Eureka Homestead Bancorp ERKH
February 23, 2020 - 8:36pm EST by
david101
2020 2021
Price: 12.24 EPS 0 0
Shares Out. (in M): 1 P/E 0 0
Market Cap (in $M): 17 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Community Bank
  • Discount to Tangible Book

Description

Louisiana thrift tryin' to get ahead.
One day they decided to I-P-O,
And up through the ground come a bubbling dough.
(Cash that is, green gold, Texas tenners)
 
 
Eureka Homestead is a tiny, one-branch bank located in Metairie, Louisiana that trades at 72% of
tangible book value (TBV). I believe that the bank will likely sell itself in 3-4 years and fetch about $18 -
$19/share. However, it is a nano-cap at $17 million m/c and $109 million in assets.
 
History: The bank was founded in 1884. It is a federal savings association, one of those old school thrifts
like the fictional Bailey Building & Loan in "It's a Wonderful Life." The bank does not offer checking
accounts or debit cards and primarily originates residential loans. The bank had opened additional
branches in the past which have since been closed. The bank does have a separate loan production
office in new Orleans that is less than 3 miles from the headquarters/branch. The bank was originally
located in New Orleans and moved to its present location in 2002.
 
Conversion: The IPO occurred on July 10, 2019 and netted $12.3 million to the bank. The CEO and CFO
both participated in the conversion offering, buying the maximum of 15,000 shares or 1.1% of the bank
each. The conversion included a stock compensation plan with 8% of the shares that will be distributed
over the coming years. Thus, management has skin in the game but nowhere near enough to really
control the bank. $6.2 million of the proceeds was contributed to the bank subsidiary and the rest
retained at the holding company level. The bank used some of the money raised to pay down debt and
bought some investment securities. It also spent money on upgrading its web site. Here is what the site
used to look like and then click on the link to see the current.
 
 
 
 
https://eurekahomestead.com/
 
 
Management & Board of Directors: I am going to take the info from the prospectus and highlight the
good stuff.
 
"Alan T. Heintzen is our Chief Executive Officer, a position he has held since 1996. Mr. Heintzen
is also Chairman of the Board of Directors and our Chief Compliance Officer. In accordance with
our succession plan, in July 2018, Mr. Heintzen relinquished the role of President, a position he
had held since 1996 and the corresponding oversight of the day-to-day operations of Eureka
Homestead, and was elected Chairman of the Board and began working off-site from the Bank’s
office. Including his 22 years of experience at Eureka Homestead, Mr. Heintzen has a total of 40
years of management experience in the banking profession. Mr. Heintzen’s experience provides
the board with a perspective on the day-to- day operations and lending function of Eureka
Homestead, and assists the board in assessing the trends and developments in the financial
institutions industry on a local and national basis.
 
Cecil A. Haskins, Jr., CPA is our President and Chief Financial Officer. He has held the position of
President since July 2018 and the position of Chief Financial Officer since September 1999. Mr.
Haskins is a certified public accountant with audit and consulting experience for financial
institutions nationally and internationally. Mr. Haskins’ experience provides the Board with the
necessary financial perspective of bank operations, and assists the Board in assessing trends and
developments in the financial institutions industry on a local and national basis.
 
 
Creed W. Brierre, Sr., FAIA is retired. Prior to his retirement in 2015, Mr. Brierre was president
of Mathes Brierre Architects, the oldest and largest architecture firm in Louisiana,
headquartered in New Orleans. Mr. Brierre has over 44 years of executive managerial and
business experience, as well as experience in regulation, contracts, and construction, all of
which provide the board of directors with general business acumen.
 
Patrick M. Gibbs is retired. Prior to his retirement in 2013, for 40 years, Mr. Gibbs was a senior
executive at the University of New Orleans, the LSU System, and the University of New Orleans
Foundation. Mr. Gibbs brings to the board his management experience in business and property
functions, as well as financing, planning, and construction. In addition, Mr. Gibbs is a retired,
inactive certified public accountant and provides experience in oversight and control to
management operations.
 
Nick O. Sagona, Jr. is retired. Prior to his retirement in 2013, Mr. Sagona was a certified public
accountant with 44 years of experience in public accounting. During that time Mr. Sagona
provided accounting, independent audit, tax and advisory services to community financial
institutions, including thrifts and commercial banks. Mr. Sagona’s expertise and background
with regard to accounting matters, internal controls, the application of generally accepted
accounting principles and business finance provide the board of directors and the Audit
Committee with valuable insight into accounting and auditing issues involving Eureka
Homestead.
 
Robert M. Shofstahl is retired. Prior to his retirement in 2009, Mr. Shofstahl served for 13 years
as Chief Administrative Officer of Adams and Reese, a large regional law firm headquartered in
New Orleans. In addition, Mr. Shofstahl has over 45 years of executive management experience
in the banking and thrift industry. Mr. Shofstahl served on the board of the New Orleans branch
of the Federal Reserve Bank of Atlanta. Mr. Shofstahl’s broad experience provides the board of
directors with broad knowledge of corporate responsibilities and oversight of management.
 
Wilbur A. Toups, Jr. is retired. Prior to his retirement in 2017, since 2007 Mr. Toups worked as
an independent contractor where he did loan review work for two commercial banks. Prior to
this, Mr. Toups worked in commercial banking performing loan reviews for commercial banks
and as a contract trainer with Omega Performance leading training sessions for various banks
both domestically and internationally as well as for bank regulators. Mr. Toups also worked for
20 years as a commercial loan officer. Mr. Toups has over 55 years of experience in commercial
lending and bank consulting. In addition, Mr. Toups has conducted numerous commercial
lending training courses for industry groups. Mr. Toups’ experience provides the board of
directors with extensive knowledge in all lending matters."
 
Several things stick out. Heintzen and Haskins have been with the bank over 20 years and respectively
will be 67 and 64 years-old this year, making them the youngest members of the board of directors. All
of the non-management directors are retired, in their 70's, and more than qualified for such a small
bank. No funeral home directors, no builders, no local business owners.
 
One thing to note for non-management directors is that they get a retirement package if they retire at
75 of $12,000/year for 10 years. The youngest of the non-management directors will be 75 in three
years.
 
Earnings: Mutual banks are not known for earning lots of money but even ERKH lags among its peers.
Over the past decade, a good year is when the bank has ROE > 2%. Any incremental improvement in
earnings, though, will improve the takeout price significantly. Each additional $130,000 in earnings adds
$1.00/sh to takeout price. I am not expecting much here, but it is a potential upside.
 
Loans: The bank has a boring portfolio of loans that is 94% residential mortgages with $0 in non-
performing loans.
 
 
 
 
Investments: About 60% of the $6.8 million in investment securities is in agency MBS and the rest in SBA
7a pools.
 
Deposits: Not being able to offer checking accounts means that the bank relies on CD's for funding. CD's
represent 91% of deposits but there are no CD's over $100,000. This is a two-edged sword. It is not hard
to gather CD deposits and banks tend to look for cheap core deposits. Flip side, a bank with a lot of
cheap core deposits could buy Eureka, let the CD's roll off, and improve net interest margins.
 
Borrowings: The bank has $23.6 million in FHLB advances. The strategy has been to reduce borrowings
and increase CD's.
 
Louisiana Bank Deals: There have been a three converted Louisiana thrifts that have sold in recent
years. There have been other bank deals in the state involving other types of banks that also have been
much larger, and thus not as relevant for comparison purposes.
 
1. Hibernia Bancorp in 2018 at 178% of TBV.
https://www.globenewswire.com/news-release/2018/07/02/1532591/0/en/Union-Savings-and-Loan-Association-Completes-Merger-with-Hibernia-Bancorp-and-Hibernia-Bank.html
 
2. Minden Bancorp and Business First Bancshares 2017 at 157% of TBV.
https://www.prnewswire.com/news-releases/business-first-bancshares-inc-and-minden-bancorp-inc-announce-merger-300532516.html
 
 
 
3. Home & Bank of New Orleans in 2015 at 126% of TBV.
https://www.nola.com/news/business/article_3a2c8d64-65c9-5923-835e-dc1200fc234f.html
 
Institutional Ownership: This is where the story picks up. Maltese Capital recently filed a 13G, stating a
9.8% stake in the bank. Maltese Capital has been around since 1996, has AUM of $1.9 billion, and was
formerly known as Sandler O'Neill Assessment Management. The investment banking division of Sandler
O'Neill did a lot of thrift conversion deals, as well as other bank and finance deals, which explains why
Maltese concentrates on banks. The firm is also not afraid to take large positions in small banks. Late
last year, the Federal Reserve changed the rule to allow for up to 24.99% ownership of a bank without
having to become a bank holding company. This goes into effect 4/1/2020. From what I have read, it
does require some additional paperwork but is not a significant hurdle. This provides an extra tool to
activist investors in this space. I have no idea whether Maltese will increase its stake or not but simply
that the option exists provides more leverage. Also, another noted bank investor, Banc Fund, has a 4.4%
position.
 
Outlook: Based on the conversion date, the earliest that the bank will be allowed to start buying back
shares is one year or 7/10/2020. I would interpret any buybacks as being positive. It is not only accretive
at the current prices but is the least riskiest capital deployment from a conversion. I know it sounds
counter-intuitive to sell shares at $10 and then buy them back at higher prices but you have to
understand the dynamics of conversion. In this particular case, the amount raised roughly equaled the
existing equity, so investors participating in the conversion were actually buying $1 of TBV for $0.50.
 
The earliest that it would be permitted to sell itself is 7/10/2022. That is an eternity in investing but at
the same time, it does allow for a patient and opportunistic investor to accumulate shares over time.
 
Risks: It's illiquid. It may not be sold. A hurricane could impact the area.
 
 
 
 
 
 
 
 
 

 

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.

Catalyst

Sale in 3-4 years.

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