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Since the start of 2008, 273 banks have bit the dust. One hundred and eight have been taken over so far this year. The acquiring banks, which I will call REBS (Regional Banks Eating Other Banks), deserve a very close look. They're a growing list which include Valley National Bancorp (VLY), New York Community Bancorp (NYB), First Citizens Bancshrs (FCNCA), BB&T (BBT), Umpqua Holdings (UMPQ), FirstMerit (FMER), CNY.

There are eleven reasons to buy the REBS.

  1. They took over loans backed by the full faith and credit of the United States. The loans taken over by troubled banks are "covered": the government will cover 80% of any losses, and, in many cases, 95% once a certain amount is reached. Contrast that to some of the large banks such as Bank of America (BAC) and JP Morgan (JPM) whose acquisitions (Countrywide and WAMU respectively) were not covered. (BAC and JPM's picks seem to have put them in the perpetual cross-hairs of litigants.)
  2. (Usually, you pay up when you acquire companies. Not here. The REBS expand their bases at no extra cost. Occasionally, the government pays them to do so when the REBS are acquiring fewer loans than deposits. For the most part, they're not paying a premium to grow their business. For instance, NYB, with its acquisition of AmTrust, became a major player in Ohio, Arizona, and Florida. As part of the deal, the FDIC paid NYB $3.2 billion because AmTrust's assets were smaller than their liabilities. Five years ago, a bank would have paid an extra $3.2 billion dollars to AmTrust's shareholders.
  3. Banks are seeing contracting net interest margins (NIM)) because mortgage rates are decreasing. In contrast, the REBS are seeing improving NIMs because of their covered loans. Covered loans generate high interest rates. VLY and NYB, for example, reported higher NIMs in large part because of these covered loans.
  4. The banks are seeing declining loan demand by qualified applicants. The REBS have acquired their loan portfolios (backed by Uncle Sam).
  5. The REBS can be more selective about whom they lend money to. Their larger book of business gives them enough to do. They can pick more carefully whom to do business with.
  6. They're growing, giving them leverage of scale as well as opportunities to become more efficient.
  7. The FDIC has a list of 775 troubled banks. They're not telling who is on it. One thing is certain: the REBS are not on that list. The REBS have been given the FDIC seal of approval.
  8. FinReg will require significant dollars in accounting and legal. Tiny banks won't be able to do that.
  9. REBS may start to look like dinner to the larger financials with their decent balance sheets and covered loans.
  10. The REBS, for the most part, were conservative in their lending, not engaging in subprime and alt-A loans.
  11. Many of the REBS are not new at the game. They've successfully acquired banks before. VLY has taken over 22 banks. NYB has swallowed 8 since 2000.

Disclosure: Long VLY, NYB, FCNCA

Source: 11 Reasons to Buy Regional Banks