10 Community Bank M&A Targets, Revisited

NEW YORK ( TheStreet) -- The pace of banking industry consolidation has lagged this year. This is no surprise, since so many banks are trading below book value.

According to SNL Financial, there were 105 bank and thrift deals announced this year through Tuesday for a total value of $16.3 billion. While the pace of deals trailed the 207 announced deals in 2010, last year's total value of announced deals was lower, at $12.1 billion. Among deals for which the underlying detail is available, the average purchase price this year has been 110% of the targets' tangible book value, declining slightly from 111% last year.

FBR Capital Markets analyst Brett Scheiner says that "in the near term, whole bank M&A of community banks at big prices is either going to be relatively slow or on hold entirely, as management teams attempt to firm-up their confidence on both their own and potential acquired loan books' credit."

Over the long term, however, it seems likely that the industry's remarkable consolidation over recent decades will continue.

V. Gerard Comizio -- the chair of the Paul Hastings Banking and Financial Institutions practice, in firm's the Washington, D.C., office -- says that "a large number of banks are in strategic planning mode," with major considerations including Basel III capital requirements, which Comizio says are facing increasing resistance from the industry and "the aggregate regulatory compliance burden of the Dodd-Frank Act, which hasn't yet to be felt."

Comizio says "many community banks have determined the regulatory and capital burdens are too much for them," and hints that much larger deals may be coming. Every bank with over $50 billion in assets will be required to submit to the Federal Deposit Insurance Corp. a contingency plan for a quick, orderly liquidation in the event of failure, while bank holding companies are required to submit similar plans to the Federal Reserve. "If the regulators don't accept your living will submission, you could be asked to raise capital or divest assets," he says.

The largest deal announced so far during 2011 is Capital One's ( COF) agreement to acquire ING Direct from ING Groep ( ING), valued at $9 billion, or just over tangible book value. The deal is facing opposition from consumer groups, and after a request from Rep. Barney Frank (D., Mass.), the senior Democrat on the House Financial Services Committee, the Federal Reserve agreed to extend the public comment period preceding the regulator's approval of the deal.

The second-largest largest deal announced this year is PNC Financial Services Group's ( PNC) agreement to purchase RBC Bank (USA) from Royal Bank of Canada ( RY), for $3.45 billion in cash and stock, which is just below RBC Bank (USA)'s tangible book value, according to SNL.

This year's third-largest announced bank deal was Comerica's ( CMA) acquisition of Sterling Bancshares ( SBIB), valued at $1 billion, or 230% of tangible book value. The deal closed in July.

The next largest 2011 deal was 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 completed in July.

Earlier this year, when so many bank stocks were trading much higher, several analysts helped us identify a group of 10 community banks that could be likely targets for acquirers. For the three potential targets identified by Scheiner, the analyst now says "at the current valuations, I can't image that they'd be in a hurry to sell."

The following are updated looks at the 10 community bank targets, by ascending asset size:

10. Guaranty Bancorp

Shares of Guaranty Bancorp ( GBNK) of Denver, Colo. closed at $1.16 Wednesday, down 18% year-to-date.

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.

Guaranty will hold a special meeting of stockholders on Sept. 29, to vote on a transaction agreement with holders of the company's series A convertible preferred shares, to app51,902,000 shares, as part of an acceleration of the preferred to common shares. The majority of the preferred is held by a group of private equity funds. Two of the fund managers involved with the conversion have agreed with the Federal Reserve to limit their common stock holdings 14.9% of outstanding common shares and 9.9% of voting shares, respectively, meaning that some of the newly issued common shares are likely to be nonvoting shares.

Following the appointment of former CFO and chief operating offer Paul Taylor to president and CEO in May, Guaranty in late July promoted senior vice president and controller Christopher Treece to CFO.

Guaranty Bancorp had $1.7 billion in total assets as of June 30 and reported second-quarter operating net income of $1.4 million. After paying $1.5 million in dividends on preferred shares, the second-quarter net loss to common stockholders was $109 thousand. In comparison, the net loss to common stockholders in the second quarter of 2010 was $5.7 million, or 11 cents a share.

The earnings improvement reflected a decline in the provision for loan losses to $1 million during the second quarter, from $8.4 million a year earlier.

Nonperforming assets totaled $72.2 million, or 4.13% of total assets, as of June 30, improving from 5.38% a year earlier. The annualized ratio of net charge-offs to average loans was 3.24% during the second quarter, which Taylor said reflected a "planned reduction in problem loans." Loan loss reserves covered 3.56% of total loans as of June 30.

Taylor said that Guaranty Bancorp achieved its "highest quarter of new loan bookings in several years" during the second quarter, with "$71.4 million of new loans with over 40 different businesses during the quarter as well as extending $22.8 million of credit on existing loans," adding that the bank's "pipeline of potential new loans continues to grow."

According to SNL Financial, Guaranty Bancorp's shares are trading for 0.7 times tangible book value. The company's tangible common equity ratio was 4.95% as of June 30, according to SNL, increasing from 4.42% at the end of the previous quarter. The company's regulatory total risk-based capital was a strong 16.22% as of June 30, increasing from 15.82% the previous quarter.

Scheiner says that "with the management change at the top, the bank is likely to continue to try and make a go of it independently. Whether or not the longer term thought process would be to sell, they will be best served by generating some reasonable level of pre-credit earnings," adding that "they wouldn't get much selling here."

Both analysts Covering Guaranty Bancorp have neutral ratings on the shares.

9. Seacoast Banking Corp. of Florida

Shares of Seacoast Banking Corp of Florida ( SBCF) of Stuart closed at $1.44 Wednesday, declining 1% year-to-date.

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, and is now current on all dividend payments on government-owned preferred shares. The company in August notified trustees for its trust-preferred securities that all accrued and unpaid dividends on those securities would be made current in September.

Seacoast returned to operating profitability during the first quarter and reported second-quarter net income to common shareholders of $176,000 to common shareholders. In a recent interview with TheStreet, CEO Dennis S. Hudson III was upbeat about the bank's improving market share, adding that in Seacoast's home market in Southeast Florida, he was seeing "solid floor established in Florida for most real estate product."

The company reported its nonperforming loans had fallen for seven straight quarters, through June 30. At the end of the second quarter, nonperforming assets made up 3.46% of total assets, improving from 5.25% a year earlier. The company's tangible common equity ratio -- which excludes certain intangible assets, such as deferred tax assets -- was 5.84% as of June 30, was up from 5.60% the previous quarter, but down from 6.60% a year earlier. Seacoast said when it announced its second-quarter results that "a future recapture of the deferred tax asset valuation allowance would add (proforma) approximately 200 basis points to the TCE ratio."

Seacoast's shares are trading for 1.1 times tangible book value, according to SNL Financial.

Scheiner says that based on Hudson's upbeat comments, Seacoast now seems likely "to go it alone and improve the operating profile of the bank," which will benefit shareholders whether or not the company eventually decides to sell.

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

8. Cardinal Financial

Shares of Cardinal Financial ( CFNL) of McLean, Va. closed at $10.04 Wednesday, down 13% year-to-date.

The company had $2.3 billion in total assets as of June 30, operating 27 branches in the Washington, D.C. area and was also mentioned in January by Brett Scheiner as a possible acquisition candidate.

Cardinal Financial also appeared on KBW's Potential Sellers List.

Second-quarter net income was $5.9 million, or 20 cents a share, improving from $4.7 million, or 16 cents a share, a year earlier. The provision for loan losses declined to $750 thousand in the second quarter, from $2.7 million a year earlier. The company's second-quarter return on average assets (ROA) was 1.14%, for the best earnings performance among the community banks listed here.

Asset quality was very strong, with nonperforming assets making up 0.46% of total assets as of June 30. The first-quarter net charge-off ratio was 0.49%, and reserves covered 1.56% of total loans as of June 30.

The shares trade for 11 times the consensus 2012 earnings estimate of 87 cents a share, among analysts polled by FactSet. According to SNL Financial, the shares trade for 1.3 times tangible book value.

Scheiner says that "Cardinal continues to perform well, but it is the wrong environment to receive the type of multiple that they would hope for," if the company decided to sell.

Five of the nine analysts covering Cardinal Financial rate the shares a buy, while the remaining four analysts all have neutral ratings.

7. Southwest Bancorp

Shares of Southwest Bancorp ( OKSB)Stillwater, Okla. closed at $4.43 Wednesday, for a year-to-date decline of 64%.

The company had $2.7 billion in total assets as of June 30, 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 were 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.

The company reported a second-quarter net loss to common shareholders of $4 million, or 21 cents a share, compared to earnings of $3.4 million, or 19 cents a share, during the second quarter of 2010.

The second-quarter loss sprang from a $20.1 million provision for loan losses, which Southwest Bancorp's CEO Rick Green said was taken "as a result of new appraisals received on collateral dependent commercial real estate loans from states outside of our home markets of Oklahoma, Texas, and Kansas."

Nonperforming assets totaled $190.1 million, or 7.15% of total assets as of June 30, increasing from 4.64% a year earlier. The second-quarter net charge-off ratio was 4.76%, and reserves covered 2.53% of portfolio loans as of June 30.

Southwest Bancorp's regulatory capital ratios remained strong, with a Tier 1 leverage ratio of 16.25% and a total risk-based capital ratio of 20.20% as of June 30, although the company in July "determined to defer future payments of interest on our debentures and dividends on related trust preferred securities," and also deferred dividend payments on the preferred shares held by the U.S. Treasury for the TARP assistance.

The shares trade for less than a third of tangible book value, according to SNL.

While Southwest Bancorp clearly has its work cut out for it as the company works through a late-cycle decline in credit quality, and the consensus among analysts polled by FactSet is for the company to lose nine cents a share in 2012, some analysts think the market has over-reacted.

The four analysts covering Southwest Bancorp are evenly split between buy ratings and neutral ratings.

6. Pinnacle Financial Partners

Shares of Pinnacle Financial Partners ( PNFP) of Nashville, Tenn. closed at $10.88 Wednesday, down 20% year-to-date.

The company had $4.8 billion in total assets as of June 30 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," but that bank stock landscape has clearly changed, as the market has priced-in a prolonged economic slump.

Back in April, Sterne Agee analyst Peyton Greene said 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." At that time, the analyst said that "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). At this point, with Bank of America facing seemingly endless risk from mortgage litigation, the nation's largest bank would be a very unlikely bidder. Regions would probably need to repay the $3.5 billion in TARP money it owes, before considering a bid.

Pinnacle reported second-quarter net income available to common shareholders of $4.8 million, or 14 cents a share, compared to a loss of $27.9 million, or 85 cents a share, in the second quarter of 2010, when the company reported a $30.5 million provision for loan losses. The provision declined to $6.6 million in the most recent quarter.

Nonperforming assets totaled $112.1 million, or 2.32% of total assets as of June 30, improving from 3.25% a year earlier. The second-quarter net charge-off ratio was 1.14%, while reserves covered 3.44% of total loans as of June 30.

On August 15, Jeff Davis of Guggenheim Securities reiterated his neutral rating for Pinnacle Financial Partners, lowered his price target for the shares to $14 from $15, "to reflect the lower multiple environment and less consideration of a potential acquisition over the next year given the subdued M&A environment." The analyst added that "even if the board never elects to sell PNFP, we think some premium for the potential will usually be reflected in the shares given its #4 market share position in the Nashville" area.

The shares trade for 15 times the consensus 2012 earnings estimate of 73 cents, and just above tangible book value, according to SNL.

Out of 12 analysts covering Pinnacle Financial, one rates 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 ( BPFH) closed at $5.86 Wednesday, down 10% year-to-date.

The company had $6 billion in total assets as of June 30.

KBW Chris McGratty told TheStreet earlier this year that that Boston Private was "a good opportunity for investors to consider," since it had "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."

Carlyle Financial Services Ltd. and affiliates controlled just under 10% of Boston Private's common shares, according to a late-August filing.

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 second-quarter net income attributable to common shareholders of $14.3 million, or 19 cents a share, compared to a net loss of $5 million, or seven cents a share, in the second quarter of 2010. The second quarter profit mainly reflected a $2.2 million transfer from loan loss reserves. A year earlier, the company added $15 million to reserves.

Boston Private reported net recoveries during the second quarter of $650 thousand, since recoveries on previously charged-off loans exceeded newly recorded loan losses.

Nonperforming assets totaled $94.4 million, or 1.56% of total assets as of June 30 declining from 1.92% a year earlier. Loan loss reserves covered 2.24% of total loans as of June 30.

Total revenue increased 11% year-over-year, to $78.3 million in the second quarter.

Following the earnings announcement, Christopher Marinac of FIG Partners reiterated his neutral "market perform" rating for Boston Private, saying "patient investors may see a $10 stock price if they are willing to wait for the company to deliver on pledged cost reductions and then execute on moderate external growth in loans, investment management revenues, and overall profits."

The shares trade for 10 times the 2012 earnings estimate of 55 cents a share.

Out of eight 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 15% year-to-date, closing at $24.50 Wednesday.

The company had $6.7 billion in total assets as of June 30.

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 second-quarter net income of $16.7 million, or 43 cents a share, increasing from $8.1 million, or 22 cents a share, in the second quarter of 2010. The company's second-quarter ROA was 1.08%, second-best among this group of 10 banks.

The year-over-year earnings improvement reflected a 23% increase in net interest income to $71.1 million, reflecting a 15% increase in total loans and an improvement in the company's net interest margin to 4.86% in the second quarter from 4.32% a year earlier. Earnings were also boosted by a 45% decline in the provision for loan losses to $8 million.

Nonperforming assets totaled $105.2 million, or 1.57% of total assets as of June 30, improving from 3.02% a year earlier. The second-quarter net charge-off ratio was 0.86% and reserves covered 1.31% of loans held for investment, as of June 30.

After meeting with the company's management team, Brett Rabatin of Sterne Agee on Sept. 2 reiterated his neutral rating for the shares, saying the shares appeared "TCBI should continue to take market share in its lending businesses, and the outlook is for higher profitability despite the environment given expected credit quality improvement."

The shares trade for 11.6 times the consensus 2012 EPS estimate of $2.02, and 1.7 times tangible book value, according to SNL.

The 12 analysts covering Texas Capital are evenly split between buy ratings and neutral ratings.

3. First Midwest Bancorp

Shares of First Midwest Bancorp of Itasca, Ill. closed at $8.02 Wednesday, down 30$ year-to-date.

The company had $8.1 billion in total assets as of June 30, and has expanded with four acquisitions 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.

The company owes $193 million in TARP money.

Sterne Agee analyst Kenneth James has called Chicago a "stressed market poised for consolidation."

First Midwest reported second-quarter net income applicable to common shares of $8.1 million, or 11 cents a share, increasing from $5.2 million, or seven cents a share, a year earlier. The provision for loan losses for the second quarter was $18.8 million, declining from $21.5 million in the second quarter of 2010.

The company reported that nonperforming assets made up 2.74% of total assets as of June 30, improving from 3.37% a year earlier. The second-quarter ratio of net charge-offs to average loans was 1.56%, and loan loss reserves appeared more than adequate, covering 2.73% of total loans.

The shares trade for 10 times the consensus 2012 earnings estimate of 79 cents a share among analysts polled by FactSet, and 0.9 times tangible book value, according to SNL Financial.

On Thursday, Kenneth James upgraded First Midwest to a buy, with a $11 price target, saying the shares "have priced in a recession as severe as the last historic downturn," and that the company is "priced below peers on most valuation metrics, particularly tangible book value, pre-provision, pre-tax income (PPI) and deposits."

Three of the nine analysts covering First Midwest rate the shares a buy, while the remaining analysts all have neutral ratings.

2. MB Financial

Shares of MB Financial of Chicago closed at $15.81 Wednesday, down 9% year-to-date.

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 was also included on KBW's Potential Buyers Who Could Become Sellers List.

The company had $10 billion in total assets as of June 30, 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.

The company reported a second-quarter net loss to common stockholders of $10 million, or 18 cents a share, mainly reflecting a $61.3 million provision for credit losses, as MB Financial sold loans with a carrying value of $281.6 million (prior to their transfer to held-for-sale), including $156.3 million in nonperforming loans. The company received $194.6 million for the loans sold, net of expenses, recognizing $87 million in charge-offs from the sale.

MB Financial reported a nonperforming assets ratio of 2.40% as of June 30, improving from 3.64a year earlier.

According to SNL, the company's Tier1 common capital ratio was 11.47% as of June 30.

Following the second-quarter earnings announcement, FIG Partners analyst Brian Martin reiterated his "outperform" or buy rating on MB Financial with a $24 price target, and said the loan sale was "a clear positive as it put a good chunk of MBFI's credit problems in the rear view mirror," which " paved the way for an acceleration in the repayment of TARP and or the ability to become more aggressive on the M&A front."

The shares trade for 9.5 times the consensus 2012 EPS estimate of $1.66, and 1.2 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 $10.15 Wednesday, down 36% year-to-date.

The company had $13.4 billion in total assets as of June 30.

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 second-quarter net income of $12.8 million, or 15 cents a share, compared with a net loss of $12.6 million, or 15 cents a share, in the second quarter of 2010. The second-quarter provision for credit losses declined 48% year-over-year, to $32.2 million.

Nonperforming assets totaled $531 million as of June 30. The nonperforming assets ratio was 3.97% as of June 30, increasing from 2.76% a year earlier. The second-quarter net charge-off ratio was 1.42% and reserves covered 2.14% of total loans as of June 30.

CEO Aubrey Patterson said "In addition, we experienced a decline in nonaccrual loan formation for the third sequential quarter and a decline in loans with early-stage delinquencies of 30 to 89 days for the fifth sequential quarter." The CEO added that "new loans placed on non-accrual status during the quarter represent the lowest level of additions in eight quarters," and while he was "encouraged" by the improving credit quality, Patterson remained "cautious about short-term prospects for continued improvement given slow economic growth and persistently high unemployment."

Guggenheim Securities analyst Jeff Davis in August reiterated his neutral rating for BancorpSouth, but lowered his price target to $12 from $14, or just above the company's tangible book value per share, saying that "M&A speculation has provided support, in our view, at times since credit issues emerged, but that too may be less of a factor with M&A presently subdued."

The shares trade for 12 times the consensus 2012 earnings estimate of 83 cents a share and 0.9 times tangible book value, according to SNL Financial.

Out of 11 analysts covering BancorpSouth, one rates the shares a buy, nine have neutral ratings, and one analyst recommends investors sell the shares.

-- Philip van Doorn in Jupiter, Fla.

To contact the writer, 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.

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