Texas Reprises Role as Bank M&A Leader

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The Lone Star State is the guiding star for bank M&A nationwide once again.

More banks have sold for higher prices in Texas than anywhere else this year, according to data through May from Sheshunoff that illustrates the widening gap between Texas and the rest of the country.

The median price-to-tangible book value was 206% in the six Texas deals whose financial terms were made public, the Austin investment bank says. It was 116% industrywide.

The median deposit premium in Texas was 8.26% compared with 1.45% for the entire industry.

Deals in Texas — marked by healthy sellers demanding cash-heavy offers — provide a hint of the future for the other parts of the country still caught in a bank deals slump, says John Adams, director of M&A for Sheshunoff.

"As other regions kind of turn that corner where more of the banks are healthy. … I think then you can start seeing this type of M&A volume," he says.

The surge in Texas in many ways is a return to the way things used to be before the slump started in 2007. Texas has been the busiest for bank mergers since interstate banking deregulation unleashed a big wave of consolidation from the 1980s to mid-2000s, according to federal data. About 10%, or 376 of the more than 3,921 banks that changed hands from 1994 to 2003, were in Texas, according to Federal Reserve's last 10-year report on industry merger trends in 2004.

"Texas has been one of the states that have always led the way. It has population growth. Not every state has minerals, and oil and gas and things like that," Adams says.

The 11 deals in Texas through May accounted for more than 12% of the total 81 deals industrywide, according to Sheshunoff.

California was No. 2 in bank mergers through May, with six deals. The median pricing multiples in California deals: a 132% price-to-tangible book value and 3.77% deposit premium.

Most mergers around the country have involved stressed institutions selling for cheap to buyers looking for big cost savings and low deposit premiums.

Texas has had different dynamics. Banks there have been attracting high premiums this year because they are profitable and relatively few are available.

A couple Texas deals have involved highly liquid buyers paying up to woo banks that do not have to sell. The buyers have sought to enter a new market with strong prospects for loan and fee growth given the relatively healthy nature of the Texas economy. That includes Cadence Bancorp $250 million agreement in March for Encore Bancshares (EBTX), and Prosperity Bancshares' (PB) $529 million deal in February for American State Financial.

The relatively high market rate for profitable Texas banks with few loan problems has big implications for banks looking to expand there, Adams says.

When a bank sells for a high multiple, the buyer has to book goodwill — which eats equity. To mitigate that problem, Texas buyers need excess capital to deploy as cash or unusually valuable stock to use as deal currency.

Paying with cash dilutes a buyer's equity while paying with stock preserves it.

There were 13 bank takeovers in Texas in 2011, with just four announced in the first five months of the year, according to SNL Financial.

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