FMNB.OB - s small Ohio community bank released great earnings today and made my day :-) - 0.24$/share in earnings for this quarter. tTis is an interesting story because they had a stock offering at 3$/share that was unnecessary (imo) and had many existing shareholders leaving money on the table. Here is the story:
The bank issued a statement a while ago to raise their capital levels per agreement with the FDIC, although they could get the metrics up to the agreed upon level (7% tangible equity ratio) even without a secondary. Management decided on a secondary but there was a problem - the charter did not allowed for - it allowed only a a rights offering. So management made a proposal to have the charter changed but shareholders refused.
SO management went ahead - they found a loophole to place 2M shares which were treasury shares (so did not need shareholders approval) with "standbuy" investors and they issued a rights offering for another 3 M shares to existing shareholders . The price for standbuy investors and existing shareholders was 3$/share. At this point FMNB shareprice was weak (no surprise because of all the uncertainty) at about 3.5$/share. Tangible book was about 6$/share , earnings at 0.5$/share and NPA were only about 1.5% of the total assets so this was actually a fairly solid bank, even before the capital raise. This was all posted on the SEC website on Nov 2010 - I had quietly accumulating shares opportunistically before the final conditions for the offering were evident.
Now the totally screwy part was when the conditions for the rights offering were posted on 11/23 that only shares held on 10/25/10 were actually allowed to participate. As I looked into my records, virtually all the shares (except one tiny lot) I accumulated were purchased after 10/25/10.
Now I was really upset that the cutoff date for participation was retroactively set almost a month ago. Per 5:1 offering ratio, I was eligible for a measly few shares (less than 100).
The rights offering itself was a mess - i received the account documents per mail from Wells Fargo late and as it turned out that despite my efforts I could not participate with this account.
My Interactive brokers account has an electronic system to rights offering that I used the first time and when I went through it I noticed that there was an oversubscription option that if an investor fully participated with his eligable shares but others did not, oversubscription allowed him to buy as many shares as desired. So this was like a free option to get extra shares but I saw the chances as dim, since the offering price was 15% below the current share prices. In this account, I signed up for a fairly large max. amount of oversubscription rights (equivalent to 8% of my account capital) at this point, assuming that it would lead to nothing. Strange enough, however, my oversubscription rights all filled! I could not believe my luck. I assume that other investors just did not file the paperwork or their brokers messed up (as did Wells Fargo), so this grew my tiny position of FMNB from a 2% into a 10% position.
Even better,with the stock offering FMNB released great earnings (0.24$/share for the quarter) and my 3$ shares are now worth 4.4$ in an instant. I sold some off, but I think even at this level and with the dilution through the offering, FMNB is still a bargain below 5$/share. I am down to a 7% position now and play the rest for keeps.
Moral of the story - opportunity props up when things get complicated. FMNB is not followed by any analyst, or tracked on any stock forum that I know of. It's a classical situation where the small guy can win because there no big guys around.
I was considering if I should post this story at all. I don't think that FMNB is an interesting investment at this point for most on this board, so you can regard this as a boastful post. But you can also take it as an interesting special situation and it's showing how rights offerings or secondaries create momentary inefficiencies that can be exploited. I personally saw this like a poker bet - I did my homework (went through the FDIC filings to assess the condition of the bank) and through the SEC filings to understand the terms of the offering. As is evident above , there are still risk that something unexpected may happen (in my story it was the retroactively set cutoff date), but it was evident to me that because I did my work, I was not the idiot on the table. The rest is just a little bit of luck (or a good hand of cards).
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