AUSTIN — Compared with past years, 2007 was a slow one for bank mergers and acquisitions in Texas, but when compared with the rest of the country, activity there actually was quite brisk.
Investment bankers and other observers say it will be a similar story this year.
Though they are not predicting a repeat of 2006 — when 30 deals for Texas banks were announced — they expect the pace of dealmaking to remain steady for two main reasons: the state's economy, while not quite booming, is stable, and there are more banks to buy there than just about anywhere else.
"We've got a good economy that hasn't been overblown, overbought, and oversold like other areas of the country," said Bob Walters, the chairman of Bank Advisory Group LLC in Austin.
Dan Bass, the managing director in the Houston office of Carson Medlin Co., said, "Inevitably, you are going to have consolidation, because of the sheer number of banks."
Last year started out looking like another banner one for dealmaking in Texas, but activity slowed considerably in the second half as stock prices of would-be buyers fell, giving them less currency to make deals. Perhaps more significantly, the market for trust-preferred securities — popular vehicles for financing bank acquisitions — dried up in the second half because of turmoil in the credit markets.
Still, for the year, the only state where more deals were announced was Illinois, which had 19, according to Carson Medlin.
Observers do not expect the trust-preferred market to pick up for another six to 12 months, but they point out that, at least in Texas, there are still many solidly profitable, well capitalized companies with the currency to make deals. There are also at least two Texas holding companies formed for the purpose of buying banks with money burning holes in their pockets.
"Texas is going to be one of your better markets for M&A," said Jacob Thompson, a managing director with Commerce Street Capital LLC in Dallas. "I don't know that you are going to reach 30 deals in '08, … but relative to the rest of the country, I think it will continue to be one of the most active markets."
Mr. Walters agreed, adding that he expects buyers to be more selective. "Buyers aren't saying they are going to sit on the sidelines and do nothing, but they are going to look closer at what they want to buy than they would have a year and a half ago," he said.
Aside from the number of deals, one notable difference between 2006 and 2007 was the size of acquisitions. In 2006 buyers paid sellers an average of $143 million, according to Carson Medlin; last year the average price was $24.5 million, because the sellers generally were smaller.
Bankers, investment bankers, and lawyers say that they expect deals to remain small this year.
Texas is home to more than 650 banks and thrifts, according to Federal Deposit Insurance Corp. data, the vast majority of which have less than $1 billion of assets. (Only Illinois has more banks, with about 670.) Observers said that fierce competition and the cost of doing business could motivate small banks to sell themselves or merge as equals with others.
"More and more banks are looking at strategic combinations or mergers of equals," said Chet Fenimore, the managing partner in the Austin office of Hunton & Williams LLP. "That would help with margin compression, and the higher costs for compliance and technology."
Texas also is home to lots of start-ups, and many came out of the gates with large amounts of capital that is not easy to deploy in a market that is so competitive. Observers say it might make more sense for these banks to use the capital raised to buy other banks, rather than trying to grow organically.
"There may be some impact by some of the recent de novos that have gone out and capitalized with $25 million, $30 million, or $35 million that may determine they need to become acquisitive to use that money more effectively, if they can find the right strategic fit for themselves," Mr. Fenimore said.
The holding companies formed to buy banks, CBFH Inc. in Beaumont and FC Holdings Inc. in Houston, have raised more than $180 million — and FC has access to another $75 million if it needs it. CBFH struck its first deal in July, when it said it would buy the $140 million-asset County Bancshares in Newton for $26 million.
Presidential politics also could play a role in determining whether banks sell or remain independent. The 15% capital gains tax rate is set to expire at yearend, and Mr. Bass of Carson Medlin said that if bankers are concerned about a tax hike, they might want consider courting potential buyers sooner rather than later.
"Everyone is worried about the Democrats coming into office and increasing the capital gains rate back to 30% or higher," he said. "It may spur some lower-priced deals, just because of the tax considerations."
