Undervalued and Flying Under the Radar: A Closer Look at Chain Bridge Bancorp

Chain Bridge Bancorp is undervalued and flying under the radar, despite community and regional bank stocks experiencing a fast rise following April's "Liberation Day" turmoil. The KBW Regional Banking Index has returned 5.5% YTD, outperforming the S&P 500. Chain Bridge Bancorp's shares have fallen 4.2% YTD, making it an undervalued opportunity for investors.

Chain Bridge Bancorp (CBNA), a community bank headquartered in McLean, Virginia, has been flying under the radar despite the recent surge in community and regional bank stocks following the "Liberation Day" turmoil in April. While the KBW Regional Banking Index (KRX) has returned approximately 21% year-to-date, CBNA's shares have fallen by 4.2%, making it an undervalued opportunity for investors.

CBNA, founded by former Illinois Senator Peter Fitzgerald, has carved out a unique niche as the depository bank for every Republican presidential nominee since the 2008 federal election cycle. The bank's conservative management and geographic focus on the Washington, D.C., Maryland, and Virginia markets have supported its growth. Despite a lending concentration risk in political organizations and no physical retail branch presence, CBNA has grown its assets at a compounded annual rate of 14.8% [1].

The bank's conservative portfolio and geographic tailwinds have supported strong credit metrics, with no year-to-date charge-offs or nonaccrual loans across the lending portfolio. This conservative lending strategy has positioned CBNA as a best-in-class lender, with low loan losses as a percent of the portfolio. The bank's unique customer base, consisting mainly of political organizations, offers investors exposure to non-traditional community bank clients, but also contains high concentration risk [1].

CBNA's recent Q2 earnings report highlighted a net income decline of 20.8% year over year and a 68.5% decline in non-interest income, driven by the cyclical nature of political organization borrowings. However, the bank's commitment to conservative lending has positioned it to compound shareholder returns at low to mid-teens over a long time horizon [1].

Valuation and Risks

Comparing CBNA with peers such as Hingham Institution for Savings (HIFS), Cullen/Frost Bankers (CFR), and Southside Bancshares (SBSI), CBNA's revenue growth, profitability, and efficiency ratio are competitive. However, the primary risk to CBNA's thesis is its ability to attract new clients outside of the political space. Without a physical presence, the bank relies solely on referrals for new clients and customer deposits. Nevertheless, CBNA has demonstrated its ability to compound deposit growth over the last decade [1].

In conclusion, Chain Bridge Bancorp is an undervalued opportunity in the regional banking sector. Despite volatility in deposit flows, the bank's unique customer base offers durable deposit growth through all market cycles. With a conservative lending strategy and strong credit metrics, CBNA presents an attractive investment opportunity for investors seeking exposure to the regional banking sector.

References:

[1] https://seekingalpha.com/article/4813964-chain-bridge-bancorp-stock-undervalued-onservative-management