Community Banks Are 'Cash Flow Machines' And Other Takeaways From The OTCQX Community Bank Conference

“In reasonable economic times community banks are pretty much cash flow machines,” according to Tim Melvin, author of The Community Bank Investor Newsletter and Banking On Profit.

Melvin made that remark at the OTCQX Community Bank Virtual Investor Conference held in late-September, where he outlined his bullish thesis on community bank stocks. Melvin’s opinion hinges on several factors, including lessened industry regulations and the fact that many smaller banks trade at relative discounts to larger financial institutions.

His main reason for optimism comes down to consolidation in the industry. According to Melvin there are approximately 5,000 community banks and thrifts in the U.S., down from around 18,000 in the mid-80’s when states began passing legislation allowing for the formation of regional banks. Once banks were emboldened to expand into other states, it became more convenient to simply buy existing banks than build entirely new ones.

Melvin estimates that about 4% of community banks get taken over every year—the vast majority at a premium to shareholders—and he expects that trend to continue until the number of community banks falls below 2,000.

Melvin said he prefers buying Small-Cap community banks that:

• Trade below its tangible book value per share
• Have high dividend yields and low P/E ratios
• Have higher earnings growth rates than their peers in the last three years

There are 67 banks in the OTCQX Banks Index, which is up approximately 8% in 2019. Ten of them presented at the OTCQX Virtual Conference last month (which you can view on demand here). Here’s a breakdown of each.

CNB Bank Shares, Inc. CNBN
Location: Carlinville, IL
Number Of Locations: 19
Market Cap: $108.9 million
Share Price (as of Sept. 30, 2019): $18.85

Presentation Highlight: At one time, 40% of CNB’s loan and deposit composition came from agriculture and agricultural real estate. Today, agriculture makes up 29% of the bank’s loan and deposit portfolio thanks to a concerted effort to expand its commercial and multi-family offerings.

Victory Bancorp Inc. VTYB
Location: Limerick, PA
Number Of Locations: 1
Market Cap: $19.5 million
Share Price (as of Sept. 30, 2019): $10.05

Presentation Highlight: According to Chairman and CEO Joseph W. Major, 75% of the bank’s $250 million in deposits come in via remote capture or an equivalent technology

PSB Holdings Inc. PSBQ
Location: Wausau, WI
Number Of Locations: 9
Market Cap: $117.4 million
Share Price (as of Sept. 30, 2019): $26.49

Presentation Highlight: PSB’s worst year during the Great Recession as far as Return on Equity was 7.38% according to President and CEO Scott Cattanach, outperforming much of the financial services sector. The bank has the highest deposit market share in Northern Wisconsin.

First National Bank Alaska FBAK
Location: Anchorage, AK
Number Of Locations: 28
Market Cap: $750.9 million
Share Price (as of Sept. 30, 2019): $240

Presentation Highlight: As of June 30, only 0.2% of First National’s loans were delinquent. The bank’s delinquency percentage has not exceeded 0.3% in two years.

Heartland Bancorp HLAN
Location: Whitehall, OH
Number Of Locations: 16
Market Cap: $166.6 million
Share Price (as of Sept. 30, 2019): $84

Presentation Highlight: Columbus is the fastest-growing metropolitan area in the midwest, projected to grow at an annual rate of 8.7% in the next five years, and Heartland is the market’s 8th-largest bank.

Communities First Financial Corporation CFST
Location: Fresno, CA
Number Of Locations: 1
Market Cap: $72.7 million
Share Price (as of Sept. 30, 2019): $24.75

Presentation Highlight: One of 60 banks with an acquiring license in the U.S., allowing them to process Visa and Mastercard payments. Community First estimates income from payment merchants will exceed $2 million in 2020, a 300% increase from 2018.

Community Bank of Santa Maria CYSM
Location: Santa Maria, CA
Number Of Locations: 2
Market Cap: $30.5 million
Share Price (as of Sept. 30, 2019): $12.46

Presentation Highlight: Is the only community bank headquartered on the central coast of California (between Goleta to the south, Salinas to the north, and Bakersfield to the east).

BankFirst Capital Corporation BFCC
Location: Columbus, MS
Number Of Locations: 21
Market Cap: $110.8 million
Share Price (as of Sept. 30, 2019): $24.71

Presentation Highlight: Despite the fact that BankFirst is headquartered in Mississippi, its largest lending market is Tuscaloosa, Al, home of the University of Alabama. BankFirst is the 9th largest bank in Mississippi and 23rd largest bank in Alabama.

Grand River Commerce Inc. GNRV
Location: Grandville, MI
Number Of Locations: 1
Market Cap: $41.3 million
Share Price (as of Sept. 30, 2019): $6.25

Presentation Highlight: The bank’s market has outperformed the state and country in terms of economic activity. As of July 2019, the unemployment rate in the Grand Rapids metro area was 2.9%, far below the national average, while employment growth has doubled the national average over the last decade.

Orange County Bancorp, Inc. OCBI
Location: Middletown, NY
Number Of Locations: 13
Market Cap: $123.8 million
Share Price (as of Sept. 30, 2019): $27.78

Presentation Highlight: Demand deposit accounts and interest-bearing demand accounts for nearly 45% of deposits. According to President and CEO Michael Gilfeather, the bank’s operations are almost exclusively funded out of these deposits.

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