- 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.
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.
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...
- 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.
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.
This article was written by
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.
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