Description

CommerceWest Bank (OTC: CWBK) is an unknown, micro-cap “compounder” with a stellar management team and significant near-term growth prospects.  Key investment highlights:

• Consistent loan growth >20% over the past 12 years, even through the Great Recession
• Tier 1 capital ratio of 16.3% provides room for continued double digit loan/deposit growth
• Repurchased 10% of outstanding shares in 2014
• Disciplined management team and underwriting standards with minimal chargoffs in 2009 (< 2.5% of assets and <4% of loans and leases)
• No analyst following as CWBK is exempt from SEC filings pursuant to Rule 15d-6 (we had to call CEO for share count)
• Multi-year growth catalyst as leading bank serving the fastest growing industry in the US (see comments for details)
• DCF value of $36 per share at a 10% discount rate, ~165% upside to current prices; with no share repo, CWBK is still worth ~$25/share at a 10% discount rate

Company Background:

CWBK was founded in 2001 by CEO Ivo Tjan as a community bank focused on medium-small business in southern California.  Over the past 12 years, Mr. Tjan has grown CWBK from an initial equity capitalization of $9M and assets of $45M to a book value of $55M and assets of $422M, a compound growth rate of 16% and 20%, respectively.  This places CWBK among the top historical performers by any measure, especially considering this period includes the Great Recession which bankrupted more than 200 community banks across the US.

From the outset, Mr. Tjan designed CWBK to be a customer service focused bank.  CWBK does not rely on formulaic credit analysis; they spend time underwriting each client based on their unique situation.  The higher level of customer service has paid off, both in terms of organic growth as well as lower default rates.  During the Great Recession, CWBK’s total chargoff’s amounted to less than 2.5% of assets and less than 4% of total loans and leases.  

Lack of Public Market Following:

CWBK does not appear on regular stock screens, as it is exempt from SEC filings pursuant to Rule 14d-6.  Section 15(d) of the Exchange Act provides an automatic suspension of the periodic reporting obligation as to any fiscal year (except for the fiscal year in which the registration statement became effective) if an issuer has fewer than 300 security holders of record at the beginning of such fiscal year.  Any due diligence has to be done via phone calls or emails.  In example, we had to email Mr. Tjan directly to get the current share count and number of shares repurchased in 2014.  Also, the best source of financials is from the FDIC website - you will not find any info on SEC.gov.

Key Stats, Growth & Share Repurchase:

Since 2011, CWBK has grown loans and deposits by >20% each year, bringing down their Tier 1 ratio from 21% to 16%.  65% of CWBK’s deposits do not pay interest, so their cost of funds is < 50bps.  NIM is ~4% and CWBK’s efficiency ratio runs less than 80%.  Given CWBK’s profitability and capitalization, Mr. Tjan has begun a share repurchase program, retiring 10% of the share count in 2014 with plans to repurchase another 5% in 2015.  

Valuation:

We valued CWBK based on a 7 year DCF model.  Key Assumptions:

• 16% Loan and 18% Deposit growth in 2015; 10% Loan and 11% Deposit growth 2016-2018; 8% Loan and 9% Deposit growth 2019-2021
• 5% - 6% of shares repurchased annually 2015-2021
• Loan/Deposit growth and share repo leads to gradual decline in Tier 1 ratio (increased leverage) from 16.3% in 2014 to 9.5% in 2021
• Terminal growth rate of 3%

Net result is that FCF per share grows from $1.33 in 2015 to $3.15 in 2021, a CAGR of 15.5% and in line with historical growth.  At a 10% discount rate (conservative given current interest rates), the present value of CWBK’s FCF is $36 per share.  Without share repurchases, the present value is $25 per share.

For comparable value, KBWR's (regional bank index) P/B ratio is 1.35x and P/E ratio is 16.6x, which would value CWBK at $18.5 - $20.6.  CWBK, however, should trade at a significant premium to comps as it is growing loans at > 20% compared to < 10% for the index.  Additionally, CWBK’s tier 1 ratio of 16.3% provides considerable room for growth compared to an average ratio of 10.5% for banks of comparable asset size.   

Key Risks:

1. Rate Hike: Any overnight rate increase by the FED will likely not be matched by higher long-term rates.  We think any rate hike, however, will be short-lived given the global economic environment.  
2. Key Man: Mr. Tjan is the driver of CWBK’s performance; if he left and/or retired performance would adversely affected.
3. Liquidity: Shares rarely trade; investors should consider this a private bank holding.
4. Share Repo: Mr. Tjan may choose to repurchase less shares than we forecast in order to maintain a higher than average tier 1 ratio.  In this scenario, we think the stock is still worth $25/share.

Catalyst

See comments.