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Texas, Oklahoma deals pick up as energy sector outlook brightens

Bank deals in Texas and Oklahoma are picking up as oil prices stabilize, leading some industry experts to believe the Southwest, long an industry giant, but adversely impacted by the U.S. energy recession, could return to its former glory.

Following a volatile year, with oil prices plummeting to around $26 a barrel in February, the new year is set to begin with prices hovering around $55 a barrel.

Keefe Bruyette & Woods analyst Brady Gailey said that with oil prices on the rise, and valuations growing rapidly in anticipation of President-elect Donald Trump's transition to office, buyers are comforted by fewer energy portfolio-related risks and have a "more valuable currency" with which to acquire financial institutions.

"I think that the Texas banks are among the most profitable, well-run and conservative credit quality banks out of anywhere," Gailey said. "They have a very healthy local state government, and assuming oil can stay here and maybe drift higher over time, I do think they will get their premium back and still be one of the better states to run a bank in."

Jacob Thompson, managing director at SAMCO Capital Markets, said the Federal Reserve's decision to boost the U.S. central bank's key interest rate by 25 basis points bodes well for asset-sensitive banks. He said there is "some weakness" in oil prices, and that he is more optimistic about bank deals in Texas than Oklahoma going into 2017.

"I think what you've seen with the recovery and the run-up in Texas stock prices, that's certainly fueled some more activity," Thompson said, referencing deals like the Independent Bank Group Inc. acquisition of Carlile Bancshares Inc. "You start seeing some of these transactions getting done, and then it maybe has a trickle-down effect into the smaller community bank space. Most of the banks that I've talked to that have energy exposure, most of the executives were saying that oil really needs to be more in the $55- to $65-a-barrel range for a lot of their energy borrowers to feel confident."

According to data collected by S&P Global Market Intelligence, the median deal value/tangible book value for Texas and Oklahoma since 2015, at 173.3%, is still above the industry median of 137.5%, despite some significant drops in oil prices during the period.

Pine Bluff, Ark.-based Simmons First National Corp. tops the list of largest bank deals in the two states, following the announcement that the company will acquire all the outstanding common stock of Stillwater, Okla.-based Southwest Bancorp Inc. in a deal valued at roughly $567.6 million.

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Houston, Texas-based Green Bancorp Inc., which completed its acquisition of Houston-based Patriot Bancshares Inc. in May 2015, is taking steps to reduce its energy portfolio. On the company's third-quarter earnings call, Chairman and CEO Manuel Mehos said the company remains confident that it will have "substantially eliminated" its energy exposure by the first quarter of 2017.

Gailey said he doesn't necessarily view the $3.93 billion company as a seller, but that it is attractive to buyers for its size and location.

"I think with the volatility they saw in the price of oil, they decided, 'This really isn't what we want to do going forward,'" Gailey said. "They've been doing a pretty good job of getting out of energy. It's kind of at a cost. When you sell an asset class like the way that they're doing it, you have results and losses higher than you would naturally see if they had just left this portfolio lying down. I think that come the next quarter or two, Green will be mostly out of energy."

Thompson, on the other hand, said it is nearly "impossible" to be a Houston-based bank and be completely out of energy.

"Certainly, you want to re-evaluate your portfolio and if you identify weaknesses, deal with them as quickly as you possibly can," he said. "But to make a blanket statement that you're getting out of energy lending altogether, I don't think that's the right approach. I think there are some energy companies that would be very valuable, and you might miss out on those opportunities, especially in a market like Houston where a lot of the economy revolves around the sector."

Gailey said he doesn't think the company's move out of energy will set a precedent for other energy-reliant banks, or that other banks in the Southwest will change how they operate following the decline in oil prices earlier in the year.

"This happens every decade. This one was a little deeper and a little longer than the last couple of ones, but when you're lending to a group of companies where the health of that company is driven by the price of a commodity like oil, that commodity can be very volatile," Gailey said. "An OPEC member makes a decision on the other side of the world, and that can drastically impact the local economy in Texas. They've priced that in. They always have and hopefully always will."

Thompson added that with prices where they've been over the last year-plus, weakness from a borrower's standpoint should have already been restructured.

"I think that we've been in this environment long enough that if you're a prudent bank, and you're looking at your energy credits pretty carefully, hopefully at this point, you've identified anything that could be a problem," he said.

While M&A in the oil-rich states has been active, just two of the top 20 deals announced in 2016 were for targets in those states.

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Gailey said he expects M&A activity to be more robust in 2017, especially in Texas.

"A lot of the bank buyers in Texas, like Cullen/Frost Bankers Inc., like Prosperity Bancshares Inc., like First Financial Bankshares Inc. ... l would expect that they're trying harder today than they have in a while to convince some of these smaller banks to sell to them," Gailey said.

He said KBW has identified Plano, Texas-based LegacyTexas Financial Group Inc., an $8.44 billion company, as a potential seller before it hits the $10 billion mark. He also said Dallas, Texas-based Hilltop Holdings Inc. is well-positioned to buy. On the company's third-quarter earnings call, President and CEO Jeremy Ford said the $12.42 billion company is "working hard" on acquisition opportunities and would like to be greater than $1 billion in Texas.

"I would say now, with Hilltop trading almost $30 a share, they do have excess capital," Gailey added. "I think they have the expertise, a stronger currency and excess capital. While they've tried to buy banks for a while, the environment is better for them now to actually go out there and get a deal."