Community Bancorp of Santa Maria (CYSM) – Tender Offer – 8% Upside

Current Price: $13.89

Tender Price: $15.00

Upside: 8% Upside (or $110 for odd lot holders)

Expiration Date: 6th Of Dec, 2019

Tender Document

 

An OTC listed micro-cap Californian bank has launched tender offer with odd-lot provision to buy back 12% of outstanding shares at $15.00/share. Due to low stock liquidity, non-demanding valuation even at $15/share, relatively large offer size and insiders tendering only minor part of their holdings, there is a high chance that the tender will end-up under-subscribed. Therefore, playing this with larger position than 100 shares is likely to end up in positive return.

Odd lot holders will be accepted on priority basis. Thus if the tender terms are not amended, odd-lots stand to gain $110 risk free. Due to low stock liquidity the risk of odd-lot provision elimination is minimal.

Insiders own 18% of shares out of which only 2.6% will be submitted for tender.

Unaffected price stands at $12.5/share (10% downside).

Community Bank of Santa Maria mostly focuses on commercial lending (small to medium sized businesses) and operates from two branches in Sata Barbara county. The bank sports $226m in deposits and $257m in assets. It currently trades at c. 1.2xBV and PE=10.7, which is a very low valuation for Californian community bank. Plenty of potential reasons for that - obscure OTC listing, low liquidity, small capitalization, no SEC reporting and till now lack of clarity if management is recognizing and willing to do something about the undervaluation. Significant capital return through tender offer might serve as a catalyst to propel the valuation higher.

Although CYSM does not report with SEC, some financials are available on company's website and detailed FDIC reports.

The bank has been consistently improving profitability from average ROE of 4%-6% during 2012-2017 to ROE of c. 10% over the last couple of years. This profitability improvement mostly resulted from cost efficiencies rather than taking on higher risk assets:

  • Ratio of non-interest expense to assets went down from 4% to 3%;
  • Efficiency ratio went down from 85%+ to 65%);
  • Average earning asset yields remained unchanged and non-performing loans/provisions non-existing;
  • Branch failing to meet profitability criteria was sold off in May 2018.

Management expects to generate ROE of 9.3% for this year, 11% for 2020 and 12% for 2021. So far management's targets for 2017 and 2018 have been met and exceeded. Due to reduced share-count following the tender offer profitability ratios are likely to improve further.

Overall CYSM seems to be a high quality bank at low valuation right in the center of consolidating Californian banking industry (refer to SMAL write-up for some references on industry dynamics and valuations). I think the bank is too cheap and as a result the tender will end up under-subscribed. Having this bank in portfolio for longer term might be a good play on consolidation of the industry.

18 COMMENTS

    1. dt

      I do not see many odd lot accounts getting on board CYSM tender mainly due to low liquidity. But if the volumes during the next two months stay elevated, then obviously the situation will be different.

  1. Martin Hernon

    Since the objective is to buy in shares, not clear to me that the bank will care how that happens (what does it care that current holders sell to odd lot players?), so I’m thinking they wouldn’t bother to change terms of the TO.

  2. nmeile

    It’s still 2 months until the tender offer expirers, start an odd lot position now and set a selling order for an amount at the higher end of the tender offer. In case this one is picked up by many, price likely moves towards upper range and you can close out without risk of proration

  3. Zulu Investment Partnership

    Does anyone know a brokerage that can Have multiple accounts for odd lots tenders? From our experience, TD, Charles Schwab, and IB do not seem to allow multiple accounts for odd lots.

    1. work 22

      Odd lots can only be done once per tax ID. Otherwise people would open up hundreds of accounts and swamp the tender, and the companies would of course cancel the tender rather than get hosed by zillions of odd lot accounts. So no, you cannot have multiple accounts for odd lots for good reason.

  4. Scott Goldsher

    I talked to investor relations . Offer was over subscribed by a large amount. She would not give me exact numbers but indicated an announcement would be happening today or tomorrow.

      1. Writser

        Is it? 1m shares tendered, they will accept ~208k shares. That means approximately 92k shares were tendered as odd lots or ~930x 99 shares. Not that much if you take into account sites such as this. If Chris DeMuth peddles it on SeekingAlpha I’d expect much more.

        1. dt

          I arrive at c. 120k odd-lot shares. Relative to split-off transactions it does not seem much, but keeping in mind this is an illiquid dark nanocap, it is quite a significant figure and shows how popular odd-lots have become.

          1. mcg

            yeah basically agree with DT. there were 116k odd lots accepted in the offer. more than 1/3rd of the entire deal.

          2. Writser

            Ah yes, I should subtract the odd lots from the 1.004m. Sloppy. So about 1200 odd lot accounts (assuming they all bought 99 shares).

            Next tender offer this company has learned its lesson and will probably remove the clause. Enjoy while you can .. Tragedy of the commons.

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