Many Banks Overdue for Takeovers

 | Sep 06, 2013 | 3:00 PM EDT
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I want to take a look at some of the thrift conversion stocks that were done in the aftermath of the credit crisis. As I mentioned on Thursday, prior to the meltdown, most converted thrifts were bought out less than five years after completing an initial public offering (IPO). On average, about 75% of each year's conversion class was taken over in that period of time. Bank merger-and-acquisition (M&A) activity has slowed as the industry dealt with staggering credit losses and a poor economy.

Now we are seeing wave after wave of new regulations being handed down to the banking industry, so activity has been delayed until the rules of the game are more certain. The thrifts that have come public in the past few years should see a rapid increase in takeover action once M&A activity begins anew.

The 2009 class of thrift conversion contained six IPOs. None of the six have been taken over as of yet. Only two are small enough to mention here on real money. Northwest Bancshares (NWBI) operates as the holding company for Northwest Savings Bank a 165-branch bank serving central and western Pennsylvania, western New York, eastern Ohio, and Maryland. They also have 52 consumer finance offices in Pennsylvania. The stock is a little rich for me at 1.1x book value but is in great shape they have equity to assets ratio of 12.6 and nonperforming assets are just 1.78% of the total. Northwest just raised the dividend and is actively buying back stocks in an ongoing effort to build shareholder value. Many of the bank's branches are in or near the Marcellus shale regions and they should benefit from the increased economic activity there.

Ocean Shore Holdings (OSHC) is the holding company for Ocean City Home Bank that provides retail banking services to consumers and businesses in Atlantic and Cape May counties, New Jersey. It has 12 branches and a little more than $1 billion in assets. The bank trades and 92% of book value and the equity to assets ratio is 10.1 and nonperforming assets are just 0.53% of total assets. The company has the bulk of its loan portfolio in residential real estate properties and will benefit greatly from a stabilizing real estate market.

The 2012 class of conversions has performed fairly well but there has only been one takeover out of the 24 deals completed in the year. I own several of the stocks, including Capital Federal Financial (CFFN), Fox Chase Bancorp (FXCB), Heritage Financial Group (HBOS) and Simplicity Bancorp (SMPL). They have all rallied in the past year and currently trade at a premium to book value. I would wait for a market pullback before putting any new money into these banks. Peoples Bancshares (PEOP) of Brighton, Mass. is trading just below book value at 0.96%. The bank has and equity-to-asset ratio of 15.18 and nonperforming assets are just 0.26% of total assets. The bank is actively buying back stock and it pays investors a small dividend. As long the shares stay below book value, Peoples Bancshares will fit my definition of a perfect investment in this sector.

Tracking mutual thrift conversions is a somewhat tedious process because it requires tracking down the deals done over the years and evaluating their current financial condition. It involves a great deal of digging and reading but it may be some of the most profitable time you ever spend. Those thrifts that convert into stock ownership seem to carry forward the thrift attitude even after becoming public companies. They usually have excess capital and pristine loan portfolios. They stick to basic banking and seem to avoid many of the pitfalls that have plagued their more aggressive competitors.

If you look at what has happened to converted thrifts over the years, the class of 2008 banks are overdue for a takeover. By the middle of last year, 75% of them should have been swallowed by larger banks. The 2009 group of newly public banks should be seeing a lot of takeover activity right about now. But due to the regulatory environment and credit crisis, the takeover wave has been delayed.

As the economy has struggled along for the past several years, there has been no organic growth in banking. So the only path to growth is going to be M&A activity. These thrifts are overdue and should pay off with large gains over the next few years.

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