Description

CFSB is the holding company for Colonial Federal Savings Bank. Colonial Federal is a former thrift that completed its first step conversion in January 2022. The bank is located in Norfolk County Massachusetts, which is just outside of Boston. Norfolk County is the wealthiest county in Massachusetts.

This is a tiny, three branch bank with around $290 million in deposits. The stock is unknown and/or ignored by the market. While Boston continues to grow, there isn’t much of a growth story here. This is simply a cheap stock which will get acquired for a substantial premium several years down the road. This is a coffee can stock: buy some cheap shares, throw it in the drawer and check back in 3-5 years when it is acquired at a nice premium by a larger bank.

As a first step conversion, CFSB is in no man’s land. Public shareholders own 45% and the MHC owns 55%. The valuation looks out of whack because of the MHC ownership (45X P/E) and the company can’t be acquired or even buy back shares. Nobody is interested in owning this right now and the valuation reflects that.  CFSB trades at 0.78 times P/TEV and 0.35 times P/TEV when adjusting for the MHC ownership.

The loan book is good shape with no provisions for loan losses recognized in the quarter ending December 31, 2022. Total allowances are under 1%. Boston real estate continues to be strong and I do not see much risk to the loan book at present. This is very inexpensive for a bank with no credit issues in a high income area. I don’t see much risk, but it could definitely flat-line for several years before being acquired.

Ok so cheap stock without much risk. What’s the upside or catalysts?

The first is that I anticipate that the 2^nd step conversion will happen as soon as possible. Management has seen many, many of their peer banks in Mass go public over the previous decades. Most of those have generated significant wealth for insiders (and depositors!). The average age of CFSB’s board is 70 years old. The CEO is 68 years old.  As they say, the clock is ticking. Management didn’t go public to have a high profile job for the next 30 years. This was clearly done to generate wealth and get a monetary return on a long career. With only three branches, this crew has already shown they aren’t empire builders to say the least. The goal is clearly to get this thing sold and retire to the golf course. So I’d be surprised if they delayed doing the second step conversion.

Once the second step conversion occurs, the countdown begins to when the bank can be acquired by another bank. This is a three year timeline. Given this bank’s location and asset base, I expect it to be gobbled up quickly by rival Boston banks.  There is no growth story here. This bank is clearly chum for the bigger banks and I think management knows this.

I think the time horizon for this idea is likely in the four to five year range and I think you are looking at 2-3x the share price once it is finally acquired. Not a bad return for throwing something in the drawer.

Catalyst

2nd step demutualization