As filed with the Securities and Exchange Commission on April _____, 1999
Registration No. 333-
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
STERLING FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 6711 23-2449551
- ---------------------------- -------------------------- -------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
John E. Stefan
President and Chief Executive Officer
STERLING FINANCIAL CORPORATION STERLING FINANCIAL CORPORATION
North Pointe Banking Center North Pointe Banking Center
101 North Pointe Boulevard 101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133 Lancaster, Pennsylvania 17601-4133
(717) 581-6030 (717) 581-6030
- ---------------------------------------- ------------------------------------
(Address, including ZIP Code, (Name, address, including ZIP Code,
and telephone number, including and telephone number, including
area code, of registrant's principal area code, of agent for service)
executive offices)
With a Copy to: With a Copy to:
Martin I. Lubaroff, Esquire Nicholas Bybel, Jr., Esquire
RICHARDS, LAYTON & FINGER, P.A., Ruth A. Courtney, Esquire
One Rodney Square SHUMAKER WILLIAMS, P.C.
P. O. Box 551 P. O. Box 88
Wilmington, Delaware 19899 Harrisburg, Pennsylvania 17108
(302) 658-6541 (717) 763-1121
- ---------------------------------------- ------------------------------------
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of the Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. _____
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Title of Each Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities to to be Registered Offering Price Per Aggregate Offering Registration Fee
be Registered Share Price(2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 677,624 $33.25(1) $22,530,998 $6,263.62
$ 5.00 per share
</TABLE>
(1) Shares to be issued in the merger computed in accordance with Rule
457(f)(2), solely for the purpose of calculating the registration fee,
based upon ____________ (as defined herein), at ______________, the latest
practicable date prior to the date of filing of this Registration
Statement.
(2) Based on maximum number of shares of Registrant's Common Stock that may be
issued in connection with the proposed transaction, including stock
options. In accordance with Rule 416, this Registration Statement shall
also register any additional shares of Registrant's common stock that may
become issuable to prevent dilution resulting from stock splits, stock
dividends or similar transactions as provided by the agreement relating to
the transaction.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
<PAGE>
Proxy/Statement Prospectus
STERLING FINANCIAL CORPORATION
PROSPECTUS FOR
677,624 SHARES COMMON STOCK
NASDAQ TRADING SYMBOL: SLFI
NORTHEAST BANCORP, INC.
PROXY STATEMENT
The Board of Directors provides this proxy statement/prospectus to you as a
stockholder of Northeast Bancorp, Inc. to solicit your proxy for a Special
Meeting of Stockholders to be held at 1:00 p.m., on Tuesday, June 15, 1999, at
14 South Main Street, North East, Maryland 21901. At the meeting, you will be
asked to adopt the Agreement and Plan of Reorganization, dated as of February
10, 1999, by and among Sterling Financial Corporation, Sterling Financial
Interim Acquisition Corporation, Northeast Bancorp, Inc. and the First National
Bank of North East to merge Northeast Bancorp, Inc. into Sterling Financial
Interim Acquisition Corporation, a subsidiary of Sterling Financial Corporation,
formed for the purpose of completing the merger.
If you vote to adopt the agreement and complete the merger of Northeast
Bancorp, Inc. into Sterling Financial Interim Acquisition Corporation at the
meeting, as a stockholder of Northeast Bancorp, Inc., you will receive 2 shares
of common stock of Sterling Financial Corporation for each share of Northeast
Bancorp, Inc. common stock that you own when the merger is completed. Sterling
Financial Corporation common stock is quoted on the Nasdaq National Market
System.
Neither of the Securities and Exchange Commission, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System, nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this proxy statement/ prospectus. Any representation to
the contrary is a criminal offense.
The shares of Sterling Financial Corporation common stock offered in this
proxy statement/prospectus are not savings accounts, deposits, or other
obligations of a bank or savings association and are not insured by the FDIC or
any other governmental agency.
No person has been authorized to give any information or to make any
representation not contained in this proxy statement/prospectus, and if given or
made, any such information or representation should not be relied upon as having
been authorized. This proxy statement/prospectus does not constitute an offer to
any person to exchange or sell, or a solicitation from any person of an offer to
exchange or purchase, the securities offered by this proxy statement/prospectus,
or the solicitation of a proxy from any person, in any jurisdiction in which it
is unlawful to make such an offer or solicitation. Neither the delivery of this
proxy statement/prospectus nor any distribution of the securities to which this
proxy statement/prospectus relates shall, under any circumstances, create any
implication that the information contained herein is correct at any time
subsequent to the date hereof.
The date of this proxy statement/prospectus is May __, 1999 and was first
mailed to stockholders on or about May __, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY .....................................................................-1-
The Meeting..........................................................-1-
Northeast Bancorp, Inc...............................................-1-
Sterling Financial Corporation.......................................-1-
The Merger...........................................................-2-
Terms of the Merger..................................................-2-
Comparison of Stockholder Rights.....................................-3-
Changes in the Rights of Stockholders................................-4-
Federal Income Tax Consequences of the Merger........................-4-
Accounting Treatment.................................................-4-
Appraisal Rights.....................................................-4-
Required Vote........................................................-5-
Adjournment of the Meeting ..........................................-5-
Regulatory Approvals.................................................-6-
Management and Operations Following the Merger.......................-6-
Opinion of Financial Advisor.........................................-7-
Recommendation of the Board of Directors.............................-8-
FORWARD LOOKING STATEMENTS...................................................-9-
COMPARATIVE PER SHARE DATA...................................................-9-
General..............................................................-9-
Market Value of Securities...........................................-9-
Comparative Stock Prices............................................-10-
SELECTED FINANCIAL DATA AND
PRO FORMA INFORMATION...............................................-10-
THE MEETING.................................................................-16-
General.............................................................-16-
Voting, Revocation and Solicitation of Proxies......................-16-
Voting Securities and Securities Ownership..........................-18-
Principal Owners of Northeast Bancorp Common Stock..................-18-
Ownership of Northeast Bancorp Common Stock by
Executive Officers and Directors of Northeast Bancorp.............-20-
Interests of Northeast Bancorp Management and
Board of Directors in the Merger..................................-21-
APPROVAL OF THE MERGER......................................................-21-
Background of the Merger, Reasons and Recommendation of the
Board of Directors................................................-22-
The Board's Consideration of the Merger with Sterling
Financial Corporation.............................................-24-
Opinion of Financial Advisor........................................-26-
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<PAGE>
Comparison of Stockholder Rights....................................-30-
Changes in the Rights of Stockholders...............................-33-
Appraisal Rights....................................................-35-
Terms of the Merger.................................................-38-
Business Pending the Merger.........................................-40-
Conditions, Amendment and Termination...............................-42-
Effective Time......................................................-44-
Interests of Northeast Bancorp's Management
and Board of Directors in the Merger..............................-44-
Management and Operations Following the Merger......................-45-
Federal Income Tax Consequences.....................................-47-
Accounting Treatment................................................-48-
Restriction on Resale of Stock Held By Affiliates...................-48-
COMPARATIVE STOCK PRICES AND DIVIDENDS
AND RELATED SHAREHOLDER MATTERS.....................................-50-
Common Stock of Sterling Financial Corporation .....................-50-
Common Stock of Northeast Bancorp, Inc..............................-50-
INFORMATION CONCERNING STERLING FINANCIAL CORPORATION ......................-51-
Incorporation of Certain Documents by Reference.....................-51-
Acquisitions by Sterling Financial Corporation......................-52-
Loans .............................................................-52-
Description of Sterling Financial Corporation Common Stock..........-52-
Dividends...........................................................-53-
Liquidation.........................................................-53-
Dividend Reinvestment Plan..........................................-53-
Securities Laws..................................................... 54-
Anti-takeover Provisions............................................-54-
Indemnification.....................................................-56-
Principal Owners of Sterling Financial Corporation Common Stock.....-57-
Ownership of Sterling Financial Corporation Common Stock by
Executive Officers and Directors of Sterling Financial
Corporation.......................................................-57-
Directors and Executive Officers of Sterling Financial Corporation..-60-
Sterling Financial Corporation Executive Compensation...............-63-
Sterling Financial Corporation Directors' Compensation..............-68-
Sterling Financial Corporation's Transactions with Directors
and Executive Officers............................................-69-
INFORMATION CONCERNING NORTHEAST BANCORP, INC...............................-70-
Description of Business and Property................................-70-
Employees...........................................................-72-
Legal Proceedings...................................................-72-
Northeast Bancorp, Inc. Common Stock Market Price and Dividends.....-72-
Year 2000 Issue.....................................................-73-
-ii-
<PAGE>
NORTHEAST BANCORP, INC. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION..................................-76-
ADJOURNMENT OF THE MEETING..................................................-87-
EXPERTS.....................................................................-87-
LEGAL OPINIONS .............................................................-87-
OTHER MATTERS ..............................................................-87-
AVAILABLE INFORMATION.......................................................-88-
NORTHEAST BANCORP, INC. -- INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTARY FINANCIAL INFORMATION.................................-89-
ANNEXES
Annex A.................................Agreement and Plan of Reorganization
Annex B................Garland McPherson & Associates, Inc. Fairness Opinion
Annex C..Section 262 of the General Corporation Law of the State of Delaware
This proxy statement/prospectus incorporates important business and
financial information about Sterling Financial Corporation that is not included
or delivered with this document. This information is available, without charge,
to stockholders of Northeast Bancorp, Inc. Please direct requests for this
information to the Secretary, Sterling Financial Corporation, 101 North Pointe
Boulevard, Lancaster, Pennsylvania 17601, telephone number (717) 581-6005. In
order to ensure timely delivery of the documents in advance of the meeting, you
should make your request no later than June 3, 1999.
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<PAGE>
SUMMARY
This summary is not intended to contain all of the information in this
proxy statement/prospectus. It is intended to summarize the most significant
aspects of the merger transaction. The remainder of the proxy
statement/prospectus and the attached annexes contain more detailed information
about the merger transaction. We strongly urge you to read the entire proxy
statement/prospectus, including the annexes, in order to understand the merger
transaction fully.
The Meeting
The Board of Directors of Northeast Bancorp, Inc. has called a special
meeting of stockholders for Tuesday, June 15, 1999, at 10:00 a.m. at 14 South
Main Street, North East, Maryland 21901. Only stockholders whose ownership
appears on the stockholders record of Northeast Bancorp, Inc. at the close of
business on Monday, April 26, 1999, will be able to attend and vote at the
meeting. The main purpose of the meeting is to vote to adopt the Agreement and
Plan of Reorganization, dated as of February 10, 1999, by and among Sterling
Financial Corporation, Sterling Financial Interim Acquisition Corporation,
Northeast Bancorp, Inc. and the First National Bank of North East which
describes a merger of Northeast Bancorp, Inc. into a subsidiary of Sterling
Financial Corporation, a bank holding company located in Lancaster,
Pennsylvania. If you vote to adopt the agreement, you will be voting to approve
the merger. If the merger is completed, you will receive 2 shares of Sterling
Financial Corporation common stock in exchange for each of your shares of
Northeast Bancorp. Inc. common stock.
Northeast Bancorp, Inc.
Northeast Bancorp, Inc. is a Delaware business corporation and a registered
bank holding company formed in 1983. Northeast Bancorp holds all of the
outstanding capital stock of The First National Bank of North East. Northeast
Bancorp's principal business has been directing, planning and coordinating the
business activities of The First National Bank of North East. The First National
Bank of North East is a national banking association, headquartered in North
East, Maryland that conducts business primarily in Cecil County, Maryland. The
First National Bank of North East's deposits are insured by the FDIC. As a
full-service commercial bank, The First National Bank of North East offers
checking, savings and time deposits and commercial, consumer and mortgage loans.
Northeast Bancorp's executive offices are located at 14 S. Main Street, North
East, Maryland, and its telephone number is (410) 287-5000. As of December 31,
1998, Northeast Bancorp had total assets of approximately $81,789,454.
Sterling Financial Corporation
Sterling Financial Corporation is a Pennsylvania business corporation and a
registered bank holding company, formed in 1987. Its principal offices are
located at 101 North Pointe Boulevard, Lancaster, Pennsylvania 17601. Sterling
Financial Corporation, through its national banking association subsidiary, Bank
of Lancaster County, N.A., engages in general commercial and retail banking
services. Bank of Lancaster County is a direct subsidiary of Sterling Financial
Corporation. Its executive offices are at the same location as Sterling
Financial Corporation.
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<PAGE>
Bank of Lancaster County operates 30 banking offices in Lancaster County,
Pennsylvania and one office in Chester County, Pennsylvania. As of December 31,
1998, Sterling Financial Corporation had consolidated total assets of
approximately $919,264,360.
The Merger
The proposed merger provides for Northeast Bancorp to merge into Sterling
Financial Interim Acquisition Corporation, a subsidiary of Sterling Financial
Corporation. Northeast Bancorp will cease to exist when the merger is complete
and, after the merger, Sterling Financial Interim Acquisition Corporation will
change its name to Northeast Bancorp as a combined entity, the new Northeast
Bancorp will continue to conduct business as a subsidiary of Sterling Financial
Corporation. You will become a shareholder of Sterling Financial Corporation
when the merger is complete, unless you chose to exercise your appraisal rights.
Each outstanding share of Northeast Bancorp common stock will be converted
into 2 shares of Sterling Financial Corporation common stock when the merger is
completed.
You will not receive any fractional shares of Sterling Financial
Corporation common stock in the merger. Instead, Sterling Financial Corporation
will issue a cash payment for any fractional share of Sterling Financial
Corporation common stock that you would receive in the merger. All together,
Sterling Financial Corporation will issue no more than 677,624 shares of
Sterling Financial Corporation common stock to former stockholders of Northeast
Bancorp in this transaction.
Northeast Bancorp and Sterling Financial Corporation propose to operate The
First National Bank of North East as a wholly owned subsidiary of Sterling
Financial Corporation.
We attach a copy of the agreement as Annex A to this proxy
statement/prospectus. We strongly urge you to read the agreement carefully.
Terms of the Merger
Sterling Financial Corporation and Northeast Bancorp will not complete the
merger unless various conditions are met, including:
o Northeast Bancorp's stockholders adopt the merger agreement;
o the Federal Reserve Bank of Philadelphia approves the merger;
o the merger qualifies for pooling of interests type of accounting
treatment; and
o fewer than 10% of the outstanding shares of Northeast Bancorp exercise
appraisal rights.
See "APPROVAL OF THE MERGER -- Accounting Treatment."
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<PAGE>
Sterling Financial Corporation and Northeast Bancorp may agree to amend the
agreement. Sterling Financial Corporation and Northeast Bancorp cannot amend the
agreement to change the number of shares of Sterling Financial Corporation
common stock that Northeast Bancorp stockholders will receive without the
stockholders' approval. If the merger has not occurred by October 31, 1999, the
agreement and merger will terminate unless the parties mutually agree to extend
the deadline. See "APPROVAL OF THE MERGER -- Business Pending the Merger."
Comparison of Stockholder Rights
When the merger is completed, the stockholders of Northeast Bancorp will
become shareholders of Sterling Financial Corporation. After the merger, the
rights of former Northeast Bancorp stockholders will be governed by the articles
of incorporation and bylaws of Sterling Financial Corporation. Differences exist
in the rights of the stockholders of Northeast Bancorp and the shareholders of
Sterling Financial Corporation. These differences are due to the differences
between Pennsylvania and Delaware law, and the differences between the
certificate of incorporation and bylaws of Northeast Bancorp and the articles of
incorporation and bylaws of Sterling Financial Corporation.
The most significant differences between the rights of the stockholders of
Northeast Bancorp and the rights of the shareholders of Sterling Financial
Corporation include the following:
o Sterling Financial Corporation's articles of incorporation
contain anti-takeover terms, which may serve to keep Sterling
Financial Corporation's current management in their positions.
Northeast Bancorp's certificate of incorporation contains very
few of these anti-takeover terms;
o Sterling Financial Corporation offers a dividend reinvestment plan to
its shareholders, while Northeast Bancorp offers no plan of this type;
o Sterling Financial Corporation common stock is registered under
the Securities Exchange Act of 1934 and is traded on the Nasdaq
National Market System, while Northeast Bancorp common stock is
not registered under the Securities Exchange Act of 1934, and is
traded on a very limited basis; and
o The market for Sterling Financial Corporation common stock is
much more active than the market for Northeast Bancorp common
stock.
See "DESCRIPTION OF STERLING FINANCIAL CORPORATION AND DESCRIPTION OF
STERLING FINANCIAL CORPORATION COMMON STOCK -- Comparison of Stockholder
Rights."
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<PAGE>
Changes in the Rights of Stockholders
After the merger, the stockholders of Northeast Bancorp, a Delaware
corporation, will become shareholders of Sterling Financial Corporation, a
Pennsylvania corporation. Differences between the corporation laws of
Pennsylvania and Delaware will result in several changes in the rights of
stockholders. See "DESCRIPTION OF STERLING FINANCIAL CORPORATION AND DESCRIPTION
OF STERLING FINANCIAL CORPORATION COMMON STOCK -- "Changed in the Rights of
Stockholders".
Federal Income Tax Consequences of the Merger
Northeast Bancorp and Sterling Financial Corporation have structured the
transaction to qualify as a tax-free reorganization under the Internal Revenue
Code. Under the Internal Revenue Code, Northeast Bancorp stockholders will not
recognize taxable gain or loss when they receive Sterling Financial Corporation
common stock in exchange for Northeast Bancorp common stock. Northeast Bancorp's
stockholders who receive cash instead of fractional shares of Sterling Financial
Corporation common stock will recognize taxable gain or loss, based upon the
amount of cash received. Northeast Bancorp stockholders who exercise appraisal
rights also will recognize taxable gain or loss based on the difference between
the amount of cash received by the stockholders who exercise appraisal rights
and the adjusted tax basis of the shares as to which appraisal rights are
exercised. Prior to the completion of the merger, Shumaker Williams, P.C. will
provide an opinion confirming these and other federal income tax consequences of
the merger. You should consult with your own tax advisor regarding the tax
consequences of the merger with respect to your own particular circumstances.
See "APPROVAL OF THE MERGER -- Federal Income Tax Consequences."
Accounting Treatment
Northeast Bancorp and Sterling Financial Corporation intend that the
transaction be accounted for as a pooling of interests for financial reporting
purposes. See "APPROVAL OF THE MERGER -- Accounting Treatment."
Appraisal Rights
The General Corporation Law of the state of Delaware provides Northeast
Bancorp stockholders with the right to demand and receive the fair value in cash
for their shares of Northeast Bancorp common stock instead of Sterling Financial
Corporation common stock in the merger. If you wish to assert these appraisal
rights, you must:
o deliver a written demand for appraisal to Northeast Bancorp prior to the
stockholder vote at the meeting;
o vote "AGAINST" the merger agreement and the merger;
-4-
<PAGE>
o continuously hold your shares of Northeast Bancorp common stock
from the date you make demand for appraisal through the completion of
the merger; and
o comply with certain other statutory procedures set forth in Delaware
law.
If you wish to exercise your appraisal rights, you must either not vote for
or must sign and return your proxy voting "AGAINST". If you sign and return your
proxy without voting instructions, your proxy will be voted in favor of the
merger and you will lose any appraisal rights that you may have with respect to
adoption of the agreement. A copy of the applicable sections of the General
Corporation Law of Delaware are attached to this proxy statement/prospectus as
Annex C.
If you do not follow the procedures set forth in the statutory provisions
of the Delaware law, you may lose your appraisal rights with respect to the
merger. We urge you to read carefully "APPROVAL OF THE MERGER -- Appraisal
Rights" and Annex C to this proxy statement/prospectus.
Required Vote
In order for the merger to occur, the stockholders of Northeast Bancorp
must adopt the agreement approving the merger. If you vote to adopt the
agreement, as a stockholder of Northeast Bancorp, you will be voting to approve
the merger. Approval of the merger requires the affirmative vote of the holders
of at least a majority of the outstanding shares of Northeast Bancorp common
stock. As of April 26, 1999 , the directors and officers of Northeast Bancorp
and persons or entities that they control own 210,262 shares of Northeast
Bancorp common stock, or 62.06% of the outstanding shares. The directors and
officers of Northeast Bancorp have agreed to vote these shares "FOR" approval of
the merger.
Each share of Northeast Bancorp common stock entitled to be voted at the
meeting is entitled to one vote. Holders of at least a majority of the total
number of shares of Northeast Bancorp common stock outstanding as of April 26,
1999, must be present in person or by proxy at the meeting in order to
constitute a quorum. A quorum must be present if actions taken at the meeting
are to be valid. In addition to voting to approve the merger, you may also be
asked to vote on other matters that may properly come before the meeting or any
adjournments of the meeting.
Adjournment of the Meeting
If a quorum is not present at the meeting, the Northeast Bancorp Board of
Directors intends to postpone or adjourn the meeting to a later date to permit
additional affirmative votes to be obtained. The affirmative vote of a majority
of the shares present at the meeting is required to approve an adjournment. The
Northeast Bancorp Board of Directors recommends that stockholders vote "FOR" the
proposal to adjourn the meeting, if necessary, to permit additional votes to be
obtained to approve the agreement.
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<PAGE>
Regulatory Approvals
An application to approve the merger has been filed with the Federal
Reserve Bank of Philadelphia. We also sent a copy of the application to the
Maryland Department of Labor, Licensing and Regulation, Division of Financial
Regulation. The Federal Reserve Bank of Philadelphia has approved the
transaction.
Management and Operations Following the Merger
Following the merger, the Board of Directors of Sterling Financial
Corporation will be the same persons who served on the Board of Directors
immediately before the merger, with the addition of Ms. S. Amy Argudo who is
currently a member of the Board of Directors of Northeast Bancorp Following the
merger, the Board of Directors of Sterling Financial Interim Acquisition
Corporation will be the same persons who served on the Board of Directors
immediately before the merger. Following the merger, the Board of Directors of
The First National Bank of North East will be the same persons who serve on the
Board of Directors immediately before the merger, with the addition of Mr. John
E. Stefan who is a member of the Board of Directors of both Sterling Financial
Corporation and Sterling Financial Interim Acquisition Corporation. Each of
these persons will serve on the Board of Directors until the his or her
successor is elected and qualified.
The following tables state the membership of the boards following the
merger:
Board of Directors
Sterling Financial Corporation
John E. Stefan (President, Chief Executive Officer
and Chairman of the Board of Directors)
Richard H. Albright, Jr.
S. Amy Argudo
Robert H. Caldwell
Howard E. Groff, Jr.
Joan R. Henderson
J. Robert Hess
Calvin G. High
David E. Hosler
J. Roger Moyer, Jr.
E. Glenn Nauman
W. Garth Sprecher
Glenn R. Walz
Board of Directors
Sterling Financial Interim Acquisition Corporation
John E. Stefan
J. Roger Moyer, Jr.
Jere L. Obetz
-6-
<PAGE>
Board of Directors
The First National Bank of North East
S. Amy Argudo
Michael A. Carenzo
Donald B. Greenberg
John E. Hughes
Nancy M. Hughes
Robert W. Hutton
H. C. Stanley
John E. Stefan
Lawrence D. Wiggins
H. Norman Wilson, Jr.
John E. Hughes, President and Chief Executive Officer of The First National
Bank of North East, has entered into an executive employment agreement with The
First National Bank of North East to be effective when the merger is complete.
See "APPROVAL OF THE MERGER -- Management and Operations Following the Merger"
for a full description of Mr. Hughes' employment agreement.
Richard D. McDaniel has entered into a consulting agreement with Sterling
Financial Corporation to be effective when the merger is complete. Mr. McDaniel
will provide advisory and consulting services and act as a resource person for
marketing Sterling Financial Corporation's and its bank subsidiaries' services
and products. This contract provides compensation to Mr. McDaniel and is
intended to maintain Mr. McDaniel's involvement in The First National Bank of
North East after the merger is completed.
For a description of these contracts, see "APPROVAL OF THE MERGER --
Interests of Northeast Bancorp's Management and Board fo Directors in the Merger
and Management and Operations Following the Merger."
Opinion of Financial Advisor
The Northeast Bancorp Board of Directors asked Garland McPherson &
Associates, Inc., located at 1122 Kenilworth Drive, Suite 508, Baltimore,
Maryland 21204-2188, to provide investment banking services to Northeast Bancorp
in the merger. These services included providing an opinion that the value of
the Sterling Financial Corporation common stock to be received by the Northeast
Bancorp stockholders in the merger is fair, from a financial point of view.
Garland McPherson & Associates did not approve the financial or other terms of
the merger; the Northeast Bancorp Board of Directors considered and approved the
terms of the merger, including financial terms. In forming its opinion, Garland
McPherson & Associates considered various factors, including Northeast Bancorp's
and Sterling Financial Corporation's operating results, current financial
condition and perceived future prospects. We recommend that you read the Garland
McPherson & Associates opinion, which is attached to this proxy
statement/prospectus as Annex B. You should read the opinion in its entirety and
pay particular attention to the assumptions made and other matters considered by
Garland McPherson &
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<PAGE>
Associates in forming its opinion. See "APPROVAL OF THE MERGER -- Opinion of
Financial Advisor."
Recommendation of the Board of Directors
Your Northeast Bancorp Board of Directors believes that the merger is in
the best interests of you and all Northeast Bancorp stockholders. We recommend
that you vote "FOR" adoption of the agreement and approval of the merger.
END OF SUMMARY
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<PAGE>
FORWARD LOOKING STATEMENTS
This proxy statement/prospectus contains and incorporates certain
statements that constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include certain statements regarding intent, belief or current
expectations about matters (including statements as to "beliefs,"
"expectations," "anticipations," "intentions" or similar words). Forward-looking
statements are also statements that are not statements of historical fact.
Forward-looking statements are subject to risks, uncertainties and assumptions.
These include:
o trends for the continued growth of the business of Sterling Financial
Corporation and Northeast Bancorp;
o the realization of anticipated revenues, profitability and cost savings
of the combined companies; and
o other risks and uncertainties.
If one or more of these risks or uncertainties occurs or if the underlying
assumptions prove incorrect, actual results, performance or achievements in 1999
and beyond could differ materially from those expressed in, or implied by, the
forward-looking statements.
COMPARATIVE PER SHARE DATA
General
The following table contains selected combined and equivalent per share
data for each of Sterling Financial Corporation and Northeast Bancorp on a
historical basis, and selected unaudited pro forma comparative per share data,
assuming the transaction had been consummated as of the beginning of the
earliest period presented for earnings per share and dividends per share and as
of the end of the period presented for book value per share. The information
shows how a share of Northeast Bancorp common stock that you hold would have
participated in the income from continuing operations, cash dividends and book
value of Sterling Financial Corporation if the merger had been completed in
1998. The pro forma data is not necessarily indicative of results that would
have been achieved had the transaction been consummated in 1998 and should not
be construed as representative of future operations. The information presented
should be read in conjunction with the historical consolidated financial
statements, and notes to the financial statements, of Sterling Financial
Corporation and Northeast Bancorp, incorporated by reference or appearing
elsewhere in this proxy statement/prospectus.
Market Value of Securities
The most recent sale of Northeast Bancorp common stock before public
announcement of the agreement and related merger was a sale to the Northeast
Bancorp K-SOP Retirement Plan of 3,040 shares at $25.00 per share on January 21,
1999. The Northeast Bancorp common stock has historically traded on a very
limited basis in privately negotiated transactions.
-9-
<PAGE>
The comparative stock price information included in this section shows
that, if the merger had taken place on February 9, 1999, the value of a share of
Northeast Bancorp common stock would have been approximately $______. On
February 9 1999, the last trading date before public announcement of the
agreement and related merger, the per share closing bid and asked quotations for
Sterling Financial Corporation common stock were $33.75 and $36.00,
respectively, as reported on the Nasdaq. The pro forma equivalent per share
closing bid and asked quotations for that date, based on the exchange ratio of 2
shares of Sterling Financial Corporation common stock for each share of
Northeast Bancorp's common stock are $______ and $______, respectively.
Comparative Stock Prices
(as of February 9, 1999)
<TABLE>
<CAPTION>
Pro Forma
Historical Price Equivalent Price
Per Share Per Share
--------- ---------
<S> <C> <C>
Sterling Financial Corporation Common Stock
February 9, 1999 Bid $ 34.00 $ .
-----------
February 9, 1999 Asked $ 37.00 $ .
-----------
Northeast Bancorp Common Stock
January 21, 1999 K-SOP sale $ 25.00 $ .
------- -----------
</TABLE>
- ---------------
SELECTED FINANCIAL DATA AND
PRO FORMA INFORMATION
We provide the following financial information to aid you in your analysis
of the financial aspects of the merger. These tables contain certain selected
historical consolidated and pro forma summary financial data, for the periods
and as of the dates indicated, for Sterling Financial Corporation and for
Northeast Bancorp This data is based on and should be read in conjunction with,
and is qualified by, the consolidated financial statements of Sterling Financial
Corporation and of Northeast Bancorp, including the notes to those financial
statements, incorporated by reference or appearing elsewhere in this proxy
statement/prospectus. In addition, the pro forma data is not necessarily
indicative of results that would have been achieved had the transaction been
consummated and should not be construed as representative of future operations.
-10-
<PAGE>
STERLING FINANCIAL CORPORATION
Selected Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 60,066 $ 56,499 $ 52,558 $ 48,850 $ 41,931
Net Interest Income 32,141 31,173 29,735 27,697 27,005
Provisions for Loan Losses 896 1,129 580 534 1,081
Net Interest After Provision
for Loan Losses 31,245 30,044 29,155 27,163 25,924
Other Operating Income 14,187 11,930 9,442 7,397 6,222
Other Operating Expenses 30,188 28,082 25,639 22,527 21,232
Income Before Income Taxes 15,244 13,892 12,958 12,033 10,914
Income Taxes 3,643 3,491 3,147 3,039 2,637
Income From Continuing
Operations 11,601 10,401 9,811 8,994 8,277
Average Balance Sheet Totals:
Total Assets 874,640 789,314 732,226 659,335 600,263
Investment Securities and
Money Market Investments 243,432 201,693 185,318 180,182 163,133
Loans and Leases (Net of
Unearned Income) 530,032 497,557 462,528 406,916 374,922
Deposits 744,612 663,149 617,741 554,663 511,997
Borrowings 31,549 35,316 30,578 29,143 22,144
Shareholders' Equity
(excluding unrealized gains) 74,240 69,865 65,351 59,864 53,486
Period End:
Total Assets 919,264 845,488 764,072 711,154 633,395
</TABLE>
-11-
<PAGE>
NORTHEAST BANCORP, INC.
Selected Financial Data
(In Thousands)
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 5,922 $ 5,483 $ 5,146 $ 5,115 $ 5,006
Net Interest Income 3,633 3,471 3,189 3,129 3,405
Provisions for Loan Losses 60 0 (39) (258) 73
Net Interest After Provision
for Loan Losses 3,573 3,471 3,228 3,387 3,332
Other Operating Income 517 432 413 407 366
Other Operating Expenses 2,787 2,644 2,432 2,697 2,679
Income Before Income Taxes 1,303 1,259 1,209 1,097 1,019
Income Taxes 513 424 374 309 416
Income From Continuing
Operations 790 835 835 788 603
Average Balance Sheet Totals: (Estimates)
Total Assets 77,122 70,008 67,768 66,891 66,092
Investment Securities and
Money Market Investments 13,695 12,995 17,649 18,797 17,400
Loans and Leases (Net of
Unearned Income) 56,462 50,458 43,709 41,924 42,751
Deposits 69,155 62,426 60,764 60,219 59,912
Borrowings 0 0 0 0 0
Shareholders' Equity (excluding
unrealized gain/loss) 7,426 7,136 6,722 6,127 5,675
Period End:
Total Assets 81,789 72,455 67,561 67,976 65,806
</TABLE>
-12-
<PAGE>
SELECTED PRO FORMA COMBINED
(In Thousands)
December 31, 1998
<TABLE>
<CAPTION>
Sterling
Financial Northeast Pro Forma
Corporation Bancorp, Inc. Adjustments Combined
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Average Balance Sheet Totals:
Total Assets $874,640 $77,122 0 $951,762
Investment Securities and Money
Market Investments 243,432 13,695 0 257,127
Loans and Leases (Net of Unearned
Income) 530,032 56,462 0 586,494
Total Deposits 744,612 69,155 0 813,767
Borrowings 31,549 0 0 31,549
Shareholders' Equity (excluding
unrealized gains 74,240 7,426 0 81,666
Period End:
Total Assets 919,264 81,789 0 1,001,053
</TABLE>
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Total Interest Income $65,988 $61,982 $57,704 $53,965 $46,937
Net Interest Income 35,774 34,644 32,924 30,826 30,410
Provisions for Loan Losses 956 1,129 541 276 1,154
Net Interest After Provision
for Loan Losses 34,818 33,515 32,383 30,550 29,256
Other Operating Income 14,704 12,362 9,855 7,804 6,588
Other Operating Expenses 32,975 30,726 28,071 25,224 23,911
Income Before Income Taxes 16,547 15,151 14,167 13,130 11,933
Income Taxes 4,156 3,915 3,521 3,348 3,053
Income From Continuing
Operations 12,391 11,236 10,646 9,782 8,880
</TABLE>
-13-
<PAGE>
SELECTED HISTORICAL, PRO FORMA
COMBINED AND EQUIVALENT PER SHARE DATA
The combined pro forma per share equivalent information shown below is
based on average shares outstanding during the period except for the book value
per share which is based on period end shares outstanding. The number of shares
in each case has been adjusted for stock dividends and stock splits through the
periods. Each share of Northeast Bancorp common stock will become the right to
receive 2 shares of Sterling Financial Corporation common stock.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sterling Financial Corporation
(Sterling)
Historical Per Common Share
Average Shares Outstanding:
Basic $ 6,456,896 $ 6,511,742 $6,545,925 $6,513,333 $6,433,385
Diluted 6,478,290 6,514,984 6,546,002 6,513,333 6,433,385
Book Value (excluding SFAS
115) $11.90 $11.01 $10.34 $10.01 $9.23
Cash Dividends Declared $0.83 $0.78 $0.70 $0.85 $0.55
Income from Operations 11,601,310 10,401,164 9,810,921 8,994,020 8,276,863
Basic $1.80 $1.60 $1.50 $1.38 $1.29
Diluted $1.79 $1.60 $1.50 $1.38 $1.29
Sterling, Northeast Combined
Pro Forma
Per Common Share
Average Shares Outstanding:
Basic $ 7,136,136 $ 7,215,182 $ 7,246,475 $7,213,803 $7,133,855
Diluted 7,157,530 7,218,424 7,246,552 7,213,803 7,133,855
Book Value (excluding
SFAS 115) $11.83 $10.93 $10.32 $9.51 $8.77
Cash Dividends Declared $0.83 $0.78 $0.70 $0.85 $0.55
Income from Operations 12,390,903 11,236,566 10,645,616 9,781,948 8,879,715
Basic $1.74 $1.56 $1.47 $1.36 $1.24
Diluted $1.73 $1.56 $1.47 $1.36 $1.24
</TABLE>
-14-
<PAGE>
SELECTED HISTORICAL, PRO FORMA
COMBINED AND EQUIVALENT PER SHARE DATA
The combined pro forma per share equivalent information shown below is
based on average shares outstanding during the period except for the book value
per share which is based on period end shares outstanding. The number of shares
in each case has been adjusted for stock dividends and stock splits through the
periods. Each share of Northeast Bancorp common stock will become the right to
receive 2 shares of Sterling Financial Corporation common stock.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Northeast Bancorp, Inc.
Historical Per Common Share
Average Shares Outstanding:
Basic $339,620 $351,720 $350,275 $350,235 $350,235
Diluted 339,620 351,720 350,275 350,235 350,235
Book Value (excluding
SFAS #115) $22.52 $21.23 $19.96 $18.26 $16.73
Cash Dividends $1.00 $0.67 $0.51 $0.72 $0.67
Income from Operations 789,593 835,402 834,695 787,928 602,852
Basic $2.32 $2.38 $2.38 $2.25 $1.72
Diluted $2.32 $2.38 $2.38 $2.25 $1.72
Sterling, Northeast Combined
Pro Forma
Per Common Share
Average Shares Outstanding:
Book Value (excluding SFAS $23.67 $21.87 $20.64 $19.03 $17.53
115)
Cash Dividends $1.66 $1.56 $1.40 $1.70 $1.10
Basic $3.47 $3.11 $2.94 $2.71 $2.49
Diluted $3.46 $3.11 $2.94 $2.71 $2.49
</TABLE>
-15-
<PAGE>
THE MEETING
General
The Board of Directors of Northeast Bancorp provides this proxy
statement/prospectus to Northeast Bancorp's stockholders for a meeting that will
be held at 14 South Main Street, North East, Maryland 21901 on Tuesday, June 15,
1999, at 10:00 a.m.
At the meeting, Northeast Bancorp stockholders will consider and vote on:
o the approval and adoption of the agreement that provides for the
merger; and
o other matters that properly come before the meeting or any adjournments
of the meeting.
If the merger and the agreement that provides for the merger are approved,
Northeast Bancorp will merge into Sterling Financial Interim Acquisition
Corporation. When the merger is completed Northeast Bancorp will cease to exist
and Northeast Bancorp's stockholders will be entitled to receive 2 shares of
Sterling Financial Corporation common stock in exchange for each share of
Northeast Bancorp common stock that they hold at the time of the merger.
Sterling Financial Interim Acquisition Corporation will amend its certificate of
incorporation and bylaws to change its name to "Northeast Bancorp," and will
continue to conduct business as a subsidiary of Sterling Financial Corporation.
A vote for approval of the agreement is a vote for approval of the merger of
Northeast Bancorp into Sterling Financial Interim Acquisition Corporation and
for the exchange of Northeast Bancorp common stock for Sterling Financial
Corporation common stock.
To complete the merger, at least a majority of the outstanding shares of
Northeast Bancorp must be voted to approve the merger.
Voting, Revocation and Solicitation of Proxies
The meeting of stockholders of Northeast Bancorp cannot proceed unless a
quorum of the shares of Northeast Bancorp common stock is present. A quorum will
be present at the meeting if the holders of at least a majority of the total
number of shares of Northeast Bancorp common stock outstanding on April 26,
1999, to be present at the meeting either in person or by proxy. As of April 26,
1999, there were 338,812 shares of Northeast Bancorp common stock outstanding
and entitled to be voted.
If you authorized your shares to be voted by proxy, they will be voted at
the meeting and at all adjournments or postponements of the meeting, unless you
revoke your proxy. You can revoke your proxy at any time before the vote on the
merger. By itself, your attendance at the meeting will not revoke your proxy.
You may revoke your proxy by:
-16-
<PAGE>
o delivering a notice of revocation or a later-dated proxy to S. Amy
Argudo, Secretary, Northeast Bancorp, 14 S. Main Street, North East,
Maryland 21901- 3998; or
o attending the meeting and notifying the person in charge of the
meeting, prior to the meeting, that you wish to vote your shares in
person before the vote is taken on the merger.
The proxy holders will vote signed and returned proxies as instructed by
the stockholders. If no instructions are indicated, the proxy holders will vote
the proxies in favor of the merger and in favor of adjournment, if necessary. A
proxy also gives the persons named as proxy holders the right to vote on other
matters incidental to the conduct of the meeting. Although the Board of
Directors of the Northeast Bancorp knows of no other business to be presented at
the meeting, if any other matters are properly brought before the meeting, any
proxy given by you will be voted in accordance with the recommendations of the
management of Northeast Bancorp. Proxies marked as abstentions will not be
counted as votes cast. Shares held by brokerage companies or in street name that
have been designated by brokers on proxy cards as not voted will not be counted
as votes cast. Proxies marked as abstentions or as broker no-votes:
o will be treated as shares present for purposes of determining whether a
quorum is present; and
o will have the same effect as a vote against the merger.
As part of its solicitation of proxies, Northeast Bancorp will:
o bear the cost of soliciting proxies;
o reimburse brokerage firms and other custodians, nominees and
fiduciaries for their reasonable expenses; and
o if it so decides, solicit proxies personally or by telegraph or
telephone.
The Board of Directors of Northeast Bancorp intends to ask for an
adjournment of the meeting to another place and time if any of the following
situations should arise:
o if a quorum is not present at the beginning of the meeting;
o if not enough shares of Northeast Bancorp common stock are voted to
approve the merger; or
o if for any other reason the Board of Directors of Northeast Bancorp
believes that additional time should be allowed to obtain proxies.
The meeting may be adjourned if the holders of a majority of the shares
represented at the meeting vote to adjourn. If the Board of Directors of
Northeast Bancorp proposes to adjourn the meeting, the persons named in the
-17-
<PAGE>
enclosed proxy will vote all shares for which they have voting authority in
favor of the adjournment. A proxy that withholds authority or that is voted
against the merger will not be voted in favor of any adjournment or postponement
of the meeting. If the meeting is adjourned, stockholders will receive no notice
unless a new record date is set or unless the meeting is adjourned for more than
thirty (30) days.
Voting Securities and Securities Ownership
Only those stockholders of Northeast Bancorp common stock whose ownership
appears on the stockholder record of Northeast Bancorp as of the close of
business on April 26, 1999, are entitled to vote at the meeting. Each share of
Northeast Bancorp common stock is entitled to one vote. On April 26, 1999, there
were 338,812 shares of Northeast Bancorp common stock outstanding. Common stock
is the only issued and outstanding class of stock of Northeast Bancorp.
Principal Owners of Northeast Bancorp Common Stock
The following table sets forth, as of April 26, 1999, the name of each
person who owns of record or who is known by the Board of Directors of the
Northeast Bancorp to own more than five percent (5%) of Northeast Bancorp's
outstanding common stock, the number of shares beneficially owned by such person
and the percentage of the Northeast Bancorp's outstanding common stock so owned.
Northeast Bancorp determined beneficial ownership by applying Securities
and Exchange Commission Rule 13d-3, which states that a person should be
credited with the ownership of any stock that he or she, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise has
or shares:
o voting power, which includes the power to vote or to direct the voting
of the stock, or
o investment power, which includes the power to dispose or direct the
disposition of the stock, or has the right to acquire beneficial
ownership within 60 days after April 26, 1999, the record date of the
meeting.
-18-
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of Shares
Ownership Outstanding
---------- -----------------
Name of Owner
- -------------
<S> <C> <C>
Northeast Bancorp, Inc. 34,507 (1) 10.2%
McDaniel/Argudo/Hughes Family Group 197,570 (2) 58.3%
</TABLE>
(1) Shares held by the Northeast Bancorp, Inc. Employee Stock Ownership Plan,
of which S. Amy Argudo and Nancy Hughes are trustees, does not include any
holdings of the McDaniel/Argudo/Hughes family group. Each of the
participants in the Employee Stock Ownership Plan directs the trustees to
vote his or her stock for or against the merger as he or she sees fit. The
trustees may vote only those shares in the Employee Stock Ownership Plan
for the merger for which the trustees have received no voting instructions.
(2) Holdings of the McDaniel/Argudo/Hughes family group include:
o 183,907 shares held by the Shady Beach Trust, of which S. Amy Argudo
and Nancy Hughes, daughters of Richard D. McDaniel are the trustees;
o 2,621 shares held by Richard D. McDaniel, Sr. and S. Amy Argudo;
o 1,045 shares held by John E. Hughes, the President and Chief Executive
Officer of the First National Bank of North East, husband of Nancy
Hughes;
o 205 shares held by Nancy Hughes and her daughter Lisa;
o 198 shares held by Nancy Hughes and her daughter Laura;
o 205 shares held by J. David McDaniel, as custodian for daughter Casey,
the son and grand-daughter of Richard D. McDaniel, Sr.;
o 3,213 shares held by Richard D. McDaniel, Sr. and J. David McDaniel;
o 3,600 shares held by Richard D. McDaniel, Sr. and Nancy Hughes;
o 2,576 shares held by Richard D. McDaniel, Sr. and Richard D. McDaniel,
Jr.
Individual members of the McDaniel/Argudo/Hughes group may disclaim
beneficial ownership of holdings of other members of the group who are not
the individual's spouse or minor children.
-19-
<PAGE>
Ownership of Northeast Bancorp Common Stock by Executive Officers and Directors
of Northeast Bancorp
The table below shows the amount and percentage of Northeast Bancorp common
stock beneficially owned by each director and executive officer, and all
executive officers and directors of Northeast Bancorp as a group as of April 26,
1999.
We determined beneficial ownership of shares of Northeast Bancorp's common
stock by applying Securities and Exchange Commission Rule 13d-3, which provides
that a person should be credited with the ownership of any stock that he or she,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise has or shares:
o voting power, which includes the power to vote or to direct the voting
of the stock, or
o investment power, which includes the power to dispose or direct the
dispostion of the stock, or has the right to acquire beneficial
ownership within 60 days after April 26, 1999.
Unless otherwise indicated in a footnote appearing below the table, all
shares reported in the table below are owned directly by the reporting person.
The number of shares owned by the directors and executive officers is rounded to
the nearest whole share. The percentage of all Northeast Bancorp common stock
owned by each director and executive officer is less than 1% unless otherwise
indicated.
<TABLE>
<CAPTION>
Percent of
Amount and Nature of Shares
Name of Individual or Identity of Group Beneficial Ownership Outstanding
- --------------------------------------- -------------------- -----------
<S> <C> <C>
S. Amy Argudo(1) 186,528 55.02%
Michael A. Carenzo 1,500 --
Donald B. Greenberg 1,000 --
Howard D. Herstine(2) 2,363 --
John Hughes(3) 187,910 55.46%
Robert Hutton 1,000 --
H. C. Stanley 1,028 --
Lawrence D. Wiggins(4) 7,805 2.30%
H. Norman Wilson, Jr. 1,645 --
Daniel A. Winters 3,390 1.00%
All directors and executive
officers as a group (9 persons) 210,262 62.06%
</TABLE>
- -------------
-20-
<PAGE>
(1) Includes 2,621 shares owned jointly with her father and 183,907 shares
owned by the Shady Beach Trust, of which Ms. Argudo is a trustee. Does not
include any other shares held by the McDaniel/Argudo/Hughes family group,
of which Ms. Argudo disclaims beneficial ownership.
(2) Includes 1,079 shares held by Mr. Herstine and relatives.
(3) Includes 183,907 shares held by the Shady Beach Trust, of which Mr. Hughes'
wife is a trustee; 205 shares held by Mr. Hughes' wife and a daughter; 198
shares held by Mr. Hughes' wife and a daughter; and 3,600 shares held by
Mr. Hughes' wife and father-in-law. Does not include any other shares held
by the McDaniel/Argudo/Hughes family group, of which Mr. Hughes disclaims
beneficial ownership.
(4) Includes 6,521 shares held jointly with wife and 1,284 shares held by Mr.
Wiggins' retirement account.
Interests of Northeast Bancorp Management and Board of Directors in the Merger
Except as described in this proxy statement/prospectus, the directors and
executive officers of Northeast Bancorp have no special interest in the proposed
merger, other than in their capacity as stockholders of Northeast Bancorp As
stockholders, the directors and executive officers are entitled to receive
Sterling Financial Corporation common stock in exchange for their Northeast
Bancorp common stock on the same terms and conditions as all other stockholders
of Northeast Bancorp See "APPROVAL OF THE MERGER -- Terms of the Merger and
Interests of Certain Persons in the Merger and Management and Operations
Following the Merger."
The directors and officers of Sterling Financial Corporation and its
subsidiaries have no special interest in the merger, other than in their
capacity as stockholders of Sterling Financial Corporation. The directors and
officers Sterling Financial Corporation and its subsidiaries will not receive
any special share and cash price or compensation because of the merger.
APPROVAL OF THE MERGER
In this section of the proxy statement/prospectus we describe the material
terms and provisions of the proposed merger. A copy of the agreement that
provides for the merger is attached to this proxy statement/prospectus as Annex
A. This is only a discussion of certain terms of the merger and is qualified in
its entirety by reference to the full text of the agreement. We urge you to read
the agreement.
The agreement provides that:
o Northeast Bancorp will be merged into Sterling Financial Interim
Acquisition Corporation and will become a wholly owned subsidiary of
Sterling Financial Corporation;
o Sterling Financial Interim Acquisition Corporation will amend its
certificate of incorporation to change its name to Northeast Bancorp;
-21-
<PAGE>
o The First National Bank of North East will become a wholly owned second
tier subsidiary of Sterling Financial Corporation after the merger; and
o The First National Bank of North East will continue to be regulated by
the Office of the Comptroller of the Currency and the Federal Deposit
Insurance Corporation.
o You, as a stockholder of Northeast Bancorp, will become entitled to
receive 2 shares of Sterling Financial Corporation common stock for
each share of Northeast Bancorp common stock that you own when the
merger is complete.
The Board of Directors of Northeast Bancorp has unanimously declared
advisable approved and adopted the merger and the agreement and the Board of
Directors believes that the merger is in the best interests of the stockholders
of Northeast Bancorp The Board of Directors of Northeast Bancorp unanimously
recommends that stockholders vote "FOR" the merger by voting "FOR" the following
resolutions that will be presented at the meeting:
RESOLVED, that the Agreement and Plan of Reorganization dated as of
February 10, 1999, by and among Sterling Financial Corporation, Sterling
Financial Interim Acquisition Corporation, Northeast Bancorp and The First
National Bank of North East (the "Agreement"), entered into among the
respective entities, approved and adopted by the Board of Directors of the
respective entities, providing, among other things, for the merger of
Northeast Bancorp with and into Sterling Financial Interim Acquisition
Corporation, and providing that each outstanding share of the common stock
of Northeast Bancorp shall be converted into the right to receive 2 shares
of Sterling Financial Corporation common stock, par value $5.00 per share,
in accordance with the terms of the Agreement, is hereby approved and
adopted by the stockholders of Northeast Bancorp
Background of the Merger, Reasons and Recommendation of the Board of Directors
Background
For several years as part of its long-range planning practices, Northeast
Bancorp's Board of Directors periodically reviewed and evaluated various
strategic options and available alternatives to maximize the economic benefits
for Northeast Bancorp and its stockholders. The Board has taken into account:
o current industry-wide economic, financial and regulatory conditions;
o current local conditions in the financial services industry; and
o the immediate impact and likely future ramifications of any plan they
might choose to pursue.
-22-
<PAGE>
The Board has considered the following options:
o maintaining Northeast Bancorp's independence;
o combining Northeast Bancorp with a smaller or similarly sized of bank
or bank holding company; or
o merging Northeast Bancorp with a larger community or regional financial
institution.
After careful analysis, the Board concluded that in 1998 Northeast Bancorp
could compete more effectively in its market area as part of a larger financial
institution because:
o it would be better able to provide larger financial accommodations to
its customers;
o it would be able to offer additional financial services and products to
its customers;
o it could offer various additional benefits to its customers, community
and employees.
In analyzing its options, the Board kept clearly in mind the need to
increase stockholder value. The Board believes that by combining with a larger
bank holding company, Northeast Bancorp's stockholder value will increase
because:
o Northeast Bancorp's improved competitiveness will lead directly to
better overall financial results; and
o exchanging Northeast Bancorp common stock for stock regularly traded on
the Nasdaq National Market System will improve liquidity for
stockholders and allow improved financial results to be more readily
reflected in the stock price.
In addition to considering stockholder value and other purely financial
aspects, the Board also considered its obligations to the community of North
East and its surrounding area. Because Northeast Bancorp is a registered bank
holding company and the stockholder of a federally chartered financial
institution, it must take into consideration the convenience and needs of the
communities served by The First National Bank of North East for retail banking
services. A discussion of the regulations governing the business of bank holding
companies and federally chartered financial institutions is included in Sterling
Financial Corporation's Annual Report on Form 10-K under Item 1 -- Business,
Supervision and Regulation, which is incorporated into this proxy
statement/prospectus by reference.
The Board decided that a suitable merger transaction would serve the
convenience and needs of North East and surrounding community in the following
ways:
-23-
<PAGE>
o The First National Bank of North East's banking offices would continue
to be open;
o the North East community and surrounding geographic area would be
able to continue to obtain at least similar or improved banking and
financial services; and
o if possible, that the "The First National Bank of North East" name and
tradition of community bank service which The First National Bank of
North East began in the beginning of the century would continue into
the next century.
It was with these considerations in mind that the Northeast Bancorp Board of
Directors examined all possible alternatives, including the Sterling Financial
Corporation merger proposal.
The Board retained Garland McPherson & Associates, Inc., as its investment
banker, to aid the Northeast Bancorp Board of Directors in its examination and
evaluation of possible merger transactions.
The Board's Consideration of the Merger with Sterling Financial Corporation
On September 3, 1998, Gregory LeFever, a vice president of trust services
with the Bank of Lancaster County, called on The First National Bank of
Northeast to discuss business opportunities. During a meeting with Mr. Michael
Carenzo, Mr. LeFever acquainted Mr. Carenzo with Sterling Financial
Corporation's positive financial position. Mr. LeFever and Mr. Carenzo did not
at that time discuss the possibility of a combination between Sterling Financial
Corporation and Northeast Bancorp.
Mr. Carenzo reported his conversation with Mr. LeFever to the Board of
Directors of Northeast Bancorp and The First National Bank of North East. Mr.
Carenzo and Mr. John Hughes, President of The First National Bank of North East,
reviewed the information concerning Sterling Financial Corporation presented by
Mr. LeFever, and determined that Sterling Financial Corporation possessed
several attributes that made it an attractive merger candidate to Northeast
Bancorp. Mr. Carenzo then contacted Mr. John Stefan, the President and Chief
Executive Officer of Sterling Financial Corporation. Mr. Stefan and Mr. Carenzo
met to discuss the possible combination of Sterling Financial Corporation and
Northeast Bancorp.
After numerous discussions of the terms of the proposal, on December 15,
1998, Sterling Financial Corporation sent a proposed merger to agreement to the
Board of Directors of Northeast Bancorp. Between January 3, 1999 and February
10, 1999, Sterling Financial Corporation and Northeast Bancorp held numerous
meetings to discuss the terms and provisions of the agreement. On February 10,
1999, the representatives of Sterling Financial Corporation and Northeast
Bancorp signed the merger agreement set out in Annex A to this proxy
statement/prospectus.
-24-
<PAGE>
In evaluating the proposed merger, the Northeast Bancorp Board of
Directors, from the Northeast Bancorp's stockholders' viewpoint, considered a
variety of financial factors, including:
o the share and cash price being offered to Northeast Bancorp's
stockholders in relation to the market value, book value, earnings per
share, projected earnings per share of Northeast Bancorp and projected
increased dividends;
o whether the share and cash price to be received by Northeast Bancorp's
stockholders reflects a premium over the values at which Northeast
Bancorp's common stock has traded in the market;
o the quality of a financial investment in and the liquidity of Sterling
Financial Corporation common stock; and
o the current operations, financial condition and future prospects of
Sterling Financial Corporation and Northeast Bancorp.
After examining the proposal from Sterling Financial Corporation to merge
with Northeast Bancorp, the Northeast Bancorp Board of Directors determined
that:
o the terms of the proposed merger compared favorably to the financial
terms of other recent business combinations in the local financial
services industry;
o the respective business management philosophies and operating culture
of Northeast Bancorp and Sterling Financial Corporation were
compatible;
o Sterling Financial Corporation's subsidiary, branches and business
operations are located in a geographic area of significant potential
growth;
o the liquidity of the stock held by Northeast Bancorp's stockholders
would substantially increase if it were to be exchanged for stock in
Sterling Financial Corporation, a larger banking organization whose
common stock is quoted and traded on the Nasdaq National Market System;
o Sterling Financial's Corporation's greater resources would enable The
First National Bank of North East to offer expanded services to its
customers and the communities it serves;
o the merger generally would benefit the Northeast Bancorp customers,
staff and community; and
o the merger would maintain The First National Bank of North East's local
identity.
In addition to the factors related directly to the merger, the Board of
Directors of Northeast Bancorp considered the effect of recent changes in
federal and state banking laws and regulations. These recent changes have
-25-
<PAGE>
had a major impact upon the banking industry throughout the United States. These
changes have increased significantly the complexity of federal banking
regulations and costs that the banks incur in complying with those regulations.
In response to these changes, many banks and bank holding companies have merged
or consolidated in order to provide the capital and depth of management
necessary to comply with these complex new laws and regulations. The North East
Bancorp, Inc. Board of Directors believes that further industry-wide merger
activity is likely to occur in the future, resulting in increased concentration
levels in banking markets and other significant changes in the competitive
environment. These changes are expected to intensify competition in local and
regional banking markets.
The factors discussed above and elsewhere in this proxy
statement/prospectus are believed to be all of the material factors considered
by the Northeast Bancorp Board of Directors in evaluating the transaction.
For the reasons outlined above in this section and elsewhere in this proxy
statement/prospectus, the Northeast Bancorp Board of Directors has unanimously
concluded that the proposed transaction is in the best interests of Northeast
Bancorp's stockholders, employees, customers and community. The Board has
unanimously agreed to recommend that the stockholders of Northeast Bancorp
approve the merger transaction with Sterling Financial Corporation. The Board of
Directors has received an opinion from Garland McPherson & Associates to the
effect that the terms of the agreement with Sterling Financial Corporation are
fair to the stockholders of Northeast Bancorp from a financial point of view.
Under Delaware law, considerations other than maximizing stockholder value may
be irrelevant and/or illegal. See "APPROVAL OF THE MERGER -- Opinion of
Financial Advisor."
Opinion of Financial Advisor
General
Under the terms of an engagement letter dated December 30, 1998, the
Northeast Bancorp Board of Directors retained Garland McPherson & Associates to
provide financial advisory and investment banking services to Northeast in
connection with the possible merger of Northeast Bancorp with Sterling.
Garland McPherson & Associates, as part of its investment banking and bank
consulting business, is engaged in the valuation of financial institution
securities for a variety of purposes, including mergers and acquisitions, and
the determination of adequate value in merger and acquisition transactions. The
Northeast Bancorp Board of Directors selected Garland McPherson & Associates on
the basis of its experience in and knowledge of the banking industry and its
ability to evaluate the fairness of the merger from a financial point of view.
Garland McPherson & Associates acted exclusively for the Northeast Bancorp Board
of Directors in providing its fairness opinion and has received fees from
Northeast Bancorp for providing its fairness opinion and its services. There are
no other material relationships between Garland McPherson & Associates, its
affiliates and representatives and Northeast Bancorp or its affiliates.
-26-
<PAGE>
The full text of the Garland McPherson & Associates opinion is attached
as Annex B to this proxy statement/prospectus and is incorporated herein by
reference. We urge you to read the Garland McPherson & Associates opinion in its
entirety for a description of the procedures followed, assumptions made, matters
considered and qualifications and limitations undertaken by Garland McPherson &
Associates during their review of the proposed merger. The following summary of
the Garland McPherson & Associates opinion is qualified in its entirety by the
full text of the Garland McPherson & Associates opinion. The per share
transaction value and cash price was determined by negotiation between Northeast
Bancorp and Sterling Financial Corporation and was not determined by Garland
McPherson & Associates.
In providing the Garland McPherson & Associates opinion, Garland McPherson
& Associates:
o reviewed the historical financial performances, current financial
positions and general prospects of Northeast Bancorp and Sterling
Financial Corporation;
o reviewed the agreement;
o reviewed the proxy statement/prospectus;
o reviewed and analyzed the stock market performance of Northeast Bancorp
and Sterling Financial Corporation;
o studied and analyzed the operations, historical financial statements
and future prospects of Northeast Bancorp;
o reviewed the respective history of dividends paid by the two
institutions;
o considered the terms and conditions of the proposed merger as compared
with the terms and conditions of comparable bank mergers and
acquisitions;
o discussed with various senior officers of Northeast Bancorp and
Sterling Financial Corporation the foregoing as well as other matters
it believed relevant to its opinion; and
o conducted such other analyses, studies and investigations as they
deemed appropriate.
Garland McPherson & Associates relied without independent verification upon
the accuracy and completeness of all the financial and other information
reviewed by and discussed with it for purposes of its opinion. With respect to
the Northeast Bancorp and Sterling Financial Corporation financial forecasts
reviewed by Garland McPherson & Associates in providing its opinion, Garland
McPherson & Associates assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the respective managements as to the future financial performance
of Northeast Bancorp and Sterling Financial Corporation. Garland McPherson &
Associates did not make an independent
-27-
<PAGE>
evaluation or appraisal of the assets (including loans) or liabilities of
Northeast Bancorp or Sterling Financial Corporation nor was it furnished with
any such appraisal. Garland McPherson & Associates also did not independently
verify, and has relied on and assumed, that all allowances for loan losses set
forth in the balance sheets of Northeast Bancorp and Sterling Financial
Corporation were adequate and complied fully with all applicable law, regulatory
policy and sound banking practice as of the date of such financial statements.
In connection with providing its opinion, Garland McPherson & Associates
performed a variety of financial analyses. Although the evaluation of the
fairness, from a financial point of view, of the merger and of the transaction
value to be paid in the merger was to some extent a subjective one based on the
experience and judgment of Garland McPherson & Associates and not merely the
result of mathematical analysis of financial data, Garland McPherson &
Associates principally relied on the financial evaluation methodology summarized
below in its determinations. Garland McPherson & Associates believes its
analyses must be considered as a whole and that selecting portions of such
analyses and factors considered by Garland McPherson & Associates without
considering all such analyses and factors could create an incomplete view of the
process underlying Garland McPherson & Associates's opinion. In its analysis,
Garland McPherson & Associates made numerous assumptions with respect to
business, market, monetary and economic conditions, industry performance and
other matters, many of which are beyond Northeast Bancorp's and Sterling
Financial Corporation's control. Any estimates contained in Garland McPherson &
Associates's analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than such estimates.
The following is a summary of selective analyses prepared by Garland
McPherson & Associates and analyzed by Garland McPherson & Associates in
connection with its opinion.
Comparable Company Analysis
Garland McPherson & Associates compared selected financial and operating
data for Northeast Bancorp with those of a peer group of banking organizations
with assets between $50 and $100 million. This data included, but was not
limited to: return on average assets, return on average equity, certain capital
adequacy ratios and certain asset quality ratios. Garland McPherson & Associates
excluded securities gains and items of a non-recurring nature in computing
profitability ratios. The analysis showed that Northeast Bancorp's return on
average assets was 0.9% compared to the peer group median of 1.0%; its return on
equity was 9.7% compared to the peer group median of 10.5%; its leverage ratio
was 9.3% compared to the peer group median of 9.5%; its non-performing loans
measured 0.0% of total loans compared to the peer group median of 0.8%; and its
loan loss reserve as a percentage of nonaccrual loans was 320% compared to the
peer group median of 240%.
Garland McPherson & Associates compared selected financial and operating
data for Sterling Financial Corporation with a group of Pennsylvania, Maryland
and Virginia banking organizations that consisted of F&M Bancorp, F&M National
Corporation, FCNB Corp., First Virginia Banks, Inc., Fulton Financial
Corporation, Harleysville National Corporation, JeffBanks, Inc., Keystone
Financial, Inc., Mason-Dixon Bancshares, Inc., Mercantile Bankshares
Corporation, National Penn Bancshares, Inc., Provident Bankshares Corporation,
Sandy Spring
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<PAGE>
Bancorp, Inc., and Susquehanna Bancshares, Inc. This data included, but was not
limited to: return on average assets, return on average equity, certain capital
adequacy ratios and certain asset quality ratios. Garland McPherson & Associates
excluded securities gains and items of a non-recurring nature in computing
profitability ratios. The analysis showed that Sterling Financial Corporation's
return on average assets was 1.2% compared to the peer group median of 1.2%; its
return on equity was 14.1% compared to the peer group median of 12.7%; its ratio
of tangible equity to assets was 9.0% compared to the peer group median of 8.9%;
its non-performing assets measured 0.4% of total loans compared to the peer
group median of 0.7%; and its loan loss reserve as a percentage of
non-performing assets was 202% compared to the peer group median of 125%.
Garland McPherson & Associates also compared stock market data for Sterling
Financial Corporation with the same group of banking organizations. The analysis
showed that the average ratio of trading price to tangible book value per share
for the peer group was 230% as compared to 344% for Sterling Financial
Corporation. In addition, the group's average stock price to earnings per share
before non-recurring items was 17.9 compared to 25.2 for Sterling Financial
Corporation.
Analysis of Selected Merger and Acquisition Transactions
Garland McPherson & Associates compared the multiples of tangible book
value and latest twelve months' earnings of the merger with the multiples
associated with bank mergers in Maryland, Pennsylvania and Virginia that were
announced since August 1, 1998. Garland McPherson & Associates also compared the
multiples of book value and latest twelve months' earnings of the merger with
the multiples associated with selected recently announced acquisitions of
banking institutions with total assets between $50 million and $100 million.
However, no company or transaction used in any of these analyses is identical to
Northeast Bancorp or Sterling Financial Corporation. Accordingly, an analysis of
the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgements concerning the differences in financial and
operating characteristics of the companies and other factors that would affect
the public trading values of the companies or company to which they are being
compared.
Discounted Dividend Analysis
Using discounted dividend analysis, Garland McPherson & Associates
estimated the present value of the future dividend streams that Northeast could
produce over a five-year period under various earnings growth assumptions.
Garland McPherson & Associates also estimated the terminal value for Northeast
by applying an earnings multiple of eighteen. The dividend streams and terminal
value were discounted to determine the present value using discount rates
ranging from 10.0% to 12.0%. Garland McPherson & Associates also used discounted
dividend analysis to estimate the present value of the future dividend streams
that Sterling could produce over a five-year period under various earnings
growth assumptions. Garland McPherson & Associates estimated the terminal value
for Sterling Common Stock by applying an earnings multiple of eighteen. The
dividend streams and terminal value were discounted to determine the present
value using discount rates ranging from 10.0% to 12.0%.
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<PAGE>
Pro Forma Merger Analysis
Garland McPherson & Associates analyzed, using projections and discussions
with managements of Northeast Bancorp and Sterling Financial Corporation,
certain pro forma effects resulting from the merger based on the proposed
transaction value. The analysis examined the projected impact (including
management's estimates of transaction related savings) on earnings per share and
book value per share of Sterling Financial Corporation.
In reaching its opinion as to fairness, none of the analyses performed by
Garland McPherson & Associates was assigned a greater significance by Garland
McPherson & Associates than any other. As a result of its consideration of the
aggregate of all factors present and analyses performed, Garland McPherson &
Associates reached the conclusion, and opines, that the transaction value, as
set forth in the agreement, is fair, from a financial point of view, to holders
of Northeast Bancorp's securities.
In connection with delivering the Garland McPherson & Associates opinion,
Garland McPherson & Associates updated certain of its analyses and reviewed the
assumptions on which such analyses were based and the factors considered
therewith.
In delivering its opinion, Garland McPherson & Associates assumed that in
the course of obtaining the necessary regulatory and governmental approvals for
the merger, no restrictions will be imposed on Northeast Bancorp or Sterling
Financial Corporation that would have a material adverse affect on the
contemplated benefits of the merger. Garland McPherson & Associates also assumed
that there would not occur any change in applicable law or regulation that would
cause a material adverse change in the prospects or operations of Sterling
Financial Corporation after the date of the merger. Pursuant to the terms of its
engagement letter with the Board of Directors of Northeast Bancorp, Northeast
Bancorp has paid Garland McPherson & Associates $22,500 and has agreed to
reimburse Garland McPherson & Associates for its reasonable out-of-pocket
expenses. Whether or not the merger is consummated, Northeast Bancorp has agreed
to indemnify Garland McPherson & Associates and other related persons against
specific liabilities relating to or arising out of its engagement.
The full text of the opinion of Garland McPherson & Associates, as of the
date of this proxy statement/prospectus, which sets forth assumptions made and
matters considered, is attached hereto as Annex B to this proxy
statement/prospectus. We urge you to read the opinion in its entirety. Garland
McPherson & Associates's opinion is directed only to the transaction value to be
received by stockholders in the merger and does not constitute a recommendation
to you as to how you should vote at the special meeting of stockholders.
Comparison of Stockholder Rights
After the merger, the stockholders of Northeast Bancorp will be entitled to
become shareholders of Sterling Financial Corporation. There are differences in
the rights of shareholders of these two companies These differences arise out of
differences in the articles and certificate of incorporation and bylaws of the
two companies. The most significant of these differences are those relating to
anti-takeover protection and public registration.
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<PAGE>
The Articles of Incorporation and Bylaws of Sterling Financial Corporation
include a number of provisions that are intended to protect the shareholders of
Sterling Financial Corporation (including the present stockholders of Northeast
Bancorp, who will be entitled to become shareholders of Sterling Financial
Corporation following the merger), but which may be considered to be
anti-takeover in nature and may serve to entrench the current management of
Sterling Financial Corporation. See "DESCRIPTION OF STERLING FINANCIAL
CORPORATION AND DESCRIPTION OF STERLING FINANCIAL CORPORATION COMMON STOCK --
Anti-takeover Provisions."
Sterling Financial Corporation common stock is registered with the
Commission under Section 12(g) of the Exchange Act and is subject to the
periodic reporting, proxy solicitation and insider trading requirements of the
Exchange Act, which do not apply to Northeast Bancorp. The requirements of the
Exchange Act mean that Sterling Financial Corporation makes available to
shareholders, potential investors and the general public a significant amount of
information regarding Sterling Financial Corporation in the form of proxy
statements, periodic reports and other Commission filings. In addition,
directors, executive officers and beneficial shareholders of more than 10
percent of the issued and outstanding shares of Sterling Financial Corporation
common stock are subject to the insider trading reporting requirements and
short-swing profit recapture provisions of Section 16 of the Exchange Act.
The material differences between Northeast Bancorp common stock and
Sterling Financial Corporation common stock and the rights of their respective
holders, as of April 26, 1999 are summarized in the following table:
<TABLE>
<CAPTION>
Northeast Bancorp, Inc. Sterling Financial Corporation
----------------------- ------------------------------
<S> <C> <C>
Title Common stock, $1.00 par value per Common stock, $5.00 par value per
share share
Shares Authorized 750,000 35,000,000
Shares Issued and Outstanding 338,812 __________
Preferred Stock Preferred Stock, $1 par value; None authorized
250,000 shares authorized; none
outstanding
Preemptive Rights None Limited Circumstances
Voting: Election of Directors Cumulative Non-cumulative
Classification of Board of Directors Board of Directors divided into 3 Board of Directors divided into 3
classes with 3 year terms; classes with 3 year terms;
approximately 1/3 of directors approximately 1/3 of directors elected
elected each year each year
Voting: Other Matters One vote for each share owned of One vote for each share owned of
record record
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
Northeast Bancorp, Inc. Sterling Financial Corporation
----------------------- ------------------------------
<S> <C> <C>
Mergers, Consolidations, Liquidations and Approval by a vote of at least a Approval by a vote of 75% of
Sales of Substantially All Assets majority of outstanding shares of outstanding shares of common stock.
common stock is required If such transaction has received prior
approval of at least 66 2/3% of all
members of the Board of Directors,
then a majority of the outstanding
shares of common stock would be
required
Special Shareholder Meetings Upon request of Chairman of the Upon request by the Chairman of the
Board of Directors, the President or Board, President, the Executive Vice
a majority of the Board of President, if any, or a majority of the
Directors. In addition, the holders Board of Directors, or by its Executive
of not less than 25% of the Committee.
outstanding shares may call a
special meeting
Authorization to Issue Additional Shares Approval by the Board of Directors Approval by the Board of Directors,
subject to the shareholder approval
requirements of the Non-quantitative
Maintenance Criteria for National
Market Systems issuers of The
Nasdaq Stock Market, Inc.
Repurchase of Additional Shares Stock can be repurchased up to the Stock can be repurchased up to the
extent of available surplus, or extent of unrestricted or unreserved
calculated under Delaware General undivided profits and as much of its
Corporation Law. unrestricted surplus as has been made
available for such purpose by the prior
affirmative vote of shareholders; stock
cannot be repurchased when Sterling
Financial Corporation is insolvent or
would be made insolvent by the
purchase; and no more than 10 percent
of the outstanding shares can be
repurchased in any twelve (12) month
period without prior regulatory
approval; and provisions of the
Securities Act of 1933 restrict the
timing, nature and amount of repurchases.
Stock Incentive Plan None Yes
Dissenters' Rights Yes Yes
Dividend Reinvestment Plan None Yes
Market Traded in privately negotiated Listed for quotation on National
transactions. Market System of The Nasdaq Stock
Market, Inc.
Registered Under Securities Exchange Act No Yes
of 1934
</TABLE>
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<PAGE>
Changes in the Rights of Stockholders
After the merger, the stockholders of Northeast Bancorp, a Delaware
corporation, will become shareholders of Sterling Financial Corporation, a
Pennsylvania corporation. Differences between the corporation laws of
Pennsylvania and Delaware and the Charter and By-Laws of Northeast Bancorp and
Sterling Financial Corporation will result in several changes in the rights of
stockholders. It is not practical to summarize all such changes here, but we
summarize below the significant changes in the rights of stockholders of
Northeast Bancorp resulting from the merger.
In many respects Northeast Bancorp's Certificate of Incorporation, By-Laws
and powers under Delaware law are identical, or very similar, to the parallel
provisions in Sterling Financial Corporation's Articles of Incorporation,
By-Laws and powers under Pennsylvania law. These include such things as loans to
officers and employees. None of these is discussed below. In both states, a
corporation's charter may be amended only with stockholder approval.
<TABLE>
<CAPTION>
Stockholder/Shareholder General Corporation Law Pennsylvania Business
Rights of the State of Delaware Corporation Law
----------------------- ------------------------ ---------------------
<S> <C> <C>
Duties and Liabilities of The board of directors manages the The board of directors manages the
Directors business and affairs of the corporation. business and affairs of the corporation.
The duty of care requires exercise of Directors must exercise their business
informed business judgment. Breach judgment, in good faith, after
of this duty requires a finding of gross appropriate consideration and act in the
negligence by directors. best interests of the corporation and its
shareholders. Breach of this duty
requires a finding of gross negligence by
directors.
A corporation's Certificate of A corporation's Articles of
Incorporation may limit or eliminate a Incorporation may limit or eliminate a
director's monetary liability for breach director's monetary liability for breach
of the duty of care, but does not include of the duty of care, but does not include
limitation or elimination of liability for: limitation or elimination of liability for:
(1) breach of the duty of loyalty to the (1) self-dealing; (2) willful misconduct;
corporation; (2) acts or omissions not or (3) recklessness. This limitation or
in good faith or intentional misconduct elimination does not affect the duty of
or a knowing violation of law; (3) care itself, or the remedies available to
declaration of an improper dividend or the corporation or shareholders for a
an improper redemption of stock; and breach of the duty.
(4) any transaction from which the
directors derived an improper personal
benefit. This limitation or elimination
does not affect the duty of care itself,
or the remedies available to the
corporation or stockholders for a
breach of the duty.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Stockholder/Shareholder General Corporation Law Pennsylvania Business
Rights of the State of Delaware Corporation Law
----------------------- ------------------------ ---------------------
<S> <C> <C>
Indemnification of A corporation may indemnify its A corporation may indemnify its
Directors and Officers directors and officers against expenses, directors and officers against expenses,
judgments, fines and settlements judgments, fines and settlements
imposed on them personally because of imposed on them personally because of
wrongdoing by the corporation. The wrongdoing by the corporation. The law
law also permits the corporation to also permits the corporation to adopt by-
adopt by-law provisions allowing law provisions allowing money to be
money to be advanced to directors and advanced to directors and officers for
officers for these expenses without these expenses without further action by
further action by the board of directors. the board of directors.
In order to receive this indemnification, No indemnification may be given to a
the director must have acted in good director for fines and penalties imposed
faith and in a manner he or she if the directors actions were reckless or
reasonably believed to be in the best if the director committed willful
interest of the corporation. misconduct.
Dividends Dividends may be paid, without Dividends are ordinarily limited to the
stockholder consent, out of any surplus. amount of earned surplus. No dividend
Dividends may also be paid out of net can be paid which could reduce the
profits of the current or the prior year, remaining net assets of the corporation
or both, unless net assets are less that below the aggregate liquidation
the capital of all outstanding preferred preferences of any outstanding shares of
stock of the corporation, if the preferred stock. Prior shareholder
corporation has outstanding preferred approval is needed to use capital surplus
stock. for dividends, except for dividend
payments on cumulative preferred stock.
Appraisal/Dissenters Stockholders have appraisal rights only Shareholders have the right to dissent
Rights in the case of a merger, but not in the and demand payment in cash of the fair
case of a sale or transfer of assets or a value of their shares in the case of a
purchase of assets for stock. Even in a merger or sale or transfer of all or almost
merger, stockholders do not have all of the corporation's assets.
appraisal rights if the shares of the Shareholders do not have dissenters
corporation are listed on a national rights if the shares of the corporation are
securities exchange or if the listed on a national securities exchange
corporation has more than 2,000 or if the corporation has more than 2,000
stockholders of record. shareholders of record. The by-laws of
the corporation or the board of directors
can grant dissenters rights to
shareholders in a situation in which
shareholders would not be otherwise
entitled to dissenters rights.
Special Meetings of Only the board of directors may call a The president, the board of directors or
Stockholders/Shareholders special meeting stockholders unless the one-fifth of the shareholders of a
by-laws of the corporation authorized corporation may call a special meeting
others to call a special meeting. of shareholders.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Stockholder/Shareholder General Corporation Law Pennsylvania Business
Rights of the State of Delaware Corporation Law
----------------------- ------------------------ ---------------------
<S> <C> <C>
Charter Amendments Only the board of directors may Either the board of directors or one-tenth
propose amendments to the Certificate of the shareholders may propose
of Incorporation. amendments to the Articles of
Incorporation.
Mergers without If a corporation plans to acquire If a corporation plans to acquire another
Stockholder Approval another corporation, no vote of the corporation, no vote of the stockholders
stockholders is required unless the is required unless the number of shares
number of shares to be issued to the to be issued to the new stockholders (the
new stockholders (the stockholders of stockholders of the corporation being
the corporation being acquired) is more acquired) is more than 15% of the
than 20% of the number of shares of number of shares of the acquiring
the acquiring corporation that are corporation that are outstanding before
outstanding before the merger. the merger.
Stock Repurchases A corporation may not purchase or Non-redeemable shares may be
redeem shares when its capital is repurchased or redeemed only out of
impaired or if the repurchase would earned surplus and only if the
cause impairment of its capital, except shareholder consent. Redeemable shares
preferred shares may be repurchased or may be repurchased to the extent of the
redeemed if the shares would then be total of the stated capital of the shares
retired and reduce the capital of the plus capital surplus plus earned surplus.
corporation.
</TABLE>
Appraisal Rights
Under Section 262 of the Delaware General Corporation Law, any record
holder of Northeast Bancorp common stock who does not wish to accept the shares
of Sterling Financial Corporation common stock for his, her or its shares of
Northeast Bancorp common stock, as provided in the merger agreement, has the
right to seek an appraisal of, and to be paid the fair value for, his, her or
its shares of Northeast Bancorp common stock if the stockholder complies with
the provisions of Section 262. Sterling Financial Corporation's obligation to
effect the merger is conditioned on the holders of not more than 27,104 shares
of Northeast Bancorp common stock not exercising appraisal rights.
Record holders of shares of Northeast Bancorp common stock who do not vote
in favor of the merger agreement and who otherwise comply with Section 262's
procedures will be entitled to appraisal rights under Section 262. These
procedures are summarized below. A person having a beneficial interest in shares
of Northeast Bancorp common stock held of record by or in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect appraisal rights.
The following discussion is not a complete statement of the law of
appraisal rights and is qualified in its entirety by the full text of Section
262, which is reprinted in its entirety by the full
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<PAGE>
text of Section 262, which is reprinted in its entirety as Annex C. All
references in Section 262 and in this summary to a "stockholder" or "holder" are
to the record holder of the shares of Northeast Bancorp common stock as to which
appraisal rights are asserted.
Under Section 262, a holder of shares of Northeast Bancorp common stock
(such shares of Northeast Bancorp common stock, the "Appraisal Shares"), that
follows the procedures set forth in Section 262 will be entitled to have its
Appraisal Shares appraised by the Delaware Court of Chancery and to receive
payment in cash of the "fair value" of such Appraisal Shares together with a
fair rate of interest, if any, as determined by the Court.
Under Section 262, if a merger agreement is to be submitted for approval at
a meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, must notify each of its stockholders who was a holder on the record
date for the meeting of shares for which appraisal rights are available, of the
availability of appraisal rights, and must include in this notice a copy of
Section 262. This joint proxy statement/prospectus is the notice to the holders
of Appraisal Shares required by Section 262 and the text of Section 262 is
attached as Annex C to this joint proxy statement/prospectus. Any stockholder
who wishes to exercise appraisal rights or who wishes to preserve his, her or
its rights to do so should review the following description and Annex C
carefully. The failure to timely, properly and strictly comply with the required
procedures will result in the loss of appraisal rights.
A holder of Appraisal Shares wishing to exercise appraisal rights must
not vote in favor of the adoption of the merger agreement and must deliver to
Northeast Bancorp prior to the vote on the merger agreement at the Northeast
Bancorp special meeting, a written demand for appraisal of such holder's
Appraisal Shares. This written demand for appraisal is in addition to and
separate from any proxy or vote abstaining from or against the merger. This
demand must reasonable inform Northeast Bancorp of the identity of the
stockholder and of the stockholder's intent thereby to demand appraisal of his,
her or its shares of Northeast Bancorp common stock or Northeast Bancorp special
voting stock. A holder of Appraisal Shares wishing to exercise appraisal rights
must be the record holder of the Appraisal Shares on the date the written demand
for appraisal is made and must continue to hold the Appraisal Shares until the
consummation of the merger. Accordingly, a record holder of Appraisal Shares on
the date the written demand for appraisal is made who thereafter transfers any
Appraisal Shares prior to consummation of the merger, will lose appraisal rights
for those Appraisal Shares.
Only a record holder of Appraisal Shares is entitled to an appraisal of the
Appraisal Shares registered in that holder's name. A demand for appraisal should
be executed by or on behalf of the record holder as the holder's name appears on
the holder's stock certificates. If the Appraisal Shares are owned of record in
a fiduciary capacity, such as by a trustee, guardian or custodian, the demand
should be executed in that capacity, and if the Appraisal Shares are owned of
record by more than one owner, as in a joint tenancy or tenancy in common, the
demand should be executed by or on behalf of all joint owners. An authorized
agent, including one or more joint owners, may execute a demand for appraisal on
behalf of a record holder. However, in the demand the agent must identify the
record owner or owners and expressly disclose that, in executing the demand, the
agent is agent for such owner or owners. A record holder such as a broker who
holds Appraisal Share as nominee for several beneficial owners may exercise
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appraisal rights the Appraisal Shares held for one or more beneficial owners and
not exercise rights for the Appraisal Shares held for other beneficial owners.
In this case, the written demand should state the number of Appraisal Shares for
which appraisal is sought. When no number of Appraisal Shares is stated, the
demand will be presumed to cover all Appraisal Shares in brokerage accounts or
other nominee forms. Those who wish to exercise appraisal rights under Section
262 are urged to consult with their brokers to determine the appropriate
procedures for the making of a demand for appraisal by a nominee.
All written demands for appraisal should be delivered to Northeast Bancorp,
Inc., 14 South Main Street, North East MD 2190, Attention: S. Amy Argudo,
Secretary.
Within 10 days after the effective time of the merger, Sterling Financial
Acquisition Corporation, as the surviving corporation in the merger, will notify
each stockholder who has properly demanded appraisal rights under Section 262
and has not voted in favor of the merger agreement of the effective time of the
merger.
Within 120 days after the effective time of the merger, but not thereafter,
Sterling Financial Acquisition Corporation, as the surviving corporation in the
merger, or any stockholder who has complied with the requirements of Section
262, and is otherwise entitled to appraisal rights, may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
Appraisal Shares. Sterling Financial Acquisition Corporation is under no
obligation to and has no present intention to file an appraisal petition.
Accordingly, it is the obligation of stockholders wishing to exercise appraisal
rights to file the petition within the time prescribed in Section 262.
Within 120 days after the effective time of the merger, any stockholder who
has complied with the requirements for exercise of appraisal rights will be
entitled to receive from Sterling Financial Acquisition Corporation a statement
setting forth the aggregate number of Appraisal Shares not voted in favor of
adoption of the merger agreement and with respect to which demands for appraisal
have been received and the aggregate number of holders of such Appraisal Shares.
A stockholder must make a written request for this information. Sterling
Financial Acquisition Corporation must mail this statement within 10 days after
the written request has been received by it.
If a petition for an appraisal is filed timely, after a hearing on the
petition, the Delaware Court of Chancery will determine the stockholders
entitled to appraisal rights and will appraise the "fair value" of their
Appraisal Shares. Under Section 262, fair value does not include any element of
value arising from the accomplishment or expectation of the merger. The Court
will also determine a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. Stockholders considering seeking appraisal
should be aware that the fair value of their Appraisal Shares as determined
under section 262 could be more than, the same as or less than the value of the
consideration they would receive under the merger agreement if they did not seek
appraisal of their Appraisal Shares and that an investment banking opinion as to
fairness from a financial point of view is not necessarily an opinion as to fair
value under Section 262. The Delaware Supreme Court has stated that "proof of
value by any techniques or methods that are
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generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in the appraisal proceedings.
The costs of the action may be determined by the Delaware Court of Chancery
and taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order that all or a portion of
the expenses incurred by any stockholder in an appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the Appraisal Shares entitled to appraisal.
Any holder of Appraisal Shares who has duly demanded an appraisal in
compliance with Section 262 will not, after the effective time of the merger, be
entitled to vote the Appraisal Shares subject to such demand for any purpose or
to the payment of dividends or other distributions on those Appraisal Shares,
except, for dividends or other distributions payable to holders of record of
Appraisal Shares as of a record date prior to the effective time of the merger.
If any stockholder who properly demands appraisal of his, her or its
Appraisal Shares under Section 262 fails to perfect, or effectively withdraws or
loses, his, her or its right to appraisal, as provided in Section 262, the
Appraisal Shares of such stockholder will be converted into the right to receive
the consideration receivable for those Appraisal Shares under the merger
agreement, without interest. A stockholder will fail to perfect, or effectively
lose or withdraw, his, her or its right to appraisal if, among other things, no
petition for appraisal is filed within 120 days after the effective time of the
merger, or if the stockholder delivers to Northeast Bancorp prior to the
effective time of the merger or Sterling Financial Acquisition Corporation after
the effective time of the merger a written withdrawal of his, her or its demand
for appraisal. An attempt to withdraw an appraisal demand made more than 60 days
after the effective time of the merger will require the written approval of
Sterling Financial Acquisition Corporation and, once a petition for appraisal is
filed, the appraisal proceeding may not be dismissed as to any holder without
court approval.
Failure to follow the steps required by Section 262 for perfecting any
pursuing appraisal rights may result in the loss of such rights. If such rights
are lost a stockholder will be entitled to receive the consideration receivable
with respect to his, her or its appraisal shares in accordance with the merger
agreement.
Terms of the Merger
We discuss the material terms of merger contained in the agreement below.
Our discussion is not complete. The discussion is qualified in its entirety by
reference to the agreement, a copy of which is attached as Annex A to this proxy
statement/prospectus. We urge you to read the agreement.
Effect of the Merger
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Northeast Bancorp will merge into Sterling Financial Interim Acquisition
Corporation, a wholly owned subsidiary of Sterling Financial Corporation. After
the merger, Sterling Financial Interim Acquisition Corporation will change its
name to Northeast Bancorp The new Northeast Bancorp will be the surviving
corporation and will be a wholly owned subsidiary of the Sterling Financial
Corporation. The First National Bank of North East will be a direct wholly-owned
subsidiary of the new Northeast Bancorp and an indirect wholly-owned subsidiary
of Sterling Financial Corporation.
Exchange of Shares
On the day of the merger, each outstanding share of Northeast Bancorp
common stock will become the right to receive 2 shares of Sterling Financial
Corporation common stock, subject to adjustment for certain stock dividends,
stock splits and similar transactions.
Sterling Financial Corporation will not issue fractional shares of Sterling
Financial Corporation common stock in the merger to holders of fractional shares
of Northeast Bancorp common stock. Instead, each former stockholder of Northeast
Bancorp who holds a fractional share will receive cash in an amount equal to the
fair market value of any fractional share interest.
Sterling Financial Corporation and Northeast Bancorp anticipate that the
merger will occur during the second quarter of 1999, assuming no difficulties
are encountered in obtaining the required regulatory approvals and Northeast
Bancorp stockholders' approval, and all other conditions to closing are
satisfied without unexpected delay. If for any reason, however, the merger does
not occur by October 31, 1999, and the parties have not agreed otherwise prior
to that date, the agreement will terminate automatically and no merger will take
place. See "APPROVAL OF THE MERGER -- Business Pending the Merger and
Conditions, Amendment and Termination" for a discussion of the various
termination provisions.
Following the merger, Sterling Financial Corporation will require former
stockholders of Northeast Bancorp to surrender their Northeast Bancorp common
stock certificates to Sterling Financial Corporation in order to obtain their
shares of Sterling Financial Corporation common stock. Sterling Financial
Corporation will send detailed instructions concerning the procedure for
surrendering the Northeast Bancorp common stock certificates to each former
stockholder of Northeast Bancorp on the date of or promptly after the merger.
After each former stockholder of Northeast Bancorp has surrendered his or her
stock certificates Sterling Financial Corporation will issue to him or her a
stock certificate representing the number of whole shares of Sterling Financial
Corporation common stock into which he or she has the right to receive because
of the merger. Each stockholder will also receive a check in the amount of any
cash to which he or she is entitled instead of a fractional share. Stockholders
of Northeast Bancorp should not surrender their Northeast Bancorp common stock
certificates for exchange until they receive written instructions to do so from
Sterling Financial Corporation.
Following the merger and until properly surrendered, Sterling Financial
Corporation will deem each Northeast Bancorp common stock certificate to
represent the right to receive number of whole shares of Sterling Financial
Corporation common stock that the holder would be
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entitled to receive upon its surrender. However, Sterling Financial Corporation,
at its option, may withhold dividends payable after the merger to any former
stockholder of Northeast Bancorp who has received written instructions from
Sterling Financial Corporation but has not surrendered his or her Northeast
Bancorp common stock certificates. Sterling Financial Corporation will pass,
without interest, any dividends withheld, to the former stockholder of Northeast
Bancorp upon the proper surrender of his or her Northeast Bancorp common stock
certificates.
All Northeast Bancorp stock certificates must be surrendered to Sterling
Financial Corporation within two years after the merger. If any former
stockholder of Northeast Bancorp does not properly surrender his or her
Northeast Bancorp certificates within that time:
o his or her shares of Sterling Financial Corporation common stock that
would otherwise have been issued may, at the option of Sterling
Financial Corporation, be sold; and
o the net proceeds of the sale, together with the cash (if any) to which
the stockholder is entitled instead of the issuance of a fractional
share and any previously accrued and unpaid dividends, will be held in
a non-interest bearing account for his or her benefit. After the sale,
the former stockholder of Northeast Bancorp will have the right solely
to collect the net proceeds, cash and accumulated dividends. Subject to
laws of escheat, Sterling Financial Corporation will pay the net
proceeds, cash and accumulated dividends to the former stockholder of
Northeast Bancorp, without interest, upon proper surrender of his or
her Northeast Bancorp common stock certificates.
Business Pending the Merger
Northeast Bancorp agreed to conduct its business in the usual, regular and
ordinary manner, consistent with prudent business judgment, pending the merger.
Northeast Bancorp has agreed to take action in the ordinary course of business
or get the prior written consent of Sterling Financial Corporation. Northeast
Bancorp and The First National Bank of North East agreed that, among other
things, pending the merger, they will:
o not amend their Certificate of Incorporation, Articles of Association
or Bylaws;
o not declare, set aside or pay any dividend or make any other
distribution on Northeast Bancorp common stock, except as provided in
Section 4.9 of the agreement;
o not authorize, purchase, issue, sell or grant:
o any shares of Northeast Bancorp common stock;
o any other equity or debt securities of Northeast Bancorp;
o any securities convertible into Northeast Bancorp common stock; or
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o any options, warrants or rights to purchase or sell Northeast
Bancorp common stock
o not change the presently outstanding number of shares or effect any
capitalization, reclassification, stock dividends, stock split or like
change in capitalization;
o not enter into or substantially modify, except as may be required by
law, any:
o pension plan;
o retirement plan;
o stock option plan;
o stock warrant plan;
o stock purchase plan;
o stock appreciation right;
o savings plan;
o profit sharing plan;
o deferred compensation plan;
o severance plan;
o consulting arrangement;
o bonus plan;
o group insurance plan;
o employee benefit or welfare plan;
o incentive plan; or
o trust agreement related to any of the above benefits which would
apply to any of their directors, officers, or other employees;
o not make any loan or extend any other type of credit in excess of
$500,000 to any executive, director or major stockholder or
renegotiate, expand, or modify any outstanding loan or extension of
credit;
o not enter into any interest rate swap or similar agreement which is not
consistent with past practice and which increases the credit or
interest rate risk over the levels existing at December 31, 1998;
o not enter into any derivative, cap, floor or agreement, except in the
ordinary course of business and consistent with past practices;
o not enter into any participation arrangements or approvals of
extensions of credit in excess of $600,000, or expand or modify any
outstanding participation arrangements or approvals;
o not sell, exchange or otherwise dispose of any investment securities or
loans that are held for sale, prior to scheduled maturity and other
than under policies agreed upon from time to time by the parties; and
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o not discuss the terms and conditions of the agreement with Sterling
Financial Corporation with any other party, or negotiate with any other
party to acquire Northeast Bancorp, of the First National Bank of North
East, except as allowed in the agreement.
Northeast Bancorp and Sterling Financial Corporation have not entered into
any material contracts or other transactions together since signing the
agreement, nor have they entered into any material contracts or other
transactions together during the past five years, other than the agreement and
as discussed elsewhere in this proxy statement/prospectus.
Conditions, Amendment and Termination
Sterling Financial Corporation and Northeast Bancorp are obligated to
complete the merger, subject to a number of conditions and contingencies. These
are stated in the agreement. The most significant of these conditions include:
o approval by the stockholders of Northeast Bancorp;
o approval by the Board of Governors of the Federal Reserve System;
o receipt of a favorable legal opinion of Shumaker Williams, P.C.
concerning certain federal income tax consequences relating to the
merger;
o maintaining the effectiveness of the registration statement containing
this proxy statement/prospectus;
o receipt of a determination that the merger can be accounted for as a
pooling of interests for financial reporting purposes;
o receipt of a determination of compliance with all applicable federal
and state securities and anti-trust laws; and
o exercise of appraisal rights by the holders of less than 27,104 shares
of Northeast Bancorp common stock.
In order to receive regulatory approvals, Sterling Financial Corporation
has filed a notice of the merger with the Federal Reserve Bank of Philadelphia,
on April 1, 1999.
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Otherwise, any term or condition of the agreement any party to the
agreement may waive that would benefit it any time before the merger, whether
before or after the approval of the agreement by Northeast Bancorp's
stockholders.
No party to the agreement may change in the amount of share and cash price
to be paid to the stockholders of Northeast Bancorp unless the stockholders of
Northeast Bancorp approve the change.
The agreement may be terminated at any time before the merger, whether
before or after its approval and adoption by the stockholders of Northeast
Bancorp:
o by the agreement of all of the parties;
o by either Northeast Bancorp or Sterling Financial Corporation
unilaterally if the other materially breaches any representation,
warranty or covenant in the agreement and does not cure it within 30
days;
o by either Northeast Bancorp or Sterling Financial Corporation if the
other fails to satisfy any condition precedent to its obligation to
complete the merger through no fault of the other party;
o automatically if Sterling Financial Corporation and Northeast Bancorp
fail to complete the merger by October 31, 1999, unless they extend the
time for completion in writing prior to that date;
o by Northeast Bancorp if the average market price of Sterling Financial
Corporation common stock for the 20 trading days prior to 5 days before
closing is less than $32.00 per share;
o by Sterling Financial Corporation if the average market price of
Sterling common stock for the 20 trading days prior to 5 days before
closing is greater than $50.00 per share;
o by Northeast Bancorp, at any time prior to obtaining stockholder's
approval and with 72 hours prior written notice to Sterling Financial
Corporation if:
o by the Board of Directors of Northeast Bancorp if it:
o receives another acquisition proposal; and
o determines that the new acquisition proposal is superior to their
agreement with Sterling Financial Corporation;
o by Northeast Bancorp, or the First National Bank of North East, if
Sterling Financial Corporation:
o sells all or substantially all of its assets; or
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o merges or consolidates with or into another corporation and
Sterling Financial Corporation is not the survivor of the merger or
consolidation.
Effective Time
The agreement provides that the closing of the merger will occur at a time
and place agreed upon by the parties with at least three business days notice to
Northeast Bancorp, but no later than the 30th business day after:
o the granting of all required governmental approvals and the expiration
of any related waiting periods;
o the lifting, discharge or dismissal of any stay of any required
governmental approval or of any injunction against the merger; and
o the approval of the Northeast Bancorp stockholders.
Immediately following the closing, provided the agreement has not been
terminated or abandoned, Northeast Bancorp and Sterling Financial Interim
Acquisition Corporation will file a Certificate of Merger with the Delaware
Secretary of State. The merger will become effective when the Certificate of
Merger is filed with the Delaware Secretary of State, or, if the parties agree,
at a later time.
Interests of Northeast Bancorp's Management and Board of Directors in the Merger
Certain members of Northeast Bancorp's management and its Board of
Directors may have interests in the transaction in addition to their interests
as stockholders of Northeast Bancorp generally. These include, among other
things, provisions in the agreement relating to indemnification and employment.
You will find additional information about the persons who may have additional
interests in the merger in the following section entitled "Management and
Operations Following the Merger." The Northeast Bancorp Board of Directors was
aware of these factors and considered them in approving the agreement and the
merger.
As of April 26, 1999, the directors and executive officers of Northeast
Bancorp beneficially own approximately 210,262 shares of Northeast Bancorp
common stock.
For a period of three years after the merger, Sterling will pay premiums
for a director and officer liability insurance tail policy for the current and
former directors and officers of Northeast Bancorp and The First National Bank
of North East that has coverages substantially comparable to the current
director and officer insurance liability policy of Northeast Bancorp and The
First National Bank of North East. Sterling is not obligated under this
provision of the agreement to pay premiums that exceed 150% of Northeast
Bancorp's current premiums for director and officer liability insurance
coverage.
In contemplation of the merger, Mr. John E. Hughes entered into an
Executive Employment Agreement with The First National Bank of North East and
Mr. Richard D.
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McDaniel entered into with a Consulting Agreement with Sterling Financial
Corporation. See "APPROVAL OF THE MERGER -- Management and Operations Following
the Merger," for a description of these agreements and for more information
regarding the interests of certain persons in the matters to be voted upon.
Management and Operations Following the Merger
The Boards of Directors of Sterling Financial Corporation and Sterling
Financial Interim Acquisition Corporation following the merger will include the
same persons who are members of those Board of Directors immediately before the
merger, each of whom will serve until his or her successor is elected and has
qualified. In addition, immediately following the closing of the merger, S. Amy
Argudo, who serves as a Director of Northeast Bancorp, shall be appointed to the
Board of Directors of Sterling Financial Corporation to serve in the class of
directors to be elected at the year 2000 Sterling Financial Corporation annual
meeting of shareholders. Upon the expiration of her initial term, the Board of
Directors of Sterling Financial Corporation shall nominate and recommend to the
shareholders of Sterling Financial Corporation, at the year 2000 Annual Meeting
of Shareholders, that they elect Ms. Argudo to the Board of Directors of
Sterling Financial Corporation for an additional three year term.
After the merger, the Directors of The First National Bank of North East
will continue to serve as Directors of The First National Bank of North East
until their successors have been elected or appointed. In addition, John E.
Stefan, President of Sterling Financial Corporation and Bank of Lancaster
County, will be added to the Board of Directors of The First National Bank of
North East after the merger is complete. Immediately after the merger is
complete, Robert W. Hutton, will serve as Chairman of the Board of Directors of
The First National Bank of North East. Mr. Hutton's annual compensation for
service as Chairman of the Board will be $18,000 per year.
The Board of the Directors of the Bank of Lancaster County, the
subsidiary bank of Sterling Financial Corporation, will remain the same with the
addition of Michael A. Carenzo, who currently serves as a Director of The First
National Bank of North East. The Board of Directors of Bank of Lancaster County
will nominate and recommend that Mr. Carenzo serve three successive one year
terms as Director of the Bank of Lancaster County.
Ms. Argudo and Mr. Carenzo will be compensated for services as a Director
of Sterling Financial Corporation and a Director of Bank of Lancaster County,
respectively, at the normal rate for Directors of Sterling Financial Corporation
or Bank of Lancaster County
The directors of The First National Bank of North East will receive the
same fees and benefits that they currently receive for service as directors. In
1998 each director of The First National Bank of North East received a fee of
$300.00 for each board meeting attended and a fee of $100.00 for each committee
meeting attended.
Sterling Financial Corporation has agreed to continue the separate
corporate existence of The First National Bank of North East as an operating
subsidiary with the corporate name, "The First National Bank of North East."
Sterling Financial Corporation has also committed to
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maintain the level of customer service and community support as has been the
custom of Northeast Bancorp and The First National Bank of North East.
The First National Bank of North East's officers who are employed in good
standing and actively at work on the day of the merger will be retained in their
current management positions at their current levels of compensation.
In addition, The First National Bank of North East's employees will be
continue to be employed by The First National Bank of North East at their
current salary levels after the merger. All benefits of the continuing employees
at The First National Bank of North East will be maintained at a level not less
than equal to the benefits enjoyed by them prior to the merger. The benefits of
the employees at the First Bank of North East may change in the future as may be
appropriate provided that the employees benefits provided after the merger shall
have a similar economic value to the employee benefits provided by Sterling
Financial Corporation or the Bank of Lancaster County to their similarly
situated. The Board of Directors and The First National Bank of North East must
determine that the change in benefits would be appropriate.
Following the merger, and subject to the terms and conditions of the
applicable health and dental insurance policies, Sterling Financial Corporation
will pay the health and dental insurance premiums for Mr. Daniel A. Winters and
Mr. Richard D. McDaniel and their respective spouses for as long as each such
person is alive. Sterling Financial Corporation will provide health and dental
insurance benefits on terms reasonably comparable to those previously provided
by Northeast Bancorp or The First National Bank of North East, or, if Sterling
Financial Corporation cannot provide such benefits, Sterling Financial
Corporation will provide Mr. Winter and Mr. McDaniel and their respective
spouses, each, a dollar amount equal to the cost to each of them of obtaining
the same or substantially similar benefits.
As part of the transaction, The First National Bank of North East and John
E. Hughes, President and Chief Executive Officer of The First National Bank of
North East, entered into an employment agreement with Northeast Bancorp for
services after the merger is completed. We summarize the major provisions of
this contract below.
Mr. Hughes' employment agreement with The First National Bank of North East
has a three year term, beginning on the day of the merger. He will serve as
President and Chief Executive Officer of The First National Bank of North East,
reporting directly to the Board of Directors of The First National Bank of North
East and the President of Sterling Financial Corporation. The employment
agreement provides that Mr. Hughes will receive an annual salary of $85,000. In
addition, the agreement provides, among other things, that Mr. Hughes has a
right to participate in any bonus plan approved by the Board of Directors and
insurance, vacation, pension and other fringe benefits and perquisites.
If Mr. Hughes' employment is terminated without "Cause," as defined in the
employment agreement, Mr. Hughes is entitled to receive his benefits under the
agreement. If Mr. Hughes is terminated for "Cause," as defined in the employment
agreement, his benefits terminate as of the date of his termination. Mr. Hughes'
benefits terminate when he dies, becomes disabled, or when he becomes entitled
to receive benefits under a disability policy available to employees of
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The First National Bank of North East. The employment agreement also contains
provisions restricting Mr. Hughes' right to compete with The First National Bank
of North East.
The directors and officers of Sterling Financial Corporation and its
subsidiaries have no special interest in the merger, other than in their
capacity as shareholders of Sterling Financial Corporation, and will not receive
any special benefits or compensation because of the merger.
Federal Income Tax Consequences
Shumaker Williams, P.C., or an independent accountant for Sterling
Financial Corporation, will give an opinion at closing that will state that for
federal income tax purposes:
o The merger of Northeast Bancorp into Sterling Financial Interim
Acquisition Corporation will constitute a "Reorganization" within the
meaning of sections 368(a)(2)(D) of the Code.
o Sterling Financial Corporation, Northeast Bancorp and Sterling
Financial Interim Acquisition Corporation will be regarded as "Parties
to a Reorganization" within the meaning of section 368(b) of the Code
with respect to the merger of Northeast Bancorp with and into Sterling
Financial Interim Acquisition Corporation.
o The former stockholders of Northeast Bancorp who exchange their
Northeast Bancorp common stock for Sterling Financial Corporation
common stock will recognize no gain or loss.
o Northeast Bancorp stockholders will carry over the basis and holding
periods of their shares of Northeast Bancorp common stock to the shares
of Sterling Financial Corporation common stock that they receive in the
transaction.
o Northeast Bancorp stockholders receiving cash instead of fractional
shares of Sterling Financial Corporation common stock will have gain or
loss on the exchanges equal to the excess of the cash received instead
of such fractional shares over the basis in their fractional shares of
Northeast Bancorp common stock. The gain or loss will be capital gain
or loss, if the shares of Northeast Bancorp common stock qualified as
capital assets in the hands of the exchanging stockholder within the
meaning of section 1221 of the Internal Revenue Code. The capital gain
or loss will be short term or long term depending upon the
stockholder's holding period for his or her Northeast Bancorp common
stock.
o Former Northeast Bancorp stockholders exercising appraisal rights will
have gain or loss on the receipt of cash for their Northeast Bancorp
common stock equal to the excess of the cash received over the basis in
their Northeast Bancorp common stock. The gain or loss will be capital
gain or loss if the shares of Northeast Bancorp common stock qualified
as capital assets in the hands of the exchanging stockholder within the
meaning of section 1221 of the Internal Revenue Code, and
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the capital gain or loss will be short term or long term depending upon
each stockholder's holding period for Northeast Bancorp common stock.
o Sterling Financial Interim Acquisition Corporation will succeed to the
tax attributes of Northeast Bancorp, including net operating loss
carryovers, credit carryovers and accounting methods, subject to any
limitations imposed under section 381 and 382 of the Internal Revenue
Code.
The above discussion is intended only to be a very general discussion of
some of the federal income tax consequences of the merger under present law. We
urge each stockholder of Northeast Bancorp to consult his or her own tax advisor
concerning how the particular tax consequences of the merger may affect his or
her individual circumstances, including the impact of any applicable estate,
gift, state, local, foreign or other tax.
Accounting Treatment
The parties intend that the merger will be treated as a pooling of
interests. Pooling of interests accounting means that the parties to the pooling
are treated, for financial accounting purposes, much as though they had always
been one company. Northeast Bancorp's assets and liabilities will be combined
with Sterling Financial Interim Acquisition Corporation's assets and liabilities
at their historical recorded bases. This means that Sterling Financial
Corporation will not recognize taxable gain on the increase over the years in
the value of Northeast Bancorp's assets. For tax and accounting purposes,
Sterling will be treated as though it were the original owner of the assets.
Results of operations of Sterling Financial Corporation will include the results
of both companies for the entire fiscal year in which the merger occurs. The
reported balance sheet amounts and results of operations of the separate
corporations for prior periods will be combined, reclassified and conformed, as
appropriate, to reflect the combined financial position and results of
operations for Sterling Financial Corporation.
Sterling Financial Corporation has reserved the right to cancel the merger
if it cannot treat its acquisition of Northeast Bancorp as a pooling of
interests. Otherwise, the tax that Sterling Financial Corporation would have to
pay to acquire Northeast Bancorp would make the price that it has agreed to pay
for Northeast Bancorp's common stock too high. The most serious threat to
treating the merger as a pooling of interests is the possibility that Sterling
Financial Corporation would be required to purchase more than 10% of the
outstanding shares of Northeast Bancorp's common stock for cash, due to the
purchase of fractional shares and the exercise of appraisal rights by Northeast
Bancorp stockholders, as described in this proxy statement/prospectus under the
heading "Appraisal Rights".
Restriction on Resale of Stock Held By Affiliates
The shares of Sterling Financial Corporation common stock to be issued at
the time of the merger have been registered with the Securities and Exchange
Commission under the Securities Act of 1933. Following the merger, all former
shareholders of Northeast Bancorp, Inc. may freely sell or transfer their new
shares of Sterling Financial Corporation common stock, except those former
shareholders who are closely associated with Northeast Bancorp, Inc. The
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Securities and Exchange Commission, in its Rules 144 and 145, calls these
closely associated people affiliates. In general, any person who is an executive
officer, director or 10% shareholder of Northeast Bancorp, Inc. at the time of
the merger is an affiliate of Northeast Bancorp, Inc. This proxy
statement/prospectus does not allow affiliates of Northeast Bancorp, Inc. to
sell their new shares of Sterling Financial Corporation common stock that they
receive in the merger.
Affiliates of Northeast Bancorp, Inc. may sell their new Sterling Financial
Corporation common stock only:
o in compliance with the provisions of Securities and Exchange Commission
Rule 145(d);
o in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act of 1933; or
o pursuant to an effective registration statement filed with the
Securities and Exchange Commission.
In general terms, Commission Rule 145(d) would permit an affiliate of Northeast
Bancorp to sell his or her new shares of Sterling Financial Corporation common
stock in ordinary brokerage transactions, except that only a limited number of
shares may be resold in any consecutive 3 month period. Generally, an affiliate
of Northeast Bancorp may not:
o sell any shares of Northeast Bancorp common stock during the 30-day
period immediately before the merger; or
o sell his or her new shares of Sterling Financial Corporation common
stock until after the publication of financial results covering at
least 30 days of post-merger combined operations of Sterling Financial
Corporation and Northeast Bancorp.
Any affiliate of Northeast Bancorp, Inc. who becomes an affiliate of Sterling
Financial Corporation after the merger will face additional restrictions if he
or she should wish to sell any Sterling Financial Corporation common stock under
Rule 144.
Affiliates of Northeast Bancorp, Inc. may not sell their new shares of
Sterling Financial Corporation common stock received in the merger unless
Sterling Financial Corporation has filed all its Exchange Act Reports for a
specified period prior to the sale.
Each person who may be an affiliate of Northeast Bancorp is required to
provide Sterling Financial Corporation with a letter before the merger agreeing
to abide by the limitations imposed by the Commission regarding the sale or
other disposition of the shares of Sterling Financial Corporation common stock
that he or she will receive in the merger.
-49-
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDENDS
AND RELATED SHAREHOLDER MATTERS
Common Stock of Sterling Financial Corporation
Sterling Financial Corporation common stock is quoted on the National
Market System of Nasdaq under the symbol "SLFI." The table below shows, for the
periods indicated, the high and low bid quotations for Sterling Financial
Corporation common stock as reported on Nasdaq, and cash dividends declared per
share. The quotations in the table represent quotations between dealers, do not
include retail markups, markdowns or commissions, and may not represent actual
transactions. All information has been adjusted for stock dividends and splits
throughout the periods.
<TABLE>
<CAPTION>
Cash Dividends
1999 High Low Paid Per Share
---- ---- --- --------------
<S> <C> <C> <C>
First Quarter $46.50 $33.75 $.21
Second Quarter
<CAPTION>
Cash Dividends
1998 High Low Paid Per Share
---- ---- --- --------------
<S> <C> <C> <C>
First Quarter $33.10 $29.29 $.20
Second Quarter 49.25 34.75 .21
Third Quarter 47.00 34.00 .21
Fourth Quarter 43.13 40.25 .21
<CAPTION>
Cash Dividends
1997 High Low Paid Per Share
---- ---- --- --------------
<S> <C> <C> <C>
First Quarter $ 24.05 $ 24.05 $ .18
Second Quarter 24.17 24.05 .18
Third Quarter 24.88 24.05 .23
Fourth Quarter 29.05 24.52 .19
</TABLE>
- ---------------
On April ______, 1999, the closing bid and asked quotations for Sterling
Financial Corporation common stock as reported on Nasdaq were, respectively,
$____ and $_____. As of April ______, 1999, Sterling Financial Corporation
common stock was held by _____ holders of record. Sterling Financial Corporation
has in the past paid regular quarterly cash dividends to its shareholders on or
about January 1, April 1, July 1, and October 1, of each year.
Common Stock of Northeast Bancorp
Northeast Bancorp common stock has historically been traded in privately
negotiated transactions. Northeast Bancorp has in the past paid regular
quarterly dividends to its stockholders on or about May 15, June 13, September
15 and December 15, of each year.
-50-
<PAGE>
INFORMATION CONCERNING STERLING FINANCIAL CORPORATION
Through its subsidiary Bank of Lancaster County, Sterling Financial
Corporation engages in the general commercial and retail banking business. Bank
of Lancaster County operates 30 banking offices in Lancaster, County,
Pennsylvania and 1 office in Chester County, Pennsylvania. Sterling Financial
Corporation is also the direct parent company of Sterling Mortgage Service,
Inc., which is presently inactive and T & C Leasing, Inc. As of December 31,
1998, Sterling Financial Corporation had consolidated total assets of
approximately $919,264,360. Bank of Lancaster County operates under the primary
supervision of the Office of the Comptroller of the Currency. Bank of Lancaster
County engages in leasing operations through its subsidiary, Town & Country,
Inc., and in trust activities.
As a registered bank holding company, Sterling Financial Corporation is
subject to regulation under the Bank Holding Company Act of 1956, as amended,
and the rules and regulations of the Board of Governors of the Federal Reserve
System. Under applicable Board of Governors of the Federal Reserve System
policies, a bank holding company is expected to act as a source of financial
strength to its subsidiary bank and to commit financial resources to support the
subsidiary bank in circumstances when it might not do so with the absence of
such a policy.
The principal executive offices of Sterling Financial Corporation are
located in Lancaster, Pennsylvania. As of December 31, 1998, Sterling Financial
Corporation and its subsidiaries had in the aggregate approximately 437
full-time equivalent employees.
Incorporation of Documents by Reference
Documents previously filed by Sterling Financial Corporation with the
Commission are incorporated by reference into this proxy statement/prospectus as
follows:
o The Definitive Proxy Statement on Schedule 14A for the Annual Meeting of
Shareholders on April 27, 1999;
o Sterling Financial Corporation's Annual Report on Form 10-K for the year
ended December 31, 1998; and
o Sterling Financial Corporation's Current Report on Form 8-K dated
February 18, 1999.
All documents filed by Sterling Financial Corporation pursuant to Sections
13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this proxy
statement/prospectus but prior to the merger are incorporated by reference into
this proxy statement/prospectus and are deemed a part of the proxy
statement/prospectus from the date of the filing of each document. Any statement
contained in a document incorporated by reference is deemed to be modified or
superseded, for purposes of this proxy statement/prospectus, to the extent that
a statement contained herein or in any subsequently filed document that is also
incorporated by reference herein modifies or
-51-
<PAGE>
supersedes the statement. Any statement so modified or superseded should not be
deemed, except as so modified or superseded, to constitute a part of this proxy
statement/prospectus. All information appearing in this proxy
statement/prospectus should be read in conjunction with, and is qualified in its
entirety by, the information and financial statements (including the notes
thereto) appearing in the documents incorporated herein by reference, except to
the extent set forth in this paragraph.
Acquisitions by Sterling Financial Corporation
Sterling Financial Corporation was incorporated in 1987. On June 30, 1987,
Sterling Financial Corporation became the parent bank holding company of Bank of
Lancaster County, a wholly-owned subsidiary of Sterling Financial Corporation.
On December 1, 1995, Bank of Lancaster County acquired two CoreStates Bank,
N.A. branch offices located in Leola, Pennsylvania and Ephrata, Pennsylvania and
assumed deposit liabilities of approximately $22 million. On May 29, 1998, Bank
of Lancaster County acquired the deposit liabilities of a third CoreStates Bank,
N.A. branch office also located in Leola, Pennsylvania, valued at approximately
$86 million. Since commencing operations, Sterling Financial Corporation's
business has consisted primarily of managing Bank of Lancaster County and its
principal source of income has been dividends paid by the bank. Sterling
Financial Corporation is registered as a bank holding company under the Bank
Holding Company Act of 1956.
Loans
Sterling Financial Corporation, through Bank of Lancaster County, grants
loans and makes other credit available to the general public. These extensions
of credit are structured to meet the varying needs of businesses, individuals,
and institutional customers and include mortgages, lines of credit, term loans,
leases and letters of credit. This activity comprises the major source of
revenue for Bank of Lancaster County and it also exposes Sterling Financial
Corporation and Bank of Lancaster County to potential losses upon borrower
default. In order to minimize the occurrence of loss, Bank of Lancaster County
follows strict loan underwriting and risk weighing policies. While collateral
continues to play an important part in lending decisions, Bank of Lancaster
County places a primary emphasis on borrowers' underlying abilities to pay.
Sterling Financial Corporation's subsidiary confines its lending activity to
customers who live or are based in its market area of Lancaster County,
Pennsylvania. By limiting lending activities to a specific geographic area, the
staff of Bank of Lancaster County is knowledgeable about local market conditions
and can thereby make better credit risk assessments and consequently more
prudent lending decisions. Sterling Financial Corporation believes that this
local knowledge, when combined with prudent underwriting standards, overcomes
the risks associated with the geographic concentration of loans.
Description of Sterling Financial Corporation Common Stock
Sterling Financial Corporation is authorized to issue 35,000,000 shares of
Sterling Financial Corporation common stock of which 6,440,171 shares were
issued and outstanding as of December 31, 1998.
-52-
<PAGE>
Dividends
The holders of Sterling Financial Corporation common stock are entitled to
receive dividends when, and if declared by its Board of Directors out of legally
available funds. Sterling Financial Corporation has historically paid quarterly
cash dividends to its shareholders on or about January 1, April 1, July 1, and
October 1, of each year.
The ability of Sterling Financial Corporation to pay dividends to its
shareholders depends primarily upon the earnings and financial condition of the
Bank of Lancaster County. Sterling Financial Corporation expects to obtain funds
for the payment of dividends on Sterling Financial Corporation common stock for
the foreseeable future primarily from dividends paid to Sterling Financial
Corporation by the bank. These dividends are subject to statutory limitations.
Under applicable federal laws, the dividends that Bank of Lancaster County
pays the Sterling Financial Corporation without prior regulatory approval are
subject to prescribed limitations. Because Bank of Lancaster County is a
national bank, the approval of the Office of the Comptroller of the Currency is
required under federal law if the total of all dividends declared during any
calendar year exceeds the total of (i) the net profits of the bank for that
year; and (ii) its retained net profits for the two preceding years. In addition
to these statutory restrictions on dividends, the Office of the Comptroller of
the Currency has general authority to prohibit a national bank from engaging in
an unsafe or unsound banking practice. The Office of the Comptroller of the
Currency could consider a bank's payment of a dividend, depending upon the
financial condition of the bank involved and other factors, to be an unsafe or
unsound practice.
Sterling Financial Corporation declared cash dividends of $0.83 per share
in 1998 and $0.78 per share in 1997.
Liquidation
In the event of liquidation, dissolution or winding up of Sterling
Financial Corporation, Sterling Financial Corporation shareholders are entitled
to share ratably in all assets remaining after payment of liabilities.
Dividend Reinvestment Plan
Sterling Financial Corporation has a Dividend Reinvestment and Stock
Purchase Plan. Shareholders of Sterling Financial Corporation may elect to
participate in the plan. The plan is administered by American Stock Transfer and
Trust Company, as plan agent. Under the plan, dividends payable to participating
shareholders are paid to the plan agent and are used to purchase, on behalf of
the participating shareholders, additional shares of Sterling Financial
Corporation common stocks either in the open market or from Sterling Financial
Corporation's authorized but unissued shares of common stock. Participating
shareholders may make additional voluntary cash payments that are also used by
the plan agent to purchase additional shares of Sterling Financial Corporation
common stock. Shares of Sterling Financial Corporation common stock held for the
accounts of shareholders participating in the Dividend Reinvestment and Stock
Purchase Plan are voted by the plan agent as instructed by each participating
shareholder.
-53-
<PAGE>
Securities Laws
Sterling Financial Corporation, as a business corporation, is subject to
the registration and prospectus delivery requirements of the Securities Act of
1933. Sterling Financial Corporation is also subject to similar requirements
under state securities laws. The Sterling Financial Corporation common stock is
registered with the Commission under Section 12(g) of the Securities Exchange
Act of 1934, as amended, and Sterling Financial Corporation is subject to the
periodic reporting, proxy solicitation and insider trading requirements of the
Securities Exchange Act of 1934. The executive officers, directors and those who
are beneficial owners of more than 10 percent of the issued and outstanding
shares of Sterling Financial Corporation common stock are subject to
restrictions affecting their right to sell shares of Sterling Financial
Corporation common stock beneficially owned by them. Specifically, each such
person is subject to the beneficial ownership reporting requirements under the
short-swing profit recapture provisions of Section 16 of the Securities Exchange
Act of 1934 and may sell shares of Sterling Financial Corporation common stock
only:
o in compliance with the provisions of Commission Rule 144;
o in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act of 1933; or
o pursuant to an effective registration statement filed with the
Commission under the Securities Act of 1933.
Anti-takeover Provisions
The Pennsylvania Business Corporation Law of 1988 and Sterling Financial
Corporation's amended Articles of Incorporation and amended Bylaws provide
numerous provisions that may be deemed to be anti-takeover in nature, both as to
purpose and effect. There are four major anti-takeover provisions under
Pennsylvania law relating to corporations that have their securities registered
with the Commission under Section 12 of the Securities and Exchange Act of 1934.
The overall effect of the various provisions described herein could be to
deter a tender offer that a majority of the Sterling Financial Corporation
shareholders might possibly view to be in their best interest because the offer
might include a substantial premium over the market price of Sterling Financial
Corporation's common stock at that time. In addition, these provisions may have
the effect of assisting Sterling Financial Corporation's current management in
retaining its position and placing it in a better position to resist changes
that the shareholders might want to make if dissatisfied with the conduct of
Sterling Financial Corporation's business.
Two of these statutory provisions have the effect of limiting the rights of
the shareholders of registered corporations to:
o call a special meeting of shareholders; and
-54-
<PAGE>
o propose amendments to the Articles of Incorporation.
One effect of these provisions may be to prevent the calling of a special
meeting of shareholders for the purpose of considering a merger, consolidation
or other corporate combination which does not have the approval of a majority of
the members of Sterling Financial Corporation's Board of Directors. This
provision may have the effect of making Sterling Financial Corporation less
attractive as a potential takeover candidate by depriving shareholders of the
opportunity to initiate special meetings at which a possible business
combination might be proposed.
These two provisions may discourage attempts by shareholders to call a
special meeting of shareholders. They also provide a greater time for
consideration of any shareholder proposal to the extent that the proposal must
be deferred until the next annual meeting of shareholders. Also, when made,
shareholder proposals must comply with notice requirements and proxy
solicitation rules. These provisions of Pennsylvania law do not affect the
calling of a special meeting by the Chairman of the Board or by a majority of
the members of the Board of Directors or of its Executive Committee if, in their
judgment, there are matters to be acted upon which are in the best interest of
Sterling Financial Corporation and its shareholders.
Sterling Financial Corporation's Articles of Incorporation and amended
Bylaws contain a number of additional provisions that could be considered
anti-takeover in purpose and effect. These provisions include:
o authorization of 35,000,000 shares of Sterling Financial Corporation
common stock;
o lack of preemptive rights for shareholders to subscribe to purchase
additional shares of stock on a pro rata basis, except in limited
circumstances;
o the necessity for the affirmative vote of the holders of
seventy-five percent (75%) of Sterling Financial Corporation's
common stock to approve an amendment to Sterling Financial
Corporation's Bylaws or to change an amendment to its Bylaws that
was approved by the Board of Directors; and
o the necessity for the affirmative vote of the holders of
seventy-five percent (75%) of Sterling Financial Corporation's
common stock to approve a merger, consolidation, liquidation, or
sale of substantially all assets unless the transaction has
received prior approval of at least a majority of all members of
the Board of Directors, in which case the affirmative vote of the
holders of sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of common stock is required for approval.
These provisions could give the holders of a minority of Sterling Financial
Corporation's outstanding shares a veto power over any merger, consolidation,
dissolution or liquidation of Sterling Financial Corporation, the sale of all or
substantially all of its assets or an amendment to its Bylaws unless a majority
of all members of the Board of Directors and sixty-six and two-
-55-
<PAGE>
thirds percent (66 2/3%) of the holders of Sterling Financial Corporation's
common stock believe that the transaction is desirable and beneficial. Without
these provisions in Sterling Financial Corporation's Articles of Incorporation
and Bylaws, the affirmative vote of at least a majority of Sterling Financial
Corporation's common stock outstanding entitled to vote would be required to
approve any merger, consolidation, dissolution, liquidation, the sale of all of
its assets or an amendment to the Bylaws.
Provisions for a classified or staggered board are included in the amended
Bylaws of Sterling Financial Corporation. A classified board has the effect of
moderating the pace of any change in control of the Board of Directors by
extending the time required to elect a majority of the directors to at least two
successive annual meetings. This extension of time may to discourage tender
offers or takeover bids. This provision may also be deemed to be anti-takeover
in nature. A classified board makes it more difficult for a majority of the
shareholders to promptly change the composition of the board of directors even
though the shareholder may consider the change desirable.
Sterling Financial Corporation's amended Articles of Incorporation contain
an additional anti-takeover provision that enables the Board of Directors to
oppose a tender offer on the basis of factors other than economic benefit. Based
on the Board's responsibilities to various constituent groups, including
Sterling Financial Corporation's subsidiaries and the community that it serves,
the Board may consider factors such as:
o the impact the acquisition of Sterling Financial Corporation would have
on the community;
o the effect of the acquisition upon shareholders, employees, depositors,
suppliers and customers; and
o the reputation and business practices of the tender offeror.
Indemnification
The Bylaws of Sterling Financial Corporation provide for indemnification of
its directors, officers, employees and agents to the fullest extent permitted
under the laws of the Commonwealth of Pennsylvania, provided that the person
seeking indemnification acted in good faith, in a manner he or she reasonably
believed to be in the best interest of Sterling Financial Corporation, and
without willful misconduct or recklessness.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Sterling
Financial Corporation, Sterling Financial Corporation has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Principal Owners of Sterling Financial Corporation Common Stock
-56-
<PAGE>
The following table shows, to our knowledge, those persons or entities, who
owned of record or beneficially on April 26, 1999, the record date, more than 5%
of the outstanding Sterling Financial Corporation common stock.
We determined beneficial ownership of shares of Sterling Financial
Corporation common stock by referring to Securities and Exchange Commission Rule
13d-3, which provides that a person should be credited with the ownership of any
stock that he or she, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares:
o voting power, which includes the power to vote or to direct the voting
of the stock, or
o investment power, which includes the power to dispose or direct
the disposition of the stock, or has the right to acquire
beneficial ownership within 60 days after April 26, 1999, the
record date for the meeting.
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of
Of Beneficial Beneficial Percent
Title of Class Owner Ownership of Class
-------------- ----- --------- --------
<S> <C> <C> <C>
Common Stock, Howard E. Groff
$5.00 par value 111 E. State Street
per share Quarryville, PA 17566 752,705 (1) 11.68%
Common Stock, Bank of Lancaster County
$5.00 par value Employee Stock Plan
per share c/o Trust Department
101 North Pointe Boulevard
Lancaster, PA 17601-4133 545,354 (2) 8.46%
</TABLE>
(1) Mr. Groff holds sole voting and investment power over 751,104 shares.
(2) Shares held for the account of plan participants are voted by the Plan
Trustee in accordance with the instructions given by the individual
participants.
Ownership of Sterling Financial Corporation Common Stock by Executive Officers
and Directors of Sterling Financial Corporation
The following table shows as of April 26, 1999, the amount and percentage
of Sterling Financial Corporation common stock beneficially owned by each
Director of Sterling Financial
-57-
<PAGE>
Corporation and each named Executive Officer of Sterling Financial Corporation
and all Directors and Executive Officers of Sterling Financial Corporation as a
group.
We determined beneficial ownership of shares of Sterling Financial
Corporation's common stock by applying Securities and Exchange Commission Rule
13d-3, which provides
that a person is deemed to own any stock that he or she, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise has
or shares:
o voting power, which includes the power to vote or to direct the voting
of the stock, or
o investment power, which includes the power to dispose or direct
the disposition of the stock, or has the right to acquire
beneficial ownership within 60 days after April 26, 1999.
Unless otherwise indicated in a footnote appearing below the table, all
shares reported in the table below are owned directly by the reporting person.
The number of shares owned by the Directors and Executive Officers is rounded to
the nearest whole share. The percentage of all Sterling Financial Corporation
common stock owned by each Director or Executive Officer is less than 1% unless
other wise indicated.
Name of Individual or Amount and Nature of
Identity of Group Beneficial Ownership Percent of Class
- ----------------- -------------------- ----------------
Directors:
Richard H. Albright, Jr. 37,355 (1) -----
Robert H. Caldwell 5,870 (2) -----
Howard E. Groff, Jr. 23,284 (3) -----
Joan R. Henderson 1,613 (4) -----
J. Robert Hess 88,863 (5) 1.38%
Calvin G. High 30,526 (6) -----
David E. Hosler 410 -----
J. Roger Moyer, Jr. 38,008 (7) -----
E. Glenn Nauman 37,439 (8) -----
W. Garth Sprecher 439 -----
John E. Stefan 147,975 (9) 2.29%
Glenn R. Walz 8,427 (10) -----
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<PAGE>
Name of Individual or Amount and Nature of
Identity of Group Beneficial Ownership Percent of Class
- ----------------- -------------------- ----------------
Other Named Executive Officer:
Jere L. Obetz
20,500 (11) -----
All Directors and Executive
Officers as a Group (15 persons): 469,290 7.27%
- -----------------------
(1) Includes 1,987 shares owned jointly with spouse, 7,293 owned directly
by spouse, 4,290 shares owned by spouse as custodian for children and
10,715 shares owned by Albright Family Enterprises, L.P. of which Dr.
Albright is a general partner.
(2) Includes 755 shares owned directly by spouse.
(3) Includes 4,529 shares owned directly by spouse and 8,010 shares owned
as custodian for children.
(4) Includes 11 shares owned jointly with spouse and 300 shares owned
directly by spouse.
(5) Includes 28,994 shares owned jointly with spouse, 4,531 shares owned
directly by spouse, 9,610 shares owned as custodian for children and
20,315 shares owned in trust for the benefit of grandchildren.
(6) Includes 30,300 shares owned jointly with spouse.
(7) Includes 28,213 shares held by trustee under the Employees Stock Plan,
1,311 shares owned jointly with spouse, 14 shares owned directly by
spouse, 1,199 shares owned directly by children and 3,553 shares owned
directly by mother for whom Mr. Moyer holds power of attorney and with
respect to which Mr. Moyer shares voting and investment power. Mr.
Moyer disclaims beneficial ownership of shares owned directly by his
children. Mr. Moyer has the right to acquire an additional 8,150
shares pursuant to the exercise of stock options.
(8) Includes 34,725 shares owned directly by spouse and 895 shares owned
directly by mother.
(9) Includes 49,802 shares held by trustee under the Employees Stock Plan,
3,087 shares owned jointly with spouse, 50,400 shares owned directly
by spouse, and 11,750 shares owned directly by child. Mr. Stefan
disclaims beneficial ownership of shares owned directly by his spouse.
Mr. Stefan has the right to acquire an additional 14,310 shares
pursuant to the exercise of stock options.
(10) Includes 6,531 shares owned directly by spouse and 210 shares owned as
custodian for children.
(11) Includes 15,290 shares held by trustee under the Employees Stock Plan
and 2,497 shares owned directly by spouse. Mr. Obetz disclaims
beneficial ownership of shares owned directly by his spouse. Mr. Obetz
has the right to acquire an additional 5,800 shares pursuant to the
exercise of stock options.
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<PAGE>
Directors and Executive Officers of Sterling Financial Corporation
After the merger, the Board of Directors of Sterling Financial Corporation
will consist of the following individuals who will hold officers listed who will
hold the offices listed below. All Directors of Sterling Financial Corporation,
except S. Amy Argudo, are and will be also Directors of the Bank of Lancaster
County, N.A. Ms. Argudo is and will be a Director of the First National Bank of
North East.
<TABLE>
<CAPTION>
Principal Occupation for the Past 5
Years and Position Held with Sterling
Name and Age Director Since Financial Corporation and Subsidiaries
<S> <C> <C>
W. Garth Sprecher 1998 Vice President and Corporate Secretary and
(47) Director, D&E Communications, Inc.
(Telecommunications)
Joan R. Henderson 1995 President, J.R. Henderson & Associates,
(56) Inc. (Planning and Fund Development for
Non-Profit Organizations)
Calvin G. High 1976 Senior Vice President, High Industries,
(66) Inc.; Partner, High Properties
David E. Hosler 1998 Chairman, President, Chief Executive
(48) Officer and Director, Old Guard Group,
Inc. (Property and Casualty Insurance
Companies)
E. Glenn Nauman 1976 Retired Chairman of the Board and retired
(66) Director, Nauman Construction (building
contractor)
Robert H. Caldwell 1991 Retired Senior Executive Vice President
(68) and Director, Armstrong World Industries,
Inc. (manufacturer, building materials,
home furnishings and industrial specialties)
J. Robert Hess 1971 President, B&E Realty;
(68) President, Hessco Construction Co.;
Partner, Sycamore Industrial Park; Broker
and Partner, Kingsway Realty
- -------------------------------------------------------------------------------------------------------
</TABLE>
-60-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation for the Past 5
Years and Position Held with Sterling
Name and Age Director Since Financial Corporation and Subsidiaries
<S> <C> <C>
J. Roger Moyer, Jr. 1994 Executive Vice President and Assistant
(50) Secretary of Sterling Financial Corporation
since 1994; Vice President of Sterling
Financial Corporation from 1987 to 1994;
Executive Vice President and
Assistant Secretary of The Bank of
Lancaster County since 1994; Senior
Vice President/Chief Administrative
Officer of the Bank of Lancaster County
from 1985 to 1994; and Director of
Sterling Financial Interim Acquisition
Corporation since 1999.
Richard H. Albright, Jr. 1985 Dentist, Specialist,
(56) Practice Limited to Orthodontics
Howard E. Groff, Jr. 1988 Vice President, Howard E. Groff Co. (fuel
(52) oil sales and service)
Chairman of the Board, President and Chief
John E. Stefan 1979 Executive Officer of Sterling Financial
(59) Corporation since 1994; President and
Chief Executive Officer of Sterling
Financial Corporation from 1987 to 1994;
Chairman of the Board, President and
Chief Executive Officer of The Bank
of Lancaster County since 1994; President
and Chief Executive Officer of the Bank
of Lancaster from 1979 to 1994;
Director of Sterling Financial Interim
Acquisition Corporation since
1999; and Director of The First National
Bank of North East since 1999.
Glenn R. Walz 1988 President, Walz, Deihm, Geisenberger,
(52) Bucklen & Tennis, P.C. (Certified Public
Accountants); Vice Chairman of the Board,
Sterling Financial Corporation and The
Bank of Lancaster County
S. Amy Argudo 1999 Director of Sterling Financial Corporation
(__) since 1999; Director of Northeast Bancorp,
Inc. from ____ to 1999. [Other positions
held since 1994.]
</TABLE>
- ------------------------
-61-
<PAGE>
After the merger, the executive officers of Sterling Financial
Corporation will be the following individuals:
<TABLE>
<CAPTION>
Principal Occupation For the Past 5 Years and
Position Held with Sterling Financial
Name Age Corporation and Subsidiaries
<S> <C> <C>
John E. Stefan 59 Chairman of the Board, President and Chief
Executive Officer of Sterling Financial Corporation since
1994; President and Chief Executive Officer of Sterling
Financial Corporation from 1987 to 1994; and Chairman of
the Board, President and Chief Executive Officer of
the Bank of Lancaster County since 1994; President and
Chief Executive Officer of the Bank of Lancaster County
from 1979 to 1994; Director of Sterling Financial Interim
Acquisition Corporation since 1999; Director of the First
National Bank of North East since 1999.
J. Roger Moyer, Jr. 50 Executive Vice President and Assistant Secretary
of Sterling Financial Corporation since 1994; Vice
President of Sterling Financial Corporation from
1987 to 1994; Executive Vice President and
Assistant Secretary of the Bank of Lancaster
County since 1994; Senior Vice President/Chief
Administrative Officer of the Bank of Lancaster
County from 1985 to 1994; Director of Sterling
Financial Interim Acquisition Corporation since
1999.
Thomas P. Dautrich 50 Executive Vice President of Sterling Financial
Corporation since 1998 and Executive Vice
President/Banking Services of the Bank of
Lancaster County since 1998; previously Executive
Vice President, CoreStates Bank, July, 1997 to
February, 1998; President, Susquehanna Valley
Division, CoreStates Bank, April, 1996 to July,
1997; and President Susquehanna Valley Division,
Meridian Bank and Executive Vice President,
Meridian Bancorp, Inc., March, 1990 to April,
1996.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation For the Past 5 Years and
Position Held with Sterling Financial
Name Age Corporation and Subsidiaries
<S> <C> <C>
Jere L. Obetz 50 Executive Vice President/Treasurer and Chief
Financial Officer of Sterling Financial Corporation
since 1998; Senior Vice President/Treasurer and
Chief Financial Officer of Sterling Financial
Corporation from 1995 to 1998; Vice
President/Treasurer and Chief Financial Officer of
Sterling Financial Corporation from 1994 to 1995;
Vice President of Sterling Financial Corporation
from 1987 to 1994 and Executive Vice
President/Chief Financial Officer of the Bank of
Lancaster County since December 1997; Senior
Vice President/Chief Financial Officer of the Bank
of Lancaster County from 1992 to 1997; Director of
Sterling Financial Interim Acquisition Corporation
since 1999.
Ronald L. Bowman 55 Vice President/Secretary of Sterling Financial
Corporation since 1994; Secretary/Treasurer of
Sterling Financial Corporation from 1987 to 1994;
Vice President/Corporate Financial Secretary of
the Bank of Lancaster County since 1995; Vice
President/Comptroller of the Bank of Lancaster
County from 1971 to 1995.
</TABLE>
Sterling Financial Corporation Executive Compensation
The officers of Sterling Financial Corporation do not receive any
additional compensation for their services, beyond the compensation paid to them
as officers of the Bank of Lancaster County. The table below shows the annual
and long-term compensation for services in all capacities to Sterling Financial
Corporation and to the Bank of Lancaster County for the fiscal years ended
December 31, 1998, 1997 and 1996 to those persons who were, at December 31,
1998:
o the Chief Executive Officer; and
o the other most highly compensated executive officers of Sterling
Financial Corporation. The table shows the information only for
those executives whose annual salary and bonus exceeded $100,000.
The column "Other Annual Compensation" shows only perquisites and other
personal benefits which do not exceed the lesser of $50,000 or 10% of total
annual salary and bonus. The
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<PAGE>
column "All Other Compensation" includes: $4,036, $3,673, $3,779 for Mr. Stefan:
$4,036, $3,673, and $3,779 for Mr. Moyer; and $3,140, $2,732, and $2,841 for Mr.
Obetz for 1998, 1997 and 1996, respectively, under the performance incentive
feature of the Employees Stock Plan. Also included in the column "All Other
Compensation" are employer provided automobile benefits of $1,885, $1,348 and
$1,253 for Mr. Stefan and $2,129, $2,181 and $2,111 for Mr. Moyer for 1998, 1997
and 1996, respectively. See pages 13 through 16 of Sterling Financial
Corporation's 1999 proxy statement for a description of the Employee Stock Plan
and all other benefit plans of Sterling Financial Corporation. Sterling
Financial Corporation's 1999 proxy statement is incorporated by reference to
this proxy statement/prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Name Other Securities
and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SAR's Payouts sation(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John E. Stefan 1998 $266,989 $65,796 --- none 7,800 none $5,921
Chairman of the 1997 261,747 53,619 --- none 6,615 none 5,021
Board, President and 1996 254,114 64,961 --- none 6,000 none 5,032
Chief Executive
Officer of Sterling
Financial
Corporation and
Bank of Lancaster
County, N.A.
J. Roger Moyer, Jr. 1998 $146,355 $27,958 --- none 5,000 none $6,165
Executive Vice 1997 141,945 23,601 --- none 3,150 none 5,854
President of Sterling 1996 134,630 26,294 --- none 3,150 none 5,890
Financial
Corporation and
Bank of Lancaster
County, N.A.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Other Securities
and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SAR's Payouts sation(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jere L. Obetz 1998 $107,466 $21,052 -- none 3,000 none $3,140
Executive Vice 1997 99,923 17,019 -- none 2,888 none 2,732
President/Treasurer/ 1996 94,432 19,079 -- none 2,625 none 2,841
Chief Financial
Officer of Sterling
Financial
Corporation and
Executive Vice
President/Chief
Financial Officer of
Bank of Lancaster
County, N.A.
</TABLE>
- -------------------
Option Exercises and Fiscal Year-End Values
Sterling Financial Corporation granted stock options under its Stock
Incentive Plan to its named executive officers during 1998 as shown in the table
below. All options shown were granted on December 14, 1998, and under the terms
of the Stock Incentive Plan, are exercisable one third per year for three years
beginning on December 14, 1999. The base price of all options granted in 1998 is
adjustable in the event of any change in the number of issued and outstanding
shares of Sterling Financial Corporation common stock which results from a stock
split, reverse stock split, payment of a stock dividend or any other change in
the capital structure of Sterling Financial Corporation.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants For Option Term
- ---------------------------------------------------------------------------------------- ---------------
% of Total
Option/SARs
Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($Sh) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
John E. Stefan 7,800 14.5% $42.25 12/14/08 $207,252 $525,218
J. Roger Moyer, Jr. 5,000 9.3% 42.25 12/14/08 132,854 336,678
Jere L. Obetz 3,000 5.6% 42.25 12/14/08 79,712 202,007
</TABLE>
- -----------------------
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<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
Information concerning:
o all exercises of stock options awarded to the named officers of Sterling
Financial Corporation and the Bank of Lancaster under Sterling Financial
Corporation's Stock Incentive Plan during 1998;
o all fiscal year-end option values for each named executive
officer under the Stock Incentive Plan and held by them at
December 31, 1998; and
o all stock options exercised under Sterling Financial
Corporation's Stock Incentive Plan during 1998 are shown in the
table below.
The column "Value Realized" shows the difference between the fair market
value on the date of exercise of the shares acquired by the exercise of the
options and the exercise price of the options exercised. The market value of
underlying securities was computed by averaging the closing bid and ask
quotations for 5 trading days immediately preceding December 31, 1998, minus the
exercise price.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-money
Options/SARs at Options/SARs at
Fiscal Year-End(#) Fiscal Year-end($)
Shares
Acquired On Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John E. Stefan 1,400 $24,055 5,005/14,310 $79,598/$87,124
J. Roger Moyer, Jr. --- --- 3,150/8,150 $51,630/$40,832
Jere L. Obetz --- --- 2,713/5,800 $44,201/$37,773
</TABLE>
- ----------------
Pension Plan
The Bank of Lancaster County Pension Plan is a qualified non-contributory
defined benefit pension plan that provides retirement benefits to employees of
the Bank of Lancaster County, including Messas, Stefan, Moyer and Obetz and to
employees of Town & Country, Inc., a wholly-owned subsidiary of the Bank of
Lancaster County. All employees who have completed 1 year of service, work at
least 1,000 hours per year and who have attained the age of 21 are eligible to
participate in the plan. Outside directors do not participate in the plan.
Employees become 100% vested upon the completion of 5 years of service.
Contributions to the plan are made by the Bank of Lancaster County and are
determined actuarially.
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<PAGE>
Benefits under the plan, which are not integrated with Social Security
benefits, are based upon average monthly compensation, determined on the basis
of the highest 5 consecutive years' base compensation preceding retirement and
years of credited service. For purposes of determining benefits payable under
the plan, the term "compensation" is defined to mean base salary only and does
not include overtime pay or bonuses. Compensation paid to Messrs. Stefan, Moyer,
and Obetz during 1998 and covered by the plan was $160,000, $146,355, and
$107,466 respectively. As of December 31, 1998, Messrs. Stefan, Moyer, and Obetz
had accrued 19, 21, and 27 years of credited service, respectively, under the
plan for benefit accrual purposes.
The following table indicates, for purposes of illustration, the
approximate annual retirement benefit that would be payable under the plan, in
the form of a straight life annuity with 120 months' certain period, at age 65,
under various assumptions as to average annual compensation and years of
credited service. The benefit amounts set forth below are not subject to further
deduction for Social Security or other offset amounts. Under the Internal
Revenue Code, the maximum annual retirement benefit that may be paid in the form
of a straight life annuity with 120 months' certain period under a qualified
defined benefit plan such as the Plan is $120,691, subject to adjustment based
upon increases in the Consumer Price Index. In addition, salary in excess of
$160,000, effective in the year 1997, is disregarded in determining a
participant's retirement benefit pursuant to regulations of the Internal Revenue
Service.
Average Annual Years of Credited Service
-------------------------
Compensation 10 20 30 40
------------ -- -- -- --
$100,000 $15,000 $30,000 $45,000 $60,000
125,000 18,750 37,500 56,250 75,000
150,000 22,500 45,000 67,500 90,000
175,000 24,000 48,000 72,000 96,000
200,000 24,000 48,000 72,000 96,000
225,000 24,000 48,000 72,000 96,000
250,000 24,000 48,000 72,000 96,000
275,000 24,000 48,000 72,000 96,000
300,000 24,000 48,000 72,000 96,000
- ---------------
Retirement Restoration Plan
Bank of Lancaster County adopted a Restoration Plan during 1996 for any
officer whose compensation exceeded $160,000. The plan is designed to "restore"
the level of benefits lost to these employees under certain qualified retirement
plans because of Internal Revenue Code restrictions.
The plan is designed to mirror the provisions of the qualified retirement
plans available to all Bank of Lancaster County employees -- the Pension Plan,
and the Employee Stock or 401(k)
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<PAGE>
plan. The Retirement Restoration Plan allows for the calculation of benefits on
an officer's salary in excess of $160,000. The effective date of the Plan is May
1, 1996.
Employment Agreement
In April of 1983, the Bank of Lancaster County entered into a 5-year
employment agreement with John E. Stefan engaging Mr. Stefan as its President
and Chief Executive Officer. The employment agreement may be automatically
renewed for additional terms of 5 years each. Mr. Stefan and the Bank of
Lancaster County, N.A. have renewed the employment agreement and it is currently
in effect. Either the Bank of Lancaster County or Mr. Stefan may cancel Mr.
Stefan's employment agreement at anytime by giving prior notice to the other of
its or his intent to cancel the agreement. The Bank of Lancaster County may
terminate Mr. Stefan's employment agreement at any time without Mr. Stefan's
consent for the following reasons:
o without cause, in which case Mr. Stefan will receive his salary until
the end of the term of the employment agreement; or
o with cause, in which case Mr. Stefan will receive his salary and
benefits under the employment agreement through his last day of
employment.
If control of Sterling Financial Corporation or the Bank of Lancaster
County should change, the Bank of Lancaster County will be prohibited from
terminating Mr. Stefan's employment agreement without cause, and the term of the
employment agreement will be extended automatically. Sterling Financial
Corporation has agreed to assume the Bank of Lancaster County's obligations to
Mr. Stefan under his employment agreement if the Bank of Lancaster County can no
longer meet those obligations.
Sterling Financial Corporation Directors' Compensation
Directors who are also salaried officers of the Sterling Financial
Corporation or the Bank of Lancaster County do not receive any fees for board or
committee meetings. Each year, Sterling Financial Corporation compensates all
its non-employee Directors:
o by issuing to each of them 200 shares of Sterling Financial Corporation
common stock; and
o by paying to each of them cash equal to the value of the Sterling
Financial common stock issued.
Sterling Financial Corporation issues the common stock by July 15th of each
year and values it at the price established for Sterling Financial Corporation's
Dividend Reinvestment Plan as of July 1st of each year. In addition, each
non-employee Director receives $100 for each meeting attended of a Board of
Directors committee of which he or she is a member. Committee chairs receive
$150 for each meeting attended. Sterling Financial Corporation reduces the
Director's cash compensation by one-twelfth for each meeting missed in excess of
three if a Director attends fewer than 75% of scheduled Board meetings.
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<PAGE>
In July, 1998, each non-employee Director received 200 shares of Sterling
Financial Corporation common stock worth $48.30 per share. The yearly cash
portion of the director's fees was $9,660 for the period beginning July 1, 1998.
In the aggregate, Sterling Financial Corporation paid $176,450 to non-employee
Directors in cash and stock during 1998.
Sterling Financial Corporation's Transactions with Directors and Executive
Officers
Some of the directors and executive officers of Sterling Financial
Corporation and the companies with which they are associated were customers of
and had banking transactions with the Bank of Lancaster County during 1998. All
loans and loan commitments made to them and to their companies were made in the
ordinary course of bank business, on substantially the same terms, including
interest rates, collateral and repayment terms, as those prevailing at the time
for comparable transactions with other customers of the bank, and did not
involve more than a normal risk of collectibility or present other unfavorable
features. The Bank of Lancaster County and anticipates that it will enter into
similar transactions in the future.
The Bank of Lancaster County has entered into several transactions with
businesses which are affiliates of Calvin G. High, a Director of Sterling
Financial Corporation and the Bank of Lancaster County. The Bank of Lancaster
County entered into a lease agreement in 1984 with High Properties, in which Mr.
High is a partner, under which High Properties constructed and leased to the
Bank of Lancaster County a building at 525 Greenfield Road, Lancaster,
Pennsylvania. Sterling Financial Corporation and The Bank of Lancaster County,
N.A. used the building for their administrative headquarters and for a branch
office from October of 1984 until August 1995. Sterling Financial Corporation
and the Bank of Lancaster County moved their administrative headquarters to
another location in August 1995, but the Bank of Lancaster County has continued
to maintain a branch office in the Greenfield Road building from October 1984 to
the present. The term of the lease for the Greenfield Road building office is 15
years. The monthly rent is $12,331.70 and the Bank of Lancaster County paid a
total of $147,980.40 in rent to High Properties during 1998 for the Greenfield
Road property.
On January 10, 1997, the Bank of Lancaster County sublet to High Employee
Services, Ltd,. 4,424 square feet of the Greenfield Road building formerly
occupied by Sterling Financial Corporation's and the Bank of Lancaster County's
administrative headquarters. High Employee Services, Ltd. is a division of High
Industries, of which Mr. High is Senior Vice President. The term of the sublease
is two years and eight months and ends on the expiration date for the original
1984 lease. The Bank of Lancaster County, N.A. will receive $159,264 in rent
from High Employee Services for the remaining term of the sublease.
On October 28, 1998, The Bank of Lancaster County entered into a new lease
agreement with High Properties for its branch bank at the Greenfield Road
building. The lease term will commence on June 1, 1999, the expiration date of
the original 1984 lease. Under the terms of the lease, High Properties will
lease to the Bank of Lancaster County 4,424 square feet of space for a term of 5
years, subject to renewal. Base rent over the five-year term is $370,999.92.
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<PAGE>
The Bank of Lancaster County paid High Associates, Ltd., a division of High
Industries, Inc., $191,259 in 1998 in payment for maintenance, lawn care,
remodeling and construction and other miscellaneous services. Mr. High is Senior
Vice President of High Industries.
The Bank of Lancaster County paid $322,130.92 to D & E Computer Networking
Services, a division of D & E Communications, Inc. in 1998. The Bank of
Lancaster County purchased local area network and wide area network integration
services, personal computer hardware and software and data communications
equipment from D & E Computer Networking Services. W. Garth Sprecher, a Director
of Sterling Financial Corporation and the Bank of Lancaster County, is Vice
President, Corporate Secretary and a Director of D & E Communications, Inc.
INFORMATION CONCERNING NORTHEAST BANCORP, INC.
Description of Business and Property
Northeast Bancorp was incorporated on April 28, 1992, to act as a holding
company for The First National Bank of North East. The First National Bank of
North East commenced operations in 1903 as a national banking association
chartered under the laws of the United States of America by the Office of the
Comptroller of the Currency. As a national bank, The First National Bank of
North East is subject to regulation and periodic examination by the Office of
the Comptroller of the Currency. The First National Bank of North East's
deposits are insured by the Federal Deposit Insurance Corporation. The First
National Bank of North East's principal executive offices are located at 14 S.
Main Street, North East, Maryland 21901-3998.
Below is a schedule of all The First National Bank of North East
properties, and their current ownership or lease terms.
Nature of Bank
Office or Facility Address Owned/Leased Date Opened
- ------------------ ------- ------------ -----------
Main Office - 14 South Main Street Owned 1903
Full Service North East, MD
Branch Office - 139 W. Main Street Owned 1964
Full Service Elkton, MD
Branch Office - Rts 40 & 272 Owned 1975
Drive Through North East, MD
Branch Office - 5405 Pulaski Hwy. Owned 1990
Full Service Perryville, MD
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<PAGE>
The First National Bank of North East is a full service commercial bank
that offers a large range of commercial and retail banking products to its
customers, including:
o personal and business checking
o NOW accounts
o money market accounts
o savings accounts
o IRA accounts
o certificates of deposit
o installment loans
o home equity loans
o lines of credit
o letters of credit
o revolving credit
o term loans
o commercial mortgage loans
o residential and commercial construction loans
In addition, the bank provides the following services:
o safe deposit boxes
o travelers checks
o money orders
o wire transfers of funds
o direct deposits of social security and payroll checks
o merchant and retail credit card processing services
o access to the "MAC" automated teller machine network.
In the event that loan requests exceed The First National Bank of North
East's lending limit to any one customer, the bank seeks to arrange such loans
on a participation basis with other financial institutions. The bank
periodically evaluates the continuation of the above enumerated services.
The First National Bank of North East competes with other commercial banks
and savings and loan associations, most of which are larger than The First
National Bank of North East. The bank also competes with major regional banking
and financial institutions headquartered elsewhere. The First National Bank of
North East generates the overwhelming majority of its deposit and loan volume
within Cecil County, Maryland, its primary service area. The majority of the
residents and business and employees within The First National Bank of North
East's primary service area are within a driving time of 30 minutes from The
First National Bank of North East's main office. There are 16 offices of
commercial banks headquartered or which have a presence in the greater Cecil
County area where The First National Bank of North East is located. The bank's
primary service area includes a wide variety of residential neighborhoods,
commercial businesses, retail stores, industrial complexes and service
institutions. The Cecil County area has a large number of established businesses
and a substantial employment base.
The bank's primary service area is the community described in The First
National Bank of North East's Community Reinvestment Act Statement, which states
that the bank intends to meet the credit needs of the entire local community. As
a financial institution subject to the
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<PAGE>
Community Reinvestment Act, The First National Bank of North East has a
responsibility to the community to be pro-active in the pursuit of satisfying
the credit needs of all creditworthy commercial enterprises and individuals up
to its legal lending limits, and to serve legitimate businesses, professional
practices, farms, non profit organizations, and governmental and educational
institutions without discrimination as to minimum size or type and without
regard to race, color, natural origin, religion, sex, handicap or financial
status. The bank is an Equal Housing Lender and Equal Opportunity Lender.
The First National Bank of North East is committed to providing quality
financial products and services for all customers within the local community and
to investing in their potential growth as well as the community's growth. In its
responsibility, the bank seeks to ascertain the credit needs of both existing
and successful business ventures and the needs of businesses that are forming
and growing, with the goal of enhancing the vitality of the community by
servicing businesses that provide jobs, goods and services.
Employees
As of December 31, 1998, Northeast Bancorp had 44 full-time equivalent
employees.
Legal Proceedings
The business of Northeast Bancorp and The First National Bank of North East
generates litigation in the ordinary course of that business. In the opinion of
management of Northeast Bancorp and The First National Bank of North East, there
are no proceedings pending to which Northeast Bancorp and The First National
Bank of North East is a party or to which their property is subject, which, if
determined adversely to them, would be material in relation to Northeast
Bancorp's or The First National Bank of North East's undivided profits or
financial condition, nor are there any proceedings pending, other than ordinary
routine litigation, incident to the business of Northeast Bancorp or The First
National Bank of North East. In addition, no material proceedings are pending or
are known to be threatened or contemplated against Northeast Bancorp or The
First National Bank of North East by government authorities or others.
Northeast Bancorp, Inc. Common Stock Market Price and Dividends
Northeast Bancorp stockholders are entitled to receive dividends when, and
if, declared by the Board of Directors out of legally available funds. Northeast
Bancorp has historically paid quarterly cash dividends to its stockholders on or
about May 15, June 15, September 15, and December 15 of each year. The ability
of Northeast Bancorp to pay dividends to its stockholders is dependent upon
receipt of dividends from The First National Bank of North East.
Under federal law, the approval of the Office of the Comptroller of the
Currency is required for the payment of dividends in any calendar year by a
subsidiary national bank if the total of all dividends declared by the bank in a
calendar year exceeds that bank's net profits for that year combined with its
retained net profits for the preceding two calendar years. Moreover, no
dividends may be paid by a national bank if its "losses" equal or exceed its
undivided profits account, and no dividend may be paid in an amount in excess of
its "net profits then on hand." In
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<PAGE>
addition, the Office of the Comptroller of the Currency may find a dividend
payment which otherwise meets the criteria specified in the law, nonetheless to
constitute an unsafe or unsound practice.
In accordance with the regulatory restrictions described above, as of
December 31, 1998, The First National Bank of North East had approximately
$______ available for the payment of dividends. The agreement permits Northeast
Bancorp to make normal quarterly cash dividend payments, not in excess of $0.25
per share during the first three calendar quarters of 1999 to its stockholders,
consistent with past practice, prior to the day of the merger.
Northeast Bancorp, Inc. paid regular cash dividends of $0.80 per share in
1998, a special dividend of $0.20 per share in December, 1998, and a regular
dividend of $0.25 per share for the first quarter of 1999.
Year 2000 Issue
The Year 2000 Problem
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact of the Year 2000 issue on Northeast
Bancorp's operations could materially differ from that which is anticipated in
these forward-looking statements as a result of the factors identified below.
The Year 2000 problem issue is the result of potential problems with
software and computer systems or any equipment with computer chips (collectively
"systems") that store the year portion of the date as just two digits (e.g. 98
for 1998). Systems using this two-digit approach will not be able to determine
whether "00" represents the year 2000 or 1900. The problem, if not corrected,
will make those systems fail altogether or, even worse, allow them to generate
incorrect calculations causing a disruption of normal computer and related
operations.
Readiness Efforts
The First National Bank of North East, the only subsidiary of Northeast
Bancorp, is addressing the Year 2000 problem and related issues for Northeast
Bancorp and for itself.
In 1997, a comprehensive project plan to address the Year 2000 problem and
related issues as those relate to The First National Bank of North East's and
its affiliates operations was developed, approved by the Board of Directors and
implemented. The scope of the plan includes five phases of Awareness,
Assessment, Renovation, Validation and Implementation as defined by Federal
Financial Institutions Examination Council and the banking regulatory agencies
which regulate Northeast Bancorp and The First National Bank of North East.
A project team that consists of key members of The First National Bank of
North East's technology staff, representatives of functional business units and
senior management was developed. Additionally, the duties of the Chief Financial
Officer of The First National Bank of North East were aligned to serve primarily
as the Year 2000 project manager.
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<PAGE>
As assessment of the impact of the Year 2000 issue on The First National
Bank of North East's computer systems has been completed. The scope of the
project also includes other operational and environmental systems since they may
be impacted if embedded computer chips control the functionality of those
systems. From the assessment, The First National Bank of North East has
identified and prioritized those systems deemed to be mission critical or those
that have a significant impact on normal operations.
The First National Bank of North East relies on third party vendors and
service providers for its data processing capabilities and to maintain its
computer systems. Formal communications with those providers of data processing
capabilities and other external counter parties were initiated in 1997 and 1998
to assess the Year 2000 readiness of their products and services. Their progress
in meeting their targeted schedules is being monitored for any indication that
they may not be able to address the problems in time. Thus far, responses
indicate that most of the significant providers currently have compliant
versions available or are well into the renovation and testing phases with
completion scheduled for sometime in 1998. However, The First National Bank of
North East can give no guarantee that the systems of these service providers and
vendors on which The First National Bank of North East's systems rely will be
timely renovated.
Additionally, The First National Bank of North East has implemented a plan
to manage the potential risk posed by the impact of the Year 2000 issue on its
major customers. Formal communications have been initiated, and the assessment
was significantly completed by December 31, 1998.
Current Status
The following table provides a summary of the current status of the five
phases involved and a projected timetable for completion.
Projected
Project Phase % Completed Completion Comments
- ------------- ----------- ----------- --------
Awareness 100% 06/30/98 Completed
Assessment 100% 06/30/99 Completed
Renovation 95% 06/30/99 Replace Asset/Liab.
Management
Software Program
Software Update for
ATM's remain
Critical systems 100% 12/31/98 Complete
Validation 95% 06/30/99 Above-listed
validation items need
validation
Implementation 95% As tested Above items
OVERALL
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<PAGE>
Costs $100,000.00
The First National Bank of North East has thus far primarily used and
expects to continue to primarily use internal resources to implement its
readiness plan and to upgrade or replace and test systems affected by the Year
2000 issue. The total cost to The First National Bank of North East of these
Year 2000 compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
In total, The First National Bank of North East estimates that its costs,
excluding personnel expenses, for Year 2000 remediation and testing of its
computer systems will amount to less than $100,000.00 over the three-year period
from 1997 through 1999. Not included in this estimate is the cost to replace
fully depreciated systems during this period, which occurs in the normal course
of business and is not directly attributable to the Year 2000 issue.
The costs and the timetable in which The First National Bank of North East
plans to complete the Year 2000 readiness activities are based on management's
best estimates, which were derived using numerous assumptions of future events
including the continued availability of particular resources, third party
readiness plans and other factors. The First National Bank of North East can
make no guarantee that these estimates will be achieved, and actual results
could differ from such plans.
Risk Assessment
Based upon current information related to the progress of its major vendors
and service providers, management has determined that the Year 2000 issue will
not pose significant operational problems for its computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which The First
National Bank of North East's systems rely. However, The First National Bank of
North East can give no guarantee that the systems of these suppliers will be
timely renovated.
Contingency Plan
Realizing that some disruption may occur despite its best efforts, The
First National Bank of North East is in the process of developing contingency
plans for each critical system in the event that one or more of those systems
fail. While this is an ongoing process, The First National Bank of North East
expects to have the plan substantially documented by May 10, 1999.
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<PAGE>
NORTHEAST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On the following pages of this proxy statement/prospectus we present
management's discussion and analysis of the consolidated financial condition and
results of operations of Northeast Bancorp, Inc., and its wholly-owned
subsidiary, The First National Bank of North East. Management's discussion and
analysis discusses the significant changes in the results of operations, capital
resources and liquidity presented in its accompanying consolidated financial
statements for Northeast Bancorp, Inc. Northeast Bancorp, Inc.'s consolidated
financial condition and results of operations consist almost entirely of The
First National Bank of North East's financial condition and results of
operations. Current performance does not guarantee, assure, or may not be
indicative of similar performance in the future.
The following discussion focuses on and highlights certain information
regarding Northeast Bancorp, Inc. We recommend that you read this discussion in
conjunction with the Consolidated Financial Statements and related notes
appearing elsewhere in this proxy statement/prospectus.
We caution you not to place undue reliance on forward-looking statements in
this section, because they reflect management's analysis only as of this date.
Northeast Bancorp, Inc. undertakes no obligation to publicly revise or update
these forward-looking statements to reflect subsequent events or circumstances.
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<PAGE>
NORTHEAST BANCORP, INC.
SELECTED FINANCIAL DATA
The following table presents Interest Income/Average Earning Assets and Net
Interest Income/Average Earning Assets on a tax equivalent basis.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Income & Expense:
Interest income $ 5,922 $ 5,483 $ 5,146 $ 5,115 $ 5,006
Interest expense 2,289 2,012 1,958 1,897 1,660
Net interest income 3,633 3,471 3,189 3,129 3,406
Provision for loan losses 60 0 (40) (258) 73
Net interest income after provision for loan losses 3,573 3,471 3,228 3,386 3,332
Noninterest income 517 432 413 407 366
Noninterest expense 2,787 2,644 2,432 2,697 2,679
Income before income taxes 1,303 1,259 1,209 1,097 1,019
Income taxes 514 424 374 309 417
Net income 790 835 835 788 603
Per share: (estimates)
Basic $ 2.32 $ 2.38 $ 2.38 $ 2.25 $ 1.72
Diluted $ 2.32 $ 2.38 $ 2.38 $ 2.25 $ 1.72
Cash dividends paid $ 1.00 $ 0.67 $ 0.51 $ 0.72 $ 0.67
Weighted average number of common
shares: (estimates)
Basic 339,620 351,720 350,275 350,235 350,235
Diluted 339,620 351,720 350,275 360,235 350,235
Book Value (excl. unrealized gain/loss) $ 22.52 $ 21.23 $ 19.96 $ 18.26 $ 16.73
Average Balance Sheet: (estimates)
Total Assets 77,122 70,008 67,768 66,891 66,092
Investment Securities and Money Market Investments 13,695 12,995 17,649 18,797 17,400
Loans and Leases (Net of Unearned Income) 56,462 50,458 43,709 41,924 42,751
Deposits 69,155 62,426 60,764 60,219 59,912
Borrowings 0 0 0 0 0
Stockholders' equity (excluding unrealized gain/loss) 7,426 7,136 6,722 6,127 5,675
Balance Sheet at Period End:
Total assets 81,789 72,455 67,561 67,976 65,806
Investments 16,402 10,989 15,002 20,295 17,299
Loans (Net of Unearned Income) 58,042 54,882 46,034 41,385 42,463
Deposits 73,673 64,636 60,216 61,313 59,124
Borrowings 0 0 0 0 0
Stockholders' equity (excluding unrealized gain/loss) 7,628 7,223 7,050 6,395 5,859
Selected Operating Ratios: (estimates)
Return on average assets (annualized) 1.02% 1.19% 1.23% 1.18% 0.91%
Return on average stockholders' equity 10.63% 11.71% 12.42% 12.86% 10.62%
Leverage (assets divided by 9.33% 9.97% 10.43% 9.41% 8.90%
stockholders' equity
Average total loans as a percentage of 81.65% 80.83% 71.93% 69.62% 71.36%
average deposits
Interest income/Average Earning Assets 8.44% 8.64% 8.39% 8.42% 8.32%
Interest expense/Average Dep. & 3.31% 3.22% 3.22% 3.30% 2.67%
Borrowings
Net interest income/Average Earn. Assets 5.18% 5.47% 5.20% 5.15% 5.66%
</TABLE>
-77-
<PAGE>
Balance Sheet Analysis
The table below presents the major asset and liability categories on an
average daily basis for the periods presented, along with interest income and
expense, and key rates and yields. During 1998, the assets showing the greatest
increase were loans. On the liability side, the most significant source of new
funds was time deposits.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY,
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------------
(Dollars in thousands)
----------------------
Average Average Average Average
Balance Rate Interest Balance Rate Interest
------- ---- -------- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments $13,695 5.65% $ 773 $12,995 6.48% $ 842
Loans 56,462 9.12% 5,149 50,458 9.20% 4,641
------- ------- ------- -------
Total Assets 70,157 8.44% 5,922 63,453 8.64% 5,483
Noninterest-earning 6,965 6,555
------- ------- ------- -------
Total assets $77,122 7.68% $ 5,922 $70,008 7.83% $ 5,483
======= ======= ======= =======
Liabilities and Stockholder
Equity Deposits:
Demand $16,575 $14,903
Interest bearing deposits 25,938 3.28% $ 850 23,622 3.10% $ 732
Time 26,642 5.40% 1,439 23,901 5.36% 1,280
------- ------- ------- -------
Total Deposits 69,155 3.31% 2,289 62,426 3.22% 2,012
Borrowings 0 0
Other liabilities 541 446
Total liabilities 69,696 3.28% 2,289 62,872 3.20% 2,012
------- ------- ------- -------
Stockholders' equity 7,426 7,136
(excluding unrealized
gains)
Total liabilities and equity $77,122 2.97% 2,289 $70,008 2.87% $ 2,012
======= ======= ======= =======
Average effective rate on $52,580 4.35% $ 2,289 $47,523 4.23% $ 2,012
interest-bearing liabilities
Interest Income/Earning 70,157 8.44% 5,922 63,453 8.65% 5,483
Assets
Interest Income/Earning 70,157 3.26% 2,289 63,453 3.17% 2,012
Assets
Effective Interest 5.18% 5.47%
Differential
</TABLE>
-78-
<PAGE>
Investment Securities
Total securities available for sale increased $1,233,221 from $10,188,527
in December 31, 1997 to $11,421,748 in December 31, 1998. The primary increase
in the securities available for sale occurred in the other investments category
which includes certificates of deposit in other banks, Federal Home Loan Bank
stock and Federal Reserve Bank stock. At December 31, 1998, other investments
consisted of $3,000,000 in certificates of deposit, $325,100 in Federal Home
Loan Bank stock and $22,400 in Federal Reserve Bank stock. At December 31, 1997,
other investments consisted of $298,100 in Federal Home Loan Bank stock and
$22,400 in Federal Reserve Bank stock. Securities of U. S. Government agencies
and state and political subdivisions decreased $1,904,000 during 1998, from
$7,771,635 at December 31, 1997, to $6,270,878 at December 31, 1998. Also
included in the securities available for sale category at December 31, 1998 are
unrealized gains of $70,724. This represents an increase of $110,287 over the
unrealized loss of $39,563 at December 31, 1997.
At December 31, 1998 federal funds sold were $4,979,950, which was
$4,179,950 higher than the $800,000 reported at December 31, 1997.
Northeast Bancorp, Inc. holds no significant concentrations of securities
except for the $3,000,000 in certificates of deposit in the Federal Home Loan
Bank. If a bank holds securities worth more than 10% of its stockholders' equity
in one company or securities issuer, then that securities holding is a
concentration of securities.
The maturity analysis of securities available for sale, including the
weighted average yield for each category, as of December 31, 1998, and with the
exception of other investments, is as follows:
<TABLE>
<CAPTION>
Under 1-5 5-10 Over
1 year years years 10 years Total
------ ----- ----- -------- -----
(Dollars in thousands)
----------------------
<S> <C> <C> <C> <C> <C>
Obligations of State and
Political Sub-Divisions:
Carrying value $ 181 $ 471 $1,080 0 $1,733
Weighted average yield 9.37% 6.17% 7.35% 7.24%
Mortgage-backed Securities:
Carrying value $1,151 $2,256 $1,842 $1,022 $6,271
Weighted average yield 7.36% 7.16% 6.84% 6.33% 6.97%
Total:
Carrying value $1,332 $2,728 $2,922 $1,022 $8,004
Weighted average yield 7.63% 6.99% 7.03% 6.33% 7.03%
</TABLE>
-79-
<PAGE>
Weighted average yield is computed by dividing the annualized interest
income, including the accretion of discounts and the amortization of premiums,
by the carrying value. Tax-exempt securities were adjusted to a tax-equivalent
basis and are based on the federal statutory tax rate of 34%.
The following table shows the amortized cost and fair value of investment
securities at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains (Losses) Value
- ------------------ ---- ----- -------- -----
<S> <C> <C> <C> <C>
Obligations of U.S. Governmental agencies $ 6,271 $ 29 -- $ 6,300
Obligations of states and political subdivisions 1,733 41 -- 1,774
Other Investments 3,348 -- -- 3,348
------- ------ --- -------
Totals $11,351 $ 71 0 $11,422
======= ====== === =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for Sale Cost Gains (Losses) Value
- ------------------ ---- ----- -------- -----
<S> <C> <C> <C> <C>
Obligations of U.S. Governmental agencies $ 7,772 $58 $117 $ 7,713
Obligations of states and political subdivisions 2,136 19 --- 2,155
Other Investments 321 --- --- 321
------- --- ---- -------
Totals $10,228 $77 $117 $10,189
======= === ==== =======
</TABLE>
Loans
Northeast Bancorp grants commercial loans, residential mortgages and
consumer loans to customers located primarily in Cecil County, Maryland.
Northeast Bancorp makes no foreign loans. At December 31, 1998, there were no
concentrations exceeding 10% of loans. A concentration is defined as amounts
loaned to a multiple number of borrowers engaged in similar activities which
would cause them to be similarly affected by changes in economic or other
conditions.
Loans grew $3,134,624, or 5.7% from $54,849,000 at December 31, 1997 to
$57,983,624 at December 31, 1998. This growth was primarily the result of an
increase in commercial related loans.
-80-
<PAGE>
Major classifications of loans are summarized as follows at December 31,
1998 and 1997 (in thousands):
December 31,
------------------------
1998 1997
---- ----
Commercial, financial and agricultural $ 10,095 $ 7,158
Real estate loans - construction 580 1,008
Real estate loans - mortgage 43,248 43,208
Installment loans to individuals 4,061 3,475
-------- --------
Total $ 57,984 $ 54,849
Net deferred fees $ 60 $ 37
Less: Unearned discount (2) (4)
Less: Allowance for possible loan losses (451) (412)
-------- --------
Net Loans $ 57,591 $ 54,470
Northeast Bancorp, Inc. generally classifies a loan as nonaccrual when:
o principal or interest consistently has been in default for a period of
90 days or more;
o the borrower's financial condition has deteriorated; or
o payment in full of principal or interest is not expected.
Northeast Bancorp, Inc. generally continues to accrue interest on
delinquent loans past due 90 days or more when Northeast Bancorp, Inc. believes
that the loans are well-secured and expects that the loans will be restored to a
current status in the near future. Northeast Bancorp., Inc. holds no loans which
it classifies as troubled debt restructurings.
The following table details those loans that Northeast Bancorp, Inc. placed
on nonaccrual status or on which Northeast Bancorp, Inc. continues to accrue
interest even though the loans were at least 90 days delinquent.
December 31,
------------------------
1998 1997
---- ----
(Dollars in thousands)
- ----------------------
Nonaccrual loans $96 $---
Trouble debt restructurings --- ---
Delinquent loans 42 482
---- ---
Total $138 $482
-81-
<PAGE>
Allowance for Possible Loan Losses
Northeast Bancorp, Inc. determines the adequacy of its allowance for
possible loan losses based on the following criteria:
o a credit review of the loan portfolio;
o past loan loss experience;
o current economic conditions; and
o any other factors that Northeast Bancorp, Inc. believes to be pertinent.
In 1998, Northeast Bancorp, Inc. added $60,000 to its allowance for loan
losses. Northeast Bancorp, Inc.'s allowance for possible loan losses at December
31, 1998, was $451,000, or .78% of total loans, compared to $412, 000 or .75% of
total loans at December 31, 1997. Northeast Bancorp, Inc. charged-off $20,692 in
1998, compared to $46,768 in 1997. In the opinion of management, Northeast
Bancorp, Inc. has reserved an amount adequate to absorb future loan losses.
The following table summarizes Northeast Bancorp, Inc.'s loan loss
experience:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance-beginning of year $ 412 $ 459 $ 544 $ 789 $ 759
Loans Charged-off 42 64 67 12 70
Recoveries 21 17 21 25 27
Net Loans charged-off 21 47 46 (13) 43
Additions charged to operations 60 0 (39) (258) 73
------- ------- ------- ------- -------
Balance at end of year $ 451 $ 412 $ 459 $ 544 $ 789
======= ======= ======= ======= =======
Average Loans $56,462 $50,481 $43,733 $41,924 $42,751
Ratios:
Net loans charged off to 0.04% 0.09% 0.10% -0.03% 0.10%
average loans
Net loans charged off to 4.58% 11.34% 9.98% -2.37% 5.52%
allowance for loan losses
</TABLE>
The following table summarizes Northeast Bancorp, Inc.'s premises and
equipment at December 31, 1998 and 1997:
-82-
<PAGE>
December 31,
---------------------
1998 1997
------- -------
Land $ 1,078 $ 1,078
Northeast Bancorp, Inc. premises 973 849
Leasehold Improvements 743 743
Furniture & Equipment 1,164 1,199
------- -------
3,958 3,869
Less accumulated depreciation (1,432) (1,520)
------- -------
Northeast Bancorp, Inc. premises and equipment, net $ 2,526 $ 2,349
======= =======
Depreciation expense for the years ended December 31, 1998 and 1997 was
$180,386 and $169,603, respectively.
Deposits
Northeast Bancorp, Inc. held total deposits of $73,673,084 at December 31,
1998, and $64,636,491 at December 31, 1997. Total deposits at December 31, 1998,
increased by $9,036,593, or 14%, over total deposits at December 31, 1997.
Demand deposits increased by $2,441,831, or 17.6%, during the same time period.
Interest bearing deposits increased by $6,594,762, or 13%, during the same time
period largely because certificates of deposit increased by $4,244,945, or
16.3%, during the same time period.
The following table shows the distribution of average balances and average
rates paid on the deposit categories at December 31, 1998 and 1997.
December 31,
---------------------------------------------
1998 1997
---- ----
(Dollars in thousands)
Amount Rate Amount Rate
------ ---- ------ ----
Noninterest-bearing $16,575 0.00% $14,903 0.00%
Interest-bearing deposits 25,938 3.28% 23,622 3.10%
Time deposits 26,642 5.40% 23,901 5.36%
------ ------
Total deposits $69,155 3.31% $62,426 3.22%
======= ===== ======= =====
The following table shows the distribution of certificates of deposit of
$100,000 and over at December 1998 and 1997 by maturity:
December 31,
-------------------------
1998 1997
---- ----
(Dollars in thousands)
- ----------------------
Three months or less $2,295 $1,305
Over three months to twelve months 1,579 1,127
Over one year to three years 861 500
Over three years 100 100
------ ------
Total $4,835 $3,032
====== ======
The following table summarizes categories of deposits at December 31, 1998
and 1997.
-83-
<PAGE>
December 31,
--------------------------
1998 1997
---- ----
(Dollars in thousands)
- ----------------------
Noninterest-bearing $16,343 $13,902
Interest-bearing checking accounts 4,459 4,202
Money market accounts 6,873 5,518
Savings 15,720 14,984
Time, under $100,000 25,443 22,998
Time, over $100,000 4,835 3,032
------- -------
Total Deposits $73,673 $64,636
======= =======
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts of capital and minimum ratios of
total and Tier 1 capital to risk-weighted assets. Management believes, as of
December 31, 1998, that Northeast Bancorp, Inc. and The First National Bank of
North East meet all capital adequacy requirements to which they are subject.
Northeast Bancorp, Inc.'s Tier 1 minimum capital ratio is 4.0% and its
minimum total capital ratio is 8.0%. Banks compute the total capital ratio by
adding the Tier 1 ratio to the Tier 2 ratio and dividing by the risk-adjusted
assets. Northeast Bancorp, Inc.'s Tier 1 risk-adjusted capital ratio was 12.9%,
and the total risk-adjusted capital ratio was 13.7%, both well above the
regulatory requirements. The risk-based capital ratio of The First National Bank
of North East also exceed regulatory requirements at December 31, 1998
The following table shows Northeast Bancorp, Inc.'s capital and leverage
ratios at December 31, 1998 and 1997:
December 31,
--------------------------
1998 1997
---- ----
Tier 1 Capital Ratio 12.90% 13.20%
Total Capital Ratio 13.74% 14.04%
Leverage Ratio 8.54% 9.07%
Results of Operations
Northeast Bancorp., Inc. reported consolidated net income at December 31,
1998 of $789,591, or 5.5% below the $835,402 that Northeast Bancorp, Inc.
reported at December 31, 1997. Basic and diluted earnings per share for 1998
were $2.32 compared to $2.38 for the same period in 1997. Net income decreased
for 1998 because operating expenses increased by $142,946 and the provision for
loan losses increased by $60,000.
-84-
<PAGE>
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 130 -- "Reporting Comprehensive Income."
Statement of Financial Accounting Standards No. 130 establishes standards to
provide prominent disclosure of comprehensive income items. Comprehensive income
consists of net unrealized gains on investment securities available for sale.
This statement was effective for fiscal years beginning after December 15, 1997.
This statement requires Northeast Bancorp to make additional disclosures in the
financial statements. The adoption of this statement had no effect on the
corporation's consolidated financial position or results of operation.
Comprehensive income for December 31, 1998 and 1997 was $67,693 and $7,344,
respectively.
Net Interest Income
The primary component of the corporation's net earnings is net interest
income, which is the difference between interest and fees earned on interest
earning assets and interest paid on deposits and borrowed funds. Net interest
income at December 31, 1998 of $3,633,275 was 5% higher than the $3,471,182
reported at December 31, 1997. This increase was the result of a 13% increase in
earnings assets during this period. Partially offsetting this increase was a
reduction in the net interest margin during this period of time, compared to the
same period in 1997. The yield on average earning assets decreased in 1998
compared to an increase in the interest rate paid on average deposits.
December 31,
------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Interest income $5,922 $5,483 $5,146
Interest expense 2,289 2,012 1,957
------ ------ ------
Net interest income $3,633 $3,471 $3,189
The rate-volume variance analysis set forth in the table below compares
changes in net interest income for the periods indicated by their rate and
volume components.
<TABLE>
<CAPTION>
1998 over (under) 1997 1997 over (under) 1996
due to changes in due to changes in
----------------- -----------------
Net Net
(Dollars in thousands) Change Rate Volume Change Rate Volume
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Investment securities $(69) $(114) $ 45 $(337) $(26) $(311)
Loans 508 (44) 552 673 63 610
Other assets -- -- -- -- -- --
---- ----- ----- ----- ---- -----
Total 439 (158) 597 336 37 299
Interest Expense:
Savings deposits and Time deposits 277 60 217 54 1 53
Borrowings and other interest-bearing liabilities -- -- -- -- -- --
Total 277 60 217 54 1 53
---- ----- ----- ----- ---- -----
Changes in net interest income $162 $(218) $(380) $ 282 $ 36 $ 246
==== ===== ===== ===== ==== =====
</TABLE>
-85-
<PAGE>
Other Income
Northeast Bancorp, Inc.'s other income grew 19.6% from $432,330 at December
31, 1997, to $517,216 at December 31, 1998. Northeast Bancorp, Inc. achieved the
increase by increasing ATM surcharges and introducing fee-generating debit cards
in 1998.
Other Operating Expenses
Northeast Bancorp, Inc.'s other operating expenses consist of costs related
to Northeast Bancorp, Inc.'s line of business which are not specifically
identified on Northeast Bancorp, Inc.'s income statement. Other operating
expenses consist of items such as the following:
o salaries and employee benefits;
o net occupancy expense;
o furniture and equipment expense;
o advertising and marketing;
o insurance premiums;
o postage, telephone, stationery and forms; and
o professional services.
Other operating expenses aggregated $2,787,356 in 1998, which was $142,946, or
5.4%, higher than in 1997. In general, the 1998 increase in other operating
expenses was consistent with industry-wide cost increases associated with the
items making up this category. Salary and employee benefit expenses did not
change in 1998, and occupancy and equipment expenses increased only modestly by
$16,860 and $16,958, respectively. Other operating expenses increased primarily
due to an increase in professional services expense.
-86-
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
1998 1997
------------ ------------
ASSETS
Cash and due from banks $ 4,627,042 $ 4,085,528
Federal funds sold 4,979,950 800,000
Securities available for sale 11,421,748 10,188,527
Loans (net of allowance for loan
losses of $451,387 and $412,079
in 1998 and 1997, respectively) 57,590,798 54,469,994
Accrued interest receivable 436,641 363,638
Bank premises and equipment 2,526,458 2,358,757
Other assets 206,817 188,610
------------ ------------
TOTAL ASSETS $ 81,789,454 $ 72,455,054
============ ============
LIABILITIES
Deposits
Demand $ 16,343,393 $ 13,901,562
Interest bearing 57,329,691 50,734,929
------------ ------------
Total deposits 73,673,084 64,636,491
Accounts payable and other
liabilities 444,521 619,777
------------ ------------
Total liabilities 74,117,605 65,256,268
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 400,000
shares authorized; 338,812 and
359,856 shares issued and outstanding
in 1998 and 1997, respectively 338,812 359,856
Additional paid in capital 874,432 910,308
Retained earnings 6,415,195 6,386,019
Net unrealized appreciation
(depreciation) on securities
available for sale 43,410 (24,283)
Treasury stock, -0- and 19,687 shares,
in 1998 and 1997, at cost -- (433,114)
------------ ------------
7,671,849 7,198,786
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 81,789,454 $ 72,455,054
============ ============
See notes to consolidated financial statements.
-87-
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1998 and 1997
1998 1997
---------- ----------
INTEREST INCOME
Loans including fees on loans $5,149,083 $4,640,583
Investment income 773,402 842,290
---------- ----------
5,922,485 5,482,873
INTEREST EXPENSE
Deposits 2,289,210 2,011,691
---------- ----------
NET INTEREST INCOME 3,633,275 3,471,182
PROVISION FOR LOAN LOSSES 60,000 --
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,573,275 3,471,182
OTHER INCOME INCLUDING SERVICE FEES 517,216 432,330
---------- ----------
NET INTEREST AND OTHER INCOME 4,090,491 3,903,512
OPERATING EXPENSES 2,787,356 2,644,410
---------- ----------
INCOME BEFORE INCOME TAXES 1,303,135 1,259,102
PROVISION FOR INCOME TAXES 513,544 423,700
---------- ----------
NET INCOME $ 789,591 $ 835,402
========== ==========
BASIC EARNINGS PER SHARE $ 2.32 $ 2.38
========== ==========
See notes to consolidated financial statements.
-88-
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Years Ended December 31, 1998 and 1997
1998 1997
-------- --------
NET INCOME $789,591 $835,402
OTHER COMPREHENSIVE INCOME
NET OF TAX
Unrealized holding gains
arising during the period 67,693 7,344
-------- --------
COMPREHENSIVE INCOME $857,284 $842,746
======== ========
See notes to consolidated financial statements.
-89-
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Stock Common Paid in Retained Appreciation
Outstanding Stock Capital Earnings (Depreciation)
------------ ------ ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 353,204 $ 353,204 $ 777,404 $ 5,919,154 $ (31,627)
NET INCOME -- -- -- 835,402 --
CASH DIVIDENDS PAID -- -- -- (228,981) --
STOCK DIVIDENDS 6,652 6,652 132,904 (139,556) --
ACQUISITION OF TREASURY STOCK -- -- -- -- --
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- -- -- -- 7,344
----------- ----------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1997 359,856 359,856 910,308 6,386,019 (24,283)
NET INCOME -- -- -- 789,591 --
CASH DIVIDENDS PAID -- -- -- (340,225) --
ISSUANCE OF COMMON STOCK 1,000 1,000 21,000 -- --
ACQUISITION OF TREASURY STOCK -- -- -- -- --
RETIREMENT OF TREASURY STOCK (22,044) (22,044) (56,876) (420,190) --
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- -- -- -- 67,693
----------- ----------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1998 338,812 $ 338,812 $ 874,432 $ 6,415,195 $ 43,410
=========== =========== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock Total
-------- -----
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 -- $ 7,018,135
NET INCOME -- 835,402
CASH DIVIDENDS PAID -- (228,981)
STOCK DIVIDENDS --
ACQUISITION OF TREASURY STOCK (433,114) (433,114)
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- 7,344
----------- -----------
BALANCE, DECEMBER 31, 1997 (433,114) 7,198,786
NET INCOME -- 789,591
CASH DIVIDENDS PAID -- (340,225)
ISSUANCE OF COMMON STOCK -- 22,000
ACQUISITION OF TREASURY STOCK (65,996) (65,996)
RETIREMENT OF TREASURY STOCK 499,110 --
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- 67,693
----------- -----------
BALANCE, DECEMBER 31, 1998 $ -- $ 7,671,849
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-90-
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998 and 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 789,591 $ 835,402
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 180,386 169,603
Provision for credit losses 60,000 --
Deferred loan origination fees 49,765 29,908
Amortization of discount on investments 12,155 3,220
Gain on disposal of equipment (3,020) --
(Increase) decrease in assets
Accrued interest receivable (73,003) 31,089
Other assets (18,207) 127,560
Increase (decrease) in liabilities
Accounts payable and other liabilities (175,256) 292,936
----------- -----------
Net cash provided by
operating activities 822,411 1,489,718
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of investment securities 5,146,921 4,640,283
Purchases of investment securities (6,393,054) (2,900)
(Increase) decrease in loans to customers (3,180,804) (8,878,382)
Purchase of property and equipment (348,087) (223,854)
Acquisition of treasury stock (65,996) (433,114)
Proceeds from sale of property and equipment 21,705 --
----------- -----------
Net cash (used for) investing
activities (4,819,315) (4,897,967)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand deposits 2,441,831 1,971,826
Increase (decrease) in time deposits 6,594,762 2,449,093
Dividends paid (340,225) (228,981)
Proceeds from the sale of common stock 22,000 --
----------- -----------
Net cash provided by financing
activities 8,718,368 4,191,938
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,721,464 783,689
CASH AND CASH EQUIVALENTS (INCLUDING FEDERAL
FUNDS SOLD), BEGINNING OF YEAR 4,885,528 4,101,839
----------- -----------
CASH AND CASH EQUIVALENTS (INCLUDING FEDERAL
FUNDS SOLD), END OF YEAR $ 9,606,992 $ 4,885,528
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Interest paid $ 2,265,739 $ 2,013,047
=========== ===========
Income taxes paid $ 534,801 $ 361,130
=========== ===========
See notes to consolidated financial statements.
-91-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northeast Bancorp, Inc. (the Company) is a bank holding company
organized under the General Corporation Law of Delaware. It holds all
of the outstanding stock of First National Bank of North East, an
organization operating under a national bank charter providing full
banking services at four branch offices strategically located
throughout Cecil County, Maryland. As a national bank, the bank is
subject to regulation of the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and
include, after elimination of material intercompany balances and
transactions, the accounts of the Company and the Bank. The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based
on management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual
results. Estimates that are particularly susceptible to change in the
near term relate to the determination of the allowance for loan losses.
Cash and Cash Equivalents
For the purpose of presentation in the statement of cash flows, cash
and cash equivalents are defined as those amounts included in the
balance sheet caption "Cash and Due from Banks" and "Federal Funds
Sold".
-92-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Securities
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115
addresses the accounting and reporting for investments in equity
securities that have readily determinable fair value and all
investments in debt securities. These investments are to be classified
into three categories as follows:
- held-to-maturity securities reported at amortized cost;
- trading securities reported at fair value with
unrealized gains and losses included in earnings;
- securities available-for-sale reported at fair value with
unrealized gains and losses reported as a separate component of
shareholders' equity (net of tax effect).
Marketable equity securities and debt securities are classified as
"available for sale" and are carried at fair value, with unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity.
Realized gains and losses and declines in value judged to be other than
temporary are included in earnings. The specific identification method
is utilized in determining the cost of a security that has been sold.
Premiums and discounts are amortized and accredit, respectively, as an
adjustment of the securities' yield using the interest method, adjusted
for the effects of prepayments on the underlying collateral.
Loans
Loans are generally stated at their outstanding unpaid principal
balance net of any deferred fees or costs on originated loans, and net
of any unamortized premiums or discounts on purchased loans. Interest
income is accrued and recognized as income based upon the principal
amount outstanding. Loan origination and commitment fees net of certain
direct origination costs are being deferred, and the net amounts are
being amortized over the contractual life of the loans as adjustments
of the yield.
-93-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans (Continued)
The accrual of interest income is discontinued when a reasonable doubt
exists as to the collectibility of interest or principal. A loan is
determined to be impaired when it is probable that a borrower will be
unable to pay all amounts due according to the contractual terms of the
loan agreement. Loans, including those determined impaired under
Statement No. 114 of the Financial Accounting Standards Board
"Accounting by Creditors for Impairment of a Loan" are generally placed
on nonaccrual status after they have become ninety days past due;
however, management may elect to continue the accrual when the
estimated net realizable value of the collateral is sufficient to cover
the principal balance and accrued interest. A nonaccrual loan is not
necessarily deemed to be uncollectible.
Allowance for Loan Losses
The allowance for loan losses has been established through provisions
for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance and subsequent
recoveries, if any, are credited to the allowance. The bank accounts
for certain loans under SFAS No. 114 and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosures".
Under these standards, the allowance for loan losses related to loans
that are identified for evaluation in accordance with SFAS No. 114 is
based on discounted cash flows using the loan's effective interest rate
at the date the loan is determined impaired or the fair value of the
collateral for collateral-dependent loans. For collateral- dependent
loans, management obtains appraisals for all significant properties.
The allowance is maintained at a level considered adequate to provide
for potential loan losses. In making this determination, management
takes into consideration the results of internal review procedures,
prior loan loss experience, an assessment of the effect of current and
anticipated future economic conditions on the loan portfolio, the
financial condition of the borrower and such other factors that, in
management's judgement, deserve consideration. The determination of the
adequacy of the allowance is inherently subjective, as it requires
material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible
to significant change.
-94-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed on the straight-line
basis over the estimated useful life of the asset. Improvements are
capitalized and depreciated over their useful lives. Gains or losses on
dispositions of property and equipment are included in income as
realized.
Other Real Estate Owned
Other real estate owned, which is reported as a component of other
assets in the Consolidated Statements of Financial Condition, consists
of assets that have been acquired through foreclosure or acceptance of
a deed in lieu of foreclosure and loans for which the bank has taken
possession of the collateral. These assets are recorded on the books of
the bank at the lower of their cost or estimated fair value less cost
to sell, adjusted periodically based upon current appraisals.
Income Taxes
The Company accounts for income taxes using the liability method under
which deferred tax assets and liabilities are determined based upon the
differences between financial statement carrying amounts and the tax
bases of exiting assets and liabilities. These temporary differences
are measured at prevailing enacted tax rates that will be in effect
when the differences are settled or realized.
Net Income Per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share". Statement No. 128 replaced the calculation of
primary and fully diluted net income per share. Accordingly, basic net
income per share is based on the weighted average number of shares
outstanding during each year. The average number of common shares
outstanding for the years ended December 31, 1998 and 1997 was 340,480
shares and 351,720 shares, respectively.
Off Balance Sheet Financial Instruments
In the ordinary course of business the Bank has entered into off
balance sheet financial instruments consisting of commitments to extend
credit, commitments under credit arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related
fees are incurred or received.
-95-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - RESTRICTED CASH BALANCES
The Bank, as a member of the Federal Reserve System, is required to
maintain average reserves with the Federal Reserve Bank against certain
outstanding deposit liabilities. The required reserves, which are
included in cash and due from banks, averaged $250,000 for both 1998
and 1997.
NOTE C - SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted Statement No. 115, of
The Financial Accounting Standards Board, "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 addresses the
accounting and reporting for certain investments in debt securities and
equity securities. It expands the use of fair value accounting for
those securities but retains the use of the amortized cost method for
investments in debt securities that the reporting enterprise has the
positive intent and ability to hold to maturity.
The carrying amounts of investment securities as shown in the
consolidated Statement of Financial Position and their approximate fair
values at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1998:
Securities available for sale
U.S. Government agencies $ 6,270,878 $ 29,294 $ -- $ 6,300,172
State and political sub-divisions 1,732,646 41,430 -- 1,774,076
Other investments 3,347,500 -- -- 3,347,500
----------- ----------- ----------- -----------
Total $11,351,024 $ 70,724 $ -- $11,421,748
=========== =========== =========== ===========
December 31, 1997:
Securities available for sale
U.S. Government agencies $ 7,771,635 $ 58,287 $ 116,519 $ 7,713,403
State and political sub-divisions 2,135,955 18,669 -- 2,154,624
Other investments 320,500 -- -- 320,500
----------- ----------- ----------- -----------
Total $10,228,090 $ 76,956 $ 116,519 $10,188,527
=========== =========== =========== ===========
</TABLE>
-96-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SECURITIES AVAILABLE FOR SALE (CONTINUED)
The scheduled maturities of securities available for sale at December
31, 1998 were as follows:
Securities
--------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 3,528,740 $ 3,529,557
Due from one year to five years 1,615,293 1,626,409
Due from five to ten years 6,206,991 6,265,782
----------- -----------
$11,351,024 $11,421,748
=========== ===========
Securities, carried at approximately $2,719,000 and $908,181 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and other purposes required or permitted by law.
NOTE D- LOANS
The Company's lending activities is focused primarily in Cecil County,
Maryland. The Company makes no foreign loans. At December 31, 1998 and
1997, the components of loans are as follows:
1998 1997
---- ----
Commercial, financial and
agricultural $10,094,875 $ 7,158,081
Real estate, construction 579,751 1,007,962
Real estate, mortgage 43,248,472 43,207,821
Installment loans to
individuals 4,060,526 3,475,136
----------- -----------
57,983,624 54,849,000
Net deferred fees 60,145 37,013
Unearned income (1,584) (3,940)
Allowance for loan losses (451,387) (412,079)
----------- -----------
$57,590,798 $54,469,994
=========== ===========
-97-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LOANS (CONTINUED)
At December 31, 1998 and 1997, the total recorded investment in
impaired loans, all of which had allowances determined in accordance
with SFAS No. 114 and No. 118 amounted to approximately $78,000 and
$26,000, respectively. The allowance for loan losses related to
impaired loans amounted to approximately $35,100 and $16,400 at
December 31, 1998 and 1997, respectively.
Loans to employees other than directors of the Company totaled $373,055
and $638,029 at December 31, 1998 and 1997, respectively.
NOTE E - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses:
1998 1997
---- ----
Balance, January 1, $ 412,079 $ 458,827
Charge-offs (42,191) (63,644)
Recoveries 21,499 16,896
Provision charged (credited)
to operations 60,000 --
----------- -----------
Balance, December 31 $ 451,387 $ 412,079
=========== ===========
NOTE F - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were as follows:
1998 1997
---- ----
Land $ 1,077,910 $ 1,077,910
Buildings 973,116 858,348
Leasehold improvements 743,442 743,442
Furniture and equipment 1,163,495 1,199,043
----------- -----------
3,957,963 3,878,743
Less: accumulated
depreciation 1,431,505 1,519,986
----------- -----------
$ 2,526,458 $ 2,358,757
=========== ===========
Depreciation expense for the years ended December 31, 1998 and 1997
amounted $180,386 and $169,603, respectively.
-98-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - DEPOSITS
Interest-bearing deposits are as follows at December 31:
1998 1997
---- ----
NOW accounts $ 4,458,601 $ 4,202,680
Savings accounts 15,720,134 14,983,688
HI-FI accounts 6,873,356 5,518,436
Certificates of deposit 30,217,384 25,972,439
Other 60,216 57,686
----------- -----------
$57,329,691 $50,734,929
=========== ===========
NOTE H - RELATED PARTY TRANSACTIONS
The Company, because of its highly regulated industry, believes it is
essential that legal counsel serve on its Board of Directors. In this
respect, the Bank paid legal service fees of $23,945 and $26,280 for
1998 and 1997, respectively, to the law firm of which one of its
Directors is a partner.
At December 31, 1998 and 1997, loans of $1,300,033 and $1,193,576,
respectively, were outstanding to directors of the Company. Such loans
were made in the ordinary course of business on substantially the same
terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other
customers, and did not, in the opinion of management involve more than
normal credit risk or present other unfavorable features. New loans to
such related parties amounted to $373,972 and repayments to $170,068.
-99-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - RETIREMENT PLANS
Effective January 1, 1996, the Company adopted an Employee Stock
Ownership Plan with 401(k) provisions (KSOP). This plan is a complete
amendment and restatement of the Company's 401(k) Profit Sharing and
its Money Purchase Plan. Each employee who was a participant in the
401(k) Profit Sharing Plan on January 1, 1996 automatically becomes a
participant in the KSOP. Thereafter, an employee becomes a participant
at age eighteen and completes one thousand hours of service per plan
year. Under the Plan, the Company will make basic contributions, will
match fifty percent of employee salary reduction contributions (up to
six percent of compensation) and may make additional discretionary
contributions. Employees may make salary reduction contributions to
fifteen percent of compensation not-to-exceed $9,500. Employer
contributions vest systematically over six years.
Total contributions to Employee Retirement Plans for the years ended
December 31, 1998 and 1997 amounted to $81,555 and $81,907,
respectively.
NOTE J - INCOME TAXES
Effective January 1, 1993, the Company adopted Statement No. 109 of The
Financial Accounting Standards Board, "Accounting for Income Taxes."
The adoption of Statement No. 109 changes the Company's method of
accounting for income taxes from the deferred method to a liability
method. Under the deferred method, the Company deferred the past tax
effects of timing differences between financial reporting and taxable
income. As explained in Note A, the liability method requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the reported
amounts of assets and liabilities and their tax bases.
-100-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (CONTINUED)
Net deferred tax assets and liabilities have been classified on the
consolidated statements of condition as other assets. They consist of
the following components as of December 31:
1998 1997
---- ----
Deferred tax assets $ 154,310 $ 115,279
Deferred tax liabilities (63,280) (67,700)
----------- -----------
Net Deferred tax asset $ 91,030 $ 47,579
=========== ===========
The tax effects of significant items that give rise to deferred taxes
are:
1998 1997
---- ----
Securities available for sale $ 27,300 $ 15,279
Depreciation (28,070) (58,900)
Allowance for credit losses 15,200 100,000
Deferred loan fees 23,400) (8,800)
----------- -----------
Net deferred tax asset $ 91,030 $ 47,579
=========== ===========
The provision for income taxes charged to operations for the years
ended December 31, 1998 and 1997 consists of the following:
1998 1997
---- ----
Taxes currently payable
Federal $ 442,318 $ 348,321
State 98,000 80,000
Deferred tax (26,774) (4,621)
----------- -----------
$ 513,544 $ 423,700
=========== ===========
-101-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Bank is a party to financial instruments with off balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist of commitments to
extend credit.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. Commitments to extend credit are as follows as of
December 31:
1998 1997
---- ----
Mortgages $ 532,582 $ 746,037
Lines of credit 2,903,893 3,709,917
Letters of credit 1,353,251 1,733,827
Revolving lines of credit 2,437,589 1,617,656
----------- -----------
$ 7,227,315 $ 7,807,437
=========== ===========
NOTE L - CONCENTRATION OF CREDIT
All loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Bank's market area.
Substantially, all such customers are depositors of the Bank.
Investments in state and municipal securities also involve governmental
entities within the Bank's market area. The concentrations of credit by
type of loan are set forth in Note D. The distribution of commitments
to extend credit approximates the distribution of loans outstanding.
Commercial and standby letters of credit were granted primarily to
commercial borrowers. At December 31, 1998 the Bank, as a matter of
policy, does not extend credit to any single borrower or group of
related borrowers in excess of $1,037,412.
-102-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements by
federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory as well as additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification also are
subject to qualitative judgements by the regulators about components
risk weighing and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios of
total and Tier I capital to risk weighted assets, and Tier I capital to
assets. Management believes that, as of December 31, 1998 and 1997, the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, capital ratios were categorized as
well-capitalized as set forth:
To Be Well
Capitalized Under
December 31 December 31 Prompt Corrective
1998 1997 Action Provisions
----------- ----------- -----------------
Tier I 12.90% 13.20% 6.00%
Total Capital 13.74% 14.04% 10.00%
Leverage 8.54% 9.07% 5.00%
The primary source of funds for payment of dividends by the Company
historically has been dividends received from the bank. The ability to
pay dividends is limited by Delaware law, which requires capital
surplus at least equal to the par value of outstanding capital stock.
During the past several years the Company reacquired 22,044 shares of
its common stock at an aggregate price of $499,110. The transactions to
reacquire common shares had been accounted for as treasury stock. In
December 1998, after obtaining approval of its Board of Directors, the
Company retired its treasury stock.
-103-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - OPERATING EXPENSES
The following is the detail of operating expenses for the years ended
December 31, 1998 and 1997.
1998 1997
---- ----
Salaries and employee benefits $ 1,413,779 $ 1,413,780
Occupancy 268,285 251,425
Equipment 242,732 225,774
Other operating expenses 862,560 753,431
--------- ----------
$ 2,787,356 $ 2,644,410
=========== ===========
NOTE O - PARENT COMPANY INFORMATION
The statement of financial condition, statements of income and retained
earnings, and cash flows as of and for the years ended December 31,
1998 and 1997 for Northeast Bancorp, Inc. are reflected below:
BALANCE SHEET
1998 1997
---- ----
ASSETS
Cash $ 84,017 $ 265,149
Prepaid expenses 14,628 19,320
Investment in subsidiary 6,959,491 6,457,379
Real estate and equipment 628,815 635,599
----------- -----------
$ 7,686,951 $ 7,377,447
========== ==========
LIABILITIES
Accounts payable and other
accrued expense $ 15,102 $ 178,661
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 338,812 359,856
Capital surplus 874,432 910,308
Retained earnings 6,415,195 6,386,019
Treasury stock -- (433,114)
Net unrealized depreciation
on securities available for
sale, net of tax 43,410 (24,283)
----------- -----------
7,671,849 7,198,786
----------- -----------
$ 7,686,951 $ 7,377,447
=========== ===========
-104-
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - PARENT COMPANY INFORMATION (CONTINUED)
STATEMENT OF INCOME AND RETAINED EARNINGS
1998 1997
---- ----
DIVIDENDS FROM SUBSIDIARY $ 410,082 $ 713,856
RENTAL AND OTHER INCOME 60,478 57,960
----------- -----------
470,560 771,816
EXPENSES 115,387 74,765
----------- -----------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF
SUBSIDIARY 355,173 697,051
EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARY 434,418 138,351
----------- -----------
NET INCOME 789,591 835,402
RETAINED EARNINGS -
BEGINNING OF YEAR 6,386,019 5,919,154
RETIREMENT OF TREASURY STOCK (420,190) --
DIVIDENDS (340,225) (368,537)
----------- -----------
RETAINED EARNINGS -
END OF YEAR $ 6,415,195 $6,386,019
=========== ===========
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 789,591 $ 835,402
Depreciation 6,775 7,608
Investment in subsidiary (434,418) (138,351)
Change in prepaid expenses 4,702 (18,758)
Change in accounts payable (163,560) 168,330
----------- -----------
Net cash provided by
operating activities 203,090 854,231
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of treasury stock (65,996) (433,114)
----------- -----------
Net cash (used for) investing
activities (65,996) (433,114)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends paid (340,225) (228,981)
Proceeds from sale of
common stock 22,000 --
----------- -----------
Net cash (used for) financing
activities (318,225) (228,981)
----------- -----------
INCREASE (DECREASE) IN CASH (181,132) 192,136
CASH, BEGINNING OF YEAR 265,149 73,013
----------- -----------
CASH, END OF YEAR $ 84,017 $ 265,149
=========== ===========
-105-
<PAGE>
ADJOURNMENT OF THE MEETING
If there are not enough votes cast at the meeting to adopt the agreement
and approve the merger, the Northeast Bancorp, Inc. Board of Directors intends
to adjourn the meeting to a later date to permit further solicitation of votes
in favor of the agreement. The affirmative vote of a majority of the shares
present at the meeting is required to adoption of the agreement and approve the
merger and the agreement. At the meeting, Northeast Bancorp, Inc. will announce
the place and date to which the meeting would be adjourned. Under the Northeast
Bancorp, Inc. Bylaws, it is not be necessary to give any notice of the time and
place of the adjourned meeting other than the announcement at the meeting,
unless the adjournment is for more than thirty days, or if after the
adjournment, a new record date is fixed for the adjourned meeting.
The Northeast Bancorp, Inc. Board of Directors recommends that you vote
"FOR" the proposal to adjourn the meeting if necessary to permit further
solicitation of proxies to approve the agreement.
EXPERTS
The consolidated financial statements of Sterling Financial Corporation and
its subsidiaries as of December 31, 1998, and 1997, and for each of the years in
the three-year period ended December 31, 1998, have been incorporated by
reference herein and in the registration statement in reliance upon the report
of Trout, Ebersole, Groff, LLP, independent certified public accountants, and
upon the authority of the firm as experts in accounting and auditing.
The financial statements of Northeast Bancorp, Inc. as of December 31,
1998, 1997 and 1996, included in this proxy statement/prospectus have been
audited by Whisman, Grygiel, and Giordano, independent public accountants, as
indicated in its reports with respect thereto, and are included herein in
reliance upon the authority of the firm as experts in accounting and auditing.
LEGAL OPINIONS
The legality of the shares of Sterling Financial Corporation common stock
to be issued in connection with the merger and certain other legal matters
relating to the transaction will be passed upon by the law firm of Shumaker
Williams, P.C., Camp Hill, Pennsylvania, Special Counsel to Sterling Financial
Corporation.
OTHER MATTERS
Northeast Bancorp, Inc.'s Board of Directors knows of no other matters,
other than those discussed in this proxy statement/prospectus, that will be
presented at the meeting. However, if any other matters are properly brought
before the meeting, and any adjournment thereof, any proxy given pursuant to
this solicitation will be voted in accordance with the recommendations of the
management of Northeast Bancorp, Inc.
AVAILABLE INFORMATION
-106-
<PAGE>
Sterling Financial Corporation is subject to the informational requirements
of the Securities Exchange Act of 1934, and, accordingly, files reports, proxy
statements and other information with the Securities and Exchange Commission.
The reports, proxy statements and other information filed with the Commission
are available for inspection and copying at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at World Trade Center, Suite 1300, New York, New York 10048. Copies of these
documents may also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Sterling Financial Corporation is an electronic filer with
the Commission. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission Web site is:
http://www.sec.gov.
You may also inspect materials and other information concerning Sterling
Financial Corporation at the offices of the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C., because Sterling
Financial Corporation common stock is authorized for quotation on the Nasdaq
National Market System.
Northeast Bancorp, Inc. is not subject to the information requirements of
the Exchange Act and Northeast Bancorp, Inc. common stock is not authorized for
quotation on the Nasdaq or on any stock exchange, but is traded on a limited
basis in the over-the-counter market and is quoted and transactions are reported
on the OTC Electronic Bulletin Board.
This proxy statement/prospectus forms a part of a Registration Statement
that Sterling Financial Corporation has filed with the Commission under the
Securities Act of 1933, with respect to the Sterling Financial Corporation
common stock that Sterling Financial Corporation intends to issue in the merger.
This proxy statement/prospectus does not contain all of the information in the
Registration Statement. The Commission's rules and regulations permit omission
of certain information. You may inspect and copy the Registration Statement,
including any amendments and exhibits at the locations mentioned above.
Statements contained in this proxy statement/prospectus as to the contents of
any contract or other document are not necessarily complete. We refer you to the
copy of the contract or other document, filed as an exhibit to the Registration
Statement. We also qualify our discussions by these documents.
All information in this proxy statement/prospectus that relates to Sterling
Financial Corporation has been provided or verified by Sterling Financial
Corporation. All information which relates to Northeast Bancorp, Inc. has been
provided or verified by Northeast Bancorp, Inc.
-107-
<PAGE>
NORTHEAST BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION F-3
CONSOLIDATED STATEMENTS OF INCOME F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME F-5
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Northeast Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Northeast Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Northeast Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Whisman, Grygiel & Giordano, P.A.
January 15, 1999
Wilmington, Delaware
F-2
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
1998 1997
------------ ------------
ASSETS
Cash and due from banks $ 4,627,042 $ 4,085,528
Federal funds sold 4,979,950 800,000
Securities available for sale 11,421,748 10,188,527
Loans (net of allowance for loan
losses of $451,387 and $412,079
in 1998 and 1997, respectively) 57,590,798 54,469,994
Accrued interest receivable 436,641 363,638
Bank premises and equipment 2,526,458 2,358,757
Other assets 206,817 188,610
------------ ------------
TOTAL ASSETS $ 81,789,454 $ 72,455,054
============ ============
LIABILITIES
Deposits
Demand $ 16,343,393 $ 13,901,562
Interest bearing 57,329,691 50,734,929
------------ ------------
Total deposits 73,673,084 64,636,491
Accounts payable and other
liabilities 444,521 619,777
------------ ------------
Total liabilities 74,117,605 65,256,268
STOCKHOLDERS' EQUITY
Common stock, $1 par value; 400,000
shares authorized; 338,812 and
359,856 shares issued and outstanding
in 1998 and 1997, respectively 338,812 359,856
Additional paid in capital 874,432 910,308
Retained earnings 6,415,195 6,386,019
Net unrealized appreciation
(depreciation) on securities
available for sale 43,410 (24,283)
Treasury stock, -0- and 19,687 shares,
in 1998 and 1997, at cost -- (433,114)
------------ ------------
7,671,849 7,198,786
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 81,789,454 $ 72,455,054
============ ============
See notes to consolidated financial statements.
F-3
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1998 and 1997
1998 1997
---------- ----------
INTEREST INCOME
Loans including fees on loans $5,149,083 $4,640,583
Investment income 773,402 842,290
---------- ----------
5,922,485 5,482,873
INTEREST EXPENSE
Deposits 2,289,210 2,011,691
---------- ----------
NET INTEREST INCOME 3,633,275 3,471,182
PROVISION FOR LOAN LOSSES 60,000 --
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,573,275 3,471,182
OTHER INCOME INCLUDING SERVICE FEES 517,216 432,330
---------- ----------
NET INTEREST AND OTHER INCOME 4,090,491 3,903,512
OPERATING EXPENSES 2,787,356 2,644,410
---------- ----------
INCOME BEFORE INCOME TAXES 1,303,135 1,259,102
PROVISION FOR INCOME TAXES 513,544 423,700
---------- ----------
NET INCOME $ 789,591 $ 835,402
========== ==========
BASIC EARNINGS PER SHARE $ 2.32 $ 2.38
========== ==========
See notes to consolidated financial statements.
F-4
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Years Ended December 31, 1998 and 1997
1998 1997
-------- --------
NET INCOME $789,591 $835,402
OTHER COMPREHENSIVE INCOME
NET OF TAX
Unrealized holding gains
arising during the period 67,693 7,344
-------- --------
COMPREHENSIVE INCOME $857,284 $842,746
======== ========
See notes to consolidated financial statements.
F-5
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Stock Common Paid in Retained Appreciation
Outstanding Stock Capital Earnings (Depreciation)
------------ ------ ----------- -------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 353,204 $ 353,204 $ 777,404 $ 5,919,154 $ (31,627)
NET INCOME -- -- -- 835,402 --
CASH DIVIDENDS PAID -- -- -- (228,981) --
STOCK DIVIDENDS 6,652 6,652 132,904 (139,556) --
ACQUISITION OF TREASURY STOCK -- -- -- -- --
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- -- -- -- 7,344
----------- ----------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1997 359,856 359,856 910,308 6,386,019 (24,283)
NET INCOME -- -- -- 789,591 --
CASH DIVIDENDS PAID -- -- -- (340,225) --
ISSUANCE OF COMMON STOCK 1,000 1,000 21,000 -- --
ACQUISITION OF TREASURY STOCK -- -- -- -- --
RETIREMENT OF TREASURY STOCK (22,044) (22,044) (56,876) (420,190) --
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- -- -- -- 67,693
----------- ----------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1998 338,812 $ 338,812 $ 874,432 $ 6,415,195 $ 43,410
=========== =========== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock Total
-------- -----
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 -- $ 7,018,135
NET INCOME -- 835,402
CASH DIVIDENDS PAID -- (228,981)
STOCK DIVIDENDS --
ACQUISITION OF TREASURY STOCK (433,114) (433,114)
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- 7,344
----------- -----------
BALANCE, DECEMBER 31, 1997 (433,114) 7,198,786
NET INCOME -- 789,591
CASH DIVIDENDS PAID -- (340,225)
ISSUANCE OF COMMON STOCK -- 22,000
ACQUISITION OF TREASURY STOCK (65,996) (65,996)
RETIREMENT OF TREASURY STOCK 499,110 --
NET CHANGE IN UNREALIZED APPRECIATION
ON SECURITIES AVAILABLE FOR SALE -- 67,693
----------- -----------
BALANCE, DECEMBER 31, 1998 $ -- $ 7,671,849
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NORTHEAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998 and 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 789,591 $ 835,402
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 180,386 169,603
Provision for credit losses 60,000 --
Deferred loan origination fees 49,765 29,908
Amortization of discount on investments 12,155 3,220
Gain on disposal of equipment (3,020) --
(Increase) decrease in assets
Accrued interest receivable (73,003) 31,089
Other assets (18,207) 127,560
Increase (decrease) in liabilities
Accounts payable and other liabilities (175,256) 292,936
----------- -----------
Net cash provided by
operating activities 822,411 1,489,718
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of investment securities 5,146,921 4,640,283
Purchases of investment securities (6,393,054) (2,900)
(Increase) decrease in loans to customers (3,180,804) (8,878,382)
Purchase of property and equipment (348,087) (223,854)
Acquisition of treasury stock (65,996) (433,114)
Proceeds from sale of property and equipment 21,705 --
----------- -----------
Net cash (used for) investing
activities (4,819,315) (4,897,967)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in demand deposits 2,441,831 1,971,826
Increase (decrease) in time deposits 6,594,762 2,449,093
Dividends paid (340,225) (228,981)
Proceeds from the sale of common stock 22,000 --
----------- -----------
Net cash provided by financing
activities 8,718,368 4,191,938
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,721,464 783,689
CASH AND CASH EQUIVALENTS (INCLUDING FEDERAL
FUNDS SOLD), BEGINNING OF YEAR 4,885,528 4,101,839
----------- -----------
CASH AND CASH EQUIVALENTS (INCLUDING FEDERAL
FUNDS SOLD), END OF YEAR $ 9,606,992 $ 4,885,528
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Interest paid $ 2,265,739 $ 2,013,047
=========== ===========
Income taxes paid $ 534,801 $ 361,130
=========== ===========
See notes to consolidated financial statements.
F-7
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northeast Bancorp, Inc. (the Company) is a bank holding company
organized under the General Corporation Law of Delaware. It holds all
of the outstanding stock of First National Bank of North East, an
organization operating under a national bank charter providing full
banking services at four branch offices strategically located
throughout Cecil County, Maryland. As a national bank, the bank is
subject to regulation of the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and
include, after elimination of material intercompany balances and
transactions, the accounts of the Company and the Bank. The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based
on management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual
results. Estimates that are particularly susceptible to change in the
near term relate to the determination of the allowance for loan losses.
Cash and Cash Equivalents
For the purpose of presentation in the statement of cash flows, cash
and cash equivalents are defined as those amounts included in the
balance sheet caption "Cash and Due from Banks" and "Federal Funds
Sold".
F-8
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Securities
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115
addresses the accounting and reporting for investments in equity
securities that have readily determinable fair value and all
investments in debt securities. These investments are to be classified
into three categories as follows:
- held-to-maturity securities reported at amortized cost;
- trading securities reported at fair value with
unrealized gains and losses included in earnings;
- securities available-for-sale reported at fair value with
unrealized gains and losses reported as a separate component of
shareholders' equity (net of tax effect).
Marketable equity securities and debt securities are classified as
"available for sale" and are carried at fair value, with unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity.
Realized gains and losses and declines in value judged to be other than
temporary are included in earnings. The specific identification method
is utilized in determining the cost of a security that has been sold.
Premiums and discounts are amortized and accredit, respectively, as an
adjustment of the securities' yield using the interest method, adjusted
for the effects of prepayments on the underlying collateral.
Loans
Loans are generally stated at their outstanding unpaid principal
balance net of any deferred fees or costs on originated loans, and net
of any unamortized premiums or discounts on purchased loans. Interest
income is accrued and recognized as income based upon the principal
amount outstanding. Loan origination and commitment fees net of certain
direct origination costs are being deferred, and the net amounts are
being amortized over the contractual life of the loans as adjustments
of the yield.
F-9
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans (Continued)
The accrual of interest income is discontinued when a reasonable doubt
exists as to the collectibility of interest or principal. A loan is
determined to be impaired when it is probable that a borrower will be
unable to pay all amounts due according to the contractual terms of the
loan agreement. Loans, including those determined impaired under
Statement No. 114 of the Financial Accounting Standards Board
"Accounting by Creditors for Impairment of a Loan" are generally placed
on nonaccrual status after they have become ninety days past due;
however, management may elect to continue the accrual when the
estimated net realizable value of the collateral is sufficient to cover
the principal balance and accrued interest. A nonaccrual loan is not
necessarily deemed to be uncollectible.
Allowance for Loan Losses
The allowance for loan losses has been established through provisions
for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance and subsequent
recoveries, if any, are credited to the allowance. The bank accounts
for certain loans under SFAS No. 114 and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosures".
Under these standards, the allowance for loan losses related to loans
that are identified for evaluation in accordance with SFAS No. 114 is
based on discounted cash flows using the loan's effective interest rate
at the date the loan is determined impaired or the fair value of the
collateral for collateral-dependent loans. For collateral- dependent
loans, management obtains appraisals for all significant properties.
The allowance is maintained at a level considered adequate to provide
for potential loan losses. In making this determination, management
takes into consideration the results of internal review procedures,
prior loan loss experience, an assessment of the effect of current and
anticipated future economic conditions on the loan portfolio, the
financial condition of the borrower and such other factors that, in
management's judgement, deserve consideration. The determination of the
adequacy of the allowance is inherently subjective, as it requires
material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible
to significant change.
F-10
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed on the straight-line
basis over the estimated useful life of the asset. Improvements are
capitalized and depreciated over their useful lives. Gains or losses on
dispositions of property and equipment are included in income as
realized.
Other Real Estate Owned
Other real estate owned, which is reported as a component of other
assets in the Consolidated Statements of Financial Condition, consists
of assets that have been acquired through foreclosure or acceptance of
a deed in lieu of foreclosure and loans for which the bank has taken
possession of the collateral. These assets are recorded on the books of
the bank at the lower of their cost or estimated fair value less cost
to sell, adjusted periodically based upon current appraisals.
Income Taxes
The Company accounts for income taxes using the liability method under
which deferred tax assets and liabilities are determined based upon the
differences between financial statement carrying amounts and the tax
bases of exiting assets and liabilities. These temporary differences
are measured at prevailing enacted tax rates that will be in effect
when the differences are settled or realized.
Net Income Per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share". Statement No. 128 replaced the calculation of
primary and fully diluted net income per share. Accordingly, basic net
income per share is based on the weighted average number of shares
outstanding during each year. The average number of common shares
outstanding for the years ended December 31, 1998 and 1997 was 340,480
shares and 351,720 shares, respectively.
Off Balance Sheet Financial Instruments
In the ordinary course of business the Bank has entered into off
balance sheet financial instruments consisting of commitments to extend
credit, commitments under credit arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related
fees are incurred or received.
F-11
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - RESTRICTED CASH BALANCES
The Bank, as a member of the Federal Reserve System, is required to
maintain average reserves with the Federal Reserve Bank against certain
outstanding deposit liabilities. The required reserves, which are
included in cash and due from banks, averaged $250,000 for both 1998
and 1997.
NOTE C - SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted Statement No. 115, of
The Financial Accounting Standards Board, "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 addresses the
accounting and reporting for certain investments in debt securities and
equity securities. It expands the use of fair value accounting for
those securities but retains the use of the amortized cost method for
investments in debt securities that the reporting enterprise has the
positive intent and ability to hold to maturity.
The carrying amounts of investment securities as shown in the
consolidated Statement of Financial Position and their approximate fair
values at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1998:
Securities available for sale
U.S. Government agencies $ 6,270,878 $ 29,294 $ -- $ 6,300,172
State and political sub-divisions 1,732,646 41,430 -- 1,774,076
Other investments 3,347,500 -- -- 3,347,500
----------- ----------- ----------- -----------
Total $11,351,024 $ 70,724 $ -- $11,421,748
=========== =========== =========== ===========
December 31, 1997:
Securities available for sale
U.S. Government agencies $ 7,771,635 $ 58,287 $ 116,519 $ 7,713,403
State and political sub-divisions 2,135,955 18,669 -- 2,154,624
Other investments 320,500 -- -- 320,500
----------- ----------- ----------- -----------
Total $10,228,090 $ 76,956 $ 116,519 $10,188,527
=========== =========== =========== ===========
</TABLE>
F-12
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SECURITIES AVAILABLE FOR SALE (CONTINUED)
The scheduled maturities of securities available for sale at December
31, 1998 were as follows:
Securities
--------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 3,528,740 $ 3,529,557
Due from one year to five years 1,615,293 1,626,409
Due from five to ten years 6,206,991 6,265,782
----------- -----------
$11,351,024 $11,421,748
=========== ===========
Securities, carried at approximately $2,719,000 and $908,181 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and other purposes required or permitted by law.
NOTE D- LOANS
The Company's lending activities is focused primarily in Cecil County,
Maryland. The Company makes no foreign loans. At December 31, 1998 and
1997, the components of loans are as follows:
1998 1997
---- ----
Commercial, financial and
agricultural $10,094,875 $ 7,158,081
Real estate, construction 579,751 1,007,962
Real estate, mortgage 43,248,472 43,207,821
Installment loans to
individuals 4,060,526 3,475,136
----------- -----------
57,983,624 54,849,000
Net deferred fees 60,145 37,013
Unearned income (1,584) (3,940)
Allowance for loan losses (451,387) (412,079)
----------- -----------
$57,590,798 $54,469,994
=========== ===========
F-13
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LOANS (CONTINUED)
At December 31, 1998 and 1997, the total recorded investment in
impaired loans, all of which had allowances determined in accordance
with SFAS No. 114 and No. 118 amounted to approximately $78,000 and
$26,000, respectively. The allowance for loan losses related to
impaired loans amounted to approximately $35,100 and $16,400 at
December 31, 1998 and 1997, respectively.
Loans to employees other than directors of the Company totaled $373,055
and $638,029 at December 31, 1998 and 1997, respectively.
NOTE E - ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses:
1998 1997
---- ----
Balance, January 1, $ 412,079 $ 458,827
Charge-offs (42,191) (63,644)
Recoveries 21,499 16,896
Provision charged (credited)
to operations 60,000 --
----------- -----------
Balance, December 31 $ 451,387 $ 412,079
=========== ===========
NOTE F - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were as follows:
1998 1997
---- ----
Land $ 1,077,910 $ 1,077,910
Buildings 973,116 858,348
Leasehold improvements 743,442 743,442
Furniture and equipment 1,163,495 1,199,043
----------- -----------
3,957,963 3,878,743
Less: accumulated
depreciation 1,431,505 1,519,986
----------- -----------
$ 2,526,458 $ 2,358,757
=========== ===========
Depreciation expense for the years ended December 31, 1998 and 1997
amounted $180,386 and $169,603, respectively.
F-14
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - DEPOSITS
Interest-bearing deposits are as follows at December 31:
1998 1997
---- ----
NOW accounts $ 4,458,601 $ 4,202,680
Savings accounts 15,720,134 14,983,688
HI-FI accounts 6,873,356 5,518,436
Certificates of deposit 30,217,384 25,972,439
Other 60,216 57,686
----------- -----------
$57,329,691 $50,734,929
=========== ===========
NOTE H - RELATED PARTY TRANSACTIONS
The Company, because of its highly regulated industry, believes it is
essential that legal counsel serve on its Board of Directors. In this
respect, the Bank paid legal service fees of $23,945 and $26,280 for
1998 and 1997, respectively, to the law firm of which one of its
Directors is a partner.
At December 31, 1998 and 1997, loans of $1,300,033 and $1,193,576,
respectively, were outstanding to directors of the Company. Such loans
were made in the ordinary course of business on substantially the same
terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other
customers, and did not, in the opinion of management involve more than
normal credit risk or present other unfavorable features. New loans to
such related parties amounted to $373,972 and repayments to $170,068.
F-15
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - RETIREMENT PLANS
Effective January 1, 1996, the Company adopted an Employee Stock
Ownership Plan with 401(k) provisions (KSOP). This plan is a complete
amendment and restatement of the Company's 401(k) Profit Sharing and
its Money Purchase Plan. Each employee who was a participant in the
401(k) Profit Sharing Plan on January 1, 1996 automatically becomes a
participant in the KSOP. Thereafter, an employee becomes a participant
at age eighteen and completes one thousand hours of service per plan
year. Under the Plan, the Company will make basic contributions, will
match fifty percent of employee salary reduction contributions (up to
six percent of compensation) and may make additional discretionary
contributions. Employees may make salary reduction contributions to
fifteen percent of compensation not-to-exceed $9,500. Employer
contributions vest systematically over six years.
Total contributions to Employee Retirement Plans for the years ended
December 31, 1998 and 1997 amounted to $81,555 and $81,907,
respectively.
NOTE J - INCOME TAXES
Effective January 1, 1993, the Company adopted Statement No. 109 of The
Financial Accounting Standards Board, "Accounting for Income Taxes."
The adoption of Statement No. 109 changes the Company's method of
accounting for income taxes from the deferred method to a liability
method. Under the deferred method, the Company deferred the past tax
effects of timing differences between financial reporting and taxable
income. As explained in Note A, the liability method requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the reported
amounts of assets and liabilities and their tax bases.
F-16
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (CONTINUED)
Net deferred tax assets and liabilities have been classified on the
consolidated statements of condition as other assets. They consist of
the following components as of December 31:
1998 1997
---- ----
Deferred tax assets $ 154,310 $ 115,279
Deferred tax liabilities (63,280) (67,700)
----------- -----------
Net Deferred tax asset $ 91,030 $ 47,579
=========== ===========
The tax effects of significant items that give rise to deferred taxes
are:
1998 1997
---- ----
Securities available for sale $ 27,300 $ 15,279
Depreciation (28,070) (58,900)
Allowance for credit losses 15,200 100,000
Deferred loan fees 23,400) (8,800)
----------- -----------
Net deferred tax asset $ 91,030 $ 47,579
=========== ===========
The provision for income taxes charged to operations for the years
ended December 31, 1998 and 1997 consists of the following:
1998 1997
---- ----
Taxes currently payable
Federal $ 442,318 $ 348,321
State 98,000 80,000
Deferred tax (26,774) (4,621)
----------- -----------
$ 513,544 $ 423,700
=========== ===========
F-17
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Bank is a party to financial instruments with off balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist of commitments to
extend credit.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. Commitments to extend credit are as follows as of
December 31:
1998 1997
---- ----
Mortgages $ 532,582 $ 746,037
Lines of credit 2,903,893 3,709,917
Letters of credit 1,353,251 1,733,827
Revolving lines of credit 2,437,589 1,617,656
----------- -----------
$ 7,227,315 $ 7,807,437
=========== ===========
NOTE L - CONCENTRATION OF CREDIT
All loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Bank's market area.
Substantially, all such customers are depositors of the Bank.
Investments in state and municipal securities also involve governmental
entities within the Bank's market area. The concentrations of credit by
type of loan are set forth in Note D. The distribution of commitments
to extend credit approximates the distribution of loans outstanding.
Commercial and standby letters of credit were granted primarily to
commercial borrowers. At December 31, 1998 the Bank, as a matter of
policy, does not extend credit to any single borrower or group of
related borrowers in excess of $1,037,412.
F-18
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements by
federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory as well as additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification also are
subject to qualitative judgements by the regulators about components
risk weighing and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios of
total and Tier I capital to risk weighted assets, and Tier I capital to
assets. Management believes that, as of December 31, 1998 and 1997, the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, capital ratios were categorized as
well-capitalized as set forth:
To Be Well
Capitalized Under
December 31 December 31 Prompt Corrective
1998 1997 Action Provisions
----------- ----------- -----------------
Tier I 12.90% 13.20% 6.00%
Total Capital 13.74% 14.04% 10.00%
Leverage 8.54% 9.07% 5.00%
The primary source of funds for payment of dividends by the Company
historically has been dividends received from the bank. The ability to
pay dividends is limited by Delaware law, which requires capital
surplus at least equal to the par value of outstanding capital stock.
During the past several years the Company reacquired 22,044 shares of
its common stock at an aggregate price of $499,110. The transactions to
reacquire common shares had been accounted for as treasury stock. In
December 1998, after obtaining approval of its Board of Directors, the
Company retired its treasury stock.
F-19
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - OPERATING EXPENSES
The following is the detail of operating expenses for the years ended
December 31, 1998 and 1997.
1998 1997
---- ----
Salaries and employee benefits $ 1,413,779 $ 1,413,780
Occupancy 268,285 251,425
Equipment 242,732 225,774
Other operating expenses 862,560 753,431
--------- ----------
$ 2,787,356 $ 2,644,410
=========== ===========
NOTE O - PARENT COMPANY INFORMATION
The statement of financial condition, statements of income and retained
earnings, and cash flows as of and for the years ended December 31,
1998 and 1997 for Northeast Bancorp, Inc. are reflected below:
BALANCE SHEET
1998 1997
---- ----
ASSETS
Cash $ 84,017 $ 265,149
Prepaid expenses 14,628 19,320
Investment in subsidiary 6,959,491 6,457,379
Real estate and equipment 628,815 635,599
----------- -----------
$ 7,686,951 $ 7,377,447
========== ==========
LIABILITIES
Accounts payable and other
accrued expense $ 15,102 $ 178,661
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 338,812 359,856
Capital surplus 874,432 910,308
Retained earnings 6,415,195 6,386,019
Treasury stock -- (433,114)
Net unrealized depreciation
on securities available for
sale, net of tax 43,410 (24,283)
----------- -----------
7,671,849 7,198,786
----------- -----------
$ 7,686,951 $ 7,377,447
=========== ===========
F-20
<PAGE>
NORTHEAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - PARENT COMPANY INFORMATION (CONTINUED)
STATEMENT OF INCOME AND RETAINED EARNINGS
1998 1997
---- ----
DIVIDENDS FROM SUBSIDIARY $ 410,082 $ 713,856
RENTAL AND OTHER INCOME 60,478 57,960
----------- -----------
470,560 771,816
EXPENSES 115,387 74,765
----------- -----------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF
SUBSIDIARY 355,173 697,051
EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARY 434,418 138,351
----------- -----------
NET INCOME 789,591 835,402
RETAINED EARNINGS -
BEGINNING OF YEAR 6,386,019 5,919,154
RETIREMENT OF TREASURY STOCK (420,190) --
DIVIDENDS (340,225) (368,537)
----------- -----------
RETAINED EARNINGS -
END OF YEAR $ 6,415,195 $6,386,019
=========== ===========
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 789,591 $ 835,402
Depreciation 6,775 7,608
Investment in subsidiary (434,418) (138,351)
Change in prepaid expenses 4,702 (18,758)
Change in accounts payable (163,560) 168,330
----------- -----------
Net cash provided by
operating activities 203,090 854,231
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of treasury stock (65,996) (433,114)
----------- -----------
Net cash (used for) investing
activities (65,996) (433,114)
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends paid (340,225) (228,981)
Proceeds from sale of
common stock 22,000 --
----------- -----------
Net cash (used for) financing
activities (318,225) (228,981)
----------- -----------
INCREASE (DECREASE) IN CASH (181,132) 192,136
CASH, BEGINNING OF YEAR 265,149 73,013
----------- -----------
CASH, END OF YEAR $ 84,017 $ 265,149
=========== ===========
F-21
<PAGE>
Annex A
Agreement and Plan of Reorganization
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF THE TENTH DAY OF FEBRUARY, 1999
BY AND AMONG
STERLING FINANCIAL CORPORATION,
STERLING FINANCIAL INTERIM ACQUISITION CORPORATION
NORTHEAST BANCORP, INC.
AND
FIRST NATIONAL BANK OF NORTH EAST
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
ARTICLE I
THE PLAN OF MERGER
SECTION 1.1 The Merger, Closing: Effective Time ....................................2
ARTICLE II
CONVERSION OF SHARES AND
EXCHANGE OF STOCK CERTIFICATES
SECTION 2.1 Conversion of Shares....................................................3
SECTION 2.2 Exchange of Stock Certificates..........................................5
SECTION 2.3 Other Matters...........................................................7
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Northeast Bancorp
and First National..................................................8
SECTION 3.2 Representations and Warranties of Sterling.............................25
SECTION 3.3 Representations and Warranties of Sterling AC..........................31
ARTICLE IV
COVENANTS OF NORTHEAST BANCORP AND FIRST NATIONAL
SECTION 4.1 Conduct of Business....................................................32
SECTION 4.2 Best Efforts...........................................................35
SECTION 4.3 Access to Properties and Records.......................................36
SECTION 4.4 Subsequent Financial Statements........................................36
SECTION 4.5 Board and Committee Minutes............................................36
SECTION 4.6 Update Schedule........................................................36
SECTION 4.7 Notice.................................................................36
SECTION 4.8 Other Proposals........................................................36
SECTION 4.9 Dividends..............................................................38
SECTION 4.10 Core Deposits..........................................................38
SECTION 4.11 Affiliate Letters......................................................38
SECTION 4.12 No Purchases or Sales of Sterling Common Stock
During Price Determination Period...............................39
SECTION 4.13 Accounting Treatment...................................................39
SECTION 4.14 Press Releases and Public Announcements................................39
SECTION 4.15 Phase I Environmental Audit............................................39
SECTION 4.16 KSOP...................................................................39
</TABLE>
<PAGE>
<TABLE>
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Page(s)
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<S> <C> <C>
ARTICLE V
COVENANTS OF STERLING AND STERLING AC
SECTION 5.1 Reasonable Best Efforts................................................40
SECTION 5.2 Access to Properties and Records.......................................41
SECTION 5.3 Subsequent Financial Statements........................................41
SECTION 5.4 Update Schedule........................................................41
SECTION 5.5 Notice.................................................................41
SECTION 5.6 No Purchase or Sales of Sterling Common Stock
During Price Determination Period.................................41
SECTION 5.7 Publicity..............................................................42
SECTION 5.8 KSOP...................................................................42
ARTICLE VI
CONDITIONS TO CONSUMMATION
SECTION 6.1 Common Conditions......................................................42
SECTION 6.2 Conditions to Obligations of Sterling and Sterling AC..................44
SECTION 6.3 Conditions to the Obligations of Northeast Bancorp
and First National ...............................................46
ARTICLE VII
TERMINATION
SECTION 7.1 Termination............................................................47
SECTION 7.2 Effect of Termination..................................................49
SECTION 7.3 Expenses...............................................................49
ARTICLE VIII
POST MERGER AGREEMENTS
SECTION 8.1 Employees. ...........................................................50
SECTION 8.2 Officers...............................................................51
SECTION 8.3 Directors..............................................................51
SECTION 8.4 First National Board of Directors......................................51
SECTION 8.5 Benefits...............................................................52
SECTION 8.6 Director and Officer Liability Insurance...............................52
SECTION 8.7 Certain Matters........................................................52
ARTICLE IX
OTHER MATTERS
SECTION 9.1 Certain Definitions; interpretation....................................53
SECTION 9.2 Survival...............................................................54
SECTION 9.3 Parties in Interest....................................................54
SECTION 9.4 Captions...............................................................54
SECTION 9.5 Severability...........................................................54
SECTION 9.6 Access; Confidentiality................................................54
SECTION 9.7 Waiver and Amendment...................................................55
SECTION 9.8 Counterparts...........................................................55
SECTION 9.9 Governing Law..........................................................55
SECTION 9.10 Expenses...............................................................55
SECTION 9.11 Notices................................................................55
SECTION 9.12 Entire Agreement: Etc..................................................57
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION dated as of the tenth day of
February, 1999 (this "Plan" or this "Agreement"), is entered into by and among
Sterling Financial Corporation, a Pennsylvania corporation ("Sterling"),
Sterling Financial Interim Acquisition Corporation, a Delaware corporation,
("Sterling AC"), Northeast Bancorp, Inc., a Delaware corporation ("Northeast
Bancorp"), and First National Bank of North East, a national banking
association ("First National").
RECITALS:
WHEREAS, Sterling is a Pennsylvania bank holding company; and
WHEREAS, Sterling AC is a wholly-owned subsidiary of Sterling created
solely to facilitate the transactions described in this Agreement; and
WHEREAS, Northeast Bancorp is a Delaware corporation and a Maryland
bank holding company; and
WHEREAS, First National is the wholly-owned national bank subsidiary of
Northeast Bancorp; and
WHEREAS, the boards of directors of Sterling, Sterling AC and Northeast
Bancorp have each determined that it is in the best interests of their
respective shareholders for Northeast Bancorp to merge with and into Sterling AC
(the "Merger") as a result of which First National will become a wholly-owned,
second tier subsidiary of Sterling, all upon the terms and subject to the
conditions set forth herein; and
WHEREAS, the parties desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement and to
set forth the conditions to the Merger; and
WHEREAS, Northeast Bancorp and Sterling AC desire to merge in the
manner provided for herein and to adopt this Agreement as a plan of
reorganization and to consummate such plan in accordance with the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of their mutual promises and
obligations hereunder, the parties hereto, intending to be legally bound hereby,
adopt and make this Agreement and prescribe the terms and conditions hereof and
the manner and basis of carrying it into effect, which shall be as follows:
1
<PAGE>
ARTICLE I
THE PLAN OF MERGER
SECTION 1.1 The Merger; Closing; Effective Time.
(a) Subject to the terms and conditions of this Agreement and in
accordance with the applicable laws of the State of Delaware,
at the Effective Time (as defined in Section 1.1(c)),
Northeast Bancorp shall be merged with and into Sterling AC
and the separate corporate existence of Northeast Bancorp
shall thereupon cease. Sterling AC shall be the surviving
corporation in the Merger (sometimes hereinafter referred to
as the "Surviving Corporation") and shall continue to be
governed by the laws of the State of Delaware and shall be a
registered bank holding company under the Bank Holding Company
Act of 1956, as amended, and the separate corporate existence
of Sterling AC with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger.
The name of the Surviving Corporation shall be "Northeast
Bancorp, Inc." The Merger shall have the effects specified in
the Delaware General Corporation Law, as amended (the
"DGCL"').
(b) The closing of the Merger (the "Closing") shall take place at
such place and time and on such date, following three (3)
business days' notice to Northeast Bancorp, as shall be agreed
upon by all parties, which date shall not be later than the
30th business day after (i) the last approval of required
governmental authorities is granted and any related waiting
periods expire, (ii) the lifting, discharge or dismissal of
any stay of any such governmental approval or of any
injunction against the Merger and (iii) all shareholder
approvals required by the parties hereunder are received.
(c) Immediately following the Closing, and provided that this
Agreement has not been terminated or abandoned pursuant to
Article VII hereof, the parties shall file a certificate of
merger (the "Certificate of Merger") executed in accordance
with the relevant provisions of the DGCL and shall make all
other filings or recordings required under the DGCL. The
Merger shall become effective at such time as the Certificate
of Merger is duly filed with the Delaware Secretary of State,
or at such subsequent time as Sterling AC and Northeast
Bancorp shall agree and is specified in the Certificate of
Merger (the time the Merger becomes effective being herein
referred to as the "Effective Time"). The "Effective Date"
when used herein means the day on which the Effective Time for
the Merger occurs.
(d) From and after the Effective Time, the certificate of
incorporation and bylaws of Sterling AC in effect immediately
prior to the Effective Time shall be amended as set forth in
Annex 1.1 hereto and, as so amended, shall constitute the
certificate of incorporation and bylaws of the Surviving
Corporation. At the Effective Time, the directors and officers
of Sterling AC immediately prior to the Effective Time shall
be and become the directors and officers of the Surviving
Corporation with such additions or deletions as Sterling, in
its sole discretion, may determine.
2
<PAGE>
ARTICLE II
CONVERSION OF SHARES AND
EXCHANGE OF STOCK CERTIFICATES
SECTION 2.1 Conversion of Shares.
At the Effective Time the shares of Northeast Bancorp Common Stock
(defined below) then outstanding shall be converted into the right to receive
shares of Sterling Common Stock (defined below), as follows:
(a) General. Subject to the provisions of this Article II, each
share of Northeast Bancorp Common Stock, par value $1.00 per
share ("Northeast Bancorp Common Stock") issued and
outstanding immediately before the Effective Time shall, be
converted into and become, without any action on the part of
the holder thereof, the right to receive 2 shares of Sterling
Common Stock, par value, $5.00 per share ("Sterling Common
Stock") (the "Exchange Ratio"). Subject to the provisions of
Section 2.1(b), the aggregate number of shares of Sterling
Common Stock to be issued under this Agreement shall not
exceed 677,624 shares and the Exchange Ratio shall be 2.
(b) Anti-dilution Provision. In the event that Sterling shall at
any time before the Effective Time: (i) declare or pay a
dividend in shares of Sterling Common Stock, (ii) combine the
outstanding shares of Sterling Common Stock into a smaller
number of shares, (iii) subdivide the outstanding shares of
Sterling Common Stock into a greater number of shares, or (iv)
reclassify the shares of Sterling stock, then the Exchange
Ratio shall be proportionately adjusted accordingly.
(c) No Fractional Shares. No fractional shares of Sterling Common
Stock, and no scrip or certificates therefor, shall be issued
in connection with the Merger. In lieu of the issuance of any
fractional share to which he would otherwise be entitled, each
former shareholder of Northeast Bancorp shall receive in cash
an amount equal to the fair market value of his fractional
interest, which fair market value shall be determined by
multiplying such fraction by the Closing Market Price (as
defined in Section 2.1(d) of this Article II).
(d) Closing Market Price. For purposes of this Agreement, the
Closing Market Price shall be the arithmetic average of the
per share closing prices for Sterling Common Stock for the
twenty (20) trading days immediately preceding the date which
is five (5) business days before the Effective Date, as
reported on the National Market System of the National
Association of Securities Dealers Automated Quotation System
(NASDAQ/NMS), the foregoing twenty (20) trading days being
hereinafter sometimes referred to as the "Price Determination
Period". (For example, if March 31, 1999 were to be the
Effective Date, then the Price Determination Period would be
February 24, 25, 26, March 1, 2, 3, 4, 5, 8, 9, 10, 11, 12,
15, 16, 17, 18, 19, 22, 23 1999.) In the event that NASDAQ/NMS
shall fail to report a closing price for Sterling Common Stock
for any trading day during the Price Determination Period,
then the closing price for that day shall be equal to the
average of the closing bid
3
<PAGE>
price and the closing asked price as quoted on NASDAQ/NMS for
that day. In the event that NASDAQ/NMS shall fail to report a
closing price, closing bid price and closing asked price,
respectively, for Sterling Common Stock for any trading day
during the Price Determination Period, then the closing price
for that day shall be equal to the average of the closing bid
prices and the closing asked prices as quoted: (i) by two
market makers in Sterling Common Stock listed in Sterling's
1998 Annual Report to Shareholders; or (ii) in the event that
neither of these firms is then making a market in Sterling
Common Stock, by two brokerage firms then making a market in
Sterling Common Stock to be selected by Sterling and approved
by the Board of Directors of Northeast Bancorp which approval
shall not be unreasonably withheld.
(e) Northeast Bancorp Treasury Stock. Notwithstanding Section
2.1(a) hereof, each share of Northeast Bancorp Common Stock
held by Sterling or any subsidiary of Sterling, with the
exception of shares of Northeast Bancorp Common Stock held in
a fiduciary capacity, and each share issued and held in the
treasury of or owned by First National or Northeast Bancorp as
of the Effective Time if any, shall be canceled, and no cash,
stock, or other property shall be delivered in exchange
therefor.
(f) Sterling Common Stock.
(i) Each share of Sterling Common Stock issued and
outstanding immediately prior to the Effective Time,
shall, on and after the Effective Time, continue to
be issued and outstanding as an identical share of
Sterling Common Stock.
(ii) Each share of Sterling Common Stock issued and held
in the treasury of Sterling as of the Effective Time,
if any, shall, on and after the Effective Time,
continue to be issued and held in the treasury of
Sterling.
(g) Sterling AC Common Stock. Each share of Sterling AC Common
Stock issued and outstanding immediately prior to the
Effective Time, shall, at the Effective Time, continue to be
issued and outstanding as an identical share of Sterling AC
Common Stock.
(h) Dissenting Holders. Notwithstanding anything in this Agreement
to the contrary, shares of Northeast Bancorp Common Stock that
are issued and outstanding immediately prior to the Effective
Time and are held by stockholders who are entitled to
appraisal rights in respect thereof under Section 262 of the
DGCL and who have
(i) not voted such shares in favor of the adoption of
this Agreement or otherwise waived or lost their
right to demand appraisal of such shares and
(ii) properly demanded appraisal of such shares in
accordance with Section 262 of the DGCL (the
"Dissenting Shares")
4
<PAGE>
shall not be converted as described in Section 2.1(a) above,
but shall become the right to receive such consideration as
may be determined to be due to such stockholders pursuant to
Section 262 of the DGCL ("Appraisal Consideration"). If, after
the Effective Time, any such stockholder withdraws his demand
for appraisal or fails to perfect or otherwise loses his right
of appraisal, in any case pursuant to the DGCL, his Dissenting
Shares shall be deemed to be converted as of the Effective
Time into the right to receive shares of Sterling Common Stock
(without any interest thereon) as provided in Section 2.1(a)
hereof. Promptly upon receiving any demands for appraisal,
withdrawals of demand for appraisal or any other instrument
served pursuant to Section 262 of the DGCL, Northeast Bancorp
shall so notify Sterling and shall give Sterling the
opportunity to participate in and direct all negotiations and
proceedings with respect to any such appraisal demands.
Northeast Bancorp shall not, without the prior written consent
of Sterling, make any payment with respect to, settle, offer
to settle or otherwise negotiate, any such appraisal demands.
SECTION 2.2 Exchange of Stock Certificates.
Northeast Bancorp Common Stock certificates shall be exchanged for
Sterling Common Stock certificates in accordance with the following procedures:
(a) Exchange Agent. The transfer agent of Sterling shall act as
exchange agent (the "Exchange Agent") to receive Northeast
Bancorp Common Stock certificates from the holders thereof and
to exchange such stock certificates for Sterling Common Stock
certificates and (if applicable) to pay cash for fractional
shares of Northeast Bancorp Common Stock pursuant to Section
2.1(c) above. The Exchange Agent shall, on or promptly after
the Effective Date, mail to each former shareholder of
Northeast Bancorp a notice specifying the procedures to be
followed in surrendering such shareholder's Northeast Bancorp
Common Stock certificates.
(b) Surrender of Certificates. As promptly as possible after
receipt of the Exchange Agent's notice, each former
shareholder of Northeast Bancorp shall surrender his Northeast
Bancorp Common Stock certificates to the Exchange Agent;
provided, that if any former shareholder of Northeast Bancorp
shall be unable to surrender his Northeast Bancorp Common
Stock certificates due to loss or mutilation thereof, he may
make a constructive surrender by following procedures
comparable to those customarily used by Sterling for issuing
replacement certificates to Sterling shareholders whose
Sterling Common Stock certificates have been lost or
mutilated. Upon receiving a proper actual or constructive
surrender of Northeast Bancorp Common Stock certificates from
a former Northeast Bancorp shareholder, the Exchange Agent
shall issue to such shareholder, in exchange therefor, a
Sterling Common Stock certificate representing the whole
number of shares of Sterling Common Stock into which such
shareholder's shares of Northeast Bancorp Common Stock have
been converted in accordance with this Article II, together
with a check in the amount of any cash to which such
shareholder is entitled, pursuant to Article II of this
Agreement.
5
<PAGE>
(c) Dividends and Other Distributions. Any dividend or other
distribution declared or made after the Effective Time with a
record date after the Effective Time in respect of Sterling
Common Stock issuable hereunder to the holder of a Northeast
Bancorp Common Stock certificate not then surrendered pursuant
to Section 2.2(b) hereof shall be paid to the Exchange Agent
(or, if payable after December 31, 2000, shall be set aside
and retained by Sterling), and no such dividend or other
distribution payable in respect of such Sterling Common Stock
shall be paid to the holder of such outstanding Northeast
Bancorp Common Stock certificate until such certificate shall
have been so surrendered to the Exchange Agent (or, if after
December 31, 2000, to Sterling). Upon surrender of such
outstanding Northeast Bancorp Common Stock certificate, there
shall be paid by the Exchange Agent (or, if after December 31,
2000, by Sterling) to or at the direction of the holder the
Sterling Common Stock certificate(s) issued in exchange
therefor the amount (without interest thereon) of all
dividends or distributions which have theretofore been paid to
the Exchange Agent (or, if after December 31, 2000, set aside
and retained by Sterling) with respect to the number of shares
of Sterling Common Stock represented by the Sterling Common
Stock certificate(s) issued upon such surrender and exchange.
(d) Termination of Exchange Fund. Any portion of the exchange fund
held by the Exchange Agent that remains undistributed to the
former stockholders of Northeast Bancorp after December 31,
2000, shall be delivered to Sterling, and any former
stockholders of Northeast Bancorp who have not theretofore
complied with this Section 2.2 shall thereafter look only to
Sterling for payment of their claims for Sterling Common
Stock, any cash in lieu of fractional shares of Sterling
Common Stock and any dividends or distributions with respect
to Sterling Common Stock.
(e) Expenses of Share Surrender and Exchange. All costs and
expenses associated with the foregoing surrender and exchange
procedure shall be borne by Sterling. Notwithstanding the
foregoing, no party hereto will be liable to any holder of
Northeast Bancorp Common Stock for any amount paid in good
faith to a public official or agency pursuant to any
applicable abandoned property, escheat or similar law.
(f) Exchange Procedures. Each certificate for shares of Northeast
Bancorp Common Stock delivered for exchange under this Article
II must be endorsed in blank by the registered holder thereof
or be accompanied by a power of attorney to transfer such
shares endorsed in blank by such holder. If more than one
certificate is surrendered at one time and in one transmittal
package for the same shareholder account, the number of whole
shares of Sterling Common Stock for which certificates will be
issued pursuant to this Article II will be computed on the
basis of the aggregate number of shares represented by the
certificates so surrendered. If shares of Northeast Bancorp
Common Stock or payments of cash are to be issued or made to a
person other than the one in whose name the surrendered
certificate is registered, the certificate so surrendered must
be properly endorsed in blank, with signature(s) guaranteed,
or otherwise in proper form for transfer, and the person to
whom certificates for shares of Sterling Common Stock is to be
issued or to whom cash is
6
<PAGE>
to be paid shall pay any transfer or other taxes required by
reason of such issuance or payment to a person other than the
registered holder of the certificate for shares of Northeast
Bancorp Common Stock which are surrendered.
(g) Closing of Stock Transfer Books; Cancellation of Northeast
Bancorp Certificates. Upon the Effective Date, the stock
transfer books for Northeast Bancorp Common Stock will be
closed and no further transfers of shares of Northeast Bancorp
Common Stock will thereafter be made or recognized. All
certificates for shares of Northeast Bancorp Common Stock
surrendered pursuant to this Article II will be canceled by
Sterling.
(h) Rights Evidenced by Certificate. Until surrendered, each
certificate theretofore evidencing shares of Northeast Bancorp
Common Stock will, from and after the Effective Date, evidence
solely the right to receive certificates for shares of
Sterling Common Stock pursuant to Section 2.2(f) hereof and
any cash payable pursuant to this Article II. No interest will
accrue or be payable in respect of dividends or cash otherwise
payable under this Section 2.2 upon surrender of certificates
for shares of Sterling Common Stock. Notwithstanding the
foregoing, no party hereto will be liable to any holder of
Northeast Bancorp Common Stock for any amount paid in good
faith to a public official or agency pursuant to any
applicable abandoned property, escheat or similar law.
SECTION 2.3 Other Matters.
(a) Notwithstanding any term of this Agreement to the contrary,
Sterling may, in its discretion at any time prior to the
Effective Time, designate a direct or indirect wholly-owned
subsidiary to substitute for Sterling AC as the constituent
corporation in the Merger by written notice to Northeast
Bancorp so long as the exercise of this right does not have a
Material Adverse Effect on the interests of the Northeast
Bancorp shareholders or cause a Material delay in, or
otherwise materially adversely affect consummation of the
transactions contemplated herein. Sterling shall also have the
right to cause Sterling AC, or such substitute, to be the
Surviving Corporation of the Merger described at Section
1.1(a), so long as the exercise of such right does not have a
material adverse effect on the interests of the Northeast
Bancorp shareholders or cause a material delay in, or
otherwise adversely affect, consummation of the transactions
contemplated herein; if such right is exercised, this
Agreement shall be deemed to be modified to accord such
change.
(b) Nothing set forth in this Agreement or any Exhibit hereto
shall be construed:
(i) to preclude Sterling or Sterling AC from acquiring or
assuming, or to limit in any way the right of
Sterling or Sterling AC to acquire or assume, prior
to or following the Effective Time, the stock, assets
or liabilities of any other
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financial services institution or other corporation
or entity, whether by issuance or exchange of
Sterling Common Stock, or otherwise;
(ii) to preclude Sterling or Sterling AC from issuing, or
to limit in any way the right of either of them to
issue, prior to or following the Effective Date,
Sterling Common Stock, Sterling Preferred Stock or
other securities;
(iii) to preclude Sterling from granting options at any
time with respect to Sterling Common Stock, Sterling
Preferred Stock or other securities;
(iv) to preclude option holders of Sterling from
exercising options at any time with respect to
Sterling Common Stock, Sterling Preferred Stock or
other securities; or
(v) to preclude Sterling or Sterling AC from taking, or
to limit in any way the right of either of them to
take, any other action not expressly and specifically
prohibited by the terms of this Agreement; provided,
however, that in the event Sterling or Sterling AC
desires to (A) take any action described in Section
2.3(b)(i) above, Sterling shall give Northeast
Bancorp written notice thereof prior to taking any
such action, or (B)(1) sell all or substantially all
of its assets, or (2) merge or consolidate with or
into, or convert to, any other person or entity and a
majority of the members of the Board of Directors of
the legal entity resulting from or existing after any
such transaction, or the Board of Directors of such
entity's parent corporation, if any, are not former
members of the Board of Directors of Sterling,
Sterling shall notify Northeast Bancorp
simultaneously with taking any such action, and
Northeast Bancorp and First National shall have the
right, in their sole discretion, to terminate this
Agreement without cost, expense or liability or their
part to any other party.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Northeast Bancorp and First
National.
Northeast Bancorp and First National represent and warrant to Sterling
and Sterling AC (and the word "it" in this Article III refers to Northeast
Bancorp, First National and each subsidiary of either) that, as of even date
herewith and except as specifically disclosed in the Annex of disclosure
schedules included herewith, as follows:
(a) Corporate Organization and Qualification. Northeast Bancorp is
a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and is in
good standing as a foreign corporation in each jurisdiction
where the properties owned, leased or operated, or the
business conducted, by Northeast Bancorp requires such
qualification, except for such failure to qualify or be in
such
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good standing which, when taken together with all other such
failures, would not have a Material Adverse Effect on
Northeast Bancorp and its subsidiaries, taken as a whole.
Northeast Bancorp is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended. Northeast
Bancorp owns directly all of the issued and outstanding shares
of capital stock of First National. First National is a
national banking association duly organized, validly existing
and in good standing under the laws of the United States of
America. Northeast Bancorp and First National each have the
requisite corporate and other power and authority (including
all federal, state, local and foreign governmental
authorizations) to carry on their respective businesses as now
being conducted and to own its properties and assets.
Northeast Bancorp has made available to Sterling a complete
and correct copy of the certificate of incorporation and
bylaws of Northeast Bancorp, and First National has made
available to Sterling and Sterling AC a complete and correct
copy of the charter and bylaws of First National and such
charter or articles, as applicable, and such bylaws are in
full force and effect as of the date hereof.
(b) Authorized Capital. The authorized capital stock of Northeast
Bancorp consists of a) 750,000 shares of Northeast Bancorp
Common Stock, of which 338,812 shares were issued and
outstanding as of the date of this Agreement and no shares
were issued and held as treasury shares as of the date of this
Agreement, and b) 50,000 shares of series preferred stock, par
value $1.00 per share, of which no shares have been issued or
are outstanding as of the date of this Agreement and no shares
are issued and held as treasury shares as of the date of this
Agreement. The authorized capital stock of First National
consists of 371,800 shares of common stock, $1.00 par value
per share, of which 371,800 shares of common stock were issued
and outstanding as of the date of this Agreement; all of these
are held by Northeast Bancorp. Except as otherwise provided in
Annex 3.1(b), all of the outstanding shares of capital stock
of Northeast Bancorp and First National have been duly
authorized and are validly issued, fully paid and
nonassessable. Neither Northeast Bancorp nor First National
has any shares of capital stock reserved for issuance. Neither
Northeast Bancorp nor First National has any outstanding
bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or
exercisable for securities having the right to vote) with
shareholders on any matter. The shares of First National's
common stock owned by Northeast Bancorp are owned free and
clear of all liens, pledges, security interests, claims or
other encumbrances. The outstanding shares of capital stock of
Northeast Bancorp and First National have not been issued in
violation of any preemptive rights. Except as set forth in
Annex 3.1 (b) and in Annex 3.1(m), there are no outstanding
subscriptions, options, warrants, rights, convertible
securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other
securities of Northeast Bancorp and First National. Except as
set forth in Annex 3.1(b), after the Effective Time, Northeast
Bancorp will have no obligation which is being assumed by
Sterling or Sterling AC which will result in any obligation to
issue, transfer or sell any shares of capital stock pursuant
to any Employee Plan (as defined in Section 3.1 (m)). All
shares of Northeast Bancorp Common Stock have been issued in
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compliance with the registration provisions of the Securities
Act of 1933, as amended.
(c) Subsidiaries. The only subsidiary of Northeast Bancorp is
First National. First National has no subsidiaries. First
National makes no use of fictitious names in the conduct of
its business.
(d) Corporate Authority. Subject only to approval of this
Agreement by the holders of Northeast Bancorp Common Stock in
accordance with the DGCL and Northeast Bancorp's certificate
of incorporation and bylaws, and, subject to the regulatory
approvals specified in Section 6.1(b) hereof, Northeast
Bancorp and First National each has the requisite corporate
power and authority, and legal right, and has taken all
corporate action necessary in order to execute and deliver
this Agreement and to consummate the transactions applicable
to either Northeast Bancorp or First National contemplated
hereby. This Agreement has been duly and validly executed and
delivered by Northeast Bancorp and First National and,
assuming due authorization, execution and delivery by Sterling
and Sterling AC, and receipt of required regulatory approvals,
constitutes the valid and binding obligations of Northeast
Bancorp and First National enforceable against each, in
accordance with its terms, except to the extent enforcement is
limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights or principles of equity
(regardless of whether considered and applied in a proceeding
in equity or at law).
(e) No Violations. The execution, delivery and performance of this
Agreement by it does not, and the consummation of the
transactions contemplated hereby by it will not, constitute
(i) subject to receipt of the required regulatory approvals
specified in Section 6.1(b), a breach or violation of, or a
default under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, to which it (or
any of its respective properties) is subject, which breach,
violation or default would have a Material Adverse Effect on
it, or enable any person to enjoin the Merger, (ii) a breach
or violation of, or a default under Northeast Bancorp's
certificate of incorporation, the charter of First National,
or the bylaws of either of them, or (iii) except as disclosed
in Annex 3.1(e), a breach or violation of, or a default under
(or an event which with due notice or lapse of time or both
would constitute a default under), or result in the
termination of, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the properties or
assets of it under any of the terms, conditions or provisions
of any note, bond, indenture, deed of trust, loan agreement or
other agreement, instrument or obligation to which it is a
party, or to which any of its respective properties or assets
may be bound, or affected, except for any of the foregoing
that, individually or in the aggregate, would not have a
Material Adverse Effect on it or enable any person to enjoin
the Merger; and the consummation of the transactions
contemplated hereby, will not require any approval, consent or
waiver under any such law, rule, regulation, judgment, decree,
order, governmental permit or license or the approval, consent
or waiver of any other party to any such agreement, indenture
or instrument, other than (w) all required approvals, consents
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and waivers of governmental authorities, (x) the approval of
its shareholders referred to in Section 6.1(a), (y) any such
approval, consent or waiver that already has been obtained,
and (z) any other approvals, consents or waivers, the absence
of which, individually or in the aggregate, would not result
in a Material Adverse Effect on it or enable any person to
enjoin the Merger.
(f) Reports.
(i) Northeast Bancorp's consolidated statement of
financial condition as of December 31, 1997
previously provided to Sterling and each statement of
financial condition provided after the date hereof to
Sterling (including in each case any related notes
and schedules) as required by Section 4.4 hereof
fairly presents or will fairly present the financial
position of it as of its date and each of the
statements of income and shareholders' equity and of
cash flows provided therewith (including in each case
any related notes and schedules), fairly presents or
will fairly present the results of operations,
shareholders' equity and cash flows, as the case may
be, of it for the periods set forth therein (subject,
in the case of unaudited interim statements, to
normal year-end audit adjustments that are not
material in amount or effect), in each case in
accordance with generally accepted accounting
principles consistently applied during the periods
involved, except as maybe noted therein.
(ii) It has timely filed all material reports,
registrations and statements, together with any
amendments required to be made with respect thereto,
that it was required to file since January 1, 1997
with (A) the Office of the Comptroller of the
Currency (the "OCC"), (B) the Federal Deposit
Insurance Corporation (the "FDIC"), (C) the Board of
Governors of the Federal Reserve System (the
"Board"), (D) any state banking department or
commission or other regulatory authority ("State
Regulator" and collectively with the OCC, the FDIC,
and the Board, the "Northeast Bancorp Regulatory
Agencies"), and (F) any other regulatory authority,
and all other material reports and statements
required to be filed by it since January 1, 1997
including, without limitation, any report or
statement required to be filed pursuant to the laws,
rules or regulations of the United States or any
Northeast Bancorp Regulatory Agency, and has paid all
fees and assessments due and payable in connection
therewith, and no such report, registration or
statement contains any material misstatement or
omission or is otherwise in material noncompliance
with any law, regulation or requirement.
(g) Absence of Certain Changes or Events. Except as provided in
Annex 3.1(g), since January 1, 1998 to the date hereof, it has
not incurred any material liability, except in the ordinary
course of its business consistent with past practice, nor has
there been any change in the financial condition, properties,
assets, business, results of operations or prospects of it
which, individually or in the aggregate, has had, or might
reasonably be expected to result in, a Material Adverse Effect
on it.
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(h) Taxes. Its federal income tax returns have been examined and
closed or otherwise closed by operation of law through 1990.
Except as provided in Annex 3.1(h), all federal, state, local
and foreign tax returns required to be filed by it or on its
behalf, have been timely filed, or requests for extensions
have been timely filed and any such extension shall have been
granted and not have expired, and, to the knowledge of
management, all such filed returns are complete and accurate
in all material respects. All taxes shown on such returns, and
all taxes required to be shown on returns for which extensions
have been granted, have been paid in full or adequate
provision has been made for any such taxes on its balance
sheet (in accordance with generally accepted accounting
principles) other than those taxes which are being contested
in appropriate forums in proceedings which are being
diligently pursued. Adequate provision has been made on its
balance sheet (in accordance with generally accepted
accounting principles consistently applied) for all federal,
state, local and foreign tax liabilities for periods
subsequent to those for which returns have been filed. There
is no audit examination, deficiency, or refund litigation
pending or, to the knowledge of Northeast Bancorp or First
National, threatened, with respect to any taxes that could
result in a determination that would have a Material Adverse
Effect on it. All taxes, interest, additions and penalties due
with respect to completed and settled examinations or
concluded litigation relating to it have been paid in full or
adequate provision has been made for any such taxes on its
balance sheet (in accordance with generally accepted
accounting principles). It has not executed an extension or
waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect.
(i) Litigation and Liabilities. Except as set forth in Annex
3.1(i), there are no (i) civil, criminal or administrative
actions, suits, claims, hearings, investigations or
proceedings before any court, governmental agency or otherwise
pending or, to the knowledge of management, threatened against
it or (ii) obligations or liabilities, whether or not accrued
(contingent or otherwise, including, without limitation, those
relating to environmental and occupational safety and health
matters, or any other facts or circumstances of which its
management is aware that could reasonably be expected to
result in any claims against or obligations or liabilities of
it), that, alone or in the aggregate, are reasonably likely to
have a Material Adverse Effect on it or to hinder or delay, in
any material respect, consummation of the transactions
contemplated by this Agreement.
(j) Absence of Regulatory Actions. It is not a party to any cease
and desist order, written agreement or memorandum of
understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any order or
directive by, or is a recipient of any extraordinary
supervisory letter from, or has adopted any board resolutions
at the request of, federal or state governmental authorities,
including, without limitation, the Northeast Bancorp
Regulatory Agencies, charged with the supervision or
regulation of financial or depository institutions or engaged
in the insurance of bank deposits, nor has it been advised by
any Northeast Bancorp Regulatory Agency that such body is
contemplating issuing or requesting (or is
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considering the appropriateness of issuing or requesting) any
such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment
letter, board resolution or similar undertaking.
(k) Agreements.
(i) Except as set forth in Annex 3.1(k) attached hereto,
as of the date of this Agreement, it is not a party
to, or bound by, any oral or written:
(A) "Material Contract" as such term is defined
in Item 601(b)(10) of Regulation S-K
promulgated by the SEC;
(B) consulting agreement not terminable on
thirty (30) days or less notice involving
the payment of more than $10,000 per annum,
in the case of any such agreement;
(C) agreement with any officer or other key
employee the benefits of which are
contingent, or the terms of which are
materially altered, upon the occurrence of a
transaction of the nature contemplated by
this Agreement;
(D) agreement with respect to any officer
providing any term of employment or
compensation guarantee extending for a
period longer than one year or for a payment
in excess of $10,000;
(E) agreement or plan, including any stock
option plan, stock appreciation rights plan,
employee stock ownership plan, restricted
stock plan or stock purchase plan, any of
the benefits of which will be increased, or
the vesting of the benefits of which will be
accelerated, by the occurrence of any of the
transactions contemplated by this Agreement
or the value of any of the benefits of which
will be calculated on the basis of any of
the transactions contemplated by this
Agreement;
(F) agreement containing covenants that limit
its ability to compete in any line of
business or with any person, or that involve
any restriction on the geographic area in
which, or method by which, it may carry on
its business (other than as may be required
by law or any regulatory agency);
(G) agreement, contract or understanding, other
than this Agreement, regarding the capital
stock of Northeast Bancorp and/or First
National or committing to dispose of some or
all of the capital stock or substantially
all of the assets of Northeast Bancorp
and/or First National; or
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(H) collective bargaining agreement, contract,
or other agreement or understanding with a
labor union or labor organization.
(ii) It is not in default under or in violation of any
provision of any note, bond, indenture, mortgage,
deed of trust, loan agreement, lease or other
agreement to which it is a party or to which any of
its respective properties or assets is subject, other
than such defaults or violations as could not
reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on it.
(1) Labor Matters. It is not the subject of any proceeding
asserting that it has committed an unfair labor practice or
seeking to compel it to bargain with any labor organization as
to wages and conditions of employment, nor is there any
strike, other labor dispute or organizational effort involving
it pending or threatened.
(m) Employee Benefit Plans. Annex 3.1(m) contains a complete list
of all pension, retirement, stock option, stock purchase,
stock ownership, savings, stock appreciation right, profit
sharing, deferred compensation, consulting, bonus, group
insurance, severance and other employee benefits, incentive
and welfare policies, contracts, plans and arrangements, and
all trust agreements related thereto, in respect to any of its
present or former directors, officers or other employees
(hereinafter referred to collectively as the "Employee
Plans").
(i) All of the Employee Plans comply in all material
respects with all applicable requirements of the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), the Code and other applicable
laws; it has not engaged in a "prohibited
transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any
Employee Plan which is likely to result in any
material penalties, taxes or other events under
Section 502(i) of ERISA or Section 4975 of the Code
which would have a Material Adverse Effect on it.
(ii) No liability to the Pension Benefit Guaranty
Corporation has been or is expected by it to be
incurred with respect to any Employee Plan which is
subject to Title IV of ERISA ("Pension Plan"), or
with respect to any "single- employer plan" (as
defined in Section 4001 (a)(15) of ERISA) currently
or formerly maintained by it or any entity which is
considered one employer with Northeast Bancorp or
First National under Section 4001 of ERISA or Section
414 of the Code (an "ERISA Affiliate").
(iii) No Pension Plan or single-employer plan of an ERISA
Affiliate had an "accumulated funding deficiency" (as
defined in Section 302 of ERISA (whether or not
waived)) as of the last day of the end of the most
recent plan year ending prior to the date hereof; all
contributions to any Pension Plan or single-employer
plan of an ERISA Affiliate that were required by
Section 302 of ERISA and were due prior to the date
hereof have been made on or before
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the respective dates on which such contributions were
due; the fair market value of the assets of each
Pension Plan or single-employer plan of an ERISA
Affiliate exceeds the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of
ERISA) under such Pension Plan or single employer
plan of an ERISA Affiliate as of the end of the most
recent plan year with respect to the respective
Pension Plan or single-employer plan of an ERISA
Affiliate ending prior to the date hereof, calculated
on the basis of the actuarial assumptions used in the
most recent actuarial valuation for such Pension Plan
or single-employer plan of an ERISA Affiliate as of
the date hereof; and no notice of a "reportable
event" (as defined in Section 4043 of ERISA) for
which the 30-day reporting requirement has not been
waived has been required to be filed for any Pension
Plan or single-employer plan of an ERISA Affiliate
within the 12-month period ending on the date hereof.
(iv) Neither has it provided, nor is it required to
provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Code.
(v) Neither it nor any ERISA Affiliate has contributed to
any "multi-employer plan," as defined in Section
3(37) of ERISA, on or after September 26, 1980.
(vi) Each Employee Plan of it which is an "employee
pension benefit plan" (as defined in Section 3(2) of
ERISA) and which is intended to be qualified under
Section 401(a) of the Code (a "Qualified Plan") has
received a favorable determination letter from the
Internal Revenue Service ("IRS") covering the
requirements of the Tax Equity and Fiscal
Responsibility Act of 1982, the Retirement Equity Act
of 1984 and the Deficit Reduction Act of 1984 and the
Tax Reform Act of 1986; it is not aware of any
circumstances likely to result in revocation of any
such favorable determination letter; each such
Employee Plan has been amended to reflect the
requirements of subsequent legislation applicable to
such plans; and each Qualified Plan has complied at
all relevant times in all material respects with all
applicable requirements of Section 401(a) of the
Code.
(vii) Each Qualified Plan which is an "employee stock
ownership plan" (as defined in Section 4975(e)(7) of
the Code) has at all relevant times satisfied all of
the applicable requirements of Sections 409 and
4975(e)(7) of the Code and the regulations
thereunder.
(viii) Neither it nor any ERISA Affiliate has committed any
act or omission or engaged in any transaction that
has caused it to incur, or created a material risk
that it may incur, liability for any excise tax under
Sections 4971 through 4980B of the Code, other than
excise taxes which heretofore have been paid and
fully reflected in its financial statements.
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(ix) There is no pending or threatened litigation,
administrative action or proceeding relating to any
Employee Plan, other than routine claims for
benefits.
(x) There has been no announcement or legally binding
commitment by it to create an additional Employee
Plan, or to amend an Employee Plan, except for
amendments required by applicable law which do not
materially increase the cost of such Employee Plan,
and it does not have any obligations for retiree
health and life benefits under any Employee Plan that
cannot be terminated without incurring any liability
thereunder.
(xi) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby
will not result in any payment or series of payments
by Northeast Bancorp or First National to any person
which is an "excess parachute payment" (as defined in
Section 280G of the Code) under any Employee Plan,
increase any benefits payable under any Employee
Plan, or accelerate the time of payment or vesting of
any such benefit.
(xii) All annual reports have been filed timely with
respect to each Employee Plan, it has made available
to Sterling a true and correct copy of (A) reports on
the applicable form of the Form 5500 series filed
with the IRS for plan years beginning after 1987, (B)
such Employee Plan, including amendments thereto, (C)
each trust agreement and insurance contract relating
to such Employee Plan, including amendments thereto,
(D) the most recent summary plan description for such
Employee Plan, including amendments thereto, if the
Employee Plan is subject to Title I of ERISA, (E) the
most recent actuarial report or valuation if such
Employee Plan is a Pension Plan and (F) the most
recent determination letter issued by the IRS if such
Employee Plan is a Qualified Plan.
(xiii) There are no retiree health benefit plans except as
required to be maintained by COBRA.
(n) Title to Assets. It has good and marketable title to its
properties and assets (other than property as to which it is
lessee), except for (i) such items shown in the Northeast
Bancorp consolidated financial statements or notes thereto;
(ii) liens on real property for current real estate taxes not
yet delinquent; or (iii) such defects in title which would
not, individually or in the aggregate, have a Material Adverse
Effect on it. With respect to any property leased by it, there
are no defaults by it, or by any of the other parties thereto,
or any events which, with the giving of notice or lapse of
time or both, would become defaults by it or any of the other
parties thereto, under any of such leases, except for such
defaults or events which would not, individually or in the
aggregate, have a Material Adverse Effect on it or on its
financial condition, business prospects or operating results;
and all such leases are in full force and effect and are
enforceable against it, as the case may be, and there is no
circumstance existing as of the date of this Agreement which
causes or would
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cause such leases to be unenforceable against any of the other
parties thereto except as the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the rights of creditors generally as well as
principles of equity (regardless of whether considered and
applied in a proceeding in equity or at law).
(o) Compliance with Laws. It has all permits, licenses,
certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with,
federal, state, local and foreign governmental or regulatory
bodies that are required in order to permit it to carry on its
business as it is presently conducted and the absence of which
could, individually or in the aggregate, have a Material
Adverse Effect on it; all such permits, licenses, certificates
of authority, orders and approvals are in full force and
effect, and no suspension or cancellation of any of them is
threatened.
(p) Fees. Neither Northeast Bancorp nor any of its respective
officers, directors, employees or agents has employed any
broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions, or finder's fees,
and no broker or finder has acted directly or indirectly for
it in connection with this Agreement or the transactions
contemplated hereby.
(q) Environmental Matters. For purposes of this Section 3.1, the
following terms shall have the indicated meaning:
"ENVIRONMENTAL LAW" means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree,
injunction or agreement with any governmental entity relating
to: the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, surface
soil, subsurface soil, plant and animal life or any other
natural resource); and the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Substances. The
term Environmental Law includes without limitation: the
Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C. ss.9601, et seq., the
Resource Conservation and Recovery Act, as amended, 42 U.S.C.
ss.6901, et seq., the Clean Air Act, as amended, 42 U.S.C.
ss.7401, et seq., the Federal Water Pollution Control Act, as
amended, 33 U.S.C. ss.1251, et seq., the Toxic Substances
Control Act, as amended, 15 U.S.C. ss.9601, et seq., the
Emergency Planning and Community Right to Know Act, 42 U.S.C.
ss.11001, et seq., the Safe Drinking Water Act, 42 U.S.C.
ss.300f, et seq., and all comparable state and local laws; and
any common law (including without limitation common law that
may impose strict liability) that may impose liability or
obligation for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous
Substance.
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"HAZARDOUS SUBSTANCE" means any substance presently listed,
defined, designated or classified as hazardous, toxic,
radioactive or dangerous or otherwise regulated under any
Environmental Law, whether by type or by quantity, including
any material containing any such substance as a component.
Hazardous Substances include without limitation petroleum or
any derivative or by-product thereof, asbestos, radioactive
material, and polychlorinated biphenyls.
"FIRST NATIONAL LOAN PORTFOLIO PROPERTIES AND OTHER PROPERTIES
OWNED" means those properties serving as collateral for loans
in First National's loan portfolio, or properties owned or
operated by First National (including, without limitation, in
a fiduciary capacity).
Except as set forth on Annex 3.1(q) hereto:
(i) To the knowledge of Northeast Bancorp and First
National, neither Northeast Bancorp nor First
National has been or is in violation of or liable
under any Environmental Law.
(ii) To the knowledge of Northeast Bancorp and First
National, none of the First National Loan Portfolio
Properties and Other Properties Owned have been or
are in violation of or liable under any
Environmental Law.
(iii) Neither Northeast Bancorp nor First National has any
knowledge that any environmental contaminant,
pollutant, toxic or hazardous waste or other similar
substance has been generated, used, stored,
processed, disposed of or discharged onto any of the
real estate now or previously owned or acquired
(including without limitation any real estate
acquired by means of foreclosure or exercise of any
other creditor's right) or leased by First National,
except as disclosed on Annex 3.1(q). In particular,
without limiting the generality of the foregoing
sentence, except as disclosed on Annex 3.1(q),
neither Northeast Bancorp nor First National has any
knowledge that: (i) any materials containing asbestos
have been used or incorporated in any building or
other structure or improvement located on any of the
real estate now or previously owned or acquired
(including without limitation any real estate
acquired by means of foreclosure or exercise of any
other creditor's right) or leased by Northeast
Bancorp or First National; (ii) any electrical
transformers, fluorescent light fixtures with
ballasts or other equipment containing PCB's are or
have been located on any of the real estate now or
previously owned or acquired (including without
limitation any real estate acquired by means of
foreclosure or exercise of any other creditor's
right) or leased by Northeast Bancorp or First
National; (iii) any underground storage tanks for the
storage of gasoline, petroleum products or other
toxic or hazardous substances are or have ever been
located on any of the real estate now or previously
owned or acquired (including without limitation any
real estate acquired by means of
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foreclosure or exercise of any other creditor's
right) or leased by Northeast Bancorp or First
National.
(iv) Except as disclosed in Annex 3.1(q), there is no
legal, administrative, arbitration or other
proceeding, claim, action, cause of action or
governmental investigation of any nature seeking to
impose, or that, to the knowledge of Northeast
Bancorp or First National, could result in the
imposition on Northeast Bancorp or First National of
any liability arising under any local, state or
federal environmental statute, regulation or
ordinance including, without limitation, the
Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, pending or
threatened against Northeast Bancorp or First
National; to the knowledge of Northeast Bancorp and
First National, there is no reasonable basis for any
such proceeding, claim, action or governmental
investigation; and neither Northeast Bancorp nor
First National is subject to any agreement, order,
judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third
party imposing any such liability.
(r) Allowance. The allowance for loan and lease losses shown on
Northeast Bancorp's consolidated statement of financial
condition as of December 31, 1997 was, and the allowance for
loan and lease losses shown on Northeast Bancorp's
consolidated statement of financial condition for periods
ending after the date of this Agreement will be, in the
opinion of management of Northeast Bancorp and First National,
adequate, as of the date thereof, under generally accepted
accounting principles applicable to commercial banks and all
other applicable regulatory requirements for all losses
reasonably anticipated in the Ordinary Course of Business (as
defined in Section 4.1(a) hereof) as of the date thereof based
on information available as of such date. It has disclosed to
Sterling in writing prior to the date hereof the amounts of
all loans, leases, advances, credit enhancements, other
extensions of credit, commitments and interest-bearing assets
of it that it has classified internally as "Other Loans
Specially Mentioned," "Special Mention," "Substandard,"
"Doubtful," "Loss," "Classified," "Criticized," "Credit Risk
Assets," "Concerned Loans" or words of similar import, and it
shall disclose promptly to Sterling after the end of each
quarter after the date hereof and on the Effective Date the
amount of each such classification. It has disclosed to
Sterling in writing prior to the date hereof the amounts of
all overdrafts occurring since January 1, 1998 and it shall
disclose promptly to Sterling after the end of each quarter
after the date hereof and on the Effective Date the amount of
such overdrafts. The OREO and in-substance foreclosures
included in any of its non-performing assets are carried net
of reserves at the lower of cost or market value based on
current independent appraisals or current management
appraisals.
(s) Anti-takeover Provisions Applicable. The restrictions
contained in Section 203 of the DGCL do not apply to Northeast
Bancorp pursuant to Section 203(b)(4) of the DGCL.
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(t) Material Interests of Certain Persons. None of its respective
officers or directors, or any "associate" (as such term is
defined in Rule 12b-2 under the Securities Exchange Act of
1934 (the "Exchange Act")) of any such officer or director,
has any material interest in any material contract or property
(real or personal), tangible or intangible, used in or
pertaining to its business.
(u) Insurance. It is presently insured, and has been insured, in
the amounts, with the companies and since the periods set
forth in Annex 3.1(u). All of the insurance policies and bonds
maintained by it are in full force and effect, it is not in
default thereunder and all material claims thereunder have
been filed in due and timely fashion. In the judgment of its
management, such insurance coverage is adequate.
(v) Dividends. The only dividends or other distributions which
Northeast Bancorp has made on its capital stock since January
1, 1998 are set forth in Annex 3.1(v).
(w) Books and Records. Its books and records have been, and are
being, maintained in accordance with applicable legal and
accounting requirements and reflect in all material respects
the substance of events and transactions that should be
included therein.
(x) Board Action. Its board of directors (at a meeting duly
called, convened and held) has, by the requisite vote of the
directors, (a) declared that the Agreement is advisable and in
the best interests of it and its shareholders, (b) approved
this Agreement, and the transactions contemplated hereby, and
(c) directed that the Agreement be submitted for consideration
by its shareholders at the Northeast Bancorp Shareholders'
Meeting (as hereafter defined) with the recommendation of the
board of directors that the shareholders adopt the Agreement.
(y) Fairness Opinions. Its board of directors has received a
written opinion, a copy of which has been furnished to
Sterling, to the effect that the consideration to be received
by its shareholders pursuant to this Agreement, at the time of
its execution, is fair to such holders from a financial point
of view.
(z) Fidelity Bonds. Since at least December 31, 1992, First
National has continuously maintained fidelity bonds insuring
it against acts of dishonesty by its employees in such amounts
as is customary for a bank of its size. Since December 31,
1992, the aggregate amount of all potential claims under such
bonds has not exceeded $10,000 and neither Northeast Bancorp
nor First National is aware of any facts which would
reasonably form the basis of a claim under such bonds. Neither
Northeast Bancorp nor First National has reason to believe
that its fidelity coverage will not be renewed by its carrier
on substantially the same terms as its existing coverage.
(aa) Condition of Tangible Assets. All buildings, structures and
improvements on the real property owned or leased by it are in
good condition, ordinary wear and tear excepted, and are free
from structural defects in all material respects. The
equipment, including heating, air conditioning and ventilation
equipment owned by it, is in good
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operating condition, ordinary wear and tear excepted. The
operation and use of the property in the business conform in
all material respects to all applicable laws, ordinances,
regulations, permits, licenses and certificates.
(bb) Loans by First National. Since December 31, 1994 and except as
shown on Annex 3.1(bb), in the aggregate, the loans by First
National have been lawfully made, constitute valid debts of
the obligors, have been incurred in the Ordinary Course of
Business, are subject to the terms of payment as shall have
been agreed upon between First National and each customer, and
First National does not know of any applicable set-off or
counterclaim which in the aggregate would have a Material
Adverse Effect on it. A list of all loans ninety (90) days or
more past due as of December 31, 1998, is attached hereto as
Annex 3.1(bb). No part of the amount collectible under any
loan is contingent upon performance by First National of any
obligation and no agreement for participation, in which First
National has relinquished or agreed to share control with a
participation in management of the facility, or agreement
providing for deductions or discounts have been made with
respect to any part of such debts, except as expressly
disclosed in Annex 3.1(bb). First National does not know of
any pending, threatened or expected actions in connection with
any material loans or commitments presently or previously made
by First National relating to claims based on theories of
"lenders' liability" or any other basis.
(cc) Regulatory Compliance - OCC. First National is in compliance
in all material respects with the applicable rules and
regulations of the OCC.
(dd) Regulatory Compliance - FDIC. Except where the failure to
comply would not have a Material Adverse Effect on it, it is
in compliance in all material respects with the rules and
regulations of the FDIC to the extent such rules and
regulations are deemed applicable by regulatory determination.
(ee) Capital Compliance. As of the date of this Agreement, First
National was in compliance with the minimum capital
requirements applicable to national banking associations,
including as to leverage ratio requirements, tangible capital
requirements and risk based capital requirements.
(ff) Year 2000 Compliance. Northeast Bancorp and First National are
in compliance with all Office of the Comptroller of the
Currency Advisory Letters issued in connection with Year 2000
preparedness and compliance.
(gg) Assessments Fully Paid. All payments, fees and charges
assessed by appropriate state and federal agencies against
First National, and due on or prior to the date of this
Agreement, have been paid in full.
(hh) Annual Reports and Financial Statements. Northeast Bancorp has
delivered to Sterling true and complete copies of (i) its
Consolidated Balance Sheets, Consolidated Statements of
Earnings, Consolidated Statements of Stockholders'
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Equity and Consolidated Statements of Cash Flows of Northeast
Bancorp for the years ended December 31, 1997, 1996 and 1995,
certified by independent public accountants, and (ii)
Northeast Bancorp's Quarterly Reports for the quarter ended
September 30, 1998, containing unaudited consolidated balance
sheets of Northeast Bancorp as at such dates and unaudited
consolidated statements of earnings and cash flows of
Northeast Bancorp for the three month period reflected
therein. Northeast Bancorp has also delivered to Sterling true
and correct copies of all financial reports furnished to
shareholders for the years 1997, 1996 and 1995. All such
reports (collectively, the "Northeast Bancorp Reports") (i)
comply in all material respects with the requirements of the
Financial Accounting Standards Board ("FASB") and the American
Institute of Certified Public Accountants ("AICPA"), (ii) do
not contain any untrue statement of a material fact and (iii)
do not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading. No documents to be filed by Northeast Bancorp with
the SEC or any regulatory agency in connection with this
Agreement, or the transactions contemplated hereby will
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading. All
documents which Northeast Bancorp is responsible for filing
with the SEC or any regulatory agency in connection with the
Merger will comply as to form in all material respects with
the requirements of applicable law.
(ii) Proxy Statement/Prospectus, Etc. Except for information
relating to Sterling and its subsidiaries and pro forma
financial information reflecting the combined operations of
Sterling and Northeast Bancorp, neither (i) the Proxy
Statement/Prospectus (as defined herein at Section 5.1(b)) or
any amendment or supplement thereto, at the time it is filed
with the SEC, at the time the Registration Statement (as
defined hereinafter at Section 5.1(b)) is declared effective,
at the time the Proxy Statement/Prospectus is mailed to the
shareholders of Northeast Bancorp or at the date of the
meeting of the Northeast Bancorp shareholders at which the
shareholders will consider this Agreement (the "Northeast
Bancorp Shareholders' Meeting") nor (ii) any other documents
to be filed by Northeast Bancorp with the SEC or any
regulatory agency in connection with this Agreement, or the
transactions contemplated hereby, will contain any untrue
statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they are made, not misleading.
(jj) Significant Customers. All significant customers of First
National as of December 31, 1998 are identified in Annex
3.1(jj). For purposes of this Section 3.1, a "significant
customer" shall mean any customer who, at any time between
January 1, 1998 and the date of this Agreement, had or has (i)
aggregate outstanding loans in the amount of $150,000 or more,
or (ii) aggregate daily deposits in the amount of $50,000 or
more.
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(kk) Complete and Accurate Disclosure. Neither this Agreement
(insofar as it relates to Northeast Bancorp, Northeast Bancorp
Common Stock and Northeast Bancorp's involvement in the
transactions contemplated hereby) nor any financial statement,
schedule (including without limitation the Annexes attached
hereto), certificate, or other statement or document delivered
by Northeast Bancorp to Sterling and Sterling AC in connection
herewith contains any statement which, at the time and in
light of the circumstances under which it is made, is false or
misleading with respect to any material fact or omits to state
any material fact necessary to make the statements contained
herein or therein not false or misleading. In particular,
without limiting the generality of the foregoing sentence, the
information provided and the representations made by Northeast
Bancorp to Sterling in connection with the Registration
Statement, both at the time such information and
representations are provided and made and at the time of the
Closing, will be true and accurate in all material respects
and will not contain any false or misleading statement with
respect to any material fact or omit to state any material
fact necessary (i) to make the statements made therein not
false or misleading, or (ii) to correct any statement
contained in an earlier communication with respect to such
information or representations which has become false or
misleading.
(ll) Beneficial Ownership of Sterling Common Stock. Prior to the
Effective Date, Northeast Bancorp and its officers and
directors will not in the aggregate own beneficially (within
the meaning of SEC Rule 13d-3(d)(1)) more than five percent
(5%) of the outstanding shares of Sterling Common Stock.
(mm) Non-Registration Under the 1934 Act. Northeast Bancorp Common
Stock is neither registered nor required to be registered
under Section 12 of the Securities Exchange Act of 1934 (the
"1934 Act") and is not subject to the periodic reporting
requirements imposed by Section 13 or 15(d) of the 1934 Act.
(nn) Deposit Insurance. The deposits of First National are insured
by the Bank Insurance Fund, as administered by the Federal
Deposit Insurance Corporation ("FDIC") in accordance with the
Federal Deposit Insurance Act, and First National has paid all
assessments and filed all reports required by the Federal
Deposit Insurance Act.
(oo) Repurchase Agreements. With respect to any agreement pursuant
to which Northeast Bancorp has purchased securities subject to
an agreement to resell, if any, Northeast Bancorp has a valid,
perfected first lien or security interest in the government
securities or other collateral securing the repurchase
agreement, and the value of such collateral equals or exceeds
the amount of the debt secured thereby. Except as disclosed on
Annex 3.1(oo), which identifies location and type of
securities, Northeast Bancorp maintains physical possession of
purchased securities that are subject to an agreement to
resell.
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(pp) Assumability of Contracts and Leases. Except as disclosed on
Annex 3.1(pp), all Material Contracts between Northeast
Bancorp or First National and any other entity or person are
assumable and assignable and do not contain any term or
provision that would accelerate or increase payments that
would otherwise be due by Northeast Bancorp or First National
to such person or entity, or change or modify the provisions
or terms of such leases, contracts and agreements by reason of
this Agreement or the transactions contemplated hereby.
(qq) Absence of Questionable Payments. From and after December 31,
1992, neither Northeast Bancorp nor First National has, nor,
to the knowledge of Northeast Bancorp or First National, has
any director, officer, agent, employee, consultant or other
person associated with or acting on behalf of, Northeast
Bancorp or First National (i) used any Northeast Bancorp or
First National corporate funds for unlawful contributions,
gifts, entertainment or unlawful expenses relating to
political activity; or (ii) made any direct or indirect
unlawful payments to governmental officials from any Northeast
Bancorp or First National corporate funds, or established or
maintained any unlawful or unrecorded accounts with funds
received from Northeast Bancorp or First National.
(rr) Powers of Attorney; Guarantees. Except as set forth on Annex
3.1(rr), First National does not have any power of attorney
outstanding, or any obligation or liability either actual,
constructive or contingent, as guarantor, surety, cosigner,
endorser, co-maker or indemnitor in respect of the obligation
of any person, corporation, partnership, joint venture,
association, organization or other entity, except for letters
of credit issued in the Ordinary Course of Business which are
listed on Annex 3.1(rr)
(ss) Adjustable Rate Mortgages. First National has made all
interest rate adjustments to any mortgage loan according to
the terms of said mortgage loan and has complied and is in
compliance in all material respects with all federal, state
and other applicable laws, rules and regulations, including
orders, writs, decrees, injunctions and other requirements of
any court or governmental authorities having jurisdiction over
adjustable rate mortgages.
(tt) CRA Compliance. First National has received a satisfactory
compliance rating and has received a satisfactory Community
Reinvestment Act rating. First National has no knowledge of
any facts or circumstances which would prevent it from
receiving such satisfactory ratings upon its next appropriate
examination.
(uu) Derivatives. First National does not own or hold any
derivatives, "caps", or "floors", in its investment portfolio.
(vv) Accuracy of Representations. Until, and as of Closing,
Northeast Bancorp will promptly notify Sterling if any of the
representations contained in this Section 3.1 cease to be true
and correct subsequent to the date hereof.
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SECTION 3.2 Representations and Warranties of Sterling.
Sterling represents and warrants to Northeast Bancorp and First
National that, as of even date herewith and except as specifically disclosed in
the Annex of disclosure schedules included herewith, as follows:
(a) Authority. Sterling has the requisite corporate power and
authority, and the legal right, to execute and deliver this
Agreement and to consummate the transactions applicable to it
contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions
contemplated herein have been duly and validly authorized by
the Board of Directors of Sterling, and no other corporate
action on the part of Sterling is necessary to authorize the
approval of this Agreement or the consummation of the
transactions contemplated herein. This Agreement has been duly
executed and delivered by Sterling and, assuming due
authorization, execution and delivery by Northeast Bancorp,
receipt of required regulatory approvals and the approval of
the Northeast Bancorp shareholders, constitutes a valid and
binding obligation of Sterling, enforceable against Sterling
in accordance with its terms, except to the extent enforcement
is limited by bankruptcy, insolvency and other similar laws
affecting creditor's rights or principles of equity. Assuming
regulatory approval, the execution, delivery, and performance
by Sterling of this Agreement, and consummation of the
transactions contemplated by this Agreement will not
constitute a violation or breach of or default under the
Articles of Incorporation or the Bylaws of Sterling or any
statute, law, rule, regulation, judgment, governmental permit
or license, order, decree, directive, agreement, indenture or
other instrument to which Sterling is a party or by which
Sterling or any of its properties are bound.
(b) Organization and Standing. Sterling is a business corporation
that is duly organized, validly existing and in good standing
under the laws of the Commonwealth of Pennsylvania and is in
good standing as a foreign corporation in each jurisdiction
where the properties owned, leased or operated, or the
business conducted, by Sterling requires such qualification,
except for such failure to qualify or be in such good standing
which, when taken together with all other such failures,
should not have a Material Adverse Effect on Sterling and its
subsidiaries, taken as a whole. Sterling is a registered bank
holding company under the Bank Holding Company Act of 1956, as
amended, and has full power and lawful authority (including
all federal, state, local and governmental authorizations) to
own and hold its properties and to carry on its present
business. Sterling owns, directly or indirectly all of the
issued and outstanding shares of capital stock of Sterling AC,
and Bank of Lancaster County, N.A. ("Bank of Lancaster
County"). Bank of Lancaster County is a national banking
association duly organized, validly existing and in good
standing under the laws of the United States, and is duly
authorized to engage in the banking business as an insured
bank under the Federal Deposit Insurance Act, as amended. Bank
of Lancaster County is authorized to engage in trust
activities.
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(c) Capitalization. The authorized capital stock of Sterling
consists of thirty-five million (35,000,000) shares of common
stock, par value Five Dollars ($5.00) per share ("Sterling
Common Stock") of which, as of the date of this Agreement,
6,447,136 shares were issued and outstanding and 23,921 shares
were issued and held as treasury shares as of the date of this
Agreement. All outstanding shares of Sterling Common Stock
have been duly authorized and are validly issued, fully paid
and nonassessable. Except as provided in Annex 3.2(c), all
shares of Sterling Common Stock have been issued in compliance
with the registration provisions of the Securities Act of
1933, as amended. The shares of Sterling Common Stock to be
issued in connection with the Merger have been duly authorized
and, when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and
nonassessable. Except as disclosed in Annex 3.2(c), no shares
of capital stock of Sterling are reserved for issuance. Except
as disclosed in Annex 3.2(c), Sterling has no outstanding
bonds, debentures, notes or other obligations the holders of
which have a right to vote (or convertible into or exercisable
for securities having the right to vote) with shareholders on
any matter. All of the outstanding shares of Bank of Lancaster
County are duly authorized and are validly issued, fully paid
and non assessable and are owned by Sterling. The shares of
Bank of Lancaster County common stock owned by Sterling are
owned free and clear of all liens, pledges, security interest,
claims or other encumbrances. The outstanding shares of
capital stock of Sterling and Bank of Lancaster County have
not been issued in violation of any preemptive rights. Except
as set forth in Annex 3.2(c), there are no outstanding
subscriptions, options, warrants, rights, convertible
securities or other agreements or commitments relating to the
issuance or mandatory repurchase by Sterling of securities of
Sterling or Bank of Lancaster County to which Sterling or Bank
of Lancaster County is a party.
(d) Subsidiaries. The only subsidiaries of Sterling are as listed
and described in Annex 3.2(d). The only subsidiaries of Bank
of Lancaster County are as listed and described in Annex
3.2(d). Each such subsidiary is duly organized and existing as
a corporation, is in good standing under the laws of the
jurisdiction in which it was organized, and has adequate
corporate power to carry on its business as now conducted. All
of the outstanding capital stock of all such subsidiaries has
been validly issued, is fully paid and nonassessable (other
than as provided at 12 U.S.C. ss.55) and is owned by Sterling
or Bank of Lancaster County, free and clear of all liens,
security interests and encumbrances. All such subsidiaries are
organized under federal or Pennsylvania law.
(e) Articles of Incorporation and Bylaws. The copies of the
Articles of Incorporation, as amended, and of the Bylaws, as
amended, of Sterling and Bank of Lancaster County, which have
been delivered to Northeast Bancorp are true, correct, and
complete in all material respects.
(f) Annual Reports and Financial Statements. Sterling has
delivered to Northeast Bancorp true and complete copies of (i)
Sterling's Annual Report on Form 10-K for Sterling's fiscal
year ended December 31, 1997, containing consolidated balance
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sheets of Sterling at December 31, 1997 and December 31, 1996
and consolidated statements of earnings, changes in
shareholders' equity and cash flows of Sterling for the three
years ended December 31, 1997, 1996 and 1995, and such
financial statements have been certified by Trout, Ebersole &
Groff, LLP and (ii) Sterling's Quarterly Report on Form 10-Q
for the quarters ended March 31, 1998, June 30, 1998, and
September 30, 1998, containing unaudited consolidated balance
sheets of Sterling as at such date and unaudited consolidated
statement of earnings and cash flows of Sterling for the
three-month period reflected therein. Sterling has also
delivered to Northeast Bancorp true and correct copies of its
annual reports on Form 10-K for the years 1997, 1996 and 1995,
together with its annual reports to shareholders for the same
periods. All such reports (collectively, the "Sterling
Reports") (i) comply in all material respects with the
requirements of the rules and regulations of the SEC, FASB and
AICPA (ii) do not contain any untrue statement of a material
fact and (iii) do not omit to state a material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading. No documents to be filed by
Sterling with the SEC or any regulatory agency in connection
with this Agreement, or the transactions contemplated hereby
will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading. All
documents which Sterling is responsible for filing with the
SEC or any regulatory agency in connection with the Merger
will comply as to form in all material respects with the
requirements of applicable law.
(g) Absence of Undisclosed Liabilities. Except as disclosed in
Annex 3.2(g) or as reflected noted or adequately reserved
against in the Sterling balance sheet, at September 30, 1998
(the "Sterling Balance Sheet"), Sterling had no material
liabilities (whether accrued, absolute, contingent or
otherwise) which are required to be reflected, noted or
reserved against therein under generally accepted accounting
principles or which are in any case or in the aggregate
material. Except as described in Annex 3.2(g), since September
30, 1998, Sterling has not incurred any such - liability other
than liabilities of the same nature as those set forth in the
Sterling Balance Sheet, all of which have been reasonably
incurred in the Ordinary Course of Business.
(h) Absence of Changes. Since September 30, 1998, there has not
been any material and adverse change in the condition
(financial or otherwise), assets, liabilities, business,
operations or future prospects of Sterling taken as a whole,
and no event has occurred that may result in a Material and
adverse change.
(i) Litigation. Except as disclosed in Annex 3.2(i): (i) there is
no civil, criminal or administrative action, suit, claim,
hearing, litigation, investigation or proceeding before any
court, governmental agency or otherwise pending, or to the
knowledge of Sterling threatened, that involves Sterling or
its properties and that, if determined adversely to Sterling,
would materially and adversely affect the condition (financial
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or otherwise), assets, liabilities, business, operations or
future prospects of Sterling; (ii) there are no outstanding
orders, writs, injunctions, decrees, consent agreements,
memoranda of understanding or other directives of any federal,
state or local court or governmental authority or of any
arbitration tribunal against Sterling which materially and
adversely affect the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects
of Sterling or restrict in any manner the right of Sterling to
conduct its business as presently conducted; and (iii)
Sterling is not aware of any fact or condition presently
existing that might give rise to any litigation, investigation
or proceeding which, if determined adversely to Sterling,
would materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business, operations or
future prospects of Sterling. For purposes of this Section
3.2(h), Sterling shall be deemed to include Bank of Lancaster
County.
(i) Proxy Statement/Prospectus. At the time the Proxy
Statement/Prospectus (as defined in Section 5.1(b) of this
Agreement) is mailed to the shareholders of Northeast Bancorp
and at all times subsequent to such mailing, up to and
including the Effective Date, the Proxy Statement/Prospectus
(including any pre- and post-effective amendments and
supplements thereto), with respect to all information relating
to Sterling, Sterling AC and Bank of Lancaster County,
Sterling Common Stock, and actions taken and statements made
by Sterling, Sterling AC and Bank of Lancaster County in
connection with the transactions contemplated herein (other
than information provided by Northeast Bancorp to Sterling,
Sterling AC and Bank of Lancaster County, will: (i) comply in
all material respects with applicable provisions of the 1933
Act and the 1934 Act and the pertinent rules and regulations
thereunder; and (ii) not contain any statement which, at the
time and in light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or
omits to state any material fact that is necessary to be
stated therein in order (A) to make the statements therein not
false or misleading, or (B) to correct any statement in an
earlier communication with respect to the Proxy
Statement/Prospectus which has become false or misleading.
(j) Year 2000 Compliance. Sterling and Bank of Lancaster County
are in compliance with all requirements announced or
promulgated by the Sterling Regulatory Agencies and by the
Federal Financial Institutions Examination Council in
connection with Year 2000 preparedness and compliance.
(k) CRA Compliance. Bank of Lancaster County has received a
satisfactory compliance rating and has received a satisfactory
Community Reinvestment Act rating. Sterling and Bank of
Lancaster County have no knowledge of any facts or
circumstances which would prevent Bank of Lancaster County
from receiving such satisfactory ratings upon its next
appropriate examination.
(l) Environmental Matters. To the knowledge of Sterling and its
subsidiaries, there is no activity or condition on or in any
property owned, occupied, leased or held as security by
Sterling or Bank of Lancaster County that would subject
Sterling or Bank of Lancaster County to damages, penalties,
injunctive relief or cleanup costs under
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any Environmental Law that individually or in the aggregate
would have a Material Adverse Effect on Sterling on a
consolidated basis. To the knowledge of Sterling and Sterling
AC, none of Sterling, Sterling AC or any subsidiary thereof is
in violation of any Environmental Law.
(m) Allowance. The allowance for loan and lease losses shown on
Sterling's consolidated statement of financial condition as of
December 31, 1997 was, and the allowance for loan and lease
losses shown on Sterling's consolidated statement of financial
condition for periods ending after the date of this Agreement
will be, in the opinion of management of Sterling and Bank of
Lancaster County, adequate, as of the date thereof, under
generally accepted accounting principles applicable to
commercial banks and all other applicable regulatory
requirements for all losses reasonably anticipated in the
Ordinary Course of Business as of the date thereof based on
information available as of such date.
(n) Absence of Regulatory Actions. Sterling and its subsidiaries
are not a party to any cease and desist order, written
agreement or memorandum of understanding with, or a party to
any commitment letter or similar undertaking to, nor are
subject to any order or directive by, nor are a recipient of
any extraordinary supervisory letter from, nor have adopted
any board resolutions at the request of, federal or state
governmental authorities, including, without limitation, (A)
the OCC, (B) the FDIC, (C) the Board, and /or (D) State
Regulator (collectively with the OCC, the FDIC, and the Board,
the "Sterling Regulatory Agencies"), charged with the
supervision or regulation of financial or depository
institutions or engaged in the insurance of bank deposits, nor
has it or they been advised by any Sterling Regulatory Agency
that such body is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any
such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment
letter, board resolution or similar undertaking.
(o) Compliance with Laws and Regulations. Sterling and its
subsidiaries have all permits, licenses, certificates of
authority, orders and approvals of, and have made all filings,
applications and registrations with, federal, state, local and
foreign governmental or regulatory bodies that are required in
order to permit each or them to carry on its business as it is
presently conducted and the absence of which could,
individually or in the aggregate, have a Material Adverse
Effect on it; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect,
and no suspension or cancellation of any of them is
threatened. Sterling and its Subsidiaries are in compliance in
all material respects with the applicable rules and
regulations of the Sterling Regulatory Authorities
(p) Board Action. The boards of directors of Sterling and Sterling
AC (at meetings duly called, convened and held) have, by the
requisite vote of each of their directors, declared that the
Agreement is advisable and in the best interests of it and its
shareholders and approved this Agreement, and the transactions
contemplated hereby.
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(q) Complete and Accurate Disclosure. Neither this Agreement
(insofar as it relates to Sterling, Sterling AC, Sterling
Common Stock and Sterling's involvement in the transactions
contemplated hereby) nor any financial statement, schedule
(including without limitation the Annexes attached hereto),
certificate, or other statement or document delivered by
Sterling to Northeast Bancorp in connection herewith contains
any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading
with respect to any material fact or omits to state any
material fact necessary to make the statements contained
herein or therein not false or misleading. In particular,
without limiting the generality of the foregoing sentence, the
information provided and the representations made by Sterling
and Sterling AC to Northeast Bancorp in connection with the
Registration Statement, both at the time such information and
representations are provided and made and at the time of the
Closing, will be true and accurate in all material respects
and will not contain any false or misleading statement with
respect to any material fact or omit to state any material
fact necessary (i) to make the statements made therein not
false or misleading, or (ii) to correct any statement
contained in an earlier communication with respect to such
information or representations which has become false or
misleading.
(r) Accuracy of Representations. Until, and as of Closing,
Sterling will promptly notify Northeast Bancorp if any of the
representations contained in this Section 3.2 cease to be true
and correct subsequent to the date hereof.
SECTION 3.3 Representations and Warranties of Sterling AC.
(a) Organization. Sterling AC is a corporation duly organized,
validly existing, in good standing and duly subsisting under
the laws of the State of Delaware. All of the outstanding
shares of capital stock of Sterling AC have been duly
authorized and are validly issued, fully paid and
nonassessable and are owned directly by Sterling free and
clear of any lien, charge or other encumbrance.
(b) Authority. Sterling AC has the corporate power and authority
to enter into this Agreement and to carry out its obligations
hereunder. The execution, delivery and performance of this
Agreement by Sterling AC and the consummation of the
transactions described herein have been duly and validly
authorized by all necessary corporate actions (including
without limitation shareholder action) in respect thereof on
the part of Sterling AC. This Agreement is a valid and binding
obligation of Sterling AC, enforceable against Sterling AC in
accordance with its terms, except to the extent enforcement is
limited by bankruptcy, insolvency and other similar laws
affecting creditor's rights or general principles of equity.
(c) Capitalization. The authorized capital stock of Sterling AC
consists of three thousand (3,000) shares of common stock, par
value $1.00 per share ("Sterling AC Common Stock"). All
outstanding shares of Sterling AC Common Stock have been duly
authorized and are validly issued, fully paid and
nonassessable and are owned by Sterling as sole shareholder.
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(d) Approval. Sterling will, as the sole shareholder of Sterling
AC, vote to approve and adopt this Agreement and the Merger.
ARTICLE IV
COVENANTS OF NORTHEAST BANCORP AND FIRST NATIONAL
From the date of this Agreement and until the Effective Time or earlier
termination of this Agreement, Northeast Bancorp and First National covenant and
agree to do the following:
SECTION 4.1 Conduct of Business.
Except as otherwise consented to by Sterling and Sterling AC in
writing, Northeast Bancorp and First National shall each:
(a) use all reasonable efforts to carry on its business in, and
only in, the ordinary course of business consistent with
customary business practices of prudently managed banks
(herein referred to as "Ordinary Course of Business").
(b) to the extent consistent with prudent business judgment, use
all reasonable efforts to preserve its present business
organization, to retain the services of its present officers
and employees, to maintain good relationships with its
employees, and to maintain its relationships with customers,
suppliers and others having business dealings with Northeast
Bancorp or First National;
(c) maintain all of Northeast Bancorp's and First National's
structures, equipment and other real property and tangible
personal property in good repair, order and condition, except
for ordinary wear and tear and damage by unavoidable casualty;
(d) use all reasonable efforts to preserve or collect all material
claims and causes of action belonging to Northeast Bancorp and
First National;
(e) keep in full force and effect all insurance policies now
carried by Northeast Bancorp and First National;
(f) perform in all material respects each of Northeast Bancorp's
and First National's obligations under all material
agreements, contracts, instruments and other commitments to
which Northeast Bancorp or First National is a party or by
which Northeast Bancorp or First National may be bound or
which relate to or affect its properties, assets and business;
(g) maintain its books of account and other records in the
Ordinary Course of Business;
(h) comply in all material respects with all statutes, laws,
ordinances, rules and regulations, decrees, orders, consent
agreements, examination reports, memoranda
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of understanding and other federal, state, county, local and
municipal governmental directives applicable to Northeast
Bancorp and First National and to the conduct of its business;
(i) not amend Northeast Bancorp's or First National's Certificate
or Articles of Incorporation or Bylaws;
(j) other than in the Ordinary Course of Business and consistent
with past practice, not enter into or assume any material
contract, incur any material liability or obligation, make any
material commitment, acquire or dispose of any property or
asset or engage in any transaction or subject any of Northeast
Bancorp's or First National's properties or assets to any
material lien, claim, charge, or encumbrance of any kind
whatsoever;
(k) not take or permit to be taken any action which would
constitute a material breach of any representation, warranty
or covenant set forth in this Agreement;
(l) not declare, set aside or pay any dividend or make any other
distribution in respect of Northeast Bancorp and First
National Common Stock, except as provided in Section 4.9 of
this Article IV;
(m) not authorize, purchase, issue or sell (or authorize, issue or
grant options, warrants or rights to purchase or sell) any
shares of Northeast Bancorp Common Stock or any other equity
or debt securities of Northeast Bancorp or any securities
convertible into Northeast Bancorp Common Stock;
(n) not increase the rate of compensation of, pay a severance
compensation to, or enter into any employment, severance,
deferred compensation or other agreement with any officer,
director, shareholder, employee or consultant of Northeast
Bancorp or First National, except that Northeast Bancorp or
First National may grant bonuses and general salary increases
to individual employees in the ordinary course of business
consistent with past practice.
(o) not enter into any related party transaction of the kind
contemplated in Section 3.1(k) of this Agreement except such
related party transactions relating to extensions of credit
made in accordance with all applicable laws, regulations and
rules and in the Ordinary Course of Business on substantially
the same terms, including interest rates and collateral, as
those prevailing at the time for comparable arm's length
transactions with other persons that do not involve more than
the normal risk of collectability or present other unfavorable
features and after disclosure of such to Sterling;
(p) not change the presently outstanding number of shares or
effect any capitalization, reclassification, stock dividends,
stock split or like change in capitalization;
(q) not enter into or substantially modify (except as may be
required by applicable law) any pension, retirement, stock
option, stock warrant, stock purchase, stock
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appreciation right, savings, profit sharing, deferred
compensation, severance, consulting, bonus, group insurance or
other employee benefit, incentive or welfare contract, or plan
or arrangement, or any trust agreement related thereto, in
respect to any of its directors, officers, or other employees;
(r) not merge with or into, or consolidate with, or be purchased
or acquired by, any other corporation, financial institution,
entity, or person (or agree to any such merger, consolidation,
affiliation, purchase or acquisition) or permit (or agree to
permit) any other corporation, financial institution, entity
or person to be merged with it or consolidate or affiliate
with any other corporation, financial institution, entity or
person; acquire control over any other firm, financial
institution, corporation or organization or create any
subsidiary; acquire, liquidate, sell or dispose (or agree to
acquire, liquidate, sell or dispose) of any assets other than
in the Ordinary Course of Business and consistent with prior
practice;
(s) except as permitted by Section 4.8 hereof, not solicit or
encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations or
discussions concerning any acquisition or purchase of all or a
substantial equity interest or portion of the assets in or of
Northeast Bancorp or First National or any business
combination with Northeast Bancorp or First National other
than as contemplated by this Agreement, or authorize or permit
any officer, director, agent or affiliate of it to do any of
the above; or, except as permitted by Section 4.8 hereof, fail
to notify Sterling immediately if any such inquiries or
proposals are received by, any such information is requested
from, or any such negotiations are sought to be initiated with
Northeast Bancorp or First National,
(t) not change any method, practice or principle of accounting
except as may be required by generally accepted accounting
principles or any applicable regulation or take any action
that would preclude satisfaction of the condition to closing
contained in Section 6.2(d) relating to financial accounting
treatment of the Merger;
(u) not make any loan or other credit facility commitment in
excess of $500,000 (including without limitation, lines of
credit and letters of credit) to any affiliate or compromise,
expand, or modify any such outstanding commitment;
(v) not enter into any swap or similar commitment, agreement or
arrangement which is not consistent with past practice and
which increases the credit or interest rate risk over the
levels existing at December 31, 1998;
(w) not enter into any derivative, cap or floor or similar
commitment, agreement or arrangement, except in the Ordinary
Course of Business and consistent with past practices;
(x) not enter into any participation arrangements or approvals of
extensions of credit in excess of $600,000 or expand or modify
any outstanding participation arrangements or approvals;
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(y) not take any action which would result in any of the
representations and warranties of Northeast Bancorp or First
National set forth in this Agreement becoming untrue as of any
date after the date hereof;
(z) other than in the Ordinary Course of Business and consistent
with past practice, not sell, exchange or otherwise dispose of
any investment securities or loans that are held for sale,
prior to scheduled maturity and other than pursuant to
policies agreed upon from time to time by the parties;
(aa) not purchase any security for its investment portfolio not
rated "A" or higher by either Standard & Poor's Ratings
Service or Moody's Investor Services, Inc.;
(bb) not waive, release, grant or transfer any rights of value or
modify or change in any material respect any existing
agreement to which Northeast Bancorp or First National is a
party, other than in the Ordinary Course of Business
consistent with past practice;
(cc) not knowingly take any action that would, under any statute,
regulation or administrative practice of any regulatory
agency, materially or adversely affect the ability of any
party to this Agreement to obtain any required approvals for
consummation of the transaction; and
(dd) not agree to any of the foregoing items (i) through (cc).
SECTION 4.2 Reasonable Best Efforts.
Northeast Bancorp and First National shall cooperate with Sterling and
Sterling AC and each shall use its reasonable best efforts to do or cause to be
done all things necessary or appropriate on its part in order to fulfill the
conditions precedent set forth in Article VI of this Agreement and to consummate
this Agreement. In particular, without limiting the generality of the foregoing
sentence, Northeast Bancorp and First National shall:
(a) cooperate with Sterling and Sterling AC in the preparation of
all required applications for regulatory approval of the
transactions contemplated by this Agreement and in the
preparation of the Registration Statement (as defined in
Section 5.1(b) of this Agreement);
(b) call a special or annual meeting of Northeast Bancorp
shareholders and take, in good faith, all actions which are
necessary or appropriate on its part in order to secure the
adoption of this Agreement by its shareholders at that
meeting, including recommending the adoption of the Agreement
by the shareholders of Northeast Bancorp, provided, however,
that the Board of Directors of Northeast Bancorp may withdraw
or modify its recommendation that its shareholders adopt this
Agreement
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if such Board of Directors determines, in good faith, that an
Acquisition Proposal (as hereinafter defined) constitutes a
Superior Proposal (as hereinafter defined) ; and
(c) suspend any dividend reinvestment and/or stock repurchase
plan, as soon as practicable.
SECTION 4.3 Access to Properties and Records.
Northeast Bancorp and First National shall give to Sterling, Sterling
AC and their authorized representatives (including, without limitation, their
counsel, accountants, economic and environmental consultants and other
designated representatives) reasonable access during normal business hours,
throughout the period prior to the Effective Time or earlier termination of this
Agreement, to all properties, books, contracts, documents and records of
Northeast Bancorp or First National as Sterling or Sterling AC may reasonably
request, subject to the obligations of Sterling, Sterling AC and their
authorized representatives to maintain the confidentiality of all non-public
information concerning Northeast Bancorp or First National obtained by reason of
such access.
SECTION 4.4 Subsequent Financial Statements.
Between the date of execution of this Agreement and the Effective Date,
Northeast Bancorp shall promptly prepare and deliver to Sterling and Sterling AC
as soon as practicable all internal monthly and quarterly financial statements,
reports to shareholders and reports to regulatory authorities prepared by or for
Northeast Bancorp, including all audit reports submitted to Northeast Bancorp by
independent auditors in connection with each annual, interim or special audit of
the books of Northeast Bancorp made by such accountants. In particular, without
limiting the generality of the foregoing sentence, Northeast Bancorp shall
deliver to Sterling and Sterling AC as soon as practicable a balance sheet as of
December 31, 1998 and a related statement of income for the twelve (12) months
then ended (which financial statements are hereinafter referred to as the
"December 31, 1998 Financial Statements"). The representations and warranties
set forth in Section 3.1(hh) of this Agreement shall apply to the December 31,
1998 Financial Statements.
SECTION 4.5 Board and Committee Minutes.
Northeast Bancorp and First National shall provide to Sterling, within
21 days after any meeting of the Board of Directors or any committee thereof or
any senior or executive management committee, a copy of the minutes of such
meeting. Northeast Bancorp and First National shall provide to Sterling at least
two (2) days prior to the Effective Time a copy of the minutes of the Board of
Directors or any committee thereof or any senior or executive management
committee occurring subsequent to the date of this Agreement and not previously
provided to Sterling.
SECTION 4.6 Update Schedule.
Northeast Bancorp and First National shall promptly disclose to
Sterling and Sterling AC in writing any change, addition, deletion or other
modification to the information set forth in the Annexes to this Agreement.
Notwithstanding the foregoing, disclosures made subsequent to the date
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of this Agreement shall not relieve Northeast Bancorp or First National from any
and all liabilities for prior statements and disclosures to Sterling and
Sterling AC.
SECTION 4.7 Notice.
Northeast Bancorp and First National shall promptly notify Sterling and
Sterling AC in writing of any actions, claims, investigations, proceedings or
other developments which, if pending or in existence on the date of this
Agreement, would have been required to be disclosed to Sterling and Sterling AC
in order to ensure the accuracy of the representations and warranties set forth
in this Agreement or which otherwise could materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business operations or
future prospects of Northeast Bancorp or First National.
SECTION 4.8 Other Proposals.
Northeast Bancorp and First National shall not, nor shall either of
them authorize or permit any officer, director, employee, agent, consultant,
counsel or other representative (whether or not acting on behalf of Northeast
Bancorp or First National) to, directly or indirectly, solicit, encourage
(including by way of furnishing non-public information), initiate or engage in
discussions or negotiations with, or respond to requests for information,
inquiries or other communications or take any other action to facilitate any
inquiries from any persons or the making of any proposals other than Sterling or
Sterling AC concerning the fact of, or the terms and conditions of, this
Agreement, or concerning any acquisition of Northeast Bancorp or First National,
or any assets or business thereof (except that Northeast Bancorp officers may
respond to inquiries from analysts, regulatory authorities and holders of
Northeast Bancorp Common Stock in the Ordinary Course of Business and as
provided herein), provided, however, that notwithstanding any other provision of
this Agreement, Northeast Bancorp and First National may (i) comply with Rule
14e-2 promulgated under the Exchange Act with regard to a tender or exchange
offer; and (ii) prior to the time Northeast Bancorp stockholders shall have
voted to adopt this Agreement, (A) engage in discussions or negotiations with a
third party who (without any solicitation, initiation, encouragement, discussion
or negotiation, directly or indirectly, by or with the party or its
representatives after the date of this Agreement) seeks to initiate such
discussions or negotiations, and may furnish such third party information
concerning the party and its business, properties and assets if, and only to the
extent that, (1) the third party has first made an Acquisition Proposal that the
Board of Directors of Northeast Bancorp or First National believes in good faith
(after consultation with its financial advisor) is reasonably capable of being
completed, taking into account all relevant legal, financial, regulatory and
other aspects of the Acquisition Proposal and the source of its financing, on
the terms proposed and, believes in good faith (after consultation with its
financial advisor and after taking into account the strategic benefits
anticipated to be derived from the Merger and the long-term prospects of
Northeast Bancorp and First National as a combined company), would, if
consummated, result in a transaction more favorable to the stockholders of
Northeast Bancorp or First National, as the case may be, from a financial point
of view, than the transactions contemplated by this Agreement and believes in
good faith (after consultation with its financial advisor) that the person
making such Acquisition Proposal
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has, or is reasonably likely to have or obtain, any necessary funds or customary
commitments to provide any funds necessary to consummate such Acquisition
Proposal (any such more favorable Acquisition Proposal being referred in this
Agreement as "Superior Proposal"), and (2) prior to furnishing information to or
entering into discussions or negotiations with such person or entity, Northeast
Bancorp or First National (y) provides prompt notice to Sterling to the effect
that it is furnishing information to or entering into discussions or
negotiations with such person or entity and (z) receives from such person or
entity an executed confidentiality agreement in reasonably customary form on
terms not materially more favorable to such person or entity than the terms
contained in the Confidentiality Agreement, and/or (B) accepts a Superior
Proposal from a third party, provided that the conditions set forth in clauses
(A)(1) and (A)(2) above have been satisfied and Northeast Bancorp or First
National complies with and terminates this Agreement pursuant to Section 7.1(g).
Northeast Bancorp and First National and each of their respective officers,
directors, employees, agents, consultants, counsel and other representatives
(whether or not acting on behalf of Northeast Bancorp or First National) shall
immediately cease and terminate any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any persons or entities
conducted heretofore by Northeast Bancorp or First National or their
representatives with respect to the foregoing. Northeast Bancorp and First
National shall notify Sterling orally and in writing of any such inquiries,
offers or proposals (including terms and conditions of any such proposal and the
identity of the person making it), within 24 hours of the receipt thereof, and
shall keep Sterling informed of the status and details (including amendments or
proposed amendments) of any such inquiry, offer or proposal. As used herein,
"Acquisition Proposal" shall mean a written proposal or written offer (other
than by another party hereto) for a tender or exchange offer for securities of a
party hereto, or a merger, consolidation or other business combination involving
an acquisition of a party or any material subsidiary of a party or any proposal
to acquire in any manner a substantial equity interest in or a substantial
portion of the assets of a party or any material subsidiary of a party.
SECTION 4.9 Dividends.
Between the date of this Agreement and the Effective Date, Northeast
Bancorp shall only declare and pay cash dividends as provided herein. Northeast
Bancorp shall only pay regular quarterly cash dividends in an amount not in
excess of $0.25 per share during the first three calendar quarters of 1999.
Except as otherwise provided in this Section 4.9, Northeast Bancorp shall
maintain the same month and day (plus or minus 5 days) of the record dates and
payment dates of its quarterly dividends announced and paid in calendar year
1998 for the record and payment dates of its 1999 quarterly cash dividends.
SECTION 4.10 Core Deposits.
First National shall use commercially reasonable efforts to maintain
deposits.
SECTION 4.11 Affiliate Letters.
Northeast Bancorp shall deliver or cause to be delivered to Sterling or
Sterling AC, at or before the Closing (as defined in Section 1.1(b) of this
Agreement), a letter or agreement from each officer, director and shareholder of
Northeast Bancorp who may be deemed to be an "affiliate" (as that term is
defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933
Act)
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of Northeast Bancorp, in form and substance satisfactory to Sterling and
Sterling AC, under the terms of which each such officer, director or shareholder
acknowledges and agrees to abide by all limitations imposed by the 1933 Act and
by all rules, regulations and releases promulgated thereunder with respect to
the sale or other disposition of the shares of Sterling Common Stock to be
received by such person pursuant to this Agreement.
SECTION 4.12 No Purchases or Sales of Sterling Common Stock During Price
Determination Period.
Neither Northeast Bancorp, First National nor any executive officer or
director of Northeast Bancorp or First National nor any shareholder of Northeast
Bancorp who may be deemed to be an "affiliate" (as that term is defined for
purposes of Rules 145 and 405 promulgated by the SEC under the 1933 Act) of
Northeast Bancorp shall purchase or sell, or submit a bid to purchase or an
offer to sell, directly or indirectly, any shares of Sterling Common Stock or
any options, rights or other securities convertible into shares of Sterling
Common Stock during the Price Determination Period.
SECTION 4.13 Accounting Treatment.
Northeast Bancorp acknowledges that Sterling presently intends to treat
the business combination contemplated by this Agreement as a "pooling of
interests" for financial reporting purposes. Neither Northeast Bancorp nor First
National shall take (and shall use its best efforts not to permit any of its
directors, officers, employees, shareholders, agents, consultants or other
representatives to take) any action which would preclude Sterling from treating
such business combination as a "pooling of interests" for financial reporting
purposes.
SECTION 4.14 Press Releases and Public Announcements.
Neither Northeast Bancorp nor First National shall issue any press
release related to this Agreement or the transactions contemplated hereby as to
which Sterling has not given its prior written consent, and shall consult with
Sterling as to the form and substance of other public disclosures related
thereto; provided, however, that nothing contained herein shall prohibit
Northeast Bancorp or First National from making any disclosure which its counsel
deems reasonably necessary.
SECTION 4.15 Phase I Environmental Audit.
Northeast Bancorp and First National shall permit, if Sterling elects
to do so at its own expense, a "phase I environmental audit" to be performed at
any physical location owned or occupied on the date hereof by Northeast Bancorp
or First National.
SECTION 4.16 KSOP
Northeast Bancorp and First National shall work in good faith with
Sterling and Sterling AC to resolve the outstanding issues regarding the First
National KSOP.
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ARTICLE V
COVENANTS OF STERLING AND STERLING AC
From the date of this Agreement until the Effective Date (as defined in
Section 1.1(c) of this Agreement), Sterling and Sterling AC covenant and agree
to do the following:
SECTION 5.1 Reasonable Best Efforts.
Sterling and Sterling AC shall cooperate with Northeast Bancorp and
First National and shall use their reasonable best efforts to do or cause to be
done all things necessary or appropriate on their part in order to fulfill the
conditions precedent set forth in Article VI of this Agreement and to consummate
this Agreement. In particular, without limiting the generality of the foregoing
sentence, Sterling and Sterling AC agree to do the following:
(a) Applications for Regulatory Approval. Sterling and Sterling AC
shall promptly prepare and file, with the cooperation and
assistance of Northeast Bancorp and First National, all
required applications for regulatory approval of the
transactions contemplated by this Agreement. Sterling shall
provide copies of all applications for regulatory approval to
Northeast Bancorp and First National for comment and review at
least five (5) business days in advance of the anticipated
filing date.
(b) Registration Statement. Sterling shall promptly prepare, with
the cooperation and assistance of Northeast Bancorp, and file
with the SEC, a registration statement under the 1933 Act (the
"Registration Statement") for the purpose of registering the
shares of Sterling Common Stock to be issued under the
provisions of this Agreement. Sterling may rely upon all
information provided to it by Northeast Bancorp in this
connection and Sterling shall not be liable for any untrue
statement of a material fact or any omission to state a
material fact in the Registration Statement or in the proxy
statement and prospectus (the "Proxy Statement/Prospectus")
which is prepared as a part thereof, if such statement is made
by Sterling in reliance upon any information provided to
Sterling by Northeast Bancorp or by its agents and
representatives. Sterling will promptly advise Northeast
Bancorp, after it receives notice thereof, of the time when
the Registration Statement or any Pre- or Post-Effective
Amendment thereto has become effective or any supplement or
amendment has been filed. Sterling shall provide a copy of the
Registration Statement to Northeast Bancorp and First National
for comment and review at least ten (10) business days in
advance of the anticipated filing date.
(c) State Securities Laws. Sterling and Sterling AC, with the
cooperation of Northeast Bancorp and First National, shall
promptly take all such actions as may be necessary or
appropriate in order to comply with all applicable securities
laws of any state or other jurisdiction having jurisdiction
over the transactions contemplated by this Agreement. Sterling
shall provide a copy of any anticipated application or filing
to Northeast Bancorp and First National for comment and review
at least five (5) business days in advance of the anticipated
filing date.
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SECTION 5.2 Access to Properties and Records.
Sterling and Sterling AC shall give to Northeast Bancorp and First
National and to their authorized representatives (including, without limitation,
counsel, accountants, economic and environmental consultants and other
designated representatives) reasonable access during normal business hours to
all properties, books, contracts, documents and records of Sterling, Sterling AC
and Bank of Lancaster County as they may reasonably request, subject to their
obligation and the obligation of their authorized representatives to maintain
the confidentiality of all non-public information concerning Sterling, Sterling
AC or Bank of Lancaster County obtained by reason of such access.
SECTION 5.3 Subsequent Financial Statements.
Between the date of execution of this Agreement and the Effective Date,
Sterling shall promptly prepare and deliver to Northeast Bancorp as soon as
practicable each Quarterly Report to Sterling's shareholders and any Annual
Report to Sterling's shareholders normally prepared by Sterling. The
representations and warranties set forth in Section 3.2(e) of this Agreement
shall apply to the financial statements set forth in the foregoing Quarterly
Reports and any Annual Report to Sterling's shareholders.
SECTION 5.4 Update Schedule.
Sterling and Sterling AC shall promptly disclose to Northeast Bancorp
and First National in writing any change, addition, deletion or other
modification to the information set forth in its Annexes to this Agreement.
Notwithstanding the foregoing, disclosures made subsequent to the date of this
Agreement shall not relieve Sterling or Sterling AC from any and all liabilities
for prior statements and disclosures to Northeast Bancorp and First National.
SECTION 5.5 Notice.
Sterling and Sterling AC shall promptly notify Northeast Bancorp and
First National in writing of any actions, claims, investigations, proceedings or
other developments which, if pending or in existence on the date of this
Agreement, would have been required to be disclosed to them in order to ensure
the accuracy of the representations and warranties set forth in this Agreement
or which otherwise could materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business, operations or future
prospects of Sterling and Sterling AC.
SECTION 5.6 No Purchase or Sale of Sterling Common Stock During Price
Determination Period.
Neither Sterling nor any subsidiary of Sterling, nor any executive
officer or director of Sterling or any subsidiary of Sterling, nor any
shareholder of Sterling who may be deemed to be an "affiliate" (as that term is
defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933
Act) of Sterling, shall purchase or sell, or submit a bid to purchase or an
offer to sell, directly or indirectly, any shares of Sterling Common Stock or
any options, rights or other securities convertible into shares of Sterling
Common Stock during the Price Determination Period; provided, however, that
Sterling may purchase shares of Sterling Common Stock in the Ordinary Course of
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Business during the Price Determination Period pursuant to Sterling's employee
benefit plans, stock option plans or Sterling's dividend reinvestment and stock
purchase plan.
SECTION 5.7 Publicity.
Sterling shall provide to Northeast Bancorp, for review and comment,
copies of any press releases and public disclosures related to this Agreement
and the transactions contemplated hereby, prior to any public release of such
press release or disclsure, and shall not make any such press release without
Northeast Bancorp's prior consent. Notwithstanding the foregoing, Sterling
reserves the right to make such public disclosures and press releases as are
necessary pursuant to Sterling's obligations as a public company .
SECTION 5.8 KSOP
Sterling and Sterling AC shall work in good faith with Northeast
Bancorp and First National to resolve the outstanding issues regarding the First
National KSOP.
ARTICLE VI
CONDITIONS TO CONSUMMATION
SECTION 6.1 Common Conditions.
The respective obligations of the parties to effect the Merger shall be
subject to the satisfaction or waiver prior to the Effective Time of the
following conditions:
(a) The Agreement and the transactions contemplated hereby shall
have been approved by the requisite vote of the shareholders
of Northeast Bancorp and Sterling (if applicable) in
accordance with applicable law.
(b) All approvals, consents or waivers required by any of the
Northeast Bancorp Regulatory Agencies or the Sterling
Regulatory Agencies with respect to this Agreement (including
the Merger) and the transactions contemplated hereby
including, without limitation, the approvals, notices to,
consents or waivers of (i) the Board (as defined in Section
3.1(f) hereof), and (ii) the Pennsylvania Department of
Banking (the Northeast Bancorp Regulatory Agencies and the
Sterling Regulatory Agencies, are, collectively the
"Regulatory Agencies") shall have been obtained and shall
remain in full force and effect, and all applicable statutory
waiting periods (including without limitation all applicable
statutory waiting periods relating to the Merger) shall have
expired; and the parties shall have procured all other
regulatory approvals, consents or waivers of governmental
authorities or other persons that are necessary or appropriate
to the consummation of the transactions contemplated by this
Agreement except those approvals, consents or waivers, if any,
of which failure to obtain would not, individually or in the
aggregate, have a Material Adverse Effect on Sterling,
Sterling AC, Northeast Bancorp or First National (after giving
effect to the transaction contemplated hereby); provided,
however, that no such approval shall
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have imposed any Material adverse condition or requirement
which in the opinion of the board of directors of Sterling
renders consummation of the Merger inadvisable.
(c) All other requirements prescribed by law which are necessary
to the consummation of the transactions contemplated by this
Agreement shall have been satisfied.
(d) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction
which enjoins or prohibits the consummation of the Merger or
any other transaction contemplated by this Agreement, and no
litigation or proceeding shall be pending against any of the
parties herein or any of their subsidiaries brought by any
governmental agency seeking to prevent consummation of the
transactions contemplated hereby.
(e) No statute, rule, regulation, order, injunction or decree
shall have been enacted, entered, promulgated or enforced by
any governmental authority which prohibits, restricts or makes
illegal consummation of the Merger or any other transaction
contemplated by this Agreement.
(f) As promptly as possible after the date of this Agreement, the
Registration Statement shall have been filed (the date of
which is referred to herein as the "Filing Date") by Sterling
with the SEC under the 1933 Act, and shall have been declared
effective prior to the time the Proxy Statement/ Prospectus is
first mailed to the shareholders of Northeast Bancorp, and no
stop order with respect to the effectiveness of the
Registration Statement shall have been issued; the Sterling
Common Stock to be issued pursuant to this Agreement shall be
duly registered or qualified under the securities or "blue
sky" laws of all states or other jurisdictions in which such
action is required for purposes of the initial issuance of
such shares and the distribution thereof to the shareholders
of Northeast Bancorp entitled to receive such shares.
(g) The receipt of a ruling from the IRS or an opinion of Shumaker
Williams, P.C., or from an accounting firm acceptable to
Sterling to the effect that:
(i) The Merger will constitute a reorganization within
the meaning of Section 368(a) of the Code and
Northeast Bancorp, Sterling and Sterling AC will each
be a "party to a reorganization" within the meaning
of Section 368(b) of the Code;
(ii) No gain or loss will be recognized by Northeast
Bancorp, Sterling or Sterling AC by reason of the
Merger;
(iii) Except for cash received in lieu of fractional shares
and cash received by Northeast Bancorp Shareholders
who exercise their dissenter's rights, no gain or
loss will be recognized by the shareholders of
Northeast Bancorp who receive solely Sterling Common
Stock upon the exchange of their shares of Northeast
Bancorp Common Stock for shares of Sterling Common
Stock;
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(iv) The tax basis of the Sterling Common Stock to be
received by the Northeast Bancorp shareholders will
be, in each instance, the same as the basis of the
Northeast Bancorp Common Stock surrendered in
exchange therefor;
(v) The holding period of the Sterling Common Stock
received by a Northeast Bancorp shareholder receiving
Sterling Common Stock will include the period during
which the Northeast Bancorp Common Stock surrendered
in exchange therefor was held, provided the Northeast
Bancorp Common Stock was held as a capital asset by
the shareholder at the time of the exchange;
(vi) Cash received by a Northeast Bancorp shareholder in
lieu of a fractional share interest of Sterling
Common Stock or upon exercise of dissenter's rights
will be treated as having been received as a
distribution in full payment in exchange for the
fractional share interest of Sterling Common Stock
which he would otherwise be entitled to receive, or
for the shares surrendered, as the case may be, and
will qualify as capital gain or loss; and
(vii) Subject to any limitations imposed under Sections 381
and 382 of the Code, Sterling AC, as the survivor to
the Merger, will carry-over and take into account all
accounting items and tax attributes of Northeast
Bancorp, including but not limited to earning and
profits, methods of accounting, and tax basis and
holding periods of Northeast Bancorp.
In case a ruling from the IRS is sought, Northeast Bancorp and Sterling
shall cooperate and each shall furnish to the other and to the IRS such
information and representations as shall, in the opinion of counsel for
Sterling and Northeast Bancorp, be necessary or advisable to obtain
such ruling.
(h) Listing of Shares. The shares of Sterling Common Stock
issuable in connection with the Merger pursuant to Article II
hereof shall have been approved for listing on the NASDAQ
Stock Market, subject to official notice of issuance.
(i) The Merger shall as of the date of the Closing meet the
requirements for pooling-of-interests accounting treatment
under generally accepted accounting principles and under the
accounting rules of the SEC, and Sterling shall have received
a letter from an accounting firm of its choice in form and
substance reasonably satisfactory to Sterling as to the
matters specified in this Section 6.1(i).
SECTION 6.2 Conditions to Obligations of Sterling and Sterling AC.
The obligations of Sterling and Sterling AC to effect the Merger shall
be subject to the satisfaction or waiver prior to the Effective Time of the
following additional conditions:
(a) Each of the representations and warranties of Northeast
Bancorp and First National contained in this Agreement shall
be true and correct in all material respects as of the
Effective Date as if made on such date (or on the date when
made in the case of any
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representation or warranty which specifically relates to an
earlier date); each of Northeast Bancorp and First National
shall have performed in all material respects each of its
covenants and agreements contained in this Agreement; and
Sterling and Sterling AC shall have received certificates
signed by the President and the Cashier of First National and
the President and Secretary of Northeast Bancorp, dated as of
the date of the Closing, to the foregoing effect.
(b) Whisman, Grygiel, & Giordano, or such other accounting firm as
is acceptable to the parties, shall have furnished to Sterling
an "agreed upon procedures" letter, dated the Effective Date,
in form and substance satisfactory to Sterling to the effect
that, based upon a procedure performed with respect to the
financial condition of Northeast Bancorp, First National and
affiliates, for the period from December 31, 1998 to a
specified date not more than five (5) days prior to the date
of such letter, including but not limited to (a) their
inspection of the minute books of Northeast Bancorp, First
National and affiliates, (b) inquiries made by them of
officers and other employees of Northeast Bancorp, First
National and affiliates responsible for financial and
accounting matters as to transaction, and events during the
period, as to consistency of accounting procedures with prior
periods and as to the existence and disclosure of any material
contingent liabilities, and (c) of other specified procedures
and inquiries performed by them, nothing has come to their
attention that would indicate that (A) during the period from
December 31, 1998 to a specified date not more than five (5)
days prior to the date of such letter, there was any change in
the capitalization of Northeast Bancorp or First National on a
consolidated basis, or (B) any material adjustments would be
required to the audited financial statements for the period
ended December 31, 1998 in order for them to be in conformity
with generally accepted accounting principles applied on a
consistent basis with that of prior periods.
(c) There shall not have occurred any change in the financial
condition, properties, assets, business or results of
operation of Northeast Bancorp or First National which,
individually or in the aggregate, has had or might reasonably
be expected to result in a Material Adverse Effect on
Northeast Bancorp or First National.
(d) Sterling shall have received an opinion or opinions dated as
of the Effective Date, from Richards, Layton & Finger, P.A.,
or other counsel reasonably satisfactory to Sterling
substantially in the form attached hereto as Exhibit A.
(e) Sterling shall have received from each of the persons
identified by Northeast Bancorp pursuant to Section 4.11
hereof an executed counterpart of an affiliate's agreement in
the form contemplated by such Section.
(f) Except as otherwise provided in this Agreement, prior to
Closing, all issued and outstanding options, warrants or
rights to acquire Northeast Bancorp Common Stock or any
capital stock of First National ("First National Common
Stock") shall have been canceled. No compensation or other
rights will be payable or exchangeable in
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the Merger in respect of any such rights which remain
unexercised at the Effective Time.
(g) Dissenting Shareholders. Holders of no more than eight percent
(8%) of the issued and outstanding shares of Northeast Bancorp
(27,104 shares) shall have exercised their statutory appraisal
or Dissenters' Rights.
(h) Environmental Matters. No environmental problem of the kind
contemplated in Section 3.1(q) of Article III of this
Agreement and not previously disclosed on Annex 3.1(q) shall
have been discovered which would, or which potentially could,
materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business, operations or
future prospects of Northeast Bancorp or First National;
provided, that for purposes of determining the materiality of
an undisclosed environmental problem or problems, the
definition of "material" shall be governed by the proviso to
Section 9.1 of this Agreement. The result of any "phase I
environmental audit" conducted pursuant to Section 4.15 with
respect to owned or occupied bank premises shall be reasonably
satisfactory to Sterling.
(i) Benefit Plans. Sterling shall have determined within
forty-five (45) days of the execution of this Agreement that
the medical, health, insurance, and employee benefit plans or
programs of Northeast Bancorp and/or First National do not
contain any provision or term which, upon assumption by
Sterling on the Effective Date, would require Sterling to
provide benefits or incur cost in excess of those provided or
paid by Northeast Bancorp or First National as of the date of
this Agreement.
(j) Litigation. All litigation pending against Northeast Bancorp
or First National which, individually or in the aggregate,
would have a Material Adverse Effect on Northeast Bancorp's
consolidated operations or future prospects, shall have been
settled or be of a status satisfactory to Sterling.
SECTION 6.3 Conditions to the Obligations of Northeast Bancorp and First
National.
The obligations of Northeast Bancorp to effect the Merger shall be
subject to the satisfaction or waiver prior to the Effective Time of the
following additional conditions:
(a) Each of the representations, warranties and covenants of
Sterling and Sterling AC contained in this Agreement shall be
true and correct in all material respects on the Effective
Date as if made on such date (or on the date when made in the
case of any representation or warranty which specifically
relates to an earlier date); Sterling and Sterling AC shall
have performed in all material respects each of its covenants
and agreements contained in this Agreement; and Northeast
Bancorp shall have received certificates signed by the
President and Secretary or Vice President or Assistant
Secretary of Sterling and Sterling AC dated as of the date of
the Closing, to the foregoing effect.
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(b) There shall not have occurred any change in the financial
condition, properties, assets or business or results of
operation of Sterling and Sterling AC which, individually or
in the aggregate, has had or might reasonably be expected to
result in a Material Adverse Effect on Sterling or its
subsidiaries taken as a whole.
(c) Northeast Bancorp shall have received an opinion dated as of
the Effective Date, from Shumaker Williams, P.C., Camp Hill,
Pennsylvania, counsel to Sterling and Sterling AC,
substantially in the form attached hereto as Exhibit B.
(d) The status of all pending litigation that might reasonably be
expected to result in a Materially Adverse Effect to Sterling
or its subsidiaries taken as a whole, shall be satisfactory to
Northeast Bancorp.
(e) Northeast Bancorp shall have received an updated opinion from
Garland McPherson & Associates, Inc., as of a date no later
than five (5) days before the date of the Proxy
Statement/Prospectus mailed to the Northeast Bancorp
shareholders in connection with the Merger, to the effect that
the Merger consideration is fair to Northeast Bancorp's
shareholders from a financial point of view.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination.
This Agreement may be terminated, and the Merger abandoned, prior to
the Effective Time, either before or after its approval by the shareholders of
Northeast Bancorp:
(a) by the mutual, written consent of the board of directors of
each of Northeast Bancorp and Sterling;
(b) by Northeast Bancorp by written notice to Sterling in the
event (i) that there has been any material breach or breaches
by Sterling or Sterling AC of any representation, warranty,
covenant or agreement contained herein, which breaches,
individually or in the aggregate, would result in monetary
damages in excess of $800,000, and such breach or breaches are
not cured or not curable within thirty (30) days after written
notice of such breach is given to Sterling by Northeast
Bancorp or (ii) that any condition precedent to Northeast
Bancorp's obligations as set forth in Article VI of this
Agreement has not been met or waived by Northeast Bancorp at
such time as such condition can no longer be satisfied through
no fault of Northeast Bancorp or First National, on October
31, 1999.
(c) by Sterling by written notice to the other parties, in the
event (i) that there has been any material breach or breaches
by Northeast Bancorp or First National of any representation,
warranty, covenant or agreement contained herein, which
breaches, individually or in the aggregate, would result in
monetary damages of $150,000 and
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such breach or breaches are not cured or not curable within
thirty (30) days after written notice of such breach is given
to Northeast Bancorp by Sterling or (ii) that any condition
precedent to Sterling's obligations as set forth in Article VI
of this Agreement has not been met or waived by Sterling at
such time as such condition can no longer be satisfied,
through no fault of Sterling or Sterling AC, on October 31,
1999.
(d) by Sterling or Northeast Bancorp by written notice to the
other, in the event that the Merger is not consummated by
October 31, 1999, unless the failure to so consummate by such
time is due to the material breach of any representation,
warranty or covenant contained in this Agreement by the party
seeking to terminate, provided, however, that such date may be
extended by the written agreement of the parties hereto.
(e) by Northeast Bancorp, whether before or after approval of the
Merger by the Northeast Bancorp shareholders, by giving
written notice to Sterling within one (1) day following a
determination that the Closing Market Price of the Sterling
Common Stock is less than $32.00 per share at the time such
calculation is required to be made pursuant to Section 2.1(d)
hereof.
(f) by Sterling, by giving written notice to Northeast Bancorp
within one (1) day following a determination that the Closing
Market Price of the Sterling Common Stock is greater than
$50.00 per share at the time such calculation is required to
be made pursuant to Section 2.1(d) hereof.
(g) By Northeast Bancorp, at any time after the date of this
Agreement and prior to obtaining the Northeast Bancorp
shareholders' approval, and on 72 hours prior written notice
to Sterling (the "Northeast Bancorp Notice") (i) if the Board
of Directors of Northeast Bancorp withdraws or modifies, in
any manner material to Sterling, its approval or
recommendation of this Agreement or the Merger, pursuant to
and in accordance with Section 4.2(b) hereof, or (ii) pursuant
to Section 4.8 but only if during the 72 hour period after the
Northeast Bancorp Notice, (A) Northeast Bancorp shall have
negotiated with, and shall have caused its respective legal
and financial advisors to negotiate with, Sterling to attempt
to make such commercially reasonable adjustments in the terms
and conditions of this Agreement as would enable Northeast
Bancorp to proceed with the transactions contemplated herein
and (B) the Board of Directors of Northeast Bancorp shall have
concluded, after considering the results of such negotiations,
that any Superior Proposal giving rise to such Northeast
Bancorp Notice continues to be a Superior Proposal as defined
in Section 4.8.
(h) by Northeast Bancorp or First National pursuant to Section
2.3(b)(v) hereof.
SECTION 7.2 Effect of Termination.
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In the event of the termination of this Agreement as provided above,
this Agreement shall thereafter become void and have no effect, except that the
provisions of Section 3.1(p) (Fees), Sections 4.3 and 5.2 (relating to
confidentiality and return of documents), Sections 4.14 and 5.7 (Press Releases
and Publicity) and Sections 7.3 and 9.10 (Expenses) of this Agreement shall
survive any such termination and abandonment.
SECTION 7.3 Expenses.
Any termination of this Agreement pursuant to Sections 7.1(a) or 7.l(d)
hereof shall be without cost, expense or liability on the part of any party to
the others. Any termination of this Agreement pursuant to Section 7.1(b) or
7.1(c) hereof shall also be without cost, liability or expense on the part of
any party to the others, unless the breach of a representation or warranty or
covenant is caused by the willful conduct or gross negligence of a party, in
which event said party shall be liable to the other parties for out-of pocket
costs and expenses including without limitation, reasonable legal, accounting
and investment banking fees and expenses, incurred by such other party in
connection with their entering into this Agreement and their carrying out of any
and all acts contemplated hereunder ("Expenses") but not to exceed, in the case
of Northeast Bancorp or First National, an amount equal to actual Expenses to
the extent that the Expenses do not exceed the amount recoverable under
Northeast Bancorp's maximum liability insurance coverage plus $300,000.
Notwithstanding the foregoing, in the event the termination is caused by fraud
on the part of Northeast Bancorp, First National or any of their officers,
directors, representatives or agents, Northeast Bancorp shall be liable for the
actual amount of Expenses. Any termination of this Agreement pursuant to Section
7.1(e), (f), (g), except as provided hereinafter, or (h) hereof shall also be
without cost, liability or expense on the part of any party to the others,
unless the termination is caused by willful misrepresentation or fraud of, in
the case of Section 7.1(e), (g) or (h), Northeast Bancorp or First National, in
which event Northeast Bancorp shall be liable to Sterling and Sterling AC for
all Expenses, and in the case of Section 7.1(f), Sterling or Sterling AC, in
which event Sterling shall be liable to Northeast Bancorp and First National for
all Expenses.
So long as Sterling shall not have breached its obligations hereunder,
if this Agreement is terminated by Northeast pursuant to 7.1(g) hereof,
Northeast Bancorp shall promptly, but in no event later than three (3) business
days after such termination, pay Sterling a fee of $100,000, which amount shall
be payable by wire transfer of same day funds. If Northeast Bancorp fails to
promptly pay the amount due pursuant to this Section 7.3, and, in order to
obtain payment, Sterling commences a suit which results in judgment against
Northeast Bancorp for all or a substantial portion of the fee set forth in this
Section 7.3, Northeast Bancorp shall pay to Sterling all costs and expenses
(including reasonable attorney's fees) incurred by Sterling in connection with
such suit.
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ARTICLE VIII
POST MERGER AGREEMENTS
SECTION 8.1 Employees.
(a) First National's employees who are employed in good standing
and actively at work as of the Effective Date (the "Continuing
Employees") shall be employed and retained in their current
positions with compensation no less than current levels of
compensation, with such changes in the future as may be
appropriate, as determined in good faith by First National's
Board of Directors. Notwithstanding the foregoing, Sterling
shall retain the right to terminate any of the Continuing
Employees at any time following the Effective Date for
"Cause", as that term is defined in Section 8.1(d) hereof.
(b) Except as otherwise provided herein, after the Effective Date,
all benefits of the Continuing Employees will be maintained at
a level not less than the benefits enjoyed by the employees of
First National prior to the Effective Date, with such changes
in the future as may be appropriate, as determined in good
faith by First National's Board of Directors, provided that
the employee benefits provided to the Continuing Employees
after the Effective Date shall be substantially similar in
economic value to the employee benefits, in the aggregate,
provided by Sterling or Bank of Lancaster County to their
similarly situated employees.
(c) After the Effective Date, Continuing Employees shall be
eligible to apply for any positions available at Sterling, or
any of its subsidiaries.
(d) As used in this Article VIII, Sterling shall have "Cause" to
terminate a Continuing Employee's or officer's employment
hereunder upon: (1) violation of any law (other than minor
traffic offenses); (2) excessive absenteeism; (3) the
employee's or officer's failure or refusal to perform his
duties or obligations; (4) the failure to correct, to First
National's or Sterling's satisfaction, within thirty (30) days
after written notice to the employee or officer, such failure
or refusal; (5) insubordination; (6) theft or abuse of company
property or of the property of its customers, employees,
contractors or business associates; (7) dishonesty or
negligence of the employee or officer in the performance of
his or her duties; (8) working while intoxicated; (9)
violation of First National's or Sterling's rules, policies,
procedures or practices; (10) abuse of benefits or privileges
of employment; (11) unprofessional conduct toward or unlawful
discrimination against First National's or Sterling's
employees, customers, business associates, contractors or
visitors; (12) the willful engaging by the employee or officer
in misconduct injurious to First National or Sterling; (13)
the willful engaging by the employee or officer in any
business or commercial activities, duties or pursuits which
compete with the business or commercial activities of First
National or Sterling and a failure to cure such violation
within thirty (30) days of said notice, or if said violation
cannot be cured within thirty (30) days, within a reasonable
time thereafter unless the employee or officer is diligently
attempting to cure the violation; (14) the breach of the
employee's or officer's fiduciary duty; (15) the
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violation of any law, rule or regulation governing banks or
bank officers or any final cease and desist order issued by a
bank regulatory authority any of which materially jeopardizes
the business of First National or Sterling; (16) conduct on
the part of the employee or officer which brings public
discredit to First National or Sterling; or (17) such other
conduct or activities as shall be grounds for termination of
employment under the policies of First National, Sterling or
Bank of Lancaster County.
SECTION 8.2 Officers.
First National's officers who are employed in good standing and
actively at work as of the Effective Date (the "Continuing Officers") shall be
employed and retained in their current management positions with compensation at
least equal to their current levels of compensation, with such changes in the
future as may be appropriate, as determined in good faith by First National's
Board of Directors. Notwithstanding the foregoing and except as otherwise
limited by an agreement then in effect between a Sterling subsidiary and a
Continuing Officer, Sterling shall retain the right to terminate any of the
Continuing Officers at any time following the Effective Date for "Cause", as
that term is defined in Section 8.1(d) hereof.
SECTION 8.3 Directors.
Subject to any necessary regulatory approval or notice, immediately
after the Effective Time, S. Amy Argudo, who previously served as a director of
Northeast Bancorp shall be appointed to the board of directors of Sterling to
serve in the Class of Director to be elected at the year 2000 Sterling Annual
Meeting of Shareholders. Upon the expiration of the initial term of the person
elected to the board of directors of Sterling pursuant to this Section 8.3, and
consistent with the board members' fiduciary duties and law, the board of
directors of Sterling shall nominate and recommend to the shareholders of
Sterling, at the year 2000 Sterling Annual Meeting of Shareholders, the election
of said person to the board of directors of Sterling for an additional three (3)
year term, to serve until such time as his successor has been duly elected,
qualified, or appointed. Subject to any necessary regulatory approval or notice,
immediately after the EffectiveTime, Michael A. Carenzo shall be appointed to
the board of directors of Bank of Lancaster County. Such person appointed to the
board of directors of Bank of Lancaster County shall, consistent with the board
members' fiduciary duties and law, be nominated and recommended by the board of
directors of Bank of Lancaster County to serve three (3) successive one year
terms, and to serve until such time as his successor has been duly elected,
qualified or appointed. S. Amy Argudo and Michael A. Carenzo shall be
compensated for services as a Director of Sterling and a Director of Bank of
Lancaster County, respectively, at the normal rate for Directors of Sterling or
Bank of Lancaster County.
SECTION 8.4 First National Board of Directors.
(a) Composition; Term; Duties. Immediately following the
Effective Time, the Board of Directors of First National shall include
the members of the board immediately preceding the Effective Time, with
the addition of Mr. John E. Stefan and, if not already a member of the
Board of Directors of First National as of the Effective Time, Mr.
Robert W. Hutton. Following the Effective Time, and for a period of two
years thereafter, so long as it is consistent with its fiduciary
duties, Sterling shall recommend that Robert W. Hutton
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serve as Chairman of the Board of First National, with an annual
compensation for service as Chairman of the Board of Directors of
$18,000. Following the Effective Date, Sterling, so long as it is
consistent with its fiduciary duties, shall continue to recommend on an
annual basis that the then current members of the Board of Directors of
First National be re-elected to the Board of Directors of First
National.
(b) Compensation. Following the Effective Time, each
non-employee member of the First National board of directors shall
receive the same compensation for services rendered in his or her
capacity as a Director, as is in effect on the date of this Agreement,
subject to future changes by the Board of First National and Sterling
after the Effective Time.
SECTION 8.5 Benefits.
Following the Effective Time, and subject to the terms and conditions
of the applicable health and dental insurance policies, Sterling shall pay the
health and dental insurance premiums for Mr. Daniel A. Winter and Mr. Richard D.
McDaniel and their respective spouses. For as long as each such person is alive,
Sterling shall provide health and dental insurance which has benefits and terms
reasonably comparable to those provided by Northeast Bancorp or First National,
or, if Sterling cannot provide such benefits, Sterling shall provide Mr. Winter
and Mr. McDaniel and their respective spouses, each, a dollar amount equal to
the cost to each of them of obtaining such benefits (or substantially similar
benefits).
SECTION 8.6 Director and Officer Liability Insurance.
For a period of three years following the Effective Date, Sterling
shall pay the premiums for a Director and Officer Liability Insurance Tail
Policy for the Directors and Officers of Northeast Bancorp and First National as
of the Effective Date and for all former directors and officers of Northeast
Bancorp and First National, if so permitted by the insurance carrier and within
the financial limitations of this Section 8.6, with conditions and terms
substantially comparable to the Director and Officer Liability Policy of
Northeast Bancorp and First National as of the date of this Agreement, so long
as such policy can be obtained at a cost not in excess of 150% of the rate for
such Director and Officer Liability Insurance Tail Policy in effect as of the
date of this Agreement. In the event Sterling is unable to obtain such a
Director and Officer Liability Insurance Tail Policy at a cost not in excess of
150% of such rate, Sterling shall obtain a Director and Officer Liability
Insurance Tail Policy with the maximum coverage reasonably available for a cost
that is equal to 150% of such rate.
SECTION 8.7 Certain Matters.
Sterling shall continue the separate corporate existence of First
National as an operating subsidiary, with the corporate name "First National
Bank of North East", with such changes in the future as may be appropriate, as
determined by First National's Board of Directors. Sterling shall use its best
efforts to maintain the level of customer service and community support as has
been the custom of Northeast Bancorp and First National.
51
<PAGE>
ARTICLE IX
OTHER MATTERS
SECTION 9.1 Certain Definitions; interpretation.
As used in this Agreement, the following terms shall have the meanings
indicated:
"MATERIAL" means material to the party in question (as the
case may be) and its respective subsidiaries, taken as a
whole.
"MATERIAL ADVERSE EFFECT," with respect to a person, means any
condition, event, change or occurrence that has or results in
an effect which is material and adverse to (A) the financial
condition, properties, assets, business or results of
operations of such person and its subsidiaries, taken as a
whole, or (B) the ability of such person to perform its
obligations under, and to consummate the transactions
contemplated by, this Agreement. In the case of First
National, receipt of a CAMELS rating in connection with a
safety and soundness examination which is lower than the
rating given to First National in connection with the safety
and soundness examination most recently reported prior to the
date of this Agreement shall be deemed to have a "Material
Adverse Effect" on First National.
"PERSON" includes an individual, corporation, partnership,
association, limited liability company, trust or
unincorporated organization.
"SUBSIDIARY," with respect to a Person, means any other Person
controlled by such Person.
When a reference is made in this Agreement to Exhibits, Sections, Annexes or
Schedules, such reference shall be to a Section of, or Annex or Schedule to,
this Agreement unless otherwise indicated. The table of contents, tie sheet and
headings contained in this Agreement are for ease of reference only and shall
not affect the meaning or interpretation of this Agreement. Whenever the words
"include," "includes," or "including" are used in this Agreement, they shall be
deemed followed by the words "without limitation". Any singular term in this
Agreement shall be deemed to include the plural, and any plural term the
singular.
52
<PAGE>
SECTION 9.2 Survival.
The representations, warranties and agreements of the parties set forth
in this Agreement shall not survive the Effective Time, and shall be terminated
and extinguished at the Effective Time, and from and after the Effective Time
none of the parties hereto shall have any liability to the other on account of
any breach or failure of any of those representations, warranties and
agreements; provided, however, that the foregoing clause shall not (i) apply to
agreements of the parties which by their terms are intended to be performed
either in whole or in part after the Effective Time, and (ii) shall not relieve
any person of liability for fraud, deception or intentional misrepresentation.
SECTION 9.3 Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto and their respective successors and assigns, and, other than
the right to receive the consideration payable in the Merger pursuant to Article
II hereof or provided individually, is not intended to and shall not confer upon
any other person any rights, benefits or remedies of any nature whatsoever under
or by reason of this Agreement.
SECTION 9.4 Captions.
The captions contained in this Agreement are for reference purposes
only and are not part of this Agreement.
SECTION 9.5 Severability.
If any provision of this Agreement or the application thereof to any
party or circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such provisions to other
parties or circumstances shall not be affected thereby and shall be enforced to
the greatest extent permitted by law.
SECTION 9.6 Access; Confidentiality.
The parties hereby agree to conduct the investigations and discussions
contemplated by Section 4.3 and Section 5.2 of this Agreement in a manner so as
to not interfere unreasonably with normal operations and customer and employee
relationships. If the transactions contemplated by this Agreement are not
consummated, the parties hereby agree to destroy or return all documents and
records obtained from the other or their respective representatives during the
course of any investigation and will cause all information with respect to the
other party obtained pursuant to this Agreement or preliminarily thereto to be
kept confidential, except to the extent such information becomes public through
no fault of the party which has obtained such information or any of its
respective representatives or agents and except to the extent disclosure of any
such information is legally required. Each party hereby agrees to give the other
party prompt notice of any contemplated disclosure where such disclosure is so
legally required.
SECTION 9.7 Waiver and Amendment.
53
<PAGE>
Prior to the Effective Time, any provision of this Agreement may be:
(i) waived by the party benefitted by the provision; or (ii) amended or modified
at any time (including the structure of the transaction) by an agreement in
writing between the parties hereto approved by their respective boards of
directors, except that no amendment or waiver may be made that would change the
form or the amount of the merger consideration or otherwise have the effect of
prejudicing the Northeast Bancorp shareholders' interest in the merger
consideration following the Northeast Bancorp Shareholders' Meeting.
SECTION 9.8 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed to constitute an original, but all of which together shall constitute one
and the same instrument.
SECTION 9.9 Governing Law.
This Agreement shall be governed by, and interpreted in accordance
with, the laws of the State of Delaware, or, to the extent it may control,
federal law, without reference to the choice of law principles thereof.
SECTION 9.10 Expenses.
Subject to the provisions of Section 7.3 hereof, each party hereto will
bear all Expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby; provided, however, that all filing and other
fees (other than federal and state income taxes) required to be paid to any
governmental agency or authority in connection with the consummation of the
transactions contemplated hereby shall be paid by Sterling.
SECTION 9.11 Notices.
All notices, requests, acknowledgments and other communications
hereunder to a party shall be in writing and shall be deemed to have been duly
given when delivered by hand, telecopy, telegram or telex (confirmed in writing)
to such party at its address set forth below or such other address as such party
may specify by notice to the other party hereto.
If to Northeast Bancorp, to:
Northeast Bancorp, Inc.
14 S. Main Street
North East, MD 21901-3998
Attention: S. Amy Argudo
54
<PAGE>
With copies to:
Richards, Layton & Finger, P.A.
One Rodney Square
Wilmington, DE 19801
Attention: Martin I. Lubaroff, Esquire
If to First National, to:
First National Bank of North East
14 S. Main Street
North East, MD 21901-3998
Attention: John E. Hughes
With copies to:
Richards, Layton & Finger, P.A.
One Rodney Square
Wilmington, DE 19801
Attention: Martin I. Lubaroff, Esquire
If to Sterling, to:
Sterling Financial Corporation
North Pointe Banking Center
101 North Pointe Boulevard
Lancaster, PA 17601
Attention: Mr. John E. Stefan
President and Chief Executive Officer
With copies to:
Shumaker Williams, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Attention: Nicholas Bybel, Jr., Esquire
55
<PAGE>
If to Sterling AC, to:
Sterling AC, Inc.
c/o Sterling Financial Corporation
North Pointe Banking Center
101 North Pointe Boulevard
Lancaster, PA 17601
Attention: Mr. John E. Stefan
President and Chief Executive Officer
With copies to:
Shumaker Williams, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Attention: Nicholas Bybel, Jr., Esquire
SECTION 9.12 Entire Agreement; Etc.
This Agreement, together with such other agreements as are executed by
the parties in connection herewith, on the date hereof, represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made. All terms and provisions of this Agreement, together with such
other agreements as are executed by the parties in connection herewith, on the
date hereof, shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Nothing in this Agreement is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement except as expressly provided.
56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
STERLING FINANCIAL CORPORATION
/s/ Ronald L. Bowman /s/ John E. Stefan
- ---------------------------- --------------------------------------------
, Secretary By: John E. Stefan
Title: President and Chief Executive Officer
STERLING ACQUISITION CORPORATION
/s/ Jere L. Obetz /s/ John E. Stefan
- ---------------------------- --------------------------------------------
, Secretary By: John E. Stefan
Title: President and Chief Executive Officer
NORTHEAST BANCORP, INC.
/s/ S. Amy Argudo
- ---------------------------- --------------------------------------------
, Secretary By:
Title:
FIRST NATIONAL BANK OF NORTH EAST
/s/ S. Amy Argudo /s/ S. Amy Argudo
- ---------------------------- --------------------------------------------
, Secretary By:
Title:
57
<PAGE>
EXHIBIT A
02/10/99
[Letterhead of Counsel for Northeast]
[Date of Closing]
Board of Directors
STERLING FINANCIAL CORPORATION
North Pointe Banking Center
101 North Pointe Boulevard
Lancaster, Pa 17601
Ladies and Gentlemen:
We have acted as Special Counsel to Northeast Bancorp, Inc. ("Northeast
Bancorp"), a Delaware corporation, and First National Bank of North East ("First
National"), a national banking association, in connection with the Agreement and
Plan of Reorganization, dated as of February 10, 1999 (the "Agreement"), by and
among Sterling Financial Corporation ("Sterling"), Sterling Financial Interim
Acquisition Corporation ("Sterling AC"), Northeast Bancorp and First National,
pursuant to which Northeast Bancorp will be merged with and into Sterling AC
(the "Merger"). While this firm represents Northeast Bancorp and First National
in connection with specific legal matters as to which we are consulted by them,
we do not perform or provide legal services to either Northeast Bancorp or First
National in connection with the day-to-day operations of their business or
routine legal proceedings related thereto. This opinion is being delivered to
you in accordance with the provisions of Section 6.2(d) of the Agreement.
Except as otherwise indicated herein, capitalized terms used in this
opinion letter are defined as set forth in the Agreement. The law covered by the
opinions expressed herein is limited to the federal law of the United States and
the laws of the State of Delaware.
In connection with the opinions expressed herein, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
the articles of incorporation. the articles of association, the certificate of
incorporation, the certificate of good standing, the by-laws, the Agreement and
such other corporate and other records, certificates and documents as we have
considered necessary or appropriate for the purposes of rendering the opinions
set forth below.
Based upon and subject to the foregoing and the other terms and
provisions hereof, it is our opinion that:
1. Northeast Bancorp has been duly incorporated, and is validly
existing and in good standing as a corporation under the laws of the State of
Delaware, and is in good standing as a foreign corporation in each jurisdiction
where the properties owned, leased or operated, or the business conducted, by
Northeast Bancorp requires such qualification, except for where such failure to
qualify or be in such good standing, when taken together with all other such
failures,
<PAGE>
Board of Directors
STERLING FINANCIAL CORPORATION
[DATE]
Page 2
would not have a Material Adverse Effect on Northeast Bancorp and its
subsidiaries, taken as a whole. Northeast Bancorp is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended.
2. First National is a national banking association that is duly
organized, validly existing and in good standing under the laws of the United
States of America.
3. Each of Northeast Bancorp and First National has the requisite
corporate power and authority to carry on their respective businesses as they
are now being conducted and to own their respective properties and assets.
4. The authorized capital stock of Northeast Bancorp consists of
___________ shares of Northeast Bancorp Common Stock, par value $1.00 per share,
of which ______________ shares are issued and outstanding and _________ shares
are issued and held as treasury shares. The authorized capital stock of First
National consists of ________ shares of common stock, $____ par value per share,
of which _____________ shares of common stock are issued and outstanding as of
the date hereof, all of which are held by Northeast Bancorp. All of the
outstanding shares of capital stock of Northeast Bancorp and First National have
been duly authorized and are validly issued, fully paid and nonassessable.
Neither Northeast Bancorp nor First National has any shares of capital stock
reserved for issuance.
5. The shares of First National's common stock owned by Northeast
Bancorp are owned free and clear of all liens, pledges, security interests,
claims or other encumbrances. The outstanding shares of capital stock of
Northeast Bancorp and First National have not been issued in violation of any
preemptive rights.
6. To our actual knowledge, the only subsidiary of Northeast Bancorp is
First National and First National has no subsidiaries.
7. Each of Northeast Bancorp and First National has the requisite
corporate power and authority to execute and deliver the Agreement and to carry
out the transactions contemplated therein, and all corporate actions required to
be taken by Northeast Bancorp and First National to authorize the execution and
delivery of the Agreement and the performance of the transactions contemplated
therein have been taken. The Agreement has been duly authorized, executed and
delivered by Northeast Bancorp and First National and, assuming due
authorization, execution and delivery by Sterling and Sterling AC and the
receipt of required regulatory approvals and the approval of Northeast Bancorp
stockholders, constitutes a valid and binding obligation of Northeast Bancorp
and First National and is enforceable against each in accordance with its terms,
subject to bankruptcy, insolvency, moratorium, receivership, reorganization,
liquidation, fraudulent transfer and other laws of general applicability
relating to or affecting creditors' rights and general equity principles.
8. The execution, delivery and performance of the Agreement will not,
and the
<PAGE>
Board of Directors
STERLING FINANCIAL CORPORATION
[DATE]
Page 3
consummation of the transactions contemplated thereby will not, constitute (i) a
breach or violation of, or a default under, any statute, rule or regulation or
any judgment, decree, order, governmental permit or license, to which Northeast
Bancorp or First National (or any of its respective properties) is subject,
which breach, violation or default would have a Material Adverse Effect on it,
or enable any person to enjoin the Merger, (ii) a breach or violation of, or a
default under Northeast Bancorp's certificate of incorporation, the charter of
First National, or the bylaws of either of them, or (iii) except as disclosed in
Annex 3.1(e), a breach or violation of, or a default under (or an event which
with due notice or lapse of time or both would constitute a default under), or
result in the termination of, accelerate the performance required by, or result
in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the properties or assets of Northeast Bancorp or First
National under any of the terms, conditions or provisions of any note, bond,
indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which either is a party, or to which any of their respective
properties or assets may be bound, or affected, except for any of the foregoing
that, individually or in the aggregate, would not have a Material Adverse Effect
on it or enable any person to enjoin the Merger.
9. The consummation of the transactions contemplated by the Agreement
does not require as to Northeast Bancorp or First National any approval, consent
or waiver under any statute, rule, regulation, judgment, decree, order,
governmental permit or license or, to our actual knowledge, the approval,
consent or waiver of any other party to any such agreement, indenture or
instrument, other than (i) all required approvals, consents and waivers of
governmental authorities, and (ii) the approval of Northeast Bancorp's
shareholders referred to in Section 6.1(a) of the Agreement.
10. To our actual knowledge, except as set forth in Annex 3.1(i) to the
Agreement, there are no civil, criminal or administrative actions, suits,
claims, hearings, investigations or proceedings before any court, governmental
agency or otherwise pending against Northeast Bancorp or First National or (ii),
that, alone or in the aggregate, are reasonably likely to have a Material
Adverse Effect on Northeast Bancorp or First National or to hinder or delay, in
any material respect, consummation of the transactions contemplated by this
Agreement.
11. To our actual knowledge, neither Northeast Bancorp nor First
National is a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, or has adopted any board resolutions
at the request of, federal or state governmental authorities, including, without
limitation, the Northeast Bancorp Regulatory Agencies, charged with the
supervision or regulation of financial or depository institutions or engaged in
the insurance of bank deposits nor has it been advised by any Northeast Bancorp
Regulatory Agency that such body is
<PAGE>
Board of Directors
STERLING FINANCIAL CORPORATION
[DATE]
Page 4
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, directive, written agreement, memorandum
of understanding, extraordinary supervisory letter, commitment letter, board
resolution or similar undertaking.
This opinion is furnished by us as Special Counsel to Northeast Bancorp
and First National solely for your benefit and solely in connection with the
above-described transaction and for no other purpose. You may not, without our
express written approval, deliver copies of this opinion or extracts therefrom
to any other person and no one other than you is entitled to rely on this
opinion. Our opinion is as of the date hereof, and we undertake no duty to
update such opinion after the date hereof.
Sincerely,
<PAGE>
EXHIBIT B
02/10/99
Board of Directors
NORTHEAST BANCORP, INC.
[DATE]
[Letterhead of Shumaker Williams, P.C.]
[Date of Closing]
Board of Directors
NORTHEAST BANCORP, INC.
14 S. Main Street
North East MD 21901-3998
Ladies and Gentlemen:
We have acted as Special Counsel to Sterling Financial Corporation
("Sterling"), a Pennsylvania corporation and Sterling Financial Interim
Acquisition Corporation ("Sterling AC"), a Delaware corporation, in connection
with the preparation of the Agreement and Plan of Reorganization dated as of
February 10, 1999, by and among Sterling, Sterling AC, Northeast Bancorp, Inc.
("Northeast Bancorp"), a Delaware corporation, and First National Bank of North
East ("First National"), a national banking association (the "Agreement") in
which the principal terms of the merger (the "Merger") of Northeast Bancorp with
and into Sterling AC are set forth. We also have participated on Sterling's
behalf in various matters and transactions related to the Merger. This opinion
letter is provided to you at the request of Sterling pursuant to Section 6.3(c)
of the Agreement.
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord of the ABA Section of Business Law
(1991) (the "Accord"). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this opinion
letter should be read in conjunction therewith. Except as otherwise indicated
herein, capitalized terms used in this opinion letter are defined as set forth
in the Agreement or the Accord. The law covered by the opinions expressed herein
is limited to the federal law of the United States and the laws of the
Commonwealth of Pennsylvania.
In connection with the opinions expressed herein, we have examined
originals or copies certified or otherwise identified to our satisfaction of the
articles of incorporation, the certificate of incorporation, the by-laws, the
Agreement, and such corporate and other records, certificates and documents as
we have considered necessary or appropriate for the purposes of rendering the
opinions set forth below.
Based upon and subject to the foregoing and the other terms and
provisions hereof, we are of the opinion that:
<PAGE>
Board of Directors
NORTHEAST BANCORP, INC.
[DATE]
Page 2
1. Sterling is a business corporation that is duly incorporated,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania as evidenced in the Subsisting Corporation Certificate issued by
the Commonwealth of Pennsylvania, Corporation Bureau.
2. Sterling AC is a business corporation that is duly organized,
validly existing and duly subsisting under the laws of the State of Delaware.
All of the outstanding shares of capital stock of Sterling AC have been validly
issued, are fully paid and nonassessable and are owned directly by Sterling free
and clear of any lien, charge or other encumbrance.
3. Sterling is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, and has full corporate power and authority to
own and hold its properties and to carry on its present business.
4. Sterling and Sterling AC each have full corporate power and
authority to execute and deliver the Agreement and to carry out the transactions
contemplated therein, and all corporate actions required to be taken by Sterling
and Sterling AC to authorize the execution and delivery of the Agreement and the
performance of the transactions contemplated therein have been taken.
5. The Agreement has been duly authorized, executed and delivered by
Sterling and Sterling AC and, assuming due authorization, execution and delivery
by Northeast Bancorp and First National and receipt of required regulatory
approvals and the approval of the Northeast Bancorp shareholders, constitutes a
valid and binding obligation of each of Sterling and Sterling AC and is
enforceable against Sterling and Sterling AC in accordance with its terms,
subject to bankruptcy, insolvency, and other laws of general applicability
relating to or affecting creditors' rights and general equity principles.
6. The execution, delivery and consummation of the Agreement will not
constitute a violation or breach of or default under the Articles of
Incorporation or the Bylaws of Sterling or Sterling AC or any statute, rule,
regulation, order, decree, directive, agreement, indenture or other instrument
to which any of them is a party or by which any of them or any of their
properties are bound.
7. To our actual knowledge, except as disclosed in Annex 3.2 (i) to the
Agreement: (i) there is no litigation, investigation or proceeding pending, or
to the knowledge of Sterling threatened, that involves Sterling or Sterling AC
or any of their properties and that, if determined adversely to any of them,
would materially and adversely affect the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of Sterling or
Sterling AC; (ii) there are no outstanding orders, writs, injunctions, decrees,
consent agreements, memoranda of understanding or other directives of any
federal, state or local court or governmental authority or of any arbitration
tribunal against Sterling or Sterling AC which materially and adversely affect
the condition (financial or otherwise), assets, liabilities, business,
operations or future
<PAGE>
Board of Directors
NORTHEAST BANCORP, INC.
[DATE]
Page 3
prospects of Sterling or Sterling AC or restrict in any manner the right of any
of them to conduct its business as presently conducted; and (iii) we are not
aware of any fact or condition presently existing that might give rise to any
litigation, investigation or proceeding which, if determined adversely to
Sterling or Sterling AC, would materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business, operations or future
prospects of Sterling or Sterling AC.
8. The authorized capital stock of Sterling consists of thirty-five
million (35,000,000) shares of common stock, par value Five Dollars ($5.00) per
share, of which as of the date hereof, __________ shares were issued and
outstanding. All outstanding shares of Sterling Common Stock have been duly
issued and are validly outstanding, fully paid and nonassessable. The shares of
Sterling Common Stock to be issued under the Agreement have been duly authorized
and, when issued in accordance with the Agreement, will be validly issued, fully
paid and non-assessable.
9. The consummation of the transactions contemplated by the Agreement
does not require as to Sterling or Sterling AC any approval, consent or waiver
under any statute, rule, regulation, judgment, decree, order, governmental
permit or license or, to our actual knowledge, the approval, consent or waiver
of any other party to any such agreement, indenture or instrument, other than
(i) all required approvals, consents and waivers of governmental authorities,
and (ii) the approval of Sterling AC's shareholder.
The General Qualifications apply to the opinions set forth in
paragraphs 4 and 6 hereof.
This opinion is furnished by us as Special Counsel to Sterling and
Sterling AC, solely for your benefit and solely in connection with the
above-described transaction and for no other purpose. You may not, without our
express written approval, deliver copies of this opinion or extracts therefrom
to any other person and no one other than you is entitled to rely on this
opinion. Our opinion is as of the date hereof, and we undertake no duty to
update such opinion after the date hereof.
Sincerely,
SHUMAKER WILLIAMS, P.C.
<PAGE>
Annex B
Garland McPherson & Associates, Inc.
Fairness Opinion
<PAGE>
ANNEX B
[Letterhead of Garland McPherson & Associates]
February 9, 1999
The Board of Directors
Northeast Bancorp, Inc.
14 South Main Street
North East, MD 21901
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Northeast Bancorp, Inc. ("NBI") of the Agreement
and Plan of Reorganization (the "Agreement") pursuant to which NBI will combine
with and into Sterling Financial Corporation ("SFC") by means of a merger. Under
the terms of the Agreement, each outstanding share of NBI common stock will be
converted into 2.0 shares of SFC common stock.
Garland McPherson & Associates, Inc., as part of its investment banking and
bank consulting business, is engaged in the valuation of financial institution
securities for a variety of purposes, including mergers and acquisitions, and
the determination of adequate consideration in such transactions.
For purposes of this opinion, we reviewed and analyzed information
pertaining to the financial and operating condition of NBI and SFC. This review
included, but was not limited to: (i) the Agreement and Plan of
Reorganization; (ii) financial and other information which was publicly
available or provided to us by NBI and SFC; (iii) certain financial information
relating to the banking industry in general; (iv) the respective history of
dividends paid by the two institutions; (v) our evaluation of future prospects
for the merged institution; (vi) terms and conditions of comparable merger
transactions and (vii) such other financial reviews, analyses, and
investigations as we deemed appropriate.
In rendering our opinion, we conducted discussions with members of senior
management of NBI and SFC concerning their respective businesses and prospects
and have relied on the accuracy and completeness of information and
representations delivered to us by NBI and SFC and their officers, directors,
counsel, and other agents. We have not independently verified the information
reviewed by us (either publicly available or provided to us by NBI and SFC) and,
in rendering our
<PAGE>
The Board of Directors
Northeast Bancorp, Inc.
February 9, 1998
Page 2
opinion, have relied upon such information as being complete and accurate
in all material respects.
We have assumed that the allowances for loan losses indicated on the balance
sheets of NBI and SFC as of December 31, 1998 are adequate to cover such
losses. We have not reviewed the loan files of NBI or SFC, nor did we make an
independent valuation or appraisal of the assets and liabilities of NBI and SFC.
We assumed that in the course of obtaining the necessary regulatory approvals
for the Merger, no restrictions will be imposed on SFC that would have a
material adverse effect on the contemplated benefits of the Merger to NBI. We
further assumed that no change would occur in applicable law or regulation that
would cause a material adverse change in the prospects or operations of SFC
after the Merger. We express no opinion as to the tax consequences of the merger
to NBI and its shareholders.
Our conclusion is based on the market, economic and other conditions
prevailing as of the date hereof and the current conditions and prospects of NBI
and SFC. Events occurring subsequent to this date could materially affect the
assumptions and conclusions contained in our opinion. We express no opinion as
to what the value of SFC common stock will be at the time the Merger is
consummated. Our opinion pertains only to the financial consideration of the
Merger and does not constitute a recommendation to the Board of NBI nor a
recommendation as to how NBI shareholders should vote with regard to the Merger.
Based upon and subject to the foregoing, it is our opinion as of the date
hereof, that the exchange and the SFC consideration to be received is fair, from
a financial point of view, to the shareholders of Northeast Bancorp, Inc.
Sincerely,
Garland McPherson & Associates, Inc.
<PAGE>
Annex C
Statute Regarding Dissenters' Rights
<PAGE>
ANNEX C
DELAWARE GENERAL CORPORATION LAW
ss.262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to ss.251(g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving
<PAGE>
corporation as provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to ss.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of
<PAGE>
the vote on the merger or consolidation, a written demand for appraisal
of such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented
to the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, each consitutent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective date
of the merger or consolidation, such notice shall be given by the surviving
or resulting corporation to all such holders of any class or series of stock
of a constituent corporation that are entitled to appraisal rights. Such
notice may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constitutent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constitutent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An
<PAGE>
affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima facie evidence
of the facts stated therein. For purposes of determining the stockholders
entitled to receive either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to the date
the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to
the effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with
the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to
the stockholder within 10 days after such stockholder's written request for
such a statement is received by the surviving or resulting corporation or
within 10 days after expiration of the period for delivery of demands for
appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to
<PAGE>
the stockholders shown on the list at the addresses therein stated. Such
notice shall also be given by 1 or more publications at least 1 week before
the day of the hearing, in a newspaper of general circulation published in
the City of Wilmington, Delaware or such publication as the Court deems
advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving
or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
<PAGE>
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of such stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of
such stockholder to an appraisal shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
of 1988, as amended (15 Pa. C.S. ss.ss.1101-4162) provides that a business
corporation shall have the power under certain circumstances to indemnify its
directors, officers, employees and agents against certain expenses incurred by
them in connection with any threatened, pending or completed action, suit or
proceeding.
Article V of the Amended Bylaws of Sterling Financial Corporation
provides for the indemnification of its directors, officers, employees and
agents in accordance with, and to the maximum extent permitted by, the
provisions of Subchapter D of Chapter 17 of the Pennsylvania Business
Corporation Law of 1988, as amended.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
2.1 Agreement and Plan of Reorganization (the "Agreement") dated
February 10, 1999, among Sterling Financial Corporation, Sterling
Financial Corporation North, Inc., Sterling Financial Interim
Acquisition Corporation, Northeast Bancorp, Inc. and The First
National Bank of North East (Included in Annex A to the Proxy
Statement contained herein).
3(i) Sterling Financial Corporation Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i) of the Current Report
on Form 8-K, filed with the Securities and Exchange Commissions,
on June 14, 1996.)
3(ii) Sterling Financial Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 3(ii) of the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 7,
1996.)
5 Opinion of Shumaker Williams, P.C. re: Legality of Sterling
Financial Corporation Common Stock.
8 Form of Opinion of Shumaker Williams, P.C. re: Tax Matters.
(Included in the proxy statement/prospectus "APPROVAL OF THE
MERGER-- Federal Income Tax Consequences.")
10.1 Employment Agreement, dated as of April 30, 1983, between The
First National Bank of Lancaster County and John E. Stefan.
(Incorporated by reference to Exhibit 10a of the Current Report
on Form 8-K, filed with the Securities and Exchange Commission,
on March 19, 1997.)
II-1
<PAGE>
10.2 Assumption and Modification Agreement, dated July 14, 1987, by
and among John E. Stefan, Bank of Lancaster County, N.A. and
Sterling Financial Corporation. (Incorporated by reference to
Exhibit 10b of the Current Report on Form 8-K, filed with the
Securities and Exchange Commission, on March 19, 1997
10.3 Sterling Financial Corporation 1996 Stock Incentive Plan.
(Incorporated by reference to Exhibit 99 of the Current Report on
Form 8-K, filed with the Securities and Exchange Commission, on
February 5, 1997.)
10.4 The Sterling Financial Corporation Dividend Reinvestment Plan and
Stock Purchase Plan. (Incorporated by reference to Exhibit A
Sterling Financial Corporation's Registration Statement No.
33-55131 on Form S-3, filed with the Securities and Exchange
Commission on August 18, 1994, and amended by the registrant's
Rule 424(b) prospectus filed with the Commission on December 23,
1998.)
10.5 Letter Agreement between Sterling Financial Corporation and
Howard E. Groff, Sr., dated June 30, 1994. (Incorporated by
reference to Exhibit 10b of From 10-Q, filed with the Securities
and Exchange Commission, on November 14, 1994.)
10.6 Executive Employment Agreement, dated as of February 10, 1999
between The First National Bank of North East and John E. Hughes.
10.7 Consulting Agreement, dated as of February 10, 1999, between
Sterling Financial Corporation and Richard D. McDaniel.
11 Statement re: Computation of Earnings Per Share. (Included at
page 11 of the proxy statement/prospectus contained herein.)
12 Computation of Ratios. (Incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.)
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C. (Included as part of
Exhibit 5.)
23.2 Consent of Trout, Ebersole & Groff, LLP.
23.3 Consent of Whisman, Grygiel, & Giordano.
23.4 Consent of Garland, McPherson & Associates, Inc.
24 Power of Attorney.
99.1 Form of Northeast Bancorp, Inc. Proxy.
99.2 Letter to Stockholders of Northeast Bancorp, Inc.
II-2
<PAGE>
99.3 Notice of Meeting.
99.4 Statute Relating to Dissenters' Rights. (Included as Annex C to
the Proxy Statement contained herein.)
(b) Financial Statement Schedules:
None required.
(c) Opinion of Financial Advisor:
The Opinion of Financial Advisor is included in the proxy
statement/prospectus as Annex B.
Item 22. Undertakings.
(a)
1. The undersigned Registrant hereby undertakes as follows:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
Provided, however, that paragraphs (1)(a)(i) and (1)(a)(ii)
above do not apply if the registration statement is on Form S-3 or Form S-8 and
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
3. The undersigned registrant hereby undertakes as follows: prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to the reofferings
by persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed
pursuant to the preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-operative amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the bylaws of the registrant, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one (1) business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supplement by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, hereunto duly authorized, in the City of Lancaster,
Commonwealth of Pennsylvania on April 20, 1999.
STERLING FINANCIAL CORPORATION
By: /s/ John E. Stefan
-------------------------------------------
John E. Stefan
President, CEO and Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John E. Stefan and Ronald L. Bowman and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Capacity Date
-------- ----
<S> <C> <C>
/s/ John E. Stefan President, CEO and Chairman April 20, 1999
- ------------------------------- of the Board and Director
John E. Stefan (Principal Executive Officer)
/s/ J. Roger Moyer, Jr Executive Vice President April 20, 1999
- ------------------------------- and Director
J. Roger Moyer, Jr.
/s/ Jere L. Obetz Executive Vice President and April 20, 1999
- ------------------------------- Treasurer and Chief Financial
Jere L. Obetz Officer (Principal Financial Officer)
/s/ Ronald L. Bowman Secretary April 20, 1999
- ------------------------------- (Principal Accounting Officer)
Ronald L. Bowman
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Richard H. Albright, Jr. Director April 20, 1999
- -------------------------------
Richard H. Albright, Jr.
/s/ Robert H. Caldwell Director April 20, 1999
- -------------------------------
Robert H. Caldwell
/s/ Howard E. Groff, Jr Director April 20, 1999
- -------------------------------
Howard E. Groff, Jr.
/s/ Joan R. Henderson Director April 20, 1999
- -------------------------------
Joan R. Henderson
/s/ J. Robert Hess Director April 20, 1999
- -------------------------------
J. Robert Hess
/s/ Calvin G. High Director April 20, 1999
- -------------------------------
Calvin G. High
/s/ David E. Hosler Director April 20, 1999
- -------------------------------
David E. Hosler
/s/ J. Roger Moyer, Jr. Director April 20, 1999
- -------------------------------
J. Roger Moyer, Jr.
/s/ E. Glenn Nauman Director April 20, 1999
- -------------------------------
E. Glenn Nauman
/s/ W. Garth Sprecher Director April 20, 1999
- -------------------------------
W. Garth Sprecher
/s/ Glenn R. Walz Director April 20, 1999
- -------------------------------
Glenn R. Walz
</TABLE>
EXHIBIT INDEX
II-6
<PAGE>
<TABLE>
<CAPTION>
Page Number
In
Number Title Sequential
------ ----- Number
System
-----------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization (the "Agreement") dated
February 10, 1999, among Sterling Financial Corporation, Sterling
Financial Corporation North, Inc., Sterling Financial Interim
Acquisition Corporation, Northeast Bancorp, Inc. and The First
National Bank of North East (Included in Annex A to the Proxy
Statement contained herein).
3(i) Sterling Financial Corporation Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i) of the Current Report on
Form 8-K, filed with the Securities and Exchange Commissions, on
June 14, 1996.)
3(ii) Sterling Financial Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 3(ii) of the Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 7, 1996.)
5 Opinion of Shumaker Williams, P.C. re: Legality of Sterling
Financial Corporation Common Stock.
8 Form of Opinion of Shumaker Williams, P.C. re: Tax Matters.
(Included in the proxy statement/prospectus "APPROVAL OF THE
MERGER-- Federal Income Tax Consequences.")
10.1 Employment Agreement, dated as of April 30, 1983, between The First
National Bank of Lancaster County and John E. Stefan. (Incorporated
by reference to Exhibit 10a of the Current Report on Form 8-K, filed
with the Securities and Exchange Commission, on March 19, 1997.)
10.2 Assumption and Modification Agreement, dated July 14, 1987, by and
among John E. Stefan, Bank of Lancaster County, N.A. and Sterling
Financial Corporation. (Incorporated by reference to Exhibit 10b of
the Current Report on Form 8-K, filed with the Securities and
Exchange Commission, on March 19, 1997.)
10.3 Sterling Financial Corporation 1996 Stock Incentive Plan.
(Incorporated by reference to Exhibit 99 of the Current Report on
Form 8-K, filed with the Securities and Exchange Commission, on
February 5, 1997.)
10.4 The Sterling Financial Corporation Dividend Reinvestment Plan and
Stock Purchase Plan. (Incorporated by reference to Sterling
Financial Corporation's Registration Statement No. 33-55131 on Form
S-3, filed with the Securities and Exchange Commission on August 18,
1994, and amended by the registrant's Rule 424(b) prospectus filed
with the Commission on December 23, 1998.)
</TABLE>
II-7
<PAGE>
10.5 Letter Agreement between Sterling Financial Corporation and Howard
E. Groff, Sr., dated June 30, 1994. (Incorporated by reference to
Exhibit 10b of From 10-Q, filed with the Securities and Exchange
Commission, on November 14, 1994.)
10.6 Executive Employment Agreement, dated as of February 10, 1999,
between The First National Bank of North East and John E. Hughes.
10.7 Consulting Agreement, dated as of February 10, 1999, between
Sterling Financial and Richard D. McDaniel.
11 Statement re: Computation of Earnings Per Share. (Included at page
11 of the proxy statement/prospectus contained herein.)
12 Computation of Ratios. (Incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1998.)
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C. (Included as part of Exhibit 5.)
23.2 Consent of Trout, Ebersole & Groff, LLP
23.3 Consent of Whisman, Grygiel, & Giordano
23.4 Consent of Garland, McPherson & Associates, Inc.
24 Power of Attorney.
99.1 Form of Northeast Bancorp, Inc. Proxy.
99.2 Letter to Stockholders of Northeast Bancorp, Inc.
99.3 Notice of Meeting.
99.4 Section 262 of the General Corporation Law of the State of Delaware.
(Included as Annex C to the Proxy Statement contained herein.)
II-8
EXHIBIT 5
[SHUMAKER WILLIAMS, P.C. LETTERHEAD]
April _____, 1999
John E. Stefan [ ]
President and CEO President and CEO
STERLING FINANCIAL CORPORATION NORTHEAST BANCORP, INC.
North Pointe Banking Center 14 S. Main Street
101 North Pointe, Boulevard North East, Maryland 21901
Lancaster, Pennsylvania 17602
Re: Sterling Financial Corporation / Northeast Bancorp, Inc.
Our File No.:
Gentlemen:
In connection with the proposed offering of up to 677,624 shares of common
stock, par value $5.00 per share (the "Common Stock"), by Sterling Financial
Corporation (the "Company"), covered by the Company's Registration Commission
under the Securities Act of 1933, as amended, with respect to the Common Stock,
we, as special counsel to the Company, have reviewed:
1. Articles of Incorporation of the Company;
2. The Bylaws of the Company;
3 Resolutions adopted by the Board of Directors of the Company relating
to the Registration Statement, certified by the Secretary of the
Company;
4. The Agreement and Plan of Reorganization, dated as of February 10,1999,
by and among, the Company, Sterling Financial Interim Acquisition
Corporation, Northeast Bancorp, Inc., and the First National Bank of
North East
5. The Registration Statement; and
6. Copies of the certificates representing shares of the Common Stock.
<PAGE>
Based on our review of the foregoing, it is our opinion that:
a. The Company has been duly incorporated under the laws of the
Commonwealth of Pennsylvania and is validly existing and in good
standing under the laws of the Commonwealth; and
b. The Common Stock covered by the Registration Statement has been duly
authorized and, when issued pursuant to the terms described in the
Registration Statement and the Agreement, will be legally issued by the
Company and fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to us in the related Proxy Statement/Prospectus. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
SHUMAKER WILLIAMS, P.C.
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 21, 1999, except for Note 22, which
is dated February 10, 1999, accompanying the consolidated financial statements
of Sterling Financial Corporation included in the Annual Report on Form 10-K for
the year ended December 31, 1998, which is incorporated by reference in this
Registration Statement and Proxy Statement/ Prospectus. We consent to the
incorporation by reference of the aforementioned report in the Registration
Statement and Proxy Statement/Prospectus and to the use of our name as it
appears under the caption "Experts."
Lancaster, Pennsylvania Trout Ebersole & Groff, LLP
April 21, 1999 Certified Public Accountants
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the inclusion in the Registration Statement on Form S-4 of
Sterling Financial Corporation, filed with the Commission in connection with the
registration of 677,624 shares of common stock, par value of $5.00 per share, of
our report, dated January 15, 1999 relating to the consolidated balance sheets
of Northeast Bancorp, Inc. and the related consolidated statements of income,
changes in stockholder's equity and cash flows. We also consent to the reference
to our firm under the caption "Experts" in the related Proxy
Statement/Prospectus.
Wilmington, Delaware Whisman, Grygiel, & Giordano
April 21, 1999
EXHIBIT 99.1
NORTHEAST BANCORP, INC.
PROXY
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JUNE 15, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints _____________________,
____________________, and __________________ and each or any of them, proxies of
the undersigned, with full power of substitution, to vote all of the shares of
Northeast Bancorp, Inc. that the undersigned may be entitled to vote at the
Special Meeting of Stockholders of the company to be held at 14 S. Main Street
in North East, Maryland on Tuesday, June 15, 1999, commencing at 10:00 a.m.,
Eastern Standard Time, and at any adjournment or postponement thereof, as
follows:
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF REORGANIZATION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting and any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1 AND FOR PROPOSAL 2.
Dated: __________________, 1999
_______________________________
Signature of Stockholder
_______________________________
Signature of Stockholder
THIS PROXY MUST BE DATED, SIGNED BY THE STOCKHOLDER AND RETURNED PROMPTLY
TO THE COMPANY IN THE ENCLOSED ENVELOPE. WHEN SHARES ARE HELD BY JOINT TENANTS,
BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF MORE THAN ONE TRUSTEE, ALL SHOULD
SIGN. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
EXHIBIT 99.2
[NORTHEAST BANCORP, INC. LETTERHEAD]
May 3, 1999
Dear Stockholder:
You are invited to attend a special meeting of the stockholders of your
company, Northeast Bancorp, Inc., the holding company for The First National
Bank of North East. This special meeting will be held on Tuesday, June 15, 1999,
at 10:00 a.m., at 14 South Main Street, North East, Maryland 21901. The main
purpose of the meeting is to vote on the adoption of an agreement and plan of
reorganization pursuant to which Northeast Bancorp, Inc. would merge into a
subsidiary of Sterling Financial Corporation, a bank holding company located in
Lancaster, Pennsylvania. If the merger is completed, you will be entitled to
receive 2 shares of Sterling Financial Corporation common stock in exchange for
each of your shares of the common stock of Northeast Bancorp, Inc. The exchange
of Northeast Bancorp, Inc. stock for Sterling Financial Corporation stock (other
than cash paid for fractional shares) will be tax-free to Northeast Bancorp,
Inc. stockholders for federal tax income purposes. Completion of the merger is
subject to certain conditions. The two principal conditions to completion of the
merger that must be met are that the stockholders of Northeast Bancorp, Inc.
adopt the agreement and that certain banking regulatory agencies approve the
merger.
The attached notice of special meeting and proxy statement/prospectus
describe the formal business to be transacted at the meeting. The directors and
officers of Northeast Bancorp, Inc. will be present at the meeting to respond to
any questions from our stockholders.
We urge you to carefully read the enclosed proxy statement/prospectus that
describes the merger in detail and the requirements needed to complete the
merger. The information contained in the "SUMMARY" portion of the proxy
statement/prospectus gives a basic description of the merger. If you have any
questions after a review of the proxy statement/prospectus consult with your own
advisors or contact Ms. S. Amy Argudo of Northeast Bancorp, Inc., telephone
(410) 287-5000.
Garland McPherson & Associates, Northeast Bancorp, Inc's investment banker,
provided the Board of Directors with an opinion that the share and cash price to
be received by the stockholders in connection with the merger transaction is
fair, from a financial point of view.
Your Board of Directors believes that the merger is in the best interests
of the stockholders and urges you to vote for the adoption of the agreement.
Sincerely yours,
Chairman of the Board of Directors
EXHIBIT 99.3
NORTHEAST BANCORP, INC.
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON JUNE 15, 1999
----------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Northeast
Bancorp, Inc. will be held at 10:00 a.m., Eastern Standard Time, on Tuesday,
June 15, 1999, at 14 South Main Street, Northeast, Maryland 21901. We enclose a
form of proxy and a proxy statement/ prospectus for the meeting.
We are holding the meeting for the purpose of considering and acting upon
the following matters:
1. Adoption of the Agreement and Plan of Reorganization, dated February 10,
1999, by and among Sterling Financial Corporation, Sterling Financial Interim
Acquisition Corporation, Northeast Bancorp, Inc., and The First National Bank of
North East. The agreement provides that Northeast Bancorp, Inc. will merge with
and into Sterling Financial Interim Acquisition Corporation, a subsidiary of
Sterling Financial Corporation. Upon completion of the merger, each Northeast
Bancorp, Inc. stockholder will have the right to receive 2 shares of Sterling
Financial Corporation common stock, par value $5.00 per share, in exchange for
each share of common stock of Northeast Bancorp, Inc., par value $1.00 per
share, held by the stockholder.
2. Such other matters as may properly come before the meeting and any
adjournment or postponement of the meeting.
We may take action on any one of these proposals at the meeting, or on any
dates to which, we may adjourn the meeting. Only those stockholders whose
ownership appears on the stockholder records of Northeast Bancorp, Inc. at the
close of business on Monday, April 26, 1999, will be entitled to receive notice
of the meeting and to vote at the meeting.
Your Board of Directors believes that this merger is in the best interests
of Northeast Bancorp, Inc. and its stockholders. Our reasons for this belief are
provided in the enclosed proxy statement/prospectus. We urge you to vote for the
adoption of the agreement. Your participation at the meeting, in person or by
sending in a completed proxy, is important. We need the affirmative vote of at
least a majority of the outstanding shares of common stock to adopt the
agreement.
<PAGE>
If you do not send in a completed proxy or you do not attend the meeting
and vote, it has the same effect as voting against the merger. Therefore, we
urge you to complete, sign, date and return the enclosed form of proxy in the
enclosed postage-paid envelope as soon as possible so that your shares will be
voted at the meeting. If you do attend the meeting and wish to vote in person,
you can do so by giving written notice to the Secretary of the Northeast
Bancorp, Inc. Your ballot at the meeting will replace your proxy.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote "FOR" approval of the agreement and merger.
By Order of the Board of Directors,
Chairman of the Board of Directors
Northeast, Maryland
May __, 1999
