|Shares Out. (in M):||4,004||P/E||10.3||8.8|
|Market Cap (in M):||54||P/FCF||10.3||8.8|
|Net Debt (in M):||0||EBIT||5||6|
CommerceWest Bank (OTC: CWBK) is an unknown, micro-cap “compounder” with a stellar management team and significant near-term growth prospects. Key investment highlights:
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.
We valued CWBK based on a 7 year DCF model. Key Assumptions:
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.
|Entry||02/26/2015 11:21 PM|
CWBK is one of 21 banks with an FDIC/FED permitted program to take deposits from companies engaged in legal cannabis sales, and they are the only publicly traded bank we've found running such a program.
CWBK launched their program 5 years ago and is considered a leading example by its regulators. Cannabis banking programs require much greater due diligence and AML background checks.
Upside is that the legal cannabis industry grew from $1B in 2013 to $2.5B in 2014 and is expected to reach $10B by 2018. Currently ~8% of CWBK's deposit base is from this program, and we expect this program to grow deposits by > 30% per year for the forseeable future.
|Entry||02/27/2015 03:21 AM|
Thanks for the post. If you have handy, would you mind sharing the historical financials for the bank with the readers as your post seems to omit the details on BV, BV growth, ROE and etc. Also any idea what the insider ownership look like? Cheers.
|Subject||Re: Re: Coverage|
|Entry||02/27/2015 12:41 PM|
What type of ROEs is the company doing now and over the cycle?