Bankers committed to taking Texas by storm during the recovery will need to revise their playbooks.

Banking companies, both large and small, determined to expand in the state have made it abundantly clear that acquisitions will be a crucial component of achieving growth. But making a deal is easier said than done in Texas, where suitors outnumber big, affordable targets. Instead, companies hoping to grow in the Lone Star State will either have to outbid rivals or narrow their geographic ambitions to key markets — and may be forced to buy branches instead of whole banks.

"This is going to be a game of small ball" for consolidators, said Curtis Carpenter, a managing director at Sheshunoff & Co. Investment Banking in Austin. "The winners in Texas are going to be the ones who can do a number of acquisitions and be good at assimilating them into an organization."

Big banks have long coveted Texas. They aggressively moved into the state through a flurry of deals that lasted up until about five years ago. This activity left very few big banks with headquarters in the state, and many of the remainder held up well during the financial crisis and the recession due to the energy trade and relatively resilient real estate values. Nonperforming loans averaged 2.42% of assets at Texas banks last quarter, compared with 3.32% nationally, according to data from the Federal Deposit Insurance Corp.

Seven banks have failed in Texas since January 2008, the FDIC says. Foresight Analytics LLC, a market research firm in Oakland, Calif., estimates that just six banks in the state are likely to be among the roughly 700 on the FDIC's list of problem banks. (Foresight estimates much higher numbers of stressed banks in states like California, Florida and Georgia.)

At the same time, traditional acquisitions are more expensive, experts say. Some Texas banks are still seeking 1.5 to 2 times book value. This would be well below the four-times-book-value deal pricing in 2005 but higher than in states with weaker economies today.

Last year, eight traditional bank deals closed, with the biggest sale involving the $250 million-asset EJ Financial Corp., according to SNL Financial in Charlottesville, Va. Traditional sales totaled 13 in 2008.

Dick Evans, the chairman and CEO of $16.3 billion-asset Cullen/Frost Bankers Inc., said the lack of inexpensive opportunities in the San Antonio company's backyard is pushing it to look for opportunities outside the state. "The economy is good in Texas, so we have [fewer] FDIC deals," he said last week during a presentation hosted by KBW Inc. "Our priority is Texas, but of course we would cross the state line to buy a neighbor."

Evans is not the only bank executive sifting through the scarce opportunities in the Lone Star State.

BB&T Corp., which gained 22 branches in markets such as Dallas and Austin with its FDIC-assisted takeover of Colonial Bank in August, is among those interested in more acquisitions. It is looking to establish a top-five market share, similar to what the Winston-Salem, N.C., company enjoys in most of the other states where it operates.

Ricky Brown, BB&T's banking network manager, said in an interview last week that the $165.8 billion-asset company is "not in a rush to go out and do anything in Texas today," though acquisitions are all but certain. "We are 53rd in terms of deposit market share, and we want to be fifth," he said. "You can't do that organically." (BB&T added $1.5 billion in Texas deposits from mid-August through yearend after taking over Colonial, he said.)

Clark Locke, the head of Texas investment banking operations at Hovde Financial Inc., said a high level of interest was apparent two weeks ago when the FDIC shuttered La Coste National Bank, which had one branch. "There were dozens of parties interested" in the $50 million-asset bank, he said.

Would-be buyers say there is enough economic uncertainty to persuade some bankers to sell.

"We've had a hard time talking people down on price," said Scott Dueser, the chairman and CEO of First Financial Bankshares Inc., explaining at the KBW conference why the $3.3 billion-asset Abilene company has made no acquisitions in five years. "But with the economy where it is today, we think we will have some opportunities."

Daniel Bass, a manager director in Houston for Carson Medlin Co., said he would encourage banks to start reaching out to targets now. "There is a great opportunity for open-bank deals because people are so down," he said. "Yes, you are going to catch some criticism for sticking your neck out there, but I think there is an opportunity to make headway in the state."

Investment bankers were hesitant to identify strong candidates, though they said most would top out at $300 million of assets. Larger targets may be privately held banks such as Park Cities Bank in Dallas and the $1.3 billion-asset Patriot Bank in Houston. Bigger banking companies such as Cullen/Frost, First Financial and Prosperity Bancshares Inc. and Sterling Bancshares Inc. in Houston have been acting more like buyers than sellers, observers said.

Tom Youngblood, the chief executive at Park Cities, said the $850 million-asset bank has fielded inquiries from banks and private-equity groups. "There are banks that are trying to approach us," he said, including shelf charters interested in keeping management intact to oversee operations. "Nobody has made a deal yet," he said. Park Cities, which has remained profitable, is unwilling to sell at a steep discount and has no interest in selling to "somebody who is limping along."

Calls to Patriot were not returned.

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said a lack of big opportunities could lead BB&T to look at Texas as a series of local markets instead of a whole state. Rather than adding $27 billion in deposits to become the state's fifth-biggest bank, BB&T could add $2.5 billion in deposits to take the same position in the Dallas area, he said. "They could come up with an alternative measure of market share," he said.

At June 30, the five biggest banks in Texas by deposits ranged from Bank of America Corp. in the top spot, with $83.87 billion and a 17.76% market share, to Banco Bilbao Vizcaya Argentaria SA's BBVA Compass, at $29.71 billion and 6.29%.

Fitzsimmons and others said that buying branches from competitors is another possibility for growth. In August, Sterling agreed to buy 19 branches and $500 million in deposits from First Banks Inc. in St. Louis.

Dan Rollins, Prosperity's president and chief operating officer, said the $8.9 billion-asset Houston company is interested in branch purchases. "We think there are going to be more transactions where a bank gets out of Texas to build capital and clean up their loans," he said at last week's KBW conference.

Hovde's Locke said there has been a steady flow of branch deals nationwide in the past year and he believes growing banks may also be interested in buying empty branches should big companies such as JPMorgan Chase & Co. or Wells Fargo & Co. close overlapping offices during their integrations of former Washington Mutual Inc. and Wachovia Corp. branches, respectively. "We are seeing situations where parties are interested in selling the real estate," he said.

A final growth opportunity, albeit one that emphasizes patience and timing, would involve hiring high-profile executives and well-connected banking teams from competitors, observers said. BB&T in January recruited Kay St.John, a former state executive for Capital One Financial Corp. and its predecessor Hibernia Corp. in New Orleans, to become its regional president for Texas.

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