Skeptics of Provident N.Y. Deal Say 'Show Me' on Promised Returns
Provident New York scouted other potential targets in the New York City region besides Sterling, but too many of them still think they can survive as independents, CEO Jack Kopnisky says.
Provident New York Bancorp wants to join forces with a similarly sized bank, KBW analyst Collyn Gilbert says. But a pool crowded with rival buyers is crimping its plans.
The merger of Provident New York Bancorp (PBNY) and Sterling Bancorp (STL) will make them bigger, but the jury is still out whether it will make them better.
Provident's agreement to buy Sterling surprised observers of the New York banking scene. Provident, a $3.8 billion-asset thrift in Montebello, had been on the prowl for a transformational deal in the commercial banking market, but experts were skeptical it would find one. Meanwhile, the $2.8 billion-asset Sterling had been viewed as a potential New York City take-out candidate, but its suitors were thought to be larger banks that could pay more.
Their executives predict sizzling advantages, but experts are wary of projections of a return on equity exceeding 12%, a return on assets exceeding 1% and an increase in earnings of 31% by yearend 2015.
"From a strategic standpoint, it is a home run," says Joseph Fenech, an analyst at Sandler O'Neill. "But financially, I'm a little hesitant to embrace the projections that are out there."
By strategic, Fenech means the way the companies would mesh.
Sterling has a large commercial and industrial portfolio that would complement Provident's commercial real estate loans; their mortgage operations appear compatible, too.
With $6.5 billion in assets, the combined company could be a bigger player in the Big Apple, while still being comfortably below the $10 billion-asset threshold that triggers additional regulatory oversight. The deal fulfills the goal that Provident Chief Executive Jack Kopnisky set when he arrived in July 2011 to remake the thrift into a commercial bank.
"It totally accelerates their transformation," Fenech says. "They leave their thrift roots behind overnight."
His skepticism about the deal's financials are rooted in Provident's recent performance. A return on equity greater than 12% was Kopnisky's three-year goal when he took the helm. Since then, Provident's ROE has hovered around 5%, according to data from the Federal Deposit Insurance Corp. When adjusted for one-time events and securities gains, the core ROE has ranged from 2.81% to 4.97% under Kopnisky's leadership, Fenech says.
Fenech says he understands transformations take time but thinks Provident should have made more progress.
"I'm not saying that they should be at that level today, but I can't go ahead and assume they are going to when we don't have the evidence [of improvement] at the legacy company," Fenech says. "It is a little too early for me to give them the benefit of the doubt that the combined company can operate at that top-tier level."
Matthew Kelley, an analyst at Sterne Agee, made a similar comment in his research note on the deal. "Management still has a good deal to prove on the execution and profitability enhancement front," he wrote.
Kopnisky says the combined company, with its projected 18% in cost saves and ability to take the best from each side, will meet its targets.
"What this does is accelerate our time frame to get there. The world is going to be in a low, flat interest rate environment for a while," Kopnisky says. "Given that, this accelerates our ability to become a high-performing company."
Kopnisky acknowledged that he is behind schedule, but the protracted rate environment has tempered reality.
"Our expectation was to get there by the end of the third year, but with the assumption that rates would be going up by right about now," he said in an interview on Thursday. "Instead, they've been static and flat. This deal extends it to make it happen."
The market generally has embraced the deal. On Thursday Provident's stock closed at $9.08, up 3%. On Friday it was pulled down 1.87% as the whole market was trending down. Sterling's shares rose 13% on Thursday and were trading at $11.14 on Friday afternoon.
Fenech expects Provident's stock to continue to perform well at least until the deal's completion, which is expected in the fourth quarter, because the market is currently driven by earnings, not tangible book value.
"Per management's projections, the deal is highly accretive to [earnings per share], which, judging from the stock price reaction yesterday, is trumping any concern regarding the substantial dilution to [tangible book value]," Fenech said in a research note on Friday.
However, at least one Sterling investor decided not to wait around to see if the management team can deliver. Mendon Capital sold its 127,000 shares in Sterling on Thursday, said Anton Schutz, the firm's president. To be fair, Schutz has a bit of grudge against Provident; he says he was shut out of a capital raise and did not want to own shares of a company that once turned down his investment.
"End of the day, we are looking to make money from M&A, and we did," Schutz said. "We handed the stock off to someone who is looking to make money from growth. We don't want to deal with things like execution risk. … I could be telling you two years from now that I love it and they did everything right but as of right now, I'm on the sidelines. Not saying they can't successfully do this deal, but thanks for the memories."