NEW YORK (
) -- 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
and other like-minded investors.
Pimco's bid to purchase a 20% stake in
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
-- 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.
also traded just above half their tangible book value when they closed at $25.52 Wednesday, while
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:
5. Mackinack Financial
Shares of the thinly-traded
of Manistique, Mich., closed at $5.00 Wednesday, returning 9% year-to-date.
The shares traded for 0.4 times their June 30 tangible book value of $12.86, according to SNL Financial.
Mackinack Financial had $492 million in total assets as of June 30, operating 13 mBank branches, mainly in Michigan's Upper Peninsula.
The holding company owes $11 million in TARP money. Its tangible common equity ratio was 8.93% as of June 30, according to SNL.
Second-quarter net income available to common shareholders was $603,000, or 17 cents a share, compared to a net loss of $2.5 million, or 73 cents a share, during the second quarter of 2010. The provision for loan losses declined to $600,000 during the most recent quarter, from $2.8 million a year earlier.
The company's second-quarter operating return on average assets (ROA) was 0.64% according to SNL Financial, which was the highest among this group of five bank and thrift holding companies.
According to SNL, Mackinack's nonperforming assets ratio declined to 2.89% as of June 30, from 3.34% a year earlier.
4. First Internet Bancorp
First Internet Bancorp
of Indianapolis closed at $10.00 Wednesday, declining 9% year-to-date.
The shares traded for 0.4 times their June 30 tangible book value of $25.26, according to SNL Financial.
The company had $538 million in total assets as of June 30, with main subsidiary offering online banking services to customers in all 50 states.
The holding company's tangible common equity ratio was 8.86% as of June 30, according to SNL.
First Internet Bancorp reported second-quarter net income of $828,000, or 43 cents a share, declining from $945,000, or 50 cents a share, in the second quarter of 2010. While the company's provision for loan losses declined to $335,000 during the second quarter from $774,000 a year earlier, earnings declined because of a $150,000 impairment charge, a decline in net interest income and an 18% year-over-year increase in salary and employee benefits expenses.
The company's second-quarter operating return on average assets (ROA) was 0.62% according to SNL.
First Internet 's nonperforming assets ratio was up slightly year-over-year, to 2.34% as of June 30, according to SNL.
3. HopFed Bancorp
of Hopkinsville, Ky., closed at $6.15 Wednesday, down 31% year-to-date.
The shares traded for just under 0.5 times their June 30 tangible book value of $12.58, according to SNL Financial.
HopFed had $1.1 billion in total assets as of June 30, operating 11 Heritage Bank branches in Kentucky and seven branches in Tennessee.
The company owes $18.4 million in TARP money and its tangible common equity ratio was 8.70% as of June 30, according to SNL.
Second-quarter net income attributable to common shareholders was $550,000, or eight cents a share, declining from $1.8 million, or 45 cents a share, during the second quarter of 2010. The provision for loan losses declined to $452,000 in the second quarter, from $858,000 a year earlier.
The year-over-year earnings decline reflected a sharp reduction in net interest income to $7 million and $268,000 in gains on the sale of real estate, in the year-earlier period.
HopFed's nonperforming assets ratio was 2.10% as of June 30 according to SNL, improving from 2.22% a year earlier.
The shares trade for 13 times the consensus 2012 earnings estimate of 51 cents a share among analysts polled by FactSet.
Following the company's second-quarter earnings announcement in August, Hilliard Lyons analyst Ross Demmelere reiterated his "Buy" rating for HopFed, with a price target of $11, saying he expects the shares to move closer to his target, "as HFBC's fundamentals improve and a Memorandum of Understanding is lifted."
Heritage Bank entered into the MOU with the Office of Thrift Supervision in August 2010, agreeing to limit its expansion.
Two of the three analysts covering HopFed rate the shares a buy, while the remaining analyst has a neutral rating.
2. MutualFirst Financial
of Muncie, Ind., closed at $7.13 Wednesday, down 22% year-to-date. Based on a quarterly payout of six cents, the shares have a dividend yield of 3.37%.
The shares traded for just under 0.5 times their June 30 tangible book value of $14.34, according to SNL Financial.
MutualFirst had $1.4 billion in total assets as of June 30, operating over 30 MutualBank branches in Indiana.
The holding company fully redeemed $32.4 million in preferred shares held by the government for TARP assistance, partially replacing the funding with its new participation in the U.S. Treasury's Small Business Lending Fund, through which MutualFirst received $28.9 million in government funding, while issuing new preferred shares to the government for the privilege.
Second-quarter net income available to common shareholders was $1.2 million, or 18 cents a share, declining from $1.3 million, or 19 cents a share, during the second quarter of 2010. The provision for loan losses increased to $1.7 million in the second quarter, from $1.5 million a year earlier.
MutualFirst's tangible common equity ratio was 7.03% as of June 30 according to SNL, and the company's nonperforming assets ratio was 2.60%, increasing from 2.25% a year earlier.
The shares trade for eight times the consensus 2012 earnings estimate of 96 cents a share, among analysts polled by FactSet.
Both analysts covering MutualFirst have neutral ratings on the shares.
1. Intervest Bancshares
of New York has seen its stock decline 8% year-to-date, closing at $2.70 Wednesday.
The shares traded for 0.3 times their June 30 tangible book value of $7.91, according to SNL Financial.
Intervest had $2.1 billion in total assets as of June 30, operating through its main office in New York and six branches in Pinellas County, Fla.
The company owes $25 million in TARP money and has deferred its last seven dividend payments to the government. Intervest's tangible common equity ratio was 8.15% as of June 30, according to SNL.
The company reported second-quarter net earnings available to common shareholders of $2.5 million, or 12 cents a share, compared to a net loss of $51.9 million, or $6.02 a share, during the second quarter of 2010, when Intervest recorded an $87.5 million provision for loan losses. During the most recent quarter, the provision was $742,000.
The company's nonperforming assets ratio was 3.96% as of June 30 according to SNL, increasing from 3.58% a year earlier.
Sandler O'Neill analyst Michael Sarcone rates Intervest a buy. The shares trade for six times the analysts' 2012 earnings estimate of 46 cents a share.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.