Sterling Bancshares Inc. (NASDAQ: SBIB) is one of those banks that no one has ever heard if they are outside of Texas.  The reason that investors and consumers outside of Texas now have to care about the company is that Sterling could end up being the first regional bank merger in the region for 2011.  Reports have been out this week that Cullen/Frost Bankers, Inc. (NYSE: CFR) may be acquiring the smaller bank.  One bank deal won’t set off a wave of M&A, but our own digging leads us to believe that there is a slew of pent-up mergers-in-waiting in the regional banks that could be set off almost at any time.

Sterling shares are higher and they have risen despite many changes there in the last 18 months.  Less than three months ago shares were actually trading under $5.50.  Shares were just at $6.80 on Monday before reports were out that Sterling may now be in play.  A 4% gain this morning has shares at $7.78, a high since 2009.  This week’s volume has been elevated with more than 1 million shares a day and an average volume being closer to 1.5 million shares versus about 900,000 shares a day under normal trading circumstances.

The WSJ chimed in this morning with a $825 million value, which would come close to $8.00 per share.  It was back in November that TAC Capital LLC, an investment firm which makes equity, private equity and hedge fund investments, submitted a proposal to nominate directors for election at the 2011 annual shareholder meeting.  Sterling’s announcement of the proposal was that it would review the proposal.

Cullen/Frost has a current market capitalization of about $3.71 billion, while Sterling now sits just under $800 million after the recent gains.  Sterling’s most recent press release indicates total assets of roughly $5.0 billion.  The bank holding company also noted that it operates 56 banking offices in the greater metro areas of Houston, San Antonio, Dallas and Ft. Worth, Texas.

Investors do need to be aware of price and value here.  There may be some additional value to unlock, but the value is not likely limitless.  Sterling listed its most recent book value per common share as of September 30, 2010 at $6.15 per share.  It also said that its tangible capital ratio was 9.13% and further noted that all regulatory capital ratios were “in excess of those considered to be well-capitalized.”

Sterling’s somewhat lengthy acquisition list is available on its site.  The question of how high this can fetch boils down to whether or not other regional banking players would want to get into what is currently considered an auction process for Sterling.  The local banks tend to make the most logical sense, but other regional players may want to consider it also.

Sterling has two other trailing securities in warrants and preferred shares under SBIBW and SBIBN.  As with all stories regarding M&A, until an announcement is made they need to be considered as rumors.

JON C. OGG

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