Prospectus Supplement
Table of Contents

Filed Pursuant to Rule 424(B)(3)
Registration Statement No. 333-169579

PROSPECTUS SUPPLEMENT

(To Prospectus dated November 16, 2010)

 

STERLING FINANCIAL CORPORATION

 

 

RECENT DEVELOPMENTS

We have attached to this prospectus supplement our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 2011.

 

 

August 9, 2011


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 JUNE 30, 2011

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) 458-3711

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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  ¨    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   ¨
Non-accelerated filer   x  (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 July 29, 2011

Common Stock

  61,956,219

 

 

 


Table of Contents

TABLE OF CONTENTS

June 30, 2011

 

          Page  
PART I - Financial Information      1   

Item 1

   Financial Statements (Unaudited)      1   
   Consolidated Balance Sheets      2   
   Consolidated Statements of Operations      3   
   Consolidated Statements of Comprehensive Income      4   
   Consolidated Statements of Cash Flows      5   
   Notes to Consolidated Financial Statements      7   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      45   

Item 4

   Controls and Procedures      45   
PART II - Other Information      46   

Item 1

   Legal Proceedings      46   

Item 1A

   Risk Factors      47   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      47   

Item 3

   Defaults Upon Senior Securities      47   

Item 4

   (Removed And Reserved)      47   

Item 5

   Other Information      47   

Item 6

   Exhibits      47   
Signatures      48   


Table of Contents

STERLING FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

 

     June 30,
2011
    December 31,
2010
 

ASSETS:

    

Cash and cash equivalents:

    

Interest bearing

   $ 495,523      $ 341,425   

Non-interest bearing

     76,255        70,158   
  

 

 

   

 

 

 

Total cash and cash equivalents

     571,778        411,583   
  

 

 

   

 

 

 

Restricted cash

     15,432        15,681   

Investments and mortgage-backed securities (“MBS”):

    

Available for sale

     2,494,002        2,825,010   

Held to maturity

     2,054        13,464   

Loans held for sale

     197,643        222,216   

Loans receivable, net

     5,387,714        5,379,081   

Accrued interest receivable

     32,018        34,087   

Other real estate owned, net (“OREO”)

     101,406        161,653   

Properties and equipment, net

     83,923        81,094   

Bank-owned life insurance (“BOLI”)

     172,774        169,288   

Core deposit intangible assets, net

     14,480        16,929   

Mortgage servicing rights, net

     23,880        20,604   

Prepaid expenses and other assets, net

     144,491        142,479   
  

 

 

   

 

 

 

Total assets

   $ 9,241,595      $ 9,493,169   
  

 

 

   

 

 

 

LIABILITIES:

    

Deposits:

    

Noninterest bearing

   $ 1,067,637      $ 992,368   

Interest bearing

     5,536,361        5,918,639   
  

 

 

   

 

 

 

Total deposits

     6,603,998        6,911,007   

Advances from Federal Home Loan Bank (“FHLB”)

     407,071        407,211   

Securities sold under repurchase agreements and funds purchased

     1,058,694        1,032,512   

Junior subordinated debentures

     245,287        245,285   

Accrued interest payable

     20,060        17,259   

Accrued expenses and other liabilities

     98,875        109,128   
  

 

 

   

 

 

 

Total liabilities

     8,433,985        8,722,402   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY:

    

Preferred stock, 10,000,000 shares authorized; no shares outstanding

     0        0   

Common stock, 151,515,151 shares authorized; 61,952,072 and 61,926,187 shares outstanding

     1,962,830        1,960,871   

Accumulated other comprehensive income (loss)

     17,733        (4,179

Accumulated deficit

     (1,172,953     (1,185,925
  

 

 

   

 

 

 

Total shareholders’ equity

     807,610        770,767   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 9,241,595      $ 9,493,169   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011      2010     2011     2010  

Interest income:

         

Loans

   $ 79,735       $ 93,885      $ 160,122      $ 190,861   

MBS

     19,928         18,616        39,962        38,442   

Investments and cash equivalents

     2,684         2,708        5,500        5,398   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     102,347         115,209        205,584        234,701   
  

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense:

         

Deposits

     15,216         25,063        32,510        52,514   

Short-term borrowings

     111         2,103        190        4,214   

Long-term borrowings

     12,213         14,948        24,334        29,988   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     27,540         42,114        57,034        86,716   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     74,807         73,095        148,550        147,985   

Provision for credit losses

     10,000         70,781        20,000        159,337   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income (expense) after provision for credit losses

     64,807         2,314        128,550        (11,352
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income:

         

Fees and service charges

     12,946         14,233        25,507        27,268   

Mortgage banking operations

     10,794         11,713        21,121        22,945   

Loan servicing fees

     709         (408     1,810        738   

BOLI

     1,578         1,560        3,310        3,855   

Gains on sales of securities, net

     8,297         15,349        14,298        17,260   

Other

     11         (1,219     (1,729     (5,541
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     34,335         41,228        64,317        66,525   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest expense

     91,587         97,315        179,895        193,292   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     7,555         (53,773     12,972        (138,119

Income tax expense

     0         0        0        0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     7,555         (53,773     12,972        (138,119

Preferred stock dividend

     0         (4,469     0        (8,881
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 7,555       $ (58,242   $ 12,972      $ (147,000
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) per share - basic (1)

   $ 0.12       $ (73.91   $ 0.21      $ (186.60
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) per share - diluted (1)

   $ 0.12       $ (73.91   $ 0.21      $ (186.60
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - basic (1)

     61,943,851         788,020        61,937,353        787,799   

Weighted average shares outstanding - diluted (1)

     62,312,224         788,020        62,320,028        787,799   

 

(1) 

Reflects the 1-for-66 reverse stock split in November 2010.

See notes to consolidated financial statements.

 

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STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Net income (loss)

   $ 7,555      $ (53,773   $ 12,972      $ (138,119
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Change in unrealized gains on investments and MBS available-for-sale

     36,651        23,201        38,594        41,239   

Less deferred income tax provision

     (3,826     (2,915     (2,384     (8,901

Realized net gains reclassified from other comprehensive income

     (8,297     (15,349     (14,298     (17,260
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income

     24,528        4,937        21,912        15,078   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 32,083      $ (48,836   $ 34,884      $ (123,041
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

     Six Months Ended June 30,  
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ 12,972      $ (138,119

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Provision for credit losses

     20,000        159,337   

Net gain on sales of loans

     (18,549     (22,385

Net gain on sales of investments and MBS

     (14,298     (17,337

Stock based compensation

     1,959        726   

Loss on OREO

     39,835        46,388   

Increase in cash surrender value of BOLI

     (3,310     (3,855

Depreciation and amortization

     19,122        16,524   

Change in:

    

Accrued interest receivable

     2,069        8,855   

Prepaid expenses and other assets

     1,742        (1,141

Accrued interest payable

     2,801        (3,926

Accrued expenses and other liabilities

     (10,257     9,170   

Proceeds from sales of loans originated for sale

     871,842        1,105,740   

Loans originated for sale

     (828,385     (1,216,103
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     97,543        (56,126
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Change in restricted cash

     249        (5,357

Loans funded

     (803,655     (382,977

Loans purchased

     (111,034     0   

Loan principal received

     716,114        1,092,544   

Proceeds from sales of loans

     31,899        296,532   

Purchase of investment securities

     (2,000     (2,501

Proceeds from maturities of investment securities

     294        4,951   

Proceeds from sale of investment securities

     30,987        17,192   

Purchase of MBS

     (242,841     (642,574

Principal payments received on MBS

     229,210        336,583   

Proceeds from sales of MBS

     353,444        542,367   

Office properties and equipment, net

     (9,595     (1,321

Improvements and other changes to OREO

     (5,061     (2,005

Proceeds from sales of OREO

     155,566        70,027   
  

 

 

   

 

 

 

Net cash provided by investing activities

     343,577        1,323,461   
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.

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STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - cont.

(in thousands)

 

     Six Months Ended June 30,  
     2011     2010  

Cash flows from financing activities:

    

Net change in deposits

   $ (307,009   $ (534,421

Advances from FHLB

     0        495,750   

Repayment of advances from FHLB

     (98     (957,593

Net change in securities sold under repurchase agreements and funds purchased

     26,182        (26,119
  

 

 

   

 

 

 

Net cash used in financing activities

     (280,925     (1,022,383
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     160,195        244,952   

Cash and cash equivalents, beginning of period

     411,583        564,783   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 571,778      $ 809,735   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Cash paid on interest during the period

   $ 54,233      $ 90,642   

Cash received on income tax refunds during the period

     0        49,390   

Noncash financing and investing activities:

    

Loans converted into OREO

     130,093        166,371   

Preferred stock cash dividend accrued

     0        7,815   

See notes to consolidated financial statements.

 

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STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

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, 2010. 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 Financial Corporation’s (“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 July 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-20,”Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This update amends codification topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance was phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” which was issued in January 2011. See Note 3.

In April 2011, the FASB issued ASU 2011-2, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This update to codification topic 310 provides guidance for what constitutes a concession and whether a debtor is experiencing financial difficulties. The amendments in this update are effective for Sterling on July 1, 2011, with retrospective application from January 1, 2011. This update is not expected to have a material effect on Sterling’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-3, “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, as compared with a secured borrowing. ASU 2011-3 will be effective for Sterling on January 1, 2012, and is not expected to have a material effect on Sterling’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-4, “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 will be effective for Sterling on January 1, 2012, and is not expected to have a material effect on Sterling’s consolidated financial statements.

 

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In June 2011, the FASB issued ASU 2011-5, “Presentation of Comprehensive Income.” This update to codification topic 220 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity, and requires a presentation of comprehensive income either on the face of the income statement, or on a separate schedule immediately following the income statement. This update will be effective for Sterling on January 1, 2012, and is not expected to have a material effect on Sterling’s consolidated financial statements.

2. 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)  

June 30, 2011

  

Available for sale

          

MBS

     2,262,128       $ 31,822       $ (11,453     2,282,497   

Municipal bonds

     188,752         4,176         (3,281     189,647   

Other

     24,871         3         (3,016     21,858   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,475,751       $ 36,001       $ (17,750   $ 2,494,002   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity

          

Tax credits

   $ 2,054       $ 0       $ 0      $ 2,054   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,054       $ 0       $ 0      $ 2,054   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2010

          

Available for sale

          

MBS

   $ 2,598,086       $ 30,017       $ (25,493   $ 2,602,610   

Municipal bonds

     208,588         949         (8,394     201,143   

Other

     24,821         2         (3,566     21,257   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,831,495       $ 30,968       $ (37,453   $ 2,825,010   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity

          

Tax credits

   $ 13,464       $ 0       $ 0      $ 13,464   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 13,464       $ 0       $ 0      $ 13,464   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other available for sale securities primarily consist of a single issuer trust preferred security at both June 30, 2011 and December 31, 2010. During the second quarter of 2011, Sterling sold $10.5 million of tax credit investments in low income housing partnerships. Until recently, there was not a liquid market for these investments. The sale was driven by the absence of a current tax burden for Sterling, combined with monthly expenses associated with the tax credits. The tax credit investments carrying balance were being systematically reduced over their projected life. The sale resulted in a loss of $2.2 million. Total sales of Sterling’s securities during the periods ended June 30, 2011 and 2010 are summarized as follows:

 

     Proceeds from
Sales
     Gross Realized
Gains
     Gross Realized
(Losses)
 
     (in thousands)  

Six months ended:

        

June 30, 2011

   $ 384,431       $ 16,605       $ (2,307

June 30, 2010

     559,559         23,681         (6,421

 

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The following table summarizes Sterling’s investments and MBS that had a market value below their amortized cost as of June 30, 2011 and December 31, 2010, 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)  

June 30, 2011

  

Municipal bonds

   $ 28,525       $ (753   $ 25,573       $ (2,528   $ 54,098       $ (3,281

MBS

     931,786         (11,453     0         0        931,786         (11,453

Other

     0         0        21,850         (3,016     21,850         (3,016
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 960,311       $ (12,206   $ 47,423       $ (5,544   $ 1,007,734       $ (17,750
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2010

               

Municipal bonds

   $ 89,364       $ (3,193   $ 47,101       $ (5,201   $ 136,465       $ (8,394

MBS

     1,460,173         (25,493     0         0        1,460,173         (25,493

Other

     0         0        21,250         (3,566     21,250         (3,566
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,549,537       $ (28,686   $ 68,351       $ (8,767   $ 1,617,888       $ (37,453
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities as of June 30, 2011, 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. As of June 30, 2011, the weighted average life of the MBS portfolio was 4.5 years, and its effective duration was 3.4%. This compares with a weighted average life of 5.0 years, and an effective duration of 3.6% at December 31, 2010.

 

     Held-to-maturity      Available-for-sale  
     Amortized Cost      Estimated Fair
Value
     Amortized Cost      Estimated Fair
Value
 
     (in thousands)  

Due within one year

   $ 0       $ 0       $ 482       $ 482   

Due after one year through five years

     0         0         0         0   

Due after five years through ten years

     0         0         222,773         224,979   

Due after ten years

     2,054         2,054         2,252,496         2,268,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,054       $ 2,054       $ 2,475,751       $ 2,494,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. If the fair value of investment securities falls below their 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. There were no investment securities that management identified to be other-than-temporarily impaired at June 30, 2011, because Sterling expects the return of all principal and interest on all securities within its investment and MBS portfolio pursuant to the contractual terms, has the ability and intent to hold these investments, has no intent to sell securities that are deemed to have a market value impairment, and believes it is unlikely that Sterling would be required to sell these investments before a recovery in market price occurs, or until maturity. As of June 30, 2011, Sterling held nonagency collateralized mortgage obligations with an amortized book value of $27.0 million, and a net unrealized gain of $361,000. All nonagency collateralized mortgage obligations are internally monitored monthly and independently stress-tested quarterly for both credit quality and collateral strength, and are AAA rated according to at least one major rating agency. The vintage, or year of issuance, for these nonagency securities ranges from 2003 to 2005. Additionally as of June 30, 2011, Sterling held municipal bonds with an amortized book value of $188.8 million, and a net unrealized gain of $895,000. Sterling reviews its municipal bonds for impairment at least quarterly. Approximately 90% of Sterling’s municipal bonds are general obligation bonds.

 

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Table of Contents

3. Loans Receivable and Allowance for Credit Losses:

The following table presents the composition of Sterling’s loan portfolio as of the balance sheet dates:

 

     June 30,
2011
    December 31,
2010
 
     (in thousands)  

Residential real estate

   $ 712,638      $ 758,410   

Multifamily real estate

     811,917        517,022   

Commercial real estate (1)

     1,324,058        1,314,657   

Construction:

    

Residential

     67,789        156,853   

Multifamily

     49,908        90,518   

Commercial

     190,576        278,297   
  

 

 

   

 

 

 

Total construction

     308,273        525,668   

Consumer

     703,675        744,068   

Commercial banking (2)

     1,741,819        1,770,426   
  

 

 

   

 

 

 

Gross loans receivable

     5,602,380        5,630,251   

Deferred loan fees, net

     (2,578     (4,114

Allowance for loan losses

     (212,088     (247,056
  

 

 

   

 

 

 

Net loans receivable

   $ 5,387,714      $ 5,379,081   
  

 

 

   

 

 

 

 

(1) 

Comprised of non owner-occupied commercial real estate (“CRE”).

(2) 

Comprised of commercial and industrial (“C&I”), and owner-occupied CRE.

Gross loans pledged as collateral for borrowings from the FHLB and the Federal Reserve totaled $1.34 billion and $1.52 billion as of June 30, 2011 and December 31, 2010, respectively. As of June 30, 2011 and December 31, 2010, the unamortized portion of discounts on acquired loans was $4.8 million and $5.3 million, respectively.

 

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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:

 

     Real Estate           Commercial
Banking
             
     Residential     Multifamily     Commercial     Construction     Consumer       Unallocated     Total  
     (in thousands)  

June 30, 2011

  

Loans receivable, gross:

                

Individually evaluated for impairment

   $ 34,604      $ 8,506      $ 53,247      $ 174,406      $ 1,851      $ 77,950      $ 0      $ 350,564   

Collectively evaluated for impairment

     678,034        803,411        1,270,811        133,867        701,824        1,663,869        0        5,251,816   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans receivable, gross

   $ 712,638      $ 811,917      $ 1,324,058      $ 308,273      $ 703,675      $ 1,741,819      $ 0      $ 5,602,380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

                

Individually evaluated for impairment

   $ (2,146   $ (626   $ (3,028   $ (19,013   $ (114   $ (5,260   $ 0      $ (30,187

Collectively evaluated for impairment

     (18,680     (10,625     (43,421     (25,894     (13,686     (41,342     (28,253     (181,901
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

   $ (20,826   $ (11,251   $ (46,449   $ (44,907   $ (13,800   $ (46,602   $ (28,253   $ (212,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2010

                

Loans receivable, gross:

                

Individually evaluated for impairment

   $ 74,994      $ 23,541      $ 103,389      $ 332,287      $ 4,852      $ 80,880      $ 0      $ 619,943   

Collectively evaluated for impairment

     683,416        493,481        1,211,268        193,381        739,216        1,689,546        0        5,010,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans receivable, gross

   $ 758,410      $ 517,022      $ 1,314,657      $ 525,668      $ 744,068      $ 1,770,426      $ 0      $ 5,630,251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses:

                

Individually evaluated for impairment

   $ (1,239   $ (1,158   $ (7,859   $ (20,676   $ (33   $ (6,689   $ 0      $ (37,654

Collectively evaluated for impairment

     (16,068     (8,510     (41,503     (45,201     (14,612     (50,262     (33,246     (209,402
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

   $ (17,307   $ (9,668   $ (49,362   $ (65,877   $ (14,645   $ (56,951   $ (33,246   $ (247,056
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

The following table presents a roll forward by segment of the allowance for credit losses for the three and six months ended June 30, 2011 and 2010:

 

     Real Estate           Commercial
Banking
             
     Residential     Multifamily     Commercial     Construction     Consumer       Unallocated     Total  
     (in thousands)  

2011 quarterly activity

  

Allowance for loan losses:

                

Beginning balance, April 1

   $ 18,512      $ 9,554      $ 48,564      $ 54,909      $ 13,056      $ 57,384      $ 30,965      $ 232,944   

Chargeoffs

     (4,210     (457     (9,269     (19,019     (2,117     (3,908     0        (38,980

Recoveries

     603        1,167        875        1,879        337        763        0        5,624   

Provisions

     5,921        987        6,279        7,138        2,524        (7,637     (2,712     12,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     20,826        11,251        46,449        44,907        13,800        46,602        28,253        212,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded commitments:

                

Beginning balance, April 1

     3,285        0        0        3,390        1,101        1,386        1,479        10,641   

Chargeoffs

     (710     0        0        0        0        0        0        (710

Recoveries

     0        0        0        0        0        0        0        0   

Provisions

     (226     0        0        (835     1,262        (631     (2,070     (2,500
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     2,349        0        0        2,555        2,363        755        (591     7,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit allowance

   $ 23,175      $ 11,251      $ 46,449      $ 47,462      $ 16,163      $ 47,357      $ 27,662      $ 219,519   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2010 quarterly activity

                

Allowance for loan losses:

                

Beginning balance, April 1

   $ 25,139      $ 9,069      $ 47,999      $ 125,752      $ 17,615      $ 66,888      $ 2,336      $ 294,798   

Chargeoffs

     (11,340     (1,566     (14,587     (73,113     (4,558     (3,677     0        (108,841

Recoveries

     483        0        401        5,390        453        265        0        6,992   

Provisions

     1,110        (2,467     21,711        45,721        2,543        (1,854     5,137        71,901   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     15,392        5,036        55,524        103,750        16,053        61,622        7,473        264,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded commitments:

                

Beginning balance, April 1

     1,080        0        189        7,146        1,273        1,816        819        12,323   

Chargeoffs

     (252     0        0        0        0        0        0        (252

Recoveries

     0        0        0        0        0        0        0        0   

Provisions

     666        1        (188     (370     (158     (372     (699     (1,120
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     1,494        1        1        6,776        1,115        1,444        120        10,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit allowance

   $ 16,886      $ 5,037      $ 55,525      $ 110,526      $ 17,168      $ 63,066      $ 7,593      $ 275,801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Table of Contents
     Real Estate           Commercial
Banking
             
     Residential     Multifamily     Commercial     Construction     Consumer       Unallocated     Total  
     (in thousands)  

2011 year to date

  

Allowance for loan losses:

                

Beginning balance, January 1

   $ 17,307      $ 9,668      $ 49,362      $ 65,877      $ 14,645      $ 56,951      $ 33,246      $ 247,056   

Chargeoffs

     (11,024     (667     (10,917     (28,360     (4,263     (13,492     0        (68,723

Recoveries

     853        1,167        1,452        5,567        958        1,258        0        11,255   

Provisions

     13,690        1,083        6,552        1,823        2,460        1,885        (4,993     22,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     20,826        11,251        46,449        44,907        13,800        46,602        28,253        212,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded commitments:

                

Beginning balance, January 1

     3,103        0        31        4,126        1,113        1,306        1,028        10,707   

Chargeoffs

     (776     0        0        0        0        0        0        (776

Recoveries

     0        0        0        0        0        0        0        0   

Provisions

     22        0        (31     (1,571     1,250        (551     (1,619     (2,500
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     2,349        0        0        2,555        2,363        755        (591     7,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit allowance

   $ 23,175      $ 11,251      $ 46,449      $ 47,462      $ 16,163      $ 47,357      $ 27,662      $ 219,519   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2010 year to date

                

Allowance for loan losses:

                

Beginning balance, January 1

   $ 28,319      $ 8,984      $ 42,296      $ 185,222      $ 19,198      $ 59,135      $ 289      $ 343,443   

Chargeoffs

     (16,060     (11,945     (22,077     (177,622     (8,279     (16,717     0        (252,700

Recoveries

     604        0        417        11,680        957        658        0        14,316   

Provisions

     2,529        7,997        34,888        84,470        4,177        18,546        7,184        159,791   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     15,392        5,036        55,524        103,750        16,053        61,622        7,473        264,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for unfunded commitments:

                

Beginning balance, January 1

     712        0        0        9,228        1,481        1,665        (1,119     11,967   

Chargeoffs

     (562     0        0        0        0        0        0        (562

Recoveries

     0        0        0        0        0        0        0        0   

Provisions

     1,344        1        1        (2,452     (366     (221     1,239        (454
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30

     1,494        1        1        6,776        1,115        1,444        120        10,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit allowance

   $ 16,886      $ 5,037      $ 55,525      $ 110,526      $ 17,168      $ 63,066      $ 7,593      $ 275,801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

In establishing its allowance for loan losses, Sterling groups its loan portfolio into standard industry categories 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. 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 confirmed loss 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.

 

14


Table of Contents

The following table presents credit quality indicators for Sterling’s loan portfolio as of June 30, 2011 and December 31, 2010 grouped according to internally assigned risk ratings and payment activity:

 

     Real Estate             Commercial
Banking
            % of
total
 
     Residential      Multifamily      Commercial      Construction      Consumer         Total     
     (in thousands)         

June 30, 2011

                       

Pass

   $ 643,819       $ 773,610       $ 1,148,668       $ 70,214       $ 690,743       $ 1,498,007       $ 4,825,061         86

Special mention

     25,994         17,467         81,502         51,056         5,747         95,740         277,506         5

Substandard

     42,820         20,840         93,882         186,158         7,185         141,901         492,786         9

Doubtful/Loss

     5         0         6         845         0         6,171         7,027         0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 712,638       $ 811,917       $ 1,324,058       $ 308,273       $ 703,675       $ 1,741,819       $ 5,602,380         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restructured

   $ 19,080       $ 0       $ 6,287       $ 33,193       $ 0       $ 25,717       $ 84,277         2

Nonaccrual

     35,330         9,115         50,121         142,616         5,565         69,085         311,832         6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming

     54,410         9,115         56,408         175,809         5,565         94,802         396,109         8

Performing

     658,229         802,802         1,267,650         132,464         698,109         1,647,017         5,206,271         92
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 712,639       $ 811,917       $ 1,324,058       $ 308,273       $ 703,674       $ 1,741,819       $ 5,602,380         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                       

Pass

   $ 638,273       $ 446,363       $ 1,047,239       $ 68,099       $ 718,831       $ 1,474,312       $ 4,393,117         78

Special mention

     15,670         29,566         91,870         89,524         7,074         89,680         323,384         6

Substandard

     104,467         41,093         175,548         368,045         18,163         205,354         912,670         16

Doubtful/Loss

     0         0         0         0         0         1,080         1,080         0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 758,410       $ 517,022       $ 1,314,657       $ 525,668       $ 744,068       $ 1,770,426       $ 5,630,251         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restructured

   $ 20,569       $ 0       $ 10,856       $ 57,662       $ 119       $ 19,298       $ 108,504         2

Nonaccrual

     70,842         23,541         95,229         277,992         7,854         70,675         546,133         10
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonperforming

     91,411         23,541         106,085         335,654         7,973         89,973         654,637         12

Performing

     666,999         493,481         1,208,572         190,014         736,095         1,680,453         4,975,614         88
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 758,410       $ 517,022       $ 1,314,657       $ 525,668       $ 744,068       $ 1,770,426       $ 5,630,251         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Aging by class for Sterling’s loan portfolio as of June 30, 2011 and December 31, 2010 was as follows:

 

     Real Estate             Commercial
Banking
            % of
total
 
     Residential      Multifamily      Commercial      Construction      Consumer         Total     
     (in thousands)         

June 30, 2011

                       

30 - 59 days past due

   $ 10,154       $ 2,076       $ 13,385       $ 2,896       $ 5,949       $ 20,188       $ 54,648         1

60 - 89 days past due

     5,452         0         7,517         1,799         2,082         8,052         24,902         0

> 90 days past due

     24,188         6,621         27,506         154,523         4,558         59,495         276,891         5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     39,794         8,697         48,408         159,218         12,589         87,735         356,441         6

Current

     672,844         803,220         1,275,650         149,055         691,086         1,654,084         5,245,939         94
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 712,638       $ 811,917       $ 1,324,058       $ 308,273       $ 703,675       $ 1,741,819       $ 5,602,380         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 days and accruing

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

December 31, 2010

                       

30 - 59 days past due

   $ 10,273       $ 3,235       $ 4,251       $ 27,251       $ 5,650       $ 12,994       $ 63,654         1

60 - 89 days past due

     4,179         6,146         7,089         15,419         1,837         4,099         38,769         1

> 90 days past due

     35,544         6,428         34,517         232,140         4,834         52,497         365,960         6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due

     49,996         15,809         45,857         274,810         12,321         69,590         468,383         8

Current

     708,414         501,213         1,268,800         250,858         731,747         1,700,836         5,161,868         92
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 758,410       $ 517,022       $ 1,314,657       $ 525,668       $ 744,068       $ 1,770,426       $ 5,630,251         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

> 90 days and accruing

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

16


Table of Contents

Sterling considers its nonperforming loans to be impaired loans, which include $45.6 million and $34.7 million of homogeneous and small balance loans which were collectively evaluated for impairment on June 30, 2011 and December 31, 2010, respectively. Impaired loans by class were as follows at June 30, 2011 and December 31, 2010:

 

                   Book balance             Three Months Ended
June 30, 2011
     Six Months Ended
June 30, 2011
 
     Unpaid
principal
balance
     Charge-offs      without
specific
reserve
     with specific
reserve
     Specific
reserve
     Average
book
balance
     Interest
income
recognized
     Average
book
balance
     Interest
income
recognized
 
     (in thousands)                

June 30, 2011

                          

Residential real estate

   $ 70,225       $ 15,815       $ 41,169       $ 13,241       $ 2,146       $ 58,572       $ 320       $ 72,911       $ 320   

Multifamily real estate

     10,496         1,381         8,507         608         626         15,075         95         16,328         623   

Commercial real estate

     78,047         21,639         35,454         20,954         3,028         60,416         908         81,247         1,228   

Construction

     269,647         93,839         31,265         144,544         19,013         206,881         14         255,732         44   

Consumer

     9,315         3,750         4,703         862         114         6,048         0         6,769         0   

Commercial banking

     145,864         51,061         61,612         33,190         5,260         89,596         709         92,388         1,431   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 583,594       $ 187,485       $ 182,710       $ 213,399       $ 30,187       $ 436,588       $ 2,046       $ 525,375       $ 3,646   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                          

Residential real estate

   $ 114,401       $ 22,990       $ 27,956       $ 63,455       $ 1,239               

Multifamily real estate

     30,464         6,923         8,326         15,215         1,158               

Commercial real estate

     135,366         29,281         30,400         75,685         7,859               

Construction

     539,330         203,674         65,618         270,037         20,676               

Consumer

     12,740         4,767         4,353         3,620         33               

Commercial banking

     142,111         52,138         46,948         43,024         6,689               
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

             

Total

   $ 974,412       $ 319,773       $ 183,601       $ 471,036       $ 37,654               
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

             

 

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Table of Contents

At the applicable foreclosure date, OREO is recorded at the fair value of the real estate, less the estimated costs to sell. The carrying value of OREO is periodically evaluated and, if necessary, an allowance is established to reduce the carrying value to net realizable value. Changes in this allowance were as follows for the periods presented:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
Allowance for OREO losses:    (in thousands)  

Balance, beginning of period

   $ 14,667      $ 12,036      $ 21,799      $ 8,204   

Provision

     8,646        9,447        12,855        16,110   

Charge-offs

     (5,469     (7,415     (16,810     (10,246
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 17,844      $ 14,068      $ 17,844      $ 14,068   
  

 

 

   

 

 

   

 

 

   

 

 

 

The increase in charge-offs during the first half of 2011 was due to the increase in OREO sales, which totaled $157.2 million for the six months ended June 30, 2011 compared to $69.4 million during the same period in 2010.

4. Junior Subordinated Debentures:

Sterling has raised regulatory capital through the formation of trust subsidiaries and the assumption of 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. Sterling’s 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 generally mature 30 years after issuance and are redeemable at the option of Sterling under certain conditions, including, with respect to certain of the trusts, payment of call premiums. During the third quarter of 2009, Sterling elected to defer regularly scheduled interest payments on these securities, and has continued to defer these payments through June 30, 2011. As of June 30, 2011 and December 31, 2010, the accrued deferred interest was $12.5 million and $9.4 million, respectively. Sterling is allowed to defer payments of interest on the junior subordinated debentures for up to 20 consecutive quarterly periods without triggering an event of default. Details of the junior subordinated debentures are as follows:

 

Subsidiary Issuer

   Issue Date    Maturity
Date
   Next Call
Date
   Rate at June 30, 2011     Amount  
     (in thousands)  

Sterling Capital Trust IX

   July 2007    Oct 2037    Oct 2012    Floating      1.70   $ 46,392   

Sterling Capital Trust VIII

   Sept 2006    Sept 2036    Dec 2011    Floating      1.88        51,547   

Sterling Capital Trust VII

   June 2006    June 2036    Sept 2011    Floating      1.77        56,702   

Lynnwood Capital Trust II

   June 2005    June 2035    Sept 2011    Floating      2.05        10,310   

Sterling Capital Trust VI

   June 2003    Sept 2033    Sept 2011    Floating      3.45        10,310   

Sterling Capital Statutory Trust V

   May 2003    May 2033    Sept 2011    Floating      3.50        20,619   

Sterling Capital Trust IV

   May 2003    May 2033    Aug 2011    Floating      3.41        10,310   

Sterling Capital Trust III

   April 2003    April 2033    July 2011    Floating      3.52        14,433   

Lynnwood Capital Trust I

   Mar 2003    Mar 2033    Sept 2011    Floating      3.40        9,449   

Klamath First Capital Trust I

   July 2001    July 2031    July 2011    Floating      4.20        15,215   
                

 

 

 
                 2.39 %*    $ 245,287   
                

 

 

 

 

* Weighted average rate

 

 

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Table of Contents

5. Earnings (Loss) Per Share:

The following table presents the basic and diluted earnings per common share computations:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011      2010     2011      2010  
     (in thousands, except shares and per share amounts)  

Numerator:

          

Net income (loss) available to common shareholders

   $ 7,555       $ (58,242   $ 12,972       $ (147,000

Denominator:

          

Weighted average shares outstanding - basic

     61,943,851         788,020        61,937,353         787,799   

Dilutive securities outstanding

     368,373         0        382,675         0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     62,312,224         788,020        62,320,028         787,799   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings (loss) per share - basic

   $ 0.12       $ (73.91   $ 0.21       $ (186.60
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings (loss) per share - diluted

   $ 0.12       $ (73.91   $ 0.21       $ (186.60
  

 

 

    

 

 

   

 

 

    

 

 

 

Antidilutive securities outstanding (weighted average):

          

Stock options

     16,493         21,799        17,093         21,799   

Warrants

     0         97,541        0         97,541   

Restricted shares

     22,752         2,555        50,798         2,555   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total antidilutive securities outstanding

     39,245         121,894        67,891         121,894   
  

 

 

    

 

 

   

 

 

    

 

 

 

Prior period share and per share amounts disclosed in this footnote, as well as all other prior period share and per share amounts disclosed in these financial statements, have been restated to reflect the 1-for-66 reverse stock split that was effected in November 2010.

6. Noninterest Expense:

The following table details the components of Sterling’s noninterest expense:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  
     (in thousands)  

Employee compensation and benefits

   $ 41,836       $ 40,858       $ 85,686       $ 80,917   

OREO operations

     14,452         17,206         25,852         28,129   

Occupancy and equipment

     10,156         9,798         19,978         19,744   

Data processing

     6,608         5,359         12,688         10,464   

Insurance

     4,170         10,191         8,675         22,876   

Professional fees

     3,352         2,786         6,410         9,166   

Depreciation

     3,014         3,372         6,026         6,940   

Advertising

     2,768         3,327         4,727         5,910   

Travel and entertainment

     1,359         960         2,595         1,676   

Amortization of core deposit intangibles

     1,224         1,224         2,449         2,449   

Other

     2,648         2,234         4,809         5,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 91,587       $ 97,315       $ 179,895       $ 193,292   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

7. Income Taxes:

Sterling uses an estimate of future earnings and an evaluation of its loss carryback ability and tax planning strategies to determine whether it is more likely than not that it will realize the benefit of its net deferred tax asset. Sterling determined that it did not meet the required threshold as of June 30, 2011 and December 31, 2010, and accordingly, had a full valuation allowance against its net deferred tax assets. As of June 30, 2011, the reserved net deferred tax asset was approximately $350 million, including approximately $279 million of net operating loss carry-forwards. This is compared with a reserved net deferred tax asset of approximately $359 million, including approximately $263 million of net operating loss carry-forwards, as of December 31, 2010.

With regard to the deferred tax asset, the benefits of Sterling’s accumulated tax losses would be reduced in the event of an “ownership change,” as determined under Section 382 of the Internal Revenue Code. During 2010, in order to preserve the benefits of these tax losses, Sterling’s shareholders approved a protective amendment to the restated articles of incorporation and Sterling’s board adopted a tax preservation rights plan, both of which restrict certain stock transfers that would result in an investor acquiring more than 4.95% of Sterling’s total outstanding common stock.

 

20


Table of Contents

8. Stock-Based Compensation:

The following table presents a summary of stock option and restricted stock activity during the six months ended June 30, 2011:

 

     Stock Options      Restricted Stock  
     Number     Weighted
Average
Exercise
Price
     Number     Weighted
Average
Grant Price
 

Balance, January 1, 2011

     18,920      $ 1,357.97         368,805      $ 18.24   

Granted

     0        0.00         99,792        17.94   

Exercised/vested

     0        0.00         (26,579     31.35   

Cancelled/expired

     (2,491     1,196.76         (10,543     16.39   
  

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding, June 30, 2011

     16,429      $ 1,382.41         431,475      $ 17.41   
  

 

 

   

 

 

    

 

 

   

 

 

 

Exercisable, June 30, 2011

     14,396      $ 1,496.74        
  

 

 

   

 

 

      

Prior period share and per share amounts disclosed in this footnote, as well as all other prior period share and per share amounts disclosed in these financial statements, have been restated to reflect the 1-for-66 reverse stock split that was effected in November 2010. The following 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
Average Life
     Intrinsic
Value
     Weighted
Average Life
   Intrinsic
Value
 

December 31, 2010

     2.8 years       $ 0       2.6 years    $ 0   

June 30, 2011

     2.6 years         0       2.5 years      0   

As of June 30, 2011, a total of 5,515,720 shares remained available for grant under Sterling’s 2003, 2007 and 2010 Long-Term Incentive Plans. The stock options granted under these plans have terms of four, six, eight and ten years. Restricted shares granted during 2011 have vesting schedules that vary, ranging from vesting immediately upon grant to vesting up to three years after the grant date.

Stock-based compensation expense recognized during the periods presented was as follows:

 

     Six Months Ended June 30,  
     2011      2010  
     (in thousands)  

Stock options

   $ 172       $ 386   

Restricted stock

     1,792         322   
  

 

 

    

 

 

 

Total

   $ 1,964       $ 708   
  

 

 

    

 

 

 

As of June 30, 2011, unrecognized equity compensation expense totaled $6.3 million, as the underlying outstanding awards had not yet been earned. This amount will be recognized over a weighted average period of 1.7 years. During the six months ended June 30, 2011, 156 stock options were forfeited, and 10,543 shares of restricted stock were forfeited.

9. Derivatives and Hedging:

From time to time, Sterling may enter into interest rate swap transactions with loan customers. The interest rate risk on these swap transactions is managed by 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 by Sterling.

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 (“interest rate lock commitments”). 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”).

 

21


Table of Contents

Residential mortgage loans held for sale that were not committed to investors were $138.9 million and $207.0 million as of June 30, 2011 and December 31, 2010, respectively. The following table summarizes the off-balance sheet portions of Sterling’s mortgage banking operations, as well as Sterling’s interest rate swaps:

 

     June 30, 2011  
            Fair Value  
     Notional      Asset      Liability  
     (in thousands)  

Interest rate lock commitments

   $ 162,893       $ 2,836       $ —     

Forward commitments

     292,569         0         1,090   

Interest rate swaps - broker-dealer

     45,847         0         4,205   

Interest rate swaps - customer

     48,477         4,416         0   
     December 31, 2010  
            Fair Value  
     Notional      Asset      Liability  
     (in thousands)  

Interest rate lock commitments

   $ 118,589       $ 1,869       $ —     

Forward commitments

     285,300         3,770         0   

Interest rate swaps - broker-dealer

     47,815         0         4,426   

Interest rate swaps - customer

     50,467         4,877         0   

The fair value of these derivatives are included in other assets and liabilities, respectively. Gains and losses on Sterling’s mortgage banking derivative transactions are included in mortgage banking income, while gains and losses on Sterling’s interest rate swap transactions are included in other noninterest income, and were as follows for the periods presented:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Mortgage banking operations

     (4,664     (6,888     (7,504     (7,568

Other noninterest income

     30        88        37        77   

10. 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 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.

 

22


Table of Contents

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:

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

     (in thousands)   

Cash and cash equivalents

   $ 587,210       $ 587,210       $ 427,264       $ 427,264   

Investments and MBS:

           

Available for sale

     2,494,002         2,494,002         2,825,010         2,825,010   

Held to maturity

     2,054         2,054         13,464         13,464   

Loans held for sale

     197,643         197,643         222,216         222,216   

Loans receivable, net

     5,387,714         5,148,479         5,379,081         5,078,157   

Accrued interest receivable

     32,018         32,018         34,087         34,087   

Other assets

     106,763         106,763         106,717         106,717   

Financial liabilities:

           

Non-maturity deposits

     3,506,712         3,260,938         3,376,188         3,123,840   

Deposits with stated maturities

     3,097,286         3,130,533         3,534,819         3,588,051   

Borrowings

     1,711,052         1,685,227         1,685,008         1,660,387   

Accrued interest payable

     20,060         20,060         17,259         17,259   

Other liabilities

     5,660         5,660         6,176         6,176   

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 entity’s 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 each class of 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 has been valued using a matrix pricing technique based on quoted prices for similar instruments, which Sterling validates with non-binding broker quotes, in depth collateral analysis and cash flow stress testing.

 

23


Table of Contents

Loans Held for Sale

Sterling has elected to carry loans held for sale at fair value. The fair values are based on investor quotes in the secondary market based upon 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.

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 management’s current estimate of future cash flows using a rate estimated to be commensurate with the risks involved. In addition, a liquidity discount has been applied against the entire portfolio to reflect the uncertainty surrounding the timing of when a sale may occur.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is estimated using a discounted cash flow model to arrive at the present value of future expected earnings from the servicing of the loans. Model inputs include prepayment speeds, market interest rates, contractual interest rates on the loans being serviced, and the amount of other fee income generated over the servicing contract.

OREO

The fair value of OREO is estimated using third party appraisals, subject to updates to reflect comparable market transactions, with appraisals ordered for “as is” or “disposal value.”

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, net of a core deposit intangible. 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 advances under lines of credit approximates their carrying value because such advances bear variable rates of interest. The fair value of long-term FHLB advances and other long-term borrowings is estimated using discounted cash flow analyses based on Sterling’s current incremental borrowing rates for similar types of borrowing arrangements with similar remaining terms.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following table presents Sterling’s financial instruments that are measured at fair value on a recurring basis:

 

     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Balance, June 30, 2011:

           

Investment securities available-for-sale:

           

MBS

   $ 2,282,497       $ 0       $ 2,282,497       $ 0   

Municipal bonds

     189,647         0         189,647         0   

Other

     21,858         0         21,858         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

     2,494,002         0         2,494,002         0   

Loans held for sale

     197,643         0         197,643         0   

Other assets - derivatives

     7,252         0         7,252         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,698,897       $ 0       $ 2,698,897       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other liabilities - derivatives

   $ 5,660       $ 0       $ 5,660       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2010:

           

Investment securities available-for-sale:

           

MBS

   $ 2,602,610       $ 0       $ 2,602,610       $ 0   

Municipal bonds

     201,143         0         201,143         0   

Other

     21,257         0         21,257         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

     2,825,010         0         2,825,010         0   

Loans held for sale

     222,216         0         222,216         0   

Other assets - derivatives

     6,746         0         6,746         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,053,972       $ 0       $ 3,053,972       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other liabilities - derivatives

   $ 6,176       $ 0       $ 6,176       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives represent mortgage banking interest rate lock and loan delivery commitments, a common stock warrant carried as a derivative liability, as well as interest rate swaps. Market values on the interest rate swaps equal the present value differential between the fixed interest rate payments, as established in the swap agreement, and the floating interest rate payments, as projected by the forward interest rate curve, over the agreed to term of the swap. See Note 9 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:

 

     Six Months Ended June 30,  
     2011      2010  
     (in thousands)  

Mortgage banking operations

   $ 4,581       $ 6,846   

 

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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 lower of cost or market (“LOCOM”) accounting or write-downs of individual assets. The following table presents the carrying value for these assets as of the dates indicated:

 

     June 30, 2011      Losses During the
Six  Months Ended
June 30, 2011
 
     Total Carrying
Value
     Level 1      Level 2      Level 3     
     (in thousands)  

Loans

   $ 216,851       $ 0       $ 0       $ 216,851       $ (29,415

OREO

     32,369         0         0         32,369         (9,906

Mortgage servicing rights

     23,880         0         0         23,880         (369
                                 Gains (Losses)
During the Twelve
Months Ended
December 31, 2010
 
     December 31, 2010     
     Total Carrying
Value
     Level 1      Level 2      Level 3     

Loans

   $ 549,320       $ 0       $ 0       $ 549,320       $ (181,165

OREO

     63,586         0         0         63,586         (21,096

Mortgage servicing rights

     20,604         0         0         20,604         1,115   

The loans disclosed above represent the net balance of loans for which a charge against earnings has occurred during the six months ended June 30, 2011, and the year ended December 31, 2010, respectively, with these charges comprised of charge-offs and increases in the specific reserve. OREO represents the carrying value on properties for which a specific reserve was established during the periods presented related to updated appraisals subsequent to foreclosure. In addition to the loan and OREO losses disclosed above, charge-offs at foreclosure for properties held as of period end totaled $18.6 million and $33.9 million for the six months ended June 30, 2011 and the year ended December 31, 2010, 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.

11. Regulatory Capital:

The following table sets forth the respective regulatory capital positions for Sterling and Sterling Savings Bank as of June 30, 2011:

 

     Actual     

 

    Adequately
Capitalized
    

 

    Well-
Capitalized
    

 

 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
                  (in thousands)  

Tier 1 leverage ratio

               

Sterling

   $ 1,016,939         10.9   $ 373,753         4.0   $ 467,192         5.0

Sterling Savings Bank

     986,113         10.6     373,722         4.0     467,153         5.0

Tier 1 risk-based capital ratio

               

Sterling

     1,016,939         16.9     241,107         4.0     361,660         6.0

Sterling Savings Bank

     986,113         16.4     240,759         4.0     361,138         6.0

Total risk-based capital ratio

               

Sterling

     1,094,065         18.2     482,213         8.0     602,767         10.0

Sterling Savings Bank

     1,063,131         17.7     481,518         8.0     601,897         10.0

12. Segment Information:

For 2011, Sterling changed its reporting segments to reflect the integration of Golf Savings Bank into Sterling Savings Bank and leadership realignments. The segments for 2011 are as follows:

 

   

Community Banking – a division within Sterling Savings Bank providing traditional banking services through the retail banking, private banking and commercial banking groups.

 

   

Home Loan Division – originating residential real estate loans primarily through the mortgage banking operations of Sterling Savings Bank on both a servicing-retained and servicing-released basis.

 

   

Commercial Real Estate – a division within Sterling Savings Bank focused on the origination and servicing of multifamily real estate, commercial real estate and construction loans.

 

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The Other and Eliminations caption represents intercompany eliminations of revenue and expenses. Segment results for the comparable period presented are grouped according to the original classifications, due to the impracticability of reclassification to current period presentation.

 

     As of and for the Three Months Ended June 30, 2011  
     Community
Banking
     Home Loan
Division
    Commercial
Real Estate
     Other and
Eliminations
    Total  
     (in thousands)  

Interest income

   $ 89,179       $ 1,537      $ 11,861       $ (230   $ 102,347   

Interest expense

     24,098         472        3,017         (47     27,540   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     65,081         1,065        8,844         (183     74,807   

Provision for credit losses

     8,623         33        1,344         0        10,000   

Noninterest income

     23,817         8,716        1,619         183        34,335   

Noninterest expense

     75,974         10,219        5,394         0        91,587   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

   $ 4,301       $ (471   $ 3,725       $ 0      $ 7,555   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 7,772,328       $ 205,799      $ 991,242       $ 272,226      $ 9,241,595   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     As of and for the Three Months Ended June 30, 2010  
     Community
Banking
    Residential
Construction
Lending
    Residential
Mortgage
Banking
     Commercial
Mortgage
Banking
     Other and
Eliminations
    Total  
     (in thousands)  

Interest income

   $ 105,631      $ 2,208      $ 6,569       $ 801       $ 0      $ 115,209   

Interest expense

     32,390        5,343        2,930         0         1,451        42,114   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     73,241        (3,135     3,639         801         (1,451     73,095   

Provision for credit losses

     50,527        16,473        3,781         0         0        70,781   

Noninterest income

     26,929        12        13,894         499         (106     41,228   

Noninterest expense

     79,993        1,408        12,913         1,003         1,998        97,315   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

   $ (30,350   $ (21,004   $ 839       $ 297       $ (3,555   $ (53,773
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 8,587,871      $ 578,445      $ 559,517       $ 6,588       $ 5,360      $ 9,737,781   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     As of and for the Six Months Ended June 30, 2011  
     Community
Banking
     Home Loan
Division
    Commercial
Real Estate
     Other and
Eliminations
    Total  
     (in thousands)  

Interest income

   $ 180,923       $ 2,832      $ 22,461       $ (632   $ 205,584   

Interest expense

     50,532         975        5,621         (94     57,034   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     130,391         1,857        16,840         (538     148,550   

Provision for credit losses

     19,301         (56     755         0        20,000   

Noninterest income

     42,118         18,648        3,041         510        64,317   

Noninterest expense

     149,094         20,501        10,300         0        179,895   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

   $ 4,114       $ 60      $ 8,826       $ (28   $ 12,972   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 7,772,328       $ 205,799      $ 991,242       $ 272,226      $ 9,241,595   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     As of and for the Six Months Ended June 30, 2010  
     Community
Banking
    Residential
Construction
Lending
    Residential
Mortgage
Banking
     Commercial
Mortgage
Banking
     Other and
Eliminations
    Total  
     (in thousands)  

Interest income

   $ 214,586      $ 4,922      $ 12,703       $ 2,420       $ 70      $ 234,701   

Interest expense

     66,127        11,672        5,993         0         2,924        86,716   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     148,459        (6,750     6,710         2,420         (2,854     147,985   

Provision for credit losses

     99,460        52,540        7,337         0         0        159,337   

Noninterest income

     39,610        23        26,487         1,162         (757     66,525   

Noninterest expense

     156,629        3,023        24,983         2,411         6,246        193,292   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

   $ (68,020   $ (62,290   $ 877       $ 1,171       $ (9,857   $ (138,119
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 8,587,871      $ 578,445      $ 559,517       $ 6,588       $ 5,360      $ 9,737,781   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in Sterling’s 2010 annual report on Form 10-K.

General

Sterling Financial Corporation, with headquarters in Spokane, Washington, is the bank holding company for Sterling Savings Bank, which commenced operations in 1983. References to “Sterling,” “the Company,” “we,” “our,” or “us” in this report refer 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 Savings Bank” refer to our subsidiary Sterling Savings Bank, a Washington state-chartered commercial bank. Sterling Savings Bank offers retail and commercial banking products and services, mortgage lending and investment products to individuals, small businesses, commercial organizations and corporations. As of June 30, 2011, Sterling had assets of $9.24 billion and operated 178 depository branches in Washington, Oregon, Idaho, Montana, and California.

Executive Summary and Highlights

Net income available to common shareholders was $7.6 million, or $0.12 per common share, for the three months ended June 30, 2011, compared to a net loss available to common shareholders of $58.2 million, or $73.91 per common share, for the comparable 2010 quarter. For the six months ended June 30, 2011, net income available to common shareholders was $13.0 million, or $0.21 per common share, versus a net loss attributable to common shareholders of $147.0 million, or $186.60 per common share for the same period in 2010. Comparability in per share results over the periods presented reflects the increase in the amount of shares outstanding subsequent to Sterling’s Recapitalization in August 2010.

The following are selected financial highlights at June 30, 2011:

 

   

Loan originations were $1.51 billion for the six months ended June 30, 2011, a 24% increase over the 2010 comparative period.

 

   

Retail transaction, savings and money market deposit accounts (“MMDA”) account balances increased by $226.9 million, or 7% since December 31, 2010.

 

   

Net interest margin expanded to 3.26% for the six months ended June 30, 2011 compared with 2.87% during the same period in 2010.

 

   

Total funding costs were reduced by 39 basis points for the six months ended June 30, 2011 compared with the same period in 2010.

 

   

Nonperforming assets declined by $318.8 million since year end, or 39%.

Critical Accounting Policies

The accounting and reporting policies of Sterling conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Allowance for Credit Losses. The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded credit commitments. In general, determining the amount of the allowance requires significant judgment and the use of estimates by management. Sterling maintains an allowance for loan losses to absorb probable losses in the loan portfolio based on a quarterly analysis of the portfolio and expected future losses. This

 

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analysis is designed to determine an appropriate level and allocation of the allowance for losses among loan types by considering factors affecting loan losses, including specific and confirmed losses, levels and trends in classified and nonperforming loans, historical loan loss experience, loan migration analysis, current national and local economic conditions, volume, growth and composition of the portfolio, regulatory guidance and other relevant factors. The reserve for unfunded credit commitments includes loss coverage for loan repurchases arising from mortgage banking activities. Management monitors the loan portfolio to evaluate the adequacy of the allowance. The allowance can increase or decrease each quarter based upon the results of management’s analysis.

The portfolio is grouped into standard industry categories for homogeneous loans based on characteristics such as loan type, borrower and collateral. Annual and quarterly loan migration to loss data is used to determine the probability of default. Currently, Sterling is establishing the expected loss rate on loans using losses from the most recent 12 months to estimate the amount that would be lost if a default were to occur, which is termed the “loss given default.” The probability of default is multiplied by the loss given default to calculate the expected losses for each loan category.

Sterling may also maintain an unallocated allowance to provide for other credit losses that may exist in the loan portfolio that are not taken into consideration in establishing the probability of default and loss given default. The unallocated amount may generally be maintained at higher levels during times of economic uncertainty. The unallocated amount is reviewed at least quarterly based on credit and economic trends. As of June 30, 2011, the unallocated allowance was 13% of the allowance for loan losses, unchanged from December 31, 2010.

Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, loan quality ratings, value of collateral, repayment ability of borrowers and guarantors, as applicable, and historical experience factors. The historical experience factors utilized and allowances for homogeneous loans (such as residential mortgage loans and consumer loans) are collectively evaluated based upon historical loss experience, loan migration analysis, trends in losses and delinquencies, growth of loans in particular markets, and known changes in economic conditions in each particular lending market.

A loan is considered impaired when, based on current information and events, it is probable Sterling will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record, the ability and willingness of guarantors to make payments, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent.

The fair value of the underlying collateral for real estate loans, which may or may not be collateral dependent, is determined by using appraisals from qualified external sources. For commercial properties and residential development loans, the external appraisals are reviewed by qualified internal appraisal staff to ensure compliance with appropriate standards and technical accuracy. Appraisals are updated according to regulatory provisions for extensions or restructurings of commercial or residential real estate construction and permanent loans that have not performed within the terms of the original loan. Updated appraisals are also ordered for loans that have not been restructured, but that have stale valuation information, generally defined in the current market as information older than one year, and deteriorating credit quality that warrants classification as substandard.

The timing of obtaining appraisals may vary, depending on the nature and complexity of the property being evaluated and the general breadth of appraisal activity in the marketplace, but generally it is within 30 to 90 days of recognition of substandard status, following determination of collateral dependency, or in connection with a loan’s maturity or a negotiation that may result in the restructuring or extension of a real estate secured loan. Delays in timing may occur to comply with actions such as a bankruptcy filing or provisions of an SBA guarantee.

 

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Estimates of fair value may be used for substandard collateral dependent loans at quarter end if external appraisals are not expected to be completed in time for determining quarter end results or to update values between appraisal dates to reflect recent sales activity of comparable inventory or pending property sales of the subject collateral. Sterling records a specific reserve for impaired loans for which an updated valuation analysis has not been completed within the last quarter. The specific reserve is calculated by applying an estimated fair value adjustment to each loan based on market and property type. Estimates of value are not used to raise a value; however, estimates may be used to recognize deterioration of market values in quarters between appraisal updates. The judgment with respect to recognition of any provision or related charge-off for a confirmed loss also takes into consideration whether the loan is collateral dependent or whether it is supported by sources of repayment or cash flow beyond the collateral that is being valued. For loans that are deemed to be collateral dependent, the amount of charge-offs is determined in relation to the collateral’s appraised value. For loans that are not deemed to be collateral dependent, the amount of charge-offs may differ from the collateral’s appraised value because there is additional support for the loan, such as cash flow from other sources.

The off-balance sheet portion of the allowance for credit losses primarily relates to loss exposure from Sterling’s mortgage banking operations. Loans sold into the secondary market are sold with limited recourse to Sterling, meaning that Sterling may be obligated to repurchase any loans that are not underwritten in accordance with agency guidelines or loans with identified post-closing borrower misrepresentations.

While management uses available information to provide for loan losses, the ultimate collectability of a substantial portion of the loan portfolio and the need for future additions to the allowance will be influenced by changes in economic conditions and other relevant factors. There can be no assurance that the allowance for credit losses will be adequate to cover all losses, but management believes the allowance for credit losses was appropriate at June 30, 2011.

Income Taxes. Sterling estimates income taxes payable based on the amount it expects to owe various taxing authorities. Accrued income taxes represent the net estimated amount due to, or to be received from, taxing authorities. In estimating accrued income taxes, Sterling assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account the applicable statutory, judicial and regulatory guidance in the context of Sterling’s tax position. Sterling also considers recent audits and examinations, as well as its historical experience in making such estimates. Although Sterling uses available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances. Penalties and interest associated with any potential estimate variances would be included in income tax expense on the Consolidated Statement of Income.

Sterling uses an estimate of future earnings and an evaluation of its loss carryback ability and tax planning strategies to determine whether it is more likely than not that it will realize the benefit of its net deferred tax asset. Sterling has determined that it does not at this time meet the required threshold, and accordingly, has a valuation allowance against its deferred tax asset. During the three and six months ended June 30, 2011, Sterling did not recognize any income tax expense, as the income tax for the periods was offset by a reduction in the deferred tax asset valuation allowance.

 

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Table of Contents

Results of Operations

The most significant component of earnings for a financial institution typically is net interest income, which is the difference between interest income, primarily from loans, MBS and investment securities, and interest expense, primarily on deposits and borrowings. Net interest spread refers to the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin refers to net interest income divided by total average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The following table sets forth, on a tax equivalent basis, information with regard to Sterling’s net interest income, net interest spread and net interest margin:

 

     Three Months Ended  
     June 30, 2011     June 30, 2010  
     Average
Balance
     Interest
Income/
Expense
     Yields/
Rates
    Average
Balance
    Interest
Income/
Expense
     Yields/
Rates
 
ASSETS:    (in thousands)  

Loans:

               

Mortgage

   $ 3,516,320       $ 43,777         4.98   $ 4,422,766      $ 49,060         4.44

Commercial and consumer

     2,478,564         36,074         5.84     3,041,988        44,984         5.93
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans (1)

     5,994,884         79,851         5.33     7,464,754        94,044         5.05

MBS (2)

     2,450,178         19,928         3.25     1,699,890        18,616         4.38

Investments and cash (2)

     668,553         3,732         2.24     1,095,491        3,815         1.40

FHLB stock

     99,629         0         0.00     100,601        0         0.00
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     9,213,244         103,511         4.50     10,360,736        116,475         4.50
     

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets (3)

     125,165              (143,740     
  

 

 

         

 

 

      

Total average assets

   $ 9,338,409            $ 10,216,996        
  

 

 

         

 

 

      

LIABILITIES and EQUITY:

               

Deposits:

               

Interest-bearing transaction

   $ 502,303         128         0.10   $ 835,572        496         0.24

Savings and MMDA

     1,981,455         1,740         0.35     1,628,250        2,934         0.72

Time deposits

     3,172,641         13,348         1.69     3,910,867        21,633         2.22
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     5,656,399         15,216         1.08     6,374,689        25,063         1.58

Borrowings

     1,704,126         12,324         2.90     2,508,813        17,051         2.73
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     7,360,525         27,540         1.50     8,883,502        42,114         1.90

Noninterest-bearing transaction

     1,040,000         0         0.00     990,726        0         0.00
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total funding liabilities

     8,400,525         27,540         1.31     9,874,228        42,114         1.71
     

 

 

    

 

 

     

 

 

    

 

 

 

Other noninterest-bearing liabilities

     145,136              128,007        
  

 

 

         

 

 

      

Total average liabilities

     8,545,661              10,002,235        

Total average equity

     792,748              214,761        
  

 

 

         

 

 

      

Total average liabilities and equity

   $ 9,338,409            $ 10,216,996        
  

 

 

         

 

 

      

Net interest income and spread (4)

      $ 75,971         3.00     $ 74,361         2.60
     

 

 

    

 

 

     

 

 

    

 

 

 

Net interest margin (4)

           3.31          2.88
        

 

 

        

 

 

 

Deposits:

               

Total interest-bearing deposits

   $ 5,656,399       $ 15,216         1.08   $ 6,374,689      $ 25,063         1.58

Noninterest-bearing transaction

     1,040,000         0         0.00     990,726        0         0.00
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

   $ 6,696,399       $ 15,216         0.91   $ 7,365,415      $ 25,063         1.36
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

Includes gross nonperforming loans.

(2) 

Does not include market value adjustments on available for sale securities.

(3) 

Includes charge-offs on nonperforming loans (“confirmed losses”) and the allowance for credit losses.

(4) 

Interest income on certain loans and securities are presented gross of their applicable tax savings using a 37% effective tax rate.

 

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Table of Contents
     Six Months Ended  
     June 30, 2011     June 30, 2010  
     Average
Balance
     Interest
Income/
Expense
     Yields/
Rates
    Average
Balance
    Interest
Income/
Expense
     Yields/
Rates
 
ASSETS:    (in thousands)  

Loans:

               

Mortgage

   $ 3,473,639       $ 86,889         5.01   $ 4,562,892      $ 98,957         4.34

Commercial and consumer

     2,499,781         75,365         6.08     3,163,297        92,226         5.88
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans (1)

     5,973,420         162,254         5.46     7,726,189        191,183         4.97

MBS (2)

     2,519,974         39,962         3.17     1,745,919        38,442         4.40

Investments and cash (2)

     730,412         5,734         1.58     1,029,313        7,701         1.51

FHLB stock

     99,790         0         0.00     83,954        0         0.00
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     9,323,596         207,950         4.48     10,585,375        237,326         4.50
     

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets (3)

     95,600              (144,086     
  

 

 

         

 

 

      

Total average assets

   $ 9,419,196            $ 10,441,289        
  

 

 

         

 

 

      

LIABILITIES and EQUITY:

               

Deposits:

               

Interest-bearing transaction

   $ 498,001         274         0.11   $ 937,231        1,359         0.29

Savings and MMDA

     1,970,569         3,711         0.38     1,593,273        5,883         0.74

Time deposits

     3,312,255         28,525         1.74     3,990,472        45,272         2.29
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     5,780,825         32,510         1.13     6,520,976        52,514         1.62

Borrowings

     1,699,286         24,524         2.91     2,532,670        34,202         2.72
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     7,480,111         57,034         1.54     9,053,646        86,716         1.93

Noninterest-bearing transaction

     1,022,741         0         0.00     991,085        0         0.00
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total funding liabilities

     8,502,852         57,034         1.35     10,044,731        86,716         1.74
     

 

 

    

 

 

     

 

 

    

 

 

 

Other noninterest-bearing liabilities

     135,134              142,693        
  

 

 

         

 

 

      

Total average liabilities

     8,637,986              10,187,424        

Total average equity

     781,210              253,865        
  

 

 

         

 

 

      

Total average liabilities and equity

   $ 9,419,196            $ 10,441,289        
  

 

 

         

 

 

      

Net interest income and spread (4)

      $ 150,916         2.94     $ 150,610         2.57
     

 

 

    

 

 

     

 

 

    

 

 

 

Net interest margin (4)

           3.26          2.87
        

 

 

        

 

 

 

Deposits:

               

Total interest-bearing deposits

   $ 5,780,825       $ 32,510         1.13   $ 6,520,976      $ 52,514         1.62

Noninterest-bearing transaction

     1,022,741         0         0.00     991,085        0         0.00
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

   $ 6,803,566       $ 32,510         0.96   $ 7,512,061      $ 52,514         1.41
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

Includes gross nonperforming loans.

(2) 

Does not include market value adjustments on available for sale securities.

(3) 

Includes charge-offs on nonperforming loans (“confirmed losses”) and the allowance for credit losses.

(4) 

Interest income on certain loans and securities are presented gross of their applicable tax savings using a 37% effective tax rate.

The following table sets forth the return on average assets and return on average common equity for the periods presented:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Return on average assets

     0.32     -2.11     0.28     -2.67

Return on average common equity

     3.82     NM  (1)      3.35     NM  (1) 

 

(1)

NM stands for “not meaningful,” as the balance of common equity reflected a deficit for the periods indicated.

 

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Table of Contents

Net Interest Income. Sterling’s net interest income was $74.8 million for the three months ended June 30, 2011, an increase of 2% compared with $73.1 million for the three months ended June 30, 2010, reflecting the decline in nonperforming loans and lower funding costs. Net interest income of $148.6 million for the six months ended June 30, 2011, was relatively unchanged compared with $148.0 million for the six months ended June 30, 2010, with the benefits from the decline in nonperforming loans and lower funding costs offset by lower average loan balances.

Net interest margin expanded to 3.31% and 3.26% for the three and six months ended June 30, 2011, respectively, as compared with 2.88% and 2.87% for the respective 2010 periods, due to the decline in nonperforming loans and the reduced cost of deposits. The reversal of interest income on nonperforming loans reduced the net interest margin by 42 basis points for the second quarter of 2011, compared with a reduction of 80 basis points for the same period a year ago, and a reduction of 47 basis points for the six months ended June 30, 2011, compared with a reduction of 85 basis points for the same period in 2010.

Provision for Credit Losses. Management’s policy is to establish valuation allowances for estimated losses by charging corresponding provisions against income. The evaluation of the adequacy of specific and general valuation allowances is an ongoing process. This process includes information derived from many factors, including historical loss trends, trends in classified assets, trends in delinquent and nonaccrual loans, trends in portfolio volume, diversification as to type of loan, size of individual credit exposure, current and anticipated economic conditions, loan policies, collection policies and effectiveness, quality of credit evaluation, effectiveness of policies, procedures and practices, and recent loss experience of peer banking institutions.

Sterling recorded provisions for credit losses of $10.0 million and $20.0 million for the three and six months ended June 30, 2011, respectively, as compared with $70.8 million and $159.3 million for the 2010 respective periods. The reduced level of credit loss provisioning reflects improvement in asset quality as evidenced by the decline in nonperforming loans and charge-offs.

Noninterest Income. Non-interest income was as follows for the periods presented:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011      2010     % Change     2011     2010     % change  
     (in thousands)  

Fees and service charges

   $ 12,946       $ 14,233        -9   $ 25,507      $ 27,268        -6

Mortgage banking operations

     10,794         11,713        -8     21,121        22,945        -8

Loan servicing fees

     709         (408     -274     1,810        738        145

BOLI

     1,578         1,560        1     3,310        3,855        -14

Gains on sales of securities, net

     8,297         15,349        -46     14,298        17,260        -17

Other

     11         (1,219     -101     (1,729     (5,541     -69
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 34,335       $ 41,228        -17   $ 64,317      $ 66,525        -17
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The reduction in quarterly fees and service charges income was primarily related to lower non-sufficient funds fees and financial services commission income, while the six month comparative decline was a result of lower non-sufficient funds fees, ATM and card fees, loan fees and financial services commission income. The decline in income from mortgage banking operations reflected a lower level of residential loan originations and sales. Fluctuation in loan servicing fees is mainly attributable to market value adjustments to mortgage servicing rights and growth in the balance of the loan servicing portfolio. BOLI income for the 2010 period included $699,000 of death benefit proceeds in excess of cash surrender value. The level of gain on sales of securities was driven by portfolio rebalancing to reduce duration levels while realizing certain valuations. Other noninterest income for the six months ended June 30, 2010 included $3.7 million of losses on loan sales, the majority of which was related to a $218.5 million sale of consumer indirect auto loans.

 

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Table of Contents

The following table presents components of mortgage banking income for the periods presented:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Loan originations - residential real estate for sale

   $ 457,123      $ 606,706      $ 820,241      $ 1,021,149   

Loan sales - residential

     398,120        660,310        896,431        1,146,915   

Margin on residential loan sales

     2.21     2.22     2.33     2.13

Noninterest Expense. Noninterest expense was as follows for the periods presented:

 

     Three Months Ended
June 30,
    

 

    Six Months Ended
June 30,
    

 

 
     2011      2010      %
change
    2011      2010      %
change
 
     (in thousands)  

Employee compensation and benefits

   $ 41,836       $ 40,858         2   $ 85,686       $ 80,917         6

OREO operations

     14,452         17,206         -16     25,852         28,129         -8

Occupancy and equipment

     10,156         9,798         4     19,978         19,744         1

Data processing

     6,608         5,359         23     12,688         10,464         21

Insurance

     4,170         10,191         -59     8,675         22,876         -62

Professional fees

     3,352         2,786         20     6,410         9,166         -30

Depreciation

     3,014         3,372         -11     6,026         6,940         -13

Advertising

     2,768         3,327         -17     4727         5910         -20

Travel and entertainment

     1,359         960         42     2,595         1,676         55

Amortization of core deposit intangibles

     1,224         1,224         0     2,449         2,449         0

Other

     2,648         2,234         19     4,809         5,021         -4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 91,587       $ 97,315         -6   $ 179,895       $ 193,292         -7
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The decrease in noninterest expense for both the three and six month periods was primarily due to a lower level of FDIC deposit insurance premiums and OREO expense. Insurance, which is primarily comprised of FDIC deposit insurance premiums, was down compared to the 2010 amounts due to the lower assessment rates applicable to Sterling Savings Bank this year.

During the second quarter of 2011, Sterling successfully completed the conversion to a new core operating system that is expected to support future growth and reduce associated operating expenses. In connection with the core conversion, Sterling incurred $2.3 million of non-recurring implementation expenses during the second quarter of 2011, and $3.8 million during the six months ended June 30, 2011.

Income Tax Provision. During the periods presented, Sterling did not recognize any federal or state tax expense or benefit, as the income tax provision was offset by changes in the deferred tax valuation allowance. As of June 30, 2011, the reserved deferred tax asset was approximately $350 million, including approximately $279 million of net operating loss carry-forwards.

Financial Position

Assets. At June 30, 2011, Sterling’s assets were $9.24 billion, down $251.6 million from $9.49 billion at December 31, 2010, primarily as a result of a decline in investments and MBS.

Investments and MBS. Sterling’s investment and MBS portfolio at June 30, 2011 was $2.50 billion, compared with $2.84 billion at December 31, 2010, with sales, prepayments and maturities outpacing purchases during the period. The level of securities sales were due to portfolio rebalancing to reduce duration levels while realizing certain valuations. As of June 30, 2011, the weighted average life of the MBS portfolio was 4.5 years, and its effective duration was 3.4%. This compares with a weighted average life of 5.0 years, and an effective duration of 3.6% at December 31, 2010. On June 30, 2011, the investment and MBS portfolio had an unrealized gain of $18.3 million versus an unrealized loss of $6.5 million at December 31, 2010.

 

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Table of Contents

Loans Receivable. The following table sets forth the composition of Sterling’s loan portfolio by type of loan at the dates indicated:

 

     June 30, 2011     December 31, 2010  
     Amount     %     Amount     %  
     (in thousands)  

Residential real estate

   $ 712,638        13      $ 758,410        13   

Multifamily real estate

     811,917        14        517,022        9   

Commercial real estate

     1,324,058        24        1,314,657        24   

Construction:

        

Residential

     67,789        1        156,853        3   

Multifamily

     49,908        1        90,518        2   

Commercial

     190,576        3        278,297        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     308,273        6        525,668        9   

Consumer

     703,675        13        744,068        13   

Commercial banking

     1,741,819        30        1,770,426        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans receivable

     5,602,380        100     5,630,251        100
    

 

 

     

 

 

 

Net deferred origination fees

     (2,578       (4,114  

Allowance for losses on loans

     (212,088       (247,056  
  

 

 

     

 

 

   

Loans receivable, net

   $ 5,387,714        $ 5,379,081     
  

 

 

     

 

 

   

 

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Table of Contents

During the first half of 2011, gross loan balances declined $27.9 million, with loan runoff experienced primarily in the construction loan portfolio, offset by new multifamily loan originations. Multifamily real estate originations of $337.0 million during the six months ended June 30, 2011 reflect Sterling’s strategic focus on multifamily lending. Additionally, loan purchases during the six months ended June 30, 2011 included $100.8 million of seasoned commercial loans for both owner-occupied and non-owner-occupied properties within Sterling’s footprint. The following table sets forth Sterling’s loan originations and purchases for the periods indicated:

 

     Three Months Ended      Six Months Ended  
     June 30,
2011
     December 31,
2010
     June 30,
2010
     June 30,
2011
     June 30,
2010
 
     (in thousands)  

Loan originations:

              

Residential real estate

   $ 483,701       $ 777,238       $ 622,144       $ 871,182       $ 1,053,201   

Multifamily real estate

     217,139         27,642         977         336,985         1,727   

Commercial real estate

     7,236         30,180         5,237         41,366         37,327   

Construction:

              

Residential

     3,886         6,502         5,671         8,082         9,262   

Multifamily

     0         0         0         0         0   

Commercial

     1,800         0         0         1,800         500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total construction

     5,686         6,502         5,671         9,882         9,762   

Consumer

     40,018         19,449         20,825         68,375         49,112   

Commercial banking

     129,234         35,098         25,352         183,624         71,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loan originations

     883,014         896,109         680,206         1,511,414         1,222,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan purchases:

              

Residential real estate

     0         0         0         7,550         0   

Multifamily real estate

     0         82,702         0         2,440         0   

Commercial real estate

     0         0         0         48,584         0   

Commercial banking

     0         0         0         52,221         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loan purchases

     0         82,702         0         110,795         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loan originations and purchases

   $ 883,014       $ 978,811       $ 680,206       $ 1,622,209       $ 1,222,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The decline in residential real estate originations over the periods presented reflects a lower level of refinancing activity due to higher mortgage rates, as well as the effect of government homebuyer incentives during 2010.

The following table presents a roll-forward of the allowance for credit losses for the periods presented:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Allowance for credit losses

        

Allowance - loans, beginning balance

   $ 232,944      $ 294,798      $ 247,056      $ 343,443   

Provision

     12,500        71,901        22,500        159,791   

Charge-offs

     (38,980     (108,841     (68,723     (252,700

Recoveries

     5,624        6,992        11,255        14,316   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance - loans, ending balance

     212,088        264,850        212,088        264,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance - unfunded commitments, beginning balance

     10,641        12,323        10,707        11,967   

Provision

     (2,500     (1,120     (2,500     (454

Charge-offs

     (710     (252     (776     (562
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance - unfunded commitments, ending balance

     7,431        10,951        7,431        10,951   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit allowance

   $ 219,519      $ 275,801      $ 219,519      $ 275,801   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

See Note 3 of the Notes to Consolidated Financial Statements for further details by loan segment for changes in the allowance for credit losses. The following table presents classified assets, which are comprised of performing substandard loans, nonperforming loans and OREO:

 

     June 30,     December 31,     June 30,  
     2011     2010     2010  
     (in thousands)  

Residential real estate

   $ 42,825      $ 104,467      $ 131,533   

Multifamily real estate

     20,840        43,331        43,878   

Commercial real estate

     93,888        173,444        164,982   

Construction

      

Residential construction

     36,828        112,600        299,207   

Commercial construction

     117,473        186,229        239,234   

Multifamily construction

     34,722        76,818        99,630   
  

 

 

   

 

 

   

 

 

 

Total construction

     189,023        375,647        638,071   
  

 

 

   

 

 

   

 

 

 

Consumer

     7,693        18,868        20,178   

Commercial banking

     148,083        222,125        252,719   
  

 

 

   

 

 

   

 

 

 

Total classified loans

     502,352        937,882        1,251,361   

OREO

     101,406        161,653        135,234   
  

 

 

   

 

 

   

 

 

 

Total classified assets

   $ 603,758      $ 1,099,535      $ 1,386,595   
  

 

 

   

 

 

   

 

 

 

Classified assets/ total assets

     6.53     11.58     14.24

Classified assets declined $495.8 million, or 45% during the six months ended June 30, 2011. The reductions were primarily due to upgraded risk ratings, resolutions of nonperforming loans, sales of OREO and charge-offs.

 

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Nonperforming assets, a subset of classified assets that includes nonperforming loans and OREO, and related information are summarized in the following table as of the dates indicated:

 

     June 30,
2011
    December 31,
2010
    June 30,
2010
 
     (in thousands)  

Past due 90 days or more and accruing

   $ 0      $ 0      $ 0   

Nonaccrual loans

     311,832        546,133        760,136   

Restructured loans

     84,277        108,504        123,999   
  

 

 

   

 

 

   

 

 

 

Total nonperforming loans

     396,109        654,637        884,135   

OREO

     101,406        161,653        135,233   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

     497,515        816,290        1,019,368   

Specific reserve - loans

     (30,165     (37,654     (18,060
  

 

 

   

 

 

   

 

 

 

Net nonperforming assets

   $ 467,350      $ 778,636      $ 1,001,308   
  

 

 

   

 

 

   

 

 

 

Nonperforming loans before charge-offs, gross

   $ 451,483      $ 874,628      $ 1,187,072   

Charge-offs on nonperforming loans

     (187,485     (319,773     (462,885
  

 

 

   

 

 

   

 

 

 

Nonperforming loans, net of charge-offs

     263,998        554,855        724,187   

Nonperforming loans without charge-offs (1)

     132,111        99,782        159,948   
  

 

 

   

 

 

   

 

 

 

Total nonperforming loans

   $ 396,109      $ 654,637      $ 884,135   
  

 

 

   

 

 

   

 

 

 

Nonperforming assets to total assets

     5.38     8.60     10.47

Nonperforming loans to loans

     7.07     11.64     13.80

Nonperforming loans carried at fair value to total nonperforming loans

     67     85     82

Charge-offs plus specific loan reserves to gross nonperforming loans

     48     41     41

Loan loss allowance to nonperforming loans

     54     38     30

Loan loss allowance to nonperforming loans excluding loans individually evaluated for impairment (2)

     138     210     154

 

(1) Charge-offs have not been recorded on these nonperforming loans, as the value of the underlying collateral exceeds the carrying value of the loans.
(2) Excludes the specific loan loss reserve.

As of June 30, 2011, Sterling has recognized charge-offs, which are also referred to as confirmed losses, totaling $187.5 million on collateral dependent nonperforming loans held in its portfolio. As a result of these confirmed losses, Sterling has written down the carrying value of these loans to the appraisal value of their underlying collateral less the estimated cost to sell the collateral. The ratio of allowance for loan losses to nonperforming loans, excluding these loans individually evaluated for impairment, was 138% at June 30, 2011. Further declines in real estate appraisal values could result in additional losses on these loans. The following table presents a roll-forward of nonperforming loans for the periods indicated:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Nonperforming loans:

    

Beginning Balance

   $ 477,067      $ 958,766      $ 654,637      $ 895,931   

Additions

     65,119        263,528        112,112        590,816   

Charge-offs

     (33,356     (101,847     (57,468     (238,384

Paydowns and sales

     (66,137     (108,003     (121,061     (156,204

Foreclosures

     (32,920     (83,087     (101,188     (134,039

Upgrade to accrual

     (13,664     (45,222     (90,923     (73,985
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 396,109      $ 884,135      $ 396,109      $ 884,135   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents certain information on Sterling’s nonperforming assets:

 

     June 30, 2011     December 31, 2010     June 30, 2010  
     (in thousands)  

Residential construction

            

Puget Sound

   $ 21,121        4   $ 55,365        7   $ 128,742        13

Portland, OR

     21,014        4     48,781        6     82,717        8

Northern California

     5,387        1     9,474        1     22,628        2

Vancouver, WA

     1,829        0     12,455        2     14,969        1

Southern California

     1,652        0     4,574        1     6,761        1

Bend, OR

     993        0     7,479        1     13,878        1

Boise, ID

     535        0     2,614        0     10,746        1

Other

     12,641        3     24,918        3     40,393        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total residential construction

     65,172        12     165,660        21     320,834        31

Commercial construction

            

Puget Sound

     32,390        7     48,619        6     47,682        5

Northern California

     18,618        4     45,132        6     30,041        3

Southern California

     14,804        3     27,227        3     37,113        4

Other

     72,817        15     76,860        9     101,266        10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial construction

     138,629        29     197,838        24     216,102        22

Multifamily construction

            

Puget Sound

     28,430        6     41,407        5     53,711        5

Portland, OR

     3,353        1     7,420        1     11,497        1

Other

     9,529        2     17,965        2     32,042        3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total multifamily construction

     41,312        9     66,792        8     97,250        9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction

     245,113        50     430,290        53     634,186        62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial banking

     104,988        21     110,872        14     147,941        15

Commercial real estate

     66,811        13     123,146        15     84,043        8

Residential real estate

     64,748        13     115,923        14     115,716        11

Multifamily real estate

     9,523        2     25,806        3     27,447        3

Consumer

     6,332        1     10,253        1     10,035        1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

     497,515        100     816,290        100     1,019,368        100
    

 

 

     

 

 

     

 

 

 

Specific reserve - loans

     (30,165       (37,654       (18,060  
  

 

 

     

 

 

     

 

 

   

Net nonperforming assets (1)

   $ 467,350        $ 778,636        $ 1,001,308     
  

 

 

     

 

 

     

 

 

   

 

(1) Net of cumulative confirmed losses on loans and OREO of $375.7 million for June 30, 2011, $516.3 million for December 31, 2010 and $592.8 million for June 30, 2010.

 

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The following table presents a roll-forward of OREO for the periods indicated:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  
     Amount     Properties     Amount     Properties     Amount     Properties     Amount     Properties  

OREO:

        

Beginning Balance

   $ 151,774        363      $ 103,973        257      $ 161,653        439      $ 83,272        203   

Additions

     32,920        140        83,087        221        101,188        298        134,039        356   

Valuation adjustments

     (8,646       (9,447       (12,855       (16,110  

Sales

     (74,837     (253     (39,746     (141     (153,236     (487     (64,981     (222

Other changes

     195          (2,634       4,656          (987  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 101,406        250      $ 135,233        337      $ 101,406        250      $ 135,233        337   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the property type composition of OREO as of the following dates:

 

     June 30, 2011      December 31, 2010  
     Amount      Number of
Properties
     Amount      Number of
Properties
 

OREO:

     

Residential real estate

   $ 10,309         57       $ 24,239         109   

Multifamily real estate

     408         3         25         1   

Commercial real estate

     20,026         41         33,817         49   

Construction:

           

Residential - acquisition and development

     4,275         12         7,353         21   

Residential - lots

     9,683         31         13,586         68   

Residential - land

     8,769         12         14,283         16   

Residential - vertical

     9,806         52         22,929         116   

Multifamily

     4,502         12         4,946         15   

Commercial

     29,484         17         34,925         16   

Consumer

     1,900         11         3,272         22   

Commercial banking

     2,244         2         2,278         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 101,406         250       $ 161,653         439   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the location of the various properties that comprise OREO as of the following dates:

 

     June 30, 2011      December 31, 2010  
     Amount      Number of
Properties
     Amount      Number of
Properties
 

OREO:

     

Oregon

   $ 34,298         74       $ 45,786         131   

California

     31,157         50         40,456         65   

Washington

     27,044         92         50,113         165   

Arizona

     5,038         14         12,255         20   

Idaho

     3,517         19         10,995         46   

Other

     352         1         2,048         12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 101,406         250       $ 161,653         439   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Deposits. The following table sets forth the composition of Sterling’s deposits at the dates indicated:

 

     June 30, 2011     December 31, 2010  
     Amount      %     Amount      %  
     (in thousands)  

Interest-bearing transaction

   $ 505,134         8   $ 497,395         7

Noninterest-bearing transaction

     1,067,637         16     992,368         14

Savings and MMDA

     1,933,941         29     1,886,425         27

Time deposits

     3,097,286         47     3,534,819         52
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 6,603,998         100   $ 6,911,007         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Changes in deposits during the six months ended June 30, 2011 mainly reflect a reduction in time deposits. The reduction in time deposits during the period was expected, as Sterling allowed some higher rate deposits to run off, thereby improving the deposit mix and reducing funding costs. This runoff was partially offset by an increase in transaction, savings and MMDA accounts, which increased by $130.5 million since December 31, 2010.

Borrowings. In addition to deposits, Sterling uses other borrowings as sources of funds. The aggregate amount of other borrowings outstanding comprised of FHLB advances, reverse repurchase agreements, and junior subordinated debentures, remained relatively unchanged over the periods presented at $1.71 billion as of June 30, 2011 compared with $1.69 billion at December 31, 2010, respectively.

Asset and Liability Management

The principal objective of Sterling’s asset and liability management activities is to provide optimum levels of net interest income and stable sources of funding while maintaining acceptable levels of interest-rate risk and liquidity risk. The Asset/Liability Committee (“ALCO”) measures interest rate risk exposure primarily through interest rate shock simulations for both net interest income and the economic value of equity (“EVE”). Interest rate risk arises from mismatches in assets and liabilities, with mismatches due to differences in the timing of rate repricing for the various instruments, the amount or volume of the underlying assets and liabilities that are repricing, and by how much or the level at which the rate is repricing. The specific characteristics of the underlying assets and liabilities, including any embedded optionality, such as a prepayment option on a loan, influence these differences.

The net interest income interest rate shock simulation measures the effect of changes in interest rates on net interest income over 12 months. This simulation consists of measuring the change in net interest income over the next 12 months from the base case scenario, from which rates are shocked, in a parallel fashion, up and down. The base case uses the assumption of the existing balance sheet and existing interest rates. The simulation requires numerous assumptions, including relative levels of market interest rates, instantaneous and parallel shifts in the yield curve, loan prepayments and reactions of depositors to changes in interest rates, and should not be relied upon as being indicative of actual or future results. The analysis does not contemplate actions Sterling may undertake in response to changes in interest rates and market conditions. The results of this simulation are included in the following table for the periods presented:

 

Change in Interest Rate in

Basis Points (Rate Shock)

   June 30, 2011     December 31,
2010
 
   % Change in
NII
    % Change in
NII
 

+300

     (5.5     (11.2

+200

     (1.6     (5.5

+100

     (0.3     (2.4

Static

     0.0        0.0   

-100

     N/A  (1)      N/A  (1) 

 

(1) Results are not meaningful in a low interest rate environment.

 

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Table of Contents

EVE simulation analysis measures risk in the balance sheet that might not be taken into account in the net interest income simulation. Whereas net interest income simulation highlights exposure over a relatively short time period of 12 months, EVE simulation analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The EVE simulation analysis of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows. The difference between the present value of the asset and liability represents the EVE. As with net interest income, the base case simulation uses current market rates, from which rates are shocked up and down in a parallel fashion. As with the net interest income simulation model, EVE simulation analysis is based on key assumptions about the timing and variability of balance sheet cash flows. However, because the simulation represents much longer time periods, inaccuracy of assumptions may increase the variability of outcomes within the simulation. It also does not take into account actions management may undertake in response to anticipated changes in interest rates. The results of this simulation are included in the following table for the periods presented:

 

Change in Interest Rate in

Basis Points (Rate Shock)

   June 30, 2011     December 31,
2010
 
   % Change in
EVE
    % Change in
EVE
 

+300

     (15.2     (21.7

+200

     (4.7     (8.2

+100

     (0.1     (1.4

Static

     0.0        0.0   

-100

     N/A  (1)      N/A  (1) 

 

(1) Results are not meaningful in a low interest rate environment.

Sterling has customer-related interest rate swap derivatives outstanding, with a total notional amount of $94.3 million of related swaps outstanding as of June 30, 2011. For a description, see Note 9 of Notes to Consolidated Financial Statements. As of June 30, 2011, Sterling has not entered into any other derivative transactions as part of managing its interest rate risk. However, Sterling continues to consider derivatives, including non-customer related interest rate swaps, caps and floors as viable alternatives in the asset and liability management process.

Capital and Liquidity Management

Sterling’s primary sources of funds are: retail, public and brokered deposits; the collection of principal and interest primarily from loans, as well as from mortgage backed securities; the sale of loans into the secondary market in connection with Sterling’s mortgage banking activities; borrowings from the FHLB and the Federal Reserve; and borrowings from commercial banks (including reverse repurchase agreements). Public deposits from states, municipalities, and other public entities generally require collateralization for some or all of the deposit amounts, depending on state and local requirements. Reverse repurchase agreements allow Sterling to sell investments (generally U.S. agency securities and MBS) under an agreement to buy them back at a specified price at a later date. Reverse repurchase agreements are considered collateralized obligations and may expose Sterling to certain risks not associated with other borrowings, including interest rate risk and the possibility that additional collateral may have to be provided if the market value of the pledged collateral declines. Sterling Savings Bank’s credit line with FHLB of Seattle provides for borrowings up to a percentage of its total assets, subject to collateralization requirements, with borrowing terms ranging from overnight to term advances. Sterling Savings Bank actively manages its liquidity to maintain an adequate margin over the level necessary to support the funding of loans and deposit withdrawals. Liquidity may vary from time to time, depending on economic conditions, deposit fluctuations, loan funding needs and regulatory requirements.

The total value of Sterling’s cash and cash equivalents, and securities was $3.08 billion at June 30, 2011, compared with $3.27 billion at December 31, 2010. Available liquidity as of June 30, 2011 was $1.63 billion, compared to total available liquidity of $1.68 billion as of December 31, 2010. Available liquidity as of June 30, 2011 included unpledged portions of cash and cash equivalents, and securities of $900.2 million, available borrowing capacity from the FHLB, the Federal Reserve and correspondent banks of $527.3 million, as well as loans held for sale of $197.6 million.

 

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Sterling, on a parent company-only basis, had cash of approximately $45.8 million and $47.5 million at June 30, 2011 and December 31, 2010, respectively. The parent (holding) company’s significant cash flows primarily relate to capital investments in and capital distributions from Sterling Savings Bank, capital distributions to shareholders, and interest payments on its junior subordinated debentures. During the third quarter of 2009, Sterling elected to defer regularly scheduled interest payments on its junior subordinated debentures, and continued to defer these payments through June 30, 2011. As of June 30, 2011 and December 31, 2010, the accrued deferred interest on junior subordinated debentures was $12.5 million and $9.4 million, respectively. Sterling is allowed to defer payments of interest on the junior subordinated debentures for up to 20 consecutive quarters without triggering an event of default. No cash dividends were declared during the periods presented. Sterling’s ability to pay dividends is generally limited by its earnings, financial condition, and capital and regulatory requirements. During the third quarter of 2010, Sterling contributed $650.0 million of capital to Sterling Savings Bank. No capital was downstreamed from Sterling to Sterling Savings Bank during the six months ended June 30, 2011.

Regulation and Compliance

Sterling, as a bank holding company, is subject to ongoing comprehensive examination and regulation by the Federal Reserve, and Sterling Savings Bank, as a Washington state-chartered bank, is subject to ongoing comprehensive regulation and examination by the Washington Department of Financial Institutions (the “WDFI”) and the FDIC. Sterling Savings Bank is further subject to standard Federal Reserve regulations related to deposit reserves and certain other matters.

On September 27, 2010, Sterling announced the cease and desist order put in place in October 2009 with Sterling Savings Bank was terminated, reflecting a stronger balance sheet and capital position. Although the cease and desist order is no longer applicable, Sterling Savings Bank continues to be subject to enhanced supervisory review by the FDIC and WDFI under a memorandum of understanding (the “SSB MOU”), pursuant to which Sterling Savings Bank must maintain Tier 1 capital in an amount that ensures that its leverage ratio is at least 8%. Sterling Savings Bank is also required to meet certain asset quality targets, develop a written capital plan, develop a three-year strategic plan and comply with other requirements.

As of the date of this filing, Sterling continues to be subject to a regulatory agreement with the Federal Reserve Bank of San Francisco (the “Reserve Bank Agreement”). Under the terms of the Reserve Bank Agreement, Sterling is subject to restrictions on its ability to pay dividends and distributions, incur debt, purchase or redeem its stock and appoint new board members or senior executive officers. Under the Reserve Bank Agreement, Sterling is also required to act as a source of strength to Sterling Savings Bank and to report quarterly to the Reserve Bank on steps taken to improve its capital ratios and risk, liquidity and fund management and on other matters.

Forward-Looking Statements

From time to time, Sterling and its senior managers have made and will make forward-looking statements that are not historical facts and that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, but are not limited to, statements about Sterling’s plans, objectives, expectations and intentions and other statements contained in this release that are not historical facts and pertain to Sterling’s future operating results. When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. We make forward-looking statements regarding projected sources of funds, use of proceeds, availability of acquisition and growth opportunities, ability to repay government funds, payment of dividends, adequacy of our allowance for loan and lease losses and provision for loan and lease losses, our real estate portfolio and subsequent charge-offs. Such statements may be contained in this report and in other documents that Sterling files with the Securities and Exchange Commission. Such statements may also be made by Sterling and its senior managers in oral or written presentations to analysts, investors, the media and others.

Actual results may differ materially from the results discussed in these forward-looking statements because such statements are inherently subject to significant assumptions, risks and uncertainties, many of which are difficult to predict and are generally beyond Sterling’s control. These include but are not limited to:

 

   

our ability to maintain adequate liquidity;

 

   

our ability to comply with the Reserve Bank Agreement and the SSB MOU;

 

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our ability to attract and retain deposits and loans;

 

   

demand for financial services in our markets;

 

   

competitive market pricing factors;

 

   

further deterioration in economic conditions that could result in increased losses on loans;

 

   

risks associated with concentrations in real estate-related loans;

 

   

market interest rate volatility;

 

   

stability of funding sources and continued availability of borrowings;

 

   

changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth;

 

   

our ability to recruit and retain key management and staff;

 

   

risks associated with merger and acquisition integration;

 

   

our ability to incur debt on reasonable terms;

 

   

regulatory limits on the ability of Sterling Savings Bank to pay dividends to Sterling;

 

   

impact of legislative and regulatory change on the financial sector;

 

   

future legislative or administrative changes to the Troubled Asset Relief Program (“TARP”) Capital Purchase Program; and

 

   

the impact of legislative changes and related rules and regulations on Sterling’s business operations and competitiveness, including the impact of executive compensation restrictions, which may affect Sterling’s ability to retain and recruit executives in competition with other firms who do not operate under such restrictions.

Other factors that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements may be found under “Risk Factors” in Sterling’s Annual Report on Form 10-K for the fiscal year ended December  31, 2010.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

For a discussion of Sterling’s market risks, see “Management’s Discussion and Analysis - Asset and Liability Management.”

Item 4 Controls and Procedures

Disclosure Controls and Procedures

Sterling’s management, with the participation of Sterling’s principal executive officer and principal financial officer, has evaluated the effectiveness of Sterling’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, Sterling’s principal executive officer and principal financial officer have concluded that, as of the end of such period, Sterling’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Sterling in the reports that it files or submits under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There were no changes in Sterling’s internal control over financial reporting that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Sterling’s internal control over financial reporting.

 

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PART II – Other Information

Item 1 Legal Proceedings

Securities Class Action Litigation

On December 11, 2009, a putative securities class action was filed in the United States District Court for the Eastern District of Washington against Sterling and certain of our current and former officers. The court appointed a lead plaintiff on March 9, 2010. On June 18, 2010, the lead plaintiff filed a consolidated complaint (the “Complaint”). The Complaint purports to be brought on behalf of a class of persons who purchased or otherwise acquired Sterling’s stock during the period from July 23, 2008 to October 15, 2009. The Complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose the extent of Sterling’s delinquent commercial real estate, construction and land development loans, properly record losses for impaired loans, and properly reserve for loan losses, thereby causing Sterling’s stock price to be artificially inflated during the purported class period. Plaintiffs seek unspecified damages and attorneys’ fees and costs. Sterling believes the lawsuit is without merit and intends to defend against it vigorously. 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. The court has not yet issued an order on the motion. 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.

ERISA Class Action Litigation

On January 20 and 22, 2010, two putative class action complaints were filed in the United States District Court for the Eastern District of Washington against Sterling Financial Corporation and Sterling Savings Bank (collectively, “Sterling”), as well as certain of Sterling’s current and former officers and directors. The two complaints were merged in a Consolidated Amended Complaint (the “Complaint”) filed on July 16, 2010 in the same court. The Complaint does not name all of individuals named in the prior complaints, but it is expected that additional defendants will be added. The Complaint alleges that the defendants breached their fiduciary duties under sections 404 and 405 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), with respect to the Sterling Savings Bank Employee Savings and Investment Plan (the “401(k) Plan”) and the FirstBank Northwest Employee Stock Ownership Plan (“ESOP”) (collectively, the “Plans”). Specifically, the Complaint alleges that the defendants breached their duties by investing assets of the Plans in Sterling’s securities when it was imprudent to do so, and by investing such assets in Sterling securities when defendants knew or should have known that the price of those securities was inflated due to misrepresentations and omissions about Sterling’s business practices. The business practices at issue include alleged over-reliance on risky construction loans; alleged inadequate loan reserves; alleged spiking increases in nonperforming assets, nonperforming loans, classified assets, and 90+-day delinquent loans; alleged inadequate accounting for rising loan payment shortfalls; alleged unsafe and unsound banking practices; and a capital base that was allegedly inadequate to withstand the significant deterioration in the real estate markets. The putative class periods are October 22, 2007 to the present for the 401(k) Plan class, and October 22, 2007 to November 14, 2008 for the ESOP class. The Complaint seeks damages of an unspecified amount and attorneys’ fees and costs. Sterling believes the lawsuit is without merit and intends to defend against it vigorously. A hearing on the motion to dismiss occurred on March 22, 2011, with the court indicating that it would take the motion under submission. The court has not yet issued an order on the motion. Failure by Sterling to obtain a favorable resolution of the claims set forth in the Complaint could have a material adverse effect on Sterling’s business, results of operations, and financial condition. Currently, a loss resulting from these claims is not considered probable or reasonably estimable in amount.

Derivative Class Action Litigation

On February 10, 2010, a shareholder derivative action was filed in the Superior Court for Spokane County, Washington, purportedly on behalf of and for the benefit of Sterling, against certain of our current and former officers and directors. On August 2, 2010, plaintiff filed an amended complaint (the “Complaint”) alleging, among other claims, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment. The Complaint alleges that the individual defendants failed to prevent Sterling from issuing improper financial statements, maintain a sufficient allowance for loan and lease losses, and establish effective credit risk management

 

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and oversight mechanisms regarding Sterling’s commercial real estate, construction and land development loans, losses and reserves recorded for impaired loans, and accounting for goodwill and deferred tax assets. The Complaint seeks unspecified damages, restitution, disgorgement of profits, equitable and injunctive relief, attorneys’ fees, accountants’ and experts’ fees, costs, and expenses. Because the Complaint is derivative in nature, it does not seek monetary damages from Sterling. However, Sterling may be required throughout the pendency of the action to advance the legal fees and costs incurred by the defendant officers and directors. On September 13, 2010, Sterling moved to dismiss the Complaint. The hearing on Sterling’s motion to dismiss was held on January 14, 2011. On February 25, 2011, the court issued an order denying Sterling’s motion to dismiss in its entirety. On April 12, 2011, Sterling filed a request for discretionary review with the Washington Court of Appeals, which was denied on June 1, 2011. Currently, a loss resulting from these claims is not considered probable or reasonably estimable in amount, and, due to the nature of the claim, any such loss would be payable, in part, to Sterling.

Item 1A Risk Factors

You should carefully consider the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results or liquidity could be materially harmed.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3 Defaults Upon Senior Securities

Not applicable.

Item 4 (Removed and Reserved)

Item 5 Other Information

Item 6 Exhibits

The exhibits filed as part of this report and the exhibits incorporated herein by reference are listed in the Exhibit Index at page E-1.

 

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STERLING FINANCIAL CORPORATION

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.

 

      STERLING FINANCIAL CORPORATION
      (Registrant)

August 9, 2011

    By:  

    /s/ Robert G. Butterfield

                Date      

      Robert G. Butterfield

     

      Senior Vice President, Controller, and

     

      Principal Accounting Officer

 

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Exhibit
No.

  

Exhibit Index

    3.1    Restated Articles of Incorporation of Sterling. Filed as Exhibit 4.1 to Sterling’s Amendment No. 1 to the Registration Statement on Form S-3 dated May 8, 2009 and incorporated by reference herein.
    3.2    Articles of Amendment of Restated Articles of Incorporation of Sterling increasing the authorized shares of common stock. Filed as Exhibit 4.2 to Sterling’s Amendment No. 1 to the Registration Statement on Form S-3 dated September 21, 2009 and incorporated by reference herein.
    3.3    Articles of Amendment to Sterling’s Restated Articles of Incorporation designating Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series C. Filed as Exhibit 3.1 to Sterling’s Current Report on Form 8-K dated August 30, 2010 and incorporated by reference herein.
    3.4    Articles of Amendment to Sterling’s Restated Articles of Incorporation eliminating par value of Sterling Common Stock. Filed as Exhibit 3.2 to Sterling’s Current Report on Form 8-K dated August 30, 2010 and incorporated by reference herein.
    3.5    Articles of Amendment to Sterling’s Restated Articles of Incorporation designating Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series B. Filed as Exhibit 3.3 to Sterling’s Current Report on Form 8-K dated August 30, 2010 and incorporated by reference herein.
    3.6    Articles of Amendment to Sterling’s Restated Articles of Incorporation designating Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series D. Filed as Exhibit 3.4 to Sterling’s Current Report on Form 8-K dated August 30, 2010 and incorporated by reference herein.
    3.7    Articles of Amendment to Sterling’s Restated Articles of Incorporation increasing the authorized shares of common stock. Filed as exhibit 3.7 to Sterling’s Amendment No. 1 to the Registration Statement on Form S-1 dated November 3, 2010 and incorporated by reference herein.
    3.8    Articles of Amendment to Sterling’s Restated Articles of Incorporation reducing the authorized shares of common stock. Filed as Exhibit 3.1 to Sterling’s Current Report on Form 8-K dated November 18, 2010 and incorporated by reference herein.
    3.9    Articles of Amendment to Sterling’s Restated Articles of Incorporation regarding certain transfer restrictions. Filed as Exhibit 3.9 to Sterling’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated by reference herein.
    3.10    Amended and Restated Bylaws of Sterling. Filed as Exhibit 3.1 to Sterling’s Registration Statement on Form 8-K dated April 25, 2011, and incorporated by referenced herein.
    4.1    Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9 and 3.10.
    4.2    Form of Common Stock Certificate. Filed as Exhibit 4.3 to Sterling’s Registration Statement on Form S-3 dated July 20, 2009 and incorporated by reference herein.
    4.3    Shareholder Rights Plan, dated as of April 14, 2010, between Sterling Financial Corporation and American Stock Transfer & Trust Company, LLC, as Rights Agent, which includes the Form of Articles of Amendment to the Restated Articles of Incorporation of Sterling Financial Corporation (Series E Participating Cumulative Preferred Stock) as Exhibit A, the Summary of Terms of the Rights Agreement as Exhibit B and the Form of Right Certificate as Exhibit C. Filed as Exhibit 4.1 to Sterling’s Current Report on Form 8-K filed on April 15, 2010 and incorporated by reference herein.
    4.4    First Amendment to Shareholder Rights Plan, dated as of December 8, 2010, between Sterling Financial Corporation and American Stock Transfer & Trust Company, LLC, as Rights Agent. Filed as Exhibit 4.1 to Sterling’s Current Report on Form 8-K filed on December 10, 2010 and incorporated by reference herein.

 

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    4.5    Form of Warrant to Purchase Shares of Sterling Common Stock, dated August 26, 2010 and issued to Thomas H. Lee Equity Fund VI, L.P., Thomas H. Lee Parallel Fund VI, L.P., Thomas H. Lee Parallel (DT) Fund VI, L.P. and THL Sterling Equity Investors, L.P. Filed as Exhibit 4.7 to Sterling’s Registration Statement on Form S-1 dated September 24, 2010 and incorporated by reference herein.
    4.6    Form of Warrant to Purchase Shares of Sterling Common Stock, dated August 26, 2010 and issued to Warburg Pincus Private Equity X, L.P. Filed as Exhibit 4.8 to Sterling’s Registration Statement on Form S-1 dated September 24, 2010 and incorporated by reference herein.
    4.7    Amended and Restated Warrant to purchase shares of Sterling Common Stock, dated August 26, 2010 and issued to the United States Department of the Treasury. Filed as Exhibit 4.9 to Sterling’s Registration Statement on Form S-1 dated September 24, 2010 and incorporated by reference herein.
    4.8    Sterling has outstanding certain long-term debt. None of such debt exceeds ten percent of Sterling’s total assets; therefore, copies of the constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
  31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
  32.1    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
  32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101.INS*    XBRL Instance Document. Furnished herewith.
101.SCH*    XBRL Taxonomy Extension Schema. Furnished herewith.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase. Furnished herewith.
101.LAB*    XBRL Taxonomy Extension Label Linkbase. Furnished herewith.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase. Furnished herewith.

 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

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Exhibit 31.1

Certification of Principal Executive Officer

I, J. Gregory Seibly, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Sterling Financial Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: August 9, 2011   By:  

        /s/ J. Gregory Seibly

        J. Gregory Seibly
        President and Principal Executive Officer

 

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Exhibit 31.2

Certification of Principal Financial Officer

I, Patrick J. Rusnak, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Sterling Financial Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: August 9, 2011     By:  

    /s/ Patrick J. Rusnak

    Patrick J. Rusnak
    Executive Vice President and
    Principal Financial Officer

 

 

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Exhibit 32.1

Certification of Principal Executive Officer

Pursuant to 18 U.S.C. Section 1350

In connection with the accompanying Report on Form 10-Q of Sterling Financial Corporation (“Sterling”) for the period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Gregory Seibly, Principal Executive Officer of Sterling, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Sterling.

 

Dated: August 9, 2011     By:  

    /s/ J. Gregory Seibly

        J. Gregory Seibly
        President and Principal Executive Officer

This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Sterling for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to Sterling and will be retained by Sterling and furnished to the Securities and Exchange Commission upon request.

 

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Exhibit 32.2

Certification of Principal Financial Officer

Pursuant to 18 U.S.C. Section 1350

In connection with the accompanying Report on Form 10-Q of Sterling Financial Corporation (“Sterling”) for the period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick J. Rusnak, Principal Financial Officer of Sterling, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Sterling.

 

Dated: August 9, 2011     By:  

    /s/ Patrick J. Rusnak

        Patrick J. Rusnak
        Executive Vice President and
        Principal Financial Officer

This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Sterling for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to Sterling and will be retained by Sterling and furnished to the Securities and Exchange Commission upon request.

 

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