And coming up fast on the outside is … Kansas?

Look out, California and Texas, because the smaller, Midwestern state has quietly established itself as one of the busiest states for bank mergers and acquisitions this year.

Eight deals were announced in Kansas in the first half, tying it with California for second place. Texas held a comfortable lead, with 14 deals. Collectively, those three states accounted for nearly 30% of transactions.

Kansas M&A gets overlooked because its deals involve very small banks, most of which are reacting to fears about banking and the economy. Other markets have commanded attention for more dramatic reasons. Texas deals are driven by banks eager to grow in one of the nation's most vibrant economies. California is brimming with overcapitalized banks that are eager to establish themselves regional players.

But if a wave of consolidation among the nation's 7,000-plus banks is to take place in coming years as expected, it will have to build momentum in markets like Kansas.

"As we look forward with this environment, with increased regulatory costs, loan demand that is not robust and a narrowing margin, we think it is imperative to get bigger to not only survive, but to do well," says Patrick Alexander, the president and chief executive of the $640 million-asset Landmark Bancorp (LARK) in Manhattan, Kan.

Landmark bought the $35 million-asset Wellsville Bancshares in April, and Alexander says he is scouting out additional opportunities. His remarks are similar to those made by other executives across the country, deal advisors say.

"When you look at the list, the majority of the targets have less than $100 million in assets," Rick Foggia, a managing director at the investment bank Commerce Street Capital, says of the Kansas deals this year.

"That speaks to the same themes we are hearing and seeing at smaller institutions everywhere: bankers are concerned about all of the additional compliance," Foggia adds. "Some have decided that they'd rather get out sooner than later."

That sentiment might be widespread, but the concentration of small banks has contributed to M&A momentum in Kansas. The state has 314 banks, and nearly three quarters of those have $150 million or less in assets, according to the Federal Deposit Insurance Corp.

Only 27% of the 251 banks in California have $150 million or less in assets. About 48% of the 587 banks in Texas are that small.

Other Midwestern states could eventually experience brisk bank consolidation, other industry observers say.

"We're seeing a great deal of activity throughout the Midwest that just has not yet been announced," says Joseph Porter, a partner at Polsinelli Shughart in St. Louis, Mo., who says he is involved in a handful of negotiations.

For now, Kansas offers a mix of the right M&A ingredients: industry concerns, and unanswered questions about who will replace older managers or investors.

"A lot of them are in smaller communities and do not have a good succession strategy and they think, 'Gee whiz, with the increased burden and the regulations, it is going to continue to get harder,'" Alexander says.

To be sure, there have been sales of struggling Kansas banks, but the bulk of deals in the state involved management teams seeking a way out.

"I've been involved in eight [Kansas] transactions in the last two years and not one was a problem bank," says Bruce Morgan, the owner of Professional Bank Consultants.

"Every single one was a situation related to age, health, the succeeding generation or guys just overburdened by new regulations," adds Morgan, who is also a former chief executive of Valley State Bank in Roeland Park, Kan., which was sold in 2008 to Mission Bank.

First Bancshares in Kansas City, Kan., started weighing its options a few years ago as it looked at the changing atmosphere and succession, says David Herndon, the company's president and chief executive. "I've come to believe there is a finish line," says Herndon, 59, regarding an eventual retirement.

First Bancshares considered selling itself or buying a bank before choosing to sell a controlling stake to an investor group led by David Spehar, a former CEO of First Community Bank in Kansas City, in a deal announced in May. Spehar is expected to bring along a team of bankers that will help First Bancshares grow.

"We're $80 million in assets in a highly competitive market. We're not going to double overnight, but we hope we can double in the next five years," Herndon says. "In order to survive, you're going to have to get bigger, and that takes capital."

Even when First Bancshares doubles, it will still be just a fourth of the size of Alexander's Landmark. So, what's the right size?

"When we were $100 million [in assets], we thought $250 [million] was a good place," Alexander says. "Then we thought it was a half a billion. Now, I'm not sure."

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