Chain Bridge Bancorp (Nasdaq: CBNA)

We purchased shares in a recent initial public offering (“IPO”) of Chain Bridge Bancorp (“Chain Bridge” or “CBNA”). Chain Bridge has a specialty deposit business providing banking services to Republican political campaigns and political action committees. These political campaigns deposit their funds in the bank in non-interest bearing checking accounts. Because of the zero-cost deposits, the bank invests its balance sheet conservatively and still earns high returns.

We think the shares of Chain Bridge provide an attractive risk/reward at the current share price. Here’s our investment thesis:

1. Unique Customer Focus – Chain Bridge’s specialty deposit business brings zero-cost deposits to the bank. Chain Bridge’s customers are the Treasurers of Republican political campaigns and Political Action Committees (“PACs”). These customers value the ability to open accounts quickly with a bank that understands their accounts. These customers have a lot of money moving in and out of their accounts, so they are not interested in earning interest. Instead, they are concerned about their transactions getting completed in a timely manner. Chain Bridge’s bankers are focused on serving these customers.
2. Deposit Franchises in Demand – After the Regional Bank Crisis in March 2023, banks with strong deposit franchises have been in demand. We believe investors will recognize the value of Chain Bridge’s deposit franchise.
3. High Returns – Chain Bridge has posted high returns on equity. We expect returns to be diluted in the near-term while the bank digests the fresh capital raised in the IPO. However, we also expect the bank to leverage its fixed expense base and potentially generate higher returns going forward as it continues to grow.
4. Virtually Zero Credit Risk – Chain Bridge has a very small loan portfolio. 80% of its loan portfolio is single-family mortgages. Since the bank started in 2007, total loans charged-off are less than $300k.
5. Very Liquid Balance Sheet – Chain Bridge has a very liquid balance sheet. Having a liquid balance sheet provides stability especially when the stock market gets concerned about a potential recession and sells down the regional banking sector. We expect CBNA to trade with a significantly lower beta than the average regional bank.
6. Management – Peter Fitzgerald is the Founder and Chairman of Chain Bridge. He is a former U.S. Senator from Illinois. His father started and grew Suburban Bancorp in Chicago before selling it to Bank of Montreal in 1994. Fitzgerald was the general counsel at Suburban. His brothers currently own several private banks in Illinois. Fitzgerald brings Republican credibility to the bank. We believe Fitzgerald is a prudent banker who excels at risk mitigation. We also think he will sell the bank when the bank achieves a premium valuation.
7. Valuation – Chain Bridge IPO’d at $22. We estimate Q3 tangible book value will be a pro forma $21.50 after adjusting for the IPO. We note that book value is lower if we adjust for losses in the bank’s Held-to-Maturity bond portfolio, but this issue will resolve itself in the coming years.
8. Attractive Acquisition for a Mid-size Bank – We believe Chain Bridge Bank would be an attractive acquisition for banks that would appreciate its deposit franchise. Ideal acquirers are Axos Bank, Enterprise Financial Services, and Western Alliance Bancorp. All three of these banks have niche deposit gathering franchises, and could easily absorb another deposit gathering franchise by acquiring CBNA. We understand that the Too Big to Fail banks don’t want the headline risk of providing banking services to political campaigns. We believe mid-sized banks can make the business decision to endure the headline risk.

Some downsides to the Chain Bridge story are worth noting, highlighted by the following points: :

1. Legacy Bond Portfolio – Chain Bridge invests in short-term bonds, but even short-term bonds sustained losses during the rate increases of 2022-23. Chain Bridge does have some longer-term municipal bonds in its investment portfolio which will take longer to mature. We are confident that Chain Bridge has learned from this and will keep its bond portfolio invested in short-term maturities going forward.
2. Cyclicality of the Business – Chain Bridge’s deposit base is cyclical with peaks during both Presidential and Mid-Term election years. This will cause earnings to decline in non-election years. Some investors will avoid investing in the bank due to the volatility in earnings. We are less concerned due to the high-quality nature of Chain Bridge’s business.
3. Dual-class Structure – Chain Bridge Bancorp has a dual-class stock structure. The stated reason is to prevent an activist investor from making a political claim that would damage the bank’s business. We disagree with this reasoning and believe that the dual share class should be collapsed. Some equity index providers will not add companies with super-voting shares to their indices. With passive ownership of stocks so high in the current environment, we believe Chain Bridge’s dual-class structure will result in lower passive ownership of the stock and a lower valuation.
4. Small Company, Low Liquidity – Chain Bridge Bancorp has a small market cap and a limited float. We expect trading in the shares to average less than 30k shares a day going forward. Some larger institutions will avoid the stock due to the lower trading volumes.
5. Unseasoned Stock – As a recent IPO, CBNA is an unseasoned stock. At most, we expect three sell-side brokerage firms to publish research reports on the company. Very few investors know the story of CBNA.

At the current stock price, Chain Bridge Bancorp presents an attractive asymmetrical investment opportunity. At tangible book value, investors are paying nothing for a very attractive deposit gathering franchise. We believe Chain Bridge will grow tangible book value while we wait for others to recognize the value of their franchise.

Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.

Not all research is for securities currently held. Any securities for which research is provided herein may be reduced, completely closed out, or not purchased at all without notice of any kind.