CORTLAND BANCORP CLDB
August 15, 2016 - 1:11pm EST by
dman976
2016 2017
Price: 15.00 EPS 0 0
Shares Out. (in M): 4 P/E 0 0
Market Cap (in $M): 66 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Community Bank
 

Description

Cortland Bancorp (CLDB)

 

Investment Thesis

Cortland Bancorp is a high upside / limited fundamental downside investment with a significant future catalyst.  The bank is one of the final remaining independent community banks in the $500 million-$1 billion asset range in a rapidly consolidating northern Ohio market, and is therefore a prime candidate for consolidation with numerous buyers interested.  Additionally, the bank recently added two shareholder friendly directors. While you wait for the event, the bank earns an 8%-9% ROE with potential future upside.  Additionally, the bank trades at an undemanding 1.1x tangible book value and has a history of solid loan underwriting (losses during Great Recession were not from the loan portfolio but due to the investment portfolio which is now considerably safer).  I estimate a buyout price of $22-$25 per share, or 50%-70% higher than current. This price should grow at 8%-9% or so per year until resolution although could go higher if the strategy of growing the asset management arm takes hold or the bank is better able to leverage its core deposits (loan-to-deposit ratio currently only at 78%).

 

Key Statistics

Cortland Bancorp (CLDB)

     
         

Canfield, OH

       
         

Share price

$15.00

 

P / E 2016

13.8x

Shares out

4.4

     

Market cap

$66.1

     
         

Total assets

$606.4

 

P / B

1.1x

Total loans

$384.1

 

P / TB

1.1x

         

BVPS

13.67

 

LTM Efficiency ratio

71.92

TBVPS

13.67

 

LTM ROA

0.8%

 

 

 

LTM ROE

8.4%

 

 

Description & M&A Thesis

Cortland Bancorp is a community bank franchise providing commercial and retail banking services throughout the Ashtabula, Cuyahoga, Mahoning, Summit, Trumbull, and Portage counties in Northeastern Ohio. 

 CLDB represents one of the last remaining “bite sized” banks left in the region. A strategic buyer would most likely have to pay a generous premium to acquire CLDB for the following reasons:

1.        Scarcity value as one of last independent banks of its size to acquire

2.        Attractive M&A premiums in Northeast Ohio over the past 3 years

3.       Long list of potential strategic buyers with interest in CLDB

4.        Pro forma synergy calculations indicate high ability to pay

5.       Additions of two new strategic directors in 2015 to help grow the bank outside of traditional Cortland market

6.      Solid business with attractive valuation (CLDB trades at 1.1x TBV)

 

Scarcity Value

The desire for larger community banks to continue to grow market share, assets, deposits, and their loan bases has resulted in a robust M&A market in Northern Ohio over the past several years (See PA / OH M&A table below). Because of this consolidation, the number of independent community banks in the Midwest with greater than $500 million of assets, and more specifically Ohio, is minimal.  With $606m of total assets, Cortland is large enough to draw attention of both in-market and out-of-market acquirers.  Over the past 3 years there have been 12 deals completed in Ohio ranging in size from $152.2m - $1,241.1m in total assets (excluding the FMER/HBAN merger) at an average purchase multiple of 1.55x TBV. These metrics support the thesis of a strategic buyer paying a premium for a scarce asset in a highly sought after market.

 

 

Midwest M&A Activity Since 8/13

       

Core

         

Deal

Price / 

Price / 

Deposit

Buyer

Target

Target

Target:

Announce

Value

TBV

Earnings

Premium

Ticker

State

Ticker

Assets

Date

($M)

(%)

(x)

(%)

                 

UVSP

PA

FXCB

    1,098.8

Dec-15

    244.3

      134.27

    23.17

        10.50

MSFG

OH

CHEV

       576.6

Nov-15

    107.4

      123.37

    60.18

          5.43

WSFS

PA

 

       649.4

Nov-15

    101.6

      198.99

    31.76

        10.57

BNCL

PA

 

       719.0

Oct-15

    100.1

      160.00

    24.52

          9.21

WSFS

PA

ALLB

       420.8

Mar-15

      93.4

      135.48

    35.49

          9.25

FMNB

OH

NBOH

       529.6

Jan-15

      70.6

      142.81

    11.69

          5.94

NWBI

OH

LNBB

    1,241.1

Dec-14

    180.7

      195.01

    23.88

        11.23

STBA

PA

ITBC

       860.4

Oct-14

    159.4

      262.63

    16.79

        15.33

WSBC

PA

ESBF

    1,945.4

Oct-14

    352.7

      207.37

    19.78

        18.27

PEBO

OH

NBTF

       652.2

Aug-14

    104.4

      151.54

    22.63

          6.86

NPBC

PA

THRD

       846.0

Jun-14

    141.6

      147.62

    19.02

          7.67

BMTC

PA

 

       658.6

May-14

    108.8

      175.28

    42.29

        13.18

PFS

PA

 

       949.2

Dec-13

    124.4

      190.58

    19.20

          9.72

HBAN

OH

CAFI

       756.8

Oct-13

      98.1

      121.20

      7.47

          6.00

                 

Average:

   

       850.3

 

    142.0

      167.58

    25.56

          9.94

Median:

   

       737.9

 

    108.1

      155.77

    22.90

          9.49

 

Substantial M&A activity in Northeast Ohio

Northern Ohio has continued to see robust M&A activity over the past 3 years. There have been 4 deals completed in relatively close proximity of each other.  Parkview Federal Savings was acquired by F.N.B Corp (FNB) in 2/2013, Lorain National Bank (LNBB) was acquired by Northwest Bancshares (NWBI) in 8/2015, Lake National Bank was acquired by CNB Financial Corp (CCNE) in 7/2016, and Liberty Bank was acquired by Middlefield Banc Corp (MBCN) in 7/2016.

NWBI received $1.2 billion in assets and $1.1 billion in deposits when it purchased LNBB at nearly 2.0x TBV in 2015. Most recently, CCNE paid approximately 1.75x TBV for Lake National, which only had $152.2 million in assets.  With limited availability of targets with greater than $500m in assets around NE OH and high purchase multiples being paid recently, it is my view that a strategic buyer would need to pay a generous premium to acquire a presence in the market.

It appears there is a long list of strategic buyers with interest in CLDB

CLDB should garner interest from a number of in-market and out-of-market buyers. The buyer list overviews presented below are separated as in-market and out-of-market.

In-market buyers:

 

Farmers National Banc Corp. (NASDAQ: FMNB)

 
         

Canfield, OH

       
         

Share price

$9.54

 

P / E 2016

12.2x

Shares out

27.0

 

P / E 2017

11.4x

Market cap

$258.0

     
         

Total assets

$1,925.1

 

P / B

1.2x

Total loans

$1,358.5

 

P / TB

1.5x

         

BVPS

7.86

 

LTM Efficiency ratio

62.82

TBVPS

6.17

 

LTM ROA

0.8%

Div. Payout ratio

21.05

 

LTM ROE

7.5%

 
 

Farmers National Banc Corp. operates as a bank holding company. Farmers National Bank is Mahoning Valley’s leading community bank with more than $1.6 Billion in assets. The bank has 38 banking locations in Mahoning, Trumbull, Columbiana, Stark, Wayne, Medina, and Cuyahoga Counties in Ohio, and Beaver County in Pennsylvania. FMNB offers clients personal and corporate trust services in the areas of estate settlement, trust administration and employee benefit plans, and insurance products through its licensed representatives. Farmers National Banc was founded in 1983 and is headquartered in Canfield, OH.

FMNB probably makes the most sense to acquire CLDB based on management’s intention to remain strategic acquirers within their core markets. Additionally, due to substantial branch overlap and operating in the same markets, synergies would likely be much higher with Farmers than any other buyer.

 

Notable M&A Activity:

Date

Target

Status

Target Assets

P / TBV

P / E

Core Deposit Premium

10/1/2015

Tri-State 1st Banc

Completed

$138.9

1.34x

NM

2.9%

1/27/2015

National Bankshares

Completed

$529.6

1.42x

NM

NM

 

United Community Financial Corp. (NASDAQ: UCFC)

 

 

         

 

Youngstown, OH

       

 

         

 

Share price

$6.75

 

P / E 2016

16.5x

 

Shares out

46.5

 

P / E 2017

14.7x

 

Market cap

$313.8

     

 

         

 

Total assets

$2,080.5

 

P / B

1.2x

 

Total loans

$1,415.3

 

P / TB

1.2x

 

         

 

BVPS

5.46

 

LTM Efficiency ratio

63.42

 

TBVPS

5.43

 

LTM ROA

0.9%

 

Div. Payout ratio

22.32

 

LTM ROE

7.0%

 

                       

 

United Community Financial Corp. operates as a financial holding company. The company provides retail and business banking products and services through Home Savings & Loan Co. Home Savings conducts business through 31 retail banking offices and 11 loan production centers in Ohio, Pennsylvania & West Virginia. The bank's primary lending activity is the origination of conventional residential real estate loans secured by real estate located in Home Savings primary market area. It originates commercial real estate, commercial and industrial loans, and various types of consumer loans. The company was founded in February 1998 and is headquartered in Youngstown, OH.

Similar to Farmers, synergies in this acquisition would be higher than out of market acquirers; however, UCFC does not have the currency of Farmers and has historically not been an aggressive buyer due to excessive price discipline.

Notable M&A Activity:

·         UCFC has no reported M&A activity over the past 3 years

 

Out-of-market buyers:

Community Bank System, Inc. (NYSE:CBU)

 
         

De Witt, NY

       
         

Share price

$44.75

 

P / E 2016

19.1x

Shares out

44.2

 

P / E 2017

18.7x

Market cap

$1,977.0

     
         

Total assets

$8,745.1

 

P / B

1.6x

Total loans

$4,904.8

 

P / TB

2.6x

         

BVPS

28.00

 

LTM Efficiency ratio

58.67

TBVPS

17.05

 

LTM ROA

1.1%

Div. Payout ratio

53.45

 

LTM ROE

8.5%

 

Community Bank System, Inc. operates as a bank holding company. The company operates five wholly owned subsidiaries, which includes Community Bank, N.A., Benefit Plans Administrative Services, Inc., CFSI Closeout Corp., First of Jermyn Realty Company, Inc. and Town & Country Agency. The company also wholly-owns two unconsolidated subsidiary business trusts formed for the purpose of issuing mandatorily-redeemable preferred securities. The Community Bank provides full banking services to consumers, businesses and governmental units in northern, central and western New York, as well as northern Pennsylvania. Community Bank System was founded on April 15, 1983 and is headquartered in DeWitt, NY.

Date

Target

Status

Target Assets

P / TBV

P / E

Core Deposit Premium

12/4/2015

Oneida Financial Corp

Completed

$800.0

2.02x

NM

NM

 

First Commonwealth Financial Corporation (NYSE:FCF)

 
         

Indiana, PA

       
         

Share price

$9.78

 

P / E 2016

15.8x

Shares out

88.9

 

P / E 2017

13.0x

Market cap

$869.9

     
         

Total assets

$6,749.8

 

P / B

1.2x

Total loans

$4,843.8

 

P / TB

1.5x

         

BVPS

8.34

 

LTM Efficiency ratio

60.03

TBVPS

6.48

 

LTM ROA

0.7%

Div. Payout ratio

50.00

 

LTM ROE

6.4%

 

First Commonwealth Financial Corp. is a financial holding company. It provides a diversified array of consumer and commercial banking services through its bank subsidiary, First Commonwealth Bank (FCB). The company also provides trust and wealth management services and offer insurance products through FCB and its other operating subsidiaries.  It also offers annuities, mutual funds, stock and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. The bank has offices located throughout 17 counties in Western Pennsylvania and Central Ohio, including a commercial banking loan production office in Cleveland, Ohio and mortgage loan offices in Stow and Dublin, Ohio. The company was founded on November 15, 1982 and is headquartered in Indiana, PA.

Date

Target

Status

Target Assets

P / TBV

P / E

Core Deposit Premium

10/1/2015

First Community Bank

Completed

$100.0

1.19x

NM

NM

  

F.N.B. Corporation (NYSE: FNB)

   
         

Pittsburgh, PA

       
         

Share price

$12.33

 

P / E 2016

13.5x

Shares out

210.1

 

P / E 2017

12.3x

Market cap

$2,590.8

     
         

Total assets

$21,214.9

 

P / B

1.1x

Total loans

$14,563.1

 

P / TB

1.9x

         

BVPS

11.61

 

LTM Efficiency ratio

55.74

TBVPS

6.4

 

LTM ROA

0.8%

Div. Payout ratio

63.16

 

LTM ROE

6.5%

 

F.N.B. Corporation (NYSE: FNB), headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas. It holds a top retail deposit market share in Pittsburgh, PA, Baltimore, MD, and Cleveland, OH. The Company has total assets of more than $21 billion and more than 300 banking offices throughout Pennsylvania, Maryland, Ohio and West Virginia. The bank provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, First National Bank of Pennsylvania, founded in 1864.

Date

Target

Status

Target Assets

P / TBV

P / E

Core Deposit Premium

7/21/2016

Yadkin Financial Corp

Pending

$7,400.0

2.32x

NM

NM

8/4/2015

Metro Bancorp

Complete

$3,000.0

1.72x

NM

NM

 

For out of market competitors hoping to establish a market presence in NE Ohio, CLDB represents one of the only options available for them. Out of the group mentioned above, we believe CBU would be interested in breaking into the NE Ohio market as part of their growth strategy. FNB already has a presence via its recent Parkview Savings acquisition and is likely to have been in the final round bidding for Lorain National.  Interest from multiple strategic buyers could result in a higher premium being paid if a bidding war ensued.

Pro forma synergy calculations indicate ability of strategic buyer to pay generous premium

Most strategic acquirers rely on some type of synergy adjusted EPS multiple to help determine what price to pay.  I currently see buyers paying between 10-12x synergy adjusted earnings multiples. I would expect a strategic to be able to extract between 35-45% of non-interest related costs in an acquisition based on the overlap with the buyer. Based on the analysis below and the fact that CLDB has high scarcity value, a strategic buyer could easily pay over $22.50 per share for CLDB, which would represent a 50% premium to the current share price.  

 

Pro Forma Purchase Price / Synergy Adjusted EPS

       
                 

Cortland Bancorp

       

Operating Expense Reduction

           

40.0%

35.0%

30.0%

Synergy Adjusted Purchase Price Analysis

 LTM

 

 Projected

 Projected

 Projected

       

 FY 2Q 2016

 

 FY 2015

 FY 2015

 FY 2015

           

 

 

 

 Operating Revenues

   

23.21

 

23.21

23.21

23.21

 Non-Interest Expense

   

17.15

 

17.15

17.15

17.15

 Provision for Loan Losses

   

0.17

 

0.17

0.17

0.17

 Pre-Tax Income

     

5.90

 

5.90

5.90

5.90

                 

 Income Tax Expense

   

1.24

 

1.24

1.24

1.24

 Net Income

     

4.66

 

4.66

4.66

4.66

                 

 Fully Diluted Shares O/S

   

4.41

 

4.41

4.41

4.41

                 

 EPS

     

$1.06

 

$1.06

$1.06

$1.06

                 

 After-Tax Synergy Reduction

       

4.66

4.08

3.50

 Tax Rate

     

21.01%

 

32.00%

32.00%

32.00%

                 

 Adjusted EPS

         

$2.11

$1.98

$1.85

                 

 Efficiency Ratio

   

73.88%

 

53.8%

56.3%

58.8%

                 

 Acquisition Price of Bank Operations:

           

 Forward P/E Multiple:

10.00x

 

$      21.15

$      19.83

$      18.50

       

11.00x

 

$      23.26

$      21.81

$      20.35

       

12.00x

 

$      25.38

$      23.79

$      22.20

                 

 Purchase of Excess Capital per Share

 

1.00x

 

$        1.29

$        1.29

$        1.29

                 

 Total Purchase Price Per share:

             

 Implied P/E Multiple:

10.61x

 

$      22.44

$      21.11

$      19.79

       

11.61x

 

$      24.55

$      23.10

$      21.64

       

12.61x

 

$      26.67

$      25.08

$      23.49

 
 

New strategic directors appointed 1/1/2016

In January the bank announced the appointment of two new strategic directors, Thomas Perciak and J. Martin Erbaugh, to CLDB’s board.  The two new directors are thought to be shareholder friendly, and should help grow the bank.  Both Mr. Perciak and Mr. Erbaugh served as directors on LNBB’s board and should be very familiar with the current dynamics in the region.

Solid Business with attractive valuation

CLDB is a $606 million bank offering a variety of commercial and retail banking services. The Bank is committed to growing loans and deposits within their core markets and continuing their strategic focus on commercial banking relationships.  CLDB services its clients through a branch network of 13 branches which are clustered in NE Ohio. Cortland offers customers checking, savings, and time deposit accounts, along with commercial, mortgage, and installment lending products. The bank has $384 million in total loans as of 6/30/16, and has been able to grow its loan book every year since 2009 at a CAGR of 8.0%.

Cortland began a revenue diversification initiative in 2013, and has since ramped up its wealth management business which doubled its income contribution from 2013 to 2015.  Wealth Advisors sell non-deposit investment products to customers in the Bank’s branch network through a third-party marketing and sales support provider.  Beginning in 2016, the Bank partnered with LPL Financial and the Ellsworth Group to offer brokerage and advisory services through the brand Cortland Private Wealth Management.  In addition to the wealth management business, CLDB generates other non-interest income through their wholesale mortgage unit, fees for customer services, and earnings from their bank owned life insurance.  Total non-interest income for 2015 was approximately $4.0 million.

CLDB currently trades at 1.1x TBV which is below the peer group average of 1.54x.The bank has improved ROA and ROE since 2012 from 0.55 and 5.99 to 0.77 and 7.73 at the end of 2015.

 

Data in ($M)

               

Ticker

Issuer Name

State

Market Cap

Total Assets

P / TBV

P / E

Effic. Ratio

ROAA

ROAE

                   

CBFV

CB Financial Services

PA

90.70

828.03

      1.13

   11.55

            62.31

      1.03

9.03

CCNE

CNB Financial Corp

PA

271.76

2,336.39

      1.51

   13.57

            61.38

      0.93

9.91

FDEF

First Defiance Fin.

OH

389.56

2,409.60

      1.83

   14.48

            63.01

      1.33

9.81

FMNB

Farmers National

OH

258.04

1,925.12

      1.59

   17.50

            75.26

      0.91

7.52

IBCP

Independent Bank

MI

340.42

2,452.70

      1.46

   16.77

            77.20

      0.99

8.44

LCNB

LCNB Corp.

OH

173.14

1,312.64

      1.56

   15.11

            63.22

      0.98

8.08

MFSF

MutualFirst Fin.

IN

203.24

1,510.45

      1.46

   16.03

            71.78

      0.97

9.60

GABC

German American Banc.

IN

525.18

2,915.81

      1.92

   15.97

            57.57

      1.26

10.67

HBNC

Horizon Bancorp

IN

392.09

2,918.08

      1.61

   15.13

            65.03

      0.97

9.18

MCBC

Macatawa Bank Corp.

MI 

261.88

1,669.46

      1.67

   19.50

            75.89

      0.94

9.16

UCFC

United Com. Financial

OH

313.88

2,080.54

      1.25

   18.76

            65.10

      0.91

6.95

                   

AVERAGE:

 

            292.7

               2,033

      1.54

   15.85

            67.07

      1.02

      8.94

MEDIAN:

 

            271.8

               2,081

      1.56

   15.97

            65.03

      0.97

      9.16

                   

CLDB

Cortland Bancorp

OH

               66.1

                    606

      1.10

   13.76

            71.92

      0.83

      8.43

 

 

 

Conclusion

Although a sale now is possible at the right price this is not just a pure sell the company play.  The Bank has a lot of opportunity to grow by competing in its core markets while engaging in a sale down the road.  CLDB is one of the last independent community banks in Ohio with greater than $500 million of assets and I believe a sale of the company is inevitable and a long list of strategic buyers would be interested.   While you wait, value should compound at 8-9% per year.

Risks

1.      CLDB’s loan book is heavily skewed toward commercial relationships. The commercial real estate loan portfolio accounted for $237.1 million or 60.1% of total loans

2.      The Bank has roughly $30.0 million of loans extended to hotels/motels

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

The Bank has a lot of opportunity to grow by competing in its core markets while engaging in a sale down the road.  CLDB is one of the last independent community banks in Ohio with greater than $500 million of assets and I believe a sale of the company is inevitable and a long list of strategic buyers would be interested.   While you wait, value should compound at 8-9% per year.

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    Description

    Cortland Bancorp (CLDB)

     

    Investment Thesis

    Cortland Bancorp is a high upside / limited fundamental downside investment with a significant future catalyst.  The bank is one of the final remaining independent community banks in the $500 million-$1 billion asset range in a rapidly consolidating northern Ohio market, and is therefore a prime candidate for consolidation with numerous buyers interested.  Additionally, the bank recently added two shareholder friendly directors. While you wait for the event, the bank earns an 8%-9% ROE with potential future upside.  Additionally, the bank trades at an undemanding 1.1x tangible book value and has a history of solid loan underwriting (losses during Great Recession were not from the loan portfolio but due to the investment portfolio which is now considerably safer).  I estimate a buyout price of $22-$25 per share, or 50%-70% higher than current. This price should grow at 8%-9% or so per year until resolution although could go higher if the strategy of growing the asset management arm takes hold or the bank is better able to leverage its core deposits (loan-to-deposit ratio currently only at 78%).

     

    Key Statistics

    Cortland Bancorp (CLDB)

         
             

    Canfield, OH

           
             

    Share price

    $15.00

     

    P / E 2016

    13.8x

    Shares out

    4.4

         

    Market cap

    $66.1

         
             

    Total assets

    $606.4

     

    P / B

    1.1x

    Total loans

    $384.1

     

    P / TB

    1.1x

             

    BVPS

    13.67

     

    LTM Efficiency ratio

    71.92

    TBVPS

    13.67

     

    LTM ROA

    0.8%

     

     

     

    LTM ROE

    8.4%

     

     

    Description & M&A Thesis

    Cortland Bancorp is a community bank franchise providing commercial and retail banking services throughout the Ashtabula, Cuyahoga, Mahoning, Summit, Trumbull, and Portage counties in Northeastern Ohio. 

     CLDB represents one of the last remaining “bite sized” banks left in the region. A strategic buyer would most likely have to pay a generous premium to acquire CLDB for the following reasons:

    1.        Scarcity value as one of last independent banks of its size to acquire

    2.        Attractive M&A premiums in Northeast Ohio over the past 3 years

    3.       Long list of potential strategic buyers with interest in CLDB

    4.        Pro forma synergy calculations indicate high ability to pay

    5.       Additions of two new strategic directors in 2015 to help grow the bank outside of traditional Cortland market

    6.      Solid business with attractive valuation (CLDB trades at 1.1x TBV)

     

    Scarcity Value

    The desire for larger community banks to continue to grow market share, assets, deposits, and their loan bases has resulted in a robust M&A market in Northern Ohio over the past several years (See PA / OH M&A table below). Because of this consolidation, the number of independent community banks in the Midwest with greater than $500 million of assets, and more specifically Ohio, is minimal.  With $606m of total assets, Cortland is large enough to draw attention of both in-market and out-of-market acquirers.  Over the past 3 years there have been 12 deals completed in Ohio ranging in size from $152.2m - $1,241.1m in total assets (excluding the FMER/HBAN merger) at an average purchase multiple of 1.55x TBV. These metrics support the thesis of a strategic buyer paying a premium for a scarce asset in a highly sought after market.

     

     

    Midwest M&A Activity Since 8/13

           

    Core

             

    Deal

    Price / 

    Price / 

    Deposit

    Buyer

    Target

    Target

    Target:

    Announce

    Value

    TBV

    Earnings

    Premium

    Ticker

    State

    Ticker

    Assets

    Date

    ($M)

    (%)

    (x)

    (%)

                     

    UVSP

    PA

    FXCB

        1,098.8

    Dec-15

        244.3

          134.27

        23.17

            10.50

    MSFG

    OH

    CHEV

           576.6

    Nov-15

        107.4

          123.37

        60.18

              5.43

    WSFS

    PA

     

           649.4

    Nov-15

        101.6

          198.99

        31.76

            10.57

    BNCL

    PA

     

           719.0

    Oct-15

        100.1

          160.00

        24.52

              9.21

    WSFS

    PA

    ALLB

           420.8

    Mar-15

          93.4

          135.48

        35.49

              9.25

    FMNB

    OH

    NBOH

           529.6

    Jan-15

          70.6

          142.81

        11.69

              5.94

    NWBI

    OH

    LNBB

        1,241.1

    Dec-14

        180.7

          195.01

        23.88

            11.23

    STBA

    PA

    ITBC

           860.4

    Oct-14

        159.4

          262.63

        16.79

            15.33

    WSBC

    PA

    ESBF

        1,945.4

    Oct-14

        352.7

          207.37

        19.78

            18.27

    PEBO

    OH

    NBTF

           652.2

    Aug-14

        104.4

          151.54

        22.63

              6.86

    NPBC

    PA

    THRD

           846.0

    Jun-14

        141.6

          147.62

        19.02

              7.67

    BMTC

    PA

     

           658.6

    May-14

        108.8

          175.28

        42.29

            13.18

    PFS

    PA

     

           949.2

    Dec-13

        124.4

          190.58

        19.20

              9.72

    HBAN

    OH

    CAFI

           756.8

    Oct-13

          98.1

          121.20

          7.47

              6.00

                     

    Average:

       

           850.3

     

        142.0

          167.58

        25.56

              9.94

    Median:

       

           737.9

     

        108.1

          155.77

        22.90

              9.49

     

    Substantial M&A activity in Northeast Ohio

    Northern Ohio has continued to see robust M&A activity over the past 3 years. There have been 4 deals completed in relatively close proximity of each other.  Parkview Federal Savings was acquired by F.N.B Corp (FNB) in 2/2013, Lorain National Bank (LNBB) was acquired by Northwest Bancshares (NWBI) in 8/2015, Lake National Bank was acquired by CNB Financial Corp (CCNE) in 7/2016, and Liberty Bank was acquired by Middlefield Banc Corp (MBCN) in 7/2016.

    NWBI received $1.2 billion in assets and $1.1 billion in deposits when it purchased LNBB at nearly 2.0x TBV in 2015. Most recently, CCNE paid approximately 1.75x TBV for Lake National, which only had $152.2 million in assets.  With limited availability of targets with greater than $500m in assets around NE OH and high purchase multiples being paid recently, it is my view that a strategic buyer would need to pay a generous premium to acquire a presence in the market.

    It appears there is a long list of strategic buyers with interest in CLDB

    CLDB should garner interest from a number of in-market and out-of-market buyers. The buyer list overviews presented below are separated as in-market and out-of-market.

    In-market buyers:

     

    Farmers National Banc Corp. (NASDAQ: FMNB)

     
             

    Canfield, OH

           
             

    Share price

    $9.54

     

    P / E 2016

    12.2x

    Shares out

    27.0

     

    P / E 2017

    11.4x

    Market cap

    $258.0

         
             

    Total assets

    $1,925.1

     

    P / B

    1.2x

    Total loans

    $1,358.5

     

    P / TB

    1.5x

             

    BVPS

    7.86

     

    LTM Efficiency ratio

    62.82

    TBVPS

    6.17

     

    LTM ROA

    0.8%

    Div. Payout ratio

    21.05

     

    LTM ROE

    7.5%

     
     

    Farmers National Banc Corp. operates as a bank holding company. Farmers National Bank is Mahoning Valley’s leading community bank with more than $1.6 Billion in assets. The bank has 38 banking locations in Mahoning, Trumbull, Columbiana, Stark, Wayne, Medina, and Cuyahoga Counties in Ohio, and Beaver County in Pennsylvania. FMNB offers clients personal and corporate trust services in the areas of estate settlement, trust administration and employee benefit plans, and insurance products through its licensed representatives. Farmers National Banc was founded in 1983 and is headquartered in Canfield, OH.

    FMNB probably makes the most sense to acquire CLDB based on management’s intention to remain strategic acquirers within their core markets. Additionally, due to substantial branch overlap and operating in the same markets, synergies would likely be much higher with Farmers than any other buyer.

     

    Notable M&A Activity:

    Date

    Target

    Status

    Target Assets

    P / TBV

    P / E

    Core Deposit Premium

    10/1/2015

    Tri-State 1st Banc

    Completed

    $138.9

    1.34x

    NM

    2.9%

    1/27/2015

    National Bankshares

    Completed

    $529.6

    1.42x

    NM

    NM

     

    United Community Financial Corp. (NASDAQ: UCFC)

     

     

             

     

    Youngstown, OH

           

     

             

     

    Share price

    $6.75

     

    P / E 2016

    16.5x

     

    Shares out

    46.5

     

    P / E 2017

    14.7x

     

    Market cap

    $313.8

         

     

             

     

    Total assets

    $2,080.5

     

    P / B

    1.2x

     

    Total loans

    $1,415.3

     

    P / TB

    1.2x

     

             

     

    BVPS

    5.46

     

    LTM Efficiency ratio

    63.42

     

    TBVPS

    5.43

     

    LTM ROA

    0.9%

     

    Div. Payout ratio

    22.32

     

    LTM ROE

    7.0%

     

                           

     

    United Community Financial Corp. operates as a financial holding company. The company provides retail and business banking products and services through Home Savings & Loan Co. Home Savings conducts business through 31 retail banking offices and 11 loan production centers in Ohio, Pennsylvania & West Virginia. The bank's primary lending activity is the origination of conventional residential real estate loans secured by real estate located in Home Savings primary market area. It originates commercial real estate, commercial and industrial loans, and various types of consumer loans. The company was founded in February 1998 and is headquartered in Youngstown, OH.

    Similar to Farmers, synergies in this acquisition would be higher than out of market acquirers; however, UCFC does not have the currency of Farmers and has historically not been an aggressive buyer due to excessive price discipline.

    Notable M&A Activity:

    ·         UCFC has no reported M&A activity over the past 3 years

     

    Out-of-market buyers:

    Community Bank System, Inc. (NYSE:CBU)

     
             

    De Witt, NY

           
             

    Share price

    $44.75

     

    P / E 2016

    19.1x

    Shares out

    44.2

     

    P / E 2017

    18.7x

    Market cap

    $1,977.0

         
             

    Total assets

    $8,745.1

     

    P / B

    1.6x

    Total loans

    $4,904.8

     

    P / TB

    2.6x

             

    BVPS

    28.00

     

    LTM Efficiency ratio

    58.67

    TBVPS

    17.05

     

    LTM ROA

    1.1%

    Div. Payout ratio

    53.45

     

    LTM ROE

    8.5%

     

    Community Bank System, Inc. operates as a bank holding company. The company operates five wholly owned subsidiaries, which includes Community Bank, N.A., Benefit Plans Administrative Services, Inc., CFSI Closeout Corp., First of Jermyn Realty Company, Inc. and Town & Country Agency. The company also wholly-owns two unconsolidated subsidiary business trusts formed for the purpose of issuing mandatorily-redeemable preferred securities. The Community Bank provides full banking services to consumers, businesses and governmental units in northern, central and western New York, as well as northern Pennsylvania. Community Bank System was founded on April 15, 1983 and is headquartered in DeWitt, NY.

    Date

    Target

    Status

    Target Assets

    P / TBV

    P / E

    Core Deposit Premium

    12/4/2015

    Oneida Financial Corp

    Completed

    $800.0

    2.02x

    NM

    NM

     

    First Commonwealth Financial Corporation (NYSE:FCF)

     
             

    Indiana, PA

           
             

    Share price

    $9.78

     

    P / E 2016

    15.8x

    Shares out

    88.9

     

    P / E 2017

    13.0x

    Market cap

    $869.9

         
             

    Total assets

    $6,749.8

     

    P / B

    1.2x

    Total loans

    $4,843.8

     

    P / TB

    1.5x

             

    BVPS

    8.34

     

    LTM Efficiency ratio

    60.03

    TBVPS

    6.48

     

    LTM ROA

    0.7%

    Div. Payout ratio

    50.00

     

    LTM ROE

    6.4%

     

    First Commonwealth Financial Corp. is a financial holding company. It provides a diversified array of consumer and commercial banking services through its bank subsidiary, First Commonwealth Bank (FCB). The company also provides trust and wealth management services and offer insurance products through FCB and its other operating subsidiaries.  It also offers annuities, mutual funds, stock and bond brokerage services through an arrangement with a broker-dealer and insurance brokers. The bank has offices located throughout 17 counties in Western Pennsylvania and Central Ohio, including a commercial banking loan production office in Cleveland, Ohio and mortgage loan offices in Stow and Dublin, Ohio. The company was founded on November 15, 1982 and is headquartered in Indiana, PA.

    Date

    Target

    Status

    Target Assets

    P / TBV

    P / E

    Core Deposit Premium

    10/1/2015

    First Community Bank

    Completed

    $100.0

    1.19x

    NM

    NM

      

    F.N.B. Corporation (NYSE: FNB)

       
             

    Pittsburgh, PA

           
             

    Share price

    $12.33

     

    P / E 2016

    13.5x

    Shares out

    210.1

     

    P / E 2017

    12.3x

    Market cap

    $2,590.8

         
             

    Total assets

    $21,214.9

     

    P / B

    1.1x

    Total loans

    $14,563.1

     

    P / TB

    1.9x

             

    BVPS

    11.61

     

    LTM Efficiency ratio

    55.74

    TBVPS

    6.4

     

    LTM ROA

    0.8%

    Div. Payout ratio

    63.16

     

    LTM ROE

    6.5%

     

    F.N.B. Corporation (NYSE: FNB), headquartered in Pittsburgh, Pennsylvania, is a diversified financial services company operating in six states and three major metropolitan areas. It holds a top retail deposit market share in Pittsburgh, PA, Baltimore, MD, and Cleveland, OH. The Company has total assets of more than $21 billion and more than 300 banking offices throughout Pennsylvania, Maryland, Ohio and West Virginia. The bank provides a full range of commercial banking, consumer banking and wealth management solutions through its subsidiary network which is led by its largest affiliate, First National Bank of Pennsylvania, founded in 1864.

    Date

    Target

    Status

    Target Assets

    P / TBV

    P / E

    Core Deposit Premium

    7/21/2016

    Yadkin Financial Corp

    Pending

    $7,400.0

    2.32x

    NM

    NM

    8/4/2015

    Metro Bancorp

    Complete

    $3,000.0

    1.72x

    NM

    NM

     

    For out of market competitors hoping to establish a market presence in NE Ohio, CLDB represents one of the only options available for them. Out of the group mentioned above, we believe CBU would be interested in breaking into the NE Ohio market as part of their growth strategy. FNB already has a presence via its recent Parkview Savings acquisition and is likely to have been in the final round bidding for Lorain National.  Interest from multiple strategic buyers could result in a higher premium being paid if a bidding war ensued.

    Pro forma synergy calculations indicate ability of strategic buyer to pay generous premium

    Most strategic acquirers rely on some type of synergy adjusted EPS multiple to help determine what price to pay.  I currently see buyers paying between 10-12x synergy adjusted earnings multiples. I would expect a strategic to be able to extract between 35-45% of non-interest related costs in an acquisition based on the overlap with the buyer. Based on the analysis below and the fact that CLDB has high scarcity value, a strategic buyer could easily pay over $22.50 per share for CLDB, which would represent a 50% premium to the current share price.  

     

    Pro Forma Purchase Price / Synergy Adjusted EPS

           
                     

    Cortland Bancorp

           

    Operating Expense Reduction

               

    40.0%

    35.0%

    30.0%

    Synergy Adjusted Purchase Price Analysis

     LTM

     

     Projected

     Projected

     Projected

           

     FY 2Q 2016

     

     FY 2015

     FY 2015

     FY 2015

               

     

     

     

     Operating Revenues

       

    23.21

     

    23.21

    23.21

    23.21

     Non-Interest Expense

       

    17.15

     

    17.15

    17.15

    17.15

     Provision for Loan Losses

       

    0.17

     

    0.17

    0.17

    0.17

     Pre-Tax Income

         

    5.90

     

    5.90

    5.90

    5.90

                     

     Income Tax Expense

       

    1.24

     

    1.24

    1.24

    1.24

     Net Income

         

    4.66

     

    4.66

    4.66

    4.66

                     

     Fully Diluted Shares O/S

       

    4.41

     

    4.41

    4.41

    4.41

                     

     EPS

         

    $1.06

     

    $1.06

    $1.06

    $1.06

                     

     After-Tax Synergy Reduction

           

    4.66

    4.08

    3.50

     Tax Rate

         

    21.01%

     

    32.00%

    32.00%

    32.00%

                     

     Adjusted EPS

             

    $2.11

    $1.98

    $1.85

                     

     Efficiency Ratio

       

    73.88%

     

    53.8%

    56.3%

    58.8%

                     

     Acquisition Price of Bank Operations:

               

     Forward P/E Multiple:

    10.00x

     

    $      21.15

    $      19.83

    $      18.50

           

    11.00x

     

    $      23.26

    $      21.81

    $      20.35

           

    12.00x

     

    $      25.38

    $      23.79

    $      22.20

                     

     Purchase of Excess Capital per Share

     

    1.00x

     

    $        1.29

    $        1.29

    $        1.29

                     

     Total Purchase Price Per share:

                 

     Implied P/E Multiple:

    10.61x

     

    $      22.44

    $      21.11

    $      19.79

           

    11.61x

     

    $      24.55

    $      23.10

    $      21.64

           

    12.61x

     

    $      26.67

    $      25.08

    $      23.49

     
     

    New strategic directors appointed 1/1/2016

    In January the bank announced the appointment of two new strategic directors, Thomas Perciak and J. Martin Erbaugh, to CLDB’s board.  The two new directors are thought to be shareholder friendly, and should help grow the bank.  Both Mr. Perciak and Mr. Erbaugh served as directors on LNBB’s board and should be very familiar with the current dynamics in the region.

    Solid Business with attractive valuation

    CLDB is a $606 million bank offering a variety of commercial and retail banking services. The Bank is committed to growing loans and deposits within their core markets and continuing their strategic focus on commercial banking relationships.  CLDB services its clients through a branch network of 13 branches which are clustered in NE Ohio. Cortland offers customers checking, savings, and time deposit accounts, along with commercial, mortgage, and installment lending products. The bank has $384 million in total loans as of 6/30/16, and has been able to grow its loan book every year since 2009 at a CAGR of 8.0%.

    Cortland began a revenue diversification initiative in 2013, and has since ramped up its wealth management business which doubled its income contribution from 2013 to 2015.  Wealth Advisors sell non-deposit investment products to customers in the Bank’s branch network through a third-party marketing and sales support provider.  Beginning in 2016, the Bank partnered with LPL Financial and the Ellsworth Group to offer brokerage and advisory services through the brand Cortland Private Wealth Management.  In addition to the wealth management business, CLDB generates other non-interest income through their wholesale mortgage unit, fees for customer services, and earnings from their bank owned life insurance.  Total non-interest income for 2015 was approximately $4.0 million.

    CLDB currently trades at 1.1x TBV which is below the peer group average of 1.54x.The bank has improved ROA and ROE since 2012 from 0.55 and 5.99 to 0.77 and 7.73 at the end of 2015.

     

    Data in ($M)

                   

    Ticker

    Issuer Name

    State

    Market Cap

    Total Assets

    P / TBV

    P / E

    Effic. Ratio

    ROAA

    ROAE

                       

    CBFV

    CB Financial Services

    PA

    90.70

    828.03

          1.13

       11.55

                62.31

          1.03

    9.03

    CCNE

    CNB Financial Corp

    PA

    271.76

    2,336.39

          1.51

       13.57

                61.38

          0.93

    9.91

    FDEF

    First Defiance Fin.

    OH

    389.56

    2,409.60

          1.83

       14.48

                63.01

          1.33

    9.81

    FMNB

    Farmers National

    OH

    258.04

    1,925.12

          1.59

       17.50

                75.26

          0.91

    7.52

    IBCP

    Independent Bank

    MI

    340.42

    2,452.70

          1.46

       16.77

                77.20

          0.99

    8.44

    LCNB

    LCNB Corp.

    OH

    173.14

    1,312.64

          1.56

       15.11

                63.22

          0.98

    8.08

    MFSF

    MutualFirst Fin.

    IN

    203.24

    1,510.45

          1.46

       16.03

                71.78

          0.97

    9.60

    GABC

    German American Banc.

    IN

    525.18

    2,915.81

          1.92

       15.97

                57.57

          1.26

    10.67

    HBNC

    Horizon Bancorp

    IN

    392.09

    2,918.08

          1.61

       15.13

                65.03

          0.97

    9.18

    MCBC

    Macatawa Bank Corp.

    MI 

    261.88

    1,669.46

          1.67

       19.50

                75.89

          0.94

    9.16

    UCFC

    United Com. Financial

    OH

    313.88

    2,080.54

          1.25

       18.76

                65.10

          0.91

    6.95

                       

    AVERAGE:

     

                292.7

                   2,033

          1.54

       15.85

                67.07

          1.02

          8.94

    MEDIAN:

     

                271.8

                   2,081

          1.56

       15.97

                65.03

          0.97

          9.16

                       

    CLDB

    Cortland Bancorp

    OH

                   66.1

                        606

          1.10

       13.76

                71.92

          0.83

          8.43

     

     

     

    Conclusion

    Although a sale now is possible at the right price this is not just a pure sell the company play.  The Bank has a lot of opportunity to grow by competing in its core markets while engaging in a sale down the road.  CLDB is one of the last independent community banks in Ohio with greater than $500 million of assets and I believe a sale of the company is inevitable and a long list of strategic buyers would be interested.   While you wait, value should compound at 8-9% per year.

    Risks

    1.      CLDB’s loan book is heavily skewed toward commercial relationships. The commercial real estate loan portfolio accounted for $237.1 million or 60.1% of total loans

    2.      The Bank has roughly $30.0 million of loans extended to hotels/motels

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    The Bank has a lot of opportunity to grow by competing in its core markets while engaging in a sale down the road.  CLDB is one of the last independent community banks in Ohio with greater than $500 million of assets and I believe a sale of the company is inevitable and a long list of strategic buyers would be interested.   While you wait, value should compound at 8-9% per year.

    Messages


    SubjectPeer Group and management motivation to sell
    Entry08/15/2016 03:37 PM
    Membergman

    I like your idea however the peer group you used isn't really representative as nearly all of them are much larger than CLDB, and larger community banks generally trade at higher valuations. As far as selling the bank, while I agree that there have been a number of acquisitions in Ohio, i find it difficult to believe that current management would want to lose their jobs as the are in their low to mid 50's in age. They also hold very few shares of stock so the payday on selling wouldn't be enough to compensate for the job loss.

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