Putting it together

By Nathan Stovall, SNL Financial staff writer

More small community banks are beginning to hit earnings walls and are looking to partner with another institution.

A number of banks presenting at the annual KBW Community Bank Investor Conference on July 28-29 said they are pursuing acquisitions and regularly find that most sellers are small banks struggling to grow earnings. It seems that some banks have offered borrowers longer-term fixed-rate loans to build their loan portfolios. Now that interest rates could move higher relatively soon, those institutions are eyeing the prospect of net interest margin pressure on the horizon, as their earning asset yields could hold while their funding costs rise.

Is ALCO view driving M&A now?

Richard Callicutt II, president and CEO of acquisitive BNC Bancorp, said at the KBW event that half of the banks he encounters in the M&A arena want to engage in deal discussions because they are not profitable and lack adequate capital and scale to focus on safety and soundness in today's operating environment.

Callicutt noted that many banks have extended duration in their loan portfolios to win new business and maintain profitability. He said the average community bank previously had a fixed-rate duration of 31 months, but now they have extended duration to closer to 60 months. Those community banks could see their earnings move higher in the next year, but if interest rates rose 100 to 200 basis points, their earnings could stabilize or decline.

M. Ray Cole Jr., president and CEO of Hattiesburg, Miss.-based First Bancshares Inc., said his bank is looking for acquisitions of banks with assets between $200 million and $500 million and there now seems to be a lot more activity among potential targets of that size. Cole said his company does not run into much competition when courting those institutions, either.

"We think there are a lot of potential acquisitions out there for us, particularly on our end of the space," Cole said at the KBW event.

Why smaller bait attracts “fish”

Banks that have sold this year have actually been slightly smaller than witnessed in past years. SNL's data shows that the median asset base of targets so far in 2015 has been $134.4 million through July 29, down from $156.9 million in 2014 and $163.0 million in 2013.

A number of acquirers said they would like to go after larger deals, but they see more competition from other buyers for those franchises. Pricing on larger deals has been higher in 2015, with the median price paid for targets with assets greater than $1 billion coming in at 199.7% of tangible book value, compared to 131.8% in deals involving smaller targets.

The higher pricing on larger transactions has prompted some bankers to consider acquiring smaller banks. There is a plethora of smaller banks considering selling—95% of selling in 2015 had assets below $1 billion—and the demand for those institutions is lower.

CenterState Banks Inc. President and CEO John Corbett said the company would like to increase its presence in Jacksonville, Orlando, and Tampa, Fla., but noted that there have been a handful of transactions in those markets where pricing did not make sense. He said CenterState could acquire another bank with assets around $1 billion, following its purchase of $1.1 billion-asset First Southern Bancorp Inc. in 2014, though he noted that most sellers are smaller in size.

Corbett said the company is considering whether it should look for deals in a second-tier market, where it could acquire a smaller bank, achieve significant cost saves and then redeploy the deposits of the target institution in other markets.

Preference for larger targets

Prosperity Bancshares Inc. CFO David Hollaway said his company would prefer to acquire banks in the $2 billion to $3 billion asset range, though he said it would look at select smaller deals if it could not find the right target. He said a small, in-market transaction might make sense for Prosperity because it could cut 50% of the target's expense base.

Other banks looking for deals say that it does not necessarily make sense to go after smaller targets due to the tedious regulatory approval process. Southside Bancshares Inc. President and CEO Sam Dawson said his company would consider acquisitions in an area between Tyler, Fort Worth, and Austin, Texas, and does not think it would make much sense to acquire a bank with as few as $200 million in assets given the amount of work it takes to obtain regulatory approval.

"With the regulatory environment being what it is, with all you have to go through and all the hoops you have to jump through, I think bigger is better," the Southside Bancshares chief executive said.

Nathan Stovall is a senior editor and columnist with SNL Financial. The views and opinions expressed in this piece are those of the author and do not necessarily represent the views of SNL.

This article originally appeared on SNL Financial’s website under the title “Small banks taking M&A plunge as earnings plateau”