A bank deal two decades in the making

Connections matter when it comes to bank M&A.

That was the case for CenterState Bank in Winter Haven, Fla., which agreed on Monday to buy National Commerce in Birmingham, Ala., in what will become its biggest acquisition when it closes next year. The $850.4 million deal is also the ninth-biggest bank acquisition announced this year.

The narrative behind the deal goes back nearly two decades.

Ties between the banks date to 1999, when CenterState, then a de novo, selected Alabama National BanCorp as its correspondent bank. The relationship grew over the years, especially in 2008 when Alabama National was sold to RBC Centura and CenterState hired a group of its bankers.

Alabama National’s management team also left, resurfacing in 2010 to buy and rebrand Red Mountain Bank as National Commerce. Subsequent expansion by CenterState and National Commerce in Georgia and Florida put the banks in closer proximity to each other.

“I always felt like our teams would work together one day,” John Corbett, the $12 billion-asset CenterState’s president and CEO, said during a Monday conference call to discuss the deal. “That day is today.”

A high comfort level with National Commerce's leaders led Corbett and CenterState to do something they had never done during scores of previous acquisitions — add a seller's executives to its management team. Richard Murray IV, National Commerce's chairman and CEO, will run CenterState's bank, while William Matthews V, the seller’s president and chief financial officer, will become CFO of the company and the bank.

“There’s a book titled 'Speed of Trust.' That’s a concept I subscribe to,” Corbett said in an interview. “Trust is something you earn over time. We’ve had 20 years to build it up — both ways.”

Such familiarity should benefit CenterState, as "execution risk should be well-controlled," Stephen Scouten, an analyst at Sandler O’Neill, wrote in a Monday note to clients.

“Overall, this appears to be a solid deal at reasonable pricing and good earnback on tangible book value,” John Rodis, who covers CenterState for FIG Partners, wrote in his client note.

Corbett said the banks had been engaged in frank, extensive dialogue for about six months.

“In a lot of deals, the seller is trying to sell itself," Corbett said. "You don’t get to have the kind of candid conversations we’ve been having."

The deal is expected to close in the second quarter, with system conversion to follow in September. CenterState, which has completed 16 whole-bank acquisitions since December 1999, will likely avoid acquisitions for the foreseeable future.

“Our plan is to land this plane safely,” Corbett said.

CenterState has cemented its reputation as a serial acquirer in recent years, agreeing to pay $2 billion since October 2016 to add more than $10 billion in assets, including the $4.1 billion-asset National Commerce.

CenterState will have $16 billion in assets and nearly $13 billion in deposits in Alabama, Florida and Georgia. It will also have increased scale in Atlanta, a market it entered after buying Charter Financial in September.

National Commerce has also been active in Georgia, buying Landmark Bancshares in Marietta in August.

Scouten wrote in his note that he was “particularly pleased to see CenterState acquire greater density in the Atlanta" metropolitan area, where the company will have $1.5 billion in deposits.

National Commerce also boosts CenterState's profile in several slower-growing Alabama markets, though Corbett said he likes his prospects there, too.

“I’ve always said, if we were ever to move into Birmingham, this is the team we’d want to go in with,” he said.

While acknowledging that Alabama is “not as dynamic” as other Southeastern states, National Commerce’s loan growth there has kept pace with its operations in Atlanta and Florida, Murray said during Monday's conference call.

“There’s a lot going on” in Alabama, Murray said. “We see tremendous opportunities for growth.”

CenterState expects to incur $47 million in merger-related expenses, though it plans to cut a quarter of National Commerce's annual noninterest expenses. Once the cost cutting is done, the deal should produce earnings-per-share accretion “in the mid-single-digit range.”

While the deal's math excludes expectations for new revenue, Corbett said his team has identified several opportunities, including mortgage banking. CenterState plans to create a residential-lending unit with annual volume topping $1.5 billion.

"It’s hard to make any money as a small-time player” in mortgages, Corbett said. “You can’t dip your toe in the pool. You’ve got to be committed.”