Description

Wayne Savings Bancshares, Inc. (Ticker: WAYN)

Investment Thesis

Wayne is a high upside / limited fundamental downside investment. Similar to our recommendations on Cortland Bancorp and Community Bankers Trust (both recently acquired at large premiums to our write up price), we believe Wayne Savings is a solid franchise with good earnings power that has the potential to be swept up in the wave of community bank M&A at some point in the next several years. However, Wayne is a much better performer than our prior two recommendations with a far stronger management team and a better core market.  The bank is one of the final remaining independent community banks in the $500 million-$1 billion asset range in a rapidly consolidating northern Ohio market, and is therefore a prime candidate for consolidation with numerous buyers interested.  While you wait for a potential event, the bank earns a 13%-14% ROE.   Additionally, the bank trades at an undemanding 1.1-1.2x tangible book value and has a history of solid loan underwriting.  Over the last four years the bank has added two of the premier community bankers in Ohio to its management team (Mark Witmer, Executive Chair and Jay VanSickle, CEO). VanSickle, a financially oriented CEO turned the bank around starting in 2017 and drove ROE from 5-6% up to 13-14% through a combination of cost cuts, loan growth and share buybacks. Witmer was brought in early 2021 and is a business development expert, and should continue to grow the relatively safe loan portfolio in the high single to low double digits while the rest of the industry is likely to shrink in 2022. I estimate, if the bank were to sell today, a buyout price of $40-$50 per share, or 50%-90% higher than current. This price should grow at 13%-14% or so per year until resolution although this could go higher if the strategy of growing the loan portfolio is better able to leverage its core deposits. Additionally, if the bank goes the acquisition or MOE route I would expect it to be highly accretive given the quality of the management team here.

Key Statistics

 Description & Thesis

Wayne Savings is a community bank franchise providing commercial and retail banking services throughout twelve branch locations focused on Wayne County in Northeastern Ohio. Wayne is a rural county but has some of the best fundamentals of any rural county in the US. The primary city in the county, Wooster, is home to a number of mid-size manufacturing companies and features two substantial institutions of higher learning (The College of Wooster and The Ohio Agricultural & Research Development Center). The county is also the home of the JM Smucker Company, a large employer which is very involved in the community and focused on continuing to see investment into education and growth for the surrounding region. Wooster is also the former home of Rubbermaid and much of the wealth from the growth and success of that company is still in the region. Finally, the area is home to substantial resources including significant high-quality farmland and oil and natural gas resources. The combination of education, commercially successful businesses, a Fortune 500 company and well utilized natural resource development makes Wayne one of the best market areas we’ve come across outside of the large cities and most successful suburbs (with far less competition).

WAYN also represents one of the last remaining “bite sized” banks left in the region. A strategic buyer would most likely have to pay a generous premium to acquire WAYN for the following reasons:

1.           Scarcity value as one of last independent banks of its size to acquire

2.        Attractive M&A premiums in Northeast Ohio over the past several years

3.       Long list of potential strategic buyers with interest in WAYN

4.        Pro forma synergy calculations indicate high ability to pay

5.       One of the best markets in Ohio outside of the large cities

6.      Solid business with attractive valuation (WAYN trades at 1.2x TBV)

Scarcity Value

The desire for larger community banks to continue to grow market share, assets, deposits, and their loan bases has resulted in a robust M&A market in Northern Ohio and surrounding regions over the past several years (See Midwest M&A table below). Because of this consolidation, the number of independent community banks in the Midwest with greater than $500 million of assets, and more specifically Ohio, is minimal.  With $636m of total assets, Wayne is large enough to draw attention of both in-market and out-of-market acquirers.  Since 2014 there have been 28 deals completed in Ohio and other Great Lakes States ranging in size from $420.8m - $1,945.4m in total assets (excluding the FMER/HBAN merger) at an average purchase multiple of 1.73x TBV and 22.9x LTM earnings. These metrics support the thesis of a strategic buyer paying a premium for a scarce asset in a highly sought-after market.

Substantial M&A activity in Northeast Ohio

Northern Ohio has very few small independent banking institutions remaining after a flurry of activity in the 2010’s. There have been 6 deals completed over the last several years.  Parkview Federal Savings was acquired by F.N.B Corp (FNB) in 2013, National Bancshares was acquired by Farmers National (FMNB) in 2015, Lorain National Bank (LNBB) was acquired by Northwest Bancshares (NWBI) in 2015, Lake National Bank was acquired by CNB Financial Corp (CCNE) in 2016, Liberty Bank was acquired by Middlefield Banc Corp (MBCN) in 2016 and Cortland Bancorp was acquired by Farmers National (FMNB) in 2021.

NWBI received $1.2 billion in assets and $1.1 billion in deposits when it purchased LNBB at nearly 2.0x TBV in 2015. CCNE paid approximately 1.75x TBV for Lake National, which only had $152.2 million in assets.  With limited availability of targets with greater than $500m in assets around NE OH and high purchase multiples being paid recently, it is my view that a strategic buyer would need to pay a generous premium to acquire a presence in the market.

There should be a long list of strategic buyers with interest in WAYN

WAYN should garner interest from a number of in-market and out-of-market buyers. The buyer list overviews presented below are separated as in-market and out-of-market.

In-market buyers:

Farmers National Banc Corp. operates as a bank holding company. Farmers National Bank is Mahoning Valley’s leading community bank with more than $4.1 Billion in assets. The bank has over t0 banking locations in Mahoning, Trumbull, Columbiana, Stark, Wayne, Medina, and Cuyahoga Counties in Ohio, and Beaver County in Pennsylvania. FMNB offers clients personal and corporate trust services in the areas of estate settlement, trust administration and employee benefit plans, and insurance products through its licensed representatives. Farmers National Banc was founded in 1983 and is headquartered in Canfield, OH.

Notable M&A Activity:

Premier Financial Corp. (Nasdaq: PFC) is a community banking and financial services corporation headquartered in Defiance, Ohio.

Premier Financial Corp. (Nasdaq: PFC), is the holding company for Premier Bank and First Insurance Group. Premier Bank, headquartered in Youngstown, Ohio, operates 75 branches and 12 loan offices in Ohio, Michigan, Indiana, Pennsylvania, and West Virginia (West Virginia office operates as Home Savings Bank) and serves clients through a team of wealth professionals dedicated to each community banking branch. First Insurance Group is a full-service insurance agency with ten offices in Ohio.

Notable M&A Activity:

·         

Out-of-market buyers:

Out of market buyers include: 1.) Community Bank System, Inc. (NYSE: CBU), a $3.9 billion market cap bank out of New York trading at over 3.0x tangible book value and which has been trying to get a foothold in Ohio for some time; 2.) First Commonwealth Financial (NYSE: FCF), a $1.6 billion market cap bank out of Pennsylvania trading at almost 2.0x tangible book value. FCF has historically been very acquisitive including in other parts of Ohio but hasn’t done a deal in a couple years; and 3.) FNB Corporation (NYSE: FNB), a $4.9 billion market cap bank out of Pennsylvania trading at 1.6x tangible book value. FNB has made acquisitions in Ohio in the past.

For out of market competitors hoping to establish a market presence in NE Ohio, WAYN represents one of the only options available for them. Out of the group mentioned above, we believe CBU would be interested in breaking into the NE Ohio market as part of their growth strategy. FNB already has a presence via its recent Parkview Savings acquisition.  Interest from multiple strategic buyers could result in a higher premium being paid if a bidding war ensued.

In addition to possible buyers a handful of MOE candidates exist including MBCN and CSBB, among others. An MOE with this management team as the surviving executives would be quite interesting as it would get WAYN close to Russell 2000 inclusion while certainly driving ROE’s even higher.

Pro forma synergy calculations indicate ability of strategic buyer to pay generous premium

Most strategic acquirers rely on some type of synergy adjusted EPS multiple to help determine what price to pay.  I currently see buyers paying between 10-12x synergy adjusted earnings multiples. Given Wayne is already quite efficient, I would expect a strategic to be able to extract between 20-30% of non-interest related costs in an acquisition based on the overlap with the buyer. Based on the analysis below and the fact that WAYN has high scarcity value, a strategic buyer could easily pay over $40 and up to $50 per share for WAYN, which would represent a 50%-90% premium to the current share price.  

 Strong Management Team

Over the last four years the bank has dramatically upgraded the management team. In 2017 the bank brought in Jay VanSickle, the former CFO of National Bancshares (sold to Farmers National in 2015), as CEO. In early 2021 Wayne hired Mark Witmer as Executive Chairman. Witmer is the former CEO of National Bancshares and Head of Commercial Banking at Farmers National. This reunited one of the best management teams in the state. During their tenure at National Bancshares Witmer and VanSickle drove significant shareholder value with ROTCE going from 3.3% to 13.2% (pro forma for new tax rate would be in excess of 15% ROE).  The bank was ultimately sold to Farmers National (FMNB) at > 2.5x the price at the time Witmer joined as CEO four years prior to the sale. The story has been similar at Wayne with ROE’s having improved dramatically post VanSickle joining the bank and loan growth being substantial after Witmer joined. We see no reason why this continued strong performance should not continue with these two at the helm.

Solid Business with attractive valuation

WAYN is a $636 million bank offering a variety of commercial and retail banking services. The Bank is committed to growing loans and deposits within their core markets and continuing their strategic focus on commercial banking relationships.  WAYN services its clients through a branch network of 12 branches which are clustered in NE Ohio. Wayne offers customers checking, savings, and time deposit accounts, along with commercial, mortgage, and installment lending products. The bank has $455 million in total loans as of 12/31/21, and has been able to grow its loan book substantially since the management change in 2017.

WAYN currently trades at 1.19x TBV which is below the peer group average of 1.58x. I realize this is a difficult compare as many of these banks are more sizable but I do believe they are relevant, although less so than the M&A sheet. The bank has improved ROA and ROE since 2016 from 0.55 and 6.23 to 1.19 and 13.85 at the end of 2021.

  Conclusion

Wayne has a number of strong elements of a solid fundamental value investment.  The Bank has numerous opportunities to grow via competing in one of the best core markets in Ohio with one of the best management teams.  Additionally, WAYN is one of the last independent community banks in Ohio with greater than $500 million of assets and I believe a sale of the company is a possibility at some point and a long list of strategic buyers would be interested. This drives significant option value for long holders.  While you wait, value should compound at 13-14% per year.

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Catalyst

The Bank has significant opportunity to grow by competing in its core markets while engaging in a sale or MOE down the road.  WAYN is one of the last independent community banks in Ohio with greater than $500 million of assets and I believe a sale of the company is a possibility in the medium term with a long list of strategic buyers lined up to participate.   While you wait, value should compound at 13-14% per year.