While many community banks are merging for economies of scale, two Texas banks are merging to increase market presence in the competitive banking state.
Smaller banks have a hard time competing due to regulatory and technology costs, and are often looking for deals to disperse those costs across a larger asset base, said bankers and analysts. "Banks under $500 million in assets, give or take, are having a harder time," said Preston Simons, a senior vice president with the investment bank Commerce Street Capital LLC.
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But Happy, Texas-based Happy State Bank announced it will acquire Lubbock, Texas-based Centennial Bank in an effort to expand its footprint, not create economies of scale, according to the two banks' management teams.
"This bank fills in some of those holes — they're in some areas we're not in," Happy State Bank Chairman and CEO Patrick Hickman said in an interview. Happy State Bank was seeking merger partners to deploy capital, and the acquisition will expand the bank into the Texas hill country region, near San Antonio and Austin, said Hickman.
"The ability to move into the hill country is a huge, huge, huge piece for us," he said.
David Williams, chairman and CEO of Centennial Bank's parent company, Commerce BancShares Inc., said in an interview that Happy State Bank's management approached Centennial about the merger. "We weren't for sale," he said.
But the two companies' cultures match up "quite well," Hickman said, and they have done participation loans together in the past.
Commerce Street Capital's Simons expects Happy State Bank to stretch farther across Texas. "With this new entry into central Texas and keeping their [Dallas-Fort Worth] presence in mind, I could see them increasing their presence across the state," he said.
There is only limited branch overlap between the two banks, and Commerce BancShares' Williams indicated that Centennial's operations center in Lubbock may stay open. "They may very well leave some operations in Lubbock," he said. Happy's operations center is in Amarillo.
Analysts said deals have slowed in Texas recently, and deal volume is on track to be slower this year than in 2018. But Happy State Bank has been particularly active in recent weeks. It announced Aug. 5 it will acquire the two branches of Mobeetie, Texas-based First State Bank of Mobeetie about 100 miles east of Happy.
The Texas Panhandle has seen other small bank deals since July, including Wellington, Texas-based WSB Bancshares Inc.'s July 28 announcement it is acquiring Paducah, Texas-based First Paducah Bancshares of Texas.
The overall slowdown in deal activity is due to a lack of sellers, said Simons. He said particularly in metro areas like Dallas, Austin and Houston, there are not many banks available. "In those metro areas, pricing will be pushed upwards."
"It's been difficult to get buyers and sellers to agree on pricing," agreed Gary Tenner, an analyst with D. A. Davidson, in an interview.
But there are six banks headquartered in Lubbock currently operating, according to S&P Global Market Intelligence data, including Centennial. All six banks have under $3 billion in total assets, with one under $500 million.
"There's still probably two to three banks in that market that I think will end up selling at some point," said Simons.

