Southside in Texas Returns to M&A with Big Deal

Southside Bancshares (SBSI) in Tyler, Texas, has returned to acquisitions by agreeing to buy a bank that had long been rumored to be exploring its options.

Southside on Tuesday agreed to buy OmniAmerican Bancorp (OABC) for $307 million in cash and stock in a deal executives at both companies call a negotiated transaction. It is the first deal for the $3.4 billion-asset Southside since it completed a small acquisition in 2007.

Southside and the $1.4 billion-asset OmniAmerican began discussing a deal in late February, says Sam Dawson, Southside's chief executive.

"Obviously we are finicky shoppers," Dawson says. "We've been looking at two or three deals a year for the last few years. We came close last year, but the price didn't work out. Same thing happened the previous year."

The deal is a "game changer" for Southside, says Brady Gailey, an analyst at Keefe, Bruyette & Woods, because it gives the sleepy bank in east Texas a significant toehold in Fort Worth, where it has four branches. OmniAmerican, which is based in Fort Worth, has 14 branches. The merger will give Southside the second-biggest deposit market share in Tarrant County.

For OmniAmerican, the deal comes roughly 15 months after it reached the third anniversary of its conversion from a mutual savings bank to a stock-owned company. At the three-year mark, converted thrifts are often prime takeout candidates and, given that it was in Texas, the speculation around OmniAmerican has been particularly feverish.

Though it has heard pitches from investment banks while also looking for ways to deploy its capital, Tim Carter, OmniAmerican's chief executive, says the company had avoided the chatter and had been working on improving itself.

Carter joined the company in 2007 after the sudden death of former CEO Larry Duckworth. The former credit union, which had become a mutual bank a year earlier, was in the beginning of its conversion to a stock corporation but had to delay the conversion as it dealt with problems. Since the conversion, Carter and his team have been working on turning the thrift into a commercial bank but there was still work to do, he says, and the Southside deal fulfills that.

"We did a great job of cleaning up the bank in terms of asset quality, but we are still inefficient and not where we need to be" in terms of profitability, Carter says. "Southside has great profitability, it is efficient and takes us to the next level and we bring them loans from this market."

Priced at 147% of OmniAmerican's tangible book value, the deal is among the smallest premiums paid in Texas recently. There have been 10 deals announced in Texas in the last 12 months, with a median premium of 200% of the seller's tangible book value.

"I was a little disappointed there wasn't more of a premium," says Theodore Kovaleff, president of Informed Sources Service Group and an OmniAmerican investor. Kovaleff, however, says the company's "lackluster" performance may explain the discount relative to other Texas deals.

OmniAmerican's earnings are weighed down by higher expenses. The company hasn't reported earnings for the first quarter, but its efficiency ratio was 80% at Dec. 31.

"Their higher expense base has held back their profitability," says Brady Gailey, an analyst at Keefe, Bruyette & Woods who covers both companies. "An 80% efficiency ratio is high, especially in Texas."

OmniAmerican's capital skews the tangible book value metric, Dawson says. The company's tangible common equity ratio was nearly 15% at the end of 2013; if it was a more-normalized level, roughly 8% or so, the price to tangible book value would be "a little over two times," he says. 

Still, other dealmakers in the market noted that Southside is paying 44 times OmniAmerican's last 12-month earnings, compared to 18 times earnings median for peer group sales.

"That's aggressive, even for this market," says C.K. Lee, a managing director at Commerce Street Capital, a Dallas investment bank.

The disparity between price to tangible book value and price to earnings was expected to be an issue in selling OmniAmerican, says Daniel Bass, a managing director at Performance Trust Capital Partners. While it is a larger bank with a good market share in a hot M&A market, it was not a big earner.

"It is hard to pay market value for it because of the earnings," Bass says. "But maybe price to earnings is not relevant. Southside likely sees enough revenue enhancements or expense cuts to get what it wants.... It does have a lot of value, it just wasn't making enough money."