The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this report. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of the risks and uncertainties inherent in such statements, see "Business-Forward-Looking Statements" and "Risk Factors."

Executive Summary and Highlights

Sterling's earnings per share and performance ratios for 2008 were impacted by the major disruption in the housing market and downturn in the economy, which has resulted in Sterling recording a credit provision that was higher than the provision recorded during 2007, and recorded a $223.8 million non-cash charge to reflect impairment of Sterling's goodwill as a result of a number of factors, including the sustained and protracted decline in Sterling's stock price and market capitalization. During 2008, Sterling recorded a $333.6 million provision for credit losses compared with $25.1 million for 2007. Sterling increased the credit provision in response to worsening economic conditions, the continued stress on real estate values, increasing levels of both classified and non-performing assets, as well as higher net charge-offs and the requirement for additional allowances for loan loss caused by a change in determining the fair market value of impaired loans. As of December 31, 2008, non-performing assets were $610.7 million versus $135.2 million at December 31, 2007.

During 2008 Sterling took a number of steps to enhance and preserve its capital base and protect customer deposits. During the first quarter of 2008, Sterling activated a Residential Construction Special Project Team to identify, manage and resolve credit quality issues. During the third quarter of 2008, Sterling separated its credit administration team into two dedicated teams: one to fix, repair and manage construction assets; and, the other to focus on generating strategic business and consumer assets. During the fourth quarter of 2008, Sterling strengthened its capital position by raising $303 million through the sale of preferred shares and a related warrant to the U.S. Department of the Treasury (the "Treasury Department") as part of the Treasury Department's Capital Purchase Program. In January 2009, Sterling suspended payment of its quarterly cash dividends on its common shares until economic conditions improve.

Sterling's retail and commercial banking groups continued to perform well, generating net interest income before the provision for credit losses of $359.6 million for 2008 versus $355.4 million for 2007. Sterling remains well capitalized, with excess liquidity, and expects to continue lending to the communities it serves, as well as to continue to absorb elevated credit costs.

2008 HIGHLIGHTS

• Capital ratios remain above "well-capitalized" levels at 13.0%.

• Available liquidity remains strong at $3.2 billion.

• Tangible book value per common share was $11.41.

• Tangible shareholders' equity-to-tangible asset ratio improved to 7.07% from 6.01%.

• Total assets were $12.79 billion.

• Total loans receivable were $8.81 billion.

• Total deposits increased 9% to a record $8.35 billion.

Critical Accounting Policies

The accounting and reporting policies of Sterling conform to generally accepted accounting principles ("GAAP") and to general practices within the banking industry. The preparation of the financial statements in accordance

with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Sterling's management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies are critical to an understanding of Sterling's Consolidated Financial Statements and MD&A.

Income Recognition. Sterling recognizes interest income by methods that conform to general accounting practices within the banking industry. In the event management believes collection of all or a portion of contractual interest on a loan has become doubtful, which generally occurs when the loan is 90 days past due, Sterling discontinues the accrual of interest, and any previously accrued interest recognized in income deemed uncollectible is reversed. Interest received on non-performing loans is included in income only if principal recovery is reasonably assured. A non-performing loan is restored to accrual status when it is brought current, has performed in accordance with contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt.

Allowance For Credit Losses. The allowance for credit losses is composed of the allowance for loan losses and the reserve for unfunded credit commitments. In general, determining the amount of the allowance requires significant judgment and the use of estimates by management. Sterling maintains an allowance for credit losses to absorb probable losses in the loan portfolio based on a quarterly analysis of the portfolio and expected future losses. This analysis is designed to determine an appropriate level and allocation of the allowance for losses among loan types by considering factors affecting loan losses, including specific and confirmed losses, levels and trends in classified and non-performing loans, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, regulatory guidance and other relevant factors. Management monitors the loan portfolio to evaluate the adequacy of the allowance. The allowance can increase or decrease each quarter based upon the results of management's analysis.

During the fourth quarter of 2008, Sterling modified its estimate of the fair value of loans being tested for impairment. The fair value is now estimated excluding the potential cash flows from certain guarantors. To the extent that these guarantors are able to provide repayments, a recovery would be recorded upon receipt. In addition, Sterling re-assessed the accounting for real estate loans treated as collateral dependent. As a result, Sterling now considers any impairment on a collateral-dependent loan to be a confirmed loss and charges off the impairment amount when the impairment is identified, rather than establishing a specific allowance on impaired collateral-dependent loans that would have been charged off when foreclosure was probable.

Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, loan quality ratings, value of collateral, repayment ability of borrowers, and historical experience factors. The historical experience factors used and allowances for homogeneous loans (such as residential mortgage loans, consumer loans, etc.) are collectively evaluated based upon historical loss experience, trends in losses and delinquencies, growth of loans in particular markets, and known changes in economic conditions in each particular lending market.

While management uses available information to provide for loan losses, the ultimate collectability of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions and other relevant factors. The slowdown in economic activity could continue to adversely affect cash flows for both commercial and individual borrowers, as a result of which Sterling could experience further increases in non-performing assets, delinquencies and losses on loans. There can be no assurance that the allowance for credit losses will be adequate to cover all losses, but management believes the allowance for credit losses was adequate at December 31, 2008.

Investments and MBS. Assets in the investment and MBS portfolios are initially recorded at cost, which includes any premiums and discounts. Sterling amortizes premiums and discounts as an adjustment to interest income over the estimated life of the security. The cost of investment securities sold, and any resulting gain or

loss, is based on the specific identification method. Sterling's MBS are primarily in agency securities, with limited investments in non-agency obligations. Municipal bonds that Sterling holds are all general obligation in nature, spread throughout Sterling's footprint. Sterling does not invest in collateralized debt obligations or similar exotic structured investment products.

The loans underlying Sterling's MBS are subject to the prepayment of principal of the underlying loans. The rate at which prepayments are expected to occur in future periods impacts the amount of premium to be amortized in the current period. If prepayments in a future period are higher or lower than expected, then Sterling will need to amortize a larger or smaller amount of premium to interest income in that future period.

Management determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Sterling has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to Sterling's liquidity needs, changes in market interest rates, and asset-liability management strategies, among other factors. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported in shareholders' equity as a separate component of other comprehensive income, net of applicable deferred income taxes.

Management evaluates investment securities for other than temporary declines in fair value on a quarterly basis. If the fair value of investment securities falls below their amortized cost and the decline is deemed to be other than temporary, the securities will be written down to current market value, resulting in a loss recorded in the income statement. There were no investment securities that management identified to be other-than-temporarily impaired for the year ended December 31, 2008, because the decline in fair value of certain classes of securities was attributable to temporary disruptions of credit markets and the impact on securities within those classes, not deteriorating credit quality of specific securities. Sterling holds positions in classes of securities negatively impacted by temporary credit market disruptions, including one single issuer trust preferred, and 19 private label collateralized mortgage obligations. The trust preferred is rated A1 by Moody's and has an amortized cost of $24.6 million compared to a $12.9 million market value, or an unrealized loss of $11.7 million. The private label collateralized mortgage obligations are all rated AAA, except for $10.1 million of such securities that are rated Aa3 by Moody's and have an amortized cost of $275.9 million compared to a $227.5 million market value, or an unrealized loss of $48.4 million. All of the aforementioned positions remain high quality investment grade, and all are quarterly stress-tested for both credit quality and collateral strength. As of December 31, 2008, Sterling expects the return of all principal and interest on all securities within the portfolios pursuant to the contractual terms and therefore Sterling is positioned to maintain the ability and intent to hold these investments until a recovery in market price occurs, or until maturity. Realized losses could occur in future periods due to a change in management's intent to hold the investments to recovery, a change in management's assessment of credit risk, or a change in regulatory or accounting requirements. See Note 2 of "Notes to Consolidated Financial Statements."

Fair Value of Financial Instruments. Sterling's available-for-sale securities portfolio totaled $2.64 billion and $1.85 billion as of December 31, 2008 and 2007, respectively, and were the majority of Sterling's financial instruments that are carried at fair value. These securities are valued using a pricing service's matrix technique based on quoted prices for similar instruments, which Sterling validates with non-binding broker quotes, in depth collateral analysis and cash flow stress testing.

Loans held for sale are also carried at fair value, as Sterling has applied FAS 159 to these loans in order to match changes in the value of the loans with the value of the economic hedges on the loans without having to apply complex hedge accounting. The fair value of loans held for sale is determined based upon an analysis of investor quoted pricing inputs.

Goodwill and Other Intangible Assets. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Sterling's goodwill relates to value

inherent in the banking business and the value is dependent upon Sterling's ability to provide quality, cost-effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted.

Sterling's management performed an annual test of its goodwill and other intangible assets as of June 30, 2008, and concluded that the recorded values were not impaired, based on present value discounted cash flow analysis as allowed by FAS 142. During the fourth quarter of 2008, due to reduced expectations for near term profitability, and the protracted decline in Sterling's stock price and market capitalization, Sterling determined that an impairment had occurred, and wrote off $223.8 million of its goodwill. Further deterioration in its loan portfolio from worsening economic conditions, continued stress on real estate values, increasing levels of both classified and non-performing assets and higher net charge-offs, resulted in higher credit costs. Dividends on Sterling's newly issued preferred stock reduce income that is available to common shareholders. Sterling will continue to perform an annual test on the remainder of its goodwill, and evaluate on a quarterly basis the need to perform an interim test. There are many assumptions and estimates underlying the determination of whether goodwill has been impaired. Future events could cause management to conclude that Sterling's goodwill or other intangible assets have become further impaired, which would result in Sterling recording an additional impairment loss. Other intangible assets consisting of core deposit intangibles with definite lives are amortized on a straight line basis over the estimated life of the acquired depositor relationships (generally eight to ten years).

Loan Purchases. In accordance with the American Institute of Certified Public Accountants' Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer," loans are recorded at fair value if, when they are acquired, they show evidence of deteriorating in terms of credit quality, and a loss is deemed likely to occur. Fair value is defined as the present value of future cash flows, including interest income, to be recognized over the life of the loan. SOP 03-3 prohibits the carryover of an allowance for loan loss on certain acquired loans within its scope that are considered in the future cash flow assessment. Sterling considers this guidance when entering into applicable transactions.

Real Estate Owned. Property and other assets acquired through foreclosure of defaulted mortgage or other collateralized loans are carried at the lower of cost or fair value, less estimated costs to sell the property and other assets. The fair value of REO is generally determined from appraisals obtained by independent appraisers. Development and improvement costs relating to such property are capitalized to the extent they are deemed to be recoverable.

An allowance for losses on real estate and other assets owned is designed to include amounts for estimated losses as a result of impairment in value of the real property after repossession. Sterling reviews its real estate owned for impairment in value whenever events or circumstances indicate that the carrying value of the property or other assets may not be recoverable. In performing the review, if expected future undiscounted cash flow from the use of the property or other assets or the fair value, less selling costs, from the disposition of the property or other assets is less than its carrying value, an impairment loss is recognized.

Income Taxes. Sterling estimates income taxes payable based on the amount it expects to owe various tax authorities. Taxes are discussed in more detail in Note 12 of Notes to Consolidated Financial Statements. Accrued income taxes represent the net estimated amount due to, or to be received from, taxing authorities. In estimating accrued income taxes, Sterling assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account the applicable statutory, judicial and regulatory guidance in the context of Sterling's tax position. Sterling also considers recent audits and examinations, as well as its historical experience in making such estimates. Although Sterling uses available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances.

Sterling's deferred tax assets and liabilities are also discussed in more detail in Note 12 of Notes to Consolidated Financial Statements. Sterling uses an estimate of future earnings to support its position that the benefit of its net

deferred taxes will be realized. If future pre-tax income should prove nonexistent or less than the amount of temporary differences giving rise to the net deferred tax assets within the tax years to which they may be applied, the assets will not be realized and Sterling's net income will be reduced.

Results of Operations

The most significant component of earnings for a financial institution typically is NII, which is the difference between interest income, primarily from loan, MBS and investment securities portfolios, and interest expense, primarily on deposits and borrowings. Net interest margin refers to NII divided by total average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities.

The following table sets forth, on a tax equivalent basis, information with regard to Sterling's NII, net interest spread and net interest margin:

                                                                               Years Ended December 31,
                                                     2008                                 2007                                2006
                                                                 Average                              Average                             Average
                                        Average       Income/    Yield/      Average       Income/    Yield/      Average      Income/    Yield/
                                        Balance       Expense    Rate(1)     Balance       Expense    Rate(1)     Balance      Expense    Rate(1)
                                                                                (Dollars in thousands)
ASSETS:
Loans:
Mortgage                              $  5,501,102   $ 350,718     6.38%   $  4,994,656   $ 401,084     8.03%   $ 3,291,944   $ 257,811     7.83%
Commercial and consumer                  3,850,263     249,020     6.47%      3,568,815     279,422     7.83%     2,599,651     201,133     7.74%

Total loans                              9,351,365     599,738     6.41%      8,563,471     680,506     7.95%     5,891,595     458,944     7.79%
Mortgage-backed securities               2,051,882     102,863     5.01%      1,655,371      79,266     4.79%     1,862,144      88,398     4.75%
Investments and cash equivalents           423,368      16,660     3.94%        270,384      10,302     3.81%       233,611       5,500     2.35%

Total interest-earning assets           11,826,615     719,261     6.08%     10,489,226     770,074     7.34%     7,987,350     552,842     6.92%

Noninterest-earning assets                 841,147                              778,201                             411,213

Total average assets                  $ 12,667,762                         $ 11,267,427                         $ 8,398,563


LIABILITIES and EQUITY:
Deposits:
Transaction                           $  1,321,932       1,372     0.10%   $  1,359,066       2,543     0.19%   $ 1,106,321       1,692     0.15%
Savings and MMDA                         2,173,133      46,231     2.13%      2,078,984      71,665     3.45%     1,512,198      47,844     3.16%
Time deposits                            4,553,160     186,734     4.10%      4,039,152     203,406     5.04%     2,962,017     135,737     4.58%

Total deposits                           8,048,225     234,337     2.91%      7,477,202     277,614     3.71%     5,580,536     185,273     3.32%
Borrowings                               3,292,287     121,173     3.68%      2,604,764     134,004     5.14%     2,125,620     101,670     4.78%

Total interest-bearing liabilities      11,340,512     355,510     3.13%     10,081,966     411,618     4.08%     7,706,156     286,943     3.72%

Noninterest-bearing liabilities            136,082                              101,044                             122,435

Total average liabilities               11,476,594                           10,183,010                           7,828,591
Total average shareholders' equity       1,191,168                            1,084,417                             569,972

Total average liabilities and
equity                                $ 12,667,762                         $ 11,267,427                         $ 8,398,563

Tax equivalent net interest spread                   $ 363,751     2.95%                  $ 358,456     3.26%                 $ 265,899     3.20%

Tax equivalent net interest margin                                 3.08%                                3.42%                               3.33%

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                                      104.29%                              104.04%                             103.65%

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

Changes in Sterling's NII are a function of changes in both rates and volumes of interest-earning assets and interest-bearing liabilities. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. The following table presents the composition of the change in NII, on a tax equivalent basis, for the periods presented. Municipal loan and bond interest income are presented gross of their applicable tax savings. For each category of interest-earning assets and interest-bearing liabilities, the following table provides information on changes attributable to:

• Volume-changes in volume multiplied by comparative period rate;

• Rate-changes in rate multiplied by comparative period volume; and

• Rate/volume-changes in rate multiplied by changes in volume.

                                                December 31, 2008                                     December 31, 2007
                                           Increase (Decrease) Due to:                           Increase (Decrease) Due to:
                                                            Rate/                                                  Rate/
                                 Volume       Rate         Volume         Total        Volume         Rate         Volume        Total
                                                                         (Dollars in thousands)
Interest income:
Loans:
Mortgage                        $ 40,669   $  (82,654 )   $  (8,381 )   $ (50,366 )   $ 133,349     $   6,541     $  3,383     $ 143,273
Commercial and consumer           22,036      (48,605 )      (3,833 )     (30,402 )      74,984         2,408          897        78,289

Total loans                       62,705     (131,259 )     (12,214 )     (80,768 )     208,333         8,949        4,280       221,562
Mortgage-backed securities        18,986        3,720           892        23,598        (9,816 )         769          (85 )      (9,132 )
Investment and cash
equivalents                        5,828          339           192         6,359           866         3,401          535         4,802

Total interest income             87,519     (127,200 )     (11,130 )     (50,811 )     199,383        13,119        4,730       217,232

Interest expense:
Deposits                          29,061      (66,320 )      (6,016 )     (43,275 )      67,680        18,087        6,574        92,341
Borrowings                        35,370      (38,135 )     (10,066 )     (12,831 )      22,918         7,684        1,732        32,334

Total interest expense            64,431     (104,455 )     (16,082 )     (56,106 )      90,598        25,771        8,306       124,675

Changes in net interest
income on a tax equivalent
basis                           $ 23,088   $  (22,745 )   $   4,952     $   5,295     $ 108,785     $ (12,652 )   $ (3,576 )   $  92,557

2008 versus 2007

Net Interest Income. During the years ended December 31, 2008 and 2007, NII was $359.6 million and $355.4 million, respectively, with the 1% increase attributable to growth in average loan balances. The growth rate in loans slowed during 2008, and turned negative in the second half of the year, reflecting a lower level of originations and an increased provision for loan losses in response to the general economic decline and specific loan portfolio deterioration.

During the years ended December 31, 2008 and 2007, net interest margin was 3.08% and 3.42%, respectively. Net interest income and net interest margin have been negatively affected by the increase in non-performing assets, and the decline in the prime rate. Sterling has been "asset sensitive" during recent periods, with a higher level of interest earning assets that were subject to re-pricing faster in the short term than deposits and borrowings. Additionally, when loans reach non-performing status, the reversal and cessation of accruing interest has an immediate negative impact on net interest margin. Reversal of $28.6 million in accrued interest income on non-performing loans lowered net interest margin by 24 basis points compared with a decline of 4 basis points, or $4.3 million, for 2007.

Provision for Credit Losses. Management's policy is to establish valuation allowances for estimated losses by charging corresponding provisions against income. The evaluation of the adequacy of specific and general valuation . . .