Description

A long time ago in a galaxy far, far away, investors used to buy stocks based on the concept of value investing that looked at the current value of a company and not what a DCF model said its value will be in 10 years based on various SWAG assumptions. Prudential Bancorp is a $1.2 billion asset bank in Philadelphia trading at 90% of TBV and a likely candidate to be bought for a potential 31% return.

Background: The bank has been around since 1886. PBIP did a first step conversion to a stock mutual holding company (MHC) on March 30, 2005. The 2nd step conversion was completed on October 9, 2013. On January 1, 2017, the Company completed its acquisition of Polonia Bancorp, Inc. (“PBCP”). PBIP issued 1,274,197 shares of its common stock and paid $18.9 million in cash.

The bank has 10 branches with 8 in Philadelphia. The headquarters are located at Oregon Avenue in South Philadelphia. You can view the locations here, although you have to zoom in:

https://www.usbanklocations.com/map.php?zoom=4&lat=39.368279&lon=-98.891603&name=Prudential+Bank

Loan Book: Over the past five years, the bank has transitioned from 2/3rds residential mortgages and 1/3rd commercial to 1/3 residential mortgages to 2/3rds commercial. The loans are 55% fixed/45% variable. One concern is the increase in construction and land development loans that now make up 38% of loans. However, non-performing loans have been steady at around $13 million or 2.2% of loans. The construction loans primarily focus on apartment buildings and condos.

Deposits: There is a good story here. The bank has reduced CD’s from almost 70% of deposits to under 40%. This has been made up with savings and checking accounts. Of note is that the branch at the headquarters has 54% of all deposits.

Management: Dennis Pollack, currently 70 years old, was initially appointed as a director to the board in 2014 as part of an agreement with Lawrence Seidman and the bank. Pollack became CEO in May 2016, after the previous CEO, Joe Corrato, retired less than a year after becoming CEO and at age 55. Rumor has it that Seidman had Corrato ousted. Less than a month after Pollack was hired, PBIP bought Polonia Bancorp (PBCP), which Seidman had been pressuring to sell for some time. Pollack’ previous banking experience includes being president of The Savings Bank of Rockland County from 1989-1996 and was bought by First Fidelity in 1995. He was also CEO of the Connecticut Bank of Commerce from 1997 to 2000. He served as a director of TF Financial, Inc., Newtown, Pennsylvania, from January 2012 until October 2013, when it was acquired by National Penn Bancshares. He was also a director of SI Financial Group, Inc. Willimantic, Connecticut, from 2015 until 2019, when the bank was bought by serial acquirer, Berkshire Hills Bancorp. He also served as Chief Operating Officer of Paulson & Co., New York, New York, a hedge fund, from 2003 to 2006.

Financials: Below are the financials for the past five years.

Major Owners: Warren Mackey of Arles Management owns 10.9% and Lawrence Seidman owns 8.5%. Blackrock filed an initial 13G on 2/2/2021 stating that it owns 5.5%. On 2/10/2021, Renaissance Technologies filed an initial 13G with 5.0% ownership. Those funds may have benefited from Firefly Value exiting PBIP. Insiders own 7.0%.

Buybacks: The bank has been buying back shares steadily. Granted, 90% of the repurchases in FY2018 and 50% in FY2019 went to stock compensation plans but shares have shrunk over 10% in the past 18 months. On 6/8/2020, the bank announced its 4th repurchase program of 407,600 shares. As of 3/31/2021, there are 204,311 shares remaining on the 4th repurchase program that expires next month but a 5th repurchase program was announced on 1/21/201 for 390,000 shares. Thus, the bank could repurchase up to 593,289 shares over the next 7 months.

Dividends: There is a quarterly $0.07 dividend. In the past four years, the bank has paid special dividends per share of $0.17, $0.35, $0.45, and $0.43. The last one was paid on 3/4/2020, right before the pandemic. Given that the 5th repurchase plan was announced in January, I am assuming that is takin

Takeout Valuation: Assuming $7.1 million in earnings and 25% cost saves, I come up with a takeout price of $18.44/sh which equates to a very modest 119% of TBV. If the bank were to complete the buybacks at an average price of $14.00/sh, that would increase the takeout to $18.80/sh for 34% return. 34% is hardly the return of a Jedi. Unfortunately, being a value investor these days is like being a Star Trek fan at a Star Wars convention.

 Risks:

·        Small and illiquid.

·        No one wants PBIP (queue Jason Kelce singing “No One Likes Us”).

Catalyst

Bought out.