Description

Company Description:

"Northwest Bancorp, Inc. is the stock holding company of Northwest Savings Bank (PA) and Jamestown Savings Bank (NY). NWSB has focused its lending activities primarily on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences. The Company, directly or through its subsidiaries, also emphasizes the origination of consumer loans, including home equity, second mortgage, education and other consumer loans. To a lesser extent, the Company also originates multifamily residential and commercial real estate loans and commercial business loans."


OK, this generic description of a home mortgage lender that also does consumer and commercial business loans could apply to thousands of banks and thrifts in the country. Northwest's current GAAP valuation of 16x earnings and 1.9x book also doesn't separate it much from the crowd, and those numbers certainly wouldn't qualify it as a VIC submission. I admit I was never impressed enough with this thrift to even try to scratch the surface and look a little deeper...and I somewhat understand the wacky GAAP distortions than MHC's can produce, so there was no excuse.


Northwest Bancorp (NWSB) recently did an incremental stock offering (not to be confused with a second-step offering), and it was the first time I really ever gave this thrift more than a cursory pass. NWSB is the majority-owned sub of Northwest Bancorp, MHC...and I always thought it a mediocre, serial acquirer. The stock price is the same as it was 5 years ago, typical of a company that cares more about expanding the corporate empire than increasing shareholder value.


So what's changed and what's to like here? First off, my perception of the company has been re-adjusted. While those shareholders, who owned it 5 years ago, can't be thrilled about their 5-year return, they should have sold it during the last MHC mania (yes, there is such a thing). During the past 5 years, NWSB got stupid cheap, as no one wanted anything to do with MHC's. It's an interesting exercise to superimpose Northwest's stock price graph with its operational performance during that time period. Efficient market? Ha!


The U-shaped 5-year price chart went from $17.50 in '98, to $7 in '00, and now back to $17.50. In the meantime, the company's total share count has hardly changed, and ROE's have consistently been in double digit territory, averaging 11.9%. Assets have grown from $2.6B to $6.1B, deposits have grown from $2.0B to $4.8B, and equity is up from $218M to $445M. This bank was a serious and committed acquirer of other banks and branches (71 full services branches grew to 136), but they were rational buyers who never paid up...and there's no question their franchise value is much higher today than 5 years ago. Several recent thrift sales in Penn have been at whopping deposit premiums. Fleet just paid over a 20% deposit premium for Progress Bank (that same deposit metric would translate to over $20/share for just Northwest's deposits.) Being an MHC precludes any such sale until NWSB decides to fully convert and sell the bank, but it gives an indication of what this franchise could be worth down the line. In the meantime, their MHC status is being used like very few other MHC's in the country and allowing them to grow their franchise very cheaply.

Their recent acquisition of Skibo (an MHC) was very similar to last year's acquisition of Leeds (another MHC). I always knew these remutualizations were wonderful for the shareholders of the acquired institution, but I never realized how good they can be for the acquirer. The interesting point about these particular MHC acquisitions is that they are not in NWSB's consolidated numbers because they reside in the parent MHC, but those purchases will eventually and most definitely benefit all Northwest shareholders. They are a hidden asset, and in the future NWSB can continue to roll up other MHC's that are ready and willing to cash out.


My own personal hurdle rate is 20%. If an investment can't logically average that annually, I'm not much interested in making the purchase. I think it may get choppy price-wise over the next few years in thriftland, but I think over the long-term, Northwest will accomplish that rate of return. I see little chance of permanent loss of capital, but I admit that it's very possible to buy this cheaper in the future. The economy, interest rates, and housing all come into play here.




(For those who aren't familiar with this corporate structure (and to save me some typing), please read the CHFN or SERC submissions for an MHC primer. I also plan on using this thread to update my past thrift submissions, my present buys, and delve more deeply into some of the new things I've learned about MHC mergers and acquisitions.)

Catalyst

Rising dividend, potential second-step offering, and investor awareness.