Capitol Federal Savings Buys Capital City Bank

Capitol Federal Financial, the parent company of Capitol Federal Savings, has agreed to buy Capital City Bancshares, Inc., the parent company of Capital City Bank, Topeka.

The two companies say they have signed a definitive agreement and plan of merger pursuant to which Capital City Bank will merge into Capitol Federal. 

They are calling it a merger, but this arrangement looks more like an acquisition by Capitol Federal. Capitol Federal has agreed to buy Capital City for $37.5 million in stock. Capitol Federal Financial stock (CFFN) was down 1.2% to $12.48 per share on the news this morning, but recovered to $12.60 by mid morning.

As of March 31, 2018, the combined company would have total assets of $9.5 billion, loans of $7.5 billion, deposits of $5.7 billion and an equity position of approximately $1.4 billion.

With the acquisition of Capital City Bank, Capitol Federal Savings will enter the commercial banking business, through the origination of commercial lending products and offering of commercial deposit services, for the first time in its 125 year history.  

While Capitol Federal Savings has built a small, but meaningful, portfolio of mostly commercial real estate loan participations through its network of correspondent banks over the course of the last five years (which portfolio totaled approximately $462 million in gross loans as of March 31, 2018), this merger with Capital City will enable the company to offer a full array of commercial lending and deposit products and services.  With the talented and experienced commercial banking teams from Capital City Bank joining Capitol Federal Savings, the Company will be able to introduce these lines of banking into its branches in overlapping communities upon closing of the merger, while working to expand to the other communities served by Capitol Federal.

John B. Dicus, Chairman and President of Capitol Federal, stated: "We are pleased to be merging with Capital City Bank to introduce a full commercial banking experience to our customer base and communities.  Capital City Bank has a long history of building a conservative, customer focused community bank, with an overlapping geographic focus in markets highly familiar to us - Topeka, Lawrence and the Overland Park market of Kansas City.  Through the leadership of the Sabatini family, Capital City Bank has built a well-regarded company over the course of many decades, driven by the people and platforms we need to enter the commercial banking business in the right way and in a meaningful way.  Through the many years of knowing the team at Capital City Bank, it is obvious to us that we hold a shared cultural approach to banking, focused on risk management and customer service.  In addition, we are able to complete this merger and remain under $10 billion in assets, allowing us to continue our current dividend policy of paying 100% of earnings, while providing a positive upside."

Dicus said: "We are excited that Bob Kobbeman, Capital City Bank's President and Chief Executive Officer, will be joining Capitol Federal Savings to run this new commercial banking division for our Company.  After growing our commercial real estate portfolio over the last 5 years through our correspondent lending network, we believe this is the right time to enter the commercial banking business through this low risk merger."

Capital City Bank generated $2.45 million in earnings in 2017. Capital City Bancshares, the holding company for the bank, generated $1.4 million in earnings in 2017, according bank filings with the FDIC.

Capital City Bank, a commercial bank holding company with $434.1 million in total assets as of March 31, 2018, has locations in Topeka, Lawrence and Overland Park.  Capital City Bank offers commercial, personal, trust, and brokerage products and services.  Like Capitol Federal Savings, Capital City Bank adheres to a business model that prioritizes customer service and conservative lending.  Established in 1892 in Richland, Kan., and relocated to Topeka in 1964, Capital City Bank has a strong history of community support through charitable, educational and non-profit donations.  These characteristics, among others, make Capital City a great fit with Capitol Federal.

Matt Sabatini, Chairman of the Board of Capital City Bank, said: "Our ownership and senior management team are truly excited about the opportunity going forward, as we join Capitol Federal.  With their size, branch network and strong capital position, the merger offers our team a wonderful chance to grow our commercial banking business.  Because Capitol Federal Savings does not currently have a full suite of commercial banking operations, we will be able to provide a significant portion of our people a role in the combined organization.  As a family-run bank for over 126 years this factor was of great importance to Frank Sabatini and our family."

Subject to the terms of the merger agreement, Capital City Bank stockholders will receive 3.725 shares of Capitol Federal's common stock for each of the outstanding shares of their common stock. Based on this fixed exchange ratio, Capitol Federal will issue approximately 3.0 million shares of its common stock, representing approximately 2.1% of pro forma shares following the merger.  Based on Capitol Federal's closing price of $12.64 as of April 27, 2018, this represents a value of $47.08 per CCB common share, and an aggregate deal value of $37.5 million.  This equates to a price to CCB tangible book value as of March 31, 2018 of 141% and a premium to CCB's core deposits of 3.2% as of March 31, 2018.