Bank Investing

Appendix

“An investment in knowledge pays the best interest.”

– Benjamin Franklin

CONVERSIONS

No book on investing in banks would be complete without a section on Thrift Conversions. This was a topic discussed by Seth Klarman in the investing classic Margin of Safety as well as by Peter Lynch in One Up on Wall Street.

WHAT IS A THRIFT?

A thrift is a depositary institution that mostly makes residential mortgage loans. They are also called a Savings Bank or a Savings and Loan Association. They can be owned by their depositors or members (Mutual Ownership) or by their shareholders (Stock Ownership). They can have a Federal Charter (regulated by the OCC) or a State Charter (regulated by a State Regulator). Credit Unions, while they share some resemblance, are not thrifts. Credit Unions are owned by their members (Mutual Ownership) and regulated by the NCUA (National Credit Union Administration) if they have a Federal charter or alternatively by a state regulator. Their deposits are insured not by the FDIC but by the NCUSIF (National Credit Union Share Insurance Fund).

Thrifts have to pass the QTL (Qualified Thrift Lender) test under which the thrift must maintain at least 65% of its portfolio assets in qualified thrift investments (primarily residential mortgages and mortgage backed securities). Since a rule change in 2019, a Federal Savings Association with total assets over $20 billion can opt to become a covered savings association and avoid meeting the QTL test and not ...