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Looking for the Next Failed Bank Winner

Recent winners of failed bank auctions have seen their stocks soar, and FBR Capital lists Washington Federal and NewAlliance among the banks likely to go this route in the near term.

Updated with closing share prices




) -- Judging by the pop in shares of

East West Bancorp

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(IBKC) - Get IBERIABANK Corporation Report

this month after these companies won separate deals to acquire failed bank assets, trying to pinpoint other institutions gunning for similar transactions could yield hefty returns for investors.

FBR Capital Markets sees past participants

BB&T Corp.

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U.S. Bancorp

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, as being active, as well as some of the smaller banks it covers:

NewAlliance Bancshares



New York Community Bancorp



People's United Financial

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, and

Washington Federal



A key to the attractiveness of these transactions is, of course, the assistance of the

Federal Deposit Insurance Corp.

, or FDIC, which pledges to share in potential losses, essentially providing what FBR Capital calls a "risk-free earnings stream" in a note issued to clients on Monday. The firm estimates the return on assets, or ROA, on these deals runs around 1% to 1.5%, while it currently puts the median ROA for the top 500 banks at 0.35%.

"The FDIC loss-sharing agreements that we are seeing today are very attractive and create a situation in which, even if the entire failed bank's portfolio fell to $0, losses to the acquirer can be relatively minimal," the firm says.

Because of this, bidding for failed banks is becoming more competitive, FBR Capital notes, but it feels the opportunities will be plentiful, however, likely outstripping the number of healthy banks in a position to participate in the auctions.

"We believe that there are currently not enough 'good' banks to buy the 'bad' banks and that, therefore, private equity groups and other pools of investors will likely remain involved with FDIC-assisted acquisitions," the note reads. Around 150 banks have failed so far this year, and there were more than 400 names included the last time the FDIC released its list of 'problem' institutions in late August.

The big banks, the firm believes, will remain on the sidelines as most of the large money-center institutions -- specifically

Bank of America

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JPMorgan Chase

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, and

Wells Fargo

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-- already have plenty on their plates in terms of integration, given the huge deals they've done not so long ago. There's also philosophical resistance from the government to consider: "We do not expect the regulators to allow banks that are 'too big to fail' to become even bigger," the note reads.

Of the individual banks it covers, FBR Capital says it has the "highest conviction" that Washington Federal will pull off an FDIC-assisted deal, and it sees the timing of such a deal as "sooner than later." The firm, which has an outperform rating on the stock, notes the Seattle-based Washington Federal recently raised $300 million through a stock offering in September, and it feels the company "could comfortably acquire a $3 billion-plus (assets) institution" with its current excess capital.

FBR Capital expects Washington Federal will look to do one big deal, rather than a series of small ones; and that the company is seeking a transaction that will increase its exposure to commercial loans, a move that would allow it to better manage interest rate risk on its balance sheet. The firm notes its current price target of $20 on the stock doesn't reflect the upside of any FDIC-assisted deal. Washington Federal shares closed Monday at $19.05, up 0.8%. The stock is up nearly 29% over the past 52 weeks, and hit its high for the past year of $19.68 last week.

Among the other banks that FBR Capital highlights, New York Community Bancorp is interesting because the firm believes the company is holding out for a comparatively large deal ($10 billion or more in assets), and that it may have a hard time getting one done because of the parameters it's putting on any transaction and the crowded field of bidders.

"We infer from management's comments that it is seeking returns in excess of 1.25% ROA, but as failed bank auctions become increasingly competitive, the possibility of a low-priced, high-return transaction is increasingly challenging," the firm says.

So while a deal involving New York Community Bancorp would grab big headlines, and be a boon to the bottom line (FBR Capital estimates a $12.5 billion

assets assisted transaction would be 14% accretive to the company's 2011 earnings per share assuming a 1.25% ROA), it's also less likely a scenario than others that the firm lays out. Shares of New York Community Bancorp gained a dime to finish at $11.37 on Monday. The stock, which FBR Capital reiterated at market perform, is up less than 1 percent for the past 52 weeks.

NewAlliance garnered an upgrade to outperform from FBR Capital as part of the call, with the firm citing "the strong earnings accretion potential of an assisted transaction, as well as our view that there is a good likelihood that NAL will be able to acquire a few billion dollars of assets" this way.

The firm estimates even a small deal of as little as $500 million in assets should be 10% accretive to the New Haven, Conn.-based company's earnings, and it feels the company will benefit from potential failures in the Northeast U.S. region, which is generally perceived as being solid but does have its share of weak banks. The stock closed 3% higher on Monday at $11.96. FBR Capital has a $13 price target on the shares.

Interestingly, People's United Financial pulled the trigger on a deal of another kind Monday, announcing its agreement to acquire

Financial Federal Corp.

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before the opening bell. Rather than a failed bank, the $738 million cash-and-stock transaction gives People's United a provider of construction equipment-related leasing and lending services. In its note composed prior to the deal, FBR Capital estimated People's United had $2.5 billion in excess capital, and said if the company can complete a deal for $30 billion or more in failed bank assets, "there is likely good upside for the shares." People's United shares fell 2.7% to finish at $16.03.

East West Bancorp shares are up more than 60% since it announced its deal to acquire the assets of UCBH Holdings on Nov. 6, while Iberiabank's stock has gained nearly 20% since it snapped up certain assets of two failed Florida-based banks on Nov. 13.

Written by Michael Baron in New York.