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.

consoldiation

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.

peers

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.

Risks

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.

Conclusion

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

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