Exchange Bank of Milledgeville, Milledgeville, GA (EXCH)

A Case of Time-Tested and True


Exchange Bank of Milledgeville is a true family bank, a true community bank, and a true opportunity for investors today.

Descendants of its founding family control 22% of EXCH shares, the current CEO is married to the founder's great granddaughter, and most of the bank's loans and deposits are local.

The opportunity is this: investors can buy EXCH today for $39 and reasonably expect it to trade at $100 or better in three years, when the bank will likely be earning $6 per share and have attained book value approaching $70.

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

Prospective Buyers Exchange Bank of Milledgeville would be highly valued by these potential acquirers, but the bank is earning enough to justify remaining independent.

South State Corp, Columbia, SC (SSB)
State Bank Financial, Atlanta, GA (STBZ)
United Community Banks, Blairsville, GA (UCBI)

Financial Snapshot
†as of 12/31/2017
Total assets:
$245M†
Tangible book value per share:
$50.05†
NPAs to assets:
1.3%†
Price to book:
79%
Market cap:
$25.2MM
Dividend yield:
2.0%
Trailing 12-month ROA:
0.9%†
Trailing 12-month ROE:
7.1%†

The Crew
William R Allen, Chairman
Henry Jackson Pope, Jr, President and CEO
Roy D (Casey) Washburn III, Senior VP, COO, CFO

The Skinny
Milledgeville was Georgia’s capitol from 1802-1868.

Two of the three colleges operating in Milledgeville today were founded after the capitol moved to Atlanta — Georgia Military College (1879) and Georgia College & State University (1889).

Milledgeville's two biggest banks were founded shortly after — The Merchants and Farmers Bank, now Century Bank and Trust (1898), and Exchange Bank of Milledgeville (1903).

Exchange Bank was founded by Otto Conn. It now holds 27% of Milledgeville’s deposits, lagging its long-time competitor Century Bank and Trust by only 6%. In 115 years there have been only eight presidents of Exchange Bank.

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Milledgeville is still a college town, and a college town is a great place to be a bank. 7,000 students attend Central Georgia Technical College alone.

Milledgeville is also a steadily growing town and its two original banks have been growing right along with it. Exchange Bank's book value per share has risen from $35.50 to $50.05 over the past four years.

My prediction is that both banks will continue to grow, but since Century Bank and Trust is privately held, I can't share anything of interest for my fellow investor-readers about it.

I can say that with 13% equity to assets, Exchange Bank can increase dividends and buy stock back for higher-than-past book value accretion.

Sources
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FMB Equibanc, Statesboro, GA (FMBE)

A Case of Being in a Better State


Economically speaking, FMBE is in the best state it's been in since the Great Recession. Geographically speaking, Georgia is a great state to be a bank in these days. So I find it linguistically satisfying that Georgia's Farmers & Merchants Bank is in a vibrant Georgian town named Statesboro.

Of course, now I have to state my case: I see FMBE's earnings reaching 70¢ a share and book value surpassing $7 in three years, making it likely the stock will trade at $10 and deliver a healthy return for today's investor. Were FMBE to sell today, it could get $9-10.

When holding out a few years doesn't get the stock to a much better state than it can obtain today, I say management should sell.

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

Prospective Buyers Farmers & Merchants Bank has more great options for a mutually lucrative M&A transaction than any community bank I have seen in quite some time. All five of these banks have holes in their branch networks FMBE would fill nicely:

Bank of the Ozarks, Little Rock, AR (OZRK)
Fidelity Southern, Atlanta, GA (LION)
South State Corp, Columbia, SC (SSB)
State Bank Financial, Atlanta, GA (STBZ)
United Community Banks, Blairsville, GA (UCBI)

Financial Snapshot
†as of 12/31/2017
Total assets:
$190M†
Tangible book value per share:
$5.67†
NPAs to assets:
1.0%†
Price to book:
115%
Market cap:
$21M
Dividend yield:
0%
Trailing 12-month ROA:
0.6%†*
Trailing 12-month ROE:
5.2%†*

*Adjusted to exclude one-time Deferred Tax Asset (DTA) charge Q4 2017

The Crew
Gary Davis, Chairman
Charles Ricky Nessmith, President and CEO
William Brett Morgan, Bank President and CEO

The Skinny
Why I'm pleased with FMBE's current state:
  1. It presents a "heads we win, tails we win" situation. Shareholders get a much higher share price whether management sells or keeps improving operations. It's just a matter of sooner or later.
  2. The state of leadership is great. CEO Brett Morgan has presided over one of the greatest bank turnarounds of this economic cycle. He brought FMBE's NPAs down from 17% in 2011 to 1% today!
  3. The bank's marketshare is in a strong state. Farmers & Merchants Bank is the only bank in Brooklet and controls 15% of the deposits in Bulloch County—an economically vibrant area anchored by Georgia Southern University and its 30,000 students and staff.
  4. The state of the bank's deposit mix is getting better and better. 36% of FMBE's $171M are in checking accounts, 15% more than in 2012 and well above the 25% most investors are happy to see.
Sources
  • Confidential interviews with shareholders and analysts
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