Regional Banks: It's All About Credit

You have some banks [at] 2.20% [of loans]. Bank of America (BAC Quote) is at 2.15%. So I think there is still a significant amount of reserve building that still needs to be done and credit will go as credit goes. And if they start to show default issues and it starts to get worse, you don't want to have to raise capital a couple quarters from now. The cost of capital is increasing daily.

Why haven't we seen more M&A at the regional bank level? Who could be a hot target?

M&A just doesn't happen in a credit cycle. The simple fact is if you're having a hard time figuring out what your problems are on your own balance sheet, why would you want to buy somebody else's?

I still think you go back to the franchise values of the markets they are in. Florida is the bear story today, but at some point, if you look out the windows in Florida, you've got palm trees and ocean and it's a nice place to live. Do you want to live there or in Oklahoma? My thought is it's a huge asset-gathering market. With the rising cost of capital, banks will be much more judicious about how they allocate when they use capital, in terms of returns. Things like asset management will be a big driver of fee revenues. You want to be where the retirement markets are, so I think Florida will come back in a few years. Franchises like Colonial, SunTrust, First Horizon, which border all those southeastern states; franchises like the Texas banks. You can't rule out names like KeyCorp(KEY Quote) and Fifth Third(FITB Quote) [for M&A, but] ... they're in the Midwest and slower growth [makes them] not as much of an attraction. Synovus could be an interesting play a year or two from now. It's a great little bank.