December 23, 2013 - 9:53pm EST by
2013 2014
Price: 25.60 EPS $0.00 $0.00
Shares Out. (in M): 54 P/E 0.0x 0.0x
Market Cap (in $M): 1,374 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • M&A Catalyst
  • Share Repurchase
  • Regional Bank
  • mutual holding company
  • Demutualization


ISBC is a best-of-breed, soon-to-2nd-step mutual thrift that operates > 100 full service branches in central and north Jersey, NY, and suburban Philadelphia.  Pro-forma for its recent ROMA acquisition but not accounting for the upcoming 2nd-step offering, ISBC's balance sheet consists of $12.4bn in loans (mostly commercial), $2.2bn in cash and securities, and $10bn in deposits.  After continued delays surrounding Fed approval of the ROMA merger, the transaction finally closed a few weeks ago and the announcement of a much anticipated 2nd-step stock offering was announced shortly thereafter, moving ISBC away from an archaic mutual/stock hybrid structure and towards that of a dividend-paying, public stock entity.  I think ISBC shares offer a mid to high-teens annualized return over several years under reasonable assumptions with manageable downside risk.
When it comes to capital allocation, I think management is as good as it gets in the thrift space.  They've responsibly leveraged the first $510mn of proceeds that they raised in the 2005 IPO, steadily accreting ROE from 2.8% to 10.5% today while keeping asset quality in check.  I have every reason to believe that management will be equally prudent with this second slug of capital.  It is likely that the Company will attempt to waive its share buyback restriction upon 2nd-stepping, and given management's policy of repurchasing shares below fully converted book value, any sell-off in the stock could be a blessing in disguise for long-term shareholders.  For what it's worth, we've spoken with the management teams of several Jersey thrift peers and have heard ISBC spoken of as the "gold standard."
ISBC has grown its loan book from $2bn in 2005 to over $12bn today through a combination of organic growth and disciplined acquisition (including several opportunistic asset and branch acquisitions during the crisis from less sure-footed competitors).  Unlike many sleepy thrifts that park their assets in govies, ISBC has over 80% of its assets loaned out and a 130%+ loan:deposit ratio (all ex. ROMA, which is an example of aforementioned sleepy thrift), having grown its loan book organically by high-teens over the last several years.   The Bank's deposit mix has dramatically improved away from CDs and towards less expensive core deposits, which have increased from 44% of total deposits in 2009 to 70% today.  Non-performing loans peaked at just 2.1% of total loans in December 2010 and have since come down to 1.2% as of Sept 2013; the Bank's current loan loss allowance covers non-performing loans and they have consistently provisioned well-above charge-offs over time.  Efficiency ratios and net interest margins are at or superior to peer levels. 
At the mid-point, ISBC will raise $1.8bn, which is on top of current book value of around $1.1bn, so that's a big slug of capital to put to work.  While it will immediately dilute ROE from ~10.5% currently to ~4%, if history is any guide (the IPO diluted ROE from 7% to 2.8% initially before reaching 10.5%), management will prudently put money to work and returns will claw their way back to low double-digits ROE over time.  
Assuming the 2nd-step occurs at the mid-point of the guided range, ISBC trades at ~1.2x TBV of $9.55 (2.2x exchange ratio).  If the offering is done at the adjusted maximum, ISBC trades ~1x.  There are a number of former thrifts of notable size ($1bn+ in assets) that have 2nd-stepped over the last 3.5-4 years and have since brought their equity returns up to high-single digits, that currently trade 1.6x-2x TBV.  Assuming the Company is able to improve ROE by 1% per annum and applying a 1.7x multiple on tangible book several years out, you can pencil in a mid to high teens annual return at the current price.  A realistic downside case might be 1.0x TBV on an offering below the mid-point, or $10.25/share, 25% downside from the current price at the appropriate exchange ratio.  
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


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