Well capitalized publicly-held banks based in Arkansas or doing business in the Natural State are growing through ongoing acquisition fueled in large part by increased federal regulations and compressed margins.
Conway-based Home Bancshares, Little Rock-based Bank of the Ozarks, Pine Bluff-based Simmons First National, and Tupelo, Miss.,-based BancorpSouth are among a new class of growing regional banks that were well-capitalized and came through the recession relatively unscathed, said Lee Burrows, CEO of Bank Street Partners, based in Atlanta, Ga.
Burrows said there are far more sellers than buyers today and he does not expect that to change in light of the heightened regulatory climate ushered in with federal Dodd Frank legislation.
Named after legislative authors U.S. Sen. Chris Dodd and U.S. Rep. Barney Frank, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law on July 21, 2010. It was passed in response to the near collapse of several large U.S.-based banking operations in 2007-2008. Advocates of the law say it will prevent banks and other financial institutions from essentially creating a financial house of cards. Opponents of the law say it is overkill regulation that will make economic recovery more difficult and prevents smaller community banks from being flexible in how they work with individuals and small businesses.
The law was designed to increase examination and enforcement of banks and other financial service companies with more than $10 billion in assets. However, regulations will also increase for banks under the $10 billion level.
A NEW LINE OF BUSINESS
Even without the aid of being in larger and faster growing markets, Burrows said these larger banks in Arkansas – and in West Virginia and Mississippi – are among the most profitable and have been the most inquisitive with respect to acquisitions. He estimated that Bank of the Ozarks, Home Bancshares and their peers look at three to four acquisition opportunities each month to scrutinize those that best suit them.
In particular, he said the banks in acquisition mode have been able to take advantage of a better economy, growing number of sellers and plenty of capital backing as their respective stock prices continue to surge. He said Bank of the Ozarks and Home BancShares have been so successful with the growth-by-acquisitions strategy that it’s become a new line of business for the banks.
Burrows said with each acquisition, bank profits grow, fueling the share price and providing the necessary capital strength for continued expansion.
RUNNING WITH BULLS
Bank of the Ozarks shares (NASDAQ: OZRK) have rallied more than 81% over the past two years. The share priced closed at $43.41 on Tuesday (Aug. 18) and was trading lower early Wednesday. The shares are up almost 15% for the year.
Burrows noted that Apple, the darling of Wall Street, is up 63.44% over the past two years, and 5.97% year-to-date. The blue chip Dow Jones Industrial composite index is up 44.97% over the past two years while falling 1.67% so far this year.
It’s not just Bank of the Ozarks shares running with the bulls. Simmons First National (NASDAQ: SFNC) has seen its shares rise 70% in value over the past two years. The share priced closed at $44.82 on Tuesday (Aug. 18), with the price up more than 10% for the year.
Home Bancshares (NASDAQ: HOMB) stock price has rallied 49% in the past two years. The share priced closed at $40.98 on Tuesday (Aug. 18) and is up more than 27% for the year.
BancorpSouth shares (NYSE: BXS) are the laggard of the group, but with a 24% increase price in the past two years, the bulls are still in charge. The share priced closed at $25.12 on Tuesday (Aug. 18) and are up around 12% for the year.
BEYOND THE OZARKS
During the second quarter ended June 30, Bank of the Ozarks acquired the Bank of the Carolinas Corp. in an all-stock deal worth $65 million, its 13th acquisition since March 2010. Following the recession in 2008 and early 2009, Bank of the Ozarks took part in seven FDIC-assisted acquisitions of failed banks in Florida, Alabama, Georgia, as well as North and South Carolina by early 2013. Analysts said the acquisitions were successful, and all were acquired at essentially bargain-basement prices so the deals were self-financed and typically profitable within the same quarter as the closing.
In the first quarter of 2015, Bank of the Ozarks completed its acquisition of Intervest Bancshares Corporation in Pinellas County, Fla. This was the bank’s largest acquisition to date, as Intervest had approximately $1.47 billion of total assets, $1.14 billion of loans and $1.17 billion of deposits at Dec. 31, 2014.
CEO George Gleason's bank-buying strategy has helped Bank of the Ozarks grow total assets from $2.77 billion on Dec. 31, 2009, to $8.71 billion as of June 30, and more than double its number of offices. Bank of the Ozarks recently reported net income for the first half of 2015 at $84.67 million, up 63.5% from the same period in 2014. Earnings per share for the first two quarters of 2015 were 98 cents per share, up from 68 cents in the year-ago period. Revenue has grown to $232.9 million, a 50% gain over the first half of 2014. The bank’s return on assets, a measure of profitability increased to 2.15% as of June 30. The industry benchmark is 1%.
Deposits were $7.09 billion at June 30, a 42.2% increase from $4.98 billion at June 30, 2014.
GROWING HOME BANCSHARES
Home BancShares, parent company of Centennial Bank, also has been active in acquisitions this year. Aside from the more than $280 million blockbuster Liberty Bank of Arkansas deal in 2014, the bank has been shopping outside the Natural State.
Earlier this year, Centennial Bank acquired Doral Bank’s Florida Panhandle operations through an FDIC no-loss share agreement. The deal provided new loans of approximately $42.2 million before loan discounts, deposits of approximately $466 million including $339.5 million of time deposits and $126.5 million of transaction and savings accounts, plus a significant cash settlement to balance the transaction.
In April, the bank completed an acquisition of national commercial real estate loans from New York City-based J.C. Flowers & Co. totaling approximately $289.1 million. This deal provided Centennial Bank with an average loan size of approximately $12.0 million of national commercial loans and a weighted average portfolio yield of 6%.
During the second quarter, Home BancShares acquired the Florida Business BancGroup, for approximately $101.6 million. The BancGroup operates six branch locations and a loan production office in the Tampa Bay area and in Sarasota. As of March 31, 2015, FBBI had approximately $540.5 million in total assets, $391.7 million in loans, and $461.4 million in deposits. Upon completion of the acquisition, the company will have approximately $8.5 billion in total assets.
“This is a smart, strategic acquisition for Home which allows us to increase our market share in the Tampa area, while continuing to increase shareholder value with disciplined pricing,” John Allison, Home BancShare’s chairman said in a statement. “There is no dilution in this transaction for our shareholders. It will be immediately accretive to diluted earnings per share, book value and tangible book value on day one.”
Home BancShares investors have to be pleased with the institutions track record. Net income for the first six months of 2015 rose to $65.025 million, a gain of 16.6% from a year ago. That equated to 96 cents per share, compared to 85 cents earned in the same period of 2014.
The bank also grew grown total revenue by 9.43% to $205.889 million, year over year. At 1.70% the bank’s return on assets is also strong as the industry benchmark is typically 1%. And Allison isn’t finished making deals.
“As a result of our strong capital position, we are adequately prepared to continue entertaining strategic opportunities in areas within and surrounding our existing footprint and supporting loan growth in our legacy organization,” Allison said.
SIMMONS APPLYING BRAKES
Since 2013, Simmons First National has been in acquisition mode, starting with a $53.6 million bankruptcy-related deal it made for Little Rock-based Metropolitan National. But that deal, as large as it was in 2013, was just the beginning for what has become a bigger appetite.
In late 2014, Simmons completed a $66 million acquisition of Delta Trust & Banking Corp, also based in Little Rock. In February, Simmons announced the acquisition of Liberty Bancshares in the Springfield, Mo., market as well as Community First Bancshares in Union City, Tenn..
“These acquisitions bring together three high-performing organizations with a shared commitment to associates, customers, communities and shareholders," George Makris, Jr., chairman and CEO of Simmons First National Corp., said at the time. "Together, we create a premier community banking organization positioned for continued, long-term success."
Through those deals, Simmons had $7.6 billion in assets, $4.7 billion in loans, $6.2 billion in deposits, more than 2,000 employees and more than 160 locations in Arkansas, Kansas, Missouri and Tennessee. Makris said in the recent earnings call that the bank would take some time to automate its compliance systems before entering new deals.
“We know that as we approach the $10 billion asset level, the stricter compliance guidelines will kick-in and while we have a way to go, if we don’t start automating some of our systems we feel we might hit some regulatory resistance in the future,” he said.
For the six months ended June 30, Simmons reported net income of $28.727 million, a whopping 101% increase from the $14.261 million reported a year ago. Earnings per share rose to $1.10, compared to 87 cents a year ago. Simmons also grew its total revenue to $173.66 million, a gain of 62.9% from a year ago.
The bank reported merger related costs of $11.665 million to date, compared to $2.626 a year ago. Makris said branch right sizing efforts also resulted in an 11-cent per share hit to earnings this year.
DEALS ON HOLD
BancorpSouth announced in January 2014 it would buy Ouachita Independent Bancorp of Monroe, La., for $115 million in stock and cash. The aggressive moves came after the bank named new CEO Dan Rollins and worked through bad-loan problems that had depressed earnings.
Within the same month BancorpSouth also sought to buy Central Community Corp., the parent company of Austin, Texas-based First State Bank Central Texas. The deal pushed BancorpSouth much deeper into the competitive Texas banking market. BancorpSouth anted up $182.3 million in stock and $28.5 million in cash for this Texas deal.
Both deals are on hold because of federal inquiries into BancorpSouth’s practices. Bank officials said federal bank regulators have found problems with its compliance with the Bank Secrecy Act and programs to fight money laundering. BancorpSouth also said the federal Consumer Financial Protection Bureau is reviewing the bank's fair lending practices.
"While disappointed in the delay in being able to close these transactions, we are working diligently to resolve the compliance concerns that have been identified and to make the necessary improvements in our compliance programs," Rollins said in a statement. "We are pleased with the confidence that our merger partners have demonstrated through the extension of the merger agreements."
Through the first half of 2015, BancorpSouth had net income of $71.979 million, rising 21.35% from the $59.312 million earned in a year ago. Earnings per share was 74 cents, compared to 62 cents a year ago.
Thus far in 2015 revenue is up 7% to $365.14 million, compared to $340.96 million a year ago. The bank’s profitability level gives it a return on assets of 1.08%, up from 0.92% a year ago.