Business Combination

9 Months Ended

Sep. 30, 2012

Business Combinations [Abstract]

Business Combination

Business Combination:

On February 29, 2012, Sterling Bank completed its acquisition of the operations of First Independent Bank ("First Independent"), by acquiring certain assets and assuming certain liabilities, including all deposits for a net purchase price of $40.6 million, comprised of $28.9 million of cash paid at closing and contingent consideration with a fair value of $11.7 million at acquisition date. As of September 30, 2012 and because of favorable performance, the fair value of this contingent consideration was estimated at $14.1 million, with the increase reflected as a charge against earnings. The contingent consideration is payable in two installments at 12 and 18 months from the date of closing, in an amount ranging from zero to $17 million. The contingent consideration payments will be determined based on certain performance metrics relating to core deposit retention, loan charge-offs, and wealth management revenues. As a result of this transaction, Sterling now offers trust services, and has 14 additional branches in the Portland/Vancouver market. The following table summarizes the amounts recorded at closing:

	February 29, 2012
	(in thousands)
Cash and cash equivalents	$	150,045
Investments and MBS	187,465
Loans receivable, net	349,990
Goodwill	22,577
Core deposit intangible	11,974
Fixed assets	4,038
Other assets	10,886
Total assets acquired	$	736,975
Deposits	$	695,919
Other liabilities	409
Total liabilities assumed	696,328
Net assets acquired	$	40,647

The recorded goodwill of $22.6 million represents the inherent long-term value anticipated from synergies expected to be achieved as a result of the transaction. The amount recorded for goodwill includes subsequent adjustments, primarily from updated appraisals on fixed assets. The amount of goodwill deductible for income tax purposes is approximately equivalent to the recorded book value. The core deposit intangible has a weighted average amortization period of ten years and will be amortized on an accelerated basis. The following table presents certain First Independent stand alone amounts and pro forma Sterling and First Independent combined amounts as if the transaction had occurred on January 1, 2011. Cost savings estimates are not included in the pro forma combined results, nor are certain credit impaired loans and associated losses excluded from the purchase and assumption transaction.

	First Independent (stand alone)				Pro Forma Combined				Pro Forma Combined
	Three Months Ended		Nine Months Ended		Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
	(in thousands, except per share data)
Net interest income	$	5,104	$	16,204	$	75,308	$	82,639	$	235,052	$	247,355
Noninterest income	1,247		3,428		46,698		31,662		124,031		100,693
Net income	2,630		8,638		30,598		13,556		368,989		33,962
Earnings per share - basic	0.04		0.14		0.49		0.22		5.94		0.55
Earnings per share - diluted	$	0.04	$	0.14	$	0.49	$	0.22	$	5.89	$	0.55

Although the majority of First Independent's credit impaired loans were excluded from the transaction, certain loans acquired were deemed to exhibit evidence of credit deterioration since origination and therefore, were classified as impaired. The accounting for purchased impaired loans is periodically updated for changes in the loans' cash flow expectations, and reflected in interest income over the life of the loans as accretable yield. For purchased impaired loans, details as of the acquisition date were as follows:

	February 29, 2012
	(in thousands)
Contractual cash flows	$	24,408
Expected prepayments and credit losses	7,220
Expected cash flows	17,188
Present value of expected cash flows	15,265
Accretable yield	$	1,923

As of September 30, 2012, no allowance for credit losses was recorded in connection with these loans, and the unpaid principal balance and carrying amount of the purchased impaired loans were $18.4 million and $11.3 million, respectively. The following table presents a roll-forward of activity for the accretable yield for the purchased impaired loans:

	Three Months Ended			Nine Months Ended
	September 30, 2012
	(in thousands)
Beginning balance	$	2,331		$	0
Additions	0			1,923
Accretion to interest income	(223		)	(545		)
Reclassifications	(678		)	52
Ending balance	$	1,430		$	1,430

As of February 29, 2012, the unpaid principal balance and contractual interest ("contractual cash flows") on purchased loans that had not exhibited evidence of credit deterioration was $403.8 million. Sterling estimated that $12.7 million of these cash flows would be uncollectable, resulting in a discount of $21.8 million being recorded on these loans. The following table presents the related five-year projected accretion of the discount which will be recognized as an increase to interest income as of September 30, 2012:

	Amount
Remainder of 2012	1,600
Years ended December 31,
2013	4,210
2014	2,796
2015	1,724
2016	1,031
2017	679