Sterling Financial Corporation of Spokane, Wash., Reports Second Quarter 2013 Earnings and Declares

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Sterling Financial Corporation of Spokane, Wash., Reports Second Quarter 2013 Earnings and Declares Quarterly Cash Dividend

SPOKANE, Wash.--(BUSINESS WIRE)-- Sterling Financial Corporation (NAS: STSA) ("Sterling") today announced its operating results for the quarter ended June 30, 2013. For the quarter, Sterling recorded net income of $27.8 million, or $0.44 per diluted common share, compared to $22.7 million, or $0.36 per diluted common share, for the quarter ended March 31, 2013, and $320.9 million, or $5.13 per diluted common share, for the quarter ended June 30, 2012. As previously disclosed, the results for the prior year period include an income tax benefit of $288.8 million resulting from the release of the deferred tax asset valuation allowance.

Following are selected financial highlights for the second quarter of 2013:

  • Annualized organic loan growth of 14 percent.
  • Net interest margin (tax equivalent) of 3.70 percent, one basis point higher than the prior quarter.
  • Deposit costs were 37 basis points, two basis points lower than the prior quarter.
  • Completed the acquisition of the Puget Sound operations of Boston Private Bank & Trust Co.
  • Declared a $0.35 special dividend on June 17, 2013, and paid a quarterly cash dividend of $0.20 per share on May 20, 2013.

"From a performance perspective, the second quarter of 2013 was one of the best in Sterling's history," said Greg Seibly, Sterling's president and chief executive officer. "We had strong organic loan growth, lower funding costs, better efficiency and improved asset quality metrics. Our continued focus on these key operating objectives, combined with the positive impact from our investments in recently completed acquisitions, helped drive the improved financial results."

Operating Results

Net Interest Income

Sterling reported net interest income of $80.4 million for the quarter ended June 30, 2013, compared to $76.9 million for the prior quarter and $78.9 million for the quarter ended June 30, 2012. The net interest margin (tax equivalent) for the second quarter of 2013 was 3.70 percent, an increase of one basis point from the prior quarter, and an increase of 14 basis points from the second quarter of 2012.

 
Three Months Ended
June 30, 2013 March 31, 2013 June 30, 2012
(in thousands)
Net interest income$80,414$76,894$78,910
Net interest margin (tax equivalent)3.70%3.69%3.56%
Loan yield4.76%4.81%5.36%
 
Funding costs:
Cost of deposits0.37%0.39%0.58%
Total funding liabilities0.67%0.72%1.07%
 

Total interest income was $94.0 million for the second quarter of 2013, compared to $90.8 million for the prior quarter, and $101.0 million for the same period a year ago. The increase over the prior quarter was primarily due to higher average loan balances, which were up $320.0 million, or 5 percent, contributing to an increase in interest income of $3.2 million. The yield on earning assets remained flat from the prior quarter at 4.32 percent, and was down from 4.52 percent for the second quarter of 2012.

For the second quarter of 2013, income from mortgaged backed securities ("MBS") was flat compared to the prior quarter, and down $5.6 million, or 43 percent, from the second quarter of 2012. The year-over-year decline was primarily due to lower average MBS balances as a result of balance sheet repositioning activity conducted during the year.

Total interest expense was $13.6 million for the second quarter of 2013, compared to $13.9 million for the prior quarter, and $22.1 million for the second quarter of 2012. The decrease from the prior quarter was primarily a result of a 10 basis point reduction in costs for time deposits. The decrease from the same period a year ago was the result of borrowing costs declining $4.6 million, or 38 percent, reflecting balance sheet repositioning activity undertaken during the fourth quarter of 2012. Additionally, deposit interest expense was down $3.9 million, or 39 percent, from the same period a year ago, reflecting the improved deposit mix and lower overall deposit costs, which were down 21 basis points.

Noninterest Income

Noninterest income includes income from mortgage banking operations, fees and service charges income, and other items such as gains on other loan sales, BOLI income, net gains on branch divestitures, and gains on sales of securities. During the second quarter of 2013, noninterest income was $42.0 million, compared to $37.6 million for the prior quarter and $44.7 million for the second quarter of 2012.

Income from mortgage banking operations for the second quarter of 2013 was $23.2 million, compared to $13.8 million for the prior quarter and $24.2 million for the second quarter of 2012. The increase from the prior period is attributable to higher margins and increased activity associated with residential mortgage banking. The margin on residential loan sales was 2.35 percent for the second quarter of 2013, up from 1.63 percent for the prior quarter.

 
Three Months Ended
June 30, 2013 March 31, 2013 June 30, 2012
(in thousands)
Residential loan sales$791,942$787,377$576,545
Change in warehouse and interest rate locks7,419 (136,948)220,252 
Total mortgage banking loan activity$799,361 $650,429 $796,797 
 
Margin on residential loan sales2.35%1.63%3.07%
 

Included in income from mortgage banking operations was a $2.8 million reversal of the valuation allowance on mortgage servicing rights, which was partially offset by a $1.0 million reduction in the fair value of a pool of portfolio residential mortgage loans. A similar reversal of the valuation allowance on mortgage servicing rights of $2.8 million was recorded in the prior quarter and a write-down of $1.1 million was recorded in the second quarter of 2012.

For the quarter ended June 30, 2013, fees and service charges income contributed $15.6 million to noninterest income, compared to $14.1 million for the prior quarter and $14.1 million for the second quarter of 2012. For the second quarter of 2013, gains on other loan sales were $1.2 million, compared to $25,000 for the prior quarter, and $2.8 million for the same period a year ago. The increase from the prior period is a result of increased SBA lending activity and associated loan sales.

For the second quarter of 2013, other noninterest income primarily consisted of the net gain on the sale of three branches. In the prior quarter, other noninterest income included a bargain purchase gain of $7.5 million in connection with the acquisition of Borrego Springs Bank.

For the second quarter of 2013 and the prior quarter, Sterling had no gains or losses on the sale of securities, compared to a gain of $9.3 million for the second quarter of 2012. During the same period a year ago, Sterling also recognized an other-than-temporary impairment charge of $6.8 million, and a prepayment of debt charge of $2.7 million; there were no similar charges in the first and second quarters of 2013.

Noninterest Expense

Noninterest expense was $81.7 million for the second quarter of 2013, compared to $81.9 million for the prior quarter and $87.6 million for the second quarter of 2012. Compared to the prior quarter, employee compensation and benefits increased by $3.4 million primarily due to acquisition related activity, annual merit increases, and incentive compensation accruals. This increase in compensation and benefits was offset by a $4.0 million reduction in other noninterest expenses, which include professional fees, legal settlements, advertising, insurance and data processing.

Additionally, other noninterest expense included merger and acquisition expenses of $2.3 million for the second quarter of 2013, $1.0 million for the prior quarter, and $2.3 million for the second quarter of 2012.

Income Taxes

During the quarter ended June 30, 2013, Sterling recognized income tax expense of $13.0 million, representing an effective tax rate of 32 percent. In the same period a year ago, Sterling recorded an income tax benefit of $288.8 million, which represented the release of substantially all of Sterling's deferred tax asset valuation allowance. As of June 30, 2013, the net deferred tax asset was $290.4 million, including $260.2 million of net operating loss and tax credit carryforwards.

With regard to the deferred tax asset, the benefits of Sterling's accumulated tax losses would be reduced in the event of an "ownership change," as determined under Section 382 of the Internal Revenue Code. During 2010, in order to preserve the benefits of these tax losses, Sterling's shareholders approved a protective amendment to Sterling's restated articles of incorporation and Sterling's board of directors adopted a tax preservation rights plan, both of which restrict certain stock transfers that would result in an investor becoming an owner of 5 percent or more of Sterling's total outstanding common stock. The protective amendment and the rights plan are expected to expire on Aug. 27, 2013.

Balance Sheet

On May 10, 2013, Sterling completed the acquisition of the Puget Sound operations of Boston Private Bank & Trust Co. ("Boston Private"), which added $278.5 million of performing loans and $168.2 million of deposits.

At June 30, 2013, total loan balances were $7.00 billion, compared to $6.48 billion at the end of the prior quarter, and $6.08 billion at June 30, 2012. During the second quarter of 2013, Sterling originated $686.9 million of new portfolio loans (which exclude residential loans held for sale), compared to $512.2 million for the prior quarter and $458.6 million for the second quarter of 2012. Excluding loan purchases and the loans acquired in the Boston Private transaction during the quarter, loans expanded at an annualized rate of 14 percent. Multifamily loan originations remained strong and represented 41 percent of portfolio loan originations for the second quarter of 2013. C&I loan originations were $104.0 million for the second quarter of 2013, compared to $83.1 million for the prior quarter, and $50.1 million for the same period a year ago.

Investments and mortgage-backed securities available for sale were $1.54 billion at June 30, 2013, compared to $1.47 billion at the end of the prior quarter, and $2.12 billion at June 30, 2012. The decrease from a year ago reflects the sale of securities to fund a $450 million reduction in repurchase agreements.

At June 30, 2013, total deposits were $6.63 billion, compared to $6.60 billion at the end of the prior quarter, and $6.80 billion at June 30, 2012. The decrease from a year ago was a result of expected runoff in retail time deposits and public deposits, which were reduced by $397.8 million and $94.8 million, respectively. These decreases were partially offset by growth in transaction deposits, which expanded by $218.9 million, or 10 percent.

The deposit composition is set forth in the following table:

    

Annual %

Change

June 30, 2013March 31, 2013June 30, 2012
(in thousands)
Deposits:
Retail:
Transaction$2,454,910$2,466,361$2,235,99110%
Savings and MMDA2,282,0552,262,7742,182,9695%
Time deposits1,414,239 1,485,029 1,812,000 (22)%
Total retail6,151,2046,214,1646,230,960(1)%
Public174,425169,961269,191(35)%
Brokered302,830 213,713 296,623 2%
Total deposits$6,628,459 $6,597,838 $6,796,774 (2)%
Gross loans to deposits106%98%90%
 

At June 30, 2013, advances from the Federal Home Loan Bank were $1.20 billion, compared to $541.3 million at the end of the prior quarter, and $205.5 million at June 30, 2012. The increase over the prior quarter was to fund acquisitions, deposit outflow associated with branch divestitures, loan growth, and to replace high-rate CD runoff. The new advances for the second quarter of 2013 have a weighted average cost of 33 basis points.

Credit Quality

During the second quarter of 2013, Sterling recognized net charge-offs of $5.1 million, compared to $4.7 million for the prior quarter and $5.0 million for the same period a year ago. Sterling did not record a provision for credit losses for the second quarter of 2013 or the prior quarter, compared to a provision of $4.0 million for the second quarter of 2012. The allowance for loan losses at June 30, 2013 was $141.9 million, or 2.02 percent of total loans, compared to $149.7 million, or 2.31 percent of total loans, at March 31, 2013, and $158.2 million, or 2.60 percent of total loans, at June 30, 2012.

At June 30, 2013, nonperforming assets were $169.2 million, or 1.70 percent of total assets, compared to $212.2 million, or 2.29 percent of total assets, at March 31, 2013, and $321.1 million, or 3.35 percent of total assets, at June 30, 2012.

Acquisition Update

On May 2, 2013, Sterling announced that it has signed a definitive agreement to acquire Newport Beach, Calif.-based Commerce National Bank. As of March 31, 2013, Commerce National Bank had assets of $242.7 million, loans of $146.3 million, deposits of $211.4 million, and shareholders equity of $30.1 million. Subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions, the transaction is expected to close during the fourth quarter of 2013.

Cash Dividend Declaration

Sterling's board of directors has approved a quarterly cash dividend of $0.20 per common share, payable on Aug. 20, 2013 to shareholders of record as of Aug. 6, 2013.

Second Quarter 2013 Earnings Conference Call

Sterling plans to host a conference call July 26, 2013 at 8:00 a.m. PDT to discuss the company's financial results. An audio webcast of the conference call can be accessed at Sterling's website (www.sterlingfinancialcorporation.com). To access this audio presentation call, click on the audio webcast icon. Additionally, the conference call may be accessed by telephone. To participate in the conference call, domestic callers should dial 517-308-9210 approximately five minutes before the scheduled start time. You will be asked by the operator to identify yourself and provide the password "STERLING" to enter the call. A webcast replay of the conference call will be available on Sterling's website approximately one hour following the conclusion of the call. The webcast replay will be offered through Aug. 26, 2013.

   

Sterling Financial Corporation

CONSOLIDATED BALANCE SHEETS
 
(in thousands, except per share amounts, unaudited)Jun 30, 2013Mar 31, 2013Jun 30, 2012
ASSETS:
Cash and due from banks$325,710$297,210$454,692
Investments and MBS available for sale1,538,8801,471,5632,119,008
Investments held to maturity1851951,726
Loans held for sale307,511295,505226,907
Loans receivable, net6,868,8666,334,5605,926,575
Other real estate owned, net ("OREO")26,51129,05655,801
Office properties and equipment, net98,48396,59486,556
Bank owned life insurance ("BOLI")188,178185,953176,593
Goodwill36,63322,57722,577
Other intangible assets, net17,83017,86622,656
Deferred tax asset, net290,377288,764285,141
Other assets240,409 216,593 221,281 
Total assets$9,939,573 $9,256,436 $9,599,513 
LIABILITIES:
Deposits$6,628,459$6,597,838$6,796,774
Advances from Federal Home Loan Bank1,197,857541,259205,470
Securities sold under repurchase agreements527,925531,0661,006,324
Other borrowings245,297245,295245,292
Accrued expenses and other liabilities133,699 103,973 124,859 
Total liabilities8,733,237 8,019,431 8,378,719 
SHAREHOLDERS' EQUITY:
Preferred stock000
Common stock1,970,2291,969,0701,966,307
Accumulated other comprehensive income30,75156,07667,102
Accumulated deficit(794,644)(788,141)(812,615)
Total shareholders' equity1,206,336 1,237,005 1,220,794 
Total liabilities and shareholders' equity$9,939,573 $9,256,436 $9,599,513 
Book value per common share$19.36$19.86$19.65
Tangible book value per common share$18.49$19.21$18.92
Shareholders' equity to total assets12.1%13.4%12.7%
Tangible common equity to tangible assets (1)11.7%13.0%12.3%
Common shares outstanding at end of period62,297,71262,275,58162,124,551
Common stock warrants outstanding2,847,1542,749,0442,722,541
 

(1) Common shareholders' equity less goodwill and other intangible assets, divided by assets, less goodwill and other intangible assets.

  
Sterling Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME
 
(in thousands, except per share amounts, unaudited)Three Months EndedSix Months Ended
Jun 30, 2013 Mar 31, 2013 Jun 30, 2012Jun 30, 2013 Jun 30, 2012
INTEREST INCOME:
Loans$84,436$81,187$85,537$165,623$165,378
Mortgage-backed securities7,3337,29712,93614,63028,271
Investments and cash2,248 2,273 2,517 4,521 5,306 
Total interest income94,017 90,757 100,990 184,774 198,955 
INTEREST EXPENSE:
Deposits6,0386,3079,92112,34521,023
Borrowings7,565 7,556 12,159 15,121 24,669 
Total interest expense13,603 13,863 22,080 27,466 45,692 
Net interest income
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