© 2016 The Texas Lawbook.
By Kerry Curry
(May 17) – There once was a time when Texas banks drew a price premium, and the Southwest led the country in banking M&A activity.
Those days are gone. At least this year.
It’s slow out there. Low oil prices, financial regulation, depressed stock prices and mediocre economic indicators are playing a role in the region’s anemic banking merger-and-acquisition market.
“There are both challenges and opportunities on the horizon,” says C.K. Lee, managing director of the Financial Institutions Group at Commerce Street Capital.
Banks need to strategically get into position, from a capital and credit quality standpoint, to maximize on the coming opportunities and not become a victim of the challenges, he says.
In 2015, bank M&A deal value reached $26.6 billion nationally, compared to $18.8 billion in 2014. So far this year, only $6.6 billion in bank deal announcements have been made.
In the Southwestern states, only four deals have been announced, compared to 10 announcements at this time a year ago:
1. Denver-based Guaranty Bancorp and Home State Bank in Loveland, Colo., announced in March that they would merge in a $133.7 million deal.
2. Also in March, Dallas-based Triumph Bancorp announced it would acquire ColoEast Bankshares, the parent of Colorado East Bank & Trust, in an all-cash deal valued at $70 million.
3. In February, Denton-based Access Bancorp announced it will acquire Dallas-based Preston National Bank. Terms weren’t disclosed.
4. Industry Bancshares in Industry, Texas, plans to acquire Dawson Bancshares.
“I think there is still some activity going on out there but it certainly has fallen off from what it has been before,” says Rick Brophy, a partner with Beard Kultgen Brophy Bostwick & Dickson in Waco.
Oil Prices Play Role in Bank M&A Slowdown
The effect of low energy prices is fairly widespread on banking M&A in Texas, with hotspots in Houston, Midland-Odessa and the Eagle Ford area of South Texas.
Despite concerns, no one has suggested Texas will experience a spike in problem banks or bank failures as the result of low oil prices. Only three banks have failed nationwide this year. None have been in Texas.
The Texas premium paid for Texas banks is gone, however, says Sanford Brown, a partner at Alston & Bird in Dallas.
Still, the stock of public banks in Texas is being punished for low oil prices and some normally acquisitive banks, who have done bank mergers using stock, have had to step back from M&A activity as a result.
“A lot of the buyers who have historically done a lot of the deals and some of the newer ones who have gone public with the stated intent of doing deals are sitting on the sidelines while their stock is being punished just because they are in Texas,” Brown says.
Mergers are still occurring around the country despite the Texas slowdown and aren’t that far off the pace of last year. Lee, speaking at Commerce Street Capital’s recent community banking conference in Irving, said there have been 61 bank M&A announcements so far this year, not very far off the 66 that had been announced at this time a year ago.
“Banks from out of state are waiting to see what happens with loan portfolios here in Texas that have a concentration in energy, especially in exploration and production,” says Annette Tripp, a partner at Thompson & Knight in Houston. “They are watching those and waiting for the fallout.”
Other bank exposure to low energy prices may be indirect. Hotel loans and pickup loans could be affected in oil rich regions of the state, for example.
Regulatory Issues
Besides oil prices, regulation is an ever present issue affecting M&A, especially for small community banks pressed by rising compliance costs.
The uncertainty of getting an M&A deal approved remains a big impediment to announcing transactions.
Derek McGee, a partner at Fenimore, Kay, Harrison & Ford in Austin, said besides the equity markets, compliance issues are keeping some banks on the sidelines.
“Regulators are hesitant to approve any transaction if the buyer or the seller has any unresolved safety and soundness or compliance issues,” McGee says. “You see that hampering some transactions. That component also increases the due diligence investigation that is conducted between the parties to make sure that both banks can get the regulatory approvals and provide deal certainty.”
Bid-ask Spread Contributing to the M&A Slowdown
In the past couple of years, the gap between what buyers wanted to pay and what sellers thought their bank was worth had narrowed. That gap has widened some this year as sellers think they are worth more than buyers are willing to pay.
“Banks are cautious and patient in this uncertain and volatile economic environment,” McGee says.
Says Brophy: “You still have a lot of people interested in selling, there are fewer people interested in buying and the prices that the people who are buying are willing to pay aren’t what they used to be.”
A New Trend: Investor Groups Want to Buy Banks
While there are few banks buying other banks, there is still interest from other parties. The interest is coming from investor groups who want to diversify their assets, says Robert Flowers, a partner at Hunton & Williams in Dallas. While these groups in the past may have started a de novo bank, today they are looking at acquiring existing community banks, he says.
It’s a nationwide phenomenon, he says, and the groups either have the money in hand or believe they can raise it.
“In the 2000s, they’d raise money and start a bank,” he says. “Now they are raising money and buying an existing bank.”
Regulatory changes make it more difficult to start a bank from scratch, and small, rural banks have been willing to sell. Flowers said his firm has a couple deals with investor groups in the works, and he’s heard of competitors working similar deals.
Looking Ahead
Several attorneys said they expect the remainder of the year to be slow while others say they think it may pick up in the second half of the year and end up only slightly behind last year’s deal numbers.
“Banks will continue to remain cautious and patient based on economic conditions and the political environment, but I think you will see activity,” McGee says. “There is tire kicking going on. Particularly in the smaller bank space, I think you’ll see activity because you still have the overarching regulatory burden that the smallest banks bear the brunt of. It’s hard for small banks to remain independent due to regulatory compliance cost.”
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