What’s the best recipe for fueling growth?
Banks approach growth several ways, with some treating M&A like a line of business and others sticking to slower but often safer organic growth.
“I believe that organic growth is imperative to the long-term performance of the company, [and] we have to be growing organically to be able to provide the returns to our shareholders that they deserve and for us to remain relevant within the industry,” says Greg Steffens, CEO of Southern Missouri Bancorp.
Still, he adds, “we do like to look at M&A.”
Any acquisition has to be “financially rewarding” for shareholders, Steffens says. When Bank Director spoke with him in October 2020, he indicated that for now, he prefers to stick to organic growth and deploy capital in other ways. “[We’re] better off investing in repurchasing our stock,” he says.
In developing an algorithm to understand which of our high performers has the best growth strategy, we awarded prudent profitability, based on growth in earnings per share, return on equity, return on assets and pre-tax pre-provision income, along with the average efficiency ratio over the five years examined, from December 2014 to December 2019. To understand potential earnings growth, we examined average fee income as a percentage of earnings as well as evidence of diverse revenue streams and niche business lines. We also analyzed the bank’s value, based on average tangible book value and price-to-earnings, as well as growth of those metrics.
Finally, we examined M&A based on the number of deals closed, and acquired deposits and loans as a percentage of the buyer’s assets. We also examined deal costs as a percentage of the purchase price, calculating an average ratio for the deals completed by the institution. If a bank didn’t complete an acquisition in the more than five years we examined — 2015 through June 2020 — they simply weren’t scored for this element.
When it comes to growth, banks have to diligently follow their strategy, says Kara Baldwin, a partner at Crowe. “If you’re going to acquire, you need to be certain that it’s additive to your strategy versus something that causes distraction.” Many banks prefer to focus primarily or even exclusively on organic growth, but whatever their approach, successful banks “aren’t trying to be what they’re not. They’re not shooting at the hip and buying everything that comes across their desk. They’re making sure [that decisions] are in line with their strategy.“
Southern Missouri comes out on top in this category. An active acquirer — completing four deals in the period of time we examined — it boasts the lowest average deal costs at 1.14%. It also exhibited strong growth in EPS (138%), PTPP income (199%), ROA (95%) and ROE (34%).
Growth-oriented Southern Missouri focuses on growth-oriented companies, says Piper Sandler managing director of equity research Andrew Liesch. “The markets and the clients that they target help them put in the loan growth that they have been [attaining],” he says.
Steffens explains that for several years, the bank aimed to grow deposits and loans between 8% and 10% annually; it backed that target down to 6% to 8% in 2019, and then to 4% for 2020 in response to the economic cycle — a prescient decision in light of the pandemic.
Lakeland Financial Corp. ranks second, scoring well for revenue diversification as well as a high level of ROA growth (33%) and EPS growth (94%). Greene County Bancorp comes in third, boasting strong tangible book value growth (81%) and EPS growth (166%). Neither bank made an acquisition in the time period we analyzed.
Independent Bank Corp., which operates through Rockland Trust Co., exhibits a high average price-to-earnings ratio (19.09x) and strong ROA growth (60%). It completed five acquisitions in the time period we examined.
Finally, Bank OZK ranks fifth. It completed four acquisitions — gaining more than $6 billion in deposits — with a low average deal cost at 2.94%. It boasts the highest tangible book value growth, at 168%; growth in EPS and PTPP income were also high, at 115% and 195% respectively.
“The management teams at these [high-performing] banks have done a good job at evaluating what is possible; they’re [also] very disciplined,” says Crowe Partner Rick Childs. Some will opt for an organic growth strategy; others may need to consider M&A. “It’s a classic make-or-buy decision. You can be successful at making — it oftentimes is the better alternative to buying — but if you’re in markets that are flat, then buying is maybe your only alternative, and you have to be good at how you do that.”
How They Ranked: Best Growth Strategy
|SCORE||NO. OF DEALS CLOSED
JAN. 2015 – JUNE 2020
|PRICE TO EARNINGS (AVG.)
DEC. 2014 – DEC. 2019
|CATEGORY WINNER: Southern Missouri Bancorp||6.65||4||18.51|
|2||Lakeland Financial Corp.||7.61||n/a||17.62|
|3||Greene County Bancorp||8.11||n/a||17.44|
|4||Independent Bank Corp.||8.17||5||19.09%|
|6||First Financial Bankshares||8.71||3||24.87|
|7||Eagle Bancorp Montana||8.96||3||15.79|
|8||Meta Financial Group||9.26||1||15.16|
|13||WSFS Financial Corp.||9.80||3||17.95|
|14||Community Bank System||10.20||4||19.96|
|15||Stock Yards Bancorp||10.43||1||17.65|
|17||Hingham Institution for Savings||11.28||n/a||13.87|
|18||City Holding Co.||11.89||2||15.98|
|19||The First Bancorp||12.00||n/a||14.46|
|20||Auburn National Bancorp.||12.36||n/a||14.99|
SOURCE: S&P Global Market Intelligence, bank websites, filings and other public information