
Shareholder Battle Brews at Sterling
HOUSTON (
) -- Investors reacted strongly after the largest stockholder of
Sterling Bancshares
(SBIB)
on Friday expressed its disappointment with the Texas lender's management and said it would nominate five candidates for board seats at the company's upcoming annual meeting.
Shares were up 12% to $6.07 in early trading, following the announcement by
TAC Capital
of Bryan, Texas, which holds a 10% stake in the bank holding company.
TAC Capital is affiliated with The Adam Corporation/Group, which is a privately-held holding company that previously acquired First American Bank, SSB, which TAC said was the largest privately-held bank in Texas prior to its sale to
Citigroup
(C) - Get Report
in March 2005.
In its letter to Sterling's shareholders, TAC Capital said it had "lost confidence that Sterling's current board of directors and executive team will be able to unilaterally effect a turnaround of this fine banking franchise and deliver the value that Sterling shareholders deserve." The private equity group complained that over the past year, "...while Sterling's regional peers have managed a median positive return of 5.9%, Sterling shareholders have suffered a negative 8.8% return."
Among the many complaints included in TAC Capital's letter to Sterling's shareholders was the holding company's management of expenses. "Through the first three quarters of 2010, Sterling's efficiency ratio is a staggering 73%, not even in the ballpark of its regional peers, who have a median of 56% year to date," according to TAC. A bank's efficiency -- noninterest expense divided by the sum of net interest income and noninterest income - is essentially the number of pennies of expense for every dollar of net revenue.
TAC also complained that "analysts cannot help but be pessimistic about Sterling's future, with Sterling's return on equity estimated to be a lackluster 3% in 2011 and 5% in 2012." Out of 17 analysts covering Sterling Bancshares polled by Thomson Reuters, six have buy ratings on the shares and 11 recommend investors hold the shares.
A call to Sterling requesting comment on TAC's letter was not returned.
Compared to many holding companies, Sterling Bancshares is in decent shape. During the second quarter of 2009, the company fully redeemed $125 million in preferred shares held by the U.S. Treasury Department for bailout funds received through the Troubled Assets Relief Program, or TARP.
For the third quarter, Sterling announced net income of $4.5 million, or 4 cents a share, improving from a second-quarter profit of $596 thousand, or a penny a share, and a net loss of $24.7 million, or 30 cents a share, during the third quarter of 2009, when the company booked a $56.1 million provision for loan loss reserves. Earnings for the third quarter were still relatively weak, with a return on average assets of 0.35% and a return on average equity of 2.80%.
The company was strongly capitalized with a Tier 1 leverage ratio of 10.53% and a tangible capital ratio of 9.13%.
Nonperforming assets - including nonaccrual loans and repossessed real estate - made up 3.54% of total assets as of September 30, compared to 3.63% the previous quarter and 2.20% a year earlier. The annualized ratio of net charge-offs to average loans during the third quarter was a relatively low 1.01%, compared to 0.83% in the second quarter and 4.27% in the third quarter of 2009. Loan loss reserves covered 2.88% of total loans as of September 30.
Sterling's loan loss reserves declined $1.6 million during the third quarter, following the industry trend of "reserve releases," which were a very important driver of earnings for many of the largest U.S. banks.
Citigroup's
(C) - Get Report
loan loss reserves declined $2.5 billion during the third quarter, while
Bank of America
(BAC) - Get Report
and
JPMorgan Chase
(JPM) - Get Report
each released $1.7 billion in reserves,
Wells Fargo
(WFC) - Get Report
released $645 million and
PNC Financial
(PNC) - Get Report
released $105 million in reserves, according to data supplied by SNL Financial.
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--
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.









