Financial Services

Sterling’s Silver Lining

By By Jeff Bond January 11, 2009

Even in these crazy days for stocks, it’s hard to find a local company whose shares have moved up and down faster than Spokane’s Sterling Financial.

Sterling, which is the parent company of Sterling Savings Bank and Golf Savings Bank, has 175 branches scattered from Washington to Montana and down to Northern California. It specializes in single-family mortgages, construction financing and investment products. Those are, obviously, not the best market sectors to be loaning money to right now.

While Sterling has remained relatively healthy, its stock price has been on a severe roller-coaster ride. As of early October 2007, Sterling Financial’s stock price stood at about $28 a share. By mid-July of 2008, the share price had fallen to a low of $2.50, based on worries that the bank’s earnings were going to be a lot worse than management had maintained.

But the second-quarter revenues of $119.6 million and earnings per share of 23 cents were stronger than expected, sending the stock skyrocketing. By early October 2008, Sterling Financial hit $14.50 a share. Then, during the next six weeks, Sterling’s shares fell off a cliff, plummeting more than 77 percent to just below $4 a share on Nov. 20.

The downward spiral appears to have been set off by the swoon of the stock market, increasing worries surrounding home mortgages and commercial loans, and the fact that federal officials took their time in agreeing to include Sterling in the federal bailout. In this strange new world of banking, it appears that it is becoming increasingly difficult for community banks to compete if they are not part of the federal Capital Purchase Program. This is the program in which the U.S. Treasury is taking stakes in banks in return for sizable cash infusions. Currently, investors seem to be betting that if a bank is not part of the bailout, it may not survive.

By Friday, Nov. 21, 2008, Sterling Financial hit an intraday low of $3.59 a share. But as of Monday, Nov. 24, it became official that the U.S. Department of the Treasury had granted preliminary approval to Sterling for an infusion of about $303 million in return for senior preferred stock and related warrants. The markets reacted immediately to the news. By Tuesday, Sterling opened at $6.17 a share, but cooled to finish the day up at around $4.90.

“Sterling Financial has been volatile within a volatile sector,” says Jeffrey Rulis, vice president and research analyst for D.A. Davidson & Co. “In July, there might have been some panic selling going on.”

At press time, Sterling was back on the upswing, but Rulis, who in early November raised his rating on the bank to a “buy,” says there may be more volatility to come. He has a 12-month to 18-month price target of $11 on the bank’s shares and a five-year target of $30 for Sterling.

Rulis contends that share prices are depressed right now because community and regional banks are, as a group, extremely stressed and there is an ongoing debate about which of them will remain solvent during this difficult economic period. “The main thing people are trying to figure out is the depth of this recession,” he says. “But I think that a pretty negative view is priced into these shares.”

Rulis says one important measurement is the percentage of nonperforming assets (NPA), such as a mortgage in default, compared to the total assets of a bank. The lower the percentage, the better, with the average regional bank showing about 4 percent NPA. He says Sterling Financial’s percentage is better than average, at 3.5 percent.

In spite of the expected ups and downs, if investors have the stomach for these kinds of stock fluctuations and make the right choices, they could realize large gains. Rulis points to the fact that investors who bought Sterling Financial in July 2008, at its low, would have made about six times their money by October. Of course, much of those gains have now evaporated, but Sterling still remains well above its July lows.

“There are unbelievable returns to be made in this sector,” Rulis says. “But right now, it’s highly volatile and fairly risky.”

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