These 10 Regional Banks Are Caught In M&A Crosshairs

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Bank M&A is picking up, especially among regional players, and the next quarter could bring a slew of new deals that will push share prices in many directions.The recent acquisition of Wilmington Trust (WL_) by M&T Bank(MTB_) is just one example. Many industry professionals agree that the transaction will act as a catalyst, prompting more mergers in the financial industry. “That regional acquisition is probably a start of the consolidation in the industry and it was probably the right thing for both M&T and Wilmington Trust,” said Scott Fainor, CEO of National Penn Bancshares(NPBC_).

“When it comes to acquisitions in finance right now you have the premium takeouts like the First Niagara(FNFG_), NewAlliance Bancshares(NAL_) deal, and then we are seeing transactions like Wilmington which had more problems than people anticipated it would have,” said Fred Cannon an analyst at Keefe, Bruyette & Woods.

Cannon says to expect more of the transactions similar to Wilmington Trust after year-end results as credit continues to deteriorate and banks struggle to meet capital requirements. He adds that impaired credit issues could put Keycorp(KEY_) in play as well as Synovus(SNV_).

“I would guess we would see a lot more strategic acquisitions of a lot of very small banks such as Central Pacific (CPF_) and National Penn,” Cannon said. Even though these institutions have received investments from private equity that won’t keep these institutions from being acquired, Cannon explained.

“Private equity investments could actually encourage a sale, in my opinion,” Cannon added.

“When opportunities confront us on the M&A front, we will take advantage of any of those opportunities to grow through acquisitions and take advantage of any consolidation that might play out in our market,” National Penn’s Fainor said in an interview.

KBW’s Cannon and Rochdale Securities analyst Richard Bove have been speculating on which institutions may be the next targets to get gobbled up by larger banks. Here’s a list of the banks that are likely already being targeted by larger banks, beginning with two smaller holding companies that are in play from the actions of private equity investors, and then moving up by asset size.

This post originally appeared at TheStreet and is republished here with permission.

Central Pacific Financial

Company Profile

Shares of Central Pacific Financial of Honolulu have returned 23% over the past year through Friday's closing price of $1.54. The shares rose 4% Friday, after the company announced a plan to raise $325 million in capital, including $98 million apiece from The Carlyle Group and Anchorage Capital Group LLC.

The private equity investments are contingent upon regulatory approval and the success raise of the remaining $130 million from 'institutional and other investors.' The capital raise is highly dilutive, as each private equity group will take a 24.9% stake in the company, valued at 75 cents a share, compared to the previous day's closing price of $1.48. Central Pacific plans to give current shareholders the opportunity to purchase additional shares at the same price as the private equity investors, through a $20 million rights offering to take place after the $325 million capital raise is completed.

Income Statement

For the third quarter, Central Pacific reported a net loss to common shareholders of $74.7 million, or $2.46 a share, following losses of $18.2 million, or 60 cents a share the previous quarter and $185.2 million, or $6.38 a share, during the third quarter of 2009, when the company recorded a non-cash $50 million goodwill impairment charge.

Net losses to common shareholders exclude dividends paid or accrued on $135 million in preferred shares held by the government for bailout assistance through the Troubled Assets Relief Program, or TARP.

Central Pacific has deferred its last five TARP dividend payments.

Earnings performance over the past year mirrors the size of the company's quarterly provision for loan loss reserves. The provision for the third quarter was $79.9 million, compared to $20.4 million in the second quarter and $142.5 million a year earlier. During the third quarter, the company increased its provision as it aggressively charged-off problem credits and sold $63.4 million in nonperforming commercial real estate and construction loans.

Balance Sheet

Central Pacific had $4.2 billion in total assets as of September 30. Total shareholders' equity was $80.5 million. The company's Tier 1 leverage ratio was 4.39% and its total risk-based capital ratio was 8.57%, below the 5% and 10% thresholds most banks need to meet to be considered well-capitalised by regulators.

Main subsidiary Central Pacific Bank missed a March 31 deadline from to achieve a Tier 1 leverage ratio of 10% and a total risk-based capital ratio of 12%, under a December 2009 regulatory order.

Nonperforming assets - including nonaccrual loans and repossessed real estate - totaled $372.7 million as of September 30, or 8.93% of total assets. This compared to nonperforming asset ratios of 10.92% the previous quarter and 8.09% a year earlier. While industry aggregates for the third quarter aren't yet available, these ratios are quite high when compared to the 'noncurrent assets' ratio for all U.S. banks and thrifts, which was 3.31% at the end of the second quarter, according to the Federal Deposit Insurance Corporation.

Net charge-offs - loan loss less recoveries - during the third quarter totaled $64.3 million, compared to $30.1 million during the second quarter and $103.4 million during the third quarter of 2009. Central Pacific's annualized ratio of net charge-offs to average loans for the third quarter was 9.73%, compared to 4.26% the previous quarter and 11.29% a year earlier. In comparison, the FDIC reported a second-quarter net charge-off ratio of 2.64% for the domestic banking industry.

Stock Ratios

According to SNL Financial, Central Pacific Financial's tangible book value was -$2.38 a share as of September 30. None of the analysts covering the company project a return to profitability through 2012.

Analyst Ratings

Both analysts covering Central Pacific rate the shares a hold. Current investors are obviously facing a major dilution of their holdings, but the successful completion of the company's capital raise may be enough for it to work through all of its problem loans and attract a buyer.

Sterling Bancshares

Company Profile

Sterling Bancshares (SBIB_) of Houston saw it stock climb 8% Friday to close at $5.88, after largest shareholder TAC Capital of Bryan, Texas, announced it would nominate five candidates for board seats at the company's next annual meeting.

In a strongly-worded letter to Sterling's shareholders, TAC Capital complained of management's performance and said the bank inefficient and was underperforming peers.

Income Statement

Sterling reported third-quarter net income of $4.5 million, or 4 cents a share, improving from a second-quarter profit of $596 thousand, or one cent a share, and a net loss of $24.7 million, or 30 cents a share, a year earlier, when the company booked a $56.1 million provision for loan loss reserves. While the company's profitability was improving, earnings performance was still relatively weak, with a return on average assets of 0.35% and a return on average equity of 2.80%.

Balance Sheet

Sterling Bancshares had $5 billion in total assets as of September 30, and was strongly capitalised with a Tier 1 leverage ratio of 10.53% and a tangible capital ratio of 9.13%. The company is not a TARP participant.

Sterling's nonperforming assets ratio was 3.54% as of September 30, compared to 3.63% the previous quarter and 2.20% in September 2009. The third-quarter net charge-off ratio was 1.01% and loan loss reserves covered 2.88% of total loans.

Stock Ratios

Shares trade for 1.4 times tangible book value according to SNL. The shares trade for 18 times the consensus earnings estimate of 33cents a share for 2012 among analysts polled by Thomson Reuters.

Analyst Ratings

Out of 17 analysts covering the company, six rate Sterling Bancshares a buy, while the other 11 analysts recommend investors hold the shares.

According to a Reuters report, BB&T Corp (BBT_) CEO Kelly King said at the Bank Analysts Association of Boston Conference on Friday that his company was looking to acquire a bank in Texas with at least $3 billion in total assets. With its largest investor looking for a quick improvement in its investment return and the company already well-capitalised and profitable, Sterling might fit the bill.

National Penn Bancshares

Company Profile

National Penn Bancshares of Boyertown, Penn. has seen its stock rise 24% over the past year to $7.24 Friday, and although the company has already announced a pending $150 million investment by Warburg Pincus, it is still considered a take-out target by analysts.

CEO Scott Fainor begs to differ, saying that the company plans to 'accelerate' its repayment of $150 million in TARP money and that National Penn will 'continue to play offence as a corporation.'

Income Statement

National Penn reported third-quarter net income available to common shareholders of $10.3 million, or 8 cents a share, improving from a net loss of $5.5 million, or 4 cents a share, in the second quarter, when the company recorded an $8.3 million noncash goodwill impairment charge. During the third quarter of 2009, the net loss to common shareholders was $65.2 million, or 65 cents a share, reflecting a securities impairment charge of $84.7 million.

Balance Sheet

Total assets were $9.2 billion as of September 30. The nonperforming assets ratio - again, including only nonaccrual loans and repossessed real estate - was 0.99% as of September 30, improving from 1.06% the previous quarter and 1.20% a year earlier. The third-quarter net charge-off ratio was 1.43% and loan loss reserves covered 2.81% of total loans.

Net charge-offs during the third quarter totaled $20.6 million, while the provision for loan loss reserves was $20 million. With loan quality improving and strong reserve coverage, an accelerated release of loan loss reserves is likely to drive continued earnings improvement over the next several quarters. Reserve releases are a major trend for boosting earning at the largest banks, including Citigroup (C_), with a $2.5 billion decline in loan loss reserves during the third quarter, along with Bank of America (BAC_) and JPMorgan Chase (JPM_), which each released $1.7 billion in reserves during the quarter.

Stock Ratios

National Penn's shares trade for 1.4 times tangible book value according to SNL Financial and 16 times the 2011 earnings consensus of 46 cents a share. Based on the 2012 consensus estimate of 64 cents a share, the P/E would drop to 11.

Analyst Ratings

Out of nine analysts covering National Penn, four have buy ratings and five recommend investors hold the shares.

Synovus Financial

Company Profile

Shares of Synovus Financial of Columbus, Ga. closed at $2.11 Friday, returning 7% over the previous year.

Following the company's announcement of its results for the third quarter, Guggenheim analyst Jeff Davis said his firm suspected Synovus's board of directors would ultimately 'elect to sell the Company,' adding that it would take 'another couple of years of loan write-downs before a buyer probably could get comfortable with the assets,' and that the 'attraction, of course, is the growth footprint.'

Income Statement

For the third quarter, Synovus reported a net loss to common shareholders of $195.8 million, or 25 cents a share, following a second-quarter loss of $242.6 million, or 36 cents a share, and a loss of $453.8 million, or $1.32 a share in the third quarter of 2009.

The third-quarter provision for loan losses was $239 million, declining from $298.9 million the previous quarter and $496.5 million a year earlier.

Balance Sheet

Synovus had $31 billion in total assets as of September 30 and owes $967.9 million in TARP money. The company's Tier 1 leverage ratio was 9.80% and its total risk-based capital ratio was 16.70%. The tangible common equity ratio was 7.26%. That last ratio excludes the TARP money and 7% is by some analysts considered a good benchmark for a profitable bank.

Synovus raised $$1.1 billion in common equity during the second quarter.

The nonperforming assets ratio was 5.03% as of September 30, compared to 4.86% the previous quarter and 5.05% a year earlier. Net charge-offs during the third quarter totaled $237.2 million or an annualized 4.12% of average loans, and loan loss reserves covered 3.70% of total loans as of September 30.

Stock Ratios

The shares trade for 0.7 times tangible book value according to SNL Financial. The consensus among analysts is that Synovus won't return to profitability until the fourth quarter of 2011. The shares trade for 11 times the consensus earnings estimate of 19 cents a share for 2012.

Analyst Ratings

Out of 21 analysts covering the Synovus Financial, five have buy recommendations, 14 recommend investors hold the shares and two recommend selling the shares.

Marshall & Ilsley

Company Profile

Shares of Marshall & Ilsley (MI_) of Milwaukee closed at $5.54 Friday, returning 7% over the previous year. Following its third-quarter earnings announcement, the company saw its credit rating downgraded by Standard & Poor's to below investment grade.

Income Statement

Marshall & Ilsley reported a third-quarter net loss to common shareholders of $169.2 billion, or 32 cents a share, following losses of $173.8 million, or 33 cents a share, the previous quarter and $248.4 million, or 68 cents a share, a year earlier.

The provision for loan losses in the third quarter declined to $431.7 million from $439.9 million in the second quarter and $578.7 million in the third quarter of 2009.

The company reported a significant improvement in its net interest margin - the difference between the average yield on loans and investments and the average cost of funds - which was 3.14% during the third quarter, up from 2.82% a year earlier, as deposits increased by $2.5 billion.

Balance Sheet

Total assets were $51.9 billion and the company's tangible common equity ratio was 8.3% as of September 30. Marshall & Ilsley owes $1.7 billion in TARP money.

The nonperforming assets ratio was 3.90% as of September 30, improving from 4.17% the previous quarter and 4.44% in September 2009. The third-quarter net charge-off ratio was 5.47% and reserves covered 3.49% of total loans as of September 30. The fifth-straight quarter of loan quality improvement left the company confident enough to release $$128.6 million from reserves during the third quarter, since net charge-offs totaled $560.3 million.

Stock Ratios

The shares trade for 0.7 times tangible book value according to SNL Financial. The consensus among analysts polled by Thomson Reuters is for the company to swing to a profit in the fourth quarter of 2011. Based on the consensus earnings estimate of 53 cents a share for 2012, the forward P/E is 10.5.

Analyst Ratings

Among 19 analysts covering Marshall & Ilsley, six rate the shares a buy, 12 have hold ratings and one recommends investors sell the shares.

Mary Mosby of Guggenheim Securities has a buy rating on the shares and a 12-month price target of $8, saying that despite a disappointing third quarter, his firm believes 'the underlying improvement in MI's credit trends still justify looking at the stock at these depressed levels, adding that 'potential investors should be prepared to be patient while waiting for MI to return to normalized earnings. '

Zions Bancorp.

Company Profile

Shares of Zions Bancorporation (ZIon) of Salt Lake City closed at $22.03, returning 57% over the previous year.

Income Statement

Zions reported a third-quarter net loss to common shareholders of $80.5 million, or 47 cents a share, improving from a second-quarter loss of $135.2 million, or 84 cents a share, and a net loss to common shareholders of $181.9 million, or $1.43 a share, in the third quarter of 2009.

Following the theme for so many large banks, a release of loan loss reserves drove the earnings improvement. The third-quarter provision for loan loss reserves was $184.7 million, while net loan charge-offs totaled $235.7 million.

The provision was reduced from 228.7 million the previous quarter and $565.9 million a year earlier.

Balance Sheet

Zions had $51.8 billion in total assets as of September 30. The company owes $1.4 billion in TARP money and reported a tangible common equity ratio of 7.03% as of September 30. During the third quarter, Zions raised $109.9 million in common equity through the sale of shares and warrants. The company also converted $55 million in subordinated debt to preferred shares.

The regulatory Tier 1 leverage ratio was 11.99% and the total risk-based capital ratio was 16.73% as of September 30.

The nonperforming assets ratio was 6.01% as of September 30, improving from 6.60% in June and 6.62% in September 2009. The net charge-off ratio for the third quarter was 2.50% and reserves covered 4.07% of total loans as of September 30.

Stock Ratios

The shares trade for 1.1 times tangible book value according to SNL Financial and 12 times the consensus earnings estimate of $1.90 for 2012 among analysts polled by Thomson Reuters.

Analyst Ratings

Out of 25 analysts covering the shares, five rate Zions Bancorporation a buy, 18 have hold ratings and two recommend investors sell the shares.

Howe Barnes Hoefer & Arnett analyst Chris Stulpin said after the company's third-quarter announcement that his firm continued to believe that the bank's footprint will once again exhibit high growth characteristics and thereby support attractive EPS growth' and increased his 12-month price target to $29. That represents 32% upside potential from Friday's close.

Comerica

Company Profile

Shares of Comerica (CMA_) of Dallas closed at $38.64 Friday, returning 43% over the previous year.

Comerica is probably not one of the Texas bank targets being considered by BB&T, as the company has considerable exposure outside Texas, especially in Michigan, its old stomping ground. As of September, the company had 441 branches, with 217 in Michigan, 102 in California and 94 in Texas.

Income Statement

Comerica reported third-quarter net income of $59 million, or 33 cents a share, compared to second-quarter earnings of $69 million, or 39 cents a share, and a net loss to common shareholders of 16 million, or 11 cents a share, in the third quarter of 2009, when the company still owed the government $2.25 billion in TARP money.

The decline in earnings from the second quarter reflected an $18 million decline in net interest income, as Comerica's loan demand remained weak.

Comerica fully repaid TARP in March 2010 following a common equity raise of $880 million. .

Balance Sheet

Total assets were $55 billion and the nonperforming assets ratio was 2.38% as of September 30. Comerica's Tier 1 leverage ratio was 10.90% and its total risk-based capital ratio was 14.38% as of Sept. 30. The tangible common equity ratio was quite high at 10.39%.

During the company's third quarter conference call, analysts raised the prospect of returns of capital to shareholders through dividend increases or stock buybacks. CFO Beth Acton said it would 'be very important to see the US regulators turn Basal III into some proposed rule making that we can evaluate in the context of share repurchase program.'

Stock Ratios

The shares trade for 1.2 times tangible book value according to SNL Financial. The forward P/E is 22 based on the consensus earnings estimate of $1.77 a share for 2011, but falls to 14 based on the estimate of $2.85 a share for 2012.

Analyst Ratings

Among 22 analysts covering the company, 10 rate Comerica a buy, nine have hold ratings and three recommend investors sell the shares.

KeyCorp

Company Profile

Shares of KeyCorp of Cleveland, Ohio closed at $8.40 Friday, returning 53% over the previous year.

Jeff Davis of Guggenheim Securities said in a report following the company's third-quarter earnings release that 'the shares may benefit from possible M&A speculation in our view, as industry consolidation increases.'

Income Statement

For the third quarter, KeyCorp reported net income attributable to common shareholders of $178 million, or 20 cents a share, improving from $29 million, or 3 cents a share during the second quarter and a net loss to common shareholders of $1.36 billion, or $2.14 a share during the third quarter of 2009, which included a $2.4 billion provision for loan loss reserves and a non-cash impairment charges on intangible assets of $241 million.

The provision for loan losses was $94 million during the third quarter, declining from $228 million during the second quarter. With third-quarter net charge-offs totaling $357 million, KeyCorp's earnings were driven by a $263 million reserve release.

A very bright development in the third quarter results was a tax-adjusted net interest margin of 3.35%, rising from 3.17% in the second quarter and 2.80% a year earlier, as the company continued to enjoy 'an improvement in the mix of deposits by reducing the level of higher costing certificates of deposit and increasing lower costing transaction accounts.'

Balance Sheet

Total assets were $94 billion as of September 30 and the nonperforming assets ratio was 1.92%, improving from 2.22% the previous quarter and 2.89% a year earlier. The third-quarter net charge-off ratio was 2.69% and reserves covered 3.81% of total loans as of September 30.

KeyCorp's Tier 1 leverage ratio was 12.44% and its total risk-based capital ratio was 18.18%. And while the company's tangible common equity ratio of 8.00% is 'approaching an over-capitalised level,' Davis believes 'regulators probably will require a common raise to exit TARP.' KeyCorp owes the government $2.5 billion in bailout funds.

Stock Ratios

The shares trade just below tangible book value according to SNL Financial, reflecting investor fears of share dilution. The forward P/E based on the consensus earnings estimate of 53 cents a share for 2011 is 16, dropping to 12, based on the consensus estimate of 71 cents a share for 2012.

Analyst Ratings

Out of 23 analysts covering the KeyCorp, four rate the shares a buy, 15 have hold ratings and four analysts recommend investors sell the shares.

Davis has a buy rating on the shares and a 12-month price target of $10.

Regions Financial

Company Profile

Shares of Regions Financial of Birmingham, Ala. closed at $6.45 Friday, returning 35% over the previous year.

Following a disappointing third-quarter earnings report from the company, FIG Partners analyst Christopher Marinac said the company is in a quandary over whether to raise capital over the short-term to 'position for TARP repayment in the next few quarters' or 'hold off on new shares, consider its independence, and allow another financial institution to payoff TARP via an M&A transaction.'

Regions owes $3.5 billion in TARP money.

Income Statement

The company reported a third-quarter net loss to common shareholders of $209 million, or 17 cents a share, compared with a loss of $135 million, or 11 cents a share the previous quarter and a net loss to common shareholders of $437 million, or 37 cents a share, a year earlier.

During the third quarter, the provision for loan losses was $760 million, matching net loan charge-offs for the quarter, and increasing from $651 million in the second quarter but declining from $1 billion in the third quarter of 2009.

Regions reported a tax-adjusted net interest margin of 2.96% for the third quarter, improving from 2.87% the previous quarter and 2.73% a year earlier and following the industry trend, with declining funding costs.

Balance Sheet

Regions reported total assets of $133.5 billion as of September 30. The nonperforming assets ratio was 2.87% as of September 30, compared to 2.97% the previous quarter and 2.65% in September 2009. The third-quarter net charge-off ratio was 3.52% and loan loss reserves covered 3.77% of total loans as of September 30.

The Tier 1 capital ratio was 12.1% and the total risk-based capital ratio was 16.0% as of September 30. The company reported a tangible common equity ratio of 6.13%.

Marinac suggests that 'the heavy inflows of new NPAs during 3Q10' could 'force more capital sooner, as well as the Board of Directors' intentions on RF's own survival as an independent regional bank.'

Stock Ratios

The shares trade just above tangible book value according to SNL Financial and 10 times the 201 consensus earnings estimate of 63 cents a share.

Analyst Ratings

Out of 19 analysts covering the company, two rate Regions a buy, 15 have hold ratings and two analysts recommend investors part with the shares.

Marinac has a market perform or 'hold' rating on the shares, saying 'investors are confused with respect to RF's outlook ... and with good reason,' adding that 'clarity on capital is necessary before investors can make a reasonable assessment on the stock's valuation. '

SunTrust

Company Profile

The largest bank target identified by analysts for this report is SunTrust Banks (STI_) of Atlanta, which had $174.7 billion in total assets as of September 30. Shares closed at $26.47 Friday, returning 31% over the previous year.

Income Statement

During the third quarter, SunTrust earned its first profit in two years, with net income available to common shareholders of $84 million, or 17 cents a share, compared to a loss of $56 million, or 11 cents a share, during the second quarter and a net loss to common shareholders of $377 million, or 76 cents a share during the third quarter of 2009.

The third-quarter provision for credit losses was $615 million, declining from $662 million during the second quarter and $1.1 billion a year earlier.

During the third quarter, net charge-offs totaled $690 million, meaning that a $75 million reserve release provided the bulk of the earnings.

Balance Sheet

SunTrust's nonperforming assets ratio was 2.95% as of September 30, improving from 3.20% the previous quarter and 3.53% a year earlier. The third-quarter net charge-off ratio was 2.42% and reserves covered 2.69% of total loans.

The Tier 1 leverage ratio was 11.05% and the tangible equity ratio of 10.19%. SunTrust owes $4.85 billion in TARP money. Marinac said in a report that 'it is increasingly apparent that not selling more shares at a low price earlier in 2010 was a wise decision for future levels of EPS and Tangible Book Value,' adding that 'STI has more flexibility than investors appreciate.'

Stock Ratios

The shares trade for 1.1 times tangible book value according to SNL Financial. The forward P/E is 11, based on the consensus earnings estimate of $2.31 for 2012.

Analyst Ratings

Out of 28 analysts covering SunTrust, six rate the shares a buy, 18 analysts have hold ratings and four recommend investors sell the shares.

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