Management wanted to provide liquidity for shareholders, but became convinced that the $722 million-asset company would need to double in size before pursuing an initial public offering. Acquisitions were considered, but executives found that the market had shifted and sellers wanted stock in a public company.
Executives had finally resigned themselves to rely on organic growth when a better solution came along – an offer from Heartland Financial USA in Dubuque, Iowa. CIC’s executives, who had known Heartland’s management for several years, believe the companies would fit culturally.
“I can’t tell you that investors were beating down the door ready to sell,” Kevin Ahern, CIC’s chairman and chief executive, said. “They were happy with our progress, but the cost of operating is rising dramatically. In our view, you have to be bigger.”
CIC’s predicament is playing out around the country, industry observers said. Since the financial crisis, a prevalent argument has been that smaller banks, particularly privately held institutions, must get bigger to survive, given an increase in regulatory requirements and pressure from persistently low interest rates.
“I’ve seen that with other banks,” said Damon DelMonte, an analyst at Keefe, Bruyette & Woods. “The bank is fine running by itself as a private, profitable company, but they get to a point where they want a liquidity event and they can’t go public, or they need additional capital to support growth. They end up seeking out partners that can help them reach that goal.”
Banks with less than $2 billion in assets often face challenges going public because the offering would be small and may not attract enough investor interest, DelMonte said. Public companies also face an expanded set of regulatory costs and requirements at a time when many banks are looking to cut expenses.
CIC raised $15 million in 2010 before buying the $25 million-asset Centennial Bank. Two years later, the company brought in another $10 million and bought Millennium Bancorp, which was nearly twice its size at the time.
Sellers were under significant duress following the financial crisis, which provided opportunities for small, ambitious institutions such as CIC. As a result, buyers were often in the best shape to determine how a consideration was paid. Now that banks are healthier, potential sellers are in better shape to negotiate whether they are paid in cash or stock.
“We had looked at doing acquisitions without a public currency and realized that it was going to be difficult,” Ahern said. “The market had changed, and we didn’t have the … cash to do transactions.”