##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM TO.
 Commission File Number 0-20800
 STERLING FINANCIAL CORPORATION
  Washington
    
    91-1572822(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)111 North Wall Street, Spokane, Washington
    
    99201(Address of principal executive offices)
    
    (Zip Code)
 
 þ o
  þ o o
 o þ
  Class
    
    Outstanding as of August 1, 2007Common Stock ($1.00 par value)
    
    51,341,243




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##### 



STERLING FINANCIAL CORPORATION
 FORM 10-Q
For the Quarter Ended JUNE 30, 2007
 TABLE OF CONTENTS
 PagePART I  Financial Information
    
    
    1Item 1 Financial Statements (Unaudited)
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Income
    
    
    2Consolidated Statements of Cash Flows
    
    
    3Consolidated Statements of Comprehensive Income
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4 Controls and Procedures
    
    
    31PART II  Other Information
    
    
    32Item 1 Legal Proceedings
    
    
    32Item 1a Risk Factors
    
    
    32Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3 Defaults Upon Senior Securities
    
    
    32Item 4 Submission of Matters to a Vote of Security Holders
    
    
    33Item 5 Other Information
    
    
    33Item 6 Exhibits
    
    
    33Signatures
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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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 31,2007
    
    
    2006(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    10,851
    
    
    $
    13,846Non-interest bearing and vault
    
    
    180,425
    
    
    
    164,719Total cash and cash equivalents
    
    
    191,276
    
    
    
    178,565Restricted cash
    
    
    1,125
    
    
    
    1,150Investment securities and mortgage-backed securities (MBS):Available for sale
    
    
    1,697,424
    
    
    
    1,820,583Held to maturity
    
    
    108,430
    
    
    
    93,063Loans receivable, net
    
    
    8,507,423
    
    
    
    7,021,241Loans held for sale
    
    
    84,613
    
    
    
    91,469Accrued interest receivable
    
    
    60,436
    
    
    
    55,519Real estate owned and other collateralized assets, net
    
    
    4,012
    
    
    
    4,052Office properties and equipment, net
    
    
    96,361
    
    
    
    93,796Bank-owned life insurance (BOLI)
    
    
    147,354
    
    
    
    139,206Goodwill
    
    
    456,315
    
    
    
    247,244Other intangible assets, net
    
    
    34,078
    
    
    
    28,570Mortgage servicing rights, net
    
    
    10,130
    
    
    
    7,335Prepaid expenses and other assets, net
    
    
    64,670
    
    
    
    52,699Total assets
    
    $
    11,463,647
    
    
    $
    9,834,492LIABILITIES:Deposits
    
    $
    7,620,362
    
    
    $
    6,746,028Advances from Federal Home Loan Bank (FHLB)
    
    
    1,594,844
    
    
    
    1,308,617Securities sold subject to repurchase agreements and funds purchased
    
    
    744,903
    
    
    
    616,354Other borrowings
    
    
    250,074
    
    
    
    240,226Cashiers checks issued and payable
    
    
    4,279
    
    
    
    18,144Borrowers reserves for taxes and insurance
    
    
    2,418
    
    
    
    2,348Accrued interest payable
    
    
    39,615
    
    
    
    39,863Accrued expenses and other liabilities
    
    
    84,981
    
    
    
    79,496Total liabilities
    
    
    10,341,476
    
    
    
    9,051,076Commitments and ContingenciesSHAREHOLDERS EQUITY:Preferred stock, $1 par value; 10,000,000 shares authorized;
no shares issued and outstanding
    
    
    0
    
    
    
    0Common stock, $1 par value; 100,000,000 shares authorized;
51,329,826 and 42,042,740 shares issued and outstanding
    
    
    51,330
    
    
    
    42,043Additional paid-in capital
    
    
    889,890
    
    
    
    590,218Accumulated other comprehensive loss:Unrealized losses on investment securities and MBS available-for-sale,
net of deferred income taxes of $26,368 and $19,531
    
    
    (44,974
    )
    
    
    (33,350
    )Retained earnings
    
    
    225,925
    
    
    
    184,505Total shareholders equity
    
    
    1,122,171
    
    
    
    783,416Total liabilities and shareholders equity
    
    $
    11,463,647
    
    
    $
    9,834,492
  1




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Income
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    172,825
    
    
    $
    103,356
    
    
    $
    325,588
    
    
    $
    195,467MBS
    
    
    19,356
    
    
    
    22,473
    
    
    
    39,824
    
    
    
    45,818Investments and cash equivalents
    
    
    1,880
    
    
    
    891
    
    
    
    3,551
    
    
    
    1,614Total interest income
    
    
    194,061
    
    
    
    126,720
    
    
    
    368,963
    
    
    
    242,899Interest expense:Deposits
    
    
    70,666
    
    
    
    40,909
    
    
    
    134,386
    
    
    
    75,719Short-term borrowings
    
    
    9,730
    
    
    
    8,881
    
    
    
    19,405
    
    
    
    15,246Long-term borrowings
    
    
    24,625
    
    
    
    15,881
    
    
    
    45,516
    
    
    
    31,929Total interest expense
    
    
    105,021
    
    
    
    65,671
    
    
    
    199,307
    
    
    
    122,894Net interest income
    
    
    89,040
    
    
    
    61,049
    
    
    
    169,656
    
    
    
    120,005Provision for losses on loans
    
    
    (3,975
    )
    
    
    (4,650
    )
    
    
    (8,200
    )
    
    
    (9,300
    )Net interest income after provision for losses on loans
    
    
    85,065
    
    
    
    56,399
    
    
    
    161,456
    
    
    
    110,705Non-interest income:Fees and service charges
    
    
    13,694
    
    
    
    10,615
    
    
    
    25,886
    
    
    
    19,694Mortgage banking operations
    
    
    9,807
    
    
    
    2,725
    
    
    
    18,665
    
    
    
    4,996Loan servicing fees
    
    
    410
    
    
    
    482
    
    
    
    1,093
    
    
    
    751Real estate owned and other collateralized assets operations
    
    
    (93
    )
    
    
    78
    
    
    
    (138
    )
    
    
    385BOLI
    
    
    1,717
    
    
    
    1,203
    
    
    
    3,264
    
    
    
    2,386Other non-interest expense
    
    
    (757
    )
    
    
    27
    
    
    
    (544
    )
    
    
    (165
    )Total non-interest income
    
    
    24,778
    
    
    
    15,130
    
    
    
    48,226
    
    
    
    28,047Non-interest expenses
    
    
    69,891
    
    
    
    46,989
    
    
    
    135,560
    
    
    
    91,229Income before income taxes
    
    
    39,952
    
    
    
    24,540
    
    
    
    74,122
    
    
    
    47,523Income tax provision
    
    
    (12,971
    )
    
    
    (7,609
    )
    
    
    (24,220
    )
    
    
    (15,176
    )Net income
    
    $
    26,981
    
    
    $
    16,931
    
    
    $
    49,902
    
    
    $
    32,347Earnings per share  basic
    
    $
    0.53
    
    
    $
    0.48
    
    
    $
    1.03
    
    
    $
    0.92Earnings per share  diluted
    
    $
    0.52
    
    
    $
    0.48
    
    
    $
    1.02
    
    
    $
    0.92Weighted average shares outstanding  basic
    
    
    51,189,438
    
    
    
    35,077,647
    
    
    
    48,230,619
    
    
    
    35,012,510Weighted average shares outstanding  diluted
    
    
    51,699,098
    
    
    
    35,404,364
    
    
    
    48,776,780
    
    
    
    35,326,837
  2




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##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Cash Flows
(Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    49,902
    
    
    $
    32,347Adjustments to reconcile net income to net cash provided by operating activities:Provisions for losses on loans and real estate owned
    
    
    8,200
    
    
    
    9,320Accretion of deferred gain on sale of branches
    
    
    (352
    )
    
    
    (18
    )Net gain on sales of loans, investment securities and MBS
    
    
    (11,460
    )
    
    
    (1,316
    )Stock based compensation
    
    
    627
    
    
    
    181Excess tax benefit from stock based compensation
    
    
    (1,336
    )
    
    
    (791
    )Stock issuances relating to 401(k) match
    
    
    1,172
    
    
    
    896Other gains and losses
    
    
    1,504
    
    
    
    387Increase in cash surrender value of BOLI
    
    
    (3,264
    )
    
    
    (2,386
    )Depreciation and amortization
    
    
    12,135
    
    
    
    9,230Change in:Accrued interest receivable
    
    
    2,123
    
    
    
    (4,695
    )Prepaid expenses and other assets
    
    
    (6,957
    )
    
    
    1,928Cashiers checks issued and payable
    
    
    (18,564
    )
    
    
    (721
    )Accrued interest payable
    
    
    (2,221
    )
    
    
    10,271Accrued expenses and other liabilities
    
    
    (4,580
    )
    
    
    (7,955
    )Proceeds from sales of loans originated for sale
    
    
    676,063
    
    
    
    62,018Loans originated for sale
    
    
    (667,682
    )
    
    
    (60,702
    )Net cash provided by operating activities
    
    
    35,310
    
    
    
    47,994Cash flows from investing activities:Change in restricted cash
    
    
    25
    
    
    
    (159
    )Loans funded and purchased
    
    
    (2,376,666
    )
    
    
    (2,128,822
    )Loan principal received
    
    
    2,026,361
    
    
    
    1,485,011Proceeds from sales of other loans
    
    
    97,114
    
    
    
    0Purchase of investment securities
    
    
    (47,195
    )
    
    
    (40,300
    )Proceeds from maturities of investment securities
    
    
    23,379
    
    
    
    10,088Proceeds from sale of investments
    
    
    5,609
    
    
    
    0Net cash and cash equivalents acquired
    
    
    92,419
    
    
    
    0Principal payments on mortgage-backed securities
    
    
    125,963
    
    
    
    139,762Purchase of office properties and equipment
    
    
    (7,202
    )
    
    
    (7,486
    )Sales of office properties and equipment
    
    
    2,792
    
    
    
    5,702Improvements and other changes to real estate owned
    
    
    (9
    )
    
    
    (221
    )Proceeds from sales and liquidation of real estate owned
    
    
    106
    
    
    
    731Net cash provided by (used in) investing activities
    
    
    (57,304
    )
    
    
    (535,694
    )
  3




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##### Table of Contents



STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006(Dollars in thousands)Cash flows from financing activities:Net change in transaction and savings deposits
    
    $
    151,234
    
    
    $
    135,327Proceeds from issuance of time deposits
    
    
    1,547,770
    
    
    
    1,781,541Payments for maturing time deposits
    
    
    (1,939,136
    )
    
    
    (1,450,573
    )Interest credited to deposits
    
    
    119,812
    
    
    
    65,195Advances from FHLB
    
    
    1,232,744
    
    
    
    1,379,784Repayment of advances from FHLB
    
    
    (1,213,095
    )
    
    
    (1,486,072
    )Net change in securities sold subject to repurchase agreements
and funds purchased
    
    
    128,549
    
    
    
    (28,635
    )Proceeds from other borrowings
    
    
    23,000
    
    
    
    75,000Repayments of other borrowings
    
    
    (13,403
    )
    
    
    0Proceeds from stock purchases
    
    
    3,070
    
    
    
    3,340Excess tax benefit from stock based compensation
    
    
    1,336
    
    
    
    791Cash dividends paid to shareholders
    
    
    (7,246
    )
    
    
    (4,023
    )Other
    
    
    70
    
    
    
    492Net cash provided by (used in) financing activities
    
    
    34,705
    
    
    
    472,167Net change in cash and cash equivalents
    
    
    12,711
    
    
    
    (15,533
    )Cash and cash equivalents, beginning of period
    
    
    178,565
    
    
    
    131,307Cash and cash equivalents, end of period
    
    $
    191,276
    
    
    $
    115,774Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    199,555
    
    
    $
    112,623Income taxes
    
    
    28,427
    
    
    
    15,686Noncash financing and investing activities:Loans converted into real estate owned and other collateralized assets
    
    
    57
    
    
    
    4,436Common stock issued upon business combination
    
    
    302,754
    
    
    
    0Common stock cash dividends accrued
    
    
    8,482
    
    
    
    2,282Deferred gain on sale of branches
    
    
    804
    
    
    
    3,670
  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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Net income
    
    $
    26,981
    
    
    $
    16,931
    
    
    $
    49,902
    
    
    $
    32,347Other comprehensive income:Change in unrealized gains (losses) on investment
securities and MBS available-for-sale
    
    
    (25,686
    )
    
    
    (17,112
    )
    
    
    (18,461
    )
    
    
    (40,820
    )Less deferred income taxes
    
    
    9,507
    
    
    
    6,335
    
    
    
    6,837
    
    
    
    15,110Net other comprehensive income (loss)
    
    
    (16,179
    )
    
    
    (10,777
    )
    
    
    (11,624
    )
    
    
    (25,710
    )Comprehensive income (loss)
    
    $
    10,802
    
    
    $
    6,154
    
    
    $
    38,278
    
    
    $
    6,637
  5




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##### Table of Contents



STERLING
FINANCIAL CORPORATION
 
 Notes to Consolidated Financial Statements
 1. Basis of Presentation :
   2. Other Borrowings :
  June 30,
    
    
    December 31,2007
    
    
    2006Junior Subordinated Debentures
    
    $
    223,620
    
    
    $
    236,772Other
    
    
    26,454
    
    
    
    3,454Total
    
    $
    250,074
    
    
    $
    240,226
  6




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##### Table of Contents



CarryingMaturity
    
    
    
    
    Rate at
    
    
    Value (inSubsidiary Issuer
    
    Issue Date
    
    
    Date
    
    
    Call Date
    
    June 30, 2007
    
    
    thousands)Sterling Capital Trust VIII
    
    Sept 2006
    
    Sept 2036
    
    N/A
    
    Floating
    
    
    6.99
    %
    
    $
    51,547Sterling Capital Trust VII
    
    June 2006
    
    June 2036
    
    N/A
    
    Floating
    
    
    6.89
    
    
    
    56,702Lynnwood Financial Statutory Trust II
    
    June 2005
    
    June 2035
    
    N/A
    
    Floating
    
    
    7.16
    
    
    
    10,310Sterling Capital Trust VI
    
    June 2003
    
    Sept 2033
    
    Sept 2008
    
    Floating
    
    
    8.56
    
    
    
    10,310Sterling Capital Statutory Trust V
    
    May 2003
    
    May 2033
    
    June 2008
    
    Floating
    
    
    8.61
    
    
    
    20,619Sterling Capital Trust IV
    
    May 2003
    
    May 2033
    
    May 2008
    
    Floating
    
    
    8.51
    
    
    
    10,310Sterling Capital Trust III
    
    April 2003
    
    April 2033
    
    April 2008
    
    Floating
    
    
    8.61
    
    
    
    14,433Lynnwood Financial Statutory Trust I
    
    Mar 2003
    
    Mar 2033
    
    Mar 2007
    
    Floating
    
    
    8.51
    
    
    
    9,480Klamath First Capital Trust I
    
    July 2001
    
    July 2031
    
    June 2006
    
    Floating
    
    
    9.15
    
    
    
    15,166Sterling Capital Trust II
    
    July 2001
    
    July 2031
    
    June 2006
    
    Fixed
    
    
    10.25
    
    
    
    24,7437.94
    %*
    
    $
    223,620
 
 *
    
    weighted average rate    7




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##### Table of Contents



3. Income Taxes :
  January 1, 2007(Dollars in thousands)Unrecognized Tax Benefit
    
    $
    1,553Potential Effective Tax Rate Impact
    
    
    1,245Recognized Penalties and Interest
    
    
    308
  4. Earnings Per Share :
  Three Months Ended June 30,2007
    
    
    2006Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    26,981
    
    
    
    51,189,438
    
    
    $
    0.53
    
    
    $
    16,931
    
    
    
    35,077,647
    
    
    $
    0.48Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    509,660
    
    
    
    (0.01
    )
    
    
    0
    
    
    
    326,717
    
    
    
    0.00Diluted computations
    
    $
    26,981
    
    
    
    51,699,098
    
    
    $
    0.52
    
    
    $
    16,931
    
    
    
    35,404,364
    
    
    $
    0.48Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    307,945
    
    
    
    
    
    
    
    
    
    
    
    0
 Six Months Ended June 30,2007
    
    
    2006Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    49,902
    
    
    
    48,230,619
    
    
    $
    1.03
    
    
    $
    32,347
    
    
    
    35,012,510
    
    
    $
    0.92Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    546,161
    
    
    
    (0.01
    )
    
    
    0
    
    
    
    314,327
    
    
    
    0.00Diluted computations
    
    $
    49,902
    
    
    
    48,776,780
    
    
    $
    1.02
    
    
    $
    32,347
    
    
    
    35,326,837
    
    
    $
    0.92Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    254,613
    
    
    
    
    
    
    
    
    
    
    
    0
 8




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##### Table of Contents



5. Non-Interest Expenses :
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Employee compensation and benefits
    
    $
    39,163
    
    
    $
    25,710
    
    
    $
    77,234
    
    
    $
    50,799Occupancy and equipment
    
    
    11,681
    
    
    
    7,375
    
    
    
    22,148
    
    
    
    14,291Data processing
    
    
    4,176
    
    
    
    3,523
    
    
    
    8,373
    
    
    
    6,855Depreciation
    
    
    3,341
    
    
    
    2,432
    
    
    
    6,536
    
    
    
    4,715Advertising
    
    
    3,279
    
    
    
    2,334
    
    
    
    5,956
    
    
    
    4,255Travel and entertainment
    
    
    2,133
    
    
    
    1,444
    
    
    
    3,641
    
    
    
    2,586Amortization of core deposit intangibles
    
    
    1,226
    
    
    
    555
    
    
    
    2,267
    
    
    
    1,111Goodwill litigation costs
    
    
    1,132
    
    
    
    135
    
    
    
    1,312
    
    
    
    220Legal and accounting
    
    
    547
    
    
    
    704
    
    
    
    1,223
    
    
    
    1,239Insurance
    
    
    513
    
    
    
    316
    
    
    
    908
    
    
    
    599Merger and acquisition costs
    
    
    413
    
    
    
    0
    
    
    
    844
    
    
    
    0Other
    
    
    2,287
    
    
    
    2,461
    
    
    
    5,118
    
    
    
    4,559Total
    
    $
    69,891
    
    
    $
    46,989
    
    
    $
    135,560
    
    
    $
    91,229
 6. Segment Information :
  
    
    The Community Banking segment consists of the operations conducted
by Sterlings subsidiary, Sterling Savings Bank.
    
    The Residential Mortgage Banking segment originates and sells
servicing-retained and servicing-released residential loans
through loan production offices of Sterlings subsidiary, Golf
Savings Bank and Sterling Savings Banks subsidiary, Action
Mortgage Company (Action Mortgage).
    
    The Commercial Mortgage Banking segment originates, sells and
services commercial real estate loans and participation interests
in commercial real estate loans through offices in the western
region primarily through Sterling Savings Banks subsidiary
INTERVEST-Mortgage Investment Company (INTERVEST).
    
    The Retail Brokerage segment markets fixed income and equity
products, mutual funds, fixed and variable annuities, insurance
and other financial products within the Sterling Savings Bank
financial service center network through sales representatives of
Sterling Savings Banks subsidiary Harbor Financial Services, Inc.
    
    The Other and Eliminations segment represents the parent company
expenses and intercompany eliminations of revenue and expenses.
 9




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##### Table of Contents



As of and for the Three Months Ended June 30, 2007Residential
    
    
    CommercialCommunity
    
    
    Mortgage
    
    
    Mortgage
    
    
    Retail
    
    
    Other andBanking
    
    
    Banking
    
    
    Banking
    
    
    Brokerage
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    179,487
    
    
    $
    12,365
    
    
    $
    2,044
    
    
    $
    0
    
    
    $
    165
    
    
    $
    194,061Interest expense
    
    
    (96,950
    )
    
    
    (3,377
    )
    
    
    0
    
    
    
    0
    
    
    
    (4,694
    )
    
    
    (105,021
    )Net interest income (expense)
    
    
    82,537
    
    
    
    8,988
    
    
    
    2,044
    
    
    
    0
    
    
    
    (4,529
    )
    
    
    89,040Provision for loan losses
    
    
    (3,900
    )
    
    
    (75
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (3,975
    )Noninterest income
    
    
    20,036
    
    
    
    7,561
    
    
    
    1,967
    
    
    
    1,006
    
    
    
    (5,792
    )
    
    
    24,778Noninterest expense
    
    
    (55,263
    )
    
    
    (10,045
    )
    
    
    (2,417
    )
    
    
    (1,000
    )
    
    
    (1,166
    )
    
    
    (69,891
    )Income before income taxes
    
    $
    43,410
    
    
    $
    6,429
    
    
    $
    1,594
    
    
    
    6
    
    
    $
    (11,487
    )
    
    $
    39,952Total assets
    
    $
    11,179,900
    
    
    $
    364,419
    
    
    $
    8,984
    
    
    $
    622
    
    
    $
    (90,278
    )
    
    $
    11,463,647
 As of and for the Three Months Ended June 30, 2006Residential
    
    
    CommercialCommunity
    
    
    Mortgage
    
    
    Mortgage
    
    
    Retail
    
    
    Other andBanking
    
    
    Banking
    
    
    Banking
    
    
    Brokerage
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    120,406
    
    
    $
    3,775
    
    
    $
    2,406
    
    
    $
    0
    
    
    $
    133
    
    
    $
    126,720Interest expense
    
    
    (63,074
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (2,597
    )
    
    
    (65,671
    )Net interest income (expense)
    
    
    57,332
    
    
    
    3,775
    
    
    
    2,406
    
    
    
    0
    
    
    
    (2,464
    )
    
    
    61,049Provision for loan losses
    
    
    (4,650
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (4,650
    )Noninterest income
    
    
    13,478
    
    
    
    2,465
    
    
    
    1,246
    
    
    
    1,015
    
    
    
    (3,074
    )
    
    
    15,130Noninterest expense
    
    
    (39,407
    )
    
    
    (3,959
    )
    
    
    (2,055
    )
    
    
    (760
    )
    
    
    (808
    )
    
    
    (46,989
    )Income before income taxes
    
    $
    26,753
    
    
    $
    2,281
    
    
    $
    1,597
    
    
    $
    255
    
    
    $
    (6,346
    )
    
    $
    24,540Total assets
    
    $
    8,091,408
    
    
    $
    14,446
    
    
    $
    9,922
    
    
    $
    907
    
    
    $
    (72,345
    )
    
    $
    8,044,338
 10




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As of and for the Six Months Ended June 30, 2007Residential
    
    
    CommercialCommunity
    
    
    Mortgage
    
    
    Mortgage
    
    
    Retail
    
    
    Other andBanking
    
    
    Banking
    
    
    Banking
    
    
    Brokerage
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    341,537
    
    
    $
    23,177
    
    
    $
    4,235
    
    
    $
    0
    
    
    
    14
    
    
    $
    368,963Interest expense
    
    
    (184,201
    )
    
    
    (6,251
    )
    
    
    0
    
    
    
    0
    
    
    
    (8,855
    )
    
    
    (199,307
    )Net interest income (expense)
    
    
    157,336
    
    
    
    16,926
    
    
    
    4,235
    
    
    
    0
    
    
    
    (8,841
    )
    
    
    169,656Provision for loan losses
    
    
    (8,050
    )
    
    
    (150
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (8,200
    )Noninterest income
    
    
    38,119
    
    
    
    14,775
    
    
    
    4,174
    
    
    
    1,823
    
    
    
    (10,665
    )
    
    
    48,226Noninterest expense
    
    
    (106,192
    )
    
    
    (20,324
    )
    
    
    (5,329
    )
    
    
    (1,839
    )
    
    
    (1,876
    )
    
    
    (135,560
    )Income before income taxes
    
    $
    81,213
    
    
    $
    11,227
    
    
    $
    3,080
    
    
    
    (16
    )
    
    $
    (21,382
    )
    
    $
    74,122Total assets
    
    $
    11,179,900
    
    
    $
    364,419
    
    
    $
    8,984
    
    
    $
    622
    
    
    $
    (90,278
    )
    
    $
    11,463,647
 As of and for the Six Months Ended June 30, 2006Residential
    
    
    CommercialCommunity
    
    
    Mortgage
    
    
    Mortgage
    
    
    Retail
    
    
    Other andBanking
    
    
    Banking
    
    
    Banking
    
    
    Brokerage
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    230,946
    
    
    $
    7,242
    
    
    $
    4,263
    
    
    $
    0
    
    
    $
    448
    
    
    $
    242,899Interest expense
    
    
    (118,156
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (4,738
    )
    
    
    (122,894
    )Net interest income (expense)
    
    
    112,790
    
    
    
    7,242
    
    
    
    4,263
    
    
    
    0
    
    
    
    (4,290
    )
    
    
    120,005Provision for loan losses
    
    
    (9,300
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (9,300
    )Noninterest income
    
    
    24,932
    
    
    
    4,552
    
    
    
    2,483
    
    
    
    1,843
    
    
    
    (5,763
    )
    
    
    28,047Noninterest expense
    
    
    (76,847
    )
    
    
    (7,775
    )
    
    
    (3,923
    )
    
    
    (1,471
    )
    
    
    (1,213
    )
    
    
    (91,229
    )Income before income taxes
    
    $
    51,575
    
    
    $
    4,019
    
    
    $
    2,823
    
    
    $
    372
    
    
    $
    (11,266
    )
    
    $
    47,523Total assets
    
    $
    8,091,408
    
    
    $
    14,446
    
    
    $
    9,922
    
    
    $
    907
    
    
    $
    (72,345
    )
    
    $
    8,044,338
 7. Stock Based Compensation :
   Weighted
    
    
    Weighted Average
    
    
    AggregateAverage
    
    
    Remaining Contractual
    
    
    Intrinsic ValueNumber
    
    
    Exercise Price
    
    
    Life (in years)
    
    
    (in thousands)Outstanding, December 31, 2006
    
    
    1,485,661
    
    
    $
    19.72Granted
    
    
    310,000
    
    
    
    33.14Exercised
    
    
    (251,694
    )
    
    
    12.43Acquisitions
    
    
    573,212
    
    
    
    12.67Cancelled
    
    
    (8,623
    )
    
    
    18.35Outstanding, June 30, 2007
    
    
    2,108,556
    
    
    $
    20.65
    
    
    
    5.01
    
    
    $
    17,480Exercisable, June 30, 2007
    
    
    1,799,556
    
    
    $
    18.51
    
    
    
    4.73
    
    
    $
    18,769
  11




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Six Months EndedJune 30,2007
    
    2006Expected volatility
    
    
    28% - 29
    %
    
    
    31
    %Expected term (in years)
    
    
    4.7 - 6.0
    
    
    
    5.5Expected dividend yield
    
    
    0.90% - 1.10
    %
    
    
    0.87
    %Risk free interest rate
    
    
    4.65% - 4.81
    %
    
    
    4.36
    %
  8. New Accounting Pronouncements :
    9. Derivatives and Hedging :
   12




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##### Table of Contents



10. Cash Dividends :
  Date Paid
    
    Per Share Amount
    
    TotalJanuary 2006
    
    $
    0.055
    
    
    $1.9 millionApril 2006
    
    
    0.060
    
    
    2.1 millionJuly 2006
    
    
    0.065
    
    
    2.3 millionOctober 2006
    
    
    0.070
    
    
    2.6 millionJanuary 2007
    
    
    0.075
    
    
    3.2 millionApril 2007
    
    
    0.080
    
    
    4.1 millionJuly 2007
    
    
    0.085
    
    
    4.3 million
 11. Business Combination :
   13




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##### Table of Contents



February 28, 2007Cash and cash equivalents
    
    $
    110,775Investments and MBS
    
    
    22,574Loans receivable, net
    
    
    1,228,816Goodwill
    
    
    208,944Core deposit intangible
    
    
    7,775Other assets
    
    
    19,523Total assets acquired
    
    $
    1,598,407Deposits
    
    $
    987,694Other borrowings
    
    
    266,853Other liabilities
    
    
    11,093Total liabilities assumed
    
    
    1,265,640Net assets acquired
    
    $
    332,767
  Three Months Ended June
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Pro forma interest income
    
    $
    194,061
    
    
    $
    150,075
    
    
    $
    385,941
    
    
    $
    287,941Pro forma interest expense
    
    
    105,021
    
    
    
    76,926
    
    
    
    208,305
    
    
    
    144,148Pro forma net interest income
    
    
    89,040
    
    
    
    73,149
    
    
    
    177,636
    
    
    
    143,793Pro forma net income
    
    
    26,981
    
    
    
    21,475
    
    
    
    48,809
    
    
    
    41,071Pro forma earnings per share  basic
    
    $
    0.53
    
    
    $
    0.49
    
    
    $
    0.85
    
    
    $
    0.93Pro forma earnings per share  diluted
    
    $
    0.52
    
    
    $
    0.48
    
    
    $
    0.84
    
    
    $
    0.92
 12. 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
June 30, 2007
 This report contains forward-looking statements. For a discussion about such statements, including
the risks and uncertainties inherent therein, see Forward-Looking Statements. Managements
Discussion and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report
and in Sterlings 2006 annual report on Form 10-K .
 General
    15




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##### Table of Contents



Executive Summary and Highlights
   
    
    Net Income was $27.0 million, an increase of 59 percent over the second quarter of 2006.
    
    Non-interest income was $24.8 million, a 64 percent increase over the second quarter of 2006.
    
    Total loan originations of $1.71 billion increased 64 percent over the second quarter of 2006.
    
    Total loans receivable increased to a record $8.51 billion, an increase of 21 percent since year end.
    
    Total deposits increased to a record $7.62 billion, an increase of 13 percent since year end.
    
    Business checking accounts increased 35 percent over the comparable prior year period
and 17 percent annualized over the previous quarter.
    
    Sterlings Board of Directors approved a cash dividend of $0.09 per common share,
payable on October 10, 2007, to shareholders of record as of September 28, 2007.
 Company Growth
    16




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##### Table of Contents



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




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##### Table of Contents



Investment Securities and MBS .
    Goodwill and Other Intangible Assets .
  18




---



##### Table of Contents



Real Estate Owned and Other Collateralized Assets.
  Income Taxes.
  Results of Operations
 Overview .
  Net Interest Income
 19




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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 30,2007 vs. 2006
    
    
    2007 vs. 2006Increase (Decrease) Due to:
    
    
    Increase (Decrease) Due to:Rate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Volume
    
    
    Rate
    
    
    Volume
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    Total(Dollars in thousands)Rate/volume analysis:Interest income:Loans
    
    $
    59,993
    
    
    $
    5,925
    
    
    $
    3,587
    
    
    $
    69,505
    
    
    $
    106,403
    
    
    $
    15,117
    
    
    $
    8,666
    
    
    $
    130,186MBS
    
    
    (3,098
    )
    
    
    (22
    )
    
    
    3
    
    
    
    (3,117
    )
    
    
    (6,034
    )
    
    
    46
    
    
    
    (6
    )
    
    
    (5,994
    )Investments and cash equivalents
    
    
    492
    
    
    
    522
    
    
    
    203
    
    
    
    1,217
    
    
    
    958
    
    
    
    1,025
    
    
    
    429
    
    
    
    2,412Total interest income
    
    
    57,387
    
    
    
    6,425
    
    
    
    3,793
    
    
    
    67,605
    
    
    
    101,327
    
    
    
    16,188
    
    
    
    9,089
    
    
    
    126,604Interest expense:Deposits
    
    
    19,887
    
    
    
    6,656
    
    
    
    3,214
    
    
    
    29,757
    
    
    
    36,061
    
    
    
    15,374
    
    
    
    7,232
    
    
    
    58,667Borrowings
    
    
    5,349
    
    
    
    3,490
    
    
    
    754
    
    
    
    9,593
    
    
    
    8,416
    
    
    
    7,917
    
    
    
    1,413
    
    
    
    17,746Total interest expense
    
    
    25,236
    
    
    
    10,146
    
    
    
    3,968
    
    
    
    39,350
    
    
    
    44,477
    
    
    
    23,291
    
    
    
    8,645
    
    
    
    76,413Net changes in NII
    
    $
    32,151
    
    
    $
    (3,721
    )
    
    $
    (175
    )
    
    $
    28,255
    
    
    $
    56,850
    
    
    $
    (7,103
    )
    
    $
    444
    
    
    $
    50,191
  Tax EquivalentThree Months Ended
    
    Net Interest MarginJune 30, 2007
    
    
    3.41
    %March 31, 2007
    
    
    3.41
    %December 31, 2006
    
    
    3.37
    %September 30, 2006
    
    
    3.34
    %June 30, 2006
    
    
    3.26
    %
  Provision for Losses on Loans.
 20




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##### Table of Contents



Six Months Ended June 30,2007
    
    
    2006(Dollars in thousands)Allowance  loans, January 1
    
    $
    77,849
    
    
    $
    52,034Acquired
    
    
    15,029
    
    
    
    0Provision
    
    
    8,200
    
    
    
    9,300Charge offs, net of recoveries
    
    
    (1,503
    )
    
    
    (1,977
    )Transfers
    
    
    59
    
    
    
    (385
    )Allowance  loans, June 30
    
    
    99,634
    
    
    
    58,972Allowance  unfunded commitments, January 1
    
    
    5,840
    
    
    
    3,449Acquired
    
    
    266
    
    
    
    0Transfers
    
    
    (59
    )
    
    
    385Allowance  unfunded commitments, June 30
    
    
    6,047
    
    
    
    3,834Total credit allowance
    
    $
    105,681
    
    
    $
    62,806
   Non-Interest Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Fees and service charges
    
    $
    13,694
    
    
    $
    10,615
    
    
    $
    25,886
    
    
    $
    19,694Mortgage banking operations
    
    
    9,807
    
    
    
    2,725
    
    
    
    18,665
    
    
    
    4,996Loan servicing fees
    
    
    410
    
    
    
    482
    
    
    
    1,093
    
    
    
    751Real estate owned operations
    
    
    (93
    )
    
    
    78
    
    
    
    (138
    )
    
    
    385BOLI
    
    
    1,717
    
    
    
    1,203
    
    
    
    3,264
    
    
    
    2,386Other non-interest expense
    
    
    (757
    )
    
    
    27
    
    
    
    (544
    )
    
    
    (165
    )Total
    
    $
    24,778
    
    
    $
    15,130
    
    
    $
    48,226
    
    
    $
    28,047
 21




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##### Table of Contents



As of and for the
    
    
    As of and for theThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    2006
    
    
    2007
    
    2006Originations of residential mortgage loans
    
    $
    454,921
    
    
    $
    78,124
    
    
    
    $
    799,539
    
    
    $
    149,221Originations of commercial real estate loans
    
    
    1,200
    
    
    
    36,528
    
    
    
    
    12,410
    
    
    
    70,503Sales of residential mortgage loans
    
    
    359,903
    
    
    
    49,868
    
    
    
    
    732,211
    
    
    
    84,600Sales of commercial real estate loans
    
    
    22,577
    
    
    
    0
    
    
    
    
    29,503
    
    
    
    0Principal balances of residential loans serviced for others
    
    
    636,598
    
    
    
    560,708
    
    
    
    
    636,598
    
    
    
    560,708Principal balances of commercial real estate loans
serviced for others
    
    
    1,796,859
    
    
    
    852,532
    
    
    
    
    1,796,859
    
    
    
    852,532
 Non-Interest Expenses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Employee compensation and benefits
    
    $
    39,163
    
    
    $
    25,710
    
    
    $
    77,234
    
    
    $
    50,799Occupancy and equipment
    
    
    11,681
    
    
    
    7,375
    
    
    
    22,148
    
    
    
    14,291Data processing
    
    
    4,176
    
    
    
    3,523
    
    
    
    8,373
    
    
    
    6,855Depreciation
    
    
    3,341
    
    
    
    2,432
    
    
    
    6,536
    
    
    
    4,715Advertising
    
    
    3,279
    
    
    
    2,334
    
    
    
    5,956
    
    
    
    4,255Travel and entertainment
    
    
    2,133
    
    
    
    1,444
    
    
    
    3,641
    
    
    
    2,586Amortization of core deposit intangibles
    
    
    1,226
    
    
    
    555
    
    
    
    2,267
    
    
    
    1,111Legal and accounting
    
    
    547
    
    
    
    704
    
    
    
    1,223
    
    
    
    1,239Merger and acquisition costs
    
    
    413
    
    
    
    0
    
    
    
    844
    
    
    
    0Insurance
    
    
    513
    
    
    
    316
    
    
    
    908
    
    
    
    599Goodwill litigation costs
    
    
    1,132
    
    
    
    135
    
    
    
    1,312
    
    
    
    220Other
    
    
    2,287
    
    
    
    2,461
    
    
    
    5,118
    
    
    
    4,559Total
    
    $
    69,891
    
    
    $
    46,989
    
    
    $
    135,560
    
    
    $
    91,229
 22




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##### Table of Contents



Income Tax Provision
 Financial Position
 Assets
 Investment Securities and MBS
 Loans Receivable
  June 30, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Residential real estate
    
    $
    676,761
    
    
    
    7.8
    
    
    $
    654,661
    
    
    
    9.2Multifamily real estate
    
    
    234,349
    
    
    
    2.7
    
    
    
    263,053
    
    
    
    3.7Commercial real estate
    
    
    1,374,218
    
    
    
    15.9
    
    
    
    795,386
    
    
    
    11.2Construction
    
    
    2,657,972
    
    
    
    30.8
    
    
    
    2,290,882
    
    
    
    32.2Consumer  direct
    
    
    765,217
    
    
    
    8.9
    
    
    
    749,626
    
    
    
    10.5Consumer  indirect
    
    
    337,491
    
    
    
    3.9
    
    
    
    288,704
    
    
    
    4.1Commercial banking
    
    
    2,579,134
    
    
    
    30.0
    
    
    
    2,069,086
    
    
    
    29.1Gross loans receivable
    
    
    8,625,142
    
    
    
    100.0
    
    
    
    7,111,398
    
    
    
    100.0Net deferred origination fees
    
    
    (18,085
    )
    
    
    
    
    
    
    (12,308
    )Allowance for losses on loans
    
    
    (99,634
    )
    
    
    
    
    
    
    (77,849
    )Loans receivable, net
    
    $
    8,507,423
    
    
    
    
    
    
    $
    7,021,241
 23




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Residential real estate
    
    $
    454,921
    
    
    $
    78,124
    
    
    $
    799,539
    
    
    $
    149,221Multifamily real estate
    
    
    4,650
    
    
    
    1,465
    
    
    
    4,650
    
    
    
    1,465Commercial real estate
    
    
    1,200
    
    
    
    36,528
    
    
    
    12,410
    
    
    
    70,503Construction
    
    
    735,552
    
    
    
    462,523
    
    
    
    1,270,372
    
    
    
    1,026,115Consumer  direct
    
    
    113,321
    
    
    
    103,659
    
    
    
    176,889
    
    
    
    182,508Consumer  indirect
    
    
    57,013
    
    
    
    41,152
    
    
    
    121,925
    
    
    
    70,687Commercial banking
    
    
    339,077
    
    
    
    316,150
    
    
    
    598,279
    
    
    
    612,110Total loans originated
    
    $
    1,705,734
    
    
    $
    1,039,601
    
    
    $
    2,984,064
    
    
    $
    2,112,609
 Deposits
 June 30, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Interest-bearing checking
    
    $
    490,695
    
    
    
    6.4
    
    
    $
    483,551
    
    
    
    7.2Noninterest-bearing checking
    
    
    918,393
    
    
    
    12.1
    
    
    
    834,140
    
    
    
    12.4Savings and MMDA
    
    
    2,132,732
    
    
    
    28.0
    
    
    
    1,830,313
    
    
    
    27.1Time deposits
    
    
    4,078,542
    
    
    
    53.5
    
    
    
    3,598,024
    
    
    
    53.3Total deposits
    
    $
    7,620,362
    
    
    
    100.0
    
    
    $
    6,746,028
    
    
    
    100.0
  Borrowings
 Asset and Liability Management
   24




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##### Table of Contents



Change inInterest Rate in
    
    June 30,
    
    December 31,Basis Points
    
    2007
    
    2006(Rate Shock)
    
    % Change in NII
    
    % Change in NII+200
    
    
    (1.3
    )
    
    
    (1.5
    )+100
    
    
    (0.5
    )
    
    
    (0.8
    )Static
    
    
    0.0
    
    
    
    0.0-100
    
    
    (0.1
    )
    
    
    (0.4
    )-200
    
    
    (1.2
    )
    
    
    (1.6
    )
  25




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##### Table of Contents



At December 31,At June 30, 2006
    
    2006Change inInterest Rate
    
    %
    
    %in Basis Points
    
    Change
    
    Change(Rate Shock)
    
    in EVE
    
    in EVE+200
    
    
    (6.3
    )
    
    
    (5.0
    )+100
    
    
    (2.2
    )
    
    
    (1.5
    )Static
    
    
    0.0
    
    
    
    0.0-100
    
    
    (1.7
    )
    
    
    (4.6
    )-200
    
    
    (10.2
    )
    
    
    (17.9
    )
 Net Interest Income
 Liquidity and Capital Resources
     26




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##### Table of Contents



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




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##### 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
    
    $
    436,896
    
    
    
    4.0
    %
    
    $
    546,119
    
    
    
    5.0
    %
    
    $
    925,482
    
    
    
    8.5
    %Sterling Savings Bank
    
    
    425,293
    
    
    
    4.0
    %
    
    
    531,616
    
    
    
    5.0
    %
    
    
    919,401
    
    
    
    8.7
    %Golf Savings Bank
    
    
    11,198
    
    
    
    4.0
    %
    
    
    13,998
    
    
    
    5.0
    %
    
    
    24,128
    
    
    
    8.6
    %Tier 1 (to risk-weighted assets)Sterling
    
    
    376,298
    
    
    
    4.0
    %
    
    
    564,447
    
    
    
    6.0
    %
    
    
    925,482
    
    
    
    9.8
    %Sterling Savings Bank
    
    
    368,424
    
    
    
    4.0
    %
    
    
    552,636
    
    
    
    6.0
    %
    
    
    919,401
    
    
    
    10.0
    %Golf Savings Bank
    
    
    8,467
    
    
    
    4.0
    %
    
    
    12,701
    
    
    
    6.0
    %
    
    
    24,128
    
    
    
    11.4
    %Total (to risk-weighted assets)Sterling
    
    
    752,596
    
    
    
    8.0
    %
    
    
    940,745
    
    
    
    10.0
    %
    
    
    1,034,163
    
    
    
    11.0
    %Sterling Savings Bank
    
    
    736,848
    
    
    
    8.0
    %
    
    
    921,060
    
    
    
    10.0
    %
    
    
    1,023,763
    
    
    
    11.1
    %Golf Savings Bank
    
    
    16,934
    
    
    
    8.0
    %
    
    
    21,168
    
    
    
    10.0
    %
    
    
    25,447
    
    
    
    12.0
    %
 28




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##### Table of Contents



Goodwill Litigation
  New Accounting Pronouncements
    Regulation and Compliance
  29




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##### Table of Contents



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




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##### Table of Contents



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




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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
  
 Item 3 Defaults Upon Senior Securities
  32




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##### Table of Contents



STERLING FINANCIAL CORPORATION
PART II  Other Information
 
 Item 4 Submission of Matters to a Vote of Security Holders
  (1)
    
    Election of three Directors to serve for terms expiring in the year 2010:
 James P. Fugate
    
    Votes for:
    
    
    33,854,753
    
    
    Withheld:
    
    
    4,873,612James B. Keegan, Jr.
    
    Votes for:
    
    
    38,108,603
    
    
    Withheld:
    
    
    619,762Robert D. Larrabee
    
    Votes for:
    
    
    34,658,544
    
    
    Withheld:
    
    
    4,069,821
  Michael F. Reuling
    
    Votes for:
    
    
    38,109,258
    
    
    Withheld:
    
    
    619,107
  Donald N. Bauhofer
    
    Donald J. LukesWilliam L. Eisenhart
    
    William W. ZuppeHarold B. Gilkey
 (2)
    
    Amendment to Sterlings Articles of Incorporation to increase the number of authorized shares
of Common Stock to 110,000,000.
 Votes for:  31,114,536
    
    
    
    Against:
    
    
    7,546,176
    
    
    Abstentions:
    
    
    67,647
 (3)
    
    Adoption of the Sterling 2007 Long-Term Incentive Plan.
 Votes for:  26,864,133
     
    
    
    Against:
    
    
    5,721,783
    
    
    Abstentions:
    
    
    171,608
  (4)
    
    Ratification of the appointment of BDO Seidman, LLP as the independent registered public
accounting firm for the year ending December 31, 2007 and any interim periods. The proposal
received the following votes:
 Votes
for:  38,452,811
     
    
    
    Against:
    
    
    193,866
    
    
    Abstentions:
    
    
    81,688
  
 Item 5 Other Information
  
 Item 6 Exhibits
  33




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##### Table of Contents



STERLING
FINANCIAL CORPORATION
 Signatures
  STERLING FINANCIAL CORPORATION(Registrant)August 8, 2007

Date
    
    By:
    
    /s/ Robert G. Butterfield

          Robert G. ButterfieldSenior Vice President, Controller, andPrincipal Accounting Officer
 34




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##### Table of Contents



Exhibit No. Exhibit Index
 3.1
    
    Articles of Restatement of Restated Articles of Incorporation of Sterling. Filed as Exhibit
3.1 to Sterlings registration statement on Form S-4/A, filed on June 22, 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 Forma 8-K filed on March 2, 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.10.1
    
    Sterlings 2007 Long-Term Incentive Plan. Filed as Exhibit 99.1 to Sterlings registration
statement on Form S-8 filed on July 30, 2007, and incorporated by reference herein.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.