Sterling Financial Corporation is a unitary savings and loan holding company. Sterling provides personalized quality financial services to its customers. Sterling Financial Corp. has a market cap of $180.2 million; its shares were traded at around $3.44 with and P/S ratio of 0.2. Sterling Financial Corp. had an annual average earning growth of 5.1% over the past 5 years.
Highlight of Business Operations:Sterlings performance and earnings per share continue to be impacted by the economic downturn which has led to higher credit costs, levels of both classified and nonperforming assets, and higher net charge-offs. During the three and six months ended June 30, 2009, Sterling recorded a provision for credit losses of $79.7 million and $145.6 million, respectively, compared to $31.0 million and $68.1 million, respectively, during the comparable 2008 periods. Expenses associated with the resolution of other real estate owned (OREO) and FDIC insurance premiums, including a special assessment, have increased during 2009. Income from mortgage banking operations increased 67% and 87%, respectively, over the three and six months ended June 30, 2008, reflecting lower prevailing interest rates and new lending initiatives, which led to a significant increase in the volume of residential mortgage originations. The year over year decrease in Sterlings net interest income and net interest margin for the three and six month periods primarily reflects a higher level of nonperforming assets (including non-accrual loans and OREO), and its asset sensitivity.
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 for the period ended June 30, 2009, 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. As of June 30, 2009, Sterling held positions in classes of securities negatively impacted by temporary credit market disruptions, including one single-issuer trust preferred security, and 23 private label collateralized mortgage obligations. The trust preferred security is rated A1 by Moodys and has an amortized cost of $24.6 million compared to a $14.5 million market value, or an unrealized loss of $10.1 million. As of June 30, 2009, the private label collateralized mortgage obligations had an aggregate amortized cost of $276.4 million compared to a $239.2 million market value, or an unrealized loss of $37.2 million. These securities are investment grade, and all are stress-tested monthly for both credit quality and collateral strength. One security of $14 million had a second rating by S&P of B-. As of June 30, 2009, Sterling expects the return of all principal and interest on all securities within the portfolios pursuant to the contractual terms, has the ability and intent to hold these investments and does not believe it is more likely than not that it would be required to sell these investments before a recovery in market price occurs, or until maturity. Realized losses could occur in future periods due to a change in managements intent to hold the investments to recovery, a change in managements assessment of credit risk, or a change in regulatory or accounting requirements. See New Accounting Pronouncements.
Fair Value of Financial Instruments. Sterlings available-for-sale securities portfolio totaled $2.55 billion and $2.64 billion as of June 30, 2009 and December 31, 2008, respectively, and were the most substantial of Sterlings financial instruments that are carried at fair value. These securities are valued using a pricing services matrix technique based on quoted prices for similar instruments, which Sterling validates with non-binding broker quotes, in-depth collateral analysis and cash flow stress testing.
Goodwill and Other Intangible Assets. As of June 30, 2009 and December 31, 2008, Sterling had goodwill and other intangible assets totaling $251.8 million and $254.3 million, respectively. Goodwill represents the difference between the value of consideration paid and the fair value of the net assets received in a business combination. Other intangible assets represent acquired customer depository relationships. Intangible assets are periodically assessed for impairment. During the fourth quarter of 2008, due to reduced expectations for near term profitability, and the protracted decline in Sterlings stock price and market capitalization, Sterling determined that an impairment had occurred, and wrote off $223.8 million of its goodwill. Sterling records impairment losses as charges to noninterest expense and adjustments to the carrying value of goodwill.
Overview. Sterling reported a net loss of $29.5 million for the second quarter ended June 30, 2009. Including the payment of $4.3 million in preferred dividends to the U.S. Department of the Treasury under its Capital Purchase Program, the net loss available to common shareholders was $33.9 million, or $0.65 per diluted share, compared to net income of $11.7 million, or $0.23 per common share for the second quarter ended June 30, 2008. The net loss available to common shareholders for the six months ended June 30, 2009 was $58.7 million, or $1.13 per common share, compared with net income of $14.6 million, or $0.28 per common share, for the same period in 2008. The annualized return on average assets was negative 0.92% and positive 0.37% for the three months ended June 30, 2009 and 2008, respectively. The annualized return on average common equity was negative 16.6% and positive 3.9% for the three months ended June 30, 2009 and 2008, respectively. The decrease in net income and performance ratios reflects elevated credit costs from the provision for credit losses, OREO charges, loss of interest income on nonperforming loans, and increased FDIC premiums, including a special assessment.
Net Interest Income. The most significant component of earnings for a financial institution typically is net interest income, which is the difference between interest income, primarily from loan, MBS and investment securities portfolios, and interest expense, primarily on deposits and borrowings. During the three and six months ended June 30, 2009, net interest income was $87.6 million and $176.0 million, respectively, as compared to $94.1 million and $186.2 million, respectively, for the three and six months ended June 30, 2008. The decrease was primarily due to the increase in nonperforming assets.
Read the The complete ReportSTSA is in the portfolios of Arnold Schneider of Schneider Capital Management, Kenneth Fisher of Fisher Asset Management, LLC.