Sterling Financial Corporation of Spokane, Wash., Reports Third Quarter 2012 Earnings of $30.6 Million and Declaration of Cash

  Sterling Financial Corporation of Spokane, Wash., Reports Third Quarter 2012   Earnings of $30.6 Million and Declaration of Cash Dividend  Business Wire  SPOKANE, Wash. -- October 25, 2012  Sterling Financial Corporation (NASDAQ:STSA) ("Sterling") today announced its operating results for the quarter ended September30, 2012. For the quarter, Sterling recorded net income of $30.6 million, or $0.49 per diluted common share, compared to $320.9 million, or $5.13 per diluted common share, for the quarter ended June30, 2012, and $11.3 million, or $0.18 per diluted common share, for the quarter ended September30, 2011. As previously reported, net income for the prior quarter included an income tax benefit of $288.8 million associated with the release of a deferred tax asset valuation allowance.  Following are selected financial highlights for the quarter ended September30, 2012:    *Gross loans were $6.14 billion, a 9 percent increase over September30,     2011.   *Portfolio loan originations were $457.1 million, a 31 percent increase     over the third quarter of 2011.   *Deposit costs were reduced by 33 basis points compared to the third     quarter of 2011.   *Income from mortgage banking operations was $28.5 million, up 74 percent     over the third quarter of 2011.   *Nonperforming assets to total assets was 2.73 percent, down from 4.74     percent at September30, 2011.   *Net charge-offs to average loans (annualized) was 0.37 percent, down from     1.99 percent for the third quarter of 2011.   *Tangible book value was $19.44 per common share, compared to $13.66 per     common share at September30, 2011.   *Tier 1 leverage ratio was 12.7 percent, compared to 11.1 percent at     September30, 2011.  "The solid financial performance for the third quarter reflects Sterling's progress on our fundamental operating objectives," said Greg Seibly, Sterling's president and chief executive officer. "We are growing loans and improving the mix and cost of deposits and asset quality metrics. Our management team remains focused on implementing initiatives to reduce our infrastructure costs."  Balance Sheet  Total loan balances were $6.14 billion at September30, 2012, compared to $6.08 billion at the end of the prior quarter, and $5.62 billion at September30, 2011. During the third quarter of 2012, Sterling originated $457.1 million of new portfolio loans (which exclude residential loans held for sale), compared to $458.6 million for the prior quarter and $348.4 million for the third quarter of 2011. Commercial loan originations, which include C&I and owner occupied CRE loans, were $155.8 million for the third quarter of 2012, compared to $80.0 million for the prior quarter, and $96.8 million for the same period a year ago.  Investments and mortgage-backed securities available for sale were $2.05 billion at September30, 2012, compared to $2.12 billion at the end of the prior quarter, and $2.45 billion at the same time last year. The reduction reflects the sale of $140.2 million of MBS during the quarter, for which a gain of $3.1 million was recognized.  At September30, 2012, total deposits were $6.74 billion, compared to $6.80 billion at the end of the prior quarter, and $6.48 billion at September30, 2011. The decrease from the prior quarter was primarily a result of expected runoff of retail time deposits, brokered time deposits, and public deposits, which were reduced by $94.3 million, $71.7 million, and $67.0 million, respectively. These decreases were partially offset by growth in transaction deposits, which expanded by $167.5 million, or 7 percent, during the third quarter of 2012.  The deposit composition is set forth in the following table:                                                                   Annual %                      September 30,                   September 30,                      2012            June 30, 2012    2011            Change                                     (in thousands)   Deposits:   Retail:   Transaction        $ 2,403,518     $  2,235,991     $ 1,675,741     43   %   Savings and MMDA   2,191,517       2,182,969        1,814,682       21   %   Time deposits      1,717,720      1,812,000       2,150,998      (20  )%   Total retail       6,312,755       6,230,960        5,641,421       12   %   Public             202,187         269,191          466,423         (57  )%   Brokered           224,968        296,623         371,396        (39  )%   Total deposits     $ 6,739,910    $  6,796,774    $ 6,479,240    4    %   Gross loans to     91          %   90           %   87          %   deposits                                                                                                                                              Annual                                                                       Basis                                                                       Point                                                                       Change   Funding costs:   Cost of deposits   0.53        %   0.58         %   0.86        %   (33  )   Total funding      1.01        %   1.07         %   1.27        %   (26  )   liabilities                                                                              Operating Results  Net Interest Income  Sterling reported net interest income of $75.3 million for the quarter ended September30, 2012, compared to $78.9 million for the prior quarter and $74.8 million for the quarter ended September30, 2011. The decrease of $3.6 million from the prior quarter was primarily a result of lower loan yields, and lower balances and yields on MBS. The net interest margin (tax equivalent) for the third quarter of 2012 was 3.47 percent, a decrease of 9 basis points from the prior quarter, and up 13 basis points over the same period a year ago.                                                                  Three Months Ended                                  September 30,                 September 30,                                  2012            June 30, 2012   2011                                  (in thousands)   Net interest income            $  75,308       $  78,910       $  74,836   Net interest margin (tax       3.47       %    3.56       %    3.34       %   equivalent)   Loan yield                     5.23       %    5.36       %    5.47       %                                                                               Total interest income was $96.0 million for the third quarter of 2012, compared to $101.0 million for the prior quarter, and $101.4 million for the same period a year ago. Interest income on loans decreased by $2.4 million from the prior quarter as a result of lower loan yields, reflecting the low interest rate environment. Additionally, interest income was impacted by a reduction in interest income on MBS, which declined by $2.6 million compared to the prior quarter and by $6.4 million from the same period in 2011. For the third quarter of 2012, average MBS balances were down $221.5 million, or 11 percent, from the prior quarter.  Total interest expense was $20.7 million for the third quarter of 2012, compared to $22.1 million for the prior quarter and $26.5 million for the third quarter of 2011. Deposit interest expense was $9.0 million for the third quarter of 2012, a reduction of $0.9 million, or 9 percent, from the prior quarter, and down $5.2 million, or 36 percent, from the same period last year, reflecting the improved deposit mix.  Noninterest Income  Noninterest income includes income from mortgage banking operations, fee and service charge income, and other items such as net gains on sales of securities and loan servicing fees. During the third quarter of 2012, noninterest income was $46.7 million, compared to $44.7 million for the prior quarter and $29.1 million for the third quarter of 2011.  Income from mortgage banking operations for the third quarter of 2012 was $28.5 million, compared to $24.7 million for the prior quarter and $16.4 million for the third quarter of 2011. The increase over the comparable prior periods is principally attributable to increased margins associated with residential mortgage banking activity. The margin on residential loan sales was 3.68 percent for the third quarter of 2012, up from 3.07 percent for the prior quarter and 2.66 percent for the same period a year ago.                                                                  Three Months Ended                                  September 30,                 September 30,                                  2012            June 30, 2012   2011                                  (in thousands)   Residential loan sales         $  728,642      $  576,545      $  475,034   Change in warehouse and        36,018         220,252        123,859        interest rate locks   Total mortgage banking loan    $  764,660     $  796,797     $  598,893     activity                                                                     Margin on residential loan     3.68        %   3.07        %   2.66        %   sales                                                                                For the quarter ended September30, 2012, fees and service charges income contributed $14.7 million to noninterest income compared to $14.1 million for the prior quarter and $12.3 million for the third quarter of 2011. The increase in fees and service charges income compared to the year ago period was primarily attributable to increased activity related to the business acquired from First Independent Bank, which was completed during the first quarter of 2012.  Due to a decline in prevailing mortgage interest rates and an increase in estimated prepayment speeds, Sterling recorded a fair value write down of $2.1 million on its mortgage servicing rights asset, which resulted in negative loan servicing fees for the third quarter of 2012. Similar write downs of $1.1 million and $5.1 million were recognized during the second quarter of 2012 and the third quarter of 2011, respectively.  For the third quarter of 2012, the gain on sales of securities was $3.1 million, compared to $9.3 million for the prior quarter. There were no sales of securities in the third quarter of 2011. Also, as previously reported, for the prior quarter Sterling recognized an other-than-temporary impairment charge of $6.8 million and a charge on prepayment of debt of $2.7 million; there were no similar charges in the third quarter of 2012 or the prior year period.  For the quarter ended September30, 2012, BOLI income was $1.7 million, compared to $3.8 million for the prior quarter and $1.6 million for the third quarter of 2011. The decrease in BOLI income from the prior quarter was due to the recognition of a $2.4 million death benefit during the second quarter of 2012.  Noninterest Expense  Noninterest expenses were $89.4 million for the third quarter of 2012, compared to $87.6 million for the prior quarter and $86.6 million for the third quarter of 2011. The increase from the prior quarter was primarily a result of a Washington State Business and Occupation tax refund of $1.9 million received during the second quarter of 2012, which was included as a reduction in other noninterest expense.  OREO operating expenses were $4.0 million for the third quarter of 2012, compared to $3.3 million for the prior quarter and $10.7 million for the same period last year. As of September30, 2012, OREO consisted of 70 properties, compared to 81 properties at June30, 2012 and 178 properties at September30, 2011.  Income Taxes  During the quarter ended September30, 2012, Sterling did not recognize any federal or state income tax expense. In the prior period, Sterling recorded a $288.8 million income tax benefit, which was the result of reversing substantially all of the deferred tax asset valuation allowance. As of September30, 2012, the net deferred tax asset was $280.4 million, including $273.0 million of net operating loss and tax credit carryforwards.  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 Sterling's restated articles of incorporation and Sterling's board of directors adopted a tax preservation rights plan, both of which restrict certain stock transfers that would result in an investor acquiring more than 4.95 percent of Sterling's total outstanding common stock.  Credit Quality  During the third quarter of 2012, Sterling recognized net charge-offs of $6.0 million, compared to $5.0 million for the prior quarter and $29.9 million for the same period a year ago. For the third quarter of 2012, Sterling recorded a $2.0 million provision for credit losses, compared to $4.0 million for the prior quarter and $6.0 million for the third quarter of 2011. The allowance for loan losses at September30, 2012 was $154.3 million, or 2.51 percent of total loans, compared to $158.2 million, or 2.60 percent of total loans, at June30, 2012, and $186.2 million, or 3.32 percent of total loans, at September30, 2011.  At September30, 2012, nonperforming assets were $259.0 million, or 2.73 percent of total assets, compared to $321.1 million, or 3.35 percent of total assets, at June30, 2012, and $434.7 million, or 4.74 percent of total assets, at September30, 2011.  As a result of Sterling's continued efforts to sell foreclosed properties, OREO decreased to $46.6 million at September30, 2012, compared to $55.8 million at June30, 2012, and $111.6 million at September30, 2011. This represents decreases of 17 percent and 58 percent, respectively.  Recent Events  On October 22, 2012, Sterling announced it had entered into a definitive agreement to acquire American Heritage Holdings ("AHH") of La Mesa, California. AHH is the holding company for Borrego Springs Bank, N.A., which had total assets of $142 million as of September 30, 2012 and operates three depository branches and seven loan production offices. The transaction is subject to regulatory approval and customary closing conditions and is expected to be completed during the first quarter of 2013.  Cash Dividend Declaration  Sterling's board of directors has approved a quarterly cash dividend of $0.15 per share of common stock. The dividend is payable on November 20, 2012 to shareholders of record as of November 6, 2012.  Third Quarter 2012 Earnings Conference Call  Sterling plans to host a conference call October 26, 2012 at 8:00 a.m. PDT to discuss the company's financial results. An audio webcast of the conference call can be accessed at Sterling's website. To access this audio presentation call, click on the audio webcast icon. Additionally, the conference call may be accessed by telephone. To participate in the conference call, domestic callers should dial 1-517-308-9459 approximately five minutes before the scheduled start time. You will be asked by the operator to identify yourself and provide the password “STERLING” to enter the call. A webcast replay of the conference call will be available on Sterling's website approximately one hour following the conclusion of the call. The webcast replay will be offered through November 26,2012.                                                                Sterling Financial Corporation CONSOLIDATED BALANCE SHEETS  (in thousands, except per        Sep 30, 2012    Jun 30, 2012    Sep 30, 2011 share amounts, unaudited) ASSETS: Cash and due from banks          $ 263,884       $ 454,692       $ 481,717 Investments and mortgage-backed securities       2,049,961       2,119,008       2,446,523 ("MBS") available for sale Investments held to maturity     1,716           1,726           1,900 Loans held for sale              320,823         226,907         241,039 Loans receivable, net            5,990,365       5,926,575       5,428,355 Other real estate owned, net     46,575          55,801          111,566 ("OREO") Office properties and            92,987          86,556          84,380 equipment, net Bank owned life insurance        178,279         176,593         174,092 ("BOLI") Goodwill                         22,577          22,577          0 Other intangible assets, net     20,864          22,656          13,290 Deferred tax asset, net          280,373         285,141         0 Other assets                     204,033        221,281        193,012      Total assets                     $ 9,472,437    $ 9,599,513    $ 9,175,874  LIABILITIES: Deposits                         $ 6,739,910     $ 6,796,774     $ 6,479,240 Advances from Federal Home       155,401         205,470         407,000 Loan Bank Repurchase agreements and fed    942,547         1,006,324       1,056,352 funds Other borrowings                 245,293         245,292         245,289 Accrued expenses and other       137,799        124,859        128,500      liabilities Total liabilities                8,220,950      8,378,719      8,316,381    SHAREHOLDERS' EQUITY: Preferred stock                  0               0               0 Common stock                     1,967,562       1,966,307       1,963,820 Accumulated other                75,263          67,102          57,297 comprehensive income Accumulated deficit              (791,338    )   (812,615    )   (1,161,624  ) Total shareholders' equity       1,251,487      1,220,794      859,493      Total liabilities and            $ 9,472,437    $ 9,599,513    $ 9,175,874  shareholders' equity Book value per common share      $ 20.14         $ 19.65         $ 13.87 Tangible book value per common   $ 19.44         $ 18.92         $ 13.66 share Shareholders' equity to total    13.2        %   12.7        %   9.4         % assets Tangible common equity to        12.8        %   12.3        %   9.2         % tangible assets (1) Common shares outstanding at     62,150,650      62,124,551      61,968,510 end of period Common stock warrants            2,625,000       2,722,541       2,722,541 outstanding                                                                                (1) Common shareholders' equity less goodwill and other intangible assets, divided by assets, less goodwill and other intangible assets.   Sterling Financial Corporation CONSOLIDATED STATEMENTS OF INCOME (LOSS)  (in thousands, except per share      Three Months Ended                          Nine Months Ended amounts, unaudited)                        Sep 30, 2012  Jun 30, 2012  Sep 30, 2011   Sep 30, 2012  Sep 30, 2011 INTEREST INCOME: Loans                  $  83,110      $  85,537      $  82,010      $  248,488     $  242,132 Mortgage-backed        10,361         12,936         16,719         38,632         56,681 securities Investments and cash   2,520         2,517         2,650         7,826         8,150       Total interest         95,991        100,990       101,379       294,946       306,963     income INTEREST EXPENSE: Deposits               8,981          9,921          14,135         30,004         46,645 Borrowings             11,702        12,159        12,408        36,371        36,932      Total interest         20,683        22,080        26,543        66,375        83,577      expense Net interest income    75,308         78,910         74,836         228,571        223,386 Provision for credit   2,000         4,000         6,000         10,000        26,000      losses Net interest income    73,308        74,910        68,836        218,571       197,386     after provision NONINTEREST INCOME: Fees and service       14,675         14,131         12,332         41,546         37,839 charges Mortgage banking       28,502         24,652         16,360         69,318         37,481 operations Loan servicing fees    (2,092     )   (471       )   (4,694     )   (183       )   (2,884     ) BOLI                   1,660          3,769          1,612          7,175          4,922 Gain on sales of       3,129          9,321          0              12,592         14,298 securities Other-than-temporary impairment losses on   0              (6,819     )   0              (6,819     )   0 securities Charge on prepayment   0              (2,664     )   0              (2,664     )   0 of debt Gains (losses) on      476            2,811          2,671          3,887          1,792 other loan sales Other                  348           11            831           (1,826     )   (19        ) Total noninterest      46,698        44,741        29,112        123,026       93,429      income NONINTEREST EXPENSE: Employee compensation and       45,636         46,485         43,828         139,502        129,514 benefits OREO                   4,008          3,337          10,739         9,337          36,591 Occupancy and          11,034         10,932         9,580          32,253         29,558 equipment Depreciation           2,918          2,923          3,000          8,754          9,026 Amortization of other intangible       1,792          1,791          1,190          4,988          3,639 assets Other                  24,020        22,139        18,283        70,830        58,187      Total noninterest      89,408        87,607        86,620        265,664       266,515     expense Income before income   30,598         32,044         11,328         75,933         24,300 taxes Income tax benefit     0             288,842       0             288,842       0           Net income             $  30,598     $  320,886    $  11,328     $  364,775    $  24,300   Earnings per common    $  0.49        $  5.17        $  0.18        $  5.87        $  0.39 share - basic Earnings per common    $  0.49        $  5.13        $  0.18        $  5.81        $  0.39 share - diluted Dividends declared     $  0.15        $  0.00        $  0.00        $  0.15        $  0.00 per share Average common shares outstanding -   62,139,833     62,112,936     61,958,183     62,110,498     61,944,392 basic Average common shares outstanding -   62,845,864     62,610,054     62,041,203     62,745,177     62,236,465 diluted                                                                                                  Sterling Financial Corporation OTHER SELECTED FINANCIAL DATA   (in thousands,     Three Months Ended                             Nine Months Ended unaudited)                 Sep 30, 2012   Jun 30, 2012   Sep 30, 2011    Sep 30, 2012   Sep 30, 2011 LOAN ORIGINATIONS AND PURCHASES: Loan originations: Residential real estate: For sale        $ 842,197       $ 578,418       $ 545,278       $ 1,997,491     $ 1,365,519 Permanent       77,650        46,569        14,893         152,947        65,834       Total residential     919,847         624,987         560,171         2,150,438       1,431,353 real estate Commercial real estate ("CRE"): Investor CRE    14,889          16,190          310             37,535          41,676 Multifamily     144,560         234,971         203,606         552,241         540,591 Construction    776            845            3,223          2,444          13,105       Total commercial      160,225         252,006         207,139         592,220         595,372 real estate Commercial: Owner           53,541          29,937          42,360          111,833         116,707 occupied CRE Commercial & Industrial      102,255        50,069         54,446         206,310        163,723      ("C&I") Total           155,796         80,006          96,806          318,143         280,430 commercial Consumer        63,435         79,991         29,513         199,881        97,888       Total loan      1,299,303      1,036,990      893,629        3,260,682      2,405,043    originations Total portfolio loan originations    457,106        458,572        348,351        1,263,191      1,039,524    (excludes residential real estate for sale) Loan purchases: Residential     1,646           37,734          2,701           76,408          10,251 real estate Commercial real estate: Investor CRE    0               0               0               0               48,584 Multifamily     292            251            309            683            2,749        Total commercial      292             251             309             683             51,333 real estate Commercial: Owner           0               0               22,495          0               74,716 occupied CRE C&I             0              0              0              0              0            Total           0               0               22,495          0               74,716 commercial Consumer        41,567         10,740         0              52,307         0            Total loan      43,505         48,725         25,505         129,398        136,300      purchases Total loan originations    $ 1,342,808    $ 1,085,715    $ 919,134      $ 3,390,080    $ 2,541,343  and purchases PERFORMANCE RATIOS: Return on       1.28        %   13.74       %   0.49        %   5.18        %   0.35        % assets Return on       9.8         %   138.7       %   5.4         %   45.5        %   4.1         % common equity Operating efficiency      69.7        %   66.1        %   71.1        %   71.5        %   74.0        % (1) Noninterest expense to      3.74        %   3.75        %   3.72        %   3.78        %   3.81        % assets Average         $ 9,520,530     $ 9,390,288     $ 9,233,112     $ 9,398,143     $ 9,356,487 assets Average         $ 1,237,205     $ 930,377       $ 832,237       $ 1,070,993     $ 802,076 common equity REGULATORY CAPITAL RATIOS: Sterling Financial Corporation Tier 1 leverage        12.7        %   12.2        %   11.1        %   12.7        %   11.1        % ratio Tier 1 risk-based      17.6        %   17.3        %   17.1        %   17.6        %   17.1        % capital ratio Total risk-based      18.9        %   18.6        %   18.4        %   18.9        %   18.4        % capital ratio Sterling Bank: Tier 1 leverage        12.6        %   12.0        %   10.8        %   12.6        %   10.8        % ratio Tier 1 risk-based      17.5        %   17.1        %   16.6        %   17.5        %   16.6        % capital ratio Total risk-based      18.8        %   18.4        %   17.9        %   18.8        %   17.9        % capital ratio OTHER: FTE employees at end of       2,527           2,523           2,461           2,527           2,461 period (whole numbers)                                                                                               (1) Operating efficiency ratio calculated as noninterest expense, excluding OREO and amortization of core deposit intangibles, divided by net interest income (tax equivalent) plus noninterest income, excluding gain on sales of securities, other-than-temporary impairment losses on securities and charge on prepayment of debt.                                  Sterling Financial Corporation OTHER SELECTED FINANCIAL DATA                                 (in thousands, unaudited)        Sep 30, 2012   Jun 30, 2012   Sep 30, 2011 INVESTMENT PORTFOLIO DETAIL: Available for sale: MBS                              $ 1,825,448     $ 1,897,310     $ 2,221,948 Municipal bonds                  205,405         203,537         205,005 Other                            19,108         18,161         19,570       Total                            $ 2,049,961    $ 2,119,008    $ 2,446,523  Held to maturity: Tax credits                      $ 1,716        $ 1,726        $ 1,900      Total                            $ 1,716        $ 1,726        $ 1,900      LOAN PORTFOLIO DETAIL: Residential real estate          $ 818,323       $ 785,482       $ 701,921 Commercial real estate: Investor CRE                     1,274,774       1,324,917       1,287,381 Multifamily                      1,359,506       1,311,247       990,707 Construction                     99,553         111,550        221,611      Total commercial real estate     2,733,833       2,747,714       2,499,699 Commercial: Owner occupied CRE               1,304,224       1,309,587       1,299,035 C&I                              517,588        504,396        430,591      Total commercial                 1,821,812       1,813,983       1,729,626 Consumer                         768,359        736,397        683,972      Gross loans receivable           6,142,327       6,083,576       5,615,218 Deferred loan fees, net          2,317           1,243           (668        ) Allowance for loan losses        (154,279    )   (158,244    )   (186,195    ) Net loans receivable             $ 5,990,365    $ 5,926,575    $ 5,428,355  DEPOSITS DETAIL: Noninterest bearing              $ 1,709,612     $ 1,539,786     $ 1,167,552 transaction                                                                   Interest bearing transaction     693,906         696,205         508,189 Savings and MMDA                 2,286,832       2,270,395       2,016,594 Time deposits                    2,049,560      2,290,388      2,786,905    Total deposits                   $ 6,739,910    $ 6,796,774    $ 6,479,240  Number of transaction accounts (whole numbers): Noninterest bearing              194,997         192,644         170,636 transaction accounts Interest bearing transaction     49,678         50,617         44,428       accounts Total transaction accounts       244,675        243,261        215,064                                                                                      Sterling Financial Corporation OTHER SELECTED FINANCIAL DATA  (in thousands, unaudited)          Sep 30, 2012  Jun 30, 2012  Sep 30, 2011 ALLOWANCE FOR CREDIT LOSSES: Allowance - loans, beginning of     $  158,244     $  161,273     $  212,088 quarter Provision                           2,000          2,000          4,000 Charge-offs: Residential real estate             (1,641     )   (157       )   (4,204     ) Commercial real estate: Investor CRE                        (2,329     )   (6,577     )   (11,189    ) Multifamily                         (463       )   0              (1,035     ) Construction                        (2,106     )   (2,904     )   (14,426    ) Total commercial real estate        (4,898     )   (9,481     )   (26,650    ) Commercial: Owner occupied CRE                  (1,544     )   (3,164     )   (4,758     ) C&I                                 (514       )   (442       )   (3,011     ) Total commercial                    (2,058     )   (3,606     )   (7,769     ) Consumer                            (1,882     )   (1,643     )   (2,554     ) Total charge-offs                   (10,479    )   (14,887    )   (41,177    ) Recoveries: Residential real estate             137            673            178 Commercial real estate: Investor CRE                        694            3,459          31 Multifamily                         347            1              684 Construction                        2,532         2,164         6,066       Total commercial real estate        3,573          5,624          6,781 Commercial: Owner occupied CRE                  236            1,249          155 C&I                                 305           1,922         3,707       Total commercial                    541            3,171          3,862 Consumer                            263           390           463         Total recoveries                    4,514         9,858         11,284      Net charge-offs                     (5,965     )   (5,029     )   (29,893    ) Allowance - loans, end of quarter   154,279        158,244        186,195 Reserve for unfunded commitments,   7,952          10,028         7,431 beginning of quarter Provision                           0              2,000          2,000 Charge-offs                         (181       )   (4,076     )   (55        ) Reserve for unfunded commitments,   7,771         7,952         9,376       end of quarter Total credit allowance              $  162,050    $  166,196    $  195,571  Net charge-offs to average loans    0.37       %   0.32       %   1.99       % (annualized) Loan loss allowance to total        2.51       %   2.60       %   3.32       % loans Total credit allowance to total     2.64       %   2.73       %   3.48       % loans Loan loss allowance to              73         %   60         %   58         % nonperforming loans Total credit allowance to           76         %   63         %   61         % nonperforming loans                                                                                 Sterling Financial Corporation OTHER SELECTED FINANCIAL DATA  (in thousands, unaudited)          Sep 30, 2012  Jun 30, 2012  Sep 30, 2011 NONPERFORMING ASSETS: Past 90 days due and accruing       $  0           $  0           $  0 Nonaccrual loans                    146,095        176,220        240,142 Restructured loans                  66,343        89,120        82,997      Total nonperforming loans           212,438        265,340        323,139 OREO                                46,575        55,801        111,566     Total nonperforming assets          259,013        321,141        434,705 Specific reserve on nonperforming   (10,104    )   (10,196    )   (15,276    ) loans Net nonperforming assets            $  248,909    $  310,945    $  419,429  Nonperforming loans to total        3.46       %   4.36       %   5.75       % loans Nonperforming assets to total       2.73       %   3.35       %   4.74       % assets Loan delinquency ratio (60 days     1.96       %   2.60       %   4.23       % and over) Classified assets                   $  267,469     $  327,336     $  500,484 Classified assets to total assets   2.82       %   3.41       %   5.45       % Classified assets to Sterling Bank Tier 1 capital plus total      21         %   26         %   42         % credit allowance Nonperforming assets by collateral type: Residential real estate             $  44,822      $  46,781      $  53,168 Commercial real estate: Investor CRE                        59,477         80,436         68,858 Multifamily                         9,221          26,508         7,325 Construction                        55,743        68,082        197,408     Total commercial real estate        124,441        175,026        273,591 Commercial: Owner occupied CRE                  71,448         81,640         84,550 C&I                                 12,072        12,526        17,337      Total commercial                    83,520         94,166         101,887 Consumer                            6,230         5,168         6,059       Total nonperforming assets          $  259,013    $  321,141    $  434,705                                                                                  Sterling Financial Corporation OTHER SELECTED FINANCIAL DATA  (in thousands,   Three Months Ended                                                                                                unaudited)               Sep 30, 2012                          Jun 30, 2012                          Sep 30, 2011                              Interest                             Interest                             Interest                  Average         Income/      Yields/   Average         Income/      Yields/   Average         Income/      Yields/               Balance         Expense      Rates     Balance         Expense      Rates     Balance         Expense      Rates ASSETS: Loans: Mortgage      $ 3,820,634     $ 47,757     5.00  %   $ 3,863,940     $ 49,486     5.12  %   $ 3,470,241     $ 45,843     5.24  % Commercial and           2,533,474      35,479      5.57  %   2,540,930      36,147      5.72  %   2,483,204      36,282      5.80  % consumer Total loans   6,354,108       83,236       5.23  %   6,404,870       85,633       5.36  %   5,953,445       82,125       5.47  % MBS           1,762,950       10,361       2.35  %   1,984,471       12,936       2.61  %   2,193,055       16,719       3.02  % Investments   529,407         3,392        2.55  %   549,590         3,422        2.50  %   767,714         3,596        1.86  % and cash FHLB stock    99,160         0           0.00  %   99,227         0           0.00  %   99,395         0           0.00  % Total interest      8,745,625       96,989      4.43  %   9,038,158       101,991     4.52  %   9,013,609       102,440     4.51  % earning assets Noninterest earning       774,905                               352,130                               219,503      assets Total average       $ 9,520,530                           $ 9,390,288                           $ 9,233,112  assets LIABILITIES and EQUITY: Deposits: Interest bearing       $ 684,906       73           0.04  %   $ 666,243       93           0.06  %   $ 501,884       123          0.10  % transaction Savings and   2,284,749       884          0.15  %   2,285,426       1,025        0.18  %   1,970,823       1,601        0.32  % MMDA Time          2,168,056      8,024       1.47  %   2,380,453      8,803       1.49  %   2,952,566      12,411      1.67  % deposits Total interest      5,137,711       8,981        0.70  %   5,332,122       9,921        0.75  %   5,425,273       14,135       1.03  % bearing deposits Borrowings    1,358,348      11,702      3.43  %   1,486,167      12,159      3.29  %   1,710,388      12,408      2.88  % Total interest      6,496,059       20,683       1.27  %   6,818,289       22,080       1.30  %   7,135,661       26,543       1.48  % bearing liabilities Noninterest bearing       1,656,318      0           0.00  %   1,510,591      0           0.00  %   1,132,589      0           0.00  % transaction Total funding       8,152,377       20,683      1.01  %   8,328,880       22,080      1.07  %   8,268,250       26,543      1.27  % liabilities Other noninterest   130,948                               131,031                               132,625      bearing liabilities Total average       8,283,325                              8,459,911                              8,400,875 liabilities Total average       1,237,205                             930,377                               832,237      equity Total average       $ 9,520,530                           $ 9,390,288                           $ 9,233,112  liabilities and equity Net interest income and                    $ 76,306    3.16  %                   $ 79,911    3.22  %                   $ 75,897    3.03  % spread (tax equivalent) Net interest                                   3.47  %                                3.56  %                                3.34  % margin (tax equivalent)                                                                                                                           Deposits: Total interest      $ 5,137,711     $ 8,981      0.70  %   $ 5,332,122     $ 9,921      0.75  %   $ 5,425,273     $ 14,135     1.03  % bearing deposits Noninterest bearing       1,656,318      0           0.00  %   1,510,591      0           0.00  %   1,132,589      0           0.00  % transaction Total         $ 6,794,029    $ 8,981     0.53  %   $ 6,842,713    $ 9,921     0.58  %   $ 6,557,862    $ 14,135    0.86  % deposits                                                                                                                                  About Sterling Financial Corporation  Sterling Financial Corporation (NASDAQ:STSA) of Spokane, Washington, is the bank holding company for Sterling Savings Bank, a Washington state chartered and federally insured commercial bank. Sterling Savings Bank does business as Sterling Bank and Sonoma Bank (in California). Sterling offers banking products and services, mortgage lending, and trust and investment products to individuals, small businesses, corporations and other commercial organizations. As of September30, 2012, Sterling had assets of $9.47 billion and operated 183 depository branches in Washington, Oregon, Idaho, Montana and California.Visit Sterling's website at www.sterlingfinancialcorporation.com.  Forward-Looking Statements  This release contains 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, strategies and intentions and other statements contained in this release that are not historical facts and pertain to Sterling's future operating results and capital position, including Sterling's ability to reduce future loan losses, improve its deposit mix, execute its asset resolution initiatives, execute its lending initiatives, contain costs and potential liabilities, realize operating efficiencies, execute its business strategy, make dividend payments, compete in the marketplace and provide increased customer support and service. When used in this release, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. 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: Sterling's ability to execute on its business plan and maintain adequate liquidity; the possibility of continued adverse economic developments that may, among other things, increase default and delinquency risks in Sterling's loan portfolios; shifts in market interest rates that may result in lower interest rate margins; shifts in the demand for Sterling's loan and other products; changes in accounting policies; changes in the monetary and fiscal policies of the federal government; changes in laws, regulations and the competitive environment; exposure to material litigation; and lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions. 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 the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Sterling's Annual Report on Form 10-K, as updated periodically in Sterling's filings with the Securities and Exchange Commission. Unless legally required, Sterling disclaims any obligation to update any forward-looking statements.  Contact:  Sterling Financial Corporation Media contact: Cara Coon, 509-626-5348 cara.coon@bankwithsterling.com or Investor contact: Patrick Rusnak, 509-227-0961 pat.rusnak@bankwithsterling.com