Merger Mania: Big Banks Absorb Little Banks

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It’s starting to look a lot like the '80s again.

Michael Douglas is back as Gordon Gekko, the Redskins have a good football team, and banks are increasingly looking to snap up weaker banks to grow stronger. Who are the big merger players and what are they up to?

Let’s set the stage. With the failure of Bradenton, Fla.-based Horizon Bank, that’s a total of 119 bank failures in the U.S. in 2010 — the highest amount since 1992. The Federal Deposit Insurance Corp. says another 829 banks are on its “troubled bank list” as of Aug. 31. So right up front there’s a burgeoning list of troubled banks — and soon-to-be-troubled banks — that could be takeover targets.

First on our list of buyers is PNC Bank (Stock Quote: PNC). The Pittsburgh-based bank is in what bank merger watchers call the "sweet spot" — big enough to throw its weight around and grab smaller, weaker banks, but not so big that it falls under the watchful eye of Uncle Sam, who has strict regulations on what mega-banks can and cannot do in terms of merger activity. Big banks like Bank of America (Stock Quote: BAC), JPMorgan (Stock Quote: JPM) and Wells Fargo (Stock Quote: WFC) each own 10% of total U.S. bank assets, making them ineligible to grow any larger under statutes laid out by the federal government.

But not PNC. A big regional bank like PNC is primed to swoop in and pick up the growing number of banks suffering depressed market values thanks to the sour economy and tight credit market. The consulting firm Keefe, Bruyette & Woods, Inc. says banks like KeyCorp, SunTrust Bank, and Regions Financial Corp. could be pick-off targets for PNC, and other big regional banks like U.S. Bank (Stock Quote: USB).

“Those companies have the luxury of looking at anything, says New York-based KBW analyst Christopher McGratty. “Acquirers are more likely to strike than they were last year now that the industry has stabilized. If you feel you have a fair assessment of what your own assets are worth, you feel better about looking at others.”

PNC has already acquired National City Corp., and absorbed the bank into its branch system this past summer. And U.S. Bank bought 10 banks in the past two years. As bank reform comes into play, and more banks wrestle with declining revenues, tougher regulations, and stronger capital requirements, we can expect more banks to put “for sale” signs outside their doors.

And they may not have a choice: “A key board consideration is likely to be whether earnings headwinds will remain too intense and preclude the bank from earning an acceptable return above its costs of capital," KBW’s McGratty wrote in a June 2010 research report. "If so, we believe this is likely to spark conversations about maintaining independence."

Under those circumstances, survival, or at least some form of it, may trump independence for a growing number of banks.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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