Sterling Financial Corp. Reports Operating Results (10-Q)
Sterling Financial Corp. has a market cap of $33.39 million; its shares were traded at around $0.64 with and P/S ratio of 0.05. STSA is in the portfolios of Jim Simons of Renaissance Technologies LLC.
Highlight of Business Operations: During the second quarter of 2010, Sterling entered into agreements with Thomas H. Lee Equity Fund VI, L.P., Thomas H. Lee Parallel Fund VI, L.P. and Thomas H. Lee Parallel (DT) Fund, VI, L.P. (collectively, THL) and with Warburg Pincus Private Equity X, L.P. (Warburg), pursuant to which THL and Warburg agreed to purchase a combination of preferred and common stock at a purchase price of up to $0.20 per underlying common share and to receive warrants with an exercise price of up to $0.22 per share (the THL and Warburg Transactions). If the THL and Warburg Transactions are completed THL and Warburg would each own 20.5% of Sterlings outstanding common stock on an as-converted basis, assuming the exercise of the warrants by such investor, for an aggregate investment by each of approximately $139 million.
Also during the second quarter of 2010, Sterling executed a definitive exchange agreement (the Treasury Exchange Agreement) with the U.S. Department of the Treasury (the Treasury) providing for (i) the exchange of the 303,000 shares of preferred stock held by the Treasury through its Capital Purchase Program for 303,000 shares of a newly-created Series C Fixed Rate Cumulative Mandatorily Convertible Preferred Stock (the Series C Stock) with a liquidation preference of $303 million, (ii) the exchange of the Series C Stock at a discounted exchange value of $75.75 million into 378,750,000 shares of Common Stock at a conversion price of $0.20 per share prior to the closing of the investments by THL and Warburg; and (iii) the amendment of the terms of the warrant currently held by Treasury to provide for an exercise price of $0.20 per share for a ten-year term following closing of the THL and Warburg Transactions, (the Treasury Exchange Transaction).
Sterling reported a net loss attributable to common shareholders during the three and six months ended June 30, 2010 of $58.2 million and $147.0 million, respectively, or $1.12 and $2.83 per common share, respectively. The provision for credit losses declined to $70.8 million during the second quarter of 2010 from $88.6 million in the first quarter of 2010. Sterlings cumulative efforts to address credit quality over the last several quarters have led to a lower provision for credit losses, a reduced rate of annualized net charge-offs and a reduction in the balance of total classified assets. Sterling continues to grow and expand customer relationships as demonstrated by the growth in retail time deposits during 2010 of 7 percent on an annualized basis. The decline in net interest income reflects a lower balance of earning assets and an increase in the amount of interest that was reversed which was related to nonperforming loans. When a loan reaches nonperforming status, interest income is no longer recognized on the loan. Sterling continues to record a full valuation allowance against the future tax benefits of its operating losses,
Management evaluates investment securities for other than temporary declines in fair value on a quarterly basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other than temporary, the securities will be written down to current market value, resulting in a loss. There were no investment securities that management identified to be other than-temporarily impaired at June 30, 2010, because the decline in fair value of certain classes of securities was attributable to temporary disruptions of credit markets and the related impact on securities within those classes, not deteriorating credit quality of specific securities. Sterling holds a single-issuer trust preferred security that has been negatively impacted by temporary credit market disruptions. As of June 30, 2010, the trust preferred security is rated A1 by Moodys and has an amortized cost of $24.8 million compared to a $19.9 million market value, or an unrealized loss of $4.9 million.
As of June 30, 2010, Sterling also held private label collateralized mortgage obligations with an aggregate amortized cost of $66.5 million compared to a $66.9 million market value, or a net unrealized gain of $417,000. All private label collateralized mortgage obligations are internally monitored monthly and independently stress-tested quarterly for both credit quality and collateral strength, and are AAA- rated according to at least one major rating agency. The vintage, or years of issuance, for these nonagency MBS ranges from 2003 to 2005.
Overview. Sterling reported a net loss attributable to common shareholders during the three months ended June 30, 2010 of $58.2 million, or $1.12 per common share, as compared with $33.9 million, or $0.65 per common share, for the three months ended June 30, 2009, with the decline primarily resulting from not recognizing an income tax benefit during the period, as well as a lower level of net interest income, partially offset by gains on the sale of securities, a lower level of credit loss provisioning and lower noninterest expenses. The net loss attributable to common shareholders during the six months ended June 30, 2010 was $147.0 million, or $2.83 per common share, as compared with $58.7 million, or $1.13 per common share, for the six months ended June 30, 2009. The decline is
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