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Banks to Watch After TARP Redemption

As smaller banks repay the government and post improved earnings, some make for better investments than Bank of America, Citigroup and other bigger players.

NEW YORK (TheStreet) -- Investors have reset their sights on big banks such as Citigroup (C) - Get Citigroup Inc. Report and Wells Fargo (WFC) - Get Wells Fargo & Company Report after they redeemed themselves by paying back the government's bailout money, but three of their smaller rivals are more attractive as investments. A fourth bank, rebounding from a loss, warrants waiting.

Shares of Citigroup and

Bank of America

(BAC) - Get Bank of America Corp Report

have fallen in the past month, even though a brace of large banks fully repaid the government's Troubled Asset Relief Program, or TARP. Wells Fargo has risen marginally. Investors are expecting big rebounds from the country's largest banks, with Thomas Villalta, manager of the

Jones Villalta Opportunity Fund

, saying Bank of America's stock could double this year.

The following four banks are worthy of being placed on investors' watch list. Data were provided by SNL Financial.

Peapack-Gladstone Financial

Peapack-Gladstone Financial

(PGC) - Get Peapack-Gladstone Financial Corporation Report

of Gladstone, N.J., repaid the government $7.2 million on Jan. 6, about 25% of the $28.7 million capital infusion received a year earlier.

After a fourth-quarter 2008 net loss of $32.6 million, mainly from losses on securities, the company was profitable during the first three quarters of 2009, although an increase in loan-loss provisions dragged down earnings in the third quarter.

Still, Peapack-Gladstone has maintained good credit quality, with nonperforming assets, including loans past due 90 days or in nonaccrual status, comprising 1% of total assets as of Sept. 30, compared with the industry average of 3.07%. The company's tier 1 capital ratio was 12.2% as of Sept. 30.

The shares closed at $10.63 on Monday, just above book value. This probably reflects concerns that Peapack-Gladstone won't be able to fully exit TARP without a capital increase, since its total risk-based capital ratio -- which needs to be at least 10% for most banks to be considered well-capitalized -- had slipped to 9.77% at the end of 2008, before the TARP money was received.

The company is scheduled to report fourth-quarter earnings Monday. For investors with faith that the company can generate sufficient earnings to continue building capital through earnings and slowly repay TARP without a secondary common offering, this is a bargain entry point.

City National

City National

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of Los Angeles repaid $200 million on Dec. 30, or half the TARP money it received in November 2008. The repayment followed the company's issuance of trust-preferred securities in early December, raising $250 million in tier 1 capital.

The company acquired the failed Imperial Capital Bank in a government-assisted transaction on Dec. 18, purchasing $2.8 billion in deposits and $3.3 billion in assets, with the Federal Deposit Insurance Corp. agreeing to share in losses on $2.5 billion of the acquired assets. As part of the deal, City National grabbed nine Imperial Capital branches in its home market.

Investors pushed up the shares 22% from Dec. 18 through Tuesday's close at $50.20.

Morgan Stanley's

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Ken Zerbe said the Imperial Capital acquisition was a "solid deal" that would allow for "considerable cost savings" and boost earnings. Morgan Stanley has a "neutral" rating on the shares, with a 12-month price target of $48.

In a report supporting


(UBS) - Get UBS Group AG Report

"sell" rating, analyst Erika Penala said the deal was "not a strategic home run," and that Imperial Capital's customers and loan portfolio were a mismatch to City National's. UBS's 12-month price target is $36.00

City National's shares were selling at 1.44 times book value Tuesday, not exactly cheap in this market and the highest of the four banks discussed here.

City National is set to report fourth-quarter earnings after the stock market closes today. The company has continued to earn money through the crisis, boosted tier 1 capital in December in a way that didn't dilute common shareholders, and then followed up with a major acquisition for next to nothing, with the FDIC backing losses from acquired assets.

With the recent rise in the shares, management's aggressive move to take advantage of the crisis and expand during the economic recovery, City National appears to be an excellent long-term play.

OceanFirst Financial

OceanFirst Financial

(OCFC) - Get OceanFirst Financial Corp. Report

completely exited TARP on Dec. 30 after paying $38.5 million to redeem preferred shares and pay accrued dividends. The company raised $58 million through a common stock offering in November.

The Toms River, N.J.-based thrift reported fourth-quarter net income of $3.6 million, or 12 cents a share, missing the 25-cent consensus estimate of analysts polled by Thomson First Call, mainly because of a $2.2 million provision for loan-loss reserves and a decline in trust-fee revenue.

The company cut its quarterly dividend to 12 cents a share, with Chairman John Garbarino saying OceanFirst was looking to "preserve capital in these turbulent economic times." Still, the dividend represented a yield of 4.55% and a payout of "roughly 50%" of expected earnings during 2010, according to

Sterne Agee

analyst Matthew Kelly, who has a "buy" rating on the shares.

OceanFirst has maintained decent loan quality through the crisis, with a nonperforming-asset ratio of 1.55% as of Dec. 31. More importantly, loan losses have been low, as 2009 net charge-offs totaled just $2.6 million, or 0.16% of total loans as of Dec. 31. Loan-loss reserves covered 0.89% of total loans as of Dec. 31.

The shares closed at $10.52, or slightly above book value, on Monday, down 6.5% so far this month and 11% over the past year.

With the capital increase and TARP repayment behind it, OceanFirst was strongly capitalized, with a ratio of total equity to total assets of 9.23% as of Dec. 31, up from 6.45% at the end of 2008.

The company looks like an excellent opportunity for investors willing to commit for a few years to double their money. They would receive a reasonably secure dividend of 4.55% while they wait.

Boston Private Financial

Boston Private Financial

(BPFH) - Get Boston Private Financial Holdings, Inc. Report

received $154 million in TARP money in November 2008 and made a partial repayment of $50 million on Jan. 13, with CEO Timothy Vaill striking a cautious note, saying the company would "continue to assess the pace" of economic recovery and "seek approvals to repay additional amounts in 2010 when we feel the timing is appropriate."

The shares rose 7% yesterday, closing at $7.49, or 1.2 times book value. After the stock market closed, Boston Private reported fourth-quarter net income available to common shareholders of $28.3 million, or 42 cents a share, beating the 41-cent consensus among analysts polled by Thomson Reuters. This compared to a third-quarter net loss of $31.4 million, or 61 cents, and a net loss of $29.7 million, or 47 cents, in the fourth quarter of 2008.

Fourth-quarter earnings mainly reflected gains on the sale of its Westfield Capital Management subsidiary, which was purchased by the unit's management for $59 million in cash, and the repurchase of $44.5 million in trust-preferred securities at a discount, which netted an after-tax gain of $10.8 million.

The loss in the third quarter mainly sprang from charges related to Boston Private's sale for $93 million of subsidiary

Gibraltar Private Bank

of Coral Gables, Fla. Boston Private had purchased Gibraltar Private for roughly $255 million in cash and stock (with a cash component of $112.2 million) in October 2005. While in hindsight the Gibraltar Private acquisition looks like a disaster, the sale reduced Boston Private's nonperforming assets by about $30 million and, together with the sale of wealth advisory affiliate RINET Co., reduced Boston Private's total assets 19% during the third quarter and significantly increased the company's capital ratios.

Total assets were $6 billion as of Dec. 31, and while regulatory capital ratios weren't available, Boston Private's tangible common equity ratio was 6.66%, up from 5.38% at the end of 2008.

At the end of September, the company's regulatory tier 1 capital ratio was 17.66%, above the 6% required for most banks and holding companies to be considered



Nonperforming assets comprised 1.77% of total assets as of Dec., 30, down from 1.98% the previous quarter although, not surprisingly, up from 1.06% at the end of 2008. The company charged-off nonperforming loans totaling $18 million in the fourth quarter for an annualized ratio of net charge-offs to loans of 0.43%. Loan-loss reserves covered 1.59% of total loans as of Dec. 31.

With the partial TARP repayment, significant boost in tangible common equity and escape from the drag on earnings from Gibraltar Private's nonperforming loans in South Florida, it appears Boston Private is turning a corner, although it's less compelling than the three other TARP redeemers discussed above.

In a report published before the company released its fourth-quarter results that supported her firm's "neutral" rating on Boston Private's shares and a 12-month price target of $8, Morgan Stanley analyst Cheryl Pate estimated that it wouldn't be necessary for the company to raise capital to complete its TARP repayment later this year. She said an expected "normalized" return on equity of 13% for 2013 would support a price-to-book multiple of 1.3 times. The shares closed at $7.49 on Tuesday, up 7% on the day, and sold for 1.2 times book value.


Reported by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.