Spillover from Twitter on $FCEC

Quick note: the below will probably make little sense to most readers, but I wanted to put some more thoughts down for a couple of guys on Twitter…and it’ll take longer than 140 characters to do it. It deals with evaluating a potential merger arbitrage investment among a couple of small banks in Pennsylvania. I passed on investing in it in Tarpon, and below is why.

Adam and Plan,

Here’s where I’m coming from on that last tweet about FCEC’s exchange ratio in the merger with Tower:

Net charge-offs for the six month period ended June 30, 2010 for FCEC were $2.3 million, and during the fourth quarter of 2009, net charge-offs were $16.6 million, which were obviously huge. So right now…

$16.6M plus $2.3M plus whatever charge-offs will be through August (assuming this is the month prior to the transaction closing) puts the cumulative net charge-offs at around $19M to $20M, ballpark. Add that to Delinquent Loans of $57M (Total NPAs from Q2 ‘10) and you get at least $77M as the Value for Charge-offs Post 9/30/09…and if you plug that in as per the line-item in slide 5 here, you get the adjusted exchange ratio. Based on that math, the ultimate ratio could be considerably lower than the market appeared to expect – at least up until yesterday.

I say that because with an exchange ratio of 0.291 multiplied by a recent TOBC price of $18.70, FCEC investors will only effectively get $5.44 in deal value per share. Until the big drop in FCEC yesterday, shares were priced well above this expected closing price. So perhaps someone else was doing the same math I was late Wednesday night – though now the gap seems to be narrowing as I type.

In any case, I may have missed something in the above, as I did not review every filing after the initial agreement. Did not talk to the management teams, either, though the deal at first glance seems highly probably to go through. I suspect perhaps because both stocks are so thinly traded the values have been out of whack…but as is, unless FCEC continues to drop and/or TOBC spikes, I’m passing. At least on the merger arb angle. Tower is probably worth a closer look post-merger, regardless.

Would appreciate any other insights you might have.



Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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2 Responses to Spillover from Twitter on $FCEC

  1. Mcom says:

    This Friday (Oct 29th), the FCEC call report was released for quarter ended Sept 30th.nnOREO worsened this quarter over this last to the tune of 2.667MnRecoveries were in excess of charge-offs i.e., a negative .315MnAnd past-due worsened by 3.604MnIt does not appear restructured/impaired loans changed over the quarter.nSumming the above –> 6.586M + 77.7M = 84.286Mnn85M straddles two ratios: .237 & .259nnIf you listen to the TOBC CC of this past week, the CEO addressed analyst question as to what happens if they don’t complete the shareholder vote by Nov 20th. In looking at the TOBC loan agreement, I don’t readily see what kind of re-payment terms FCEC would be subject if they choose to tell TOBC to jump-in-the-lake. The TOBC loan covenant would seem to bear interest at 6% and perhaps like Jamie Dimon’s situation with Bear Stearns – the lawyers maybe screwed up by not addressing what should happen if the Bear Stearns shareholders tell Dimon to take a hike – i.e., FCEC might have free use of the capital going forward for a year or so at 6% rate of interest – hence Dimon’s willingness to revisit the Bear Stearns price raising from $2 (original offer) to $4 (wasn’t that where it went off?).nnOn last interesting point, the SEC doc would seem to indicate FCEC has tangible shareholder equity of 55M while yahoo reports current market value at 34M. This isn’t to say FCEC is worth 55M – only that they are trading at 61% of tangible book and for their current financial shape (improving with NPA not yet astronomical) and desirable location + wealth management division, perhaps worthy of 75% price to tangible book.nnFinally, don’t believe FCEC was a TARP recipient (more valuable to a potential acquirer) and if they were able to participate in SBLF and take a loan from Uncle Sam at 1%, might conceivably save their bacon.nnInteresting to watch this one play out.