Description

What if I told you that there was a $5 bil.+ asset bank with a market cap over $400 mil. that was trading at only 8x next year’s earnings?  You’d probably contend that it must be some foreign bank or one that was under-capitalized or one that had severe credit issues or one heavily reliant on volatile gain-on-sale income. Or perhaps it couldn’t earn a 100 bps ROA or was facing the prospect of stagnant growth in perpetuity.  However, there is one company that is as healthy and vibrant as any of the other community banks out there its size but trading at an unwarranted discount: CCNE.  

Also referred to as CNB Financial, CCNE is a financial holding company with over $5.2 bil. in assets based out of Indiana, that is the county in PA, not the state in the Midwest. This community bank has successfully expanded from its legacy footprint in western PA into more prosperous MSAs such as Buffalo, Cleveland, and Columbus in recent years. Importantly throughout this process, it has not sacrificed its underwriting standards and managed to deliver profitable growth through solid execution. Yet despite a long list of accomplishments not limited to its expertise at navigating challenging credit environments and successfully integrating acquisitions, CCNE continues to fly under the radar screen, especially for a bank its size.  Perhaps partly to blame is its lack of quarterly earnings calls where analysts can ask predictable questions about loan growth, NIM, and M&A. Management is quite non-promotional and they are focused on managing the business, providing great service to its customers, and generating long-term value. 

In my opinion, the shares offer an attractive entry point into a high-quality community bank with below-average risks and above-average growth prospects. The chart below compares and contrasts CCNE versus some of its nearest peers including S&T Bancorp, Inc. (STBA), First Commonwealth Financial Corp. (FCF), Citizens Financial Services, Inc. (CZFS), and Northwest Bancshares, Inc. (NWBI). 

Comps

As indicated above, CCNE is trading at a discount to its peer averages on both a price to tangible book and 22 consensus P/E basis. The CCNE multiples are comparable to those of CZFS, which is an illiquid stock that trades OTC. I would probably also be recommending CZFS if it were trading on a major exchange.

While part of the CCNE discount is arguably attributable to the company’s relatively smaller size and slightly lower ROA, the delta is simply too wide to ignore. My guess is that investors are either ignoring CCNE or dismissing it because its TCE ratio of 7.57% adjusted for its significant excess liquidity and PPP-related loans is below average amongst a massively overcapitalized banking universe. 

When looking backwards over the last decade, CCNE on average has traded at a price to tangible book value multiple of 1.67x and 11.4x P/E NTM (see table below).  I arrive at a price target of nearly $35/sh using an equal weighting of these two metrics and their respective historical ten-year average multiples, representing upside of about 30%.

Historical 10 Year Multiples

Meanwhile, the aforementioned comp set of STBA, FCF, CZFS, and NWBI suggests a price target upwards of almost $34/sh.  

Prior to the pandemic, in November 2019, CCNE was trading at a high of nearly $34/sh, which is less than $0.50/sh away from my price target. Since that time, or to be even more precise, using end of Q3 19 balances as the relevant starting point, CCNE has adeptly navigated all the credit-related uncertainty, grown its tangible BVPS by 17%, and increased its assets by nearly 50% through both organic loan growth and the mid-2020 acquisition of the Bank of Akron in NY.  Absent from this entire two-year lookback was a dividend cut or suspension or an unprofitable quarter.  

CCNE is not only asset-sensitive but should also be able to consistently churn out high single-digit organic loan growth as far as the eye can see while many of its peers will struggle to generate half that amount. Despite superior performance, CCNE somehow still finds itself in the penalty box, trading 20% below its pre-pandemic highs while the larger bank index is making fresh all-time highs. 

Catalyst

- Acquisition

- Value will out