##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM TO.
 Commission
File Number 0-20800
 STERLING FINANCIAL CORPORATION
  Washington
    
    91-1572822(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)111 North Wall Street, Spokane, Washington
    
    99201(Address of principal executive offices)
    
    (Zip Code)
 
 þ o
  þ o o
 o þ
  Class
    
    Outstanding as of May 1, 2007Common Stock ($1.00 par value)
    
    51,265,711




---



##### 



STERLING FINANCIAL CORPORATION
 FORM 10-Q
For the Quarter Ended March 31, 2007
 TABLE OF CONTENTS
 PagePART I  Financial Information
    
    
    1Item 1
    
    Financial Statements (Unaudited)
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Income
    
    
    2Consolidated Statements of Cash Flows
    
    
    3Consolidated Statements of Comprehensive Income
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4
    
    Controls and Procedures
    
    
    31PART II  Other Information
    
    
    32Item 1
    
    Legal Proceedings
    
    
    32Item 1a
    
    Risk Factors
    
    
    32Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3
    
    Defaults Upon Senior Securities
    
    
    32Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    33Item 5
    
    Other Information
    
    
    33Item 6
    
    Exhibits
    
    
    33Signatures
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




---



##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial Statements
 STERLING FINANCIAL CORPORATION
 
 Consolidated Balance Sheets
 (Unaudited)
 March 31,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    57,481
    
    
    $
    13,846Non-interest bearing and vault
    
    
    159,193
    
    
    
    164,719Total cash and cash equivalents
    
    
    216,674
    
    
    
    178,565Restricted cash
    
    
    1,150
    
    
    
    1,150Investment securities and mortgage-backed securities (MBS):Available for sale
    
    
    1,782,947
    
    
    
    1,820,583Held to maturity
    
    
    101,150
    
    
    
    93,063Loans receivable, net
    
    
    8,370,625
    
    
    
    7,021,241Loans held for sale
    
    
    71,446
    
    
    
    91,469Accrued interest receivable
    
    
    60,504
    
    
    
    55,519Real estate owned and other collateralized assets, net
    
    
    4,076
    
    
    
    4,052Office properties and equipment, net
    
    
    97,629
    
    
    
    93,796Bank-owned life insurance (BOLI)
    
    
    145,182
    
    
    
    139,206Goodwill
    
    
    452,540
    
    
    
    247,244Other intangible assets
    
    
    35,304
    
    
    
    28,570Mortgage servicing rights, net
    
    
    10,537
    
    
    
    7,335Prepaid expenses and other assets, net
    
    
    49,857
    
    
    
    52,699Total assets
    
    $
    11,399,621
    
    
    $
    9,834,492LIABILITIES:Deposits
    
    $
    7,574,058
    
    
    $
    6,746,028Advances from Federal Home Loan Bank (FHLB)
    
    
    1,605,060
    
    
    
    1,308,617Securities sold subject to repurchase agreements and funds purchased
    
    
    707,733
    
    
    
    616,354Other borrowings
    
    
    252,230
    
    
    
    240,226Cashiers checks issued and payable
    
    
    7,595
    
    
    
    18,144Borrowers reserves for taxes and insurance
    
    
    2,818
    
    
    
    2,348Accrued interest payable
    
    
    41,702
    
    
    
    39,863Accrued expenses and other liabilities
    
    
    94,696
    
    
    
    79,496Total liabilities
    
    
    10,285,892
    
    
    
    9,051,076Commitments and ContingenciesSHAREHOLDERS EQUITY:Preferred stock, $1 par value; 10,000,000 shares authorized;
no shares issued and outstanding
    
    
    0
    
    
    
    0Common stock, $1 par value; 60,000,000 shares authorized;
51,245,273 and 42,042,740 shares issued and outstanding
    
    
    51,245
    
    
    
    42,043Additional paid-in capital
    
    
    887,961
    
    
    
    590,218Accumulated other comprehensive loss:Unrealized losses on investment securities and MBS available-for-sale,
net of deferred income taxes of $16,861 and $19,531
    
    
    (28,795
    )
    
    
    (33,350
    )Retained earnings
    
    
    203,318
    
    
    
    184,505Total shareholders equity
    
    
    1,113,729
    
    
    
    783,416Total liabilities and shareholders equity
    
    $
    11,399,621
    
    
    $
    9,834,492
  1




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    152,763
    
    
    $
    92,111MBS
    
    
    20,468
    
    
    
    23,345Investments and cash equivalents
    
    
    1,671
    
    
    
    723Total interest income
    
    
    174,902
    
    
    
    116,179Interest expense:Deposits
    
    
    63,720
    
    
    
    34,810Short-term borrowings
    
    
    9,675
    
    
    
    6,365Long-term borrowings
    
    
    20,891
    
    
    
    16,048Total interest expense
    
    
    94,286
    
    
    
    57,223Net interest income
    
    
    80,616
    
    
    
    58,956Provision for losses on loans
    
    
    (4,225
    )
    
    
    (4,650
    )Net interest income after provision for losses on loans
    
    
    76,391
    
    
    
    54,306Non-interest income:Fees and service charges
    
    
    12,192
    
    
    
    9,079Mortgage banking operations
    
    
    8,858
    
    
    
    2,271Loan servicing fees
    
    
    683
    
    
    
    269Real estate owned and other collateralized assets operations
    
    
    (45
    )
    
    
    307BOLI
    
    
    1,547
    
    
    
    1,183Other non-interest expense
    
    
    213
    
    
    
    (192
    )Total non-interest income
    
    
    23,448
    
    
    
    12,917Non-interest expenses
    
    
    65,669
    
    
    
    44,240Income before income taxes
    
    
    34,170
    
    
    
    22,983Income tax provision
    
    
    (11,249
    )
    
    
    (7,567
    )Net income
    
    $
    22,921
    
    
    $
    15,416Earnings per share  basic
    
    $
    0.51
    
    
    $
    0.44Earnings per share  diluted
    
    $
    0.50
    
    
    $
    0.44Weighted average shares outstanding  basic
    
    
    45,238,924
    
    
    
    34,946,649Weighted average shares outstanding  diluted
    
    
    45,833,530
    
    
    
    35,255,602
  2




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    22,921
    
    
    $
    15,416Adjustments to reconcile net income to net cash
provided by operating activities:Provisions for losses on loans and real estate owned
    
    
    4,225
    
    
    
    4,670Accretion of deferred gain on sale of branches
    
    
    (175
    )
    
    
    0Net gain on sales of loans, investment securities and MBS
    
    
    (5,340
    )
    
    
    (591
    )Stock based compensation
    
    
    250
    
    
    
    0Excess tax benefit from stock based compensation
    
    
    (933
    )
    
    
    0Stock issuances relating to 401(k) match
    
    
    607
    
    
    
    820Other gains and losses
    
    
    262
    
    
    
    (15
    )Increase in cash surrender value of BOLI
    
    
    (1,547
    )
    
    
    (1,183
    )Depreciation and amortization
    
    
    5,597
    
    
    
    4,586Change in:Accrued interest receivable
    
    
    2,055
    
    
    
    (1,157
    )Prepaid expenses and other assets
    
    
    1,092
    
    
    
    3,367Cashiers checks issued and payable
    
    
    (15,248
    )
    
    
    1,216Accrued interest payable
    
    
    1,706
    
    
    
    5,367Accrued expenses and other liabilities
    
    
    3,937
    
    
    
    (2,278
    )Proceeds from sales of loans originated for sale
    
    
    312,381
    
    
    
    31,376Loans originated for sale
    
    
    (308,199
    )
    
    
    (30,785
    )Net cash provided by operating activities
    
    
    23,591
    
    
    
    30,809Cash flows from investing activities:Change in restricted cash
    
    
    0
    
    
    
    (105
    )Loans funded and purchased
    
    
    (1,084,329
    )
    
    
    (1,013,695
    )Loan principal received
    
    
    910,602
    
    
    
    638,276Proceeds from sales of other loans
    
    
    72,613
    
    
    
    0Purchase of investment securities
    
    
    (21,952
    )
    
    
    (12,359
    )Proceeds from maturities of investment securities
    
    
    19,060
    
    
    
    647Net cash and cash equivalents acquired
    
    
    92,419
    
    
    
    0Principal payments on mortgage-backed securities
    
    
    60,427
    
    
    
    68,028Purchase of office properties and equipment
    
    
    (2,990
    )
    
    
    (3,664
    )Sales of office properties and equipment
    
    
    1,588
    
    
    
    77Improvements and other changes to real estate owned
    
    
    (101
    )
    
    
    (229
    )Proceeds from sales and liquidation of real estate owned
    
    
    77
    
    
    
    371Net cash provided by (used in) investing activities
    
    
    47,414
    
    
    
    (322,653
    )
  3




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Cash flows from financing activities:Net change in transaction and savings deposits
    
    $
    93,863
    
    
    $
    63,201Proceeds from issuance of time deposits
    
    
    637,875
    
    
    
    883,864Payments for maturing time deposits
    
    
    (952,966
    )
    
    
    (697,332
    )Interest credited to deposits
    
    
    54,604
    
    
    
    29,268Advances from FHLB
    
    
    557,744
    
    
    
    573,747Repayment of advances from FHLB
    
    
    (528,046
    )
    
    
    (646,036
    )Net change in securities sold subject to repurchase agreements
and funds purchased
    
    
    91,379
    
    
    
    48,744Net proceeds from other borrowings
    
    
    12,000
    
    
    
    20,000Proceeds from stock purchases
    
    
    2,401
    
    
    
    2,838Excess tax benefit from stock based compensation
    
    
    933
    
    
    
    0Cash dividends paid to shareholders
    
    
    (3,153
    )
    
    
    (1,917
    )Other
    
    
    470
    
    
    
    915Net cash provided by (used in) financing activities
    
    
    (32,896
    )
    
    
    277,292Net change in cash and cash equivalents
    
    
    38,109
    
    
    
    (14,552
    )Cash and cash equivalents, beginning of period
    
    
    178,565
    
    
    
    131,307Cash and cash equivalents, end of period
    
    $
    216,674
    
    
    $
    116,755Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    90,607
    
    
    $
    51,855Income taxes
    
    
    1,243
    
    
    
    0Noncash financing and investing activities:Loans converted into real estate owned and other collateralized assets
    
    
    0
    
    
    
    4,227Common stock issued upon business combination
    
    
    302,754
    
    
    
    0Common stock cash dividends accrued
    
    
    4,108
    
    
    
    2,106Deferred gain on sale of branches
    
    
    266
    
    
    
    0Modification of purchase price allocation
    
    
    2,344
    
    
    
    0
  4




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Net income
    
    $
    22,921
    
    
    $
    15,416Other comprehensive income:Change in unrealized gains (losses) on investment
securities and MBS available-for-sale
    
    
    7,225
    
    
    
    (23,708
    )Less deferred income taxes
    
    
    (2,670
    )
    
    
    8,775Net other comprehensive income (loss)
    
    
    4,555
    
    
    
    (14,933
    )Comprehensive income (loss)
    
    $
    27,476
    
    
    $
    483
  5




---



##### Table of Contents



STERLING
FINANCIAL CORPORATION
 
 Notes to Consolidated Financial Statements
 1. Basis of Presentation :
   2. Other Borrowings :
  March 31,
    
    
    December 31,2007
    
    
    2006Junior Subordinated Debentures
    
    $
    236,776
    
    
    $
    236,772Other
    
    
    15,454
    
    
    
    3,454Total
    
    $
    252,230
    
    
    $
    240,226
  6




---



##### Table of Contents



CarryingMaturity
    
    
    
    
    
    
    Rate at
    
    
    Value (inSubsidiary Issuer
    
    Issue Date
    
    
    Date

    
    Call Date

    
    March 31, 2007
    
    
    thousands)Sterling Capital Trust VIII
    
    Sept 2006
    
    Sept 2036
    
    
    N/A
    
    
    Floating
    
    
    6.98
    %
    
    $
    51,547Sterling Capital Trust VII
    
    June 2006
    
    June 2036
    
    
    N/A
    
    
    Floating
    
    
    6.88
    
    
    
    56,702Lynnwood Financial Statutory Trust II
    
    June 2005
    
    June 2035
    
    
    N/A
    
    
    Floating
    
    
    7.15
    
    
    
    10,310Sterling Capital Trust VI
    
    June 2003
    
    Sept 2033
    
    Sept 2008
    
    Floating
    
    
    8.55
    
    
    
    10,310Sterling Capital Statutory Trust V
    
    May 2003
    
    May 2033
    
    June 2008
    
    Floating
    
    
    8.60
    
    
    
    20,619Sterling Capital Trust IV
    
    May 2003
    
    May 2033
    
    May 2008
    
    Floating
    
    
    8.51
    
    
    
    10,310Sterling Capital Trust III
    
    April 2003
    
    April 2033
    
    April 2008
    
    Floating
    
    
    8.61
    
    
    
    14,433Lynnwood Financial Statutory Trust I
    
    Mar 2003
    
    Mar 2033
    
    Mar 2007
    
    Floating
    
    
    8.50
    
    
    
    9,482Klamath First Capital Trust II
    
    April 2002
    
    April 2032
    
    April 2007
    
    Floating
    
    
    9.09
    
    
    
    13,156Klamath First Capital Trust I
    
    July 2001
    
    July 2031
    
    June 2006
    
    Floating
    
    
    9.15
    
    
    
    15,164Sterling Capital Trust II
    
    July 2001
    
    July 2031
    
    June 2006
    
    Fixed
    
    
    10.25
    
    
    
    24,7438.00
    %*
    
    $
    236,776
 
 *
    
    weighted average rate   7




---



##### Table of Contents



3. Income Taxes :
  January 1, 2007(Dollars in thousands)Unrecognized Tax Benefit
    
    $
    1,553Potential Effective Tax Rate Impact
    
    
    1,245Recognized Penalties and Interest
    
    
    308
  4. Earnings Per Share :
  Three Months Ended March 31,2007
    
    
    2006Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount

    

    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    22,921
    
    
    
    45,238,924
    
    
    $
    0.51
    
    
    $
    15,416
    
    
    
    34,946,649
    
    
    $
    0.44Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    582,602
    
    
    
    (0.01
    )
    
    
    0
    
    
    
    308,953
    
    
    
    0.00Contingently issuable shares
    
    
    0
    
    
    
    12,004
    
    
    
    0.00
    
    
    
    0
    
    
    
    0
    
    
    
    0.00Diluted computations
    
    $
    22,921
    
    
    
    45,833,530
    
    
    $
    0.50
    
    
    $
    15,416
    
    
    
    35,255,602
    
    
    $
    0.44Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    305,000
    
    
    
    
    
    
    
    
    
    
    
    0
 8




---



##### Table of Contents



5. Non-Interest Expenses :
  Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Employee compensation and benefits
    
    $
    38,072
    
    
    $
    25,089Occupancy and equipment
    
    
    10,467
    
    
    
    6,916Data processing
    
    
    4,197
    
    
    
    3,332Depreciation
    
    
    3,195
    
    
    
    2,283Advertising
    
    
    2,677
    
    
    
    1,921Travel and entertainment
    
    
    1,508
    
    
    
    1,142Amortization of core deposit intangibles
    
    
    1,041
    
    
    
    556Legal and accounting
    
    
    676
    
    
    
    535Merger and acquisition costs
    
    
    1,207
    
    
    
    0Insurance
    
    
    395
    
    
    
    283Goodwill litigation costs
    
    
    180
    
    
    
    85Other
    
    
    2,054
    
    
    
    2,098Total
    
    $
    65,669
    
    
    $
    44,240
 6. Segment Information :
  
    
    The Community Banking segment consists of the operations conducted
by Sterlings subsidiary, Sterling Savings Bank.
    
    The Residential Mortgage Banking segment originates and sells
servicing-retained and servicing-released residential loans
through loan production offices of Golf Savings Bank and Sterling
Savings Banks subsidiary Action Mortgage Company (Action
Mortgage).
    
    The Commercial Mortgage Banking segment originates, sells and
services commercial real estate loans and participation interests
in commercial real estate loans through offices in the western
region primarily through Sterling Savings Banks subsidiary
INTERVEST-Mortgage Investment Company (INTERVEST).
    
    The Retail Brokerage segment markets fixed income and equity
products, mutual funds, fixed and variable annuities, insurance
and other financial products within the Sterling Savings Bank
financial service center network through sales representatives of
Sterling Savings Banks subsidiary Harbor Financial Services, Inc.
    
    The Other and Eliminations segment represents the parent company
expenses and intercompany eliminations of revenue and expenses.
 
 9




---



##### Table of Contents



As of and for the Three Months Ended March 31, 2007Residential
    
    
    CommercialCommunity
    
    
    Mortgage
    
    
    Mortgage
    
    
    Retail
    
    
    Other andBanking
    
    
    Banking
    
    
    Banking
    
    
    Brokerage
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    162,050
    
    
    $
    10,812
    
    
    $
    2,191
    
    
    $
    0
    
    
    $
    (151
    )
    
    $
    174,902Interest expense
    
    
    (87,251
    )
    
    
    (2,874
    )
    
    
    0
    
    
    
    0
    
    
    
    (4,161
    )
    
    
    (94,286
    )Net interest income (expense)
    
    
    74,799
    
    
    
    7,938
    
    
    
    2,191
    
    
    
    0
    
    
    
    (4,312
    )
    
    
    80,616Provision for loan losses
    
    
    (4,150
    )
    
    
    (75
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (4,225
    )Noninterest income
    
    
    18,083
    
    
    
    7,214
    
    
    
    2,207
    
    
    
    817
    
    
    
    (4,873
    )
    
    
    23,448Noninterest expense
    
    
    (50,929
    )
    
    
    (10,279
    )
    
    
    (2,912
    )
    
    
    (839
    )
    
    
    (710
    )
    
    
    (65,669
    )Income before income taxes
    
    $
    37,803
    
    
    $
    4,798
    
    
    $
    1,486
    
    
    
    (22
    )
    
    $
    (9,895
    )
    
    $
    34,170Total assets
    
    $
    11,178,327
    
    
    $
    323,878
    
    
    $
    11,670
    
    
    $
    925
    
    
    $
    (115,179
    )
    
    $
    11,399,621
 As of and for the Three Months Ended March 31, 2006Residential
    
    
    CommercialCommunity
    
    
    Mortgage
    
    
    Mortgage
    
    
    Retail
    
    
    Other andBanking
    
    
    Banking
    
    
    Banking
    
    
    Brokerage
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    110,540
    
    
    $
    3,467
    
    
    $
    1,857
    
    
    $
    0
    
    
    $
    315
    
    
    $
    116,179Interest expense
    
    
    (55,082
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (2,141
    )
    
    
    (57,223
    )Net interest income (expense)
    
    
    55,458
    
    
    
    3,467
    
    
    
    1,857
    
    
    
    0
    
    
    
    (1,826
    )
    
    
    58,956Provision for loan losses
    
    
    (4,650
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (4,650
    )Noninterest income
    
    
    11,454
    
    
    
    2,087
    
    
    
    1,237
    
    
    
    828
    
    
    
    (2,689
    )
    
    
    12,917Noninterest expense
    
    
    (37,440
    )
    
    
    (3,816
    )
    
    
    (1,868
    )
    
    
    (711
    )
    
    
    (405
    )
    
    
    (44,240
    )Income before income taxes
    
    $
    24,822
    
    
    $
    1,738
    
    
    $
    1,226
    
    
    $
    117
    
    
    $
    (4,920
    )
    
    $
    22,983Total assets
    
    $
    7,891,077
    
    
    $
    12,752
    
    
    $
    8,581
    
    
    $
    705
    
    
    $
    (68,611
    )
    
    $
    7,844,504
 7. Stock Based Compensation :
   Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    Intrinsic ValueNumber
    
    
    Exercise Price
    
    
    Life (in years)
    
    
    (in thousands)Outstanding, December 31, 2006
    
    
    1,485,661
    
    
    $
    19.72Granted
    
    
    306,000
    
    
    
    33.17Exercised
    
    
    (185,936
    )
    
    
    13.23Acquisitions
    
    
    573,212
    
    
    
    12.67Cancelled
    
    
    (7,123
    )
    
    
    18.04Outstanding, March 31, 2007
    
    
    2,171,814
    
    
    $
    20.31
    
    
    
    5.20
    
    
    $
    28,190Exercisable, March 31, 2007
    
    
    1,866,814
    
    
    $
    18.21
    
    
    
    4.92
    
    
    $
    24,218
  10




---



##### Table of Contents



Three Months EndedMarch 31,2007
    
    2006Expected volatility
    
    
    29
    %
    
    
    31
    %Expected term (in years)
    
    
    4.7 - 6.0
    
    
    
    5.5Expected dividend yield
    
    
    0.90
    %
    
    
    0.87
    %Risk free interest rate
    
    
    4.81
    %
    
    
    4.36
    %
  8. New Accounting Policies :
      11




---



##### Table of Contents



9. Derivatives and Hedging :
    10. Cash Dividends :
  Date Paid
    
    Per Share Amount
    
    TotalJanuary 2006
    
    
    0.055
    
    
    1.9 millionApril 2006
    
    
    0.060
    
    
    2.1 millionJuly 2006
    
    
    0.065
    
    
    2.3 millionOctober 2006
    
    
    0.070
    
    
    2.6 millionJanuary 2007
    
    
    0.075
    
    
    3.2 millionApril 2007
    
    
    0.080
    
    
    4.1 million
 11. Business Combination :
  12




---



##### Table of Contents



February 28, 2007Cash and cash equivalents
    
    $
    110,775Investments and MBS
    
    
    22,574Loans receivable, net
    
    
    1,231,310Goodwill
    
    
    206,399Core deposit intangible
    
    
    7,775Other assets
    
    
    18,834Total assets acquired
    
    $
    1,597,667Deposits
    
    $
    987,694Other borrowings
    
    
    266,853Other liabilities
    
    
    10,353Total liabilities assumed
    
    
    1,264,900Net assets acquired
    
    $
    332,767
  Three Months Ended March 31,2007
    
    
    2006Pro forma interest income
    
    $
    191,985
    
    
    $
    133,060Pro forma interest expense
    
    
    103,255
    
    
    
    62,920Pro forma net interest income
    
    
    88,730
    
    
    
    70,140Pro forma net income
    
    
    21,854
    
    
    
    19,441Pro forma earnings per share  basic
    
    $
    0.40
    
    
    $
    0.44Pro forma earnings per share  diluted
    
    $
    0.40
    
    
    $
    0.44
 12. Subsequent Events :
   13




---



##### Table of Contents



PART I  Financial Information (continued )
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operation
 STERLING FINANCIAL CORPORATION
March 31, 2007
 This report contains forward-looking statements. For a discussion about such statements, including
the risks and uncertainties inherent therein, see Forward-Looking Statements. Managements
Discussion and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report
and in Sterlings 2006 annual report on Form 10-K .
 General
    14




---



##### Table of Contents



Executive Summary and Highlights
   
    
    Net Income was $22.9 million, an increase of 49 percent over the first quarter of 2006;
earnings per diluted share were $0.50, an increase of 14 percent over the first quarter of
2006.
    
    Total loan originations of $1.28 billion increased 19 percent over the first quarter of
2006.
    
    Total loans receivable increased to a record $8.37 billion, while total deposits
increased to a record $7.57 billion.
    
    Total assets increased to a record $11.40 billion, an increase of 16 percent since year
end.
    
    Sterlings Board of Directors approved a cash dividend of $0.08 per common share, paid
on April 11, 2007, to shareholders of record as of March 30, 2007.
    
    Sterling completed the acquisition of Northern Empire Bancshares and its wholly owned
subsidiary, Sonoma National Bank, and celebrated its 20th anniversary on NASDAQ.
 15




---



##### Table of Contents



Company Growth
       Critical Accounting Policies
  16




---



##### Table of Contents



Income Recognition .
 Allowance for Loan Losses.
    Investment Securities and MBS .
   17




---



##### Table of Contents



Goodwill and Other Intangible Assets .
  Real Estate Owned and Other Collateralized Assets.
  Income Taxes.
  18




---



##### Table of Contents



Results of Operations
 Overview .
  Net Interest Income
   
    
    Volume  changes in volume multiplied by comparative period rate;
    
    Rate  changes in rate multiplied by comparative period volume; and
    
    Rate/volume  changes in rate multiplied by changes in volume.
 Three Months Ended March 31,2007 vs. 2006Increase (Decrease) Due to:Rate/Volume
    
    
    Rate
    
    
    Volume
    
    
    Total(Dollars in thousands)Rate/volume analysis:Interest income:Loans
    
    $
    46,559
    
    
    $
    9,171
    
    
    $
    4,951
    
    
    $
    60,681MBS
    
    
    (2,936
    )
    
    
    67
    
    
    
    (8
    )
    
    
    (2,877
    )Investments and cash equivalents
    
    
    460
    
    
    
    506
    
    
    
    229
    
    
    
    1,195Total interest income
    
    
    44,083
    
    
    
    9,744
    
    
    
    5,172
    
    
    
    58,999Interest expense:Deposits
    
    
    16,206
    
    
    
    8,709
    
    
    
    3,995
    
    
    
    28,910Borrowings
    
    
    2,461
    
    
    
    5,129
    
    
    
    563
    
    
    
    8,153Total interest expense
    
    
    18,667
    
    
    
    13,838
    
    
    
    4,558
    
    
    
    37,063Net changes in NII
    
    $
    25,416
    
    
    $
    (4,094
    )
    
    $
    614
    
    
    $
    21,936
 19




---



##### Table of Contents



Tax EquivalentThree Months Ended
    
    Net Interest MarginMarch 31, 2007
    
    
    3.41
    %December 31, 2006
    
    
    3.37
    %September 30, 2006
    
    
    3.34
    %June 30, 2006
    
    
    3.26
    %March 31, 2006
    
    
    3.32
    %
  Provision for Losses on Loans.
   Three Months Ended March 31,2007
    
    
    2006(Dollars in thousands)Allowance  loans, January 1
    
    $
    77,849
    
    
    $
    52,034Acquired
    
    
    12,535
    
    
    
    0Provision
    
    
    4,225
    
    
    
    4,650Charge offs, net of recoveries
    
    
    (832
    )
    
    
    (1,434
    )Transfers
    
    
    60
    
    
    
    (770
    )Allowance  loans, March 31
    
    
    93,837
    
    
    
    54,480Allowance  unfunded commitments, January 1
    
    
    5,840
    
    
    
    3,449Acquired
    
    
    266
    
    
    
    0Transfers
    
    
    (60
    )
    
    
    770Allowance  unfunded commitments, March 31
    
    
    6,046
    
    
    
    4,219Total credit allowance
    
    $
    99,883
    
    
    $
    58,699
 20




---



##### Table of Contents



Non-Interest Income
 Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Fees and service charges
    
    $
    12,192
    
    
    $
    9,079Mortgage banking operations
    
    
    8,858
    
    
    
    2,271Loan servicing fees
    
    
    683
    
    
    
    269Real estate owned operations
    
    
    (45
    )
    
    
    307BOLI
    
    
    1,547
    
    
    
    1,183Other non-interest expense
    
    
    213
    
    
    
    (192
    )Total
    
    $
    23,448
    
    
    $
    12,917
    21




---



##### Table of Contents



As of and for theThree Months EndedMarch 31,2007
    
    2006(Dollars in thousands)Originations of residential mortgage loans
    
    $
    344,617
    
    
    $
    71,097Originations of commercial real estate loans
    
    
    11,210
    
    
    
    33,975Sales of residential mortgage loans
    
    
    372,728
    
    
    
    34,732Sales of commercial real estate loans
    
    
    6,926
    
    
    
    0Principal balances of residential loans serviced for others
    
    
    672,049
    
    
    
    594,110Principal balances of commercial real estate loans serviced for others
    
    
    1,744,863
    
    
    
    820,845
 Non-Interest Expenses
 Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Employee compensation and benefits
    
    $
    38,072
    
    
    $
    25,089Occupancy and equipment
    
    
    10,467
    
    
    
    6,916Data processing
    
    
    4,197
    
    
    
    3,332Depreciation
    
    
    3,195
    
    
    
    2,283Advertising
    
    
    2,677
    
    
    
    1,921Travel and entertainment
    
    
    1,508
    
    
    
    1,142Amortization of core deposit intangibles
    
    
    1,041
    
    
    
    556Legal and accounting
    
    
    676
    
    
    
    535Merger and acquisition costs
    
    
    1,207
    
    
    
    0Insurance
    
    
    395
    
    
    
    283Goodwill litigation costs
    
    
    180
    
    
    
    85Other
    
    
    2,054
    
    
    
    2,098Total
    
    $
    65,669
    
    
    $
    44,240
  Income Tax Provision
 Financial Position
 Assets
 22




---



##### Table of Contents



Investment Securities and MBS
 Loans Receivable
  March 31, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Residential real estate
    
    $
    639,326
    
    
    
    7.5
    
    
    $
    654,661
    
    
    
    9.2Multifamily real estate
    
    
    248,590
    
    
    
    2.9
    
    
    
    263,053
    
    
    
    3.7Commercial real estate
    
    
    1,401,248
    
    
    
    16.5
    
    
    
    795,386
    
    
    
    11.2Construction
    
    
    2,515,392
    
    
    
    29.7
    
    
    
    2,290,882
    
    
    
    32.2Consumer  direct
    
    
    749,183
    
    
    
    8.8
    
    
    
    749,626
    
    
    
    10.5Consumer  indirect
    
    
    318,426
    
    
    
    3.8
    
    
    
    288,704
    
    
    
    4.1Commercial banking
    
    
    2,608,482
    
    
    
    30.8
    
    
    
    2,069,086
    
    
    
    29.1Gross loans receivable
    
    
    8,480,647
    
    
    
    100.0
    
    
    
    7,111,398
    
    
    
    100.0Net deferred origination fees
    
    
    (16,185
    )
    
    
    
    
    
    
    (12,308
    )Allowance for losses on loans
    
    
    (93,837
    )
    
    
    
    
    
    
    (77,849
    )Loans receivable, net
    
    $
    8,370,625
    
    
    
    
    
    
    $
    7,021,241
  Three Months EndedMarch 31,2007
    
    
    2006(Dollars in thousands)Residential real estate
    
    $
    344,617
    
    
    $
    71,097Commercial real estate
    
    
    11,210
    
    
    
    33,975Construction
    
    
    534,821
    
    
    
    563,592Consumer  direct
    
    
    63,568
    
    
    
    78,849Consumer  indirect
    
    
    64,913
    
    
    
    29,535Commercial banking
    
    
    259,203
    
    
    
    295,960Total loans originated
    
    $
    1,278,332
    
    
    $
    1,073,008
 23




---



##### Table of Contents



Deposits
 March 31, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Interest-bearing checking
    
    $
    524,492
    
    
    
    6.9
    
    
    $
    483,551
    
    
    
    7.2Noninterest-bearing checking
    
    
    896,506
    
    
    
    11.8
    
    
    
    834,140
    
    
    
    12.4Savings and MMDA
    
    
    2,045,493
    
    
    
    27.0
    
    
    
    1,830,313
    
    
    
    27.1Time deposits
    
    
    4,107,567
    
    
    
    54.3
    
    
    
    3,598,024
    
    
    
    53.3Total deposits
    
    $
    7,574,058
    
    
    
    100.0
    
    
    $
    6,746,028
    
    
    
    100.0
  Borrowings
 Asset and Liability Management
     24




---



##### Table of Contents



Change in
    
    March 31,
    
    December 31,Interest Rate in
    
    2007
    
    2006Basis Points
    
    % Change in
    
    % Change in(Rate Shock)
    
    NII
    
    NII+200
    
    
    (3.6
    )
    
    
    (1.5
    )+100
    
    
    (1.8
    )
    
    
    (0.8
    )Static
    
    
    0.0
    
    
    
    0.0-100
    
    
    0.9
    
    
    
    (0.4
    )-200
    
    
    1.2
    
    
    
    (1.6
    )
  At December 31,Change in
    
    At March 31, 2007
    
    2006Interest Rate
    
    %
    
    %in Basis Points
    
    Change
    
    Change(Rate Shock)
    
    in NPV
    
    in NPV+200
    
    
    (5.4
    )
    
    
    (5.0
    )+100
    
    
    (1.9
    )
    
    
    (1.5
    )Static
    
    
    0.0
    
    
    
    0.0-100
    
    
    (3.1
    )
    
    
    (4.6
    )-200
    
    
    (14.1
    )
    
    
    (17.9
    )
 25




---



##### Table of Contents



Net Interest Income
 Liquidity and Capital Resources
       26




---



##### Table of Contents



SterlingSterling
    
    Savings BankRating
    
    Sterling
    
    Short-Term
    
    Long-TermInstitution
    
    Long-Term Debt
    
    Debt
    
    Deposits
    
    OutlookFitch
    
    BBB-
    
    
    F3
    
    
    BBB
    
    Stable
 Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
     27




---



##### Table of Contents



Capital
     Minimum Capital
    
    Well-CapitalizedRequirements
    
    Requirements
    
    ActualAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Tier 1 leverage (to average assets)Sterling
    
    $
    396,508
    
    
    
    4.0
    %
    
    $
    495,635
    
    
    
    5.0
    %
    
    $
    910,611
    
    
    
    9.2
    %Sterling Savings Bank
    
    
    385,793
    
    
    
    4.0
    %
    
    
    482,241
    
    
    
    5.0
    %
    
    
    889,132
    
    
    
    9.2
    %Golf Savings Bank
    
    
    10,233
    
    
    
    4.0
    %
    
    
    12,792
    
    
    
    5.0
    %
    
    
    24,243
    
    
    
    9.5
    %Tier 1 (to risk-weighted assets)Sterling
    
    
    369,563
    
    
    
    4.0
    %
    
    
    554,345
    
    
    
    6.0
    %
    
    
    910,611
    
    
    
    9.9
    %Sterling Savings Bank
    
    
    362,403
    
    
    
    4.0
    %
    
    
    543,605
    
    
    
    6.0
    %
    
    
    889,132
    
    
    
    9.8
    %Golf Savings Bank
    
    
    7,914
    
    
    
    4.0
    %
    
    
    11,871
    
    
    
    6.0
    %
    
    
    24,243
    
    
    
    12.3
    %Total (to risk-weighted assets)Sterling
    
    
    739,127
    
    
    
    8.0
    %
    
    
    923,908
    
    
    
    10.0
    %
    
    
    1,010,494
    
    
    
    10.9
    %Sterling Savings Bank
    
    
    724,807
    
    
    
    8.0
    %
    
    
    906,009
    
    
    
    10.0
    %
    
    
    987,770
    
    
    
    10.9
    %Golf Savings Bank
    
    
    15,828
    
    
    
    8.0
    %
    
    
    19,785
    
    
    
    10.0
    %
    
    
    25,487
    
    
    
    12.9
    %
 Goodwill Litigation
   28




---



##### Table of Contents



New Accounting Policies
      Regulation and Compliance
  29




---



##### Table of Contents



Forward-Looking Statements
   
    
    inflation, interest rate levels and market and monetary fluctuations;
    
    trade, monetary and fiscal policies and laws, including interest rate policies of the federal government;
    
    applicable laws and regulations and legislative or regulatory changes;
    
    the timely development and acceptance of new products and services of Sterling;
    
    the willingness of customers to substitute competitors products and services for Sterlings products and services;
    
    Sterlings success in gaining regulatory approvals, when required;
    
    technological and management changes;
    
    growth and acquisition strategies;
    
    Sterlings critical accounting policies and the implementation of such policies;
    
    lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions;
    
    changes in consumer spending and saving habits;
    
    the strength of the United States economy in general and the strength of the local economies in which Sterling conducts
its operations; and
    
    Sterlings success at managing the risks involved in the foregoing.
 
 30




---



##### Table of Contents



Item 3 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4 Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  31




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 PART II  Other Information
 
 Item 1 Legal Proceedings
  
 Item 1a Risk Factors
  
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3 Defaults Upon Senior Securities
  32




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
PART II  Other Information
 
 Item 4 Submission of Matters to a Vote of Security Holders
  (1)
    
    The proposal to approve the Agreement and Plan of Merger dated September 17, 2006, by and
between Sterling and Northern Empire received the following votes:
 Percentage ofVotes
    
    For & AgainstFor
    
    
    33,241,798
    
    
    
    78.98
    %Against
    
    
    168,190
    
    
    
    0.40
    %Abstain
    
    
    88,621
    
    
    
    0.21
    %
 The foregoing proposal was approved.(2)
    
    The proposal to authorize Sterlings Board of Directors to adjourn or postpone the Special
Meeting received the following votes:
 Percentage ofVotes
    
    For & AgainstFor
    
    
    28,716,426
    
    
    
    68.23
    %Against
    
    
    4,584,856
    
    
    
    10.89
    %Abstain
    
    
    197,327
    
    
    
    0.47
    %
  
 Item 5 Other Information
  
 Item 6 Exhibits
  33




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Signatures
  STERLING FINANCIAL CORPORATION(Registrant)May 9,
2007

       Date
    
    
    
    By:
    
    /s/ Robert G. Butterfield

     Robert G. ButterfieldVice President, Controller, andPrincipal Accounting Officer
 
 34




---



##### Table of Contents



Exhibit No.
    
    Exhibit Index2.1
    
    Agreement and Plan of Merger by and between Sterling and North Valley Bancorp dated April 10,
2007, filed as Exhibit 2.1 to Sterling Current Report on Form 8-K dated April 11, 2007 and
incorporated by reference herein.3.1
    
    Restated Articles of Incorporation of Sterling. Filed as Exhibit 3.1 to Sterlings
registration statement on Form S-3 dated December 20, 2005, and incorporated by reference
herein.3.2
    
    Articles of Amendment of Restated Articles of Incorporation of Sterling. Filed as Exhibit
4.2 to Sterlings registration statement on Form S-3 dated December 20, 2005 and incorporated
by reference herein.3.3
    
    Amended and Restated Bylaws of Sterling. Filed as Exhibit 3.3 to Sterlings Registration
Statement on Form S-4 dated December 9, 2002, and incorporated by reference herein.4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.4.2
    
    Sterling has outstanding certain long-term debt. None of such debt exceeds ten percent of
Sterlings total assets; therefore, copies of the constituent instruments defining the rights
of the holders of such debt are not included as exhibits. Copies of instruments with respect
to such long-term debt will be furnished to the Securities and Exchange Commission upon
request.31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. Filed herewith.31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. Filed herewith.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
 
 E-1