A bad year for bank mergers culminated in a tough yearend for KBW Inc.

The New York investment bank lost money and cut staff in the fourth quarter as it braces for an extended slump in bank M&A, its primary business. "It's a hard environment to conduct a merger," Thomas Michaud, KBW's president and chief executive, said in a conference call Thursday with analysts about its results.

Most of Michaud's banking clients believe that "consolidation has to happen" across the industry to drive shareholder returns, but "I just don't know the exact timing of when that's going to pick up," he said.

KBW, which operates as Keefe, Bruyette & Woods Inc., lost $16.3 million in the fourth quarter after a year-earlier profit of $3 million. Analysts had expected a small profit. Higher restructuring costs and fewer advisory fees were the main culprits.

It was the slowest year for U.S. bank mergers in 2011 since 1980, Michaud said.

A "steep decline in capital raising and merger advisory fees" that began in the third quarter extended through October, November and December, he said.

Full-year M&A and advisory revenue fell 21% to $47.6 million; the firm reported a loss of $22.4 million for 2011.

KBW booked $13.2 million in fourth-quarter restructuring charges; it eliminated 100 positions, and exited the asset management business. Consolidating office space and cancelling certain market data contracts should save money this year.

There were some bright spots in 2011, Michaud said. KBW was the top book runner for bank public offerings, as well the leading advisor to mutual banks that converted to bank holding companies, he said. It was also one of the top bank M&A advisors despite an overall industry slump, he said.

And it started off 2012 by announcing the hiring of two veteran dealmakers: former Merrill Lynch banker James Harasimowicz and D.A. Davidson & Co. veteran Joseph Gulash.

KBW and Sandler O'Neill & Partners LP are the two dominant players in community bank M&A. The deal drought has been particularly bruising for KBW.

Image and information are precious in investment banking. KBW has less control over both because, as a public company, it has to disclose its financial woes. Sandler remains private.

KBW lost its longtime chairman and chief executive, John Duffy, in October. He stepped down from his leadership positions for health reasons; KBW has said he will remain active in a business development role.

There are new competitive pressures, too.

A general malaise across investment banking has compelled more Wall Street players "to look for different areas of growth," Michaud said. "We are seeing that the bigger firms are in our space."

But KBW's talent, relationships and intensity will enable it to hold its ground, he said.

The long-term prospects for bank M&A look good, he said. Problem loan levels have declined for two straight years, and "buyers are feeling more comfortable" with their ability to properly value sellers' assets.

Low-interest rates through at least 2014 will curtail profits and put pressure on banks to explore deals or other options, Michaud said.

Though bank stocks have been recovering from a steep sell-off last summer, regulatory uncertainty and other factors are stymieing deal activity, he said.

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