10 Bank Stocks in the M&A Crosshairs (Update 2)

Updated with Federal Reserve approval of Capital One's deal to acquire ING Direct (USA), and market reaction.

NEW YORK ( TheStreet) -- There are plenty of good reasons for plenty of community banks to consider selling to larger rivals, and shareholders can be rewarded when the truth rears its ugly head.

After a slow 2011 for industry consolidation, there are some signs that boards of directors at weaker performing banks are starting to lose patience, while rising share prices for some acquirers and possible entries into the U.S. market by foreign competitors could jump-start bank M&A later this year.

V. Gerard Comizio -- the chair of the Paul Hastings Global Banking Group in the firm's Washington, D.C., office -- says that some "regional and community banks are motivated," and while "market conditions are not optimum, if they have a good and stable platform to sell, and if they are concerned with increased regulatory compliance costs and increased capital requirements, they may be considering a sale."

Comizio adds that "foreign banks are looking for opportunities to expand in the U.S," and he is "seeing some interest from some Asian and South American banks, not so much Europe."

A number foreign holding companies have been reducing U.S. exposure, including ING Groep ( ING), which is selling its ING Direct (USA) subsidiary to Capital One ( COF), HSBC ( HBC), selling its U.S branch network to First Niagara Financial Group ( FNFG) and its U.S. credit card unit to Capital One, and Royal Bank of Canada ( RY), which is selling its RBC Bank (USA) subsidiary to PNC Financial Services Group ( PNC).

After seventh months of extended public comment periods, three public hearings and other delays, the Federal Reserve finally approved the Capital One/ING Direct deal late Tuesday, setting the stage for the Office of the Comptroller of the Currency to approve the Capital One/HSBC deal. Capital One said it expects to complete its ING Direct acquisitions "within the next few days."

Capital One's shares were up over 3% to $49.57 during the first few minutes of trading on Wednesday, as investors breathed a sigh of relief. Meanwhile, Citigroup analyst Donald Fandetti saw 21% upside for the shares, from Tuesday's close.

FBR analyst Brett Scheiner says that "between the regulatory issues, the flattening yield curve, and bank board expectations of higher prices based on pre-cycle valuation, there are a number of factors entering into management teams heads when they thing about selling their banks."

"If you don't earn a reasonable return on equity -- call it 10% -- and you don't anticipate doing so, the board has an obligation to at least consider other alternatives," says Scheiner, who also says that M&A activity has been slow because some sellers have worked to clean up credit quality in order to maximize sale value.

With that cleanup continuing, while potential sellers look for full value and potential buyers "want to buy something cheap," Scheiner thinks that M&A won't really pick up steam until at least the second half of 2012.

In order to come up with our new list of 10 community bank M&A targets, we asked several analysts to name takeout candidates, and narrowed the group down to 10 that posted 2011 returns on equity of less than 10%, with one notable exception, because of a one-time gain on a government-assisted acquisition of a failed bank. All 10 of these names trade at high multiples to consensus 2011 earnings estimates.

All data was provided by HighlineFI.

Here are the TheStreet's 10 community bank M&A targets for 2012, in descending order by price to tangible book value:

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