Baraboo Bancorporation, Baraboo, WI (BAOB)

A Case of a Circus Cleaning Up Its Act


After a few bozos pushed Baraboo Bancorporation into a many-year freefall, it looks like the bank is finally back on its feet. BAOB stock recovered 85% last year, and is still a bargain at $3.15.

I foresee book value growing to over $5 per share by 2019 and stock trading at 125% of that, nearly double today's price. If 74-years young Chairman Merlin Zitzner were to sell the bank, shareholders could enjoy this performance even sooner. Given that he owns 47% of the stock, Merlin certainly has both the power and incentive to do so.


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


Prospective Buyers

Knowing that Baraboo National holds more than half the deposits in Baraboo, Wisconsin, any of these higher-performing, better-capitalized banks could be in line to buy Merlin's show.

Bank of Montreal, Toronto, Canada (BMO)
Bank of Prairie du Sac, Prairie du Sac, WI (private)
Bank of Wisconsin Dells, Wisconsin Dells, WI (private)
National Exchange Bank & Trust, Fond du Lac, WI (private)

Financial Snapshot
as of 9/30/2016
Total assets:
$412M
Tangible book value per share:
$3.71
NPAs to assets:
2.4%
Price to book:
80.8%
Market cap:
$27.9M
Dividend yield:
0%
Trailing 12-month return on assets:
1.12%
Trailing 12-month return on equity:
8.64%
TARP:$5.1M*
*Technically, no longer TARP, but Preferred Stock: 
The Bank received $20.7M in TARP 01/16/2009 
The Government auctioned it all off 12/03/2012 
The Bank redeemed all but $5.1M on 01/05/2017

The Crew

Merlin Zitzner, Chairman, President, Treasurer
Greg Linder, VP and Secretary
Jeff P. Blada, "acting" CEO, COO

The Skinny

Baraboo National Bank has weathered many challenges since its founding in 1857 — including both the Civil War and the Great Depression. It's probably safe to say, now, that it has survived the Great Recession, too, in spite of a 16-year sideshow that cost the bank over half its assets.

That clumsy act in the bank's history began in 1999 when ringmaster Merlin Zitzner appears to have fallen under the spell of two ding-a-ling lenders, who proceeded to spend the next six years making unsafe, unsound, and self-dealing loans. That stunt left Baraboo National teetering on a tightrope before the Great Recession even came to town.
  • By year end 2008, Baraboo was scrambling to get a TARP safety net in place. 
  • By January 2013, the circus was such that Regulators put the bank under a 27-page Cease and Desist order (most are 3-5 pages).
  • By New Year's Day 2014, BAOB tangible common equity had fallen to 3.5% and NPAs had skyrocketed to 13.5%.
To their credit, Merlin and his troupe have worked some magic since. To pull off the turnaround they had to perform a major disappearing act on bad loans, foreclosed assets, and out-of-market branches. In the process, nearly half of the bank's assets went "poof!"
  • Baraboo National is now operating solidly in the black.
  • The bank earns 1% on assets and is achieving close to 10% ROE.
    • Total equity is a healthy 13.7%
    • Tangible common equity is still light at 8.3%, but is a leap above the 2013 low point of just 3.5%
  • NPAs are down to 2.8% and NPAs less TDRs to only 1.4% assets.
Backstage, Merlin has a few more tricks up his sleeve that may be less visible to the average investor: 
  • Wonderful deposits! Although Baraboo National is half its prior size, its total cost of funds is only 30 basis points, which means it can lend money very profitably.
  • Low loan to deposit ratio! Nearly $92M of the bank's $347M in deposits is still available for lending.
  • Deferred Tax Assets! Sooner or later, the bank will recognize an $11M DTA, which could add over $1 per share to book value.

Sources

9 comments :

  1. Nice pick! The share prices also moved up 16% today

    ReplyDelete
  2. I appears that you may have flip flopped ROA and ROE for the period ending 9/30/16.

    ReplyDelete
    Replies
    1. nervhq7-
      Good catch. All fixed now. Thanks for reading and letting me know.
      Best,
      Phil

      Delete
  3. Hi
    I see Banc funds are holding 2.5%. Are they strong activists to defend shareholders interest?

    ReplyDelete
  4. Thanks for reading and commenting, iota!

    While Banc Funds is a great ally for shareholders, it typically does not take an activist role. I'm hoping Merlin's 4,414,484 share position will guide the way.

    Best, Phil

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  5. Any idea where to find the specs on (what's left of) the BAOB preferred?

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    Replies
    1. Thank you for reading and commenting Axster! Since it was originally TARP, the stub that's left yields 9% now.

      Delete
    2. OK. Surprised BAOB didn't redeem the entire preferred instead of continuing to face paying 9% on that $5mm stub. Hope they reel in the balance this year.

      Delete