Why you should expect bank M&A activity to pick up next year

Mergers and acquisitions have slowed this year amid the highest inflation in 40 years, soaring interest rates and a struggling stock market but a Dallas attorney who advises banks on deals thinks activity will pick up next year.

Why you should expect bank M&A activity to pick up next year

Expect the deal market for bank mergers and acquisitions to pick up in Texas next year when a possible recession begins to separate the winners from the losers.

2022 has been a relatively slow year for bank deals across the U.S. after a record-breaking amount of activity last year. Nationally, there have been 149 deals through the end of November, down from 193 the same time a year ago, according to S&P Global Market Intelligence. There were 206 deals overall in 2021.

Due to high inflation and a weak stock market, dealmaking has been slow this year.

"Our public-company buyers' stock has fallen significantly over the past year and beyond. Sanford Brown, a partner at Alston & Bird's Dallas branch who advises banks regarding M&A deals, said that this has taken a lot off the playing field.

Some of the most notable deals in Texas this year include:

Louisiana-based Origin Bancorp's $313.5 million all-stock acquisition of Quitman-based BT Holdings, which closed in August.
Houston-based Prosperity Bancshares Inc. agreed in October to buy Midland-based First Bancshares of Texas Inc., the parent company of FirstCapital Bank of Texas NA, and Lubbock-based Lone Star State Bancshares Inc. for a combined $570.3 million. The transactions are expected to close in the first quarter
Denver-based SunFlower Bank, a subsidiary of FirstSun Capital Bancorp, bought Austin-based Pioneer Bancshares Inc. in March for an undisclosed amount.
Texas State Bankshares Inc. acquired Denton-based Access Bancorp Inc.
Kemp-based Harmony Bank and Dallas-based Texas Brand Bank announced plans to merge in September. The deal is expected to close in the first quarter of 2023.

Most of the deals that have occurred this year have been all-cash transactions due to volatility in the stock market, Brown said. Despite the slowdown of activity, Brown said investor groups and out-of-state players continue to have interest in buying into the attractive Dallas-Fort Worth market.

"If the recessions develops as it certainly looks like it will, it will make for buying opportunities for the healthy banks and there will be a set of problem banks," Brown said.

Economists and bankers expect Texas to be protected from a severe downturn. Brown stated that he believes that a recession would reveal which banks have strong balance sheets and which ones made poor loans.

"As my friends at the [Office of the Comptroller of the Currency] like to say, 'When the tide goes out, we'll find out who was swimming naked," Brown said.

Banks that see past-due loans and non-performing assets increase as percentages of capital will emerge as M&A targets, Brown said. Lack of succession planning will also force some banks to sell. Others will look to make deals because they have deferred investing in technology upgrades and now need to catch up.

Yet another driving force behind some deals will be private equity groups that own banks may look to do an acquisition in order to bring aboard a seasoned executive management team.

"They either need to hire a banker, CEO-type who can help them find a bank to buy, or they need to go find a bank that has management that can execute the strategy that the investor group wants," Brown said. "Management is critical to successful banking at any level. Whether it's [JPMorgan Chase CEO] Jamie Dimon, or [Veritex Community Bank CEO] Malcolm Holland or [Oakwood Bank CEO] Roy Salley, you need to have a dynamic CEO leading the organization."

Also on the buyer side, Brown said some banks will seek "market share efficiencies" by acquiring an inefficient bank at an attractive price.

"They can realize cost savings by buying a bank that has not made efficiency a high priority," Brown said.

Institutions that could be active next year may include Veritex, Independent Bank and Texas Capital Bank.

Veritex (Nasdaq: VBTX) announced in March a $91 million deal to buy a subsidiary of StoneCastle Partners LLC. However, Veritex disclosed in September that StoneCastle terminated the deal. The deal would have provided Veritex with funding to support its loan-growth efforts.

Brown stated that banks would have to continue funding their operations in 2023, regardless of whether they make another deal like this. He also said that financial institutions still need to work through the "gap of liquidity" that was introduced into the banking system by the government stimulus in 2020.

Independent Bank (Nasdaq : IBTX), and Texas Capital (Nasdaq : TCBI) were to merge in 2020, before the pandemic. Independent has been focusing on its middle market business line, upgrading its technology systems, and expanding its McKinney corporate campus.

Brown, who advised Texas Capital in the failed merger, said he would be surprised if Independent sells but noted the bank has a "nice footprint" that potential partners would find intriguing.

"[CEO David Brooks ] has built a really good franchise and I can see how it'd be attractive, but it would have to be for a big price," Brown said of a potential sale by Independent.

Rob Holmes' plans, but said he does not expect the bank to stand still. Holmes, who took over the top position at Texas Capital at the beginning of 2021, has led a major transformation of the bank which has included expanding private wealth and treasury services, adding corporate and business banking efforts and launching an investment banking platform.

"Rob is a very dynamic leader and he will not stay static," Brown said.