Thrift conversions are one of the most boring ways I have ever found for making an enormous amount of money.
When mutual savings banks convert to public ownership, the process is known as a thrift conversion, which involves offering shares to the public (“conversion offering”), similar to any other IPO. Most of the time, the money that comes in adds to book value and creates a chance to buy a stock at a huge discount to the new book value. Great investors like Seth Klarman and Peter Lunch have invested in these deals with a great deal of success over the years.
It works something like this. A mutual thrift with a net asset value of $10 per share and a total worth of $100 million sells 10 million shares at $10 to complete the first step of the conversion process. The thrift takes in the $100 million, and the shares now have a higher book value. It is instant value creation, and even if you cannot get in on the first day of the offering you can usually buy the shares at $11-$12 and own the stock at a huge discount to book value.
Between 1990 and 2008 the average newly converted thrift had a pretty short lifespans. Within about 4 years after the closing of the transaction, roughly 75% of them had been purchased by a larger bank. They were cheap, well-run institutions with conservative loan portfolios and were too tempting to pass up.
The financial crisis bought an end to the takeover activity, but as the industry has recovered and valuations have stabilized we should once again see the former thrifts become too tempting for growth-starved larger banks to ignore. It is a worthwhile exercise to look at some older thrift conversions that may be beyond their “sell by” dates.
Northwest Bancshares (NWBI)
Northwest Bancshares (NWBI) did its conversion offering back in 2009, right near the bottom of the financial crisis. The bank has 65 community banking offices in central and western Pennsylvania, western New York, eastern Ohio, and Maryland as well as 52 consumer finance offices in Pennsylvania. The bank has an above-average equity-to-assets ratio of 13.42, and nonperforming assets are just 1.59% of total assets. That puts NWBI in solid financial shape.
NWBI stock trades at 1.12 times book value and serves a very attractive market. It would be a great acquisition for a bank looking to expand into the region, which includes part of the Marcellus Shale fields. Investors get paid to wait for good things to happen, as the dividend yield is currently 3.65%.
OmniAmerican Bancorp (OBAF)
It is very surprising to me that OmniAmerican Bancorp (OBAF) hasn’t yet been bought out by another bank in the red-hot Texas banking market. The bank has 15 branches located in the Dallas/Fort Worth Metroplex region and total assets of about$385 million of assets. It has held onto its capital, and the equity-to-asset ratio is more than 16. Non-performing assets are just 0.18% of total assets, so this is another financially solid bank.
The bank went public back in 2010 and is nearing the average sale time for a converted thrift. The stock is one of the cheapest Texas banks with a price-to-book-value ratio of just 1.2. I would be less than surprised to see OBAF taken over in 2014, but with insider ownership at more than 30% it will have to be at a decent premium to the current share price.
With practically no organic growth in the banking sector, the regional banks will be looking to grow via acquisition, and former mutual thrifts will be one of their favorite targets.
As of this writing, Tim Melvin was long NWBI and OBAF.
