Brace yourself as I introduce Croghan Bancshares (CHBH), a boring brick-and-mortar bank franchise operating in Ohio around Toledo and Sandusky with approximately $850 million total assets.
What Croghan lacks in glitz and glamour (and market liquidity…), it more than makes up for by producing superb operating profitability and delivering shareholder returns. The bank’s profitability metrics (ROA/ROE, see “Financial Overview” section) are nothing short of spectacular.
Working in favor of long-term shareholders is a nontrivial lack of market liquidity. CHBH shares trade with a very shallow volumes and, as a result, the institutional community bank investor base will likely ignore Croghan as an investable opportunity. Likely due to the liquidity issue, the current valuation of CHBH is cheap relative to peers and very compelling consider they deliver best-in-class performance. I’ll highlight the three potential drivers I see working for long-term shareholders (note: multiple expansion should not be expected to contribute forward returns given the aforementioned liquidity issue with the shares):
- Dividend Income: Croghan pays a current dividend yield of ~2.75% and has been diligent about boosting its per-share payment over time. The company maintains plenty of optionality in its dividend policy as the current annual dividend equates to a manageable ~30% payout ratio.
- Compounding Equity: any earnings not paid out as dividends are either reinvested into the growth of the franchise or simply booked as equity and allowed to grow over time for the benefit of CHBH shareholders (since year-end 2013, CHBH has grown tangible book value by ~52%). Given the easing regulatory and tax environment, it is entirely reasonable to expect ROE’s anywhere from 9-12%.
- Potential M&A Upside: At ~$850 million in total assets and attractive adjacent geographies, Croghan has runway to grow as a standalone bank via organic growth and smaller bolt-on acquisitions. Should management ever consider selling, there are many OH-based suitors that make a ton of sense. Given the quality of deposit funding (cost of interest-bearing deposits is just 0.43% and its deposit costs have hardly moved since 2013!), Croghan would surely garner a hefty premium from potential buyers like Civista (CIVB), First Defiance (FDEF), or United Community (UCFC).
Taking items 1. and 2. together, it shouldn’t surprise that CHBH has delivered a 13.9% annualized return (dividends reinvested) over the past 5 years. Given where we are in the economic and banking/credit cycle, I think it foolish to expect similar shareholder returns over the next 5 years. We will get a economic downturn and banks will have to operate through a credit cycle, likely beginning at some time in the next 1-3 years.
Warning aside, I’m not intelligent enough to attempt to market-time a recession and credit cycle. What I am comfortable doing is investing alongside a management team and franchise that has successfully operated through a significant liquidity and credit shock (hello 2007-2009). How did CHBH weather the financial crisis? Well, the *worst* year it had was FY 2009 when it still printed a 0.7% ROA and 5.6% ROE, not to mention its NPAs couldn’t even crack above 2.4% (as a percentage of assets). Even if you invested in CHBH right at the top in its share price (peaked in May 2007), shares have a returned 7.8% annualized from May 2007 to August 2018.
Overall, CHBH should continue to deliver steady long-term returns for its shareholders. It is a wonderfully operated banking franchise that should appeal to investors that don’t require the liquidity and can tuck it away for the long-term. And even though it currently trades a little high from a P/TBV perspective (150%), I think the superior earnings performance, low-cost deposit base, and low P/E multiple (11.5x) more than offsets the P/TBV level.
Bank Description & Geography
Croghan Bancshares, a financial holding company incorporated, owns all of the outstanding shares of The Croghan Colonial Bank, an Ohio state-chartered bank incorporated in 1888 and headquartered in Fremont, Ohio, and Croghan Risk
Management Inc., a captive insurance company, incorporated in 2016.
The Bank offers a diverse range of commercial and retail banking services through its 17 banking centers as well as one Loan Production office. Products are comprised of traditional banking services such as consumer, commercial, agricultural and real estate loans, personal and business checking accounts, savings accounts, time deposit accounts, safe deposit box services, and trust department services.
Prospective OH-based Buyers
- First Financial ($13.1B Assets / FFBC)
- First Defiance ($3.0B Assets / FDEF)
- United Community Financial ($2.5B Assets / UCFC)
- Civista Bancshares ($2.0B Assets / CIVB)