The new year is offering hope to deal advisers, as U.S. bank M&As promises to return at a healthy clip after three years of gloom.

For a change, healthy banks are once again stepping up to snap up rivals as they search for revenue growth in a lukewarm economy, investment bankers said.

Healthier banks are emboldened by a better sense of the credit risks on the target's books, their own ability to absorb losses when assets are marked to market in a transaction, and rising stock prices, which give them the currency to acquire while preserving capital, these experts said.

"Healthy banks want to expand their business, grow their earnings and grow their balance sheets," said Brian Sterling, co-head of investment banking at Sandler O'Neill. "And there is no way to do that by making more loans because of the relatively weak loan demand."

"We saw that trend coming out of the last credit cycle in the '90s and we fully expect it this time — that banks will look to grow and they will look to grow by acquiring other banks," Sterling said.

The U.S. banking sector saw $16.1 billion in deals this year, down from $68.8 billion in 2007, Thomson Reuters data shows.

Although the volume was much higher during the financial crisis — $64.8 billion in 2008 and $56.2 billion in 2009 — deals have been dominated by failed bank transactions and sometimes forced marriages.

The pace of more normalized dealmaking — involving open but still troubled banks — has been picking up in recent months, a trend experts expect will accelerate in 2011.

Two of this year's top 5 deals were announced in the last two weeks.

Bank of Montreal's agreed to buy Marshall & Ilsley Corp. for $4.1 billion on Dec. 17, while Hancock Holding Co. agreed to buy Whitney Holding Corp. for $1.5 billion on Dec. 22. Both deals were in stock and offered hefty premiums — 34 percent for M&I and 42 percent for Whitney.

"The environment is improving and boards and management have more confidence in the assets they are buying," said Steve Frankel, a Joele Frank partner who specializes in financial services. "With the stock performance improving, the banks have better currency to use in these transactions."

The KBW Regional Banks index is up 20 percent this year.

CONFIDENCE RETURNS

Bank deals are also likely to be driven by buyers' improved confidence in their ability to size up risks in loan portfolios and snap up weakened institutions before they are seized and auctioned off by the Federal Deposit Insurance Corp (FDIC).

A deal before a bank is seized is preferable as the acquirer can avoid having to compete in an auction. An agreed sale also saves the target company from reputation damage, employee issues and other stress that comes from being seized by regulators.

That attitude has changed from the crisis era when no one was able to quantify with certainty the risks of a toxic loan portfolio, and the best deals were seen in the FDIC process.

In one example last month of a deal done without FDIC help, M&T Bank Corp. agreed to buy troubled Wilmington Trust Corp. for about $681 million.

Pressure to repay bailout funds under the Troubled Asset Relief Program (TARP) is also likely to be a catalyst for transactions like the Whitney deal this month, as companies decide between a deal — possibly at a premium — and a dilutive equity raise.

The return of the mega transaction, however, is still some time away. While the number of transactions would pick up in 2011, most deals are likely to be small, below $1 billion in size, experts said. That means deals like M&I Bank Corp. might still be rare next year.

"We will expect people to be active at all sizes as buyers, but I don't think there's a lot of big banks to be bought," Sterling said.

Frankel, whose firm specializes in communications around deals and other special situations, said CEOs who maintained their reputations and the confidence of their shareholders during the crisis will "have the juice to do deals."

"The momentum takes on a life of its own," he said.