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Bank M&A is bigger in Texas, but number of deals smaller than usual

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Bank M&A is bigger in Texas, but number of deals smaller than usual

M&A activity is slower than usual in Texas this year, but the banks being targeted are large by historical standards in the state.

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As of Sept. 24, 10 bank M&A deals with a Texas-based target have been announced this year, roughly on pace with the 13 announced in all of 2020 as M&A slowed across the country with the onset of the COVID-19 pandemic. However, the 2021 total is trending down compared to 2019 and 2018, which saw 22 and 21 deals, respectively. The last time Texas had fewer than 15 whole-bank M&A deals announced was 2011.

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Yet what the activity lacks in numbers, it makes up for in size. Banks targeted this year in Texas reported an aggregate $27.80 billion in assets the quarter before deal announcement, which is well above the average amount over the last decade in the state. Last year's 13 bank targets reported $107.64 billion in assets as of deal announcement, but that was almost entirely due to PNC Financial Services Group Inc.'s acquisition of Houston-based BBVA USA Bancshares Inc., which reported almost $104 billion in assets and was the largest Texas bank deal target ever. The 22 bank targets in 2019 reported only $15.42 billion in assets prior to deal announcement.

Bigger deals coming to market has been a theme in U.S. bank M&A in 2021. In Texas, this year has seen two large deals, including Houston-based Cadence Bancorp.'s $2.87 billion merger of equals with Tupelo, Miss.-based BancorpSouth Bank, which is the second-largest Texas bank deal in history.

Most recently, on Sept. 15, Conway, Ark.-based Home Bancshares Inc. announced that it would acquire Canyon, Texas-based Happy Bancshares Inc., parent company of Happy State Bank, Texas' eighth-largest community bank by assets for almost $887 million. Happy has also been an active acquirer in Texas, gobbling up four other banks in the state since the beginning of 2020.

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Texas community banks and thrifts were more profitable than the national median in the second quarter but lagged their peers in the broader Southwest.

The median return on average equity for Texas community banks and thrifts with less than $10 billion in assets was 11.60% in the second quarter, below the Southwest median of 11.87%, but higher than the national median of 10.78%. Similarly, the 3.51% median net interest margin for Texas community banks was 7 basis points lower than the Southwest median but 18 basis points higher than the U.S. median.

Loans and deposits also grew faster at Texas community banks and thrifts compared with their peers across the U.S. During the second quarter, median deposit growth in Texas was 13.5% year over year and median loan growth was 2.7%. By comparison, deposits grew by a median 12.9% across the U.S. as a whole and loans fell by a median 0.3%.

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The Woodlands-based Woodforest National Bank, Texas' largest community bank under $10 billion in assets, posted higher deposit and loan growth than the state median in the second quarter, but the bank's 0.78% nonperforming assets ratio was 3x the state median. According to S&P Global Market Intelligence data, 725 of Woodforest's 768 branches are located inside a store, with the vast majority (718) located in Walmart stores across the country.

Dallas-based Veritex Community Bank, the state's second-largest community bank by assets, has recently pursued M&A to help grow noninterest income. On Sept. 21, Veritex announced a $62.5 million deal for North Avenue Capital LLC and its U.S. Department of Agriculture business and industry lending program. On April 27, Veritex announced it would buy a 49% stake in Thrive Mortgage LLC for $53.9 million in an effort to grow its mortgage lending and sales business. That deal closed on July 19.

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Texas, like most of the rest of the U.S., is seeing more branch closures than openings, as banking continues to go digital. Over the last 12 months ended June 30, 200 bank or thrift branches were closed in Texas, while 141 were opened.

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Click here for a list of active Texas community banks.