The Merger Between Independent Bank And SouthState Is Unexciting (IBTX)

For practically a yr and a half, I’ve devoted portion of my time to analyzing and understanding monetary establishments higher. For the overwhelming majority of the 16 years that I’ve spent investing, I largely shied away from these companies. However due to the banking disaster that occurred final yr, I couldn’t resist the attract of them any additional. Two banks that I’ve analyzed beforehand that I took quite impartial stances on had been Impartial Financial institution Group (NASDAQ:IBTX) and SouthState Company (NYSE:SSB). Within the case of Impartial Financial institution Group, shares of the enterprise have seen upside of solely 4.5% since I wrote about it in February of this yr. That is under the 7.2% enhance seen by the S&P 500 over the identical window of time. And since I initially wrote about SouthState Company in September of 2023, shares have seen upside of solely 4.2% at a time when the S&P 500 has jumped by 20.9%.

This underperformance is clearly disconcerting, however not terribly shocking given the ranking that I assigned each companies. In Might of this yr, nonetheless, the administration groups at each companies agreed to a transaction that will see SouthState Company purchase Impartial Financial institution Group in an all-stock deal that was initially valued at about $2 billion. The hope right here is that, as a mixed enterprise, further alternatives will be had and worth will be created. However wanting on the massive image, I haven’t got an excessive amount of hope of this coming to fruition.

Whereas it’s fully potential that value financial savings will come on account of this maneuver, the draw back for SouthState Company is that it’s shopping for a financial institution that’s, basically talking, fairly a bit inferior to itself. This would possibly look like a blessing for shareholders of Impartial Financial institution Group. On the finish of the day, I preserve SouthState Company nonetheless warrants a ‘maintain’ ranking. Proper now, Impartial Financial institution Group provides solely a 1% unfold between its present value and its implied buyout value, which can appear to some a motive to justify a ‘promote’ ranking. However on condition that its fortunes are tied to SouthState Company’s fortunes, retaining the agency a ‘maintain’ is sensible as properly.

A giant guess on the south

On Might 20, the administration groups at Impartial Financial institution Group and SouthState Company introduced that the 2 firms will probably be merging in an all-stock deal valued at practically $2 billion. In brief, for each share of Impartial Financial institution Group that an investor has, they’ll obtain, upon closing of the deal, 0.60 shares of SouthState Company. All mixed, the establishment will probably be fairly giant. Complete property of the mixed enterprise, as of the date of the announcement, got here in at $65 billion. This included $48 billion value of loans. These are backed by $55 billion of deposits.

Operationally talking, the mixed enterprise will probably be fairly giant, with 343 department places and a bodily presence in 12 of the 15 quickest rising metropolitan statistical areas within the US. Actually, the mixed agency would be the fifth largest regional financial institution within the southern portion of the nation. Primarily, SouthState Company has operated in Florida, Georgia, and South Carolina. Nonetheless, it does even have operations in different places like Virginia, North Carolina, and Alabama. By comparability, Impartial Financial institution Group operates largely in Texas, although it does have places elsewhere reminiscent of Colorado.

This transaction is a giant guess on the southern portion of the nation. And there’s a good motive to be bullish about that usually. In response to the administration groups of each companies, from April 1, 2020 by way of July 1, 2023, a internet 2.44 million individuals have migrated into the southern portion of the nation. Most of those have come from the northeast, although some have come from the Midwest and the western parts of the nation. The most important beneficiary has been Florida, with internet home migration of 818,762 individuals. Nonetheless, Texas, the place Impartial Financial institution Group has a large presence, was the second largest beneficiary of this, with internet home migration of 656,220 people.

The mix of those two companies is anticipated to carry some fairly vital value financial savings. If every little thing goes in accordance with plan, complete annualized financial savings needs to be round 25% of the non-interest expense that Impartial Financial institution Group generates. That is based mostly on projected non-interest expense for the yr 2025. Administration assumed, on this case, that annual non-interest expense would develop at about 3% every year. If we take away sure one-time prices that Impartial Financial institution Group incurred in 2023, and apply that 3% annual development fee for 2 years, we get potential annualized financial savings of about $77.3 million on a pre-tax foundation. Roughly half of those financial savings needs to be realized in 2025, with the remainder someday thereafter.

This may not come with out some significant prices. For starters, SouthState Company expects to incur round $175 million in pre-tax merger bills. Along with this, it expects to see write downs of sure property, reminiscent of loans, securities, and debt, of roughly $438.8 million on a pre-tax foundation. If we assume a 21% tax fee, the web ache will quantity to roughly $346.7 million.

To be very clear, this transaction just isn’t one in all equals. For starters, SouthState Company is sort of a bit bigger than Impartial Financial institution Group presently. This is the reason shareholders of Impartial Financial institution Group will solely obtain 24.7% of the mixed enterprise. The opposite 75.3% will probably be retained by present shareholders of SouthState Company. The businesses are unequal not solely due to dimension, but in addition due to general high quality. Within the chart above, you possibly can see the newest calculations for his or her return on property, return on fairness, and return on tangible fairness. Overwhelmingly, SouthState Company is the superior enterprise.

Now you will need to remember that, relating to two of those metrics, return on property and return on tangible fairness, the companies have supplied some various estimates. These estimates, as proven within the picture above, consider sure changes and undertaking out to 2025 as a substitute of utilizing the newest information supplied by administration. However even on this case, there is a clear distinction in high quality. Overwhelmingly, SouthState Company stays vastly superior to Impartial Financial institution Group on this entrance.

There may be one other method to gauge whether or not or not this transaction is sensible. That is to have a look at how a lot in fairness and tangible fairness Impartial Financial institution Group is bringing to the desk relative to what value SouthState Company is paying for it. As an example, as of the top of the newest quarter, Impartial Financial institution Group had a e-book worth per share of $58.02. Nonetheless, shareholders of SouthState Company are giving simply $43.69 value of e-book worth for that. Even when we strip out the estimated $346.7 million in after tax write downs from the equation, Impartial Financial institution Group would have a e-book worth per share of roughly $49.65. Which means shareholders are nonetheless getting a haircut on a e-book worth per share foundation of 12%. Within the chart above, you possibly can see how this works out on a tangible e-book worth foundation as properly. The underside line from this, nonetheless, is that SouthState Company is getting a reduction on the web property that Impartial Financial institution Group brings to the desk. And this nearly actually is due to the decrease high quality of property that we already talked about.

This isn’t to say that every little thing about this transaction is unhealthy. For starters, the low cost that SouthState is getting is a constructive. Along with that, Impartial Financial institution Group does have some constructive issues going for it. It’s projected, for example, that from 2024 by way of 2029, median family earnings in areas by which Impartial Financial institution Group operates will develop by about 7.6% yearly. That’s down from the 9.3% forecasted for SouthState Company. Nonetheless, even by the top of that forecast interval, Impartial Financial institution Group will probably be working in areas the place the median family earnings of $100,368 is comfortably above the $77,027 that SouthState Company is uncovered to. With greater median family incomes ought to, by definition, grow to be better alternatives.

Takeaway

The way in which I see issues, whereas that is an fascinating acquisition, it’s one which places the entire threat transferring ahead on SouthState Company. Happily, the enterprise is getting internet property at a reduction due to this threat and due to the decrease high quality of these property. On the finish of the day, this isn’t sufficient to alter my very own opinion of SouthState Company. Given the decrease high quality that Impartial Financial institution Group brings to the desk, it might appear odd that I’m not ranking the enterprise a ‘promote’. Nonetheless, because it now appears tied to the efficiency of SouthState Company and provides a 1% unfold between its value and the buyout value, retaining it a ‘maintain’ as properly is sensible.