Current Price: $10.17
Offer Price: $12.5
Upside: 23%
Expected Timeline: Oct 10
The play here is quite simple and asymmetric. Hawaiian bank Territorial Bancorp signed an agreement to be acquired by Hope Bancorp, a much larger mainland peer. Consideration is in stock at 0.8048 ratio, which at today’s prices is equivalent to c. $9.8 per TBNK share. However, an activist is trying to block this merger and made a competing all-cash bid at $12.5/share. TBNK currently trades at $10.17/share or 23% spread to activist’s bid. Management is unwilling to engage with the activist and is currently proceeding with Hope merger. Shareholder vote is set for Oct 10. Proxy firm ISS is encouraging shareholders to vote against the merger with Hope.
As I see it, these are the likely outcomes after the Oct 10 vote:
- Merger with HOPE is approved – loss of 4% (theoretically the loss could be larger if HOPE price drops significantly till the vote, and the merger still get’s approved);
- Shareholders reject the merger with HOPE, and management agrees to activist’s bid – gain of 23% (probably a bit less, till the transaction actually closes);
- Shareholders reject the merger with HOPE, but management refuses to entertain activist’s bid – in this case TBNK shares will most likely trade somewhere in the range of $10-12.5/share.
- Even before the vote, HOPE improves it’s offer – probably at least 10% gain.
I like this asymmetric risk/return profile and I do not see how this bet could result in material loss of capital. We’ve got an undervalued bank and two credible suitors vying for it. TBNK trades at only 0.32xBV (or 0.68xBV after adjusting for fair value of HTM securities) and could be considered as a longer-term hold, even if all buyout attempts ultimately fail.
Also, in case both of the current bids fail, TBNK would probably be forced to launch a full sale process. As per proxy background, the agreement with HOPE was signed after engaging only with parties that “had previously expressed interest in Territorial” (resulting in a total of 3). You can hardly come up with a more limited screening process for potential buyers. Why was it done this way? No sure, but maybe Chairman/CEO being at the age of 78 and Japanese culture among management / board members (at least judging by surnames) had something to do with a very limited sale reach-out.
For a quick snapshot of the situation and the bank, I would recommend to read through the activist’s pitch in this presentation.
Timeline so far
- The merger with Hope Bancorp was announced in late April, with closing expected by the end of the year. Market saw minimal regulatory risks (tiny bank, no teritorial overlap) and the spread quickly settled at around 5%, mostly due to remaining time till closing.
- At the end of August, Allan Landon (as Blue Hill advisors) approached TBNK, arguing that HOPE’s offer was too low and placed a competing bid at $12/share in cash instead.
- This offer together with board’s rejection were announced on the 12th of September. The board argued the offer was too conditional and materially flawed.
- After a brief proxy exchange, on September 26, Landon raised his offer to $12.5/share, claiming, “Shareholders recognize the superiority of our offer and want Territorial to engage with us”. The activist has also been urging shareholders to reject the merger with HOPE, which would finally force management to engage with him.
- On the same day an arm of Wellington Management filed a 13G, disclosing breaching 5% ownership threshold in the bank, however it is not clear what part of this stake has been acquired recently.
- The board dismissed the improved bid on Sep 30, saying “While the latest Blue Hill Group information indicates an increase in their offer by 4%, the proposal continues to leave so many unanswered questions, such that the Blue Hill proposal remains highly uncertain and inferior to the Hope merger”.
- On Oct 1, proxy firm ISS recommended for shareholders to vote against the merger with HOPE, stating that it “does not appear to maximize value for shareholders.” ISS criticized the board for not running a full sales process and argued that “the competing offer from Blue Hill appears sufficiently credible to mitigate the downside risk of rejecting the proposed merger.” This recommendation is significant, as a large portion of TBNK’s shares are held by large, seemingly passive investors, which typically follow proxy firm advice. Dimensional Fund Advisors owns 6.4% of TBNK, AllianceBernstein holds 5.4%, Renaissance Technologies owns 5.2%, and the above mentioned Wellington Management is at 5%.
Since mid-September TBNK stock has settled at around 3-4% premium to HOPE’s offer, but with low trading liquidity, it is hard to tell if this says anything about the likely vote outcome. Nevertheless, these recent developments have increased the likelihood that shareholders will reject the merger with HOPE.
Landon’s bid
Landon looks like a very credible suitor. He is a former CEO and Chairman of Bank of Hawaii (the largest bank in the islands) and is a seasoned player with a deep knowledge of the sector. In 2015, he was nominated by President Obama for the Federal Reserve Board of Governors, though it seems he wasn’t ultimately elected. With a deep understanding of Hawaiian banking industry and its players, he should have pretty good grasp of what TBNK is actually worth. One of Landon’s backers was revealed to be Jerry O’Brien. He runs a PE firm O’Brien-Staley Partners, which manages a couple of billion in assets. O’Brien raised $600m for a new fund last September.
While Landon’s bid comes at a substantial premium to HOPE’s proposal and comes in cash, it also involves a few quirks:
- The proposal is structured as a tender offer for a “minimum 70% of TBNK”, allowing up to 30% of shareholder to rollover their shares into a private company.
- The tender is conditioned on a quick 2-weeks-long due diligence;
- There is also a financing condition – Landon will need to secure funds from an “unidentified investor group” (except for above mentioned Jerry O’Brien). These investors have apparently already provided non-binding letters of interest under non-disclosure agreements;
Essentially, the offer requires TBNK to cancel its deal with HOPE, pay a $3m termination fee, and then start fresh with the new suitor. TBNK’s board framed it as trading a ‘sure thing’ for a ‘gamble’. While, switching buyers is not a risk-free endeavor, given Landon’s background and strong financial partners, the risk of him backing out appears to be minimal. It is also very unlikely that due diligence will will uncover anything unexpected (it had just been carried out by HOPE).
TBNK’s management also emphasized regulatory risk for Landon’s proposal, citing concerns over not being able to identify his backers and whether they could secure regulatory approval in the case of a takeover. However, Landon noted in the presentation that his backers manage over $3bn in AUM and are seasoned bank and thrift investors with a strong track record of obtaining regulatory approvals for dozens of deals. Since this would be an acquisition by a consortium of PE firms rather than a traditional bank merger, the regulatory approval process should also be lighter than in the merger with HOPE. I believe this concern may have been more of a diversion than a legitimate risk.
Why are these parties interested in TBNK? Because it is seriously undervalued
Landon positions TBNK/HOPE’s merger as being one of the lowest valued deals over the past 25 years – see the slide below. However, this is slightly misleading as it does not take into account the held-to-maturity securities, which comprise a third of TBNK’s assets and are recorded on the balance sheet at amortized costs. Rising interest rates have reduced the fair value of these securities significantly – if these had to be sold now, it would result in a $130m hit to the book value (or almost $15/share, might be lower now after the recent rate cut). However, even adjusting for the fair value of HTM securities the multiple only moves to 0.68xBV – still an incredibly low valuation for a bank takeover.
TBNK is trading as if it’s a seriously impaired bank. So, what’s the issue? Are there material problems with its loan portfolio? High default rates? Declining deposits?
Actually, none of that. The loan portfolio is conservatively managed – there’s hardly any commercial real estate exposure, the loan-to-value (LTV) ratio is 63%, and charge-offs have been minimal, even during GFC. Deposits are rather stable and have even lower cost than HOPE’s deposits.
Until late 2022, TBNK was regarded as a pretty decent community bank and was trading at around 1x BV while generating consistent high single-digit ROE.
However, in 2023 TBNK’s profitability (and consequently, its valuation) were hammered by rising interest rates. The already discussed $700m of held-to-maturity securities were also partially to blame. On the loan portfolio side, TBNK focuses almost exclusively on residential mortgages, which make up 97.5% of its portfolio. Most of these loans are fixed-rate and have very long (c. 30 years) maturities. While holding such a narrow focus on a single loan type worked pretty well in the low/stable interest rate environment, it completely backfired after the rates spiked in 2022. TBNK’s deposit costs went up, however, it’s interest income line barely budged, as there were almost no offsetting increase in income neither from securities nor loan portfolios. Net income evaporated. The dynamic is shown in the table below:
The same point was also well illustrated in Landon’s presentation:
The buyers seem to be betting on the return to profitability once we are back to lower interest rate environment and/or part of TBNK’s asset portfolio rolls over / gets repriced. Allan Landon expects TBNK’s net income to recover to $27m within five years, driven mainly by lower deposit costs, reinvested held-to-maturity securities and improved efficiency:
As shown in the graph above, the activist projects potential $8.9m boost to earnings from the repricing of 30% of TBNK loans over the next five years. It is not clear how exactly he arrives at such a figure as TBNK’s 10-K notes that only <1% of total loans will mature before 2028 (page 41). Maybe this “repricing” also includes new originations. However, even if you exclude this ‘repricing’ impact altogether, it is still easy to see a path of net income returning to historical $16-$20m levels. Currently, TBNK trades at just 4-5x the historical or “normalized” earnings.
In his presentation, Landon puts a $40+/share target (vs the average $20 share price over the last decade). At quick glance, flashing such a large potential upside estimate seems a bit odd, considering his own bid is just $12.5/share. However, this is probably aimed at the “up to 30%” of shares that would be allowed to roll-over into a private company.
It’s also quite telling that HOPE’s only apparent rationale for this merger is TBNK’s cheapness. Otherwise, the two banks have very limited in common – they operate in entirely different regions and have very different loan portfolios (HOPE focuses primarily on CRE and commercial & industrial loans). Strategic angle/alignment is also difficult to find. HOPE is the largest Korean-American bank in the US and is primarily focused on Korean-American clients. The buyer has a very clearly defined niche, where it knows its customers best and has been able to perform very well historically because of that. Meanwhile, I haven’t found TBNK mentioning Korean or Asian customers niche anywhere at all (albeit TBNK’s management seems to be predominantly of Japanese origins). Koreans also only make up about 5% of Hawaii’s population (around 50k people). HOPE could also achieve certain degree of cost-synergies by incorporating TBNK’s assets into its larger structure and eliminating duplicating overheads (i.e. reducing the non-interest expense line, which is standard practice and strongest argument for most of the banking M&A), but these synergies should be far lower than in a merger of neighbouring community banks with similar asset structures. I think, HOPE’s pursuit of this rather unusual merger with no clear strategic alignment underscores the opportunity it sees in TBNK as a “bargain” play on earnings inflection.
So, even if no offers materialize, there seems to be solid downside protection from the fundamentals, especially considering that the US regional banking sector has risen 12% since the offer announcement, and interest rates were recently cut by 50bps.
Your email hit my inbox at 15:45 UK time, 35mins later the stock is up 5.7% on 163% relative volume – having impact :)
Interesting idea. One edit: “In his presentation, Landon puts” The presentation link is to the sec filing in error?
Anyone able to find much on Blue Hills? They don’t even have a landing page bluehilladv.com
Alternatively maybe a shell co. is normal for these types of deals?
On Blue Hill’s Jason Blumberg, based on his LinkedIn Profile, his earlier experiences were mostly about advising M&A’s (Cowen, Jefferies, financial services sector boutique Hovde) .
His last position (Oct 2020 to Feb 2023) before founding Blue Hill was senior analyst at HoldCo Asset Management.
HoldCo has AUM of $2.4 billion as of Mar 2023 but reported only $16 million in US public investments (based on latest 13F), mostly banking stocks. So HoldCo’s main focus may be non-listed investments or credit.
Before that, he worked as Head of Investment Strategy at Driver Management Company LLC (Sep 2019 to Apr 2020).
Starting from Dec 2023 (Blumberg wasn’t there anymore), Driver has been involved in some activist campaigns related to banks (e.g. ASRV, AMAL, BLFY). There are some DFAN14A forms filed by Driver but no 13Fs.
Back in August when Landon made the offer, why did he insist that TBNK cancel the HOPE deal first before starting fresh with him? (or maybe I misunderstood?)
Since the vote was still two months away, what’s wrong with allowing TBNK negotiate with two suitors simultaneously?
I don’t think Landon explicitly asked for the merger with HOPE to be terminated when he first approached. The issue is that TBNK’s management can’t engage with another buyer under the current agreement with HOPE. So, for Landon to get due diligence access, they’d have to break the merger first. At least that is my understanding. Landon mentioned something along these lines in the Sep 17 press release:
Thanks DT.
What makes this one a “Portfolio Idea” vs Equals Group (EQLS:L) which is a “Quick Pitch”?
I am guessing the downside protection at EQLS is not as safe.
The short answer is ‘gut feeling’ – I simply have more conviction in TBNK situation. This is partially due the well-protected downside as well as easier to understand business: B2B payments provider (i.e. EQLS) seems way more complicated than a portfolio of residential mortgages.
Among others, I am guessing there are two reasons why management doesn’t like Landon’s offer.
1. Taxes: they may prefer HOPE’s stock swap offer to a cash offer (from anyone), to avoid cashing out.
2. Under HOPE, which has no expertise in Hawaii or single family mortgages, they (or their allies/friends/relatives) have better chance of staying employed/involved in the Hawaiian operation.
This can also explain why they don’t want to roll their shares into a private company controlled by Landon, who knows Hawaiian banking very well and doesn’t need their services.
Swapping TBNK stocks for more liquid, larger cap HOPE stocks, while staying employed/involved for a few years, seems to be a perfect outcome for TBNK management.
I assume HOPE (even after absorbing TBNK) is also less correlated with their other investments (real estates, private businesses) in Hawaii. So it makes sense from a wealth diversification perspective too.
I think it is quite the opposite. TBKN’s execs actually want to cash out and retire and that’s the key reason why they want to take HOPE’s offer. The 3 named execs are retiring upon merger consummation and will not be staying “employed/involved for a few years”:
– From the merger proxy “Pursuant to the settlement agreements, the executive officers’ employment with Territorial and Territorial Savings Bank will terminate effective as of the closing date of the Merger and the executive officers have resigned from all director, officer and other positions with Territorial and Territorial Savings Bank effective as of the closing date of the Merger.”
– CEO/Chairman is set to pocket almost $5m payment in connection with the merger – that’s more than his 2.9% in TBNK.
– Vice chairman / co-CEO will pocket almost $4m, and COO $2m.
– Also, with more liquidity in HOPE stock, they will be able to sell their stake easily in the market.
So management has all the incentives to push through merger with HOPE if they do not expect a similarly generous offer from someone else. This is their retirement ticket.
Severance package of $11 million in total, that’s really outrageous for a company with market cap of only $95 million.
Thats how you do it- pay off the shot callers, not the shareholders…much cheaper
I am wondering whether the severance pay is actually part of their existing employment agreements and simply triggered by a change of control event, and which Landon has to honor as well?
Here we go – Territorial Bancorp Postpones Special Meeting of Stockholders
“The Special Meeting has been postponed in order to allow the Territorial Board of Directors and management team to continue discussions with stockholders regarding the pending Hope Bancorp merger.”
Looks positive. New meeting scheduled for November 6.
dt, there is very little bank equity when the assets and liabilities are fair-valued. On an adjusted basis, Hope is paying 4.75x TBV. If the activist bid is successful, they are paying more than 6x TBV. This is a falling interest rate bet because the bank is far from cheap. The adjustment made to equity was fair-valuing not only the HTM securities, but also fair-valuing Territorial’s loans and deposits.
Landon may be too aggressive with his 30% assumption, but repricing/repayment is always expected to happen much sooner than original mortgage terms （even in a high interest rate environment) , because many people refinance, move, change into larger/smaller houses, lose jobs, get new jobs in other places, have more/fewer children at home, divorce, get married (again), need cash to start businesses, etc
@maverick,
Can you please share the source of the numbers re fair-valuing loans/deposits? Is the pro-forma/adjustment done by the bank, or third-parties? (sorry I didn’t read the financials in details.)
Snowball, in the Territorial proxy that dt provided a link to, it states on page 81 the following:
The Implied Transaction Price / December 31, 2023 Adjusted Tangible Book Value per Share [is] 4.75x
Adjusted Tangible Book Value per Share calculated by subtracting the total after-tax interest rate fair value marks on loans, held to maturity securities and deposits.
There is at least a half dozen of us on this board who are bank investors, with a particular interest in former mutual banks. The following is ancient history, as I wrote it 8 years ago in response to a friend of mine who owned and liked Territorial.
Count me as skeptical with regard to TBNK getting “4.5 times TBV”. In fact, I think 2.5x may be hard to attain for this bank. While it’s a very clean bank with scarcity value, it’s also a plain vanilla home lender with more interest rate risk than investors realize.
It’s been a fabulous run since they IPO’d, but investors seem to have forgotten what happens to an institution that is loaded with long-term low-interest mortgages in a rising rate environment.
There is far more interest rate risk here than in most banks. Out of their 100-bank peer group, they are #1 in percentage of 1-4 family fixed mortgages, as they have relatively few of these loans in adjustable mortgages.
Many banks consider themselves asset-sensitive, so if rates go up, their assets will reprice faster than liabilities, so they would welcome a rise in rates. When you are liability-sensitive, liabilities reprice faster than assets. TBNK is very liability sensitive.
That may be true on a GAAP basis, but not on an economic basis. TBNK has $1.3B in long term fixed first lien loans, with 94% of their loans having maturities of 15 years or longer. No one knows where rates will be in 5-10 years, but if rates were to ratchet up, a portfolio of HTM securities may not affect book value in accounting terms, but an acquirer will most definitely discount those securities AND a long-term fixed rate portfolio of low interest loans. I don’t know of any bank in the country that has such a high percentage of their loans in fixed 1-4 family mortgages. They are not adjustable loans, so rising rates will move the cost of deposits up, but the value of this loan portfolio will be worth less.
The bank maintains in their filings that they will not be affected that much by a 200-basis point rise in interest rates. If I owned this, I would want to ask them to walk me through how that was possible.
This is an excellent low-cost deposit franchise, but they do have competition from other Hawaiian banks, and I’m not so sure if they start raising rates, Territorial would be immune to the pressure of doing the same. Also, while it’s an island in the middle of nowhere, we are in a brave new world. In my case, I’m the least tech-savvy person I know, and while I do use a local bank for convenience, my main deposits are not held locally and are out of state. Depositors looking for yield do not have to use their local bank. I also don’t know the last time my kids were in a bank branch, they deposit checks remotely with their cell phones and use ATM’s, so bank branches don’t have the scarcity value and convenience they once had.
Thanks. I learned a lot from your thread. I own CBBI and am well aware of the Eastern Asia culture that tends to overshot on everything, and only change after hard bumps. Banks will always be black boxes, and it is better to buy banks with good management.
Is there a way to use italics in the threads? It would be a lot clearer when trying to make a point. I tried to space out the Q&A, but when posted, that spacing disappears., so it’s more of a jumbled mess.
Thank you for the discussion. I do not want to argue with seasoned bank investors – you most likely have a much better understanding of how M&A works in the industry. But…
The 4.75x figure comes from Territorial’s Financial Advisor. They had a task to prove that Hope’s offer is more than fair. And they did that by coming up with a very high multiple after adjusting not only for fair value of HTM securities but also for fair value of loans and deposit. But is this really a good way to value a bank? It would be a correct way to think about it if the whole portfolio were to be liquidated right after the acquisition. But that is not going to happen in TBKN’s case.
HOPE wants to pay around $80m for this bank, if this is regarded as 4.75x multiple, then the fully adjusted book value (as per financial advisor calc) of TBNK stands at $17m. The existing TBNK portfolio generates run-rate of $34m in net interest income. Currently the whole of this income is spent on operating expenses. But if you assume some degree of synergies and savings, it would easily become profitable in HOPE’s higher scale structure even if we interest rates remain unchanged.
In a scenario of 30% cost synergies (seems feasible), the acquired TBNK portfolio would be generating $10m of annual income. So the ROE on the adjusted BV would be a staggering 60% ($10m income on $17m of BV). In this perspective, paying 4.75x multiple on the fully adjusted BV sounds quite ok.
So while TBNK’s financial advisor is quick point to a very high multiple that HOPE is paying on the fully adjusted BV, it does not tell anything about the profitability levels that will be realized relative to this depressed BV figure.
I think the 4.75x figure presented by TBNK’s financial advisor and 0.31xBV by Landon are equally true/misleading.
I agree on equally true, but the .31x BV is far more misleading.
dt, in the past, carrying values and fair-market values of loan and securities were not much of an issue. In fact, in the falling rate environment we’ve had for many years, FMV’s were often higher than carrying values, so it was an added plus when buying a bank.
When rates go from near 0% to 5% in a very short period of time, though, the acquirer most definitely looks at the fair value of loans and securities when buying a bank. The adjusted marks are clearly far more important than the unadjusted marks. And that’s especially true with a bank like Territorial that is loaded with low-interest long-term fixed mortgages.
Depositors have smartened up and are no longer willing to accept low yields when alternatives are easily available. It now cost Territorial 11x what it cost 2 years ago for their deposits (1.96% vs .18%), while their loan yields have barely budged. Historically, they’ve always had a very attractive low-cost deposit franchise, but depositors are now shifting more of the savings into higher yielding CD.s. So they now have $532M in CD’s yielding 4.6%, while their loan portfolio yields 3.75%, which is not a great trend.
To be clear, if I was a shareholder, I’d be voting for the activist proposal, but there is more risk in the deal because Territorial is not nearly as cheap as it looks without making adjustments. And if the activists are successful, I would definitely take the $12.50/share and not remain with the bank until I received a lot more information. They are projecting a wonderful profitable future, but there is scant info on funding the deal with a convertible preferred. It will be structured as a recap, so the devil will be in the details.
I am guessing the buyers are neither looking at 0.31x nor at 4.75x. What they look at is post-synergies FCF to be generated from the existing loans portfolio (which can probably be calculated to pretty accurately) plus additional value from having an established retail banking footprint in Hawaii.
In today’s presentation released by TBNK, they show expected synergies at $10.5m, or $8m post-tax. So HOPE is paying 10x post-synergies earnings. That’s does not sound overly expensive.
But, I fully understand your points. My initial statement that TBNK “could be considered as a longer-term hold, even if all buyout attempts ultimately fail” was probably overly optimistic.
I guess @maverick’s point is that TBNK at $12.5 is expensive for Landon (because there will not be any synergy savings in the Landon deal), and thus there’s risk that his potential partners turn out not as optimistic as Landon and not as supportive when it’s time to fund the deal.
@maverick,
Costs of deposits: 1.96% is indeed 11X of 0.18%.
But things look not as bad if we paint the picture as an increase of 1.78%. During the same period, short-term market rate has increased much more than 1.78%.
If TBNK’s average rates on loans gradually move toward market rates as a result of natural attrition of existing loans (refinance/repayment/prepayment), wouldn’t its loan/deposit spread eventually benefit from a higher interest rate environment (because loan rates reprice more fully than deposits)?
Territorial released a new presentation – most of it highlighting the short-comings of Landon’s/Blue Hill’s offer. It focuses a lot on unclear financing, required regulatory approvals (new board/management would need to be approved by FED first) and lack of operational plan to improve efficiency.
These moves – postponement of the vote and the new presentation clearly show that TBNK believes it does not have sufficient votes to power through approval for HOPE merger.
Now the ball is Landon’s court to address all of these shortcomings and present a more streamlined offer with a clearer financing structure. I would expect a response from Blue Hill over the coming week or two. Then we will see how serious is Landon with the $12.5 offer. If no further details will be clarified, shareholder will most likely approve merger with HOPE.
https://www.bamsec.com/filing/110465924106485?cik=1447051
“If TBNK’s average rates on loans gradually move toward market rates as a result of natural attrition of existing loans (refinance/repayment/prepayment), wouldn’t its loan/deposit spread eventually benefit from a higher interest rate environment (because loan rates reprice more fully than deposits)?”
Snowball, if Territorial was asset-sensitive that would be the case, but they are liability sensitive. So higher rates hurt spreads because cost of funds go up faster than yields on loans. Eventually they get into balance, but when you have lots of long-term low-interest fixed rate loans, borrowers aren’t in any hurry to pay off loans, so attrition takes longer. I have a 10-year 2.87% mortgage that could easily be repaid, but it doesn’t make much economic sense to do so when I can get a 5% CD at the same bank.
When fixed mortgages have a low interest rate, prepayments are going to be slower than normal.
Here are Territorial’s loan yields for the past 12 quarters:
3.62%
3.59%
3.49%
3.46%
3.53%
3.52%
3,55%
3.60%
3.63%
3.67%
3.70%
3.75%
So, they are up, so it’s a slow slog. Deposit costs went up much faster.
Although near multi-year lows, the Conditional Prepayment Rate (CPR) for 30-year mortgages is still around 5% annualized. (sources: FHFA’s Prepayment Monitoring Report or Fannie’s Benchmark CPR Bulletin)
So Landon’s assumption of repricing 30% of existing loans over five years is not that unrealistic.
Historically, annualized CPR often went above 30% in a rapidly falling rate environment.
This time is somewhat different, in that TBNK likely originated far fewer loans since 2022, so there are not that many high-interest loans in the book.
For loans originated during 2022 – Sep 2024, their CPR can be very high over the next few years as Fed continues to cut rates.
Landon and HOPE/TBNK exchanged shots again yesterday, though nothing really new came up. Landon has simply reiterated the same offer, with the only new details being that his group now has 6 investors and that they’ve expressed openness to a lower tender threshold than the previously mentioned 70%. However, key concerns, such as financing, the anonymity of financiers, and the lack of operational efficiency plan, have remained unaddressed.
TBNK’s response was much more agressive and punchy, but similarly just reshuffled the same information.
TBNK is currently trading at a 9% premium to HOPE’s offer and with a 15% spread to Landon’s bid.
Landon’s press release >> https://www.prnewswire.com/news-releases/blue-hill-advisors-and-investors-reiterate-superior-proposal-for-territorial-bancorp-and-refute-territorials-assertions-302271675.html
TBNK’s reply >> https://www.bamsec.com/filing/110465924107389?cik=1447051
Is it a good idea to hedge the TBNK position with HOPE short, just in case something extreme may happen to HOPE?
What’s the risk? The deal gets terminated and HOPE stock price rallies (because HOPE shareholders consider TBNK to be a poor deal) ?
If you don’t hedge, you’ll be exposed to the CRE banking sector for about a month. If you hedge, you limit the potential downside, but risk potentially getting lower upside if shareholders side with Landon and HOPE’s share price rises. How is HOPE going to trade during this month? My guess is as good as yours, but I like that the timeline is short.
I don’t think the outcome of the vote will have much of an impact on HOPE’s share price either way. The deal size is only around 5% of HOPE’s market cap. The buyer’s price did not budge at all when the offer was announced. HOPE itself doesn’t really look expensive. It has a very long and solid history of BV growth. It’s now trading just below TBV and used to generate consistent double digit ROTCE until last year (now mid-high single digits).
There might be some incerased volatility in the markets around the presidential elections, but I don’t have any specific insights into that.
Friday was interesting in that HOPE rose 4% while TBNK barely moved.
So the market is starting to price in the risk of both HOPE and Landon deals failing apart?
This question raised by TBNK about Landon’s role is interesting:
“Blue Hill repeatedly names Allan Landon in its materials. However, Mr. Landon is not a stated investor. What is Mr. Landon’s role in Blue Hill’s transaction?”
According to Blue Hill’s Proposed Terms and Conditions, it looks what Landon is getting for organizing the deal is merely 20k of TBNK shares, worth maybe $250k.
“As organizer, Mr. Landon will be entitled to a grant of up to 20,000 shares of Common Stock at the closing of the Transactions.”
Is that really so unusual, the “chip in”?
With TBNK currently trading at only 1.3% premium to HOPE’s offer and 15% spread to Landon’s offer, the market is pricing in a significant risk of HOPE’s offer getting rejected by shareholders AND Landon’s offer not materializing.
This risk seems to be very significant, otherwise the risk (-1.3%)/reward (15%) of this trade is just too asymmetrical to be true.
Couldn’t this also signal that investors are pricing in a high likelihood of HOPE’s offer getting accepted, with a small chance of rejection + acceptance of Landon’s offer?
No opinion here but would we be here if the market was always priced right?
ISS has changed its opinion and is now recommending TNBK / HOPE merger. In the meantime, Landon/Blue Hill have failed to provide any further details regarding their $12.5/share offer or to counter the issues raised by TBNK management. I think shareholders are now much more likely to support HOPE’s offer than in the beginning of October.
I am closing TBNK position, luckily, at a few percent gain as HOPE’s share price (and in turn HOPE’s offer in dollar terms) went up over the last three weeks.
https://finance.yahoo.com/news/leading-independent-proxy-advisory-firm-110000800.html
TBNK is now trading at 4% above the HOPE offer value.
Maybe we can turn around and short it (hedged with HOPE long)?
A Landon deal seems less likely now, and there’s also a chance of the HOPE deal getting voted down.
TBNK is still trading at 2% above the HOPE offer value.
If the HOPE deal gets voted down on Wednesday, I don’t think it’s good news for TBNK, because the Landon offer is not very reliable.
saga continues …
https://finance.yahoo.com/news/investors-behind-territorial-proposal-advance-225100914.html
In after market trading, TBNK was down 12% and HOPE was down 5%.
So the market lost even more confidence in the Landon consortium, and now believes that even the HOPE deal is at risk.
And HOPE was down because the market previously believed that the acquisition was a bargain?
A couple of details from the addendum:
– It says that bidder group collectively manages $3.4b and has secured $134m in committed interest to support the acquisition—$26m more than needed to buy 100% of Territorial’s shares at $12.50/share each.
– The group includes seven seasoned investors, two of whom chose to stay anonymous due to the Board’s past responses but still disclosed details to the Board for validation.
– Additionally, the investors reduced their minimum tender threshold from 70% to 51%.
So Landon and his group addressed some of the concerns, but it’s likely not enough unless they significantly restructure the offer to let TBNK’s management engage without breaching the deal with HOPE.
Another major proxy firm Glass Lewis joined ISS in recommending TBNK shareholders to support the merger with HOPE:
https://www.globenewswire.com/news-release/2024/10/25/2969396/0/en/Leading-Independent-Proxy-Advisory-Firm-Glass-Lewis-Joins-ISS-in-Recommending-that-Territorial-Shareholders-Vote-FOR-Merger-with-Hope-Bancorp.html
Hope merger approved. Not easy to fight management, whether they are shareholder friendly or not.
https://finance.yahoo.com/news/territorial-bancorp-shareholders-approve-hope-191500170.html
Are we expecting a Q1 2025 close? or has management of either side said anything about the timing?
I haven’t seen any updates on the date. Are you suggesting shorting this?
No, I am not shorting this (yet).
But I expect that FDIC (the primary regulator of this deal) is tougher than the Fed on mergers, in particular after FDIC released the new policy guidance on bank mergers in Sep 2024, which many said have created new uncertainty, delays, and inconsistencies.
The 8-K statement from the Hope Bancorp after TBNK shareholder approval is unusually reticent, in sharp contrast with COFS’s CEO who on an earnings call already “welcome FETM’s employees and customers” even before target shareholders’ approval.
“On November 7, 2024, Territorial Bancorp Inc. (“Territorial”) filed a Current Report on Form 8-K disclosing the results of its special meeting of stockholders held on November 6, 2024 (the “Special Meeting”). Territorial disclosed that at the Special Meeting, stockholders of Territorial voted to approve Territorial’s proposed merger with Hope Bancorp, Inc. (the “Company”), pursuant to that certain Agreement and Plan of Merger, dated as of April 26, 2024, between the Company and Territorial.”
TBNK/HOPE spread has widened to >8%.
Hope deal approved by regulators. Spread is zero now, TBNK $8.80, HOPE $11 x .805 ratio. Landon offered $12.50 months ago – TBNK management blew a 42% premium, which they said is “an inferior deal”, LOL.
https://finance.yahoo.com/news/hope-bancorp-receives-regulatory-approvals-133000355.html
I doubt Landon could actually come up with the money or obtain regulatory approvals.