FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-16276
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2449551
(State or other jurisdiction of incorporation (I.R.S.Employer
or organization) Identification No.)
101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
(717) 581-6030
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $5.00 Par Value-6,447,209 shares outstanding as of April 30,
1999.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of March 31, 1999 (Unaudited), December 31, 1998,
and March 31, 1998 (Unaudited). 3
Consolidated Statements of Income
for the Three Months ended March 31, 1999
and 1998 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Three Months ended
March 31, 1999 and 1998 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signature Page 24
Subsidiaries of the Registrant 25
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and due from banks...................$ 30,290,261 $ 34,089,083 $ 35,918,835
Interest-bearing deposits in other banks.. 569,867 556,603 23,005
Federal funds sold........................ 22,900,000 26,850,000 33,690,000
Mortgage loans held for sale.............. 2,148,000 6,005,300 836,100
Investment Securities::
Securities held to maturity (market value-
$61,677,913; $66,289,939; $81,282,542)... 60,048,604 64,408,384 79,986,406
Securities available for sale............ 185,285,782 177,878,334 130,989,907
Loans..................................... 535,597,130 534,319,804 520,680,500
Less: Unearned Income.................... (74,509) (110,276) (323,666)
Allowance for loan losses.......... (7,692,631) (7,618,457) (7,918,187)
Loans, Net................................ 527,829,990 526,591,071 512,438,647
Premises and Equipment.................... 21,953,672 22,195,492 21,666,747
Other real estate owned................... 63,600 180,385 553,479
Accrued interest receivable and
prepaid expenses......................... 14,176,087 12,828,717 12,788,623
Other assets.............................. 52,638,850 47,680,991 40,866,621
TOTAL ASSETS..............................$ 917,904,713 $919,264,360 $869,758,370
============ ============ ===========
LIABILITIES
Deposits:
Non-interest bearing.....................$ 92,216,917 $ 90,712,714 $ 85,302,676
Interest-bearing......................... 691,980,510 690,670,003 655,732,215
TOTAL DEPOSITS............................ 784,197,427 781,382,717 741,034,891
Interest-bearing demand notes issued to
U.S. Treasury............................ 2,364,184 1,557,696 2,275,706
Other liabilities for borrowed money...... 29,417,399 34,103,331 30,889,011
Accrued interest payable and accrued
expenses................................. 11,636,405 11,233,564 11,200,819
Other liabilities......................... 8,370,645 9,674,322 8,423,843
TOTAL LIABILITIES......................... 835,986,060 837,951,630 793,824,270
STOCKHOLDERS' EQUITY
Common Stock - (Par Value: $5.00)
No. Shares authorized: 35,000,000;35,000,000;
35,000,000
No. Shares issued: 6,471,057; 6,471,057;
6,237,009
No. Shares outstanding: 6,447,136; 6,440,171;
6,149,716............................... 32,355,285 32,355,285 31,185,045
Capital Surplus............................ 24,812,377 24,782,649 16,454,590
Retained Earnings.......................... 22,301,374 20,665,282 27,359,482
Net unrealized gain on securities available
for sale.................................. 3,370,624 4,694,300 3,363,433
Less: Treasury Stock (23,921; 30,886; 87,293)-
at cost................................... (921,007) (1,184,786) (2,428,450)
TOTAL STOCKHOLDERS' EQUITY................. 81,918,653 81,312,730 75,934,100
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$ 917,904,713 $919,264,360 $869,758,370
============ =========== ===========
See accompanying notes to financial statements
</TABLE>
[CAPTION]
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans............................$ 11,278,783 $ 11,421,051
Interest on deposits in other banks................... 7,128 541
Interest on federal funds sold........................ 222,854 295,025
Interest and dividends on investment securities:
Taxable............................................ 2,408,597 2,146,634
Tax-exempt......................................... 929,054 798,489
Dividends on stock................................. 65,720 60,375
TOTAL INTEREST INCOME................................... 14,912,136 14,722,115
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more................................... 405,825 541,607
Interest on all other deposits........................ 5,683,993 5,760,619
Interest on demand notes issued to the U.S. Treasury.. 27,718 24,439
Interest on federal funds purchased................... none none
Interest on other borrowed money...................... 483,131 496,910
TOTAL INTEREST EXPENSE.................................. 6,600,667 6,823,575
NET INTEREST INCOME..................................... 8,311,469 7,898,540
Provision for loan losses............................. 137,500 360,000
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.......................................... 8,173,969 7,538,540
OTHER OPERATING INCOME
Income from fiduciary activities..................... 563,446 477,385
Service charges on deposit accounts.................. 713,340 700,136
Other service charges, commissions and fees.......... 440,145 424,058
Mortgage banking income.............................. 569,561 646,728
Other operating income............................... 1,179,878 1,054,257
Gains/(Losses) on securities transactions............ 200,148 none
TOTAL OTHER OPERATING INCOME............................ 3,666,518 3,302,564
OTHER OPERATING EXPENSES
Salaries and employee benefits....................... 4,661,329 4,274,651
Net occupancy expense................................ 523,951 536,820
Furniture and equipment expense...................... 735,651 648,714
FDIC insurance assessment............................ 22,603 21,052
Other operating expenses............................. 1,923,179 1,629,069
TOTAL OTHER OPERATING EXPENSES........................ 7,866,713 7,110,306
Income before income taxes........................... 3,973,774 3,730,798
Applicable income taxes.............................. 919,311 905,676
NET INCOME..............................................$ 3,054,463 $ 2,825,122
============ ===========
Earnings per common share:
Net Income (basic).....................................$ .47 $ .44
Net Income (diluted)...................................$ .47 $ .43
Cash dividends declared per common share...............$ .22 $ .20
Consolidated Statements of Comprehensive Income (Unaudited)
NET INCOME..............................................$ 3,054,463 $ 2,825,122
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available-
for-sale arising during the period.................... (1,191,578) 447,715
Reclassification adjustment for gains (losses) included
in net income......................................... (132,098) none
Other comprehensive income............................. (1,323,676) 447,715
COMPREHENSIVE INCOME....................................$ 1,730,787 3,272,837
============ ==========
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Income..............................................$ 3,054,463 $ 2,825,122
Adjustments to reconcile net income to net cash
provided by/(used in)operating activities:
Depreciation.......................................... 554,366 505,331
Accretion and amortization of investment securities... 148,320 72,848
Provision for possible loan and lease losses.......... 137,500 360,000
(Gain) on disposition of property and equipment....... (2,420) (75)
(Gain) on sales of investment securities.............. (200,148) none
(Gain) on sale of mortgage loans...................... (193,204) (184,494)
Proceeds from sales of mortgage loans................. 28,773,053 26,275,721
Origination of mortgage loans held for sale........... (24,722,549) (26,135,827)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and prepaid expenses................................ (1,347,370) (545,416)
(Increase) decrease in other assets.................. (4,841,074) (3,898,107)
Increase (decrease) in accrued interest payable
and accrued expenses................................ 402,841 805,449
Increase (decrease) in other liabilities............. (621,783) 1,060,335
Net cash provided by/(used in) operating activities. 1,141,995 1,140,887
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks.. 28,952 28,929
Purchase of interest-bearing deposits in other banks.... (42,216) (37,369)
Proceeds from sales of investment securities available-
for-sale............................................... 200,542 none
Proceeds from maturities of investment securities....... 11,553,578 13,801,823
Purchase of investment securities....................... (16,755,530) (17,542,849)
Federal funds sold, net................................. 3,950,000 (5,540,000)
Net loans and leases made to customers.................. (1,376,419) (8,891,202)
Purchases of premises and equipment..................... (316,666) (234,452)
Proceeds from sale of premises and equipment............ 6,540 75
Net cash provided by/(used in) investing activities. (2,751,219) (18,415,045)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW
and savings accounts................................... (1,760,597) 9,344,942
Net increase (decrease) in time deposits................ 4,575,307 13,029,334
Net increase (decrease) in interest-bearing demand
notes issued to U.S. Treasury.......................... 806,488 (724,294)
Proceeds from borrowings................................ none 3,320,555
Repayments of borrowings................................ (4,685,932) (4,743,776)
Cash dividends .......................................... (1,418,370) (1,293,391)
Acquisition of treasury stock............................ none (614,190)
Proceeds from issuance of treasury stock................. 293,506 581,851
Net cash provided by/(used in) financing activities.. (2,189,598) 18,901,031
Increase (decrease) in cash and due from banks......... (3,798,822) 1,626,873
Cash and due from banks::
Beginning............................................... 34,089,083 34,291,962
Ending..................................................$ 30,290,261 $ 35,918,835
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money......$ 6,602,496 $ 6,429,684
Income taxes........................................... none none
Supplemental Schedule of Noncash Investing and Financing Activities
Other Real Estate acquired in settlement of loans........ none 239,824
See accompanying notes to financial statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Sterling
Financial Corporation have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
The consolidated financial statements of Sterling Financial Corporation
include the accounts of its wholly owned subsidiaries, Bank of Lancaster County,
N.A. and its wholly owned subsidiary, Town & Country, Inc., T & C Leasing, Inc.
and Sterling Mortgage Services, Inc. Sterling Mortgage Services, Inc. is
presently inactive. All significant intercompany transactions have been
eliminated in the consolidation.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 - "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This statement
amends and extends to all servicing assets and liabilities the accounting
standards for mortgage servicing rights now in Financial Accounting Standards
Board Statement No. 65, "Accounting for Certain Mortgage Banking
Activities," and supersedes Financial Accounting Standards Board Statement
No. 122, "Accounting for Mortgage Servicing Rights." Statement of
Financial Accounting Standards No. 125 establishes accounting and reporting
standards for transfers and servicing of financial assets
and extinguishments of liabilities based on the consistent application of the
financial-components approach. This approach requires the recognition of
financial assets and servicing assets that are controlled by the reporting
entity, the derecognition of financial assets when control is surrendered
and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control
has been surrendered in the transfer of financial assets.
Liabilities incurred and derivatives obtained by transferors in connection
with the transfer of financial assets are measured at fair value,
if practicable. Servicing assets and other retained interests in
transferred assets are measured by allocating any prior carrying
amount between the assets sold, if any, and the
interest retained, if any, and the interest retained, if any, based on
the relative fair values of the assets at the date of transfer.
Servicing assets retained are
then subject to amortization and assessment for impairment. As issued, this
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively.
The Financial Accounting Standards Board became aware that the volume and
variety of certain transactions and the related changes to information systems
and accounting processes necessary to comply with the requirements of
Statement of Financial Accounting Standards No. 125 would make it
extremely difficult, if not impossible, for some affected companies to comply
by January 1, 1997. As a result, in December 1966, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 127, "Deferral of the Effective Date of Certain
Provisions of Financial Accounting Standards Board Statement No. 125" that
deferred, for one year, the effective date of certain provisions, as well as
accounting for transfer and servicing for repurchase agreements, dollar-roll,
securities lending and similar transactions. Therefore, this statement was
effective for such transfers of financial assets after December 31, 1997.
Adoption of Statement of Financial Accounting Standards No. 127 did not
have a material effect on the financial position or results of
operations of Sterling Financial Corporation.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 - "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Statement No. 130 requires
that all items that are required to be recognized as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Statement No. 130 was effective for fiscal years
beginning after December 15, 1997. Sterling Financial Corporation adopted
Statement of Financial Accounting Standards No. 130, effective March 31, 1998.
The adoption of this statement requires Sterling Financial
Corporation to set forth additional disclosures in the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 - "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires
that those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supersedes Financial Accounting Standards Board
Statement No. 14 - "Financial Reporting for Segments of
a Business Enterprise," but retains the requirement to
report information about major customers. It amends Statement of Financial
Accounting Standards No. 94 -"Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for
previously unconsolidated subsidiaries. The statement was effective
for fiscal years beginning after December 15, 1997. The adoption
of this statement requires Sterling Financial
Corporation to set forth additional disclosures in the financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 - "Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment
of Financial Accounting Standards Board Statements No.
87, 88 and 106." This statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful
as they were when Financial Accounting Standards Board Statements
No. 87, No. 88 and No. 106 were issued. The statement suggests combined
formats for presentation of pension and other postretirement
benefit disclosures. This statement was effective for fiscal
years beginning after December 15, 1997. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information
is not readily available, in which case the notes to the
financial statements should include all available information and
a description of the information not available. The adoption of
this statement requires Sterling Financial Corporation
to set forth additional disclosures in the financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as:
a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment,
a hedge of the exposure to variable cash flows of a forecasted
transaction, or
a hedge of the foreign currency exposure of a net investment in a
foreign operation, and unrecognized firm commitment, an available-for-
sale security, or a foreign-currency-denominated forecaster
transaction.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Sterling Financial Corporation has not
completed the analysis required to estimate the impact of this statement.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134 - "Accounting for
Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise". This statement is effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of this statement did not
have an effect on the financial position or results of operations.
Note 2 - Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 - "Earnings per Share." The statement was effective
for periods ending after December 15, 1997. The statement is designed to
simplify the computation of earnings per share and requires
disclosure of "basic earnings per share" and if applicable, "diluted earnings
per share." Basic earnings per share is simply the
per share allocation of income available to common stockholders based only
on the weighted average number of common shares actually
outstanding during the period. Diluted earnings per share
represents the per share allocation of income
attributable to common stockholders based on the weighted average
number of common shares actually outstanding plus all dilutive
potential common shares outstanding during the period.
Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which
were 6,446,891 and 6,467,070 for 1999 and 1998, after giving
retroactive effect to a 5% stock dividend paid in June 1998. Diluted
earnings per share were computed by dividing net income
by the weighted average number of shares of common stock outstanding plus all
dilutive potential common shares outstanding during the period which were
6,461,304 and 6,483,483 for 1999 and 1998, after giving retroactive effect
to a 5% stock dividend paid in June 1998.
Note 3 - Dividends Declared
The cash dividend declared for the first quarter of 1999 amounted to $.22
per share while the cash dividend for the first quarter of 1998 amounted
to $.20 per share. The dividend for 1998 has been retroactively
restated to reflect the effect of the 5% stock dividend paid in June 1998.
Note 4 - Segment Information
In 1998, Sterling Financial Corporation adopted Statement of Financial
Accounting Standards No. 131 - "Disclosures about Segments of an Enterprise and
Related Information". Statement of Financial Accounting Standards No. 131
requires disclosure of segment information on the basis used
internally by management to evaluate segment performance.
Sterling Financial Corporation's segments are commercial and retail
banking, leasing, mortgage banking, and trust and investment services.
The accounting policies of each segment are the same as described in Note 2 of
the Form 10-K for the period ended December 31, 1998. Intersegment
income or expense is based upon commercial and retail bank funding of the
leasing and mortgage baking segments and
of trust funding of the commercial and retail bank segment.
The commercial and retail bank segment consists of all the general banking
of Sterling Financial Corporation. Leasing includes the vehicle and equipment
leasing of Town and Country, Inc. and T & C Leasing, Inc. Mortgage
banking includes the origination sales and servicing of mortgages. The trust
and investment services segment is the trust department of Bank of
Lancaster County, N.A.
Segment Information - March 31, 1999
(In thousands)
Commercial Trust and
and Retail Mortgage Investment Consolidated
Banking Leasing Banking Services Total
Interest Income......$ 12,476 $ 1,456 $ 980 $ --- $ 14,912
Interest Expense..... 5,869 458 --- 274 6,601
Intersegment Income
(Expense)........... 1,454 (983) (804) 333 ---
Other Income......... 1,507 1,040 576 544 3,667
Operating Expenses... 6,709 773 90 432 8,004
Profit before tax.... 2,859 282 662 171 3,974
Assets............... 759,168 104,270 54,467 528,632 1,446,537
Expeditures for long-
lived assets........ 308 7 --- 2 317
Depreciation and
amortization........ 487 51 5 11 554
Income taxes......... 523 113 225 58 919
Not included in the above information under the leasing segment are
expenditures for long-lived assets consisting of operating leases of $10,540,621
and depreciation of $3,381,397.
The following is a reconcilement of total assets as reported on the
accompanying financial statements.
ASSETS (In thousands)
Reportable segments...................................$ 1,446,537
Less: Trust assets not included on
consolidated financial statements................... 528,632
Total assets..........................................$ 917,905
==========
Note 5 - Merger and Acquisition Activity
On February 10, 1999, Sterling Financial Corporation entered into an
agreement to acquire Northeast Bancorp, Inc., the parent company of The First
National Bank of North East, based in Maryland. Northeast Bancorp is an $82
million bank holding company for The First National Bank of North East,
with 4 branches located in Cecil County, Maryland.
Under the terms of the agreement, Northeast Bancorp shareholders will
receive 2 shares of Sterling Financial Corporation common stock for each
share of Northeast Bancorp's common stock in a tax-free exchange.
The purchase, which is subject to regulatory approval, will give Sterling
Financial Corporation its first banking presence outside of Pennsylvania.
The transaction is expected to be completed in mid 1999 and the
acquisition is expected to be accounted for as a pooling of
interests. The First National Bank of North East will continue to operate as a
separate bank after the acquisition.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion provides management's analysis of the consolidated
financial condition and results of operations of Sterling Financial Corporation
and its subsidiaries, the Bank of Lancaster County, N.A. and its
subsidiary, Town & Country, Inc., T & C Leasing, Inc. and Sterling Mortgage
Services, Inc., which is presently inactive.
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainities that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect mnagement's analysis
only as of the date hereof. Sterling Financial
Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors
described in other documents Sterling Financial Corporation files
from time to time with the Securities and Exchange Commission,
including Quarterly Reports on Form 10-Q and
the Annual Report on Form 10-K Annual Report to be filed by Sterling Financial
Corporation and any Current Reports on Form 8-K filed by Sterling Financial
Corporation.
Financial Condition
Total assets at March 31, 1999 amounted to $917,904,713 compared to
$869,758,370 at March 31, 1998. This represents an increase of $48,146,343, or
5.5% over that period of time. Total assets at March 31, 1999 decreased
$1,359,647 or .15% over the $919,264,360 reported at December 31, 1998.
The investment securities portfolio reflects a 16.3% increase of
$34,358,073 during the twelve month period March 31, 1998 to March 31, 1999.
Sterling Financial Corporation accounts for securities under the Statement of
Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which requires that
these securities be classified into one of three categories: held-to-maturity,
available-for-sale or trading. Specific accounting treatments
apply to each of the three categories. Securities held-to-maturity will be
reported at amortized cost, trading securities are reported at
fair value with unrealized gains and losses included in earnings and available-
for-sale will be reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
shareholders' equity. Sterling Financial Corporation has segregated its
investment securities into two categories:
those held-to-maturity and those available-for-sale. During the first
three months of 1999, there was in increase in investment securities in the
amount of $3,047,668 or 1.3% from the $242,286,718 reported
at December 31, 1998. The amount of unrealized gains included
in the available-for-sale category at December 31, 1998
was $7,112,576, while at March 31, 1999 and 1998 it was $5,107,006 and
$5,096,006.
Net loans have grown from $512,438,647 at March 31, 1998 to $527,829,990 at
March 31, 1999. This represents an increase of $15,391,343 or 3%. Net loans
have grown from $526,591,071 to $527,829,990 during the three month
period ended March 31, 1999. This represents an increase
of .2% since December 31, 1998.
Federal funds sold amounted to $22,900,000 at March 31, 1999 compared to
$33,690,000 at March 31, 1998 and $26,850,000 at December 31, 1998.
Premises and equipment increased $286,925 from $21,666,747 at March 31,
1998 to $21,953,672 at March 31, 1999. During the first three months
of 1999, total premises and equipment decreased $241,820 from
$22,195,492 at December 31, 1998. Depreciation expense during the
first 3 months of 1999 was greater than the net
acquisition of premises and equipment which resulted in the decrease in premises
and equipment.
Total deposits increased $43,162,536 or 5.8% from $741,034,891 at March 31,
1998 to $748,197,427 at March 31, 1999. During the first three months of 1999,
total deposits increased $2,814,710 or .4% from the $781,382,717 reported at
December 31, 1998. Noninterest bearing deposits increased $6,914,241 from
$85,302,676 at March 31, 1998 to $92,216,917 at March 31, 1999. This
represents an increase of 8.1%. During the same period, interest
bearing deposits increased $36,248,295 or 5.5%. Noninterest bearing
deposits increased $1,504,203 during the first three months of 1999 while
interest bearing deposits increased $1,310,507.
Stockholders' equity increased $5,984,553 or 7.9% from the $75,934,100
reported at March 31, 1998 to $81,918,653 at March 31, 1999. There was an
increase of $605,923 or .7% from the $81,312,730 reported at
December 31, 1998. The major contributor to these increases was net
income from operations. Regulatory authorities have decided to
exclude the net unrealized holding gains and losses on
available-for-sale securities, which represents the accumulated other
comprehensive income, from the definition of common stockholders' equity for
regulatory capital purposes. The capital ratios reflect that exclusion.
Total stockholders' equity to total assets at March 31, 1999 was 8.61%
compared to 8.39% at March 31, 1998 and 8.40% at December 31, 1998.
Federal regulatory authorities issued risk-based capital guidelines
applicable to banks and bank holding companies in an effort to make
regulatory capital more responsive to the risk exposure related to various
categories of assets and off-balance sheet items. These guidelines require
that banking organizations meet a minimum risk-based capital, define the
components of capital, categorize assets into different risk classes and
include certain off-balance sheet items in the calculation of capital
requirements. The components of total capital are called
Tier 1 and Tier 2 Capital. Tier 1 capital is the shareholders' equity and
Tier 2 capital is the allowance for loan losses. The risk-based
capital ratios are computed by dividing the components of
capital by risk-weighted assets. Risk-weighted assets are determined by
assigning various levels of risk to different
categories of assets and off-balance sheet items. Regulatory authorities have
decided to exclude the net unrealized holding gains and losses on available-for-
sale securities from the definition of common stockholders' equity for
regulatory capital purposes. However, national banks will continue
to deduct unrealized losses on equity securities in their computation
of Tier 1 capital. Therefore, national banks will continue to
report the net unrealized holding gains and losses
on available-for-sale securities in the reports of condition and
income submitted to federal regulators as required by Statement
of Financial Accounting Standards No. 115 and the financial reports
prepared in accordance with generally accepted accounting principles, but will
exclude these amounts from calculations of Tier 1 capital. In addition,
national banks should use the amortized cost of available-for-sale debt
securities (as opposed to fair value) to determine the average total
assets as well as the risk-weighted assets used in the calculations of the
leverage and risk-based capital ratios. The ratios below reflect the
above definition of common stockholders' equity which included common
stock, capital surplus and retained earnings, less
net realized holding losses on available-for-sale equity
securities with readily determinable fair values. The guidelines require Tier 1
capital of at least 4% and total capital of 8% of risk-weighted assets. The
Tier 1 capital ratio was 9.93% and the total risk-based capital ratio
was 10.93% at March 31, 1999 while the Tier 1 capital ratio was 9.78%
and the total risk-based capital ratio was 10.88% at March 31, 1998.
The following table reflects the various capital ratios for the periods
indicated:
March 31, 1999 December 31, 1998 March 31, 1998
"Statement"
Equity Capital 8.61% 8.40% 8.39%
Primary and
Total Capital 9.37% 9.16% 9.22%
"Risk-based"
Tier 1 Capital 9.93% 9.73% 9.78%
Total Capital 10.93% 10.94% 10.88%
Changes in the Allowance for Loan Losses for the three months ended March
31, 1999 and 1998 were as follows:
1999 1998
Balance at January 1 $7,618,457 $7,730,000
Provision for loan losses
charged to operating expenses 137,500 360,000
---------- ----------
7,755,957 8,090,000
---------- ----------
Losses charged to allowance 119,551 234,856
Recoveries credited to allowance 56,225 63,043
---------- ----------
Net charge-offs 63,326 171,813
---------- ----------
Balance at March 31, $7,692,631 $7,918,187
========== ==========
Allowance as a percent of
period-end loans 1.44% 1.52%
The net charge-offs for the first three months of 1999 were within Sterling
Financial Corporation's expectations and management believes that the allowance
for loan losses is adequate. Management makes a determination no less
frequently than quarterly as to the appropriate provision
necessary to maintain an adequate allowance for potential loan losses.
The amount of provision made is based upon a variety of factors including
a specific allocation by individual credits, loss
experience for classified loans using migration analysis, loss experience for
homogenous loan pools, levels and trends in delinquency, specific
non-accruing and problem loans, evaluation of economic conditions and
forecasts and other factors deemed appropriate by management.
While there can be no assurance that material amounts of additional
loan loss provisions will not be required in the future,
management believes that, based upon information presently available, the
amount of the allowance for possible loan losses is adequate.
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
March 31, December 31, March 31,
1999 1998 1998
Nonaccrual loans $ 755,693 $ 811,802 $1,143,155
Accruing loans, past due 90 days or more $ 362,827 $ 612,565 $1,295,519
Restructured loans $1,984,631 $1,992,953 $2,129,314
Non-performing loans to total loans .58% .64% .88%
Allowance for loan losses to
non-performing loans 247.9% 222.9% 173.3%
The general policy has been to cease accruing interest on loans when it is
determined that a reasonable doubt exists as to the collectibility of additional
interest. Interest income on these loans is only recognized to the extent
payments are received. If interest income had been recorded on such loans
for the periods indicated, such interest income would have been
increased by approximately $17,825 and $25,923 at March 31, 1999 and 1998
respectively, and $85,667 at December 31, 1998. There was no interest
income recorded on the nonaccrual loans in 1999 or 1998. Potential problem
loans are loans which are included as performing loans,
but for which possible credit problems of the borrower causes management to have
doubts as to the ability of such borrower to comply with present repayment terms
and which may eventually result in disclosure as a non-performing loan. At
March 31,1999, there were no such loans that had to be
disclosed as potential problem loans. The restructured loans are a series of
loans to 1 borrower involving $1,984,631. There are no commitments to
lend additional funds to this borrower in relation to the restructured loans.
A loan is categorized as restructured if the original interest rate on
the loan, repayment terms or both are restructured due to
a deterioration in the financial condition of the borrower. In the case of the
above referenced loans, the Bank is secured by real estate. The loans are
current and have performed in accordance with the contractual
terms, both prior to and after the restructure. Accrual of interest
on these loans continues.
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures", an amendment of Statement of Financial Accounting Standards
No. 114, was implemented at the beginning of 1995. The Bank has defined
impaired loans as all loans on nonaccrual status and restructured,
except those specifically excluded from the scope of
Statement of Financial Accounting Standards No. 114, regardless of the
credit grade assigned by loan review. All impaired loans were
measured by utilizing the fair value of the collateral for each loan.
When the measure of an impaired loan is
less than the recorded investment in the loan, the Bank will compare the
impairment to the existing allowance assigned to the loan.
If the impairment is greater than the existing allowance, the Bank will adjust
the existing allowance to reflect the greater amount or take a
corresponding charge to the provision for loan and lease
losses. If the impairment is less than the existing allowance for a particular
loan, no adjustment to the allowance or the provision for loan and lease losses
will be made. There was no adjustment necessary for the impaired loans for the
periods indicated.
The average amount of impaired loans was $2,733,723 for the first
quarter of 1999 and $3,286,510 for the first quarter of 1998, while the
average for the year 1998 was $3,125,142.
The following table presents information concerning impaired loans for the
periods indicated:
March 31, December 31, March 31,
1999 1998 1998
Gross impaired loans which have allowances...$2,740,324 $2,804,755 $3,272,469
Less: Related allowances for loan loss..... (137,016) (140,238) (163,623)
---------- ---------- ----------
Net impaired loans..........................$2,603,308 $2,664,517 $3,108,846
At March 31, 1999, there were no concentrations exceeding 10% of total
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.
There were no foreign loans outstanding at March 31, 1999.
Liquidity is the ability to meet the requirements of customers for loans and
deposit withdrawals in the most economical manner. Some liquidity is ensured by
maintaining assets which may be immediately converted into cash at minimal
cost. Liquidity from asset categories is provided through cash,
noninterest-bearing and interest bearing deposits with banks, federal funds
sold and marketable investment securities maturing within one year.
The loan portfolio also provides an
additional source of liquidity due to the Bank of Lancaster County, N.A.
participating in the secondary mortgage market. The loan portfolio also
provides significant liquidity by repayment of loans by maturity or
scheduled amortization payments. On the liability side, liquidity
is available through customer deposit growth and short term borrowings.
Liquidity must constantly be monitored because
future customer demands for funds are uncertain. The amount of liquidity
needed is determined by the changes in levels of deposits
and in the demand for loans. Management believes that the sources
of funds mentioned provide sufficient liquidity.
YEAR 2000
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact on Sterling Financial
Corporation of the Year 2000 issue could materially differ from that
which is anticipated in the forward-looking statements as a result of certain
factors identified below.
The Year 2000 issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define the applicable year.
It is anticipated that most systems may recognize a date
using "00" as the year "1900" rather than "2000". This could result in system
failures, miscalculations, and disruptions of normal business operations
including, among other things, a temporary inability to
process transactions, send statements, or engage in similar day to day business
activities. At Sterling Financial Corporation, we recognize the Year 2000
problem is more than just a systems issue. It is a business issue, and
we are dealing with it in that manner.
Corporation's State of Readiness
Sterling Financial Corporation is committed to ensuring that the daily
operations suffer little or no impact from the century date change. Sterling
Financial Corporation has applied due diligence throughout the Y2K process,
following the guidelines contained in the series of Federal Financial
Institutions.
Examination Council's Interagency Guidelines. These guidelines include the
following five phases:
awareness,
assessment,
renovation or remediation,
testing or validation and
implementation.
Management has initiated an enterprise-wide program to prepare Sterling
Financial Corporation's computer systems and applications for the Year 2000.
Sterling Financial Corporation has developed
a comprehensive inventory of all mainframe and PC based applications,
third-party relationships,
environmental (bank vaults, VCRs, security systems, etc.) and
proprietary programs.
This assessment identified 225 systems or processes and 448 proprietary
programs, which could be impacted by the century date change.
The 448 proprietary programs consist of management reporting, interface
programs, and bridge programs. As of March 31, 1999, Sterling Financial
Corporation has remediated 324 or 72% of these programs.
In January of 1997, Sterling Financial Corporation began converting its
computer systems to be Year 2000 ready. As of March 31, 1999, approximately
78% of Sterling Financial Corporation's systems were ready, with all
systems expected to be ready by June 1999.
Vendor Type Total # # Y2K Ready % Y2K Ready
PC Based Applications 125 107 86%
Mainframe Applications 48 46 96%
Third-Party Relationships 27 2 81%
Environmental 25 24 96%
Proprietary Programs 448 324 72%
Total 673 523 78%
Sterling Financial Corporation has acquired its core mission-critical
systems from a highly regarded third-party vendor. Thus, even though
Sterling Financial
Corporation does not have direct control over the renovation process, it is
monitoring the progress of its third-party vendors to assess the status of their
Y2K readiness efforts. However, because most computer systems are, by their
very nature, independent, it is possible that noncompliant third-party
computers could impact Sterling Financial Corporation's
computer systems. Sterling Financial Corporation could be adversely
affected by the Y2K problem if it or unrelated
parties fail to successfully address the problem. Steps have been taken to
communicate with the unrelated parties with whom it deals to coordinate
Year 2000 readiness. Additionally, we are dependent on external
suppliers, such as, wire transfer systems, telephone systems,
electric companies, and other utility companies for continuation
of service. Sterling Financial Corporation is also
assessing the impact, if any, the century date change may have on its credit
risk. Sterling Financial Corporation has contacting its large
commercial loan customers concerning their level of readiness for
Year 2000. Formal communications have been
initiated with all of its vendors and large commercial customers to determine
the extent to which Sterling Financial Corporation is vulnerable to those
third-parties' failure to remedy their own Year 2000 issues. The Y2K Project
Manager has available each vendors' Y2K readiness efforts which
includes their remediation plan, renovation approach, testing
methodologies and target dates.
A comprehensive testing plan has been developed. Sterling Financial
Corporation has prioritized all mainframe and PC based applications, third-party
relationships, environmental and proprietary programs to be tested. Separate
environments for testing have been defined and established. Beginning in the
fourth quarter of 1998, Sterling Financial Corporation performed a variety of
testing to include,
limited unit testing (aging dates forward on files),
system testing (advancing the computer system date forward),
combined system integration (running applications dependent on each other
together with the data files aged and computer system date advanced
forward) and
acceptance testing (user review and validation).
Test scripts have been written which define the type of testing to be performed,
the resources necessary to perform the test, the transactions or files to be
processed, and expected results for each type of testing performed.
Additionally, a testing validation, certification and reporting process
has been established.
Costs of Year 2000
As of March 31, 1999, $282,501 has been expended as Year 2000 costs.
Management expects to spend a total of $323,459 for the entire project. The
estimated Year 2000 project costs include the costs and time associated with the
impact of third-parties' Year 2000 issues, and are based on presently available
information. The total cost of the project is being funded through operating
cash flows. Sterling Financial Corporation continues to evaluate
appropriate courses of corrective action, including replacement of certain
systems whose associated costs would be recorded as assets and amortized.
Accordingly, Sterling Financial Corporation does not expect the amounts
required to be expensed over the next 9 months to have a material
effect on the financial position or results of operations. However, if
readiness is not achieved in a timely manner by Sterling
Financial Corporation or any of its significant related third-parties, be it a
supplier of services or customer, the Y2K issue could possibly have a material
effect on Sterling Financial Corporation's operations and financial position.
The cost of the projects and the date on which Sterling Financial
Corporation plans to complete both Year 2000 modifications and systems
conversions are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification
plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Risks of Year 2000
At present, management believes it's progress in remediating the
proprietary programs and installing Y2K upgrades to the third-party vendor
mainframe and PC based computer applications is on target. The Year
2000 computer problem creates risk for Sterling Financial Corporation
from unforseen problems in its own computer systems and from third-party
vendors who provide the majority of Sterling Financial
Corporation's mainframe and PC based computer applications. Failures of
third-party systems relative to the Y2K issue could have a material impact
on Sterling Financial Corporation's ability to conduct business.
Continency Plans
A contingency plan has been developed for mission-critical and required
mainframe and PC based applications, third-party relationships, environmental
and proprietary programs. Sterling Financial Corporation's contingency
plans involve the use of manual labor and replacement or
update of computer systems to compensate for the loss or
inconveniences caused by the disruption of certain automated
computer systems. The contingency plans define scheduled completion dates, test
dates and trigger dates. The trigger date being the date Sterling Financial
Corporation would implement the continency plan.
A detailed business resumption contingency plan is currently under
development with a target completion date of June 30, 1999. This detailed
business resumption contingency plan will calculate a risk factor
for each core business line and/or product. Based on the calculated risk
factor, a specific business resumption contingency plan will be
written and tested.
Merger and Acquisition Activity
On February 10, 1999, Sterling Financial Corporation entered into an
agreement to acquire Northeast Bancorp, Inc., the parent company of The
First National Bank of North East, based in Maryland. Northeast Bancorp
is an $82 million bank holding company for The First
National Bank of North East, with 4 branches located in Cecil
County, Maryland.
Under the terms of the agreement, Northeast Bancorp shareholders will
receive 2 shares of Sterling Financial Corporation common stock for
each share of Northeast Bancorp's common stock in a tax-free exchange.
The purchase, which is subject to regulatory approval, will give
Sterling Financial Corporation its first banking
presence outside of Pennsylvania. The transaction is expected to be
completed in mid 1999 and the acquisition is expected to be
accounted for as a pooling of interests. The First National Bank of
North East will continue to operate as a separate bank after the acquisition.
Results of Operations
The following discussion analyzes the specific components affecting the
changes in net income for the periods analyzed.
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Net income for the first quarter of 1999 amounted to $3,054,463 compared to
$2,825,122 for the first quarter of 1998. This represents an increase of
$229,341 or 8.1%. On a per share basis, both basic and diluted,
income was $.47 for the first quarter of 1999 compared to basic
earnings per share of $.44 and diluted earnings per share of
$.43 for the first quarter of 1998.
Return on average assets for the first quarter of 1999 was 1.35% compared
to 1.34% for the first quarter of 1998. Return on equity was 15.70% for the
first quarter of 1999 compared to 15.32% for the same period in 1998.
Total interest income increased $190,021 or 1.3% while total interest
expense decreased $222,908 or 3.3%. Therefore, the interest differential
increased $412,929. Loans increased nearly $15 million over the same period
in 1998. Although loans increased, the rate charged on loans
decreased during this period of time which resulted in a
decrease of $142,268 in interest and fees on loans. Interest
on deposits with banks increased $6,587. Interest on federal funds sold
decreased $72,171. The daily average of federal funds sold was
$18,884,444 in 1999 compared to $21,462,000 in 1998. Income on
investment securities increased $397,873 or 13.2% in 1999 as a result of
increased volumes. The daily average of investment
securities in 1999 was $241,580,372 compared to $208,324,948 in 1998.
Total interest expense amounted to $6,600,667 reflecting a decrease of
$222,908 or 3.3% from the $6,823,575 reported in 1998. Interest paid on
interest-bearing deposits decreased $212,408 or 3.4% in 1999 over the same
period in 1998. Interest bearing deposits increased over $36 million from
the same period in 1998. However, lower interest rates generated a
decrease in interest expense on these deposits. Interest expense
on other interest bearing liabilities decreased $10,500
during the same period of time primarily as a result of decreased volumes
in this category of liabilities, as well as a decrease
in rates charged on these liabilities.
The provision for possible loan losses decreased $222,500 from a charge of
$360,000 in 1998 to $137,500 in 1999. The provision reflects the amount deemed
appropriate by management to provide an adequate reserve to meet the present and
foreseeable risk characteristics of the loan portfolio.
Total other operating income increased $363,954 or 11%. Income from
fiduciary activities increased $86,061 or 18%. Service charges on deposit
accounts increased $13,204 while other various service charges
increased $16,087. Other operating income increased $125,621.
Included in total other operating income in 1999 was a gain of $200,148
on securities sold. Mortgage banking income decreased $77,167 as a result of
decreased volumes of originations and subsequent sales.
Total other operating expenses rose $756,407 or 10.6% over the same period
last year. Increases of $386,678 in salaries and employee benefits, $86,937 in
furniture and equipment expense, $1,551 in FDIC insurance, $294,110 in other
operating expenses and a decrease in net occupancy expense of $12,869 constitute
the total increase. The increase in salaries and employee benefits was primarily
due to increases in staff as well as increases in wages and increased costs of
employee benefits. The number of full-time equivalent employees at March 31,
1999 was 452 compared to 432 at March 31, 1998. Contributing to the increase
in other operating expenses in 1999 was increases in
Pennsylvania Shares Tax, professional services, postage, telephone expense,
marketing and education and training expense. The remaining increase during
1999 was due to the normal increases in expenses
related to the overall growth of Sterling Financial Corporation.
Applicable income taxes amounted to $919,311 in 1999 compared to
$905,676 in 1998. The increase in taxes is due in part to
increases in taxable income.
Three months ended March 31, 1999 compared to three months ended
December 31, 1998
Net income increased $340,552 or 12.5% in the first quarter of 1999 over
the fourth quarter of 1998. Net income at March 31, 1999 was $3,054,463
compared to $2,713,911 for the quarter ending December 31, 1998. Net income
on a per share basis, both basic and diluted, was $.47
for the first quarter of 1999 compared to $.42 for the last
quarter of 1998. Return on average assets for the first quarter
of 1999 was 1.35% compared to 1.33% for the last quarter of 1998. Return
on equity was 15.70% and 15.63% respectively for March 31, 1999
and December 31, 1998.
Total interest income decreased $114,876 or .76%. Interest and fees on
loans decreased $168,613 while interest on investment securities
increased $56,846. Interest on other earning assets
decreased $3,109. Earning assets decreased approximately $3.5 million
during the first three months of 1999. The most
significant decrease in earning assets was in federal funds sold, which
was $3.9 million and mortgage loans held for sale, which was $3.9 million.
Loans increased nearly $1.3 million the first three months
of 1999, while the securities increased over $3 million.
Total interest expense decreased $280,300 or 4.1% during the first
quarter of 1999. Total interest-bearing liabilities decreased nearly
$2.6 million in the first quarter of 1999 over the last quarter
of 1998. Interest-bearing deposits increased over $1.3
million during this period of time, while all other interest-bearing
liabilities decreased $3.9 million.
Net interest income increased $165,424 as a result of the decrease in
interest expense being greater than the decrease in interest income.
The loan loss provision for the first quarter of 1999 was $137,500
compared to $15,000 for the last quarter of 1998.
Total other operating income increased $621,015 or 20.4% in the first
quarter of 1999 over the last quarter of 1998. Income from fiduciary
activities contributed over $79,000 to this increase, while mortgage
banking income contributed over $358,000 of this increase. Gains on
securities sold amounted to $200,000 for the first quarter of 1999
compared to no reported gains for the last quarter of 1998.
Total other operating expenses increased $168,597 or 2.2% over the fourth
quarter of 1998. Salaries and employee benefits increased $319,541. Occupancy
and furniture and equipment expense increased $43,200 and other
operating expenses decreased $195,239. The FDIC insurance assessment
reflected an increase of $1,095.
Applicable income taxes were $154,790 greater than those recorded for the
fourth quarter of 1998.
Part I - Financial Information
Quantitative and Qualitative Disclosures About Market Risk
Discussion of Market Risk and Interest Rate Sensitivity
As a financial institution, the primary component of the Bank of Lancaster
County's market risk is interest rate volatility. Changes in interest rates
will ultimately impact the Bank of Lancaster County's interest income from
earning assets and the interest expense from funding sources, deposits and debt.
Based upon the Bank of Lancaster County's nature of operations, the Bank of
Lancaster County is not subject to foreign currency exchange or commodity price
risk. The Bank of Lancaster County's market area for loans and deposits is
concentrated in Lancaster County, Pennsylvania and as such is subject to risks
associated with the local economy. The Bank of Lancaster County does not own
any trading assets. The Bank of Lancaster County does not have any hedging
transactions in place such as interest rate swaps and caps.
Management endeavors to control the exposure of earnings to changes in
interest rates. The Bank of Lancaster County's asset/liability committee reviews
interest rate risk by various means including "Gap" management and internally
developed models and reports. The Bank of Lancaster County also utilizes
Sheshunoff Interest Rate Risk management services and IBAA investment portfolio
valuation services to enhance risk exposure review. Interest repricing of
assets and liabilities is measured over future time periods, interest rate
sensitivity gaps. While all time gaps are measured,
management's primary focus is the cumulative gap through one year,
as this time frame directly impacts net interest
income in the near term time horizon and is most difficult to make reactive
adjustment to actual rate movements.
The Bank of Lancaster County has various investments structured to change
investment yield with current market conditions. Assets subject to repricing
include federal funds sold (repricing daily), loans floating to "treasury bill"
indexes (repricing monthly) and loans tied to "prime" or other indexes subject
to immediate change. Other factors effecting income are maturing and contracted
repayments and prepayments of existing loans and investments. These cash flows
will be re-invested at current market yields.
The Bank of Lancaster County's funding liabilities, customer deposits and
borrowed funds, have more complex repricing characteristics, since interest
bearing deposits are subject to rate change but are not specifically indexed
to "prime" or "treasury" indexes. Time certificates and
borrowed money are subject to interest rate change at maturity. The Bank of
Lancaster County's deposit funding is essentially comprised of "core" deposits
that have been historically loyal and stable, and these deposits, with the
exception of certificates of deposit, have not been rate sensitive. All
interest rates do not move in full and equal amounts for
loans and deposits. Deposit rates historically lag loans in rate movement, and
rate movement occurs to a smaller degree for deposits than loans. Modeling
is used to forecast projected impact to the net interest margin
as a result of rate movements, either increasing or decreasing.
Historic pricing correlations are calculated for all interest-bearing
deposit products for rate change repricing impact as - immediate, monthly,
and annually over a five year time period. Management's view of interest
rate sensitivity reflects a calculated interpretation
of net interest margin exposure to rate changes. Pricing correlations are
constantly refined by management. There is no guarantee that past history will
accurately reflect future changes.
Although the make-up of the balance sheet is subject to change from time to
time, management is of the opinion that there have been no material changes in
reported market risks faced by the company since the end of the most recent
fiscal year. Quantitative and qualitative disclosures about market risk was
listed in Part II, Item 7A, of the Form 10-K for
the fiscal year ended December 31, 1998.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of March 31, 1999, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to business,
to which Sterling Financial Corporation or its subsidiaries are a
party or of which any of their property is the subject.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
A report on Form 8-K dated February 18, 1999 was filed February 18,
1999 pursuant to Item 5 and Item 7 on Form 8-K filing, as Exhibit
99, a copy of the press release announcing that Sterling Financial
Corporation signed a definitive agreement to acquire Northeast
Bancorp, Inc., a Delaware corporation and a Maryland bank holding
company and its wholly-owned subsidiary, The First National Bank of
North East based in North East, Maryland.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: May 12, 1999 By:/s/ John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: May 12, 1999 By:/s/ Jere L. Obetz
Jere L. Obetz
Executive Vice President/Treasurer
Chief Financial Officer
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following are the subsidiaries of Sterling Financial Corporation:
Subsidiary State of Incorporation or Organization
Bank of Lancaster County, N.A. Pennsylvania (National Banking Association)
1 East Main Street
P.O. Box 0300
Strasburg, PA 17579
Town & Country, Inc. (Wholly owned Pennsylvania
Subsidiary of Bank of Lancaster
County, N.A.)
1097 Commercial Avenue
East Petersburg, PA 17520
T & C Leasing, Inc. Pennsylvania
1097 Commercial Avenue
East Petersburg, PA 17520
Sterling Mortgage Services, Inc. Pennsylvania
101 North Point Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,290,261
<INT-BEARING-DEPOSITS> 569,867
<FED-FUNDS-SOLD> 22,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 185,285,782
<INVESTMENTS-CARRYING> 60,048,604
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0
0
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</TABLE>
