Liz's post from the trading swamp on SWBT:
08:48am EDT 20-Apr-00 USBancorp Piper (Erick J. Reim 612-342-5509) SWBT
Southwest Bk of TX (SWBT): 1QE Of $0.30; In-Line; Buy; $23 PT
*** U.S. Bancorp Piper Jaffray *** U.S. Bancorp Piper Jaffray ***
Southwest Bancorporation of Texas, Inc. (SWBT - 19 15/16) April 20, 2000
Erick J. Reim, 612-342-5509 or ereim@pjc.com
First Quarter Earnings Of $0.30 Per Share, In-Line With Our Estimate And
$0.01 Ahead Of The Street; Fundamentals And Credit Quality Remain Extremely
Solid; Earnings Outlook Remains Excellent, Driven By Successful Execution
Of Southwest's Community And Business Banking Strategy; Continued
Opportunity To Gain Market Share In Houston; Initiating 2001 EPS Estimate
Of $1.45; Maintaining Buy Rating
Rating: Buy, Growth (#)
Price:$19 15/16 52-Week Range $20 1/4 - $14 7/8
FY End:December 12-Mth PT (18x 2000E EPS) $23
Shares Out (Mil.) 28.1
EPS 1999 2000E 2001E Market Cap (Mil.) $560.2
Mar $0.24 $0.30A $0.34 Average Daily Volume 85,000
Jun $0.26 $0.31E $0.36 Book Value $7.09
Sep $0.27 $0.32E $0.37 Dividend Nil
Dec $0.29 $0.33E $0.38 3- To 5-Year EPS Growth 15%
FY $1.05 $1.26E $1.45 Price To Book Value 2.8x
P/E 19.0x 15.8x 13.8x Price To 2000E GAAP Earnings 15.8x
Price To 2001E GAAP Earnings 13.8x
Net Inc(Mil)1999 2000E 2001E Return On Assets 1.22%
Mar $6.7 $8.8A $10.0 Return On Equity 18.2%
Jun $7.5 $9.0E $10.4
Sep $7.8 $9.2E $10.7
Dec $8.5 $9.7E $11.1 Quarter End June 30, 2000
FY $30.5 $36.7E $42.2 Est. Rep. Date July 2000
Note: Second quarter of 1999 excludes $4.5 million in pretax merger
charges.
Key Points
--Southwest Bancorporation of Texas reported first quarter 2000 net income
of $0.30 per share or $8.8 million, an increase of 3.4% from $0.29 per
share or $8.5 million in the prior quarter, and an increase of 25.0% from
$0.24 per share or $6.7 million in the year-ago quarter. Performance of the
Company remained strong, with return on assets of 1.22% and return on
equity of 18.2% versus 1.23% and 17.7% in the prior quarter, respectively,
and 1.09% and 15.3% in the year-ago quarter, respectively.
--Financial highlights for the quarter include a 16.0% increase in average
earning assets, a 21 basis point increase in the net interest margin, a
13.8% increase in noninterest income, and an 18.4% increase in noninterest
expense, all versus the year-ago quarter. We expect this solid financial
performance to continue as management executes their strategy of operating
a premier business bank and building a solid retail banking presence in the
Houston area. We also expect continued year-over-year asset growth in the
15% range.
--The Company was added to the S&P Small Cap 600 during the first quarter
of 2000.
--We believe that Southwest is one of the best managed banks in the country
as demonstrated by its growth rate, which is among the highest in banking
over nearly a decade. We expect that management will continue to pursue
opportunistic acquisitions and remain focused on their relationship-based
business-banking model that continues to attract customers to the bank and
generates the strong internal growth that has been associated with this
franchise since its organization.
Investment Thesis
Southwest Bank of Texas was formed in 1990 by a group of prominent Houston
bankers and businesspeople with a focus on relationship-based middle-market
business banking and private banking services. While Southwest has migrated
to providing other banking services such as consumer banking, its
consistent focus on local decision making and superior customer service has
allowed the bank to gain significant market share in the Houston
metropolitan area and to grow assets and earnings at superior rates.
Southwest Bank's three-part strategy for growth is as follows: 1) to
continue to actively target the middle-market and private banking customers
in Houston; 2) to establish de novo branches in areas that demographically
complement its existing or targeted customer base; and 3) to pursue
selected strategic acquisitions of other financial institutions that either
geographically complement the existing franchise or provide the bank with
additional products and services (i.e., investments, insurance, mortgage
banking, leasing, and commercial finance).
We are maintaining our Buy rating on Southwest Bank and expect the bank to
deliver earnings and asset growth in the 15% range into the foreseeable
future. Additionally, we feel confident that the talent is in place to
continue gaining market share and grow the bank to a much larger level
because of the impressive management team, composed largely of alumni of
much larger Texas banks. Shares of Southwest are currently trading at 15.8
and 13.8 times our 2000 and 2001 earnings estimates of $1.26 and $1.45,
respectively. This is at a premium to our community banking peer group
median multiple of 10.7 and 9.9 for 2000 and 2001, respectively. We are
maintaining a price target of 18 times our 2000 estimate, or $23 per share,
a 15% appreciation potential.
First Quarter Highlights
Net interest income for the quarter was $30.3 million, a 22.7% increase
from $24.7 million in the year-ago quarter. The increase over the prior
year was driven by 16.0% growth in average earning assets to $2.6 billion
and a 21 basis point increase in the net interest margin to 4.60%.
Sequentially, however, the margin decreased six basis points from 4.66% in
the prior quarter. The year-over-year increase in earning assets is a
result of the strong growth in loans, which is being driven by execution of
its business banking strategy. Total loans grew by 28.0% year over year.
The margin expansion occurred as a result of the following factors: a $105
million increase in average noninterest bearing liabilities; a $186 million
increase in average savings deposits; the bank's firm pricing strategy; a
change in the asset mix from investment securities to loans; and its asset
sensitivity balance sheet composition. This resulted in a 56 basis point
increase in the yield on earning assets to 8.21%, which was somewhat
mitigated by a 32 basis point increase in the cost of funds to 3.58%. We
expect continued strong loan growth in 2000 and net interest margin to be
stable to slightly declining, as Southwest faces the challenges of
maintaining low-cost funding sources to support strong loan growth in a
rising interest rate environment.
Noninterest income for the quarter was $7.6 million, an increase of 13.8%
from $6.7 million in the year-ago quarter. The increase from the prior year
was driven by strong increases in service charges on deposit accounts,
factoring fees, investment services fees, and mortgage banking fees. These
increases were offset by nonrecurring fee income from arbitrage activities
in the year-ago quarter. As Southwest continues to focus on cross-selling
investment and other products to existing customers, as well as grow its
factoring business, we expect fee income to become a more important part of
the total revenues of the bank. We are projecting sequential low- to mid-
single-digit percentage increases in noninterest income and expect
management to continue to focus on fee income generation as a supplement to
what has primarily been a net interest income growth story.
Noninterest expense for the quarter was $23.1 million, an 18.4% increase
from $19.5 million in the year-ago quarter. The overall increase was driven
by higher compensation and other expenses. None of the individual expense
categories grew at rates inconsistent with our expectations of controlled
expense growth in a well-managed and fast-growing bank. The efficiency
ratio for the first quarter improved to 60.8% from 62.2% in the year-ago
quarter. Our expectation is for slight improvements to the efficiency ratio
in 2000 and continued expense growth at rates somewhat slower than overall
net interest and noninterest income growth. We expect mid-single-digit
expense growth for 2000, and believe that management will continue to
execute its growth strategy with only necessary expense increases.
Asset quality remains strong with nonperforming assets at quarter end of
$3.9 million compared to $4.4 million in the prior quarter and $2.4 million
in the year-ago quarter. As a percentage of total loans, nonperforming
assets were 0.19% at quarter end, up from 0.15% in the prior-year quarter.
The allowance for loan losses at March 31, 2000, was $21.0 million or 689%
of nonperforming loans, up from $16.2 million or 826% of nonperforming
loans in the year-ago quarter. Net charge-offs were 0.04% of average loans
for the quarter. Southwest continues to build its reserve levels with an
allowance as a percentage of total loans at quarter end of 1.08%, compared
to 1.07% and 1.05% in the prior and year-ago quarters, respectively. We
expect Southwest to continue to build reserves, but at a slow pace because
of its historically low charge-off levels and extremely strong allowance to
nonperforming assets ratio.
Business Description
Southwest Bancorporation of Texas, Inc., with $3.0 billion in assets, is
the largest independent bank holding company with headquarters in Houston.
The Bank focuses on private and middle-market relationship banking and
provides a complete range of retail, private, commercial, and mortgage
banking services through 26 full-service branches located throughout the
Houston metropolitan area.
Selected Financial Ratios 1Q00 4Q99 1Q99
Return on Average Assets 1.22% 1.23% 1.09%
Return on Average Common Equity 18.2% 17.7% 15.3%
Net Interest Margin 4.60% 4.66% 4.39%
Efficiency Ratio 60.8% 60.5% 62.2%
Average Equity/Assets Ratio 6.7% 6.8% 7.2%
Nonperforming Assets ($ Million) $3.9 $4.4 $2.4
Reserves/Nonperforming Loans 689% 651% 826%
Net Charge-Offs/Average Loans 0.04% 0.09% 0.09% |
