Stocks to Buy Now Ahead of Major Bank Industry Takeovers

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There has been a lot of discussion among investors over the past few years about whether the banking industry offers any quality stocks to buy now.

The big banks brought the economy to its knees in 2008 and had to be bailed out by the federal government with taxpayer dollars. The disastrous decisions at large banks spilled over to the smaller banks and caused severe economic distress for many of them.

Many banks were forced to close with 140 banks failing in 2009 and another 157 in 2011.

Although the numbers have tapered off some we still saw more than 50 banks fail last year as a result of residual problems from the housing boom and ensuing credit crisis. This type of carnage is reflected in the price of many small banks, which are just now starting to see their balance sheets and stock price show signs of improvement.

We now face an environment much like the aftermath of the savings & loan debacle in the late 1980s and early 1990s.

You see, during the economic boom from 2001 to 2007 many new banks opened across the United Sates to take advantage of the cheap money from the Fed and the high demand for housing and home equity loans.

Now in the aftermath of the implosion of housing prices, we find ourselves with too many banks even after all the failures. We have seen some bank mergers in 2012 but this is just the start of what will be a massive wave of bank and thrift consolidation activity.

While we have seen some economic recovery, we continue to operate in a better but not good economy. Loan demand is still fairly tepid and is well below pre-crisis levels. It is difficult for many banks to gain market share and maintain profitability.

As we enter 2013 banks face new regulation and compliance costs that may further crimp operating profits. Smaller banks in particular are experiencing high levels of frustration at their inability to remain profitable and grow their franchise. Shareholders are unhappy after several years of poor share-price performance and want to see a return on their investment.

For many the best path is going to seek a suitor and sell out to a larger competitor.

For investors this creates an enormous opportunity for long-term profits, if you know the right stocks to buy now.

Stocks to Buy Now as Banks Consolidate

One way to profit is going to be to identify the takeover targets and profit when they are purchased at a premium to the current stock price.

Indeed, many investors and funds have been advocating this approach and they should do very well over the next five to ten years.

However, there is another path to profits that is largely ignored by most investors in their search for stocks to buy.

The traditional approach of investing in banks that are takeover targets will continue to be very profitable — but do not ignore the opportunities that exist in buying the buyer.

There are several banks that have formulated a strategy of making acquisitions and expanding their business by taking advantage of smaller banks' desire to sell. In the aftermath of the crisis bank assets are still very cheap on a historical and economic basis and the buyers should do very well as the economy recovers over the next decade.

One such institution is Capital Bank Financial Corp. (Nasdaq: CBF) a Florida-based bank that has rapidly expanded throughout the Southeast portion of the United States.

The bank was formed in 2009 by a group of experienced bankers for the specific purpose of acquiring banks in the region on favorable terms. The founders raised more than $900 million in a private sale of stock and the original investors included several of the better-known private equity and value-investing firms.

They have purchased seven institutions including three failed banks with the assistance of the Federal Deposit Insurance Corporation. With the closing of their latest transaction the bank now has 164 branches with $7.3 billion in assets.

The bank has established strong presence throughout the Southeast and intends to continue to seek targets for acquisition in the region. Because of the turmoil in the banking industry they have acquired assets for extraordinarily low prices in desirable locations.

The bank is also seeing organic growth in both assets and loans as they take market share from the larger banks in the region. Although many of the banks they purchased had substantial nonperforming assets, the credit condition of the portfolio has improved every quarter for more than a year now.

The company has plenty of capital with equity-to-asset ratio of more than 15 and recently announced they will use some of the excess to buy back more than $50 million of stock. With the shares trading at tangible book value the stock is cheap enough to buy for long-term bank stock investors.

For a look at a couple juicy takeover targets that make great stocks to buy, check out these picks.

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