Bigger banks vying to deepen their market penetration might try to get there through a series of small steps rather than one big leap.

The chief executives of U.S. Bancorp and Fifth Third Bancorp said this week that building density in the markets they are in, instead of entering new ones, is the key to their acquisition strategy. They want to increase their market share, and both indicated they are willing to cobble their way to a higher position.

In this capital-focused environment, companies like U.S. Bancorp and Fifth Third could pursue smaller banks merely because of price, says Richard Bove, an analyst at Rochdale Securities LLC.

“You can pick up a small community bank for essentially nothing,” Bove said in an interview Thursday, a day after the executives’ remarks. “So, you look at your footprint, and figure out the holes and you try to fill it without having to pay too much for it. Take a look at Wells Fargo. It was through small acquisitions that it got to become a big bank in Texas.”

Bove predicts the companies will pursue banks with assets of $500 million to $3 billion. Of course, they would not necessarily shy away from larger targets, but there are fewer of those and purchase-accounting rules can put a large dent in capital.

At an investor conference hosted by Goldman Sachs Group Inc., Kevin Kabat, CEO of the $112.5 billion-asset Fifth Third, said he is focusing on markets where the Cincinnati company is not one of the three largest players and is targeting banks struggling to survive.

“We’re one, two or three in about half of our markets, and we think there’s an opportunity over the next couple years to change that from about half, to about two-thirds,” Kabat said. But he said the company does not envision making the deals until late 2012 or early 2013.

Richard Davis, CEO of the $330 billion-asset U.S. Bancorp, says he is focusing on adding market share in places where the Minneapolis company is not one of the top three players. He named Arizona, California, Colorado, Nevada, Tennessee and Utah as places where he would like to get larger. “So if we get a 90-branch bank in Denver, Colo., where we can move from fourth to third because we did it, it would be hugely interesting to us,” Davis said.

Fifth Third will definitely stick to smaller banks, says R. Scott Siefers, an analyst at Sandler O’Neill & Partners LP. U.S. Bancorp is “willing to look at pretty much anything” in its markets, but it too will likely keep filling in with smaller banks, he says.

“There are only a couple of targets on the large side, so in-fills are more likely. That tends to be smaller stuff that is easy to manage and is low-risk,” Siefers says. The larger banks would likely have a leg up on midsize banks that had been viewed as the expected consolidators of community banks, he adds.

Charlie Crowley, a managing director at the Cleveland investment bank Paragon Capital Group LLC, says he has heard larger banks make statements at investor conferences about their willingness to build market share through piecemeal acquisitions. They rarely go that route, he warns.

“If there is a $600 million bank that can take them from No. 4 to No. 3, would they in fact go through the trouble of doing it?” Crowley says. “It makes sense, but when we’ve brought them smaller banks they didn’t want to be tied up if something bigger and better became available.”

There are limits, Davis said. U.S. Bancorp doesn’t aim to grow in areas where it has a healthy lead. “We are not interested in taking market share where we have a huge density market and bring another risk to that. Because when you’re a big market leader, you actually have more risk than the reward,” Davis says.

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