First Commerce Bank, Lakewood, NJ (CMRB)

A Case of Growing Too Fast


Rapid growth, rising NPAs, and deposit quality have had me wincing about First Commerce Bank for a few years now.

Fortunately, management has let up on the gas and begun tending to the bank's wounds. I’m swayed by CMRB's cheap price, the level to which its board is vested, and its prospects for sale given the competitive landscape in New Jersey.

If First Commerce Bank addresses asset quality, it could sell for $8.50 within a year and deliver a 50% return over today's price.


Disclosure: As of this posting, I own shares of CMRB and may subsequently either dispose of them or purchase more.


Prospective Buyers

Any of these larger, area banks could easily pick up First Commerce Bank and proceed to grow safely.

ConnectOne Bank, Englewood Cliffs, NJ (CNOB)
Columbia Financial, Fairlawn, NJ (CLBK)
Lakeland Bancorp, Oak Ridge, NJ (LBAI)

Financial Snapshot
as of 12/31/2018

Total assets:
$962M
Tangible book value per share:   
$5.81
NPAs to assets:
3.96%
Price to book:
97%
Market cap:
$126M
Dividend yield:
0%
Trailing 12-month ROA:
1.31%
Trailing 12-month ROE:
10.25%

The Crew

Abraham S Opatut, Chairman
Donald Mindiak, President and CEO
Abraham M Penzer, Director, largest shareholder

The Skinny

First Commerce Bank pursued a course of dramatic growth after it was recapitalized in 2010.
  • Branches grew from one to 10. (1000%)
  • Assets grew from $67 million to $962 million. (1436%)
  • Deposits grew from $60.9 million to $824 million. (1353%)
  • Loans outstanding grew from $50.4 million to $753 million. (1491%)

Not surprisingly, pursuing growth at this speed resulted in a few scrapes.
  • Over the past decade, NPAs at First Commerce Bank have grown ten-fold, from a very low 0.7% ($3.8 million) in 2010 to 3.95% ($38.2 million) today.
  • The steady increase in the bank's profitability hit a wall in 2016, and has been declining since then.
  • The value of CMRB stock has dropped by 28% from a high of $7.75 in 2018 to today's price of $5.61.
  • It's arguable the bank sacrificed deposit quality for quantity in its haste to grow — 35% of First Commerce Bank deposits are jumbo CDs, and only 12% non-interest bearing.

Still, I have confidence in both First Commerce Bank and CMRB stock.
  • The clock is running out, but the bank is still on track with the ten-year plan Chairman Abe Opatut and former CEO Herb Schneider laid out when they invested their own millions and took the helm back in 2010. 
  • Of all the banks I have reviewed here, First Commerce Bank has my favorite board of directors. As a group, the 15 directors own 25% of the bank — a stake that's worth nearly $32 million today. They take no pay, and no outside director owns less than $1,000,000 of CMRB shares.
  • In short, I believe the board remains wholly aligned and behind the plan to grow First Commerce Bank for sale. I anticipate they will do so as soon as the scrapes heal up. 

Sources

UPDATE: Parkway Acquisition Corp, Floyd, VA (PKKW)

When I first reviewed Parkway Acquisition Corp in July 2017, I was hoping they'd reach their own projected earnings of $1.01 per share and get the stock trading at $14 by year end 2018.

Instead, Parkway paid $14.1 million in stock to incorporate the assets of Great State Bank of Wilkesboro, NC into Skyline National Bank. They missed their projections, and CEO Alan Funk retired shortly after the acquisition.

Happily, Parkway is still A Case of Better Than Before. PKKW has outperformed the BKX Index by 10% over the past two years. If Parkway's progress pattern holds through 2020, PKKW should earn over $1.30, have a book value over $14, and trade over $15.


Disclosure: As of this posting, I own shares of PKKW and may subsequently either dispose of them or purchase more.


Prospective Buyers

Skyline National Bank has the same prospects for sale as it did in 2017.

First Citizens BancShares, Raleigh, NC (FCNCA)
National Bankshares, Blacksburg, VA (NKSH)
Union Bankshares, Richmond, VA (UBSH)

Financial Snapshot
as of 12/31/2018

Total assets:
$680M
Tangible book value per share:   
$11.03
NPAs to assets:
1.7%
Price to book:
90%
Market cap:
$68.3M
Dividend yield:
2.2%
Trailing 12-month ROA:
0.8%
Trailing 12-month ROE:
7.0%

The Crew

Thomas M. Jackson, Jr., Chairman
Blake M. Edwards Jr., President and CEO
Laurie J. Vaught, Executive VP and CFO

The Skinny

It's too soon to say whether Parkway's acquisition of Great State Bancorp has added to the value of the combined franchise, but I'm still bullish on this stock.

I see two new reasons to have high hopes for PKKW:
  • The bank recently authorized a buyback which should make book value and earnings accrete even faster. 
  • Skyline National Bank could attract some strong talent and customers disrupted by the upcoming BB&T/SunTrust merger.
As in 2017, I don't expect miracles from this latest acquisition.
  • Floyd County is a low-growth market that has struggled to attract business, which is why 8 out of the 20 branches Parkway now owns are smaller today than they were in 2013.
  • With 206 employees, Skyline National Bank now has $3.3M in assets per employee, but neighboring National Bankshares — which has $5.4M in assets per employee — is still doing more with less.
  • Five Directors from Cardinal's board are still on Parkway's board, including third generation Director Dr. Condruff, under whose watch Cardinal's Bank of Floyd was grossly mismanaged.
    Why I'm not worried the sky's going to fall for investors:
    • At 90% of book value, PKKW is cheap, and there aren't many $700M banks with relatively clean asset quality left that are trading this low.
    • Skyline National Bank is the only bank in four towns and enjoys over 50% market share in two other towns.
    • If the bank underperforms, I believe shareholders will hold management to its 2016 Investor Presentation promise that it would either perform or sell.

      Sources

      • Confidential interviews with shareholders and analysts

      UPDATE: Peoples Financial Corp, Biloxi, MS (PFBX)

      I no longer have reservations about calling management of The Peoples Bank "scoundrels." 

      When I reviewed Peoples Financial Corp back in 2015, Chairman and CEO Chevis Swetman had some handy excuses — Hurricane Katrina, the BP oil spill. But what's the excuse for being a bloated, non-performing bank to this day?

      Clearly, Swetman's not going to do the work it takes to turn The Peoples Bank around. The only folks sweating in this scenario are shareholders. And the only way out of this hot mess is for Swetman to do the right thing and sell this bank.


      Disclosure: As of this posting, I own shares of PFBX and may subsequently either dispose of them or purchase more.


      Prospective Buyers

      Peoples Financial Corp has the same prospects for selling The Peoples Bank that it had when I reviewed it three years ago.

      Bancorp South, Tupelo, MS (BXS)
      First Bancshares, Hattisburg, MS (FBMS)
      Iberiabank, Lafayette, LA (IBKC)

      Financial Snapshot
      as of 12/31/2018

      Total assets:
      $617M
      Tangible book value per share:   
      $17.59
      NPAs to assets:
      3.0%
      Price to book:
      66%
      Market cap:
      $57.6M
      Dividend yield:
      0.17%
      Trailing 12-month ROA:
      0.1%
      Trailing 12-month ROE:
      0.7%

      Scoundrels

      Chevis B Swetman, Chairman, President, and CEO
      A Wes Fulmer, Executive VP and Chief Credit Officer
      Laurie A Wood, Senior VP and CFO

      Red Flags

      Want me to explain how bad this bank is? No sweat!
      • Swetman's 92% efficiency ratio is in the bottom 5% of all US banks
      • His 3% NPAs to assets ratio is in the bottom 5%, too
      • Loans at The Peoples Bank are down 24% in the last five years
      • Book value per share has declined by $1 in spite of stock buybacks at 70%
      • PFBX shareholders have seen the value of their holdings drop by $110M since 2000
      Meanwhile...
      • Among the people who suffered this 70% decline in the value of their holdings since 2000 are the clients of Peoples' Trust Department, who collectively own 5% of PFBX
      Enough already. In three years, Swetman has barely budged. He's now 69. The bank's not working and neither is he. Every stakeholder in PFBX and the bank's geographic area will be better served by new operators who will put some muscle into The Peoples Bank.

      Sources