a50041744.htm
Filed Pursuant to Rule 424(B)(3)
Registration Statement No. 333-169579
 

 
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 16, 2010)
 
 
 
 
 
STERLING FINANCIAL CORPORATION
 
 
 
 
RECENT DEVELOPMENTS
 
We have attached to this prospectus supplement our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 25, 2011.
 
 
 
 
October 25, 2011

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
 
FORM 8-K
 
CURRENT REPORT
 
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Date of Report (Date of earliest event reported): October 25, 2011
 
 
 
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Washington
001-34696
91-1572822
(State or other jurisdiction of
(Commission File Number)
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
111 North Wall Street, Spokane, Washington 99201
(Address of principal executive offices) (Zip Code)
 
(509) 458-3711
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 
 
 
INFORMATION TO BE INCLUDED IN THE REPORT
 
Item 2.02.  Results of Operations and Financial Condition.
 
On October 25, 2011, Sterling Financial Corporation ("Sterling") issued a press release regarding its results of operations and financial condition for the quarter ended September 30, 2011.  The text of the press release is included as Exhibit 99.1 to this report.  The information included in the press release is considered to be "furnished" under the Securities Exchange Act of 1934.  Sterling will include final financial statements and additional analyses for the period ended September 30, 2011, as part of its quarterly report on Form 10-Q covering that period.
 
Item 9.01.  Financial Statements and Exhibits.
 
          (d)  The following exhibit is being furnished herewith:
 
Exhibit No.
Exhibit Description
 
99.1
Press release text of Sterling Financial Corporation dated October 25, 2011.
 
 
 
 
 
 
 
S I G N A T U R E
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
     
STERLING FINANCIAL CORPORATION
  
       
(Registrant)
  
           
           
October 25, 2011
  
By:
/s/  Patrick J. Rusnak
  
Date
    
Patrick J. Rusnak
  
       
Chief Financial Officer
  
 
 
 
 
 
 
 
EXHIBIT INDEX
 
Exhibit No.
  
Exhibit Description
     
99.1
  
Press release text of Sterling Financial Corporation dated October 25, 2011.

 
 
 
 
 
 
 
 
Exhibit 99.1
 
Sterling Financial Corporation of Spokane, Wash. Reports Third Quarter 2011 Earnings and Operating Results
 
SPOKANE, Wash.--(BUSINESS WIRE)--October 25, 2011--Sterling Financial Corporation (NASDAQ:STSA), the bank holding company of Sterling Savings Bank, today announced results for the quarter ended September 30, 2011. For the quarter, Sterling recorded net income available to common shareholders of $11.3 million, or $0.18 per diluted common share, compared to $7.6 million, or $0.12 per diluted common share, for the second quarter of 2011.
 
Sterling’s prior year third quarter results included a net loss of $48.0 million and a one-time, non-cash increase to income available to common shareholders of $84.3 million related to the conversion of preferred stock held by the U.S. Treasury into common shares in connection with Sterling’s $730 million recapitalization completed during that quarter. As a result, Sterling reported third quarter 2010 net income available to common shareholders of $33.6 million, or $1.31 per diluted common share (with the per share amount adjusted for a 1-for-66 reverse stock split in November 2010).
 
Following are selected financial highlights for the third quarter of 2011:
 
 
·
Third consecutive quarter of positive earnings and earnings growth.
 
 
·
Classified assets declined by $103.3 million, or 17 percent, for the quarter.
 
 
·
Net interest margin expanded to 3.34 percent, improving 3 basis points for the quarter, and 57 basis points over the third quarter of 2010.
 
 
·
Deposit funding costs declined 5 basis points as transaction, savings and money market deposit accounts (“MMDA”) average balances increased by $81.5 million, or 2 percent, compared to the linked quarter.
 
 
·
Noninterest expenses declined by $5.0 million, or 5 percent, from the linked quarter and declined $7.6 million, or 8 percent from the third quarter of last year.
 
 
·
Tier 1 leverage ratio increased to 11.1 percent.
 
Greg Seibly, Sterling’s president and chief executive officer noted, “This marks the third successive quarter of improved earnings growth. The results in the third quarter were driven by continued focus on our primary operating objectives: improving our deposit mix, reducing problem assets, originating quality loans and expense control. With lower levels of nonperforming assets, we were able to reduce the level of loan loss provision, OREO expense, and nonaccrual interest reversals from the linked quarter, all of which contributed to improved earnings during the quarter. Additionally, earnings benefited from higher income from mortgage banking operations and lower operating expenses, resulting in net income growth of $3.8 million, or 50 percent, over last quarter.”
 
Balance Sheet Management
 
Seibly continued, “We reported another quarter of solid loan originations. We were able to offset declines in the construction portfolio with expansion of the multifamily portfolio, which increased 22 percent for the quarter and more than doubled over the past 12 months. This is a result of a strategy implemented last year to bolster our loan portfolio with increased focus on the multifamily segment.”
 
       
Sept 30, 2011
    
June 30, 2011
    
Sept 30, 2010
        
             
% of
          
% of
          
% of
      
Annual
       
Amount
    
Loans
    
Amount
    
Loans
    
Amount
    
Loans
      
% Change
       
(in thousands)
Total assets
      
$
9,175,874
          
$
9,241,595
          
$
10,030,043
            
-9
%
Investments and MBS
        
2,448,423
            
2,496,056
            
2,722,917
            
-10
%
Loans receivable:
                                              
Residential real estate
        
701,921
    
13
%
      
712,638
    
13
%
      
752,763
    
13
%
      
-7
%
Multifamily real estate
        
990,707
    
18
%
      
811,917
    
14
%
      
445,193
    
8
%
      
123
%
Commercial real estate
        
1,287,381
    
23
%
      
1,324,058
    
24
%
      
1,326,971
    
22
%
      
-3
%
Construction
        
221,611
    
4
%
      
308,273
    
6
%
      
720,140
    
12
%
      
-69
%
Consumer
        
683,972
    
12
%
      
703,675
    
13
%
      
787,193
    
13
%
      
-13
%
Commercial banking
        
1,729,626
    
30
%
      
1,741,819
    
30
%
      
1,885,570
    
32
%
      
-8
%
Gross loans receivable
      
$
5,615,218
    
100
%
    
$
5,602,380
    
100
%
    
$
5,917,830
    
100
%
      
-5
%
                                               
 
 
 
 
 
Loan originations for the third quarter of 2011 were $893.6 million, including portfolio loan originations of $348.4 million, representing an increase in portfolio originations of 225 percent over the year-ago period. This growth in originations was primarily within the multifamily portfolio, with originations of $203.6 million for the third quarter of 2011, compared to zero in the third quarter of 2010. Commercial banking loan originations were $96.8 million during the third quarter of 2011, compared to $24.6 million in the third quarter of 2010, representing an increase of 294 percent. The impact of the strong originations on the total loan portfolio were partially offset by reductions due to resolutions of nonperforming loans.
 
       
Sept 30,
    
June 30,
    
Sept 30,
    
Annual
       
2011
    
2011
    
2010
    
% Change
Deposits:
      
(in thousands)
Retail:
                          
Transaction
      
$
1,675,741
      
$
1,572,771
      
$
1,495,495
      
12
%
Savings and MMDA
        
1,814,682
        
1,710,527
        
1,533,666
      
18
%
Time deposits
        
2,150,998
        
2,279,025
        
3,002,924
      
-28
%
Total retail
        
5,641,421
        
5,562,323
        
6,032,085
      
-6
%
Public
        
466,423
        
561,651
        
559,626
      
-17
%
Brokered
        
371,396
        
480,024
        
317,503
      
17
%
Total deposits
      
$
6,479,240
      
$
6,603,998
      
$
6,909,214
      
-6
%
Gross loans to deposits
        
87
%
      
85
%
      
86
%
    
1
%
                         
Annual Basis
                         
Point Change
Funding costs:
                          
Cost of deposits
        
0.86
%
      
0.91
%
      
1.27
%
    
(41
)
Total funding liabilities
        
1.27
%
      
1.31
%
      
1.69
%
    
(42
)
                           
 
During the quarter, Sterling continued its strategy of repositioning its deposit base by allowing higher-rate CDs to run off in order to reduce funding costs, resulting in a reduction of deposit costs of 41 basis points compared to the same period last year. Retail transaction, savings and MMDA account balances grew by 15 percent year-over-year, while retail time deposits, public deposits and brokered deposits, in the aggregate, declined by 23 percent.
 
At September 30, 2011, Sterling had total shareholders’ equity of $859.5 million, compared to $807.6 million at June 30, 2011, and $845.0 million at September 30, 2010. Sterling’s ratio of shareholders’ equity to total assets was 9.4 percent at September 30, 2011, compared to 8.7 percent at June 30, 2011. The Tier 1 leverage ratio increased to 11.1 percent at September 30, 2011, from 10.9 percent at June 30, 2011. Tangible common equity to tangible assets increased to 9.2 percent at September 30, 2011, from 8.6 percent at June 30, 2011.
 
 
 
 
 
Operating Results
 
Net Interest Income
 
Sterling reported net interest income of $74.8 million for the quarter ended September 30, 2011, unchanged from the linked quarter and up from $67.4 million for the same period a year ago.
 
       
Three Months Ended
       
Sept 30,
    
June 30,
    
Sept 30,
       
2011
    
2011
    
2010
       
(in thousands)
Net interest income
      
$
74,836
      
$
74,807
      
$
67,435
  
Net interest margin (tax equivalent)
        
3.34
%
      
3.31
%
      
2.77
%
                     
Loan yield
        
5.47
%
      
5.33
%
      
5.02
%
                     
 
Interest income on loans was $82.0 million for the third quarter of 2011, compared to $79.7 million for the linked quarter, reflecting higher loan yields. Contributing to the higher loan yields was the lower level of interest reversal on nonperforming loans. Reversal of interest income on nonperforming loans reduced the net interest margin by 26 basis points for the third quarter of 2011, compared to 42 basis points for the linked quarter and 70 basis points for the same period a year ago.
 
Interest income on mortgage backed securities was $16.7 million for the third quarter of 2011, compared to $19.9 million for the linked quarter. The reduction was a result of lower yields and lower balances due to the sale of longer duration, higher yielding securities during the linked quarter.
 
Interest expense of $26.5 million was down $1.0 million, or 4 percent, compared to the linked quarter. Total funding costs were 1.27 percent for the third quarter of 2011, compared to 1.31 percent for the second quarter of 2011, and 1.69 percent for the same period a year ago. The decrease is a result of replacing higher cost CDs with lower cost retail transaction accounts.
 
Noninterest Income
 
For the third quarter of 2011, noninterest income was $29.1 million, compared to $34.3 million for the linked quarter and $39.7 million for the same period a year ago. The decrease on a linked quarter basis was a result of Sterling not recording securities gains as no securities were sold during the third quarter of 2011, and of a fair value write down of the mortgage servicing rights asset.
 
For the quarter ended September 30, 2011, income from mortgage banking operations was $16.4 million, up from $10.8 million for the linked quarter, and down from $19.4 million from the same period a year ago. The increase over the linked quarter is a result of higher levels of mortgage refinance activity in the historically low interest rate environment. Similarly, due to a decline in prevailing interest rates, Sterling recorded a fair value write down of $5.1 million on its mortgage servicing rights asset, which resulted in negative loan servicing fees for the third quarter of 2011. The table below presents residential loan originations and sales for the periods indicated.
 
       
Three Months Ended
      
       
Sept 30,
    
June 30,
    
Sept 30,
    
Annual
       
2011
    
2011
    
2010
    
% Change
       
(in thousands)
      
Loan originations - residential real estate for sale
      
$
545,278
      
$
457,123
      
$
703,220
      
-22
%
Loan sales - residential
        
475,034
        
398,120
        
520,612
      
-9
%
                         
Annual Basis
                         
Point Change
Margin - residential loan sales
        
2.66
%
      
2.21
%
      
2.47
%
    
19
  
                           
 
Fees and service charges income contributed $12.3 million to noninterest income for the third quarter of 2011, compared to $12.9 million in the linked quarter and $13.8 million in the same period a year ago. The reduction in fees and service charges income is primarily related to lower non-sufficient funds fees due to implementation of provisions related to the Dodd-Frank Act.
 
During the quarter ended September 30, 2011, Sterling did not record a gain on sales of securities, compared to a gain of $8.3 million during the linked quarter and $7.0 million for the same period a year ago.
 
For the quarter ended September 30, 2011, other noninterest income was $3.5 million, compared to $11,000 for the linked quarter, and a loss of $1.0 million for the third quarter a year ago. The difference is primarily the result of higher gains on sales of loans, primarily SBA loans, for the third quarter of 2011.
 
Noninterest Expense
 
Noninterest expense was $86.6 million for the third quarter of 2011, compared to $91.6 million in the linked quarter and $94.2 million for the same period a year ago. The decrease compared to the linked quarter was primarily the result of lower expenses related to other-real-estate-owned (OREO), which decreased by $3.7 million. The $7.6 million reduction of noninterest expense compared to the third quarter of last year primarily reflects lower expenses for professional fees and lower Federal Deposit Insurance Corporation deposit insurance premiums.
 
 
 
 
 
Included in other noninterest expense, data processing expense was $5.7 million for the third quarter of 2011, compared to $6.6 million for the linked quarter. During the linked quarter, Sterling completed the conversion to a new core operating system and is expected to support future growth and reduce associated operating expenses going forward. In connection with the core conversion, Sterling incurred $1.2 million of non-recurring implementation expenses for the third quarter of 2011 and $2.3 million for the second quarter of 2011.
 
Income Taxes
 
For the third quarter of 2011, Sterling did not recognize any federal or state tax expense, as the income tax expense for the quarter was offset by a reduction in the deferred tax valuation allowance.
 
Sterling uses an estimate of future earnings and an evaluation of its loss carryback ability and tax planning strategies to determine whether it is more likely than not that it will realize the benefit of its deferred tax asset. Sterling determined that it did not meet the required threshold as of September 30, 2011, and accordingly, a full valuation reserve was recorded against the net deferred tax asset. As of September 30, 2011, the reserved deferred tax asset was approximately $335 million, including approximately $288 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. In order to preserve the benefits of these tax losses, during 2010 Sterling’s shareholders approved a protective amendment to the restated articles of incorporation and Sterling’s board adopted a tax preservation rights plan, both of which restrict certain stock transfers that would result in investors acquiring more than 4.95 percent of Sterling’s total outstanding common stock.
 
Credit Quality
 
Seibly commented, “Our delinquencies, nonaccrual loans and classified assets are less than half of what they were a year ago. We continue our focus on getting asset quality issues behind us. During the third quarter, classified assets were reduced 17 percent, coming off the heels of the second quarter when they were reduced by 26 percent. We expect the pace of resolutions to continue through the remainder of the year.”
 
For the third quarter of 2011, Sterling reported a provision for credit losses of $6.0 million, compared to $10.0 million for the linked quarter and $60.9 million for the same period a year ago. Net charge-offs for the third quarter of 2011 declined to $29.9 million, compared to $33.4 million for the linked quarter, and $77.1 million for the same period a year ago. The loan loss allowance at September 30, 2011 was $186.2 million, or 3.32 percent, of total loans, compared to $212.1 million, or 3.79 percent, of total loans at June 30, 2011.
 
The reduction in the allowance as a percent of total loans reflects the continued improvement in asset quality metrics and charge-offs during the quarter. At September 30, 2011, classified assets were $500.5 million, a reduction of $103.3 million, or 17 percent, from June 30, 2011, and down $821.8 million, or 62 percent, from September 30, 2010. These reductions were a result of improved risk ratings, sales of OREO, and net charge-offs. Nonperforming assets were $434.7 million at September 30, 2011, compared to $497.5 million at June 30, 2011, and $965.8 million at September 30, 2010, representing reductions of 13 percent and 55 percent, respectively. At September 30, 2011, nonperforming assets as a percentage of total assets were 4.74 percent, compared to 5.38 percent at June 30, 2011, and 9.63 percent at September 30, 2010.
 
 
 
 
 
As of September 30, 2011, OREO, which is included in nonperforming assets, was $111.6 million, compared to $101.4 million at June 30, 2011 and $156.8 million at September 30, 2010. During the third quarter of 2011, Sterling sold 163 properties with a carrying value of $40.8 million.
 
The following table presents an analysis of Sterling’s nonperforming assets by loan category and geographic region as of the dates indicated.
 
Nonperforming Asset Analysis
      
Sept 30,
    
June 30,
    
Sept 30,
       
2011
    
2011
    
2010
Residential construction
      
(in thousands)
Puget Sound
      
$
15,535
    
4
%
    
$
21,121
    
4
%
    
$
87,431
    
9
%
Portland, OR
        
13,553
    
3
%
      
21,014
    
4
%
      
59,506
    
6
%
Vancouver, WA
        
1,401
    
0
%
      
1,829
    
0
%
      
14,307
    
1
%
Northern California
        
4,565
    
1
%
      
5,387
    
1
%
      
15,658
    
2
%
Southern California
        
1,533
    
0
%
      
1,652
    
0
%
      
5,168
    
1
%
Bend, OR
        
381
    
0
%
      
993
    
0
%
      
9,183
    
1
%
Other
        
8,226
    
2
%
      
13,176
    
3
%
      
38,152
    
4
%
Total residential construction
        
45,194
    
10
%
      
65,172
    
12
%
      
229,405
    
24
%
Commercial construction
                                
Puget Sound
        
26,439
    
6
%
      
32,390
    
7
%
      
51,886
    
5
%
Northern California
        
12,625
    
3
%
      
18,618
    
4
%
      
51,175
    
5
%
Southern California
        
12,906
    
3
%
      
14,804
    
3
%
      
32,019
    
3
%
Other
        
67,029
    
15
%
      
72,817
    
15
%
      
94,393
    
10
%
Total commercial construction
        
118,999
    
27
%
      
138,629
    
29
%
      
229,473
    
23
%
Multifamily construction
                                
Puget Sound
        
26,761
    
6
%
      
28,430
    
6
%
      
57,670
    
6
%
Other
        
6,454
    
2
%
      
12,882
    
3
%
      
42,279
    
4
%
Total multifamily construction
        
33,215
    
8
%
      
41,312
    
9
%
      
99,949
    
10
%
Total construction
        
197,408
    
45
%
      
245,113
    
50
%
      
558,827
    
57
%
Commercial banking
        
101,887
    
24
%
      
104,988
    
21
%
      
130,842
    
14
%
Commercial real estate
        
68,858
    
16
%
      
66,811
    
13
%
      
112,754
    
12
%
Residential real estate
        
53,168
    
12
%
      
64,748
    
13
%
      
126,770
    
13
%
Multifamily real estate
        
7,325
    
2
%
      
9,523
    
2
%
      
25,640
    
3
%
Consumer
        
6,059
    
1
%
      
6,332
    
1
%
      
10,939
    
1
%
Total nonperforming assets
      
$
434,705
    
100
%
    
$
497,515
    
100
%
    
$
965,772
    
100
%
Specific reserve - loans
        
(15,276
)
          
(30,165
)
          
(40,012
)
    
Net nonperforming assets (1)
      
$
419,429
          
$
467,350
          
$
925,760
      
                                 
(1) Net of cumulative confirmed losses on loans and OREO of $299.7 million for September 30, 2011, $375.7 million for June 30, 2011, and $588.4 million for September 30, 2010.
 
 
 
 
 
 
Third Quarter 2011 Earnings Conference Call
 
Sterling plans to host a conference call October 26, 2011 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. 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 1-773-756-4806 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 completion of the call. The webcast replay will be offered through November 26, 2011.
 
Sterling Financial Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts, unaudited)
      
Sept 30,
    
June 30,
    
Sept 30,
       
2011
    
2011
    
2010
ASSETS:
                    
Cash and due from banks
      
$
481,717
      
$
587,210
      
$
713,991
  
Investments and mortgage-backed securities ("MBS") available for sale
        
2,446,523
        
2,494,002
        
2,708,595
  
Investments held to maturity
        
1,900
        
2,054
        
14,322
  
Loans held for sale
        
241,039
        
197,643
        
314,784
  
Loans receivable, net
        
5,428,355
        
5,387,714
        
5,665,503
  
Other real estate owned, net ("OREO")
        
111,566
        
101,406
        
156,801
  
Office properties and equipment, net
        
84,380
        
83,923
        
83,527
  
Bank owned life insurance ("BOLI")
        
174,092
        
172,774
        
167,391
  
Core deposit intangibles, net
        
13,290
        
14,480
        
18,153
  
Prepaid expenses and other assets, net
        
193,012
        
200,389
        
186,976
  
Total assets
      
$
9,175,874
      
$
9,241,595
      
$
10,030,043
  
                                 
LIABILITIES:
                    
Deposits
      
$
6,479,240
      
$
6,603,998
      
$
6,909,214
  
Advances from Federal Home Loan Bank
        
407,000
        
407,071
        
837,303
  
Repurchase agreements and fed funds
        
1,056,352
        
1,058,694
        
1,034,945
  
Other borrowings
        
245,289
        
245,287
        
248,284
  
Accrued expenses and other liabilities
        
128,500
        
118,935
        
155,250
  
Total liabilities
        
8,316,381
        
8,433,985
        
9,184,996
  
                                 
SHAREHOLDERS' EQUITY:
                    
Preferred stock
        
0
        
0
        
0
  
Common stock
        
1,963,820
        
1,962,830
        
1,959,697
  
Accumulated other comprehensive income
        
57,297
        
17,733
        
33,133
  
Accumulated deficit
        
(1,161,624
)
      
(1,172,953
)
      
(1,147,783
)
Total shareholders' equity
        
859,493
        
807,610
        
845,047
  
Total liabilities and shareholders' equity
      
$
9,175,874
      
$
9,241,595
      
$
10,030,043
  
                                 
Book value per common share (1)
      
$
13.87
      
$
13.04
      
$
77.15
  
Tangible book value per common share (1)
        
13.66
        
12.80
        
75.49
  
Diluted book value per common share (1)
      
$
13.86
      
$
12.98
      
$
13.42
  
Shareholders' equity to total assets
        
9.4
%
      
8.7
%
      
8.4
%
Tangible common equity to tangible assets (2)
        
9.2
%
      
8.6
%
      
8.3
%
Common shares outstanding at end of period (1)
        
61,968,510
        
61,952,072
        
10,953,089
  
Diluted common shares outstanding at end of period (1) (3)
        
62,025,944
        
62,214,769
        
62,968,439
  
Common stock warrants outstanding (1)
        
2,722,541
        
2,722,541
        
2,722,541
  
                     
(1) Reflects the 1-for-66 reverse stock split in Nov 2010.
(2) Common shareholders' equity less core deposit intangibles divided by assets less core deposit intangibles.
(3) Includes outstanding warrants adjusted per the treasury stock method.
 
 
 
 
 
                     
Sterling Financial Corporation
      
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
      
(in thousands, except per share amounts, unaudited)
      
Three Months Ended
    
Nine Months Ended
       
Sept 30,
    
June 30,
    
Sept 30,
    
Sept 30,
    
Sept 30,
       
2011
    
2011
    
2010
    
2011
    
2010
INTEREST INCOME:
                                
Loans
      
$
82,010
      
$
79,735
    
$
85,886
      
$
242,132
      
$
276,747
  
Mortgage-backed securities
        
16,719
        
19,928
      
18,127
        
56,681
        
56,569
  
Investments and cash
        
2,650
        
2,684
      
2,641
        
8,150
        
8,039
  
Total interest income
        
101,379
        
102,347
      
106,654
        
306,963
        
341,355
  
                                 
INTEREST EXPENSE:
                                
Deposits
        
14,135
        
15,216
      
22,639
        
46,645
        
75,153
  
Borrowings
        
12,408
        
12,324
      
16,580
        
36,932
        
50,782
  
Total interest expense
        
26,543
        
27,540
      
39,219
        
83,577
        
125,935
  
                                 
Net interest income
        
74,836
        
74,807
      
67,435
        
223,386
        
215,420
  
Provision for credit losses
        
6,000
        
10,000
      
60,892
        
26,000
        
220,229
  
Net interest income (loss) after provision
        
68,836
        
64,807
      
6,543
        
197,386
        
(4,809
)
                                 
NONINTEREST INCOME:
                                
Fees and service charges
        
12,332
        
12,946
      
13,826
        
37,839
        
41,094
  
Mortgage banking operations
        
16,360
        
10,794
      
19,409
        
37,481
        
42,354
  
Loan servicing fees
        
(4,694
)
      
709
      
(1,120
)
      
(2,884
)
      
(382
)
BOLI
        
1,612
        
1,578
      
1,570
        
4,922
        
5,425
  
Gain on sales of securities
        
0
        
8,297
      
7,005
        
14,298
        
24,265
  
Other
        
3,502
        
11
      
(1,032
)
      
1,773
        
(6,573
)
Total noninterest income
        
29,112
        
34,335
      
39,658
        
93,429
        
106,183
  
                                 
NONINTEREST EXPENSE:
                                
Employee compensation and benefits
        
43,828
        
41,836
      
42,561
        
129,514
        
125,875
  
OREO
        
10,739
        
14,452
      
10,456
        
36,591
        
38,585
  
Occupancy and equipment
        
3,554
        
13,170
      
12,888
        
29,558
        
29,306
  
Amortization of core deposit intangibles
        
1,190
        
1,224
      
1,225
        
3,639
        
3,674
  
Other
        
27,309
        
20,905
      
27,093
        
67,213
        
90,075
  
Total noninterest expense
        
86,620
        
91,587
      
94,223
        
266,515
        
287,515
  
                                 
Income (loss) before income taxes
        
11,328
        
7,555
      
(48,022
)
      
24,300
        
(186,141
)
Income tax (provision) benefit
        
0
        
0
      
0
        
0
        
0
  
Net income (loss)
        
11,328
        
7,555
      
(48,022
)
      
24,300
        
(186,141
)
Preferred stock dividend
        
0
        
0
      
(2,715
)
      
0
        
(11,596
)
                                 
Other shareholder allocations (1)
        
0
        
0
      
84,329
        
0
        
84,329
  
Net income (loss) available to common shareholders
      
$
11,328
      
$
7,555
    
$
33,592
      
$
24,300
      
$
(113,408
)
                                 
Earnings per common share - basic (2)
      
$
0.18
      
$
0.12
    
$
7.05
      
$
0.39
      
$
(53.29
)
Earnings per common share - diluted (2)
      
$
0.18
      
$
0.12
    
$
1.31
      
$
0.39
      
$
(53.29
)
                                 
Average common shares outstanding - basic (2)
        
61,958,183
        
61,943,851
      
4,764,875
        
61,944,392
        
2,128,059
  
Average common shares outstanding - diluted (2)
        
62,041,203
        
62,312,224
      
25,739,308
        
62,236,465
        
2,128,059
  
                                 
(1) The August 26, 2010 conversion of Series C preferred stock into common stock resulted in an increase in income available to common shareholders.
(2) Reflects the 1-for-66 reverse stock split in Nov 2010.
 
 
 
 
 
       
Sterling Financial Corporation
      
OTHER SELECTED FINANCIAL DATA
      
(in thousands, unaudited)
      
Three Months Ended
    
Nine Months Ended
       
Sept 30,
    
June 30,
    
Sept 30,
    
Sept 30,
    
Sept 30,
       
2011
    
2011
    
2010
    
2011
    
2010
LOAN ORIGINATIONS AND PURCHASES:
                                
Loan originations:
                                
Residential real estate:
                                
For sale
      
$
545,278
      
$
457,123
      
$
703,220
      
$
1,365,519
      
$
1,739,032
  
Permanent
        
14,893
        
26,578
        
28,894
        
65,834
        
46,283
  
Total residential real estate
        
560,171
        
483,701
        
732,114
        
1,431,353
        
1,785,315
  
Multifamily real estate
        
203,606
        
217,139
        
0
        
540,591
        
1,727
  
Commercial real estate
        
310
        
7,236
        
30,666
        
41,676
        
67,992
  
Construction:
                                
Residential
        
3,223
        
3,886
        
3,820
        
11,305
        
13,082
  
Commercial
        
0
        
1,800
        
0
        
1,800
        
500
  
Total construction
        
3,223
        
5,686
        
3,820
        
13,105
        
13,582
  
Consumer
        
29,513
        
40,018
        
19,256
        
97,888
        
68,368
  
Commercial banking
        
96,806
        
129,234
        
24,599
        
280,430
        
95,878
  
Total loan originations
        
893,629
        
883,014
        
810,455
        
2,405,043
        
2,032,862
  
Loan purchases:
                                
Residential real estate
        
2,701
        
0
        
0
        
10,251
        
0
  
Multifamily real estate
        
309
        
0
        
0
        
2,749
        
0
  
Commercial real estate
        
0
        
0
        
0
        
48,584
        
0
  
Commercial banking
        
22,495
        
0
        
0
        
74,716
        
0
  
Total loan purchases
        
25,505
        
0
        
0
        
136,300
        
0
  
Total loan originations and purchases
      
$
919,134
      
$
883,014
      
$
810,455
      
$
2,541,343
      
$
2,032,862
  
                                 
PERFORMANCE RATIOS:
                                
Return on assets
        
0.49
%
      
0.32
%
      
-1.94
%
      
0.35
%
      
-2.43
%
Return on common equity
        
5.40
%
      
3.82
%
      
50.40
%
      
4.05
%
      
-244.11
%
Operating efficiency (1)
        
71
%
      
74
%
      
82
%
      
74
%
      
81
%
Noninterest expense to assets
        
3.72
%
      
3.93
%
      
3.80
%
      
3.81
%
      
3.75
%
Average assets
      
$
9,233,112
      
$
9,338,409
      
$
9,825,509
      
$
9,356,487
      
$
10,254,728
  
Average common equity
      
$
832,237
      
$
792,748
      
$
264,436
      
$
802,076
      
$
62,115
  
                                 
REGULATORY CAPITAL RATIOS:
                                
Sterling Financial Corporation:
                                
Tier 1 leverage ratio
        
11.1
%
      
10.9
%
      
10.5
%
      
11.1
%
      
10.5
%
Tier 1 risk-based capital ratio
        
17.1
%
      
16.9
%
      
16.0
%
      
17.1
%
      
16.0
%
Total risk-based capital ratio
        
18.4
%
      
18.2
%
      
17.3
%
      
18.4
%
      
17.3
%
Sterling Savings Bank:
                                
Tier 1 leverage ratio
        
10.8
%
      
10.6
%
      
10.2
%
      
10.8
%
      
10.2
%
Tier 1 risk-based capital ratio
        
16.6
%
      
16.4
%
      
15.5
%
      
16.6
%
      
15.5
%
Total risk-based capital ratio
        
17.9
%
      
17.7
%
      
16.8
%
      
17.9
%
      
16.8
%
                                 
OTHER:
                                
FTE employees at end of period (whole numbers)
        
2,461
        
2,480
        
2,466
        
2,461
        
2,466
  
                                 
(1) Operating efficiency ratio calculated as noninterest expense, excluding OREO and amortization of core deposit intangibles, divided by net interest income (tax equivalent) plus noninterest income, excluding gain on sales of securities.
 
 
 
 
 
       
Sterling Financial Corporation
OTHER SELECTED FINANCIAL DATA
(in thousands, unaudited)
      
Sept 30,
    
June 30,
    
Sept 30,
       
2011
    
2011
    
2010
INVESTMENT PORTFOLIO DETAIL:
                    
Available for sale
                    
MBS
      
$
2,221,948
      
$
2,282,497
      
$
2,489,129
  
Municipal bonds
        
205,005
        
189,647
        
199,786
  
Other
        
19,570
        
21,858
        
19,680
  
Total
      
$
2,446,523
      
$
2,494,002
      
$
2,708,595
  
                     
Held to maturity
                    
Tax credits
      
$
1,900
      
$
2,054
      
$
14,322
  
Total
      
$
1,900
      
$
2,054
      
$
14,322
  
                     
LOAN PORTFOLIO DETAIL:
                    
Residential real estate
      
$
701,921
      
$
712,638
      
$
752,763
  
Multifamily real estate
        
990,707
        
811,917
        
445,193
  
Commercial real estate
        
1,287,381
        
1,324,058
        
1,326,971
  
Construction:
                    
Residential
        
44,671
        
67,789
        
252,867
  
Multifamily
        
29,285
        
49,908
        
133,217
  
Commercial
        
147,655
        
190,576
        
334,056
  
Total construction
        
221,611
        
308,273
        
720,140
  
Consumer
        
683,972
        
703,675
        
787,193
  
Commercial banking
        
1,729,626
        
1,741,819
        
1,885,570
  
Gross loans receivable
        
5,615,218
        
5,602,380
        
5,917,830
  
Deferred loan fees, net
        
(668
)
      
(2,578
)
      
(3,822
)
Allowance for loan losses
        
(186,195
)
      
(212,088
)
      
(248,505
)
Net loans receivable
      
$
5,428,355
      
$
5,387,714
      
$
5,665,503
  
                     
DEPOSITS DETAIL:
                    
Interest-bearing transaction
      
$
508,189
      
$
505,134
      
$
702,052
  
Noninterest-bearing transaction
        
1,167,552
        
1,067,637
        
1,011,378
  
Savings and MMDA
        
2,016,594
        
1,933,941
        
1,677,831
  
Time deposits
        
2,786,905
        
3,097,286
        
3,517,953
  
Total deposits
      
$
6,479,240
      
$
6,603,998
      
$
6,909,214
  
                     
Number of transaction accounts (whole numbers):
                    
Interest-bearing transaction accounts
        
44,428
        
44,116
        
47,645
  
Noninterest-bearing transaction accounts
        
170,636
        
166,483
        
164,913
  
Total transaction accounts
        
215,064
        
210,599
        
212,558
  
 
 
 
 
 
                     
Sterling Financial Corporation
OTHER SELECTED FINANCIAL DATA
(in thousands, unaudited)
      
Sept 30,
    
June 30,
    
Sept 30,
       
2011
    
2011
    
2010
ALLOWANCE FOR CREDIT LOSSES:
                    
Allowance - loans, beginning of quarter
      
$
212,088
      
$
232,944
      
$
264,850
  
Provision
        
4,000
        
12,500
        
60,800
  
Charge-offs:
                    
Residential real estate
        
(4,204
)
      
(4,210
)
      
(10,708
)
Multifamily real estate
        
(1,035
)
      
(457
)
      
(5,173
)
Commercial real estate
        
(11,189
)
      
(9,269
)
      
(12,739
)
Construction:
                    
Residential
        
(2,072
)
      
(10,218
)
      
(25,405
)
Multifamily
        
(743
)
      
(2,158
)
      
(85
)
Commercial
        
(11,609
)
      
(6,643
)
      
(17,778
)
Total construction
        
(14,424
)
      
(19,019
)
      
(43,268
)
Consumer
        
(2,554
)
      
(2,117
)
      
(3,696
)
Commercial banking
        
(7,769
)
      
(3,908
)
      
(8,225
)
Total charge-offs
        
(41,175
)
      
(38,980
)
      
(83,809
)
Recoveries:
                    
Residential real estate
        
178
        
603
        
187
  
Multifamily real estate
        
684
        
1,167
        
145
  
Commercial real estate
        
31
        
875
        
627
  
Construction:
                    
Residential
        
2,400
        
784
        
4,584
  
Multifamily
        
3,422
        
62
        
0
  
Commercial
        
244
        
1,033
        
8
  
Total construction
        
6,066
        
1,879
        
4,592
  
Consumer
        
463
        
337
        
511
  
Commercial banking
        
3,862
        
763
        
602
  
Total recoveries
        
11,284
        
5,624
        
6,664
  
Net charge-offs
        
(29,891
)
      
(33,356
)
      
(77,145
)
Allowance - loans, end of quarter
        
186,197
        
212,088
        
248,505
  
Allowance - unfunded commitments, beginning of quarter
        
7,431
        
10,641
        
10,951
  
Provision
        
2,000
        
(2,500
)
      
92
  
Charge-offs
        
(55
)
      
(710
)
      
(26
)
Allowance - unfunded commitments, end of quarter
        
9,376
        
7,431
        
11,017
  
Total credit allowance
      
$
195,573
      
$
219,519
      
$
259,522
  
                     
Net charge-offs to average net loans (annualized)
        
1.99
%
      
2.23
%
      
4.50
%
Net charge-offs to average net loans (ytd)
        
1.47
%
      
0.96
%
      
4.25
%
Loan loss allowance to total loans
        
3.32
%
      
3.79
%
      
4.20
%
Total credit allowance to total loans
        
3.48
%
      
3.92
%
      
4.39
%
Loan loss allowance to nonperforming loans
        
58
%
      
54
%
      
31
%
Loan loss allowance to nonperforming loans excluding loans individually evaluated for impairment
        
153
%
      
138
%
      
143
%
Total credit allowance to nonperforming loans
        
61
%
      
55
%
      
32
%
                     
NONPERFORMING ASSETS:
                    
Past 90 days due and accruing
      
$
0
      
$
0
      
$
0
  
Nonaccrual loans
        
240,142
        
311,832
        
658,678
  
Restructured loans
        
82,997
        
84,277
        
150,293
  
Total nonperforming loans
        
323,139
        
396,109
        
808,971
  
OREO
        
111,566
        
101,406
        
156,801
  
Total nonperforming assets
        
434,705
        
497,515
        
965,772
  
Specific reserve on nonperforming loans
        
(15,276
)
      
(30,165
)
      
(40,012
)
Net nonperforming assets
      
$
419,429
      
$
467,350
      
$
925,760
  
Nonperforming loans to total loans
        
5.76
%
      
7.07
%
      
13.68
%
Nonperforming assets to total assets
        
4.74
%
      
5.38
%
      
9.63
%
Loan delinquency ratio (60 days and over)
        
4.23
%
      
5.46
%
      
8.43
%
Classified assets
        
500,484
        
603,758
      
$
1,322,296
  
Classified assets to total assets
        
5.45
%
      
6.53
%
      
13.18
%
Classified assets to Sterling Savings Bank Tier 1 capital plus Credit Allowance
        
41.87
%
      
50.08
%
      
104.80
%
                     
Nonperforming assets by collateral type:
                    
Residential real estate
      
$
53,168
      
$
64,748
      
$
126,770
  
Multifamily real estate
        
7,325
        
9,523
        
25,640
  
Commercial real estate
        
68,858
        
66,811
        
112,754
  
Construction:
                    
Residential
        
45,194
        
65,172
        
229,405
  
Multifamily
        
33,215
        
41,312
        
99,949
  
Commercial
        
118,999
        
138,629
        
229,473
  
Total Construction
        
197,408
        
245,113
        
558,827
  
Consumer
        
6,059
        
6,332
        
10,939
  
Commercial banking
        
101,887
        
104,988
        
130,842
  
Total nonperforming assets
      
$
434,705
      
$
497,515
      
$
965,772
  
 
 
 
 
 
                     
Sterling Financial Corporation
AVERAGE BALANCE AND RATE
(in thousands, unaudited)
      
Three Months Ended
       
Sept 30, 2011
    
June 30, 2011
    
Sept 30, 2010
             
Interest
                
Interest
                
Interest
      
       
Average
    
Income/
    
Yields/
    
Average
    
Income/
    
Yields/
    
Average
    
Income/
    
Yields/
       
Balance
    
Expense
    
Rates
    
Balance
    
Expense
    
Rates
    
Balance
    
Expense
    
Rates
ASSETS:
                                                        
Loans:
                                                        
Mortgage
      
$
3,470,241
    
$
45,843
    
5.24
%
    
$
3,516,320
    
$
43,777
    
4.98
%
    
$
3,954,265
    
$
43,495
    
4.36
%
Commercial and consumer
        
2,483,204
      
36,282
    
5.80
%
      
2,478,564
      
36,074
    
5.84
%
      
2,843,072
      
42,474
    
5.93
%
Total loans
        
5,953,445
      
82,125
    
5.47
%
      
5,994,884
      
79,851
    
5.33
%
      
6,797,337
      
85,969
    
5.02
%
MBS
        
2,193,055
      
16,719
    
3.02
%
      
2,450,178
      
19,928
    
3.25
%
      
1,920,690
      
18,127
    
3.74
%
Investments and cash
        
767,714
      
3,596
    
1.86
%
      
668,553
      
3,732
    
2.24
%
      
1,001,212
      
3,722
    
1.47
%
FHLB stock
        
99,395
      
0
    
0.00
%
      
99,629
      
0
    
0.00
%
      
100,364
      
0
    
0.00
%
Total interest-earning assets
        
9,013,609
      
102,440
    
4.51
%
      
9,213,244
      
103,511
    
4.50
%
      
9,819,603
      
107,818
    
4.36
%
Noninterest-earning assets
        
219,503
                  
125,165
                  
5,906
            
Total average assets
      
$
9,233,112
                
$
9,338,409
                
$
9,825,509
            
                                                         
LIABILITIES and EQUITY:
                                                        
Deposits:
                                                        
Interest-bearing transaction
      
$
501,884
      
123
    
0.10
%
    
$
502,303
      
128
    
0.10
%
    
$
737,114
      
315
    
0.17
%
Savings and MMDA
        
1,970,823
      
1,601
    
0.32
%
      
1,981,455
      
1,740
    
0.35
%
      
1,653,751
      
2,288
    
0.55
%
Time deposits
        
2,952,566
      
12,411
    
1.67
%
      
3,172,641
      
13,348
    
1.69
%
      
3,671,278
      
20,036
    
2.17
%
Total interest-bearing deposits
        
5,425,273
      
14,135
    
1.03
%
      
5,656,399
      
15,216
    
1.08
%
      
6,062,143
      
22,639
    
1.48
%
Borrowings
        
1,710,388
      
12,408
    
2.88
%
      
1,704,126
      
12,324
    
2.90
%
      
2,152,611
      
16,580
    
3.06
%
Total interest-bearing liabilities
        
7,135,661
      
26,543
    
1.48
%
      
7,360,525
      
27,540
    
1.50
%
      
8,214,754
      
39,219
    
1.89
%
Noninterest-bearing transaction
        
1,132,589
      
0
    
0.00
%
      
1,040,000
      
0
    
0.00
%
      
1,001,012
      
0
    
0.00
%
Total funding liabilities
        
8,268,250
      
26,543
    
1.27
%
      
8,400,525
      
27,540
    
1.31
%
      
9,215,766
      
39,219
    
1.69
%
Other noninterest-bearing liabilities
        
132,625
                  
145,136
                  
165,568
            
Total average liabilities
        
8,400,875
                  
8,545,661
                  
9,381,334
            
Total average equity
        
832,237
                  
792,748
                  
444,175
            
Total average liabilities and equity
      
$
9,233,112
                
$
9,338,409
                
$
9,825,509
            
                                                         
Net interest income and spread (tax equivalent)
            
$
75,897
    
3.03
%
          
$
75,971
    
3.00
%
          
$
68,599
    
2.46
%
                                                         
Net interest margin (tax equivalent)
                  
3.34
%
                
3.31
%
                
2.77
%
                                                         
                                                         
Deposits:
                                                        
Total interest-bearing deposits
      
$
5,425,273
    
$
14,135
    
1.03
%
    
$
5,656,399
    
$
15,216
    
1.08
%
    
$
6,062,143
    
$
22,639
    
1.48
%
Noninterest-bearing transaction
        
1,132,589
      
0
    
0.00
%
      
1,040,000
      
0
    
0.00
%
      
1,001,012
      
0
    
0.00
%
Total deposits
      
$
6,557,862
    
$
14,135
    
0.86
%
    
$
6,696,399
    
$
15,216
    
0.91
%
    
$
7,063,155
    
$
22,639
    
1.27
%
                                                         
 
 
 
 
 
About Sterling Financial Corporation
 
Sterling Financial Corporation of Spokane, Wash., is the bank holding company for Sterling Savings Bank, a state chartered and federally insured commercial bank. Sterling offers banking products and services, mortgage lending, and investment products to individuals, small businesses, commercial organizations and corporations. As of September 30, 2011, Sterling Financial Corporation had assets of $9.18 billion and operated 178 depository branches throughout Washington, Oregon, Idaho, Montana and California. Visit Sterling’s website at www.sterlingfinancialcorporation-spokane.com.
 
Forward-Looking Statements
 
This release contains forward-looking statements that are not historical facts and that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, but are not limited to, statements about Sterling’s plans, objectives, expectations, strategy and intentions and other statements contained in this release that are not historical facts and pertain to Sterling’s future operating results and capital position, including Sterling’s ability to complete recovery plans, and Sterling’s ability to reduce future loan losses, improve its deposit mix, execute its asset resolution initiatives, execute its lending initiatives, contain costs, realize operating efficiencies and provide increased customer support and service. When used in this release, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. Actual results may differ materially from the results discussed in these forward-looking statements because such statements are inherently subject to significant assumptions, risks and uncertainties, many of which are difficult to predict and are generally beyond Sterling’s control. These include but are not limited to: Sterling’s ability to execute on its business plan and maintain adequate liquidity; the possibility of continued adverse economic developments that may, among other things, increase default and delinquency risks in Sterling’s loan portfolios; shifts in interest rates that may result in lower interest rate margins; shifts in the demand for Sterling’s loan and other products; changes in accounting policies; changes in the monetary and fiscal policies of the federal government; changes in laws, regulations and the competitive environment; and Sterling’s ability to comply with regulatory actions and agreements. Other factors that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements may be found under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Sterling’s Annual Report on Form 10-K, as updated periodically in Sterling’s filings with the Securities and Exchange Commission. Unless legally required, Sterling disclaims any obligation to update any forward-looking statements.
 
CONTACT:
Sterling Financial Corporation
Media:
Cara Coon, 509-626-5348
cara.coon@sterlingsavings.com
or
Investors:
Patrick Rusnak, 509-227-0961
or
Daniel Byrne, 509-458-3711