Current Price: $13.89
Tender Price: $15.00
Upside: 8% Upside (or $110 for odd lot holders)
Expiration Date: 6th Of Dec, 2019
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.
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.