10 Community Bank M&A Targets

NEW YORK ( TheStreet) -- The banking industry's consolidation is continuing this year, but the pace hasn't picked up yet, and the premiums being paid for non-failing institutions have actually declined from last year.

According to SNL Financial, there were 47 bank and thrift deals announced this year through last Friday for a total value of $2.9 billion, following 207 in 2010, for a total value of $12.1 billion. Among deals for which the underlying detail is available, the average purchase price this year has been 109% of the targets' tangible book value, declining slightly from 111% last year.

"Right now there are a lot of sellers that are selling out of weakness. There are 7500 banks out there today and a lot of them are too small to compete. These will be the banks that sell," said KBW Analyst Chris McGratty in an interview with TheStreet. The analyst added that merger activity would pick up in 2012 and 2013, with "Regulatory pressure and capital pressure building, and many boards facing fatigue."

The largest deal announced so during 2011 is Comerica's ( CMA) acquisition of Sterling Bancshares ( SBIB), valued at $1 billion, or 230% of tangible book value. The deal was approved Thursday by Sterling's shareholders, and is expected to close this quarter.

The next largest 2011 deal is People's United Financial's ( PBCT) agreement to acquire Danvers Bancorp for $489 million in cash and stock. SNL values the deal at 184% of Danvers Bancorp's tangible book value. The deal was announced in January and is expected to be completed during the second quarter.

Grow or Sell

Another recent purchase for a solid premium over book value was Valley National's ( VLY) agreement to purchase State Bancorp ( STBC) of Jericho, N.Y., in an exchange of shares that SNL values at $279 million, or 198% of the target's tangible book value.

When the two companies announced the merger deal, State Bancorp's CEO said that his company's shareholders were "receiving an attractive premium to the recent market price," but also made a frank statement about the challenges faced by community bankers: "The ever increasing regulatory and compliance costs and complexity are making it more difficult for the traditional community bank to independently produce long term attractive returns to shareholders."

Two of the banks McGratty mentioned as possible targets are in Chicago, which the analyst termed "the most fragmented market in the country," with MB Financial ( MBFI) and First Midwest ( FMBI) among possible targets for larger banks like U.S. Bancorp or Fifth Third Bancorp, which "are two that would expand in Chicago."

The two Chicago banks were included in TheStreet's list of 10 community bank targets back in January.

McGratty also mentioned Boston Private ( BPFH) as a target, mentioning City National ( CYN) and First Republic ( FRC) as possible entrants into the Boston market through an acquisition.

Chip MacDonald, a partner at Jones Day said that Boston Private had "struggled with their business model," selling-off some assets and some businesses," and had a new management team in place. "They seem to be stalled so they are a likely candidate," he said.

United Community Banks ( UCBI) of Blairsville, Ga., was included in TheStreet's previous list of 10 community bank targets, with Stephens, Inc. analyst Matt Olney saying that with its asset quality concerns, the company looked appropriate for "a different type of bidder," possibly for a private equity investor.

Instead of selling, United Community on March 31 raised $380 million in capital from a group of investors led by a subsidiary of group of institutional investors led by an affiliate of Corsair Capital, LLC. The company also announced plans to dispose of $293 million in problem assets.

With these moves, Guggenheim analyst Jeff Davis said in a report on Thursday that United Community could be an acquirer of smaller or weaker institutions as it would have difficulty generating "much growth on its own given the state of its core north GA market." Davis also said that eventually the investor group led by Corsair may push a sale of United Community, "if the M&A market becomes sufficiently robust; it is not today."

Chip MacDonald agreed that United Community would sell "if they could get a premium on their stock," since the "the private equity money is looking for a return," but said it was too early for a sale, since "they haven't finished their clean up their balance sheet."

We have therefore removed United Community from our list of 10 community bank takeover targets, replacing it with Boston Private.

Here are the 10 community bank targets, by ascending asset size:

10. Guaranty Bancorp

Shares of Guaranty Bancorp ( GBNK) of Denver, Colo. closed at $1.39 Friday, rising 7% over the previous year.

The company is one of three community bank targets named in January by FBR analyst Brett Scheiner, who cited credit problems, while adding that Guaranty Bancorp's market footprint in Denver could be attractive to buyers.

On May 4, the company announced that Paul Taylor had been appointed president and CEO subject to regulatory approval. Taylor had previously served as Guaranty Bancorp's CFO and chief operating officer.

Guaranty Bancorp had $1.8 billion in total assets as of March 31 and reported a first-quarter net loss to common stockholders of $972 thousand, or 2 cents a share, improving from a loss of $3.2 million, or 6 cents a share, in the first quarter of 2010. The improvement reflected a 50% reduction in the provision for loan losses to $2 million in the first quarter, a $714 thousand in gains on the sale of securities, and a reduction in expenses on repossessed real estate to $763 thousand, from $2.7 million a year earlier.

Nonperforming assets totaled $97.8 million, or 5.33% of total assets, as of March 31, compared to 5.02% a year earlier. The annualized ratio of net charge-offs to average loans was 0.75% for the first quarter, while loan loss reserves covered 4.16% of total loans as of March 31.

According to SNL Financial, Guaranty Bancorp's shares are trading for 0.9 times tangible book value. The company's tangible common equity ratio was a relatively low 4.42% as of March 31, according to SNL, although the company's regulatory total risk-based capital ratio was a strong 15.82%.

Scheiner has a "market perform" or neutral rating on the shares.

9. Cardinal Financial

Shares of Cardinal Financial ( CFNL) of McLean, Va. closed at $10.94 Friday, up 6% over the previous year.

The company had $2.1 billion in total assets as of March 31, operating 26 branches in the Washington, D.C. area and was also mentioned in January by Brett Scheiner as a possible acquisition candidate.

Cardinal Financial also appears on KBW's Potential Sellers List, with analyst Brian Klock rating the shares at "market perform," or neutral, with a $12.25 price target.

First-quarter net income was $5.2 million, or 18 cents a share, improving from $3.8 million, or 13 cents a share, a year earlier. The provision for loan losses declined to $1.1 million in the first quarter, from $2.4 million a year earlier. The company's first-quarter return on average assets (ROA) was 1.02%, making it, by far, the best earnings performer among the 10 banks listed here.

Asset quality was strong, with nonperforming assets making up 0.45% of total assets as of March 31. The first-quarter net charge-off ratio was 0.32%, and reserves covered 1.71% of total loans as of March 31.

The shares trade for 12 times the consensus 2012 earnings estimate of 89 cents a share, among analysts polled by FactSet. According to SNL Financial, the shares trade for 1.4 times tangible book value.

The eight analysts covering Cardinal Financial are evenly split between buy and hold ratings.

8. Seacoast Banking Corp. of Florida

Shares of Seacoast Banking Corp of Florida ( SBCF) of Stuart closed at $1.69 Friday, declining 20% over the previous year.

The company was also listed in January as a possible target by Brett Scheiner.

Seacoast owes $50 million in government bailout funds received through the Troubled Assets Relief Program, or TARP, in December 2008, and has deferred eight consecutive quarterly dividend payments to the government, according to SNL Financial.

For the first quarter, Seacoast reported a net loss to common shareholders of $579 thousand, or a penny a share, improving from a loss of $2.5 million, or 4 cents a share, in the first quarter of 2010. The provision for loan losses declined to $640 thousand in the first quarter, from $2.1 million a year earlier.

CEO Dennis Hudson said that with six consecutive quarters of credit quality improvement, the company was "poised to accelerate our business plan to increase profitability and ultimately position Seacoast as a top-tier community bank, measured by low risk, strong organic growth and increased shareholder value."

Seacoast reported that its nonperforming assets ratio was 4.34% as of March 31, improving from 5.44% a year earlier. The first-quarter net charge-off ratio was 1.32% and reserves covered 2.80% of total loans as of March 31.

Following the earnings announcement, FIG Partners analyst Christopher Marinac reiterated his "market perform" rating on the shares, with a $1.75 price target. Regarding takeout possibilities, the analyst said investors "may wish to speculate that SBCF no longer remains independent once credit impairments are behind it."

While Marinac views a takeout as possible, he said "there is a reasonable chance that the company stays independent for quite a while," since "SBCF would be benefitted by demonstrating a few quarters of core profits plus removing incremental credit risk to justify a strong valuation."

All 10 analysts covering Seacoast Banking Corp. of Florida have neutral ratings on the shares.

7. Southwest Bancorp

Shares of Southwest Bancorp ( OKSB)Stillwater, Okla. closed at $13.33 Friday, down 5% from a year earlier.

The company had $2.8 billion in total assets as of March 31, and owes $70 million in TARP money.

Stephens, Inc. analyst Matt Olney in January listed Southwest Bancorp as "a small takeout target in Oklahoma," adding that he didn't think the company had "plans to sell in the near term but they are in an attractive area so they would get offers." He also said that the Texas market is "the most attractive part of the country" for acquirers.

First-quarter net income available to common shareholders was $1.4 million, or 7 cents a share, declining from $3.3 million, or 17 cents a share, in the first quarter of 2010. The earnings decline was across the board, with a slight year-over-year increase in the provision for loan losses to $9.1million, while net interest income declined 5% to $25.4 million, noninterest income declined 22% to $3.2 million, and noninterest expenses increased slightly. The decline in noninterest income reflected lower sales of mortgages and student loans.

Nonperforming assets totaled $148.9 million, or 5.36 of total assets as of March 31, increasing from 3.79% a year earlier. The first-quarter net charge-off ratio was 1.90%, while reserves covered 2.82% of portfolio loans as of March 31.

The shares trade for 19 times the consensus 2012 earnings estimate of 71 cents, and 0.9 times tangible book value, according to SNL.

Two of the three analysts covering Southwest Bancorp rate the shares a buy, while the remaining analyst has a neutral rating.

6. Pinnacle Financial Partners

Shares of Pinnacle Financial Partners ( PNFP) of Nashville, Tenn. closed at $15.56 Friday, up 11% from a year earlier.

The company had $4.8 billion in total assets as of March 31 and owes $95 million in TARP money.

Matt Olney said in January that Pinnacle could have "a takeout price in excess of $16 because of its attractive Tennessee footprint." The shares are up 15% year-to-date.

In a report following the company's first-quarter earnings announcement, Sterne Agee analyst Peyton Greene said some of the recent rise in Pinnacle's shares reflected M&A speculation, and that the company's "penetration and concentration in the Nashville MSA make it an obvious target for would-be acquirers looking to deepen or extend their footprint into one of the most attractive and business friendly markets in the Southeast." The "the three superregional and money center banks that dominate the market" and could be potential bidders for Pinnacle Financial include Bank of America ( BAC), SunTrust ( STI) and Regions Financial ( RF).

Pinnacle reported first-quarter net income available to common shareholders of $2 million, or 6 cents a share, compared to a loss of $5.4 million, or 16 cents a share, in the first quarter of 2010. As would be expected at this point in the credit cycle, the earnings improvement sprang from a reduction in the provision for loan losses to $6.1 million from $13.3 million a year earlier.

Nonperforming assets totaled $132.4 million, or 2.75% of total assets as of March 31, improving from 3.18% a year earlier. The first-quarter net charge-off ratio was 1.22%, while reserves covered 2.46% of total loans as of March 31.

Following the earnings announcement, FIG Partners analyst Christopher Marinac lowered his rating on Pinnacle Financial to a neutral rating of "market perform," saying that although the company's favorable credit and revenue trends was "sustainable," its valuation was a bit high when compared to his firm's normalized earnings estimate $1.02 a share.

The shares trade for 21 times the consensus 2012 earnings estimate of 76 cents, and 1.6 times tangible book value, according to SNL.

Out of 13 analysts covering Pinnacle Financial, two rate the shares a buy, 10 have neutral ratings and the remaining analyst recommends selling the shares.

5. Boston Private Financial Holdings

Shares of Boston Private Financial Holdings closed at $6.66 Friday, down 4% from a year earlier.

The company had $6 billion in total assets as of March 31.

KBW Chris McGratty told TheStreet that Boston Private is "a good opportunity for investors to consider," since it has "been under a lot of stress and has raised capital from Carlyle," with the private equity investor looking to "monetize that in the next 18 months."

Over the past year, major events for Boston Private have included the company's repayment of its remaining TARP preferred shares last June, the appointment of Clayton Deutsch as new CEO, various other board of directors and senior management changes, the consolidation of its three banking subsidiaries, and $35 million in common equity raised.

Boston Private reported a first-quarter net loss to common shareholders of $425 thousand, or a penny a share, compared to net income to common shareholders of $1.6 million, or 2 cents a share, in the first quarter of 2010. The first-quarter loss reflected a $13.4 million provision for loan losses, increasing from $7.6 million a year earlier.

Nonperforming assets - including nonaccrual loans and repossessed real estate - totaled $122.7 million, or 2.05% of total assets, increasing from 1.73% a year earlier. The first-quarter net charge-off ratio was a low 0.26% of total loans, while reserves covered 2.25% of total loans as of March 31.

The bank reported that loan balances were flat during the first quarter, with planned declines in commercial real estate and construction exposure offset by "residential mortgage and commercial and industrial balances remaining strong at an annualized growth rate of 9%.

First-quarter fee revenue totaled $27.4 million, increasing 8% year-over-year, with improvements in private banking, investment management and advisory fee revenue.

Following the earnings announcement, Christopher Marinac of FIG Partners reiterated is neutral "market perform" rating for Boston Private, saying he expected "the company to post quarterly losses the next two quarters as credit marks over $125 million are necessary" on a total of "$430 million in classified loans."

The shares trade for 13 times the consensus 2012 earnings estimate of 51 cents.

Out of nine analysts covering Boston Private, two rate the shares a buy, while the remaining analysts all have neutral ratings.

4. Texas Capital Bancshares

Texas Capital Bancshares ( TCBI) of Dallas has seen its stock rise 36% over the past year, to close at $24.90 Friday.

The company had $6.1 billion in total assets as of March 31.

Matt Olney told TheStreet in January that TCBI's "franchise is very good and it is in a fantastic position to be acquired by any out of state bank looking to get into the state."

Texas Capital reported first-quarter net income of $11.9 million, or 31 cents a share, increasing from 7.6 million, or 21 cents a share a year earlier. The company's first-quarter ROA was 0.77%, second-best among this group of 10 banks.

The year-over-year earnings improvement reflected a 44% decline in the provision for loan losses to $7.5 million, but more importantly, a 17% increase in net interest income to $64.5 million, reflecting solid loan growth and the company's "ability to maintain and improve spreads on its loans." Noninterest income was up 11% year-over-year to $7.7 million, which Texas Capital Bancshares said in its earnings announcement was "primarily related to increase of $626,000 in brokered loan fees."

Nonperforming assets totaled $142.7 million, or 2.35% of total assets as of March 31, compared to 2.63% a year earlier. The first-quarter net charge-off ratio was 0.77% and reserves covered 1.49% of loans held for investment, as of March 31.

Following the earnings release, Brett Rabatin of Sterne Agee reiterated his neutral rating for the shares, saying the shares appeared "to be trading near fair value at present levels absent an increase in speculation about Texas M&A (we do not expect TCBI to be a near-term seller)."

The shares trade for 14 times the consensus 2012 earnings estimate of $1.83, and 1.7 times tangible book value, according to SNL.

Five of the 13 analysts covering Texas Capital rate the shares a buy, while the remaining analysts all have neutral ratings.

3. First Midwest Bancorp

Shares of First Midwest Bancorp of Itasca, Ill. closed at $12.38 Friday, down 13% from a year earlier.

The company had $8 billion in total assets as of March 31, and has expanded with three acquisition of failed banks over the past two years with assistance from the Federal Deposit insurance Corp., including Palos Bank & Trust of Palos Heights, Ill. in August, Peotone Bank & Trust of Peotone, Ill. in April 2010, and First DuPage Bank of Westmont, Ill., in October 2009.

First Midwest is one of two Chicago area banks mentioned in January as possible targets by John Rodis, who was then covering the company for Howe Barnes Hoefer & Arnett. Rodis cited "scarcity value" for acquirers seeking an entrance into the Chicago Market. More recently, the analyst told TheStreet that First Midwest and MBFI were longer-term targets, as they are looking to continue to expand through FDIC deals over the short term, and "neither management team really wants to sell."

The company is also included on KBW's Potential Buyers Who Could Become Sellers List, with Chris McGratty rating the shares at "market perform," with a $13 price target.

The company owes $193 million in TARP money.

Sterne Agee analyst Kenneth James has called Chicago a "stressed market poised for consolidation," and estimated that First Midwest's takeout value would be "$15-$16 per share, with TARP and likely Chicago credit marks weighing somewhat on the valuation."

First Midwest reported first-quarter net income applicable to common shares of $7.5 million, or 10 cents a share, increasing from $5.4 million, or 8 cents a share, a year earlier. The provision for loan losses for the first quarter was $19.5 million, increasing from 18.4 million in the first quarter of 2010.

The company reported that nonperforming assets made up 2.98% of total assets as of March 31, improving from 3.84% a year earlier. The first-quarter ratio of net charge-offs to average loans was 1.46%, and loan loss reserves appeared more than adequate, covering 2.66% of total loans.

The shares trade for 15 times the consensus 2012 earnings estimate of 83 cents a share, and for 1.4 times tangible book value, according to SNL Financial..

Two of the 12 analysts covering First Midwest, four rate the shares a buy, seven have neutral ratings and one analyst recommends selling the shares.

Following the first-quarter earnings release, Kenneth James said the shares were "near fair value absent more fervent M&A speculation."

2. MB Financial

Shares of MB Financial of Chicago closed at $19.73 Friday, down 15% from a year earlier.

MB Financial is the other Chicago-area holding company cited in January by John Rodis as a possible acquisition target, with "a good management team" and a ninth-place deposit market share.

The company is also included on KBW's Potential Buyers Who Could Become Sellers List, with Chris McGratty rating the shares at "market perform," with a $21 price target.

The company had $10.1 billion in total assets as of March 31, and owes $196 million in TARP money.

MB Financial has expanded through the credit crisis, with six FDIC-assisted acquisitions of failed institutions since the beginning of 2009, including the deposits and dome assets from Corus Bank in September 2009.

First-quarter net income available to common stockholders was $4.3 million, or 8 cents a share, improving from a loss of $1.6 million, or 3 cents a share, in the first quarter of 2010. The provision for loan losses declined to $40 million in the first quarter, from $47.2 million a year earlier.

MB Financial reported a nonperforming assets ratio of 3.96% as of March 31, improving from 4.21% the previous quarter, but higher than 3.58% a year earlier. The first-quarter net charge-off ratio was 3.38% and reserves covered 2.80% of total loans as of March 31.

Following the first-quarter earnings report, FIG Partners analyst Brian Martin reiterated his "outperform" or buy rating on MB Financial with a $23 price target, and said the company's quarter-over-quarter "improvement in credit has paved the way for MBFI to begin discussions with regulators regarding repayment of TARP."

The shares trade for 12 times the consensus 2012 earnings estimate of $1.67, and 1.5 times tangible book value, according to SNL Financial.

The 12 analysts covering MB Financial are evenly split between buy and hold ratings.

1. BancorpSouth

Shares of BancorpSouth ( BXS) of Tupelo, Miss. closed at $13.17 Friday, down 33% over the previous year.

The company had $13.5 billion in total assets as of March 31.

On April 29, the company announced it would cut its quarterly dividend from 11 cents to a penny, which CEO Aubrey Patterson said was done "to better preserve BancorpSouth's strong capital position." The latest dividend cut follow a reduction in the quarterly payout from 22 cents in January.

Matt Olney said in January that with a focus on smaller communities, BancorpSouth "would be a target of a regional such as Wells Fargo ( WFC).

BancorpSouth reported a first-quarter net loss of $494 thousand, or a penny a share, compared to earnings of $8.4 million, or 10 cents a share, in the first quarter of 2010. The first-quarter provision for credit losses was $53.5 million, rising from $43.5 million a year earlier.

Nonperforming assets totaled $561.4 million as of March 31, increasing 90% from a year earlier. The nonperforming assets ratio was 4.14% as of December 31. The first-quarter net charge-off ratio was 2.24% and reserves covered 2.15% of total loans as of December 31.

The shares trade for 15 times the consensus 2012 earnings estimate of 90 cents a share and 1.2 times tangible book value, according to SNL Financial.

Out of 12 analysts covering BancorpSouth, 11 have neutral ratings and one analyst recommends investors sell the shares. Following the first-quarter earnings release, Jeff Davis of Guggenheim Securities reiterated his neutral rating with a $15 price target, saying that although "while the Street sees a common raise," his firm does not, "because of the lack of parent leverage, easing loans, and confined NPA issues for now."

>>To see these stocks in action, visit the 10 Community Bank M&A Targets portfolio on Stockpickr.

-- Written by Maria Woehr in New York and Philip van Doorn in Jupiter, Fla.

To contact Philip van Doorn, click here: Philip van Doorn.

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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.