Sterling Financial Corp.'s first deal to buy a California community banking company is a big move south for the Spokane company as it seeks stronger growth than it has found in its home markets.
Sterling said Monday that it would pay $355 million, mostly in stock, for the $1.3 billion-asset Northern Empire Bancshares in Santa Rosa. Northern Empire's Sonoma National Bank subsidiary has 12 branches in Sonoma, Marin, and Contra Costa counties north and east of San Francisco.
"Northern California has a higher growth rate than our existing footprint" [in the Pacific Northwest], so we see this as an opportunity to garner" more business "at an earlier stage," Harold B. Gilkey, Sterling's chairman and chief executive, said in an interview Monday.
After buying Northern Empire, Sterling would have assets of about $11.2 billion and 177 branches in Washington, Oregon, Montana, Idaho, and California, and it expects to open additional branches in California. The branch and asset figures include another pending Sterling deal, for FirstBank NW Corp.
Northern Empire had $178.5 million of U.S. Small Business Administration 7(a) loans in its portfolio as of June 30, most of which are secured by real estate; and Sterling executives said they intend to extend Northern Empire's SBA operations to all of its markets. Sterling Savings Bank, which converted from a thrift to a commercial bank charter last year, now has a small SBA program.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp., said that the deal - at 2.75 times tangible book value and 18 times trailing earnings - is reasonably priced.
"This is a good opportunity for Sterling to expand in California, particularly by opening branches along the Interstate 5 corridor from Yuba City south to Roseville," a Sacramento suburb, Mr. Rabatin said. "That's one of the fastest-growing parts of the state."
Sterling Financial already has lending operations in the state through its mortgage subsidiary, Intervest Mortgage Investment Co. That unit recently expanded its lending after acquiring Mason-McDuffie Financial Corp. of Oakland on July 31, through which it makes commercial real estate, apartment, and construction loans in northern California.
Buying Northern Empire would give Sterling a funding vehicle to match the loans it is making in the state - a crucial need, given its aggregate loan-to-deposit ratio of 103% as of June 30, said James Bradshaw, an analyst with D.A. Davidson & Co. in Portland, Ore.
"They're already a lender in that market, but their need for deposits is pretty pressing, and California is certainly an impressive market that's got a lot of deposits," Mr. Bradshaw said.
Northern Empire shareholders would receive 0.8050 shares of Sterling stock and $2.71 in cash for each Northern Empire share, for aggregate consideration of $29.31 per share based on Sterling's Sept. 15 closing price. The deal is expected to close in late March or early April, and executives said the acquisition would be accretive to 2007 earnings per share.
Deborah Meekins, Northern Empire's president and CEO, is to run Sterling's California operations, and a Northern Empire director is to join Sterling Financial's board.
Sterling and FirstBank would make six acquisitions since 1998 for Sterling. The deal for the $884 million-asset FirstBank, a thrift company in Clarkston, Wash., should close by the end of November. Mr. Bradshaw said that Sterling is one of the most acquisitive banking companies in the Pacific Northwest, with 16 acquisitions in 23 years, and it apparently expects to do more.
Mr. Gilkey said that although the company is absorbing an acquisition it closed in July (the $435 million-asset Lynnwood Financial Group Inc. in Washington) and is now buying two more companies, it is still looking for deals in northern Nevada, Utah, Phoenix, and California.
In July, Sterling Financial filed a shelf registration statement with the Securities and Exchange Commission to raise an additional $100 million of capital. It may issue additional common or preferred stock in separate offerings to pay for future acquisitions and other capital expenditures, repay debt, or repurchase capital stock, but Mr. Gilkey said Monday that no timetable has been set.
Northern Empire's stock rose 17% Monday, to $27.95. Sterling's fell 2.6%, to $32.17.
