Despite dynamic economic changes in the third quarter of 2007, pricing for banks remained generally strong in the period, and the number of announced transactions, both quarterly and year-to-date, is consistent with last year. Bank pricing is experiencing some downward pressure, but came in above or approximately equal to year-to-date medians for three of five commonly reported metrics, including price to earnings of 24.1x, higher than the nine-month ratio of 23.9x. Price to book and price to tangible book were off from prior quarters on slightly lower equity levels, but year-to-date data is in line with the prior three years. The transactions announced to date were struck prior to the events of the third quarter.

Third Quarter Summary

Despite dynamic economic changes in the third quarter of 2007, pricing for banks remained generally strong in the period, and the number of announced transactions, both quarterly and year-to-date, is consistent with last year. Bank pricing is experiencing some downward pressure, but came in above or approximately equal to year-to-date medians for three of five commonly reported metrics, including price to earnings of 24.1x, higher than the nine-month ratio of 23.9x. Price to book and price to tangible book were off from prior quarters on slightly lower equity levels, but year-to-date data is in line with the prior three years. The transactions announced to date were struck prior to the events of the third quarter.

With some buyers still actively pursuing acquisitions, others definitely on the sidelines, and select markets recoiling from the sub-prime debacle, the real question is: Where is bank merger and acquisition activity headed over the next few quarters? While the future is always uncertain, we anticipate price volatility, increased buyer scrutiny, and intense negotiations with more negotiated transactions.

The equity markets dealt with fallout from sub-prime concerns during the third quarter, leaving publicly traded banks down slightly and thrifts down significantly, while overall market indices rose slightly. The SNL Bank Index fell 2.4% during the third quarter, leaving it down 7.7% for the year. The SNL Thrift Index fell 6.0% during the third quarter and is down 15.4% for the year, undoubtedly reflecting the market’s increased concerns for traditional thrift assets. Both groups reached their lows in early August, as the sub-prime issues began to dominate headlines, but have since rebounded as the Fed moved to ease conditions in the credit markets (banks are up 6% and thrifts are up 9% off their lows).

Bank Merger & Acquisition Activity

Deal activity was in line with second quarter activity, resulting in 218 reported transactions through September 30 compared with 209 during the same period last year (Exhibit 1). But that information describes the past. The real question is: Where is M&A activity headed over the next few quarters? These third quarter deals would have originated in the first or second quarter, prior to the credit market freeze in response to the sub-prime meltdown felt by many bank stocks. Without a doubt, uncertainty clouds the market, which only time can clarify. With overall bank stock prices down and trust preferred securities suddenly expensive and hard to secure, many buyers do not have the same access to acquisition currency they had only a few months ago. When these factors are combined with seller’s pricing expectations, which, in general, have not drifted downward, we may face a quarter or two of hesitation as both buyers and sellers adjust to the new reality in the merger and acquisition market.

1.        31 of the 187 deals were announced without terms.

Curtis Carpenter
Managing Director of Investment Banking

Carpenter has over 24 years in the financial services industry and has extensive experience with mergers and acquisitions, financial management, financial reporting, and strategic planning.

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