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, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-16276
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, $5.00 Par Value-8,931,568 shares outstanding as of
April 30, 2000.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
as of March 31, 2000 and December 31, 1999. 3
Consolidated Statements of Income
for the Three Months ended March 31, 2000
and 1999. 4
Consolidated Statements of Cash Flows
for the Three Months ended
March 31, 2000 and 1999. 5
Notes to Consolidated Financial
Statements. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities and Use of Proceeds 15
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Securities Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signature Page 17
<TABLE>
<CAPTION>
Part I - Financial Information
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
(Dollars in thousands) 2000 1999
<S> <C> <C>
Assets
Cash and due from banks..........................................$ 35,568 $ 47,674
Federal funds sold................................................ 13,940 5,250
--------- ---------
Cash and cash equivalents....................................... 49,508 52,924
Interest-bearing deposits in banks................................ 828 1,009
Mortgage loans held for sale...................................... 553 836
Securities held-to-maturity(fair value 2000-$49,692;1999-$52,099). 50,028 52,392
Securities available-for-sale..................................... 214,909 207,183
Loans, net of allowance for loan losses 2000-$8,217; 1999-$8,174.. 670,170 654,834
Assets held for operating leases, net............................. 51,432 47,639
Premises and equipment, net....................................... 23,662 23,675
Other real estate owned........................................... 275 163
Accrued interest receivable....................................... 7,050 6,847
Other assets...................................................... 11,556 11,872
--------- ---------
Total assets.....................................................$1,079,971 $1,059,374
========= ==========
Liabilities
Deposits:
Noninterest-bearing............................................$ 123,398 $ 118,394
Interest-bearing................................................ 798,240 774,038
--------- ---------
Total deposits................................................ 921,638 892,432
--------- ---------
Short-term borrowings................................ ............ 20,592 25,000
Long-term debt.................................................... 29,447 34,291
Accrued interest payable.......................................... 5,059 4,700
Other liabilities................................................. 11,964 12,933
--------- ---------
Total liabilities................................................. 988,700 969,356
--------- ---------
Stockholders' equity
Common Stock -($5.00 par value)................................... 44,674 44,674
No. shares authorized: 2000 and 1999 - 35,000,000
No. shares issued: 2000 - 8,934,788; 1999 - 8,934,788
No. shares outstanding: 2000 - 8,931,568; 1999 - 8,931,568
Capital surplus................................................... 14,461 14,461
Retained earnings................................................. 34,296 32,432
Accumulated other comprehensive income (loss)..................... (2,059) (1,448)
Common stock in treasury, at cost (2000 - 3,220; 1999 - 3,220).... (101) (101)
--------- ---------
Total stockholders' equity........................................ 91,271 90,018
--------- ---------
Total liabilities and stockholders' equity.......................$1,079,971 $1,059,374
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31,
(Dollars in thousands, except per share data) 2000 1999
<S> <C> <C>
Interest and dividend income
Loans, including fees................................$ 13,794 $ 12,448
Debt securities
Taxable.......................................... 2,622 2,528
Tax-exempt....................................... 1,065 951
Dividends............................................ 75 66
Federal funds sold................................... 214 266
Deposits in other banks.............................. 43 36
--------- ---------
Total interest and dividend income.............. 17,813 16,295
Interest expense --------- ---------
Deposits............................................. 7,334 6,647
Short-term borrowings................................ 364 28
Long-term debt....................................... 488 483
--------- ---------
Total interest expense.......................... 8,186 7,158
--------- ---------
Net interest income.................................. 9,627 9,137
--------- ---------
Provision for loan losses............................ 50 153
--------- ---------
Net interest income after
provision for loan losses..................... 9,577 8,984
Noninterest income --------- ---------
Income from fiduciary activities..................... 682 563
Service charges on deposit accounts.................. 831 781
Other service charges, commissions and fees.......... 542 474
Mortgage banking income.............................. 118 570
Rental income on operating leases.................... 5,268 4,282
Other operating income............................... 280 274
Securities gains..................................... 150 200
--------- ---------
Total noninterest income........................ 7,871 7,144
Noninterest expenses --------- ---------
Salaries and employee benefits....................... 4,800 4,754
Net occupancy........................................ 655 592
Furniture and equipment.............................. 759 789
Professional services................................ 374 341
Depreciation on operating lease assets............... 4,165 3,411
Other................................................ 1,941 1,840
--------- ---------
Total noninterest expenses..................... 12,694 11,727
--------- ---------
Income before income taxes........................... 4,754 4,401
Income tax expense................................... 1,237 1,117
--------- ---------
Net income...........................................$ 3,517 $ 3,284
Per share information: ========= =========
Basic and diluted earnings per share................$ .39 $ .37
Dividends declared..................................$ .185 $ .176
Other Comprehensive Income
Net income...........................................$ 3,517 $ 3,284
--------- ---------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available
for sale arising during the period................. (513) (1,181)
Reclassification adjustment for gains included in
net income......................................... (98) (130)
--------- --------
Other comprehensive income.......................... (611) (1,311)
--------- --------
COMPREHENSIVE INCOME.................................$ 2,906 $ 1,973
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
(Dollars in thousands) 2000 1999
<S> <C> <C>
Cash Flows from Operating Activities
Net income..............................................$ 3,517 $ 3,284
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................... 4,755 4,015
Accretion and amortization of investment securities... 128 152
Provision for loan losses............................. 50 153
(Gain) on sale of property and equipment.............. (7) (2)
(Gain) on sales of securities available-for-sale...... (150) (200)
(Gain) on sale of mortgage loans...................... (18) (193)
Proceeds from sales of mortgage loans................. 3,630 28,773
Origination of mortgage loans held for sale........... (3,329) (24,723)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and other assets.................................... 113 (2,192)
Increase in accrued interest payable................. 359 73
Increase (decrease) in other liabilities............. (637) (219)
Net cash provided by operating activities............. 8,411 8,921
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks.. 328 3,029
Purchase of interest-bearing deposits in other banks.... (147) (42)
Proceeds from sales of securities available-for-sale.... 151 201
Proceeds from maturities or calls of securities
held-to-maturity..................................... 2,439 4,478
Proceeds from maturities or calls of securities
available-for-sale................................... 7,029 7,720
Purchases of securities held-to-maturity................ (276) (629)
Purchases of securities available-for-sale.............. (15,626) (21,071)
Net loans and direct finance leases made to customers... (15,498) (3,186)
Purchases of equipment acquired for operating leases,net (7,958) (5,657)
Purchases of premises and equipment..................... (583) (342)
Proceeds from sale of premises and equipment............ 13 7
Net cash used by investing activities............... (30,128) (15,492)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW
and savings accounts................................... 17,975 (2,317)
Net increase in time deposits........................... 11,231 5,457
Net increase (decrease) in short-term borrowings........ (4,408) 806
Repayments of long-term debt............................ (4,844) (4,686)
Cash dividends ......................................... (1,653) (1,503)
Proceeds from issuance of treasury stock................ --- 294
Net cash provided by/(used by) financing activities.. 18,301 (1,949)
Net change in cash and cash equivalents................. (3,416) (8,520)
Cash and cash equivalents:
Beginning of period..................................... 52,924 70,546
End of period...........................................$ 49,508 $ 62,026
========== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans........$ 112 $ ---
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest to depositors and on borrowed money...........$ 7,827 $ 7,085
Income taxes........................................... 38 125
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation - The accompanying unaudited consolidated financial
statements of Sterling Financial Corporation and subsidiaries have been prepared
in accordance with generally accepted accounting principles for interim
financial information and instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
For further information, refer to the audited consolidated financial
statements, footnotes thereto, included in the Annual Report on Form 10-K, as
amended, 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 and Country, Inc., T&C Leasing, Inc.,
Northeast Bancorp, Inc. and its subsidiary, The First National Bank of North
East and Sterling Mortgage Services, Inc. (inactive). All significant
intercompany transactions are eliminated in consolidation.
Earnings Per Common Share - Basic earnings per share represents income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would
result from the assumed issuance. Potential common shares that may be issued by
Sterling consist solely of outstanding stock options, and are determined
using the treasury stock method.
Earnings per common share for the three months ended March 31, 2000 and
1999 have been computed based on the following (dollars in thousands):
2000 1999
Net income available to stockholders $ 3,517 $ 3,284
========= =========
Average number of shares outstanding 8,931,568 8,904,580
Effect of dilutive stock options 4,119 18,016
--------- ---------
Average number of shares outstanding used to
calculate diluted earnings per share 8,935,687 8,922,596
========= =========
Reclassifications - Certain items in the 1999 consolidated financial
statements have been reclassified to conform with 2000 presentation format.
Note 2 - Merger
On January 26, 2000, Sterling signed a definitive agreement to merge with
Hanover Bancorp, Inc., a commercial bank holding company with total assets of
$515 million, headquartered in Hanover, Pennsylvania. Under the
terms of the agreement, each Hanover shareholder will
receive .93 shares of Sterling's common stock for each
Hanover share outstanding. This transaction will be accounted for
under the pooling-of-interests method of accounting and is subject to regulatory
and stockholder approvals. The merger is expected to be consummated by the
third quarter of 2000.
The following table provides a summary of consolidated operating results
and financial condition on a proforma basis as of and for the
quarter ended March 31, 2000 (in thousands):
Sterling Sterling
(As reported) Hanover (Proforma)
Net interest income $ 9,627 $ 4,110 $ 13,737
Net income 3,517 1,162 4,679
Total assets 1,079,971 515,032 1,595,003
Total stockholders' equity 91,271 32,395 123,666
Note 3 - Segment Information
Sterling has adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. Statement No. 131
established standards for the way that public business enterprises report
information about operating segments in interim financial reports.
This standard introduces the "management approach" model, which focuses on
the manner in which the chief decision makers organize segments
with a corporation for making operating decisions and assessing performance.
Statement No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers.
Sterling's chief decision makers continue to assess performance and make
operating decisions based on two operating segments. These segments include 1)
providing community banking and related financial services to consumers,
businesses and governmental units in Lancaster County, PA, Cecil County, MD and
surrounding counties, and also includes corporate-related activities; and 2)
providing vehicle and equipment financing alternatives to businesses primarily
located in Pennsylvania, although assets are located throughout the United
States.
Condensed financial information of Sterling's two segments and a
reconciliation of such information to the consolidated financial statements as
of and for the three months ended March 31 is as follows (in thousands):
<TABLE>
<CAPTION>
Community
Banking and
Related Intersegment Consolidated
Services Leasing Eliminations Totals
March 31, 2000
<S> <C> <C> <C> <C>
Interest and dividend income $ 17,204 $ 1,604 $ (995) $ 17,813
Interest expense 7,404 1,777 (995) 8,186
Provision for loan losses 20 30 --- 50
Noninterest income 2,492 5,379 --- 7,871
Noninterest expenses 7,859 4,835 --- 12,694
Income before income taxes 4,413 341 --- 4,754
Income tax expense 1,094 143 --- 1,237
Net income 3,319 198 --- 3,517
Assets 1,015,735 126,506 (62,270) 1,079,971
March 31, 1999
Interest and dividend income $ 15,887 $ 1,391 $ (983) $ 16,295
Interest expense 6,701 1,440 (983) 7,158
Provision for loan losses 130 23 --- 153
Noninterest income 2,717 4,427 --- 7,144
Noninterest expenses 7,700 4,027 --- 11,727
Income before income taxes 4,073 328 --- 4,401
Income tax expense 994 123 --- 1,117
Net income 3,079 205 --- 3,284
Assets 954,169 104,552 (61,751) 996,970
</TABLE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The management of Sterling Financial Corporation has made forward-looking
statements in this quarterly report on Form 10-Q. These forward-looking
statements may be subject to risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed future
results of operations of Sterling Financial Corporation and its subsidiaries,
Bank of Lancaster County, N.A., Northeast Bancorp, Inc.,
The First National Bank of North East, T&C Leasing, Inc. Sterling Mortgage
Services, Inc. and Town & Country, Inc. When words such as "believes",
"expects", "anticipates" or similar expressions occur in this quarterly report,
management is making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this report, could affect the future financial results of Sterling
Financial Corporation and its subsidiaries, both individually and collectively,
and could cause those results to differ materially from those expressed in the
forward-looking statements contained in this quarterly report on Form 10-Q.
These factors include the following:
operating, legal and regulatory risks;
economic, political and competitive forces affecting our banking,
securities, asset management and credit service products; and
the risk that our analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them
could be unsuccessful.
Sterling undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date of this report. Readers should carefully review the
risk factors described in other documents Sterling files periodically
with the Securities and Exchange Commission, including Quarterly Reports
on Form 10-Q and the Annual Report on Form 10-K to be filed by Sterling
Financial Corporation, and any Current Reports on Form 8-K.
RESULTS OF OPERATIONS
Overview
Net income for the quarter ended March 31, 2000 was $3,517,000 versus
$3,284,000 in 1999, an increase of $233,000 or 7.1%. Basic and diluted earnings
per share was $.39 for the first quarter of 2000, an increase of $.02 or 5.4%
from $.37 for the same quarter in 1999. These earnings resulted in a return on
average assets of 1.32% and return on average realized equity of 15.23% for the
first quarter of 2000, versus 1.33% and 15.51%, respectively, in the
corresponding period last year.
Net Interest Income
The following table summarizes, on a fully taxable equivalent basis (35%
tax rate), net interest income and net interest margin for the three months
ended March 31, 2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Securities, federal funds sold
and short-term investments $276,068 $ 4,593 6.69% $276,544 $ 4,359 6.39%
Loans 671,067 14,200 8.51% 599,151 12,655 8.57%
-------- ------- ----- -------- ------- -----
947,135 18,793 7.98% 875,695 17,014 7.88%
-------- ------- ----- -------- ------- -----
Interest bearing liabilities:
Deposits 768,677 7,334 3.84% 725,965 6,647 3.71%
Borrowings 54,277 852 6.32% 33,180 511 6.25%
-------- ------- ----- -------- ------- -----
822,954 8,186 4.00% 759,145 7,158 3.82%
-------- ------- ----- -------- ------- -----
Interest rate spread 3.98% 4.06%
===== =====
Net interest income/
average earning assets $ 10,607 4.50% $ 9,856 4.56%
======== ===== ======== =====
</TABLE>
The primary component of Sterling's revenue is net interest income,
which is the difference between interest and fees on interest earning
assets and interest accrued on deposits and borrowed funds. Interest
income, on a tax equivalent basis, totaled $18,793,000 for the quarter ended
March 31, 2000, an increase of $1,779,000 from 1999. This increase in
interest income was a result of an 8.2% increase in interest earning
assets combined with an approximate 10 b.p. increase in yield earned on
those assets. Contributing factors to the increase in the
yield was generally higher interest rates in the first quarter of 2000, and a
shift in the composition of interest earning assets. Loans increased from
68% of total interest earning assets in 1999 to 71% in 2000. Loans
generally have higher interest rates associated with them than securities
and short-term investments.
Interest expense totaled $8,186,000 for the quarter ended March 31,
2000, and increase of $1,028,000 from 1999. This increase was
a result of a $63,809,000 increase in average interest bearing
liabilities and an increase in rates paid of 18 b.p. Generally
higher interest rates paid in 2000, combined with greater reliance on more
costly third party funding led to the increase in rates on interest
bearing liabilities.
Sterling experienced a slight decline in its net interest margin as the
increase on rates accrued on interest bearing liabilities outpaced the
increase in the yields earned on interest earning assets.
Although there can be no assurances, management believes it will be difficult
to maintain its net interest margin at historical levels. As interest rates
rise, the cost of funding sources will rise. However, we believe it will be
difficult to gain similar increases on yields in interest earning assets
due to the competitive nature in which financial institutions are
pricing new credits.
Provision for Loan Losses
The provision for loan losses decreased from $153,000 for the three months
ended March 31, 1999, to $50,000 in 2000. The provision reflects the amount
deemed appropriate by management to produce an adequate reserve to meet the
present risk characteristics of the loan portfolio. The decrease in the
provision reflects the improvements in the asset quality ratios,
including a reduction in net charge-offs as a percent of average
loans outstanding.
Noninterest Income
Total noninterest income for the three months ended March 31, 2000 totaled
$7,871,000, an increase of 10.2% from 1999. The increase in noninterest
income was primarily the result of management's concerted efforts
to continue to grow its noninterest income, primarily through income
generated from its wealth management division and leasing
subsidiaries. These increases were offset by a decline in
mortgage banking revenue.
Income from fiduciary activities increased 21.1% to $682,000 for the three
months ended March 31, 2000, as compared to the same period in 1999. This
increase was achieved primarily due to increased transaction volume and growth
in assets under management.
Rental income on operating leases has increased 23.0% from $4,282,000
for the quarter ended March 31, 1999 to $5,268,000 in 2000. The increase
in rental income is primarily due to an increase in the number
of units under operating leases which totaled 4,843 as of March 31, 2000,
versus 3,960 at March 31, 1999.
Mortgage banking income totaled $118,000 for the three months ended
March 31, 2000, a 79.3% decline from the same period in 1999.
The financial services industry has seen a significant reduction in
mortgage loan refinancing volume, a direct result of increases in
fixed interest rates on conventional mortgage loan products. Sterling
experienced similar declines in mortgage loan origination
volume in the first quarter of 2000, and expects to see similar
results throughout the remainder of the year as long as interest rates
remain at the current levels.
Noninterest Expenses
Noninterest expenses totaled $12,694,000 for the quarter ended March 31,
2000, an increase of 8.2%, or $967,000, from 1999. The primary contributor to
the increase was depreciation on leased property, which increased 22.1% to
$4,165,000 for the three months ended March 31, 2000 versus 1999. This increase
is consistent with the increase noted in rental income on leased property. The
remaining increases in noninterest expenses is consistent with the overall
growth in Sterling Financial Corporation.
Operating expense levels are often measured by the efficiency ratio, which
expresses noninterest expense as a percentage of tax-equivalent net interest
income and total fees and other income. Operating leases significantly impact
Sterling's consolidated efficiency ratio, which tends to drive the ratio higher
than is typically achieved on financial institutions with no similar operating
lease portfolio. In order to effectively monitor the efficiency ratio, Sterling
monitors this ratio on its two significant operating segments: 1) community
banking and related services and 2) leasing.
Sterling's efficiency ratio for the community banking segment has improved
from 62% for the three months ended March 31, 1999 to 60% for the same period in
2000. The leasing segment's efficiency ratio increased from 92% in 1999 to
93% in 2000.
Income Taxes
Income tax expense for the three months ended March 31, 2000 was
$1,237,000, resulting in an effective tax rate of 26.0%, versus
25.4% for 1999. The difference between the effective tax rate and
the statutory tax rate of 35% is primarily due to tax exempt interest
income.
FINANCIAL CONDITION
Assets totaled $1,079,971,000 at March 31, 2000 compared to
$1,059,374,000 at December 31, 1999. This represents an increase of
$20,597,000, or 1.9% over that period of time.
Securities
As of March 31, 2000, securities totaled $264,937,000, and increase of
$5,362,000 from December 31, 1999. A portion of the increase in the security
balance was funded through investing cash and cash equivalents, including excess
cash stockpiled for the Year 2000, into longer term security instruments which
yield higher interest rates.
Loans
Net loans have grown 2.3% from $654,834,000 at December 31, 1999 to
$670,170,000 at March 31, 2000. Commercial loans represents a significant
portion of this growth, and is a direct result of demand remaining
strong during the first quarter of 2000. The strong economy in Lancaster
and Cecil counties has fueled the commercial loan demand.
Allowance for Loan Losses
Sterling's allowance for loan losses was $8,217,000 at March 31, 2000, or
1.21% of loans outstanding which was comparable to the 1.23% ratio at
December 31, 1999. Net charge-offs to average loans outstanding
totaled .001% for the first quarter of 2000, versus .02% for the
same period in 1999.
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans as of March 31, 2000 and
December 31, 1999 (in thousands):
March 31, December 31,
2000 1999
Nonaccrual loans $ 430 $ 325
Accruing loans, past due 90 days or more 463 751
Restructured loans 1,952 1,961
------- -------
Total non-performing loans 2,845 3,037
Other real estate owned 275 163
------- -------
Total non-performing assets $ 3,120 $ 3,200
======= =======
Non-performing loans to total loans 0.42% 0.46%
Allowance for loan losses to non-performing loans 289% 269%
The restructured loans included in nonperforming loans represent a
series of loans to one borrower in the real estate business. Sterling
has no commitment to lend this customer additional funds related to
the restructured notes. These restructured loans are fully secured with
real estate collateral, are current, and have performed in accordance
with the contractual terms, both prior to and after the restructuring.
Accrual of interest on the restructured loans continues.
Potential problem loans are defined as performing loans which have
characteristics that cause management to have serious doubts as to the
ability of the borrower to perform under present loan repayment
terms and which may result in the reporting of these loans as nonperforming
loans in the future. Total potential problem loans
approximated $3,319,000 at March 31, 2000.
The following table presents information concerning impaired loans at March
31, 2000 and December 31, 1999 (in thousands):
March 31, December 31,
2000 1999
Impaired loans with a related allowance $ 2,382 $ 2,286
Impaired loans without a related allowance --- ---
------- -------
Total impaired loans $ 2,382 $ 2,286
======= =======
Allowance related to impaired loans $ 134 $ 111
======= =======
Sterling maintains the allowance for loan losses at a level believed
adequate by management to absorb potential losses in the loan
portfolio. It is established through a provision for loan losses charged
to earnings. Quarterly, Sterling utilizes a defined methodology in
determining the adequacy of the allowance for loan losses which considers
specific credit reviews, past loan loss historical experience, and qualitative
factors. This methodology, which has remained consistent for the past
several years, results in allowance consisting of two components, "allocated"
and "unallocated". (For a more thorough discussion of the allowance for
loan losses methodology, please refer to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999).
Management feels the above methodology accurately reflects losses
inherent in the portfolio. Management bases the provision for
loan losses, or lack of provision, on the overall analysis taking into
account the methodology discussed above.
A rollforward of the allowance for loan losses for the three months ended
March 31, 2000 and 1999 were as follows (in thousands):
2000 1999
Balance at January 1 $ 8,174 $ 8,070
Provision for loan losses charged to income 50 153
Loans charged-off (36) (169)
Recoveries of loans previously charged off 29 60
------- -------
Balance at March 31 $ 8,217 $ 8,114
======= =======
Net charge-offs to average loans outstanding .001% .02%
Assets Held for Operating Leases
During the first quarter of 2000, Sterling increased the balance of assets
held for operating leases from $47,639,000 at year-end 1999 to $51,432,000 at
March 31, 2000. Sterling recognizes that leasing operations represent a growth
opportunity for the corporation and has committed resources to expand this
business. These resources include increased marketing efforts, not only in
developing customer relationships, but also in maintaining existing customers.
The strong national and local economy has led to our leasing customers expanding
their business operations, resulting in an increase in the number of new units
leased within our customer base.
Deposits
At March 31, 2000, total deposits were $921,638,000, representing a
$29,206,000, or 3.3% increase from December 31, 1999. The increase is deposits
is attributable to competitive pricing, particularly in time deposits and cash
management accounts. Sterling increased its rates paid on these deposit
types in order to decrease its reliance on third party funding sources,
which typically have higher interest rates associated with them.
Borrowings
Short term borrowings totaled $20,592,000 at March 31, 2000, a decrease of
$4,408,000 from December 31, 1999. Additionally, long-term debt declined by
$4,844,000 from December 31, 1999 to March 31, 2000, and totaled $29,447,000.
Sterling was able to fund the pay-off of scheduled principal payments on
long-term debt with deposit sources, as discussed above. The decrease
in short-term borrowings was exclusively related to a reduction in the
interest bearing demand notes issued to the U.S. Treasury.
Capital
Total stockholder's equity increased $1,253,000 from December 31, 1999 to
March 31, 2000. This increase was a result of operating activities, and
consisted of net income for the period of $3,517,000, less dividends
declared of $1,653,000, and unrealized loss on securities available
for sale, net of tax, of $611,000.
Sterling and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on Sterling and the subsidiary banks' financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Sterling and its banking subsidiaries
must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
amounts and reclassifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require Sterling and its banking subsidiaries to maintain minimum amounts and
ratios of total and Tier 1 capital to average assets. Management believes,
as of March 31, 2000 and December 31, 1999, that Sterling and
the subsidiary banks met all minimum capital adequacy requirements
to which they are subject and are categorized as "well capitalized".
Sterling's capital ratios as of March 31, 2000 and December 31, 1999 and
related regulatory minimum requirements are as follows:
<TABLE>
<CAPTION>
Per Regulation
(1)
March 31, December 31, Minimum Well
2000 1999 Requirement Capitalized
<S> <C> <C> <C> <C>
Total capital to risk weighted assets 10.9% 11.1% 8.0% 10.0%
Tier 1 capital to risk weighted assets 10.0% 10.2% 4.0% 6.0%
Tier 1 capital to average assets 8.6% 8.5% 4.0% 5.0%
(1) represents amounts for the banking subsidiaries and not Sterling, as prompt
corrective action provisions are not applicable to bank holding companies
</TABLE>
Liquidity
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
Sterling 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 source of funds mentioned provide
sufficient liquidity.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2000, there have been no material changes to information
regarding Quantitative and Qualitative Disclosures About Market Risk as
presented in the 1999 Annual Report on Form 10-K, as amended.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As of March 31, 2000, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to business, to which
Sterling or its subsidiaries are a party or of which any of their
property is the subject.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
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
During the quarter ended March 31, 2000, the registrant filed the
following reports on Form 8-K.
Date of Report Item Description
January 25, 2000 5 Press release announcing earnings
January 25, 2000 5 Announcement of Agreement and
Plan of Merger with Hanover
Bancorp, Inc.
March 28, 2000 5 Refiling of Letter Agreement
between the Registrant and
Howard E. Groff, Sr.
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, 2000 By:
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: May 12, 2000 By:
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
Northeast Bancorp, Inc. Delaware
14 S. Main Street
North East, Maryland 21901
The First National Bank of North East Maryland
(Wholly-owned Subsidiary of Northeast
Bancorp, Inc.)
14 S. Main Street
North East, Maryland 21901
Sterling Mortgage Services, Inc. Pennsylvania
101 North Point Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 35,568
<INT-BEARING-DEPOSITS> 828
<FED-FUNDS-SOLD> 13,940
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 214,909
<INVESTMENTS-CARRYING> 50,028
<INVESTMENTS-MARKET> 49,692
<LOANS> 678,387
<ALLOWANCE> 8,217
<TOTAL-ASSETS> 1,079,971
<DEPOSITS> 921,638
<SHORT-TERM> 20,592
<LIABILITIES-OTHER> 17,023
<LONG-TERM> 29,447
0
0
<COMMON> 44,674
<OTHER-SE> 46,597
<TOTAL-LIABILITIES-AND-EQUITY> 1,079,971
<INTEREST-LOAN> 13,794
<INTEREST-INVEST> 3,762
<INTEREST-OTHER> 257
<INTEREST-TOTAL> 17,813
<INTEREST-DEPOSIT> 7,334
<INTEREST-EXPENSE> 8,186
<INTEREST-INCOME-NET> 9,627
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 150
<EXPENSE-OTHER> 12,694
<INCOME-PRETAX> 4,754
<INCOME-PRE-EXTRAORDINARY> 4,754
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,517
<EPS-BASIC> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 4.09
<LOANS-NON> 430
<LOANS-PAST> 463
<LOANS-TROUBLED> 1,952
<LOANS-PROBLEM> 3,319
<ALLOWANCE-OPEN> 8,174
<CHARGE-OFFS> 36
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 8,217
<ALLOWANCE-DOMESTIC> 8,217
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 34,886
<INT-BEARING-DEPOSITS> 570
<FED-FUNDS-SOLD> 27,140
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,908
<INVESTMENTS-CARRYING> 60,049
<INVESTMENTS-MARKET> 61,678
<LOANS> 595,738
<ALLOWANCE> 8,115
<TOTAL-ASSETS> 996,970
<DEPOSITS> 858,196
<SHORT-TERM> 2,364
<LIABILITIES-OTHER> 18,037
<LONG-TERM> 29,418
0
0
<COMMON> 35,743
<OTHER-SE> 53,212
<TOTAL-LIABILITIES-AND-EQUITY> 996,970
<INTEREST-LOAN> 12,448
<INTEREST-INVEST> 3,545
<INTEREST-OTHER> 302
<INTEREST-TOTAL> 16,295
<INTEREST-DEPOSIT> 6,647
<INTEREST-EXPENSE> 7,158
<INTEREST-INCOME-NET> 9,137
<LOAN-LOSSES> 153
<SECURITIES-GAINS> 200
<EXPENSE-OTHER> 11,727
<INCOME-PRETAX> 4,401
<INCOME-PRE-EXTRAORDINARY> 4,401
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,284
<EPS-BASIC> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 4.23
<LOANS-NON> 855
<LOANS-PAST> 397
<LOANS-TROUBLED> 1,985
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,070
<CHARGE-OFFS> 169
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 8,114
<ALLOWANCE-DOMESTIC> 8,114
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
