Puget Sound Bank (PUGB) is being careful to not mess up a good thing with its first acquisition.

The Bellevue, Wash., bank announced late last month that it was acquiring the $64 million-asset Core Business Bank, also in Bellevue, in an $8.4 million cash and stock deal.

The eight-year-old Puget Sound performed well throughout the downturn. By sticking to commercial and industrial lending, the $268 million-asset bank had few problem loans and in each year since 2006 it has posted a profit. It has also increased its loans by double-digit percentages annually since 2009.

About two years ago, the company decided it wanted to augment its growth by looking at acquisitions, says Jim Mitchell, the president and chief executive of Puget Sound.

"We rolled out of the recession with a pretty good platform … we decided we were in awfully good position to start looking at growth not just from an organic standpoint," Mitchell said in an interview on Tuesday. "But the last thing we wanted to do was screw up a good thing, so it had to be a good deal for us to even do it."

Banks in Puget Sound's asset class often cite the tough regulatory environment and the anemic economy for its reasons to pursue deals. Mitchell says those might be contributing factors, but mostly he was just looking for ways to make the bank bigger and improve its stock price.

"We always have an eye on how we are delivering returns to shareholders," he says. "Look at the stats: the bigger banks trade at a higher multiple of book value. The market says size matters."

The market validated Mitchell's belief or, at least, it really liked his deal. The company's thinly traded stock rose 6% after the deal's March 22 announcement to $12.50. On Thursday, it was trading at $12.40.

As it launched its pursuit of a deal, Mitchell says he had four-point checklist. His ideal target would be an in-market, healthy commercial lender that was significantly smaller, Mitchell says. Essentially, the bank was looking for a smaller version of itself.

"We kissed a lot of frogs in the last two years," Mitchell says. "We looked real seriously at four others; two scared us away with credit, two wanted too much."

That left Core Business Bank, a five-year-old bank with no problem loans at the end of 2012 and loan book with a 60% concentration in C&I lending. Core didn't return a call for comment, but Mitchell says the bank was held back by its size.

"They have a few of the best networked relationship managers in the city. We think they were hamstrung over there with their lending limits. These guys should just flourish with us," Mitchell says. "I think the bank knew that if they were ever going to return anything meaningful to their shareholders they would need to sell."

In that regard, Puget Sound likely found a gem that larger banks passed over.

"We are getting cost savings north of 35% and it is accretive right away to our tangible book value," Mitchell says. "It was below the radar for the big banks and the regionals."

Observers say the size difference between the two banks is the sweet spot for healthy M&A.

"When I'm representing a seller, I get excited if my client is going to make up 10% to 20% of the pro forma company," says Stephen E. Nelson, managing director of investment banking for D.A. Davidson in Chicago. "It is not 1% or 2% where it is just a rounding error, but it also not transformational. It is a nice, meaningful number and it is worthwhile."

Mitchell says the Core Business transaction isn't his last, either. Acquisitions will play a key role in hitting the company's growth goals. He wants the bank to have $500 million of assets within the next year or two and $1 billion in five years.

"With our performance, we get calls from buyers from time to time," Mitchell says. "We are not interested. We are on a growth-and-acquisition phase ourselves."

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