NEW YORK ( TheStreet) -- Now that the economy is healing, the rumblings are starting that traditional M&A is on its way back to the bank sector. There have already been a few smallish transactions, most recently privately held Eastern Bank Corp.'s $163 million agreement to acquire Wainwright Bank & Trust ( WAIN) for a hefty premium. Then on Thursday, private equity stepped up as famed distressed investor Wilbur Ross led a $100 million investment in Sun Bancorp.
But the big deals may have to wait a while. Potential acquirers still need word on capital requirements from regulators, and a return to normalized earnings remains beyond the horizon. Banks that might be open to selling themselves are of course dealing with many of the same issues. The eventual shape of finreg and increased competition for failed institutions are also evolving factors. But when the things do pick up, the activity could be brisk. "This cycle is going to be even bigger than usual," says analyst Bob Patten of investment bank Morgan Keegan, which is owned by Regions Financial ( RF - Get Report). Patten predicts the first wave of mergers will be so-called "takeunders" of small banks by larger regional banks looking for fill-in acquisitions. He expects to start to see "transformational" deals in 2011, as well as an increasing amount of smaller transactions. In the near-term, FDIC-assisted deals for failed or teetering institutions, such as TD Bank's agreement to purchase the troubled The South Financial Group ( TSFG) in May, are expected to continue to dominate as the industry isn't quite out of the woods when it comes to credit costs just yet. >>>10 Potential Small Bank Takeout Targets Michael Rose, vice president of equity research at Raymond James & Associates, thinks the pace of economic recovery will be key to timing the next wave of bank M&A as management teams need to get more comfortable with being able to value the troubled assets of targets. Rose predicts consolidation over the next five to 10 years will bring the current tally of more than 8,000 banks in the United States down to roughly 6,000 banks. The most likely buyers will be the large and mid-size regional banks. The "too big to fail" bunch -- mainly Bank of America ( BAC), JPMorgan Chase ( JPM - Get Report), Citigroup ( C) and Wells Fargo ( WFC) -- could find it tough to participate as they deal with their sprawling businesses and finreg's impact. Although they could jump in under the right circumstances, as this article later theorizes. Foreign names like Canada's TD Bank, Barclays ( BCS), Spain's BBVA ( BBVA) and Banco Santander ( STD) also constitute a force to be reckoned with as they are itching for a larger piece of the U.S. consumer. Sumitomo Mitsui Financial Group is hoping to own a majority stake in a U.S. bank by 2013. The Japanese bank is willing to spend as much as $5 billion to buy a stake and is apparently looking at 20 U.S. banks, according to a Bloomberg article, citing an interview with an executive from Sumitomo on July 7. The executive told Bloomberg that Sumitomo is likely targeting banks in the Midwest or East Coast. "When it comes, I think it's going to be something like an arms race so to speak. Once one of them gets comfortable with doing these transactions," more banks will do them, Rose says. "At some point - it's not yet -- but when this M&A wave does start, you're going to see the stocks of these companies rebuild in an M&A premium." So what kind of deals will we see when the cycle kicks in? The Southeast looks like it could be ripe for significant consolidation. Banks of all sizes sought to capitalize on the massive residential housing wave there, and many of these banks are now sitting on mortgages, residential construction, and land and development loans that soured since the downturn. That being said, the common historical view is that "banks are sold, not bought," meaning that no deal will get done unless a potential seller's management team is willing to entertain discussions. For this article, we decided to look at three sizable regional banks in the South that could be potential sellers over the next few years. All three have yet to pay back TARP funds and are still reporting losses while struggling against overwhelming amounts of troubled commercial and residential loans. Once we settled on who might end up on the block, the next logical step was to make an educated guess about who might be the logical buyer. Here then are three potential hookups: