CenterState Bank and South State finalized this year’s biggest bank merger ahead of schedule — no small feat given the ongoing coronavirus outbreak.
The $3.2 billion deal, finalized on June 8, created a prominent $35 billion-asset regional bank that spans six states across the Southeast. The companies had eyed a third quarter closing.
The transaction came together smoothly, CEO John Corbett said in an interview, despite a whirlwind of events that have enveloped the banking industry in recent months, including the pandemic, a sudden economic slowdown and civil unrest.
The surviving company took South State’s name. Winter Haven, Fla., where the new South State is headquartered, served as the base of operations for CenterState, where Corbett also had the title of chief executive. The management team and board include representation from both companies.
The rationale for the deal remains intact months after its announcement: achieving scale, efficiency and more funds to invest in technology. Corbett said the pandemic only amplified the importance of scale and robust digital platforms, while social distancing has pushed branches out of favor and online banking to the forefront.
“The pandemic has only affirmed our strategic rationale,” Corbett said. “This industry is evolving, and it is incumbent on us to evolve with it. A lot of it is extracting costs from the brick-and-mortar system and investing it back into the digital transformation.”
South State identified $80 million in annual cost savings, or about a tenth of all noninterest expenses, which should be fully phased in by 2022. The deal is expected to be 20% accretive to South State’s earnings per share once costs are taken out.
“We’re on track to meet our targets,” Corbett said.
Though the companies were able to complete the deal early, they must now tackle a challenging operating environment that shows no signs of easing up.
“On top of a recession, we have a near-zero interest rate environment that could last for years,” Corbett said.
Corbett discussed the road ahead, along with his views on running a bank during a pandemic and social upheaval. Here is an edited transcript of the conversation.
What are your thoughts on the banking landscape and U.S. economy, given the pandemic?
JOHN CORBETT: The world is opening back up in a big way. In our six-state footprint, things are close to wide open in Florida, Georgia, Alabama and South Carolina. There’s more caution in North Carolina, and it is much more cautious in Virginia, based on state government reopening orders. It’s different based on the state, but I would say overall it definitely feels like we’ve turned a page. People are getting out and getting active. That’s encouraging. Memorial Day weekend felt like the turning point. Hotels were sold out in many places, which was far different than a month before.
One laggard in Florida has been the theme parks, but they’re opening back up again — all the Disney parks open back by July 15. That’ll be one of the last big economic drivers to get cranked back up again.
Generally speaking, COVID-19 case totals continue to climb and there’s a lot of concern about a second wave. Are you worried about new outbreaks shutting down the economy again?
It will be interesting to see if we have to dial it back down again. We’ve seen isolated cases of, for example, restaurants that open then have to close again because an employee tested positive. But at some point, you have to come out of the bunker and figure out how to live with this. And probably there will be more isolated cases where businesses have to clamp back down. It’ll probably look like an accordion, expanding and pulling back a bit, then expanding more in order to get it all back going. We’re going to have to learn to live with it.
You don’t see another complete lockdown?
I don’t see the political will for that. The good news is that people know a whole lot more about this now — how the disease spreads, how hospitals can prepare or get overrun. It seems like while there were so many unknowns in March, we now have a good knowledge base to draw from, and the fear isn’t as high.
Recent protests have pushed racism to the forefront of public discussion. How is South State addressing the issue?
It’s created a lot of healthy discussion and introspection, and that’s a good thing. As community bankers, we look at what’s going on and ask what role do we play in rebuilding our communities from both the social unrest and the pandemic? I tell our bankers they have a lot more influence than they may realize. As bankers, we’re capital allocators. Through lending, we supply billions of dollars a year in capital, which is the lifeblood of opportunity. It’s our responsibility as stewards of that capital to be sure we’re supplying opportunity to all —regardless of race.
As an employer, how are you responding?
We’re examining our own diversity policies and practices and business initiatives, and really trying to make sure we do the right things to build a diverse, inclusive team.
You already had a lot on your plate when you announced the South State-CenterState deal in January. Did the pandemic and social unrest disrupt the closing process in any way?
Our plan was to close the merger in the third quarter. So in reality, we were able to close ahead of schedule, in spite of all the issues we as a society are facing. We really were able to do it on a parallel path, without disruptions. The regulators worked with us closely, and the approval was actually faster than we anticipated.
But it wasn’t easy. At the same time, while we were doing all of this, the combined company generated some 20,000 [Paycheck Protection Program] loans. We had employees working around the clock — seven days a week. But it was a good team-building process. It pulled the companies together because we were working on a common challenge as an almost-combined company. Integrations are hard, but a challenge outside of the integration that brings the teams together is a great thing.
So no issues brought up by regulators?
That’s right. We announced this early, relative to the pandemic. We were well down the road and well-positioned before it hit.
What cracks are you seeing in credit quality due to the pandemic?
It’s all speculation at this point. It feels like the whole nation got a morphine injection and it hasn’t worn off yet. All the trillions of dollars in stimulus, there’s so much that hasn’t worn off. Having said that, in the third quarter, we could see the PPP stimulus run out, a lot of the loan deferrals could end, a lot of the unemployment benefits will run out. It feels like the morphine will wear off in the third quarter, and then we as an industry will know where we are.
There will be some notable impact, but you’re saying it is too soon to quantify?
Anecdotally, I think the impacts are going to be sector-specific. Some businesses are as busy as they’ve ever been, but others have really struggled. If you’re a supplier to Disney World, for instance, you are hurting because [the park] has been closed for three months. Business has stopped. It also will be different by geography nationwide. Some places, it looks and feels completely different than others.
Some compare the expected recovery to what often occurs after a natural disaster — a sharp rebound as rebuilding takes place. Do you see that?
I don’t think it’s a perfect comparison. You think about a hurricane, it creates a lot of damage to physical properties that are almost entirely insured. You end up with insurance-funded stimulus to rebuild that is geographically specific. This is different. It’s so widespread that it’s hard to compare. It was like a hurricane in the way the economy shut down, but the recovery will look different. Here, we have the issue that we’re going to have to learn to live with this disease for a long time.
Would you expect to see pent-up demand unleashed in a recovery?
Again, I think it will be sector specific. Restaurants, hospitality, retail — we’ll have sectors that will take a lot longer than others to recover. But yes, there are bright spots. Residential real estate and the warehouse business are doing well. As more and more people work from home, you see more and more products distributed through these warehouses. They're growing. So there will be opportunities.
What’s your outlook on M&A in the near term?
Where we sit today, this is an opportunity to step back and focus on integration because there just isn’t much going on while the pandemic is still here. I just don’t foresee a lot of M&A opportunity when there are so many uncertainties about the loan quality of sellers. Nobody’s really sized up the potential losses yet. You just don’t know.