Tracking the Activists in Small Bank Stocks

 | Sep 18, 2013 | 3:00 PM EDT  | Comments
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Among the items I track on a regular basis are 13D filings by activist and interested investors. These filings indicate that a holder of 5% or more of a company's stock intends to have a conversation with management about the direction of the company. These filings frequently lead to a new business plan or a reorganization or outright sale of the company. All of these tend to create a premium to the current stock price and produce gains for shareholders, so this is a useful and potentially profitable activity.

This has particularly been true among the small bank stocks. You won't see the big activists such as Carl Icahn and Bill Ackman in the little banks, but a handful of investors have had a great deal of success in the sector.

Lawrence Seidman has been active in the small bank stocks for as long as I can remember. The former Securities and Exchange Commission attorney has been buying undervalued banks and thrifts since the mid-1980s with a great deal of success, and he has been snapping up shares of some banks of late. He has been in numerous proxy fights over the years, and more than 20 of the banks in which he has filed an activist position have been taken over through the years.

Seidman recently added to his position in one of my old favorites, Fox Chase Bancorp (FXCB). The 11-branch bank, based in Hatboro, Pa., is a thrift conversion from a few years back. The equity-to-assets ratio is over 12, and nonperforming assets are 1.49%, so the bank is in sound financial shape. The activist investor has not announced any particular actions such as a request for board seats or a proxy fight, but in his filing he does reserve the right to do so. The Philadelphia market is one of those over-banked Northeastern markets where a takeover of a strong yet inexpensively valued bank would not be shock to anyone. Fox Chase certainly fits that profile.

He was not so sanguine in his filing regarding OBA Financial Services (OBAF), a smaller bank in Maryland that serves the wealthy counties of Montgomery, Anne Arundel and Howard. He starts by saying, "I was dismayed by Mr. Weller's statement that the OBAF Board of Directors has no interest in entertaining a sale of OBAF." Then he turns up the pressure by informing the bank's management, "I believe that a sale to a strategic buyer, because of OBAF's poor financial performance, is the only way for the OBAF shareholders to maximize the value of their investment. I also believe that there are several strategic buyers, who would provide the OBAF shareholders an adequate premium and greater liquidity."

Institutions own about 45% of OBA Financial and might be receptive to the idea of a sale if Seidman pushes a proxy fight. Since insider ownership is fairly low, the board would stand a good chance of losing a proxy fight. The stock trades at about 94% of book value, so there would appear to be pretty good upside if a sale is the outcome.

Seidman has also been a steady buyer of a bank where he is already a director. He owns more than 20% of Center Bancorp (CNBC) and has been picking shares on a regular basis. The bank has 14 branches and about $1.6 billion in assets as of the last quarter. The branches are in the northern New Jersey market, including Union, Morris and Bergen counties. This is a wealthy area close to New York City that is heavily overbanked, but considering the stellar performance of this bank, I would not be surprised to see it grow by acquisition rather than seeing a sale of the bank.

Center Bancorp trades at 1.5x book value, so I might not rush to buy shares, but it is on my radar screen, because the company can push the stock higher by growing though acquisition or by being purchased by a larger bank. The bank is in solid financial shape with equity-to-assets ratio of more than 12, and nonperforming assets are a minuscule 0.17% of total assets.

I make no secret of my fondness of the small bank stocks, and tracking the activists in the sector is one way of uncovering ideas that have potential short-term catalysts for unlocking value.

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