For Sterling Financial (STSA), small deals are just right.

Most other buyers around $10 billion of assets would have ignored the $243 million-asset Commerce National Bank in Costa Mesa, Calif. All bank deals take about the same legwork, so buyers should focus on targets that would make up at least 10% of the combined company, according to the conventional wisdom.

But Sterling, in Spokane, Wash., agreed to buy Commerce last week for $42.9 million.

Executives at the $9.3 billion-asset Sterling say they would be interested in buying something large but haven't seen those opportunities. Unwilling to wait around, they are piling up the smaller ones.

"We would rather do something smaller that fits our desired requirements of location, business mix, quality of management and those sorts of factors," says Pat Rusnak, the chief financial officer. "Those factors matter more than sheer size. We are not going to do something larger just for the sake of size."

Sterling has done four deals for banks with less than $500 million in assets since it raised $730 million in equity from private-equity and other investors in 2010.

What Commerce lacks in assets, it makes up for in possibilities, Rusnak says. The deal would provide a full banking office in a region where Sterling has had success. In 2010 Sterling recruited David DePillo to do multifamily lending in Southern California at a loan production office. Through DePillo's team's work, Sterling had $635 million in loans in that region at the end of 2012.

"All we've been able to do with these customers is offer them apartment loans," Rusnak says. "We can now try to get a bigger share of the wallet by offering them more products and services. … Orange County is an affluent area with a lot of successful individuals who we can help."

Commerce also has an equipment-leasing business, a hot business line that banks across the country are coveting as they search for ways to make loans that carry a higher yield.

The deal also would be another step toward having a presence in every major California city along Interstate 5, which runs along the West Coast. This year Sterling completed its acquisition of the $142 million-asset American Heritage Holdings in the San Diego area, and Sterling already has a presence in Santa Rosa, Calif., from an earlier transaction.

Analysts welcomed the deal activity, even if it is small.

"As we went through the first quarter, we saw activity wane and the expectations for M&A dwindle, but Sterling is an outlier," says Brett Rabatin, an analyst at Sterne Agee. "Small deals take a lot of work relative to what you get, but this transaction deploys some capital and gives them another engine for loan growth."

The price tag — 133% of Commerce's tangible book value — was slightly expensive, says Jeff Rulis, an analyst with D.A. Davidson. But its potential benefits could outweigh the price if properly leveraged, he says.

"The deal price looks modestly expensive relative to the bank's average performance metrics," Rulis wrote in a research note. "Although the opportunity to offer more scale to all operations in Southern [California] may go beyond the price of the individual [Commerce] transaction."

However, investors could get antsy for bigger deals, Rabatin says.

"From the buy side, this deal is all well and good, but investors are waiting for stuff that moves the needle more," Rabatin says. "And it would be nicer if they did, but let's face it — that is not what is out there."

The pressure to do bigger deals could build as Sterling gets closer to $10 billion in assets. At that level, the Durbin rule kicks in; Sterling's deposit insurance premiums would get more difficult to calculate, and probably rise; and it would be subject to regulation by the Consumer Financial Protection Bureau.

Rusnak says the Durbin rule, which caps the amount banks can charge on interchanges, would cost Sterling $6 million annually before taxes. It has already built the infrastructure to allow it to exceed assets of $10 billion but says the overall costs of the regulatory changes are largely unknown.

Just to level out the effects of Durbin, Sterling would need to grow to $10.4 billion of assets, Rusnak says. Banks that cross that threshold should quickly get to at least $11 billion or higher, many industry observers say. Again, Rusnak says, Sterling refuses to add assets for the sake of growth.

"In a perfect world, you go right from $10 billion to $11 billion and go on your merry way," Rusnak says. "But going over 10 isn't going to change the way we look at acquisitions. The risks of trying to force something just to get there faster far outweigh not getting past that level quickly."

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