FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

For the quarterly period ended March 31, 2004

OR

For the transition period from _________ to _________

Commission file number 0-16276

STERLING FINANCIAL CORPORATION

(717) 581-6030

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes [X] No [  ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical data.

Common Stock, $5.00 Par Value – 21,484,340 shares outstanding as of April 30, 2004.

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Sterling Financial Corporation and Subsidiaries
Index

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Part I — Financial Information
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

     Basis of Presentation – The accompanying unaudited consolidated financial statements of Sterling Financial Corporation and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

     Operating results for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

     For further information, refer to the audited consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K, for the year ended December 31, 2003.

     The consolidated financial statements and footnotes thereto of Sterling Financial Corporation include the accounts of its wholly owned subsidiaries, Bank of Lancaster County, N.A. (Bank of Lancaster County), First National Bank of North East (First National), Bank of Hanover and Trust Company (Bank of Hanover), HOVB Investment Co., T&C Leasing, Inc. (T&C), Pennbanks Insurance Company, SPC, Church Capital Management, LLC, Bainbridge Securities Inc., and Sterling Mortgage Services, Inc. (inactive). The unaudited consolidated financial statements also include Town & Country Leasing, LLC (Town & Country), Sterling Financial Trust Company, and Equipment Finance, LLC, all wholly-owned subsidiaries of Bank of Lancaster County. All significant intercompany balances and transactions have been eliminated in consolidation.

     Earnings Per Share – Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if potential dilutive common shares had been issued. Potential common shares that may be issued by Sterling consist solely of outstanding stock options and are determined using the treasury stock method.

     Earnings per common share have been computed based on the following (dollars in thousands):

     All share and per share amounts have been properly restated to reflect the 5-for-4 stock split effected in the form of a 25% stock dividend declared in January 2004 and paid in February 2004.

     Comprehensive Income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and interest rate derivatives are reported as separate components of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

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     The components of other comprehensive income and related tax effects are as follows:

     The ending accumulated balances for each item included in accumulated other comprehensive income, net of related income taxes, were as follows:

     Reclassifications – Certain items in the 2003 consolidated financial statements have been reclassified to conform to the 2004 presentation format. Such reclassifications had no impact on net income.

     Recent Accounting Pronouncements – Sterling accounts for interest rate lock commitments (“IRLCs”) for those mortgage loans that it intends to sell as derivatives in accordance with SFAS No. 133. On March 9, 2004, the SEC staff released Staff Accounting Bulletin (“SAB”) No. 105 that requires registrants to exclude the future expected cash flows related to expected servicing fees from the fair value of IRLCs. This statement delays the recognition of such servicing revenues until such time as the loan is sold, however, the pronouncement would have no effect on the ultimate amount of revenue or cash flows recognized over time. This pronouncement is effective April 1, 2004 and must be adopted prospectively for commitments entered into after March 31, 2004. Sterling does not anticipate a significant impact to its financial condition or results of operations as a result of SAB 105.

     In December 2003, the Financial Accounting Standards Board (FASB) revised Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. This Statement retains the disclosures required by the original Statement No. 132 and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension and postretirement plans. In addition, this Statement requires interim period disclosure of the components of net period benefit cost and contributions if significantly different from previously reported amounts. Sterling adopted the provisions of this Statement as of December 31, 2003. See Note 5 for the additional pension and other postretirement benefit disclosures.

     In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, FIN 46 provides guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabil