##### 






|                                                 |          
|------------------------------------------------ | ---------
|UNITED STATES SECURITIES AND EXCHANGE COMMISSION | FORM 10-K

Washington, D. C. 20549


(Mark One)


| |                                                                 
| | ----------------------------------------------------------------
| | x      ANNUAL
    REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
| | SECURITIES EXCHANGE ACT OF 1934                                 
| | For the fiscal year ended December 31, 2004                     

OR




| |                                                                    
| | -------------------------------------------------------------------
| | o      TRANSITION
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
| | SECURITIES EXCHANGE ACT OF 1934                                    

For the transition period
from  to


Commission file number 0-16276





STERLING FINANCIAL CORPORATION




|                                                                                               |  |                                                   
|---------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Pennsylvania(State or other jurisdiction of
    incorporation or organization)                 |  | 23-2449551(I.R.S. Employer
    Identification No.)
|                                                                                              
|101 North Pointe Boulevard
    Lancaster, Pennsylvania(Address of principal executive offices) |  | 17601-4133(Zip Code)                              







Common Stock, Par Value $5.00 Per Share




o


x o


x o






Documents Incorporated by Reference






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Sterling Financial Corporation


Table of Contents


|           |  |                                                                                                                        |  |      |    | 
|---------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|           |  |                                                                                                                        |  | Page |   
|           |  |                                                                                                                        |  |      |   
|Part I    
|Item 1.    |  | Business                                                                                                               |  |      | 3  | 
|          
|Item 2.    |  | Properties                                                                                                             |  |      | 10 | 
|          
|Item 3.    |  | Legal Proceedings                                                                                                      |  |      | 11 | 
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                    |  |      | 11 | 
|Part II   
|Item 5.    |  | Market for the Registrants Common Equity and Related
    Stockholder Matters                                          |  |      | 12 | 
|          
|Item 6.    |  | Selected Financial Data                                                                                                |  |      | 13 | 
|          
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                              |  |      | 14 | 
|          
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                             |  |      | 41 | 
|          
|Item 8.    |  | Financial Statements and Supplementary Data                                                                            |  |      | 43 | 
|          
|Item 9.    |  | Changes in and Disagreements with Registered Independent Public
    Accountants on Accounting and Financial Disclosure |  |      | 91 | 
|          
|Item 9A.   |  | Controls and Procedures                                                                                                |  |      | 91 | 
|          
|Item 9B.   |  | Other information                                                                                                      |  |      | 91 | 
|Part III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                                     |  |      | 91 | 
|          
|Item 11.   |  | Executive Compensation                                                                                                 |  |      | 91 | 
|          
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters                     |  |      | 91 | 
|          
|Item 13.   |  | Certain Relationships and Related Transactions                                                                         |  |      | 92 | 
|          
|Item 14.   |  | Principal Accountant Fees and Services                                                                                 |  |      | 92 | 
|Part IV   
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                             |  |      | 92 | 
|          
|Signatures |  |                                                                                                                        |  |      | 94 | 

2



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##### 



Part I








| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operating, legal and regulatory risks;                                                                                                                                                  
|
| |  | Economic, political and competitive forces impacting our various
    lines of business;                                                                                                 
|
| |  | The risk that our analysis of these risks and forces could be
    incorrect and/or that the strategies developed to address them
    could be unsuccessful;                             
|
| |  | The possibility that increased demand for Sterlings
    financial services and products may not occur;                                                                                 
|
| |  | Volatility in interest rates;                                                                                                                                                           
|
| |  | Integration of our newly acquired affiliates may not occur as
    quickly or smoothly as anticipated and projected synergies may
    not occur on the projected timeframe or at all; and
|
| |  | Other risks and uncertainties.                                                                                                                                                          



Item 1  Business




Community Banking and Related Services




3



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##### 





|                                                                       |  |         |    |  |                |                                                                                               |       |   |       |          |  |   |        |  |  |   |       | 
|---------------------------------------------------------------------- |  | ------- | -- |  | -------------- | --------------------------------------------------------------------------------------------- | ----- | - | ----- | -------- |  | - | ------ |  |  | - | ----- | 
|                                                                       |  | # of    |    |  |                |                                                                                               |       |   |       |          | 
|Bank Name                                                              |  | Offices |    |  | Markets Served |                                                                                               | Loans |   |       | Deposits |  |   | Assets | 
|                                                                       |  |         |    |  |                |                                                                                               |       |   |       |          |  |   |        | 
|Bank of Lancaster County, N.A                                          |  |         | 36 |  |                | Lancaster County, PA
    Chester County, PA
    Berks County, PA(1)
    Lebanon County, PA(2) |       | $ | 1,172 |          |  | $ | 1,195  |  |  | $ | 1,558 | 
|Bank of Hanover and Trust Company                                      |  |         | 16 |  |                | York County, PA
    Adams County, PA
    Carroll County, MD                                   |       |   | 472   |          |  |   | 555    |  |  |   | 691   | 
|Pennsylvania State Bank                                                |  |         | 6  |  |                | Cumberland County, PA
    Dauphin County, PA                                                  |       |   | 155   |          |  |   | 156    |  |  |   | 243   | 
|First National Bank of North East                                      |  |         | 4  |  |                | Cecil County, MD                                                                              |       |   | 71    |          |  |   | 113    |  |  |   | 123   | 
|Delaware Sterling Bank & Trust Company
    (chartered January 3, 2005) |  |         | 1  |  |                | New Castle County, DE(3)                                                                      |       |   |      |          |  |   |       |  |  |   |      | 






|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | Bank of Lancaster County conducts business through its
    PennSterling Bank division office.                              
|   
|(2) | Bank of Lancaster County conducts business through its two Bank
    of Lebanon County division offices.                    
|   
|(3) | Bank of Lancaster County conducted business through its Delaware
    Sterling Bank division office through January 3, 2005.









Leasing








4



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Commercial Finance






Trust and Investment Services










Insurance and Related Services






5



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##### 













Competition




Environmental Compliance




Supervision and Regulation










| |                                
| | -------------------------------
| | Bank Holding Company Regulation



6



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##### 













| |                                             
| | --------------------------------------------
| | Financial Services Modernization Legislation









7



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| |                        
| | -----------------------
| | USA Patriot Act of 2001





| |                           
| | --------------------------
| | Sarbanes-Oxley Act of 2002





Regulation W






| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | to an amount equal to 10% of the banks capital and
    surplus, in the case of covered transactions with any one
    affiliate; and
|
| |  | to an amount equal to 20% of the banks capital and
    surplus, in the case of covered transactions with all affiliates.           





| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | a loan or extension of credit to an affiliate;                                                                               
|
| |  | a purchase of, or an investment in, securities issued by an
    affiliate;                                                   
|
| |  | a purchase of assets from an affiliate, with some exceptions;                                                                
|
| |  | the acceptance of securities issued by an affiliate as
    collateral for a loan or extension of credit to any
    party; and
|
| |  | the issuance of a guarantee, acceptance or letter of credit on
    behalf of an affiliate.                                   

8



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##### 







| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a bank and its subsidiaries may not purchase a low-quality asset
    from an affiliate;                                                                                                                                                                         
|
| |  | covered transactions and other specified transactions between a
    bank or its subsidiaries and an affiliate must be on terms and
    conditions that are consistent with safe and sound banking
    practices; and                                            
|
| |  | with some exceptions, each loan or extension of credit by a bank
    to an affiliate must be secured by collateral with a market
    value ranging from 100% to 130%, depending on the type of
    collateral, of the amount of the loan or extension of credit.

Check
21


st




Dividends






FDIC
Insurance






Regulation
of Banks




9



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##### 









Other




Products and Services with Reputation Risk




Employees


www.sterlingfi.com


Item 2  Properties




10



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##### 









Item 3  Legal Proceedings






Item 4  Submission of Matters to a Vote of
Security Holders




11



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##### 



Part II


Item 5  Market for the Registrants
Common Equity and Related Stockholder Matters








|               |  |                       |       |  |           |   |       |          |  |   |       | 
|-------------- |  | --------------------- | ----- |  | --------- | - | ----- | -------- |  | - | ----- | 
|               |  | Price Range Per Share |       |  |          
|               |  |                       |       |  | Per Share |  
|2004           |  | High                  |       |  | Low       |   |       | Dividend | 
|               |  |                       |       |  |           |   |       |          | 
|First Quarter  |  | $                     | 25.95 |  |           | $ | 22.08 |          |  | $ | 0.150 | 
|Second Quarter |  |                       | 29.04 |  |           |   | 23.11 |          |  |   | 0.150 | 
|Third Quarter  |  |                       | 27.44 |  |           |   | 22.58 |          |  |   | 0.160 | 
|Fourth Quarter |  |                       | 30.50 |  |           |   | 25.17 |          |  |   | 0.160 | 
|              
|2003           |  |                       |       |  |           |   |       |          |  |   |       | 
|               |  |                       |       |  |           |   |       |          | 
|              
|First Quarter  |  | $                     | 19.66 |  |           | $ | 17.38 |          |  | $ | 0.136 | 
|Second Quarter |  |                       | 20.40 |  |           |   | 18.12 |          |  |   | 0.136 | 
|Third Quarter  |  |                       | 23.06 |  |           |   | 18.80 |          |  |   | 0.144 | 
|Fourth Quarter |  |                       | 23.54 |  |           |   | 21.02 |          |  |   | 0.144 | 







12



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##### 



Item 6  Selected Financial Data


|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |           |        | 
|--------------------------------------------- | --------------------------------------------------- | ------------------------ | - | --------- | ------- |  | - | --------- | ------ |  | ---- | --------- | ------ | ---- | - | --------- | ------ |  | - | --------- | ------ | 
|                                              |                                                     | Years Ended December 31, |  
|                                              |                                                     |                          |  
|(Dollars in thousands, except per share data) |                                                     | 2004(5)                  |   |           | 2003(5) |  |   | 2002(5)   |        |  | 2001 |           |        | 2000 |  
|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |  
|Summaries of Income                           |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |          
|                                              | Interest income                                     |                          | $ | 137,682   |         |  | $ | 127,074   |        |  | $    | 123,591   |        |      | $ | 115,916   |        |  | $ | 113,319   |       
|                                              | Interest expense                                    |                          |   | 40,265    |         |  |   | 41,156    |        |  |      | 48,643    |        |      |   | 57,274    |        |  |   | 58,501    |       
|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |  
|                                              | Net interest income                                 |                          |   | 97,417    |         |  |   | 85,918    |        |  |      | 74,948    |        |      |   | 58,642    |        |  |   | 54,818    |       
|                                              | Provision for loan losses                           |                          |   | 4,438     |         |  |   | 3,697     |        |  |      | 2,095     |        |      |   | 1,217     |        |  |   | 605       |       
|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |  
|                                              | Net interest income after provision for loan losses |                          |   | 92,979    |         |  |   | 82,221    |        |  |      | 72,853    |        |      |   | 57,425    |        |  |   | 54,213    |       
|                                              | Non-interest income                                 |                          |   | 59,296    |         |  |   | 49,721    |        |  |      | 44,832    |        |      |   | 43,925    |        |  |   | 37,508    |       
|                                              | Non-interest expense                                |                          |   | 107,086   |         |  |   | 92,568    |        |  |      | 85,922    |        |      |   | 75,172    |        |  |   | 70,203    |       
|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |  
|                                              | Income before income taxes                          |                          |   | 45,189    |         |  |   | 39,374    |        |  |      | 31,763    |        |      |   | 26,178    |        |  |   | 21,518    |       
|                                              | Applicable income taxes                             |                          |   | 11,860    |         |  |   | 10,315    |        |  |      | 7,018     |        |      |   | 5,844     |        |  |   | 4,951     |       
|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |  
|                                              |                                                     | Net income               |   | $         | 33,329  |  |   | $         | 29,059 |  |      | $         | 24,745 |      |   | $         | 20,334 |  |   | $         | 16,567 | 
|                                              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |  
|Financial Condition at Year End               |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |          
|                                              | Assets                                              |                          | $ | 2,742,762 |         |  | $ | 2,343,517 |        |  | $    | 2,156,928 |        |      | $ | 1,861,439 |        |  | $ | 1,726,138 |       
|                                              | Loans, net                                          |                          |   | 1,888,380 |         |  |   | 1,481,369 |        |  |      | 1,283,075 |        |      |   | 1,087,102 |        |  |   | 1,021,499 |       
|                                              | Deposits                                            |                          |   | 2,015,394 |         |  |   | 1,778,397 |        |  |      | 1,702,302 |        |      |   | 1,535,649 |        |  |   | 1,420,300 |       
|                                              | Borrowed money                                      |                          |   | 403,973   |         |  |   | 296,342   |        |  |      | 217,717   |        |      |   | 141,378   |        |  |   | 139,506   |       
|                                              | Stockholders equity                                |                          |   | 281,944   |         |  |   | 220,011   |        |  |      | 196,833   |        |      |   | 152,111   |        |  |   | 139,347   |       
|Per Common Share Data (3)                     |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |          
|                                              | Earnings per share  basic                          |                          |   | 1.53      |         |  |   | 1.37      |        |  |      | 1.19      |        |      |   | 1.04      |        |  |   | 0.85      |       
|                                              | Earnings per share  diluted                        |                          |   | 1.51      |         |  |   | 1.35      |        |  |      | 1.18      |        |      |   | 1.03      |        |  |   | 0.85      |       
|                                              | Cash dividends declared                             |                          |   | 0.62      |         |  |   | 0.56      |        |  |      | 0.53      |        |      |   | 0.50      |        |  |   | 0.48      |       
|                                              | Book value                                          |                          |   | 12.07     |         |  |   | 10.24     |        |  |      | 9.31      |        |      |   | 7.78      |        |  |   | 7.11      |       
|                                              | Realized book value (2)                             |                          |   | 11.63     |         |  |   | 9.60      |        |  |      | 8.64      |        |      |   | 7.50      |        |  |   | 6.98      |       
|                                              | Weighted average number of common shares:           |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |           |       
|                                              |                                                     | Basic                    |   |           | 21,772  |  |   |           | 21,224 |  |      |           | 20,849 |      |   |           | 19,576 |  |   |           | 19,601 | 
|                                              |                                                     | Diluted                  |   |           | 22,121  |  |   |           | 21,448 |  |      |           | 21,028 |      |   |           | 19,656 |  |   |           | 19,620 | 
|                                              | Dividend payout ratio (1)                           |                          |   | 40.5      | %       |  |   | 40.9      | %      |  |      | 44.5      | %      |      |   | 48.1      | %      |  |   | 56.5      | %     
|Profitability Ratios on Earnings              |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |          
|                                              | Return on average assets                            |                          |   | 1.39      | %       |  |   | 1.33      | %      |  |      | 1.22      | %      |      |   | 1.14      | %      |  |   | 1.02      | %     
|                                              | Return on average equity                            |                          |   | 14.24     | %       |  |   | 14.02     | %      |  |      | 13.70     | %      |      |   | 13.74     | %      |  |   | 12.99     | %     
|                                              | Return on average realized equity (2)               |                          |   | 15.00     | %       |  |   | 15.10     | %      |  |      | 14.47     | %      |      |   | 14.41     | %      |  |   | 12.36     | %     
|                                              | Average equity to average assets                    |                          |   | 9.70      | %       |  |   | 9.38      | %      |  |      | 8.87      | %      |      |   | 8.33      | %      |  |   | 7.83      | %     
|                                              | Efficiency ratio (4)                                |                          |   | 61.34     | %       |  |   | 59.20     | %      |  |      | 60.20     | %      |      |   | 64.50     | %      |  |   | 63.10     | %     
|Selected Asset Quality Ratios                 |                                                     |                          |   |           |         |  |   |           |        |  |      |           |        |      |   |           |        |  |   |          
|                                              | Non-performing loans to total loans                 |                          |   | 0.24      | %       |  |   | 0.31      | %      |  |      | 0.90      | %      |      |   | 0.80      | %      |  |   | 0.59      | %     
|                                              | Net charge-offs to average loans outstanding        |                          |   | 0.10      | %       |  |   | 0.14      | %      |  |      | 0.08      | %      |      |   | 0.17      | %      |  |   | 0.08      | %     
|                                              | Allowance for loan losses to total loans            |                          |   | 0.99      | %       |  |   | 0.98      | %      |  |      | 1.00      | %      |      |   | 1.01      | %      |  |   | 1.13      | %     
|                                              | Allowance for loan losses to non-performing loans   |                          |   | 417.02    | %       |  |   | 315.25    | %      |  |      | 110.62    | %      |      |   | 125.80    | %      |  |   | 192.10    | %     






|    |                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Dividends per share divided by basic earnings per share.                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | Excludes accumulated other comprehensive income (loss).                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | All per share information reflects the 5-for-4 stock split,
    effected in the form of a 25% stock dividend, declared in
    January 2004 and paid in February 2004.                                                                                                                                                                                                                         
|   
|(4) | Calculated after netting depreciation on operating leases with
    related rental income.                                                                                                                                                                                                                                                                                                     
|   
|(5) | Financial information reflects the acquisition of Equipment
    Finance LLC on February 28, 2002, Church Capital Management
    LLC and Bainbridge Securities, Inc. on October 15, 2003,
    Corporate Healthcare Strategies, LLC on May 29, 2004, and
    Pennsylvania State Bank on December 3, 2004. These
    acquisitions were accounted for under the purchase method of
    accounting.

13



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##### 



Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations






Critical Accounting Policies










14



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##### 







Non-GAAP Presentations






Inflation and Interest Rates








RESULTS OF OPERATIONS




Executive Overview






15



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Net Interest Income






16



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As noted previously, growth rate in loans has exceeded the
    growth rate in earning assets, reflecting the funding of a
    portion of the loan growth with securities portfolio cash flow
    and overnight federal funds over the past year. Generally, loans
    carry a higher yield than alternative interest-earning assets,
    namely securities and other investments. Thus, this improved mix
    of earning assets has helped to minimize the decrease in the
    overall yield on earning assets to 3 b.p. from 2003 to 2004.
|
| |  | During the two years from January 2001 to December 2002, the
    Federal Reserve Bank lowered the federal funds rate twelve times
    totaling 5.25%. While the Fed began to raise the federal funds
    target rate in 2004, the year-over-year impact of the dramatic
    decreases in short-term interest rates during this time has
    continued to result in a decrease in the cost of funds for
    Sterling. The rate paid on interest-bearing liabilities declined
    21 b.p. from 2003 to 2004.                                 
|
| |  | During the second quarter of 2004, Sterling expanded the use of
    off-balance sheet instruments to manage its interest rate risk
    position by adding $25,000,000 of receive fixed, pay floating
    swaps. The new swaps, when combined with the existing
    $25,000,000 pay fixed, receiving floating interest rate swap,
    negatively impacted the margin by approximately 3 b.p. in
    2004, a slight improvement over the 5 b.p. negative impact
    in 2003.                                                                 

17



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##### 









| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Improved earning asset mix with strong growth in commercial
    loans and finance receivables funded in large part by securities
    portfolio cash flow and overnight federal funds;
|
| |  | Growth in lower cost demand and savings deposits;                                                                                                                                    
|
| |  | Downward re-pricing of certificates of deposit portfolio;                                                                                                                            
|
| |  | Leveraging of trust preferred proceeds with borrowings of
    $75,000,000; and                                                                                                       
|
| |  | Less reliance on third-party borrowings to fund growth in both
    finance receivables and operating leases.                                                                         



18



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##### 



Table 1  Distribution of Assets, Liabilities and
Stockholders Equity Interest Rates and Interest
Differential-Tax Equivalent Yields


|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |       |  
|---------------------------------------------- | ------------------------ | ------------------------ | --------- | --------- | -------- | - | ------- | ------- |  | ------- | ------- | ----- | - | -------- | --------- | --------- | ---- | ------- | ------- | ------- |  |  | -------- | ----- | - | ---- | --------- | --------- |  | - | ------- | ------ |  |  | ---- | ----- | -
|                                               |                          | Years Ended December 31, |          
|                                               |                          |                          |          
|                                               |                          | 2004                     |           |           | 2003     |   |         | 2002    | 
|                                               |                          |                          |           |           |          |   |         |         | 
|                                               |                          | Average                  |           |           |          |   | Annual  |         |  | Average |         |       |   |          | Annual    |           |      | Average |         |         |  |  | Annual   |      
|                                               |                          | Balance                  |           |           | Interest |   |         | Rate    |  |         | Balance |       |   | Interest |           |           | Rate |         |         | Balance |  |  | Interest |       |   | Rate |          
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Assets:                                        |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |      
|Federal funds sold                             |                          | $                        | 8,117     |           |          | $ | 126     |         |  |         | 1.55    | %     |   | $        | 21,281    |           |      | $       | 232     |         |  |  | 1.09     | %     |   | $    | 51,561    |           |  | $ | 850     |        |  |  | 1.65 | %    
|Other short-term investments                   |                          |                          | 7,425     |           |          |   | 40      |         |  |         | 0.53    | %     |   |          | 8,605     |           |      |         | 81      |         |  |  | 0.94     | %     |   |      | 4,079     |           |  |   | 49      |        |  |  | 1.20 | %    
|Securities:                                    |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |      
|                                               | U.S. Treasury            |                          |           | 4,291     |          |   |         | 156     |  |         |         | 3.64  | % |          |           | 8,742     |      |         |         | 366     |  |  |          | 4.19  | % |      |           | 14,542    |  |   |         | 779    |  |  |      | 5.36  | %
|                                               | U.S. Government agencies |                          |           | 157,347   |          |   |         | 6,790   |  |         |         | 4.32  | % |          |           | 177,913   |      |         |         | 8,204   |  |  |          | 4.61  | % |      |           | 158,126   |  |   |         | 8,823  |  |  |      | 5.58  | %
|                                               | State and Municipal      |                          |           | 238,122   |          |   |         | 16,946  |  |         |         | 7.12  | % |          |           | 226,802   |      |         |         | 16,364  |  |  |          | 7.22  | % |      |           | 201,552   |  |   |         | 15,028 |  |  |      | 7.46  | %
|                                               | Other                    |                          |           | 98,836    |          |   |         | 5,289   |  |         |         | 5.35  | % |          |           | 138,343   |      |         |         | 7,553   |  |  |          | 5.46  | % |      |           | 162,685   |  |   |         | 9,305  |  |  |      | 5.72  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|                                               | Total securities         |                          |           | 498,596   |          |   |         | 29,181  |  |         |         | 5.85  | % |          |           | 551,800   |      |         |         | 32,487  |  |  |          | 5.89  | % |      |           | 536,905   |  |   |         | 33,935 |  |  |      | 6.32  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Loans:                                         |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |      
|                                               | Commercial               |                          |           | 902,733   |          |   |         | 51,718  |  |         |         | 5.73  | % |          |           | 762,278   |      |         |         | 45,779  |  |  |          | 6.01  | % |      |           | 683,497   |  |   |         | 45,755 |  |  |      | 6.69  | %
|                                               | Consumer                 |                          |           | 332,478   |          |   |         | 19,734  |  |         |         | 5.94  | % |          |           | 304,167   |      |         |         | 19,383  |  |  |          | 6.37  | % |      |           | 284,469   |  |   |         | 21,149 |  |  |      | 7.43  | %
|                                               | Residential mortgages    |                          |           | 79,721    |          |   |         | 5,002   |  |         |         | 6.27  | % |          |           | 98,347    |      |         |         | 7,044   |  |  |          | 7.16  | % |      |           | 109,929   |  |   |         | 8,152  |  |  |      | 7.42  | %
|                                               | Leases                   |                          |           | 124,949   |          |   |         | 8,654   |  |         |         | 6.93  | % |          |           | 101,638   |      |         |         | 7,571   |  |  |          | 7.45  | % |      |           | 83,498    |  |   |         | 6,906  |  |  |      | 8.27  | %
|                                               | Finance receivables      |                          |           | 203,638   |          |   |         | 29,933  |  |         |         | 14.70 | % |          |           | 140,600   |      |         |         | 20,973  |  |  |          | 14.92 | % |      |           | 84,513    |  |   |         | 12,339 |  |  |      | 14.60 | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|                                               | Total loans              |                          |           | 1,643,519 |          |   |         | 115,041 |  |         |         | 7.00  | % |          |           | 1,407,030 |      |         |         | 100,750 |  |  |          | 7.16  | % |      |           | 1,245,906 |  |   |         | 94,301 |  |  |      | 7.57  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Total interest earning assets                  |                          |                          | 2,157,657 |           |          |   | 144,388 |         |  |         | 6.69    | %     |   |          | 1,988,716 |           |      |         | 133,550 |         |  |  | 6.72     | %     |   |      | 1,838,451 |           |  |   | 129,135 |        |  |  | 7.02 | %    
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Allowance for loan losses                      |                          |                          | (16,032   | )         |          |   |         |         |  |         |         |       |   |          | (13,688   | )         |      |         |         |         |  |  |          |       |   |      | (12,423   | )         |  |   |         |        |  |  |      |      
|Cash and due from banks                        |                          |                          | 56,217    |           |          |   |         |         |  |         |         |       |   |          | 55,553    |           |      |         |         |         |  |  |          |       |   |      | 54,057    |           |  |   |         |        |  |  |      |      
|Other non-interest earning assets              |                          |                          | 208,090   |           |          |   |         |         |  |         |         |       |   |          | 177,874   |           |      |         |         |         |  |  |          |       |   |      | 156,106   |           |  |   |         |        |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|TOTAL ASSETS                                   |                          | $                        | 2,405,932 |           |          |   |         |         |  |         |         |       |   | $        | 2,208,455 |           |      |         |         |         |  |  |          |       |   | $    | 2,036,191 |           |  |   |         |        |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Liabilities and Stockholders Equity:          |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |      
|Deposits:                                      |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |      
|                                               | Demand deposits          |                          | $         | 608,414   |          |   | $       | 3,947   |  |         |         | 0.65  | % |          | $         | 558,425   |      |         | $       | 3,461   |  |  |          | 0.62  | % |      | $         | 494,778   |  |   | $       | 5,038  |  |  |      | 1.02  | %
|                                               | Saving deposits          |                          |           | 218,852   |          |   |         | 1,200   |  |         |         | 0.55  | % |          |           | 205,373   |      |         |         | 1,262   |  |  |          | 0.61  | % |      |           | 186,403   |  |   |         | 1,973  |  |  |      | 1.06  | %
|                                               | Time deposits            |                          |           | 739,802   |          |   |         | 21,757  |  |         |         | 2.94  | % |          |           | 746,421   |      |         |         | 24,720  |  |  |          | 3.31  | % |      |           | 742,198   |  |   |         | 31,163 |  |  |      | 4.20  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|                                               | Total deposits           |                          |           | 1,567,068 |          |   |         | 26,904  |  |         |         | 1.72  | % |          |           | 1,510,219 |      |         |         | 29,443  |  |  |          | 1.95  | % |      |           | 1,423,379 |  |   |         | 38,174 |  |  |      | 2.68  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Borrowings:                                    |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |           |           |  |   |         |        |  |  |      |      
|                                               | Short-term borrowings    |                          |           | 63,440    |          |   |         | 2,055   |  |         |         | 3.24  | % |          |           | 37,924    |      |         |         | 1,599   |  |  |          | 4.22  | % |      |           | 42,303    |  |   |         | 1,531  |  |  |      | 3.62  | %
|                                               | Long-term debt           |                          |           | 203,094   |          |   |         | 8,109   |  |         |         | 3.99  | % |          |           | 169,316   |      |         |         | 8,044   |  |  |          | 4.75  | % |      |           | 151,957   |  |   |         | 8,044  |  |  |      | 5.29  | %
|                                               | Subordinated notes       |                          |           | 57,970    |          |   |         | 3,197   |  |         |         | 5.51  | % |          |           | 38,861    |      |         |         | 2,070   |  |  |          | 5.33  | % |      |           | 15,708    |  |   |         | 894    |  |  |      | 5.69  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|                                               | Total borrowings         |                          |           | 324,504   |          |   |         | 13,361  |  |         |         | 4.12  | % |          |           | 246,101   |      |         |         | 11,713  |  |  |          | 4.76  | % |      |           | 209,968   |  |   |         | 10,469 |  |  |      | 4.99  | %
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Total interest-bearing liabilities             |                          |                          | 1,891,572 |           |          |   | 40,265  |         |  |         | 2.13    | %     |   |          | 1,756,320 |           |      |         | 41,156  |         |  |  | 2.34     | %     |   |      | 1,633,347 |           |  |   | 48,643  |        |  |  | 2.98 | %    
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Demand deposits                                |                          |                          | 242,147   |           |          |   |         |         |  |         |         |       |   |          | 206,372   |           |      |         |         |         |  |  |          |       |   |      | 186,860   |           |  |   |         |        |  |  |      |      
|Other liabilities                              |                          |                          | 38,781    |           |          |   |         |         |  |         |         |       |   |          | 38,552    |           |      |         |         |         |  |  |          |       |   |      | 35,355    |           |  |   |         |        |  |  |      |      
|Stockholders equity                           |                          |                          | 233,432   |           |          |   |         |         |  |         |         |       |   |          | 207,211   |           |      |         |         |         |  |  |          |       |   |      | 180,629   |           |  |   |         |        |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY     |                          | $                        | 2,405,932 |           |          |   |         |         |  |         |         |       |   | $        | 2,208,455 |           |      |         |         |         |  |  |          |       |   | $    | 2,036,191 |           |  |   |         |        |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Net interest rate spread                       |                          |                          |           |           |          |   |         |         |  |         | 4.56    | %     |   |          |           |           |      |         |         |         |  |  | 4.38     | %     |   |      |           |           |  |   |         |        |  |  | 4.04 | %    
|Net interest income (FTE)/ net interest margin |                          |                          |           |           |          |   | 104,123 |         |  |         | 4.83    | %     |   |          |           |           |      |         | 92,394  |         |  |  | 4.65     | %     |   |      |           |           |  |   | 80,492  |        |  |  | 4.38 | %    
|Interest recovery on charged-off loan          |                          |                          |           |           |          |   |        |         |  |         |         |       |   |          |           |           |      |         |        |         |  |  |          |       |   |      |           |           |  |   | 419     |        |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Total net interest (FTE)                       |                          |                          |           |           |          |   | 104,123 |         |  |         |         |       |   |          |           |           |      |         | 92,394  |         |  |  |          |       |   |      |           |           |  |   | 80,911  |        |  |  |      |      
|Taxable-equivalent adjustment                  |                          |                          |           |           |          |   | (6,706  | )       |  |         |         |       |   |          |           |           |      |         | (6,476  | )       |  |  |          |       |   |      |           |           |  |   | (5,963  | )      |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          
|Net interest income                            |                          |                          |           |           |          | $ | 97,417  |         |  |         |         |       |   |          |           |           |      | $       | 85,918  |         |  |  |          |       |   |      |           |           |  | $ | 74,948  |        |  |  |      |      
|                                               |                          |                          |           |           |          |   |         |         |  |         |         |       |   |          |           |           |      |         |         |         |  |  |          |       |   |      |          





19



---



##### 



Table 2  Analysis of Changes in Net Interest
Income




|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |      |        |        |        |  
|------------------- | ---------------------------- | -------------------------------- | ---------------- | ---------------------- | ----------------- | ------ | ------ | ----- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------- | ---- | ------ | ------ | ------ | -
|                    |                              | 2004 Versus 2003                 |                  |                        | 2003 Versus 2002  |       
|                    |                              | Due to Changes in                |                  |                        | Due to Changes in |       
|                    |                              |                                  |                  |                        |                   |       
|                    |                              | Volume                           |                  |                        | Rate              |        |        | Total |        |        | Volume |      |        | Rate   |        |      | Total  |       
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|Interest income:    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |     
|                    | Federal funds sold           |                                  | $                | (144                   | )                 |        | $      | 38    |        |        | $      | (106 | )      |        | $      | (499 | )      |        | $      | (119 | )      |        | $       | (618 | )     
|                    | Other short-term investments |                                  |                  | (11                    | )                 |        |        | (30   | )      |        |        | (41  | )      |        |        | 54   |        |        |        | (22  | )      |        |         | 32   |       
|                    | Securities:                  |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |      |       
|                    |                              | U.S. Treasury                    |                  |                        | (186              | )      |        |       | (24    | )      |        |      | (210   | )      |        |      | (311   | )      |        |      | (102   | )      |         |      | (413   | )     
|                    |                              | U.S. Government                  |                  |                        | (948              | )      |        |       | (466   | )      |        |      | (1,414 | )      |        |      | 1,104  |        |        |      | (1,723 | )      |         |      | (619   | )     
|                    |                              | State and political subdivisions |                  |                        | 817               |        |        |       | (235   | )      |        |      | 582    |        |        |      | 1,883  |        |        |      | (547   | )      |         |      | 1,336  |       
|                    |                              | Other                            |                  |                        | (2,157            | )      |        |       | (107   | )      |        |      | (2,264 | )      |        |      | (1,392 | )      |        |      | (360   | )      |         |      | (1,752 | )     
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    |                              |                                  | Total securities |                        |                   | (2,474 | )      |       |        | (832   | )      |      |        | (3,306 | )      |      |        | 1,284  |        |      |        | (2,732 | )       |      |        | (1,448 | )     
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    | Loans:                       |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |      |       
|                    |                              | Commercial                       |                  |                        | 8,435             |        |        |       | (2,496 | )      |        |      | 5,939  |        |        |      | 5,274  |        |        |      | (5,250 | )      |         |      | 24     |       
|                    |                              | Consumer                         |                  |                        | 1,804             |        |        |       | (1,453 | )      |        |      | 351    |        |        |      | 1,464  |        |        |      | (3,230 | )      |         |      | (1,766 | )     
|                    |                              | Residential mortgages            |                  |                        | (1,334            | )      |        |       | (708   | )      |        |      | (2,042 | )      |        |      | (859   | )      |        |      | (249   | )      |         |      | (1,108 | )     
|                    |                              | Leases                           |                  |                        | 1,736             |        |        |       | (653   | )      |        |      | 1,083  |        |        |      | 1,500  |        |        |      | (835   | )      |         |      | 665    |       
|                    |                              | Finance receivables              |                  |                        | 9,403             |        |        |       | (443   | )      |        |      | 8,960  |        |        |      | 8,189  |        |        |      | 445    |        |         |      | 8,634  |       
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    |                              |                                  | Total loans      |                        |                   | 20,044 |        |       |        | (5,753 | )      |      |        | 14,291 |        |      |        | 15,568 |        |      |        | (9,119 | )       |      |        | 6,449  |       
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    |                              |                                  |                  | Total interest income  |                   |        | 17,415 |       |        |        | (6,577 | )    |        |        | 10,838 |      |        |        | 16,407 |      |        |        | (11,992 | )    |        |        | 4,415  |  
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|Interest expense:   |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |     
|                    | Deposits:                    |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |      |       
|                    |                              | Demand                           |                  |                        | 310               |        |        |       | 176    |        |        |      | 486    |        |        |      | 648    |        |        |      | (2,225 | )      |         |      | (1,577 | )     
|                    |                              | Savings                          |                  |                        | 83                |        |        |       | (145   | )      |        |      | (62    | )      |        |      | 201    |        |        |      | (912   | )      |         |      | (711   | )     
|                    |                              | Time                             |                  |                        | (219              | )      |        |       | (2,744 | )      |        |      | (2,963 | )      |        |      | 177    |        |        |      | (6,620 | )      |         |      | (6,443 | )     
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    |                              |                                  | Total deposits   |                        |                   | 174    |        |       |        | (2,713 | )      |      |        | (2,539 | )      |      |        | 1,026  |        |      |        | (9,757 | )       |      |        | (8,731 | )     
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    | Borrowings:                  |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |        |        |      |        |        |         |      |       
|                    |                              | Short-term                       |                  |                        | 1,076             |        |        |       | (620   | )      |        |      | 456    |        |        |      | (158   | )      |        |      | 226    |        |         |      | 68     |       
|                    |                              | Long-term debt                   |                  |                        | 1,605             |        |        |       | (1,540 | )      |        |      | 65     |        |        |      | 919    |        |        |      | (919   | )      |         |      |       |       
|                    |                              | Subordinated notes               |                  |                        | 1,018             |        |        |       | 109    |        |        |      | 1,127  |        |        |      | 1,318  |        |        |      | (142   | )      |         |      | 1,176  |       
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    |                              |                                  | Total borrowings |                        |                   | 3,699  |        |       |        | (2,051 | )      |      |        | 1,648  |        |      |        | 2,079  |        |      |        | (835   | )       |      |        | 1,244  |       
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|                    |                              |                                  |                  | Total interest expense |                   |        | 3,873  |       |        |        | (4,764 | )    |        |        | (891   | )    |        |        | 3,105  |      |        |        | (10,592 | )    |        |        | (7,487 | )
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       
|Net interest income |                              | $                                | 13,542           |                        |                   | $      | (1,813 | )     |        | $      | 11,729 |      |        | $      | 13,302 |      |        | $      | (1,400 | )    |        | $      | 11,902  |     
|                    |                              |                                  |                  |                        |                   |        |        |       |        |        |        |      |        |        |        |      |        |       

Provision for Loan Losses




20



---



##### 







Non-interest Income






Table 3  Non-interest Income


|                                            |  |      |        |                  |        |   |        |   |                  |  |         |    |  |        |        |  |   |   |       |      |  |  |        |    |  |  |        |  
|------------------------------------------- |  | ---- | ------ | ---------------- | ------ | - | ------ | - | ---------------- |  | ------- | -- |  | ------ | ------ |  | - | - | ----- | ---- |  |  | ------ | -- |  |  | ------ | -
|                                            |  |      |        | 2004 Versus 2003 |        |   |        |   | 2003 Versus 2002 |  |         |   
|                                            |  |      |        |                  |        |   |        |   |                  |  |         |   
|                                            |  | 2004 |        |                  | Amount |   |        | % |                  |  | 2003    |    |  | Amount |        |  | % |   |       | 2002 | 
|                                            |  |      |        |                  |        |   |        |   |                  |  |         |    |  |        |        |  |   |   |       |      | 
|Trust and investment management income      |  | $    | 9,057  |                  |        | $ | 3,479  |   |                  |  | 62.4    | %  |  | $      | 5,578  |  |   | $ | 1,351 |      |  |  | 32.0   | %  |  |  | 4,227  |  
|Service charges on deposit accounts         |  |      | 6,415  |                  |        |   | 573    |   |                  |  | 9.8     | %  |  |        | 5,842  |  |   |   | 243   |      |  |  | 4.3    | %  |  |  | 5,599  |  
|Other service charges, commissions and fees |  |      | 3,824  |                  |        |   | 218    |   |                  |  | 6.0     | %  |  |        | 3,606  |  |   |   | 43    |      |  |  | 1.2    | %  |  |  | 3,563  |  
|Brokerage fees and commissions              |  |      | 3,351  |                  |        |   | 1,968  |   |                  |  | 142.3   | %  |  |        | 1,383  |  |   |   | 399   |      |  |  | 40.5   | %  |  |  | 984    |  
|Insurance commissions and fees              |  |      | 4,611  |                  |        |   | 4,288  |   |                  |  | 1,327.6 | %  |  |        | 323    |  |   |   | (191  | )    |  |  | (37.2  | )% |  |  | 514    |  
|Mortgage banking income                     |  |      | 1,854  |                  |        |   | (2,183 | ) |                  |  | (54.1   | )% |  |        | 4,037  |  |   |   | 934   |      |  |  | 30.1   | %  |  |  | 3,103  |  
|Rental income on operating leases           |  |      | 24,969 |                  |        |   | (830   | ) |                  |  | (3.2    | )% |  |        | 25,799 |  |   |   | 47    |      |  |  | .2     | %  |  |  | 25,752 |  
|Other operating income                      |  |      | 3,144  |                  |        |   | 502    |   |                  |  | 19.0    | %  |  |        | 2,642  |  |   |   | 1,092 |      |  |  | 70.5   | %  |  |  | 1,550  |  
|Securities gains (losses)                   |  |      | 2,071  |                  |        |   | 1,560  |   |                  |  | 305.3   | %  |  |        | 511    |  |   |   | 971   |      |  |  | (211.1 | )% |  |  | (460   | )
|                                            |  |      |        |                  |        |   |        |   |                  |  |         |    |  |        |        |  |   |   |       |      | 
|Total                                       |  | $    | 59,296 |                  |        | $ | 9,575  |   |                  |  | 19.3    | %  |  | $      | 49,721 |  |   |   | 4,889 |      |  |  | 10.9   | %  |  |  | 44,832 |  
|                                            |  |      |        |                  |        |   |        |   |                  |  |         |    |  |        |        |  |   |   |       |      | 









21



---



##### 











|                   |        |                          |       |       |       |  |     |      |     |  |      |        |      |  
|------------------ | ------ | ------------------------ | ----- | ----- | ----- |  | --- | ---- | --- |  | ---- | ------ | ---- | -
|                   |        | Years Ended December 31, |      
|                   |        |                          |      
|                   |        | 2004                     |       |       | 2003  |  |     | 2002 |    
|                   |        |                          |       |       |       |  |     |      |    
|Debt securities:   |        |                          |       |       |       |  |     |      |     |  |      |       
|                   | Gains  |                          | $     | 177   |       |  | $   | 468  |     |  | $    | 706    |     
|                   | Losses |                          |       | (115  | )     |  |     | (153 | )   |  |      | (766   | )   
|                   |        |                          |       |       |       |  |     |      |    
|                   |        |                          | 62    |       |       |  | 315 |      |     |  | (60  | )     
|                   |        |                          |       |       |       |  |     |      |    
|Equity securities: |        |                          |       |       |       |  |     |      |     |  |      |       
|                   | Gains  |                          |       | 2,009 |       |  |     | 379  |     |  |      | 814    |     
|                   | Losses |                          |       |      |       |  |     | (183 | )   |  |      | (1,214 | )   
|                   |        |                          |       |       |       |  |     |      |    
|                   |        |                          | 2,009 |       |       |  | 196 |      |     |  | (400 | )     
|                   |        |                          |       |       |       |  |     |      |    
|                   |        | Total                    |       | $     | 2,071 |  |     | $    | 511 |  |      | $      | (460 | )
|                   |        |                          |       |       |       |  |     |      |    







Non-interest Expense






22



---



##### 







Table 4  Non-interest Expense


|                                       |  |      |         |                  |        |   |        |             |      |  |       |    |  |        |        |  |   |   |       |      |  |  |      |   |  |   |        | 
|-------------------------------------- |  | ---- | ------- | ---------------- | ------ | - | ------ | ----------- | ---- |  | ----- | -- |  | ------ | ------ |  | - | - | ----- | ---- |  |  | ---- | - |  | - | ------ | 
|                                       |  |      |         |                  |        |   |        | 2003 Versus |      |  |      
|                                       |  |      |         | 2004 Versus 2003 |        |   |        |             | 2002 |  |       |   
|                                       |  |      |         |                  |        |   |        |             |      |  |       |   
|                                       |  | 2004 |         |                  | Amount |   |        | %           |      |  | 2003  |    |  | Amount |        |  | % |   |       | 2002 | 
|                                       |  |      |         |                  |        |   |        |             |      |  |       |    |  |        |        |  |   |   |       |      | 
|Salaries and employee benefits         |  | $    | 48,201  |                  |        | $ | 8,767  |             |      |  | 22.2  | %  |  | $      | 39,434 |  |   | $ | 2,574 |      |  |  | 7.0  | % |  | $ | 36,860 | 
|Net occupancy                          |  |      | 5,445   |                  |        |   | 519    |             |      |  | 10.5  | %  |  |        | 4,926  |  |   |   | 717   |      |  |  | 17.0 | % |  |   | 4,209  | 
|Furniture & equipment                  |  |      | 7,016   |                  |        |   | 597    |             |      |  | 9.3   | %  |  |        | 6,419  |  |   |   | 634   |      |  |  | 11.0 | % |  |   | 5,785  | 
|Professional services                  |  |      | 4,410   |                  |        |   | 1,256  |             |      |  | 39.8  | %  |  |        | 3,154  |  |   |   | 309   |      |  |  | 10.9 | % |  |   | 2,845  | 
|Depreciation on operating lease assets |  |      | 21,084  |                  |        |   | (354   | )           |      |  | (1.7  | )% |  |        | 21,438 |  |   |   | 536   |      |  |  | 2.6  | % |  |   | 20,902 | 
|Taxes other than income                |  |      | 2,237   |                  |        |   | 581    |             |      |  | 35.1  | %  |  |        | 1,656  |  |   |   | 214   |      |  |  | 14.8 | % |  |   | 1,442  | 
|Intangible asset amortization          |  |      | 1,650   |                  |        |   | 1,414  |             |      |  | 599.2 | %  |  |        | 236    |  |   |   | 69    |      |  |  | 41.3 | % |  |   | 167    | 
|Other                                  |  |      | 17,043  |                  |        |   | 1,738  |             |      |  | 11.4  | %  |  |        | 15,305 |  |   |   | 1,593 |      |  |  | 11.6 | % |  |   | 13,712 | 
|                                       |  |      |         |                  |        |   |        |             |      |  |       |    |  |        |        |  |   |   |       |      | 
|Total                                  |  | $    | 107,086 |                  |        | $ | 14,518 |             |      |  | 15.7  | %  |  | $      | 92,568 |  |   | $ | 6,646 |      |  |  | 7.7  | % |  | $ | 85,922 | 
|                                       |  |      |         |                  |        |   |        |             |      |  |       |    |  |        |        |  |   |   |       |      | 





| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A full year of salaries and benefits associated with Church
    Capital Management and Bainbridge Securities in 2004 as compared
    to two and one-half months in 2003, with no similar expenses in
    2002;                            
|
| |  | Seven months of salaries and benefits associated with Corporate
    Healthcare Strategies and approximately one month of salaries
    and benefits associated with Pennsylvania State Bank with no
    similar expense in the prior years;
|
| |  | Increased number of employees, the result of office expansion
    including PennSterling Bank and Delaware Sterling
    Bank & Trust Company initiatives, and expansion in
    Carroll County, Maryland;                                  
|
| |  | Additions to staff required to continue to serve our customers
    in light of increased transaction volumes;                                                                                                                             
|
| |  | Increased healthcare costs that has resulted from a growing
    employee base, as well as nationwide trends of increasing
    employee benefits costs; and                                                                                
|
| |  | Normal merit increases to existing employees.                                                                                                                                                                                             







23



---



##### 

















| |             
| | ------------
| | Income Taxes









| |                    
| | -------------------
| | FINANCIAL CONDITION



24



---



##### 









| |           
| | ----------
| | Securities









Table 5  Investment Securities




|                                 |          |              |        |        |      |   |        |        |  |   |        |        | 
|-------------------------------- | -------- | ------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                 |          | December 31, |       
|                                 |          |              |       
|                                 |          | 2004         |        |        | 2003 |   |        | 2002   | 
|                                 |          |              |        |        |      |   |        |        | 
|U.S. Government agencies         |          | $            | 105    |        |      | $ |       |        |  | $ |       |       
|State and political subdivisions |          |              | 20,426 |        |      |   | 23,320 |        |  |   | 27,123 |       
|Mortgage-backed securities       |          |              | 87     |        |      |   | 172    |        |  |   | 450    |       
|Corporate securities             |          |              | 620    |        |      |   | 622    |        |  |   | 1,126  |       
|                                 |          |              |        |        |      |   |        |        | 
|                                 | Subtotal |              |        | 21,238 |      |   |        | 24,114 |  |   |        | 28,699 | 
|Non-marketable equity securities |          |              | 12,914 |        |      |   | 11,842 |        |  |   | 7,897  |       
|                                 |          |              |        |        |      |   |        |        | 
|                                 | Total    |              | $      | 34,152 |      |   | $      | 35,956 |  |   | $      | 36,596 | 
|                                 |          |              |        |        |      |   |        |        | 

25



---



##### 







|                                 |  |              |         |  |       |   |         |           |  |   |         |  |  |           |         |  |       |   |         |  |  |   |         | 
|-------------------------------- |  | ------------ | ------- |  | ----- | - | ------- | --------- |  | - | ------- |  |  | --------- | ------- |  | ----- | - | ------- |  |  | - | ------- | 
|                                 |  | December 31, |        
|                                 |  |              |        
|                                 |  | 2004         |         |  | 2003  |   |         | 2002      | 
|                                 |  |              |         |  |       |   |         |           | 
|                                 |  | Amortized    |         |  | Fair  |   |         | Amortized |  |   | Fair    |  |  | Amortized |         |  | Fair  |  
|                                 |  | Cost         |         |  | Value |   |         | Cost      |  |   | Value   |  |  | Cost      |         |  | Value |  
|                                 |  |              |         |  |       |   |         |           |  |   |         |  |  |           |         |  |       |  
|U.S. Treasury securities         |  | $            | 2,739   |  |       | $ | 2,789   |           |  | $ | 6,923   |  |  | $         | 7,099   |  |       | $ | 11,825  |  |  | $ | 12,176  | 
|U.S. Government agencies         |  |              | 129,910 |  |       |   | 127,502 |           |  |   | 166,436 |  |  |           | 165,529 |  |       |   | 106,792 |  |  |   | 110,024 | 
|State and political subdivisions |  |              | 221,023 |  |       |   | 230,740 |           |  |   | 217,256 |  |  |           | 228,271 |  |       |   | 191,383 |  |  |   | 200,497 | 
|Mortgage-backed securities       |  |              | 27,742  |  |       |   | 28,328  |           |  |   | 22,814  |  |  |           | 23,669  |  |       |   | 74,317  |  |  |   | 76,603  | 
|Corporate securities             |  |              | 64,833  |  |       |   | 66,850  |           |  |   | 95,125  |  |  |           | 100,378 |  |       |   | 135,270 |  |  |   | 140,535 | 
|                                 |  |              |         |  |       |   |         |           |  |   |         |  |  |           |         |  |       |  
|Subtotal                         |  |              | 446,247 |  |       |   | 456,209 |           |  |   | 508,554 |  |  |           | 524,946 |  |       |   | 519,587 |  |  |   | 539,835 | 
|Equity securities                |  |              | 4,586   |  |       |   | 11,310  |           |  |   | 8,748   |  |  |           | 15,103  |  |       |   | 8,414   |  |  |   | 11,861  | 
|                                 |  |              |         |  |       |   |         |           |  |   |         |  |  |           |         |  |       |  
|Total                            |  | $            | 450,833 |  |       | $ | 467,519 |           |  | $ | 517,302 |  |  | $         | 540,049 |  |       | $ | 528,001 |  |  | $ | 551,696 | 
|                                 |  |              |         |  |       |   |         |           |  |   |         |  |  |           |         |  |       |  





|                                            |  |              |       |  |       |   |        |           |  |   |       |  |  |           |        |  |       |   |       |  |  |   |        | 
|------------------------------------------- |  | ------------ | ----- |  | ----- | - | ------ | --------- |  | - | ----- |  |  | --------- | ------ |  | ----- | - | ----- |  |  | - | ------ | 
|                                            |  | December 31, |      
|                                            |  |              |      
|                                            |  | 2004         |       |  | 2003  |   |        | 2002      | 
|                                            |  |              |       |  |       |   |        |           | 
|                                            |  | Amortized    |       |  | Fair  |   |        | Amortized |  |   | Fair  |  |  | Amortized |        |  | Fair  |  
|                                            |  | Cost         |       |  | Value |   |        | Cost      |  |   | Value |  |  | Cost      |        |  | Value |  
|                                            |  |              |       |  |       |   |        |           |  |   |       |  |  |           |        |  |       |  
|Government sponsored enterprise stock       |  | $            | 2     |  |       | $ | 4,910  |           |  | $ | 2     |  |  | $         | 3,462  |  |       | $ | 2     |  |  | $ | 3,196  | 
|Community bank stocks                       |  |              | 1,969 |  |       |   | 3,054  |           |  |   | 2,045 |  |  |           | 2,919  |  |       |   | 1,697 |  |  |   | 1,924  | 
|Large cap financial services company stocks |  |              | 2,615 |  |       |   | 3,346  |           |  |   | 6,701 |  |  |           | 8,722  |  |       |   | 6,715 |  |  |   | 6,741  | 
|                                            |  |              |       |  |       |   |        |           |  |   |       |  |  |           |        |  |       |  
|Total                                       |  | $            | 4,586 |  |       | $ | 11,310 |           |  | $ | 8,748 |  |  | $         | 15,103 |  |       | $ | 8,414 |  |  | $ | 11,861 | 
|                                            |  |              |       |  |       |   |        |           |  |   |       |  |  |           |        |  |       |  







26



---



##### 



Table 6  Investment Securities (Yields)




|                                 |  |                 |       |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |       |        |  |  |       |   |  |        |       |  |       |  |      |   |  |   |        |  |  |  |      |  
|-------------------------------- |  | --------------- | ----- | ------------- | ----- |  | -------------- | ------ |  | - | ------------- |  |  | ------ | ---- | - | ----- | - | ----- | ------ |  |  | ----- | - |  | ------ | ----- |  | ----- |  | ---- | - |  | - | ------ |  |  |  | ---- | -
|                                 |  |                 |       | Over 1 thru 5 |       |  | Over 5 thru 10 |        |  |   |               | 
|                                 |  | 1 Year and Less |       |               | Years |  |                | Years  |  |   | Over 10 Years |  |  | Total  |     
|                                 |  |                 |       |               |       |  |                |        |  |   |               |  |  |        |     
|                                 |  | Amount          |       |               | Yield |  |                | Amount |  |   | Yield         |  |  | Amount |      |   | Yield |   |       | Amount |  |  | Yield |   |  | Amount |       |  | Yield | 
|                                 |  |                 |       |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |       |        |  |  |       |   |  |        |       |  |       | 
|U.S. Treasury securities         |  | $               | 105   |               |       |  | 2.00           | %      |  | $ |              |  |  |        |     | % |       | $ |      |        |  |  |      | % |  | $      |      |  |       |  |     | % |  | $ | 105    |  |  |  | 2.00 | %
|State and political subdivisions |  |                 | 1,785 |               |       |  | 7.49           | %      |  |   | 14,394        |  |  |        | 7.34 | % |       |   | 3,652 |        |  |  | 7.00  | % |  |        | 595   |  |       |  | 8.95 | % |  |   | 20,426 |  |  |  | 7.34 | %
|Mortgage-backed securities       |  |                 |      |               |       |  |               | %      |  |   | 49            |  |  |        | 6.92 | % |       |   | 22    |        |  |  | 9.02  | % |  |        | 16    |  |       |  | 3.96 | % |  |   | 87     |  |  |  | 6.91 | %
|Corporate securities             |  |                 | 115   |               |       |  | 2.00           | %      |  |   |              |  |  |        |     | % |       |   |      |        |  |  |      | % |  |        | 505   |  |       |  | 9.40 | % |  |   | 620    |  |  |  | 8.03 | %
|                                 |  |                 |       |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |       |        |  |  |       |   |  |        |       |  |       | 
|                                 |  | $               | 2,005 |               |       |  | 6.88           | %      |  | $ | 14,443        |  |  |        | 7.34 | % |       | $ | 3,674 |        |  |  | 7.01  | % |  | $      | 1,116 |  |       |  | 9.08 | % |  | $ | 21,238 |  |  |  | 7.33 | %
|                                 |  |                 |       |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |       |        |  |  |       |   |  |        |       |  |       | 



|                                 |  |                 |        |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |         |        |  |  |       |   |  |        |         |  |       |  |      |   |  |   |         |  |  |  |      |  
|-------------------------------- |  | --------------- | ------ | ------------- | ----- |  | -------------- | ------ |  | - | ------------- |  |  | ------ | ---- | - | ----- | - | ------- | ------ |  |  | ----- | - |  | ------ | ------- |  | ----- |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                 |  |                 |        | Over 1 thru 5 |       |  | Over 5 thru 10 |        |  |   |               | 
|                                 |  | 1 Year and Less |        |               | Years |  |                | Years  |  |   | Over 10 Years |  |  | Total  |     
|                                 |  |                 |        |               |       |  |                |        |  |   |               |  |  |        |     
|                                 |  | Amount          |        |               | Yield |  |                | Amount |  |   | Yield         |  |  | Amount |      |   | Yield |   |         | Amount |  |  | Yield |   |  | Amount |         |  | Yield | 
|                                 |  |                 |        |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |         |        |  |  |       |   |  |        |         |  |       | 
|U.S. Treasury securities         |  | $               | 1,929  |               |       |  | 3.18           | %      |  | $ | 860           |  |  |        | 5.00 | % |       | $ |        |        |  |  |      | % |  | $      |        |  |       |  |     | % |  | $ | 2,789   |  |  |  | 3.66 | %
|U.S. Government agencies         |  |                 | 10,297 |               |       |  | 5.35           | %      |  |   | 42,409        |  |  |        | 3.98 | % |       |   | 74,796  |        |  |  | 3.96  | % |  |        |        |  |       |  |     | % |  |   | 127,502 |  |  |  | 4.15 | %
|State and political subdivisions |  |                 | 6,112  |               |       |  | 5.33           | %      |  |   | 19,808        |  |  |        | 6.43 | % |       |   | 65,787  |        |  |  | 6.71  | % |  |        | 139,033 |  |       |  | 6.88 | % |  |   | 230,740 |  |  |  | 6.47 | %
|Mortgage-backed securities       |  |                 | 22     |               |       |  | 6.04           | %      |  |   | 6,177         |  |  |        | 4.61 | % |       |   | 5,046   |        |  |  | 4.35  | % |  |        | 17,083  |  |       |  | 5.51 | % |  |   | 28,328  |  |  |  | 5.00 | %
|Corporate securities             |  |                 | 23,024 |               |       |  | 6.18           | %      |  |   | 42,519        |  |  |        | 5.59 | % |       |   | 1,305   |        |  |  | 7.39  | % |  |        | 2       |  |       |  | 2.45 | % |  |   | 66,850  |  |  |  | 5.65 | %
|                                 |  |                 |        |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |         |        |  |  |       |   |  |        |         |  |       | 
|                                 |  | $               | 41,384 |               |       |  | 5.63           | %      |  | $ | 111,773       |  |  |        | 4.94 | % |       | $ | 146,934 |        |  |  | 5.14  | % |  | $      | 156,118 |  |       |  | 6.47 | % |  | $ | 456,209 |  |  |  | 5.59 | %
|                                 |  |                 |        |               |       |  |                |        |  |   |               |  |  |        |      |   |       |   |         |        |  |  |       |   |  |        |         |  |       | 



Loans






27



---



##### 













Table 7  Loan Portfolio




|                                             |  |              |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|-------------------------------------------- |  | ------------ | --------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | 
|                                             |  | December 31, |          
|                                             |  |              |          
|                                             |  | 2004         |           |  | 2003 |   |           | 2002 |  |   | 2001      |  |  | 2000 |          
|                                             |  |              |           |  |      |   |           |      |  |   |           |  |  |      |          
|Commercial and agricultural                  |  | $            | 494,760   |  |      | $ | 321,728   |      |  | $ | 284,462   |  |  | $    | 271,348   |  |  | $ | 250,483   | 
|Commercial real estate                       |  |              | 515,257   |  |      |   | 453,456   |      |  |   | 399,818   |  |  |      | 326,826   |  |  |   | 272,230   | 
|Financial                                    |  |              | 25,790    |  |      |   | 19,488    |      |  |   | 4,700     |  |  |      |          |  |  |   |          | 
|Real estate-construction                     |  |              | 61,591    |  |      |   | 23,471    |      |  |   | 19,504    |  |  |      | 19,710    |  |  |   | 9,665     | 
|Real estate-mortgage                         |  |              | 78,694    |  |      |   | 80,674    |      |  |   | 102,891   |  |  |      | 117,293   |  |  |   | 142,534   | 
|Consumer                                     |  |              | 364,991   |  |      |   | 316,190   |      |  |   | 284,016   |  |  |      | 279,139   |  |  |   | 279,645   | 
|Finance receivables (net of unearned income) |  |              | 236,617   |  |      |   | 171,733   |      |  |   | 115,200   |  |  |      |          |  |  |   |          | 
|Lease financing (net of unearned income)     |  |              | 129,571   |  |      |   | 109,285   |      |  |   | 85,437    |  |  |      | 83,857    |  |  |   | 78,658    | 
|                                             |  |              |           |  |      |   |           |      |  |   |           |  |  |      |          
|Total                                        |  | $            | 1,907,271 |  |      | $ | 1,496,025 |      |  | $ | 1,296,028 |  |  | $    | 1,098,173 |  |  | $ | 1,033,215 | 
|                                             |  |              |           |  |      |   |           |      |  |   |           |  |  |      |          

Table 8  Loan Maturity and Interest Sensitivity




|                                                                  |  |          |         |           |            |   |         |            |  |   |         |  |  |   |           | 
|----------------------------------------------------------------- |  | -------- | ------- | --------- | ---------- | - | ------- | ---------- |  | - | ------- |  |  | - | --------- | 
|                                                                  |  |          |         | After One |            |   |         |            | 
|                                                                  |  | Within   |         |           | but Within |   |         | After Five |  |   |        
|                                                                  |  | One Year |         |           | Five Years |   |         | Years      |  |   | Total   | 
|                                                                  |  |          |         |           |            |   |         |            |  |   |         | 
|Commercial and agricultural, financial and commercial real estate |  | $        | 237,672 |           |            | $ | 197,901 |            |  | $ | 600,234 |  |  | $ | 1,035,807 | 
|Real estate-construction                                          |  |          | 29,165  |           |            |   | 20,513  |            |  |   | 11,914  |  |  |   | 61,592    | 
|                                                                  |  |          |         |           |            |   |         |            |  |   |         | 
|                                                                  |  | $        | 266,837 |           |            | $ | 218,414 |            |  | $ | 612,148 |  |  | $ | 1,097,399 | 
|                                                                  |  |          |         |           |            |   |         |            |  |   |         | 

28



---



##### 







Asset Quality








Table 9  Nonaccrual, Past Due and Restructured
Loans




|                                         |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |       |       |   |   |       |       |  
|---------------------------------------- | ---------------------------------------------------------------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | - | - | ------ | ------ | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|                                         |                                                                        | December 31, |      
|                                         |                                                                        |              |      
|                                         |                                                                        | 2004         |       |       | 2003 |   |       | 2002  |   |   | 2001   |        |   | 2000 |      
|                                         |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |      
|Nonaccrual loans                         |                                                                        | $            | 3,474 |       |      | $ | 3,136 |       |   | $ | 10,643 |        |   | $    | 6,707 |       |   | $ | 3,102 |      
|Accruing loans, past due 90 days or more |                                                                        |              | 875   |       |      |   | 1,513 |       |   |   | 545    |        |   |      | 1,562 |       |   |   | 1,145 |      
|Restructured loans                       |                                                                        |              | 181   |       |      |   |      |       |   |   | 521    |        |   |      | 531   |       |   |   | 1,851 |      
|                                         |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |      
|                                         | Total non-performing loans                                             |              |       | 4,530 |      |   |       | 4,649 |   |   |        | 11,709 |   |      |       | 8,800 |   |   |       | 6,098 |  
|Foreclosed assets                        |                                                                        |              | 80    |       |      |   | 601   |       |   |   | 293    |        |   |      | 74    |       |   |   | 469   |      
|                                         |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |      
|                                         | Total non-performing assets                                            |              | $     | 4,610 |      |   | $     | 5,250 |   |   | $      | 12,002 |   |      | $     | 8,874 |   |   | $     | 6,567 |  
|                                         |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |      
|Nonaccrual loans:                        |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |       |       |   |   |       |      
|                                         | Interest income that would have been recorded under original
    terms |              | $     | 178   |      |   | $     | 433   |   |   | $      | 458    |   |      | $     | 429   |   |   | $     | 196   |  
|                                         | Interest income recorded                                               |              |       |      |      |   |       |      |   |   |        |       |   |      |       |      |   |   |       |      |  
|Ratios:                                  |                                                                        |              |       |       |      |   |       |       |   |   |        |        |   |      |       |       |   |   |       |      
|                                         | Non-performing loans to total loans                                    |              |       | 0.24  | %    |   |       | 0.31  | % |   |        | 0.90   | % |      |       | 0.80  | % |   |       | 0.59  | %
|                                         | Non-performing assets to total loans and foreclosed assets             |              |       | 0.24  | %    |   |       | 0.35  | % |   |        | 0.93   | % |      |       | 0.81  | % |   |       | 0.64  | %
|                                         | Non-performing assets to total assets                                  |              |       | 0.17  | %    |   |       | 0.22  | % |   |        | 0.56   | % |      |       | 0.48  | % |   |       | 0.38  | %

29



---



##### 











Allowance for Loan Losses








| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | Adverse situations that may affect the borrowers ability
    to repay;
|
| |  | Estimated value of underlying collateral; and                          
|
| |  | Prevailing market conditions.                                          





| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Trends in delinquency levels;                                         
|
| |  | Trends in non-performing and potential problem loans;                 
|
| |  | Trends in composition, volume and terms of loans;                     
|
| |  | Effects in changes in lending policies or underwriting
    procedures;
|
| |  | Experience ability and depth of management;                           

30



---



##### 





| |   |                                                  
| | - | -------------------------------------------------
| |  | National and local economic conditions;          
|
| |  | Concentrations in lending activities; and        
|
| |  | Other factors as management may deem appropriate.





| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | Risk of error in the specific and general reserve allocations;                           
|
| |  | Other potential exposures in the loan portfolio;                                         
|
| |  | Variances in managements assessment of national and local
    economic conditions; and  
|
| |  | Other internal or external factors that management believes
    appropriate at that time.





31



---



##### 





Table 10  Summary of Loan Loss Experience


|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |  |   |        |       | 
|----------------------------------------------------------------- | --------------------------- | ------------------------ | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                                  |                             | Years Ended December 31, |       
|                                                                  |                             |                          |       
|                                                                  |                             | 2004                     |        |       | 2003 |   |        | 2002  |  |   | 2001   |       |  | 2000 |       
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Beginning balance                                                 |                             | $                        | 14,656 |       |      | $ | 12,953 |       |  | $ | 11,071 |       |  | $    | 11,716 |       |  | $ | 11,875 |      
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Allowance acquired in acquisition                                 |                             |                          | 1,843  |       |      |   |       |       |  |   | 837    |       |  |      |       |       |  |   |       |      
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Loans charged off during year:                                    |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |  |   |        |      
|                                                                  | Commercial and agricultural |                          |        | 506   |      |   |        | 556   |  |   |        | 485   |  |      |        | 1,152 |  |   |        | 45    | 
|                                                                  | Commercial real estate      |                          |        | 134   |      |   |        | 399   |  |   |        |      |  |      |        |      |  |   |        | 523   | 
|                                                                  | Real estate mortgage        |                          |        | 58    |      |   |        | 142   |  |   |        | 210   |  |      |        | 1     |  |   |        | 53    | 
|                                                                  | Consumer                    |                          |        | 821   |      |   |        | 1,138 |  |   |        | 961   |  |      |        | 864   |  |   |        | 459   | 
|                                                                  | Lease financing             |                          |        | 604   |      |   |        | 504   |  |   |        | 429   |  |      |        | 577   |  |   |        | 101   | 
|                                                                  | Finance receivables         |                          |        |      |      |   |        | 37    |  |   |        | 85    |  |      |        |      |  |   |        |      | 
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|                                                                  | Total charge-offs           |                          |        | 2,123 |      |   |        | 2,776 |  |   |        | 2,170 |  |      |        | 2,594 |  |   |        | 1,181 | 
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Recoveries:                                                       |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |        |       |  |   |        |      
|                                                                  | Commercial and agricultural |                          |        | 109   |      |   |        | 187   |  |   |        | 819   |  |      |        | 8     |  |   |        | 37    | 
|                                                                  | Commercial real estate      |                          |        |      |      |   |        | 234   |  |   |        | 4     |  |      |        | 428   |  |   |        | 58    | 
|                                                                  | Real estate mortgage        |                          |        | 3     |      |   |        | 1     |  |   |        | 2     |  |      |        |      |  |   |        | 10    | 
|                                                                  | Consumer                    |                          |        | 310   |      |   |        | 255   |  |   |        | 269   |  |      |        | 269   |  |   |        | 301   | 
|                                                                  | Lease financing             |                          |        | 75    |      |   |        | 86    |  |   |        | 24    |  |      |        | 27    |  |   |        | 11    | 
|                                                                  | Finance receivables         |                          |        |      |      |   |        | 19    |  |   |        | 2     |  |      |        |      |  |   |        |      | 
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|                                                                  | Total recoveries            |                          |        | 497   |      |   |        | 782   |  |   |        | 1,120 |  |      |        | 732   |  |   |        | 417   | 
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Net loans charged off                                             |                             |                          | 1,626  |       |      |   | 1,994  |       |  |   | 1,050  |       |  |      | 1,862  |       |  |   | 764    |      
|Provision for loan losses                                         |                             |                          | 4,438  |       |      |   | 3,697  |       |  |   | 2,095  |       |  |      | 1,217  |       |  |   | 605    |      
|Reserve on loan commitments transferred to other liabilities      |                             |                          | (420   | )     |      |   |       |       |  |   |       |       |  |      |       |       |  |   |       |      
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Balance at end of year                                            |                             | $                        | 18,891 |       |      | $ | 14,656 |       |  | $ | 12,953 |       |  | $    | 11,071 |       |  | $ | 11,716 |      
|                                                                  |                             |                          |        |       |      |   |        |       |  |   |        |       |  |      |       
|Ratio of net loans charged off to average loans outstanding       |                             |                          | 0.10   | %     |      |   | 0.14   | %     |  |   | 0.08   | %     |  |      | 0.17   | %     |  |   | 0.08   | %    
|Ending allowance for loan losses to net loans charged off         |                             |                          | 11.6x  |       |      |   | 7.4x   |       |  |   | 12.3x  |       |  |      | 5.9x   |       |  |   | 15.3x  |      
|Net loans charged off to provision for loan losses                |                             |                          | 36.6   | %     |      |   | 53.9   | %     |  |   | 50.1   | %     |  |      | 152.9  | %     |  |   | 126.2  | %    
|Allowance for loan losses as a percent of total loans outstanding |                             |                          | 0.99   | %     |      |   | 0.98   | %     |  |   | 1.00   | %     |  |      | 1.01   | %     |  |   | 1.13   | %    
|Allowance for loan losses as a percent of non-performing loans    |                             |                          | 417.0  | %     |      |   | 315.2  | %     |  |   | 110.6  | %     |  |      | 125.8  | %     |  |   | 192.1  | %    





32



---



##### 



Table 11  Allocation of Allowance for Loan
Losses


|                                        |  |                          |        |       |       |  |     |        |       |   |        |  |  |        |     |   |       |   |        |        |  |  |       |       |  |        |        |  |       |  |     |   |  |   |        |  |  |  |     |  
|--------------------------------------- |  | ------------------------ | ------ | ----- | ----- |  | --- | ------ | ----- | - | ------ |  |  | ------ | --- | - | ----- | - | ------ | ------ |  |  | ----- | ----- |  | ------ | ------ |  | ----- |  | --- | - |  | - | ------ |  |  |  | --- | -
|                                        |  | Years Ended December 31, |       
|                                        |  |                          |       
|                                        |  | 2004                     |        |       | 2003  |  |     | 2002   |       |   | 2001   |  |  | 2000   |    
|                                        |  |                          |        |       |       |  |     |        |       |   |        |  |  |        |    
|                                        |  |                          |        | Loans |       |  |     |        | Loans |   |        |  |  | Loans  |     |   |       |   | Loans  |        |  |  |       | Loans | 
|                                        |  |                          |        | % to  |       |  |     |        | % to  |   |        |  |  | % to   |     |   |       |   | % to   |        |  |  |       | % to  | 
|                                        |  |                          |        | Total |       |  |     |        | Total |   |        |  |  | Total  |     |   |       |   | Total  |        |  |  |       | Total | 
|                                        |  | Amount                   |        |       | Loans |  |     | Amount |       |   | Loans  |  |  | Amount |     |   | Loans |   |        | Amount |  |  | Loans |       |  | Amount |        |  | Loans | 
|                                        |  |                          |        |       |       |  |     |        |       |   |        |  |  |        |     |   |       |   |        |        |  |  |       |       |  |        |        |  |       | 
|Commercial, financial and agricultural  |  | $                        | 10,865 |       |       |  | 54  | %      |       | $ | 9,337  |  |  |        | 53  | % |       | $ | 8,355  |        |  |  | 53    | %     |  | $      | 6,751  |  |       |  | 54  | % |  | $ | 7,816  |  |  |  | 50  | %
|Real estate  mortgage and construction |  |                          | 228    |       |       |  | 7   | %      |       |   | 218    |  |  |        | 7   | % |       |   | 138    |        |  |  | 9     | %     |  |        | 188    |  |       |  | 13  | % |  |   | 255    |  |  |  | 15  | %
|Consumer                                |  |                          | 2,131  |       |       |  | 20  | %      |       |   | 1,443  |  |  |        | 21  | % |       |   | 962    |        |  |  | 22    | %     |  |        | 791    |  |       |  | 25  | % |  |   | 1,283  |  |  |  | 27  | %
|Leases                                  |  |                          | 2,769  |       |       |  | 7   | %      |       |   | 1,856  |  |  |        | 7   | % |       |   | 1,032  |        |  |  | 7     | %     |  |        | 617    |  |       |  | 8   | % |  |   | 512    |  |  |  | 8   | %
|Finance receivables                     |  |                          | 1,559  |       |       |  | 12  | %      |       |   | 807    |  |  |        | 12  | % |       |   | 854    |        |  |  | 9     | %     |  |        |       |  |       |  |    |   |  |   |       |  |  |  |    |  
|Unallocated                             |  |                          | 1,339  |       |       |  | 0   | %      |       |   | 995    |  |  |        | 0   | % |       |   | 1,612  |        |  |  | 0     | %     |  |        | 2,724  |  |       |  | 0   | % |  |   | 1,850  |  |  |  | 0   | %
|                                        |  |                          |        |       |       |  |     |        |       |   |        |  |  |        |     |   |       |   |        |        |  |  |       |       |  |        |        |  |       | 
|Total                                   |  | $                        | 18,891 |       |       |  | 100 | %      |       | $ | 14,656 |  |  |        | 100 | % |       | $ | 12,953 |        |  |  | 100   | %     |  | $      | 11,071 |  |       |  | 100 | % |  | $ | 11,716 |  |  |  | 100 | %
|                                        |  |                          |        |       |       |  |     |        |       |   |        |  |  |        |     |   |       |   |        |        |  |  |       |       |  |        |        |  |       | 







| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Composition mix of the loan portfolio, which include greater
    percentages of commercial lending and leasing, and away from
    more traditional consumer loan types;                                                                              
|
| |  | Greater instances of unsecured credits and credits secured by
    current assets, such as accounts receivable and inventory, and
    less instances of loans fully secured by real estate;                                                           
|
| |  | Geographic mix of loans, which includes entrance into emerging
    markets, where Sterling has less experience and insight compared
    to its historical footprint;                                                                                 
|
| |  | Greater reliance on individual loan officers and credit
    personnel at the bank affiliates to enforce underwriting
    standards and policy, as decisions continue to be made in the
    markets served, rather than in a centralized location; and
|
| |  | Higher legal lending limits, allowing Sterling to accommodate
    larger credit facilities with customers, which management
    believes carry a greater risk than smaller credits.                                                                  







33



---



##### 









Assets Held for Operating Leases






Deposits








34



---



##### 



Table 12  Average Deposit Balances and Rates
Paid




|                                     |  |                          |           |  |      |  |      |        |  |   |           |  |  |        |      |   |      |   |           |  |  |  |      |  
|------------------------------------ |  | ------------------------ | --------- |  | ---- |  | ---- | ------ |  | - | --------- |  |  | ------ | ---- | - | ---- | - | --------- |  |  |  | ---- | -
|                                     |  | Years Ended December 31, |          
|                                     |  |                          |          
|                                     |  | 2004                     |           |  | 2003 |  |      | 2002   | 
|                                     |  |                          |           |  |      |  |      |        | 
|                                     |  | Amount                   |           |  | Rate |  |      | Amount |  |   | Rate      |  |  | Amount |      |   | Rate |  
|                                     |  |                          |           |  |      |  |      |        |  |   |           |  |  |        |      |   |      |  
|Non-interest-bearing demand deposits |  | $                        | 242,147   |  |      |  |     | %      |  | $ | 206,372   |  |  |        |     | % |      | $ | 186,860   |  |  |  |     | %
|Interest-bearing demand deposits     |  |                          | 608,414   |  |      |  | 0.65 | %      |  |   | 558,425   |  |  |        | 0.62 | % |      |   | 494,778   |  |  |  | 1.02 | %
|Savings deposits                     |  |                          | 218,852   |  |      |  | 0.55 | %      |  |   | 205,373   |  |  |        | 0.61 | % |      |   | 186,403   |  |  |  | 1.06 | %
|Time deposits                        |  |                          | 739,802   |  |      |  | 2.94 | %      |  |   | 746,421   |  |  |        | 3.31 | % |      |   | 742,198   |  |  |  | 4.20 | %
|                                     |  |                          |           |  |      |  |      |        |  |   |           |  |  |        |      |   |      |  
|Total                                |  | $                        | 1,809,215 |  |      |  |      |        |  | $ | 1,716,591 |  |  |        |      |   |      | $ | 1,610,239 |  |  |  |      |  
|                                     |  |                          |           |  |      |  |      |        |  |   |           |  |  |        |      |   |      |  

Table 13  Deposit Maturity




|                               |  |              |         |  |      |   |         | 
|------------------------------ |  | ------------ | ------- |  | ---- | - | ------- | 
|                               |  | December 31, |        
|                               |  |              |        
|                               |  | 2004         |         |  | 2003 |  
|                               |  |              |         |  |      |  
|Three months or less           |  | $            | 22,126  |  |      | $ | 32,420  | 
|Over three through six months  |  |              | 13,205  |  |      |   | 23,881  | 
|Over six through twelve months |  |              | 28,371  |  |      |   | 21,134  | 
|Over twelve months             |  |              | 85,499  |  |      |   | 62,815  | 
|                               |  |              |         |  |      |  
|Total                          |  | $            | 149,201 |  |      | $ | 140,250 | 
|                               |  |              |         |  |      |  

Short-Term Borrowings






| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A shift in Sterlings overnight federal funds position from
    selling federal funds to purchasing federal funds due. This
    resulted from a strategy to fund a portion of loan growth over
    the past year with securities portfolio cash flow and overnight
    federal funds.
|
| |  | Development of Sterlings Correspondent Services Group
    whereby federal funds lines have been established for a number
    of community bank clients. At December 31, 2004 the balance
    of federal funds purchased from these relationships totaled
    $11,000,000.           
|
| |  | Securities sold under repurchase agreements at Pennsylvania
    State Bank, Sterlings newest affiliate, of $15,800,000 at
    December 31, 2004, with no corresponding balance in 2003.                                                                                             

Long-Term Debt






| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Debt assumed in the acquisition of The Pennsylvania State
    Banking Company of $18,195,000, including a mark-to-market
    adjustment of $700,000;
|
| |  | A $5,000,000 note payable to fund the acquisition of Corporate
    Healthcare Strategies, LLC.;                                                     

35



---



##### 





| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fixed rate advances from the Federal Home Loan Bank of
    $14,500,000 to provide funding for loan growth;                                                                           
|
| |  | Fixed rate, amortizing borrowings of $20,000,000 from other
    financial institutions to provide funding for growth in finance
    receivables and finance and operating leases; and
|
| |  | Variable rate, amortizing borrowing of $10,000,000 from a
    financial institution to provide funding for growth in finance
    receivables and finance and operating leases.       



Subordinated Notes Payable








Derivative Financial Instruments






| |                           
| | --------------------------
| | Asset liability management



|                               |                             |                   |        |        |                   |   |      |          |   |   |          |   |  |   |        |   | 
|------------------------------ | --------------------------- | ----------------- | ------ | ------ | ----------------- | - | ---- | -------- | - | - | -------- | - |  | - | ------ | - | 
|                               |                             | December 31, 2004 |        |        | December 31, 2003 |  
|                               |                             |                   |        |        |                   |  
|                               |                             | Notional          |        |        | Carrying          |   |      | Notional |   |   | Carrying |  
|                               |                             | Amount            |        |        | Value             |   |      | Amount   |   |   | Value    |  
|                               |                             |                   |        |        |                   |   |      |          |   |   |          |  
|Interest rate swap agreements: |                             |                   |        |        |                   |   |      |          |   |   |          |   |  |   |        |  
|Pay fixed/receiving floating   |                             | $                 | 25,000 |        |                   | $ | (564 | )        |   | $ | 25,000   |   |  | $ | (1,480 | )
|                               | Pay floating/received fixed |                   |        | 25,000 |                   |   |      | (378     | ) |   |          |  |  |   |        |  | 



36



---



##### 





|                                 |  |              |     |  |      |   |     |      |  |   |     | 
|-------------------------------- |  | ------------ | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                 |  | Years Ended  |    
|                                 |  | December 31, |    
|                                 |  |              |    
|                                 |  | 2004         |     |  | 2003 |   |     | 2002 | 
|                                 |  |              |     |  |      |   |     |      | 
|Interest income-commercial loans |  | $            | 338 |  |      | $ |    |      |  | $ |    | 
|Interest expense-borrowed funds  |  |              | 870 |  |      |   | 918 |      |  |   | 543 | 







| |                 
| | ----------------
| | Customer Related



|                               |                              |                   |       |        |                   |  |     |          |   |  |          |       |  |  |     |     |  
|------------------------------ | ---------------------------- | ----------------- | ----- | ------ | ----------------- |  | --- | -------- | - |  | -------- | ----- |  |  | --- | --- | -
|                               |                              | December 31, 2004 |       |        | December 31, 2003 | 
|                               |                              |                   |       |        |                   | 
|                               |                              | Notional          |       |        | Carrying          |  |     | Notional |   |  | Carrying |      
|                               |                              | Amount            |       |        | Value             |  |     | Amount   |   |  | Value    |      
|                               |                              |                   |       |        |                   |  |     |          |   |  |          |      
|Interest rate swap agreements: |                              |                   |       |        |                   |  |     |          |   |  |          |       |  |  |     |    
|                               | Pay fixed/receiving floating |                   | $     | 11,673 |                   |  | $   | (72      | ) |  | $        | 7,000 |  |  | $   | (33 | )
|                               | Pay floating/received fixed  |                   |       | 11,673 |                   |  |     | 72       |   |  |          | 7,000 |  |  |     | 33  |  
|Interest rate caps written     |                              |                   | 9,931 |        |                   |  | (12 | )        |   |  | 6,000    |       |  |  | (27 | )  
|Interest rate caps purchased   |                              |                   | 9,931 |        |                   |  | 12  |          |   |  | 6,000    |       |  |  | 27  |    





37



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##### 



Capital




















38



---



##### 





Table 14  Risked-Based Capital




|                  |                                          |                |   |                 |             |  |  |        |   |  |       |         |  |  |  |     |  
|----------------- | ---------------------------------------- | -------------- | - | --------------- | ----------- |  |  | ------ | - |  | ----- | ------- |  |  |  | --- | -
|                  |                                          |                |   | Minimum Capital |            
|                  |                                          | Actual Capital |   |                 | Requirement | 
|                  |                                          |                |   |                 |             | 
|                  |                                          | Amount         |   |                 | Ratio       |  |  | Amount |   |  | Ratio |        
|                  |                                          |                |   |                 |             |  |  |        |   |  |       |        
|December 31, 2004 |                                          |                |   |                 |             |  |  |        |   |  |       |         |  |  |  |    
|                  | Total capital to risked weighted assets  |                | $ | 277,271         |             |  |  | 12.2   | % |  | $     | 181,418 |  |  |  | 8.0 | %
|                  | Tier 1 capital to risked weighted assets |                |   | 254,787         |             |  |  | 11.2   | % |  |       | 90,709  |  |  |  | 4.0 | %
|                  | Tier 1 capital to average assets         |                |   | 254,787         |             |  |  | 10.0   | % |  |       | 101,710 |  |  |  | 4.0 | %
|December 31, 2003 |                                          |                |   |                 |             |  |  |        |   |  |       |         |  |  |  |    
|                  | Total capital to risked weighted assets  |                | $ | 244,621         |             |  |  | 13.4   | % |  | $     | 145,952 |  |  |  | 8.0 | %
|                  | Tier 1 capital to risked weighted assets |                |   | 227,106         |             |  |  | 12.4   | % |  |       | 72,976  |  |  |  | 4.0 | %
|                  | Tier 1 capital to average assets         |                |   | 227,106         |             |  |  | 10.0   | % |  |       | 90,546  |  |  |  | 4.0 | %



Liquidity












| |                                                                            
| | ---------------------------------------------------------------------------
| | Contractual Obligations, Commitments and Off-balance Sheet
    Arrangements



39



---



##### 





|                                                          |  |           |    |       |           |                 |           |             |  |   |             |  |  |            |         |  |           |   |         |  |  |   |         | 
|--------------------------------------------------------- |  | --------- | -- | ----- | --------- | --------------- | --------- | ----------- |  | - | ----------- |  |  | ---------- | ------- |  | --------- | - | ------- |  |  | - | ------- | 
|                                                          |  |           |    |       |           | Payments Due In |          
|                                                          |  |           |    | Total |           |                 |           |            
|                                                          |  | Note      |    |       | Amount    |                 |           | One Year or |  |   | One to      |  |  | Three to   |         |  | Over Five |  
|                                                          |  | Reference |    |       | Committed |                 |           | Less        |  |   | Three Years |  |  | Five Years |         |  | Years     |  
|                                                          |  |           |    |       |           |                 |           |             |  |   |             |  |  |            |         |  |           |  
|Deposits without a stated maturity                        |  |           |   |       |           | $               | 1,229,587 |             |  | $ | 1,229,587   |  |  | $          |        |  |           | $ |        |  |  | $ |        | 
|Time deposits                                             |  |           | 10 |       |           |                 | 785,807   |             |  |   | 304,263     |  |  |            | 365,324 |  |           |   | 112,699 |  |  |   | 3,521   | 
|Federal funds purchased                                   |  |           | 11 |       |           |                 | 42,500    |             |  |   | 42,500      |  |  |            |        |  |           |   |        |  |  |   |        | 
|Securities sold under repurchase agreements               |  |           | 11 |       |           |                 | 21,159    |             |  |   | 21,159      |  |  |            |        |  |           |   |        |  |  |   |        | 
|Interest-bearing demand notes issued to the U.S. Treasury |  |           | 11 |       |           |                 | 5,109     |             |  |   | 5,109       |  |  |            |        |  |           |   |        |  |  |   |        | 
|Lines of credit                                           |  |           | 11 |       |           |                 | 30,000    |             |  |   | 30,000      |  |  |            |        |  |           |   |        |  |  |   |        | 
|Long-term debt                                            |  |           | 12 |       |           |                 | 233,039   |             |  |   | 53,377      |  |  |            | 99,979  |  |           |   | 24,391  |  |  |   | 55,292  | 
|Subordinated notes payable                                |  |           | 13 |       |           |                 | 72,166    |             |  |   |            |  |  |            |        |  |           |   |        |  |  |   | 72,166  | 
|Operating leases                                          |  |           | 7  |       |           |                 | 12,827    |             |  |   | 1,586       |  |  |            | 2,681   |  |           |   | 2,030   |  |  |   | 6,530   | 
|                                                          |  |           |    |       |           |                 |           |             |  |   |             |  |  |            |         |  |           |  
|                                                          |  |           |    |       |           | $               | 2,432,194 |             |  | $ | 1,687,581   |  |  | $          | 467,984 |  |           | $ | 139,120 |  |  | $ | 137,509 | 
|                                                          |  |           |    |       |           |                 |           |             |  |   |             |  |  |            |         |  |           |  





|                              |                                    |   |         |         | 
|----------------------------- | ---------------------------------- | - | ------- | ------- | 
|Commitments to extend credit: |                                    |   |         |        
|                              | Unused home equity lines of credit |   | $       | 79,299  | 
|                              | Other commitments to extend credit |   |         | 349,488 | 
|Standby letters of credit     |                                    |   | 88,467  |        
|                              |                                    |   |        
|                              |                                    | $ | 517,254 |        
|                              |                                    |   |        





New Financial Accounting Standards




40



---



##### 



Item 7A  Quantitative and Qualitative
Disclosures About Market Risk






Interest Rate Risk












Earnings at Risk




41



---



##### 









Value
at Risk








|                      |      |      |                     |  |      |                       |  |  |                     |      |  |  |      |  |  |  |      |   |  |  |      |  
|--------------------- | ---- | ---- | ------------------- |  | ---- | --------------------- |  |  | ------------------- | ---- |  |  | ---- |  |  |  | ---- | - |  |  | ---- | -
|Table 15a             |      |      | Table 15b           | 
|                      |      |      |                     | 
|Change in             |      |      | % Change in         |  |      | Change in             |  |  | % Change in Present |     
|Market Interest Rates |      |      | Net Interest income |  |      | Market Interest Rates |  |  | Value of Equity     |     
|                      |      |      |                     |  |      |                       |  |  |                     |     
|                      |      | 2004 |                     |  | 2003 |                       |  |  |                     | 2004 |  |  | 2003 | 
|                      |      |      |                     |  |      |                       |  |  |                     |      |  |  |      | 
|                      | -200 |      |                     |  | -5.1 | %                     |  |  | -5.3                | %    |  |  | -200 |  |  |  | -1.7 | % |  |  | -1.7 | %
|                      | -100 |      |                     |  | -2.4 | %                     |  |  | -2.0                | %    |  |  | -100 |  |  |  | -0.1 | % |  |  | -0.7 | %
|                      | 0    |      |                     |  | 0.0  | %                     |  |  | 0.0                 | %    |  |  | 0    |  |  |  | 0.0  | % |  |  | 0.0  | %
|                      | +100 |      |                     |  | 2.0  | %                     |  |  | 2.0                 | %    |  |  | +100 |  |  |  | -0.8 | % |  |  | 0.1  | %
|                      | +200 |      |                     |  | 3.8  | %                     |  |  | 3.9                 | %    |  |  | +200 |  |  |  | -1.9 | % |  |  | 0.0  | %

42



---



##### 





|         |                     
|-------- | --------------------
|Item 8  | Financial Statements



|                                                                      |  |      |       | 
|--------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                      |  | Page |      
|                                                                      |  |      |      
|Managements Report on Internal Controls over Financial
    Reporting |  |      | 44    | 
|Reports of Independent Registered Public Accounting Firm              |  |      | 45-47 | 
|Consolidated Balance Sheets                                           |  |      | 48    | 
|Consolidated Statements of Income                                     |  |      | 49    | 
|Consolidated Statements of Changes in Stockholders Equity            |  |      | 50    | 
|Consolidated Statements of Cash Flows                                 |  |      | 51    | 
|Notes to Consolidated Financial Statements                            |  |      | 52    | 

43



---



##### 



Managements Report on Internal Control Over Financial
Reporting








Internal
Control  Integrated Framework. Internal
Control  Integrated Framework.






|                                                              |  |                                                                                   
|------------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|/s/ J. Roger
    Moyer, Jr.                                   |  | /s/ J. Bradley Scovill                                                            
|                                                              |  |                                                                                   
|J. Roger Moyer, Jr.
    President and Chief Executive Officer |  | J. Bradley Scovill
    Senior Executive Vice President and Chief Financial Officer

44



---



##### 



Report of Independent Registered Public Accounting Firm




Internal Control  Integrated Framework












45



---



##### 







| |                    
| | -------------------
| | (ERNST & YOUNG LLP)





46



---



##### 



Report of Independent Registered Public Accounting Firm










Internal Control 
Integrated Framework




| |                    
| | -------------------
| | (ERNST & YOUNG LLP)





47



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Consolidated Balance Sheets


|                                                                                                                                 |                           |              |           |           |      |   |           |           | 
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                                                                                                                                 |                           | December 31, |          
|                                                                                                                                 |                           |              |          
|(Dollars in thousands)                                                                                                           |                           | 2004         |           |           | 2003 |  
|                                                                                                                                 |                           |              |           |           |      |  
|Assets                                                                                                                           |                           |              |           |           |      |   |           |          
|Cash and due from banks                                                                                                          |                           | $            | 67,708    |           |      | $ | 64,996    |          
|Federal funds sold                                                                                                               |                           |              | 15,147    |           |      |   | 19,102    |          
|                                                                                                                                 |                           |              |           |           |      |  
|                                                                                                                                 | Cash and cash equivalents |              |           | 82,855    |      |   |           | 84,098    | 
|Interest-bearing deposits in banks                                                                                               |                           |              | 5,813     |           |      |   | 4,102     |          
|Short-term investments                                                                                                           |                           |              | 6,542     |           |      |   | 11,275    |          
|Mortgage loans held for sale                                                                                                     |                           |              | 4,345     |           |      |   | 11,520    |          
|Securities held-to-maturity (fair value 2004 
    $34,919; 2003  $37,405)                                                      |                           |              | 34,152    |           |      |   | 35,956    |          
|Securities available-for-sale                                                                                                    |                           |              | 467,519   |           |      |   | 540,049   |          
|Loans, net of allowance for loan losses (2004 
    $18,891; 2003  $14,656)                                                     |                           |              | 1,888,380 |           |      |   | 1,481,369 |          
|Premises and equipment, net                                                                                                      |                           |              | 43,658    |           |      |   | 38,720    |          
|Assets held for operating lease, net                                                                                             |                           |              | 58,475    |           |      |   | 57,891    |          
|Other real estate owned                                                                                                          |                           |              | 80        |           |      |   | 520       |          
|Goodwill                                                                                                                         |                           |              | 75,350    |           |      |   | 30,490    |          
|Intangible assets                                                                                                                |                           |              | 14,268    |           |      |   | 5,083     |          
|Mortgage servicing rights                                                                                                        |                           |              | 2,697     |           |      |   | 2,908     |          
|Accrued interest receivable                                                                                                      |                           |              | 11,407    |           |      |   | 11,236    |          
|Other assets                                                                                                                     |                           |              | 47,221    |           |      |   | 28,300    |          
|                                                                                                                                 |                           |              |           |           |      |  
|Total assets                                                                                                                     |                           | $            | 2,742,762 |           |      | $ | 2,343,517 |          
|                                                                                                                                 |                           |              |           |           |      |  
|                                                                                                                                
|Liabilities                                                                                                                      |                           |              |           |           |      |   |           |          
|Deposits:                                                                                                                        |                           |              |           |           |      |   |           |          
|                                                                                                                                 | Non-interest-bearing      |              | $         | 303,722   |      |   | $         | 249,929   | 
|                                                                                                                                 | Now and money market      |              |           | 705,330   |      |   |           | 577,486   | 
|                                                                                                                                 | Savings                   |              |           | 220,535   |      |   |           | 210,347   | 
|                                                                                                                                 | Time                      |              |           | 785,807   |      |   |           | 740,635   | 
|                                                                                                                                 |                           |              |           |           |      |  
|                                                                                                                                 | Total deposits            |              |           | 2,015,394 |      |   |           | 1,778,397 | 
|                                                                                                                                 |                           |              |           |           |      |  
|Short-term borrowings                                                                                                            |                           |              | 98,768    |           |      |   | 43,878    |          
|Long-term debt                                                                                                                   |                           |              | 233,039   |           |      |   | 195,762   |          
|Subordinated notes payable                                                                                                       |                           |              | 72,166    |           |      |   | 56,702    |          
|Accrued interest payable                                                                                                         |                           |              | 6,375     |           |      |   | 6,273     |          
|Other liabilities                                                                                                                |                           |              | 35,076    |           |      |   | 42,494    |          
|                                                                                                                                 |                           |              |           |           |      |  
|Total liabilities                                                                                                                |                           |              | 2,460,818 |           |      |   | 2,123,506 |          
|                                                                                                                                 |                           |              |           |           |      |  
|Stockholders equity                                                                                                             |                           |              |           |           |      |   |           |          
|Preferred stock, no par value, 10,000,000 shares
    authorized; no shares issued and outstanding                                |                           |              |          |           |      |   |          |          
|Common stock  $5.00 par value,
    70,000,000 shares authorized; issued: 2004 
    23,298,588 shares; 2003  21,776,551 shares |                           |              | 116,493   |           |      |   | 108,883   |          
|Capital surplus                                                                                                                  |                           |              | 80,734    |           |      |   | 44,615    |          
|Escrowed shares (2004  192,002 shares;
    2003  240,002 shares)                                                               |                           |              | (3,901    | )         |      |   | (4,877    | )        
|Retained earnings                                                                                                                |                           |              | 78,384    |           |      |   | 58,874    |          
|Accumulated other comprehensive income                                                                                           |                           |              | 10,234    |           |      |   | 13,827    |          
|Common stock in treasury, at cost (2004 
    0 shares; 2003  59,310 shares)                                                    |                           |              |          |           |      |   | (1,311    | )        
|                                                                                                                                 |                           |              |           |           |      |  
|Total stockholders equity                                                                                                       |                           |              | 281,944   |           |      |   | 220,011   |          
|                                                                                                                                 |                           |              |           |           |      |  
|Total liabilities and stockholders equity                                                                                       |                           | $            | 2,742,762 |           |      | $ | 2,343,517 |          
|                                                                                                                                 |                           |              |           |           |      |  



48



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Consolidated Statements of Income


|                                              |                            |                                                     |         |        |         |   |        |        |         |   |        |        |         | 
|--------------------------------------------- | -------------------------- | --------------------------------------------------- | ------- | ------ | ------- | - | ------ | ------ | ------- | - | ------ | ------ | ------- | 
|                                              |                            | Years Ended December 31,                            |        
|                                              |                            |                                                     |        
|(Dollars in thousands, except per share data) |                            | 2004                                                |         |        | 2003    |   |        | 2002   |        
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Interest and dividend income                  |                            |                                                     |         |        |         |   |        |        |         |   |        |       
|Loans, including fees                         |                            | $                                                   | 113,984 |        |         | $ | 99,657 |        |         | $ | 93,635 |       
|Debt securities:                              |                            |                                                     |         |        |         |   |        |        |         |   |        |       
|                                              | Taxable                    |                                                     |         | 12,458 |         |   |        | 16,482 |         |   |        | 19,484 |        
|                                              | Tax-exempt                 |                                                     |         | 10,493 |         |   |        | 9,990  |         |   |        | 9,059  |        
|Dividends                                     |                            |                                                     | 581     |        |         |   | 632    |        |         |   | 514    |       
|Federal funds sold                            |                            |                                                     | 126     |        |         |   | 232    |        |         |   | 850    |       
|Short-term investments                        |                            |                                                     | 40      |        |         |   | 81     |        |         |   | 49     |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|                                              |                            | Total interest and dividend income                  |         |        | 137,682 |   |        |        | 127,074 |   |        |        | 123,591 | 
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Interest expense                              |                            |                                                     |         |        |         |   |        |        |         |   |        |       
|Deposits                                      |                            |                                                     | 26,904  |        |         |   | 29,443 |        |         |   | 38,174 |       
|Short-term borrowings                         |                            |                                                     | 2,055   |        |         |   | 1,599  |        |         |   | 1,531  |       
|Long-term debt                                |                            |                                                     | 8,109   |        |         |   | 8,044  |        |         |   | 8,044  |       
|Subordinated debt                             |                            |                                                     | 3,197   |        |         |   | 2,070  |        |         |   | 894    |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|                                              |                            | Total interest expense                              |         |        | 40,265  |   |        |        | 41,156  |   |        |        | 48,643  | 
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Net interest income                           |                            |                                                     | 97,417  |        |         |   | 85,918 |        |         |   | 74,948 |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Provision for loan losses                     |                            |                                                     | 4,438   |        |         |   | 3,697  |        |         |   | 2,095  |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|                                              |                            | Net interest income after provision for loan losses |         |        | 92,979  |   |        |        | 82,221  |   |        |        | 72,853  | 
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Non-interest income                           |                            |                                                     |         |        |         |   |        |        |         |   |        |       
|Trust and investment management income        |                            |                                                     | 9,057   |        |         |   | 5,578  |        |         |   | 4,227  |       
|Service charges on deposit accounts           |                            |                                                     | 6,415   |        |         |   | 5,842  |        |         |   | 5,599  |       
|Other service charges, commissions and fees   |                            |                                                     | 3,824   |        |         |   | 3,606  |        |         |   | 3,563  |       
|Brokerage fees and commissions                |                            |                                                     | 3,351   |        |         |   | 1,383  |        |         |   | 984    |       
|Insurance commissions and fees                |                            |                                                     | 4,611   |        |         |   | 323    |        |         |   | 514    |       
|Mortgage banking income                       |                            |                                                     | 1,854   |        |         |   | 4,037  |        |         |   | 3,103  |       
|Rental income on operating leases             |                            |                                                     | 24,969  |        |         |   | 25,799 |        |         |   | 25,752 |       
|Other operating income                        |                            |                                                     | 3,144   |        |         |   | 2,642  |        |         |   | 1,550  |       
|Securities gains (losses)                     |                            |                                                     | 2,071   |        |         |   | 511    |        |         |   | (460   | )     
|                                              |                            |                                                     |         |        |         |   |        |        |        
|                                              |                            | Total non-interest income                           |         |        | 59,296  |   |        |        | 49,721  |   |        |        | 44,832  | 
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Non-interest expenses                         |                            |                                                     |         |        |         |   |        |        |         |   |        |       
|Salaries and employee benefits                |                            |                                                     | 48,201  |        |         |   | 39,434 |        |         |   | 36,860 |       
|Net occupancy                                 |                            |                                                     | 5,445   |        |         |   | 4,926  |        |         |   | 4,209  |       
|Furniture and equipment                       |                            |                                                     | 7,016   |        |         |   | 6,419  |        |         |   | 5,785  |       
|Professional services                         |                            |                                                     | 4,410   |        |         |   | 3,154  |        |         |   | 2,845  |       
|Depreciation on operating lease assets        |                            |                                                     | 21,084  |        |         |   | 21,438 |        |         |   | 20,902 |       
|Taxes other than income                       |                            |                                                     | 2,237   |        |         |   | 1,656  |        |         |   | 1,442  |       
|Intangible asset amortization                 |                            |                                                     | 1,650   |        |         |   | 236    |        |         |   | 167    |       
|Other                                         |                            |                                                     | 17,043  |        |         |   | 15,305 |        |         |   | 13,712 |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|                                              |                            | Total non-interest expenses                         |         |        | 107,086 |   |        |        | 92,568  |   |        |        | 85,922  | 
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Income before income taxes                    |                            |                                                     | 45,189  |        |         |   | 39,374 |        |         |   | 31,763 |       
|Income tax expenses                           |                            |                                                     | 11,860  |        |         |   | 10,315 |        |         |   | 7,018  |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Net income                                    |                            | $                                                   | 33,329  |        |         | $ | 29,059 |        |         | $ | 24,745 |       
|                                              |                            |                                                     |         |        |         |   |        |        |        
|Per share information:                        |                            |                                                     |         |        |         |   |        |        |         |   |        |       
|                                              | Basic earnings per share   |                                                     | $       | 1.53   |         |   | $      | 1.37   |         |   | $      | 1.19   |        
|                                              | Diluted earnings per share |                                                     |         | 1.51   |         |   |        | 1.35   |         |   |        | 1.18   |        
|                                              | Dividends declared         |                                                     |         | 0.62   |         |   |        | 0.56   |         |   |        | 0.53   |        



49



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Consolidated Statements of Changes in Stockholders
Equity


|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |        |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ----------- | ---------- | --------- | ------ | - | ------- | ------- |  | ----------- | ------------- | ------ | - | -------- | ------- | ------- | -------- | - | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------ | -
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  | Accumulated |               |        |   |          |        
|                                                                            |                                                                                                                | Common      |            |           |        |   |         |         |  |             | Other         |        |   | Treasury |         |         |         
|                                                                            |                                                                                                                | Shares      |            |           |        |   |         |         |  |             | Comprehensive |        |   | and      |         |         |         
|                                                                            |                                                                                                                | Issued and  |            |           | Common |   |         | Capital |  |             | Retained      |        |   | Income   |         |         | Escrowed |   |        |       
|(Dollars in thousands)                                                      |                                                                                                                | Outstanding |            |           | Stock  |   |         | Surplus |  |             | Earnings      |        |   | (Loss)   |         |         | Shares   |   |        | Total  |  
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Balance, January 1, 2002                                                    |                                                                                                                |             | 12,511,953 |           |        | $ | 62,733  |         |  | $           | 17,849        |        |   | $        | 66,823  |         |          | $ | 5,433  |        |   | $ | (727   | )      |   | $ | 152,111 |       
|Comprehensive income:                                                       |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Net income                                                                                                     |             |            |           |        |   |         |         |  |             |               |        |   |          |         | 24,745  |          |   |        |        |   |   |        |        |   |   |         | 24,745 |  
|                                                                            | Change in net unrealized gain (loss) on securities AFS, net of
    reclassification adjustment and tax effects |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        | 9,944  |   |   |        |        |   |   |         | 9,944  |  
|                                                                            | Change in unrealized loss on cash flow derivatives                                                             |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        | (1,078 | ) |   |        |        |   |   |         | (1,078 | )
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Total comprehensive income                                                  |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   | 33,611  |       
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Common stock issued:                                                        |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Acquisition of Equipment Finance, Inc.                                                                         |             |            | 954,452   |        |   |         | 4,772   |  |             |               | 16,226 |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 20,998 |  
|                                                                            | Stock options                                                                                                  |             |            | 48,093    |        |   |         | 241     |  |             |               | 404    |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 645    |  
|                                                                            | 5-for-4 stock split effected in the form of a 25% common stock
    dividend                                    |             |            | 3,372,017 |        |   |         | 16,869  |  |             |               |        |   |          |         | (16,901 | )        |   |        |        |   |   |        |        |   |   |         | (32    | )
|Treasury stock issued:                                                      |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Directors compensation plan                                                                                   |             |            | 3,900     |        |   |         |         |  |             |               | 33     |   |          |         |         |          |   |        |        |   |   |        | 65     |   |   |         | 98     |  
|                                                                            | Stock options                                                                                                  |             |            | 32,654    |        |   |         |         |  |             |               | (109   | ) |          |         |         |          |   |        |        |   |   |        | 662    |   |   |         | 553    |  
|Purchase of treasury shares                                                 |                                                                                                                |             | (22,500    | )         |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   | (551   | )      |   |   | (551    | )     
|Cash dividends declared                                                     |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          | (11,146 | )       |          |   |        |        |   |   |        |        |   |   | (11,146 | )     
|Income tax benefit of nonqualified stock options                            |                                                                                                                |             |            |           |        |   |         |         |  |             | 171           |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   | 171     |       
|                                                                            | Compensation expense on modification of stock option awards                                                    |             |            |           |        |   |         |         |  |             |               | 375    |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 375    |  
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Balance, December 31, 2002                                                  |                                                                                                                |             | 16,900,569 |           |        |   | 84,615  |         |  |             | 34,949        |        |   |          | 63,521  |         |          |   | 14,299 |        |   |   | (551   | )      |   |   | 196,833 |       
|Comprehensive income:                                                       |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Net income                                                                                                     |             |            |           |        |   |         |         |  |             |               |        |   |          |         | 29,059  |          |   |        |        |   |   |        |        |   |   |         | 29,059 |  
|                                                                            | Other comprehensive income:                                                                                    |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |        |  
|                                                                            | Change in net unrealized gain/loss on securities AFS, net of
    reclassification adjustment and tax effects   |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        | (608   | ) |   |        |        |   |   |         | (608   | )
|                                                                            | Change in unrealized loss on cash flow derivatives                                                             |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        | 136    |   |   |        |        |   |   |         | 136    |  
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Total comprehensive income                                                  |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   | 28,587  |       
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Common stock issued:                                                        |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Acquisition of Church Capital Management LLC                                                                   |             |            | 255,000   |        |   |         | 2,125   |  |             |               | 8,670  |   |          |         |         |          |   |        |        |   |   |        | (4,318 | ) |   |         | 6,477  |  
|                                                                            | Acquisition of Bainbridge Securities, Inc.                                                                     |             |            | 32,998    |        |   |         | 275     |  |             |               | 1,122  |   |          |         |         |          |   |        |        |   |   |        | (559   | ) |   |         | 838    |  
|                                                                            | Stock options                                                                                                  |             |            | 17,947    |        |   |         | 90      |  |             |               | 225    |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 315    |  
|                                                                            | Directors compensation plan                                                                                   |             |            | 225       |        |   |         | 1       |  |             |               | 20     |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 21     |  
|Treasury stock issued:                                                      |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Dividend Reinvestment Plan                                                                                     |             |            | 29,548    |        |   |         |         |  |             |               | (20    | ) |          |         |         |          |   |        |        |   |   |        | 720    |   |   |         | 700    |  
|                                                                            | Directors compensation plan                                                                                   |             |            | 6,725     |        |   |         |         |  |             |               | 5      |   |          |         |         |          |   |        |        |   |   |        | 150    |   |   |         | 155    |  
|                                                                            | Stock options                                                                                                  |             |            | 78,267    |        |   |         |         |  |             |               | (563   | ) |          |         |         |          |   |        |        |   |   |        | 1,829  |   |   |         | 1,266  |  
|Purchase of treasury shares                                                 |                                                                                                                |             | (139,500   | )         |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   | (3,459 | )      |   |   | (3,459  | )     
|Cash dividends declared                                                     |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          | (11,929 | )       |          |   |        |        |   |   |        |        |   |   | (11,929 | )     
|Income tax benefit of nonqualified stock options                            |                                                                                                                |             |            |           |        |   |         |         |  |             | 207           |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   | 207     |       
|5-for-4 stock split effected in the form of a 25% common stock
    dividend |                                                                                                                |             | 4,295,460  |           |        |   | 21,777  |         |  |             |               |        |   |          | (21,777 | )       |          |   |        |        |   |   |        |        |   |   |        |       
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Balance, December 31, 2003                                                  |                                                                                                                |             | 21,477,239 |           |        |   | 108,883 |         |  |             | 44,615        |        |   |          | 58,874  |         |          |   | 13,827 |        |   |   | (6,188 | )      |   |   | 220,011 |       
|Comprehensive income:                                                       |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Net income                                                                                                     |             |            |           |        |   |         |         |  |             |               |        |   |          |         | 33,329  |          |   |        |        |   |   |        |        |   |   |         | 33,329 |  
|                                                                            | Change in net unrealized gain (loss) on securities AFS, net of
    reclassification adjustment and tax effects |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        | (3,929 | ) |   |        |        |   |   |         | (3,929 | )
|                                                                            | Change in unrealized loss on cash flow derivatives                                                             |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        | 336    |   |   |        |        |   |   |         | 336    |  
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Total comprehensive income                                                  |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   | 29,736  |       
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Common stock issued:                                                        |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Acquisition of Corporate Healthcare Strategies                                                                 |             |            | 282,657   |        |   |         | 1,413   |  |             |               | 5,749  |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 7,162  |  
|                                                                            | Acquisition of Pennsylvania State Bank                                                                         |             |            | 1,209,728 |        |   |         | 6,049   |  |             |               | 30,687 |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 36,736 |  
|                                                                            | Shares released from escrow                                                                                    |             |            | 48,000    |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        | 976    |   |   |         | 976    |  
|                                                                            | Stock options                                                                                                  |             |            | 31,054    |        |   |         | 155     |  |             |               | 327    |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         | 482    |  
|Treasury stock issued:                                                      |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   |         |       
|                                                                            | Directors compensation plan                                                                                   |             |            | 9,438     |        |   |         |         |  |             |               | 19     |   |          |         |         |          |   |        |        |   |   |        | 215    |   |   |         | 234    |  
|                                                                            | Stock options                                                                                                  |             |            | 124,872   |        |   |         |         |  |             |               | (1,179 | ) |          |         |         |          |   |        |        |   |   |        | 2,803  |   |   |         | 1,624  |  
|Purchase of treasury shares                                                 |                                                                                                                |             | (75,000    | )         |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |   |   | (1,707 | )      |   |   | (1,707  | )     
|Cash dividends declared                                                     |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          | (13,793 | )       |          |   |        |        |   |   |        |        |   |   | (13,793 | )     
|Cash paid in lieu of fractional shares                                      |                                                                                                                |             | (1,402     | )         |        |   | (7      | )       |  |             |               |        |   |          | (26     | )       |          |   |        |        |   |   |        |        |   |   | (33     | )     
|Income tax benefit of nonqualified stock options                            |                                                                                                                |             |            |           |        |   |         |         |  |             | 516           |        |   |          |         |         |          |   |        |        |   |   |        |        |   |   | 516     |       
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  
|Balance, December 31, 2004                                                  |                                                                                                                |             | 23,106,586 |           |        | $ | 116,493 |         |  | $           | 80,734        |        |   | $        | 78,384  |         |          | $ | 10,234 |        |   | $ | (3,901 | )      |   | $ | 281,944 |       
|                                                                            |                                                                                                                |             |            |           |        |   |         |         |  |             |               |        |   |          |         |         |          |   |        |        |  



50



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Consolidated Statements of Cash Flows


|                                                                                      |                                                          |                                          |          |          |        |   |          |          |        |   |          |          |      |  
|------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | -------- | -------- | ------ | - | -------- | -------- | ------ | - | -------- | -------- | ---- | -
|                                                                                      |                                                          | Years Ended December 31,                 |         
|                                                                                      |                                                          |                                          |         
|(Dollars in thousands)                                                                |                                                          | 2004                                     |          |          | 2003   |   |          | 2002     |       
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|Cash Flows from Operating Activities                                                  |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|Net income                                                                            |                                                          | $                                        | 33,329   |          |        | $ | 29,059   |          |        | $ | 24,745   |         
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|                                                                                      | Depreciation                                             |                                          |          | 25,618   |        |   |          | 25,708   |        |   |          | 24,926   |     
|                                                                                      | Accretion and amortization of investment securities      |                                          |          | 635      |        |   |          | 741      |        |   |          | 762      |     
|                                                                                      | Amortization of intangible assets                        |                                          |          | 1,650    |        |   |          | 236      |        |   |          | 167      |     
|                                                                                      | Provision for loan losses                                |                                          |          | 4,438    |        |   |          | 3,697    |        |   |          | 2,095    |     
|                                                                                      | Provision for deferred income taxes                      |                                          |          | 245      |        |   |          | 887      |        |   |          | 936      |     
|                                                                                      | Gains on sale of finance leases                          |                                          |          | (330     | )      |   |          | (125     | )      |   |          |         |     
|                                                                                      | (Gains) losses on sales of securities available-for-sale |                                          |          | (2,071   | )      |   |          | (511     | )      |   |          | 460      |     
|                                                                                      | Gains on sale of mortgage loans                          |                                          |          | (781     | )      |   |          | (2,122   | )      |   |          | (1,393   | )   
|                                                                                      | Proceeds from sales of mortgage loans                    |                                          |          | 118,325  |        |   |          | 263,740  |        |   |          | 177,381  |     
|                                                                                      | Originations of mortgage loans held for sale             |                                          |          | (110,369 | )      |   |          | (256,354 | )      |   |          | (171,748 | )   
|                                                                                      | Change in operating assets and liabilities:              |                                          |          |          |        |   |          |          |        |   |          |          |     
|                                                                                      |                                                          | Decrease in accrued interest receivable  |          |          | 530    |   |          |          | 534    |   |          |          | 346  |  
|                                                                                      |                                                          | Increase in other assets                 |          |          | (9,615 | ) |          |          | (7,951 | ) |          |          | (139 | )
|                                                                                      |                                                          | Decrease in accrued interest payable     |          |          | (65    | ) |          |          | (1,708 | ) |          |          | (771 | )
|                                                                                      |                                                          | Increase (decrease) in other liabilities |          |          | (8,558 | ) |          |          | 8,036  |   |          |          | 755  |  
|                                                                                      |                                                          | Other                                    |          |          | 6      |   |          |          | (100   | ) |          |          | 375  |  
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|Net cash provided by operating activities                                             |                                                          |                                          | 52,987   |          |        |   | 63,767   |          |        |   | 58,897   |         
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|Cash Flows From Investing Activities                                                  |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|Net increase in interest-bearing deposits in other banks                              |                                                          |                                          | (1,459   | )        |        |   | (690     | )        |        |   | (1,045   | )       
|Net increase in short-term investments                                                |                                                          |                                          | 4,733    |          |        |   | (75      | )        |        |   | (9,923   | )       
|Proceeds from sales of securities available-for-sale                                  |                                                          |                                          | 45,619   |          |        |   | 74,907   |          |        |   | 29,150   |         
|Proceeds from maturities or calls of securities held-to-maturity                      |                                                          |                                          | 5,339    |          |        |   | 5,522    |          |        |   | 7,617    |         
|Proceeds from maturities or calls of securities
    available-for-sale                |                                                          |                                          | 80,754   |          |        |   | 114,577  |          |        |   | 94,619   |         
|Purchases of securities held-to-maturity                                              |                                                          |                                          | (2,075   | )        |        |   | (4,874   | )        |        |   | (2,420   | )       
|Purchases of securities available-for-sale                                            |                                                          |                                          | (26,856  | )        |        |   | (178,905 | )        |        |   | (170,400 | )       
|Net loans and direct finance leases made to customers                                 |                                                          |                                          | (279,748 | )        |        |   | (210,427 | )        |        |   | (118,678 | )       
|Proceeds from sale of financing leases                                                |                                                          |                                          | 21,020   |          |        |   | 8,248    |          |        |   |         |         
|Purchases of equipment acquired for operating leases, net                             |                                                          |                                          | (21,668  | )        |        |   | (16,038  | )        |        |   | (25,197  | )       
|Purchases of premises and equipment, net                                              |                                                          |                                          | (3,818   | )        |        |   | (7,738   | )        |        |   | (6,974   | )       
|Net cash paid for business combination                                                |                                                          |                                          | (16,998  | )        |        |   | (8,282   | )        |        |   | (8,783   | )       
|Cash placed in escrow related to business combination                                 |                                                          |                                          | (4,500   | )        |        |   | (5,280   | )        |        |   |         |         
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|                                                                                      | Net cash used by investing activities                    |                                          |          | (199,657 | )      |   |          | (229,055 | )      |   |          | (212,034 | )   
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|Cash Flows From Financing Activities                                                  |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|Net increase in deposits                                                              |                                                          |                                          | 80,608   |          |        |   | 76,095   |          |        |   | 166,653  |         
|Net increase (decrease) in short-term borrowings                                      |                                                          |                                          | 43,261   |          |        |   | 2,258    |          |        |   | (45,655  | )       
|Proceeds from issuance of long-term debt                                              |                                                          |                                          | 78,752   |          |        |   | 75,038   |          |        |   | 65,250   |         
|Repayment of long-term debt                                                           |                                                          |                                          | (60,052  | )        |        |   | (34,754  | )        |        |   | (30,865  | )       
|Proceeds from issuance of subordinated notes payable                                  |                                                          |                                          | 15,464   |          |        |   | 36,083   |          |        |   | 20,619   |         
|Proceeds from issuance of common stock                                                |                                                          |                                          | 482      |          |        |   | 336      |          |        |   | 645      |         
|Cash dividends                                                                        |                                                          |                                          | (13,206  | )        |        |   | (11,671  | )        |        |   | (10,771  | )       
|Cash paid in lieu of fractional shares                                                |                                                          |                                          | (33      | )        |        |   | -        |          |        |   | (32      | )       
|Purchase of treasury stock                                                            |                                                          |                                          | (1,707   | )        |        |   | (3,459   | )        |        |   | (551     | )       
|Proceeds from issuance of treasury stock                                              |                                                          |                                          | 1,858    |          |        |   | 2,121    |          |        |   | 651      |         
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|                                                                                      | Net cash provided by financing activities                |                                          |          | 145,427  |        |   |          | 142,047  |        |   |          | 165,944  |     
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|Net change in cash and cash equivalents                                               |                                                          |                                          | (1,243   | )        |        |   | (23,241  | )        |        |   | 12,807   |         
|Cash and cash equivalents:                                                            |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|                                                                                      | Beginning of year                                        |                                          |          | 84,098   |        |   |          | 107,339  |        |   |          | 94,532   |     
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|                                                                                      | End of year                                              |                                          | $        | 82,855   |        |   | $        | 84,098   |        |   | $        | 107,339  |     
|                                                                                      |                                                          |                                          |          |          |        |   |          |          |       
|Supplemental Disclosure of Cash Flow Information:                                     |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|Cash payments for:                                                                    |                                                          |                                          |          |          |        |   |          |          |        |   |          |         
|                                                                                      | Interest                                                 |                                          | $        | 40,163   |        |   | $        | 42,864   |        |   | $        | 49,383   |     
|                                                                                      | Income taxes                                             |                                          |          | 11,229   |        |   |          | 9,224    |        |   |          | 6,457    |     



51



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial Statements




Note 1  Summary of Significant Accounting
Policies


Basis of Presentation and Consolidation


Use of Estimates


Business


Concentration of Credit Risk


Cash and Cash Equivalents


Interest-bearing Deposits in Banks


Securities




52



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Mortgage Loans Held for Sale


Loans




Accounting for Leases






Allowance for Loan Losses




53



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)












Servicing


Credit Related Financial Instruments


Derivative financial instruments


54



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Accounting for Derivative Instruments and Hedging
Activities




Foreclosed Assets


Premises and Equipment


Assets Held for Operating Leases


Goodwill Goodwill and Other Intangible Assets Acquisitions of Certain
Financial Institutions  an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation
No. 9


Intangible assets


55



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Income Taxes


Advertising


Revenue Recognition


Stock Compensation Plan Accounting for
Stock-Based Compensation Accounting
for Stock Issued to Employees


Share-Based Payment Accounting for
Stock Issued to Employees


Earnings Per Share


56



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                                                                             |                            |                          |            |      |      |   |            |      |  |   |            |      | 
|-------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ---------- | ---- | ---- | - | ---------- | ---- |  | - | ---------- | ---- | 
|                                                                                             |                            | Years Ended December 31, |           
|                                                                                             |                            |                          |           
|                                                                                             |                            | 2004                     |            |      | 2003 |   |            | 2002 | 
|                                                                                             |                            |                          |            |      |      |   |            |      | 
|Net income available to stockholders                                                         |                            | $                        | 33,329     |      |      | $ | 29,059     |      |  | $ | 24,745     |     
|                                                                                             |                            |                          |            |      |      |   |            |      | 
|Average number of shares outstanding                                                         |                            |                          | 21,772,481 |      |      |   | 21,224,302 |      |  |   | 20,849,318 |     
|Effect of dilutive stock options                                                             |                            |                          | 348,664    |      |      |   | 223,969    |      |  |   | 179,180    |     
|                                                                                             |                            |                          |            |      |      |   |            |      | 
|Average number of shares outstanding used to calculate diluted
    earnings per common share |                            |                          | 22,121,145 |      |      |   | 21,448,271 |      |  |   | 21,028,498 |     
|                                                                                             |                            |                          |            |      |      |   |            |      | 
|Per share information:                                                                       |                            |                          |            |      |      |   |            |      |  |   |            |     
|                                                                                             | Basic earnings per share   |                          | $          | 1.53 |      |   | $          | 1.37 |  |   | $          | 1.19 | 
|                                                                                             | Diluted earnings per share |                          |            | 1.51 |      |   |            | 1.35 |  |   |            | 1.18 | 

Comprehensive Income


|                                                          |                                                                                                                                             |                          |        |        |      |   |        |      |   |   |        |        |  
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ---- | - | - | ------ | ------ | -
|                                                          |                                                                                                                                             | Years Ended December 31, |       
|                                                          |                                                                                                                                             |                          |       
|                                                          |                                                                                                                                             | 2004                     |        |        | 2003 |   |        | 2002 |  
|                                                          |                                                                                                                                             |                          |        |        |      |   |        |      |  
|Net income                                                |                                                                                                                                             | $                        | 33,329 |        |      | $ | 29,059 |      |   | $ | 24,745 |       
|Other comprehensive income, net of tax expense (benefit): |                                                                                                                                             |                          |        |        |      |   |        |      |   |   |        |       
|                                                          | Unrealized holding gains (losses) on available for sale
    securities, net of taxes 2004-$(1,409), 2003-$(159), 2002-$5,231                |                          |        | (2,583 | )    |   |        | (276 | ) |   |        | 9,645  |  
|                                                          | Reclassification adjustment for securities (gains) in
    income, net of taxes 2004-$725, 2003-$179, 2002-$(161)                            |                          |        | (1,346 | )    |   |        | (332 | ) |   |        | 299    |  
|                                                          | Unrealized gains (losses) on derivatives used in cash flow
    hedging relationships, net of taxes of 2004-$204, 2003-$257,
    2002-$(797) |                          |        | 336    |      |   |        | 136  |   |   |        | (1,078 | )
|                                                          |                                                                                                                                             |                          |        |        |      |   |        |      |  
|                                                          |                                                                                                                                             |                          | (3,593 | )      |      |   | (472   | )    |   |   | 8,866  |       
|                                                          |                                                                                                                                             |                          |        |        |      |   |        |      |  
|Comprehensive income                                      |                                                                                                                                             | $                        | 29,736 |        |      | $ | 28,587 |      |   | $ | 33,611 |       
|                                                          |                                                                                                                                             |                          |        |        |      |   |        |      |  



|                                                                                         |  |              |        |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                                                         |  | December 31, |       
|                                                                                         |  |              |       
|                                                                                         |  | 2004         |        |   | 2003 |  
|                                                                                         |  |              |        |   |      |  
|Accumulated unrealized gains on securities available-for-sale                            |  | $            | 10,840 |   |      | $ | 14,769 |  
|Accumulated unrealized losses on derivatives used in cash flow
    hedging relationships |  |              | (606   | ) |      |   | (942   | )
|                                                                                         |  |              |        |   |      |  
|                                                                                         |  | $            | 10,234 |   |      | $ | 13,827 |  
|                                                                                         |  |              |        |   |      |  

Reclassifications


57



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Recent Accounting Pronouncements


Note 2  Business Combinations


Equipment Finance LLC


Business Combinations




Church Capital Management, Inc. and Bainbridge Securities,
Inc.




58



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Business Combinations.


Corporate Healthcare Strategies, Inc.




Business Combinations.


Lancaster Insurance Group, LLC


Pennsylvania State Bank




59



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|             |                         |                   |   |         |         | 
|------------ | ----------------------- | ----------------- | - | ------- | ------- | 
|Assets:      |                         |                   |   |        
|             | Cash and due from banks |                   | $ | 3,998   |        
|             | Securities              |                   |   | 33,075  |        
|             | Net loans               |                   |   | 151,951 |        
|             | Other assets            |                   |   | 11,112  |        
|             |                         |                   |  
|             |                         | Total assets      |   | $       | 200,136 | 
|             |                         |                   |  
|Liabilities: |                         |                   |   |        
|             | Total deposits          |                   | $ | 156,389 |        
|             | Short-term borrowings   |                   |   | 10,714  |        
|             | Long-term borrowings    |                   |   | 18,195  |        
|             | Other liabilities       |                   |   | 3,119   |        
|             |                         |                   |  
|             |                         | Total liabilities |   | $       | 188,417 | 
|             |                         |                   |  



|                                                     |                                                                 |   |        |        |  
|---------------------------------------------------- | --------------------------------------------------------------- | - | ------ | ------ | -
|Total consideration                                  |                                                                 | $ | 48,593 |       
|                                                     |                                                                 |   |       
|Less: Net assets acquired                            |                                                                 |   | 16,242 |       
|                                                     | Core deposit intangible (ten year
    accelerated amortization) |   |        | 3,804  |  
|                                                     | Trademark (not subject to
    amortization)                     |   |        | 237    |  
|                                                     |                                                                 |   |       
|                                                     |                                                                 |   | 20,283 |       
|                                                     |                                                                 |   |       
|Plus: Revaluation adjustments:                       |                                                                 |   |        |       
|                                                     | Securities mark-to-market
    (5 year weighted average life)    |   |        | (195   | )
|                                                     | Loans mark-to-market (3 year
    weighted average life)         |   |        | 11     |  
|                                                     | Deposits mark-to-market
    (2 year weighted average life)      |   |        | 549    |  
|                                                     | FHLB advances mark-to-market
    (3 year weighted average life) |   |        | 695    |  
|                                                     | Premises mark-to-market
    (40 year life)                      |   |        | 1,791  |  
|                                                     |                                                                 |   |       
|                                                     |                                                                 |   | 2,851  |       
|                                                     |                                                                 |   |       
|Plus: Severance and supplemental retirement benefits |                                                                 |   | 1,900  |       
|                                                     | Capitalized acquisition costs                                   |   |        | 583    |  
|Less: Deferred taxes on above                        |                                                                 |   | 228    |       
|                                                     |                                                                 |   |       
|                                                     | Goodwill                                                        |   | $      | 33,416 |  
|                                                     |                                                                 |   |       



60



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|         |                                        
|-------- | ---------------------------------------
|Note 3  | Restrictions on Cash and Due from Banks





|         |           
|-------- | ----------
|Note 4  | Securities



|                   |                                  |           |   |         |            |  |       |            |  |  |            |       |  |  |   |         | 
|------------------ | -------------------------------- | --------- | - | ------- | ---------- |  | ----- | ---------- |  |  | ---------- | ----- |  |  | - | ------- | 
|                   |                                  |           |   | Gross   |            |  | Gross |            |  | 
|                   |                                  | Amortized |   |         | Unrealized |  |       | Unrealized |  |  |           
|                   |                                  | Cost      |   |         | Gains      |  |       | Losses     |  |  | Fair Value |      
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|December 31, 2004: |                                  |           |   |         |            |  |       |            |  |  |            |       |  |  |   |        
|                   | Available-for sale:              |           |   |         |            |  |       |            |  |  |            |       |  |  |   |         | 
|                   | U.S. Treasury securities         |           | $ | 2,739   |            |  | $     | 50         |  |  | $          |      |  |  | $ | 2,789   | 
|                   | U.S. Government agencies         |           |   | 129,910 |            |  |       | 484        |  |  |            | 2,892 |  |  |   | 127,502 | 
|                   | State and political subdivisions |           |   | 221,023 |            |  |       | 10,312     |  |  |            | 595   |  |  |   | 230,740 | 
|                   | Mortgage-backed securities       |           |   | 27,742  |            |  |       | 593        |  |  |            | 7     |  |  |   | 28,328  | 
|                   | Corporate securities             |           |   | 64,833  |            |  |       | 2,023      |  |  |            | 6     |  |  |   | 66,850  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Subtotal                         |           |   | 446,247 |            |  |       | 13,462     |  |  |            | 3,500 |  |  |   | 456,209 | 
|                   | Equity securities                |           |   | 4,586   |            |  |       | 6,736      |  |  |            | 12    |  |  |   | 11,310  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Total                            |           | $ | 450,833 |            |  | $     | 20,198     |  |  | $          | 3,512 |  |  | $ | 467,519 | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Held-to-maturity:                |           |   |         |            |  |       |            |  |  |            |       |  |  |   |         | 
|                   | U.S. Treasury securities         |           | $ | 105     |            |  | $     |           |  |  | $          |      |  |  | $ | 105     | 
|                   | State and political subdivisions |           |   | 20,426  |            |  |       | 765        |  |  |            |      |  |  |   | 21,191  | 
|                   | Mortgage-backed securities       |           |   | 87      |            |  |       | 2          |  |  |            |      |  |  |   | 89      | 
|                   | Corporate securities             |           |   | 620     |            |  |       |           |  |  |            |      |  |  |   | 620     | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Subtotal                         |           |   | 21,238  |            |  |       | 767        |  |  |            |      |  |  |   | 22,005  | 
|                   | Equity securities                |           |   | 12,914  |            |  |       |           |  |  |            |      |  |  |   | 12,914  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Total                            |           | $ | 34,152  |            |  | $     | 767        |  |  | $          |      |  |  |   | 34,919  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      

61



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


|                   |                                  |           |   |         |            |  |       |            |  |  |            |       |  |  |   |         | 
|------------------ | -------------------------------- | --------- | - | ------- | ---------- |  | ----- | ---------- |  |  | ---------- | ----- |  |  | - | ------- | 
|                   |                                  |           |   | Gross   |            |  | Gross |            |  | 
|                   |                                  | Amortized |   |         | Unrealized |  |       | Unrealized |  |  |           
|                   |                                  | Cost      |   |         | Gains      |  |       | Losses     |  |  | Fair Value |      
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|December 31, 2003: |                                  |           |   |         |            |  |       |            |  |  |            |       |  |  |   |        
|                   | Available-for sale:              |           |   |         |            |  |       |            |  |  |            |       |  |  |   |         | 
|                   | U.S. Treasury securities         |           | $ | 6,923   |            |  | $     | 176        |  |  | $          |      |  |  | $ | 7,099   | 
|                   | U.S. Government agencies         |           |   | 166,436 |            |  |       | 1,912      |  |  |            | 2,819 |  |  |   | 165,529 | 
|                   | State and political subdivisions |           |   | 217,256 |            |  |       | 11,861     |  |  |            | 846   |  |  |   | 228,271 | 
|                   | Mortgage-backed securities       |           |   | 22,814  |            |  |       | 860        |  |  |            | 5     |  |  |   | 23,669  | 
|                   | Corporate securities             |           |   | 95,125  |            |  |       | 5,253      |  |  |            |      |  |  |   | 100,378 | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Subtotal                         |           |   | 508,554 |            |  |       | 20,062     |  |  |            | 3,670 |  |  |   | 524,946 | 
|                   | Equity securities                |           |   | 8,748   |            |  |       | 6,370      |  |  |            | 15    |  |  |   | 15,103  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Total                            |           | $ | 517,302 |            |  | $     | 26,432     |  |  | $          | 3,685 |  |  | $ | 540,049 | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Held-to-maturity:                |           |   |         |            |  |       |            |  |  |            |       |  |  |   |         | 
|                   | State and political subdivisions |           | $ | 23,320  |            |  | $     | 1,442      |  |  | $          |      |  |  | $ | 24,762  | 
|                   | Mortgage-backed securities       |           |   | 172     |            |  |       | 7          |  |  |            |      |  |  |   | 179     | 
|                   | Corporate securities             |           |   | 622     |            |  |       |           |  |  |            |      |  |  |   | 622     | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Subtotal                         |           |   | 24,114  |            |  |       | 1,449      |  |  |            |      |  |  |   | 25,563  | 
|                   | Equity securities                |           |   | 11,842  |            |  |       |           |  |  |            |      |  |  |   | 11,842  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      
|                   | Total                            |           | $ | 35,956  |            |  | $     | 1,449      |  |  | $          |      |  |  | $ | 37,405  | 
|                   |                                  |           |   |         |            |  |       |            |  |  |            |      





|                                      |  |                    |         |  |                  |   |         |           |  |   |        |  |  |   |        | 
|------------------------------------- |  | ------------------ | ------- |  | ---------------- | - | ------- | --------- |  | - | ------ |  |  | - | ------ | 
|                                      |  | Securities         |         |  | Securities       |  
|                                      |  | Available-for-Sale |         |  | Held-to-Maturity |  
|                                      |  |                    |         |  |                  |  
|                                      |  | Amortized          |         |  | Fair             |   |         | Amortized |  |   | Fair   | 
|                                      |  | Cost               |         |  | Value            |   |         | Cost      |  |   | Value  | 
|                                      |  |                    |         |  |                  |   |         |           |  |   |        | 
|Due in one year or less               |  | $                  | 40,787  |  |                  | $ | 41,362  |           |  | $ | 2,005  |  |  | $ | 2,025  | 
|Due after one year through five years |  |                    | 103,196 |  |                  |   | 105,596 |           |  |   | 14,394 |  |  |   | 14,959 | 
|Due in five years through ten years   |  |                    | 140,940 |  |                  |   | 141,888 |           |  |   | 3,652  |  |  |   | 3,811  | 
|Due after ten years                   |  |                    | 133,582 |  |                  |   | 139,035 |           |  |   | 1,100  |  |  |   | 1,121  | 
|                                      |  |                    |         |  |                  |   |         |           |  |   |        | 
|                                      |  |                    | 418,505 |  |                  |   | 427,881 |           |  |   | 21,151 |  |  |   | 21,916 | 
|Mortgage-backed securities            |  |                    | 27,742  |  |                  |   | 28,328  |           |  |   | 87     |  |  |   | 89     | 
|                                      |  |                    |         |  |                  |   |         |           |  |   |        | 
|                                      |  | $                  | 446,247 |  |                  | $ | 456,209 |           |  | $ | 21,238 |  |  | $ | 22,005 | 
|                                      |  |                    |         |  |                  |   |         |           |  |   |        | 

62



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                    |                                  |                     |        |        |                   |  |     |       |  |  |            |        |  |       |       |       |            |  |         |         |  |  |       |       | 
|------------------- | -------------------------------- | ------------------- | ------ | ------ | ----------------- |  | --- | ----- |  |  | ---------- | ------ |  | ----- | ----- | ----- | ---------- |  | ------- | ------- |  |  | ----- | ----- | 
|                    |                                  | Less Than 12 Months |        |        | 12 Months or More |  |     | Total | 
|                    |                                  |                     |        |        |                   |  |     |       | 
|                    |                                  | Fair                |        |        | Unrealized        |  |     | Fair  |  |  | Unrealized |        |  | Fair  |       |       | Unrealized | 
|                    |                                  | Value               |        |        | Losses            |  |     | Value |  |  | Losses     |        |  | Value |       |       | Losses     | 
|                    |                                  |                     |        |        |                   |  |     |       |  |  |            |        |  |       |       |       |            | 
|Available for sale: |                                  |                     |        |        |                   |  |     |       |  |  |            |        |  |       |       |       |            |  |         |         |  |  |       |      
|                    | U.S. Treasury securities         |                     | $      | 500    |                   |  | $   |      |  |  | $          |       |  |       | $     |      |            |  | $       | 500     |  |  | $     |      | 
|                    | U.S. Government agencies         |                     |        | 46,444 |                   |  |     | 336   |  |  |            | 40,072 |  |       |       | 2,556 |            |  |         | 86,516  |  |  |       | 2,892 | 
|                    | State and political subdivisions |                     |        | 16,786 |                   |  |     | 136   |  |  |            | 11,043 |  |       |       | 459   |            |  |         | 27,829  |  |  |       | 595   | 
|                    | Mortgage-backed securities       |                     |        | 4,857  |                   |  |     | 4     |  |  |            | 122    |  |       |       | 3     |            |  |         | 4,979   |  |  |       | 7     | 
|                    | Corporate securities             |                     |        | 295    |                   |  |     | 5     |  |  |            | 2      |  |       |       | 1     |            |  |         | 297     |  |  |       | 6     | 
|                    |                                  |                     |        |        |                   |  |     |       |  |  |            |        |  |       |       |       |            | 
|                    |                                  |                     | 68,882 |        |                   |  | 481 |       |  |  | 51,239     |        |  |       | 3,019 |       |            |  | 120,121 |         |  |  | 3,500 |      
|                    | Equity securities                |                     |        | 4      |                   |  |     |      |  |  |            | 29     |  |       |       | 12    |            |  |         | 33      |  |  |       | 12    | 
|                    |                                  |                     |        |        |                   |  |     |       |  |  |            |        |  |       |       |       |            | 
|                    | Total                            |                     | $      | 68,886 |                   |  | $   | 481   |  |  | $          | 51,268 |  |       | $     | 3,031 |            |  | $       | 120,154 |  |  | $     | 3,512 | 
|                    |                                  |                     |        |        |                   |  |     |       |  |  |            |        |  |       |       |       |            | 









63



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|         |      
|-------- | -----
|Note 5  | Loans



|                                                                                        |  |              |           |  |      |   |           | 
|--------------------------------------------------------------------------------------- |  | ------------ | --------- |  | ---- | - | --------- | 
|                                                                                        |  | December 31, |          
|                                                                                        |  |              |          
|                                                                                        |  | 2004         |           |  | 2003 |  
|                                                                                        |  |              |           |  |      |  
|Commercial and agricultural                                                             |  | $            | 494,760   |  |      | $ | 321,728   | 
|Commercial real estate                                                                  |  |              | 515,257   |  |      |   | 453,456   | 
|Financial                                                                               |  |              | 25,790    |  |      |   | 19,488    | 
|Real estate  construction                                                              |  |              | 61,591    |  |      |   | 23,471    | 
|Real estate  mortgage                                                                  |  |              | 78,694    |  |      |   | 80,674    | 
|Consumer                                                                                |  |              | 364,991   |  |      |   | 316,190   | 
|Finance receivables, (net of unearned income 2004 
    $33,019; 2003  $23,088)        |  |              | 236,617   |  |      |   | 171,733   | 
|Lease financing receivables (net of unearned income
    2004  $15,586; 2003  $13,822) |  |              | 129,571   |  |      |   | 109,285   | 
|                                                                                        |  |              |           |  |      |  
|Total loans                                                                             |  | $            | 1,907,271 |  |      | $ | 1,496,025 | 
|                                                                                        |  |              |           |  |      |  



|                                              |                      |              |       |       |      |   |       |       | 
|--------------------------------------------- | -------------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | 
|                                              |                      | December 31, |      
|                                              |                      |              |      
|                                              |                      | 2004         |       |       | 2003 |  
|                                              |                      |              |       |       |      |  
|Impaired loans with a valuation allowance     |                      | $            | 3,655 |       |      | $ | 3,136 |      
|Impaired loans without a valuation allowance  |                      |              |      |       |      |   |      |      
|                                              |                      |              |       |       |      |  
|                                              | Total impaired loans |              |       | 3,655 |      |   |       | 3,136 | 
|                                              |                      |              |       |       |      |  
|Valuation allowance related to impaired loans |                      | $            | 683   |       |      | $ | 292   |      
|                                              |                      |              |       |       |      |  

|                                                             |  |                          |       |  |      |   |       |      |  |   |       | 
|------------------------------------------------------------ |  | ------------------------ | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                                             |  | Years Ended December 31, |      
|                                                             |  |                          |      
|                                                             |  | 2004                     |       |  | 2003 |   |       | 2002 | 
|                                                             |  |                          |       |  |      |   |       |      | 
|Average investment in impaired loans                         |  | $                        | 2,780 |  |      | $ | 5,076 |      |  | $ | 8,381 | 
|Interest income recognized on impaired loans                 |  |                          | 1     |  |      |   |      |      |  |   | 28    | 
|Interest income recognized on a cash basis on impaired loans |  |                          | 1     |  |      |   |      |      |  |   | 28    | 



64



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                       |                                                              |                          |        |        |      |   |        |        |   |   |        |        |  
|---------------------- | ------------------------------------------------------------ | ------------------------ | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                       |                                                              | Years Ended December 31, |       
|                       |                                                              |                          |       
|                       |                                                              | 2004                     |        |        | 2003 |   |        | 2002   |  
|                       |                                                              |                          |        |        |      |   |        |        |  
|Balance at January 1   |                                                              | $                        | 14,656 |        |      | $ | 12,953 |        |   | $ | 11,071 |       
|                       | Allowance acquired in acquisition                            |                          |        | 1,843  |      |   |        |       |   |   |        | 837    |  
|                       | Provisions for loan losses                                   |                          |        | 4,438  |      |   |        | 3,697  |   |   |        | 2,095  |  
|                       | Loans charged off                                            |                          |        | (2,123 | )    |   |        | (2,776 | ) |   |        | (2,170 | )
|                       | Recoveries of loans previously charged off                   |                          |        | 497    |      |   |        | 782    |   |   |        | 1,120  |  
|                       | Reserve on loan commitments transferred to other liabilities |                          |        | (420   | )    |   |        |       |   |   |        |       |  
|                       |                                                              |                          |        |        |      |   |        |        |  
|Balance at December 31 |                                                              | $                        | 18,891 |        |      | $ | 14,656 |        |   | $ | 12,953 |       
|                       |                                                              |                          |        |        |      |   |        |        |  







|         |                            
|-------- | ---------------------------
|Note 6  | Mortgage Banking Activities



|                       |                                     |                          |       |        |      |   |       |        |   |   |       |       |  
|---------------------- | ----------------------------------- | ------------------------ | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ----- | -
|                       |                                     | Years Ended December 31, |      
|                       |                                     |                          |      
|                       |                                     | 2004                     |       |        | 2003 |   |       | 2002   |  
|                       |                                     |                          |       |        |      |   |       |        |  
|Balance at January 1   |                                     | $                        | 3,350 |        |      | $ | 2,339 |        |   | $ | 1,881 |      
|                       | Mortgage service rights capitalized |                          |       | 1,073  |      |   |       | 2,512  |   |   |       | 1,389 |  
|                       | Mortgage service rights amortized   |                          |       | (1,344 | )    |   |       | (1,501 | ) |   |       | (931  | )
|                       |                                     |                          |       |        |      |   |       |        |  
|Balance at December 31 |                                     | $                        | 3,079 |        |      | $ | 3,350 |        |   | $ | 2,339 |      
|                       |                                     |                          |       |        |      |   |       |        |  



|                                                     |  |                          |     |   |      |   |     |      |  |   |     | 
|---------------------------------------------------- |  | ------------------------ | --- | - | ---- | - | --- | ---- |  | - | --- | 
|                                                     |  | Years Ended December 31, |    
|                                                     |  |                          |    
|                                                     |  | 2004                     |     |   | 2003 |   |     | 2002 | 
|                                                     |  |                          |     |   |      |   |     |      | 
|Balance at January 1                                 |  | $                        | 442 |   |      | $ | 301 |      |  | $ | 198 | 
|Additional valuation allowance recognized (reversed) |  |                          | (60 | ) |      |   | 141 |      |  |   | 103 | 
|                                                     |  |                          |     |   |      |   |     |      | 
|Balance at December 31                               |  | $                        | 382 |   |      | $ | 442 |      |  | $ | 301 | 
|                                                     |  |                          |     |   |      |   |     |      | 



65



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|         |                       
|-------- | ----------------------
|Note 7  | Premises and Equipment



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | December 31, |        
|                                  |  |              |        
|                                  |  | 2004         |         |   | 2003 |  
|                                  |  |              |         |   |      |  
|Land                              |  | $            | 7,419   |   |      | $ | 5,962   |  
|Buildings                         |  |              | 32,265  |   |      |   | 28,171  |  
|Leasehold improvements            |  |              | 3,247   |   |      |   | 3,135   |  
|Equipment, furniture and fixtures |  |              | 42,595  |   |      |   | 39,508  |  
|                                  |  |              |         |   |      |  
|                                  |  |              | 85,526  |   |      |   | 76,776  |  
|Less: Accumulated depreciation    |  |              | (41,868 | ) |      |   | (38,056 | )
|                                  |  |              |         |   |      |  
|                                  |  | $            | 43,658  |   |      | $ | 38,720  |  
|                                  |  |              |         |   |      |  



|                                     |  |   |        | 
|------------------------------------ |  | - | ------ | 
|Due in 2005                          |  | $ | 1,586  | 
|Due in 2006                          |  |   | 1,417  | 
|Due in 2007                          |  |   | 1,264  | 
|Due in 2008                          |  |   | 1,142  | 
|Due in 2009                          |  |   | 888    | 
|Thereafter                           |  |   | 6,530  | 
|                                     |  |   |       
|Total minimum future rental payments |  | $ | 12,827 | 
|                                     |  |   |       





|         |       
|-------- | ------
|Note 8  | Leases



|                                 |  |              |         |   |      |   |         |  
|-------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                 |  | December 31, |        
|                                 |  |              |        
|                                 |  | 2004         |         |   | 2003 |  
|                                 |  |              |         |   |      |  
|Minimum lease payment receivable |  | $            | 144,318 |   |      | $ | 122,438 |  
|Residual values                  |  |              | 118     |   |      |   |        |  
|Lease origination costs          |  |              | 721     |   |      |   | 669     |  
|Unearned income                  |  |              | (15,586 | ) |      |   | (13,822 | )
|                                 |  |              |         |   |      |  
|                                 |  | $            | 129,571 |   |      | $ | 109,285 |  
|                                 |  |              |         |   |      |  



66



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                |  |              |         |   |      |   |         |  
|------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                |  | December 31, |        
|                                |  |              |        
|                                |  | 2004         |         |   | 2003 |  
|                                |  |              |         |   |      |  
|Automobiles                     |  | $            | 29,145  |   |      | $ | 30,364  |  
|Heavy truck, trailers and buses |  |              | 20,878  |   |      |   | 19,745  |  
|Trucks, light and medium duty   |  |              | 48,317  |   |      |   | 45,691  |  
|Other                           |  |              | 33,168  |   |      |   | 31,337  |  
|                                |  |              |         |   |      |  
|                                |  |              | 131,508 |   |      |   | 127,137 |  
|Less: Accumulated depreciation  |  |              | (73,033 | ) |      |   | (69,246 | )
|                                |  |              |         |   |      |  
|                                |  | $            | 58,475  |   |      | $ | 57,891  |  
|                                |  |              |         |   |      |  



|                             |  |         |         |  |           |   |        | 
|---------------------------- |  | ------- | ------- |  | --------- | - | ------ | 
|                             |  | Finance |         |  | Operating |  
|                             |  |         |         |  |           |  
|Due in 2005                  |  | $       | 54,901  |  |           | $ | 23,606 | 
|Due in 2006                  |  |         | 41,524  |  |           |   | 12,580 | 
|Due in 2007                  |  |         | 27,729  |  |           |   | 6,581  | 
|Due in 2008                  |  |         | 14,087  |  |           |   | 1,743  | 
|Due in 2009                  |  |         | 5,502   |  |           |   | 363    | 
|Thereafter                   |  |         | 575     |  |           |   |       | 
|                             |  |         |         |  |           |  
|Total minimum future rentals |  | $       | 144,318 |  |           | $ | 44,873 | 
|                             |  |         |         |  |           |  



|         |                               
|-------- | ------------------------------
|Note 9  | Goodwill and Intangible Assets



|                           |                                          |           |        |        |            |         |        |            |            |   |          |        |  |       |       |       |  |   |        |        |  
|-------------------------- | ---------------------------------------- | --------- | ------ | ------ | ---------- | ------- | ------ | ---------- | ---------- | - | -------- | ------ |  | ----- | ----- | ----- |  | - | ------ | ------ | -
|                           |                                          |           |        |        |            | Trust & |        |            | Insurances |   |          |       
|                           |                                          | Community |        |        | Commercial |         |        | Investment |            |   | Related  |        |  |      
|                           |                                          | Banking   |        |        | Finance    |         |        | Services   |            |   | Services |        |  | Total |      
|                           |                                          |           |        |        |            |         |        |            |            |   |          |        |  |       |      
|Balance, January 1, 2003   |                                          | $         | 1,140  |        |            | $       | 17,220 |            |            | $ |         |        |  | $     |      |       |  | $ | 18,360 |       
|                           | Goodwill acquired                        |           |        |       |            |         |        |           |            |   |          | 12,218 |  |       |       |      |  |   |        | 12,218 |  
|                           | Impairment losses                        |           |        |       |            |         |        |           |            |   |          |       |  |       |       |      |  |   |        |       |  
|                           | Amortization of branch purchase goodwill |           |        | (88    | )          |         |        |           |            |   |          |       |  |       |       |      |  |   |        | (88    | )
|                           |                                          |           |        |        |            |         |        |            |            |   |          |        |  |       |      
|Balance, December 31, 2003 |                                          |           | 1,052  |        |            |         | 17,220 |            |            |   | 12,218   |        |  |       |      |       |  |   | 30,490 |       
|                           | Goodwill acquired                        |           |        | 33,416 |            |         |        |           |            |   |          | 2,032  |  |       |       | 9,500 |  |   |        | 44,948 |  
|                           | Impairment losses                        |           |        |       |            |         |        |           |            |   |          |       |  |       |       |      |  |   |        |       |  
|                           | Amortization of branch purchase goodwill |           |        | (88    | )          |         |        |           |            |   |          |       |  |       |       |      |  |   |        | (88    | )
|                           |                                          |           |        |        |            |         |        |            |            |   |          |        |  |       |      
|Balance, December 31, 2004 |                                          | $         | 34,380 |        |            | $       | 17,220 |            |            | $ | 14,250   |        |  | $     | 9,500 |       |  | $ | 75,350 |       
|                           |                                          |           |        |        |            |         |        |            |            |   |          |        |  |       |      

67



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                    |                          |                   |        |        |                   |   |        |          |   |   |              |       |  |   |        |      |  
|----------------------------------- | ------------------------ | ----------------- | ------ | ------ | ----------------- | - | ------ | -------- | - | - | ------------ | ----- |  | - | ------ | ---- | -
|                                    |                          | December 31, 2004 |        |        | December 31, 2003 |  
|                                    |                          |                   |        |        |                   |  
|                                    |                          | Gross             |        |        |                   |   | Gross  |          |   |  
|                                    |                          | Carrying          |        |        | Accumulated       |   |        | Carrying |   |   | Accumulated  |      
|                                    |                          | Amount            |        |        | Amortization      |   |        | Amount   |   |   | Amortization |      
|                                    |                          |                   |        |        |                   |   |        |          |   |   |              |      
|Finite-lived assets:                |                          |                   |        |        |                   |   |        |          |   |   |              |       |  |   |        |     
|                                    | Core deposit intangible  |                   | $      | 4,785  |                   |   | $      | (1,003   | ) |   | $            | 981   |  |   | $      | (917 | )
|                                    | Customer list            |                   |        | 10,013 |                   |   |        | (1,247   | ) |   |              | 3,700 |  |   |        | (55  | )
|                                    | Trademark                |                   |        | 480    |                   |   |        | (80      | ) |   |              | 480   |  |   |        | (11  | )
|                                    | Covenants not to compete |                   |        | 1,180  |                   |   |        | (196     | ) |   |              | 930   |  |   |        | (25  | )
|                                    | Vendor agreements        |                   |        | 140    |                   |   |        | (41      | ) |   |              |      |  |   |        |     |  
|                                    |                          |                   |        |        |                   |   |        |          |   |   |              |      
|                                    |                          |                   | 16,598 |        |                   |   | (2,567 | )        |   |   | 6,091        |       |  |   | (1,008 | )   
|                                    |                          |                   |        |        |                   |   |        |          |   |   |              |      
|Non-finite lived intangible assets: |                          |                   |        |        |                   |   |        |          |   |   |              |       |  |   |        |     
|                                    | Trademark                |                   |        | 237    |                   |   |        |         |   |   |              |      |  |   |        |     |  
|                                    |                          | $                 | 16,835 |        |                   | $ | (2,567 | )        |   | $ | 6,091        |       |  | $ | (1,008 | )   
|                                    |                          |                   |        |        |                   |   |        |          |   |   |              |      





|          |         
|--------- | --------
|Note 10  | Deposits





|            |  |   |         | 
|----------- |  | - | ------- | 
|Due in 2005 |  | $ | 304,263 | 
|Due in 2006 |  |   | 252,243 | 
|Due in 2007 |  |   | 113,081 | 
|Due in 2008 |  |   | 99,491  | 
|Due in 2009 |  |   | 13,208  | 
|Thereafter  |  |   | 3,521   | 
|            |  |   |        
|Total       |  | $ | 785,807 | 
|            |  |   |        



|          |                      
|--------- | ---------------------
|Note 11  | Short-Term Borrowings



|                                                          |  |              |        |  |      |  |      |        |  |   |        |  |  |  |      |  
|--------------------------------------------------------- |  | ------------ | ------ |  | ---- |  | ---- | ------ |  | - | ------ |  |  |  | ---- | -
|                                                          |  | December 31, |       
|                                                          |  |              |       
|                                                          |  | 2004         |        |  | 2003 | 
|                                                          |  |              |        |  |      | 
|                                                          |  | Amount       |        |  | Rate |  |      | Amount |  |   | Rate   | 
|                                                          |  |              |        |  |      |  |      |        |  |   |        | 
|Federal funds purchased                                   |  | $            | 42,500 |  |      |  | 2.49 | %      |  | $ |       |  |  |  |     | %
|Securities sold under repurchase agreements               |  |              | 21,159 |  |      |  | 1.26 | %      |  |   | 7,794  |  |  |  | 0.73 | %
|Interest-bearing demand notes issued to the U.S. Treasury |  |              | 5,109  |  |      |  | 1.87 | %      |  |   | 6,084  |  |  |  | 0.73 | %
|Lines of credit                                           |  |              | 30,000 |  |      |  | 3.21 | %      |  |   | 30,000 |  |  |  | 2.14 | %
|                                                          |  |              |        |  |      |  |      |        |  |   |        | 
|Total                                                     |  | $            | 98,768 |  |      |  |      |        |  | $ | 43,878 |  |  |  |      |  
|                                                          |  |              |        |  |      |  |      |        |  |   |        | 

68



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Note 12  Long-Term Debt




|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           |              |         |         |      |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           | December 31, |        
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           |              |        
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           | 2004         |         |         | 2003 |  
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           |              |         |         |      |  
|FHLB advances:                                                                                                                                                                                                                                                                              |                                                                                                                                                                           |              |         |         |      |   |         |        
|                                                                                                                                                                                                                                                                                            | Redeemable advances, 3.13%-6.99%, due 2007-2014, with a weighted
    average interest rate of 4.48% and 5.50% at December 31,
    2004 and 2003                           |              | $       | 73,725  |      |   | $       | 60,000  | 
|                                                                                                                                                                                                                                                                                            | Nonredeemable fixed rate advances, 1.74%-5.06%, due 2005-2009,
    with a weighted average interest rate of 3.06% and 3.12% at
    December 31, 2004 and 2003             |              |         | 111,495 |      |   |         | 106,288 | 
|                                                                                                                                                                                                                                                                                            | Nonredeemable fixed rate, amortizing advances, 3.00%-4.33%, due
    2007-2011, with a weighted average interest rate of 4.27% and
    4.29% at December 31, 2004 and 2003 |              |         | 6,939   |      |   |         | 9,936   | 
|Notes payable to two financial institutions, generally with an
    original maturity of 36 months. Interest rates on the notes
    range from 3.84% to 5.23%, with a weighted average interest rate
    of 5.08% and 4.50% at December 31, 2004 and 2003. The notes
    mature through 2007 |                                                                                                                                                                           |              | 20,772  |         |      |   | 12,869  |        
|Note payable with an original term of 36 months due in 2007
    with equal monthly principal payments and a variable rate of
    interest based on the 30 day LIBOR rate. The rate resets
    monthly and was 2.88% at December 31, 2004                                                    |                                                                                                                                                                           |              | 9,444   |         |      |   |        |        
|Notes payable with an original term of 24 months due in
    2006 with balloon principal payments at maturity and a variable
    rate of interest based on the 30-day LIBOR rate. The rate resets
    monthly and was 3.54% at December 31, 2004                                             |                                                                                                                                                                           |              | 10,000  |         |      |   |        |        
|Note payable due in 2008 with a variable note of interest based
    on the 30 day LIBOR rate. The rate resets monthly and was
    4.71% at December 31, 2004                                                                                                                                |                                                                                                                                                                           |              | 327     |         |      |   |        |        
|Note payable with an original term of 36 months due in 2005
    with even quarterly principal payments and a fixed rate of
    interest of 5.25%                                                                                                                                            |                                                                                                                                                                           |              | 337     |         |      |   | 1,669   |        
|Note payable with an original term of 24 months due in 2004
    and a variable rate of interest based on the 30 day LIBOR
    rate. The rate reset monthly                                                                                                                                  |                                                                                                                                                                           |              |        |         |      |   | 5,000   |        
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           |              |         |         |      |  
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           | $            | 233,039 |         |      | $ | 195,762 |        
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                           |              |         |         |      |  

69



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|            |  |   |         | 
|----------- |  | - | ------- | 
|Due in 2005 |  | $ | 53,377  | 
|Due in 2006 |  |   | 54,695  | 
|Due in 2007 |  |   | 45,284  | 
|Due in 2008 |  |   | 20,281  | 
|Due in 2009 |  |   | 4,110   | 
|Thereafter  |  |   | 55,292  | 
|            |  |   |        
|Total       |  | $ | 233,039 | 
|            |  |   |        



Note 13  Junior Subordinated Debentures Owed
to Unconsolidated Subsidiary Trusts and Corporation-Obligated
Mandatorily Redeemable Capital Securities of Subsidiary Trusts
Holding Solely Debentures of the Corporation






|                                                                                                                                                                                                                                                                            |  |              |        |  |      |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                                                                                                                                                                                                                                                                            |  | December 31, |       
|                                                                                                                                                                                                                                                                            |  |              |       
|                                                                                                                                                                                                                                                                            |  | 2004         |        |  | 2003 |  
|                                                                                                                                                                                                                                                                            |  |              |        |  |      |  
|Debenture issued to Sterling Financial Statutory Trust I,
    first redeemable, in whole or part, by Sterling on
    March 26, 2007. Interest payable quarterly at a floating
    rate of LIBOR plus 360 basis points (6.15% at
    December 31, 2004), and matures in 2032 |  | $            | 20,619 |  |      | $ | 20,619 | 
|Debenture issued to Sterling Financial Statutory Trust II,
    first redeemable, in whole or part, by Sterling on June 26,
    2008. Interest payable quarterly at a fixed rate of 5.55%, and
    matures in 2033                                                           |  |              | 36,083 |  |      |   | 36,083 | 
|Debenture issued to Sterling Financial Statutory Trust III,
    first redeemable, in whole or part, by Sterling on
    December 2, 2009. Interest payable quarterly at a fixed
    rate of 6.00%, and matures in 2034                                                       |  |              | 15,464 |  |      |   |       | 
|                                                                                                                                                                                                                                                                            |  |              |        |  |      |  
|                                                                                                                                                                                                                                                                            |  | $            | 72,166 |  |      | $ | 56,702 | 
|                                                                                                                                                                                                                                                                            |  |              |        |  |      |  

70



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|          |             
|--------- | ------------
|Note 14  | Income Taxes



|          |         |                          |        |        |      |   |        |       |  |   |       |        |  
|--------- | ------- | ------------------------ | ------ | ------ | ---- | - | ------ | ----- |  | - | ----- | ------ | -
|          |         | Years Ended December 31, |       
|          |         |                          |       
|          |         | 2004                     |        |        | 2003 |   |        | 2002  | 
|          |         |                          |        |        |      |   |        |       | 
|Current:  |         |                          |        |        |      |   |        |       |  |   |       |       
|          | Federal |                          | $      | 11,063 |      |   | $      | 8,813 |  |   | $     | 5,151  |  
|          | State   |                          |        | 552    |      |   |        | 615   |  |   |       | 931    |  
|          |         |                          |        |        |      |   |        |       | 
|          |         |                          | 11,615 |        |      |   | 9,428  |       |  |   | 6,082 |       
|          |         |                          |        |        |      |   |        |       | 
|Deferred: |         |                          |        |        |      |   |        |       |  |   |       |       
|          | Federal |                          |        | 212    |      |   |        | 840   |  |   |       | 2,046  |  
|          | State   |                          |        | 33     |      |   |        | 47    |  |   |       | (1,110 | )
|          |         |                          |        |        |      |   |        |       | 
|          |         |                          | 245    |        |      |   | 887    |       |  |   | 936   |       
|          |         |                          |        |        |      |   |        |       | 
|Total     |         | $                        | 11,860 |        |      | $ | 10,315 |       |  | $ | 7,018 |       
|          |         |                          |        |        |      |   |        |       | 





|                                    |                                            |                          |      |      |      |  |      |       |    |  |      |       |   
|----------------------------------- | ------------------------------------------ | ------------------------ | ---- | ---- | ---- |  | ---- | ----- | -- |  | ---- | ----- | --
|                                    |                                            | Years Ended December 31, |     
|                                    |                                            |                          |     
|                                    |                                            | 2004                     |      |      | 2003 |  |      | 2002  |   
|                                    |                                            |                          |      |      |      |  |      |       |   
|Pretax income                       |                                            |                          | 35.0 | %    |      |  | 35.0 | %     |    |  | 35.0 | %    
|Increase (decrease) resulting from: |                                            |                          |      |      |      |  |      |       |    |  |      |      
|                                    | Tax-exempt interest income                 |                          |      | (9.7 | )%   |  |      | (10.7 | )% |  |      | (12.2 | )%
|                                    | Disallowed interest                        |                          |      | 0.7  | %    |  |      | 0.8   | %  |  |      | 1.2   | % 
|                                    | Dividends paid deduction                   |                          |      | (0.5 | )%   |  |      |      |    |  |      |      |   
|                                    | Low-income housing credits                 |                          |      | (0.2 | )%   |  |      | (0.3  | )% |  |      | (0.4  | )%
|                                    | State tax (benefit), net of federal impact |                          |      | 0.8  | %    |  |      | 1.1   | %  |  |      | (1.4  | )%
|                                    | Other, net                                 |                          |      | 0.1  | %    |  |      | 0.3   | %  |  |      |      |   
|                                    |                                            |                          |      |      |      |  |      |       |   
|Effective tax rates                 |                                            |                          | 26.2 | %    |      |  | 26.2 | %     |    |  | 22.2 | %    
|                                    |                                            |                          |      |      |      |  |      |       |   



71



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                           |                                        |              |         |        |      |   |         |        |  
|-------------------------- | -------------------------------------- | ------------ | ------- | ------ | ---- | - | ------- | ------ | -
|                           |                                        | December 31, |        
|                           |                                        |              |        
|                           |                                        | 2004         |         |        | 2003 |  
|                           |                                        |              |         |        |      |  
|Deferred tax assets:       |                                        |              |         |        |      |   |         |       
|                           | Allowance for loan losses              |              | $       | 6,772  |      |   | $       | 5,198  |  
|                           | Employee benefit plans                 |              |         | 1,520  |      |   |         | 649    |  
|                           | Accrued directors fees                 |              |         | 627    |      |   |         | 569    |  
|                           | State net operating loss carryforwards |              |         | 630    |      |   |         | 522    |  
|                           | Restructuring charge reserve           |              |         | 499    |      |   |         | 221    |  
|                           | Securities impairment reserve          |              |         | 135    |      |   |         | 305    |  
|                           | Others                                 |              |         | 632    |      |   |         | 183    |  
|                           |                                        |              |         |        |      |  
|                           |                                        |              | 10,815  |        |      |   | 7,647   |       
|                           | Valuation allowance                    |              |         | (630   | )    |   |         | (465   | )
|                           |                                        |              |         |        |      |  
|                           |                                        |              | 10,185  |        |      |   | 7,182   |       
|                           |                                        |              |         |        |      |  
|Deferred tax liabilities:  |                                        |              |         |        |      |   |         |       
|                           | Leasing                                |              |         | 13,803 |      |   |         | 11,607 |  
|                           | Premises and equipment                 |              |         | 921    |      |   |         | 737    |  
|                           | Deferred loan fees                     |              |         | 307    |      |   |         | 353    |  
|                           | Securities accretion                   |              |         | 147    |      |   |         | 188    |  
|                           | Accumulated other comprehensive income |              |         | 5,748  |      |   |         | 7,440  |  
|                           | Purchase accounting amortization       |              |         | 2,749  |      |   |         | 1,757  |  
|                           | Other                                  |              |         | 157    |      |   |         | 222    |  
|                           |                                        |              |         |        |      |  
|                           |                                        |              | 23,832  |        |      |   | 22,304  |       
|                           |                                        |              |         |        |      |  
|Net deferred tax liability |                                        | $            | (13,647 | )      |      | $ | (15,122 | )     
|                           |                                        |              |         |        |      |  



Note 15  Commitments and Contingent
Liabilities


Credit-Related Financial Instruments




72



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                              |                                    |              |        |         |      |  |        |         | 
|----------------------------- | ---------------------------------- | ------------ | ------ | ------- | ---- |  | ------ | ------- | 
|                              |                                    | December 31, |       
|                              |                                    |              |       
|                              |                                    | 2004         |        |         | 2003 | 
|                              |                                    |              |        |         |      | 
|Commitments to extend credit: |                                    |              |        |         |      |  |        |        
|                              | Unused home equity lines of credit |              | $      | 79,299  |      |  | $      | 59,550  | 
|                              | Other commitments to extend credit |              |        | 349,488 |      |  |        | 264,329 | 
|Standby letters of credit     |                                    |              | 88,467 |         |      |  | 67,557 |        





Derivative Financial Instruments




Asset liability management




|                               |                              |                   |   |        |                   |  |   |          |   |  |          |        |  |  |   |        |  
|------------------------------ | ---------------------------- | ----------------- | - | ------ | ----------------- |  | - | -------- | - |  | -------- | ------ |  |  | - | ------ | -
|                               |                              | December 31, 2004 |   |        | December 31, 2003 | 
|                               |                              |                   |   |        |                   | 
|                               |                              | Notional          |   |        | Carrying          |  |   | Notional |   |  | Carrying |       
|                               |                              | Amount            |   |        | Value             |  |   | Amount   |   |  | Value    |       
|                               |                              |                   |   |        |                   |  |   |          |   |  |          |       
|Interest rate swap agreements: |                              |                   |   |        |                   |  |   |          |   |  |          |        |  |  |   |       
|                               | Pay fixed/receiving floating |                   | $ | 25,000 |                   |  | $ | (564     | ) |  | $        | 25,000 |  |  | $ | (1,480 | )
|                               | Pay floating/received fixed  |                   |   | 25,000 |                   |  |   | (378     | ) |  |          |       |  |  |   |       |  



73



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                 |  |              |     |  |      |   |     |      |  |   |     | 
|-------------------------------- |  | ------------ | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                                 |  | Years Ended  |    
|                                 |  | December 31, |    
|                                 |  |              |    
|                                 |  | 2004         |     |  | 2003 |   |     | 2002 | 
|                                 |  |              |     |  |      |   |     |      | 
|Interest income-commercial loans |  | $            | 338 |  |      | $ |    |      |  | $ |    | 
|Interest expense-borrowed funds  |  |              | 870 |  |      |   | 918 |      |  |   | 543 | 





Customer Related




|                               |                              |                   |       |        |                   |  |     |          |   |  |          |       |  |  |     |     |  
|------------------------------ | ---------------------------- | ----------------- | ----- | ------ | ----------------- |  | --- | -------- | - |  | -------- | ----- |  |  | --- | --- | -
|                               |                              | December 31, 2004 |       |        | December 31, 2003 | 
|                               |                              |                   |       |        |                   | 
|                               |                              | Notional          |       |        | Carrying          |  |     | Notional |   |  | Carrying |      
|                               |                              | Amount            |       |        | Value             |  |     | Amount   |   |  | Value    |      
|                               |                              |                   |       |        |                   |  |     |          |   |  |          |      
|Interest rate swap agreements: |                              |                   |       |        |                   |  |     |          |   |  |          |       |  |  |     |    
|                               | Pay fixed/receiving floating |                   | $     | 11,673 |                   |  |     | (72      | ) |  | $        | 7,000 |  |  |     | (33 | )
|                               | Pay floating/received fixed  |                   |       | 11,673 |                   |  |     | 72       |   |  |          | 7,000 |  |  |     | 33  |  
|Interest rate caps written     |                              |                   | 9,931 |        |                   |  | (12 | )        |   |  | 6,000    |       |  |  | (27 | )  
|Interest rate caps purchased   |                              |                   | 9,931 |        |                   |  | 12  |          |   |  | 6,000    |       |  |  | 27  |    





74



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




Note 16  Stockholders Equity and
Regulatory Matters














75



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                       |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |      |  
|-------------------------------------- | --------------------------------- | ------ | - | ------- | ------- | ----------------- |  | ---------- | - | ---------------- | ----- | ------- |  | ------ |  | --- | ----- |  | - | ------- |  |  |  | ---- | -
|                                       |                                   |        |   |         |         |                   |  |            |   | Minimum To Be    |      
|                                       |                                   |        |   |         |         |                   |  |            |   | Well Capitalized |      
|                                       |                                   |        |   |         |         |                   |  |            |   | Under Prompt     |      
|                                       |                                   |        |   |         |         | Corrective Action | 
|                                       |                                   | Actual |   |         | Minimum |                   |  | Provisions |  
|                                       |                                   |        |   |         |         |                   |  |            |  
|                                       |                                   | Amount |   |         | Ratio   |                   |  | Amount     |   |                  | Ratio |         |  | Amount |  |     | Ratio | 
|                                       |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       | 
|December 31, 2004                      |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|Total capital to risk weighted assets  |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|                                       | Sterling (consolidated)           |        | $ | 277,271 |         |                   |  | 12.2       | % |                  | $     | 181,418 |  |        |  | 8.0 | %     |  | $ | n/a     |  |  |  | n/a  |  
|                                       | Bank of Lancaster County, N.A.    |        |   | 173,363 |         |                   |  | 11.6       | % |                  |       | 119,285 |  |        |  | 8.0 | %     |  |   | 149,107 |  |  |  | 10.0 | %
|                                       | Bank of Hanover and Trust Company |        |   | 59,097  |         |                   |  | 12.4       | % |                  |       | 38,165  |  |        |  | 8.0 | %     |  |   | 47,706  |  |  |  | 10.0 | %
|                                       | Pennsylvania State Bank           |        |   | 18,188  |         |                   |  | 10.8       | % |                  |       | 13,471  |  |        |  | 8.0 | %     |  |   | 16,839  |  |  |  | 10.0 | %
|                                       | First National Bank of North East |        |   | 10,388  |         |                   |  | 13.8       | % |                  |       | 6,035   |  |        |  | 8.0 | %     |  |   | 7,543   |  |  |  | 10.0 | %
|Tier 1 capital to risk weighted assets |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|                                       | Sterling (consolidated)           |        |   | 254,787 |         |                   |  | 11.2       | % |                  |       | 90,709  |  |        |  | 4.0 | %     |  |   | n/a     |  |  |  | n/a  |  
|                                       | Bank of Lancaster County, N.A.    |        |   | 158,391 |         |                   |  | 10.6       | % |                  |       | 59,643  |  |        |  | 4.0 | %     |  |   | 89,464  |  |  |  | 6.0  | %
|                                       | Bank of Hanover and Trust Company |        |   | 54,919  |         |                   |  | 11.5       | % |                  |       | 19,082  |  |        |  | 4.0 | %     |  |   | 28,623  |  |  |  | 6.0  | %
|                                       | Pennsylvania State Bank           |        |   | 16,294  |         |                   |  | 9.7        | % |                  |       | 6,735   |  |        |  | 4.0 | %     |  |   | 10,103  |  |  |  | 6.0  | %
|                                       | First National Bank of North East |        |   | 9,741   |         |                   |  | 12.9       | % |                  |       | 3,017   |  |        |  | 4.0 | %     |  |   | 4,526   |  |  |  | 6.0  | %
|Tier 1 capital to average assets       |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|                                       | Sterling (consolidated)           |        |   | 254,787 |         |                   |  | 10.0       | % |                  |       | 98,234  |  |        |  | 4.0 | %     |  |   | n/a     |  |  |  | n/a  |  
|                                       | Bank of Lancaster County, N.A.    |        |   | 158,391 |         |                   |  | 9.7        | % |                  |       | 65,026  |  |        |  | 4.0 | %     |  |   | 81,282  |  |  |  | 5.0  | %
|                                       | Bank of Hanover and Trust Company |        |   | 54,919  |         |                   |  | 8.0        | % |                  |       | 27,350  |  |        |  | 4.0 | %     |  |   | 34,188  |  |  |  | 5.0  | %
|                                       | Pennsylvania State Bank           |        |   | 16,294  |         |                   |  | 8.5        | % |                  |       | 7,646   |  |        |  | 4.0 | %     |  |   | 9,558   |  |  |  | 5.0  | %
|                                       | First National Bank of North East |        |   | 9,741   |         |                   |  | 7.8        | % |                  |       | 4,995   |  |        |  | 4.0 | %     |  |   | 6,243   |  |  |  | 5.0  | %
|December 31, 2003                      |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|Total capital to risk weighted assets  |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|                                       | Sterling (consolidated)           |        | $ | 244,621 |         |                   |  | 13.4       | % |                  | $     | 145,952 |  |        |  | 8.0 | %     |  | $ | n/a     |  |  |  | n/a  |  
|                                       | Bank of Lancaster County, N.A.    |        |   | 156,863 |         |                   |  | 12.3       | % |                  |       | 101,630 |  |        |  | 8.0 | %     |  |   | 127,037 |  |  |  | 10.0 | %
|                                       | Bank of Hanover and Trust Company |        |   | 55,875  |         |                   |  | 12.6       | % |                  |       | 35,468  |  |        |  | 8.0 | %     |  |   | 44,335  |  |  |  | 10.0 | %
|                                       | First National Bank of North East |        |   | 10,124  |         |                   |  | 13.5       | % |                  |       | 5,986   |  |        |  | 8.0 | %     |  |   | 7,482   |  |  |  | 10.0 | %
|Tier 1 capital to risk weighted assets |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|                                       | Sterling (consolidated)           |        |   | 227,106 |         |                   |  | 12.4       | % |                  |       | 72,976  |  |        |  | 4.0 | %     |  |   | n/a     |  |  |  | n/a  |  
|                                       | Bank of Lancaster County, N.A.    |        |   | 144,523 |         |                   |  | 11.4       | % |                  |       | 50,815  |  |        |  | 4.0 | %     |  |   | 76,222  |  |  |  | 6.0  | %
|                                       | Bank of Hanover and Trust Company |        |   | 52,538  |         |                   |  | 11.9       | % |                  |       | 17,734  |  |        |  | 4.0 | %     |  |   | 26,601  |  |  |  | 6.0  | %
|                                       | First National Bank of North East |        |   | 9,528   |         |                   |  | 12.7       | % |                  |       | 2,993   |  |        |  | 4.0 | %     |  |   | 4,489   |  |  |  | 6.0  | %
|Tier 1 capital to average assets       |                                   |        |   |         |         |                   |  |            |   |                  |       |         |  |        |  |     |       |  |   |         |  |  |  |     
|                                       | Sterling (consolidated)           |        |   | 227,106 |         |                   |  | 10.0       | % |                  |       | 90,546  |  |        |  | 4.0 | %     |  |   | n/a     |  |  |  | n/a  |  
|                                       | Bank of Lancaster County, N.A.    |        |   | 144,523 |         |                   |  | 9.8        | % |                  |       | 59,281  |  |        |  | 4.0 | %     |  |   | 74,101  |  |  |  | 5.0  | %
|                                       | Bank of Hanover and Trust Company |        |   | 52,538  |         |                   |  | 7.9        | % |                  |       | 26,672  |  |        |  | 4.0 | %     |  |   | 33,340  |  |  |  | 5.0  | %
|                                       | First National Bank of North East |        |   | 9,528   |         |                   |  | 7.9        | % |                  |       | 4,833   |  |        |  | 4.0 | %     |  |   | 6,041   |  |  |  | 5.0  | %

76



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Note 17  Employee Benefit Plans






|                                               |  |                       |        |   |      |   |        |  
|---------------------------------------------- |  | --------------------- | ------ | - | ---- | - | ------ | -
|                                               |  | Other Post-Retirement |       
|                                               |  | Benefits              |       
|                                               |  |                       |       
|                                               |  | 2004                  |        |   | 2003 |  
|                                               |  |                       |        |   |      |  
|Change in benefit obligation                   |  |                       |        |   |      |   |        |  
|Benefit obligation at beginning of year        |  | $                     | 1,977  |   |      | $ | 1,561  |  
|Service cost                                   |  |                       | 94     |   |      |   | 85     |  
|Interest cost                                  |  |                       | 114    |   |      |   | 94     |  
|Benefit payments                               |  |                       | (90    | ) |      |   | (65    | )
|Change in discount rate and plan amendments    |  |                       | 398    |   |      |   | 302    |  
|                                               |  |                       |        |   |      |  
|Benefit obligation at end of year              |  |                       | 2,493  |   |      |   | 1,977  |  
|                                               |  |                       |        |   |      |  
|Change in plan assets                          |  |                       |        |   |      |   |        |  
|Fair value of plan assets at beginning of year |  |                       |       |   |      |   |       |  
|Return on plan assets                          |  |                       |       |   |      |   |       |  
|Employer contributions                         |  |                       | 90     |   |      |   | 65     |  
|Benefit payments                               |  |                       | (90    | ) |      |   | (65    | )
|                                               |  |                       |        |   |      |  
|Fair value of plan assets at end of year       |  |                       |       |   |      |   |       |  
|                                               |  |                       |        |   |      |  
|Reconciliation of funded status                |  |                       |        |   |      |   |        |  
|Funded status of plans                         |  |                       | (2,493 | ) |      |   | (1,977 | )
|Unrecognized net transition obligation         |  |                       | 73     |   |      |   | 83     |  
|Unrecognized prior service costs               |  |                       | 129    |   |      |   | 143    |  
|Unrecognized net (gains) losses                |  |                       | 583    |   |      |   | 184    |  
|                                               |  |                       |        |   |      |  
|Accrued benefit expense                        |  | $                     | (1,708 | ) |      | $ | (1,567 | )
|                                               |  |                       |        |   |      |  





|                                                |                               |              |     |     |      |   |    |      |  |   |     |     | 
|----------------------------------------------- | ----------------------------- | ------------ | --- | --- | ---- | - | -- | ---- |  | - | --- | --- | 
|                                                |                               | Years Ended  |    
|                                                |                               | December 31, |    
|                                                |                               |              |    
|                                                |                               | 2004         |     |     | 2003 |   |    | 2002 | 
|                                                |                               |              |     |     |      |   |    |      | 
|Retirement benefit costs                        |                               |              |     |     |      |   |    |      |  |   |     |    
|Service cost                                    |                               | $            | 94  |     |      | $ | 85 |      |  | $ | 66  |    
|Interest cost                                   |                               |              | 114 |     |      |   | 94 |      |  |   | 80  |    
|Amortization of transition losses               |                               |              | 9   |     |      |   | 8  |      |  |   | 9   |    
|Amortization of unrecognized prior service cost |                               |              | 14  |     |      |   | 14 |      |  |   | 14  |    
|Actuarial losses                                |                               |              |    |     |      |   |   |      |  |   | (20 | )  
|                                                |                               |              |     |     |      |   |    |      | 
|                                                | Net retirement benefits costs |              | $   | 231 |      |   | $  | 201  |  |   | $   | 149 | 
|                                                |                               |              |     |     |      |   |    |      | 

77



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                                        |  |          |     |  |          |   |      |  
|------------------------------------------------------- |  | -------- | --- |  | -------- | - | ---- | -
|                                                        |  | 1% Point |     |  | 1% Point |  
|                                                        |  | Increase |     |  | Decrease |  
|                                                        |  |          |     |  |          |  
|Effect on total of service and interest cost components |  | $        | 26  |  |          | $ | (23  | )
|Effect on postretirement benefit obligation             |  |          | 230 |  |          |   | (202 | )



Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug Improvement Modernization Act of
2003










78



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits.




Note 18  Stock Compensation




Accounting for Stock Issued to
Employees


79



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Accounting for
Stock-Based Compensation


|                            |                                                                                                                                              |                          |   |        |      |  |   |        |   |  |   |        |  
|--------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                            |                                                                                                                                              | Years Ended December 31, |  
|                            |                                                                                                                                              |                          |  
|                            |                                                                                                                                              | 2004                     |   |        | 2003 |  |   | 2002   |  
|                            |                                                                                                                                              |                          |   |        |      |  |   |        |  
|Net income:                 |                                                                                                                                              |                          |   |        |      |  |   |        |   |  |   |       
|                            | As reported                                                                                                                                  |                          | $ | 33,329 |      |  | $ | 29,059 |   |  | $ | 24,745 |  
|                            | Total stock-based employee compensation expense determined under
    fair value based methods for all awards, net of related tax
    effects |                          |   | (1,561 | )    |  |   | (1,006 | ) |  |   | (917   | )
|                            |                                                                                                                                              |                          |   |        |      |  |   |        |  
|                            | Proforma                                                                                                                                     |                          | $ | 31,768 |      |  | $ | 28,053 |   |  | $ | 23,828 |  
|                            |                                                                                                                                              |                          |   |        |      |  |   |        |  
|Basic earnings per share:   |                                                                                                                                              |                          |   |        |      |  |   |        |   |  |   |       
|                            | As reported                                                                                                                                  |                          | $ | 1.53   |      |  | $ | 1.37   |   |  | $ | 1.19   |  
|                            | Proforma                                                                                                                                     |                          |   | 1.46   |      |  |   | 1.32   |   |  |   | 1.14   |  
|Diluted earnings per share: |                                                                                                                                              |                          |   |        |      |  |   |        |   |  |   |       
|                            | As reported                                                                                                                                  |                          | $ | 1.51   |      |  | $ | 1.35   |   |  | $ | 1.18   |  
|                            | Proforma                                                                                                                                     |                          |   | 1.44   |      |  |   | 1.31   |   |  |   | 1.13   |  



|                         |  |              |      |   |      |  |      |      |  |  |      |  
|------------------------ |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                         |  | Years Ended  |     
|                         |  | December 31, |     
|                         |  |              |     
|                         |  | 2004         |      |   | 2003 |  |      | 2002 | 
|                         |  |              |      |   |      |  |      |      | 
|Dividend yield           |  |              | 2.70 | % |      |  | 3.04 | %    |  |  | 3.40 | %
|Risk-free interest rate  |  |              | 3.53 | % |      |  | 3.70 | %    |  |  | 4.90 | %
|Expected life (in years) |  |              | 7    |   |      |  | 7    |      |  |  | 7    |  
|Expected volatility      |  |              | 39.2 | % |      |  | 41.4 | %    |  |  | 45.3 | %

Share-Based Payment Accounting for
Stock Issued to Employees


80



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                                                             |                                |        |           |          |       |   |       |        |          |  |         |          |   |          |       |       |       |  |         |          |   |   |       |       | 
|------------------------------------------------------------ | ------------------------------ | ------ | --------- | -------- | ----- | - | ----- | ------ | -------- |  | ------- | -------- | - | -------- | ----- | ----- | ----- |  | ------- | -------- | - | - | ----- | ----- | 
|                                                             |                                | 2004   |           |          | 2003  |   |       | 2002   |         
|                                                             |                                |        |           |          |       |   |       |        |         
|                                                             |                                |        |           | Weighted |       |   |       |        | Weighted |  |         |          |   | Weighted |      
|                                                             |                                |        |           | Average  |       |   |       |        | Average  |  |         |          |   | Average  |      
|                                                             |                                |        |           | Exercise |       |   |       |        | Exercise |  |         |          |   | Exercise |      
|                                                             |                                | Shares |           |          | Price |   |       | Shares |          |  | Price   |          |   | Shares   |       |       | Price | 
|                                                             |                                |        |           |          |       |   |       |        |          |  |         |          |   |          |       |       |       | 
|Outstanding at January 1                                     |                                |        | 979,721   |          |       | $ | 15.94 |        |          |  | 811,476 |          |   | $        | 14.80 |       |       |  | 695,906 |          |   | $ | 14.13 |      
|                                                             | Granted                        |        |           | 262,814  |       |   |       | 23.72  |          |  |         | 304,156  |   |          |       | 17.95 |       |  |         | 230,000  |   |   |       | 14.95 | 
|                                                             | Options assumed in acquisition |        |           | 154,917  |       |   |       | 12.06  |          |  |         |         |   |          |       |      |       |  |         |         |   |   |       |      | 
|                                                             | Exercised                      |        |           | (155,927 | )     |   |       | 13.51  |          |  |         | (119,536 | ) |          |       | 13.13 |       |  |         | (109,430 | ) |   |       | 10.93 | 
|                                                             | Forfeited                      |        |           | (8,094   | )     |   |       | 18.15  |          |  |         | (16,375  | ) |          |       | 17.49 |       |  |         | (5,000   | ) |   |       | 11.93 | 
|                                                             |                                |        |           |          |       |   |       |        |          |  |         |          |   |          |       |       |       | 
|Outstanding at December 31                                   |                                |        | 1,233,431 |          |       |   | 17.40 |        |          |  | 979,721 |          |   |          | 15.94 |       |       |  | 811,476 |          |   |   | 14.80 |      
|                                                             |                                |        |           |          |       |   |       |        |          |  |         |          |   |          |       |       |       | 
|Options exercisable at December 31                           |                                |        | 714,152   |          |       |   | 15.17 |        |          |  | 484,673 |          |   |          | 15.51 |       |       |  | 497,083 |          |   |   | 15.63 |      
|Weighted average fair value of options granted during period |                                |        |           |          |       | $ | 8.11  |        |          |  |         |          |   | $        | 6.20  |       |       |  |         |          |   | $ | 5.66  |      



|                |             |                     |             |          |                     |          |           |   |                 |  |  |             |     |  |           |  |         |                 |  |   |       |  |  |  |     | 
|--------------- | ----------- | ------------------- | ----------- | -------- | ------------------- | -------- | --------- | - | --------------- |  |  | ----------- | --- |  | --------- |  | ------- | --------------- |  | - | ----- |  |  |  | --- | 
|                |             | Options Outstanding |             |          | Options Exercisable |         
|                |             |                     |             |          |                     |         
|                |             |                     |             | Weighted |                     |          |           |   | Weighted        | 
|                |             |                     |             | Weighted |                     |          | Average   |   |                 |  |  | Weighted    |     |  | Average   | 
|                |             |                     |             | Average  |                     |          | Remaining |   |                 |  |  | Average     |     |  | Remaining | 
|Range of        |             |                     | Number      |          |                     | Exercise |           |   | Contractual     |  |  | Number      |     |  | Exercise  |  |         | Contractual     | 
|Exercise Prices |             |                     | Outstanding |          |                     | Price    |           |   | Life (in years) |  |  | Outstanding |     |  | Price     |  |         | Life (in years) | 
|                |             |                     |             |          |                     |          |           |   |                 |  |  |             |     |  |           |  |         |                 | 
|$               | 5.00-5.99   |                     |             |          | 3,360               |          |           | $ | 5.38            |  |  |             | 1.0 |  |           |  | 3,360   |                 |  | $ | 5.38  |  |  |  | 1.0 | 
|                | 6.00-6.99   |                     |             |          | 1,620               |          |           |   | 6.68            |  |  |             | 2.0 |  |           |  | 1,620   |                 |  |   | 6.68  |  |  |  | 2.0 | 
|                | 7.00-7.99   |                     |             |          | 1,645               |          |           |   | 7.00            |  |  |             | 2.0 |  |           |  | 1,645   |                 |  |   | 7.00  |  |  |  | 2.0 | 
|                | 9.00-9.99   |                     |             |          | 8,428               |          |           |   | 9.38            |  |  |             | 6.0 |  |           |  | 8,428   |                 |  |   | 9.38  |  |  |  | 6.0 | 
|                | 10.00-10.99 |                     |             |          | 137,607             |          |           |   | 10.83           |  |  |             | 6.3 |  |           |  | 137,607 |                 |  |   | 10.83 |  |  |  | 6.3 | 
|                | 11.00-11.99 |                     |             |          | 67,361              |          |           |   | 11.78           |  |  |             | 5.9 |  |           |  | 67,361  |                 |  |   | 11.78 |  |  |  | 5.9 | 
|                | 12.00-12.99 |                     |             |          | 39,791              |          |           |   | 12.52           |  |  |             | 8.0 |  |           |  | 39,791  |                 |  |   | 12.52 |  |  |  | 8.0 | 
|                | 14.00-14.99 |                     |             |          | 241,512             |          |           |   | 14.83           |  |  |             | 6.6 |  |           |  | 175,247 |                 |  |   | 14.78 |  |  |  | 6.4 | 
|                | 15.00-15.99 |                     |             |          | 1,667               |          |           |   | 15.42           |  |  |             | 5.0 |  |           |  | 1,667   |                 |  |   | 15.42 |  |  |  | 5.0 | 
|                | 16.00-16.99 |                     |             |          | 11,054              |          |           |   | 16.87           |  |  |             | 9.2 |  |           |  | 11,054  |                 |  |   | 16.87 |  |  |  | 9.2 | 
|                | 17.00-17.99 |                     |             |          | 213,583             |          |           |   | 17.50           |  |  |             | 8.2 |  |           |  | 71,194  |                 |  |   | 17.50 |  |  |  | 8.2 | 
|                | 18.00-18.99 |                     |             |          | 134,012             |          |           |   | 18.38           |  |  |             | 6.0 |  |           |  | 104,845 |                 |  |   | 18.48 |  |  |  | 5.4 | 
|                | 19.00-19.99 |                     |             |          | 12,500              |          |           |   | 19.25           |  |  |             | 8.3 |  |           |  | 4,168   |                 |  |   | 19.25 |  |  |  | 8.3 | 
|                | 20.00-20.99 |                     |             |          | 79,915              |          |           |   | 21.63           |  |  |             | 4.0 |  |           |  | 79,915  |                 |  |   | 21.63 |  |  |  | 4.0 | 
|                | 22.00-22.99 |                     |             |          | 18,750              |          |           |   | 22.30           |  |  |             | 8.9 |  |           |  | 6,250   |                 |  |   | 22.30 |  |  |  | 8.9 | 
|                | 23.00-24.06 |                     |             |          | 260,626             |          |           |   | 23.72           |  |  |             | 9.2 |  |           |  |        |                 |  |   | 23.72 |  |  |  | 9.2 | 
|                |             |                     |             |          |                     |          |           |   |                 |  |  |             |     |  |           |  |         |                 | 
|                |             |                     |             |          | 1,233,431           |          |           | $ | 17.40           |  |  |             | 7.2 |  |           |  | 714,152 |                 |  | $ | 15.17 |  |  |  | 6.2 | 
|                |             |                     |             |          |                     |          |           |   |                 |  |  |             |     |  |           |  |         |                 | 



81



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Note 19  Related Party Transactions




Note 20  Restrictions On Dividends, Loans and
Advances






Note 21  Fair Value of Financial
Instruments


Disclosures about Fair Value of Financial Instruments




Cash and cash equivalents:


Interest-bearing deposits in banks and short-term
investments:


Securities:


82



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Mortgage loans held for sale:


Loans receivable:


Mortgage Servicing Rights:


Deposit liabilities:


Short-term borrowings:


Long-term debt and subordinated notes payable:


Accrued interest:


Derivative assets and liabilities:


Off-balance sheet instruments:


83



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                       |                                    |              |   |           |       |  |   |           |  |  |       |           |  |  |   |           | 
|---------------------- | ---------------------------------- | ------------ | - | --------- | ----- |  | - | --------- |  |  | ----- | --------- |  |  | - | --------- | 
|                       |                                    | December 31, |  
|                       |                                    |              |  
|                       |                                    | 2004         |   |           | 2003  | 
|                       |                                    |              |   |           |       | 
|                       |                                    | Carrying     |   |           | Fair  |  |   | Carrying  |  |  | Fair  |          
|                       |                                    | Amount       |   |           | Value |  |   | Amount    |  |  | Value |          
|                       |                                    |              |   |           |       |  |   |           |  |  |       |          
|Financial Assets:      |                                    |              |   |           |       |  |   |           |  |  |       |           |  |  |   |          
|                       | Cash and cash equivalents          |              | $ | 82,855    |       |  | $ | 82,855    |  |  | $     | 84,098    |  |  | $ | 84,098    | 
|                       | Interest-bearing deposits in banks |              |   | 5,813     |       |  |   | 5,813     |  |  |       | 4,102     |  |  |   | 4,102     | 
|                       | Short-term investments             |              |   | 6,542     |       |  |   | 6,542     |  |  |       | 11,275    |  |  |   | 11,275    | 
|                       | Mortgage loans held for sale       |              |   | 4,345     |       |  |   | 4,345     |  |  |       | 11,520    |  |  |   | 11,520    | 
|                       | Securities held-to-maturity        |              |   | 34,152    |       |  |   | 34,919    |  |  |       | 35,956    |  |  |   | 37,405    | 
|                       | Securities available-for-sale      |              |   | 467,519   |       |  |   | 467,519   |  |  |       | 540,049   |  |  |   | 540,049   | 
|                       | Loans, net                         |              |   | 1,765,492 |       |  |   | 1,784,522 |  |  |       | 1,374,105 |  |  |   | 1,410,953 | 
|                       | Accrued interest receivable        |              |   | 11,407    |       |  |   | 11,407    |  |  |       | 11,236    |  |  |   | 11,236    | 
|                       | Mortgage servicing rights          |              |   | 2,697     |       |  |   | 4,180     |  |  |       | 2,908     |  |  |   | 4,768     | 
|                       | Derivative assets                  |              |   | 93        |       |  |   | 93        |  |  |       | 144       |  |  |   | 144       | 
|Financial Liabilities: |                                    |              |   |           |       |  |   |           |  |  |       |           |  |  |   |          
|                       | Deposits                           |              | $ | 2,015,394 |       |  | $ | 2,023,299 |  |  | $     | 1,778,397 |  |  | $ | 1,795,289 | 
|                       | Short-term borrowings              |              |   | 98,768    |       |  |   | 98,768    |  |  |       | 43,878    |  |  |   | 43,878    | 
|                       | Long-term debt                     |              |   | 233,039   |       |  |   | 244,340   |  |  |       | 195,762   |  |  |   | 208,756   | 
|                       | Subordinated notes payable         |              |   | 72,166    |       |  |   | 77,003    |  |  |       | 56,702    |  |  |   | 54,677    | 
|                       | Accrued interest payable           |              |   | 6,375     |       |  |   | 6,375     |  |  |       | 6,273     |  |  |   | 6,273     | 
|                       | Derivative liabilities             |              |   | 1,026     |       |  |   | 1,026     |  |  |       | 1,540     |  |  |   | 1,540     | 

84



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


Note 22  Condensed Financial Statements of
Parent Company




|                     |                               |                      |                                            |        |         |         |         |        |         |         | 
|-------------------- | ----------------------------- | -------------------- | ------------------------------------------ | ------ | ------- | ------- | ------- | ------ | ------- | ------- | 
|                     |                               | December 31,         |                                           
|                     |                               |                      |                                           
|                     |                               | 2004                 |                                            |        | 2003    |        
|                     |                               |                      |                                            |        |         |        
|Assets               |                               |                      |                                            |        |         |         |         |       
|                     | Cash and cash equivalents     |                      | $                                          | 2,387  |         |         | $       | 8,633  |        
|                     | Securities available for sale |                      |                                            | 3,051  |         |         |         | 3,010  |        
|                     | Investment in:                |                      |                                            |        |         |         |         |        |        
|                     |                               | Bank subsidiaries    |                                            |        | 300,540 |         |         |        | 237,249 |        
|                     |                               | Nonbank subsidiaries |                                            |        | 41,743  |         |         |        | 27,637  |        
|                     | Due from affiliates           |                      |                                            | 42     |         |         |         | 39     |        
|                     | Other assets                  |                      |                                            | 20,382 |         |         |         | 10,998 |        
|                     |                               |                      |                                            |        |         |        
|                     |                               |                      | Total assets                               |        | $       | 368,145 |         |        | $       | 287,566 | 
|                     |                               |                      |                                            |        |         |        
|                    
|Liabilities          |                               |                      |                                            |        |         |         |         |       
|                     | Long-term debt                |                      | $                                          | 10,337 |         |         | $       | 6,669  |        
|                     | Subordinated debentures       |                      |                                            | 72,166 |         |         |         | 56,702 |        
|                     | Other liabilities             |                      |                                            | 6,138  |         |         |         | 4,184  |        
|                     |                               |                      |                                            |        |         |        
|                     |                               |                      | Total liabilities                          |        |         | 88,641  |         |        |         | 67,555  | 
|                     |                               |                      |                                            |        |         |        
|Stockholders equity |                               |                      | 279,504                                    |        |         |         | 220,011 |       
|                     |                               |                      |                                            |        |         |        
|                     |                               |                      | Total liabilities and stockholders equity |        | $       | 368,145 |         |        | $       | 287,566 | 
|                     |                               |                      |                                            |        |         |        

85



---



##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


|                                                                                      |                                            |                          |        |        |        |   |        |        |        |   |        |        |        | 
|------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                      |                                            | Years Ended December 31, |       
|                                                                                      |                                            |                          |       
|                                                                                      |                                            | 2004                     |        |        | 2003   |   |        | 2002   |       
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|Statements of Income                                                                  |                                            |                          |        |        |        |   |        |        |        |   |        |       
|Income:                                                                               |                                            |                          |        |        |        |   |        |        |        |   |        |       
|                                                                                      | Dividends from banking subsidiaries        |                          | $      | 17,440 |        |   | $      | 10,630 |        |   | $      | 9,530  |       
|                                                                                      | Dividends from nonbanking subsidiaries     |                          |        | 6,255  |        |   |        | 60     |        |   |        | 376    |       
|                                                                                      | Dividends on securities available-for-sale |                          |        | 60     |        |   |        | 56     |        |   |        | 47     |       
|                                                                                      | Gains on securities available-for-sale     |                          |        | 167    |        |   |        | 31     |        |   |        | 16     |       
|                                                                                      | Management fees from subsidiaries          |                          |        | 23,685 |        |   |        | 19,869 |        |   |        | 18,723 |       
|                                                                                      | Other                                      |                          |        | 169    |        |   |        | 311    |        |   |        | 5      |       
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|                                                                                      |                                            | Total income             |        |        | 47,776 |   |        |        | 30,957 |   |        |        | 28,697 | 
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|Expenses:                                                                             |                                            |                          |        |        |        |   |        |        |        |   |        |       
|                                                                                      | Interest expense                           |                          |        | 3,485  |        |   |        | 2,333  |        |   |        | 1,195  |       
|                                                                                      | Operating expenses                         |                          |        | 26,683 |        |   |        | 22,862 |        |   |        | 17,572 |       
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|                                                                                      |                                            | Total expense            |        |        | 30,168 |   |        |        | 25,195 |   |        |        | 18,767 | 
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|Income before income taxes and equity in undistributed net
    income of subsidiaries |                                            |                          | 17,608 |        |        |   | 5,762  |        |        |   | 9,930  |       
|Income tax expense (benefit)                                                          |                                            |                          | (2,334 | )      |        |   | (1,780 | )      |        |   | 24     |       
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|                                                                                      |                                            |                          | 19,942 |        |        |   | 7,542  |        |        |   | 9,906  |       
|Equity in undistributed income of:                                                    |                                            |                          |        |        |        |   |        |        |        |   |        |       
|                                                                                      | Banking subsidiaries                       |                          |        | 16,770 |        |   |        | 21,085 |        |   |        | 15,485 |       
|                                                                                      | Other subsidiaries                         |                          |        | (3,383 | )      |   |        | 432    |        |   |        | (646   | )     
|                                                                                      |                                            |                          |        |        |        |   |        |        |       
|Net income                                                                            |                                            | $                        | 33,329 |        |        | $ | 29,059 |        |        | $ | 24,745 |       
|                                                                                      |                                            |                          |        |        |        |   |        |        |       

86



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |         |         |         |        |         |         |         |  
|------------------------------------- | ---------- | ------------------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                      |            | Years Ended December 31,                                                              |                                                   
|                                      |            |                                                                                       |                                                   
|                                      |            | 2004                                                                                  |                                                    |                                           | 2003    |         |         | 2002   |        
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|Statements of Cash Flows              |            |                                                                                       |                                                    |                                           |         |         |         |        |         |         |         |       
|Cash flows from operating activities: |            |                                                                                       |                                                    |                                           |         |         |         |        |         |         |         |       
|                                      | Net income |                                                                                       | $                                                  | 33,329                                    |         |         | $       | 29,059 |         |         | $       | 24,745 |        
|                                      |            | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                    |                                           |         |         |         |        |         |         |         |        |         |        
|                                      |            |                                                                                       | Depreciation                                       |                                           |         | 751     |         |        |         | 267     |         |        |         |        |        
|                                      |            |                                                                                       | Equity in undistributed net income of subsidiaries |                                           |         | (13,385 | )       |        |         | (21,517 | )       |        |         | (14,839 | )      
|                                      |            |                                                                                       | Gains on securities available-for-sale             |                                           |         | (167    | )       |        |         | (31     | )       |        |         | (16     | )      
|                                      |            |                                                                                       | (Increase) in other assets                         |                                           |         | (10,015 | )       |        |         | (3,255  | )       |        |         | (4,570  | )      
|                                      |            |                                                                                       | Increase (decrease) in other liabilities           |                                           |         | 1,818   |         |        |         | (259    | )       |        |         | 1,771   |        
|                                      |            |                                                                                       | Other                                              |                                           |         |        |         |        |         | (67     | )       |        |         | 375     |        
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|                                      |            |                                                                                       |                                                    | Net cash provided by operating activities |         |         | 12,331  |        |         |         | 4,197   |        |         |         | 7,466   |  
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|Cash flows investing activities:      |            |                                                                                       |                                                    |                                           |         |         |         |        |         |         |         |       
|                                      |            | Purchases of securities available-for-sale                                            |                                                    |                                           |        |         |         |        | (300    | )       |         |        | (447    | )      
|                                      |            | Proceeds from sales and maturities of securities
    available-for-sale               |                                                    |                                           | 311     |         |         |        | 72      |         |         |        | 140     |        
|                                      |            | Investment in and advances to banking subsidiaries                                    |                                                    |                                           | (15,438 | )       |         |        | (11,750 | )       |         |        | (21,764 | )      
|                                      |            | Investment in nonbanking subsidiaries                                                 |                                                    |                                           | (8,708  | )       |         |        | (9,756  | )       |         |        | (619    | )      
|                                      |            | Return of capital from nonbanking subsidiaries                                        |                                                    |                                           |        |         |         |        |        |         |         |        | 500     |        
|                                      |            | Purchase of premises and equipment                                                    |                                                    |                                           | (1,267  | )       |         |        | (3,164  | )       |         |        |        |        
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|                                      |            |                                                                                       |                                                    | Net cash used in investing activities     |         |         | (25,102 | )      |         |         | (24,898 | )      |         |         | (22,190 | )
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|Cash flows from financing activities: |            |                                                                                       |                                                    |                                           |         |         |         |        |         |         |         |       
|                                      |            | Proceeds from subordinated note from subsidiary                                       |                                                    |                                           | 15,464  |         |         |        | 36,083  |         |         |        | 20,619  |        
|                                      |            | Proceeds from long-term debt                                                          |                                                    |                                           | 5,000   |         |         |        |        |         |         |        | 9,000   |        
|                                      |            | Repayment of long-term debt                                                           |                                                    |                                           | (1,332  | )       |         |        | (1,332  | )       |         |        | (999    | )      
|                                      |            | Proceeds from issuance of common stock                                                |                                                    |                                           | 482     |         |         |        | 336     |         |         |        | 645     |        
|                                      |            | Cash dividends on common stock                                                        |                                                    |                                           | (13,206 | )       |         |        | (11,671 | )       |         |        | (10,771 | )      
|                                      |            | Cash paid in lieu of fractional shares                                                |                                                    |                                           | (33     | )       |         |        |        |         |         |        | (32     | )      
|                                      |            | Purchases of treasury stock                                                           |                                                    |                                           | (1,707  | )       |         |        | (3,459  | )       |         |        | (551    | )      
|                                      |            | Proceeds from issuance of treasury stock                                              |                                                    |                                           | 1,857   |         |         |        | 2,121   |         |         |        | 651     |        
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|                                      |            |                                                                                       |                                                    | Net cash used in financing activities     |         |         | 6,525   |        |         |         | 22,078  |        |         |         | 18,562  |  
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|Increase (decrease) in cash           |            |                                                                                       | (6,246                                             | )                                         |         |         | 1,377   |        |         |         | 3,838   |       
|Cash:                                 |            |                                                                                       |                                                    |                                           |         |         |         |        |         |         |         |       
|                                      |            | Beginning of year                                                                     |                                                    |                                           | 8,633   |         |         |        | 7,256   |         |         |        | 3,418   |        
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        
|                                      |            | End of year                                                                           |                                                    | $                                         | 2,387   |         |         | $      | 8,633   |         |         | $      | 7,256   |        
|                                      |            |                                                                                       |                                                    |                                           |         |         |         |        |        

Note 23  Segment Reporting




87



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)




|                             |  |           |           |  |         |   |            |         |           |            |          |           |         |          |        |               |             |   |              |        |  |   |          |   |  |   |           | 
|---------------------------- |  | --------- | --------- |  | ------- | - | ---------- | ------- | --------- | ---------- | -------- | --------- | ------- | -------- | ------ | ------------- | ----------- | - | ------------ | ------ |  | - | -------- | - |  | - | --------- | 
|                             |  | Community |           |  |         |   |            |         |           |            |          |           |         |          |       
|                             |  | Banking & |           |  |         |   |            |         | Trust and |            |          | Insurance |         |          |        |               |            
|                             |  | Related   |           |  |         |   | Commercial |         |           | Investment |          |           | Related |          |        | Inter-Segment |             |   | Consolidated |       
|                             |  | Services  |           |  | Leasing |   |            | Finance |           |            | Services |           |         | Services |        |               | Elimination |   |              | Totals | 
|                             |  |           |           |  |         |   |            |         |           |            |          |           |         |          |        |               |             |   |              |        | 
|Year ended December 31, 2004 |  |           |           |  |         |   |            |         |           |            |          |           |         |          |        |               |             |   |              |        |  |   |          |   |  |   |           | 
|Interest and dividend income |  | $         | 110,643   |  |         | $ | 10,876     |         |           | $          | 27,677   |           |         | $        | 34     |               |             | $ | 25           |        |  | $ | (11,573  | ) |  | $ | 137,682   | 
|Interest expense             |  |           | 37,990    |  |         |   | 7,867      |         |           |            | 5,948    |           |         |          | 8      |               |             |   | 25           |        |  |   | (11,573  | ) |  |   | 40,265    | 
|Provision for loan losses    |  |           | 2,381     |  |         |   | 1,422      |         |           |            | 635      |           |         |          |       |               |             |   |             |        |  |   |         |   |  |   | 4,438     | 
|Non-interest income          |  |           | 15,296    |  |         |   | 26,725     |         |           |            | 320      |           |         |          | 12,409 |               |             |   | 4,546        |        |  |   |         |   |  |   | 59,296    | 
|Non-interest expenses        |  |           | 63,395    |  |         |   | 26,255     |         |           |            | 2,684    |           |         |          | 10,630 |               |             |   | 4,122        |        |  |   |         |   |  |   | 107,086   | 
|Income before income taxes   |  |           | 22,173    |  |         |   | 2,057      |         |           |            | 18,730   |           |         |          | 1,805  |               |             |   | 424          |        |  |   |         |   |  |   | 45,189    | 
|Income tax expenses          |  |           | 3,379     |  |         |   | 824        |         |           |            | 6,766    |           |         |          | 709    |               |             |   | 182          |        |  |   |         |   |  |   | 11,860    | 
|Net income                   |  |           | 18,794    |  |         |   | 1,233      |         |           |            | 11,964   |           |         |          | 1,096  |               |             |   | 242          |        |  |   |         |   |  |   | 33,329    | 
|Assets                       |  |           | 2,596,552 |  |         |   | 241,304    |         |           |            | 210,690  |           |         |          | 22,622 |               |             |   | 18,541       |        |  |   | (346,947 | ) |  |   | 2,742,762 | 
|Year ended December 31, 2003 |  |           |           |  |         |   |            |         |           |            |          |           |         |          |        |               |             |   |              |        |  |   |          |   |  |   |           | 
|Interest and dividend income |  | $         | 107,344   |  |         | $ | 9,085      |         |           | $          | 19,469   |           |         | $        | 29     |               |             | $ | 26           |        |  | $ | (8,879   | ) |  | $ | 127,074   | 
|Interest expense             |  |           | 38,570    |  |         |   | 7,330      |         |           |            | 4,128    |           |         |          | 7      |               |             |   |             |        |  |   | (8,879   | ) |  |   | 41,156    | 
|Provision for loan losses    |  |           | 2,352     |  |         |   | 1,345      |         |           |            |         |           |         |          |       |               |             |   |             |        |  |   |         |   |  |   | 3,697     | 
|Non-interest income          |  |           | 15,333    |  |         |   | 26,869     |         |           |            | 255      |           |         |          | 6,945  |               |             |   | 319          |        |  |   |         |   |  |   | 49,721    | 
|Non-interest expenses        |  |           | 57,930    |  |         |   | 25,867     |         |           |            | 2,479    |           |         |          | 6,034  |               |             |   | 258          |        |  |   |         |   |  |   | 92,568    | 
|Income before income taxes   |  |           | 23,825    |  |         |   | 1,412      |         |           |            | 13,117   |           |         |          | 933    |               |             |   | 87           |        |  |   |         |   |  |   | 39,374    | 
|Income tax expenses          |  |           | 4,387     |  |         |   | 530        |         |           |            | 4,881    |           |         |          | 385    |               |             |   | 132          |        |  |   |         |   |  |   | 10,315    | 
|Net income (loss)            |  |           | 19,438    |  |         |   | 882        |         |           |            | 8,236    |           |         |          | 548    |               |             |   | (45          | )      |  |   |         |   |  |   | 29,059    | 
|Assets                       |  |           | 2,246,298 |  |         |   | 203,906    |         |           |            | 160,142  |           |         |          | 19,385 |               |             |   | 3,387        |        |  |   | (289,601 | ) |  |   | 2,343,517 | 
|Year ended December 31, 2002 |  |           |           |  |         |   |            |         |           |            |          |           |         |          |        |               |             |   |              |        |  |   |          |   |  |   |           | 
|Interest and dividend income |  | $         | 111,113   |  |         | $ | 7,394      |         |           | $          | 11,857   |           |         | $        | 19     |               |             | $ | 22           |        |  | $ | (6,814   | ) |  | $ | 123,591   | 
|Interest expense             |  |           | 45,422    |  |         |   | 7,401      |         |           |            | 2,630    |           |         |          | 4      |               |             |   |             |        |  |   | (6,814   | ) |  |   | 48,643    | 
|Provision for loan losses    |  |           | 1,131     |  |         |   | 685        |         |           |            | 279      |           |         |          |       |               |             |   |             |        |  |   |         |   |  |   | 2,095     | 
|Non-interest income          |  |           | 12,594    |  |         |   | 26,566     |         |           |            | 121      |           |         |          | 5,201  |               |             |   | 350          |        |  |   |         |   |  |   | 44,832    | 
|Non-interest expenses        |  |           | 53,981    |  |         |   | 24,722     |         |           |            | 1,947    |           |         |          | 4,989  |               |             |   | 283          |        |  |   |         |   |  |   | 85,922    | 
|Income before income taxes   |  |           | 23,173    |  |         |   | 1,152      |         |           |            | 7,122    |           |         |          | 227    |               |             |   | 89           |        |  |   |         |   |  |   | 31,763    | 
|Income tax expenses          |  |           | 4,576     |  |         |   | (645       | )       |           |            | 2,990    |           |         |          | 97     |               |             |   |             |        |  |   |         |   |  |   | 7,018     | 
|Net income                   |  |           | 18,597    |  |         |   | 1,797      |         |           |            | 4,132    |           |         |          | 130    |               |             |   | 89           |        |  |   |         |   |  |   | 24,745    | 
|Assets                       |  |           | 2,073,176 |  |         |   | 165,385    |         |           |            | 121,224  |           |         |          | 2,137  |               |             |   | 1,776        |        |  |   | (206,770 | ) |  |   | 2,156,928 | 





88



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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)












Note 24  Quarterly Financial Data
(Unaudited)




|                             |                            |                    |        |      |              |   |        |         |  |   |          |      |  |   |        |      | 
|---------------------------- | -------------------------- | ------------------ | ------ | ---- | ------------ | - | ------ | ------- |  | - | -------- | ---- |  | - | ------ | ---- | 
|                             |                            | Three Months Ended |       
|                             |                            |                    |       
|                             |                            | December 31        |        |      | September 30 |   |        | June 30 |  |   | March 31 |     
|                             |                            |                    |        |      |              |   |        |         |  |   |          |     
|2004                         |                            |                    |        |      |              |   |        |         |  |   |          |      |  |   |        |     
|Interest and dividend income |                            | $                  | 37,194 |      |              | $ | 35,041 |         |  | $ | 33,205   |      |  | $ | 32,242 |     
|Interest expense             |                            |                    | 11,021 |      |              |   | 10,084 |         |  |   | 9,485    |      |  |   | 9,675  |     
|Net interest income          |                            |                    | 26,173 |      |              |   | 24,957 |         |  |   | 23,720   |      |  |   | 22,567 |     
|Provision for loan losses    |                            |                    | 779    |      |              |   | 2,030  |         |  |   | 915      |      |  |   | 714    |     
|Securities gains             |                            |                    | 15     |      |              |   | 1,025  |         |  |   | 514      |      |  |   | 517    |     
|Non-interest income          |                            |                    | 15,715 |      |              |   | 15,023 |         |  |   | 13,801   |      |  |   | 12,686 |     
|Non-interest expense         |                            |                    | 28,821 |      |              |   | 27,374 |         |  |   | 25,919   |      |  |   | 24,972 |     
|Income before income taxes   |                            |                    | 12,303 |      |              |   | 11,601 |         |  |   | 11,201   |      |  |   | 10,084 |     
|Income tax expense           |                            |                    | 3,319  |      |              |   | 3,101  |         |  |   | 2,985    |      |  |   | 2,455  |     
|Net income                   |                            |                    | 8,984  |      |              |   | 8,500  |         |  |   | 8,216    |      |  |   | 7,629  |     
|Per share information:       |                            |                    |        |      |              |   |        |         |  |   |          |      |  |   |        |     
|                             | Basic earnings per share   |                    | $      | 0.40 |              |   | $      | 0.39    |  |   | $        | 0.38 |  |   | $      | 0.36 | 
|                             | Diluted earnings per share |                    |        | 0.40 |              |   |        | 0.38    |  |   |          | 0.37 |  |   |        | 0.35 | 
|                             | Dividends declared         |                    |        | 0.16 |              |   |        | 0.16    |  |   |          | 0.15 |  |   |        | 0.15 | 

89



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##### 



STERLING FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Consolidated Financial
Statements  (Continued)


|                             |                            |                    |        |      |              |   |        |         |  |   |          |      |  |   |        |      | 
|---------------------------- | -------------------------- | ------------------ | ------ | ---- | ------------ | - | ------ | ------- |  | - | -------- | ---- |  | - | ------ | ---- | 
|                             |                            | Three Months Ended |       
|                             |                            |                    |       
|                             |                            | December 31        |        |      | September 30 |   |        | June 30 |  |   | March 31 |     
|                             |                            |                    |        |      |              |   |        |         |  |   |          |     
|2003                         |                            |                    |        |      |              |   |        |         |  |   |          |      |  |   |        |     
|Interest and dividend income |                            | $                  | 32,473 |      |              | $ | 32,157 |         |  | $ | 31,271   |      |  | $ | 31,173 |     
|Interest expense             |                            |                    | 10,306 |      |              |   | 10,154 |         |  |   | 10,094   |      |  |   | 10,602 |     
|Net interest income          |                            |                    | 22,167 |      |              |   | 22,003 |         |  |   | 21,177   |      |  |   | 20,571 |     
|Provision for loan losses    |                            |                    | 881    |      |              |   | 872    |         |  |   | 909      |      |  |   | 1,035  |     
|Securities gains             |                            |                    | 121    |      |              |   | 346    |         |  |   | 40       |      |  |   | 4      |     
|Non-interest income          |                            |                    | 13,686 |      |              |   | 12,389 |         |  |   | 11,707   |      |  |   | 11,428 |     
|Non-interest expense         |                            |                    | 24,140 |      |              |   | 23,781 |         |  |   | 22,735   |      |  |   | 21,912 |     
|Income before income taxes   |                            |                    | 10,953 |      |              |   | 10,085 |         |  |   | 9,280    |      |  |   | 9,056  |     
|Income tax expense           |                            |                    | 2,960  |      |              |   | 2,588  |         |  |   | 2,336    |      |  |   | 2,431  |     
|Net income                   |                            |                    | 7,993  |      |              |   | 7,497  |         |  |   | 6,944    |      |  |   | 6,625  |     
|Per share information:       |                            |                    |        |      |              |   |        |         |  |   |          |      |  |   |        |     
|                             | Basic earnings per share   |                    | $      | 0.37 |              |   | $      | 0.35    |  |   | $        | 0.33 |  |   | $      | 0.31 | 
|                             | Diluted earnings per share |                    |        | 0.37 |              |   |        | 0.35    |  |   |          | 0.33 |  |   |        | 0.31 | 
|                             | Dividends declared         |                    |        | 0.14 |              |   |        | 0.14    |  |   |          | 0.14 |  |   |        | 0.14 | 

90



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##### 





|         |                                                                                         
|-------- | ----------------------------------------------------------------------------------------
|Item 9  | Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure



Item 9A  Controls and Procedures






Item 9B  Other Information




Part III




|          |                                                   
|--------- | --------------------------------------------------
|Item 10  | Directors and Executive Officers of the Registrant







|          |                       
|--------- | ----------------------
|Item 11  | Executive Compensation





|          |                                                                                                   
|--------- | --------------------------------------------------------------------------------------------------
|Item 12  | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters



91



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##### 





|          |                                               
|--------- | ----------------------------------------------
|Item 13  | Certain Relationships and Related Transactions





|          |                                       
|--------- | --------------------------------------
|Item 14  | Principal Accountant Fees and Services



Part IV




|          |                                 
|--------- | --------------------------------
|Item 15  | Exhibits and Financial Schedules

|    |  |                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The following documents are filed as part of this report:                                                                                                                   
|    |  | The financial statements listed on the index set forth in
    Item 8 of this Annual Report on Form 10-K are filed as
    part of this Annual Report.                        
|    |  | Financial statement schedules  all schedules are
    omitted                                                                                                               
|    |  | because or the the not                                                                                                                                                       |  | they are either not applicable, the data is not significant
    required information is shown in the financial statements or es
    thereto or elsewhere herein.                                                                                                                                                                                                                 
|(b) |  | Exhibits  the following is a list of Exhibits
    required by Item 601 of Regulation S-K and are
    incorporated by reference herein or annexed to this Annual
    Report.
|    |  | 2                                                                                                                                                                            |  | Agreement and Plan of Merger between Registrant and The
    Pennsylvania State Banking Company, dated June 14, 2004.
    (Incorporated by reference to Exhibit 2.1 to
    Registrants Current Report on Form 8-K, filed with
    the Commission on June 22, 2004.)                                                                                                              
|    |  | 3(i)                                                                                                                                                                         |  | Amended Articles of Incorporation. (Incorporated by reference to
    Exhibit 3(i) to Registrants Current Report on
    Form 8-K, dated April 30, 2002, filed with the
    Commission on May 15, 2002.)                                                                                                                                                                          
|    |  | 3(ii)                                                                                                                                                                        |  | Amended Bylaws. (Incorporated by reference to Exhibit 3(ii)
    to Registrants Current Report on Form 8-K, dated and
    filed with the Commission on April 25, 2000.)                                                                                                                                                                                                          
|    |  | 10.1                                                                                                                                                                         |  | 1996 Stock Incentive Plan (Incorporated by reference to
    Exhibit 4.3 of Registration Segment No. 333-28065 on
    Form S-8, filed with the Commission on May 30, 1997.)                                                                                                                                                                                                       
|    |  | 10.2                                                                                                                                                                         |  | Dividend Reinvestment and Stock Purchase Plan (Incorporated by
    reference to Registration Statement No. 33-55131 on
    Form S-3, filed with the Commission on August 18,
    1994, and as amended by Registrants
    Rule 424(b) prospectus, filed with the Commission on
    December 23, 1998, and by Amendment No. 1, filed with
    the Commission on January 16, 2001.)
|    |  | 10.3                                                                                                                                                                         |  | Stock Disposition Agreement, dated September 6, 2001, by
    and between Howard E. Groff, Sr., and Sterling Financial
    Corporation. (Incorporated by reference to Exhibit 99.1 in
    Registrants Current Report on Form 8-K, dated
    September 6, 2001, and filed with the Commission on
    September 26, 2001.)                                                         
|    |  | 10.4                                                                                                                                                                         |  | 1997 Directors Stock Compensation Plan and Policy.
    (Incorporated by reference to Exhibit 4.3 to
    Registrants Registration Statement No. 333-28101 on
    Form S-8, filed with the Commission on May 30, 1997.)                                                                                                                                                           
|    |  | 10.5                                                                                                                                                                         |  | Supplemental Executive Retirement Agreement, dated
    April 22, 2002, between Sterling Financial Corporation and
    John Stefan. (Incorporated by reference to Exhibit 10.1 to
    Registrants Current Report on Form 8-K, dated
    April 30, 2002, filed with the Commission on May 15,
    2002.)                                                                          

92



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##### 



| |  |       |  |                                                                                                                                                                                                                                                                                                                                                
| |  | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.6  |  | Consulting Agreement and General Release, dated April 22,
    2002, between Sterling Financial Corporation and John E. Stefan.
    (Incorporated by reference to Exhibit 10.2 to
    Registrants Current Report on Form 8-K, dated
    April 30, 2002, filed with the Commission on May 15,
    2002.)                                        
| |  | 10.7  |  | Employment Agreement, dated December 18, 2001, between
    Sterling Financial Corporation, Bank of Lancaster County, N.A.
    and J. Roger Moyer, Jr. (Incorporated by reference to
    Exhibit 10.6 to Registrants Statement
    No. 333-75650 on Form S-4, filed with the Commission
    on January 16, 2002.)                              
| |  | 10.8  |  | Employment Agreement, dated July 23, 2002, between Sterling
    Financial Corporation, Bank of Lancaster County, N.A. and Thomas
    P. Dautrich. (Incorporated by reference to Exhibit 10 to
    Registrants Quarterly Report on 10-Q for the quarter-ended
    June 30, 2002, filed with the Commission on August 14,
    2002.)            
| |  | 10.9  |  | Employment Agreement, dated as of February 28, 2002,
    between Sterling Financial Corporation, Bank of Lancaster
    County, N.A. and J. Bradley Scovill. (Incorporated by reference
    to Exhibit 10.10 to Registrants Annual Report on
    Form 10-K for the year ended December 31, 2001, filed
    with the Commission March 27, 2002.)
| |  | 10.10 |  | Change in Control Agreement, dated as of July 27, 2000,
    between Sterling Financial Corporation, Bank of Hanover, and
    Chad M. Clabaugh (Incorporated by reference to
    Exhibit 10.10 to Registrants Annual Report on
    Form 10-K, dated December 31, 2002, and filed with the
    Commission on March 27, 2003)                    
| |  | 10.11 |  | Employment Agreement, dated as of December 1, 2000, between
    Sterling Financial Corporation, Bank of Lancaster County, N.A.,
    and Gregory S. Lefever (Incorporated by reference to
Exhibit 10.11 to Registrants Annual Report on
Form 10-K, dated December 31, 2003, and filed with the
Commission on March 12, 2004)                   
| |  | 11    |  | Statement re: Computation of per Share Earnings  See
    Note 1, Summary of Significant Accounting Policies,
    included in this Annual Report on Form 10-K                                                                                                                                                                                  
| |  | 14    |  | Code of Ethics (Incorporated by reference to Exhibit 14 to
    Registrants Annual Report on Form 10-K, dated
    December 31, 2003, and filed with the Commission on
    March 12, 2004)                                                                                                                                                      
| |  | 21    |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                 
| |  | 23    |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                   
| |  | 31    |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                                                                                        
| |  | 31.1  |  |  Certification of CEO Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                           
| |  | 31.2  |  |  Certification of CFO Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                           
| |  | 32    |  | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                    
| |  | 32.1  |  |  Certification of CEO Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                
| |  | 32.2  |  |  Certification of CFO Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                



93



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##### 



Signatures






| |                               
| | ------------------------------
| | STERLING FINANCIAL CORPORATION



| |     |                            
| | --- | ---------------------------
| | By: | /s/ J. Roger
    Moyer, Jr.

| |                                      
| | -------------------------------------
| |                                      
| | J. Roger Moyer, Jr.                  
| | President and Chief Executive Officer

|                                                           |  |                                                                            |  |                |  | 
|---------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                  |  | Title                                                                      |  | Date          
|                                                           |  |                                                                            |  |               
|                                                          
|/s/ John E. Stefan(John
    E. Stefan)                     |  | Chairman of the Board                                                      |  | March 22, 2005
|                                                          
|/s/ J. Roger
    Moyer, Jr.(J.
    Roger Moyer, Jr.)       |  | President and Chief Executive Officer, Director                            |  | March 22, 2005
|                                                          
|/s/ J. Bradley Scovill(J.
    Bradley Scovill)             |  | Senior Executive Vice President, Chief Financial Officer and
    Treasurer |  | March 22, 2005
|                                                          
|/s/ Douglas P. Barton(Douglas
    P. Barton)               |  | Vice President and Chief Accounting Officer                                |  | March 22, 2005
|                                                          
|/s/ Richard H.
    Albright,(Richard
    H. Albright, Jr.) |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Michael A. Carenzo(Michael
    A. Carenzo)             |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Anthony d.
    Chivinski(Anthony
    d. Chivinski)     |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Bertram F. Elsner(Bertram
    F. Elsner)               |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Howard E.
    Groff, Jr.(Howard
    E. Groff, Jr.)     |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Joan R. Henderson(Joan
    R. Henderson)               |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Terrence L. Hormel(Terrence
    L. Hormel)             |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ David E. Hosler(David
    E. Hosler)                   |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ William E.
    Miller, Jr.(William
    E. Miller, Jr.) |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ W. Garth Sprecher(W.
    Garth Sprecher)               |  | Director                                                                   |  | March 22, 2005
|                                                          
|/s/ Glenn R. Walz(Glenn
    R. Walz)                       |  | Director                                                                   |  | March 22, 2005

94