Fair Value

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value

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.

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:

		March 31, 2012				December 31, 2011
	Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:		(in thousands)
Cash and cash equivalents	1	$	368,948	$	368,948	$	491,228	$	491,228
Investments and MBS:
Available for sale	2	2,459,880		2,459,880		2,547,876		2,547,876
Held to maturity	2	1,736		1,736		1,747		1,747
Loans held for sale	2	234,933		234,933		273,957		273,957
Loans receivable, net	3	5,853,558		5,877,297		5,341,179		5,347,555
Other assets (1)	2, 3	110,160		110,160		109,317		109,317
Financial liabilities:
Non-maturity deposits	2	4,486,501		4,486,501		3,824,948		3,824,948
Deposits with stated maturities	2	2,463,367		2,507,614		2,660,870		2,710,740
Borrowings	2	1,516,626		1,512,123		1,706,662		1,724,347
Other liabilities	2	6,140		6,140		9,212		9,212

(1) FHLB stock is categorized as level 3, while derivatives are categorized as level 2. As of March 31, 2012 and December 31, 2011, FHLB stock was carried at $99.2 million and $99.0 million, respectively.

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 certain 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 are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to assess the impact of changes in interest rates and to develop prepayment scenarios. All models and processes used take into account market convention.

Loans Held for Sale.  Sterling has elected to carry residential loans held for sale at fair value. The fair values of residential loans 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. Nonresidential loans held for sale are carried at the lower of cost or market (“LOCOM”) due to the frequency of these loan sale transactions, as well as the availability of market data for these loan types.

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. Changes in the various inputs in the fair value of nonperforming loans will have a significant impact on the fair value.

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, the amount of other fee income generated and other factors. The fair value of mortgage servicing rights is impacted by any changes in these inputs.

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. 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 analysis based on Sterling's current incremental borrowing rates for similar types of borrowing arrangements with similar remaining terms.

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, March 31, 2012:
Investment securities available-for-sale:
MBS	$	2,233,175	$	0	$	2,233,175	$	0
Municipal bonds	206,743		0		206,743		0
Other	19,962		0		19,962		0
Total investment securities available-for-sale	2,459,880		0		2,459,880		0
Loans held for sale	234,933		0		234,933		0
Other assets - derivatives	10,933		0		10,933		0
Total assets	$	2,705,746	$	0	$	2,705,746	$	0
Other liabilities - derivatives	$	6,141	$	0	$	6,141	$	0
Balance, December 31, 2011:
Investment securities available-for-sale:
MBS	$	2,320,934	$	0	$	2,320,934	$	0
Municipal bonds	207,456		0		207,456		0
Other	19,486		0		19,486		0
Total investment securities available-for-sale	2,547,876		0		2,547,876		0
Loans held for sale	223,638		0		223,638		0
Other assets - derivatives	10,269		0		10,269		0
Total assets	$	2,781,783	$	0	$	2,781,783	$	0
Other liabilities - derivatives	$	9,212	$	0	$	9,212	$	0

Derivatives represent mortgage banking interest rate lock and loan delivery commitments, a common stock warrant carried as a derivative liability and interest rate swaps. Fair values for the interest rate swaps are based on the present value differential between the fixed interest rate payments and the floating interest rate payments as projected by the forward interest rate curve, over the term of the swap, with the recorded amount net of any credit valuation adjustments. See Note 11 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:

	Three Months Ended March 31,
	2012			2011
	(in thousands)
Mortgage banking operations	$	(1,589	)	$	3,348

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 LOCOM accounting or write-downs of individual assets. The following table presents the carrying value for these assets as of the dates indicated:

	March 31, 2012
	Total Carrying Value		Level 1		Level 2		Level 3		Gains/(Losses) During the Three Months Ended March 31, 2012
	(in thousands)
Loans	$	86,900	$	0	$	0	$	86,900	$	(20,954	)
OREO	8,939		0		0		8,939		(2,320		)
Mortgage servicing rights	25,975		0		0		25,975		2,216
	December 31, 2011								Losses During the Twelve Months Ended December 31, 2011
	Total Carrying Value		Level 1		Level 2		Level 3
Loans	$	268,837	$	0	$	0	$	268,837	$	(47,372	)
OREO	31,379		0		0		31,379		(10,860		)
Mortgage servicing rights	23,102		0		0		23,102		(6,191		)

The loans disclosed above represent the net balance of loans for which a charge against earnings has occurred during the three months ended March 31, 2012, and the year ended December 31, 2011, respectively, with these charges comprised of charge-offs and increases in the specific reserve. OREO represents the carrying value of properties for which a specific reserve was established during the periods presented as a result of updated appraisals subsequent to foreclosure. The appraisals may utilize comparable sales and income approach valuation methods and may be adjusted to reflect current market or property information. In addition to the loan and OREO losses disclosed above, charge-offs at foreclosure for properties held as of period end totaled $4.5 million and $20.9 million for the three months ended March 31, 2012 and the year ended December 31, 2011, 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. Qualitative information regarding the fair value measurements for Level 3 financial instruments are as follows:

	March 31, 2012
	Method	Inputs
Loans	Income, Market, Comparable Sales, Discounted Cash Flows	External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors; selling costs ranging from 4.5% to 9%.
OREO	Income, Market, Comparable Sales, Discounted Cash Flows	External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors; selling costs ranging from 4.5% to 9%.
Mortgage servicing rights	Discounted Cash Flow	Weighted average prepayment speed 17.4%; weighted average discount rate 10.2%