A New Jersey Thrift's Grand Plan

Investors Bancorp Inc. is nearing its conversion to an all-stock company, but would like to find a few partners to join it in the plunge.

The $10.2 billion-asset mutual holding company from Short Hills, N.J., announced Wednesday that it would acquire Brooklyn Federal Bancorp Inc. in New York, a fellow mutual that is struggling.

The acquisition is valued at $10.3 million, but only $2.9 million of that is cash for the public shareholders, with the remainder a share swap among members of the mutual companies. That means Investors gets to pick up a small thrift and expand more in New York City without much dilution to its book value.

It would like to strike at least another deal like this before initiating the process to go all stock.

"It would be a wonderful thing to do one or two more mutual holding company deals before we convert," Kevin Cummings, president and chief executive of Investors, said in an interview Wednesday. "Many of these MHCs don't want to lose their independence, but we hope they can see value that can be created."

The value, the company said, is in Investors' size and likely more attractive conversion price.

"To the extent that the second-step market does not provide the same value to their current shareholders, given the size of some of the smaller MHCs, we think obviously putting a deal together with a larger MHC like ourselves who can provide more value in the second-step market makes a lot of sense," said Domenick A. Cama, chief operating officer, during a conference call with investors.

"The key here to me is that our mutual holding company and our depositors will be incorporated into a much stronger financial institution," Gregg J. Wagner, president and chief executive of Brooklyn Federal, said in an interview.

Rick Weiss, an analyst at Janney Montgomery Scott LLC, said that Investors also has an added advantage: as a New Jersey-chartered thrift company, it might be able to entice mutual holding companies that are still wary about life under the Office of the Comptroller of the Currency, which absorbed the Office of Thrift Supervision in July.

Investors is known for its creative deal making. Analysts praised its purchase last year of the U.S. operations of Banco Commercial Portugues SA. In 2008 it acquired the $112 million-asset Summit Federal Bankshares Inc., giving it five branches and deposits of $95 million. Using "pooling of interests" accounting, Investors absorbed the mutual holding company without paying for it outright.

Brooklyn Federal is under a cease-and-desist order, and because it missed capital targets set for April 30, it has been on the hunt for a buyer.

Investors liked Brooklyn Federal's deposits. Its five branches would double Investors' network in New York City, where it has three branches and two under construction. But Investors did not want Brooklyn Federal's problem loans, which made up nearly 40% of total loans at the end of the second quarter. An unnamed real estate investment fund has agreed to buy $208 million of Brooklyn Federal's commercial real estate assets simultaneous to the deal's expected closing in the fourth quarter. Investors would be left with $89 million.

"Despite the fact that it has a good franchise in New York, it didn't have the credit standard we have here," Cama said in an interview. "We were emphatic that we could not do this deal unless we could sell those assets at the same time."

That is a smart way to handle nonperforming assets and one that should be utilized more, said Kingsley Greenland, chief executive officer of DebtX, a loan sale adviser.

"It is a great way to isolate the value of a portion of the portfolio that the acquiring institution does not want to keep. The risk is removed, and so it should improve the value of the deal," Greenland said.

Matthew Kelley, an analyst with Sterne Agee & Leach Inc., said that the deal is a good one for Investors, particularly because it brings $411 million of deposits, something Investors needs. The company has been bucking industry trends by increasing loans, mostly through the expansion of multifamily lending. It recently has had to turn to Federal Home Loan bank borrowings to fund them, Kelley said.

"This helps fund an asset generation story that has been successful," Kelley said in an interview. "They are picking up $400 million for basically $3 million. That moves them further into New York City at a pretty cheap price."

Kelley said he would like to see the company strike more deals for mutual holding companies, but expects the company to prepare for a conversion soon.

"I think it is inevitable in the next six to eight months," Kelley. For those looking to partner with the company before then need to act soon, though. "The window is closing."