Description

Community Bankers Trust (ESXB)

Investment Thesis

Community Bankers Trust represents a compelling investment opportunity given cheap valuation and activist pressure to pursue a sale of the bank. ESXB is trading right around TBV (1.01x) and 12.1x 2021 consensus earnings estimates. The bank weathered the Covid pandemic well and is strategically located in the Richmond, VA metropolitan area. I estimate the bank is worth $11.50 - $13.50 based on an acquisition multiple between 1.50x – 1.75x TBV representing ~50% - 75% upside from current levels. While we wait for a transaction the bank generates solid returns with LTM ROAAs and ROAEs of 0.99% and 9.58%.

 Description and Key Stats

Community Bankers Trust is the holding company for the Essex Bank, a Virginia state bank operating 24 full-service branches and two loan production offices. Branch network is clustered around Richmond, VA (18 branches in VA) with the remaining 6 branches located between Washington DC and Annapolis, MD around the John Hanson Hwy corridor.

Overall, ESXB is a traditional small community bank with a market cap of $170 million, $1.6 billion in assets and a loan book of $1.2 billion comprised of 40% commercial Re loans, 17% residential Re loans, 15% construction and land development loans, 7% multi-family Re loans, and 19% commercial loans, and 2% other loans (agriculture, second mortgage, consumer installment). The bank has posted solid returns over the past three years averaging ROAAs and ROAEs of +1% and +10% (with Q4 2020 metrics of 1.3% and 12.6%), while also continuing to manage expenses with their efficiency ratio dropping below 60% in 2020.

Source: SNL

 ESXB has managed the Covid pandemic well. Overall, the bank does not have high exposure to Covid industries but does have 5% of their loan book exposed to hotels while another 5% is exposed to the medical industry. Deferrals peaked out at 15% in Q2 and have since fallen to ~4%. The CEO walked through the remaining deferrals on the Q4 earnings call and the bank appears confident deferral performance will continue to improve as the Virginia and Maryland Covid restrictions ease further in 2021. Additionally, performance measures have remained strong with NPAs and NPLs declining every quarter through 12/31/2020.

 Activist Pressure

As I mentioned above, activist shareholder, Driver Management, has been publicly agitating ESXB to pursue a legitimate sales process due to the belief that a sale of the bank represents the best outcome for shareholders compared to the prospect of remaining a standalone company. Below you can find the link to the letter made public by Driver in January 2020 highlighting their concerns of remaining independent:

https://www.businesswire.com/news/home/20200113005784/en/Driver-Management-Issues-Letter-to-Community-Bankers-Trust-Corporation-Shareholders

I agree with Driver’s thesis that ESXB should pursue a legitimate sales process given the bank operates in a very desirable geography, the valuation is cheap at ~1x TBV, and there appears to be several potential buyers that would be interested in acquiring the franchise at a significant premium to ESXB’s current price. Shareholder base appears to line up well with Maltese Capital Management owning ~5.9% and Fourthstone LLC owning 5.7%.

 Acquisition Scenario

I estimate ESBX could be acquired for $11.50 - $13.50 based on an acquisition multiple of 1.50x – 1.75x TBV, or a synergy adjusted earnings multiple of 11x – 13x. Recent M&A transactions in VA and MD support valuation multiples as evidenced by the table below (M&A deals in VA and MD over last 3 years):

Source: SNL

The majority of strategic bank acquirers look to synergy adjusted EPS multiples to help drive their decision on prices paid. Below I lay out my synergy adjusted analysis which achieves 25% - 35% cost synergies given overlap with strategic acquirer and additional operating expense reductions. The synergy adjusted earnings multiple corroborates the TBV multiple range of 1.50x – 1.75x in a takeout.

Potential Buyers

One item Driver Management did not profile in their letter was a list of potential acquirers for the bank, below I attempt to quantify several potential strategic acquirers and their ability to pay based on current TBV multiples:

Atlantic Union Bankshares Corporation (AUB)

Richmond, VA

Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation is the holding company for Atlantic Union Bank. Atlantic Union Bank has 135 branches and approximately 155 ATMs located throughout Virginia, and in portions of Maryland and North Carolina.

Notable M&A Activity:

In my opinion AUB would be the most likely buyer of ESXB given geographic overlap and high currency value to complete the acquisition given the bank is trading at 1.8x TBV and AUB is headquartered in Richmond.

 United Bankshares, Inc. (UBSI)

Charleston, WV

As of September 30, 2020, United had consolidated assets of approximately $25.9 billion. United is the parent company of United Bank, the largest community bank headquartered in the D.C. Metro region. United Bank has 231 offices in West Virginia, Virginia, Ohio, Pennsylvania, Maryland, North Carolina, South Carolina, Georgia, and the nation’s capital.

Notable M&A Activity:

USBI has the currency to acquire ESXB at a significant premium. The acquisition would also bridge the gap in USBI’s branch network between North Carolina and Washington DC as USBI does not have exposure in the Richmond, VA metro area.

WesBanco, Inc. (WSBC)

Wheeling, WV

WesBanco's banking subsidiary, WesBanco Bank, Inc., operates 212 financial centers in the states of Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and West Virginia. In addition to its banking operation, WesBanco provides trust, wealth management, securities brokerage, and private banking services through our century-old Trust and Investment Services department, with approximately $5.0 billion of assets under management (as of December 31, 2020)

 Notable M&A Activity:

Acquiring ESXB would enable WSBC to expand their footprint in the Washington DC / Annapolis, MD area down the I95 corridor and enter the Richmond, VA metro area. Although WSBC’s currency is on the low end compared to that of AUB and UBSI, the bank has shown interest and the ability to pay premiums for desirable assets in the past.

First Community Bankshares, Inc. (FCBC)

Bluefield, VA

First Community Bankshares, Inc., a financial holding company headquartered in Bluefield, Virginia, provides banking products and services through its wholly owned subsidiary First Community Bank. First Community Bank operated 50 branch banking locations in Virginia, West Virginia, North Carolina, and Tennessee as of December 31, 2020. First Community Bank offers wealth management and investment advice through its Trust Division and First Community Wealth Management, which collectively managed and administered $1.18 billion in combined assets as of December 31, 2020.

Notable M&A Activity:

FCBC is the smallest of the potential acquirers but the bank does have branches in the Richmond, VA metro area and the acquisition of ESXB would enable them to continue to expand their presentence in the market.

Conclusion

ESXB is an attractive asset given its cheap valuation, desirable geographic location in VA and MD, $1.6 billion asset base, and its solid return profile (LTM ROAAs and ROAEs of 0.99% and 9.58%). I believe a sale of the bank at a significant premium to the current price represents the best risk adjusted outcome for shareholders compared to remaining independent in the current banking environment. While we wait for further activist pressure and the ultimate sale of the bank value should compound around 10% per year.

Risks

• Construction / land development loans represent 15% of the loan book

• Bank does not have high exposure to Covid industries but 5% of loan book is exposed to hotels while another 5% is exposed to the medical industry

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

• Financial performance continues to improve as VA and MD Covid restrictions ease
• Continued pressure from shareholders for sale of the bank
• Ultimate sale of bank