The Street, like many investors, seems to be split somewhere down the middle when it comes to the banking sector. On the one hand there are those that see nothing but storm clouds and nasty weather as far as the eye can see for the entire industry. Some well known investors - folks like George Soros and John Paulson - are shedding bank shares as quickly as they can find investors to buy them.
On the other hand, there are a host of just as famous pundits who can't seem to find enough bank stocks to buy. Warren Buffett recently plunked down $5 billion for shares in Bank of America (BAC). Noted fund managers Bruce Berkowitz and Thomas Brown followed suit with sizable B of A investments. So what gives?
As for me, I am firmly in the latter camp. There are so many inexpensive bank stocks out there that are inherently sound but simply in the wrong industry at the wrong time, that it's difficult to count them. This is worth noting as it relates to Sterling Financial Corp., the holding company for Sterling Savings Bank (STSA), because it would be easy for those on the value side of the fence to simply dismiss the following review as coming from a naysayer, which is not the case. Not for the industry as a whole that is; just Sterling Savings Bank.
Sterling Financial is headquartered in Spokane, Wash., and operates 178 branches in Washington, Oregon, Montana, Idaho and California. The bank has both commercial and retail customers and services and $9.2 billion in assets with a market capitalization of $795.52 million.
The stock has been battered and for good reason. It was down another 6.14 percent to $12.00 a share until after hours trading kicked in. Some late buying brought it back to where it started the day at $12.84.
While earnings have at least made it into the black, there's a long way to go before Sterling is on solid financial footing. Assets under management have consistently dropped each of the past 3 years. That may prove to be a good thing because so much of their consumer mortgage and construction loan portfolio was bad, and the loan provision so high, the write-offs and subsequent asset decline may end up improving the financials and the stock. But that time is a ways off, certainly relative to other regional bank opportunities out there.
The mantra at Sterling had been to grow deposits regardless of what it costs. Ask an executive of Sterling what he or she was most proud of and invariably the first thing would be assets under management. That was a common theme among banks before they realized that trying to make a living on interest income alone was a losing proposition.
STSA raised assets primarily by going on an acquisition frenzy that stretched over several years and is, in large part, the reason for the bank's branches in California and other states. Secondly, a concerted effort from management to gain as much retail consumer deposits as was humanly possible also raised assets. Unfortunately, these two methodologies couldn't have come at a worse time, and STSA is paying the price.
On the upside, management hasn't given up the ship. They've been steady buyers of the stock in the past 6 months, a positive signal for many investors. Long term, I fully expect Sterling will regain some traction. However, there are simply too many other solid, undervalued bank investment opportunities out there to risk STSA.