Eagle Bancorp Montana (EBMT) – Odd Lot Tender Offer – $246 Upside

Current Price: $23.76

Offer Price: $24-$26.25

Upside: $246 (if priced at the upper limit)

Expiration Date: 22nd of June 2021

Offer document

 

This is a very small US bank ($144m market cap) tender offer with odd lot provision trading below lower limit and expiring in two days.

Eagle Bancorp Montana has announced a tender offer to purchase 3.4%-3.7% of its outstanding shares through a modified Dutch auction with prices ranging from $24.00/share to $26.25/share. Odd-lots (less than 100 shares) are exempt from proration. Just a few days remain till the expiration and the share price has drifted below the lower limit over the last week. Odd lot holders have a risk-free possibility to earn some pocket change ($24, if the offer is priced at the lower limit) with a free option on tender pricing ending up above the lower limit.  Interactive Brokers allows to purchase and tender shares till midday on the expiration day. Requirements might be different for other brokers.

Price movement of the stock is strange – for a few weeks since the announcement EBMT shares were fluctuating around the middle of the tender range, however, over the last week shares have retreated closer to $24, and then on the 18th of June fell below the lower limit price. I have been unable to find any news/updates to explain such price action except for the overall sell-off in the markets and bank stocks.

Given limited liquidity of the stock and small tender size, the offer is likely to end up oversubscribed.

Management owns 7.3% of shares outstanding and will not participate in this tender offer. Larger shareholders include EJF Capital (owns 5.2%) and BlackRock (5%).

 

EBMT

Eagle Bancorp Montana operates 23 full-service branches and 26 automated teller machines in Montana.

Loan portfolio consists mostly of real estate loans (72%) with commercial real estate loan comprising 53%.

The company also benefits from selling mortgage loans on the secondary market. Due to the booming real estate market this business line has experienced very strong growth since 2019:

• 2017 – $473m total loans originated. Sold $289m. Gain on sale – $8.8m;
• 2018 – $518m total loans originated. Sold $280m. Gain on sale – $7.7m;
• 2019 – $796m total loans originated. Sold $480m. Gain on sale – $16.7m;
• 2020 – $1.29bn total loans originated. Sold $874m. Gain on sale – $36.3m;
• Q1’21 – Total loans originated – $364m. Sold $260m (vs. $132m Q1’20). Gain on sale – $14.3m (vs. $5.4m Q1’20).

At first glance, Eagle Bancorp Montana looks cheap. The bank is highly profitable for its size and has generated 15% ROE/1.7% ROA in 2020 and 13.5% ROE/1.7% ROA in Q1’21 (annualized). Despite that, the tender offer comes at just 1.2x-1.3x TBV and 7.2x-7.9x TTM P/E – significantly below the historical P/E multiple for EBMT. 

However, the increase in profitability since 2018 (see table below) has been mostly a result of strong mortgage loan sales in the secondary market. Apparently, EBMT has managed to capitalize on the ongoing tailwinds in the RE market (2020 10-K) and it is not clear for how long these elevated earnings can be sustained.

The Company’s performance for the year ended  December 31, 2020 was strong due to higher mortgage banking operations, as a result of a historically low interest rate environment and substantial gains from loan sales.

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If we are unable to continue to sell loans in the secondary market or we experience a period of low mortgage activity, our noninterest income as well as our ability to fund, and thus originate, additional mortgage loans may be adversely affected, which could have a material adverse effect on our business, financial condition or results of operations.

Historical performance and profitability: