Sterling (Nasdaq:SBIB), Texas Capital (Nasdaq:TCBI), Cullen/Frost Bankers (NYSE:CFR), Prosperity (Nasdaq:PRSP): FBR Takeaways

Sterling Bancshares (Nasdaq:SBIB), Texas Capital Bancshares (Nasdaq:TCBI), Cullen/Frost Bankers (NYSE:CFR) and Prosperity Bancshares (Nasdaq:PRSP), all financial institutions based in Texas, were visited by FBR Capital, and they give their takeaway on the group.

FBR said, "In summary, the Texas bank management teams we visited had a generally positive outlook for the Texas economy and growth opportunities, positioning themselves to take advantage when loan demand returns. Compared to most regional and community banks that face both high credit costs and NIM pressure, the Texas banks we met with, for the most part, were primarily concerned with NIM pressure. We continue to believe the Texas-based banks face a better macro environment than most other banks in our coverage universe, given the stronger underlying Texas economy—faster job growth and more stable CRE prices. Most managers felt loan demand had bottomed and was slowly improving, and across the board, the banks have hired additional loan officers in preparation for increased lending activity. All management teams noted increased competition versus six months ago, but agreed it was on rate, not structure, and only for the highest-quality borrowers; the large, out-of-state banks continue to serve as meaningful sources of customers. Management teams noted good investor demand for distressed assets and prices that were generally improving. Most managers expect M&A to resume in 2H11; however, consensus was that price expectations of small banks remain too high in light of the looming challenges—reduced NSF and interchange income, increased regulation, and higher capital levels will all conspire to reduce long-term profitability, therefore historical M&A multiples are no longer justifiable.

"We continue to believe Sterling Bancshares (Outperform) has the most upside given its valuation; however, Texas Capital Bancshares (Market Perform) possesses a differentiated business model, and at a more attractive share price, we would revisit our rating. Cullen/Frost Bankers (Market Perform) and Prosperity Bancshares' (Market Perform) valuations, along with NIM pressure, keep us on the sidelines, but we believe are the most likely to be involved in M&A as acquirers."

Sterling Bancshares closed at $6.01 Tuesday, remaining level from the prior trading session. Texas Capital Bancshares closed at $18.76, losing $0.05, or 0.27 percent. Cullen/Frost Bankers was down to $54.20, dropping by $0.28, or 0.51 percent. Prosperity Bancshares (Nasdaq:PRSP) ended the day at $32.60, losing $0.10, or 0.31 percent.