Blackhawk Bancorp, Beloit, WI (BHWB)

A Case of Shareholders Shivering in their Shoes at a Crossroad

Will Blackhawk deal shareholders the same sort of scalping that Mackinac did? Although Richard Bastion told shareholders not long ago that he wouldn't sell stock, it's looking to me like BHWB is strongly considering a dilutive capital raise.

As I review the backgrounds of BHWB's directors, I fear ties to their community and opportunities for personal gain may override their duty to the bank's shareholders. But when your stock trades at barely 40% of stated book value and you've proven unable to earn decent returns, it's immoral to harm hundreds of people in such a fashion.

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

Prospective Buyers
Blackhawk has several compelling selling opportunities, especially to BMO and Heartland, both of which have been acquiring banks similar to Blackhawk for years.
Associated Banc-Corp, Green Bay, WI (ASBC)
BMO Financial, Toronto, Canada (BMO)
Heartland Financial USA, Dubuque, IA (HTLF)
Financial Snapshot
(as of 06/30/2012)

Total assets:
Tangible book value per share:
NPAs to assets:
Price to book:
Market cap:
Dividend yield:
Trailing 12-month return on assets:
Trailing 12-month return on equity:
The Crew
Merrit J. Mott, Chairman
Rick Bastian III, President and CEO
Todd James, Executive VP, Treasurer, Secretary, and CFO
Red Flags
Five Reasons Blackhawk Financial Should Sell Instead of Diluting Long-Suffering Shareholders
  • NPAs have grown for three quarters in a row and now equal 4.7% of BHWB's assets, while NPAs have declined to half that in many US banks, including ASBC (2.17%), BMO (1.9%), and HTLF (2.3%)
    • Reserves as a percentage of NPAs have dropped for three quarters in a row and are now below 27% of NPAs. In contrast, HTLF has a reserves to NPA assets ratio of 40%, ASBC's is 73%, and BMO's is 187%
    • Returns on assets have been sub-par for over five years
    • Earnings and capital are insufficient to repay TARP anytime soon
    • Investment banking partner River Branch Holdings is the same firm that reportedly advised Mackinac Financial to effect a dilutive capital raise to detriment of its shareholders

    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:
      Tangible book value per share:
      NPAs to assets:
      Price to book:
      Market cap:
      Dividend yield:
      Trailing 12-month return on assets:
      Trailing 12-month return on equity:
      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

      If Aubrey “retires”…
      If Aubrey sells…
      Aubrey Patterson
      James Kelley
      Gordon Lewis
      William Prater
      W. James Threadgill, Jr.
      Total compensation

      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:
      Tangible book value per share:
      $14.43 (prior to capital raise)
      NPAs to assets:
      Price to book:
      Market cap:
      Dividend yield:
      Trailing 12-month return on assets:
      Trailing 12-month return on equity:
      *U.S. Government recently auctioned their TARP holdings in MFNC for approximately 96¢ on the dollar ($10.4M)
      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
        • Shareholder letters to management
        *Note MFNC hasn't posted an Annual Report more recent than 2010

        Northeast Community Bancorp, White Plains, NY (NECB)

        The Case of a Gluttonous Bank en route to Morbid Obesity

        Is there any hope Northeast Community Bancorp will check its overindulgence before it's too late? 

        After reviewing the state of affairs at NECB, I have to agree with what the market is saying: the bank's directors have dissipated half of its value since it came public in 2006, and their expansion plans are only taking it down.

        To watch how they gorge themselves at the expense of shareholders is just plain revolting. The two Kennies in charge ought to be ashamed of themselves, cut their salaries, dispose of their far-flung branches, take the rest of the bank's shares public, buy back what stock they can, sell to the highest bidder, and spare us their ugliness.

        Disclosure: As of this posting, I do not own shares of NECB but may subsequently purchase them.

        Prospective Buyers
        Customers Bancorp, Wyomissing, PA (privately held) - Recently purchased CMS Bancorp (CMSB) of White Plains and has expressed intentions to continue growing in New York
        Hudson Valley Holding, Younkers, NY (HVB) - Five times bigger than NECB with overlapping branches 
        Peoples United Financial, Bridgeport, CT (PBCT) - An acquisitive bank with overlapping branches
        Financial Snapshot
        (as of 06/30/2012)

        Total assets:
        Tangible book value per share:
        NPAs to assets:
        Price to book:
        Market cap:
        Dividend yield:
        Trailing 12-month return on assets:
        Trailing 12-month return on equity:
        Kenneth Martinek, Chairman, President, and CEO
        Kenneth H. Thomas, Director and "Consultant"
        Salvatore Randazzo, CFO and Executive VP
        Jose Collazo, COO, CIO, and Executive VP

        Red Flags
        NECB isn't earning anything close to a reasonable return
        • Decent banks make 10% on equity or can at least articulate a plan for getting there
        • The most NECB ever made was about 0.8% ($6M on $240M in assets) in the three years prior to going public (2003-2005)
        • In contrast, Lake Shore Bancorp (LSBK), a bank of almost identical asset size, is nearly five times more profitable
        • NECB's stock is trading at half where it was when it came public, while rival LSBK is still trading where it came public
        NECB's expansion plan is delusional
        • The more NECB has grown over the past decade, the less it has earned
        • After more than doubling its assets, NECB netted a mere $1.5M, 0.01% return — a spectacular 79% drop in performance from before going public in 2006
        NECB is grossly overcompensating its executives
        • The executive team of Northeast Community Bancorp earns more in personal compensation than the bank earns as a corporation 
        • NECB's CEO pays himself $340K per year — more than three times the national average of $110K estimated by Career Builder
        • Kenneth Martinek's compensation is 40% higher then that paid to Daniel P. Reininga, CEO of way-better-performing Lake Shore Bancorp (LSBK)
        NECB is putting self-dealing above insider ownership
        • Bank Director Kenneth Thomas has been receiving compensation from NECB for 34 years!
        • NECB has paid Thomas over $500K in the past five years alone, presumably for expansion consulting services that clearly haven't served the bank or its shareholders
        • The self-proclaimed bank analyst has at least $2.5M to toss around in bids after failed bank branches, but doesn't believe enough in his own bank after all these years to own more than $50K worth of stock
        • Last week this whiny sore loser loose cannon of a Director lost a bid to purchase a bank branch in Doral, FL and filed a lawsuit against the winning bidder

        Franklin Financial Services, Chambersburg, PA (FRAF)

        The Case of a Deeply-Rooted Pennsylvania Money Tree

        If you're looking for a safe place to earn a solid dividend at a bargain price, Franklin Financial Services might just be your money tree. 

        You can buy this undervalued bank's stock today at $13.60, earn a 5% dividend for the foreseeable future, and obtain a reasonable chance of doubling your money.

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

        Prospective Buyers
        F.N.B. Corp, Hermitage, PA (FNB)
        M&T Bank Corp, Buffalo, NY (MTB)
        PNC Financial Services, Pittsburgh, PA (PNC)
        Financial Snapshot
        (as of 3/31/2012)

        Total assets:
        Book value per share:
        NPAs to assets:
        Price to book:
        Market cap:
        Dividend yield:
        Trailing 12-month return on assets:
        Trailing 12-month return on equity:
        The Crew
        G Warren Elliott, Chairman
        William Snell Jr, President and CEO
        Mark Hollar, Senior VP, Treasurer, and CFO
        The Skinny
        How undervalued is FRAF's stock price?
        • Over the past 12 months, the KBW Bank Index climbed 12.2%, while FRAF stock fell 17%
        • The average bank in the KBW Index trades at 124% of book value, while investors can now buy FRAF at 61% of book value
        • The average bank in the KBW Index trades at 15x earnings, while FRAF is trading at 8x earnings
        • Therefore, Franklin Financial Services is effectively trading at a 50% discount 
        Why is FRAF so cheap?
        • Most investors have never heard of it
        • FRAF recently cut its dividend so many people who did own it appear to be selling
        • Current EPS of $1.60 is well below historical level of $2.50
        • NPAs were still rising in Q1 and may not have peaked
        • Brokerage firms do not appear to be following FRAF
        What would make the stock price double?
        • When NPAs start to decline…
        • Then earnings and book value will grow…
        • And people will start to trust that the dividend will not be cut again…
        • Then FRAF could trade at book value 
        What makes this stock relatively safe?
The bank has been around for over 100 years and is very conservative
        • Its managers don’t pay themselves exorbitant salaries or take big risks
        • It has maintained profitability through the Great Recession
        • It never took TARP
        • Regional unemployment is significantly below the national average

            First M&F Corp, Kosciusko, MS (FMFC)

            The Case of a Registration Statement That Doesn't Mean What You'd Think

            If you're thinking of selling or avoiding FMFC stock because First M&F filed a Registration Statement on April 3, 2012, think again: 

            According to bank Chairman and CEO Hugh Potts, First M&F has no intentions of selling additional shares. The bank simply renewed the March 2009 Registration Statement as required for its TARP warrants. So there's little risk of a big dilutive capital raise to anything like the 37 million registered shares, which at today's market could have brought book value down from over $10 to something under $6.

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

            Prospective Buyers
            Although it doesn't sound like FMFC would be open to selling, three banking heavyweights have a significant presence in its markets and would benefit from an acquisition of its branches:

            BancorpSouth, Inc, Tupelo, MS (BXS)
            16 local branches with $1.1B deposits (9% of total business)
            Regions Financial Corp, Birmingham, AL (RF)
            27 local branches with $1.3B deposits (less than 1% of total business)
            Trustmark, Jackson, MS (TRMK)
            15 local branches with $500M deposits (5% of total business)
            Financial Snapshot
            (as of 03/31/2012)

            Total assets:
            Tangible book value per share:
            NPAs to assets:
            Price to book:
            Market cap:
            Dividend yield:
            Trailing 12-month return on assets:
            Trailing 12-month return on equity:
            *Converted to CDCI Preferred at 2% until 2018
            The Crew
            Hugh Potts Jr., Chairman and CEO
            Jeffrey Lacey, President
            John Copeland, Executive VP and CFO
            The Skinny
            - - - PLUSSES - - - - - - - - - - - - - - -
            • NPAs are down. After peaking at $87.9M (5.4% of assets), NPAs are down to $58.9M (4.5% of assets). 
            • Earnings are up. After four straight quarters of making pennies per share, FMFC earned $0.12 in Q1 2012. 
            • Equity is improving. After hitting a low of $104M, equity is up to over $111M. 
            • Insider ownership is strong. Insiders own over 24%, and there have been 12 separate insider buys in the open market this year.
            • Still room to make a buck. Keefe, Bruyette and Woods predicts FMFC will earn $0.75 per share in 2013. If they're right, investors buying FMFC stock today could make $2 or so per share.
            - - - MINUSES - - - - - - - - - - - - - - -
            • Low tangible common equity. At 5.6%, FMFC's tangible common equity is a bit thin. Truly strong banks carry 8-10%.
            • Little chance of sale. Chairman Potts  — who's been building First M&F for the past 39 years — intends to continue building the bank.

              PSB Holdings, Wausau, WI (PSBQ)

              The Case of a Good Catch on the Wisconsin River

              Fishing for community bank stock that can produce a big return? The parent company of Peoples State Bank is one of only 35 banks in the country to have increased their dividend more than 1.5% in each of the last 10 years. And of those 35, PSBQ is one of just 9 whose stock nonsensically declined over this period. I'd say this Fish is a real bargain.

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

              Prospective Buyers
              I think Peoples State Bank is swimming along so prosperously they needn't bite at any takeover offers, but any of these banking behemoths with overlapping branches should be thrilled to land such a strong franchise.

              Associated Banc-Corp, Green Bay, WI (ASBC)
              BMO Financial, Toronto, Canada (BMO)
              US Bancorp, Minneapolis, MN (USB)
              Financial Snapshot
              (as of 03/31/2012)

              Total assets:
              Tangible book value per share:
              NPAs to assets:
              Price to book:
              Market cap:
              Dividend yield:
              Trailing 12-month return on assets:
              Trailing 12-month return on equity:
              William J. Fish, Chairman
              Peter W. Knitt, President and CEO
              Scott M. Cattanach, Senior VP, Secretary, Treasurer and CFO
              Gold Stars
              Thanks to the inarguably skilled leadership of Fish, Knitt, and Cattanach, PSB Holdings earns at least Five Stars in my book:
              • Ability to swim upstream. Counter to banking industry trends during the Great Recession, PSBQ's financial performance has been strong across the board — The bank was profitable in every period. Earnings for 2011 were a healthy 29% higher than their pre-recession earnings of 2007. And NPAs never exceeded a low 3.2%.
              • Stellar rise in book value. Since the start of 2007, PSB Holdings' tangible equity has grown by an astounding 56%, while most other banks' per share equity has declined. 
              • Healthy insider ownership. Insiders own over 15% of PSBQ stock. (See also my article in Seeking Alpha on the importance of Insider Ownership)
              • Room for dividend growth. Even though People's State Bank has a healthy 2.8% dividend yield, their payout ratio is still a low 22%, indicating there's plenty of room for dividend growth in the future. 
              • No TARP to hold it down. PSB Holdings never needed TARP funding.