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10 Bank M&A Targets

NEW YORK ( TheStreet) -- It looks like private equity is becoming more aggressive about pursuing acquisitions in the financial industry. Community Bancorp LLC's outbidding of Trustmark ( TRMK ) for Cadence Financial (CADE) is the most recent example.

Several small community and regional banks have been rumored to be targets of private equity investment or acquisitions. So we have compiled a list of banks that will likely be targets for investments by private equity. We selected the largest bank holding companies to post net losses for both the first and second quarters of 2010, leaving out Flagstar Bancorp (FBC - Get Report) and Pacific Capital Bancorp (PCBC) because these companies have already received very significant capital infusions from private equity firms.

"This is a good list of banks. These are all banks that all have credit issues and need capital," Jones Day partner Chip MacDonald said of our top 10 acquisition targets.

"All of these franchises have attributes of good market share in good markets and that makes them potentially attractive to buyers," said Jeff Davis, a managing director with Guggenheim Partners LLC. "All of these could be sellers. M&A can be the icing on the cake, but investors should never buy a bank stock based on bank stock takeover valuation though."

What may be surprising to several investors, is that even though many of these banks are in need of capital, they are considered reasonably healthy. That is mostly because most private equity firms are looking for banks with depressed valuations that they can easily turn around.

"If you invest in a healthy bank or a relatively healthy bank that's the way to go," says Roman Regelman, a Partner with Booz & Company's Financial Services Practice. "You invest a little bit and you can build a platform."

That's exactly what Community Bancshares intends to do with Cadence. The bank-holding company, owned by former bankers, intends to make several investments in both failed and healthy banks.

Several of the banks on our list such as Synovus Financial (SNV - Get Report), United Community Banks (UCBI - Get Report) and Wilmington Trust (WL) racked up big losses in their real estate loan portfolios and are also still participating in the Troubled Assets Relief Program, or TARP. "With the economy in neutral, there will be a ton of M&A activity, but it is not going to be like shooting fish in a barrel," says Davis. "There are several hurdles for transactions to clear."

Some of these challenges will be regulatory. Regulators cap any single PE firm at 24.9% investment in a bank, unless the PE firm becomes a bank holding company, putting under a much heavier regulatory burden. That's why there will be several smaller PE firms and consortiums investing in financial institutions.

"A common trend is that most of these investments are made by small PE firms established by former bankers," said Regelman. He added that regulations have kept many larger private equity firms away from investments in banks. "It's unlikely that you will see a TPG or Bain investing in a 24% stake in a bank," he said.

CBC is just one of several small PE firms interested in expanding their financial services investments. Warburg Pincus, Carlyle and Wilbur Ross have also made recent investments in banks.

Here are the top 10 banks likely to be targeted by private equity firms, by increasing asset size:
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