Sterling Financial Corp. of Spokane is wasting no time filling in the gaping hole in its California operations.
Just weeks after closing its first-ever California acquisition, the $11 billion-asset Sterling said Tuesday that it is buying North Valley Bancorp, a Redding company with 25 branches stretching from the Oregon border to Sonoma County to the northern suburbs of Sacramento.
Sterling agreed to pay $196.2 million in cash and stock for the $906 million-asset North Valley. The deal would nearly double Sterling's branch network in California and boost assets there to more than $2 billion.
Daniel G. Byrne, Sterling's chief financial officer, said in an interview Wednesday that it makes sense to bulk up quickly in Northern California.
"The marketplace has been very robust and fast-growing, and it's a natural extension to our franchise in the Pacific Northwest," Mr. Byrne said. A number of its corporate customers are "doing business in California, and this allows us to provide better service to them."
Sterling entered California when it bought the $1.3 billion-asset Northern Empire Bancshares and its Sonoma National Bank in Santa Rosa for $355 million.
Though Mr. Byrne said that Sterling's attention will be focused on integrating Northern Empire and North Valley, he stressed that his company would be open to other deals in California if the right opportunity came along. He also said it plans to open additional branches there over the next several years.
Sterling is not the only Pacific Northwest company that has been expanding in Northern California of late. Umpqua Holdings Corp. in Portland, Ore., has bought two banks there in the last three years and recently announced a deal for a third.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, said out-of-state banks want to be there because "the long-term demographic trends of population migration and job growth are good."
Now is a good time to buy in Northern California, because sellers' stock prices are down somewhat as a result of concerns about the housing market's slowdown, he said.
Sterling's deal for North Valley had been rumored for months, Mr. Bradshaw said, and takeover speculation was the reason North Valley's stock has risen roughly 37% so far this year.
Sterling would pay $25.14 for each North Valley share, or 2.43 times book value.
Both company's shares fell slightly on news of the deal. Sterling's stock closed at $30.05, down 0.9%, while North Valley's fell 1%, to $24.60.
The deal, scheduled to close next quarter, is expected to add a penny a share to Sterling's earnings next year, but Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, said earnings from Northern California should be much better in 2009 and beyond, since he expects Sterling to grow aggressively there.
Not only will it open more branches there, but it also will enhance the commercial and industrial loan products that North Valley currently offers, he said.
Sterling converted from a thrift to a state-chartered commercial banking company two years ago, and as of March 31 it had more than $2 billion of commercial and industrial loans, which made up about 29% of its total portfolio.
"It has a higher level of C&I loans in its portfolio than many banks, and the yields have been extremely attractive," Mr. Rabatin said. Over time Sterling likely will open corporate banking centers in certain California markets such as Sacramento, similar to the ones it has in Seattle and Portland.
Sterling also expects to beef up its Small Business Administration lending after the deal closes. It has had a small SBA operation for several years, but the Northern Empire purchase made that operation much more sizable. North Valley is also a preferred SBA lender.
The purchase would give Sterling a strong base of core deposits in California. According to Mr. Rabatin, 75% of North Valley's deposits are considered core — a percentage he called well above the industry average.
In a press release, Harold B. Gilkey, Sterling's chairman and chief executive officer, said he has been impressed with North Valley's management and its "ability to generate an exceptional core deposit base in a competitive environment for deposits."
Three North Valley executives — Mike Cushman, its president and CEO; Scott Louis, its chief operating officer; and Roger Nash, its chief credit officer — would remain with Sterling for at least three years after the deal closes.
