| 2023 | 2024 | ||||||
| Price: | 11.00 | EPS | 0.96 | 1.0 | |||
| Shares Out. (in M): | 3 | P/E | 11.5 | 11 | |||
| Market Cap (in $M): | 27 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 27 | TEV/EBIT | 0 | 0 | |||
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- Banks
- Discount to Tangible Book
Description
Summary: Uncorrelated ~30%+ IRR to a takeout while you get paid to wait with protected downside from balance sheet strength, and return of capital
Ottawa Bancorp, trading as OTCPK:OTTW, is a sub-scale micro-cap bank that came to the market via a mutual conversion and subsequent second step conversion (conversion completed in October 2016), operating as Ottawa Savings Bancorp, primarily in Ottawa Illinios. ADV is ~25k/day though blocks are availible recently ($50-500k blocks), and given micro-cap status, is likely only suitable for personal accounts or smaller, concentrated funds.
Mutual banks are permitted to be sold 3 years after thier conversion anniversary, with bulk of sales happening 3-5 years after conversion anniversary is completed. In the case of Ottawa, the advent of COVID-19 a few months after they hit thier anniversary put a pause to the sale process, given the big-gap between buyers and sellers expectations. Management took advantage of the depressed share price to buy-back stock below tangible book -- a clear signal that they are not empire builders looking to continue to clip thier annual salary and bonuses
The company is so focussed on shareholder value that in 2020, the company took the opportunity from the COVID pandemic to delist from the Nasdaq to OTC in June 2020, allowing them to increase ROE and buyback shares at even larger discount from TBV, soaking up significant selling volume.
To this point, from 2017 through 2022, the Company repurchased and retired over 954,000 of its shares, representing 27.5% of the shares outstanding at the beginning of the first repurchase plan.
The company has currently paused its repurchase program due to losses on its AOCI/securities book as well as tight liquidity conditions, but plans to re-start this soon as conditions ease.
While lower earnings and tighter liquidity levels caused by the higher interest rate environment have impacted our ability to make use of these capital management tools since 2022, we expect that the Board will evaluate the Company’s ability to further implement these types of strategies once the current economic uncertainty subsides and operating metrics return to more normal levels.”
On a standalone basis, shares of OTTW are not especially attractive - the stock trades at $11, has $15.90 of tangible book per share, and earns a MSD-HSD% ROE on this book value. Assuming 6% NTM ROE, this is about $0.96/share in annual EPS, with a $0.44/share annual dividend (c. 4% yield). Between natural compounding from ROE, dividend, and repurchases below TBV, per-share value should grow at HSD% annually as a standalone business, slighly below the return expected from holding onto KRE/broad basket of community banks. The annual dividend has slighly increased over time and the management has occasionally paid large special dividends from year to year with thier excess capital, another sign that management is not focussed on empire building
What makes OTTW attractive is that like other mutual banks post conversion, it is highly likely to be sold in 6-36 months. Famous bank investor, Stilwell Value has a significant stake in shares of OTTW, and has filed with the Federal Reserve persmission to buy additional shares, to take its stake up to 19.99% which was approved -- Stillwell has a strong track record of pushing small community banks to consolidate
A recent 13D filed by Stilwell shows thier incredible track record in the space - since 2000, they had made 74 investments, most of which were sold or where management took actions to enhance shareholder value, with only a handful of failures, if any. They mention that they are on the board of 2 banks where they are working to create value today, actively engaged with 5 more banks (of which OTTW is one), and fighting management on 3 more, suggesting that OTTW is a focus for the group today. We beleive that they want management to buyback stock as long as it remains below TBV to grow TBV/share, and then sell the bank at a multiple of TBV
https://www.sec.gov/Archives/edgar/data/1113303/000110465923101338/tm2326299d1_sc13d.htm
Ottawa Bancorp, Inc. (“OTTW”) – We hope to work with management and the board to maximize shareholder value and believe OTTW should be repurchasing its shares through book value. On August 11, 2023, the Federal Reserve Bank of Chicago notified us that it would not object to our request to buy additional shares of OTTW up to 19.99%. OTTW deregistered its shares of common stock effective in 2020.
There have been ~72 announced bank M&A deals YTD 2023, of which Illinois was #1, acccounting for 11 deals. While M&A activity slowed down post the SVB crisis, last month in August saw the busiest month for these deals, with more deals announced in September, suggesting a pick up in activity.
Thus we have 4 reasons to beleive OTTW will be acquired - 1) management actions to create shareholder value, 2) involvement of a top-tier sector specialist activist with a large ownership stake, 3) presence in a fast consolidating market, and 4) inability of the bank to earn its cost of equity as a standalone business.
While bank M&A multiples have fallen with the broader downturn in banks' valuations, recent transactions have still been happening at levels that would imply a significant premium to the CMP for OTTW. Post SVB, deals have happened at a median px of c. 1.2x P/TBV, which for OTTW would imply $19.1/share of takeout price for OTTW, or a 73% premium to the CMP
Assuming 8% compounding, if this happens in 1 year we will earn c. 87% upside. If this takes 3 years to happen, we will earn +118% upside from the CMP or a ~29% IRR. I would be surprised if OTTW remained a standalone business in 3 years from now as the company has been steadily consuming capital between buybacks, dividends and growth, so if it continues on its current trajectory, the business will have run out of room to grow, neccessitating a sale.
I am especially attracted to OTTW due to its low-risk profile, along with potential for high, uncorrelated upside, which is a rare-combination to find in a single security. NPAs are only 0.63% of assets, and risk-based capital is ~18%, so the balance sheet is strong and should be resilient to a reccession. 60% of the loan book is concentrated in single family residential housing, 4% in multi-family, the rest split between C&I, consumer loans, and direct/indirect auto. This is a plain vanilla community bank doing simple spread based lending -- I don't expect there to be material losses even in a reccessionary scenario.
Should bank multiples recover, we could see more like a 1.5x P/TBV takeout multiple like in 2019, 2021, and 2022, or 116% upside from the CMP today, so you participate in KRE as banks recover. These multiples make a lot of sense when you consider that an acquirer could cut 30-40% of non-interest spend at the bank juding from previous deals, so these deals tend to be EPS accretive even at these multiples for the acquirer. Given the large potential pool of acquirers for the asset between credit unions and regional banks (small size asset in a consolidating market), I'd imagine that shareholders of OTTW get paid most of these synergies in the takeout px v/s them being captured by the acquirer.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Restart of buybacks
Continued compounding between ROE, dividends, and buybacks
Sale of the bank at a material premium
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