Mergers and acquisitions activity appears to be gaining traction in the banking industry, but one glaring void remains: banks with more than $10 billion of assets doing splashy deals.

Dealmaking in the post-crisis era has largely been small banks buying other small banks hoping that there is safety in numbers when it comes to the operating environment and regulatory climate.

Interspersed within the crowd of small transactions have been a few standouts: the emergence of new regionals with combinations like Umpqua Holdings and Sterling Financial on the West Coast and FirstMerit and Citizens Republic Bancorp in the Midwest; the regulatory snags M&T Bank has encountered in its bid to buy Hudson City Bancorp; and most recently, CIT Group's agreement to buy OneWest Bank, in a deal that will thrust the specialty lender into the realm of the systemically important.

More pairings in this size range are likely on the way, says Aaron Packles, the head of investment banking for depository institutions at Bank of America Merrill Lynch, which represented IMB Holdco, the parent company of OneWest, in the $3.4 billion deal with CIT.

"We are seeing the number of deals increasing, but the overall deal sizes remain relatively small," Packles says. "A good amount of uncertainty for the larger banks still exists; however, we would be surprised if there wasn't a pick-up in activity for banks with balance sheets under $100 billion in assets in the next few years."

Of course, some banks have reasons to refrain from M&A, such as lingering regulatory issues. But Packles says the willing and able should jump in before the pool of buyers gets crowded. With suitors in this $10 billion to $100 billion size range still lacking, bargaining power is at its strongest now.

"The framework for deal-making is there, the ingredients are there, but all the buyers are not," Packles says. "If you are a thoughtful buyer, and are able to buy, now can be a good time given the lack of competition in certain markets. There is potential to garner real value on the buy side in a transaction."

One of the main issues keeping the larger banks out of the M&A market is the stress-testing and capital-planning oversight conducted by the Federal Reserve. But Packles says that as banks become more accustomed to the exercise, they also should start to feel more comfortable with pursuing deals. "Once the banks have a few at-bats with stress-testing — and who knows how many will be needed — there may come a point when folks say, 'I get how this works' and become more confident to enter the M&A arena."

The challenge of producing loan growth these days should make acquisitions all the more attractive, Packles adds.

However, at least some buyers also are starting to look at liquidity-driven acquisitions as they plan for a higher rate environment. John Thain, CIT's chief executive, cited attractive funding as a primary reason for pursuing the OneWest deal. 

Additionally, one of the strongest inducements for M&A in recent years has been the performance of the buyer's stock immediately following the deal announcement. Although most of the significant increases in 2013 happened when large community banks bought out their rivals, even the bigger buyers have experienced a boost. CIT is up 11% since the OneWest announcement in July, for instance.

"What's the holdup when the markets are supporting the deal?" Packles says. With the stock pops, "investors are telling other potential buyers to go find a strategic deal and, if it is the right deal, we will support you."

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