Sterling Financial Corporation of Spokane, Wash., Reports 2012 Earnings and Balance Sheet Reposition

Sterling Financial Corporation of Spokane, Wash., Reports 2012 Earnings and Balance Sheet Repositioning

SPOKANE, Wash.--(BUSINESS WIRE)-- Sterling Financial Corporation (NAS: STSA) ("Sterling") today announced its operating results for the quarter and year ended December 31, 2012. For the quarter, Sterling recorded net income of $20.9 million, or $0.33 per diluted common share, compared to $30.6 million, or $0.49 per diluted common share, for the quarter ended September 30, 2012, and $14.8 million, or $0.24 per diluted common share, for the quarter ended December 31, 2011. For the year ended December 31, 2012, Sterling recorded net income of $385.7 million, or $6.14 per diluted common share, compared to $39.1 million, or $0.63 per diluted common share, for the year ended December 31, 2011. The 2012 annual net income included an income tax benefit of $292.0 million associated with the release of a deferred tax asset valuation allowance.

During the fourth quarter of 2012, there were four significant items that, in the aggregate, reduced net income by $11.9 million, or $0.19 per diluted share.


1. Sterling elected to effect a partial repositioning of its balance sheet in light of the current interest rate environment and outlook by prepaying $250.0 million of repurchase agreements and selling $361.8 million of mortgage-backed securities and other investments. A prepayment penalty of $32.7 million was recorded in connection with the debt prepayment and a gain of $11.2 million was recorded in connection with the securities sales.

2. A net gain of $8.4 million was recognized as a result of the divestiture of Sterling's Montana operations in a transaction that was completed on November 30, 2012.

3. A charge of $2.0 million was recorded in connection with a tentative settlement related to a previously disclosed ERISA class action complaint.

4. An income tax benefit of $3.2 million was recorded principally as the result of the aforementioned three items, which were not contemplated at the time Sterling released substantially all of its deferred tax asset valuation allowance effective June 30, 2012.

Following are selected financial highlights for the quarter and year ended December 31, 2012:

  • Gross loans were $6.25 billion, a 7 percent annualized increase over the prior quarter.

  • Portfolio loan originations for the quarter were $561.7 million, a 23 percent increase over the prior quarter.

  • Net interest margin was 3.49 percent, up 6 basis points from the prior quarter, and up 23 basis points from the fourth quarter of 2011.

  • Deposit costs were reduced by 7 basis points compared to the prior quarter, and by 34 basis points compared to the fourth quarter of 2011.

  • Income from mortgage banking operations for the year was $96.9 million, up 85 percent over 2011.

  • Nonperforming assets to total assets was 2.28 percent, down from 2.73 percent at September 30, 2012, and 4.01 percent at December 31, 2011.

  • Net recoveries were $566,000 for the quarter, compared to net charge-offs of $6.0 million for the prior quarter.

  • A total of $40.4 million, or $0.65 per share, was returned to shareholders during the fourth quarter of 2012 through payment of a $0.15 per share regular dividend, a $0.35 per share special dividend and the accelerated payment of the $0.15 regular dividend that would have otherwise been paid during the first quarter of 2013.

  • During the fourth quarter, Sterling announced the signing of definitive agreements to acquire American Heritage Holdings and its wholly-owned subsidiary, Borrego Springs Bank, N.A., and to acquire the Puget Sound operations of Boston Private Bank & Trust.

"The fourth quarter capped a year of solid financial performance," said Greg Seibly, Sterling's president and chief executive officer. "Our strong financial position has allowed us to take steps to reduce costly borrowings in order to improve our profitability in future periods. We were also able to take steps to manage excess capital by re-establishing cash dividends during 2012. This is a result of continued attention on our key operating objectives of growing loans, reducing deposit costs, eliminating asset quality challenges and controlling operating expenses."

Balance Sheet

Total portfolio loan balances (which exclude residential loans held for sale) were $6.25 billion at December 31, 2012, compared to $6.14 billion at the end of the prior quarter, and $5.52 billion at December 31, 2011. During the fourth quarter of 2012, Sterling originated $561.7 million of new portfolio loans, compared to $457.1 million for the prior quarter and $346.3 million for the fourth quarter of 2011. For the year, portfolio loan originations were $1.82 billion, compared to $1.39 billion for 2011, representing an increase of 32 percent. Approximately $41 million of loans were sold in connection with Sterling's Montana divestiture.

Multifamily loan originations were $261.3 million for the fourth quarter of 2012, accounting for 47 percent of total portfolio originations. This compares to $144.6 million for the prior quarter, and $179.6 million for the same period a year ago.

Commercial loan originations, which include C&I and owner occupied CRE loans, were $136.8 million for the fourth quarter of 2012, accounting for 24 percent of total portfolio originations. This compares to $155.8 million for the prior quarter, and $95.6 million for the same period a year ago.

Investments and mortgage-backed securities available for sale were $1.51 billion at December 31, 2012, compared to $2.05 billion at the end of the prior quarter, and $2.55 billion at the same time last year. The reduction reflects the sale of $361.8 million of MBS and other investments during the quarter.

At December 31, 2012, total deposits were $6.44 billion, compared to $6.74 billion at the end of the prior quarter, and $6.49 billion at December 31, 2011. The decrease from the prior quarter was primarily a result of the sale of approximately $182 million of deposits in connection with the Montana divestiture. This decrease was partially offset by growth in transaction deposits, which expanded by $31.3 million, or 1 percent, during the fourth quarter of 2012.

The deposit composition is set forth in the following table:

December 31,
2012

September 30,
2012

December 31,
2011

Annual %
Change

(in thousands)

Deposits:

Retail:

Transaction

$

2,434,778

$

2,403,518

$

1,732,665

41

%

Savings and MMDA

2,129,722

2,191,517

1,902,209

12

%

Time deposits

1,529,566

1,717,720

1,993,260

(23

)%

Total retail

6,094,066

6,312,755

5,628,134

8

%

Public

174,161

202,187

428,691

(59

)%

Brokered

167,890

224,968

428,993

(61

)%

Total deposits

$

6,436,117

$

6,739,910

$

6,485,818

(1

)%

Gross loans to deposits

97

%

91

%

85

%

At December 31, 2012, advances from the Federal Home Loan Bank were $605.3 million, compared to $155.4 million at the end of the prior quarter, and $405.6 million at December 31, 2011. The increase over the prior quarter was to fund the deposit outflow associated with the Montana divestiture, to fund loan growth, and to replace CD runoff.

Operating Results

Net Interest Income

Sterling reported net interest income of $76.1 million for the quarter ended December 31, 2012, compared to $75.3 million for the prior quarter and $71.8 million for the quarter ended December 31, 2011. The increase of $799,000 from the prior quarter was primarily a result of lower deposit costs. The net interest margin (tax equivalent) for the fourth quarter of 2012 was 3.49 percent, an increase of 6 basis points from the prior quarter, and up 23 basis points over the same period a year ago.

Three Months Ended

December 31,
2012

September 30,
2012

December 31,
2011

(in thousands)

Net interest income

$

76,107

$

75,308

$

71,809

Net interest margin (tax equivalent)

3.49

%

3.43

%

3.26

%

Loan yield

4.96

%

5.15

%

5.34

%

Funding costs:

Cost of deposits

0.46

%

0.53

%

0.80

%

Total funding liabilities

0.90

%

1.01

%

1.24

%

Total interest income was $94.3 million for the fourth quarter of 2012, compared to $96.0 million for the prior quarter, and $97.3 million for the same period a year ago. Interest income on loans decreased by $84,000 from the prior quarter as a result of lower loan yields, reflecting the low interest rate environment. Additionally, interest income was adversely impacted by a reduction in interest income on MBS, which declined by $1.6 million compared to the prior quarter and by $5.7 million from the same period in 2011. For the fourth quarter of 2012, average MBS balances were down $169.5 million, or 10 percent, from the prior quarter resulting primarily from prepayments.

Total interest expense was $18.1 million for the fourth quarter of 2012, compared to $20.7 million for the prior quarter and $25.5 million for the fourth quarter of 2011. Deposit interest expense was $7.7 million for the fourth quarter of 2012, a reduction of $1.3 million, or 14 percent, from the prior quarter, and down $5.3 million, or 41 percent, from the same period last year, reflecting the improved deposit mix.

Borrowing costs were $10.5 million for the fourth quarter of 2012, compared to $11.7 million for the prior quarter, and $12.5 million for the fourth quarter of 2011. The decrease from the prior quarter is due to lower average costs, which were down 49 basis points. The decrease from the fourth quarter of 2011 is a result of lower average outstanding borrowings, which were down $293.6 million, or 17 percent.

Noninterest Income

During the fourth quarter of 2012, noninterest income was $31.2 million, compared to $46.7 million for the prior quarter and $32.9 million for the fourth quarter of 2011.

Income from mortgage banking operations for the fourth quarter of 2012 was $27.6 million, compared to $28.5 million for the prior quarter and $14.9 million for the fourth quarter of 2011. The decrease from the prior period is attributable to a decline in the volume of mortgage banking activity, as well as a decrease in the related margin, while the increase over the year ago period is attributable to an increase in volume of mortgage banking activity, and higher margins on residential loan sales. The margin on residential loan sales was 3.60 percent for the fourth quarter of 2012, down from 3.68 percent for the prior quarter and up from 2.43 percent for the same period a year ago.

Three Months Ended

December 31,
2012

September 30,
2012

December 31,
2011

(in thousands)

Residential loan sales

$

779,289

$

728,642

$

646,000

Change in warehouse and interest rate locks

(44,931

)

36,018

(57,123

)

Total mortgage banking activity

$

734,358

$

764,660

$

588,877

Margin on residential loan sales

3.60

%

3.68

%

2.43

%

For the quarter ended December 31, 2012, fees and service charges income contributed $14.2 million to noninterest income, compared to $14.7 million for the prior quarter and $12.2 million for the fourth quarter of 2011. The increase in fees and service charges income compared to the year ago period was primarily attributable to increased activity related to the business acquired from First Independent Bank, which was completed during the first quarter of 2012.

As previously noted, in order to reduce its funding costs in future periods, Sterling prepaid $250.0 million of repurchase agreements during the fourth quarter of 2012, resulting in a prepayment charge of $32.7 million. A similar charge of $2.7 million was incurred during the second quarter of 2012, resulting in total debt prepayment charges of $35.3 million for the full year. No such charges were incurred during 2011.

For the fourth quarter of 2012, the gain on sales of securities was $11.2 million, compared to $3.1 million for the prior quarter and $1.9 million for the fourth quarter of 2011. Included in the gain for the fourth quarter of 2012 is a gain on the sale of a trust preferred security of $2.5 million.

The gain on the sale of assets for the quarter ended December 31, 2012, included a gain, before associated selling expenses, of $9.1 million recognized in conjunction with the Montana divestiture.

Noninterest Expense

Noninterest expenses were $89.6 million for the fourth quarter of 2012, compared to $89.4 million for the prior quarter and $85.9 million for the fourth quarter of 2011. During the fourth quarter of 2012, employee compensation and benefits increased by $3.9 million over the prior quarter due to increased production and other incentive compensation. Other noninterest expenses were down $1.9 million, despite a charge of $2.0 million in connection with a tentative settlement related to a previously disclosed ERISA class action complaint. The key drivers of the decline in other expenses included reductions in advertising, professional services, FDIC insurance and data processing expenses.

OREO operating expenses were $2.5 million for the fourth quarter of 2012, compared to $4.0 million for the prior quarter and $4.9 million for the same period last year, reflecting continued reductions in the level of OREO.

Income Taxes

During the quarter ended December 31, 2012, Sterling recognized an income tax benefit of $3.2 million, which represents the release of the remaining portion of Sterling's deferred tax valuation allowance.

For the year, Sterling recognized an income tax benefit of $292.0 million, which was principally the result of reversing substantially all of the deferred tax asset valuation allowance during the second quarter of 2012. As of December 31, 2012, the net deferred tax asset was $292.1 million, including $274.0 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 acquiring more than 4.95 percent of Sterling's total outstanding common stock.

Credit Quality

During the fourth quarter of 2012, Sterling recognized net recoveries of $566,000, compared to net charge-offs of $6.0 million for the prior quarter and $10.7 million for the same period a year ago. Sterling did not record a provision for credit losses for the fourth quarter of 2012, compared to a provision of $2.0 million for the prior quarter and $4.0 million for the fourth quarter of 2011. The allowance for loan losses at December 31, 2012 was $154.3 million, or 2.47 percent of total loans, compared to $154.3 million, or 2.51 percent of total loans, at September 30, 2012, and $177.5 million, or 3.22 percent of total loans, at December 31, 2011.

At December 31, 2012, nonperforming assets were $210.4 million, or 2.28 percent of total assets, compared to $259.0 million, or 2.73 percent of total assets, at September 30, 2012, and $369.1 million, or 4.01 percent of total assets, at December 31, 2011.

As a result of Sterling's continued efforts to sell foreclosed properties, OREO decreased to $25.0 million at December 31, 2012, compared to $46.6 million at September 30, 2012, and $81.9 million at December 31, 2011. This represents decreases of 46 percent and 69 percent, respectively.

Fourth Quarter 2012 Earnings Conference Call

Sterling plans to host a conference call on January 25, 2013 at 8:00 a.m. PST to discuss the company's financial results. In addition to this press release, management will reference a slide presentation filed with the SEC and available on Sterling's website at www.sterlingfinancialcorporation.com. An audio webcast of the conference call can also be accessed at Sterling's website. 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 1-517-308-9210 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 February 25, 2013.

Sterling Financial Corporation
CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts, unaudited)

Dec 31, 2012

Sep 30, 2012

Dec 31, 2011

ASSETS:

Cash and due from banks

$

331,550

$

263,884

$

491,228

Investments and mortgage-backed securities ("MBS") available for sale

1,513,157

2,049,961

2,547,876

Investments held to maturity

206

1,716

1,747

Loans held for sale

465,983

320,823

273,957

Loans receivable, net

6,101,749

5,990,365

5,341,179

Other real estate owned, net ("OREO")

25,042

46,575

81,910

Office properties and equipment, net

93,850

92,987

84,015

Bank owned life insurance ("BOLI")

179,828

178,279

174,512

Goodwill

22,577

22,577

0

Other intangible assets, net

19,072

20,864

12,078

Deferred tax asset, net

292,082

280,373

0

Other assets

191,814

204,033

184,735

Total assets

$

9,236,910

$

9,472,437

$

9,193,237

LIABILITIES:

Deposits

$

6,436,117

$

6,739,910

$

6,485,818

Advances from Federal Home Loan Bank

605,330

155,401

405,609

Repurchase agreements and fed funds

586,867

942,547

1,055,763

Other borrowings

245,294

245,293

245,290

Accrued expenses and other liabilities

145,379

137,799

122,200

Total liabilities

8,018,987

8,220,950

8,314,680

SHAREHOLDERS' EQUITY:

Preferred stock

0

0

0

Common stock

1,968,025

1,967,562

1,964,234

Accumulated other comprehensive income

60,712

75,263

61,115

Accumulated deficit

(810,814

)

(791,338

)

(1,146,792

)

Total shareholders' equity

1,217,923

1,251,487

878,557

Total liabilities and shareholders' equity

$

9,236,910

$

9,472,437

$

9,193,237

Book value per common share

$

19.58

$

20.14

$

14.16

Tangible book value per common share

$

18.91

$

19.44

$

13.96

Shareholders' equity to total assets

13.2

%

13.2

%

9.6

%

Tangible common equity to tangible assets (1)

12.8

%

12.8

%

9.4

%

Common shares outstanding at end of period

62,207,529

62,150,650

62,057,645

Common stock warrants outstanding

2,748,672

2,625,000

2,722,541

(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 (LOSS)

(in thousands, except per share amounts, unaudited)

Three Months Ended

Twelve Months Ended

Dec 31, 2012

Sep 30, 2012

Dec 31, 2011

Dec 31, 2012

Dec 31, 2011

INTEREST INCOME:

Loans

$

83,026

$

83,110

$

80,303

$

331,514

$

322,435

Mortgage-backed securities

8,810

10,361

14,535

47,442

71,216

Investments and cash

2,418

2,520

2,491

10,244

10,641

Total interest income

94,254

95,991

97,329

389,200

404,292

INTEREST EXPENSE:

Deposits

7,693

8,981

12,989

37,697

59,634

Borrowings