First Busey in Champaign, Ill., is acquiring more than a bank with its latest deal.
The $7.7 billion-asset company is also buying itself time and flexibility with the pending purchase of Banc Ed in Edwardsville, Ill.
Acquiring the holding company for the $1.8 billion-asset Bank of Edwardsville will put First Busey on a collision course with more regulatory oversight. Banc Ed, however, has nearly twice as many deposits as loans and a large securities portfolio that will allow First Busey to manage its own asset size.
That should give First Busey time to grow organically as President and CEO Van Dukeman determines the best way to cross over the $10 billion-asset mark. At that point, the company's revenue will take a hit from a cap on interchange fees.
“The economic impact of interchange is still significant," Dukeman said. “It is still something banks have to be mindful of.”
While First Busey has bought four banks since September 2014, Banc Ed stands out for several reasons. The deal is the biggest acquisition for First Busey in terms of the seller's asset size.
The $305 million transaction will help First Busey's deposit-gathering around St. Louis, boosting its market share from 18th to seventh, Dukeman said. Banc Ed has a trust department that should complement First Busey’s wealth management operations.
Bank of Edwardsville’s low 56% loan-to-deposit ratio gives First Busey plenty of low-cost funding. The deal will lower First Busey's loan-to-deposit ratio from 91% to 84%.
About 41% of Banc Ed's assets are securities, according to the Federal Deposit Insurance Corp. While First Busey will eventually try to replace those securities with loans, there is a short-term opportunity to run off securities to stay below $10 billion in assets. Less than a fifth of First Busey's assets are securities.
Doing so should give Dukeman time to evaluate First Busey's next bank acquisition. First Busey has not disclosed how much revenue it will eventually lose due to the Durbin amendment's cap on interchange fees.
"The loan-to-deposit ratio at Banc Ed will allow Busey to fund their organic growth without growing the overall balance sheet," said Brian Martin, an analyst at FIG Partners.
“I think in the near term they will manage below $10 billion of assets,” said Kevin Reevey, an analyst at D.A. Davidson. “There's no pressure, so they can take their time. That way they can find the right deal and remain disciplined. ... First Busey is a disciplined acquirer.”
Timing is important for acquisitions, industry observers said. Conventional wisdom has held that banks must leap over $10 billion of assets. That thinking hasn’t changed much despite the recent passage of regulatory reform.
Though legislators eliminated mandatory stress testing for banks that reach $10 billion of assets, regulators could still want institutions to perform some kind of testing, even it is conducted informally.
First Busey already stress tests, Dukeman said, calling the effort a prudent risk-management practice.
“It just makes sense," Dukeman said. "In different economic cycles you'd want to see how your portfolio performs."
Dukeman said he is unsure how First Busey would reach $10 billion in assets, though he believes it will be best to go over the mark significantly. That means waiting to find the right partnership; having extra time should be helpful.
To be sure, it can be hard to buy a bank with meaningful scale. For instance, only 15 of the roughly 440 banks based in Illinois have $2 billion to $5 billion in assets, according to FDIC data. On top of that, targets must be interested in selling and have a complementary culture.
“More time just gives them an opportunity to consider all of their options,” said Michael Perito, an analyst at Keefe, Bruyette & Woods. “Almost all of their deals are privately negotiated. They don’t get into bidding wars. That speaks to Van’s ability to cultivate these deals. ... Time helps with that.”
First Busey’s deal also shows the importance of fair pricing. In general, as bank stock prices rise the multiple that buyers pay sellers also increases. The average price to tangible book ratio in August was 178%, up from 160% a year earlier, according to data from FIG Partners. The KBW bank stock index is up roughly 14% from the end of August 2017.
“Whenever banks stocks are trading high, you tend to see more M&A ... because the multiples get higher,” said Michael Iannaccone, chief strategy officer at Community Capital Technology. “That’s what people focus on.”
Still, that doesn’t give acquirers carte blanche to write massive checks to sellers. Investors still expect buyers to be strategic and disciplined. Investors who deem a price to be too high, or tangible book value erosion to be too severe, often sell off a buyer's stock.
“First Busey is publicly traded," said Lynn David, president of Community Bank Consulting Services. "They don’t want to pay too much where they can’t continue to have good core earnings for their shareholders.”
The pricing for the Banc Ed deal seemed fair, Martin said. The deal priced the seller at 164% of its tangible book value. It should take less than three years for First Busey to earn back any dilution to its own tangible book value.
First Busey, which could pursue more acquisitions, has no asset requirements for its targets, Dukeman said. The company has been focusing its M&A on populous markets such as St. Louis and the Chicago suburbs.
“Over the last several years we have wanted to both organically grow and really fundamentally serve our clients and put associates in a good position on behalf of the clients,” Dukeman said. “To supplement organic growth, there is external growth and we have really embarked on that.”
