Street Capitalist: Event Driven Value Investments

Joe Bel Bruno has a great post about Wilbur Ross’ new investment in Sun Bancorp, a New Jersey-based bank:

The billionaire financier, who has been beating the drum that private-equity dollars can save the troubled banking industry, bought a nearly 25% stake for $100 million in Vineland, N.J.-based Sun Bancorp. And, he’s making no secret of the fact that he wants to be involved in consolidating the nearly 120 Garden State banks with deposits of less than $3 billion apiece.

Becoming a mogul in New Jersey banking shouldn’t be too difficult: Ross has a lot of dented merchandise to choose from. Given Ross’s penchant for finding distressed gems, he might look at nine banks in the state that regulators have slapped with enforcement actions that order lenders to meet more stringent capital requirements — or else.

For example, privately-held Amboy Bank, based in Old Bridge with $2 billion of deposits, would jibe well with Ross’ latest acquisition. It is the biggest bank that is being asked by the Federal Reserve Bank of New York and the New Jersey Department of Banking and Insurance to boost capital within the next three years, and could benefit from a well-capitalized partner.

Some smaller names on the list under the watch of regulators include Delanco Federal Savings Bank, BNB Bank, City National Bank, Grand Bank NA, Millennium BCP, First Bank, ISN Bank, and Sterling Bank. The state’s publicly-traded banks have also gotten a lift after the Sun Bancorp deal. Moving higher in morning trading are Lakeland Bancorp, which has about $2.2 billion in deposits; Kearny Financial, with $1.5 billion of deposits; and OceanFirst Financial Corp; with $1.4 billion of deposits.

Wilbur Ross: The King of NJ Banking (WSJ Deal Journal)

I’ve actually spent the last few months analyzing banks in New Jersey and believe that there is indeed some great value to be found over there. New Jersey banks have benefited from largely being unscathed by a lot of the credit issues you saw in other parts of the country. With some of the wealthiest communities in the nation, banks can compete for some high quality deposits.

From speaking to management teams in the region, the consensus is that while they would love to do deals, there aren’t many depressed banks in the region. Deals are going to have to be done at a premium or in the form of a merger of equals. I’m not sure how that will jive with the idea of Ross doing rollups in New Jersey. What we might see are mergers of equals to get some size.

I think that there could be some incentive to do mergers. New Jersey banks face fierce competition for deposits from money center banks. In a number of counties like Bergen, Hudson, Essex, Middelsex, and Union: Bank of America or Wells Fargo leads the pack in deposit market share. More broadly, the largest competitors for deposits tend to be Bank of America, Citibank, Hudson City Savings Bank, JP Morgan Chase Bank, PNC Bank, TD Bank, and Wells Fargo Bank. That puts smaller, regionally/community focused banks at a big disadvantage. They are often left competing with each other for a spot outside of the top 10 in deposits. For a bank, that’s not good. You end up having to market CDs and interest bearing deposits which cut into your NIM. A great bank is able to rely more on savings accounts or low/non-interest deposits.

As a result, there might be some logic for a rolling up banks. It would help ease the competition between New Jersey banks and give the larger money center banks a run for their money. New Jersey is home to a number of mutuals that have excess capital too. Those banks would be very attractive to larger acquirers that are hoping to recapture equity after doing a wave of deals. I’m quite familiar (and bullish) with one of the banks listed in Bruno’s list excerpted above, so I recommend you check it out.

Over the last few weeks, I have spent a lot of time trying to find certain industries that appear undervalued. One area is insurance, where many insurers with good combined ratios and past performance are trading below book. I was happy to see Wilbur Ross agree in this Q&A with Fortune:

Where do you think the biggest opportunities are now?

There are deep value opportunities in insurance stocks, which were beaten down because of their exposure to the subprime crisis, annuities, and commercial real estate. I won’t name names, but some well-managed life insurance and fire and casualty companies will come through this stronger. They used to trade at one or two times book value but now trade at three-quarters book…

Mr. Distress is ready to buy (Fortune)

A quick look at Google shows us how the sector is looking for reinsurance players:

Most appear pretty cheap on the basis of book value. For the moment, it seems as if these companies are trading at discounts mainly due to market conditions. Most insurance companies are reporting that they are still in a soft market. I know that the folks at W.R. Berkley are expecting that things will start to turn. One indicator of that, to me, seems to be with the uptick in M&A activity. We saw Fairfax Financial acquire Zenith, and recently Perry Capital urged Endurance Services to find a merger partner:

PEMBROKE, Bermuda—One of the largest shareholders of Endurance Specialty Holdings Ltd. has urged the Pembroke, Bermuda-based insurer to find a merger partner.

New York-based hedge fund manager Perry Corp.—which owns 12.6% of Endurance and whose president, Richard C. Perry, is a member of its board of directors—said in a regulatory filing Monday that it expects consolidation in the Bermuda reinsurance market to accelerate in the near term.

Endurance “should undertake an evaluation of its strategic alternatives and pursue a possible merger or other strategic transaction in order to create a stronger company with a defined growth strategy,” Perry, which does business as Perry Capital L.L.C., wrote in the filing with the Securities and Exchange Commission.

In addition, Perry said recent executive appointments at Endurance will “not position the insurer to capitalize on consolidation opportunities.”

Endurance Shareholder Urges Merger (Business Insurance)

Richard Perry might also see the reinsurance sector as undervalued, which is why he thinks opportunities are ripe for Endurance Services. If that is not enough, we also saw Warren Buffett purchase stakes in Munich Re and Swiss Re. Smart, value savvy investors appear to be really interested in these companies and I think they are worth a look.

To me, the key will be to find insurance companies that are trading at low multiples with the capacity to increase policy volumes as the market improves.

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I still like Fairfax given its book value growth, great management team, and current price. However, I see plenty of other opportunities worth analyzing, especially with P&C insurers. I plan on posting some work that I have been doing on insurance companies sometime this week, so be sure to look for that.