Thrift Conversion Roundup - May 2023

A bit of news, links, and updated thrift results

Greetings and welcome to another issue of Conversion Confidential! It’s been too long since I wrote on here and for that I apologize, but it’s not like there’s anything notable occurring in the realm of banking 🤔. Around this time last year, I wrote a post on the possibility of bank book values declining. If you re-read it, you can see I was onto something, but there’s also a fair amount I didn’t get quite right…such as how held-to-maturity securities were unlikely to cause issues, or foreseeing that quick deposit outflows would unravel several well known banks. At risk of jinxing things however, I’m happy to report I don’t own any banks that have suffered massive drawdowns or have turned into a zero.

Actually, the real reason for the hiatus are the current demands on my time. A couple months back I accepted an investor relations role at a local public company to supplement my income. Between the requirements of that position during the day and moonlighting as an investor, there just isn’t all that much time left for writing. I aim to fix that to a degree going forward and I realize I have a number of prospective conversion filings to evaluate. Okay, with that PSA out of the way, let’s get to some updates on banks that have been mentioned here in the past.

Banks of Conversion Confidential Past

I started writing Conversion Confidential back in November of 2021 and have dedicated write-ups on a handful or so of thrift conversions. As you may recall, I wasn’t interested in a good number of them. Given the current environment, I thought it might be fun to check in and see how a number of them are doing as it relates to deposit costs and liquidity. Below are a couple high-level stats that interest me without comment for each bank I’ve written up since I started this Substack:

1Q23 Results from NECB

I had some time to flip through Northeastern Community Bancorp’s recent 10-Q. Results look pretty good, particularly on the income statement. With a short-duration, floating-rate loan book, interest and net income are predictably way up.

Talk about operating leverage! 1Q23 net income of $11.2 million is up from $3.6 million a year ago. EPS is up even more considering the effect of share repurchases. Given the enhanced interest income (NIM of 6.6%), the efficiency ratio looks great with only 34% of noninterest expense relative to total income.

Asset quality remains impressive. Currently, there are no non-performing or past due loans, but I also don’t believe we’ve seen the true effects of a credit cycle yet. To this point, I would really like to see NECB boost their reserves to a higher level than the current 0.31% of loans. Somewhat surprisingly though, the adoption of CECL reduced their allowance by $1.6 million, although $1.4 million of this was ultimately set aside for off-balance sheet commitments. Meanwhile, special mention loans represent only 7bps, and there are no loans that are classified as substandard or doubtful.

On the balance sheet, NECB was still able to grow loans although non-interest bearing deposits saw a decline. This shouldn’t come as much of a surprise. A year ago, 38% of total deposits were non-interest bearing so many of those deposits have found a home earning a bit of interest. Non-interest bearing deposits still account for a respectable 27%. Elsewhere, NECB also ditched $7 million worth of FLHB advances which were paying at ~2.85%.

Capital levels are more than adequate with the tangible equity ratio at 17.5% and the CET1 ratio at 13.8%. Not bad for a bank valued well below book value.

Finally, NECB hasn’t been shy about returning capital to shareholders. This flexibility is one reason I like smaller banks compared to the super regionals and money center banks. When sh*t hits the fan and valuations become attractive, it’s very rare that the largest financial institutions will be in a position to capitalize on depressed share prices by repurchasing shares. Whether this is because they are under actual distress themselves or just suffer from the poor optics of doing buybacks from the perspective of regulators and/or politicians doesn’t matter to me. It’s just a bit of a pattern I’ve noticed.

As of May 11, there are 15.1 million shares outstanding at Northeastern Community Bancorp, down from 16.4 million or nearly 8% since before the one year conversion anniversary. NECB also pays a quarterly cash dividend of $0.06 and added a special dividend last year.

FFBW De-lists to OTC

At the end of January, FFBW disclosed it would be de-listing from the NASDAQ and moving to the OTCQX Marketplace effective February 14, 2023. For those unfamiliar, when a company de-lists it usually finds itself trading “over-the-counter”, or OTC, which is a successor to the old pink sheets. This can be either a good or bad thing. The exchanges such as NYSE and NASDAQ have certain rules and fees they require in order to earn/maintain a listing on a distinguished public market. If a company is involuntarily de-listed for not maintaining these thresholds it’s usually a sign the company has run into some kind of issue.

In the case of FFBW, it’s neutral at worst and more realistically, a net positive. First, FFBW is choosing to de-register itself. Let’s take a look at why as stated in the 8-K:

“The Company’s Board of Directors authorized the delisting and deregistration after concluding that the significant costs of remaining an SEC reporting company, including the regulatory compliance burden, outweighed the current benefits of NASDAQ listing and SEC registration. The Board of Directors believes that the expense reductions inherent in delisting and deregistering will benefit the Company and its stockholders and serve to enhance the long-term value of the Company by allowing management to focus on the Company’s core banking operations as opposed to spending considerable time and expense to comply with SEC reporting requirements.”

-Ed Schaefer, FFBW CEO

FFBW will also continue to publish annual audited financials as well as limited quarterly information so investors will not be left in the dark. And like any FDIC insured institution, quarterly call reports will of course remain available. The news may have had a modest impact on the short-term price, but it’s difficult to discern cause-and-effect these days given the general turmoil in banking.

After speaking with CEO Ed Schaefer, I learned he expects to save $150-200k annually by de-listing. This isn’t a massive amount, but it’s something for a bank that only earns a couple million per year. Apparently, a bank must wait three years after a demutualization in order to move to OTC, not unlike the period required before a converted thrift can be sold. As a reminder, FFBW is now in this window as it’s second-step conversion was completed back in January 2020. Ed also informed me they intended to continue share repurchases OTC, but they were running up against an annual upper limit of share repurchases of 20% until June.

For those of you keeping score, as of May 5, FFBW has 5.2 million shares outstanding. That’s down from 7.7 million in November 2020, a few months before the buybacks started in earnest in February 2021. This has enabled EPS to actually increase in the most recent quarter despite net income being down slightly. 170k shares remain authorized for repurchase, but if I understand correctly, another month or two will have to pass before they can re-up beyond that amount due to the 20% rule.

FFBW asset quality remains sound. Past due loans are nonexistent as of 1Q23 and nonaccrual loans total $104,000, or 0.04% of total loans. The allowance for loan losses is 1.25% after having been added to with the implementation of CECL which boosted it $436,000.

As of 3/31/23, FFBW TBV per share stands at $14.36 and FFBW’s tangible equity ratio stands at 22.6%. The biggest problem I see is noninterest expenses simply chew up too much of income (75% efficiency ratio). Profitability is, and always has been only mediocre at FFBW. Hopefully, some of the savings from delisting will trickle down to the bottom line and returns, but longer term, I’m still not confident how effective/profitable they can be as a standalone institution. I trust at the right time, Schaefer will do the right thing for shareholders.

Acquisition Activity!

On Thursday, it was announced LCNB Corp. had agreed to acquire Cincinnati Bancorp (CNNB). CNNB was not a thrift I had covered here before, but it is of the same vintage as FFBW having completed it’s second-step conversion in January of 2020. Based on the LCNB closing share price as of May 17, 2023, the transaction consideration is valued at $15.05 for each CNNB share or approximately $43.7 million in aggregate which equates to a 108.9% multiple of tangible book value, a 32.3x multiple on LTM earnings and a core deposit premium of 2.3% as of March 31, 2023. The full press release is available here.

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.