Sterling Financial Corp. Reports Operating Results (10-Q)
Sterling Financial Corp. has a market cap of $45.41 million; its shares were traded at around $0.8704 with and P/S ratio of 0.06. STSA is in the portfolios of Paul Tudor Jones of The Tudor Group, Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC.
Highlight of Business Operations: On April 29, 2010, Sterling and Thomas H. Lee Partners, L.P. (THL) entered into a definitive investment agreement (the THL Agreement) pursuant to which it is expected that THL will purchase shares of Sterlings common stock (the Common Stock) at a price of up to $0.20 per share and shares of a newly-created Series B Convertible Participating Voting Preferred Stock (the Series B Stock) at a price of $75.00 per share of Series B Stock, representing a pro forma ownership interest of 16.6% on an as-converted basis, for an aggregate purchase price of approximately $134.7 million. THL would also receive a warrant with a seven-year term to purchase 168,383,759 shares of Common Stock exercisable at a price of up to $0.22 per share, representing a total investment of 19.9% on an as-converted basis and assuming the exercise of these warrants (together with the purchase of the Common Stock and the Series B Stock, the THL Transaction). A copy of the THL Agreement is attached hereto as Exhibit 10.1.
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 THL Transaction; 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 the THL Transaction (the Treasury Exchange Transaction). See Sterlings Current Report on Form 8-K, as filed with the SEC on April 27, 2010, for additional information regarding the THL Transaction and the exchange with Treasury. A copy of the Treasury Exchange Agreement is attached hereto as Exhibit 10.2.
On May 3, 2010, Sterling announced that Sterling and THL intend to increase the size of the proposed investment in Sterling to $170 million, subject to the approval of the Treasury under the terms of the Treasury Exchange Agreement. If approved, THL would purchase shares of Common Stock at a price of up to $0.20 per share and shares of Series B Stock at $92.00 per share, each of which would be mandatorily convertible into 460 shares of Common Stock. THL would continue to receive a warrant with a seven-year term to purchase shares of Common Stock exercisable at a price of up to $0.22 per share, representing a total investment of 24.9% on an as-converted basis and assuming the exercise of these warrants. If approved, the THL Agreement and the Treasury Exchange Agreement would be revised to reflect the increased size of the investment and certain other related technical matters.
Sterling reported a net loss attributable to common shareholders during the quarter ending March 31, 2010 of $88.8 million, or $1.71 per common share, which was an improvement over the fourth quarter 2009 results. Sterlings earnings per share and performance ratios continue to be impacted by the major disruption in the housing market and downturn in the economy. Nonperforming assets increased $87.4 million during the quarter. However, the broader category of classified assets experienced a decline during the quarter. The provision for credit losses declined from the linked quarter with a decline in charge-offs experienced. Sterling continues to grow and expand customer relationships as demonstrated by the growth in retail and public deposits during the quarter of $207.0 million. The decline in net interest income during the quarter reflected a lower balance of earning assets and an increase in the amount of interest that was reversed which was related to nonperforming loans. Sterling continues to record a full valuation allowance against the future tax benefits of its operating losses, and has implemented a shareholders rights plan to preserve this asset. As of March 31, 2010, Sterlings total risk-based capital ratio was 6.9%. Sterling continues to make progress towards its recapitalization, as demonstrated by the agreements reached with the U.S. Treasury and THL. Liquidity enhancements during the quarter included increases in on-balance sheet liquidity, and a further lowering of the ratio of loans to deposits.
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 March 31, 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 positions in classes of securities negatively impacted by temporary credit market disruptions, including a single-issuer trust preferred security, and private label collateralized mortgage obligations. As of March 31, 2010, the trust preferred security is rated A1 by Moodys and has an amortized cost of $24.7 million compared to a $20.9 million market value, or an unrealized loss of $3.8 million. As of March 31, 2010, the private label collateralized mortgage obligations had an aggregate amortized cost of $139.3 million compared to a $135.0 million market value, or an unrealized loss of $4.2 million. All private label collateralized mortgage obligations are internally monitored monthly and independently stress-tested quarterly for both credit quality and collateral strength, and are investment grade according to at least one rating agency. As of March 31, 2010, S&P had a rating of below investment grade on two of these securities, while Moodys maintained its investment grade rating on the same securities. At March 31, 2010, these two private label collateralized mortgage obligations had an amortized cost of $46.4 million and a market value of $44.0 million. The vintage, or years of issuance, for these nonagency MBS ranges from 2003 to 2005. As of March 31, 2010, 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, has no intent to sell securities that are deemed to have a market value impairment, and Sterling 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.
Overview. Sterling reported a net loss attributable to common shareholders during the three months ended March 31, 2010 of $88.8 million, or $1.71 per common share, compared with $24.8 million or $0.48 per common share during the three months ended March 31, 2009. The 2010 results included a provision for credit losses of $88.6 million, compared with a provision of $65.9 million during the 2009 period. In addition to the increase in the credit loss provision year over year, the increase in net loss primarily reflects lower net interest income, a lower level of gains on the sale of securities, and increased FDIC premiums.
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