Bank M&A's New Formula: Cut, Buy, Cut Some More
Cutting its expenses can get a bank only so far. Sometimes it has to cut someone else's expenses to get where it wants to go.
CenterState Banks (CSFL) in Davenport, Fla., recently said it would trim about 5% off its annual operating costs this year, and it announced Wednesday night another reason to keep its blade sharp: it has agreed to acquire First Southern Bancorp (FSOF) in Boca Raton, Fla., and anticipates 46% in cost savings for the $1.1 billion-asset seller.
The combined company would have $4 billion in assets, cover a big portion of Florida and be well on its way toward producing a 1% return on its assets.
"You have to acknowledge the 0% interest rate environment and understand that if you stand still you're going to be obsolete, so we are trying to do what we can on multiple fronts," says John Corbett, president and chief executive of the company's CenterState Bank of Florida unit. "We have our internal program and we are complementing that with M&A, which is essentially an efficiency program, too."
The company is expected to hit its 1% ROA on a quarterly basis next year, and achieve it for the full year in 2016. In the meantime, it warned during a conference call with analysts on Thursday to expect bumpy performance in 2014 as it makes the previously announced cost cuts; aims to complete the First Southern deal in the third quarter; and integrates Gulfstream Bancshares, which it bought this month.
"2014 is going to be noisy as we do the sausage-making of the three big projects," Corbett said in an interview after the call.
The market and analysts appear to be OK with a topsy-turvy 2014, because the deal is large and focused heavily on building scale, two of the industry's favorite parts of M&A.
Keefe, Bruyette & Woods and Raymond James analysts upgraded the stock to outperform. CenterState's shares rose 12.5%, to $11.25, on Thursday.
"The cost saves are certainly aggressive, so they have some work to do, but clearly there is overlap," says John Rodis, an analyst at FIG Partners, who says most transactions boast cost savings of 30% at the target. "Focusing on efficiency was expected at some point. They needed to do something, and there was a desire to do more meaningful deals and this fits the bill."
Analysts have criticized CenterState for lackluster expense cuts after acquisitions, but Brady Gailey, an analyst at KBW, says the First Southern deal would be a big step in the right direction.
"Over the years they've had a little trouble in credit and expenses," Gailey says. "Credit is a tailwind now and expense, while it has taken longer than I would have liked, seem to be finally getting there. With this deal and Gulfstream, they are moving forward to get efficiency and profitability where they need to be."
Moreover, Gailey said he was impressed with other projections for the deal, including that it would be immediately accretive to tangible book value, provide a 10.3% boost to earnings in 2013 and that First Southern's war chest of equity would add to capital.
"They pulled off an in-market, larger deal that is accretive to tangible book, earnings and capital. That is almost unheard of," Gailey says.
First Southern was one of several banks that, loaded with capital in 2010, started buying failed or problem banks.
Now-Chairman J. Herbert Boydstun, former CEO of Hibernia National Bank which sold to Capital One Financial (COF) in 2005, led a $400 million investment in the bank. It acquired two failed banks one in Orlando and one near Jacksonville and then concentrated on organic growth as bidding for failed banks became too competitive, Chief Executive Lynne Wines said.
Last year First Southern achieved a net positive loan increase which is a key metric for acquisitive banks as they attempt to demonstrate true growth but Wines said the board decided to sell now.
"We felt like we had built a good franchise, and our board felt this was a good time to enter the [M&A] market," Wines says.
Such banks still rich in capital because the supply of failed banks fell short of expectations are expected to play a major role in open-bank M&A in coming years.
Some are exploring going public to give their shareholders an opportunity to cash out and to use publicly traded shares to buy healthy banks. Others will look to sell.
"The inventory of failed banks was less robust, and the best deals were the first deals," says Jeffrey Brand, managing director at Silver Lane, an investment bank in Chicago. "If there is not a plan in place, you can imagine that there is pressure [among the platform banks] to find liquidity."
Robert Barba is one a community banking reporter for American Banker.