Capital Pacific Bank, Portland, OR (CPBO)

A Case of Earning One's Keep in Portland

This bank stock has me wanting to wage a "Bank on (not just in) Portland" campaign, just to see how much wealth we could help Portlandians create for themselves. Imagine:

Within one mile, Portland's Bank of America, U.S. Bancorp, and Wells Fargo have branches holding $10.6 billion in deposits. If even a small fraction of Portlandians were to move their deposits from these corporate banks — (don't worry, they won't even notice) — next door to Capital Pacific Bank, this fine community bank would grow exponentially.

Meanwhile, if Portlandians were to trade in any U.S. Bancorp stock they may own — (expensively trading as high as 293% of tangible book value) — for CPBO stock (cheap at 101.3% of book value) — they could grow their own wealth exponentially right along with Capital Pacific. Wouldn't that be cool?

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

Prospective Buyers	In my opinion, Capital Pacific Bank has earned the right to remain independent and to control its own destiny. That being said, I am sure CPBO is pretty darn attractive to these local competitors: Pacific Continental, Eugene, OR (PCBK). Deposits in PCBK's two branches combined fall short of those held in CPBO's one branch by 50%.  Umpqua Holdings, Portland, OR (UMPQ). CPBO's one branch bank has more deposits than 21 of UMPQ's 22 Portland area branches! Washington Federal, Seattle, WA (WAFD). CPBO has twice as many deposits in its one-branch bank as WAFD has in two.
Financial Snapshot (as of 12/31/2013)	Total assets: $239M Tangible book value per share: $8.36 NPAs to assets: 1.6% Price to book: 101.3% Market cap: $21.7M Dividend yield: 0% Trailing 12-month return on assets: 0.86% Trailing 12-month return on equity: 8.8% TARP: $4M* *Redeemed 11/09/2012
Luminaries	Karen Whitman, Chairman Mark C. Stevenson, President and CEO Felice I. Belifiore, Executive VP and CFO
Gold Stars	Capital Pacific Bank has PURPOSE With a strong niche in lending to sustainable businesses and non-profit organizations underserved by America's corporate banks, CPBO is filling a real need and making a real difference specifically for Portland. For doing this work, CPBO's Mark Stevenson receives less than 2% of the annual compensation a typical corporate bank CEO draws every year. Would you rather have your deposits support Mark, or contribute to the $14M in compensation Bank of America's CEO Brian Moynihan gets (for doing things like damage control for the company's illegal activities). Bottom line? Portlandians can feel great about moving their deposits and investments over to CPBO. Capital Pacific Bank has PERFORMED Since peaking at nearly 6% at the end of 2010 (when CPBO had a small yearly loss), NPAs have been in steady decline to the current 1.6%.  CPBO can boast three years straight of quarterly profits, profits are growing, and in Q4 2013, ROE surpassed 11%.  Bottom line? Portlandians can reasonably expect CPBO stock will eventually trade at substantial premiums to book value.
Sources	Capital Pacific Bank website 2013 Annual Report SNL Financial Interviews with management Confidential interviews with shareholders

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.

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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! 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. Healthy insider ownership. Including ESOP shares, Merchants Bank insiders own over 23% of MFGI shares. 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. Lagging share price. While the KBW Bank Index has risen over 38% in the past 12 months, MFGI is up only 1%. 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	Merchants Bank website 2008 Annual Report 2012 Annual Report SNL Corporate Profile SNL Article (Members Only) SNL Financial Interviews with management Confidential interviews with shareholders

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.

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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: $607M Tangible book value per share: $32.51 NPAs to assets: 3.1% Price to book: 82.3% Market cap: $42.4M Dividend yield: 2.8% Trailing 12-month return on assets: 0.86% Trailing 12-month return on equity: 10.4%
Luminaries	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.
Sources	Peoples State Bank website SNL Corporate Profile April 2012 Proxy Statement 2011 Annual Report SNL Article (Members Only)

HopFed Bancorp, Hopkinsville, KY (HFBC)

The Case of the Missing 40% Growth in a Bible Belt Bank

After a few years of hanging onto my hopes for HopFed, I'm afraid the only reason to invest in it today is if you believe management will come to their senses and sell instead of continuing to run the bank into the ground. Given HFBC's still outstanding $18M in TARP, its MOU, deteriorating asset quality, and unfulfilled promises, wouldn't shareholders be better served by the bank selling for even 70% of book value to a company that's capable of earning decent returns? Scarier still, that opportunity may be waning.

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

Prospective Buyers	Any of these three super-regionals with branches overlapping HFBC's would have a prayer of resurrecting the bank's performance: BB&T Corp, Winston Salem, NC (BBT) Regions Financial, Birmingham, AL (RF) US Bancorp, Minneapolis, MN (USB)
Financial Snapshot (as of 3/31/2012)	Total assets: $1.042B Tangible book value per share: $13.39 NPAs to assets: 1.8% Price to book: 52.8% Market cap: $53M Dividend yield: 1.1% Trailing 12-month return on assets: 0.52% Trailing 12-month return on equity: 4.7% TARP: $18.4M
The Crew	Gilbert Lee, Chairman John Peck, President and CEO Billy Duval, Sr VP, Treasurer, and CFO
Red Flags	HFBC isn't meeting the following five of my top criteria for investing in banks: Invest where NPAs are declining. Inexplicably, HFBC's Q1 2012 NPAs rose a steep 30% after three quarters of declines Invest where you can expect above-average returns. HFBC hasn't produced a decent return on the bank's capital for over two years. Invest where insiders are buying. HFBC insiders — led by Chairman Gilbert Lee and Directors Boyd Clark and Harry Dempsey — have been Net Sellers of stock in the open market since HFBC's ill-fated Secondary in 2010. Invest where Management has a strong history of keeping its word. See timeline below of HFBC's performance and questionable commitment to integrity.  Invest where Officer interests are aligned with shareholders'. Since 2008, HFBC CFO Billy Duvall and COO Michael Woolfolk have raised their compensation 47% and 29%, respectively, while producing significant declines in company earnings and share price.
Sources	Heritage Bank website Q4 2011 Financial Reports 2011 Annual Report April 2012 Proxy Statement SNL Financial

HFBC Performance Timeline

DATE		EVENT	PRICE / SHARE
1998	FEB 09	HFBC goes public	$10
2009	OCT 28	Investor presentation shows Book Value $16.98, Dividend Yield 4.75%	$9.61
2010	FEB 26	President Peck exercises and surrenders 30K shares, netting ~ $50K	$11.45
	MAR 22	Board raises salary of CFO Billy Duval	$10.90
	APR 26	Howe Barnes raises HFBC rating to Buy with $20 price target	$14.41
	MAY 06	HFBC announces MOU with Regulators	$12.11
	MAY 25	HFBC files Registration Statement to sell additional shares	$11.02
	JUN 09	President Peck and CFO Billy Duval predict 40% growth to Howe Barnes investors	$9.39
	JUN 16	HFBC issues 3.33M shares @ $9.00	$8.66
	JUL 26	HFBC releases Q2 EPS of $0.44 claiming “profitability levels are improving”	$9.03
	NOV 01	HFBC releases Q3 EPS of $0.20	$6.10
2011	JAN 31	HFBC releases Q4 EPS of $0.07, half of analyst estimates	$7.70
	SEP 22	HFBC cuts dividend 75%, from to $0.02 from $0.08	$5.66
2012	MAY 03	Analyst Ross A. Demmerle, Hilliard Lyons, issues Neutral report for HFBC, citing the bank’s “weak fundamentals and foggy outlook”	$8.80
	JUN 22	Investors are still awaiting the promised 40% growth, or at least a clear and honest explanation for two years of failure to perform	$7.07