Two prominent investors bought more shares of Investors Bancorp (ISBC +0.00%) in the second quarter, a time when a lot of smart money appeared to be negative on the banking sector. Specifically, bank hedge fund EJF Capital and community bank activist investor Lawrence Seidman both significantly increased their stakes.
According to 13F reports filed with the Securities and Exchange Commission, EJF Capital increased its stake in Investors Bancorp from 30,000 shares as of March 31 to 200,000 shares as of June 30, a 566% increase. Seidman is a longtime bank investor who will frequently buy a large stake in a public bank and join its board. Seidman increased his position in the roughly $27 billion asset bank from 45,000 shares to more than 117,000, representing a 160% increase.
Following the smart money is a popular investment strategy. EJF Capital was recently down about 20% on the year, according to The Wall Street Journal. That is obviously not good, but it could be worse when you consider that most banking indexes have been down more than 30%. And notably, Investors was one of the few banks in which Seidman increased his stake during the second quarter.
Image source: Investors Bancorp.
Meet Investors Bancorp
Investors Bancorp operates largely in the New Jersey and greater New York metropolitan markets. Most of the bank's assets are tied up in loans, with roughly a third of its portfolio in the multi-family category. The bank also has large commercial real estate and commercial and industrial loan portfolios.
The bank's share price has not performed that well over the years, trending downward since 2017. The bank performed better in 2019, but still lagged the KRE index, which tracks regional bank stocks.
Investors Bancorp got hit hard by the coronavirus pandemic. Operating in hot spots when the pandemic first hit, 48 employees at the bank contracted the coronavirus. The bank also had a ton of exposure early on, with 23% of its commercial loan balances going into deferral following the first quarter of the year.
Since that time, however, deferrals in the commercial portfolio have come down to 14% of commercial loans as of July 22. Bank executives said they expect deferrals to ultimately get down to around $750 million in the commercial portfolio, which analysts seemed pleased with on the company's earnings call. However, the bank still has exposure to the hotel and food services sectors, and is not seeing similar positive deferral trends in its smaller residential portfolio, with 65% of initial deferrals requesting a second deferral.
Possibly an acquisition candidate
Personally, I don't see anything special about this bank right now. It had a lot of exposure to loan deferrals after the first quarter, and still has a good amount of exposure now. Also, being in places like New Jersey and New York, where commercial real estate could see a significant transformation as a result of the pandemic, it is not a foregone conclusion that deferrals will continue to trend positively. Additionally, the bank didn't do that many loans through the Paycheck Protection Program, so it won't see any tailwinds from fees there or pick up that many new business clients in the process. Therefore, I wouldn't take the long view on this bank.
But perhaps Seidman and EJF Capital are looking at Investors as more of a short-term play. The bank only traded at 111% tangible book value coming into the year, which was toward the lower end of the spectrum before the pandemic. In the second quarter, Investors traded at a low of $7.15 per share, or roughly 68% of tangible book value. So, at these levels, smart money may see Investors as an acquisition candidate, which can result in a premium to the share price. The stock could also see a bump next quarter if deferral levels continue to trend positively as management says they will.
