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5 Buy-Rated Bank Stock Takeout Targets From KBW

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NEW YORK ( TheStreet) -- With narrowing margins and a growing regulatory burden, there are plenty of reasons for community banks to throw in the towel and sell to competitors, but there's one overriding reason: To make money for their shareholders.

The banking industry survivors are still building capital, as they await regulators' final set of rules to implement the Basel III rules. This is the powder for an expected wave of industry consolidation, which has been held back by relatively low stock valuations.

Many small and regional banks' boards of directors facing limited returns on their investments have, or will have, numerous reasons to sell:

Lingering Credit Problems Threatening Capital

In his firm's Bank M&A Weekly report on Monday, KBW analyst Timur Braziler said that while "the overall health of the banking industry continues to improve... there remain 350 banks that have a Texas ratio of greater than 100% with total assets of $191.6 billion."

The Texas ratio is a bank's ratio of Tier 1 capital and loan loss reserves to its nonperforming loans, and considering the drop in collateral values over the past five years, a ratio of more than 100% offers quite an incentive for many banks to look for stronger acquirers.

V. Gerard Comizio -- the chair of the Global Banking practice of Paul Hastings, based in the firm's Washington office -- says that community banks that need additional capital will find it very difficult to remain independent. "Only the biggest of the community and regional banks will have access to private equity and the capital markets," he says.


The Consumer Financial Protection Bureau was formed under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and according to Comizio, "there was a misperception on the part of community banks that they would not be regulated by the CFPB if they had less than $10 billion in total assets. In some ways, they will face an even worse regulatory burden than the larger institutions, because the CFPB's requirements will be enforced by the community banks' everyday regulators, which really have something on the line."

Because the consumer protection aspects of Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency supervision are now under the umbrella of the CFPB, Comizio says it is likely that "you are going to see the primary regulators of the smaller institutions be pretty vigilant in enforcing CFPB regulations."

Lenders large and small will also be affected by the "skin in the game" rules under Dodd-Frank, which send banks "back to the future," according to Comizio, in requiring lenders to retain a significant piece of the risk when they securitize residential mortgage loans or sell commercial loans into syndication or participations.