????The CEO of one small bank says that his larger rivals' need to shrink spells opportunity for thriving banks like his - and he just did a deal to prove it.

????By Colin Barr

????Government stress tests could prove just the tonic for some smaller banks.

????Regulators are kicking the tires at the biggest financial institutions this month. The administration says this risk-checking regime, together with plans to remove toxic assets and raise new capital, will leave surviving banks stronger and more able to support the economy.

????But some big banks may not pass the stress tests -- and even those that do may still seek to slim down after years of expansion. A deal announced this week shows how those trends could spell opportunity for banks that haven't been scorched by the meltdown of the past two years.

????On Tuesday, tiny First Niagara (FNFG) of Lockport, N.Y., struck a deal to buy 57 branches in Pennsylvania from Pittsburgh-based PNC (PNC, Fortune 500), one of the nation's biggest regional banks. The agreement, which will boost First Niagara's assets by 45% to $13.6 billion, sent the bank's shares up 12% on a day when the rest of the market fell.

????First Niagara CEO John Koelmel emphasizes that his bank made the deal because the price - a modest 1.3% premium on acquired deposits - was right. But he also said he believes a shakeout in coming months will create more buying opportunities for well capitalized banks like his.

????"With the stress tests under way, we'd expect to see the government starting to identify some winners and losers," he said. "In places where that leads to mergers where banks have overlapping presences, you're going to see some divestitures."

????That's exactly how Koelmel wound up being able to buy the PNC branches. Tuesday's agreement comes just months after PNC bought another big regional rival, struggling National City of Cleveland. That $5.2 billion deal took place after regulators approved PNC's application to participate in the Troubled Asset Relief Program but rejected National City's.

????Flush with $7.7 billion in cash from Treasury, PNC made a below-market bid for the wounded National City in October. It completed the purchase of its bigger rival at year-end, giving it half of the retail banking market in Pittsburgh. As a condition of the National City deal, PNC agreed to sell some branches.

????That paved the way for First Niagara, which up until now has operated primarily in the Buffalo region, to strike this week's deal. Once the acquisition is completed in the third quarter, First Niagara should vault into third place in western Pennsylvania, with a 13% share of the market's deposits.

????Seeking footprint

????Of course, there's no guarantee that similar deals are in the offing. For one, it's too early to know how many of the 19 banks facing government stress testing could fail the test.

????Even those that do receive poor marks may not have to sell branches and deposits, said Bart Narter, a San Francisco-based banking analyst at the Celent consultancy. Instead, he said, they may be able to raise new money from the government or sell other assets.

????"The PNC-National City deal was unusual in that both banks had such significant concentration in a single market," he said. "A lot of the deals we've seen over the last year have been bigger banks wanting to get a new footprint."

????He points to some of the signature deals of 2008, in which strong banks bulked up in new markets by buying distressed properties.

????Last fall, New York-based JPMorgan Chase (JPM, Fortune 500) bought Washington Mutual, a deal that allowed it to expand significantly on the West Coast, while San Francisco-based Wells Fargo (WFC, Fortune 500) snapped up Charlotte-based Wachovia, gaining a strong presence in the Southeast.

????What's more, some of the banks that have come under the most intense pressure in the market as the stress tests approach -- such as KeyCorp (KEY, Fortune 500) of Cleveland and Fifth Third (FITB, Fortune 500) in Cincinnati -- reside in states whose economic doldrums could make them less attractive to acquirers.

????Still, some opportunities will be there for those with means.

????At the top of the industry, Bank of America (BAC, Fortune 500), the recipient of multiple rounds of federal aid, is reportedly shopping the First Republic wealth management business acquired in 2007 by its Merrill Lynch unit.

????In addition, 21 banks have failed so far this year, according to the Federal Deposit Insurance Corp. Most of them have been smaller community banks and many more failures are likely on the way. The FDIC's problem bank list more than tripled last year.

????Koelmel said the economic unrest will inevitably benefit banks that aren't up to their ears in mortgage-backed securities and other relics of the credit bubble.

????"It's hard to know what will come and when, but we're expecting to see some more investment opportunities," he said.