Five months after entering the state with a large-scale branch acquisition, RBC Centura Banks Inc. said it plans to acquire Alabama National BanCorp of Birmingham, in part to gain an experienced management team to oversee its operations there.
"This really complements our original entry point into Alabama, and it gives us better credibility there," Scott Custer, the chairman and chief executive of the $25.5 billion-asset Raleigh unit of Royal Bank of Canada, said in an interview Thursday after it said it would acquire Alabama National for $1.6 billion.
The purchase would give RBC Centura more sizable Alabama operations than the 39 branches it bought from AmSouth Bancorp. in March, Mr. Custer said.
"The branch acquisition was very opportunistic … but it forced us to look at things differently, because we were suddenly in a new market," he said. "What we were missing there was infrastructure and a management group. Now we have that."
Buying the $7.9 billion-asset Alabama National would also allow RBC Centura to boost its branch network in two other states that Mr. Custer characterized as important for future growth. Alabama National has 103 branches: 45 in Alabama and Florida and 13 in Georgia.
"We're now a very strong Southeastern regional bank with a much-improved position," he said.
Mr. Custer defended the price for the deal, which was announced just weeks after he had said pricing and market volatility suggested a need for cautious dealmaking. At $80 a share in cash and stock, the price is a 51% premium over Alabama National's closing price Wednesday.
"We think it is a fair deal," he said. "When you look at other metrics, this one stacks up to other related transactions going on in the Southeast."
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said that even though the price seems "eye-popping," it was only 19 times the seller's trailing 12-month earnings, or slightly less than the three-year median for similar deals in the region. The price also is an 8% premium over Alabama National's 52-week high on Feb. 22.
Since then, Alabama National's earnings have come under pressure. Margin pressure pinched first-quarter earnings, and rising chargeoffs and provisions hampered second-quarter earnings. In the second quarter Alabama National's loan-loss provision rose 87.5% from the first quarter and 70.3% from a year earlier, to $3.3 million. The ratio of net chargeoffs to average loans rose 8 basis points from the first quarter and 9 basis points from a year earlier, to 0.1%. Earnings rose 10.6% from the first quarter and 14.1% from a year earlier, to $22 million.
Also, Alabama National's high concentration in commercial real estate loans raised some eyebrows in the analyst community.
Adam Barkstrom, an analyst at Sterne, Agee & Leach Inc., said in an interview Thursday that he is skeptical about the price, given Alabama National's past issues with credit quality.
"I credit them for being more realistic about credit quality than others," Mr. Barkstrom said. "But they have fairly extensive commercial real estate exposure … and several of the markets they're in, such as Atlanta, are looking pretty ugly."
But Mr. Fitzsimmons said "Alabama National is still regarded as a well-run bank and a conservative underwriter … but the environment isn't getting any easier." he said.
"What this says to me is that their management team realized that this is a tough market … and that earnings were likely to remain under pressure," he added.
Mr. Custer said that his team is content with Alabama National's position after conducting a "thorough" review of its balance sheet. "We're comfortable with their loan portfolio, which has stood up over time … and their margin has held up reasonably well when you look at it over the past few quarters."
RBC Centura would keep Alabama National's management team. John H. Holcomb 3rd, its chairman and CEO, would become RBC Centura's vice chairman and would oversee the integration and later assist with mergers and acquisitions. Richard Murray 4th, Alabama National's president and chief operating officer, would run RBC Centura's operations in Alabama and Florida. Mr. Custer said he also would keep the leaders for Alabama National's 11 banks.
Retention is critical to the acquisition, he said, since he plans to consolidate all those banks under the RBC Centura brand under a phaseout expected to begin after the deal closes early next year. He also said that he would cut costs by closing branches and layoffs, but he would not quantify any targets. The acquisition is expected to add to earnings in 2009. RBC Centura wants to put more business bankers in Alabama National's branches while learning more about local banking from its management team, Mr. Custer said.
The "sensitivity" associated to rolling up multiple banks makes it unlikely that RBC Centura would pursue another bank acquisition for several quarters, he said. "We prefer to do one thing at a time, and the importance of integrating this transaction is first and foremost on my mind."
Mr. Custer also said he has little interest in buying any of the 34 branches that First Horizon National Corp. of Memphis is looking to sell. The branches - located in Atlanta, Baltimore, Dallas, and northern Virginia - collectively lost $10 million in the second quarter.
"We would be very selective on those if we were interested at all," he said. "Most of the branches out there are ones that are struggling. You really have to be selective in this market."
The deal could cause more disruption in Birmingham, which was home to four large banking companies until November 2004, when Wachovia Corp. bought SouthTrust Corp. In November, Regions Financial Corp. acquired AmSouth. This year Spain's Banco Bilbao Vizcaya Argentaria SA agreed to buy Compass Bancshares Inc.; that deal is expected to close today.
Executives at Colonial BancGroup Inc. commented on the Alabama National deal during a presentation Thursday at a conference hosted by Regions' Morgan Keegan & Co. Inc.
Sarah Moore, Colonial's chief financial officer, said the turmoil should create hiring opportunities for her $23.8 billion-asset Montgomery company.
Robert E. Lowder, Colonial's chairman, president, and CEO, was asked about the price of the Alabama National deal. "It's good to see a great bank like that sell for that kind of price, because we have a better bank," he said. "It just shows the value of what we're building here.
