Smaller Banks Ripe for the Buying

The community banks are familiar with the businesses and are doing business with their friends and neighbors. As a result, loan quality tends to be better and these "good loans" form the backbone of any bank. It's what the bank depends on for income.

Despite the emerging opportunities seen by analysts, M&A activity in the sector has been slow amid the credit crisis. The Bank of Tokyo-Mitsubishi UFJ last month bought out the remaining 35% stake of UnionBanCal (UB Quote) it didn't already own for $3.5 billion. Valley National Bancorp (VLY Quote) also bought Greater Community Bancorp in March.

In a note Thursday, Ladenburg Thalmann analyst Richard Bove speculated that BB&T (BBT Quote) CEO John Allison's plans to retire could make a deal with another regional like Fifth Third Bancorp (FITB Quote) more likely.

Private-equity players also have been kicking the tires of many regionals, but are hampered by regulatory requirements that allow only individuals or bank holding companies to control a bank. Thus, while private equity funds like TPG and Corsair Capital have invested in Washington Mutual (WM Quote) and National City (NCC Quote), respectively, they can only buy minority stakes.

Anton Schutz, who manages two Burnham Financial Funds, says he believes more private equity funds will create bank holding subsidiaries to get around this restriction. He points out that the best areas for banks are in Texas and the northeast. The weak geographic regions, no surprise, are California, Florida, Nevada, Arizona and Michigan. But Schutz thinks there's hope for the troubled banks.

"Private equity is looking for broken names, especially the funds that want big returns," he says. "They want to fix these banks up and then sell them for a nice profit."