SLFI Sterling Financial (MM)

LANCASTER, Pa., Oct. 24 /PRNewswire-FirstCall/ -- Sterling Financial Corporation (NASDAQ:SLFI) reported earnings for the quarter and nine months ended September 30, 2006. Results of Operations Quarter Ended September 30, 2006 Sterling's net income for the third quarter ended September 30, 2006, was $5.6 million or $0.19 per diluted share, compared to $10.1 million or $0.34 per diluted share for the same period last year. Included in Sterling's third quarter 2006 net income was a non-cash impairment charge totaling $5.2 million ($8.0 million pre-tax) or $0.18 per diluted share. The impairment charge was related to Sterling's affiliate, Corporate Healthcare Strategies, LLC's (CHS), goodwill and intangible assets and reflects management's current estimate of the expected impairment (see non-interest expense section for a more detailed explanation). Historically, this affiliate has not been a material contributor to Sterling's earnings or earnings per share. Excluding this charge, Sterling's third quarter 2006 net income would have been $10.8 million, an increase of 6.8 percent from the same period last year, while diluted earnings per share would have been $0.37, an increase of 8.8 percent from the same quarter in the prior year. Return on assets and return on average realized equity were 0.72 percent and 7.18 percent, respectively, for the third quarter of 2006. Excluding the impairment charge, return on assets and return on average realized equity would have been 1.39 percent and 13.88 percent, respectively, compared to 1.39 percent and 14.07 percent, respectively, for the same period last year. Return on average tangible equity was 11.11 percent for the quarter ended September 30, 2006. Excluding the impact of the impairment charge, return on average tangible equity would have been 20.84 percent, compared to 20.73 percent for the same period last year. Total revenue, comprised of net interest income and non-interest income excluding net gains on sale of securities, was $49.3 million for the third quarter of 2006, an increase of $3.7 million or 8.0 percent from the same period last year. Non-interest expense totaled $40.9 million for the third quarter of 2006, an increase of $10.1 million from the third quarter of 2005. Included in non-interest expense in the third quarter of 2006 was the goodwill and intangible assets impairment charge of $8.0 million. The efficiency ratio was 77.55 percent for the three months ended September 30, 2006. Excluding the impact of the impairment charge, the efficiency ratio would have been 59.39 percent for the third quarter of 2006, compared to 60.43 percent for the third quarter of 2005. Sterling has continued its trend of increasing net interest income, from $28.9 million for the third quarter of 2005 to $30.7 million for the same period in 2006, a 6.4 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 4.69 percent for the third quarter of 2006 as compared to 4.77 percent for the three months ended June 30, 2006, and 4.75 percent for the quarter ended September 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 $1.2 million for the quarter ended September 30, 2006, compared to $1.5 million for the same period in 2005. The provision as of September 30, 2005 included additional reserves related to increased credit risk identified in two significant loan relationships. Non-interest income, excluding net gains on sale of securities, was $18.6 million for the quarter ended September 30, 2006, a 10.8 percent increase over $16.8 million earned during the same period in 2005. This increase was driven by a 6.5 percent increase in service charges and commissions related to deposit growth and transaction fees generated by the banking segment; a 21.1 percent increase in rental income on operating leases from the leasing segment as a result of growth in the business; an increase of 9.3 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; an increase of 29.1 percent in other operating income primarily due to higher gains on sale of loans; partially offset by a decrease in mortgage banking income of 47.5 percent; and a decrease of 3.8 percent in insurance commissions and fees from the insurance segment. Non-interest expense was $40.9 million for the quarter ended September 30, 2006, and included a non-cash impairment charge estimated at $8.0 million. During the third quarter of 2006, Sterling determined that indicators of impairment existed within Corporate Healthcare Strategies (CHS), Sterling's employee benefits insurance affiliate, and performed an analysis to calculate the fair value of the goodwill and other intangible assets. Sterling is finalizing the valuation; however management estimates that the fair value of CHS is $7.5 million to $8.5 million less than its current book value. Consequently, Sterling wrote down the book value of CHS by $8 million as an estimate of the affiliate's current market value and expects to finalize the valuation in the fourth quarter of 2006. Excluding the impact of the impairment charge, non-interest expense would have been $32.9 million compared to $30.8 million in the third quarter of 2005, an increase of $2.1 million or 6.9 percent. Contributing to the increase was $136,000 related to the adoption of Financial Accounting Standards No. 123R, "Share Based Payment" (Statement No. 123R) and $919,000 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 $6.8 million for the third quarter 2006 increased $1.0 million or 18.3 percent, corresponding with the increase noted above in rental income on operating leases. "While we did absorb a non-cash impairment charge which had a negative impact on earnings, our company's fundamentals remain strong," said J. Roger Moyer, Jr., president and chief executive officer of Sterling Financial Corporation. "Our customer acquisition strategy continued to strengthen as we saw growth in both our loans and deposits. Referrals among our diverse lines of business also are helping us drive revenue." Nine Months Ended September 30, 2006 Sterling's net income was $26.0 million for the nine months ended September 30, 2006, or $0.89 per diluted share, compared to $29.0 million or $0.99 per diluted share for the same period last year. Excluding the impact of the impairment charge, net income would have been $31.2 million, an increase of 7.4 percent from the same period last year, while diluted earnings per share would have been $1.07 for the nine months ended September 30, 2006, an increase of 8.1 percent from the same period last year. Return on assets, return on average realized equity and return on average tangible equity were 1.16 percent, 11.52 percent, and 17.25 percent, respectively, for the nine months ended September 30, 2006. Excluding the impact of the impairment charge, return on assets, return on average realized equity and return on average tangible equity would have been 1.39 percent, 13.82 percent, and 20.55 percent, respectively, as compared to 1.39 percent, 13.97 percent and 20.63 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, of $145.1 million for the first nine months of 2006 increased $11.0 million or 8.2 percent from the same period last year. Non-interest expense totaled $106.0 million for the first nine months of 2006, an increase of $14.3 million from the same period in 2005. Included in non-interest expense in 2006 was the goodwill and intangible assets impairment charge of $8.0 million. The efficiency ratio was 66.35 percent for the nine months ended September 30, 2006. Excluding the impact of the impairment charge, the efficiency ratio would have been 60.22 percent for the nine months ended September 30, 2006, compared to 61.25 percent for the same period in 2005. Sterling's net interest income improved from $84.7 million for the nine months ended September 30, 2005 to $90.8 million in 2006, a 7.2 percent increase. This increase was driven primarily by growth in loans and deposits, partially offset by a decrease of four basis points in the net interest margin to 4.76 percent as a result of the interest rate environment and pricing competition during the first nine months of 2006. The provision for loan losses was $3.6 million for the nine months ended September 30, 2006, compared to $3.0 million in 2005. This increase was driven primarily by growth in the loan portfolio. Non-interest income, excluding net gains on sale of securities, was $54.3 million for the nine months ended September 30, 2006, a 9.9 percent increase over $49.4 million earned during the same period in 2005. This increase was driven by a 11.3 percent increase in service charges and commissions related to deposit growth and transaction fees generated by the banking segment; a 16.6 percent increase in rental income on operating leases from the leasing segment as a result of growth in the business; an increase of 6.0 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; an increase of 18.1 percent in other operating income primarily due to higher gains on sale of loans; partially offset by a decrease in mortgage banking income of 5.7 percent; and by a decrease of 11.4 percent in insurance commissions and fees from the insurance segment. Non-interest expenses were $106.0 million for the nine months ended September 30, 2006, and included a non-cash impairment charge estimated at $8.0 million as explained in more detail in the non-interest expense discussion for the third quarter of 2006. Excluding the impact of the impairment charge, non-interest expense would have been $98.0 million for the nine months ended September 30, 2006, compared to $91.7 million in 2005, an increase of $6.3 million or 6.9 percent. Contributing to the increase were employment related expenses from a combined $563,000 in charges related to the departure of certain employees and expenses related to the adoption of Statement No. 123R and $3.3 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 $19.5 million for the nine months ended September 30, 2006, increased $2.5 million or 14.5 percent, corresponding with the increase in rental income on operating leases as noted above. Financial Position Total assets of $3.1 billion at September 30, 2006, increased by 7.1 percent and 6.1 percent from September 30, 2005, and December 31, 2005, respectively. The largest increase in assets was in loans outstanding, which totaled $2.3 billion at September 30, 2006, an 8.5 percent increase over the September 30, 2005 balance of $2.1 billion. On an annualized basis, loans outstanding at September 30, 2006 increased 11.0 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 September 30, 2006, total deposits were $2.5 billion, an increase of $269.6 million or 12.1 percent over September 30, 2005. This growth resulted from an increase of 9.3 percent in non-maturity deposits and 16.0 percent in time deposits. When compared to December 31, 2005, total deposits increased by 15.9 percent on an annualized basis. This growth was driven by an annualized increase in non-maturity and time deposits of 12.5 percent and 20.5 percent, respectively. Credit quality remained strong in the third quarter of 2006. Non-performing loans to total loans were 0.19 percent at September 30, 2006, versus 0.17 percent at September 30, 2005, and 0.22 percent at December 31, 2005. The allowance for loan losses of $22.8 million represented 1.00 percent of total loans at September 30, 2006, compared to $20.2 million, or 0.96 percent at September 30, 2005 and $21.0 million, or 1.00 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 average 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 $2.8 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, except September 30, December 31, September 30, per share data) 2006 2005 2005 Assets Cash and due from banks $77,132 $79,509 $70,406 Federal funds sold 56,387 30,203 22,078 Cash and cash equivalents 133,519 109,712 92,484 Interest-bearing deposits in banks 3,061 5,690 6,433 Short-term investments 2,451 2,156 1,742 Mortgage loans held for sale 4,456 3,200 6,889 Securities held-to-maturity 21,782 28,891 31,502 Securities available-for-sale 452,620 455,117 460,089 Loans, net of unearned income 2,275,761 2,104,086 2,096,588 Allowance for loan losses (22,798) (21,003) (20,231) Loans, net of allowance for loan losses 2,252,963 2,083,083 2,076,357 Premises and equipment, net 47,310 43,498 42,371 Assets held for operating lease, net 88,656 73,636 69,822 Other real estate owned 60 60 64 Goodwill 79,865 78,764 77,848 Intangible assets 8,162 11,318 12,309 Mortgage servicing rights 3,104 3,011 2,892 Accrued interest receivable 12,480 12,304 11,538 Other assets 36,661 55,297 46,015 Total assets $3,147,150 $2,965,737 $2,938,355 Liabilities Deposits: Non-interest bearing $293,125 $304,475 $295,599 Interest-bearing 2,198,317 1,921,812 1,926,252 Total deposits 2,491,442 2,226,287 2,221,851 Short-term borrowings 90,430 140,573 108,361 Long-term debt 126,503 168,875 187,927 Subordinated notes payable 87,630 87,630 87,630 Accrued interest payable 9,476 8,821 8,265 Other liabilities 32,083 35,465 30,866 Total liabilities 2,837,564 2,667,651 2,644,900 Stockholders' equity Preferred stock -- -- -- Common stock 145,689 145,692 145,692 Capital surplus 77,392 79,351 79,165 Restricted stock -- (2,926) (3,414) Retained earnings 86,418 72,849 66,701 Accumulated other comprehensive income 2,999 4,042 6,620 Common stock in treasury, at cost (2,912) (922) (1,309) Total stockholders' equity 309,586 298,086 293,455 Total liabilities and stockholders' equity $3,147,150 $2,965,737 $2,938,355 Ratios: Book value per share $10.68 $10.31 $10.17 Realized book value per share 10.57 10.17 9.94 Allowance for loan losses to total loans 1.00% 1.00% 0.96% Allowance for loan losses to nonperforming loans 534% 460% 578% Nonperforming loans to total loans 0.19% 0.22% 0.17% Net charge-offs to total average loans 0.11% 0.11% 0.11% STERLING FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended, Nine Months Ended, (Dollars in thousands, except September 30, September 30, per share data) 2006 2005 2006 2005 Interest and dividend income Loans, including fees $47,076 $38,687 $133,585 $109,131 Debt securities Taxable 2,568 2,659 7,696 8,246 Tax-exempt 2,490 2,611 7,643 7,817 Dividends 264 107 621 486 Federal funds sold 300 181 571 249 Short-term investments 76 43 200 111 Total interest and dividend income 52,774 44,288 150,316 126,040 Interest expense Deposits 17,550 11,020 45,578 28,528 Short-term borrowings 1,511 734 4,493 2,154 Long-term debt 1,553 2,326 5,113 6,784 Subordinated debt 1,464 1,354 4,297 3,835 Total interest expense 22,078 15,434 59,481 41,301 Net interest income 30,696 28,854 90,835 84,739 Provision for loan losses 1,224 1,532 3,647 3,029 Net interest income after provision for loan losses 29,472 27,322 87,188 81,710 Non-interest income Trust and investment management income 2,477 2,221 7,219 6,809 Service charges on deposit accounts 2,323 2,235 6,751 6,243 Other service charges, commissions and fees 1,361 1,224 4,065 3,478 Brokerage fees and commissions 757 739 2,415 2,279 Insurance commissions and fees 1,612 1,675 4,858 5,481 Mortgage banking income 410 781 1,415 1,500 Rental income on operating leases 8,268 6,827 23,698 20,320 Other operating income 1,361 1,054 3,864 3,272 Securities gains, net 324 241 1,158 489 Total non-interest income 18,893 16,997 55,443 49,871 Non-interest expenses Salaries and employee benefits 14,726 14,459 44,755 42,490 Net occupancy 1,745 1,576 5,071 4,777 Furniture and equipment 2,045 1,700 6,121 5,496 Professional services 997 1,040 3,031 3,041 Depreciation on operating lease assets 6,755 5,710 19,461 16,992 Taxes other than income 774 696 2,113 1,962 Intangible asset amortization 566 659 1,787 2,025 Goodwill and intangible asset impairment 8,000 -- 8,000 -- Other 5,304 4,937 15,615 14,867 Total non-interest expenses 40,912 30,777 105,954 91,650 Income before income taxes 7,453 13,542 36,677 39,931 Income tax expenses 1,882 3,456 10,668 10,882 Net income $5,571 $10,086 $26,009 $29,049 Per share information: Basic earnings per share $0.19 $0.35 $0.90 $1.01 Diluted earnings per share 0.19 0.34 0.89 0.99 Dividends declared 0.150 0.140 0.430 0.398 Performance ratios: Return on average assets 0.72% 1.39% 1.16% 1.39% Return on average realized equity 7.18% 14.07% 11.52% 13.97% Return on average tangible equity 11.11% 20.73% 17.25% 20.63% Efficiency ratio 77.55% 60.43% 66.35% 61.25% COMPARISON OF RESULTS WITH AND WITHOUT THE ESTIMATED IMPAIRMENT WRITE-DOWN Three months ended September 30, 2006 (Dollars in thousands, With Without except for per share Estimated Estimated Estimated data and performance Impairment Impairment Impairment ratios) Condensed Consolidated Statements of Income Impairment Net interest income $30,696 $30,696 $-- Provision for loan losses 1,224 1,224 -- Net interest income after provision for loan losses 29,472 29,472 -- Non-interest income 18,893 18,893 -- Non-interest expenses 40,912 32,912 8,000 Income before income taxes 7,453 15,453 (8,000) Income tax expense (benefit) 1,882 4,682 (2,800) Net income 5,571 10,771 (5,200) Per share information: Basic earnings per share $0.19 $0.37 $(0.18) Diluted earnings per share 0.19 0.37 (0.18) Performance Ratios: Return on average assets 0.72% 1.39% (0.67)% Return on average realized equity 7.18% 13.88% (6.70)% Return on average tangible equity 11.11% 20.84% (9.73)% Efficiency ratio 77.55% 59.39% 18.16% Nine months ended September 30, 2006 (Dollars in thousands, With Without except for per share Estimated Estimated Estimated data and performance Impairment Impairment Impairment ratios) Condensed Consolidated Statements of Income Net interest income $90,835 $90,835 $-- Provision for loan losses 3,647 3,647 -- Net interest income after provision for loan losses 87,188 87,188 -- Non-interest income 55,443 55,443 -- Non-interest expenses 105,954 97,954 8,000 Income before income taxes 36,677 44,677 (8,000) Income tax expense (benefit) 10,668 13,468 (2,800) Net income 26,009 31,209 (5,200) Per share information: Basic earnings per share $0.90 $1.08 $(0.18) Diluted earnings per share 0.89 1.07 (0.18) Performance Ratios: Return on average assets 1.16% 1.39% (0.23)% Return on average realized equity 11.52% 13.82% (2.30)% Return on average tangible equity 17.25% 20.55% (3.30)% Efficiency ratio 66.35% 60.22% 6.13% 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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