Suddenly, Texas is having a deal dry spell.
Industry watchers said that buyers in the state have gone into wait-and-see mode, because of the recent market volatility, while sellers are wondering if they missed the peak pricing period.
"Everybody is sitting on the sidelines," said Dan Rollins, the president and chief operating officer of the $6.2 billion-asset Prosperity Bancshares Inc. in Houston. "I think there is a lot of talk going on, but I think everybody is trying to determine, with all the volatility in the market, what the right price is."
So far this quarter only one acquisition — a small one — has been announced in a state that has been a hotbed of activity in recent years. Last month the $380 million-asset Legend Bancorp Inc. in Bowie said it had agreed to buy the $89 million-asset Bonstate Bancshares Inc. in Bonham. The price was not disclosed.
Several bankers and other industry insiders said an inability to obtain funding is slowing down some would-be buyers. Financial stocks have slipped, taking their value as a deal currency with them. In addition, the rate on trust-preferred securities, which often are used to finance deals, has shot up 75% in recent weeks, for those who can obtain that funding at all.
"One of the biggest obstacles to a full market recovery is the availability of trust-preferred funding," said Curtis Carpenter, a managing director with Sheshunoff & Co. Investment Banking.
So far this year more deals have been announced in Texas than in any other state. As of last week there had been 14 announced in the state, or 7.5% of those announced nationwide, according to statistics from Carson Medlin Co.
But the deals are much smaller than those announced last year, when six banking companies with over $1 billion of assets were sold. This year's deals are worth $387 million, versus about $4 billion for those announced in the same period last year. (Prices have been reported for 11 of this year's Texas deals, compared with 14 of the 17 announced by this point last year.)
What's more, one transaction accounts for more than half the dollar volume — BOK Financial Corp.'s $127.1 million deal to buy the $390 million-asset Worth Bancorp in Lake Worth.
The recent Texas lull also runs counter to the rest of the country. So far there have been 186 deals announced nationwide, including 36 this quarter, according to Carson Medlin. At this point last year there had been 175 deals, including 30 in the third quarter. This year the median deal price has been 2.36 times tangible book value, compared with 2.42 for all of last year.
Though Texas prices have edged upward this year — the median has been 3.08 times tangible book value — industry watchers say sellers may need to adjust their expectations to end the recent lull there.
"We have probably come off the highs of valuation," said Chris Murray, a managing director with Sandler O'Neill & Partners LP. "But they are still at historically good levels."
Because the state's economy and demographics are excellent, most insiders said that prices for companies with branches in the largest markets there should remain high.
But after last year's record-setting prices, sellers appear to be expecting too much, while buyers have become more tight-fisted. Several observers said one factor is that competition for deals is less intense, since several active acquirers — like Texas United Bancshares and Texas Regional Bancshares — were acquired themselves last year.
"I get a lot of calls from investors trying to find a rural bank, but they want to pay two times book value, and nobody is selling for that anymore, unless you have asset-quality issues or other things going on," said Dan Bass, the managing director in Carson Medlin's Houston office.
Mr. Murray said market turbulence has dented stock prices, so the shares have less value as currency for acquisitions. However, he said, that could make now an even better time to sell, because some buyers could offer more shares of their stock at the depreciated value.
Mr. Bass also pointed out the potential for extra stock. Though the price might not be the same as the seller would have gotten a year ago, the longer-term payoff could be better, as stock prices rebound, he said. "If you believe your buyer has good currency, you should sell now for more shares, but less value, because the stock will go back up," he said.
Another way banks finance acquisitions is with trust-preferred securities, and investment bankers said those are more expensive and more difficult to sell lately.
The market for the securities is "really drying up," said Clark Locke, the vice president in charge of Texas investment banking operations for Hovde Financial Inc.
Mr. Locke said the spreads banks pay on the securities have increased by 100 basis points over the past month or so, and the increase is making acquisitions less lucrative.
"As the spreads go up, if they want to get the same return on a deal as before, they are going to have to pay less" for a company, he said.
Southside Bancshares Inc. of Tyler is using trust-preferred securities to fund a significant portion of the $35.7 million deal it announced in May for the $127 million-asset Fort Worth Bancshares. Last week Southside said it had raised $22.5 million at a spread of 130 basis points above the London interbank offered rate.
Had Southside negotiated that acquisition today — with trust-preferred securities at spreads of 220 to 250 basis points above Libor — it would have sought a lower deal price, said Lee Gibson, its chief financial officer.
"Obviously, the cost of capital goes into the equation when you are looking at making a long-term purchase like a bank," he said. "Increase in the cost of capital will decrease what you can pay."
Southside is not looking for more acquisitions, Mr. Gibson said, but it would not oppose one, especially since he sees as a swing in buyers' favor right now. "I don't know this for a fact, but I would think deals done now would be done at a lower price — not a substantially lower price, but lower than they were at the beginning of the year, and part of that is the cost of capital."
Mr. Gibson also said he has heard some dealmakers have not been able to use trust-preferred securities at all in recent weeks. So an even bigger issue than the spread is "the availability of trust-preferred," he said.
Mr. Carpenter of Sheshunoff said that he is hearing from both buyers and sellers looking for a deal, and that the lack of signed agreements this quarter is "a pause and nothing more serious than that."
Dick Evans, the chairman and CEO of the $13 billion-asset Cullen/Frost Bankers Inc. of San Antonio, agreed that the slowdown is temporary. He said his company, for one, is undeterred by the volatility and continues to scout for potential acquisitions.
But he said the lull in Texas is understandable. "When you have uncertainty in the market, you are going to have a time where people slow down in their decision-making and postpone until they can get more certainty, both on the buyer and seller side," he said.
