There has been a good deal of consolidation in the banking sector, and it is likely to continue. In 2006, there were approximately 250 whole-bank acquisitions, some of which, of course, involved privately held companies. The average price paid was roughly 24 times trailing-12-month earnings, and 2.5 times tangible book value.
Through the end of the first quarter of 2007, there have been more than 65 announced transactions, and the multiples have been inching up. Therefore, it looks like we are off to another brisk year in terms of transaction activity.
Given the pace of consolidation and the healthy premiums that selling shareholders are receiving in buyouts, it isn't surprising that some investors have asked me about potential buyout candidates. Here is the advice I give most of them: Don't buy the stock unless the fundamentals are sound, as well. Otherwise, you may be stuck with a poorly performing bank, waiting for a deal that never happens.
With that in mind, let me give you a few names if you are interested in solid banks with good buyout prospects, meaning that, among other things, they have a strong franchise (often defined as deposit market share), relatively low inside ownership, and valuations that aren't too unreasonable.
SunTrust Banks (NYSE: STI)
Based in Atlanta, SunTrust has $182 billion in assets, meaning it would take a large player to buy this bank; there are only a handful of domestic buyers that large. Nevertheless, it would be a great geographic fit for a company like Wells Fargo (NYSE: WFC), just to name one potential partner. While not necessarily a top performer, SunTrust remains a decent bank.
TCF Financial Corporation (NYSE: TCB)
TCF Financial is another good bank, this one based in Wayzata, Minn. It has less than $15 billion in assets, which is still a good size but small enough that there would be plenty of bidders. It has a solid presence in a number of Midwest markets, has achieved solid growth, and has an impressive return on equity (ROE).
South Financial Group (Nasdaq: TSFG)
If you prefer a warmer-climate idea, consider South Financial Group, which has $14 billion in assets and is based in the wonderful city of Greenville, S.C. (disclosure: I grew up there). Profitability measures like ROE haven't been stellar, but the bank is sound, and asset quality has held up well. It serves mostly in attractive markets in the Carolinas and Florida.
Bank of Granite Corporation (Nasdaq: GRAN)
Finally, for a community bank idea, there is Bank of Granite Corporation, which has $1.2 billion in assets and is based in Granite Falls, N.C. Profitability measures have been perennially high, and efficiency measures are impressive. Although asset quality isn't as high as we would like, the company is well capitalized and has a strong reserve position.
Again, each of these banks is fundamentally sound, and I would be comfortable owning them even if they did not get bought out.
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Fool contributor John A. (Buddy) Howard, CFA, who still misses Greenville, S.C., does not own any of the stocks mentioned in this report. The Fool has a disclosure policy.
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