Roger Moyer, Sterling Financial Corp.'s president and chief executive, knew Sterling was getting a profitable company when it paid $30 million in stock and cash for Equipment Finance Inc. in February 2002.
What he could not have guessed was how much EFI would prosper - or that the subsidiary's outsize profits would help finance a buying spree.
In the 31 months since Sterling took over its Lancaster, Pa., neighbor, EFI's net income has jumped from $4.1million in 2002 to $8.2 million last year and is on pace to top $12 million in 2004. Sterling's net income has had a similar trajectory, going from $24.7 million in 2002 to $29.1 million last year. It was $15.8 million through June 30.
Those profits have helped fuel Sterling's transformation from a one-bank holding company concentrated almost entirely in Lancaster County, into a highly diversified, $2.4 billion-asset multibank business with a presence in two states (it is also in Maryland) and its eye on a third.
Sterling began changing in 1999, when it made its first whole bank acquisition, but its progress has been especially rapid the past 12 months. It has bought an asset manager and an employee-benefits consulting firm, and announced a third deal, scheduled to close in early 2005, for a Camp Hill, Pa., bank.
Mr. Moyer said recently that Sterling is not through buying and that EFI's cash flow is contributing to its acquisition capital.
"We've deliberately used those earnings to reinvest in our banking franchise," he said. "EFI is absolutely at the top of its game. Its results have been spectacular."
It has never troubled him, he said, that EFI's specialty leasing operation is not particularly compatible with Sterling's focus on relationship banking. He was well acquainted with EFI's managers, knew the company had a solid book of business, and was confident it would do well with a bank behind it to guarantee its funding stream.
Banks typically go into lending to provide a value-added service to commercial clients, many of whom use heavy equipment. But EFI's line of business is financing the purchase of forestry and land-clearing equipment, and its clients are hundreds of miles from the southeastern Pennsylvania markets Sterling serves.
Andy Stapp, an analyst who covers Sterling for Cohen Bros. & Co. in Philadelphia, said Sterling has been careful not to upset things at EFI, which he called a "money-making machine.
"One of the directors talked about folding it into" Sterling's equipment leasing company, Town and Country Leasing, "but Roger was adamant about leaving a good situation alone," Mr. Stapp said.
All the deals Sterling has done since buying EFI have complemented relationship banking. Sterling has always offered trust services, but buying Church Capital Management in October 2003 enhanced its asset management capabilities and gave it an in-house brokerage.
Likewise, its January purchase of Stoudt Cos. moved it into employee benefits consulting, a service that is in increasing demand among small businesses. Its deal for the $209 million-asset Pennsylvania State Bank, announced June 14, would add no new products but would take Sterling into two new counties.
In all the completed deals, the seller's management stayed on. Mr. Moyer said Sterling probably would not consider buying a business whose management was intent on cashing out.
"That's one of the critical factors we look at - what kind of leadership are we getting," he said. "What we're after is a young, aggressive management team that wants to use its equity in a company to buy into Sterling, rather than create an exit strategy for themselves."
So far the formula is paying dividends. Every company Sterling has bought has subsequently grown, Mr. Moyer said, and through the first six months of this year Sterling's noninterest income was $28 million, 22% more than the first half of 2001.
"I like the diversification," said William McCrystal, managing director for research at McConnell, Budd & Romano in Morristown, N.J. "This company's performance speaks for itself. It's a high-performance company. I don't think that's even debatable."
Sterling's next goal is to acquire a property and casualty insurance agency, something Mr. Moyer says it needs to round out its product offerings.
For Sterling's core customer base of family-owned businesses, "protecting wealth and assets is an important consideration," the CEO said. "We need a commercial services platform that meets the needs of small businesses, with workers' compensation coverage, traditional property and casualty policies, and overall counseling."
Buying Pennsylvania State Bank would move Sterling into Cumberland and Dauphin counties in the south-central part of the state.
Sterling will not make "any quantum leaps geographically" but wants to keep expanding its banking operation, Mr. Moyer said. He mentioned New Castle County in Delaware as a potential new market.
Mr. McCrystal said Sterling is "very selective" and "actively" seeking opportunities "to expand its banking franchise" and "enhance its other businesses."
