TriCo Bancshares (TCBK) in Chico, Calif., wants to outperform the country's biggest banks in the rural communities it serves, and that means it has to think like a big bank.
TriCo announced plans this week to buy North Valley Bancorp (NOVB), a $907 million-asset company in Redding, Calif., for about $178 million in stock. The deal would push TriCo to about $3.5 billion in assets and give it a top-three deposit share in more than half of the 26 counties it serves, which are mainly in rural, inland California.
Most importantly, the deal could give TriCo the scale to make improvements and compete with the megabanks, Chief Executive Rick Smith says.
"Size does matter these days. The major players in our industry have doubled in size over the past five years, and we need to do our best to compete against them," Smith said. "Because we do consider Wells Fargo (WFC) and Bank of America(BAC) to be competitors of ours good, tough competitors, too."
The deal for North Valley which is also a competitor of TriCo in the rural north of the state could give TriCo the scale to beef up its internal processes and adapt to changes in the industry, Smith says. TriCo wants to invest in new technology like online banking and improvements in its check-processing and loan-approval processes, Smith says.
"One of the key areas going forward is our ability to implement new technologies that our customers expect from us," Smith says. "And technology is expensive. So I want to make sure that we can spend the kind of money necessary to be best in class."
TriCo and North Valley resemble far larger companies in the diversity of their revenue streams, analysts say. Fee revenue makes up about 30% of the revenue of both banks, making them standouts among community banks, according to Jacquelynne Chimera, an analyst at Keefe, Bruyette & Woods.
Both companies also have relatively diverse loan portfolios for small lenders. CRE loans would make up about 48%, and single-family loans about 31%, of the combined company's loan book, according to a research note on the deal by D.A. Davidson analyst Jeff Rulis.
For Smith, diversification is part of the job of "traditional community banks" like TriCo and North Valley.
"In small communities you need to provide a breadth of products and services, and not be reliant on one type of customer," he says. "That diversification is one of the things that continue to keep us on the path of diversified revenues."
While TriCo and North Valley are now similar institutions, they traveled very different paths to get where they are.
North Valley is a bank on the mend. The deal is a second chance for North Valley to be a seller, after it agreed to be bought by Sterling Financial in Spokane in 2007. North Valley canceled the deal after regulators expressed concern that Sterling's internal controls weren't keeping up with its rapid growth.
Shortly after that cancellation, a wave of real estate losses nearly swept North Valley away. It lost $23 million in 2009, and the Federal Reserve issued an enforcement action requiring it to clean up its loan book.
The company began its cleanup in 2010, after landing a $40 million recapitalization led by institutional investors. North Valley also managed to reduce its bad loans and escape the Fed's regulatory order. It cut nonperformers to about 2.5% of total assets as of the end of the third quarter of last year, down from nearly 7% in 2009.
It returned to profit in 2011, and made more than $4 million in the first nine months of 2013, according to the Federal Deposit Insurance Corp.
TriCo, meanwhile, passed through the financial crisis cleanly - it didn't take Troubled Asset Relief Program funds and never posted a loss during the downturn, Chimera says. Yet the company has been a cautious player in M&A, making FDIC-assisted deals in 2010 and 2011 but no significant open-bank acquisitions.
For its first substantial deal, TriCo wanted to avoid the risk of buying a fixer-upper.
"We have been strong and comfortable with our own position for a long time, but we have been concerned about the health of the banks we were looking to acquire," Smith said. "But now, with an improving economy, banks are starting to right themselves as earnings improve and asset quality improves, and we feel more comfortable with their position."
The price TriCo is paying for North Valley is high but reasonable, analysts say. While it "appears steep" at 188% of tangible book value, it could be justified by cost savings and earnings accretion, Rulis says.
That price could kindle more deals among banks on the West Coast, as it is one of the most lucrative for a seller in that region in recent years, says Tim Coffey, vice president of research at FIG partners.
"This price is going to set the bar. I really think it will make other potential sellers evaluate their options," Coffey says.
TriCo predicts savings of 40% of North Valley's costs, but analysts called that a conservative estimate. There's significant overlap in the two branch networks, with 13 of North Valley's 22 branches within five miles of a TriCo branch, according to Chimera. Along with the cost saves, the deal would give TriCo an entry into Sonoma, Humboldt and Trinity counties, relatively affluent markets that lie along the state's northern coast.
"The deal is a logical choice for TriCo, because not only do they get cost saves, but North Valley is in markets it isn't," Coffey says. "The deal hits both targets, cost saves and expansion."