Park Sterling Finds Big Value in Small Deal

Small accents often follow broad strokes in the art of M&A.

Park Sterling (PSTB) in Charlotte, N.C., had focused on big deals in the last few years, quadrupling its assets to $2 billion through two game-changing acquisitions.

But last week it changed things up with a small prize: an agreement to buy the $322 million-asset Provident Community Bancshares (PCBS) in Rock Hill, S.C.

The move shows how the vision of Park Sterling's managers — all former Wachovia Corp. executives — has evolved since they arrived in 2010, Chief Executive James Cherry says.

They raised $150 million to buy banks and decided initially that big acquisitions were the best use of their capital.

"We had to fill out the suit," Cherry says. "We had a 44-inch suit but had a 38-inch chest. We are maybe a 42 now."

Park Sterling belongs to a group of banks that stocked up on capital in anticipation of a massive M&A wave that hasn't exactly materialized. Stubborn sellers and fewer failures than expected narrowed the field of targets.

But the buyers early on had made investments in computer systems, staffing and other infrastructure to get their business plans approved by regulators. With that kind of cost structure in place at the beginning, the need for big moves to gain scale became paramount.

"We had this infrastructure to run, so we were looking to gain scale fairly quickly, and a $300 million-asset bank doesn't give you scale," Cherry says. "Now that we have scale, we can look to do fill-ins. When we started we were only screening banks above $500 million." Moving down-market now is a smart move, analysts say. Competition is intensifying for larger transactions, and Park Sterling is at a disadvantage because its stock trades at 1.3 times its tangible book value. Some of its peers have more buying power: Yadkin Financial (YDKN) is trading at 1.9 times its tangible book value, and BNC Bancorp (BNCN) is trading at two times, says William Wallace, an analyst at Raymond James.

"From a competitive standpoint, they don't bring as much to the table for the sellers in big deals," Wallace says. "If you move down the spectrum, the competition lessens and those banks tend to be cheaper."

The timing was good for Provident, too. It had needed some time to stabilize its credit issues. The bank's nonperforming assets totaled 5.56% at the end of 2013, but they have remained relatively stable for the last year. Provident is now in compliance with nearly every aspect of its enforcement actions with regulators, except the most pressing one: capital, Chief Executive Dwight Neese says.

Regulators have called for the bank to have an 8% leverage ratio. It was 7.1% at the end of 2013.

"We just can't get there on our own," Neese says. "The capital markets are not open for community banks like us. … We've spent two years trying to do a recapitalization."

In mid-2013 an unidentified bank made a cash offer for Provident, which hired investment bank Sandler O'Neill to see if there were others who might be interested. It entered into a letter of intent with another bidder, but that deal collapsed. A third bidder, Park Sterling, then emerged.

Despite its lingering credit issues, Provident is appealing because it is fills in the area between Charlotte, N.C., and Greenville, S.C., for Park Sterling, Cherry says. Additionally, the bank has a 45% loan-to-deposit ratio, bringing some additional liquidity to complement Park Sterling's de novo lending expansions in places like Richmond, Va. It is expecting 40% in cost savings.

"And those cost saves are not coming out of branches, either," Cherry says, adding that it is only planning to shutter one of Provident's four branches.

Kevin Fitzsimmons, an analyst at Sandler O'Neill, says Provident's remaining problems are just a blip on a good deal.

"We view the deal as a good opportunity for [Park Sterling] to acquire a deposit franchise at a steep discount to what would be paid for such an institution in healthier circumstances," he said in a research note last week.

Additionally, Park Sterling is projecting a 12% boost to earnings with the acquisition. To Wallace, that kind of accretion negates any concerns about size.

"This is double-digit accretive," Wallace says. "I don't care how big or small the bank is, something that is going to increase earnings 12% is worth a look."

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