UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the year ended December 31, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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COMMISSION FILE NUMBER 0-20800
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Washington |
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91-1572822 |
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(State or other jurisdiction of |
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(IRS Employer Identification No.) |
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111 North Wall Street, Spokane, Washington 99201 |
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(Address of principal executive offices) (Zip code) |
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Registrant’s telephone number, including area code: (509) 458-3711 |
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Securities registered pursuant to Section 12(b) of the Act: |
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None |
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None |
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(Title of each class) |
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(Name of each exchange on which registered) |
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Securities registered pursuant to Section 12(g) of the Act: |
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Common Stock ($1.00 par value) |
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(Title of class) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
As of June 30, 2003, the aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices on such date as reported by The NASDAQ National Market, was $337,696,829.
The number of shares outstanding of the registrant’s Common Stock, par value $1.00 per share, as of January 30, 2004 was 20,294,984.
DOCUMENTS INCORPORATED BY REFERENCE
Specific portions of the registrant’s Proxy Statement dated April 1, 2004 are incorporated by reference into Part III hereof.
STERLING
FINANCIAL CORPORATION
DECEMBER 31, 2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Sterling Financial Corporation (“Sterling”) is a unitary savings and loan holding company, the significant operating subsidiary of which is Sterling Savings Bank. The principal operating subsidiaries of Sterling Savings Bank are Action Mortgage Company (“Action Mortgage”), INTERVEST-Mortgage Investment Company (“INTERVEST”) and Harbor Financial Services, Inc. (“Harbor Financial”). Sterling Savings Bank commenced operations in 1983 as a Washington State-chartered, federally insured stock savings and loan association headquartered in Spokane, Washington.
Sterling provides personalized, quality financial services to its customers as exemplified by its “Hometown Helpful” philosophy. Sterling believes that this dedication to personalized service has enabled it to grow both its retail deposit base and its lending portfolio in the Pacific Northwest region. With $4.28 billion in total assets at December 31, 2003, Sterling attracts Federal Deposit Insurance Corporation (“FDIC”) insured deposits from the general public through 86 retail branches located in Washington, Oregon, Idaho and Montana. Sterling originates loans through its branch offices as well as Action Mortgage residential loan production offices in the four-state area and through INTERVEST commercial real estate lending offices in Washington, Oregon and Arizona. Sterling also markets tax-deferred annuities, mutual funds and other financial products through Harbor Financial and property and casualty insurance coverage in Montana through The Dime Service Corporation, a subsidiary of Sterling Savings Bank.
Sterling continues to enhance its presence as a leading community bank by increasing its commercial real estate, business banking, consumer and construction lending while increasing its retail deposits, particularly transaction accounts. Commercial real estate, business banking, consumer and construction loans generally produce higher yields than residential loans. Management believes that a community bank mix of assets and liabilities will enhance its net interest income (“NII”) (the difference between the interest earned on loans and investments and the interest paid on liabilities) and will increase other fee income, although there can be no assurance in this regard. Such loans, however, generally involve a higher degree of risk than financing residential real estate. Sterling’s revenues are derived primarily from interest earned on loans and asset-backed securities (“ABS”), fees and service charges and mortgage banking operations. The operations of Sterling Savings Bank, and savings institutions generally, are influenced significantly by general economic conditions and by policies of its primary regulatory authorities, the Office of Thrift Supervision (“OTS”), the FDIC and the State of Washington Department of Financial Institutions (“Washington Supervisor”).
On February 28, 2003, Empire Federal Bancorp, Inc. (“Empire”) was merged with and into Sterling, with Sterling being the surviving corporation in the merger. Sterling issued 1,401,370 shares of common stock in exchange for all of the stock of Empire. Sterling acquired approximately $144 million of cash, $67 million of loans, $184 million of deposits and $29 million of capital in the transaction. See Note 25 of “Notes to Consolidated Financial Statements.”
On July 15, 2003, Sterling announced that it had entered into an Agreement and Plan of Merger (the “Klamath Merger”) with Klamath First Bancorp, Inc. (“Klamath”), an Oregon corporation. Subsequent to the end of the year, on January 2, 2004, Klamath was merged with and into Sterling, with Sterling being the surviving corporation in the merger. Klamath’s wholly-owned subsidiary, Klamath First Federal Savings and Loan Association, was merged with and into Sterling’s wholly-owned subsidiary, Sterling Savings Bank, with Sterling Savings Bank being the surviving institution.
Under the terms of the Klamath Merger, each share of Klamath common stock was converted into 0.77 shares of Sterling common stock. Sterling issued 5,431,067 shares of common stock in exchange for all of the stock of Klamath. As a result of the merger, Sterling acquired approximately $988 million in deposits, $767 million in investments and ABS, $566 million in loans and $145 million in capital, while adding approximately 450 employees to its work force. In addition, Sterling added 48 retail branches and significantly increased its deposit market share in Oregon from 0.5% to over 4.0%. See Note 26 of “Notes to Consolidated Financial Statements.”
1
With the increase to 134 branches serving Washington, Oregon, Idaho and Montana, Sterling strengthens its position as a leading regional community bank. This merger is consistent with Sterling’s growth strategy to become the leading community bank in the Pacific Northwest region and furthers Sterling’s goal of providing extensive coverage throughout the region by further extending Sterling’s geographic footprint in Oregon. Klamath’s strong deposit base complements Sterling’s strong asset growth, while the combined branch network and access to capital gives Sterling the opportunity to continue its growth in the region.
Sterling intends to continue to pursue an aggressive growth strategy to become the leading community bank in the Pacific Northwest. This strategy may include acquiring other financial businesses or branches thereof or other substantial assets or deposit liabilities. Sterling may not be successful in identifying further acquisition candidates, integrating acquisitions or preventing such acquisitions from having an adverse effect on Sterling. There is significant competition for acquisitions in Sterling’s market area, and Sterling may not be able to acquire other businesses on attractive terms. Furthermore, the success of Sterling’s growth strategy will depend on increasing and maintaining sufficient levels of regulatory capital, obtaining necessary regulatory approvals, generating appropriate growth and favorable economic and market conditions. There can be no assurance that Sterling will be successful in implementing its growth strategy.
Focus on Community Lending. In recent years, Sterling focused its efforts on becoming more like a community bank. Sterling increased its commercial real estate, business banking, consumer and construction lending. Commercial real estate, business banking, consumer and construction loans generally produce higher yields than residential permanent mortgage loans. Such loans, however, generally involve a higher degree of risk than the financing of residential real estate.
Business Banking Lending. Sterling’s Business Banking Group provides a full range of credit products to small- and medium-sized businesses and individuals. Credit products include lines of credit, receivable and inventory financing, equipment loans and permanent and construction real restate financing. Loans may be made unsecured, partially secured or fully secured based on certain credit criteria. The credit product line for both businesses and individuals includes standardized products as well as customized accommodations.
Sterling’s Private Banking Group provides services to higher-net-worth and higher-income borrowers by originating a variety of consumer and business banking loans. Such loans generally, but do not always, meet the same underwriting requirements or have the same terms as general consumer loans of the same type.
Sterling’s Corporate Banking Group provides a full line of financial services to middle market companies in its service area. Credit products include lines of credit, receivable and inventory financing, equipment loans and permanent and construction financing. Loans may be made on an unsecured, partially-secured or fully-secured basis. The Corporate Banking Group also serves the needs of the owners and key employees of its business customers.
Sterling has established minimum underwriting standards which delineate criteria for sources of repayment, financial strength and credit enhancements such as guarantees. Typically, the primary source of repayment is recurring cash flow of the borrower or cash flow from the business or project being financed. Depending on the type of loan, underwriting standards include minimum financial requirements, maximum loan-to-collateral value ratios, minimum cash flow coverage of debt service, debt-to-income ratios and minimum liquidity requirements. Exceptions to the minimum underwriting standards may be made depending upon the type of loan and financial strength of the borrower. Exceptions are reported to the appropriate level of authority up to and including the board of directors. Common forms of collateral pledged to secure business banking loans include real estate, accounts receivable, inventory, equipment, agricultural crops or livestock and marketable securities. Most loans have maximum terms of one to ten years and loan-to-value ratios in the range of 65% to 80%, based on an analysis of the collateral pledged.
Business, private and corporate banking loans generally involve a higher degree of risk than the financing of real estate, primarily because collateral is more difficult to appraise, the collateral may be difficult to obtain or liquidate following an uncured default and it is difficult to accurately predict the borrower’s ability to generate future cash flows. These loans, however, typically offer relatively higher yields and variable interest rates. The availability of such loans enables potential depositors to establish full-service banking relationships with Sterling.
2
Multifamily Residential and Commercial Real Estate Lending. Sterling offers multifamily residential and commercial real estate loans as both construction and permanent loans collateralized by real property. Although Sterling’s market for such loans is primarily in the Pacific Northwest, Sterling has also recently established a production office in Phoenix, Arizona. Construction loans on such properties typically have terms of 12 to 24 months and have variable interest rates. Permanent fixed- and adjustable-rate loans on existing properties typically have maturities of three to ten years. Multifamily residential and commercial real estate loans generally involve a higher degree of risk than one- to four-family residential real estate loans, because they typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project and is subject to certain risks not present in one- to four-family residential mortgage lending. These risks include excessive vacancy rates or inadequate operating cash flows. Construction lending is subject to risks such as construction delays, cost overruns, insufficient values and an inability to obtain permanent financing in a timely manner. Sterling attempts to reduce its exposure to these risks by limiting loan amounts to the amounts readily accepted in the secondary market, by closely monitoring the construction disbursement process, by investigating the borrowers’ finances and, depending on the circumstances, requiring annual financial statements from the borrowers, requiring operating statements on the properties or acquiring personal guarantees from the borrowers.
One- to Four-Family Residential Lending. Sterling originates fixed-rate and adjustable-rate residential mortgages (“ARMs”), which have interest rates that adjust annually or every three, five and seven years and are indexed to a variety of market indices.
Sterling continues to originate conventional and government-insured residential loans for sale into the secondary mortgage market. Within the secondary mortgage market for conventional loans, Sterling sells its residential loans both on a servicing-released and servicing-retained basis to others. Sterling also sells loans to the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal National Mortgage Association (“FNMA”). Sterling endeavors to underwrite residential loans in compliance with FHLMC and FNMA underwriting standards. Loans sold into the secondary market are all sold without recourse to Sterling, except that Sterling may be obligated to repurchase any loans which are not underwritten in accordance with FHLMC and FNMA or applicable investor underwriting guidelines.
Conventional residential mortgage loans are originated for up to 103% of the appraised value or selling price of the mortgaged property, whichever is less. Borrowers must purchase private mortgage insurance from approved third parties so that Sterling’s risk is limited to approximately 80% of the appraised value on all loans with loan-to-value ratios in excess of 80%. Sterling’s residential lending programs are designed to comply with all applicable regulatory requirements. For a discussion of Sterling’s management of interest rate risk (“IRR”) on conventional loans, see “Secondary Market Activities.”
Sterling originates residential construction loans on custom homes, presold homes and spec homes. Sterling also provides acquisition and development loans for residential subdivisions. Construction financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate. Sterling’s risk of loss on construction loans depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, Sterling might have to advance funds beyond the amount originally committed to permit completion of the development and to protect its security position. Sterling also might be confronted, at or prior to maturity of the loan, with a project with insufficient value to ensure full repayment. Sterling’s underwriting, monitoring and disbursement practices with respect to construction financing are intended to ensure that sufficient funds are available to complete construction projects. Sterling endeavors to limit its risk through its underwriting procedures by using only approved, qualified appraisers and by dealing only with qualified builders/ borrowers. The properties that serve as underlying collateral for these construction loans are located primarily in the states of Washington, Oregon, Idaho and Montana.
At December 31, 2003, approximately 48% of Sterling’s one- to four-family residential construction loans consisted of loans for spec properties. Further, approximately 46% of Sterling’s one- to four-family residential construction loan portfolio was concentrated in the greater Portland, Oregon market. A reduction in market values or in the demand for residential housing, particularly in the Portland market, could lead to higher delinquencies and foreclosures and have a negative impact on Sterling.
3
Consumer Lending. Consumer loans and lines of credit are originated directly through Sterling’s retail branches and Private Banking Group, and indirectly through Sterling’s Dealer Banking Department. Sterling finances purchases of consumer goods including automobiles, boats, and recreational vehicles and lines of credit for personal use. Generally, consumer loans are originated for terms ranging from six months to ten years. Interest rates may be either fixed or adjustable based on a contractual formula tied to established external indices. Sterling also makes loans secured by borrowers’ savings accounts and equity loans collateralized by residential real estate. Equity loans may have maturities of up to 15 years.
The following table sets forth information on loan originations for the periods indicated.
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Years Ended December 31, |
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2003 |
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2002 |
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2001 |
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Amount |
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% |
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Amount |
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% |
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Amount |
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% |
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(Dollars in thousands) |
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Mortgage - permanent: |
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One- to four-family residential |
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$ |
504,169 |
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22.2 |
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$ |
350,973 |
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19.2 |
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$ |
204,503 |
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14.0 |
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Multifamily residential |
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71,962 |
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3.2 |
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77,761 |
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4.3 |
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50,111 |
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3.4 |
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Commercial real estate |
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114,487 |
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5.0 |
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66,492 |
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3.6 |
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146,391 |
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10.0 |
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690,618 |
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30.4 |
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495,226 |
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27.1 |
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401,005 |
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27.4 |
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Mortgage - construction: |
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One- to four-family residential |
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531,875 |
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23.4 |
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481,328 |
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26.3 |
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351,824 |
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24.0 |
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Multifamily residential |
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79,463 |
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3.5 |
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62,498 |
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3.4 |
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53,470 |
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3.6 |
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Commercial property |
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96,213 |
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4.2 |
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54,621 |
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3.0 |
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80,875 |
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5.5 |
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707,551 |
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31.1 |
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598,447 |
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32.7 |
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486,169 |
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33.1 |
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Total mortgage loans |
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1,398,169 |
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61.5 |
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1,093,673 |
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59.8 |
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887,174 |
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60.5 |
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Commercial and consumer: |
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Corporate banking |
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204,733 |
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9.0 |
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121,348 |
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6.6 |
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0 |
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0.0 |
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Business banking |
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386,521 |
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17.0 |
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403,181 |
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22.1 |
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389,470 |
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26.5 |
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Consumer - direct |
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211,505 |
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9.3 |
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146,575 |
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8.0 |
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129,133 |
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8.8 |
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Consumer - indirect |
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73,046 |
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3.2 |
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64,333 |
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3.5 |
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62,374 |
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4.2 |
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Total commercial and consumer loans |
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875,805 |
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38.5 |
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735,437 |
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40.2 |
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580,977 |
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39.5 |
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Total loans originated |
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$ |
2,273,974 |
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100.0 |
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$ |
1,829,110 |
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100.0 |
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$ |
1,468,152 |
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100.0 |
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4
Loan Portfolio Analysis. The following table sets forth the composition of Sterling’s loan portfolio by type of loan at the dates indicated.
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December 31, |
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2003 |
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2002 |
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2001 |
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2000 |
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1999 |
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Amount |
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% |
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Amount |
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% |
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Amount |
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% |
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Amount |
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% |
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Amount |
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% |
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(Dollars in thousands) |
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Mortgage - permanent: |
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One- to four-family residential |
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$ |
407,999 |
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13.8 |
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$ |
358,359 |
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14.8 |
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$ |
315,242 |
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14.8 |
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$ |
409,592 |
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20.6 |
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$ |
396,565 |
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21.9 |
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Multifamily residential |
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167,220 |
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5.7 |
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161,547 |
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6.7 |
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155,250 |
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7.3 |
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163,675 |
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8.2 |
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137,835 |
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7.6 |
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Commercial real estate |
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463,191 |
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15.7 |
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458,712 |
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18.9 |
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438,594 |
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20.5 |
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347,654 |
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17.5 |
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317,565 |
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17.6 |
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Land and other |
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0 |
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0.0 |
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0 |
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0.0 |
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925 |
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0.0 |
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956 |
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0.0 |
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0 |
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0.0 |
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1,038,410 |
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35.2 |
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978,618 |
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40.4 |
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910,011 |
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42.6 |
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921,877 |
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46.3 |
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851,965 |
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47.1 |
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Mortgage - construction: |
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One- to four-family residential |
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271,480 |
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9.2 |
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280,514 |
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11.6 |
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214,849 |
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10.1 |
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215,844 |
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10.9 |
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184,081 |
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10.2 |
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Multifamily residential |
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127,424 |
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4.3 |
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96,297 |
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4.0 |
|
88,977 |
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4.2 |
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80,728 |
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4.1 |
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71,024 |
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3.9 |
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Commercial real estate |
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154,061 |
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5.2 |
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104,108 |
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4.3 |
|
92,089 |
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4.3 |
|
81,347 |
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4.1 |
|
32,018 |
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1.8 |
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|||||
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|
552,965 |
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18.7 |
|
480,919 |
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19.9 |
|
395,915 |
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18.6 |
|
377,919 |
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19.1 |
|
287,123 |
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15.9 |
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Total mortgage loans |
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1,591,375 |
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53.9 |
|
1,459,537 |
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60.3 |
|
1,305,926 |
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61.2 |
|
1,299,796 |
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65.4 |
|
1,139,088 |
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63.0 |
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Commercial and consumer: |
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Business, private and corporate banking |
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948,304 |
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32.2 |
|
655,727 |
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27.0 |
|
520,866 |
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24.3 |
|
435,284 |
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21.9 |
|
348,941 |
|
19.3 |
|
|||||
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Consumer - direct |
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309,931 |
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10.5 |
|
246,578 |
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10.2 |
|
244,097 |
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11.4 |
|
235,423 |
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11.8 |
|
223,286 |
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12.4 |
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Consumer - indirect |
|
99,697 |
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3.4 |
|
62,896 |
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2.5 |
|
65,169 |
|
3.1 |
|
17,682 |
|
0.9 |
|
96,602 |
|
5.3 |
|
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Total commercial and consumer loans |
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1,357,932 |
|
46.1 |
|
965,201 |
|
39.7 |
|
830,132 |
|
38.8 |
|
688,389 |
|
34.6 |
|
668,829 |
|
37.0 |
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Total loans receivable |
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2,949,307 |
|
100.0 |
|
2,424,738 |
|
100.0 |
|
2,136,058 |
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100.0 |
|
1,988,185 |
|
100.0 |
|
1,807,917 |
|
100.0 |
|
|||||
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Deferred loan origination fees, net of costs |
|
(7,276 |
) |
|
|
(6,450 |
) |
|
|
(5,980 |
) |
|
|
(5,518 |
) |
|
|
(4,543 |
) |
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|
|||||
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Gross loans receivable |
|
2,942,031 |
|
|
|
2,418,288 |
|
|
|
2,130,078 |
|
|
|
1,982,667 |
|
|
|
1,803,374 |
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|
|
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Allowance for loan losses |
|
(35,605 |
) |
|
|
(27,866 |
) |
|
|
(20,599 |
) |
|
|
(16,740 |
) |
|
|
(15,603 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Loans receivable, net |
|
$ |
2.906,426 |
|
|
|
$ |
2,390,422 |
|
|
|
$ |
2,109,479 |
|
|
|
$ |
1,965,927 |
|
|
|
$ |
1,787,771 |
|
|
|
5
Contractual Principal Payments. The following table sets forth the scheduled contractual principal repayments for Sterling’s loan portfolio at December 31, 2003. Demand loans, loans having no stated repayment schedule and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, deferred loan origination costs and fees, or allowances for loan losses.
|
|
|
Balance |
|
Principal
Payments |
|
||||||||
|
|
|
December 31, 2003 |
|
2004 |
|
2005-2008 |
|
Thereafter |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Mortgage - permanent: |
|
|
|
|
|
|
|
|
|
||||
|
Fixed rate |
|
$ |
413,559 |
|
$ |
12,911 |
|
$ |
72,903 |
|
$ |
327,745 |
|
|
Variable rate |
|
624,851 |
|
42,963 |
|
155,867 |
|
426,021 |
|
||||
|
Mortgage - construction |
|
552,965 |
|
354,160 |
|
173,091 |
|
25,714 |
|
||||
|
Consumer - direct |
|
309,931 |
|
120,429 |
|
68,725 |
|
120,777 |
|
||||
|
Consumer - indirect |
|
99,697 |
|
18,677 |
|
72,932 |
|
8,088 |
|
||||
|
Business, private and corporate banking |
|
948,304 |
|
461,167 |
|
245,515 |
|
241,622 |
|
||||
|
|
|
$ |
2,949,307 |
|
$ |
1,010,307 |
|
$ |
789,033 |
|
$ |
1,149,967 |
|
Loan Servicing. Sterling services its own loans as well as loans owned by others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding escrow funds for the payment of real estate taxes and insurance premiums, contacting delinquent borrowers and supervising foreclosures in the event of unremedied defaults. Sterling generally receives a fee based on the unpaid principal balance of each loan to compensate for the costs of performing the servicing function.
For residential mortgage loans serviced for other investors, Sterling receives a fee, generally ranging from 0.24% to 0.375% of the unpaid principal balance. At December 31, 2003 and 2002, Sterling serviced for itself and for other investors residential mortgage loans totaling $737.6 million and $718.5 million, respectively. Of such mortgage loans, Sterling serviced $329.4 million and $198.3 million, respectively, at these dates for FHLMC, FHLB and FNMA. Sterling’s ability to continue as a seller/servicer for FHLMC and FNMA is dependent upon meeting the qualifications of these agencies. Sterling currently meets all applicable requirements.
Sterling receives a fee for servicing commercial real estate loans for other investors. This fee generally ranges from 0.10% to 0.25% of the unpaid principal balance. At December 31, 2003 and 2002, Sterling serviced for itself and other investors commercial real estate loans totaling $842.0 million and $698.6 million, respectively.
Sterling also receives a fee of 0.50% of the unpaid principal balance of each loan for servicing automobile loans for other investors. At December 31, 2003 and 2002, Sterling serviced $25.9 million and $54.4 million of such loans, respectively.
Secondary Market Activities. Sterling has developed correspondent relationships with a number of mortgage companies and financial institutions to facilitate the origination or purchase and sale of mortgage loans in the secondary market on either a participation or whole loan basis. Substantially all of such purchased loans or participations are secured by real estate. Those agents who present loans to Sterling for purchase are required to provide a processed loan package prior to commitment. Sterling then underwrites the loan in accordance with its established lending standards.
Sterling, from time to time, sells participations in certain commercial real estate loans to investors on a servicing-retained basis. During the years ended December 31, 2003, 2002 and 2001, Sterling sold approximately $35.9 million, $65.1 million and $51.5 million in loans under participation agreements, resulting in net gains of $328,000, $618,000 and $380,000, respectively.
Sterling generally receives a fee of approximately 1.0% to 2.0% of the principal balance of mortgage loans for releasing the servicing. In 2003, 40.9% of Sterling’s sales of Federal Housing Administration (“FHA”) and Veteran’s Administration (“VA”) insured loans have been sold into the secondary market on a loan-by-loan servicing-released basis. In 2002, 66.3% of such sales were sold on a servicing-released basis.
6
In 2003, 59.1% of Sterling’s sales of conventional, FHA and VA insured loans were sold into the secondary market on a servicing-retained basis. This compares with 33.7% in 2002. Sterling records a valuation of approximately 1.00% to 1.15% of the principal balance of such loans for retaining the servicing. At December 31, 2003 and 2002, Sterling had recorded as net assets $3.5 million and $1.7 million in servicing rights, respectively. See Note 3 of “Notes to Consolidated Financial Statements.”
Loan Commitments. Sterling makes written commitments to individual borrowers and mortgage brokers for the purposes of originating and purchasing loans. These loan commitments establish the terms and conditions under which Sterling will fund the loans. Sterling had outstanding commitments to originate or purchase loans aggregating $762.3 million at December 31, 2003. Sterling also had secured and unsecured commercial and personal lines of credit totaling approximately $754.1 million, of which the undisbursed portion was approximately $343.2 million at December 31, 2003. See Note 17 of “Notes to Consolidated Financial Statements.”
Derivatives and Hedging. Sterling, through its subsidiary Action Mortgage, enters into interest rate lock commitments (“rate locks”) to prospective residential mortgage borrowers. Traditionally, Action Mortgage has endeavored to hedge IRR by entering into non-binding (“best-efforts”) forward sales agreements with third parties. In July 2003, in an effort to improve and protect the profit margin on loans sold into the secondary market, Action Mortgage began hedging IRR by entering into mandatory forward sales agreements on ABS with third parties.
The risks inherent in such mandatory forward sales agreements include the risk that, if for any reason Action Mortgage does not close and sell the loans in question, it is nonetheless obligated to deliver ABS to the counterparty on the agreed terms. Action Mortgage could incur significant costs in acquiring replacement loans or ABS and such costs could have a material adverse impact on mortgage banking operations in future periods, especially in rising interest rate environments. During the year ended December 31, 2003, Sterling recorded $1.1 million in revenue from forward sales agreements and similar transactions. This revenue is a component of other gains and losses on sales of loans into the secondary market.
Rate locks and forward sales agreements are considered to be derivatives. Sterling has recorded the estimated fair values of the rate locks and forward sales agreements on its balance sheet in either other assets or other liabilities. Changes in the fair values of these derivative instruments are recorded in net gain on sales of mortgage loans in the income statement as the changes occur. The estimated fair value of rate locks was $85,000 and the estimated fair value of forward sales agreements was $(73,000) at December 31, 2003.
Classified Assets, Real Estate Owned and Delinquent Loans. To measure the quality of assets, including loans and real estate owned (“REO”), Sterling has established guidelines for classifying assets and determining provisions for anticipated loan and REO losses. Under these guidelines, an allowance for anticipated loan and REO losses is established when certain conditions exist. This system for classifying and reserving for loans and REO is administered by Sterling’s Special Assets Department, which is responsible for minimizing loan deficiencies and losses therefrom. An oversight committee, comprised of senior management, monitors the activities of the Special Assets Department and reports results to Sterling’s Board of Directors.
Under this system, Sterling classifies loans and other assets it considers of questionable quality. Sterling’s system employs the classification categories of “substandard,” “doubtful” and “loss.” Substandard assets have deficiencies which give rise to the distinct possibility that Sterling will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets, and on the basis of currently existing facts, there is a high probability of loss. An asset classified as loss is considered uncollectible and of such little value that it should not be included as an asset of Sterling. Total classified assets increased slightly to $84.8 million at December 31, 2003 from $84.7 million at December 31, 2002. As a percentage of total assets, classified assets decreased from the prior year. The percentage of classified assets to total assets was 2.0% and 2.4% at December 31, 2003 and 2002, respectively. See “Major Classified Loans.”
Assets classified as substandard or doubtful require the establishment of valuation allowances in amounts considered by management to be adequate under accounting principles generally accepted in the United States of America (“GAAP”). Assets classified as loss require either a specific valuation allowance of 100% of the amount classified or a write-off of such amount. At December 31, 2003, Sterling’s assets classified as loss totaled $3.3 million compared to $4.0 million at December 31, 2002. Judgments regarding the adequacy of a valuation allowance are based
7
on on-going evaluations of the nature, volume and quality of the loan portfolio, REO and other assets, specific problem assets and current economic conditions that may affect the recoverability of recorded amounts.
REO is recorded at the lower of estimated fair value, less estimated selling expenses, or carrying value at foreclosure. Fair value is defined as the amount in cash or other consideration that a real estate asset would yield in a current sale between a willing buyer and a willing seller. Development and improvement costs relating to the property are capitalized to the extent they are deemed to be recoverable upon disposal. The carrying value of REO is continuously evaluated and, if necessary, an allowance is established to reduce the carrying value to net realizable value which considers, among other things, estimated direct holding costs and selling expenses.
The following table sets forth the activity in Sterling’s REO for the periods indicated.
|
|
|
Years Ended December 31, |
|
|||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|
|||
|
Balance at beginning of period |
|
$ |
3,953 |
|
$ |
2,982 |
|
$ |
6,407 |
|
|
Loan foreclosures and other additions |
|
3,900 |
|
7,876 |
|
5,599 |
|
|||
|
Improvements and other changes |
|
282 |
|
715 |
|
(211 |
) |
|||
|
Sales |
|
(3,729 |
) |
(7,382 |
) |
(8,354 |
) |
|||
|
Provisions for losses |
|
(180 |
) |
(238 |
) |
(459 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance at end of period |
|
$ |
4,226 |
|
$ |
3,953 |
|
$ |
2,982 |
|
Major Classified Loans. Sterling’s classified loans with a net carrying value at December 31, 2003 of more than $4.0 million included the following, which together constitute 39.3% of classified assets.
Sterling holds an income property loan secured by a specialized care facility located in Arizona. The aggregate carrying value of this loan at December 31, 2003 was $8.1 million. This loan has matured and is currently in default. Sterling has entered into negotiations for an extension agreement.
Sterling holds two income property construction loans and a commercial line of credit secured by a hotel in western Washington. The aggregate carrying value of these three loans at December 31, 2003 was $5.7 million. The loans were classified as substandard due to lack of stable occupancy, insufficient debt service coverage, and payment and property tax defaults. Borrowers are performing under the terms of a conditional forbearance agreement. Taxes and loan payments are current. The loans continue to be closely monitored for adherence to the forbearance agreement.
Sterling holds an income property loan secured by a specialized care facility located in western Washington. The aggregate carrying value of this loan at December 31, 2003 was $5.3 million. Although this facility has been classified as substandard because it has failed to reach a stabilized level of occupancy or satisfactory debt service coverage, there have been recent improvements in both of these areas. The loan continues to perform as agreed and is being closely monitored.
Sterling holds an income property loan secured by four hotel properties located in Washington, Oregon and Idaho. The aggregate carrying value of this loan at December 31, 2003 was $5.2 million. The loan was classified as substandard due to the borrower’s delinquency. Judicial foreclosure proceedings and lawsuits against guarantors are currently in process. These hotels are operating under receivership.
Sterling holds six business banking loans secured by inventory in Idaho. The aggregate carrying value of these loans at December 31, 2003 was $4.8 million. The loans were classified as substandard due to operating losses. As of December 31, 2003, the loans continue to perform as agreed and are being closely monitored.
Sterling holds three business banking loans secured by real estate, accounts receivable, equipment and inventory in western Oregon. The aggregate carrying value of these loans at December 31, 2003 was $4.1 million. The loans were classified as substandard due to operating losses, lack of operating capital and past due accounts receivable. Sterling has entered into negotiations for a forbearance agreement.
8
Major Real Estate Owned. At December 31, 2003, the aggregate value of outstanding REO properties was $4.2 million. None of the REO properties had a carrying value of more than $1.0 million.
Delinquent Loan Procedures. Delinquent and problem loans are part of any lending business. If a borrower fails to make a required payment when due, Sterling institutes internal collection procedures. For residential mortgage and consumer loans, Sterling’s collection procedures generally require that an initial request for payment be mailed to the borrower when the loan is 15 days past due. At 25 days past due, the borrower is contacted by telephone and payment is requested orally. At 30 days past due, Sterling records the loan as a delinquency. In the case of delinquent residential mortgage loans, a notice of intent to foreclose is mailed at 45 days past due. If the loan is still delinquent 30 days following the mailing of the notice of intent to foreclose, Sterling generally initiates foreclosure proceedings.
For consumer loans, a demand letter is sent when the account becomes delinquent for two payments. Additional collection work or repossession may follow. In certain instances, Sterling may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs. Similar collection procedures to those for consumer and mortgage loans are followed for business loans with the exception that these accounts are generally handled as a joint effort between the originating loan officer and the collection department during initial stages of delinquency. On or before 75 days of delinquency, the collection effort is typically shifted from the originating loan officer to the collection department with legal action to follow.
The following table summarizes the principal balances of nonperforming assets at the dates indicated.
|
|
|
December 31, |
|
|||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Nonaccrual loans |
|
$ |
16,208 |
|
$ |
16,278 |
|
$ |
21,102 |
|
$ |
8,385 |
|
$ |
9,259 |
|
|
Restructured loans |
|
1,164 |
|
594 |
|
886 |
|
0 |
|
66 |
|
|||||
|
Total nonperforming loans |
|
17,372 |
|
16,872 |
|
21,988 |
|
8,385 |
|
9,325 |
|
|||||
|
Real estate owned (1) |
|
4,226 |
|
3,953 |
|
2,982 |
|
6,407 |
|
7,299 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total nonperforming assets (2) |
|
$ |
21,598 |
|
$ |
20,825 |
|
$ |
24,970 |
|
$ |
14,792 |
|
$ |
16,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Ratio of total nonperforming assets to total assets |
|
0.50 |
% |
0.59 |
% |
0.82 |
% |
0.56 |
% |
0.65 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Ratio of total nonperforming loans to gross loans |
|
0.59 |
% |
0.70 |
% |
1.03 |
% |
0.42 |
% |
0.52 |
% |
|||||
|
Ratio of allowance for estimated losses on loans to total nonperforming loans (3) |
|
216.6 |
% |
174.3 |
% |
91.9 |
% |
190.1 |
% |
164.4 |
% |
|||||
(1) Amount is net of the allowance for REO losses.
(2) Includes $6.5 million, $3.2 million and $4.4 million in nonperforming assets acquired from Empire and Source Capital outstanding at December 31, 2003, 2002 and 2001, respectively.
(3) Excludes loans classified as loss. Loans classified as loss that are excluded from allowance for loan losses were $2,897,000, $2,067,000, $1,843,000, $803,000 and $275,000 at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. There were no loans classified as loss that are excluded from total nonperforming loans in any of the periods.
Sterling regularly reviews the collectibility of accrued interest and generally ceases to accrue interest on a loan when either principal or interest is past due by 90 days or more. Any accrued and uncollected interest is reversed from income at that time. Loans may be placed in nonaccrual status earlier if, in management’s judgment, the loan may be uncollectible. Interest on such a loan is then recognized as income only if collected or if the loan is restored to performing status. Interest income of $1,025,000, $1,103,000 and $707,000 was recorded on these loans during the years ended December 31, 2003, 2002 and 2001, respectively. Additional interest income of $1,487,000, $778,000 and $762,000 would have been recorded during the years ended December 31, 2003, 2002 and 2001, respectively, if nonaccrual and restructured loans had been current in accordance with their original contractual terms.
9
Allowance for Loan and Real Estate Owned Losses. Generally, Sterling establishes specific allowances for the difference between the anticipated fair value (market value less selling costs, foreclosure costs and projected holding costs), adjusted for other possible sources of repayment, and the book balance (loan principal and accrued interest or carrying value of REO) of its loans classified as loss and REO. Each classified loan and REO property is reviewed at least monthly. Allowances are established or periodically adjusted, if necessary, based on the review of information obtained through on-site inspections, market analysis, appraisals and purchase offers.
The allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and probable losses and inherent risks in the loan portfolio. The allowance is based upon a number of factors, including prevailing and anticipated economic trends, industry experience, estimated collateral values, management’s assessment of credit risk inherent in the portfolio, delinquency trends, historical loss experience, specific problem loans and other relevant factors.
Additions to the allowance, in the form of provisions, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. Because the allowance for loan losses is based on estimates, ultimate losses may materially differ from the estimates. See Note 5 of “Notes to Consolidated Financial Statements.”
Management believes that the allowance for loan losses is adequate given the composition and risks of the loan portfolios, although there can be no assurance that the allowance will be adequate to cover all contingencies. The following table sets forth information regarding changes in Sterling’s allowance for estimated losses on loans for the periods indicated.
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
Balance at beginning of period |
|
$ |
27,866 |
|
$ |
20,599 |
|
$ |
16,740 |
|
$ |
15,603 |
|
$ |
14,623 |
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Mortgage - permanent |
|
(165 |
) |
(48 |
) |
(270 |
) |
(209 |
) |
(483 |
) |
|||||
|
Mortgage - construction |
|
(106 |
) |
(868 |
) |
(756 |
) |
(618 |
) |
(227 |
) |
|||||
|
Consumer - direct |
|
(1,146 |
) |
(954 |
) |
(1,011 |
) |
(1,181 |
) |
(1,434 |
) |
|||||
|
Consumer - indirect |
|
(445 |
) |
(407 |
) |
(544 |
) |
(1,048 |
) |
(925 |
) |
|||||
|
Business, private and corporate banking |
|
(2,391 |
) |
(2,776 |
) |
(2,016 |
) |
(835 |
) |
(103 |
) |
|||||
|
Total charge-offs |
|
(4,253 |
) |
(5,053 |
) |
(4,597 |
) |
(3,891 |
) |
(3,172 |
) |
|||||
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Mortgage - permanent |
|
42 |
|
19 |
|
9 |
|
27 |
|
16 |
|
|||||
|
Mortgage - construction |
|
3 |
|
2 |
|
31 |
|
1 |
|
0 |
|
|||||
|
Consumer - direct |
|
160 |
|
208 |
|
203 |
|
165 |
|
76 |
|
|||||
|
Consumer - indirect |
|
149 |
|
170 |
|
184 |
|
209 |
|
152 |
|
|||||
|
Business, private and corporate banking |
|
268 |
|
54 |
|
29 |
|
26 |
|
8 |
|
|||||
|
Total recoveries |
|
622 |
|
453 |
|
456 |
|
428 |
|
252 |
|
|||||
|
Net charge-offs |
|
(3,631 |
) |
(4,600 |
) |
(4,141 |
) |
(3,463 |
) |
(2,920 |
) |
|||||
|
Provisions for loan losses |
|
10,500 |
|
11,867 |
|
8,000 |
|
4,600 |
|
3,900 |
|
|||||
|
Allowance for losses on assets acquired |
|
870 |
|
0 |
|
0 |
|
0 |
|
0 |
|
|||||
|
Balance at end of period |
|
$ |
35,605 |
|
$ |
27,866 |
|
$ |
20,599 |
|
$ |
16,740 |
|
$ |
15,603 |
|
|
Allowances allocated to loans classified as loss |
|
$ |
2,897 |
|
$ |
2,067 |
|
$ |
1,843 |
|
$ |
803 |
|
$ |
275 |
|
|
Ratio of net charge-offs to average loans outstanding during the period |
|
0.13 |
% |
0.21 |
% |
0.21 |
% |
0.18 |
% |
0.17 |
% |
|||||
10
Allowances are provided for individual loans when management considers ultimate collection to be questionable. Such allowances are based, among other factors, upon the estimated net realizable value of the collateral of the loan or guarantees, if applicable. The following table sets forth the allowances for estimated losses on loans by category and summarizes the percentage of total loans in each category to total loans.
|
|
|
December 31, |
|
|||||||||||||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
|||||||||||||||
|
|
|
Allowance |
|
Loans in |
|
Allowance |
|
Loans in |
|
Allowance |
|
Loans in |
|
Allowance |
|
Loans in |
|
Allowance |
|
Loans in |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Mortgage - permanent |
|
$ |
4,902 |
|
35.2 |
|
$ |
2,881 |
|
40.4 |
|
$ |
2,285 |
|
42.6 |
|
$ |
3,801 |
|
46.3 |
|
$ |
4,837 |
|
47.1 |
|
|
Mortgage - construction |
|
6,336 |
|
18.7 |
|
6,199 |
|
19.9 |
|
3,601 |
|
18.6 |
|
3,903 |
|
19.1 |
|
3,336 |
|
15.9 |
|
|||||
|
Consumer - direct |
|
3,843 |
|
10.5 |
|
2,986 |
|
10.2 |
|
2,812 |
|
11.4 |
|
2,907 |
|
11.8 |
|
2,397 |
|
12.4 |
|
|||||
|
Consumer - indirect |
|
1,676 |
|
3.4 |
|
1,349 |
|
2.5 |
|
1,202 |
|
3.1 |
|
760 |
|
0.9 |
|
938 |
|
5.3 |
|
|||||
|
Business, private and corporate banking |
|
17,979 |
|
32.2 |
|
14,014 |
|
27.0 |
|
10,211 |
|
24.3 |
|
5,166 |
|
21.9 |
|
3,595 |
|
19.3 |
|
|||||
|
Unallocated |
|
869 |
|
N/A |
|
437 |
|
N/A |
|
488 |
|
N/A |
|
203 |
|
N/A |
|
500 |
|
N/A |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
$ |
35,605 |
|
100.0 |
|
$ |
27,866 |
|
100.0 |
|
$ |
20,599 |
|
100.0 |
|
$ |
16,740 |
|
100.0 |
|
$ |
15,603 |
|
100.0 |
|
11
Investments and ABS that management has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. At December 31, 2003 and 2002, investments and ABS classified as held to maturity were $2.2 million and $3.5 million, respectively. Unrealized gains and losses on such investments and ABS are not reported in the Consolidated Financial Statements, as these investments and ABS are held for investment purposes.
Sterling classifies specific investments and ABS as available for sale. Investments classified as available for sale are carried at fair value. Unrealized gains and losses that are considered to be temporary are excluded from earnings and are reported net of deferred income tax as a separate component of accumulated comprehensive income (loss) in shareholders’ equity until such investments and ABS mature or are actually sold. These investments and ABS may be sold in response to changes in market interest rates and related changes in prepayment risk, needs for liquidity, changes in the availability of and the yield on alternative investments and changes in funding sources and terms.
At December 31, 2003 and 2002, investments and ABS classified as available for sale were $1.07 billion and $826.7 million, respectively. The carrying value of these investments and ABS at December 31, 2003 and 2002 includes net unrealized losses of $23.4 million and net unrealized gains of $5.3 million, respectively. Fluctuations in prevailing interest rates continue to cause volatility in this component of accumulated comprehensive income and may continue to do so in future periods.
Sterling invests primarily in ABS issued by FHLMC and FNMA and other agency obligations. Such investments provide Sterling with a relatively liquid source of interest income and collateral which can be used to secure borrowings. Sterling invests primarily in investment-grade investments and ABS. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis”) – Results of Operations – Other Income/Expense” and Note 1 of “Notes to Consolidated Financial Statements.”
12
The following table provides the carrying values, contractual maturities and weighted average yields of Sterling’s investment and ABS portfolio at December 31, 2003. Actual maturities may differ from the contractual maturities, because issuers may have the right to call or prepay obligations with or without prepayment penalties.
|
|
|
Maturity |
|
|||||||||||||
|
|
|
Less than |
|
One to |
|
Over Five
to |
|
Over Ten |
|
Total |
|
|||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance |
|
$ |
0 |
|
$ |
779 |
|
$ |
92,472 |
|
$ |
890,485 |
|
$ |
983,736 |
|
|
Weighted average yield |
|
0.00 |
% |
11.09 |
% |
4.10 |
% |
4.70 |
% |
4.65 |
% |
|||||
|
U.S. government and agency obligations |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance |
|
$ |
4,988 |
|
$ |
8,345 |
|
$ |
0 |
|
$ |
0 |
|
$ |
13,333 |
|
|
Weighted average yield |
|
5.06 |
% |
3.31 |
% |
0.00 |
% |
0.00 |
% |
3.98 |
% |
|||||
|
FHLB Seattle stock, at cost |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
51,261 |
|
$ |
51,261 |
|
|
Weighted average yield (1) |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
5.00 |
% |
5.00 |
% |
|||||
|
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance |
|
$ |
748 |
|
$ |
2,574 |
|
$ |
1,005 |
|
$ |
1,958 |
|
$ |
6,285 |
|
|
Weighted average yield (2) |
|
6.14 |
% |
4.15 |
% |
3.59 |
% |
5.05 |
% |
4.57 |
% |
|||||
|
Other (3) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance |
|
$ |
0 |
|
$ |
0 |
|
$ |
54 |
|
$ |
18,515 |
|
$ |
18,569 |
|
|
Weighted average yield |
|
0.00 |
% |
0.00 |
% |
0.00 |
% |
1.79 |
% |
1.79 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total carrying value |
|
$ |
5,736 |
|
$ |
11,698 |
|
$ |
93,531 |
|
$ |
962,219 |
|
$ |
1,073,184 |
|
|
Weighted average yield |
|
5.20 |
% |
4.01 |
% |
4.10 |
% |
4.67 |
% |
4.62 |
% |
|||||
(1) The weighted average yield on Federal Home Loan Bank of Seattle (“FHLB Seattle”) stock is based upon the dividends received for the year ended December 31, 2003.
(2) The weighted average yields on municipal bonds reflect the actual yields on the bonds and are not presented on a tax-equivalent basis.
(3) Other investments relate primarily to trust-preferred securities.
13
The following table sets forth the carrying values and classifications for financial statement reporting purposes of Sterling’s investment and ABS portfolio at the dates indicated.
|
|
|
December 31, |
|
|||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|
|||
|
Asset-backed securities |
|
$ |
983,736 |
|
$ |
743,610 |
|
$ |
617,569 |
|
|
U.S. government and agency obligations |
|
13,333 |
|
13,666 |
|
7,178 |
|
|||
|
FHLB Seattle stock |
|
51,261 |
|
42,213 |
|
39,699 |
|
|||
|
Municipal bonds |
|
6,285 |
|
3,352 |
|
6,879 |
|
|||
|
Other |
|
18,569 |
|
27,327 |
|
22,723 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
1,073,184 |
|
$ |
830,168 |
|
$ |
694,048 |
|
|
|
|
|
|
|
|
|
|
|||
|
Available for sale |
|
1,070,955 |
|
826,692 |
|
686,995 |
|
|||
|
Held to maturity |
|
2,229 |
|
3,476 |
|
7,053 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Total |
|
$ |
1,073,184 |
|
$ |
830,168 |
|
$ |
694,048 |
|
|
|
|
|
|
|
|
|
|
|||
|
Weighted average yield |
|
4.62 |
% |
4.65 |
% |
5.76 |
% |
|||
General. Sterling’s primary sources of funds for use in lending and for other general business purposes are deposits, loan repayments, FHLB Seattle advances, secured lines of credit and other borrowings, proceeds from sales of investments and ABS and proceeds from sales of loans. Scheduled loan repayments are a relatively stable source of funds, while other sources of funds are influenced significantly by prevailing interest rates, interest rates available on other borrowings and other economic conditions. Borrowings also may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and to match repricing intervals of assets. See “Lending Activities” and “Investments and Asset-Backed Securities.”
Deposit Activities. As a community bank, Sterling offers a variety of accounts for depositors designed to attract both short-term and long-term deposits from the general public. These accounts include money market demand accounts (“MMDA”) and checking accounts in addition to more traditional savings accounts and certificates of deposit (“CDs”) accounts. Sterling offers both interest- and noninterest-bearing checking accounts. The interest-bearing checking accounts can be subject to monthly service charges, unless a minimum balance is maintained. MMDA, CDs and savings accounts earn interest at rates established by management and are based on a competitive market analysis. The method of compounding varies from simple interest credited at maturity to daily compounding, depending on the type of account.
With the exception of certain promotional CDs and variable-rate 18-month Individual Retirement Account certificates, all CDs carry a fixed rate of interest for a defined term from the opening date of the account. Substantial penalties are imposed if principal is withdrawn from most CDs prior to maturity.
Sterling supplements its retail deposit gathering by soliciting funds from public entities and acquiring brokered deposits. Public funds were 13.9% and 14.2% of deposits at December 31, 2003 and 2002, respectively. Public funds are generally obtained by competitive bidding among qualifying financial institutions. Sterling had $114.2 million and $19.6 million of brokered deposits at December 31, 2003 and 2002, respectively.
14
The primary deposit vehicles being utilized by Sterling’s customers are CDs with terms of one year or less, regular savings accounts, money market accounts, commercial checking, or noninterest-bearing demand accounts and negotiable order of withdrawal (“NOW”) accounts. The following table presents the average balance outstanding and weighted average interest rate paid for each major category of deposits for the periods indicated.
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||||||||
|
|
|
Average |
|
Weighted |
|
Average |
|
Weighted |
|
Average |
|
Weighted |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
Time deposits |
|
$ |
1,152,281 |
|
2.54 |
% |
$ |
1,052,792 |
|
3.44 |
% |
$ |
981,243 |
|
5.35 |
% |
|
Regular savings and money market accounts |
|
572,842 |
|
1.15 |
|
364,823 |
|
1.62 |
|
406,551 |
|
2.42 |
|
|||
|
Checking accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
NOW accounts |
|
318,722 |
|
0.31 |
|
335,003 |
|
0.44 |
|
209,020 |
|
0.52 |
|
|||
|
Noninterest-bearing demand accounts |
|
280,990 |
|
0.00 |
|
206,323 |
|
0.00 |
|
129,096 |
|
0.00 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
$ |
2,324,835 |
|
1.58 |
% |
$ |
1,958,941 |
|
2.23 |
% |
$ |
1,725,910 |
|
3.68 |
% |
The following table shows the amounts and remaining maturities of time deposits that had balances of $100,000 or more at December 31, 2003 and 2002.
|
|
|
December 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
|
|
|
|
|
|
||
|
Less than three months |
|
$ |
296,458 |
|
$ |
175,647 |
|
|
Three to six months |
|
113,516 |
|
102,134 |
|
||
|
Six to twelve months |
|
164,436 |
|
149,151 |
|
||
|
Over twelve months |
|
87,859 |
|
59,248 |
|
||
|
|
|
|
|
|
|
||
|
|
|
$ |
662,269 |
|
$ |
486,180 |
|
15
The following table presents the types of deposit accounts and the rates offered by Sterling Savings Bank and the balances in such accounts as of the specified dates.
|
|
|
|
|
December 31, 2003 |
|
December 31, 2002 |
|
||||||||||||||
|
Minimum |
|
Category |
|
Minimum |
|
Amount |
|
Percentage |
|
Interest
Rate |
|
Minimum |
|
Amount |
|
Percentage |
|
Interest
Rate |
|
||
|
|
|
|
|
(Dollars in thousands, except minimum amounts) |
|
||||||||||||||||
|
Transaction Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
None |
|
NOW checking |
|
Varies |
|
$ |
301,197 |
|
12.3 |
|
0.10 |
% |
Varies |
|
$ |
367,391 |
|
18.2 |
|
0.10 |
% |
|
None |
|
Commercial checking |
|
Varies |
|
306,456 |
|
12.5 |
|
0.00 |
|
Varies |
|
239,033 |
|
11.9 |
|
0.00 |
|
||
|
|
|
Total transaction accounts |
|
|
|
607,653 |
|
24.8 |
|
|
|
|
|
606,424 |
|
30.1 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Savings Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
None |
|
Regular savings |
|
100 |
|
118,251 |
|
4.8 |
|
0.40 |
|
100 |
|
89,474 |
|
4.4 |
|
0.50 |
|
||
|
None |
|
Money market demand |
|
1,000 |
|
545,607 |
|
22.2 |
|
1.14 |
|
1,000 |
|
311,865 |
|
15.5 |
|
1.17 |
|
||
|
|
|
Total savings accounts |
|
|
|
663,858 |
|
27.0 |
|
|
|
|
|
401,339 |
|
19.9 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Time Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Less than 90 days |
|
Fixed term, fixed rate |
|
5,000 |
|
2,803 |
|
0.1 |
|
0.50 |
|
5,000 |
|
2,035 |
|
0.1 |
|
0.63 |
|
||
|
3 months |
|
Fixed term, fixed rate |
|
500 |
|
5,772 |
|
0.2 |
|
0.75 |
|
500 |
|
4,099 |
|
0.2 |
|
1.00 |
|
||
|
6 months |
|
Fixed term, fixed rate |
|
500 |
|
34,260 |
|
1.4 |
|
0.85 |
|
500 |
|
123,750 |
|
6.2 |
|
1.14 |
|
||
|
9 months |
|
Fixed term, adjustable rate |
|
5,000 |
|
87,471 |
|
3.6 |
|
0.90 |
|
5,000 |
|
60,291 |
|
3.0 |
|
1.98 |
|
||
|
11 months |
|
Fixed term, fixed rate |
|
500 |
|
49,383 |
|
2.0 |
|
1.24 |
|
500 |
|
70,238 |
|
3.5 |
|
1.24 |
|
||
|
12 months |
|
Fixed term, fixed rate |
|
500 |
|
54,770 |
|
2.2 |
|
0.90 |
|
500 |
|
43,484 |
|
2.2 |
|
1.29 |
|
||
|
12 months |
|
Fixed term, adjustable rate |
|
N/A |
|
2 |
|
0.0 |
|
N/A |
(1) |
N/A |
|
1 |
|
0.0 |
|
N/A |
(1) |
||
|
15 months |
|
Fixed term, adjustable rate |
|
5,000 |
|
75,121 |
|
3.1 |
|
1.00 |
|
5,000 |
|
37,625 |
|
1.9 |
|
1.39 |
|
||
|
18 months |
|
Fixed term, fixed rate |
|
500 |
|
22,812 |
|
0.9 |
|
1.49 |
|
500 |
|
38,806 |
|
1.9 |
|
1.49 |
|
||
|
24 months |
|
Fixed term, fixed rate |
|
500 |
|
32,326 |
|
1.3 |
|
1.83 |
|
500 |
|
28,765 |
|
1.4 |
|
1.98 |
|
||
|
36 months |
|
Fixed term, fixed rate |
|
500 |
|
120,333 |
|
4.9 |
|
2.52 |
|
500 |
|
123,439 |
|
6.1 |
|
2.72 |
|
||
|
Greater than 36 months |
|
Fixed term, fixed rate |
|
500 |
|
204,662 |
|
8.3 |
|
3.06 |
|
500 |
|
139,259 |
|
6.9 |
|
3.30 |
|
||
|
18 months |
|
Variable rate, IRA |
|
100 |
|
4,214 |
|
0.2 |
|
1.53 |
|
100 |
|
4,911 |
|
0.2 |
|
1.79 |
|
||
|
18 months |
|
Fixed rate, IRA |
|
500 |
|
6,460 |
|
0.3 |
|
1.24 |
|
500 |
|
2,427 |
|
0.1 |
|
1.39 |
|
||
|
36 months |
|
Variable rate, IRA |
|
2,000 |
|
10,491 |
|
0.4 |
|
N/A |
(1) |
2,000 |
|
13,401 |
|
0.7 |
|
N/A |
(1) |
||
|
9 months |
|
Mini-jumbos |
|
80,000 |
|
5,442 |
|
0.2 |
|
1.05 |
|
80,000 |
|
6,257 |
|
0.3 |
|
1.20 |
|
||
|
6 months |
|
Jumbos |
|
100,000 |
|
353,059 |
|
14.4 |
|
1.10 |
|
100,000 |
|
287,910 |
|
14.3 |
|
1.30 |
|
||
|
Less than 1 year |
|
Brokered |
|
N/A |
|
114,184 |
|
4.7 |
|
1.33 |
|
N/A |
|
19,635 |
|
1.0 |
|
1.65 |
|
||
|
|
|
Total time deposits |
|
|
|
1,183,565 |
|
48.2 |
|
|
|
|
|
1,006,333 |
|
50.0 |
|
|
|
||
|
|
|
Total deposits |
|
|
|
$ |
2,455,076 |
|
100.0 |
|
|
|
|
|
$ |
2,014,096 |
|
100.0 |
|
|
|
(1) Not currently offered.
16
The following table sets forth the composition of Sterling’s deposit accounts at the dates indicated.
|
|
|
December 31, |
|
||||||||
|
|
|
2003 |
|
2002 |
|
||||||
|
|
|
Amount |
|
Percentage |
|
Amount |
|
Percentage |
|
||
|
|
|
(Dollars in thousands) |
|
||||||||
|
|
|
|
|
||||||||
|
NOW checking |
|
$ |
301,197 |
|
12.3 |
|
$ |
367,391 |
|
18.2 |
|
|
Commercial checking |
|
306,456 |
|
12.5 |
|
239,033 |
|
11.9 |
|
||
|
Regular savings |
|
118,251 |
|
4.8 |
|
89,474 |
|
4.4 |
|
||
|
Money market demand |
|
545,607 |
|
22.2 |
|
311,865 |
|
15.5 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Variable-rate time deposits: |
|
|
|
|
|
|
|
|
|
||
|
9-36 months |
|
177,300 |
|
7.2 |
|
116,229 |
|
5.8 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Fixed-rate time deposits: |
|
|
|
|
|
|
|
|
|
||
|
1-11 months |
|
564,903 |
|
23.0 |
|
513,924 |
|
25.5 |
|
||
|
12-35 months |
|
165,920 |
|
6.8 |
|
113,482 |
|
5.6 |
|
||
|
36-240 months |
|
275,442 |
|
11.2 |
|
262,698 |
|
13.1 |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
Total deposits |
|
$ |
2,455,076 |
|
100.0 |
|
$ |
2,014,096 |
|
100.0 |
|
Substantially all of Sterling’s depositors are residents of the States of Washington, Oregon, Idaho and Montana. Sterling has 66 automated teller machines (“ATM”) to better serve customers in those markets. Customers also can access ATMs operated by other financial institutions. Sterling is a member of The Exchange, an ATM system that allows participating customers to deposit or withdraw funds from NOW accounts, MMDA and savings accounts throughout the United States and Canada. Sterling is also a member of the Plus System ATM network, with numerous locations in the United States and internationally.
Borrowings. Deposit accounts are Sterling’s primary source of funds. Sterling does, however, rely upon advances from the FHLB Seattle and reverse repurchase agreements to supplement its funding and to meet deposit withdrawal requirements. See “Management’s Discussion and Analysis – Liquidity and Capital Resources.”
The FHLB Seattle is part of a system, which consists of 12 regional Federal Home Loan Banks (the “FHL Banks”) each subject to Federal Housing Finance Board supervision and regulation, that functions as a central reserve bank providing credit to savings institutions. As a condition of membership in the FHLB Seattle, Sterling is required to own stock of the FHLB Seattle in an amount determined by a formula based upon Sterling’s total mortgages outstanding or total advances from the FHLB Seattle. At December 31, 2003, Sterling exceeded the minimum FHLB Seattle stock ownership requirement. The stock of the FHLB Seattle always has been redeemable at par value, but there can be no assurance that this always will be the case.
As a member of the FHLB Seattle, Sterling Savings Bank can apply for advances on the security of its FHLB Seattle stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States or its agencies), provided certain standards related to creditworthiness, including a minimum ratio of total capital assets of at least five percent, are met. Each available credit program has its own interest rate and range of maturities. At December 31, 2003, Sterling had advances totaling $1.03 billion from the FHLB Seattle which mature from 2004 through 2015 at interest rates ranging from 1.14% to 8.40%. See “Management’s Discussion and Analysis – Liquidity and Capital Resources” and Note 9 of “Notes to Consolidated Financial Statements.”
Sterling also borrows funds under reverse repurchase agreements pursuant to which it sells investments (generally U.S. agency and ABS) under an agreement to buy them back at a specified price at a later date. These agreements to repurchase are deemed to be borrowings collateralized by the investments and ABS sold. Sterling uses these borrowings to supplement deposit gathering for funding the origination of loans. Sterling had $360.6 million and $249.8 million in wholesale and retail reverse repurchase agreements outstanding at December 31, 2003 and 2002, respectively. The use of reverse repurchase agreements may expose Sterling to certain risks not associated with other
17
borrowings, including IRR and the possibility that additional collateral may have to be provided if the market value of the pledged collateral declines. For additional information regarding reverse repurchase agreements, see “Management’s Discussion and Analysis – Asset and Liability Management,” “Management’s Discussion and Analysis – Liquidity and Capital Resources” and Note 10 of “Notes to Consolidated Financial Statements.”
Other Borrowings. Sterling has a variable-rate term note with U.S. Bank, N.A. (“U.S. Bank”) with a balance of $22.0 million outstanding at December 31, 2003. This note matures on September 17, 2007. Interest accrues at the 30-day London Interbank Offering Rate (“LIBOR”) plus 2.00% and is payable monthly. Sterling also has a $5.0 million revolving line of credit with U.S. Bank. This line of credit matures on September 15, 2004. The interest rate is adjustable monthly at the 30-day LIBOR plus 2.00% and is payable monthly. At December 31, 2003, no amounts were outstanding on the line of credit. The term note and line of credit are collateralized by a majority of the Common and Preferred Stock of Sterling Savings Bank. See Note 11 of “Notes to Consolidated Financial Statements.”
At December 31, 2003, Sterling had outstanding $78.0 million in various series of Trust Preferred Securities issued to investors. See Note 11 of “Notes to Consolidated Financial Statements.”
Sterling has outstanding $30.0 million of Floating Rate Notes Due 2006. Interest accrues at the 90-day LIBOR plus 2.50% and is adjustable and payable quarterly. The notes mature in 2006 and may be redeemed under certain conditions. See Note 11 of “Notes to Consolidated Financial Statements.”
The following table sets forth certain information regarding Sterling’s short-term borrowings as of and for the periods indicated.
|
|
|
Years Ended December 31, |
|
|||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|
|||
|
Maximum amount outstanding at any month-end during the period: |
|
|
|
|
|
|
|
|||
|
Short-term reverse repurchase agreements |
|
$ |
285,637 |
|
$ |
154,769 |
|
$ |
115,971 |
|
|
Short-term advances |
|
372,500 |
|
238,975 |
|
115,648 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Average amount outstanding during the period: |
|
|
|
|
|
|
|
|||
|
Short-term reverse repurchase agreements |
|
56,518 |
|
45,728 |
|
66,718 |
|
|||
|
Short-term advances |
|
197,500 |
|
55,641 |
|
96,544 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Weighted average interest rate paid during the period: |
|
|
|
|
|
|
|
|||
|
Short-term reverse repurchase agreements |
|
1.82 |
% |
1.85 |
% |
3.56 |
% |
|||
|
Short-term advances |
|
2.73 |
% |
4.69 |
% |
5.71 |
% |
|||
|
|
|
|
|
|
|
|
|
|||
|
Weighted average interest rate paid at end of period: |
|
|
|
|
|
|
|
|||
|
Short-term reverse repurchase agreements |
|
1.59 |
% |
1.83 |
% |
2.68 |
% |
|||
|
Short-term advances |
|
2.51 |
% |
3.69 |
% |
5.06 |
% |
|||
18
The following table sets forth certain information concerning Sterling’s outstanding borrowings for the periods indicated.
|
|
|
December 31, |
|
|||||||||||||
|
|
|
2003 |
|
2002 |
|
2001 |
|
|||||||||
|
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|||
|
|
|
(Dollars in thousands) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
FHLB Seattle advances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Short-term |
|
$ |
408,685 |
|
26.8 |
|
$ |
238,975 |
|
19.1 |
|
$ |
117,376 |
|
12.0 |
|
|
Long-term |
|
617,346 |
|
40.5 |
|
635,540 |
|
50.8 |
|
515,678 |
|
52.6 |
|
|||
|
Securities sold subject to reverse repurchase agreements and funds purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Short-term |
|
288,137 |
|
18.9 |
|
154,769 |
|
12.3 |
|
114,999 |
|
11.7 |
|
|||
|
Long-term |
|
75,000 |
|
4.9 |
|
95,000 |
|
7.6 |
|
103,550 |
|
10.6 |
|
|||
|
Convertible Subordinated Debt |
|
0 |
|
0.0 |
|
0 |
|
0.0 |
|
3,500 |
|
0.4 |
|
|||
|
Floating Rate Notes Due 2006 |
|
30,000 |
|
2.0 |
|
30,000 |
|
2.4 |
|
30,000 |
|
3.1 |
|
|||
|
Term note payable |
|
22,000 |
|
1.4 |
|
25,000 |
|
2.0 |
|
30,000 |
|
3.1 |
|
|||
|
Trust Preferred Securities |
|
78,000 |
|
5.1 |
|
64,000 |
|
5.1 |
|
64,000 |
|
6.5 |
|
|||
|
Other |
|
5,583 |
|
0.4 |
|
8,682 |
|
0.7 |
|
0 |
|
0.0 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total borrowings |
|
$ |
1,524,751 |
|
100.0 |
|
$ |
1,251,966 |
|
100.0 |
|
$ |
979,103 |
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Weighted average interest rate at end of period |
|
|
|
3.40 |
% |
|
|
4.50 |
% |
|
|
5.52 |
% |
|||
Sterling’s principal subsidiary is Sterling Savings Bank. Sterling Savings Bank has three principal subsidiaries which have been previously described: Action Mortgage, INTERVEST and Harbor Financial. Additionally, Sterling and Sterling Savings Bank have the following other wholly-owned, direct subsidiaries:
Sterling Financial Corporation.
(1) Sterling Capital Trust II (“Trust-II”) was organized in July 2001 as a Delaware business trust. Sterling owns all the common equity of Trust-II. The sole asset of Trust-II is the Junior Subordinated Debentures-II issued by Sterling. See Note 11 of “Notes to Consolidated Financial Statements.”
(2) Sterling Capital Trust III (“Trust-III”) was organized in April 2003 as a Delaware business trust. Sterling owns all the common equity of Trust-III. The sole asset of Trust-III is the Junior Subordinate Debentures-III issued by Sterling. See Note 11 of “Notes to Consolidated Financial Statements.”
(3) Sterling Capital Trust IV (“Trust-IV”) was organized in May 2003 as a Delaware business trust. Sterling owns all the common equity of Trust-IV. The sole asset of Trust-IV is the Junior Subordinate Debentures-IV issued by Sterling. See Note 11 of “Notes to Consolidated Financial Statements.”
(4) Sterling Capital Statutory Trust V (“Trust-V”) was organized in May 2003 as a Connecticut business trust. Sterling owns all the common equity of Trust-V. The sole asset of Trust-V is the Junior Subordinate Debentures-V issued by Sterling. See Note 11 of “Notes to Consolidated Financial Statements.”
(5) Sterling Capital Trust VI (“Trust-VI”) was organized in June 2003 as a Delaware business trust. Sterling owns all the common equity of Trust-VI. The sole asset of Trust-VI is the Junior Subordinate Debentures-VI issued by Sterling. See Note 11 of “Notes to Consolidated Financial Statements.”
19
(6) Tri-Cities Mortgage Corporation was organized to engage in real estate development.
Sterling Savings Bank.
(1) Fidelity Service Corporation was organized to acquire and sell real and personal property in Washington and Idaho.
(2) Evergreen Environmental Development Corporation was organized to engage in real estate development.
(3) Tri-West Mortgage, Inc. was organized to engage in mortga