Thrift Conversion Roundup - August 2022

Reviewing the second quarter results from a few of the thrifts I follow closely

Greetings and welcome to another issue of Conversion Confidential! Today, I’m taking a look at the 2Q22 results of FFBW and NECB which as many regular readers know, I’ve discussed a number of times previously. We also have some announcements on the conversion front so I’ll provide links to those as well. Okay, let’s jump in!

FFBW Inc.

The first thing that stood out to me was how the share count continues to slide. FFBW is cannibalizing itself and it has been fun to witness the pace at which they have managed to do so! As the press release notes, the third 10% repurchase since the conversion was initiated in the second quarter and FFBW has already worked through that at pace, having bought another 4.3% of shares outstanding at 6/30. Subsequent to quarter end, they repurchased another ~220,000 shares so they are already approaching completion of that 10% tranche. Per CEO Ed Schaefer, they can do 20% a year (from March to March) so I expect they’ll of course follow up this another 10% buyback sometime in the coming months. With the TCE ratio at an extremely conservative 25.4%, they have the capital to spare. It would also seem FFBW demonstrated a willingness to repurchase at slightly higher valuations - up to avg. price of $12.40 which is ~90% of TBV, somewhat higher than I recall in the past. I think Ed understands there's a case to be made for buying shares below private market value even if those repurchases are also modestly above TBV. Only time will tell if that’s the case or if it will even be necessary though.

Asset quality remains strong. NPLs are only $0.2 million, or 0.075% of total loans. With no Real Estate Owned (REO) on the books either, NPAs are only 0.05% of assets. Loan loss provisioning in the quarter was zero. I did happen to notice a notable jump in special mention loans in the C&I loan book, representing 1.8% of loans. While none of these are even 30 days past due yet, I will be watching how these evolve in future quarters. At June 30, 2022, the allowance for loan loss was 1.11% of total loans and 1,607% of non-performing loans.

Loans held came down a couple million in the quarter, largely as a result of nearly $9 million worth of development loans rolling off the books. Similarly, deposits were also down, but there was a healthy shift in mix. Of the $12 million decline in deposits, $7 million was CDs (although the rest was checking) and $20 million worth of CDs are scheduled to roll off in the second half of the year. Non-interest bearing deposits remained up YoY. FFBW also repaid $5 million in FHLB advances so that balance is only $1.5 million at this point. As might be expected with increasing rates, FFBW’s NIM increased, but what I found surprising was interest expenses actually went down. I’m not sure how long that can go on for, but it’s a decent test of the deposit franchise I suppose.

At 2Q22, TBV/share stands $13.92, down just a few cents from YE21 as FFBW has taken a very minor AOCI hit ($3.6 million YTD) which I’ve discussed previously.

Finally, FFBW made mention of opening a new branch. With an efficiency ratio over 70% I wasn’t crazy about this development, but it sounds like it shouldn’t alter the cost base significantly. Ed informed me they have a leased office space (but not a branch) that comes up for renewal next year that they intend to let roll off the books. Ed is also anticipating this branch will only require $5 million in loan production per year to cash flow and expects to hit breakeven around the 12 month mark. My thought is Ed has done right by shareholders so I will trust him on this decision despite my hesitation that additional physical branches are what small community banks need at this point in time.

Northeast Community Bancorp (NECB) Inc.

Back in March, I wrote that I was anxiously awaiting the share repurchase announcement from NECB following the one-year anniversary of their conversion. Well, on July 27th, NECB delivered by taking a page out of the FFBW playbook and going big with a 10% buyback as opposed to the more traditional 5% tranche. Now I’ll wait and watch to see whether they execute it with a sense of urgency given the valuation. Given the share count on August 10 is lower than the 2Q figure, it’s safe to say the repurchase has at least begun (NECB said it would commence August 1st).

There was some minor deterioration in the loan book worth noting. Two non-residential loans secured by the same property and labeled as TDRs at YE21 totaling $769,000 entered foreclosure after defaulting on June 30th to become non-performing. This had the impact of increasing NPLs to 0.08% of loans (from 0%) and NPAs from 0.16% of assets at YE21 to 0.23% today. There are another $949,000 worth of multi-family loans that are 60-89 days past due but still accruing. In addition, there are two other loans of $865,000 considered TDRs which are performing in accordance with their restructured terms. By my count, even if all these vulnerable loans (past due + TDRs) went belly up overnight, NPAs at the bank would total 0.38% which seems quite manageable given the earnings power and capital.

Interestingly enough, the construction loan book remains sound with no NPLs and no loans past due. NECB didn’t take any loan provisioning at the consolidated level in the quarter either while a net recovery of $139,000 occurred (charge-off of $7,000 against multifamily property recovery of $146,000). There were minor adjustments to provisions within the various loan categories due to increased loan balances however. The allowance remains at 0.53% of loans which I have always thought was a bit light but it does represent 711% of current NPLs.

Earnings have never been much of a problem at NECB. Net interest income was up 31% on the back of increased interest rates/yields on assets and lower interest expenses. The efficiency ratio dropping below 50% means more of the top line increase makes it to the bottom line than ever before. All in all, net income for the quarter increased 46%. The end result is an impressive ROA figure and a reasonable ROE considering the excess capital.

NECB’s deposit growth has slowed which is probably why loan expansion has been reeled in a bit (in addition to any macro concerns), but there is a similar mix effect to what I discussed for FFBW with more expensive CDs rolling off, ultimately improving the deposit profile. Non-interest bearing deposits continue to comprise a significant percentage of total deposits, registering 39% at 2Q22. I still worry about an LTD ratio at 110% however.

Finally, capital remains quite high with a TCE ratio of 20.9%. On the regulatory capital framework however, the ratio is lower at 14.5% as the construction book doesn’t score well on the basis of risk-based assets.

As of 2Q22, TBV/share was ~$15.60. Bring on the accretive repurchases please!

New Conversions Announced

New Jersey based Somerset Savings Bank announced a conversion, and in connection with the conversion, also announced a merger with Regal Bank for ~$58 million. I haven’t been doing this long enough to have seen this previously (although I understand from the banking mafia on Twitter it used to be more prevalent prior to the GFC) so digging into this one when the filings are published should be interesting.

First Seacoast Bancorp (FSEA) of New Hampshire also announced a second-step conversion on August 12th. FSEA completed its first-step conversion in July 2019 so it’s clear this bank didn’t intend to linger in partially-converted limbo forever which automatically increases my interest level.

Alright folks, this feels like it’s getting long so that’s it for this edition. I’ll be back soon to check in on TC Bancshares’ (TCBC) results. Awhile back, readers also indicated interest in a spreadsheet to help them keep track of the many thrift conversions. Stay tuned for something on that front in the coming weeks as well. As always, thanks for reading and please leave a comment or get in touch directly if you’ve got anything on your mind!

Disclaimer: I and others I advise are long FFBW & NECB shares. 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.