William Penn: Priced Below Liquidation Value And Insiders Are Buying

Summary

• Despite a strong capital position and attractive credit metrics, WMPN trades at just 88% of tangible book value.
• Management is top-notch and laser-focused on increasing shareholder value.
• Insiders are scooping up shares.
• First catalyst - initiation of a recurring dividend - expected in the next 90 days.

georgeclerk/E+ via Getty Images

Background

Within our coverage universe, our favorite sector is community banks and thrifts. These traditionally sleepy opportunities often present usually attractive risk-rewards due to inexpensive valuations and a 30 year+ history of bank consolidation.

Our preference is to invest in banks trading below tangible book value with overcapitalized balance sheets, solid asset quality, and shareholder-friendly management teams.

One of our favorites is William Penn Bancorporation (NASDAQ:WMPN), which we first highlighted in July.

Overview

Headquartered in Bristol, Pennsylvania, WMPN, is the holding company for William Penn Bank, which serves the Delaware Valley area through twelve full-service branch offices in Bucks County and Philadelphia, Pennsylvania, and Burlington and Camden Counties in New Jersey.

With over $800 million in assets and a market cap of approximately $200 million, the bank operates the traditional community bank business model – attracting retail deposits from the general public (with a focus on the local area) and using those funds to originate loans secured by residential and nonresidential real estate.

In March 2021, WMPN completed its second-step conversion, making it a fully public institution.

Our Investment Thesis

• Asset quality is excellent with non-performing assets to total assets of 0.68%, as of September 30, 2021.
• With a tangible capital to asset (TC/A) ratio of over 25%, WMPN is wildly overcapitalized. And this substantial liquidity is key to driving shareholder value as it provides the wherewithal to pay dividends, repurchase shares, and ramp loan growth.
• At today's price ($12.05), the stock trades at only 88% of tangible book value ($13.67 per share) - a proxy for liquidation value.
• Management is top-notch and laser-focused on driving shareholder value.
• Insiders are buying...

Source: OpenInsider.com

• We're less than 90 days away from the one-year anniversary of WMPN's second-step conversion, which lifts the restrictions on a recurring dividend and share repurchases. We expect WMPN to be a great steward of capital ASAP. Our expectation is that an initiation of a recurring dividend is the first step.
• Longer term, there is a good chance WMPN is eventually acquired.

Valuation & Risks

Due to an odd set of arcane regulations, thrifts must wait three years after the conversion date (March 2021) to sell the business. At that point, in March 2024, WMPN will be eligible to be acquired, a fairly typical outcome for demutualized banks.

For an acquirer, WMPN offers a high-quality portfolio and an attractive footprint in Philadelphia's robust surrounding markets. Historically, the average thrift is acquired at ~130% of tangible book value.

To be conservative, we typically model an exit multiple of 120% of tangible book value. In this case, we have targeted a tangible book value of ~$15 per share in June 2024, indicating an acquisition price of ~$18 per share or a ~50% return (prior to dividends) over the next ~3 years.

Potential risks to our thesis include:

• Quality of the loan portfolio deteriorates. As a small thrift, WMPN is significantly exposed to the economic conditions within its regional footprint.
• Leadership changes course and elects to hold excess capital versus returning to shareholders via dividends and buybacks.
• Material change in the local competitive environment could slow growth or reduce profitability.

Conclusion

We are shareholders in WMPN and increased our position in late December.

Despite a strong capital position and attractive credit metrics, the company trades at just 88% of tangible book value.

We believe management will continue to follow the proven, shareholder-friendly "thrift game plan" which includes conservative organic growth, dividends, prudent buybacks, and ultimately a sale.

Although there are no guarantees in the equity market, we view WMPN as a low downside holding, which conservatively offers a total return of approximately 60% over the next 2-3 years.

Due to its small market capitalization, WMPN is anonymous to most investors and therefore perfect for the value-centric individual investor.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WMPN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Hemlock Partners]

The first of several expected positive announcements from one of our favorite small cap banks

AMC on Jan 19..."William Penn also announced that its Board of Directors has declared a cash dividend of $0.03 per share, payable on February 10, 2022, to common shareholders of record at the close of business on January 31, 2022."

seekingalpha.com/...

[eaglez12]

@Hemlock Partners cool, wish it was higher

[rgtichy]

@Hemlock Partners - So sitting in April looking back at March, any newer thoughts on how these small banks including William Penn are looking?

[Hemlock Partners]

@rgtichy in the small/micro cap world we like to play in, we haven't seen or heard of a material disruption in the business model. Cash has been available to depositors and dividends are being paid to shareholders. We used the dislocation to add to existing positions, but in an attempt to minimize risk, limited our activity to only those banks that displayed some tangible form of confidence (insider buying, share repurchase program) or employ our favorite management teams. Time will tell how this will play out.

[Hemlock Partners]

WMPN has authorized a new (sixth) stock repurchase program to acquire up to 1,138,470 shares, or ~10%, of the company's currently outstanding stock.

Since March 2022, the company has repurchased 27% of shares outstanding via five repurchase programs. Most notably, the average purchase price per share of the 5 programs is $11.50, well below TBV ($12.48).

Outstanding capital allocation. One of our favs.

[Billball70]

@Hemlock Partners Thanks for the update! Looking forward to March and hope they’ll sell next year. Thoughts about others such as GBNY or FSEA?

[Hemlock Partners]

@Billball70 Unfortunately, SA limits publishing on the microcaps, so its tough to share thoughts on these names.

In the comment section of our GBNY article, we recently wrote...

"GBNY released the 2Q 10Q on Aug 3. Relative to 12/31, TBV per share increased 2% to $16.21 and asset quality improved. The stock is down ~9% YTD and trades at 60% of TBV. The bank is eligible to be sold in mid-January 2024 (about 5 months from now). As of 6/30, Stilwell owns 9.97% of shares."

And FSEA, a couple of thoughts / observations:

FSEA has been left for dead. Down ~30% YTD, it trades for just over 50% of TBV despite an overcapitalized balance sheet and attractive credit quality. Unfortunately, this one is in the early innings, first year demutualization anniversary is Jan '24. Catalysts for the stock are a buyback program announcement in 1Q and / or Stilwell increases his small position.

[Searching Thoughtfully]

@Hemlock Partners Thanks for posting the above. In both GBNY and FSEA----no worries about either from here---

[Billball70]

They bought back 8.4% of their shares this quarter. Clearly their CEO and board are looking out for shareholders.

[DanM3500]

Added WMPN today.

[Billball70]

@DanM3500 Seems to me to be the proverbial baby out with the bath water. I added on Friday

[rgtichy]

@Billball70 , @DanM3500 --

This 10% buyback just months after executing a 5% buyback announcement and filling it, is very aggressive... super encouraging, imo.

[Billball70]

@rgtichy Agree. And they’re eligible to be sold in March, 2024. And insiders own about 14%.

[Billball70]

CEO bought more today after it was down 9%. Hopefully it will be sold when it’s eligible next March. Great entry point.

[Hemlock Partners]

@Billball70 good catch - thanks for highlighting!

5k shares @ $10.68

[Hemlock Partners]

Trading at just 88% of TBV, WMPN has adopted a stock repurchase program for up to 5% of its outstanding stock.

[Searching Thoughtfully]

@Hemlock Partners just saw this article. Another one we overlap in. This management team is qualitatively better than most demutualizations....this one's a hold as they get rid of the excess capital........thanks

[Hemlock Partners]

@Searching Thoughtfully great, good to hear! thanks!

[GrayhawkAZ]

@Searching Thoughtfully What is your preferred way for mgmt to do this? Share buybacks, I assume?

[Searching Thoughtfully]

@GrayhawkAZ Agressive share buybacks below the franchise value of the bank in a sale.

[DKOPPENHAFER]

Nice article, but I got to be missing something on how you get to 15 tangible book value in 2 years. If earnings only .08 a quarter and much of that will be paid out in dividends, it really does not add up to me. Stock buybacks below tangible book value can only do a little.

[Hemlock Partners]

good question, @DKOPPENHAFER, our article did not restate management's growth initiatives as outlined in their Oct 21 press release. our June 2024 TBV/sh target assumes reasonable execution and prudent share repurchases.

[PHILIP MAX]

#Hemlock, Based on your recommendations I will open a position here and trust that you guys know your stuff. Thank you.

[Hemlock Partners]

@PHILIP MAX we're owners with you, hopefully this works well for all of us.

[User 6426931]

With the large banks valued on a PE 10 what justifies the PE 40 here? Unless this $180mm bank can pay out $140mm plus to shareholders I don't see where the value is.

[Hemlock Partners]

@User 6426931 The bank is overcapitalized, so P/E is not the best metric to use to gauge value. Management can't put their full balance sheet to work, which is why we expect dividends and buybacks (if the stock continues to trade under TBV). The value is that it trades below liquidation value, but is a profitable going concern. Hope that helps, but if not, let us know - happy to elaborate.

[craftbrewinfo]

"We're less than 90 days away from the one-year anniversary of WMPN's second-step conversion, which lifts the restrictions on a recurring dividend and share repurchases." Are you stating in less than 90 days this bank will pay a dividend? I am an income investor more so than capital appreciation, which is secondary....

[BrPanthers99]

@craftbrewinfo at the one year mark they can pay a dividend. It’s not a guarantee, but as an overcapitalized bank that already paid a $.30 special dividend, it’s a reasonable assumption at some point in the next few quarters they will.

[Hemlock Partners]

@craftbrewinfo if we're correct on the dividend announcement, the actual payment is likely in the first half of april

[valuearb2]

@Hemlock Partners I'm confused, it's always paid a dividend and paid a special dividend in August.

From 10k, "The Company has historically paid an annual cash dividend to stockholders and, for the year ended June 30, 2020, declared an annual cash dividend of $0.13 per share. On July 21, 2021, the Company also declared a one-time special dividend of $0.30 per common share, payable August 18, 2021, to common shareholders of record at the close of business on August 2, 2021"

What dividend restrictions get lifted in March?

[BrPanthers99]

I’ve owned this since May. The special dividend was nice and it is a well positioned stock going into 2022.

Follow my other Bank and Value picks on Twitter @ValueInvestor94

[Hemlock Partners]

@BrPanthers99 Great, thanks!

[craftbrewinfo]

@BrPanthers99 I don't see dividend info here on SA?

[oscargarcia]

@craftbrewinfo
seekingalpha.com/...

[eaglez12]

In! And ready for a positive announcement in 1Q!

[Hemlock Partners]

@eaglez12 Terrific, fingers crossed!

[Silence Dogwood]

Interesting article, thank you.

[Hemlock Partners]

@Silence Dogwood Thanks for reading and the feedback!