West Town Bancorp (OTCPK:WTWB) is a FinTech company hiding inside of a bank. While many FinTech companies trade at P/E ratios of 30x-60x, West Town trades at 5x core EPS. While many FinTech companies sell at 4x-6x book value, West Town trades at 0.5x book value. In the 2nd quarter, West Town earned $2.84 per share and achieved a 35% ROE. Book value increased from $28.12 to $33.19 per share. Not bad for a $16 stock.
West Town is composed of 6 different businesses: Hemp Business Services, West Town Payments Company, Windsor, Mortgage Lending, Micro Lending, Solar Farms, and an SBA (Small Business Administration) Assistance Agent. The bulk of West Town’s earnings come from non-banking businesses. West Town earned $16.2m in non-interest income in Q2 2020, a 41% increase over Q2 2019. In Q3 2020, West Town will change its name to Integrated Financial Holdings Inc. to better reflect its identity.
The Hemp business uses VeriLeaf technology and does merchant processing through the bank’s payment program to bank Hemp and CBD customers across all states. They have developed a propriety technology that allows the bank to take deposits from these customers that other banks cannot service. Given the lack of competition for these services, the fees for these customers are unusually high. We believe the Hemp/CBD business will double over the next 12-18 months.
The payments business (West Town Payments) supports hemp customers and other merchants. Think Square (SQ) or PayPal (PYPL) for hemp and CBD. We expect growth here in line with that of the Hemp/CBD business.
Windsor Advantage is the SBA agent. This company did $14 million in revenues last quarter helping process PPP loans. It contributed over $2.50 a share in EPS to the bank in the second quarter. Windsor assists 100s of banks in the SBA loans. The company only acts as an agent with zero credit risk. Banks across the spectrum used and will use Windsor to assist with SBA origination including PPP loans and PPP forgiveness programs.
In the last quarter, Windsor’s software assisted and received fees on $2.3 billion closing 14,000 individual loans. While the market may think that this was a one-quarter trend, it is very likely that Windsor will continue to benefit. Outside of PPP, this business should add $2.00 a share annually to West Town Bank’s EPS. Windsor also services over $2B in SBA assets generating secure repeating annual fees.
West Town holds a 10% interest in Dogwood State bank, a mid-sized North Carolina bank. West Town’s stake is worth about $3 in book value and growing at a 40% clip.
Solar lending has become a large part of West Town’s USDA business. Solar has zero credit risk for West Town and there is no risk due to the coronavirus. The solar fields are all run by computers. There are no customers other than those receiving the output. This is a huge play on alternative energy.
These businesses and assets will continue to steadily grow book value for West Town. We project 25+% annual book value growth over the next few years. With prospects like these, we wouldn’t be surprised if West Town becomes an acquisition target in the near-to-medium term.
So, what can go wrong? Stock trading is thin on this small-cap stock. Few investors or institutions are aware of this stock which is why it is priced so low. But it also means it could stay low for a while and you may have to wait a few years for a significant payoff. Although the company is under-followed, it will be attending the Raymond James Conference in September and may pick up some new institutional investors. Like all banks, the coronavirus could hurt West Town’s core bank lending business, however that business is not the driver of West Town’s growth.
Management has bought back over 2 million shares in the last year and with 14% capital, we would expect additional buybacks. As the stock does not trade a lot of volumes, we believe the company will tender for shares at roughly $23 a share. The company was buying back shares at this level in 2019.
In summary, West Town is an undiscovered gem in the FinTech banking space. With zero analyst coverage, the valuation has a big disconnect. The stock trades at 1/2 of the stated book and has a core EPS multiple of 5. Several of their business is growing at 100% a year. Management has shown a tendency to buy back its own stock. Finally, the CEO is a 7% holder of the shares. In full disclosure, our Fund owns 6.5% of the shares outstanding and continues to add daily.
Disclosure: I am/we are long WTWB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.