A year after the worst financial meltdown since the 1920s, capital markets are giving the country's banks a vote of confidence. Whether that turns out to have been a good idea or not, the surge in capital raising, combined with a stream of bank seizures and generous terms by the government to acquirers, is prompting a consolidation wave that could rival any on record.

"We're going to have a very powerful run of mergers in the next couple of years," says Anton Schutz, portfolio manager of the Burnham Financial Services Fund. Schutz argues that today's climate is similar to what existed in the early days of the savings and loan crisis, where the government sold off weak banks at attractive discounts, allowing strong institutions to gain market share and recast the industry.

According to SNL Financial, banks and thrifts have raised $80.9 billion through the equity capital markets this year, with a further $49.2 billion through preferred equity offerings. Debt capital markets have allowed banks to raise an additional $30.1 billion in both senior and subordinated debt, and $29.6 billion has come through the issuance of hybrid trust preferred securities.

Banks are using some of that money to repay government money. SNL estimates that about 85 banks, including behemoths such as J.P. Morgan Chase & Co. and PNC Financial Services Group Inc., and minor players such as Valley National Bancorp and HF Financial Corp., have either fully or partly redeemed their Troubled Asset Relief Program shares. According to the department's latest report for the week ended Sept. 23, about $70.7 billion of the $204.6 billion the U.S. Treasury invested in the banking sector has been repaid.

Andrew Senchak, president of Keefe, Bruyette & Woods Inc., predicts consolidation activity will pick up in the coming months, and the action will be concentrated among mid- and small-size firms. "Overall, the market shares have been established by the big guys," he says, adding there's little appetite for the bigger banks to expand meaningfully. In some cases, they are already digesting sizable acquisitions, including J.P. Morgan Chase, which bought Washington Mutual Inc., Wells Fargo & Co., which loaded up with Wachovia Corp., and Bank of America Corp., with its takeover of Merrill Lynch & Co. Citigroup Inc. is reportedly moving away from retail banking; it may sell branches in Massachusetts and Pennsylvania.

Frank Cicero, a managing director in Barclays Capital's financial institutions group, says midtier banks are being encouraged by government support and risk assumption in deals for troubled institutions. Ninety-five banks have failed so far this year -- the most since the early 1990s.

Meanwhile, 416 others sit on the Federal Deposit Insurance Corp.'s problem list, the most in 15 years. Some banking analysts think the number of likely bank failures is much higher, as worries persist of another round of damaging write-downs to overextended lenders as commercial real estate values drop.

The data show the average size of banking deals has been dropping, even as numbers increase. According to Dealogic, there were 59 bank deals in the second quarter, up from 48 in the first. Total deal value, however, dropped from $10.4 billion to $1.2 billion. In the third quarter, 56 deals were announced, totaling $518 million.

Cicero most recently advised Ohio's First Financial Bancorp, which announced Sept. 18 it was acquiring 27 banks in nine states with about $3.2 billion in assets and about $2.5 billion in deposits from Irwin Union Bank and Trust Co. First Financial bought Irwin's performing loans at a 25% discount from the FDIC. "We're going to see deals similar to the Irwin deal," Cicero says.

In the short term, government aid from FDIC Chairwoman Sheila Bair will be the crucial factor for banking deals.

Take, for example, BB&T Corp., which this year has raised about $2.75 billion from equity offerings and roughly $2.3 billion from debt offerings. The Winston-Salem, N.C., bank most recently put its capital to work by acquiring FDIC-seized Colonial BancGroup Inc.'s assets and deposits. As part of the deal, BB&T took on $22 billion in assets and $20 billion in deposits from Colonial for a roughly $500 million deposit premium. The deal came with a FDIC loss-sharing agreement in which the regulator agreed to cover $14.3 billion of the acquired assets. The FDIC also made a $3.5 billion cash payment to BB&T to cover a gap between the assets and liabilities on the Colonial balance sheet. In the end, the deal allows BB&T to get Colonial's branches while the FDIC takes on the bulk of the risk.

"Why would you do any other kind of deal right now?" asks a lawyer in the financial sector. He says banks that acquire from the FDIC can even be relieved of the obligation of terminating bank branch leases because landlords' claims against tenants are considered subordinated if a bank goes into receivership. "You get everything clean," the lawyer says.

BB&T, which concentrates on the especially hard-hit Southeast, is poised to digest the local competition because it "avoided getting into problems -- it never did the 25-story building projects and avoided out-of-market mistakes," says Robert Patten of Morgan Keegan & Co. Several banks that failed did so due to soured acquisitions of smaller banks in 2006 and 2007 in high-growth regions outside their core markets, he says.

Another active midsized acquirer using recent capital raisings to buy up market share is Lockport, N.Y.-based First Niagara Financial Group Inc., which priced a $400 million stock offering in late September. The bank said that offering would help foster "continued opportunistic growth, both in-market as well as through acquisitions."

This followed an April $380 million stock offering in advance of a $3.2 billion all-cash purchase of 57 Pennsylvania branches, $3.9 billion in deposits and $757 million in performing loans from PNC Financial. Also in July, the bank announced an all-stock $237 million deal to buy Harleysville, Pa.-based Harleysville National Corp.

"First Niagara's management had the foresight to raise capital when it did and positioned themselves with a stronger balance sheet than others," says Fox-Pitt Kelton Cochran Caronia Waller LLC analyst Thomas Alonso. "It is also a beneficiary of the markets it operated within."

First Niagara's upstate New York and Western Pennsylvania markets did not experience rampant housing growth as other parts of the country did, leaving area banks less exposed to risky construction loans. Pennsylvania is an "overbanked region of the country," making it ripe for acquisitions by a healthy and expanding franchise, says Collyn Gilbert of Stifel, Nicolaus & Co.

Schutz adds that banks in Florida are also angling for deals. They include 1st United Bancorp Inc., which raised $70 million on Sept. 23; CenterState Banks of Florida Inc., which raised $86.45 million in August; and Seacoast Banking Corp. of Florida, which sold about $75 million of stock in August.

"We're just at the start of the wave," he says.