Expands Footprint With All-Cash Acqusition of F&S Bank
After the close, CFB announced it has reached a definitive agreement to acquire $567 million
asset Farmers & Stockmens Bank (“F&S Bank”) from Central bank in an all-cash transaction (~$75
million). The deal will include F&S’ five branches across Colorado (two) and New Mexico (three),
but notably will not include Central’s wealth management business. This transaction is expected
to close in 2H22 and it will represent CFB’s entrance into these two new states (bringing its total
branch lite model to seven states) with the pro forma company is expected to have ~$6.2 billion
in assets, ~$4.9 billion in loans and ~$5.3 billion in deposits. Additionally, the deal carries an
acceptable earnback period of 2.7 years, comes with a >25% IRR and it is expected to be 11.7%
and 17.6% accretive to CFB’s 2023 and 2024 EPS, respectively, after assuming the full cost-synergy
benefit (20% of F&S Bank’s non-interest expense; 75% of which is expected to be realized in 2023,
100% thereafter). We note that these accretion metrics incorporate F&S Bank’s higher loan yields
(5.25%; legacy CFB: 3.94%; pro forma: 4.03%) and their lower cost of deposits (0.15%; legacy CFB:
0.30%; pro forma: 0.29%), while helping the company modestly lower its loan-to-deposit ratio
(legacy CFB: 94%; pro forma: 91.4%).
Deal terms: As noted, the deal is valued at $75 million, which includes a one-time dividend to
F&S Bank shareholders for any excess capital above an 8% leverage ratio (expected to be ~$2.3
million). The transaction has is expected to have $3 million in merger expense charges (4% of
after-tax deal value), come with a $4.5 million gross credit mark (1.37% of F&S Bank’s ex. PPP
loans; 20% PCD, 80% non-PCD) and, carry a Day 2 CECL reserve of 1.0x non-PCD mark ($3.6
million). The purchase price represents a 2023 post cost saves P/E of ~11.6x, an aggregate P/TBV
of 1.63x, and a 5.9% core deposit premium, which is modestly above 1Q22 deal premiums (link).
Lastly, it expects a CET1 ratio of 11.1% at close (11.9% in 1Q22).
Bottom line: The all cash deal accelerates CFB’s growth story, which has primarily relied on
organic growth with its most recent de novo market expansion occurring in Phoenix which turned
a profit for the first time in 1Q22 (expects it will become a +$1 billion marking in the next 3-5
years). To this end, the transaction helps fill in the geographical gap to create a continuous
footprint across its legacy markets. Moreover, we are encouraged that CFB will be able to retain
F&S bank’s local management team, inclusive of +35 year veteran banking CEO Scott Page (former
CoBiz CEO), as well as bolstering CFB’s product set through incorporating F&S Bank’s SBA and
agricultural lending capabilities. That said, given its relatively depressed currency (1.05x TBV),
we believe this all-cash transaction represents a good use of capital as it extends its footprint
(including into the attractive Denver market) where we believe it can create franchise value, as
well as harvest additional revenue synergies down the road. We plan to follow up with updated
EPS forecasts following management’s presentation tomorrow.