HopFed Bancorp, Hopkinsville, KY (HFBC)

The Case of the Missing 40% Growth in a Bible Belt Bank


After a few years of hanging onto my hopes for HopFed, I'm afraid the only reason to invest in it today is if you believe management will come to their senses and sell instead of continuing to run the bank into the ground. Given HFBC's still outstanding $18M in TARP, its MOU, deteriorating asset quality, and unfulfilled promises, wouldn't shareholders be better served by the bank selling for even 70% of book value to a company that's capable of earning decent returns? Scarier still, that opportunity may be waning.

Disclosure: As of this posting, I own significant shares of HFBC and may subsequently either dispose of them or purchase more.

Prospective Buyers
Any of these three super-regionals with branches overlapping HFBC's would have a prayer of resurrecting the bank's performance:

BB&T Corp, Winston Salem, NC (BBT)
Regions Financial, Birmingham, AL (RF)
US Bancorp, Minneapolis, MN (USB)
Financial Snapshot
(as of 3/31/2012)

Total assets:
$1.042B
Tangible book value per share:
$13.39
NPAs to assets:
1.8%
Price to book:
52.8%
Market cap:
$53M
Dividend yield:
1.1%
Trailing 12-month return on assets:
0.52%
Trailing 12-month return on equity:
4.7%
TARP:
$18.4M
The Crew
Gilbert Lee, Chairman
John Peck, President and CEO
Billy Duval, Sr VP, Treasurer, and CFO
Red Flags
HFBC isn't meeting the following five of my top criteria for investing in banks:
  • Invest where NPAs are declining. Inexplicably, HFBC's Q1 2012 NPAs rose a steep 30% after three quarters of declines
  • Invest where you can expect above-average returns. HFBC hasn't produced a decent return on the bank's capital for over two years.
  • Invest where insiders are buying. HFBC insiders — led by Chairman Gilbert Lee and Directors Boyd Clark and Harry Dempsey — have been Net Sellers of stock in the open market since HFBC's ill-fated Secondary in 2010.
  • Invest where Management has a strong history of keeping its word. See timeline below of HFBC's performance and questionable commitment to integrity. 
  • Invest where Officer interests are aligned with shareholders'. Since 2008, HFBC CFO Billy Duvall and COO Michael Woolfolk have raised their compensation 47% and 29%, respectively, while producing significant declines in company earnings and share price.
Sources

HFBC Performance Timeline

DATE
EVENT
PRICE / SHARE
1998
FEB 09
HFBC goes public
$10
2009
OCT 28
Investor presentation shows Book Value $16.98, Dividend Yield 4.75%
$9.61
2010
FEB 26
President Peck exercises and surrenders 30K shares, netting ~ $50K
$11.45

MAR 22
Board raises salary of CFO Billy Duval
$10.90

APR 26
Howe Barnes raises HFBC rating to Buy with $20 price target
$14.41

MAY 06
HFBC announces MOU with Regulators
$12.11

MAY 25
HFBC files Registration Statement to sell additional shares
$11.02

JUN 09
President Peck and CFO Billy Duval predict 40% growth to Howe Barnes investors
$9.39

JUN 16
HFBC issues 3.33M shares @ $9.00
$8.66

JUL 26
HFBC releases Q2 EPS of $0.44 claiming “profitability levels are improving”
$9.03

NOV 01
HFBC releases Q3 EPS of $0.20
$6.10
2011
JAN 31
HFBC releases Q4 EPS of $0.07, half of analyst estimates
$7.70

SEP 22
HFBC cuts dividend 75%, from to $0.02 from $0.08
$5.66
2012
MAY 03
Analyst Ross A. Demmerle, Hilliard Lyons, issues Neutral report for HFBC, citing the bank’s “weak fundamentals and foggy outlook”
$8.80

JUN 22
Investors are still awaiting the promised 40% growth, or at least a clear and honest explanation for two years of failure to perform
$7.07

Southeastern Bank Financial, Augusta, GA (SBFC)

The Case of a Juicy Bank Stock in the Peachtree State


If I were limited to owning stock in just one bank in this country, I'd probably put my money into Augusta, Georgia's Southeastern Bank Financial.

It's really rare to find a bank doing this well trading this cheaply. It could easily fetch twice book value in a sale, but given the bank's rate of earnings growth and return on equity, I see no reason why SBFC's stellar team shouldn't keep running the bank themselves. At the end of the day, it's reasonable to expect that owners of SBFC stock will wake up sometime in the next 10 years with shares trading at a multiple of today's price.

Disclosure: As of this posting, I own significant shares of SBFC and may subsequently either dispose of them or purchase more.

Prospective Buyers
By acquiring SBFC's 12 branches and $1.4B in deposits, any of these deposit-hungry banks could expect to scale regional operations manyfold:

First Citizens Bancorp, Columbia, SC (FCNCA) has seven nearby branches holding collectively less than $300M in deposits.
SunTrust Banks, Atlanta, GA (STI) has four local branches with $165M in deposits. 
TD Bank, Toronto, Canada (TD) has just two branches in the area and $88M in deposits.
Financial Snapshot
(as of 3/31/2012)

Total assets:
$1.6B
Tangible book value per share:
$18
NPAs to assets:
2.9%
Price to book:
70%
Market cap:
$85M
Dividend yield:
0%
Trailing 12-month return on assets:
0.8%
Trailing 12-month return on equity:
10.7%
Luminaries
Robert W. Pollard, Jr., Chairman
Daniel Blanton, President and CEO
Ronald Thigpen, Executive VP and COO
Gold Stars
Four traits about Southeastern Bank Financial that I find especially peachy include:
  • Top Five Performance.  According to an SNL Article, for the one-year period ending September 30, 2011 only three banks in the entire US grew their tangible book value by a greater percentage than SBFC. In fact, since the start of the Great Recession in 2007, SBFC's book value rose over 20% while most of our nation's banks saw their book value dive.
  • High Insider Ownership. Insiders own over 30% and have been steady buyers in the open market over the years. The largest individual shareholders include Founder Pollard, Sr. (15.2%), Current Chairman Pollard, Jr., (8.7%), and Current President and CEO Blanton (8%).
  • Superior Asset Quality. SBFC's NPAs are a manageable 2.9% of assets and never got to be more than 3.2%, well below national averages. Reserves are a healthy 69% of non-performing loans. (In my experience, bank regulators like to see reserves above 30%.)
  • Good Old-Fashioned Self-Reliance. While other banks were taking TARP funding from the government (that is, from taxpayers), Southeastern Bank Financial raised $12M from friends and family.
      Sources

      Carter Bank & Trust, Martinsville, VA (CARE)

      A Case of Gray Hairs Proving Their Worth in 123 Bank Branches


      I wonder how this little gem of a bank has gone so long undiscovered by investors? Only two institutions own shares in Carter Bank & Trust (and less than 1/2 of 1% at that). And no brokerage firm appears to have written anything about it, despite six fine years of earnings when the rest of the industry was mired in the Great Recession. Trading at only 62% of book value and 6.8 times earnings, CARE clearly offers investors a Worthy opportunity.

      Disclosure: As of this posting, I own significant shares of CARE and may subsequently either dispose of them or purchase more.

      Prospective Buyers
      CARE would present an easy in-market transaction for any of the following acquisition-hungry banks:

      BB&T Corporation, Winston-Salem, NC (BBT)
      First Citizens BancShares, Raleigh, NC (FCNCA)
      Sun Trust Banks, Atlanta, GA (STI)
      Financial Snapshot
      (as of 3/31/2012)

      Total assets:
      $4.3B
      Tangible book value per share:
      $9.99
      NPAs to assets:
      2.5%
      Price to book:
      82%
      Market cap:
      $216M
      Dividend yield:
      4.9%
      Trailing 12-month return on assets:
      0.8%
      Trailing 12-month return on equity:
      9.5%
      Luminaries
      Worth Harris Carter, Jr., Founder, Chairman, and President
      Jane Davis, Senior VP and CFO
      Gold Stars
      Combined with Carter Bank & Trust's low price to book value and low price to earnings, five Key Performance Indicators (KPIs) give me tremendous confidence in the bank's ability to deliver outsized returns for investors:
      1. No annual losses during the Great Recession
      2. Strong return on assets of .8%, just shy of the Industry Gold Standard target of 1% before the Great Recession, in a current economic environment where negative returns have not been uncommon
      3. Stellar return on tangible common equity of 14.8%, versus industry trends closer to 7%
      4. Consistent growth in both deposits and core deposits
      5. Healthy and growing insider ownership, currently over 28% of the stock, a whopping 7.5M shares (Since January 1st, there have already been 14 open market purchases of stock by directors at prices ranging from $8.00 to $8.80 per share)
      Kudos to an experienced team for showing the banking industry how it's done. Mr. Carter, at 74, has built a bank worthy of his name, and shows no signs of slowing down. His board doesn't have a single director under the age of 70. Clearly many of nation's bankers could learn a thing or two from these graybeards.
        Sources