Everett Bancorp Files to Convert

Preliminary takeaways from the initial review of the ECBK prospectus

Greetings and welcome to another issue of Conversion Confidential! This week, we’re diving back into the fine print of another prospectus undertaking a standard thrift conversion. Everett Bank, a mutual co-operative bank located in Everett, Massachusetts has filed to convert to stock ownership and will become a wholly owned subsidiary of newly formed bank holding company, ECB Bancorp, Inc. I’m early to this one so the final details of the transaction, such as the number of shares that will be sold, are not yet known. We do know the minimum offering is 7.86 million shares and the adjusted maximum is 12.23 million shares. Fortunately, we can still get a good idea of whether this is a thrift that piques my interest or not. With that, let’s dig in!

The High Level Stats (Prior to Conversion Proceeds)

Total Assets: $666.5 million

Market Cap: N/A

Dividend Yield: 0%

Loans/Deposits 3yr Growth Rates: 6.8% / 9.6%

2021 ROA: 0.64% (0.89% in 2020)

4Q21 NPL Ratio: 0.19%

5yr Avg. NCO Rate: 0.00%

TCE Ratio: 11.6%

PF TBV/Share: $14.58 - $17.74

4Q21 LTD Ratio: 91.2%

Deposits/Branch: $285.9 million

The Market

ECB was organized in 1890 and operates in the greater Boston metropolitan area and considers Middlesex, Essex, and Suffolk counties its primary markets. Everett, where it is headquartered is adjacent to Boston and only three miles from the downtown financial district. I’m sure most readers are also familiar that the greater area is well known for multiple higher education institutions, advanced medical and research centers, as well as numerous corporate headquarters.

Said another way, this is a strong market (10th largest metro in US) with job, income, and population growth. The numbers bear this out; median household incomes in Middlesex and Essex counties were $102,603 and $79,263, respectively. This compares to median incomes of $71,115 for Boston metro, $81,215 for Massachusetts, and $62,843 for the U.S. From 2010 to 2021, the population has grown 0.60% per annum in Middlesex and 0.45% in Essex. This is somewhat below the U.S. average. In December 2021, the Boston MSA had an unemployment rate of 3.0% vs. 3.9% across both the state and country.

Capital

Tangible equity to assets stood at 11.6% at YE21 so the conversion definitely isn’t capital motivated. At the minimum and maximum range of the offering, capital levels would increase anywhere from 19.7% to 23.6% according to the prospectus. And at a CET1 ratio of 16.8% pre-conversion, ECBK’s regulatory ratios are even higher, reflecting a relatively mundane loan portfolio.

Loan Portfolio / Asset Quality

The loan book strikes me as pretty standard for a thrift with a heavy tilt towards loans collateralized by real estate, whether residential, multi-family, or CRE. Underwriting guidelines also look relatively straightforward as far as terms, LTVs, and DSCRs are concerned. ECBK does consider $30.8 million within the construction category, or 6% of the total loan book to be speculative builds (units not pre-sold).

I was a bit surprised to see 74% of loans categorized as adjustable rate, especially given the 1-4 residential emphasis, where 61% of loans are floating rate. Initial upward adjustments are limited to 200bps increases, subsequent increases are limited to 200bps, and maximum upward adjustments tap out at 600bps. I suppose this will serve the bank well in a rising rate environment, but is there a possibility ECBK is taking borrower affordability risk if rates get too far out of hand with inflation on the rise?

Asset quality also looks solid to me based on the ratios below. Low nonperforming loans with no charge-offs in sight combine to form a nice pair in banking. No loans remain on any sort of Covid-19 deferral although there are still about $30 million worth that were paused and have now resumed payments.

Of course it’s how a bank performs in a downturn that matters most. Because I began to think ECBK might warrant investment consideration, I pulled some old data from the FDIC site to see how Everett Bank performed in the financial crisis. While NPLs initially spiked to 4.3% of loans back in 2009, net charge-offs never increased past 22bps in any of the ensuing years and the bank maintained profitability throughout. That equals a ‘pass’ in my book.

One thing I noticed according to the bank’s risk rating disclosure (p. F-25 of the prospectus) is that a large proportion of its loans are “not formally rated”. I cross checked with a few filings from other banks and didn’t see that category called out so I’m not sure if ECBK is an outlier in that they don’t rate a lot of their loans or simply that they are the only bank who identifies this. Perhaps there is a reader who works in the industry or knows more than I and can chime in here!

Deposits

ECBK market share was 0.53% in Middlesex County (31st out of 52 financial institutions) and 0.30% in Essex County (29th out of 36 financial institutions) so the strong regional market does not come without competition. That said, the deposit franchise strikes me as okay for a small thrift. As noted in the high level stats, total deposits have grown nearly 10% p.a. the past three years. Core deposits comprise 60.3% of the total base. Obviously this could be higher, but I’ve seen plenty worse in thrift land. Non-interest bearing deposits are only 14.6% of total deposits as things stand today, but should ECBK be successful establishing commercial relationships, I would expect this to tick up over time.

There is one depositor who in aggregate has 4.8% of the bank’s total deposits. I can’t say I recall ever reading a line like that before so I guess there is a bit of concentration risk.

Management / Corporate Governance

Let’s start with the bad, although admittedly, my corporate governance complaints are relatively limited on ECBK. Directors will serve three year staggered terms which I don’t care for. Regular readers and experienced thrift investors will know this is essentially par for the course however. Most of the directors are very long tenured with five of the seven having served at least 20 years. The positive side of this is that there are now three directors in their 70s and only one under the age of 60. Perhaps selling the bank will cross their minds a few years from now. I’m also okay with the director fees and the backgrounds of most directors. If I were to complain it would be that the Chairman, Dennis Leonard, and newest director Susan Sgroi don’t appear to have banking backgrounds. They seem otherwise qualified from their professional experience however.

ECBK is headed by Richard O’Neil Jr. (age 64), who joined as CEO in 2016. O’Neil is an attorney by trade with over 34 years of experience and has been a director at Everett since 1997. It isn’t immediately clear to me what led the board to select him as CEO. My interest level in ECBK is high enough however that I think I’ll arrange for a call with management and pose the question, as well as report back with any other significant findings.

If I wanted to really nitpick, I suppose he’s well compensated with $567,000 in 2021, but this is Boston metro we’re talking about and the bank performs adequately so I don’t have much problem with it. In the event of a change in control, O’Neil will be entitled to a sum of 3x his base salary and average bonus of the preceding three years.

In recent years, Everett Bank has been building an experienced team to lead while simultaneously revising the business strategy to focus more on commercial lending. In 2019, John Citrano (age 58) was brought on as EVP, COO, and CFO. Citrano has 33 years in the financial services industry and comes from Belmont Savings Bank where he was for EVP/CFO for nearly a decade. In November of last year, Cary Lynch came aboard to head the retail operations. Lynch has 30 years of Boston metro banking experience. Everett also hired SVP/CAO Brandon Lavertu who has 17 years of public company accounting and community bank experience in anticipation of the conversion. And finally, in January 2022, John Migliozzi (age 63) was hired to help with CRE and multifamily lending, which management has stated will be an emphasis after the conversion.

If nothing else, this tells me the board of directors is serious about recruiting human capital that they believe can help them going forward. This seems to be a good sign. As a side note, it also occurred to me that identifying a hiring spree of external bankers at a local thrift might be a decent “tell”, or indicator the subject bank has intentions to undertake a conversion in advance of any announcements. Of course this is still speculative and you would have to be watching the space really closely in order to even notice this occurring at a small bank. To be clear, I do not follow banking that closely. You’d also have to consider whether you’d be eligible to participate in a near term conversion if you opened an account at the time of noticing the executive recruitment initiatives.

Lastly, I want to give more credit where credit is due. Seven of the nine insiders listed will be participating in the subscription offering to the maximum individual allotment. Five are going to the supermax of 50,000 shares by including their spouse. After it’s all said and done, directors and management will combine to invest $3.5 million and own ~4.5% of shares at the minimum offering range.

Earnings Power

ECBK seems to truck along with a pretty steady net income of $4 million plus the past three years. Earnings came down a bit in 2021, but as discussed in the above section, the bank has been hiring new talent which is visibly hitting the non-interest expense (opex) line. Returns are nothing special, but if they were just a few percentage points higher, they’d start to move towards pretty satisfactory territory, especially for a small thrift.

Valuation

The conversion will take place at a proforma valuation range of 0.56x to 0.69x price to tangible book value. I’ll hold off on my valuation for now until we progress a bit further down the road and know the exact amount of capital to be raised, pro-forma shares outstanding, etc. For now, consider me interested in watching how this one develops once it begins trading on public markets.

I’d also say that if I had the chance to participate in the subscription offering as a depositor, I would without hesitation. Congratulations to any mutual depositors or investors out there who have waited on Everett Bank and now get to subscribe! If you’re a reader and will be participating, please leave a comment.

Risks

• Strategic shift - The move into commercial lending comes with elevated risks. Will management be able to pull it off in a competitive Boston market without taking on undue risk in the loan portfolio?

• Asset quality - No points for originality, but we are talking a bank here. Despite things looking good currently, this should always be one of the first things an investor checks as time goes by.

• Interest rate shocks - If the Federal Reserve really tightened, would the floating rate aspect of the book - initially a benefit - become a liability if borrower’s couldn’t afford their loans at substantially higher rates?

That’s all for this week folks. Thanks for reading and if you like what you’re seeing then please don’t hesitate to tell your friends!

Disclaimer: No position. This is not investment advice nor a recommendation to buy or sell any security. Everything written is for general educational/entertainment purposes and I have not considered your specific financial situation. Always do your own research before making any kind of an investment.