November 20, 2020 - 5:15pm EST by
2020 2021
Price: 9.00 EPS 0 0
Shares Out. (in M): 6 P/E 0 0
Market Cap (in $M): 54 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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CRSS is an attractive under-the-radar financial services company previously written up on VIC that has survived the COVID-19 pandemic and is on the cusp of a major acquisition of a local community bank in the Dallas area that will completely transform the business. VIC members can refer to the excellent writeup by chupling1065 in 2018 here:  Because of the disruption caused by the pandemic and the pending transformative acquisition, we thought it would be worthwhile for members to revisit this investment idea.  


Please note this stock is a nanocap and trades by appointment so it's primarily actionable for PAs and small funds.


This is more akin to a venture capital investment given the limited near term liquidity and the need for a long term investment horizon. After the closing of the acquisition of the community bank, CRSS will be transformed from a community development financial institution (CDFI) specialty lender (with a high cost of funds) to a bank that specializes in mortgage lending and financial services that serves the under-served Hispanic market in Texas (with a drastically lower cost of funds financed by retail deposits of the bank and much cheaper wholesale funding). 


The company is in two lines of business. First line is purchasing, rehabbing and reselling starter single family houses in urban and suburban metro areas in Texas. The second line is to provide mortgages to finance the purchase of these rehabbed houses. The company originates and holds 30 year mortgages that finance the purchase of these rehabbed houses. The average rate on these mortgages is 10.55%. The annual prepayment rate of these mortgages is quite low, around 2-3%.


The company can continue to expand these two businesses, which are quite attractive in and of themselves. The rehabbed houses can be sold for a decent profit and mortgages provide an attractive return with low risk of loss because of the collateral. The company has historically experienced very little loss if the mortgage goes into default because it can foreclose on the house (Texas is a trust deed state so it’s easier to foreclose) and rehab it and resell it relatively easily without much loss since it already rehabbed the house previously.  


However, the huge upside for the company materializes when it closes the purchase of the community bank. When it closes the transaction, which is expected sometime before the end of 1Q21, the company can massively expand the mortgage business to borrowers beyond just those who purchase the company’s rehabbed houses.  The acquisition of the bank will lower the cost of capital dramatically from around 5%+ down to about 1%, which will not only reduce the funding costs for the existing mortgages associated with the rehabbed houses but also allow the company to offer mortgages to other under-served Hispanic borrowers in Texas at a competitive rate. This market segment is quite a bit larger than the 1000 mortgage customers they currently have.

Investment Considerations


1. Transformative acquisition


The company is on the cusp of a major acquisition that will completely transform the business. It is in the process of acquiring a small 4-branch community bank called First State bank (Rice Bancshares Inc) in the suburban/rural areas around Dallas, TX. The closing is expected before the end of 1Q21. Here’s some publicly available data about the bank.


First State bank (Rice Bancshares Inc)  (4 branches)


The acquisition will dramatically lower CRSS’s cost of funds, which is currently in the 5-6% range (, because it will be able to fund its loans with retail deposits from the bank, which cost <1.0% (see below for further discussion of all the low cost sources of funding). This will allow the company to offer mortgages to the under-served Hispanic customer base in Texas at much lower rates (likely in the 5-7% range for a 30-year mortgage) and still maintain attractive margins.


The lower cost of funds resulting from the acquisition of the bank will greatly increase the addressable market for the company. CRSS will no longer just be lending to customers that purchased a house that CRSS has rehabbed and sold them. CRSS will be providing mortgages to customers who are purchasing non-CRSS owned properties. The company says it routinely gets inquiries from potential mortgage customers who like the high-touch service it provides. The total addressable market is massive just in the state of Texas, and there are attractive market niches all over the country where there are large Hispanic concentrations.  


The company has not disclosed the terms of the acquisition & financing of First State Bank. First State is a rural community bank with a loan book consisting of SBA loans, commercial loans, and 1 restaurant in its portfolio. The bank has 4 branches spread out in the greater Dallas area.


Pro forma for the acquisition, there will be about $300 mil in total assets. The CEO is quite well versed in community banking. He expects the pro forma entity to have ROA around 2.5% on the lower end but is aiming for something much higher. While the new mortgage business will have a much higher NIM (5%+), the existing loans of the community bank are at a much lower NIM so the expected ROA initially will be on the lower end but as the mortgage business scales, the ROA should expand.


The bank will have a 65-70% loan to deposit ratio, and the current cost of funds is 75bps. The retail deposit base is quite sticky. In addition to the low cost retail deposit, CRSS will be able to access other attractive sources of financing for its business because of its minority bank status for providing credit to the under-served Hispanic demographic. Whereas previously CRSS obtained financing through CRA preferreds, once CRSS becomes a bank, it can obtain funds from other banks at much lower yields, similar to overnight commercial paper rates. CRSS will have access to this cheaper financing because the banks that provide excess deposits to CRSS will be getting CRA (Community Reinvestment Act) credit. There is huge amounts of this capital available, and this source of capital is functionally unlimited as far as the company is concerned at this point. This will provide the financing to massively grow the mortgage business without having to raise equity capital. Finally, CRSS will also have access to funding up to $100mil through a special government program at a 30-year fixed rate of 30 year treasury + 70bps.

2. Huge total addressable market


The customer segment the company serves is the Spanish-speaking Hispanic demographic in Texas, often without a conventional credit history (no FICO score), generally under-banked, and under-served by the financial system. The customer segment is a mix of customers who are citizens and some who are not (ie, a mix of those who have social security numbers and ITINs). Currently about 25% of the company’s customer base uses ITINs vs. SSNs.


Here’s the simplified math of how large the total addressable market is for the company. The company currently owns about 1k mortgage loans with a book value of $123 mil. Once the pending acquisition of the local community bank closes, the company will be able to access a <1.0% cost of funds so that it can offer mortgages at a much more competitive rate of 5-7% to its target Hispanic demographic segment. 


It’s not hard to imagine that the combined company could conservatively generate 10x that number of mortgages over the next 3-5 years just in the Texas market. That’s only 10k mortgage loans, or a total loan book of $1.23 bil. To put that number in perspective, there are 11.3 mil houses in Texas, of which 61% is owner-occupied. The Hispanic population is 40% ( So the rough long-term addressable target market just in Texas is the 2.76 mil Hispanic households that would be in the market for a mortgage. 10k mortgages would be only 0.36% of the theoretical addressable market. Moreover, the Hispanic population is the fastest growing segment of the population in Texas. Obviously, the company serves a specific segment of the general Hispanic market in Texas, but the simplified calculation above shows the huge TAM for the business even just in the Texas market.


The back of the envelope calculation on the 10k mortgage loans is as follows. With a mortgage rate in the 5-7% range and cost of funds in the <1.0% range, the NIM on a $1.23 bil loan book would be in the range of $50 - $74 mil (4-6% NIM). On the expense side, as the company scales, there should be huge economies of scale even assuming it keeps all of the origination and servicing of these loans in house.


Other lending opportunities


Although the company has not specifically addressed what other types of loans it may be able to originate in the future, it’s not difficult to imagine that once it develops a relationship with the customer, it can expand its lending relationship to adjacent loan types such as car loans and other consumer loans.

3. Strong management team and high insider ownership


The CEO Eric Donnelly is accessible and willing to talk to potential investors.  Eric is a former banking executive that bought business from the original founder.  He knows community banking quite well.  While the team is small (about 30 employees), we believe he and his team are top notch in this niche market. He has also built a strong board to help in scaling the company that will be good stewards of capital and will look out for the shareholder. For example, we expect a board member like Claire Gogel, a former Partner at Greenlight Capital, will be a good advocate for shareholders. See


The current management team and the board own approximately 75% of the shares and thus are highly aligned with the minority shareholders. The downside to the high insider ownership is there are very limited number of shares available for purchase. According to the CEO, there are no insiders that are interested in selling any shares at these prices but occasionally there are pockets of liquidity in the stock.


According to the CEO, there is no current need for outside capital. However if the company decides to accelerate growth, it may want to access the capital markets at some point. However, given the attractive financing options available through First State Bank, it’s possible the company does not ever need to raise equity capital again to fund its growth.

4. Limited downside of the current loan book


We believe there’s limited risk to the current loan book. 


First, the prepayment rate on the existing mortgage book is 2-3%. The refi risk is mitigated by the low loan balance. Because of the low loan balance ($123k avg balance) there is not as much incentive for mortgage brokers to try to refi these loans. Mortgage brokers may make about $1.5k-$2k to refi this type of loan and have lots of extra work they need to do to process these loans. The opportunity cost to do these loans is quite high when there are plenty of other easier and more lucrative loans to go after. There are some other factors at play here as well in the low refi rate. The borrowers have a certain level of trust with CRSS that they don’t necessarily have of the financial system in general. Many of the borrowers have traditionally not used the mainstream financial system, so they value being able to work with a local lender that they feel comfortable with, speaks their language and is willing to work with them when difficult circumstances arise. Thus, the interest rate on the loan is just one of a number of factors that borrowers weigh before deciding if they should refi somewhere else at a lower rate. Moreover, because the monthly payment is in the low $1000s per month, the savings from a lower rate is not as attractive as it would be if the loan balance were much higher. The $1k+ monthly payment for a typical loan is quite an attractive value proposition to live in a nicely rehabbed house relative to renting at that monthly payment level. Thus, the historical prepayment rates have been at about 2-3% seasoned over 13 years that the mortgage book has been in existence.


Second, the company has experienced limited loan losses from mortgage defaults. While the pandemic has obviously made life difficult for many borrowers, the overall loan book has been resilient even throughout the pandemic. The typical borrower in the portfolio is a working class dual income family. The borrowers are typically engaged in construction, cleaning, retail, restaurant, hospitality or other types of manual labor work and have generally been resilient in their ability to switch careers and resourceful in finding work even in difficult circumstances. Moreover, the houses that serve as collateral for the loans are houses the company has rehabbed. The houses are generally small single family houses. Once the house has been rehabbed, many of the components get upgraded so even if a house gets foreclosed and repossessed, it’s relatively inexpensive to rehab it again (mostly cosmetic rehab) and resell it without experiencing much of a loss. The strong single family housing market provides a good tailwind to REO recoveries in the event of a foreclosure.

5. Hidden asset


The company has 2 hidden assets. These are marked at zero for our valuation purposes but provide additional upside.


Patent recovery


There is potential value from the legacy patent portfolio when it was a NPE (or patent troll, to be less polite). The company partnered up with Fortress to continue to prosecute the claims. The terms are such that Fortress pays all litigation costs and CRSS shares 50% of the upside above all costs plus a hurdle rate. The company has been able to obtain settlements in the past from defendants, albeit small so the patents appear to have some value. Any future rev share presents pure upside without any further costs.




The company has $135mil of NOLs and $5mil of Research and Experimentation Credits. The NOLs expire 2020-2037. The NOLs were accumulated from the legacy patent business and were preserved in the pre-pack bankruptcy proceeding. These can be used to offset future earnings. Since the business is profitable, we expect that a portion of the NOLs will be used in the future, and thus the NOLs actually have value but we have not included the NOL value in our valuation analysis. Further details on the NOLs can be found here: 



Since this is more of a venture capital investment, we’re looking 5-10 years out in the future. In that time frame, we are assuming the company can get to at least 10k loans. The loan book at that point would be $1.23 bil assuming about $123k per loan (the avg size of loan in the current book). 


The company is targeting a ROA of at least 2.5% but expects to be able to exceed that over time. This level of ROA seems high but should be achievable since the NIM will be in the 4-6%+ range (loans at 5-7% and cost of funds <1%). On $1.23bil of assets and ROA of 2.5%, the net income would be $30.75mil or $5.15/share. At a 10x multiple, the stock would trade at $51.50 and at a 15x multiple, the stock would trade at $77.25 (This earnings power is just based on the incremental new loans and does not include the current earnings power of $0.80/share embedded in the existing loan book). The potential target share price needs to be reduced by whatever the potential dilution to equity will be for the acquisition of First State Bank (terms of the deal may be disclosed once it’s closed) and whatever equity capital raises may be required to fund the company’s growth (although the company could grow organically over time without having to raise equity). Even assuming a 20-40% potential future dilution, the potential upside is attractive.



- Limited liquidity in the stock

- Interest rate risk

- Credit risk

- Regulatory risk

- Small company / key man risk





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- Closing of acquisition of First State Bank

- Continued loan growth

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