Description

Pinnacle Bancshares is an Alabama community bank that trades at 173% of TBV and has a 6 month ROTE of 28.6%. The bank trades on the OTC market and is dark. I fully expect that the numbers for TBV and ROTE to drop significantly in the coming year, which likely seems odd for a long recommendation. However, with ratios, it is a matter of whether the fluctuations are in the numerator or in the denominator. In this case, it is the denominator, specifically, equity.

The bank’s equity as of 6/30/2024 was $13.8 million but excluding -$26.5 million in AOCI, it was $40.3 million. Here is a table that shows how the bank subsidiary’s equity (which is slightly less than figure above) has fluctuated over the past four years:

With AOCI twice that of the equity, falling interest rates will have a dramatic impact on the equity. The obvious reason on why AOCI has such an impact is that available-for-sale (AFS) securities represent about half of assets. Using amortized cost, AFS securities would be well over half of assets.

Securities: This is a big part of PCLB so let us delve into the details. About 75% of the securities are municipal bonds for state and local entities. Further, 75% of those had maturities of 10 or more years, as seen here:

In a way, you could almost think of PCLB as a levered municipal bond fund that is disguised as a bank. The long-dated nature of the securities means that the yield has been fairly steady but also slightly above average.

 Going back three years, you can see where the bank loaded up with munis in 2021 and then MBS in 2022:

Bank Metrics: Overall, the numbers look good on the bank, as its efficiency ratio is around 60%, NIM is over 3%, and the bank has generated normalized ROEs between 9-10%.

Before the interest rate gyrations, the bank was achieving ROTEs in the 9-10% range which is good for a bank with $347 million in assets.

Loans: The bank focuses on commercial loans, particularly C&I. Loan performance is very good.

When it comes to CRE, the loans tend to be owner occupied. Bill Moreland at BankRegData.com had some interesting generalized comments on these types of loan. He noted that in the aggregate that non-owner occupied loans tend to perform better than owner occupied. This may seem counter intuitive but he noted that owner occupied loans have the additional business risk. In a non-owner occupied building, if a business fails, it is relatively easy to clear the space and get a new tenant. When owner occupied loans go bad, the process gets drawn out.

Deposits:  The distribution of deposits is good. The bank does have a decent size amount of municipal deposits that may explain all the municipal bonds held. There are some brokered deposits but not a lot.

Capital Allocation: Pinnacle pays a $0.27 quarterly dividend for a little over 4% yield and announced a 5% buyback on 3/6/2024. The bank purchased $2.1 million of shares in 2022 but none in 2023. Over the past 27 years, the bank has bought back 49% of its shares.

History: Pinnacle Bank was founded as the First Federal Savings and Loan Association on May 16, 1935 by Thomas Russell (T.R.) Simmons, who later had an elementary school named after him in Jasper, Alabama. It was originally a mutual thrift and converted to stock form in 1987. The current CEO is Robert Nolen, who was hired as CFO in 1987 and became CEO in 1994. It changed its name several times and became a commercial bank in 1997. The company was registered with the SEC from 1996 to 2008 and then went dark. Stilwell filed a SC 13D on the bank in 2014 and exited in 2016 after bank did a share buyback.

Insider Ownership: The most recent FR Y-6 filed with the Federal Reserve Bank of Atlanta which was for 2022:

https://www.atlantafed.org/-/media/documents/FRY6Docs/2022/PINNACLE_BSHRS_2520605_2022.pdf

I also received the 2024 shareholder proxy from the CFO Joe Adams which does not show any 5%+ shareholders but shows that insiders increased their shares held.

In a quirk of differing regulations, the bank is required to list 5%+ shareholders to the Fed but not for the proxy since the bank does not report to the SEC. I am going to assume that Tontine Financial still maintains a 9.52% position and that John Simmons, a grandson of the founder, owns 5.06%.

Greg Batchelor is from Russellville, Alabama and owns 7.2% (4.32% of which is held in John John II LLC). I believe his family owns a good chunk of CBS Bank, which is a $2 billion bank operating in AL, GA, and TN. His father was Cecil, who was chairman of CBS for many years, and who opposed the sale of the bank and bought shares to become the majority owner. Here is the YR-6:

https://www.atlantafed.org/-/media/documents/FRY6Docs/2022/CBS_BC_1493654_2022.pdf

Nolen owns 3.0% which seems small given the long tenure but I think it stems from the bank not doling out stock options.

I also found this application with the Atlanta Federal Reserve:

https://www.federalregister.gov/documents/2023/10/11/2023-22489/change-in-bank-control-notices-acquisitions-of-shares-of-a-bank-or-bank-holding-company

“John Gregory Batchelor, John Gregory Mitchell Batchelor, Rebecca Ann Batchelor Reeves, Ray Bradley Reeves, Hilda Olivia Batchelor, and John John II LLC, all of Russellville, Alabama; and John Bradley Batchelor Reeves, Tuscumbia, Alabama; as a group acting in concert, to retain voting shares of Pinnacle Bancshares, Inc., and thereby indirectly retain voting shares of Pinnacle Bank, both of Jasper, Alabama.”

From 2022 to 2023, two directors (Walker and Simmons) retired and were not replaced and a third, Humphries, will retire at end of this year and not be replaced. All three were 76 years or older. This leaves 6 directors on the board.

My takeaway is that the bank is unlikely to sell itself, save for a potential merger with CBS.

Risks:

• Illiquid and dark
• Interest rates do not drop further from here
• Recession

Catalyst

Reversal of AOCI and growth of equity