- Third quarter results were the best in the banks history.
- ROE >16% and ROA >1.20%. Historically higher than the national and state average.
- P/B of 116% isn’t too expensive given the growth, quality and profitability.
- Efficiency ratio fell under 60%.
- Bank is still attractive and should have a record breaking year.
I am glad I took the plunge into banks in the early part of this year. So far, the majority of my bank holdings have done well and I expect them to continue to perform going forward. Analyzing banks is a different ball game than your typical stock – however, as with any investment class, there is a learning curve. With that being said, I believe I am getting a better understanding of how to invest in banks and what to look for.
One bank I highlighted back in July, in an article titled ‘Plumas Bank: Under The Radar And Brimming With Potential’, has done remarkably well in a short period of time. I was turned onto the bank by Seeking Alpha commentator, Insider-Alerts, in his well-written instablog titled ‘Plumas Bancorp – 50% To 100% Upside Today’. After doing due diligence on the company I took the plunge – buying it for my PA and for my theoretical fund.
Today, the company reported record breaking results – shooting the stock price up ~7.00-8.00% as of this writing. I was pleased with the reported earnings and have confidence that the full-year earnings will be without dismay. In fact, I would be quite surprised if the full-year was not a record breaking year for the bank as a whole. But let’s get down to it. What exactly did the company report?
For one, earnings hit a record high of $2.0 million in Q3. This is a 22% or so gain from the $1.6 million reported last year. Moreover, the bank posted diluted EPS of $0.39/share – an improvement from $0.32/share. And for the nine months, the company had EPS of $1.06/share from last years’ nine months of $0.82/share.
There are a few things driving earnings. First, the company has a new branch in Reno, Nevada – which I am guessing helped to contribute to the 11% increase in net interest income. Likewise, deposits increased by $42 million in the period and the company’s net loans increase 14% Y/Y.
Another contributing factor to the earnings expansion was the declination in the efficiency ratio from 61.5% to a low of 58%. Sure, noninterest expenses did increase from a tech upgrade and an increase marketing expenses for the new Reno branch, however, as a percentage of net interest income, noninterest expenses are fairly proportioned.
Profitability metrics continue to improve as well. Annualized ROA for the quarter was 1.23%, an increase from 1.08%. Even better, annualized ROE was 16.3% an increase from 15.7%. And finally, the net interest margin expanded from 4.08% to 4.20%.
On an absolute basis, these metrics are great. On a relative basis, they are outstanding.
Even more better, if we drill down the relative metrics to just banks in California, Plumas continues to outperform its peers – by a wide margin at that.
In light of the much higher profitability metrics, Plumas isn’t that expensive. Stockholders’ equity is around $48.3 million – with a market cap pushing $56 million. Furthermore, earnings and profitability across the board continues to increase. Give the bank another solid year – or even flat year – and retained earnings will push stockholders’ equity to the $56 million mark or higher. But really, a P/B of 116% is justified given the ability of the bank to grow, with outstanding relative metrics.
My main concern is the concentration of the assets. Plumas operates in the California market. There is a low amount of inventory in the California real estate market, prices are higher than the national average and if rent prices continue to increase – there should be an increase in demand. In foresight, if there is a real estate bubble in California and it pops, Plumas could be in trouble.
But on the flipside, the company’s nonperforming loans decreased to 0.69% from 1.29% and nonperforming assets decreased to 0.86% from 1.21%. A decrease in nonperforming loans and assets is a positive trend and shows the quality of the banks underwriting process.
I think it’s clear what will happen to Plumas. If the bank continues to grow, they could be a great acquisition target – at the right price. If they are not willing to sell, I would expect the bank to continue their expansion in the Nevada market or other similar markets. Either way, I think the bank looks highly attractive. It will be interesting to see what the full-year brings for the bank.