Houston bank consultant Bill Strunk is like a motivational speaker, exhorting community bankers to action.

Work on core earnings, he says. Grab and defend market share. Decide now if you want to be acquired or acquire others.

The latter advice may be especially timely for the community banks of Texas. The institutions, which hold a hefty 45% of the state's deposits, are about to be swept up in a once-in-a-lifetime wave of deals, Mr. Strunk predicts.

The chairman of Barrett, Strunk & Associates has divided Texas into 15 regions and called the financial statement data from the community banks in each region. What he came up with is a virtual road map to where M&A activity will be in the huge state.

At last count, there were 402 independent community banks in Texas with assets of at least $50 million, a group Mr. Strunk says will see the biggest change.

Mr. Strunk talked to the American Banker about how and where the M&A boom will come to Texas, who will be affected, and his estimates of the kinds of prices that will be bandied about in the next five years.

Q.: Texas dropped strict interstate and intrastate banking rules in 1987. Why has it taken so long for the merger bug to infect community banks?

STRUNK: Well, it was a unit banking state. That's the simple answer as to why there are so many banks.

In most states that dropped unit banking statutes, the number of banks dropped off dramatically. That happened in Texas, but only at the largest banks. The small banks were untouched. They just hunkered down.

And during the recession here, you couldn't sell a bank for book value, simply because nobody knew what was under the sheets and didn't want to find out.

Today, the opposite it true. Every banker I know, and I know just about every one of them in Texas, is getting calls from prospective buyers about every week.

Q.: What parts of Texas will see the most M&A action?

STRUNK: We tried to determine that by doing a branch deposit analysis in every county.

There are certain parts of Texas, Dallas County, by the way, where community banks don't have much deposit market share at all.

Houston is just the opposite. There's a community bank on every corner in Houston, and they all have decent core deposit market share.

One thing you have to understand about Texas is that it's really too big to be looked at as one region. You have to separate groups of banks geographically to get a clear picture. Bankers out in Amarillo and Lubbock just don't relate to anything that a Dallas or San Antonio banker is dealing with.

Take Harris County [Houston]. In Houston, there is $6.3 billion worth of community bank deposits.

In Dallas County, there's only $2 billion. In Austin, there's just $614 million. Now, which city do you think will see the most acquisition activity?

There's just not a lot left to buy in Dallas. The level of activity is not going to be what it's going to be in Houston, because there's just not a lot of apples in the pot there like there is here.

Q.: Who will the buyers be?

STRUNK: Not NationsBank. I think other banks want to be bigger in this state much more than NationsBank does.

Bank of America is just getting started here, and I think they'll be a big player. B of A has a $10 billion bank, but that's not that big of a number in Texas.

You're going to see some new players, too, buying midsize and large community bank franchises.

Boatmen's, which just bought a bank in Amarillo, First Union, Bank IV will all buy banks in Texas and find ways to grow them.

Q.: What about mergers of equals, community banks affiliating to reach that critical mass and fend off acquirers?

STRUNK: You'll see some of that too. That 402 number will shrink. It's my opinion, though, that most of the M&A stuff will be driven by larger banks buying smaller ones. The prices will be too tempting.

Q.: What about prices? What can a community banker expect to hear from a potential acquirer?

STRUNK: I'm a little aggressive in that area. The prices have already gone up, and they will go up more.

Until now, the prices paid for Texas banks have been a little lower than those paid nationally.

The national average is 12 times core earnings, and in Texas it was about 10.5 times core earnings for the last two years. I predict in Texas it will get to be 15 times core earnings.

We're back. I mean, look at the ROA in Texas. It was 1.34% in 1993. That's a record. The cycle of tax benefits to the assisted S&Ls and banks is just about played itself out, and financial institutions here are still making more money than anywhere else.

Q.: What will the dynamics be? Will all mergers be friendly?

STRUNK: I think they will, but I also think that shareholders need to reevaluate their expectations.

Let's take as an example a bank whose shareholders are in for about 25 years at a $10-a-share basis. Now, just five years ago their stock was worth nothing. Suddenly, some bank comes along and offers them $30 a share.

That is going to be a problem for a lot of managers, because holding off a shareholder with that kind of money dangling before their faces is difficult.

They need to be able to communicate with their shareholders that the bank is in all likelihood worth $40 a share.

Q.: What should a community banker in Texas be doing right now if he or she wants to be a player in the M&A wave?

STRUNK: I would be working on my core earnings stream, basic blocking and tackling. The basics of banking is going to be the yardstick of performance.

Community bankers here are saying, "We've made it."

And now they are asking themselves what it is they really want to do. The business of just trying to survive has played itself out, and bankers need to be busy now competing.

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