Umpqua Holdings' (UMPQ) latest deal is low profile by design.
Its $45 million agreement to buy a three-branch community bank north of Los Angeles is a safe bargain that probably will keep thrifty shareholders and "too big to fail" watchdogs at ease.
And though American Perspective Bank — which has $260 million of assets — would be by far the smallest of the nine acquisitions Umpqua has done in 10 years, it still promises to be a moneymaker, says Ron Farnsworth, the chief financial officer of the $11.6 billion-asset Umpqua.
American Perspective is "a very, very clean bank in a good market," he says. "It is not about the size for us. It is about what we think we can do in the market over time. We think this is step one."
The next steps would include opening more branches in American Perspective's home market of San Luis Obispo and neighboring Santa Maria. Umpqua would also begin collecting deposits at American Perspective's loan office in Paso Robles.
Bite-size deals have become popular with banks hungry for acquisitions. The $13.8 billion Washington Federal (WAFD) of Seattle last week agreed to pay up to $73 million for the $868 million-asset South Valley Bancorp of Klamath Falls, Ore. Other banks with several billion dollars of assets that bought much smaller ones in March included S&T Bancorp (STBA) of Indiana, Pa., and Iberiabank Corp. (IBKC) of Lafayette, La.
The well-established trend should continue, experts say.
"These small deals, while they are a lot of work for the amount of integration involved, they make sense because the pricing is pretty reasonable," says Brett Rabatin, an analyst with Sterne Agee & Leach.
Small banks are facing mounting competitive and regulatory costs, he says. Umpqua and other regional franchises with several dozen branches are eager to grow profits but afraid to overpay.
"It fits in with what they have been telling investors: that they are going to be disciplined in pricing" acquisitions, Rabatin says. "It takes a lot of these to add up, but it's still a solid announcement for them."
American Perspective's more than $200 million in deposits should help boost Umpqua's loan-to-deposit ratio from a fairly low 70% at yearend.
Umpqua, which has 194 branches from Seattle to San Francisco, also wants to enter California's central coast. It could open new branches, which is expensive and time-consuming. It is also wary of doing a large deal that may not translate into big growth in the area, Farnsworth says.
"We see pretty much every deal that comes up. It has to come back to strategic importance. That is not necessarily going to be driven by size," Farnsworth says. "We have got to be able to grow it over time."
American Perspective has unusually good credit quality. It has no overdue loans. Its funding costs are extremely low, and it is more efficient than most banks its size. But it does not have the capital to maintain its growth trajectory: Its loans increased nearly 11% in 2011 as profits increased more than fourfold, to $2.8 million.
Its robust profits have not translated into a robust share price. Its shares traded over the counter at a discount to its tangible book at yearend. Umpqua's offer values it at 100% of its tangible book, or $10 per share. The deal is expected to close in mid-2012.
Umpqua has bought four failed banks since 2009 and its deal for the five-year-old American Perspective would be its first open-bank acquisition since 2007.
Umpqua's shares closed down more than 1% Tuesday to $12.70. It reports first-quarter profits on April 19.