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Small Banks Feel the Urge to Merge

Getting larger helps cover the cost of complying with new rules
Small Banks Feel the Urge to Merge
Photograph by Witold Skrypczak/Alamy

After almost 30 years in business, Prosperity Bancshares surpassed $10 billion in assets early last year. For Chief Executive Officer David Zalman, it wasn’t cause for celebration. Crossing the $10 billion threshold subjected the Houston-based bank to a variety of regulatory hurdles under Dodd-Frank. To help absorb the burden, Zalman went on a shopping spree. He’s spent $1.37 billion to buy six banks since the start of 2012, making Prosperity the most acquisitive U.S. bank during that time. Now its assets total $16.3 billion. “The regulations are getting more strict, more strict all the time,” says Zalman, who pointed to the bank’s spending $500,000 in August on software for a Fed-mandated stress test. “We’re going to do more deals as they come along.”

Small institutions are merging at a rapid pace, saying they need to be bigger to swallow the costs of complying with new rules. About 55 banks with assets of less than $10 billion have made acquisitions this year through Sept. 30, according to data compiled by Bloomberg. That’s the most activity among banks of this size since the same period in 2007, when 62 made deals. The Standard & Poor’s Small Cap Regional Banks Index has risen 27 percent this year, compared with 18 percent for the Standard & Poor’s 500-stock index. “Most banks either want to stay right below that $10 billion mark or, if they go over it, they want to go over it aggressively,” says Brady Gailey, an analyst who covers midsize banks for Keefe, Bruyette & Woods. “We’ll see more banks that are right on the edge elect to go over.”