Edgar Filing: STERLING FINANCIAL CORP /WA/

03 2013 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, 2013



¨	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, 2013
Common Stock		62,296,704

Table of Contents

TABLE OF CONTENTS

March 31, 2013



		Page
PART I - Financial Information
Item 1	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	8
	1 - Basis of Presentation	8
	2 - Business Combinations	9
	3 - Investments and MBS	11
	4 - Loans Receivable and Allowance for Credit Losses	13
	5 - Goodwill and Other Intangible Assets	21
	6 - Junior Subordinated Debentures	23
	7 - Earnings Per Share	24
	8 - Noninterest Expense	24
	9 - Income Taxes	25
	10 - Stock Based Compensation	25
	11 - Derivatives and Hedging	26
	12 - Offsetting Assets and Liabilities	27
	13 - Fair Value	28
	14 - Regulatory Capital	32
	15 - Segment Information	33
	16 - Commitments and Contingencies	34
	17 - Subsequent Event	35
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4	Controls and Procedures	50
PART II - Other Information		51
Item 1	Legal Proceedings	51
Item 1A	Risk Factors	51
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3	Defaults Upon Senior Securities	52
Item 4	Mine Safety Disclosures	52
Item 5	Other Information	52
Item 6	Exhibits	52
Signature		53
Exhibit Index		E-1

Table of Contents

STERLING FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except shares)



	March 31, 2013			December 31, 2012
ASSETS:
Cash and cash equivalents:
Interest bearing	$	213,390		$	173,962
Noninterest bearing	68,974			125,916
Total cash and cash equivalents	282,364			299,878
Restricted cash	14,846			31,672
Investments and mortgage-backed securities (“MBS”):
Available for sale	1,471,563			1,513,157
Held to maturity	195			206
Loans held for sale	295,505			465,983
Loans receivable, net	6,334,560			6,101,749
Accrued interest receivable	30,705			28,019
Other real estate owned, net (“OREO”)	29,056			25,042
Properties and equipment, net	96,594			93,850
Bank-owned life insurance (“BOLI”)	185,953			179,828
Goodwill	22,577			22,577
Other intangible assets, net	17,866			19,072
Mortgage servicing rights, net	45,061			32,420
Deferred tax asset, net	288,764			292,082
Other assets, net	140,827			131,375
Total assets	$	9,256,436		$	9,236,910
LIABILITIES:
Deposits:
Noninterest bearing	$	1,705,835		$	1,702,740
Interest bearing	4,892,003			4,733,377
Total deposits	6,597,838			6,436,117
Advances from Federal Home Loan Bank (“FHLB”)	541,259			605,330
Securities sold under repurchase agreements	531,066			586,867
Junior subordinated debentures	245,295			245,294
Accrued interest payable	3,845			4,229
Accrued expenses and other liabilities	100,128			141,150
Total liabilities	8,019,431			8,018,987
SHAREHOLDERS’ EQUITY:
Preferred stock, 10,000,000 shares authorized; no shares outstanding	0			0
Common stock, 151,515,151 shares authorized; 62,275,581 and 62,207,529 shares outstanding, respectively	1,969,070			1,968,025
Accumulated other comprehensive income	56,076			60,712
Accumulated deficit	(788,141		)	(810,814		)
Total shareholders’ equity	1,237,005			1,217,923
Total liabilities and shareholders’ equity	$	9,256,436		$	9,236,910

See notes to consolidated financial statements.

Table of Contents

STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except share amounts)



	Three Months Ended
	March 31,
	2013			2012
Interest income:
Loans	$	81,187		$	79,841
MBS	7,297			15,335
Investments and cash equivalents	2,273			2,789
Total interest income	90,757			97,965
Interest expense:
Deposits	6,307			11,102
Short-term borrowings	446			2,206
Long-term borrowings	7,110			10,304
Total interest expense	13,863			23,612
Net interest income	76,894			74,353
Provision for credit losses	0			4,000
Net interest income after provision for credit losses	76,894			70,353
Noninterest income:
Fees and service charges	14,130			12,740
Mortgage banking operations	13,794			18,544
BOLI	1,557			1,746
Gains on sales of securities	0			142
Gains on other loan sales	25			600
Other	8,060			(2,185		)
Total noninterest income	37,566			31,587
Noninterest expense	81,929			88,649
Income before income taxes	32,531			13,291
Income tax (provision) benefit	(9,853		)	0
Net income	$	22,678		$	13,291
Earnings per share - basic	$	0.36		$	0.21
Earnings per share - diluted	$	0.36		$	0.21
Dividends declared per share	$	0.00		$	0.00
Weighted average shares outstanding - basic	62,242,183			62,078,404
Weighted average shares outstanding - diluted	63,004,784			62,682,987

See notes to consolidated financial statements.

Table of Contents

STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)



			Three Months Ended
			March 31,
			2013					2012
Net income			$	22,678				$	13,291
Beginning balance, accumulated other comprehensive income	$	60,712				$	61,115
Other comprehensive (loss) income:
Change in unrealized gains on investments and MBS available for sale			(7,359		)			4,598
Realized net gains reclassified from other comprehensive income			0					(142		)
Less deferred income tax provision			2,723					0
Net other comprehensive (loss) income			(4,636		)			4,456
Ending balance, accumulated other comprehensive income	$	56,076				$	65,571
Comprehensive income			$	18,042				$	17,747

For the periods presented, accumulated other comprehensive income was comprised solely of unrealized market value adjustments on available for sale securities. The realized portion reclassified out of other comprehensive income is reflected on the income statement in gains on sales of securities.

See notes to consolidated financial statements.

Table of Contents

STERLING FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)

	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	22,678		$	13,291
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	0			4,000
Net gain on sales of loans	(10,614		)	(13,939		)
Net gain on sales of investments and MBS	0			(142		)
Net gain on mortgage servicing rights	(2,834		)	(2,216		)
Stock based compensation	632			990
Loss (gain) on OREO	214			(752		)
Increase in cash surrender value of BOLI	(1,461		)	(1,486		)
Depreciation and amortization	10,692			10,921
Bargain purchase gain	(7,544		)	0
Change in:
Accrued interest receivable	(2,253		)	2,085
Prepaid expenses and other assets	2,148			(11,321		)
Accrued interest payable	(419		)	1,556
Accrued expenses and other liabilities	(47,044		)	2,308
Proceeds from sales of loans originated for sale	797,735			578,189
Loans originated for sale	(631,632		)	(577,405		)
Net cash provided by operating activities	130,298			6,079
Cash flows from investing activities:
Change in restricted cash	16,826			(17,003		)
Net change in loans	(129,515		)	(125,173		)
Proceeds from sales of loans	2,190			1,718
Purchase of investment securities	0			(2,530		)
Proceeds from maturities of investment securities	169			13,484
Proceeds from sale of investment securities	0			178,380
Purchase of MBS	(76,590		)	(72,032		)
Principal payments received on MBS	108,098			158,133
Proceeds from sales of MBS	0			283
Office properties and equipment, net	(5,537		)	(1,814		)
Improvements and other changes to OREO	(125		)	(760		)
Proceeds from sales of OREO	6,738			22,424
Net change in cash and cash equivalents from acquisitions	6,877			121,098
Net cash (used in) provided by investing activities	$	(70,869	)	$	276,208

See notes to consolidated financial statements.

Table of Contents

STERLING FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)—cont. (in thousands)

	Three Months Ended March 31,
	2013			2012
Cash flows from financing activities:
Net change in deposits	$	43,499		$	(231,869	)
Advances from FHLB	225,000			0
Repayment of advances from FHLB	(290,054		)	(200,052		)
Net change in short term repurchase agreements	(5,801		)	10,032
Payments under structured repurchase agreements	(50,000		)	0
Proceeds from stock issuance, net	413			319
Net cash used in financing activities	(76,943		)	(421,570		)
Net change in cash and cash equivalents	(17,514		)	(139,283		)
Cash and cash equivalents, beginning of period	299,878			470,599
Cash and cash equivalents, end of period	$	282,364		$	331,316
Supplemental disclosures:
Cash paid during the period for:
Interest	$	14,247		$	21,923
Income taxes, net	687			31
Noncash financing and investing activities:
Foreclosed real estate acquired in settlement of loans	6,764			9,385

See notes to consolidated financial statements.

Table of Contents

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013


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, 2012. 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.

During 2012, Sterling identified an error related to the classification of the loss on foreclosure amounts reported in the Consolidated Statement of Cash Flows for the quarter ended March 31, 2012, and for the years ended December 31, 2011 and 2010, and the interim periods therein. The loss on foreclosure amounts were previously included in the cash flows from operating activities in the "Loss on OREO" line item, instead of the cash flows from investing activities in the "Net change in loans" line item. In accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, "Materiality," and SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," management evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to prior periods. Consequently, the Consolidated Statement of Cash Flows contained in this Report has been revised for the three months ended March 31, 2012. This change resulted in a decrease of $5.3 million to cash flows from operating activities and an increase of the same amount to cash flows from investing activities for the three months ended March 31, 2012. This change did not affect net income, the balance sheet, or shareholders' equity for any period.

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

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” as amended by ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." The guidance adds certain additional disclosure requirements about financial instruments and derivatives instruments that are subject to netting arrangements. ASU 2011-11 became effective for Sterling on January 1, 2013, and did not have a material impact on its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment." ASU 2012-02,

similar to ASU 2011-08, provided a qualitative assessment of determining if it is more likely than not that impairment has

occurred, to establish the extent to which further testing is required. ASU 2012-02 became effective for Sterling on

January 1, 2013, and did not have a material impact on its consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The amendment requires an entity to provide additional information about reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for Sterling on January 1, 2013, and did not have a material impact on its consolidated financial statements.

Table of Contents

In February 2013, the FASB issued 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 is not expected to have a material impact on Sterling's consolidated financial statements.

2. Business Combinations:

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 Sterling's principal operating subsidiary, Sterling Bank, with Borrego's 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 Borrego's assets, in addition to Borrego's 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 $13.6 million, and the fair value of the loans $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.

Table of Contents

First Independent Bank. On February 29, 2012, Sterling Bank completed its acquisition of the operations of First Independent Bank ("First Independent") of Vancouver, WA, 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. Due to favorable performance, the full value of the contingent consideration of $17 million may be recognized. During the first quarter 2013, a payment of $6.8 million was made for this contingent consideration, resulting in a remaining estimated fair value of $9.2 million. The following table summarizes the amounts recorded at closing:



	February 29, 2012
	(in thousands)
Cash and cash equivalents	$	150,045
Investments and MBS	187,465
Loans receivable, net	349,990
Goodwill	22,577
Core deposit intangible	11,974
Fixed assets	4,038
Other assets	10,886
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 $22.6 million represents the inherent long-term value anticipated from synergies expected to be achieved as a result of the transaction. The amount recorded for goodwill includes subsequent adjustments, primarily from updated appraisals on fixed assets. 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. On the acquisition date of February 29, 2012, the contractual cash flows of purchased impaired loans from First Independent were $24.4 million, cash flows expected to be collected $17.2 million, and the fair value of the loans $15.3 million.

As of February 29, 2012, the contractual cash flows on purchased loans that had not exhibited evidence of credit deterioration was $403.8 million. Sterling estimated that $12.7 million of these cash flows would be uncollectable, resulting in a discount of $21.8 million being recorded on these loans.

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, 2012. 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 Months Ended		Three Months Ended
	March 31, 2012
	(in thousands, except per share data)
Net interest income	$	3,241	$	80,834
Noninterest income	503		32,592
Net income	2,107		17,505
Earnings per share - basic	0.03		0.28
Earnings per share - diluted	$	0.03	$	0.28

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, 2013
Available for sale
MBS	$	1,229,428	$	39,074	$	(172	)	$	1,268,330
Municipal bonds	188,434		15,219		(590		)	203,063
Other	162		8		0			170
Total	$	1,418,024	$	54,301	$	(762	)	$	1,471,563
Held to maturity
Tax credits	$	195	$	0	$	0		$	195
Total	$	195	$	0	$	0		$	195
December 31, 2012
Available for sale
MBS	$	1,263,786	$	45,052	$	0		$	1,308,838
Municipal bonds	188,467		16,452		(613		)	204,306
Other	5		8		0			13
Total	$	1,452,258	$	61,512	$	(613	)	$	1,513,157
Held to maturity
Tax credits	$	206	$	0	$	0		$	206
Total	$	206	$	0	$	0		$	206

Sterling’s MBS portfolio is comprised primarily of residential agency securities. Total sales of Sterling’s securities during the periods ended March 31, 2013 and 2012 are summarized as follows:



	Proceeds from Sales		Gross Realized Gains		Gross Realized Losses
	(in thousands)
Three Months Ended:
March 31, 2013	$	0	$	0	$	0
March 31, 2012	178,663		142		0

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, 2013 and December 31, 2012, 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, 2013
MBS	$	32,685	$	(172	)	$	0	$	0		$	32,685	$	(172	)
Municipal bonds	0		0			14,047		(590		)	14,047		(590		)
Other	0		0			0		0			0		0
Total	$	32,685	$	(172	)	$	14,047	$	(590	)	$	46,732	$	(762	)
December 31, 2012
MBS	$	0	$	0		$	0	$	0		$	0	$	0
Municipal bonds	0		0			12,921		(613		)	12,921		(613		)
Other	0		0			0		0			0		0
Total	$	0	$	0		$	12,921	$	(613	)	$	12,921	$	(613	)

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, 2013 and 2012, 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, 2013, 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	$	0	$	0
Due after one year through five years	0		0		2,720		2,917
Due after five years through ten years	0		0		72,378		75,451
Due after ten years	195		195		1,342,926		1,393,195
Total	$	195	$	195	$	1,418,024	$	1,471,563

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, 2013			December 31, 2012
	(in thousands)
Residential real estate	$	857,864		$	806,722
Commercial real estate ("CRE"):
Investor CRE	1,163,821			1,219,847
Multifamily	1,725,403			1,580,289
Construction	71,213			74,665
Total CRE	2,960,437			2,874,801
Commercial:
Owner occupied CRE	1,372,949			1,276,591
Commercial & Industrial ("C&I")	533,955			540,499
Total commercial	1,906,904			1,817,090
Consumer	752,292			754,621
Gross loans receivable	6,477,497			6,253,234
Deferred loan costs (fees), net	6,736			2,860
Allowance for loan losses	(149,673		)	(154,345		)
Net loans receivable	$	6,334,560		$	6,101,749

As of March 31, 2013 and December 31, 2012, loans pledged as collateral for borrowings from the FHLB and the Federal Reserve were $4.28 billion and $4.15 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, 2013, 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 $37.0 million and $22.5 million, respectively. The following table presents a roll-forward of accretable yield over the periods presented:



	Three Months Ended March 31,
	2013			2012
	(in thousands)
Beginning balance	$	1,332		$	0
Additions	1,774			1,923
Accretion to interest income	(205		)	(14		)
Reclassifications	160			0
Ending balance	$	3,061		$	1,909

Table of Contents

As of March 31, 2013 and December 31, 2012, net loans receivable included unamortized discounts on acquired loans of $27.0 million and $21.3 million, respectively. The following table presents, as of March 31, 2013, the five-year projected loan discount accretion to be recognized as an increase to interest income:



	Amount
	(in thousands)
Remainder of 2013	$	2,938
Years ended December 31,
2014	2,796
2015	1,724
2016	1,032
2017	679
2018	434

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, 2013
Loans receivable, gross:
Individually evaluated for impairment	$	0	$	83,454	$	48,342	$	0	$	0	$	131,796
Collectively evaluated for impairment	857,864		2,876,983		1,858,562		752,292		0		6,345,701
Total loans receivable, gross	$	857,864	$	2,960,437	$	1,906,904	$	752,292	$	0	$	6,477,497
Allowance for loan losses:
Individually evaluated for impairment	$	0	$	4,308	$	5,106	$	0	$	0	$	9,414
Collectively evaluated for impairment	19,968		40,827		34,490		25,817		19,157		140,259
Total allowance for loan losses	$	19,968	$	45,135	$	39,596	$	25,817	$	19,157	$	149,673
December 31, 2012
Loans receivable, gross:
Individually evaluated for impairment	$	9,134	$	68,317	$	48,312	$	494	$	0	$	126,257
Collectively evaluated for impairment	797,588		2,806,484		1,768,778		754,127		0		6,126,977
Total loans receivable, gross	$	806,722	$	2,874,801	$	1,817,090	$	754,621	$	0	$	6,253,234
Allowance for loan losses:
Individually evaluated for impairment	$	365	$	3,182	$	4,916	$	0	$	0	$	8,463
Collectively evaluated for impairment	19,482		44,912		36,958		25,602		18,928		145,882
Total allowance for loan losses	$	19,847	$	48,094	$	41,874	$	25,602	$	18,928	$	154,345

Purchased credit impaired loans included in loans collectively evaluated for impairment as of March 31, 2013 are $22.5 million and as of December 31, 2012 are $11.2 million.

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)
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
2012 first quarter 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

In establishing the allowance for loan losses, Sterling groups its loan portfolio into segments for loans collectively evaluated for impairment. 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. The calculated expected loss for each loan class is compared to the actual one-year and three-year (annualized) losses. If the calculated expected loss rate is less than the actual one and

Table of Contents

three year loss rates, then the expected loss rate would be set at the greater of the actual one or three year 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 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 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 management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or of Sterling's 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 or liquidation 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.

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, 2013
Pass	$	766,136	$	571,102	$	1,640,373	$	11,362	$	733,524	$	346,956	$	722,180	$	4,791,633	74	%
Marginal	52,250		453,064		69,576		41,995		499,192		149,595		15,901		1,281,573		20	%
Special mention	11,542		81,649		10,568		4,585		76,629		29,485		5,425		219,883		3	%
Substandard	27,625		55,001		4,667		12,187		58,560		7,894		8,786		174,720		3	%
Doubtful/Loss	311		3,005		219		1,084		5,044		25		0		9,688		0	%
Total	$	857,864	$	1,163,821	$	1,725,403	$	71,213	$	1,372,949	$	533,955	$	752,292	$	6,477,497	100	%
Restructured	$	24,407	$	8,482	$	3,504	$	9,718	$	22,263	$	806	$	304	$	69,484	1	%
Nonaccrual	18,421		35,765		1,321		7,488		40,458		4,407		5,787		113,647		2	%
Nonperforming	42,828		44,247		4,825		17,206		62,721		5,213		6,091		183,131		3	%
Performing	815,036		1,119,574		1,720,578		54,007		1,310,228		528,742		746,201		6,294,366		97	%
Total	$	857,864	$	1,163,821	$	1,725,403	$	71,213	$	1,372,949	$	533,955	$	752,292	$	6,477,497	100	%
December 31, 2012
Pass	$	714,346	$	599,660	$	1,486,824	$	10,946	$	678,916	$	349,674	$	723,698	$	4,564,064	73	%
Marginal	53,722		472,801		74,379		42,518		454,348		146,554		17,255		1,261,577		20	%
Special mention	11,739		77,342		10,122		3,401		85,228		38,874		4,864		231,570		4	%
Substandard	26,550		67,347		8,745		17,534		53,183		5,397		8,804		187,560		3	%
Doubtful/Loss	365		2,697		219		266		4,916		0		0		8,463		0	%
Total	$	806,722	$	1,219,847	$	1,580,289	$	74,665	$	1,276,591	$	540,499	$	754,621	$	6,253,234	100	%
Restructured	$	22,968	$	4,334	$	4,094	$	8,551	$	23,152	$	810	$	307	$	64,216	1	%
Nonaccrual	20,457		46,399		4,055		8,144		31,696		3,424		6,938		121,113		2	%
Nonperforming	43,425		50,733		8,149		16,695		54,848		4,234		7,245		185,329		3	%
Performing	763,297		1,169,114		1,572,140		57,970		1,221,743		536,265		747,376		6,067,905		97	%
Total	$	806,722	$	1,219,847	$	1,580,289	$	74,665	$	1,276,591	$	540,499	$	754,621	$	6,253,234	100	%

Purchased credit impaired loans of $15.7 million as of March 31, 2013, and $2.1 million as of December 31, 2012, are included in the nonaccrual loans.

Table of Contents

Aging by class for Sterling’s loan portfolio as of March 31, 2013 and December 31, 2012 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, 2013
30 - 59 days past due	$	5,884	$	6,004	$	168	$	219	$	7,666	$	1,048	$	4,810	$	25,799	0	%
60 - 89 days past due	2,587		5,329		0		3,661		5,522		414		1,281		18,794		0	%
> 90 days past due	19,542		23,404		1,184		7,488		27,780		2,096		4,034		85,528		2	%
Total past due	28,013		34,737		1,352		11,368		40,968		3,558		10,125		130,121		2	%
Current	829,851		1,129,084		1,724,051		59,845		1,331,981		530,397		742,167		6,347,376		98	%
Total Loans	$	857,864	$	1,163,821	$	1,725,403	$	71,213	$	1,372,949	$	533,955	$	752,292	$	6,477,497	100	%
> 90 days and accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	0	%
December 31, 2012
30 - 59 days past due	$	5,800	$	10,565	$	707	$	611	$	10,543	$	2,690	$	4,028	$	34,944	1	%
60 - 89 days past due	1,576		1,042		479		0		3,300		376		1,796		8,569		0	%
> 90 days past due	20,507		34,196		3,436		8,243		20,883		1,954		4,717		93,936		2	%
Total past due	27,883		45,803		4,622		8,854		34,726		5,020		10,541		137,449		3	%
Current	778,839		1,174,044		1,575,667		65,811		1,241,865		535,479		744,080		6,115,785		97	%
Total Loans	$	806,722	$	1,219,847	$	1,580,289	$	74,665	$	1,276,591	$	540,499	$	754,621	$	6,253,234	100	%
> 90 days and accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	0	%

Table of Contents

Sterling considers its nonperforming loans to be impaired loans. The following table summarizes impaired loans by class as of March 31, 2013 and December 31, 2012:



					Book Balance
	Unpaid Principal Balance		Charge-Offs		Without Specific Reserve		With Specific Reserve		Specific Reserve
	(in thousands)
March 31, 2013
Residential real estate	$	47,967	$	5,139	$	42,517	$	311	$	311
CRE:
Investor CRE	50,451		6,204		34,451		9,796		3,005
Multifamily	5,562		737		3,575		1,250		219
Construction	31,541		14,335		11,584		5,622		1,084
Total CRE	87,554		21,276		49,610		16,668		4,308
Commercial:
Owner Occupied CRE	71,229		8,508		44,935		17,786		5,107
C&I	17,223		12,010		5,213		0		0
Total commercial	88,452		20,518		50,148		17,786		5,107
Consumer	6,509		418		6,091		0		0
Total	$	230,482	$	47,351	$	148,366	$	34,765	$	9,726
					Book Balance
	Unpaid Principal Balance		Charge-Offs		Without Specific Reserve		With Specific Reserve		Specific Reserve
	(in thousands)
December 31, 2012
Residential real estate	$	49,816	$	6,391	$	43,060	$	365	$	365
CRE:
Investor CRE	59,099		8,366		33,540		17,193		2,697
Multifamily	9,554		1,405		6,873		1,276		219
Construction	31,040		14,345