As acquisition prices go, the $148 million that Westamerica Bancorp. is paying for Redwood Empire Bancorp would rank only 40th among this year's bank deals.
But on a price-to-book basis the cash-and-stock deal is eye-popping.
The $4.6 billion-asset Westamerica, of San Rafael, Calif., is to pay the equivalent of five times book value for the $515 million-asset Redwood Empire - by far the highest multiple among this year's bank deals. No buyer is paying as much as four times book, and most banks in Redwood Empire's asset range are selling for an average of 2.1 times book, according to Highline Data Services.
But Brian Harvey, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc., said Redwood is a good buy even at that multiple.
Like Westamerica, the Santa Rosa, Calif., parent of National Bank of the Redwoods has some of the best performance figures in the industry, Mr. Harvey said. Redwood Empire's return on equity in the second quarter was 26.2%, far above average for banks its size. (Westamerica's second-quarter ROE was 31.1%).
Westamerica is offering "a full price" but getting "a high-quality institution in their marketplace, which is going to allow for an easy consolidation," Mr. Harvey said.
Redwood's stock soared on news of the deal, which was announced late Wednesday. It closed Thursday at $28.27, up 8.8%, while Westamerica dropped slightly, to $53.23.
Brian Conn, an analyst with Royal Bank of Canada's RBC Capital Markets in San Francisco, said the deal seems pricey compared to others but that Westamerica will be able to make it work by slashing costs. All of Redwood Empire's seven branches are close to Westamerica branches, and it is expected that some overlapping branches will close.
Westamerica's strategy "has been to buy banks, realize cost savings very quickly, and make the deals accretive within a couple of quarters," Mr. Conn said.
Robert A. Thorson, Westamerica's senior vice president and treasurer, said his company will cut costs but not as heavily as it did in buying six banks during the 1990s.
Westamerica fired management at the six banks in an attempt to make the purchases accretive within three months. It eased up on that strategy when it bought First Counties Bank of Clearlake in 2000 and Kerman State Bank in 2002, holding on to important employees and business lines.
"There will be some branch consolidation, but we're studying which branches to keep that would be best suited for the customers' needs," Mr. Thorson said. One aim is to keep customer runoff under 10%; during the series of deals in the 1990s runoff ran as high as 20%.
"We currently need to add some staffing at our current Westamerica branches and in our back offices, and so we're conducting interviews with Redwood employees first," Mr. Thorson said. "We're doing everything we can to generate opportunities for them, so that employee impact" will "be minimized."
Mr. Conn said it makes sense for Westamerica to seek acquisitions again. It started to scale back on lending in 2000, just as the dot-com bust slowed the San Francisco economy to a virtual standstill, and has been waiting for demand for quality loans - with higher margins - to pick back up.
"Organic growth has been in the mid-single digits because Westamerica is very conservative, so the best way for them to grow right now is through acquisitions," Mr. Conn said.
Mr. Thorson agreed and said Redwood's current loan-to-deposit ratio of 91.6% will help raise Westamerica's, which is 64.5%. "That will increase our loans over all, which will enhance our profitability," he said.
Like Westamerica, Redwood is in some of California's most affluent counties. Its parent's purchase of Redwood would move Westamerica Bank to No. 6 from No. 9 in deposit share in Sonoma, the second-fastest-growing county in the San Francisco Bay area, the company said.
David L. Payne, Westamerica's chairman, president, and chief executive, said the acquisition would also help boost fee income. Redwoods' "merchant draft processing revenues will provide a significant source of noninterest income to the combined revenue stream," he said in Wednesday's announcement.
Mergers and acquisitions are up in general in the industry, and Mr. Thorson said this may be the start of another buying spree for Westamerica.
"We'd certainly love to pick up the pace and do more deals now," he said. "That's definitely our objective."
