Midwestern community bankers take note: Great Western Bancorp in Sioux Falls, S.D., is back in the business of buying banks.
The once-prolific acquirer had been on the sidelines for more than three years while under the ownership of National Australia Bank. But it said when it was spun off from NAB over the summer that it was eyeing acquisitions, and on Monday it announced a deal to buy rival HF Financial for $139.5 million.
"Acquisitions have been a big part of our past, and we expect them to be a big part of our future," President and Chief Executive Kenneth Karels said on a conference call with reporters late Monday. He added that the $9.8 billion-asset Great Western would look to acquire banks with between $500 million and $3 billion of assets in the seven Midwestern and Mountain states where it currently operates, as well as adjoining ones.
The deal for $1.2 billion-asset HF Financial, also based in Sioux Falls, would boost Great Western's assets above $10 billion — a mark some banks have actively sought to stay under in order to avoid stress tests and caps on interchange fees.
But Karels said that Great Western had already been actively preparing for the increased regulatory scrutiny because it expected to cross the $10 billion-asset threshold mark in early 2016 whether it made an acquisition or not.
Prior to being purchased by NAB in 2008, Great Western completed a string of small acquisitions that helped build it into the largest bank based in South Dakota. Then while under the NAB umbrella, the company completed several more deals, including the purchase of the failed $2.8 billion-asset TierOne Bank in Lincoln, Neb.
Its break from deal making coincided with NAB's decision to shed its U.S. operations and deploy its resources closer to home. The spinoff was done in phases — Great Western has had its own ticker symbol since October 2014 — and was completed in July.
Often after a prolonged break from M&A, companies will look for deals that are likely to be a hit with investors, that are low risk and that are easy to integrate. The HF Financial acquisition checks all of those boxes.
The deal is priced at 1.35 times the seller's tangible book value, compared with the median price of 1.6 times tangible book value that Midwestern banks have fetched since 2014. Great Western was able to get the better pricing because HF Financial, the parent of Home Federal Bank, had been underperforming its peers for several years.
The acquisition would give Great Western a stronger presence in the Minneapolis area and Fargo, N.D., where there is the potential for strong agricultural business lending. Though Great Western does business in these markets, it has no branches in either location. The addition of HF's branches and staff will only accelerate its growth in those markets, Karels said on a conference call with analysts Tuesday.
"Someone once told me if you can't buy something and grow then you shouldn't buy it," Karels said during a call with analysts on Tuesday to discuss the HF deal.
"We definitely know it's important to continue to grow organically."
Analysts said they view the HF Financial acquisition as a model for future deals
"This sets the table for them to move forward with future deals," said Erik Zwick, an analyst at Stephens. "This gives management credibility that they won't do an unfavorable deal. They have demonstrated that they will do deals that align with the criteria they have previously outlined."
They added, too, that Great Western has the resources to pursue multiple deals at once.
Some of its top executives, including Chief Financial Officer Peter Chapman and Chief Risk Officer Stephen Ulenberg, came up through the ranks of NAB, so they have experience working within much larger organizations.
Its stock price might also be attractive to prospective buyers. Since its initial public offering in October 2014, Great Western's stock is up nearly 68%, to $30.48 at Tuesday's close.
Karels "has a team that is capable of doing multiple deals at once," said Timothy O'Brien, an analyst at Sandler O'Neill. He added that crossing the $10 billion-asset mark will add some "regulatory hurdles" but should in no way dissuade Great Western from pursuing more acquisitions.
"Why stop at $11 billion of assets if you have a good currency in the market?" he said.
Kristin Broughton contributed to this story.