LCNB Corp (LCNB), headquartered in Lebanon, Ohio, is the one-bank holding company for LCNB National Bank. LCNB’s roots trace all the way back to 1877 (founded as The Lebanon Citizens National Bank) and it currently operates a 33 branches in markets in or adjacent to Cincinnati, Dayton, and Columbus.
While recent market weakness has not spared many bank socks, LCNB’s share performance has been in a sustained downtrend since shares peaked after the 2016 election. While its hard to attribute the downtrend to a singular cause (the bank’s operating results support an argument that its not an earnings-related issue), there are a couple of items that could be at play. First, LCNB announced a fairly-large acquisition at the end of 2017 (Columbus First Bancorp) with a TBV earnback estimate of 4.3 years. Columbus is a new market for LCNB and that brings heightened execution risk and, typically, a bump in expense items beyond typical one-time deal charges. The one-time items have hit profitability YTD, but this is a proven management team and they should be able to normalize operational costs and begin to see deal benefits in the intermediate-term. Second, the rally in shares in late 2016 and early 2017 got ahead of itself: LCNB shares traded above 200% TBV for nearly the first half of 2017. Its hard for a bank to grow into and justify such a lofty valuation, which is another reason I think shares trended down mid-2017 to early-2018.
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First Northern Community Bancorp (FNRN), headquartered in Dixon, California (Solano County, near Sacramento) is the single-bank holding company for First Northern Bank. First Northern Bank was established in 1910 and currently has a 10 branch network in and around Sacramento.
The market weakness in bank stocks has not hit FNRN as hard as most of its peers as shares are down ~10% since the 2018 highs. The current valuation on shares of FNRN (14x P/E and 135% P/TBV) provides a good entry point to start accumulating a position in an attractive banking franchise.
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Eagle Financial Services, Inc (EFSI), headquartered in Berryville, VA , is a bank holding company for the Bank of Clarke County. Bank of Clarke County currently operates 12 branch offices in Northern Virginia (west of Washington DC) and its largest market is Winchester, a city of ~28,000 residents in the Shenandoah Valley.
The weakness in bank stocks and the broader market has EFSI shares down ~20% since its 2018 highs. The current valuation on shares of EFSI (12x P/E and 125% P/TBV) provides a good entry point to start accumulating a position in an attractive banking franchise.
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Alright, ENBP was one for me, and here is one for the (3) readers of this burgeoning blog.
Peoples Bancorp of North Carolina (PEBK) of Newton, NC. Peoples Bank currently operates 19 banking offices, mainly northwest of Charlotte (Catawba, Alexander, Lincoln, Mecklenburg, & Iredell counties) and they are focused on growing its presence in Wake County (Raleigh MSA).
The weakness in bank stocks and the broader market has PEBK shares down ~20% since its 2018 highs. While PEBK’s P/E and P/TBV valuations have not retreated all the way back to pre-election levels, current valuation (13.7x P/E and 137% P/TBV) on PEBK shares are back at early 2017 levels and provide a good entry point to start accumulating a position in an attractive banking franchise.
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I’ll put disclaimer upfront – this name is illiquid, boring, and unlikely to fit anything but a retail position size. But I like the bank so I’m going to write it up.
ENB Financial Corp (ENBP) of Ephrata, PA. ENB operates as Ephrata National Bank, and it is a small community bank that has served SE Pennsylvania (footprint is around Lancaster, PA) since 1881. Folks, ENB is as boring and straightforward as banking gets these days. Prudent and seasoned management team with a proven track record of performance positioned to compound ROE’s at ~10% while paying a 3%+ dividend.
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Quick market note: Yes, the market has been choppy as most prognosticators have been attributing recent weakness to multitude of items (trade/geopolitical saber-rattling, Fed policy error & corresponding flattening in yield curve, normal test/reset/pause during expansionary cycle, etc…). I’m not going to debate these items or assign points for which argument is the most convincing. What I do see, specific to banks, is there has been a resetting of expectations as bank investors begin to consider the implications of a flatter/flat/inverted yield curve and a maturing/mature economic cycle. Many banks have struggled during the second half of 2018: loan pricing remains very competitive and deposit betas have increased, resulting in NIM pressure/compression. The bank franchises I’ve highlighted have shared a common thread: each company was an attractive deposit franchise trading at an attractive market valuation (P/E, P/TBV, etc…). I’m of the opinion that vetting deposit franchises and analyzing management execution and loan growth/spreads should strip the wheat from the chaff to position one’s capital investments amongst truly attractive bank franchises. With this in mind, the recent selloff has moved some previously fully- or over-valued bank franchises back to “investable” levels.
First up: Mercantile Bank Corporation (MBWM) of Grand Rapids, MI.
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Quick note from an article on SNL today that confirms my priors (just being honest…), and I thought it to be worth sharing as low beta, core deposit funding is a key component I look for in the majority of my community bank investments. From SNL (emphasis mine):
“Matt Kennedy, vice president at investment bank Banks Street Partners, said in an interview that a strong deposit base has move up acquirer wish lists of late. He said lower funding costs attract more potential buyers and thus drives deal prices higher. ‘The conversations when we talk to these acquirers have centered and focused on deposits and the deposit base more over the past two or three quarters than they did previously,’ he said.
Buyers are also increasingly seeking targets with lower loan-to-deposit ratios, Kennedy said, as acquirers want to take that deposit base and use it as a funding source for future loan growth.”
Source: https://www.snl.com/interactivex/article.aspx?KPLT=7&id=46002260 ($)