UPDATE: Franklin Financial Services, Chambersburg, PA (FRAF)

I'd like to plant a new seed for this money tree.

Since my August 2012 review, Franklin Financial has grown in value just as I had predicted.

Although not the screaming bargain it was back then, given another three years, FRAF should trade at 150% of its estimated book value of $31 or $47 per share.

Were Management to list FRAF on the NASDAQ, the stock would be eligible for inclusion in the Russell Index and trade more in line with its peers. (The average NASDAQ bank stock trades for 186% of book value and 21x earnings.)


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


Prospective Buyers

F&M Trust's low 23 bps of funding costs, #1 marketshare position in Franklin County, and #2 position in Fulton County make the bank a very attractive franchise for acquisitive neighbors like these:

F.N.B. Corporation, Pittsburgh, PA (FNB)
Fulton Financial Corporation, Lancaster, PA (FULT)
Northwest Bancshares Inc., Warren, PA (NWBI)

Financial Snapshot
as of 03/31/2017

Total assets:
$1.13B
Tangible book value per share:   
$25.47
NPAs to assets:
1.6%
Price to book:
113.4%
Market cap:
$135.2M
Dividend yield:
3.1%
Trailing 12-month ROA:
0.8%
Trailing 12-month ROE:
7.2%

The Crew

G. Warren Elliott, Chairman
Timothy G. Henry, President and CEO
Mark R. Hollar,  Senior VP, Treasurer and CFO

The Skinny

If the crew at Franklin Financial Services takes me up on my suggestion to list FRAF on NASDAQ, and FRAF starts to trade in line with its peers, the stock could trade for $44 pretty quickly.

Improvements at Franklin Financial since my 2012 review
  • Transaction accounts now make up 43% of F&M Trust's deposits, versus 29% five years ago
  • NPAs are down to 1.6% and still declining 
  • Dividend yield is pretty high at 3.1%, and now rising
Other things to like about this deeply rooted Pennsylvania money tree
  • The bank's markets have grown, and its share of those markets has, too
  • Merger activity has lessened the competition making FRAF more valuable
  • FRAF does not get the credit it deserves for its solid and growing trust business, which has $725M in assets
  • Going forward I expect FRAF will consistently earn over 1% on assets and 10% on equity

Sources

  • Confidential interviews with shareholders and analysts

Parkway Acquisition Corp, Floyd, VA (PKKW)

A Case of Better Than Before


If you're looking for a relatively safe place to park a few dollars, PKKW might be it.

Parkway Acquisition Corp and its wholly owned subsidiary Skyline National Bank are the product of a 2016 merger of Grayson Bankshares, Inc. (GSON), Cardinal Bankshares Corporation (CDBK), and their respective subsidiaries, Grayson National Bank and the Bank of Floyd.

I would have preferred to see Grayson and Cardinal sell rather than merge, but now that they've kicked the scoundrels* to the curb, I'm content to focus on the blue sky ahead.

Management predicts PKKW will earn $1.01 per share in 2018. If they're right, book value should grow to $12.50 and the stock could trade at $14, providing investors who buy PKKW today a decent 37% return.

*See my April 2012 review of Cardinal Bankshares for the backstory.


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 may be landlocked in the mountains and short on options for organic growth, but it's holding upwards of 50% of the deposits in five Virginia towns.

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

Financial Snapshot
as of 03/31/2017

Total assets:
$558M
Tangible book value per share:   
$10.72
NPAs to assets:
2.1%
Price to book:
91.3%
Market cap:
$51.2M
Dividend yield:
1.6%
Trailing 12-month ROA:
0.49%
Trailing 12-month ROE:
5.0%

The Crew

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

The Skinny

Although I'm bullish on PKKW in general, I don't expect miracles from this new combination.
  • Floyd County is a low-growth market that has struggled to attract business, which is why 7 out of the 16 branches Parkway now owns are smaller today than they were five years ago.
  • With 188 employees, Skyline National Bank has less than $3M in assets per employee. Neighboring National Bankshares operates with $6.2M in assets per employee.
  • Five Directors from Cardinal's board are now 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 92% of book value, PKKW is cheap, and there aren't many $500M 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.
    • In its recent investor presentation, Parkway's Management team overtly acknowledges it must perform or forfeit control of the bank.

      Sources

      • Confidential interviews with shareholders and analysts

      UPDATE: Embassy Bancorp, Bethlehem, PA (EMYB)

      Clearly, the bankers in charge at Embassy still know how to pack a punch. As I predicted in my 2013 review, CEO David Lobach and his colleagues have succeeded in doubling the bank's value. In fact, they've done better than I predicted, accomplishing this growth "organically" versus sale of the bank. EMYB is up 120%, and assets are up 50%.

      I see no reason why this team can't grow EMYB another 50% over the next four years. If I'm right, Embassy's stock could trade for $30 on its own by 2021, giving investors another chance to double their money.

      Lobach is 67 and has certainly earned the right to cash in on his 500% change in control provision any time he likes. I'd be just as happy to see him keep running at full steam ahead for another four years, first. Either way, he's done right by the bank, its customers, its shareholders, and his own family.


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



      Prospective Buyers

      The M&A scene in Embassy's back yard is so hot that two of the institutions I had listed as prospective buyers in May 2013 have since been acquired, themselves — First Niagara Financial Group, Buffalo, NY (FNFG) and National Penn Bancshares, Boyertown, PA (NPBC).

      Fulton Financial Corp, Lancaster, PA (FULT)
      Provident Financial Services, Iselin, NJ (PFS)

      Financial Snapshot
      as of 03/31/2017
      Total assets:$963M
      Tangible book value per share:$10.15
      NPAs to assets:0.66%
      Price to book:145%
      Market cap:$110M
      Dividend yield:0.9%
      Trailing 12-month return on assets:0.83%
      Trailing 12-month return on equity:10%

      Luminaries

      David Lobach, Jr, Chairman, President, CEO
      Judith Hunsicker, Senior Executive VP, Secretary, CFO, COO
      James R. Bartholomew, Executive VP

      Gold Stars

      I still love how efficient and committed Embassy is! In some ways the bank is operating even more efficiently now than it was four years ago, especially considering that its peer group is now comprised of only the strongest players.
        Employees per branch.
        • In 2013, Embassy Bank had just 70 employees across 7 branches and was operating 30% to 90% more efficiently than its peers.
        • Today, Embassy has just 83 employees across 8 branches, and is now operating 30% to 100% more efficiently than its peers.
        Assets per employee.
        • In 2013, Embassy Bank had whopping $9.2M in assets per employee and was operating 50% to 100% more efficiently than its peers.
        • Today, Embassy has $11.6M in assets per employee and is still operating 30% to 60% more efficiently than its peers.
        Insider ownership.
        • In 2013, insiders owned an impressive 32% of EMYB stock worth $15M and Embassy Bank managers and directors were 3x to 20x as invested in their bank's success as their peers in other banks.
        • Today, insiders own 27% of EMYB stock worth $30M, and Embassy managers and directors are still 3x to 4x as invested as their industry peers.

        Sources

        • Confidential interviews with shareholders and analysts