Value Investors Club / Eureka Homestead Bancorp (ERKH)

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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			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 (in $M):	0	TEV/EBIT	0	0