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Although the Federal Reserve Board ultimately signed off on Capital One Financial Corp.'s deal to buy ING Direct USA, the grueling 9-month long process to get there is a warning to other large would-be acquirers.
February 17 -
With numerous attractive institutions and robust growth markets, the state could kickstart a round of traditional deals nationwide. The only problem? Texas bankers also know they're attractive, and the most comely banks aren't interested in low-priced dates.
February 8
If Scott Dueser had his way with acquisitions, some billion-asset bank in Texas would be his by now.
"We're knocking on a lot of doors and we have banks selected that we would like to acquire," says Dueser, the chairman and chief executive of First Financial Bankshares in Abilene, Texas.
He may be knocking for a while.
Part of the problem for a $4.1 billion-asset bank like First Financial is that the only banks answering the call are far smaller than $1 billion. These smaller banks make up a greater percentage of the banking population and are the first to feel the earnings pressure from low interest rates, higher regulatory costs and weaker economies of scale. Thus, they are more likely to sell.
Buyers' reluctance is understandable, says Mark Fitzgibbon, analyst at Sandler O'Neill & Partners. "They're rightly looking at this in such a way where they're saying 'look guys, acquisitions can be painful so we're going to make sure this has an impact on the balance sheet and earnings.'"
To a bank the size of First Financial, one small deal hardly boosts earnings, yet takes just as much effort to integrate.
The typical bank deal averages about 25% the size of the buyer, Fitzgibbon says.
"You do the same amount of work for a billion-asset deal as you do for a $100 million-asset deal but the needle moves a lot more for the $1 billion-asset deal," Dueser says.
First Financial has acquired 14 banks since 1993, all of which were less than $200 million of assets.
The last bank First Financial acquired was Sam Houston Financial Corp. in November 2010. The bank had $159 million of assets but it represented less than 5% of First Financial's size at the time. In general, a $1 billion-asset bank would generate a 24% growth rate for First Financial based on its current size.
Other serial acquirers echoed Dueser and said they are focused on small banks because they have to be.
"The integration process doesn't vary a lot based on size," says Daryl Byrd, president and chief executive of IberiaBank Corp. in Lafayette, La. "But from an efficiency perspective, bigger may be more efficient."
Still, Byrd says Iberiabank, which has acquired two open banks last year, tends to focus on markets they want to be in rather than size or cost savings.
Most acquirers and shareholders expect the deal to be accretive to earnings within the first two years, experts say. Typically, there are fixed costs such as legal fees for submitting documents. Other costs have risen since the financial crisis began, such as due diligence on asset quality.
"There's no question" costs have increased, Dueser says. In particular, he says, purchase accounting standards have become "ridiculous" since the bank buyer must write down the reserve that the seller held against its bad loans.
"You have to start with no reserve when you pick up those loans … and a year later it's possible that some of those you had to write down have gotten better," he says. "Frankly, purchase accounting today distorts good accounting valuations for shareholders in really knowing what they have."
So what will it take for larger community banks to achieve the growth they are seeking?
They will have to make a cluster of small bank deals, says Dory Wiley, the president and chief executive at Commerce Street Capital LLC.
A single million-asset bank acquisition "is not going to move the needle a lot but if you do a couple of those a year … it really starts to manifest itself and the bank can do really well," Wiley says.
One example is Prosperity Bancshares Inc. in Houston which has announced three bank deals since September. The targets total $330 million of assets with one as low as $37 million. But Wiley says what matters to shareholders is that the $10 billion-asset bank is more than a talker when it comes to growth.
"It sends a message to the market that they're still buying," Wiley says, adding that it is imperative to have a staff dedicated to just M&A. "If you don't buy banks very often, you're sort of half pregnant … but if you're in the market all the time, you're a well-oiled machine."
Wiley acknowledges that because there are fewer banks above $1 billion of assets looking to sell, competition for them will be fierce, which drives up pricing for those banks. So the buyers interested in larger banks must decide whether they want to hold their capital to bid heavy on a large bank or spend it on a bunch of little banks now.
"What happens if you made two acquisitions and your dream deal shows up? Whoops," Wiley says. "You need to make sure you can stay in the business and can handle the opportunities that arise."
Almost 93% of the 183 bank deals announced since 2011 were for targets under $1 billion of assets, according to data compiled by Sandler O'Neill. And 85% were under $500 million of assets.
There are fewer billion-asset banks looking to sell and the pricing will be competitive, Dueser says.
"My question to a person of that size is where are you going to be in five years with your stock and where would you be in five years with our stock?" says Dueser, whose company reported its 25th year of consecutive earnings growth in 2011. "They have to go home and do the math."
First Financial's 2011 earnings jumped 16% to $2.17 a share from a year earlier. It was down 9% from five years ago.
