Sunday, November 24, 2013

West View Savings..a sleepy bank ripe for an activist

I have a confession to make, when I see a cheap bank I have a hard time not purchasing shares, when the bank is local the shares become irresistible, which is how I ended up owning a position in WVS Financial (WVFC), the holding company of West View Savings Bank.

There's something to be said about investing in local companies.  It's easier to conduct research beyond filings.  I used to live behind West View Bank's headquarters, my evening run used to take me past their building and parking lot.  One might argue this is meaningless to an investment, but I'd argue otherwise.  After running past their branch daily I had a sense for how busy the bank became on certain days, and could see how well the company maintained their facilities.  The biggest advantage though is that their annual meetings are local, in West View's case they hold them at a church about 15m away from where I live.

The annual meeting was a great opportunity to meet other like minded investors in Pittsburgh, it also gave me a chance to talk to senior management at WVS Financial and question the board.  Unlike my experience at Solitron, the WVS Financial team was open to questions and glad to have shareholders interested in the company.

West View Savings Bank was a Pennsylvania chartered mutual savings bank up until the early 1990s.  A mutual savings bank is owned by their depositors.  When a mutual bank IPO's the depositors are given the option of subscribing to the IPO, in effect they're doubling down on their stake in the company.  The bank raises capital in the IPO and shareholders receive the cash they put in, along with the existing equity they had previously owned.  It became apparent to me at the meeting that many of the shareholders in attendance were original participants in the IPO.  One even going as far as asking the CEO if it was even possible to dispose of shares, to which the CEO told him that he could go down the street to the local Fidelity office and open an account to sell them for $8.

The bank is listed on the NASDAQ, but their listing hasn't attracted much investor attention, shares trade infrequently and were selling at 50% of BV in the past year and a half.

The investment case for WVS Financial is fairly simple and can be summarized in a few bullet points:

  • The bank is selling for 72% of tangible common equity.
  • They are profitable, and remained so during the financial crisis.
  • The CEO is fanatical about managing risk, NPA's are almost nonexistent, charge-offs are low, lending is extremely conservative.
  • The bank's balance sheet is conservative, most of their assets are in cash and securities, lending is very low.
  • Due to the balance sheet mix if the bank were to grow their lending, or rates were to rise earnings would rise significantly.
Here is a snapshot of the holding company's statistics from CompleteBankData.com :


Two numbers from the above stats are probably sticking out to anyone who invests in banks, the 5.87% ROE, and the 1.63% NIM.  You're inclined to stop reading, please bear with me, those figures are low, but there is hope.

The reason for the bank's below average net interest margin can be easily spotted by looking at their balance sheet:



The bank's loan book has been in decline over the past decade from $61m down to $33m.  Couple the lending decline with a decline in interest rates over the same period and it's not a surprise that their NIM has been trending downward.  The bank has never been a strong earner due to their conservatism, but even if lending had stayed flat at 2011 levels earnings would be much higher than now.

At the annual meeting the company was questioned regarding their lending and their conservatism.  Management says they're waiting until rates jump 100bps before they increase lending.  Unfortunately there's no telling when this might be, in the next year, or in five years or more.  The conclusion I took away from the meeting is that the company has a lackluster lending operation.  In a low rate environment they should have been originating loans and earning the servicing revenue where possible.

Compared to the lackluster lending operations the company's deposit base is strong:

Most of their deposits are interest bearing, but from what management explained at the annual meeting the majority of the interest bearing deposits are in 1-year or shorter CD's paying a nominal amount of interest.

If I could summarize my post to this point it would be: West View Savings is a very conservative bank with a poor lending program, solid deposits, and a great branch network selling at a cheap price.

The issue all investors ask is whether the price is justified, and what might happen to unlock value.  If West View were to never change, then it's possible that 72% of book value is a reasonable valuation.  I don't believe it's reasonable because I believe cheap sleepy banks eventually catch the eye of an activist or acquirer.  One bank activist who has a small toehold position in the stock is Joseph Stilwell, he owns about 1.5% of the common, not much more than a book mark position.

While a stock activist might not be waiting in the wings I think West View is extremely attractive to a potential acquirer.  I've spoken to some knowledgable individuals in the bank industry and there are rumors floating that a few regional banks are looking to buy into Pittsburgh.  Wesbanco did this recently with Fidelity Bancorp.  Fidelity had a similar profile as West View, a great deposit network, but poor lending.  Wesbanco purchased their deposits and placed their own lending program in the branches, the formerly poorly producing branches should be churning out profits for Wesbanco soon. It's possible Wesbanco would be interested in acquiring West View to further expand their presence, or another bank looking to enter the market.

An acquiring bank would see a valuable branch network, valuable deposits, a clean loan book, and inefficient assets.  Turning West View's mortgage backed securities portfolio into a valuable loan portfolio is a much easier task than turning around failed assets, or trying to build a brand in a new market.

I'm hoping that either West View's current management will be prompted to develop their lending, an activist will get involved, or an acquirer will see value in the bank.  I believe in the maxim, but something cheap and maybe something good will happen.  I'm also not opposed to working to unlock value myself through discussions with other investors/funds/potential banks/management.

Disclosure: Long WVS Financial, open to acquiring more.

All screenshots are from CompleteBankData.com, stop hunting down call reports, FFEIC reports and building massive spreadsheets, let us do the work for you.


4 comments:

  1. Doesn't WesBanco own 3.3% of this company?

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  2. Also, I presume that the board ownership (~9.5%) is held through the brokerage services of Rodgers Brothers?

    Adding that ~9.5% to the ESOP ownership of 12.6% makes it a initiate barrier to change of 22.1%. As this is an illiquid stock, taking a position might prove difficult.

    Your thoughts?

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  3. One thing to look at in terms of small banks is the age of the CEO. It may sound crazy, but CEO's who are near or past retirement age will in general (obviously not all!) be more willing to sell. Younger CEO's are more likely to want to be empire builders. It is not a hard rule, but it is worth thinking about in terms of sleepy banks, activism, etc.

    Some years ago I worked at an investment bank and we managed a pool of internal capital that invested in financial service companies. We used this strategy in the mid to late 90's and it was quite effective.

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  4. I really don't like these kinds of banks. They're not conservative in the Basel equity to assets ratio sense. That's at about 10%. They're pretty levered from that perspective, they just choose to use that balance sheet leverage to hold onto cash. I would be much more comfortable if they used some of that cash increase their tangible equity %, ie use $75 million of the cash to repay the short-term federal home loan bank advances, then after they're done doing that, maybe pay a special cash dividend to shareholders. No this is a pretty badly run bank in my opinion.

    ReplyDelete