Description

Elevator Pitch: BV Financial is a community bank that recently completed its “2^nd Step” conversion from a mutual holding company (MHC) to a full-converted stock company. It trades at 65% of TBV, has achieved 10-11% ROEs in recent years, securities represent only 5% of the banks $933 million in assets, and is well-capitalized.

Background: The bank is headquartered in Baltimore, Maryland and has been around for 150 years. The bank represents an amalgamation of 14 other banks from 7 acquisitions since 1990. Two of the mergers happened while the bank was still a mutual. The bank did a first step conversion in 2005 and used the MHC structure wisely in acquiring 4 mutual banks (technically, these were mergers), and acquiring one stock bank. However, most of the transformation has been in the past 5 years, as the bank went from $162 million in assets as of 9/30/2018 to $931 million as of 9/30/2023, an almost 6-fold increase.

Branch Locations: The bank has 15 branches as noted in the map below. You can see the cluster around Baltimore, and then the branches further away, and finally the branches on the Eastern Shore of Maryland. Reviewing the branch count over time, you can see that the bank has consolidated branches.

Here are the deposits by branch:

History: Here is a timeline of significant events at the bank:

• 1873-09-01 Institution established: Original name: Light Street Savings and Building Association
• 1988-03-31 Changed name to Light Street Federal Savings and Loan Association
• 1990-06-01 Acquired Weekly Savings & Loan Assoc. (32361) in BALTIMORE, MD (Mutual); $5 million in assets.
• 1990-06-01 Changed name to Bay Federal Savings and Loan Association
• 1996-04-01 Acquired Vanguard Savings and Loan Association (32384) in BALTIMORE, MD (Mutual that converted in 1992); $28 million in assets.
• 1996-04-01 Changed name to Bay-Vanguard Federal Savings Bank
• 1996-04-01 Changed organization type to MUTUAL SAVINGS BANK
• 2005-01-14 Converted to MHC in a “First Step” conversion.
• 2009-09-25 Deregistered from SEC, i.e., went “dark.”
• 2011-07-21 Changed primary regulatory agency from OFFICE OF THRIFT SUPERVISION to COMPTROLLER OF THE CURRENCY
• 2013-05-31 Acquired Vigilant Federal Savings Bank (32547) in BALTIMORE, MD (Mutual); $9 million in assets.
• 2018-08-23 Changed primary regulatory agency from COMPTROLLER OF THE CURRENCY to FEDERAL DEPOSIT INSURANCE CORPORATION
• 2018-08-23 Changed institution class to FDIC SUPERVISED SAVINGS BANK
• 2018-08-23 Changed name to BayVanguard Bank
• 2019-02-28 Acquired Kopernik Bank (29901) in BALTIMORE, MD (Mutual that merged with other mutuals: Hull Federal, Kosciuzko Federal, Liberty Bank of Maryland, and St Casimirs); $145 million in assets.
• 2020-02-29 Acquired Madison Bank of Maryland (32331) in FOREST HILL, MD (Mutual that had merged with Bohemian Federal Savings and Loan, and The Back and Middle River Federal Savings and Loan); $139 million in assets.
• 2020-10-31 Acquired 1880 Bank (4829) in CAMBRIDGE, MD (Stock bank that had acquired Easton Bank & Trust); $403 million in assets.
• 2022-01-01 Acquired North Arundel Savings Bank (31109) (Mutual); $45 million in assets.
• 2023-08-01 Completed “2^nd Step” conversion, raising $95 million by selling 9,798,980 shares.

Assets: Here is a quick overview of the assets. Note that securities are < 5%.

Loans: The loan book is primarily CRE and residential mortgage. Credit quality is good although there have been ups and downs in NPLs. Loans to deposits are 101% but given the conversion, the bank has plenty of capital and liquidity.

Performance: Here is a chart of various bank metrics and the part that highlights the bank’s performance. Investors may not be impressed to ROEs around 10% but in the small bank world, that it decent. It helps that NIMs are at 4% currently. Also impressive is that the efficiency ratios are under 50%.

Deposits: Overall, deposits are average. 3^rd Qtr saw a decrease in deposits but I believe that is related to the 2^nd step conversion.

Valuation: This is where things get interesting. Using the takeout formula and assuming 7X pro forma takeout earnings and 10% equity capital, I get a current takeout price of $19.37/share. Obviously, it does not mean much because the bank is not allowed to sell itself for three years.

Let’s extrapolate 5 years out. I make the following assumptions:

• assets and earnings grow 30%
• bank grows equity by $70 million from earnings
• the bank buys back 15% of shares (1.7 million) at an average price of $15, reducing equity by $25.6 million
• TBVPS would be $23.17 in 2028
• pro forma earnings multiple reverts to 9X

Using those inputs, the takeout formula comes up with $33.79/sh. That would represent a 27% CAGR which would be awesome but unlikely. Let’s assume that it trades to 100% of projected TBV, that would be a 18% CAGR. Let’s say that TBVPS only gets to $20 in 5 years (4.8% CAGR) and the bank trades at 90% of TBV, which is a 11.8% CAGR.

That is quite a range of possibilities but let me reframe it. I think that without much effort or expectation, the bank could achieve a 10% CAGR over the next five years with the option that it works out better than that. The bank is not necessarily a takeout target, in part because it is Maryland chartered which affords more protections to companies, particularly from activist investors. I also would not be surprised if the bank made another acquisition. Normally, I am not a fan of banks that are acquirers but management has shown that it can run the bank well and achieve ROEs > 10% with an efficiency ratio around 50%. I also think that this is a good environment for a bank with cash capital to go bargain hunting when valuations are low and capital is tight.

In the past, I tended to focus on banks that would be likely takeout candidates but BVFL is a departure from that. I think the bank can be one of those rare consolidators that could compound over time. And if it doesn’t, at 65% of TBV, it should still do okay.

It is also useful to look at the peer analysis done by RP Financial in the final conversion documents. The numbers are from 12/31/2022, so a little dated but useful as a point of reference.

https://www.sec.gov/Archives/edgar/data/1302387/000119312523113103/d447808dex998.htm

Here is the updated peer comparison on TBV:

In that scenario, BVFL looks decent but let me take it a step further and apply the fair value marks (FMV) from HTM securities and loans to TBV. While most of the comps have reported 3^rd Qtr results, only 3 (HMNF, MGYR, WMPN) have released the corresponding 10-Q that provide the fair value measures for the loans. On the three that did report, the marks did get worse in 3^rd Qtr which is what I would have expected given the rise in interest rates. I used a blend of 2nrd Qtr and 3^rd Qtr numbers, but I don’t think it will change the relative position of BVFL.

Management: This is where things get interesting. The bank has two CEOs, David Flair, 59, who has been CEO since 2013, and Timothy Prindle, 37, who was CEO of Kopernik Bank when it merged with Bayvanguard in 2019 and was made co-CEO upon the completion of the merger. Despite his youth, Prindle is the largest shareholder among insiders. He ordered 70,000 shares ($700,000) in the 2^nd step conversion.

I can’t help but notice that the bank began to really transform after the merger with Kopernik and the involvement of Prindle. From 2013 to 2018, Flair was sole CEO and not much happened or changed at the bank but it has become a much different bank once Prindle became involved. This should not be surprising, as Kopernik merged 5 other mutuals prior to merging with BayVanguard.

Besides Prindle, there are two other directors who were at Kopernik Bank. Another director was the CEO of North Arundel Bank. The CFO was the former CEO of Patapsco Bank, a bank that later merged with Howard Bank. The chief credit officer held the same position at the 1880 Bank.  The board has an unusual depth of directors with bank backgrounds. Rounding out the board are three people involved with real estate, an accountant, and a longshoreman/former politician. In terms of shares owned, insiders own 6%. I expect that will increase over time with stock options and awards.

There are no SC 13 filers as of yet. It will be interesting to see if there are any institutional shareholders when 13-F are filed shortly.

 Risks:

• Illiquid, small cap
• Interest rates may go higher
• Recession and credit quality may deteriorate

Catalyst

Deep value and reversion to the mean on bank valuations.