Pennsylvania's small and midsize banks appear to be warming up to mergers and acquisitions.

The Keystone State is home to 31 banks and thrifts with $680 million to $2.6 billion in assets, a total that exceeds most other Northeastern states. An abundance of institutions, along with lingering industry headwinds, makes the state ripe for increased M&A.

"Pennsylvania is much less consolidated than other markets, especially New York and New England," says Matthew Kelley, an analyst at Sterne Agee. "You still have a lot of small public and private banks, and a lot of banks that have strong liquidity that they can put to work."

In recent years, most deals have involved Pennsylvania's banks expanding outside the state.

F.N.B. Corp. (FNB) in Hermitage has led the charge, announcing three out-of-state acquisitions in the last year. The $11.8 billion-asset company has turned to Maryland with deals for BCSB Bancorp (BCSB) and Annapolis Bancorp, and Ohio, where it is buying PVF Capital (PVFC).

F.N.B. would consider in-state markets such as Pittsburgh, but it would largely involve cutting overlap instead of immediately adding revenue, Vince Delie, the company's president and chief executive, said during an April conference call. He was cautious about Philadelphia, calling it "highly competitive" and challenging to quickly gain scale.

S&T Bancorp (STBA) in Indiana, Pa., has also settled into Ohio by opening loan production offices in Akron and Youngstown.

"There are some opportunities in contiguous states and banks that need new markets to grow in have an opportunity to take advantage of that," says Matthew Schultheis, an analyst at Boenning & Scattergood.

Mergers between in-state banks often involve smaller institutions. A typical example took place in March, when Riverview Financial (RIVE), a $311 million-asset company in Halifax, agreed to buy the $120 million-asset Union Bancorp (UBPT) in Pottsville.

Still, some industry observers believe more in-state mergers are looming. They point to a recent agreement by the $678 million-asset Peoples Financial Services in Hallstead to buy Penseco Financial Services (PFNS), a $926 million-asset company in Scranton. The deal makes sense by combining two well-run franchises, Schultheis says.

"There are still a lot of very small banks in Pennsylvania," Schultheis says. "I think we'll see M&A pick up again."

Peoples Financial decided to pursue Penseco to address the higher costs of doing business, says Alan Dakey, the company's president and CEO. Dakey says he also expects the rate of mergers to accelerate across the state.

"A lot of Pennsylvania banks have had a fierce independent philosophy," Dakey says. "But with economic and regulatory changes — and some challenges in future profitability — I do think it will result in more transactions."

Peoples Financial will become a publicly traded company as part of the all-stock offer for Penseco, as a result of an increase in shareholder count. The companies expect to complete the deal late this year.

Other Pennsylvania institutions are laying the groundwork for potential deals. Prudential Bancorp of Pennsylvania, a $479 million-asset company in Philadelphia, filed documents last month for a second-step conversion. Prudential must wait three years after closing the conversion to sell itself, though the second-step would provide a considerable amount of offensive capital.

A forecasted uptick in deals should eventually include bigger acquirers.

Several bigger banks could benefit from gobbling up smaller competitors. Kelley says such acquirers could include F.N.B., the $8.3 billion-asset National Penn Bancshares (NPBC) in Boyertown, the $16.7 billion-asset Fulton Financial (FULT) in Lancaster; and the $18 billion-asset Susquehanna Bancshares (SUSQ) in Lititz. "There are some who we think could be active buyers," Kelley says.

Smaller banks in Pennsylvania are "right in their wheelhouse," Kelley adds. "Some of these buyers have a stronger currency than they did 90 to 120 days ago. That's a chance that gets people excited."

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