After a three-year hiatus, Royal Bank of Canada resumed U.S. bank dealmaking Wednesday with a transaction it said would act as a yardstick for the kinds of purchases it now intends to pursue.
RBC Centura Banks Inc., the Toronto company's $20.5 billion-asset Raleigh unit, said Wednesday that it would buy the $1.8 billion-asset Flag Financial Corp. of Atlanta. The cash deal is valued at $456 million.
The acquisition would be Royal Bank's first in the United States since it bought 13 branches in Florida from Provident Financial Group Inc. in November 2003. However, in 2004, having spent more than $6 billion on acquisitions from 2000 to 2003, Royal Bank launched a massive overhaul of its U.S. operation to regain earnings momentum from the acquired businesses.
Scott Custer, who became the Raleigh unit's CEO in October 2004 as part of that overhaul, said in an interview Wednesday that the deal does not signal a return to Royal Bank's aggressive M&A of the past.
"We want to continue growing … but we need to prove that we can execute on this transaction and provide the appropriate returns from this investment," he said.
The Flag deal illustrates a strategic shift for Royal Bank. Mr. Custer said it previously looked for ways to enter specific markets, but this time it looked for a target that would fill a hole in its business mix within a current market.
In Atlanta, Royal Bank needed to find a way to provide banking services for business and professional customers in a way that would complement its distribution network. Mr. Custer said his company also was impressed with Flag's ability to increase low-cost deposits.
His comments echoed those he made while Royal Bank sat on the sidelines. At that time he expressed an interest in acquisitions, but he said repeatedly that RBC Centura needed to post enough quarters of earnings growth to earn the right to do deals.
On Wednesday, he said the Flag deal shows that his unit has gotten back on track. "This deal reaffirms Royal Bank's commitment to the U.S. and to growing its business here," he said. "We've had eight consecutive quarters of earnings momentum, so we do feel like we've turned our performance around."
Royal Bank would pay $25.50 a share for Flag, or a narrow 0.7% premium to the stock's closing price Tuesday. The deal is expected to close this year.
Kevin Reynolds, an analyst at Stanford Group Co. in Memphis, said that Flag's stock had risen 21% since mid-July on rumors the company might sell itself. Mr. Reynolds, who downgraded Flag's stock to "hold," from "sell," last week on its valuation, nonetheless said in an interview Wednesday that the price seemed "reasonable" compared to other Atlanta deals over the past 12 months.
When the deal closes, Mr. Custer said, his company would have 50 branches and about $2.5 billion of assets in Atlanta, which Royal Bank entered by buying the thrift company Eagle Bancshares Inc. in early 2003.
On June 30 about 15% of Flag's $1.4 billion of deposits were in no-interest accounts. Commercial and industrial loans made up 10% of its $1.3 billion loan portfolio, while commercial real estate accounted for another 42%.
An RBC Centura spokeswoman said in an e-mail that the unit expects an undetermined amount of cost savings from the deal. However, she also said most of Flag's management team and "client-facing" jobs would be kept. "There will be some head office cuts at Flag, but we're still working through the full scope."
A renewed focus on commercial banking was a key component of RBC Centura's transition after Royal Bank's last round of acquisitions ended. Last year the company sold its RBC Mortgage to New Century Mortgage Corp. and cut RBC Centura's work force by 3.5%.
Wednesday's deal is the latest in a series involving banking companies in the Atlanta area, which a year ago had $94.5 billion of deposits, according to data released last fall by the Federal Deposit Insurance Corp. Three banking companies - SunTrust Banks Inc. in Atlanta and Charlotte's Bank of America Corp. and Wachovia Corp. - collectively control 61.5% of those deposits.
In June, BB&T Corp. of Winston-Salem, N.C., acquired the $2.3 billion-asset Main Street Banks Inc.; and in March, Synovus Financial Corp. of Columbus, Ga., bought the $620 million-asset Riverside Bank of Marietta.
Flag itself has been an acquirer, buying the $673 million-asset First Capital Corp. of Norcross in November.
Mr. Reynolds said that 16 banks based in Georgia have been acquired in the past 12 months, 10 of them in the Atlanta area. Despite the dominance of the city's three largest banking companies, the market is strong enough that anyone "has an opportunity to double in size just by taking the crumbs off of the table."
Mr. Custer said he hopes to capitalize on some of the turbulence.
"I think the market is very fragmented and there will still be more consolidation in that market," he said.
