##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  FORM 10-K
 (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the year ended DECEMBER 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   COMMISSION FILE NUMBER 0-20800
  STERLING FINANCIAL
    CORPORATION
 (Exact name of registrant as
    specified in its charter)
  WASHINGTON(State or other jurisdiction
    of
    incorporation or organization)

91-1572822(IRS Employer Identification
    No.)   111 North
    Wall Street, Spokane, Washington 99201(Address of principal executive
    offices) (Zip code)
  (509) 458-3711
    None

None(Title of each class)

(Name of each exchange on which
    registered)     (Title of class)
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large
    accelerated
    filer  þ
    Accelerated
    filer  o
    Non-accelerated filer
    o
    Smaller
    Reporting
    Company  o (Do
    not check if a smaller reporting company)
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### Table of Contents





STERLING
    FINANCIAL CORPORATION
  DECEMBER
    31, 2007 ANNUAL REPORT ON
    FORM 10-K
 TABLE OF
    CONTENTS
  PagePART I


1Item 1.

Business


1General


1Company Growth


1Profitability Drivers


2Lending Activities


2Investments and Mortgage-Backed Securities


12Sources of Funds


13Subsidiaries


17Competition


18Personnel


19Environmental Laws


19Regulation


19Forward-Looking Statements


24Where You Can Find More Information


25Item 1A.

Risk Factors


26Item 1B.

Unresolved Staff Comments


32Item 2.

Properties


32Item 3.

Legal Proceedings


32Item 4.

Submission of Matters to a Vote of Security
    Holders


32PART II


33Item 5.

Market for Registrant's Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


33Stock Market and Dividend Information


33Item 6.

Selected Financial Data


35Item 7.

Management's Discussion and Analysis of
    Financial Condition and Results of Operations


37Executive Summary and Highlights


37Critical Accounting Policies


37Results of Operations for the Years Ended
    December 31, 2007 and 2006


40Results of Operations for the Years Ended
    December 31, 2006 and 2005


45Financial Position


47Asset and Liability Management


48Liquidity and Capital Resources


51Off-Balance Sheet Arrangements and Aggregate
    Contractual Obligations


52Capital


53Goodwill Litigation


53New Accounting Policies


54Effects of Inflation and Changing Prices


54Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


54Item 8.

Financial Statements and Supplementary
    Data


54Item 9.

Changes in and Disagreements with Accountants
    on Accounting and Financial Disclosure


55




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##### Table of Contents



PageItem 9A.

Controls and Procedures


55Management's Report on Internal Control Over
    Financial Reporting


55Report of Independent Registered Public
    Accounting Firm


56Item 9B.

Other Information


57PART III


57Item 10.

Directors, Executive Officers and Corporate
    Governance


57Item 11.

Executive Compensation


57Item 12.

Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters


57Item 13.

Certain Relationships and Related
    Transactions, and Director Independence


57Item 14.

Principal Accounting Fees and Services


57PART IV


58Item 15.

Exhibits, Financial Statement Schedules


58SIGNATURES


59EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I  Item 1.
    Business General       Company
    Growth     1




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##### Table of Contents



Profitability
    Drivers    
    continuing to increase the volume of our loans and change the
    mix of our loan portfolio to higher-yielding commercial banking
    and consumer loans.
    growing our core deposits, particularly commercial, consumer and
    public sector transaction deposits.
    expanding products and services for commercial and public sector
    customers, including depository and treasury management services
    such as lockbox, on-line net banking, merchant services,
    analyzed and sweep accounts, remote deposit capture and
    international services.
    diversifying and growing our fee income through existing and new
    fee income sources, including deposit fees, transaction fees,
    fees from mortgage banking and other fees.
    maintaining strong asset quality through robust underwriting and
    credit approval functions.
    managing interest rate risk to protect net interest margin in a
    changing interest rate environment.   Lending
    Activities  Focus on Community Lending.
 2




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##### Table of Contents



Commercial Lending.
      higher-net-worth
      Multifamily Residential and Commercial Real Estate
    Lending.
 3




---



##### Table of Contents



One- to Four-Family Residential
    Lending.
        Consumer Lending.
 4




---



##### Table of Contents



Years Ended December 31,2007


2006


2005Amount


%


Amount


%


Amount


%(Dollars in thousands)Mortgage:One- to four-family residential

$
1,492,026



27.2


$
830,619



16.7


$
461,414



11.9Multifamily residential


35,870



0.7



4,215



0.1



57,571



1.5Commercial real estate


163,315



3.0



131,001



2.6



218,396



5.6Total mortgage loans


1,691,211



30.9



965,835



19.4



737,381



19.0Construction:One- to four-family residential


1,584,449



28.9



1,425,248



28.7



1,106,632



28.5Multifamily residential


118,799



2.2



156,932



3.2



175,018



4.5Commercial real estate


488,372



8.9



752,458



15.1



519,893



13.4Total construction loans


2,191,620



40.0



2,334,638



47.0



1,801,543



46.4Total mortgage and construction loans


3,882,831



70.9



3,300,473



66.4



2,538,924



65.4Commercial and consumer:Commercial banking


995,732



18.2



1,154,304



23.2



898,768



23.1Consumerdirect


359,338



6.6



327,027



6.6



353,840



9.1Consumerindirect


242,309



4.3



189,505



3.8



90,096



2.4Total commercial and consumer loans


1,597,379



29.1



1,670,836



33.6



1,342,704



34.6Total loans originated

$
5,480,210



100.0


$
4,971,309



100.0


$
3,881,628



100.0   Loan Portfolio Analysis.
  December 31,2007


2006


2005


2004


2003Amount


%


Amount


%


Amount


%


Amount


%


Amount


%(Dollars in thousands)Mortgage:One- to four-family residential

$
703,826



7.8


$
654,661



9.2


$
488,633



9.9


$
794,632



18.4


$
407,999



13.8Multifamily residential


389,388



4.3



263,053



3.7



332,211



6.7



184,754



4.3



167,220



5.7Commercial real estate


1,223,036



13.5



795,386



11.2



792,219



16.0



699,879



16.3



463,191



15.7Total mortgage loans


2,316,250



25.6



1,713,100



24.1



1,613,063



32.6



1,679,265



39.0



1,038,410



35.2Construction:One- to four-family residential


1,933,125



21.3



1,429,772



20.1



591,362



11.9



356,644



8.3



271,480



9.2Multifamily residential


263,873



2.9



189,819



2.7



143,272



2.9



102,166



2.4



127,424



4.3Commercial real estate


747,913



8.2



671,291



9.4



286,868



5.8



194,085



4.5



154,061



5.2Total construction loans


2,944,911



32.4



2,290,882



32.2



1,021,502



20.6



652,895



15.2



552,965



18.7Total mortgage and construction loans


5,261,161



58.0



4,003,982



56.3



2,634,565



53.2



2,332,160



54.2



1,591,375



53.9Commercial and consumer:Commercial banking


2,639,196



29.1



2,069,086



29.1



1,531,079



30.9



1,311,197



30.4



948,304



32.2Consumerdirect


798,519



8.8



749,626



10.5



618,528



12.5



543,895



12.6



309,931



10.5Consumerindirect


376,937



4.1



288,704



4.1



166,143



3.4



120,894



2.8



99,697



3.4Total commercial and consumer loans


3,814,652



42.0



3,107,416



43.7



2,315,750



46.8



1,975,986



45.8



1,357,932



46.1Total loans receivable


9,075,813



100.0



7,111,398



100.0



4,950,315



100.0



4,308,146



100.0



2,949,307



100.0Deferred fees, net


(16,480
)






(12,308
)






(8,916
)






(6,907
)






(7,276
)Gross loans receivable


9,059,333







7,099,090







4,941,399







4,301,239







2,942,031Allowance for loan losses


(111,026
)






(77,849
)






(52,033
)






(47,352
)






(34,139
)Loans receivable, net

$
8,948,307






$
7,021,241






$
4,889,366






$
4,253,887






$
2,907,892  5




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##### Table of Contents



Contractual Principal Payments.
  Balance


Principal PaymentsOutstanding at


Contractually Due in Fiscal YearsDecember 31, 2007


2008


2009-2012


Thereafter(In thousands)Mortgage:Fixed rate

$
854,661


$
44,245


$
176,421


$
633,995Variable rate


1,461,589



66,296



320,237



1,075,056Construction


2,944,911



2,172,912



656,751



115,248Consumerdirect


798,519



266,338



146,808



385,373Consumerindirect


376,937



75,550



268,942



32,445Commercial banking


2,639,196



1,092,377



519,881



1,026,938$
9,075,813


$
3,717,718


$
2,089,040


$
3,269,055   Loan Servicing.
      Secondary Market Activities.
  loan-by-loan,
   6




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##### Table of Contents



Loan Commitments.
  Derivatives and Hedging.
        Classified and Nonperforming Assets.
   7




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##### Table of Contents



December 31,2007


2006


2005


2004


2003(Dollars in thousands)Nonaccrual loans

$
115,112


$
7,107


$
6,542


$
10,738


$
16,208Restructured loans


350



0



1,081



1,305



1,164Total nonperforming loans


115,462



7,107



7,623



12,043



17,372Real estate owned


11,075



4,052



779



1,865



4,226Total nonperforming assets

$
126,537


$
11,159


$
8,402


$
13,908


$
21,598Ratio of total nonperforming assets to total assets


1.04%



0.11%



0.11%



0.20%



0.50%Ratio of total nonperforming loans to loans


1.27%



0.10%



0.15%



0.28%



0.59%Ratio of allowance for estimated losses on loans to total
    nonperforming loans


101.8%



1437.0%



975.9%



538.3%



216.6%  8




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##### Table of Contents



December 31,2007


2006


2005


2004


2003(Dollars in thousands)Residential real estate

$
1,616


$
1,713


$
840


$
1,302


$
1,131Multifamily real estate


2,205



3,356



3,061



5,853



9,280Commercial real estate


13,987



1,340



2,331



2,254



8,269Construction


96,815



96



0



350



224Consumerdirect


1,219



621



470



1,057



899Consumerindirect


631



140



149



132



191Commercial banking


10,064



3,893



1,551



2,960



1,604Total nonperforming assets

$
126,537


$
11,159


$
8,402


$
13,908


$
21,598        9




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##### Table of Contents



Years Ended December 31,2007


2006


2005(Dollars in thousands)Balance at beginning of period

$
4,052


$
779


$
1,865Loan foreclosures and other additions


8,252



4,581



2,271Improvements and other changes


119



(244
)


331Sales


(1,348
)


(894
)


(3,665
)Provisions for losses


0



(170
)


(23
)Balance at end of period

$
11,075


$
4,052


$
779   Allowance for Credit Losses. on-site
     10




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##### Table of Contents



Years Ended December 31,2007


2006


2005


2004


2003(Dollars in thousands)Allowanceloans, January 1

$
77,849


$
52,034


$
47,352


$
34,139


$
26,677Charge-offs:Residential real estate


(30
)


(32
)


(37
)


(59
)


(165
)Multifamily real estate


0



0



(3
)


(2
)


0Commercial real estate


(70
)


(902
)


(2,315
)


(1,824
)


(802
)Construction


(3,430
)


(12
)


(19
)


(645
)


(106
)Consumerdirect


(1,268
)


(619
)


(1,107
)


(1,373
)


(1,146
)Consumerindirect


(1,884
)


(823
)


(449
)


(370
)


(445
)Commercial banking


(1,000
)


(2,017
)


(5,721
)


(1,210
)


(1,589
)Total charge-offs


(7,682
)


(4,405
)


(9,651
)


(5,483
)


(4,253
)Recoveries:Residential real estate


5



5



6



25



42Multifamily real estate


0



0



0



0



0Commercial real estate


41



157



42



5



16Construction


3



20



0



2



3Consumerdirect


261



193



238



214



160Consumerindirect


495



310



200



111



149Commercial banking


128



68



86



11



252Total recoveries


933



753



572



368



622Net charge-offs


(6,749
)


(3,652
)


(9,079
)


(5,115
)


(3,631
)Provision


24,838



18,703



15,200



12,150



10,500Acquired


15,294



13,155



0



6,722



870Transfers


(206
)


(2,391
)


(1,439
)


(544
)


(277
)Allowanceloans, December 31


111,026



77,849



52,034



47,352



34,139Allowanceunfunded commitments, January 1


5,840



3,449



2,010



1,466



1,189Provision


260



0



0



0



0Transfers


206



2,391



1,439



544



277Allowanceunfunded commitments, December 31


6,306



5,840



3,449



2,010



1,466Balance at end of period

$
117,332


$
83,689


$
55,483


$
49,362


$
35,605Allowances allocated to loans classified as loss

$
8,678


$
1,379


$
2,159


$
3,528


$
2,897Ratio of net charge-offs to average loans outstanding during the
    period


0.08%



0.06%



0.20%



0.13%



0.13%  11




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##### Table of Contents



December 31,2007


2006


2005


2004


2003Loans in





Loans in





Loans in





Loans in





Loans inCategory





Category





Category





Category





Categoryas a





as a





as a





as a





as aPercentage





Percentage





Percentage





Percentage





PercentageAllowance


of Total


Allowance


of Total


Allowance


of Total


Allowance


of Total


Allowance


of TotalAmount


Loans


Amount


Loans


Amount


Loans


Amount


Loans


Amount


Loans(Dollars in thousands)Residential real estate

$
965



7.8


$
1,405



9.2


$
1,039



9.9


$
1,642



18.4


$
918



13.8Multifamily real estate


659



4.3



671



3.7



790



6.7



440



4.3



399



5.7Commercial real estate


21,244



13.5



17,565



11.2



12,748



16.0



14,185



16.3



9,324



15.7Construction


50,109



32.4



12,098



32.2



4,566



20.6



4,254



15.2



4,871



18.7Consumerdirect


7,274



8.8



8,205



10.5



6,795



12.5



7,247



12.6



3,843



10.5Consumerindirect


5,056



4.1



2,880



4.1



1,205



3.4



1,156



2.8



1,676



3.4Commercial banking


23,830



29.1



34,209



29.1



23,626



30.9



18,075



30.4



12,239



32.2Unallocated


1,889



N/A



816



N/A



1,265



N/A



353



N/A



869



N/A$
111,026



100.0


$
77,849



100.0


$
52,034



100.0


$
47,352



100.0


$
34,139



100.0  Investments
    and Mortgage-Backed Securities  Investments and MBS
  Investments and MBS
  Non-Interest Income Non-Interest Expense
 12




---



##### Table of Contents



MaturityLess than


One to


Over Five to


Over TenOne Year


Five Years


Ten Years


Years


Total(Dollars in thousands)Mortgage-backed securitiesBalance

$
0


$
67,306


$
63,237


$
1,654,488


$
1,785,031Weighted average yield


0.00%



3.99%



4.47%



5.02%



4.96%U.S. government and agency obligationsBalance

$
9,994


$
0


$
0


$
0


$
9,994Weighted average yield


3.87%



0.00%



0.00%



0.00%



3.87%Municipal bondsBalance

$
574


$
2,498


$
10,849


$
129,142


$
143,063Weighted average
    yield(1)


3.63%



3.03%



4.27%



4.45%



4.41%Other(2)Balance

$
272


$
95


$
0


$
47,609


$
47,976Weighted average yield


4.30%



4.55%



0.00%



3.45%



4.15%Total carrying value

$
10,840


$
69,899


$
74,086


$
1,831,239


$
1,986,064Weighted average yield


3.87%



4.01%



4.49%



5.01%



4.95%   (1)
    
    The weighted average yields on municipal bonds reflect the
    actual yields on the bonds and are not presented on a
    tax-equivalent basis.(2)
    
    Other investments relate primarily to limited partnership
    interests in low-income housing projects.    December 31,2007


2006


2005(Dollars in thousands)Mortgage-backed securities

$
1,785,031


$
1,687,672


$
1,960,582U.S. government and agency obligations


9,994



22,328



21,793Municipal bonds


143,063



92,808



50,907Other


47,976



18,941



18,631Total

$
1,986,064


$
1,821,749


$
2,051,913Available for sale

$
1,853,271


$
1,728,686


$
1,999,989Held to maturity


132,793



93,063



51,924Total

$
1,986,064


$
1,821,749


$
2,051,913Weighted average yield


4.95%



4.47%



4.63%  Sources
    of Funds  General.
 13




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##### Table of Contents



Deposit Activities.
  18-month
       14




---



##### Table of Contents



Years Ended December 31,2007


2006


2005Weighted





Weighted





WeightedAverage





Average





AverageAverage


Interest


Average


Interest


Average


InterestBalance


Rate


Balance


Rate


Balance


Rate(Dollars in thousands)Transaction accounts:Interest-bearing

$
463,337



0.55
%

$
399,690



0.42
%

$
419,137



0.32
%Noninterest-bearing


895,729



0.00



706,631



0.00



648,385



0.00Savings and MMDA


2,078,984



3.45



1,512,198



3.16



1,158,270



1.92Time deposits


4,039,152



5.04



2,962,017



4.58



2,041,122



3.35$
7,477,202



3.71
%

$
5,580,536



3.32
%

$
4,266,914



2.16
%     December 31,2007


2006(Dollars in thousands)Three months or less

$
1,068,537


$
931,437After three months through six months


539,165



644,825After six months through twelve months


647,097



509,732After twelve months


305,550



212,639$
2,560,349


$
2,298,633   Borrowings.
     15




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##### Table of Contents



Years Ended December 31,2007


2006


2005(Dollars in thousands)Maximum amount outstanding at any month-end during the period:Short-term reverse repurchase agreements and funds purchased

$
288,845


$
235,495


$
821,363Short-term advances


826,045



803,307



670,047Average amount outstanding during the period:Short-term reverse repurchase agreements and funds purchased

$
158,852


$
160,702


$
634,838Short-term advances


539,635



674,929



461,897Weighted average interest rate paid during the period:Short-term reverse repurchase agreements and funds purchased


4.62%



4.64%



3.23%Short-term advances


5.19%



4.44%



3.15%Weighted average interest rate paid at end of period:Short-term reverse repurchase agreements and funds purchased


4.31%



4.81%



4.07%Short-term advances


4.48%



5.14%



3.39%  16




---



##### Table of Contents



December 31,2007


2006


2005Amount


%


Amount


%


Amount


%(Dollars in thousands)FHLB advances:Short-term

$
399,617



12.7


$
803,307



37.1


$
670,047



30.9Long-term


1,288,372



41.0



505,310



23.3



773,415



35.7Securities sold subject to reverse repurchase agreements and
    funds purchased:Short-term


288,845



9.2



86,354



4.0



261,676



12.1Long-term


890,000



28.4



530,000



24.5



350,000



16.2Trust Preferred Securities


270,015



8.6



236,772



10.9



108,707



5.0Other


3,000



0.1



3,454



0.2



1,981



0.1Total borrowings

$
3,139,849



100.0


$
2,165,197



100.0


$
2,165,826



100.0Weighted average interest rate at end of period






4.63%







5.17%







4.03%  Subsidiaries    Sterling
    Financial Corporation.
  (1)
    Golf Escrow Corporation was acquired in July 2006 and offers a
    full range of escrow closing services.(2)
    Sterling Capital Trust II ("SCT-II") was
    organized in July 2001 as a Delaware business trust. Sterling
    owns all the common equity of SCT-II. The sole asset of SCT-II
    is the Junior Subordinated Debentures-II issued by Sterling. See
    Note 10 of "Notes to Consolidated Financial
    Statements."(3)
    Sterling Capital Trust III ("SCT-III") was
    organized in April 2003 as a Delaware business trust. Sterling
    owns all the common equity of SCT-III. The sole asset of SCT-III
    is the Junior Subordinated Debentures-III issued by Sterling.
    See Note 10 of "Notes to Consolidated Financial
    Statements."(4)
    Sterling Capital Trust IV ("SCT-IV") was
    organized in May 2003 as a Delaware business trust. Sterling
    owns all the common equity of SCT-IV. The sole asset of SCT-IV
    is the Junior Subordinated Debentures-IV issued by Sterling. See
    Note 10 of "Notes to Consolidated Financial
    Statements."(5)
    Sterling Capital Statutory Trust V ("SCT-V") was
    organized in May 2003 as a Connecticut business trust. Sterling
    owns all the common equity of SCT-V. The sole asset of SCT-V is
    the Junior Subordinated Debentures-V issued by Sterling. See
    Note 10 of "Notes to Consolidated Financial
    Statements."(6)
    Sterling Capital Trust VI ("SCT-VI") was
    organized in June 2003 as a Delaware business trust. Sterling
    owns all the common equity of SCT-VI. The sole asset of SCT-VI
    is the Junior Subordinated Debentures-VI issued by Sterling. See
    Note 10 of "Notes to Consolidated Financial
    Statements." 17




---



##### Table of Contents



(7)
    Sterling Capital Trust VII ("SCT-VII") was
    organized in June 2006 as a Delaware business trust. Sterling
    owns all the common equity of SCT-VII. The sole asset of SCT-VII
    is the Junior Subordinated
    Debentures-VII
    issued by Sterling. See Note 10 of "Notes to
    Consolidated Financial Statements."(8)
    Sterling Capital Trust VIII ("SCT-VIII") was
    organized in September 2006 as a Delaware business trust.
    Sterling owns all the common equity of SCT-VIII. The sole asset
    of SCT-VIII is the Junior Subordinated Debentures-VIII issued by
    Sterling. See Note 10 of "Notes to Consolidated
    Financial Statements."(9)
    Sterling Capital Trust IX ("SCT-IX") was
    organized in July 2007 as a Delaware business trust. Sterling
    owns all the common equity of SCT-IX. The sole asset of SCT-IX
    is the Junior Subordinated Debentures-IX issued by Sterling. See
    Note 10 of "Notes to Consolidated Financial
    Statements."(10)
    Klamath First Capital Trust I ("KCT-I") was
    organized in July 2001 as a Delaware business trust. Sterling
    owns all the common equity of KCT-I. The sole asset of KCT-I is
    the Junior Subordinated Debentures-I issued by KFBI and assumed
    by Sterling. See Note 10 of "Notes to Consolidated
    Financial Statements."(11)
    Lynnwood Financial Statutory Trust I ("LCT-I")
    was organized in March 2004 as a Connecticut business trust.
    Sterling owns all the common equity of LCT-I. The sole asset of
    LCT-I is the Junior Subordinated Debentures-I issued by Lynnwood
    and assumed by Sterling. See Note 10 of "Notes to
    Consolidated Financial Statements."(12)
    Lynnwood Financial Statutory Trust II ("LCT-II")
    was organized in June 2006 as a Delaware business trust.
    Sterling owns all the common equity of LCT-II. The sole asset of
    LCT-II is the Junior Subordinated Debentures-II issued by
    Lynnwood and assumed by Sterling. See Note 10 of
    "Notes to Consolidated Financial Statements."(13)
    Tri-Cities
    Mortgage Corporation was organized to engage in real estate
    development.  Sterling
    Savings Bank.
  (1)
    The Dime Service Corporation was acquired as part of a merger in
    February 2004.(2)
    Evergreen Environmental Development Corporation was organized to
    engage in real estate development.(3)
    Evergreen First Service Corporation owns all of the outstanding
    capital stock of Harbor Financial, through which Sterling offers
    tax-deferred annuities, mutual funds and other financial
    products.(4)
    Fidelity Service Corporation acts as a trustee in the
    reconveyance of deeds of trust originated by Sterling Savings
    Bank and Action.(5)
    Mason-McDuffie conducts mortgage banking operations.(6)
    Peter W. Wong Associates, Inc. was organized to offer
    alternative financial services.(7)
    Source Capital Corporation was acquired in September 2001. The
    corporation was organized to hold and service loans, and is
    currently inactive.(8)
    Source Capital Leasing Corporation was acquired in September
    2001, and was organized to engage in corporate leasing. Competition   18




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##### Table of Contents



Personnel   Environmental
    Laws  clean-up clean-up clean-up clean-up
 Regulation  The following is not intended to be a complete discussion but
    is intended to be a summary of some of the more significant
    provisions of laws applicable to Sterling and its subsidiaries.
    This regulatory framework is intended to protect depositors,
    federal deposit insurance funds and the banking system as a
    whole, and not to protect security holders. To the extent
    that the information describes statutory and regulatory
    provisions, it is qualified in its entirety by reference to
    those provisions. Further, such statutes, regulations and
    policies are continually under review by Congress and state
    legislatures, and federal and state regulatory agencies. A
    change in statutes, regulations or regulatory policies
    applicable to Sterling, including changes in interpretation or
    implementation thereof, could have a material effect on
    Sterling's business.
  General
      Bank
    Holding Company Regulation
  The Fair and Accurate Credit Transactions
    Act.
 19




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##### Table of Contents



The Sarbanes-Oxley Act.
    The U.S.A. Patriot Act.
  The Gramm-Leach-Bliley Act.
    The Riegle-Neal Interstate Banking and Branching
    Efficiency Act.
   20




---



##### Table of Contents



The Bank Holding Company Act.
    The Change in Bank Control
    Act.
  The Federal Reserve Act.
  Transactions with Affiliates.
  Tying Arrangements.
  Support of Subsidiary Banks.
 21




---



##### Table of Contents



Federal
    and State Regulation of Banking Activities
  General.
  Community Reinvestment.
  Insider Credit Transactions.
  Regulation of Management.
  Safety and Soundness Standards.
  Lending Restrictions and Disclosure
    Requirements.
  Deposit Insurance Assessments.
 22




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##### Table of Contents



Dividends Restrictions.
    Federal Reserve System.
  Federal Taxation.
  State Law and Regulation.
 23




---



##### Table of Contents



Capital
    Adequacy
  Regulatory Capital Guidelines.
  Tier I and Tier II
    Capital.
  Risk-based Capital Ratios.
  Leverage Ratio.
  Prompt Corrective Action.
 Forward-Looking
    Statements   24




---



##### Table of Contents




    the 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. Where You
    Can Find More Information  Form 10-K. Sterling will provide you with copies of these reports,
    without charge, upon request made to:
      (509) 458-3711
 25




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##### Table of Contents



Item 1A.
    Risk
    Factors  Set forth below and elsewhere in this Annual Report on
    Form 10-K
    and in other documents Sterling files with the SEC are risks and
    uncertainties that could cause actual results to differ
    materially from the results contemplated by the forward-looking
    statements contained in this Annual Report on
    Form 10-K.
  As a bank
    holding company, Sterling's earnings are dependent upon the
    performance of its bank and non-bank subsidiaries as well as by
    business, economic and political conditions.
        A
    downturn in the local economies or real estate markets could
    negatively impact Sterling's banking business.
        Sterling
    has shifted its focus to community banking.
   26




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##### Table of Contents



Sterling's
    loan originations are highly concentrated in certain types of
    loans.
        Sterling's
    earnings are significantly affected by the fiscal and monetary
    policies of governmental and regulatory agencies.
     27




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##### Table of Contents



Sterling's
    banking business is highly regulated.
      Changes
    in market interest rates could adversely affect Sterling's
    earnings.
       28




---



##### Table of Contents



Sterling's
    cost of funds may increase as a result of a change in one or
    more variables.
    Competition
    may adversely affect Sterling's ability to attract and
    retain customers at current levels.
      Sterling
    may not be able to successfully implement its internal growth
    strategy.
    There are
    risks associated with potential acquisitions.
   29




---



##### Table of Contents



Sterling
    may not be able to replace key members of management or attract
    and retain qualified relationship managers in the
    future.
    Defaults
    may negatively impact Sterling's business.
      The
    allowance for credit losses may be inadequate.
     30




---



##### Table of Contents



Sterling
    is expanding its lending activities in riskier areas.
    Sterling
    operations could be interrupted if its third-party service
    providers experience difficulty, terminate their services or
    fail to comply with banking regulations.
    Sterling's
    internal control systems could fail to detect certain
    events.
    The
    network and computer systems on which Sterling depends could
    fail or experience a security breach.
      Sterling
    could be held responsible for environmental liabilities of
    properties acquired through foreclosure.
  clean-up clean-up
 31




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##### Table of Contents



Sterling's
    stock price can be volatile.
      Shares
    eligible for future sale could have a dilutive effect.
  Form S-3 and/or
    Future
    legislation could change our competitive position.
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   32




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##### Table of Contents



PART II  Item 5.
    Market
    for Registrant's Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Stock
    Market and Dividend Information      High


LowYear ended December 31, 2007:Fourth quarter

$
28.11


$
16.36Third quarter


28.96



20.31Second quarter


31.03



28.67First quarter


33.79



30.40Year ended December 31, 2006:Fourth quarter

$
34.97


$
31.75Third quarter


33.78



29.50Second quarter


32.35



28.31First quarter


29.91



24.50     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 millionOctober 2007


0.090



4.6 millionJanuary 2008


0.095



4.9 million  33




---



##### Table of Contents



Performance
    Graph
    
 34




---



##### Table of Contents



Item 6.
    Selected
    Financial Data    Years Ended December 31,2007


2006


2005


2004


2003(Dollars in thousands, except per share amounts)Interest income

$
766,978


$
550,855


$
387,811


$
319,761


$
214,727Interest expense


(411,618
)


(286,943
)


(171,276
)


(122,945
)


(89,807
)Net interest income


355,360



263,912



216,535



196,816



124,920Provision for credit losses


(25,088
)


(18,703
)


(15,200
)


(12,150
)


(10,500
)Net interest income after provision for credit loss


330,272



245,209



201,335



184,666



114,420Non-interest income


93,478



69,340



59,569



47,799



33,735Non-interest expenses


(285,537
)


(206,373
)


(170,281
)


(148,370
)


(94,564
)Income before income taxes


138,213



108,176



90,623



84,095



53,591Income tax provision


(44,924
)


(34,230
)


(29,404
)


(27,790
)


(18,678
)Net income

$
93,289


$
73,946


$
61,219


$
56,305


$
34,913Earnings per share:Basic(1)

$
1.87


$
2.03


$
1.77


$
1.66


$
1.45Diluted(1)


1.86



2.01



1.75



1.62



1.42Dividends declared per share

$
0.350


$
0.270


$
0.105


$
0.000


$
0.000Weighted average shares outstanding:Basic(1)


49,786,349



36,423,095



34,633,952



33,931,509



23,980,113Diluted(1)


50,217,515



36,841,866



35,035,029



34,708,794



24,590,172Financial Ratios:Book value per
    share(1)

$
23.04


$
18.63


$
14.54


$
13.65


$
10.21Return on average assets


0.83%



0.88%



0.87%



0.88%



0.88%Return on average shareholders' equity


8.6%



13.0%



12.4%



13.2%



14.4%Shareholders' equity to total assets


9.8%



8.0%



6.7%



6.8%



5.9%Operating efficiency


63.6%



61.9%



61.7%



60.7%



59.6%Tax equivalent net interest margin


3.42%



3.33%



3.30%



3.34%



3.36%Nonperforming assets to total assets


1.04%



0.11%



0.11%



0.20%



0.50%Statistical Data:Number of:Employees (full-time equivalents)


2,571



2,405



1,789



1,624



1,121Depository branches


178



166



140



135



86   35




---



##### Table of Contents



Item 6.
    Selected
    Financial Data (continued)  December 31,2007


2006


2005


2004


2003(Dollars in thousands)Balance Sheet Data:Total assets

$
12,149,775


$
9,834,492


$
7,562,377


$
6,944,234


$
4,280,787Loans receivable, net


8,948,307



7,021,241



4,889,366



4,253,887



2,907,892Mortgage-backed securities


1,785,031



1,687,672



1,960,582



2,036,920



983,736Investments


201,033



134,077



91,331



92,819



38,187Deposits


7,677,772



6,746,028



4,806,301



3,863,296



2,455,076FHLB advances


1,687,989



1,308,617



1,443,462



1,635,933



1,026,031Reverse repurchase agreements and funds purchased


1,178,845



616,354



611,676



780,012



363,137Other borrowings


273,015



240,226



110,688



131,822



137,998Shareholders' equity


1,185,330



783,416



506,685



469,844



250,348Capital
    Ratios(2):Tier 1 leverage (to average assets)Sterling


8.7%



8.7%



7.4%



N/A



N/ASterling Savings Bank


8.5%



8.6%



7.2%



6.6%



7.4%Golf Savings Bank


7.3%



6.9%



N/A



N/A



N/ATier I (to risk-weighted assets)Sterling


10.1%



10.0%



9.5%



N/A



N/ASterling Savings Bank


9.8%



9.7%



9.2%



9.7%



9.9%Golf Savings Bank


10.2%



10.9%



N/A



N/A



N/ATotal (to risk-weighted assets)Sterling


11.3%



11.1%



10.5%



N/A



N/ASterling Savings Bank


11.0%



10.8%



10.2%



10.7%



10.9%Golf Savings Bank


10.8%



11.6%



N/A



N/A



N/A   (1)
    
    All prior period per share and weighted average share amounts
    have been restated to reflect the 3 for 2 stock split that was
    effected August 31, 2005.(2)
    
    Sterling Financial Corporation did not have regulatory capital
    ratio requirements prior to its conversion to a bank holding
    company. Golf Savings Bank's capital ratios have not been
    disclosed for periods prior to Sterling's acquisition of
    Golf Savings Bank in July 2006. 36




---



##### Table of Contents



Item 7.  Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations  The following discussion and analysis should be read in
    conjunction with the Consolidated Financial Statements and Notes
    thereto presented elsewhere in this report. This report contains
    forward-looking statements within the meaning of the Private
    Securities Litigation Reform Act of 1995. For a discussion of
    the risks and uncertainties inherent in such statements, see
    "BusinessForward-Looking Statements."
 Executive
    Summary and Highlights      2007 HIGHLIGHTS
  
    Net income for the year was a record $93.3 million.
    Total assets were a record $12.15 billion.
    Total loans receivable increased to a record $8.95 billion.
    Total loan originations were a record $5.48 billion.
    Total deposits increased to $7.68 billion.
    Tangible shareholders' equity to tangible assets increased
    70 basis points to 6.01 percent.
    Net interest margin was 3.42 percent.
    Non-interest income was $93.5 million.
    Cash dividends declared were $0.35 per share for 2007. Critical
    Accounting Policies    Income Recognition.
 37




---



##### Table of Contents



Allowance For Credit Losses.
        Investments and MBS.
       38




---



##### Table of Contents



Goodwill and Other Intangible
    Assets.
    Loan Purchases. 03-3, SOP 03-3
  Real Estate Owned.
    Income Taxes.
   39




---



##### Table of Contents



Results
    of Operations for the Years Ended December 31, 2007 and
    2006  Net Interest Income.
     40




---



##### Table of Contents





Years Ended December 31,2007


2006


2005Average








Average








AverageAverage


Income/


Yield/


Average


Income/


Yield/


Average


Income/


Yield/Balance


Expense


Rate(1)


Balance


Expense


Rate(1)


Balance


Expense


Rate(1)(Dollars in thousands)ASSETS:Loans:Mortgage

$
4,994,656


$
401,084



8.03%


$
3,291,944


$
257,811



7.83%


$
2,368,974


$
160,656



6.78%Commercial and consumer


3,568,815



279,422



7.83%



2,599,651



201,133



7.74%



2,113,038



136,628



6.47%Total loans


8,563,471



680,506



7.95%



5,891,595



458,944



7.79%



4,482,012



297,284



6.63%Mortgage-backed securities


1,655,371



79,266



4.79%



1,862,144



88,398



4.75%



1,948,435



88,682



4.55%Investments and cash equivalents


270,384



10,302



3.81%



233,611



5,500



2.35%



168,853



3,101



1.84%Total interest-earning assets


10,489,226



770,074



7.34%



7,987,350



552,842



6.92%



6,599,300



389,067



5.90%Noninterest-earning assets


778,201











411,213











447,755Total average assets

$
11,267,427










$
8,398,563










$
7,047,055LIABILITIES and EQUITY:Deposits:Transaction

$
1,359,066



2,543



0.19%


$
1,106,321



1,692



0.15%


$
1,067,522



1,340



0.13%Savings and MMDA


2,078,984



71,665



3.45%



1,512,198



47,844



3.16%



1,158,270



22,272



1.92%Time deposits


4,039,152



203,406



5.04%



2,962,017



135,737



4.58%



2,041,122



68,378



3.35%Total deposits


7,477,202



277,614



3.71%



5,580,536



185,273



3.32%



4,266,914



91,990



2.16%Borrowings


2,604,764



134,004



5.14%



2,125,620



101,670



4.78%



2,192,934



79,286



3.62%Total interest-bearing liabilities


10,081,966



411,618



4.08%



7,706,156



286,943



3.72%



6,459,848



171,276



2.65%Noninterest-bearing liabilities


101,044











122,435











93,992Total average liabilities


10,183,010











7,828,591











6,553,840Total average shareholders' equity


1,084,417











569,972











493,215Total average liabilities and equity

$
11,267,427










$
8,398,563










$
7,047,055Tax equivalent net interest spread





$
358,456



3.26%






$
265,899



3.20%






$
217,791



3.25%Tax equivalent net interest margin










3.42%











3.33%











3.30%Ratio of average interest-earning assets to average
    interest-bearing liabilities










104.04%











103.65%











102.16%   (1)
    
    The yield information for the
    available-for-sale portfolio does not give effect to changes in
    fair value that are reflected as a component of
    shareholders' equity. 41




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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.  December 31, 2007


December 31, 2006Increase (Decrease) Due to:


Increase (Decrease) Due to:Rate/











Rate/Volume


Rate


Volume


Total


Volume


Rate


Volume


Total(Dollars in thousands)Interest income:Loans:Mortgage

$
133,349


$
6,541


$
3,383


$
143,273


$
62,593


$
24,872


$
9,690


$
97,155Commercial and consumer


74,984



2,408



897



78,289



31,464



26,856



6,185



64,505Total loans


208,333



8,949



4,280



221,562



94,057



51,728



15,875



161,660Mortgage-backed securities


(9,816
)


769



(85
)


(9,132
)


(3,927
)


3,812



(169
)


(284
)Investment and cash equivalents


866



3,401



535



4,802



1,189



874



336



2,399Total interest income


199,383



13,119



4,730



217,232



91,319



56,414



16,042



163,775Interest expense:Deposits


67,680



18,087



6,574



92,341



37,705



39,825



15,753



93,283Borrowings


22,918



7,684



1,732



32,334



(2,434
)


25,604



(786
)


22,384Total interest expense


90,598



25,771



8,306



124,675



35,271



65,429



14,967



115,667Changes in net interest income on a tax equivalent basis

$
108,785


$
(12,652
)

$
(3,576
)

$
92,557


$
56,048


$
(9,015
)

$
1,075


$
48,108   Provision for Credit
    Losses.
   42




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##### Table of Contents



Years Ended December 31,2007


2006(Dollars in thousands)Allowanceloans, January 1

$
77,849


$
52,034Acquired


15,294



13,155Provision


24,838



18,703Charge offs, net of recoveries


(6,749
)


(3,652
)Transfers


(206
)


(2,391
)Allowanceloans, December 31


111,026



77,849Allowanceunfunded commitments, January 1


5,840



3,449Acquired


0



0Provision


260



0Transfers


206



2,391Allowanceunfunded commitments, December 31


6,306



5,840Total credit allowance

$
117,332


$
83,689   03-3,
    Non-Interest Income.
  Years Ended December 31,2007


2006(Dollars in thousands)Fees and service charges

$
55,978


$
42,995Mortgage banking operations


32,649



20,216Bank-owned life insurance


6,500



5,020Loan servicing fees


1,442



1,812REO operations


72



176Net gains (losses) on sales of securities


0



0Gain (charge) related to early repayment of debt


(2,324
)


(204
)Other non-interest expense


(839
)


(675
)Total non-interest income

$
93,478


$
69,340  43




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##### Table of Contents



As of and For The Years EndedDecember 31,2007


2006(Dollars in millions)Originations of residential mortgage loans

$
1,492.0


$
830.6Originations of commercial real estate loans


163.3



131.0Sales of residential loans


1,294.9



655.6Sales of commercial real estate loans


56.0



54.9Principal balances of residential loans serviced for others


598.5



621.6Principal balances of commercial real estate loans serviced for
    others


1,683.0



1,622.8     Non-Interest Expenses.
  Years Ended December 31,2007


2006(Dollars in thousands)Employee compensation and benefits

$
158,483


$
117,186Occupancy and equipment


46,446



32,769Data processing


18,109



14,180Depreciation


13,498



10,280Advertising


12,898



9,985Travel and entertainment


7,676



5,955Legal and accounting


3,001



2,478Amortization of core deposit intangibles


4,718



2,405Insurance


3,778



1,360Merger and acquisition costs


2,833



454Goodwill litigation costs


2,720



275Other


11,377



9,046Total

$
285,537


$
206,373  44




---



##### Table of Contents



Income Tax Provision.
 Results
    of Operations for the Years Ended December 31, 2006 and
    2005  Net Interest Income.
    Provision for Credit Losses.
  Years Ended December 31,2006


2005(Dollars in thousands)Allowanceloans, January 1

$
52,034


$
47,352Acquired


13,155



0Provision


18,703



15,200Charge offs, net of recoveries


(3,652
)


(9,079
)Transfers


(2,391
)


(1,439
)Allowanceloans, December 31


77,849



52,034Allowanceunfunded commitments, January 1


3,449



2,010Acquired


0



0Provision


0



0Transfers


2,391



1,439Allowanceunfunded commitments, December 31


5,840



3,449Total credit allowance

$
83,689


$
55,483    45




---



##### Table of Contents



Non-Interest Income.
  Years Ended December 31,2006


2005(Dollars in thousands)Fees and service charges

$
42,995


$
34,702Mortgage banking operations


20,216



17,899Bank-owned life insurance


5,020



5,914Loan servicing fees


1,812



434Real estate owned operations


176



477Net gains (losses) on sales of securities


0



(57
)Gain (charge) related to early repayment of debt


(204
)


645Other non-interest expense


(675
)


(445
)Total non-interest income

$
69,340


$
59,569         Years Ended December 31,2006


2005(Dollars in millions)Originations of residential mortgage loans

$
830.6


$
461.4Originations of commercial real estate loans


131.0



218.4Sales of residential loans


655.6



583.2Sales of commercial real estate loans


54.9



125.5Principal balances of residential loans serviced for others


621.6



606.7Principal balances of commercial real estate loans serviced for
    others


1,622.8



814.2  46




---



##### Table of Contents



Non-Interest Expense.
  Years Ended December 31,2006


2005(Dollars in thousands)Employee compensation and benefits

$
117,186


$
93,367Occupancy and equipment


32,769



26,411Data processing


14,180



12,678Depreciation


10,280



8,627Advertising


9,985



9,125Travel and entertainment


5,955



4,522Legal and accounting


2,478



3,134Amortization of core deposit intangibles


2,405



2,222Insurance


1,360



1,213Merger and acquisition costs


454



0Goodwill litigation costs


275



179Other


9,046



8,803Total

$
206,373


$
170,281     Income Tax Provision.
 Financial
    Position  Assets.
  Investments and MBS.
  Loans Receivable.
  Bank-Owned Life Insurance
    ("BOLI").
  Goodwill and Other Intangible
    Assets.
 47




---



##### Table of Contents



Deposits.
  December 31,


December 31,2007


2006Amount


%


Amount


%(Dollars in thousands)Interest-bearing transaction

$
469,428



6.1


$
483,551



7.2Noninterest-bearing transaction


898,606



11.7



834,140



12.4Savings and MMDA


2,156,808



28.1



1,830,313



27.1Time deposits


4,152,930



54.1



3,598,024



53.3Total deposits

$
7,677,772



100.0


$
6,746,028



100.0Annualized cost of deposits






3.71%







3.32%     Borrowings.
 Asset and
    Liability Management         48




---



##### Table of Contents



Form 10-K.
  Maturity or RepricingOver


Over


Over0 to 3


3 Months


1 Year


3 Years


OverMonths


to 1 Year


to 3 Years


to 5 Years


5 Years


Total(Dollars in thousands)Interest-earning assets:Mortgage loans and MBS:ARM, balloon mortgage loans and MBS

$
3,283,254


$
438,930


$
541,738


$
335,757


$
19,496


$
4,619,175Fixed-rate mortgage loans and MBS


157,733



425,450



683,883



462,393



733,846



2,463,305Loans held for sale


55,840



0



0



0



0



55,840Total mortgage loans and MBS


3,496,827



864,380



1,225,621



798,150



753,342



7,138,320Commercial and consumer loans:Consumer


290,686



196,403



368,811



174,168



136,873



1,166,941Commercial


1,183,825



463,643



508,623



350,791



125,498



2,632,380Total loans and MBS


4,971,338



1,524,426



2,103,055



1,323,109



1,015,713



10,937,641Cash and investments


146,281



670



1,118



1,475



164,515



314,0595,117,619



1,525,096



2,104,173



1,324,584



1,180,228



11,251,700Cash on hand and in banks


0



0



0



0



185,536



185,536Other noninterest-earning assets


0



0



0



0



712,539



712,539Total assets

$
5,117,619


$
1,525,096


$
2,104,173


$
1,324,584


$
2,078,303


$
12,149,775Interest-bearing liabilities:Deposits:Time deposits

$
1,686,876


$
1,941,422


$
317,500


$
153,262


$
53,870


$
4,152,930Checking accounts


45,475



94,710



86,448



76,134



1,065,267



1,368,034Savings


475,586



955,288



88,725



67,712



569,497



2,156,808Total deposits


2,207,937



2,991,420



492,673



297,108



1,688,634



7,677,772FHLB advances


1,006,750



94,647



503,632



71,377



11,583



1,687,989Repurchase agreements and funds purchased


388,845



250,000



490,000



0



50,000



1,178,845Other borrowings


24,743



0



0



0



248,272



273,015Total interest-bearing liabilities


3,628,275



3,336,067



1,486,305



368,485



1,998,489



10,817,621Other noninterest-bearing liabilities


0



0



0



0



146,824



146,824Shareholders' equity


0



0



0



0



1,185,330



1,185,330Total liabilities and shareholders' equity

$
3,628,275


$
3,336,067


$
1,486,305


$
368,485


$
3,330,643


$
12,149,775Net gap

$
1,489,344


$
(1,810,971
)

$
617,868


$
956,099


$
(1,252,340
)

$
0Cumulative gap

$
1,489,344


$
(321,627
)

$
296,241


$
1,252,340


$
0


$
0Cumulative gap to total assets


12.26%



(2.65
)%


2.44%



10.31%



0.00%



0.00%  49




---



##### Table of Contents



Change in

December 31,Interest Rate

2007


2006in Basis Points

% Change


% Change(Rate Shock)

in NII


in NII+200


(0.1
)


(1.5
)+100


0.1



(0.8
)Static


0.0



0.0-100


(1.5
)


(0.4
)-200


(3.7
)


(1.6
)     At December 31,Change in

2007


2006Interest Rate

%


%in Basis Points

Change


Change(Rate Shock)

in EVE


in EVE+200


(4.9
)


(5.0
)+100


(1.6
)


(1.5
)Static


0.0



0.0-100


(4.3
)


(4.6
)-200


(16.4
)


(17.9
)  50




---



##### Table of Contents



Liquidity
    and Capital Resources             51




---



##### Table of Contents



SterlingSavings BankRating

Sterling


Sterling


Long-TermInstitution

Long-Term Debt


Short-Term Debt


Deposits


OutlookFitch


BBB



F3



BBB



Stable  Off-Balance
    Sheet Arrangements and Aggregate Contractual
    Obligations  on-and-off-balance
  Payments Due by PeriodLess than





Over


More than


IndeterminateTotal


1 year


1 to 3 years


3 to 5 years


5 years


Maturity(Dollars in thousands)Deposits(1)

$
7,677,772


$
3,612,958


$
332,836


$
153,267


$
53,869


$
3,524,842Borrowings(1)


3,139,849



713,204



915,682



531,519



979,444



0Operating leases


90,637



13,640



22,813



16,158



38,026



0Purchase
    obligations(2)


47,608



15,836



20,514



11,258



0



0Other long-term
    liabilities(3)


36,917



536



1,979



2,572



31,830



0Total

$
10,992,783


$
4,356,174


$
1,293,824


$
714,774


$
1,103,169


$
3,524,842   (1)
    
    Excludes interest payments. Deposits with indeterminate
    maturities are composed of transaction, savings and MMDA
    accounts. See Notes 710 of "Notes to
    Consolidated Financial Statements."(2)
    
    Excludes recurring accounts payable amounts due in the first
    quarter of 2008.(3)
    
    Includes amounts associated with retirement and benefit plans
    and other compensation arrangements. The amounts represent the
    total future potential payouts assuming all current participants
    become fully vested in their respective plans or arrangements.
    See Note 17 of "Notes to Consolidated Financial
    Statements."     52




---



##### Table of Contents



Capital         Goodwill
    Litigation  Tri-Cities
 53




---



##### Table of Contents



New
    Accounting Policies        No. 06-4, No. 06-4, EITF 06-4
   Effects
    of Inflation and Changing Prices    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K.
 54




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
  Rules 13a-15(f) 15d-15(f)),
 Management's
    Report on Internal Control Over Financial Reporting  Rules 13a-15(f). Internal
    ControlIntegrated Framework
  10-K,
 55




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  Board of
    Directors and Shareholders
    Sterling Financial Corporation
    Spokane, Washington
  Internal
    ControlIntegrated Framework
            BDO Seidman,
    LLP
    Spokane, Washington
    February 28, 2008
 56




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance        Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accounting Fees and Services   57




---



##### Table of Contents



PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules    1.
    Financial Statements: The required financial statements
    are contained in pages F-1 through F-45 of this
    Form 10-K.2.
    Financial Statement Schedules: Financial statement
    schedules have been omitted as they are not applicable or the
    information is included in the Consolidated Financial Statements.3.
    Exhibits: The exhibits filed as part of this report and
    the exhibits incorporated herein by reference are listed in the
    Exhibit Index at
    page E-1.    (c)
    All schedules are omitted as the required information is not
    applicable or the information is presented in the Consolidated
    Financial Statements or related notes. 58




---



##### Table of Contents



SIGNATURES    STERLING FINANCIAL CORPORATIONFebruary 28, 2008

By /s/  Harold
    B. GilkeyHarold
    B. GilkeyChairman of the Board, Chief Executive Officer    February 28, 2008

By /s/  Harold
    B. GilkeyHarold
    B. GilkeyChairman of the Board, Chief Executive Officer,
    Principal Executive OfficerFebruary 28, 2008

By /s/  Daniel
    G. ByrneDaniel
    G. ByrneExecutive Vice President, Assistant Secretary and
    Principal Financial OfficerFebruary 28, 2008

By /s/  Robert
    G. ButterfieldRobert
    G. ButterfieldSenior Vice President, Controller and
    Principal Accounting OfficerFebruary 28, 2008

By /s/  Katherine
    K. AndersonKatherine
    K. Anderson, DirectorFebruary 28, 2008

By /s/  Donald
    N. BauhoferDonald
    N. Bauhofer, DirectorFebruary 28, 2008

By /s/  Ellen
    R.M. BoyerEllen
    R.M. Boyer, DirectorFebruary 28, 2008

By /s/  William
    L. EisenhartWilliam
    L. Eisenhart, DirectorFebruary 28, 2008

By /s/  James
    P. FugateJames
    P. Fugate, DirectorFebruary 28, 2008

By /s/  James
    B. KeeganJames
    B. Keegan, DirectorFebruary 28, 2008

By /s/  Robert
    D. LarrabeeRobert
    D. Larrabee, DirectorFebruary 28, 2008

By /s/  Donald
    J. LukesDonald
    J. Lukes, DirectorFebruary 28, 2008

By /s/  Michael
    F. ReulingMichael
    F. Reuling, DirectorFebruary 28, 2008

By /s/  William
    W. ZuppeWilliam
    W. Zuppe, Director  59




---



##### Table of Contents



Exhibit No.

Exhibit Index3
.1

Restated Articles of Incorporation of Sterling. Filed as
    Exhibit 3.1 to Sterling's registration statement on
    Form S-4
    filed May 31, 2007, and incorporated by reference herein.3
.2

Amended and Restated Bylaws of Sterling. Filed as
    Exhibit 3.1 to Sterling's current report on
    Form 8-K
    filed December 21, 2007, and incorporated by reference
    herein.4
.1

Reference is made to Exhibits 3.1 and 3.2.4
.2

Sterling has outstanding certain long-term debt. None of such
    debt exceeds ten percent of Sterling's total assets;
    therefore, copies of the constituent instruments defining the
    rights of the holders of such debt are not included as exhibits.
    Copies of instruments with respect to such long-term debt will
    be furnished to the Securities and Exchange Commission upon
    request.10
.1

First Amendment to the Amended and Restated Employment Agreement
    by and between Sterling and William W. Zuppe, entered into on
    December 28, 2007. Filed as Exhibit 10.1 to
    Sterling's current report on From
    8-K filed
    December 28, 2007 and incorporated by reference herein.10
.2

Sterling Financial Corporation 2003 Long-Term Incentive Plan.
    Filed as Exhibit A to Sterling's Proxy Statement in
    connection with the Annual Meeting of Shareholders held on
    April 22, 2003, and incorporated by reference herein.10
.3

Sterling Financial Corporation 2001 Long-Term Incentive Plan.
    Filed as Exhibit A to Sterling's Proxy Statement in
    connection with the Annual Meeting of Shareholders held on
    April 24, 2001, and incorporated by reference herein.10
.4

Sterling Financial Corporation Amended and Restated Deferred
    Compensation Plan, effective July 1, 1999. Filed as
    Exhibit 10.5 to Sterling's Annual Report on
    Form 10-K
    dated February 22, 2000, and incorporated by reference
    herein.10
.5

Sterling Financial Corporation 1998 Long-Term Incentive Plan.
    Filed as Exhibit A to Sterling's Proxy Statement in
    connection with the Annual Meeting of Shareholders held on
    April 28, 1998, and incorporated by reference herein.10
.6

Sterling Savings Bank Deferred Compensation Plan, effective date
    April 1, 2006. Filed as Exhibit 10.6 to Sterling's
    Annual Report on Form 10-K dated February 28, 2007, and
    incorporated by reference herein.10
.7

Sterling Financial Corporation and Sterling Savings Bank
    Supplemental Executive Retirement Plan. Filed as
    Exhibit 10.9 to Sterling's Annual Report on
    Form 10-K
    dated March 21, 2005, and incorporated by reference herein.12
.1

Statement regarding Computation of Return on Average
    Shareholders' Equity. Filed herewith.12
.2

Statement regarding Computation of Return on Average Assets.
    Filed herewith.21
.1

List of Subsidiaries of Sterling. Filed herewith.23
.1

Consent of BDO Seidman, LLP. Filed herewith.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.  60




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of
    Directors and Shareholders
    Sterling Financial Corporation
    Spokane, Washington
        Share-Based Payment
  Internal ControlIntegrated
    Framework
  BDO Seidman,
    LLP
    Spokane, Washington
    February 28, 2008




---



##### Table of Contents



Sterling Financial Corporation
 Consolidated Balance Sheets
 December 31, 2007 and 2006
 (Dollars in thousands)
   2007


2006ASSETS:Cash and cash equivalents:Interest bearing

$
10,042


$
13,846Noninterest bearing and vault


184,436



164,719Total cash and cash equivalents


194,478



178,565Restricted cash


1,100



1,150Investments and mortgage-backed securities ("MBS"):Available for sale


1,853,271



1,728,686Held to maturity


132,793



93,063Loans receivable, net


8,948,307



7,021,241Loans held for sale


55,840



91,469Accrued interest receivable


63,649



55,519Real estate owned, net


11,075



4,052Office properties and equipment, net


93,467



93,796Bank-owned life insurance ("BOLI")


150,825



139,206Goodwill


453,136



247,244Other intangible assets


31,627



28,570Mortgage servicing rights, net


9,042



7,335Prepaid expenses and other assets, net


151,165



144,596Total assets

$
12,149,775


$
9,834,492LIABILITIES:Deposits

$
7,677,772


$
6,746,028Advances from Federal Home Loan Bank ("FHLB")


1,687,989



1,308,617Securities sold subject to repurchase agreements and funds
    purchased


1,178,845



616,354Other borrowings


273,015



240,226Cashiers checks issued and payable


764



18,144Borrowers' reserves for taxes and insurance


1,765



2,348Accrued interest payable


40,209



39,863Accrued expenses and other liabilities


104,086



79,496Total liabilities


10,964,445



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; 51,456,461 and 42,042,740 shares issued and
    outstanding


51,456



42,043Additional paid-in capital


892,028



590,218Accumulated other comprehensive loss:Unrealized losses on investments and MBS available-for-sale, net
    of deferred income taxes of $10,518 and $19,531


(17,967
)


(33,350
)Retained earnings


259,813



184,505Total shareholders' equity


1,185,330



783,416Total liabilities and shareholders' equity

$
12,149,775


$
9,834,492    See accompanying summary of significant accounting policies
    and notes to consolidated financial statements.
 F-2




---



##### Table of Contents



Sterling Financial Corporation
 Consolidated Statements of Income
 For the Years Ended December 31, 2007, 2006 and 2005
 (Dollars in thousands, except per share amounts)
   2007


2006


2005Interest income:Loans

$
679,991


$
458,558


$
296,306MBS


79,266



88,398



88,682Investments and cash equivalents


7,721



3,899



2,823Total interest income


766,978



550,855



387,811Interest expense:Deposits


277,614



185,273



91,990Short-term borrowings


29,956



35,979



35,255Long-term borrowings


104,048



65,691



44,031Total interest expense


411,618



286,943



171,276Net interest income


355,360



263,912



216,535Provision for credit losses


(25,088
)


(18,703
)


(15,200
)Net interest income after provision for credit losses


330,272



245,209



201,335Non-interest income:Fees and service charges


55,978



42,995



34,702Mortgage banking operations


32,649



20,216



17,899Loan servicing fees


1,442



1,812



434Real estate owned and other collateralized assets operations


72



176



477BOLI


6,500



5,020



5,914Gain (charge) related to early repayment of debt


(2,324
)


(204
)


645Other non-interest expense


(839
)


(675
)


(502
)Total non-interest income


93,478



69,340



59,569Non-interest expenses (Note 18)


285,537



206,373



170,281Income before income taxes


138,213



108,176



90,623Income tax benefit (provision)Current


(53,777
)


(41,797
)


(23,192
)Deferred


8,853



7,567



(6,212
)Total tax provision


(44,924
)


(34,230
)


(29,404
)Net income

$
93,289


$
73,946


$
61,219Earnings per sharebasic

$
1.87


$
2.03


$
1.77Earnings per sharediluted

$
1.86


$
2.01


$
1.75Weighted average shares outstandingbasic


49,786,349



36,423,095



34,633,952Weighted average shares outstandingdiluted


50,217,515



36,841,866



35,035,029    See accompanying summary of significant accounting policies
    and notes to consolidated financial statements.
 F-3




---



##### Table of Contents



Sterling Financial Corporation
 Consolidated Statements of Comprehensive Income
 For the Years Ended December 31, 2007, 2006 and 2005
 (Dollars in thousands)
   2007


2006


2005Net income

$
93,289


$
73,946


$
61,219Other comprehensive income (loss):Change in unrealized gains or losses on investments and MBS
    available for sale, net of reclassification adjustments


24,397



1,359



(39,303
)Less deferred income tax benefit (provision)


(9,014
)


(490
)


14,554Net other comprehensive income (loss)


15,383



869



(24,749
)Comprehensive income

$
108,672


$
74,815


$
36,470    See accompanying summary of significant accounting policies
    and notes to consolidated financial statements.
 F-4




---



##### Table of Contents



Sterling
    Financial Corporation
 Consolidated Statements of Changes in Shareholders'
    Equity
 For the Years Ended December 31, 2007, 2006 and 2005
 (Dollars in thousands)
   Additional


Other





TotalCommon Stock


Paid-In


Comprehensive


Retained


Shareholders'Shares


Amount


Capital


Income (Loss)


Earnings


EquityBalance, January 1, 2005


22,936,154


$
22,936


$
393,245


$
(9,470
)

$
63,133


$
469,844Shares issued upon exercise of stock options


366,696



367



3,044











3,411Change in unrealized gain or loss on investments and MBS
    available for sale, net of income tax














(24,749
)






(24,749
)Stock splitthree for two


11,553,249



11,553



(11,553
)










0Cash dividends declared


















(3,657
)


(3,657
)Cash paid for fractional shares


(550
)






(14
)










(14
)Tax benefit of stock options










631











631Net income


















61,219



61,219Balance, December 31, 2005


34,855,549



34,856



385,353



(34,219
)


120,695



506,685Shares issued upon exercise of stock options


483,183



483



5,883











6,366Shares issued for business combinations


6,645,882



6,646



194,479











201,125Shares issued for 401(k) match and direct stock purchases


58,126



58



1,617











1,675Change in unrealized gain or loss on investments and MBS
    available for sale, net of income tax














869







869Cash dividends declared


















(10,136
)


(10,136
)Equity based compensation










182











182Tax benefit of stock options










2,704











2,704Net income


















73,946



73,946Balance, December 31, 2006


42,042,740



42,043



590,218



(33,350
)


184,505



783,416Shares issued upon exercise of stock options


318,130



318



3,274











3,592Shares issued for business combinations


8,926,819



8,927



294,137











303,064Shares issued for 401(k) match and direct stock purchases


83,772



83



2,146











2,229Change in unrealized gain or loss on investments and MBS
    available for sale, net of income tax














15,383







15,383Cash dividends declared


















(17,981
)


(17,981
)Equity based compensation


85,000



85



1,319











1,404Tax benefit of stock options










934











934Net income


















93,289



93,289Balance, December 31, 2007


51,456,461


$
51,456


$
892,028


$
(17,967
)

$
259,813


$
1,185,330    See accompanying summary of significant accounting policies
    and notes to consolidated financial statements.
 F-5




---



##### Table of Contents



Sterling
    Financial Corporation
 Consolidated Statements of Cash Flows
 For the Years Ended December 31, 2007, 2006 and 2005
 (Dollars in thousands)
   2007


2006


2005Cash flows from operating activities:Net income

$
93,289


$
73,946


$
61,219Adjustments to reconcile net income to net cash provided by
    operating activities:Provisions for credit losses and real estate owned


25,088



18,873



15,223Stock dividends on FHLB Seattle stock


0



0



(303
)Accretion of deferred gains on sale of buildings


(826
)


(320
)


0Net gain on sales of loans, investments and MBS


(20,413
)


(10,545
)


(10,219
)Stock based compensation


1,404



182



0Excess tax benefit from stock based compensation


(934
)


(2,704
)


0Stock issuances relating to 401(k) match


2,229



1,582



0Other gains and losses


4,170



1,910



(103
)Loss (gain) related to early repayment of debt


2,324



0



(645
)Increase in cash surrender value of BOLI


(6,500
)


(5,020
)


(5,914
)Depreciation and amortization


24,674



19,253



20,063Deferred income tax (provision) benefit


8,853



7,567



(6,212
)Change in:Accrued interest receivable


(1,090
)


(11,259
)


(8,326
)Prepaid expenses and other assets


(15,104
)


(11,722
)


17,375Cashiers checks issued and payable


(22,079
)


11,529



2,270Accrued interest payable


(3,951
)


19,684



3,327Accrued expenses and other liabilities


14,497



(10,375
)


10,734Proceeds from sales of loans originated for sale


1,258,621



630,185



182,538Loans originated for sale


(1,241,934
)


(620,214
)


(178,718
)Net cash provided by operating activities


122,318



112,552



102,309Cash flows from investing activities:Change in restricted cash


50



(288
)


419Loans funded and purchased


(4,876,317
)


(4,235,924
)


(3,732,692
)Loan principal received


4,073,897



3,066,906



2,619,152Proceeds from sales of portfolio loans


112,676



90,802



472,682Purchase of investments securities


(109,940
)


(60,165
)


(17,152
)Proceeds from maturities of investments securities


45,198



21,685



2,604Proceeds from sales of investments securities


7,208



0



14,844Net change in cash and cash equivalents from acquisitions


92,419



82,403



0Purchase of BOLI


(2,257
)


(1,392
)


(10,000
)Purchase of mortgage-backed securities


(305,009
)


0



(471,715
)Principal payments on MBS


230,770



270,291



385,126Proceeds from sales of MBS


0



0



115,837Purchase of office properties and equipment


(14,671
)


(15,120
)


(12,901
)Sale of office properties and equipment


5,467



21,015



268Improvements and other changes to real estate owned


(119
)


(11
)


(331
)Proceeds from sales of real estate owned


1,348



1,353



4,104Net cash used in investing activities


(739,280
)


(758,445
)


(629,755
)    See accompanying summary of significant accounting policies
    and notes to consolidated financial statements.
 F-6




---



##### Table of Contents



Sterling
    Financial Corporation
 Consolidated Statements of Cash Flows
 For the Years Ended December 31, 2007, 2006 and 2005
 (Dollars in thousands)
   2007


2006


2005Cash flows from financing activities:Net change in transaction and savings deposits

$
96,120


$
249,122


$
302,593Proceeds from issuance of time deposits


3,998,803



3,912,383



2,749,173Payments for maturing time deposits


(4,420,908
)


(3,451,067
)


(2,195,593
)Interest credited to deposits


263,075



164,185



86,832Advances from FHLB Seattle


2,246,244



2,316,797



1,204,777Repayment of advances from FHLB Seattle


(2,133,187
)


(2,519,021
)


(1,395,513
)Net change in securities sold subject to repurchase agreements
    and funds purchased


562,491



(83,137
)


(168,336
)Proceeds from other borrowings


69,392



130,000



0Repayment of other borrowings


(36,855
)


(27,200
)


(19,000
)Payments for fractional shares


0



0



(14
)Proceeds from stock sales


3,592



6,459



3,411Excess tax benefit from stock based compensation


934



2,704



0Deferred financing costs


0



0



(75
)Cash dividends paid to shareholders


(16,243
)


(8,895
)


(1,736
)Other


(583
)


821



(953
)Net cash provided by financing activities


632,875



693,151



565,566Net change in cash and cash equivalents


15,913



47,258



38,120Cash and cash equivalents, beginning of year


178,565



131,307



93,187Cash and cash equivalents, end of year

$
194,478


$
178,565


$
131,307Supplemental disclosures:Cash paid during the period for:Interest

$
411,272


$
265,249


$
167,949Income taxes


52,729



41,273



11,377Noncash financing and investing activities:Loans converted into real estate owned


8,252



4,326



2,271Common stock issued for business combinations


303,064



201,125



0Common stock cash dividend accrued


4,889



3,154



1,921Deferred gains on sales of branches


804



10,319



0Common stock split, effected as dividend


0



0



11,553    See accompanying summary of significant accounting policies
    and notes to consolidated financial statements.
 F-7




---



##### Table of Contents



Sterling
    Financial Corporation
    Summary of Significant Accounting Policies
    For the Years Ended December 31, 2007, 2006 and
    2005
   Business
      Principles
    of Consolidation
    Estimates
    Cash and
    Cash Equivalents
       F-8




---



##### Table of Contents



Sterling
    Financial Corporation
    Summary of Significant Accounting Policies
    For the Years Ended December 31, 2007, 2006 and
    2005
     Investments
    and MBS
    
    Available for Sale.  Debt and equity
    investments and MBS that will be held for indefinite periods of
    time are classified as available for sale and are carried at
    market value. Market value is determined using published quotes
    or other indicators of value as of the close of business on
    December 31, 2007 and 2006. Unrealized gains and losses are
    reported, net of deferred income taxes, as a component of
    accumulated other comprehensive income or loss in
    shareholders' equity until realized.
    Held to Maturity.  Investments in debt
    securities that management of Sterling has the intent and
    ability to hold until maturity are classified as held to
    maturity and are carried at their remaining unpaid principal
    balance, net of unamortized premiums or unaccreted discounts.    Loans
    Receivable
      Allowance
    for Credit Losses
       F-9




---



##### Table of Contents



Sterling
    Financial Corporation
    Summary of Significant Accounting Policies
    For the Years Ended December 31, 2007, 2006 and
    2005
   Loans
    Held for Sale
    Loan
    Origination and Commitment Fees
      Office
    Properties and Equipment
    Real
    Estate Owned
    Goodwill
    and Other Intangible Assets
     F-10




---



##### Table of Contents



Sterling
    Financial Corporation
    Summary of Significant Accounting Policies
    For the Years Ended December 31, 2007, 2006 and
    2005
     Loan
    Purchases
  03-3, SOP 03-3
  Mortgage
    Banking Operations
      Income
    Taxes
    Earnings
    Per Share
   F-11




---



##### Table of Contents



Sterling
    Financial Corporation
    Summary of Significant Accounting Policies
    For the Years Ended December 31, 2007, 2006 and
    2005
   Stock-Based
    Compensation
    Comprehensive
    Income
      AmountYear ended December 31, 2007

$
(3
)Year ended December 31, 2006


0Year ended December 31, 2005


(64
)     Hedging
    Activities
     F-12




---



##### Table of Contents



Sterling
    Financial Corporation
    Summary of Significant Accounting Policies
    For the Years Ended December 31, 2007, 2006 and
    2005
     Mergers
    and Acquisitions
    Reclassifications
    New
    Accounting Pronouncements
        No. 06-4, No. 06-4, EITF 06-4
 F-13




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
     1.
    Investments
    and MBS:    Available for SaleGross


GrossUnrealized


Unrealized


Carrying/Amortized Cost


Gains


Losses


Fair ValueDecember 31, 2007U.S. Government and agency obligations

$
9,999


$
0


$
(5
)

$
9,994MBS


1,810,361



2,692



(28,022
)


1,785,031Municipal bonds


10,850



0



(213
)


10,637Other


50,488



4



(2,883
)


47,609Total

$
1,881,698


$
2,696


$
(31,123
)

$
1,853,271December 31, 2006U.S. Government and agency obligations

$
22,462


$
1


$
(135
)

$
22,328MBS


1,740,328



1



(52,657
)


1,687,672Other


18,681



5



0



18,686Total

$
1,781,471


$
7


$
(52,792
)

$
1,728,686   Held to MaturityGross


GrossAmortized Cost/


Unrealized


UnrealizedCarrying Value


Gains


Losses


Fair ValueDecember 31, 2007Municipal bonds

$
132,426


$
575


$
(906
)

$
132,095Other


367



0



0



367Total

$
132,793


$
575


$
(906
)

$
132,462December 31, 2006Municipal bonds

$
92,808


$
314


$
(848
)

$
92,274Other


255



0



0



255Total

$
93,063


$
314


$
(848
)

$
92,529    F-14




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    1.
    Investments
    and MBS, Continued:    Proceeds from


Gross Realized


Gross RealizedSales


Gains


LossesYear ended December 31, 2007

$
7,208


$
6


$
2Year ended December 31, 2006


0



0



0Year ended December 31, 2005


130,681



442



499     Amortized Cost


Fair ValueAvailable-for-sale MBS:1 to 5 years

$
68,322


$
67,306After 5 years through 10 years


64,063



63,237After 10 years


1,677,976



1,654,488$
1,810,361


$
1,785,031Available-for-sale U.S. Government and agency obligations:Under 1 year

$
9,999


$
9,994$
9,999


$
9,994Other available for sale:After 10 years

$
61,338


$
58,246$
61,338


$
58,246Held-to-maturity municipal bonds:Under 1 year

$
574


$
575After 1 year through 5 years


2,498



2,490After 5 through 10 years


10,849



10,859After 10 years


118,505



118,171$
132,426


$
132,095Other held-to-maturities securities:Under 1 year

$
272


$
272After 1 year through 5 years


95



95$
367


$
367  F-15




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    1.
    Investments
    and MBS, Continued:  No. 115-1,
  Less than 12 months


12 months or longer


TotalMarket


Unrealized


Market


Unrealized


Market


UnrealizedDecember 31, 2007

Value


Losses


Value


Losses


Value


LossesU.S. Government and agency obligations

$
9,994


$
(5
)

$
0


$
0


$
9,994


$
(5
)Municipal bonds


71,700



(3,578
)


37,958



(424
)


109,658



(4,002
)MBS


51,125



(599
)


1,343,065



(27,423
)


1,394,190



(28,022
)Total

$
132,819


$
(4,182
)

$
1,381,023


$
(27,847
)

$
1,513,842


$
(32,029
)December 31, 2006U.S. Government and agency obligations

$
2,003


$
(2
)

$
11,855


$
(134
)

$
13,858


$
(136
)Municipal bonds


42,236



(564
)


24,861



(283
)


67,097



(847
)MBS


47,503



(238
)


1,630,945



(52,420
)


1,678,448



(52,658
)Total

$
91,742


$
(804
)

$
1,667,661


$
(52,837
)

$
1,759,403


$
(53,641
)        F-16




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   2.
    Loans
    Receivable:    December 31,2007


2006Residential real estate

$
703,826


$
654,661Multifamily real estate


389,388



263,053Commercial real estate


1,223,036



795,386Construction


2,944,911



2,290,882Consumerdirect


798,519



749,626Consumerindirect


376,937



288,704Commercial banking


2,639,196



2,069,086Total loans receivable


9,075,813



7,111,398Deferred loan fees, net


(16,480
)


(12,308
)Gross loans receivable


9,059,333



7,099,090Allowance for losses on loans


(111,026
)


(77,849
)Net loans receivable

$
8,948,307


$
7,021,241       BalanceOutstanding at


Principal PaymentsDecember 31,


Contractually Due in Fiscal Years2007


2008


2009-2012


Thereafter(In thousands)Mortgagepermanent:Fixed rate

$
854,661


$
44,245


$
176,421


$
633,995Variable rate


1,461,589



66,296



320,237



1,075,056Mortgageconstruction


2,944,911



2,172,912



656,751



115,248Consumerdirect


798,519



266,338



146,808



385,373Consumerindirect


376,937



75,550



268,942



32,445Commercial banking


2,639,196



1,092,377



519,881



1,026,938$
9,075,813


$
3,717,718


$
2,089,040


$
3,269,055  F-17




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    2.
    Loans
    Receivable, Continued:      3.
    Allowances
    for Credit Losses:    Years Ended December 31,2007


2006


2005Allowance for credit lossesAllowanceloans, January 1

$
77,849


$
52,034


$
47,352Allowance for losses on loans acquired


15,294



13,155



0Provision


24,838



18,703



15,200Amounts written off


(7,682
)


(4,405
)


(9,651
)Recoveries


933



753



572Transfers


(206
)


(2,391
)


(1,439
)Allowanceloans, December 31


111,026



77,849



52,034Allowanceunfunded commitments, January 1


5,840



3,449



2,010Acquired


0



0



0Provision


260



0



0Transfers


206



2,391



1,439Allowanceunfunded commitments, December 31


6,306



5,840



3,449Total credit allowance

$
117,332


$
83,689


$
55,483  F-18




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    3.
    Allowances
    for Credit Losses, Continued:    December 31,2007


2006Non-accrual
    loans(1)

$
115,112


$
7,107Restructured
    loans(2)


350



0Total nonperforming loans

$
115,462


$
7,107    (1)
    As of December 31, 2007 and 2006, Sterling had established
    a specific credit loss allowance of $8.7 million and
    $1.4 million on nonperforming loan balances of
    $24.5 million and $2.5 million, respectively.
    Nonperforming loans that do not have a specific credit loss
    allowance are evaluated as part of Sterling's general
    credit loss allowance. Interest income of $1.5 million,
    $249,000 and $258,000, was recorded during the years ended
    December 31, 2007, 2006 and 2005, respectively, in
    connection with such loans. For loans on non-accrual status at
    year end, additional gross interest income of $4.5 million,
    $321,000 and $693,000, would have been recorded during the years
    ended December 31, 2007, 2006 and 2005, respectively, if
    non-accrual and restructured loans had been current in
    accordance with their original contractual terms. The average
    recorded investment in nonperforming loans during the years
    ended December 31, 2007, 2006 and 2005 was
    $36.5 million, $5.4 million and $12.3 million,
    respectively.(2)
    Restructured loans occur when Sterling has agreed to compromise
    the contractual loan terms to provide a reduction in the rate of
    interest and, in most instances, an extension of payments of
    principal or interest, or both, because of deterioration in the
    financial position of the borrower. Restructured loans
    performing in accordance with their new terms are not included
    in non-accrual loans unless there is uncertainty as to the
    ultimate collection of principal or interest.  4.
    Loan
    Servicing:    December 31,2007


2006


2005Residential

$
598,462


$
621,597


$
606,807Commercial real estate


1,683,029



1,622,788



807,456Commercial banking


117,678



15,960



6,860Consumer


9



724



3,098Total

$
2,399,178


$
2,261,069


$
1,424,221  F-19




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    4.
    Loan
    Servicing, Continued:    Years Ended December 31,2007


2006Balance, January 1

$
7,335


$
5,430Originated servicing


1,912



797Amortization


(2,057
)


(1,160
)Acquired


2,464



2,268Adjustment to fair value


(612
)


0Balance, December 31

$
9,042


$
7,335     5.
    Office
    Properties and Equipment:    December 31,


Estimated2007


2006


Useful LifeBuildings and improvements

$
55,003


$
55,583



20-40 yearsFurniture, fixtures, equipment and computer software


76,428



66,733



3-10 yearsLeasehold improvements


16,466



12,896



5-20 yearsAutomobiles


120



116



3-5 years148,017



135,328Less accumulated depreciation and amortization


(66,229
)


(55,346
)81,788



79,982Land


11,679



13,814Total office properties and equipment

$
93,467


$
93,796   F-20




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   6.
    Goodwill
    and Other Intangible Assets:    ResidentialCommunity


MortgageTotal


Banking


BankingBalance as of January 1, 2006

$
112,707


$
112,707


$
0Additions


134,537



103,604



30,933Balance at December 31, 2006


247,244



216,311



30,933Additions


205,892



205,755



137Balance as of December 31, 2007

$
453,136


$
422,066


$
31,070       December 31,2007


2006Gross carrying value

$
43,456


$
35,682Accumulated amortization


(11,829
)


(7,112
)Net carrying value

$
31,627


$
28,570       Year Ending December 31,

Amount2008

$
4,8972009


4,8972010


4,8972011


4,7872012


4,777   F-21




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   7.
    Deposits:    December 31, 2007


December 31, 2006Amount


%


Amount


%(Dollars in thousands)Interest-bearing transaction

$
469,428



6.1


$
483,551



7.2Noninterest-bearing transaction


898,606



11.7



834,140



12.4Savings and MMDA


2,156,808



28.1



1,830,313



27.1Time deposits


4,152,930



54.1



3,598,024



53.3Total deposits

$
7,677,772



100.0


$
6,746,028



100.0Annualized cost of deposits






3.71%







3.32%       Weighted AverageAmount


Interest RateDue within 1 year

$
3,612,958



4.81
%Due in 1 to 2 years


216,873



4.54Due in 2 to 3 years


115,963



4.93Due in 3 to 4 years


49,763



5.19Due in 4 to 5 years


103,504



4.98Due after 5 years


53,869



4.56$
4,152,930     December 31,2007


2006Three months or less

$
1,068,537


$
931,437After three months through six months


539,165



644,825After six months through twelve months


647,097



509,732After twelve months


305,550



212,639$
2,560,349


$
2,298,633  F-22




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    7.
    Deposits,
    Continued:    Years Ended December 31,2007


2006


2005Transaction accounts

$
2,543


$
1,692


$
1,340Savings and MMDA


71,665



47,844



22,272Time deposits


203,406



135,737



68,378$
277,614


$
185,273


$
91,990    8.
    Advances
    from Federal Home Loan Bank:      December 31, 2007


December 31, 2006Weighted Average





Weighted AverageAmount


Interest Rate


Amount


Interest RateDue within 1 year

$
399,617



4.66
%

$
803,307



5.14
%Due in 1 to 2 years


431,994



4.55



148,019



4.71Due in 2 to 3 years


440,688



4.89



83,596



5.28Due in 3 to 4 years


11,519



5.00



195,941



4.86Due in 4 to 5 years


370,000



4.91



11,579



5.00Due after 5 years


34,171



4.68



66,175



4.60$
1,687,989



4.75
%

$
1,308,617



5.03
%    9.
    Securities
    Sold Subject to Repurchase Agreements and Funds
    Purchased:     F-23




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    9.
    Securities
    Sold Subject to Repurchase Agreements and Funds Purchased,
    Continued:    December 31, 2007


December 31, 2006Weighted Average





Weighted AverageAmount


Interest Rate


Amount


Interest RateDue within 1 yr

$
288,845



4.31
%

$
86,354



4.81
%Due within 2 yrs


40,000



4.77



40,000



4.82Due within 3 yrs


0



0.00



40,000



4.77Due within 4 yrs


0



0.00



50,000



4.34Due within 5 yrs


150,000



4.19



0



0.00Thereafter


700,000



3.45



400,000



4.18$
1,178,845



3.82
%

$
616,354



4.35
%    10.
    Other
    Borrowings:    December 31,2007


2006Junior Subordinated Debentures

$
270,015


$
236,772Other


3,000



3,454Total other borrowings

$
273,015


$
240,226    F-24




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    10.
    Other
    Borrowings, Continued:    Maturity



Rate at December 31,


AmountSubsidiary Issuer

Issue Date

Date

Call Date

2007


(in Thousands)Sterling Capital Trust IX

July 2007

Oct 2037

N/A

Floating


6.63
%

$
46,392Sterling Capital Trust VIII

Sept 2006

Sept 2036

N/A

Floating


6.62



51,547Sterling Capital Trust VII

June 2006

June 2036

N/A

Floating


6.52



56,702Lynnwood Capital Trust II

June 2005

June 2035

June 2010

Floating


6.79



10,310Sterling Capital Trust VI

June 2003

Sept 2033

Sept 2008

Floating


8.19



10,310Sterling Capital Statutory Trust V

May 2003

May 2033

June 2008

Floating


8.11



20,619Sterling Capital Trust IV

May 2003

May 2033

May 2008

Floating


8.02



10,310Sterling Capital Trust III

April 2003

April 2033

April 2008

Floating


8.16



14,433Lynnwood Capital Trust I

Mar 2003

Mar 2033

Mar 2007

Floating


8.01



9,477Klamath First Capital Trust I

July 2001

July 2031

June 2006

Floating


9.06



15,172Sterling Capital Trust II

July 2001

July 2031

June 2006

Fixed


10.25



24,7437.44
%*

$
270,015   *
    Weighted average rate      F-25




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   11.
    Income
    Taxes:    Years Ended December 31,2007


2006


2005Current income taxes:Federal

$
51,395


$
38,436


$
21,667State


2,382



3,361



1,525Total current income taxes


53,777



41,797



23,192Deferred income taxes:Federal


(8,033
)


(6,959
)


5,703State


(820
)


(608
)


509Total deferred income taxes


(8,853
)


(7,567
)


6,212Total income tax expense

$
44,924


$
34,230


$
29,404     December 31,2007


2006Assets


Liabilities


Assets


LiabilitiesAllowance for losses on loans

$
42,216


$
0


$
31,123


$
0Unrealized losses on available-for-sale securities


10,518



0



19,532



0Purchase accounting premiums/discounts


13,941



20,868



15,581



19,636Deferred compensation


9,045



0



6,333



0FHLB Seattle dividends


0



16,772



0



16,016Deferred loan fees


0



7,037



0



4,258Office properties and equipment


2,216



0



2,408



0Mortgage servicing rights


0



1,975



0



2,634Nonaccrual loans


1,731



0



168



0Prepaid expenses


0



751



0



444Other


0



1,591



0



1,322$
79,667


$
48,994


$
75,145


$
44,310  F-26




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    11.
    Income
    Taxes, Continued:    Years Ended December 31,2007


2006


2005Amount


%


Amount


%


Amount


%Income tax provision at the federal statutory rate

$
48,374



35.0
%


37,862


$
35.0
%

$
31,718



35.0
%Tax effect of:State taxes, net of federal benefit


1,210



0.9



1,333



1.2



1,322



1.5Tax-exempt interest


(1,539
)


(1.1
)


(998
)


(0.9
)


(655
)


(0.7
)Bank owned life insurance


(2,203
)


(1.6
)


(1,735
)


(1.6
)


(2,070
)


(2.3
)Tax credits


(1,388
)


(1.0
)


(1,433
)


(1.4
)


(874
)


(1.0
)Other, net


470



0.3



(799
)


(0.7
)


(37
)


(0.1
)$
44,924



32.5
%


34,230


$
31.6
%

$
29,404



32.4
%     2007(Dollars in thousands)Balance at January 1

$
1,553Additionscurrent year tax positions


193Additionsprior year tax positions


455Reductionsprior year tax positions


(415
)Balance at December 31

$
1,786    F-27




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   12.
    Stock
    Based Compensation:    2007


2006


2005Weighted





Weighted





WeightedAverage





Average





AverageNumber


Exercise Price


Number


Exercise Price


Number


Exercise PriceBalance, January 1


1,485,661


$
19.72



1,703,959


$
19.46



1,793,975


$
15.18Granted


340,000



32.37



20,000



25.28



401,000



25.71Exercised


(319,849
)


11.42



(495,208
)


13.60



(491,016
)


8.93Acquisitions


573,212



12.67



265,160



9.35



0



0.00Cancelled


(11,623
)


18.74



(8,250
)


8.91



0



0.00Balance, December 31


2,067,401


$
21.13



1,485,661


$
19.72



1,703,959


$
19.46Exercisable


1,728,401


$
18.93



1,485,661


$
19.72



1,700,659


$
19.50       Year EndedDecember2005Reported net income:

$
61,219Add back: Stock-based employee compensation expense, net of
    related tax effects


0Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects


(3,319
)Pro forma net income

$
57,900Basic earnings per share:Reported earnings per share

$
1.77Stock-based employee compensation, fair value


(0.10
)Pro forma earnings per share

$
1.67Diluted earnings per share:Reported earnings per share

$
1.75Stock-based employee compensation, fair value


(0.09
)Pro forma earnings per share

$
1.66  F-28




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    12.
    Stock
    Based Compensation, Continued:    Years Ended December 31,2007

2006

2005Expected volatility

26%29%

31%

32%Expected lives (in years)

4.76.0

5.5

2.95.4Expected dividend yield

0.90%1.47%

0.87%

0.87%1.04%Risk free interest rates

4.65%4.80%

4.36%

4.37%4.44%     Options OutstandingWeighted





Options ExercisableRange of




Average


Weighted





WeightedExercise

Number


Remaining


Average


Number


AveragePrices

Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise Price$4.27$8.01


285,279



1.2 years


$
5.58



285,279


$
5.58$8.01$12.02


252,708



3.4 years



9.24



252,708



9.24$12.02$16.03


24,631



5.9 years



14.01



24,631



14.01$16.03$20.04


225,736



4.4 years



19.36



225,736



19.36$20.04$24.01


180,381



6.8 years



22.67



180,381



22.67$24.01$28.02


755,200



5.2 years



26.14



725,200



26.21$28.02$33.17


343,466



6.3 years



32.68



34,466



28.602,067,401











1,728,401        13.
    Shareholders'
    Equity:     F-29




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    13.
    Shareholders'
    Equity, Continued:    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 millionOctober 2007


0.090



4.6 millionJanuary 2008


0.095



4.9 million    F-30




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   14.
    Earnings
    Per Share:    For the Year Ended December 31, 2007Weighted AverageNet Income


Shares


Per Share(Numerator)


(Denominator)


AmountEarnings per common sharebasic

$
93,289



49,786,349


$
1.87Effect of dilutive securities:Common stock options and restricted shares


0



431,166



(0.01
)Earnings per common sharediluted

$
93,289



50,217,515


$
1.86Antidilutive options not included in diluted 
    earnings per share






330,318   For the Year Ended December 31, 2006Weighted AverageNet Income


Shares


Per Share(Numerator)


(Denominator)


AmountEarnings per common sharebasic

$
73,946



36,423,095


$
2.03Effect of dilutive securities:Common stock options


0



418,771



(0.02
)Earnings per common sharediluted

$
73,946



36,841,866


$
2.01Antidilutive options not included in diluted 
    earnings per share






237,850   For the Year Ended December 31, 2005Weighted AverageNet Income


Shares


Per Share(Numerator)


(Denominator)


AmountEarnings per common sharebasic

$
61,219



34,633,952


$
1.77Effect of dilutive securities:Common stock options


0



365,065



(0.02
)Contingently issuable shares


0



36,012



0.00Earnings per common sharediluted

$
61,219



35,035,029


$
1.75Antidilutive options not included in diluted 
    earnings per share






857,000   F-31




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   15.
    Regulatory
    Capital:    Minimum Capital


Well-CapitalizedRequirements


Requirements


ActualAmount


Ratio


Amount


Ratio


Amount


RatioAs of December 31, 2007:Tier 1 leverage (to average assets)Sterling

$
456,749



4.0
%

$
570,936



5.0
%

$
991,261



8.7
%Sterling Savings Bank


441,407



4.0



551,759



5.0



938,717



8.5Golf Savings Bank


14,866



4.0



18,582



5.0



27,173



7.3Tier I (to risk-weighted assets)Sterling


392,497



4.0



588,746



6.0



991,261



10.1Sterling Savings Bank


382,746



4.0



574,120



6.0



938,717



9.8Golf Savings Bank


10,674



4.0



16,011



6.0



27,173



10.2Total (to risk-weighted assets)Sterling


784,995



8.0



981,243



10.0



1,111,593



11.3Sterling Savings Bank


765,493



8.0



956,866



10.0



1,054,497



11.0Golf Savings Bank


21,348



8.0



26,685



10.0



28,725



10.8As of December 31, 2006:Tier 1 leverage (to average assets)Sterling

$
361,112



4.0
%

$
451,390



5.0
%

$
787,630



8.7
%Sterling Savings Bank


349,254



4.0



436,568



5.0



749,567



8.6Golf Savings Bank


11,484



4.0



14,355



5.0



19,728



6.9Tier I (to risk-weighted assets)Sterling


315,401



4.0



473,101



6.0



787,630



10.0Sterling Savings Bank


308,994



4.0



463,491



6.0



749,567



9.7Golf Savings Bank


7,280



4.0



10,920



6.0



19,728



10.8Total (to risk-weighted assets)Sterling


630,802



8.0



788,502



10.0



871,319



11.1Sterling Savings Bank


617,988



8.0



772,486



10.0



832,074



10.8Golf Savings Bank


14,560



8.0



18,200



10.0



20,910



11.5   16.
    Commitments
    and Contingencies:   F-32




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    16.
    Commitments
    and Contingencies Continued:      December 31,2007


2006Undisbursed loan fundsconstruction loans

$
1,398,498


$
1,421,104Undisbursed lines of creditcommercial loans


750,938



746,084Undisbursed lines of creditconsumer loans


374,694



288,839Firm commitments to purchase loans


4,034



33,378Firm commitments to sell loans


93,933



104,061         Year Ending December 31,

Amount2008

$
13,6402009


12,2982010


10,5152011


9,1192012


7,039Thereafter


38,026$
90,637     17.
    Benefit
    Plans:   F-33




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    17.
    Benefit
    Plans, Continued:         F-34




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    17.
    Benefit
    Plans, Continued:     18.
    Non-Interest
    Expenses:    Years Ended December 31,2007


2006


2005Employee compensation and benefits

$
158,483


$
117,186


$
93,367Occupancy and equipment


46,446



32,769



26,411Data processing


18,109



14,180



12,678Depreciation


13,498



10,280



8,627Advertising


12,898



9,985



9,125Travel and entertainment


7,676



5,955



4,522Legal and accounting


3,001



2,478



3,134Amortization of core deposit intangibles


4,718



2,405



2,222Insurance


3,778



1,360



1,213Merger and acquisition costs


2,833



454



0Goodwill litigation


2,720



275



179Other


11,377



9,046



8,803$
285,537


$
206,373


$
170,281   19.
    Segment
    Information:    
    The Community Banking segment consists of the operations
    conducted by Sterling's subsidiaries, Sterling Savings Bank
    and Golf Savings Bank.
    The Residential Mortgage Banking segment originates and sells
    servicing-retained and servicing-released residential loans
    through loan production offices of Golf Savings Bank and
    Sterling Savings Bank's subsidiary Action Mortgage Company
    ("Action Mortgage").  
    The Commercial Mortgage Banking segment originates, sells and
    services commercial real estate loans and participation
    interests in commercial real estate loans through offices in the
    western region primarily through Sterling Savings Bank's
    subsidiary INTERVEST-Mortgage Investment Company
    ("INTERVEST").
    The Retail Brokerage segment markets fixed income and equity
    products, mutual funds, fixed and variable annuities, insurance
    and other financial products within the Sterling Savings Bank
    financial service center network through sales representatives
    of Sterling Savings Bank's subsidiary Harbor Financial
    Services, Inc.
    The Other and Eliminations segment represents the parent company
    expenses and intercompany eliminations of revenue and expenses. F-35




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    19.
    Segment
    Information, Continued:     As of and for the Year Ended December 31, 2007Residential


CommercialCommunity


Mortgage


Mortgage


Retail


Other andBanking


Banking


Banking


Brokerage


Eliminations


TotalInterest income

$
705,664


$
52,104


$
9,000


$
0


$
210


$
766,978Interest expense


(378,858
)


(14,462
)


0



0



(18,298
)


(411,618
)Net interest income (expense)


326,806



37,642



9,000



0



(18,088
)


355,360Provision for losses on loans


(24,705
)


(383
)


0



0



0



(25,088
)Noninterest income


77,378



27,759



7,496



4,555



(23,710
)


93,478Noninterest expense


(226,718
)


(40,982
)


(10,970
)


(4,104
)


(2,763
)


(285,537
)Income (loss) before income taxes

$
152,761


$
24,036


$
5,526


$
451


$
(44,561
)

$
138,213Total assets

$
11,790,838


$
454,127


$
10,445


$
1,033


$
(106,668
)

$
12,149,775As of and for the Year Ended December 31, 2006Residential


CommercialCommunity


Mortgage


Mortgage


Retail


Other andBanking


Banking


Banking


Brokerage


Eliminations


TotalInterest income

$
514,156


$
28,899


$
9,298


$
0


$
(1,498
)

$
550,855Interest expense


(269,164
)


(7,153
)


0



0



(10,626
)


(286,943
)Net interest income (expense)


244,992



21,746



9,298



0



(12,124
)


263,912Provision for losses on loans


(18,613
)


(90
)


0



0



0



(18,703
)Noninterest income


55,569



18,875



6,047



3,445



(14,596
)


69,340Noninterest expense


(161,121
)


(30,694
)


(9,101
)


(3,010
)


(2,447
)


(206,373
)Income (loss) before income taxes

$
120,827


$
9,837


$
6,244


$
435


$
(29,167
)

$
108,176Total assets

$
9,596,998


$
326,462


$
10,929


$
947


$
(100,844
)

$
9,834,492As of and for the Year Ended December 31, 2005Residential


CommercialCommunity


Mortgage


Mortgage


Retail


Other andBanking


Banking


Banking


Brokerage


Eliminations


TotalInterest income

$
367,918


$
11,794


$
8,099


$
0


$
0


$
387,811Interest expense


(163,405
)


0



0



0



(7,871
)


(171,276
)Net interest income (expense)


204,513



11,794



8,099



0



(7,871
)


216,535Provision for losses on loans


(15,200
)


0



0



0



0



(15,200
)Noninterest income


52,766



9,939



5,194



3,516



(11,846
)


59,569Noninterest expense


(140,153
)


(18,317
)


(7,584
)


(3,612
)


(615
)


(170,281
)Income (loss) before income taxes

$
101,926


$
3,416


$
5,709


$
(96
)

$
(20,332
)

$
90,623Total assets

$
7,627,471


$
22,204


$
22,368


$
623


$
(113,738
)

$
7,558,928   F-36




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   20.
    Quarterly
    Financial Data (Unaudited):    Year Ended December 31, 2007First Quarter


Second Quarter


Third Quarter


Fourth QuarterInterest income

$
174,902


$
194,061


$
199,918


$
198,097Interest expense


(94,286
)


(105,021
)


(106,254
)


(106,057
)Provision for credit losses


(4,225
)


(3,975
)


(3,888
)


(13,000
)Net interest income after provision


76,391



85,065



89,776



79,040Non interest income


23,448



24,778



24,207



21,045Non interest expenses


(65,669
)


(69,891
)


(74,104
)


(75,873
)Income before income taxes


34,170



39,952



39,879



24,212Income tax provision


(11,249
)


(12,971
)


(13,349
)


(7,355
)Net income

$
22,921


$
26,981


$
26,530


$
16,857Earnings per sharebasic

$
0.51


$
0.53


$
0.52


$
0.33Earnings per sharediluted

$
0.50


$
0.52


$
0.51


$
0.33Weighted average shares outstandingbasic


45,238,924



51,189,438



51,279,114



51,354,316Weighted average shares outstandingdiluted


45,833,530



51,699,098



51,660,186



51,643,958   Year Ended December 31, 2006First Quarter


Second Quarter


Third Quarter


Fourth QuarterInterest income

$
116,179


$
126,720


$
148,208


$
159,748Interest expense


(57,223
)


(65,671
)


(78,175
)


(85,874
)Provision for credit losses


(4,650
)


(4,650
)


(4,698
)


(4,705
)Net interest income after provision


54,306



56,399



65,335



69,169Non interest income


12,917



15,130



18,451



22,842Non interest expenses


(44,240
)


(46,989
)


(55,302
)


(59,842
)Income before income taxes


22,983



24,540



28,484



32,169Income tax provision


(7,567
)


(7,609
)


(9,145
)


(9,909
)Net income

$
15,416


$
16,931


$
19,339


$
22,260Earnings per sharebasic

$
0.44


$
0.48


$
0.52


$
0.57Earnings per sharediluted

$
0.44


$
0.48


$
0.52


$
0.57Weighted average shares outstandingbasic


34,946,649



35,077,647



36,891,986



38,729,376Weighted average shares outstandingdiluted


35,255,602



35,404,364



37,273,560



39,159,001   F-37




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
   21.
    Fair
    Values of Financial Instruments:      Cash and
    Cash Equivalents
    Investments
    and MBS
    Loans
    Held for Sale
    Loans
    Receivable
      Deposits
    Borrowings
   F-38




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    21.
    Fair
    Values of Financial Instruments, Continued:      December 31,2007


2006Carrying





CarryingAmount


Fair Value


Amount


Fair ValueFinancial assets:Cash and cash equivalents

$
195,578


$
195,578


$
179,715


$
179,715Investments and MBS:Available for sale


1,853,271



1,853,271



1,728,686



1,728,686Held to maturity


132,793



132,462



93,063



92,529Loans held for sale


55,840



55,840



91,469



91,469Loans receivable, net


8,948,307



8,930,519



7,021,241



6,947,660Accrued interest receivable


63,649



63,649



55,519



55,519Financial liabilities:Non-maturity deposits


3,524,842



3,524,842



3,148,004



3,148,004Deposits with stated maturities


4,152,930



4,182,402



3,598,024



3,600,415Borrowings


3,139,849



3,093,266



2,165,197



2,148,717Accrued interest payable


40,209



40,209



39,863



39,863     22.
    Related-Party
    Transactions:     F-39




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    22.
    Related-Party
    Transactions, Continued:    2007Balance, January 1

$
42,446New


74,041Acquired


2,559Repayments


(48,038
)Balance, December 31

$
71,008    23.
    Parent
    Company-Only Financial Information:    December 31,Condensed Balance Sheets

2007


2006Assets:Cash and cash equivalents

$
33,660


$
21,056Investments in subsidiaries:Sterling Savings Bank


1,391,475



944,420Golf Savings Bank


29,714



50,661Golf Escrow Company


528



466Tri-Cities
    Mortgage Company


32



32Capital Trust Subsidiaries


8,109



7,120Receivable from subsidiaries


0



2,667Available for sale investments


27



42Other assets


2,029



2,463Total assets

$
1,465,574


$
1,028,927Liabilities and Shareholders' Equity:Accrued expenses payable

$
8,047


$
8,707Term note payable


0



0Junior Subordinated Debentures


270,015



236,772Due to affiliates


2,182



32Shareholders' equity


1,185,330



783,416Total liabilities and shareholders' equity

$
1,465,574


$
1,028,927   F-40




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    23.
    Parent
    Company-Only Financial Information, Continued:  Years Ended December 31,2007


2006


2005(In thousands)Condensed Statements of IncomeInterest income

$
1,625


$
1,520


$
748Interest expense


(20,455
)


(14,483
)


(8,618
)Net interest expense


(18,830
)


(12,963
)


(7,870
)Equity in net earnings of subsidiary


106,790



84,553



68,339Noninterest expenses


(3,997
)


(3,993
)


(3,433
)Income before income taxes


83,963



67,597



57,036Income tax benefit


9,326



6,349



4,183Net income

$
93,289


$
73,946


$
61,219Condensed Statements of Cash FlowsCash flows from operating activities:Net income

$
93,289


$
73,946


$
61,219Adjustments to reconcile net income to net cash used in
    operating activities


(110,835
)


(89,181
)


(65,444
)Net cash used in operating activities


(17,546
)


(15,235
)


(4,225
)Cash flows from investing activities:Investments in subsidiaries, net


(8,000
)


(118,688
)


0Repayment of advances to subsidiaries


4,817



7,186



6,484Dividends from subsidiary


30,923



56,456



11,616Cash flows from acquisitions


(17,873
)


(26,449
)


0Net cash provided by (used in) investing activities


9,867



(81,495
)


18,100Cash flows from financing activities:Proceeds from other borrowings


45,000



130,000



0Repayment of other borrowings


(13,000
)


(25,475
)


(19,000
)Proceeds from exercise of stock options


4,526



6,459



3,411Dividends paid


(16,243
)


(8,895
)


(1,736
)Other


0



(9
)


(89
)Net cash provided by (used in) financing activities


20,283



102,080



(17,414
)Net change in cash and cash equivalents


12,604



5,350



(3,539
)Cash and cash equivalents, beginning of year


21,056



15,706



19,245Cash and cash equivalents, end of year

$
33,660


$
21,056


$
15,706      F-41




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    23.
    Parent
    Company-Only Financial Information, Continued:    24.
    Business
    Combinations:    Northern
    Empire
      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  F-42




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    24.
    Business
    Combinations, Continued:    Year Ended December 31,2007


2006Pro forma interest income

$
785,064


$
646,710Pro forma interest expense


421,556



335,130Pro forma net interest income


363,508



311,580Pro forma net income


93,497



91,159Pro forma earnings per sharebasic

$
1.82


$
2.01Pro forma earnings per sharediluted

$
1.81


$
1.98   FirstBank
      AmountCash and cash equivalents

$
103,971Investments and MBS


20,851Loans receivable, net


670,619Goodwill


102,266Core deposit intangible


10,935Other assets


47,930Total assets acquired

$
956,572Deposits

$
618,677Other borrowings


157,480Other liabilities


14,986Total liabilities assumed


791,143Net assets acquired

$
165,429  F-43




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    24.
    Business
    Combinations, Continued:    Twelve Months EndedDecember 31,2006


2005Pro forma interest income

$
605,830


$
436,117Pro forma interest expense


310,621



191,361Pro forma net interest income


295,209



244,756Pro forma net income


77,622



64,920Pro forma earnings per sharebasic

$
1.90


$
1.65Pro forma earnings per sharediluted

$
1.87


$
1.62   Mason-McDuffie
    Lynnwood
   F-44




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial Statements
    For the Years Ended December 31, 2007, 2006 and
    2005
    24.
    Business
    Combinations, Continued:    AmountCash and cash equivalents

$
5,732Investments


3,495Loans receivable, net


488,188Goodwill


30,916Core deposit intangible


696Other assets


7,236Total assets acquired

$
536,263Deposits

$
443,427Other borrowings


19,798Other liabilities


6,723Total liabilities assumed


469,948Net assets acquired

$
66,315     Year Ended December 31,2006


2005Pro forma interest income

$
575,268


$
430,173Pro forma interest expense


297,325



186,314Pro forma net interest income


277,943



243,859Pro forma net income


75,403



68,322Pro forma earnings per sharebasic

$
2.02


$
1.88Pro forma earnings per sharediluted

$
2.00


$
1.86    25.
    Subsequent
    Event:  Tri-Cities
 F-45