Redwood Empire Bancorp is bulking up its thrift subsidiary and extending its reach southward by buying La Cumbre Savings Bank in Santa Barbara. The deal also could signal the beginning of a new surge in midsize thrift mergers in the Golden State. Redwood Empire in Santa Rosa, north of San Francisco, owns both a thrift and a bank, Allied Bank FSB and National bank of the Redwoods. It has $471 million in assets.

La Cumbre, with $150 million in assets, will go for about $9.5 million, or a little less than book value, according to Redwood Empire officials. It has been a lackluster performer in recent year's, with a relatively low 5.14% core capital ratio.

Such deals will become more common, according to analysts at Keefe, Bruyette & Woods. The New York investment banking firm, in a recent report, predicted the next two years would see a huge increase in merger activity within California, with thrifts the predominant sellers.

"We're at a state where the economy is finding its bottom," said Tom Theurkauf, an analyst at Keefe.

"It's allowed thrifts to recover from a credit perspective, but on a going forward basis it will be harder for thrifts to show earnings momentum without looking at a merger to increase shareholder value."

Mr. Theurkauf said in most of the in-market deals, thrifts will be the targets, but both thrifts and banks will be buyers.

"The buyers will be compelled because to grow they'll have to buy customers," he said. "The sellers will be compelled because as the selling institution recovers, the lower provisioning can be a very powerful driver of earnings momentum. Once those decreasing provisions run their course, you'll see investor pressure to sell because of a lack of internally generated loan growth."

Redwood Empire is paying cash of about $11.40 a share.

Officials described the two thrifts, which are generally in contiguous markets, as a good fit.

"La Cumbre's market on the central coast of California is very similar to Allied's on the noah coast," said Robert Downey Jr., chairman of Redwood. "We believe with know-how to operate in this environment."

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