More banks with few loan problems are changing hands, signaling the return of a healthier, more conventional bank M&A market.

Sales of banks with nonperforming asset ratios of 3% or less rose in the third quarter in the Midwest, Southwest and West, according to SNL Financial data.

About 59% of all U.S. bank and thrift mergers involved such healthy sellers in the quarter, up from 50% in the previous quarter, according to SNL.

The numbers indicate that more traditional bank M&A is making a comeback, as small banks with clean balance sheets opt to sell because of rising costs and falling profits – not because they are at the brink of collapse, experts say.
 
“You are going to see more deals at the smaller end of the range,” says Ralph “Chip” MacDonald, a partner with law firm Jones Day who handles bank mergers.

Though credit quality is improving broadly, the outlook for bank profitability is dim because of tougher regulation, soft loan demand and low interest rates, he and other experts say. Returns are being squeezed at most institutions with $1 billion in assets or less.

As a result more community banks are choosing to sell even as they put the crisis years behind them, experts say.

“There are way too many banks,” says Michael Barry, head of the financial institutions group of Stifel, Nicolaus, Weisel, the investment banking arm of Stifel Financial (SF). “It is very difficult for these smaller institutions.”

Healthy deal activity is most robust in the healthiest parts of the country.

Fourteen of the 20 bank deals in the Midwest in the third quarter involved healthy sellers, according to SNL. Just five of the nine Midwestern banks that agreed to sell in the second quarter were healthy.

Wintrust Financial (WTFC) in September agreed to pay $27.5 million for HPK Financial in Chicago, which had $390 million in assets and a nonperforming asset ratio of 2.21%.

The experience in the Southwest has been similar. Seven of the eight deals announced there in the third quarter were healthy, up from six healthy deals out of seven deals in the second quarter.

MidSouth Bancorp (MSL) in Lafayette, La., agreed to pay $39 million in September for PSB Financial in Many, La.

PSB had assets of $495 million and a nonperforming asset ratio of 1.59%, according to SNL. Its owners decided to sell because of mounting regulatory and economic uncertainty.
 
In total there were 27 healthy deals announced in the third quarter, up from 18 in the second quarter.

Though healthy transactions rose in the quarter, bank valuations did not. The median bank sold for 106% of its tangible book value in the quarter, down from a median price of 112% in the previous quarter.

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