03 2012 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
 FORM 10-Q
___________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .
Commission File Number.....001-34696
___________________________________________________
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________
Washington
 
91-1572822
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
111 North Wall Street, Spokane, Washington 99201
(Address of principal executive offices) (Zip Code)
(509) 358-8097
(Registrant’s telephone number, including area code)
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
  
Accelerated filer
 
x
 
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
Class
 
Outstanding as of April 30, 2012
Common Stock
 
62,121,439


Table of Contents

TABLE OF CONTENTS
March 31, 2012
 
 
 
Page
PART I - Financial Information
Item 1
Financial Statements (Unaudited)
 
 
 
 
 
Item 2
Item 3
Item 4
PART II - Other Information
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



Table of Contents

STERLING FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except shares)
 
 
March 31,
2012
 
December 31,
2011
ASSETS:
 
 
 
Cash and cash equivalents:
 
 
 
Interest bearing
$
246,661

 
$
382,330

Noninterest bearing
84,655

 
88,269

Total cash and cash equivalents
331,316

 
470,599

Restricted cash
37,632

 
20,629

Investments and mortgage-backed securities (“MBS”):
 
 
 
Available for sale
2,459,880

 
2,547,876

Held to maturity
1,736

 
1,747

Loans held for sale (at fair value: $234,933 and $223,638)
234,933

 
273,957

Loans receivable, net
5,853,558

 
5,341,179

Accrued interest receivable
34,271

 
32,826

Other real estate owned, net (“OREO”)
70,383

 
81,910

Properties and equipment, net
86,362

 
84,015

Bank-owned life insurance (“BOLI”)
176,345

 
174,512

Goodwill
21,730

 
0

Other intangible assets, net
24,447

 
12,078

Mortgage servicing rights, net
25,975

 
23,102

Other assets, net
143,713

 
128,807

Total assets
$
9,502,281

 
$
9,193,237

LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
1,513,616

 
$
1,211,628

Interest bearing
5,436,252

 
5,274,190

Total deposits
6,949,868

 
6,485,818

Advances from Federal Home Loan Bank (“FHLB”)
205,540

 
405,609

Securities sold under repurchase agreements and funds purchased
1,065,795

 
1,055,763

Junior subordinated debentures
245,291

 
245,290

Accrued interest payable
24,262

 
22,575

Accrued expenses and other liabilities
113,912

 
99,625

Total liabilities
8,604,668

 
8,314,680

SHAREHOLDERS’ EQUITY:
 
 
 
Preferred stock, 10,000,000 shares authorized; no shares outstanding
0

 
0

Common stock, 151,515,151 shares authorized; 62,094,447 and 62,057,645 shares outstanding
1,965,542

 
1,964,234

Accumulated other comprehensive income
65,571

 
61,115

Accumulated deficit
(1,133,500
)
 
(1,146,792
)
Total shareholders’ equity
897,613

 
878,557

Total liabilities and shareholders’ equity
$
9,502,281

 
$
9,193,237



See notes to consolidated financial statements.
3

Table of Contents

STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share amounts)
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Interest income:
 
 
 
Loans
$
79,841

 
$
80,387

MBS
15,335

 
20,034

Investments and cash equivalents
2,789

 
2,816

Total interest income
97,965

 
103,237

Interest expense:
 
 
 
Deposits
11,102

 
17,294

Short-term borrowings
2,206

 
80

Long-term borrowings
10,304

 
12,120

Total interest expense
23,612

 
29,494

Net interest income
74,353

 
73,743

Provision for credit losses
4,000

 
10,000

Net interest income after provision for credit losses
70,353

 
63,743

Noninterest income:
 
 
 
Fees and service charges
12,740

 
12,561

Mortgage banking operations
16,164

 
10,327

Loan servicing fees
2,380

 
1,101

BOLI
1,746

 
1,732

Gains on sales of securities, net
142

 
6,001

Gains on other loan sales
600

 
(1,350
)
Other
(2,185
)
 
(390
)
Total noninterest income
31,587

 
29,982

Noninterest expense
88,649

 
88,308

Income before income taxes
13,291

 
5,417

Income tax expense
0

 
0

Net income
$
13,291

 
$
5,417

Earnings per share - basic
$
0.21

 
$
0.09

Earnings per share - diluted
$
0.21

 
$
0.09

Weighted average shares outstanding - basic
62,078,404

 
61,930,783

Weighted average shares outstanding - diluted
62,682,987

 
62,335,212

 




See notes to consolidated financial statements.
4

Table of Contents

STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Net income
$
13,291

 
$
5,417

Other comprehensive income (loss):
 
 
 
Change in unrealized gains on investments and MBS available-for-sale
4,598

 
1,849

Realized net gains reclassified from other comprehensive income
(142
)
 
(6,001
)
Less deferred income tax provision
0

 
1,536

Net other comprehensive income (loss)
4,456

 
(2,616
)
Comprehensive income
$
17,747

 
$
2,801




See notes to consolidated financial statements.
5

Table of Contents

STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
13,291

 
$
5,417

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
4,000

 
10,000

Net gain on sales of loans
(13,939
)
 
(7,376
)
Net gain on sales of investments and MBS
(142
)
 
(6,001
)
Net gain on mortgage servicing rights
(2,216
)
 
(3,570
)
Stock based compensation
990

 
927

Loss on OREO
4,551

 
17,364

Increase in cash surrender value of BOLI
(1,486
)
 
(1,732
)
Depreciation and amortization
10,921

 
11,573

Change in:
 
 
 
Accrued interest receivable
2,085

 
(957
)
Prepaid expenses and other assets
(11,321
)
 
(11,933
)
Accrued interest payable
1,556

 
760

Accrued expenses and other liabilities
2,308

 
21,972

Proceeds from sales of loans originated for sale
578,189

 
469,392

Loans originated for sale
(577,405
)
 
(363,453
)
Net cash provided by operating activities
11,382

 
142,383

Cash flows from investing activities:
 
 
 
Change in restricted cash
(17,003
)
 
1,012

Net change in loans
(130,476
)
 
(55,083
)
Proceeds from sales of loans
1,718

 
10,483

Purchase of investment securities
(2,530
)
 
(2,000
)
Proceeds from maturities of investment securities
13,484

 
94

Proceeds from sale of investment securities
178,380

 
5,377

Purchase of MBS
(72,032
)
 
(233,538
)
Principal payments received on MBS
158,133

 
130,111

Proceeds from sales of MBS
283

 
113,402

Office properties and equipment, net
(1,814
)
 
(7,489
)
Improvements and other changes to OREO
(760
)
 
(5,404
)
Proceeds from sales of OREO
22,424

 
77,922

Net change in cash and cash equivalents from acquisitions
121,098

 
0

Net cash provided by investing activities
270,905

 
34,887

Cash flows from financing activities:
 
 
 
Net change in deposits
(231,869
)
 
(186,580
)
Repayment of advances from FHLB
(200,052
)
 
(48
)
Net change in securities sold under repurchase agreements and funds purchased
10,032

 
19,483

Proceeds from stock issuance, net
319

 
0

Net cash used in financing activities
(421,570
)
 
(167,145
)

See notes to consolidated financial statements.
6

Table of Contents

STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)—cont.
(in thousands)
 
Three Months Ended March 31,
 
2012
 
2011
Net change in cash and cash equivalents
$
(139,283
)
 
$
10,125

Cash and cash equivalents, beginning of period
470,599

 
411,583

Cash and cash equivalents, end of period
$
331,316

 
$
421,708

Supplemental disclosures:
 
 
 
Cash paid (refunded) during the period for:
 
 
 
Interest
21,923

 
28,734

Income taxes, net
31

 
(56
)
Noncash financing and investing activities:
 
 
 
Foreclosed real estate acquired in settlement of loans
14,688

 
79,820




See notes to consolidated financial statements.
7

Table of Contents

STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012

1.
Basis of Presentation:

The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. 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 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, 2011. 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 Sterling’s 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 Sterling’s consolidated financial position and results of operations.

In addition to other established accounting policies, the following is a discussion of recent accounting pronouncements:

In April 2011, the FASB issued Accounting Standards Update ("ASU") 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This update to codification topic 860 revises the assessment of effective control for purposes of determining if a reverse repurchase agreement should be accounted for as a sale, compared with a secured borrowing. ASU 2011-03 became effective for Sterling on January 1, 2012, and did not have a material effect on Sterling’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This update to codification topic 820 clarifies the application of existing fair value measurement and disclosure requirements, and implements changes to the codification that align U.S. GAAP and IFRS. This update became effective for Sterling on January 1, 2012. See Note 12.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet: Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 adds certain additional disclosure requirements about financial instruments and derivatives instruments that are subject to netting arrangements. The new disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those periods. This standard could add additional disclosures if applicable to Sterling. However, it is not expected to have a material impact on Sterling’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other: Testing Goodwill for Impairment.” ASU 2011-08 is intended to simplify goodwill impairment testing by adding a qualitative review step to assess whether the required quantitative impairment analysis that exists today is necessary. Under the amended rule, a company will not be required to calculate the fair value of a business that contains recorded goodwill unless it concludes, based on the qualitative assessment, that it is more likely than not that the fair value of that business is less than its book value. If such a decline in fair value is deemed more likely than not to have occurred, then the quantitative goodwill impairment test that exists under current GAAP must be completed; otherwise, goodwill is deemed to be not impaired and no further testing is required until the next annual test date (or sooner if conditions or events before that date raise concerns of potential impairment in the business). The amended goodwill impairment guidance does not affect the manner in which a company estimates fair value. ASU 2011-08 became effective for Sterling on January 1, 2012, and did not have a material effect on Sterling’s consolidated financial statements.



8

Table of Contents

2. Business Combination:

On February 29, 2012, Sterling Bank completed its acquisition of the operations of First Independent Bank, by acquiring certain assets and assuming certain liabilities, including all deposits for a net purchase price of $40.6 million, comprised of $28.9 million of cash paid at closing and contingent consideration with a fair value of $11.7 million at acquisition date. The contingent consideration is payable in two installments at 12 and 18 months from the date of closing, in an amount ranging from zero to $17 million. The contingent consideration payments will be determined based on certain performance metrics relating to core deposit retention, loan charge-offs, and wealth management revenues. As a result of this transaction, Sterling now offers trust services, and has 14 additional branches in the Portland/Vancouver market. The following table summarizes the amounts recorded at closing:
 
February 29, 2012
 
(in thousands)
Cash and cash equivalents
$
150,045

Investments and MBS
187,469

Loans receivable, net
350,129

Goodwill
21,730

Core deposit intangible
11,974

Fixed assets
4,843

Other assets
10,785

Total assets acquired
$
736,975

Deposits
$
695,919

Other liabilities
409

Total liabilities assumed
696,328

Net assets acquired
$
40,647


The recorded goodwill of $21.7 million represents the inherent long-term value anticipated from synergies expected to be achieved as a result of the transaction. The amount of goodwill deductible for income tax purposes is approximately equivalent to the recorded book value. The core deposit intangible has a weighted average amortization period of ten years and will be amortized on an accelerated basis. The following table presents certain First Independent stand alone amounts and pro forma Sterling and First Independent combined amounts as if the transaction had occurred on January 1, 2011. Cost savings estimates are not included in the pro forma combined results, nor are certain credit impaired loans and associated losses excluded from the purchase and assumption transaction.
 
First Independent (stand alone)
 
Pro Forma Combined
 
One Month Ended
 
Three Months Ended
 
March 31, 2012
 
March 31, 2012
 
March 31, 2011
 
(in thousands, except per share data)
Net interest income
$
3,241

 
$
80,834

 
$
82,083

Noninterest income
503

 
32,592

 
32,403

Net income
2,107

 
17,505

 
10,038

Earnings per share - basic
0.03

 
0.28

 
0.16

Earnings per share - diluted
$
0.03

 
$
0.28

 
$
0.16






9

Table of Contents

Although the majority of First Independent's credit impaired loans were excluded from the transaction, certain loans acquired were deemed to exhibit evidence of credit deterioration since origination. The purchased impaired loans are accounted for under Accounting Standards Codification ("ASC") 310-30 (Receivables - Loan and Debt Securities Acquired with Deteriorated Credit Quality), with periodic updates to the loans' cash flow expectations reflected in interest income over the life of the loans as accretable yield. For purchased impaired loans (ASC 310-30 loans), details as of the acquisition date were as follows:
 
February 29, 2012
 
(in thousands)
Contractual cash flows
$
24,408

Expected prepayments and credit losses
7,220

Expected cash flows
17,188

Present value of expected cash flows
15,265

Accretable yield
$
1,923

As of March 31, 2012, no allowance for credit losses was recorded in connection with these loans, and the unpaid principal balance and carrying amount of the purchased impaired loans were $21.2 million and $14.6 million, respectively. The following table presents a roll forward of activity for the accretable yield for the purchased impaired loans:
 
Three Months Ended
 
March 31, 2012
 
(in thousands)
Beginning balance
$
0

Additions
1,923

Accretion to interest income
(14
)
Ending balance
$
1,909

For purchased loans that had not exhibited evidence of credit deterioration, as of February 29, 2012, the unpaid principal balance and contractual interest ("contractual cash flows") were $403.8 million, with $12.7 million of these cash flows not expected to be collected. A discount of $21.8 million was recorded on these loans. As of March 31, 2012, the following table provides the related five-year projected accretion of the discount which will be recognized as increase to interest income:
 
Amount
Remainder of 2012
$
7,374

Years ended December 31,
 
2013
4,210

2014
2,796

2015
1,724

2016
1,031

2017
679




10

Table of Contents

3. Investments and MBS:

The carrying and fair values of investments and MBS are summarized as follows:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
March 31, 2012
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
MBS
$
2,174,544

 
$
58,655

 
$
(24
)
 
$
2,233,175

Municipal bonds
193,687

 
14,112

 
(1,056
)
 
206,743

Other
24,948

 
5

 
(4,991
)
 
19,962

Total
$
2,393,179

 
$
72,772

 
$
(6,071
)
 
$
2,459,880

Held to maturity
 
 
 
 
 
 
 
Tax credits
$
1,736

 
$
0

 
$
0

 
$
1,736

Total
$
1,736

 
$
0

 
$
0

 
$
1,736

December 31, 2011
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
MBS
$
2,265,207

 
$
55,760

 
$
(33
)
 
$
2,320,934

Municipal bonds
195,512

 
13,338

 
(1,394
)
 
207,456

Other
24,923

 
2

 
(5,439
)
 
19,486

Total
$
2,485,642

 
$
69,100

 
$
(6,866
)
 
$
2,547,876

Held to maturity
 
 
 
 
 
 
 
Tax credits
$
1,747

 
$
0

 
$
0

 
$
1,747

Total
$
1,747

 
$
0

 
$
0

 
$
1,747


Sterling’s MBS portfolio is comprised primarily of residential agency securities. Other available for sale securities consist of a single issuer trust preferred security. Total sales of Sterling’s securities during the periods ended March 31, 2012 and 2011 are summarized as follows:

 
Proceeds from
Sales
 
Gross Realized
Gains
 
Gross Realized
Losses
 
(in thousands)
Three Months Ended
 
 
 
 
 
March 31, 2012
$
178,663

 
$
142

 
$
0

March 31, 2011
118,779

 
6,004

 
3



11

Table of Contents

The following table summarizes Sterling’s investments and MBS that had a market value below their amortized cost as of March 31, 2012 and December 31, 2011, 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
Losses
 
Market Value
 
Unrealized
Losses
 
Market Value
 
Unrealized
Losses
 
(in thousands)
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
MBS
$
30,030

 
$
(24
)
 
$
0

 
$
0

 
$
30,030

 
$
(24
)
Municipal bonds
0

 
0

 
15,192

 
(1,056
)
 
15,192

 
(1,056
)
Other
0

 
0

 
19,953

 
(4,991
)
 
19,953

 
(4,991
)
Total
$
30,030

 
$
(24
)
 
$
35,145

 
$
(6,047
)
 
$
65,175

 
$
(6,071
)
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
MBS
$
1,419

 
$
(12
)
 
$
24,726

 
$
(21
)
 
$
26,145

 
$
(33
)
Municipal bonds
0

 
0

 
17,289

 
(1,394
)
 
17,289

 
(1,394
)
Other
0

 
0

 
19,479

 
(5,439
)
 
19,479

 
(5,439
)
Total
$
1,419

 
$
(12
)
 
$
61,494

 
$
(6,854
)
 
$
62,913

 
$
(6,866
)

The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities as of March 31, 2012, 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
Value
 
Amortized Cost
 
Estimated Fair
Value
 
(in thousands)
Due within one year
$
0

 
$
0

 
$
1,432

 
$
1,432

Due after one year through five years
0

 
0

 
805

 
805

Due after five years through ten years
0

 
0

 
177,549

 
181,900

Due after ten years
1,736

 
1,736

 
2,213,393

 
2,275,743

Total
$
1,736

 
$
1,736

 
$
2,393,179

 
$
2,459,880


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 a loss. At March 31, 2012, there were no investment securities that management identified to be other-than-temporarily impaired because Sterling expects the return of all principal and interest on all securities pursuant to their contractual terms, has the ability and intent to hold these securities, has no intent to sell securities that are deemed to have a market value impairment, and believes it is unlikely that it would be required to sell any of these securities prior to a recovery in market price, or until maturity. Realized losses could occur in future periods due to a change in management’s ability or intent to hold the securities to recovery, a change in management’s assessment of credit risk, or a change in regulatory or accounting requirements. As of March 31, 2012, Sterling held a single issuer trust preferred security issued by JP Morgan Chase with an amortized book value of $24.9 million, and a net unrealized loss of $5.0 million. Interest payments have not been deferred, and as of March 31, 2012, the security was rated A2 by Moody’s. Sterling currently expects to collect all amounts due according to the contractual terms of this investment.



12

Table of Contents

4. Loans Receivable and Allowance for Credit Losses:

The following table presents the composition of Sterling’s loan portfolio as of the balance sheet dates:
 
 
March 31,
2012
 
December 31,
2011
 
(in thousands)
Residential real estate
$
738,739

 
$
688,020

Commercial real estate (CRE):
 
 


Investor CRE
1,421,085

 
1,275,667

Multifamily
1,149,498

 
1,001,479

Construction
166,607

 
174,608

Total commercial real estate
2,737,190

 
2,451,754

Commercial:
 
 
 
Owner occupied CRE
1,326,218

 
1,272,461

Commercial & Industrial (C&I)
495,225

 
431,693

Total commercial
1,821,443

 
1,704,154

Consumer
715,971

 
674,961

Gross loans receivable
6,013,343

 
5,518,889

Deferred loan fees, net
1,488

 
(252
)
Allowance for loan losses
(161,273
)
 
(177,458
)
Net loans receivable
$
5,853,558

 
$
5,341,179

 
Gross loans pledged as collateral for borrowings from the FHLB and the Federal Reserve totaled $4.63 billion and $4.02 billion as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, the unamortized portion of discounts on acquired loans was $32.6 million and $4.3 million, respectively.


13

Table of Contents

The following table sets forth details by segment for Sterling’s loan portfolio and related allowance as of the balance sheet dates:
 
 
Residential Real Estate
 
Commercial Real Estate
 
Commercial
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Loans receivable, gross:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
15,512

 
$
133,170

 
$
74,105

 
$
1,079

 
$
0

 
$
223,866

Collectively evaluated for impairment
723,227

 
2,604,020

 
1,747,338

 
714,892

 
0

 
5,789,477

Total loans receivable, gross
$
738,739

 
$
2,737,190

 
$
1,821,443

 
$
715,971

 
$
0

 
$
6,013,343

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
365

 
$
9,240

 
$
3,706

 
$
43

 
$
0

 
$
13,354

Collectively evaluated for impairment
11,877

 
71,374

 
30,777

 
14,117

 
19,774

 
147,919

Total allowance for loan losses
$
12,242

 
$
80,614

 
$
34,483

 
$
14,160

 
$
19,774

 
$
161,273

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Loans receivable, gross:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
18,301

 
$
149,578

 
$
74,041

 
$
1,192

 
$
0

 
$
243,112

Collectively evaluated for impairment
669,719

 
2,302,176

 
1,630,113

 
673,769

 
0

 
5,275,777

Total loans receivable, gross
$
688,020

 
$
2,451,754

 
$
1,704,154

 
$
674,961

 
$
0

 
$
5,518,889

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
872

 
$
11,170

 
$
4,206

 
$
57

 
$
0

 
$
16,305

Collectively evaluated for impairment
14,325

 
80,552

 
33,840

 
13,370

 
19,066

 
161,153

Total allowance for loan losses
$
15,197

 
$
91,722

 
$
38,046

 
$
13,427

 
$
19,066

 
$
177,458


14

Table of Contents


The following tables present a roll forward by segment of the allowance for credit losses for the periods presented:
 
 
Residential Real Estate
 
Commercial Real Estate
 
Commercial
 
Consumer
 
Unallocated
 
Total
 
(in thousands)
2012 quarterly activity
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, Jan 1
$
15,197

 
$
91,722

 
$
38,046

 
$
13,427

 
$
19,066

 
$
177,458

Provisions
(980
)
 
(2,824
)
 
4,458

 
2,638

 
708

 
4,000

Charge-offs
(2,187
)
 
(11,518
)
 
(9,533
)
 
(2,452
)
 
0

 
(25,690
)
Recoveries
212

 
3,234

 
1,512

 
547

 
0

 
5,505

Ending balance, March 31
12,242

 
80,614

 
34,483

 
14,160

 
19,774

 
161,273

Reserve for unfunded credit commitments:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, Jan 1
3,828

 
2,321

 
1,796

 
1,787

 
297

 
10,029

Provisions
(25
)
 
(713
)
 
665

 
(505
)
 
578

 
0

Charge-offs
(1
)
 
0

 
0

 
0

 
0

 
(1
)
Recoveries
0

 
0

 
0

 
0

 
0

 
0

Ending balance, March 31
3,802

 
1,608

 
2,461

 
1,282

 
875

 
10,028

Total credit allowance
$
16,044

 
$
82,222

 
$
36,944

 
$
15,442

 
$
20,649

 
$
171,301

2011 quarterly activity
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, Jan 1
$
17,307

 
$
124,907

 
$
56,951

 
$
14,645

 
$
33,246

 
$
247,056

Provisions
7,771

 
(4,948
)
 
9,522

 
(64
)
 
(2,281
)
 
10,000

Charge-offs
(6,816
)
 
(11,198
)
 
(9,584
)
 
(2,146
)
 
0

 
(29,744
)
Recoveries
250

 
4,266

 
495

 
621

 
0

 
5,632

Ending balance, March 31
18,512

 
113,027

 
57,384

 
13,056

 
30,965

 
232,944

Reserve for unfunded credit commitments:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, Jan 1
3,103

 
4,157

 
1,306

 
1,113

 
1,028

 
10,707

Provisions
248

 
(767
)
 
80

 
(12
)
 
451

 
0

Charge-offs
(66
)
 
0

 
0

 
0

 
0

 
(66
)
Recoveries
0

 
0

 
0

 
0

 
0

 
0

Ending balance, March 31
3,285

 
3,390

 
1,386

 
1,101

 
1,479

 
10,641

Total credit allowance
$
21,797

 
$
116,417

 
$
58,770

 
$
14,157

 
$
32,444

 
$
243,585


In establishing its allowance for loan losses, Sterling groups its loan portfolio into segments for homogeneous loans. The groups are further segregated based on internal risk ratings. Both qualitative and quantitative data are 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 expected loss rate which is multiplied by the loan balance in each category to determine the general allowance for loan losses. If a loan is determined to be impaired, Sterling performs an individual evaluation of the loan.

15

Table of Contents

The individual evaluation compares the present value of the expected 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 could determine the need to record a charge-off or a specific reserve.

Sterling assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:
Pass-asset is considered of sufficient quality to preclude a Special Mention or an adverse 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.
Special Mention-asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Sterling's credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard-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 will sustain some loss if the deficiencies are not corrected.
Doubtful/Loss-a Doubtful asset has the weaknesses of those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is considered uncollectible and/or of such little value that its continuance as an asset, without establishment of a specific valuation allowance or charge-off, 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.






16

Table of Contents

The following table presents credit quality indicators for Sterling’s loan portfolio grouped according to internally assigned risk ratings and performance status:
 
 
 
 
Commercial Real Estate
 
Commercial
 
 
 
 
 
 
 
Residential Real Estate
 
Investor CRE
 
Multifamily
 
Construction
 
Owner Occupied CRE
 
Commercial & Industrial
 
Consumer
 
Total
 
% of
Total
 
(in thousands)
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
695,690

 
$
1,223,778

 
$
1,123,065

 
$
53,219

 
$
1,171,528

 
$
433,313

 
$
702,304

 
$
5,402,897

 
90
%
Special mention
11,636

 
103,221

 
10,641

 
25,218

 
70,578

 
43,808

 
6,193

 
271,295

 
5
%
Substandard
31,048

 
91,221

 
15,125

 
82,463

 
80,731

 
17,779

 
7,431

 
325,798

 
5
%
Doubtful/Loss
365

 
2,865

 
667

 
5,707

 
3,381

 
325

 
43

 
13,353

 
0
%
Total
$
738,739

 
$
1,421,085

 
$
1,149,498

 
$
166,607

 
$
1,326,218

 
$
495,225

 
$
715,971

 
$
6,013,343

 
100
%
Restructured
$
26,700

 
$
6,224

 
$
1,604

 
$
36,924

 
$
18,036

 
$
3,012

 
$
0

 
$
92,500

 
2
%
Nonaccrual
22,711

 
40,988

 
5,566

 
46,812

 
56,236

 
9,684

 
5,205

 
187,202

 
3
%
Nonperforming
49,411

 
47,212

 
7,170

 
83,736

 
74,272

 
12,696

 
5,205

 
279,702

 
5
%
Performing
689,328

 
1,373,873

 
1,142,328

 
82,871

 
1,251,946

 
482,529

 
710,766

 
5,733,641

 
95
%
Total
$
738,739

 
$
1,421,085

 
$
1,149,498

 
$
166,607

 
$
1,326,218

 
$
495,225

 
$
715,971

 
$
6,013,343

 
100
%
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
643,071

 
$
1,116,991

 
$
975,583

 
$
51,284

 
$
1,123,796

 
$
385,643

 
$
663,829

 
$
4,960,197

 
90
%
Special mention
14,031

 
83,372

 
9,901

 
24,578

 
54,009

 
25,334

 
4,166

 
215,391

 
4
%
Substandard
30,046

 
70,412

 
15,279

 
93,185

 
90,613

 
19,355

 
6,909

 
325,799

 
6
%
Doubtful/Loss
872

 
4,892

 
716

 
5,561

 
4,043

 
1,361

 
57

 
17,502

 
0
%
Total
$
688,020

 
$
1,275,667

 
$
1,001,479

 
$
174,608

 
$
1,272,461

 
$
431,693

 
$
674,961

 
$
5,518,889

 
100
%
Restructured
$
17,638

 
$
4,366

 
$
0

 
$
38,833

 
$
13,519

 
$
2,583

 
$
0

 
$
76,939

 
1
%
Nonaccrual
25,265

 
47,827

 
5,867

 
56,385

 
59,752

 
9,296

 
5,829

 
210,221

 
4
%
Nonperforming
42,903

 
52,193

 
5,867

 
95,218

 
73,271

 
11,879

 
5,829

 
287,160

 
5
%
Performing
645,117

 
1,223,474

 
995,612

 
79,390

 
1,199,190

 
419,814

 
669,132

 
5,231,729

 
95
%
Total
$
688,020

 
$
1,275,667

 
$
1,001,479

 
$
174,608

 
$
1,272,461

 
$
431,693

 
$
674,961

 
$
5,518,889

 
100
%


17

Table of Contents

Aging by class for Sterling’s loan portfolio as of March 31, 2012 and December 31, 2011 was as follows:
 
 
 
 
Commercial Real Estate
 
Commercial
 
 
 
 
 
 
 
Residential Real Estate
 
Investor CRE
 
Multifamily
 
Construction
 
Owner Occupied CRE
 
Commercial & Industrial
 
Consumer
 
Total
 
% of
Total
 
(in thousands)
 
 
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 - 59 days past due
$
4,233

 
$
12,160

 
$
1,269

 
$
1,807

 
$
11,441

 
$
2,288

 
$
3,851

 
$
37,049

 
1
%
60 - 89 days past due
3,142

 
9,805

 
0

 
881

 
10,175

 
1,066

 
1,432

 
26,501

 
0
%
> 90 days past due
19,493

 
31,402

 
2,917

 
58,413

 
45,257

 
6,865

 
4,662

 
169,009

 
3
%
Total past due
26,868

 
53,367

 
4,186

 
61,101

 
66,873

 
10,219

 
9,945

 
232,559

 
4
%
Current
711,871

 
1,367,718

 
1,145,312

 
105,506

 
1,259,345

 
485,006

 
706,026

 
5,780,784

 
96
%
Total Loans
$
738,739

 
$
1,421,085

 
$
1,149,498

 
$
166,607

 
$
1,326,218

 
$
495,225

 
$
715,971

 
$
6,013,343

 
100
%
> 90 days and accruing
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
0
%
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 - 59 days past due
$
5,718

 
$
3,354

 
$
1,523

 
$
11,830

 
$
19,967

 
$
1,741

 
$
4,167

 
$
48,300

 
1
%
60 - 89 days past due
4,585

 
3,954

 
193

 
879

 
4,233

 
520

 
2,258

 
16,622

 
0
%
> 90 days past due
20,207

 
33,759

 
3,178

 
68,024

 
40,987

 
7,871

 
5,054

 
179,080

 
3
%
Total past due
30,510

 
41,067

 
4,894

 
80,733

 
65,187

 
10,132

 
11,479

 
244,002

 
4
%
Current
657,510

 
1,234,600

 
996,585

 
93,875

 
1,207,274

 
421,561

 
663,482

 
5,274,887

 
96
%
Total Loans
$
688,020

 
$
1,275,667

 
$
1,001,479

 
$
174,608

 
$
1,272,461

 
$
431,693

 
$
674,961

 
$
5,518,889

 
100
%
> 90 days and accruing
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
0
%


18

Table of Contents

Sterling considers its nonperforming loans to be impaired loans. The following table summarizes impaired loans by class as of March 31, 2012 and December 31, 2011:

 
 
 
 
 
Book Balance
 
 
 
Three Months Ended March 31, 2012
 
Unpaid
Principal
Balance
 
Charge-Offs
 
Without
Specific
Reserve
 
With
Specific
Reserve
 
Specific
Reserve
 
Average
Book
Balance
 
Interest
Income
Recognized
 
(in thousands)
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
58,465

 
$
9,054

 
$
49,046

 
$
365

 
$
365

 
$
46,157

 
$
244

Investor CRE
70,168

 
22,956

 
35,865

 
11,348

 
2,865

 
49,703

 
582

Multifamily
7,735

 
565

 
6,204

 
966

 
667

 
6,519

 
95

Construction
123,831

 
40,095

 
47,317

 
36,419

 
5,708

 
89,477

 
852

Owner Occupied CRE
93,023

 
18,751

 
59,181

 
15,090

 
3,381

 
73,771

 
778

C&I
27,440

 
14,744

 
12,371

 
325

 
325

 
12,288

 
29

Consumer
5,753

 
548

 
4,756

 
449

 
43

 
5,517

 
0

Total
$
386,415

 
$
106,713

 
$
214,740

 
$
64,962

 
$
13,354

 
$
283,432

 
$
2,580

 
 
 
 
 
Book Balance
 
 
 
Year Ended December 31, 2011
 
Unpaid
Principal
Balance
 
Charge-Offs
 
Without
Specific
Reserve
 
With
Specific
Reserve
 
Specific
Reserve
 
Average
Book
Balance
 
Interest
Income
Recognized
 
(in thousands)
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
52,023

 
$
9,120

 
$
38,519

 
$
4,384

 
$
872

 
$
67,157

 
$
992

Investor CRE
70,517

 
18,324

 
31,503

 
20,690

 
4,892

 
79,139

 
2,245

Multifamily
6,185

 
318

 
4,496

 
1,371

 
716

 
14,704

 
804

Construction
133,588

 
38,370

 
43,281

 
51,937

 
5,562

 
215,436

 
1,401

Owner Occupied CRE
89,604

 
16,333

 
48,194

 
25,077

 
4,043

 
75,553

 
2,757

C&I
25,497

 
13,618

 
11,207

 
672

 
163

 
12,009

 
460

Consumer
6,613

 
784

 
5,246

 
583

 
57

 
6,901

 
0

Total
$
384,027

 
$
96,867

 
$
182,446

 
$
104,714

 
$
16,305

 
$
470,899

 
$
8,659






19

Table of Contents


The following tables present loans that were modified and recorded as troubled debt restructurings (“TDR’s”) during the following period:
 
Three Months Ended March 31, 2012
 
Number of
Contracts
 
Pre-Modification
Recorded
Investment
 
Post-Modification
Recorded
Investment
 
(in thousands, except number of contracts)
Residential real estate
4

 
$
1,041

 
$
1,040

Investor CRE
1

 
1,302

 
1,302

Multifamily
1

 
1,612

 
1,611

Construction
1

 
2,692

 
2,692

Owner Occupied CRE
3

 
6,632

 
6,624

C&I
4

 
1,988

 
706

Consumer
0

 
0

 
0

Total (1)
14

 
$
15,267

 
$
13,975

 
(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, 2012, Sterling had specific reserves of $219,000 on TDRs which were restructured during the three months ended March 31, 2012. No loans were removed from TDR status during this period. The following table shows the post-modification recorded investment by class for TDRs restructured during the three months ended March 31, 2012 by the primary type of concession granted:
 
Principal
Deferral
 
Rate
Reduction
 
Extension of Terms
 
Forgiveness
of Principal
and/or
Interest
 
Total
 
(in thousands)
Residential Real Estate
$
407