Slow, but pricey, M&A year: look for '06 action in the Southwest (Texas) and the Southeast.

Year-to-date 2005 has been a slow year for mergers and acquisition activity in the banking space. As of Nov. 3, 165 bank deals have been announced, with an aggregate deal value of $15.5 billion, compared to 220 in 2004 with an aggregate deal value of $117.9 billion. The latter includes $59 billion

for the JPMorgan Chase acquisition of Bank One Corp. The slowdown comes at a time when earnings are being adversely affected by a flattening yield curve, de novo branching activity is being pinched in some markets because of the real estate market, and deal pricing multiples are at near record levels. Consider, for example, that the average price to tangible book for a bank deal in 2005 is 233% compared to 183% in 2001. Banks are paying up to buy one another these days.

While it is true that the banking world tends to view deals on a price-to-tangible-equity basis, one of the most predictive metrics is the deal price to last-12-month earnings, often referred to simply as price to earnings.

In 2005 and on a national level the bank median price to earnings ratio continued its steady growth compared to previous years. Year-to-date 2005 the median p/e ratio is 25.64 for the 165 bank deals announced, up from 19.10 times in 2000, and 23.68 times in 2003. The multiple in 2004 was 25.93, so 2005 has been seeing a pull back, but the longer trend has been growth. Doing a simple linear regression and projecting this trend into the future, we see that pricing multiples ought to continue to rise, with valuations approaching the 30 times earnings mark in 2010.

Southwest, Southeast are hot

On a regional basis the Southwest has the highest median deal p/e at 31.99 times; this is up from all years since 2000. The pending deal by Cullen/Frost Bankers, San Antonio, for the one-branch Texas Community Bancshares, Dallas, at 65.13 times earnings, and the pending acquisition by Texas United Bancshares, La Grange, of the $210 million Gateway Holding Company of Dallas, at 37.34 times earnings, were among the highest in the group and pointed to the attractiveness of the Dallas market.

The Southeast continued to show the strong trends with a median price/earnings of 30.46 times, down slightly from the record high level 31.71 times in 2004. The acquisition of Tarpon Coast Bancorp Punta Gorda, Fla., by First Busey Corp., Urbana, Ill., at 50.94 times earnings heads the list while the Raleigh, N.C.-based Capital Bank Corp.'s pending acquisition by 1st State Bancorp, Burlington, N.C., at 30.20 times earnings, fits the mold of the median.

New England saw a surge in 2005 with a median p/e of 29.93 times, up from an anemic 20.14 times in 2004. However it was a median out of a set of five deals, which points to a relative lack of interest in the New England market.

The Mid-Atlantic and Western regions saw the median deal p/e pull back from previous-year levels, while the Midwest saw a modest uptick from prior period levels. The pending acquisition by Fulton Financial Corp., Lancaster, Pa., of Columbia Bancorp, Columbia, Md., at 20.61 times earnings was notable in the Mid-Atlantic region, mostly because of the strong market demographics of the target, including population per branch and median household income. In the Midwest, Frankfurt, Ken.-based Farmers Capital Bank Corp.'s pending acquisition of Citizens Bancorp, New Port, Ken., was the median deal on a price to earnings basis.

The 2006 outlook on a regional basis is for the Southeast and Southwest, most notably Texas, to continue to see strong deal valuations as the consolidation wave continues to spread throughout the community bank space. The West will most likely see steady consolidation, but nothing approaching levels seen in the Southeast.

New England will continue to see few interesting deals, and a relative lack of activity. The sleepers might be the Mid-Atlantic, which is ripe for consolidation, especially in Pennsylvania, and the Mid-west, which could be poised for a rebound if the economy picks up.

Branch deals off

On the branch side, the total number of bank branches changing hands in branch deals has fallen from a peak of 844 branches in 2001 to 109 year-to-date in 2005. At the same time the number of deals has fallen from 136 in 2001 to 55 year-to-date 2005. Median premium to deposits was 8.00%, up from 6.35% in 2004 and 7.06% in 2002. We have to look back to 2000 to see premiums higher than what we are seeing now.

The outlook for branch acquisitions is neutral and depends largely on the ability of banks to grow through whole deals and de novo activity. We expect a slight uptick in branch deals, but nothing approaching 2001 levels.

By John McCune, director, Financial Institutions Group, SNL Financial LC, Charlottesville, Va. jmccune@snl.com

Bank branch deals

                                    2000         2001        2002

Number of deals                      106          136         121
Total branches                       385          844         260
Median premium/deposits (%)         8.50         6.45        5.69
Total deposits ($000)         10,901,793   28,308,781   7,587,761

                                   2003        2004        2005 *

Number of deals                     100          93          55
Total branches                      217         162         109
Median premium/deposits (%)        7.06        6.35        8.00
Total deposits ($000)         5,826,638   3,059,027   2,042,520

* Updated as of 11/03/05. Includes terminated deals.

Source: SNL Financial

Bank deal pricin by region
Median price/earnings (x)

                2000    2001    2002    2003    2004    2005 *

New England    19.35   14.28   17.18   22.62   20.14   29.93
Mid-Atlantic   19.30   21.32      NM   23.33   29.65   23.44
Southeast      20.67   21.86   24.24   25.98   31.71   30.46
Midwest        18.58   19.13   20.82   22.14   22.26   24.07
Southwest      17.73   16.95   28.00   25.09   24.76   31.99
West           20.76   17.52   17.98   22.03   24.68   21.58
Nation         19.10   19.23   23.11   23.68   25.93   25.70

* Updated as of 11/03/05. Includes terminated deals. NM = not
meaningful

Source: SNL Financial