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:

10. Encore Bancshares

Encore Bancshares ( EBTX) of Houston has seen its stock rise 28% over the past year, closing Friday at $14.31.

The company was mentioned as a possible M&A target by Stephens, Inc. analyst Matt Olney, who says that the Houston location makes Encore "more attractive" than many of the other potential bank targets mentioned here.

Encore Bancshares had $1.5 billion in total assets as of Dec. 30. The company reported net earnings available to common shareholders of $1.3 million, or 11 cents a share, for 2011. That number is net of $4.1 million in "accelerated amortization of preferred stock discount" on $34 million in preferred shares that were held by the government for bailout assistance provided through the Troubled Assets Relief Program, or TARP.

Encore repaid the TARP money on Sept. 27.

Fourth-quarter earnings to common shareholders were $1.9 million, or 17 cents a share, compared to a net loss of $1.5 million, or 13 cents a share, when the company wrote-down $5.7 million in assets held for sale. The fourth-quarter return on average assets (ROA) was 0.56% and the return on average equity (ROE) was 5.52%.

SunTrust Robinson Humphrey analyst Jennifer Dembra has a neutral rating on Encore, saying on Jan. 27 that she was "favorably biased on the shares following a strong 4Q11," and considered the company "a likely seller over the next two to three years." Dembra estimates that Encore will earn 87 cents a share in 2012, followed by EPS of 76 cents in 2013.

The shares trade for 1.7 times tangible book value according to HighlineFI, and for 17 times the consensus 2012 EPS estimate of 83 cents.

Interested in more on Encore Bancshares? See TheStreet Ratings' report card for this stock.

9. Pinnacle Financial Partners

Shares of Pinnacle Financial Partners ( PNFP) of Nashville, Tenn., closed at $16.98 Friday, returning 15% from a year earlier.

Matt Olney originally mentioned Pinnacle as a potential target early last year, "because of its attractive Tennessee footprint."

The company owes $71.25 million in TARP money, having repaid $23.75 million in government bailout funds on Dec. 28.

Pinnacle had $4.9 billion in total assets as of Dec. 30. The company reported 2011 net income available to common shareholders of $37.2 million, or $1.09 a share, improving from a loss of $30.4 million, or 93 cents a share, in 2010. The earnings improvement reflected a significant decline in the provision for loan losses, but also a decline in interest expense.

The company's net interest margin -- the difference between a bank's average yield on loans and investments and it average cost for deposits and wholesale borrowings -- improved to 3.65% in the fourth quarter, from 3.29% a year earlier.

The 2010 ROA was 0.90% and the ROE was 6.25%, according to HighlineFI.

The shares trade for 1.5 times tangible book value, according to HighlineFI, and for 21 times the consensus 2012 EPS estimate of 81 cents.

FIG Partners analyst Brian Martin rates Pinnacle "Market Perform," with a price target of $16.75, saying on Jan. 20 that the company posted a solid fourth-quarter, "underscored by excellent progress in improving credit quality and growing the core earnings power of the bank," and that "Earnings power is expected to build in the coming quarters as the company expands loan volumes and increases its margin."

Martin estimates the company will earn 79 cents a share during 2012, followed by 2013 EPS of $1.16.

The analyst added that "repayment of the remaining TARP preferred remains a priority and is expected late in 2Q12 with no dilution to common shareholders."

Interested in more on Pinnacle Financial Partners? See TheStreet Ratings' report card for this stock.

8. MB Financial

Shares of MB Financial ( MBFI) of Chicago closed at $19.50 Friday, pulling back 5% from a year earlier.

The company is one of two Chicago-area franchises mentioned by FIG Partners analyst John Rodis, who says that "there's no doubt the industry needs to consolidate," which Chicago's over 200 community banks being a prime example.

MB Financial had $9.8 billion in total assets as of Dec. 31. The company owes $196 million in TARP money

MB Financial reported 2011 net income available to common shareholders of $28.3 million, or 52 cents a share, improving from $10.1 million, or 19 cents a share, in 2010. The main factor in the operating improvement was a decline in the provision for loan losses to $120.8 million in 2011, from $246.2 million, the previous year.

The 2011 ROA was 0.39% and the ROE was 2.85%.

The shares trade for 1.4 times tangible book value, according to HighlineFI, and for 13 times the consensus 2012 EPS estimate of $1.48.

FIG Partners analyst Brian Martin rates MB Financial "Outperform," with a price target of $21, saying on Jan. 31 that the company achieved a respectable fourth-quarter return on tangible common equity of 9.3%, and that "highlights included a return to loan growth after a period of contraction, an uptick in the margin, and continued improvement in credit quality."

Martin also said that "TARP repayment is likely a near term event given advanced discussions with regulators."

Interested in more on MB Financial? See TheStreet Ratings' report card for this stock.

7. ViewPoint Financial Group

Shares of ViewPoint Financial Group ( VPFG) of Plano, Texas, closed at $14.50 Friday, returning 11% over the previous year.

ViewPoint is another attractive Texas franchise mentioned by several analysts as a possible takeout target.

The company on Dec. 9 announced an agreement to Highlands Bancshares of Dallas, for in an exchange of shares valued at $71 million, bringing on $508 million in assets, with six branches in North Texas.

ViewPoint has not yet announced its fourth-quarter results.

ViewPoint had $3.2 billion in total assets as of Sept. 30, and reported net income of $16.6 million, or 51 cents a share, for the first three quarters of 2011, improving from $11.3 million, or 38 cents a share, a year earlier, mainly from a decline in interest expense. The net interest margin improved to 2.84% during the first three quarters of 2011, from 2.74% a year earlier.

The ROA for the first three quarters of 2011 was 0.77%, according to HighlineFI, and the ROE was 5.40%.

The shares trade for 1.2 times tangible book value, according to HighlineFI, and for 23 times the consensus 2012 EPS estimate of 64 cents.

Sterne Agee analyst Mike Shafir rates ViewPoint a "Buy," with a $15 price target, and said after the Highlands deal was announced that the deal was "reasonable," for a "a commercial franchise (C&I loans 27%) with clean credit metrics and 20% non-interest bearing deposits."

Shafir estimates that ViewPoint will report full-year 2011 EPS of 61 cents, followed by EPS of 60 cents in 2012 and 65 cents in 2013.

Interested in more on ViewPoint Financial Group? See TheStreet Ratings' report card for this stock.

6. First Midwest Bancorp

shares of First Midwest Bancorp ( FMBI) of Itasca, Ill., closed at $11.16 Friday, declining 10% from a year earlier.

The company was mentioned by FIG Partners analyst John Rodis as ""one of the premier Chicago-based franchises growing both organically and through strategic acquisitions," and an attractive target for potential acquirers.

First Midwest fully repaid $193 million in TARP money, in November.

The company reported 2012 earnings available to common shareholders of $25.4 million, or 35 cents a share, improving from a 2012 net loss to common shareholders of $19.7 million, or 27 cents a share. Once again, the story was improved credit quality, with the provision for loan losses declining to $80.6 million in 2011 from $147.4 million, in 2010.

The 2011 ROA was 0.45% and the 2010 ROE was 3.27%, according to HighlineFI.

The shares trade for 1.2 times tangible book value, according to HighlineFI, and for 15.5 times the consensus 2012 EPS estimate of 72 cents.

Rodis on Jan. 26 lowered his rating on First Midwest to "Market Perform," with a price target of 11, from "Outperform," since the shares had returned 20% since he initiated his coverage on the company in mid-November. The analyst said "the Company is moving in the right direction as it relates to credit" but that its fourth-quarter results "reminds us that the improvement will not be linear and one or two bigger credits can sometimes have a material impact on the results."

Interested in more on First Midwest Bancorp? See TheStreet Ratings' report card for this stock.

5. Guaranty Bancorp

Shares of Guaranty Bancorp ( GBNK) of Denver closed at $1.75 Friday, returning 24% over the previous year.

The company was originally mentioned as a takeout candidate by FBR analyst Brett Scheiner in early 2011. Scheiner now says that "the company continues to improve operating results, though an impressive return on equity seems allusive." On the likelihood of a near-term takeout, the analyst says "it would seem in the next six months they can create more value by continuing operations of the bank."

Guaranty reported a 2011 loss to common shareholders of $13.4 million, or 21 cents a share, narrowing from a loss of $37.0 million, or 72 cents a share, in 2010, with the provision for loan losses declining to $5 million in 2010 from $34.4 million, a year earlier.

Fourth-quarter earnings to common shareholders were $2.3 million, or two cents a shares, compared to a loss of $22.6 million, or 44 cents a share, in the fourth quarter of 2010.

The shares trade for 1.1 times tangible book value, according to HighlineFI, and for 28 times the consensus 2012 EPS estimate of six cents.

Roth Capital Partners analyst Dave King has a neutral rating on Guaranty Bancorp, with a price target of $1.75, saying on Feb. 6 that the company's fourth quarter "exceeded expectations on a stronger margin and a resumption in loan growth," with the net interest margin increasing by "24 basis points sequentially to 3.86% after last quarter's early repayment of $51.0M in Federal Home Loan Bank borrowings and due to the continued runoff of brokered time deposits."

Interested in more on Guaranty Bancorp? See TheStreet Ratings' report card for this stock.

4. BancorpSouth

Shares of BancorpSouth ( BXS) of Tupelo, Miss., closed at $11.73, dropping 25% from a year earlier.

The company has been mentioned as an attractive M&A target by both Olney and Rodis.

BancorpSouth on Jan. 24 closed a public offering of 10,952,381 common shares at a price of $10.50, raising $109.3 million, before expenses.

The company had $13 billion in total assets as of Dec. 30, and reported net income for 2011 of $37.6 million, or 45 cents a share, increasing from $22.9 million, or 27 cents a share, in 2010. The 2010 results reflected an income tax benefit of $8.7 million, while the company paid $4.5 million in taxes during 2011.

The provision for credit losses declined to $130.1 million in 2011, from $204.0 million in 2010.

The ROA for 2011 was .028%, and the ROA was 3.03%, according to HighlineFI.

The shares are trading right at tangible book value, according to HighlineFI, and for 17 times the consensus 2012 EPS estimate of 70 cents.

Jefferies analyst Emlen Harmon has a neutral rating on BancorpSouth, saying on Feb. 1 that aside from the improvement in the company's credit quality, "core earnings power heads lower as interchange legislation had a greater than expected impact on fees, expenses reset higher across a number of categories, and loans contracted more than initially forecast" for the fourth quarter.

Interested in more on BancorpSouth? See TheStreet Ratings' report card for this stock.

3. Seacoast Banking Corp.

Shares of Seacoast Banking Corp. ( SBCF) of Stuart, Fla., closed at $1.71 Friday, up 3% from a year earlier.

Seacoast was originally mentioned as a takeout target by Brett Scheiner in early 2011, however, the analyst now says that with "material improvement in credit and operating trends and a deferred tax asset that can be recaptured if the company remains profitable , they believe they can create the most value for their shareholders by operating the bank independently."

The company owes $50 million in TARP money.

Seacoast reported 2011 earnings available to common shareholders of $2.9 million, or three cents a share, improving from a loss of $37.0 million, or 48 cents a share, in 2010. The provision for loan losses declined to $2.0 million in 2011, from $31.7 million, a year earlier.

The company estimated that its tangible common equity ratio "was 5.6 percent at year-end 2011 and will increase to an estimated 7.6 percent when the deferred tax asset valuation allowance is released."

SunTrust Robinson Humphrey analyst Mac Hodgson has a neutral rating on Seacoast, saying on Jan. 27 that "potential catalysts appear to be developing slowly, and core earnings power will likely remain weak for some time," and that the shares are fairly valued, factoring-in the eventual recapture of the deferred tax assets.

Seacoast trades just below tangible book value, according to HighlineFI. The consensus 2012 EPS estimate is six cents.

Interested in more on Seacoast Banking Corp.? See TheStreet Ratings' report card for this stock.

2. First California Financial Group

Shares of First California Financial Group ( FCAL) of Westlake Village, Calif., closed at $4.85 Friday, for a one-year total return of 41%.

The shares are in play because FCAL's management is being pressured by several large shareholders to consider strategic alternatives. Castine Capital Management, LLC, describing itself as "the third largest shareholder," of the company, "owning over 5.1% of the current shares outstanding," on Jan. 23 sent a letter to First California Financial Group's board of directors, supporting a Jan. 12 letter from three members of the Pohlad family (which holds 10.9% of outstanding common shares) demanding that the board "immediately engage independent, nationally recognized investment bankers with relevant industry and transactional experience to assess all strategic alternatives," including a sale.

The Castine group said that "FCAL will continue to struggle to generate shareholder value if it maintains its current course of action," and that achieving success through a strategy of expanding through cheap acquisitions is not "a realistic possibility given the numerous competing banks in FCAL's markets that also want to make acquisitions and have a stock currency that makes a higher purchase price more easily achievable."

First California Financial Group earned $23.4 million in 2012, achieving a return on average equity of 10.84% during 2011, according to HighlineFI, however, the earnings mainly because of a $34 million pretax gain during the first quarter, on the purchase of the failed San Luis Trust Bank from the Federal Deposit Insurance Corp.

So far, the activist shareholders' efforts have been quite effective, with the shares rising 34% since the Pohlad letter was filed, through Friday's market close.

The shares traded just below book value at Friday's close, according to HighlineFI, and for 14 times the consensus 2012 earnings estimate of 34 cents, among analysts polled by Thomson Reuters.

Sterne Agee analyst Brett Rabatin has ""Buy" rating on First California Financial Group, with price target of $5.50, saying on Jan. 29 that "given improving profitability, an attractive valuation, and the potential for shareholders to remain aggressive with "unlocking" shareholder value, we continue to believe FCAL will outperform small cap bank peers."

Interested in more on First California Financial Group? See TheStreet Ratings' report card for this stock.

1. Southwest Bancorp

Shares of Southwest Bancorp ( OKSB) of Stillwater, Okla., closed at $8.25 Friday, down 44% from a year earlier.

Stephens, Inc. analyst Matt Olney mentioned Southwest Bancorp as a "small takeout candidate in Oklahoma," in January of last year, and the analyst still believes that the company's footprint, which includes Texas, is very attractive for acquirers.

The company on Jan. 24 reported a fourth-quarter net loss to common shareholders of $59.3 million, or $3.05 a share, compared to earnings of $3.2 million, or 17 cents a share earlier.

For all of 2011, Southwest Bancorp's net loss to common shareholders was $72.5 million, or $3.73 a share, as the company looked to move beyond a late-cycle decline in credit quality that became apparent in the second quarter, when the company set aside $20.1 million for loan loss reserves, which CEO Rick Green said resulted from "new appraisals received on collateral dependent commercial real estate loans from states outside of our home markets of Oklahoma, Texas, and Kansas."

The total provision for loan losses for 2011 was $132.1 million.

During the fourth quarter, the company sold $300 million in loans and repossessed real estate, including $170 million in nonperforming assets.

Southwest Bancorp had $2.4 billion in total assets as of Dec. 30, with total nonperforming assets (excluding government-guaranteed balances) of $33.4 million, or 1.40% of total assets, improving from nonperforming assets ratios of 7.91% the previous quarter and 5.13% a year earlier.

The company reported "potential problem loans" totaling $133 million as of Dec. 30, declining from $276.7 million in September and $233.1 million in December 2010.

Southwest Bancorp was strongly capitalized as of Dec. 30, with a tangible common equity ratio of 12.46%, according to HighlineFI. The company's regulator Tier 1 leverage ratio was 14.62% and its total risk-based capital ratio was 20.78%, far exceeding the respective 5% and 10% required for most banks to be considered well-capitalized by regulators.

Southwest Bancorp owes $70 million, and has been deferring its dividends to the government since July.

The shares trade for just over half their tangible book value, according to HighlineFI, reflecting the TARP overhang and showing that investors believe more major losses lie ahead.

Interested in more on Southwest Bancorp? See TheStreet Ratings' report card for this stock.

-- Written by 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.