"Is my bank worth that much?"
That is the urgent question potential sellers are asking in the Lone Star State, after two pricey mergers there the past two months.
The $246 million deal announced March 6 for Encore Bancshares of Houston and the $529 million sale announced Feb. 27 of American State Financial were unusually rich even for Texas, whose economy held up reasonably well during the nationwide financial crisis.
"The deals recently have sparked more chatter," says Jacob Thompson, managing director with investment bank Samco Capital Markets Inc. in Dallas. But, he says, "I don't know if that chatter is going to translate into done deals."
He adds: "There is an immediate euphoria after a big deal like" those ones. "Not everybody is going to be worth those kind of exit multiples."
Over and above sellers' expectations, buyers remain scarce in Texas, so either way, it's not a slam-dunk more deals will occur soon, investment bankers say.
But facts are facts: Encore in its sale agreement with Cadence Bancorp is fetching a price worth 2.4 times its tangible book, or equity minus intangibles; American State agreed to sell for 2.06 times tangible book to Prosperity Bancshares.
Both prices appear generous. In the 13 Texas bank deals worth from $100 million to $600 million since January 2010, the median price-to-tangible book ratio was 1.53 times, according to regulatory filings detailing the fairness review Sandler O'Neill provided Encore in its transaction.
John Blaylock, an associate director with Sheshunoff in Austin, says he has spent the past six weeks telling clients to keep their pricing expectations in check.
"Now that they've hit this benchmark of 2.4 times, everybody wants 2.5," he says. "Our task is to convince sellers that not everybody gets 2.4."
"Sometimes you get 1.7 and that's a great price," Blaylock says.
The basic reason Encore and American State fetched way more than that: they had to be convinced to sell. Encore, for one, made Cadence promise to submit a preliminary bid of at least 2.4 times tangible book before letting even letting it see its numbers, according to regulatory filings. American State has enviable expense and profitability ratios.
Their buyers could justify paying up for them because of where and how they operate.
Taken together, the two banks may establish a rough profile of which Texas banks may actually be worth more than two times book. Whether banks that are worth that much would be enticed to sell depends on factors that range from the temperament of shareholders to age of management.
But broadly speaking, to attract bids, be big enough to move the needle, and healthy enough to ensure no one is buying your problems.
Encore has $1.6 billion assets and 12 branches in Houston. American State has $3.1 billion assets and 37 branches across West Texas, particularly in the important energy industry hotbeds of Midland and Odessa. Fewer than 1% of American State's assets are non-performing, while just over 1% of Encore's are non-performing. That is low.
Diversity is welcome, too. Encore is involved in wealth management and insurance. Prosperity, the company that bought American State, has a trust division that generates a healthy level of fees.
Being scarce drives the price up too: Encore is one of just six independent banks based in the important market of Houston with at least $1 billion in assets, according to the Texas Department of Banking.
Also, banks that simply make good money are worth good money. American State has a high returns on assets and a low efficiency ratio.