An interesting bank stock

Wayne Savings Bancshares is plain vanilla bank with plenty of capital, a good dividend, and a strong deposit base.  Wayne operates through 11 branches in northeast Ohio.  Unlike most banks still working their way through poor loans and repairing their balance sheets, Wayne is healthy with a modest ratio of non-performing loans and strong earnings.  Wayne is well positioned to return more capital to shareholders through buybacks and dividends, and the presence of an activist investor might help unlock this catalyst. 

Wayne trades at 80% of tangible book value and 68% of book value and 11x earnings.  The main problem with valuing a bank is that the numbers are susceptible to manipulation through provisioning and allowances for losses, which fall largely to the discretion of management.  The greatest danger is waking up one day and realizing that the bank is going to take one huge hit on loans that they knew had been souring in prior reporting periods à la Citigroup.

Wayne has $13.6m in total non-performing, impaired assets, and loans past 30 days, which is a wide proxy of things that can go wrong with the balance sheet.  Against $33.7m in tangible capital, $3m in allowances and assuming 25% recoveries on all bad assets, that leaves $26.5m in tangible capital, which would still be above the regulatory definition of “well capitalized” and is marginally higher than the market capitalization.  The bank is earning about $2.8m in pretax pre provision income annualized right now.

Put into the context of the loan book, these broadly defined “bad assets” amount to 5.7% of the loan book and 3.3% of total assets, although some of them are not delinquent (yet?), being renegotiated, or are already in the process of being liquidated to cover the principal.    Non-performing loans were 1.7% as of Dec 2010, which is within reason and about average for peers. 

Funding – the importance of which 2008 really highlighted – is what makes the bank attractive as a potential takeover candidate.  It has a 50/50 split between sticky or low cost deposits with $62m in demand deposits, $101m in savings and money market deposits, and $155m in time deposits (CDs).  The chairman is in his late 70s and the CEO is 65, which makes me wonder if the bank has a greater likelihood of being sold than your average local bank in a similar position.  The presence of Joseph Stilwell, (not to be confused with Vinegar Joe Stillwell, a feisty US general who romped around the Asia-Pacific theater in WW2) an investor – oftentimes activist- who has filed a 13-D in regards to WAYN, might push this process along.  In Item 4, Stilwell lists many of his past investments in small banks.  If you read the summaries of his older investments, many of them sold themselves fairly quickly after his involvement.  In the case of WAYN, it is not his stated purpose, but it seems possible.  The filing states:

“Our purpose in acquiring shares of Common Stock of the Issuer is to profit from the appreciation in the market price of the shares of Common Stock through asserting shareholder rights.  We do not believe the value of the Issuer’s assets is adequately reflected in the current market price of the Issuer’s Common Stock.
 We hope to work with existing management and the board to maximize shareholder value.  We will encourage management and the board to pay dividends to shareholders and repurchase shares of outstanding common stock with excess capital, and will support them if they do so.  We oppose using excess capital to "bulk up" on securities or to rapidly increase the loan portfolio.  We will support only a gradual increase in the branch network.  If the Issuer pursues any action that dilutes tangible book value per share, we will aggressively seek board representation.”

One might read through the lines and think that asserting shareholder rights to have the market price reflect the value could entail an acquisition.  If that were the case, this would be a situation where you could say “heads I win, tails I don’t lose.”

The bank does seem to trade at a discount to what is likely tangible book value when the smoke disappears and it is earning strong returns to justify trading at tangible book value at the minimum.  The TBV is greater than the market price, although not by much.  The upside is only 33% if the reported tangible book value is used.  One might argue it is worth a premium to TBV since the deposits have franchise value.  The problem is that the real attractive upside would be in a buyout scenario, which is feasible considering the consolidation in the industry.  To the extent of publicly available information, such a scenario is entirely predicated on the actions of one individual not directly involved in the company.  As such I’m standing on the sidelines for this, but this its an interesting stock to follow and see how the balance sheet act in the coming quarters.


Disclosure: none