Texas banks have recovered from a selloff in share prices and collapsed deal values, and investment bankers seem optimistic about future deal activity in the Lone Star State.
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Crude oil fell from its highs above $100 a barrel in mid-2014 to a record low of $30 a barrel at the beginning of 2016. The decline in oil prices led to a cratering of Texas bank stocks with price-to-tangible book values hitting an all-time low in the first quarter of 2016, according to S&P Global Market Intelligence data. Investors worried that financial institutions were exposed to energy in the same way they had been during the 1980s energy crisis.
Bank loan portfolios showed some resilience during this decline in energy prices, in part due to less energy concentration and greater diversity of industries in the markets where they operated.
Crude oil prices have since slightly recovered, recently bouncing around $60, but remain well below their 2014 highs. The improvement has influenced Texas banks' share performance. It has helped boost their share prices to a modest premium above national peers and tempted some once-shy private banks to conduct offerings and gather offensive capital. Six banks have gone public since August 2014, including Cadence Bancorp. and Veritex Holdings Inc., and they may consider acquisitions as a way to grow more efficiently. R. Clark Locke, a managing director at Hovde Group, said others chose to tap into a "robust" subordinated debt market.
Locke said a number of external factors have also helped Texas bank share prices recover, including the broad increase in prices after the election of President Donald Trump and the more-recent reduction in the corporate tax rate. Those factors coupled with attractive demographic growth and the lack of income tax in the state have positioned Texas banks for continued M&A.
There were 23 deals announced in 2015, with a high of 273% of median price to tangible book value in the second quarter on transactions with disclosed values. There were 18 deals in 2016 and 19 in 2017. Pricing also hit a low in 2016, with the median price to tangible book hitting 159.7% before jumping to 198.7% in 2017. There have been four deals in 2018 so far.
Daniel Bass, managing director of investment banking at Performance Trust Capital Partners, said he is busy with more deal activity than he has seen in a long time. He said the activity is driven by two sets of sellers: institutions in more-rural areas that may have succession issues and institutions chartered after 2000 that promised their investors a liquidity event.
Bass pointed out that David Zalman, chairman and CEO of the famously acquisitive Prosperity Bancshares Inc., has spoken critically of price expectations, saying that recently sellers "want more." Higher pricing can make a potential deal less attractive and limit pro forma upside.
Bass added that many of these institutions selling have less than $1 billion in assets and are targets for midsize banks that have between $3 billion and $10 billion in assets. These sellers may be too small for some of the larger players that drove M&A in the past. Independent Bank and Hilltop Holdings Inc. announced deals in late 2017 and earlier this year, respectively, but analysts covering both companies believe they have enough capital and capacity to do more.
"As long as bank valuations stay where they are now," Bass said, "it will be a very good year for a lot of M&A transactions. I see more activity on the ground here in Texas than I've seen in a long time. It takes a lot of talking to get to the finish line but at least there's a lot of talking going on."



