Seeking Alpha
Value, long-term horizon, research analyst, growth
Profile| Send Message|
( followers)  

The U.S. Treasury announced that it is starting secondary public offerings of the preferred stock it holds in seven institutions. These are institutions Treasury bailed out with taxpayer funds. Is this a sign the financial sector is stabilizing? And are these offerings an opportunity for investors?

  • Taylor Capital Group, Inc., Rosemont, IL (NASDAQ:TAYC)
  • Ameris Bancorp, Moultrie, GA (NASDAQ:ABCB)
  • First Defiance Financial Corp., Defiance, OH (NASDAQ:FFKT)
  • LNB Bancorp, Inc., Lorain, OH (NASDAQ:LNBB)
  • First Capital Bancorp, Inc., Glen Allen, VA (NASDAQ:FCVA)
  • United Bancorp, Inc., Ann Arbor, MI (OTCQB:UBMI)

How is the U.S. Treasury involved?

The U.S. Treasury acquired interests in these companies through the Capital Purchase Program (CPP) created in October 2008. The program's purpose was to stabilize the financial system, providing capital to viable financial institutions of all sizes throughout the nation. This was a way for Treasury to help these institutions strengthen their capital base and provide increased capacity to lend to businesses and consumers - one part of Treasury's effort to support the U.S. economy.

The program was voluntary, with Treasury providing $205 billion of capital to 707 financial institutions by purchasing senior preferred shares. Terms were standardized for all participating institutions and included warrants for future Treasury purchases of common stock.

The CPP was made available to qualifying U.S. controlled banks, savings association, and certain bank and savings and loan holding companies. Under CPP terms, participating institutions pay the Treasury a five percent dividend on senior preferred shares for the first five years following the Treasury's investment and a rate of nine percent per year following that.

Banks can repay Treasury under certain conditions established in the purchase agreements and under the American Recovery and Reinvestment Act.

Why is Treasury selling?

Treasury was given the right to sell the shares when market conditions stabilize - so maybe this move is indeed a sign that the U.S. financial sector is moving in a positive direction. Or, at least a sign that these companies have achieved improved stability.

Are these good investment deals?

As we look more closely at the companies, we think "maybe" for some and "maybe not" for others. You'll see our take below. And remember, before you decide to invest, make sure you read the prospectus, including the financial statements and all the risk factors. The prospectus is the official document that regulators have reviewed and approved. They caution that you should not rely on information that is different than the prospectus.

So when's the auction?

Treasury shares that are up for sale are expected to sell through a modified Dutch auction. Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch, acquired by Bank of America (NYSE:BAC) and Sandler O'Neill + Partners, L.P. (Sandler O'Neill) are the auction agents. The auction began Monday, June 11, 2012 at 8:30 a.m. EST and will close on June 13, 2012 at 6:30 p.m. EST. Bids can be placed in increments of whole shares at a price per share equal to or above the minimum prices in the associated preliminary prospectus supplements.

At settlement, winning bidders will pay the clearing price for the preferred stock plus accrued and unpaid dividends from and including May 15, 2012. The auction procedure and terms are described in the preliminary prospectus supplements.

A preliminary prospectus supplement has been filed by each company with the SEC and is available from the SEC's website at http://www.sec.gov.

What if I miss the auction?

Even if you don't participate in the auction, you may still have an opportunity to purchase or short these stocks once they are in non-government investor hands.

Now that you have the logistics, let's look at the companies and the offers. Here's our take from the prospectus, the Weiss Watchdog stock rating and the Weiss Financial Strength Rating.

All of the bank subsidiaries face similar risk factors related to political and regulatory environment, competition, challenging economic conditions, declining real estate values, changes in monetary policy and interest rates, and the potential for higher FDIC insurance premiums. The impact of these factors on each company may vary depending on their lines of business.

Taylor Capital Group

  • Weiss Watchdog Stock Rating for Holding Company = C (Fair)
  • Weiss Financial Strength Rating for Cole Taylor Bank = D+ (Weak)
  • Offer: 104,823 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 9550 West Higgins Road, Rosemont, IL
  • Phone: 847-653-7978

Taylor Capital Group is a bank holding company headquartered in Rosemont, Illinois, a suburb of Chicago. Its revenue comes primarily from the wholly-owned subsidiary, Cole Taylor Bank.

Primary businesses are commercial banking, asset-based lending, mortgage banking and retail banking. Commercial clients are generally closely-held, middle market companies with annual revenues between $5 million and $250 million. Commercial lending consists of loans for working capital, business expansion or acquisition, owner occupied commercial real estate financing, revolving lines of credit and commercial letters of credit. It also provides treasury cash management services. Asset based lending through Cole Taylor Business Capital is supported by receivables/inventory or collateralized with equipment and real estate.

Mortgage loans are originated, sold and serviced through Cole Taylor Mortgage, qualified for business in 32 states and the District of Columbia. Investment management and brokerage services are offered through third party providers.

Key Financials as of March 31, 2012

  • Assets: $4.7 billion
  • Loans: $3.1 billion
  • Deposits: $3.0 billion
  • Stockholder Equity: $416.8 million
  • See the prospectus on the SEC.gov website to review risk factors.

Ameris Bancorp

  • Weiss Watchdog Stock Rating for Holding Company = B (NASDAQ:GOOD)
  • Weiss Financial Strength Rating for Ameris Bank = D+ (Weak)
  • Offer: 52,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 310 First St. S.E., Moultrie, GA 31768
  • Phone: 229-890-1111

Ameris Bancorp is a financial holding company conducting business primarily through its wholly-owned subsidiary, Ameris Bank, which provides a full range of banking services to its retail and commercial customers who are concentrated in Georgia, Alabama, Florida and South Carolina.

Ameris operates 62 domestic banking offices with no foreign activities.

Key Financials as of March 31, 2012

  • Assets: $3.04 billion
  • Loans: $1.98 billion
  • Deposits: $2.67 billion
  • Stockholder Equity: $297.7 million
  • See the prospectus on the SEC.gov website to review risk factors.

First Defiance Financial Corp (NASDAQ:FDEF)

  • Weiss Watchdog Stock Rating for Holding Company = B+
  • Weiss Financial Strength Rating for First Federal Bank of the Midwest = C+ (Fair)
  • Offer: 37,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 601 Clinton Street, Defiance, OH 43512
  • Phone: 419-782-5015

First Defiance is a thrift holding company with two wholly owned subsidiaries, First Federal Bank of the Midwest and First Insurance Group of the Midwest, Inc. First Federal primarily operates traditional banking activities including originating and servicing residential, commercial and consumer loans and providing depository, trust and wealth management services.

First Insurance is an insurance agency with revenue from commissions on sales of property and casualty, group health, and life insurance products.

Key Financials as of March 31, 2012

  • Assets: $2.1 billion
  • Loans: $1.4 billion
  • Deposits: $1.7 billion
  • Stockholder Equity: $281.4million
  • Special Risk Factors:
  • · Local high unemployment (above national and state averages)
  • See the prospectus on the SEC.gov website for a more complete discussion of risks.

Farmers Capital Bank Corp

  • Weiss Watchdog Stock Rating for Holding Company = D+ (Weak)
  • Weiss Financial Strength Rating for:
  • Farmers Bank & Capital Tr Co = D+ (Weak)
  • United Bank & Trust Co = D (Weak)
  • First Citizens Bank = C (Fair)
  • Citizens Bank of Northern KY = D+ (Weak)
  • Offer: 30,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 202 W. Main St., Frankfort, KY 40602
  • Phone: 502-227-1668

Farmers Capital Bank Corporation is a bank holding company. It has a wide range of banking and bank-related services at 36 locations throughout Central and Northern Kentucky. Bank subsidiaries are Farmers Bank & Capital Trust Company, United Bank & Trust Company, First Citizens Bank and Citizens Bank of Northern Kentucky, Inc. It also owns FCB Services, Inc. a nonbank data processing subsidiary which provides services primarily to its own banks. It also owns EKT properties, Inc., which is involved in real estate management and liquidation for some properties repossessed by subsidiary banks.

Key Financials as of March 31, 2012

  • Assets: $1.89 billion
  • Loans: $1.05 billion
  • Deposits: $1.457 billion
  • Stockholder Equity: $160 million
  • Special Risk Factors:
  • · High level of nonperforming loans and other real estate owned increase risk profile and the amount of capital regulators require
  • · Resolution of nonperforming assets requires significant time commitment from management
  • See the prospectus on the SEC.gov website for a more complete discussion of risks.

LNB Bancorp, Inc.

  • Weiss Watchdog Stock Rating for Holding Company = B
  • Weiss Financial Strength Rating for Lorain National Bank = D (Weak)
  • Offer: 25,223 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 457 Broadway, Lorain, Ohio 44052
  • Phone: 440-244-6000

LNB Bancorp is a bank holding company engaged in diversified banking services including lending, depository services, investment services and other traditional banking through a wholly-owned subsidiary, The Lorain National Bank. The bank provides personal, mortgage and commercial banking products, investment management and trust services through 20 retail locations in Ohio. Management believes quality personal service and local community involvement give the Bank a competitive advantage over other financial institutions operating in its markets.

Key Financials as of March 31, 2012

  • Assets: $1.2 billion
  • Loans: $845.1 million
  • Deposits: $1.012 billion
  • Stockholder Equity: $114 million
  • See the prospectus on the SEC.gov website to review risk factors.

First Capital Bancorp, Inc.

  • Weiss Watchdog Stock Rating for Holding Company = D- (Weak)
  • Weiss Financial Strength Rating for First Capital Bank= D- (Weak)
  • Offer: 10,958 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 4222 Cox Road, Glen Allen, VA 23060
  • Phone: 804-273-1160

First Capital Bancorp, Inc. is a bank holding company with its wholly-owned subsidiary First Capital Bank headquartered in Richmond, Virginia. First Capital Bank operates seven full-service branch offices in the Richmond area. The bank is engaged in general commercial banking focusing on small and medium-sized businesses and their owners and key employees in the professional community. Emphasis on personalized service, access to decision makers, quick turnaround for lending decisions and offers comparable products to those offered by larger banks in the market area.

In May 2012, it raised $17.8 million through the sale of approximately 8.9 million shares of common stock and warrants to purchase an additional 4.5+ million shares of common stock. Read the prospectus for further details. They intend to use the proceeds to capitalize First Capital Bank, and for other corporate purposes including purchase of some of the Preferred Shares from Treasury if the company's auction bid is successful.

Key Financials as of March 31, 2012

  • Assets: $530 million
  • Loans: $368 million
  • Deposits: $428 million
  • Stockholder Equity: $41.4 million
  • Special Risk Factors:
  • · Loss of certain senior officers could impair client relationships
  • · Concentration in acquisition and development real estate loans is 15.6 percent of total loans outstanding. Regulators may require higher allowance for losses and capital levels.
  • · Small to medium sized business market may have fewer financial resources to weather economic downturn.
  • See the prospectus on the SEC.gov website for a more complete discussion of risks.

United Bancorp, Inc. (OTCQB:UBMI)

  • Weiss Watchdog Stock Rating = D+ (Weak)
  • Weiss Financial Strength Rating: United Bank & Trust = D (Weak)
  • Offer: 20,600 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
  • Liquidation Preference Amount $1,000 per Share
  • Principal Office: 2723 S. State Street, Ann Arbor, Michigan 48104
  • Phone: 734-214-3700

United Bancorp, Inc. is a holding company for United Bank & Trust, a Michigan-chartered bank. It is a community based financial services company with four primary lines of business: Banking services, residential mortgage (United Mortgage Company), wealth management and structured finance. Services are provided through 16 banking offices, one trust office, and one loan production office. The bank has correspondent relationships with a small number of larger banks

The Wealth Management Group offers investment services to individuals, corporations and government entities. United Structured Finance Company offers financing solutions to small businesses and commercial property owners, primarily using government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources.

Key Financials as of March 31, 2012

  • Assets: $913.3 million
  • Loans: $566.2 million
  • Deposits: $792.5 million
  • Stockholder Equity: $94.3 million
  • Special Risk Factors:
  • · Small bank size with concentration in small geographic market
  • · Business loans including commercial mortgages (60 percent of loan portfolio)
  • · Exposure to commercial (39.7 percent of loan portfolio), residential real estate (14.4 percent) and construction and development (7.2 percent) loan risks
  • · Potential environmental liability associated with commercial real estate
  • · Pressure from purchasers of residential mortgage loans to repurchase or reimburse losses
  • · Exposure to decline in common stock value of Federal Home Loan Bank of Indianapolis
  • See the prospectus on the SEC.gov website for a more complete discussion of risks.

Okay, so from our perspective none of these look like gangbusters with weak stock ratings for the holding companies and weak financial health ratings for the wholly-owned subsidiary banks.

First Defiance Financial Corp fares better than the other holding companies from an investment standpoint with a stock rating of B+ and its subsidiary bank, First Federal of the Midwest, rated a C+ (Fair) for financial strength.

Ameris Bancorp, LNB Bancorp, Inc. and Taylor Capital Group would be the next to review if you have an interest in researching the purchase of these stocks. The holding companies' stock ratings are in the B to C (Fair) range. Weiss Financial Strength Ratings for the bank subsidiaries don't look as good, falling in the D (Weak) range.

There are so many aspects to consider when you're making investment decisions. We recommend you take a look at the details of the stock ratings and the Weiss Financial Strength Ratings to see what specifically put them in their respective rating categories. And, you'll want to read the prospectus to get all the facts. Then, you'll need to think about what you'd be willing to pay for these stocks that will let you hold or flip them … and make a few bucks. Or, you might consider taking a "short" position.

Of course, you could look at this as charitable giving. Auction participants will be helping the U.S. Treasury get out from under the tangled web of financial supports it created. For investors looking for immediate profits, that may not seem like the best approach, but think of it this way: The success Treasury has getting taxpayer money back and returning these companies to the capital markets, could be a "sign." And good signs, no matter how small in actuality, often have a bigger effect on the markets.

A strong showing from investors both during and after the auction could help the financial sector as it continues to claw out of the crisis. Remember, we said help - not fix!

So, if you have some money to play with, go ahead and roll the dice. Treasury will love you for it, the banks will thank you for releasing them from the extra scrutiny, taxpayers will be happy and you never know - you just might pick a winner.

Source: Roll The Dice On These Bank Holding Companies