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Feature: “Small Bank Snapshot”

There are more OTC-listed banks than any other type of company. In fact, with a total of about 500 of
them, there are probably more OTC-listed banks than every other type of legitimate OTC-listed
company combined. We took a “snapshot” look at small banks in Issue 21 (August 2018) of the
Newsletter, exactly two years ago.

At that time the SPDR® S&P Regional Banking ETF (ticker: KRE) was trading for around $60. That
ETF, which is a decent proxy for OTC listed banks, absolutely collapsed in the March 2020 crash and
has not recovered as much as the other sectors in the market. It trades for $38, up from the lows in the
high $20s during the crash. The KRE portfolio trades for around 13 times earnings, 0.8 times book, and
a 3.8% distribution yield. The average market capitalization is $6 billion. Banks are cheap compared to
the market by those metrics. The S&P 500 ETF (SPY) trades at 27 times earnings and 3.6 times book.

Another possibly better proxy would be the First Trust NASDAQ® ABA Community Bank Index Fund
ETF (ticker: QABA), which has had a similar slump in 2020. It trades at $35 now, down from $53 in
August of 2018. (Both ETFs have had a drawdown of about one-third.) The median market
capitalization is $574 million, the average P/E of the portfolio is 11, and the price to book is 0.9x.

Note that as with all ETFs and indices, you do not get the benefit of assiduous security selection when
you buy those two. The largest holding of KRE is SVB Financial Group (Silicon Valley Bank, ticker
SIVB, which has “helped fund more than 30,000 start-ups”). And QABA has a 1.9% holding in Bank
OZK. Interestingly, there are 140 different ETFs which hold SIVB and SPY is the largest holder. (This
is starting to sound like a Horizon Kinetics letter...)

As “Catahoula” mentions in his writings, and as you will see in subsequent pages, the Oddball banks
offer attributes that you can not get via ETFs. There are risks, of course – small banks have both
weaknesses and strengths compared to the bigger banks and gigantic banks, and it is hard to say which
will outperform. Other risks that exist industry-wide regardless of size include credit losses and interest
rate changes. (If you have never read our piece on Interest Rates and Small Banks, please email
editor@oddballnewsletter.com and we will send you a copy.)

As your Oddball editors, we monitor a sample of 72 OTC-listed banks for the Oddball small bank
snapshot. On the next page, you will see a scatter plot with each bank's return on equity as the
independent variable (on the X-axis) and its price-to-tangible-book multiple as the dependent variable
on the Y-axis. Note that the return on equity is based on an average of 2018 and 2019 earnings, which
is helpful because it normalizes for the fluctuation in the 10 year bond yield over that period.

The banks are plotted as blue dots – except for famous bank activist Joe Stilwell's 13D positions, which
are plotted as orange dots. You can see that his sweet spot consists of the profitable banks with P/TBV
between 0.7 and 0.8. For an investor buying a diversified bucket of banks, the core of the “cheap”
bucket could be the green oval (discounts to TBV but still profitable) and the “quality” bucket could be
the brown circle (with ROEs near or above 10% but valuation not too far above book value).

Copyright Oddball Media, LLC 2020 ISSUE 31

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On the next page is the same plot, but with each bank's asset size represented as a bubble. There are
“cheap” banks with only $100 million of assets but also with over $1 billion of assets. The largest
bubble in the chart belongs to First National of Nebraska (ticker: FINN) which is a Catahoula bank that
has $22 billion in assets.

You can make out Bank of Utica (ticker: BKUTK) on there with $1.1 billion of assets, a price to
tangible book of 0.40, and a 6% ROE. The very top right corner (P/TBV of 2 and ROE of 21%)
belongs to CVB Financial Corp (ticker: CVBF) which owns Citizens Business Bank. The bottom right
corner (P/TBV of 0.34 and 23% ROE) belongs to Allied First Bancorp (ticker: AFBA) which Catahoula
mentioned in Issues 26 and 28.

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When we mentioned Joe Stilwell's picks for his activist fund, we meant the ones that he lists in his
Schedule 13D filings as having activist effort currently underway. 1 Included below is a table showing
those eight positions (which were orange dots in the first scatter plot). You can see that Mr. Stilwell
seems to have a “type”: very small (so his fund can take a meaningful voting position), discounted to
book, reasonably profitable, not majority controlled, and adequately (but not overly) capitalized.

1 If you have never read a Stilwell 13D, you owe it to yourself: https://www.sec.gov/cgi-bin/browse-edgar?
action=getcompany&CIK=0001113303&owner=include&count=40&hidefilings=0

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Market Cap Equity/ Assets P/TBV ROE Deposit Cost 2019 Majority Control? Public?
BRBW 22,492,368 15.6% 0.57 3.2% 1.19% no? no
CNNB 26,780,625 16.7% 0.71 4.0% 1.36% no yes
NECB 100,605,541 14.8% 0.71 9.2% 1.83% MHC no
UNIF 37,730,266 14.7% 0.73 10.4% 1.22% ? no
SCAY 19,221,880 7.5% 0.74 -0.3% 0.90% MHC yes
CIBH 23,000,000 4.1% 0.79 11.7% 1.44% no no
SFBC 62,660,121 10.6% 0.80 8.8% 1.24% no yes
WAYN 42,290,134 9.8% 0.87 12.6% 0.74% no no
th
• Brunswick Bancorp (BRBW) is in the 10 percentile of cheapness of our entire small bank
sample. The largest shareholders are the Gumina family of New Jersey. Bank investor Phil
Timyan has written about them and said, “expenses are way out of line with industry norms,”
“Roman Gumina owned at least 10 unrelated entities, and money is still flowing from the bank
to some of them,” “more than half the bank's branches are too small to be profitable, and should
be closed,” and “[non-performing assets] are 4x current industry average.”
• Cincinnati Bancorp (CNNB) is the holding company for Cincinnati Federal, it converted from
a mutual holding company in January 2020. Directors and officers own only 13.52% as of the
2020 proxy statement. Stilwell owns 6.9%.
• Northeast Community Bancorp, Inc. (NECB) was sued by a Stilwell fund, which alleged that
the directors had breached their fiduciary duties by not voting to authorize a second step
conversion of the MHC. In 2016, a New York appellate court reversed a lower court victory for
Stilwell, ruling that because Stilwell bought shares of common stock of the Company pursuant
to the prospectus issued in connection with its mutual holding company reorganization and
minority stock issuance, it could not now complain about the facts that the prospectus disclosed.
• U & I Financial Corp (UNIF) is the holding company of UniBank, a Washington state
chartered commercial bank incorporated on September 1, 2006, which conducts “general
business banking that includes deposits, lending, and investing, with its primary market
encompassing the Korean American community of King, Snohomish, and Pierce Counties. The
principal office and full service branch is located in Lynnwood, Washington, 98036. In addition,
the Bank has branches in Tacoma, Bellevue, and Federal Way, Washington.”
• Seneca Cayuga Bancorp Inc. (SCAY) is the holding company of Generations Bank, and they
announced in May that the company and the Bank expect to implement a second step
conversion. The Stilwell interests own 7.72%.
• CIB Marine Bancshares Inc. is frequently discussed in the Oddball Stocks Newsletter,
including later on in this Issue. The big issue with this one is the busted preferred stock.
• Sound Financial Bancorp, Inc. (SFBC) is publicly traded. Stilwell's funds own 8.4%, FJ
Capital Management in Virginia owns 7.8%, and officers and directors own 12.4%. With their
second quarter earnings release, they mentioned that they had funded $73 million of PPP loans.
• Wayne Savings Bancshares Inc. (WAYN) de-registered in 2017. Stilwell, which owns close to
10%, ran proxy contests in 2017 and 2018 but lost both. In the second contest his nominee got
43% of the vote, and he didn't challenge management after that. Shareholder letter:
https://www.sec.gov/Archives/edgar/data/1036030/000092189517001526/dfan1410318006_05
152017.htm

Copyright Oddball Media, LLC 2020 ISSUE 31

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Two Small Bank Ponds for Fishing

The scatterplot on page four had the green oval, with “cheap” banks, and the brown circle, with
“quality” at a reasonable price banks. We'll start with the “cheap” ones:

Assets Tangible Book Market Cap P/TBV ROE Equity/Assets

AFBA 109 14 5 0.34 22.7% 13%
BKUTK 1,100 232 93 0.40 5.9% 21%
SRNN 98 12 5 0.44 -3.5% 12%
CBBI 1,202 150 74 0.50 10.0% 12%
WCFB 140 28 15 0.54 1.8% 20%
RIVE 1,117 91 50 0.54 8.3% 8%
BRBW 255 40 22 0.57 3.2% 16%
CCSB 52 8 4 0.58 -7.5% 15%
SCBS 121 10 6 0.60 6.4% 8%
PPSF 114 15 10 0.69 4.6% 13%
TDCB 176 18 12 0.70 6.6% 10%
CNNB 228 38 27 0.71 4.0% 17%
VERF 56 12 9 0.71 2.9% 21%
NECB 955 141 101 0.71 9.2% 15%
FMIA 913 120 86 0.72 9.0% 13%
FMBL 7,950 1,074 771 0.72 6.7% 14%
UNIF 354 52 38 0.73 10.4% 15%
EXSR 2,600 281 206 0.73 13.2% 11%
SCAY 347 26 19 0.74 -0.3% 8%
MNBP 408 38 28 0.76 6.5% 9%
MNBO 250 30 23 0.77 8.0% 12%
SOME 1,399 121 93 0.77 12.9% 9%
BNCC 1,042 103 81 0.79 8.9% 10%
CIBH 704 29 23 0.79 11.7% 4%
WAYN 738 78 63 0.80 7.8% 11%
SFBC 738 78 63 0.80 8.8% 11%

Notice that almost all (except three) were profitable on average for 2018 and 2019. And many have
been mentioned in the Newsletter before. Our guest writer Catahoula has mentioned FMBL, AFBA,
and EXSR. And we have written about BKUTK, WCFB, CCSB, MNBO, and CIBH. (If you would like
us to track down the Issues where we talked about any Oddball, just email editor@oddballstocks.com.)

We mentioned WCFB in Issue 30: “normally when we see a profitable bank at half of book value, it
has a controlling shareholder. But the proxy statement discloses that there is an ESOP which owns 7%
and the directors and officers combined only own one percent. Meanwhile, there are two funds that
own: Firefly Value Partners in New York has 8.4% and Western Standard in Los Angeles owns 5.3%.”

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Here are the potential “quality” ones from the brown circle:

Assets Tangible Book Market Cap P/B ROE Equity Assets

SBNC 3,140 295 284 0.96 16.0% 9%
NASB 2,631 262 295 1.13 13.9% 10%
AMBK 642 61 71 1.16 12.3% 9%
HCBC 303 33 33 1.00 12.1% 11%
SQCF 457 50 51 1.03 12.1% 11%
PCLB 245 28 31 1.11 12.1% 11%
FBAK 3,859 576 599 1.04 11.6% 15%
JDVB 885 85 97 1.14 11.6% 10%
QNBC 1,232 125 105 0.84 11.5% 10%
FUNC 1,461 98 106 1.08 11.2% 7%
GNBF 389 42 34 0.82 11.1% 11%
ADKT 1,237 113 131 1.15 11.1% 9%
AMBZ 2,402 193 203 1.05 11.0% 8%
CNAF 417 61 51 0.84 10.8% 15%
VABK 703 75 68 0.90 10.6% 11%
CIWV 285 28 27 0.94 10.5% 10%
DIMC 733 87 89 1.02 10.5% 12%
KEFI 573 78 65 0.83 10.1% 14%
MBKL 394 41 43 1.05 9.9% 10%
HRRB 355 31 25 0.81 9.8% 9%
DBIN 2,700 320 370 1.16 9.7% 12%
CCFN 738 94 91 0.98 9.7% 13%
HARL 770 77 88 1.14 9.6% 10%

Some of these have been mentioned by guest writer “Catahoula” in previous Issues: SBNC, NASB,
AMBK, FBAK, ADKT, and KEFI. And we mentioned CNAF in Issue 29 and DBIN in a previous
Small Bank Snapshot. Here is what Catahoula said about Southern Bank (SBNC) back in Issue 20:

“Southern Bank owns shares in First Citizens Bank in Raleigh. For every share of SBNC, you
effectively own 2.52 and 0.28 shares of FCNCA and FCNCB, respectively, collectively worth
over $1,200 / share. Book value at SBNC has been going up because the recent change in
accounting requires SBNC to “mark to market” its position in First Citizen’s. (This cuts both
ways, of course, so if First Citizen’s falls, the book value of SBNC falls too). Since 12/31/17,
SBNC’s book value is up by about $10 million due to First Citizen’s share price increases. First
Citizens is now about one-third, or $100 million, of the approximately $300 million in equity...”

An example of small bank valuation contraction over the past two years: when we mentioned Dacotah
Banks (DBIN) in the 2018 Snapshot, it was trading at 129% of book with a 6.3% ROE based on 2017
earnings. The 2018 and 2019 average ROE was higher (9.7%) but the P/B is now lower (1.16x).

Copyright Oddball Media, LLC 2020 ISSUE 31