Bank tellers: talk is cheap--even if prices aren't--about possible deals affecting the state's largest financial institutions.

• Author: Speizer, Irwin
• Position: FEATURE

Bank of America Chairman and CEO Ken Lewis once summed up his philosophy of banking in two words: Size matters. But as the Charlotte-based financial giant gobbled up bank after bank and rumors ran rampant about what would be its next meal, a new question emerged: How big is too big? BofA now has an answer, courtesy of the federal government.

On June 30, BofA said it would pay about $35 billion for Wilmington, Del.-based MBNA, one of the nation's largest credit-card issuers. The deal would bestow that distinction on BofA, but MBNA also held about $30 billion in customer deposits, potentially enough to tip BofA over a federal limit. No bank is allowed to attain more than 10% of total U.S. deposits through acquisition, and BofA may have to shed some to complete the deal.

That would put BofA, arguably the most aggressive bank buyer in the nation during the last two decades, out of the game, at least domestically, unless Congress raises the cap. Having used bank takeovers to create a network that stretches from New England to California, BofA now must grow by adding branches rather than buying banks if it wants to continue expanding its retail banking business in the U.S. It already has started buying into foreign banks. In September, BofA bought a 9% stake in China Construction Bank, with a five-year option to increase its stake to 19.9%, for $3 billion.

A regulatory roadblock might have been the only way to slow BofA, which has long dwarfed its in-state rivals. It sits atop The Financial 100, BUSINESS NORTH CAROLINA'S ranking of the largest financial institutions with headquarters in the state, as it or its predecessor has since the magazine began ranking banks annually in 1989. Moreover, it brings in more revenue, has more assets and makes more money than the rest of the Financial 100 combined.

For all other Tar Heel banks, the domestic cap is of little concern. For many, profits have been high, which gives them extra cash to spend on acquisitions, and stock prices have stayed up, too, which can provide leverage in deals. Already, there have been a few big buys this year. And there's no shortage of speculation about what's to come.

Wachovia, the second-largest bank in the state, has been among the busiest during the past few months. In September--though still integrating Birmingham, Ala.-based SouthTrust, which it bought for $14.3 billion last year--it agreed to buy Irvine, Calif.-based Westcorp, including its auto-finance subsidiary, WFS Financial, for $3.9 billion. The stock deal is expected to close early next year and make Wachovia the nation's ninth-largest originator of car loans. Less than two weeks later, it announced it would buy the international banking business of San Francisco-based UnionBanCal for $245 million and San Diego-based mortgage originator AmNet Mortgage for $83 million. Both are cash deals.

Acquirers, even if they're just rumored to be in the market, often see their stock price stagnate or dip. Investors tend to bid down the stock of acquiring companies on the theory that takeovers are costly and can dilute earnings, at least in the short term. Wachovia was no exception. Its stock had been hovering at about $50 since March--down from a 52-week high of $56.28--when it announced the Westcorp deal. Two weeks and two deals later, its shares were trading for less than $48.

It might not be finished buying. Wachovia, the nation's fourth-largest bank in assets, will keep looking for expansion opportunities in the West, Southwest and Northeast. It would love to grab a bigger chunk of the California market. In addition to the auto-loan business, Westcorp has 19 bank branches there, opening the door for other West Coast acquisitions.

A rumored merger of Wachovia and San Francisco-based Wells Fargo & Co., the nation's fifth-largest bank with $435 billion in assets, while attractive on paper, doesn't seem likely. One reason: Wells Fargo has often said it isn't interested in another big merger, particularly if Wachovia insists on keeping the headquarters in Charlotte. "Wachovia is still very hungry as far as building a national franchise," says Anthony Polini, an analyst at Advest, part of New York-based AXA Financial. "They are probably more interested in a merger of equals than Wells Fargo."

Apart from Wells Fargo, California no longer offers merger partners that could quickly give Wachovia a major banking presence there. One option sometimes mentioned: Minneapolis-based U.S. Bancorp. It's the nation's 7th-largest bank with $204 billion in assets and has 237 branches in California. Another possibility is Comerica, a Detroit-based financial company with $55 billion in assets and 44 California branches. Wachovia spokesperson Mary Eshet says the bank still wants to grow--through acquisition if the price is right. "But there is no imperative need to create a coast-to-coast franchise."

Even if no suitable deals come along, Wachovia plans to keep opening branches, mainly in Texas and the New York metro-politan area. It opened its first Manhattan branch in 2003 and had 13 by the end of September, with plans to open as many as a dozen more by 2007. In Texas, Wachovia began opening branches earlier this year and had 20 by September. It planned to add 30 more and convert 60 SouthTrust branches by year-end.

Winston-Salem-based BB&T, the third-largest bank in the state by revenue, has been...