##### 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, 2006oro

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

91-1572822(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification No.)   111 North Wall Street,
    Spokane,Washington

99201(Address of principal executive
    offices)

(Zip code)   Registrants telephone number, including area code:
 (509) 458-3711
  Securities registered pursuant to Section 12(b) of the
    Act:
  None

None(Title of Each Class)

(Name of Each Exchange on Which
    Registered)   Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock ($1.00 par value)
 (Title of class)
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  þ o o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



STERLING
    FINANCIAL CORPORATION
  DECEMBER 31,
    2006 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


14Subsidiaries


16Competition


18Personnel


18Environmental
    Laws


18Regulation


18Forward-Looking
    Statements


24Where You Can Find
    More Information


25Item 1A.

Risk
    Factors


25Item 1B.

Unresolved Staff
    Comments


31Item 2.

Properties


31Item 3.

Legal
    Proceedings


31Item 4.

Submission of
    Matters to a Vote of Security Holders


31PART II


32Item 5.

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


32Stock Market and
    Dividend Information


32Item 6.

Selected
    Financial Data


34Item 7.

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


35Executive Summary
    and Highlights


35Critical Accounting
    Policies


36Results of
    Operations for the Years Ended December 31, 2006 and
    2005


38Results of
    Operations for the Years Ended December 31, 2005 and
    2004


42Financial
    Position


44Asset and Liability
    Management


45Liquidity and
    Capital Resources


48Off-Balance Sheet
    Arrangements and Aggregate Contractual Obligations


50Capital


51Goodwill
    Litigation


51New Accounting
    Policies


51Effects of Inflation
    and Changing Prices


52Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


52Item 8.

Financial
    Statements and Supplementary Data


52Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


52Item 9A.

Controls and
    Procedures


52Managements
    Report on Internal Control Over Financial Reporting


53Report of
    Independent Registered Public Accounting Firm


54Item 9B.

Other
    Information


55PART III


55Item 10.

Directors,
    Executive Officers and Corporate Governance


55Item 11.

Executive
    Compensation


55Item 12.

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


55Item 13.

Certain
    Relationships and Related Transactions, and Director
    Independence


55Item 14.

Principal
    Accounting Fees and Services


55PART IV


56Item 15.

Exhibits,
    Financial Statement Schedules


56SIGNATURES


57EXHIBIT 10.6EXHIBIT 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




---



##### 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,
    construction and consumer loans.
    growing our core deposits, particularly non-interest bearing
    consumer and commercial transaction deposits.
    expanding products and services for commercial customers,
    including depository and treasury management services such as
    lockbox, on-line net banking, merchant services, analyzed and
    sweep accounts, remote deposit 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
  loan-to-collateral debt-to-income loan-to-value
    Multifamily Residential and Commercial Real Estate
    Lending.
  One- to Four-Family Residential
    Lending.
   3




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##### Table of Contents



loan-to-value Secondary Market Activities
    Consumer Lending.
 4




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##### Table of Contents



Years Ended December 31,2006


2005


2004Amount


%


Amount


%


Amount


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

$
830,619



16.7


$
461,414



11.9


$
400,391



13.7Multifamily residential


4,215



0.1



57,571



1.5



43,395



1.5Commercial real estate


131,001



2.6



218,396



5.6



241,754



8.3965,835



19.4



737,381



19.0



685,540



23.5Mortgage  construction:One- to four-family residential


1,425,248



28.7



1,106,632



28.5



719,146



24.6Multifamily residential


156,932



3.2



175,018



4.5



102,970



3.5Commercial real estate


752,458



15.1



519,893



13.4



203,401



7.02,334,638



47.0



1,801,543



46.4



1,025,517



35.1Total mortgage loans


3,300,473



66.4



2,538,924



65.4



1,711,057



58.6Commercial and consumer:Commercial banking


1,154,304



23.2



898,768



23.1



818,594



28.1Consumer  direct


327,027



6.6



353,840



9.1



332,076



11.4Consumer  indirect


189,505



3.8



90,096



2.4



56,403



1.9Total commercial and consumer loans


1,670,836



33.6



1,342,704



34.6



1,207,073



41.4Total loans originated

$
4,971,309



100.0


$
3,881,628



100.0


$
2,918,130



100.0  5




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##### Table of Contents



Loan Portfolio Analysis.
  December 31,2006


2005


2004


2003


2002Amount


%


Amount


%


Amount


%


Amount


%


Amount


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

$
654,661



9.2


$
488,633



9.9


$
794,632



18.4


$
407,999



13.8


$
358,359



14.8Multifamily residential


263,053



3.7



332,211



6.7



184,754



4.3



167,220



5.7



161,547



6.7Commercial real estate


795,386



11.2



792,219



16.0



699,879



16.3



463,191



15.7



458,712



18.91,713,100



24.1



1,613,063



32.6



1,679,265



39.0



1,038,410



35.2



978,618



40.4Mortgage  construction:One- to four-family residential


1,429,772



20.1



591,362



11.9



356,644



8.3



271,480



9.2



280,514



11.6Multifamily residential


189,819



2.7



143,272



2.9



102,166



2.4



127,424



4.3



96,297



4.0Commercial real estate


671,291



9.4



286,868



5.8



194,085



4.5



154,061



5.2



104,108



4.32,290,882



32.2



1,021,502



20.6



652,895



15.2



552,965



18.7



480,919



19.9Total mortgage loans


4,003,982



56.3



2,634,565



53.2



2,332,160



54.2



1,591,375



53.9



1,459,537



60.3Commercial and consumer:Commercial banking


2,069,086



29.1



1,531,079



30.9



1,311,197



30.4



948,304



32.2



655,727



27.0Consumer  direct


749,626



10.5



618,528



12.5



543,895



12.6



309,931



10.5



246,578



10.2Consumer  indirect


288,704



4.1



166,143



3.4



120,894



2.8



99,697



3.4



62,896



2.5Total commercial and consumer loans


3,107,416



43.7



2,315,750



46.8



1,975,986



45.8



1,357,932



46.1



965,201



39.7Total loans receivable


7,111,398



100.0



4,950,315



100.0



4,308,146



100.0



2,949,307



100.0



2,424,738



100.0Deferred fees, net


(12,308
)






(8,916
)






(6,907
)






(7,276
)






(6,450
)Gross loans receivable


7,099,090







4,941,399







4,301,239







2,942,031







2,418,288Allowance for loan losses


(83,689
)






(55,483
)






(49,362
)






(35,605
)






(27,866
)Loans receivable, net

$
7,015,401






$
4,885,916






$
4,251,877






$
2,906,426






$
2,390,422   Contractual Principal Payments.
 6




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##### Table of Contents



BalanceOutstanding at


Principal PaymentsDecember 31,


Contractually Due in Fiscal Years2006


2007


2008-2011


Thereafter(In thousands)Mortgage  permanent:Fixed rate

$
785,819


$
50,989


$
191,245


$
543,585Variable rate


927,281



67,120



263,518



596,643Mortgage  construction


2,290,882



1,562,065



682,318



46,499Consumer  direct


749,626



271,566



139,410



338,650Consumer  indirect


288,704



60,201



201,032



27,471Commercial banking


2,069,086



1,071,813



509,287



487,986$
7,111,398


$
3,083,754


$
1,986,810


$
2,040,834   Loan Servicing.
      Secondary Market Activities.
    loan-by-loan,
   7




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##### Table of Contents



Loan Commitments.
  Derivatives and Hedging.
  one-to-four
      Classified Assets, Real Estate Owned and Delinquent
    Loans.
   8




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##### Table of Contents



Major Classified Loans.
        Years Ended December 31,2006


2005


2004(Dollars in thousands)Balance at beginning of period

$
779


$
1,865


$
4,226Loan foreclosures and other
    additions


4,581



2,271



4,445Improvements and other changes


(244
)


331



(132
)Sales


(894
)


(3,665
)


(6,669
)Provisions for losses


(170
)


(23
)


(5
)Balance at end of period

$
4,052


$
779


$
1,865   Major Classified Loans.
        Major Real Estate Owned.
  Delinquent Loan Procedures.
 9




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##### Table of Contents



December 31,2006


2005


2004


2003


2002(Dollars in thousands)Nonaccrual loans

$
7,107


$
6,542


$
10,738


$
16,208


$
16,278Restructured loans


0



1,081



1,305



1,164



594Total nonperforming loans


7,107



7,623



12,043



17,372



16,872Real estate owned(1)


4,052



779



1,865



4,226



3,953Total nonperforming assets

$
11,159


$
8,402


$
13,908


$
21,598


$
20,825Ratio of total nonperforming
    assets to total assets


0.11
%


0.11
%


0.20
%


0.50
%


0.59
%Ratio of total nonperforming loans
    to gross loans


0.10
%


0.15
%


0.28
%


0.59
%


0.70
%Ratio of allowance for estimated
    losses on loans to total nonperforming loans(2)


1437.0
%


975.9
%


538.3
%


216.6
%


174.3
%     (1)
    
    Amount is net of the allowance for REO losses.(2)
    
    Excludes loans classified as loss. Loans classified as loss that
    are excluded from allowance for loan losses were $1,379,000,
    $2,159,000, $3,528,000, $2,897,000 and $2,067,000 at
    December 31, 2006, 2005, 2004, 2003 and 2002, respectively.
    There were no loans classified as loss that are excluded from
    total nonperforming loans in any of the periods.    Allowance for Loan and Real Estate Owned
    Losses. on-site
 10




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##### Table of Contents



Years Ended December 31,2006


2005


2004


2003


2002(Dollars in thousands)Balance at beginning of period

$
55,483


$
49,362


$
35,605


$
27,866


$
20,599Charge-offs:Mortgage  permanent


(32
)


(37
)


(59
)


(165
)


(48
)Mortgage  construction


(12
)


(19
)


(645
)


(106
)


(868
)Consumer  direct


(619
)


(1,107
)


(1,373
)


(1,146
)


(954
)Consumer  indirect


(823
)


(449
)


(370
)


(445
)


(407
)Commercial banking


(2,919
)


(8,039
)


(3,036
)


(2,391
)


(2,776
)Total charge-offs


(4,405
)


(9,651
)


(5,483
)


(4,253
)


(5,053
)Recoveries:Mortgage  permanent


5



6



25



42



19Mortgage  construction


20



0



2



3



2Consumer  direct


193



237



214



160



208Consumer  indirect


310



201



111



149



170Commercial banking


225



128



16



268



54Total recoveries


753



572



368



622



453Net charge-offs


(3,652
)


(9,079
)


(5,115
)


(3,631
)


(4,600
)Provisions for loan losses


18,703



15,200



12,150



10,500



11,867Allowance for losses on assets
    acquired


13,155



0



6,722



870



0Balance at end of period

$
83,689


$
55,483


$
49,362


$
35,605


$
27,866Allowances allocated to loans
    classified as loss

$
1,379


$
2,159


$
3,528


$
2,897


$
2,067Ratio of net charge-offs to
    average loans outstanding during the period


0.06
%


0.20
%


0.13
%


0.13
%


0.21
%  11




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##### Table of Contents



December 31,2006


2005


2004


2003


2002Loans 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)Mortgage  permanent

$
13,782



24.1


$
14,576



32.6


$
10,632



39.0


$
4,902



35.2


$
2,881



40.4Mortgage  construction


17,925



32.2



8,016



20.6



6,264



15.2



6,336



18.7



6,199



19.9Consumer  direct


8,205



10.5



6,795



12.5



7,247



12.6



3,843



10.5



2,986



10.2Consumer  indirect


2,880



4.1



1,205



3.4



1,156



2.8



1,676



3.4



1,349



2.5Commercial banking


40,082



29.1



23,626



30.9



23,710



30.4



17,979



32.2



14,014



27.0Unallocated


815



N/A



1,265



N/A



353



N/A



869



N/A



437



N/A$
83,689



100.0


$
55,483



100.0


$
49,362



100.0


$
35,605



100.0


$
27,866



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


$
78,196


$
9,115


$
1,600,361


$
1,687,672Weighted average yield


0.00
%


3.94
%


4.03
%


4.82
%


4.77
%U.S. government and agency
    obligationsBalance

$
12,469


$
9,859


$
0


$
0


$
22,328Weighted average yield


4.82
%


3.94
%


0.00
%


0.00
%


4.43
%FHLB Seattle stock, at costBalance

$
0


$
0


$
0


$
91,897


$
91,897Weighted average yield(1)


0.00
%


0.00
%


0.00
%


0.39
%


0.39
%Municipal bondsBalance

$
1,800


$
1,755


$
9,445


$
79,808


$
92,808Weighted average yield(2)


3.64
%


3.46
%


4.10
%


4.40
%


4.33
%Other(3)Balance

$
80


$
175


$
0


$
18,686


$
18,941Weighted average yield


3.20
%


4.20
%


0.00
%


0.55
%


0.60
%Total carrying value

$
14,349


$
89,985


$
18,560


$
1,790,752


$
1,913,646Weighted average yield


4.66
%


3.93
%


4.07
%


4.53
%


4.49
%     (1)
    
    FHLB Seattle resumed paying dividends during the second half of
    2006.(2)
    
    The weighted average yields on municipal bonds reflect the
    actual yields on the bonds and are not presented on a
    tax-equivalent basis.(3)
    
    Other investments relate primarily to limited partnership
    interests in low-income housing projects.    December 31,2006


2005


2004(Dollars in thousands)Mortgage-backed securities

$
1,687,672


$
1,960,582


$
2,036,920U.S. government and agency
    obligations


22,328



21,793



28,070FHLB Seattle stock


91,897



76,626



74,846Municipal bonds


92,808



50,907



47,449Other


18,941



18,631



17,300Total

$
1,913,646


$
2,128,539


$
2,204,585Available for sale

$
1,820,583


$
2,076,615


$
2,157,136Held to maturity


93,063



51,924



47,449Total

$
1,913,646


$
2,128,539


$
2,204,585Weighted average yield


4.49
%


4.46
%


4.50
%  13




---



##### Table of Contents



Sources
    of Funds  General.
  Deposit Activities.
  18-month
      Years Ended December 31,2006


2005


2004Weighted





Weighted





WeightedAverage





Average





AverageAverage


Interest


Average


Interest


Average


InterestBalance


Rate


Balance


Rate


Balance


Rate(Dollars in thousands)Time deposits

$
2,962,017



4.58
%

$
2,041,122



3.35
%

$
1,608,599



2.57
%Savings and MMDA


1,512,198



3.16



1,158,270



1.92



1,092,612



1.04Transaction accounts:Interest-bearing


399,690



0.42



419,137



0.32



399,963



0.21Noninterest-bearing


706,631



0.00



648,385



0.00



546,128



0.00$
5,580,536



3.32
%

$
4,266,914



2.16
%

$
3,647,302



1.47
%     December 31,2006


2005(Dollars in thousands)Three months or less

$
931,437


$
525,623After three months through six
    months


644,825



332,184After six months through twelve
    months


509,732



449,559After twelve months


212,639



201,183$
2,298,633


$
1,508,549  14




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##### Table of Contents



Borrowings.
         15




---



##### Table of Contents



Years Ended December 31,2006


2005


2004(Dollars in thousands)Maximum amount outstanding at any
    month-end during the period:Short-term reverse repurchase
    agreements

$
235,495


$
821,363


$
779,012Short-term advances


803,307



670,047



648,648Average amount outstanding during
    the period:Short-term reverse repurchase
    agreements

$
160,702


$
634,838


$
630,057Short-term advances


674,929



461,897



517,499Weighted average interest rate
    paid during the period:Short-term reverse repurchase
    agreements


4.64
%


3.23
%


2.22
%Short-term advances


4.44
%


3.15
%


2.77
%Weighted average interest rate
    paid at end of period:Short-term reverse repurchase
    agreements


4.81
%


4.07
%


2.53
%Short-term advances


5.14
%


3.39
%


3.36
%     December 31,2006


2005


2004Amount


%


Amount


%


Amount


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

$
803,307



37.1


$
670,047



30.9


$
562,238



22.1Long-term


505,310



23.3



773,415



35.7



1,073,695



42.1Securities sold subject to reverse
    repurchase agreements and funds purchased:Short-term


86,354



4.0



261,676



12.1



780,012



30.6Long-term


530,000



24.5



350,000



16.2



0



0.0Term note payable(1)


0



0.0



0



0.0



19,000



0.7Trust Preferred Securities


236,772



10.9



108,707



5.0



108,685



4.3Other


3,454



0.2



1,981



0.1



4,137



0.2Total borrowings

$
2,165,197



100.0


$
2,165,826



100.0


$
2,547,767



100.0Weighted average interest rate at
    end of period






5.17
%






4.03
%






3.36
%     (1)
    
    These notes were redeemed in full in April 2005. Subsidiaries   16




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##### Table of Contents



Sterling
    Financial Corporation.
                      Debentures-I
    (13) Tri-Cities
  Sterling
    Savings Bank.
     17




---



##### Table of Contents



Competition   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
 18




---



##### Table of Contents



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.
  The Sarbanes-Oxley Act.
    The U.S.A. Patriot Act.
 19




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##### Table of Contents



The Gramm-Leach-Bliley Act.
    The Riegle-Neal Interstate Banking and Branching Efficiency
    Act.
  out-of-state out-of-state out-of-state
  The Bank Holding Company Act.
  out-of-state
  The Change in Bank Control Act.
 20




---



##### Table of Contents



The Federal Reserve Act.
  Transactions with Affiliates.
  Tying Arrangements.
  Support of Subsidiary Banks.
  Federal
    and State Regulation of Banking Activities
  General.
  Community Reinvestment.
  Insider Credit Transactions.
  Regulation of Management.
  Safety and Soundness Standards.
 21




---



##### Table of Contents



Lending Restrictions and Disclosure
    Requirements.
  Deposit Insurance Assessments.
        Dividends Restrictions.
 22




---



##### Table of Contents



Federal Reserve System.
  Federal Taxation.
  State Law and Regulation.
  Capital
    Adequacy
  Regulatory Capital Guidelines.
  Tier I and Tier II Capital.
  Risk-based Capital Ratios.
 23




---



##### Table of Contents



Leverage Ratio.
  Prompt Corrective Action.
 Forward-Looking
    Statements      
    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. 24




---



##### Table of Contents



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
  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.
   25




---



##### Table of Contents



Sterling
    has shifted its focus to community banking.
    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.
     26




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##### Table of Contents



Changes
    in market interest rates could adversely affect Sterlings
    earnings.
        Sterlings
    cost of funds may increase as a result of general economic
    conditions, interest rates or competitive pressures.
    Competition
    may adversely affect Sterlings ability to attract and
    retain customers at current levels.
   27




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##### Table of Contents



Sterling
    may not be able to successfully implement its internal growth
    strategy.
    There are
    risks associated with potential acquisitions.
     28




---



##### 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 loan losses may be inadequate.
        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.
   29




---



##### Table of Contents



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
  Sterlings
    banking business is highly regulated.
     30




---



##### 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   31




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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, 2006:Fourth quarter

$
34.97


$
31.75Third quarter


33.78



29.50Second quarter


32.35



28.31First quarter


29.91



24.50Year ended December 31, 2005:Fourth quarter

$
26.78


$
21.86Third quarter


27.39



21.66Second quarter


25.12



21.69First quarter


26.75



23.36     Date Paid

Per Share Amount


TotalOctober 2005

$
0.050


$
1.7 millionJanuary 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 million  32




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##### Table of Contents



Performance
    Graph
    Total
    Return Performance
  
 33




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##### Table of Contents



Item 6.Selected
    Financial Data    Years Ended December 31,2006


2005


2004


2003


2002(Dollars in thousands, except per share amounts)Interest income

$
550,855


$
387,811


$
319,761


$
214,727


$
197,313Interest expense


(286,943
)


(171,276
)


(122,945
)


(89,807
)


(96,965
)Net interest income


263,912



216,535



196,816



124,920



100,348Provision for losses on loans


(18,703
)


(15,200
)


(12,150
)


(10,500
)


(11,867
)Net interest income after
    provision for loss on loans


245,209



201,335



184,666



114,420



88,481Non-interest income


69,340



59,569



47,799



33,735



29,080Merger and acquisition costs


(454
)


0



(4,835
)


(792
)


0Amortization of core deposit
    intangibles


(2,405
)


(2,222
)


(2,222
)


(262
)


(644
)Goodwill litigation


(275
)


(179
)


(141
)


(600
)


(1,100
)Non-interest expenses


(203,239
)


(167,880
)


(141,172
)


(92,910
)


(79,199
)Income before income taxes


108,176



90,623



84,095



53,591



36,618Income tax provision


(34,230
)


(29,404
)


(27,790
)


(18,678
)


(11,031
)Net income

$
73,946


$
61,219


$
56,305


$
34,913


$
25,587Earnings per share:Basic(1)

$
2.03


$
1.77


$
1.66


$
1.45


$
1.19Diluted(1)


2.01



1.75



1.62



1.42



1.16Dividends declared per share

$
0.270


$
0.105


$
0.000


$
0.000


$
0.000Weighted average shares
    outstanding:Basic(1)


36,423,095



34,633,952



33,931,509



23,980,113



21,496,008Diluted(1)


36,841,866



35,035,029



34,708,794



24,590,172



22,115,723Financial Ratios:Book value per share(1)

$
18.63


$
14.54


$
13.65


$
10.21


$
9.38Return on average assets


0.88
%


0.87
%


0.88
%


0.88
%


0.80
%Return on average
    shareholders equity


13.0
%


12.4
%


13.2
%


14.4
%


13.9
%Shareholders equity to total
    assets


8.0
%


6.7
%


6.8
%


5.9
%


5.8
%Operating efficiency


61.9
%


61.7
%


60.7
%


59.6
%


62.5
%Net interest margin


3.30
%


3.28
%


3.32
%


3.35
%


3.37
%Nonperforming assets to total
    assets


0.11
%


0.11
%


0.20
%


0.50
%


0.59
%Statistical Data:Number of:Employees (full-time equivalents)


2,405



1,789



1,624



1,121



953Full service branches


166



140



135



86



79   34




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##### Table of Contents



December 31,2006


2005


2004


2003


2002(Dollars in thousands)Balance Sheet Data:Total assets

$
9,828,652


$
7,558,928


$
6,942,224


$
4,279,321


$
3,507,021Loans receivable, net


7,015,401



4,885,916



4,251,877



2,906,426



2,390,422Mortgage-backed securities


1,687,672



1,960,582



2,036,920



983,736



743,610Investments


225,974



167,957



167,665



89,448



86,558Deposits


6,746,028



4,806,301



3,863,296



2,455,076



2,014,096FHLB Seattle advances


1,308,617



1,443,462



1,635,933



1,026,031



874,515Reverse repurchase agreements
    and funds purchased


616,354



611,676



780,012



363,137



249,769Other borrowings


240,226



110,688



131,822



137,998



127,682Shareholders equity


783,416



506,685



469,844



250,348



203,656Capital Ratios(2):Tier 1 leverage (to average
    assets) Sterling


8.7
%


7.4
%


N/A



N/A



N/ASterling Savings Bank


8.6
%


7.2
%


6.6
%


7.4
%


7.6
%Golf Savings Bank


6.9
%


N/A



N/A



N/A



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


10.0
%


9.5
%


N/A



N/A



N/ASterling Savings Bank


9.7
%


9.2
%


9.7
%


9.9
%


10.0
%Golf Savings Bank


10.9
%


N/A



N/A



N/A



N/ATotal (to risk-weighted assets)Sterling


11.1
%


10.5
%


N/A



N/A



N/ASterling Savings Bank


10.8
%


10.2
%


10.7
%


10.9
%


11.0
%Golf Savings Bank


11.6
%


N/A



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.  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   35




---



##### Table of Contents



2006
    Highlights
  
    Net income increased by 21 percent to a record
    $73.9 million.
    Total assets increased 30 percent
    year-over-year
    to a record $9.83 billion. Sterlings organic growth
    represented 10 percent of total asset growth.
    Loan originations of nearly $5.0 billion reflect an
    increase of 28 percent over 2005.
    Total loans receivable increased to a record $7.02 billion,
    a 44 percent increase over 2005. Sterlings organic
    growth represented 21 percent of total loan growth.
    Total deposits increased to a record $6.75 billion, a
    40 percent increase over 2005. Sterlings organic
    growth represented 18 percent of total deposit growth.
    Net interest income increased to $263.9 million, a
    22 percent increase over 2005.
    The number of transaction accounts increased to over 185,000, a
    21 percent increase over 2005.
    Asset quality remains solid and slightly stronger than regional
    peer averages. Critical
    Accounting Policies    Income Recognition.
  Allowance For Loan Losses.
     36




---



##### Table of Contents



Investments and MBS.
    Held-to-maturity Available-for-sale Available-for-sale
  other-than-temporarily
  Goodwill and Other Intangible Assets.
   37




---



##### Table of Contents



Loan Purchases. 03-3, SOP 03-3
  Real Estate Owned.
    Income Taxes.
   Results
    of Operations for the Years Ended December 31, 2006 and
    2005  Net Interest Income.
   38




---



##### Table of Contents



Years Ended December 31,2006


2005


2004Interest


Average





Interest


Average





Interest


AverageEarned


Yield





Earned


Yield





Earned


YieldAverage


or


or


Average


or


or


Average


or


orBalance(1)


Paid(2)


Cost(3)


Balance(1)


Paid(2)


Cost(3)


Balance(1)


Paid(2)


Cost(3)(Dollars in thousands)Interest-earning assets:Loans

$
5,891,595


$
458,558



7.78
%

$
4,482,012


$
296,306



6.61
%

$
3,852,247


$
229,448



5.96
%Mortgage-backed securities


1,862,144



88,398



4.75
%


1,948,435



88,682



4.55
%


1,885,239



85,009



4.51
%Investments and cash equivalents


233,611



3,899



1.67
%


168,853



2,823



1.67
%


190,934



5,304



2.78
%Total interest-earning assets


7,987,350



550,855



6.90
%


6,599,300



387,811



5.88
%


5,928,420



319,761



5.39
%Noninterest-earning assets


411,213











447,755











447,997Total average assets

$
8,398,563










$
7,047,055










$
6,376,417Interest-bearing liabilities:Transaction:Interest-bearing

$
399,690



1,692



0.42
%

$
419,137



1,340



0.32
%

$
399,963



837



0.21
%Non-interest-bearing


706,631



0



0.00
%


648,385



0



0.00
%


546,128



0



0.00
%Savings and MMDA


1,512,198



47,844



3.16
%


1,158,270



22,272



1.92
%


1,092,612



11,347



1.04
%Time deposits


2,962,017



135,737



4.58
%


2,041,122



68,378



3.35
%


1,608,599



41,299



2.57
%Total deposits


5,580,536



185,273



3.32
%


4,266,914



91,990



2.16
%


3,647,302



53,483



1.47
%Borrowings


2,125,620



101,670



4.78
%


2,192,934



79,286



3.62
%


2,200,229



69,462



3.16
%Total interest-bearing liabilities


7,706,156



286,943



3.72
%


6,459,848



171,276



2.65
%


5,847,531



122,945



2.10
%Noninterest-bearing liabilities


122,435











93,992











101,134Total average liabilities


7,828,591











6,553,840











5,948,665Total average shareholders
    equity


569,972











493,215











427,752Total average liabilities and equity

$
8,398,563










$
7,047,055










$
6,376,417Net interest spread





$
263,912



3.17
%





$
216,535



3.23
%





$
196,816



3.29
%Net interest margin










3.30
%










3.28
%










3.32
%Ratio of average interest-earning
    assets to average interest-bearing liabilities










103.65
%










102.16
%










101.38
%     (1)
    
    Average balances are computed on a monthly basis.(2)
    
    Interest earned includes $2.9 million, $1.9 million
    and $2.2 million of tax exempt interest for 2006, 2005 and
    2004, respectively.(3)
    
    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. 39




---



##### 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, 2006


December 31, 2005Increase (Decrease) Due to:


Increase (Decrease) Due to:Rate/











Rate/Volume


Rate


Volume


Total


Volume


Rate


Volume


Total(Dollars in thousands)Interest income on:Loans

$
93,832


$
52,392


$
16,028


$
162,252


$
37,508


$
25,226


$
4,124


$
66,858Mortgage-backed securities


(3,927
)


3,812



(169
)


(284
)


2,850



797



26



3,673Investment and cash equivalents


1,083



(5
)


(2
)


1,076



(613
)


(2,112
)


244



(2,481
)Total interest income


90,988



56,199



15,857



163,044



39,745



23,911



4,394



68,050Interest-bearing deposits:Time deposits


30,850



25,158



11,351



67,359



11,105



12,589



3,385



27,079Savings and MMDA


6,806



14,374



4,392



25,572



682



9,662



581



10,925Interest-bearing transaction
    accounts


49



293



10



352



40



442



21



503Total deposits


37,705



39,825



15,753



93,283



11,827



22,693



3,987



38,507Other borrowings


(2,434
)


25,604



(786
)


22,384



(933
)


9,310



1,447



9,824Total interest expense


35,271



65,429



14,967



115,667



10,894



32,003



5,434



48,331Net interest income

$
55,717


$
(9,230
)

$
890


$
47,377


$
28,851


$
(8,092
)

$
(1,040
)

$
19,719   Provision for Losses on
    Loans.
   40




---



##### Table of Contents



Years Ended December 31,2006


2005(Dollars in thousands)Balance at January 1

$
55,483


$
49,362Allowance for loan losses acquired


13,155



0Provision for losses on loans


18,703



15,200Amounts written off net of
    recoveries and other


(3,652
)


(9,079
)Balance at December 31

$
83,689


$
55,483     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



434REO 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      41




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##### Table of Contents



As of and for the 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   Non-Interest Expenses.
  Years EndedDecember 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   year-over-year
  Income Tax Provision.
 Results
    of Operations for the Years Ended December 31, 2005 and
    2004  Net Interest Income.
   42




---



##### Table of Contents



Provision for Losses on Loans.
  Years Ended December 31,2005


2004(Dollars in thousands)Balance at January 1

$
49,362


$
35,605Allowance for loan losses acquired


0



6,722Provision for losses on loans


15,200



12,150Amounts written off net of
    recoveries and other


(9,079
)


(5,115
)$
55,483


$
49,362     Non-Interest Income.
  Years Ended December 31,2005


2004(Dollars in thousands)Fees and service charges

$
34,702


$
32,692Mortgage banking operations


17,899



6,155Bank-owned life insurance


5,914



4,340Charge related to early repayment
    of debt


645



(238
)Real estate owned operations


477



(162
)Loan servicing fees


434



561Net gains on sales of securities


(57
)


4,571Other non-interest expense


(445
)


(120
)Total non-interest income

$
59,569


$
47,799      43




---



##### Table of Contents



Years Ended December 31,2005


2004(Dollars in millions)Originations of residential
    mortgage loans

$
461.4


$
400.4Originations of commercial real
    estate loans


218.4



241.8Sales of residential loans


583.2



186.1Sales of commercial real estate
    loans


125.5



16.3Principal balances of residential
    loans serviced for others


606.7



373.6Principal balances of commercial
    real estate loans serviced for others


814.2



593.3   Non-Interest Expense.
  Years EndedDecember 31,2005


2004(Dollars in thousands)Employee compensation and benefits

$
93,367


$
77,617Occupancy and equipment


26,411



23,051Data processing


12,678



10,596Advertising


9,125



6,976Depreciation


8,627



7,321Travel and entertainment


4,522



4,071Legal and accounting


3,134



3,075Amortization of core deposit
    intangibles


2,222



2,222Insurance


1,213



1,155Goodwill litigation costs


179



141Merger and acquisition costs


0



4,835Other


8,803



7,310Total

$
170,281


$
148,370   year-over-year
  Income Tax Provision.
 Financial
    Position  Assets.
  Investments and MBS.
 44




---



##### Table of Contents



Loans Receivable.
  Bank-Owned Life Insurance
    (BOLI).
  Goodwill and Other Intangible Assets.
  Deposits.
  December 31, 2006


December 31, 2005Amount


%


Amount


%(Dollars in thousands)Interest-bearing transaction

$
483,551



7.2


$
432,936



9.0Noninterest-bearing transaction


834,140



12.4



673,934



14.0Savings and MMDA


1,830,313



27.1



1,312,033



27.3Time deposits


3,598,024



53.3



2,387,398



49.7Total deposits

$
6,746,028



100.0


$
4,806,301



100.0Annualized cost of deposits






3.32
%






2.16
%     Borrowings.
 Asset and
    Liability Management       45




---



##### Table of Contents



Form 10-K.
 46




---



##### Table of Contents



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

$
2,422,028


$
261,905


$
410,130


$
214,084


$
51,846


$
3,359,993Fixed-rate mortgage loans and MBS


124,675



338,599



636,033



550,496



585,861



2,235,664Loans held for sale


91,469



0



0



0



0



91,469Total mortgage loans and MBS


2,638,172



600,504



1,046,163



764,580



637,707



5,687,126Commercial and consumer loans:Consumer


282,406



161,054



314,791



159,138



120,941



1,038,330Commercial


1,127,062



262,104



417,082



196,081



66,757



2,069,086Total loans and MBS


4,047,640



1,023,662



1,778,036



1,119,799



825,405



8,794,542Cash and investments


162,698



1,214



11,070



676



83,751



259,4094,210,338



1,024,876



1,789,106



1,120,475



909,156



9,053,951Cash on hand and in banks


0



0



0



0



146,280



146,280Other noninterest-earning assets


0



0



0



0



628,421



628,421Total assets

$
4,210,338


$
1,024,876


$
1,789,106


$
1,120,475


$
1,683,857


$
9,828,652Interest-bearing liabilities:Deposits:Time deposits

$
1,341,352


$
1,802,669


$
259,722


$
121,183


$
73,098


$
3,598,024Checking accounts


45,912



95,462



83,631



73,544



1,019,142



1,317,691MMDA


397,181



796,656



50,592



39,301



357,463



1,641,193Passbook accounts


20,198



40,396



0



0



128,526



189,120Total deposits


1,804,643



2,735,183



393,945



234,028



1,578,229



6,746,028FHLB Seattle advances


1,021,006



36,063



108,019



81,792



61,737



1,308,617Repurchase agreements and funds
    purchased


86,354



0



80,000



50,000



400,000



616,354Other borrowings


0



0



0



0



236,772



236,772Total interest-bearing liabilities


2,912,003



2,771,246



581,964



365,820



2,276,738



8,907,771Other noninterest-bearing
    liabilities


0



0



0



0



137,465



137,465Shareholders equity


0



0



0



0



783,416



783,416Total liabilities and
    shareholders equity

$
2,912,003


$
2,771,246


$
581,964


$
365,820


$
3,197,619


$
9,828,652Net gap

$
1,298,335


$
(1,746,370
)

$
1,207,142


$
754,655


$
(1,513,762
)

$
0Cumulative gap

$
1,298,335


$
(448,035
)

$
759,107


$
1,513,762


$
0


$
0Cumulative gap to total assets


13.21
%


(4.56
)%


7.72
%


15.40
%


0.00
%


0.00
%    47




---



##### Table of Contents



December 31,2006


2005% Change


% ChangeChange in Interest Rate in Basis Points (Rate Shock)

in NII


in NII+200


(1.5
)


(4.6
)+100


(0.8
)


(2.4
)Static


0.0



0.0−100


(0.4
)


(0.5
)−200


(1.6
)


(5.2
)     At December 31,2006


2005% Change


% ChangeChange in Interest Rate in Basis Points (Rate Shock)

in NPV


in NPV+200


(5.0
)


(7.1
)+100


(1.5
)


(3.5
)Static


0.0



0.0−100


(4.6
)


(5.9
)−200


(17.9
)


(25.5
)    Liquidity
    and Capital Resources     48




---



##### Table of Contents



49




---



##### Table of Contents



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





Over


More ThanTotal


1 Year


1 to 3 Years


3 to 5 Years


5 Years(Dollars in thousands)Long-term debt(1)

$
2,165,197


$
890,114


$
311,615


$
699,224


$
264,244Capital lease obligations


0



0



0



0



0Operating leases


86,352



11,703



20,249



14,982



39,418Purchase obligations(2)


41,161



18,157



15,336



7,668



0Other long-term liabilities(3)


34,854



478



1,528



1,940



30,908Total

$
2,327,564


$
920,452


$
348,728


$
723,814


$
334,570     (1)
    
    Excludes interest payments. See Notes 8  10 of
    Notes to Consolidated Financial Statements.(2)
    
    Excludes recurring accounts payable amounts due in the first
    quarter of 2007.(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.    one-to-four
     50




---



##### Table of Contents



Capital         Goodwill
    Litigation    Tri-Cities
 New
    Accounting Policies  No. 06-4, No. 06-4, No. 06-5, Bulletin No. 85-4, No. 06-5 06-4 EITF 06-5
 51




---



##### Table of Contents



available-for-sale
   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.
  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)
 52




---



##### Table of Contents



Rules 13a-15(f) 15d-15(f)),
 Managements
    Report on Internal Control Over Financial Reporting  Rules 13a-15(f). Internal
    Control  Integrated Framework
    form 10-K,
 53




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm                     54




---



##### 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   55




---



##### Table of Contents



PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules    Financial Statements: Form 10-K.
  Financial Statement
    Schedules:
  Exhibits: page E-1.
     56




---



##### Table of Contents



SIGNATURES      By
    /s/  Harold
    B. Gilkey  Harold B. Gilkey
       By
    /s/  Harold
    B. Gilkey  Harold B. Gilkey
      By
    /s/  William
    W. Zuppe  William W. Zuppe
     By
    /s/  Daniel
    G. Byrne  Daniel G. Byrne
      By
    /s/  Robert
    G. Butterfield  Robert G. Butterfield
    57




---



##### Table of Contents



By
    /s/  Rodney
    W. Barnett  Rodney W. Barnett
   By
    /s/  Donald
    N. Bauhofer  Donald N. Bauhofer
   By
    /s/  William
    L. Eisenhart  William L. Eisenhart
   By
    /s/  James
    P. Fugate  James P. Fugate
  By  Robert D. Larrabee
   By
    /s/  Donald
    J. Lukes  Donald J. Lukes
   By
    /s/  Michael
    F. Reuling  Michael F. Reuling
 58




---



##### Table of Contents



Exhibit No.

Exhibit Index2
.1

Agreement and Plan of Merger by
    and between Sterling and Northern Empire Bancshares dated as of
    September 17, 2006. Filed as Exhibit 2.1 to
    Sterlings current report on
    Form 8-K
    filed September 18, 2006 and incorporated by reference
    herein.2
.2

Agreement and Plan of Merger by
    and between Sterling and FirstBank NW Corp. dated as of
    June 4, 2006. Filed as Appendix A to Sterlings
    Registration Statement on
    Form S-4
    dated August 31, 2006 and incorporated by reference herein.3
.1

Restated Articles of Incorporation
    of Sterling. Filed as Exhibit 3.1 to Sterlings report
    on
    Form 10-Q
    filed May 15, 2003, and incorporated by reference herein.3
.2

Articles of Amendment of Restated
    Articles of Incorporation of Sterling. Filed as Exhibit 3.1
    to Sterlings current report on
    Form 8-K
    filed September 2, 2005 and incorporated by reference
    herein.3
.3

Amended and Restated Bylaws of
    Sterling. Filed as Exhibit 3.3 to Sterlings
    Registration Statement on
    Form S-4
    dated December 9, 2002, and incorporated by reference
    herein.4
.1

Reference is made to
    Exhibits 3.1, 3.2 and 3.3.4
.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

Credit Agreement by and between
    Sterling and Wells Fargo Bank, National Association, entered
    into on August 21, 2006 and dated as of August 4,
    2006, and First Amendment thereto dated as of August 29,
    2006. Filed as Exhibit 10.1 to Sterlings Quarterly
    Report on
    Form 10-Q
    dated November 9, 2006 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
    herewith.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, 2004, 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.  E-1




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
          ,
  Share-Based
    Payment
  Internal Control 
    Integrated Framework




---



##### Table of Contents



Sterling
    Financial Corporation
  Consolidated
    Balance Sheets
 December 31,
    2006 and 2005
  2006


2005(Dollars in thousands)ASSETS:Cash and cash equivalents:Interest bearing

$
13,846


$
9,400Noninterest bearing and vault


164,719



121,907Total cash and cash equivalents


178,565



131,307Restricted cash


1,150



862Investments and mortgage-backed
    securities (MBS):Available for sale


1,820,583



2,076,615Held to maturity


93,063



51,924Loans receivable, net


7,015,401



4,885,916Loans held for sale


91,469



7,894Accrued interest receivable


55,519



35,805Real estate owned, net


4,052



779Office properties and equipment,
    net


93,796



82,432Bank-owned life insurance
    (BOLI)


139,206



107,649Goodwill


247,244



112,707Other intangible assets


28,570



17,625Mortgage servicing rights, net


7,335



5,430Prepaid expenses and other assets,
    net


52,699



41,983Total assets

$
9,828,652


$
7,558,928LIABILITIES:Deposits

$
6,746,028


$
4,806,301Advances from Federal Home
    Loan Bank of Seattle (FHLB Seattle)


1,308,617



1,443,462Securities sold subject to
    repurchase agreements and funds purchased


616,354



611,676Other borrowings


240,226



110,688Cashiers checks issued and payable


18,144



5,483Borrowers reserves for taxes
    and insurance


2,348



1,527Accrued interest payable


39,863



18,169Accrued expenses and other
    liabilities


73,656



54,937Total liabilities


9,045,236



7,052,243Commitments and contingenciesSHAREHOLDERS EQUITY:Preferred stock, $1 par
    value; 10,000,000 shares authorized; no shares issued and
    outstanding


0



0Common stock, $1 par value;
    60,000,000 shares authorized; 42,042,740 and
    34,855,549 shares issued and outstanding


42,043



34,856Additional paid-in capital


590,218



385,353Accumulated other comprehensive
    loss:Unrealized losses on investments
    and MBS
    available-for-sale,
    net of deferred income taxes of $19,531 and $20,021


(33,350
)


(34,219
)Retained earnings


184,505



120,695Total shareholders equity


783,416



506,685Total liabilities and
    shareholders equity

$
9,828,652


$
7,558,928    F-2




---



##### Table of Contents



Sterling
    Financial Corporation
  Consolidated
    Statements of Income
 For the
    Years Ended December 31, 2006, 2005 and 2004
  2006


2005


2004(Dollars in thousands, except per share amounts)Interest income:Loans

$
458,558


$
296,306


$
229,448MBS


88,398



88,682



85,009Investments and cash equivalents


3,899



2,823



5,304Total interest income


550,855



387,811



319,761Interest expense:Deposits


185,273



91,990



53,483Short-term borrowings


35,979



35,255



23,787Long-term borrowings


65,691



44,031



45,675Total interest expense


286,943



171,276



122,945Net interest income


263,912



216,535



196,816Provision for losses on loans


(18,703
)


(15,200
)


(12,150
)Net interest income after
    provision for losses on loans


245,209



201,335



184,666Non-interest income:Fees and service charges


42,995



34,702



32,692Mortgage banking operations


20,216



17,899



6,155Loan servicing fees


1,812



434



561Net gains (losses) on sales of
    securities


0



(57
)


4,571Real estate owned and other
    collateralized assets operations


176



477



(162
)BOLI


5,020



5,914



4,340Gain (charge) related to early
    repayment of debt


(204
)


645



(238
)Other non-interest expense


(675
)


(445
)


(120
)Total non-interest income


69,340



59,569



47,799Non-interest expenses
    (Note 18)


206,373



170,281



148,370Income before income taxes


108,176



90,623



84,095Income tax benefit (provision)Current


(41,797
)


(23,192
)


(19,030
)Deferred


7,567



(6,212
)


(8,760
)Total tax provision


(34,230
)


(29,404
)


(27,790
)Net income

$
73,946


$
61,219


$
56,305Earnings per share 
    basic

$
2.03


$
1.77


$
1.66Earnings per share 
    diluted

$
2.01


$
1.75


$
1.62Weighted average shares
    outstanding  basic


36,423,095



34,633,952



33,931,509Weighted average shares
    outstanding  diluted


36,841,866



35,035,029



34,708,794    F-3




---



##### Table of Contents



Sterling
    Financial Corporation
  Consolidated
    Statements of Comprehensive Income
 For the
    Years Ended December 31, 2006, 2005 and 2004
  2006


2005


2004(Dollars in thousands)Net income

$
73,946


$
61,219


$
56,305Other comprehensive income (loss):Change in unrealized gains or
    losses on investments and MBS available for sale, net of
    reclassification adjustments


1,359



(39,303
)


8,437Less deferred income tax benefit
    (provision)


(490
)


14,554



(2,714
)Net other comprehensive income
    (loss)


869



(24,749
)


5,723Comprehensive income

$
74,815


$
36,470


$
62,028    F-4




---



##### Table of Contents



Sterling
    Financial Corporation
  Consolidated
    Statements of Changes in Shareholders Equity
 For the
    Years Ended December 31, 2006, 2005 and 2004
  Additional


Other





TotalCommon Stock


Paid-In


Comprehensive


Retained


ShareholdersShares


Amount


Capital


Income (Loss)


Earnings


Equity(Dollars in thousands)Balance, January 1, 2004


14,863,917


$
14,864


$
181,382


$
(15,193
)

$
69,295


$
250,348Shares issued upon exercise of
    stock options


565,638



566



6,074











6,640Shares issued for business
    combination


5,455,269



5,455



140,485











145,940Change in unrealized gain or loss
    on investments and MBS available for sale, net of income tax














5,723







5,72310% common stock dividend


2,053,421



2,053



60,414







(62,467
)


0Cash paid for fractional shares


(2,091
)


(2
)


(61
)










(63
)Tax benefit of stock options










4,951











4,951Net income


















56,305



56,305Balance, December 31, 2004


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
)Stock option compensation expense










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


$
783,416    F-5




---



##### Table of Contents



Sterling
    Financial Corporation
  Consolidated
    Statements of Cash Flows
 For the
    Years Ended December 31, 2006, 2005 and 2004
  2006


2005


2004(Dollars in thousands)Cash flows from operating
    activities:Net income

$
73,946


$
61,219


$
56,305Adjustments to reconcile net income
    to net cash provided by operating activities:Provisions for losses on loans and
    real estate owned


18,873



15,223



12,155Stock dividends on FHLB Seattle
    stock


0



(303
)


(1,994
)Accretion of deferred gain on sale
    of building


(320
)


0



0Net gain on sales of loans,
    investments and MBS


(10,545
)


(10,219
)


(7,093
)Stock based compensation


182



0



0Excess tax benefit from stock based
    compensation


(2,704
)


0



0Stock issuances relating to 401(k)
    match


1,582



0



0Other gains and losses


1,910



(103
)


117Gain related to early repayment of
    debt


0



(645
)


0Increase in cash surrender value of
    BOLI


(5,020
)


(5,914
)


(4,340
)Depreciation and amortization


19,253



20,063



14,289Deferred income tax (provision)
    benefit


7,567



(6,212
)


8,760Change in:Accrued interest receivable


(11,259
)


(8,326
)


(4,437
)Prepaid expenses and other assets


(11,722
)


17,375



1,955Cashiers checks issued and payable


11,529



2,270



(14,411
)Accrued interest payable


19,684



3,327



4,505Accrued expenses and other
    liabilities


(11,767
)


10,734



(7,934
)Proceeds from sales of loans
    originated for sale


630,185



182,538



205,899Loans originated for sale


(620,214
)


(178,718
)


(203,378
)Net cash provided by operating
    activities


111,160



102,309



60,398Cash flows from investing
    activities:Change in restricted cash


(288
)


419



223Loans funded and purchased


(4,235,924
)


(3,732,692
)


(3,102,775
)Loan principal received


3,066,906



2,619,152



2,308,746Proceeds from sales of other loans


90,802



472,682



0Purchase of investments securities


(60,165
)


(17,152
)


(239,438
)Proceeds from maturities of
    investments securities


21,685



2,604



226,535Proceeds from sales of investments
    securities


0



14,844



97,597Cash and cash equivalents acquired
    as part of mergers


82,403



0



44,031Purchase of BOLI


0



(10,000
)


0Purchase of mortgage-backed
    securities


0



(471,715
)


(1,312,581
)Principal payments on MBS


270,291



385,126



353,175Proceeds from sales of MBS


0



115,837



537,672Purchase of office properties and
    equipment


(15,120
)


(12,901
)


(10,623
)Sale of office properties and
    equipment


21,015



268



0Improvements and other changes to
    real estate owned


(11
)


(331
)


241Proceeds from sales of real estate
    owned


1,353



4,104



6,705Net cash used in investing
    activities


(757,053
)


(629,755
)


(1,090,492
)Cash flows from financing
    activities:Net change in transaction and
    savings deposits

$
249,122


$
302,593


$
139,333Proceeds from issuance of time
    deposits


3,912,383



2,749,173



2,050,289Payments for maturing time deposits


(3,451,067
)


(2,195,593
)


(1,819,944
)Interest credited to deposits


164,185



86,832



50,399Advances from FHLB Seattle


2,316,797



1,204,777



1,401,062Repayment of advances from FHLB
    Seattle


(2,519,021
)


(1,395,513
)


(1,150,896
)Net change in securities sold
    subject to repurchase agreements and funds purchased


(83,137
)


(168,336
)


416,875Proceeds from other borrowings


130,000



0



0Repayment of other borrowings


(27,200
)


(19,000
)


(36,995
)Payments for fractional shares


0



(14
)


(240
)Proceeds from stock purchases


6,459



3,411



7,083Excess tax benefit from stock based
    compensation


2,704



0



0Deferred financing costs


0



(75
)


0Cash dividends paid to shareholders


(8,895
)


(1,736
)


0Other


821



(953
)


836Net cash provided by financing
    activities


693,151



565,566



1,057,802Net change in cash and cash
    equivalents


47,258



38,120



27,708Cash and cash equivalents,
    beginning of year


131,307



93,187



65,479Cash and cash equivalents, end of
    year

$
178,565


$
131,307


$
93,187Supplemental disclosures:Cash paid during the period for:Interest

$
265,249


$
167,949


$
116,326Income taxes


41,273



11,377



17,427Noncash financing and investing
    activities:Loans converted into real estate
    owned


4,326



2,271



3,858Common stock issued for business
    combinations


201,125



0



145,940Common stock cash dividend accrued


3,154



1,921



0Common stock dividend


0



0



62,467Common stock split, effected as
    dividend


0



11,553



0Deferred gains on sales of branches


10,319



0



0    F-6




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting Policies
 For the
    Years Ended December 31, 2006, 2005 and 2004
  Business
      Principles
    of Consolidation
    Estimates
    Cash and
    Cash Equivalents
       F-7




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting
    Policies  (Continued)
    Investments
    and MBS
    
    Available for Sale.  Except for FHLB Seattle
    stock, 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, 2006 and 2005. 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 Losses on Loans
       F-8




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting
    Policies  (Continued)
    Loans
    Held for Sale
    Loan
    Origination and Commitment Fees
      Office
    Properties and Equipment
    Real
    Estate Owned
    Goodwill
    and Other Intangible Assets
     F-9




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting
    Policies  (Continued)
    Loan
    Purchases
  03-3, SOP 03-3
  Mortgage
    Banking Operations
      Income
    Taxes
    Earnings
    Per Share
   F-10




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting
    Policies  (Continued)
   Stock-Based
    Compensation
    Comprehensive
    Income
    available-for-sale
  AmountYear ended December 31, 2006

$
0Year ended December 31, 2005


(64
)Year ended December 31, 2004


464     Hedging
    Activities
  one-to-four
   F-11




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting
    Policies  (Continued)
      Mergers
    and Acquisitions
    Reclassifications
    Other
    Accounting Pronouncements
  No. 06-4, No. 06-4, No. 06-5, Bulletin No. 85-4, No. 06-5 06-4 EITF 06-5
      available-for-sale
   F-12




---



##### Table of Contents



Sterling
    Financial Corporation
  Summary
    of Significant Accounting
    Policies  (Continued)
   F-13




---



##### Table of Contents



Sterling
    Financial Corporation
  Notes to Consolidated Financial Statements
 For the Years Ended December 31, 2006, 2005 and 2004
   1.
    Investments
    and MBS:    Available for saleGross


GrossUnrealized


Unrealized


Carrying/FairAmortized Cost


Gains


Losses


ValueDecember 31, 2006U.S. Government and agency
    obligations

$
22,462


$
1


$
(135
)

$
22,328FHLB Seattle stock (restricted)


91,897



0



0



91,897MBS


1,740,328



1



(52,657
)


1,687,672Other


18,681



5



0



18,686Total

$
1,873,368


$
7


$
(52,792
)

$
1,820,583December 31, 2005U.S. Government and agency
    obligations

$
21,976


$
1


$
(184
)

$
21,793FHLB Seattle stock (restricted)


76,626



0



0



76,626MBS


2,014,512



188



(54,118
)


1,960,582Other


17,614



0



0



17,614Total

$
2,130,728


$
189


$
(54,302
)

$
2,076,615   Held to MaturityGross


GrossAmortized Cost/


Unrealized


UnrealizedCarrying Value


Gains


Losses


Fair ValueDecember 31, 2006Municipal bonds

$
92,808


$
314


$
(848
)

$
92,274Other


255



0



0



255Total

$
93,063


$
314


$
(848
)

$
92,529December 31, 2005Municipal bonds

$
50,907


$
224


$
(400
)

$
50,731Other


1,017



0



0



1,017Total

$
51,924


$
224


$
(400
)

$
51,748     available-for-sale
  Proceeds from


Gross Realized


Gross RealizedSales


Gains


LossesYear ended December 31, 2006

$
0


$
0


$
0Year ended December 31, 2005


130,681



442



499Year ended December 31, 2004


635,269



6,390



1,819  F-14




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  available-for-sale held-to-maturity
  Amortized Cost


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

$
80,747


$
78,196After 5 years through
    10 years


9,382



9,115After 10 years


1,650,199



1,600,361$
1,740,328


$
1,687,672Available-for-sale
    U.S. Government and agency obligations:Under 1 year

$
12,472


$
12,469After 1 year through
    5 years


9,990



9,859$
22,462


$
22,328FHLB Seattle stock (restricted)
    and other available for sale:After 5 years through
    10 years

$
0


$
0After 10 years


110,578



110,583$
110,578


$
110,583Held-to-maturity
    municipal bonds:Under 1 year

$
1,800


$
1,802After 1 year through
    5 years


1,755



1,722After 5 through 10 years


9,445



9,381After 10 years


79,808



79,369$
92,808


$
92,274Other
    held-to-maturities
    securities:Under 1 year

$
80


$
80After 1 year through
    5 years


175



175$
255


$
255  F-15




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  No. 115-1,
  Less than 12 Months


12 Months or Longer


TotalUnrealized





Unrealized





UnrealizedMarket Value


Losses


Market Value


Losses


Market Value


LossesDecember 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
)December 31, 2005U.S. Government and agency
    obligations

$
19,754


$
(184
)

$
0


$
0


$
19,754


$
(184
)Municipal bonds


6,031



(84
)


26,490



(316
)


32,521



(400
)MBS


958,156



(16,040
)


934,828



(38,078
)


1,892,984



(54,118
)Total

$
983,941


$
(16,308
)

$
961,318


$
(38,394
)

$
1,945,259


$
(54,702
)        F-16




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  2.
    Loans
    Receivable:    December 31,2006


2005Residential real estate

$
654,661


$
488,633Multifamily real estate


263,053



332,211Commercial real estate


795,386



792,219Construction


2,290,882



1,021,502Consumer  direct


749,626



618,528Consumer  indirect


288,704



166,143Commercial banking


2,069,086



1,531,079Total loans receivable


7,111,398



4,950,315Deferred loan fees, net


(12,308
)


(8,916
)Gross loans receivable


7,099,090



4,941,399Allowance for losses on loans


(83,689
)


(55,483
)Net loans receivable

$
7,015,401


$
4,885,916       Balance


Principal PaymentsOutstanding at


Contractually Due in Fiscal YearsDecember 31, 2006


2007


2008-2011


Thereafter(In thousands)Mortgage  permanent:Fixed rate

$
785,819


$
50,989


$
191,245


$
543,585Variable rate


927,281



67,120



263,518



596,643Mortgage  construction


2,290,882



1,562,065



682,318



46,499Consumer  direct


749,626



271,566



139,410



338,650Consumer  indirect


288,704



60,201



201,032



27,471Commercial banking


2,069,086



1,071,813



509,287



487,986$
7,111,398


$
3,083,754


$
1,986,810


$
2,040,834      F-17




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    3.
    Allowances
    for Losses on Loans and Real Estate Owned:    Years Ended December 31,2006


2005


2004Allowance for losses on loansBalance, January 1

$
55,483


$
49,362


$
35,605Provision


18,703



15,200



12,150Allowance for losses on assets
    acquired


13,155



0



6,722Amounts written off


(4,405
)


(9,651
)


(5,483
)Recoveries


753



572



368Balance, December 31


83,689



55,483



49,362Allowance for losses on real
    estate ownedBalance, January 1


17



0



3Provision


170



23



5Amounts written off


(187
)


(6
)


(8
)Recoveries


0



0



0Balance, December 31


0



17



0Total allowance for losses on
    loans and real estate owned

$
83,689


$
55,500


$
49,362     December 31,2006


2005Non-accrual loans(1)

$
7,107


$
6,542Restructured loans(2)


0



1,081Total impaired loans

$
7,107


$
7,623     (1)
    
    The total allowance for losses on loans related to these loans
    was $1.4 million and $2.2 million at December 31,
    2006 and 2005, respectively. Interest income of $249,000,
    $258,000 and $659,000, was recorded during the years ended
    December 31, 2006, 2005 and 2004, respectively, in
    connection with such loans. For loans on non-accrual status at
    year end, additional gross interest income of $321,000, $693,000
    and $1,348,000, would have been recorded during the years ended
    December 31, 2006, 2005 and 2004, respectively, if
    non-accrual and restructured loans had been current in
    accordance with their original contractual terms.The average recorded investment in impaired loans during the
    years ended December 31, 2006, 2005 and 2004 was
    $5.4 million, $12.3 million and $13.9 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 F-18




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  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 31,2006


2005Residential

$
621,597


$
606,807Commercial


1,638,748



814,316Consumer


724



3,098Total

$
2,261,069


$
1,424,221     Years Ended December 31,2006


2005Balance, January 1

$
5,430


$
4,078Originated servicing


797



2,790Amortization


(1,160
)


(1,754
)Acquired


2,268



316Balance, December 31

$
7,335


$
5,430     5.
    Office
    Properties and Equipment:    December 31,


Estimated2006


2005


Useful LifeBuildings and improvements

$
55,583


$
57,678



20-40 yearsFurniture, fixtures, equipment and
    computersoftware


66,733



55,002



3-10 yearsLeasehold improvements


12,896



7,716



5-20 yearsAutomobiles


116



178



3-5 years135,328



120,574Less accumulated depreciation and
    amortization


(55,346
)


(51,236
)79,982



69,338Land


13,814



13,094Total office properties and
    equipment

$
93,796


$
82,432  F-19




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    6.
    Goodwill
    and Other Intangible Assets:    AmountBalance as of January 1, 2005

$
112,398Goodwill added


309Balance at December 31, 2005


112,707Goodwill acquired during the year


134,129Goodwill added


408Balance as of December 31,
    2006

$
247,244       December 31,2006


2005Gross carrying value

$
35,682


$
22,332Accumulated amortization


(7,112
)


(4,707
)Net carrying value

$
28,570


$
17,625       Year Ending December 31,

Amount2007

$
3,7862008


3,7862009


3,7862010


3,7862011


3,676  F-20




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  7.
    Deposits:    December 31,


December 31,2006


2005Amount


%


Amount


%(Dollars in thousands)Interest-bearing transaction

$
483,551



7.2


$
432,936



9.0Noninterest-bearing transaction


834,140



12.4



673,934



14.0Savings and MMDA


1,830,313



27.1



1,312,033



27.3Time deposits


3,598,024



53.3



2,387,398



49.7Total deposits

$
6,746,028



100.0


$
4,806,301



100.0Annualized cost of deposits






3.32
%






2.16
%       Weighted AverageAmount


Interest RateDue within 1 year

$
3,119,514



4.89
%Due in 1 to 2 years


174,248



4.21Due in 2 to 3 years


105,417



4.27Due in 3 to 4 years


78,344



4.88Due in 4 to 5 years


42,838



5.14Due after 5 years


77,663



4.76$
3,598,024     December 31,2006


2005Three months or less

$
931,437


$
525,623After three months through six
    months


644,825



332,184After six months through twelve
    months


509,732



449,559After twelve months


212,639



201,183$
2,298,633


$
1,508,549  F-21




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  7.
    Deposits,
    Continued:    Years Ended December 31,2006


2005


2004Transaction accounts

$
1,692


$
1,340


$
837Savings and MMDA


47,844



22,272



11,347Time deposits


135,737



68,378



41,299$
185,273


$
91,990


$
53,483   8.
    Advances
    from Federal Home Loan Bank of Seattle:      December 31,2006


December 31,2005Weighted Average





Weighted AverageAmount


InterestRate


Amount


Interest RateDue within 1 year

$
803,307



5.14
%

$
670,047



3.39
%Due in 1 to 2 years


148,019



4.71



131,018



3.76Due in 2 to 3 years


83,596



5.28



120,636



4.30Due in 3 to 4 years


195,941



4.86



168,000



3.81Due in 4 to 5 years


11,579



5.00



225,000



4.41Due after 5 years


66,175



4.60



128,761



4.23$
1,308,617



5.03
%

$
1,443,462



3.84
%   9.
    Securities
    Sold Subject to Repurchase Agreements and Funds
    Purchased:     F-22




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    December 31,2006


December 31,2005Weighted





WeightedAverage





AverageAmount


Interest Rate


Amount


Interest RateDue within 1 yr

$
86,354



4.81
%

$
261,676



4.07
%Due within 2 yrs


40,000



4.82



0



0.00Due within 3 yrs


40,000



4.77



0



0.00Due within 4 yrs


50,000



4.34



0



0.00Due after 4 yrs


400,000



4.18



350,000



3.39$
616,354



4.35
%

$
611,676



3.68
%   10.
    Other
    Borrowings:    December 31,2006


2005Junior Subordinated Debentures

$
236,772


$
108,707Other


3,454



1,981Total other borrowings

$
240,226


$
110,688    F-23




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    Maturity





Rate at December 31,


Amount (inSubsidiary Issuer

Issue Date


Date


Call Date


2006


Thousands)Sterling Capital Trust VIII


Sept 2006



Sept 2036



Sept 2011



Floating



6.99
%

$
51,547Sterling Capital Trust VII


June 2006



June 2036



June 2011



Floating



6.89



56,702Lynnwood Capital Trust II


June 2005



June 2035



June 2010



Floating



7.16



10,310Sterling Capital Trust VI


June 2003



Sept 2033



Sept 2008



Floating



8.56



10,310Sterling Capital Statutory
    Trust V


May 2003



May 2033



June 2008



Floating



8.62



20,619Sterling Capital Trust IV


May 2003



May 2033



May 2008



Floating



8.52



10,310Sterling Capital Trust III


April 2003



April 2033



April 2008



Floating



8.62



14,433Lynnwood Capital Trust I


Mar 2003



Mar 2033



Mar 2007



Floating



8.52



9,484Klamath First Capital Trust II


April 2002



April 2032



April 2007



Floating



9.09



13,154Klamath First Capital Trust I


July 2001



July 2031



June 2006



Floating



9.30



15,160Sterling Capital Trust II


July 2001



July 2031



June 2006



Fixed



10.25



24,7438.02
%*

$
236,772     *
    
    Weighted average rate   F-24




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  11.
    Income
    Taxes:    Years Ended December 31,2006


2005


2004Current income taxes:Federal

$
38,436


$
21,667


$
17,229State


3,361



1,525



1,801Total current income taxes


41,797



23,192



19,030Deferred income taxes:Federal


(6,959
)


5,703



8,031State


(608
)


509



729Total deferred income taxes


(7,567
)


6,212



8,760Total income tax expense

$
34,230


$
29,404


$
27,790     December 31,2006


2005Assets


Liabilities


Assets


LiabilitiesAllowance for losses on loans

$
31,123


$
0


$
20,057


$
0Unrealized losses on
    available-for-sale
    securities


19,532



0



20,025



0Purchase accounting
    premiums/discounts


15,581



19,636



12,314



12,941Deferred compensation


6,333



0



4,775



0FHLB Seattle dividends


0



16,016



0



12,930Deferred loan fees


0



4,258



0



3,280Office properties and equipment


2,408



0



0



2,417Mortgage servicing rights


0



2,634



0



1,801Nonaccrual loans


168



0



527



0Prepaid expenses


0



444



0



570Other


0



1,322



0



0$
75,145


$
44,310


$
57,698


$
33,939  F-25




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    Years Ended December 31,2006


2005


2004Amount


%


Amount


%


Amount


%Income tax provision at the
    federal statutory rate

$
37,862



35.0
%

$
31,718



35.0
%

$
29,433



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


1,333



1.2



1,322



1.5



1,644



2.0Tax-exempt interest


(998
)


(0.9
)


(655
)


(0.7
)


(770
)


(0.9
)Bank owned life insurance


(1,735
)


(1.6
)


(2,070
)


(2.3
)


(1,519
)


(1.8
)Acquisition costs


0



0.0



0



0.0



(366
)


(0.4
)Tax credits


(1,433
)


(1.4
)


(874
)


(1.0
)


(531
)


(0.6
)Other, net


(799
)


(0.7
)


(37
)


(0.1
)


(101
)


(0.1
)$
34,230



31.6
%

$
29,404



32.4
%

$
27,790



33.2
%   12.
    Stock
    Options:    2006


2005


2004Weighted





Weighted





WeightedAverage





Average





AverageNumber


Exercise Price


Number


Exercise Price


Number


Exercise PriceBalance, January 1


1,703,959


$
19.46



1,793,975


$
15.18



1,560,464


$
9.61Granted


20,000



25.28



401,000



25.71



478,500



26.49Exercised


(495,208
)


13.60



(491,016
)


8.93



(895,287
)


8.09Acquisitions


265,160



9.35



0



0.00



650,298



10.38Cancelled


(8,250
)


8.91



0



0.00



0



0.00Balance, December 31


1,485,661


$
19.72



1,703,959


$
19.46



1,793,975


$
15.18Exercisable


1,485,661







1,700,659







1,166,280      F-26




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    Years Ended December 31,2005


2004Reported net income:

$
61,219


$
56,305Add back: Stock-based employee
    compensation expense, net of related tax effects


0



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


(3,319
)


(7,331
)Pro forma net income

$
57,900


$
48,974Basic earnings per share:Reported earnings per share

$
1.77


$
1.66Stock-based employee compensation,
    fair value


(0.10
)


(0.22
)Pro forma earnings per share

$
1.67


$
1.44Diluted earnings per share:Reported earnings per share

$
1.75


$
1.62Stock-based employee compensation,
    fair value


(0.09
)


(0.21
)Pro forma earnings per share

$
1.66


$
1.41     Years Ended December 31,2006


2005


2004Expected volatility


31
%


32
%


37
% - 132%Expected lives (in years)


5.5



2.9 - 5.4



4 - 10Risk free interest rates


4.36
%


4.37
% - 4.44%


1.77
% - 6.52%Expected forfeiture rate


0
%


0
%


0
%Annual dividend yield


0.87
%


0.87
% - 1.04%


0
%     Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedRange of Exercise


Number


Remaining


Average


Number


AveragePrices


Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise Price$
4.27 - $ 8.01



167,010



2.8 years


$
5.64



167,010


$
5.64$
8.01 - $12.02



247,884



3.6 years



9.71



247,884



9.71$
12.02 - $16.03



24,631



6.9 years



14.01



24,631



14.01$
16.03 - $20.04



251,767



5.1 years



19.38



251,767



19.38$
20.04 - $24.01



23,869



6.9 years



21.84



23,869



21.84$
24.01 - $26.71



770,500



6.0 years



26.21



770,500



26.211,485,661











1,485,661  F-27




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    13.
    Shareholders
    Equity:        Form S-3
    Date Paid

Per Share Amount


TotalOctober 2005

$
0.050


$
1.7 millionJanuary 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 million     14.
    Earnings
    Per Share:   F-28




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    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
)Contingently issuable shares


0



0



0.00Earnings 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   For the Year Ended December 31, 2004Weighted AverageNet Income


Shares


Per Share(Numerator)


(Denominator)


AmountEarnings per common
    share  basic

$
56,305



33,931,509


$
1.66Effect of dilutive securities:Common stock options


0



774,236



(0.04
)Contingently issuable shares


0



3,049



0.00Earnings per common
    share  diluted

$
56,305



34,708,794


$
1.62Antidilutive options not included
    in diluted earnings per share






469,500   15.
    Regulatory
    Capital:   F-29




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    Minimum Capital


Well-CapitalizedRequirements


Requirements


ActualAmount


Ratio


Amount


Ratio


Amount


RatioAs 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



11.5As of December 31, 2005:Tier 1 leverage (to average
    assets)Sterling

$
283,237



4.0
%

$
354,046



5.0
%

$
524,708



7.4
%Sterling Savings Bank


283,573



4.0



354,466



5.0



507,711



7.2Golf Savings Bank(1)


N/A



N/A



N/A



N/A



N/A



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


221,485



4.0



332,227



6.0



524,708



9.5Sterling Savings Bank


221,248



4.0



331,871



6.0



507,711



9.2Golf Savings Bank(1)


N/A



N/A



N/A



N/A



N/A



N/ATotal (to risk-weighted assets)Sterling


442,969



8.0



553,712



10.0



580,191



10.5Sterling Savings Bank


442,495



8.0



553,119



10.0



563,194



10.2Golf Savings Bank(1)


N/A



N/A



N/A



N/A



N/A



N/A     (1)
    
    Golf Savings Banks capital ratios have not been disclosed
    for periods prior to Sterlings acquisition of
    Golf Savings Bank in July 2006.  16.
    Commitments
    and Contingencies:   F-30




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
     December 31,2006


2005Undisbursed loan funds 
    construction loans

$
1,421,104


$
911,864Undisbursed lines of
    credit  commercial loans


746,084



579,182Undisbursed lines of
    credit  consumer loans


288,839



247,030Firm commitments to purchase loans


33,378



13,911Firm commitments to sell loans


104,061



22,408           Year Ending December 31,

Amount2007

$
11,7032008


10,8982009


9,3512010


8,4262011


6,556Thereafter


39,418$
86,352     17.
    Benefit
    Plans:   F-31




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
         F-32




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    18.
    Non-Interest
    Expenses:    Years Ended December 31,2006


2005


2004Employee compensation and benefits

$
117,186



93,367


$
77,617Occupancy and equipment


32,769



26,411



23,051Data processing


14,180



12,678



10,596Depreciation


10,280



8,627



7,321Advertising


9,985



9,125



6,976Travel and entertainment


5,955



4,522



4,071Legal and accounting


2,478



3,134



3,075Amortization of core deposit
    intangibles


2,405



2,222



2,222Insurance


1,360



1,213



1,155Merger and acquisition costs


454



0



4,835Goodwill litigation


275



179



141Other


9,046



8,803



7,310$
206,373



170,281


$
148,370   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-33




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
     As 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


$
(106,684
)

$
9,828,652   As 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-34




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  As of and for the Year Ended December 31, 2004Residential


CommercialCommunity


Mortgage


Mortgage


Retail


Other andBanking


Banking


Banking


Brokerage


Eliminations


TotalInterest income

$
303,431


$
8,912


$
7,280


$
1


$
137


$
319,761Interest expense


(114,803
)


0



0



0



(8,142
)


(122,945
)Net interest income (expense)


188,628



8,912



7,280



1



(8,005
)


196,816Provision for losses on loans


(12,150
)


0



0



0



0



(12,150
)Noninterest income


47,073



9,202



1,606



3,678



(13,760
)


47,799Noninterest expense


(128,436
)


(14,309
)


(3,964
)


(2,957
)


1,296



(148,370
)Income (loss) before income taxes

$
95,115


$
3,805


$
4,922


$
722


$
(20,469
)

$
84,095Total assets

$
6,992,194


$
21,212


$
18,485


$
1,395


$
(91,062
)

$
6,942,224   20.  Quarterly
    Financial Data (Unaudited):
    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 losses on loans


(4,650
)


(4,650
)


(4,698
)


(4,705
)Net interest income after
    provision for losses on loans


54,306



56,399



65,335



69,169Other income


12,917



15,130



18,451



22,842Operating 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-35




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  Year Ended December 31, 2005First Quarter


Second Quarter


Third Quarter


Fourth QuarterInterest income

$
92,066


$
95,056


$
94,774


$
105,915Interest expense


(39,248
)


(41,242
)


(41,686
)


(49,100
)Provision for losses on loans


(3,750
)


(3,400
)


(3,400
)


(4,650
)Net interest income after
    provision for losses on loans


49,068



50,414



49,688



52,165Other income


14,639



15,405



13,306



16,219Operating expenses


(39,647
)


(41,602
)


(42,599
)


(46,433
)Income before income taxes


24,060



24,217



20,395



21,951Income tax provision


(8,169
)


(8,209
)


(6,505
)


(6,521
)Net income

$
15,891


$
16,008


$
13,890


$
15,430Earnings per share 
    basic

$
0.46


$
0.46


$
0.40


$
0.44Earnings per share 
    diluted

$
0.45


$
0.46


$
0.40


$
0.44Weighted average shares
    outstanding  basic


34,484,822



34,597,964



34,660,107



34,789,284Weighted average shares
    outstanding  diluted


34,979,051



35,022,597



35,097,474



35,121,020   21.
    Fair
    Values of Financial Instruments:      Cash
    and Cash Equivalents
    Investments
    and MBS
    Loans
    Held for Sale
   F-36




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
   Loans
    Receivable
      Deposits
    Borrowings
      December 31,2006


2005Carrying


Fair


CarryingAmount


Value


Amount


Fair ValueFinancial assets:Cash and cash equivalents

$
179,715


$
179,715


$
132,169


$
132,169Investments and MBS:Available for sale


1,820,583



1,820,583



2,076,615



2,076,615Held to maturity


93,063



92,529



51,924



51,748Loans held for sale


91,469



91,469



7,894



7,894Loans receivable, net


7,015,401



6,947,660



4,885,916



4,883,265Accrued interest receivable


55,519



55,519



35,805



35,805Financial liabilities:Non-maturity deposits


3,148,004



3,148,004



2,418,903



2,418,903Deposits with stated maturities


3,598,024



3,600,415



2,387,398



2,382,189Borrowings


2,165,197



2,148,717



2,165,826



2,115,145Accrued interest payable


39,863



39,863



18,169



18,169    F-37




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    22.
    Related-Party
    Transactions:        2006Balance, January 1

$
16,265New


37,693Repayments


(11,512
)Balance, December 31

$
42,446  F-38




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  23.
    Parent
    Company-Only Financial Information:    December 31,Condensed Balance Sheets

2006


2005Assets:Cash and cash equivalents

$
21,056


$
15,706Investments in subsidiaries:Sterling Savings Bank


944,420



598,394Golf Savings Bank


50,661



0Golf Escrow Company


466



0Tri-Cities
    Mortgage Company


32



32Capital Trust Subsidiaries


7,120



3,282Receivable from subsidiaries


2,667



3,260Available for sale investments


42



55Other assets


2,463



2,366Total assets

$
1,028,927


$
623,095Liabilities and Shareholders
    Equity:Accrued expenses payable

$
8,707


$
7,671Term note payable


0



0Junior Subordinated Debentures


236,772



108,707Due to affiliates


32



32Shareholders equity


783,416



506,685Total liabilities and
    shareholders equity

$
1,028,927


$
623,095   F-39




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
  Years Ended December 31,2006


2005


2004(In thousands)Condensed Statements of IncomeInterest income

$
1,520


$
748


$
626Interest expense


(14,483
)


(8,618
)


(8,630
)Net interest expense


(12,963
)


(7,870
)


(8,004
)Equity in net earnings of
    subsidiary


84,553



68,339



63,247Operating expenses


(3,993
)


(3,433
)


(2,778
)Other noninterest income (expense)


0



0



(238
)Income before income taxes


67,597



57,036



52,227Income tax benefit


6,349



4,183



4,078Net income

$
73,946


$
61,219


$
56,305Condensed Statements of Cash FlowsCash flows from operating
    activities:Net income

$
73,946


$
61,219


$
56,305Adjustments to reconcile net
    income to net cash used in operating activities


(89,181
)


(65,444
)


(64,359
)Net cash used in operating
    activities


(15,235
)


(4,225
)


(8,054
)Cash flows from investing
    activities:Investments in subsidiaries, net


(118,688
)


0



0Repayment of advances to
    subsidiaries


7,186



6,484



6,862Dividends from subsidiary


56,456



11,616



11,616Cash flows from acquisitions


(26,449
)


0



5,152Other


0



0



3,037Net cash provided by (used in)
    investing activities


(81,495
)


18,100



26,667Cash flows from financing
    activities:Proceeds from other borrowings


130,000



0



0Repayment of other borrowings


(25,475
)


(19,000
)


(33,000
)Proceeds from exercise of stock
    options


6,459



3,411



7,083Dividends paid


(8,895
)


(1,736
)


0Other


(9
)


(89
)


(240
)Net cash provided by (used in)
    financing activities


102,080



(17,414
)


(26,157
)Net change in cash and cash
    equivalents


5,350



(3,539
)


(7,544
)Cash and cash equivalents,
    beginning of year


15,706



19,245



26,789Cash and cash equivalents, end of
    year

$
21,056


$
15,706


$
19,245      F-40




---



##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
     24.
    Business
    Combinations:    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-41




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (Continued)
    Twelve Months Ended December 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-42




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##### Table of Contents



Sterling
    Financial Corporation
    Notes to Consolidated Financial
    Statements  (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   Northern
    Empire
   F-43