Sterling Bancshares has built itself into one of Houston's most prominent small-business lenders by aggressively acquiring other community banks and targeting customers shunned by the market's big banks.
Now $1.4 billion-asset Sterling is ready to expand and is looking for another high-growth city, such as Dallas, Phoenix, Denver, or Atlanta.
Sterling, which has made six acquisitions in greater Houston since 1993, focuses on loans of under $1 million. That is a sector that community banks can serve better than large banks-no matter where they are, Sterling chairman George Martinez said.
"Our model can be replicated into other markets," Mr. Martinez said.
Analysts, however, are urging Sterling to approach its expansion conservatively. Part of its success in Houston, they say, has been its ability to use its local-bank status to woo customers from its out-of-town competitors, namely Charlotte, N.C.-based Bank of America Corp., Bank One Corp. of Chicago, Chase Manhattan Corp. of New York, and San Francisco's Wells Fargo & Co.
But Mr. Martinez said Sterling would not bill itself as an outsider in new markets. Any bank that Sterling buys would retain its name and management team.
"We want to be as close as we can to the local bank," Mr. Martinez said.
Sterling has drawn up a list of possible targets. Mr. Martinez said the company will take its time to find a company that matches Sterling's dedication to small-business owners.
"There's a tendency to move too quickly," he said of other active acquirers. "The main thing we look for is compatibility-personal service and commitment to the customer."
That strategy is working in Houston, analysts say.
All but one of its acquisitions have had $50 million to $150 million of assets and are located near clusters of small businesses.
"They're not going to get big for big's sake, like some other companies," said Joseph A. Stieven, bank analyst at Stifel, Nicolaus in St. Louis. "They've got one of the best track records in the industry."
Sterling requires its acquisitions to add at least 2% to earnings within 12 months of converting to Sterling's back-room processing center, which usually occurs a few months after the deal closes. So far the company has met those goals, Mr. Martinez said, and it would apply the same criteria in another market.
"Our history is we don't lose business after the transaction closes," he said. "It's just part of our drive to stay focused and eliminate distractions."
Sterling's focus on small-business customers has led to strong returns. The company earned $17 million last year, up 23% over 1997 and $4.6 million in the first quarter, a 15.3% jump from the same period in 1998.
"Fundamentally, the company is very solid," said Daniel Cardenas, bank analyst at Howe Barnes Investments in Chicago. "Their performance is very consistent."
"I really admire their focus and their dedication to their strategy," said Marni Pont O'Doherty, bank analyst at Keefe Bruyette & Woods in New York. "They have zeroed in like a laser on those under-$2 million loans."
Commercial loans of less than $1 million make up 30% of Sterling's assets, whereas similar credits make up less than 5% of large banks' assets, according to 1998 call report data. An additional 20% of Sterling's assets are in loans in the range of $1 million to $2 million.
"If you take one loan away from a big bank, it's imperceptible to them, but it's a big deal to us," Mr. Martinez said. "They're worried about fighting the other three banks, not us."
