Iberiabank Returns to M&A, Adds Competition in South

Iberiabank (IBKC) is gearing up for a busy year of bank M&A, and it started with the low-hanging fruit Monday.

The Lafayette, La., company's $161 million deal to buy Teche Holding (TSH) in nearby New Iberia signaled its return to the M&A market.

Iberiabank was once an active buyer, having completed several failed-bank deals during the downturn and was among the first to enter the open-bank market in the years following the collapse.

However, the $13 billion-asset company was noticeably absent from dealmaking in 2013 except for a small branch deal in the fall, as it instead focused on trying to become more efficient. The introspection may have been prompted by investors' concerns over lumpy earnings and high expenses, analysts say.

Meanwhile, other Southeast acquirers pounced on targets, and the market handsomely rewarded their stocks. But with the Teche deal and third-quarter results that beat expectations by a nickel, Iberiabank appears to be on upswing and could join the likes of Bank of the Ozarks (OZRK), Home BancShares (HOMB) and others in the South in once again being a major player in M&A.

"There were some concerns that they'd never get to normalized profitability or hit their efficiency targets," says Michael Rose, an analyst at Raymond James. "But this is another step in the direction of showing that they can make this work."

The acquisition of the $857 million-asset Teche would be small, but helpful to the company's goals, analysts say.

One of Iberiabank's 2011 five-year goals was to reach an efficiency ratio of less than 60%. Rose says his 2015 projection for the company's efficiency ratio went from 67% to 65.3% with the acquisition announcement. Meanwhile, his projections for return on assets improved six basis points, and return on tangible common equity rose 80 basis points.

The addition of Teche, with projected 50% cost savings at Teche operations given that eight of its 20 branches are within a mile of an Iberiabank branch, would help the buyer increase its revenue faster than it raises its expenses, says Chris Marinac, an analyst at FIG Partners.

"The goal for them is to create positive operating leverage, and there is nothing like doing it in your home market," Marinac says.

More deals are likely coming, too. Daryl Byrd, president and chief executive, said 2013 was a busy year of working on efficiency and implementing new organic growth initiatives, but the demand from sellers has grown too large to ignore.

"My personal opinion is there are not as many buyers out there as you might think just given some of the regulatory concerns, and we're happy to be in a position to be able to announce a transaction like this and we've worked pretty hard to get in this kind of position," Byrd said during a conference call.

He later added that he is expecting an active year of acquisitions. "We're going to try to participate appropriately and wisely in that process."

Noting the kind of cost-cutting possibilities in a deal like the one from Teche, Byrd says he is particularly fond of in-market deals. However, he reminds his company's followers that it operations in a lot of markets.

"We love the ones in the markets where we have infrastructure, but remember, that could mean Birmingham or Houston, too," Byrd said in an interview on Monday. "Teche is easy because it is near our headquarters, so it is very much in our backyard, but those other markets — we consider those are backyard, as well."

Entry into new markets is still on the table, too, Byrd said.

"If it's the right kind of strategic transaction, and it presents a new market to us that we're excited about, we'll have an interest in that, too," he said.

The cost savings expectations are aggressive, but Byrd says he has a "high degree of confidence" in the company's ability to deliver.

Joseph Fenech, an analyst at Sandler O'Neill said in a research note that he was somewhat skeptical of Iberiabank's projections for the deal, but given the relative size of the deal a miss wouldn't be too damaging to earnings.

"We're taking more of a wait-and-see approach on the company's ability to realize the promised cost synergies," Fenech says. "But given the relatively small size of the transaction, failure to fully realize the promised synergies wouldn't move the needle all that much."

The buyer's other projections include 6% earnings accretion and 2% dilution to book value, which is expected to be earned back within four years. Iberiabank's stock closed at $62.04, down 0.10% from Friday.