Michael G. Riley is a managing member of Narragansett-based Coastal Management Group LLC, a registered investment adviser. He worked on Wall Street for 25 years before retiring in 2002 and settling in Rhode Island. In 2005, he formed Coastal Management Group with two longtime associates. He is a member of the Providence Society of Financial Analysts.
While Coastal Management has no positions in the locally based, publicly held banks, Riley studies those banks for his personal account. In fact, he had a short position in Providence-based Bancorp Rhode Island Inc., which announced it will be acquired by Brookline Bancorp Inc. BancorpRI’s stock price jumped from $30.71 to more than $44 per share.
Riley recently answered by five questions about the BancorpRI acquisition, from the perspective of a trader. These are his opinions alone, not Coastal Management Group’s or anyone else’s.
PBN: Does the Brookline acquisition of Bank Rhode Island surprise you? Why?
RILEY: This acquisition surprises me. I am not surprised that BancorpRI liked this deal, but I am surprised they got such a high price. Mr. Chace [the bank chairman and largest shareholder] will do rather well.
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PBN: Are there winners and losers in this deal? Who are they?
RILEY: I think BancorpRI [Nasdaq: BARI] shareholders have clearly won. They have received an excellent price from Brookline, especially for the economic environment that I see going forward. I see a flattening yield curve and continuing difficulty in small business and commercial loans. It’s not clear to me why Brookline felt the need to pay such a premium. I was still short some BARI upon the announcement so I was a loser.
PBN: Is this the kind of transaction that activist shareholder PL Capital was pushing for BancorpRI executives to make a few years ago?
RILEY: I am not sure how many shares of BARI that PL Capital still owns, but I recall that they felt that the bank could be much more efficient. They referred to an efficiency ratio of nearly 70 percent. Brookline efficiency ratio appears to be under 50 percent, so I would guess PL Capital would be happy with this deal.
PBN: Is this an indication that there were will be more local mergers and acquisitions in the near future?
RILEY: I think general consensus is that there will be more deals as the economy heals. That, of course, presupposes a better economy. I do not share that view so I would be careful not to speculate on takeovers.
PBN: What about other local, publicly traded banks? Are they undervalued or overvalued right now?
RILEY: I think it’s important to remember that many of these banks have still not fixed the problems of a few years ago. The Federal Reserve has basically financed the banking system recovery with emergency loans, taking bad assets off balance sheets and engineering steep yield curve via a zero-interest-rate policy. Assets still sit on the books at 100 cents on the dollar when we all know that’s not the true value. So assets are universally overstated and suspension of “mark to market” is still in effect. I think the next few years will see an increase in banks fees to regulators, a flatter yield curve and a dangerous economy. It’s also not clear if the securitization market or shadow banking system will come back and if that will help or hurt bank earnings. Basically from an investor point of view, my sense is there are very few solid investments in banking.
