Will energy boom turn West Texas into bank M&A hot spot?

A booming energy sector could spur more interest in bank acquisitions in West Texas.

Oil production in the state's Permian Basin hit a new high in June, increasing 21% from a year earlier, to 4.1 million barrels a day, according to the Dallas Fed. The price of West Texas Intermediate crude oil, the U.S. benchmark, has been trading at more than $56 a barrel, or a more than 20% increase from the beginning of the year.

Pipelines are being completed that will carry even more product, and the region's oil reserve estimates are among the best in the nation.

That means opportunity for lenders that can weather periodic volatility. On two occasions in the last five years, significant declines in oil prices created credit quality challenges for banks operating in that sector.

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"If banks hold line on energy lending and learn their lessons from past booms, they will do well and be well positioned," said Danny Payne, a bank consultant and a former commissioner of the Texas Department of Savings and Mortgage Lending.

"Most areas are seeing moderate to heavy growth in practically every aspect," Payne added. "The banks are doing well due to the business climate and activities associated with it."

The energy sector is a part of South Plains Financial's growth strategy.

The Lubbock, Texas, parent of City Bank agreed on Thursday to buy the $429 million-asset West Texas State Bank in Odessa for $76 million. The deal comes two months after South Plains raised $52.5 million in an initial public offering.

Commercial loans make up about a third of West Texas State's portfolio. Most of that lending is tied to energy-related service companies rather than firms involved with exploration and production.

South Plains is approaching energy carefully by avoiding direct exposure to the industry, said Curtis Griffith, the company's chairman and CEO. Still, he called the Permian Basin the nation's most attractive area for energy exploration and production.

South Plains wants to pursue more acquisitions. Griffith said the comapny has identified several potential targets that have less than $1 billion in assets and good management teams, low loan-to-deposit ratios and attractive funding costs.

"There are several that are of a size that we think would make really good sense to bring into the City Bank family," Griffith said.

Oil prices are prone to shocks from international events. For instance, prices can fall quickly if overseas production ramps up.

Escalated tension in the Middle East could lead to a spike in oil prices, said Jacob Thompson, a managing director at SAMCO Capital in Dallas.

While Midland and Odessa have more ties to oil, Lubbock is better know for its agricultural industry. While ag lending is also facing challenges, the city also has some stability as the home of Texas Tech University, Thompson said.

Acquirers like South Plains will find that there are fewer targets, given years of consolidation, said Curtis Carpenter, head of investment banking at Sheshunoff Consulting + Solutions in Austin, Texas. In many cases, banks looking to buy in West Texas often already have operations in the area, he said.

"It is not a market for everyone," Carpenter said. "Given South Plains’ familiarity with the people and industries in West Texas, this was a good fit for them."

Carpenter said most acquirers are focused on growth between Dallas and San Antonio, or they are interested in Houston.

Griffith said South Plains would be open to acquisitions in new markets. There are plenty of family-owned banks that lack firm succession plans, and their investors eventually to cash out, he noted.

"They're not having a whole lot of fun anymore," Griffith said.

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