This week we announced the acquisition of Platinum Bank Holding Company, the parent of Platinum Bank. Platinum Bank is a $584mm total asset competitor located next door to us in Brandon, FL. The acquisition makes us a $5.6B asset sized institution and gives us the number one deposit share in our core market and the number two community bank market share in the State. While there are lots of reasons to acquire another bank, this one illustrates a couple of interesting points that both bank buyers and sellers should consider for their next transaction.
Platinum Bank was founded in 1997 and currently has seven branches in the central part of Florida. The Bank has been a solid performer with a current 14.6% return on equity, an efficiency ratio of 64.5%, and a net interest margin of 3.83%. Platinum is largely commercial (88%) with 32% in checking and an asset growth rate of approximately 7%. Loan-to-deposits is around 91% while equity-to-assets is almost 9.2%. In short, Platinum is your basic higher performing community bank.
This transaction is targeted to close in April of 2017, and its value is approximate $83.9mm which comes out to 1.75x tangible book value or 1.62x tangible book value after adjusting for fair value marks. Another way to look at the price is that it comes out to a 21.4x multiple to tax-effected trailing 12-month earnings which is not an expensive transaction, but not a cheap one either.
We strongly believe that every acquisition should fulfill a strategic goal. Sometimes we want to acquire a certain lending line, skill set or expertise. Other times, like in the case of Platinum, we are trying to increase our scale. That is, the more efficient we can make our platform, the more options we will have to acquire and the more free cash flow we can drive to the bottom line. In the case of Platinum, as can be seen below, we look to add low-risk market share.
The size/risk tradeoff is an interesting point that some banks overlook. A larger asset size doesn’t always result in scale as the goal is to add assets not only lower incremental cost but at lower incremental risk. New asset classes, increased geography, different processes, new product lines and new organizational structures of an acquisition all serve to potentially increase risk. For every acquisition, acquiring banks need to be clear on not only the assets, liabilities and the fee lines that they are purchasing, but the bundle of risks that come with it. Further, acquiring banks need to model how these new risks interact with existing residual risks.
In Platinum’s case, the Bank has similar operations and has been a worthy competitor for some time. As such, we have pretty good knowledge of their history. They have a similar culture, strong management and probably weathered the downturn better than most Florida banks.
When it comes to acquisitions, it is the hidden credit risk that can turn a good acquisition bad. In this case, their credit performance has been solid which was further validated by our credit team that after looking at 33 banks has some expertise in this area. We reviewed 79% of their loans and almost 100% of their riskier and higher dollar loans which is what we like to target.
Not Knowing What We Don’t Know - Culture
One problem with any acquisition is that you don’t know what you don’t know. One mitigate is the fact that we have built a relationship with their management team over the last several years. This is an important pre-negotiation tactic that any buyer or seller should consider, as it is such an important aspect in order for both parties to de-risk a transaction.
Having confidence in each other’s culture helps fill in the knowledge gaps that may arise. While this usually pertains to credit, it is hard, no matter what your experience, to conduct full due diligence in a 60 day period on every system. Due diligence on technology, operations, compliance, facilities and similar can suck up a huge amount of resources. To help mitigate a portion of this risk, not only do we look for a similar culture than us, but we look for what we call an “ownership mentality.” When we interview any employee, we want the sense that they do their job not for the paycheck, but for the sake of doing a good job. Sometimes this is because their management team had a grand vision, but often it is a management team that just hired conscientious bankers that take good ol’ American pride in their position. Platinum Bank fell into this category, and it gave us great comfort.
The other interesting aspect of the transaction is that we are paying 90% of our purchase price in CenterState equity. Now, all things being equal, we don’t want to use stock if we can avoid it. We have a great plan for CenterState and are very confident in our ability to execute that plan. As such, we know how valuable the future of our equity is, and we don’t want dilution. Cash, compared to our equity, is relatively less expensive, in our opinion.
However, Platinum is a quality organization and one that we can recognize immediate cost saves on due to the overlapping footprint. Five of seven Platinum branches are within 1.25 miles of our branches. As a result, we are targeting 40% expense savings when integration is fully phased in. Thus, in our opinion, we paid a multiple of 11x after taking into account these synergies.
In addition, every bank’s stock goes through cycles and we have recently been close to our record high. While we still think we are undervalued, we are probably less so these days than we have in the past. As such, to get a transaction done now, we were talked into giving away our equity in exchange for their platform. Given our projections, this can be immediately accretive to earnings with an earn back of dilution within two-and-a-half years which is an ongoing target we try to achieve with each acquisition.
Gaining Pricing Power
Finally, there is a synergistic aspect of adding a competitor within your core market. Platinum was a relationship-driven bank with deep ties to the community. Not only do we get some great people (all the key executives came under contract), but we gain more pricing power in our core market which is additionally additive.
Because of the value of Platinum Bank, we are targeting a healthy 20% internal rate of return on this purchase. More assets don’t always make you more efficient. With any acquisition, you have to look at the quality and composition of those assets. Some of our past acquisitions increased assets, but they also increased complexity. As such, they did not give us scale on a risk-adjusted basis. In this case, we believe a combination of asset quality, culture, and footprint gives us true scale at a lower incremental risk.
Submitted by Chris Nichols on October 19, 2016