More bank mergers, sales expected

02/24/2012 12:00 AM

02/24/2012 9:46 AM

After a rough couple of years, Kansas banks look to be on the mend.

Last year, more of them returned to profitability, and fewer of them failed. The latest report from the Federal Deposit Insurance Corp. said the combined earnings of the 320 banks and thrifts it insures in the state climbed to $379 million in third quarter 2011, the largest amount in three years.

And only one bank failed in Kansas in 2011, compared with three in 2010 and three in 2009.

“The way we see it right now we do think 2012 is going to be another decent year in banking,” said Shawn Mitchell, president and CEO of the Community Bankers Association of Kansas. “2011 … allowed them to become a little more profitable. Banks are getting a lot healthier and stronger.”

But the number of Kansas-based banks is likely to shrink in 2012 because of several forces that will push more of them to sell or merge, Mitchell and other industry officials said.

“We’ve seen a definite uptick in the interest in and pursuit of acquisitions (beginning) in late 2011,” said Chuck Marshall, bank consultant with Kennedy and Coe.

Marshall said he thinks that the valuations of banks were depressed for a few years after the financial crisis in 2008.

“Some of that pricing has come back, and if a bank doesn’t have a transition plan for management, a lot of times a good solution is to be able to cash (in) your investment,” Marshall said.

Mitchell agrees that there will be more consolidation in 2012.

“I know of five or six (deals) in one stage or another,” he said.

“Right now, it’s a way banks are finding to stay afloat.”

What Mitchell means is some banks aren’t big enough to sustain the rising costs of regulation and ensuring that they are in compliance with that regulation, brought about in large measure by the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010.

“The new reality is a heavier regulatory burden on banking organizations,” Marshall said. “It may just require a larger asset base and more capital to pay for that compliance.”

Real estate appraisal requirements are more onerous and the closing of a consumer loan nowadays comes with about 20 extra pages of regulatory disclosures, Mitchell and Marshall said.

“Banks have a lot more I’s to dot and T’s to cross to do the same things they did 10 years ago,” Marshall said.

But Marshall and Mitchell differ on all the reasons for increased merger and acquisition activity.

It’s not just about finding a merger partner that will make complying with new regulations less costly. Marshall also thinks that an improving economy will promote more bank sales.

“Banks with growth strategies might find an acquisition to be more effective than some large focus on organic growth,” he said.

Mitchell said he thinks the acquisition activity will mostly affect rural banks, many of which make up the 120 or so Kansas banks his organization represents.

“I think it’s going to be heavily disproportionate,” he said. “You’ll see more and more of them looking for ways to survive just because of the regulatory burden coming down on them, which is sad because you lose some local flavor.”

But Marshall thinks 2012 won’t just be about bank consolidation.

“I think there’s a lot of pent up enthusiasm in the banking sector,” he said.

And that means more banks will be looking to make more loans. That’s a function of an improving economy and regulators who are being “a little more helpful than absolutely crushing,” Mitchell said.

Marshall said while banks have always had money to lend, an improving economy is whetting their appetite to increase lending this year.

“They feel more confident both in the economy and their ability to find new, good customers,” he said.

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