RISK FACTORS

      By approving the merger, Pennsylvania shareholders will be choosing to invest in Sterling’s common stock or receive cash (or a combination of stock and cash) in exchange for their shares of Pennsylvania common stock. Because at least 70% of Pennsylvania shares will be exchanged for Sterling stock, there can be no assurance that those shareholders who elect to receive cash will, indeed, receive all or part cash for their shares. An investment in Sterling’s common stock involves a degree of risk. In addition to the other information included in this document, including the matters addressed in “A Warning About Forward-Looking Information,” on page      , you should carefully consider the matters described below in determining whether to approve the merger agreement.

Some Pennsylvania Shareholders may not Receive the Form of Merger Consideration that They Elect.

      Depending on the elections made by all Pennsylvania shareholders, including National Penn, certain Pennsylvania shareholders who elect to receive shares of Sterling common stock may receive cash consideration for all or a portion of their shares of Pennsylvania common stock. Alternatively, certain Pennsylvania shareholders who elect to receive cash consideration may receive shares of Sterling common stock for all or a portion of their shares of Pennsylvania common stock.

      In the event that Pennsylvania shareholders oversubscribe for the available pool of cash or shares of Sterling common stock, either those Pennsylvania shareholders electing to receive cash or those electing to receive Sterling common stock will have the consideration of the type they selected reduced on a pro rata basis and will receive all or a portion of their consideration in the form that they did not elect to receive. The pro rata allocation process will be administered by Sterling’s exchange agent in its sole discretion. Accordingly, at the time Pennsylvania shareholders vote on the proposal to approve the merger agreement, they will not know the form of merger consideration that they will receive, regardless of their election prior to the merger. In addition, a Pennsylvania shareholder may receive a pro rata amount of cash or Sterling common stock even if he or she has elected to receive all cash or all Sterling common stock. Further, to the extent that Pennsylvania shareholders receive all or a portion of the merger consideration in a form that they did not elect, they also will not know the tax consequences that will result upon the exchange of their shares of Pennsylvania common stock. See “The Merger — Certain Federal Income Tax Consequences,” on page      .

Because the Market Price of Sterling Common Stock will Fluctuate, Pennsylvania Shareholders cannot be Sure of the Market Value of the Sterling Common Stock that They will Receive in the Merger.

      Under the terms of the merger agreement, and subject to certain exceptions, as described elsewhere in this document, the exchange ratio for the stock consideration to be issued in connection with the merger fluctuates between .8300 and .7239 shares of Sterling common stock for each share of Pennsylvania common stock, based on the average closing price of Sterling common stock for the 20 consecutive trading days ending three business days prior to closing. The closing price of Sterling common stock, as reported on the NASDAQ National Market, was $25.63 on June 10, 2004, the trading day immediately preceding the day on which the merger was publicly announced. As of July 30, 2004, the closing price of Sterling common stock, as reported on the NASDAQ National Market, was $24.30. The high and low closing prices of Sterling common stock for the twelve month period between July 1, 2003, and July 1, 2004, were $29.04, on April 2, 2004, and $18.80, on August 5, 2003, adjusted to reflect cash and stock dividends paid. The market price of Sterling common stock may vary from these prices, and may also vary from the price on the date that this document is mailed to Pennsylvania shareholders or on the date of the special meeting of Pennsylvania shareholders. See “Summary — Market Price and Dividend Information,” beginning on page      .

      The market price of Sterling common stock may change as a result of a variety of factors, including general market and economic conditions, changes in its business, operations and prospects, and regulatory considerations. Many of these factors are beyond the control of Sterling and are not necessarily related to a change in the financial performance or condition of Sterling. As a result of the fluctuating exchange ratio,

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      There can be no assurance that the value of the Sterling common stock that Pennsylvania shareholders receive in the merger will be substantially equivalent to the cash merger consideration of $22.00 per share, or that it will be substantially equivalent to the market price of Sterling common stock at the time Pennsylvania shareholders vote to approve the merger agreement. We urge you to obtain current market quotations for Sterling common stock.

If the Pennsylvania Board of Directors does not Terminate the Merger Agreement if the Twenty Day Average Closing Sales Price of Sterling is Less than $21.21, then the Value of the Stock Consideration you Receive could be Less than $17.60 per share of Pennsylvania Common Stock you Hold.

      If the merger closes at a time when the 20 day average closing price of Sterling common stock is below $21.21, the consideration received by Pennsylvania shareholders who receive Sterling common stock in exchange for their shares of Pennsylvania common stock would be less than $17.60 per share of Pennsylvania common stock. Pennsylvania has the option, but is not required, to terminate the merger agreement if the 20 day average closing price of Sterling common stock is below $21.21 and the decline in the average closing price of Sterling common stock, since April 12, 2004, is at least 20% more than the change during the same period on an index based on the stock price of 16 other bank and thrift holding companies. See Exhibit 7.01(c) to the merger agreement, attached to this proxy statement/ prospectus as Annex A. Pennsylvania cannot predict whether or not the Pennsylvania Board of Directors would exercise its right to termination the merger agreement if these conditions were met. The merger agreement does not provide for a resolicitation of Pennsylvania shareholders in the event that the conditions are met and the Pennsylvania Board nevertheless chooses to complete the transaction. Pennsylvania’s Board of Directors has made no decision as to whether it would exercise its right to terminate the merger agreement. In considering whether to exercise its right to terminate the merger agreement, Pennsylvania’s Board would take into account all the relevant facts and circumstances that exist at the time and would consult with its financial advisor and legal counsel.

Sterling’s Business is Subject to Interest Rate Risk and Variations in Interest Rates May Negatively Affect its Financial Performance.

      Changes in the interest rate environment may reduce profits. The primary source of income for Sterling is the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially adversely affect Sterling’s net interest spread, asset quality, loan origination volume and overall profitability.

Future Governmental Regulation and Legislation could limit Sterling’s Future Growth.

      Sterling and its subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of the operations of Sterling and its subsidiaries. These laws may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. Any changes to these laws may negatively affect Sterling’s ability to expand its services and to increase the value of its business. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on Sterling, these changes could be materially adverse to Sterling’s shareholders.

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Sterling’s Ability to Pay Dividends Depends Primarily on Dividends from its Banking Subsidiaries, Which are Subject to Regulatory Limits.

      Sterling is a bank holding company and its operations are conducted by direct and indirect subsidiaries, each of which is a separate and distinct legal entity. Substantially all of Sterling’s assets are held by its direct and indirect subsidiaries.

      Sterling’s ability to pay dividends depends on its receipt of dividends from its direct and indirect subsidiaries. Sterling’s subsidiaries are Sterling’s primary source of dividends. Dividend payments from its banking subsidiaries are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of a banking subsidiary to pay dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. At June 30, 2004, approximately $          was available without the need for regulatory approval for the payment of dividends to Sterling from its banking subsidiaries. There is no assurance that Sterling’s subsidiaries will be able to pay dividends in the future or that Sterling will generate adequate cash flow to pay dividends in the future. Sterling’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.

Sterling’s Future Acquisitions Could Dilute your Ownership of Sterling and may Cause Sterling to Become More Susceptible to Adverse Economic Events.

      Sterling has used its common stock to acquire other companies in the past and intends to acquire or make investments in banks and other complementary businesses with its common stock in the future. Sterling may issue additional shares of common stock to pay for those acquisitions, which would dilute your ownership interest in Sterling. Future business acquisitions could be material to Sterling, and the degree of success achieved in acquiring and integrating these businesses into Sterling could have a material effect on the value of Sterling common stock. In addition, any acquisition could require Sterling to use substantial cash or other liquid assets or to incur debt. In those events, Sterling could become more susceptible to economic downturns and competitive pressures.

Competition From Other Financial Institutions may Adversely Affect Sterling’s Profitability.

      Sterling’s banking subsidiaries face substantial competition in originating, both commercial and consumer loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of Sterling’s competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce Sterling’s net income by decreasing the number and size of loans that its banking subsidiaries originate and the interest rates they may charge on these loans.

      In attracting business and consumer deposits, Sterling’s banking subsidiaries face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of Sterling’s competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more convenient branch locations. These competitors may offer higher interest rates than Sterling, which could decrease the deposits that Sterling attracts or require Sterling to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect Sterling’s ability to generate the funds necessary for lending operations. As a result, Sterling may need to seek other sources of funds that may be more expensive to obtain and could increase Sterling’s cost of funds.

      Sterling’s banking and non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations which may offer more favorable terms. Some of Sterling’s non-bank competitors are not subject to the same extensive regulations that govern its banking operations. As a

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The Long-Term Economic Effects of Terrorist Attacks on the United States, the War with Iraq and an Economic Slowdown Could Negatively Affect Financial Condition.

      The long-term economic impact of the September 11, 2001 terrorist attacks in New York City and the Washington D.C. area and the Iraqi war has yet to be determined, and the ultimate cost associated with these events and related incidents may place significant burdens on the United States economy as a whole. If these events or additional terrorist attacks or other factors cause or worsen an overall economic decline, the financial condition and operating results of Sterling could be materially adversely affected. The long-term economic impact of the Iraqi war upon the financial markets in general could be negative. In addition, events such as the ones referred to could cause or contribute to a general decline in equity valuations, which in turn could reduce the market value of your investment in Sterling stock.

Pennsylvania Directors and Executive Officers may have Interests in the Merger that Differ from your Interests.

      Some of Pennsylvania’s directors and executive officers have interests in the transaction other than their interests as shareholders. For example, certain executive officers of Pennsylvania have entered into agreements with Pennsylvania that will provide them with change-in-control payments upon termination of their employment in connection with the transaction. Pennsylvania, Pennsylvania State Bank and Sterling also have entered into employment agreements with Thomas J. Sposito, II, the President and Chief Executive Officer of Pennsylvania and Pennsylvania State Bank, and Robert M. Garst, the Chief Lending Officer of Pennsylvania State Bank, with respect to their employment after the effective date of the merger. The employment agreements are attached to this proxy statement/ prospectus as Annex E and F. Sterling has also agreed to increase the size of Sterling’s Board of Directors to include William E. Miller, Jr., who is currently Chairman of the Board of Directors of Pennsylvania. In addition, the merger agreement provides that after the merger the current board of directors of Pennsylvania State Bank, with the addition of Thomas P. Dautrich, the Chief Banking Officer of Sterling, will continue to serve as the board of directors of Pennsylvania State Bank. These and certain other additional interests of Pennsylvania’s directors and executive officers are described in detail in “The Merger — Interests of Management and Others in the Merger,” beginning on page      of this document. These circumstances may cause some of Pennsylvania directors and executive officers to view the proposed transaction differently than you view it.

The Federal Income Tax Consequences of the Merger for Pennsylvania Shareholders will be Dependent upon the Merger Consideration Received.

      The federal income tax consequences of the transaction to you will depend upon the merger consideration you received. In general, if you exchange your shares of Pennsylvania common stock solely for cash, you will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the cash you receive and your adjusted tax basis in your Pennsylvania common stock. If you receive solely Sterling common stock in exchange for your Pennsylvania common stock, you generally will not recognize any gain or loss for federal income tax purposes. However, you generally will have to recognize gain or loss in connection with cash received in lieu of fractional shares of Sterling common stock. If you receive a combination of cash and Sterling common stock in the transaction, you generally will not recognize loss but will recognize gain, if any, to the extent of the lesser of (1) any cash received and (2) the amount of cash and the fair market value of the Sterling common stock you receive, less your adjusted tax basis in the shares of Pennsylvania common stock you surrender in the transaction. For a more detailed discussion of the federal income tax consequences of the transaction to you, see “The Merger — Certain Federal Income Tax Consequences,” on page      .

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After the Merger is Completed, Pennsylvania Shareholders who Receive Sterling Common Stock for Some or all of Their Shares of Pennsylvania Common Stock will Become Sterling Shareholders and will have Different Rights that may be Less Advantageous than Their Current Rights.

      Upon completion of the merger, Pennsylvania shareholders who receive Sterling common stock for some or all of their shares of Pennsylvania common stock will become Sterling shareholders. Differences in Pennsylvania’s articles of incorporation and bylaws and Sterling’s articles of incorporation and bylaws will result in changes to the rights of Pennsylvania shareholders who become Sterling shareholders. For more information, see “Comparison of the Shareholders Rights,” beginning on page      of this document. A shareholder of Pennsylvania may conclude that his, her or its current rights under Pennsylvania’s articles of incorporation and bylaws are more advantageous than the rights they may have as a Sterling shareholder under Sterling’s articles of incorporation and bylaws.

If the Merger is not Completed, Pennsylvania will have Incurred Substantial Expenses Without Realizing the Expected Benefits.

      Pennsylvania has incurred substantial expenses in connection with the merger. The completion of the merger depends on the satisfaction of specified conditions and the receipt of regulatory approvals. We cannot guarantee that these conditions will be met. If the merger is not completed, these expenses could have a material adverse impact on the financial condition of Pennsylvania because it would not have realized the expected benefits.