BancorpSouth, Tupelo, MS (BXS)

The Case of One Highly Incentivized Exiting Executive


Wondering if BXS Chairman and CEO Aubrey Patterson will retire on schedule in May 2013 as announced and bequeath bank leadership to a successor? Personally, having read the April 2012 Proxy and considered his incentives to sell, I don't think he will. At least not if he had any of the same business school professors at Michigan State that I had.

Disclosure: As of this posting, I own shares of BXS and may subsequently either dispose of them or purchase more.
    Prospective Buyers
    BancorpSouth enjoys an unusually low cost of deposits and an unusually high percentage of steady, fee-based revenues, making it a highly coveted franchise. If any of the following banks were to purchase it at a 20% premium to today's trading price of $15, the buyer's earnings would immediately go up.
    BB&T Corp, Winston-Salem, NC (BBT)
    Capital One Financial, McLean, VA (COF)
    IBERIA Bank, Lafayette, LA (IBKC)
    Financial Snapshot
    (as of 06/30/2012)

    Total assets:
    $13.148B
    Tangible book value per share:
    $12
    NPAs to assets:
    3.11%
    Price to book:
    103%
    Market cap:
    $1.45B
    Dividend yield:
    0.26%
    Trailing 12-month return on assets:
    0.53%
    Trailing 12-month return on equity:
    5.2%
    The Crew
    Aubrey Patterson, Jr, Chairman and CEO
    James Kelley, President and COO
    William Prater, Treasurer and CFO
    The Skinny
    What would you do if you were Aubrey?

    According to the Proxy Statement:

    If Aubrey simply retires...
    • He receives a cash payout of $952,000.
    • His executive team keeps running the bank at current compensation levels.
    • Shareholders experience no material benefit and stock price may decline.
    If Aubrey retires by selling...
    • He receives compensation of over $11M.
    • His executive team collectively makes nearly $10M over and above normal compensation.
    • After putting in 38 years of service to the bank, 77-year older Director Hassell H. Franklin could cash in his 1,247,000 shares.
    • Shareholders enjoy benefit of increased share price.

    The 2000% Difference Between Aubrey's Choices

    Executive
    Compensation
    If Aubrey “retires”…
    If Aubrey sells…
    Aubrey Patterson
    $952,000
    $11,608,000
    James Kelley
    $213,000
    $5,712,000
    Gordon Lewis
    $105,000
    $1,440,000
    William Prater
    $10,000
    $995,000
    W. James Threadgill, Jr.
    $107,000
    $1,474,000
    Total compensation
    $1,387,000.00
    $21,229,000.00
    Sources

    Mackinac Financial, Manistique, MI (MFNC)

    A Case of Scalping Shareholders at the Fork in the Road


    Here's one sad story I really hope doesn't repeat itself a third time, or in any other bank at a similar crossroads for that matter. The hit that Makinac's shareholders were forced to take in the bank's recent dilutive capital raise was entirely unnecessary and egregious. Bank management bought itself some cash to play with as they please without a strategic plan for putting it to good use, but only by materially injuring real people. Unconscionable.

    Disclosure: As of this posting, I do not own shares of MFNC but may subsequently purchase them.
    Prospective Buyers
    MFNC would make a nice acquisition target for any of the following banks, but by going forward with its recent dilutive capital raise, management missed the opportunity to obtain a great price for the bank. 
    Chemical Financial, Midland, MI (CHFC)
    Fifth Third Bancorp, Cincinnati, OH (FITB)
    Huntington Bancshares, Columbus, OH (HBAN)
    Financial Snapshot
    (as of 06/30/2012)

    Total assets:
    $524M
    Tangible book value per share:
    $14.43 (prior to capital raise)
    NPAs to assets:
    1.7%
    Price to book:
    50.6%
    Market cap:
    $40.6M
    Dividend yield:
    0.0%
    Trailing 12-month return on assets:
    1.19%
    Trailing 12-month return on equity:
    10.78%
    TARP:
    $11M*
    *U.S. Government recently auctioned their TARP holdings in MFNC for approximately 96¢ on the dollar ($10.4M)
    Scoundrels
    Paul D. Tobias, Chairman and CEO
    Kelly W. George, President
    Ernie R. Krueger, CFO and Executive VP
    Red Flags
    THE "CRIME": MFNC under Tobias' leadership executed a rights offering that diluted shareholders and socked TBV by at least 15%.
    • Tobias did a similarly dilutive capital raise in 2004, tasted blood, apparently liked it, and raised his salary 60% from $225K to $360K
      • MFNC faced three perfectly reasonable options for proceeding in ways that would have achieved respectable results without bloodshed (see below)
      • Management disregarded the rational advice and concerns of successful, business-savvy shareholders
      • The scoundrels boast grandiose notions and vague “hopes” for acquiring a branch or bank, despite evidence that they've not done a particularly great job of running their own

      THE CROSSROADS: MFNC faced three more responsible and humane options than the dilutive capital raise it chose:
      • Carry on for a few years and try to strike some deal with new owners of TARP
      • Wait to raise money until they have an actual deal in the works and could raise it on better terms
      • Sell the bank for something close to book value like Citizens Republic Bancorp (CRBC), which had a similar credit and TARP profile and recently sold for 125% tangible book value and 90% stated book value
      Sources
      • Shareholder letters to management
      *Note MFNC hasn't posted an Annual Report more recent than 2010