CFS Bancorp, Munster, IN (CITZ)

A Case of Feeding One Family Well in Munster, Indiana


Given CFS Bancorp's dangerously thinning equity—fallen from $258M to $103M in the 14 years since the bank came public—can it really hope to do any better than be rescued by a sale? 

After years of feeding prior management at the expense of stakeholders, and constantly buying stock back at multiples of today's price, this anorexic bank has run out of room to do anything else. Someone, please, bring in the cheese and put an end to the starvation!
Disclosure: As of this posting, I own shares of CITZ and may subsequently either dispose of them or purchase more.

Prospective Buyers
BMO Financial Group, Toronto, Canada (BMO)
Fifth Third Bancorp, Cincinnati, OH (FITB)
First Midwest Bancorp, Itasca, IL (FMBI)
Horizon Bancorp, Michigan City, IN (HBNC)
Financial Snapshot
(as of 3/31/2012)

Total assets:
$1.170B
Tangible book value per share:
$9.66
NPAs to assets:
6.3%
Price to book:
56%
Market cap:
$57.8M
Dividend yield:
0.7%
Trailing 12-month return on assets:
- 0.9%
Trailing 12-month return on equity:
- 0.3%
The Cast
Robert Ross, Chairman
Daryl Pomranke, President, CEO, COO
Jerry Weberling, Executive VP, CFO
Red Flags
CITZ hasn't delivered an adequate return on assets or equity since going public in 1998, achieving at best the meager "high" of 5.7% return on equity in 2007, a year when they were loading up on risky real estate loans that would later come back to haunt them.

While they've declined from their peak of $86M at year end 2010, CFS Bancorp's NPAs are still a hefty $65.7M, a high 10.1% of loans and REO, and up $1M from last quarter, in spite of $1.7M in chargeoffs.

CFS Bancorp's loan loss reserve is just $11.7M, a paltry 15.9% of NPAs. In contrast, Horizon's reserves to NPAs are 88%, Fifth Third's are 55%, and First Midwest's are 48%.

Since their mutual conversion in the summer of 1998, CITZ shareholders' equity has declined from $258M to $103M.

Prior management cost shareholders an estimated $127M, when Chairman Tom Prisby fired his brother, President James Prisby, with a $1M severance. Why? For suggesting it was in the bank's best interest to sell to Bank Financial (BFIN) in 2004, when book value was $13 and a premium to book of 25% or more was predictable.

Former Chairman Tom Prisby, resigned in December 2011, only after receiving $1.2M severance, negotiating a nice severance for his daughter, and paying his son nearly $1M to "decorate" bank branches.
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Community West Bancshares, Goleta, CA (CWBC)

A Case of Opportunity's Last Knock?


Can Community West reasonably expect to climb out from under its NPAs and TARP obligations? Much as I wish it weren't so, seems to me there's no way out without a highly diluted capital raise or a sale. Had CWBC sold last summer for 80% of book and taken PacWest stock, its value today would be close to $9 per share vs today's $2.30. I submit it's more likely than not that an interested buyer's share price will continue to outperform CWBC's.

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

Prospective Buyers
PacWest Bancorp, Los Angeles, CA (PACW) has expressed interest in filling out franchise, and recently hired CWBC's former President, Lynda Nahra
Umpqua Holdings, Portland, OR (UMPQ) recently tried and failed to buy nearby American Perspective Bank of San Luis Obispo, CA (APBA), suggesting interest in a regional acquisition
AmericanWest Bank, Spokane, WA (private) Chairman Scott Kisting has said he'd like to triple in size over next several years mainly via acquisition
Financial Snapshot
(as of 3/31/2012)

Total assets:
$623M
Tangible book value per share:
$6.00
NPAs to assets:
6.9%
Price to book:
38%
Market cap:
$13.8M
Dividend yield:
0.00%
Trailing 12-month return on assets:
-1.59%
Trailing 12-month return on equity:
-17.4%
TARP
$15.6M
The Crew
William Peeples, Chairman
Martin Plourd, Acting President and CEO
Robert Bartlein, Vice Chairman
Red Flags
In January, CWBC signed a highly restrictive consent order with the OCC and regulators have indicated they won't allow payment of TARP dividends.

NPAs are up from 4.6% a year ago, 5.4% at year end, and climbing. Retained earnings are pretty much gone. And of $51M of remaining equity $15.6M (30%) is TARP.

CEO Marty Plourd was the COO and a Director of Temecula Valley Bank from July 2005 until the bank was seized in 2009, attracting criticism of the FDIC Inspector General for "risk controls related to concentrations in commercial real estate and land development loans" and "inadequate supervision of lending units." I want to believe it was CEO Wacknitz's fault, but is that naive?

Chairman William Peeples seems to be a decent guy, was a founder of the bank, clearly believes in it, is constantly buying Community West's stock in the open market, and now owns 840,000 shares, yet appears oddly disinterested in prospective buyers knocking at the door:
  • Knock knock. In the mid-2000s, Jim Dierberg of First Banks, Inc. Clayton, MO (private) made several friendly acquisition overtures. Community West was performing well and Peeples was still having fun. CWBC opted to await a "better opportunity."
  • Knock knock. Last summer 2011, or so I've been told, PacWest expressed an interest in an acquisition, but Peeples declined, allowing President Lynda Nahra to be lured away PacWest, instead.
  • Knock knock. Who's next, our Better Opportunity? — or, the Grim Regulator?
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Horizon Bancorp, Michigan City, IN (HBNC)

The Case of a Five Star Performer on the Horizon of Lake Michigan


Want to hear a rare tale of a high performing bank trading at a bargain price? After 12 straight years of record earnings and greater than 17% return on equity, Horizon's current price is barely above book value, even after rising five points in the past month. Given how much and for how long Horizon has been outshining its peers, I think at twice book it would still leave room for a nice return.

Disclosure: As of this posting, I own significant shares of HBNC and a 13-D filing position in acquisition target HRTB, and may subsequently either dispose of them or purchase more.

Prospective Buyers
In my opinion, Horizon shareholders are best served under the current leadership of Messrs Dwight and Edwards. However, it's comforting to know that the bank would be a great target for many companies, including:
Fifth Third, Cincinnati, OH (FITB)
Wells Fargo, San Francisco, CA (WFC)
Financial Snapshot
(as of 3/31/2012)

Total assets:
$1.5B
Tangible book value per share:
$21.35
NPAs to assets:
1.4%
Price to book:
110%
Market cap:
$125M
Dividend yield:
2.1%
Trailing 12-month return on assets:
1%
Trailing 12-month return on equity:
12%
Luminaries
Robert Dabagia, Chairman
Craig Dwight, CEO
Thomas Edwards, President, COO
Gold Stars
Horizon was recently named one of just 45 banks on the Keefe, Bruyette & Woods Honor Roll of top performing banks in the country.

Horizon's earnings grew by 58%, from $8.1M in 2007 to $12.8M in 2011, navigating through the Great Recession with flying colors.

Q1 2012 performance measures show even greater profitability—a 1.2% return on assets, 14.7% return on equity, and an even more impressive 17.6% return on tangible common equity.

Horizon hasn't experienced a single loss for any quarter for at least the past six years. In contrast, the aggregate earnings of all banks in Indiana and Michigan were a loss in both 2008 and 2009.

The highest level of NPAs to total loans Horizon ever reached in the past five years was 2.4% vs the industry average of nearly 5%.
Sources
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