With Zions Bancorp. having won an apparent bidding war for Houston's Amegy Bancorp, analysts say the merger-and-acquisition spotlight will shift to Texas' remaining independent banks, especially Sterling Bancshares Inc.
Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc. initiated coverage on five Texas banking companies Wednesday, and Fox-Pitt analyst Todd L. Hagerman said Sterling's subpar profitability "puts it at the top of anyone's list" of takeout candidates.
The $3.4 billion-asset Sterling, also of Houston, sold its mortgage company for $49 million two years ago and it has yet to fully deploy that capital or replace the earnings it lost. The $7.8 million profit it reported for the quarter that ended March 31 was 30% below its net income for the same quarter in 2003.
At the same time, its return on equity for the quarter, 9.88%, was the lowest of any of the 10 biggest Texas-based bank companies - with the exception of the $7.6 billion-asset Amegy.
"Time is running out," Mr. Hagerman said Wednesday. "Sterling has an attractive franchise, particularly in Houston, but they've struggled in terms of profitability. Their returns have been below average."
Amegy announced Wednesday that it had agreed to sell itself to Zions for $1.7 billion, or roughly 2.83 times Amegy's book value (see story page 1). Compass Bancshares in Birmingham, Ala., was also said to have been in the running for Amegy.
Curtis Carpenter, managing director of Alex Sheshunoff Investment Banking in Austin, said out-of-state companies looking to enter the Texas market will probably put even more money on the table as the number of targets with operations in the state's major metropolitan areas dwindles.
That means another Houston company, Prosperity Bancshares, will get some attention as well, but most of the focus will be on Sterling, Mr. Carpenter said.
"Sterling's earnings have never fully recovered from the sale of their mortgage company," he said. "They're in a position where an attractive offer could be compelling."
Mr. Hagerman agreed. He said that the management team at the $3.5 billion-asset Prosperity is younger than that of most banks and that it is doubtful the $9.8 billion-asset Cullen/Frost Bankers Inc. will give up its status as the state's oldest and largest bank while it is still producing solid returns.
And though the $6.1 billion-asset Texas Regional Bancshares Inc. is highly profitable, Mr. Hagerman said it lacks the presence in Houston, Dallas, and San Antonio that makes Sterling, Prosperity and Cullen/Frost so appealing.
Since the beginning of 2004 nearly three dozen Texas banking companies have announced deals to sell themselves, according to Highline Banking Data Services. Mr. Carpenter said, "I don't see things changing, and the scarcity of product is going to push prices higher."
Sterling's president and chief executive officer, J. Downey Bridgwater, would not comment on the speculation but said Amegy's decision to sell to Zions, of Salt Lake City, offers his company and other banks in Houston "a tremendous opportunity to grow through attrition." He said he expects Sterling will pick up customers leaving Amegy, as well as employees who would prefer to work for a smaller company.
The merger talk swirling around Amegy has been a boon to Sterling's stock. It has been trading at or near its 52-week high of $15.65 for the past week, and Mr. Hagerman said it will probably stay there or rise as the talk gets louder.
Oddly enough, though, Sterling's stock fell after the Amegy announcement. It closed at $15.33, down 0.78%.
