By Curtis Carpenter, Sheshunoff Management Services

2006 Second Quarter Summary 
Merger and acquisition momentum accelerated in the second quarter of 2006. Banks in the Western region saw a 44% increase in bank activity from nine transactions in the first quarter to 13 in the second and realized exceptional pricing for their institutions. For the nation, the number of transactions in the second quarter totaled 72 (60 banks and 12 thrifts), 19 more than in the first quarter of 2006. Transactions in the West accounted for 24% of the national total reporting 13 bank and 4 thrift transactions in the second quarter. The price paid for Western banks continued to surpass the national median pricing levels by most measures.

Bank Merger & Acquisition Activity
During the first half of 2006, merger and acquisition activity in the West not only increased but exceeded all national pricing measures with the exception of earnings, due to the high median level of earnings generated in the West. The median price to earnings multiple in the West was 19.8x on a median Return on Average Assets of 1.15% compared to a national price to earnings median multiple 23.2x on a Return on Average Assets of 0.88%. During the first half, Western banks reported pricing multiples in excess of national medians with a price to book of 2.52x, price as a percentage of assets of 25.6% and a median price to deposits, an exceptional 29.6% (Exhibit 1).  

When comparing transactions involving banks with different levels of equity capital, it is helpful to assess the multiple of 7% tangible capital. Attempting to compare the price received by a bank with a 12.0% equity-to-assets ratio to a bank with a 5.5% ratio can be confusing and misleading. The 7% tangible capital multiple assumes that every selling bank had exactly 7.0% tangible capital to assets, and that the price received in the transaction is adjusted on a dollar-for-dollar basis for any tangible capital above or below 7% of total assets. This makes comparability meaningful among the different transactions.

In this regard, a new pattern is emerging among the bank transactions commanding the highest pricing multiples: the 4x 7% tangible capital multiple. On a national basis, in the first half of 2006 alone, 10 bank transactions (10% of the total) exceeded the 4x 7% tangible capital pricing level, a historically rare event. Western banks accounted for 4 of the 10 banks priced in excess of 4x 7% tangible (Exhibit 2). This top-tier pricing momentum increased in the second quarter with the announcement of 7 transactions exceeding 4x 7% tangible capital, up from 3 transactions in the first quarter. The West reported 3 transactions exceeding 4x 7% tangible capital in the second quarter, up from 1 in the first quarter.  

These 10 deals ranged from $9.2 million to $6.6 billion in asset size, but their $609 million median size was 4 times the median size of total transactions. Of these transactions, 8 involved acquisitions in the West or Southwest. Thus top pricing for large banks in the West and Southwest is becoming synonymous with pricing over 4x 7% tangible capital. With subsequent transactions announced so far in the second half of 2006, another 10 transactions at this pricing level can be expected through the remainder of the year. 

Among all bank acquisitions, the correlation between multiple of 7% tangible capital and the loan to deposit ratio was not as strong as expected, implying that buyers are not overly concerned about loan levels at selling banks. Non-interest bearing deposits (as a percentage of total deposits) also showed no strong correlation to price. The strongest correlation with pricing involved efficiency ratios. Banks with efficiency ratios under 65% had a median multiple of 7% tangible capital of 3.27x, while banks with higher efficiency ratios had a median multiple of 2.35x. Yield / cost spread was also very important to buyers, as evidenced by the fact that sellers whose spread was over 3% had a median multiple of 7% tangible capital of 3.14x while banks with lower spreads had a median multiple of only 2.04x.

Banks below $50 million in assets received the lowest pricing multiples in the first half of 2006. As a group, they significantly underperformed the larger selling banks with a median ROAA of only 0.31% and efficiency ratios ranging between 67% and 149%. Intense competition, regulatory burdens, margin pressure and other costs are contributing to diminished performance among many smaller banks.

Statistically, among banks in the $100 million to $500 million asset size group, ROAA had the highest correlation to pricing based on multiple of 7% tangible capital. Among this group, banks with over 1% ROAA were acquired at a median multiple of 7% tangible capital of 3.13x, while banks earning less than 1% ROAA were acquired at a median multiple of 2.07x.  Interestingly, this was the only size group that did not have a positive correlation between pricing multiples and non-interest income (NII) levels, indicating that acquirors are not overly concerned with levels of noninterest income in this size group. Apparently buyers are content to pay for the bottom line growth potential in this group and expect to add new product offerings to increase NII after the sale.

Nationally, in the first half, the number of acquisitions driven by market expansion exceeded in-market transactions by a large margin but reflected pricing multiples similar to overall median multiples. Cash or a combination of cash and stock, was the preferred consideration in 82% of all bank transactions in the first half. Pricing multiples were similar between the two categories.

The largest bank transaction in the west during the second quarter is credited to Rancho Santa Fe, Calif.-based First Community Bancorp with its $266.7 million purchase of  Escondido, Calif.-based Community Bancorp Inc. (Exhibit 4)

Thrift Merger & Acquisition Activity
Thrift acquisition activity in the second quarter was dominated by two large deals, both involving the acquisition of California-based thrifts: the Wachovia acquisition of Golden West and Washington Mutual’s acquisition of Commercial Capital. Golden West was a $127.6 billion thrift acquired for $25.5 billion. This represented 2.76x tangible book value and over 41% of total deposits. Commercial Capital was a $5.7 billion thrift acquired for just under $1 billion, or 2.93x tangible book value and 40% of total deposits.

Public Equity Markets
Publicly traded bank stocks as a group traded slightly higher in the second quarter of 2006 compared to year-end 2005 and have modestly out-performed the broader market indices for the year. The SNL All Bank Index was up 0.95% in the second quarter and up 3.14% for the year while publicly traded banks in the West advanced an impressive 1.75% in the second quarter and 4.59% for the year. The broader market, as reflected by the S&P 500, was down 1.90% for the second quarter trimming the advance for the year to 1.76%.  (Exhibit 3)

Conclusion
Strong momentum in transaction pricing and volume characterize activity in the second quarter of 2006. Financial Institutions in the western region, continue to enjoy strong buyer interest and superior pricing. The new top-tier pricing levels over 4x 7% tangible capital are expected to continue as the industry consolidates and competition for quality organizations increases. Recent announcements since June 30 lead us to believe M&A activity and pricing will continue to be strong throughout the remainder of 2006.

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