10 Regional Bank Predators

NEW YORK ( TheStreet) -- The banking industry is coming out of its summer doldrums and the consolidation of regional players is likely to accelerate.

There are bargains out there for acquisitive regional banks, and with an increased regulatory burden there are plenty of reasons for some banks to throw in the towel -- providing they get a decent price. In addition, stronger players continue to ponder government-assisted acquisitions of failed banks.

First Niagara Financial ( FNFG) of Buffalo, N.Y. agreed to purchase NewAlliance Bancshares ( NAL) of New Haven, Conn. for either $14.09 in cash or 1.10 First Niagara shares for each NewAlliance share, . This represented a 24% premium based on NewAlliance's Wednesday closing price of $11.36.

New Alliance's CEO Peyton Patterson also pointed out that NewAlliance's shareholders who accept First Niagara shares would "more than double the dividends earned."

Following the trend for other recent bank merger deals, at least two law firms were "investigating" the transactions, as some NewAlliance shareholders were looking for a better price.

The deal marked the third recent major expansion First Niagara into neighboring markets, following the acquisition of Harleysville National of Harleysville, Penn. which was acquired on April 9 and the purchase of 57 National City Bank branches in western Pennsylvania in September 2009..

Ten More Strong Regional Banks

Using second-quarter data provided by SNL Financial, we pared down the list of 83 publicly traded domestic bank and thrift holding companies with total assets ranging from $5 billion to $100 billion, by excluding companies with outstanding preferred shares held by the U.S. Treasury for bailout money received via the Troubled Assets Relief Program, or TARP.

Then, excluding First Niagara - which probably needs a breather to integrate all of its recent acquisitions -- and also Northern Trust ( NTRS) of Chicago, which is mainly focused on asset management and other fee-based services, the following ten holding companies posted the best returns on assets during the first half of 2010:

Shares of Hudson City Bancorp ( HCBK) of Paramus, N.J. closed at $11.71 Thursday, down 12% year-to-date, and represented an excellent value for a low-risk play, with shares featuring a dividend yield of 5.12% on a quarterly payout of 15 cents.

Earnings: Hudson City's return on average assets (ROA) for the first half of 2010 was 0.96% and its return on equity was 10.42%. Please see TheStreet's second-quarter earnings coverage for much more detail on the company's results, including a look at its industry-leading efficiency.

Asset Quality: Hudson City's conservative, traditional mortgage lending business has enabled it to sail through the credit crisis. The company's annualized ratio of net charge-offs to average loans for the first half was a very low 0.29%. While a first-half industry average wasn't yet available, the Federal Deposit Insurance Corp. said the combined U.S. banking industry's net charge-off ratio for the first quarter was 2.84%.

Prospects: Hudson City's strong capital position, steady earnings, strong asset quality and high efficiency place it among the regional holding companies that could consider a strategic expansion. Then again, with shares trading at just 1.2 times tangible book value and yielding over 5%, it's a mystery as to why the stock isn't flying higher.

Washington Federal ( WFSL) of Seattle has seen its shares drop 22% year to date, closing at $15 Thursday. On August 6, the company said main subsidiary Washington Federal Savings and Loan had entered into a memorandum of understanding with the Office of Thrift Supervision, requiring the thrift to improve its policies and procedures relating to construction lending and interest rate risk management. The company said the order wouldn't require it to raise capital and it believed it was already in compliance with the MOU.

Washington Federal was strongly capitalized as of June 30, with a Tier 1 capital ratio of 21.49%, more than three times the 6% level most banks and thrifts need to be considered well capitalized by regulators. The company already made one major acquisition this year, picking up the failed Horizon Bank of Bellingham, Wash., with the FDIC agreeing to cover 80% of losses on $1 billion of acquired assets. Horizon also acquired 18 branches as part of the deal.

Earnings: Washington Federal's ROA for the first half of 2010 was 1.03%, although the company has a way to go to get back to its earnings performance before the crisis began. ROA was 1.40% in 2007 and 1.67% in 2006, according to SNL.

Asset Quality: Washington Federal's net charge-off ratio for the first half of 2010 was 2.21%, the highest among this group of ten regional holding companies. But with the company turning a profit and having so much excess capital, this is a manageable loan loss pace.

Prospects: On Friday Sandler O'Neill initiated coverage of Washington Federal with a buy rating and a price target of $17. But analyst Joe Fenech added that the regulatory order "introduces an element of uncertainty to the story and is potentially disruptive to the near-term strategic plan, which we had hoped would include leveraging excess capital through multiple FDIC-assisted transactions."

Shares of CVB Financial ( CVBF) of Ontario, Calif. closed at $7.66 Thursday, down 10% year-to-date. Based on a quarterly payout of 8.5 cents a share, the stock was yielding 4.44%.

The company's shares slid 22% on August 10, after it was revealed that the Securities and Exchange Commission had issued a subpoena for information on CVB's loan underwriting, reserve provisioning and risk-grading.

CVB's management said it didn't know what led to the SEC's investigation.

Prior to the order, the company appeared to be firing on all cylinders, with improving earnings and capital ratios, along with minimal loan losses.

Earnings: ROA for the first half was 1.03%, which exceeds a pre-crisis ROA of 1.00% in 2007, and is inching toward a "normalized" 1.22% in 2006.

Asset Quality: CVB's net charge-off ratio for the first half was a quite-manageable 0.68%.

Prospects: The major pullback in the shares following the SEC subpoena could present an excellent buying opportunity. There's no way of know whether the investigation will lead to anything major, and even if it does, it is doubtful that the company's state and federal banking regulators would have missed credit reporting deficiencies requiring CVB to recognize major losses or need to raise capital.

In a report saying that the SEC subpoena was fueling "excess speculation," FIG Partners analyst maintained his "outperform" rating on the shares, with a 12-month target of $12.00.

Shares of Trustmark Corporation ( TRMK) of Jackson, Miss. were down 9% year-to-date, closing at $20.04 Thursday. The stock was yielding 4.59% on a quarterly dividend payout of 23 cents.

Earnings: ROA for the first half of 2010 was 1.07% and earnings have been remarkably steady through the crisis, with ROA of about 1% for 2008 and 2009, although earnings performance was down from an ROA 1.23% in 2007.

The company's earnings comfortably support the dividend and Trustmark was strongly capitalized as of June 30, with a Tier 1 capital ratio of 13.53%.

Asset Quality: The net charge-off ratio for the first half of 2010 was 0.90% - an easily manageable level.

Prospects: Shares were trading for 14.1 times the consensus 2010 earnings estimate among analysts polled by Thomson Reuters. Jeff Davis of Guggenheim Securities has a neutral rating on the shares, saying that while Trustmark is a "well managed institution," the shares are reasonably valued. Davis added that "acquisitions are possible."

Community Bank System ( CBU) of De Witt, N.Y. closed at $23.17 Thursday, up 22% year-to-date, and the best stock performer during 2010 among this group of holding companies. With a quarterly payout of 24 cents, the shares had a dividend yield of 4.14%.

Earnings: The company's ROA for the first half of 2010 was 1.11%, beating its earnings performance for the previous four full years.

Asset Quality: Community Bank System's net charge-off ratio for the first half of 2010 was a very low 0.21%.

Prospects: The shares appeared to be reasonably valued, at 2.7 times tangible book value and 13 times the consensus earnings estimate for 2010. Guggenheim Securities analyst David Darst has a neutral rating on the shares, saying that Community Bank System "is currently operating at a peak earnings level."

Shares of Commerce Bancshares ( CBSH) of Kansas City, Mo. closed at $37.20 Thursday, down 3% year-to-date.

The company was strongly capitalized with a Tier 1 capital ratio of 14.11% as of June 30.

Earnings: Commerce's ROA for the first half of 2009 was 1.15%, and the company's pre-crisis performance would indicate potential for more earnings improvement, as the ROA was 1.34% in 2007 and 1.54% in 2006.

Asset Quality: The net charge-off ratio for the first half of 2010 was 1.03%, and overall asset quality improved over the quarters ended June 30.

Prospects: Commerce's shares were trading for 14.5 times the consensus 2010 earnings estimate and didn't appear cheap. John Rodis of Howe Barnes Hoefer & Arnett downgraded his rating on the shares to neutral on August 4, saying they were fully-valued. The shares have pulled back 6% since then.

Cullen/Frost Bankers ( CFR) of San Antonio, Texas closed at $52.63 Thursday, up 7% year-to-date.

The company was included among TheStreet's 10 Banks Hurt By Overdraft "Opt-In" Law, since it was among the 10 large holding companies with the highest percentage of second-quarter operating revenue derived from fees on deposit accounts.

Earnings: For the first half of 2010, Cullen Frost's ROA was 1.21% which was very good earnings performance considering the economic environment, although a way off from ROA in excess of 1.5% achieved 2006-2008.

Asset Quality: The net charge-off ratio for the first half of 2010 was a low 0.54% and overall credit quality improved over the past two quarters.

Prospects: Shares appeared a bit pricy at 15.6 times the consensus earnings estimate of $3.44 for 2010, however, when moving out to the consensus estimate of $4.26 for 2012, the P/E ratio drops to a more attractive 12.6. Brett Rabatin of Sterne Agee has a buy rating on the shares, calling Cullen/Frost "a solid name to own in the current environment."

Shares of New York Community Bancorp ( NYCB) of Westbury closed at $16.13 Thursday, up 16% during 2010.

Based on a quarterly payout of 25 cents a share, the stock's dividend yield was a very attractive 6.20%.

New York Community has taken full advantage of the bargains available from bank failures, picking up 66 branches in Ohio, Florida and Arizona along with $11 billion in assets from the failed AmTrust in December, in an FDIC-assisted transaction. Another smaller acquisition of the failed Desert Hills Bank of Phoenix, Ariz., took place in March.

Please see Laurie Kulikowski's coverage of New York Community as part of the Best In Class series, for an exclusive interview with CEO Joe Ficalora and insight into the company's unique market niche in multifamily lending in New York City.

Earnings: New York Community's ROA for the first half of 2010 was 1.23%, reflecting in part gains on the Desert Hills acquisition. ROA for 2009 was 1.20%, when the company benefitted from gains recognized on the AmTrust acquisition.

Asset Quality: While New York Community experienced an increase in problem loans during the crisis, actual loan losses remained low, and the net charge-off ratio for the first half of 2010 was 0.20%, the lowest among this group of ten bank holding companies.

Prospects: New York Community's 6.20% dividend yield certainly stands out and while shares were trading for 13.4 times the 2010 consensus earnings estimate among analysts polled by Thomson Reuters, the P/E ratio based on the 2012 estimate is just 10.6. This is a solid franchise with a conservative lending niche among rent-controlled and rent-stabilized apartment buildings in New York, and with shares pulling back 8% this month, investors are looking at a buying opportunity.

Prosperity Bancshares ( symbol) of Houston, Texas has seen its shares drop 23% this year, closing at $30.75 Thursday.

The company acquired 46 branches and $3.1 billion in deposits from the FDIC when Franklin Bank of Houston failed in November 2008.

Earnings: ROA for the first half of 2010 1.37%, just below the company's pre-crises ROA of 1.38% in 2007.

Asset Quality: Prosperity has reported very low nonperforming assets through the credit crisis, and its net charge-off ratio for the first half of 2010 was a very low, at 0.40%.

Prospects: On Thursday, Prosperity's shares were trading for 11.5 times the consensus earnings estimate for 2010. Following the company's second-quarter earnings release, Bain Slack of KBW reiterated his "market perform" or neutral rating on the shares, with a 12-month target of $40.00. That's a 30% premium over Thursday's close. Slack summed up his feelings on the company, saying "PRSP is successfully managing...everything."

Shares of Bank of Hawaii ( BOH) closed at $47.54 Thursday, increasing 3% year-to-date. Shares were yielding 3.79% on a quarterly dividend payout of 45 cents.

Earnings: ROA for the first half of 2010 was an excellent 1.59% -- the best earnings performance among this group of holding companies. Please see TheStreet's earnings coverage for a detailed review of Bank of Hawaii's second-quarter results.

Asset Quality: The net charge-off ratio for the first half was 1.17%, although overall asset quality has remained strong through the credit crisis.

Prospects: KBW analyst Robert Bohlen has a market perform rating on the shares, with a 12-month target of $51.

-- 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.

More from Stocks

Market Can't Handle the Wild Ride: Cramer's 'Mad Money' Recap (Thursday 5/24/18)

Market Can't Handle the Wild Ride: Cramer's 'Mad Money' Recap (Thursday 5/24/18)

Replay: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Replay: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Canopy Growth: First Cannabis Firm on the NYSE Fails to Generate Buzz

Canopy Growth: First Cannabis Firm on the NYSE Fails to Generate Buzz

Video: This Startup Connects Buyers and Sellers of Legal Marijuana

Video: This Startup Connects Buyers and Sellers of Legal Marijuana

Dow, S&P 500 and Nasdaq Tumble After Trump Calls Off North Korea Summit

Dow, S&P 500 and Nasdaq Tumble After Trump Calls Off North Korea Summit