Small deals don’t garner attention in the national or regional press. Yet, despite their smaller size and more opportunistic nature, community bank acquisitions represent a sizeable portion of the M&A marketplace: More than one-third of the acquisitions examined for the 2020 RankingBanking study feature acquirers with less than $1 billion in assets.
Individually, community banks tend to be infrequent acquirers, opting to intentionally focus their strategy on organic growth. “It’s a little less ‘being a serial acquirer’ like we see in some of the other categories, and it’s more about being the right size, the right fit and being willing to go into a transaction,” says Rick Childs, a partner at Crowe LLP.
Only two acquirers in this ranking — $973 million asset Texas State Bankshares, based in Harlingen, Texas, and $326 million asset Wallkill Valley Federal Savings & Loan Association, based in Wallkill, New York, have made more than one acquisition in the past decade. Covington, Indiana-based Piper Holdings, with $375 million in assets, and Gainesville, Missouri- based Ozarks Heritage Financial Group, with $273 million in assets, last acquired more than 15 years ago. And $370 million asset Eaton Federal Savings Bank, headquartered in Charlotte, Michigan, has only made one bank acquisition, which appears on this list: its June 2018 purchase of $66 million asset Stockbridge Bancorp.
“Most of these [deals] are smaller buyers, and most of the sellers fit within the framework of the size and institution that’s being sold these days,” says Childs. “It still is a relatively small bank market in terms of the consolidation.”
The best community bank deals feature transactions where the buyer has less than $1 billion in assets at the time of the acquisition. For this category, we only examined deals where the seller comprised at least 10% of the buyer’s assets, to ensure the acquisition had a material impact.
Bank Director chose the five best deals based on growth in return on assets following the close of the transaction. We then analyzed and ranked them again based on profitability growth, measured through ROA and return on average equity; efficiency improvement, based on the efficiency ratio and noninterest expense as a percentage of assets, and credit quality improvement, based on nonperforming loans as a percentage of loans. Bank Director also examined geographic expansion and acquired talent.
The top-ranked deal features an acquirer that entered a new market roughly three hours away from its home in the Rio Grande Valley region in south Texas. Texas State exhibited the best profitability and efficiency improvement one year after acquiring $185 million asset Blanco National Holdings, in Blanco, Texas. These four locations gave Texas State — operating under its subsidiary, Texas Regional Bank — a foothold in the Hill Country around San Antonio, fulfilling its strategy to pursue growth in that region.
Texas State has since strengthened its position in the Hill Country by establishing loan production offices and de novo branches.
Michael Scaief, the bank’s chairman, explained the deal’s rationale in a 2016 shareholder letter, describing the economies of the Rio Grande Valley and acquired Hill Country markets as “very different, yet complementary.” The Rio Grande Valley, he wrote, is “predominantly blue collar” and driven by agriculture, manufacturing, transportation and trade. In contrast, the acquired market features a “highly-technical, white-collar employment base.”
Ranking second is Eaton Federal’s June 2018 acquisition of Stockbridge Bancorp. and its subsidiary, SSBBank. The deal rated highly for efficiency and credit quality improvement.
Acquiring the Stockbridge, Michigan-based bank added three new branches, extending Eaton Federal’s reach in small Michigan communities. They were able to close an acquired branch in Eaton Rapids, eliminating one of their community bank competitors. Eaton Federal also competes in that town with $3.6 billion asset Independent Bank Corp., based in nearby Grand Rapids, and PNC Financial Services Group.
The acquisition of Clinton, Missouri-based Financial Enterprises by $273 million asset Ozarks Heritage, which closed in October 2017, placed third in the ranking. Adding three new branches from the $70 million asset purchase almost doubled the branch network of Ozarks’ subsidiary, Rogersville-based Legacy Bank & Trust Co. The deal rated well for profitability growth and efficiency improvement.
Piper’s acquisition of $69 million asset Farmers State Bank, based in Brookston, Indiana, ranked fourth. The transaction extended the footprint for Piper’s subsidiary bank, The Fountain Trust Co., around Lafayette, a large town to the northwest of Indianapolis that today represents more than one-third of the bank’s physical locations. The bank retained all staff when the deal closed in July 2017, a hallmark of community bank deals.
From a community bank seller’s point of view, getting a good price for the bank’s owners is important, but it’s not the only consideration. “That’s what we’re seeing more in the community bank deals — it’s less about the price and more about fit for the seller,” says Crowe Partner Kara Baldwin.
Finally, Wallkill Valley Federal exhibited the best credit quality improvement in the year following its August 2017 acquisition of $115 million asset Hometown Bancorp — a deal that doubled the acquirer’s footprint and its geographic reach into contiguous markets.
Wallkill Valley acquired a fixer-upper in Hometown. Total deposits at the Walden, New York-based bank declined by almost one-third from June 2012 to June 2017, according to call report data. The bank’s efficiency ratio hit 108.8%; ROA and ROE were below zero. A local news story opined that regulators may have forced the bank’s sale.
But the price was right: Wallkill Valley paid 88.7% of tangible book, compared to a regional average of 137.1%, per S&P Global Market Intelligence. Since the deal closed, the bank has grown total deposits by 4.6%. Of the banks examined in this category, Wallkill Valley demonstrated the highest level of long-term profitability improvement, through June 2019, with ROA growth exceeding 100%.
How They Ranked: Best Community Bank Deal
|ACQUIRER NAME, LOCATION / ASSET SIZE||TARGET NAME, LOCATION / ASSET SIZE||DEAL DATE||SCORE|
|1||Texas State Bankshares
Harlingen, TX / $973 million
|Blanco National Holdings
Blanco, TX / $185 million
|Feb. 24, 2017||2.17|
|2||Eaton Federal Savings Bank
Charlotte, MI / $370 million
Stockbridge, MI / $66 million
|Jun. 30, 2018||2.72|
|3||Ozarks Heritage Financial Group
Gainesville, MO / $273 million
Clinton, MO / $70 million
|Oct. 4, 2017||2.83|
Covington, IN / $375 million
|Farmers State Bank
Brookston, IN / $69 million
|Jul. 15, 2017||3.17|
|5||Wallkill Valley Federal Savings & Loan Assn.
Wallkill, NY / $326 million
|Hometown Bancorp (MHC)
Walden, NY / $115 million
|Aug. 11, 2017||3.33|
SOURCES: S&P Global Market Intelligence, bank filings