Plumas Bancorp: Record Breaking Earnings not to my surprise


  • 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.

Blackhawk Bancorp – Worth More Dead Than Alive

Blackhawk Bancorp (OTCQX:BHWB)…with a name like that how could you not dig into the company? The bank name reminds me of the movie Black Hawk Down or the Sauk war leader Black Hawk himself. However, the bank has nothing to do with helicopters or Sauk war leaders – even though they do have a picture of planes on their 2015 annual report; which is a whole 16 pages long by the way. Likewise, the bank was founded in 1881 and is headquartered in Beloit, Wisconsin – thus, it’s your typical boring bank.

Blackhawk operates eight banking centers – located in Wisconsin and Illinois. The bank is a small lender that specializes in commercial based loans – C&I loans equate to 33% of the loan portfolio, COO equate to 23% of the portfolio and Other Commercial loans equal 14% of the portfolio. The other remaining bulk of the loan portfolio, 23%, is 1-4 Family loans.

Unlike a lot of small banks, I have covered in the past, Blackhawk’s stock price has been quite the volatile rollercoaster. Phil Timyan, explains it best in his excellent article titled,Community Banks Breaching Fiduciary Responsibility To Shareholders:

“BHWB’s shares reached a 1998 high of $16, declining to a low of $8 in 2001.They recovered to $14 in 2005 only to drop to $5 in 2010. BHWB shares are now trading sporadically between $7 and $9.”

Timyan’s article was published back in early 2012 – and is one of the only public articles written on Blackhawk. Today the company is trading around $17.60/share, after retreating from a high of around $20/share.

At first glance, the company looks attractively priced: P/B of 86% and P/E around 7.41x. However, the P/B doesn’t take into account the $5,037,000 in goodwill and the P/E doesn’t account for the one-time gain associated with a fraud loss recovery. Taking into consideration the former the P/TBV becomes ~96% and the P/E turns into 10.84x – not as attractive as before.

On a dividend basis, the company recently increased their quarterly dividend from $0.02/share to $0.04/share – a 100% increase. Despite the attractive increase in the dividend, the company still pays a paltry annualized yield of only 0.91%. This yield isn’t anything to brag about and I don’t think we will see ‘yield hungry’ investors flocking to Blackhawk anytime in the near-term.

The company has also seen its interest income continuously fall in the past five years; from $24,822,000 in 2011 to a low of $22,234,000 in 2015 – a -10.43% decline. Despite the precipitous fall in interest income, noninterest expense has continued to increase from $19,551,000 in 2011 to a high of $21,341,000 in 2015 – a 9.16% increase. Sure, interest expenses in the five-year time period has fallen ~54% and net income has grown ~120%. Furthermore, ROE and ROA have hit five year highs of 8.90% and 0.66%, respectively. However, the continuous rise in noninterest expense is alarming and simply put, around twenty-one million a year in noninterest expenses is quite high for a bank with a market cap around forty million.

The biggest noninterest expense is salaries and employee benefits, which equate to 54% of noninterest expenses. This is then followed by occupancy and equipment, data processing and other, which equate to 12%, 11% and 10% of noninterest expenses, respectively.

It’s quite challenging for a small bank with under one billion in assets to achieve the scale they need to operate efficiently. There are a few things banks can do to offset the increasing regulatory expense environment and the low interest rate situation: scale up, drastically cut unneeded expenses or sell themselves.

I don’t think Blackhawk is going to scale up anytime soon via acquisition – based upon the language in their recent annual report. I also am skeptical that noninterest expenses will be cut anytime soon either and will probably incrementally increase – especially on the salary side and from more stringent regulations.

One optimal case for producing ‘quick’ shareholder value is selling the bank completely.

(click to enlarge)

An acquirer could make a decent gain form cutting noninterest expenses. Based on our model above, an acquirer could come in, cut noninterest expenses 30% and applying a multiple of 10x we get a premium to takeout value of almost 100%. Even in the bear case, if an acquirer only cuts noninterest expenses by 15% and with a multiple of 8.0x there is still a solid 16% gain.

The model above doesn’t take into account the interest expense savings from cutting out unneeded FHLB loans and the possibility of taking out the subordinated debentures from a potential acquirer. Taking the former into account, the upside from a potential acquirer becomes more attractive.

The key question is; will management perform their fiduciary duty to shareholders and maximize value? I’d think not. First, the CEO and CFO are still ‘younger’ than your typical bank CEO who is looking to sell to maximize value for himself. Secondly, executive officers hold a paltry amount of shares outstanding- meaning they will realize more value for themselves on a going concern basis. Finally, the language in the recent financials speak of organic growth – not the maximization of value via outright sale.

Thus, as it appears now, the future of Blackhawk bank is to continue operating with a high-end efficiency ratio of ~77%. It is unlikely the bank will ever command a P/TBV over 1.00x and the stock appears to be appropriately valued by the market. Unless there is a dramatic price drop, management alludes to cutting noninterest expenses or the bank starts looking for a sale, an investment in the company appears to be ill-advised.

Crazy Woman Creek Bancorp: One Crazy Valuation

  • A small community bank located in the rural state of Wyoming.
  • The bank is trading significantly below its TBV.
  • Despite the notable turnaround, an initiation of a dividend and vast bottom line improvements, the market is pricing this company in value territory.
  • Either the valuation gap will close or another bank will step in and take this company over.

Crazy Woman Creek Bancorp (CRZY) has one of the most unique and original names I have seen in the world of community banks. Without the unique name, it may have taken me months to uncover this gem. Interestingly, Crazy Woman Creek is an actual stream and first time visitors of Wyoming always ask about the origin of the name

“There are actually several “legends” or “myths” that explain the name. In these legends, the “crazy” woman is either white or Indian. According to one Indian woman version, a squaw who was left completely alone after her village had been attacked, lost her mind and lived in the area in a dirty, squalid manner until her death.

Another story involves a white family named Morgan, traveling by covered wagon, who was attacked by Sioux warriors. They tomahawked and scalped the husband and three children. Mrs. Morgan was not killed but was driven out of her mind from witnessing the terrible fate of her family. However, she had seized an ax and killed four of the attacking Indians who then left her alone.

Supposedly, a mountain man named Johnson chanced upon the scene shortly thereafter, buried the dead family members, but could not persuade the woman to leave the gravesides. As a warning to the Indians not to bother her, he decapitated the dean warriors and placed their heads upon stakes near the graves. Johnson then built the woman a small cabin and stopped by occasionally to bring her supplies.

Because of her presence on the stream it came to be known as Crazy Woman Creek. Johnson eventually found her frozen body, apparently dead from starvation.”

Before we go too off topic here is a quick video of the scenic view of Crazy Woman Creek—note the rural aspect of the area. Here is a longer video.

Today, the company is a three branch bank with Buffalo Federal Bank as the subsidiary and Crazy Woman Creek as the holding company. The bank was started in 1936 and is headquartered in Buffalo Wyoming. The three locations are in Buffalo, Gillette and Sheridan, Wyoming.

Investment Thesis

CRZY is your typical Post-TARP turnaround. The company took on TARP funding back in 2009 and has recently retired the cumbersome preferred and warrants that came with it. With the retirement of the TARP funding, the company has initiated a common dividend, bought back a slight amount of shares and will experience cash inflows for the FY. Moreover, the TARP redemptions have allowed the company to increase its bottom line by 60% in the first nine months.

The company is trading at an attractive price, however, the company is not very liquid. Moreover, many investors will not be able to establish a meaningful position. If you don’t mind liquidity and have a lot of patience, CRZY would make for a great investment in a basket full of community banks.

Historical Improvements: From 2013 until Today

Back in 2013, the company had Classified Assets to Tier 1 Capital at 33.25%; high right. However, this was a vast improvement from 2012 given they were at 57.37% just one year before. The company also experienced a turnaround in their bottom line from a net loss of $38,000 in 2012 to a gain of $366,000.

2014 was a good year for the company. In the previous six quarters, the state of Wyoming was losing jobs, however, at the end of 2014, there was a 1.4% employment growth in the mining sector. Furthermore, loan demand started to catch up to its neighboring states. The company also received regulatory permission to pay off the TARP obligations and they were in the process of finalizing the sale of their Casper Branch. Finally, the cost of funds fell from 0.60% in 2013 to 0.39% in 2014.

In 2015 net income improved by 43% and Classified Assets to Tier 1 Capital decreased from 32.35% to a low of 11.40%. The company also had a balance of zero for repossessed assets (in 2012 repossessed assets were $2,487,000) and loan growth was 15.3%, ranking the bank in the top ten for all Wyoming banks. In addition, the company initiated a $0.25/share annual dividend. Finally, the net interest margin hit a high of 4.26%, which is above the Wyoming median of 3.46%.

In the first nine months of 2016, total assets decreased from $109,706,000 to $106,022,000. Despite the decrease in total assets, loans increased from $66,410,000 to $69,211,000 and deposits fell to a low $89,439,000. Deposits fell due to the company’s plan of getting rid of high cost CD deposits and replacing them with lower cost deposits. Finally, stockholder equity grew from $11,764,000 to $12,108,000 and diluted EPS grew an astounding 60%.

The company is officially in turnaround mode. TARP obligations are gone. A dividend was declared. And the bottom line is rapidly increasing. Given the liquidity nature of the company or lack of liquidity, the company still sitting near attractive valuations.


There are a few things to like about CRZY. One of my favorites is that it is grossly undervalued on a P/TBV basis.

first CRZY

There are a few reasons for the undervaluation. First, the company is a pink sheet community bank. Secondly, the market cap is under ten million. Thirdly, there isn’t much liquidity. These three reasons will give the bank a basement level valuation, despite the notable turnaround efforts.

Despite the liquidity, the absolute low market cap and pink sheet nature of the company, the bank is trading for a significant discount and they continue to improve their bottom line in a dramatic way. The valuation under TBV should not persist forever, especially if they continue to improve operations. Moreover, either the market will give the company a better valuation in the coming quarters/years or another bank will step in and realize the undervaluation themselves.

Second CRZY

There are not many public banks in Wyoming so I had to compile data from private banks in the area for comps. As shown above, CRZY outperforms their local peers on a NIM and noncurrent loans to loans basis. Other areas such as ROE, ROA, efficiency ratio and total risk-based capital ratios, the bank lacks. However, the absolute low noncurrent loans to loans, low cost of deposits and higher-end efficiency ratio could prove to be beneficial on an acquisition standpoint. Another bank in the area such as First Northern Bank of Wyoming could buyout CRZY, eliminate 35% of noninterest expenses and have immediate accretion to earnings.

Furthermore, an acquirer would get three solid locations in a rural area with low competition…

location one

location two

location three

Finally, the company has recently eliminated their TARP funds. TARP obligations are a huge overhang in regards to M&A and substantially eat into net income. For an example, in 2014 and 2013 the company was paying around $160,000 on their TARP obligations. Now the company can cash flow these earnings and/or pay more in dividends.

The elimination of the TARP obligations has also increased net income for the first nine months of 2016 by ~60%. This is a huge increase in the bottom line. The market is officially saying that CRZY is not worth more than TBV and all improvements going forward mean nothing in regards to valuation.

There are three ways the valuation gap will be closed:

  1. The market realizes the discount and value will become its own catalyst.
  2. Another company takes over CRZY.
  3. Continual improvements in operations and/or a dividend raise.


There isn’t much liquidity in the stock and establishing a meaningful position may take some time. Investors should use limit orders and expect their money to be tied away for the long-term.

The demographics in Wyoming are not the best right now. The state is heavily tied to the O&G industry and the low price of oil may hurt loan growth.

The company has a significant amount of loans in the commercial sector. These loans are typically riskier. Offsetting the risk is the company’s high amount of investable securities in their capitalization structure.

Further regulations will increase noninterest expenses making the bank’s efficiency ratio increase. This could be beneficial for they could look to sell themselves to a larger bank if regulations continue to increase.


CRZY is a unique micro-cap bank that is flying over the heads of many bank investors. The company is trading at an attractive valuation and is in turnaround mode. It will be hard for investors to establish a position in the bank, however, an investment at the current price could be very compelling. I believe the bank is worth at least its tangible book value and on an acquisition standpoint could be worth 1.4-1.5x TBV. Overall, the bank would fit best in a portfolio of other small community banks.

Nick Bodnar

FHLB…What is it?

The more I dig into community banks, the more I find funny things in the financials that do not exist in non-banking companies. One of those items is FHLB stock. This article will be a quick overview on FHLB stock and what it means when you see FHLB stock in a bank’s balance sheet.


The FHLB or the Federal Home Loan Banks is a cooperative consisting of 11 US government-sponsored banks that provide liquidity to its members. A map of the 11 existing FHLB institutions is shown in the map below…


In 1932, the FHLB was formed in order to provide members with financial products, services and liquidity; in order to help develop and finance community lending across the nation. Members of the FHLB consist of commercial banks, credit unions, savings and loan associations and insurance companies.

Stepping back in time, pre-Great Depression, it was very common to see very short-term mortgages—we’re talking less than five years—carrying variable interest rates and requiring a nasty balloon payment; which usually needed to be refinanced. After the Great Recession rocked the economy, the federal government stepped in, and created long-term, fixed rate and fully amortizing mortgages, through their creation of a financial institution known as the FHLB.

Today, the reason why financial institutions join the FHLB is due to the quick and dependable liquidity through a type of secured loan. The liquidity is funded in a type of discount note, term debt or consolidated obligation.

The FHLB is a type of union for banks. The equity in the FHLB are held by the thousands of members of the FHLB. Interestingly, in order to become a member, a bank must purchase FHLB stock. After purchasing the stock, they will then become members and subsequently receive access to low-cost funding and dividends based upon the ownership they own in the FHLB. The basis of FHLB stock is not for capital gains growth or dividends, but rather to capital advances.

On the balance sheet, FHLB stock is sold at par, accounted for at par and redeemed at par. Furthermore, FHLB stock can only be sold to and from the FHLB or another member in the FHLB. Thus, the FHLB stock really doesn’t have a liquid market other than the members and the FHLB itself.


One regulation put into place that had a long lasting implication on FHLB members was The Financial Institutions Recovery and Reform Act of 1989 or otherwise known as FIRREA. The first implication gave all depository institutions with more than 10% of portfolios in residential mortgages clear access to join the cooperative. This allowed a vast majority of credit unions and commercial banks to join the FHLB. Interestingly, membership increased from 3,200 to 8,000 from 1989 to 2005.

The FIRREA also imposed an income tax on the members of the FHLB. The tax required members to pay 20% of their net earnings in order to cover a portion of the interest on the Resolution Funding Corporation or REFCORP bonds. The REFCORP bonds were initially used to help finance the thrift ‘cleanup’.

For those who don’t know, the REFCROP bonds were issued in order to rescue savings and loan institutions that failed to save during the loan crises. The crises began in the late 70s and lasted through the early 90s. Many speculate that the crises happened because S&L companies increased their risk profile by speculating in commercial real estate and junk bond investing because their deposits were insured by the Federal Savings and Loan Insurance Corporation or FSLIC. Due to the rampant speculation, the FSLIC eventually became an insolvent government institution.

On August 5th, 2011, the FHLB banks were told that they satisfied their obligation to the Resolution Funding Corporation. Instead of paying 20% of net earnings to the Resolution Funding Corp, banks now pay 20% of their net income into its own restricted retained earnings account, until the account equates to one percent of the bank’s outstanding consolidated obligations.


This is just a quick introduction article on FHLB stock. The depth and breadth and analysis of the FHLB could go on and on, deserving the attention of a research report. If you want to learn more about the FHLB I suggest you start here…

The Federal Home Loan Banks in the Housing Finance System


Federal Housing Finance Industry

Harbor Bankshares: The Valuation Doesn’t Make Sense

Ever week I scan through my favorite idea screener on CompleteBankData called the Growing Cheap Bank screener. With this idea generator, I always go straight to the bottom to find the cheapest bank that I can find. Today, the cheapest bank on the screener is Harbor Bankshares Corporation (HRBK).

Harbor Bankshares is an extremely cheap bank that openly begs to question the validity of the valuation. Moreover, I am exceedingly skeptical in regards to an investment the company given the blatant discount as a whole.


Harbor Bankshares is the Hold Co. of the Harbor Bank of Maryland, which is a seven branch bank located in Baltimore, Maryland. The company has assets of $266,014,000, equity capital of $19,229,000 and total loans of $185,391,000.


Valuation doesn’t make sense

One of the biggest share price overhangs in regards to Harbor Bankshares is the company’s ‘dark’ status. The company as a whole stopped filing financials sometime in 2006-2007, leaving shareholders completely in the dark.

Although, the company did file a 2016 proxy statement which states that there are 989,624 shares outstanding. At a share price of $2.95/share, this leaves us with a market cap of $2,919,390. With a market cap of $2,919,390 and total equity capital of $19,229,000, we arrive at a BV of 0.15x.

A BV of 0.15x makes Harbor Bankshares one of the cheapest banks that I have ever found. Conversely, the valuation seems too good to be true and leaves me to be a skeptic at best. In addition, if you look at the Hold Co., there is a significant amount of preferred stock.

If we take into consideration the Hold Co. and its preferred stock of 6,800,000, we get a total equity capital position of $12,429,000. With an equity value of $12,429,000 and a market cap of $2,919,390, we arrive at a TBV of 0.23x; a significant valuation gap.

What we have now is a very cheap bank. However this cheap bank is losing money (on a bottom-line basis), and while seeing its net interest income shrink in the past few years. Furthermore, the company has negative ROE and ROA ratios and a sky-high efficiency ratio of 114.45.


Harbor Bankshares appears to be an extremely cheap company, trading at a basement level valuation. On the flipside, the company is dark and the business is losing money on a bottom-line basis. However, it begs to ask; what could go wrong at this point to justify the valuation?

Nick Bodnar

Recent Activity In The Banking Industry: M&As, Branch Openings And Buybacks

  • There has been a significant amount of M&A activity in the banking industry for the month of June; public and private.
  • A handful of banks continue of open new branches and grow their deposit base.
  • It is not uncommon to see significant repurchase programs in an undervalued industry.
  • The banking industry is an unfollowed sector, yet has a significant amount of actionable ideas presenting themselves to investors every month.

When I first started investing, I followed and invested in some of the most popular stocks: Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM) and Waste Management (NYSE:WM) to name a few. My research style was easy. All I had to do was pull up the recent 100 or so articles written about those companies and boom, no independent research was needed.

The entirety of this article can be found at Seeking Alpha.

Should You Invest In Community Banks?

  • Community banks are boring and very unexciting.
  • The community banking space has lack of investor attention, leaving some of these banks trading for low multiples.
  • The lack of competition in the community banking space should be compelling for the investor in search of alpha.

When I first started dabbling in the investment world, I always avoided banks. The reason was simple, banks just seemed too hard to value and understand. Furthermore, all of the investors that I talked to wholly avoided banks for the same reason.

There was one exception. I found out a local bank that I had been banking at my whole life was a public company; Independent Bank Corporation (NASDAQ:IBCP). After doing very little due diligence, I proceeded to buy the stock, making a quick return in a very short time.

The entirety of the article can be found at Seeking Alpha.

What Is The Quickest Way To Find A Bank To Invest In?

  • Finding a bank to invest in seems like a very time-consuming process. News flash: it doesn’t have to be.
  • A quick look at the loan book, historical trends, share structure, and whether the valuation is rational, can all help to determine if a bank deserves more research.
  • Bank investing is not as hard as it seems to be.

Have you always been interested in banks but haven’t had the time to fully understand the business model and where to start your research process? I know I have fallen into this camp more than a few times.

What is interesting is that finding an investment research candidate in the banking space is not that hard and does not need to be a timely process. Furthermore, there are a few items that an investor can initially look at which will help decide if further research is necessary. A few areas that have been helpful for me in terms of “weeding out the bad candidates” is: historical trends, share structure, the quality of the loan book and if valuation is rational.

The entirety of the article can be found at Seeking Alpha.

Ojai Community Bank- A Small Community Bank With Attractive Growth Rates

Ojai Community Bank (OJCB) is a three branch community bank located in Ventura, California. The bank is locally owned and operated as a holding company that was formed in September of 2013.

Investment Thesis

OJCB is an undervalued community bank with attractive growth rates. With the company sitting near a 52-week low, growth potential and real inclination for industry wide consolidation, in short, the bank makes for a compelling investment thesis.

Growth Rates Should not be ignored

I think one of the main reasons why investors ignore community banks is due to the preconceived notion that banks slug along with low to no growth rates. What is interesting is that community banks have the potential to be growth machines, just like any other company.

OJCB is a great example of a fast growing bank with real top and bottom-line potential. In the most recent fiscal year, OJCB’s net interest income grew from $5,640 million to $7,426 million, or a 31.66% increase YOY. Furthermore, in the most recent quarter, net interest income grew 5.43% QoQ and 33.61% YOY. On an annualized three, five and ten year basis, OJCB’s net interest income grew 17.16%, 9.34% and 15.88%, respectively.

The bank has had good bottom-line expansion as well. For an example, in the past fiscal year, net income grew from $492K to $1,126 million, or a 128.86% increase YOY. Furthermore, in the most recent quarter, net income grew 56.56% YOY. Finally, on an annualized basis in the past three (uses pretax income given deferred tax asset utilization), five and ten years, net income grew at a 34.22%, 231% and 28.60%, respectively.

The reason for the top and bottom-line improvements are derived from the increase in loan and asset growth. In the past year, total assets grew 27.79% YOY. Additionally, in the most recent quarter total assets grew 4.17% QoQ and 23.29% YOY. Finally, in the past three, five and ten years, total assets have grown at an annualized rate of 16.37%, 11.32% and 19.17%, respectively.

The biggest derivative in regards to total asset growth is due to the bank’s overall loan growth. For an example, in the past year, total loan growth grew 37.53% YOY. In addition, in the most recent quarter, total loan growth grew at a 3.76% rate QoQ and 32.38% rate YOY. Finally, as I have done before, total loan growth in the past three, five and ten years, on an annualized basis, has grown at a 33.62%, 15.79% and 24.90% rates, respectively.

What is really interesting is that OJCB has grown its loan book without taking on any extra risk or toxic loans…

non current loans

Source: CompleteBankData

With no loans past due over 30 days, in the most recent quarter, this is strong evidence that the banks has experienced underwriters and valuable credit management.

Although, the bank did see deposits decline from $178 million to $174 million in the most recent quarter. Declining deposits are never a good sign, and could be the reason for the weak price action lately. However, investors should remember that the Q1 of the calendar year is typically a weak time for banks. Many companies usually hold off equipment and inventory purchases until after year-end, which thus, makes them replenish inventory and deplete deposits in Q1. Investors should look at the bigger picture and see that deposits grew 13% YOY.

Going forward, there should be continual bottom-line improvements from the result of the movement of their Ventura Division branch. On April 11th, 2016, the bank moved its Ventura Division to the heart of Downtown Ventura. This location not only has very high visibility and growth potential, but also will consolidate administrative and bank office personnel, which will lead to labor efficiencies, lower G&A expenses and more money flowing to the bottom-line.

The final item I would like to touch on before we move to the valuation is the consolidation in the industry. The banking industry is going through a wave of M&A’s.


Source: CompleteBankData Home

Given that OJCB is in the heart of Ventura County, which in fact is a fast growing community, well, that makes for a compelling potential M&A case. Likewise, OJCB is a fast growing bank that is trading significantly below TBV. Based upon the lack of takeover provisions, located in a growing demographic, trading below TBV and has great organic growth, OJCB may make for a takeover target down the road.

I would like to leave off with a statement David Brubaker, the CEO stated in the most recent press release…

“We are seeing excellent opportunities with the recent mergers, buyouts and acquisitions locally, and our continued presence as the strongest local community bank is highly significant in this market. Local people like local banking. Very soon, we will be the only community bank headquartered in Ventura County.”

Valuation and Price Target

OJCB is undervalued on an absolute and relative basis.


Based upon the relative comparison in profitability metrics with OJCB’s comps, the question begs to be asked; why is OJCB selling significantly below its local peers? In all reality, I am not sure I know the answer to that question. However, I do know that OJCB is much cheaper than its peers, it has higher profitability metrics and it’s the only one who pays a solid dividend (3.21% in the past year).

price target

Based upon the relative comps, my price target for OJCB is between $8.44-12.50/share, with an average upside potential of 81.15% or a price target of $10.69/share. Given the high growth rates, decent profitability, good demographics and excellent loan book, OJCB should continue to grow at double digit rates, thus, eventually experiencing mean reversion. In addition, the office move to the heart of downtown Ventura or continual consolidation in the industry may be underlying catalysts this company needs to trade at fair value.


Any unfavorable shift in interest rates could harm the company. Additionally, given that OJCB has a good chunk of assets in fixed income based securities, an unfavorable shift in interest rates could do considerable damage.

If the company experiences a reversion in credit quality they may post high loss provisions.

Increased regulations will hinder the bottom-line and increase fixed costs.


The price target of $10.69/share is found by applying the average peer P/TBV and P/E and taking the average of the two sums. An investment in OJCB may only be for the investors managing a small sum of money and who can handle the lower end of the liquidity spectrum. Furthermore, due to regulations and the low market cap, the most an investor can buy into this company is 10% of the shares outstanding or ~$1.3 million; based upon the current market cap. On the flipside, if you don’t mind the liquidity issue and you are not managing a large sum of money, OJCB has real potential for alpha generation.

Nick Bodnar

What Is The Least Risky Loan?

I think one of the main reasons a lot of investor wholly avoid bank stocks is due to the preconceived belief that banks have complex business models. I myself have fell into this camp before. I mean it’s kind of hard not to think banks have complex business models given the variety of loans on the loan book, immense regulation in the industry and much different financial statements than your typical business.

One aspect of valuing banks that confused me from the onset was the different types of loans on a loan book and what these meant in terms of the future prospects for a bank. At first, these different types of loans confused me and shied away from banks. However, after learning more about banks and what each type of loan means, I gained more competence and knowledge with bank investing.

With this article, I would like to take some time to quickly elaborate my thoughts on bank lending.


Source: Time Business

Loan Overview

There is a lot of arguments into what the least risky loan can be. Likewise, not everyone will come to the same agreement if loan X is more risky than loan Y; vice versa. Furthermore, a less risky loan in bank A may be a more risky loan in bank B, and thus depends on the circumstances of the underlying company/loan officers. Despite the never-ending quarrel on what type of loan is the least risky, in my opinion the least risky loan is a short-term loan, likely to be repaid.

In regards to risk management, short-term loans, typically are less risky and have a higher likelihood to be repaid. The issue with short-term loans is that the interest rate will be much less than a longer duration loan, putting pressure on a company’s net interest margin.

Another type of loan that is less risky is one with a lot of collateral. For an example, if bank A lends out $50,000 to the Smith’s on a mortgage loan with $50,000 in equity, the loan is less risky than the same monetary valued loan but with only $5,000 in equity. The more equity the better.

The issue with loans is that we as investors will not know the equity on a loan. This is a big problem and gives the investor an added complexity in his or her valuation. One way to offset this issue is to establish a relationship with the bankers. If you can trust the bankers and know his or her risk approach, the issue with not knowing the size of an equity position in a loan can be counterbalanced.

A further way to compensate for not knowing the equity value of a loan is to look at a bank’s historical losses on each loan you are analyzing. If for an example, bank A has historically done well lending out mortgages, it makes for an easier assumption that their strict and less risky mortgage lending practices will continue going forward. On the flipside, if bank A has little experience taking on commercial loans and just lent out a significantly high commercial loan, we cannot use historical data to evaluate the potential probability of this loan going down the drain.

A few loans that are on the higher end of the risk spectrum are consumer, auto, unsecured, and residential unsecured.

Consumer loans are risky because there is effectively zero equity involved. Consumer loans can be used for pretty much anything. From buying a new ATV to picking up some groceries. These loans have higher interest rates and have real potential to expand the bottom-line of a company, but with much more added risk than your equity backed mortgage.

Auto loans can have some equity attached to them. However, for the most part, they generally risky. Think about it, when you drive your car off the lot, it immediately losses value. Thus, it’s hard to attach an equity value on a car loan given the depreciating and value losing effects cars generally have.

Any unsecured loan is risky. Unsecured loans have a lack of equity and are not backed or secured by an underlying value. These loans will have higher interest rates, combined with much more risk.

Commercial loans are typically more risky. With commercial loans, the bank is betting on the success of a business. Furthermore, commercial construction is even more risky. With commercial construction, the bank is not just betting on the success of a business, but also on the company’s growth. For an example, if company X gets a commercial loan from bank A, in order to build a strip mall, the risk is derived if company X cannot fill any tenants in the lot.

Readers should be aware that some banks specialize in commercial loans and have historically done well investing the vast majority of their deposits into commercial businesses. If you are able to find a bank that has historically done well investing in commercial business, that bank may be less risky than the bank down the road who has never invested in commercial business but has taken hefty losses on their mortgage loans.

Construction and land is another very risky loan. These loans have high interest rates and can go south for a number of reasons. For an example, if the construction is not complete, for any reason, the loan will most likely take a loss, given that pure land, most of the time, doesn’t produce cash flows to pay the loan off.

C&I loans can also be quite risky. With these loans, a bank is betting that a company’s receivables are of good quality. Furthermore, if a company doesn’t have cash on hand to fund working capital or to buy inventory, the quality of that business, most of the time, is likely to be quite poor.


What makes for a good loan? It really depends on the bank. Business banks that focus on business loans, will most likely not have added risk lending to commercial customers. On the flipside, banks that focus primarily on mortgages, will have an added risk lending to commercial customers, if they don’t have the experience and track record of commercial lending.

As I stated before, the risk of a certain type of loan, without in regards to the type of lender lending the loan, can and will always be argued. Furthermore, the blatant question of; what is the least risky loan, is a loaded question. When evaluating banks, I believe the best way to measure the risk of a loan is to find out historically how well each type of loan that bank has lent out, has done.

Nick Bodnar