THE ODDBALL STOCKS NEWSLETTER | 46

One other thing to consider is that if A is correct, we are in totally uncharted investment territory. All of
our understanding that comes from personal experience and study of economic history would be
obsolete.

But in fact we can already see two things that are reducing profit margins: rising labor costs and rising
interest rates. For example, U.S. nonfinancial corporations have $6 trillion of debt outstanding. An
extra 2% in the five year yield is a $120 billion annual hit to profits for a set of companies that have
about $1 trillion of combined profit. The labor cost would probably be a bigger factor, back of the
envelope. Total wages are ~$8 trillion and year over year they were growing at a 2.9% rate.

Small Bank Snapshot

We get a LOT of small bank annual reports in the mail at Oddball Headquarters. We thought we should
take a shoebox full of these, present some key metrics, and make some other qualitative observations
where appropriate, to give a sense of how micro-sized bank valuations and businesses are doing at this
point in the cycle.

Market Cap P/B ROE 10y+ Securities/Equity

Southern Community Bancshares 5,060,920 52% 4.1% 11%
SouthFirst Bancshares 3,402,401 71% -2.7% 23%
WC Bancorp 22,541,570 79% 0.0% 22%
First Citizens National Bank 31,438,400 81% -2.8% 1%
The Southern Bank Company 9,622,713 81% -10.8% 4%
Mars Bancorp 30,960,000 89% 3.5% 88%
MNB Holdings Corporation 22,952,592 92% 7.4% 0%
Damariscotta Bankshares 16,809,000 94% 4.0% 29%
Metairie Bank and Trust Company 42,914,403 117% 6.1% 22%
Dacotah Banks Inc. 357,536,000 129% 6.3% 3%
Apollo Bancorp 27,067,976 140% 6.7% 100%
Denmark Bancshares 90,033,626 151% 4.9% 12%
First Suffield Financial 58,750,000 199% 5.9% 67%

One thing we like to do at Oddball is compare-and-contrast. Take Dacotah Banks, Inc.: at $32 per share
the market capitalization is $358 million, which is 1.3x the book value of $274 million. They earned
$17.5 million for a P/E of 20 times. Return on equity was 6.5% in 2017 and 9.1% in 2016. They have
only $233 million of debt securities. Of these, only $25.3 million have more than five years to maturity.
This is much more conservative than we have seen at a lot of other banks.

Also, of the $1.9 billion of loans only $230 million has a maturity or next repricing of greater than five
years. Loans for agricultural purposes comprised approximately 46% of total loans. A similar amount
are commercial and commercial real estate loans. Not much consumer or residential lending.

They have $47 million of premises and equipment. But, they have 32 locations across the Dakotas and
rural western Minnesota. So the total book value per store is only $1.5 million. They have $1.9 billion
of loans and $2.1 billion of deposits. So, another way to look at the locations is that each one is

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 THE ODDBALL STOCKS NEWSLETTER | 47

responsible for about $60 million worth of loan and deposit business.

Interest expense in 2017 was $10.4 million on $2.1 billion of liabilities. That's a funding cost of only 50
basis points! Interest received on loans was $94 million, which is a 4.9% coupon. The result is a net
interest margin that's been steady around 4% the past four years. They have some impressive non-
interest income as well. For example, $4.8 million of insurance commissions. They paid $735,000 to
the FDIC in 2017 on the $2.1 billion of deposits.

From their proxy statement, their bylaws provide for cumulative voting, which is cool. They also
included the minutes of the previous year's annual meeting, which you never see. However, no
disclosure in the proxy of who the largest shareholders are or how much management/directors own.

Compare with the much smaller WC Bancorp: at $9.85 per share the market capitalization is $25
million, which is 0.89x the book value of $28.4 million. This one is a tenth the size of Dacotah. They
lost $116,000 in 2017 vs making $109,000 in 2016. So, no net income over previous two years.

This is a mutual conversion, the second-step conversion was completed on July 13, 2016. A fund called
Firefly Value Partners in New York owns 8%. The ESOP owns 6.7%. Directors and management own
less than 1%!

Interest expense on $88 million of deposits was 68 basis points. The loan portfolio is 81% 1-4 family
residential. The securities portfolio is $43 million, which is 1.5 times their equity. Of this, about $17
million is more than five year maturity.

Neither one seems attractively priced. However, Dacotah is a better business and better positioned for
rising interest rates.

MNBO is an outlier. They are the only one of these small banks with no securities portfolio. They have
loans almost equal to their deposits. Only about a third of their loans are single family residential. They
do a significany amount of hotels followed by gas stations and multi-family residential loans. They are
focused in the San Francisco Bay area, so they would be exposed if the venture-capital-backed
unprofitable startup bubble there were to pop. They actually do not originate single family residential
loans, they bought their portfolio in order to lower the risk portfolio and reduce commercial real estate
percentage of their overall loan portfolio.

In 2016, MNBO had more than double their book value in borrowings from the FHLB at an average
cost of 0.99%. During 2017 they had to leave most of this cheap money behind and so they gathered
interest bearing deposits to replace them. However, they are only paying 0.76% on their interest
bearing deposits, and have a significant amount of non-interest bearing deposits as well.

The advantage of owning a small bank, which we Oddballians hope to one day enjoy, is access to the
mispriced deposit insurance. There is no way in a free, unsubsidized market that a portfolio of San
Francisco commercial real estate loans leveraged at 11.4 to one would be able to borrow at 0.76%. This
is especially strange when the three month Treasury bill is yielding two percent!

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 THE ODDBALL STOCKS NEWSLETTER | 48

Finally, every time we look at a small bank (e.g. $25 million in equity, $1.5 million in earnings) annual
report where data processing expense is $500,000-$750,000 annual, we wonder why we or anyone else
owns small bank stocks instead of owning Fiserv, Inc.

Tesla Inc
[We wrote this before the “Financing Secured” buyout tweet by Musk on August 7 th. Even if a
takeover goes through at $420 per share, it says a lot about the state of the market that this company
could change hands at a $70 billion valuation.]

First thing to know is that the stock at $310 is trading at 12 times book value. Book value gives them
full credit for their acquisition of Solar City (be sure to read the recent Delaware Chancery ruling in the
litigation about that deal) and for their groundbreaking automotive assembly facilities, such as the tent.

Market capitalization of Tesla is currently $53 billion. They have already sold their 200,000th car
(cumulative), so their important $7,500 per car tax credit is going to start phasing out. Perhaps they can
produce 200,000 cars annually with their current plant; probably not at an overall profit.

The Honda plant in Lincoln, Alabama can produce as many cars as Tesla on just one of its two lines.
Honda has 12 plants in the U.S. Their market cap is about the same as Tesla. They sold about 2 million
cars in the U.S. last year and 3.7 million worldwide, at an overall average annual profit margin of about
5 percent. Honda automotive plus their other businesses (like motorcycles) earn three to four billion
dollars a year.

The market capitalization of Ford is $43 billion, which is only 6 times last year's earnings. They too
have a 5 percent automotive operating margin. They sold 2.6 million cars in the U.S. last year and 6.5
million worldwide.

Ford and Honda each earn about $1,000 net per car sold. For Tesla to justify a higher valuation than
either company, it either needs to match that profit per car and sell more, or else have a smaller market
(but still much larger than current production and sales) and an order of magnitude higher profit per car.
The people paying $53 billion for Tesla seem to believe in the higher profit per car scenario.

Ferarri earns about $500 million selling cars at a 15% net margin. They sell under 10,000 units
annually at an average of about a quarter million dollars. But Musk's idea has been to move away from
high price and margin, low volume, to compete head-to-head against mass market manufacturers like
Toyota.

I think what the bulls fundamentally do not realize is what a legitimate premise of a $50 or $100 billion
market cap electric vehicle manufacturer would be: a new battery chemistry. If you had invented that
and obtained patent protection on it, and assuming it resulted in significantly better energy density and
lower $/kwh than current batteries, you would be able to sell a lot of vehicles at an above industry
average profit margin.

But... why would you want to? If you invented this better battery, you didn't disrupt automobiles. You
disrupted oil. The share of oil used for ground transportation, which could be disrupted by a battery

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