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.
Jim Royal has no position in any stocks mentioned. The Motley Fool owns shares of Prudential Bancorp of PA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.