John Donnelly quoted in Crain’s Detroit Business – “Banks’ wild ride”

Originally published March 27, 2011 in Crain’s Detroit Business by Tom Henderson

Most of the local community bank executives who have survived the recent economic crisis — and the staggering losses fueled by defaults in commercial lending — think the worst is behind them.

But as local banks start returning to profitability, there’s one thing that likely won’t return to normal: shareholder value for banks that are publicly traded.

By Crain’s publication deadline, nine of 11 area public banks had reported earnings for the fourth quarter that ended Dec. 31, with six reporting better quarters than in the fourth quarter of 2009. Four were in the black, compared with two a year ago.

Shareholder value in area public banks, however, has been decimated and shows no sign of improvement.

“Much of that is gone forever,” said Don Mann, regulatory liaison for the East Lansing-based Community Bankers of Michigan, a trade association.

“They’re not going to get that money back. There’s just been too much erosion in the value of these banks,” said John Donnelly, managing director of the Grosse Pointe-based investment banking firm of DPP & Partners, which focuses on helping community banks raise money — and in happier times helped many of them across the country go public.

“Shareholders can only hope to get a fraction of that back. A lot of these banks are trading on speculation now,” Donnelly said of those still willing to buy shares in the most battered stocks.

According to research by Loomis Sayles & Co. LP in Bloomfield Hills, the combined peak market capitalization in the past decade of nine area public banks it tracks — the value of their common stock — totaled more than $5 billion.

Their combined market cap today is $625.4 million, a decline of more than 87 percent.

Individual share prices for stocks have fallen off a cliff since Jan. 3, 2005, arguably a peak time for area community banks. Oxford Bank Corp. traded at $60.40 then and was at $1.01 last week; Flint-based Citizens Republic Bancorp Inc. was at $34.81 then and is at 88 cents; Howell-based FNBH Bancorp Inc. fell from $31.76 to 24 cents; Mt. Clemens-based Community Central Bank Corp. fell from $13.45 to 24 cents.

Some banks issued more stock to stay afloat, diluting share price. Other declines in share price reflected market reaction to ongoing losses or attempts by banks to purposely shrink their assets to meet regulatory requirements requiring certain ratios of capital to assets.

In any event, share prices are tiny fractions of what they were six years ago, and while some rise is expected, no one foresees shareholders being made whole, despite improved bottom lines.

“The decline in value of community banks has made many of them uninvestable,” said Terry McEvoy, senior equity analyst for New York-based Oppenheimer & Co. Inc. Before the recession hit, he used to write a quarterly report on Michigan’s community banks and bring would-be institutional investors here to meet with local bank executives.

Both have long since been discontinued.

“I don’t want to scare shareholders, but it will continue to be a slow process for these companies,” he said. “Will Citizens Republic ever be a $40 stock again? The answer, quite frankly, is no. As for investors in some of the smaller banks, cutting your losses at $1 and getting out now instead of riding it down to zero might be an option.”

H. Douglas Chaffin is president and CEO of Monroe-based MBT Financial Corp., one of the area’s largest community banks, with about $1.2 billion in assets, 18 branches in Monroe County and five in Wayne County. He declined to talk specifically about the potential for a rise in his bank’s share — it was at $23.80 to start 2005 and was trading last week at $1.70 — but said investors in general can expect some bounce back as bank earnings improve.

“I’m very optimistic and very confident the worst is behind us, but by no means is it a spigot being turned on,” said Chaffin, who was chairman of Michigan Bankers Association in 2008 and 2009. “It’s impossible for me to speculate as to what stocks will do in the future, but we’ll ultimately see better earnings reflected in higher share prices.”

Michael Ross, chairman and CEO of Dearborn Bancorp Inc., said he didn’t want to speculate about his bank’s future share price for fear of running afoul of regulators, but “my sense is we’ve hit the bottom and are starting to feel our way out of it. We’ve seen a firming up of real estate values. A year ago, if we took possession of a property and sold it at auction, we’d have had nominal bidding at very low prices. Today, we’re getting multiple bidders at much better prices.

“It’s going to take time and an improved Michigan economy and hard work to get share values to come back. But the banks that are showing signs of life, it might be a good time to buy,” he said.

DPP is evolving its business model to reflect changing times for community banks. In the 1990s and 2000s, it was common for existing community banks to go public — Oxford Bank, which was founded in 1884, went public in 2000, and the now-closed Peoples State Bank, founded in Hamtramck in 1909, went public as PSB Group Inc. in 2003.

It was also common for new, small community banks to launch with IPOs, including Community Central in 1999, FNBH Bancorp in 2003 and Bank of Birmingham in 2005.

DPP had a national reputation for helping established and new community banks with their IPOs.

“That’s a dead model,” Donnelly said of new and small community banks going public.

“Regulators won’t allow it,” said Mann. “You can’t grow a publicly traded community bank without taking on some risk, and regulators won’t allow risk anymore. It’s not going to happen again.”

Both said First Michigan Bancorp Inc. — a fast-growing, well-funded community bank that has bought failed banks in Wisconsin and Michigan and plans to buy others in Illinois, Ohio and Indiana — will be the exception to the rule if it goes public, as planned, later this year or next.

Donnelly said the next phase for the state and nation’s community banks is a wave of consolidations, and that his firm is raising a second private equity fund of $30 million to $50 million to invest in such mergers and acquisitions.

“We want to invest in the right management teams as the roll-up in the industry takes the tired and poor out of foster care. It’s going to be very Darwinian.”

Donnelly said that while the community bank model has been shaken, it will survive.

“Is there a place in small markets for small community banks? Sure,” said Donnelly. “But in large markets like Detroit, scale will be important. There’s going to be consolidation.”