3 Highly Rated Community Bank Takeout Targets from KBW

NEW YORK ( TheStreet) -- While the bull market for bank stocks has lifted most boats this year, there are still a few bargain stocks out there among potential bank M&A targets, according to KBW.

The U.S. banking industry has been consolidating for decades. The total number of banks and savings and loan associations declined to 6,940 as of June 30, from 8,451 in June 2008 and 9,313 in June 2003, according to the Federal Deposit Insurance Corp.

Most of the community banks being gobbled up by local rivals are privately held, but there are plenty of publicly traded potential targets out there. Since investors are looking to make a profit on a takeout premium, many of the potential targets have seen strong returns for their shares this year.

According to KBW analyst Frank Barlow, publicly traded banks on his firm's "potential sellers list" as a group saw their stocks return 42% this year through Tuesday. Banks on KBW's "potential buyers list" have also seen their shares perform quite well, with their stocks returning 30.9%.

A year-to-date return of 30.9% excellent, even for this year's bull market, but it trails the KBW Regional Banking Index, was up 35% year-to-date through Tuesday.

Here are the three "outperform" rated banks on KBW's "potential sellers list."

Shares of Flushing Financial Corp. ( FFIC) of Lake Success, N.Y., closed at $20.04 Wednesday. The shares have returned 33% this year, trade for 14.7 times the consensus 2014 earnings estimate of $1.36 a share, among analysts polled by Thomson Reuters.

KBW analyst Brian Kleinhanzl's price target for the shares is $21.00. The stock trades at a discount to peers, according to Kleinhanzl, who wrote in KBW's M&A report on Wednesday that the bank has "a Long Island footprint and Asian niche which could be attractive to buyers looking for a fill-in transaction or entry into the NYC market."

OmniAmerican Bancorp ( OABC)of Fort Worth, Texas, has seen its shares decline 5% this year through Wednesday's close at $22.00. The shares trade for 27.2 times the consensus 2014 EPS estimate of 81 cents.

KBW analyst Brady Gailey's price target for OmniAmerican's shares is $26.00. The analyst in a note on Oct. 28 said the price target includes a "takeout premium, which we believe happens in the short term." The analyst also cited the bank's "attractive Dallas/Fort Worth footprint."

The third potential takeout target listed by KBW with an "outperform" rating is Yadkin Financial ( YDKN) of Elkin, N.C. The company's shares closed at $16.74, for a whopping 90% return this year. The stock trades for 13.2 times the consensus 2014 EPS estimate of $1.27.

Gailey's price target for Yadkin Financial is $19.00. "Post its recapitalization and bulk loan sale completion, YDKN has a much lower risk profile and an attractive geography that would be of interest to multiple buyers," the analyst wrote in KBW's M&A note on Wednesday. Yadkin Financial raised $42.5 million through a private offering of shares during the fourth quarter of 2012.

M&A and Dilution

Community bank acquisitions are often paid for by a combination of cash and stock. According to an analysis of bank M&A deals for more than $50 million, KBW found that "the market generally appears to be rewarding the buyers who take on the least ownership dilution relative to the assets acquired." In other words, all-cash deals are favored by shareholders, since there is no dilution to their ownership stakes through the issuance of new shares, and the acquirer is making more efficient use of excess capital by expanding.

A better market reaction for cash deals won't surprise many investors, but it is worth thinking about -- an overcapitalized potential acquirer may be a much safer investment than an otherwise healthy acquirer with less excess capital.

There are many other factors to weigh when considering an M&A deal. A good strategic fit for expansion and the potential for cost savings weigh heavily on acquirers' decisions, as does the deposit mix of the target institution. But to provide more food for thought, we have listed the 10 "outperform" rated banks on KBW's "potential buyer's list" with the highest Tier 1 leverage ratios, using data provide by Thomson Reuters Bank Insight. We used June 30 data, since Sept. 30 data isn't yet available for the entire group.

This by no means provides a clear indication of which potential acquirers would be less likely to enter into an M&A deal featuring significant dilution to common, but it is a useful indicator for investors:
  • HomeTrust Bancshares (HTBI) of Asheville, N.C. The company's June 30 Tier 1 leverage ratio was a very high 23.13%. The stock closed at $16.19 Wednesday. KBW's price target for the shares is $18.00.
  • National Bank Holdings (NBHC) of Greenwood Village, Colo. The company's June 30 Tier 1 leverage ratio was 18.69%. The stock closed at $20.52 Wednesday. KBW's price target for the shares is $23.00.
  • Banner Corp. (BANR) of Walla Walla, Wash. The company's June 30 Tier 1 leverage ratio was 13.26%. The stock closed at $30.49 Wednesday. KBW's price target for the shares is $41.00.
  • Heritage Financial (HFWA) of Olympia, Wash. The company's June 30 Tier 1 leverage ratio was 13.08%. The stock closed at $16.39 Wednesday. KBW's price target for the shares is $19.00.
  • Fidelity Southern Corp. (LION) of Atlanta. The company's June 30 Tier 1 leverage ratio was 12.96%. The stock closed at $16.45 Wednesday. KBW's price target for the shares is $18.00.
  • First NBC Bank Holding Co. (NBCB) of New Orleans. The company's June 30 Tier 1 leverage ratio was 12.54%. The stock closed at $28.52 Wednesday. KBW's price target for the shares is $32.00.
  • Pacific Continental Corp. (PCBK) of Eugene, Ore. The company's June 30 Tier 1 leverage ratio was 11.58%. The stock closed at $13.30 Wednesday. KBW's price target for the shares is $15.00.
  • CVB Financial (CVBF) of Ontario, Calif. The company's June 30 Tier 1 leverage ratio was 11.55%. The stock closed at $14.83 Wednesday. KBW's price target for the shares is $16.00.
  • Ameris Corp. (ABCB) of Moultrie, Ga. The company's June 30 Tier 1 leverage ratio was 11.43%. The stock closed at $19.35 Wednesday. KBW's price target for the shares is $23.00.
  • Bank of Marin Bancorp (BMRC) of Novato, Ca. The company's June 30 Tier 1 leverage ratio was 11.14%. The stock closed at $43.96 Wednesday. KBW's price target for the shares is $47.00.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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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