Smaller Banks Ripe for the Buying

Dragged down by the general malaise gripping the financial sector, some healthier regional banks are emerging as attractive acquisition targets.

Regional bank stocks have been pummeled along with the rest of the financial sector over the past year, as hedge funds short names across the board. As a result, the valuations of some extremely well-run banks have been pushed down to bargain basement prices, creating new interest among possible buyers.

"Between now and the end of the year, expect to see things happen," says Chris Whalen of Institutional Risk Analytics, a firm that is evaluating several banks for potential acquirers. "The value is compelling, if you can afford to wait."

The KBW Regional Banking ETF (KRE Quote - Cramer on KRE - Stock Picks) is down about 35% from its 52-week high, even though some of the banks in the index are in excellent shape. Sterling Bank (STL Quote - Cramer on STL - Stock Picks) has limited exposure to residential mortgages and has paid dividends for 62 years. Then there's Webster Financial (WBS Quote - Cramer on WBS - Stock Picks), which has tumbled 52% for the last 12 months. Both of these banks operate in the northeast and have been spared some of the pain that other regions have faced.

Whalen said he has signed on four new clients to value banks for them. His company takes information directly from the Federal Deposit Insurance Corp. and applies various financial metrics in order to determine the health of a bank called the FDIC/IRA Bank Monitor.

Smaller regional banks have managed to capture a great deal of business as the larger nationwide banks have pulled back credit. The big banks have been distracted with losses from bad residential loans, risky collateralized debt obligations and legal pressure from state and federal authorities on sales of auction rate securities. Meanwhile, businesses continue to need capital and have turned to their local lenders for help.

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