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$EBMT - Eagle Bancorp Montana: An Undervalued Community Bank In An Uncongested Financial Market

|Includes: Eagle Bancorp Montana, Inc. (EBMT)

Eagle Bancorp Montana ($EBMT) is a holding company for a small community bank in Montana that operates under the name Opportunity Bank of Montana. It currently operates 13 branches in Montana plus several loan offices. The bank has about $550 million in assets and $440 million in deposits.

The following are the bank's primary stats. It pays an annual dividend of .31/share which is currently about 2.8%. It's P/E is about 12 and it currently trades at .77 of book value.

The bank has a good track record of increasing dividends and buying back stock. It currently has about 3.7 million shares outstanding which are trading at about $11.

So what do I like about this bank. First, it certainly trades at a discount to its peers based on the above-noted stats. All of its peers in Montana trade at much higher valuations. Second, Montana is a strong State that likely many investors do not focus on. It has low unemployment and is quite diversified economically, especially due to its resources. This is significant because it can hedge against downturns in the general economy. Third, non-performing assets are at .15% of all assets which is extremely low. This means that the bank runs a tight conservative ship so to speak. Depending on how you view this figure it could be positive or negative as typically with more risk comes more reward.

Is there anything that makes this bank standout from all of the other community banks as there remains several community banks trading under book value in more attractive markets? Yes,which is why I am writing this article.

Unlike almost any other State in the U.S., $EBMT (a small community bank) is the 6th largest bank by branch size or footprint in the State of Montana. This is significant because it is so rare to see/find. If you searched most States, you would find that a bank with 13 branches would have no real significance when compared to its peers within that State. In addition, most States have the larger banks, such as Bank of America, Wells Fargo, Citigroup, and U.S. Bank, to be the top banks within the State. Not in Montana. The following is a list of the top banks in Montana by their number of branches:

Glacier Bank - 63

First Interstate -51

Wells Fargo - 45

Stockman Bank - 35

US Bank - 25

Opportunity Bank - 13

It appears that the community and regionals have a stronger hold on this State than in most other States. Or possibly the Nationals do not believe that it is worth the additional investment to compete strongly with the regionals and community banks in Montana. For whatever the reason, $EBMT is a significant bank in Montana despite its small size. In almost any other State it would be at the bottom of the pack.

How or why is this important? With such an attractive valuation, $EBMT could be seriously considered as a merger candidate to further solidify one of the larger banks foothold in the State or to take a smaller bank to great heights within the region. That's my point, it wouldn't take much for a 10 branch bank with $500 million to $1 billion in assets to merge with $EBMT and become a true contender in Montana.

Whats not to like about this bank? For one, its earnings are nothing special. They appear to be growing very slowly. Furthermore, the bank has no activist investors involved and appears to be very conservatively run which could mean that management is not interested in mergers. Moreover, the stock is very thinly traded And it's 52 week range is between 10.50 to 11.40.

I probably wouldn't suggest taking a large position in this bank. However, if you have some room in your portfolio take a small position and hold then this could be for you. You could see a merger which would likely propel the stock to over its book value of about $14/share. Do not buy this stock for earnings growth unless through a merger.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.