|Shares Out. (in M):||38||P/E||NA||NA|
|Market Cap (in $M):||40||P/FCF||NA||NA|
|Net Debt (in $M):||140||EBIT||1||1|
MBHI, Midwest Banc Holding, is a poorly run Chicago bank that has tangible common equity of -$144M as of Q4/09. It is currently trading at $1.10 per share and has a market value of $40M. In all likelihood it is seized by the FDIC within a month or two and the equity goes to zero.
They are already below the official “well-capitalized” regulatory measure for banks, and on March 29, they received a notice from their regulator, the Fed, that within 45 days they must raise capital to become adequately capitalized, sell the bank, or take other measures to increase capital. As a result, MBHI is currently trying to:
1) Convince its subordinated debt-holders ($79M total face value) to convert to common stock, and
2) Pursuade an outside investor to put in $125M+ in new equity capital. They may get the debt-holders to convert at a reasonable rate, because the FDIC may have told them they’d be wiped out in any sort of seizure scenario, but a new and unencumbered investor would likely demand substantial ownership of the company by massively diluting the current shareholders--with the share count rising from 38M to a minimum of 400M (in a recent proxy measure, MBHI changed its authorized number of shares from 50 million to 4 billion). In such a case, tangible book value would likely not be more than $0.35 per share and normalized EPS would not be more than 2 cents per share.
So, in a low-probability best-case scenario, MBHI is trading at 3 times tangible book and 50 times blue-sky earnings.
Below is a snapshot of the balance sheet as of 12/31/2009:
Securities $581 million
Commercial real estate 726
Residential mortgage/consumer 330
Total loans 2,320
Total Assets 3,436
Liabilities and Equity
Non-interest demand deposits 343
Interest bearing demand deposits 177
Money market/savings 342
Time deposits (CDs) 1,717
Total deposits 2,579
Repurchase/FHLB borrowings 538
Junior sub debt 61
Subordinated debt 15
Revolving note payable 9
Term note payable 55
Preferred equity 34
TARP preferred equity 89
Common equity (67)
Total liabilities and equity 3,436
On the balance sheet, MBHI’s current stated common equity is -$67M. Adjusting for the goodwill, tangible common equity (TCE) is $-144M. In January, MBHI, did get $34M of non-TARP preferred stock to convert into 10M common shares. So the TCE was closer to -$110M as of January. But MBHI will probably lose another $10M in Q1, so my estimated TCE is currently -120M (and 38M shares). Even if they manage to convert $79 of subordinated debt, TCE will still be substantially negative (I estimate -$41M, with a share count of 63M). Additionally, MBHI managed to qualify for an $85M government TARP investment in late 2008, and on March 2nd of 2010, lightning struck twice when they convinced the Treasury to convert its TARP in mandatorily convertible preferred stock--if MBHI can get the debt holders to convert and get a new investor to put in $125M+, it converts into 47M shares (although there are non-disclosed anti-dilution protections--I’m guessing it will be more like 60M shares). The Treasury likely reasoned that it would lose all of its investment in any other alternative--all of which would lead to seizure by the FDIC.
So if the sub-debt holders convert and if we assume TARP converts, MBHI could conceivably have +$44M in TCE and 123M shares, translating to book value of +$0.36 per share for proforma Q1/10. However, it is highly likely that MBHI continues to lose around $10M per quarter for the next several quarters, dropping TCE and book value close to zero or negative by the end of the year--which still makes MBHI a very distressed bank.
Everything is then dependent on the new potential investor. At what price would the investor invest $125M. How much control would he or she want? I’m guessing 90% at a minimum (although the TARP’s non-disclosed anti-dilution measures will complicate things). A $125M investment at $0.10 per share translates to 1.250 billion new shares and $1.37 billion total shares and a new tangible book value per share of around $0.10. (And in MBHI’s best quarter in the last 10 years, it earned $5.1M. If we annualize to 20M, that translates to EPS $0.015. In this scenario, it would earn about a penny per share. After looking at the historic profitability of MBHI (see below) anyone making an investment in MBHI would have to be a complete nincompoop. (A quick look at the deposit profile also reveals that most of the deposits are low-quality CDs--MBHI is a terrible banking franchise on many different levels.)
Below is a snapshot of the income statement for Q4/09 and Q4/08.
Income statement Q4/09 Q4/08
Net interest revenue $15 million $20
Provision for credit losses 99 20
Fee revenue 3 3
Salaries and benefits 9 14
Total operating expenses 25 25
Goodwill impairment charge 14
Pretax loss -120 -22
Taxes 0 -27
Net income -120 4
The most important thing to note is that MBHI’s pre-provision profit in Q4/09 was -$6M. That’s right, MBHI loses money even before accounting for credit costs. Undoubtedly, MBHI’s op/ex are elevated as a result of the crisis (I estimate about $3M per quarter), but MBHI has always had poor profitability--even during the boom years (i.e. 2006), its ROA was only 0.67% while its ROE was only 7%. Even if credit does get better over the next few quarters, MBHI is going to continue losing money for a long time. The two sell-side analysts that cover MBHI are projecting an average loss of $1.46 per share for 2010, or $55M total. The estimated loss for 2011 is $0.60 per share or $23M total. This is simply not sustainable for a company with a negative tangible equity position.
And we can’t discuss a bank today without looking at its credit quality profile. MBHI’s is ugly as of Q4/09:
Nonaccrual loans: $274M (11.8% of total loans)
Troubled debt restructurings: 12
Foreclosed properties: 27
Total non-performing assets: 312 (9.09% of total assets)
Loan loss reserves: 129
In the past year, MBHI’s NPAs have quadrupled from $84M to $312M (13.4% of loans--these guys are terrible underwriters) and that includes $97M in net charge-offs throughout the past year. Loan loss reserves grew from $44M to $129M, but still stand at a low coverage rate of 41% of NPAs--most other banks are well above 50%. Its Texas ratio (NPAs divided by reserves plus equity) can’t even be defined because LLR + TCE is negative. Even if we include the potential sub-debt and TARP conversions, the Texas Ratio is still a very lofty 185%.
The stock has gone vertical the last couple of weeks with the day-traders going nuts. I think you can short it above $1.00 and be relatively safe, but I suspect that if MBHI announces its debt-holders have converted, the stock could spike some more, as it did on January 21, when they announced the preferred stock conversion. That will likely be the best entry point to short, but the borrow may be limited at that time. I think it is worth building a position now and saving some powder to add on any potential spike. In the meantime, let’s all hope and pray the day-traders continue to pump the stock to allow for a higher cost averaging.
Debt conversion announcement and potential stock price spike
Terrible Q1/10 results
FDIC seizure causes the stock to go to zero