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.

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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: $558M Tangible book value per share: $13.77 NPAs to assets: 4.7% Price to book: 43% Market cap: $15.3M Dividend yield: 0.0% Trailing 12-month return on assets: 0.5% Trailing 12-month return on equity: 6.2% TARP: $10M
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
Sources	Blackhawk Bank website 2011 Annual Report 2011 Proxy Statement SNL Financial Standard and Poors Industry Report Card Confidential interviews with 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.

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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	BancorpSouth website 2011 Annual Report 2012 Proxy Statement SNL Financial

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.

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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	mBank website * May 2012 Proxy Statement SNL Corporate Profile SNL Financial Shareholder letters to management *Note MFNC hasn't posted an Annual Report more recent than 2010

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.

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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?
Sources	Form 10-K Annual Report Proxy Statement Q1 Press Release SNL Financial Confidential interviews with major investors