07 September 2007

RBC to Buy Alabama National BanCorp

BMO Capital Markets, 7 September 2007

Royal Bank announced on September 6 an agreement to purchase Alabama National BanCorporation (ANB), a bank headquartered in Birmingham, Alabama, for US$1.6 billion. Under the terms of the agreement, ANB shareholders will receive US$80 per share of either cash, RBC shares, or a combination of the two. The total consideration will consist of roughly half cash and half stock. The deal is expected to close in early 2008.

The purchase price represents 20x 2007E earnings and 3.1x tangible book value. We expect Royal's Tier 1 ratio to decline by about 30bps. Management anticipates the deal to be accretive to RBC earnings in 2009. We would view this as a reasonable price for a reasonable franchise. According to all reports, the management team is strong.

ANB is the parent company of 11 subsidiary banks. It has 103 branches throughout the U.S. Southeast - 45 in Alabama, 45 in Florida and 13 in Georgia. The bank has assets of US$7.9 billion, and core deposits of US$4.5 billion. Its largest presence is in Alabama, where it has roughly 3.5% deposit market share.

Bit by bit, Royal is cobbling together a medium-sized banking footprint in the Southern U.S. After this acquisition is integrated, RBC Centura will have a branch count to 440 branches and US$33 billion of assets. The pro forma deposit market share positions will be #4 in Alabama (7% share), #6 in North Carolina (4%) and #8 in Georgia (2%). It is clear that Royal still has some distance to cover if it plans to build a leadership position in any of these states.

After a difficult start, the earnings contribution of RBC Centura has been showing solid improvements. Net earnings in the first half of 2007 are about 5% higher than in the same period of 2006, and up 26% from the same period of 2005. Needless to say, the environment in 2007 has been very challenging so this is a very respectable result.

We continue to recommend RY shares. The bank's success in the U.S. has been limited, but it is clear that given the strength of the Canadian dollar and the valuation premium that is currently afforded to Canadian bank shares, RY is far better positioned to build now than it has been in the past. The U.S. operation still only produces 6% of overall earnings, and can best be described as a 'free option' in RY shares. The attractiveness of the stock is principally driven by the strength of the domestic retail and wealth management franchises.
Scotia Capital, 7 September 2007

RBC Centura to Acquire Alabama National BanCorp for US$1.6 Billion

• RY announced that it intends to acquire Alabama National BanCorporation (ANB) through RBC Centura (RBCC) for US$1.6 billion or US$80 per ANB share with consideration expected to be 50% cash and 50% RY shares. The transaction is expected to close in early 2008 and be accretive to RY's earnings in fiscal 2009.

• ANB has 45 locations in Alabama including locations in the attractive market of Birmingham, 45 locations in Florida, the majority along the Gulf and 13 in Georgia. As of June 30, 2007, ANB had loans of US$5.7 billion, deposits of US$5.8 billion (core deposits of US$4.5 billion) and assets of US$7.9 billion.

ANB Acquisition - Positive Strategic Fit

• RBCC's acquisition of Alabama National Bancorporation (ANB) is positive strategically as it expands the banks' distribution platform by 30% which is critical to generating higher returns from RY's U.S. retail platform. This acquisition doubles the banks' branch network in Florida and Alabama and increases its presence in Georgia by 24%.

• The addition of 103 branches and 124 ATMs from ANB brings RBCC's network up to 440 locations with 85 locations in Alabama, 89 locations in Florida and 68 in Georgia. This acquisition brings RBCC deposit market share in Alabama to 4th, Georgia 8th (Atlanta 6th) and 17th in Florida. Total RBCC assets would be approximately US$33 billion.

• RBCC hopes this acquisition will allow it to leverage its infrastructure, new front-end technologies and product and service capabilities. RBCC also plans to maintain local market expertise and customer service models and the appropriate local autonomy with centralized processing capabilities.

Cost Savings

• We guesstimate the cost synergies to be approximately 20% on ANB's cost base or US$37 million.


• The purchase price of US$80 per ANB share was a hefty 50% premium to the closing price of US$53 on September 5, 2007 but a more modest 8% premium to its year high of US$74.15 on February 21, 2007.

• We believe the bank paid a relatively high price in the context of the current environment with the purchase price at 19.8x 2007 consensus estimate of US$4.04 per share, 3.0x price to tangible book value and a 25% core deposit premium.

• If we made the presumption that US$60 or 15.0x EPS would have been a very attractive price, representing a 13% premium, the bank would have overpaid by US$400 million or $0.33 per RY share.

• The bank paid up based on scarcity value and strategic fit and if properly executed we expect that the deal will enhance shareholder value.

Deal Size

• RY acquisition of ANB at US$1.6 billion represents 2.4% of RY's market capitalization similar to BNS's recent acquisition of Banco del Desarollo in Chile for US$1.03 billion (including minority) at 2.1% of market capitalization.


• We view this acquisition as positive and believe it should enhance shareholder return from RY's U.S. business longer term. Maintain 1-Sector Outperform.
The Globe and Mail, Tavia Grant, 7 September 2007

Royal Bank of Canada has pulled off its second-largest acquisition in the U.S., bolstering its presence in the Southeast just as parts of the region's real estate woes are deepening.

Canada's biggest bank is paying $1.6-billion (U.S.) in cash and stock for Alabama National Bancorporation, a 51-per-cent premium over Wednesday's closing share price. The move will double RBC Centura's locations in Alabama, triple its business in Florida and add to its presence in Georgia, boosting RBC's total U.S. banking centres by a third.

RBC and other Canadian banks, prevented from domestic mergers, have been aggressively expanding their footprint abroad. RBC's plan to boost its exposure in the Southeast, however, means increased exposure to areas facing rising foreclosures and falling house prices, especially in Florida.

"It's definitely an area that's under stress in the short term but over the long term it's probably likely that [Alabama National] is able to weather it without real significant losses," said Kevin Fitzsimmons, managing director of New York-based Sandler O'Neill & Partners, who covers the U.S. bank.

He figures about 35 per cent of Alabama National's loans are construction-related and another 25 per cent are in commercial real estate in Florida or Alabama, areas that have seen loan growth slow and credit quality deteriorate. The rate of U.S. home loans in foreclosure hit a record in the second quarter, with Florida one of the hardest hit states, a Mortgage Bankers' Association survey showed yesterday.

That's not deterring RBC, which is betting that attractive demographics and sound economies in the region will outweigh shorter-term market troubles.

"I think the portfolios will stand the test of a little bit of a market downturn," said Scott Custer, chairman and chief executive officer of Raleigh, N.C.-based RBC Centura, in an interview.

"This company has demonstrated over the past years that they have got a great credit culture and a very sound and solid loan portfolio," Mr. Custer said.

"And they have shied away from the high-risk type lending that some others have gotten in trouble with there."

Birmingham-based Alabama National is the parent of 11 banks and has assets of about $8-billion.

The bank's net loan losses crept above its historical average in the first half of this year, prompting it to take a $2.48-million charge in the second quarter.

Mr. Custer said he got acquainted with Alabama National's management earlier this year while finalizing a separate deal to buy 39 branches from AmSouth Bancorp. in Alabama. He expects to keep Alabama National's management team in place and maintain its customer base.

RBC Centura expects the move will boost revenue growth in the near term and add to RBC earnings in 2009.

This is RBC's largest acquisition in six years and one of its biggest ever after it bought Centura Banks for $2.2-billion in 2001.

And while a 51-per-cent premium seems hefty, it's in line with similar deals of that size, said a U.S. analyst, who believes a competing bid is unlikely to emerge.

Fears of exposure to residential real estate construction in the Florida and metropolitan Atlanta markets mean "that could potentially dissuade some other potential buyers from making a bid run," said Adam Barkstrom, an analyst at Sterne Agee who last month cut his estimates for the company.

RBC isn't the only Canadian bank on the prowl, given the strength of the Canadian dollar. Rival Bank of Nova Scotia last week boosted its South American presence through the $1.03-billion purchase of Banco del Desarrollo in Chile. And Toronto-Dominion Bank has been expanding in the U.S. Northeast.

Yesterday's deal, which will see RBC Centura swell to about 440 locations in the region, is expected to close early next year if no hiccups arise. Half of the purchase will be financed through cash and the other half through RBC shares.

There won't likely be "significant branch consolidation" though some jobs may be affected, Alabama National said in a Securities and Exchange Commission filing yesterday.
Financial Post, Duncan Mavin, 6 September 2007

While other banks are running for cover from the U.S. mortgage maelstrom, Royal Bank of Canada is jumping into the eye of the storm, announcing yesterday it is spending US$1.6-billion to boost its banking operations in the Deep South.

Canada's biggest bank said it has netted Alabama National Bancorporation (ANB), doubling the presence of its U.S. re-tail-banking subsidiary, RBC Centura, in Florida and Alabama, and adding about 25% to its branch network in Georgia.

RBC is paying US$80 a share for the bank, which has assets of US$7.9-billion and will bring Raleigh, N.C.-based Centura's total assets to more than US$33-billion.

At first blush, the price paid by RBC looks high. ANB's stock was trading at US$53.12 before the deal was announced and RBC's offer represents a premium of more than 50% at a time when the U.S. banking sector is in trouble.

ANB's US$5.7-billion loan book is heavily weighted toward residential mortgages and construction. About 46% of its loans are in Florida, one of the states worst-hit by a steep decline in the housing market that has sparked widespread mortgage-related panic.

However, Scott Custer, RBC Centura chief executive, said the price is fair and ANB represents good long-term potential despite the current market turmoil.

Adam Barkstrom, an analyst at Sterne, Agee and Leach Co. in Birmingham, Ala., says the transaction is a positive one for RBC.

ANB is "very, very conservative on the credit side," and its stock has been overly punished by investors spooked by the wider mortgage crisis, Mr. Barkstrom said.

Also, the deal values ANB at a lower price compared to its earnings than the average price other banks have paid for similar acquisitions in the region in the past two years, he added.

Another positive is that RBC will acquire a "very, very strong" management team, Mr. Barkstrom said.

"RBC has been fairly aggressively expanding in the South East and they've got this stuff all over this place but no management. To a large degree, with ANB they are buying management," he said.

RBC has bolstered the RBC Centura franchise with a number of smaller acquisitions over the past 12 months.

In a deal announced last November, the bank bought 39 branches with about US$1.5-billion in loans formerly belonging to AmSouth Bancorporation in Alabama.

In August, 2006, RBC Centura also bought Flag Financial Corp. -- a 17-branch operation located in metropolitan Atlanta, and central and western areas of Georgia.

The ANB deal marks a much bigger step and is one of the largest acquisitions in RBC's history.

The purchase of Centura in 2001 was the bank's largest at US$2.2-billion. RBC also paid US$1.2-billion for Dain Rauscher in 2000.

The purchase of ANB will add 103 branches to the RBC Centura network, bringing its total presence to more than 440 branches.

It will likely take 12 to 24 months to integrate ANB into the Centura network, Mr. Custer said. RBC Centura will keep the ANB management team in place after the transaction closes in early 2008, he added.

The Centura chief said it is tough to forecast whether the mortgage crisis will slash the valuations of regional U.S. banks leading to further acquisition opportunities.

"It's hard for me to know if things are ever going to get cheaper," he said. "You just have to be opportunistic."
RBC Centura Expansion:

    2001 Acquired by RBC; banking subsidiary renamed RBC Centura.
    2002 Acquires Eagle Bancshares
    2003 Acquires Provident Financial Group
    2003 Acquires Admiralty Bancorp
    2004 Closed 38 branches, opened 21
    2005 Closed 19 branches, opened 8
    2006 Acquires Flag Financial
    2007 Acquires 39 AmSouth branches
    2007 Acquires Alabama National Bank
    Total 440 branches
Bloomberg, Doug Alexander and Sean B. Pasternak, 6 September 2007

Royal Bank of Canada, the country's largest lender, agreed to buy Alabama National BanCorp. for $1.6 billion in cash and stock in its biggest acquisition since expanding into U.S. consumer banking six years ago.

Royal Bank offered $80 a share, or 51 percent more than Alabama National's share price yesterday. The Birmingham-based bank has 103 branches in Alabama, Florida and Georgia, and would increase Royal Bank's U.S. outlets by about a third, the banks said today in a statement.

Canadian banks, barred from merging at home, are taking advantage of a stronger dollar to step up acquisitions abroad. Royal Bank bought Atlanta-based Flag Financial Corp. in December for $433.5 million, and added 39 branches in Alabama from AmSouth Bancorp. Bank of Nova Scotia, the second-biggest bank, agreed last week to buy Chile's Banco del Desarrollo for about $1.03 billion.

``The money's there, the acquisition opportunities are potentially there,'' said Jacob Jegher, an analyst at Boston- based research firm Celent. ``It would not surprise me to see other large acquisitions by these banks.''

Royal Bank shares fell 4 cents to C$53.96 at 4:10 p.m. on the Toronto Stock Exchange. Alabama National rose $23.98, or 45 percent, to $77.10 on the Nasdaq Stock Market.

Royal Bank offered cash, stock or a combination of both, the Toronto-based bank said. The transaction, scheduled to close early next year, will make a ``significant'' contribution to revenue growth at RBC Centura, as the Raleigh-based U.S. consumer bank is called, and add to earnings in 2009, the bank said.

``They're basically going to go full-force ahead with the Southeast,'' CIBC World Markets analyst Darko Mihelic said today in an interview. ``There's probably more to come, especially if the weakness in the markets continues and the Canadian dollar stays where it is.''

Royal Bank is paying about 1.9 times the net assets, or book value, of Alabama National, in line with recent U.S. bank purchases, said John Aiken, an analyst at Dundee Securities Corp. in Toronto. It will be the bank's largest purchase since the $2.16 billion takeover of Centura Banks Inc. in 2001.

``This is another step along the path of progress that we're trying to make in building a southeastern regional bank,'' said Scott Custer, chief executive officer of RBC Centura, in an interview.

Royal Bank has increased the pace of acquisitions after slowing purchases in 2004 when losses in the U.S. led to the company's first annual profit decline in four years. The Canadian dollar has gained 23 percent against the U.S. currency the past three years, making foreign purchases cheaper.

In response to the profit slump, the lender cut about 500 U.S. jobs and sold a money-losing mortgage business. Earnings from U.S. and international banking climbed 6.1 percent to C$87 million ($83 million) in the third-quarter this year, the highest in at least nine quarters.

Alabama National has 11 bank units with 103 banking centers, eight mortgage and loan offices and 124 automated teller machines. The bank has $7.9 billion in assets, deposit balances of $5.8 billion and loans of $5.7 billion, Royal Bank said. Profit rose 20 percent last year to $79.8 million.

Alabama National was approached by Royal Bank, and said there won't be ``significant branch consolidation'' as a result of the takeover, according to a filing with the U.S. Securities and Exchange Commission.

The Alabama bank declined to say how many jobs will be affected. Alabama National has 1,900 full-time employees and about 200,000 customers, according to Royal Bank's Web site. With the purchase, Royal Bank will rank fourth in Alabama for deposits, eighth in Georgia and 17th in Florida.
Reuters, Lynne Olver,6 September 2007

"If you look at our franchise, we're in six states in the Southeast and this company was in three of those states," RBC Centura's chief executive and chairman, Scott Custer, said in an interview. "It significantly expands us and gives us management depth."

Amid concerns about the U.S. housing market, Custer told Reuters that the credit quality of Alabama National's real estate portfolio is "excellent," and he said neither Centura nor Alabama National had any exposure to subprime mortgages.

"We're very comfortable with the current state and the future prospects for the loan portfolio," he said.

There will be some efficiencies through branch consolidations and head-office cost savings, Custer said.

With the purchase, RBC Centura will nearly double its branch locations in Alabama and Florida, and will be a bigger player in Atlanta, Georgia.

RBC Centura will become the fourth-largest bank by market share in Alabama, with a 6.4 percent chunk of the market, after Regions Financial Corp , Wachovia Corp and Banco Bilbao Vizcaya Argentaria SA, according to research firm SNL Financial.

The research firm noted that RBC Centura will also rise to eighth-largest in the Georgia market, and becomes the 16th largest bank by market share in Florida, where many retired Canadians spend their winters.
Reuters, Lynne Olver,6 September 2007

Royal Bank of Canada subsidiary RBC Centura Inc said on Thursday it has agreed to acquire Alabama National BanCorporation in a $1.6 billion deal that will add to the Canadian bank's presence in the U.S. Southeast.

Royal Bank, which expects the deal to close in early 2008, said Alabama National shareholders may choose to receive $80 per share in cash, Royal Bank shares, or a combination of the two.

The offer price is a 50.6 percent premium to Alabama National's closing share price of $53.12 on Wednesday. Alabama National's stock has traded in a wide range of $49.31 to $74.15 over the past year.

According to Royal Bank, or RBC, the acquisition will add to its earnings in 2009.

Canada's largest bank has been gradually expanding its U.S. assets after it bought Raleigh, North Carolina-based Centura Banks in 2001 for $2.3 billion. Last summer, RBC Centura bought Atlanta, Georgia-based Flag Financial for nearly $456 million, and in March this year it closed the acquisition of 39 Alabama branches from AmSouth Bancorp.

Since Canadian banks are not permitted to do domestic mergers, they have sought to grow by moving into new geographic regions and broadening their range of financial services at home.

Alabama National, based in Birmingham, is the parent of 11 subsidiary banks and affiliated businesses in Alabama, Florida and Georgia.

They offer banking services to individuals and businesses, commercial mortgage services through a division of First American Bank in north-central Alabama, and brokerage services through another First American subsidiary, NBC Securities Inc.

Shares of Alabama National soared 45 percent to $77.01 on Nasdaq by early Thursday afternoon, after rising as high as $77.80. Royal Bank shares slipped 26 Canadian cents, or 0.5 percent, to C$53.74 on the Toronto Stock Exchange.

While the premium may appear high, RBC is offering to pay 1.9 times Alabama National's book value, and a multiple of almost 20 times its 2007 forecast earnings, Dundee Securities analyst John Aiken said in a research note. Those valuations "are essentially in line with other recent acquisitions," he said.

Al Savastano, an analyst at Fox-Pitt Kelton in New York, said that RBC is picking up additional branches in a high-growth area.

"If you're going to pick anywhere in the U.S. to grow, it would be the Southeast, because it's showing the most growth in terms of population," Savastano said.

But Alabama National is not without problems. About two-thirds of its assets are in construction and commercial real estate, including loans to home builders, who have broadly suffered amid the U.S. housing market slump.

"We expect credit quality at Alabama National to perform better than peers, but the company is not immune to the environment," Savastano wrote in a note last week. In the same note, he lowered his 2007 and 2008 earnings estimates for the bank because of expected credit difficulties and lower fee income.

Alabama National's exposure to "a very frothy real estate market in Florida" highlights the risk associated with the transaction, but this is partly mitigated by the U.S. bank's "conservative lending practices," said Genuity Capital Markets analyst Mario Mendonca in a research note.
Canadian Press. Laura Bobak, 6 September 2007

A U.S. subsidiary of Royal Bank of Canada is paying $1.6 billion (U.S.) in cash and stock for Alabama National BanCorporation, the parent of 11 small banks in the southern United States.

The acquisition by RBC Centura Banks of Raleigh, N.C., adds 45 branches in Alabama, 45 in Florida and 13 in Georgia, extending Centura's reach in the fiercely competitive U.S. Southeast.

Under the takeover deal announced Thursday, shareholders of Birmingham, Ala.-based ANB will receive $80 (U.S.) per share in cash or RBC shares, with the total transaction consisting of half cash and half stock.

ANB's 11 subsidiaries have 103 branches, eight loan offices and 124 bank machines.

As of June 30, ANB had assets of $7.9 billion (U.S.). The acquisition will expand RBC Centura to over $33 billion (U.S.) in assets.

The takeover by RBC, Canada's largest bank with assets of $604.6 billion, follows the acquisition of 39 branches from AmSouth Bank in March, which sparked a down-home reaction from a rival bank.

Superior Bancorp erected a billboard in April near an RBC branch in Decatur, Ala., which read "Sweet Home Canada." On the sign, "Canada" was crossed out, replaced by "Alabama," with the annotation: "It didn't sound right to us either."

Although American banks may be taking the Canadian interloper as a serious threat, Mario Mendonca, an analyst with Genuity Capital Markets in Toronto, said the ANB deal is small in the scope of the overall operations of Toronto-based Royal Bank, which earned $1.4 billion in its latest quarter.

"A deal like this, for $1.6 billion, is hardly a replacement for a merger with the Bank of Montreal, for example," Mendonca said in an interview. "It's better than nothing, let's be clear, but it's hardly a replacement for a merger in Canada."

The purchase is reasonably priced at about 20 times earnings, he said.

"There's nothing really outrageously high about that," Mendonca said.

Asked if it's a good time to expand in the U.S., given the turmoil of swelling mortgage defaults, Mendonca said: "As long as you know what you're buying and you're paying an appropriate price, it might be a great time, especially if things are actually getting better from here, but we don't know."

Royal is facing a "super-competitive" American market for deposits and loans, while the real estate market continues softening, he noted.

Another major issue is whether to centralize major credit decisions or give local managers wide discretion, he said. In Canada, most big loan approvals are made in Toronto.

"You lose a little bit of control over your overall portfolio if you give just a bit too much discretion at the branch level," Mendonca said. "So you can do that, but you have to monitor it pretty closely."

The acquisition, slated to close in early 2008 subject to shareholder and regulatory approval, "is expected to make a significant contribution to RBC Centura's revenue growth in the near term and be accretive to RBC earnings in 2009," the Royal stated.

Scott Custer, chairman and CEO of RBC Centura, said the deal "strengthens our ability to reach more customers in the region by expanding our branch network to more than 440 locations, solidifying our market position in Alabama and opening new and important markets in Florida, and increasing our presence in Atlanta."

The ANB bank units are First American Bank, Alabama Exchange Bank and Bank of Dadeville in Alabama; Indian River National Bank, First Gulf Bank, Florida Choice Bank, Community Bank of Naples, Cypress Coquina Bank and Millennium Bank in Florida; and Georgia State Bank and The Peachtree Bank, both in Atlanta, Ga.
Dow Jones Newswires, 6 September 2007

Royal Bank of Canada's paying a full price for a valuable franchise, Fox-Pitt Kelton says of its $80/share deal for Alabama National (ALAB), one ALAB couldn't refuse. "Given the challenging credit environment that lies ahead, we believe this was an offer that could not be refused," firm says. "Clearly, (ALAB) management recognized the challenges ahead and took advantage of a very attractive offer to maximize value for shareholders."
The Globe and Mail, 6 September 2007

Royal Bank of Canada’s acquisition of Alabama National Bancorp is “consistent with long-term strategy but, at this point, is not material to its bottom line,” says Blackmont Capital analyst Brad Smith, adding that the deal will be accretive to earnings by fiscal 2009.

He figures Royal’s deposit market share will rise in Alabama to 6.5 per cent from 3.5 per cent; in Georgia, to 1.9 per cent from 1.4 per cent; and in Florida, to 0.9 per cent from 0.3 per cent.

He kept Royal at a “buy,” with a $65 price target. The stock has been in negative territory all day Thursday and is now down 14 cents at $53.86.
Alabama National has been steady from its opening vault and is quoted at $77.01 (U.S.), up $23.89 or 45 per cent, on the Nasdaq.