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LegacyTexas' rich price could make M&A difficult

StreetTalk – Episode 70: Banks' Liquidity Conundrum Could Fuel M&A Activity

Street Talk Episode 70 - Banks' Liquidity Conundrum Could Fuel M&A Activity

StreetTalk – Episode 69: Banks left with pockets full of cash and few places to go

Street Talk – Episode 69: Banks left with pockets full of cash and few places to go

LegacyTexas' rich price could make M&A difficult

executives want to make a move, but finding a dance partner might provedifficult.

Onthe company's July 20 earningscall, management said the bank was at "a crossroads,"unable to drive significantly higher profits off an already-lean operation. At$8 billion in assets, management said they were concerned about the slug ofregulatory costs that will hit when the bank crosses $10 billion in assets.Exceeding the threshold subjects banks to a host of regulations, such as stresstesting and CFPB supervision.

"Youdon't want to grow organically and creep over the $10 billion mark. … When youlook at all those [costs], you really need to leapfrog it," said CurtisCarpenter, principal and head of investment banking for Sheshunoff & Co.

Plano,Texas-based LegacyTexas does have some runway before crossing the threshold.The bank reported $8.06 billion in assets for the second quarter. Also,stress-testing requirementsdo not kick in immediately after crossing the threshold. Instead, banks need toaverage greater than $10 billion in assets over the course of four quarters,allowing some wiggle room.

Nonetheless,CEO Kevin Hanigan expressed a desire to get a deal done soon, saying the bank'sstrategic options would be a topic of discussion at the August board meeting.Finding a buyer might be difficult since LegacyTexas trades at more than 200%tangible book value.

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"Logically,a good partner would be someone who's trading at that level, or evenhigher," Carpenter said. "And that's a pretty short list."

EugeneKatz, an investment banker with D.A. Davidson, also said the quality ofLegacyTexas' franchise will make for a short list of potential suitors. Inorder to justify paying a high price for the bank, Katz said it could makesense for a larger bank that lacks a presence in Texas.

"Therewill likely be some atypical buyers that we have not necessarily seen surfacein Texas before," Katz said.

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Carpentersaid BB&T Corp. isan oft-mentioned name as a likely buyer in Texas. The bank has scale, tradeswell above book and has expressed a desire for additional exposure to Texas.The bank is just outside the top 10 banks by deposit share in Texas, incontrast to its top-five status throughout much of the Southeast. But CEO KellyKing tossed cold water on that idea during the bank's July 21 second-quarterearnings call,unequivocally saying, "M&A is off the table" as the bank works tointegrate its most recent acquisitions.

Focusingon the state of Texas, ProsperityBancshares Inc. jumps out as a possible candidate. Trading atroughly 240% of tangible book, the bank has a stock with sufficient value. Withnearly $22 billion in assets, the company is comfortably below the $50 billionasset threshold that subjects bank holding companies to yet more regulation.And while the bank has a significant presence in Texas, especially in Houston,it ranks as the No. 17 bank in the Dallas-Fort Worth-Arlington, Texas MSA. Allbut one of LegacyTexas' 46 branches are located in the Dallas metro area, whereit was No. 8 by deposits as of June 30, 2015.

Dallashas proven to be a highly attractive market, posting economic growth in line withother top Texas markets without the oil risk of Houston or other energy-exposedmarkets. And LegacyTexas, founded as a credit union before a wildly successfulconversion to apublicly traded bank, has developed one of the strongest franchises in themarket.

"Wecontinue to believe that LTXB has one of the most enviable franchises in theTexas market," said Brad Milsaps, an equity analyst with Sandler O'Neill,in a July 21 note.

Otherbanks with strong currencies and a limited exposure to the Dallas metro areainclude Bank of the OzarksInc. and HomeBancShares Inc. But with such a rich price and a short list of potentialbuyers, Carpenter said he does not see LegacyTexas announcing a deal beforeyear-end.

"Ifthey were a couple billion dollars in size, there would be a lot of names you'dbe throwing around," he said. "But at $8 billion, there are just notthat many people who can handle it."