A panel of bank buyers ended up looking like a band of brothers at the Four Seasons hotel in Boston this week.
John W. Allison, Ed Wehmer and David Zalman three of the industry's master dealmakers ribbed each other, flexed a bit and offered one another advice about growing up Tuesday at RBC Capital Markets' Financial Institutions Conference.
They also provided serious insights about buying and selling banks. Allison, the chief executive of the $4 billion-asset Home BancShares (HOMB), Wehmer, the CEO of the $17.6 billion-asset Wintrust Financial (WTFC) and Zalman, the head of the $16.3 billion-asset Prosperity Bancshares (PB), have announced a combined 15 acquisitions of open and failed banks since the beginning of 2012. They alone represent more than 3% of the 375 open-bank and 73 failed-bank deals during that time frame.
"These three built their companies from what they were to what they are today," said Jon Arfstrom, the RBC analyst who moderated their panel discussion. "Where is the bank M&A? It is clearly here."
Breaking the $10B-Asset Barrier
Allison was the self-proclaimed "little boy of the panel," but his company is set to get a lot larger. Home, in Conway, Ark., announced this year it would acquire the $3 billion-asset Liberty Bancshares in Jonesboro, Ark. The deal is set to close at the end of October.
Allison has said that his goal is to build Home's assets to about $8.5 billion and then weigh his options. With a stock that trades at nearly four times Home's tangible book value, Allison says he is now considering going over the $10 billion-asset threshold. At that level the company would be subject to interchange fee limits under the Durbin amendment of the Dodd-Frank Act, as well as to additional regulation.
Zalman told Allison to leap past $10 billion, not to tiptoe.
"If you're going to 10, you can't stop. You gotta go to 20," Zalman said, adding Prosperity lost as much as $8 million from interchange fees just by crossing that threshold. "You can't stop there."
Wehmer added that managing the company to stay below the threshold may not be enough to dodge the additional regulation.
"Johnny, it is not going to matter if you're 8.5 or nine. It is going to trickle down and you're going to be hit by the same torpedoes that are hitting all of us," Wehmer said. The regulators are "riding into the battle and killing all of the survivors. You might as well blow through [the threshold] and use your currency because it isn't going to get any better in the foreseeable future."
Downside of Pricier Deals
Before announcing his deal to buy Liberty in Arkansas, Allison visited with a handful of smaller Florida banks he was interested in buying. He plans to return to shopping in Florida after the integration of Liberty, but he said he is worried about the recent uptick in prices and hopes other buyers don't ruin the market while he is away.
"The biggest fear of bankers is the stupidity of bankers. What we could end up with is bankers doing stupid deals and setting the price," Allison said. "We need to be careful and not be stupid, because it truly is a buyers' market out there."
"It is a good deal for those guys but it has raised people's expectations and it needs to be beaten back into line," Wehmer said.
Sellers' Change of Heart
Zalman and Allison say the biggest change they've noticed this year is the wallflowers that are now ready to dance. Zalman said the last two deals his Houston company announced involved banks he has been courting for a long time. He approached FVNB in Victoria, Texas, 15 years ago, and F&M Bancorp in Tulsa, Okla., about 10 years ago, he said; both have agreed to sell to Prosperity in the last two months.
"Companies that we didn't think would ever be interested in selling are coming to the table," Zalman said.
That rang true for Allison, who had long hinted about a game-changing deal that turned out to be Liberty.
"I'd been on that trade for 10 years," Allison said.
On Multiples and Margins
Prosperity and Home trade significantly above tangible book value, while Wintrust in Rosemont, Ill., trades near 1.5% of its tangible book . The rich values give Prosperity and Home the opportunity to do larger deals. Wehmer says his stock valuation has room to improve, but the banks he is looking to buy are smaller targets that likely want cash.
"These guys [Allison and Zalman] are done, but we have a lot of room to go," Wehmer said as his fellow panelists laughed. "We are limited in the larger deals, but there are not that many in Chicago that we'd be interested in and if one did come up there would be a feeding frenzy for it."
Wehmer and Zalman were also impressed by Allison's commitment to his margin. Home's Centennial Bank unit has an average yield of 6.04%, and it is the result of a conservative lending rate that Allison has termed "Johnny Prime."
"I'm not going to sell off my future," Allison said. "There is not a [3% interest rate] written in my company. I don't even know how to spell 'three.' I tell my lenders, 'Don't bring me a three.' Johnny Prime does not reach three."
Somewhere after their introductions but before they dove into the banking nitty-gritty, the executives cracked jokes about each other.
Allison mocked the picture of Wehmer on the cover of the February issue of American Banker Magazine, while Wehmer likened Allison and his board to the cast of A&E's hugely popular reality show "Duck Dynasty." Each came with doctored photos to complete his gag.
Meanwhile, Allison compared Zalman to Pac-Man: "he is going through Texas and Oklahoma and just gobbling up banks."
"I wondered when I'd lose control 13 minutes in," panel moderator Arfstrom said.