Bank M&A's Mini Gold Rush

California could be the cradle of a long-anticipated boom in bank mergers.

That is deal-makers' hope after a surge of acquisitions in the state this year. A dozen California banks agreed to be sold in the first six months of the year — three more than in 2010, according to data from SNL Financial LC and Sheshunoff & Co.

Six banks were sold in the first half in Texas, the state with the second most deals.

Another California deal last week — Chula Vista-based First PacTrust Bancorp's $37 million purchase of Beach Business Bank in Manhattan Beach — bolstered hopes that the state will continue to provide fertile ground in an otherwise disappointing market for bank mergers.

"Southern California is the busiest sector right now in M&A," said Wesley Grace, managing director Wunderlich Securities Inc. in Memphis, who advised First PacTrust in the Beach Business deal. "It's a perfect environment for a community bank to thrive in."

The 12 deals were worth $50 million or less, and most involved the sale of an institution heavily involved in business banking. Building scale was an important strategic driver, with four examples of companies partnering up to create an institution with $400 million to $600 million of assets.

"Banking profitability is more coordinated to size than it ever has been," said John Adams, director of mergers for Sheshunoff, an Austin, Texas, investment bank. The "pent-up demand" between "buyers and sellers finally had a chance to break loose a little bit" in the first half, he said.

California is ripe for deal-making for a few reasons. It is one of the largest and richest banking markets in the country, with high concentrations of two types of highly coveted customers: wealthy people and small businesses.

It ranked second to New York in deposits, with some $845 billion as of June 2010, according to the Federal Deposit Insurance Corp. It ranked eighth in number of banks, with 324 institutions based there.

It went into the recession relatively early compared with other parts of the country, so small banks have had years to get a grip on delinquent business and consumer loans. But their executives are also tired, coping with higher regulatory costs and the thinner loan spreads caused by falling rates and tepid demand.

"It is the first area that got hit in the recession. A lot of the dead wood has been removed," said Patrick Nicolini, a senior vice president who handles West Coast transactions for FIG Partners LLC of Atlanta.

A number of banks and investment groups have raised cash in the last year to roll up Southern California's relatively fragmented community banking market, including First PacTrust, which agreed to buy another business bank called Gateway Bancorp in June, and Irvine's Opus Bank, which in June agreed to purchase RMG Capital Corp., owner of Fullerton Community Bank.

Pricing expectations among buyers and sellers seem to be closer than in other parts of the country. That is reflected in California's deal prices, which were lower than deals industry-wide in the first half, according to Sheshunoff. The median price to tangible book ratio was 15 basis points lower in California. Deposit premiums were lower as well.

"Sellers are getting more rational," said Adam Desmond, co-head of investment banking and managing principal of FIG Partners.

Experts expect a wave of bank mergers when the economy stabilizes because the industry is too fragmented and scale will be necessary to cope with economic and regulatory challenges. Most mergers are expected to be between community banks.

"We've had a considerable amount of reverse inquiry for transactions in California — that continues," Gregory Mitchell, chief executive of First PacTrust, said last week in a conference call discussing the Beach Business deal.