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.

CEO Kevin Cummings said that "excluding the one-time charge for the integration of Brooklyn Federal, net income was $22.7 million or $0.21 per share which reflects a return on tangible equity of 9.80%."

Cummings added that the company was continuing its plan "to become a full service commercial bank as commercial loans now account for 42% of our loan portfolio."

Investors Bancorp's total loans grew 3% during the first quarter, to $9.0 billion as of March 31, reflecting a "continued focus on generating multi-family and commercial real estate loans, which was partially offset by pay downs and payoffs of loans." Total assets were $11.3 billion as of March 31.

Investors Bancorp's chief operating officer Domenick Cama says that the company has been "steadfast in our approach -- when we need the capital we will take the second step," and that "taking the capital in the first step in October 2005 and actually doing something with it was important."

Cama says that when he and Cummings joined Investors Bancorp in 2003, the company had about $5.5 billion in total assets, with $4.5 billion invested in securities. "The bank has gone to $11. 2 billion in assets, with over $9 billion in loans, so it is our intention to become a full service commercial bank here in the New Jersey/New York region," he says."

With over half of the company's $2 billion in multifamily mortgage loans in Brooklyn, Cama says that Investors Bancorp will keep expanding there. The company opened its 10th New York Branch on Sunday, in the Midwood section of Brooklyn, and Cama says "We have leases for two additional branches, signed, and are going to continue our expansion east."

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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