Merchants Financial Group, Winona, MN (MFGI)

A Case of Winning On One's Own in Winona


Looks to me like all Merchants Bank Management needs is to be left alone to keep doing what they do! Given the historical rate of this bank's earnings, I can see MFGI book value exceeding $50 by 2015 and the stock trading at $60. That makes today’s shares at $32.50 an irresistible bargain, and this stock a winner for me.

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

Prospective Buyers
Although I'd prefer to see Merchants Bank remain independent, the bank's impressive footprint so close to Minneapolis has got to be appealing to one of these Twin City heavyweights:
TCF Financial, Wayzata, MN (TCB)
US Bancorp, Minneapolis, MN (USB)
Wells Fargo, San Francisco, CA (WFC)
Financial Snapshot
(as of 09/30/2013)

Total assets:
$1.344B
Tangible book value per share:
$33.16
NPAs to assets:
0.94%
Price to book:
77%
Market cap:
$88.7M
Dividend yield:
2.77%
Trailing 12-month return on assets:
1.14%
Trailing 12-month return on equity:
9.9%

Luminaries
Richard L. Mahoney, President and CEO
Rodney R. Nelson, Executive VP
Susan M. Savat, Senior VP and CFO
Gold Stars
Let me count the ways I love this bank!
  1. Great value. At 7x trailing 12 month earnings, MFGI stock is exceptionally cheap, especially when you consider that the bank ranks in the top quartile of US banks in both ROA and ROE.
  2. Healthy insider ownership. Including ESOP shares, Merchants Bank insiders own over 23% of MFGI shares.
  3. Conservative bankers. Thanks to the sound underwriting practices of Merchants Bank loan officers, NPAs are a low 0.94% of loans and barely got above 4% during the worst of the Great Recession.
  4. Lagging share price. While the KBW Bank Index has risen over 38% in the past 12 months, MFGI is up only 1%.
  5. Phenomenal growth. Although Merchants Bank has been operating soundly since 1875, in recent years, it has shown tremendous growth in assets and earnings, as illustrated in the chart below.

Sources
  • Interviews with management
  • Confidential interviews with shareholders

UPDATE: CFS Bancorp, Munster, IN (CITZ)

What a difference a year can make! I am happy to report that the CFS Bancorp of today presents a far prettier picture than when I reviewed it last May. After 14 years of feeding the insatiable Prisby family at the expense of its own health and prospects, the bank has healed remarkably under the care of more ethical managers. So much so that it has attracted a fine suitor and will soon be merging with First Merchants Corporation of Muncie, IN (FRME).

Disclosure: As of this posting, I own shares of CITZ and may subsequently either dispose of them or purchase more.
    Prospective Buyers
    One year after our May 2012 review of the bank, CITZ surprised us by agreeing to be bought by First Merchants Corporation, Muncie, IN (FRME), a prospective buyer we hadn't anticipated.
    Financial Snapshot
    (as of 6/30/2013)


    MAR 2012
    JUN 2013
    Total assets:
    $1.170B
    $1.131B
    Tangible book value per share:
    $9.66
    $10.21
    NPAs to assets:
    6.3%
    6.01%
    Price to book:
    56%
    124.4%
    Market cap:
    $57.8M
    $128.8M
    Dividend yield:
    0.7%
    0.3%
    Trailing 12-month return on assets:
    -0.9%
    0.37%
    Trailing 12-month return on equity: 
    -0.3%
    3.78%  



    The Crew
    Robert Ross, Chairman
    Daryl Pomranke, President, CEO, COO
    Jerry Weberling, Executive VP, CFO
    The Skinny
    No doubt, I owe a few people a big shout out and "Thank You" on behalf of all CITZ shareholders. Congratulations are due to two folks, in particular.

    Thank you, Daryl! The bank under Daryl Pomranke's leadership is no longer the anorexic, poorly performing, nepotist institution it was under Prisby family management. Pomranke deserves credit for:
    • Decreasing NPAs from $65.7M to $56.1M in the quarter preceding the merger announcement (a 15% improvement)
      • Increasing profitability from next to nothing to a respectable $1.5M per quarter
      • Transforming company culture from a dysfunctional family-centric mindset to one more appropriate for a public company 

      Thank you, John! Clearly, CFS Bancorp's future got brighter the minute shareholders elected John Palmer of PL Capital to the CFS Bancorp board. Palmer deserves acknowledgment for:
      • Shining a spotlight on Thomas Prisby's abuse of his Office, as Chairman and CEO of a public company   
      • Advocating on behalf of both the bank and its shareholders, as needed for fiscal recovery 
      • Standing firm, despite Prisby's best efforts to thwart responsible leadership and due process 

      No thanks to you, Prisby clan! Who knows what CFS Bancorp could have been on its own, had you respected your fiduciary responsibilities and not treated it as your personal piggy bank?
        Sources

        Northway Financial Inc, North Conway, NH (NWYF)

        A Case of a Rock Solid Opportunity in the Granite State


        You'd have to dig pretty hard to unearth a better bank stock to buy now than Northway Financial. NWYF's current price of $15.70 is a bargain, and the bank's takeover prospects present strong opportunity for capital gains. I'm pretty happy to own more of this high-yielding block of granite than I do of diamonds or gold.

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

        Prospective Buyers
        Surveying the regional banking landscape, I can see three institutions for which an acquisition of Northway Financial would make great sense:
        New Hampshire Thrift Bancshares, Newport, NH (NHTB)
        People's United Financial, Bridgeport, CT (PBCT)
        Toronto Dominion Bank, Toronto, Canada (TD)
        Financial Snapshot
        (as of 03/31/2013)

        Total assets:
        $850M
        Tangible book value per share:
        $17.30
        NPAs to assets:
        2.2%
        Price to book:
        75%
        Market cap:
        $43.4M
        Dividend yield:
        3.9%
        Trailing 12-month return on assets:
        0.83%
        Trailing 12-month return on equity:
        8.83%
        TARP:
        $0M*
        *Redeemed $10M in full, July 2011
        Luminaries
        William J. Woodward, Chairman, President and CEO
        Fletcher Adams, Vice Chairman of the Board
        Russell Cronin Jr. Senior VP and CFO
        Gold Stars
        GREAT VALUE!
        • Northway Financial is producing a solid 8.8% Return on Equity. That's 32% better than New Hampshire Thrift's 6.6%, and 87% better than People's rocky 4.7% 
        • NWYF stock is currently trading at a significant discount to its stated book value of $21.03 per share, where regional competitors are trading at a premium
        • Currently trading for just 6.7x earnings, NWYF offers a far better PE Multiple than its peers, considering NHTB is trading for 13x earnings and PBCT is trading for 21.4x earnings 
        ROOM TO GROW!
        • Having already grown tangible equity by over 55% in the past four years mainly through record earnings, Northway Financial is inarguably on a growth path
        • Northway could easily double the already fat 3.9% dividend it pays out, which represents only 15% of the bank's earnings (half the industry average of 30%)
        TAKEOVER POTENTIAL?
        • Northway Financial enjoys significant marketshare in three of the six counties in which it operates, including market dominance in Coos County, NH, where it owns 33% of the market. So any bank looking to grow in these counties could obtain a strong foothold in Northway's bedrock 
        • Northway's Chairman and Vice Chairman are both over 65 years old —an age at which it's not unusual to be making plans for retirement. So it's reasonable to anticipate that they'd at least consider offers for selling this durable bank
        • As NWYF's single largest shareholder, Chairman William Woodward would be personally enriched by a sale of the bank, and in my book, he has certainly earned the right to exit on a high note and move on to other endeavors
        Sources

          Harvard Savings Bank, Harvard, IL (HARI)

          A Case of Peculiarly Prestigious Non-Performance


          Don't let the three sticks behind the CEO of this bank's name fool you: HARI is no Harvard of the banking industry, and the performance of Harvard Savings Bank is far from worthy of its prestigious name. I, for one, will be buying more stock and voting with the Stilwell Group to wrest control of this bank from Duffield J. Seyller III as needed to either turn it around or sell it.

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

          Prospective Buyers
          First Midwest Bancorp, Itasca, IL (FMBI)
          Standard Bancshares, Hickory Hills, IL (private)
          Wintrust Financial, Rosemont, IL (WTFC)
          Financial Snapshot
          (as of 03/31/2013)

          Total assets:
          $170M
          Tangible book value per share:
          $23.88
          NPAs to assets:
          4.4%
          Price to book:
          58.6%
          Market cap:
          $11.6M
          Dividend yield:
          0%
          Trailing 12-month return on assets:
          0.53%
          Trailing 12-month return on equity:
          4.6%
          TARP:
          $0M

          Scoundrels
          William D. Schack, Chairman
          Duffield J. Seyller III, President and CEO
          Donn L. Claussen, Executive VP and CFO
          Red Flags
          The way I see it, Duffield J. Seyller III and friends are behaving like badly bred pitbulls, biting the hands that feed them, instead of doing their job of guarding the business. I give this team at least four sticks, and zero carrots, for:
          • Getting the bank tied up under an MOU. After losing a total of $2.7M in 2008 and 2009, Harvard management was forced to sign an MOU with the Office of Thrift Supervision, severely restricting the bank's opportunities to buy back stock and make other independent bank management decisions. 
          • Letting the bank "go to the dogs." Under Duffy Three Sticks' leadership, HARI earned a paltry 1.9% return on equity from 2010-2012. During the same period, the average thrift of Harvard's size outperformed HARI by a factor of nearly 3x, earning a 5.4% ROE; and the similarly sized, more responsibly managed institution of Logansport Financial Group (LOGN) delivered an 8.6% ROE.
          • Paying themselves extravagantly for trashing the place. Over the past five years, HARI's management team bled a total pre-tax net loss of $1.8M out of the bank. For this pathetic performance, Duffield and Claussen chew off over $200K each per year in "compensation," nearly twice what the high-performing execs at Logansport allot themselves.
          • Blowing money and value on a totally unnecessary dog fight. No honest bank should have reason to disallow its largest shareholder representation on its Board. For the $800K or so Harvard is wasting on proxy battles I predict it will wind up losing in the end anyhow, the bank could have bought back nearly 7% of its outstanding shares, and nearly doubled reported earnings per share. That is, of course, had they not first gotten themselves leashed under an MOU. As you can see from the chart below comparing the two scenarios, Team Duffy's game is killing bank value.
          How HARI stock could have performed, had Harvard 
          avoided getting itself under an MOU and not fought Stilwell


          *According to SNL, the average Illinois thrift trades for 16x earnings
          Sources

          Embassy Bancorp, Bethlehem, PA (EMYB)

          A Case of a Dynamic Duo in the Steel City


          The two in charge at Embassy sure know how to pack a punch. This is one bank that I believe could get 150%-160% of book value in a sale. If this pair succeeds in growing book value to over $8 over the next three years, a sale would present a really nice opportunity to double one's money. And given the Chairman's previous experience selling Ambassador to Fulton in 1998, I think it's reasonable to anticipate that the bank will sell when the price is right. That being said, at a discount to book and only 8x earnings, EMBY will almost certainly make shareholders money even if the bank never sells.

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

          Prospective Buyers
          In addition to the obvious neighborhood heavyweights, F. N. B. Corp (FNB) and M & T Bank Corp (MTB), each of these three banks has good reason to be interested in Embassy, given its 5% share of the deposit market in both Lehigh County and North Hampton County
          First Niagara Financial, Buffalo, NY (FNFG) - acquiring EMYB would double FNFG's deposit market share in Lehigh and make it #2 in the county
          Fulton Financial, Lancaster, PA (FULT)
          National Penn Bancshares, Boyertown, PA (NPBC) - acquiring EMYB would make NPBC #1 in North Hampton and a solid #2 in Lehigh
          Financial Snapshot
          (as of 03/31/2013)

          Total assets:
          $636M
          Tangible book value per share:
          $7.07
          NPAs to assets:
          1.5%
          Price to book:
          95%
          Market cap:
          $47M
          Dividend yield:
          0.6%
          Trailing 12-month return on assets:
          0.92%
          Trailing 12-month return on equity:
          12.9%
          TARP:
          $0M
          Luminaries
          David Lobach, Jr, Chairman, President, CEO
          Judith Hunsicker, Senior Executive VP, Secretary, CFO, COO

          Gold Stars
          I just love how efficient and committed Embassy is! Just look at how many jobs the two leaders at the helm take on their own shoulders. Here are a few numbers that speak volumes, as well.
            Employees per branch. With just 70 employees across its 7 branches, Embassy is operating 30% to 90% more efficiently than its peers.
            • M & T has almost twice as many employees per branch (19)
            • First Niagara, Fulton, and National Penn have 30% more per branch (13)
            Assets per employee. With a whopping $9.2M in assets per employee, Embassy is operating 50% to 100% more efficiently than its peers
            • Fulton has half the assets per employee ($4.6M)
            • First Niagara is managing a third less assets per employee ($6M)
            • National Penn and M & T aren't managing any more, with $5M and $5.7M in assets per employee each, respectively
            Insider ownership. With insiders owning an impressive 32% of EMYB stock, Embassy managers and directors are 3x to 20x as invested in their bank's success as their peers are in their own
            • Fulton and First Niagara insiders own a measly 1.5% and 2% of their own FULT and FNFG stocks, respectively
            • M & T and National Penn insiders, although wildly beating the average bank's level of insider ownership with 10% and 20% of their respective MTB and NPBC stocks, still fall far short of Embassy's impressive level
            Sources

            Community Bankshares of Indiana, New Albany, IN (CBIN)

            A Case of the Road Less Gravelled


            I love this bank! Since coming public over 15 years ago, Community Bankshares of Indiana has grown nicely from a little $130M thrift to an $800M commercial bank with a diversified loan portfolio.

            CBIN stock is cheap no matter how you look at it: price to book value, price to tangible book, or price to earnings. I would guess that a year from now, tangible book could reach $20 a share and we’re likely to see the stock trading for 120% of book or better, paving the way for a nice return if you buy it today.

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

            Prospective Buyers
            Although CBIN is surely an attractive acquisition target, I believe it should stay independent as long as Management continues to deliver such stellar returns 
            MainSource Financial Group, Greensburg, IN (MSFG)
            Old National Bancorp, Evansville, IL (ONB)
            Republic Bancorp, Louisville, KY (RBCAA)
            Financial Snapshot
            (as of 03/31/2013)

            Total assets:
            $810M
            Tangible book value per share:
            $17.23
            NPAs to assets:
            2.6%
            Price to book:
            61%
            Market cap:
            $53.6M
            Dividend yield:
            2.8%
            Trailing 12-month return on assets:
            0.95%
            Trailing 12-month return on equity:
            9.11%
            TARP:
            $0M

            Luminaries
            Gary L. Libs, Chairman
            James D. Rickard, CEO and President
            Paul A. Chrisco, Executive VP and CFO
            Gold Stars
            I like these people! Although I don’t know them personally, I have a lot of confidence in CBIN's management team.
            • Libs and Rickard have been driving this money-making machine together for more than a decade. Libs has been a Director since 1989, and Rickard has been CEO and President since 2000
            • CBIN insiders own a whopping 19% of stock, and have made eight separate insider purchases already this year. Which — if you’ve followed my work, you already know — I consider a super strong indicator of future success
            I like their numbers! Besides being solidly profitable for the past 15 quarters, CBIN:
            • Ranks in the top quartile of U.S. banks in ROE and ROA
            • Has reduced NPAs by more than 60% since they peaked in 2011
            • Has shown it can effectively acquire other banks — three so far! (most recently, First Federal Bank of Lexington, KY)
            Sources

            UPDATE: Blackhawk Bancorp, Beloit, WI (BHWB)


            Thankfully, the fears I expressed in last October's review of Blackhawk Bancorp have not come true! I'm happy to report that the bank has proven remarkably shareholder-friendly, has largely resolved its capital issues without diluting shareholders, and is currently trading at just eight times earnings, making BHWB now a very cheap, appealing stock.

            Disclosure: As of this posting, I own shares of BHWB and may subsequently either dispose of them or purchase more.
              Prospective Buyers
              Blackhawk has the same compelling selling opportunities observed in last October's review:
              Associated Banc-Corp, Green Bay, WI (ASBC)
              BMO Financial, Toronto, Canada (BMO)
              Heartland Financial USA, Dubuque, IA (HTLF)
              Financial Snapshot
              (as of 12/31/2012)


              JUN 2012
              DEC 2012
              Total assets:
              $558M
              $560M
              Tangible book value per share:
              $13.77
              $14.69
              NPAs to assets:
              4.7%
              4.4%
              Price to book:
              43%
              48.4%
              Market cap:
              $15.3M
              $18.1M
              Dividend yield:
              0.0%
              0.0%
              Trailing 12-month return on assets:
              0.5%
              0.52%
              Trailing 12-month return on equity: 
              6.2%
              6.26%  
              TARP:
              $10M
              $10M*

              *The U.S. Government recently auctioned off its TARP holdings in BHWB in two series for 91¢ and 95¢ on the dollar, respectively
              The Crew
              Merrit J. Mott, Chairman
              Rick Bastian III, President and CEO
              Todd James, Executive VP, Treasurer, Secretary, and CFO
              The Skinny
              Three reasons I'm really excited about Blackhawk Bancorp today:

              Shareholder Dilution? No longer a concern!
              • Blackhawk earned $2.4M in 2012
                • On April 1, 2013, it sold $6.1M in subordinated debt, rather than pursue a dilutive capital raise
                • At current rate of earnings, the bank is now within spitting distance of funding an entire repurchase of TARP
                Operating Performance? Much improved!
                • NPAs have shifted from trending up to down
                  • Loans increase by $33M in 2012
                  • Margin is holding up well at 3.75%
                  Stock Price? Great value!
                  • BHWB stock has underperformed the market by 20%
                    • Fears of dilution drove BHWB share price down 4% over the past 12 months, while the Keefe Bruyette and Woods Bank Index rose 17%
                    • BHWB stock is currently trading at just 48% of its stated book value of $17.06 per share
                    Sources
                    • Confidential interviews with shareholders