Last month, my Special Situations portfolio acquired shares in Investors Bancorp (NASDAQ:ISBC) as part of its impending demutualization. With that conversion to a fully public bank still in process, I'm back to buy more, doubling my position in the company.
It was only a few weeks ago that I first purchased an initial stake in the New Jersey bank, and the stock is up a few percent. You can see the original write-up here, and I'm back to highlight a few points again. The key impetus for my purchase is the cash-raising demutualization, which should allow this well-run bank to trade substantially over tangible book value, especially as it puts all its new cash to work.
Investors Bancorp operates in the Jersey, Philadelphia, and Long Island areas, and it's performed very well throughout the credit crisis. Non-performing assets topped out at 1.7%, a very low level for an economy undergoing one of the worst crises in several generations. Credit metrics have improved since the height of the debacle, and last year, the bank earned a respectable 9.3% return on equity. The bank has increasingly focused on "stickier" funding sources, such as checking and savings accounts.
In the near future, Investors' return on equity will go down, but for purely technical reasons. The demutualization will raise a ton of cash -- the exact amount will vary on how well the demutualization subscription plays out -- and half of that will go to the bank, while the parent gets the other half.
Regardless of where that cash goes, however, Investors won't be able to put it all to work immediately. Some cash will go into expanding banking operation, while cash at the holding company will go to buybacks, dividends, or acquisitions. It all means the bank will be way overcapitalized, squeezing return on equity. That may pressure the stock in the short term, but management has shown that it can build out a profitable banking franchise, so I'm not concerned with a short-term blip in the stock price if it gives us an opportunity to own a quality bank for the longer term.
Currently, it looks like the stock is priced at a little more than 1.1 times tangible book. That's still cheap enough for a solid bank, though clearly not the value that many demutualized banks are when they go public at substantial discounts to book value. On the other hand, Investors has been able to generate much better returns on equity than most of those cheaper peers.
Foolish bottom line
In the next few days, my Special Situations portfolio will invest another $500 in Investors Bancorp. The demutualization should allow the stock to trade significantly over book value as the bank puts that new capital to work.