Territorial stock up 50% in debut


POSTED: Tuesday, July 14, 2009

Territorial Bancorp Inc., the state's fifth-largest bank, enriched its depositors yesterday and left outside investors scrambling for shares as the company skyrocketed nearly 50 percent in its initial public offering.

The parent of Territorial Savings Bank, which converted from mutual to full stock ownership, priced its shares at $10 and saw them open trading at $14.05 and finish the day at $14.99—a 49.9 percent gain—after briefly touching $15 on the Nasdaq. The first-day jump was the largest for any thrift undertaking that type of conversion since at least January 2005. The previous largest during that period was in July 2006 when Massachusetts-based Chicopee Bancorp. Inc. soared 44.6 percent. The average first-day increase for similar mutual conversions since 2005 has been 14 percent.

“;It was fantastic,”; said analyst Laurie Hunsicker, of Washington, D.C.-based Stifel, Nicolaus & Co. “;This came out to subscribers at 59 percent of book value. (Territorial) was decent in size, being over a billion in assets to attract institutional ownership, their balance sheet is whistle clean and they have a lot of capital. The banking industry right now has been somewhat paralyzed by continuous credit erosion and thin capital levels, so this company really hits it on both cylinders.”;

Territorial received gross proceeds of $122.3 million from the offering after issuing 12,233,125 shares to depositors who were eligible to participate if they had at least $50 in their account as of Sept. 30, 2007.

Volume was heavy as 4,580,593 shares exchanged hands, representing 37 percent of the total shares issued.

Hunsicker, who has a 12-month target price of $18.50, said the shares are still attractive despite yesterday's price increase.

“;Even though it's up 50 percent, you still look at these things relative to where they're priced, and it's trading at 89 percent of book value,”; she said. “;It's still a discount even at this level and has 23 percent upside to our target price. Plus, they also may pay a dividend.”;

Walter Ida, senior vice president and director of investor relations for Territorial, said it is the company's policy not to comment on the movement of the bank's stock price or trading volume.

However, he said the bank was “;pleased with the success of our offering and the interest shown by our customers and others.”;

Territorial, founded in 1921, has 24 branches and said it plans to open an additional branch this quarter in Kihei. It surpassed $1 billion in assets in 2003 and now has $1.2 billion in assets, placing it fifth in the state as of March 31 behind First Hawaiian Bank ($13.4 billion), Bank of Hawaii ($11.4 billion), Central Pacific Financial ($5.4 billion) and American Savings Bank ($5.2 billion). The totals for First Hawaiian Bank and Bank of Hawaii include assets held at five and 12 branches, respectively, outside of Hawaii.

Analyst Brett Rabatin, who covers Bank of Hawaii and Central Pacific for Birmingham, Ala.-based Sterne Agee, said when conversions such as Territorial's are priced, “;there's a first-day pop.”;

“;Typically, when these conversions go public, there's a pop of 20 percent or so,”; he said. “;But this one was obviously much more significant. I think the market was very receptive of the quality of the loan portfolio and just the fact they'll have excess capital. There haven't been that many this year, so generally I think folks who like to invest in them haven't had much of a chance to do so.”;

Territorial said in its IPO prospectus that it intends to use the proceeds to support its internal growth through lending and the establishment of new branches.

Analyst Mike Shafir, who has a 12-month $19 price target on Territorial and covers the bank for Sterne Agee, said Territorial's “;solid credit history”; is helped by the fact that it deals primarily in residential mortgages rather than riskier commercial real estate and construction.

At the end of the first quarter, Territorial had just $1 million in nonperforming loans, or 0.16 percent of total loans at that date.

“;But what it comes down to is their cost of funds,”; Shafir said. “;What they pay for deposits is significantly lower than a lot of guys on the mainland”; even though it's at the high end for Hawaii.

Territorial's first-quarter net interest margin—which is the difference between what it pays depositors and what it brings in from loans—was 3.54 percent. Shafir said the net interest margin for its mainland peer group was 3.06 percent.

Hunsicker, who rates the stock a “;buy,”; said former Fidelity Magellan investor guru Peter Lynch may have summed it up best when he said the “;short-term pop from an IPO is nice, but don't let it distract you from the long-term potential of thrifts. ... So what if you missed the IPO? Imagine if you'd caught even the last half of the ride.”;