Quick Pitch: BV Financial (BVFL)

Recent Demutualization – 30% Upside

Dave Waters from Alluvial Capital blog has recently highlighted thrift conversions as a potentially fertile ground to look for exceptionally cheap bank stocks. Thrift conversions is a process when a mutual bank, owned by its depositors, transforms into a publicly traded bank, which is owned by its shareholders. Historically, newly converted banks were often met with enthusiasm followed by a share price jump and continued trading above the IPO price ($10/share). However, the sector appears to have lost its luster recently amidst the broader bank sector downturn, resulting in most of the recent freshly converted bank stocks trading below the IPO price and deep discounts to tangible book value. A potential event-driven catalyst here lies in the fact that all these companies have just raised significant amounts of cash, some of them doubling the book value. The new capital should eventually be put to use (either through new loans or share repurchases) and enhance the relative earnings power of these banks, making them look even cheaper now.

Dave favors one particular stock – PFS Bancorp (PFSB) – as a potentially interesting case and one of the worst performing recent conversions (share price wise). PFSB is a tiny bank with a single branch in Aurora, IL. It completed the conversion on October 18, raising $17m of gross proceeds in the IPO. Pre-conversion BV stood at $20m, translating into around $36m pro-forma BV. Despite this, the company now trades at a $15m market capitalization, resulting in 0.43x P/BV and 12.7x PE multiple on current run-rate earnings. If PFSB were to allocate its entire recently raised capital towards 5% notes, it could potentially double its earnings and bring its PE multiple below 8x. Pre-conversion ROE ranged from 4% to 6%.

Several other mutual bank conversions have been completed this year, including PFSB (Dave’s pick), FSEA, MSBB, BVFL, SRBK, CPBI, and GOVB. Most of these conversions lack appeal due to underwhelming profitability, very low liquidity, and/or limited financial disclosures. Even PFSB itself falls somewhat into this category. Yet there is one bank that stands out from the crowd and looks quite intriguing – BVFL.

BV Financial (BVFL)

BV Financial, the holding company for BayVanguard Bank, is a Maryland-based bank with 15 branches across Baltimore and the Eastern Shore. BVFL completed its second step thrift conversion on July 31, raising $87m net proceeds at $10/share. The newly raised cash has doubled BVFL’s tangible equity to $180m as of Q3. Total assets are $931m.

BVFL currently trades at 0.7x TBV and 9.1x PE on TTM earnings, which seems pretty cheap considering the bank has been generating 12%+ ROE and 1.2%-1.8% ROA over the last 4 years. A pretty solid profitability for such a small community bank. A bit more info on historical financials is provided below:

If BVFL can utilize its new capital at historical profitability levels, its PE multiple would drop to under 6x. According to Mercer Capital’s Bank Watch (October edition, see graph below), Atlantic coast peers are trading at 1.06x TBV and 9x-10x forward earnings. Community bank peers are trading at 1x TBV and 8x-9x forward earnings. At those multiples, BVFL would be worth $15.5/share, which implies around 32% upside potential without accounting for any incremental BV/profitability growth in the meantime (as deploying this amount of cash might take some time).

Potential soft catalysts for BVFL include continued earnings growth driven by the deployment of new capital into loans and potential share buybacks, which would be highly accretive at current levels. Worth noting that regulations prohibit the sale of the bank for three years following a thrift conversion.

Some of the weaknesses of BVFL include significant exposure to commercial real estate loans, which comprise 54% of the loan portfolio. The second largest segment is 1-4 family real estate loans (37%). Yet majority of the portfolio is secured by real estate assets. Another weakness is that a pretty high amount of loans, over 60%, are fixed rate and were issued at the time when rates were lower. Nonetheless, there are several offsetting factors here to consider. The loan portfolio has been growing fast lately and on top of that the company has now had a large injection of fresh capital from the conversion (equal to 13% of the loan portfolio), which it will be able to deploy into new loans at higher rates. The company reported fair value of loan portfolio at just 4% below than the carrying value as of Q3. Meanwhile, the deposit portfolio looks quite solid with 79% in core deposits and 24% in non-interest-bearing deposits, and has been rather stable/flat for several years, including this year. Net interest margin has been steadily growing over the last few years and is currently above 2021 levels.

Thus, despite a few drawbacks, I think BVFL is a pretty interesting bank, which looks cheap following the conversion.

A bit more color on the financials:

• • Tangible book value has been growing at a decent pace from $60m in 2020 to $90m before the conversion and now is at $180m. In the meantime, the company has also made 3 acquisitions.
  • Any risk from the securities portfolio is minimal as it comprises just 5% of total assets. The portfolio of securities held to maturity was held on the books at $10m or $0.87/share, while the fair value stood at $9m as of Q3.
  • Non-performing loans are just 0.54% of the portfolio.
  • The bank is now massively overcapitalized with CET1 ratio at 23.6% as of Q3. In comparison, the minimum regulatory requirement is 4.5%, while 7% is considered to be a threshold for a well-capitalized bank.
  • Efficiency ratio of 50% is rather impressive for such a small bank.
  • Management owns 6% of shares and has invested $3.6m in the recent equity raise.