Citizens trust to acquire CFS bancshares: will deal lead to `merger mania' within black banking community? - B.E. 100s

Black Enterprise, Sept, 2002 by Cliff Hocker

Atlanta-based Citizens Trust Bank (No. 3 on the BE BANKS list with $292.4 million in assets) signed a definitive agreement to acquire CFS Bancshares Inc. in Birmingham, Alabama, (No. 19 on the BE BANKS list with $107 million in assets) to form the second largest African American-owned bank in the U.S. in a deal that may portend future consolidation within the black banking community. When the acquisition is completed, Citizens Trust's combined assets will exceed $400 million.

Citizens Bancshares, which will rank behind only Carver Federal Savings Bank (No. 1 on the BE BANKS list with $449.6 in assets), will pay CFS Bancshares shareholders $64.62 cash per share of outstanding common stock. Though Citizens Trust has enough cash available to entirely bankroll the $9.2 million purchase, it will probably finance half the purchase price as a trust preferred debt, according to CEO James E. Young. Regulators allow this type of debt to be counted as equity and it does not negatively affect existing shareholders. The deal is subject to approval by the approximately 350 shareholders of CFS Bancshares with a vote tentatively scheduled for the third quarter of 2002.

Experts say small banks, which would include all the black-owned banks, will participate in a wave of merger activity. This will be driven partially by technology such as online banking, ATMs, debit cards, and even credit-scoring programs that computerize loan decisions. Dr. Thomas D. Boston, professor of economics at the Georgia Institute of Technology, and member of the BE Board of Economists, says small institutions must merge to succeed in a banking market radically different from what it used to be (see "Banking on Diversification," June 2002). "The companies that adapt and institute these kinds of technological changes are going to survive this revolutionary period taking place in the banking industry," he says. "Most of them are trying to adjust through mergers and acquisitions, and create a large enough capital base and enough economies of scale to introduce the kinds of technology needed to stay on the cutting edge."

Besides IT, banking laws now permit banks to operate across state lines while deregulation allows banks to do financial and estate planning and offer brokerage, insurance, and investment services. African Americans are earning higher incomes and want these services at their banks. "If a black-owned bank wants to maintain its clientele, it has to be able to offer this broader range of services. One of the most effective ways it can do that is to acquire another bank to get the capitalization it needs to grow," Boston contends.

However, in order to see "merger mania" the way we did in the '90s when the economy was red-hot, the stock market would have to pick up, as most bank mergers are stock swap transactions where the acquirer uses its stock as currency to purchase the acquisition target. Joe Gladue, director of research at The Chapman Co. in Baltimore, Maryland, (No. 8 on the BE INVESTMENT BANKS lists with $16.7 billion in total issues) says, "We are seeing a little bit of an uptick from the very low levels we have seen, but I don't really think we're going to see a trend as robust as the consolidation trend in the mid-1990s."

Gladue believes that, in the South where there are many small historically black local banks, good markets still exist for banks that are very close to their customers. They won't all be absorbed into larger institutions. "I think there will be a place for small independents for a long time. Eventually, their numbers will probably get smaller, but I think a lot of them will be around," says Gladue.

Casual discussions between Citizens Trust and CFS Bancshares began around June 2001. As a savings bank, the current banking charter of Citizens Federal (the operating subsidiary of CFS Bancshares) limits the service it provides, which is primarily residential mortgage financing. As a commercial bank. Citizens Trust wants to enter the vibrant Birmingham, Alabama market. "Neither of these organizations had to merge to survive. These were two profitable corporations that had the vision to see that they could do more together than they could alone. That is the basis for the transaction," says Young.

CFS Bancshares, the parent company of Citizens Federal Savings Bank of Birmingham, now Citizens Trust, was founded by late Birmingham entrepreneur Dr. A.G. Gaston in 1957. Executives at CFS's Bancshares expect little attrition as a result of the merger. "In most mergers you would be downsizing, but in this situation, we are going to try to build on what we already have here. We are going to create new jobs from bringing in new products and services to the community. You will see the same faces. I will still be president and CEO of the Alabama division," says Bunny Stokes Jr., chairman and CEO of CFS Bancshares.

Citizens Trust wants to be the first black financial institution to reach the billion-dollar mark and company executives say it has the cash and the aggressive acquisition strategy to do just that, so more consolidation among black banks could lay ahead.