Even if lightning fails to strike twice at
, investors could still walk away richer for their trouble.
tried to acquire Patriot, but federal regulators balked over the structure of the transaction.
So Pottstown, Pa.-based Patriot, which went public after the failed deal, is now pushing ahead on its own, which suits at least some investors fine.
"Our sense when we bought it was that it was a takeover candidate," says one portfolio manager who is a larger shareholder but asked not to be identified. "As we got to know the management, we saw more and more that it's a growth story, and that's good news, not bad news."
Indeed, the portfolio manager says over the long term the stock could trade at two times book value, which now is about $13.38 a share, as management executes its new strategy. It's trading now at about 1.2 times book value. It closed Thursday at its 52-week high of 16 1/4. In fact, the manager adds that a takeover could be a "disappointment" if it occurred before management has had a chance to build the savings bank, which has about $529.2 million in assets.
"We expect earnings to grow 15% to 20% annually due to growth in higher-yielding mortgages such as home-equity lines and commercial real estate loans," adds Wayne Bopp, an analyst with
Robert W. Baird & Co.
, which participated in Patriot's initial public offering in December 1995. Bopp rates the stock a buy.
Yet at the same time, Patriot remains very much an attractive takeover target. Bopp says a likely price would be 1.8 times the company's book value, which would put the price at about 24.
For now, however, Patriot's management team is proceeding as if the company will remain independent, putting together a plan to make the savings bank resemble its more profitable cousins, the commercial banks. There is room for improvement. While Patriot's earnings are growing, its key measures of profitability lag the banks it's trying to emulate. Its return on equity, for instance, was 6.23% in the fourth quarter, which was up from 3.82% a year earlier still badly lags the 15% mark at which banks aim.
Management, led by President Joseph Major and Chief Financial Officer Richard Elko, both of whom were recruited as part of the IPO, has put together a plan that includes opening branches in supermarkets to boost its cheap deposits from sources such as checking accounts. "What we like to say is that we have a low-cost deposit-gathering strategy," says Elko.
And the company is emphasizing higher-yielding assets, such as home-equity loans, which carry higher interest rates than the company's traditional home mortgages. It also is emphasizing commercial loans and has hired people with experience in that field. "Most thrifts got into problems with thrift guys trying to be commercial bankers," says Elko. "Commercial loans were too important for our strategy, so we hired a team of commercial lenders."
As a result, the company's loan portfolio has jumped 43% to about $280 million from $196 million a year ago. And of the latest total, roughly 38% is in commercial and consumer loans. A year ago, the portfolio was weighted more heavily in traditional home loans, which accounted for 77% of the portfolio.
Of course, the plan is not free from potential pitfalls. "Growing this quickly can be viewed as risky," Bopp writes in a report. "Additionally, this type of lending has higher yields because it typically has higher loan losses than traditional one-to-four family first mortgage lending."
But Patriot so far has maintained stellar credit quality, with its nonperforming loans as a percentage of its overall loans at 0.60% in the fourth quarter, according to Bopp. Banks shoot for below 1%.
Yet all this actually may just end up making Patriot more attractive to an acquirer, which management acknowledges. "If somebody came in and offered a whopper of a deal that was good for the shareholders, we'd have to consider it," says Elko. "But we've decided the best way to give the shareholders a good return is to invest" in the company.
By Erle Norton