In the realm of bank mergers, one bank's concentration problem could serve as the key to another bank's diversity.

Sterling Financial, a $9.6 billion-asset company in Spokane, Wash., agreed on Monday to enter southern California by acquiring American Heritage Holdings in La Mesa for $6.5 million in cash.

Sterling (STSA) has long-term plans to grow in southern California, but the main motivation for the deal was Borrego Springs Bank, an American Heritage unit that focuses on loans guaranteed by the U.S. Small Business Administration.

"We really view this as something that will significantly enhance our limited penetration in the SBA arena," Pat Rusnak, Sterling's chief financial officer, said in an interview Monday. Sterling should be able to deepen relationships with Borrego Springs' existing borrowers and expand SBA lending to match Sterling's size, he said.

Borrego Springs "has for many years been a leading SBA originator and, for fiscal year 2011, was among the top 20 in the nation," David DePillo, Sterling's vice chairman and chief lending officer, said in a release announcing the deal. "They have a solid and scalable SBA origination and servicing platform that we expect will have a meaningful positive impact."

As banks struggle to find ways to grow earning assets, small niche banks make for good targets for growth-minded buyers, industry observers say. Niche player provide buyers with an opportunity to mesh expertise with scale. Meanwhile, the regulatory environment has made it more difficult for banks to be exceptional in just one area.

"In the absence of loan demand, there's a lot more focus in specialty lending. A specialty lending platform gives a buyer a skill set they can leverage," says Wesley A. Brown, a managing director at St. Charles Capital, an investment bank in Denver. "On the other side, greater regulatory uncertainty makes it tougher for the small specialty lenders."

The deal has similarities to last week's announcement that Pacific Premier Bancorp (PPBI) in Costa Mesa, Calif., would buy First Associations Bank, a financial institution in Dallas that focuses on homeowners associations. That deal centered on low-cost deposits, but Pacific Premier's management team said its larger balance sheet would allow it to expand the business and free the seller from regulatory constraints.

First Association's regulatory issues stemmed from its de novo status, but American Heritage's issues were more about challenges to its long-standing business plan.

The $142 million-asset American Heritage began making SBA-guaranteed loans in 1993. It originated $161 million of 7(a) loans, the SBA's most-popular loan, last year 2011. William Ruhlman, the bank's president and chief executive, said in an interview Tuesday that American Heritage was touted as a model for SBA lending throughout the downturn.

The mood changed as the secondary market for the unsecured portion of the loans dried up and the economy continued to sputter. At June 30, the bank had nonaccrual loans of $12 million, but 84% of the loans had government guarantees. American Heritage was profitable the last three years and remains on track to make money this year, Ruhlman said.

In the summer of 2011, the Office of the Comptroller of the Currency began pushing American Heritage to branch into other areas.

"The local OCC was holding me out as a model and wanted us to talk to their people in Washington about how to do SBA" early in the crisis, Ruhlman said. "Then we went from being perceived as really good guys in 2010 to really bad guys in 2011."

Ruhlman said that diversification was implausible, so he decided to try and sell the bank.

"They want you to do commercial non-real estate, residential mortgages and consumer stuff, but we found a niche that worked well for us," Ruhlman said. "We found a buyer that appreciates what we do and all the issues of concentration that we have disappear."

American Heritage has 14 SBA lenders across three branches and seven loan-production offices in California and Oregon. Sterling has seven SBA lenders and there are no plans to close any offices after the acquisition closes, Rusnak said.

Multifamily lending has driven Sterling's loan growth in recent years, and Rusnak said the acquisition should bring more variety to the balance sheet. "We can't subsist entirely on apartment lending," he said. "We needed some diversity."

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