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STERLING FINANCIAL CORP /WA/
10-Q, 2000-08-11
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000
OR
/ /	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 0-20800

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STERLING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

111 North Wall Street, Spokane, Washington 99201
(Address of principal executive offices) (Zip Code)

(509) 458-2711
(Registrant's telephone number, including area code)

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

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STERLING FINANCIAL CORPORATION

FORM 10-Q
For the Quarter Ended June 30, 2000

TABLE OF CONTENTS

		Page
PART I - Financial Information		1
Item 1 - Financial Statements		1
Consolidated Balance Sheets		1
Consolidated Statements of Income		2
Consolidated Statements of Cash Flows		3
Consolidated Statements of Comprehensive Income (Loss)		5
Notes to Consolidated Financial Statements		6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		21
PART II - Other Information		22
Item 1 - Legal Proceedings		22
Item 2 - Changes in Securities and Use of Proceeds		22
Item 3 - Defaults Upon Senior Securities		22
Item 4 - Submission of Matters to a Vote of Security Holders		22
Item 5 - Other Information		22
Item 6 - Exhibits and Reports on Form 8-K		23
Signature		24

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PART I - Financial Information
Item 1 - Financial Statements

STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)

				June 30, 2000			December 31, 1999
				(Dollars in thousands)
ASSETS
	Cash and cash equivalents:
		Interest bearing		$	81		$	23,365
		Non-interest bearing and vault			65,696			72,221
		Restricted			10,272			1,018
	Loans receivable, net				1,942,581			1,787,771
	Loans held for sale				1,484			985
	Investments and mortgage-backed securities ("MBS"):
		Available for sale			472,038			494,483
		Held to maturity			10,994			11,247
	Accrued interest receivable (including $4,171 and $3,504 on investments and MBS)				17,128			16,720
	Real estate owned, net				6,668			7,299
	Office properties and equipment, net				51,165			52,649
	Other intangibles, net				52,693			55,488
	Mortgage servicing rights, net				330			222
	Prepaid expenses and other assets, net				25,116			23,457
		Total assets		$	2,656,246		$	2,546,925
LIABILITIES AND SHAREHOLDERS' EQUITY
	Deposits			$	1,653,316		$	1,617,368
	Advances from Federal Home Loan Bank of Seattle ("FHLB Seattle")				526,525			490,503
	Securities sold subject to repurchase agreements and federal funds purchased				203,387			179,515
	Other borrowings (Note 3)				114,000			110,000
	Cashiers checks issued and payable				10,479			11,967
	Borrowers' reserves for taxes and insurance				1,903			1,369
	Accrued interest payable				10,138			7,539
	Accrued expenses and other liabilities				13,005			11,025
		Total liabilities			2,532,753			2,429,286
	Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued and outstanding				0			0
	Common stock, $1 par value; 20,000,000 shares authorized; 8,100,470 and 8,089,844 shares issued and outstanding				8,100			8,090
	Additional paid-in capital				70,385			70,339
	Accumulated other comprehensive loss:
		Unrealized losses on investments and MBS available for sale, net of deferred income tax benefit of $7,778 and $7,298			(14,445	)		(13,553	)
	Retained earnings				59,453			52,763
		Total shareholders' equity			123,493			117,639
		Total liabilities and shareholders' equity		$	2,656,246		$	2,546,925

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

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STERLING FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)

				Three Months Ended June 30,						Six Months Ended June 30,
				2000			1999			2000			1999
				(Dollars in thousands, except per share data)
Interest income:
	Loans			$	42,587		$	35,360		$	81,941		$	68,106
	MBS				5,526			5,326			11,178			11,260
	Investments and cash equivalents				2,586			2,797			5,465			5,623
		Total interest income			50,699			43,483			98,584			84,989
Interest expense:
	Deposits				17,730			14,937			34,457			29,606
	Short-term borrowings				8,773			2,687			11,721			5,543
	Long-term borrowings				4,095			7,074			12,914			13,312
		Total interest expense			30,598			24,698			59,092			48,461
		Net interest income			20,101			18,785			39,492			36,528
Provision for losses on loans					(1,100	)		(1,000	)		(2,200	)		(1,900	)
		Net interest income after provision for losses on loans			19,001			17,785			37,292			34,628
Other income:
	Fees and service charges				3,182			2,605			6,175			5,073
	Mortgage banking operations				209			239			330			592
	Loan servicing fees				221			217			442			414
	Net gains on sales of securities				1			0			1			593
	Real estate owned operations				60			2			88			(90	)
		Total other income			3,673			3,063			7,036			6,582
Operating expenses (Note 5)					17,315			15,714			33,709			31,576
		Income before income taxes			5,359			5,134			10,619			9,634
Income tax provision					1,983			1,900			3,929			3,562
Net income				$	3,376		$	3,234		$	6,690		$	6,072
Income per share - basic				$	0.42		$	0.40		$	0.83		$	0.75
Income per share - diluted				$	0.42		$	0.40		$	0.82		$	0.74
Weighted average shares outstanding - basic					8,099,709			8,088,299			8,097,026			8,076,096
Weighted average shares outstanding - diluted					8,116,691			8,150,463			8,115,110			8,171,131

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

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STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)

							Six Months Ended June 30,
							2000			1999
							(Dollars in thousands)
Cash flows from operating activities:
	Net income						$	6,690		$	6,072
	Adjustments to reconcile net income to net cash provided by operating activities:
			Provisions for losses on loans and real estate owned					2,200			2,105
			Stock dividends on FHLB Seattle stock					(1,133	)		(1,213	)
			Net gain on sales of loans, investments and MBS					(291	)		(1,124	)
			Net gain on sales of real estate owned					(149	)		(154	)
			Depreciation and amortization					5,390			5,698
			Change in:
					Accrued interest receivable			(408	)		(874	)
					Prepaid expenses and other assets			(1,422	)		(2,979	)
					Cashiers checks issued and payable			(1,488	)		(2,109	)
					Accrued interest payable			2,599			499
					Accrued expenses and other liabilities			1,980			(5,808	)
			Proceeds from sales of loans					32,202			48,741
			Loans originated for sale					(31,913	)		(48,412	)
					Net cash provided by operating activities			14,257			442
Cash flows from investing activities:
	Change in restricted cash							(9,254	)		8,233
	Loans disbursed							(669,167	)		(717,580	)
	Loan principal received							508,840			484,056
	Purchase of investments							(19,912	)		(29,823	)
	Proceeds from maturities of investments							20,137			48,461
	Proceeds from sales of available-for-sale investments							2,138			542
	Purchase of MBS							0			(60,128	)
	Principal payments on MBS							19,979			51,628
	Proceeds from sales of MBS							0			29,104
	Purchase of office properties and equipment							(769	)		(3,411	)
	Improvements and other changes to real estate owned							(766	)		(213	)
	Proceeds from sales and liquidation of real estate owned							4,365			1,249
					Net cash used in investing activities			(144,409	)		(187,882	)

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STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Unaudited)

							Six Months Ended June 30,
							2000			1999
							(Dollars in thousands)
Cash flows from financing activities:
	Net change in checking, passbook and money market deposits						$	(24,291	)	$	(12,521	)
	Proceeds from issuance of certificates of deposit							297,225			435,998
	Payments for maturing certificates of deposit							(270,338	)		(386,650	)
	Interest credited to deposits							33,352			29,192
	Advances from FHLB Seattle							285,000			135,877
	Repayment of FHLB Seattle advances							(249,066	)		(65,058	)
	Net change in securities sold subject to repurchase agreements and funds purchased							23,872			51,299
	Proceeds from other borrowings							4,000			35,000
	Repayment of other borrowings							0			(22,240	)
	Proceeds from exercise of stock options, net of repurchases							56			144
	Deferred financing costs							0			(1,113	)
	Other							533			237
					Net cash provided by financing activities			100,343			200,165
Net change in cash and cash equivalents								(29,809	)		12,725
Cash and cash equivalents, beginning of period								95,586			88,331
Cash and cash equivalents, end of period							$	65,777		$	101,056
Supplemental disclosures:
	Cash paid during the period for:
			Interest				$	56,493		$	47,962
			Income taxes					2,369			3,497
	Noncash financing and investing activities:
			Loans converted into real estate owned					2,819			975

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

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STERLING FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

				Three Months Ended June 30,						Six Months Ended June 30,
				2000			1999			2000			1999
				(Dollars in thousands)
Net income				$	3,376		$	3,234		$	6,690		$	6,072
Other comprehensive income (loss):
	Change in unrealized losses on investments and MBS available for sale				2,386			(9,427	)		(1,372	)		(12,704	)
	Less deferred income taxes				835			(3,299	)		(480	)		(4,446	)
	Net other comprehensive income (loss)				1,551			(6,128	)		(892	)		(8,258	)
Comprehensive income (loss)				$	4,927		$	(2,894	)	$	5,798		$	(2,186	)

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

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STERLING FINANCIAL CORPORATION
Notes to Consolidated Financial Statements

1.

General:

Notes to the December 31, 1999 consolidated financial statements, as set forth in Sterling Financial Corporation's ("Sterling's") December 31, 1999 Annual Report on Form 10-K, substantially apply to these interim consolidated financial statements as of and for the three and six months ended June 30, 2000 and are not repeated here. All financial statements presented are unaudited. However, the December 31, 1999 consolidated balance sheet was derived from the audited balance sheet as of that date.

2.

Interim Financial Statements:

The financial information set forth in the unaudited interim consolidated financial statements reflects the adjustments, all of which are of a normal and recurring nature, which, in the opinion of management, are necessary for a fair presentation of the periods reported.

3.

Other Borrowings:

The following table details Sterling's other borrowings.

⁽¹⁾

Sterling has a $50.0 million non-revolving, variable-rate, line-of-credit agreement with KeyBank National Association ("KeyBank"), of which $40.0 million was outstanding at June 30, 2000. This line of credit matures on May 31, 2001. Interest accrues at the 30-day London Interbank Offering Rate ("LIBOR") plus 2.00% (8.69% at June 30, 2000) and is payable monthly. This line of credit, as well as the line of credit referred to in Note 2 below, is collateralized by all of the stock of Sterling Savings Bank.



⁽²⁾

Sterling has a $5.0 million revolving line-of-credit agreement with KeyBank. The revolving line of credit matures in August 2000. The interest rate is adjustable monthly at KeyBank's prime interest rate (9.50% at June 30, 2000). At June 30, 2000, $4.0 million was outstanding under this line-of-credit agreement. This amount was repaid on July 3, 2000. At December 31, 1999, no amount was outstanding under this agreement.



⁽³⁾

On June 4, 1997, Sterling issued $41.2 million of 9.50% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") to Sterling Capital Trust I (the "Trust"), a Delaware business trust, in which Sterling owns all of the common equity. The sole asset of the Trust is the Junior Subordinated Debentures. The Trust issued $40.0 million of 9.50% Cumulative Capital Securities (the "Trust Preferred Securities") to investors. Sterling's obligations under the Junior Subordinated Debentures and related documents, taken together, constitute a full and unconditional guarantee by Sterling of the Trust's obligations under the Trust Preferred Securities. The Trust Preferred Securities are treated as debt of Sterling. Although Sterling, as a savings and loan holding company, is not subject to the Federal

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Reserve capital requirements for bank holding companies, the Trust Preferred Securities have been structured to qualify as Tier 1 capital, subject to certain limitations, if Sterling were to become regulated as a bank holding company. The Junior Subordinated Debentures and related Trust Preferred Securities mature on June 30, 2027 and are redeemable at the option of Sterling in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The Trust Preferred Securities must be redeemed upon maturity of the Junior Subordinated Debentures in 2027.

⁽⁴⁾

Sterling has outstanding $30.0 million of Floating Rate Notes Due 2006. These notes are unsecured general obligations of Sterling and are subordinated to certain other existing and future indebtedness. Under the terms of the notes, Sterling is limited in the amount of certain long-term debt that it may incur; and the notes restrict Sterling, under certain circumstances, as to the amount of cash dividends on its preferred or common stock and capital distributions which can be made. At June 30, 2000, Sterling could incur approximately $37.5 million of additional long-term debt, and Sterling would have been limited to the payment of up to approximately $6.6 million in additional dividends. Interest accrues at the 90-day LIBOR plus 2.50% (9.31% until September 15, 2000) and is adjustable and payable quarterly. The notes mature on June 15, 2006 and may be redeemed under certain conditions after June 15, 2002.

4.

Income Per Share:

The following table presents the basic and diluted income per share computations.

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5.

Operating Expenses:

The following table details Sterling's components of total operating expenses:

6.

Other Accounting Policies:

In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," is effective for all fiscal quarters of fiscal years beginning after June 15, 2000; however, earlier application of all of the provisions of this Statement is encouraged as of the beginning of any fiscal quarter. Sterling has not yet determined the effect, if any, of implementing SFAS No. 133 on its consolidated financial statements.

7.

Mortgage Banking Operations:

Sterling operates residential loan production offices primarily in the Spokane and Seattle, Washington; Portland, Oregon; and Boise, Idaho metropolitan areas through its subsidiary Action Mortgage Company. Residential mortgage banking operations include revenues from servicing-released and servicing-retained sales of originated residential loans, bulk sales of loan servicing rights and other fees.

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The following table summarizes information related to Sterling's residential mortgage banking operations:

Sterling also operates commercial real estate loan production offices primarily in the Spokane and Seattle, Washington and Portland, Oregon metropolitan areas through its subsidiary INTERVEST-Mortgage Investment Company. Commercial real estate lending operations include revenues from sales of commercial real estate loans and participation interests in commercial real estate loans, loan fees and servicing fees.

The following table summarizes information related to Sterling's commercial real estate lending operations:

Sterling has determined that its reportable business segments are those that are based on its method of disaggregated internal reporting.

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The following is a reconciliation of certain mortgage banking operations to the amounts reported in the consolidated financial statements:

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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

STERLING FINANCIAL CORPORATION
Comparison of the Three and Six Months Ended June 30, 2000 and 1999

    Any trend or forward-looking information discussed in this report is subject to numerous possible risks and uncertainties. These include but are not limited to: the possibility of adverse economic developments which may, among other things, increase default and delinquency risks in Sterling's loan portfolios; shifts in interest rates which 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; changes in laws, regulations and the competitive environment. Sterling's future results may differ materially from historical results as well as from any trend or forward-looking information included in this report.

General

    Sterling Financial Corporation ("Sterling") is a unitary savings and loan holding company, the significant operating subsidiary of which is Sterling Savings Bank. The significant operating subsidiaries of Sterling Savings Bank are Action Mortgage Company ("Action Mortgage"), INTERVEST-Mortgage Investment Company ("INTERVEST") and Harbor Financial Services, Inc. ("Harbor Financial").

    Sterling provides personalized, quality financial services to its customers as exemplified by its "Hometown Helpful" philosophy. Sterling believes that this dedication to personalized service has enabled it to maintain a stable retail deposit base. Sterling, with $2.66 billion in total assets at June 30, 2000, attracts Federal Deposit Insurance Corporation ("FDIC") insured deposits from the general public through 77 retail branches located primarily in rural and suburban communities in Washington, Oregon, Idaho and Montana. Sterling originates loans through its branch offices as well as Action Mortgage residential loan production offices in the metropolitan areas of Spokane and Seattle, Washington; Portland, Oregon; and Boise, Idaho; and INTERVEST commercial real estate lending offices located in the metropolitan areas of Spokane and Seattle, Washington; and Portland, Oregon. Sterling also markets tax-deferred annuities, mutual funds and other financial products through Harbor Financial.

    Sterling continues to enhance its presence as a community bank by increasing its commercial real estate, business banking, consumer and construction lending while increasing its retail deposits, particularly transaction accounts. Management believes that by changing the mix of its assets and liabilities to be more like a community bank, its net interest income (the difference between the interest earned on loans and investments and the interest paid on liabilities) and other fee income will increase, although there can be no assurance in this regard. Commercial real estate, business banking, consumer and construction loans generally produce higher yields than residential loans. Such loans, however, generally involve a higher degree of risk than financing residential real estate. Sterling's revenues are derived primarily from interest earned on loans, investments and mortgage-backed securities ("MBS"), from fees and service charges and from mortgage banking operations. The operations of Sterling Savings Bank, and savings institutions generally, are influenced significantly by general economic conditions and by policies of its primary regulatory authorities, the Office of Thrift Supervision ("OTS"), the FDIC and the State of Washington Department of Financial Institutions ("Washington Supervisor").

    Sterling intends to continue to pursue an aggressive growth strategy, which may include acquiring other financial institutions or branches thereof or other substantial assets or deposit liabilities. Sterling may not be successful in identifying further acquisition candidates, integrating acquired institutions or preventing deposit erosion or loan quality deterioration at acquired institutions. There is significant competition for acquisitions in Sterling's market area, and Sterling may not be able to acquire other institutions on attractive terms. Furthermore, the success of Sterling's growth strategy will depend on

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increasing and maintaining sufficient levels of regulatory capital, obtaining necessary regulatory approvals, generating appropriate growth and favorable economic and market conditions. There can be no assurance that Sterling will be successful in implementing its growth strategy.

Results of Operations

    Overview.  Sterling recorded net income of $3.4 million, or $0.42 per diluted share, for the three months ended June 30, 2000, compared with net income of $3.2 million, or $0.40 per diluted share, for the three months ended June 30, 1999. Sterling recorded net income of $6.7 million, or $0.82 per diluted share, for the six months ended June 30, 2000. This compares with net income of $6.1 million, or $0.74 per diluted share, for the six months ended June 30, 1999. The increase in net income for both periods reflected higher net interest income and other income.

    The annualized return on average assets was 0.52% and 0.54% for the three months ended June 30, 2000 and 1999, respectively. The decrease in the ratio was primarily due to a greater increase in average assets than net income. For the six months ended June 30, 2000 and 1999, the annualized return on average assets was 0.52% and 0.51%, respectively. The increase in the ratio was primarily due to the increase in net income.

    The annualized return on average equity was 11.29% and 10.69% for the three months ended June 30, 2000 and 1999, respectively. For the six months ended June 30, 2000 and 1999, the annualized return on average equity was 11.24% and 10.13%, respectively. The increases in the ratios were primarily due to increases in net income.

    Operating cash earnings, operating cash earnings per common share and the ratios given below exclude amortization of intangible assets of $881,000, $912,000, $1,761,000 and $1,825,000, which are net of related income taxes for the three months ended June 30, 2000 and 1999 and the six months ended June 30, 2000 and 1999, respectively.

		Three Months Ended June 30,						Six Months Ended June 30,
		2000			1999			2000			1999
Operating cash earnings (dollars in thousands)		$	4,257		$	4,146		$	8,451		$	7,897
Operating cash earnings per common share - diluted		$	0.52		$	0.51		$	1.04		$	0.97
Operating cash return on average assets			0.65	%		0.69	%		0.65	%		0.67	%
Operating cash return on average common shareholders' equity			14.24	%		13.71	%		14.20	%		13.17	%

    Net Interest Income.  The most significant component of earnings for a financial institution typically is net interest income ("NII"), which is the difference between interest income, primarily from loan, MBS and investment portfolios, and interest expense, primarily on deposits and borrowings. During the three months ended June 30, 2000 and 1999, NII was $20.1 million and $18.8 million, respectively, representing an increase of 7.0%. During the six months ended June 30, 2000 and 1999, NII was $39.5 million and $36.5 million, respectively, an increase of 8.1%.

    Changes in NII result from changes in volume, net interest spread and net interest margin. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities. Net interest margin refers to NII divided by total interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. The increases in NII during the three and six months ended June 30, 2000, compared to the same periods in the prior year, were primarily due to the increase in the average volume of loans.

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    During the three months ended June 30, 2000 and 1999, the volume of average interest-earning assets was $2.45 billion and $2.22 billion, respectively. Net interest spread during these periods was 3.10% and 3.25%, respectively. The net interest margin for the three months ended June 30, 2000 and 1999 was 3.30% and 3.39%, respectively. Net interest margin decreased primarily due to the narrower interest rate spreads, the increase in average interest-earning assets and increases in the average volumes and costs of advances from the Federal Home Loan Bank of Seattle ("FHLB Seattle") and other long-term borrowings. Net interest spread decreased primarily due to a greater increase in the rates paid on all interest-bearing liabilities than the increase in yield on the loan portfolio.

    During the six months ended June 30, 2000 and 1999, the volume of average interest-earnings assets was $2.41 billion and $2.19 billion, respectively. Net interest spread during these periods was 3.12% and 3.23%, respectively. The net interest margin for the six months ended June 30, 2000 and 1999 was 3.30% and 3.37%, respectively. The reasons for the decreases in net interest spread and net interest margin were similar to those for the related quarterly periods.

    Provision for Losses on Loans.  Management's policy is to establish valuation allowances for estimated losses by charging corresponding provisions against income. The evaluation of the adequacy of specific and general valuation allowances is an ongoing process.

    Sterling recorded provisions for losses on loans of $1.1 million and $1.0 million for the three months ended June 30, 2000 and 1999, respectively. Sterling recorded provisions for losses on loans of $2.2 million and $1.9 million for the six months ended June 30, 2000 and 1999, respectively. Management anticipates that its provisions for losses on loans will continue to increase in the future as Sterling originates more commercial real estate, construction, business banking and consumer loans. At June 30, 2000, Sterling's total classified assets were $26.4 million, compared with $19.9 million at December 31, 1999. At June 30, 2000, Sterling's loan delinquency rate (60 days or more) as a percentage of total loans was 0.64%, compared with 0.55% at June 30, 1999. Total nonperforming loans were $11.6 million at June 30, 2000, compared with $7.3 million at June 30, 1999. The increase in nonperforming loans was primarily attributable to certain commercial real estate and construction loans. Management believes that Sterling's asset quality remains at acceptable levels and reflects the greater emphasis on higher-risk commercial real estate, construction, business banking and consumer loans.

    Management believes the provisions for losses on loans for the three and six months ended June 30, 2000 are appropriate based upon its evaluation of factors affecting the adequacy of valuation allowances, although there can be no assurance in this regard. Such factors include locations and concentrations of loans, loan loss experience and economic factors affecting the Pacific Northwest economy.

    Other Income.  The following table summarizes the components of other income for the periods indicated.

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    Fees and service charges primarily consist of service charges on deposit accounts, fees for certain customer services, commissions on sales of credit life insurance, commissions on sales of mutual funds and annuity products and late charges on loans. The increases for the three and six months ended June 30, 2000, compared with the three and six months ended June 30, 1999, were primarily due to the implementation of new service charges on transaction accounts, improved efficiencies in assessing overdraft charges and higher commissions on sales of mutual funds and annuity products.

    The following table summarizes loan originations and sales of loans for the periods indicated.

		Three Months Ended June 30,						Six Months Ended June 30,
		2000			1999			2000			1999
		(Dollars in millions)
Originations of one- to four-family permanent mortgage loans		$	28.1		$	41.2		$	53.7		$	105.8
Sales of residential loans			11.5			18.7			20.1			48.4
Sales of commercial real estate loans			10.5			0.0			11.8			0.0
Principal balances of mortgage loans serviced for others			208.8			210.6			208.8			210.6

    The decreases in income from mortgage banking operations for the three and six months ended June 30, 2000 compared to the same period in 1999 were primarily due to a lower volume of loan sales. Sterling anticipates increasing income from its mortgage servicing portfolio over the next twelve months by generating a greater volume of loan sales.

    During the three and six months ended June 30, 2000, Sterling sold approximately $136,000 of investments and MBS, resulting in net gains of $1,000. During the three months ended June 30, 1999, Sterling did not sell any investments and MBS. During the six months ended June 30, 1999, Sterling sold approximately $29.1 million of investments and MBS, resulting in net gains of $593,000.

    Operating Expenses.  Operating expenses were $17.3 million and $15.7 million for the three months ended June 30, 2000 and 1999, respectively. During the six months ended June 30, 2000 and 1999, operating expenses were $33.8 and $31.6 million, respectively. The higher level of operating expenses was primarily a result of expanded staffing in Sterling's branch delivery network and the full implementation of the item processing operations.

    Employee compensation and benefits were $8.0 million and $7.1 million for the three months ended June 2000 and 1999, respectively. During the six months ended June 30, 2000 and 1999, employee compensation and benefits were $16.1 million and $14.1 million, respectively. The increases reflected increased community bank lending staff and additional staff for Sterling's Internet banking operations and item processing centers. At June 30, 2000, full-time-equivalent employees were 817, compared with 799 at June 30, 1999.

    Occupancy and equipment expenses were $2.6 million and $2.5 million for the three months ended June 30, 2000 and 1999, respectively. During the six months ended June 30, 2000 and 1999, occupancy and equipment expenses were $5.1 million and $4.9 million, respectively. The increases reflected costs associated with the item processing centers and higher maintenance costs.

    Data processing expenses were $1.4 million and $1.3 million for the three months ended June 30, 2000 and 1999, respectively. During the six months ended June 30, 2000 and 1999, data processing expenses were $2.9 million and $2.6 million, respectively. The increases were primarily attributable to costs associated with the item processing centers, internal data processing upgrades and increased out-sourcing of computer maintenance.

    Other expenses were $918,000 and $512,000 for the three months ended June 30, 2000 and 1999, respectively. During the six months ended June 30, 2000 and 1999, other expenses were $1.1 million

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and $1.7 million, respectively. The increase for the three-month period was primarily due to the non-recurrence of refunds of state excise taxes during the three months ended June 30, 1999. The decrease for the six-month period was primarily a result of cost savings realized from in-house item processing and higher loan processing costs in the quarter ended June 30, 1999.

    Income Tax Provision.  Sterling recorded federal and state income tax provisions of $2.0 million and $1.9 million for the three months ended June 30, 2000 and 1999, respectively. Tax provisions were $3.9 million and $3.6 million for the six months ended June 30, 2000 and 1999, respectively. The effective tax rates during these periods approximated the applicable statutory federal and state income tax rates.

Financial Position

    Assets.  At June 30, 2000, Sterling's assets were $2.66 billion, up 4.3% from $2.55 billion at December 31, 1999. The increase was primarily due to growth in net loans receivable.

    Investments and MBS.  Sterling's investment and MBS portfolio at June 30, 2000 was $483.0 million, down $22.7 million from the December 31, 1999 balance of $505.7 million. The decrease was primarily due to principal repayments and the reduction in market values of investments and MBS available for sale.

    Loans Receivable.  At June 30, 2000, net loans receivable were $1.94 billion, up $154.8 million (or 8.7%) from $1.79 billion at December 31, 1999. The increase was primarily due to strong growth in construction and business banking loans. During the three months ended June 30, 2000, total loan originations were $305.9 million compared with $314.3 million for the prior year's comparable quarter. The most significant increase in loan originations during the three-month period was in multifamily lending, which was more than offset by decreases in business banking and residential lending. During the six months ended June 30, 2000 and 1999, total loan originations were $554.6 million and $655.0 million, respectively. The most significant increase in loan originations during the six-month period was in construction lending, which was more than offset by decreases in residential and commercial real estate lending. See the loan origination table below.

    The following table sets forth the composition of Sterling's loan portfolio at the dates indicated. Loan balances do not include unearned discounts, deferred loan origination costs and fees or allowances for loan losses.

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    The following table sets forth Sterling's loan originations for the periods indicated.

The decreases in loan originations were primarily due to decreased lending in the residential housing sectors, primarily caused by higher interest rates.

    Deposits.  Total deposits increased $35.9 million to $1.65 billion at June 30, 2000 from $1.62 billion at December 31, 1999. For the quarter ended June 30, 2000, the weighted average cost of total deposits was 4.34%, compared with 3.76% for the quarter ended June 30, 1999. The increase in the average cost of total deposits was primarily due to the increase in interest rates, particularly on certificates of deposit.

    The following table sets forth the composition of Sterling's deposits at the dates indicated.

    Borrowings.  Deposit accounts are Sterling's primary source of funds. Sterling does, however, rely upon advances from FHLB Seattle, reverse repurchase agreements and other borrowings to supplement its funding and to meet deposit withdrawal requirements. At June 30, 2000, the total of such borrowings was $843.9 million, compared with $780.0 million at December 31, 1999, an increase of $63.9 million. See "Liquidity and Sources of Funds."

Asset and Liability Management

    The results of operations for savings institutions may be materially and adversely affected by changes in prevailing economic conditions, including rapid changes in interest rates, declines in real estate market values and the monetary and fiscal policies of the federal government. Like all financial institutions, Sterling's NII and the net present value of assets, liabilities and off-balance sheet contracts ("NPV"), or estimated fair value, are subject to fluctuations in interest rates. For example, some of Sterling's adjustable-rate mortgages are indexed to the weekly average yield on one-year U.S. Treasury securities. When interest-earning assets such as loans are funded by interest-bearing liabilities such as deposits, FHLB Seattle advances and other borrowings, a changing interest rate environment may have a dramatic effect on Sterling's results of operations. Currently, Sterling's interest-bearing liabilities, consisting primarily of savings and time deposits, FHLB Seattle advances and other borrowings, mature or reprice more rapidly, or on different terms, than do its interest-earning assets. The fact that

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liabilities mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates; however, such an asset/liability structure may result in declining NII during periods of rising interest rates.

    Additionally, the extent to which borrowers prepay loans is affected by prevailing interest rates. When interest rates increase, borrowers are less likely to prepay loans; whereas when interest rates decrease, borrowers are more likely to prepay loans. Prepayments may affect the levels of loans retained in an institution's portfolio as well as its NII.

    Sterling maintains an asset and liability management program intended to manage NII through interest rate cycles and to protect its NPV by controlling its exposure to changing interest rates. Sterling uses a simulation model designed to measure the sensitivity of NII and NPV to changes in interest rates. This simulation model is designed to enable Sterling to generate a forecast of NII and NPV given various interest rate forecasts and alternative strategies. The model is also designed to measure the anticipated impact that prepayment risk, basis risk, customer maturity preferences, volumes of new business and changes in the relationship between long- and short-term interest rates have on the performance of Sterling. The model calculates the present value of assets, liabilities, off-balance sheet financial instruments and equity at current interest rates and at hypothetical higher and lower interest rates at various intervals. The present value of each major category of financial instruments is calculated using estimated cash flows based on weighted-average contractual rates and terms, then discounted at the estimated current market interest rate for similar financial instruments. The present value of longer term fixed-rate financial instruments is more difficult to estimate because such instruments are susceptible to changes in market interest rates. Present value estimates of adjustable-rate financial instruments are more reliable since they represent the difference between the contractual and discounted rates until the next interest rate repricing date.

    The calculations of present value have certain shortcomings. The discount rates utilized for loans, investments and MBS are based on estimated nationwide market interest rate levels for similar loans and securities, with prepayment assumptions based on historical experience and market forecasts. The unique characteristics of Sterling's loans and MBS may not necessarily parallel those in the model. The discount rates utilized for deposits and borrowings are based upon available alternative types and sources of funds which are not necessarily indicative of the market value of deposits and FHLB Seattle advances since such deposits and advances are unique to and have certain price and customer relationship advantages for depository institutions. The present values are determined based on the discounted cash flows over the remaining estimated lives of the financial instruments on the assumption that the resulting cash flows are reinvested in financial instruments with virtually identical terms.

    The total measurement of Sterling's exposure to interest rate risk ("IRR") as presented in the following table may not be representative of the actual values which might result from a higher or lower interest rate environment. A higher or lower interest rate environment will most likely result in different investment and borrowing strategies by Sterling designed to further mitigate the effect on the value of and the net earnings generated from Sterling's net assets from any change in interest rates.

    Sterling is continuing to pursue strategies to manage the level of its IRR while increasing its NII and NPV through the origination and retention of variable-rate consumer, business banking, construction and commercial real estate loans, which generally have higher yields than residential permanent loans, and by increasing the level of its core deposits, which are generally a lower-cost funding source than borrowings. There can be no assurance that Sterling will be successful implementing any of these strategies or that, if those strategies are implemented, they will have the intended effect of reducing IRR or increasing NII.

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    The following table presents Sterling's estimates of changes in NPV for the periods indicated. The results indicate the potential effects of instantaneous, parallel shifts in the market yield curve. These calculations are highly subjective and technical and are relative measurements of IRR which do not necessarily reflect any expected rate movement.

    At June 30, 2000, Sterling calculated that its NPV was $101.3 million and that its NPV would decrease by 58.3% and 89.9% if interest rate levels generally were to increase by 2% and 3%, respectively. This compares with an NPV of $96.9 million at December 31, 1999, which would decline by 62.5% and 97.2% if interest rates generally were to increase by 2% and 3%, respectively.

    Sterling also uses gap analysis, a traditional analytical tool designed to measure the difference between the amount of interest-earning assets and the amount of interest-bearing liabilities expected to mature or reprice in a given period. Sterling calculated its one-year cumulative gap positions to be negative 15.0% and negative 17.6% at June 30, 2000 and 1999, respectively. Sterling calculated its three-year gap positions to be negative 18.1% and negative 20.7% at June 30, 2000 and 1999, respectively. The decrease in the negative readings at both the one-year gap position and the three-year gap position was primarily due to new and existing loans being funded with longer-term borrowings. Management attempts to maintain Sterling's gap position between positive 10% and negative 25%. At June 30, 2000, Sterling's gap positions were within limits established by its Board of Directors. Management is pursuing strategies to increase its NII without significantly increasing its cumulative gap positions in future periods.

    Sterling is continuing to pursue strategies to manage the level of its IRR while increasing its NII and NPV through the origination and retention of variable-rate consumer, business banking, construction and commercial real estate loans, which generally have higher yields than residential permanent loans, by the sale of certain long-term fixed rate loans and investments and by increasing the level of its core deposits, which are generally a lower-cost funding source than borrowings. There can be no assurance that Sterling will be successful implementing any of these strategies or that, if these strategies are implemented, they will have the intended effect of reducing IRR or increasing NII.

Liquidity and Sources of Funds

    As a financial institution, Sterling's primary sources of funds are investing and financing activities, including the collection of loan principal and interest payments. Financing activities consist primarily of customer deposits, advances from FHLB Seattle and other borrowings. Deposits increased to $1.65 billion at June 30, 2000 from $1.62 billion at December 31, 1999. Advances from FHLB Seattle increased to $526.5 million at June 30, 2000 from $490.5 million at December 31, 1999. At June 30, 2000 and December 31, 1999, securities sold subject to repurchase agreements were $203.4 million and $179.5 million, respectively. The net increase in these borrowings was primarily used to supplement loan growth during the quarter. These borrowings are required to be collateralized by investments and

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MBS with a market value exceeding the face value of the borrowings. Under certain circumstances, Sterling could be required to pledge additional securities or reduce the borrowings.

    During the six months ended June 30, 2000, cash provided by investing activities consisted primarily of principal and interest payments on loans and MBS and maturities of investments. The levels of these payments increase or decrease depending on the size of the loan and MBS portfolios and the general trend and level of interest rates, which influences the level of refinancing and mortgage prepayments. During the six months ended June 30, 2000, net cash was used in investing activities primarily to fund loans.

    Sterling Savings Bank's credit line with FHLB Seattle provides for borrowings of up to 30% of its total assets. At June 30, 2000, this credit line represented a total borrowing capacity of $803.9 million, of which $277.3 million was available. Sterling Savings Bank also borrows on a secured basis from major broker/dealers and financial entities by selling securities subject to repurchase agreements. At June 30, 2000, Sterling Savings Bank had $179.9 million in outstanding borrowings under reverse repurchase agreements and had securities available for additional secured borrowings of approximately $171.3 million. Sterling Savings Bank also had a secured line-of-credit agreement from KeyBank of $10.0 million as of June 30, 2000. At June 30, 2000, Sterling Savings Bank had no funds drawn on this line of credit.

    Sterling, on a parent company-only basis, had cash and other resources of approximately $6.9 million and a revolving line of credit from KeyBank of $5.0 million at June 30, 2000. On June 30, 2000, Sterling borrowed $4.0 million on this line of credit. Sterling used the proceeds for short-term liquidity needs, and this amount was repaid on July 3, 2000. At June 30, 2000, Sterling also had $40.0 million outstanding on a $50.0 million non-revolving, variable-rate line of credit from KeyBank. The KeyBank lines of credit are secured by all of the stock of Sterling Savings Bank. See Note 3 of "Notes to Consolidated Financial Statements."

    At June 30, 2000 and December 31, 1999, Sterling had an investment of $95.1 million in the Preferred Stock of Sterling Savings Bank. Sterling's right to receive dividends is subordinate to its pledge of the stock to KeyBank. Sterling received cash dividends on Sterling Savings Bank Preferred Stock of $5.0 million during the six months ended June 30, 2000. These resources were sufficient to meet the operating needs of Sterling, including interest expense on the Floating Rate Notes Due 2006 and other borrowings. Sterling Savings Bank's ability to pay dividends is limited by its earnings, financial condition and capital requirements, as well as rules and regulations imposed by the OTS.

    OTS regulations require savings institutions such as Sterling Savings Bank to maintain an average daily balance of liquid assets equal to or greater than a specific percentage (currently 4%) of the average daily balance of net withdrawable accounts and borrowings payable on demand in one year or less during the preceding calendar month. At June 30, 2000 and December 31, 1999, Sterling Savings Bank's liquidity ratio was 7.5% and 9.1%, respectively. The lower level of liquidity at June 30, 2000 was primarily due to a decrease in the average balance of cash and cash equivalents. Sterling Savings Bank's strategy generally is to maintain its liquidity ratio at or near the level necessary to support expected and potential loan fundings and deposit withdrawals. Sterling Savings Bank tries to minimize liquidity levels in order to maximize its yield on alternative investments. The regulatory liquidity ratio does not take into account certain other sources of liquidity, such as funds invested through Sterling Savings Bank subsidiaries, potential borrowings against investments and MBS and other potential financing alternatives. The required minimum liquidity ratio may vary from time to time, depending on economic conditions, savings flows and loan funding needs.

Capital Resources

    Sterling's total shareholders' equity was $123.5 million at June 30, 2000 compared with $117.6 million at December 31, 1999. The increase in total shareholders' equity was primarily due to

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the increase in retained earnings partially offset by a decrease in the market value of available-for-sale investments and MBS. Shareholders' equity was 4.7% of total assets at June 30, 2000 and December 31, 1999.

    At June 30, 2000, Sterling had an unrealized loss of $14.4 million, net of related income taxes, on investments and MBS classified as available for sale. At December 31, 1999, Sterling had an unrealized loss of $13.6 million, net of related income taxes, on investments and MBS classified as available for sale. Fluctuations in prevailing interest rates continue to cause volatility in this component of accumulated comprehensive income or loss in shareholders' equity and may continue to do so in future periods.

    Sterling has outstanding $30.0 million of Floating Rate Notes Due 2006. The notes mature on June 15, 2006 and may be redeemed subject to certain conditions after June 15, 2002. These notes are general unsecured obligations of Sterling and are subordinate to certain other existing and future indebtedness. The indenture governing the notes limits the ability of Sterling under certain circumstances to incur additional indebtedness, to pay cash dividends or to make other capital distributions. See Note 3 of "Notes to Consolidated Financial Statements."

    Sterling has issued and outstanding $40.0 million of Trust Preferred Securities. The indenture governing the Trust Preferred Securities limits the ability of Sterling under certain circumstances to pay dividends or to make other capital distributions. The Trust Preferred Securities are treated as debt of Sterling. The Trust Preferred Securities mature on June 30, 2027 and are redeemable at the option of Sterling on June 30, 2002 or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted or certain other contingencies arise.

    Sterling anticipates total capital expenditures of approximately $1.9 million for the remainder of the year ending December 31, 2000. Sterling anticipates continuing to fund these expenditures from various sources, including retained earnings and borrowings with various maturities. Sterling is exploring opportunities to sell certain developed properties and enter into lease arrangements. There can be no assurance that Sterling's estimates of capital expenditures or the funding thereof are accurate.

    Sterling Savings Bank is required by applicable regulations to maintain certain minimum capital levels with respect to tangible capital, core leverage capital and risk-based capital. Sterling Savings Bank anticipates that it will continue to enhance its capital resources and regulatory capital ratios of Sterling Savings Bank through the retention of earnings, the amortization of intangible assets and the management of the level and mix of assets, although there can be no assurance in this regard. At June 30, 2000, Sterling Savings Bank exceeded all such regulatory capital requirements.

    In connection with Sterling Savings Bank's acquisition of three insolvent savings institutions between 1985 and 1988, the U.S. government agreed that Sterling could utilize $13.5 million of cash assistance and $38.0 million of supervisory goodwill associated with the acquisitions to help meet its regulatory capital and liquidity requirements. In 1989, Congress enacted FIRREA which provided, among other things, that savings institutions such as Sterling Savings Bank were no longer permitted to include supervisory goodwill in their regulatory capital. Consequently, Sterling Savings Bank was required to write off its supervisory goodwill, which resulted in Sterling Savings Bank's failing to comply with its minimum regulatory capital requirements from 1989 through 1991.

    In May 1990, Sterling sued the U.S. government with respect to the loss of the goodwill treatment and other matters in a lawsuit entitled Sterling Savings Association and Sterling Financial Corporation v. The United States, No. 95 829 C (the "Goodwill Litigation"). In the Goodwill Litigation, Sterling seeks damages for, among other things, breach of contract and for deprivation of property without just compensation and without due process of the law.

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    In 1996, the U.S. Supreme Court ruled in three cases similar to the Goodwill Litigation that the U.S. government was liable for having breached its acquisition contracts with certain savings associations. Sterling is encouraged by the Supreme Court's decision, although it is uncertain when a trial to determine Sterling's damages will be held or when a judgment, if any, will be paid.

    Sterling's Goodwill Litigation has been stayed for almost ten years; and in November 1999, Sterling was finally authorized to begin taking discovery related to its claim. Although it is impossible to accurately predict when this effort will be concluded, it is anticipated that the discovery stage will take most or all of 2000 and that Sterling's case will be scheduled for trial by late 2001. Because of the increased level of effort required to bring the case to conclusion, Sterling likely will see an increase in legal expenses over the next few years.

Regulation and Compliance

    Sterling, as a registered thrift holding company, is subject to comprehensive examination and regulation by the OTS. Sterling Savings Bank, as a Washington State-chartered savings association, is subject to comprehensive regulation and examination by the Washington Supervisor as its chartering authority, the OTS as its primary federal regulator, and by the FDIC, which administers the Savings Association Insurance Fund, which insures Sterling Savings Bank's deposits to the maximum extent permitted by law. Sterling Savings Bank is a member of FHLB Seattle, which is one of the twelve regional banks which comprise the FHLB System. Sterling Savings Bank is further subject to regulations of the Board of Governors of the Federal Reserve System governing reserves required to be maintained against deposits and certain other matters.

    In November 1999, the United States Congress passed and the President signed the Gramm-Leach Bliley Act (the "GLBA"). The GLBA is also known as the Financial Services Modernization Act due to its sweeping overhaul of the financial services industry. Enactment of the GLBA allows banks, securities firms and insurance companies to affiliate. Now financial institutions can act as financial "supermarkets" offering customers "one-stop shopping" for bank accounts, insurance policies and securities transactions.

    One of the continuing challenges for Sterling, especially as it transforms Sterling Savings Bank from a traditional thrift association to a community bank, is to ensure compliance with the many laws and regulations applicable to banking. These laws and regulations include the federal Home Mortgage Disclosure Act, Expedited Funds Availability Act, Flood Disaster Protection Act, Electronic Fund Transfers Act, Real Estate Settlement and Procedures Act, Bank Secrecy Act and many others. During the quarter ended June 30, 1999, Sterling entered into an agreement with the OTS pursuant to which Sterling has developed a comprehensive compliance program. As part of the compliance program, management and the Board of Directors are jointly working to ensure that Sterling's policies and procedures regarding compliance with pertinent laws are appropriate, compliance staffing is increased and compliance staff members are adequately trained. Management is committed to meeting and exceeding the requirements of the compliance program.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

    For a discussion of Sterling's market risks, see "Management's Discussion and Analysis - Asset and Liability Management."

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PART II - Other Information

Item 1 - Legal Proceedings

    Periodically various claims and lawsuits are brought against Sterling and its subsidiaries, such as claims to enforce liens, condemnation proceedings involving properties on which Sterling holds security interests, claims involving the making and servicing of real property loans and other issues incidental to Sterling's business. No material loss is expected from any of such pending claims or lawsuits.

Item 2 - Changes in Securities and Use of Proceeds

    None.

Item 3 - Defaults Upon Senior Securities

    None.

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

    Sterling's Annual Meeting of Shareholders ("the Meeting") was held on April 25, 2000. The following matters were submitted to a vote of the security holders of Sterling at the Meeting:

For:		6,754,781		Against: 37,297
Abstain:		39,557		Approximate Broker Non-votes: 0

    There was no solicitation in opposition to management's proposals or nominees.

Item 5 - Other Information

    None.

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Item 6 - Exhibits and Reports on Form 8-K

(a)		Exhibit No.		Exhibit
		3.1		Restated Articles of Incorporation of Registrant and Articles of Amendment of Restated Articles of Incorporation. Filed as Exhibits 3.1 and 3.2, respectively, to Registrant's Form S-4 dated November 7, 1994 and incorporated by reference herein.
		3.2		Copy of Bylaws of Registrant (amended and restated as of May 24, 1999). Filed as Exhibit 3.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated by reference herein.
		4.1		Reference is made to Exhibits 3.1 through 3.3.
		4.2		The Registrant has outstanding certain long-term debt. None of such debt exceeds ten percent of Registrant's total assets; therefore, copies of the constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
		27.1		Financial Data Schedule. Filed herewith.

(b)

Reports on Form 8-K. During the quarter ended June 30, 2000, there was one report on Form 8-K (Item 5) filed on May 2, 2000.

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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)
August 10, 2000 Date				By:	/s/  Daniel G. Byrne DANIEL G. BYRNE Senior Vice President - Finance, Assistant Secretary, and Principal Financial Officer
				By:	/s/  William R. Basom WILLIAM R. BASOM Vice President, Treasurer, and Principal Accounting Officer

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QuickLinks

PART I - Financial Information Item 1 - Financial Statements
STERLING FINANCIAL CORPORATION Consolidated Balance Sheets (Unaudited)
STERLING FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited)
STERLING FINANCIAL CORPORATION Comparison of the Three and Six Months Ended June 30, 2000 and 1999
PART II - Other Information
STERLING FINANCIAL CORPORATION
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