A small deal last week could be a great sign for bank investors if strategic M&A really is revving up for a return to the sector.
On June 29, privately held Eastern Bank agreed to acquire Wainwright Bank & Trust for roughly $163 million. While that number isn't particularly substantial in the grand scheme of things, the $19 per share cash consideration for Wainwright's stock was a 98% premium to the prior session's close, and a 105% premium to the target bank's tangible book value, according to SNL Financial.
Historically, paying two times book value for a strategic acquisition to expand market share is not a very high premium, but in this market the deal looks very expensive. Spokesman Joe Bartolotta told TheStreet that Eastern Bank viewed the deal as "not a financial transaction but a strategic one" and aggressively pursued it.
The two banks' branch networks compliment each other very well, Bartolotta added, noting that Eastern Bank would seek further expansion to fill in other gaps in its retail network, either by opening new branches or more acquisitions.
Eastern Bank had $6.6 billion in total assets as of March 31, while Boston-based Wainwright had $1 billion in assets, so Eastern Bank will be about 15% bigger if the deal closes in the fourth quarter as expected. The combined bank would operate more than 90 branches in eastern Massachusetts.
While it may have made sense for the community-focused Eastern Bank to pay twice the market price for a well-capitalized and profitable competitor to expand in its preferred market, the deal might not be a trend setter, since there are so many other reasonably healthy banks priced close to book value.
Still, if strategic M&A does become a bigger factor in the next year or so, as some analysts have already hypothesized, the profile of the Wainwright deal — relatively small-scale, complimentary footprint, no major holes in the balance sheet, and the ability to pay an eye-popping premium because of depressed valuations — may provide the blueprint for future transactions.
Out of 959 publicly traded U.S. banks and thrifts — excluding those traded on the pink sheets — for which the data was available from SNL Financial, about two-thirds were trading below tangible book value at the end of last week.
Narrowing down potential prey for regional expansion to banks and thrifts with total assets between $1 billion and $10 billion, 263 names fit the bill, and 122 of those closed below book value on July 2.
Potential acquirers would tend to steer clear of banks and thrifts with capital shortfalls, or high levels of nonperforming assets, since the Federal Deposit Insurance Corp. is still offering loss-sharing agreements to acquirers of most failed banks. So it's better to wait and pick up a failed institution, rather than buy an operating bank with big problems and be on the hook for significant loan losses.
For bank holding companies, the nonperforming assets ratio includes loans and securities in nonaccrual status or past due 90 days or more (less government-guaranteed balances) and repossessed real estate. For thrift holding companies, the nonperforming assets ratio is for the main thrift subsidiary.
Considering all of this, we narrowed down the list of potential low-cost targets among bank and thrifts stocks selling below book value last week to 10 well capitalized institutions that don't owe bailout funds and have less have nonperforming asset ratios below 4%.
One of the names on the list made its public debut in January, and would presumably not be seeking to do a merger any time soon — but if an acquirer came calling with sweet 100% premium offer, they'd probably be tempted, so we're including them anyway.
First Commonwealth Financial of Indiana, Pa. closed last week at $5.09, or 0.94 times tangible book value, according to SNL Financial. The stock finished Wednesday at $5.35, and was up around 15% year-to-date.
Earnings: Elevated provisions for loan loss reserves caused First Commonwealth to post a first-quarter loss of $13.2 million or 15 cents a share, following a 2009 net loss of $20.1 million or 24 cents a share. On average, analysts polled by Thomson Reuters are projecting a 2010 profit of 9 cents a share.
The bank's net interest margin — essentially the average rate earned on loans and investments, less the average cost of funds — was 3.82% in the first quarter, just shy of the 3.83% national aggregate for all domestic banks and thrifts, reported by the FDIC.
Asset Quality: First Commonwealth's ratio of nonperforming assets -- loans and securities past due 90 days or in nonaccrual status (less government-guaranteed balances) along with repossessed real estate -- to total assets was 3.27% in the latest quarter, up from 2.92% at the end of the first quarter and 1.12% a year earlier. This compares to a national aggregate "noncurrent assets" ratio of 3.43% as of March 31, reported by the FDIC.
The annualized ratio of net charge-offs (actual loan losses, less recoveries) to average loans for the first quarter was 0.68%, compared to 2.57% in the fourth quarter, and 1.74% during the first quarter of 2009. The national aggregate charge-off ratio for the first quarter was 2.84%.
First Commonwealth's loan loss reserves covered 2.58% of total loans as of March 31 after the company aggressively set aside $45 million for reserves during the first quarter, while net charge-offs totaled $7.9 million.
Prospects: First Commonwealth hadn't yet turned the corner on asset quality during the first quarter, and four consecutive quarterly losses left its capital ratios a bit low, with a Tier 1 leverage ratio of 8.72% and a total risk-based capital ratio of 11.23% as of March 31. These ratios need to be at least 5% and 10% for most institutions to be considered well capitalized, and unless credit quality has improved considerably for the second quarter, the company might need to raise additional capital.
Stern Agee analyst Mike Shafir recently initiated his firm's coverage of First Commonwealth with a buy rating, projecting the holding company will report profits of 4 cents a share for 2010, 54 cents in 2011 and 76 cents a share in 2012. Shafir factored in a potential $100 million capital raise into his 12-month price target of $7. That price target is 9.2 times First Commonwealth's 2012 projected earnings, making the stock appear quite cheap for long-term investors.
Bank Mutual Corp. of Milwaukee closed last week $5.45, or just 0.72 times tangible book value. The stock finished Wednesday at $5.51, and was down a little more than 20% year-to-date.
Earnings: The thrift holding company reported first-quarter net income of $2.1 million, or 5 cents a share, following a profit of $13.7 million, or 29 cents a share, in 2009. Earnings have been weakened by elevated loan loss provisions and a narrowing net interest margin. The bank's net interest margin was just 1.76% for the first quarter, down from 2.35% in the same period a year earlier. The decline in margins reflected weak loan demand, but also an increase in Bank Mutual's overnight investments, as the company positioned itself ahead of the expected rise in interest rates.
Bank Mutual's ROA (return on average assets) for the first quarter was 0.24% and its ROE (return on average equity) was 2.09%, compared to the national aggregate ROA of 0.54% and ROE of 4.96%. Even before the crisis began, Bank Mutual was not a strong earnings performer. The company's annual ROA last exceeded 0.50% in 2006, when it was 0.59%. That year, the industry's ROA was 1.28%.
The low ROE reflects the main thrift subsidiary's strong capital position, with a Tier 1 leverage ratio of 10.06% and a total risk-based capital ratio of 21.99% as of March 31.
Asset Quality: Nonperformers comprised 1.97% of total assets at Bank Mutual's main subsidiary thrift as of March 31. While problem assets have increased, loan losses have been minimal. The first-quarter net charge-off ratio was 0.25%, compared to 0.45% in 2009.
Prospects: Despite a lackluster earnings track record, Bank Mutual is an excellent long-term play for conservative investors, since the shares sell at a 28% discount to the company's liquidation value. Not only are the shares cheap, but the company is profitable, strongly capitalized and pays a quarterly dividend of 7 cents a share. That's a yield of 5.14% for new investors. Because of the anemic earnings, the company could be a merger target, and would probably command a nice premium if it ended up in play.
Shares of Sun Bancorp of Vineland, N.J. closed last week at $3.59, and finished Wednesday 2 cents higher at $3.61 for a year-to-date decline of around 4%. All that changed however on Thursday as the stock soared roughly 40% on news of a $100 million capital infusion from famed distressed investor Wilbur Ross.
The deal will give Ross a stake of nearly 25% in Sun Bancorp at a cost of $4 per share, and would appear to solve capital woes underlined in an agreement the company struck with the Office of the Comptroller of the Currency back in April.
Earnings: The company reported a net loss of $762,000, or 3 cents a share, for the first quarter, following a loss of $22.5 million, or 97 cents a share, for 2009. Sun repaid the government $89.3 million in April 2009 for bailout funds received just three months earlier, and subsequently repurchased a warrant held by the Treasury for $2.1 million in May 2009.
Earnings have suffered over the past two years as the company beefed-up loan loss reserves. The net interest margin for the first quarter was 3.56%, up from 2.74% in the same period a year earlier.
Asset Quality: The nonperforming assets ratio was 2.54% as of March 31, and the first-quarter net charge-off ratio was 0.93%, following a 2009 charge-off ratio of 0.88%. Reserves covered 2.35% of total loans as of Dec. 31, staying well ahead of the pace of loan losses.
Prospects: Despite nearly breaking even for the first quarter, the prospect of a dilutive common equity raise was a drag on the shares, which closed last week at just 0.39 times tangible book value. But the valuation question has obviously changed since then as investors immediately pushed the stock well above where Ross is going to own his substantial chunk, indicating they see good times ahead.
The average estimate of analysts polled by Thomson Reuters currently calls for the bank to return to profitability in 2011, earning 18 cents a share, followed by a profit of 53 cents a share in 2012.
OmniAmerican Bancorp of Fort Worth, Texas is the holding company for OmniAmerican Bank. Shares closed last week at $11.40, and finished Wednesday nominally lower at $11.36. At those levels, the stock has returned about 14% since its initial public offering at $10 a share on January 20.
Earnings: Net income for the period beginning January 20 and ending March 31 was $655,000, or 3 cents a share. According to the holding company's Federal Reserve filings, first-quarter net income was $709,000, increasing from $98,000 in the fourth quarter and $163,000 a year earlier.
The net interest margin for the first quarter was 3.84%, just above the national aggregate. The weak earnings reflect a high efficiency ratio of 86.29 for the first quarter, although this was an improvement from 91.06 a year earlier. The efficiency ratio is essentially the cost of each dollar of revenue.
Asset Quality: For main subsidiary OmniAmerican Bank, the nonperforming assets ratio was 1.46% as of March 31. The first-quarter net charge-off ratio was just 0.25%, and the ratio was 0.70% for 2009. OmniAmerican Bancorp had $1.1 billion in total assets as of March 31.
Prospects: Having completed a public offering less than six months ago, OmniAmerican would probably not be a prospect for a quick takeout, but the shares are downright cheap at just 0.68 times tangible book value. The company has quite a war chest of capital and with expansion and/or efficiency improvements, should be able to turn a decent profit and make money for investors.
Shares of Westfield Financial of Westfield, Mass. closed last week at $8.25, just below book value, and finished 10 cents higher on Wednesday at $8.35. The stock is up 1.2% so far in 2010.
Earnings: Net income for the first quarter was $1.4 million, or 5 cents a share, following 2009 net income of $5.5 million, or 18 cents a share. ROA for the first quarter was 0.45% and was 0.47% for 2009. The low ROE in the chart above reflects the company's very strong capital position.
Asset Quality: The nonperforming asset ratio for main subsidiary Westfield Bank was 0.38% as of March 31. Loan losses have been low throughout the crisis.
Prospects: Westfield Financial was recently featured among TheStreet's Five Bank Stock Bargains, and this is another holding company that has been undervalued for years.
The bank has been putting some of its excess capital to workthrough stock buybacks and special dividends, but the shares have hovered around book value for several years. Maybe an increase in the regular dividend would provide more of a benefit to investors. Based on a quarterly payout of 5 cents a share, Westfield's stock was yielding was 2.42%. The company also paid a special dividend of 15 cents a share in May.
Stern Agee's Shafir downgraded the shares to "neutral" on April 29, when Westfield closed at $9.51, and the shares have pulled back a fair amount since then. While noting the share buybacks as a positive for investors, Shafir cited "sluggish organic growth"
With strong asset quality, steady (although unexciting) earnings and very strong capital, Westfield is a low-risk play, but at some point there could be a change in strategy if and when the thrift holding company's board of directors decides to go after a stronger return on their investment.
Metro Bancorp of Harrisburg, Pa. closed last week at $12.08, then rose this week to finished at $12.51 on Wednesday. It's now incrementally lower year-to-date.
The company canceled a planned merger with Philadelphia's Republic First Bancorp on March 15, when the companies' boards of directors agreed to terminate their November 2008 agreement, citing "uncertainties regarding regulatory approval."
Then on April 27, Metro Bancorp's main subsidiary, Metro Bank entered into a consent order with the FDIC, agreeing to hire a third party to assess the qualifications of the bank's management and board of directors, as well as executive pay policies. The third-party assessment was also to cover staff responsible for compliance with the Bank Secrecy Act (BSA) and regulations of the Office of Foreign Assets Control.
The order also detailed required enhancements in the BSA and other controls, and required Metro Bank's management to submit a profitability plan to the FDIC along with a plan to reduce the larger "classified assets" (loans with documentation deficiencies or other problems) identified by FDIC examiners in August 2009 — only eight months before the consent order was issued.
Earnings: Metro Bancorp essentially broke even for the first quarter, reporting net income of $6,000, following a 2009 net loss of $1.9 million, or 24 cents a share. The 2009 loss sprang from loan charge-offs and resulting provisions for loan loss reserves. Charge-off activity during the first quarter was light, and was exceeded by the provision for reserves. Putting the 2009 net loss into perspective, the ROA was a negative 0.09% and the ROE was a negative 1.34, making for a very small loss in a tough year for the industry.
The holding company's operating efficiency has declined over the past year, with an efficiency ratio of 90.77 for the first quarter, up from 81.24 a year earlier. This isn't surprising, considering the extra costs the company must bear to comply with the FDIC order. A bright spot in Metro Bancorp's results is the company's reliable net interest margin, which was 4.09% for the first quarter, up from 4.02% a year earlier.
Asset Quality: Nonperforming assets comprised 2.45% of total assets as of March 31, up from 1.42% a year earlier. The net charge-off ratio was 0.45% for the first quarter and 1.00% for 2009. The company has plenty of capital to work through problem loans, with a Tier 1 leverage ratio of 11.08% and a total risk-based capital ratio of 14.83%, as of March 31.
Prospects: Metro Bancorp's stock has languished since the FDIC order was announced. The order was a wake-up call for the institution, but since asset quality is decent, and the company's capital ratios are strong, the end result of the order is a threat to management and the board of directors, but not a threat to the bank.
This looks like a golden buying opportunity for investors and maybe a potential acquirer. Shares were trading last week for just 0.81 times tangible book value and the company's healthy net interest margin indicates strong earnings potential once Metro Bancorp's management problems are behind it.
Shares of Cape Bancorp of Cape May Court House, N.J. closed last week at $7.37, and pulled back this week to close at $7.15 on Wednesday, still up about 6.4% year-to-date.
Earnings: Net income for the first quarter was $635,000, or 5 cents a share, following a 2009 loss of $17.9 million, or $1.45 a share, reflecting loan loss provisions and impairment charges on securities. The net interest margin was 3.59% for the first quarter, unchanged from a year earlier.
Asset Quality: For main unit Cape Bank, the nonperforming assets ratio was 3.01% as of March 31, improving from 3.55% the previous quarter. The net charge-off ratio was 0.84% for the first quarter vs. 1.38% in 2009.
Prospects: Cape Bancorp's shares were trading for 0.93 times tangible book value last Friday, and 11.9 times the 2012 consensus earnings projection of 60 cents a share, making it appear to be a decent buy right now. Sterne Agee's Shafir has a buy rating on the shares, with a 12-month price target of $9.50, saying that Sterne Agee is "encouraged" by the declining delinquency trend.
ESSA Bancorp of Stroudsburg, Pa. closed last week at $12.18, and rose to finish at $12.50 on Wednesday, putting the stock up nearly 7% year-to-date.
Earnings: First-quarter net income was $1.6 million, or 12 cents a share, following 2009 net income of $6.6 million, or 47 cents a share. Over the past three full years, ROA has ranged from 0.49% to 0.54%.
Asset Quality: For main subsidiary ESSA Bank & Trust, the nonperforming assets ratio was 1.11% as of March 31, which is quite low in the current environment. The next charge-off ratio for the first quarter was a low 0.14% and was a miniscule 0.03% for 2009.
Prospects: While ESSA Bancorp has not been a stellar earnings performer, the thrift certainly is a steady performer, and is strongly capitalized with good asset quality. This is a bargain name, with shares trading below book value. Stifel Nicolaus analyst Laurie Hunsicker rates the stock a buy, with a 12-month target of $16.
Shore Bancshares of Easton, Md. closed last week at $11.76, and fell further to finish at $11.23 on Wednesday for a year-to-date decline of 23%.
The company repaid $25 million in TARP money on April 15.
Earnings: The company reported a net loss of $1.6 million, or 19 cents a share, for the first quarter. The red ink followed a decent 2009 when net income reached $7.3 million, or 64 cents a share. The first-quarter loss resulted from an elevated provision for loan loss reserves, as loan quality dipped. Net interest margin came in at 3.88% for the first quarter, down a bit from 4.03% a year earlier.
Asset Quality: The nonperforming assets ratio was 3.07% as of March 31, increasing from 2.27% in December and 1.58% in March 2009. The net charge-off ratio for the first quarter was a high 2.50%. Net charge-offs for the first quarter totaled $5.7 million, and the company set aside $7.6 million for reserves. While Shore Bancshares stayed ahead of the charge-offs, the ratio of reserves to loans appeared low at 1.41% as of March 31,
The holding company filed a shelf registration statement on June 25 to sell up to $75 million in equity or debt. The bank's Tier 1 leverage ratio was 9.29% and the total risk-based capital ratio was 12.79% as of March 31, but these ratios don't reflect the TARP repayment. That along with the shelf registration points to a likely offering of common shares.
Prospects: The market has already punished the shares, pushing them down below book value. Shore Bancshares earned $1.61 a share in 2006 and $1.60 a share in 2007, before earnings declined to $1.37 a share in 2008 when the crisis hit. While a consensus "normalized" earnings estimate isn't available, shares were trading at around 11.5 times Wall Street's current estimate for earnings of $1.04 a share in 2011, and if the company can get back to the good earnings performance it enjoyed before the crisis, investors might look back on a missed bargain opportunity.
Shares of Enterprise Bancorp of Lowell, Mass. closed at last week at $10.56, and the stock declined further to finish at $10.67 on Wednesday, down less than 3% year-to-date.
Earnings: The bank has remained profitable through the crisis. First-quarter net income was $2.9 million, or 32 cents a share, and earnings totaled $7.9 million, or 96 cents a share, for 2009. ROA for the first quarter was 0.88%, improving from 0.87% in the fourth quarter and 0.51% a year earlier. Net interest margin for the first quarter was an excellent 4.43%, up from 4.13% a year earlier.
Asset Quality: The nonperforming assets ratio was 1.29% as of March 31. Loan charge-offs through the crisis have been minimal.
Prospects: Enterprise Bancorp is a quality franchise that is certainly undervalued, with shares trading below tangible book value and at 8.3 times trailing earnings. No analyst projections of earnings were available from SNL Financial or other sources.
With earnings improving over the past three quarters and a history of shares trading at much higher multiples before the credit crisis, Enterprise looks like a winner.
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Disclosure information was not available for Van Doorn or his company.