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Mutual Thrifts yet to go public


junto.investing
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The trend is back.  This was happening quite frequently back in the early '90s after the S&L mess was over.  True that the best deals are if you are a depositor of the bank prior to conversion as you receive rights or something like that.  Good hunting!

 

Cheers

JEast

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I've spent a lot of time analyzing thrifts and MHCs, I even have a list broken up by state of the non-public thrifts with basic data on assets and loans. I spent a lot of time monitoring three MHCs in the past year and call their CEOs up every few months, so it's an area I feel comfortable talking about.

 

There are some problems with the strategy though. If you want to invest in a thrift pre-first step, the best bet is to go ahead and do deposits. The issue is that sometimes you can only do a deposit if you actually live in the state. There are ways to get around it (for instance, if your parents lived in MA you could have the deposits in their name)... but it's just a really convoluted process and quite frankly not worth the time IMO. The excess capital isn't really at the insane levels like it was back in Peter Lynch's day.

 

In the long run, thrifts face significant issues. They tend to put the majority of their assets into mortgages which are bound to take a hit when interest rates begin to rise. Earnings-wise they tend to be pretty poor, they mostly write mortgages and HELOCs, but HELOC lending is facing constraints at the moment (TFSL was told not to increase their HELOC book recently).

 

So instead, some people try to target MHCs (a thrift that completed the first step in the conversion process) and invest before they do their second step conversion. The problem is, a second step conversion can take years and sometimes might not even happen at all. During that time, MHCs tend to trade sideways.

 

Some people thought that with the OTS going away, it would serve as a catalyst for second step conversions. But again there is another problem - so far the second step conversion market has been pretty weak. Basically, it's like doing an entirely new IPO and if the market is not receptive to IPOs, you have to lower your offering price. So before, maybe you were seeing second step conversions priced at 100% of TBV, now they might get priced at only 80% TBV. If that happens, you don't get the "pop" in value appreciation that you used to get when a second step was announced.

 

In addition, most thrift and MHC bankers tend to have a bad reputation -- they are often looked at as being less savvy than commercial bankers and as a result tend to do bad deals when it comes to acquisitions. You have to watch these because when a thrift converts it ends up with a ton of excess capital. They can either use that excess capital to do buybacks, dividends, make more loans, or perform acquisitions. In the past I've seen thrift bankers pay really rich multiples for acquisitions that just weren't worth it.

 

In the recent issue of Grant's, Joe Stilwell mentions two MHCs he is bullish on - STND and FFCO. He owns 7-8% stakes in each and is a 13D filer (I believe). He has basically told management not to do any deals and to focus on paying dividends and buying back stock with their excess capital. It could work, but it will take a long time and they might run into issues with their assets.

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I've spent a lot of time analyzing thrifts and MHCs, I even have a list broken up by state of the non-public thrifts with basic data on assets and loans. I spent a lot of time monitoring three MHCs in the past year and call their CEOs up every few months, so it's an area I feel comfortable talking about.

 

There are some problems with the strategy though. If you want to invest in a thrift pre-first step, the best bet is to go ahead and do deposits. The issue is that sometimes you can only do a deposit if you actually live in the state. There are ways to get around it (for instance, if your parents lived in MA you could have the deposits in their name)... but it's just a really convoluted process and quite frankly not worth the time IMO. The excess capital isn't really at the insane levels like it was back in Peter Lynch's day.

 

In the long run, thrifts face significant issues. They tend to put the majority of their assets into mortgages which are bound to take a hit when interest rates begin to rise. Earnings-wise they tend to be pretty poor, they mostly write mortgages and HELOCs, but HELOC lending is facing constraints at the moment (TFSL was told not to increase their HELOC book recently).

 

So instead, some people try to target MHCs (a thrift that completed the first step in the conversion process) and invest before they do their second step conversion. The problem is, a second step conversion can take years and sometimes might not even happen at all. During that time, MHCs tend to trade sideways.

 

Some people thought that with the OTS going away, it would serve as a catalyst for second step conversions. But again there is another problem - so far the second step conversion market has been pretty weak. Basically, it's like doing an entirely new IPO and if the market is not receptive to IPOs, you have to lower your offering price. So before, maybe you were seeing second step conversions priced at 100% of TBV, now they might get priced at only 80% TBV. If that happens, you don't get the "pop" in value appreciation that you used to get when a second step was announced.

 

In addition, most thrift and MHC bankers tend to have a bad reputation -- they are often looked at as being less savvy than commercial bankers and as a result tend to do bad deals when it comes to acquisitions. You have to watch these because when a thrift converts it ends up with a ton of excess capital. They can either use that excess capital to do buybacks, dividends, make more loans, or perform acquisitions. In the past I've seen thrift bankers pay really rich multiples for acquisitions that just weren't worth it.

 

In the recent issue of Grant's, Joe Stilwell mentions two MHCs he is bullish on - STND and FFCO. He owns 7-8% stakes in each and is a 13D filer (I believe). He has basically told management not to do any deals and to focus on paying dividends and buying back stock with their excess capital. It could work, but it will take a long time and they might run into issues with their assets.

 

Tariq, thanks for the thorough response. I would agree with many of the issues that you've highlighted - which is why, when dealing with thrifts / MHCs, I've focused mainly on activist situations. I recently purchased shares of STND and am now taking a look at FFCO. Can you share some of Stilwell's points from Grant's?

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Tariq,  take a look at (BNCL) Beneficial Bank and tell me what you think. They did their 1st step in 2007 and have been sitting on excess capital since. They took a large write down for q3 but management is pretty conservative and think they were just being proactive. Stock took a huge hit when they announced the write downs a couple weeks ago and I added to my position. Earnings have been weak because of excess capital, but there should be acquisition opportunities over the next couple of years.  There are many small banks in the Philadelphia region that won't be able to make it much longer.

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  • 6 years later...

I know this thread is super outdated but has anyone figure out ways to get around opening an account for a out-of-state thrift?

 

I've spent a lot of time analyzing thrifts and MHCs, I even have a list broken up by state of the non-public thrifts with basic data on assets and loans. I spent a lot of time monitoring three MHCs in the past year and call their CEOs up every few months, so it's an area I feel comfortable talking about.

 

There are some problems with the strategy though. If you want to invest in a thrift pre-first step, the best bet is to go ahead and do deposits. The issue is that sometimes you can only do a deposit if you actually live in the state. There are ways to get around it (for instance, if your parents lived in MA you could have the deposits in their name)... but it's just a really convoluted process and quite frankly not worth the time IMO. The excess capital isn't really at the insane levels like it was back in Peter Lynch's day.

 

In the long run, thrifts face significant issues. They tend to put the majority of their assets into mortgages which are bound to take a hit when interest rates begin to rise. Earnings-wise they tend to be pretty poor, they mostly write mortgages and HELOCs, but HELOC lending is facing constraints at the moment (TFSL was told not to increase their HELOC book recently).

 

So instead, some people try to target MHCs (a thrift that completed the first step in the conversion process) and invest before they do their second step conversion. The problem is, a second step conversion can take years and sometimes might not even happen at all. During that time, MHCs tend to trade sideways.

 

Some people thought that with the OTS going away, it would serve as a catalyst for second step conversions. But again there is another problem - so far the second step conversion market has been pretty weak. Basically, it's like doing an entirely new IPO and if the market is not receptive to IPOs, you have to lower your offering price. So before, maybe you were seeing second step conversions priced at 100% of TBV, now they might get priced at only 80% TBV. If that happens, you don't get the "pop" in value appreciation that you used to get when a second step was announced.

 

In addition, most thrift and MHC bankers tend to have a bad reputation -- they are often looked at as being less savvy than commercial bankers and as a result tend to do bad deals when it comes to acquisitions. You have to watch these because when a thrift converts it ends up with a ton of excess capital. They can either use that excess capital to do buybacks, dividends, make more loans, or perform acquisitions. In the past I've seen thrift bankers pay really rich multiples for acquisitions that just weren't worth it.

 

In the recent issue of Grant's, Joe Stilwell mentions two MHCs he is bullish on - STND and FFCO. He owns 7-8% stakes in each and is a 13D filer (I believe). He has basically told management not to do any deals and to focus on paying dividends and buying back stock with their excess capital. It could work, but it will take a long time and they might run into issues with their assets.

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