Updated with the U.S. Treasury's auction of LNB Bancorp's TARP preferred shares, and with additional comments from KBW analyst Fred Cannon about Banner Corp.
NEW YORK (
) -- A quick look at KBW's Consolidation List for banks highlights several names trading at significant discounts to book value, providing food for thought for investors.
As the regulatory landscape continues to evolve, investors can count on continued industry consolidation as old business models get
. Savings and loan associations -- or thrift institutions -- are continuing to feel great pressure as their traditional business model of "a focus on variable-rate mortgage lending, heavy concentrations in residential real estate, and limited capital regulations," is no longer viable, as the group faces the same increased capital requirements as banks, according to KBW analyst Fred Cannon.
Cannon said on Monday that because of the higher capital requirements and a change in regulation from the Office of Thrift Supervision to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve, "high loan-to-deposit ratios are no longer tolerated and concentrations in residential real estate are questions."
Hudson City Bancorp
is an example of a large thrift that has been force by regulators to restructure its balance sheet by prepaying wholesale borrowings -- with large losses from prepayment penalties -- and also cut its dividend. The company's net interest margin -- the difference between a bank or thrift's average yield on deposits and investments and its average cost for deposits and wholesale borrowings -- was pressured for several years, in the prolonged low-rate environment, because of a focus on jumbo mortgage lending.
Sterne Agee analyst Matthew Kelley late in May said that Hudson City's options included "a push into a less capital-intensive mortgage banking," focusing on quickly selling newly originated conforming mortgages" to
"to generate gains-on-sale," and that the company could "also be considering a move into non-residential lending (multi-family and commercial real estate)."
Kelly also sees Hudson City as a takeout target, with a "terminal value" of $8.25 a share, which is a 37% premium to Hudson City's closing price of $6.04 on Friday.
With the Federal Reserve announcing last week that its enhanced minimal capital requirements for banks would apply to all institutions with total assets of at least $500 million, there is likely to be additional pressure on many community banks -- not just thrifts -- to sell to stronger rivals, because a higher capital requirement means a lower return on equity for investors. Institutions with higher profit margins -- those with an edge from a focus on niche lending, card lending, or with strong fee-generating businesses - with have a much easier time remaining independent.
According to KBW, there are hundreds of potential targets out there, with "398 banks that have a Texas ratio of greater than 100% with total assets of $206 billion," as of March 31. The Texas Ratio is the ratio of a bank's nonperforming loans to its Tier 1 capital plus loan loss reserves. A 100% Texas ratio is a very high level of credit exposure.
The seven holding companies on KBW's bank Consolidation List trading at the lowest multiples to tangible book value include two thrifts and five commercial banks. Several of the companies still owe the federal government for bailout funds received through the Troubled Assets Relief Program, or TARP. The dividend rate on the government-held preferred shares will increase to 9.00% from 5.00% in December 2013. This huge increase in funding cost weighs heavily on share valuations and increases pressure on the management of these companies to consider various strategic options.
Here they are, ordered by ascending price-to-tangible-book valuation as of Friday's close:
7. Astoria Financial
of Lake Success, N.Y., closed at $9.04 Friday, returning 9% year-to-date, following a 30% decline during 2011.
The shares trade for 83% of tangible book value, according to Thomson Reuters Bank Insight, and for 14 times the consensus 2013 earnings estimate of 65 cents, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 53 cents.
Astoria during the first quarter cut its quarterly dividend to four cents from 13 cents, as the company suffered year-over-year declines in net interest income and margin.
The company had $17.1 billion in total assets as of March 31, and reported first-quarter net income of $10.0 million, or 11 cents a share, declining from $11.8 million, or 12 cents a share, the previous quarter, and $27.4 million, or 29 cents a share, a year earlier. Astoria's first-quarter results included $3.4 million in charges -- $2.2 million, or two cents a share, after tax -- for severance related expenses as part of the company's cost-control initiative.
The first-quarter net interest margin was 2.20%, unchanged from the fourth quarter, but declining from 2.40% during the first quarter of 2011. The company's operating return on average assets (ROA) during the first quarter was a weak 0.23%, and has ranged as high as 0.6! over the past five quarters, according to Thomson Reuters Bank Insight.
KBW analyst Fred Cannon rates Astoria "Market Perform," said in April after the company reported its first-quarter results that he expected "the downward re-pricing of loans and the reinvestment of cash flows at lower rates to be the source of pressure as long as rates remain low," adding that that although "the downward pressure will be partly offset by relief in CD costs since we believe that the 1.06% cost of deposits in 1Q12 should move lower with CDs re-pricing in 2012," this will be more than offset by "rates on new multifamily loans
ranging from 3.50-4.00%," which is "still well below the portfolio yield of 6.08% in 1Q12."
Cannon's $7 price target for Astoria "implies a 0.5x multiple based on our 2013 tangible book value estimate-- below the 1.3x average multiple that the peer group trades on a similar basis."
Interested in more on Astoria Financial? See TheStreet Ratings' report card for this stock.
6. Banner Corp.
of Walla Walla, Wash., closed at $19.00 Friday, returning 11% year-to-date, following a 7% return during 2011.
The shares trade for 82% of tangible book value, and for 19 times the consensus 2013 earnings estimate of $1.02. The consensus 2012 EPS estimate is $1.55.
Banner Corp. owes $124 million in bailout funds received through TARP in December 2008, although the U.S. Treasury no longer holds preferred shares in the company, having
the shares in March for a discounted price of roughly $108 million.
When asked during the company's first-quarter conference call when Banner might consider redeeming the (formerly TARP) preferred shares, CEO Mark Grescovich said "we want to make sure we have complete clarity as to where the economy is going, and we will be prudent with our capital management and redeeming that debt," according to a transcript provided by Thomson Reuters.
Banner Corp. had $4.2 billion in total assets as of March 31. The company reported first-quarter earnings available to common shareholders of $7.2 million, or 40 cents a share, increasing from $3.1 million, or 18 cents a share, in the fourth quarter, and a net loss of $9.8 million, or 60 cents, in the first quarter of 2011.
The improved first-quarter results reflected an increase in mortgage banking revenue to $2.6 million in the first quarter, from $1.9 million the previous quarter, and $962,000 a year earlier. Banner also bucked the industry trend with a first-quarter net interest margin of 4.11%, expanding from 4.07% in the fourth quarter and 3.94% in the first quarter of 2011.
The year-over-year earnings improvement mainly resulted from a decline in the provision for loan losses to $5 million from $17 million.
Cannon rates Banner "Market Perform," with a $21 price target, calling the company's first-quarter performance a "solid beat" of expectations, "with credit improving and the net interest margin expanding," but said that the shares (closing at $22.44 on April 24) were "fully valued" at a "premium to peers" that was "warranted due to the stable margin, loan growth, and the stock
trading at a discount to tangible book value.
The shares pulled back 26% from April 24 through Friday's close.
The analyst said that "Banner was able to improve the net interest margin this quarter even with higher average loan growth (up 2% annualized)," but that he expect that loan growth would "go lower for the remainder of this year," and "modest loan growth to return in 2013."
Cannon says that KBW's bank analysis team has been "debating whether or not it is time" to take Banner Corp. off of the Consolidation List, in light of the company's success.
"They have really turned the bank around especially since Mark Grescovich came in a year and a half ago," but "we still view them as a company that may look for a partner."
Interested in more on Banner Bancorp? See TheStreet Ratings' report card for this stock.
5. Sierra Bancorp
of Porterville, Calif., closed at $9.04 Friday, returning 4% year-to-date, following a 16% decline during 2011. Based on a quarterly payout of six cents, the shares have a dividend yield of 2.65%.
The shares trade for 77% of tangible book value, and for 12 times the consensus 2013 earnings estimate of 70 cents. The consensus 2012 EPS estimate is 55 cents.
Sierra Bancorp had $1.3 billion in total assets as of March 31. The company reported first-quarter earnings of $1.9 million, or 13 cents a share, increasing from $1.5 million, or 11 cents a share, in the fourth quarter, and $1.5 million, or 11 cents a share, in the first quarter of 2011. The fourth quarter results included "$2.529 million in write-downs on other real estate owned (OREO), and a $1.370 million other-than-temporary impairment (OTTI) charge against equity investment securities which was offset by $1.660 million in gains taken on the sale of mortgage-backed securities," according to the company."
The year-over-year earnings improvement reflected a decline in the provision for loan losses to $2.8 million from $3.6 million. The company's ROA has ranged from 0.46% to 0.75% over the past five quarters, according to Thomson Reuters Bank Insight. The company's ratio of nonperforming assets to total assets was a rather high 7.69% as of March 31.
KBW analyst Jacquelynne Chimera on May 23 upgraded Sierra Bancorp to "Outperform," with a $12 price target, saying the discount to book value for the shares -- closing at $8.59 that day -- was not warranted "given the company's core income generation capabilities," adding that "Sierra pays a cash dividend, while the majority of its peers do not."
Interested in more on Sierra Bancorp? See TheStreet Ratings' report card for this stock.
4. LNB Bancorp
of Lorain, Ohio, closed at $6.12 Friday, returning 31% year-to-date, following a 5% decline last year.
The shares trade for 73% of tangible book value, and for eight times the consensus 2013 earnings estimate of 74 cents. The consensus 2012 EPS estimate is 61 cents.
LNB Bancorp owes $25.2 million in TARP money. The U.S. Treasury on Monday initiated a second round of auctions of TARP preferred shares, for a group of seven banks, including LNB Bancorp. Bidding for the government-held preferred shares will end at 6:30PM, Eastern Standard Time, on Wednesday.
The company had $1.2 billion in total assets as of March 31 and reported first-quarter net income available to common shareholders of $1.2 million, or 15 cents a share, compared to $811 thousand, or 10 cents a share, in the fourth quarter, and $1.1 million, or 15 cents a share, in the first quarter of 2011. LNB Bancorp's first-quarter ROA was 0.51%, and the ROA has ranged from 0.24% to 0.57% over the past five quarters, according to Thomson Reuters Bank Insight.
KBW analyst John Barber on May 20 initiated his firm's coverage of LNB Bancorp with a "Market Perform" rating and a $7.00 price target, saying that TARP remains an overhang, and the increase in the dividend rate on preferred shares held by the government "from 5% to 9% in December 2013 represents a significant earnings event."
Barber said that he expects "LNB to continue building capital as our current estimates assume the company organically increases its tangible common equity (TCE) ratio over 6% by mid-2013 from 5.7% in 1Q12," adding that he believes "the company will be patient in its approach towards redeeming TARP; however, all strategic options remain on the table."
Interested in more on LNB Bancorp? See TheStreet Ratings' report card for this stock.
3. First Financial Service Corp.
First Financial Service Corp.
of Elizabethtown, Ky., closed at $3.00 Friday, returning 96% year-to-date, following a 62% decline during 2011. To put those figures in perspective, the 52-week return for the shares was 15%.
The shares trade for 44% of tangible book value.
The company owes $20 million in TARP money.
Fist Financial Service Corp. had $1.2 billion in total assets as of March 31. The company on May 15 announced that its main subsidiary
First Federal Savings Bank
had agreed to sell four branches in Louisville to
First Security Bank
of Owensboro, Ky. First Security will pay a premium of $3.6 million to assume $217 million in deposits, while also assuming $74 million in loans, at a 1% discount.
First Financial Service Corp. expects the branch sale, "combined with the impending sale of four southern Indiana branches announced earlier this year," to increase First Federal Savings Bank's total risk-based capital ratio "to over 13.00%" from 10.70% as of March 31, which will exceed the 12.00% risk-based capital ratio required under a regulatory consent order.
The holding company reported a first-quarter net loss to common shareholders of $533 thousand, or 12 cents a share, compared to a loss of $2.3 million, or 49 cents a share, during the first quarter of 2011. The provision for loan losses declined to $1.0 million during the first quarter from $3.5 million a year earlier. The company's nonperforming assets ratio was 6.63% as of March 31, with a Texas Ratio of 88.53%, according to Thomson Reuters Bank Insight.
KBW analyst Catherine Mealor rates First Financial Service Corp. "Market Perform," and said on May 22 that with the latest announced branch deal, the company "only needs $3M to be compliant with its consent order, versus $28M last quarter." The analyst increased her 2012 EPS estimate to a net loss of 95 cents, from a net loss of $2.12, while maintaining her 2013 EPS estimate of five cents.
Mealor said that "FFKY has come a long way over the last couple quarters, and we continue to be impressed with the internal capital generated through the divestitures outside the core markets of operation," adding that "while the company still has a ways to go, we are increasing our price target by $1 to $3.50, which is in line with its peer group and represents 0.5x current
tangible book value.
Interested in more on First Defiance Financial? See TheStreet Ratings' report card for this stock.
2. Porter Bancorp
of Louisville, Ky., closed at $1.66 Friday, down 43% year-to-date, after dropping 72% during 2011.
The shares trade for 44% of tangible book value, and for 13 times the consensus 2013 earnings estimate of 13 cents. The consensus 2012 earnings is a loss of 11 cents a share.
The company owes $35 million in TARP money.
Porter Bancorp had $1.4 billion in total assets as of March 31. The company reported first-quarter net income available to common shareholders of $985,000, or eight cents a share, compared to a net loss of $54.5 million, or $4.64 in the fourth quarter, and earnings to common shareholders of $305 thousand, or three cents a share, during the first quarter of 2011.
The fourth-quarter loss sprang from the establishment of a $28.5 million deferred tax asset, a $35.8 million provision for loan losses and related expenses, as the company took aggressive steps aimed at "reducing our nonperforming assets in light of the sluggish economic recovery, continued weakness in local real estate activities, and declining values of real estate in certain market sectors," according to CEO Maria Bouvette.
Porter Bancorp's ratio of nonperforming assets -- including nonaccrual loans and loans past due 90 days or more, less government-guaranteed balances, plus repossessed real estate -- was 15.75% as of March 31, and the Texas ratio was 97.65% as of March 31, according to Thomson Reuters Bank Insight.
A consent order from state regulators and the FDIC requires main subsidiary
to maintain a total risk-based capital ratio of at least 12%. The bank's total risk-based capital ratio was 11.38% as of March 31.
Mealor rates Porter Bancorp "Market Perform," with a price target of $2.00, and said on April 30 that "the Bank still has a regulatory consent order outstanding and would need at least ~$25M of capital just to be compliant," and that she remained "cautious on the shares as PBIB needs a vastly improved level of NPAs and classified assets, sustainable core profitability and compliant regulatory capital."
Interested in more on Porter Bancorp? See TheStreet Ratings' report card for this stock.
1. Eastern Virginia Bancshares
Eastern Virginia Bancshares
of Tappahannock closed at $3.84 Friday, returning 91% year-to-date, following a 47% decline during 2011. The 52-week return was 7%.
The shares trade for 41% of tangible book value, and for nine times the consensus 2013 earnings estimate of 43 cents. The consensus 2012 earnings estimate is a net loss of nine cents a share.
The company owes $24 million in TARP money.
Eastern Virginia Bancshares had $1.1 billion in total assets as of March 31 and reported first-quarter net income available to common shareholders of $439,000, or seven cents a share, increasing from 217,000, or four cents a share, in the fourth quarter, and $100,000, or two cents a share, in the first quarter of 2011. The company's operating ROA has ranged from 0.08% to 0.30% over the past five quarters, according to Thomson Reuters Bank Insight. The March 31 nonperforming assets ratio was 3.01%.
Mealor rates Eastern Virginia Bankshares "Market Perform," with a $4.00 price target, and said in April that she was "pleased to see progress in credit quality" as the company continued "to take advantage of securities gains to move problem assets off its books."
While saying "we do not believe EVBS will be forced to raise capital under its written agreement
with regulators," the analyst said that "capital does still remain thin (5.4% TCE) and EVBS still has $20M in TARP."
Mealor estimates the company will post a net operating loss of nine cents for all of 2012, followed by earnings of 43 cents a share in 2013.
Interested in more on Eastern Virginia Bancshares? See TheStreet Ratings' report card for this stock.
Written by Philip van Doorn in Jupiter, Fla.
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.