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WASHINGTON		6719		91-1572822
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

Andrew J. Schultheis, Esq.		Jerry A. Creim, Esq.
Richard A. Repp, Esq.		Susan E. Lehr, Esq.
Witherspoon, Kelley, Davenport & Toole, P.S.		Williams, Kastner & Gibbs PLLC
1100 U.S. Bank Building		Two Union Square
422 West Riverside Avenue		601 Union Street, Suite 4100
Spokane, Washington 99201		Seattle, WA 98101
(509) 624-5265		(206) 628-6600

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The information in this document is not complete and may be changed. We may not issue the securities offered by this document until the registration statement filed with the Securities and Exchange Commission is effective. This document is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

	/s/ Robert B. Fuller
	Robert B. Fuller
	Chief Financial Officer
	and Secretary
	Lynnwood Financial Group, Inc.

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	1. Approval of the Plan of Merger. To consider and vote on a proposal to approve the plan of merger by and between Lynnwood and Sterling, pursuant to which you will receive cash and/or shares of Sterling common stock for each share of Lynnwood common stock you own, as described in the accompanying proxy statement/ prospectus.
	2. Adjournments. To consider and act upon a proposal to approve, if necessary, an adjournment of the special meeting to solicit additional proxies in favor of the plan of merger.

	BY ORDER OF THE BOARD OF DIRECTORS
	/s/ Robert B. Fuller
	Robert B. Fuller, Secretary

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QUESTIONS AND ANSWERS ABOUT THE MERGER			1
SUMMARY			4
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF STERLING			10
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF LYNNWOOD			13
UNAUDITED PRO FORMA COMPARATIVE PER SHARE DATA FOR THE YEAR ENDED DECEMBER 31, 2005			15
MARKET PRICE DATA AND DIVIDEND INFORMATION			16
	Comparative Market Price Information		16
	Historical Market Prices and Dividend Information		16
RISK FACTORS			18
	Risks Related to the Merger		18
	Risks Related to Sterling Following Completion of the Merger		19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			25
THE SPECIAL MEETING OF LYNNWOOD SHAREHOLDERS			26
	Record Date		26
	Voting		26
	Adjournments		27
	Revocation of Proxies		27
	Proxy Solicitation		27
	Outstanding Voting Securities		27
	Security Ownership of Management and Certain Beneficial Owners		28
THE MERGER			29
	General		29
	Background of the Merger		29
	Recommendation of the Lynnwood Board of Directors and Reasons of Lynnwood for the Merger		31
	Consideration to be Received in the Merger		33
	Conversion of Shares; Exchange of Certificates; Elections as to Form of Consideration		34
	Reasons of Sterling for the Merger		34
	Regulatory Approvals Required for the Merger		34
	Material United States Federal Income Tax Considerations of the Merger		35
	Accounting Treatment		38
	Interests of Certain Persons in the Merger		38
	Restrictions on Resales by Affiliates		40
	Method of Effecting the Acquisition		40
	Effective Time		40
	Treatment of Options		40
	Declaration and Payment of Dividends		41
	No Fractional Shares		41
THE MERGER AGREEMENT			42
	Representations and Warranties		42
	Conduct of Sterling Pending the Merger		43
	Conduct of Lynnwood Pending the Merger		43
	Additional Covenants		46
	Conditions to Consummation of the Merger		48
	Nonsolicitation		50
	Termination of the Merger Agreement		50
	Waiver and Amendment to the Merger Agreement		51

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	Termination Fee		51
	Nasdaq Listing		52
	Expenses		52
	Voting Agreements		52
	Shareholder Agreements		52
INFORMATION ABOUT LYNNWOOD			53
	Business of Lynnwood		53
	Lending Products and Services		54
	Deposit Products and Services		54
	Competition		54
	Facilities		55
	Employees		55
	Legal Proceedings		55
	Lynnwood’s Management’s Discussion and Analysis of Financial Condition and Results of Operations		56
	Critical Accounting Policies		56
	Results of Operations		58
REGULATION AND SUPERVISION			70
	General		70
	Bank Holding Company Regulation		70
	Bank Regulation		72
	Prompt Corrective Action		72
	Sarbanes-Oxley Act		73
	USA Patriot Act		73
DESCRIPTION OF STERLING CAPITAL STOCK			74
	Common Stock		74
	Preferred Stock		74
	Registration Rights		74
COMPARISON OF RIGHTS OF LYNNWOOD COMMON STOCK AND STERLING COMMON STOCK			74
	Board of directors		75
	Right to call special meeting of shareholders		75
	Removal of officers		75
	Amendment of articles and bylaws		75
	Right to call special meeting of directors		76
	Voting rights		76
DISSENTERS’ RIGHTS			77
LEGAL MATTERS			78
EXPERTS			78
WHERE YOU CAN FIND MORE INFORMATION			78
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE			79
Appendix A     Agreement and Plan of Merger			A-1
Appendix B     Washington Dissenters’ Rights Statute			B-1
Appendix C     Lynnwood’s Audited Financial Statements for December 31, 2005 and 2004			C-1
EXHIBIT 5.1
EXHIBIT 8.1
EXHIBIT 8.2
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 99.1

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Q1:	Why are these proxy materials being sent to Lynnwood shareholders?
A1:	This document is being provided by, and the enclosed proxy is solicited by and on behalf of, the Lynnwood board of directors for use at the special meeting of Lynnwood shareholders.
Q2:	When and where is the Lynnwood special meeting?
A2:	The Lynnwood special meeting is scheduled to be held at 3:00 p.m., local time, on June 14, 2006 at 23515 Timberlane Road, Woodway, Washington 98020, unless it is postponed.
Q3:	What is the purpose of the Lynnwood special meeting? What am I voting on?
A3:	The purpose of the special meeting is to consider and vote upon: approval of the plan of merger by and between Lynnwood and Sterling, as provided in the Agreement and Plan of Merger, dated as of February 12, 2006, by and between Sterling and Lynnwood, and, if necessary, approval of an adjournment of the special meeting to solicit additional proxies in favor of the plan of merger.
Q4:	Who is entitled to vote at the Lynnwood special meeting?
A4:	Lynnwood shareholders of record at the close of business on May 5, 2006, the record date for the Lynnwood special meeting, are entitled to receive notice of and to vote on matters that come before the special meeting and any adjournments or postponements of the special meeting. However, a Lynnwood shareholder may only vote his or her shares if he or she is present in person or is represented by proxy at the Lynnwood special meeting.
Q5:	How do I vote?
A5:	After carefully reading and considering the information contained in this document, please fill out, sign and date the proxy card, and then mail your signed proxy card in the enclosed envelope as soon as possible so that your shares may be voted at the special meeting. Lynnwood shareholders may attend the Lynnwood special meeting and vote in person. Even if you are planning to attend the special meeting, we request that you fill out, sign and return your proxy card. For more detailed information, please see the section entitled “The Special Meeting of Lynnwood Shareholders” beginning on page 26.
Q6:	How many votes do I have?
A6:	Each share of Lynnwood common stock that you own as of the record date entitles you to one vote. As of the close of business on May 5, 2006, there were 1,038,921 outstanding shares of Lynnwood common stock. As of that date, 80.46% of the outstanding shares of Lynnwood common stock was held by directors and executive officers of Lynnwood and their respective affiliates.
Q7:	What constitutes a quorum at the Lynnwood special meeting?
A7:	The presence of the holders of a majority of the shares entitled to vote at the Lynnwood special meeting constitutes a quorum. Presence may be in person or by proxy. You will be considered part of the quorum if you return a signed and dated proxy card, or if you vote in person at the special meeting.

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Q8:	What vote is required to approve the plan of merger? What is the effect of not voting?
A8:	The affirmative vote of the holders of at least two-thirds of all outstanding shares of Lynnwood common stock not held by Charles and Lynette Ainslie is required under the terms of the agreement and plan of merger. No vote of the shareholders of Sterling is required to approve the plan of merger.

	Because the affirmative vote required to approve the plan of merger is based upon the total number of outstanding shares of Lynnwood common stock, the failure to submit a proxy card (or to vote in person at the special meeting) or the abstention from voting by a shareholder will have the same effect as a vote against approval of the plan of merger.

Q9:	What is the recommendation of the Lynnwood board of directors?
A9:	The Lynnwood board of directors unanimously recommends a vote “FOR” approval of the plan of merger.
Q10:	What if I return my proxy but do not mark it to show how I am voting?
A10:	If your proxy card is signed and returned without specifying your choice, your shares will be voted according to the recommendation of the Lynnwood board of directors.
Q11:	Can I change my vote after I have mailed my signed proxy card?
A11:	Yes. You can change your vote by revoking your proxy at any time before it is exercised at the Lynnwood special meeting. You can revoke your proxy in one of three ways:

	•	notify Lynnwood’s corporate secretary in writing before the special meeting that you are revoking your proxy,
	•	submit another proxy with a later date prior to the special meeting, or
	•	vote in person at the special meeting.

Q12:	As a holder of Lynnwood common stock, what will I receive in the merger?
A12:	Lynnwood’s founder, Charles Ainslie, and his wife Lynette, will receive a combination of cash and Sterling common stock for the Lynnwood common stock they own. All other Lynnwood shareholders will receive Sterling common stock for the shares of Lynnwood common stock they own.
Q13:	Why are Lynnwood’s founder, Charles Ainslie, and his wife Lynette, receiving all of the cash consideration to be paid in the merger?
A13:	Sterling and Lynnwood determined that all of the cash to be paid in the merger would be paid to Lynnwood’s founder, Charles Ainslie, and his wife Lynette, for a number of reasons. Under federal securities law, because Charles Ainslie would be a former officer and director of Lynnwood, Mr. and Mrs. Ainslie would be subject to restrictions on trading in their Sterling common stock, which would limit their ability to obtain liquidity — a limitation not likely to be faced by any of the other Lynnwood shareholders because no other Lynnwood shareholder is likely to acquire enough shares of Sterling so as to be subject to the trading volume limitations. In addition, Sterling was also concerned with the potential impact that a sale by Mr. and Mrs. Ainslie of a large amount of Sterling stock might have on the price of Sterling’s common stock, even if Mr. and Mrs. Ainslie received less shares and all of the cash consideration. To address this concern, Sterling required that Mr. and Mrs. Ainslie agree to additional restrictions on the sale of their Sterling shares. Sterling and Lynnwood were also aware that the receipt of cash consideration would generally result in immediate recognition of gain for the recipient and that Lynnwood shareholders receiving only stock consideration would not be expected to experience a taxable event as a result of the merger, except for any cash received in lieu of fractional shares.

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Q14:	What regulatory approvals are required to complete the merger?
A14:	In order to complete the merger, Sterling must first obtain the prior approval of the Board of Governors of the Federal Reserve System, or FRB. Moreover, the acquisition of Golf Savings Bank and Golf Escrow Corporation is subject to the receipt of prior approval from the Federal Deposit Insurance Corporation, or FDIC, and the Washington Department of Financial Institutions, or WDFI. An application with the FRB was filed on or about April 20, 2006. An application with the FDIC was filed on or about April 20, 2006. An application with the WDFI was filed on or about April 20, 2006.
Q15:	Do I have dissenter’s or appraisal rights with respect to the merger?
A15:	Yes. Under Washington law, you have the right to dissent from the merger. To exercise dissenters’ rights of appraisal you must strictly follow the procedures prescribed by the Washington Business Corporation Act, or the WBCA. To review these procedures in more detail, see the section entitled “Dissenters’ Rights” beginning on page 77, and Appendix B of this proxy statement/ prospectus.
Q15:	What are the material U.S. Federal income tax consequences of the merger to me?
A15:	The merger will qualify for U.S. Federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, referred to as the Code. As a result, we expect that, for U.S. federal income tax purposes, Lynnwood shareholders receiving only Sterling common stock generally will not recognize any gain or loss in their Lynnwood common stock as a result of the merger (except with respect to cash for fractional shares).

	For further information concerning U.S. federal income tax consequences of the merger, please see the section entitled “The Merger — Material United States Federal Income Tax Considerations of the Merger” beginning on page 34 of this proxy statement/ prospectus.

Q16:	What risks should I consider before I vote on the merger?
A16:	We encourage you to read carefully the detailed information about the merger contained in this document, including the section entitled “Risk Factors” beginning on page 18.
Q17:	When do you expect to complete the merger?
A17:	We are working to complete the merger in the third quarter of 2006. We must first obtain the necessary regulatory approvals and the approval of Lynnwood’s shareholders at the special meeting. In the event of delays, the date for completing the merger can occur as late as November 30, 2006, after which Lynnwood and Sterling would need to mutually agree to extend the closing date of the merger. We cannot assure you as to if and when all the conditions to the merger will be met nor can we predict the exact timing. It is possible we will not complete the merger.
Q18:	Whom should I contact with questions or to obtain additional copies of this document?
A18:	Sterling Financial Corporation

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	Our loan originations are highly concentrated in certain types of loans.

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	•	our businesses may not be combined successfully, or such combination may take longer to accomplish than expected;
	•	the growth opportunities and cost savings from the merger may not be fully realized or may take longer to realize than expected;
	•	operating costs, customer losses and business disruption following the merger, including adverse effects of relationships with employees, may be greater than expected;
	•	adverse governmental or regulatory policies may be enacted;
	•	the interest rate environment may change, causing margins to compress and adversely affecting net interest income;
	•	the global financial markets may experience increased volatility;
	•	we may experience adverse changes in our credit rating;
	•	we may experience competition from other financial services companies in our markets; and
	•	the risk of an economic slowdown that may adversely affect credit quality and loan originations.

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			Amount and Nature
			of Beneficial				Percent
Name of Beneficial Owner			Ownership				of Class
Charles J Ainslie — President & CEO				551,198				53.05	%
	Lynette Ainslie (included in above)
Dennis V. O’Leary — EVP & Director				123,637				11.9	%
Donn C. Costa — EVP & Director				125,715				12.1	%
Robert B. Fuller — EVP & Director(1)				39,662				3.73	%(3)
David E. A. Holmstrom — SVP & Director				1,428				*
Gerald R. Zachary — Director				2,338				*
William Tindall — Director				3,768				*
Nicole A. Galipeau — Director(2)				15,058				1.45	%
Jennifer Clark — Director				1,000				*
All directors and executive officers as a group				863,804				81.22	%(3)

	*	Less than 1%.

(1)	Includes 24,662 shares issuable pursuant to vested stock options.
(2)	Includes 3,000 shares held of record by Ms. Galipeau as trustee of the William Jay Ainslie Galipeau Irrevocable Trust and 6,200 shares held for the benefit of Ms. Galipeau’s children.
(3)	Based on 1,038,921 shares outstanding as of December 31, 2005, together with 24,662 shares issuable pursuant to vested stock options.

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	•	Terms of the Merger. The terms of the merger, including the consideration being paid and various other documents related to the merger and the structure of the merger.
	•	Capital Constraints. Lynnwood’s growth rate during 2005 expanded its balance sheet to a level near regulatory limits and future growth cannot continue at such a pace without additional capital.
	•	Liquidity. The historical stock price performance and liquidity of Sterling common stock should provide greater liquidity for Lynnwood shareholders, especially for the minority shareholders, because there is no public market for Lynnwood’s common stock.
	•	Value. The value to be received by holders of Lynnwood common stock pursuant to the merger agreement in relation to the historical trading prices of Lynnwood common stock, as compared to other similar transactions of a comparable nature in the view of the board of directors’ financial advisors.
	•	Dividends. Sterling’s common stock pays dividends, and Lynnwood may have limited ability to pay future dividends due to regulatory capital limitations.
	•	Products & Services. Lynnwood customers would be afforded new or enhanced products and services not previously available. Examples of these enhancements include larger credit relationships, more advanced cash management services, a broader array of commercial real estate conduits, and all-in-one residential construction loans.
	•	Competitive Issues. Competition in Lynnwood’s market has increased in the past few years, especially in pricing of commercial real estate financing and the competition for single-family mortgage financing, and is expected to increase in the future as other larger banks enter the market.
	•	Financial Advisors. The advice of Sandler O’Neill & Partners, L.P. and D.A. Davidson & Co., Lynnwood’s financial advisors, as to the financial terms of the merger.
	•	Future Prospects. The Lynnwood board of directors believes that future earnings prospects will be stronger on a combined basis. In addition, affiliation with Sterling should offer expansion opportunities not currently available because Lynnwood has nearly reached its regulatory limits and capital is required for future growth.

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	•	Other Strategies. Other alternatives to the merger for raising capital and for achieving shareholder value and liquidity were not likely to be successful in the near term or at all.
	•	Employee Matters. The expectation that the merger will generally expand the career opportunities and employee benefits available to many Lynnwood employees.
	•	Risks of Remaining Independent. The Lynnwood board of directors considered the risks and costs associated with remaining an independent bank given the increasing level of regulation and competition.
	•	Approvals. The likelihood of receiving regulatory approvals in a timely fashion and the likelihood that the merger would be completed.
	•	Corporate Values. The Lynnwood board of directors’ belief that the two companies share a common vision of the importance of customer service and that management and employees of Lynnwood and Sterling possess complementary skills and expertise.
	•	Reorganization. The expectation that the merger will constitute a reorganization under section 368(a) of the Internal Revenue Code (see the section entitled “Material United States Federal Income Tax Considerations of the Merger” on page 34).

	•	Amount of Consideration Unknown until Closing. Because the market price of Sterling stock will fluctuate, and because the merger consideration consists of 1,800,000 shares of Sterling common stock, Lynnwood shareholders cannot be sure of the exact dollar value of the consideration they will receive for their shares of Lynnwood common stock.
	•	Business Interruption. The possible disruption to Lynnwood’s business that may result from the announcement of the merger and the resulting distraction of its management’s attention from the day-to-day operation of Lynnwood’s business.
	•	Integration Issues. The difficulty inherent in integrating two businesses and the risk that the cost efficiencies, synergies and other benefits expected to be obtained in the merger may not be fully realized.
	•	Operational Restrictions. The restrictions contained in the merger agreement on the operation of Lynnwood’s business during the period between the signing of the merger agreement and completion of the merger.
	•	Termination, No-Approval, and Break-up Fees. Under certain circumstances, Sterling may terminate the merger agreement and require Lynnwood to pay a termination fee of either $1,000,000 or $2,500,000, depending on the circumstances of the termination. In certain circumstances, Lynnwood may terminate the merger agreement and require Sterling to pay a termination fee of $1,000,000. In particular, in certain instances in which the merger agreement is terminated following the receipt of a superior proposal prior to the consummation of the merger and such a superior proposal is accepted, Lynnwood may be required to pay a termination fee of $2,500,000 and the board of directors considered the risk that this termination fee may discourage third parties from offering to acquire Lynnwood by increasing the cost of a third-party acquisition.
	•	Risk of Termination. The possibility that the merger might not be completed and the effect of the resulting public announcement of the termination of the merger agreement on, among other things, the market price of Lynnwood common stock and Lynnwood operating results, particularly in light of the costs incurred in connection with the transaction.

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	•	Assume the average closing price of Sterling common stock on the Nasdaq Stock Market for the twenty (20) trading days ending on (and inclusive of) the fifth business day immediately prior to the closing date of the merger is $25.00.
	•	The aggregate merger consideration value to be received by all Lynnwood shareholders would be $60,750,000.00 ((1,800,000 x $25.00) + $15,750,000.00).
	•	Assume that 1,038,921 shares of Lynnwood common stock are outstanding. The per share merger consideration value to be received by all Lynnwood shareholders would be $58.4741 ($60,750,000.00 ÷ 1,038,921).
	•	Assume Charles and Lynnette Ainslie hold 551,198 Lynnwood Shares. Their consideration value would be $32,230,806.97 ($58.4741 x 551,198).
	•	The value of the Sterling common stock to be received by Charles and Lynnette Ainslie would be $16,480,806.97 ($32,230,806.97 - $15,750,000.00).
	•	The number of shares of Sterling common stock that they would receive would be 659,232.2788 shares of Sterling common stock ($16,480,806.97 ÷ $25.00).
	•	The cash and stock to be received by Charles and Lynnette Ainslie therefore would be $15,750,000.00 in cash and 659,232.2788 shares of Sterling Common Stock.
	•	The aggregate number of shares of Sterling common stock to be received by all other Lynnwood shareholders would be 1,140,767.7212 shares (1,800,000 - 659,232.2788).
	•	Assume that all other Lynnwood shareholders hold 487,723 shares of Lynnwood Common Stock. Their per share consideration therefore would be 2.3390 shares of Sterling Common Stock for each share of Lynnwood Common Stock held by the Other Holders (1,140,767.7212 ÷ 487,723).

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	•	Lynnwood’s strong existing customer base and reputation for providing mortgage banking and financial services;
	•	the compatibility of the merger with Sterling’s long-term community banking strategy;
	•	Golf Savings Bank’s construction lending prowess along the I-5 corridor north of Seattle complements Sterling’s existing Puget Sound franchise;
	•	the ability of the combined company to offer a broader array of products and services to Lynnwood’s customers;
	•	Lynnwood’s financial performance would make the transaction immediately accretive to earnings;
	•	potential opportunities to reduce operating costs and enhance revenue; and
	•	Sterling management’s prior record of integrating acquired financial institutions.

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	•	a partnership, subchapter S corporation or other pass through entity;
	•	a foreign person, foreign entity or U.S. expatriate;
	•	a mutual fund, bank, thrift or other financial institution;
	•	a tax-exempt organization or pension fund;
	•	an insurance company;
	•	a trader in securities that elects mark-to-market;
	•	a dealer in securities or foreign currencies;
	•	a shareholder who received his or her shares of Lynnwood common stock through a benefit plan or a tax-qualified retirement plan or through the exercise of employee stock options or similar derivative securities or otherwise as compensation;
	•	a shareholder who may be subject to the alternative minimum tax provisions of the Code;
	•	a shareholder whose functional currency is not the U.S. dollar;
	•	a shareholder who exercises dissenters’ rights; and
	•	a shareholder who holds Lynnwood common stock as part of a hedge, appreciated financial position, straddle, synthetic security, conversion transaction or other integrated investment.

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	Exchange of Lynnwood Common Stock for Sterling Common Stock.

	•	A Lynnwood shareholder who receives shares of Sterling common stock in exchange for shares of Lynnwood common stock will not recognize gain or loss as a result of the merger, except with respect to any cash received instead of fractional share interests in Sterling common stock;
	•	the aggregate tax basis of the Sterling common stock received in the merger will be the same as the aggregate tax basis of the Lynnwood common stock for which it is exchanged, less any tax basis attributable to fractional share interests in Sterling common stock for which cash is received; and
	•	the holding period of Sterling common stock received in exchange for shares of Lynnwood common stock will include the holding period of the Lynnwood common stock for which it is exchanged.

	Exchange of Lynnwood Common Stock for Sterling Common Stock and Cash.

	•	A Lynnwood shareholder who receives part cash and part Sterling common stock in exchange for shares of Lynnwood common stock generally will recognize gain, but not loss, equal to the lesser of (1) the excess, if any, of the fair market value of the Sterling common stock and the amount of cash received by the shareholder (excluding cash received in lieu of a fractional share, which would be taxed as discussed below) over that shareholder’s adjusted tax basis in the Lynnwood common stock exchanged in the merger or (2) the amount of cash received by the shareholder in the merger (excluding cash received in lieu of fractional shares, which will be taxed as discussed below);
	•	the gain recognized by a Lynnwood shareholder in the merger generally will constitute capital gain, unless, as discussed below, the shareholder’s receipt of cash has the effect of a distribution of a dividend for U.S. federal income tax purposes, in which case the shareholder’s gain will be treated as ordinary dividend income to the extent of the shareholder’s ratable share of current and accumulated earnings and profits as calculated for U.S. federal income tax purposes;
	•	any capital gain recognized by a Lynnwood shareholder generally will constitute long-term capital gain (taxed at a maximum rate of 15% in the case of an individual) if the shareholder’s holding period for the Lynnwood common stock exchanged in the merger is more than one year as of the date of the merger, and otherwise will constitute short-term capital gain;
	•	the aggregate tax basis of the shares of Sterling common stock received by a Lynnwood shareholder in exchange for Lynnwood common stock in the merger will be the same as the aggregate tax basis of the shareholder’s Lynnwood common stock exchanged therefor (less any tax basis attributable to a fractional share for which cash is received), decreased by the amount of cash received by the shareholder in the merger (excluding any cash received in lieu of a fractional share) and increased by the amount of gain recognized by the shareholder in the merger (including any portion of the gain that is treated as a dividend and excluding any gain recognized as a result of cash received in lieu of a fractional share); and
	•	the holding period of the shares of Sterling common stock received by a Lynnwood shareholder in the merger will include the holding period of the shareholder’s Lynnwood common stock exchanged in the merger.

	Potential Treatment of Cash as a Dividend.

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	Cash Received in Lieu of a Fractional Share.

	Backup Withholding.

	Reporting Requirements.

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	Stock Ownership.

	Stock Options.

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	Lynnwood Change in Control Obligations.

	Nonqualified Deferred Compensation Plan.

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	Employee Benefits.

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	•	corporate organization and existence;
	•	the corporate organization and existence of any subsidiaries;
	•	capitalization;
	•	corporate power and authority;
	•	governmental and third-party approvals required to complete the merger;
	•	timely filing of required regulatory reports and absence of regulatory investigations or restrictive agreements with regulators;
	•	availability, accuracy and compliance with generally accepted accounting principles of financial reports, in the case of Lynnwood, and of reports and filings with the Securities and Exchange Commission, in the case of Sterling, and absence of material adverse effect since the date of the last amended financial statements;
	•	absence of broker’s fees;
	•	absence of certain changes or events;
	•	payment of taxes and filing of tax returns;
	•	compliance with applicable laws; and
	•	tax treatment of the merger.

	•	absence of material litigation;
	•	employee benefit matters;
	•	validity of, and the absence of defaults under, certain material contracts;
	•	regulatory agreements;
	•	state takeover laws;
	•	environmental matters;
	•	allowances for losses;
	•	properties and assets;
	•	insurance coverage;
	•	loans;
	•	undisclosed material liabilities;
	•	intellectual property rights;

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	•	indemnification
	•	insiders’ interests; and
	•	information to be contained in securities filings or other documents filed with governmental entities.

	•	take any action that will result in: Sterling’s representations and warranties set forth in the merger agreement being or becoming untrue; any of the conditions to the consummation of the merger not being satisfied; or, a violation of the merger agreement, except, in each case, as may be required by applicable law;
	•	take any action, or amend the Sterling Articles of Incorporation or Bylaws, the effect of which would be to materially and adversely affect the rights or powers of shareholders generally;
	•	take or omit to take any other action that would materially adversely affect or materially delay the ability of Sterling to obtain the required regulatory approvals or otherwise materially adversely affect Sterling’s ability to consummate the transactions contemplated by the merger agreement; or
	•	agree or commit to take any such prohibited action.

	Ordinary Course of Business.

	•	conduct business in the usual, regular and ordinary course in substantially the same manner as previously conducted;
	•	pay all debts, taxes and other obligations when due,
	•	use its commercially reasonable efforts to preserve intact its present business organizations, keep available the services of its present officers and key employees and preserve relationships with customers, suppliers, distributors, licensors, licensees, and other business contacts;
	•	promptly notify Sterling of any change, occurrence or event not in the ordinary course of its or any subsidiary’s business, and of any change, occurrence or event which, individually or in the aggregate with any other changes, occurrences and events, would reasonably be expected to cause any of the conditions to closing set forth in the merger agreement not to be satisfied;
	•	use its commercially reasonable efforts to assure that each of its contracts entered into after February 12, 2006 will not require the procurement of any consent, waiver or novation or provide for any change in the obligations of any party in connection with, or terminate as a result of the consummation of, the merger, and to give reasonable advance notice to Sterling prior to allowing any material contract or right thereunder to lapse or terminate by its terms; and
	•	maintain each of its leased premises in accordance with the terms of the applicable lease.

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	Dividends and Capital Stock.

	•	declare or pay any dividends on, or make other distributions in respect of, any capital stock, except cash dividends from Lynnwood subsidiaries to Lynnwood or to other Lynnwood subsidiaries, in conformity with past practice and applicable law;
	•	split, combine or reclassify any shares of capital stock or issue, authorize or propose the issuance of any other securities for shares of its capital stock, except upon the exercise or fulfillment of options issued and outstanding as of February 12, 2006 pursuant to the Lynnwood Stock Option Plan;
	•	repurchase, redeem or otherwise acquire any shares of the capital stock of Lynnwood or Golf Savings Bank, or any securities convertible into or exercisable for any shares of the capital stock of Lynnwood or Golf Savings Bank; or
	•	issue, allocate, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any such shares, or enter into any agreement with respect to any of the foregoing, other than the issuance of Lynnwood common stock pursuant to stock options or similar rights to acquire Lynnwood common stock granted pursuant to the Lynnwood Stock Option Plan and outstanding prior to February 12, 2006.

	Amendments to Governing Documents.

	•	amend its articles of incorporation, bylaws or other similar governing documents unless required to do so by applicable law or regulation or by regulatory directive.

	Capital Expenditures.

	•	make capital expenditures aggregating in excess of $35,000, except as provided in the merger agreement.

	Other Business.

	•	enter into any new line of business;
	•	acquire or agree to acquire, by merging or consolidating with, or by purchasing an equity interest in or the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets, other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings, or in the ordinary course of business; and
	•	make any investment, or incur deposit liabilities, other than in the ordinary course of business consistent with past practices.

	Representations and Warranties.

	•	take any action that is intended or may reasonably be expected to result in: any of its representations and warranties set forth in the merger agreement being or becoming untrue; any of the conditions to the merger not being satisfied; or a violation of any provision of the merger agreement, except, in each case as may be required by applicable law.

	Accounting Methods.

	•	change its methods of accounting in effect at September 30, 2005 except as required by changes in GAAP or regulatory accounting principles as concurred to by Lynnwood’s independent auditors.

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	Compensation and Benefits.

	•	except as required by applicable law or the merger agreement or to maintain qualification pursuant to the Code, adopt, amend, renew or terminate any benefit plan or any agreement, arrangement, plan or policy between Lynnwood or Golf Savings Bank and one or more of its current or former directors, officers or employees;
	•	other than normal annual increases in pay, consistent with past practice, for employees not subject to an employment, change in control or severance agreement, increase in any manner the compensation of any employee or director or pay any benefit not required by any plan or agreement as in effect as on February 12, 2006;
	•	enter into, modify or renew any contract, agreement, commitment or arrangement providing for the payment to any director, officer or employee of compensation or benefits, other than normal annual increases in pay, consistent with past practice, for employees not subject to an employment, change in control or severance agreement;
	•	hire any new employee at an annual compensation in excess of $65,000;
	•	pay aggregate expenses of more than $3,000 of employees or directors who attend conventions or similar meetings after the date of the merger agreement;
	•	promote any employee to a rank of vice president or more senior; or
	•	except as provided in the merger agreement, pay any retention or other bonuses in excess of $25,000 to any employees.

	Indebtedness.

	•	incur any indebtedness, with a term greater than one year, for borrowed money, or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, in each case other than in the ordinary course of business;
	•	sell, purchase, enter into a lease, relocate, open or close any banking or other loan production office or other real estate, or file an application pertaining to such action with any governmental entity, except as provided in the merger agreement; and
	•	make any equity investment or commitment to make such an investment in real estate or in any real estate development project, other than in connection with foreclosure, settlements in lieu of foreclosure, or troubled loan or debt restructuring, in the ordinary course of business.

	Loans.

	•	make any new loans to, modify the terms of any existing loan to, or engage in any other transactions with, any officer, director or greater than five-percent shareholder of Lynnwood or Golf Savings Bank (or any of their affiliates), or to or with any of their employees, other than loans to employees that are in the ordinary course of business and that are qualified to be sold in the secondary market; and
	•	purchase or originate: (a) any loans except in accordance with existing Golf Savings Bank lending policies; (b) unsecured consumer loans in excess of $50,000; (c) residential permanent or construction loans in excess of $2,000,000; (d) non-mortgage commercial loans in excess of $250,000; or (e) income property (permanent and construction) loans, excluding multi-family, in excess of $750,000, except in each case, as provided in the merger agreement.

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	Investments.

	•	make any investments in any equity or derivative securities or engage in any forward commitment, futures transaction, financial options transaction, hedging or arbitrage transaction or covered asset trading activities or make any investment in any investment security with an average life greater than one year at the time of purchase;
	•	sell any “held for investment” loans or servicing rights related thereto or purchase any mortgage loan servicing rights; or
	•	take or omit to take any other action that would have a material adverse effect on, or materially delay, the ability of Lynnwood and Sterling to obtain any required regulatory approvals or otherwise have a material adverse effect on Lynnwood’s and Golf Savings Bank’s ability to consummate the transactions contemplated by the merger agreement.

	Commitments.

	•	take or omit to take any other action that would materially adversely affect or materially delay the ability of Sterling to obtain the required regulatory approvals or otherwise materially adversely affect Sterling’s or Sterling Savings Bank’s ability to consummate the transactions contemplated by the merger agreement.

	Prior Shareholder Agreements.

	•	cause its prior agreements with shareholders to be terminated, effective as of the effective time, in accordance with their respective terms, and cause the shareholders who are parties to prior shareholder agreements to waive all of their respective rights thereunder, effective as of the effective time.

	Benefit Plans.

	•	use its reasonable best efforts to (i) merge the Golf Savings Bank 401(k) Plan into Sterling’s 401(k) Plan and (ii) terminate or withdraw from the Golf Savings Bank Deferred Compensation Plan and the Golf Savings Bank Benefits Plan, and all other plans, except for the Golf Savings Bank 401(k) Plan and the Lynnwood Stock Option Plan, at or as soon as reasonably practicable after the effective time, in accordance with the applicable plan documents and laws; unless Sterling chooses to merge one or more of the plans into a corresponding Sterling plan.

	•	promptly cause a registration statement and applicable state filings for the merger to be prepared and filed with the SEC and to use their reasonable best efforts to have the registration statement declared effective by the SEC as soon as possible after the filing thereof. The parties have also agreed to cooperate in responding to any questions or comments from the SEC and in amending the registration statement and such filings as necessary;
	•	cooperate and consult with each other and use their best efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, and to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and governmental entities which are necessary or advisable to consummate the transactions contemplated by the merger agreement and to keep the other apprised of the status of matters relating to such transactions;
	•	furnish each other all information concerning each other and their directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with the registration statement, this proxy statement/ prospectus or any other statement, filing, notice or

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		application made by or on behalf of Sterling or Lynnwood to any governmental entity in connection with the merger or the other transactions contemplated by the merger agreement;
	•	promptly advise each other upon receiving any communication from any governmental entity whose consent or approval is required for consummation of the transactions contemplated by the merger agreement which causes such party to believe that there is a reasonable likelihood that any required regulatory approval will not be obtained or that the receipt of any such approval will be materially delayed;
	•	use reasonable efforts to have the merger qualify as a “reorganization” under section 368(a) of the Internal Revenue Code, or the Code;
	•	pursuant to a Confidentiality Agreement dated November 17, 2005, keep confidential information they provide each other pursuant to the merger agreement;
	•	use their reasonable best efforts (a) to comply with all legal requirements which may be imposed on them with respect to the merger; and (b) obtain (and cooperate with each other to obtain) any consent, authorization, order or approval of, or any exemption by, any governmental entity and any other third party which is required to be obtained in connection with the merger;
	•	promptly advise each other of any change or event that, individually or in the aggregate, has had or would be reasonably likely to have a material adverse effect on us or cause or constitute a material breach of any of its representations, warranties or covenants contained herein; and
	•	promptly notify each other of any material change in the normal course of business or in the operation of their properties and of any governmental complaints, investigations or hearings, or the institution or the threat of litigation involving either of them or any of their subsidiaries.

	•	Sterling may elect to modify the structure of the transactions contemplated by the merger agreement so long as: (i) there are no material adverse consequences to Lynnwood, Lynnwood’s directors or the Lynnwood shareholders; (ii) the consideration paid to Lynnwood’s shareholders is not changed or reduced; and (iii) such modification will not delay or jeopardize receipt of any required regulatory approvals.

	•	accord to the representatives of Sterling, access, during normal business hours throughout the period prior to the effective time, to all of its and its subsidiaries’ properties, books, contracts, commitments and records and, during such period, and to give Sterling notice of all meetings of its board of directors and any committees thereof, and of any management committees, so that a Sterling representative may attend such meeting if Sterling chooses;
	•	take all steps necessary to duly call, give notice of, convene and hold a special meeting of shareholders within 40 days after this proxy statement/ prospectus becomes effective for the purpose of voting upon the adoption or approval of the merger agreement and the merger, and that the board of directors of Lynnwood shall recommend approval of the merger unless a change of recommendation is permitted as provided in the merger agreement;
	•	provide to Sterling the audited consolidated balance sheet of Lynnwood and its subsidiaries as of the end of Lynnwood’s fiscal year and each month and the related audited consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for the relevant periods;
	•	take any further action that is necessary or desirable to effect the purposes of the merger, or to vest Sterling with full title to all properties, assets, rights, approvals, immunities and franchises of any of the parties to the merger;

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	•	cause one or more of its designated representatives to confer on a regular and frequent basis (not less than monthly) with representatives of Sterling and to report the general status of the ongoing operations of Lynnwood;
	•	provide to Sterling an estimate of the expenses Lynnwood expects to incur in connection with the merger, and to keep Sterling reasonably informed of material changes in such estimate.

	•	afford to the representatives of Lynnwood such access, during normal business hours during the period prior to the effective time, to Sterling’s representatives as Lynnwood shall reasonably request, and shall make available to Lynnwood a copy of each report, schedule, and other document filed by it (including by its subsidiaries) during such period pursuant to the requirements of federal securities laws or federal or state banking laws;
	•	use its reasonable best efforts to cause Sterling’s shares of common stock to be issued pursuant to the merger agreement to be approved for quotation on Nasdaq prior to or at the effective time;
	•	credit employees of Lynnwood or any Lynnwood subsidiary with periods of service with Lynnwood or the applicable Lynnwood subsidiary before the effective time as if such service had been with Sterling or a Sterling subsidiary, as applicable;
	•	give credit to employees of Lynnwood and its subsidiaries, with respect to the satisfaction of the waiting periods for participation and coverage which are applicable under the welfare benefit plans of Sterling or its applicable subsidiary, equal to the credit that any such employee had received as of the effective time towards the satisfaction of any such limitations and waiting periods under the comparable welfare benefit plans of Lynnwood and its subsidiaries;
	•	provide each employee of Lynnwood and its subsidiaries with credit for any co-payment and deductibles paid prior to the effective time in satisfying any deductible or out-of-pocket requirements;
	•	allow each employee of Lynnwood and its subsidiaries to have credit for all unused sick leave as of the effective time;
	•	provide coverage for all pre-existing conditions that were covered under any welfare plan of Lynnwood or the applicable Lynnwood subsidiary;
	•	give Lynnwood employees credit for prior service for vacation accruals after the effective time;
	•	provide severance benefits to those employees of Lynnwood and its subsidiaries whose employment is involuntarily terminated without cause at or within 180 days of the effective time unless such employees are entitled to receive severance payments under employment or similar agreements;
	•	indemnify and hold harmless the officers, directors and employees of Lynnwood and its subsidiaries for any liabilities incurred in connection with any matters arising prior to the merger out of their service as an officer, director or employee of Lynnwood or its subsidiaries or the merger agreement for a period of six years after the merger; and
	•	obtain the release of Charles and Lynnette Ainslie from all personal guarantees of, and all personal liability under or for, extensions of credit for which Lynnwood or its subsidiaries is the borrower.

	•	approval of the principal terms of the merger by two-thirds of all outstanding shares of Lynnwood common stock not held by Charles and Lynette Ainslie;

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	•	approval for quotation on Nasdaq of the shares of Sterling common stock that are to be issued to Lynnwood shareholders upon completion of the merger;
	•	receipt of required regulatory approvals for the merger and the related transactions and the expiration of all statutory waiting periods in respect thereof;
	•	effectiveness of the registration statement, of which this proxy statement/ prospectus forms a part, under the Securities Act, with no stop order suspending the effectiveness of the registration statement having been issued and no proceedings for that purpose having been initiated by the SEC and not withdrawn;
	•	absence of any order, injunction or decree issued or enacted by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the completion of the merger or any of the other transactions contemplated by the merger agreement;
	•	receipt by each party of the opinion of its counsel in form and substance reasonably satisfactory to it, dated as of the effective time, that the merger will be treated for U.S. federal income tax purposes as a reorganization under Section 368(a) of the Code;
	•	accuracy of the representations and warranties of the other party in all material respects as of the closing date, as defined in the merger agreement, and, to the extent representations and warranties speak as of some other date, then those representations and warranties shall be true and correct as of such date, provided, however, that the representations and warranties will be deemed to be true and correct, unless the failure or failures of the representations and warranties to be true and correct would have or would be reasonably likely to have a material adverse effect on the party making the representation or on the combined company;
	•	performance by each party in all material respects of all covenants and agreements required to be performed by it under the merger agreement at or prior to the closing date; and
	•	absence of any material adverse change in the other party, whether or not resulting from a breach in any representation, warranty or covenant contained in the merger agreement and the receipt by each party of a certificate to that effect from the designated executive officers of the other party.

	•	The merger agreement and the merger shall have been duly and validly approved and adopted, as required by the WBCA and Lynnwood’s Articles of Incorporation and Bylaws, each as currently in effect, and by the valid and affirmative vote or written consent of at least two-thirds of the outstanding shares of Lynnwood common stock not held by Charles and Lynette Ainslie;
	•	Receipt by Sterling of voting agreements from Charles Ainslie, Donn Costa and Dennis O’Leary, which were executed concurrently with the merger agreement;
	•	Receipt by Sterling of shareholder agreements from each of Charles Ainslie, Donn Costa and Dennis O’Leary, which were executed concurrently with the merger agreement, restricting the transferability of the Sterling common stock following the merger, and no action shall have been taken by any such individual to rescind such shareholder agreement;
	•	Sterling shall have entered into employment agreements with individuals specified in the merger agreement, which were executed concurrently with the merger agreement, and as of the closing date, each of such individuals shall have remained continuously employed with Lynnwood or its subsidiaries and no action shall have been taken by any such individual to rescind such employment agreement;
	•	Charles Ainslie shall have entered into an amendment to his employment agreement with Lynnwood, terminating such agreement immediately prior to the effective time, and shall have entered into a consulting agreement with Sterling, both of which were executed concurrently with

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		the merger agreement, and no action shall have been taken by Mr. Ainslie to rescind such agreements; and
	•	Sterling shall have received resignations from each director of Lynnwood and each of its subsidiaries.

	•	any governmental entity which must grant a required regulatory approval has denied such approval and such denial has become final and nonappealable;
	•	any governmental entity of competent jurisdiction shall have issued a final nonappealable order enjoining or otherwise prohibiting the consummation of the transactions contemplated by the merger agreement, unless such denial or order shall be due to the failure of the party seeking to terminate the merger agreement to perform or observe the covenants and agreements of such party set forth in the merger agreement;
	•	failure to complete the merger by November 30, 2006, unless the failure of the closing to occur by such date shall be due to the failure of the party seeking to terminate the merger agreement (i) to perform or observe the covenants and agreements of such party or (ii) to fulfill the other party’s conditions to closing, in each case as set forth herein;
	•	if the merger has not occurred by the closing date, and the conditions to closing to be performed by the other party have not been satisfied or waived, and the party seeking to terminate (A) is not then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement and (B) has not failed to materially satisfy the other party’s conditions to closing (that have not been waived) due to be performed or satisfied as of the date of the event giving rise to the right to terminate;
	•	if the other party shall have materially breached (i) any of the covenants, agreements, representations or warranties contained in the merger agreement and such breach is not cured

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		within 30 days following written notice to the party committing such breach, or which breach, by its nature, cannot be cured prior to the closing date; and
	•	if the approval of the shareholders of Lynnwood contemplated by the merger agreement shall not have been obtained by reason of the failure to obtain the vote required under the WBCA at the Lynnwood special meeting, unless such failure was caused by Lynnwood or a party to a voting agreement as provided by the merger agreement.

	•	if: (i) the board of directors of Lynnwood shall have failed to recommend to its shareholders the approval of the merger, or shall have changed, or publicly announced its intention to change such recommendation, or (ii) Lynnwood shall have breached its covenant not to solicit other acquisition proposals;

	•	if the average closing price of Sterling’s common stock during a specified period just prior to the closing date is less than $22.56 per share and the Sterling common stock price has also declined from a price of $26.54 per share, the average closing price of Sterling common stock on the Nasdaq National Market for the twenty (20) trading days ending on (and inclusive of) February 10, 2006, by 15% or more relative to a weighted average index of a certain group of financial institution holding companies. Sterling, however, will then have the option to avoid the termination by increasing the consideration paid to Lynnwood shareholders, as provided in the merger agreement.

	•	Lynnwood must pay Sterling a termination fee of $2.5 million if Sterling terminates the merger agreement and elects to receive such fee as a result of: (i) the Lynnwood shareholders failing to approve the merger; (ii) the Lynnwood board of directors failing to recommend the approval of the merger or changing, or publicly announcing its intention to change such recommendation; or (iii) Lynnwood breaching its covenant not to solicit other acquisition proposals;
	•	Lynnwood must pay Sterling a termination fee of $1.0 million if Sterling terminates the merger agreement and elects to receive such fee as a result of Lynnwood (i) failing to perform its closing conditions by the closing date or (ii) materially breaching any of the covenants, agreements, representations or warranties it made in the merger agreement, and such breach is not cured within 30 days following written notice to Lynnwood, or which breach, by its nature, cannot be cured prior to the closing date; and
	•	Sterling must pay Lynnwood a termination fee of $1.0 million if Lynnwood terminates the merger agreement and elects to receive such fee as a result of Sterling (i) failing to perform its closing conditions by the closing date or (ii) materially breaching any of the covenants, agreements, representations or warranties it made in the merger agreement, and such breach is not cured within 30 days following written notice to Sterling, or which breach, by its nature, cannot be cured prior to the closing date.

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Date of

Lease/

Location

SF

Lease

Own

6505 218th St SW, Mountlake Terrace, WA 98043

20,400

06/05/01

Lease

3312 Rosedale Street NW #203, Gig Harbor, WA 98335

1,895

01/10/05

Lease

11871 Silverdale Way NW Ste 111, Silverdale, WA 98383

2,545

03/23/04

Lease

115 NE 100th Ste 110, Seattle, WA 98125

5,087

02/26/01

Lease

1730 Minor Ste 1100, Seattle, WA 98101

6,280

09/17/04

Lease

410 Neel #A Kennewick, WA 98336

2,000

06/21/01

Lease

10230 NE Pointe Dr. Suite 530, Kirkland, WA 98033

7,966

10/01/03

Lease

6100 219th St SW #480 and #440, Mountlake Terrace, WA 98043

11,132

05/09/03

Lease

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		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter				Total
Year Ended December 31, 2005
Interest income		$	7,712			$	10,004			$	11,727			$	12,919			$	42,362
Interest expense			(2,021	)			(2,817	)			(3,785	)			(4,174	)			(12,797	)
Net interest income			5,691				7,187				7,942				8,745				29,565
Provision for loan losses			(210	)			(220	)			(223	)			(243	)			(896	)
Net interest income after provision for loan losses			5,481				6,967				7,719				8,502				28,669
Non-interest income			4,399				5,561				6,607				5,200				21,767
Non-interest expense			(7,086	)			(8,736	)			(10,162	)			(10,255	)			(36,239	)
Income before provision for income taxes			2,794				3,792				4,164				3,447				14,197
Provision for income taxes			(761	)			(1,328	)			(1,453	)			(1,191	)			(4,733	)
Net income		$	2,033			$	2,464			$	2,711			$	2,256			$	9,464

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter				Total
Year Ended December 31, 2004
Interest income		$	4,641			$	5,454			$	6,016			$	6,727			$	22,838
Interest expense			(860	)			(946	)			(1,250	)			(1,514	)			(4,570	)
Net interest income			3,781				4,508				4,766				5,213				18,268
Provision for loan losses			(15	)			(32	)			(135	)			(715	)			(897	)
Net interest income after provision for loan losses			3,766				4,476				4,631				4,498				17,371
Non-interest income			3,833				5,366				4,483				5,094				18,776
Non-interest expense			(5,829	)			(6,965	)			(6,775	)			(7,749	)			(27,318	)
Income before provision for income taxes			1,770				2,877				2,339				1,843				8,829
Provision for income taxes			(619	)			(365	)			(856	)			(643	)			(2,483	)
Net income		$	1,151			$	2,512			$	1,483			$	1,200			$	6,346

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	Allowance for Loan Losses.

	Income Recognition.

	Mortgage Banking Activities.

	Income Taxes.

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	For the years ended December 31, 2005 and December 31, 2004.

		2005				2004
		(Dollars in thousands)
Loan brokerage fees and servicing release premiums		$	13,346			$	12,726
Gain on loan sales			5,795				3,821
Escrow			1,818				1,577
Other			808				652
Total non-interest income		$	21,767			$	18,776
Total loans originated and brokered		$	1,215,000			$	928,000

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	For the years ended December 31, 2004 and December 31, 2003.

		2004				2003
		(Dollars in thousands)
Loan brokerage fees and servicing release premiums		$	12,726			$	18,043
Gain on loan sales			3,821				3,235
Escrow			1,577				1,762
Other			652				563
Total non-interest income			18,766				23,603
Total loans originated and brokered		$	928,000			$	1,121,000

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	Loan Portfolio.

				December 31, 2005								December 31, 2004								December 31, 2003
								Percent of								Percent of								Percent of
				Amounts				Total Loans				Amounts				Total Loans				Amounts				Total Loans
				(Dollars in thousands)
Mortgage — Permanent
	One to Four Family Residential			$	73,679				15.6	%		$	50,067				18.2	%		$	37,706				20.9	%
	Multi — Family Residential				16,525				3.5	%			10,210				3.7	%			2,316				1.3	%
		Commercial Real Estate			40,814				8.6	%			3,647				1.3	%			0				0.0	%
Mortgage — Construction
	One to Four Family Residential				309,246				65.5	%			209,279				75.7	%			139,412				77.1	%
	Multi — Family Residential				22,031				4.7	%			2,324				0.8	%			0				0.0	%
		Commercial Real Estate			6,174				1.3	%			0				0.0	%			0				0.0	%
Total Mortgages				$	468,469				99.2	%		$	275,527				99.7	%		$	179,434				99.3	%
	Commercial and Consumer
	Consumer				421				0.1	%			437				0.2	%			630				0.3	%
	Commercial				3,698				0.8	%			615				0.2	%			650				0.4	%
Total Commercial and Consumer				$	4,119				0.9	%		$	1,052				0.4	%		$	1,280				0.7	%
Total Loans Receivable*					472,588				100.1	%			276,579				100.1	%			180,714				100.0	%
Deferred loan origination fees, net of costs					(601	)			-0.1	%			(256	)			-0.1	%			(12	)			0.0	%
Gross Loans Receivable				$	471,987				100.0	%		$	276,323				100.0	%		$	180,702				100.0	%
Allowance for Loan Losses					(3,102	)			0.66	%*			(2,126	)			0.77	%*			(1,261	)			0.70	%*
Loans Receivable, net and held for sale				$	468,885							$	274,197							$	179,441

*	Total loans includes loans held for sale.

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							Principal Payments Contractually Due
							in Fiscal Years
			Balance Outstanding as
			of December 31, 2005				2006				2007-2010				Thereafter
			(Dollars in thousands)
Mortgage — Permanent
	Fixed rate		$	37,731			$	0			$	0			$	37,731
	Variable rate			93,244				12,112				12,310				68,822
Mortgage — Construction				336,909				310,640				26,269				0
Consumer				421				143				278				0
Commercial				3,682				2,780				902				0
			$	471,987			$	325,675			$	39,759			$	106,553

	Asset and Liability Management.

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	•	construction residential lending at prime plus 1.25 percent;
	•	construction commercial lending at prime plus 1.10 percent; and
	•	consumer lending (home equity loans and short-term bridge financing) of prime plus 1 percent.

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			Projected				Change				Return				Return				Projected
			2006 Net				from				on				on				Capital
			Income				Base				Equity				Assets				Ratio
Probable			Projected Shock to Growth Scenario
	Base case		$	11,032				0%				24%				2.04%				8.71%
	Shock up 1%		$	10,007				-9%				23%				1.86%				8.64%
	Shock up 2%		$	9,006				-18%				21%				1.69%				8.55%
	Shock down 1%		$	12,747				16%				27%				2.33%				8.87%
	Shock down 2%		$	14,903				35%				30%				2.70%				9.13%
Worst Case			Shock to No Growth Scenario
	Base case		$	11,032				0%				24%				2.04%				8.71%
	Shock 1% up-no growth		$	7,616				-31%				18%				1.45%				8.56%
	Shock 2% up-no growth		$	6,558				-41%				16%				1.23%				8.33%
	Shock 1% down-no growth		$	10,413				-6%				23%				2.03%				9.16%
	Shock 2% down-no growth		$	12,291				-11%				26%				2.41%				9.54%

	Assets.

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			Within One Year								One to Five Years								Over Five Years								Grand Total
							%								%								%								%
							Earning								Earning								Earning								Earning
			Total				Assets				Total				Assets				Total				Assets				Total				Assets
Rate sensitive assets:
	Loan Portfolio, including held for sale*		$	380,187				97%			$	47,635				100%			$	44,766				92%			$	472,588				97%
	Investments			0				0%				0								3,649				8%				3,649				1%
	Fed funds sold and interest-bearing deposits			11,178				3%				0								0								11,178				2%
				391,365				100%				47,635				100%				48,415				100%				487,415				100%
Rate sensitive liabilities:
	Saving, NOW, and interest-bearing checking			39,914								0								0								39,914
	Time deposits			324,911								33,937								5,472								364,320
	Other borrowings			39,867								0								0								39,867
				404,692								33,937								5,472								444,101
Interest sensitive gap				(13,327	)							13,698								42,943
Cumulative gap			$	(13,327	)						$	371							$	43,314
Cumulative gap to Total Assets				-2.68	%							0.07	%							8.71	%
Total Assets			$	497,371

*	Excludes deferred fees and includes the allowance for loan losses

	Investment Policy.

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	Yield Analysis.

		Years Ended December 31,
		2005												2004												2003
						Interest				Average								Interest				Average								Interest				Average
						Earned				Yield								Earned				Yield								Earned				Yield
		Average				or				or				Average				or				or				Average				or				or
		Balance				Paid				Cost				Balance				Paid				Cost				Balance				Paid				Cost
		(Dollars in thousands)
Loans		$	391,086			$	42,211				10.79%			$	223,518			$	22,788				10.20%			$	185,246			$	22,168				11.97%
Investment and cash equivalents			14,765				151				1.02%				10,701				50				0.47%				3,138				127				4.05%
Total interest-earning assets		$	405,851			$	42,362				10.44%			$	234,219			$	22,838				9.75%			$	188,384			$	22,295				11.83%
Interest-bearing liabilities:
Time deposits		$	285,820			$	9,821				3.44%			$	131,795			$	2,906				2.20%			$	81,959			$	989				1.21%
Regular savings and MMDA			28,488				738				2.59%				28,131				457				1.62%				26,166				480				1.83%
Interest-bearing demand accounts			23,138				71				0.31%				18,945				64				0.31%				16,287				65				0.40%
Total interest-bearing deposits		$	337,446			$	10,630				3.15%			$	178,871			$	3,427				1.91%				124,412				1,534				1.23%
FHLB Seattle advances			8,152				292				3.58%				7,870				137				1.74%				15,781				250				1.58%
All other borrowings			18,362				987				5.38%				15,937				572				3.58%				28,121				1,970				7.01%
Trust Preferred Securities			14,928				888				5.95%				9,279				434				4.68%				7,144				304				4.26%
Total interest-bearing liabilities			378,888			$	12,797				3.38%				211,957			$	4,570				2.15%				175,458			$	4,058				2.31%
Net interest spread						$	29,565				7.06%							$	18,268				7.60%							$	18,237				9.52%
Net interest margin											7.28%												7.80%												9.68%
Ratio of average interest-earning assets to average interest-bearing liabilities											107.12%												110.50%												107.37%

	Deposits.

			Year Ended December 31, 2005																Year Ended December 31, 2004																Year Ended December 31, 2003
			Period																Period																Period
			End				Average				% of Avg.				Avg. Rate				End				Average				% of Avg.				Avg. Rate				End				Average				% of Avg.				Avg. Rate
			Deposits				Deposits				Deposits				Paid				Deposits				Deposits				Deposits				Paid				Deposits				Deposits				Deposits				Paid
			(Dollars in thousands)
Non-interest bearing demand			$	13,465			$	19,495				5.78%				0.00%			$	13,262			$	15,506				8.67%				0.00%			$	12,082			$	13,845				11.13%				0.0%
NOW, Savings, & MMDA				39,914				32,130				9.52%				2.55%				30,274				31,570				17.65%				1.66%				31,222				28,608				22.99%				1.9%
Certificates of deposit				364,320				285,820				84.70%				3.33%				190,601				131,795				73.68%				2.20%				84,104				81,959				65.88%				1.2%
Maturity in:
	3 months or less			109,016				—				—				—				40,848				—				—				—				28,907				—				—				—
	Over 3 months through 6 months			99,478				—				—				—				54,325				—				—				—				22,093				—				—				—
	6-12 months			116,417				—				—				—				83,700				—				—				—				21,853				—				—				—
	Over 12 months			39,409				—				—				—				11,728				—				—				—				11,251				—				—				—
Total deposits			$	417,699			$	337,445								3.15%			$	234,137			$	178,871								1.91%				127,408				124,412								1.23%

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	Borrowings.

			2005				%				2004				%				2003				%
			(Dollars in thousands)
Federal Home Loan Bank Borrowings			$	0							$	1,200				5.35%			$	6,000				16.00%
Fed Fund Purchases				0								0								5,000				13.33%
Lines of Credit				20,278				50.86%				11,940				53.26%				17,230				45.94%
Trust Preferred Offerings				19,589				49.14%				9,279				41.39%				9,279				24.73%
	Total Borrowings		$	39,867				100.00%			$	22,419				100.00%			$	37,509				100.00%

	Credit Risk Management and Allowance for Loan Losses.

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				December 31,				December 31,				December 31,
				2005				2004				2003
				(Dollars in thousands)
Balance at beginning of period				$	2,126			$	1,261			$	1,084
Charge-offs:
	Mortgage — Permanent				13				67				130
	Mortgage — Construction				0				0				0
	Consumer				0				1				0
	Commercial				0				0				0
		Total charge-offs		$	13			$	68			$	130
Recoveries:
	Mortgage — Permanent				93				36				2
	Mortgage — Construction				0				0				0
	Consumer				0				0				0
	Commercial				0				0				0
		Total recoveries			93				36				2
Net charge-offs/recoveries					(80	)			32				128
Provision charged to operations					896				897				305
Balance at end of period				$	3,102			$	2,126			$	1,261
Loans Outstanding (including loans held-for-sale):
	End of period			$	471,987			$	276,323			$	180,702
	Average during the period				391,087				223,518				185,246
Ratio of allowance for loan losses at end of period to:
	Loans outstanding at end of period				0.66	%			0.77	%			0.70	%
Ratio of net charge offs during the period to average loans outstanding during the period					–0.02	%			0.01	%			0.07	%

		December 31, 2005								December 31, 2004								December 31, 2003
		Allocation				Percentage				Allocation				Percentage				Allocation				Percentage
		(Dollars in thousands)
Mortgage — Permanent		$	861				27.76	%		$	492				23.14	%		$	279				22.13	%
Mortgage — Construction			2,218				71.50	%			1,628				76.58	%			973				77.16	%
Consumer			3				0.10	%			3				0.14	%			4				0.32	%
Commercial			24				0.77	%			5				0.24	%			5				0.40	%
Unallocated			(4	)			-0.13	%			(2	)			-0.09	%			(0	)			-0.01	%
Total		$	3,102				100.00	%		$	2,126				100.00	%		$	1,261				100.00	%
TOTAL LOANS(1)		$	471,987							$	276,323							$	180,702

(1)	Includes loans held for sale.

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	Risk Elements for Nonaccrual, Past Due and Restructured Loans.

	Impact of Inflation and Changing Prices.

	Contractual Obligations and Off-Balance Sheet Arrangements.

			Total				<1 Yr				1 - 3 Yrs				3 - 5 Yrs				over 5 Yrs
			(Dollars in thousands)
Federal Home Loan Bank Borrowings			$	0			$	0			$	0			$	0			$	0
Fed Fund Purchases			$	0			$	0			$	0			$	0			$	0
Warehouse Lines of Credit			$	20,278			$	20,278			$	0			$	0			$	0
Trust Preferred Offerings			$	19,589			$	0			$	0			$	0			$	19,589
	Total Borrowings		$	39,867			$	20,278			$	0			$	0			$	19,589
Lease obligations			$	3,178			$	882			$	2,151			$	145			$	0
Total			$	43,045			$	21,160			$	2,151			$	145			$	19,589

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	Liquidity and Capital Management.

											Capital								Well
			Actual								Adequacy								Capitalized
December 31, 2005			Amount				Ratio				Amount				Ratio				Amount				Ratio
			(Dollars in thousands)
Tier 1 capital (average assets)
	Consolidated		$	46,444				9.79%			$	18,984				4.00%			$	N/A				N/A
	Bank			47,328				10.48%				18,069				4.00%				22,587				5.00	%
Tier 1 capital (risk-weighted assets)
	Consolidated			46,444				10.09%				18,410				4.00%				N/A				N/A
	Bank			47,328				10.86%				17,426				4.00%				26,139				6.00	%
Total 1 capital (risk-weighted assets)
	Consolidated			49,546				10.76%				36,821				8.00%				N/A				N/A
	Bank			50,240				11.53%				34,852				8.00%				43,565				10.00	%

											Capital								Well
			Actual								Adequacy								Capitalized
December 31, 2004			Amount				Ratio				Amount				Ratio				Amount				Ratio
			(Dollars in thousands)
Tier 1 capital (average assets)
	Consolidated		$	35,681				12.76%			$	11,188				4.00%			$	N/A				N/A
	Bank			30,839				11.85%				10,412				4.00%				13,015				5.00	%
Tier 1 capital (risk-weighted assets)
	Consolidated			35,681				12.27%				11,634				4.00%				N/A				N/A
	Bank			30,839				11.21%				11,001				4.00%				16,502				6.00	%
Total 1 capital (risk-weighted assets)
	Consolidated			37,807				13.00%				23,268				8.00%				N/A				N/A
	Bank			32,820				11.93%				22,003				8.00%				27,503				10.00	%

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			Actual								Adequacy								Capitalized
December 31, 2003			Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier 1 Capital (average assets)
	Consolidated		$	29,729				15.20%			$	7,821				4.00%				N/A				N/A
	Bank			25,935				15.67%				6,620				4.00%			$	8,275				5.00	%
Tier 1 Capital (risk-weighted assets)
	Consolidated			29,729				16.74%				7,102				4.00%				N/A				N/A
	Bank			25,935				16.72%				6,203				4.00%				9,304				6.00	%
Total Capital (risk-weighted assets)
	Consolidated			30,990				17.45%				14,204				8.00%				N/A				N/A
	Bank			26,996				17.41%				12,406				8.00%				15,507				10.00	%

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		complete statement of the differences affecting the rights of shareholders and is qualified in its entirety by reference to governing law and the articles of incorporation and bylaws of each corporation and the relevant provisions of the WBCA. See the section entitled “Where You Can Find More Information.”

Lynnwood		Lynnwood’s bylaws provide that the number of directors on the Lynnwood board of directors shall be not less than five nor more than twelve.
Sterling		Sterling’s bylaws provide that the number of directors on the Sterling board of directors shall be nine and that the number of directors may be increased or decreased by an amendment to the bylaws.

Lynnwood		A special meeting of the shareholders may be called by the president, the board of directors or the holders of not less than 10% of all the votes entitled to be cast on any issue proposed to be considered at the special meeting.
Sterling		A special meeting of shareholders may be called by Sterling’s board of directors or by the holders of 10% of Sterling’s voting shares entitled to vote on the proposals to be considered at the special meeting.

Lynnwood		Lynnwood’s bylaws provide that any officer or agent may be removed with or without cause by a vote of the board of directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.
Sterling		Sterling’s bylaws provide that any officer or agent may be removed by a vote of a majority of the board of directors.

Lynnwood		Lynnwood’s bylaws may be adopted, altered, amended or repealed by either 75% of the full board of directors or by 60% of the outstanding shares entitled to vote.
Sterling		Amendments to the bylaws may be adopted by Sterling’s shareholders or by a majority of the board of directors without shareholder approval, subject to the provisions of the WBCA.

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Lynnwood		A special meeting of the board of directors may be called by the president or any two directors.
Sterling		A special meeting of the board of directors may be called by the chairman of the board, or any two directors.

Lynnwood		Lynnwood’s articles of incorporation provide that holders of the common stock exclusively possess all voting power and each share of common stock generally entitles the holder to one vote for each share.
Sterling		Sterling’s articles of incorporation provide that each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as may be otherwise provided by statute or in the articles of incorporation.

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	•	Sterling’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 15, 2006; and
	•	Sterling’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on January 9, 2006, January 30, 2006, February 13, 2006, February 16, 2006 and March 1, 2006.

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				Page
THE MERGER					A-1
1.1		THE MERGER			A-1
1.2		EFFECTIVE TIME			A-1
1.3		EFFECTS OF THE MERGER			A-1
1.4		CONVERSION OF LYNNWOOD COMMON STOCK			A-2
1.5		STERLING COMMON STOCK			A-4
1.6		OPTIONS			A-4
1.7		RESERVATION OF SHARES AND SECURITIES FILINGS			A-5
1.8		ARTICLES OF INCORPORATION			A-5
1.9		BYLAWS			A-5
1.10		DIRECTORS AND OFFICERS			A-5
1.11		TAX CONSEQUENCES			A-5
1.12		ACCOUNTING TREATMENT			A-5
EXCHANGE OF SHARES					A-6
2.1		STERLING TO MAKE SHARES AVAILABLE			A-6
REPRESENTATIONS AND WARRANTIES OF LYNNWOOD					A-7
3.1		CORPORATE ORGANIZATION			A-7
3.2		CAPITALIZATION			A-8
3.3		AUTHORITY; NO VIOLATION			A-9
3.4		CONSENTS AND APPROVALS			A-9
3.5		REPORTS			A-10
3.6		FINANCIAL STATEMENTS; BOOKS AND RECORDS			A-10
3.7		BROKER’S FEES			A-11
3.8		ABSENCE OF CERTAIN CHANGES OR EVENTS			A-11
3.9		LEGAL PROCEEDINGS			A-11
3.10		TAXES AND TAX RETURNS			A-11
3.11		EMPLOYEE PLANS			A-12
3.12		CERTAIN CONTRACTS			A-13
3.13		REGULATORY AGREEMENTS			A-14
3.14		STATE TAKEOVER LAWS			A-14
3.15		ENVIRONMENTAL MATTERS			A-14
3.16		ALLOWANCES FOR LOSSES			A-15
3.17		PROPERTIES AND ASSETS			A-15
3.18		INSURANCE			A-16
3.19		COMPLIANCE WITH APPLICABLE LAWS			A-16
3.20		LOANS			A-16
3.21		UNDISCLOSED LIABILITIES			A-17
3.22		INTELLECTUAL PROPERTY RIGHTS			A-17

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				Page
3.23		INDEMNIFICATION			A-17
3.24		INSIDER INTERESTS			A-17
3.25		TAX TREATMENT OF MERGER			A-18
3.26		LYNNWOOD INFORMATION			A-18
REPRESENTATIONS AND WARRANTIES OF STERLING					A-18
4.1		CORPORATE ORGANIZATION			A-18
4.2		CAPITALIZATION			A-19
4.3		AUTHORITY; NO VIOLATION			A-19
4.4		CONSENTS AND APPROVALS			A-20
4.5		REPORTS			A-20
4.6		FINANCIAL STATEMENTS; EXCHANGE ACT FILINGS; BOOKS AND RECORDS			A-20
4.7		BROKER’S FEES			A-21
4.8		ABSENCE OF CERTAIN CHANGES OR EVENTS			A-21
4.9		TAXES AND TAX RETURNS			A-21
4.10		COMPLIANCE WITH APPLICABLE LAWS			A-22
4.11		TAX TREATMENT OF MERGER			A-22
COVENANTS RELATING TO CONDUCT OF BUSINESS					A-22
5.1		COVENANTS OF LYNNWOOD			A-22
5.2		COVENANTS OF STERLING			A-26
5.3		MERGER COVENANTS			A-26
ADDITIONAL AGREEMENTS					A-27
6.1		REGULATORY MATTERS			A-27
6.2		ACCESS TO INFORMATION			A-27
6.3		SHAREHOLDERS MEETING			A-28
6.4		LEGAL CONDITIONS TO MERGER			A-29
6.5		STOCK EXCHANGE LISTING			A-29
6.6		EMPLOYEES			A-29
6.7		INDEMNIFICATION			A-30
6.8		SUBSEQUENT INTERIM AND ANNUAL FINANCIAL STATEMENTS			A-30
6.9		ADDITIONAL AGREEMENTS			A-31
6.10		ADVICE OF CHANGES			A-31
6.11		CURRENT INFORMATION			A-31
6.12		CHANGE IN STRUCTURE			A-31
6.13		TRANSACTION EXPENSES OF LYNNWOOD			A-31
6.14		EXISTING LYNNWOOD BORROWING LINES			A-32
CONDITIONS PRECEDENT					A-32
7.1		CONDITIONS TO EACH PARTY’S OBLIGATION TO EFFECT THE MERGER			A-32
7.2		CONDITIONS TO OBLIGATIONS OF STERLING			A-33
7.3		CONDITIONS TO OBLIGATIONS OF LYNNWOOD			A-34
TERMINATION AND AMENDMENT					A-35
8.1		TERMINATION			A-35
8.2		EFFECT OF TERMINATION			A-37
8.3		AMENDMENT			A-38
8.4		EXTENSION; WAIVER			A-38

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				Page
GENERAL PROVISIONS					A-38
9.1		CLOSING			A-38
9.2		NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS			A-38
9.3		EXPENSES			A-39
9.4		NOTICES			A-39
9.5		INTERPRETATION			A-40
9.6		COUNTERPARTS			A-40
9.7		ENTIRE AGREEMENT			A-40
9.8		GOVERNING LAW			A-40
9.9		ENFORCEMENT OF AGREEMENT			A-40
9.10		SEVERABILITY			A-40
9.11		PUBLICITY			A-41
9.12		ASSIGNMENT; LIMITATION OF BENEFITS			A-41
EXHIBITS
A		Articles of Merger
B		Form of Voting Agreement
C		Form of Shareholders Agreement
D		Index Group

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	(1) Assume the Sterling Average Price Per Share is equal to $25.00.
	(2) The Aggregate Merger Consideration Value would be $60,750,000.00 ((1,800,000 x $25.00) + $15,750,000.00).
	(3) Assume that 1,038,921 shares of Lynnwood Common Stock are outstanding. The Per Share Merger Consideration Value would be $58.4741 ($60,750,000.00 ÷ 1,038,921).
	(4) Assume the Founder holds 551,198 Lynnwood Shares. The Founder Merger Consideration Value would be $32,230,806.97 ($58.4741 x 551,198).
	(5) The Founder Stock Consideration Value would be $16,480,806.97 ($32,230,806.97 - $15,750,000.00).
	(6) The Founder Stock Consideration would be 659,232.2788 shares of Sterling Common Stock ($16,480,806.97 ÷ $25.00).
	(7) The Founder Consideration would be 659,232.2788 shares of Sterling Common Stock and $15,750,000.00 in cash.
	(8) The Other Holders Aggregate Consideration would be 1,140,767.7212 shares of Sterling Common Stock (1,800,000 - 659,232.2788).
	(9) Assume that the Other Holders hold 487,723 shares of Lynnwood Common Stock. The Other Holders Per Share Consideration would be 2.3390 shares of Sterling Common Stock for each share of Lynnwood Common Stock held by the Other Holders (1,140,767.7212 ÷ 487,723).

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	(i) The number of shares of Sterling Common Stock to be subject to the option immediately after the Effective Time shall be equal to the product of the number of shares of Lynnwood Common Stock subject to the option immediately before the Effective Time, multiplied by the Other Holders Per Share Consideration, provided that any fractional shares of Sterling Common Stock resulting from such multiplication shall be rounded to the nearest whole share; and
	(ii) The exercise price per share of Sterling Common Stock under the option immediately after the Effective Time shall be equal to the exercise price per share of Lynnwood Common Stock under the option immediately before the Effective Time divided by the Other Holders Per Share Consideration, provided that such exercise price shall be rounded to the nearest cent. The adjustment provided herein shall be and is intended to be effected in a manner that is consistent with Section 424(a) of the Code. The duration and other terms of the option immediately after the

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	Effective Time shall be the same as the corresponding terms in effect immediately before the Effective Time, except that all references to Lynnwood in the Lynnwood Stock Option Plan (and the corresponding references in the option agreement documenting such option) shall be deemed to be references to Sterling.

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	(i) Lynnwood shall, and shall cause each Subsidiary to, conduct its business in the usual, regular and ordinary course in substantially the same manner as previously conducted (except to the extent expressly provided otherwise in this Agreement or as consented to in writing by Sterling);
	(ii) Lynnwood shall, and shall cause each Subsidiary to, (A) pay all of its debts and Taxes when due, subject to good faith disputes over such debts or Taxes, (B) pay or perform its other obligations when due, and (C) use its commercially reasonable efforts consistent with past practice and policies to preserve intact its present business organizations, keep available the services of its present officers and key employees (and in any event, as of the Determination Date (as defined in Section 8.1), the number of Lynnwood loan officers shall be at least 85% of the number of Lynnwood loan officers as of the date of this Agreement) and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, to the end that its goodwill and ongoing businesses shall be unimpaired at the Closing;
	(iii) Lynnwood shall promptly notify Sterling of any change, occurrence or event not in the ordinary course of its or any Subsidiary’s business, and of any change, occurrence or event which, individually or in the aggregate with any other changes, occurrences and events, would reasonably be expected to cause any of the conditions to closing set forth in Article VII not to be satisfied;
	(iv) Lynnwood shall, and shall cause each Subsidiary to, use its commercially reasonable efforts to assure that each of its contracts (other than with Sterling) entered into after the date hereof will not require the procurement of any consent, waiver or novation or provide for any change in the obligations of any party in connection with, or terminate as a result of the consummation of, the Merger, and shall give reasonable advance notice to Sterling prior to allowing any material contract or right thereunder to lapse or terminate by its terms; and
	(v) Lynnwood shall, and shall cause each Subsidiary to, maintain each of its leased premises in accordance with the terms of the applicable lease.

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	(i) declare or pay any dividends on, or make other distributions in respect of, any of its capital stock, except cash dividends from Lynnwood Subsidiaries to Lynnwood or to other Lynnwood Subsidiaries, in conformity with past practice and applicable Law;
	(ii) (a) split, combine or reclassify any shares of its capital stock or issue, authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock except upon the exercise or fulfillment of rights or options issued and outstanding as of the date hereof pursuant to the Lynnwood Stock Option Plan in accordance with their present terms, or (b) repurchase, redeem or otherwise acquire any shares of the capital stock of Lynnwood or Golf, or any securities convertible into or exercisable for any shares of the capital stock of Lynnwood or Golf;
	(iii) issue, allocate, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any such shares, or enter into any agreement with respect to any of the foregoing, other than the issuance of Lynnwood Common Stock pursuant to stock options or similar rights to acquire Lynnwood Common Stock granted pursuant to the Lynnwood Stock Option Plan and outstanding prior to the date of this Agreement, in each case in accordance with their present terms;
	(iv) amend its Articles of Incorporation, Bylaws or other similar governing documents unless required to do so by applicable law or regulation or by regulatory directive;
	(v) authorize or permit its officers, directors, employees, agents, advisors and affiliates (collectively, “Representatives”) to (a) initiate, solicit, encourage or knowingly facilitate any inquiries or proposals with respect to, any Acquisition Proposal (as defined below) or (b) engage in any negotiations concerning, or provide any nonpublic information to, or have any discussions with, any person relating to, any Acquisition Proposal; provided that, in the event Lynnwood receives an unsolicited bona fide Acquisition Proposal and Lynnwood’s Board of Directors concludes in good faith that such Acquisition Proposal constitutes or is reasonably likely to result in a Superior Proposal (as defined below), Lynnwood may, and may permit its Subsidiaries and its and their Representatives to, take any action described in clause (b) above to the extent that the Board of Directors of Lynnwood concludes in good faith (based on the advice of its outside counsel) that failure to take such actions would more likely than not result in a violation of its fiduciary duties under applicable law. Prior to providing any nonpublic information permitted to be provided pursuant to this Section, Lynnwood shall have entered into a confidentiality agreement with such third party on terms no less favorable to Lynnwood than the Confidentiality Agreement (as defined in Section 6.2). Lynnwood will immediately cease and cause to be terminated any activities, discussions or negotiations conducted before the date of this Agreement with any persons other than Sterling with respect to any Acquisition Proposal and will use its reasonable best efforts to enforce any confidentiality or similar agreement relating to an Acquisition Proposal. Lynnwood will promptly (within one business day) advise Sterling following receipt of any Acquisition Proposal of the substance thereof (including the identity of the person making such Acquisition Proposal), and will keep Sterling apprised of any related developments, discussions and negotiations (including the terms and conditions of the Acquisition Proposal) on a current basis. As used in this Agreement, “Acquisition Proposal” shall mean any tender or exchange offer, proposal for a merger, consolidation or other business combination involving Lynnwood or any of its Subsidiaries or any proposal or offer to acquire in any manner more than 15% of the voting power in, or more than 15% of the business, assets or deposits of, Lynnwood or any of its Subsidiaries, other than the transactions contemplated by this Agreement. As used in this Agreement, “Superior Proposal” means any bona fide written Acquisition Proposal which the Board of Directors of Lynnwood concludes in good faith to be more favorable from a financial point of view to its shareholders than the Merger and the other transactions contemplated hereby, (1) after receiving the advice of its financial advisors (who shall be regionally recognized investment banking firms), (2) after taking into account the likelihood of consummation of such transaction on the terms

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	set forth therein (as compared to, and with due regard for, the terms herein) and (3) after taking into account all legal (with the advice of outside counsel), financial (including the financing terms of any such proposal), regulatory and other aspects of such proposal and any other relevant factors permitted under applicable Law. For purposes of the definition of “Superior Proposal,” the references to “more than 15%” in the definition of Acquisition Proposal shall be deemed to be references to “a majority” and the definition of Acquisition Proposal shall only refer to a transaction involving Lynnwood and not its Subsidiaries;
	(vi) other than commitments entered into prior to the date of this Agreement, as set forth in Section 5.1(b)(vi) of the Lynnwood Disclosure Letter, make capital expenditures aggregating in excess of $35,000, except for emergency repairs and replacements;
	(vii) enter into any new line of business;
	(viii) acquire or agree to acquire, by merging or consolidating with, or by purchasing an equity interest in or the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets, other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings, or in the ordinary course of business consistent with past practices;
	(ix) take any action that is intended or may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue or in any of the conditions to the Merger set forth in Article VII not being satisfied, or in a violation of any provision of this Agreement, except, in every case, as may be required by applicable Law;
	(x) change its methods of accounting in effect at September 30, 2005 except as required by changes in GAAP or regulatory accounting principles as concurred to by Lynnwood’s independent auditors;
	(xi) (a) except as required by applicable Law or this Agreement or to maintain qualification pursuant to the Code, adopt, amend, renew or terminate any Plan or any agreement, arrangement, plan or policy between Lynnwood or Golf and one or more of its current or former directors, officers or employees, (b) other than normal annual increases in pay, consistent with past practice, for employees not subject to an employment, change of control or severance agreement, increase in any manner the compensation of any employee or director or pay any benefit not required by any Plan or agreement as in effect as of the date hereof (including, without limitation, the granting of stock options, stock appreciation rights, restricted stock, restricted stock units or performance units or shares), (c) enter into, modify or renew any contract, agreement, commitment or arrangement providing for the payment to any director, officer or employee of compensation or benefits, other than normal annual increases in pay, consistent with past practice, for employees not subject to an employment, change of control or severance agreement, (d) hire any new employee at an annual compensation in excess of $65,000, (e) pay aggregate expenses of more than $3,000 of employees or directors who attend conventions or similar meetings after the date hereof, (f) promote any employee to a rank of vice president or more senior, or (g) except as itemized in Section 5.1(b)(xi) of the Lynnwood Disclosure Letter, pay any retention or other bonuses in excess of $25,000 to any employees;
	(xii) incur any indebtedness, with a term greater than one year, for borrowed money, assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, in each case other than in the ordinary course of business consistent with past practices;
	(xiii) except as provided in Section 5.1(b)(xiii) of the Lynnwood Disclosure Letter, sell, purchase, enter into a lease, relocate, open or close any banking or other loan production office or other real estate, or file an application pertaining to such action with any Governmental Entity;

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	(xiv) make any equity investment or commitment to make such an investment in real estate or in any real estate development project, other than in connection with foreclosure, settlements in lieu of foreclosure, or troubled loan or debt restructuring, in the ordinary course of business consistent with past practices;
	(xv) make any new Loans to, modify the terms of any existing Loan to, or engage in any other transactions with, any officer, director or greater than five-percent shareholder of Lynnwood or Golf (or any affiliate of any of them), or to or with any employee of Lynnwood or Golf other than Loans to employees that are in the ordinary course of business consistent with past practices and that are qualified to be sold in the secondary market;
	(xvi) make any investment, or incur deposit liabilities, other than in the ordinary course of business consistent with past practices;
	(xvii) purchase or originate (a) any Loans except in accordance with existing Golf lending policies, (b) unsecured consumer Loans in excess of $50,000, (c) residential permanent or construction Loans in excess of $2,000,000, (d) non-mortgage commercial Loans in excess of $250,000, or (e) income property (permanent and construction) Loans, excluding multi-family, in excess of $750,000, except in each case for (1) Loans for which written commitments have been issued by Golf as of the date hereof and (2) renewals of Loans existing as of the date of this Agreement or Loans permitted pursuant to this Section 5.1(b)(xvii), provided, however, that Lynnwood shall provide Sterling notice of (y) any permitted Loans set forth in (c), (d) or (e) above and (z) any commitments or renewals over any of the limits set forth above, and provided further, that with respect to any Loan in excess of the foregoing limits, Lynnwood shall provide notice to Sterling of such Loan, describing the pertinent terms of the Loan (and for purposes of this clause (xvii) such notice may be by telephone (confirmed by electronic transmission or facsimile), electronic transmission or facsimile), and Sterling shall have three business days to give notice of objection to such Loan, acting reasonably (and for purposes of this clause (xvii) such notice may be by telephone (confirmed by electronic transmission or facsimile), electronic transmission or facsimile) and such notice of objection shall provide in reasonable detail the basis for such objection, and the failure to so object within three business days shall be deemed a waiver of any such objection;
	(xviii) make any investments in any equity or derivative securities or engage in any forward commitment, futures transaction, financial options transaction, hedging or arbitrage transaction or covered asset trading activities or make any investment in any investment security with an average life greater than one year at the time of purchase;
	(xix) sell any “held for investment” Loans or servicing rights related thereto or purchase any mortgage Loan servicing rights;
	(xx) take or omit to take any other action that would have a Material Adverse Effect on, or materially delay, the ability of Lynnwood and Sterling to obtain the Requisite Regulatory Approvals (as defined in Section 7.1) or otherwise have a Material Adverse Effect on Lynnwood’s and Golf’s ability to consummate the transactions contemplated by this Agreement; or
	(xxi) agree or commit to do any of the actions set forth in clauses (i) - (xx) of this Section 5.1(b).

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	(a) take any action that will result in any of Sterling’s representations and warranties set forth in this Agreement being or becoming untrue or any of the conditions to the Merger set forth in Article VII not being satisfied or in a violation of any provision of this Agreement, except, in every case, as may be required by applicable Law;
	(b) take any action, or amend the Sterling Articles of Incorporation or Bylaws, the effect of which would be to materially and adversely affect the rights or powers of shareholders generally;
	(c) take or omit to take any other action that would materially adversely affect or materially delay the ability of Sterling to obtain the Requisite Regulatory Approvals or otherwise materially adversely affect Sterling’s or Sterling Savings Bank’s ability to consummate the transactions contemplated by this Agreement; or
	(d) agree or commit to do any of the actions set forth in clauses (a) - (c) of this Section 5.2.

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	(i) Lynnwood’s Board of Directors, based on the advice of its outside counsel, determines in good faith that failure to take such action would result in a violation of its fiduciary duties under applicable Law, and
	(ii) Prior to effecting such Change in Lynnwood Recommendation: (A) Lynnwood shall have complied in all material respects with Section 5.1(b)(v); (B) the Board of Directors of Lynnwood shall have concluded in good faith that such Acquisition Proposal constitutes a Superior Proposal after giving effect to all of the adjustments which may be offered by Sterling pursuant to clause (D) below; (C) Lynnwood shall notify Sterling, at least five business days in advance, of its intention to effect a Change in Lynnwood Recommendation in response to such Superior Proposal, specifying the material terms and conditions of any such Superior Proposal and furnishing to Sterling a copy of the relevant proposed transaction agreements with the party making such Superior Proposal and other material

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documents; and (D) Lynnwood shall, and shall cause its financial and legal advisors to, during the period following Lynnwood’s delivery of the notice referred to in clause (C) above, negotiate with Sterling in good faith (to the extent Sterling desires to negotiate) to make such adjustments in the terms and conditions of this Agreement so that such Acquisition Proposal ceases to constitute a Superior Proposal.

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	(a) Shareholder Approvals. This Agreement and the Merger shall have been approved or adopted by the requisite vote of the Lynnwood shareholders.
	(b) Stock Exchange Listing. The shares of Sterling Common Stock which shall be issued in the Merger upon consummation of the Merger shall have been authorized for quotation on NASDAQ (or such other exchange on which the Sterling Common Stock may become listed).
	(c) Other Approvals. All regulatory approvals required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired (all such approvals and the expiration of all such waiting periods being referred to herein as the “Requisite Regulatory Approvals”).
	(d) Registration Statement. The Registration Statement shall have become effective under the Securities Act, and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC.
	(e) No Injunctions or Restraints; Illegality. No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition (an “Injunction”) preventing the consummation of the Merger or any of the other transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, order, Injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits, restricts or makes

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	illegal consummation of the Merger. No proceeding initiated by any Governmental Entity seeking an Injunction shall be pending.
	(f) Federal Tax Opinion. Sterling shall have received an opinion from Witherspoon, Kelley, Davenport & Toole, P.S., counsel to Sterling, and Lynnwood shall have received an opinion from Williams, Kastner & Gibbs PLLC, counsel to Lynnwood, in form and substance reasonably satisfactory to Sterling and Lynnwood, respectively, dated the date of the Effective Time, in each case substantially to the effect that on the basis of facts, representations, and assumptions set forth in such opinion which are consistent with the state of facts existing at the Effective Time, the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and each of Sterling and Lynnwood will be a party to the reorganization within the meaning of Section 368(b) of the Code and that, accordingly, for federal income tax purposes, (i) no gain or loss will be recognized by Sterling or Lynnwood as a result of the Merger, (ii) no gain or loss will be recognized by the shareholders of Lynnwood who exchange all of their Lynnwood Common Stock solely for Sterling Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Sterling Common Stock), and (iii) the aggregate tax basis of the Sterling Common Stock received by shareholders who exchange all of their Lynnwood Common Stock solely for Sterling Common Stock pursuant to the Merger will be the same as the aggregate tax basis of the Lynnwood Common Stock surrendered in exchange therefore (reduced by any amount allocable to a fractional share interest for which cash is received). In rendering such opinion, such counsel shall require and, to the extent such counsel deems necessary or appropriate, may rely upon representations and covenants, including those contained in certificates of officers of Lynnwood, Sterling, their respective affiliates and others.

	(a) Representations and Warranties. The representations and warranties of Lynnwood set forth in this Agreement (a) that are qualified by materiality or Material Adverse Effect will be true and correct and (b) that are not qualified by materiality or Material Adverse Effect will be true and correct in all material respects, in each case on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except for any such representations or warranties that, by their terms, speak only as of a specific date or dates, in which case such representations and warranties that are qualified by materiality or Material Adverse Effect will be true and correct, and such representations and warranties that are not qualified by materiality or Material Adverse Effect will be true and correct in all material respects, on and as of such specified date or dates). Sterling shall have received a certificate signed on behalf of Lynnwood by each of (y) the President, Chairman and Chief Executive Officer and (z) the Chief Financial Officer of Lynnwood, solely in their official capacities, to the foregoing effect.
	(b) Performance of Covenants and Agreements of Lynnwood. Lynnwood shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement at or prior to the Closing Date. Sterling shall have received a certificate signed on behalf of Lynnwood by each of (y) the President, Chairman and Chief Executive Officer and (z) the Chief Financial Officer of Lynnwood, solely in their official capacities, to the foregoing effect.
	(c) Absence of Material Change. There will not have been any Material Adverse Change in Lynnwood, whether or not resulting from a breach in any representation, warranty or covenant contained herein. Sterling shall have received a certificate signed on behalf of Lynnwood by each of (y) the President, Chairman and Chief Executive Officer and (z) the Chief Financial Officer of Lynnwood, solely in their official capacities, to the foregoing effect.
	(d) This Agreement and the Merger shall have been duly and validly approved and adopted, as required by the WBCA and Lynnwood’s Articles of Incorporation and Bylaws, each as currently in

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	effect, by the valid and affirmative vote or written consent of at least two-thirds of the outstanding shares of Lynnwood Common Stock held by the Other Holders.
	(e) Voting Agreement. On and effective as of the date of this Agreement, Sterling shall have received Voting Agreements from each of the shareholders set forth on Schedule 7.1(e) hereto.
	(f) Shareholders Agreement. On and effective as of the date of this Agreement, Sterling shall have received Shareholders Agreements from each of the Shareholders set forth on Schedule 7.1(f) hereto, and as of the Closing Date no action shall have been taken by any such Shareholder to rescind the Shareholders Agreement.
	(g) Employment Agreements. On the date of this Agreement, Sterling shall have entered into employment agreements with each of the individuals set forth on Schedule 7.1(g) hereto, with such employment agreements effective as of the Effective Time, and as of the Closing Date each of such individuals shall have remained continuously employed with Lynnwood or a Subsidiary from the date of this Agreement through the Closing (other than as a result of the death or disability of such individual), and no action shall have been taken by any such individual to rescind such employment agreement.
	(h) Consulting Agreement. On the date of this Agreement, the individual set forth on Schedule 7.1(h) hereto shall have entered into an amendment to his employment agreement with Lynnwood, terminating such Agreement immediately prior to the Effective Time and shall have entered into a consulting agreement with Sterling, and no action shall have been taken by such individual to rescind such documents.
	(i) Director Resignations. Sterling shall have received resignations from each director of Lynnwood and each of its Subsidiaries.

	(a) The representations and warranties of Sterling set forth in this Agreement (i) that are qualified by materiality or Material Adverse Effect will be true and correct and (ii) that are not qualified by materiality or Material Adverse Effect will be true and correct in all material respects, in each case on and as of the Closing Date with the same force and effect as if they had been made on the Closing Date (except for any such representations or warranties that, by their terms, speak only as of a specific date or dates, in which case such representations and warranties that are qualified by materiality or Material Adverse Effect will be true and correct, and such representations and warranties that are not qualified by materiality or Material Adverse Effect will be true and correct in all material respects, on and as of such specified date or dates). Lynnwood shall have received a certificate signed on behalf of Sterling by each of the Chief Executive Officer and the Chief Financial Officer of Sterling, solely in their official capacities, to the foregoing effect.
	(b) Performance of Covenants and Agreements of Sterling. Sterling shall have performed in all material respects all covenants and agreements required to be performed by it under this Agreement at or prior to the Closing Date. Lynnwood shall have received a certificate signed on behalf of Sterling by each of the Chief Executive Officer and the Chief Financial Officer of Sterling, solely in their official capacities, to such effect.
	(c) Absence of Material Change. There will not have been any Material Adverse Change in Sterling, whether or not resulting from a breach in any representation, warranty or covenant contained herein. Lynnwood shall have received a certificate signed on behalf of Sterling by each of the Chief Executive Officer and the Chief Financial Officer of Sterling, solely in their official capacities, to such effect.

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	(a) by mutual written consent of Sterling and Lynnwood;
	(b) by either Sterling or Lynnwood if: (i) any Governmental Entity which must grant a Requisite Regulatory Approval has denied such approval and such denial has become final and nonappealable or (ii) any Governmental Entity of competent jurisdiction shall have issued a final nonappealable order enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement, unless such denial or order shall be due to the failure of the party seeking to terminate this Agreement to perform or observe the covenants and agreements of such party set forth herein;
	(c) by either Sterling or Lynnwood if the Merger shall not have been consummated on or before November 30, 2006, unless the failure of the Closing to occur by such date shall be due to the failure of the party seeking to terminate this Agreement (i) to perform or observe the covenants and agreements of such party or (ii) to fulfill the other party’s conditions to Closing, in each case as set forth herein;
	(d) if the Merger has not occurred by the Closing Date, (i) by Sterling if the conditions to Closing set forth in Section 7.2 have not been satisfied or waived, and Sterling (A) is not then in material breach of any representation, warranty, covenant or other agreement contained herein and (B) has not failed to materially satisfy the other party’s conditions to Closing (that have not been waived) due to be performed or satisfied as of the date of the event giving rise to the right to terminate; or (ii) by Lynnwood if the conditions to Closing set forth in Section 7.3 have not been satisfied or waived, and Lynnwood (A) is not then in material breach of any representation, warranty, covenant or other agreement contained herein and (B) has not failed to materially satisfy the other party’s conditions to Closing (that have not been waived) due to be performed or satisfied as of the date of the event giving rise to the right to terminate;
	(e) by either Sterling or Lynnwood (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein and has not failed to materially satisfy the other party’s conditions to Closing that have not been waived) if the other party shall have materially breached (i) any of the covenants or agreements made by such other party herein or (ii) any of the representations or warranties made by such other party herein, and in either case, such breach is not cured within 30 days following written notice to the party committing such breach, or which breach, by its nature, cannot be cured prior to the Closing Date;
	(f) by either Sterling or Lynnwood if the approval of the shareholders of Lynnwood contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the vote required under the WBCA at the Lynnwood Meeting, provided, however, that the right to terminate this Agreement under this Section 8.1(f) will not be available to Lynnwood where the failure to obtain the approval of the shareholders of Lynnwood will have been caused by (i) Lynnwood’s action or failure to act, and such action or failure to act constitutes a material breach by Lynnwood of this Agreement, or (ii) a breach of the Voting Agreements by any party thereto other than Sterling;
	(g) by Sterling if: (i) the Board of Directors of Lynnwood shall have failed to recommend to its shareholders the approval of the Merger, or shall have made, or publicly announced its intention to make, a Change in Lynnwood Recommendation, or (ii) Lynnwood shall have breached the terms of Section 5.1(b)(v) hereof in any respect adverse to Sterling; or

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	(h) by Lynnwood, upon its written notice to Sterling within the two business days following the Determination Date (as defined below), in the event that:

	(1) There is not a material breach by Lynnwood of any representations, warranties, covenants or other agreements contained herein;
	(2) The Sterling Determination Price (as defined below) on the Determination Date is less than $22.56; and
	(3) (a) the number obtained by dividing the Sterling Determination Price by $26.54 (the “Sterling Change Ratio”) is less than (b) the number obtained by dividing the Final Index Price (as defined below) by the Initial Index Price (as defined below) and then multiplying the quotient in this clause 3(b) by 0.85 (the “Index Change Ratio”).

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	(a) if to Sterling, to:
	Sterling Financial Corporation
	111 North Wall Street
	Spokane, Washington 99201
	Attn.: Daniel G. Byrne
	Executive Vice President-Finance
	Facsimile Number: (509) 624-6233

	Witherspoon, Kelley, Davenport & Toole, P.S.
	422 West Riverside Avenue, Suite 1100
	Spokane, Washington 99201
	Attn.: Andrew J. Schultheis, Esq.
	Facsimile Number: (509) 458-2728

	(b) if to Lynnwood, to:
	Lynnwood Financial Group, Inc.
	6505 218th Ave. SW, Suite 9
	Mountlake Terrace, Washington 98043
	Attn.: Charles J. Ainslie
	President, Chairman and Chief Executive Officer
	Facsimile Number: (425) 771-4850

A-39

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	Williams, Kastner & Gibbs, PLLC
	Two Union Square
	601 Union Street, Suite 4100
	Seattle, WA 98101
	Attn: Jerry A. Creim, Esq.
	Facsimile Number: (206) 628-6611

A-40

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A-41

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A-42

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A-43

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A-44

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A-45

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	a. Consummation of a plan of merger to which the corporation is a party (i) if shareholder approval is required for the merger by RCW 23B.11.030, 23B.11.080, or the articles of incorporation, and the shareholder is entitled to vote on the merger, or (ii) if the corporation is a subsidiary that is merged with its parent under RCW 23B.11.040;
	b. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan;
	c. Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one year after the date of sale;
	d. An amendment of the articles of incorporation , whether or not the shareholder was entitled to vote on the amendment, if the amendment effects a redemption or cancellation of all of the shareholder’s shares in exchange for cash or other consideration other than shares of the corporation; or
	e. Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares.

B-1

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	a. The proposed corporate action is abandoned or rescinded;
	b. A court having jurisdiction permanently enjoins or sets aside the corporate action; or
	c. The shareholder’s demand for payment is withdrawn with the written consent of the corporation.

	a. The beneficial shareholder submits to the corporation the record shareholder’s consent to the dissent not later than the time the beneficial shareholder asserts dissenters’ rights, which consent shall be set forth either (i) in a record or (ii) if the corporation has designated an address, location, or system to which the consent may be electronically transmitted and the consent is electronically transmitted to the designated address, location, or system, in an electronically transmitted record; and
	b. The beneficial shareholder does so with respect to all shares of which such shareholder is the beneficial shareholder or over which such shareholder has power to direct the vote.

B-2

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	a. State where the payment demand must be sent and where and when certificates for certificated shares must be deposited;
	b. Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received;
	c. Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters’ rights certify whether or not the person acquired beneficial ownership of the shares before that date;
	d. Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty nor more than sixty days after the date the notice in subsection (1) of this section is delivered; and
	e. Be accompanied by a copy of this chapter.

B-3

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	a. The corporation’s balance sheet as of the end of a fiscal year ending not more than sixteen months before the date of payment, an income statement for that year, a statement of changes in shareholders’ equity for that year, and the latest available interim financial statements, if any;
	b. An explanation of how the corporation estimated the fair value of the shares;
	c. An explanation of how the interest was calculated;
	d. A statement of the dissenter’s right to demand payment under RCW 23B.13.280; and
	e. A copy of this chapter.

	a. The dissenter believes that the amount paid under RCW 23B.13.250 or offered under RCW 23B.13.270 is less than the fair value of the dissenter’s shares or that the interest due is incorrectly calculated;
	b. The corporation fails to make payment under RCW 23B.13.250 within sixty days after the date set for demanding payment; or
	c. The corporation does not effect the proposed action and does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty days after the date set for demanding payment.

B-4

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	a. Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of RCW 23B.13.200 through 23B.13.280; or
	b. Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by chapter 23B.13 RCW.

B-5

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Independent Auditor’s Report		C-1
Consolidated Financial Statements
Consolidated Balance Sheets		C-3
Consolidated Statements of Income		C-4
Consolidated Statements of Shareholders’ Equity		C-5
Consolidated Statements of Cash Flows		C-6
Notes to Consolidated Financial Statements		C-7-25
Consolidating Information
Consolidating Schedule, Balance Sheets		C-27-28
Consolidating Schedule, Statements of Income		C-29-30

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C-1

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C-2

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				2005				2004
				(Dollars in thousands)
ASSETS
	Cash and due from banks			$	4,066			$	2,264
	Interest-bearing deposits at other financial institutions				11,178				811
	Securities trading				1,162				736
	Federal Home Loan Bank stock, at cost				2,487				2,477
	Loans held for sale				40,204				23,439
	Loans				431,783				252,884
	Less allowance for credit losses				3,102				2,126
	Net loans				428,681				250,758
	Premises and equipment				2,595				1,961
	Accrued interest receivable				3,115				1,427
	Foreclosed real estate				—				121
	Other assets				3,883				2,497
	Total assets			$	497,371			$	286,491
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
	Deposits:
		Demand, non-interest-bearing		$	13,465			$	13,262
		Savings and NOW			39,914				30,274
		Time			364,320				190,601
	Total deposits				417,699				234,137
	Notes payable				20,278				13,140
	Guaranteed preferred beneficial interests in subordinated debt				19,589				9,279
	Accrued interest payable				619				306
	Other liabilities				4,353				2,868
	Total liabilities				462,538				259,730
Commitments and Contingencies					—				—
Shareholders’ Equity
	Common stock (par value: $.20); 4,000,000 shares authorized; issued and outstanding: 2005 — 1,038,921 shares; 2004 — 939,954 shares				208				188
	Additional paid-in capital				14,791				13,204
	Retained earnings				19,834				13,369
	Total shareholders’ equity				34,833				26,761
	Total liabilities and shareholders’ equity			$	497,371			$	286,491

C-3

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			2005				2004
			(Dollars in thousands)
Interest and Dividend Income
	Loans		$	42,211			$	22,788
	Federal funds sold and interest-bearing deposits at other financial institutions			38				5
	Federal Home Loan Bank stock dividends			9				45
	Securities trading			104				—
	Total interest and dividend income			42,362				22,838
Interest Expense
	Deposits			10,630				3,427
	Notes payable			1,279				709
	Guaranteed preferred beneficial interests in subordinated debt			888				434
	Total interest expense			12,797				4,570
	Net interest income			29,565				18,268
Provision for Credit Losses				896				897
	Net interest income after provision for credit losses			28,669				17,371
Non-Interest Income
	Mortgage broker fees and service release premiums			13,346				12,726
	Gains on sales of loans			5,795				3,821
	Escrow fees			1,818				1,577
	Other			808				652
	Total non-interest income			21,767				18,776
Non-Interest Expense
	Salaries and employee benefits			26,766				20,061
	Occupancy			1,017				829
	Equipment expense			1,823				1,425
	Other			6,633				5,003
	Total non-interest expense			36,239				27,318
	Income before income taxes			14,197				8,829
Income Taxes				4,733				2,483
	Net income		$	9,464			$	6,346

C-4

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			Shares of								Additional
			Common				Common				Paid-In				Retained
			Stock				Stock				Capital				Earnings				Total
			(Dollars in thousands)
Balance at December 31, 2003				756,084			$	151			$	13,125			$	9,021			$	22,297
Net income				—				—				—				6,346				6,346
Exercise of stock options				181,900				37				24				—				61
Sale of common stock				1,970				—				55				—				55
Cash dividends ($2.13 per share)				—				—				—				(1,998	)			(1,998	)
	Balance at December 31, 2004			939,954				188				13,204				13,369				26,761
Net income				—				—				—				9,464				9,464
Exercise of stock options				72,900				15				229				—				244
Sale of common stock				26,067				5				1,350				—				1,355
Cash dividends ($2.99 per share)				—				—				—				(2,999	)			(2,999	)
Income tax benefit from stock options exercised				—				—				8				—				8
	Balance at December 31, 2005			1,038,921			$	208			$	14,791			$	19,834			$	34,833

C-5

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					2005				2004
					(Dollars in thousands)
Cash Flows from Operating Activities
	Net income				$	9,464			$	6,346
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Provision for credit losses			896				897
			Depreciation and amortization			794				664
			Amortization of loan fees			345				244
			Deferred income tax expense			89				365
			Origination of loans held for sale			(856,371	)			(545,588	)
			Proceeds from sale of loans held for sale			845,401				549,414
			Gains on sales of loans			(5,795	)			(3,821	)
			Stock dividends received			(9	)			(45	)
			Increase in interest receivable			(1,688	)			(702	)
			Loss on sale of foreclosed real estate			68				—
			Increase in interest payable			313				168
			Purchase of securities trading			(323	)			(186	)
			Other			1,069				(1,040	)
		Net cash provided by (used in) operating activities				(5,747	)			6,716
Cash Flows from Investing Activities
	Increase in interest bearing deposits at other financial institutions					(10,367	)			(776	)
	Increase in loans made to customers, net of principal collections					(179,232	)			(95,939	)
	Purchases of premises and equipment					(2,267	)			(1,630	)
	Proceeds from sale of foreclosed real estate					115				177
	Purchase of investment in Lynnwood Financial Statutory Trust II					(310	)			—
	Net cash used in investing activities					(192,061	)			(98,168	)
Cash Flows from Financing Activities
	Net increase in deposits					183,562				106,941
	Net decrease in short-term borrowings					—				(5,000	)
	Net increase (decrease) in notes payable					7,138				(10,090	)
	Proceeds from issuance of guaranteed preferred beneficial interests in subordinated debt					10,310				—
	Sale of common stock					1,355				55
	Exercise of stock options					244				61
	Cash dividends paid					(2,999	)			(1,998	)
	Net cash provided by financing activities					199,610				89,969
	Net increase (decrease) in cash and due from banks					1,802				(1,483	)
Cash and Due from Banks
	Beginning of year					2,264				3,747
	End of year				$	4,066			$	2,264
Supplemental Disclosures of Cash Flow Information
	Interest paid				$	12,484			$	4,402
	Income taxes paid					4,756				2,645
Supplemental Disclosures of Non-Cash Investing and Financing Activities
	Foreclosed real estate acquired in settlement of loans				$	(293	)		$	—
	Financed sale of foreclosed real estate					225				—

C-6

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	Nature of Business and Principles of Consolidation

	Consolidated Financial Statement Presentation

	Cash and Cash Equivalents

	Securities Trading

C-7

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	Federal Home Loan Bank Stock

	Mortgage Banking Activities

	Loans Receivable

C-8

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	Premises and Equipment

	Foreclosed Real Estate

	Transfers of Financial Assets

	Income Taxes

C-9

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Table of Contents

	Stock-Based Compensation

			2005				2004
Net income, as reported			$	9,464			$	6,346
Less total stock-based compensation expense determined under the fair value method for all qualifying awards				32				75
	Pro forma net income		$	9,432			$	6,271

	Fair Value of Financial Instruments

	Cash, Due from Banks and Interest-Bearing Deposits at Other Financial Institutions

	Securities Trading

	Federal Home Loan Bank Stock

	Loans

C-10

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	Deposit Liabilities

	Notes Payable

	Guaranteed Preferred Beneficial Interests in Subordinated Debt

	Accrued Interest

	Off-Balance-Sheet Instruments

	Recent Accounting Pronouncements

C-11

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		2005				2004
Mutual funds		$	1,162			$	736

			2005				2004
Commercial			$	3,698			$	3,738
Real estate:
	Residential 1-4 family			33,473				25,829
	Construction			337,452				209,279
	Commercial			57,340				13,857
Consumer				421				437
				432,384				253,140
Less net deferred loan origination fees				601				256
	Total loans		$	431,783			$	252,884

			2005				2004
Balance at beginning of year			$	2,126			$	1,261
Provision for credit losses				896				897
Charge-offs				(13	)			(68	)
Recoveries				93				36
	Net charge-offs			80				(32	)
	Balance at end of year		$	3,102			$	2,126

C-12

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			2005				2004
Furniture, artwork and equipment			$	1,916			$	1,523
Automobiles				293				270
Leasehold improvements				1,778				1,329
Computer equipment				2,072				1,608
				6,059				4,730
Less accumulated depreciation and amortization				(3,464	)			(2,769	)
	Total premises and equipment		$	2,595			$	1,961

	Leases

2006				882
2007				891
2008				710
2009				550
2010				145
	Total		$	3,178

C-13

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			2005				2004
Golf Savings Bank
Note payable to Federal Home Loan Bank of Seattle; the Bank’s total available balance is related to the balance of FHLB Class B(1) stock, which must be no more than 3.5 percent of advances ($171,000 at December 31, 2005); maturing July 1, 2006, with interest due monthly. The note was paid in full during 2005			$	—			$	1,200
Lynnwood Financial Group
Note payable to US Bank of Washington; $20,000 revolving line of credit; maturing October 31, 2006, with interest due monthly at LIBOR plus 1.75 percent; secured by residential construction loans; interest rate 6.14 percent at December 31, 2005				17,688				11,940
Note payable to Banner Bank; $5,000 revolving line of credit; maturing June 30, 2006, with interest due monthly at LIBOR plus 2.75 percent; secured by collateral of property directly related to the line of credit; interest rate 7.375 percent at December 31, 2005				2,590				—
	Total Notes Payable		$	20,278			$	13,140

			2005				2004
Demand deposits, non-interest-bearing			$	13,465			$	13,262
NOW and money market accounts				34,586				24,522
Savings deposits				5,328				5,752
Time certificates, $100 or more				205,724				109,683
Other time certificates				158,596				80,918
	Total		$	417,699			$	234,137

2006		$	324,911
2007			2,644
2008			6,157
2009			3,538
2010			21,598
Thereafter			5,472
Total		$	364,320

C-14

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C-15

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			2005				2004
Current tax expense			$	4,644			$	2,118
Deferred tax expense				294				982
Change in valuation allowance				(205	)			(617	)
	Total income taxes		$	4,733			$	2,483

			2005								2004
							Percent								Percent
							of Pretax								of Pretax
			Amount				Income				Amount				Income
Income taxes at statutory rate			$	4,969				35.00	%		$	3,090				35.00	%
Tax effects of:
	Entertainment, promotion and other nondeductible expenses			128				.90				95				1.08
	Stock option compensation			(205	)			(1.44	)			(617	)			(6.98	)
	Other			(159	)			(1.12	)			(85	)			(.98	)
			$	4,733				33.34	%		$	2,483				28.12	%

			2005				2004
Deferred Tax Assets
	Stock option compensation expense		$	—			$	411
	Deferred compensation items			407				355
	Loans held for sale mark to market			99				177
	Allowance for credit losses			1,047				687
	Accrual to cash adjustments			212				52
	Foreclosed real estate valuation			—				42
	Total deferred tax assets			1,765				1,724

C-16

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			2005				2004
Deferred Tax Liabilities
	Deferred income		$	(276	)		$	(143	)
	Accumulated depreciation and capitalized software			(299	)			(97	)
	Total deferred tax liabilities			(575	)			(240	)
	Net deferred tax assets before valuation allowance			1,190				1,484
Less Valuation Allowance				—				(205	)
	Net deferred tax assets		$	1,190			$	1,279

			2005				2004
Commitments to extend credit:
	Real estate — construction		$	185,385			$	126,801
	Real estate — mortgage			13,584				13,602
	Real estate — open-ended lines			8,285				3,855
			$	207,254			$	144,258

C-17

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C-18

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			2005								2004
							Weighted-								Weighted-
							Average								Average
							Exercise								Exercise
			Shares				Price				Shares				Price
Outstanding at beginning of year				107,562			$	8.17				289,462			$	3.17
Exercised				72,900				3.34				181,900				.22
	Outstanding at end of year			34,662			$	18.33				107,562			$	8.17
	Options exercisable at year-end			9,848			$	17.84				71,932			$	3.06

Weighted-

Average

Weighted-

Weighted-

Remaining

Average

Average

Number

Contractual

Exercise

Number

Exercise

Range of Exercise Prices

Outstanding

Life (Years)

Price

Exercisable

Price

$17.50 - $18.66

34,662

5.10

$

18.33

9,848

$

17.84

C-19

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																				To be
																				Well-Capitalized
																				Under Prompt
												Capital Adequacy								Corrective Action
				Actual								Purposes								Provisions
				Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2005
	Tier 1 capital (to average assets)
		Consolidated		$	46,444				9.79	%		$	18,984				4.00	%			N/A				N/A
		Bank			47,328				10.48				18,069				4.00			$	22,587				5.00	%
	Tier 1 capital (to risk-weighted assets)
		Consolidated			46,444				10.09				18,410				4.00				N/A				N/A
		Bank			47,328				10.86				17,426				4.00				26,139				6.00
	Total capital (to risk-weighted assets)
		Consolidated			49,546				10.76				36,821				8.00				N/A				N/A
		Bank			50,240				11.53				34,852				8.00				43,565				10.00
December 31, 2004
	Tier 1 capital (to average assets)
		Consolidated		$	35,681				12.76	%		$	11,188				4.00	%			N/A				N/A
		Bank			30,839				11.85				10,412				4.00			$	13,015				5.00	%
	Tier 1 capital (to risk-weighted assets)
		Consolidated			35,681				12.27				11,634				4.00				N/A				N/A
		Bank			30,839				11.21				11,001				4.00				16,502				6.00
	Total capital (to risk-weighted assets)
		Consolidated			37,807				13.00				23,268				8.00				N/A				N/A
		Bank			32,820				11.93				22,003				8.00				27,503				10.00

	Restrictions on Retained Earnings

C-20

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C-21

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			2005				2004
ASSETS
	Cash		$	1,048			$	470
	Investment in subsidiaries			47,747				31,237
	Loans			23,306				14,560
	Allowance for credit losses			190				145
	Net loans			23,116				14,415
	Premises and equipment			237				237
	Accrued interest receivable			180				80
	Intercompany receivable			842				—
	Other assets			1,624				1,885
	Total assets		$	74,794			$	48,324
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
	Notes payable		$	20,278			$	11,940
	Guaranteed preferred beneficial interests in subordinated debt			19,589				9,279
	Accrued interest payable			94				45
	Intercompany payable			—				299
	Total liabilities			39,961				21,563
Shareholders’ Equity				34,833				26,761
	Total liabilities and shareholders’ equity		$	74,794			$	48,324

C-22

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				2005				2004
Operating Income
	Dividends from bank			$	3,886			$	2,432
	Interest income on loans				1,874				1,346
	Other				43				62
	Total operating income				5,803				3,840
Operating Expenses
	Interest expense:
		Notes payable			946				527
		Guaranteed preferred beneficial interests in subordinated debt			888				434
	Salaries and employee benefits				—				335
	Other expenses				326				232
	Total operating expenses				2,160				1,528
	Income before income taxes and equity in undistributed income of the subsidiaries				3,643				2,312
Income Tax Benefit					(69	)			(7	)
	Income before undistributed income of the subsidiaries				3,712				2,319
Equity in Undistributed Income of the Subsidiaries					5,752				4,027
	Net income			$	9,464			$	6,346

C-23

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				2005				2004
Cash Flows from Operating Activities
	Net income			$	9,464			$	6,346
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed income of the subsidiaries			(5,752	)			(4,027	)
		Provision for credit losses			45				(55	)
		Amortization of loan fee			59				58
		Other — net			(680	)			(1,151	)
	Net cash provided by operating activities				3,136				1,171
Cash Flows from Investing Activities
	Investment in subsidiary				(10,750	)			(1,000	)
	(Increase) decrease in loans made to customers, net of principal collections				(8,746	)			6,737
	Purchase of investment in Lynnwood Financial Statutory Trust II				(310	)			—
	Net cash provided by (used in) investing activities				(19,806	)			5,737
Cash Flows from Financing Activities
	Net increase (decrease) in notes payable				8,338				(5,290	)
	Proceeds from issuance of guaranteed preferred beneficial interests in subordinated debt				10,310				—
	Cash dividends paid				(2,999	)			(1,998	)
	Sale of common stock				1,355				—
	Exercise of stock options				244				116
	Net cash provided by (used in) financing activities				17,248				(7,172	)
	Increase (decrease) in cash				578				(264	)
Cash
	Beginning of year				470				734
	End of year			$	1,048			$	470

C-24

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			2005								2004
			Carrying				Fair				Carrying				Fair
			Amount				Value				Amount				Value
Financial Assets
	Cash and due from banks, interest-bearing deposits at other financial institutions		$	15,244			$	15,244			$	3,075			$	3,075
	Securities trading			1,162				1,162				736				736
	Federal Home Loan Bank stock			2,487				2,487				2,477				2,477
	Loans receivable, net			428,681				428,586				250,758				250,667
	Loans held for sale			40,204				40,470				23,439				23,845
	Accrued interest receivable			3,115				3,115				1,427				1,427
	Rate lock commitments			—				—				—				5
Financial Liabilities
	Deposits		$	417,699			$	416,343			$	234,137			$	233,975
	Notes payable			20,278				20,278				13,140				13,140
	Guaranteed preferred beneficial interests in subordinated debt			19,589				19,589				9,279				9,279
	Accrued interest payable			619				619				306				306

	a. Interest only or below market interest rates that are subject to future increases
	b. Loans with combined loan-to-value ratios above 100 percent
	c. Option ARM loans that permit negative amortization

Interest only or below market interest rates		$	23,765
Loans with combined loan-to-value ratios above 100 percent			1,818
Option ARM loans			984
		$	26,567

C-25

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Table of Contents

C-26

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Table of Contents

				Lynnwood				Golf				Golf				Eliminating
				Financial				Savings				Escrow				Journal
				Group				Bank				Corporation				Entries				Consolidated
				(Dollars in thousands)
ASSETS
	Cash and due from banks			$	1,048			$	4,000			$	871			$	(1,853	)		$	4,066
	Interest-bearing deposits at other financial institutions				—				11,178				—				—				11,178
	Securities trading				—				1,162				—				—				1,162
	Federal Home Loan Bank stock, at cost				—				2,487				—				—				2,487
	Loans held for sale				—				40,204				—				—				40,204
	Loans				23,306				408,477				—				—				431,783
	Less allowance for credit losses				190				2,912				—				—				3,102
	Net loans				23,116				405,565				—				—				428,681
	Premises and equipment				237				2,290				68				—				2,595
	Accrued interest receivable				180				2,935				—				—				3,115
	Foreclosed real estate				—				—				—				—				—
	Other assets				48,700				2,919				11				(47,747	)			3,883
	Total assets			$	73,281			$	472,740			$	950			$	(49,600	)		$	497,371
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
	Deposits:
		Demand, non-interest-bearing		$	—			$	15,318			$	—			$	(1,853	)		$	13,465
		Savings and NOW			—				39,914				—				—				39,914
		Time			—				364,320				—				—				364,320
	Total deposits				—				419,552				—				(1,853	)			417,699
	Intercompany payable				(842	)			598				244				—				—
	Notes payable				20,278				—				—				—				20,278
	Guaranteed preferred beneficial interests in subordinated debt				19,589				—				—				—				19,589
	Accrued interest payable				94				525				—				—				619
	Other liabilities				(671	)			4,737				287				—				4,353
	Total liabilities				38,448				425,412				531				(1,853	)			462,538
Commitments and Contingencies					—				—				—				—				—
Shareholders’ Equity
	Common stock				208				—				2				(2	)			208
	Additional paid-in capital				14,791				20,282				—				(20,282	)			14,791
	Retained earnings				19,834				27,046				417				(27,463	)			19,834
	Total shareholders’ equity				34,833				47,328				419				(47,747	)			34,833
	Total liabilities and shareholders’ equity			$	73,281			$	472,740			$	950			$	(49,600	)		$	497,371

C-27

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Table of Contents

				Lynnwood				Golf				Golf				Eliminating
				Financial				Savings				Escrow				Journal
				Group				Bank				Corporation				Entries				Consolidated
				(Dollars in thousands)
ASSETS
	Cash and due from banks			$	470			$	2,196			$	633			$	(1,035	)		$	2,264
	Interest-bearing deposits at other financial institutions				—				811				—				—				811
	Securities trading				—				736				—				—				736
	Federal Home Loan Bank stock, at cost				—				2,477				—				—				2,477
	Loans held for sale				—				23,439				—				—				23,439
	Loans				14,560				238,324				—				—				252,884
	Less allowance for credit losses				145				1,981				—				—				2,126
	Net loans				14,415				236,343				—				—				250,758
	Premises and equipment				237				1,681				43				—				1,961
	Accrued interest receivable				80				1,347				—				—				1,427
	Foreclosed real estate				—				121				—				—				121
	Other assets				32,133				1,580				21				(31,237	)			2,497
	Intercompany receivable				—				445				—				(445	)			—
	Total assets			$	47,335			$	271,176			$	697			$	(32,717	)		$	286,491
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
	Deposits:
		Demand, non-interest-bearing		$	—			$	14,297			$	—			$	(1,035	)		$	13,262
		Savings and NOW			—				30,274				—				—				30,274
		Time			—				190,601				—				—				190,601
	Total deposits				—				235,172				—				(1,035	)			234,137
	Intercompany payable				299				—				146				(445	)			—
	Notes payable				11,940				1,200				—				—				13,140
	Guaranteed preferred beneficial interests in subordinated debt				9,279				—				—				—				9,279
	Accrued interest payable				45				261				—				—				306
	Other liabilities				(989	)			3,704				153				—				2,868
	Total liabilities				20,574				240,337				299				(1,480	)			259,730
Commitments and Contingencies					—				—				—				—				—
Shareholders’ Equity
	Common stock				188				—				2				(2	)			188
	Additional paid-in capital				13,204				9,523				—				(9,523	)			13,204
	Retained earnings				13,369				21,316				396				(21,712	)			13,369
	Total shareholders’ equity				26,761				30,839				398				(31,237	)			26,761
	Total liabilities and shareholders’ equity			$	47,335			$	271,176			$	697			$	(32,717	)		$	286,491

C-28

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Table of Contents

				Lynnwood				Golf				Golf				Eliminating
				Financial				Savings				Escrow				Journal
				Group				Bank				Corporation				Entries				Consolidated
				(Dollars in thousands)
Interest and Dividend Income
	Loans			$	1,874			$	40,337			$	—			$	—			$	42,211
	Federal funds sold and interest-bearing deposits in banks at other financial institutions				—				38				—				—				38
	Federal Home Loan Bank stock				—				9				—				—				9
	Trading securities				—				104				—				—				104
	Total interest and dividend income				1,874				40,488				—				—				42,362
Interest Expense
	Deposits				—				10,630				—				—				10,630
	Notes payable				946				333				—				—				1,279
	Guaranteed preferred beneficial interests in subordinated debt				888				—				—				—				888
	Total interest expense				1,834				10,963				—				—				12,797
	Net interest income				40				29,525				—				—				29,565
Provision for Credit Losses					45				851				—				—				896
	Net interest income after provision for credit losses				(5	)			28,674				—				—				28,669
Non-Interest Income
	Mortgage broker fees and service release premiums				—				13,346				—				—				13,346
	Gains on sales of loans				—				5,795				—				—				5,795
	Escrow fees				—				—				1,818				—				1,818
	Income from subsidiaries:
		Dividends			3,886				—				—				(3,886	)			—
		Undistributed equity			5,752				—				—				(5,752	)			—
	Other				43				895				—				(130	)			808
	Total non-interest income				9,681				20,036				1,818				(9,768	)			21,767
Non-Interest Expense
	Salaries and employee benefits				—				25,543				1,223				—				26,766
	Occupancy				—				957				60				—				1,017
	Equipment expense				—				1,755				68				—				1,823
	Other				281				6,083				399				(130	)			6,633
	Total non-interest expense				281				34,338				1,750				(130	)			36,239
	Income before income taxes				9,395				14,372				68				(9,638	)			14,197
Income Taxes (Benefit)					(69	)			4,755				47				—				4,733
	Net income			$	9,464			$	9,617			$	21			$	(9,638	)		$	9,464

C-29

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Table of Contents

				Lynnwood				Golf				Golf				Eliminating
				Financial				Savings				Escrow				Journal
				Group				Bank				Corporation				Entries				Consolidated
				(Dollars in thousands)
Interest and Dividend Income
	Loans			$	1,346			$	21,442			$	—			$	—			$	22,788
	Federal funds sold and interest-bearing deposits in banks at other financial institutions				—				5				—				—				5
	Federal Home Loan Bank stock				—				45				—				—				45
	Total interest and dividend income				1,346				21,492				—				—				22,838
Interest Expense
	Deposits				—				3,427				—				—				3,427
	Notes payable				527				182				—				—				709
	Guaranteed preferred beneficial interests in subordinated debt				434				—				—				—				434
	Total interest expense				961				3,609				—				—				4,570
	Net interest income				385				17,883				—				—				18,268
Provision for Credit Losses					(55	)			952				—				—				897
	Net interest income after provision for credit losses				440				16,931				—				—				17,371
Non-Interest Income
	Mortgage broker fees and service release premiums				—				12,726				—				—				12,726
	Gains on sales of loans				—				3,821				—				—				3,821
	Escrow fees				—				—				1,577				—				1,577
	Income from subsidiaries:
		Dividends			2,432				—				—				(2,432	)			—
		Undistributed equity			4,027				—				—				(4,027	)			—
	Other				62				677				2				(89	)			652
	Total non-interest income				6,521				17,224				1,579				(6,548	)			18,776
Non-Interest Expense
	Salaries and employee benefits				335				18,820				906				—				20,061
	Occupancy				—				759				70				—				829
	Equipment expense				—				1,366				59				—				1,425
	Other				287				4,482				323				(89	)			5,003
	Total non-interest expense				622				25,427				1,358				(89	)			27,318
	Income before income taxes				6,339				8,728				221				(6,459	)			8,829
Income Taxes (Benefit)					(7	)			2,416				74				—				2,483
	Net income			$	6,346			$	6,312			$	147			$	(6,459	)		$	6,346

C-30

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Item 20.	Indemnification of Directors and Officers.

II-1

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Table of Contents

Item 21.	Exhibits.

Exhibit
No.				Description and Method of Filing
	2	.1		Agreement and Plan of Merger, dated as of February 12, 2006, by and between Sterling and Lynnwood (included as Appendix A to the proxy statement/ prospectus in Part I of this Registration Statement).
	3	.1		Restated Articles of Incorporation of Sterling. Filed as Exhibit 4.1 to Sterling’s Registration Statement on Form S-3 dated December 19, 2005, and incorporated herein by this reference.
	3	.2		Articles of Amendment of Restated Articles of Incorporation of Sterling. Filed as Exhibit 4.2 to Sterling’s Registration Statement on Form S-3 dated December 19, 2005, and incorporated herein by this reference.
	3	.3		Amended and Restated Bylaws of Sterling. Filed as Exhibit 3.3 to Sterling’s Registration Statement on Form S-4 dated December 9, 2002, and incorporated herein by this reference.
	4	.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.
	5	.1		Opinion of Witherspoon, Kelley, Davenport & Toole, P.S. regarding the legality of the shares of common stock being registered. Filed herewith.
	8	.1		Opinion of Witherspoon, Kelley, Davenport & Toole, P.S. as to U.S. federal income tax matters. Filed herewith.
	8	.2		Opinion of Williams, Kastner & Gibbs PLLC as to U.S. federal income tax matters. Filed herewith.
	21	.1		List of Subsidiaries of Sterling. Filed as Exhibit 21.1 to Sterling’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 filed on March 15, 2006 and incorporated herein by this reference.
	23	.1		Consent of BDO Seidman, LLP, as Sterling’s independent registered public accounting firm. Filed herewith.
	23	.2		Consent of McGladrey & Pullen, LLP, as Lynnwood’s independent auditors. Filed herewith.
	23	.3		Consent of Witherspoon, Kelley, Davenport & Toole, P.S. (included in Exhibits 5.1 and 8.1). Filed herewith.
	23	.4		Consent of Williams, Kastner & Gibbs PLLC (included in Exhibit 8.2). Filed herewith.
	24	.1		Power of Attorney. Previously filed.
	99	.1		Form of Proxy of Lynnwood. Filed herewith.

Item 22.	Undertakings.

II-2

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II-3

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Table of Contents

	STERLING FINANCIAL CORPORATION
	By /s/ Daniel G. Byrne

	Name: Daniel G. Byrne

	Title:	Executive Vice President, Assistant

	Secretary and Chief Financial Officer

Signature				Title		Date
/s/ Harold B. Gilkey*   Harold B. Gilkey				Chairman of the Board, Chief Executive Officer, Principal Executive Officer		May 5, 2006
/s/ William W. Zuppe*   William W. Zuppe				President, Chief Operating Officer, Director		May 5, 2006
/s/ Daniel G. Byrne   Daniel G. Byrne				Executive Vice President, Assistant Secretary and Principal Financial Officer		May 5, 2006
/s/ William R. Basom*   William R. Basom				Vice President, Treasurer and Principal Accounting Officer		May 5, 2006
/s/ Rodney W. Barnett*   Rodney W. Barnett				Director		May 5, 2006
/s/ Donald N. Bauhofer*   Donald N. Bauhofer				Director		May 5, 2006
/s/ William L. Eisenhart*   William L. Eisenhart				Director		May 5, 2006
/s/ James P. Fugate*   James P. Fugate				Director		May 5, 2006
/s/ Robert D. Larrabee*   Robert D. Larrabee				Director		May 5, 2006
/s/ Donald J. Lukes*   Donald J. Lukes				Director		May 5, 2006
*By:		/s/ Daniel G. Byrne   Daniel G. Byrne Attorney-in-fact

II-4

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Exhibit
No.				Description and Method of Filing
	2	.1		Agreement and Plan of Merger, dated as of February 12, 2006, by and between Sterling and Lynnwood (included as Appendix A to the proxy statement/ prospectus in Part I of this Registration Statement).
	3	.1		Restated Articles of Incorporation of Sterling. Filed as Exhibit 4.1 to Sterling’s Registration Statement on Form S-3 dated December 19, 2005, and incorporated herein by this reference.
	3	.2		Articles of Amendment of Restated Articles of Incorporation of Sterling. Filed as Exhibit 4.2 to Sterling’s Registration Statement on Form S-3 dated December 19, 2005, and incorporated herein by this reference.
	3	.3		Amended and Restated Bylaws of Sterling. Filed as Exhibit 3.3 to Sterling’s Registration Statement on Form S-4 dated December 9, 2002, and incorporated herein by this reference.
	4	.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.
	5	.1		Opinion of Witherspoon, Kelley, Davenport & Toole, P.S. regarding the legality of the shares of common stock being registered. Filed herewith.
	8	.1		Opinion of Witherspoon, Kelley, Davenport & Toole, P.S. as to U.S. federal income tax matters. Filed herewith.
	8	.2		Opinion of Williams, Kastner & Gibbs PLLC as to U.S. federal income tax matters. Filed herewith.
	21	.1		List of Subsidiaries of Sterling. Filed as Exhibit 21.1 to Sterling’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 filed on March 15, 2006 and incorporated herein by this reference.
	23	.1		Consent of BDO Seidman, LLP, as Sterling’s independent registered public accounting firm. Filed herewith.
	23	.2		Consent of McGladrey & Pullen, LLP, as Lynnwood’s independent auditors. Filed herewith.
	23	.3		Consent of Witherspoon, Kelley, Davenport & Toole, P.S. (included in Exhibits 5.1 and 8.1). Filed herewith.
	23	.4		Consent of Williams, Kastner & Gibbs PLLC (included in Exhibit 8.2). Filed herewith.
	24	.1		Power of Attorney. Previously filed.
	99	.1		Form of Proxy of Lynnwood. Filed herewith.