Cadence Bancorp. CEO thinks bank is worth more than stock price

If Houston-based Cadence Bancorp. is exploring a sale, potential buyers might need to pay a premium despite some credit concerns.

Cadence is working with financial advisers to explore a potential sale, according to a Feb. 17 Bloomberg report. If the company were to sell, industry observers believe Cadence could get up to 2.0x tangible book value, but credit quality concerns could weigh on pricing. While some bankers see more M&A on the horizon due to prolonged low interest rates and tepid loan growth, a deal is not imminent for Cadence, Chairman and CEO Paul Murphy Jr. said in an interview. Murphy did not confirm or deny the Bloomberg report, noting that the bank does not comment on M&A rumors.

"Bank M&A makes sense, generally speaking, but you have to be really careful. And you can't just rush into anything," Murphy said. "Shareholders' best interest is always what our management team is thinking about. And to the extent there's something that could benefit our shareholders, we're open to having that dialogue."

The day after the Bloomberg article, the company's stock ended the day at $20.24, up 5.14%. When Murphy spoke with S&P Global Market Intelligence on Feb. 19, Cadence's stock was $20.77 per share for a 131% price-to-tangible book value.

"There's a price of my stock on any one day, and then there's the value of my company. And sometimes they're aligned and sometimes they're not. And so yes, right now, I think the value of my company is a bit higher than the price of my stock. And so that's a factor that we would think about when talking to any potential partner," Murphy said. "[But] it's not imminent that we will participate in any M&A any time soon."

Cadence's stock has edged higher over the last week, hitting a 138% price-to-tangible book value on Feb. 23. But some analysts and bankers think the company could fetch a price closer to 2x tangible book.

"Given its current multiple, scarcity value for banks its size in Texas and growth profile, we do not see a 2.0x multiple in a takeout as unreasonable for [Cadence] shares in a post COVID environment," Raymond James analyst Michael Rose wrote in a Nov. 23, 2020, note.

Cadence's stock was hammered in April 2020 following credit quality concerns. If Cadence is exploring a sale, a buyer would likely be cautious of the bank's portfolio, Eric Corrigan, senior managing director for Commerce Street Capital, a Dallas-based broker/dealer, said in an interview.

"I would think that a buyer is going to give a pretty big haircut to a lot of those assets," Corrigan said. "If I was a buyer, I'm just going to be very cautious about it." But Cadence's attractive footprint could offset those concerns for an interested buyer, he said. Corrigan believes a buyer could pay about 1.5x TBV, or about 2.0x TBV excluding the credit mark.

While credit quality is a risk, Murphy said he does not believe it would be a hurdle for two banks looking at a deal that makes sense and has other benefits, such as cost savings.

"Bank M&A, typically, you can save 25%, 30% of the target's expenses, and that's a big slug of money. And that's something that most targets would not be able to achieve, that type of EPS growth stand-alone or at least not in the near future, so it's a big driver," he said.

Bank M&A is expected to accelerate over the next few years after grinding to a halt during the pandemic. While many banks feel more optimistic about their portfolios and have lowered provisioning, credit quality — with many unknowns surrounding certain COVID-19-impacted industries — is still causing hesitation among buyers, experts said.

Dan Bass, a Houston-based managing director of investment banking for Performance Trust Capital Partners, said it could be tough for Cadence to get a large premium. Instead, the company could seek a merger of equals, he said.

"Bank stocks aren't that high right now, so it's going to be hard for them to get a big premium," he said. "When you're giving up control, you want to sell for a certain premium to justify giving up that control. And if you're not going to get the premium, then you could find the right merger of equal partner."

A buyer would have to be at least 5x Cadence's size, according to Corrigan. Cadence reported $18.7 billion in total assets at Dec. 31, 2020. "It's got to be somewhat big enough that even if they're wrong on the credit, it doesn't end up damaging the whole franchise," he said.

Bass believes a buyer could be about $30 billion but said bigger is better when it comes to regulatory review. "The bigger you are, the more likely you can integrate something that big. The closer you are to $19 billion, the more [the regulators] are going to have concerns," Bass said.

Corrigan believes a bank based in the Midwest or Northeast could be interested in Cadence. He pointed to Providence, R.I.-based Citizens Financial Group Inc. or Cincinnati-based Fifth Third Bancorp as potential buyers. He also pegged South State Corp. as a potential suitor but noted that it would be a "big bet" for the Winter Haven, Fla.-based company.

Both Ken Zerbe, an analyst with Morgan Stanley, and Brady Gailey, an analyst with Keefe Bruyette & Woods, named Memphis, Tenn.-based First Horizon Corp. and Tulsa, Okla.-based BOK Financial Corp. as potential buyers.

M&A in Texas is set to speed up due to factors like management succession and increased technology and regulatory expenses, Bass said. The number of banks in Texas also suggests the state is ripe for consolidation, he said. There are currently 420 banks headquartered in Texas.

"There are a lot more discussions going on right now than there were when COVID hit," Bass said. "The same reasons why we had a lot of discussions going on early 2020 have really been exacerbated with the COVID."