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10 Community Bank M&A Targets

NEW YORK ( TheStreet) -- The banking industry's consolidation is continuing this year, but the pace hasn't picked up yet, and the premiums being paid for non-failing institutions have actually declined from last year.

According to SNL Financial, there were 47 bank and thrift deals announced this year through last Friday for a total value of $2.9 billion, following 207 in 2010, for a total value of $12.1 billion. Among deals for which the underlying detail is available, the average purchase price this year has been 109% of the targets' tangible book value, declining slightly from 111% last year.

"Right now there are a lot of sellers that are selling out of weakness. There are 7500 banks out there today and a lot of them are too small to compete. These will be the banks that sell," said KBW Analyst Chris McGratty in an interview with TheStreet. The analyst added that merger activity would pick up in 2012 and 2013, with "Regulatory pressure and capital pressure building, and many boards facing fatigue."

The largest deal announced so during 2011 is Comerica's (CMA) acquisition of Sterling Bancshares (SBIB), valued at $1 billion, or 230% of tangible book value. The deal was approved Thursday by Sterling's shareholders, and is expected to close this quarter.

The next largest 2011 deal is People's United Financial's (PBCT) agreement to acquire Danvers Bancorp for $489 million in cash and stock. SNL values the deal at 184% of Danvers Bancorp's tangible book value. The deal was announced in January and is expected to be completed during the second quarter.

Grow or Sell

Another recent purchase for a solid premium over book value was Valley National's (VLY) agreement to purchase State Bancorp (STBC) of Jericho, N.Y., in an exchange of shares that SNL values at $279 million, or 198% of the target's tangible book value.

When the two companies announced the merger deal, State Bancorp's CEO said that his company's shareholders were "receiving an attractive premium to the recent market price," but also made a frank statement about the challenges faced by community bankers: "The ever increasing regulatory and compliance costs and complexity are making it more difficult for the traditional community bank to independently produce long term attractive returns to shareholders."

Two of the banks McGratty mentioned as possible targets are in Chicago, which the analyst termed "the most fragmented market in the country," with MB Financial (MBFI) and First Midwest (FMBI - Get Report) among possible targets for larger banks like U.S. Bancorp or Fifth Third Bancorp, which "are two that would expand in Chicago."

The two Chicago banks were included in TheStreet's list of 10 community bank targets back in January.

McGratty also mentioned Boston Private (BPFH - Get Report) as a target, mentioning City National (CYN) and First Republic (FRC) as possible entrants into the Boston market through an acquisition.

Chip MacDonald, a partner at Jones Day said that Boston Private had "struggled with their business model," selling-off some assets and some businesses," and had a new management team in place. "They seem to be stalled so they are a likely candidate," he said.

United Community Banks (UCBI) of Blairsville, Ga., was included in TheStreet's previous list of 10 community bank targets, with Stephens, Inc. analyst Matt Olney saying that with its asset quality concerns, the company looked appropriate for "a different type of bidder," possibly for a private equity investor.

Instead of selling, United Community on March 31 raised $380 million in capital from a group of investors led by a subsidiary of group of institutional investors led by an affiliate of Corsair Capital, LLC. The company also announced plans to dispose of $293 million in problem assets.

With these moves, Guggenheim analyst Jeff Davis said in a report on Thursday that United Community could be an acquirer of smaller or weaker institutions as it would have difficulty generating "much growth on its own given the state of its core north GA market." Davis also said that eventually the investor group led by Corsair may push a sale of United Community, "if the M&A market becomes sufficiently robust; it is not today."

Chip MacDonald agreed that United Community would sell "if they could get a premium on their stock," since the "the private equity money is looking for a return," but said it was too early for a sale, since "they haven't finished their clean up their balance sheet."

We have therefore removed United Community from our list of 10 community bank takeover targets, replacing it with Boston Private.

Here are the 10 community bank targets, by ascending asset size:
1 of 11

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