##### 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 SEPTEMBER 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO.
 Commission File Number.....0-20800
 STERLING FINANCIAL CORPORATION
  Washington
(State or other jurisdiction of 
incorporation or organization)
    
    91-1572822
(I.R.S. Employer
Identification No.)
 
 
 þ o
  Large accelerated filer
þ

    

  Accelerated filer
o

    

    Non-accelerated filer o
(Do not check if a smaller reporting company)

  

    Smaller reporting company
o
 o þ
  Class
    
    Outstanding as of November 1, 2008Common Stock ($1.00 par value)
    
    52,133,798




---



##### 



STERLING FINANCIAL CORPORATION
 FORM 10-Q
For the Quarter Ended September 30, 2008
 TABLE OF CONTENTS
 PagePART I  Financial Information
    
    
    1Item 1 Financial Statements (Unaudited)
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Income
    
    
    2Consolidated Statements of Cash Flows
    
    
    3Consolidated Statements of Comprehensive Income
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4 Controls and Procedures
    
    
    37PART II  Other Information
    
    
    39Item 1 Legal Proceedings
    
    
    39Item 1a Risk Factors
    
    
    39Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3 Defaults Upon Senior Securities
    
    
    40Item 4 Submission of Matters to a Vote of Security Holders
    
    
    40Item 5 Other Information
    
    
    40Item 6 Exhibits
    
    
    40Signatures
    
    
    41EX-3.1EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



PART I  Financial Information
 
 Item 1  Financial Statements
 STERLING FINANCIAL CORPORATION
 
 Consolidated Balance Sheets
 (Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing
    
    $
    85
    
    
    $
    10,042Non-interest bearing
    
    
    128,393
    
    
    
    184,436Total cash and cash equivalents
    
    
    128,478
    
    
    
    194,478Restricted cash
    
    
    1,050
    
    
    
    1,100Investment securities and mortgage-backed securities (''MBS''):Available for sale
    
    
    2,100,880
    
    
    
    1,853,271Held to maturity
    
    
    177,519
    
    
    
    132,793Loans receivable, net
    
    
    9,074,911
    
    
    
    8,948,307Loans held for sale ($84,395 at fair value as of September 30, 2008)
    
    
    86,090
    
    
    
    55,840Accrued interest receivable
    
    
    57,005
    
    
    
    63,649Real estate owned and other collateralized assets, net
    
    
    54,795
    
    
    
    11,075Office properties and equipment, net
    
    
    91,138
    
    
    
    93,467Bank-owned life insurance (''BOLI'')
    
    
    156,271
    
    
    
    150,825Goodwill
    
    
    451,323
    
    
    
    453,136Other intangible assets
    
    
    27,950
    
    
    
    31,627Mortgage servicing rights, net
    
    
    7,392
    
    
    
    9,042Prepaid expenses and other assets, net
    
    
    208,107
    
    
    
    151,165Total assets
    
    $
    12,622,909
    
    
    $
    12,149,775LIABILITIES:Deposits
    
    $
    8,073,303
    
    
    $
    7,677,772Advances from Federal Home Loan Bank (''FHLB'')
    
    
    1,787,264
    
    
    
    1,687,989Securities sold subject to repurchase agreements and funds purchased
    
    
    1,178,262
    
    
    
    1,178,845Other borrowings
    
    
    248,275
    
    
    
    273,015Cashiers checks issued and payable
    
    
    13,752
    
    
    
    764Borrowers' reserves for taxes and insurance
    
    
    3,727
    
    
    
    1,765Accrued interest payable
    
    
    37,742
    
    
    
    40,209Accrued expenses and other liabilities
    
    
    100,157
    
    
    
    104,086Total liabilities
    
    
    11,442,482
    
    
    
    10,964,445SHAREHOLDERS' EQUITY:Preferred stock, $1 par value; 10,000,000 shares authorized;
no shares issued and outstanding
    
    
    0
    
    
    
    0Common stock, $1 par value; 100,000,000 shares authorized;
52,131,757 and 51,456,461 shares issued and outstanding
    
    
    52,132
    
    
    
    51,456Additional paid-in capital
    
    
    897,466
    
    
    
    892,028Accumulated other comprehensive loss:Unrealized losses on investment securities and MBS available-for-sale,
net of deferred income taxes of $18,112 and $10,518
    
    
    (30,879
    )
    
    
    (17,967
    )Retained earnings
    
    
    261,708
    
    
    
    259,813Total shareholders' equity
    
    
    1,180,427
    
    
    
    1,185,330Total liabilities and shareholders' equity
    
    $
    12,622,909
    
    
    $
    12,149,775
  1




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands, except per share data)Interest income:Loans
    
    $
    147,585
    
    
    $
    179,132
    
    
    $
    461,976
    
    
    $
    504,720MBS
    
    
    25,219
    
    
    
    18,882
    
    
    
    75,304
    
    
    
    58,706Investments and cash equivalents
    
    
    3,523
    
    
    
    1,904
    
    
    
    8,672
    
    
    
    5,455Total interest income
    
    
    176,327
    
    
    
    199,918
    
    
    
    545,952
    
    
    
    568,881Interest expense:Deposits
    
    
    57,101
    
    
    
    71,489
    
    
    
    177,409
    
    
    
    205,875Short-term borrowings
    
    
    3,061
    
    
    
    6,690
    
    
    
    15,900
    
    
    
    26,095Long-term borrowings
    
    
    26,157
    
    
    
    28,075
    
    
    
    76,429
    
    
    
    73,591Total interest expense
    
    
    86,319
    
    
    
    106,254
    
    
    
    269,738
    
    
    
    305,561Net interest income
    
    
    90,008
    
    
    
    93,664
    
    
    
    276,214
    
    
    
    263,320Provision for credit losses
    
    
    (36,950
    )
    
    
    (3,888
    )
    
    
    (105,080
    )
    
    
    (12,088
    )Net interest income after provision for credit losses
    
    
    53,058
    
    
    
    89,776
    
    
    
    171,134
    
    
    
    251,232Non-interest income:Fees and service charges
    
    
    15,327
    
    
    
    14,966
    
    
    
    45,490
    
    
    
    40,852Mortgage banking operations
    
    
    6,434
    
    
    
    7,314
    
    
    
    20,859
    
    
    
    25,979Loan servicing fees
    
    
    737
    
    
    
    366
    
    
    
    1,286
    
    
    
    1,459Real estate owned and other collateralized assets operations
    
    
    102
    
    
    
    223
    
    
    
    (242
    )
    
    
    85BOLI
    
    
    1,362
    
    
    
    1,553
    
    
    
    4,575
    
    
    
    4,817Other
    
    
    (943
    )
    
    
    (215
    )
    
    
    (2,289
    )
    
    
    (759
    )Total non-interest income
    
    
    23,019
    
    
    
    24,207
    
    
    
    69,679
    
    
    
    72,433Non-interest expenses
    
    
    71,520
    
    
    
    74,104
    
    
    
    216,074
    
    
    
    209,664Income before income taxes
    
    
    4,557
    
    
    
    39,879
    
    
    
    24,739
    
    
    
    114,001Income tax (provision) benefit
    
    
    441
    
    
    
    (13,349
    )
    
    
    (5,190
    )
    
    
    (37,569
    )Net income
    
    $
    4,998
    
    
    $
    26,530
    
    
    $
    19,549
    
    
    $
    76,432Earnings per share  basic
    
    $
    0.10
    
    
    $
    0.52
    
    
    $
    0.38
    
    
    $
    1.55Earnings per share  diluted
    
    $
    0.10
    
    
    $
    0.51
    
    
    $
    0.38
    
    
    $
    1.54Weighted average shares outstanding  basic
    
    
    51,821,446
    
    
    
    51,279,114
    
    
    
    51,678,981
    
    
    
    49,257,951Weighted average shares outstanding  diluted
    
    
    52,006,215
    
    
    
    51,660,186
    
    
    
    51,892,900
    
    
    
    49,768,308
  2




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    19,549
    
    
    $
    76,432Adjustments to reconcile net income to net cash provided by operating activities:Provision for credit losses
    
    
    105,080
    
    
    
    12,088Accretion of deferred gain on sale of branches
    
    
    (603
    )
    
    
    (536
    )Net gain on sales of loans, investment securities and MBS
    
    
    (14,883
    )
    
    
    (16,499
    )Stock based compensation
    
    
    1,901
    
    
    
    1,013Excess tax benefit from stock based compensation
    
    
    (844
    )
    
    
    (1,419
    )Stock issuances relating to 401(k) match
    
    
    1,979
    
    
    
    1,637Other gains and losses
    
    
    3,049
    
    
    
    3,024Increase in cash surrender value of BOLI
    
    
    (5,091
    )
    
    
    (4,817
    )Depreciation and amortization
    
    
    18,620
    
    
    
    18,184Change in:Accrued interest receivable
    
    
    6,644
    
    
    
    (3,117
    )Prepaid expenses and other assets
    
    
    (46,908
    )
    
    
    (10,027
    )Cashiers checks issued and payable
    
    
    12,988
    
    
    
    (16,867
    )Accrued interest payable
    
    
    (2,467
    )
    
    
    (2,664
    )Accrued expenses and other liabilities
    
    
    (5,705
    )
    
    
    7,094Proceeds from sales of loans originated for sale
    
    
    868,126
    
    
    
    988,255Loans originated for sale
    
    
    (853,166
    )
    
    
    (975,871
    )Net cash provided by operating activities
    
    
    108,269
    
    
    
    75,910Cash flows from investing activities:Change in restricted cash
    
    
    50
    
    
    
    50Loans funded and purchased
    
    
    (3,048,586
    )
    
    
    (3,702,199
    )Loan principal received
    
    
    2,733,861
    
    
    
    3,122,955Proceeds from sales of other loans
    
    
    (77
    )
    
    
    112,651Purchase of investment securities
    
    
    (644,735
    )
    
    
    (79,941
    )Proceeds from maturities of investment securities
    
    
    630,656
    
    
    
    38,580Proceeds from sale of investments
    
    
    0
    
    
    
    5,609Net cash and cash equivalents acquired
    
    
    0
    
    
    
    92,419Purchase of BOLI
    
    
    0
    
    
    
    0Purchase of MBS
    
    
    (524,265
    )
    
    
    (120,419
    )Principal payments on MBS
    
    
    219,442
    
    
    
    183,899Purchase of office properties and equipment
    
    
    (8,417
    )
    
    
    (10,806
    )Sales of office properties and equipment
    
    
    73
    
    
    
    3,810Improvements and other changes to real estate owned
    
    
    1,923
    
    
    
    30Proceeds from sales and liquidation of real estate owned
    
    
    6,197
    
    
    
    1,348Net cash provided by (used in) investing activities
    
    
    (633,878
    )
    
    
    (352,014
    )
  3




---



##### Table of Contents



STERLING FINANCIAL CORPORATIONConsolidated Statements of Cash Flows(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007(Dollars in thousands)Cash flows from financing activities:Net change in transaction and savings deposits
    
    $
    (293,667
    )
    
    $
    105,673Proceeds from issuance of time deposits
    
    
    3,904,739
    
    
    
    3,010,268Payments for maturing time deposits
    
    
    (3,388,151
    )
    
    
    (3,280,346
    )Interest credited to deposits
    
    
    172,610
    
    
    
    190,115Advances from FHLB
    
    
    780,245
    
    
    
    1,517,744Repayment of advances from FHLB
    
    
    (680,505
    )
    
    
    (1,630,642
    )Net change in securities sold subject to repurchase agreements
and funds purchased
    
    
    (583
    )
    
    
    324,789Proceeds from other borrowings
    
    
    0
    
    
    
    69,392Repayment of other borrowings
    
    
    (24,000
    )
    
    
    (36,403
    )Proceeds from exercise of stock options
    
    
    1,390
    
    
    
    3,546Excess tax benefit from stock based compensation
    
    
    844
    
    
    
    1,419Cash dividends paid to shareholders
    
    
    (15,275
    )
    
    
    (11,635
    )Other
    
    
    1,962
    
    
    
    875Net cash provided by (used in) financing activities
    
    
    459,609
    
    
    
    264,795Net change in cash and cash equivalents
    
    
    (66,000
    )
    
    
    (11,309
    )Cash and cash equivalents, beginning of period
    
    
    194,478
    
    
    
    178,565Cash and cash equivalents, end of period
    
    $
    128,478
    
    
    $
    167,256Supplemental disclosures:Cash paid during the period for:Interest
    
    $
    272,205
    
    
    $
    306,252Income taxes
    
    
    15,968
    
    
    
    35,902Noncash financing and investing activities:Loans converted into real estate owned and other collateralized assets
    
    
    51,840
    
    
    
    753Common stock issued upon business combination
    
    
    0
    
    
    
    8,927Common stock cash dividends accrued
    
    
    5,211
    
    
    
    4,611Deferred gain on sale of branches
    
    
    0
    
    
    
    804
  4




---



##### Table of Contents



STERLING FINANCIAL CORPORATIONConsolidated Statements of Comprehensive Income
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Net income
    
    $
    4,998
    
    
    $
    26,530
    
    
    $
    19,549
    
    
    $
    76,432Other comprehensive income:Change in unrealized losses on investment
securities and MBS available-for-sale
    
    
    2,116
    
    
    
    20,482
    
    
    
    (20,506
    )
    
    
    2,021Less deferred income taxes
    
    
    (780
    )
    
    
    (7,575
    )
    
    
    7,594
    
    
    
    (738
    )Net other comprehensive income (loss)
    
    
    1,336
    
    
    
    12,907
    
    
    
    (12,912
    )
    
    
    1,283Comprehensive income
    
    $
    6,334
    
    
    $
    39,437
    
    
    $
    6,637
    
    
    $
    77,715
  5




---



##### Table of Contents



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




---



##### Table of Contents



2. Allowance for Credit Losses:
  Nine Months Ended September 30,2008
    
    
    2007Allowance for credit lossesAllowance  loans, January 1
    
    $
    111,026
    
    
    $
    77,849Allowance for losses on loans acquired
    
    
    0
    
    
    
    15,294Provision
    
    
    105,081
    
    
    
    11,838Amounts written off
    
    
    (40,230
    )
    
    
    (3,429
    )Recoveries
    
    
    1,433
    
    
    
    696Transfers
    
    
    (3
    )
    
    
    (206
    )Allowance  loans, September 30
    
    
    177,307
    
    
    
    102,042Allowance  unfunded commitments, January 1
    
    
    6,306
    
    
    
    5,840Acquired
    
    
    0
    
    
    
    0Provision
    
    
    53
    
    
    
    258Amounts written off
    
    
    (6
    )
    
    
    0Transfers
    
    
    12
    
    
    
    206Allowance  unfunded commitments, September 30
    
    
    6,365
    
    
    
    6,304Total credit allowance
    
    $
    183,672
    
    
    $
    108,346
   3. Goodwill and Other Intangible Assets:
  7




---



##### Table of Contents



4. Other Borrowings :
  September 30,
    
    
    December 31,2008
    
    
    2007Junior subordinated debentures
    
    $
    245,275
    
    
    $
    270,015Other
    
    
    3,000
    
    
    
    3,000Total other borrowings
    
    $
    248,275
    
    
    $
    273,015
   Maturity
    
    
    
    Rate at September 30,
    
    
    Amount (inSubsidiary Issuer
    
    Issue Date
    
    Date
    
    Call Date
    
    2008
    
    
    Thousands)Sterling Capital Trust IX
    
    July 2007
    
    Oct 2037
    
    N/A
    
    Floating
    
    
    4.19
    %
    
    $
    46,392Sterling Capital Trust VIII
    
    Sept 2006
    
    Sept 2036
    
    N/A
    
    Floating
    
    
    4.45
    
    
    
    51,547Sterling Capital Trust VII
    
    June 2006
    
    June 2036
    
    N/A
    
    Floating
    
    
    4.34
    
    
    
    56,702Lynnwood Capital Trust II
    
    June 2005
    
    June 2035
    
    June 2010
    
    Floating
    
    
    4.62
    
    
    
    10,310Sterling Capital Trust VI
    
    June 2003
    
    Sept 2033
    
    Sept 2008
    
    Floating
    
    
    6.02
    
    
    
    10,310Sterling Capital Statutory Trust V
    
    May 2003
    
    May 2033
    
    June 2008
    
    Floating
    
    
    6.73
    
    
    
    20,619Sterling Capital Trust IV
    
    May 2003
    
    May 2033
    
    May 2008
    
    Floating
    
    
    5.95
    
    
    
    10,310Sterling Capital Trust III
    
    April 2003
    
    April 2033
    
    April 2008
    
    Floating
    
    
    6.05
    
    
    
    14,433Lynnwood Capital Trust I
    
    Mar 2003
    
    Mar 2033
    
    Mar 2007
    
    Floating
    
    
    6.63
    
    
    
    9,470Klamath First Capital Trust I
    
    July 2001
    
    July 2031
    
    June 2006
    
    Floating
    
    
    6.88
    
    
    
    15,1825.03
    %*
    
    $
    245,275
 
 *
    
    Weighted average rate  8




---



##### Table of Contents



5. Earnings Per Share :
  Three Months Ended September 30,2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    4,998
    
    
    
    51,821,446
    
    
    $
    0.10
    
    
    $
    26,530
    
    
    
    51,279,114
    
    
    $
    0.52Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    184,769
    
    
    
    0.00
    
    
    
    0
    
    
    
    381,072
    
    
    
    (0.01
    )Diluted computations
    
    $
    4,998
    
    
    
    52,006,215
    
    
    $
    0.10
    
    
    $
    26,530
    
    
    
    51,660,186
    
    
    $
    0.51Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    1,823,738
    
    
    
    
    
    
    
    
    
    
    
    735,749
 Nine Months Ended September 30,2008
    
    
    2007Net
    
    
    Weighted
    
    
    Per Share
    
    
    Net
    
    
    Weighted
    
    
    Per ShareIncome
    
    
    Avg. Shares
    
    
    Amount
    
    
    Income
    
    
    Avg. Shares
    
    
    Amount(Dollars in thousands, except per share amounts)Basic computations
    
    $
    19,549
    
    
    
    51,678,981
    
    
    $
    0.38
    
    
    $
    76,432
    
    
    
    49,257,951
    
    
    $
    1.55Effect of dilutive securities:Common stock options and
restricted shares
    
    
    0
    
    
    
    213,919
    
    
    
    0.00
    
    
    
    0
    
    
    
    510,357
    
    
    
    (0.01
    )Diluted computations
    
    $
    19,549
    
    
    
    51,892,900
    
    
    $
    0.38
    
    
    $
    76,432
    
    
    
    49,768,308
    
    
    $
    1.54Antidilutive options not included
in diluted earnings per share
    
    
    
    
    
    
    1,700,224
    
    
    
    
    
    
    
    
    
    
    
    281,396
 9




---



##### Table of Contents



6. Non-Interest Expenses :
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Employee compensation and benefits
    
    $
    39,851
    
    
    $
    41,114
    
    
    $
    121,874
    
    
    $
    118,348Occupancy and equipment
    
    
    10,829
    
    
    
    10,767
    
    
    
    33,054
    
    
    
    32,915Data processing
    
    
    5,179
    
    
    
    4,833
    
    
    
    15,665
    
    
    
    13,206Depreciation
    
    
    3,445
    
    
    
    3,387
    
    
    
    10,516
    
    
    
    9,923Advertising
    
    
    3,158
    
    
    
    3,289
    
    
    
    8,975
    
    
    
    9,245Insurance
    
    
    1,869
    
    
    
    1,338
    
    
    
    5,507
    
    
    
    2,246Travel and entertainment
    
    
    1,586
    
    
    
    2,022
    
    
    
    5,032
    
    
    
    5,663Amortization of core deposit intangibles
    
    
    1,225
    
    
    
    1,225
    
    
    
    3,677
    
    
    
    3,492Legal and accounting
    
    
    560
    
    
    
    591
    
    
    
    2,097
    
    
    
    1,814Goodwill litigation costs
    
    
    105
    
    
    
    1,525
    
    
    
    360
    
    
    
    2,837Merger and acquisition costs
    
    
    18
    
    
    
    263
    
    
    
    200
    
    
    
    1,883Other
    
    
    3,695
    
    
    
    3,750
    
    
    
    9,117
    
    
    
    8,092Total
    
    $
    71,520
    
    
    $
    74,104
    
    
    $
    216,074
    
    
    $
    209,664
  7. Segment Information :
  
    
    The Community Banking segment provides traditional bank services through the retail and
commercial banking groups of Sterling's subsidiary, Sterling Savings Bank.
 
    
    The Residential Construction Lending segment originates and services loans through the real
estate division of Sterling's subsidiary, Sterling Savings Bank.
 
    
    The Residential Mortgage Banking segment originates and sells servicing-retained and
servicing-released residential loans through loan production offices of Sterling's subsidiary,
Golf Savings Bank.
 
    
    The Commercial Mortgage Banking segment originates, sells and services commercial real
estate loans and participation interests in commercial real estate loans through offices in
the western region primarily through Sterling Savings Bank's subsidiary INTERVEST-Mortgage
Investment Company (''INTERVEST'').
 
    
    The Other and Eliminations segment represents the parent company expenses and intercompany
eliminations of revenue and expenses.
  10




---



##### Table of Contents



As of and for the Three Months Ended September 30, 2008Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    140,776
    
    
    $
    23,178
    
    
    $
    7,407
    
    
    $
    4,766
    
    
    $
    200
    
    
    $
    176,327Interest expense
    
    
    (64,739
    )
    
    
    (14,529
    )
    
    
    (4,144
    )
    
    
    0
    
    
    
    (2,907
    )
    
    
    (86,319
    )Net interest income (expense)
    
    
    76,037
    
    
    
    8,649
    
    
    
    3,263
    
    
    
    4,766
    
    
    
    (2,707
    )
    
    
    90,008Provision for credit losses
    
    
    (25,106
    )
    
    
    (10,894
    )
    
    
    (950
    )
    
    
    0
    
    
    
    0
    
    
    
    (36,950
    )Noninterest income
    
    
    17,895
    
    
    
    1,160
    
    
    
    5,417
    
    
    
    926
    
    
    
    (2,379
    )
    
    
    23,019Noninterest expense
    
    
    (57,470
    )
    
    
    (4,040
    )
    
    
    (7,036
    )
    
    
    (2,276
    )
    
    
    (698
    )
    
    
    (71,520
    )Income before income taxes
    
    $
    11,356
    
    
    $
    (5,125
    )
    
    $
    694
    
    
    $
    3,416
    
    
    $
    (5,784
    )
    
    $
    4,557Total assets
    
    $
    10,537,444
    
    
    $
    1,620,553
    
    
    $
    495,513
    
    
    
    12,921
    
    
    
    (43,522
    )
    
    $
    12,622,909
 As of and for the Three Months Ended September 30, 2007Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    140,006
    
    
    $
    50,902
    
    
    $
    6,636
    
    
    $
    2,309
    
    
    $
    65
    
    
    $
    199,918Interest expense
    
    
    (68,103
    )
    
    
    (29,533
    )
    
    
    (3,908
    )
    
    
    0
    
    
    
    (4,710
    )
    
    
    (106,254
    )Net interest income (expense)
    
    
    71,903
    
    
    
    21,369
    
    
    
    2,728
    
    
    
    2,309
    
    
    
    (4,645
    )
    
    
    93,664Provision for credit losses
    
    
    15,320
    
    
    
    (19,095
    )
    
    
    (113
    )
    
    
    0
    
    
    
    0
    
    
    
    (3,888
    )Noninterest income
    
    
    21,398
    
    
    
    1,577
    
    
    
    4,655
    
    
    
    1,751
    
    
    
    (5,174
    )
    
    
    24,207Noninterest expense
    
    
    (60,107
    )
    
    
    (2,987
    )
    
    
    (7,584
    )
    
    
    (2,881
    )
    
    
    (545
    )
    
    
    (74,104
    )Income before income taxes
    
    $
    48,514
    
    
    $
    864
    
    
    $
    (314
    )
    
    $
    1,179
    
    
    $
    (10,364
    )
    
    $
    39,879Total assets
    
    $
    9,643,825
    
    
    $
    1,808,948
    
    
    $
    385,493
    
    
    $
    10,370
    
    
    $
    (101,721
    )
    
    $
    11,746,915
 11




---



##### Table of Contents



As of and for the Nine Months Ended September 30, 2008Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    424,878
    
    
    $
    84,280
    
    
    $
    23,577
    
    
    $
    12,690
    
    
    $
    527
    
    
    $
    545,952Interest expense
    
    
    (197,149
    )
    
    
    (49,276
    )
    
    
    (13,504
    )
    
    
    0
    
    
    
    (9,809
    )
    
    
    (269,738
    )Net interest income (expense)
    
    
    227,729
    
    
    
    35,004
    
    
    
    10,073
    
    
    
    12,690
    
    
    
    (9,282
    )
    
    
    276,214Provision for credit losses
    
    
    (53,900
    )
    
    
    (48,150
    )
    
    
    (3,030
    )
    
    
    0
    
    
    
    0
    
    
    
    (105,080
    )Noninterest income
    
    
    51,894
    
    
    
    3,318
    
    
    
    17,537
    
    
    
    2,849
    
    
    
    (5,919
    )
    
    
    69,679Noninterest expense
    
    
    (175,723
    )
    
    
    (9,942
    )
    
    
    (20,300
    )
    
    
    (7,106
    )
    
    
    (3,003
    )
    
    
    (216,074
    )Income before income taxes
    
    $
    50,000
    
    
    $
    (19,770
    )
    
    $
    4,280
    
    
    $
    8,433
    
    
    $
    (18,204
    )
    
    $
    24,739Total assets
    
    $
    10,537,444
    
    
    $
    1,620,553
    
    
    $
    495,513
    
    
    $
    12,921
    
    
    $
    (43,522
    )
    
    $
    12,622,909
 As of and for the Nine Months Ended September 30, 2007Residential
    
    
    Residential
    
    
    CommercialCommunity
    
    
    Construction
    
    
    Mortgage
    
    
    Mortgage
    
    
    Other andBanking
    
    
    Lending
    
    
    Banking
    
    
    Banking
    
    
    Eliminations
    
    
    Total(Dollars in thousands)Interest income
    
    $
    408,384
    
    
    $
    137,248
    
    
    $
    16,626
    
    
    $
    6,544
    
    
    $
    79
    
    
    $
    568,881Interest expense
    
    
    (204,029
    )
    
    
    (77,808
    )
    
    
    (10,159
    )
    
    
    0
    
    
    
    (13,565
    )
    
    
    (305,561
    )Net interest income (expense)
    
    
    204,355
    
    
    
    59,440
    
    
    
    6,467
    
    
    
    6,544
    
    
    
    (13,486
    )
    
    
    263,320Provision for credit losses
    
    
    13,574
    
    
    
    (25,399
    )
    
    
    (263
    )
    
    
    0
    
    
    
    0
    
    
    
    (12,088
    )Noninterest income
    
    
    61,231
    
    
    
    5,328
    
    
    
    15,788
    
    
    
    5,925
    
    
    
    (15,839
    )
    
    
    72,433Noninterest expense
    
    
    (168,137
    )
    
    
    (7,685
    )
    
    
    (23,211
    )
    
    
    (8,210
    )
    
    
    (2,421
    )
    
    
    (209,664
    )Income before income taxes
    
    $
    111,023
    
    
    $
    31,684
    
    
    $
    (1,219
    )
    
    $
    4,259
    
    
    $
    (31,746
    )
    
    $
    114,001Total assets
    
    $
    9,643,825
    
    
    $
    1,808,948
    
    
    $
    385,493
    
    
    $
    10,370
    
    
    $
    (101,721
    )
    
    $
    11,746,915
 12




---



##### Table of Contents



. 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
    
    
    254,000
    
    
    
    17.72
    
    
    
    222,000
    
    
    
    16.42Exercised / vested
    
    
    (237,078
    )
    
    
    5.86
    
    
    
    (21,250
    )
    
    
    33.17Cancelled / expired
    
    
    (86,986
    )
    
    
    22.04
    
    
    
    0
    
    
    
    0.00Outstanding, September 30, 2008
    
    
    1,997,337
    
    
    $
    22.45
    
    
    
    285,750
    
    
    $
    20.16Exercisable, September 30, 2008
    
    
    1,514,587
    
    
    $
    21.64
  Nine Months EndedSeptember 30,2008
    
    2007Expected volatility
    
    
    30% - 33
    %
    
    
    26% - 29
    %Expected term (in years)
    
    
    4.3
    
    
    
    4.7 - 6.0Expected dividend yield
    
    
    2.14% - 3.32
    %
    
    
    0.90% - 1.47
    %Risk free interest rate
    
    
    2.93% - 3.11
    %
    
    
    4.65% - 4.80
    %
  Nine Months EndedSeptember 30,2008
    
    
    2007(Dollars in thousands)Stock based compensation expense:Stock options
    
    $
    816
    
    
    $
    543Restricted stock
    
    
    1,085
    
    
    
    470Total
    
    $
    1,901
    
    
    $
    1,013
  13




---



##### Table of Contents



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




---



##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Recurring Basis.
 September 30,2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Dollars in thousands)Investment securities and
mortgage-backed
securities available for sale
    
    $
    2,100,880
    
    
    $
    0
    
    
    $
    2,100,880
    
    
    $
    0Loans held for sale
    
    
    84,395
    
    
    
    0
    
    
    
    84,395
    
    
    
    0Other assets  derivatives
    
    
    3,814
    
    
    
    0
    
    
    
    1,476
    
    
    
    2,338Total assets
    
    $
    2,189,089
    
    
    $
    0
    
    
    $
    2,186,751
    
    
    $
    2,338Other liabilities  derivatives
    
    $
    2,701
    
    
    $
    0
    
    
    $
    363
    
    
    $
    2,338
  Nine Months EndedSeptember 30,(Dollars in thousands)Mortgage banking operations
    
    $
    813
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis.
 Losses Duringthe Nine MonthsEndedTotal Carrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 30,Value
    
    Level 1
    
    Level 2
    
    Level 3
    
    2008(Dollars in thousands)Loans
    
    $
    76,759
    
    
    $
    0
    
    
    $
    76,759
    
    
    $
    0
    
    
    $
    (35,816
    )Mortgage servicing
rights
    
    
    4,062
    
    
    
    0
    
    
    
    4,062
    
    
    
    0
    
    
    
    (462
    )Real estate owned
    
    
    45,139
    
    
    
    0
    
    
    
    45,139
    
    
    
    0
    
    
    
    (27,635
    )
  15




---



##### Table of Contents



11. Cash Dividends :
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands, except per share amounts)Total amount
    
    $
    5,201
    
    
    $
    4,389
    
    
    $
    15,275
    
    
    $
    11,635Per share amount
    
    
    0.100
    
    
    
    0.085
    
    
    
    0.295
    
    
    
    0.240Payout ratio
    
    
    104
    %
    
    
    17
    %
    
    
    78
    %
    
    
    15
    %
  12. Goodwill Lawsuit :
  13. Subsequent Event :
 Troubled Assets Relief Program
    16




---



##### Table of Contents



17




---



##### Table of Contents



PART I  Financial Information (continued )
 
 Item 2  Management's Discussion and Analysis of Financial Condition and Results of
Operations
 STERLING FINANCIAL CORPORATION
September 30, 2008
 This report contains forward-looking statements. For a discussion about such statements, including
the risks and uncertainties inherent therein, see ''Forward-Looking Statements.'' Management's
Discussion and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report
and in Sterling's 2007 annual report on Form 10-K.
 General
    18




---



##### Table of Contents



Executive Summary and Highlights
   
    
    Capital ratios remain above ''well-capitalized'' levels at 11.0%.
 
    
    Available liquidity rose to over $3.0 billion.
 
    
    Net interest income was $90.0 million.
 
    
    Fees and service charges income grew 2% to $15.3 million.
 
    
    Total deposits gained 4% to a record $8.07 billion.
 
    
    Quarterly cash dividend was maintained at $0.10 per share.
 
    
    Tangible book value per share increased 3% to $13.45.
 Company Growth
    19




---



##### Table of Contents



Critical Accounting Policies
  Income Recognition .
 Allowance for Credit Losses.
    20




---



##### Table of Contents



Investment Securities and MBS .
    Fair Value of Financial Instruments.
 Goodwill and Other Intangible Assets .
   21




---



##### Table of Contents



Real Estate Owned and Other Collateralized Assets.
  Loans Held for Sale.
 Income Taxes.
  Results of Operations
 Overview .
 Net Interest Income .
 22




---



##### Table of Contents




 
    
    Rate  changes in rate multiplied by comparative period volume; and
 
    
    Rate/volume  changes in rate multiplied by changes in volume.
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008 vs. 2007
    
    
    2008 vs. 2007Increase (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
    
    $
    11,310
    
    
    $
    (39,789
    )
    
    $
    (3,067
    )
    
    $
    (31,546
    )
    
    $
    58,792
    
    
    $
    (91,262
    )
    
    $
    (10,243
    )
    
    $
    (42,713
    )MBS
    
    
    5,050
    
    
    
    1,056
    
    
    
    232
    
    
    
    6,338
    
    
    
    13,228
    
    
    
    2,707
    
    
    
    664
    
    
    
    16,599Investments and cash
equivalents
    
    
    2,146
    
    
    
    (158
    )
    
    
    (138
    )
    
    
    1,850
    
    
    
    3,377
    
    
    
    455
    
    
    
    216
    
    
    
    4,048Total interest income
    
    
    18,506
    
    
    
    (38,891
    )
    
    
    (2,973
    )
    
    
    (23,358
    )
    
    
    75,397
    
    
    
    (88,100
    )
    
    
    (9,363
    )
    
    
    (22,066
    )Interest expense:Deposits
    
    
    6,833
    
    
    
    (19,532
    )
    
    
    (1,688
    )
    
    
    (14,387
    )
    
    
    20,964
    
    
    
    (45,433
    )
    
    
    (3,996
    )
    
    
    (28,465
    )Borrowings
    
    
    8,565
    
    
    
    (11,240
    )
    
    
    (2,872
    )
    
    
    (5,547
    )
    
    
    31,345
    
    
    
    (29,520
    )
    
    
    (9,182
    )
    
    
    (7,357
    )Total interest expense
    
    
    15,398
    
    
    
    (30,772
    )
    
    
    (4,560
    )
    
    
    (19,934
    )
    
    
    52,309
    
    
    
    (74,953
    )
    
    
    (13,178
    )
    
    
    (35,822
    )Changes in net interest income
    
    $
    3,108
    
    
    $
    (8,119
    )
    
    $
    1,587
    
    
    $
    (3,424
    )
    
    $
    23,088
    
    
    $
    (13,147
    )
    
    $
    3,815
    
    
    $
    13,756
  Tax EquivalentThree Months Ended
    
    Net Interest MarginSeptember 30, 2008
    
    
    3.04
    %June 30, 2008
    
    
    3.23
    %March 31, 2008
    
    
    3.24
    %December 31, 2007
    
    
    3.34
    %September 30, 2007
    
    
    3.50
    %
  Provision for Credit Losses.
 23




---



##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007(Dollars in thousands)Allowance  loans, January 1
    
    $
    111,026
    
    
    $
    77,849Acquired
    
    
    0
    
    
    
    15,294Provision
    
    
    105,081
    
    
    
    11,838Amounts written off
    
    
    (40,230
    )
    
    
    (3,429
    )Recoveries
    
    
    1,433
    
    
    
    696Transfers
    
    
    (3
    )
    
    
    (206
    )Allowance  loans, September 30
    
    
    177,307
    
    
    
    102,042Allowance  unfunded commitments, January 1
    
    
    6,306
    
    
    
    5,840Acquired
    
    
    0
    
    
    
    0Provision
    
    
    53
    
    
    
    258Amounts written off
    
    
    (6
    )
    
    
    0Transfers
    
    
    12
    
    
    
    206Allowance  unfunded commitments,
September 30
    
    
    6,365
    
    
    
    6,304Total credit allowance
    
    $
    183,672
    
    
    $
    108,346
    24




---



##### Table of Contents



September 30,2008
    
    
    2007(Dollars in thousands)Past due 90 days
    
    $
    0
    
    
    $
    0Nonaccrual loans
    
    
    380,599
    
    
    
    58,403Restructured loans
    
    
    1,153
    
    
    
    0Total nonperforming loans
    
    
    381,752
    
    
    
    58,403Real estate owned
    
    
    54,957
    
    
    
    3,427Total nonperforming assets
    
    
    436,709
    
    
    
    61,830Specific reserves
    
    
    (37,554
    )
    
    
    (4,135
    )Net nonperforming assets
    
    $
    399,155
    
    
    $
    57,695
 25




---



##### Table of Contents



September 30,2008
    
    
    2007(Dollars in thousands)Residential real estate
    
    $
    35,358
    
    
    $
    1,338Multifamily real estate
    
    
    4,133
    
    
    
    2,343Commercial real estate
    
    
    8,636
    
    
    
    549Construction
    
    
    338,391
    
    
    
    40,263Consumer  direct
    
    
    4,113
    
    
    
    1,462Consumer  indirect
    
    
    915
    
    
    
    400Commercial banking
    
    
    45,163
    
    
    
    15,475Total nonperforming assets
    
    $
    436,709
    
    
    $
    61,830
  September 30, 2008
    
    
    June 30, 2008
    
    
    March 31, 2008
    
    
    December 31, 2007(Dollars in thousands)Residential construction
Portland, OR
    
    $
    92,599
    
    
    
    21
    %
    
    $
    46,101
    
    
    
    15
    %
    
    $
    7,567
    
    
    
    3
    %
    
    $
    501
    
    
    
    0
    %Boise, ID
    
    
    41,046
    
    
    
    9
    %
    
    
    34,939
    
    
    
    12
    %
    
    
    37,338
    
    
    
    17
    %
    
    
    32,728
    
    
    
    24
    %Utah
    
    
    38,143
    
    
    
    9
    %
    
    
    36,179
    
    
    
    12
    %
    
    
    15,372
    
    
    
    7
    %
    
    
    3,603
    
    
    
    3
    %Puget Sound
    
    
    38,128
    
    
    
    9
    %
    
    
    30,986
    
    
    
    10
    %
    
    
    23,356
    
    
    
    10
    %
    
    
    12,442
    
    
    
    9
    %Southern California
    
    
    32,322
    
    
    
    7
    %
    
    
    40,085
    
    
    
    13
    %
    
    
    28,032
    
    
    
    13
    %
    
    
    23,614
    
    
    
    17
    %Bend, OR
    
    
    22,793
    
    
    
    5
    %
    
    
    19,695
    
    
    
    6
    %
    
    
    20,927
    
    
    
    9
    %
    
    
    18,500
    
    
    
    15
    %Vancouver, WA
    
    
    19,704
    
    
    
    5
    %
    
    
    19,854
    
    
    
    7
    %
    
    
    19,943
    
    
    
    9
    %
    
    
    2,103
    
    
    
    2
    %Other
    
    
    32,047
    
    
    
    7
    %
    
    
    13,061
    
    
    
    4
    %
    
    
    15,985
    
    
    
    8
    %
    
    
    7,309
    
    
    
    5
    %Total residential construction
    
    
    316,782
    
    
    
    72
    %
    
    
    240,900
    
    
    
    79
    %
    
    
    168,520
    
    
    
    76
    %
    
    
    100,800
    
    
    
    75
    %Other loan categories
    
    
    119,927
    
    
    
    28
    %
    
    
    62,507
    
    
    
    21
    %
    
    
    54,564
    
    
    
    24
    %
    
    
    34,415
    
    
    
    25
    %Total gross nonperforming
assets
    
    
    436,709
    
    
    
    100
    %
    
    
    303,407
    
    
    
    100
    %
    
    
    223,084
    
    
    
    100
    %
    
    
    135,215
    
    
    
    100
    %Specific reserves
    
    
    (37,554
    )
    
    
    
    
    
    
    (40,597
    )
    
    
    
    
    
    
    (19,084
    )
    
    
    
    
    
    
    (8,678
    )Total net nonperforming assets
    
    $
    399,155
    
    
    
    
    
    
    $
    262,810
    
    
    
    
    
    
    $
    204,000
    
    
    
    
    
    
    $
    126,537
  26




---



##### Table of Contents



Non-Interest Income
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Fees and service charges
    
    $
    15,327
    
    
    $
    14,966
    
    
    $
    45,490
    
    
    $
    40,852Mortgage banking operations
    
    
    6,434
    
    
    
    7,314
    
    
    
    20,859
    
    
    
    25,979Bank-owned life insurance
    
    
    1,362
    
    
    
    1,553
    
    
    
    4,575
    
    
    
    4,817Loan servicing fees
    
    
    737
    
    
    
    366
    
    
    
    1,286
    
    
    
    1,459Real estate owned operations
    
    
    102
    
    
    
    223
    
    
    
    (242
    )
    
    
    85Other
    
    
    (943
    )
    
    
    (215
    )
    
    
    (2,289
    )
    
    
    (759
    )Total
    
    $
    23,019
    
    
    $
    24,207
    
    
    $
    69,679
    
    
    $
    72,433
   As of and for the
    
    As of and for theThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands)Originations of residential mortgage loans
    
    $
    336,392
    
    
    $
    369,216
    
    
    $
    1,123,630
    
    
    $
    1,168,755Originations of commercial real estate loans
    
    
    68,947
    
    
    
    80,371
    
    
    
    251,864
    
    
    
    97,431Sales of residential mortgage loans
    
    
    288,244
    
    
    
    308,189
    
    
    
    1,000,706
    
    
    
    1,040,820Sales of commercial real estate loans
    
    
    7,535
    
    
    
    14,501
    
    
    
    10,528
    
    
    
    44,004Principal balances of residential loans serviced for others
    
    
    519,754
    
    
    
    613,134
    
    
    
    519,754
    
    
    
    613,134Principal balances of commercial real estate loans serviced for others
    
    
    1,667,497
    
    
    
    1,679,335
    
    
    
    1,667,497
    
    
    
    1,679,335
 27




---



##### Table of Contents



Non-Interest Expenses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Employee compensation and benefits
    
    $
    39,851
    
    
    $
    41,114
    
    
    $
    121,874
    
    
    $
    118,348Occupancy and equipment
    
    
    10,829
    
    
    
    10,767
    
    
    
    33,054
    
    
    
    32,915Data processing
    
    
    5,179
    
    
    
    4,833
    
    
    
    15,665
    
    
    
    13,206Depreciation
    
    
    3,445
    
    
    
    3,387
    
    
    
    10,516
    
    
    
    9,923Advertising
    
    
    3,158
    
    
    
    3,289
    
    
    
    8,975
    
    
    
    9,245Insurance
    
    
    1,869
    
    
    
    1,338
    
    
    
    5,507
    
    
    
    2,246Travel and entertainment
    
    
    1,586
    
    
    
    2,022
    
    
    
    5,032
    
    
    
    5,663Amortization of core deposit intangibles
    
    
    1,225
    
    
    
    1,225
    
    
    
    3,677
    
    
    
    3,492Legal and accounting
    
    
    560
    
    
    
    591
    
    
    
    2,097
    
    
    
    1,814Goodwill litigation costs
    
    
    105
    
    
    
    1,525
    
    
    
    360
    
    
    
    2,837Merger and acquisition costs
    
    
    18
    
    
    
    263
    
    
    
    200
    
    
    
    1,883Other
    
    
    3,695
    
    
    
    3,750
    
    
    
    9,117
    
    
    
    8,092Total
    
    $
    71,520
    
    
    $
    74,104
    
    
    $
    216,074
    
    
    $
    209,664
  Income Tax Provision
 28




---



##### Table of Contents



Financial Position
 Assets
 Investment Securities and MBS
 Loans Receivable
  September 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Residential real estate
    
    $
    830,811
    
    
    
    9.0
    
    
    $
    703,826
    
    
    
    7.8Multifamily real estate
    
    
    454,500
    
    
    
    4.9
    
    
    
    389,388
    
    
    
    4.3Commercial real estate
    
    
    1,352,954
    
    
    
    14.6
    
    
    
    1,223,036
    
    
    
    13.5Construction
    
    
    2,766,895
    
    
    
    29.9
    
    
    
    2,944,911
    
    
    
    32.4Consumer  direct
    
    
    857,003
    
    
    
    9.3
    
    
    
    798,519
    
    
    
    8.8Consumer  indirect
    
    
    398,031
    
    
    
    4.3
    
    
    
    376,937
    
    
    
    4.1Commercial banking
    
    
    2,603,037
    
    
    
    28.0
    
    
    
    2,639,196
    
    
    
    29.1Gross loans receivable
    
    
    9,263,231
    
    
    
    100.0
    
    
    
    9,075,813
    
    
    
    100.0Net deferred origination fees
    
    
    (11,013
    )
    
    
    
    
    
    
    (16,480
    )Allowance for losses on loans
    
    
    (177,307
    )
    
    
    
    
    
    
    (111,026
    )Loans receivable, net
    
    $
    9,074,911
    
    
    
    
    
    
    $
    8,948,307
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)Residential real estate
    
    $
    336,392
    
    
    $
    369,216
    
    
    $
    1,123,630
    
    
    $
    1,168,755Multifamily real estate
    
    
    20,047
    
    
    
    13,240
    
    
    
    131,949
    
    
    
    17,890Commercial real estate
    
    
    68,947
    
    
    
    67,131
    
    
    
    251,864
    
    
    
    79,541Construction
    
    
    97,222
    
    
    
    579,287
    
    
    
    519,667
    
    
    
    1,849,659Consumer  direct
    
    
    72,313
    
    
    
    90,440
    
    
    
    277,948
    
    
    
    267,329Consumer  indirect
    
    
    43,819
    
    
    
    63,001
    
    
    
    159,242
    
    
    
    184,926Commercial banking
    
    
    120,785
    
    
    
    198,317
    
    
    
    439,306
    
    
    
    796,596Total loans originated
    
    $
    759,525
    
    
    $
    1,380,632
    
    
    $
    2,903,606
    
    
    $
    4,364,696
 29




---



##### Table of Contents



Deposits
 September 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Interest-bearing checking
    
    $
    437,447
    
    
    
    5.4
    
    
    $
    469,428
    
    
    
    6.1Noninterest-bearing checking
    
    
    924,270
    
    
    
    11.4
    
    
    
    898,606
    
    
    
    11.7Savings and money market demand accounts
    
    
    2,028,035
    
    
    
    25.1
    
    
    
    2,156,808
    
    
    
    28.1Time deposits
    
    
    4,683,551
    
    
    
    58.1
    
    
    
    4,152,930
    
    
    
    54.1Total deposits
    
    $
    8,073,303
    
    
    
    100.0
    
    
    $
    7,677,772
    
    
    
    100.0
  Borrowings
 Asset and Liability Management
     30




---



##### Table of Contents



September 30,
    
    December 31,Change in
    
    2008
    
    2007Interest Rate in
    
    % Change in
    
    % Change inBasis Points
    
    Net Interest
    
    Net Interest(Rate Shock)
    
    Income
    
    Income+200
    
    2.0
    
    (0.1)+100
    
    2.4
    
    0.1Static
    
    0.0
    
    0.0-100
    
    (4.2)
    
    (1.5)
  At September 30,
    
    At December 31,2008
    
    2007Change inInterest Rate
    
    %
    
    %in Basis Points
    
    Change
    
    Change(Rate Shock)
    
    in EVE
    
    in EVE+200
    
    (14.4)
    
    (4.9)+100
    
    (5.8)
    
    (1.6)Static
    
    0.0
    
    0.0-100
    
    (2.5)
    
    (4.3)
 31




---



##### Table of Contents



Liquidity and Capital Resources
     32




---



##### Table of Contents



Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
      33




---



##### 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
    
    $
    490,512
    
    
    
    4.0
    %
    
    $
    613,140
    
    
    
    5.0
    %
    
    $
    979,713
    
    
    
    8.0
    %Sterling Savings Bank
    
    
    472,119
    
    
    
    4.0
    %
    
    
    590,149
    
    
    
    5.0
    %
    
    
    936,177
    
    
    
    7.9
    %Golf Savings Bank
    
    
    18,019
    
    
    
    4.0
    %
    
    
    22,523
    
    
    
    5.0
    %
    
    
    33,816
    
    
    
    7.5
    %Tier 1 (to risk-weighted assets)Sterling
    
    
    404,557
    
    
    
    4.0
    %
    
    
    606,835
    
    
    
    6.0
    %
    
    
    979,713
    
    
    
    9.7
    %Sterling Savings Bank
    
    
    393,029
    
    
    
    4.0
    %
    
    
    589,543
    
    
    
    6.0
    %
    
    
    936,177
    
    
    
    9.5
    %Golf Savings Bank
    
    
    12,303
    
    
    
    4.0
    %
    
    
    18,454
    
    
    
    6.0
    %
    
    
    33,764
    
    
    
    11.0
    %Total (to risk-weighted assets)Sterling
    
    
    809,114
    
    
    
    8.0
    %
    
    
    1,011,392
    
    
    
    10.0
    %
    
    
    1,109,844
    
    
    
    11.0
    %Sterling Savings Bank
    
    
    786,057
    
    
    
    8.0
    %
    
    
    982,571
    
    
    
    10.0
    %
    
    
    1,062,697
    
    
    
    10.8
    %Golf Savings Bank
    
    
    24,605
    
    
    
    8.0
    %
    
    
    30,757
    
    
    
    10.0
    %
    
    
    37,614
    
    
    
    12.3
    %
  Goodwill Litigation
  34




---



##### Table of Contents



New Accounting Pronouncements
     Regulation and Compliance
    35




---



##### Table of Contents



Forward-Looking Statements
   36




---



##### Table of Contents




    
    inflation, interest rate levels and market and monetary fluctuations;
    
    trade, monetary and fiscal policies and laws, including interest rate policies of the
federal government;
    
    applicable laws and regulations and legislative or regulatory changes;
    
    the timely development and acceptance of new products and services of Sterling;
    
    the willingness of customers to substitute competitors' products and services for
Sterling's products and services;
    
    Sterling's success in gaining regulatory approvals, when required;
    
    technological and management changes;
    
    growth and acquisition strategies;
    
    Sterling's critical accounting policies and the implementation of such policies;
    
    lower-than-expected revenue or cost savings or other issues in connection with mergers and
acquisitions;
    
    changes in consumer spending and saving habits;
    
    the strength of the United States economy in general and the strength of the local
economies in which Sterling conducts its operations; and
    
    Sterling's success at managing the risks involved in the foregoing.
 
 Item 3 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4 Controls and Procedures
 Disclosure Controls and Procedures
  37




---



##### Table of Contents



Changes in Internal Control Over Financial Reporting
  38




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 PART II  Other Information
 
 Item 1 Legal Proceedings
  
 Item 1a Risk Factors
  Current market developments may adversely affect our industry, business, results of operations and
access to capital.
  
    
    Market developments may affect consumer confidence levels and may cause declines in
credit card usage and adverse changes in payment patterns, causing increases in
delinquencies and default rates.
    
    The processes we use to estimate inherent losses may no longer be reliable because they
rely on complex judgments, including forecasts of economic conditions, which may no longer
be capable of accurate estimation.
    
    Our ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage, and underwrite our customers become less
predictive of future charge-offs.
    
    Our ability to borrow from other financial institutions or to engage in securitization
funding transactions on favorable terms or at all could be adversely affected by further
disruptions in the capital markets or other events, including actions by rating agencies
and deteriorating investor expectations.
    
    We may be required to pay significantly higher FDIC premiums because market developments
have significantly depleted the insurance fund of the FDIC and reduced the ratio of
reserves to insured deposits.
    
    Competition in our industry could intensify as a result of the increasing consolidation
of financial services companies in connection with current market conditions.
    
    We expect to face increased regulation of our industry. Compliance with such regulation
may increase our costs, limit our ability to pursue business opportunities, and increase
compliance challenges.
 39




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
PART II  Other Information
 Current levels of market volatility are unprecedented.
  The soundness of other financial institutions could adversely affect us.
  
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3 Defaults Upon Senior Securities
  
 Item 4 Submission of Matters to a Vote of Security Holders
  
 Item 5 Other Information
  
 Item 6 Exhibits
  40




---



##### Table of Contents



STERLING FINANCIAL CORPORATION
 
 Signatures
  STERLING FINANCIAL CORPORATION
                          (Registrant)November
7, 2008
    By:
    /s/ Robert G. ButterfieldDate
    
    Robert G. ButterfieldSenior Vice President, Controller, and
Principal Accounting Officer 41




---



##### Table of Contents



Exhibit No.
    
    Exhibit Index
 3.1
    
    Restated Articles of Incorporation of Sterling. Filed herewith.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.