© 2015 The Texas Lawbook.
By Kerry Curry
(May 4) – Bank mergers and acquisitions may prove more challenging to get done this year if the oil sector doesn’t bounce back, according to financial M&A experts, who say there is a significant disconnect between buyers and sellers over valuations.
In 2014, 287 M&A deals involving banking institutions were announced nationally compared to 223 in 2013, according to SNL Financial. That equates to $18.6 billion in deal value last year compared to $14.2 billion in 2013.
There have been 83 transactions announced so far, which annualizes to 268 or an eight percent decline from one year ago. The average price to tangible equity is 159 percent, according to SNL.
“If you are a seller, you are reluctant to take currency until you understand what the long-term stabilizing trend will be on oil prices,” Commerce Street Capital Managing Director C.K. Lee said last week during the financial institution’s 13th annual banking conference last week in Irving. “Will it stabilize at $40 or $50 or $75, and what impact will that have on your buyer?”
Concerns about a bathtub-shaped recovery to oil prices —prices staying low over a sustained period — coupled with concerns about when the next economic downturn will hit, have convinced some bankers that now might be the time to explore an exit plan, he said.
The number of months between the past four U.S. recessions averages out to 95 months, and 70 months have already passed since the Great Recession and credit crisis, with the GDP growth rate showing signs of resistance.
O. Paul Corley Jr., a partner at Thompson & Knight, said sellers, especially small community banks, will find the M&A environment challenging this year, but said plenty of pressure exists to sell.
“There is owner fatigue and management/ownership is getting older,” said Corley, who attended the Commerce Street Capital conference. “Sellers just haven’t been able to come to terms with lower prices, and the buyers are getting pretty picky.”
Small community banks often don’t have a succession plan in place and some may be too small to attract interest from today’s buyers who are looking for larger deals.
In Texas, five bank M&A deals have been announced so far this year. Corley said he doubts there will be more than 15 total by year-end.
Regulatory concerns and the price of compliance can also push these small players to sell or merge as can a location in a town that isn’t growing.
Lee said Commerce Street has observed a “hollowing out of the middle market” in Texas banking.
The state has 20 banks in Dallas and Houston that are between $1 billion and $10 billion in asset size. These banks performing well, with great returns to their shareholders while remaining off the radar screen of bank regulators.
But over the next few years, they will become M&A targets, Lee said.
“If you roll the movie forward five years, I can make the case that 16 to 18 of those banks will either be in the Dodd-Frank vortex or they will be consolidated out because they are saying we don’t want to go into the Dodd-Frank vortex solo,” Lee said. The Dodd-Frank Act is the massive financial reform act that was passed in response to the 2008 financial crisis. It has been a headache for many bankers due to increased time and cost required for compliance.
The expected consolidation in that asset size creates a hole in the banking sector, Lee said. “It also creates tremendous opportunity for the $200, $500 and $700 million-dollar banks of today to say ‘We are going to consciously work to fill that hole.’ ”
About 3½% of the banking industry had been consolidating annually prior to the financial crisis. “Now we are consolidating above 4% (annually),” Lee said, “and I think anyone who works in this business would say that’s probably a trend we will continue to see.”
© 2015 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.