##### 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 JUNE 30, 2008
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
 
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
  Class
    
    Outstanding as of August 1, 2008Common Stock ($1.00 par value)
    
    
    52,065,358




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##### 



STERLING FINANCIAL CORPORATION
 FORM 10-Q
For the Quarter Ended June 30, 2008
 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
    
    
    17Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4 Controls and Procedures
    
    
    34PART II  Other Information
    
    
    36Item 1 Legal Proceedings
    
    
    36Item 1a Risk Factors
    
    
    36Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3 Defaults Upon Senior Securities
    
    
    37Item 4 Submission of Matters to a Vote of Security Holders
    
    
    37Item 5 Other Information
    
    
    37Item 6 Exhibits
    
    
    37Signatures
    
    
    38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial Statements
 STERLING FINANCIAL CORPORATION
 
 Consolidated Balance Sheets
 (Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    100
    
    
    $
    10,042Non-interest bearing and vault
    
    
    180,641
    
    
    
    184,436Total cash and cash equivalents
    
    
    180,741
    
    
    
    194,478Restricted cash
    
    
    1,100
    
    
    
    1,100Investment securities and mortgage-backed securities (MBS):Available for sale
    
    
    2,023,306
    
    
    
    1,853,271Held to maturity
    
    
    180,185
    
    
    
    132,793Loans receivable, net
    
    
    9,219,919
    
    
    
    8,948,307Loans held for sale ($73,859 at fair value as of June 30, 2008)
    
    
    82,413
    
    
    
    55,840Accrued interest receivable
    
    
    56,322
    
    
    
    63,649Real estate owned and other collateralized assets, net
    
    
    22,998
    
    
    
    11,075Office properties and equipment, net
    
    
    90,750
    
    
    
    93,467Bank-owned life insurance (BOLI)
    
    
    154,714
    
    
    
    150,825Goodwill
    
    
    451,323
    
    
    
    453,136Other intangible assets
    
    
    29,175
    
    
    
    31,627Mortgage servicing rights, net
    
    
    7,559
    
    
    
    9,042Prepaid expenses and other assets, net
    
    
    199,205
    
    
    
    151,165Total assets
    
    $
    12,699,710
    
    
    $
    12,149,775LIABILITIES:Deposits
    
    $
    7,987,831
    
    
    $
    7,677,772Advances from Federal Home Loan Bank (FHLB)
    
    
    1,881,973
    
    
    
    1,687,989Securities sold subject to repurchase agreements and funds purchased
    
    
    1,245,569
    
    
    
    1,178,845Other borrowings
    
    
    248,274
    
    
    
    273,015Cashiers checks issued and payable
    
    
    8,504
    
    
    
    764Borrowers reserves for taxes and insurance
    
    
    2,969
    
    
    
    1,765Accrued interest payable
    
    
    37,190
    
    
    
    40,209Accrued expenses and other liabilities
    
    
    109,216
    
    
    
    104,086Total liabilities
    
    
    11,521,526
    
    
    
    10,964,445SHAREHOLDERS EQUITY:Preferred stock, $1 par value; 10,000,000 shares authorized;
no shares issued and outstanding
    
    
    0
    
    
    
    0Common stock, $1 par value; 100,000,000 shares authorized;
52,008,761 and 51,456,461 shares issued and outstanding
    
    
    52,009
    
    
    
    51,456Additional paid-in capital
    
    
    896,469
    
    
    
    892,028Accumulated other comprehensive loss:Unrealized losses on investment securities and MBS available-for-sale,
net of deferred income taxes of $18,892 and $10,518
    
    
    (32,215
    )
    
    
    (17,967
    )Retained earnings
    
    
    261,921
    
    
    
    259,813Total shareholders equity
    
    
    1,178,184
    
    
    
    1,185,330Total liabilities and shareholders equity
    
    $
    12,699,710
    
    
    $
    12,149,775
  1




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    152,271
    
    
    $
    172,825
    
    
    $
    314,391
    
    
    $
    325,588MBS
    
    
    25,586
    
    
    
    19,356
    
    
    
    50,085
    
    
    
    39,824Investments and cash equivalents
    
    
    2,785
    
    
    
    1,880
    
    
    
    5,149
    
    
    
    3,551Total interest income
    
    
    180,642
    
    
    
    194,061
    
    
    
    369,625
    
    
    
    368,963Interest expense:Deposits
    
    
    57,438
    
    
    
    70,666
    
    
    
    120,308
    
    
    
    134,386Short-term borrowings
    
    
    9,408
    
    
    
    9,730
    
    
    
    12,839
    
    
    
    19,405Long-term borrowings
    
    
    19,677
    
    
    
    24,625
    
    
    
    50,272
    
    
    
    45,516Total interest expense
    
    
    86,523
    
    
    
    105,021
    
    
    
    183,419
    
    
    
    199,307Net interest income
    
    
    94,119
    
    
    
    89,040
    
    
    
    186,206
    
    
    
    169,656Provision for losses on loans
    
    
    (30,987
    )
    
    
    (3,975
    )
    
    
    (68,130
    )
    
    
    (8,200
    )Net interest income after provision for credit losses
    
    
    63,132
    
    
    
    85,065
    
    
    
    118,076
    
    
    
    161,456Non-interest income:Fees and service charges
    
    
    16,012
    
    
    
    13,694
    
    
    
    30,163
    
    
    
    25,886Mortgage banking operations
    
    
    8,227
    
    
    
    9,807
    
    
    
    14,425
    
    
    
    18,665Loan servicing fees
    
    
    697
    
    
    
    410
    
    
    
    549
    
    
    
    1,093Real estate owned and other collateralized assets
operations
    
    
    (238
    )
    
    
    (93
    )
    
    
    (344
    )
    
    
    (138
    )BOLI
    
    
    1,747
    
    
    
    1,717
    
    
    
    3,213
    
    
    
    3,264Other
    
    
    (947
    )
    
    
    (757
    )
    
    
    (1,346
    )
    
    
    (544
    )Total non-interest income
    
    
    25,498
    
    
    
    24,778
    
    
    
    46,660
    
    
    
    48,226Non-interest expenses
    
    
    72,447
    
    
    
    69,891
    
    
    
    144,554
    
    
    
    135,560Income before income taxes
    
    
    16,183
    
    
    
    39,952
    
    
    
    20,182
    
    
    
    74,122Income tax provision
    
    
    (4,508
    )
    
    
    (12,971
    )
    
    
    (5,631
    )
    
    
    (24,220
    )Net income
    
    $
    11,675
    
    
    $
    26,981
    
    
    $
    14,551
    
    
    $
    49,902Earnings per share  basic
    
    $
    0.23
    
    
    $
    0.53
    
    
    $
    0.28
    
    
    $
    1.03Earnings per share  diluted
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.28
    
    
    $
    1.02Weighted average shares outstanding  basic
    
    
    51,687,600
    
    
    
    51,189,438
    
    
    
    51,606,966
    
    
    
    48,230,619Weighted average shares outstanding  diluted
    
    
    51,883,549
    
    
    
    51,699,098
    
    
    
    51,837,108
    
    
    
    48,776,780
  2




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    14,551
    
    
    $
    49,902Adjustments to reconcile net income to net cash provided by operating activities:Provision for credit losses
    
    
    68,130
    
    
    
    8,200Accretion of deferred gain on sale of branches
    
    
    (404
    )
    
    
    (352
    )Net gain on sales of loans, investment securities and MBS
    
    
    (10,370
    )
    
    
    (11,460
    )Stock based compensation
    
    
    1,260
    
    
    
    627Excess tax benefit from stock based compensation
    
    
    (830
    )
    
    
    (1,336
    )Stock issuances relating to 401(k) match
    
    
    1,601
    
    
    
    1,172Other gains and losses
    
    
    1,844
    
    
    
    1,504Increase in cash surrender value of BOLI
    
    
    (3,213
    )
    
    
    (3,264
    )Depreciation and amortization
    
    
    13,116
    
    
    
    12,135Change in:Accrued interest receivable
    
    
    7,327
    
    
    
    2,123Prepaid expenses and other assets
    
    
    (36,870
    )
    
    
    (6,957
    )Cashiers checks issued and payable
    
    
    7,740
    
    
    
    (18,564
    )Accrued interest payable
    
    
    (3,019
    )
    
    
    (2,221
    )Accrued expenses and other liabilities
    
    
    3,165
    
    
    
    (4,580
    )Proceeds from sales of loans originated for sale
    
    
    598,665
    
    
    
    676,063Loans originated for sale
    
    
    (588,218
    )
    
    
    (667,682
    )Net cash provided by operating activities
    
    
    74,475
    
    
    
    35,310Cash flows from investing activities:Change in restricted cash
    
    
    0
    
    
    
    25Loans funded and purchased
    
    
    (2,243,517
    )
    
    
    (2,376,666
    )Loan principal received
    
    
    1,861,961
    
    
    
    2,026,361Proceeds from sales of other loans
    
    
    (77
    )
    
    
    97,114Purchase of investment securities
    
    
    (26,655
    )
    
    
    (47,195
    )Proceeds from maturities of investment securities
    
    
    10,934
    
    
    
    23,379Proceeds from sale of investments
    
    
    0
    
    
    
    5,609Net cash and cash equivalents acquired
    
    
    0
    
    
    
    92,419Purchase of BOLI
    
    
    (686
    )
    
    
    0Purchase of MBS
    
    
    (384,349
    )
    
    
    0Principal payments on MBS
    
    
    155,707
    
    
    
    125,963Purchase of office properties and equipment
    
    
    (4,536
    )
    
    
    (7,202
    )Sales of office properties and equipment
    
    
    300
    
    
    
    2,792Improvements and other changes to real estate owned
    
    
    (661
    )
    
    
    (9
    )Proceeds from sales and liquidation of real estate owned
    
    
    3,028
    
    
    
    106Net cash provided by (used in) investing activities
    
    
    (628,551
    )
    
    
    (57,304
    )
  3




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##### Table of Contents



STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007(Dollars in thousands)Cash flows from financing activities:Net change in transaction and savings deposits
    
    $
    (31,044
    )
    
    $
    151,234Proceeds from issuance of time deposits
    
    
    2,487,222
    
    
    
    1,547,770Payments for maturing time deposits
    
    
    (2,263,734
    )
    
    
    (1,939,136
    )Interest credited to deposits
    
    
    117,615
    
    
    
    119,812Advances from FHLB
    
    
    779,750
    
    
    
    1,232,744Repayment of advances from FHLB
    
    
    (585,457
    )
    
    
    (1,213,095
    )Net change in securities sold subject to repurchase agreements
and funds purchased
    
    
    66,724
    
    
    
    128,549Net proceeds from other borrowings
    
    
    0
    
    
    
    23,000Repayment of other borrowings
    
    
    (24,000
    )
    
    
    (13,403
    )Proceeds from exercise of stock options
    
    
    1,303
    
    
    
    3,070Excess tax benefit from stock based compensation
    
    
    830
    
    
    
    1,336Cash dividends paid to shareholders
    
    
    (10,074
    )
    
    
    (7,246
    )Other
    
    
    1,204
    
    
    
    70Net cash provided by (used in) financing activities
    
    
    540,339
    
    
    
    34,705Net change in cash and cash equivalents
    
    
    (13,737
    )
    
    
    12,711Cash and cash equivalents, beginning of period
    
    
    194,478
    
    
    
    178,565Cash and cash equivalents, end of period
    
    $
    180,741
    
    
    $
    191,276Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    186,438
    
    
    $
    199,555Income taxes
    
    
    12,784
    
    
    
    28,427Noncash financing and investing activities:Loans converted into real estate owned and other
collateralized assets
    
    
    14,290
    
    
    
    57Common stock issued upon business combination
    
    
    0
    
    
    
    302,754Common stock cash dividends accrued
    
    
    5,188
    
    
    
    4,374Deferred gain on sale of branches
    
    
    0
    
    
    
    804
  4




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Net income
    
    $
    11,675
    
    
    $
    26,981
    
    
    $
    14,551
    
    
    $
    49,902Other comprehensive income:Change in unrealized losses on investment
securities and MBS available-for-sale
    
    
    (34,325
    )
    
    
    (25,686
    )
    
    
    (22,622
    )
    
    
    (18,461
    )Less deferred income taxes
    
    
    12,701
    
    
    
    9,507
    
    
    
    8,374
    
    
    
    6,837Net other comprehensive income
    
    
    (21,624
    )
    
    
    (16,179
    )
    
    
    (14,248
    )
    
    
    (11,624
    )Comprehensive income
    
    $
    (9,949
    )
    
    $
    10,802
    
    
    $
    303
    
    
    $
    38,278
  5




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##### Table of Contents



Notes to Consolidated Financial Statements
 1. Basis of Presentation :
        6




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##### Table of Contents



2. Allowance for Credit Losses:
  Six Months Ended June 30,2008
    
    
    2007Allowance for credit lossesAllowance  loans, January 1
    
    $
    111,026
    
    
    $
    77,849Allowance for losses on loans acquired
    
    
    0
    
    
    
    15,029Provision
    
    
    68,131
    
    
    
    8,200Amounts written off
    
    
    (17,466
    )
    
    
    (1,984
    )Recoveries
    
    
    639
    
    
    
    481Transfers
    
    
    38
    
    
    
    59Allowance  loans, June 30
    
    
    162,368
    
    
    
    99,634Allowance  unfunded commitments, January 1
    
    
    6,306
    
    
    
    5,840Acquired
    
    
    0
    
    
    
    266Provision
    
    
    53
    
    
    
    0Transfers
    
    
    (38
    )
    
    
    (59
    )Allowance  unfunded commitments, June 30
    
    
    6,321
    
    
    
    6,047Total credit allowance
    
    $
    168,689
    
    
    $
    105,681
  3. Other Borrowings :
  June 30,
    
    
    December 31,2008
    
    
    2007Junior subordinated debentures
    
    $
    245,274
    
    
    $
    270,015Other
    
    
    3,000
    
    
    
    3,000Total other borrowings
    
    $
    248,274
    
    
    $
    273,015
  7




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##### Table of Contents



Maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amount (inSubsidiary Issuer
    
    Issue Date
    
    
    Date
    
    
    Call Date
    
    
    Rate at June 30, 2008
    
    
    Thousands)Sterling Capital Trust IX
    
    July 2007
    
    Oct 2037
    
    
    N/A
    
    
    Floating
    
    
    4.10
    %
    
    $
    46,392Sterling Capital Trust VIII
    
    Sept 2006
    
    Sept 2036
    
    
    N/A
    
    
    Floating
    
    
    4.41
    
    
    
    51,547Sterling Capital Trust VII
    
    June 2006
    
    June 2036
    
    
    N/A
    
    
    Floating
    
    
    4.30
    
    
    
    56,702Lynnwood Capital Trust II
    
    June 2005
    
    June 2035
    
    June 2010
    
    Floating
    
    
    4.58
    
    
    
    10,310Sterling Capital Trust VI
    
    June 2003
    
    Sept 2033
    
    Sept 2008
    
    Floating
    
    
    5.98
    
    
    
    10,310Sterling Capital Statutory Trust V
    
    May 2003
    
    May 2033
    
    June 2008
    
    Floating
    
    
    6.06
    
    
    
    20,619Sterling Capital Trust IV
    
    May 2003
    
    May 2033
    
    May 2008
    
    Floating
    
    
    5.83
    
    
    
    10,310Sterling Capital Trust III
    
    April 2003
    
    April 2033
    
    April 2008
    
    Floating
    
    
    6.12
    
    
    
    14,433Lynnwood Capital Trust I
    
    Mar 2003
    
    Mar 2033
    
    Mar 2007
    
    Floating
    
    
    5.96
    
    
    
    9,472Klamath First Capital Trust I
    
    July 2001
    
    July 2031
    
    June 2006
    
    Floating
    
    
    6.94
    
    
    
    15,1794.91
    %*
    
    $
    245,274
 
 *
    
    Weighted average rate  8




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##### Table of Contents



4. Earnings Per Share :
  Three Months Ended June 30,2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    11,675
    
    
    
    51,687,600
    
    
    $
    0.23
    
    
    $
    26,981
    
    
    
    51,189,438
    
    
    $
    0.53Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    195,949
    
    
    
    0.00
    
    
    
    0
    
    
    
    509,660
    
    
    
    (0.01
    )Diluted computations
    
    $
    11,675
    
    
    
    51,883,549
    
    
    $
    0.23
    
    
    $
    26,981
    
    
    
    51,699,098
    
    
    $
    0.52Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    1,719,222
    
    
    
    
    
    
    
    
    
    
    
    307,945
 Six Months Ended June 30,2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    14,551
    
    
    
    51,606,966
    
    
    $
    0.28
    
    
    $
    49,902
    
    
    
    48,230,619
    
    
    $
    1.03Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    230,142
    
    
    
    0.00
    
    
    
    0
    
    
    
    546,161
    
    
    
    (0.01
    )Diluted computations
    
    $
    14,551
    
    
    
    51,837,108
    
    
    $
    0.28
    
    
    $
    49,902
    
    
    
    48,776,780
    
    
    $
    1.02Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    1,697,470
    
    
    
    
    
    
    
    
    
    
    
    254,613
 9




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##### Table of Contents



5. Non-Interest Expenses :
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Employee compensation and benefits
    
    $
    41,133
    
    
    $
    39,163
    
    
    $
    82,023
    
    
    $
    77,234Occupancy and equipment
    
    
    10,693
    
    
    
    11,681
    
    
    
    22,225
    
    
    
    22,148Data processing
    
    
    5,168
    
    
    
    4,176
    
    
    
    10,487
    
    
    
    8,373Depreciation
    
    
    3,507
    
    
    
    3,341
    
    
    
    7,071
    
    
    
    6,536Advertising
    
    
    3,019
    
    
    
    3,279
    
    
    
    5,817
    
    
    
    5,956Insurance
    
    
    1,926
    
    
    
    513
    
    
    
    3,638
    
    
    
    908Travel and entertainment
    
    
    1,781
    
    
    
    2,133
    
    
    
    3,446
    
    
    
    3,641Amortization of core deposit intangibles
    
    
    1,226
    
    
    
    1,226
    
    
    
    2,452
    
    
    
    2,267Legal and accounting
    
    
    723
    
    
    
    547
    
    
    
    1,536
    
    
    
    1,223Goodwill litigation costs
    
    
    105
    
    
    
    1,132
    
    
    
    255
    
    
    
    1,312Merger and acquisition costs
    
    
    157
    
    
    
    413
    
    
    
    182
    
    
    
    844Other
    
    
    3,009
    
    
    
    2,287
    
    
    
    5,422
    
    
    
    5,118Total
    
    $
    72,447
    
    
    $
    69,891
    
    
    $
    144,554
    
    
    $
    135,560
 6. Segment Information :
  
    
    The Community Banking segment provides traditional bank services through the retail and
commercial banking groups of Sterlings subsidiary, Sterling Savings Bank.
 
    
    The Residential Construction Lending segment originates and services loans through the real
estate division of 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 Sterlings subsidiary,
Golf Savings Bank.
 
    
    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 Other and Eliminations segment represents the parent company expenses and intercompany
eliminations of revenue and expenses.
  10




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As of and for the Three Months Ended June 30, 2008Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    139,452
    
    
    $
    28,084
    
    
    $
    8,023
    
    
    $
    4,890
    
    
    $
    193
    
    
    $
    180,642Interest expense
    
    
    (63,474
    )
    
    
    (15,586
    )
    
    
    (4,559
    )
    
    
    0
    
    
    
    (2,904
    )
    
    
    (86,523
    )Net interest income (expense)
    
    
    75,978
    
    
    
    12,498
    
    
    
    3,464
    
    
    
    4,890
    
    
    
    (2,711
    )
    
    
    94,119Provision for loan losses
    
    
    (15,709
    )
    
    
    (13,641
    )
    
    
    (1,637
    )
    
    
    0
    
    
    
    0
    
    
    
    (30,987
    )Noninterest income
    
    
    18,625
    
    
    
    1,173
    
    
    
    7,155
    
    
    
    905
    
    
    
    (2,360
    )
    
    
    25,498Noninterest expense
    
    
    (59,160
    )
    
    
    (2,965
    )
    
    
    (6,817
    )
    
    
    (2,395
    )
    
    
    (1,110
    )
    
    
    (72,447
    )Income before income taxes
    
    $
    19,734
    
    
    $
    (2,935
    )
    
    $
    2,165
    
    
    $
    3,400
    
    
    $
    (6,181
    )
    
    $
    16,183Total assets
    
    $
    10,475,295
    
    
    $
    1,759,429
    
    
    $
    500,402
    
    
    $
    10,044
    
    
    
    (45,460
    )
    
    $
    12,699,710
 As of and for the Three Months Ended June 30, 2007Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    141,225
    
    
    $
    45,179
    
    
    $
    5,448
    
    
    $
    2,044
    
    
    $
    165
    
    
    $
    194,061Interest expense
    
    
    (71,983
    )
    
    
    (24,967
    )
    
    
    (3,377
    )
    
    
    0
    
    
    
    (4,694
    )
    
    
    (105,021
    )Net interest income (expense)
    
    
    69,242
    
    
    
    20,212
    
    
    
    2,071
    
    
    
    2,044
    
    
    
    (4,529
    )
    
    
    89,040Provision for loan losses
    
    
    2,226
    
    
    
    (6,126
    )
    
    
    (75
    )
    
    
    0
    
    
    
    0
    
    
    
    (3,975
    )Noninterest income
    
    
    20,977
    
    
    
    2,013
    
    
    
    5,613
    
    
    
    1,967
    
    
    
    (5,792
    )
    
    
    24,778Noninterest expense
    
    
    (56,261
    )
    
    
    (2,206
    )
    
    
    (7,841
    )
    
    
    (2,417
    )
    
    
    (1,166
    )
    
    
    (69,891
    )Income before income taxes
    
    $
    36,184
    
    
    $
    13,893
    
    
    $
    (232
    )
    
    $
    1,594
    
    
    $
    (11,487
    )
    
    $
    39,952Total assets
    
    $
    9,582,395
    
    
    $
    1,615,945
    
    
    $
    346,601
    
    
    $
    8,984
    
    
    $
    (90,278
    )
    
    $
    11,463,647
 11




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As of and for the Six Months Ended June 30, 2008Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    284,102
    
    
    $
    61,102
    
    
    $
    16,170
    
    
    $
    7,924
    
    
    $
    327
    
    
    $
    369,625Interest expense
    
    
    (132,410
    )
    
    
    (34,747
    )
    
    
    (9,360
    )
    
    
    0
    
    
    
    (6,902
    )
    
    
    (183,419
    )Net interest
income (expense)
    
    
    151,692
    
    
    
    26,355
    
    
    
    6,810
    
    
    
    7,924
    
    
    
    (6,575
    )
    
    
    186,206Provision for loan
losses
    
    
    (28,794
    )
    
    
    (37,256
    )
    
    
    (2,080
    )
    
    
    0
    
    
    
    0
    
    
    
    (68,130
    )Noninterest income
    
    
    33,999
    
    
    
    2,158
    
    
    
    12,120
    
    
    
    1,923
    
    
    
    (3,540
    )
    
    
    46,660Noninterest expense
    
    
    (118,253
    )
    
    
    (5,902
    )
    
    
    (13,264
    )
    
    
    (4,830
    )
    
    
    (2,305
    )
    
    
    (144,554
    )Income before
income taxes
    
    $
    38,644
    
    
    $
    (14,645
    )
    
    $
    3,586
    
    
    $
    5,017
    
    
    $
    (12,420
    )
    
    $
    20,182Total assets
    
    $
    10,475,295
    
    
    $
    1,759,429
    
    
    $
    500,402
    
    
    $
    $10,044
    
    
    
    (45,460
    )
    
    $
    12,699,710
 As of and for the Six Months Ended June 30, 2007Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    268,378
    
    
    $
    86,346
    
    
    $
    9,990
    
    
    $
    4,235
    
    
    $
    14
    
    
    $
    368,963Interest expense
    
    
    (135,926
    )
    
    
    (48,275
    )
    
    
    (6,251
    )
    
    
    0
    
    
    
    (8,855
    )
    
    
    (199,307
    )Net interest income
(expense)
    
    
    132,452
    
    
    
    38,071
    
    
    
    3,739
    
    
    
    4,235
    
    
    
    (8,841
    )
    
    
    169,656Provision for loan losses
    
    
    (1,746
    )
    
    
    (6,304
    )
    
    
    (150
    )
    
    
    0
    
    
    
    0
    
    
    
    (8,200
    )Noninterest income
    
    
    39,833
    
    
    
    3,751
    
    
    
    11,133
    
    
    
    4,174
    
    
    
    (10,665
    )
    
    
    48,226Noninterest expense
    
    
    (108,030
    )
    
    
    (4,698
    )
    
    
    (15,627
    )
    
    
    (5,329
    )
    
    
    (1,876
    )
    
    
    (135,560
    )Income before income
taxes
    
    $
    62,509
    
    
    $
    30,820
    
    
    $
    (905
    )
    
    $
    3,080
    
    
    $
    (21,382
    )
    
    $
    74,122Total assets
    
    $
    9,582,395
    
    
    $
    1,615,945
    
    
    $
    346,601
    
    
    $
    8,984
    
    
    $
    (90,278
    )
    
    $
    11,463,647
 12




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##### Table of Contents



7. Stock Based Compensation :
  Stock Options
    
    
    Restricted StockWeightedAverage
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    
    AverageNumber
    
    
    Price
    
    
    Number
    
    
    Grant PriceBalance, January 1, 2008
    
    
    2,067,401
    
    
    $
    21.13
    
    
    
    85,000
    
    
    $
    33.17Granted
    
    
    251,000
    
    
    
    17.79
    
    
    
    182,000
    
    
    
    17.79Exercised / vested
    
    
    (224,973
    )
    
    
    5.79
    
    
    
    (21,250
    )
    
    
    33.17Cancelled / expired
    
    
    (72,736
    )
    
    
    22.45
    
    
    
    0
    
    
    
    0.00Outstanding, June 30, 2008
    
    
    2,020,692
    
    
    $
    22.40
    
    
    
    245,750
    
    
    $
    21.78Exercisable, June 30, 2008
    
    
    1,525,942
    
    
    $
    21.52
  Six Months EndedJune 30,2008
    
    2007Expected volatility
    
    
    30
    %
    
    
    28% - 29
    %Expected term (in years)
    
    
    4.3
    
    
    
    4.7 - 6.0Expected dividend yield
    
    
    2.14
    %
    
    
    0.90% - 1.10
    %Risk free interest rate
    
    
    2.93
    %
    
    
    4.65% - 4.81
    %
  Six Months EndedJune 30,2008
    
    
    2007(Dollars in thousands)Stock based compensation expense:Stock options
    
    $
    570
    
    
    $
    334Restricted stock
    
    
    690
    
    
    
    293Total
    
    $
    1,260
    
    
    $
    627
  13




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##### Table of Contents



8. Derivatives and Hedging :
    9. Fair Value:
   
    
    Level 1 inputs are a select class of observable inputs, based upon the quoted prices for
identical instruments in active markets that are accessible as of the measurement date, and
are to be used whenever available.
    
    Level 2 inputs are other types of observable inputs, such as quoted prices for similar
instruments in active markets; quoted prices for identical or similar instruments in markets
that are inactive; or other inputs that are observable or can be derived from or supported by
observable market data. Level 2 inputs are to be used whenever Level 1 inputs are not
available.
    
    Level 3 inputs are significantly unobservable, reflecting the reporting entitys own
assumptions regarding what market participants would assume when pricing a financial
instrument. Level 3 inputs are to only be used when Level 1 and Level 2 inputs are
unavailable.
  14




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##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Recurring Basis.
 June 30, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Dollars in thousands)Investment securities and
mortgage-backed
securities available for sale
    
    $
    2,023,306
    
    
    $
    0
    
    
    $
    2,023,306
    
    
    $
    0Loans held for sale
    
    
    73,859
    
    
    
    0
    
    
    
    73,859
    
    
    
    0Other assets  derivatives
    
    
    3,069
    
    
    
    0
    
    
    
    819
    
    
    
    2,250Total assets
    
    $
    2,100,234
    
    
    $
    0
    
    
    $
    2,097,984
    
    
    $
    2,250Other liabilities  derivatives
    
    $
    2,312
    
    
    $
    0
    
    
    $
    62
    
    
    $
    2,250
  Six Months EndedJune 30, 2008(Dollars in thousands)Mortgage banking operations
    
    $
    1,010
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis.
 Losses Duringthe Six MonthsTotal Carrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ended June 30,Value
    
    Level 1
    
    Level 2
    
    Level 3
    
    2008(Dollars in thousands)Loans
    
    $
    74,141
    
    
    $
    0
    
    
    $
    74,141
    
    
    $
    0
    
    
    $
    (36,763
    )Mortgage servicing rights
    
    
    3,558
    
    
    
    0
    
    
    
    3,558
    
    
    
    0
    
    
    
    (503
    )Real estate owned
    
    
    12,898
    
    
    
    0
    
    
    
    12,898
    
    
    
    0
    
    
    
    (4,047
    )
  15




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##### Table of Contents



10. Cash Dividends :
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands, except per share amounts)Total amount
    
    $
    5,186
    
    
    $
    4,093
    
    
    $
    10,075
    
    
    $
    7,251Per share amount
    
    
    0.100
    
    
    
    0.080
    
    
    
    0.195
    
    
    
    0.155Payout ratio
    
    
    45
    %
    
    
    15
    %
    
    
    69
    %
    
    
    15
    %
  11. Goodwill Lawsuit :
  16




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##### Table of Contents



PART I  Financial Information (continued )
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 STERLING FINANCIAL CORPORATION
June 30, 2008
 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 2007 annual report on Form 10-K.
 General
    17




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##### Table of Contents



Executive Summary and Highlights
   
    
    Capital ratios remain above well-capitalized levels.
    
    Net interest income rose 6% to $94.1 million.
    
    Fees and service charge income grew 17% to $16.0 million.
    
    Total deposits gained 5% to a record $7.99 billion.
    
    Quarterly cash dividend was maintained at $0.10 per share.
    
    Tangible book value per share increased 9% to $13.41.
 Company Growth
    18




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##### Table of Contents



Critical Accounting Policies
  Income Recognition .
 Allowance for Credit Losses.
    19




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##### Table of Contents



Investment Securities and MBS .
    Goodwill and Other Intangible Assets .
   Real Estate Owned and Other Collateralized Assets.
  20




---



##### Table of Contents



Loans Held for Sale.
 Income Taxes.
  Results of Operations
 Overview .
 Net Interest Income .
  21




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##### Table of Contents




    
    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 June 30,
    
    
    Six Months Ended June 30,2008 vs. 2007
    
    
    2008 vs. 2007Increase (Decrease) Due to:
    
    
    Increase (Decrease) Due to:Rate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Volume
    
    
    Rate
    
    
    Volume
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    TotalRate/volume analysis:
    
    (Dollars in thousands)Interest income:Loans
    
    $
    15,572
    
    
    $
    (32,631
    )
    
    $
    (3,489
    )
    
    $
    (20,548
    )
    
    $
    47,379
    
    
    $
    (51,886
    )
    
    $
    (6,660
    )
    
    $
    (11,167
    )MBS
    
    
    5,069
    
    
    
    961
    
    
    
    200
    
    
    
    6,230
    
    
    
    8,178
    
    
    
    1,637
    
    
    
    446
    
    
    
    10,261Investments and cash
equivalents
    
    
    882
    
    
    
    250
    
    
    
    83
    
    
    
    1,215
    
    
    
    1,293
    
    
    
    699
    
    
    
    206
    
    
    
    2,198Total interest income
    
    
    21,523
    
    
    
    (31,420
    )
    
    
    (3,206
    )
    
    
    (13,103
    )
    
    
    56,850
    
    
    
    (49,550
    )
    
    
    (6,008
    )
    
    
    1,292Interest expense:Deposits
    
    
    6,071
    
    
    
    (17,702
    )
    
    
    (1,597
    )
    
    
    (13,228
    )
    
    
    14,123
    
    
    
    (25,874
    )
    
    
    (2,327
    )
    
    
    (14,078
    )Borrowings
    
    
    9,804
    
    
    
    (11,647
    )
    
    
    (3,427
    )
    
    
    (5,270
    )
    
    
    22,765
    
    
    
    (18,341
    )
    
    
    (6,234
    )
    
    
    (1,810
    )Total interest expense
    
    
    15,875
    
    
    
    (29,349
    )
    
    
    (5,024
    )
    
    
    (18,498
    )
    
    
    36,888
    
    
    
    (44,215
    )
    
    
    (8,561
    )
    
    
    (15,888
    )Changes in net interest income
    
    $
    5,648
    
    
    $
    (2,071
    )
    
    $
    1,818
    
    
    $
    5,395
    
    
    $
    19,962
    
    
    $
    (5,335
    )
    
    $
    2,553
    
    
    $
    17,180
  Tax EquivalentThree Months Ended
    
    Net Interest MarginJune 30, 2008
    
    
    3.23
    %March 31, 2008
    
    
    3.24
    %December 31, 2007
    
    
    3.34
    %September 30, 2007
    
    
    3.50
    %June 30, 2007
    
    
    3.41
    %
  Provision for Credit Losses.
  22




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Six Months Ended June 30,2008
    
    
    2007(Dollars in thousands)Allowance  loans, January 1
    
    $
    111,026
    
    
    $
    77,849Acquired
    
    
    0
    
    
    
    15,029Provision
    
    
    68,131
    
    
    
    8,200Charge offs, net of recoveries
    
    
    (16,827
    )
    
    
    (1,503
    )Transfers
    
    
    38
    
    
    
    59Allowance  loans, June 30
    
    
    162,368
    
    
    
    99,634Allowance  unfunded commitments, January 1
    
    
    6,306
    
    
    
    5,840Acquired
    
    
    0
    
    
    
    266Provision
    
    
    53
    
    
    
    0Transfers
    
    
    (38
    )
    
    
    (59
    )Allowance  unfunded commitments, June 30
    
    
    6,321
    
    
    
    6,047Total credit allowance
    
    $
    168,689
    
    
    $
    105,681
    June 30,2008
    
    
    2007(Dollars in thousands)Past due 90 days
    
    $
    0
    
    
    $
    803Nonaccrual loans
    
    
    280,260
    
    
    
    28,565Restructured loans
    
    
    149
    
    
    
    0Total nonperforming loans
    
    
    280,409
    
    
    
    29,368Real estate owned
    
    
    22,998
    
    
    
    4,012Total nonperforming assets
    
    
    303,407
    
    
    
    33,380Specific reserves
    
    
    (40,597
    )
    
    
    (2,947
    )Net nonperforming assets
    
    $
    262,810
    
    
    $
    30,433
 23




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##### Table of Contents



June 30,2008
    
    
    2007(Dollars in thousands)Residential real estate
    
    $
    10,121
    
    
    $
    1,358Multifamily real estate
    
    
    2,197
    
    
    
    8,765Commercial real estate
    
    
    4,838
    
    
    
    6,152Construction
    
    
    253,170
    
    
    
    9,401Consumer  direct
    
    
    3,053
    
    
    
    1,454Consumer  indirect
    
    
    956
    
    
    
    258Commercial banking
    
    
    29,072
    
    
    
    5,992Total nonperforming assets
    
    $
    303,407
    
    
    $
    33,380
  June 30, 2008
    
    
    March 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Residential constructionPortland, OR
    
    $
    46,101
    
    
    
    15
    %
    
    $
    7,567
    
    
    
    3
    %
    
    $
    501
    
    
    
    0
    %Southern California
    
    
    40,085
    
    
    
    13
    %
    
    
    28,032
    
    
    
    13
    %
    
    
    23,614
    
    
    
    17
    %Utah
    
    
    36,179
    
    
    
    12
    %
    
    
    15,372
    
    
    
    7
    %
    
    
    3,603
    
    
    
    3
    %Boise, ID
    
    
    34,939
    
    
    
    12
    %
    
    
    37,338
    
    
    
    17
    %
    
    
    32,728
    
    
    
    24
    %Puget Sound
    
    
    30,986
    
    
    
    10
    %
    
    
    23,356
    
    
    
    10
    %
    
    
    12,442
    
    
    
    9
    %Vancouver, WA
    
    
    19,854
    
    
    
    7
    %
    
    
    19,943
    
    
    
    9
    %
    
    
    2,103
    
    
    
    2
    %Bend, OR
    
    
    19,695
    
    
    
    6
    %
    
    
    20,927
    
    
    
    9
    %
    
    
    18,500
    
    
    
    15
    %Other
    
    
    13,061
    
    
    
    4
    %
    
    
    15,985
    
    
    
    8
    %
    
    
    7,309
    
    
    
    5
    %Total residential construction
    
    
    240,900
    
    
    
    79
    %
    
    
    168,520
    
    
    
    76
    %
    
    
    100,800
    
    
    
    75
    %Other loan categories
    
    
    62,507
    
    
    
    21
    %
    
    
    54,564
    
    
    
    24
    %
    
    
    34,415
    
    
    
    25
    %Total gross nonperforming
assets
    
    
    303,407
    
    
    
    100
    %
    
    
    223,084
    
    
    
    100
    %
    
    
    135,215
    
    
    
    100
    %Specific reserves
    
    
    (40,597
    )
    
    
    
    
    
    
    (19,084
    )
    
    
    
    
    
    
    (8,678
    )Total net nonperforming assets
    
    $
    262,810
    
    
    
    
    
    
    $
    204,000
    
    
    
    
    
    
    $
    126,537
  24




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##### Table of Contents



Non-Interest Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Fees and service charges
    
    $
    16,012
    
    
    $
    13,694
    
    
    $
    30,163
    
    
    $
    25,886Mortgage banking operations
    
    
    8,227
    
    
    
    9,807
    
    
    
    14,425
    
    
    
    18,665Bank-owned life insurance
    
    
    1,747
    
    
    
    1,717
    
    
    
    3,213
    
    
    
    3,264Loan servicing fees
    
    
    697
    
    
    
    410
    
    
    
    549
    
    
    
    1,093Real estate owned operations
    
    
    (238
    )
    
    
    (93
    )
    
    
    (344
    )
    
    
    (138
    )Other
    
    
    (947
    )
    
    
    (757
    )
    
    
    (1,346
    )
    
    
    (544
    )Total
    
    $
    25,498
    
    
    $
    24,778
    
    
    $
    46,660
    
    
    $
    48,226
   As of and for the
    
    As of and for theThree Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands)Originations of residential mortgage loans
    
    $
    376,122
    
    
    $
    454,921
    
    
    $
    787,238
    
    
    $
    799,539Originations of commercial real estate loans
    
    
    118,400
    
    
    
    1,200
    
    
    
    182,917
    
    
    
    12,410Sales of residential mortgage loans
    
    
    376,952
    
    
    
    359,903
    
    
    
    712,462
    
    
    
    732,211Sales of commercial real estate loans
    
    
    0
    
    
    
    22,577
    
    
    
    2,993
    
    
    
    29,503Principal balances of residential loans serviced for others
    
    
    538,116
    
    
    
    636,598
    
    
    
    538,116
    
    
    
    636,598Principal balances of commercial real estate loans
serviced for others
    
    
    1,763,479
    
    
    
    1,796,859
    
    
    
    1,763,479
    
    
    
    1,796,859
 25




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##### Table of Contents



Non-Interest Expenses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Employee compensation and
benefits
    
    $
    41,133
    
    
    $
    39,163
    
    
    $
    82,023
    
    
    $
    77,234Occupancy and equipment
    
    
    10,693
    
    
    
    11,681
    
    
    
    22,225
    
    
    
    22,148Data processing
    
    
    5,168
    
    
    
    4,176
    
    
    
    10,487
    
    
    
    8,373Depreciation
    
    
    3,507
    
    
    
    3,341
    
    
    
    7,071
    
    
    
    6,536Advertising
    
    
    3,019
    
    
    
    3,279
    
    
    
    5,817
    
    
    
    5,956Insurance
    
    
    1,926
    
    
    
    513
    
    
    
    3,638
    
    
    
    908Travel and entertainment
    
    
    1,781
    
    
    
    2,133
    
    
    
    3,446
    
    
    
    3,641Amortization of core
deposit intangibles
    
    
    1,226
    
    
    
    1,226
    
    
    
    2,452
    
    
    
    2,267Legal and accounting
    
    
    723
    
    
    
    547
    
    
    
    1,536
    
    
    
    1,223Goodwill litigation costs
    
    
    105
    
    
    
    1,132
    
    
    
    255
    
    
    
    1,312Merger and acquisition costs
    
    
    157
    
    
    
    413
    
    
    
    182
    
    
    
    844Other
    
    
    3,009
    
    
    
    2,287
    
    
    
    5,422
    
    
    
    5,118Total
    
    $
    72,447
    
    
    $
    69,891
    
    
    $
    144,554
    
    
    $
    135,560
  Income Tax Provision
 26




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##### Table of Contents



Financial Position
 Assets
 Investment Securities and MBS
 Loans Receivable
  June 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Residential real estate
    
    $
    798,408
    
    
    
    8.5
    
    
    $
    703,826
    
    
    
    7.8Multifamily real estate
    
    
    445,298
    
    
    
    4.7
    
    
    
    389,388
    
    
    
    4.3Commercial real estate
    
    
    1,321,895
    
    
    
    14.1
    
    
    
    1,223,036
    
    
    
    13.5Construction
    
    
    2,911,847
    
    
    
    31.0
    
    
    
    2,944,911
    
    
    
    32.4Consumer  direct
    
    
    842,713
    
    
    
    9.0
    
    
    
    798,519
    
    
    
    8.8Consumer  indirect
    
    
    398,219
    
    
    
    4.2
    
    
    
    376,937
    
    
    
    4.1Commercial banking
    
    
    2,677,479
    
    
    
    28.5
    
    
    
    2,639,196
    
    
    
    29.1Gross loans receivable
    
    
    9,395,859
    
    
    
    100.0
    
    
    
    9,075,813
    
    
    
    100.0Net deferred origination fees
    
    
    (13,572
    )
    
    
    
    
    
    
    (16,480
    )Allowance for losses on loans
    
    
    (162,368
    )
    
    
    
    
    
    
    (111,026
    )Loans receivable, net
    
    $
    9,219,919
    
    
    
    
    
    
    $
    8,948,307
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Residential real estate
    
    $
    376,122
    
    
    $
    454,921
    
    
    $
    787,238
    
    
    $
    799,539Multifamily real estate
    
    
    70,516
    
    
    
    4,650
    
    
    
    111,902
    
    
    
    4,650Commercial real estate
    
    
    118,400
    
    
    
    1,200
    
    
    
    182,917
    
    
    
    12,410Construction
    
    
    158,164
    
    
    
    735,552
    
    
    
    422,445
    
    
    
    1,270,372Consumer  direct
    
    
    124,032
    
    
    
    113,321
    
    
    
    205,635
    
    
    
    176,889Consumer  indirect
    
    
    43,742
    
    
    
    57,013
    
    
    
    115,423
    
    
    
    121,925Commercial banking
    
    
    169,836
    
    
    
    339,077
    
    
    
    318,521
    
    
    
    598,279Total loans originated
    
    $
    1,060,812
    
    
    $
    1,705,734
    
    
    $
    2,144,081
    
    
    $
    2,984,064
 27




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##### Table of Contents



Deposits
 June 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Interest-bearing checking
    
    $
    444,888
    
    
    
    5.6
    
    
    $
    469,428
    
    
    
    6.1Noninterest-bearing checking
    
    
    896,671
    
    
    
    11.2
    
    
    
    898,606
    
    
    
    11.7Savings and money market
demand accounts
    
    
    2,178,826
    
    
    
    27.3
    
    
    
    2,156,808
    
    
    
    28.1Time deposits
    
    
    4,467,446
    
    
    
    55.9
    
    
    
    4,152,930
    
    
    
    54.1Total deposits
    
    $
    7,987,831
    
    
    
    100.0
    
    
    $
    7,677,772
    
    
    
    100.0
  Borrowings
 Asset and Liability Management
     28




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##### Table of Contents



DecemberChange in
    
    June 30, 2008
    
    
    31, 2007Interest Rate in
    
    % Change In
    
    
    % Change inBasis Points
    
    Net Interest
    
    
    Net Interest(Rate Shock)
    
    Income
    
    
    Income+200
    
    
    1.2
    
    
    
    (0.1
    )+100
    
    
    0.7
    
    
    
    0.1Static
    
    
    0.0
    
    
    
    0.0-100
    
    
    (0.9
    )
    
    
    (1.5
    )
  At June 30,
    
    
    At DecemberChange in
    
    2008
    
    
    31, 2007Interest Rate in
    
    %
    
    
    %Basis Points
    
    Change
    
    
    Change(Rate Shock)
    
    in EVE
    
    
    in EVE+200
    
    
    (5.3
    )
    
    
    (4.9
    )+100
    
    
    0.4
    
    
    
    (1.6
    )Static
    
    
    0.0
    
    
    
    0.0-100
    
    
    (6.0
    )
    
    
    (4.3
    )
 29




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##### Table of Contents



Liquidity and Capital Resources
     30




---



##### Table of Contents



Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
      31




---



##### 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
    
    $
    489,342
    
    
    
    4.0
    %
    
    $
    611,677
    
    
    
    5.0
    %
    
    $
    978,022
    
    
    
    8.0
    %Sterling Savings Bank
    
    
    470,237
    
    
    
    4.0
    %
    
    
    587,797
    
    
    
    5.0
    %
    
    
    938,653
    
    
    
    8.0
    %Golf Savings Bank
    
    
    18,729
    
    
    
    4.0
    %
    
    
    23,411
    
    
    
    5.0
    %
    
    
    33,364
    
    
    
    7.1
    %Tier 1 (to risk-weighted assets)Sterling
    
    
    408,942
    
    
    
    4.0
    %
    
    
    613,414
    
    
    
    6.0
    %
    
    
    978,022
    
    
    
    9.6
    %Sterling Savings Bank
    
    
    397,802
    
    
    
    4.0
    %
    
    
    596,702
    
    
    
    6.0
    %
    
    
    938,653
    
    
    
    9.4
    %Golf Savings Bank
    
    
    12,045
    
    
    
    4.0
    %
    
    
    18,068
    
    
    
    6.0
    %
    
    
    33,364
    
    
    
    11.1
    %Total (to risk-weighted assets)Sterling
    
    
    817,885
    
    
    
    8.0
    %
    
    
    1,022,356
    
    
    
    10.0
    %
    
    
    1,109,321
    
    
    
    10.9
    %Sterling Savings Bank
    
    
    795,603
    
    
    
    8.0
    %
    
    
    994,504
    
    
    
    10.0
    %
    
    
    1,066,471
    
    
    
    10.7
    %Golf Savings Bank
    
    
    24,090
    
    
    
    8.0
    %
    
    
    30,113
    
    
    
    10.0
    %
    
    
    36,813
    
    
    
    12.2
    %
  Goodwill Litigation
  32




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##### Table of Contents



New Accounting Pronouncements
     Regulation and Compliance
  Forward-Looking Statements
   33




---



##### Table of Contents




    
    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.
 
 Item 3 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4 Controls and Procedures
 Disclosure Controls and Procedures
  34




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##### Table of Contents



Changes in Internal Control Over Financial Reporting
  35




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##### 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
  36




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##### Table of Contents



STERLING FINANCIAL CORPORATION
PART II  Other Information
 
 Item 3 Defaults Upon Senior Securities
  
 Item 4 Submission of Matters to a Vote of Security Holders
  (1)
    
    Election of two Directors to serve for terms expiring in the year 2011:
 Donald N. Bauhofer
    
    Votes for:
    
    
    44,747,531
    
    
    Withheld:
    
    
    1,431,658Harold B. Gilkey
    
    Votes for:
    
    
    43,374,910
    
    
    Withheld:
    
    
    2,804,279
 Election of two Directors to serve for the term expiring in the year 2009:
 Katherine K. Anderson
    
    Votes for:
    
    
    44,756,599
    
    
    Withheld:
    
    
    1,422,591Ellen R.M. Boyer
    
    Votes for:
    
    
    44,767,923
    
    
    Withheld:
    
    
    1,411,267
 The following are the names of the other Directors whose terms continued after the meeting:
 William L. Eisenhart
    
    Robert D. Larrabee
    
    Michael F. ReulingJames P. Fugate
    
    Donald J. Lukes
    
    William W. ZuppeJames. B. Keegan, Jr.
 (2)
    
    Amendment to Sterlings Articles of Incorporation to eliminate staggered terms for Directors and require the
annual election of all Directors
 Votes for:
    
    
    44,477,664
    
    
    Against:
    
    
    1,636,594
    
    
    Abstentions:
    
    
    64,929
 (3)
    
    Ratification of the appointment of BDO Seidman, LLP as the independent registered public accounting firm for
the year ending December 31, 2008 and any interim periods. The proposal received the following votes:
 Votes for:
    
    
    45,721,950
    
    
    Against:
    
    
    379,287
    
    
    Abstentions:
    
    
    77,952Approximate Broker Non-votes:
    
    
    0
 
 Item 5 Other Information
  
 Item 6 Exhibits
  37




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Signatures
  STERLING FINANCIAL CORPORATION(Registrant)August 8, 2008
    By:
    /s/ Robert G. ButterfieldDate
    
    Robert G. ButterfieldSenior Vice President, Controller, andPrincipal Accounting Officer
 38




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##### Table of Contents



Exhibit No.
    
    Exhibit Index3.1
    
    Restated Articles of Incorporation of Sterling. Filed as Exhibit 3.1 to Sterlings
registration statement on Form S-4 filed May 31, 2007, and incorporated by reference herein.3.2
    
    Amended and Restated Bylaws of Sterling. Filed as Exhibit 3.1 to Sterlings current report
on Form 8-K filed December 21, 2007, and incorporated by reference herein.4.1
    
    Reference is made to Exhibits 3.1 and 3.2.4.2
    
    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.