Wall Street Network - Crain's New York Business

Sterling’s stellar performance makes it a HOT ticket; could fetch $375 million

By Heike Wipperfurth

The days of independence for New York’s last small stand-alone commercial bank could be numbered. In the wake of an almost 30% spike in its share price over the last month, speculation is rife that Sterling Bancorp will be snapped up by one of its large competitors.

Sterling Bancorp, with $1.3 billion in assets, became the last of a once plentiful breed of small publicly traded commercial banks four months ago when North Fork Bancorp announced its plans to acquire Commercial Bank of New York. Only five months earlier, another small independent, Merchants Bank of New York, had been gobbled up by Valley National Bancorp.

Invisible hand

If Sterling is acquired, it will not be entirely an accident. Sterling’s stock price began its steep climb from a low of $12.65 in March of last year, just after the bank hired Charles Lee, a fast-talking former broker with D.H. Blair and A.T. Brod.

His mission was to push the company forward into the sights of Wall Street’s research departments. Soon after, three of them, Janney Montgomery Scott, Friedman Billings Ramsey and Ferris Baker Watts, took up coverage of Sterling, praising it as an undervalued stock with great potential.

“They were just below the radar screen,” says Mr. Lee, a member of Sterling’s business advisory board and president of investor relations firm Wall Street Network. “The analysts I introduced them to never heard of Sterling before.”

Institutional appeal

Where the analysts led, some large institutions that had ignored the company quickly followed. Today, institutions hold about 37% of the bank’s 9 million shares, up from 26.3% at the end of 1999.

Among the converts to the stock are David L. Babson & Co., Wellington Management and Keefe Managers, all of which bought into the stock in the quarter that ended Jan. 31. Others, including Royce & Associates and Riggs National Bank, increased their holdings during the same period.

The surge in interest marks quite a change for a niche bank whose share price peaked in 1998, when banks were hot, but moved downward until it began to recuperate last summer.

Until recently, Sterling had never been considered a hot ticket. Founded as a financing and factoring company in 1932, it went public in 1946 and entered the banking business in 1968. Louis Capelli, its 70-year-old chief executive since 1992, joined the bank as an office boy in 1945.

Since entering banking, Sterling has done well while maintaining a low profile. In the last 31 consecutive quarters, Sterling has produced an unbroken string of double-digit earnings growth figures by focusing on a niche strategy. It provides high-margin loans to a base of 12,000 customers that are small to medium-sized businesses. For the first quarter, its net income rose to $4.5 million, or $0.47 per share, up from last year’s $3.9 million, or $0.41 per diluted share.

Ahead of the class

Now, its stellar performance, propelled into the limelight in part by its marketing push, is showing results. Today, Sterling is trading at 13.95 times this year’s estimated earnings, higher than the 13.3 price/earnings ratio of its 21 peers in the mid-Atlantic region, according to Roberta Probber, an analyst at Ryan Beck & Co.

Its predecessors on the endangered species list were Commercial Bank of New York, which sold for 17.2 times 2000 earnings, or $175 million, and Merchants Bank, which sold for $375 million, or 18 times last year’s earnings. Jared Shaw, an analyst at Friedman Billings Ramsey & Co., calculates that as a potential acquisition target, Sterling could fetch as much as 20 times next year’s earnings, or $375 million.

“I think that someone would really like to have this franchise,” says Mr. Shaw. “Somebody who wants to have a Manhattan commercial bank presence.”

Mr. Capelli insists that “the company is not for sale,” adding, however, that he would bring an offer to the board for its consideration.