##### 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
1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-16276
 STERLING FINANCIAL CORPORATION
  Pennsylvania
    
    23-2449551(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)101 North Pointe BoulevardLancaster, Pennsylvania
    
    17601-4133(Address of principal executive offices)
    
    (ZipCode)
 (717) 581-6030
  Common Stock, Par Value $5.00 per Share
 None
 o þ
 o þ
 Note
 þ o
 þ
  o þ o
 o þ




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##### 



Sterling Financial Corporation
Table of Contents
 PageForward-Looking Statements
    
    
    3Part IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    11Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11Part IIItem 5. Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    12Item 6. Selected Financial Data
    
    
    14Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes in and Disagreements with Registered Independent Public Accountants on
Accounting and Financial Disclosure
    
    
    86Item 9A. Controls and Procedures
    
    
    86Item 9B. Other information
    
    
    86Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    87Item 11. Executive Compensation
    
    
    87Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    87Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    87Item 14. Principal Accountant Fees and Services
    
    
    87Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    88Signatures
    
    
    90Subsidiaries of the RegistrantConsent of Ernst & Young LLPCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to Section 1350Certification of CFO pursuant to Section 1350
  2




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##### Table of Contents



Forward-Looking Statements
   
    
    Operating, legal and regulatory risks;
    
    Economic, political and competitive forces impacting our various lines of business;
    
    The risk that our analysis of these risks and forces could be incorrect and/or that the
strategies developed to address them could be unsuccessful;
    
    The possibility that increased demand or prices for Sterlings financial services and
products may not occur;
    
    Volatility in the levels of interest rates, as well as the difference between short and
long term rates as reflected in the shape of the yield curve;
    
    Integration of our acquired affiliates may not occur as quickly or smoothly as
anticipated, and projected synergies may not occur on the projected time frame or at all;
    
    The risk that the fair values of the business segments will not continue to exceed their carrying value;
    
    Changes/volatility in the securities markets; and
    
    Other risks and uncertainties.
  
 Part I
 
 Item 1  Business
    3




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Community Banking and Related Services
   # ofBank Name
    
    Offices
    
    Markets Served
    
    Loans
    
    Deposits
    
    AssetsBank of Lancaster County, N.A.
    
    
    36
    
    
    Lancaster County, PA
Chester County, PA
Berks County, PA (1)
Lebanon County, PA (2)
    
    $
    1,432
    
    
    $
    1,473
    
    
    $
    1,783Bank of Hanover and Trust
Company
    
    
    18
    
    
    York County, PA Adams County, PA
Carroll County, MD
    
    
    551
    
    
    
    702
    
    
    
    814Pennsylvania State Bank
    
    
    6
    
    
    Cumberland County, PA
Dauphin County, PA
    
    
    194
    
    
    
    210
    
    
    
    297Bay First Bank, N.A.
    
    
    6
    
    
    Cecil County, MD
    
    
    147
    
    
    
    220
    
    
    
    255Delaware Sterling Bank & Trust
Company
    
    
    1
    
    
    New Castle County, DE
    
    
    9
    
    
    
    31
    
    
    
    36
 
 (1)
    
    Bank of Lancaster County conducts business through its two PennSterling Bank division
offices.(2)
    
    Bank of Lancaster County conducts business through its two Bank of Lebanon County
division offices.     4




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##### Table of Contents



Leasing
   Commercial Finance
   Trust and Investment Services
    Other
    www.sterlingfi.com www.sterlingfi.com
 5




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##### Table of Contents



Competition
  Environmental Compliance
  Supervision and Regulation
  Bank Holding Company Regulation
     Financial Services Modernization Legislation
  6




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##### Table of Contents



USA Patriot Act of 2001
  Sarbanes-Oxley Act of 2002
   Regulation W
  
    
    to an amount equal to 10% of the banks capital and surplus, in the case of covered transactions with any one affiliate; and
    
    to an amount equal to 20% of the banks capital and surplus, in the case of covered transactions with all affiliates.
 7




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##### Table of Contents




    
    a loan or extension of credit to an affiliate;
    
    a purchase of, or an investment in, securities issued by an affiliate;
    
    a purchase of assets from an affiliate, with some exceptions;
    
    the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and
    
    the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
  
    
    a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
    
    covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and
    
    with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.
 Check 21
 st
 Dividends
   FDIC Insurance
   8




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##### Table of Contents



Federal Deposit Insurance Reform Act of 2005
   
    
    merging the Savings Association Insurance Fund and Bank Insurance Fund, which became effective March 31, 2006;
    
    maintaining basic deposit and municipal account insurance coverage at $100,000 but
providing for a new basic insurance coverage for retirement accounts of $250,000. Insurance
coverage for basic deposit and retirement accounts could be increased for inflation every
five years in $10,000 increments beginning in 2011;
    
    providing the FDIC with the ability to set the designated reserve ratio within a range
of between 1.15% and 1.50%, rather than maintaining 1.25% at all times regardless of
prevailing economic conditions;
    
    providing a one-time assessment credit of $4.7 billion to banks and savings associations
in existence on December 31, 1996, which may be used to offset future premiums with certain
limitations;
    
    requiring the payment of dividends of 100% of the amount that the insurance fund exceeds
1.5% of the estimated insured deposits and the payment of 50% of the amount that the
insurance fund exceeds 1.35% of the estimated insured deposits (when the reserve is greater
than 1.35% but no more than 1.5%); and
    
    providing for a new risk-based assessment system that allows the FDIC to establish
separate risk-based assessments for large and small members of the DIF.
 .
 .
 Regulation of Banks
    9




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##### Table of Contents



Regulation of Other Subsidiaries
   Other
  Products and Services with Reputation Risk
  Employees
  
 Item 1A  Risk Factors
   Changes in Interest Rates.
 Competition.
 Changes in Real Estate.
 10




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##### Table of Contents



Changes in the logging industry
 Changes in Economic Conditions.
 
    
    Loan delinquencies may increase;
    
    Problem assets and foreclosures may increase;
    
    Demand for our products and services may decline; and
    
    Collateral for loans made by us may decline in value, in turn reducing a clients
borrowing power, and reducing the value of assets and collateral associated with our loans
held for investment.
 Legislative and Regulatory Changes
 
 Item 1B  Unresolved Staff Comments
  
 Item 2  Properties
    
 Item 3  Legal Proceedings
  Item 4  Submission of Matters to a Vote of Security Holders
  11




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Part II
 
 Item 5  Market for the Registrants Common Equity and Related Stockholder Matters
    Price Range Per Share
    
    Per ShareHigh
    
    Low
    
    Dividend2006First Quarter
    
    $
    21.49
    
    
    $
    19.86
    
    
    $
    0.140Second Quarter
    
    
    21.61
    
    
    
    19.54
    
    
    
    0.140Third Quarter
    
    
    22.43
    
    
    
    20.53
    
    
    
    0.150Fourth Quarter
    
    
    24.20
    
    
    
    21.39
    
    
    
    0.1502005First Quarter
    
    $
    22.94
    
    
    $
    19.73
    
    
    $
    0.128Second Quarter
    
    
    22.16
    
    
    
    19.05
    
    
    
    0.130Third Quarter
    
    
    23.52
    
    
    
    19.41
    
    
    
    0.140Fourth Quarter
    
    
    22.31
    
    
    
    18.47
    
    
    
    0.140
    12




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##### Table of Contents



Stockholder Return Performance
  
 Base Period
    
    
    Years Ended December 31,Indexed Returns
    
    
    2001
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Sterling Financial Corporation
    
    
    
    100
    
    
    
    
    216.71
    
    
    
    
    176.65
    
    
    
    
    199.34
    
    
    
    
    150.83
    
    
    
    
    124.96S&P 500 Index
    
    
    
    100
    
    
    
    
    135.03
    
    
    
    
    116.61
    
    
    
    
    111.15
    
    
    
    
    100.25
    
    
    
    
    77.90NASDAQ Bank Index
    
    
    
    100
    
    
    
    
    165.21
    
    
    
    
    147.23
    
    
    
    
    150.71
    
    
    
    
    131.69
    
    
    
    
    102.37
 Years Ended December 31,Annual Return Percentage
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Sterling Financial Corporation
    
    
    
    22.68
    %
    
    
    
    (11.38
    )%
    
    
    
    32.16
    %
    
    
    
    20.71
    %
    
    
    
    24.96S&P 500 Index
    
    
    
    15.79
    %
    
    
    
    4.91
    %
    
    
    
    10.88
    %
    
    
    
    28.68
    %
    
    
    
    (22.10
    )NASDAQ Bank Index
    
    
    
    12.21
    %
    
    
    
    (2.31
    )%
    
    
    
    14.44
    %
    
    
    
    28.64
    %
    
    
    
    2.37
 13




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##### Table of Contents



Item 6  Selected Financial Data
 (Dollars and shares in thousands, except per share data)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Summaries of IncomeInterest income
    
    $
    205,541
    
    
    $
    172,178
    
    
    $
    137,681
    
    
    $
    127,074
    
    
    $
    123,591Interest expense
    
    
    83,496
    
    
    
    57,905
    
    
    
    40,240
    
    
    
    41,156
    
    
    
    48,643Net interest income
    
    
    122,045
    
    
    
    114,273
    
    
    
    97,441
    
    
    
    85,918
    
    
    
    74,948Provision for loan losses
    
    
    5,171
    
    
    
    4,383
    
    
    
    4,438
    
    
    
    3,697
    
    
    
    2,095Net interest income after provision for loan losses
    
    
    116,874
    
    
    
    109,890
    
    
    
    93,003
    
    
    
    82,221
    
    
    
    72,853Non-interest income
    
    
    69,155
    
    
    
    60,950
    
    
    
    54,963
    
    
    
    49,721
    
    
    
    44,832Non-interest expenses
    
    
    126,640
    
    
    
    116,826
    
    
    
    103,227
    
    
    
    92,568
    
    
    
    85,922Income before income taxes
    
    
    59,389
    
    
    
    54,014
    
    
    
    44,739
    
    
    
    39,374
    
    
    
    31,763Applicable income taxes
    
    
    17,807
    
    
    
    14,957
    
    
    
    11,684
    
    
    
    10,315
    
    
    
    7,018Net income from continuing operations
    
    
    41,582
    
    
    
    39,057
    
    
    
    33,055
    
    
    
    29,059
    
    
    
    24,745Discontinued operations, net of tax
    
    
    (5,130
    )
    
    
    210
    
    
    
    274
    
    
    
    
    
    
    
    Net income
    
    $
    36,452
    
    
    $
    39,267
    
    
    $
    33,329
    
    
    $
    29,059
    
    
    $
    24,745Financial Condition at Year EndAssets
    
    $
    3,279,835
    
    
    $
    2,965,737
    
    
    $
    2,742,762
    
    
    $
    2,343,517
    
    
    $
    2,156,928Assets related to discontinued operations
    
    
    
    
    
    
    16,836
    
    
    
    16,264
    
    
    
    
    
    
    
    Loans, net
    
    
    2,337,099
    
    
    
    2,083,083
    
    
    
    1,888,380
    
    
    
    1,481,369
    
    
    
    1,283,075Deposits
    
    
    2,615,912
    
    
    
    2,226,287
    
    
    
    2,015,394
    
    
    
    1,778,397
    
    
    
    1,702,302Borrowed money
    
    
    283,670
    
    
    
    396,845
    
    
    
    403,647
    
    
    
    296,342
    
    
    
    217,717Liabilities related to discontinued operations
    
    
    
    
    
    
    498
    
    
    
    1,593
    
    
    
    
    
    
    
    Stockholders equity
    
    
    330,585
    
    
    
    298,086
    
    
    
    281,944
    
    
    
    220,011
    
    
    
    196,833Per Common Share Data(1)Basic earnings per shareContinuing operations
    
    $
    1.43
    
    
    $
    1.35
    
    
    $
    1.21
    
    
    $
    1.10
    
    
    $
    0.95Discontinued operations
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    Net income
    
    $
    1.26
    
    
    $
    1.36
    
    
    $
    1.22
    
    
    $
    1.10
    
    
    $
    0.95Diluted earnings per shareContinuing operations
    
    $
    1.41
    
    
    $
    1.33
    
    
    $
    1.20
    
    
    $
    1.08
    
    
    $
    0.94Discontinued operations
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    Net income
    
    $
    1.24
    
    
    $
    1.34
    
    
    $
    1.21
    
    
    $
    1.08
    
    
    $
    0.94Cash dividends declared
    
    
    0.580
    
    
    
    0.538
    
    
    
    0.496
    
    
    
    0.448
    
    
    
    0.424Book value
    
    
    11.14
    
    
    
    10.31
    
    
    
    9.76
    
    
    
    8.19
    
    
    
    7.45Realized book value (2)
    
    
    11.05
    
    
    
    10.17
    
    
    
    9.41
    
    
    
    7.68
    
    
    
    6.91Weighted average number of common shares:Basic
    
    
    29,029
    
    
    
    28,854
    
    
    
    27,216
    
    
    
    26,530
    
    
    
    26,061Diluted
    
    
    29,436
    
    
    
    29,318
    
    
    
    27,651
    
    
    
    26,810
    
    
    
    26,285Dividend payout ratio (3)
    
    
    46.0
    %
    
    
    39.6
    %
    
    
    40.5
    %
    
    
    40.9
    %
    
    
    44.5
    %Performance Ratios (based on income from continuing
operations)Return on average assets
    
    
    1.36
    %
    
    
    1.38
    %
    
    
    1.37
    %
    
    
    1.33
    %
    
    
    1.22
    %Return on average equity
    
    
    13.49
    %
    
    
    13.55
    %
    
    
    14.16
    %
    
    
    14.02
    %
    
    
    13.70
    %Return on average realized equity (2)
    
    
    13.59
    %
    
    
    13.89
    %
    
    
    14.88
    %
    
    
    15.10
    %
    
    
    14.47
    %Return on average tangible equity (4)
    
    
    18.56
    %
    
    
    18.66
    %
    
    
    17.01
    %
    
    
    15.67
    %
    
    
    15.23
    %Average equity to average assets
    
    
    10.11
    %
    
    
    10.21
    %
    
    
    9.70
    %
    
    
    9.38
    %
    
    
    8.87
    %Efficiency ratio (5)
    
    
    59.12
    %
    
    
    59.50
    %
    
    
    60.42
    %
    
    
    59.20
    %
    
    
    60.20
    %Selected Asset Quality RatiosNon-performing loans to total loans
    
    
    0.16
    %
    
    
    0.22
    %
    
    
    0.24
    %
    
    
    0.31
    %
    
    
    0.90
    %Net charge-offs to average loans outstanding
    
    
    0.15
    %
    
    
    0.11
    %
    
    
    0.10
    %
    
    
    0.14
    %
    
    
    0.08
    %Allowance for loan losses to total loans
    
    
    0.99
    %
    
    
    1.00
    %
    
    
    0.99
    %
    
    
    0.98
    %
    
    
    1.00
    %Allowance for loan losses to non-performing loans
    
    
    635.37
    %
    
    
    459.89
    %
    
    
    417.02
    %
    
    
    315.25
    %
    
    
    110.62
    %
 
 (1)
    
    All per share information reflects the 5-for-4 stock split, effected in the form of a 25% stock dividend, declared in April
2005 and paid in June 2005.(2)
    
    Excludes accumulated other comprehensive income (loss) totaling $2.8 million and $4.0 million as of December 31, 2006 and 2005, respectively.(3)
    
    Dividends declared per share divided by basic earnings per share on net income including discontinued operations.(4)
    
    Excludes amortization of intangible assets of $928,000, $998,000 $619,000, $153,000, and $109,000, net of tax, for 2006, 2005, 2004, 2003 and 2002, respectively, and
average goodwill and intangibles of $79.2 million, $73.6 million, $35.4 million, $20.9 million and $17.5 million as of December 31, 2006, 2005, 2004, 2003, and 2002, respectively.(5)
    
    Calculated after netting depreciation of equipment on operating leases with related rental income. 14




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Quarterly Financial Data
  Three Months EndedDecember 31
    
    
    September 30
    
    
    June 30
    
    
    March 312006Interest and dividend income
    
    $
    55,259
    
    
    $
    52,762
    
    
    $
    50,085
    
    
    $
    47,435Interest expense
    
    
    24,023
    
    
    
    22,078
    
    
    
    19,698
    
    
    
    17,697Net interest income
    
    
    31,236
    
    
    
    30,684
    
    
    
    30,387
    
    
    
    29,738Provision for loan losses
    
    
    1,524
    
    
    
    1,224
    
    
    
    1,298
    
    
    
    1,125Securities gains
    
    
    327
    
    
    
    324
    
    
    
    532
    
    
    
    302Non-interest income
    
    
    18,087
    
    
    
    17,010
    
    
    
    16,513
    
    
    
    16,060Non-interest expenses
    
    
    32,950
    
    
    
    31,592
    
    
    
    31,401
    
    
    
    30,697Income before income taxes
    
    
    15,176
    
    
    
    15,202
    
    
    
    14,733
    
    
    
    14,278Income tax expenses
    
    
    4,518
    
    
    
    4,590
    
    
    
    4,555
    
    
    
    4,144Net income from continuing operations
    
    
    10,658
    
    
    
    10,612
    
    
    
    10,178
    
    
    
    10,134Discontinued operations, net of tax
    
    
    (215
    )
    
    
    (5,041
    )
    
    
    103
    
    
    
    23Net income
    
    
    10,443
    
    
    
    5,571
    
    
    
    10,281
    
    
    
    10,157Per share information:Basic earnings per share:Continuing operations
    
    $
    0.36
    
    
    $
    0.35
    
    
    $
    0.36
    
    
    $
    0.35Discontinued operations
    
    
    (0.01
    )
    
    
    (0.16
    )
    
    
    
    
    
    
    Net income
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.36
    
    
    $
    0.35Diluted earnings per share:Continuing operations
    
    $
    0.36
    
    
    $
    0.36
    
    
    $
    0.34
    
    
    $
    0.35Discontinued operations
    
    
    (0.01
    )
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    Net income
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.35
    
    
    $
    0.35Dividends declared
    
    
    0.150
    
    
    
    0.150
    
    
    
    0.140
    
    
    
    0.1402005Interest and dividend income
    
    $
    46,159
    
    
    $
    44,282
    
    
    $
    42,010
    
    
    $
    39,727Interest expense
    
    
    16,616
    
    
    
    15,430
    
    
    
    13,706
    
    
    
    12,153Net interest income
    
    
    29,543
    
    
    
    28,852
    
    
    
    28,304
    
    
    
    27,574Provision for loan losses
    
    
    1,354
    
    
    
    1,532
    
    
    
    1,140
    
    
    
    357Securities gains
    
    
    372
    
    
    
    241
    
    
    
    114
    
    
    
    134Non-interest income
    
    
    16,018
    
    
    
    15,126
    
    
    
    15,124
    
    
    
    13,821Non-interest expenses
    
    
    30,149
    
    
    
    29,124
    
    
    
    29,154
    
    
    
    28,399Income before income taxes
    
    
    14,430
    
    
    
    13,563
    
    
    
    13,248
    
    
    
    12,773Income tax expenses
    
    
    4,199
    
    
    
    3,478
    
    
    
    3,755
    
    
    
    3,525Net income from continuing operations
    
    
    10,231
    
    
    
    10,085
    
    
    
    9,493
    
    
    
    9,248Discontinued operations, net of tax
    
    
    (13
    )
    
    
    1
    
    
    
    191
    
    
    
    31Net income
    
    
    10,218
    
    
    
    10,086
    
    
    
    9,684
    
    
    
    9,279Per share information:Basic earnings per share:Continuing operations
    
    $
    0.35
    
    
    $
    0.35
    
    
    $
    0.33
    
    
    $
    0.32Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Net income
    
    $
    0.35
    
    
    $
    0.35
    
    
    $
    0.34
    
    
    $
    0.32Diluted earnings per share:Continuing operations
    
    $
    0.35
    
    
    $
    0.34
    
    
    $
    0.32
    
    
    $
    0.32Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Net income
    
    $
    0.35
    
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.32Dividends declared
    
    
    0.140
    
    
    
    0.140
    
    
    
    0.130
    
    
    
    0.128
 15




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##### Table of Contents



Item 7
 Managements Discussion and Analysis of Financial Condition and Results of Operations
    Critical Accounting Policies
    Goodwill and Other Intangible Assets,
 16




---



##### Table of Contents



Non-GAAP Presentations
     Inflation and Interest Rates
    17




---



##### Table of Contents



RESULTS OF OPERATIONS
  Executive Overview
          18




---



##### Table of Contents



Net Interest Income
         
    
    After more than three years of declining short-term interest rates, the Federal Reserve
Bank began to raise the Fed funds target rate in 2004. Since June of 2004, the Federal
Reserve has increased the fed funds target by 25 basis points on seventeen separate
occasions. However, the increase of short-term rates at a faster pace than long-term rates
led to a flattening and, at times, an inversion of the yield curve. A flat / inverted
yield curve diminishes the opportunity to earn a spread on new business with longer term
rates generally driving loan originations and shorter term rates driving funding costs.
The following table depicts the spread between the two and the ten year treasuries at the
end of the past twelve quarters:
 19




---



##### Table of Contents



Quarter Ended:
    
    2006
    
    2005
    
    2004March 31
    
    4 bps
    
    70 bps
    
    226 bpsJune 30
    
    (1) bps
    
    28 bps
    
    192 bpsSeptember 30
    
    (7) bps
    
    16 bps
    
    151 bpsDecember 31
    
    (11) bps
    
    (2)
bps
    
    116 bps
 By contrast, over the last three decades, the average spread between the two and the ten-year
treasuries was approximately 70 basis points.
    
    As noted previously, growth in loans has accounted for all of the growth in earning
assets. Generally, loans carry a higher yield than alternative interest-earning assets,
namely securities and other investments. Thus, this improved mix of earning assets has
helped to increase the overall yield on earning assets by 67 basis points from 2005 to
2006. Going forward, Sterlings ability to fund a portion of loan growth with a decrease in
investment securities is expected to diminish as a result of Sterlings need to maintain
certain levels of securities to be available as collateral to be pledged for business
purposes.
    
    The rate paid on interest-bearing liabilities increased 84 basis points from 2005 to
2006, exceeding the increase in the yield on earning assets. The increase in the cost of
funds for Sterling had lagged the increase in the yield on earning assets through the first
part of 2005. The increase in the cost of funds thereafter has resulted from both a
general trend of increases in the rates paid on deposit accounts, as well as a shift in the
funding mix with an increasing percentage of deposit growth coming from comparatively
higher yielding money market and time deposits.
    
    The combination of the above factors contributed to a narrowing of the spread between
the yield on interest-earning assets and the rate paid on interest-bearing liabilities of
18 basis points from 2005 to 2006. Offsetting this narrowing spread was growth in
stockholders equity, an interest-free source of funding that helped minimize the decline
in margin to 10 basis points.
       

    
    Pennsylvania State Bank, acquired by Sterling on December 3, 2004, contributed $7.4
million of the increase in net interest income and $184.0 million of the increase in the
average balance of interest-earning assets. In addition, the acquisition of Pennsylvania
State Bank negatively impacted Sterlings net interest margin by 6 basis points;     

    
    Improved earning asset mix with strong growth in commercial loans and finance
receivables funded partially by securities portfolio cash flow;     

    
    Growth in non-maturity accounts and time deposits;     

    
    Increase in rates paid on deposits accounts;     

    
    Two issuances of junior subordinated debentures totaling $30.9 million; and     

    
    Dampening effect of yield curve flattening / inversion.
       

    
    Continuing competitive pricing pressure for new loans and deposits; and     

    
    Continued flat/inverted yield curve, leading to pressure on the ability to attract new business at historical margin levels.
  20




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##### Table of Contents



Table
1  Distribution of Assets, Liabilities and Stockholders Equity, Interest Rates and Interest Differential-Tax Equivalent Yields
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Annual
    
    
    Average
    
    
    
    
    
    
    Annual
    
    
    Average
    
    
    
    
    
    
    AnnualBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssets:Federal funds sold
    
    $
    17,080
    
    
    $
    887
    
    
    
    5.19
    %
    
    $
    8,903
    
    
    $
    322
    
    
    
    3.62
    %
    
    $
    8,117
    
    
    $
    126
    
    
    
    1.55
    %Other short-term investments
    
    
    7,811
    
    
    
    314
    
    
    
    4.02
    %
    
    
    4,973
    
    
    
    135
    
    
    
    2.71
    %
    
    
    7,099
    
    
    
    39
    
    
    
    0.54
    %Securities:U.S. Treasury
    
    
    915
    
    
    
    45
    
    
    
    4.96
    %
    
    
    1,796
    
    
    
    78
    
    
    
    4.34
    %
    
    
    4,291
    
    
    
    156
    
    
    
    3.63
    %U.S. Government agencies
    
    
    196,063
    
    
    
    8,716
    
    
    
    4.45
    %
    
    
    167,359
    
    
    
    7,135
    
    
    
    4.26
    %
    
    
    157,347
    
    
    
    6,790
    
    
    
    4.32
    %State and political
subdivisions
    
    
    226,458
    
    
    
    15,995
    
    
    
    7.06
    %
    
    
    237,728
    
    
    
    16,725
    
    
    
    7.03
    %
    
    
    238,122
    
    
    
    16,946
    
    
    
    7.12
    %Other
    
    
    39,650
    
    
    
    2,208
    
    
    
    5.57
    %
    
    
    68,422
    
    
    
    3,641
    
    
    
    5.32
    %
    
    
    98,836
    
    
    
    5,289
    
    
    
    5.35
    %Total securities
    
    
    463,086
    
    
    
    26,964
    
    
    
    5.82
    %
    
    
    475,305
    
    
    
    27,579
    
    
    
    5.80
    %
    
    
    498,596
    
    
    
    29,181
    
    
    
    5.85
    %Loans:Commercial
    
    
    1,260,057
    
    
    
    89,897
    
    
    
    7.13
    %
    
    
    1,155,694
    
    
    
    73,323
    
    
    
    6.34
    %
    
    
    902,733
    
    
    
    51,718
    
    
    
    5.73
    %Consumer
    
    
    396,055
    
    
    
    27,404
    
    
    
    6.92
    %
    
    
    375,383
    
    
    
    23,549
    
    
    
    6.27
    %
    
    
    332,478
    
    
    
    19,734
    
    
    
    5.94
    %Residential mortgages
    
    
    91,071
    
    
    
    5,624
    
    
    
    6.18
    %
    
    
    82,215
    
    
    
    4,904
    
    
    
    5.96
    %
    
    
    79,721
    
    
    
    5,002
    
    
    
    6.27
    %Leases
    
    
    137,698
    
    
    
    10,122
    
    
    
    7.35
    %
    
    
    134,123
    
    
    
    9,294
    
    
    
    6.93
    %
    
    
    124,949
    
    
    
    8,654
    
    
    
    6.93
    %Finance receivables
    
    
    347,995
    
    
    
    50,536
    
    
    
    14.52
    %
    
    
    272,617
    
    
    
    39,431
    
    
    
    14.46
    %
    
    
    203,638
    
    
    
    29,933
    
    
    
    14.70
    %Total loans
    
    
    2,232,876
    
    
    
    183,583
    
    
    
    8.22
    %
    
    
    2,020,032
    
    
    
    150,501
    
    
    
    7.45
    %
    
    
    1,643,519
    
    
    
    115,041
    
    
    
    7.00
    %Total interest earning assets
    
    
    2,720,853
    
    
    
    211,748
    
    
    
    7.78
    %
    
    
    2,509,213
    
    
    
    178,537
    
    
    
    7.12
    %
    
    
    2,157,331
    
    
    
    144,387
    
    
    
    6.68
    %Allowance for loan losses
    
    
    (22,179
    )
    
    
    
    
    
    
    
    
    
    
    (19,424
    )
    
    
    
    
    
    
    
    
    
    
    (16,032
    )Cash and due from banks
    
    
    65,873
    
    
    
    
    
    
    
    
    
    
    
    66,100
    
    
    
    
    
    
    
    
    
    
    
    56,217Other non-interest earning
assets
    
    
    268,732
    
    
    
    
    
    
    
    
    
    
    
    250,173
    
    
    
    
    
    
    
    
    
    
    
    199,042Assets related to
discontinued operations
    
    
    14,622
    
    
    
    
    
    
    
    
    
    
    
    16,495
    
    
    
    
    
    
    
    
    
    
    
    9,374TOTAL ASSETS
    
    $
    3,047,901
    
    
    
    
    
    
    
    
    
    
    $
    2,822,557
    
    
    
    
    
    
    
    
    
    
    $
    2,405,932Liabilities and
Stockholders Equity:Deposits:Interest-bearing demand
    
    $
    784,851
    
    
    
    19,068
    
    
    
    2.43
    %
    
    $
    713,983
    
    
    
    10,067
    
    
    
    1.41
    %
    
    $
    608,414
    
    
    
    3,947
    
    
    
    0.65
    %Savings
    
    
    238,764
    
    
    
    3,856
    
    
    
    1.61
    %
    
    
    236,256
    
    
    
    2,251
    
    
    
    0.95
    %
    
    
    218,852
    
    
    
    1,200
    
    
    
    0.55
    %Time
    
    
    1,046,314
    
    
    
    42,602
    
    
    
    4.07
    %
    
    
    877,491
    
    
    
    28,684
    
    
    
    3.27
    %
    
    
    739,802
    
    
    
    21,757
    
    
    
    2.94
    %Total deposits
    
    
    2,069,929
    
    
    
    65,526
    
    
    
    3.17
    %
    
    
    1,827,730
    
    
    
    41,002
    
    
    
    2.24
    %
    
    
    1,567,068
    
    
    
    26,904
    
    
    
    1.72
    %Borrowings:Short-term borrowings
    
    
    104,777
    
    
    
    5,742
    
    
    
    5.48
    %
    
    
    77,663
    
    
    
    3,000
    
    
    
    3.86
    %
    
    
    63,067
    
    
    
    2,039
    
    
    
    3.23
    %Long-term debt
    
    
    146,210
    
    
    
    6,462
    
    
    
    4.42
    %
    
    
    212,648
    
    
    
    8,677
    
    
    
    4.08
    %
    
    
    202,874
    
    
    
    8,100
    
    
    
    3.99
    %Subordinated notes payable
    
    
    87,630
    
    
    
    5,766
    
    
    
    6.58
    %
    
    
    85,173
    
    
    
    5,226
    
    
    
    6.14
    %
    
    
    57,970
    
    
    
    3,197
    
    
    
    5.51
    %Total borrowings
    
    
    338,617
    
    
    
    17,970
    
    
    
    5.31
    %
    
    
    375,484
    
    
    
    16,903
    
    
    
    4.50
    %
    
    
    323,911
    
    
    
    13,336
    
    
    
    4.12
    %Total interest-bearing
liabilities
    
    
    2,408,546
    
    
    
    83,496
    
    
    
    3.47
    %
    
    
    2,203,214
    
    
    
    57,905
    
    
    
    2.63
    %
    
    
    1,890,979
    
    
    
    40,240
    
    
    
    2.13
    %Non-interest-bearing demand
deposits
    
    
    286,835
    
    
    
    
    
    
    
    
    
    
    
    288,950
    
    
    
    
    
    
    
    
    
    
    
    242,147Other liabilities
    
    
    43,897
    
    
    
    
    
    
    
    
    
    
    
    41,328
    
    
    
    
    
    
    
    
    
    
    
    38,518Liabilities related to
discontinued operations
    
    
    375
    
    
    
    
    
    
    
    
    
    
    
    744
    
    
    
    
    
    
    
    
    
    
    
    856Stockholders equity
    
    
    308,248
    
    
    
    
    
    
    
    
    
    
    
    288,321
    
    
    
    
    
    
    
    
    
    
    
    233,432TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    3,047,901
    
    
    
    
    
    
    
    
    
    
    $
    2,822,557
    
    
    
    
    
    
    
    
    
    
    $
    2,405,932Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    4.31
    %
    
    
    
    
    
    
    
    
    
    
    4.49
    %
    
    
    
    
    
    
    
    
    
    
    4.55
    %Net interest income (FTE)/
net interest margin
    
    
    
    
    
    
    128,252
    
    
    
    4.71
    %
    
    
    
    
    
    
    120,632
    
    
    
    4.81
    %
    
    
    
    
    
    
    104,147
    
    
    
    4.83
    %Taxable-equivalent adjustment
    
    
    
    
    
    
    (6,207
    )
    
    
    
    
    
    
    
    
    
    
    (6,359
    )
    
    
    
    
    
    
    
    
    
    
    (6,706
    )Net interest income
    
    
    
    
    
    $
    122,045
    
    
    
    
    
    
    
    
    
    
    $
    114,273
    
    
    
    
    
    
    
    
    
    
    $
    97,441
 
 21




---



##### Table of Contents



Table
2  Analysis of Changes in Net Interest Income
  2006 Versus 2005
    
    
    2005 Versus 2004Due to changes in
    
    
    Due to changes inVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest income:Federal funds sold
    
    $
    296
    
    
    $
    269
    
    
    $
    565
    
    
    $
    12
    
    
    $
    184
    
    
    $
    196Other short-term investments
    
    
    77
    
    
    
    102
    
    
    
    179
    
    
    
    (12
    )
    
    
    108
    
    
    
    96Securities:U.S. Treasury
    
    
    (38
    )
    
    
    5
    
    
    
    (33
    )
    
    
    (91
    )
    
    
    13
    
    
    
    (78
    )U.S. Government agencies
    
    
    1,224
    
    
    
    357
    
    
    
    1,581
    
    
    
    432
    
    
    
    (87
    )
    
    
    345State and political subdivisions
    
    
    (793
    )
    
    
    63
    
    
    
    (730
    )
    
    
    (28
    )
    
    
    (193
    )
    
    
    (221
    )Other
    
    
    (1,531
    )
    
    
    98
    
    
    
    (1,433
    )
    
    
    (1,627
    )
    
    
    (21
    )
    
    
    (1,648
    )Total securities
    
    
    (1,138
    )
    
    
    523
    
    
    
    (615
    )
    
    
    (1,314
    )
    
    
    (288
    )
    
    
    (1,602
    )Loans:Commercial
    
    
    6,621
    
    
    
    9,953
    
    
    
    16,574
    
    
    
    14,488
    
    
    
    7,117
    
    
    
    21,605Consumer
    
    
    1,297
    
    
    
    2,558
    
    
    
    3,855
    
    
    
    2,547
    
    
    
    1,268
    
    
    
    3,815Residential mortgages
    
    
    528
    
    
    
    192
    
    
    
    720
    
    
    
    156
    
    
    
    (254
    )
    
    
    (98
    )Leases
    
    
    248
    
    
    
    580
    
    
    
    828
    
    
    
    636
    
    
    
    4
    
    
    
    640Finance receivables
    
    
    10,903
    
    
    
    202
    
    
    
    11,105
    
    
    
    10,140
    
    
    
    (642
    )
    
    
    9,498Total loans
    
    
    19,597
    
    
    
    13,485
    
    
    
    33,082
    
    
    
    27,967
    
    
    
    7,493
    
    
    
    35,460Total interest income
    
    
    18,832
    
    
    
    14,379
    
    
    
    33,211
    
    
    
    26,653
    
    
    
    7,497
    
    
    
    34,150Interest expense:Deposits:Interest-bearing demand
    
    
    999
    
    
    
    8,002
    
    
    
    9,001
    
    
    
    685
    
    
    
    5,435
    
    
    
    6,120Savings
    
    
    24
    
    
    
    1,581
    
    
    
    1,605
    
    
    
    95
    
    
    
    956
    
    
    
    1,051Time
    
    
    5,519
    
    
    
    8,399
    
    
    
    13,918
    
    
    
    4,049
    
    
    
    2,878
    
    
    
    6,927Total deposits
    
    
    6,542
    
    
    
    17,982
    
    
    
    24,524
    
    
    
    4,829
    
    
    
    9,269
    
    
    
    14,098Borrowings:Short-term
    
    
    1,047
    
    
    
    1,695
    
    
    
    2,742
    
    
    
    472
    
    
    
    489
    
    
    
    961Long-term debt
    
    
    (2,711
    )
    
    
    496
    
    
    
    (2,215
    )
    
    
    390
    
    
    
    187
    
    
    
    577Subordinated notes payable
    
    
    151
    
    
    
    389
    
    
    
    540
    
    
    
    1,500
    
    
    
    529
    
    
    
    2,029Total borrowings
    
    
    (1,513
    )
    
    
    2,580
    
    
    
    1,067
    
    
    
    2,362
    
    
    
    1,205
    
    
    
    3,567Total interest expense
    
    
    5,029
    
    
    
    20,562
    
    
    
    25,591
    
    
    
    7,191
    
    
    
    10,474
    
    
    
    17,665Net interest income
    
    $
    13,803
    
    
    $
    (6,183
    )
    
    $
    7,620
    
    
    $
    19,462
    
    
    $
    (2,977
    )
    
    $
    16,485
 Provision for Loan Losses
   Non-interest Income
  22




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##### Table of Contents



Table 3  Non-interest Income
 2006 Versus 2005
    
    
    
    
    
    
    2005 Versus 20042006
    
    
    Amount
    
    
    %
    
    
    2005
    
    
    Amount
    
    
    %
    
    
    2004Trust and investment management income
    
    $
    9,928
    
    
    $
    655
    
    
    
    7.1
    %
    
    $
    9,273
    
    
    $
    216
    
    
    
    2.4
    %
    
    $
    9,057Service charges on deposit accounts
    
    
    9,130
    
    
    
    696
    
    
    
    8.3
    %
    
    
    8,434
    
    
    
    2,019
    
    
    
    31.5
    %
    
    
    6,415Other service charges, commissions
and fees
    
    
    5,481
    
    
    
    729
    
    
    
    15.3
    %
    
    
    4,752
    
    
    
    928
    
    
    
    24.3
    %
    
    
    3,824Brokerage fees and commissions
    
    
    3,087
    
    
    
    64
    
    
    
    2.1
    %
    
    
    3,023
    
    
    
    (328
    )
    
    
    (9.8
    )%
    
    
    3,351Mortgage banking income
    
    
    1,930
    
    
    
    (167
    )
    
    
    (8.0
    )%
    
    
    2,097
    
    
    
    243
    
    
    
    13.1
    %
    
    
    1,854Rental income on operating leases
    
    
    32,306
    
    
    
    4,825
    
    
    
    17.6
    %
    
    
    27,481
    
    
    
    2,512
    
    
    
    10.1
    %
    
    
    24,969Other operating income
    
    
    5,808
    
    
    
    779
    
    
    
    15.5
    %
    
    
    5,029
    
    
    
    1,607
    
    
    
    47.0
    %
    
    
    3,422Securities gains (losses)
    
    
    1,485
    
    
    
    624
    
    
    
    72.5
    %
    
    
    861
    
    
    
    (1,210
    )
    
    
    (58.4
    )%
    
    
    2,071Total
    
    $
    69,155
    
    
    $
    8,205
    
    
    
    13.5
    %
    
    $
    60,950
    
    
    $
    5,987
    
    
    
    10.9
    %
    
    $
    54,963
       Years Ended December 31,2006
    
    
    2005
    
    
    2004Debt securities:Gains
    
    $
    111
    
    
    $
    49
    
    
    $
    177Losses
    
    
    (98
    )
    
    
    (39
    )
    
    
    (115
    )13
    
    
    
    10
    
    
    
    62Equity securities:Gains
    
    
    1,521
    
    
    
    916
    
    
    
    2,009Losses
    
    
    (49
    )
    
    
    (65
    )
    
    
    1,472
    
    
    
    851
    
    
    
    2,009Total
    
    $
    1,485
    
    
    $
    861
    
    
    $
    2,071
   23




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##### Table of Contents



Non-interest Expense
  Table
4  Non-interest Expense
 2006 Versus 2005
    
    
    
    
    
    
    2005 Versus 20042006
    
    
    Amount
    
    
    %
    
    
    2005
    
    
    Amount
    
    
    %
    
    
    2004Salaries and employee benefits
    
    $
    57,852
    
    
    $
    3,585
    
    
    
    6.6
    %
    
    $
    54,267
    
    
    $
    7,781
    
    
    
    16.7
    %
    
    $
    46,486Net occupancy
    
    
    6,662
    
    
    
    635
    
    
    
    10.5
    %
    
    
    6,027
    
    
    
    753
    
    
    
    14.3
    %
    
    
    5,274Furniture & equipment
    
    
    8,034
    
    
    
    869
    
    
    
    12.1
    %
    
    
    7,165
    
    
    
    299
    
    
    
    4.4
    %
    
    
    6,866Professional services
    
    
    3,939
    
    
    
    (97
    )
    
    
    (2.4
    )%
    
    
    4,036
    
    
    
    (284
    )
    
    
    (6.6
    )%
    
    
    4,320Depreciation on operating lease
assets
    
    
    26,459
    
    
    
    3,501
    
    
    
    15.2
    %
    
    
    22,958
    
    
    
    1,874
    
    
    
    8.9
    %
    
    
    21,084Taxes other than income
    
    
    2,838
    
    
    
    248
    
    
    
    9.6
    %
    
    
    2,590
    
    
    
    392
    
    
    
    17.8
    %
    
    
    2,198Intangible asset amortization
    
    
    1,428
    
    
    
    (107
    )
    
    
    (7.0
    )%
    
    
    1,535
    
    
    
    583
    
    
    
    61.2
    %
    
    
    952Other
    
    
    19,428
    
    
    
    1,180
    
    
    
    6.5
    %
    
    
    18,248
    
    
    
    2,201
    
    
    
    13.7
    %
    
    
    16,047Total
    
    $
    126,640
    
    
    $
    9,814
    
    
    
    8.4
    %
    
    $
    116,826
    
    
    $
    13,599
    
    
    
    13.2
    %
    
    $
    103,227
  
    
    Employment related expenses from a combined $699,000 in charges related to the departure
of certain employees and expenses related to the adoption of Statement No. 123R in 2006
and $32,000 in 2005;
    
    Initiatives undertaken during 2005 and 2006 to support a major customer acquisition and retention strategy;
    
    Additions to staff required to continue to serve our customers in light of increased transaction volumes; and
    
    Normal merit increases to existing employees;
    
    Partially offsetting the increases were lower executive gain sharing and profit sharing expenses in 2006.
     24




---



##### Table of Contents



Income Taxes
    Discontinued Operations
  FINANCIAL CONDITION
  Securities
  25




---



##### Table of Contents



Table
5  Investment Securities
  December 31,2006
    
    
    2005
    
    
    2004U.S. Treasury securities
    
    $
    105
    
    
    $
    105
    
    
    $
    105State and political subdivisions
    
    
    10,901
    
    
    
    15,951
    
    
    
    20,426Mortgage-backed securities
    
    
    39
    
    
    
    55
    
    
    
    87Corporate securities
    
    
    117
    
    
    
    368
    
    
    
    620Subtotal
    
    
    11,162
    
    
    
    16,479
    
    
    
    21,238Non-marketable equity securities
    
    
    10,368
    
    
    
    12,412
    
    
    
    12,914Total
    
    $
    21,530
    
    
    $
    28,891
    
    
    $
    34,152
   December 31,2006
    
    
    2005
    
    
    2004Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueU.S. Treasury securities
    
    $
    805
    
    
    $
    805
    
    
    $
    814
    
    
    $
    822
    
    
    $
    2,739
    
    
    $
    2,789U.S. Government agencies
    
    
    211,066
    
    
    
    207,667
    
    
    
    162,298
    
    
    
    157,114
    
    
    
    129,910
    
    
    
    127,502State and political subdivisions
    
    
    207,831
    
    
    
    213,001
    
    
    
    220,833
    
    
    
    227,379
    
    
    
    221,023
    
    
    
    230,740Mortgage-backed securities
    
    
    23,461
    
    
    
    23,440
    
    
    
    20,410
    
    
    
    20,345
    
    
    
    27,742
    
    
    
    28,328Corporate securities
    
    
    8,356
    
    
    
    8,397
    
    
    
    39,313
    
    
    
    39,601
    
    
    
    64,833
    
    
    
    66,850Subtotal
    
    
    451,519
    
    
    
    453,310
    
    
    
    443,668
    
    
    
    445,261
    
    
    
    446,247
    
    
    
    456,209Equity securities
    
    
    2,903
    
    
    
    6,706
    
    
    
    4,244
    
    
    
    9,856
    
    
    
    4,586
    
    
    
    11,310Total
    
    $
    454,422
    
    
    $
    460,016
    
    
    $
    447,912
    
    
    $
    455,117
    
    
    $
    450,833
    
    
    $
    467,519
  26




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##### Table of Contents



December 31,2006
    
    
    2005
    
    
    2004Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueGovernment sponsored enterprise stock
    
    $
    2
    
    
    $
    3,088
    
    
    $
    2
    
    
    $
    4,262
    
    
    $
    2
    
    
    $
    4,910Equity mutual fund
    
    
    51
    
    
    
    55
    
    
    
    50
    
    
    
    50
    
    
    
    
    
    
    
    Community bank stocks
    
    
    2,288
    
    
    
    2,623
    
    
    
    2,402
    
    
    
    3,058
    
    
    
    1,969
    
    
    
    3,054Large cap financial services company
stocks
    
    
    562
    
    
    
    940
    
    
    
    1,790
    
    
    
    2,486
    
    
    
    2,615
    
    
    
    3,346Total
    
    $
    2,903
    
    
    $
    6,706
    
    
    $
    4,244
    
    
    $
    9,856
    
    
    $
    4,586
    
    
    $
    11,310
   Table
6  Investment Securities (Yields)
  Over 1 thru 5
    
    
    Over 5 thru 101 Year and less
    
    
    Years
    
    
    Years
    
    
    Over 10 years
    
    
    TotalHeld to Maturity
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. Treasury securities
    
    $
    105
    
    
    
    5.03
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    105
    
    
    
    5.03
    %State and political
subdivisions
    
    
    3,116
    
    
    
    7.24
    %
    
    
    7,339
    
    
    
    7.16
    %
    
    
    446
    
    
    
    6.62
    %
    
    
    
    
    
    
    
    %
    
    
    10,901
    
    
    
    7.16
    %Mortgage-backed securities
    
    
    
    
    
    
    
    %
    
    
    24
    
    
    
    8.57
    %
    
    
    
    
    
    
    
    %
    
    
    15
    
    
    
    7.06
    %
    
    
    39
    
    
    
    8.02
    %Corporate securities
    
    
    115
    
    
    
    2.00
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    2
    
    
    
    7.15
    %
    
    
    117
    
    
    
    2.11
    %$
    3,336
    
    
    
    6.99
    %
    
    $
    7,363
    
    
    
    7.17
    %
    
    $
    446
    
    
    
    6.62
    %
    
    $
    17
    
    
    
    7.08
    %
    
    $
    11,162
    
    
    
    7.09
    %
 Over 1 thru 5
    
    
    Over 5 thru 101 Year and less
    
    
    Years
    
    
    Years
    
    
    Over 10 years
    
    
    TotalAvailable for Sale
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU. S. Treasury securities
    
    $
    805
    
    
    
    5.00
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    805
    
    
    
    5.00
    %U.S. Government agencies
    
    
    26,515
    
    
    
    5.06
    %
    
    
    113,874
    
    
    
    4.01
    %
    
    
    57,515
    
    
    
    5.40
    %
    
    
    9,763
    
    
    
    5.96
    %
    
    
    207,667
    
    
    
    4.61
    %State and political
subdivisions
    
    
    2,950
    
    
    
    6.94
    %
    
    
    26,819
    
    
    
    6.49
    %
    
    
    78,751
    
    
    
    6.34
    %
    
    
    104,481
    
    
    
    6.72
    %
    
    
    213,001
    
    
    
    6.55
    %Mortgage-backed securities
    
    
    202
    
    
    
    3.57
    %
    
    
    7,975
    
    
    
    4.84
    %
    
    
    2,149
    
    
    
    4.65
    %
    
    
    13,114
    
    
    
    5.67
    %
    
    
    23,440
    
    
    
    5.27
    %Corporate securities
    
    
    6,789
    
    
    
    5.74
    %
    
    
    1,320
    
    
    
    6.88
    %
    
    
    286
    
    
    
    6.07
    %
    
    
    2
    
    
    
    4.59
    %
    
    
    8,397
    
    
    
    5.93
    %$
    37,261
    
    
    
    5.32
    %
    
    $
    149,988
    
    
    
    4.60
    %
    
    $
    138,701
    
    
    
    5.83
    %
    
    $
    127,360
    
    
    
    6.41
    %
    
    $
    453,310
    
    
    
    5.56
    %
  27




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##### Table of Contents



Loans
   Table
7  Loan Portfolio
  December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Commercial and agricultural
    
    $
    504,084
    
    
    $
    429,703
    
    
    $
    494,760
    
    
    $
    321,728
    
    
    $
    284,462Commercial real estate
    
    
    656,366
    
    
    
    638,119
    
    
    
    515,257
    
    
    
    453,456
    
    
    
    399,818Financial institutions
    
    
    16,375
    
    
    
    21,150
    
    
    
    25,790
    
    
    
    19,488
    
    
    
    4,700Real estate-construction
    
    
    173,824
    
    
    
    103,753
    
    
    
    61,591
    
    
    
    23,471
    
    
    
    19,504Real estate-mortgage
    
    
    101,946
    
    
    
    84,775
    
    
    
    78,694
    
    
    
    80,674
    
    
    
    102,891Consumer
    
    
    403,691
    
    
    
    390,913
    
    
    
    364,991
    
    
    
    316,190
    
    
    
    284,016Finance receivables (net
of unearned income)
    
    
    373,465
    
    
    
    310,777
    
    
    
    236,617
    
    
    
    171,733
    
    
    
    115,200Lease financing
receivables (net of
unearned income)
    
    
    130,775
    
    
    
    124,896
    
    
    
    129,571
    
    
    
    109,285
    
    
    
    85,437Total
    
    $
    2,360,526
    
    
    $
    2,104,086
    
    
    $
    1,907,271
    
    
    $
    1,496,025
    
    
    $
    1,296,028
 Table 8  Loan Maturity and Interest Sensitivity
  After one butWithin one
    
    
    within five
    
    
    After fiveyear
    
    
    years
    
    
    years
    
    
    TotalCommercial and
agricultural, financial
and commercial real
estate
    
    $
    284,637
    
    
    $
    225,578
    
    
    $
    666,610
    
    
    $
    1,176,825Real estate-construction
    
    
    71,185
    
    
    
    66,046
    
    
    
    36,593
    
    
    
    173,824$
    355,822
    
    
    $
    291,624
    
    
    $
    703,203
    
    
    $
    1,350,649
   Asset Quality
  28




---



##### Table of Contents



Table 9  Nonaccrual, Past Due and Restructured Loans
  December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Nonaccrual loans
    
    $
    3,235
    
    
    $
    4,158
    
    
    $
    3,474
    
    
    $
    3,136
    
    
    $
    10,643Accruing loans, past due 90 days or
more
    
    
    452
    
    
    
    409
    
    
    
    875
    
    
    
    1,513
    
    
    
    545Restructured loans
    
    
    
    
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    521Total non-performing loans
    
    
    3,687
    
    
    
    4,567
    
    
    
    4,530
    
    
    
    4,649
    
    
    
    11,709Foreclosed assets
    
    
    1,055
    
    
    
    328
    
    
    
    80
    
    
    
    601
    
    
    
    293Total non-performing assets
    
    $
    4,742
    
    
    $
    4,895
    
    
    $
    4,610
    
    
    $
    5,250
    
    
    $
    12,002Nonaccrual loans:Interest income that would have been
recorded under original terms
    
    $
    302
    
    
    $
    216
    
    
    $
    178
    
    
    $
    433
    
    
    $
    458Interest income recorded
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ratios:Non-performing loans to total loans
    
    
    0.16
    %
    
    
    0.22
    %
    
    
    0.24
    %
    
    
    0.31
    %
    
    
    0.90
    %Non-performing assets to total loans
and foreclosed assets
    
    
    0.20
    %
    
    
    0.23
    %
    
    
    0.24
    %
    
    
    0.35
    %
    
    
    0.93
    %Non-performing assets to total assets
    
    
    0.14
    %
    
    
    0.17
    %
    
    
    0.17
    %
    
    
    0.22
    %
    
    
    0.56
    %
   Allowance for Loan Losses
  29




---



##### Table of Contents




    
    Adverse situations that may affect the borrowers ability to repay;
    
    Estimated value of underlying collateral; and
    
    Prevailing market conditions.
  
    
    Trends in delinquency levels;
    
    Trends in non-performing and potential problem loans;
    
    Trends in composition, volume and terms of loans;
    
    Effects in changes in lending policies or underwriting procedures;
    
    Experience, ability and depth of management;
    
    National and local economic conditions;
    
    Concentrations in lending activities; and
    
    Other factors as management may deem appropriate.
  
    
    Potential for the lack of precision in Sterlings allowance for loan loss loan assessment;
    
    Other potential exposures in the loan portfolio;
    
    Variances in managements assessment of national and local economic conditions; and
    
    Other internal or external factors that management believes appropriate at that time.
  30




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##### Table of Contents



Table
10  Summary of Loan Loss Experience
 Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Beginning balance
    
    $
    21,003
    
    
    $
    18,891
    
    
    $
    14,656
    
    
    $
    12,953
    
    
    $
    11,071Allowance acquired in acquisition
    
    
    535
    
    
    
    
    
    
    
    1,843
    
    
    
    
    
    
    
    837Loans charged off during year:Commercial and agricultural
    
    
    493
    
    
    
    457
    
    
    
    506
    
    
    
    556
    
    
    
    485Commercial real estate
    
    
    306
    
    
    
    164
    
    
    
    134
    
    
    
    399
    
    
    
    Real estate mortgage
    
    
    8
    
    
    
    6
    
    
    
    58
    
    
    
    142
    
    
    
    210Consumer
    
    
    1,935
    
    
    
    1,388
    
    
    
    821
    
    
    
    1,138
    
    
    
    961Lease financing
    
    
    1,306
    
    
    
    746
    
    
    
    604
    
    
    
    504
    
    
    
    429Finance receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    85Total charge-offs
    
    
    4,048
    
    
    
    2,761
    
    
    
    2,123
    
    
    
    2,776
    
    
    
    2,170Recoveries:Commercial and agricultural
    
    
    47
    
    
    
    40
    
    
    
    109
    
    
    
    187
    
    
    
    819Commercial real estate
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    234
    
    
    
    4Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1
    
    
    
    2Consumer
    
    
    441
    
    
    
    309
    
    
    
    310
    
    
    
    255
    
    
    
    269Lease financing
    
    
    278
    
    
    
    109
    
    
    
    75
    
    
    
    86
    
    
    
    24Finance receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    2Total recoveries
    
    
    766
    
    
    
    490
    
    
    
    497
    
    
    
    782
    
    
    
    1,120Net loans charged off
    
    
    3,282
    
    
    
    2,271
    
    
    
    1,626
    
    
    
    1,994
    
    
    
    1,050Provision for loan losses
    
    
    5,171
    
    
    
    4,383
    
    
    
    4,438
    
    
    
    3,697
    
    
    
    2,095Reserve on loan commitments
transferred to other liabilities
    
    
    
    
    
    
    
    
    
    
    (420
    )
    
    
    
    
    
    
    Balance at end of year
    
    $
    23,427
    
    
    $
    21,003
    
    
    $
    18,891
    
    
    $
    14,656
    
    
    $
    12,953Ratio of net loans charged off
to average loans outstanding
    
    
    0.15
    %
    
    
    0.11
    %
    
    
    0.10
    %
    
    
    0.14
    %
    
    
    0.08
    %Ending allowance for loan losses
to net loans charged off
    
    
    7.1
    x
    
    
    9.2
    x
    
    
    11.6
    x
    
    
    7.4
    x
    
    
    12.3
    xNet loans charged off to
provision for loan losses
    
    
    63.5
    %
    
    
    51.8
    %
    
    
    36.6
    %
    
    
    53.9
    %
    
    
    50.1
    %Allowance for loan losses as a
percent of total loans
outstanding
    
    
    0.99
    %
    
    
    1.00
    %
    
    
    0.99
    %
    
    
    0.98
    %
    
    
    1.00
    %Allowance for loan losses as a
percent of non-performing loans
    
    
    635
    %
    
    
    460
    %
    
    
    417
    %
    
    
    315
    %
    
    
    111
    %
   31




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##### Table of Contents



Table 11  Allocation of Allowance for Loan Losses
 Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Loans
    
    
    
    
    
    
    Loans
    
    
    
    
    
    
    Loans
    
    
    
    
    
    
    Loans
    
    
    
    
    
    
    Loans% to
    
    
    
    
    
    
    % to
    
    
    
    
    
    
    % to
    
    
    
    
    
    
    % to
    
    
    
    
    
    
    % tototal
    
    
    
    
    
    
    total
    
    
    
    
    
    
    total
    
    
    
    
    
    
    total
    
    
    
    
    
    
    totalAmount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loansCommercial, financial and
agricultural
    
    $
    15,415
    
    
    
    49
    %
    
    $
    13,876
    
    
    
    52
    %
    
    $
    10,865
    
    
    
    54
    %
    
    $
    9,337
    
    
    
    53
    %
    
    $
    8,355
    
    
    
    53
    %Real estate  mortgage
and construction
    
    
    201
    
    
    
    12
    %
    
    
    196
    
    
    
    9
    %
    
    
    228
    
    
    
    7
    %
    
    
    218
    
    
    
    7
    %
    
    
    138
    
    
    
    9
    %Consumer
    
    
    2,345
    
    
    
    17
    %
    
    
    2,070
    
    
    
    18
    %
    
    
    2,131
    
    
    
    20
    %
    
    
    1,443
    
    
    
    21
    %
    
    
    962
    
    
    
    22
    %Leases
    
    
    2,845
    
    
    
    6
    %
    
    
    2,918
    
    
    
    6
    %
    
    
    2,769
    
    
    
    7
    %
    
    
    1,856
    
    
    
    7
    %
    
    
    1,032
    
    
    
    7
    %Finance receivables
    
    
    2,208
    
    
    
    16
    %
    
    
    1,769
    
    
    
    15
    %
    
    
    1,559
    
    
    
    12
    %
    
    
    807
    
    
    
    12
    %
    
    
    854
    
    
    
    9
    %Unallocated
    
    
    413
    
    
    
    0
    %
    
    
    174
    
    
    
    0
    %
    
    
    1,339
    
    
    
    0
    %
    
    
    995
    
    
    
    0
    %
    
    
    1,612
    
    
    
    0
    %Total
    
    $
    23,427
    
    
    
    100
    %
    
    $
    21,003
    
    
    
    100
    %
    
    $
    18,891
    
    
    
    100
    %
    
    $
    14,656
    
    
    
    100
    %
    
    $
    12,953
    
    
    
    100
    %
       32




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##### Table of Contents



Assets Held for Operating Leases
   Goodwill
   ,
  Other Assets
  Deposits
   33




---



##### Table of Contents



Table
12  Average Deposit Balances and Rates Paid
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateNon-interest-bearing demand deposits
    
    $
    286,835
    
    
    
    
    %
    
    $
    288,950
    
    
    
    
    %
    
    $
    242,147
    
    
    
    
    %Interest-bearing demand deposits
    
    
    784,851
    
    
    
    2.43
    %
    
    
    713,983
    
    
    
    1.41
    %
    
    
    608,414
    
    
    
    0.65
    %Savings deposits
    
    
    238,764
    
    
    
    1.61
    %
    
    
    236,256
    
    
    
    0.95
    %
    
    
    218,852
    
    
    
    0.55
    %Time deposits
    
    
    1,046,314
    
    
    
    4.07
    %
    
    
    877,491
    
    
    
    3.27
    %
    
    
    739,802
    
    
    
    2.94
    %Total
    
    $
    2,356,764
    
    
    
    
    
    
    $
    2,116,680
    
    
    
    
    
    
    $
    1,809,215
 Table
13  Deposit Maturity
  December 31,2006
    
    
    2005Three months or less
    
    $
    63,642
    
    
    $
    27,313Over three through six months
    
    
    42,129
    
    
    
    19,671Over six through twelve months
    
    
    62,418
    
    
    
    45,329Over twelve months
    
    
    97,004
    
    
    
    109,990Total
    
    $
    265,193
    
    
    $
    202,303
 Short-Term Borrowings
  
    
    Fluctuation in funds purchased related to Sterlings Correspondent Services Group
whereby federal funds lines have been established for a number of community bank clients;
and
    
    Reduced usage of short-term borrowings due to deposit growth over the past year.
 Long-Term Debt
  
    
    Scheduled principal maturities and repayments of $55.6 million;
    
    Payoff of $5.5 million of redeemable FHLB advances due to mature in 2008 and 2009 that
were converted by the FHLB; and
    
    Offsetting these reductions was a $10.0 million fixed rate borrowing from the FHLB
entered into during 2006.
 34




---



##### Table of Contents



Subordinated Notes Payable
  Derivative Financial Instruments
  Asset Liability Management
 Interest rate derivatives
  December 31, 2006
    
    December 31, 2005Notional
    
    Carrying
    
    Notional
    
    CarryingAmount
    
    Value
    
    Amount
    
    ValueInterest rate swap agreements:Pay fixed/receive floating
    
    $
    25,000
    
    
    $
    (2
    )
    
    $
    25,000
    
    
    $
    (24
    )Pay floating/receive fixed
    
    
    25,000
    
    
    
    (810
    )
    
    
    25,000
    
    
    
    (988
    )Interest rate floors purchased
    
    
    50,000
    
    
    
    105
    
    
    
    
    
    
    
    
 
    
    Interest rate swaps have been entered into to hedge the variability in future expected
cash flows related to floating rate assets and liabilities.
    
    Interest rate floors have been purchased to hedge the variability in future expected
cash flows related to floating rate assets in exchange for the payment of a premium when
the contract is initiated.
   Years Ended December 31,2006
    
    2005
    
    2004Interest income-commercial loans
    
    $
    (456
    )
    
    $
    (8
    )
    
    $
    338Interest expense-borrowed funds
    
    
    27
    
    
    
    398
    
    
    
    870
 Equity derivatives
  December 31, 2006
    
    December 31, 2005Shares
    
    Carrying
    
    Shares
    
    CarryingCovered
    
    Value
    
    Covered
    
    ValueWritten call options
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Purchased put options
    
    
    50,000
    
    
    
    45
    
    
    
    30,000
    
    
    
    
 35




---



##### Table of Contents




    
    During 2005 and 2006, Sterling wrote call options on certain equity security holdings
(covered calls). Sterling received a premium in exchange for selling the call options.
The buyer of the option had the right to purchase a specified number of shares at a future
date at an agreed upon price level, or strike price. The options are recorded at fair
value (initially the premium received) with the changes in fair value recognized in other
non-interest income. At December 31, 2006 and 2005, there were no outstanding options.
    
    Sterling has purchased equity put options to protect the company from the risk that the
fair value of certain equity security holdings might be adversely impacted by changes in
market price. Sterling has the right to sell a specified number of shares through a future
date at an agreed upon price level, or strike price. The options are recorded at fair
value (initially the premium paid) with the changes in fair value recognized in other
non-interest expense.
  Years Ended December 31,2006
    
    2005
    
    2004Other non-interest income
    
    $
    3
    
    
    $
    21
    
    
    $
    Other non-interest expense
    
    
    9
    
    
    
    9
    
    
    
    75
 Customer Related
  December 31, 2006
    
    December 31, 2005Notional
    
    Carrying
    
    Notional
    
    CarryingAmount
    
    Value
    
    Amount
    
    ValueInterest rate swap agreements:Pay fixed/receive floating
    
    $
    42,288
    
    
    $
    (271
    )
    
    $
    25,768
    
    
    $
    (110
    )Pay floating/receive fixed
    
    
    42,288
    
    
    
    271
    
    
    
    25,768
    
    
    
    110Interest rate caps written
    
    
    18,510
    
    
    
    (18
    )
    
    
    28,201
    
    
    
    (40
    )Interest rate caps purchased
    
    
    18,510
    
    
    
    18
    
    
    
    28,201
    
    
    
    40
   Capital
    36




---



##### Table of Contents



Table
14  Risked-Based Capital
  Minimum CapitalActual Capital
    
    RequirementAmount
    
    Ratio
    
    Amount
    
    RatioDecember 31, 2006Total capital to risked weighted assets
    
    $
    343,805
    
    
    
    12.9
    %
    
    $
    212,928
    
    
    
    8.0
    %Tier 1 capital to risked weighted assets
    
    
    318,061
    
    
    
    11.9
    %
    
    
    106,464
    
    
    
    4.0
    %Tier 1 capital to average assets
    
    
    318,061
    
    
    
    10.3
    %
    
    
    123,998
    
    
    
    4.0
    %December 31, 2005Total capital to risked weighted assets
    
    $
    315,083
    
    
    
    13.2
    %
    
    $
    191,475
    
    
    
    8.0
    %Tier 1 capital to risked weighted assets
    
    
    290,818
    
    
    
    12.2
    %
    
    
    95,737
    
    
    
    4.0
    %Tier 1 capital to average assets
    
    
    290,818
    
    
    
    10.4
    %
    
    
    112,424
    
    
    
    4.0
    %
  37




---



##### Table of Contents



Liquidity
     Contractual Obligations, Commitments and Off-balance Sheet Arrangements
  Total
    
    
    Payments Due InNote
    
    
    Amount
    
    
    One Year or
    
    
    One to
    
    
    Three to
    
    
    Over FiveReference
    
    
    Committed
    
    
    Less
    
    
    Three Years
    
    
    Five Years
    
    
    YearsDeposits without a stated maturity
    
    
    
    
    
    $
    1,463,357
    
    
    $
    1,463,357
    
    
    $
    
    
    
    $
    
    
    
    $
    Time Deposits
    
    
    10
    
    
    
    1,152,555
    
    
    
    696,054
    
    
    
    378,752
    
    
    
    76,594
    
    
    
    1,155Short-Term Borrowings
    
    
    11
    
    
    
    78,833
    
    
    
    78,833
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    12
    
    
    
    117,207
    
    
    
    51,839
    
    
    
    10,151
    
    
    
    35,033
    
    
    
    20,184Subordinated notes payable
    
    
    13
    
    
    
    87,630
    
    
    
    20,619
    
    
    
    
    
    
    
    
    
    
    
    67,011Operating leases
    
    
    7
    
    
    
    21,950
    
    
    
    2,401
    
    
    
    4,342
    
    
    
    3,200
    
    
    
    12,007$
    2,921,532
    
    
    $
    2,313,103
    
    
    $
    393,245
    
    
    $
    114,827
    
    
    $
    100,357
   Commitments to extend credit:Unused home equity lines of credit
    
    $
    103,565Other commitments to extend credit
    
    
    681,194Standby letters of credit
    
    
    93,080$
    877,839
 38




---



##### Table of Contents



New Financial Accounting Standards
  
 Item 7A  Quantitative and Qualitative Disclosures About Market Risk
   Interest Rate Risk
      39




---



##### Table of Contents



Earnings at Risk
    Value at Risk
    Table 15a
    
    Table 15b% Change in
    
    
    
    
    
    % Change inChange in
    
    Net Interest income
    
    Change in
    
    Present Value of EquityMarket Interest Rates
    
    2006
    
    2005
    
    Market Interest Rates
    
    2006
    
    2005(200)
    
    
    (0.3
    %)
    
    
    (2.2
    %)
    
    
    (200
    )
    
    
    2.1
    %
    
    
    (0.5
    %)(100)
    
    
    (0.0
    %)
    
    
    (0.9
    %)
    
    
    (100
    )
    
    
    1.5
    %
    
    
    0.4
    %0
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0
    
    
    
    0.0
    %
    
    
    0.0
    %+100
    
    
    (1.0
    %)
    
    
    0.1
    %
    
    
    +100
    
    
    
    (3.3
    %)
    
    
    (1.8
    %)+200
    
    
    (2.3
    %)
    
    
    0.0
    %
    
    
    +200
    
    
    
    (7.0
    %)
    
    
    (4.0
    %)
 40




---



##### Table of Contents



Item 8
 Financial Statements
  PageManagements Report on Internal Controls over Financial Reporting
    
    
    42Reports of Independent Registered Public Accounting Firm
    
    
    43-44Consolidated Balance Sheets
    
    
    45Consolidated Statements of Income
    
    
    46Consolidated Statements of Changes in Stockholders Equity
    
    
    47Consolidated Statements of Cash Flows
    
    
    48Notes to Consolidated Financial Statements
    
    
    49
 41




---



##### Table of Contents



Managements Report on Internal Control Over Financial Reporting
    Internal Control 
Integrated Framework Internal Control  Integrated Framework
  /s/ J. Roger Moyer, Jr.

J. Roger Moyer, Jr.
    
    /s/ Tito L. Lima

Tito L. LimaPresident and Chief Executive Officer
    
    Chief Financial Officer
 42




---



##### Table of Contents



Report
of Independent Registered Public Accounting Firm
 On Effectiveness of Internal Control Over Financial Reporting
 
       
 
 43




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 
 44




---



##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 December 31,(Dollars in thousands)
    
    2006
    
    
    2005AssetsCash and due from banks
    
    $
    86,472
    
    
    $
    79,509Federal funds sold
    
    
    61,017
    
    
    
    30,203Cash and cash equivalents
    
    
    147,489
    
    
    
    109,712Interest-bearing deposits in banks
    
    
    6,339
    
    
    
    5,690Short-term investments
    
    
    3,119
    
    
    
    2,156Mortgage loans held for sale
    
    
    4,136
    
    
    
    3,200Securities held-to-maturity (fair value 2006 - $21,644; 2005 - $29,169)
    
    
    21,530
    
    
    
    28,891Securities available-for-sale
    
    
    460,016
    
    
    
    455,117Loans, net of unearned income
    
    
    2,360,526
    
    
    
    2,104,086Allowance for loan losses
    
    
    (23,427
    )
    
    
    (21,003
    )Loans, net of allowance for loan losses
    
    
    2,337,099
    
    
    
    2,083,083Premises and equipment, net
    
    
    48,983
    
    
    
    43,498Assets held for operating lease, net
    
    
    89,120
    
    
    
    73,636Other real estate owned
    
    
    45
    
    
    
    60Goodwill
    
    
    88,670
    
    
    
    67,770Intangible assets
    
    
    6,312
    
    
    
    6,448Mortgage servicing rights
    
    
    3,177
    
    
    
    3,011Accrued interest receivable
    
    
    13,979
    
    
    
    12,304Assets related to discontinued operations
    
    
    
    
    
    
    16,836Other assets
    
    
    49,821
    
    
    
    54,325Total assets
    
    $
    3,279,835
    
    
    $
    2,965,737LiabilitiesDeposits:Non-interest-bearing
    
    $
    311,881
    
    
    $
    304,475Now and money market
    
    
    884,893
    
    
    
    746,262Savings
    
    
    266,583
    
    
    
    231,024Time
    
    
    1,152,555
    
    
    
    944,526Total deposits
    
    
    2,615,912
    
    
    
    2,226,287Short-term borrowings
    
    
    78,833
    
    
    
    140,573Long-term debt
    
    
    117,207
    
    
    
    168,642Subordinated notes payable
    
    
    87,630
    
    
    
    87,630Accrued interest payable
    
    
    10,332
    
    
    
    8,821Liabilities related to discontinued operations
    
    
    
    
    
    
    498Other liabilities
    
    
    39,336
    
    
    
    35,200Total liabilities
    
    
    2,949,250
    
    
    
    2,667,651Stockholders equityPreferred stock, no par value, 10.0 million shares authorized; no shares issued and
outstanding
    
    
    
    
    
    
    Common stock  $5.00 par value, 70.0 million shares authorized; issued: 2006  29.7
million
shares; 2005  29.1 million shares
    
    
    148,642
    
    
    
    145,692Capital surplus
    
    
    88,279
    
    
    
    79,351Escrowed shares (2006  0 shares; 2005  180,000 shares)
    
    
    
    
    
    
    (2,926
    )Retained earnings
    
    
    92,404
    
    
    
    72,849Accumulated other comprehensive income
    
    
    2,756
    
    
    
    4,042Common stock in treasury, at cost (2006  64,000 shares; 2005  45,000 shares)
    
    
    (1,496
    )
    
    
    (922
    )Total stockholders equity
    
    
    330,585
    
    
    
    298,086Total liabilities and stockholders equity
    
    $
    3,279,835
    
    
    $
    2,965,737
  45




---



##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Income
 Years Ended December 31,(Dollars in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004Interest and dividend incomeLoans, including fees
    
    $
    182,808
    
    
    $
    149,762
    
    
    $
    113,984Debt securities:Taxable
    
    
    10,626
    
    
    
    10,852
    
    
    
    12,458Tax-exempt
    
    
    10,089
    
    
    
    10,439
    
    
    
    10,493Dividends
    
    
    817
    
    
    
    668
    
    
    
    581Federal funds sold
    
    
    887
    
    
    
    322
    
    
    
    126Short-term investments
    
    
    314
    
    
    
    135
    
    
    
    39Total interest and dividend income
    
    
    205,541
    
    
    
    172,178
    
    
    
    137,681Interest expenseDeposits
    
    
    65,526
    
    
    
    41,002
    
    
    
    26,904Short-term borrowings
    
    
    5,742
    
    
    
    3,000
    
    
    
    2,039Long-term debt
    
    
    6,462
    
    
    
    8,677
    
    
    
    8,100Subordinated notes payable
    
    
    5,766
    
    
    
    5,226
    
    
    
    3,197Total interest expense
    
    
    83,496
    
    
    
    57,905
    
    
    
    40,240Net interest income
    
    
    122,045
    
    
    
    114,273
    
    
    
    97,441Provision for loan losses
    
    
    5,171
    
    
    
    4,383
    
    
    
    4,438Net interest income after provision for loan losses
    
    
    116,874
    
    
    
    109,890
    
    
    
    93,003Non-interest incomeTrust and investment management income
    
    
    9,928
    
    
    
    9,273
    
    
    
    9,057Service charges on deposit accounts
    
    
    9,130
    
    
    
    8,434
    
    
    
    6,415Other service charges, commissions and fees
    
    
    5,481
    
    
    
    4,752
    
    
    
    3,824Brokerage fees and commissions
    
    
    3,087
    
    
    
    3,023
    
    
    
    3,351Mortgage banking income
    
    
    1,930
    
    
    
    2,097
    
    
    
    1,854Rental income on operating leases
    
    
    32,306
    
    
    
    27,481
    
    
    
    24,969Other operating income
    
    
    5,808
    
    
    
    5,029
    
    
    
    3,422Securities gains, net
    
    
    1,485
    
    
    
    861
    
    
    
    2,071Total non-interest income
    
    
    69,155
    
    
    
    60,950
    
    
    
    54,963Non-interest expensesSalaries and employee benefits
    
    
    57,852
    
    
    
    54,267
    
    
    
    46,486Net occupancy
    
    
    6,662
    
    
    
    6,027
    
    
    
    5,274Furniture and equipment
    
    
    8,034
    
    
    
    7,165
    
    
    
    6,866Professional services
    
    
    3,939
    
    
    
    4,036
    
    
    
    4,320Depreciation on operating lease assets
    
    
    26,459
    
    
    
    22,958
    
    
    
    21,084Taxes other than income
    
    
    2,838
    
    
    
    2,590
    
    
    
    2,198Intangible asset amortization
    
    
    1,428
    
    
    
    1,535
    
    
    
    952Other
    
    
    19,428
    
    
    
    18,248
    
    
    
    16,047Total non-interest expenses
    
    
    126,640
    
    
    
    116,826
    
    
    
    103,227Income before income taxes
    
    
    59,389
    
    
    
    54,014
    
    
    
    44,739Income tax expenses
    
    
    17,807
    
    
    
    14,957
    
    
    
    11,684Net income from continuing operations
    
    
    41,582
    
    
    
    39,057
    
    
    
    33,055Discontinued operations, net of taxes of ($2,723), $138 and $176
    
    
    (5,130
    )
    
    
    210
    
    
    
    274Net income
    
    $
    36,452
    
    
    $
    39,267
    
    
    $
    33,329Per share information:Basic earnings per share:Continuing operations
    
    $
    1.43
    
    
    $
    1.35
    
    
    $
    1.21Discontinued operations
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    1.26
    
    
    $
    1.36
    
    
    $
    1.22Diluted earnings per share:Continuing operations
    
    $
    1.41
    
    
    $
    1.33
    
    
    $
    1.20Discontinued operations
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    1.24
    
    
    $
    1.34
    
    
    $
    1.21Dividends declared
    
    $
    0.580
    
    
    $
    0.538
    
    
    $
    0.496
  46




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Changes in Stockholders Equity
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    TreasuryShares Issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    andand
    
    
    Common
    
    
    Capital
    
    
    Retained
    
    
    Comprehensive
    
    
    Escrowed(Dollars in thousands, except per share data)
    
    Outstanding
    
    
    Stock
    
    
    Surplus
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Shares
    
    
    TotalBalance, January 1, 2004
    
    
    26,846,549
    
    
    $
    108,883
    
    
    $
    44,615
    
    
    $
    58,874
    
    
    $
    13,827
    
    
    $
    (6,188
    )
    
    $
    220,011Comprehensive income:Continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,055
    
    
    
    
    
    
    
    
    
    
    
    33,055Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    274Change in net unrealized gain (loss) on securities
AFS, net of reclassification adjustment and tax
effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,929
    )
    
    
    
    
    
    
    (3,929
    )Change in unrealized loss on cash flow derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336
    
    
    
    
    
    
    
    336Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,736Common stock issued:Acquisition of Corporate Healthcare Strategies, LLC
    
    
    353,321
    
    
    
    1,413
    
    
    
    5,749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,162Acquisition of Pennsylvania State Bank
    
    
    1,512,160
    
    
    
    6,049
    
    
    
    30,687
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,736Shares released from escrow
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    976
    
    
    
    976Stock options
    
    
    38,818
    
    
    
    155
    
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Treasury stock issued:Directors compensation plan
    
    
    11,798
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    234Stock options
    
    
    156,090
    
    
    
    
    
    
    
    (1,179
    )
    
    
    
    
    
    
    
    
    
    
    2,803
    
    
    
    1,624Purchase of treasury shares
    
    
    (93,750
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,707
    )
    
    
    (1,707
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,793
    )
    
    
    
    
    
    
    
    
    
    
    (13,793
    )Cash paid in lieu of fractional shares
    
    
    (1,753
    )
    
    
    (7
    )
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    (33
    )Income tax benefit of nonqualified stock options
    
    
    
    
    
    
    
    
    
    
    516
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516Balance, December 31, 2004
    
    
    28,883,233
    
    
    
    116,493
    
    
    
    80,734
    
    
    
    78,384
    
    
    
    10,234
    
    
    
    (3,901
    )
    
    
    281,944Comprehensive income:Continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,057
    
    
    
    
    
    
    
    
    
    
    
    39,057Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    
    
    
    
    210Change in net unrealized gain(loss) on securities
AFS, net of reclassification adjustment and
tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,141
    )
    
    
    
    
    
    
    (6,141
    )Change in unrealized loss on cash flow derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,075Common stock issued:Shares released from escrow
    
    
    59,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    975
    
    
    
    975Stock options
    
    
    16,598
    
    
    
    64
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138Treasury stock issued:Directors compensation plan
    
    
    13,840
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    293
    
    
    
    292Stock options
    
    
    193,004
    
    
    
    
    
    
    
    (1,889
    )
    
    
    
    
    
    
    
    
    
    
    4,074
    
    
    
    2,185Shares issued in connection with contingent
consideration provisions of CHS, LLC acquisition
    
    
    38,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    803
    
    
    
    803Purchase of treasury shares
    
    
    (290,075
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,092
    )
    
    
    (6,092
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,636
    )
    
    
    
    
    
    
    
    
    
    
    (15,636
    )Cash paid in lieu of fractional shares
    
    
    (1,476
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )Income tax benefit of nonqualified stock options
    
    
    
    
    
    
    
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4335-for-4 stock split effected in the form of a 25%
common stock dividend
    
    
    
    
    
    
    29,135
    
    
    
    
    
    
    
    (29,135
    )
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2005
    
    
    28,913,229
    
    
    
    145,692
    
    
    
    79,351
    
    
    
    72,849
    
    
    
    4,042
    
    
    
    (3,848
    )
    
    
    298,086Comprehensive income:Continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,582
    
    
    
    
    
    
    
    
    
    
    
    41,582Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,130
    )
    
    
    
    
    
    
    
    
    
    
    (5,130
    )Change in net unrealized gain(loss) on securities
AFS, net of reclassification adjustment and
tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,017
    )
    
    
    
    
    
    
    (1,017
    )Change in unrealized loss on cash flow derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    75Unrealized post retirement benefit accrual
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344
    )
    
    
    
    
    
    
    (344
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,166Common stock issued:Acquisition
of BayNet, Inc.
    
    
    575,449
    
    
    
    2,877
    
    
    
    10,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,043Release of Church escrowed shares
    
    
    177,345
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,883
    
    
    
    2,883Release of Bainbridge escrowed shares
    
    
    2,662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    43Stock options
    
    
    15,166
    
    
    
    76
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Other
    
    
    (550
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Treasury stock issued:Directors compensation plan
    
    
    13,278
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    290Stock options
    
    
    457,270
    
    
    
    
    
    
    
    (3,002
    )
    
    
    
    
    
    
    
    
    
    
    9,606
    
    
    
    6,604Shares issued in connection with contingent
consideration provisions of CHS, LLC acquisition
    
    
    29,987
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    626
    
    
    
    652Other
    
    
    1,824
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    42Purchase of treasury shares
    
    
    (445,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,341
    )
    
    
    (9,341
    )Treasury shares acquired on sale of CHS, LLC
    
    
    (76,499
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,782
    )
    
    
    (1,782
    )Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,897
    )
    
    
    
    
    
    
    
    
    
    
    (16,897
    )Income tax benefit of nonqualified stock options
    
    
    
    
    
    
    
    
    
    
    1,187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,187Non-cash compensation cost
    
    
    
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412Balance, December 31, 2006
    
    
    29,664,161
    
    
    $
    148,642
    
    
    $
    88,279
    
    
    $
    92,404
    
    
    $
    2,756
    
    
    $
    (1,496
    )
    
    $
    330,585
  47




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash Flows from Operating ActivitiesIncome from continuing operations
    
    $
    41,582
    
    
    $
    39,057
    
    
    $
    33,055Income from discontinued operations
    
    
    (5,130
    )
    
    
    210
    
    
    
    274Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    31,902
    
    
    
    27,571
    
    
    
    25,618Accretion and amortization of investment securities
    
    
    (587
    )
    
    
    239
    
    
    
    635Amortization of intangible assets
    
    
    2,294
    
    
    
    2,671
    
    
    
    1,650Provision for loan losses
    
    
    5,171
    
    
    
    4,383
    
    
    
    4,438Provision for deferred income taxes
    
    
    1,664
    
    
    
    (2,080
    )
    
    
    245Stock option compensation cost
    
    
    412
    
    
    
    
    
    
    
    Gain on sales of finance leases and receivables
    
    
    (1,586
    )
    
    
    (1,308
    )
    
    
    (330
    )Net gain on sales of securities available-for-sale
    
    
    (1,485
    )
    
    
    (861
    )
    
    
    (2,071
    )Gain on sales of mortgage loans
    
    
    (464
    )
    
    
    (471
    )
    
    
    (781
    )Loss on sale of affiliate
    
    
    41
    
    
    
    
    
    
    
    Proceeds from sales of mortgage loans held for sale
    
    
    67,802
    
    
    
    88,630
    
    
    
    118,325Originations of mortgage loans held for sale
    
    
    (68,274
    )
    
    
    (87,014
    )
    
    
    (110,369
    )Change in operating assets and liabilities:(Increase) decrease in accrued interest receivable
    
    
    (1,301
    )
    
    
    (897
    )
    
    
    530(Increase) decrease in assets related to discontinued operations
    
    
    5,020
    
    
    
    (8,614
    )
    
    
    (8,858
    )(Increase) decrease in other assets
    
    
    1,452
    
    
    
    (215
    )
    
    
    (757
    )Increase (decrease) in accrued interest payable
    
    
    1,495
    
    
    
    2,446
    
    
    
    (65
    )Increase (decrease) in liabilities related to discontinued operations
    
    
    (104
    )
    
    
    (1,001
    )
    
    
    1,266Increase (decrease) in other liabilities
    
    
    4,332
    
    
    
    6,846
    
    
    
    (9,824
    )Other
    
    
    (75
    )
    
    
    
    
    
    
    6Net cash provided by operating activities
    
    
    84,161
    
    
    
    69,592
    
    
    
    52,987Cash Flows From Investing ActivitiesNet (increase) decrease in interest-bearing deposits in other banks
    
    
    (649
    )
    
    
    123
    
    
    
    (1,459
    )Net (increase) decrease in short-term investments
    
    
    (963
    )
    
    
    4,386
    
    
    
    4,733Proceeds from sales of securities available-for-sale
    
    
    25,549
    
    
    
    16,983
    
    
    
    45,619Proceeds from maturities or calls of securities held-to-maturity
    
    
    13,884
    
    
    
    12,898
    
    
    
    5,339Proceeds from maturities or calls of securities available-for-sale
    
    
    141,286
    
    
    
    56,584
    
    
    
    80,754Purchases of securities held-to-maturity
    
    
    (6,119
    )
    
    
    (7,636
    )
    
    
    (2,075
    )Purchases of securities available-for-sale
    
    
    (161,169
    )
    
    
    (70,026
    )
    
    
    (26,856
    )Net loans and direct finance leases made to customers
    
    
    (250,380
    )
    
    
    (248,235
    )
    
    
    (279,748
    )Proceeds from sales of finance leases and receivables
    
    
    53,385
    
    
    
    50,477
    
    
    
    21,020Purchases of equipment acquired for operating leases, net
    
    
    (41,943
    )
    
    
    (38,118
    )
    
    
    (21,668
    )Purchases of premises and equipment, net
    
    
    (9,805
    )
    
    
    (4,454
    )
    
    
    (3,818
    )Proceeds from sales of premises and equipment
    
    
    266
    
    
    
    
    
    
    
    Net cash received (paid) for business combinations
    
    
    10,247
    
    
    
    (918
    )
    
    
    (16,998
    )Cash placed in escrow related to business combinations
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Net cash used by investing activities
    
    
    (226,411
    )
    
    
    (227,936
    )
    
    
    (199,657
    )Cash Flows From Financing ActivitiesNet increase in deposits
    
    
    314,546
    
    
    
    210,893
    
    
    
    80,608Net increase (decrease) in short-term borrowings
    
    
    (61,740
    )
    
    
    41,805
    
    
    
    43,261Proceeds from issuance of long-term debt
    
    
    10,000
    
    
    
    9,000
    
    
    
    78,752Repayment of long-term debt
    
    
    (63,998
    )
    
    
    (73,164
    )
    
    
    (60,052
    )Proceeds from issuance of subordinated notes payable
    
    
    
    
    
    
    15,464
    
    
    
    15,464Proceeds from issuance of common stock
    
    
    241
    
    
    
    138
    
    
    
    482Cash dividends
    
    
    (16,512
    )
    
    
    (15,289
    )
    
    
    (13,206
    )Cash paid in lieu of fractional shares
    
    
    
    
    
    
    (31
    )
    
    
    (33
    )Purchase of treasury stock
    
    
    (9,341
    )
    
    
    (6,092
    )
    
    
    (1,707
    )Proceeds from issuance of treasury stock
    
    
    6,831
    
    
    
    2,477
    
    
    
    1,858Net cash provided by financing activities
    
    
    180,027
    
    
    
    185,201
    
    
    
    145,427Net change in cash and cash equivalents
    
    
    37,777
    
    
    
    26,857
    
    
    
    (1,243
    )Cash and cash equivalents:Beginning of year
    
    
    109,712
    
    
    
    82,855
    
    
    
    84,098End of year
    
    $
    147,489
    
    
    $
    109,712
    
    
    $
    82,855Supplemental Disclosure of Cash Flow Information:Cash payments for:Interest
    
    $
    81,993
    
    
    $
    55,475
    
    
    $
    40,163Income taxes
    
    
    15,081
    
    
    
    18,943
    
    
    
    11,229
  48




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##### Table of Contents

\

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 (All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies
 Basis of Presentation and Consolidation
  Use of Estimates
 Business
 Concentration of Credit Risk
 Cash and Cash Equivalents
 Interest-bearing Deposits in Banks
 Securities 
   49




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies  (Continued)
 Mortgage Loans Held for Sale
 Loans
  Accounting for Leases,
   Allowance for Loan Losses
  50




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies  (Continued)
     Servicing
 Credit Related Financial Instruments
 Derivative financial instruments
  Accounting for Derivative Instruments and
Hedging Activities,
 51




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies  (Continued)
  Foreclosed Assets
 Premises and Equipment
 Assets Held for Operating Leases
 Goodwill Goodwill and Other Intangible Assets, , Acquisitions of Certain Financial Institutions  an amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9,
 Intangible Assets
 Income Taxes
 52




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies  (Continued)
 Advertising
 Revenue Recognition
 Stock Compensation Plan  Share-Based Payment Accounting for Stock Issued to Employees
   Earnings Per Share
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Net income from continuing operations available to stockholders
    
    $
    41,582
    
    
    $
    39,057
    
    
    $
    33,055Net income from discontinued operations available to stockholders
    
    
    (5,130
    )
    
    
    210
    
    
    
    274Net income available to stockholders
    
    $
    36,452
    
    
    $
    39,267
    
    
    $
    33,329Average number of shares outstanding
    
    
    29,029,400
    
    
    
    28,854,200
    
    
    
    27,215,600Effect of dilutive stock options
    
    
    406,800
    
    
    
    463,300
    
    
    
    435,800Average number of shares outstanding used to calculate diluted
earnings per common share
    
    
    29,436,200
    
    
    
    29,317,500
    
    
    
    27,651,400Per share information:Basic earnings per shareContinuing operations
    
    $
    1.43
    
    
    $
    1.35
    
    
    $
    1.21Discontinued operations
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    1.26
    
    
    $
    1.36
    
    
    $
    1.22Diluted earnings per shareContinuing operations
    
    $
    1.41
    
    
    $
    1.33
    
    
    $
    1.20Discontinued operations
    
    
    (0.17
    )
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    1.24
    
    
    $
    1.34
    
    
    $
    1.21
 53




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies  (Continued)
 Comprehensive Income
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Net income from continuing operations
    
    $
    41,582
    
    
    $
    39,057
    
    
    $
    33,055Net income from discontinued operations
    
    
    (5,130
    )
    
    
    210
    
    
    
    274Other comprehensive income, net of tax expense (benefit):Change in unrealized holding gains on available-for-sale securities
    
    
    (124
    )
    
    
    (8,622
    )
    
    
    (3,992
    )Tax effect
    
    
    72
    
    
    
    3,041
    
    
    
    1,409Reclassification adjustment for gains included in net income
    
    
    (1,485
    )
    
    
    (861
    )
    
    
    (2,071
    )Tax effect
    
    
    520
    
    
    
    301
    
    
    
    725Change in unrealized gains (losses) on derivatives used in cash
flow hedging transactions
    
    
    116
    
    
    
    (71
    )
    
    
    540Tax effect
    
    
    (41
    )
    
    
    20
    
    
    
    (204
    )Change in unrecognized post retirement benefit cost
    
    
    (529
    )
    
    
    
    
    
    
    Tax effect
    
    
    185
    
    
    
    
    
    
    
    (1,286
    )
    
    
    (6,192
    )
    
    
    (3,593
    )Comprehensive income
    
    $
    35,166
    
    
    $
    33,075
    
    
    $
    29,736
  December 31,2006
    
    
    2005Accumulated unrealized gains on securities available-for-sale
    
    $
    3,682
    
    
    $
    4,699Accumulated unrealized losses on derivatives used in cash
flow hedging transactions
    
    
    (582
    )
    
    
    (657
    )Accumulated unrecognized post retirement benefit cost
    
    
    (344
    )
    
    
    $
    2,756
    
    
    $
    4,042
 Reclassifications
 Recent Accounting Pronouncements  Accounting for Certain Hybrid
Financial Instruments
 Accounting for
Servicing of Financial Assets Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
 54




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 1  Summary of Significant Accounting Policies  (Continued)
  Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Fair Value
Measurements
  Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans
 The Fair Value
Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.
115
 55




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 2  Acquisitions and Divestitures
  
    
    Monitoring the impact, if any, that a change in a key small group health insurance
carrier would have on longer term customer retention and the related impact on long term
commission growth of the insurance segment;
    
    Determining how an industry-wide shift from self funded to fully insured health plans
experienced during 2006 would impact our long term revenue projections on our wholesale
stop-loss product line; and
    
    Determining the impact of macro-trends in the insurance market due to changes in the
business practices of certain major insurance providers in our markets.
  Goodwill and Other Intangible Asset
 Accounting for the Impairment or
Disposal of Long-Lived Assets
    56




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 2  Acquisitions and Divestitures  (Continued)
  December 31,2006
    
    
    2005
    
    
    2004AssetsGoodwill
    
    $
    
    
    
    $
    10,994
    
    
    $
    9,501Intangible assets
    
    
    
    
    
    
    4,870
    
    
    
    6,006Other assets
    
    
    
    
    
    
    972
    
    
    
    757Total assets related to discontinued operations
    
    
    
    
    
    
    16,836
    
    
    
    16,264LiabilitiesLong-term debt
    
    
    
    
    
    
    233
    
    
    
    327Other liabilities
    
    
    
    
    
    
    265
    
    
    
    1,266Total liabilities related to discontinued operations
    
    $
    
    
    
    $
    498
    
    
    $
    1,593
  December 31,2006
    
    
    2005
    
    
    2004Interest income
    
    $
    47
    
    
    $
    33
    
    
    $
    2Interest expense
    
    
    8
    
    
    
    17
    
    
    
    25Non-interest income
    
    
    6,193
    
    
    
    6,886
    
    
    
    4,332Non-interest expense
    
    
    14,085
    
    
    
    6,554
    
    
    
    3,859Income before income taxes
    
    
    (7,853
    )
    
    
    348
    
    
    
    450Income taxes
    
    
    (2,723
    )
    
    
    138
    
    
    
    176Income from discontinued operations
    
    $
    (5,130
    )
    
    $
    210
    
    
    $
    274
 Pennsylvania State Bank 
  Business Combinations Disclosures about Segments of an
Enterprise and Related Information
 Infinity Investment Advisors 
 Business
Combinations
 57




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 2  Acquisitions and Divestitures  (Continued)
  Bay Net Bank, N.A. 
  Business Combinations Disclosures about Segments of an Enterprise and Related
Information,
 Note 3  Restrictions on Cash and Due from Banks
  58




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 4  Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2006:Available-for sale:U.S. Treasury securities
    
    $
    805
    
    
    $
    
    
    
    $
    
    
    
    $
    805U.S. Government agencies
    
    
    211,066
    
    
    
    594
    
    
    
    3,993
    
    
    
    207,667State and political subdivisions
    
    
    207,831
    
    
    
    5,546
    
    
    
    376
    
    
    
    213,001Mortgage-backed securities
    
    
    23,461
    
    
    
    206
    
    
    
    227
    
    
    
    23,440Corporate securities
    
    
    8,356
    
    
    
    56
    
    
    
    15
    
    
    
    8,397Subtotal
    
    
    451,519
    
    
    
    6,402
    
    
    
    4,611
    
    
    
    453,310Equity securities
    
    
    2,903
    
    
    
    3,803
    
    
    
    
    
    
    
    6,706Total
    
    $
    454,422
    
    
    $
    10,205
    
    
    $
    4,611
    
    
    $
    460,016Held-to-maturity:U.S. Treasury securities
    
    $
    105
    
    
    $
    
    
    
    $
    
    
    
    $
    105State and political subdivisions
    
    
    10,901
    
    
    
    114
    
    
    
    
    
    
    
    11,015Mortgage-backed securities
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    39Corporate securities
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    117Subtotal
    
    
    11,162
    
    
    
    114
    
    
    
    
    
    
    
    11,276Non-marketable equity securities
    
    
    10,368
    
    
    
    
    
    
    
    
    
    
    
    10,368Total
    
    $
    21,530
    
    
    $
    114
    
    
    $
    
    
    
    $
    21,644December 31, 2005:Available-for sale:U.S. Treasury securities
    
    $
    814
    
    
    $
    8
    
    
    $
    
    
    
    $
    822U.S. Government agencies
    
    
    162,298
    
    
    
    33
    
    
    
    5,217
    
    
    
    157,114State and political subdivisions
    
    
    220,833
    
    
    
    7,115
    
    
    
    569
    
    
    
    227,379Mortgage-backed securities
    
    
    20,410
    
    
    
    206
    
    
    
    271
    
    
    
    20,345Corporate securities
    
    
    39,313
    
    
    
    294
    
    
    
    6
    
    
    
    39,601Subtotal
    
    
    443,668
    
    
    
    7,656
    
    
    
    6,063
    
    
    
    445,261Equity securities
    
    
    4,244
    
    
    
    5,659
    
    
    
    47
    
    
    
    9,856Total
    
    $
    447,912
    
    
    $
    13,315
    
    
    $
    6,110
    
    
    $
    455,117Held-to-maturity:U.S. Treasury securities
    
    $
    105
    
    
    $
    
    
    
    $
    
    
    
    $
    105State and political subdivisions
    
    
    15,951
    
    
    
    277
    
    
    
    
    
    
    
    16,228Mortgage-backed securities
    
    
    55
    
    
    
    1
    
    
    
    
    
    
    
    56Corporate securities
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    368Subtotal
    
    
    16,479
    
    
    
    278
    
    
    
    
    
    
    
    16,757Non-marketable equity securities
    
    
    12,412
    
    
    
    
    
    
    
    
    
    
    
    12,412Total
    
    $
    28,891
    
    
    $
    278
    
    
    $
    
    
    
    $
    29,169
  59




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 4  Securities  (Continued)
  Securities
    
    
    SecuritiesAvailable-for-Sale
    
    
    Held-to-MaturityAmortized
    
    
    
    
    
    
    AmortizedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    37,057
    
    
    $
    37,059
    
    
    $
    3,336
    
    
    $
    3,350Due after one year through five years
    
    
    145,008
    
    
    
    142,013
    
    
    
    7,339
    
    
    
    7,430Due in five years through ten years
    
    
    134,502
    
    
    
    136,552
    
    
    
    446
    
    
    
    455Due after ten years
    
    
    111,491
    
    
    
    114,246
    
    
    
    2
    
    
    
    2428,058
    
    
    
    429,870
    
    
    
    11,123
    
    
    
    11,237Mortgage-backed securities
    
    
    23,461
    
    
    
    23,440
    
    
    
    39
    
    
    
    39$
    451,519
    
    
    $
    453,310
    
    
    $
    11,162
    
    
    $
    11,276
  Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2006
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable-for-sale:U.S. Treasury securities
    
    $
    749
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    749
    
    
    $
    U.S. Government agencies
    
    
    15,015
    
    
    
    29
    
    
    
    130,561
    
    
    
    3,964
    
    
    
    145,576
    
    
    
    3,993State and political subdivisions
    
    
    4,728
    
    
    
    14
    
    
    
    24,057
    
    
    
    362
    
    
    
    28,785
    
    
    
    376Mortgage-backed securities
    
    
    911
    
    
    
    3
    
    
    
    9,392
    
    
    
    224
    
    
    
    10,303
    
    
    
    227Corporate securities
    
    
    895
    
    
    
    7
    
    
    
    645
    
    
    
    8
    
    
    
    1,540
    
    
    
    1522,298
    
    
    
    53
    
    
    
    164,655
    
    
    
    4,558
    
    
    
    186,953
    
    
    
    4,611Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    22,298
    
    
    $
    53
    
    
    $
    164,655
    
    
    $
    4,558
    
    
    $
    186,953
    
    
    $
    4,611
 Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2005
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesAvailable-for-sale:U.S. Treasury securities
    
    $
    -
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    U.S. Government agencies
    
    
    73,380
    
    
    
    1,313
    
    
    
    65,002
    
    
    
    3,904
    
    
    
    138,382
    
    
    
    5,217State and political subdivisions
    
    
    19,823
    
    
    
    172
    
    
    
    15,730
    
    
    
    397
    
    
    
    35,553
    
    
    
    569Mortgage-backed securities
    
    
    9,440
    
    
    
    198
    
    
    
    2,856
    
    
    
    73
    
    
    
    12,296
    
    
    
    271Corporate securities
    
    
    753
    
    
    
    1
    
    
    
    298
    
    
    
    5
    
    
    
    1,051
    
    
    
    6103,396
    
    
    
    1,684
    
    
    
    83,886
    
    
    
    4,379
    
    
    
    187,282
    
    
    
    6,063Equity securities
    
    
    2,766
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    2,766
    
    
    
    47Total
    
    $
    106,162
    
    
    $
    1,731
    
    
    $
    83,886
    
    
    $
    4,379
    
    
    $
    190,048
    
    
    $
    6,110
 60




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 4  Securities  (Continued)
     Note 5  Loans
  December 31,2006
    
    
    2005Commercial and agricultural
    
    $
    504,084
    
    
    $
    429,703Commercial real estate
    
    
    656,366
    
    
    
    638,119Financial
    
    
    16,375
    
    
    
    21,150Real estate  construction
    
    
    173,824
    
    
    
    103,753Real estate  mortgage
    
    
    101,946
    
    
    
    84,775Consumer
    
    
    403,691
    
    
    
    390,913Finance receivables (net of unearned income 2006 - $50,269; 2005 - $41,875)
    
    
    373,465
    
    
    
    310,777Lease financing receivables (net of unearned income 2006 - $17,391; 2005 -
$15,295)
    
    
    130,775
    
    
    
    124,896Total loans
    
    $
    2,360,526
    
    
    $
    2,104,086
   December 31,2006
    
    
    2005Impaired loans with a valuation allowance
    
    $
    3,235
    
    
    $
    4,158Impaired loans without a valuation allowance
    
    
    
    
    
    
    Total impaired loans
    
    
    3,235
    
    
    
    4,158Valuation allowance related to impaired loans
    
    $
    296
    
    
    $
    511
 61




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 5  Loans  (Continued)
 Years Ended December 31,2006
    
    2005
    
    2004Average investment in impaired loans
    
    $
    3,815
    
    
    $
    3,671
    
    
    $
    2,780Interest income recognized on impaired loans
    
    
    
    
    
    
    
    
    
    
    1Interest income recognized on a cash basis on impaired loans
    
    
    
    
    
    
    
    
    
    
    1
   Years Ended December 31,2006
    
    
    2005
    
    
    2004Balance at January 1
    
    $
    21,003
    
    
    $
    18,891
    
    
    $
    14,656Allowance acquired in acquisition
    
    
    535
    
    
    
    
    
    
    
    1,843Provisions for loan losses
    
    
    5,171
    
    
    
    4,383
    
    
    
    4,438Loans charged off
    
    
    (4,048
    )
    
    
    (2,761
    )
    
    
    (2,123
    )Recoveries of loans previously charged off
    
    
    766
    
    
    
    490
    
    
    
    497Reserve on loan commitments transferred to other liabilities
    
    
    
    
    
    
    
    
    
    
    (420
    )Balance at December 31
    
    $
    23,427
    
    
    $
    21,003
    
    
    $
    18,891
    62




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 6  Mortgage Banking Activities
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Balance at January 1
    
    $
    3,011
    
    
    $
    3,079
    
    
    $
    3,350Mortgage servicing rights capitalized
    
    
    706
    
    
    
    719
    
    
    
    1,073Mortgage servicing rights amortized
    
    
    (534
    )
    
    
    (787
    )
    
    
    (1,344
    )Balance at December 31
    
    $
    3,183
    
    
    $
    3,011
    
    
    $
    3,079
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Balance at January 1
    
    $
    
    
    
    $
    382
    
    
    $
    442Change in valuation allowance increase (decrease)
    
    
    6
    
    
    
    (382
    )
    
    
    (60
    )Balance at December 31
    
    $
    6
    
    
    $
    
    
    
    $
    382
  Note 7  Premises and Equipment
  Estimated
    
    
    December 31,Useful Lives
    
    
    2006
    
    
    2005Land
    
    
    
    
    
    $
    7,653
    
    
    $
    7,171Buildings
    
    10  40 years
    
    
    33,080
    
    
    
    31,815Leasehold improvements
    
    over lease term
    
    
    5,914
    
    
    
    4,252Equipment, furniture and fixtures
    
    3  10 years
    
    
    52,541
    
    
    
    46,22199,188
    
    
    
    89,459Less: Accumulated depreciation
    
    
    
    
    
    
    (50,205
    )
    
    
    (45,961
    )$
    48,983
    
    
    $
    43,498
  Due in 2007
    
    $
    2,401Due in 2008
    
    
    2,337Due in 2009
    
    
    2,005Due in 2010
    
    
    1,722Due in 2011
    
    
    1,478Thereafter
    
    
    12,007Total minimum future rental payments
    
    $
    21,950
  63




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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 8  Leases
  December 31,2006
    
    
    2005Minimum lease payment receivable
    
    $
    147,187
    
    
    $
    139,296Residual values
    
    
    34
    
    
    
    72Lease origination costs
    
    
    945
    
    
    
    823Unearned income
    
    
    (17,391
    )
    
    
    (15,295
    )$
    130,775
    
    
    $
    124,896
   December 31,2006
    
    
    2005Automobiles
    
    $
    30,512
    
    
    $
    29,362Heavy truck, trailers and buses
    
    
    33,085
    
    
    
    26,941Trucks, light and medium duty
    
    
    55,581
    
    
    
    50,928Other
    
    
    55,242
    
    
    
    45,049174,420
    
    
    
    152,280Less: Accumulated depreciation
    
    
    (85,300
    )
    
    
    (78,644
    )$
    89,120
    
    
    $
    73,636
  Finance
    
    
    OperatingDue in 2007
    
    $
    55,006
    
    
    $
    33,098Due in 2008
    
    
    41,736
    
    
    
    19,577Due in 2009
    
    
    27,580
    
    
    
    13,520Due in 2010
    
    
    16,246
    
    
    
    4,793Due in 2011
    
    
    6,244
    
    
    
    599Thereafter
    
    
    375
    
    
    
    Total minimum future rentals
    
    $
    147,187
    
    
    $
    71,587
 64




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 9  Goodwill and Intangible Assets
  Trust &Community
    
    
    Commercial
    
    
    InvestmentBanking
    
    
    Finance
    
    
    Services
    
    
    TotalBalance, January 1, 2005
    
    $
    34,380
    
    
    $
    17,220
    
    
    $
    14,250
    
    
    $
    65,850Additions to goodwill
    
    
    454
    
    
    
    
    
    
    
    1,554
    
    
    
    2,008Amortization of branch purchase goodwill
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    (88
    )Balance, December 31, 2005
    
    
    34,746
    
    
    
    17,220
    
    
    
    15,804
    
    
    
    67,770Additions to goodwill
    
    
    14,373
    
    
    
    
    
    
    
    6,615
    
    
    
    20,988Amortization of branch purchase goodwill
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    (88
    )Balance, December 31, 2006
    
    $
    49,031
    
    
    $
    17,220
    
    
    $
    22,419
    
    
    $
    88,670
  December 31, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationFinite-lived assets:Core deposit intangible
    
    $
    5,368
    
    
    $
    (2,255
    )
    
    $
    4,163
    
    
    $
    (1,702
    )Customer list
    
    
    3,897
    
    
    
    (1,709
    )
    
    
    3,897
    
    
    
    (1,148
    )Trademark
    
    
    480
    
    
    
    (217
    )
    
    
    480
    
    
    
    (149
    )Covenants not to compete
    
    
    988
    
    
    
    (477
    )
    
    
    989
    
    
    
    (319
    )10,733
    
    
    
    (4,658
    )
    
    
    9,529
    
    
    
    (3,318
    )Non-finite lived intangible assets:Trademark
    
    
    237
    
    
    
    
    
    
    
    237
    
    
    
    $
    10,970
    
    
    $
    (4,658
    )
    
    $
    9,766
    
    
    $
    (3,318
    )
    2007
    
    $
    1,6082008
    
    
    1,5042009
    
    
    1,3872010
    
    
    1,0952011
    
    
    445
 65




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 10  Deposits
   Due in 2007
    
    $
    696,054Due in 2008
    
    
    326,348Due in 2009
    
    
    52,404Due in 2010
    
    
    64,018Due in 2011
    
    
    12,576Thereafter
    
    
    1,155Total
    
    $
    1,152,555
 Note 11  Short-Term Borrowings
  December 31,2006
    
    
    2005Amount
    
    
    Rate
    
    
    Amount
    
    
    RateFederal funds purchased
    
    $
    15,000
    
    
    
    5.25
    %
    
    $
    49,500
    
    
    
    4.23
    %Securities sold under repurchase agreements
    
    
    6,492
    
    
    
    4.38
    %
    
    
    15,710
    
    
    
    1.75
    %Interest-bearing demand notes issued to the U.S. Treasury
    
    
    2,341
    
    
    
    5.04
    %
    
    
    5,363
    
    
    
    3.95
    %Federal Home Loan Bank
    
    
    5,000
    
    
    
    5.43
    %
    
    
    40,000
    
    
    
    4.24
    %Lines of credit
    
    
    50,000
    
    
    
    6.26
    %
    
    
    30,000
    
    
    
    5.23
    %Total
    
    $
    78,833
    
    
    
    
    
    
    $
    140,573
  66




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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 12  Long-Term Debt
  December 31,2006
    
    
    2005FHLB advances:Redeemable advances, 3.13%-6.99%, due 2007-2014,
with a weighted average interest rate of 5.29%
and 5.15% at December 31, 2006 and 2005,
respectively
    
    $
    67,718
    
    
    $
    73,544Nonredeemable fixed rate advances, 2.93%-5.39%,
due 2007-2009, with a weighted average interest
rate of 3.97% and 2.91% at December 31, 2006
and 2005, respectively
    
    
    36,850
    
    
    
    61,196Nonredeemable fixed rate, amortizing advances,
3.00%-4.33%, due 2007-2011, with a weighted
average interest rate of 3.68% and 4.23% at
December 31, 2006 and 2005, respectively
    
    
    541
    
    
    
    3,810Notes payable to two financial institutions,
generally with an original maturity of 36 months.
Interest rates on the notes range from 4.62% to
5.23%, with a weighted average interest rate of
4.93% and 4.98% at December 31, 2006 and 2005,
respectively. The notes mature through 2008
    
    
    9,320
    
    
    
    18,981Note payable with an original term of 36 months due
in 2007 with equal monthly principal payments and a
variable rate of interest based on the 30 day LIBOR
rate. The rate resets monthly and was 5.95% and
4.89% at December 31, 2006 and 2005, respectively
    
    
    2,778
    
    
    
    6,111Notes payable with an original term of 24 months
due in 2006 with balloon principal payments at
maturity and a variable rate of interest based on
the 30 day LIBOR rate. The rate resets monthly and
was 5.56% at December 31, 2005
    
    
    
    
    
    
    5,000$
    117,207
    
    
    $
    168,642
  Due in 2007
    
    $
    51,839Due in 2008
    
    
    9,528Due in 2009
    
    
    623Due in 2010
    
    
    35,016Due in 2011
    
    
    17Thereafter
    
    
    20,184Total
    
    $
    117,207
  67




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 13  Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts and
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely
Debentures of the Corporation
   December 31,2006
    
    
    2005Debenture issued to Sterling Financial Statutory
Trust I, first redeemable, in whole or part, by
Sterling in March 2007. Interest payable quarterly
at a floating rate of LIBOR plus 360 basis points
(8.97% at December 31, 2006), and matures in 2032
    
    $
    20,619
    
    
    $
    20,619Debenture issued to Sterling Financial Statutory
Trust II, first redeemable, in whole or part, by
Sterling in June 2008. Interest payable quarterly at
a fixed rate of 5.55%, and matures in 2033
    
    
    36,083
    
    
    
    36,083Debenture issued to Sterling Financial Statutory
Trust III, first redeemable, in whole or part, by
Sterling in December 2009. Interest payable
quarterly at a fixed rate of 6.00%, and matures in
2034
    
    
    15,464
    
    
    
    15,464Debenture issued to Sterling Financial Statutory
Trust IV, first redeemable, in whole or part, by
Sterling in March 2010. Interest payable quarterly at
a fixed rate of 6.19% and matures in 2035
    
    
    15,464
    
    
    
    15,464$
    87,630
    
    
    $
    87,630
 68




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 14  Income Taxes
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    15,616
    
    
    $
    16,712
    
    
    $
    10,592State
    
    
    566
    
    
    
    495
    
    
    
    54716,182
    
    
    
    17,207
    
    
    
    11,139Deferred:Federal
    
    
    1,315
    
    
    
    (2,457
    )
    
    
    513State
    
    
    310
    
    
    
    207
    
    
    
    321,625
    
    
    
    (2,250
    )
    
    
    545Total
    
    $
    17,807
    
    
    $
    14,957
    
    
    $
    11,684
  Years Ended December 31,2006
    
    2005
    
    2004Pretax income
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:Tax-exempt interest income
    
    
    (6.8
    )%
    
    
    (7.7
    )%
    
    
    (9.8
    )%Disallowed interest
    
    
    0.8
    %
    
    
    0.7
    %
    
    
    0.7
    %Dividends paid deduction
    
    
    (0.5
    )%
    
    
    (0.5
    )%
    
    
    (0.5
    )%Low-income housing credits
    
    
    (0.1
    )%
    
    
    (0.1
    )%
    
    
    (0.2
    )%State tax (benefit), net of federal impact
    
    
    0.9
    %
    
    
    0.8
    %
    
    
    0.8
    %Uncertain tax position resolution
    
    
    
    %
    
    
    (0.7
    )%
    
    
    0.2
    %Other, net
    
    
    0.7
    %
    
    
    0.2
    %
    
    
    (0.1
    )%Effective tax rates
    
    
    30.0
    %
    
    
    27.7
    %
    
    
    26.1
    %
  69




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 14  Income Taxes  (Continued)
  December 31,2006
    
    
    2005Deferred tax assets:Allowance for loan losses
    
    $
    8,510
    
    
    $
    7,601Employee benefit plans
    
    
    2,856
    
    
    
    2,048Accrued directors fees
    
    
    602
    
    
    
    615State net operating loss carryforwards
    
    
    2,305
    
    
    
    1,160Restructuring charge reserve
    
    
    133
    
    
    
    219Securities impairment reserve
    
    
    13
    
    
    
    57Other
    
    
    512
    
    
    
    46114,931
    
    
    
    12,161Valuation allowance
    
    
    (2,305
    )
    
    
    (1,160
    )12,626
    
    
    
    11,001Deferred tax liabilities:Leasing
    
    
    (11,244
    )
    
    
    (11,026
    )Premises and equipment
    
    
    (1,166
    )
    
    
    (1,243
    )Deferred loan fees
    
    
    (487
    )
    
    
    (334
    )Securities accretion and mark to market
    
    
    (6,884
    )
    
    
    (2,324
    )Accumulated other comprehensive income
    
    
    (2,045
    )
    
    
    (3,099
    )Purchase accounting amortization
    
    
    (2,126
    )
    
    
    (2,006
    )Other
    
    
    (334
    )
    
    
    (231
    )(24,286
    )
    
    
    (20,263
    )Net deferred tax liability
    
    $
    (11,660
    )
    
    $
    (9,262
    )
  Note 15  Commitments and Contingent Liabilities
 Credit-Related Financial Instruments
    December 31,2006
    
    2005Commitments to extend credit:Unused home equity lines of credit
    
    $
    103,565
    
    
    $
    85,803Other commitments to extend credit
    
    
    681,194
    
    
    
    444,588Standby letters of credit
    
    
    93,080
    
    
    
    89,865
 70




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 15  Commitments and Contingent Liabilities  (Continued)
  .
 Derivative Financial Instruments
  Asset Liability Management
 Interest rate derivatives
  December 31, 2006
    
    December 31, 2005Notional
    
    Carrying
    
    Notional
    
    CarryingAmount
    
    Value
    
    Amount
    
    ValueInterest rate swap agreements:Pay fixed/receive floating
    
    $
    25,000
    
    
    $
    (2
    )
    
    $
    25,000
    
    
    $
    (24
    )Pay floating/receive fixed
    
    
    25,000
    
    
    
    (810
    )
    
    
    25,000
    
    
    
    (988
    )Interest rate floors purchased
    
    
    50,000
    
    
    
    105
    
    
    
    
    
    
    
    
 
    
    Interest rate swaps have been entered into to hedge the variability in future expected
cash flows related to floating rate assets and liabilities.
    
    Interest rate floors have been purchased to hedge the variability in future expected
cash flows related to floating rate assets in exchange for the payment of a premium when
the contract is initiated.
   Years Ended December 31,2006
    
    2005
    
    2004Interest income-commercial loans
    
    $
    (456
    )
    
    $
    (8
    )
    
    $
    338Interest expense-borrowed funds
    
    
    27
    
    
    
    398
    
    
    
    870
 71




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 15  Commitments and Contingent Liabilities  (Continued)
 Equity derivatives
  December 31, 2006
    
    December 31, 2005Shares
    
    Carrying
    
    Shares
    
    CarryingCovered
    
    Value
    
    Covered
    
    ValueWritten call options
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Purchased put options
    
    
    50,000
    
    
    
    45
    
    
    
    30,000
    
    
    
    
 
    
    During 2005 and 2006, Sterling wrote call options on certain equity security holdings
(covered calls). Sterling received a premium in exchange for selling the call options.
The buyer of the option had the right to purchase a specified number of shares at a future
date at an agreed upon price level, or strike price. The options are recorded at fair
value (initially the premium received) with the changes in fair value recognized in other
non-interest income. At December 31, 2006 and 2005, there were no outstanding options.
    
    Sterling has purchased equity put options to protect the company from the risk that the
fair value of certain equity security holdings might be adversely impacted by changes in
market price. Sterling has the right to sell a specified number of shares through a future
date at an agreed upon price level, or strike price. The options are recorded at fair
value (initially the premium paid) with the changes in fair value recognized in other
non-interest expense.
  Years Ended December 31,2006
    
    2005
    
    2004Other non-interest income
    
    $
    3
    
    
    $
    21
    
    
    $
    Other non-interest expense
    
    
    9
    
    
    
    9
    
    
    
    75
 Customer Related
  December 31, 2006
    
    December 31, 2005Notional
    
    Carrying
    
    Notional
    
    CarryingAmount
    
    Value
    
    Amount
    
    ValueInterest rate swap agreements:Pay fixed/receive floating
    
    $
    42,288
    
    
    $
    (271
    )
    
    $
    25,768
    
    
    $
    (110
    )Pay floating/receive fixed
    
    
    42,288
    
    
    
    271
    
    
    
    25,768
    
    
    
    110Interest rate caps written
    
    
    18,510
    
    
    
    (18
    )
    
    
    28,201
    
    
    
    (40
    )Interest rate caps purchased
    
    
    18,510
    
    
    
    18
    
    
    
    28,201
    
    
    
    40
  72




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 15  Commitments and Contingent Liabilities  (Continued)
  Note 16  Stockholders Equity and Regulatory Matters
       73




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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 16  Stockholders Equity and Regulatory Matters  (Continued)
 Minimum To Be WellCapitalized UnderPrompt CorrectiveActual
    
    Minimum
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioDecember 31, 2006Total capital to risk weighted assetsSterling (consolidated)
    
    $
    343,805
    
    
    
    12.9
    %
    
    $
    212,928
    
    
    
    8.0
    %
    
    $
    n/a
    
    
    
    n/aBank of Lancaster County, N.A
    
    
    195,070
    
    
    
    11.4
    %
    
    
    137,219
    
    
    
    8.0
    %
    
    
    171,524
    
    
    
    10.0
    %Bank of Hanover and Trust Company
    
    
    73,936
    
    
    
    12.9
    %
    
    
    45,754
    
    
    
    8.0
    %
    
    
    57,193
    
    
    
    10.0
    %Pennsylvania State Bank
    
    
    24,545
    
    
    
    11.9
    %
    
    
    16,458
    
    
    
    8.0
    %
    
    
    20,572
    
    
    
    10.0
    %Bay First Bank, N.A
    
    
    19,106
    
    
    
    12.3
    %
    
    
    12,383
    
    
    
    8.0
    %
    
    
    15,479
    
    
    
    10.0
    %Delaware Sterling Bank and Trust Company
    
    
    4,382
    
    
    
    28.2
    %
    
    
    1,245
    
    
    
    8.0
    %
    
    
    1,556
    
    
    
    10.0
    %Tier 1 capital to risk weighted assetsSterling (consolidated)
    
    
    318,061
    
    
    
    11.9
    %
    
    
    106,464
    
    
    
    4.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lancaster County, N.A
    
    
    178,877
    
    
    
    10.4
    %
    
    
    68,609
    
    
    
    4.0
    %
    
    
    102,914
    
    
    
    6.0
    %Bank of Hanover and Trust Company
    
    
    68,380
    
    
    
    12.0
    %
    
    
    22,877
    
    
    
    4.0
    %
    
    
    34,316
    
    
    
    6.0
    %Pennsylvania State Bank
    
    
    22,350
    
    
    
    10.9
    %
    
    
    8,229
    
    
    
    4.0
    %
    
    
    12,343
    
    
    
    6.0
    %Bay First Bank, N.A
    
    
    17,699
    
    
    
    11.4
    %
    
    
    6,192
    
    
    
    4.0
    %
    
    
    9,287
    
    
    
    6.0
    %Delaware Sterling Bank and Trust Company
    
    
    4,300
    
    
    
    27.6
    %
    
    
    622
    
    
    
    4.0
    %
    
    
    933
    
    
    
    6.0
    %Tier 1 capital to average assetsSterling (consolidated)
    
    
    318,061
    
    
    
    10.3
    %
    
    
    123,998
    
    
    
    4.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lancaster County, N.A
    
    
    178,877
    
    
    
    9.7
    %
    
    
    74,023
    
    
    
    4.0
    %
    
    
    92,529
    
    
    
    5.0
    %Bank of Hanover and Trust Company
    
    
    68,380
    
    
    
    8.5
    %
    
    
    32,180
    
    
    
    4.0
    %
    
    
    40,225
    
    
    
    5.0
    %Pennsylvania State Bank
    
    
    22,350
    
    
    
    8.6
    %
    
    
    10,358
    
    
    
    4.0
    %
    
    
    12,947
    
    
    
    5.0
    %Bay First Bank, N.A
    
    
    17,699
    
    
    
    9.0
    %
    
    
    7,851
    
    
    
    4.0
    %
    
    
    9,813
    
    
    
    5.0
    %Delaware Sterling Bank and Trust Company
    
    
    4,300
    
    
    
    12.8
    %
    
    
    1,348
    
    
    
    4.0
    %
    
    
    1,685
    
    
    
    5.0
    %December 31, 2005Total capital to risk weighted assetsSterling (consolidated)
    
    $
    315,083
    
    
    
    13.2
    %
    
    $
    191,475
    
    
    
    8.0
    %
    
    $
    n/a
    
    
    
    n/aBank of Lancaster County, N.A
    
    
    192,072
    
    
    
    12.1
    %
    
    
    127,499
    
    
    
    8.0
    %
    
    
    159,374
    
    
    
    10.0
    %Bank of Hanover and Trust Company
    
    
    66,254
    
    
    
    12.8
    %
    
    
    41,403
    
    
    
    8.0
    %
    
    
    51,753
    
    
    
    10.0
    %Pennsylvania State Bank
    
    
    21,969
    
    
    
    11.6
    %
    
    
    15,108
    
    
    
    8.0
    %
    
    
    18,885
    
    
    
    10.0
    %Bay First Bank, N.A
    
    
    11,200
    
    
    
    13.5
    %
    
    
    6,652
    
    
    
    8.0
    %
    
    
    8,315
    
    
    
    10.0
    %Delaware Sterling Bank and Trust Company
    
    
    3,876
    
    
    
    51.6
    %
    
    
    601
    
    
    
    8.0
    %
    
    
    751
    
    
    
    10.0
    %Tier 1 capital to risk weighted assetsSterling (consolidated)
    
    
    290,818
    
    
    
    12.2
    %
    
    
    95,737
    
    
    
    4.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lancaster County, N.A
    
    
    175,699
    
    
    
    11.0
    %
    
    
    63,750
    
    
    
    4.0
    %
    
    
    95,624
    
    
    
    6.0
    %Bank of Hanover and Trust Company
    
    
    61,556
    
    
    
    11.9
    %
    
    
    20,701
    
    
    
    4.0
    %
    
    
    31,052
    
    
    
    6.0
    %Pennsylvania State Bank
    
    
    20,134
    
    
    
    10.7
    %
    
    
    7,554
    
    
    
    4.0
    %
    
    
    11,331
    
    
    
    6.0
    %Bay First Bank, N.A
    
    
    10,479
    
    
    
    12.6
    %
    
    
    3,326
    
    
    
    4.0
    %
    
    
    4,989
    
    
    
    6.0
    %Delaware Sterling Bank and Trust Company
    
    
    3,823
    
    
    
    50.9
    %
    
    
    300
    
    
    
    4.0
    %
    
    
    451
    
    
    
    6.0
    %Tier 1 capital to average assetsSterling (consolidated)
    
    
    290,818
    
    
    
    10.4
    %
    
    
    112,424
    
    
    
    4.0
    %
    
    
    n/a
    
    
    
    n/aBank of Lancaster County, N.A
    
    
    175,699
    
    
    
    10.1
    %
    
    
    69,924
    
    
    
    4.0
    %
    
    
    87,405
    
    
    
    5.0
    %Bank of Hanover and Trust Company
    
    
    61,556
    
    
    
    8.2
    %
    
    
    29,940
    
    
    
    4.0
    %
    
    
    37,425
    
    
    
    5.0
    %Pennsylvania State Bank
    
    
    20,134
    
    
    
    8.9
    %
    
    
    9,057
    
    
    
    4.0
    %
    
    
    11,321
    
    
    
    5.0
    %Bay First Bank, N.A
    
    
    10,479
    
    
    
    7.4
    %
    
    
    5,683
    
    
    
    4.0
    %
    
    
    7,104
    
    
    
    5.0
    %Delaware Sterling Bank and Trust Company
    
    
    3,823
    
    
    
    13.8
    %
    
    
    1,110
    
    
    
    4.0
    %
    
    
    1,388
    
    
    
    5.0
    %
 74




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 17  Employee Benefit Plans
   Other Post-RetirementBenefits2006
    
    
    2005Change in benefit obligationBenefit obligation at beginning of year
    
    $
    2,707
    
    
    $
    2,493Service cost
    
    
    138
    
    
    
    123Interest cost
    
    
    143
    
    
    
    138Benefit payments
    
    
    (59
    )
    
    
    (46
    )Change in discount rate and plan amendments
    
    
    (186
    )
    
    
    (1
    )Benefit obligation at end of year
    
    
    2,743
    
    
    
    2,707Change in plan assetsFair value of plan assets at beginning of year
    
    
    
    
    
    
    Return on plan assets
    
    
    
    
    
    
    Employer contributions
    
    
    59
    
    
    
    46Benefit payments
    
    
    (59
    )
    
    
    (46
    )Fair value of plan assets at end of year
    
    
    
    
    
    
    Reconciliation of funded statusFunded status of plans
    
    
    (2,743
    )
    
    
    (2,707
    )Unrecognized net transition obligation
    
    
    
    
    
    
    Unrecognized prior service costs
    
    
    
    
    
    
    (127
    )Unrecognized net losses
    
    
    
    
    
    
    867Accrued benefit expense
    
    $
    (2,743
    )
    
    $
    (1,967
    )
   Years Ended December 31,2006
    
    
    2005
    
    
    2004Retirement benefit costsService cost
    
    $
    138
    
    
    $
    123
    
    
    $
    94Interest cost
    
    
    143
    
    
    
    138
    
    
    
    114Amortization of transition losses
    
    
    
    
    
    
    9
    
    
    
    9Amortization of unrecognized prior service cost
    
    
    (13
    )
    
    
    14
    
    
    
    14Actuarial losses
    
    
    37
    
    
    
    21
    
    
    
    Net retirement benefits costs
    
    $
    305
    
    
    $
    305
    
    
    $
    231
  Before application of
    
    
    
    
    
    After application ofStatement No. 158
    
    Reclassifications
    
    Statement No. 158Other liabilities
    
    $
    38,992
    
    
    $
    344
    
    
    $
    39,336Total liabilities
    
    
    2,948,906
    
    
    
    344
    
    
    
    2,949,250Accumulated other comprehensive income
    
    
    3,100
    
    
    
    (344
    )
    
    
    2,756Total stockholders equity
    
    
    330,929
    
    
    
    (344
    )
    
    
    330,585
 75




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 17  Employee Benefit Plans  (Continued)
  1% Point Increase
    
    1% Point DecreaseEffect on total of service and interest cost components
    
    $
    37
    
    
    $
    (32
    )Effect on postretirement benefit obligation
    
    
    256
    
    
    
    (225
    )
      76




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 18  Stock Compensation
   Accounting for Stock Issued to
Employees Accounting for Stock-based Compensatio
      77




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 18  Stock Compensation  (Continued)
  2005
    
    
    2004Net income:As reported
    
    $
    39,267
    
    
    $
    33,329Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of related tax
effects
    
    
    (4,302
    )
    
    
    (1,561
    )Proforma
    
    $
    34,965
    
    
    $
    31,768Basic earnings per share:As reported
    
    $
    1.36
    
    
    $
    1.22Proforma
    
    
    1.21
    
    
    
    1.17Diluted earnings per share:As reported
    
    $
    1.34
    
    
    $
    1.21Proforma
    
    
    1.19
    
    
    
    1.15
  Years Ended December 31,2006
    
    2005
    
    2004Dividend yield
    
    
    2.70
    %
    
    
    2.59
    %
    
    
    2.70
    %Risk-free interest rate
    
    
    5.00
    %
    
    
    3.94
    %
    
    
    3.53
    %Expected life (in years)
    
    
    6
    
    
    
    7
    
    
    
    7Expected volatility
    
    
    34.0
    %
    
    
    35.7
    %
    
    
    39.2
    %
 78




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 18  Stock Compensation  (Continued)
  WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Life
    
    ValueOutstanding at January 1, 2006
    
    
    1,688,788
    
    
    $
    15.77
    
    
    
    
    
    
    $Granted
    
    
    256,000
    
    
    
    20.78Options assumed in acquisition
    
    
    70,194
    
    
    
    9.24Exercised
    
    
    (472,436
    )
    
    
    14.27
    
    
    
    
    
    
    
    3,724,000Forfeited and expired
    
    
    (13,215
    )
    
    
    20.15Outstanding at December 31, 2006
    
    
    1,529,331
    
    
    
    16.37
    
    
    6.6 years
    
    
    9,730,000Exercisable at December 31, 2006
    
    
    1,279,331
    
    
    
    15.94
    
    
    6.0 years
    
    
    9,007,000Outstanding at January 1, 2005
    
    
    1,541,787
    
    
    $
    13.92
    
    
    
    
    
    
    $Granted
    
    
    367,688
    
    
    
    20.94Exercised
    
    
    (208,792
    )
    
    
    11.12
    
    
    
    
    
    
    
    2,141,000Forfeited and expired
    
    
    (11,895
    )
    
    
    18.17Outstanding at December 31, 2005
    
    
    1,688,788
    
    
    
    15.77
    
    
    6.7 years
    
    
    7,226,000Exercisable at December 31, 2005
    
    
    1,688,788
    
    
    
    15.77
    
    
    6.7 years
    
    
    7,214,000Outstanding at January 1, 2004
    
    
    1,224,650
    
    
    $
    12.75
    
    
    
    
    
    
    $Granted
    
    
    328,517
    
    
    
    18.98Options assumed in acquisition
    
    
    193,647
    
    
    
    9.65Exercised
    
    
    (194,909
    )
    
    
    10.81
    
    
    
    
    
    
    
    1,809,000Forfeited and expired
    
    
    (10,118
    )
    
    
    14.52Outstanding at December 31, 2004
    
    
    1,541,787
    
    
    
    13.92
    
    
    6.9 years
    
    
    12,268,000Exercisable at December 31, 2004
    
    
    892,690
    
    
    
    12.14
    
    
    5.7 years
    
    
    7,587,000
     79




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 19  Related Party Transactions
   Note 20  Restrictions on Dividends, Loans and Advances
   Note 21  Fair Value of Financial Instruments
 Disclosures about Fair Value of Financial Instruments,
  Cash and cash equivalents:
 Interest-bearing deposits in banks and short-term investments:
 Securities:
 Mortgage loans held for sale:
 Loans receivable:
 80




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 21  Fair Value of Financial Instruments  (Continued)
 Mortgage servicing rights:
 Deposit liabilities:
 Short-term borrowings:
 Long-term debt and subordinated notes payable:
 Accrued interest:
 Derivative assets and liabilities:
 Off-balance sheet instruments:
  December 31,2006
    
    2005Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial Assets:Cash and cash equivalents
    
    $
    147,489
    
    
    $
    147,489
    
    
    $
    109,712
    
    
    $
    109,712Interest-bearing deposits in banks
    
    
    6,339
    
    
    
    6,339
    
    
    
    5,690
    
    
    
    5,690Short-term investments
    
    
    3,119
    
    
    
    3,119
    
    
    
    2,156
    
    
    
    2,156Mortgage loans held for sale
    
    
    4,136
    
    
    
    4,136
    
    
    
    3,200
    
    
    
    3,200Securities held-to-maturity
    
    
    21,530
    
    
    
    21,644
    
    
    
    28,891
    
    
    
    29,169Securities available-for-sale
    
    
    460,016
    
    
    
    460,016
    
    
    
    455,117
    
    
    
    455,117Loans, net
    
    
    2,209,058
    
    
    
    2,190,270
    
    
    
    1,959,606
    
    
    
    1,941,242Accrued interest receivable
    
    
    13,979
    
    
    
    13,979
    
    
    
    12,304
    
    
    
    12,304Mortgage servicing rights
    
    
    3,177
    
    
    
    5,948
    
    
    
    3,011
    
    
    
    5,974Derivative assets
    
    
    1,164
    
    
    
    1,164
    
    
    
    707
    
    
    
    707Financial Liabilities:Deposits
    
    $
    2,615,912
    
    
    $
    2,622,316
    
    
    $
    2,226,287
    
    
    $
    2,230,485Short-term borrowings
    
    
    78,833
    
    
    
    78,833
    
    
    
    140,573
    
    
    
    140,573Long-term debt
    
    
    117,207
    
    
    
    118,418
    
    
    
    168,642
    
    
    
    130,345Subordinated notes payable
    
    
    87,630
    
    
    
    89,629
    
    
    
    87,630
    
    
    
    89,653Accrued interest payable
    
    
    10,332
    
    
    
    10,332
    
    
    
    8,821
    
    
    
    8,821Derivative liabilities
    
    
    1,826
    
    
    
    1,826
    
    
    
    1,719
    
    
    
    1,719
 81




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 22  Condensed Financial Statements of Parent Company
  December 31,2006
    
    
    2005Balance SheetsAssetsCash and cash equivalents
    
    $
    18,423
    
    
    $
    10,094Securities available-for-sale
    
    
    1,952
    
    
    
    2,412Investment in:Bank subsidiaries
    
    
    363,360
    
    
    
    328,962Nonbank subsidiaries
    
    
    31,821
    
    
    
    43,727Due from affiliates
    
    
    225
    
    
    
    30Other assets
    
    
    21,451
    
    
    
    13,992Total assets
    
    $
    437,232
    
    
    $
    399,217LiabilitiesShort-term borrowings
    
    $
    5,000
    
    
    $
    Long-term debt
    
    
    
    
    
    
    5,000Subordinated notes payable
    
    
    87,630
    
    
    
    87,630Other liabilities
    
    
    14,017
    
    
    
    8,501Total liabilities
    
    
    106,647
    
    
    
    101,131Stockholders equity
    
    
    330,585
    
    
    
    298,086Total liabilities and stockholders equity
    
    $
    437,232
    
    
    $
    399,217
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Statements of IncomeIncome:Dividends from banking subsidiaries
    
    $
    35,037
    
    
    $
    18,250
    
    
    $
    17,440Dividends from nonbanking subsidiaries
    
    
    5,558
    
    
    
    2,809
    
    
    
    6,255Dividends on securities available-for-sale
    
    
    56
    
    
    
    54
    
    
    
    60Gains on securities available-for-sale
    
    
    249
    
    
    
    118
    
    
    
    167Management fees from subsidiaries
    
    
    31,323
    
    
    
    28,322
    
    
    
    23,685Other
    
    
    473
    
    
    
    413
    
    
    
    169Total income
    
    
    72,696
    
    
    
    49,966
    
    
    
    47,776Expenses:Interest expense
    
    
    6,154
    
    
    
    5,676
    
    
    
    3,485Operating expenses
    
    
    35,525
    
    
    
    32,260
    
    
    
    26,683Total expense
    
    
    41,679
    
    
    
    37,936
    
    
    
    30,168Income before income taxes and equity in undistributed
net income of subsidiaries
    
    
    31,017
    
    
    
    12,030
    
    
    
    17,608Income tax expense (benefit)
    
    
    (3,289
    )
    
    
    (3,421
    )
    
    
    (2,334
    )34,306
    
    
    
    15,451
    
    
    
    19,942Equity in undistributed income of:Banking subsidiaries
    
    
    10,863
    
    
    
    25,362
    
    
    
    16,770Nonbanking subsidiaries
    
    
    (3,587
    )
    
    
    (1,756
    )
    
    
    (3,657
    )Income from continuing operations
    
    
    41,582
    
    
    
    39,057
    
    
    
    33,055Undistributed earnings from discontinued operations
    
    
    (5,130
    )
    
    
    210
    
    
    
    274Net Income
    
    $
    36,452
    
    
    $
    39,267
    
    
    $
    33,329
 82




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 22  Condensed Financial Statements of Parent Company  (Continued)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Statements of Cash FlowsCash flows from operating activities:Income from continuing operations
    
    $
    41,582
    
    
    $
    39,057
    
    
    $
    33,055Income from discontinued operations
    
    
    (5,130
    )
    
    
    210
    
    
    
    274Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    1,952
    
    
    
    1,126
    
    
    
    751Equity in undistributed net income of subsidiaries
    
    
    (2,143
    )
    
    
    (23,816
    )
    
    
    (13,385
    )Gains on securities available-for-sale
    
    
    (249
    )
    
    
    (118
    )
    
    
    (167
    )Non-cash compensation cost
    
    
    412
    
    
    
    
    
    
    
    Decrease (increase) in other assets
    
    
    (3,852
    )
    
    
    2,800
    
    
    
    (10,015
    )Increase in other liabilities
    
    
    3,276
    
    
    
    2,583
    
    
    
    1,818Other
    
    
    194
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    36,042
    
    
    
    21,842
    
    
    
    12,331Cash flows investing activities:Purchases of securities available-for-sale
    
    
    (276
    )
    
    
    
    
    
    
    Proceeds from sales and maturities of securities available-for-sale
    
    
    610
    
    
    
    367
    
    
    
    311Investment in and advances to banking subsidiaries
    
    
    (11,266
    )
    
    
    (1,966
    )
    
    
    (15,438
    )Investment in nonbanking subsidiaries
    
    
    4,699
    
    
    
    (1,217
    )
    
    
    (8,708
    )Purchase of premises and equipment
    
    
    (2,684
    )
    
    
    (2,649
    )
    
    
    (1,267
    )Net cash used in investing activities
    
    
    (8,917
    )
    
    
    (5,465
    )
    
    
    (25,102
    )Cash flows from financing activities:Proceeds from subordinated note from subsidiary
    
    
    
    
    
    
    15,464
    
    
    
    15,464Net increase in short-term borrowings
    
    
    5,000
    
    
    
    
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    5,000Repayment of long-term debt
    
    
    (5,000
    )
    
    
    (5,337
    )
    
    
    (1,332
    )Proceeds from issuance of common stock
    
    
    197
    
    
    
    138
    
    
    
    482Cash dividends on common stock
    
    
    (16,512
    )
    
    
    (15,289
    )
    
    
    (13,206
    )Cash paid in lieu of fractional shares
    
    
    
    
    
    
    (31
    )
    
    
    (33
    )Purchases of treasury stock
    
    
    (9,341
    )
    
    
    (6,092
    )
    
    
    (1,707
    )Proceeds from issuance of treasury stock
    
    
    6,860
    
    
    
    2,477
    
    
    
    1,857Net cash provided by (used in) financing activities
    
    
    (18,796
    )
    
    
    (8,670
    )
    
    
    6,525Increase (decrease) in cash
    
    
    8,329
    
    
    
    7,707
    
    
    
    (6,246
    )Cash:Beginning of year
    
    
    10,094
    
    
    
    2,387
    
    
    
    8,633End of year
    
    $
    18,423
    
    
    $
    10,094
    
    
    $
    2,387
 83




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 23  Segment Reporting
   CommunityBanking &
    
    
    
    
    
    
    
    
    
    Trust andRelated
    
    
    
    
    
    Commercial
    
    Investment
    
    
    
    
    
    Inter-Segment
    
    ConsolidatedServices
    
    Leasing
    
    Finance
    
    Services
    
    Other
    
    Elimination
    
    TotalsYear ended December 31, 2006Interest and dividend income
    
    $
    171,396
    
    
    $
    16,181
    
    
    $
    44,331
    
    
    $
    91
    
    
    $
    133
    
    
    $
    (26,591
    )
    
    $
    205,541Interest expense
    
    
    74,314
    
    
    
    13,362
    
    
    
    16,257
    
    
    
    
    
    
    
    6,154
    
    
    
    (26,591
    )
    
    
    83,496Provision for loan losses
    
    
    3,728
    
    
    
    985
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,171Non-interest income
    
    
    18,766
    
    
    
    34,449
    
    
    
    1,914
    
    
    
    13,184
    
    
    
    987
    
    
    
    (145
    )
    
    
    69,155Non-interest expenses
    
    
    76,551
    
    
    
    32,621
    
    
    
    2,940
    
    
    
    10,472
    
    
    
    4,201
    
    
    
    (145
    )
    
    
    126,640Income before income taxes
    
    
    35,569
    
    
    
    3,662
    
    
    
    26,590
    
    
    
    2,803
    
    
    
    (9,235
    )
    
    
    
    
    
    
    59,389Income tax expenses
    
    
    8,948
    
    
    
    1,347
    
    
    
    9,732
    
    
    
    1,069
    
    
    
    (3,289
    )
    
    
    
    
    
    
    17,807Net income from continued
operations
    
    
    26,621
    
    
    
    2,315
    
    
    
    16,858
    
    
    
    1,734
    
    
    
    (5,946
    )
    
    
    
    
    
    
    41,582Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,130
    )
    
    
    
    
    
    
    (5,130
    )Net income
    
    
    26,621
    
    
    
    2,315
    
    
    
    16,858
    
    
    
    1,734
    
    
    
    (11,076
    )
    
    
    
    
    
    
    36,452Assets
    
    
    3,091,435
    
    
    
    317,194
    
    
    
    303,698
    
    
    
    30,177
    
    
    
    21,313
    
    
    
    (483,982
    )
    
    
    3,279,835Year ended December 31, 2005Interest and dividend income
    
    $
    141,001
    
    
    $
    12,923
    
    
    $
    35,511
    
    
    $
    61
    
    
    $
    285
    
    
    $
    (17,603
    )
    
    $
    172,178Interest expense
    
    
    49,486
    
    
    
    9,936
    
    
    
    10,403
    
    
    
    7
    
    
    
    5,676
    
    
    
    (17,603
    )
    
    
    57,905Provision for loan losses
    
    
    3,615
    
    
    
    638
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,383Non-interest income
    
    
    17,163
    
    
    
    29,416
    
    
    
    1,419
    
    
    
    12,405
    
    
    
    601
    
    
    
    (54
    )
    
    
    60,950Non-interest expenses
    
    
    70,679
    
    
    
    28,627
    
    
    
    2,947
    
    
    
    10,689
    
    
    
    3,938
    
    
    
    (54
    )
    
    
    116,826Income before income taxes
    
    
    34,384
    
    
    
    3,138
    
    
    
    23,450
    
    
    
    1,770
    
    
    
    (8,728
    )
    
    
    
    
    
    
    54,014Income tax expenses
    
    
    8,027
    
    
    
    1,239
    
    
    
    8,402
    
    
    
    710
    
    
    
    (3,421
    )
    
    
    
    
    
    
    14,957Net income from continued
operations
    
    
    26,357
    
    
    
    1,899
    
    
    
    15,048
    
    
    
    1,060
    
    
    
    (5,307
    )
    
    
    
    
    
    
    39,057Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    210Net income
    
    
    26,357
    
    
    
    1,899
    
    
    
    15,048
    
    
    
    1,060
    
    
    
    (5,097
    )
    
    
    
    
    
    
    39,267Assets
    
    
    2,789,391
    
    
    
    291,583
    
    
    
    253,753
    
    
    
    23,624
    
    
    
    36,408
    
    
    
    (429,022
    )
    
    
    2,965,737Year ended December 31, 2004Interest and dividend income
    
    $
    110,610
    
    
    $
    10,876
    
    
    $
    27,677
    
    
    $
    32
    
    
    $
    60
    
    
    $
    (11,574
    )
    
    $
    137,681Interest expense
    
    
    34,506
    
    
    
    7,867
    
    
    
    5,948
    
    
    
    8
    
    
    
    3,485
    
    
    
    (11,574
    )
    
    
    40,240Provision for loan losses
    
    
    2,381
    
    
    
    1,422
    
    
    
    635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,438Non-interest income
    
    
    14,967
    
    
    
    26,725
    
    
    
    320
    
    
    
    12,409
    
    
    
    542
    
    
    
    
    
    
    
    54,963Non-interest expenses
    
    
    60,660
    
    
    
    26,255
    
    
    
    2,684
    
    
    
    10,630
    
    
    
    2,998
    
    
    
    
    
    
    
    103,227Income before income taxes
    
    
    28,030
    
    
    
    2,057
    
    
    
    18,730
    
    
    
    1,803
    
    
    
    (5,881
    )
    
    
    
    
    
    
    44,739Income tax expenses
    
    
    5,719
    
    
    
    824
    
    
    
    6,766
    
    
    
    709
    
    
    
    (2,334
    )
    
    
    
    
    
    
    11,684Net income from continued
operations
    
    
    22,311
    
    
    
    1,233
    
    
    
    11,964
    
    
    
    1,094
    
    
    
    (3,547
    )
    
    
    
    
    
    
    33,055Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    274Net income
    
    
    22,311
    
    
    
    1,233
    
    
    
    11,964
    
    
    
    1,094
    
    
    
    (3,273
    )
    
    
    
    
    
    
    33,329Assets
    
    
    2,571,883
    
    
    
    241,304
    
    
    
    210,690
    
    
    
    22,622
    
    
    
    43,210
    
    
    
    (346,947
    )
    
    
    2,742,762
   84




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##### Table of Contents



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share data)
 Note 23  Segment Reporting  (Continued)
        85




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##### Table of Contents



Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A  Controls and Procedures
    
 Item 9B  Other Information
  86




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##### Table of Contents



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 Accountant Fees and Services
  87




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##### Table of Contents



Part IV
 
 Item 15  Exhibits and Financial Statement Schedules
 (a)
    
    The following documents are filed as part of this report:The financial statements listed on the index set forth in Item 8 of this Annual Report on
Form 10-K are filed as part of this Annual Report.Financial statement schedules  all schedules are omitted because they are either not
applicable, the data is not significant or the required information is shown in the financial
statements or the notes thereto or elsewhere herein.(b)
    
    Exhibits  the following is a list of Exhibits required by Item 601 of Regulation S-K and
are incorporated herein by reference are attached to this Annual Report.
 3(i)
    
    Amended Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) to
Registrants Current Report on Form 8-K, dated April 30, 2002, filed with the Commission
on May 15, 2002.)3(ii)
    
    Amended Bylaws. (Incorporated by reference to Exhibit 3(ii) to Registrants
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, filed with the
Commission on May 10, 2005.)10.1
    
    Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to
Registration Statement No. 33-55131 on Form S-3, filed with the Commission on August 18,
1994, and as amended by Registrants Rule 424 (b) prospectus, filed with the Commission
on December 23, 1998 by Amendment No. 1, filed with the Commission on January 16, 2001
and by Registration Statement No. 33-55131 on Form S-3/A, filed with the Commission on
June 26, 2003.)10.2
    
    Stock Disposition Agreement, dated September 6, 2001, by and between Howard E.
Groff, Sr., and Sterling Financial Corporation. (Incorporated by reference to Exhibit
99.1 in Registrants Current Report on Form 8-K, dated September 6, 2001, and filed with
the Commission on September 26, 2001.)10.3
    
    2005 Directors Stock Compensation Plan and Policy. (Incorporated by reference to
Exhibit 99.1 to Registrants Registration Statement No. 333-126258 on Form S-8, filed
with the Commission on June 30, 2005.)10.4
    
    Supplemental Executive Retirement Agreement, dated April 22, 2002, between
Sterling Financial Corporation and John E. Stefan. (Incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K, dated April 30, 2002, filed
with the Commission on May 15, 2002.)10.5
    
    Employment Agreement, dated December 18, 2001, between Sterling Financial
Corporation, Bank of Lancaster County, N.A. and J. Roger Moyer, Jr. (Incorporated by
reference to Exhibit 10.6 to Registrants Statement No. 333-75650 on Form S-4, filed
with the Commission on January 16, 2002.)10.6
    
    Employment Agreement, dated as of February 28, 2002, between Sterling Financial
Corporation, Bank of Lancaster County, N.A. and J. Bradley Scovill. (Incorporated by
reference to Exhibit 10.10 to Registrants Annual Report on Form 10-K for the year ended
December 31, 2001, filed with the Commission on March 27, 2002.) Amended by the Waiver
of Rights Under and Amendment to Employment Agreement, dated April 25, 2005, between
Sterling Financial Corporation, Bank of Lancaster County, N.A. and J. Bradley Scovill.
(Incorporated by reference to Exhibit 10.9 to Registrants Current Report on Form 8-K,
dated April 25, 2005, filed with the Commission on April 25, 2005.)10.7
    
    Change in Control Agreement, dated as of July 27, 2000, between Sterling
Financial Corporation, Bank of Hanover, and Chad M. Clabaugh (Incorporated by reference
to Exhibit 10.10 to Registrants Annual Report on Form 10-K, dated December 31, 2002,
and filed with the Commission on March 27, 2003.)
 88




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##### Table of Contents



10.8
    
    Amendment to Employment Agreement, dated December 1, 2006, between Sterling
Financial Corporation, and Thomas J. Sposito, II. (Incorporated by reference to Exhibit
10.8 to Registrants Current Report on Form 8-K, dated November 30, 2006, and filed with
the Commission on December 5, 2006.)10.9
    
    Employment Agreement dated May 16, 2005, between Registrant and Tito L. Lima.
(Incorporated by reference to Exhibit 10.12 to Registrants Current Report on Form 8-K,
as amended, filed with the Commission on May 19, 2005.)10.10
    
    2006 Equity Compensation Plan (Incorporated by reference to Exhibit 99.1 to
Registrants Registration Statement No. 333-138382 on Form S-8, filed with the
Commission on November 2, 2006.)11
    
    Statement re: Computation of per Share Earnings  See Note 1, Summary of
Significant Accounting Policies, included in this Annual Report on Form 10-K.14
    
    Code of Ethics (Incorporated by reference to Exhibit 14.1 to Registrants Current
Report on Form 8-K, dated February 28, 2006, and filed with the Commission on February
28, 2006.21
    
    Subsidiaries of the Registrant23
    
    Consent of Ernst & Young LLP31
    
    Rule 13a-14(a)/15d-14(a) Certifications31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Section 1350 Certifications32.1
    
    Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
906 of the Sarbanes-Oxley Act of 2002
  89




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##### Table of Contents



Signatures
  STERLING FINANCIAL CORPORATIONBy:
    /s/ J. Roger Moyer, Jr.J. Roger Moyer, Jr.President and Chief Executive Officer Signature
    
    Title
    
    Date/s/ GLENN R. WALZ
    
    Chairman of the Board
    
    March 15, 2007(Glenn R. Walz)/s/ J. Roger Moyer, Jr.
    
    President and Chief Executive Officer, Director
    
    March 15, 2007(J. Roger Moyer, Jr.)/s/ TITO L. LIMA
    
    Chief Financial Officer and Treasurer
    
    March 15, 2007(Tito L. Lima)/s/ DOROTHY R. GALLAGHER
    
    Chief Accounting Officer
    
    March 15, 2007(Dorothy R. Gallagher)/s/ Richard H. Albright, Jr.
    
    Director
    
    March 15, 2007(Richard H. Albright, Jr.)/s/ Michael A. Carenzo
    
    Director
    
    March 15, 2007(Michael A. Carenzo)/s/ Anthony d. chivinski
    
    Director
    
    March 15, 2007(Anthony D. Chivinski)/s/ Howard E. Groff, Jr.
    
    Director
    
    March 15, 2007(Howard E. Groff, Jr.)/s/ Joan R. Henderson
    
    Director
    
    March 15, 2007(Joan R. Henderson)/s/ Terrence L. Hormel
    
    Director
    
    March 15, 2007(Terrence L. Hormel)/s/ David E. Hosler
    
    Director
    
    March 15, 2007(David E. Hosler)/s/ william e. miller, jr.
    
    Director
    
    March 15, 2007(William E. Miller Jr.)/s/ w. Garth Sprecher
    
    Director
    
    March 15, 2007(W. Garth Sprecher)/s/ John E. Stefan
    
    Director
    
    March 15, 2007(John E. Stefan)
 90