trending Market Intelligence /marketintelligence/en/news-insights/trending/epq0bs05pxl5585tzyuipq2 content esgSubNav
In This List

Deal provides CapStar Financial scale, new markets and coveted low-cost deposits

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Deal provides CapStar Financial scale, new markets and coveted low-cost deposits

With its $113.5 million planned acquisition of Athens Bancshares Corp. in eastern Tennessee, Nashville, Tenn.-based CapStar Financial Holdings Inc. says it will diversify its business, expand its footprint, lower its funding costs and add scale to bolster efficiency and profitability.

CapStar President and CEO Claire Tucker, speaking with analysts on a June 12 call after announcing the acquisition, called the deal "compelling" both financially and strategically.

Tucker said the deal will enable CapStar to expand outside of middle Tennessee and grow from about $1.4 billion in assets to roughly $2 billion by the time the deal is slated to close in the fourth quarter. The buyer will pick up 10 Athens branches that span a swath of the eastern side of the state, from near Chattanooga in the south and through the city of Athens and neighboring markets to the north.

Until now, CapStar has concentrated its efforts in the Nashville area.

The eastern region of Tennessee has proven fertile ground for low-cost deposits, an area of banking in sharp focus as interest rates rise amid Federal Reserve policy tightening and as funding costs for many banks creep up. CapStar entered the deal with a cost of deposits around 88 basis points, while Athens' deposit costs hover around 43 basis points, Tucker noted.

The target holds more than $420 million in deposits.

Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets, said a hunt for low-cost deposits across the industry is happening now and will likely continue to "prove an important driver" of bank M&A as long as the Fed continues to raise rates. Its monetary policy arm has lifted rates several times over the past year, and it has signaled that more increases loom.

"Deposits are more and more going to be part of the M&A conversation," Thompson said in an interview.

The Athens acquisition will give the commercial-focused CapStar overall heft — more than $480 million in assets and more than $330 million in gross loans — to help it better absorb costs and improve efficiency while broadening its services into more retail banking areas. These include Athens' prominent mortgage business and a consumer finance operation, executives said.

CapStar expects cost savings of about 25% of the target's noninterest expense base, with about 60% realized in 2019 and 100% thereafter. The savings will help fuel profitability on the deal. The buyer looks for earnings-per-share accretion of 6% in 2019 and more than 10% the following year, CFO Robert Anderson said on the call.

He said that CapStar will earn back 6.8% dilution to tangible book value per share in less than four years. The buyer based its projection on the commonly used "crossover method," he said.

"Under four years is typically palatable" for investors, Matthew Shields, a managing director at bank adviser Performance Trust Capital Partners, said in an interview. "That's where the market has generally settled in terms of a comfort level" with earnback periods.

But the seller did attract a relatively high price. SNL valued the deal at 231.6% of tangible common equity on an aggregate basis. SNL valuations for bank and thrift targets in the Southeast region between June 11, 2017, and the same date this year — when CapStar announced the Athens acquisition — averaged 158.7% of tangible book.

Shares of CapStar moved in a narrow range of gains and losses during morning trading June 12, the first session after the deal announcement.

Executives also pitched the deal to analysts as safe. They noted that it is an in-state acquisition, that the target is financially healthy and that key executives from the seller will join CapStar in senior leadership roles after closing, ensuring expertise in eastern Tennessee. These include Jeffrey Cunningham, president and CEO of Athens, and Michael Hutsell, COO and CFO.

"We do believe it's a low-risk transaction" and "a natural extension for us," Tucker said.