Earlier this year, I published two articles on investing in thrift conversions in the US stock market titled Potential Bargains In A Niche Corner Of The US Stock Market and Potential Bargains In A Niche Corner Of The US Stock Market (Part 2). In them, I described what thrift conversions are and why both fully-converted thrifts and first-step thrift conversions could all be huge potential bargains.
I focused on first-step conversions in Potential Bargains In A Niche Corner Of The US Stock Market (Part 2). In it, I referenced an article from the experienced US-community-bank investor Phil Timyan on Rhinebeck Bancorp and used the same bank to explain first-step thrift conversions, how such thrifts can be acquired, and their potential for generating good returns for shareholders. Timyan’s article briefly mentioned two examples of completed or ongoing acquisitions of first-step thrift conversions and I would be delving into their details in this article you’re now reading.
Wake Forest Bancshares, which was the owner of the operating bank Wake Forest Federal Savings & Loan Association, is one of them. In January 2024, Wake Forest Bancshares (shortened to WAKE from here on) was acquired by Piedmont Financial Holding Company for US$34 per share in cash. Before the acquisition, Wake Forest Bancorp MHC owned 0.635 million of the 1.070 million WAKE shares that were outstanding in total. Wake Forest Bancorp MHC was a mutual holding company, so it had no shareholders. At the point of the acquisition by Piedmont Financial Holding Company, Wake Forest Bancorp MHC’s 0.635 million WAKE shares were cancelled, which resulted in 100% of the economics of Wake Forest Federal Savings & Loan Association belonging to WAKE’s remaining shareholders.
Based on the latest financials that I could find for WAKE* prior to the acquisition, it had stockholders’ equity of US$26.507 million, which translates to a book value per share of US$61 based on the 0.435 million shares of WAKE remaining after the cancellation of Wake Forest Bancorp MHC’s stake. At a stock price of US$34 for WAKE, Piedmont Financial Holding Company paid a P/B ratio of just 0.56. But public shareholders of WAKE still enjoyed substantial gains, as WAKE’s stock price was significantly lower than US$20 for months prior to the acquisition. If WAKE’s stock price was, say, US$17 before the acquisition, it would have an optically higher P/B ratio of 0.69 but a true P/B ratio of just 0.28.
CFSB Bancorp, the owner of the operating bank Colonial Federal Savings Bank, is another instance. CFSB Bancorp (shortened to CFSB from here on) completed its first-step conversion process in January 2022. As of 31 March 2025, CFSB has:
- 6.549 million outstanding shares, of which 3.587 million belongs to 15 Beach MHC, the mutual holding company – again, with no shareholders – that owns a portion of CFSB.
- Stockholders’ equity of US$75.715 million, which gives CFSB a book value per share of US$26 if 15 Beach MHC’s shares are cancelled.
Hometown Financial Group announced on 20 May 2025 that it will be acquiring CFSB for US$14.25 per share, subject to regulatory approval. If the acquisition is successful, it will be a mutually beneficial situation for both Hometown Financial Group and public shareholders of CFSB. Hometown Financial Group will be buying CFSB at an effective P/B ratio of just 0.55, while CFSB’s public shareholders get to earn a healthy return, seeing that the thrift’s stock price was only US$8.19 just prior to the deal’s announcement. For perspective, a US$8.19 stock price for CFSB translates into an optical P/B ratio of 0.70 but a true P/B ratio of just 0.32.
In Potential Bargains In A Niche Corner Of The US Stock Market, I shared the traits I looked out for and they apply to first-step thrift conversions too. In fact, CFSB ticks most of the boxes against my criteria for investing in thrifts:
- The equity-to-assets ratio: As of 31 March 2025, CFSB has total assets of US$366.2 million and total stockholders’ equity of US$75.715 million, giving it a high equity-to-assets ratio of 20.7%
- The P/B ratio: Earlier, I mentioned that CFSB’s true P/B ratio was just 0.32 before Hometown Financial Group jumped into the scene
- Share buybacks: CFSB announced a plan on 5 April 2024 to repurchase up to 0.152 million shares (around 5% of its outstanding shares then); as of the first quarter of 2025, CFSB has bought back more than half of the number of shares under the plan
- Non-performing assets as a percentage of total assets: CFSB had no non-performing assets in its fiscal years ended 30 June 2024 and 30 June 2023
- Net income: CFSB was profitable in each of its fiscal years ended 30 June 2022, 30 June 2023, and 30 June 2024, but made a small loss of US$0.16 million in the nine months ended 31 March 2025 (the loss is immaterial against the bank’s total stockholders’ equity)
- Change in control provisions: CFSB’s CEO, Michael McFarland, can receive up to three times the average of his effective annual compensation in the five years prior to a change in control
- Management’s compensation: McFarland controlled 61,549 CFSB shares as of 4 October 2024; the shares were worth slightly more than US$0.5 million at the stock price of US$8.19 before Hometown Financial Group’s involvement and the value of the shares was also higher than McFarland’s annual compensation of US$0.35 million for the fiscal year ended 30 June 2024; It’s worth noting too that McFarland is already 71 this year, so there is even more incentive for him to cash out from CFSB
I also cautioned in Potential Bargains In A Niche Corner Of The US Stock Market that “not every thrift conversion [referring to standard conversions or thrifts that have completed the second-step of the two-step conversion process] leads to a happy ending.” I think this absolutely stands with first-step thrift conversions too.
If any of you reading this letter is interested to have deeper conversations about investing in thrifts, please reach out, I would love to engage.
*Publicly-available historical financials for WAKE are currently scarce and the latest we could find was for the fiscal year ended September 2021 (fiscal 2021). Despite the time-gap between WAKE’s acquisition in January 2024 and the financials we could find, we think the numbers are still relevant. This is because WAKE’s total assets just prior to its acquisition and at the end of fiscal 2021 were US$121 million and US$110.5 million, respectively.
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