Exhibit 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
     This Amended and Restated Employment Agreement (this “Agreement”) is made
effective as of August 11, 2008, by and between STERLING FINANCIAL CORPORATION
(“Sterling”) and HAROLD B. GILKEY (the “Executive”).
W I T N E S S E T H :
     WHEREAS, the Executive is Chairman of the Board, President and Chief
Executive Officer of Sterling, and Sterling desires to retain the Executive and
the Executive is willing to continue to serve in such capacities on the terms
and conditions herein set forth; and
     WHEREAS, the parties desire to enter into this Agreement, which is intended
to amend and supersede an existing Employment Agreement, as amended (the “Prior
Agreement”).
     NOW THEREFORE, in consideration of the mutual covenants herein contained,
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
     1. Employment. Sterling agrees to continue to employ the Executive, and the
Executive agrees to continue to be employed by Sterling, upon the terms and
conditions hereinafter provided until December 31, 2013 (the “Term”).
     2. Position and Duties. During the Term, Sterling agrees to employ the
Executive to serve as the Chairman of the Board, President and Chief Executive
Officer of Sterling, and the Executive will have such powers and duties as are
commensurate with such position and as may be conferred upon him by the Board of
Directors of Sterling (the “Board”). During the Term, and except for illness or
incapacity and reasonable vacation periods as shall be consistent with
Sterling’s policies for other key executives, the Executive shall devote all of
his business time, attention, skill and efforts exclusively to the business and
affairs of Sterling and its subsidiaries; provided, however, that the Executive
may serve on other boards as a director or trustee if such service does not
interfere with his ability to discharge his duties and responsibilities to
Sterling.
     3. Compensation. For all services rendered by the Executive in any capacity
required hereunder during the Term, including, without limitation, services as
an executive officer, director,

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or member of any committee of Sterling, or any subsidiary or division thereof,
the Executive shall be compensated as follows:
          (a) Base Salary. Sterling shall pay the Executive a fixed minimum
salary of $650,000 per annum (such amount or such higher annual amount as is
paid from time to time pursuant to the terms hereof being referred to as the
“Base Salary”). The Base Salary shall be subject to such periodic review (which
shall occur at least annually) and such periodic increases as the Board shall
deem appropriate in accordance with Sterling’s customary procedures and
practices regarding the salaries of senior officers. The Base Salary shall be
payable in accordance with the customary payroll practices of Sterling, but in
no event less frequently than monthly.
          (b) Bonus Awards. The Executive shall be entitled to receive an
incentive bonus (the “Incentive Bonus”) for each fiscal year during the Term.
The Incentive Bonus shall be paid within thirty days of the end of each fiscal
year. The Incentive Bonus may be increased, upon the recommendation of the
Personnel Committee and the approval of the Board, depending, among other
factors, upon the attainment of performance goals set by the Board for Sterling.
          (c) Stock Retention Grant. In order to provide on-going motivation for
employment, the Company will provide Executive with a grant of 40,000 shares of
restricted stock in each fiscal year in which the Executive is employed by the
Company. Each of these restricted stock grants will vest two years following the
date of grant. However, if the Executive is not re-elected to serve on the
Board, any unvested shares will vest immediately.
          (d) Additional Equity Grants. In addition to the foregoing, the
Executive may be awarded, for each fiscal year during the Term, equity grants
under Sterling’s equity incentive plan(s) then in effect subject to the terms
and conditions of such plan(s).
          (e) Perquisites. Sterling also will furnish the Executive during each
fiscal year of the Term, without cost to him except any associated tax
liability, with reasonable (i) payment for tax preparation and financial
planning; (ii) reimbursement for club membership fees or dues in accordance with
Sterling policy; (iii) payment for an annual physical examination of the
Executive by a physician selected by the Executive; and (iv) payment of an
automobile allowance, it being understood that the automobile allowance shall be
primarily to further the business of Sterling.
          (f) Additional Benefits. Except as modified by this Agreement, the
Executive shall be entitled to participate in all compensation or employee
benefit plans or programs, and to receive all benefits, perquisites and
emoluments, for which any salaried employees of Sterling are

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eligible under any plan or program now or hereafter established and maintained
by Sterling for senior officers, to the fullest extent permissible under the
general terms and provisions of such plans or programs and in accordance with
the provisions thereof, including group hospitalization, health, dental care,
life or other insurance, tax-qualified pension, savings, thrift, 401(k) and
profit-sharing plans, termination pay programs, sick-leave plans, travel or
accident insurance, salary continuation plans, disability insurance, automobile
allowance or automobile lease plans, and executive contingent compensation
plans, including, without limitation, stock option or incentive plan(s) then in
effect.
     4. Business Expenses. It is understood that for the Executive to
successfully perform his duties hereunder so as to produce the greatest economic
return to Sterling, it is necessary for the Executive to entertain persons
having an existing or prospective business relationship with Sterling and to
attend seminars, conventions and continuing education programs. Sterling,
therefore, shall pay directly or reimburse the Executive for all reasonable
travel, entertainment or other expenses incurred by the Executive (and his
spouse where there is a legitimate business reason for his spouse to accompany
him) in connection with the performance of his duties and obligations under this
Agreement, subject to the Executive’s presentation of appropriate vouchers in
accordance with such procedures as Sterling may from time to time establish for
senior officers and to preserve any deductions for Federal income taxation
purposes to which Sterling may be entitled.
     5. Effect of Termination of Employment Other Than in Connection with a
Change in Control.
          (a) Certain Terminations. In the event the Executive’s employment
hereunder terminates due to either Permanent Disability, the Executive’s death,
a Without Cause Termination or a Constructive Discharge, Sterling shall, as
severance pay, continue, subject to the provisions of Section 7 below, to pay
the Executive’s Base Salary as in effect at the time of such termination for a
three-year period beginning on the date of Termination of Employment (the
“Severance Period”), provided, that in the case of Permanent Disability, such
payments shall be offset by any amounts otherwise paid to the Executive under
Sterling’s disability program generally available to other employees. In
addition, earned but unpaid Base Salary and Incentive Bonus amounts and amounts
(whether vested or not) held for the Executive’s account in Sterling’s deferred
compensation plan and supplemental executive retirement plan then in effect as
of the date of Termination of Employment shall be fully vested and payable in
full, pursuant to the payment terms of the applicable plan

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document. The automobile allowance set forth in Section 3(d)(iv) shall continue
through the end of the Severance Period. All stock options and other incentive
awards held by the Executive shall become fully vested and exercisable during
the Severance Period.
          (b) Other Terminations. In the event that the Executive’s employment
hereunder terminates due to a Termination for Cause, or the Executive
voluntarily terminates employment with Sterling for reasons other than a
Constructive Discharge or Permanent Disability, earned but unpaid Base Salary
and Incentive Bonus amounts as of the date of Termination of Employment shall be
payable in full. However, no other payments shall be made, or benefits provided,
by Sterling under this Agreement except for stock options and other incentive
awards held by the Executive pursuant to the terms of the grant(s) thereof,
vested benefits payable under the terms of the deferred compensation plan and
supplemental executive retirement plan then in effect, and any other benefits
which the Executive is entitled to receive under the terms of employee benefit
programs maintained by Sterling or its subsidiaries for its employees and under
Section 18 below.
          (c) Payment in Accordance with §409A. In accordance with the
regulations under Section 409A (§409A) of the Internal Revenue Code of 1986, as
amended (the “Code”), the payment of Base Salary as severance and the provision
of the automobile allowance to Executive, under Section 5(a) hereof, shall be
treated as a separation pay plan that does not provide for the deferral of
compensation to the extent of the exceptions provided under Treasury Regulations
Sections (“Treas. Reg. §”) 1.409A-1(b)(9)(ii), (iii), (iv) and (v), which
exceptions provide that such payments will not be subject to §409A, including
the six-month delay in payments to specified employees following a separation
from service, to the extent of such exceptions. All payments of Base Salary as
severance and the provision of the automobile allowance shall be paid in
accordance with the same schedule as when Executive was employed by Sterling.
          (d) Definitions. For purposes of this Agreement, the following terms
have the following meanings:
               (i) The term “Termination for Cause” means:
                    (A) the continued failure of Executive to substantially
perform the Executive’s duties with Sterling or one of its subsidiaries (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to the
Executive by the Board, which specifically identifies the manner in which the
Board believes that the Executive has not substantially performed the
Executive’s duties, or

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                    (B) the willful engaging by the Executive in illegal conduct
that is materially and demonstrably injurious to Sterling or any of its
subsidiaries, or
                    (C) conviction of a felony involving fraud, dishonesty or
moral turpitude, or a guilty or nolo contendere plea by Executive with respect
thereto, or
                    (D) violation of the provisions of Section 7 herein.
          For purposes of this provision, no act or failure to act on the part
of Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith and without reasonable belief that the
Executive’s action or omission was in the best interest of Sterling or its
subsidiaries. Any act or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Board or based upon the advice of counsel for
Sterling shall be conclusively presumed to be done, or omitted to be done, by
the Executive in good faith and in the best interests of Sterling and its
subsidiaries. The cessation of employment of the Executive shall not be deemed
to be a Termination for Cause unless and until there shall have been delivered
to the Executive a copy of a resolution duly adopted by the affirmative vote of
not less than two-thirds of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice is provided
to Executive and the Executive is given an opportunity, together with counsel,
to be heard before the Board), finding that, in the good faith opinion of the
Board, the Executive is guilty of the conduct described in subparagraph (A),
(B) or (D) above, and specifying the particulars thereof in detail.
               (ii) The term “Constructive Discharge” means a termination of the
Executive’s employment by the Executive following the occurrence of any of the
following events:
                    (A) Inferior Duties. The assignment of duties by Sterling to
Executive, without his express written consent, that (i) are inferior to
Executive’s duties on the Effective Date in any material respect, (ii) result in
Executive having inconsequential authority or responsibility compared to the
authority or responsibility he had on the Effective Date, or (iii) result in
Executive reporting to or being supervised by someone other than the Board of
Sterling or any successor, as contemplated by Section 9 below; and (iv) any
failure of the shareholders of Sterling to elect or re-elect the Executive as a
member of the Board or to the offices of Chairman of the Board, President and
Chief Executive Officer of Sterling.
                    (B) Base Compensation Reduction. A material reduction by
Sterling of Executive’s Base Salary.

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                    (C) Relocation. Executive, without his written consent, is
required by his employment to perform a substantial part of his duties at one or
more locations more than twenty-five miles distant from Spokane, Washington.
                    (D) Breach. A material breach by Sterling of any provision
of this Agreement.
          If an event constituting Constructive Discharge has occurred without
the Executive’s consent, the Executive’s termination for Constructive Discharge
must occur within two years of the first occurrence of such event. The Executive
shall give notice to Sterling, in accordance with Section 10, of the existence
of an event constituting Constructive Discharge within 90 days of the initial
occurrence of such event, and Sterling will have 60 days to cure or otherwise
obtain Executive’s express written consent to the occurrence or continuance of
such event. If Executive’s employment is terminated for Constructive Discharge,
it will be treated as an involuntary separation from service under §409A.
               (iii) The term “Without Cause Termination” means a termination of
the Executive’s employment by Sterling, for a reason other than Permanent
Disability, retirement, expiration of the Term, or Termination for Cause.
               (iv) The term “Permanent Disability” means a condition pursuant
to which an Executive (i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months, or (ii) is, by reason of
any medically determinable physical or mental impairment that can be expected to
result in death or can be expected to last for a continuous period of not less
than twelve (12) months, receiving income replacement benefits for a period of
not less than three (3) months under an accident or health policy covering
employees of Employer.
     6. Effect of Termination of Employment in Connection with a Change in
Control.
          (a) Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
               (i) A “Change in Control” shall be deemed to have occurred at
such time as the occurrence of a “change in ownership,” a “change in effective
control” or a “change in the ownership of a substantial portion of the assets”
of a corporation, as determined in accordance with this Section 6(a)(i).

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                    (A) A “change in ownership” of Sterling shall occur on the
date on which any one person, or more than one person acting as a group,
acquires ownership of stock of Sterling that, together with stock held by such
person or group, constitutes more than 50% of the total fair market value or
total voting power of the stock of Sterling, as determined in accordance with
Treas. Reg. §1.409A-3(i)(5)(v). If a person or group is considered either to own
more than 50% of the total fair market value or total voting power of the stock
of Sterling, or to have effective control of such corporation within the meaning
of part (B) of this Section, and such person or group acquires additional stock
of such corporation, the acquisition of additional stock by such person or group
shall not be considered to cause a “change in the ownership” of Sterling.
                    (B) A “change in effective control” of Sterling shall occur
only on either of the following dates:
                         (1) The date on which any one person, or more than one
person acting as a group, acquires (or has acquired during the 12-month period
ending on the date of the most recent acquisition by such person or persons)
ownership of stock of Sterling possessing 30% or more of the total voting power
of the stock of Sterling, as determined in accordance with Treas. Reg.
§1.409A-3(i)(5)(vi). If a person or group is considered to possess 30% or more
of the total voting power of the stock of Sterling, and such person or group
acquires additional stock of Sterling, the acquisition of additional stock by
such person or group shall not be considered to cause a “change in effective
control” of Sterling, or
                         (2) The date on which a majority of the members of
Sterling’s Board is replaced during any 12-month period by directors whose
appointment or election is not endorsed by a majority of the members of the
Board before the date of the appointment or election, as determined in
accordance with Treas. Reg. §1.409A-3(i)(5)(vi).
                         (3) A “change in the ownership of a substantial portion
of the assets” of Sterling shall occur on the date on which any one person, or
more than one person acting as a group, acquires (or has acquired during the
12-month period ending on the date of the most recent acquisition by such person
or persons) assets from Sterling that have a total gross fair market value equal
to more than 40% of the total gross fair market value of all for the assets of
Sterling immediately before such acquisition or acquisitions, as determined in
accordance with Treas. Reg. §1.409A-3(i)(5)(vii). A transfer of assets shall not
be treated as a “change in the ownership of a substantial portion of the assets”
when such transfer is made to an entity that is

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controlled by the shareholders of the transferor corporation, as determined in
accordance with Treas. Reg. §1.409A-3(i)(5)(vii)(B).
               (ii) “Separation Period” means a three-year period beginning on
the date of Termination of Employment.
               (iii) “Termination of Employment” shall mean the termination of
the Executive’s actual employment with Sterling, which constitutes a separation
from service as defined under §409A.
               (iv) “Termination Upon a Change in Control” shall mean a
Termination of Employment upon or within twenty-four months after a Change in
Control by Sterling, or its successors, without Cause, or by Executive due to a
Constructive Discharge, as described under Section 5(d)(ii) hereof.
          (b) Payments for Termination Upon a Change in Control. Within twenty
days of the Executive’s Termination Upon a Change in Control, Sterling shall pay
to the Executive in a single payment in cash and/or provide to the Executive, as
applicable, the following:
               (i) the Executive’s earned but unpaid Base Salary and Incentive
Bonus amounts and amounts (whether vested or not) held for the Executive’s
account in the deferred compensation plan and the supplemental executive
retirement plan then in effect as of the date of Termination of Employment;
               (ii) the benefits, if any, to which the Executive is entitled as
a former employee under the employee benefit programs and compensation plans and
programs maintained for the benefit of Sterling’s officers and employees;
               (iii) continued automobile allowance as provided in
Section 3(d)(iv) throughout the Separation Period;
               (iv) an amount equal to the Base Salary and Incentive Bonus
amounts the Executive would have earned if the Executive had continued working
for Sterling during the Separation Period, at the highest annual rate of Base
Salary, and the highest annual Incentive Bonus achieved during the Executive’s
period of actual employment with Sterling; and
               (v) an amount equal to Sterling’s contributions to which the
Executive would have been entitled under Sterling’s 401(k) Plan if the Executive
had continued working for Sterling during the Separation Period at the highest
annual rate of Base Salary achieved during the

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Executive’s period of actual employment with Sterling, and the Executive had
made the maximum amount of employee contributions as are permitted under such
plans.
          (c) Options and Other Incentive Awards. All stock options and other
incentive awards held by the Executive shall become fully vested and exercisable
during the Separation Period.
          (d) Adjustment for Taxes. In the event that either Sterling’s
independent public accountants or the Internal Revenue Service determines that
any payment, coverage, benefit or benefit acceleration provided to Executive,
whether specifically provided for in this Agreement or otherwise, is subject to
the excise tax imposed by Section 4999 (or any successor provision)
(“Section 4999”) of the Code, Sterling, within 30 days thereafter, shall pay to
Executive, in addition to any other payment, coverage or benefit due and owing
hereunder, an amount determined by multiplying the rate of excise tax then
imposed by Section 4999 by the amount of the “excess parachute payment” (as
defined in Section 280G of the Code) received by Executive (determined without
regard to any payments made to the Executive pursuant to this paragraph) and
dividing the product so obtained by the amount obtained by subtracting the
aggregate local, state and Federal income tax rate applicable to the receipt by
Executive of the “excess parachute payment” (taking into account the
deductibility for Federal income tax purposes of the payment of state and local
income taxes thereon) from the amount obtained by subtracting from 1.00 the rate
of excise tax then imposed by Section 4999 of the Code, it being Sterling’s
intention that the Executive’s net after tax position be identical to that which
would have obtained had Sections 280G and 4999 not been part of the Code.
          (e) In the event that, on or after the occurrence of a Change in
Control, Sterling fails to make any payment or provide any coverage to Executive
arising out of or relating in any way to this Agreement or to the Executive’s
employment by Sterling (collectively, “Employment Rights”), then Sterling shall
pay to the Executive and reimburse the Executive for the Executive’s full costs
(including, without limitation, the fees and expenses of the Executive’s
attorneys and court and related costs) of enforcing the Executive’s Employment
Rights. In addition, if the enforceability of this Agreement or the payment of
any benefit to the Executive hereunder is disputed by Sterling on or after the
occurrence of a Change in Control, then the Term of this Agreement shall be
extended for the period of the dispute in the event of a final judicial
determination that the Executive is

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entitled to at least fifty percent (in dollar amount) of the benefits that
Executive claimed from, and that were disputed by, Sterling.
     7. Other Duties of Executive During and After Term.
          (a) Confidential Information. The Executive recognizes and
acknowledges that all information pertaining to the affairs, business, clients,
or customers of Sterling or any of its subsidiaries (any or all of such entities
being hereinafter referred to as the “Business”), as such information may exist
from time to time, other than information that Sterling has previously made
publicly available or which is in the public domain, is confidential information
and is a unique and valuable asset of the Business, access to and knowledge of
which are essential to the performance of the Executive’s duties under this
Agreement. The Executive shall not, through the end of the Term, except to the
extent reasonably necessary in the performance of his duties under this
Agreement, divulge to any person, firm, association, corporation, or
governmental agency, any information concerning the affairs, business, clients,
or customers of the Business (except such information as is required by law to
be divulged to a government agency or pursuant to lawful process), or make use
of any such information for his own purposes or for the benefit of any person,
firm, association or corporation (except the Business) and shall use his
reasonable best efforts to prevent the disclosure of any such information by
others. All records, memoranda, letters, books, papers, reports, accountings,
experience or other data, and other records and documents relating to the
Business, whether made by the Executive or otherwise coming into his possession,
are confidential information and are, shall be, and shall remain the property of
the Business. No copies thereof shall be made which are not retained by the
Business, and the Executive agrees, on termination of his employment or on
demand of Sterling, to deliver the same to Sterling.
          (b) Non-Compete. For a period of two years following Executive’s
Termination of Employment (the “Non-Compete Period”), the Executive shall not,
without express prior written approval of Sterling’s Board, directly or
indirectly own or hold any proprietary interest in, or be employed by or receive
remuneration from, any corporation, partnership, sole proprietorship or other
entity engaged in competition with Sterling or any of its subsidiaries (a
“Competitor”), other than severance-type or retirement-type benefits from
entities constituting prior employers of the Executive. During the Non-Compete
Period, the Executive also agrees that he will not solicit for the account of
any Competitor, any customer or client of Sterling or its subsidiaries. The
Executive also agrees not to act on behalf of any Competitor to interfere with
the relationship between Sterling or

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its subsidiaries and their employees during the Non-Compete Period. In addition,
if the Executive obtains non-competitive employment during the Non-Compete
Period, for such period the Executive agrees not to solicit employees of
Sterling or its subsidiaries for new employment without the prior written
consent of Sterling. For purposes of this section, (i) the term “proprietary
interest” means legal or equitable ownership, whether through stockholdings or
otherwise, of greater than a 20% equity interest in a business, firm or entity,
and (ii) an entity shall be considered to be “engaged in competition” if such
entity is, or is a holding company for, a bank, savings and loan association or
other financial services business engaged in a business that competes with
Sterling in the States of Washington, Oregon, Idaho, Montana, or California.
Executive acknowledges the receipt and sufficiency of specific consideration for
the agreements in this Section 7.
          (c) Remedies. Sterling’s obligation to make payments, deliver shares
of stock or provide for any benefits under this Agreement (except to the extent
vested or exercisable prior to Executive’s Termination of Employment) shall
cease upon a violation of the preceding provisions of this section. Executive
acknowledges that there would be no adequate remedy at law or in damages to
compensate Sterling for any violation of this Section 7, and agrees that
Sterling shall be entitled to injunctive relief requiring specific performance
by Executive of this Section 7 without the necessity of proving actual damages
or the posting of a bond, and Executive consents to the entry thereof.
          (d) Survival. The provisions of this Section 7 shall: (a) survive the
termination of this Agreement, and continue throughout the duration of the
Executive’s employment with Sterling, except as amended or modified by written
agreement of the parties; and (b) survive the Executive’s Termination of
Employment with Sterling. The running of the Non-Compete Period provided under
Section 7(b) shall be tolled between the time any controversy with respect to
this Section 7 is filed with a court or arbitrator and the decision of the
judge, jury or arbitrator on said controversy.
          (e) Modification of Terms. If any restriction in this Section 7 is
finally adjudicated by a court of competent jurisdiction to exceed the time,
geographic, service or other limitations permitted by applicable law in any
jurisdiction, such restriction may be modified and narrowed by a court to the
maximum time, geographic, service or other limitations permitted by applicable
law so as to preserve and protect Sterling’s legitimate business interest,
without negating or impairing any other restrictions or undertaking set forth in
the Agreement.

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          (f) Application. The provisions of Section 7(b) shall be inapplicable
if the Executive’s Termination of Employment is due to: a Permanent Disability;
a Without Cause Termination; a Constructive Discharge; or a Termination Upon a
Change in Control.
     8. Withholding Taxes. Sterling may directly or indirectly withhold from any
payments made under this Agreement all Federal, state, city or other taxes as
shall be required pursuant to any law or governmental regulation or ruling.
     9. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement
shall preclude Sterling from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation that
assumes this Agreement and all obligations and undertakings of Sterling
hereunder. Upon such a consolidation, merger or transfer of assets, the term
“Sterling” as used herein shall mean such other corporation and this Agreement
shall continue in full force and effect.
     10. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be given in writing and shall be deemed to
have been duly given if delivered or mailed, postage prepaid, by same day or
overnight mail as follows:

         
 
  (a)   To Sterling:
 
       
 
      111 North Wall Street
 
      Spokane, WA 99201
 
       
 
      Attention: Chief Financial Officer
 
      With a copy to:
 
       
 
      Witherspoon, Kelley, Davenport & Toole, P.S.
 
      422 West Riverside, Suite 1100
 
      Spokane, WA 99201-0390
 
       
 
      Attention: Andrew J. Schultheis, Esq.
 
       
 
  (b)   To the Executive:
 
       
 
      At his regular office and to his primary residence

or to such other address as either party shall from time-to-time specify in
writing to the other.
     11. No Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge or hypothecation, or to execution,
attachment, levy or similar process, or assignment

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by operation of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect; provided, however, that
nothing in this Section 11 shall preclude the assumption of such rights by
executors, administrators or other legal representatives of the Executive or his
estate and their assigning any rights hereunder to the person or persons
entitled thereto.
     12. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by other employment
or otherwise, except as provided herein.
     13. Source of Payment. All payments provided for under this Agreement shall
be paid in cash from the general funds of Sterling. To the extent that any
person acquires a right to receive payments from Sterling hereunder, such right,
without prejudice to rights which employees may have, shall be no greater than
the right of an unsecured creditor of Sterling.
     14. Further Action. Sterling shall perform all acts and execute all
documents as may be reasonably necessary to effect performance of this Agreement
by Sterling. In the event Sterling’s Deferred Compensation Plan, the 1992 Stock
Option Plan, the 1998 Long-Term Incentive Plan, the 2001 Long-Term Incentive
Plan, the 2003 Long-Term Incentive Plan, the 2007 Long-Term Incentive Plan, the
Sterling Savings Bank Deferred Compensation Plan, and the Supplemental Executive
Retirement Plan, or plans which are substantially similar to such plans are not
maintained, Sterling shall provide the Executive with compensation which is
substantially similar in financial effect to the compensation which would
otherwise have been provided through such plans. References herein to deferred
compensation, stock option or incentive plan(s) and any other benefit plans
shall be deemed to include all successor plans. Nothing in this Agreement shall
be deemed to be a modification of Sterling’s stock option or incentive plans.
     15. Severability. If any provision of this Agreement or application thereof
to anyone or under any circumstances is finally adjudicated by a court of
competent jurisdiction to be invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall not affect any other provision or
application and shall not invalidate or render unenforceable such provision or
application in any other jurisdiction.
     16. Contents of Agreement. This Agreement supersedes all prior agreements
and sets forth the entire understanding among the parties hereto with respect to
the subject matter hereof and

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cannot be changed, modified, extended or terminated except upon written
amendment approved by the parties hereto.
     17. Governing Law. The validity, interpretation, performance, and
enforcement of this Agreement shall be governed by the laws of the State of
Washington, and the Executive consents to the jurisdiction of the state and
federal courts of Washington in any dispute arising under this Agreement.
     18. Survival of Benefits. If the Term expires and no employment agreement
between Sterling and Executive is in effect, but Executive’s employment
relationship with Sterling continues, any section of this Agreement that
provides a benefit to the Executive and that does not expressly provide for its
termination upon the expiration of the Term shall survive the expiration of the
Term, and the obligation to provide benefits to the Executive as set forth in
such Section shall remain binding upon Sterling until such time as the
Executive’s employment relationship with Sterling is terminated and the benefits
provided under such Section are paid in full to the Executive or until such time
as a new employment agreement between Sterling and Executive is in effect.
Anything to the contrary herein notwithstanding, following any Termination of
Employment, including retirement, but not following a Termination for Cause, for
the later of Executive’s and his spouse’s lifetime, Sterling shall continue to
provide the perquisites set forth in Section 3(e)(i) and (ii), as well as
medical, dental and travel accident insurance coverages for the Executive and
his spouse to substantially the same extent as if the Executive had continued in
Sterling’s employ, subject to the terms and conditions described in this
Section 18.
          (a) For any reimbursements or in-kind benefits provided by Sterling
after Executive’s Termination of Employment, the following conditions apply:
               (i) The benefit plan or reimbursement arrangement must provide an
objectively determinable non-discretionary definition of expenses eligible for
reimbursement or the in-kind benefits to be provided.
               (ii) The benefit or expense eligible for reimbursement or in-kind
benefit during a particular calendar year may not affect the expenses eligible
for reimbursement or in-kind benefit provided in any other calendar year.
               (iii) The reimbursement of an eligible expense must be made on or
before the last day of the calendar year following the calendar year in which
the expense was incurred.

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               (iv) No reimbursement or in-kind benefit is subject to
liquidation or exchange for another benefit.
               (v) The amount of the dues and fees for Executive’s club
memberships paid in each calendar year shall equal only the amount actually
charged by the respective club or organization during the period.
               (vi) The amount of reimbursement for tax preparation and
financial planning related expenses shall be subject to an annual cap of $20,000
and shall be limited to expenses incurred in seeking advice and assistance from
professionals licensed in the tax, accounting, legal or financial service
industries.
               (vii) The amount of reimbursement for an annual physical
examination of Executive by a physician selected by Executive shall be limited
to the actual charges incurred in conjunction with such physical examination to
the extent not otherwise reimbursed or paid by insurance or Medicare.
               (viii) The provision of medical, dental and travel accident
insurance coverage shall be offset by the receipt of any alternative benefits
under Medicare or similar programs.
          (b) In accordance with the regulations under §409A, the provision of
benefits and payment of expenses during the first two calendar years following
the calendar year in which Executive’s Termination of Employment occurs (whether
voluntary or otherwise), which expenses or benefits must be paid to Executive
prior to the end of the third calendar year following the calendar year in which
the Termination of Employment occurs, is an exception from the definition of
deferred compensation under §409A, and therefore is not subject to the rules and
restrictions under §409A, including, but not limited to, the six-month delay in
payment of benefits to specified employees. The provision of benefits and
payment of expenses during this initial period of time is intended to comply
with such exception from the definition of deferred compensation in the
regulations under §409A.
          (c) Notwithstanding Sections 18(a) and (b) above, with respect to each
welfare benefit provided after Termination of Employment that constitutes a
health reimbursement arrangement satisfying the requirements of Section 105 and
Section 106 of the Code such that the benefits or reimbursements provided under
such arrangement are not includable in Executive’s

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income, the terms and conditions of Sections 18(a) and (b) shall not apply to
such benefits or reimbursements due to the fact that such health reimbursement
arrangement is exempt from §409A.
     19. Representations. The Executive hereby represents and warrants that he
has the legal capacity to execute and perform this Agreement, that it is a valid
and binding agreement against him according to its terms, and that its execution
and performance by him does not and will not violate the terms of any existing
agreement or understanding to which the Executive is a party. In addition, the
Executive represents and warrants that he knows of no reason why he is not
physically capable of performing his obligations under this Agreement in
accordance with its terms.
     20. Miscellaneous. All section headings are for convenience only. This
Agreement may be executed in any number of counterparts, each of which when
executed shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
     21. Compliance with §409A. This Agreement is intended to constitute an
enforceable contract for the payment of compensation, severance and certain
other benefits. The Agreement is not intended to constitute a “nonqualified
deferred compensation plan” within the meaning of §409A. Notwithstanding the
foregoing, in the event this Agreement and/or any benefit paid to the Executive
hereunder is deemed to be subject to §409A, this Agreement shall be interpreted
and, as reasonably necessary in the discretion of the Board, may be amended to
bring this Agreement and/or any such benefit into compliance with §409A, without
reducing the amounts of any benefits due to the Executive hereunder.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, and intending to be legally bound, Sterling has caused
this Agreement to be executed by its duly authorized representatives and the
Executive has signed this Agreement, all as of the first date above written.

            STERLING FINANCIAL CORPORATION
      BY:   /s/ Robert B. Larrabee         ROBERT B. LARRABEE        Chairman,
Personnel Committee     

          ATTEST:

STERLING FINANCIAL CORPORATION
    BY:   /s/ Daniel G. Byrne       DANIEL G. BYRNE      Executive Vice
President, Finance and
Chief Financial Officer     

                     /s/ Harold B. Gilkey         HAROLD B. GILKEY             

[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]

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