A Nearly Overlooked Filing

 | May 17, 2013 | 4:00 PM EDT
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I want to take one last look at this week's 13F filings because I noticed a firm popping up in many of the bank and financial stocks I am fond of buying. It is a firm I have not paid much attention to in the past but perhaps I should have. EJF Capital is a firm co-founded by Emanuel Friedman, who was also one of the co-founders of what is now brokerage and investment banking firm, FBR & Co. (FBRC). The firm does extensive research, trading and investment banking for smaller banks and their pedigree has spilled out into the hedge fund world. Martin Friedman of EJF Capital also came out of FBR to found a hedge fund specializing in small bank stocks.

In the aftermath of the credit crisis, the firm has done very well for itself by investing in undervalued securities that benefited from the clean-up process. They are apparently a big believer in my so-called "trade of the decade" as well. The firm owns a lot of small community bank stocks and has continued to buy into the first quarter of the year. As is the case with many of the funds that invest in community banks, most are too small to mention. However, one stock stands out and is worthy of deeper investigation.

United Community Financial (UCFC) is the holding company for Home Savings and Loan of Youngstown Ohio. The bank has 33 branches in Ohio and Western Pennsylvania and about $1.3 billion of assets. It has struggled with problem loans and has made substantial progress. Non-performing loans have fallen from almost 9% of total assets to just 3.32% in the latest quarter. After two quarters of positive earnings, it is finally profitable again.

In January, it did a private placement stock offering along with a rights offering to existing shareholders raising $47 million to build up the balance sheet. Currently, the equity to assets ratio is over 10 so they have enough capital to operate successfully. The stock trades at about 77% of tangible book value and is worth buying at the current level.

The firm was a buyer of Northfield Bancorp (NFBK), the Staten Island, NY bank that has also seen buying form Arbiter Partner, Michael Price and other noted value investors. They also like the prospects for some of the larger banks as they were buyers of Citigroup (C) , SunTrust (STI), JPMorgan (JPM) and Regions Financial (RF) in the first three months of the year.

The fund appears to be a big believer in lenders operating outside the banking system as well. The managers have been buying shares of RM Management (RM) a lender to those with limited access to traditional bank lending services. They lend money to consumers for autos, furniture and appliances. EJF Capital also bought shares of Consumer Portfolio Services (CPSS), a subprime auto lender. In addition the fund purchased shares of small business lender CIT Group (CIT) and private student loan provider First Marblehead (FMD) in the first quarter.

Mortgage servicing was also a theme in the funds purchases in the first quarter. Steve Eisman of Emrys Partners called Ocwen Financial (OCN) the most leveraged way to play a housing rebound at a recent investment conference and Friedman's fund apparently agrees as they continued adding to their position in the stocks.

In addition to Ocwen the fund added to stakes in other mortgage servicing companies including Lenders Processing Services (LPSS) and Nationwide Mortgage Holdings (NSM). If the housing recovery continues, this will be an incredibly profitable business and these stocks will do very well. I am not too interested in chasing them at this level, but if we actually get a market pullback, these would become very interesting long-term candidates.

I am not sure how I have overlooked the filings from EJF Capital. After going through the most recent 13F filings and seeing the number of high quality ideas and huge profits in their older positions, you can be assured it will not happen again. They are now on the must-read list and long-term investors will find it worth their time to read the filing.

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