Acquisition Could Portend Another Big IPO in Texas

Another Texas bank's public offering is coming - eventually.

George Martinez, chief executive of Allegiance Bancshares in Houston, has been vocal about a desire to go public, saying last August that he would likely take the company through the process when it hit about $1.2 billion in assets.

Martinez, who had just agreed to buy Independence Bank, said the deal, plus organic growth projections, would put Allegiance on track to reach its asset goal in 2014. He was right; Allegiance has $1.2 billion in assets.

Rather than rush immediately to pursue an initial public offering, Martinez reached another deal late last month. Allegiance's agreement to buy the $540 million-asset Farmers & Merchants Bancshares in Houston will push the IPO timeline back a bit.

"The deal is what we're concentrating on for the next few quarters," Martinez said in an interview. "We have to swallow this bite first, but we will always have going public as a goal."

The acquisition is expected to give Allegiance double-digit earnings improvement, Martinez said, largely by cost-cutting opportunities. The seller's Enterprise Bank unit had an efficiency ratio of 63% at March 31, compared to 66% at Allegiance.

"We're going to be able to absorb the cost of additional regulation and the deal gives us improvement in our efficiency," Martinez says.

Enterprise's lenders should also benefit from joining a larger organization. The bank's loan book increased by 1.3% in the second quarter, compared to a quarter earlier. Allegiance's portfolio increased by 6.7% over that time, benefiting from its purchase of Independence, which closed in the fourth quarter.

"We put an emphasis on organic growth," Martinez said. "It is critically important to demonstrate it because you can't just rely on M&A by itself."

Enterprise may not provide as much of a pop to loan growth as Independence, Martinez said, though he added that loans at Enterprise should be able to ramp up its originations after the deal closes.

Enterprise's loan growth was held back by its size and its board's decision avoid a dilutive capital raise, said Daniel Bass, a managing director of Performance Trust Capital Partners, which represented Farmers & Merchants.

"This gives Enterprise the capital they need and it gives Allegiance the earnings," Bass added. "It will make a good story even better when they go public."

A focus on earnings and loan growth will be critical to Allegiance's IPO, industry observers say. As the market returns to valuing companies based on earnings metrics, rather than tangible book value, an ability to show strong profitability is important again.

"Investors in bank IPOs today want growth stories... because the sector is no longer cheap," said Jeff K. Davis, managing director of the financial institutions group at Mercer Capital. "Two or three years ago you may have been able to get away with an IPO priced where investors could see the value improving over time. That's no longer the case."

The desire for growth stories has stoked interest in bank stocks in places like Texas and Florida, Davis said.

A well-received Texas IPO story in the past year involved Independent Bank Group in McKinney. Its April 2013 offering was priced at $26 a share. The stock currently trades around $48 a share. The company has used the strong currency to make four acquisitions in the last year.

Also, the $1.8 billion-asset Green Bancorp in Houston priced its IPO on Thursday at $15 a share. The company's stock price rose nearly 14% in its first day of trading.

"The market is still interested in new banks and particularly new banks in Texas," Martinez said in response to a question about Green's IPO.

Besides Allegiance's performance, Davis said Martinez's name and career should also aide his company's IPO, whenever it happens. Martinez was co-founder, chief executive and chairman of Sterling Bancshares from its 1974 formation until 2004.

Sterling went public in 1992, just as Texas was starting to crawl out of the banking crisis of the late 1980s. The company sold to Comerica for 2.3 times its tangible book value in 2011.

"Sterling was a great growth story and George was very well liked and respected on Wall Street," said Davis said, who once covered the company. "I would assume that if they do an IPO a lot of people will remember the money George made for them in the '90s."