425: Capital Bancorp to Acquire Integrated Financial Holdings in $66 Million Deal

Capital Bancorp, Inc. (CBNK) will acquire Integrated Financial Holdings, Inc. (IFHI) in a cash and stock transaction valued at $66 million, aiming to diversify CBNK with IFHI's niche C&I business.

Summary

• Capital Bancorp, Inc. (CBNK) and Integrated Financial Holdings, Inc. (IFHI) have announced a definitive merger agreement where CBNK will acquire IFHI in a cash and stock transaction valued at $66 million.
• IFH shareholders will receive $5.36 in cash and 1.115 shares of CBNK common stock for each IFH share, subject to certain adjustments.
• Based on CBNK's closing price of $20.00 on March 26, 2024, the implied per share purchase price is $27.66, inclusive of the cash consideration.
• IFH is expected to distribute its minority equity interest in Dogwood State Bank to IFH shareholders in the form of a dividend equal to approximately 0.469 shares of Dogwood State Bank for each share of IFH common stock, a value of $7.69/share or approximately $18 million based on the closing price of Dogwood State Bank on March 26, 2024.
• Upon closing, CBNK shareholders will own approximately 84% and IFHI shareholders will own approximately 16% of the combined company.
• The transaction is expected to produce 17% EPS accretion in 2025 with manageable tangible book value dilution of ~5% earned back in approximately ~1.8 years.
• The pro forma tangible common equity / tangible assets ratio is expected to be 11.0%.
• The deal is expected to close in the second half of 2024, pending shareholder and regulatory approvals.

Sentiment

Score: 8

Explanation: The document presents a positive outlook on the acquisition, highlighting the strategic benefits, financial accretion, and value creation for shareholders. The management comments and detailed financial projections contribute to the optimistic sentiment.

Positives

• The acquisition is expected to be 17% accretive to CBNK's EPS in 2025.
• The tangible book value dilution of approximately 5% is projected to be earned back in about 1.8 years.
• The combined company will have a more diversified loan book, with approximately 38% in C&I and owner-occupied CRE loans.
• The acquisition is expected to significantly increase CBNK's return on tangible common equity by approximately 260bps in 2025.
• The pro forma fee income contribution will exceed approximately 20% of total revenue.
• The transaction will create a best-in-class nationwide lender in government guaranteed lending across both USDA and SBA government guaranteed lending.
• The combined company is expected to have robust pro forma capital ratios, with a tangible common equity / tangible assets ratio of 11.0%.

Negatives

• The transaction will result in tangible book value dilution of approximately 5% at close.
• The deal is subject to shareholder and regulatory approvals, which could delay or prevent the closing.
• Integration of IFHI's operations into CBNK may be more difficult, time-consuming, or costly than expected.
• Revenues following the proposed transaction may be lower than expected.

Risks

• The occurrence of any event that could terminate the merger agreement.
• The outcome of any legal proceedings that may be instituted against Capital or IFHI.
• Failure to obtain required regulatory, shareholder, or other approvals.
• The risk that regulatory approvals may result in conditions that could adversely affect the combined company.
• The ability of Capital and IFHI to meet expectations regarding the timing, completion, and accounting and tax treatments of the proposed transaction.
• Adverse effects on the market price of Capital's common stock due to announcements relating to the proposed transaction.
• The possibility that the anticipated benefits of the proposed transaction will not be realized.
• Difficulties in integrating the two companies.
• Diversion of management's attention from ongoing business operations.
• Inability to achieve expected synergies and operating efficiencies.
• Effects of the announcement, pendency, or completion of the proposed transaction on the ability of IFHI and Capital to retain customers and key personnel.
• General economic, political, and market factors affecting the companies or the proposed transaction.
• The effects of inflation and changing interest rates on IFHI and Capital.

Future Outlook

The combined company aims to capitalize on the growing niche of government guaranteed lending and servicing, with expectations of strong EPS accretion and returns on capital.

Management Comments

• Ed Barry, Chief Executive Officer of Capital Bank, stated that the acquisition represents a continuation of their strategy to build a highly diversified business that generates best-in-class returns for shareholders.
• Marc McConnell, Chairman, President and CEO of IFH, expressed excitement for the partnership with Capital and the benefits it brings to both banks, believing they can secure and grow their position as a leader in nationwide government guaranteed lending.

Industry Context

This acquisition reflects a trend of consolidation in the banking industry, with larger institutions seeking to expand their services and geographic reach through strategic acquisitions. The focus on government guaranteed lending aligns with the increasing demand for these types of loans, particularly in the renewable energy sector.

Comparison to Industry Standards

• The document compares Capital Bancorp's financial metrics to a selected group of banks with assets between $1.5 billion and $4.5 billion in the Mid-Atlantic and New England regions, including ACNB, BCBP, BHRB, BPRN, BWFG, EBTC, FLIC, FRBA, FRST, FVCB, HNVR, JMSB, MNSB, MRBK, MVBF, NBN, PKBK, PVBC, and UNTY.
• The pro forma ROAA for the combined company is projected to be 1.7% at close, which is higher than the median of 1.1% for the selected banks.
• The pro forma ROATCE is projected to be 14.9% in 2025, which is higher than the median of 13.7% for the selected banks.
• The document also references the KBW Regional Bank Index (KRX) for broader industry comparisons.

Management Changes

Stakeholder Impact

• Shareholders of both CBNK and IFHI will be impacted by the merger, with IFHI shareholders receiving cash and stock in CBNK.
• Employees of IFHI will be integrated into CBNK, with key personnel retained in leadership roles.
• Customers of both banks will have access to a broader range of services and a larger lending capacity.
• The combined company will be better positioned to serve the government guaranteed lending market, benefiting borrowers seeking USDA and SBA loans.

Next Steps

• Obtain shareholder approvals from both Capital Bancorp and Integrated Financial Holdings.
• Secure regulatory approvals.
• Satisfy other customary closing conditions.
• Complete the merger in the second half of 2024.
• Integrate IFHI's operations into Capital Bancorp.
• Achieve projected cost synergies and revenue growth.

Key Dates