Thrift Conversion Roundup - July 2022

Highlighting the numerous thrifts approaching their one year conversion anniversary

Greetings and happy 4th of July! Welcome to another edition of Conversion Confidential. This time a year ago, Conversion Confidential didn’t yet exist but thrift conversions were occurring all the same and at a heightened pace in the month of July. Now approaching a year since their respective conversions, regular readers and seasoned thrift investors are excited because of what the one year anniversary means…share repurchases become possible! By my count, July 2021 saw four second-step conversions and four standard conversions get completed. In this post, I’ll give my quick take on the high level financials of the thrifts approaching their one year anniversaries. The intent of this 30,000 ft. approach is to help me organize which (if any), I prioritize to do a full write-up on.

Northeast Community Bancorp (NECB)

First up is Northeast Community Bancorp, which completed a second-step conversion on 7/13/21. I have discussed NECB at length here and here so I won’t say much in this post. As of 1Q22, TBV per share stands around $15.50 meaning the bank is valued at about 75% of book. Insiders have been active on the open market in recent weeks/months. I’m optimistic for a 10% buyback announcement in short order.

1895 Bancorp of Wisconsin (BCOW)

Next up is 1895 Bancorp of Wisconsin, a second-step conversion from 7/15/21 and a thrift I have not written on before. They operate in a similar market to FFBW, that is Milwaukee and Waukesha counties. With a 15.6% TCE ratio and 76% P/TBV, BCOW sports a well capitalized balance sheet and an undemanding valuation. Loans are predominantly CRE (58%) followed by first mortgage residential (24%) so nothing that would appear too exotic at first glance. BCOW’s challenge is achieving better/more stable profitability in its earnings. Much of its limited income is eaten right up by operating expenses so I would question its scale and/or management’s discipline. Asset quality looks okay outside of 2020 which I’m willing to look past.

I’d also worry a bit about the liability side of the balance sheet personally. BCOW has $58 million of FHLB advances as a source of funding. These pay a higher interest rate and will be increasing in cost in the current environment. BCOW does appear to have them termed them out well with $42 million of the $58 million not due until 2027+. Still, with a respectable mix of deposits (27.6% non-interest bearing and 79% core), I'd be curious to learn more about why they feel the need to utilize them.

Magyar Bancorp (MGYR)

Okay, that brings us to Magyar Bancorp which is another second-step that converted on 7/15/21 in New Jersey. This one currently trades around 84% of TBV. Well known thrift investor/bank activist PL capital owns 9.9% of the bank. The loan book is mostly CRE (47%), 1-4 residential (34%) and other commercial loans (12%). Like many small thrifts, the efficiency ratio presents a challenge in most years, but MGYR has a pretty consistent track record of delivering positive albeit modest ROAs of 20-50bps, and 80bps in 2021. Prior to the conversion, MGYR was running a little lighter on capital (< 8.5% equity/assets) than I personally like to see and that could have been a consideration for converting. At a TCE ratio of 12.3% as of 1Q22 this has largely been remedied but Magyar isn’t sitting on huge amounts of excess capital like we’ve seen at select other thrifts. That could impact their decisions returning capital to shareholders going forward, but with PL capital on board I suspect they’ll find the right balance. Finally, the deposit base looks respectable with 84% of deposits qualifying as core deposits so maybe this one gets sold in due time.

My main concern about MGYR is their asset quality. NPLs as a percent of loans have been well over 1% in recent years and longer term are trending the wrong direction. It did improve in the most recent quarter, but this gives me pause considering what may occur if the economy were to enter a prolonged downturn. Without knowing more my guess would be this is an indictment of the market MGYR operates in or that the bank’s underwriting is subpar.

PB Bankshares (PBBK)

PB Bankshares in Pennsylvania also converted on 7/15/21, but this time in a standard conversion. The bank is extraordinarily small with a market cap at only $36 million and is valued at ~81% of TBV. Insiders have been buying over the course of the past few months which is usually a good starting point. Again, the loan book looks pretty vanilla with 1-4 residential comprising 42% of loans and CRE 44%. Capital stands about 12.2% so satisfactory but not extraordinarily high.

PBBK was marginally profitable in 2021, lost money in 2020, and was profitable in 2019. The history from the prospectus is limited to two years so you’d have to pull FDIC/call report data to get a better sense of performance through time. NPLs were running at an elevated level in 2019/2020 at 1.5%, but came down to 0.61% most recently as a larger loan returned to accrual status. Given the small nature of PBBK, it’s not surprising the bank relies a bit more on higher cost funding with about 30% of deposits being CDs.

Cullman Bancorp (CULL)

Alabama based Cullman Bancorp completed a second-step conversion on 7/15/21. At recent prices of $11.21 per share, CULL is trading at 84% of TBV. The balance sheet sticks out for having a LTD ratio above 100% which might hint at a struggle to attract deposits on favorable terms. Loans are 50% 1-4 residential real estate, 31% CRE, and 9% other commercial. Cullman is consistently profitable with ROAs over 1%, mid-single digit ROEs, and a higher NIM than I would’ve expected. These figures dropped in 2021 on the back of a (onetime?) $1.6 million contribution to a foundation, but CULL also appears to have a respectable grasp on costs with an efficiency ratio traditionally in mid-60s. Asset quality is strong, as is capital.

According to the proxy, insiders own 15.7% in aggregate so they at least have an interest in seeing shareholders succeed. It also appears management is not afraid to award themselves generous stock awards but perhaps they deserve it given the operational results of the bank. Cullman’s kryptonite is likely their funding base. Throughout 2021, CULL relied on CDs for ~37% of deposits. Were the sound results of recent years simply a function of the lower rate environment and is the bank vulnerable in the current environment?

Texas Community Bancshares (TCBS)

Texas Community completed a standard conversion on 7/16/21 and equity stands at 15.7% of assets. The bank is serves a small town outside the Dallas Fort Worth metro area and is valued at 92% of book. TCBS is marginally profitable but struggles with expenses as demonstrated by the mid 80s (or higher) efficiency ratios. TCBS has a decent insider position with all directors and executives owning 15.7% of the bank as of March 2022.

The loan book skews heavily towards residential with nearly 70% of the portfolio 1-4 residential. CRE is the second largest category at 14% followed by construction at 8%. NPLs have been in the realm of 40bps but tick up in 2021 to 0.72%. NCOs however are actually slightly negative which means they’ve been releasing reserves and/or recovering more than expected. The funding profile looks satisfactory but not spectacular with 74% of deposits qualifying as core deposits.

Blue Foundry Bancorp (BLFY)

Moving on down the line we come to Blue Foundry Bancorp, another New Jersey thrift which completed a standard conversion on 7/16/21 and is the largest of the banks highlighted today. Shares trade at ~82% of TBV and the bank is extremely well capitalized with a 21.7% TCE ratio. 44% of loans are 1-4 residential, 40% are multifamily, and 11% are non-residential. Using the prospectus, earnings were typically positive prior to the conversion but this changed in a big way in 2020. BLFY lost $39 million pretax ($24 million ex goodwill impairment) in 2020 and $27 million in 2021 so I’m not sure what’s going on, but the bank appears susceptible to compressing margins if nothing else.

BLFY is another bank with a LTD ratio over 100%. I would’ve thought the deposit franchise might be stronger given its larger size, but BLFY has a high mix of time deposits…35% as of 1Q22. NPLs are also a little higher than I like to see at a conservative thrift at just under 1%. Asset quality had been improving but one only has to go back to 2016 to see NPLs at ~2% of total loans.

TC Bancshares (TCBC)

And finally we have TCBC which I won’t go into detail on today. TCBC is the most recent deep-dive I have written on Conversion Confidential, which I have linked to here. In short, I thought there was a fair amount to like and I have high hopes on what CEO Greg Eiford will do with the pending share repurchase announcement in coming weeks.

Conclusion

If I were to dig in further on one of these conversions from the class of July 2021, I’d probably go with Cullman Bancorp. In fact stay tuned on that front. Per usual, if you think I missed anything (likely given the high level approach of this post), please don’t hesitate to leave a comment with your take on any of the subject banks. As always, thanks for reading and I hope you enjoy the holiday weekend!

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