UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): June 17, 2014
Umpqua Holdings Corporation
(Exact Name of Registrant as Specified in Its Charter)
Oregon |
|
001-34624 |
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93-1261319 |
(State or Other Jurisdiction of Incorporation) |
|
(Commission File Number) |
|
(IRS Employer Identification No.) |
One SW Columbia, Suite 1200
Portland, Oregon 97258
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number, Including Area Code: (503) 727-4100
Not Applicable
Former Name or Former Address, if Changed Since Last Report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 8.01. Other Events.
As previously announced, on April 18, 2014, Umpqua Holdings Corporation, an Oregon corporation (Umpqua), completed its previously announced merger (the Merger) with Sterling Financial Corporation, a Washington corporation (Sterling) pursuant to an Agreement and Plan of Merger, dated September 11, 2013, between Umpqua and Sterling. At the closing of the Merger, Sterling merged with and into Umpqua, with Umpqua surviving the Merger as the surviving corporation.
Attached hereto as Exhibits 99.1 and 99.2, and incorporated herein by reference are, respectively, (i) the unaudited and unreviewed consolidated balance sheets of Sterling and subsidiaries as of March 31, 2014 and December 31, 2013, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three months ended March 31, 2014 and 2013, as well as the accompanying notes thereto and (ii) unaudited pro forma condensed combined financial statements of Umpqua and Sterling, as of and for the three months ended March 31, 2014, reflecting the Merger.
Forward-Looking Statements
This Form 8-K includes forward-looking statements within the meaning of the Safe-Harbor provisions of the Private Securities Litigation Reform Act of 1995, which management believes are a benefit to shareholders. These statements are necessarily subject to risk and uncertainty and actual results could differ materially due to various risk factors, including those set forth from time to time in our filings with the SEC. You should not place undue reliance on forward-looking statements and we undertake no obligation to update any such statements. In this Form 8-K we make forward-looking statements regarding the size and growth potential from the Merger; cost savings and other synergies expected to result from the Merger; and the financial and accounting impact of the Merger and related integration activities. Specific risks that could cause results to differ from the forward-looking statements are set forth in our filings with the SEC and include, without limitation, changes in the discounted cash flow model used to determine the fair value of Sterlings assets, prolonged low interest rate environment, unanticipated weakness in loan demand or loan pricing, deterioration in the economy, material reductions in revenue or material increases in expenses, lack of strategic growth opportunities or our failure to execute on those opportunities, our inability to effectively manage problem credits, certain loan assets becoming ineligible for loss sharing, unanticipated increases in the cost of deposits; Umpquas ability to achieve the synergies and earnings accretion contemplated by the merger; Umpquas ability to promptly and effectively integrate the businesses of Sterling and Umpqua; the diversion of management time on issues related to merger integration; changes in laws or regulations; and changes in general economic conditions.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit |
|
Description |
99.1 |
|
Unaudited and Unreviewed Consolidated balance sheets of Sterling Financial Corporation and subsidiaries as of March 31, 2014 and December 31, 2013, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three months ended March 31, 2014 and 2013, as well as the accompanying notes thereto |
|
|
|
99.2 |
|
Unaudited Pro Forma Condensed Consolidated Financial Statements of Umpqua Holdings Corporation and Sterling Financial Corporation as of and for the three months ended March 31, 2014 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Umpqua Holdings Corporation | |
|
| |
|
| |
Date: June 17, 2014 |
By: |
/s/ Andrew H. Ognall |
|
Name: |
Andrew H. Ognall |
|
Title: |
Executive Vice President, General Counsel and Secretary |
EXHIBIT INDEX
Exhibit |
|
Description |
99.1 |
|
Unaudited and Unreviewed Consolidated balance sheets of Sterling Financial Corporation and subsidiaries as of March 31, 2014 and December 31, 2013, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three months ended March 31, 2014 and 2013, as well as the accompanying notes thereto |
|
|
|
99.2 |
|
Unaudited Pro Forma Condensed Consolidated Financial Statements of Umpqua Holdings Corporation and Sterling Financial Corporation as of and for the three months ended March 31, 2014 |
Exhibit 99.1
TABLE OF CONTENTS
March 31, 2014
|
|
Page |
Financial Information |
| |
|
| |
|
Financial Statements (Unaudited and Unreviewed) |
|
|
Consolidated Balance Sheets |
2 |
|
Consolidated Statements of Income |
3 |
|
Consolidated Statements of Comprehensive Income |
4 |
|
Consolidated Statements of Cash Flows |
5 |
|
Notes to Consolidated Financial Statements |
6 |
|
1 - Basis of Presentation |
6 |
|
2 - Business Combinations |
7 |
|
3 - Investments and MBS |
10 |
|
4 - Loans Receivable and Allowance for Credit Losses |
11 |
|
5 - Goodwill and Other Intangible Assets |
21 |
|
6 - Junior Subordinated Debentures |
22 |
|
7 - Earnings Per Share |
23 |
|
8 - Noninterest Expense |
23 |
|
9 - Income Taxes |
24 |
|
10 - Stock Based Compensation |
24 |
|
11 - Derivatives and Hedging |
25 |
|
12 - Offsetting Assets and Liabilities |
26 |
|
13 - Fair Value |
26 |
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14 - Regulatory Capital |
31 |
|
15 - Segment Information |
31 |
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16 - Commitments and Contingencies |
32 |
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17 - Subsequent Event |
33 |
STERLING FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED AND UNREVIEWED)
(in thousands, except shares)
|
|
March 31, |
|
December 31, |
| ||
ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents: |
|
|
|
|
| ||
Interest bearing |
|
$ |
329,916 |
|
$ |
428,746 |
|
Noninterest bearing |
|
106,650 |
|
109,942 |
| ||
Total cash and cash equivalents |
|
436,566 |
|
538,688 |
| ||
Restricted cash |
|
7,000 |
|
6,747 |
| ||
Investments and mortgage-backed securities (MBS): |
|
|
|
|
| ||
Available for sale |
|
1,386,382 |
|
1,429,812 |
| ||
Held to maturity |
|
154 |
|
165 |
| ||
Loans held for sale ($146,336 and $138,952 at fair value) |
|
229,084 |
|
138,952 |
| ||
Loans receivable, net ($25,741 and $26,462 at fair value) |
|
7,285,163 |
|
7,331,228 |
| ||
Accrued interest receivable |
|
28,896 |
|
28,493 |
| ||
Other real estate owned, net (OREO) |
|
7,891 |
|
8,047 |
| ||
Properties and equipment, net |
|
98,095 |
|
101,610 |
| ||
Bank-owned life insurance (BOLI) |
|
193,015 |
|
191,553 |
| ||
Goodwill |
|
52,018 |
|
52,018 |
| ||
Other intangible assets, net |
|
14,342 |
|
15,561 |
| ||
Mortgage servicing rights, net |
|
59,955 |
|
60,100 |
| ||
Deferred tax asset, net |
|
275,502 |
|
284,059 |
| ||
Other assets, net |
|
134,474 |
|
132,216 |
| ||
Total assets |
|
$ |
10,208,537 |
|
$ |
10,319,249 |
|
LIABILITIES: |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest bearing |
|
1,896,353 |
|
$ |
1,881,360 |
| |
Interest bearing |
|
5,236,517 |
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5,193,630 |
| ||
Total deposits |
|
7,132,870 |
|
7,074,990 |
| ||
Advances from Federal Home Loan Bank (FHLB) |
|
976,059 |
|
1,146,103 |
| ||
Securities sold under repurchase agreements |
|
539,972 |
|
531,679 |
| ||
Junior subordinated debentures |
|
245,300 |
|
245,299 |
| ||
Accrued interest payable |
|
4,073 |
|
4,284 |
| ||
Accrued expenses and other liabilities |
|
99,055 |
|
100,947 |
| ||
Total liabilities |
|
8,997,329 |
|
9,103,302 |
| ||
SHAREHOLDERS EQUITY: |
|
|
|
|
| ||
Preferred stock, 10,000,000 shares authorized; no shares outstanding |
|
0 |
|
0 |
| ||
Common stock, 151,515,151 shares authorized; 62,452,826 and 62,363,741 shares outstanding, respectively |
|
1,972,921 |
|
1,972,457 |
| ||
Accumulated other comprehensive income |
|
27,273 |
|
19,857 |
| ||
Accumulated deficit |
|
(788,986 |
) |
(776,367 |
) | ||
Total shareholders equity |
|
1,211,208 |
|
1,215,947 |
| ||
Total liabilities and shareholders equity |
|
$ |
10,208,537 |
|
$ |
10,319,249 |
|
See notes to consolidated financial statements.
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND UNREVIEWED)
(in thousands, except share amounts)
|
|
Three Months Ended |
| ||||
|
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March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
Interest income: |
|
|
|
|
| ||
Loans |
|
$ |
86,153 |
|
$ |
81,187 |
|
MBS |
|
8,261 |
|
7,297 |
| ||
Investments and cash equivalents |
|
2,252 |
|
2,273 |
| ||
Total interest income |
|
96,666 |
|
90,757 |
| ||
Interest expense: |
|
|
|
|
| ||
Deposits |
|
5,153 |
|
6,307 |
| ||
Short-term borrowings |
|
145 |
|
446 |
| ||
Long-term borrowings |
|
7,680 |
|
7,110 |
| ||
Total interest expense |
|
12,978 |
|
13,863 |
| ||
Net interest income |
|
83,688 |
|
76,894 |
| ||
Provision for credit losses |
|
0 |
|
0 |
| ||
Net interest income after provision for credit losses |
|
83,688 |
|
76,894 |
| ||
Noninterest income: |
|
|
|
|
| ||
Fees and service charges |
|
14,632 |
|
14,130 |
| ||
Mortgage banking operations |
|
7,788 |
|
13,794 |
| ||
BOLI |
|
1,461 |
|
1,557 |
| ||
Gains on sales of securities |
|
0 |
|
0 |
| ||
Gains on other loan sales |
|
2,641 |
|
25 |
| ||
Other |
|
(6,312 |
) |
8,060 |
| ||
Total noninterest income |
|
20,210 |
|
37,566 |
| ||
Noninterest expense |
|
85,165 |
|
81,929 |
| ||
Income before income taxes |
|
18,733 |
|
32,531 |
| ||
Income tax provision |
|
(6,380 |
) |
(9,853 |
) | ||
Net income |
|
$ |
12,353 |
|
$ |
22,678 |
|
Earnings per share - basic |
|
$ |
0.20 |
|
$ |
0.36 |
|
Earnings per share - diluted |
|
$ |
0.19 |
|
$ |
0.36 |
|
Dividends declared per share |
|
$ |
0.40 |
|
$ |
0.00 |
|
Weighted average shares outstanding - basic |
|
62,398,357 |
|
62,242,183 |
| ||
Weighted average shares outstanding - diluted |
|
63,730,740 |
|
63,004,784 |
|
See notes to consolidated financial statements.
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED AND UNREVIEWED)
(in thousands)
|
|
|
|
Three Months Ended |
| ||||||||
|
|
|
|
March 31, |
| ||||||||
|
|
|
|
2014 |
|
|
|
2013 |
| ||||
Net income |
|
|
|
$ |
12,353 |
|
|
|
$ |
22,678 |
| ||
Beginning balance, accumulated other comprehensive income |
|
$ |
19,857 |
|
|
|
$ |
60,712 |
|
|
| ||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| ||||
Change in unrealized gains on investments and MBS available for sale |
|
|
|
11,771 |
|
|
|
(7,359 |
) | ||||
Less deferred income tax (provision) benefit |
|
|
|
(4,355 |
) |
|
|
2,723 |
| ||||
Net other comprehensive income (loss) |
|
|
|
7,416 |
|
|
|
(4,636 |
) | ||||
Ending balance, accumulated other comprehensive income |
|
$ |
27,273 |
|
|
|
$ |
56,076 |
|
|
| ||
Comprehensive income |
|
|
|
$ |
19,769 |
|
|
|
$ |
18,042 |
|
For the periods presented, accumulated other comprehensive income was comprised solely of unrealized market value adjustments on available for sale securities.
See notes to consolidated financial statements.
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND UNREVIEWED)
(in thousands)
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
12,353 |
|
$ |
22,678 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Net gain on sales of loans |
|
(9,213 |
) |
(10,614 |
) | ||
Net (gain) loss on mortgage servicing rights |
|
96 |
|
(2,834 |
) | ||
Stock based compensation |
|
1,095 |
|
632 |
| ||
Loss on OREO |
|
436 |
|
214 |
| ||
Increase in cash surrender value of BOLI |
|
(1,447 |
) |
(1,461 |
) | ||
Depreciation and amortization |
|
10,152 |
|
10,692 |
| ||
Bargain purchase gain |
|
0 |
|
(7,544 |
) | ||
Loss on pending sale of branches |
|
7,000 |
|
0 |
| ||
Change in: |
|
|
|
|
| ||
Accrued interest receivable |
|
(403 |
) |
(2,253 |
) | ||
Prepaid expenses and other assets |
|
(944 |
) |
2,148 |
| ||
Accrued interest payable |
|
(211 |
) |
(419 |
) | ||
Accrued expenses and other liabilities |
|
(14,385 |
) |
(47,044 |
) | ||
Proceeds from sales of loans originated for sale |
|
300,624 |
|
797,735 |
| ||
Loans originated for sale |
|
(303,269 |
) |
(631,632 |
) | ||
Net cash provided by operating activities |
|
1,884 |
|
130,298 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Change in restricted cash |
|
(253 |
) |
16,826 |
| ||
Net change in loans |
|
(189,161 |
) |
(129,515 |
) | ||
Proceeds from sales of loans |
|
147,523 |
|
2,190 |
| ||
Proceeds from maturities of investment securities |
|
12,896 |
|
169 |
| ||
Purchase of MBS |
|
0 |
|
(76,590 |
) | ||
Principal payments received on MBS |
|
40,842 |
|
108,098 |
| ||
Office properties and equipment, net |
|
(1,230 |
) |
(5,537 |
) | ||
Improvements and other changes to OREO |
|
11 |
|
(125 |
) | ||
Proceeds from sales of OREO |
|
2,327 |
|
6,738 |
| ||
Net change in cash and cash equivalents from acquisitions |
|
0 |
|
6,877 |
| ||
Net cash provided (used in) by investing activities |
|
|
12,955 |
|
|
(70,869 |
) |
Cash flows from financing activities: |
|
|
|
|
| ||
Net change in deposits |
|
|
57,880 |
|
|
43,499 |
|
Advances from FHLB |
|
125,000 |
|
225,000 |
| ||
Repayment of advances from FHLB |
|
(295,026 |
) |
(290,054 |
) | ||
Net change in short term repurchase agreements |
|
8,293 |
|
(5,801 |
) | ||
Payments under structured repurchase agreements |
|
0 |
|
(50,000 |
) | ||
Proceeds from stock issuance, net |
|
(631 |
) |
413 |
| ||
Cash dividends paid |
|
(12,477 |
) |
0 |
| ||
Net cash used in financing activities |
|
(116,961 |
) |
(76,943 |
) | ||
Net change in cash and cash equivalents |
|
(102,122 |
) |
(17,514 |
) | ||
Cash and cash equivalents, beginning of period |
|
538,688 |
|
299,878 |
| ||
Cash and cash equivalents, end of period |
|
$ |
436,566 |
|
$ |
282,364 |
|
Supplemental disclosures: |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest |
|
$ |
13,189 |
|
$ |
14,247 |
|
Income taxes, net |
|
2,215 |
|
687 |
| ||
Noncash financing and investing activities: |
|
|
|
|
| ||
Foreclosed real estate acquired in settlement of loans |
|
2,618 |
|
6,764 |
| ||
Common stock cash dividend accrued |
|
12,494 |
|
0 |
|
See notes to consolidated financial statements.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
1. Basis of Presentation:
The foregoing unaudited and unreviewed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited and unreviewed interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements as disclosed in the annual report on Form 10-K for the year ended December 31, 2013. References to Sterling, in this report are to Sterling Financial Corporation, a Washington corporation, and its consolidated subsidiaries on a combined basis, unless otherwise specified or the context otherwise requires. References to Sterling Bank refer to our subsidiary Sterling Savings Bank, a Washington state-chartered commercial bank. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Sterlings consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Sterlings consolidated financial position and results of operations.
In addition to other established accounting policies, the following is a discussion of recent accounting pronouncements:
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of such obligations. ASU 2013-04 is effective for fiscal years beginning after December 15, 2013, and did not have a material impact on Sterlings consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013, and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU No. 2013-11 did not have a material impact on Sterlings consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-04 permits an entity to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and should be applied prospectively. The adoption of ASU No. 2014-01 is not expected to have a material impact on Sterlings consolidated financial statements.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU No. 2014-04 is not expected to have a material impact on Sterlings consolidated financial statements.
2. Business Combinations:
Commerce National Bank. On October 1, 2013, Sterling paid $42.9 million in cash to acquire Commerce National Bank (CNB). The following table summarizes the amounts recorded at closing:
|
|
October 1, 2013 |
| |
|
|
(in thousands) |
| |
Cash and cash equivalents |
|
$ |
8,555 |
|
Investments and MBS |
|
69,353 |
| |
Loans receivable, net |
|
161,043 |
| |
Goodwill |
|
15,384 |
| |
Core deposit intangible |
|
1,160 |
| |
Other assets |
|
5,325 |
| |
Total assets acquired |
|
$ |
260,820 |
|
Deposits |
|
$ |
189,563 |
|
Advances from FHLB |
|
25,000 |
| |
Other liabilities |
|
3,350 |
| |
Total liabilities assumed |
|
217,913 |
| |
Net assets acquired |
|
$ |
42,907 |
|
The recorded goodwill represents the inherent value of the CNB transaction, as a result of the expected enhancement of Sterlings operations in Southern California. The amount of goodwill deductible for income tax purposes is approximately equivalent to the recorded book value. The core deposit intangible has an amortization period of approximately ten years and will be amortized on an accelerated basis. The fair value of assets acquired and liabilities assumed are presented above.
As of October 1, 2013, the unpaid principal balance and contractual interest (contractual cash flows) on purchased loans was $164.2 million. Sterling estimated that $3.7 million of these cash flows would be uncollectable, resulting in a combined credit and interest rate discount of $3.8 million being recorded on these loans. As of the acquisition date, the amount of loans purchased from CNB that exhibited evidence of credit deterioration was immaterial.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
Boston Private Bank and Trust Company. On May 10, 2013, Sterling paid $123.0 million in cash to acquire the Puget Sound operations of Boston Private Bank & Trust Company (Boston Private). The Boston Private Puget Sound offices were located in Seattle, Bellevue and Redmond, Washington. Upon acquisition, the Boston Private Seattle branch was consolidated into one of Sterlings existing Seattle branches. The following table summarizes the amounts recorded at closing:
|
|
May 10, 2013 |
| |
|
|
(in thousands) |
| |
Cash and cash equivalents |
|
$ |
340 |
|
Loans receivable, net |
|
273,353 |
| |
Goodwill |
|
14,056 |
| |
Core deposit intangible |
|
1,674 |
| |
Other assets |
|
2,721 |
| |
Total assets acquired |
|
$ |
292,144 |
|
Deposits |
|
$ |
168,246 |
|
Other liabilities |
|
913 |
| |
Total liabilities assumed |
|
169,159 |
| |
Net assets acquired |
|
$ |
122,985 |
|
The recorded goodwill represents the inherent value of the Boston Private transaction, which expands Sterlings presence in the Puget Sound market through the addition of two branch offices and the associated customer relationships. The additional branches are along the I-5 corridor, which Sterling identified as its primary focus for growth. The amount of goodwill deductible for income tax purposes is approximately equivalent to the recorded book value. The core deposit intangible will be amortized on an accelerated basis over approximately ten years.
As of May 10, 2013, the contractual cash flows on purchased loans was $280.7 million. Sterling estimated that $3.5 million of these cash flows would be uncollectable, resulting in a combined credit and interest rate discount of $5.1 million being recorded on these loans. As of the acquisition date, none of the loans purchased from Boston Private exhibited evidence of credit deterioration.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
American Heritage Holdings. On February 28, 2013, Sterling paid $6.5 million in cash and paid off an existing note payable of $2.2 million for a total of $8.7 million in consideration to acquire American Heritage Holdings, the holding company for Borrego Springs Bank, N.A. (Borrego). Immediately following the acquisition, Borrego was merged with and into Sterlings principal operating subsidiary, Sterling Bank, with Borregos operations continuing under the registered trade name of Borrego Springs Bank. As a result of this transaction, Sterling has expanded its SBA lending platform and added depository branches in Southern California. The following table summarizes the amounts recorded at closing:
|
|
February 28, 2013 |
| |
|
|
(in thousands) |
| |
Cash and cash equivalents |
|
|
15,626 |
|
Investments and MBS |
|
1,030 |
| |
Loans receivable, net |
|
97,262 |
| |
Core deposit intangible |
|
453 |
| |
Other assets |
|
27,197 |
| |
Total assets acquired |
|
$ |
141,568 |
|
Deposits |
|
$ |
118,221 |
|
Other liabilities |
|
7,054 |
| |
Total liabilities assumed |
|
125,275 |
| |
Net assets acquired |
|
16,293 |
| |
Consideration paid |
|
8,749 |
| |
Bargain purchase gain |
|
$ |
7,544 |
|
We recognized a bargain purchase gain of $7.5 million in the transaction for the net assets acquired in excess of the purchase price, primarily due to limited market for Borregos assets, in addition to Borregos regulatory and capital constraints. The bargain purchase gain is included in other noninterest income on the income statement for the three months ended March 31, 2013. The core deposit intangible has a weighted average amortization period of ten years and will be amortized on an accelerated basis. On the acquisition date of February 28, 2013, the contractual cash flows of purchased impaired loans, which are described in Note 4, from Borrego were $16.1 million, cash flows expected to be collected were $13.6 million, and the fair value of the loans was $11.9 million, with $9.8 million of these loans being guaranteed by government agencies.
As of February 28, 2013, the unpaid principal balance and contractual interest (contractual cash flows) on purchased loans that had not exhibited evidence of credit deterioration was $83.3 million. Sterling estimated that $3.9 million of these cash flows would be uncollectable, resulting in a combined credit and interest rate discount of $4.5 million being recorded on these loans.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
3. Investments and MBS:
The carrying and fair values of investments and MBS are summarized as follows:
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair Value |
| ||||
|
|
(in thousands) |
| ||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
|
|
|
|
|
|
|
| ||||
MBS |
|
$ |
1,206,561 |
|
$ |
14,798 |
|
$ |
(15,199 |
) |
$ |
1,206,160 |
|
Municipal bonds |
|
171,787 |
|
8,639 |
|
(426 |
) |
180,000 |
| ||||
Other |
|
213 |
|
9 |
|
0 |
|
222 |
| ||||
Total |
|
$ |
1,378,561 |
|
$ |
23,446 |
|
$ |
(15,625 |
) |
$ |
1,386,382 |
|
Held to maturity |
|
|
|
|
|
|
|
|
| ||||
Tax credits |
|
$ |
154 |
|
$ |
0 |
|
$ |
0 |
|
$ |
154 |
|
Total |
|
$ |
154 |
|
$ |
0 |
|
$ |
0 |
|
$ |
154 |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
|
|
|
|
|
|
|
| ||||
MBS |
|
$ |
1,248,908 |
|
$ |
13,269 |
|
$ |
(22,277 |
) |
$ |
1,239,900 |
|
Municipal bonds |
|
184,642 |
|
6,045 |
|
(997 |
) |
189,690 |
| ||||
Other |
|
212 |
|
10 |
|
0 |
|
222 |
| ||||
Total |
|
$ |
1,433,762 |
|
$ |
19,324 |
|
$ |
(23,274 |
) |
$ |
1,429,812 |
|
Held to maturity |
|
|
|
|
|
|
|
|
| ||||
Tax credits |
|
$ |
165 |
|
$ |
0 |
|
$ |
0 |
|
$ |
165 |
|
Total |
|
$ |
165 |
|
$ |
0 |
|
$ |
0 |
|
$ |
165 |
|
The following table summarizes Sterlings investments and MBS that had a market value below their amortized cost as of March 31, 2014 and December 31, 2013, segregated by those investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer:
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
| ||||||||||||
|
|
Market Value |
|
Unrealized |
|
Market Value |
|
Unrealized |
|
Market Value |
|
Unrealized |
| ||||||
|
|
(in thousands) |
| ||||||||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
MBS |
|
$ |
448,824 |
|
$ |
(13,409 |
) |
$ |
33,932 |
|
$ |
(1,790 |
) |
$ |
482,756 |
|
$ |
(15,199 |
) |
Municipal bonds |
|
1,429 |
|
(18 |
) |
3,772 |
|
(408 |
) |
5,201 |
|
(426 |
) | ||||||
Other |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||||
Total |
|
$ |
450,253 |
|
$ |
(13,427 |
) |
$ |
37,704 |
|
$ |
(2,198 |
) |
$ |
487,957 |
|
$ |
(15,625 |
) |
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
MBS |
|
$ |
679,954 |
|
$ |
(22,277 |
) |
$ |
0 |
|
$ |
0 |
|
$ |
679,954 |
|
$ |
(22,277 |
) |
Municipal bonds |
|
10,051 |
|
(268 |
) |
12,947 |
|
(729 |
) |
22,998 |
|
(997 |
) | ||||||
Other |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||||
Total |
|
$ |
690,005 |
|
$ |
(22,545 |
) |
$ |
12,947 |
|
$ |
(729 |
) |
$ |
702,952 |
|
$ |
(23,274 |
) |
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
Management evaluates investment securities for other-than-temporary declines in fair value each quarter. If the fair value of investment securities falls below the amortized cost and the decline is deemed to be other-than temporary, the securities are written down to current market value, resulting in the recognition of an other-than-temporary impairment (OTTI). During the three months ended March 31, 2014 and 2013, no securities were determined to be other-than-temporarily impaired.
The following table presents the amortized cost and fair value of available for sale and held to maturity securities as of March 31, 2014, grouped by contractual maturity. Actual maturities for MBS will differ from contractual maturities as a result of the level of prepayments experienced on the underlying mortgages.
|
|
Held to maturity |
|
Available for sale |
| ||||||||
|
|
Amortized Cost |
|
Estimated Fair |
|
Amortized Cost |
|
Estimated Fair |
| ||||
|
|
(in thousands) |
| ||||||||||
Due within one year |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
Due after one year through five years |
|
0 |
|
0 |
|
1,724 |
|
1,820 |
| ||||
Due after five years through ten years |
|
0 |
|
0 |
|
90,332 |
|
91,181 |
| ||||
Due after ten years |
|
154 |
|
154 |
|
1,286,505 |
|
1,293,381 |
| ||||
Total |
|
$ |
154 |
|
$ |
154 |
|
$ |
1,378,561 |
|
$ |
1,386,382 |
|
4. Loans Receivable and Allowance for Credit Losses:
The following table presents the composition of Sterlings loan portfolio as of the balance sheet dates:
|
|
March 31, |
|
December 31, |
| ||
|
|
(in thousands) |
| ||||
Residential real estate |
|
$ |
1,187,998 |
|
$ |
1,119,574 |
|
Commercial real estate (CRE): |
|
|
|
|
| ||
Investor CRE |
|
1,109,880 |
|
1,114,768 |
| ||
Multifamily |
|
2,126,241 |
|
2,156,434 |
| ||
Construction |
|
83,740 |
|
71,693 |
| ||
Total CRE |
|
3,319,861 |
|
3,342,895 |
| ||
Commercial: |
|
|
|
|
| ||
Owner occupied CRE |
|
1,381,997 |
|
1,431,140 |
| ||
Commercial & Industrial (C&I) |
|
714,700 |
|
742,142 |
| ||
Total commercial |
|
2,096,697 |
|
2,173,282 |
| ||
Consumer |
|
804,254 |
|
822,068 |
| ||
Gross loans receivable |
|
7,408,810 |
|
7,457,819 |
| ||
Deferred loan costs (fees), net |
|
12,329 |
|
10,703 |
| ||
Allowance for loan losses |
|
(135,976 |
) |
(137,294 |
) | ||
Net loans receivable |
|
$ |
7,285,163 |
|
$ |
7,331,228 |
|
As of March 31, 2014 and December 31, 2013, loans pledged as collateral for borrowings from the FHLB and the Federal Reserve were $4.88 billion and $4.95 billion, respectively.
Loans receivable include purchased impaired loans, which are loans acquired that are deemed to exhibit evidence of credit deterioration since origination and therefore, are classified as impaired. The accounting for purchased impaired loans is periodically updated for changes in the loans cash flow expectations, and reflected in interest income over the life of the loans as accretable yield. As of March 31, 2014, no allowance for credit losses was recorded in connection with purchased impaired loans, and the unpaid principal balance and carrying amount of these loans were $27.5 million and $16.6 million, respectively.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
The following table presents a roll-forward of accretable yield over the periods presented:
|
|
Three Months Ended |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Beginning balance |
|
$ |
2,989 |
|
$ |
1,332 |
|
Additions |
|
0 |
|
1,774 |
| ||
Accretion to interest income |
|
(593 |
) |
(205 |
) | ||
Reclassifications |
|
(635 |
) |
160 |
| ||
Ending balance |
|
$ |
1,761 |
|
$ |
3,061 |
|
As of March 31, 2014 and December 31, 2013, net loans receivable included unamortized discounts on acquired loans of $26.2 million and $28.4 million, respectively. The following table presents, as of March 31, 2014, the five-year projected loan discount accretion to be recognized as an increase to interest income:
|
|
Amount |
| |
|
|
(in thousands) |
| |
Remainder of 2014 |
|
$ |
4,005 |
|
Years ended December 31, |
|
|
|
2015 |
|
3,613 |
|
2016 |
|
2,239 |
|
2017 |
|
1,494 |
|
2018 |
|
1,011 |
|
2019 |
|
812 |
|
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
The following table sets forth details by segment for Sterlings loan portfolio and related allowance as of the balance sheet dates:
|
|
Residential |
|
Commercial |
|
Commercial |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||
|
|
(in thousands) |
| ||||||||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans receivable, gross: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Individually evaluated for impairment |
|
$ |
13,675 |
|
$ |
55,706 |
|
$ |
40,947 |
|
$ |
0 |
|
$ |
0 |
|
$ |
110,328 |
|
Collectively evaluated for impairment |
|
1,174,323 |
|
3,264,155 |
|
2,055,750 |
|
804,254 |
|
0 |
|
7,298,482 |
| ||||||
Total loans receivable, gross |
|
$ |
1,187,998 |
|
$ |
3,319,861 |
|
$ |
2,096,697 |
|
$ |
804,254 |
|
$ |
0 |
|
$ |
7,408,810 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Individually evaluated for impairment |
|
$ |
2,964 |
|
$ |
987 |
|
$ |
2,803 |
|
$ |
133 |
|
$ |
0 |
|
$ |
6,887 |
|
Collectively evaluated for impairment |
|
8,742 |
|
39,917 |
|
33,328 |
|
26,476 |
|
20,626 |
|
129,089 |
| ||||||
Total allowance for loan losses |
|
$ |
11,706 |
|
$ |
40,904 |
|
$ |
36,131 |
|
$ |
26,609 |
|
$ |
20,626 |
|
$ |
135,976 |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans receivable, gross: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Individually evaluated for impairment |
|
$ |
7,924 |
|
$ |
58,232 |
|
$ |
37,794 |
|
$ |
0 |
|
$ |
0 |
|
$ |
103,950 |
|
Collectively evaluated for impairment |
|
1,111,650 |
|
3,284,663 |
|
2,135,488 |
|
822,068 |
|
0 |
|
7,353,869 |
| ||||||
Total loans receivable, gross |
|
$ |
1,119,574 |
|
$ |
3,342,895 |
|
$ |
2,173,282 |
|
$ |
822,068 |
|
$ |
0 |
|
$ |
7,457,819 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Individually evaluated for impairment |
|
$ |
2,968 |
|
$ |
952 |
|
$ |
2,842 |
|
$ |
155 |
|
$ |
0 |
|
$ |
6,917 |
|
Collectively evaluated for impairment |
|
11,277 |
|
40,201 |
|
39,272 |
|
27,423 |
|
12,204 |
|
130,377 |
| ||||||
Total allowance for loan losses |
|
$ |
14,245 |
|
$ |
41,153 |
|
$ |
42,114 |
|
$ |
27,578 |
|
$ |
12,204 |
|
$ |
137,294 |
|
Purchased credit impaired loans included in loans collectively evaluated for impairment as of March 31, 2014 are $16.6 million and as of December 31, 2013 are $16.7 million.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
The following tables present a roll-forward by segment of the allowance for credit losses for the periods presented:
|
|
Residential Real |
|
Commercial |
|
Commercial |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||
|
|
(in thousands) |
| ||||||||||||||||
2014 first quarter activity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance, Jan 1 |
|
$ |
14,245 |
|
$ |
41,153 |
|
$ |
42,114 |
|
$ |
27,578 |
|
$ |
12,204 |
|
$ |
137,294 |
|
Provisions |
|
(2,453 |
) |
(518 |
) |
(5,384 |
) |
(67 |
) |
8,422 |
|
0 |
| ||||||
Charge-offs |
|
(252 |
) |
(635 |
) |
(2,221 |
) |
(1,336 |
) |
0 |
|
(4,444 |
) | ||||||
Recoveries |
|
166 |
|
904 |
|
1,622 |
|
434 |
|
0 |
|
3,126 |
| ||||||
Ending balance, March 31 |
|
11,706 |
|
40,904 |
|
36,131 |
|
26,609 |
|
20,626 |
|
135,976 |
| ||||||
Reserve for unfunded credit commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance, Jan 1 |
|
3,320 |
|
998 |
|
3,132 |
|
3,599 |
|
72 |
|
11,121 |
| ||||||
Provisions |
|
397 |
|
108 |
|
(114 |
) |
(114 |
) |
(277 |
) |
0 |
| ||||||
Charge-offs |
|
(222 |
) |
0 |
|
0 |
|
0 |
|
0 |
|
(222 |
) | ||||||
Recoveries |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||||
Ending balance, March 31 |
|
3,495 |
|
1,106 |
|
3,018 |
|
3,485 |
|
(205 |
) |
10,899 |
| ||||||
Total credit allowance |
|
$ |
15,201 |
|
$ |
42,010 |
|
$ |
39,149 |
|
$ |
30,094 |
|
$ |
20,421 |
|
$ |
146,875 |
|
2013 first quarter activity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance, Jan 1 |
|
$ |
19,847 |
|
$ |
48,094 |
|
$ |
41,874 |
|
$ |
25,602 |
|
$ |
18,928 |
|
$ |
154,345 |
|
Provisions |
|
960 |
|
(1,091 |
) |
(1,610 |
) |
1,512 |
|
229 |
|
0 |
| ||||||
Charge-offs |
|
(1,019 |
) |
(2,923 |
) |
(1,588 |
) |
(1,644 |
) |
0 |
|
(7,174 |
) | ||||||
Recoveries |
|
180 |
|
1,055 |
|
920 |
|
347 |
|
0 |
|
2,502 |
| ||||||
Ending balance, March 31 |
|
19,968 |
|
45,135 |
|
39,596 |
|
25,817 |
|
19,157 |
|
149,673 |
| ||||||
Reserve for unfunded credit commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance, Jan 1 |
|
2,230 |
|
405 |
|
2,806 |
|
2,118 |
|
443 |
|
8,002 |
| ||||||
Provisions |
|
(309 |
) |
(50 |
) |
(373 |
) |
604 |
|
128 |
|
0 |
| ||||||
Charge-offs |
|
(12 |
) |
0 |
|
0 |
|
0 |
|
0 |
|
(12 |
) | ||||||
Recoveries |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||||
Ending balance, March 31 |
|
1,909 |
|
355 |
|
2,433 |
|
2,722 |
|
571 |
|
7,990 |
| ||||||
Total credit allowance |
|
$ |
21,877 |
|
$ |
45,490 |
|
$ |
42,029 |
|
$ |
28,539 |
|
$ |
19,728 |
|
$ |
157,663 |
|
In establishing the allowance for loan losses, Sterling groups its loan portfolio into classes of loans collectively evaluated for impairment. The groups are further segregated based on internal risk ratings. Both qualitative and quantitative data are
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
considered in determining the probability of default and loss given default for each group of loans. The probability of default and loss given default are used to calculate an estimated inherent loss rate. If a loan is determined to be impaired, Sterling prepares an individual evaluation of the loan. The individual evaluation compares the present value of future cash flows or the fair value of the underlying collateral to the recorded investment in the loan. The results of the individual impairment evaluation would determine the need to record a charge-off or establish a specific reserve.
Sterling assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:
Pass - the asset is considered of sufficient quality to preclude a Marginal rating. Pass assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral.
Marginal - the asset is susceptible to deterioration if stressed from a cash flow or earnings shock, with liquidity and leverage possibly below industry norms. The borrower may have few reserves to cover debt service, besides current income. A business generating cash flows that service the debt may be dependent on the successful reception of new products in the marketplace.
Special Mention - the asset has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or of Sterlings credit position at some future date. Special Mention assets are not adversely classified and do not expose Sterling to sufficient risk to warrant adverse classification.
Substandard - the asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have well-defined weaknesses. They are characterized by the distinct possibility that Sterling may sustain some loss if the deficiencies are not corrected.
Doubtful/Loss - the Doubtful asset has the weaknesses of those classified Substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is the portion of the asset that is considered uncollectible and/or of such little value that its continuance as an asset, without a charge-off or establishment of a specific reserve, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off an asset that is no longer deemed to have financial value, even though partial recovery may be recognized in the future.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
The following table presents credit quality indicators for Sterlings loan portfolio grouped according to internally assigned risk ratings and performance status:
|
|
|
|
Commercial Real Estate |
|
Commercial |
|
|
|
|
|
|
| ||||||||||||||
|
|
Residential Real |
|
Investor CRE |
|
Multifamily |
|
Construction |
|
Owner Occupied |
|
Commercial & |
|
Consumer |
|
Total |
|
% of |
| ||||||||
|
|
(in thousands) |
| ||||||||||||||||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Pass |
|
$ |
1,107,383 |
|
$ |
609,598 |
|
$ |
2,031,012 |
|
$ |
22,824 |
|
$ |
775,855 |
|
$ |
514,739 |
|
$ |
777,947 |
|
$ |
5,839,358 |
|
79% |
|
Marginal |
|
53,313 |
|
430,241 |
|
87,379 |
|
58,376 |
|
503,862 |
|
169,777 |
|
15,765 |
|
1,318,713 |
|
18% |
| ||||||||
Special mention |
|
7,533 |
|
37,006 |
|
6,798 |
|
1,107 |
|
58,875 |
|
17,668 |
|
5,411 |
|
134,398 |
|
2% |
| ||||||||
Substandard |
|
16,805 |
|
32,185 |
|
915 |
|
1,433 |
|
41,718 |
|
12,478 |
|
4,998 |
|
110,532 |
|
1% |
| ||||||||
Doubtful/Loss |
|
2,964 |
|
850 |
|
137 |
|
0 |
|
1,687 |
|
38 |
|
133 |
|
5,809 |
|
0% |
| ||||||||
Total |
|
$ |
1,187,998 |
|
$ |
1,109,880 |
|
$ |
2,126,241 |
|
$ |
83,740 |
|
$ |
1,381,997 |
|
$ |
714,700 |
|
$ |
804,254 |
|
$ |
7,408,810 |
|
100% |
|
Restructured |
|
$ |
23,160 |
|
$ |
3,380 |
|
$ |
0 |
|
$ |
2,081 |
|
$ |
20,302 |
|
$ |
766 |
|
$ |
20 |
|
$ |
49,709 |
|
1% |
|
Nonaccrual |
|
14,717 |
|
22,538 |
|
0 |
|
783 |
|
20,657 |
|
2,661 |
|
3,732 |
|
65,088 |
|
1% |
| ||||||||
Nonperforming |
|
37,877 |
|
25,918 |
|
0 |
|
2,864 |
|
40,959 |
|
3,427 |
|
3,752 |
|
114,797 |
|
2% |
| ||||||||
Performing |
|
1,150,121 |
|
1,083,962 |
|
2,126,241 |
|
80,876 |
|
1,341,038 |
|
711,273 |
|
800,502 |
|
7,294,013 |
|
98% |
| ||||||||
Total |
|
$ |
1,187,998 |
|
$ |
1,109,880 |
|
$ |
2,126,241 |
|
$ |
83,740 |
|
$ |
1,381,997 |
|
$ |
714,700 |
|
$ |
804,254 |
|
$ |
7,408,810 |
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Pass |
|
$ |
1,038,460 |
|
$ |
602,384 |
|
$ |
2,058,031 |
|
$ |
14,591 |
|
$ |
785,237 |
|
$ |
521,711 |
|
$ |
794,032 |
|
$ |
5,814,446 |
|
78% |
|
Marginal |
|
52,154 |
|
435,022 |
|
87,830 |
|
53,742 |
|
544,329 |
|
177,998 |
|
15,955 |
|
1,367,030 |
|
18% |
| ||||||||
Special mention |
|
7,808 |
|
44,934 |
|
9,296 |
|
1,128 |
|
61,103 |
|
17,761 |
|
6,193 |
|
148,223 |
|
2% |
| ||||||||
Substandard |
|
18,184 |
|
31,613 |
|
1,140 |
|
2,232 |
|
38,709 |
|
24,672 |
|
5,733 |
|
122,283 |
|
2% |
| ||||||||
Doubtful/Loss |
|
2,968 |
|
815 |
|
137 |
|
0 |
|
1,762 |
|
0 |
|
155 |
|
5,837 |
|
0% |
| ||||||||
Total |
|
$ |
1,119,574 |
|
$ |
1,114,768 |
|
$ |
2,156,434 |
|
$ |
71,693 |
|
$ |
1,431,140 |
|
$ |
742,142 |
|
$ |
822,068 |
|
$ |
7,457,819 |
|
100% |
|
Restructured |
|
$ |
22,337 |
|
$ |
3,005 |
|
$ |
0 |
|
$ |
2,084 |
|
$ |
19,553 |
|
$ |
774 |
|
$ |
21 |
|
$ |
47,774 |
|
1% |
|
Nonaccrual |
|
15,571 |
|
23,709 |
|
222 |
|
1,582 |
|
20,472 |
|
3,230 |
|
4,516 |
|
69,302 |
|
1% |
| ||||||||
Nonperforming |
|
37,908 |
|
26,714 |
|
222 |
|
3,666 |
|
40,025 |
|
4,004 |
|
4,537 |
|
117,076 |
|
2% |
| ||||||||
Performing |
|
1,081,666 |
|
1,088,054 |
|
2,156,212 |
|
68,027 |
|
1,391,115 |
|
738,138 |
|
817,531 |
|
7,340,743 |
|
98% |
| ||||||||
Total |
|
$ |
1,119,574 |
|
$ |
1,114,768 |
|
$ |
2,156,434 |
|
$ |
71,693 |
|
$ |
1,431,140 |
|
$ |
742,142 |
|
$ |
822,068 |
|
$ |
7,457,819 |
|
100% |
|
Purchased credit impaired loans of $5.4 million as of March 31, 2014, and $5.7 million as of December 31, 2013, are included in the nonaccrual loans.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
Aging by class for Sterlings loan portfolio as of March 31, 2014 and December 31, 2013 was as follows:
|
|
|
|
Commercial Real Estate |
|
Commercial |
|
|
|
|
|
|
| ||||||||||||||
|
|
Residential |
|
Investor CRE |
|
Multifamily |
|
Construction |
|
Owner Occupied |
|
Commercial & |
|
Consumer |
|
Total |
|
% of |
| ||||||||
|
|
(in thousands) |
| ||||||||||||||||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
30 - 59 days past due |
|
$ |
5,741 |
|
$ |
3,017 |
|
$ |
1,519 |
|
$ |
0 |
|
$ |
9,302 |
|
$ |
659 |
|
$ |
6,435 |
|
$ |
26,673 |
|
0% |
|
60 - 89 days past due |
|
924 |
|
2,511 |
|
411 |
|
0 |
|
4,870 |
|
104 |
|
1,515 |
|
10,335 |
|
0% |
| ||||||||
> 90 days past due |
|
15,101 |
|
12,332 |
|
0 |
|
783 |
|
11,551 |
|
2,346 |
|
3,396 |
|
45,509 |
|
1% |
| ||||||||
Total past due |
|
21,766 |
|
17,860 |
|
1,930 |
|
783 |
|
25,723 |
|
3,109 |
|
11,346 |
|
82,517 |
|
1% |
| ||||||||
Current |
|
1,166,232 |
|
1,092,020 |
|
2,124,311 |
|
82,957 |
|
1,356,274 |
|
711,591 |
|
792,908 |
|
7,326,293 |
|
99% |
| ||||||||
Total Loans |
|
$ |
1,187,998 |
|
$ |
1,109,880 |
|
$ |
2,126,241 |
|
$ |
83,740 |
|
$ |
1,381,997 |
|
$ |
714,700 |
|
$ |
804,254 |
|
$ |
7,408,810 |
|
100% |
|
> 90 days and accruing |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
0% |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
30 - 59 days past due |
|
$ |
2,544 |
|
$ |
1,575 |
|
$ |
378 |
|
$ |
0 |
|
$ |
6,069 |
|
$ |
1,066 |
|
$ |
5,332 |
|
$ |
16,964 |
|
0% |
|
60 - 89 days past due |
|
1,258 |
|
1,230 |
|
0 |
|
0 |
|
1,350 |
|
1,893 |
|
1,473 |
|
7,204 |
|
0% |
| ||||||||
> 90 days past due |
|
15,175 |
|
12,553 |
|
222 |
|
1,582 |
|
12,086 |
|
1,997 |
|
4,030 |
|
47,645 |
|
1% |
| ||||||||
Total past due |
|
18,977 |
|
15,358 |
|
600 |
|
1,582 |
|
19,505 |
|
4,956 |
|
10,835 |
|
71,813 |
|
1% |
| ||||||||
Current |
|
1,100,597 |
|
1,099,410 |
|
2,155,834 |
|
70,111 |
|
1,411,635 |
|
737,186 |
|
811,233 |
|
7,386,006 |
|
99% |
| ||||||||
Total Loans |
|
$ |
1,119,574 |
|
$ |
1,114,768 |
|
$ |
2,156,434 |
|
$ |
71,693 |
|
$ |
1,431,140 |
|
$ |
742,142 |
|
$ |
822,068 |
|
$ |
7,457,819 |
|
100% |
|
> 90 days and accruing |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
0% |
|
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
Sterling considers its nonperforming loans to be impaired loans. The following table summarizes impaired loans by class as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
Book Balance |
|
|
| |||||||
|
|
Unpaid |
|
Charge-Offs |
|
Without |
|
With |
|
Specific |
| |||||
|
|
(in thousands) |
| |||||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential real estate |
|
$ |
43,709 |
|
$ |
5,832 |
|
$ |
29,644 |
|
$ |
8,233 |
|
$ |
2,964 |
|
CRE: |
|
|
|
|
|
|
|
|
|
|
| |||||
Investor CRE |
|
32,325 |
|
6,407 |
|
20,809 |
|
5,109 |
|
850 |
| |||||
Multifamily |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Construction |
|
5,030 |
|
2,166 |
|
2,864 |
|
0 |
|
0 |
| |||||
Total CRE |
|
37,355 |
|
8,573 |
|
23,673 |
|
5,109 |
|
850 |
| |||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner Occupied CRE |
|
44,765 |
|
3,806 |
|
26,172 |
|
14,787 |
|
2,766 |
| |||||
C&I |
|
10,218 |
|
6,791 |
|
2,217 |
|
1,210 |
|
33 |
| |||||
Total commercial |
|
54,983 |
|
10,597 |
|
28,389 |
|
15,997 |
|
2,799 |
| |||||
Consumer |
|
3,896 |
|
144 |
|
3,220 |
|
532 |
|
133 |
| |||||
Total |
|
$ |
139,943 |
|
$ |
25,146 |
|
$ |
84,926 |
|
$ |
29,871 |
|
$ |
6,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Balance |
|
|
| |||||||
|
|
Unpaid |
|
Charge-Offs |
|
Without |
|
With |
|
Specific |
| |||||
|
|
(in thousands) |
| |||||||||||||
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential real estate |
|
$ |
43,910 |
|
$ |
6,002 |
|
$ |
29,984 |
|
$ |
7,924 |
|
$ |
2,968 |
|
CRE: |
|
|
|
|
|
|
|
|
|
|
| |||||
Investor CRE |
|
32,908 |
|
6,194 |
|
21,732 |
|
4,982 |
|
815 |
| |||||
Multifamily |
|
222 |
|
0 |
|
222 |
|
0 |
|
0 |
| |||||
Construction |
|
12,986 |
|
9,320 |
|
3,666 |
|
0 |
|
0 |
| |||||
Total CRE |
|
46,116 |
|
15,514 |
|
25,620 |
|
4,982 |
|
815 |
| |||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner Occupied CRE |
|
43,810 |
|
3,785 |
|
26,154 |
|
13,871 |
|
2,842 |
| |||||
C&I |
|
10,806 |
|
6,802 |
|
4,004 |
|
0 |
|
0 |
| |||||
Total commercial |
|
54,616 |
|
10,587 |
|
30,158 |
|
13,871 |
|
2,842 |
| |||||
Consumer |
|
4,770 |
|
233 |
|
3,953 |
|
584 |
|
155 |
| |||||
Total |
|
$ |
149,412 |
|
$ |
32,336 |
|
$ |
89,715 |
|
$ |
27,361 |
|
$ |
6,780 |
|
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
The following table presents the average book balance and interest income recognized for impaired loans by class for the periods presented:
|
|
Three Months Ended March 31, |
| ||||||||||
|
|
2014 |
|
2013 |
| ||||||||
|
|
Average |
|
Interest |
|
Average |
|
Interest |
| ||||
|
|
(in thousands) |
| ||||||||||
Residential real estate |
|
$ |
37,893 |
|
$ |
152 |
|
$ |
43,127 |
|
$ |
152 |
|
Investor CRE |
|
26,316 |
|
42 |
|
47,490 |
|
347 |
| ||||
Multifamily |
|
111 |
|
0 |
|
6,487 |
|
35 |
| ||||
Construction |
|
3,265 |
|
38 |
|
16,951 |
|
1,701 |
| ||||
Owner Occupied CRE |
|
40,492 |
|
174 |
|
58,785 |
|
394 |
| ||||
C&I |
|
3,715 |
|
6 |
|
4,723 |
|
34 |
| ||||
Consumer |
|
4,144 |
|
0 |
|
6,668 |
|
5 |
| ||||
Total |
|
$ |
115,936 |
|
$ |
412 |
|
$ |
184,231 |
|
$ |
2,668 |
|
The following tables present loans that were modified and recorded as troubled debt restructurings (TDRs) during the following period:
|
|
Three Months Ended March 31, |
| ||||||||||||||
|
|
2014 |
|
2013 |
| ||||||||||||
|
|
Number of |
|
Pre- |
|
Post- |
|
Number of |
|
Pre- |
|
Post- |
| ||||
|
|
(in thousands, except number of contracts) |
| ||||||||||||||
Residential real estate |
|
4 |
|
$ |
1,271 |
|
$ |
1,274 |
|
9 |
|
$ |
2,134 |
|
$ |
1,929 |
|
Investor CRE |
|
1 |
|
439 |
|
437 |
|
3 |
|
1,482 |
|
1,180 |
| ||||
Multifamily |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Construction |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Owner Occupied CRE |
|
1 |
|
1,000 |
|
996 |
|
3 |
|
2,432 |
|
2,414 |
| ||||
C&I |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Consumer |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Total (1) |
|
6 |
|
$ |
2,710 |
|
$ |
2,707 |
|
15 |
|
$ |
6,048 |
|
$ |
5,523 |
|
(1) Amounts exclude specific loan loss reserves.
Substantially all TDRs are determined to be impaired prior to being restructured. As such, they are individually evaluated for impairment, unless they are considered homogeneous loans in which case they are collectively evaluated for impairment. As of March 31, 2014, Sterling had specific reserves of $62,000 on TDRs which were restructured during the previous three months. There were no loans that were removed from TDR status during the three months ended March 31, 2014.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
The following table shows the post-modification recorded investment by class for TDRs restructured during the periods presented by the primary type of concession granted:
|
|
Principal |
|
Rate |
|
Extension of |
|
Forgiveness |
|
Total |
| |||||
|
|
(in thousands) |
| |||||||||||||
Three Months Ended March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential Real Estate |
|
$ |
516 |
|
$ |
758 |
|
$ |
0 |
|
$ |
0 |
|
$ |
1,274 |
|
Investor CRE |
|
437 |
|
0 |
|
0 |
|
0 |
|
437 |
| |||||
Multifamily |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Construction |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Owner CRE |
|
0 |
|
0 |
|
996 |
|
0 |
|
996 |
| |||||
C&I |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Consumer |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Total |
|
$ |
953 |
|
$ |
758 |
|
$ |
996 |
|
$ |
0 |
|
$ |
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months Ended March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential Real Estate |
|
$ |
0 |
|
$ |
1,395 |
|
$ |
203 |
|
$ |
331 |
|
$ |
1,929 |
|
Investor CRE |
|
0 |
|
1,139 |
|
0 |
|
41 |
|
1,180 |
| |||||
Multifamily |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Construction |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Owner CRE |
|
730 |
|
1,684 |
|
0 |
|
0 |
|
2,414 |
| |||||
C&I |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Consumer |
|
0 |
|
0 |
|
0 |
|
0 |
|
0 |
| |||||
Total |
|
$ |
730 |
|
$ |
4,218 |
|
$ |
203 |
|
$ |
372 |
|
$ |
5,523 |
|
Restructurings that result in the forgiveness of principal or interest are typically part of a bankruptcy settlement. There were two Owner CRE TDRs with a value of $107,000 that were completed during the twelve month period ended March 31, 2014 that subsequently defaulted during the period. During the three months ended March 31, 2014, and 2013, there were $1.1 million, and $1.2 million of TDRs that were returned to accrual status, respectively.
The following table outlines accrual status of TDRs as of the dates shown:
|
|
March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
TDRs on nonaccrual status |
|
$ |
14,987 |
|
$ |
22,383 |
|
TDRs on accrual status |
|
34,723 |
|
47,102 |
| ||
Total TDRs |
|
$ |
49,710 |
|
$ |
69,485 |
|
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
5. Goodwill and Other Intangible Assets:
Goodwill represents the excess of a purchase price over the net assets acquired. The following table presents a roll-forward of Sterlings goodwill:
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Beginning balance, January 1 |
|
$ |
52,018 |
|
$ |
22,577 |
|
Acquired |
|
0 |
|
0 |
| ||
Ending balance, March 31 |
|
$ |
52,018 |
|
$ |
22,577 |
|
Goodwill is not amortized, but is reviewed for impairment at least annually. Other intangible assets at March 31, 2014 and December 31, 2013 were comprised of core deposit intangibles from various acquisitions, and other identifiable intangibles related to the trust and wealth management business acquired in 2012. The following table provides details of other intangible assets:
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
| |||
|
|
(in thousands) |
| |||||||
March 31, 2014 |
|
|
|
|
|
|
| |||
Core deposit intangibles |
|
$ |
58,707 |
|
$ |
45,823 |
|
$ |
12,884 |
|
Other |
|
1,800 |
|
342 |
|
1,458 |
| |||
|
|
$ |
60,507 |
|
$ |
46,165 |
|
$ |
14,342 |
|
December 31, 2013 |
|
|
|
|
|
|
| |||
Core deposit intangibles |
|
$ |
58,707 |
|
$ |
44,652 |
|
$ |
14,055 |
|
Other |
|
1,800 |
|
294 |
|
1,506 |
| |||
|
|
$ |
60,507 |
|
$ |
44,946 |
|
$ |
15,561 |
|
The following table provides the projected core deposit and other intangibles amortization expense for the remainder of 2014 and the next five years:
|
|
Amount |
| |
Remainder of 2014 |
|
$ |
2,641 |
|
|
|
|
| |
Years ended December 31, |
|
|
| |
2015 |
|
2,779 |
| |
2016 |
|
1,606 |
| |
2017 |
|
1,447 |
| |
2018 |
|
1,314 |
| |
2019 |
|
1,232 |
| |
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
6. Junior Subordinated Debentures:
Sterling has raised regulatory capital through the formation of trust subsidiaries and has assumed similar obligations through mergers with other financial institutions. The trusts are business trusts in which Sterling owns all of the common equity. The proceeds from the sale of the securities were used to purchase junior subordinated debentures issued by Sterling. Sterlings obligations under the junior subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by Sterling of the trusts obligations. The junior subordinated debentures are treated as debt of Sterling. The junior subordinated debentures mature 30 years after issuance, and are redeemable, subject to certain conditions. As of March 31, 2014, all of Sterlings junior subordinated debentures were redeemable at par, at their applicable quarterly or semiannual interest payment dates.
Details of the junior subordinated debentures are as follows:
|
|
|
|
Maturity |
|
Next Interest |
|
March 31, 2014 |
| |||
Subsidiary Issuer |
|
Issue Date |
|
Date |
|
Payment Date |
|
Rate |
|
Amount |
| |
|
|
(in thousands) |
| |||||||||
Sterling Capital Trust IX |
|
July 2007 |
|
Oct 2037 |
|
April 2014 |
|
1.64 |
% |
$ |
46,392 |
|
Sterling Capital Trust VIII |
|
Sept 2006 |
|
Dec 2036 |
|
June 2014 |
|
1.86 |
|
51,547 |
| |
Sterling Capital Trust VII |
|
June 2006 |
|
June 2036 |
|
June 2014 |
|
1.76 |
|
56,702 |
| |
Lynnwood Financial Statutory Trust II |
|
June 2005 |
|
June 2035 |
|
June 2014 |
|
2.03 |
|
10,310 |
| |
Sterling Capital Trust VI |
|
June 2003 |
|
Sept 2033 |
|
June 2014 |
|
3.43 |
|
10,310 |
| |
Sterling Capital Statutory Trust V |
|
May 2003 |
|
June 2033 |
|
June 2014 |
|
3.49 |
|
20,619 |
| |
Sterling Capital Trust IV |
|
May 2003 |
|
May 2033 |
|
May 2014 |
|
3.39 |
|
10,310 |
| |
Sterling Capital Trust III |
|
April 2003 |
|
April 2033 |
|
April 2014 |
|
3.49 |
|
14,433 |
| |
Lynnwood Financial Statutory Trust I |
|
Mar 2003 |
|
Mar 2033 |
|
June 2014 |
|
3.39 |
|
9,426 |
| |
Klamath First Capital Trust I |
|
July 2001 |
|
July 2031 |
|
July 2014 |
|
4.09 |
|
15,251 |
| |
|
|
|
|
|
|
|
|
2.36 |
%* |
$ |
245,300 |
|
* Weighted average rate.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
7. Earnings Per Share:
The following table presents the computations for basic and diluted earnings per common share:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands, except shares and per share |
| ||||
Numerator: |
|
|
|
|
| ||
Net income |
|
$ |
12,353 |
|
$ |
22,678 |
|
Denominator: |
|
|
|
|
| ||
Weighted average shares outstanding - basic |
|
62,398,357 |
|
62,242,183 |
| ||
Dilutive securities outstanding |
|
1,332,383 |
|
762,601 |
| ||
Weighted average shares outstanding - diluted |
|
63,730,740 |
|
63,004,784 |
| ||
Earnings per share - basic |
|
$ |
0.20 |
|
$ |
0.36 |
|
Earnings per share - diluted |
|
$ |
0.19 |
|
$ |
0.36 |
|
Antidilutive securities outstanding (weighted average): |
|
|
|
|
| ||
Stock options |
|
6,103 |
|
18,315 |
| ||
Restricted shares |
|
47,359 |
|
1,295 |
| ||
Total antidilutive securities outstanding |
|
53,462 |
|
19,610 |
|
8. Noninterest Expense:
The following table details the components of Sterlings noninterest expense:
|
|
Three Months Ended |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Employee compensation and benefits |
|
$ |
47,576 |
|
$ |
42,436 |
|
OREO operations |
|
1,508 |
|
2,030 |
| ||
Occupancy and equipment |
|
7,629 |
|
9,859 |
| ||
Data processing |
|
7,737 |
|
6,577 |
| ||
FDIC insurance |
|
1,178 |
|
1,930 |
| ||
Professional fees |
|
3,241 |
|
5,952 |
| ||
Depreciation |
|
3,989 |
|
2,934 |
| ||
Advertising |
|
1,666 |
|
2,436 |
| ||
Travel and entertainment |
|
1,200 |
|
1,171 |
| ||
Merger and acquisition |
|
2,715 |
|
1,036 |
| ||
Amortization of other intangible assets |
|
1,218 |
|
1,659 |
| ||
Other |
|
5,508 |
|
3,909 |
| ||
Total noninterest expense |
|
$ |
85,165 |
|
$ |
81,929 |
|
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
9. Income Taxes:
During the three months ended March 31, 2014, Sterling recognized income tax expense of $6.4 million, reflecting a 34% effective tax rate, compared to income tax expense of $9.9 million and an effective tax rate of 30% for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2013 reflected permanent differences between book income and tax income, from the Borrego acquisition bargain purchase gain, in addition to tax exempt municipal bond and BOLI income. As of March 31, 2014, the net deferred tax asset was $275.5 million, including $241.7 million of net operating loss and tax credit carry-forwards, compared with $284.1 million as of December 31, 2013, including $242.3 million of net operating loss and tax credit carry-forwards.
10. Stock Based Compensation:
The following table presents a summary of restricted stock unit activity during the period:
|
|
Shares |
|
Weighted |
| |
Balance, January 1, 2014 |
|
454,079 |
|
$ |
21.27 |
|
Granted |
|
170,492 |
|
33.41 |
| |
Vested |
|
(107,612 |
) |
32.84 |
| |
Expired |
|
(3,722 |
) |
20.57 |
| |
Outstanding, March 31, 2014 |
|
513,237 |
|
$ |
22.88 |
|
The following table presents a summary of stock option activity during the period:
|
|
Shares |
|
Weighted |
| |
Balance, January 1, 2014 |
|
252,626 |
|
$ |
50.87 |
|
Granted |
|
0 |
|
0.00 |
| |
Exercised |
|
0 |
|
0.00 |
| |
Expired |
|
(1,947 |
) |
1,190.00 |
| |
Cancelled |
|
0 |
|
0.00 |
| |
Outstanding, March 31, 2014 |
|
250,679 |
|
$ |
42.02 |
|
Exercisable, March 31, 2014 |
|
102,022 |
|
$ |
71.75 |
|
The following table presents the weighted average remaining contractual life and the aggregate intrinsic value for stock options as of the dates indicated:
|
|
Stock Options |
| ||||||||
|
|
Outstanding |
|
Exercisable |
| ||||||
|
|
Weighted |
|
Intrinsic |
|
Weighted |
|
Intrinsic |
| ||
|
|
(dollars in thousands) |
| ||||||||
March 31, 2014 |
|
8.7 years |
|
$ |
2,861 |
|
8.5 years |
|
$ |
1,210 |
|
December 31, 2013 |
|
9.0 years |
|
3,046 |
|
8.4 years |
|
889 |
| ||
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
As of March 31, 2014, a total of 4.8 million shares remained available for grant under Sterlings 2007 and 2010 Long-Term Incentive Plans. The stock options outstanding under these plans have terms of six and 10 years. Stock based compensation expense recognized during the periods presented was as follows:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Stock options |
|
$ |
199 |
|
$ |
104 |
|
Restricted stock |
|
896 |
|
991 |
| ||
Total |
|
$ |
1,095 |
|
$ |
1,095 |
|
As of March 31, 2014, unrecognized equity compensation expense totaled $11.9 million as the underlying outstanding awards had not yet been earned. This amount will be recognized over a weighted average period of 3.2 years.
11. Derivatives and Hedging:
Sterling enters into interest rate swap transactions with loan customers. The interest rate risk on these swap transactions is hedged by Sterling entering into offsetting interest rate swap agreements with various unaffiliated counterparties (broker-dealers). Both customer and broker-dealer related interest rate derivatives are carried at fair value, which includes consideration of counterparty credit risk.
As part of its mortgage banking activities, Sterling makes commitments to prospective borrowers on residential mortgage loan applications, which may have the interest rates locked for a period of 10 to 60 days or longer, if extended (interest rate lock commitments). The fair value of interest rate lock commitments presented in the table below has been adjusted to reflect the expected fallout. These interest rate lock commitments, and loans held for sale that have not been committed to investors, give rise to interest rate risk. Sterling hedges the interest rate risk arising from these mortgage banking activities by entering into forward sales agreements on MBS with third parties (forward commitments).
Residential mortgage loans held for sale that were not committed to investors were $134.8 million and $129.5 million as of March 31, 2014 and December 31, 2013, respectively. The following table summarizes Sterlings mortgage banking operations and interest rate swaps:
|
|
March 31, 2014 |
| |||||||
|
|
|
|
Fair Value |
| |||||
|
|
Notional |
|
Asset |
|
Liability |
| |||
|
|
(in thousands) |
| |||||||
Interest rate lock commitments, net |
|
$ |
136,528 |
|
$ |
2,569 |
|
$ |
0 |
|
Forward commitments |
|
243,500 |
|
50 |
|
0 |
| |||
Interest rate swaps - broker-dealer |
|
20,693 |
|
0 |
|
580 |
| |||
Interest rate swaps - customer |
|
20,693 |
|
557 |
|
0 |
| |||
|
|
December 31, 2013 |
| |||||||
|
|
|
|
Fair Value |
| |||||
|
|
Notional |
|
Asset |
|
Liability |
| |||
|
|
(in thousands) |
| |||||||
Interest rate lock commitments, net |
|
$ |
99,215 |
|
$ |
1,740 |
|
$ |
0 |
|
Forward commitments |
|
211,000 |
|
2,231 |
|
0 |
| |||
Interest rate swaps - broker-dealer |
|
21,054 |
|
0 |
|
516 |
| |||
Interest rate swaps - customer |
|
22,090 |
|
508 |
|
0 |
| |||
The fair value of these derivatives is included in other assets and liabilities, respectively. Gains and losses on Sterlings mortgage banking derivative transactions are included in mortgage banking income, while gains and losses on Sterlings interest rate swap agreements are included in other noninterest income. The following table sets forth these gains and losses:
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Mortgage banking operations |
|
$ |
(749 |
) |
$ |
(10,168 |
) |
Other noninterest income |
|
(4 |
) |
76 |
| ||
Also included in mortgage banking income were loan servicing fees of $475,000 and $2.7 million for the three months ended March 31, 2014 and 2013, respectively.
12. Offsetting Assets and Liabilities:
Certain derivatives and repurchase agreements are subject to net settlement. Depending on the governing disclosure rules or elections made by management, amounts are presented gross or net on a balance sheet. The following summarizes the presentation of Sterlings interest rate swaps and securities sold under repurchase agreements, all of which are presented gross on Sterlings balance sheet:
|
|
Amount |
|
Amount Offset |
|
Amount |
|
Pledged Collateral on |
|
Net |
| ||||||||
|
|
Recognized |
|
Sheet |
|
Balance Sheet |
|
Securities |
|
Cash |
|
Position |
| ||||||
|
|
(in thousands) |
| ||||||||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps |
|
$ |
557 |
|
$ |
0 |
|
$ |
557 |
|
$ |
0 |
|
$ |
0 |
|
$ |
557 |
|
Total |
|
$ |
557 |
|
$ |
0 |
|
$ |
557 |
|
$ |
0 |
|
$ |
0 |
|
$ |
557 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities sold under repurchase agreements |
|
$ |
539,972 |
|
$ |
0 |
|
$ |
539,972 |
|
$ |
539,972 |
|
$ |
0 |
|
$ |
0 |
|
Interest rate swaps |
|
580 |
|
0 |
|
580 |
|
0 |
|
580 |
|
0 |
| ||||||
Total |
|
$ |
540,552 |
|
$ |
0 |
|
$ |
540,552 |
|
$ |
539,972 |
|
$ |
580 |
|
$ |
0 |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps |
|
$ |
508 |
|
$ |
0 |
|
$ |
508 |
|
$ |
0 |
|
$ |
0 |
|
$ |
508 |
|
Total |
|
$ |
508 |
|
$ |
0 |
|
$ |
508 |
|
$ |
0 |
|
$ |
0 |
|
$ |
508 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities sold under repurchase agreements |
|
$ |
531,679 |
|
$ |
0 |
|
$ |
531,679 |
|
$ |
531,679 |
|
$ |
0 |
|
$ |
0 |
|
Interest rate swaps |
|
516 |
|
0 |
|
516 |
|
0 |
|
516 |
|
0 |
| ||||||
Total |
|
$ |
532,195 |
|
$ |
0 |
|
$ |
532,195 |
|
$ |
531,679 |
|
$ |
516 |
|
$ |
0 |
|
Sterlings cash, and investments and MBS included cash and securities pledged against its interest rate swap and securities sold under repurchase agreements liabilities.
13. Fair Value:
Fair value estimates are determined as of a specific date using quoted market prices, where available, or various assumptions and estimates. As the assumptions underlying these estimates change, the fair value of the financial instruments will change. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
instruments, will likely reduce the comparability of fair value disclosures between financial institutions. Accordingly, the aggregate fair value amounts presented do not represent and should not be construed to represent the full underlying value of Sterling.
The carrying amounts and fair values of financial instruments as of the periods indicated were as follows. Other assets are comprised of FHLB stock and derivatives, while other liabilities are comprised of derivatives:
|
|
|
|
March 31, 2014 |
|
December 31, 2013 |
| ||||||||
|
|
Level |
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
| ||||
|
|
|
|
(in thousands) |
| ||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
1 |
|
$ |
443,566 |
|
$ |
443,566 |
|
$ |
545,435 |
|
$ |
545,435 |
|
Investments and MBS: |
|
|
|
|
|
|
|
|
|
|
| ||||
Available for sale |
|
2 |
|
1,386,382 |
|
1,386,382 |
|
1,429,812 |
|
1,429,812 |
| ||||
Held to maturity |
|
2 |
|
154 |
|
154 |
|
165 |
|
165 |
| ||||
Loans held for sale |
|
2 |
|
229,084 |
|
229,084 |
|
138,952 |
|
138,952 |
| ||||
Loans receivable, net |
|
3 |
|
7,285,163 |
|
7,306,368 |
|
7,331,228 |
|
7,344,637 |
| ||||
Mortgage servicing rights, net |
|
3 |
|
59,955 |
|
75,118 |
|
60,100 |
|
75,017 |
| ||||
Other assets (1) |
|
2 |
|
97,289 |
|
97,289 |
|
99,756 |
|
99,756 |
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||
Non-maturity deposits |
|
2 |
|
5,491,427 |
|
5,491,427 |
|
5,373,544 |
|
5,373,544 |
| ||||
Deposits with stated maturities |
|
2 |
|
1,641,443 |
|
1,656,275 |
|
1,701,446 |
|
1,717,039 |
| ||||
Borrowings |
|
2 |
|
1,761,331 |
|
1,684,343 |
|
1,923,081 |
|
1,845,614 |
| ||||
Other liabilities |
|
2 |
|
580 |
|
580 |
|
516 |
|
516 |
| ||||
(1) Other assets includes FHLB stock. As of March 31, 2014 and December 31, 2013, FHLB stock was carried at $94.1 million and $95.3 million, respectively.
Companies have the option of carrying financial assets and liabilities at fair value, which can be implemented on all or individually selected financial instruments. The framework for defining and measuring fair value requires that one of three valuation methods be used to determine fair market value: the market approach, the income approach or the cost approach. To increase consistency and comparability in fair value measurements and related disclosures, the standard also creates a fair value hierarchy to prioritize the inputs to these valuation methods into the following three levels:
· Level 1 inputs are a select class of observable inputs, based upon the quoted prices for identical instruments in active markets that are accessible as of the measurement date, and are to be used whenever available.
· Level 2 inputs are other types of observable inputs, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; or other inputs that are observable or can be derived from or supported by observable market data. Level 2 inputs are to be used whenever Level 1 inputs are not available.
· Level 3 inputs are substantially unobservable, reflecting the reporting entitys own assumptions regarding what market participants would assume when pricing a financial instrument. Level 3 inputs are to be used only when Level 1 and Level 2 inputs are unavailable.
The methods and assumptions used to estimate the fair value of certain financial instruments are as follows:
Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value due to the relatively short-term nature of these instruments.
Investments and MBS. The fair value of investments and MBS are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
assess the impact of changes in interest rates and to develop prepayment scenarios. All models and processes used take into account market convention.
Loans Held for Sale. Sterling has elected to carry residential loans held for sale at fair value. The fair values of residential loans are based on investor quotes in the secondary market, determined by the fair value of options and commitments to sell or issue mortgage loans. The fair value election was made to match changes in the value of these loans with the value of their economic hedges. Loan origination fees, costs and servicing rights, which were previously deferred on these loans, are now recognized as part of the loan value at origination. Nonresidential loans held for sale are carried at the lower of cost or market (LOCOM) due to the frequency of these loan sale transactions, as well as the availability of market data for these loan types.
Loans Receivable. The fair value of performing loans is estimated by discounting the cash flows using interest rates that consider the current credit and interest rate risk inherent in the loans and current economic and lending conditions and does not incorporate the exit price concept of fair value. The fair value of nonperforming collateral-dependent loans is estimated based upon the value of the underlying collateral. The fair value of other nonperforming loans is estimated by discounting managements current estimate of future cash flows using a rate estimated to be commensurate with the risks involved. Changes in the various inputs in the fair value of nonperforming loans will have a significant impact on the fair value.
Mortgage Servicing Rights. The fair value of mortgage servicing rights is estimated using a discounted cash flow model to arrive at the net present value of expected earnings from the servicing of the loans. Model inputs include prepayment speeds, market interest rates, contractual interest rates on the loans being serviced, the amount of other fee income generated and other factors. The fair value of mortgage servicing rights is impacted by any changes in these inputs.
Deposits. The fair values of deposits subject to immediate withdrawal such as interest and noninterest bearing checking, regular savings, and money market deposit accounts, are equal to the amounts payable on demand at the reporting date. Fair values for time deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities.
Borrowings. The carrying amounts of short-term borrowings under repurchase agreements, federal funds purchased, short-term FHLB advances and other short-term borrowings approximate their fair values due to the relatively short period of time between the origination of the instruments and the expected payment dates on the instruments. The fair value of long-term FHLB advances and other long-term borrowings is estimated using discounted cash flow analysis based on Sterlings current incremental borrowing rates for similar types of borrowing arrangements with similar remaining terms.
Derivatives. Valuations of interest rate lock commitments and forward commitments are estimated using quoted market prices for similar instruments. Fair values for the interest rate swaps are based on the present value differential between the fixed interest rate payments and the floating interest rate payments as projected by the forward interest rate curve, over the term of the swap, with the recorded amount net of any credit valuation adjustments.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents Sterlings financial instruments that are measured at fair value on a recurring basis:
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
(in thousands) |
| ||||||||||
March 31, 2014 |
|
|
|
|
|
|
|
|
| ||||
Investment securities available for sale: |
|
|
|
|
|
|
|
|
| ||||
MBS |
|
$ |
1,206,160 |
|
$ |
0 |
|
$ |
1,206,160 |
|
$ |
0 |
|
Municipal bonds |
|
180,000 |
|
0 |
|
180,000 |
|
0 |
| ||||
Other |
|
222 |
|
0 |
|
222 |
|
0 |
| ||||
Total investment securities available for sale |
|
1,386,382 |
|
0 |
|
1,386,382 |
|
0 |
| ||||
Loans held for sale |
|
146,336 |
|
0 |
|
146,336 |
|
0 |
| ||||
Loans receivable, net |
|
25,741 |
|
0 |
|
0 |
|
25,741 |
| ||||
Other assets - derivatives |
|
3,176 |
|
0 |
|
3,176 |
|
0 |
| ||||
Total assets |
|
$ |
1,561,635 |
|
$ |
0 |
|
$ |
1,535,894 |
|
$ |
25,741 |
|
Other liabilities - derivatives |
|
580 |
|
0 |
|
580 |
|
0 |
| ||||
Total liabilities |
|
$ |
580 |
|
$ |
0 |
|
$ |
580 |
|
$ |
0 |
|
December 31, 2013 |
|
|
|
|
|
|
|
|
| ||||
Investment securities available for sale: |
|
|
|
|
|
|
|
|
| ||||
MBS |
|
$ |
1,239,900 |
|
$ |
0 |
|
$ |
1,239,900 |
|
$ |
0 |
|
Municipal bonds |
|
189,690 |
|
0 |
|
189,690 |
|
0 |
| ||||
Other |
|
222 |
|
0 |
|
222 |
|
0 |
| ||||
Total investment securities available for sale |
|
1,429,812 |
|
0 |
|
1,429,812 |
|
0 |
| ||||
Loans held for sale |
|
138,952 |
|
0 |
|
138,952 |
|
0 |
| ||||
Loans receivable, net |
|
26,462 |
|
0 |
|
0 |
|
26,462 |
| ||||
Other assets - derivatives |
|
4,479 |
|
0 |
|
4,479 |
|
0 |
| ||||
Total assets |
|
$ |
1,599,705 |
|
$ |
0 |
|
$ |
1,573,243 |
|
$ |
26,462 |
|
Other liabilities - derivatives |
|
516 |
|
0 |
|
516 |
|
0 |
| ||||
Total liabilities |
|
$ |
516 |
|
$ |
0 |
|
$ |
516 |
|
$ |
0 |
|
The following table presents the changes in fair value for loans receivable measured at fair value on a recurring basis using Level 3 inputs:
|
|
Three months ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Beginning balance |
|
$ |
26,462 |
|
$ |
23,177 |
|
Transfers from held for sale |
|
416 |
|
16,571 |
| ||
Principal payments and payoffs |
|
(1,261 |
) |
(806 |
) | ||
Valuation adjustments |
|
124 |
|
(47 |
) | ||
Ending balance |
|
$ |
25,741 |
|
$ |
38,895 |
|
The change in value between the aggregate fair value and the aggregate unpaid principal balance of loans receivable carried at fair value were a gain $124,000 during the three months ended March 31, 2014, and a loss of $47,000 during the three months
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
ended March 31, 2013, and were included in income from mortgage banking operations. Valuation adjustments were based on current market rates for comparable loans, in addition to discounts applied based on specific loan characteristics.
Derivatives include mortgage banking interest rate lock and loan delivery commitments, and interest rate swaps. See Note 11 for a further discussion of these derivatives. The difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale that are carried at fair value were included in earnings as follows:
|
|
Three Months Ended March 31, |
| ||||
|
|
2014 |
|
2013 |
| ||
|
|
(in thousands) |
| ||||
Mortgage banking operations |
|
$ |
1,781 |
|
$ |
(10,189 |
) |
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Sterling may be required, from time to time, to measure certain assets at fair value on a non-recurring basis from application of LOCOM accounting or write-downs of individual assets. The following table presents the carrying value for these assets as of the dates indicated:
|
|
March 31, 2014 |
|
Losses During the |
| |||||||||||
|
|
Total Carrying |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Three Months Ended |
| |||||
|
|
(in thousands) |
| |||||||||||||
Loans held for sale |
|
$ |
82,748 |
|
$ |
0 |
|
$ |
0 |
|
$ |
82,748 |
|
$ |
(6,811 |
) |
Loans |
|
31,269 |
|
0 |
|
0 |
|
31,269 |
|
(983 |
) | |||||
OREO |
|
989 |
|
0 |
|
0 |
|
989 |
|
(138 |
) | |||||
Mortgage servicing rights |
|
59,955 |
|
0 |
|
0 |
|
59,955 |
|
(96 |
) | |||||
|
|
December 31, 2013 |
|
Gains (Losses) |
| |||||||||||
|
|
Total Carrying |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
During the Year Ended |
| |||||
Loans |
|
$ |
118,037 |
|
$ |
0 |
|
$ |
0 |
|
$ |
118,037 |
|
$ |
(15,352 |
) |
OREO |
|
522 |
|
0 |
|
0 |
|
522 |
|
(930 |
) | |||||
Mortgage servicing rights |
|
60,100 |
|
0 |
|
0 |
|
60,100 |
|
6,948 |
| |||||
The loans held for sale disclosed above relate to loans that were identified to be divested as part of the branch sales that are expected to be sold in the second quarter of 2014. Based on the agreement to sell those branches, the loans will be sold at a loss. The loans disclosed above represent the net balance of loans as of period end for which a charge-off or specific reserve has been recognized during the three months ended March 31, 2014, and the year ended December 31, 2013, respectively, with these losses comprised of charge-offs and increases in the specific reserve. OREO represents the carrying value of properties for which a specific reserve was recorded during the periods presented as a result of updated appraisals subsequent to foreclosure. The appraisals may use comparable sales and income approach valuation methods and may be adjusted to reflect current market or property information. In addition to the loan and OREO losses disclosed above, charge-offs at foreclosure for properties held as of period end totaled $129,000 and $884,000 for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively. Fair value adjustments to the mortgage servicing rights were mainly due to market derived assumptions associated with mortgage prepayment speeds. Sterling carries its mortgage servicing rights at LOCOM, and they are accordingly measured at fair value on a non-recurring basis. Qualitative information regarding the fair value measurements for Level 3 financial instruments are as follows:
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
|
|
March 31, 2014 |
| ||
|
|
Method |
|
Inputs |
|
Loans |
|
Income, Market, Comparable Sales, Discounted Cash Flows |
|
External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors; selling costs ranging from 4.5% to 9%. |
|
OREO |
|
Income, Market, Comparable Sales, Discounted Cash Flows |
|
External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors; selling costs ranging from 4.5% to 9%. |
|
Mortgage servicing rights |
|
Discounted Cash Flow |
|
Weighted average prepayment speed: residential 9.6%, commercial 12.1%; weighted average discount rate: residential 9.7%, commercial 15.8%. |
|
14. Regulatory Capital:
The following table sets forth the respective regulatory capital positions for Sterling and Sterling Bank as of March 31, 2014:
|
|
Actual |
|
Adequately |
|
Well-Capitalized |
| |||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
|
|
(in thousands) |
| |||||||||||||
Tier 1 leverage ratio |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Sterling |
|
$ |
1,135,769 |
|
11.5% |
|
$ |
393,586 |
|
4.0% |
|
$ |
491,982 |
|
5.0% |
|
Sterling Bank |
|
1,100,641 |
|
11.2% |
|
393,456 |
|
4.0% |
|
491,820 |
|
5.0% |
| |||
Tier 1 risk-based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Sterling |
|
1,135,769 |
|
14.9% |
|
305,534 |
|
4.0% |
|
458,300 |
|
6.0% |
| |||
Sterling Bank |
|
1,100,641 |
|
14.4% |
|
305,599 |
|
4.0% |
|
458,399 |
|
6.0% |
| |||
Total risk-based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Sterling |
|
1,231,883 |
|
16.1% |
|
611,067 |
|
8.0% |
|
763,834 |
|
10.0% |
| |||
Sterling Bank |
|
1,196,775 |
|
15.7% |
|
611,198 |
|
8.0% |
|
763,998 |
|
10.0% |
| |||
15. Segment Information:
Sterlings operations are divided into two primary business segments that represent its core businesses:
· Community Banking - providing traditional banking services through the retail banking, private banking and commercial banking groups, including the originating and servicing of commercial real estate, owner occupied CRE and C&I loans.
· Home Loan Division - originating and selling residential real estate loans through its mortgage banking operations, on both a servicing-retained and servicing-released basis.
The Eliminations caption represents intercompany eliminations.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
|
|
As of and for the Three Months Ended March 31, 2014 |
| ||||||||||
|
|
Community |
|
Home Loan |
|
Eliminations |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
Interest income |
|
$ |
94,247 |
|
$ |
2,419 |
|
$ |
0 |
|
$ |
96,666 |
|
Interest expense |
|
12,182 |
|
0 |
|
796 |
|
12,978 |
| ||||
Net interest income |
|
82,065 |
|
2,419 |
|
(796 |
) |
83,688 |
| ||||
Provision for credit losses |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Noninterest income |
|
10,531 |
|
9,679 |
|
0 |
|
20,210 |
| ||||
Noninterest expense |
|
67,730 |
|
17,330 |
|
105 |
|
85,165 |
| ||||
Income (loss) before income taxes |
|
$ |
24,866 |
|
$ |
(5,232 |
) |
$ |
(901 |
) |
$ |
18,733 |
|
Total assets |
|
$ |
10,028,063 |
|
$ |
154,239 |
|
$ |
26,235 |
|
$ |
10,208,537 |
|
|
|
As of and for the Three Months Ended March 31, 2013 |
| ||||||||||
|
|
Community |
|
Home Loan |
|
Eliminations |
|
Total |
| ||||
|
|
(in thousands) |
| ||||||||||
Interest income |
|
$ |
83,690 |
|
$ |
7,067 |
|
$ |
0 |
|
$ |
90,757 |
|
Interest expense |
|
12,419 |
|
0 |
|
1,444 |
|
13,863 |
| ||||
Net interest income |
|
71,271 |
|
7,067 |
|
(1,444 |
) |
76,894 |
| ||||
Provision for credit losses |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
Noninterest income |
|
21,185 |
|
16,373 |
|
8 |
|
37,566 |
| ||||
Noninterest expense |
|
62,453 |
|
17,472 |
|
2,004 |
|
81,929 |
| ||||
Income (loss) before income taxes |
|
$ |
30,003 |
|
$ |
5,968 |
|
$ |
(3,440 |
) |
$ |
32,531 |
|
Total assets |
|
$ |
8,942,231 |
|
$ |
308,209 |
|
$ |
5,996 |
|
$ |
9,256,436 |
|
16. Commitments and Contingencies:
Merger Litigation. Sterling, its directors and Umpqua Holdings Corporation (Umpqua) are named as defendants in three lawsuits pending in the Superior Court of Washington in and for Spokane County, which have been consolidated under the caption In re Sterling Financial Corp. Merger Litigation, Lead No. 13-2-03848-4. The consolidated litigation generally alleges that the directors of Sterling breached their duties to the Sterling shareholders by approving the Merger, failing to take steps to maximize shareholder value, engaging in a flawed sales process, and agreeing to deal protection provisions in the merger agreement that are alleged to unduly favor Umpqua. Umpqua is alleged to have aided and abetted the alleged breaches of duty. The consolidated litigation also alleges that the disclosures approved by the Sterling board in connection with the Merger and the vote thereon are false and misleading in various respects. As relief, the complaints seek, among other things, an injunction against consummation of the Merger, rescission of the Merger if it is effected, damages in an unspecified amount, and the payment of plaintiffs attorneys fees and costs. The defendants believe that the lawsuits are without merit. On January 16, 2014 the parties to the consolidated litigation entered into a memorandum of understanding to settle the consolidated litigation (such memorandum including plaintiffs agreement to stay the consolidated litigation, except for proceedings relating to the settlement), subject to court approval and other customary conditions, including the execution of definitive documentation. The proposed settlement covers all holders of Sterling common stock (other than the defendants and their immediate families, heirs and assigns) from and including November 1, 2012 until the consummation of the Merger. The proposed settlement provides for the defendants to make certain additional disclosures, which were included in the proxy statement/prospectus that was mailed to Sterling shareholders in connection with the special meeting at which the Merger was approved. The proposed settlement does not provide for any other consideration from the defendants, including any monetary consideration (other than potentially attorneys fees as described in the following paragraph). Sterling shareholders who are members of the proposed settlement class will, at a later date, receive written notice containing the full terms of the proposed settlement and proposed release of class claims and related matters.
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
In the event that the parties enter into a settlement, a hearing will be scheduled at which the Superior Court of Washington in and for Spokane County will consider the fairness, reasonableness, and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims in the consolidated litigation that were or could have been brought challenging any aspect of the proposed Merger, the merger agreement and the transactions contemplated thereby, and any disclosure made in connection therewith (but excluding dissenters rights pursuant to Chapter 23B.13 of the WBCA), among other claims, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiffs counsel will file a petition in the Superior Court of Washington in and for Spokane County for an award of attorneys fees and expenses to be paid by Sterling or its successor, which the defendants may oppose. Sterling or its successor will pay or cause to be paid any attorneys fees and expenses awarded by the Superior Court of Washington in and for Spokane County. There can be no assurance that the parties will ultimately enter into a settlement or that the Superior Court of Washington in and for Spokane County will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated. Sterling management believes the proposed settlement will have no adverse material impact on Sterling.
Neither the memorandum of understanding nor the ultimate settlement is, and neither should be construed as, an admission of wrongdoing or liability by any defendant. Sterling, its directors and Umpqua continue to believe that the consolidated litigation is without merit and vigorously deny the allegations that Sterlings directors breached their fiduciary duties.
Securities Class Action Litigation. On December 11, 2009, a putative securities class action complaint, captioned City of Roseville Employees Retirement System v. Sterling Financial Corp., et al., No. CV 09-00368-EFS, was filed in the United States District Court for the Eastern District of Washington against Sterling and certain of its current and former officers. The Court appointed City of Roseville Employees Retirement System as lead plaintiff on March 9, 2010. On June 18, 2010, lead plaintiff filed a consolidated complaint alleging that the defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making false and misleading statements concerning our business and financial results. The consolidated complaint purported to be brought on behalf of a class of persons who purchased or otherwise acquired Sterlings stock during the period from July 23, 2008 to October 15, 2009. The consolidated complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose the extent of Sterlings delinquent commercial real estate, construction and land development loans, properly record losses for impaired loans, and properly reserve for loan losses, thereby causing Sterlings stock price to be artificially inflated during the purported class period. Plaintiffs sought unspecified damages and attorneys fees and costs. On August 30, 2010, Sterling moved to dismiss the Complaint. On March 2, 2011, after complete briefing, the court held a hearing on the motion to dismiss. On August 5, 2013, the court granted the motion to dismiss without prejudice. On October 11, 2013, the lead plaintiff filed an amended consolidated complaint. The amended consolidated complaint names the same defendants, specifies the same class period, alleges the same violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks the same relief. The amended consolidated complaint contains similar allegations of improper disclosure regarding Sterlings lending practices, status of loans and reserving and accounting for loans. On January 24, 2014, Sterling moved to dismiss the amended consolidated complaint. Sterling believes the lawsuit is without merit and continues to vigorously defend against it. Failure by Sterling to obtain a favorable resolution of the claims set forth in the complaint could have a material adverse effect on our business, results of operations and financial condition. Currently, a loss resulting from these claims is not considered probable or reasonably estimable in amount.
Additionally, Sterling is involved in ongoing litigation, primarily related to its normal business operations. When establishing a liability for contingent litigation losses, Sterling determines a range of potential losses for each matter that is both probable and estimable, and records the amount it considers to be the best estimate within the range. For these matters and others where an unfavorable outcome is reasonably possible but not probable, there is no estimable range of possible losses. Sterling believes that the eventual outcome from these cases will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position.
17. Subsequent Event:
On September 11, 2013, Sterling entered into a definitive agreement to merge (the Merger) with and into Umpqua, with headquarters in Portland, Oregon. As of the close of business on April 18, 2014, the Merger was completed with Sterling merging with and into Umpqua, as the surviving corporation in the Merger. Sterling Bank was merged with and into Umpqua Bank, an Oregon state chartered bank and wholly owned subsidiary of Umpqua. The combined company will operate under the
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
Umpqua Bank name and brand. Under the terms of the Merger, Sterling shareholders received 1.671 shares of Umpqua common stock and $2.18 in cash, without interest, for each share of Sterling common stock.
On February 19, 2014, Sterling entered into a definitive agreement for the sale of six depository branches located in Coos County and Douglas County, Oregon to Banner Bank (Banner), a wholly owned subsidiary of Banner Corporation. The branches are being divested in connection with the Merger pursuant to agreements with the United States Department of Justice and the Federal Reserve Board. Under the terms of the agreement, Sterling Bank will pay a negative premium of approximately $7.0 million for Banner to acquire approximately $225 million of deposits and $90 million of performing loans. During the three months ended March 31, 2014, the $7.0 million negative premium was recorded as a loss on assets held for sale in other noninterest income on the consolidated statements of income. This transaction is subject to customary closing conditions, and is expected to be completed during the second quarter of 2014.
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined balance sheet as of March 31, 2014 is presented as if the merger with Sterling had occurred on March 31, 2014.
(in thousands)
|
|
Umpqua |
|
Sterling |
|
Pro Forma |
|
Notes |
|
Pro Forma |
| ||||
Cash and due from banks |
|
$ |
196,963 |
|
$ |
106,650 |
|
$ |
|
|
|
|
$ |
303,613 |
|
Restricted cash |
|
|
|
7,000 |
|
|
|
|
|
7,000 |
| ||||
Interest bearing deposits |
|
887,620 |
|
329,916 |
|
(328,694 |
) |
A |
|
888,842 |
| ||||
Temporary investments |
|
525 |
|
|
|
|
|
|
|
525 |
| ||||
Total cash and cash equivalents |
|
1,085,108 |
|
443,566 |
|
(328,694 |
) |
|
|
1,199,980 |
| ||||
Investment securities, trading |
|
4,498 |
|
4,493 |
|
|
|
|
|
8,991 |
| ||||
Investment securities, available for sale |
|
1,701,730 |
|
1,386,382 |
|
|
|
|
|
3,088,112 |
| ||||
Investment securities, held to maturity |
|
5,465 |
|
154 |
|
|
|
|
|
5,619 |
| ||||
Loans held for sale |
|
73,106 |
|
229,084 |
|
(82,748 |
) |
B |
|
219,442 |
| ||||
Non-covered loans and leases |
|
7,411,108 |
|
7,421,139 |
|
(318,347 |
) |
C |
|
14,513,900 |
| ||||
Less: allowance for noncovered loan and lease losses |
|
(86,709 |
) |
(135,976 |
) |
135,976 |
|
D |
|
(86,709 |
) | ||||
Non-covered loans and leases, net |
|
7,324,399 |
|
7,285,163 |
|
(182,371 |
) |
|
|
14,427,191 |
| ||||
Covered loans and leases, net of allowance |
|
342,263 |
|
|
|
|
|
|
|
342,263 |
| ||||
Restricted equity securities |
|
29,948 |
|
|
|
|
|
|
|
29,948 |
| ||||
Premises and equipment, net |
|
180,199 |
|
98,095 |
|
22,662 |
|
E |
|
300,956 |
| ||||
Mortgage servicing rights |
|
49,220 |
|
59,955 |
|
11,986 |
|
F |
|
121,161 |
| ||||
Goodwill |
|
764,304 |
|
52,018 |
|
971,494 |
|
G |
|
1,787,816 |
| ||||
Other intangible assets, net |
|
11,184 |
|
14,342 |
|
40,219 |
|
H |
|
65,745 |
| ||||
Non-covered other real estate owned |
|
22,034 |
|
7,891 |
|
(460 |
) |
I |
|
29,465 |
| ||||
Covered other real estate owned |
|
1,746 |
|
|
|
|
|
|
|
1,746 |
| ||||
FDIC indemnification asset |
|
18,362 |
|
|
|
|
|
|
|
18,362 |
| ||||
Bank owned life insurance |
|
97,589 |
|
193,015 |
|
|
|
|
|
290,604 |
| ||||
Deferred tax asset |
|
11,393 |
|
275,502 |
|
29,165 |
|
J |
|
316,060 |
| ||||
Accrued interest receivable |
|
24,572 |
|
28,896 |
|
|
|
|
|
53,468 |
| ||||
Other assets |
|
91,606 |
|
129,981 |
|
|
|
|
|
221,587 |
| ||||
Total assets |
|
$ |
11,838,726 |
|
$ |
10,208,537 |
|
$ |
481,253 |
|
|
|
$ |
22,528,516 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-interest bearing demand deposits |
|
$ |
2,465,606 |
|
$ |
1,896,353 |
|
$ |
(56,831 |
) |
K |
|
$ |
4,305,128 |
|
Interest bearing deposits |
|
6,807,977 |
|
5,236,517 |
|
(153,800 |
) |
K |
|
11,890,694 |
| ||||
Total deposits |
|
9,273,583 |
|
7,132,870 |
|
(210,631 |
) |
|
|
16,195,822 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities sold under agreements to repurchase - customer |
|
262,483 |
|
39,972 |
|
|
|
|
|
302,455 |
| ||||
Securities sold under agreements to repurchase - broker/dealer |
|
|
|
500,000 |
|
46,795 |
|
L |
|
546,795 |
| ||||
Term debt |
|
250,964 |
|
976,059 |
|
3,690 |
|
M |
|
1,230,713 |
| ||||
Junior subordinated debentures, at fair value |
|
87,800 |
|
|
|
156,105 |
|
N |
|
243,905 |
| ||||
Junior subordinated debentures, at amortized cost |
|
101,818 |
|
245,300 |
|
(245,300 |
) |
O |
|
101,818 |
| ||||
Other liabilities |
|
127,602 |
|
103,128 |
|
333 |
|
P |
|
231,063 |
| ||||
Total liabilities |
|
10,104,250 |
|
8,997,329 |
|
(249,008 |
) |
|
|
18,852,571 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Preferred stock |
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock |
|
1,514,969 |
|
1,972,921 |
|
20,548 |
|
Q |
|
3,508,438 |
| ||||
Retained earnings/accumulated deficit |
|
219,686 |
|
(788,986 |
) |
736,986 |
|
R |
|
167,686 |
| ||||
Accumulated other comprehensive income |
|
(179 |
) |
27,273 |
|
(27,273 |
) |
S |
|
(179 |
) | ||||
Total shareholders equity |
|
1,734,476 |
|
1,211,208 |
|
730,261 |
|
|
|
3,675,945 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholders equity |
|
$ |
11,838,726 |
|
$ |
10,208,537 |
|
$ |
481,253 |
|
|
|
$ |
22,528,516 |
|
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined income statements for the three months ended March 31, 2013 and March 31, 2014 are presented as if the merger and the FinPac acquisition had occurred on January 1, 2013.
|
|
Three Months Ended March 31, 2014 |
|
Three Months Ended March 31, 2013 |
| ||||||||||||||||||||||||||||||||
(in thousands, except earnings per share) |
|
Umpqua |
|
Sterling Historical |
|
Sterling Pro |
|
Notes |
|
Pro Forma |
|
Umpqua |
|
FPH, LLC |
|
FinPac Pro |
|
Notes |
|
Sterling |
|
Sterling Pro |
|
Notes |
|
Pro Forma |
| ||||||||||
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Non-covered loans and leases |
|
$ |
91,268 |
|
$ |
86,153 |
|
$ |
5,568 |
|
T |
|
$ |
182,989 |
|
$ |
78,545 |
|
$ |
14,294 |
|
$ |
(1,224 |
) |
T |
|
$ |
81,187 |
|
$ |
4,061 |
|
T |
|
$ |
176,863 |
|
Covered loans |
|
12,718 |
|
|
|
|
|
|
|
12,718 |
|
14,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,580 |
| ||||||||||
Interest and dividends on investment securities |
|
11,453 |
|
10,357 |
|
|
|
|
|
21,810 |
|
10,956 |
|
|
|
|
|
|
|
9,418 |
|
|
|
|
|
20,374 |
| ||||||||||
Temporary investments and interest bearing deposits |
|
441 |
|
156 |
|
(173 |
) |
U |
|
424 |
|
252 |
|
|
|
|
|
|
|
152 |
|
(173 |
) |
U |
|
231 |
| ||||||||||
Total interest income |
|
115,880 |
|
96,666 |
|
5,395 |
|
|
|
217,941 |
|
104,333 |
|
14,294 |
|
(1,224 |
) |
|
|
90,757 |
|
3,888 |
|
|
|
212,048 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Deposits |
|
3,848 |
|
5,153 |
|
(1,424 |
) |
V |
|
7,577 |
|
5,878 |
|
|
|
|
|
|
|
6,307 |
|
(2,236 |
) |
V |
|
9,949 |
| ||||||||||
Federal funds purchased and securities sold under agreement to repurchase |
|
41 |
|
4,657 |
|
(3,360 |
) |
W |
|
1,338 |
|
31 |
|
|
|
|
|
|
|
4,775 |
|
(3,360 |
) |
W |
|
1,446 |
| ||||||||||
Term debt |
|
2,273 |
|
1,757 |
|
(406 |
) |
X |
|
3,624 |
|
2,273 |
|
1,747 |
|
|
|
|
|
1,333 |
|
(291 |
) |
X |
|
5,062 |
| ||||||||||
Junior subordinated debentures |
|
1,880 |
|
1,411 |
|
|
|
|
|
3,291 |
|
1,962 |
|
|
|
|
|
|
|
1,448 |
|
|
|
|
|
3,410 |
| ||||||||||
Total interest expense |
|
8,042 |
|
12,978 |
|
(5,190 |
) |
|
|
15,830 |
|
10,144 |
|
1,747 |
|
|
|
|
|
13,863 |
|
(5,887 |
) |
|
|
19,867 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net interest income |
|
107,838 |
|
83,688 |
|
10,585 |
|
|
|
202,111 |
|
94,189 |
|
12,547 |
|
(1,224 |
) |
|
|
76,894 |
|
9,775 |
|
|
|
192,181 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Provision for credit losses - non-covered |
|
5,400 |
|
|
|
|
|
Y |
|
5,400 |
|
6,988 |
|
2,577 |
|
|
|
Y |
|
|
|
|
|
Y |
|
9,565 |
| ||||||||||
(Recapture of) provision for credit losses - covered |
|
571 |
|
|
|
|
|
|
|
571 |
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
232 |
| ||||||||||
Net interest income after provision for (recapture of) credit losses |
|
101,867 |
|
83,688 |
|
10,585 |
|
|
|
196,140 |
|
86,969 |
|
9,970 |
|
(1,224 |
) |
|
|
76,894 |
|
9,775 |
|
|
|
182,384 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Service charges on deposit accounts |
|
7,767 |
|
13,710 |
|
(4,247 |
) |
Z |
|
17,230 |
|
6,992 |
|
|
|
|
|
|
|
13,140 |
|
(3,463 |
) |
Z |
|
16,669 |
| ||||||||||
Brokerage commissions and fees |
|
3,725 |
|
922 |
|
|
|
|
|
4,647 |
|
3,636 |
|
|
|
|
|
|
|
990 |
|
|
|
|
|
4,626 |
| ||||||||||
Mortgage banking revenue, net |
|
10,439 |
|
7,788 |
|
|
|
|
|
18,227 |
|
23,568 |
|
|
|
|
|
|
|
13,794 |
|
|
|
|
|
37,362 |
| ||||||||||
Gain on sale of investment securities, net |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
| ||||||||||
Other than temporary impairment losses on investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Portion of other-than-temporary impairment losses transferred from OCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Loss on junior subordinated debentures carried at fair value |
|
(542 |
) |
|
|
(966 |
) |
AA |
|
(1,508 |
) |
(542 |
) |
|
|
|
|
|
|
|
|
(966 |
) |
AA |
|
(1,508 |
) | ||||||||||
Bargain purchase gain on acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,544 |
|
|
|
|
|
7,544 |
| ||||||||||
Gain (Loss) on other assets |
|
7 |
|
(6,389 |
) |
7,000 |
|
AB |
|
618 |
|
121 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
178 |
| ||||||||||
Charge on prepayment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Gain on other loan sales |
|
517 |
|
2,641 |
|
|
|
|
|
3,158 |
|
744 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
769 |
| ||||||||||
Bank owned life insurance |
|
736 |
|
1,461 |
|
|
|
|
|
2,197 |
|
760 |
|
|
|
|
|
|
|
1,557 |
|
|
|
|
|
2,317 |
| ||||||||||
Change in FDIC indemnification asset |
|
(4,840 |
) |
|
|
|
|
|
|
(4,840 |
) |
(5,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(5,073 |
) | ||||||||||
Other income |
|
5,198 |
|
77 |
|
|
|
|
|
5,275 |
|
3,802 |
|
790 |
|
|
|
|
|
459 |
|
|
|
|
|
5,051 |
| ||||||||||
Total non-interest income |
|
23,007 |
|
20,210 |
|
1,787 |
|
|
|
45,004 |
|
34,015 |
|
790 |
|
|
|
|
|
37,566 |
|
(4,429 |
) |
|
|
67,942 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Salaries and employee benefits |
|
53,218 |
|
47,576 |
|
(101 |
) |
AC |
|
100,693 |
|
51,505 |
|
1,979 |
|
182 |
|
AC |
|
42,436 |
|
(5 |
) |
AC |
|
96,097 |
| ||||||||||
Net occupancy and equipment |
|
16,501 |
|
11,761 |
|
|
|
|
|
28,262 |
|
14,735 |
|
407 |
|
|
|
|
|
10,173 |
|
|
|
|
|
25,315 |
| ||||||||||
Communications |
|
2,902 |
|
9,783 |
|
|
|
|
|
12,685 |
|
3,203 |
|
81 |
|
|
|
|
|
8,728 |
|
|
|
|
|
12,012 |
| ||||||||||
Marketing |
|
1,005 |
|
1,666 |
|
|
|
|
|
2,671 |
|
861 |
|
|
|
|
|
|
|
2,436 |
|
|
|
|
|
3,297 |
| ||||||||||
Supplies |
|
896 |
|
321 |
|
|
|
|
|
1,217 |
|
718 |
|
|
|
|
|
|
|
469 |
|
|
|
|
|
1,187 |
| ||||||||||
Services |
|
5,990 |
|
3,241 |
|
|
|
|
|
9,231 |
|
5,893 |
|
682 |
|
|
|
|
|
5,952 |
|
|
|
|
|
12,527 |
| ||||||||||
FDIC assessments |
|
1,863 |
|
1,178 |
|
|
|
|
|
3,041 |
|
1,651 |
|
|
|
|
|
|
|
1,930 |
|
|
|
|
|
3,581 |
| ||||||||||
Net (gain) loss on non-covered OREO |
|
(18 |
) |
1,508 |
|
|
|
|
|
1,490 |
|
(130 |
) |
|
|
|
|
|
|
2,030 |
|
|
|
|
|
1,900 |
| ||||||||||
Net (gain) loss on covered OREO |
|
(46 |
) |
|
|
|
|
|
|
(46 |
) |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
284 |
| ||||||||||
Intangible amortization |
|
1,194 |
|
1,218 |
|
1,735 |
|
AD |
|
4,147 |
|
1,204 |
|
177 |
|
|
|
|
|
1,659 |
|
2,024 |
|
AD |
|
5,064 |
| ||||||||||
Merger related expense |
|
5,983 |
|
2,715 |
|
|
|
|
|
8,698 |
|
1,531 |
|
|
|
|
|
|
|
1,036 |
|
|
|
|
|
2,567 |
| ||||||||||
Other expenses |
|
7,030 |
|
4,198 |
|
(213 |
) |
AE |
|
11,015 |
|
4,307 |
|
506 |
|
(385 |
) |
AE |
|
5,080 |
|
(233 |
) |
AE |
|
9,275 |
| ||||||||||
Total non-interest expense |
|
96,518 |
|
85,165 |
|
1,421 |
|
|
|
183,104 |
|
85,762 |
|
3,832 |
|
(203 |
) |
|
|
81,929 |
|
1,786 |
|
|
|
173,106 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Income before provision for income taxes |
|
28,356 |
|
18,733 |
|
10,951 |
|
|
|
58,040 |
|
35,222 |
|
6,928 |
|
(1,021 |
) |
|
|
32,531 |
|
3,560 |
|
|
|
77,220 |
| ||||||||||
Provision for income taxes |
|
9,592 |
|
6,380 |
|
4,216 |
|
AF |
|
20,188 |
|
11,861 |
|
2,716 |
|
(393 |
) |
AF |
|
9,853 |
|
1,371 |
|
AF |
|
25,408 |
| ||||||||||
Net income |
|
$ |
18,764 |
|
$ |
12,353 |
|
$ |
6,735 |
|
|
|
$ |
37,852 |
|
$ |
23,361 |
|
$ |
4,212 |
|
$ |
(628 |
) |
|
|
$ |
22,678 |
|
$ |
2,189 |
|
|
|
$ |
51,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income |
|
$ |
18,764 |
|
$ |
12,353 |
|
$ |
6,735 |
|
|
|
$ |
37,852 |
|
$ |
23,361 |
|
$ |
4,212 |
|
$ |
(628 |
) |
|
|
$ |
22,678 |
|
$ |
2,189 |
|
|
|
$ |
51,812 |
|
Dividends and undistributed earnings allocated to participating securities |
|
113 |
|
|
|
|
|
|
|
113 |
|
183 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
211 |
| ||||||||||
Net earnings available to common shareholders |
|
$ |
18,651 |
|
$ |
12,353 |
|
$ |
6,735 |
|
|
|
$ |
37,739 |
|
$ |
23,178 |
|
$ |
4,212 |
|
$ |
(656 |
) |
|
|
$ |
22,678 |
|
$ |
2,189 |
|
|
|
$ |
51,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
$ |
0.17 |
|
$ |
0.20 |
|
|
|
|
|
$ |
0.17 |
|
$ |
0.21 |
|
$ |
|
|
|
|
|
|
$ |
0.36 |
|
|
|
|
|
$ |
0.24 |
| |||
Diluted |
|
$ |
0.17 |
|
$ |
0.19 |
|
|
|
|
|
$ |
0.17 |
|
$ |
0.21 |
|
$ |
|
|
|
|
|
|
$ |
0.36 |
|
|
|
|
|
$ |
0.24 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
112,170 |
|
62,398 |
|
41,870 |
|
AG |
|
216,438 |
|
111,937 |
|
|
|
|
|
|
|
62,242 |
|
41,765 |
|
AG |
|
215,944 |
| ||||||||||
Diluted |
|
112,367 |
|
63,731 |
|
42,782 |
|
AH |
|
218,880 |
|
112,118 |
|
|
|
|
|
|
|
63,005 |
|
43,247 |
|
AH |
|
218,370 |
|
Note 1Basis of Presentation
The unaudited pro forma condensed combined financial information and explanatory notes have been prepared to illustrate the effects of the merger involving Umpqua and Sterling under the acquisition method of accounting with Umpqua treated as the acquirer. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of each period presented, nor does it necessarily indicate the results of operations in future periods or the future financial position of the combined entities. Under the acquisition method of accounting, the assets and liabilities of Sterling, as of the effective date of the merger, will be recorded by Umpqua at their respective fair values and the excess of the merger consideration over the fair value of Sterlings net assets will be allocated to goodwill.
The merger, which was completed on April 18, 2014, provided for Sterling common shareholders to receive 1.671 shares of Umpqua common stock and $2.18 in cash for each share of Sterling common stock they held immediately prior to the merger. The value of the per share merger consideration was approximately $33.23 based upon the $18.58 closing price of Umpqua common stock on the date of merger closing multiplied by the exchange ratio of 1.671 and adding the cash portion of the merger consideration of $2.18 per share. The pro forma allocation of purchase price reflected in the unaudited pro forma condensed combined financial information is subject to adjustment and may vary from the actual purchase price allocation that will be recorded. Adjustments may include, but not be limited to, changes in (i) Sterlings balance sheet through the effective time of the merger; (ii) total merger related expenses if consummation and/or implementation costs vary from currently estimated amounts; and (iii) the underlying values of assets and liabilities if market conditions differ from current assumptions.
The accounting policies of both Umpqua and Sterling are in the process of being reviewed in detail. Upon completion of such review, conforming adjustments or financial statement reclassification may be determined.
Note 2Estimated Merger and Integration Costs
In connection with the merger, the plan to integrate Umpquas and Sterlings operations is still being developed. Over the next several months, the specific details of these plans will continue to be refined. Umpqua and Sterling are currently in the process of assessing the two companies personnel, benefit plans, premises, equipment, computer systems, supply chain methodologies, and service contracts to determine where they may take advantage of redundancies or where it will be beneficial or necessary to convert to one system. Certain decisions arising from these assessments may involve involuntary termination of Sterlings employees, vacating Sterlings leased premises, changing information systems, canceling contracts between Sterling and certain service providers and selling or otherwise disposing of certain premises, furniture and equipment owned by Sterling. Additionally, as part of our formulation of the integration plan, certain actions regarding existing Umpqua information systems, premises, equipment, benefit plans, supply chain methodologies, supplier contracts, and involuntary termination of personnel may be taken. Umpqua expects to incur merger-related expenses including system conversion costs, employee retention and severance agreements, communications to customers, and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature and timing of these integration actions. Most acquisition and restructuring costs are recognized separately from a business combination and generally will be expensed as incurred. We estimate total merger related cost to be approximately $80 million. We incurred $6.2 million of merger expense in 2013 and $6.0 during three months ended March 31, 2014, and anticipate the majority of the remainder to be incurred in 2014.
Note 3Estimated Annual Cost Savings
Umpqua expects to realize $87 million in annual pre-tax cost savings following the merger, which management expects to be phased-in over a two-year period, but there is no assurance that the anticipated cost savings will be realized on the anticipated time schedule or at all. These cost savings are not reflected in the presented pro forma financial information.
Note 4Divestiture of Sterling branches
Due to competitive considerations of the merger in accordance with regulatory guidelines, Sterling branches in several banking markets will be divested in conjunction with the merger. These amounts are reflected in the pro forma adjustments below. However, other asset dispositions not required as further discussed in Note 2 are not included in the pro forma adjustments.
Note 5Preliminary Purchase Accounting Allocation
The unaudited pro forma condensed combined financial information reflects the issuance of approximately 104,386,252 shares of Umpqua common stock totaling approximately $1.94 billion as well as cash consideration of approximately $136.2 million and liability for future cash consideration for exchange of warrants of $6.5 million. The merger will be accounted for using the acquisition method of accounting; accordingly Umpqua will recognize Sterlings assets (including identifiable intangible assets) and liabilities at their respective estimated fair values as of the merger date. Accordingly, the pro forma purchase consideration and the assets acquired and the liabilities assumed based on their estimated fair values are summarized in the following table.
|
|
March 31, 2014 |
| ||||
|
|
(in thousands) |
| ||||
Fair value consideration to Sterling shareholders |
|
|
|
|
| ||
Cash paid (62,469,331 shares at $2.18 per share and cash-in-lieu of fractional shares) |
|
|
|
$ |
136,191 |
| |
Liability recorded for warrants (2,960,238 shares at $2.18 per share) |
|
|
|
6,453 |
| ||
Fair value of common shares issued (62,469,331 shares at approximately $31.05 price per share) |
|
|
|
1,939,497 |
| ||
Fair value of warrants, common stock options, and restricted stock exchanged (6,380,825 shares at a weighted average pre-merger service period cost per share of approximately $8.46) |
|
|
|
53,972 |
| ||
Total pro forma purchase price |
|
|
|
$ |
2,136,113 |
| |
Fair value of assets acquired: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
303,063 |
|
|
| |
Investment securities |
|
1,391,029 |
|
|
| ||
Non-covered loans and leases, net |
|
7,249,128 |
|
|
| ||
Premises and equipment, net |
|
120,757 |
|
|
| ||
Mortgage servicing rights |
|
71,941 |
|
|
| ||
Other intangible assets, net |
|
54,561 |
|
|
| ||
Non-covered other real estate owned |
|
7,431 |
|
|
| ||
Bank owned life insurance |
|
193,015 |
|
|
| ||
Deferred tax asset |
|
304,667 |
|
|
| ||
Accrued interest receivable |
|
28,896 |
|
|
| ||
Other assets |
|
129,981 |
|
|
| ||
Total assets acquired |
|
$ |
9,854,469 |
|
|
| |
Fair value of liabilities assumed: |
|
|
|
|
| ||
Deposits |
|
$ |
6,922,239 |
|
|
| |
Securities sold under agreements to repurchase |
|
586,767 |
|
|
| ||
Term debt |
|
979,749 |
|
|
| ||
Junior subordinated debentures |
|
156,105 |
|
|
| ||
Other liabilities |
|
103,128 |
|
|
| ||
Total liabilities assumed |
|
$ |
8,747,988 |
|
|
| |
Net assets acquired |
|
|
|
$ |
1,106,481 |
| |
Preliminary pro forma goodwill |
|
|
|
$ |
1,023,512 |
|
Note 6Pro Forma Adjustments
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current assumptions and valuations, which are subject to change.
Balance Sheet |
|
|
| |||
(dollars in thousands) |
|
|
| |||
A |
|
Adjustments to cash and cash equivalents |
|
|
| |
|
|
To reflect cash used to purchase Sterling |
|
$ |
(136,191 |
) |
|
|
To reflect cash paid for merger expenses |
|
(52,000 |
) | |
|
|
To reflect cash paid for divestiture of Sterling branches |
|
(140,503 |
) | |
|
|
|
|
$ |
(328,694 |
) |
|
|
|
|
|
| |
B |
|
Adjustment to loans held for sale |
|
|
| |
|
|
To reflect loans sold with divestiture of Sterling branches at merger date. |
|
$ |
(82,748 |
) |
|
|
|
|
|
| |
C |
|
Adjustments to non-covered loans and leases |
|
|
| |
|
|
To reflect estimated fair value at merger date. The adjustment to loans is primarily related to credit deterioration in the acquired loan portfolio. The credit adjustment to loans is calculated as 3.5% of gross loans. During Umpquas due diligence on Sterling, Umpqua reviewed loan information across collateral types and geographic distributions. Umpqua applied traditional loan examination methodologies to arrive at the fair value adjustment. The rate adjustment to loans reflects estimated fair value at merger date based on current market rates for similar assets and will be accreted to income using the effective yield method over the contractual lives of the loans, which is approximately ten years. |
|
$ |
(302,000 |
) |
|
|
To reflect removal of deferred loan fees, costs and dealer incentives |
|
(16,347 |
) | |
|
|
|
|
$ |
(318,347 |
) |
|
|
|
|
|
| |
D |
|
Adjustment to allowance for non-covered loan and lease losses |
|
|
| |
|
|
To remove Sterling allowance at merger date as the credit risk is contemplated in the fair value adjustment in Adjustment B above. |
|
$ |
135,976 |
|
|
|
|
|
|
| |
E |
|
Adjustment to premises and equipment, net |
|
|
| |
|
|
To reflect divestiture of Sterling branches at merger date. |
|
$ |
(2,295 |
) |
|
|
To reflect fair value adjustments to acquired premises and equipment |
|
$ |
24,957 |
|
|
|
|
|
$ |
22,662 |
|
|
|
|
|
|
| |
F |
|
Adjustment to mortgage servicing rights |
|
|
| |
|
|
To reflect estimated fair value at merger date based on current market rates for similar assets. |
|
$ |
11,986 |
|
|
|
|
|
|
| |
G |
|
Adjustments to goodwill |
|
|
| |
|
|
To remove Sterling goodwill at merger date |
|
$ |
(52,018 |
) |
|
|
To reflect the goodwill associated with the merger |
|
1,023,512 |
| |
|
|
|
|
$ |
971,494 |
|
H |
|
Adjustments to other intangible assets, net |
|
|
| |
|
|
To remove Sterling other intangible assets, net |
|
$ |
(14,342 |
) |
|
|
To record the third party calculated fair value of acquired identifiable intangible assets. The acquired core deposit intangible will be amortized over ten years using a sum-of-the-years-digits method. |
|
54,561 |
| |
|
|
|
|
$ |
40,219 |
|
|
|
|
|
|
| |
I |
|
Adjustment to non-covered other real estate owned |
|
|
| |
|
|
To record the estimated fair value of acquired non-covered other real estate owned. |
|
$ |
(460 |
) |
|
|
|
|
|
| |
J |
|
Adjustments to deferred tax asset |
|
|
| |
|
|
To reflect deferred tax asset created in the merger, which is calculated as follows: |
|
|
| |
|
|
Adjustments to non-covered loans and leases |
|
$ |
302,000 |
|
|
|
Adjustment to allowance for non-covered loan and lease losses |
|
(135,976 |
) | |
|
|
Adjustment to deferred loan fees/costs |
|
16,347 |
| |
|
|
Adjustments to premises and equipment |
|
(24,957 |
) | |
|
|
Adjustment to mortgage servicing rights |
|
(11,986 |
) | |
|
|
Adjustments to other intangible assets, net |
|
(40,219 |
) | |
|
|
Adjustment to non-covered other real estate owned |
|
460 |
| |
|
|
Adjustments to deposits |
|
14,915 |
| |
|
|
Adjustments to other liabilites (deferred revenue and rent) |
|
(6,120 |
) | |
|
|
Adjustment to securities sold under agreements to repurchase - broker/dealer |
|
46,795 |
| |
|
|
Adjustments to term debt |
|
3,690 |
| |
|
|
Adjustment to junior subordinated debentures |
|
(89,195 |
) | |
|
|
Subtotal for fair value adjustments |
|
$ |
75,754 |
|
|
|
Calculated deferred tax asset at Umpquas estimated statutory tax rate of 38.5% |
|
$ |
29,165 |
|
|
|
|
|
|
| |
K |
|
Adjustments to deposits |
|
|
| |
|
|
To reflect estimated fair value at merger date based on current market rates for similar products. This adjustment will be accreted into income over the estimated lives of the deposits, which is approximately three years. |
|
$ |
14,915 |
|
|
|
To reflect deposits sold with divestiture of Sterling branches at merger date. |
|
|
| |
|
|
Non-interest bearing demand deposits |
|
(56,831 |
) | |
|
|
Interest bearing deposits |
|
(168,715 |
) | |
|
|
|
|
$ |
(210,631 |
) |
|
|
|
|
|
| |
L |
|
Adjustment to securities sold under agreements to repurchase - broker/dealer |
|
|
| |
|
|
To reflect estimated fair value at merger date based on current market rates and spreads for similar borrowings. This estimated premium will be accreted to interest expense over the remaining contractual life of such borrowings, which is approximately 4 years. |
|
$ |
46,795 |
|
|
|
|
|
|
| |
M |
|
Adjustment to term debt |
|
|
| |
|
|
To reflect estimated fair value at merger date based on current market rates and spreads for similar borrowings. This estimated premium will be accreted to interest expense over the remaining contractual life of such borrowings, which is approximately three years. |
|
$ |
3,690 |
|
|
|
|
|
|
| |
N |
|
Adjustment to junior subordinated debentures, at fair value |
|
|
| |
|
|
To reclassify junior subordinated debentures, at amortized cost to junior subordinated debentures, at fair value. Junior subordinated debentures acquired will be held at fair value. |
|
$ |
245,300 |
|
|
|
To reflect estimated fair value at merger date based on third party valuation. |
|
(89,195 |
) | |
|
|
|
|
$ |
156,105 |
|
O |
|
Adjustment to junior subordinated debentures, at amortized cost |
|
|
| |
|
|
To reclassify junior subordinated debentures, at amortized cost to junior subordinated debentures, at fair value. Junior subordinated debentures acquired will be held at fair value. |
|
$ |
(245,300 |
) |
|
|
|
|
|
| |
P |
|
Adjustment to other liabilities |
|
|
| |
|
|
To remove deferred revenue and deferred rent liabilities |
|
$ |
(6,120 |
) |
|
|
To record liability created due to exchange of Sterling warrants. |
|
$ |
6,453 |
|
|
|
|
|
$ |
333 |
|
|
|
|
|
|
| |
Q |
|
Adjustments to common stock |
|
|
| |
|
|
To eliminate historical Sterling common stock |
|
$ |
(1,972,921 |
) |
|
|
To reflect the issuance and exchange of Umpqua common stock to Sterling shareholders |
|
1,993,469 |
| |
|
|
|
|
$ |
20,548 |
|
|
|
|
|
|
| |
R |
|
Adjustment to retained earnings/accumulated deficit |
|
|
| |
|
|
To eliminate historical Sterling accumulated deficit |
|
$ |
788,986 |
|
|
|
To adjust for after tax merger expenses |
|
(52,000 |
) | |
|
|
|
|
$ |
736,986 |
|
|
|
|
|
|
| |
S |
|
Adjustment to accumulated other comprehensive income |
|
|
| |
|
|
To eliminate historical Sterling accumulated other comprehensive income |
|
$ |
(27,273 |
) |
Income Statements |
|
Three Months |
|
Three Months |
| ||||
T |
|
Adjustments to non-covered loans and leases interest income |
|
|
|
|
| ||
|
|
FinPac |
|
|
|
|
| ||
|
|
To reflect adjusted interest income from leases due to the estimated loss of income from the write-off of FinPacs loan mark and the amortization of the new interest rate mark and the accretion of the acquisition accounting adjustment relating to the credit mark. The amortization period will be the contractual lives of the leases, which is approximately four years, and will be amortized into income using the effective yield method. |
|
$ |
|
|
$ |
(1,224 |
) |
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect accretion of loan rate discount resulting from non-covered loans and leases fair value pro forma Adjustment C using effective yield methodology over the estimated lives of the acquired loan portfolio, which is approximately ten years. |
|
$ |
4,433 |
|
$ |
4,048 |
|
|
|
To reclassify miscellaneous loan fees from service charges on deposit accounts to non-covered loans and leases interest income to conform with consolidated presentation. |
|
2,248 |
|
1,316 |
| ||
|
|
To reflect non-covered loans and leases interest income on branches divested at merger date. |
|
(1,113 |
) |
(1,303 |
) | ||
|
|
|
|
$ |
5,568 |
|
$ |
4,061 |
|
|
|
|
|
|
|
|
| ||
U |
|
Adjustments to interest income on temporary investments and interest bearing deposits |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect adjusted interest income on temporary investments and interest bearing cash due to cash paid for purchase and divestiture of Sterling branches. |
|
$ |
(173 |
) |
$ |
(173 |
) |
V |
|
Adjustments to interest expense on deposits |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect amortization of deposit premium resulting from deposit fair value pro forma Adjustment K based on weighted average life of time deposits being approximately three years. |
|
$ |
(1,283 |
) |
$ |
(2,050 |
) |
|
|
To reflect interest expense on branches divested at merger date. |
|
(141 |
) |
(186 |
) | ||
|
|
|
|
$ |
(1,424 |
) |
$ |
(2,236 |
) |
|
|
|
|
|
|
|
| ||
W |
|
Adjustments to interest expense on Federal funds purchased and securities sold under agreement to repurchase |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect amortization of securities sold under agreements to repurchase premium resulting from Securities sold under agreements to repurchase fair value pro forma Adjustment L based on weighted average life of borrowings of 20 months. |
|
$ |
(3,360 |
) |
$ |
(3,360 |
) |
|
|
|
|
|
|
|
| ||
X |
|
Adjustments to interest expense on term debt |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect amortization of term debt premium resulting from term debt fair value pro forma Adjustment M. |
|
$ |
(406 |
) |
$ |
(291 |
) |
|
|
|
|
|
|
|
| ||
Y |
|
Adjustments to provision for credit losses - non-covered |
|
|
|
|
| ||
|
|
FinPac |
|
|
|
|
| ||
|
|
With acquired leases recorded at fair value, Umpqua would expect a reduction in the historical the provision for loan and lease losses from FinPac, however no adjustment to the historical amount of FinPac provision for loan and lease losses is reflected in this pro forma financial information. |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
With acquired loans recorded at fair value, Umpqua would expect a reduction in the provision for loan losses from Sterling, however no adjustment to the historical amount of Sterling provision for loan losses is reflected in this pro forma financial information. |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
| ||
Z |
|
Adjustments to service charges on deposit accounts |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect service charges on deposit accounts on branches divested at merger date. |
|
$ |
(560 |
) |
$ |
(708 |
) |
|
|
To reclassify miscellaneous loan fees from service charges on deposit accounts to non-covered loans and leases interest income to conform with consolidated presentation. |
|
(2,248 |
) |
(1,316 |
) | ||
|
|
To reflect lower service charges on deposit accounts as a result of passing $10 billion asset threshold. |
|
(1,439 |
) |
(1,439 |
) | ||
|
|
|
|
$ |
(4,247 |
) |
$ |
(3,463 |
) |
|
|
|
|
|
|
|
| ||
AA |
|
Adjustment to loss on junior subordinated debentures carried at fair value |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect change in fair value of junior subordinated debenture discount resulting from junior subordinated debenture fair value pro forma Adjustment N based on remaining average life of junior subordinated debentures of 23.1 years. |
|
$ |
(966 |
) |
$ |
(966 |
) |
|
|
|
|
|
|
|
| ||
AB |
|
Adjustment to gain (loss) on sale of other assets |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To remove loss on sale of branch divestiture. |
|
$ |
7,000 |
|
$ |
|
|
AC |
|
Adjustments to salaries and employee benefits |
|
|
|
|
| ||
|
|
FinPac |
|
|
|
|
| ||
|
|
To reflect additional compensation expense related to restricted stock granted to FinPac management. |
|
$ |
|
|
$ |
205 |
|
|
|
To remove Financial Pacific Holdings LLC salaries and employee benefits |
|
|
|
(92 |
) | ||
|
|
To reclassify private equity compensation expense from other expense. |
|
|
|
69 |
| ||
|
|
|
|
$ |
|
|
$ |
182 |
|
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect salaries and employee benefits related to branches divested at merger date. |
|
$ |
(647 |
) |
$ |
(551 |
) |
|
|
To reflect additional compensation expense related to restricted stock granted to Sterling management and retention bonuses of top five retained executives. |
|
546 |
|
546 |
| ||
|
|
|
|
$ |
(101 |
) |
$ |
(5 |
) |
|
|
|
|
|
|
|
| ||
AD |
|
Adjustments to amortization of intangibles |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect amortization of acquired intangible assets based on amortization period of ten years and using the sum-of-the-years-digits method of amortization |
|
1,735 |
|
2,024 |
| ||
|
|
|
|
$ |
1,735 |
|
$ |
2,024 |
|
|
|
|
|
|
|
|
| ||
AE |
|
Adjustments to other expenses |
|
|
|
|
| ||
|
|
FinPac |
|
|
|
|
| ||
|
|
To remove management fees. |
|
$ |
|
|
$ |
(286 |
) |
|
|
To remove director compensation and travel fees. |
|
|
|
(30 |
) | ||
|
|
To reclassify private equity compensation expense to salaries and benefits. |
|
|
|
(69 |
) | ||
|
|
|
|
$ |
|
|
$ |
(385 |
) |
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect other expenses related to branches divested at merger date. |
|
(213 |
) |
(233 |
) | ||
|
|
|
|
$ |
(213 |
) |
$ |
(233 |
) |
|
|
|
|
|
|
|
| ||
AF |
|
Adjustments to income tax provision |
|
|
|
|
| ||
|
|
FinPac |
|
|
|
|
| ||
|
|
To reflect the income tax effect of pro forma adjustments at Umpquas statutory tax rate of 38.5% |
|
$ |
|
|
$ |
(393 |
) |
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect the income tax effect of pro forma adjustments at Umpquas statutory tax rate of 38.5% |
|
$ |
4,216 |
|
$ |
1,371 |
|
|
|
|
|
|
|
|
| ||
AG |
|
Adjustment to weighted average number of common shares outstanding - Basic |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect acquisition of Sterling common shares. |
|
(62,398 |
) |
(62,242 |
) | ||
|
|
To reflect issuance of Umpqua common stock as Sterling shareholders will receive 1.671 shares of Umpqua common stock for each share of Sterling common stock they hold immediately prior to the merger. |
|
104,268 |
|
104,007 |
| ||
|
|
|
|
41,870 |
|
41,765 |
| ||
|
|
|
|
|
|
|
| ||
AH |
|
Adjustment to weighted average number of common shares outstanding - Diluted |
|
|
|
|
| ||
|
|
Sterling |
|
|
|
|
| ||
|
|
To reflect acquisition of Sterling common shares. |
|
(63,731 |
) |
(63,005 |
) | ||
|
|
To reflect issuance of Umpqua common stock as Sterling shareholders will receive 1.671 shares of Umpqua common stock for each share of Sterling common stock they hold immediately prior to the merger. |
|
104,268 |
|
104,007 |
| ||
|
|
To reflect issuance of Umpqua common stock as Sterling restricted stock award holders and stock option holders will receive 1.7896 shares of Umpqua common stock for each restricted stock award or stock option they hold immediately prior to the merger and Sterling warrant holders will receive 1.671 shares of Umpqua common stock for each warrant they hold immediately prior to the merger. |
|
2,245 |
|
2,245 |
| ||
|
|
|
|
42,782 |
|
43,247 |
|
COMPARATIVE PER SHARE DATA
Shares issued for purchase |
|
104,386,252 |
|
|
|
Umpqua |
|
Pro Forma |
|
Sterling |
|
Umpqua Pro |
|
Sterling Pro |
| |||||
Basic Earnings |
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months ended March 31, 2014 |
|
$ |
0.17 |
|
$ |
0.17 |
|
$ |
0.20 |
|
$ |
0.17 |
|
$ |
0.29 |
|
Three Months ended March 31, 2013 |
|
$ |
0.21 |
|
$ |
0.24 |
|
$ |
0.36 |
|
$ |
0.24 |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Diluted Earnings |
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months ended March 31, 2014 |
|
$ |
0.17 |
|
$ |
0.17 |
|
$ |
0.19 |
|
$ |
0.17 |
|
$ |
0.29 |
|
Three Months ended March 31, 2013 |
|
$ |
0.21 |
|
$ |
0.24 |
|
$ |
0.36 |
|
$ |
0.24 |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash Dividends Paid (2) |
|
|
|
|
|
|
|
|
|
|
| |||||
Three Months ended March 31, 2014 |
|
$ |
0.15 |
|
$ |
0.15 |
|
$ |
0.20 |
|
$ |
0.15 |
|
$ |
0.25 |
|
Three Months ended March 31, 2013 |
|
$ |
0.10 |
|
$ |
0.10 |
|
$ |
|
|
$ |
0.10 |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Book Value |
|
|
|
|
|
|
|
|
|
|
| |||||
March 31, 2014 |
|
$ |
15.44 |
|
$ |
15.44 |
|
$ |
19.39 |
|
$ |
16.98 |
|
$ |
28.38 |
|
March 31, 2013 |
|
$ |
15.49 |
|
$ |
15.52 |
|
$ |
19.86 |
|
$ |
16.96 |
|
$ |
28.34 |
|
(1) Computed by multiplying the Umpqua pro forma combined amounts by the exchange ratio of 1.671.
(2) Pro forma combined cash dividends paid are based only upon Umpquas historical amounts