story by Kim Souza
The largest banks in Arkansas continue to get bigger through active mergers and acquisitions in recent months. Home Bancshares/Centennial Bank, Simmons First and Bank of the Ozarks have been on shopping sprees, growing their footprints well beyond the Natural State.
This active M&A climate is fueled by stronger balance sheets by the mid-tier banks and higher regulatory costs which are more burdensome for the smaller community banks.
“One of the reasons for consolidations is the elimination of overhead costs by combining banking institutions It costs the same for a $100 million bank as it does for a $500 million bank in compliance costs. Larger organizations are generally more efficient,” said Garland Binns, bank attorney with Dover Dixon & Horne.
Tom Michaud, president of Keefe, Bruyette & Woods, recently said during the Boston Bank Conference that investors recognize regional banks can grow faster than their larger counterparts. Investors are also just generally more supportive of investing in the the financial sector where there are fewer regulatory hurdles.
Michaud said Wall Street is supportive now, largely because fewer deals are auctions and more are negotiations which allows for ample due diligence. He said “Regional Champions” like Home Bancshares remind him of something he recalls from the 1980s where regional compacts for interstate banking created an artificial barrier to letting some acquirers in. He said today the artificial barrier is SIFI – Systemically important financial institutions with more than $50 billion in assets).
“You're not seeing SIFI banks active in M&A and I think it's because they're still adjusting to the new regulatory framework, including the stress tests. But, there is a runway here for these $5 billion to $50 billion banks to build their companies and build these new Regional Champions,” Michaud notes.
Home Bancshares is not just garnering praise from Michaud.
“Home Bancshares is trading at a 3.6 times (book) valuation and 15 times analyst’s projected earnings for 2015. Their price to earnings are inline with other similar acquiring banks. They keep doing transactions that are accretive to future earnings which is building share value,” said Mark Saunders, managing director for Banks Street Partners.
He told The City Wire that the nine deals Home Banschares has done in Florida involve about $2.5 billion in added assets and now comprise about one-third of the bank’s assets.
“Florida is a pretty attractive market for growth. … In Arkansas there are three metro areas in the 500,000 population range – one of those is Memphis. In Florida there are nine metro areas 500,000 or more and most are growing faster than the national average,” Saunders said.
He said Home Bancshares has a solid enough presence in Florida to see more running room, which is why investors view the stock a growth play, even though it’s trading at higher valuations.
The heightened interest in M&A this past year has pushed bank valuations higher, according to industry experts. There were 19 bank acquisitions across the country in January with a total value of $1.8 billion, compared to deals worth $767 million in the prior year period, according to the Atlanta-based Banks Street Partners. They also report the average tangible book value rose to 160%, from 101% a year ago.
Experts agree that healthier balance sheets and a rising stock market are the two main ingredients making more deals possible like the Bank of the Ozarks purchase of Summit Bancorp for about $216 million in cash and stock. Bank of the Ozarks agreed to pay around 160% of tangible book value for Summit, in line with the industry average. Also, the deal was expected to be immediately accretive to earnings.
"Ozarks has a very strong currency, and they're able to use that currency to create attractive pricing,” Saunders said.
He said Bank of the Ozarks was aggressive with bids on failed banks a few years ago and had some home run bids that have helped to build franchise value. In Texas, he said Bank of the Ozarks has been able to increase its value and brand given the investments made there.
“Texas banks have higher valuations. Population density is growing and businesses are relocating there because of lower tax climate. Bank of the Ozarks benefits because of its Texas presence,” Saunders said.
Binns agreed that the pricing of banks has increased during the past year.
“In the Southwest region of the U.S. the medium price-to-tangible book multiple was 174.3. Liberty, Delta and Summit had a multiple of book of approximately 1.6. The value of the currency of a bank such as Home Bancshares and Bank of the Ozarks which trades at approximately 3.5 times book adds to the value of their currency in an acquisition of another bank,” Binns said.
BANK OF OZARKS
Bank of the Ozarks shares rallied earlier this year on news of the $216 million Summit purchase, outpacing the KBW Bank Index by a three to one margin. But, Bank of the Ozarks shares (NASDAQ: OZRK) have regressed some after the first quarter results that were a little softer than expected.
Share were trading at $58 per share on Thursday (May 8) down from $63 a share in January following the announcement of the Summit deal. The Summit purchase came of the heels of smaller $23 million cash acquisition of Bancshares, a small Houston, Texas-based bank in December.
Seeking Alpha contributor Stephen Simpson of Krastisto Investing, notes that Bank of the Ozarks paid less than 1.0 times tangible book value for the Texas assets, a cheaper deal than the Summit 1.6 times valuation.
He said the Summit deal was an ideal fit for Bank of the Ozarks because Summit’s model (50% real estate and construction lending) compliments its own and more than half of the offices are within two miles of an existing Bank of the Ozarks office, suggesting a good cost reduction potential. Analysts project Bank of the Ozarks will shave 38% from Summit’s operational expenses with synergies.
“Even with these deals, Bank of the Ozarks could still acquire additional assets if the right deal came along. I would project that Texas, North Carolina, South Carolina, and Tennessee would be attractive target markets,” Simpson said.
Bank of the Ozarks CEO George Gleason said in a January conference call that the bank is "seeing more [M&A] opportunities than we can take a look at.”
Saunders said Pine Bluff-based Simmons First National is trading 12.9 times its projected earnings at $38 per share. It’s discounted valued of 2 times book shows there is room for this stock to rise.
On Tuesday (May 6) Simmons acquired Community First Bancshares of Union City, Tenn., for $243.4 million. This deal was priced at 177% of book value, which was more expensive than average pricing multiple in the region. Saunders said Simmons was able to pay that high price because of the untapped value in its share price.
The Community First deal came less than two months after Simmons announced the $66 million acquisition of Little Rock-based Delta Trust and Bank, and comes less than a year after Simmons’ $53.6 million bid to buy Little Rock-based Metropolitan National Bank out of a bankruptcy process.
In a recent interview with Talk Business, Simmons First CEO George Makris Jr. hinted that the next moves might be in Kansas or Missouri.
“We really would like to fill in our footprint in Missouri and Kansas. We have a strategy now for de novo growth. We’ve got some really good bankers in those markets,” Makris said in the interview. “We need a little more scale in those markets to be able to do some of the things that we really want to do.”
RIPE FOR CONSOLIDATION
Saunders expects the consolidation to continue. He said there are fewer failed bank deals, but much room for strategic plays by up and coming regionals.
“In Atlanta, where we are located, it was ground zero for failed banks. There have been none this year. But, we have seen five whole bank deals for institutions between $150 million and $200 million in assets,” Saunders said.
The experts agree the timing is ripe for more consolidations of smaller banks that cropped up in the past decade with plans to sell when valuations rose.
Saunders said the small banks have a tougher time competing on loans, and their regulatory oversight costs are rising to the point where earnings are squeezed.