Quick Pitch: Peak Bancorp (IDFB)

Merger Arbitrage – 28% Upside

 

This is an interesting $65m cross-border bank buyout with a wide 28% spread but with a very limited liquidity. Considerable patience will be required to establish a position.

Peak Bancorp, a US community bank, is being acquired by BAWAG Group, a holdco of the fourth largest bank in Austria. Consideration stands at $12.05/share in cash. Shareholder consent has already been received and the only remaining hurdle is regulatory approval from the Federal Reserve. In the recent weeks the spread has increased from the previously stable range of 10%-11% to the current 28%. There are two possible explanations for this increase. Firstly, the market is likely getting nervous about the prolonged acquisition timeline – the parties are already 17 months into the merger process, way past the initial deadline of Q1’23. Secondly – the US bank crisis and market turbulence since the merger announcement have likely heightened concerns about the buyer’s willingness to proceed with the transaction. The fact that IDFB doesn’t report with the SEC and has only limited disclosures on the bank’s website. However, the buyer, BAWAG, is actually listed on Vienna Stock Exchange (€3.6bn mcap) and has been providing very valuable commentary on the merger in their conference calls throughout the whole process. These comments and several other aspects suggest that the current spread might be overblown.

The likelihood of regulatory issues appears low, and the extended timeline shouldn’t necessarily be seen as a sign of approval problems. Despite the transaction size, cross-border mergers typically take more time to complete. Even such a small buyout as IDFB was initially expected to be closed within a year. However, the recent US banking crisis has undoubtedly thrown regulators off their game, causing significant delays and reordering of priorities. To make matters worse, the Fed office responsible for reviewing IDFB’s case is located in San Francisco, which, has been hit with sorting out two out of three recent bank failures (FRB and SVB). In Q1’23 conf. call BAWAG explained that review delays were not surprising:

That’s still pending regulatory approval. Nothing out of the ordinary is a prolonged process. Obviously, I think regulators have been probably busy. It’s out of the San Francisco office as well.

There is also no apparent reason why regulators would even be willing to block this acquisition. The target is a super small community bank in Idaho, which definitely poses no systemic risk to the US banking sector. BAWAG is a credible buyer supervised by ECB and has already been running some small cross-border lending operations in the US for the last 10 years, focused mostly on corporate and real estate sectors. Last year, US regulators have granted the Austrian group an approval to establish a representative office in the US. The language in the approval document suggests that regulators viewed BAWAG in good light at the time:

BAWAG P.S.K. appears to have the experience and capacity to support the Venice Representative Office. […] Taking into consideration BAWAG P.S.K.’s record of operations in its home country, its overall financial resources, and its standing with its home country supervisors, it has been determined that financial and managerial factors are consistent with approval of BAWAG P.S.K.’s application to establish the Venice Representative Office.

Taking all of this into account, I would be quite surprised if regulators did not approve this merger.

The risk of the buyer abandoning the transaction seems low. This is a highly strategic deal for BAWAG and will finally allow it to secure a US banking license. The buyer specified that this acquisition saves them 2-3 years of time in fully entering the US market. The buyer intends to infuse substantial capital into IDFB and completely refocus its loan portfolio from commercial real estate into retail/mortgage. With this strategy, BAWAG estimates IDFB to generate $30m profit before tax in 2025 vs $6m PBT in 2022. All of this indicates that BAWAG is mostly interested in the banking license and probably doesn’t care much about IDFB’s current operating performance or valuation multiples. Nonetheless, despite its small size IDFB operates profitably generating around 10% ROE. The offer values it at 1.4x TBV and 12x PE, which compares favorably to peer bank transaction multiples in the West over the last 12 months (see here). Any impact of the recent banking crisis on this merger should be limited too. IDFB doesn’t even have a portfolio of securities and so far has seen no leakage of deposits either. In fact, in Q1 IDFB deposits grew by 2% QoQ. In April’s call BAWAG explicitly noted that it had no concern over IDFB’s financial standing whatsoever:

And then we’ve been in touch with the management team almost daily. And that’s pretty robust and static in terms of just the deposits and divorce from some of the issues you’re seeing with the U.S. regional banks. Those issues have not migrated to Idaho First Bank or Peak Bancorp.

Overall, the merger seems likely to close and given how much time has already passed since the merger announcement, it’s probably safe to assume that the remaining timeline should be short.

However, if the merger eventually breaks, I would expect IDFB to trade down to $7/share or 25% below the current prices. This would still leave IDFB at 0.8x TBV and 7x PE, quite cheap for bank that manages to generate 10%+ ROE while being this small. Given that IDFB is clearly for sale, it is quite likely to be scooped up by other interested parties.

 

22 Comments

22 thoughts on “Quick Pitch: Peak Bancorp (IDFB)”

  1. I didn’t see Definitive Merger Agreement (DMA) or Proxy Statement Filings.

    Are we passed the DMA End date? – so no contract in force and the stock just trading on BAWAG intent?

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  2. IDFB is a non-reporting security, so you should not expect to find DMA or proxy documents filed with SEC. Merger agreement was signed in January 2022 and shareholders have approved the transaction in April 2022. I am guessing shareholders of the bank at the time have received the necessary proxy documents by post.

    With regards to June 30 deadline, I am able to comment on it, as I have not seen it referenced in any of the documents/announcements/transcripts. Maybe it was included in the proxy documents mailed to shareholders for approval back in 2022. In any case, even if there was a June 30 deadline, I do not think it is really that relevant. If BAWAG wants to acquire IDFB, they would easily extend the timeline by mutual agreement. BAWAG’s comments after Q1’23 earnings do not suggest they are looking for ways out. Another BAWAG conference call will be on July 19 and might shed more light on the situation.

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    • Given the listing status of BAWAG, do they have any obligation to provides similar documents under Austrian listing rules?

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    • I noticed this also and can’t find any news. The volume was almost double the 10 day average at 13,600 shares – but still very light comapred to other days when news has been released. Could it be due to one seller and illiquidity?

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      • I wasn’t able to find any news either. Maybe we will get an update during Bawag’s upcoming conf. call on July 19. I don’t see anything unusual with the price volatility. It still continues to trade in the same price range.

  3. At the end of June, short seller Petrus Advisers issued report accusing BAWAG of acting like a hedge fund, standing on shaky foundations and relying mostly on US CRE for growth. Shares reacted on the day but have since recovered. Not sure if this might have any implications for the ongoing acquisition of IDFB, the conference call tomorrow should shed more light on this.

    From the report:

    A high risk and plain stupid investment of customer funds
    – BAWAG has erased all revenue generating business units and relies almost exclusively on brokers and third-party vendors for the
    structure and growth of its balance sheet
    – Management actively depleted product knowledge and there is no more visible expertise in relevant lending categories
    – Inability to grow organically in the core business has resulted in growth in US commercial real estate (“CRE”) loans and buying
    structured credit portfolios
    – BAWAG acts like a credit hedge fund which is unacceptable for a regulated bank

    https://petrusadvisers.com/media/20230630_-_bawag_-_back-up_materials_vf.pdf

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  4. On BAWAG call, buyer’s management confirmed that they are still waiting for the regulatory approval of IDFB acquisition. And also stressed that they continue to be in close touch with IDFB’s team and are pleased with the bank’s performance in light of US regional banking crisis.

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  5. Below are the earnings call extracts that mention the acquisition of IDFB:

    “The acquisition of Peak Bancorp in the United States is still pending regulatory approval. However, we’ve been pleased with the business performance despite the challenges experienced across U.S. regional banks in the past few months.”

    Question:

    “Thanks for the presentation. My questions are mainly around the targeted bank acquisitions and holdings. First, in terms of the Idaho First Bank acquisition, to what extent have you revised your strategic thinking around the asset following the U.S. regional bank crisis earlier in the year?”

    Answer:

    “On Idaho First Bank or Peak Bancorp. Look, this is — we get a lot of questions on this. The community bank that we’re targeting, which is Idaho First Bank. Let me start by saying we’ve been close — in close contact with the team, the operating performance obviously, in light of the market environment with U.S. regional banks. We’re very pleased with the development, both on a deposit as well as the asset quality standpoint. So we like that. The process is still pending regulatory approval, so we can’t talk about the broader or more details in terms of just the overall acquisition. But hopefully, we’ll be able to come back shortly and provide more details on that.”

    Now, it may be nothing but saying “hopefully, we’ll be able to come back shortly and provide more details on that” vs e.g., “we are confident that regulatory approval will be attained in the near future” suggests to me there might be delays or issues. Now, that short report looked rather toothless, however, the way regulators recently have shot down mergers without just cause (in my opinion) concerns me with this deal. Perhaps there was ‘enough’ mud for an overzealous regulator to block the deal? Maybe the regulators are different, the risks totally different, and it is my lack of knowledge and diligence that is the root cause of my loss of conviction, but nonetheless I’m not going to wait around to find out.

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    • The base rate on approving bank mergers is incredibly high though. Nearly 100%. Out of over 4000 bank mergers in past 2 decades only 2 were denied.

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      • Yeah I noted that. It just doesn’t make sense that with a base rate of basically 100% it has implied odds of maybe 50% of closing….. I’m just assuming I’m missing something and I also have no faith in the regulatory environment as it stands.

        Hope everyone gets a win!

  6. Bank regulators don’t deny mergers. They stall. The companies then end the merger.
    You won’t see that captured in the base rate.

    There’s def. issues here. You need (i) clarity on what those issues are, and (ii) how committed the companies are if it continues to take longer.

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    • Fantastic news. All regulatory approvals have been received and there is no change to the acquisition price. Merger is expected to close on the 30th of November.

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