Description

Summary:

• WMPN is a cheap PA bank where management has been buying back shares furiously and gets paid a fortune if the bank gets sold
• PA is an overbanked market that has seen, and is likely to continued to see significant M&A activity, as bank management teams face the reality of buy or get bought 
• Given rally in KRE, M&A activity is likely around the corner, with banks likely to see a period of elevated "catch up" M&A as banks do deals that were put on the sidelines post SVB fiasco
• There is 34-65% upside from the CMP, while downside is protected from owning a bank below tangible book with a clean B/S 

William Penn Bancorp (WMPN, listed on Nasdaq) is a small, PA based overcapitalized thrift conversion that completed its second step conversion in March 2021 to an oversubscribed IPO, at $10/share.  As a reminder, thifts have a 3 year "cool off" period post IPO before which they cannot be acquired - this ended in March of 2024.  Many thrifts tend to get acquired post the cool of period, creating an opportunity in shares of WMPN

I beleive that WMPN is a classic "thrift conversion" playbook idea that will likely be sold in the next 12-18 months, at a premium to tangible book value per share of $12.80, for upside of 34-65% from the CMP. 

Thesis

Thifts tend to be low ROE, overcapitalized banks with limited growth opportunities, and size of operations too small to be able to earn a reasonable cost of capital.   Operators and managements of thrifts, therefore, have two ways to get paid -- either grow the bank's B/S at low ROEs and grow your empire, allowing you to argue for higher comp, or get paid in undervalued shares of the thrift, buy more shares on the market, and eventually sell at a large premium to an acquirer. Despite low ROEs, these are attractive acquisitions for neighboring banks as they have low-cost deposits that can be slotted into an acquirer, who can cut out of most of the costs associated with servicing these loans/deposits. 

WMPN management seems to be taking the second option, which as you can imagine, works a lot better for shareholders. Instead of putting excess capital towards growing loans, WMPN has made the right decision, and shurnk share capital - this has the benefit of improving ROEs, and allowing for a larger premium on T/BV for the remaining holders. 

Incentives and signalling 

WMPN sold 12.64mn shares in its IPO in 2021 - since then on, the company has repurchased 6.3mn shares, or more than half of the shares sold to the public, at prices generally below tangible book value per share.  

Management has significant insider ownership in the bank, with directors and officers owning 8.1% of the company or $11mn of stock, not a small amount for a bank of this size and stature.  The ESOP pool (which holds shares underlying options below), has another 9.7% of the company. 

Intriguingly, management was granted a large chunk of options in 2022 with a 11.61 exercise price that would vest in a change of control of the company (~400k shares in total) on top of this common equity holding. The CEO's change of control is ~3x the highest bonus paid in the last three years - about ~$10mn of net-value, while other sr execs get $1-2mn each.  All-in all, management and directors stand to make a wind-fall on a successful sale of the company. 

Management and directors are around the age where they are probably looking to retire, and a sale of the bank would set them up for that - Kenneth, the CEO is 64, while the directors are 64, 75, 63, 67, 79, and 62

The directors are also highly (cash) motivated to sell this bank, with a significant PV of their healthy ~$45k/year fees + benefits 

Upon a Change in Control of the Bank, if the director experiences a termination of service, then the director shall be presumed to have 15 years of service as of the date of such Change in Control and shall receive a lump sum payment equal to the present value of the aggregate payments that would have been due the director. Upon a disability, the director shall be presumed to have 10 years of service and shall receive benefits on the first day of the calendar month after the disability.  

Macro

WMPN is based in Bucks County PA, and has a strong deposit base - PA has seen significant banking consolidation over the last 5, 10, and 20 years, and I beleive this trend will continue given the scale advantages to banking

Pennsylvania is highly overbanked, and consolidation is the need of hour for banks that want to be competitive versus their larger regional peers

PNC report from 2019

https://www.pnc.com/content/dam/pnc-com/pdf/corporateandinstitutional/FIG/fig-advisory-a-look-at-pennsylvania.pdf

Buyers have paid a median of ~1.5x P/Tangible Book for deals in Pennsylvania, before the 2023 banks crisis. 

We see that such multiples have held back going as far back as 2016, with buyers paying 1.56x book in the 2016-2019 period, or about a 9% core deposit premium 

Post 2023, deal prices in the US have fallen to more like ~1.25x tangible book. The 4 deals in PA, happened at 1.13x, 1.02x, 1.22x, and 1.28x P/TBV - it is important to note all 4 of these were stock for stock mergers with a limited premium - cash deals genearlly happen at higher prices (done by price insentive buyers like CUs or privates)

Given recent rally in KRE  which is materially above 2023 post crisis levels, P/BV valuations have recovered closer to historical ranges

Part of the issue with M&A is that securities and loan values need to be marked to market in terms of fair value accounting (in cash deals to simplify) - hence large bond or credit losses can make deals hard to price.

In the case of WMPN, credit is pristine (NPLs are 0.4% of assets, ACL of 0.63% with good history on charge-offs), while there is limited impact of rates. Even including the impact of rates, an acquisition at 1.3-1.6x P/BV could provide a significant return to shareholders (34-65% upside)

For a sense check on these numbers, a typical acquirer can cut 40-50% of the non-interest expense in a bank like WMPN, or earn $14-16mn in adjusted pre-tax income (adjusting for rate mark on securities), on an acquisition price of $132-163mn, or roughly a ~10-12% pre-tax-ROIC (which can be incresed by increasing leverage as it is overcapitalized).  Presence of credit unions in PA also helps this dynamic, as they have a lower cost of capital which means that they can often overpay for deals.

 Another way some people look at bank M&A is core deposit premium - the above implies a $30-60mn desposit premium.  In exchange, the acquirer gets ~565mn of deposits with a 2.4% weighted average cost (as of June-24), a mere 5-11% deposit premium for rural low-cost sticky deposits with low-beta (inline with the 9% cited by PNC for PA deals). 

Given the bank's 14.7% TCE ratio, much of the cost of buying the bank can be funded by excess capital received on acquisition, making this an easy deal in this capital constrained environment (buyer does NOT have to raise funding like a HMST/FSUN deal).

Given the bank's poor recent earnings trajectory, I beleive management is entering the "end-game" given they are borrowing from the FHLB to fund stock repurchases, a risky and "negative carry" type move that one would only do if you are certain an acquisition is happening in the near term. As mentioned above, the recent KRE rally offers a great time for would be acquirers to step on the offensive and for deal making activity to return, of which I think WMPN is a prime beneficiary.  Poor earnings makes it difficult for mangement to continue to get paid and repurchase stock and instead I beleive they will look to sell and sail free into the sunset with their generous CoC packages.

Catalyst

Sale of the bank (prefereably a cash deal) at a large premium to CMP 

Continued share repurchases