Best Deal By Market Reaction

How do you construct a deal that satisfies shareholders, customers and employees in the long term, while also moving the needle on your bank’s stock price?

“If you think I can get inside those investors minds, boy, I shouldn’t be running banks,” quips C. Malcolm Holland III, chairman and CEO of Dallas-based Veritex Holdings, with $8 billion in assets. Yet, his bank’s August 2017 acquisition of $1 billion asset Sovereign Bancshares, also in Dallas, saw the greatest one-day stock price improvement — 11.93% — of deals completed from Jan. 1, 2017, through June 30, 2018. “There’s no question that when we bought Sovereign, it changed who we were,” he says. “Now I was in a couple of cities, and I had some scale and wow, that had some real possibilities to make a nice return for our investors.”

The acquisition boosted Veritex’s market share in Dallas while taking it into three new Texas markets: Fort Worth, Austin and Houston. It also topped our ranking of the best deals by market reaction.

To analyze these deals, Bank Director examined acquisitions where the seller comprised 25% or more of the buyer’s assets when the deal closed, as these would have a greater impact on the acquirer’s stock valuation. We analyzed the immediate impact of the announcement on the acquirer’s stock price to determine the five best performers. From there, we compared this growth to movement at that time in a selection of indices: the Dow Jones Industrial Average, the S&P 500, the SNL U.S. Bank Index and the KBW Bank Index. We also incorporated input from bank analysts.

The top five deals based on stock price movement reveal some common characteristics. They are largely in-market deals that fit with each bank’s strategy. “They have to be able to deliver on the promise, but it starts with a good reaction,” says Crowe LLP Partner Rick Childs. “All of these are logical transactions.”

Another commonality among these acquirers: They are all practiced veterans in the M&A game. Veritex has acquired four banks, and FB Financial Corp. three, since 2015. Independent Bank Group has acquired six banks, and Atlantic Union Bankshares Corp. three, since 2014. Byline Bancorp has closed three bank acquisitions since 2016.

The Sovereign acquisition worked out long term and positioned Veritex for its next transformative deal: Green Bancorp, which more than doubled its size and expanded the bank further in Houston. (Veritex’s stock declined slightly, by 2.4%, after announcing the Green acquisition.) But Holland learned some hard lessons with Sovereign. “It was a very, very good financial deal for us, and I think everybody could see that,” he says. Unfortunately, “it is the worst deal I’ve done from a social standpoint.” The relationship soured between Holland and former Sovereign CEO Thomas Mastor. Most of the former Sovereign employees left, and the transition was stressful for the Veritex team.

In response to that experience, “we went above and beyond on the Green deal,” Holland says.

“Malcolm has proven to be a good executor of his internal organic growth model and then doing acquisitions that push him to the next level,” says Brett Rabatin, a senior research analyst at Piper Jaffray. “Sovereign was one of those deals.”

With its acquisition of $2.2 billion asset Carlile Bancshares, Independent Bank gained 24 locations in Texas, including entry into Fort Worth, where the seller was based. The deal “strengthened the [Dallas/Fort Worth] franchise for David Brooks and IBTX; that was a great transaction,” says Rabatin. The bank also expanded into Colorado, with 17 locations.

The $15 billion asset bank, based in McKinney, Texas, saw a 7.88% bump in its stock for the financially attractive deal, which was accretive to earnings, tangible book value and regulatory capital; it also improved the bank’s loan-to-deposit ratio and cost of funds, and lessened its exposure to commercial real estate and construction lending. The deal placed second in our ranking.

With its acquisition of Knoxville, Tennessee-based American City Bank and Clayton Bank & Trust, both owned by Clayton HC, Nashville-based FB Financial enhanced its footprint in Tennessee. The $5.9 billion asset bank saw its stock price rise 6.56% upon announcing the third-ranked deal, which was immediately accretive to earnings per share.

“You got a double positive impact — one, from a double-digit accretive deal plus multiple expansion, because now the bank moved from 40% of earnings being mortgage to [about] 20%,” says Catherine Mealor, managing director at Keefe Bruyette & Woods. “That helped the overall valuation of the stock.”

The acquisition of $3.3 billion asset Xenith Bankshares, based in Richmond, Virginia, fulfilled Atlantic Union’s vision of creating a true Virginia bank by strengthening the $17.2 billion asset institution’s presence in the Hampton Roads/Virginia Beach area, adding market share in its native Richmond and Northern Virginia, and new markets in North Carolina. It also strengthened the bank’s commercial and industrial lending platform.

Improving profitability and enhancing the bank’s C&I capabilities were goals clearly communicated by president and CEO John Asbury, says Mealor. “[Xenith] gave him some nice cost savings for the profitability improvement and gave him a strong C&I platform that he could grow from,” she says. The acquisition was immediately accretive to EPS and TBV. Atlantic Union’s stock price rose 3.59% with the announcement of the deal, which ranked fourth.

Finally, $5.4 billion asset Byline’s stock price increased 4.11% when it acquired First Evanston Bancorp, with $1.2 billion in assets in Evanston, Illinois. (While this is a higher increase than seen in the Atlantic Union/Xenith deal, it didn’t perform quite as favorably compared to major indices.)

Chicago-based Byline gained scale in the Evanston market, accessing low-cost core deposits, diversifying its commercial banking business and gaining a wealth management line with recurring fee income. Byline stated publicly that acquisitions would play an important role in its strategy. “This is one that added to the credibility of the company’s M&A track record,” says Terry McEvoy, managing director at Stephens.

How They Ranked: Best Deal By Market Reaction

1 Veritex Holdings
Dallas, TX / $8.0 billion
Sovereign Bancshares
Dallas, TX / $1.0 billion
Aug. 1, 2017 1.30
2 Independent Bank Group
McKinney, TX / $15.0 billion
Carlile Bancshares
Fort Worth, TX / $2.2 billion
Apr. 1, 2017 1.90
3 FB Financial Corp.
Nashville, TN / $5.9 billion
American City Bank & Clayton Bank & Trust
Knoxville, TN / $1.2 billion
Jul. 31, 2017 2.60
4 Atlantic Union Bankshares Corp.
Richmond, VA / $17.2 billion
Xenith Bankshares
Richmond, VA / $3.3 billion
Jan. 1, 2018 3.90
5 Byline Bancorp
Chicago, IL / $5.4 billion
First Evanston Bancorp
Evanston, IL / $1.2 billion
May 31, 2018 4.00

SOURCES: S&P Global Market Intelligence, bank filings