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:

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. 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.

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.

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.

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.  

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.

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