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Simmons First extols latest bank deal, but investors balk

Simmons First National Corp. executives lauded their second announced bank acquisition in as many months as a substantial deal that will help the Pine Bluff, Ark.-based company march westward into Oklahoma, Texas and beyond.

The new markets, Simmons Chairman and CEO George Makris Jr. told analysts during a deal call, "will be real drivers of our future growth."

The deal, a $564.4 million play for Southwest Bancorp Inc. announced Dec. 14, will give Simmons roughly $2.4 billion in additional assets. That transaction, slated to close in the third quarter of 2017, follows a plan announced last month to buy out Jackson, Tenn.-based Hardeman County Investment Co. Inc. and its bank, a deal that would give Simmons more than $460 million in assets. Combined, the two acquisitions would help Simmons surge past $10 billion in assets, a threshold at which banks face higher regulatory scrutiny and a cap on debit interchange income linked to the Durbin amendment.

Community banks in recent years often have sought to leap over the $10 billion line via deals in order to efficiently pack on earning assets that can more than offset new costs. Speaking with analysts Dec. 15 on the deal call, Simmons executives said they expect the Southwest deal alone to more than make up for lost income linked to the Durbin rule.

But Simmons investors recoiled on pricing concerns. Shares of Simmons fell more than 5% in morning trading Dec. 15, the day after the company said it would acquire Stillwater, Okla.-based Southwest in a cash-and-stock deal.

S&P Global Market Intelligence's SNL calculated the deal's per-share value at 212.0% of tangible book. SNL valuations for bank and thrift targets in the Southwest between Dec. 14, 2015, and Dec. 14, 2016, averaged 156.78% of tangible book.

The relatively strong pricing raised concerns on the Street that Simmons may have overpaid.

"They paid a really full price; there is no doubt about that," Sandler O'Neill & Partners analyst Stephen Scouten said in an interview. He said that, given the run-up in bank stocks since the November presidential election, it should not surprise that a seller in a deal involving stock would fetch a price that comfortably bests the average of the past 12 months. But because Simmons went well beyond the average, investors experienced some initial sticker shock.

He said that the market may need more post-election deals to compare this one to, as well as time to assess the integration of Southwest following closing, to truly gauge the merits of the deal terms.

What is clear, however, is that Southwest attracted a price it could not turn down, analyst John Rodis of FIG Partners said in an interview. He noted that Southwest President and CEO Mark Funke had run the company for only about four years and that many on the Street thought he would want to remain independent for at least another year to continue to build up the bank.

"At first, I was a little surprised with the timing," Rodis said. "But when you see the price they got, they did the right thing. They got a very good price for the franchise and did right by shareholders."

Southwest's stock jumped more than 18% in morning trading Dec. 15.

As for the strategic merits of the deal, analysts said a push westward makes geographic sense for Simmons, given that it marks a natural extension from its current footprint, which spans Arkansas, Tennessee and parts of Missouri and Kansas. The acquisition of Southwest gives Simmons additional branches in Kansas and provides it modest entrance to both Texas and Colorado, with a handful of branches in each state.

Most notably, it acquires a major presence in Oklahoma, where it will pick up 19 branches and be ranked in the top 10 in deposit market share. "The bulk of the business is there," Makris said of Oklahoma. "That is an attractive market."

Some local economies in the energy-heavy state, along with parts of neighboring Texas, have been bruised by the downturn in oil prices in recent years. But oil has recovered notable ground in recent months, and markets such as Oklahoma City and nearly every major market of Texas are widely considered long-term growth plays for banks, analysts said.

Simmons executives also noted that they anticipate cost savings of 35% of the target's expense base, and they expect the deal to prove accretive to EPS in the first full year. They also said they expect it to be accretive to tangible book value in less than 2.5 years, a span analysts said investors are likely to welcome. "Mostly, anything below three or four years has been fine," Rodis said.

Executives from both Simmons and Southwest said that future revenue growth opportunities are bright. Simmons, for example, will introduce an established Small Business Administration lending operation to Southwest's commercial customers and more credit card offerings to its consumers, among other additions.

"They add the scale we needed," Funke, the Southwest chief executive, said on the call. He will become president of the new Southwest division of Simmons, overseeing banking operations in Oklahoma, Texas, Colorado and Kansas.

Simmons' Makris said the company he leads would remain acquisitive in 2017. It closed one bank deal earlier this year and four others over the three previous year. He continues to "have very good discussions" with potential sellers. "We'll continue down the M&A path."