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Capital Bank Financial Corp. in Coral Gables, Fla., reported higher third quarter earnings driven by lower expenses and asset quality improvements.
October 16 -
Capital Bank Financial shares a problem with other investor-backed companies built to make a lot of bank acquisitions: their stocks trade at low premiums because they are overcapitalized, but they are unable to deploy their capital in M&A deals because of those low stock values.
September 16 -
Capital Bank Financial in Coral Gables, Fla., has gone more than a year since its last acquisition a common problem for M&A-minded banks these days. Its leaders urged shareholders to be patient in a sales pitch that other execs in the same bind could learn from.
September 9 -
A number of roll-up companies were built for an M&A market characterized by a torrent of failed banks, a dearth of available capital and lots of sellers. Things turned out much differently. Here's how one company, National Bank Holdings, has adjusted.
November 13
Talking about Capital Bank Financial in Coral Gables, Fla., almost always includes some mention of M&A, unless you are talking to one of the company's executives these days.
The $6.7 billion-asset company was founded in 2009 with nearly $1 billion in capital and an eye toward buying banks. Capital's leaders, who
"There is more talk about M&A than anything I've ever seen, and there are
Chris Marshall, the company's chief financial officer, declined in an interview earlier this month to discuss the reasoning for no longer discussing M&A as a general theme, but analysts said it is not surprising. Investors know the company is aggressively looking, but restrained because of its stock price. Meanwhile, Capital knows investors and analysts are keenly interested, and perhaps frustrated, with a lack of activity.
"They don't want to talk about it because it is the same answer," said Paul Miller, an analyst at FBR Capital Markets. "They're looking under every rock for a deal that is accretive and not that expensive…. I think their thinking was, 'You all know my answer, I'm not going waste any of our time.'"
Miller said he didn't view the message as a harbinger of forthcoming activity, or a lack thereof, though Stephen Scouten, an analyst at Sandler O'Neill, said he interpreted Taylor's comment as a negative.
"I took it as a signal that nothing is close to being imminent and they're tired of telling people 'We hope to have something done' and then not," Scouten said. "Instead, they're trying to change the narrative and focus on the good things."
Silence about M&A will do little to squelch onlooker interest, but management's decision to focus on the strides it is making with organic growth is a lesson all banks could heed, especially after a quarter brimming with lumpy results. Accentuating the positive seems to make sense.
For Capital,
Net loan growth, for instance, is a major point of pride at the company. Such a metric is important because, unlike a traditional de novo that starts at zero, Capital started with a loan portfolio that suffered from runoff from regular pay downs, problem loan resolutions and management's tinkering with concentrations.
"Half of our portfolio was in commercial real estate," Marshall said during the interview. "We thought that was too much and said we were going to cut that in half. We had to build up the origination machine and stabilize the payouts and exits. Getting to positive loan growth — even if it was by a dollar — would be a major milestone."
This year has been a breakthrough for Capital in that regard. Loans in the first quarter were flat from Dec. 31. In the second quarter, they rose nearly 4% from the prior quarter. Total loans increased by another 2.3% during the third quarter, to $4.8 billion.
The next major milestone, and a problem that nearly every bank in the country is facing, is adding enough loans so that volume can offset lower yields. In the third quarter, Capital's net interest income increased by almost 1% from a quarter earlier, to $61.4 million.
Marshall said during the recent conference call that the trend is potentially sustainable.
"As long as we see continued momentum in originations and we continue to see stabilized and diminishing payoffs, we believe that the expansion in loan growth is going to offset the contraction in margins," he said.
Capital is also committed to producing a 1% return on assets by the end of 2015. At Sept. 30, that metric stood at 0.80%, up from 0.76% at June 30 and 0.69% a year earlier.
"We have made consistent progress," Marshall said during the call. "We are virtually on top of the guidance, or well ahead of the guidance that we've shared with you in the past. We're very confident about our ability to hit the 100 basis points by the end of next year."
Analysts were divided on whether Capital can meet its return targets.
Brady Gailey, a Sandler O'Neill analyst, called it a "tough order to fill" in a research note. "According to our model, we expect Capital to fall short of this ROA goal, basically staying flat ... from here through 2016," he wrote in a note to clients.
Miller, however, believes in management's ability to make good on the goal. "Given building momentum in organic asset growth that has begun offsetting falling headline margins, along with a stable expense base that has begun to generate corresponding revenues, we believe Capital is well on its way to achieving these targets," Miller wrote in his latest research note.
Miller has the stock rated as an "outperform" with a $27.50 price target. The stock is up about 11% from a year earlier, hovering near $24.70 a share. Such improvement is likely a mixture of the market, Capital's improving earnings profile and its stock repurchases.
The company is authorized to buy back up to $150 million in stock, and it spent an average of $23.78 a share to retire 820,000 shares during the third quarter. Marshall said the buyback "is a part of our ongoing capital deployment, but not the most important part."
An improved stock price could help Capital eventually find a financially appealing deal. With the company's stock currently trading at 130% of its tangible book value, a stock deal would likely be dilutive.
For Scouten, all roads lead back to Capital's lack of acquisitions in recent years.
"Sure, they are making strides, but apart from M&A, none of it is happening fast enough to push them to a place where the stock will trade off earnings," Scouten said. "There are good directional trends, but given the steepness, it is just not enough."