UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     (Mark One)

     OR

     For the transition period from                                          to                                         

     Commission file number 0-16276

Registrant’s Telephone number, including area code: (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 þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

     Yes þ No o

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

     Common Stock, $5.00 Par Value – 23,028,405 shares outstanding as of April 29, 2005.

Sterling Financial Corporation and Subsidiaries
Index

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Part I – Financial Information

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)

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

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)

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

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity

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

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)

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

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Notes to Consolidated Financial Statements
(All dollar amounts presented in the footnotes are in thousands, except per share data)

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 U. S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

     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, 2004.

     The consolidated financial statements and footnotes thereto of Sterling Financial Corporation (Sterling) include the accounts of its wholly-owned subsidiaries, Bank of Lancaster County, N.A. (Bank of Lancaster County), First National Bank of North East (Bank of North East), Bank of Hanover and Trust Company (Bank of Hanover), Pennsylvania State Bank, Delaware Sterling Bank & Trust Company (Delaware Sterling), HOVB Investment Co., T&C Leasing, Inc. (T&C), Pennbanks Insurance Company, SPC, Church Capital Management, LLC, Bainbridge Securities Inc., Corporate Healthcare Strategies, LLC (d/b/a StoudtAdvisors), Lancaster Insurance Group, LLC 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 (EFI), 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 potentially dilutive stock options had been exercised. Potential common shares that may be issued by Sterling used in the dilutive per share calculation consist solely of outstanding stock options and are determined using the treasury stock method.

     Earnings per common share for the three months ended March 31, 2005 and 2004 have been computed based on the following:

     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 April 26, 2005 and payable on June 1, 2005.

     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

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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.

     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:

     Recent Accounting Pronouncements – In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” This statement addresses accounting for differences between contractual cash flows expected to be collected from an investor’s initial investment in non-homogeneous loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. This statement limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This statement requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This statement prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. This statement is effective for loans acquired in fiscal years beginning after December 15, 2004.

Note 2 – Business Combinations

     Corporate Healthcare Strategies, LLC – On May 28, 2004, Sterling acquired 100 percent of the outstanding common shares of Corporate Healthcare Strategies, Inc. d/b/a StoudtAdvisors. StoudtAdvisors is headquartered in Lancaster, Pennsylvania. As a result of the acquisition, Sterling plans to enhance earnings and provide financial product diversification.

     In connection with the completion of the acquisition of StoudtAdvisors, Sterling issued 282,657 shares of its common stock and paid $7.398 million. In addition, 121,139 shares of Sterling’s common stock and $2.640 million are to be paid out over the next four years as contingent consideration based upon StoudtAdvisors reaching specified performance criteria. Based on the closing price of Sterling’s common stock on May 25, 2004, the 282,657 shares of common stock were valued at $7.162 million.

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     The transaction was accounted for under the provisions of FASB Statement No. 141, Business Combinations. The purchase price allocation included $6.624 million to finite-lived intangible assets, including $6.234 million to customer lists, $140 thousand to vendor contracts and $250 thousand to covenants not to compete. The intangible assets have lives ranging from 2 to 12 years, and a weighted average life of 4 years. The remaining portion of the purchase price, or $9.330 million, was assigned to goodwill within the Insurance Services segment. The goodwill is being amortized for tax purposes.

     Lancaster Insurance Group, LLC – As a result of the purchase of the remaining fifty percent of Lancaster Insurance Group’s membership interest effective July 1, 2004, this affiliate became a consolidated subsidiary of Sterling. Sterling paid $225 thousand to obtain the remaining fifty percent of the outstanding membership interest of this entity. To the extent that the purchase price exceeded tangible and intangible assets, the amount was allocated to goodwill.

     Pennsylvania State Bank – On December 3, 2004, Sterling completed the acquisition of The Pennsylvania State Banking Company, parent company of Pennsylvania State Bank. At the date of acquisition, The Pennsylvania State Banking Company was merged into Sterling, and Pennsylvania State Bank became a wholly owned subsidiary of Sterling. Sterling acquired Pennsylvania State Bank in order to enhance its banking franchise by entering Cumberland and Dauphin Counties of Pennsylvania.

     In connection with this transaction, Sterling acquired all of the outstanding shares of The Pennsylvania State Banking Company’s common stock for cash consideration of $11.436 million, 1,209,728 shares of Sterling’s common stock valued at $34.296 million, and the exchange of stock options into Sterling options valued at $2.440 million. In addition, shares of The Pennsylvania State Banking Company, valued at $421 thousand, owned by Sterling were not exchanged into Sterling shares, but are included in the acquisition cost.

     The transaction was accounted for under the provisions of FASB Statement No. 141, Business Combinations. The purchase price allocation included $13.400 million to net tangible assets, including a $2.851 million valuation adjustment, $3.804 million to core deposit intangibles and $237 thousand to a trademark. Additional costs of acquisition of $2.425&