A number of commercial banks are deciding they'd rather hire than acquire.
Sellers tend to be picky about price, whereas loan officers have become far more open to negotiation since the financial crisis. Banks frequently find it's cheaper to recruit talent than make an acquisition.
"If you're a company with clean capital, a good banker can bring in 10 times their cost in revenue," says Paul Murphy Jr., the president and chief executive of Cadence Bancorp in Houston. "In some cases, we bought the bank first, but what I prefer to do is get the team first and then build out the brick and mortar."
The $5.5 billion-asset Cadence has hired more than a dozen bankers in the past year in cities such as Birmingham, Ala.; Tampa, Fla.; and Houston. Its biggest haul took place earlier this month when the bank snagged a lending team from International Bancshares (IBOC) in San Antonio.
"I'm so pepped up and pleased with this extremely capable group of bankers in San Antonio," Murphy says. "They have deep ties to the market and they're very experienced, responsive and motivated."
After forming in 2009, the group behind Cadence started buying banks early last year. But Murphy found that, in many cases, the key commercial officers had already left the seller.
"When you're acquiring a bank less than $5 billion … you rarely get the lending talent that can compete or have a portfolio" suitable for a target market, says Rod Taylor, an executive recruiter who helped Cadence hire the San Antonio team. Taylor, who admits that he benefits from the business, says it is better to pay up for top talent than pay a premium for branches and deposits.
Still, industry observers agree with Taylor. Most small banks lack the commercial loan infrastructure that buyers covet, particularly failed banks. This has led banks like CenterState Banks (CSFL) and First National Bank of the Gulf Coast in Florida to hire executives in markets they had targeted for acquisitions.
"Typically [failed] banks have been out of market so long that they're really just an asset purchase," says Bob Reichert, First National's chief administrative officer. "It's not all that great of a deal … because the talent has already moved away."
First National brought in roughly $140 million in capital last year for acquisitions, buying its first failed bank in July. But it has also hired executives in target markets, including a former Fifth Third Tampa market executive.
"We prefer to do more internally through organic growth versus acquiring a portfolio," Reichert says. Still, he says acquisition provide certain accounting benefits, "but you're dealing with loans that were underwritten two to three years ago versus loans written today," he adds.
Growth-minded banks should not overlook the lender-client relationship. "Middle-market companies typically bank more with the banker than they do with the bank," Murphy says. The teams that Cadence has brought on since last year have produced about $750 million in loans, he says.
There are risks to hiring talent and it can take time to build a portfolio through hiring. "It takes good six months before you see" bottom-line improvements, says Dan Bass, a managing partner at FBR Capital Markets. "You don't pull all the relationships you thought you would get. I wouldn't budget more than 50% that moves over."
Still, Bass says that hiring lenders is a good way to grow. "You should always look for good talent and if the opportunity for an acquisition comes along then it makes sense to do so," he said. "So frankly, you should do both."