Enterprising Investor
9 years ago
Atlanta’s State Bank Financial: A Veteran’s Third Act (10/31/14)
Atlanta’s State Bank Financial has a strong upside, thanks to veteran chief Joseph Evans, who’s built an attractive low-cost loan base.
By David Englander
In 2009, when bank failures were heating up around the country, Atlanta–based State Bank Financial saw opportunity.
Under the leadership of Georgia banking veteran Joseph Evans, State Bank raised nearly $300 million in a private placement and went shopping for failed banks. Between 2009 and 2011, State Bank acquired 12 failed banks, bringing in $3.9 billion in assets.
The deals were done at discount prices, under lucrative Federal Deposit Insurance Corp.–assisted deals, where the FDIC covers losses on loans.
State (ticker: STBZ) has used the deals to build up one of the most attractive low-cost deposit bases in Georgia, and has been increasing its loan book. With over $200 million in excess capital, the momentum is likely to continue. As Evans and his team deploy the cash in acquisitions, stock buybacks, and dividends, the shares could rally.
This year, State bought two healthy Georgia banks, and another bank deal within the next year is a strong possibility. Evans, 64, has built and sold two banks at high multiples in his long career, and that, too, could be his end game with State.
At a recent $17.80, the stock trades at 1.3 times tangible book value of $13.83, compared with about two times for peers.
Given improving earnings prospects, Christopher Marinac, an analyst at FIG Partners, sees the bank’s tangible book value growing to $14.70 in 2015. He values the shares at $22, based on 1.57 times his estimate.
Once the most recent deals are complete, State will have some $3.3 billion in assets, and operate 30 branches in attractive Georgia markets, including metro Atlanta and Macon, under the State Bank & Trust banner. The bank primarily underwrites commercial real estate, construction, and commercial businesses. Those loans account for 85% of its $1.5 billion loan book. State also makes residential mortgages and consumer loans.
Loans that State acquired from the FDIC under loss-sharing agreements have shrunk to 14% of loans. The bank has increased the majority of its loans organically. Credit costs are low. In the September quarter, nonperforming assets were just 0.64% of total assets.
This year, State is expected to earn $31 million, or 96 cents a share, on $143 million in revenue. In 2015, earnings could jump to $1.28 a share, reflecting strong organic loan growth. Earnings power, given the capital base, could be over $1.70 a share.
Like any bank involved in FDIC-assisted transactions, State has had to contend with the runoff of its FDIC covered loans, and the need to replace them with organic growth. Given that covered loans dominated its balance sheet a few years ago, this has been a particular challenge, though State has excelled at it. Since 2011, its total loans rose 4%, while its covered loans declined 75%.
State has been hiring seasoned bankers, and taking a relationship approach to its commercial customers, underwriting their loans and handling their deposits. State’s deposits have swelled to $2.16 billion and are low-cost, with 25% noninterest bearing, offering cheap funding for new loans.
In the September quarter, total loans rose 4.4%, sequentially, driven by organic loan growth. Organic loan growth could top 15% on average in 2015 and 2016.
State’s covered loans have performed well, providing another source of income, known as “accretable income,” from the accounting used in loan-loss transactions. If the loan performs well, State will realize the income, which is essentially the difference between the loan’s cash flows over time, and the discounted price it paid in the deal.
The accretable discount now stands at $131 million, after State recognized $21 million in accretable income in the recent quarter. Marinac, the FIG analyst, notes in a report that he models a “steady recognition” of the discount in his estimates, and expects most of it to be collected by the end of 2016.
State’s capital position lends it many options. For acquisitions, State is targeting banks with assets of $200 million to $1 billion, and it recently hired a banker, David Brown, who has worked with Evans before, to look for deals.
On State’s Oct. 23 earnings call, Evans said of acquisitions, “I absolutely think that we’re equipped to do another one whenever that opportunity presents itself.” Evans could not be reached for comment.
Other possibilities also include stock buybacks and increased dividends—the current yield is 0.9%.
Evans is an old pro at selling his banks for high multiples, getting three times tangible book for Century South in 2001, and four times for Flag Financial in 2006. Given its attractive deposit base and footprint in Georgia, State could fetch as much as 1.7 to two times in a deal. Assuming tangible book value rises in the next two to three years, a deal price close to $30 isn’t out of the question.
E-mail: editors@barrons.com
http://online.barrons.com/articles/atlantas-state-bank-financial-a-veterans-third-act-1414810993?mod=BOL_hp_mag
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