Recently I joined Tobias Carlisle at The Acquirer's Multiple podcast to chat about the new book, The Zen of Thrift Conversions, and how thrift conversions work. We discuss how to value thrifts, what kinds of returns you can expect, how to use activist investors to supercharge you returns and why this little niche of the market can continue to offer attractive risk-adjusted profits for investors. It's classic value investing, but with a catalyst in a potential buyout.
The long track record of takeouts in the thrift space is incredible, and it’s a great catalyst to get full value on these tiny banks. Investors looking to take advantage need to know that a thrift must be fully public for at least three years before it’s legally buyout bait for other public banks. So it’s not surprising that thrifts start to perk up after Year 2 of their public life.
This piece looks briefly at three thrifts at various stages in that life cycle but that are all discounted (sometimes massively) from a likely takeout multiple. I’ll give you an estimate of what you might make annually on these cheapies and when they pass that three-year mark.
First Financial Northwest (FFNW)
First Financial Northwest is nothing new in the thrift world, so if you’ve been following this niche of the market, this one won’t surprise you. This Seattle-area bank, which debuted in 2007, now trades at an undemanding 71% of tangible book, despite a history of profitability.
The bank regularly earns at least mid-single-digit returns on equity and pays out half of that in a nice dividend that now amounts to about 3.6%. The bank has taken advantage of the slide in its stock – now around $11, though north of $15 earlier this year – and announced a repurchase authorization for 5% mid-year. It’s taken out about 3.6% of its shares in 2020.
The thrift maintains a strong level of reserves with equity at more than 11% of assets. And since this bank debuted quite a while ago, it can be acquired at any point, though it’s been resistant to being acquired in the past. I detail much of this thrift’s history with activist Joe Stilwell in The Zen of Thrift Conversions, but this bank looks much too cheap today.
Even if it simply returned to its highwater valuation of this year – 100% of tangible book – investors are looking at a seriously good return. That’s 40% upside by itself, plus a dividend.
If it took a couple years to hit that mark? After factoring in two years of retained earnings, investors could see 22% annual returns over the next two years. If it took three years, that would translate into nearly 16% annualized returns. The thing is, that multiple (100%) is still much too low a takeout multiple for a bank of this size, so there’s potential upside from here.
It wouldn’t be unreasonable to see this bank valued around 140% of tangible book – a clean double from here. That would be a best-case scenario and may or may not require a buyout.
Cincinnati Bancorp (CNNB)
Cincinnati Bancorp completed its second-step conversion on January 23 (as you can see on this list of conversions), and it’s less than 10% above its offering price nearly a year later. The bank has equity at 17% of assets, so it’s got a ton of reserves and plenty of room to execute a buyback. I’m looking for that as the bank hits the one-year anniversary of its second step. It will be a good measure of whether the bank is serious about driving value for shareholders.
With tangible book value of just under $40 million, this Ohio bank is small, but it’s put together a decent mid-single-digit return on equity this year and has a history of profits.
Today the stock trades at 81.8% of tangible book value, and it’s got a great catalyst in activist Joe Stilwell, who owns 9.4% of the stock. That helps create some margin of safety here, because Stilwell will push the bank’s management to take value-creating actions.
It would be about 25 months before this stock could be a legitimate buyout candidate, but what kind of returns would investors be looking at? Factoring in a 4% annual return on equity for the following calculations, I estimate that investors could earn nearly 26% annually if the stock is taken out in two years (at a 120% multiple) or about 18% over a three-year period.
Think that takeout multiple is too aggressive? At a 110% multiple, a two-year takeout would result in more than 20% annual returns, while a three-year would garner investors 15%.
Mid-Southern Bancorp (MSVB)
Mid-Southern Bancorp is just seven months away from passing the three-year anniversary of its second-step conversion, and the Indiana bank trades at 93.5% of its tangible book value of $48.8 million as of the last quarter. The bank has a whopping level of reserves – equity is 22.5% of assets here even more than two years after the IPO!
With all that cash (or near-cash) in the bank’s vault, I’m thrilled to see activist Larry Seidman has a sizable stake here, about 5% of the shares with an average price of about $12.45. Seidman has a great history of getting banks to make moves that benefit all shareholders.
Through the first three quarters of 2020, the bank repurchased 343,000 shares (nearly 10% of its outstanding shares) at a price of $12.32. It’s been aggressive about repurchases this year, and has announced a pair of 5% repurchase authorizations since May 2020. It has speedily repurchased stock, but still has about four percent left on its most recent authorization.
With the stock now at $14.22, it’s seen a nice return on its investment in a short period, and I’d like to see the bank do even more in the upcoming months.
Those are all positive signs when the bank is quickly approaching its three-year anniversary of being fully public and likely to be on the auction block. What could it return to investors?
If the stock were acquired at 120% tangible book value in a year (factoring in a 3% return on equity), that would be a nearly 34% gain. If that’s too rich, then you might see 22% at 110%.
Too soon then? A 120% buyout in two years would equate to better than 17% annualized returns, while a 110% buyout in two years would provide investors a 12% return.
Thrifts offer an attractive way to play the investing game, and the history of buyouts provides parameters around your potential returns. Activists help get the job done, too, so it can be a profitable place to play with limited and calculable downsides. My book The Zen of Thrift Conversions details the key things you need to know, and provides three exclusive interviews with the biggest activist names in thrifts. It’s a “must read” if you want to invest here.
Recently I joined Rich Howe at Stock Spinoff Investing to discuss thrift conversions and the new book. Here you can see what thrift investing is all about and how it can fit into your investing portfolio. Rich and I discuss how you can use thrifts to earn attractive returns, how to find these interesting stocks, and how to evaluate them once you find them. We also discuss a few attractive thrifts that look like worthwhile investments today.