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Tangible book value was considered nearly sacred after the financial crisis. With the economy improving, investors are becoming more tolerant of acquirers diluting tangible book value for accretive deals.
March 16 -
Potential buyers have long been wary of high premiums and the potential for volatility in the energy sector. A harsh correction in oil prices and Texas bank pricing has suddenly given those banks a chance to revisit their views.
January 8
John W. Allison, chairman of Home Bancshares, often says he that he doesn't like to get out of his lane. But he is always on the hunt for an opportunity.
Actions beat out words in Home's latest deal. The Conway, Ark., company agreed last week to
Allison is well aware of the apparent disconnect what does a bank that mainly does business in Arkansas and Florida know about New York or national commercial real estate lending? His answer is essentially twofold: Don't expect the team to ramp up the business too fast and hope stakeholders trust his company's due diligence team to make smart calls.
"I know we've got to answer to the world with this but if my team read it right, these loans are really good," Allison said in an interview.
"We've recruited the same team that created those loans," Allison added. "I've told them, 'Just give me good credits. There is no need to be in a hurry, don't think you have to run out and give me $1 billion.' I'm not interested in that. I'd much rather prefer $300 million that is good."
Allison said that the team, led by Christopher Poulton, a former executive vice president of Doral Bank's U.S. operations, could wind up as large as 15% to 20% of Home's current loan book in a few years if his company finds the venture to be lucrative enough.
"If this turns out to be a place where we ought to be, we'll grow the heck out of it," Allison said. "And if not, we can paralyze it where it is. I'll do the right thing for my shareholders." (Allison is the $7.4 billion-asset Home's biggest shareholder.)
Of course, what percentage this business line will make up also depends on what else Home finds on the M&A front.
Still, Allison said the deal, which should be immediately accretive to earnings and was done at a slight discount to book value, is somewhat a reflection of deal making today. Home has spent the last several years building itself via M&A, but Allison said pricing has gotten a bit out of whack lately.
"I'm shocked by some of the prices out there right now," he said.
Though Home has participated in some healthy bank M&A, it was one of the more-active players in the failed- and distressed-bank space. The opportunity with the new team is also a function of that focus. In late February, Home
Allison's team initially bid all of Doral's U.S. operations, meeting Poulton and vetting the entire property finance book while conducting due diligence. (Home's latest deal, with J.C. Flowers & Co., included nearly $290 million in loans that had been part of Doral Property Finance.)
"What was supposed to be a 30-minute meeting turned into three hours," Allison said. "We looked at their portfolio and they had done a great job. They're good lenders who know what they are doing and I thought, 'Wow, this is really an interesting trade.'"
Analysts said they were not surprised by the loan acquisition, given Home's initial run for the all the operations. Several noted the deal's financial benefits.
Brian Zabora, an analyst at Keefe, Bruyette & Woods, said he expects the new business to add four to five cents to this year's earnings per share. Stephen Scouten at Sandler O'Neill focused more on next year's earnings, saying he thinks it could bring eight to 10 cents to earnings per share.
The analysts, however, had differing opinions of the venture's long-term benefits.
"It is a nice addition and has the potential to be a growth driver for them," Zabora said. "It is not a significant piece, but another engine, and their execution in the past gives me confidence."
Scouten said national businesses like this rarely create the same kind of value as building out a franchise. While he, too, gives Home deference for its past track record, Scouten said he is unsure if the company's M&A track record is totally compatible.
"I know their level of expertise in M&A, but don't know it here," Scouten said, adding that he would prefer that Home stick with buying and fixing "scratch-and-dent" banks in Florida.
"Do I think it is going to blow up on them? No, but again, I still don't know their level of expertise," Scouten added. "At the same time, they seem to have a strong level of comfort and have proven they have the ability to discern talent, so I guess it is a wait-and-see with this one."
