The consolidation trend hit the Northwest again as Washington Federal Inc. of Seattle signed a $200 million cash-and-stock deal to buy First Mutual Bancshares Inc. of Bellevue.
But while most buyers in the region have been looking elsewhere, Washington Federal stuck close to home with the deal it announced late Monday; the $1.06 billion-asset First Mutual has 13 branches east of Seattle. Buying it would bring Washington Federal's branch total to 148 and lift its asset size to $11 billion.
Though the economy in the Northwest is strong, analysts say stiff competition for loans and deposits will prod more companies to sell.
"There are a lot of competitors, a lot of little competitors, so I do think that's a market that could be consolidated," James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, Ore., said Tuesday.
Sara E. Hasan, an analyst at McAdams Wright Ragen Inc., noted that there are more than two dozen publicly traded banking companies in Washington. "As things get more difficult, I think if you can get a good price for your bank, why not let someone else run it and take your payday and go home?" she asked.
But John R. Valaas, First Mutual's president and chief executive officer, said in an interview Tuesday that many of the state's banking companies are just five to 10 years old — too young to consider selling.
"I'd be hesitant to characterize" the deal as the start of an intra-market trend, he said. "I'm not sure this is a precursor to a wave of consolidation, because a lot of those banks are still working on deploying their capital, particularly the newer start-ups."
First Mutual decided to sell because it wanted to be able to make larger loans, Mr. Valaas said. "This gives a substantial scale to the combined operation. It's a case of looking at the business and saying scale is important."
In October, Washington Federal made its first deal in three years, saying it would acquire the $562 million-asset First Federal Banc of the Southwest Inc. of Roswell, N.M. That deal, which closed in February, was more typical of recent trends in the Northwest, where buyers have been looking outside the region for targets.
For instance, the $11 billion-asset Sterling Financial Corp. of Spokane bought the Oakland, Calif., commercial mortgage banking company Mason-McDuffie Financial Corp. in July of last year. It bought a second California company in February and announced a deal two months later for the $906 million-asset North Valley Bancorp of Redding.
Umpqua Holdings Corp. of Portland, Ore., has bought three California banks over the last three years. It more than tripled its branch count in and around Sacramento, the state's capital, last year when it acquired the $1.3 billion-asset Western Sierra Bancorp of Cameron Park.
Washington Federal said it would pay $27.05 a share, a 21% premium over First Mutual's closing price Monday. Shares of First Mutual rose 16% Tuesday, while shares of Washington Federal rose 0.5%.
As a 30-year fixed-rate mortgage lender, Washington Federal has struggled to make loans during the prolonged period when the yield curve has been flat or inverted, analysts said.
With this deal, "it's an inch closer to getting their capital utilized," Mr. Bradshaw said.
Buying First Mutual would lower Washington Federal's capital ratio to 12% or 12.5% from nearly 14% before the First Federal Banc acquisition. A ratio of 9.5% to 10% would be more appropriate, Mr. Bradshaw said. "By no means are they fully levered. They still have room to grow."
He expects Washington Federal to look for more small acquisitions.
In First Mutual, analysts said it was getting a well-run thrift that has struggled with net interest margin pressure recently. Before the first quarter, First Mutual had 55 consecutive quarters in which earnings grew from a year earlier, said Louis J. Feldman, an analyst with Punk, Ziegel & Co., who owns shares of First Mutual.
"They had some margin issues," Mr. Feldman said. Commercial loan spreads have been under pressure, and "deposit growth has been rather anemic."
First Mutual's first-quarter margin declined 5 basis points from the fourth quarter, to 3.73%. Loans declined about 3%, and deposits declined about 4%.
The company has been looking for a chief financial officer for more than a year, and Mr. Bradshaw speculated that Mr. Valaas, 62, may be ready to retire.
"First Mutual was struggling on the deposit side, and they had to seriously rethink their branch network and adding to it, trying to generate more core deposits, so it just seemed like a good time," Mr. Bradshaw said. He called First Mutual "a company that maybe was near the finish line."
Mr. Valaas said that his age had nothing to do with First Mutual's decision to sell itself, and that his role at Washington Federal has not been determined.
In a press release Monday, Roy M. Whitehead, Washington Federal's chairman and CEO, said, "First Mutual makes our organization stronger by adding a high quality customer base, 13 excellent branch locations, and a great deal of management and employee talent."
A company spokeswoman said Mr. Whitehead was not available for comment Tuesday.
The deal is expected to close next quarter.
