Umpqua Holdings Buys Sterling Financial

NEW YORK (TheStreet) -- On Wednesday I profiled 90 publicly-traded community banks in Community Banks With CRE Loan Exposures. My message to these banks is that they should take action to raise capital, trim noncurrent loans or consider merger opportunities.

On Thursday premarket we learned that the Portland, Ore., community bank Umpqua Holdings ( UMPQ) will acquire the Spokane, Wash., savings and loan Sterling Financial ( STSA) in a $2 billion deal.

Sterling is partially owned by private-equity firms Thomas H. Lee Partners LP and Warburg Pincus LLC with both having stakes of about 20.8%.

The deal is a combination of cash and stock valuing Sterling stock at a premium of 26% above its share price of Aug. 30 which was $24.20 and $2.18 in cash. A 26% premium puts the stock at $30.49.

According to the FDIC Quarterly Banking Profile for the second quarter of 2013 Umpqua Holdings ended the second quarter with $11.79 billion in assets, a commercial real estate (CRE) to risk-based capital ratio of 376.8% and with their CRE loan commitments 55.3% funded.

At the end of 2010 Umpqua had $11.67 billion in assets, a CRE to risk-based capital ratio of 423.9% with their CRE loan commitments a stressed out 86% funded. This bank has thus done a good job in reducing CRE exposures and in raising assets.

Umpqua ($16.14) has a hold rating according to ValuEngine with fair value at $12.66, which makes the stock 27.5% overvalued with the stock just below its one-year price target at $16.44. The daily chart profile is negative with the stock trading below its 50-day simple moving average at $16.60. My annual and quarterly value levels are $15.37 and $14.18 with a monthly pivot at $16.72 and semiannual risky level at $18.02.

According to the FDIC Quarterly Banking Profile for second quarter of 2013 Sterling Financial ended the quarter with $9.25 billion in assets, a CRE to risk-based capital ratio of 346.5% and with their CRE loan commitments 68.2% funded.

At the end of 2010 Sterling had $9.5 billion in assets, a CRE to risk-based capital ratio of 349.8% with their CRE loan commitments a stressed out 91.8% funded. This bank has not grown since the end of 2010, but their CRE loan commitment pipeline is better managed.

Sterling ($28.40) has a buy rating according to ValuEngine and a one-year price target at $30.11, just below the deal price. The daily chart profile is positive with the stock well above its 50-day SMA at $26.05. Monthly and quarterly value levels are $25.23 and $24.21 with a semiannual risky level, now a pivot at $28.26.

The daily chart below shows some funky price action going into Aug. 30 and also in the days that followed. The deal was priced off the close of Aug. 30 and the stock was declining going into that day and bottomed that day with a low of $24.02 and close at $24.20. Note the spiky trading pattern that began with a high of $29.76 on Sept. 9, three days before the deal was announced.

Chart Courtesy of Thomson/Reuters

Based upon FDIC data the combined community bank will have assets at about $21 billion and still be overexposed to CRE loans versus the regulatory guideline of 300% of risk-based capital. The overall CRE loan commitment would be considered well-managed.

In my opinion this merger is just the first among the 90 focus community banks that I profiled Wednesday.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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