Bbt bought crump for $570 million cash. King says the deal is accretive to earnings - meets or exceeds the hurdle rate of 15%. 15% of $570 million is $85 million per year or about .12 eps per year. So we ought to see a quarterly increase of about 3 cents per share in the 2nd qtr. There will be one time merger costs though. Between crump and bbx, merger costs should be in the $50 million range in the second qtr.
Read the transcript of their 1st qtr. 2012 earnings report sheds some light on the profitability of crump. CFO Bible says that crump will lower the efficiency ratio from .52 to .51 in the second qtr. with crump quarterly revenues amounting to about $75 million in the 2nd qtr.
Maybe .52 to .51 does not sound too significant but it is. The efficency ratio is total noninterest expense divided by net interest income and noninterest revenue. In the first quarter of 2012, bbt denominator was around $2.6 billion. Crump will be increasing the denominator by about 3%. Do the math. It validates King's 15% or better hurdle rate.
Credit Suisse has not picked this up. Their most recent report, I believe, states that crump will only improve eps by about 4 pennies per year. That only equates to a 5% annual return on the $570 million investment.
The hurdle is pre tax as is the efficiency ratio. So the EPS accretion is likely less than 12c. More likely 8-9c imo assuming king did indeed get it at 15% pretax return. But agree CSFB is too low if they are at 4c; though I haven't read the report so unsure if they are including integration costs.
If you take CFO Bible literally per the earnings transcript the denominator increases by 3% or $75 million of revenue while the numerator increases by 1.1% or $16 million of expense. Assuming 30% tax, pat is about 6 cents. Bible may have rounded off some so instead of .52 maybe it's .513, so I'm calling it 4 cents per qtr or 16 cents per year. This would validate King's statement.
On the other hand the press release said, the purchase price equals 9 times ebitda or $63 million. I think is where credit suisse is coming up with a penny per quarter. However, I suspect this is before cost reductions and revenue synergies to be realized from the acquisition. Bbt insurance will be placing more business through Crump making it more profitable. Merger charge for the 2nd qtr. I think is $45 million (some is bbx).
I would take CFO Bible at his word that the efficiency ratio will drop to .51 from the Crump acquisition, all other things being equal.
Do you see any chance of another dividend increase this year? KK maintains this as a high priority and seems empathetic with those of us relying on them. Earnings would seem to justify an increase to.25 before the end of the year.
Any dividend increase will have to be approved by the Fed. The pattern has been one increase per year.
Last qtr. the payout ratio was 28% before one time charges and 33% based on the bottom line.
I think quarterly eps going forward will increase significantly and approach $1 per share by the 4th qtr. Without a dividend increase, this would put the payout ratio well below the stated objective of 30 to 50%.
So I don't have an answer. Does bbt submit another increase to the Fed in 2012?
My view is it will be booked mostly as goodwill which won't be amortized so minimal EPS impact from amortization. Goodwill and specific intangibles tend to get lumped under the generic 'intangibles' bucket when getting discussed. Have to wait for the Q and see how the purchase accounting allocates the price. I think it shakes out ~15%-16% pretax returns and ~12% after tax returns. Good but not great. We'll see Q2.
Don't forget the amortization impact on eps. I did not take that into account before - about $10 million increase in quarterly amortization. Including amortization I'm looking at 1.5 to 2 cent eps increase in 2nd qtr. from crump before acquisition charges.
To calculate an irr on a pretax basis while the textbook definition is aftertax would violate basic principles of honesty and fairness and bbt core values. I know Kelly King would never do something like this. King got crump at a good value and I believe it spins off cash in excess of 15% annually.
And yes, the valuation allowance charge-offs are still vividly in my mind but who in the world could project that land values would drop close to nothing? Besides King's back end approach minimized shareholder dilution.