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NEW YORK (
TheStreet) -- The almost-daily flow of bad news for U.S. banks could push valuations down even further for attractive community franchises, making deals irresistible to
PIMCO and other like-minded investors.
Pimco's bid to purchase a 20% stake in
ECB Bancorp (ECBE) sheds light on an interesting phenomenon and hope for community bank stock investors who have been hanging in there through thick and thin. According data provided by SNL Financial, the Engelhard, N.C., bank holding company was in decent shape as of June 30, but its shares were trading below half their tangible book value, at Wednesday's closing price of $11.10.
Pimco Founder Bill Gross.
ECB Bancorp is the holding company for East Carolina Bank, which was chartered in 1919, and operates 27 branches in 13 North Carolina counties. The holding company had $941 million in total assets as of June 30, and a tangible common equity ratio of 6.90%. Its regulatory Tier 1 leverage ratio was 8.39% and its total risk-based capital ratio was 13.46%. Those are fairly strong numbers. The nonperforming assets ratio was 3.43%, according to SNL Financial.
The company reported second-quarter net income of $880,000, or 31 cents a share, increasing from $692,000, or 24 cents a share, a year earlier.
The holding company owes $17.9 million in federal bailout funds, received through the Troubled Assets Relief Program, or TARP, in January 2009.
On Sept. 9, ECB Bancorp filed an amended purchase agreement with the Securities & Exchange Commission, increasing a previous deal to raise $75 million in common equity through a private placement with Pimco, Patriot Financial Partners, L.P., an affiliate of Endicott Management Company and three other institutional investors, to $75.9 million. The investors will pay $16 per share to gain control over the holding company, paying a 44% premium over Wednesday's closing price.
The deal is subject to Federal Reserve approval and the approval of ECB shareholders, who are scheduled to vote on October 12 on a proposal to increase the company's authorized common shares to 50 million, from 10 million.
The private equity investors will also receive warrants "to purchase shares of either voting common stock or a new class of the Company's mandatorily convertible non-voting common stock at a purchase price of $8.00 per share and in an amount equal to 25% of the number of shares of common stock each Investor purchases" in the offering.
While the private equity investors are paying a hefty premium up front, the $16.00 price is a 30% discount to ECB's June 30 tangible book value of $22.79 a share, according to SNL. And the warrants are a lovely sweetener.
Looking at the full set of data for 899 publicly traded U.S. bank and thrift holding companies -- excluding those traded on the Pink Sheets -- 611 of the names traded below tangible book value at Wednesday's market close.
These included three of the largest U.S. banks, facing an almost daily onslaught of mortgage putback demands, new regulations as the Dodd Frank Wall Street Reform and Consumer Protection Act is implemented, and the Federal Reserve's latest move to shift its investment strategy, which is expected to lower long-term rates while keeping short-term rates low, which will hurt banks' net interest margins.
Bank of America (BAC - Get Report) -- facing the highest risk from mortgage putback demands -- traded for just above half their June 30 tangible book value at Wednesday's closing price of $6.38.
Citigroup (C - Get Report) also traded just above half their tangible book value when they closed at $25.52 Wednesday, while
JPMorgan Chase (JPM - Get Report) traded just below tangible book, closing at $30.34 Wednesday.
Going back to our list of 899 publicly traded holding companies, 185 traded below half of their tangible book value at Wednesday's market close, according to SNL.
If we narrow down the list further, to include only bank and thrift holding companies that reported profits available to common shareholders during the second quarter, with nonperforming assets ratios below 4% and tangible common equity ratios of at least 6.50%, we're left with 22 holding companies, excluding four, for which the nonperforming assets data wasn't available from SNL, and also excluding ECB Bancorp.
Five of these holding company's had total assets exceeding $450 million as of June 30.
Here are the 5 More Bank Targets for PIMCO, in ascending order by asset size: