A recent price build-up for Texas banks hit a bump Wednesday when PlainsCapital in Dallas agreed to sell for slightly more than book value.
Texas banks are leading the nation, with many deals nearing two times book value, making PlainsCapital's decision to sell to Hilltop Holdings for 1.3x tangible book stand out. Industry observers say the deal is unlikely to permanently stall pricing momentum in Texas, but it could cause some short-term uncertainty for aspiring sellers.
"It certainly does reset expectations in the near term," says Brad Milsaps, a managing director at Sandler O'Neill & Partners. "At same time, if it's a good franchise in a good market, you can still command a strong multiple."
Texas has been an anomaly this year in terms of higher priced deals. Among the 11 deals announced in Texas in 2012, only two compare to the $5.7 billion-asset PlainsCapital in terms of the seller's asset size. Encore Bancshares (EBTX) is selling to Cadence Bancorp for 2.4x tangible book value. American State Financial is selling to Prosperity Bancshares (PB) for 2.1x book value. The PlainsCapital pricing "looks to be little light relative to the market in Dallas," says C.K. Lee, the managing director of the financial institutions group at Commerce Street Capital. "But we forget that to the rest of the country, a deal like this would be welcomed."
Analysts say PlainsCapital delivers good size and markets, but the Dallas company's mortgage business may have lowered its underlying value PlainsCapital has a national mortgage lender, PrimeLending, which generated about $9 billion in loans last year. Buyers are generally wary of inconsistencies in mortgage revenue because of refinance ripples.
"With the refinance business now, some buyers may say it is not recurring so they will discount" the company's pricing, says Dan Bass, a managing partner at FBR Capital Markets. "It's a good revenue stream, but is it choppy?"
At the same time, analysts say PlainsCapital may have been eager to sell, because many of its shareholders lack liquidity. The company withdrew a planned initial public offering in 2008 due to market conditions and has not tested any capital markets since then.
"Their shareholders had been clamoring for liquidity for many years," Bass says. "Given the current market conditions, they probably felt it was a good time to sell."
This is where Hilltop comes into play because of management's reputation of flipping banks.
Hilltop's chairman, Gerald Ford, is known for investing in banks, making improvements, and then selling them at high premiums. In March, Ford sold Pacific Capital Bancorp (PCBC) in Santa Barbara, Calif., to UnionBanCal.
"Ford is known nationally for stabilizing banks and returning them to profitability" before selling at a significant premium, Lee says. As a potential seller, "it would be hard to say no to someone like Gerald Ford."
Calls to PlainsCapital were directed to Ford. In an interview Wednesday, Ford was reluctant to specifically discuss his strategy, though he said that PlainsCapital's management will continue to run the company. A longtime Texan himself, Ford has competed against PlainsCapital's management team for many years.
"This is a bank that is well run, and they will continue to do what they do and we'll continue to do what we've historically done," Ford says. "This is a very profitable bank that has good management, and they don't need a lot of help from us."