By Curtis Carpenter, Sheshunoff Management Services

Merger and acquisition activity in the third quarter of 2006 paused after the torrid pace posted during the second quarter. Transaction volume in the Western region fell from 17 recorded in the second quarter to just five in the third quarter. All of third quarter transactions involved banks.  Nationally, the number of transactions announced in the third quarter totaled 54 (44 bank and 10 thrift), which put the 2006 year-to-date total of 192 ahead of last year’s total by 14. Prices paid for Western banks remained robust, beating the national medians once again.

Bank and Thrift Quarterly Merger & Acquisition Activity
The decline in transaction volume during the third quarter of 2006 did not impact the prices received by Western banks.  For the third consecutive quarter, the price to tangible book exceeded 2.7x.  The median price to assets for the quarter was 25.2% while the median price to deposits was an astounding 36.8%. On a price to earnings basis, the median price received by Western banks in the quarter, 19.9x, fell short of the national median of 21.9x, despite having similar ROAAs. National pricing for bank mergers and acquisitions also continued at record levels. For the first time in at least eight quarters, the median price to book multiple topped 2.4x. The median price  to tangible book jumped to 2.6x in the third quarter. Price as a percent of deposits was even more startling as the median metric jumped to 28.5% of total deposits, the highest on record over the last three years.  The median price to earnings multiple edged down to 21.9x in the third quarter compared to 22.5x in the previous quarter. (Exhibit 1)

As noted earlier, transaction activity in the West slowed during the third quarter.  National bank and thrift transaction activity followed suit with volume dropping to 54 in the third quarter from an amazing 83 revised transactions announced in the second quarter of 2006. While 5 and 54 for the region and nation respectively appear low at first glance, this seems to be more an anomaly of the calendar than a change in the trend of acquisitions when compared to the 2005 and 2006 year-to-date totals. Each quarter usually sees an additional five to ten smaller transactions reported in the subsequent quarter that boost the total. Based on Sheshunoff’s financial advisory services, transaction activity remains brisk. (Exhibit 2)

Bank acquisitions in the third quarter focused on banks between $1 and $2 billion in assets. The eight transactions in this size range equaled the total for all of 2005. Two of these were Western banks - Stockman’s Bancorp in Kingman , Ariz. , acquired by Zions and Northern Empire Bancshares of Santa Rosa, Calif., by Sterling Financial. The median price to book ratio for these eight transactions was an average 2.2x book, but the median price to tangible book was an astounding 3.4x. This was driven largely by the high level of intangibles on the books of two of the acquired banks.

Year-To-Date Bank Merger & Acquisition Activity
Through the third quarter, Western region bank merger volume stood at 28, up 22% over the comparable 2005 period. Pricing multiples on a book and tangible book basis were considerably higher than year-to-date 2005, while the price to assets multiple of 26.4% just eclipsed its 2005 counterpart. Surprisingly, the price to earnings multiple was down 2 multiples from 21.6x to 19.6x, while the price to deposits was relatively unchanged at 30%.

With 163 announcements through Sept. 30, deal volume for bank acquisitions appears on track to match the levels seen in the last few years. The median price paid as a percent of deposits for 2006 bank transactions escalated to almost 27% while the median price as a percent of assets ticked up slightly to 22.4%. Prices paid on book and last twelve months (LTM) earnings were 2.3x and 22.8x, respectively. (Exhibit 3)

As usual, the same five states reported the most bank transactions in 2006. Texas , with 19 deals, an average of more than two per month, led Illinois , Florida , Georgia and California in transaction volume. The 11 California bank acquisitions this year ranged in size from $86 million to $1.3 billion reflecting a high median asset balance of $480 million compared to median assets of $124 million for the nineteen Texas targets.

Year-To-Date Thrift Merger & Acquisition Activity
The number of thrift deals announced this year remains consistent with last year with 29 reported through the third quarter. The West is home to the two largest thrift transactions so far in 2006: the purchase of Golden West Financial ($127.6 billion) by Wachovia Corp. and Washington Mutual’s acquisition of Commercial Capital ($5.7 billion). 

Median prices paid as a percent of deposits for thrifts were up over 300 basis points over the same nine-month period of 2005, and as a percent of assets, prices were up to 19% from 17%.  When viewed from a median price to LTM earnings, prices are up significantly to 25.2x earnings, while the price paid as a multiple of book is up slightly.

Public Equity Markets
The public equity markets exhibited considerable choppiness during the nine months ending September 30, but the S&P 500 managed to post a 7% gain and the NASDAQ, a 4.9%. However, publicly-traded bank stocks outperformed the broader equity markets by wide margin with the SNL Financial All-Bank index up 12% year-to-date through the third quarter.

Western bank stocks traded above the SNL All-Bank index for most of the year. Western banks suffered a mild decline when the broader market sold off in the second quarter but have traded well above both the S&P and the SNL All-Bank index since the market’s recovery in August. (Exhibit 4)

Conclusion
The Western region continues to be one of the hottest markets in the nation for bank and thrift acquisitions due to its attractive demographics. On a national basis, pricing for banks continues to be strong and, as a general rule, still rising. This quarter highlights specific examples of how much a buyer will pay for a financial target that enables it to achieve its strategic objectives more efficiently than on a stand-alone basis. This year has also seen the acquisition of several roll-up organizations by large regionals. This trend has reignited thoughts of “double-dipping” by smaller-size sellers reminiscent of the 1990’s.

Similarly, the increase in stock prices for the banking industry as a whole, and specifically for successful acquirers and expected targets, indicates that intelligent money continues to view financial institutions as attractive investments.

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