8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 24, 2005

STERLING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington	0-20800	91-1572822
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

111 North Wall Street, Spokane, Washington 99201

(Address of principal executive offices) (Zip Code)

(509) 458-3711

(Registrant’s telephone number, including area code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

INFORMATION TO BE INCLUDED IN THE REPORT

Item 2.02.  Results of Operations and Financial Condition.

On October 24, 2005, Sterling Financial Corporation (“Sterling”) issued a press release and financial supplement thereto regarding its results of operations and financial condition for the quarter ended September 30, 2005.  The text of the press release is included as Exhibit 99.1 to this report and the financial supplement is included as Exhibit 99.2 to this report.  The information included in the press release text and the financial supplement is considered to be “furnished” under the Securities Exchange Act of 1934.

Item 9.01.  Financial Statements and Exhibits.

(c)  The following exhibits are being furnished herewith:

Exhibit No.	Exhibit Description
99.1	Press release text of Sterling Financial Corporation dated October 24, 2005.
99.2	Financial supplement of Sterling Financial Corporation.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STERLING FINANCIAL CORPORATION
	(Registrant)
October 24, 2005	By:	/s/ Daniel G. Byrne
Date		Daniel G. Byrne
		Executive Vice President, Assistant Secretary, and Principal Financial Officer

2

EX-99.1

Exhibit 99.1

For Release October 24, 2005—1:30 p.m. PDT	Contact: Daniel G. Byrne
	(509) 458-3711

STERLING FINANCIAL CORPORATION OF SPOKANE, WASHINGTON,

ANNOUNCES THIRD QUARTER EARNINGS

AND RECORD QUARTERLY LOAN ORIGINATIONS

Spokane, Washington, October 24, 2005 – Sterling Financial Corporation (NASDAQ:STSA) today announced earnings of $13.9 million, or $0.40 per diluted share, for the third quarter of 2005.  This represented a nine percent decrease from earnings of $15.3 million, or $0.44 per diluted share, for the prior year’s comparable quarter.  The decrease was due to the slower than expected growth in loan balances, the impact of the continued flattening of the yield curve, and an increase in operating expenses.  Earnings for the nine months ended September 30, 2005 were $45.8 million, or $1.31 per diluted share, compared with $40.8 million, or $1.18 per diluted share, for the same period in 2004, reflecting a 12 percent increase year-over-year.  The increase for the year-to-date results over the prior year reflects growth in net interest income.

THIRD QUARTER 2005 HIGHLIGHTS

•Earnings for the three months ended September 30, 2005 were $13.9 million, or $0.40 per diluted share.

•Net interest margin increased to 3.33 percent, up seven basis points over the prior quarter.

•Loan production for the quarter was $955.5 million, up 28 percent year-over-year.

•Construction loan originations increased 47 percent over the prior year, to $443.5 million for the quarter ended September 30, 2005.

•Deposits increased to $4.39 billion, up $613.8 million, or 16 percent, over the same period in the prior year.

•Sterling’s three-for-two stock split was payable on August 31, 2005 and distributed in the form of a 50 percent stock dividend.

•Sterling’s board of directors approved a quarterly cash dividend of $0.05 per common share, payable to shareholders of record as of September 30, 2005, and paid on October 14, 2005.

Harold B. Gilkey, Sterling’s chairman and chief executive officer, said, “During the third quarter, we experienced market pressures that were affecting the financial institutions industry, including the flattening

of the yield curve and tighter spreads on loans.  Additionally, our earning assets were lower than anticipated, in part because loan pay-offs in the third quarter were much higher than anticipated, primarily in the permanent real estate segments.”

“Part of the reason for the lower earning assets this quarter relates to Sterling’s repositioning the mix of assets in its loan portfolio near the end of the second quarter, when the Bank took advantage of market conditions and sold $336 million in lower yielding residential and commercial loans.  Reducing the level of these loans helped avoid a reduction in interest margin and increased our mortgage banking operations income for the second quarter.  However, replacement of these earning assets has been slower than anticipated.  While loan originations have been strong, draw-downs on construction and commercial lines are well below Sterling’s historical levels and pay-offs, as mentioned, have been higher than expected.”

“While market conditions, and our portfolio repositioning, impacted earnings for the third quarter, Sterling’s overall performance, reflects strength in a number of sectors, including percentage growth in deposits and transaction account fee income.  The current pipeline of pending loans in business, corporate and construction lending provides confidence for better earning asset growth for the remainder of the year.”

Gilkey went on to further comment, “Sterling’s employees have been focused on our customers’ needs, which is reflected in record loan originations.  The 28 percent annual growth in loan originations indicates that lending opportunities in the Pacific Northwest region continue to be robust, and Sterling’s increasing pipeline of loan applications reflects the positive economies throughout our four-state footprint. I am confident, based on conversations with customers and our division managers, that loan draw-downs and loan growth will continue to improve.  The improving economy encourages management to expect that draw-downs will return to more normal levels, and at the same time we expect that rising interest rates will slow pre-payments.”

OPERATING RESULTS

Net Interest Income

Sterling reported record net interest income of $53.1 million for the three months ended September 30, 2005, a six percent increase over the $50.2 million reported for the same period in the prior year.  Net interest income for the nine months ended September 30, 2005 was $159.7 million, compared to $144.6 million for the nine months ended September 30, 2004.  Both the three and the nine-month increases primarily resulted from growth in the volume of loans outstanding, particularly in construction lending.

The net interest margin of 3.33 percent for the third quarter of 2005 represented a seven basis point increase from the June 30, 2005 quarter.  Net interest margin increased for the quarter mainly due to the sale of lower-yielding loans in the prior quarter and the replacement of wholesale funds with lower-costing deposits.  Net interest margin for the nine months ended September 30, 2005 was 3.27 percent, an eight basis point decrease from 3.35 percent for the comparable 2004 period, reflecting a greater increase in the cost of funding, the absence of a Federal Home Loan Bank Seattle dividend and increasing prepayments on mortgage backed securities.

Non-Interest Income

Total non-interest income was $13.3 million for the three-month period ended September 30, 2005, compared to $12.7 million for the same period one year ago, a 5 percent increase.  Total non-interest income was $43.4 million for the nine months ended September 30, 2005, compared to $37.4 million for the same period one year ago.  These increases were primarily due to the increase in fees and service charge income and mortgage banking income.

Fees and service charge income increased by 14.8 percent to $9.3 million for the quarter, from $8.1 million for the same period one year ago.  The increase from the same period in 2004 was principally due to an increase in the number of activities with transaction accounts plus enhancements to our merchant services programs.  Total transaction accounts were 152,365 at September 30, 2005, an increase of 5,491 from a year ago.  For the nine-month period ended September 30, 2005, fees and service charge income remain unchanged at approximately $25 million compared to the same period in the prior year.

Mortgage banking income of $3.0 million for the September 30, 2005 quarter was down from $6.1 million for the second quarter of 2005 and up from $1.5 million for the same period in 2004.  The fluctuation in the three-month period was mainly due to differences in loan sale volumes.  Sterling sold $71.8 million of loans during the third quarter, compared to $402.8 million during the second quarter, and $52.9 million during the third quarter of 2004. Also during the third quarter, Sterling brokered $124.4 million in multifamily, commercial and residential loans, accounting for 45 percent of total mortgage banking income.  Total mortgage banking income was $14.4 million for the nine months ended September 30, 2005, compared to $4.4 million for the same period one year ago, reflecting higher loan sales in 2005.

Non-Interest Expenses

Total non-interest expenses were $42.6 million, or 2.49 percent of average assets, for the three months ended September 30, 2005, compared with $36.6 million, or 2.24 percent of average assets, for the three months ended September 30, 2004.  Non-interest expenses were $123.8 million and $111.1 million for the nine months ended September 30, 2005 and 2004, respectively, an increase of 11.2 percent.  In both the three and nine month periods, the increases represent growth in the scale of operations, and reflect higher personnel, occupancy and data processing expenses, primarily related to Sterling’s branch expansion.  Sterling’s footprint has expanded in 2005 to include four metropolitan branches, one in Boise, Idaho, two near Portland, Oregon, and one in Spokane, Washington.  Additionally, the bank is slated to open two new branches in mid-November 2005, both in the Seattle, Washington area, bringing its total branch network to 140.  Full-time equivalent employees increased year-over-year by 160 to 1,770 at September 30, 2005.

Commenting on non-interest expenses and efficiency, Mr. Gilkey stated, “The increase in non-interest expenses year-over-year underlies Sterling’s investment in corporate and business lending as well as retail branch and commercial mortgage expansion.  Our resource commitments in metropolitan areas, such as Boise, ID and the Puget Sound area, are being confirmed by the strong loan and deposit growth coming from those areas.

Performance Ratios

Return on average equity was 10.8 percent for the three months ended September 30, 2005, compared to 14.6 percent for the same period in 2004 and 13.4 percent for the second quarter of 2005.  Return on average assets was 0.81 percent for the three months ended September 30, 2005, compared to 0.94 percent for the same period in 2004 and 0.92 percent for the second quarter of 2005.  Return on tangible equity decreased to 14.6 percent for the quarter, down from 18.5 percent at June 30, 2005 and 22.8 percent in the prior year’s same period.  The decrease in these ratios from the third quarter of 2004 was mainly due to the year-over-year decrease in net income.

Lending

As of September 30, 2005, Sterling’s loans receivable were $4.29 billion, up $106.4 million from the preceding quarter, primarily from strength in construction lending.  Sterling’s capacity in commercial and industrial lending, as well as construction and consumer lending, is ideally suited for opportunities inherent in the region’s improving economies.

Sterling’s total loan originations for the quarter ended September 30, 2005 were a record $955.5 million, compared to $748.7 million in the third quarter of 2004, a 28 percent increase.  Sterling’s total loan originations for the nine months ended September 30, 2005 were $2.69 billion, compared with $2.12 billion for the first nine months of 2004, a 26.4 percent increase. Sterling’s position as a commercial bank has been enhanced by the 12.5 percent year-over-year balance growth in commercial and industrial loan balances. One of Sterling’s core strengths is reflected by the 50.7 percent year-over-year balance increase in construction loan balances. Our construction lending relationships remain robust as a result of the economic strength seen across the greater Pacific Northwest region.

Credit Quality

As of September 30, 2005, total nonperforming assets were $11.6 million, or 0.17 percent of total assets.  This compares favorably with the third quarter 2004 level of $16.9 million, or 0.25 percent of total assets.  The improvement in nonperforming assets reflects strength in the regional economy and Sterling’s continued high lending standards.

Classified assets were $63.5 million at September 30, 2005, a decrease compared to $73.8 million at June 30, 2005, and a decrease from the $74.6 million at September 30, 2004.  The loan delinquency ratio decreased to 0.28 percent of total loans, compared to 0.45 percent of total loans at June 30, 2005, and 0.34 percent of total loans at September 30, 2004, reflecting Sterling’s continued strong lending standards.  Sterling’s classified assets and delinquency ratio are still among the lowest in Sterling’s twenty-two year history.

The annualized level of net charge-offs to average loans was 0.40 percent for the third quarter of 2005, compared to 0.13 percent for the quarter ended June 30, 2005 and 0.10 percent for the quarter ended September 30, 2004.  The quarterly increase in net loan charge-offs reflects primarily the charge-off of two loans, one in commercial real estate and one in dealer banking.  Both of these loans were previously classified.  Management expects that our increasing focus on commercial lending will generate a charge-off ratio higher than Sterling’s historical levels; however, our credit standards will maintain better ratios than our peers.

Sterling’s provision for loan losses was $3.4 million for the three months ended September 30, 2005, compared with $3.0 million for the same period in 2004 and $3.4 million for the second quarter of 2005.  At September 30, 2005, the loan loss allowance totaled $53.7 million and was 1.24 percent of total loans, compared to $47.3 million, or 1.16 percent of total loans, at September 30, 2004 and $54.6 million, or

1.29 percent of total loans, at June 30, 2005.  The decrease in allowance ratios reflects charge-offs and shifts in net loan balances.  Sterling believes the allowance is adequate given management’s analysis of the loan portfolio and Sterling’s relative mix of products.

Balance Sheet and Capital Management

At September 30, 2005, Sterling’s total assets were $6.80 billion, an increase from the preceding quarter’s total assets of $6.74 billion, primarily reflecting loan growth. Equity to assets was 7.35 percent and tangible shareholders’ equity to tangible assets was 5.54 percent at September 30, 2005, reflecting year-over-year asset growth.

As of September 30, 2005, Sterling’s book value per share was $14.39 compared to $14.54 at June 30, 2005.  This decrease in book value reflects an increase in the unrealized loss on our investment portfolio.  The Bank’s risk-based capital ratios continued to exceed the “well-capitalized” requirements.

Goodwill Litigation

In May 1990, Sterling sued the U.S. Government with respect to the loss of the goodwill treatment and other matters relating to Sterling’s past acquisitions of troubled thrift institutions (the “Goodwill Litigation”).  In the Goodwill Litigation, Sterling seeks damages for, among other things, breach of contract and deprivation of property without just compensation.

In September 2002, the U.S. Court of Federal Claims granted Sterling Savings Bank’s motion for summary judgment as to liability on its contract claim, holding that the U.S. Government owed contractual obligations to Sterling with respect to the company’s acquisition of three failing regional thrifts during the 1980s and had breached its contracts with Sterling.  On March 31, 2005, a hearing was held in the U.S. Court of Federal Claims on the U.S. Government’s motion to reconsider part of the September 2002 liability judgment.  Sterling opposed the motion.  Sterling is waiting for a decision on the motion and for a trial date to be set to determine what amount, if any, the U.S. Government must pay in damages for its breach.  The timing and ultimate outcome of the motion for reconsideration and the Goodwill Litigation cannot be predicted with certainty.  Because of the effort required to bring the case to conclusion, Sterling will likely continue to incur legal expenses as the case progresses.

Outlook

Commenting on the third quarter of 2005, Gilkey stated, “Although earnings growth for the second half of 2005 has been under pressure, I believe in the systems we have in place and in the ability of our

employees to rise to challenges, and I am encouraged by the fact that many segments of our business plan are on track as we continue to develop Sterling’s commercial bank capabilities.  While I remain confident in Sterling’s ability to perform well, in the near term, we are likely to continue to be somewhat impacted by market conditions.”

Gilkey continued, “Those segments of Sterling’s business that are within our control are meeting or exceeding our expectations.  For example, I am pleased to see our loan originations at record levels, strong growth in deposit balances and continued success in meeting our customers’ needs, while at the same time providing opportunities for generation of fee income.  The strength in these key fundamentals, in addition to the backlog of business in our lending portfolio, reflects that Sterling remains a leader in regional community banking.”

Third Quarter Earnings Conference Call

Management will be discussing third quarter earnings and guidance for the remainder of the year during Sterling’s Third Quarter Earnings Conference Call to be hosted October 25, 2005 at 8:00 a.m. Pacific Time.  To participate in the conference call, domestic callers should dial 517-308-9004 approximately five minutes before the scheduled start time.  You will be asked to identify yourself to the operator and should provide the password “STERLING” to enter the call.  A continuous replay will be available approximately one hour following the conference call and may be accessed by dialing 203-369-0329.  The continuous replay will be offered through November 26, 2005.

In addition, the Sterling Third Quarter 2005 Earnings Conference Call is being made available on-line at Sterling’s web site, www.sterlingsavingsbank.com. To access the audio webcast presentation, click on “Investor Relations,” then click on the live audio webcast icon.

ABOUT STERLING

Sterling Financial Corporation of Spokane, Washington is a bank holding company, the principal operating subsidiary of which is Sterling Savings Bank.  Sterling Savings Bank is a Washington State-chartered, federally insured commercial bank, which opened in April 1983 as a stock savings and loan association.  Sterling Savings Bank, based in Spokane, Washington, has financial service centers throughout Washington, Oregon, Idaho and Montana.  Through Sterling Saving Bank’s wholly owned subsidiaries, Action Mortgage Company and INTERVEST-Mortgage Investment Company, it operates loan production offices in Washington, Oregon, Idaho, Montana, Arizona and California.  Sterling Savings Bank’s subsidiary Harbor Financial Services provides non-bank investments, including mutual

funds, variable annuities and tax-deferred annuities and other investment products through regional representatives throughout Sterling Savings Bank’s branch network.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, which are not historical facts and pertain to Sterling’s future operating results.  These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may include, but are not limited to, statements about Sterling’s plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts.  When used in this report, the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements.  These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Sterling’s control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  Actual results may differ materially from the results discussed in these forward-looking statements because of numerous possible risks and uncertainties.  These include but are not limited to: the possibility of adverse economic developments that may, among other things, increase default and delinquency risks in Sterling’s loan portfolios; shifts in interest rates that may result in lower interest rate margins; shifts in the demand for Sterling’s loan and other products; lower-than-expected revenue or cost savings in connection with acquisitions; changes in accounting policies; changes in the monetary and fiscal policies of the federal government; and changes in laws, regulations and the competitive environment.

EX-99.2

Exhibit 99.2

STERLING FINANCIAL CORPORATION
SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS, UNAUDITED)

	SEPT 30, 2005			JUNE 30, 2005			SEPT 30, 2004 (1)
ASSETS:
CASH AND CASH EQUIVALENTS	$	126,812		$	126,345		$	106,023
LOANS RECEIVABLE, NET	4,287,684			4,181,265			4,021,008
LOANS HELD FOR SALE	26,091			15,559			16,367
INVESTMENTS AND MORTGAGE-BACKED SECURITIES (MBS) AVAILABLE FOR SALE	1,915,287			1,996,804			2,173,086
INVESTMENTS AND MBS HELD TO MATURITY	49,716			49,908			47,841
OFFICE PROPERTIES AND EQUIPMENT, NET	81,007			80,582			77,920
REAL ESTATE OWNED AND OTHER COLLATERALIZED ASSETS, NET	2,454			2,463			3,447
GOODWILL, NET	112,391			112,391			111,050
OTHER INTANGIBLE ASSETS, NET	18,180			18,736			20,403
BANK OWNED LIFE INSURANCE (BOLI)	107,122			95,957			92,792
PREPAID EXPENSES AND OTHER ASSETS, NET	69,304			63,802			63,509
TOTAL ASSETS	$	6,796,048		$	6,743,812		$	6,733,446
LIABILITIES:
DEPOSITS	$	4,390,757		$	4,200,196		$	3,776,932
ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE	1,266,874			1,317,141			1,593,503
REPURCHASE AGREEMENTS AND FED FUNDS	461,594			536,152			681,843
OTHER BORROWINGS	110,683			111,152			166,134
ACCRUED EXPENSES AND OTHER LIABILITIES	66,457			75,684			67,797
TOTAL LIABILITIES	6,296,365			6,240,325			6,286,209
SHAREHOLDERS’ EQUITY:
COMMON STOCK	34,725			23,084			22,791
ADDITIONAL PAID-IN CAPITAL	384,409			395,865			386,322
ACCUMULATED COMPREHENSIVE INCOME (LOSS):
UNREALIZED LOSS ON INVESTMENTS AND MBS (2)	(26,635		)	(10,494		)	(9,481		)
RETAINED EARNINGS	107,184			95,032			47,605
TOTAL SHAREHOLDERS’ EQUITY	499,683			503,487			447,237
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	6,796,048		$	6,743,812		$	6,733,446
BOOK VALUE PER SHARE (3)	$	14.39		$	14.54		$	13.08
TANGIBLE BOOK VALUE PER SHARE (3)(4)	$	10.63		$	10.75		$	9.24
SHARES OUTSTANDING AT END OF PERIOD	34,725,400			23,084,300			22,791,122
SHAREHOLDERS’ EQUITY TO TOTAL ASSETS	7.35		%	7.47		%	6.64		%
TANGIBLE SHAREHOLDERS’ EQUITY TO TANGIBLE ASSETS (5)	5.54		%	5.63		%	4.78		%

(1)	Certain prior period amounts have been reclassified to conform with the current period’s presentation.
(2)	Net of deferred income taxes.
(3)	Prior period amounts have been restated to reflect the 3 for 2 stock split that occurred on August 31, 2005.
(4)	Amount represents shareholders’ equity less net goodwill and other intangible assets divided by total shares outstanding.
(5)	Amount represents shareholders’ equity less net goodwill and other intangible assets divided by assets less net goodwill and other intangible assets.

1

STERLING FINANCIAL CORPORATION

SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS,

EXCEPT PER SHARE AMOUNTS, UNAUDITED)

	THREE MONTHS ENDED									NINE MONTHS ENDED
	SEPT 30,			JUNE 30,			SEPT 30,			SEPT 30,			SEPT 30,
	2005			2005			2004 (1)			2005			2004 (1)
INTEREST INCOME:
LOANS	$	73,375		$	72,619		$	57,665		$	214,037		$	165,724
MORTGAGE-BACKED SECURITIES	20,757			21,858			22,642			65,697			61,985
INVESTMENTS AND CASH	642			579			1,319			2,162			4,548
TOTAL INTEREST INCOME	94,774			95,056			81,626			281,896			232,257
INTEREST EXPENSE:
DEPOSITS	23,827			21,105			13,696			63,255			38,233
BORROWINGS	17,859			20,137			17,729			58,921			49,410
TOTAL INTEREST EXPENSE	41,686			41,242			31,425			122,176			87,643
NET INTEREST INCOME	53,088			53,814			50,201			159,720			144,614
PROVISION FOR LOSSES ON LOANS	(3,400		)	(3,400		)	(3,000		)	(10,550		)	(8,850		)
NET INTEREST INCOME AFTER PROVISION	49,688			50,414			47,201			149,170			135,764
NON INTEREST INCOME:
FEES AND SERVICE CHARGES	9,260			8,205			8,116			24,868			24,836
MORTGAGE BANKING OPERATIONS	2,969			6,106			1,477			14,447			4,440
LOAN SERVICING FEES	90			103			129			330			435
NET GAIN (LOSS) ON SALES OF SECURITIES	0			0			1,264			(57		)	4,571
REAL ESTATE OWNED OPERATIONS	(23		)	99			196			188			(120		)
BOLI	1,164			1,107			1,089			3,331			3,342
GAIN RELATED TO EARLY REPAYMENT OF DEBT	0			0			0			645			0
OTHER NONINTEREST INCOME (EXPENSE)	(154		)	(215		)	396			(402		)	(130		)
TOTAL NON INTEREST INCOME	13,306			15,405			12,667			43,350			37,374
NON INTEREST EXPENSE:
EMPLOYEE COMPENSATION AND BENEFITS	23,274			22,334			19,286			67,625			57,610
OCCUPANCY AND EQUIPMENT	6,578			6,617			5,901			19,241			17,048
AMORTIZATION OF CORE DEPOSIT INTANGIBLES	556			555			556			1,667			1,667
MERGER AND ACQUISITION COSTS	0			0			0			0			4,835
OTHER	12,191			12,096			10,827			35,315			30,217
TOTAL NON INTEREST EXPENSE	42,599			41,602			36,570			123,848			111,377
INCOME BEFORE INCOME TAXES	20,395			24,217			23,298			68,672			61,761
INCOME TAX PROVISION	(6,505		)	(8,209		)	(7,988		)	(22,883		)	(20,984		)
NET INCOME	$	13,890		$	16,008		$	15,310		$	45,789		$	40,777
EARNINGS PER SHARE - BASIC (2)	$	0.40		$	0.46		$	0.45		$	1.32		$	1.21
EARNINGS PER SHARE - DILUTED (2)	$	0.40		$	0.46		$	0.44		$	1.31		$	1.18
CORE EARNINGS (3)	$	13,890		$	16,008		$	14,488		$	45,419		$	40,949
CORE EARNINGS PER SHARE - BASIC (3)	$	0.40		$	0.46		$	0.42		$	1.31		$	1.21
CORE EARNINGS PER SHARE - DILUTED (3)	$	0.40		$	0.46		$	0.42		$	1.30		$	1.18
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (2)	34,660,107			34,597,964			34,015,769			34,581,606			33,811,065
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (2)	35,097,474			35,022,597			34,721,952			35,033,011			34,626,014

(1)   Certain prior period amounts have been reclassified to conform with the current period’s presentation.

(2)   Weighted average shares and per share amounts for prior periods have been restated to reflect the 3 for 2 stock split that occurred on August 31, 2005.

(3)   Core earnings per share excludes net securities gains (losses), merger and acquisition costs and gains (losses) related to early repayment of debt, net of related income taxes. See Exhibit A for a reconciliation to reported earnings per share. Management believes that this presentation of non-GAAP information regarding core earnings provides useful information to investors regarding the registrant’s financial condition and results of operations as core earnings are widely used for comparison purposes in the financial services industry.

2

STERLING FINANCIAL CORPORATION

SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS,

EXCEPT PER SHARE AMOUNTS, UNAUDITED)

	THREE MONTHS ENDED									NINE MONTHS ENDED
	SEPT 30,			JUNE 30,			SEPT 30,			SEPT 30,			SEPT 30,
	2005			2005			2004 (1)			2005			2004 (1)
NET INTEREST SPREAD:
YIELD ON LOAN PORTFOLIO	6.77		%	6.44		%	5.91		%	6.46		%	5.92		%
YIELD ON MORTGAGE-BACKED SECURITIES	4.43		%	4.53		%	4.54		%	4.53		%	4.50		%
YIELD ON INVESTMENTS AND CASH	1.50		%	1.44		%	3.10		%	1.72		%	3.07		%
YIELD ON INTEREST-EARNING ASSETS	5.94		%	5.76		%	5.38		%	5.77		%	5.37		%
COST OF DEPOSITS	2.20		%	2.04		%	1.46		%	2.03		%	1.42		%
COST OF BORROWINGS	3.76		%	3.48		%	3.19		%	3.52		%	3.12		%
COST OF INTEREST-BEARING LIABILITIES	2.67		%	2.55		%	2.11		%	2.55		%	2.05		%
NET INTEREST SPREAD	3.27		%	3.21		%	3.27		%	3.22		%	3.32		%
NET INTEREST MARGIN	3.33		%	3.26		%	3.31		%	3.27		%	3.35		%
PERFORMANCE RATIOS:
RETURN ON AVERAGE ASSETS	0.81		%	0.92		%	0.94		%	0.88		%	0.87		%
RETURN ON AVERAGE ASSETS, CORE OPERATING BASIS (2)	0.81		%	0.92		%	0.89		%	0.87		%	0.88		%
RETURN ON AVERAGE SHAREHOLDERS’ EQUITY	10.8		%	13.4		%	14.6		%	12.5		%	13.0		%
RETURN ON AVERAGE SHAREHOLDERS’ EQUITY, CORE OPERATING BASIS (2)	10.8		%	13.4		%	13.9		%	12.4		%	13.1		%
RETURN ON AVERAGE TANGIBLE EQUITY (3)	14.6		%	18.5		%	22.8		%	17.1		%	20.1		%
OPERATING EFFICIENCY	64.2		%	60.1		%	58.2		%	61.0		%	61.2		%
OPERATING EFFICIENCY, CORE OPERATING BASIS (2)	64.2		%	60.1		%	60.2		%	61.3		%	61.0		%
NONINTEREST EXPENSE TO AVERAGE ASSETS (ANNUALIZED)	2.49		%	2.39		%	2.24		%	2.38		%	2.39		%
CAPITAL ADEQUACY:
SHAREHOLDERS’ EQUITY TO TOTAL ASSETS RATIO	7.4		%	7.5		%	6.6		%	7.4		%	6.6		%
REGULATORY CAPITAL RATIOS (FOR STERLING FINANCIAL CORPORATION):
CORE CAPITAL RATIO	7.7		%	N/A			N/A			7.7		%	N/A
TIER 1 RISK-BASED CAPITAL RATIO	10.6		%	N/A			N/A			10.6		%	N/A
TOTAL RISK-BASED CAPITAL RATIO	11.7		%	N/A			N/A			11.7		%	N/A
REGULATORY CAPITAL RATIOS (FOR STERLING SAVINGS BANK):
CORE CAPITAL RATIO	6.7		%	7.2		%	6.6		%	6.7		%	6.6		%
TIER 1 RISK-BASED CAPITAL RATIO	10.7		%	10.0		%	9.9		%	10.7		%	9.9		%
TOTAL RISK-BASED CAPITAL RATIO	11.9		%	11.1		%	10.8		%	11.9		%	10.8		%
LOAN ORIGINATIONS BY PROPERTY TYPE:
RESIDENTIAL REAL ESTATE	$	115,870		$	106,489		$	105,421		$	378,842		$	268,098
MULTIFAMILY REAL ESTATE	0			0			2,588			13,267			39,005
COMMERCIAL REAL ESTATE	51,065			14,700			77,434			120,820			175,949
CONSTRUCTION	443,521			424,519			302,309			1,212,960			690,900
CONSUMER - DIRECT	86,216			120,593			79,779			270,760			275,703
CONSUMER - INDIRECT	30,825			21,746			12,903			67,613			37,322
BUSINESS BANKING	155,831			130,128			92,065			380,107			358,039
CORPORATE BANKING	72,176			89,955			76,156			241,864			279,972
TOTAL LOAN ORIGINATION VOLUME	$	955,504		$	908,130		$	748,655		$	2,686,233		$	2,124,988

(1)   Certain prior period amounts have been reclassified to conform with the current period’s presentation.

(2)   Core earnings per share excludes net securities gains (losses), merger and acquisition costs and gains (losses) related to early repayment of debt, net of related income taxes. See Exhibit A for a reconciliation to reported earnings per share. Management believes that this presentation of non-GAAP information regarding core earnings provides useful information to investors regarding the registrant’s financial condition and results of operations as core earnings are widely used for comparison purposes in the financial services industry.

(3)   Average tangible equity is average shareholders’ equity less average net goodwill and other intangible assets.

3

STERLING FINANCIAL CORPORATION

SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS, UNAUDITED)

	SEPT 30,			JUNE 30,			SEPT 30,
	2005			2005			2004
LOANS BY COLLATERAL TYPE:
RESIDENTIAL REAL ESTATE	$	493,752		$	495,682		$	718,686
MULTIFAMILY REAL ESTATE	219,224			225,476			176,287
COMMERCIAL REAL ESTATE	580,567			568,945			671,976
CONSTRUCTION	905,381			801,746			600,673
CONSUMER - DIRECT	598,956			591,409			537,985
CONSUMER - INDIRECT	141,475			128,510			115,495
BUSINESS BANKING	1,001,691			994,054			896,321
CORPORATE BANKING	409,251			438,038			357,929
DEFERRED LOAN FEES, NET	(8,942		)	(8,002		)	(7,054		)
ALLOWANCE FOR LOSSES ON LOANS	(53,671		)	(54,593		)	(47,290		)
NET LOANS RECEIVABLE	$	4,287,684		$	4,181,265		$	4,021,008
ALLOWANCE FOR LOSSES ON LOANS:
BALANCE AT BEGINNING OF QUARTER	$	54,593		$	52,712		$	45,251
PROVISION FOR LOSSES ON LOANS	3,400			3,400			3,000
AMOUNTS WRITTEN OFF NET OF RECOVERIES AND OTHER	(4,322		)	(1,519		)	(961		)
BALANCE AT END OF QUARTER	$	53,671		$	54,593		$	47,290
NET CHARGE-OFFS TO AVERAGE NET LOANS (ANNUALIZED)	0.40		%	0.13		%	0.10		%
NET CHARGE-OFFS TO AVERAGE NET LOANS (YTD)	0.14		%	0.03		%	0.10		%
LOAN LOSS ALLOWANCE TO TOTAL LOANS	1.24		%	1.29		%	1.16		%
LOAN LOSS ALLOWANCE TO NONPERFORMING LOANS (EXCLUDING LOANS CLASSIFIED AS LOSS)	953.1		%	460.1		%	443.8		%
NONPERFORMING LOANS TO NET LOANS	0.21		%	0.37		%	0.33		%
NONPERFORMING ASSETS:
ACCRUING LOANS WHICH ARE PAST DUE 90 DAYS	$	0		$	0		$	0
NONACCRUAL LOANS	7,888			14,020			12,097
RESTRUCTURED LOANS	1,226			1,267			1,341
TOTAL NONPERFORMING LOANS	9,114			15,287			13,438
REO	2,454			2,463			3,447
TOTAL NONPERFORMING ASSETS (NPA)	$	11,568		$	17,750		$	16,885
NPA TO TOTAL ASSETS	0.17		%	0.26		%	0.25		%
LOAN DELINQUENCY RATIO (60 DAYS AND OVER)	0.28		%	0.45		%	0.34		%
CLASSIFIED ASSETS	$	63,537		$	73,753		$	74,623
CLASSIFIED ASSETS/TOTAL ASSETS	0.93		%	1.09		%	1.11		%

4

STERLING FINANCIAL CORPORATION

SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS,

EXCEPT AS INDICATED, UNAUDITED)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPT 30,		JUNE 30,		SEPT 30,		SEPT 30,		SEPT 30,
	2005		2005		2004		2005		2004
AVERAGE BALANCE SHEET DATA:
AVERAGE LOANS	$	4,300,460	$	4,526,338	$	3,881,064	$	4,429,644	$	3,737,149
AVERAGE MORTGAGE-BACKED SECURITIES	1,858,353		1,933,964		1,985,485		1,937,322		1,838,727
AVERAGE INVESTMENTS AND CASH	169,716		161,791		169,293		168,167		198,071
AVERAGE INTEREST-EARNING ASSETS	$	6,328,529	$	6,622,093	$	6,035,842	$	6,535,133	$	5,773,947
AVERAGE DEPOSITS	$	4,303,180	$	4,158,092	$	3,727,825	$	4,161,898	$	3,585,208
AVERAGE BORROWINGS	1,885,913		2,323,964		2,208,496		2,238,298		2,116,533
AVERAGE INTEREST-BEARING LIABILITIES	$	6,189,093	$	6,482,056	$	5,936,321	$	6,400,196	$	5,701,741
AVERAGE ASSETS	6,785,740		6,972,385		6,496,332		6,948,356		6,232,461
AVERAGE SHAREHOLDERS’ EQUITY	509,256		478,378		416,279		488,564		418,251
AVERAGE TANGIBLE EQUITY (1)	378,326		346,889		267,594		357,074		270,320
DEPOSITS DETAIL (ACTUAL):
INTEREST-BEARING TRANSACTION ACCOUNTS	$	439,838	$	420,460	$	415,706	$	439,838	$	415,706
NONINTEREST-BEARING TRANSACTION ACCOUNTS	717,026		634,997		576,456		717,026		576,456
SAVINGS AND MONEY MARKET DEPOSIT ACCOUNTS (MMDA)	1,198,489		1,116,071		1,116,203		1,198,489		1,116,203
TIME DEPOSITS	2,035,404		2,028,668		1,668,567		2,035,404		1,668,567
TOTAL DEPOSITS	$	4,390,757	$	4,200,196	$	3,776,932	$	4,390,757	$	3,776,932
NUMBER OF TRANSACTION ACCOUNTS (ACTUAL):
INTEREST-BEARING TRANSACTION ACCOUNTS	47,157		47,745		45,382		47,157		45,382
NONINTEREST-BEARING TRANSACTION ACCOUNTS	105,208		102,477		101,492		105,208		101,492
TOTAL TRANSACTION ACCOUNTS	152,365		150,222		146,874		152,365		146,874
FULL-TIME EQUIVALENT EMPLOYEES AT END OF PERIOD:	1,770		1,707		1,610		1,770		1,610
NONBANKING SUBSIDIARY PRODUCTION:
SALES OF FINANCIAL PRODUCTS	$	23,332	$	26,183	$	20,774	$	78,430	$	56,683

(1)  Average tangible equity is average shareholders’ equity less average net goodwill and other intangible assets.

5

STERLING FINANCIAL CORPORATION

SELECTED FINANCIAL DATA

(DOLLAR AMOUNTS IN THOUSANDS,

EXCEPT PER SHARE AMOUNTS, UNAUDITED)

	AS OF OR FOR THE THREE MONTHS ENDED									AS OF OR FOR THE NINE MONTHS ENDED
	SEPT 30,			JUNE 30,			SEPT 30,			SEPT 30,			SEPT 30,
EXHIBIT A - RECONCILIATION SCHEDULE	2005			2005			2004			2005			2004
CORE EARNINGS: (2)
NET INCOME, AS REPORTED	$	13,890		$	16,008		$	15,310		$	45,789		$	40,777
SUBTRACT: NET (GAIN) LOSS ON SECURITIES, NET OF TAX	0			0			(822		)	36			(2,971		)
ADD BACK: MERGER AND ACQUISITION COSTS, NET OF TAX	0			0			0			0			3,143
SUBTRACT: NET (GAIN) LOSS ON EARLY DEBT REPAYMENT, NET OF TAX	0			0			0			(406		)	0
CORE EARNINGS	$	13,890		$	16,008		$	14,488		$	45,419		$	40,949
CORE EARNINGS PER SHARE - BASIC: (1)(2)
EARNINGS PER SHARE - BASIC, AS REPORTED	$	0.40		$	0.46		$	0.45		$	1.32		$	1.21
SUBTRACT: NET (GAIN) LOSS ON SECURITIES, NET OF TAX	0.00			0.00			(0.03		)	0.00			(0.09		)
ADD BACK: MERGER AND ACQUISITION COSTS, NET OF TAX	0.00			0.00			0.00			0.00			0.09
SUBTRACT: NET (GAIN) LOSS ON EARLY DEBT REPAYMENT, NET OF TAX	0.00			0.00			0.00			(0.01		)	0.00
CORE EARNINGS PER SHARE - BASIC	$	0.40		$	0.46		$	0.42		$	1.31		$	1.21
CORE EARNINGS PER SHARE - DILUTED: (1)(2)
EARNINGS PER SHARE - DILUTED, AS REPORTED	$	0.40		$	0.46		$	0.44		$	1.31		$	1.18
SUBTRACT: NET (GAIN) LOSS ON SECURITIES, NET OF TAX	0.00			0.00			(0.02		)	0.00			(0.09		)
ADD BACK: MERGER AND ACQUISITION COSTS, NET OF TAX	0.00			0.00			0.00			0.00			0.09
SUBTRACT: NET (GAIN) LOSS ON EARLY DEBT REPAYMENT, NET OF TAX	0.00			0.00			0.00			(0.01		)	0.00
CORE EARNINGS PER SHARE - DILUTED	$	0.40		$	0.46		$	0.42		$	1.30		$	1.18
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (1)	34,660,107			34,597,964			34,015,769			34,581,606			33,811,065
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (1)	35,097,474			35,022,597			34,721,952			35,033,011			34,626,014
COMMON SHARES OUTSTANDING	34,725,400			23,084,300			22,791,122			34,725,400			22,791,122
RETURN ON AVERAGE ASSETS, CORE OPERATING BASIS: (2)
RETURN ON AVERAGE ASSETS, AS REPORTED	0.81		%	0.92		%	0.94		%	0.88		%	0.87		%
SUBTRACT: NET (GAIN) LOSS ON SECURITIES, NET OF TAX	0.00		%	0.00		%	(0.05		)%	0.00		%	(0.06		)%
ADD BACK: MERGER AND ACQUISITION COSTS, NET OF TAX	0.00		%	0.00		%	0.00		%	0.00		%	0.07		%
SUBTRACT: NET (GAIN) LOSS ON EARLY DEBT REPAYMENT, NET OF TAX	0.00		%	0.00		%	0.00		%	(0.01		)%	0.00		%
RETURN ON AVERAGE ASSETS, CORE OPERATING BASIS	0.81		%	0.92		%	0.89		%	0.87		%	0.88		%
RETURN ON AVERAGE SHAREHOLDERS’ EQUITY, CORE OPERATING BASIS: (2)
RETURN ON AVERAGE SHAREHOLDERS’ EQUITY, AS REPORTED	10.8		%	13.4		%	14.6		%	12.5		%	13.0		%
SUBTRACT: NET (GAIN) LOSS ON SECURITIES, NET OF TAX	0.0		%	0.0		%	(0.7		)%	0.0		%	(1.0		)%
ADD BACK: MERGER AND ACQUISITION COSTS, NET OF TAX	0.0		%	0.0		%	0.0		%	0.0		%	1.0		%
SUBTRACT: NET (GAIN) LOSS ON EARLY DEBT REPAYMENT, NET OF TAX	0.0		%	0.0		%	0.0		%	(0.1		)%	0.0		%
RETURN ON AVERAGE SHAREHOLDERS’ EQUITY, CORE OPERATING BASIS	10.8		%	13.4		%	13.9		%	12.4		%	13.1		%
AVERAGE ASSETS	$	6,785,740		$	6,972,385		$	6,496,332		$	6,948,356		$	6,232,461
AVERAGE SHAREHOLDERS’ EQUITY	509,256			478,378			416,279			488,564			418,251
OPERATING EFFICIENCY RATIO, CORE OPERATING BASIS: (2)
OPERATING EFFICIENCY RATIO, AS REPORTED	64.2		%	60.1		%	58.2		%	61.0		%	61.2		%
ADD BACK: NET (GAIN) LOSS ON SECURITIES	0.0		%	0.0		%	2.0		%	0.0		%	2.5		%
SUBTRACT: MERGER AND ACQUISITION COSTS	0.0		%	0.0		%	0.0		%	0.0		%	(2.7		)%
ADD BACK: NET GAIN (LOSS) ON EARLY DEBT REPAYMENT, NET OF TAX	0.0		%	0.0		%	0.0		%	0.3		%	0.0		%
OPERATING EFFICIENCY RATIO, CORE OPERATING BASIS	64.2		%	60.1		%	60.2		%	61.3		%	61.0		%
ADJUSTED SHAREHOLDERS’ EQUITY:
SHAREHOLDERS’ EQUITY, AS REPORTED	$	499,683		$	503,487		$	447,237		$	499,683		$	447,237
ADD (SUBTRACT) UNREALIZED LOSS (GAIN) ON INVESTMENTS AND MBS, NET	26,635			10,494			9,481			26,635			9,481
ADJUSTED SHAREHOLDERS EQUITY	$	526,318		$	513,981		$	456,718		$	526,318		$	456,718
ADJUSTED BOOK VALUE PER SHARE: (1)
BOOK VALUE PER SHARE, AS REPORTED	$	14.39		$	14.54		$	13.08		$	14.39		$	13.08
ADD (SUBTRACT) UNREALIZED LOSS (GAIN) ON INVESTMENTS AND MBS, NET	0.77			0.30			0.28			0.77			0.28
ADJUSTED BOOK VALUE PER SHARE	$	15.16		$	14.84		$	13.36		$	15.16		$	13.36

(1)Weighted average shares and per share amounts have been restated to reflect the 3 for 2 stock split that occurred on August 31, 2005.

(2)Core earnings per share excludes net securities gains (losses), merger and acquisition costs and gains (losses) related to early repayment of debt, net of related income taxes. Management believes that this presentation of non-GAAP information regarding core earnings provides useful information to investors regarding the registrant’s financial  condition and results of operations as core earnings are widely used for comparison purposes in the financial services industry.

6