PDF ATTACHED: STL Coverage Initiation
Close $17.60 / “Outperform” / Price Target: $21 / HQ= Montebello, NY / $2.3 Bil. Mkt. Cap.
- Initiating Coverage with an “Outperform” Rating and $21.00 Target (234% of 2017 TBV)
- EPS Outlook: $1.07 in 2016 (Operating, ex-merger/restructuring charges) & $1.27 in 2017 (18% growth)
- Commercially-focused Bank with core profitability near 1.15% (ROA) and ROATCE of 15%+
- Spread Income positively biased to rising short-term interest rates
Sterling has built a strong Commercial Loan and Deposit franchise with admirable organic and total growth rates comparing favorably to peers with the former growing 20% annualized in 2Q16. The company continues to migrate away from its Consumer platforms (recent sale of Mortgage Origination platform is one example) and has made significant investments in Specialty Finance segments in order to diversify the Loan Portfolio from both a geographic and product segment perspective. These segments also have a high degree of short-duration Assets from a repricing perspective and we believe the company will be a beneficiary of rising short-term rates (see Page 5). Under a +100 basis points instantaneous change in the Treasury Yield curve, STL has a 5.0% positive impact to Spread Income on a forward 12-month basis—among the highest within the Mid-Cap Bank stocks.
A strong Core Deposit (94%) base supporting these Specialty segments should allow for growth funding at attractive Risk-adjusted spreads as management notes an all-in Yield on these lines of 5%+. The pending acquisition of GE Capital’s Northeast Restaurant portfolio as well as the 1Q-2016 deal for NewStar Financial’s asset-backed (ABL) business are examples of expansion in these segments. Sterling remains opportunistic in adding Top-Tier Lending Staff within these segments to support growth, recently announcing senior Lending hires.
Positive Operating Leverage continues to be a primary focus (i.e., targeted Revenue growth at 2x Expense growth) and was on display in 2Q16 as Operating Revenues rose 7.4% compared to a 3.8% rise in Expenses. With the full impact of closing 7 branches in 2Q16 as well as the divestiture of certain business lines during 3Q16, we continue to model positive Operating Leverage throughout our model horizon. The company notes it is continuously evaluating its branch system for further consolidation opportunities and we envision continued branch downsizing.