SLFI Sterling Financial (MM)

LANCASTER, Pa., July 25 /PRNewswire-FirstCall/ -- Sterling Financial Corporation (NASDAQ:SLFI) reported record earnings for the quarter and six months ended June 30, 2006. "We delivered another quarter of solid performance," said J. Roger Moyer, Jr., president and chief executive officer of Sterling Financial Corporation. "While we have experienced some modest compression in our net interest margin, our company is well positioned to meet a challenging interest rate environment as we continue to focus on revenue growth by delivering a broad portfolio of complementary financial services through our banks and financial services group companies." Results of Operations Quarter Ended June 30, 2006 Sterling's net income was $10.3 million for the quarter ended June 30, 2006, an increase of $597,000, or 6.2 percent from the second quarter of 2005. Diluted earnings per share totaled $0.35 for the second quarter of 2006 versus $0.33 for the same period in 2005, an increase of 6.1 percent. Return on assets for the second quarter of 2006 was 1.37 percent as compared to 1.39 percent for the same period last year, while return on average realized equity and return on average tangible equity were 13.71 percent and 20.55 percent, respectively for the second quarter of 2006 as compared to 14.00 percent and 21.10 percent, respectively for the same period last year. Total revenue, comprised of net interest income and non-interest income excluding net gains on sale of securities, totaled $48.5 million for the second quarter of 2006, an increase of $3.1 million or 6.9 percent from the same period last year. Meanwhile, non-interest expense totaling $32.8 million for the second quarter of 2006 increased $2.0 million or 6.6 percent from the second quarter of 2005. As a result, the efficiency ratio improved from 60.86 percent for the three months ended June 30, 2005, to 60.45 percent for the second quarter of 2006. Sterling has continued its trend of increasing net interest income, from $28.3 million for the second quarter of 2005 to $30.4 million in 2006, a 7.4 percent increase. The growth in net interest income has resulted primarily from the continued organic growth in loans and deposits, particularly higher yielding loans, including commercial loans and finance receivables. The net interest margin was 4.77 percent for the second quarter of 2006 as compared to 4.83 percent for the three months ended March 31, 2006, and 4.81 percent for the quarter ended June 30, 2005. While Sterling has been successful in managing its net interest margin by attracting new households and growing its loans and deposits, it has also experienced pressure in its net interest margin primarily resulting from the relatively flat yield curve, when compared to historical levels, and increased pricing competition on loans and deposits. The provision for loan losses was $1.3 million for the quarter ended June 30, 2006, compared to $1.1 million for the same period in 2005, primarily as a result of the growth in the loan portfolio and enhancements made to the allowance methodology in the third quarter of 2005 to give more weight to loan growth and changes in the composition of the loan portfolio. Non-interest income, excluding net gains on sale of securities, was $18.1 million for the quarter ended June 30, 2006, a 6.1 percent increase over $17.0 million earned during the same period in 2005. This increase was driven by a 12.4 percent increase in service charges and commissions related to deposit growth and transaction fees generated by the banking segment; a 17.6 percent increase in rental income on operating leases from the leasing segment as a result of growth in the business; an increase of 4.1 percent in trust and investment management income and brokerage fees and commissions generated by the investment services segment resulting primarily from growth in assets under administration; partially offset by a decrease of 25.7 percent in other operating income primarily due to lower gains on sale of loans; and a decrease of 18.0 percent in insurance commissions and fees from the insurance segment. Sterling's insurance segment continues to underperform primarily as a result of adverse changes in the small group health insurance market and certain of our customers restructuring their health plans. Non-interest expense was $32.8 million for the quarter ended June 30, 2006, compared to $30.8 million in the second quarter of 2005, a $2.0 million or 6.6 percent increase. Contributing to this was an increase of $995,000 or 7.0 percent in employment-related expenses, driven by $291,000 in charges related to the departure of certain employees, $135,000 related to the adoption of Financial Accounting Standards No. 123R, "Share-Based Payment" (Statement No. 123R) and $569,000 resulting from certain initiatives undertaken this year to promote growth in customer relationships as well as expenses incurred in support of business growth. In addition, depreciation on operating lease assets, totaling $6.5 million for the second quarter 2006 increased $827,000 or 14.6 percent, corresponding with the increase noted above in rental income on operating leases. Six Months Ended June 30, 2006 Sterling's net income was $20.4 million for the six months ended June 30, 2006, an increase of $1.5 million, or 7.8 percent from the same period in 2005. Diluted earnings per share totaled $0.70 for the six months ended June 30, 2006, versus $0.65 for 2005, an increase of 7.7 percent. Return on assets, return on average realized equity and return on average tangible equity were 1.39 percent, 13.79 percent, and 20.40 percent, respectively, for the six months ended June 30, 2006, as compared to 1.39 percent, 13.92 percent and 20.59 percent, respectively, for the same period last year. Total revenue of $95.9 million for the first six months of 2006 increased $7.3 million or 8.3 percent from the same period last year and exceeded growth in expenses of $4.2 million or 6.8 percent, for the same comparison period. This resulted in an improvement in Sterling's efficiency ratio from 61.67 percent for the first six months of 2005 to 60.64 percent for the first six months of 2006. Sterling's net interest income improved from $55.9 million for the six months ended June 30, 2005 to $60.1 million in 2006, a 7.6 percent increase. This increase was driven primarily by growth in loans and deposits, partially offset by a decrease of three basis points in the net interest margin to 4.80 percent as a result of the interest rate environment and pricing competition during the first six months of 2006. The provision for loan losses was $2.4 million for the six months ended June 30, 2006, compared to $1.5 million in 2005. This increase was driven primarily by growth in the loan portfolio as well as enhancements made to the allowance methodology in the third quarter of 2005. Non-interest income, excluding net gains on sale of securities, was $35.7 million for the six months ended June 30, 2006, a 9.5 percent increase over $32.6 million earned during the same period in 2005. This increase was driven by a 13.9 percent increase in service charges and commissions related to deposit growth and transaction fees generated by the banking segment; an increase of 39.8 percent in mortgage banking income; a 14.4 percent increase in rental income on operating leases from the leasing segment as a result of growth in the business; an increase of 4.4 percent in trust and investment management income and brokerage fees and commissions generated by the investment services segment resulting primarily from growth in assets under administration; partially offset by a decrease of 14.7 percent in insurance commissions and fees from the insurance segment. Sterling's insurance segment has been adversely impacted by a key insurance carrier that vacated the small group health insurance market in early 2005, customers restructuring their health plans and certain customers moving from self-funded to fully insured arrangements to better hedge their risk. Non-interest expenses were $65.0 million for the six months ended June 30, 2006, compared to $60.9 million in 2005, a $4.1 million or 6.8 percent increase. Contributing to this was an increase of $2.0 million or 7.1 percent increase in employment-related expenses resulting from a combined $426,000 in charges related to the departure of certain employees and expenses related to the adoption of Statement No. 123R and $1.6 million resulting from certain initiatives undertaken this year to promote growth in customer relationships as well as expenses incurred in support of business growth. In addition, depreciation on operating lease assets totaling $12.7 million for the six months ended June 30, 2006, increased $1.4 million or 12.6 percent, corresponding with the increase in rental income on operating leases as noted above. Financial Position Total assets of $3.1 billion at June 30, 2006, increased by 9.6 percent and 4.3 percent from June 30, 2005, and December 31, 2005, respectively. The largest increase in assets was in loans outstanding, which totaled $2.2 billion at June 30, 2006, an 11.4 percent increase over the June 30, 2005 balance of $2.0 billion. On an annualized basis, loans outstanding at June 30, 2006 increased 13.1 percent from the December 31, 2005 balance of $2.1 billion. The increase in the loan portfolio both on a year-over-year basis and from December 31, 2005 resulted from growth over most loan categories, particularly in finance receivables and commercial loans. Sterling's loan growth was funded primarily with growth in deposits. At June 30, 2006, total deposits were $2.4 billion, an increase of $243.7 million or 11.5 percent over June 30, 2005. This growth resulted from an increase of 6.5 percent in non-maturity deposits and 18.6 percent in time deposits. When compared to December 31, 2005, total deposits increased by 11.5 percent on an annualized basis. This growth was driven by an annualized increase in non- maturity and time deposits of 5.0 percent and 20.3 percent, respectively. Credit quality remained strong in the second quarter of 2006. The allowance for loan losses of $22.4 million represented 1.00 percent of total loans at June 30, 2006, compared to $19.1 million, or 0.95 percent at June 30, 2005 and $21.0 million, or 1.00 percent at December 31, 2005. Nonperforming loans to total loans were 0.22 percent at June 30, 2006, versus 0.19 percent at June 30, 2005, and 0.22 percent at December 31, 2005. Non-GAAP Presentations In addition to the results of operation presented in accordance with U.S. generally accepted accounting principles (GAAP), Sterling's management uses, and this press release contains, certain non-GAAP financial measures to monitor performance, including the efficiency ratio, return on average realized equity and return on average tangible equity. The efficiency ratio is a non-GAAP financial measure that we believe provides readers with important information regarding Sterling's results of operations. Comparison of Sterling's efficiency ratio with that of other companies' may not be appropriate, as they may calculate their ratio in a different manner. Sterling's calculation of the efficiency ratio is computed by dividing non- interest expenses, less depreciation on operating leases, by the sum of tax equivalent net interest income and non-interest income, less depreciation on operating leases. Sterling nets the depreciation on operating leases against related income, as it is consistent with utilizing net interest income presentation for comparable capital leases, which nets interest expense against interest income. The efficiency ratio excludes net gains on sale of securities. Return on average realized equity is a non-GAAP financial measure, as it is calculated by taking net income, divided by average shareholders' equity, excluding average other comprehensive income. We believe the presentation of return on realized equity provides a reader with a better understanding of our financial performance based on economic transactions, as it excludes the impact of unrealized gains and losses on securities available for sale and derivatives used in cash flow hedges, which can fluctuate based on interest rate volatility. Return on average tangible equity is a non-GAAP financial measure, defined as net income, excluding the amortization of intangible assets, divided by average stockholders' equity less average goodwill and intangible assets. We believe that by excluding the impact of purchase accounting, the return on average tangible equity provides the reader with an important view of our financial performance. Sterling, in referring to its net income, is referring to income determined in conformity with GAAP. Although we believe that the above-mentioned non-GAAP financial measures enhance readers' understanding of our business and performance, these non-GAAP measures should not be considered an alternative to GAAP. About Sterling With assets of $3.1 billion and investment assets under administration of $2.5 billion, Sterling Financial Corporation (NASDAQ:SLFI) is a diversified financial services company based in Lancaster, Pa. Sterling Banking Group affiliates offer a full range of banking services in south-central Pennsylvania, northern Maryland and northern Delaware; the group also offers correspondent banking services in the mid-Atlantic region to other companies within the financial services industry. Sterling Financial Services Group affiliates provide specialty commercial financing; fleet and equipment leasing; investment, trust and brokerage services; insurance services; and human resources consulting services. Visit http://www.sterlingfi.com/ for more information. Banking Group -- Banks: Pennsylvania: Bank of Lancaster County, N.A.; Bank of Lebanon County; PennSterling Bank; and Pennsylvania State Bank. Pennsylvania and Maryland: Bank of Hanover and Trust Company. Maryland: First National Bank of North East. Delaware: Delaware Sterling Bank & Trust Company. Correspondent banking services: Correspondent Services Group (provider of Sterling services to other financial institutions). Financial Services Group -- Specialty commercial financing: Equipment Finance LLC (commercial financing company for the forestry, land clearing and construction industries). Fleet and equipment leasing: Town & Country Leasing, LLC (nationwide fleet and equipment leasing company). Trust, investment and brokerage services: Sterling Financial Trust Company (trust and investment services), Church Capital Management, LLC (registered investment advisor) and Bainbridge Securities Inc. (securities broker/dealer). Insurance services: Lancaster Insurance Group, LLC (independent insurance agency for personal, property and business insurance); StoudtAdvisors (employee benefits consulting and brokerage firm); and Sterling Financial Settlement Services, LLC (title insurance agency). Human resources consulting: Professional Services Group (human resources consulting services provider for small to medium size businesses). This news release may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various factors. Such factors include costs and efforts required to integrate aspects of the operations of the companies being more difficult than expected, anticipated merger-related synergies not being achieved timely or not being achieved at all, the possibility that increased demand or prices for Sterling's financial services and products may not occur, changing economic and competitive conditions, volatility in interest rates, technological developments, costs associated with complying with laws, rules and regulations, and other risks and uncertainties, including those detailed in Sterling's filings with the Securities and Exchange Commission. STERLING FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (Dollars in thousands, June 30, December 31, June 30, except per share data) 2006 2005 2005 Assets Cash and due from banks $88,641 $79,509 $69,655 Federal funds sold 40,824 30,203 168 Cash and cash equivalents 129,465 109,712 69,823 Interest-bearing deposits in banks 4,217 5,690 5,353 Short-term investments 3,136 2,156 2,584 Mortgage loans held for sale 2,691 3,200 6,239 Securities held-to-maturity 26,232 28,891 30,952 Securities available-for-sale 428,452 455,117 456,977 Loans, net of unearned income 2,240,383 2,104,086 2,011,250 Allowance for loan losses (22,424) (21,003) (19,095) Loans, net of allowance for loan losses 2,217,959 2,083,083 1,992,155 Premises and equipment, net 45,597 43,498 42,140 Assets held for operating lease, net 84,473 73,636 68,609 Other real estate owned 75 60 64 Goodwill 86,468 78,764 77,869 Intangible assets 10,141 11,318 12,946 Mortgage servicing rights 3,096 3,011 2,558 Accrued interest receivable 12,513 12,304 11,854 Other assets 39,611 55,297 42,760 Total assets $3,094,126 $2,965,737 $2,822,883 Liabilities Deposits: Non-interest bearing $319,734 $304,475 $296,681 Interest-bearing 2,033,857 1,921,812 1,813,254 Total deposits 2,353,591 2,226,287 2,109,935 Short-term borrowings 149,840 140,573 69,105 Long-term debt 159,129 168,875 226,445 Subordinated notes payable 87,630 87,630 87,630 Accrued interest payable 9,975 8,821 7,637 Other liabilities 31,604 35,465 32,400 Total liabilities 2,791,769 2,667,651 2,533,152 Stockholders' equity Preferred stock -- -- -- Common stock 145,689 145,692 145,692 Capital surplus 78,536 79,351 79,562 Restricted stock -- (2,926) (3,414) Retained earnings 85,188 72,849 60,683 Accumulated other comprehensive income (1,117) 4,042 8,957 Common stock in treasury, at cost (5,939) (922) (1,749) Total stockholders' equity 302,357 298,086 289,731 Total liabilities and stockholders' equity $3,094,126 $2,965,737 $2,822,883 Ratios: Book value per share $10.48 $10.31 $10.04 Realized book value per share 10.52 10.17 9.73 Allowance for loan losses to total loans 1.00% 1.00% 0.95% Allowance for loan losses to nonperforming loans 460% 460% 505% Nonperforming loans to total loans 0.22% 0.22% 0.19% STERLING FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended, Six Months Ended, (Dollars in thousands, June 30, June 30, except per share data) 2006 2005 2006 2005 Interest and dividend income Loans, including fees $44,617 $36,373 $86,509 $70,444 Debt securities Taxable 2,523 2,774 5,128 5,587 Tax-exempt 2,519 2,592 5,153 5,206 Dividends 180 183 357 379 Federal funds sold 192 56 271 68 Short-term investments 67 41 124 68 Total interest and dividend income 50,098 42,019 97,542 81,752 Interest expense Deposits 15,005 9,379 28,028 17,508 Short-term borrowings 1,457 750 2,982 1,420 Long-term debt 1,813 2,236 3,560 4,458 Subordinated debt 1,427 1,345 2,833 2,481 Total interest expense 19,702 13,710 37,403 25,867 Net interest income 30,396 28,309 60,139 55,885 Provision for loan losses 1,298 1,140 2,423 1,497 Net interest income after provision for loan losses 29,098 27,169 57,716 54,388 Non-interest income Trust and investment management income 2,329 2,296 4,742 4,588 Service charges on deposit accounts 2,295 2,102 4,428 4,008 Other service charges, commissions and fees 1,383 1,170 2,704 2,254 Brokerage fees and commissions 776 688 1,658 1,540 Insurance commissions and fees 1,618 1,974 3,246 3,806 Mortgage banking income 529 432 1,005 719 Rental income on operating leases 7,915 6,729 15,430 13,493 Other operating income 1,221 1,644 2,503 2,218 Securities gains, net 532 114 834 248 Total non-interest income 18,598 17,149 36,550 32,874 Non-interest expenses Salaries and employee benefits 15,148 14,153 30,029 28,031 Net occupancy 1,691 1,585 3,326 3,201 Furniture and equipment 2,033 1,893 4,076 3,796 Professional services 1,085 1,049 2,034 2,001 Depreciation on operating lease assets 6,485 5,658 12,706 11,282 Taxes other than income 750 558 1,339 1,266 Intangible asset amortization 601 675 1,221 1,366 Other 5,003 5,195 10,311 9,930 Total non-interest expenses 32,796 30,766 65,042 60,873 Income before income taxes 14,900 13,552 29,224 26,389 Income tax expenses 4,619 3,868 8,786 7,426 Net income $10,281 $9,684 $20,438 $18,963 Per share information: Basic earnings per share $0.36 $0.34 $0.71 $0.66 Diluted earnings per share 0.35 0.33 0.70 0.65 Dividends declared 0.140 0.130 0.280 0.258 Performance ratios: Return on average assets 1.37% 1.39% 1.39% 1.39% Return on average realized equity 13.71% 14.00% 13.79% 13.92% Return on average tangible equity 20.55% 21.10% 20.40% 20.59% Efficiency ratio 60.45% 60.86% 60.64% 61.67% DATASOURCE: Sterling Financial Corporation CONTACT: Financial: Tito Lima, Chief Financial Officer, +1-717-735-4547, or , or Media: Joe Patterson, Vice President, Director of Corporate Communications, +1-717-735-5651 (office), +1-717-940-2759 (mobile), or , both of Sterling Financial Corporation Web site: http://www.sterlingfi.com/

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