Stock Conversion Opportunity for Bank Investors (Update 1)

Updated with comments from Investors Bancorp chief operating officer Domenick Cama.

NEW YORK (TheStreet) -- Investors may be looking at an excellent low-risk opportunity, on the anticipated second-step conversion of Investors Bancorp (ISBC) of Short Hills, N.J., to full stock ownership.

Investors Bancorp is part of a mutual thrift holding company structure, with Investors Bancorp MHC holding 58.7% of the common shares as of Dec. 30.

Shares of Investors Bancorp closed at $15.52 Friday, returning 15% year-to-date, following a 3% return during 2011. Last year's return was quite impressive, if you compare it to a 25% decline for the KBW Bank Index (I:BKX).

Sterne Agee analyst Matthew Kelley on Friday reiterated his "Buy" rating for Investors Bancorp, with a $17 price target, saying that the shares "remain undervalued trading at roughly 95% of estimated fully converted tangible book value (TBV)," while "recently converted Northeast peers now trade at roughly 125% of TBV."

Kelley added that "with capital approaching 8% and returns on equity approaching 10%, we continue to believe the company will undergo a second step conversion [to full stock ownership] this year."

Sterne Agee estimates that the company's fully converted tangible book value would be $15.63, growing by "an additional 4% (to $16.25) over the next year." Kelley also said that Investors Bancorp "executed on several transactions, opportunistically repurchased shares, and improved [its return on average assets] to roughly 0.85%."

The analyst said that the company's "fundamental improvements combined with astute capital actions warrant a higher second-step valuation," and that a conversion offering at 95% of tangible book value "out one year from now would produce a $17 fully converted TBV in current terms," supporting Sterne Agee's price target.

Then again, investors may eventually place a premium on a strongly capitalized institution, migrating to a commercial banking model, with steadily improving earnings performance. Following a second-step conversion, Investors Bancorp would be sitting on excess capital, which it could put to work through further acquisitions, or, eventually a return of capital to investors through dividends and/or share buybacks.

Investors Bancorp on Thursday reported first-quarter net income of $18.9 million, or 18 cent a share, compared to $21.1 million, or 20 cents a share, in the fourth quarter, and $18.2 million, or 17 cents a share, in the first quarter of 2011. The first-quarter results included "the acquisition of Brooklyn Federal Savings Bank and the sale of most of Brooklyn Federal's commercial real estate portfolio on January 10, 2012," and also included roughly $6 million one-time acquisition related expenses.

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