One of my favorite ways to find a new banks is using the graphic valuation overview tool in the Bloomberg edition of CompleteBankData (accessible on your Terminal via APPS BANKS<GO>). The reason I like this overview is because it shows all of the traded banks in the US compared to one other graphically. I’ve included a screenshot below showing a portion of the ROE vs P/B graph. On the left axis is the ROE and the bottom axis is P/B ratio. The goal is to find banks that are trading for or below book value with above average returns on equity. The orange dot is representative of Ohana Pacific Bank (OHPB).
Ohana Pacific Bank is a small bank located in Honolulu, Hawaii. The bank was founded in 2007, which wasn’t ideal timing for a de novo bank. The bank ended 2007 with $64m in assets which they’ve grown to their current $112m. The bank primarily serves the Korean community in Hawaii.
While the bank’s assets have almost doubled the bank’s equity has only grown by about 50%. Most of this is related to their lack of income for the first four years of operation. The graph below shows net interest income in red and net income in blue. The graph is a great example of how asset scale matters in banking. While net interest income has been growing since the start of the bank the bank generated losses as they struggled to overcome fixed costs with a small asset base.
The bank’s loan book is in good shape. At the end of the first quarter only .16% of their loans were non-current. The bank is over-reserved with a 907% loan loss reserve to non-current loans. What’s even more encouraging is their non-current loans have been declining.
The bank is over-capitalized with a 12% leverage ratio and 17.7% Tier 1 ratio. They have no debt or FHLB advances or preferred stock. Equity stood at $15.1m, well above their market cap of $7.8m.
The negatives for Ohana Pacific Bank is that they still have a high efficiency ratio due to their small asset base. While the bank has done well growing assets they need to put more of them to work. The limiting factor is the amount of deposits and capital the bank has to work with. They could loan out an additional $7-10m, which might generate an extra $50k in earnings or so.
To really grow the bank needs to significantly increase assets, cut costs to boost profitability or be acquired.
The following picture shows what the bank might be worth under different valuation scenarios:
The bank is worth the most of they were to simply trade in line with peers. Often a bank doesn’t trade with peers because the shares are too illiquid, the bank has credit quality problems, or the bank has a visibility issue. Trading at a similar multiple as peers would result in a value of $15.23 per share.
In the case of Ohana Pacific Bank my belief is the reason the bank doesn’t trade in line with peers is because shares are illiquid, the market cap is small and the bank provides no information to investors. Financials are available on CompleteBankData.com as well as in spartan press releases the bank issues at irregular intervals to the local paper.
If the bank were to be acquired and the acquiring bank were to save 35% shares could be worth $12.91 compared to the most recent price of $5.60.
The bank is small, but they’re profitable and have a quality loan book. At a minimum they should trade for at least $10.80, book value. The largest negative against Ohana Pacific Bank is the bank rarely trades and it could be difficult to acquire a position.
Disclosure: No position