Description

Central Federal Bancshares, Inc. (OTCPK:CFDB)

Central Federal Bancshares, Inc. (Nasdaq:  CFDB)
Price: $12.75
Shares: 1.52m
Market Cap: $19.38m
Book Value of Common Equity: $23.7

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Assets: $69.5m
Total Loans: $53.2m
Book Value per share:  $15.60

**This is a very illiquid microcap stock that often trades by appointment.  In this environment of record market highs, heightened geopolitical and cycle risk, and various bubbles everywhere, we seek bottom-up ideas that can function as an alternative to holding cash (absent the liquidity benefit), and where downside is well protected.**

 **The QUICK PITCH **

 -        Central Federal is a sleepy one-location bank in Rolla, Missouri that came public in late 2015.

-        The bank has around $70m in assets, of which $53m are loans, and deposits of around $46m.

-        The largest segment of the bank’s loan portfolio is real estate loans, consisting primarily of residential real estate loans (including one- to four-family and home equity loans), and, to a lesser extent, commercial and multi-family real estate loans, commercial business loans, and consumer loans.  The bank retains substantially all of the loans it originates in its portfolio.

-        Tangible equity is $23.7m, or around $15.60 per share vs a stock price of $12.75 (82% of book).

-        In Sept 2019, the bank completed its third share repurchase for 65k shares of stock.  The second repurchase program saw 80,296 shares retired, and the first program bought back 54,300 shares.  In total, around 199,000 shares have been retired, or around 12% of the total shares outstanding since the company came public.

-        The Company has been unable to earn any meaningful returns over the last 4 years.

-        Tangible equity is almost 35% of assets and non-performing loans are de minimus.

-        The CEO and Board Members are no youngsters, with the average age of the team hovering around 70 years old.

Description

Central Federal is a community-oriented financial institution, dedicated to serving the financial service needs of customers within its market area, which generally consists of Phelps County, Missouri, although it also services customers in the contiguous Missouri counties of Dent, Texas, Crawford, Pulaski and Maries. Central Federal offers a variety of loan and deposit products to meet the borrowing needs of our customers. The Company’s real estate loans consist primarily of residential loans, including owner-occupied and nonowner-occupied one- to four-family residential loans. They also offer commercial and multi-family real estate loans, commercial business loans and consumer loans, including automobile and recreational vehicle loans. The bank operates out of a single office in Rolla, Missouri.

As of June 30, 2018 (the latest date for which information is available), according to the U.S. Deposit Market Share by County compiled by SNL Financial, Central Federal represented 5.2% of deposits in Phelps County, Missouri, ranking the bank seventh out of the county’s ten FDIC-insured institutions, which are comprised of 19 office locations.

Delisted

In April of 2019, the Company filed to deregister its shares.  As a savings and loan holding company, the Company is eligible to file the Form 15 because its common stock was held by fewer than 1,200 holders of record as of April 26, 2019 and upon the filing of the Form 15 with the SEC.

One branch / office

The Company and Central Federal operate from its office located at 210 West 10th Street, Rolla, Missouri 65401. The net book value of its premises at December 31, 2018 was $506,000

Market

The bank is headquartered and maintains its sole office in Rolla, Missouri, and considers its primary deposit and lending market to be Phelps County, Missouri. Rolla is located along Interstate 44 in south-central Missouri, less than 100 miles from major Missouri population centers of St. Louis, Jefferson City, Columbia and Springfield. With a population of approximately 20,293 according to U.S. Census Bureau estimates, Rolla is the largest city, and center of government, of Phelps County, which has a population of approximately 44,744, also according to U.S. Census Bureau estimates. Rolla is home to Missouri University of Science and Technology, a public, leading technological research university within Missouri that has an enrollment as of Fall 2018 of approximately 8,416 students. Other major employers in Rolla and Phelps County include Phelps County Regional Medical Center and other health care service providers, as well as Walmart Stores, Inc. (including a regional distribution center in St. James, Missouri) and various agencies of the federal and state governments.

Home Prices

Missouri home values have gone up 4.3% over the past year. The median price of homes currently listed in Missouri is $189,500.  The median home value in Rolla is $148,000.  Rolla home values have gone up 3.1% over the past year.  Since 2000, home values in Rolla are up ~26%.

The Board is not young…

NEWLY ELECTED DIRECTORS (2019 meeting)

Larry D. Thomas (age 68)

Jeffrey L. McKune (age 61)

Michael E. Estey (age 68)

TERMS ENDING IN 2020

Robert R. Thompson (age 76)

John D. Wiggins (age 70)

TERMS ENDING IN 2021

Stephen L. Bowles (age 64)

James R. Sowers (age 72)

Executive Officers Who Are Not Directors

CEO                      William A. Stoltz (age 74)

VP of OPS            Barbara E. Hamilton (age 66)

Holders

                Maltese Capital                11.5%

               ESOP Plan                        10.4%

               Stilwell Value                    10.2%

               Directors & Officers            1.5%

Stilwell Value Partners
In our last write-up, we highlighted the presence of Stilwell Value Partners stake in Alcentra (ABDC), a struggling BDC that traded well below book.  ABDC was later bought out by Crescent, and investors are to receive a decent premium (the deal has not yet closed) plus have had the ability to collect quite a few dividends in the process.

Stilwell bought their first shares of Central Federal in 2016 at an average of around $10.50 per share and filed a Form 13-D on Jan 25, 2016.

At that time, Stilwell made the following statement:

“We hope to work with existing management and the board of directors to maximize shareholder value. We will encourage management and the board to pay dividends to shareholders and repurchase shares of outstanding Common Stock with excess capital when permitted by applicable regulations. We oppose using excess capital to "bulk up" on securities or to rapidly increase the size of the loan portfolio. If the Issuer pursues any action that dilutes tangible book value per share, we will aggressively seek board representation. Our purpose in acquiring shares of Common Stock of the Issuer is to profit from the appreciation in the market price of the shares of Common Stock through asserting shareholder rights. We do not believe the value of the Issuer’s assets is adequately reflected in the current market price of the Issuer’s Common Stock.”

Stilwell Value Partners is based in NYC and is typically an activist in banks, insurance companies and other financials.  Over the course of more than 20 years, they have pressed hard for change at small public companies.  While not every investment has been a winner, they have done quite well at forcing small financial institutions trading at a meaningful discount to book value to buy back shares or sell the company.  A cursory look through years of their 13-D filings reveals:

-    68 Activist Investments
-    30 Companies Sold or Merged
-    450 13-D Filings
-    34 Proxy Contests
-    23 Board seats obtained

Given the duration of Stilwell’s position here, it is surprising that they have not been more active in seeking to get the bank sold.  This could ultimately serve as a catalyst over time.

Possible Outcomes

Bank consolidation continues across the United States.  According to American Banker, “Banks announced 231 deals through Nov. 1, 2019 a 4% increase from a year earlier, according to data compiled by Compass Point, Keefe, Bruyette & Woods and S&P Global Market Intelligence. A flurry of activity in September and October contributed to the increase. (Note that less than 10% of the deals announced this year have involved sellers with more than $1 billion in assets.)  Premiums averaged 155% of a seller’s tangible book value through Nov. 1, compared with a 174% average in the same period of 2018.”  The table below highlights the last five “small” bank deals that we were able to find.  It is worth noting that Stilwell was a filer on each of these.

Examples of Sub $125m recent bank deals:

Small banks come public so that executives can grab more shares from company stock plans, attempt to modestly grow book, and ultimately sell.  You do not see many small banks with a team this old that come public to acquire and grow their footprint.

With the CEO and the Board not getting any younger, and the bank’s earnings subpar through its public life, now would seem to be a great time for the bank to explore a strategic process given that M&A is hot.  It goes without saying that large banks buy small banks because they lower their cost of capital and get access to new and differentiated markets, and are usually able to achieve fairly accretive synergies.  At premiums to tangible book ranging from .9x – 1.15x, the returns to shareholders are attractive at the current price, and do not carry a lot of risk given how well capitalized this bank is, other than a lack of liquidity.  An acquirer should be able to realize substantial synergies and lower costs of funds.  At an ROE of 5% of the target value per share, the buyer is paying roughly 20x before any synergies.

The three biggest pubco banks in the state are:

Commerce Bancshares, Inc. (NasdaqGS:CBSH) 2.6x book

Central Bancompany, Inc. (OTCPK:CBCY.B)  1.4x book  (merged w Liberty Bancorp in mid 2019)

UMB Financial Corporation (NasdaqGS:UMBF) 1.3x book

With tanglible equity pushing 35% of assets, this overcapitalized bank's earnings power certainly improves under a larger institution's control.

Catalyst

Bank runs a process to sell itself.

Activist holders seek Board seats to initiate a process.

Bank continues to buy back its shares.

Biggest risk: dead money / time / deterioration in housing prices