##### 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, 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
(State or other jurisdiction of 
incorporation or organization)
    
    91-1572822
(I.R.S. Employer
Identification No.)
 111 North Wall Street, Spokane, Washington 
(Address of principal executive offices)
    
    99201
 (Zip Code)
 
 þ o
  þ o o o
  o þ
  Class
    
    Outstanding as of May 1, 2008Common Stock ($1.00 par value)
    
    51,885,447




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##### 



STERLING FINANCIAL CORPORATION
 FORM 10-Q
For the Quarter Ended MARCH 31, 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
    
    15Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4 Controls and Procedures
    
    32PART II  Other Information
    
    33Item 1 Legal Proceedings
    
    33Item 1a Risk Factors
    
    33Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 3 Defaults Upon Senior Securities
    
    34Item 4 Submission of Matters to a Vote of Security Holders
    
    34Item 5 Other Information
    
    34Item 6 Exhibits
    
    34Signatures
    
    35EXHIBIT 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)
 March 31,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    1,787
    
    
    $
    10,042Non-interest bearing and vault
    
    
    178,436
    
    
    
    184,436Total cash and cash equivalents
    
    
    180,223
    
    
    
    194,478Restricted cash
    
    
    1,110
    
    
    
    1,100Investment securities and mortgage-backed securities (MBS):Available for sale
    
    
    2,143,950
    
    
    
    1,853,271Held to maturity
    
    
    172,874
    
    
    
    132,793Loans receivable, net
    
    
    9,119,942
    
    
    
    8,948,307Loans held for sale ($67,048 at fair value as of March 31, 2008)
    
    
    110,481
    
    
    
    55,840Accrued interest receivable
    
    
    59,009
    
    
    
    63,649Real estate owned and other collateralized assets, net
    
    
    13,027
    
    
    
    11,075Office properties and equipment, net
    
    
    92,218
    
    
    
    93,467Bank-owned life insurance (BOLI)
    
    
    152,794
    
    
    
    150,825Goodwill
    
    
    451,249
    
    
    
    453,136Other intangible assets
    
    
    30,401
    
    
    
    31,627Mortgage servicing rights, net
    
    
    7,878
    
    
    
    9,042Prepaid expenses and other assets, net
    
    
    155,997
    
    
    
    151,165Total assets
    
    $
    12,691,153
    
    
    $
    12,149,775LIABILITIES:Deposits
    
    $
    7,840,784
    
    
    $
    7,677,772Advances from Federal Home Loan Bank (FHLB)
    
    
    1,915,789
    
    
    
    1,687,989Securities sold subject to repurchase agreements and funds purchased
    
    
    1,333,505
    
    
    
    1,178,845Other borrowings
    
    
    248,273
    
    
    
    273,015Cashiers checks issued and payable
    
    
    11,531
    
    
    
    764Borrowers reserves for taxes and
insurance
    
    
    3,046
    
    
    
    1,765Accrued interest payable
    
    
    35,589
    
    
    
    40,209Accrued expenses and other liabilities
    
    
    111,250
    
    
    
    104,086Total liabilities
    
    
    11,499,767
    
    
    
    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;
51,863,067 and 51,456,461 shares issued and outstanding
    
    
    51,863
    
    
    
    51,456Additional paid-in capital
    
    
    894,679
    
    
    
    892,028Accumulated other comprehensive loss:Unrealized losses on investment securities and MBS available-for-sale,
net of deferred income taxes
of $6,190 and $10,518
    
    
    (10,591
    )
    
    
    (17,967
    )Retained earnings
    
    
    255,435
    
    
    
    259,813Total shareholders equity
    
    
    1,191,386
    
    
    
    1,185,330Total liabilities and
shareholders equity
    
    $
    12,691,153
    
    
    $
    12,149,775
  1




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Income
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    162,120
    
    
    $
    152,763MBS
    
    
    24,499
    
    
    
    20,468Investments and cash equivalents
    
    
    2,364
    
    
    
    1,671Total interest income
    
    
    188,983
    
    
    
    174,902Interest expense:Deposits
    
    
    62,870
    
    
    
    63,720Short-term borrowings
    
    
    3,431
    
    
    
    9,675Long-term borrowings
    
    
    30,595
    
    
    
    20,891Total interest expense
    
    
    96,896
    
    
    
    94,286Net interest income
    
    
    92,087
    
    
    
    80,616Provision for losses on loans
    
    
    (37,143
    )
    
    
    (4,225
    )Net interest income after provision for credit losses
    
    
    54,944
    
    
    
    76,391Non-interest income:Fees and service charges
    
    
    14,151
    
    
    
    12,192Mortgage banking operations
    
    
    6,198
    
    
    
    8,858Loan servicing fees
    
    
    (148
    )
    
    
    683Real estate owned and other collateralized assets operations
    
    
    (106
    )
    
    
    (45
    )BOLI
    
    
    1,466
    
    
    
    1,547Other
    
    
    (399
    )
    
    
    213Total non-interest income
    
    
    21,162
    
    
    
    23,448Non-interest expenses
    
    
    72,107
    
    
    
    65,669Income before income taxes
    
    
    3,999
    
    
    
    34,170Income tax provision
    
    
    (1,123
    )
    
    
    (11,249
    )Net income
    
    $
    2,876
    
    
    $
    22,921Earnings per share  basic
    
    $
    0.06
    
    
    $
    0.51Earnings per share  diluted
    
    $
    0.06
    
    
    $
    0.50Weighted average shares outstanding  basic
    
    
    51,526,332
    
    
    
    45,238,924Weighted average shares outstanding  diluted
    
    
    51,786,038
    
    
    
    45,833,530
  2




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    2,876
    
    
    $
    22,921Adjustments to reconcile net income to net cash provided by operating activities:Provision for credit losses
    
    
    37,143
    
    
    
    4,225Accretion of deferred gain on sale of branches
    
    
    (202
    )
    
    
    (175
    )Net gain on sales of loans, investment securities and MBS
    
    
    (4,192
    )
    
    
    (5,340
    )Stock based compensation
    
    
    540
    
    
    
    250Excess tax benefit from stock based compensation
    
    
    (689
    )
    
    
    (933
    )Stock issuances relating to 401(k) match
    
    
    830
    
    
    
    607Other gains and losses
    
    
    974
    
    
    
    262Increase in cash surrender value of BOLI
    
    
    (1,466
    )
    
    
    (1,547
    )Depreciation and amortization
    
    
    6,774
    
    
    
    5,597Change in:Accrued interest receivable
    
    
    4,640
    
    
    
    2,055Prepaid expenses and other assets
    
    
    (7,361
    )
    
    
    2,641Cashiers checks issued and payable
    
    
    10,767
    
    
    
    (15,248
    )Accrued interest payable
    
    
    (4,620
    )
    
    
    1,706Accrued expenses and other liabilities
    
    
    5,000
    
    
    
    3,937Proceeds from sales of loans originated for sale
    
    
    342,695
    
    
    
    312,381Loans originated for sale
    
    
    (338,503
    )
    
    
    (308,199
    )Net cash provided by operating activities
    
    
    55,206
    
    
    
    25,140Cash flows from investing activities:Change in restricted cash
    
    
    (10
    )
    
    
    0Loans funded and purchased
    
    
    (1,133,883
    )
    
    
    (1,084,329
    )Loan principal received
    
    
    866,436
    
    
    
    910,602Proceeds from sales of other loans
    
    
    0
    
    
    
    72,613Purchase of investment securities
    
    
    (16,807
    )
    
    
    (21,952
    )Proceeds from maturities of investment securities
    
    
    10,157
    
    
    
    19,060Net cash and cash equivalents acquired
    
    
    0
    
    
    
    92,419Purchase of BOLI
    
    
    (345
    )
    
    
    (1,549
    )Purchase of mortgage-backed securities
    
    
    (384,349
    )
    
    
    0Principal payments on mortgage-backed securities
    
    
    69,904
    
    
    
    60,427Purchase of office properties and equipment
    
    
    (2,419
    )
    
    
    (2,990
    )Sales of office properties and equipment
    
    
    72
    
    
    
    1,588Improvements and other changes to real estate owned
    
    
    (258
    )
    
    
    (101
    )Proceeds from sales and liquidation of real estate owned
    
    
    2,334
    
    
    
    77Net cash provided by (used in) investing activities
    
    
    (589,168
    )
    
    
    45,865
  3




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##### Table of Contents



STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Cash flows from financing activities:Net change in transaction and savings deposits
    
    $
    (180,362
    )
    
    $
    93,863Proceeds from issuance of time deposits
    
    
    1,522,689
    
    
    
    637,875Payments for maturing time deposits
    
    
    (1,242,093
    )
    
    
    (952,966
    )Interest credited to deposits
    
    
    62,778
    
    
    
    54,604Advances from FHLB
    
    
    714,000
    
    
    
    557,744Repayment of advances from FHLB
    
    
    (486,046
    )
    
    
    (528,046
    )Net change in securities sold subject to repurchase agreements
and funds purchased
    
    
    154,660
    
    
    
    91,379Net proceeds from other borrowings
    
    
    0
    
    
    
    12,000Repayment of other borrowings
    
    
    (24,000
    )
    
    
    0Proceeds from exercise of stock options
    
    
    999
    
    
    
    2,401Excess tax benefit from stock based compensation
    
    
    689
    
    
    
    933Cash dividends paid to shareholders
    
    
    (4,888
    )
    
    
    (3,153
    )Other
    
    
    1,281
    
    
    
    470Net cash provided by (used in) financing activities
    
    
    519,707
    
    
    
    (32,896
    )Net change in cash and cash equivalents
    
    
    (14,255
    )
    
    
    38,109Cash and cash equivalents, beginning of period
    
    
    194,478
    
    
    
    178,565Cash and cash equivalents, end of period
    
    $
    180,223
    
    
    $
    216,674Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    101,516
    
    
    $
    90,607Income taxes
    
    
    325
    
    
    
    1,243Noncash financing and investing activities:Loans
converted into real estate owned and other collateralized assets
    
    
    4,028
    
    
    
    0Common stock issued upon business combination
    
    
    0
    
    
    
    302,754Common stock cash dividends accrued
    
    
    5,200
    
    
    
    4,108Deferred gain on sale of branches
    
    
    0
    
    
    
    266Modification of purchase price allocation
    
    
    0
    
    
    
    2,344
  4




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STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Net income
    
    $
    2,876
    
    
    $
    22,921Other comprehensive income:Change in unrealized losses on investment
securities and MBS available-for-sale
    
    
    11,704
    
    
    
    7,225Less deferred income taxes
    
    
    (4,328
    )
    
    
    (2,670
    )Net other comprehensive income
    
    
    7,376
    
    
    
    4,555Comprehensive income
    
    $
    10,252
    
    
    $
    27,476
  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:
  Three Months Ended March 31,2008
    
    
    2007Allowance for credit lossesAllowance  loans, January 1
    
    $
    111,026
    
    
    $
    77,849Allowance for losses on loans acquired
    
    
    0
    
    
    
    12,535Provision
    
    
    37,143
    
    
    
    4,225Amounts written off
    
    
    (3,453
    )
    
    
    (1,043
    )Recoveries
    
    
    231
    
    
    
    211Transfers
    
    
    62
    
    
    
    60Allowance  loans, March 31
    
    
    145,009
    
    
    
    93,837Allowance  unfunded commitments, January 1
    
    
    6,306
    
    
    
    5,840Acquired
    
    
    0
    
    
    
    0Provision
    
    
    21
    
    
    
    266Transfers
    
    
    (62
    )
    
    
    (60
    )Allowance  unfunded commitments, March 31
    
    
    6,265
    
    
    
    6,046Total credit allowance
    
    $
    151,274
    
    
    $
    99,883
  3. Other Borrowings :
  March 31,
    
    
    December 31,2008
    
    
    2007Junior subordinated debentures
    
    $
    245,273
    
    
    $
    270,015Other
    
    
    3,000
    
    
    
    3,000Total other borrowings
    
    $
    248,273
    
    
    $
    273,015
  7




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##### Table of Contents



Maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amount (inSubsidiary Issuer
    
    Issue Date
    
    
    Date
    
    
    Call Date
    
    
    Rate at March 31, 2008
    
    
    Thousands)Sterling Capital Trust IX
    
    July 2007
    
    Oct 2037
    
    N/A     
    Floating
    
    
    6.13
    %
    
    $
    46,392Sterling Capital Trust VIII
    
    Sept 2006
    
    Sept 2036
    
    N/A     
    Floating
    
    
    4.43
    
    
    
    51,547Sterling Capital Trust VII
    
    June 2006
    
    June 2036
    
    N/A     
    Floating
    
    
    4.33
    
    
    
    56,702Lynnwood Capital Trust II
    
    June 2005
    
    June 2035
    
    June 2010
    
    Floating
    
    
    4.60
    
    
    
    10,310Sterling Capital Trust VI
    
    June 2003
    
    Sept 2033
    
    Sept 2008
    
    Floating
    
    
    6.00
    
    
    
    10,310Sterling Capital Statutory Trust V
    
    May 2003
    
    May 2033
    
    June 2008
    
    Floating
    
    
    5.86
    
    
    
    20,619Sterling Capital Trust IV
    
    May 2003
    
    May 2033
    
    May 2008
    
    Floating
    
    
    6.34
    
    
    
    10,310Sterling Capital Trust III
    
    April 2003
    
    April 2033
    
    April 2008
    
    Floating
    
    
    6.49
    
    
    
    14,433Lynnwood Capital Trust I
    
    Mar 2003
    
    Mar 2033
    
    Mar 2007
    
    Floating
    
    
    5.76
    
    
    
    9,474Klamath First Capital Trust I
    
    July 2001
    
    July 2031
    
    June 2006
    
    Floating
    
    
    6.91
    
    
    
    15,1765.33
    %*
    
    $
    245,273
 
 *
    
    Weighted average rate  4. Earnings Per Share :
  Three Months Ended March 31,2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    

Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    2,876
    
    
    
    51,526,332
    
    
    $
    0.06
    
    
    $
    22,921
    
    
    
    45,238,924
    
    
    $
    0.51Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    259,706
    
    
    
    0.00
    
    
    
    0
    
    
    
    582,602
    
    
    
    (0.01
    )Contingently issuable shares
    
    
    0
    
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    12,004
    
    
    
    0.00Diluted computations
    
    $
    2,876
    
    
    
    51,786,038
    
    
    $
    0.06
    
    
    $
    22,921
    
    
    
    45,833,530
    
    
    $
    0.50Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    1,651,087
    
    
    
    
    
    
    
    
    
    
    
    305,000
 8




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##### Table of Contents



5. Non-Interest Expenses :
  Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Employee compensation and benefits
    
    $
    40,890
    
    
    $
    38,072Occupancy and equipment
    
    
    11,532
    
    
    
    10,467Data processing
    
    
    5,319
    
    
    
    4,197Depreciation
    
    
    3,565
    
    
    
    3,195Advertising
    
    
    2,798
    
    
    
    2,677Insurance
    
    
    1,711
    
    
    
    395Travel and entertainment
    
    
    1,665
    
    
    
    1,508Amortization of core deposit intangibles
    
    
    1,226
    
    
    
    1,041Legal and accounting
    
    
    813
    
    
    
    676Goodwill litigation costs
    
    
    150
    
    
    
    180Merger and acquisition costs
    
    
    24
    
    
    
    1,207Other
    
    
    2,414
    
    
    
    2,054Total
    
    $
    72,107
    
    
    $
    65,669
 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.
  9




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##### Table of Contents



As of and for the Three Months Ended March 31, 2008Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    144,650
    
    
    $
    33,018
    
    
    $
    8,147
    
    
    $
    3,034
    
    
    $
    134
    
    
    $
    188,983Interest expense
    
    
    (68,936
    )
    
    
    (19,161
    )
    
    
    (4,801
    )
    
    
    0
    
    
    
    (3,998
    )
    
    
    (96,896
    )Net interest income (expense)
    
    
    75,714
    
    
    
    13,857
    
    
    
    3,346
    
    
    
    3,034
    
    
    
    (3,864
    )
    
    
    92,087Provision for loan losses
    
    
    (13,085
    )
    
    
    (23,615
    )
    
    
    (443
    )
    
    
    0
    
    
    
    0
    
    
    
    (37,143
    )Noninterest income
    
    
    15,374
    
    
    
    985
    
    
    
    4,965
    
    
    
    1,018
    
    
    
    (1,180
    )
    
    
    21,162Noninterest expense
    
    
    (59,093
    )
    
    
    (2,937
    )
    
    
    (6,447
    )
    
    
    (2,435
    )
    
    
    (1,195
    )
    
    
    (72,107
    )Income before income taxes
    
    $
    18,910
    
    
    $
    (11,710
    )
    
    $
    1,421
    
    
    $
    1,617
    
    
    $
    (6,239
    )
    
    $
    3,999Total assets
    
    $
    10,371,758
    
    
    $
    1,844,599
    
    
    $
    527,413
    
    
    $
    12,850
    
    
    $
    (65,467
    )
    
    $
    12,691,153
 As of and for the Three Months Ended March 31, 2007Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    127,153
    
    
    $
    41,167
    
    
    $
    4,542
    
    
    $
    2,191
    
    
    $
    (151
    )
    
    $
    174,902Interest expense
    
    
    (63,943
    )
    
    
    (23,308
    )
    
    
    (2,874
    )
    
    
    0
    
    
    
    (4,161
    )
    
    
    (94,286
    )Net interest income (expense)
    
    
    63,210
    
    
    
    17,859
    
    
    
    1,668
    
    
    
    2,191
    
    
    
    (4,312
    )
    
    
    80,616Provision for loan losses
    
    
    (3,972
    )
    
    
    (178
    )
    
    
    (75
    )
    
    
    0
    
    
    
    0
    
    
    
    (4,225
    )Noninterest income
    
    
    18,856
    
    
    
    1,738
    
    
    
    5,520
    
    
    
    2,207
    
    
    
    (4,873
    )
    
    
    23,448Noninterest expense
    
    
    (51,769
    )
    
    
    (2,492
    )
    
    
    (7,786
    )
    
    
    (2,912
    )
    
    
    (710
    )
    
    
    (65,669
    )Income before income taxes
    
    $
    26,325
    
    
    $
    16,927
    
    
    $
    (673
    )
    
    $
    1,486
    
    
    $
    (9,895
    )
    
    $
    34,170Total assets
    
    $
    9,706,307
    
    
    $
    1,494,268
    
    
    $
    302,555
    
    
    $
    11,670
    
    
    $
    (115,179
    )
    
    $
    11,399,621
 10




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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
    
    
    (171,399
    )
    
    
    5.83
    
    
    
    (21,250
    )
    
    
    33.17Cancelled / expired
    
    
    (57,736
    )
    
    
    21.50
    
    
    
    0
    
    
    
    0.00Outstanding, March 31, 2008
    
    
    2,089,266
    
    
    $
    21.98
    
    
    
    245,750
    
    
    $
    21.78Exercisable, March 31, 2008
    
    
    1,578,516
    
    
    $
    20.98
    
    
    
    0
    
    
    $
    0
  Three Months EndedMarch 31,2008
    
    2007Expected volatility
    
    
    30
    %
    
    
    29
    %Expected term (in years)
    
    
    4.3
    
    
    
    4.7-6.0Expected dividend yield
    
    
    2.14
    %
    
    
    0.90
    %Risk free interest rate
    
    
    2.93
    %
    
    
    4.81
    %
  Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Stock based compensation expense:Stock options
    
    $
    246
    
    
    $
    133Restricted stock
    
    
    311
    
    
    
    117Total
    
    $
    557
    
    
    $
    250
  11




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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.
 12




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##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Recurring Basis.
 March 31, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Dollars in thousands)Investment securities and mortgage-backed
securities available for sale
    
    $
    2,143,950
    
    
    $
    2,133,764
    
    
    $
    10,186
    
    
    $
    0Loans held for sale
    
    
    67,048
    
    
    
    0
    
    
    
    67,048
    
    
    
    0Other assets  derivatives
    
    
    3,483
    
    
    
    0
    
    
    
    26
    
    
    
    3,457Total assets
    
    $
    2,214,481
    
    
    $
    2,133,764
    
    
    $
    77,260
    
    
    $
    3,457Other liabilities  derivatives
    
    $
    4,304
    
    
    $
    0
    
    
    $
    847
    
    
    $
    3,457
  Three Months EndedMarch 31, 2008(Dollars in thousands)Mortgage banking operations
    
    $
    1,201
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis.
 Losses Duringthe ThreeTotal Carrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    Months EndedValue
    
    Level 1
    
    Level 2
    
    Level 3
    
    March 31, 2008(Dollars in thousands)Mortgage servicing rights
    
    $
    7,878
    
    
    $
    0
    
    
    $
    7,878
    
    
    $
    0
    
    
    $
    (711
    )
  13




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##### Table of Contents



10. Cash Dividends :
  11. Subsequent Events :
   14




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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
Operation
 STERLING FINANCIAL CORPORATION
March 31, 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
    15




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##### Table of Contents



Executive Summary and Highlights
   
    
    Capital ratios remain above well-capitalized levels.
 

    
    Tangible book value per share increased 12 percent to $13.68.
 

    
    Net interest income rose 14 percent to $92.1 million.
 

    
    Fees and service charges grew 16 percent to $14.2 million.
 

    
    Total assets increased 11 percent to a record $12.69 billion.
 

    
    Total loans receivable increased 9 percent to a record $9.12 billion.
 

    
    Total deposits gained 4 percent to a record $7.84 billion.
 

    
    Quarterly cash dividend rose 25 percent to $0.10 per share.
 Company Growth
    16




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##### Table of Contents



Critical Accounting Policies
  Income Recognition .
 Allowance for Credit Losses.
    17




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##### Table of Contents



Investment Securities and MBS .
    Goodwill and Other Intangible Assets .
  Real Estate Owned and Other Collateralized Assets.
  18




---



##### Table of Contents



Loans Held for Sale.
 Income Taxes.
  Results of Operations
 Overview .
 Net Interest Income .
  19




---



##### 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 March 31,2008 vs. 2007Increase (Decrease) Due to:Rate/Volume
    
    
    Rate
    
    
    Volume
    
    
    Total(Dollars in thousands)Rate/volume analysis:Interest income:Loans
    
    $
    31,834
    
    
    $
    (19,688
    )
    
    $
    (2,765
    )
    
    $
    9,381MBS
    
    
    3,092
    
    
    
    668
    
    
    
    271
    
    
    
    4,031Investments and cash equivalents
    
    
    424
    
    
    
    454
    
    
    
    105
    
    
    
    983Total interest income
    
    
    35,350
    
    
    
    (18,566
    )
    
    
    (2,389
    )
    
    
    14,395Interest expense:Deposits
    
    
    8,043
    
    
    
    (8,280
    )
    
    
    (613
    )
    
    
    (850
    )Borrowings
    
    
    12,950
    
    
    
    (6,862
    )
    
    
    (2,628
    )
    
    
    3,460Total interest expense
    
    
    20,993
    
    
    
    (15,142
    )
    
    
    (3,241
    )
    
    
    2,610Net changes in NII
    
    $
    14,357
    
    
    $
    (3,424
    )
    
    $
    852
    
    
    $
    11,785
  Tax EquivalentThree Months Ended
    
    Net Interest MarginMarch 31, 2008
    
    
    3.24
    %December 31, 2007
    
    
    3.34
    %September 30, 2007
    
    
    3.50
    %June 30, 2007
    
    
    3.41
    %March 31, 2007
    
    
    3.41
    %
  Provision for Credit Losses.
  20




---



##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007(Dollars in thousands)Allowance  loans, January 1
    
    $
    111,026
    
    
    $
    77,849Acquired
    
    
    0
    
    
    
    12,535Provision
    
    
    37,143
    
    
    
    4,225Charge offs, net of recoveries
    
    
    (3,222
    )
    
    
    (832
    )Transfers
    
    
    62
    
    
    
    60Allowance  loans, March 31
    
    
    145,009
    
    
    
    93,837Allowance  unfunded commitments, January 1
    
    
    6,306
    
    
    
    5,840Acquired
    
    
    21
    
    
    
    266Transfers
    
    
    (62
    )
    
    
    (60
    )Allowance  unfunded commitments, March 31
    
    
    6,265
    
    
    
    6,046Total credit allowance
    
    $
    151,274
    
    
    $
    99,883
    March 31,2008
    
    
    2007(Dollars in thousands)Nonaccrual loans
    
    $
    190,766
    
    
    $
    14,855Restructured loans
    
    
    207
    
    
    
    0Total nonperforming loans
    
    
    190,973
    
    
    
    14,855Real estate owned
    
    
    13,027
    
    
    
    4,076Total nonperforming assets
    
    $
    204,000
    
    
    $
    18,931
 21




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##### Table of Contents



March 31,2008
    
    
    2007(Dollars in thousands)Residential real estate
    
    $
    3,801
    
    
    $
    1,318Multifamily real estate
    
    
    2,026
    
    
    
    7,810Commercial real estate
    
    
    4,534
    
    
    
    709Construction
    
    
    161,674
    
    
    
    2,295Consumer  direct
    
    
    1,393
    
    
    
    465Consumer  indirect
    
    
    579
    
    
    
    128Commercial banking
    
    
    29,993
    
    
    
    6,206Total nonperforming assets
    
    $
    204,000
    
    
    $
    18,931
     22




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##### Table of Contents



Non-Interest Income
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Fees and service charges
    
    $
    14,151
    
    
    $
    12,192Mortgage banking operations
    
    
    6,198
    
    
    
    8,858Loan servicing fees
    
    
    (148
    )
    
    
    683Real estate owned operations
    
    
    (106
    )
    
    
    (45
    )Bank-owned life insurance
    
    
    1,466
    
    
    
    1,547Other
    
    
    (399
    )
    
    
    213Total
    
    $
    21,162
    
    
    $
    23,448
   As of and for theThree Months EndedMarch 31,2008
    
    2007(Dollars in thousands)Originations of residential mortgage loans
    
    $
    411,116
    
    
    $
    344,617Originations of commercial real estate loans
    
    
    64,517
    
    
    
    11,210Sales of residential mortgage loans
    
    
    335,510
    
    
    
    372,728Sales of commercial real estate loans
    
    
    2,993
    
    
    
    6,926Principal balances of residential loans serviced for others
    
    
    569,448
    
    
    
    672,049Principal balances of commercial real estate loans serviced for others
    
    
    1,677,898
    
    
    
    1,744,863
 23




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##### Table of Contents



Non-Interest Expenses
 Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Employee compensation and benefits
    
    $
    40,890
    
    
    $
    38,072Occupancy and equipment
    
    
    11,532
    
    
    
    10,467Data processing
    
    
    5,319
    
    
    
    4,197Depreciation
    
    
    3,565
    
    
    
    3,195Advertising
    
    
    2,798
    
    
    
    2,677Insurance
    
    
    1,711
    
    
    
    395Travel and entertainment
    
    
    1,665
    
    
    
    1,508Amortization of core deposit intangibles
    
    
    1,226
    
    
    
    1,041Legal and accounting
    
    
    813
    
    
    
    676Goodwill litigation costs
    
    
    150
    
    
    
    180Merger and acquisition costs
    
    
    24
    
    
    
    1,207Other
    
    
    2,414
    
    
    
    2,054Total
    
    $
    72,107
    
    
    $
    65,669
  Income Tax Provision
 24




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##### Table of Contents



Financial Position
 Assets
 Investment Securities and MBS
 Loans Receivable
  March 31, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Residential real estate
    
    $
    761,887
    
    
    
    8.2
    
    
    $
    703,826
    
    
    
    7.8Multifamily real estate
    
    
    407,673
    
    
    
    4.4
    
    
    
    389,388
    
    
    
    4.3Commercial real estate
    
    
    1,247,472
    
    
    
    13.4
    
    
    
    1,223,036
    
    
    
    13.5Construction
    
    
    3,012,754
    
    
    
    32.6
    
    
    
    2,944,911
    
    
    
    32.4Consumer  direct
    
    
    800,048
    
    
    
    8.6
    
    
    
    798,519
    
    
    
    8.8Consumer  indirect
    
    
    402,520
    
    
    
    4.3
    
    
    
    376,937
    
    
    
    4.1Commercial banking
    
    
    2,647,969
    
    
    
    28.5
    
    
    
    2,639,196
    
    
    
    29.1Gross loans receivable
    
    
    9,280,323
    
    
    
    100.0
    
    
    
    9,075,813
    
    
    
    100.0Net deferred origination fees
    
    
    (15,372
    )
    
    
    
    
    
    
    (16,480
    )Allowance for losses on loans
    
    
    (145,009
    )
    
    
    
    
    
    
    (111,026
    )Loans receivable, net
    
    $
    9,119,942
    
    
    
    
    
    
    $
    8,948,307
  Three Months EndedMarch 31,2008
    
    
    2007(Dollars in thousands)Residential real estate
    
    $
    411,116
    
    
    $
    344,617Multifamily real estate
    
    
    41,386
    
    
    
    0Commercial real estate
    
    
    64,517
    
    
    
    11,210Construction
    
    
    264,281
    
    
    
    534,821Consumer  direct
    
    
    81,603
    
    
    
    63,568Consumer  indirect
    
    
    71,681
    
    
    
    64,913Commercial banking
    
    
    148,685
    
    
    
    259,203Total loans originated
    
    $
    1,083,269
    
    
    $
    1,278,332
 25




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##### Table of Contents



Deposits
 March 31, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Interest-bearing checking
    
    $
    462,768
    
    
    
    5.9
    
    
    $
    469,428
    
    
    
    6.1Noninterest-bearing checking
    
    
    887,129
    
    
    
    11.3
    
    
    
    898,606
    
    
    
    11.7Savings and MMDA
    
    
    2,226,090
    
    
    
    28.4
    
    
    
    2,156,808
    
    
    
    28.1Time deposits
    
    
    4,264,797
    
    
    
    54.4
    
    
    
    4,152,930
    
    
    
    54.1Total deposits
    
    $
    7,840,784
    
    
    
    100.0
    
    
    $
    7,677,772
    
    
    
    100.0
  Borrowings
 Asset and Liability Management
     26




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##### Table of Contents



Change inInterest Rate in

    
    March 31,
    
    December 31,Basis Points

    
    2008
    
    2007(Rate
Shock)

    

% Change in NII
    

% Change in NII+200
    
    
    
    1.8
    
    
    
    (0.1
    )+100
    
    
    
    1.4
    
    
    
    0.1Static
    
    
    
    0.0
    
    
    
    0.0-100
    
    
    
    (1.9
    )
    
    
    (1.5
    )
  At March 31,
    
    At December 31,2008
    
    2007Change inInterest Rate

    
    %
    
    %in Basis Points

    
    Change
    
    Change(Rate
Shock)

    
    in EVE
    
    in EVE+200
    
    
    
    (0.9
    )
    
    
    (4.9
    )+100
    
    
    
    1.9
    
    
    
    (1.6
    )Static
    
    
    
    0.0
    
    
    
    0.0-100
    
    
    
    (8.5
    )
    
    
    (4.3
    )
  27




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##### Table of Contents



Liquidity and Capital Resources
     28




---



##### Table of Contents



Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
      29




---



##### 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
    
    $
    459,348
    
    
    
    4.0
    %
    
    $
    574,185
    
    
    
    5.0
    %
    
    $
    968,952
    
    
    
    8.1
    %Sterling Savings Bank
    
    
    459,449
    
    
    
    4.0
    %
    
    
    574,311
    
    
    
    5.0
    %
    
    
    934,812
    
    
    
    8.1
    %Golf Savings Bank
    
    
    17,556
    
    
    
    4.0
    %
    
    
    21,945
    
    
    
    5.0
    %
    
    
    31,043
    
    
    
    7.1
    %Tier 1 (to risk-weighted assets)Sterling
    
    
    402,225
    
    
    
    4.0
    %
    
    
    603,337
    
    
    
    6.0
    %
    
    
    968,952
    
    
    
    9.7
    %Sterling Savings Bank
    
    
    389,161
    
    
    
    4.0
    %
    
    
    583,742
    
    
    
    6.0
    %
    
    
    934,812
    
    
    
    9.6
    %Golf Savings Bank
    
    
    12,641
    
    
    
    4.0
    %
    
    
    18,961
    
    
    
    6.0
    %
    
    
    31,043
    
    
    
    9.8
    %Total (to risk-weighted assets)Sterling
    
    
    804,449
    
    
    
    8.0
    %
    
    
    1,005,562
    
    
    
    10.0
    %
    
    
    1,097,570
    
    
    
    11.0
    %Sterling Savings Bank
    
    
    778,323
    
    
    
    8.0
    %
    
    
    972,904
    
    
    
    10.0
    %
    
    
    1,059,767
    
    
    
    10.9
    %Golf Savings Bank
    
    
    25,281
    
    
    
    8.0
    %
    
    
    31,602
    
    
    
    10.0
    %
    
    
    32,986
    
    
    
    10.4
    %
  Goodwill Litigation
  30




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##### Table of Contents



New Accounting Pronouncements
   Regulation and Compliance
  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;
 31




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##### Table of Contents




    
    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
  Changes in Internal Control Over Financial Reporting
  32




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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
  (d) MaximumNumber (or(c) Total Number
    
    
    Approximateof Share (or
    
    
    Dollar Value) of(a) Total
    
    
    
    
    
    
    Units) Purchased
    
    
    Shares (or Units)Number of
    
    
    
    
    
    
    as Part of
    
    
    that May Yest BeShares (or
    
    
    (b) Average
    
    
    Publicly
    
    
    Purchased UnderUnits)
    
    
    Price Paid per
    
    
    Announced Plans
    
    
    the Plans ofPeriod
    
    Purchased (1)
    
    
    Share (or Unit)
    
    
    or Programs
    
    
    ProgramsJanuary 1,
2008
to
January 31,
2008
    
    
    991
    
    
    $
    17.79
    
    
    
    0
    
    
    
    0February 1,
2008
to
February 29,
2008
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    
    0March 1, 2008
to
March 31,
2008
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    
    0Total
    
    
    991
    
    
    $
    17.79
    
    
    
    0
    
    
    
    0
 
 (1)
    
    None of the 991 shares of the Companys common stock purchased during the quarter
ended March 31, 2008, were purchased through a publicly announced repurchase plan or program.
The purchase was the result of the administration of an employee stock-based compensation
plan. 33




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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
  
 Item 5 Other Information
  
 Item 6 Exhibits
  34




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Signatures
  STERLING FINANCIAL CORPORATION(Registrant)May 7, 2008
    
    By:

    /s/ Robert G. ButterfieldDate
    
    
    
    Robert G. ButterfieldSenior
Vice President, Controller, and
     Principal Accounting Officer
 35




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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.
 E-1