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Texas banks aren't messing with the IPO market

The market has closed the door on several privately heldTexas-based banks looking to go public due to a considerable decline in oilprices, and it is unlikely to reopen anytime soon.

While some members of the sell-side community argue thatTexas-based banks have weathered the worst of oil price drops, which hit a lowpoint in February, the institutions remain wary of pursuing acquisitions or initialpublic offerings in the near term. Observers say that several private Texasbanks considered, and then shelved, plans to go public in the last year becauseof the sustained decline in energy prices and volatility in the equity markets.

Sources said Houston-based and Canyon,Texas-based Happy BancsharesInc. had considered and then shelved plans for IPOs at the end of2015 and the beginning of 2016. One of the sources added that College Station,Texas-based ST Financial GroupInc. had also looked into an IPO.

Some of the institutions went so far as to engage investmentbankers, but none ultimately went through with their plans because of marketconditions. One source said that a Texas bank IPO in late 2015 or early 2016"would've been a hard sell."

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While oil prices are still off triple-digit peaks achievedin 2014, prices have rebounded and traded in the range of $42 to $46 a barrellately, up from February lows, when the price per barrel dropped below $30.

Even as oil continues its moderate recovery, no bank hastried to test the waters. Houston-based Allegiance Bancshares Inc. went in , the fifth Texas-based bankto go public since April 2013. Dory Wiley, president and CEO of Commerce StreetHoldings, said equity markets havebeen "choppy" all year — an unattractive trait for IPOs — and he doesnot predict they will smooth out before 2017.

The same may hold true for M&A, a departure for a statethat historically enjoyed elevated deal activity. There were eight bank andthrift deals announced with a Texas target in the first half of 2016, comparedto 22 during 2015 and 27 in both 2014 and 2013, according to SNL Financialdata. Some Texas banks have seen their share prices recover from lows reachedat the beginning of the year, and that might bring some prospective buyers backto the negotiating table, though Wiley believes it will take until the thirdquarter for anything to manifest. He said M&A activity is up, but that ittakes time for deals to close, especially in a market where executives may fearan outsized reaction from the Street following an announcement.

Jacob Thompson, managing director at SAMCO Capital Markets,said 2016 "feels like it's going to be a slower M&A year" asbanking executives evaluate their footprints and approach potential partnerscautiously. He said that, based on recent conversations, banks that have askedhim about selling also seem willing to wait for higher valuations or greatercertainty in the economy or elections. But there may be signs that banks arewarming up to deals, as executives from Houston-based and Plano,Texas-based LegacyTexas FinancialGroup Inc. have telegraphed their interest in doing a or a .

The recovery in energy prices has coincided with an increasein the investment community's bullishness and optimism around Texas banks,though some were quicker to revisit their opinions than others. Wiley went sofar as to call the decline in Texas bank share prices an"overcorrection." Raymond James analysts upgraded a spate ofenergy-exposed banks in early May, writing that the worst of the energy cyclehad been "baked" into stock prices.

"[W]ith contagion seemingly unlikely (from managementcommentary across the board) over the next few quarters it is increasinglyclear to us the risk/reward dynamic has changed," wrote the analysts. Theincrease in energy prices offers borrowers "a lot more options" andlessens pressure on Houston-based institutions like Cadence Bancorp, saidPresident and CEO Paul Murphy Jr. While selective, unit is still open to newenergy credits and clients even as its energy exposure has declined while otherareas have grown, he said. Compared to energy, commercial real estate is lessof a concern at Cadence, though he has seen some overbuilding in certainHouston submarkets.

The growth comes at an inflection point for the bank as itnears the $10 billionasset threshold. Many banks have used deals to push them over this ceiling andrapidly gain scale, but as a private bank, Cadence would need to use cash orfirst go public. Murphy said Cadence is slated to organically cross $10 billionsometime in 2017, a timeline that could accelerate if the bank pursued a deal.The bank is open to doing a deal but believes 2017 is a more likely year.

"As we think about our long-term capital plan, an IPOis one of the options we do consider," he said. "We haven't made anydecisions, though, as to whether or not we would do an IPO, or if we did, whenthat would be."

An IPO is also an option for Happy Bancshares, the parentcompany of Happy StateBank — although Chairman and CEO Pat Hickman said management istrying to "dodge" that possibility. The bank, which had $2.88 billionat the end of the first quarter, grew 9.56% in the last 12 months, andcompleted a privateplacement of more than $51 million nearly a year ago. The bank is aC-corp and has 700 shareholders; its stock is not subject to the samevolatility and fluctuations of public markets. Hickman said the bank isinterested in doing deals and fielded five or six calls from potential sellersin the first quarter, but has put M&A on the backburner as it undergoes acore systems conversion. Despite the interest in growth and acquisitions,Hickman said the bank is not interested in going public.

"We have considered doing an IPO three different timesover probably the last six years, and all three times, people came in andslapped me and I sobered up," he said. "We really did look at ithard. So far, we've been able to dodge that bullet all three times. Today weare working diligently to figure out a way to dodge that bullet."

ST Financial, the parent company of Spirit of Texas Bank SSB, did not return calls forcomment.

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SNL Financial is anoffering of S&P Global Market Intelligence.