Sterling Financial Corp. Reports Operating Results (10-Q)
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 $41.7 million; its shares were traded at around $0.796 . 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 levels of both classified and nonperforming assets, and higher credit costs, as well as a $227.6 million non-cash charge to reflect the impairment of goodwill, and a $143.0 million non-cash valuation allowance against its deferred tax asset. Sterling reported a net loss of $463.7 million, or approximately $8.93 per common share, for the third quarter of 2009. During the three and nine months ended September 30, 2009, Sterling recorded a provision for credit losses of $195.5 million and $341.1 million, respectively, compared to $37.0 million and $105.1 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 47% and 75%, respectively, over the three and nine months ended September 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 nine month periods primarily reflects a higher level of nonperforming assets (including nonaccrual loans and OREO).
credit markets and the related impact on securities within those classes, not deteriorating credit quality of specific securities. As of September 30, 2009, Sterling held positions in classes of securities negatively impacted by temporary credit market disruptions, including one single-issuer trust preferred security, and 20 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 an $18.1 million market value, or an unrealized loss of $6.5 million. As of September 30, 2009, the private label collateralized mortgage obligations had an aggregate amortized cost of $229.7 million compared to a $211.4 million market value, or an unrealized loss of $18.3 million. These securities are investment grade, and all are stress-tested monthly for both credit quality and collateral strength. As of September 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.
Goodwill and Other Intangible Assets. During the three months ended September 30, 2009, Sterling recorded a goodwill impairment charge of $227.6 million, reducing the balance of goodwill to zero, as compared to the December 31, 2008 balance of $227.6 million. Goodwill represents the difference between the value of consideration paid and the fair value of the net assets received in a business combination. Sterling records impairment losses as charges to noninterest expense and adjustments to the carrying value of goodwill. As of September 30, 2009, Sterling had other intangible assets related to acquired depository relationships of $23.1 million, as compared to $26.7 million as of December 31, 2008. Other intangible assets are periodically assessed for impairment when certain triggering events occur that indicate the possibility of impairment. Goodwill is tested for impairment on an annual basis, or more frequently as events occur, or as current circumstances and conditions warrant. The analysis compares the fair value of each of the reporting units, including goodwill, to the respective carrying amounts. If the carrying amount of the reporting unit, including goodwill, exceeds the fair value of that reporting unit, then further testing for goodwill impairment is performed. Sterlings Community Banking segment was the only reporting unit of Sterling that had any goodwill ascribed to it during 2009.
Sterling uses an estimate of future earnings, and an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. At September 30, 2009, Sterling assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Sterling determined that the negative evidence associated with a projected three year cumulative loss for the period ending December 31, 2009, the recent SSB Order entered into with its regulators, and continued credit deterioration in its loan portfolio outweighed the positive evidence. Therefore, Sterling established a valuation allowance of $143.0 million against its deferred tax asset. After recording the valuation allowance Sterling had a net deferred tax liability of $14.1 million as of September 30, 2009, compared to a net deferred tax asset of $96.1 million as of December 31, 2008. As of September 30, 2009, Sterling has recorded a $52.5 million income tax receivable which represents amounts that can be realized through loss carrybacks to prior tax years and refunds of estimated tax payments.
Overview. Sterling reported a net loss attributable to Sterlings common shareholders of $463.7 million, or $8.93 per common share, compared with net income in last years third quarter of $5.0 million or $0.10 per common share. The net loss was $459.4 million before the accrual of $4.3 million in cumulative preferred dividends associated with the U.S. Treasurys Capital Purchase Program. The net loss available to common shareholders for the nine months ended September 30, 2009 was $522.4 million, or $10.06 per common share, compared with net income of $19.5 million, or $0.38 per common share, for the same period in 2008. The annualized return on average assets was negative 14.98% and positive 0.16% for the three months ended September 30, 2009 and 2008, respectively. The annualized return on average common equity was negative 257.4% and positive 1.7% for the three months ended September 30, 2009 and 2008, respectively. The decrease in net income and performance ratios reflects impairment charges for goodwill and Sterlings deferred tax asset, 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 nine months ended September 30, 2009, net interest income was $87.1 million and $263.0 million, respectively, as compared to $90.0 million and $276.2 million, respectively, for the three and nine months ended September 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, Kenneth Fisher of Fisher Asset Management, LLC.