Investors are betting that $3.3 billion-asset Southwest Bancorp of Texas will be the next to sell in the red-hot Houston market, but the company and analysts say those are bad bets.
Southwest's stock price has soared 39% since June 30, to $28.75 at midday Tuesday, and is up about 5% since Aug. 21, when Washington Mutual Inc. of Seattle and BOK Financial Corp. of Tulsa, Okla., announced deals for Houston banks. Eric E. Rothmann, an analyst at First Securities Van Kasper in San Francisco, attributed the surge in part to speculation that Southwest is in play, but he says Southwest is performing so well on its own that it has no incentive to seek a merger partner.
"I think there are some investors who are looking at this bank, erroneously, to be a take-out candidate," said Mr. Rothmann, who upgraded his investment rating on Southwest to "strong buy" Aug. 24. "This is one of the best-run small banks in the country, in an extremely strong market. Right now, it is hitting on all cylinders."
Southwest president and chief executive officer Paul B. Murphy insisted that his company is not for sale and argued that investors are buying its stock because of the company's performance. He added that top executives - many of whom own generous stock options - have no interest in selling.
"Which bank's stock would I rather have than Southwest's? I cannot think of one," Mr. Murphy said.
It's hard to argue with him. Southwest had first-half net income of $18.7 million, up 31%. And its return on equity - 17.5% to 17.29%, according to the Federal Deposit Insurance Corp. - is higher than the average for banks with assets of $1 billion to $10 billion.
Houston, one of banking's busiest merger-and-acquisition markets, stayed that way last week when BOK Financial announced it was buying $424 million-asset CNBT Bancshares and Washington Mutual said it had a deal for $18 billion-asset Bank United Co., the Lone Star State's largest thrift.
In all, 26 Houston-area banks have changed hands since the beginning of 1998.
Yet no other Houston bank's stock has performed as well Southwest's. Prices at two companies of similar size - $3.1 billion-asset Coastal Bancorp and $2 billion-asset Sterling Bancshares, - have actually fallen slightly since the BOK and Washington Mutual deals were announced.
Ben Crabtree of George K. Baum & Co. downgraded Southwest from "buy" to "neutral" on July 27, but his opinion of the company remains high.
"This is the best small bank I have ever dealt with. It is a fabulous company," said Mr. Crabtree, who, like Mr. Rothmann, said he doubts that Southwest will sell itself.
Mr. Crabtree said Southwest's heavy emphasis on commercial lending and its apparent reluctance to expand outside metropolitan Houston are what make him ambivalent. "There is an inherent risk in being in one geographical area with a narrow focus on small-to-midsize customers," he said. "If the Houston market turns down, there is no place for these guys to go."
Mr. Murphy disagreed. Noting that only 80,000 of the metropolitan area's 4.4 million residents bank at Southwest, he said the company would concentrate on growing in Houston for the next several years.
Added Mr. Rothmann, "Why should they go too far, when they are getting 15% earnings-per-share growth at home?"
Related Content Online:
- Southwest Bancorporation of Texas 12-month stock performance (Source: Thomson Investors Network)
- Southwest Bancorporation of Texas second quarter 2000 earnings (Source: SWBT)
- Washington Mutual's 12-month stock performance (Source: Thomson Investors Network)
- BOK Financial Corp.'s 12-month stock performance (Source: Thomson Investors Network)