Veritex Holdings in Dallas went big with its latest acquisition.
The $3.1 billion-asset company agreed on Tuesday to buy the $4.4 billion-asset Green Bancorp for $1 billion. The deal, which is the fifth-largest bank acquisition announced this year, should give Veritex a major lift in Houston, the nation's fourth-biggest city.
The acquisition stands out because Green is 40% larger than Veritex. It is by far the bank's biggest acquisition, dwarfing its 2016 purchase of the $1.1 billion-asset Sovereign Bancshares.
Only 22 bank deals announced since early 2016 have featured sellers that were bigger than their acquirers, according to data compiled by Keefe, Bruyette & Woods.
The differential reinforces the importance of accounting rules and currency strength when working on a deal, industry experts said.
It "is certainly the exception rather than the rule” for a bank buyer to be smaller than the seller in a merger deal, said Gary Tenner, an analyst at D.A. Davidson. Accounting rules likely played a role in the smaller Veritex emerging as the buyer, he said.
Green has lingering exposure to energy credits despite spending the last two years purging those loans from its books. While that portfolio has shrunk by 86% since early 2016, about $40 million in energy loans remained on Green's balance sheet at June 30.
Veritex plans to record a $59 million loan mark, which represents about 1.8% of Green's loan book. The company will also take a $15 million loan-rate mark and make fair-value adjustments tied to Green's subrordinated debt and trust-preferred securities.
“I think it’s very important that Veritex is the accounting acquirer, because this allows us to reset the Green balance sheet and go forward without the drag that could potentially be there,” Terry Earley, Green's chief financial officer, said during a Tuesday conference call to discuss the deal.
Veritex, meanwhile, is willing to work through Green's remaining energy exposure.
“It made sense for them to combine ... with someone who was equal or close to their size,” said Malcolm Holland, Veritex's chairman and CEO. “From a return standpoint, this made more sense."
The energy exposure also undercut Green's aspirations for being an acquirer. Its stock price decreased by 56% between June 2015 and April 2016, making it very difficult to pursue deals. The company's shares have recovered in recent months, trading above $20 before the Veritex deal was announced.
The deal, which has been in the works for about three months, was structured to give Green some clout at Veritex.
Geoff Greenwade, Green's president, will serve as its Houston president. Manny Mehos, Green's chairman and CEO, will join Veritex's board, while Earley will become the company's CFO.
“This is the best solution we saw out there on the merger/acquisition front for our customers, employees and our shareholders,” Greenwade said in an interview. “We just thought that when all of that adds up that way, you have to do it.”
The outcome makes sense given the relative size of the institutions, said Bob Wray, a managing director at Capital Corp., an investment bank in Prairie Village, Kan.
“If one was much bigger than the other, there’s no question typically it’s the buyer’s people that fill all the top positions,” Wray said. “When you have two organizations of similar size, my guess is to get this done they had to put together people where everyone was happy.”
To be sure, acquirers typically buy much smaller banks, which helps reduce the credit risk and hiccups from integration. Since early 2016, the average seller has been a tenth the size of its acquirer, according to KBW data.
Holland, for his part, is confident Veritex did its homework before striking the deal. The company is an experienced acquirer, buying six banks since the financial crisis. In the case of Fidelity Resources, which Veritex bought in March 2011, the seller was the bigger institution.
Veritex, which reviewed 70% of Green’s loan book, looked closely at its remaining energy loans.
“We did a very deep dive ... and we feel really good about what we found and how we marked it,” Holland said.
Holland is confident that the deal will receive regulatory approval.
“We have great relationships with our regulators,” Holland said. “We have a lot of credibility and a lot of confidence in the regulatory process. This wasn’t a surprise to them.”
Holland said that he is keeping an open mind about more acquisitions and that deals for banks outside of Texas are a possibility. Still, absorbing Green is his immediate priority.
“I have this crazy dream that you can build a super Texas franchise,” Holland said.
“I think the credibility and the growth pattern of our company gives us some options to do several different things down the road," he added. "Our focus today is integration, efficiency and getting this company put together where we can start returning what our shareholders expect us to return.”