Not much has changed since my Special Situations portfolio purchased shares of Prudential Bancorp (NASDAQ: PBIP ) early last month. The recently demutualized bank remains chock-a-block with cash and is trading well below tangible book value, at just 75%. That's remarkably cheap for a profitable, though underperforming, bank. So I'm back to buy more.
In my original write-up, I noted the opportunities at the Philadelphia-based Prudential. Average equity now sits at 19% of average assets. That massive overcapitalization makes return on equity look anemic, just 2.5% over the past four quarters. As the bank expands its balance sheet, return on equity should go up. And with a ton of cash at the holding company, I expect the company to begin buying back stock when the one-year moratorium on repurchases is eclipsed in October.
Credit metrics have been moving in the right direction. Non-performing assets peaked at 3.3% in 2012, but are now down to 1.3% in 2013. I expect that to continue to fall as the economy strengthens.
In addition, the bank's funding is sticky. It relies heavily on cheaper checking and savings accounts, about 60% of deposits. These customers aren't the "rate chasers" that CD buyers are, so they tend to stick around with a bank for longer.
And over the longer term, most demutualized banks are acquired. With Prudential located in a major metro area, I think there's a good opportunity that it gets folded into a larger, better-run bank.
Foolish bottom line
My Special Situations portfolio will be buying $500 of this cheap and profitable bank, and will look to add more. At just 75% of tangible book value, it's hard to imagine this profitable bank becoming much cheaper.