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 September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-16276
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, $5.00 Par Value-12,546,477 shares outstanding as of October 31,
2000.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999. 3
Consolidated Statements of Income
for the Three Months and Nine Months ended
September 30, 2000 and 1999. 4
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months ended
September 30, 2000 and 1999. 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 2000 and 1999. 5
Notes to Consolidated Financial
Statements. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosure about Market Risk 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities and Use of Proceeds 22
Item 3 - Defaults Upon Senior Securities 22
Item 4 - Submission of Matters to a Vote of Securities Holders 22
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 23
Signature Page 24
<TABLE>
Part I - Financial Information
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
<CAPTION>
September 30, December 31,
(Dollars in thousands) 2000 1999
<S> <C> <C>
Assets
Cash and due from banks..........................................$ 50,491 $ 68,103
Federal funds sold................................................ 21,535 5,250
--------- ---------
Cash and cash equivalents....................................... 72,026 73,353
Short-term investments............................................ 702 29
Interest-bearing deposits in banks................................ 834 1,377
Mortgage loans held for sale...................................... 497 1,120
Securities held-to-maturity(fair value 2000-$45,881;1999-$53,766). 45,680 54,056
Securities available-for-sale..................................... 415,843 376,571
Loans, net of allowance for loan losses 2000-$11,722;1999-$11,875.1,023,260 947,413
Assets held for operating leases, net............................. 53,078 47,639
Premises and equipment............................................ 29,933 30,660
Other real estate owned........................................... 381 409
Accrued interest receivable....................................... 11,749 10,313
Other assets...................................................... 14,239 13,383
--------- ---------
Total assets.....................................................$1,668,222 $1,556,323
========= =========
Liabilities
Deposits:
Noninterest-bearing............................................$ 158,701 $ 155,339
Interest-bearing................................................1,216,202 1,133,475
--------- ---------
Total deposits................................................1,374,903 1,288,814
--------- ---------
Short-term borrowings................................ ............ 29,328 45,372
Long-term debt.................................................... 109,652 80,625
Accrued interest payable.......................................... 10,755 7,086
Other liabilities................................................. 12,671 11,666
--------- ---------
Total liabilities.................................................1,537,309 1,433,563
--------- ---------
Stockholders' equity
Common Stock -($5.00 par value)...................................
No. shares authorized: 35,000,000
No. shares issued: 2000 - 12,546,477; 1999 - 12,545,858
No. shares outstanding: 2000 - 12,546,477 1999 - 12,542,638 ... 62,732 62,729
Capital surplus................................................... 17,856 17,895
Retained earnings................................................. 54,141 48,704
Accumulated other comprehensive income (loss)..................... (3,816) (6,467)
Common stock in treasury, at cost (2000-0 shares; 1999-3,220 shares --- (101)
--------- ---------
Total stockholders' equity........................................ 130,913 122,760
--------- ---------
Total liabilities and stockholders' equity.......................$1,668,222 $1,556,323
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest and dividend income
Loans, including fees................................$ 21,706 $ 19,426 $ 62,491 $ 56,540
Debt securities
Taxable.......................................... 4,569 4,169 13,686 12,261
Tax-exempt....................................... 1,985 1,633 5,636 4,644
Dividends............................................ 217 159 640 434
Federal funds sold................................... 409 447 1,031 1,252
Deposits in other banks.............................. 24 34 97 105
--------- --------- -------- ---------
Total interest and dividend income.............. 28,910 25,868 83,581 75,236
Interest expense --------- --------- -------- --------
Deposits............................................. 13,266 10,604 36,781 30,702
Short-term borrowings................................ 407 298 1,465 596
Long-term debt....................................... 1,607 1,135 4,135 3,473
--------- --------- -------- --------
Total interest expense.......................... 15,280 12,037 42,381 34,771
--------- --------- -------- --------
Net interest income.................................. 13,630 13,831 41,200 40,465
--------- --------- -------- --------
Provision for loan losses............................ 158 293 447 923
--------- --------- -------- --------
Net interest income after
provision for loan losses..................... 13,472 13,538 40,753 39,542
Noninterest income --------- --------- -------- --------
Income from fiduciary activities..................... 936 885 2,892 2,583
Service charges on deposit accounts.................. 1,185 1,204 3,517 3,501
Other service charges, commissions and fees.......... 784 785 2,375 2,271
Mortgage banking income.............................. 220 231 521 1,221
Rental income on operating leases.................... 5,668 4,628 16,392 13,329
Gain on sale of real estate.......................... 0 0 343 0
Other operating income............................... 365 236 1,112 904
Securities gains..................................... 134 141 657 827
--------- --------- -------- --------
Total noninterest income........................ 9,292 8,110 27,809 24,636
Noninterest expenses --------- --------- -------- --------
Salaries and employee benefits....................... 7,163 6,646 20,618 19,409
Net occupancy........................................ 810 775 2,544 2,354
Furniture and equipment.............................. 1,126 1,153 3,443 3,413
Professional services................................ 440 490 1,433 1,466
Depreciation on operating lease assets............... 4,457 3,662 12,923 10,561
Merger related and restructuring costs............... 2,881 14 2,881 423
Other................................................ 2,880 2,782 8,942 8,433
--------- --------- -------- --------
Total noninterest expenses..................... 19,757 15,522 52,784 46,059
--------- --------- -------- --------
Income before income taxes........................... 3,007 6,126 15,778 18,119
Income tax expense................................... 608 1,703 3,715 4,639
--------- --------- -------- --------
Net income...........................................$ 2,399 $ 4,423 12,063 13,480
Per share information: ========= ========= ======== ========
Basic and diluted earnings per share................$ 0.19 $ 0.35 $ 0.96 $ 1.07
Dividends declared..................................$ 0.190 $ 0.184 0.560 0.536
Other Comprehensive Income
Net income...........................................$ 2,399 $ 4,423 $ 12,063 $ 13,480
--------- --------- -------- --------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities available
for sale arising during the period................. 4,434 (1,425) 3,078 (8,762)
Reclassification adjustment for gains included in
net income......................................... (87) (91) (427) (538)
--------- -------- -------- --------
Other comprehensive income.......................... 4,347 (1,516) 2,651 (9,300)
--------- -------- -------- --------
COMPREHENSIVE INCOME.................................$ 6,746 $ 2,907 $ 14,714 $ 4,180
========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Nine Months Ended
(Dollars in thousands) September 30,
2000 1999
<S> <C> <C>
Cash Flows from Operating Activities
Net income..............................................$ 12,063 $ 13,480
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................... 15,755 13,238
Accretion and amortization of investment securities... 65 470
Provision for loan losses............................. 447 923
(Gain) on sale of property and equipment.............. (370) (7)
(Gain) on sales of securities available-for-sale...... (657) (827)
(Gain) on sale of mortgage loans...................... (94) (360)
Proceeds from sales of mortgage loans................. 21,636 62,464
Origination of mortgage loans held for sale........... (20,919) (58,355)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and other assets.................................... (2,151) 1,448
Increase in accrued interest payable................. 3,669 1,079
Increase (decrease) in other liabilities............. (750) (65)
Net cash provided by operating activities............. 28,694 33,488
Cash Flows from Investing Activities
Net decrease in interest-bearing deposits in other banks 543 2,492
Net increase in short-term investments.................. (673) (398)
Proceeds from sales of securities available-for-sale.... 11,979 28,866
Proceeds from maturities or calls of securities
held-to-maturity..................................... 8,918 12,499
Proceeds from maturities or calls of securities
available-for-sale................................... 28,905 38,263
Purchases of securities held-to-maturity................ (542) (1,120)
Purchases of securities available-for-sale.............. (75,160) (120,063)
Net loans and direct finance leases made to customers... (76,406) (54,681)
Purchases of equipment acquired for operating leases,net (18,362) (18,061)
Purchases of premises and equipment..................... (2,530) (1,946)
Proceeds from sale of premises and equipment............ 795 32
Net cash used by investing activities............... (122,533) (114,117)
Cash Flows from Financing Activities
Net increase in deposits................................ 86,089 76,980
Net increase (decrease) in short-term borrowings........ (16,044) (1,078)
Proceeds from issuance of long-term debt................ 50,001 24,058
Repayments of long-term debt............................ (20,974) (20,144)
Proceeds from issuance of common stock.................. 16 130
Cash dividends ......................................... (6,620) (6,008)
Cash paid in lieu of fractional shares.................. (8) ---
Purchase of treasury stock.............................. --- (703)
Proceeds from issuance of treasury stock................ 52 365
Net cash provided by financing activities............ 92,512 73,600
Net change in cash and cash equivalents................. (1,327) (7,029)
Cash and cash equivalents:
Beginning of period..................................... 73,353 96,720
End of period...........................................$ 72,026 $ 89,691
========== =========
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 and nine months ended September
30, 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, and the Current Report on
Form 8-K filed with the Commission on September 30, 2000.
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., Bank of
Hanover and Trust Company, HOVB Investment Co., T&C Leasing, Inc., Northeast
Bancorp, Inc. and its wholly-owned 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 and nine months ended
September 30, 2000 and 1999 have been computed based on the following
(dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Net income available to
stockholders $ 2,399 $ 4,423 $ 12,063 $ 13,480
========== ========== ========== ==========
Average number of shares
outstanding 12,545,673 12,551,672 12,543,882 12,563,521
Effect of dilutive stock
options 1,729 40,859 14,266 47,429
---------- ---------- ---------- ----------
Average number of shares
outstanding used to
calculate diluted earnings
per share 12,547,402 12,592,531 12,558,148 12,610,950
========== ========== ========== ==========
Earnings per share:
Basic $ .19 $ .35 $ .96 $ 1.07
Diluted .19 .35 .96 1.07
Reclassifications - Certain items in the 1999 consolidated financial
statements have been reclassified to conform with 2000 presentation format.
Recently Issued Accounting Guidance - In March 2000, the Financial
Accounting Standards Board issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion No. 25. The Interpretation provides clarification on stock option
repricings, modifications to extend the term, modifications to accelerate
vesting, and other matters. Sterling has adopted the provisions prospectively
as of July 1, 2000 with no impact on earnings or stockholders' equity.
Note 2 - Merger
On July 27, 2000, Sterling completed its merger with Hanover Bancorp,
Inc., parent company of Bank of Hanover and Trust Company, headquartered in
Hanover, Pennsylvania. Bank of Hanover, with 12 branches in York and Adams
counties, Pennsylvania, and one branch in Westminster, Maryland, continues to
operate as a separate commercial bank.
Under the terms of the agreement, Hanover Bancorp shareholders received
.93 shares of Sterling common stock for each share of Hanover Bancorp's common
stock in a tax-free exchange. Sterling issued 3,611,409 shares of its common
stock in connection with the merger. The transaction was accounted for under
the pooling-of-interests method of accounting. Accordingly, the consolidated
financial statements have been restated to include the consolidated accounts
of Hanover Bancorp for all periods presented.
Financial data for Sterling and Hanover Bancorp, Inc. from January 1 to
July 31, 2000 is presented below. Although the consummation date was July 27,
2000, the financial data presented is for the nearest interim period.
For the seven months ended July 31, 2000:
Sterling
Sterling Hanover Consolidated
Net interest income $ 22,507 $ 9,652 $ 32,159
Net income 8,603 2,650 11,253
Dividends declared 3,305 932 4,237
The effect of Hanover merger on Sterling's financial condition and
results of operations were as follows:
Sterling
Sterling Hanover Consolidated
For the three months ended
September 30, 1999:
Net interest income $ 9,700 $ 4,131 $ 13,831
Net income 3,224 1,199 4,423
Dividends declared 1,639 470 2,109
For the nine months ended
September 30, 1999:
Net interest income $28,344 $ 12,121 $ 40,465
Net income 10,072 3,408 13,480
Dividends declared 4,625 1,336 5,961
Sterling
Sterling Hanover Elim. Consolidated
As of December 31, 1999
Assets $1,059,374 $ 503,924 $(6,975) $1,556,323
Liabilities 969,356 471,176 (6,969) 1,433,563
Equity 90,018 32,748 (6) 122,760
During the third quarter of 2000, Sterling completed its merger with
Hanover Bancorp, Inc. and incurred $2,881,000 of merger related and
restructuring charges. The direct costs that resulted from the merger totaled
$1,409,000, and consisted primarily of legal, accounting, investment advising
fees, as well as regulatory filing fees and other miscellaneous expenses.
These amounts were paid throughout 2000, and were expensed in the third
quarter. In addition, Sterling incurred restructuring costs totaling
$1,472,000, which primarily consists of severance and related benefit,
professional fees, non-cancelable service contracts and asset write-offs
related to conversion of the banking subsidiaries into a common core
processing system.
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 within 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 South Central Pennsylvania and Northern
Maryland, 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 and nine months ended September 30 is as follows
(in thousands):
Community
Banking and
Related Intersegment
Consolidated Services Leasing Eliminations Totals
Three months ended
September 30, 2000
Interest and dividend income $ 28,538 $ 1,749 $ (1,377) $ 28,910
Interest expense 14,697 1,960 (1,377) 15,280
Provision for loan losses 128 30 --- 158
Noninterest income 3,489 5,803 --- 9,292
Noninterest expenses 14,588 5,169 --- 19,757
Income before income taxes 2,614 393 --- 3,007
Income tax expense 443 165 --- 608
Net income 2,171 228 --- 2,399
Three months ended
September 30, 1999
Interest and dividend income $ 25,399 $ 1,580 $ (1,111) $ 25,868
Interest expense 11,501 1,647 (1,111) 12,037
Provision for loan losses 270 23 --- 293
Noninterest income 3,402 4,708 --- 8,110
Noninterest expenses 11,233 4,289 --- 15,522
Income before income taxes 5,797 329 --- 6,126
Income tax expense 1,558 145 --- 1,703
Net income 4,239 184 --- 4,423
Nine months ended
September 30, 2000
Interest and dividend income $ 82,177 $ 4,995 $ (3,591) $ 83,581
Interest expense 40,358 5,614 (3,591) 42,381
Provision for loan losses 357 90 --- 447
Noninterest income 11,007 16,802 --- 27,809
Noninterest expenses 37,790 14,994 --- 52,784
Income before income taxes 14,679 1,099 --- 15,778
Income tax expense 3,254 461 --- 3,715
Net income 11,425 638 --- 12,063
Assets 1,618,079 133,116 (82,973) 1,668,222
Nine months ended
September 30, 1999
Interest and dividend income $ 74,001 $ 4,459 $ (3,224) $ 75,236
Interest expense 33,363 4,632 (3,224) 34,771
Provision for loan losses 855 68 --- 923
Noninterest income 10,970 13,666 --- 24,636
Noninterest expenses 33,605 12,454 --- 46,059
Income before income taxes 17,148 971 --- 18,119
Income tax expense 4,210 429 --- 4,639
Net income 12,938 542 --- 13,480
Assets 1,490,381 117,837 (66,456) 1,541,762
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 are subject to certain 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., Bank of Hanover and Trust Company, Northeast
Bancorp, Inc., The First National Bank of North East, Town & Country, Inc.,
HOVB Investment Co., T & C Leasing, Inc. and Sterling Mortgage Services, 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 it 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; and
the success of the July 27, 2000 merger of Hanover Bancorp, Inc.
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, 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
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Overview
Operating income, as defined below, was $4,652,000 for the quarter
ending September 30, 2000, a $215,000, or 4.8%, increase from 1999. Basic and
diluted earnings per share on an operating basis totaled $.37 for the quarter
ended September 30, 2000, versus $.35 for the same period in 1999,
an increase of 5.7%. The operating return on average realized
equity totaled 13.58% for third quarter of 2000, versus 14.17%
for the same period in 1999.
Operating earnings for the quarter ended September 30, 2000 and 1999
exclude tax-effected merger-related costs and restructuring charges of
$2,252,000 and $14,000. These expenses relate to the merger integration
of the operations of Hanover Bancorp, Inc., which was acquired in the
third quarter of 2000, and the merger of North East Bancorp, Inc. in the
second quarter of 1999. Including merger related and restructuring charges,
net income totaled $2,399,000 and $4,423,000 for the three months ended
September 30, 2000 and 1999. Basic and diluted earnings per share totaled
$.19 for the quarter ended September 30, 2000, versus $.35 for 1999. The
return on average realized equity totaled 7.01% for the third quarter of 2000,
versus 14.12% for the same period in 1999.
Net Interest Income
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 totaled
$28,910,000 for the quarter ended September 30, 2000 compared to $25,868,000
for the same period 1999. This represents an increase of $3,042,000 or 11.8%.
This increase in interest income was a result of an approximate 9.8% increase
in interest earning assets combined with a modest increase in the yield earned
on those assets. Contributing to the increase in the yield was generally
higher interest rates in the third quarter of 2000 as well as a shift in the
composition of interest earning assets.
Interest expense amounted to $15,280,000 for the quarter ended September
30, 2000 which was an increase of $3,243,000, or 26.9%, from $12,037,000
reported for the same period 1999. Interest bearing liabilities totaled
$1,355,182,000 at September 30, 2000 compared to $1,259,472,000 at September
30, 1999. Higher interest rates paid in 2000 along with increased volumes and
greater reliance on short-term borrowings and long-term debt led to the
increase in interest expense.
Provision for Loan Losses
The provision for loan losses decreased $135,000 from $293,000 for the
quarter ended September 30, 1999 to $158,000 in 2000. The provision reflects
the amount deemed appropriate by management to provide an adequate allowance
to meet the present risk characteristics of the loan portfolio.
Noninterest Income
Total noninterest income totaled $9,292,000 for the three months ended
September 30, 2000 compared to $8,110,000 for the same period in 1999. This
represents an increase of $1,182,000 or 14.6% over 1999.
The primary reason for the growth in noninterest income is due to growth
in the operating lease portfolio. Rental income on operating leases has
increased from $4,628,000 for the quarter ended September 30, 1999 to
$5,668,000 in 2000. This is an increase of $1,040,000 or 22.5%. This
increase is due primarily to increases in the number of units under operating
leases, which totaled 5,155 as of September 30, 2000, versus 4,387 at
September 30, 1999.
Noninterest Expenses
Noninterest expenses totaled $19,757,000 for the quarter ended September
30, 2000, compared to $15,522,000 for the same period in 1999. This
represents and increase of $4,235,000 or 27.3%.
A major contributor to the increase was depreciation on leased property,
which increased from $3,662,000 in 1999 to $4,457,000 in 2000. This increase
is consistent with the increase noted in rental income on leased property.
Professional services decreased $50,000 or 10.2% for the quarter end
September 30, 2000 to $440,000. The decrease in professional services can be
attributed primarily to the hiring of an information systems officer at one of
the subsidiary banks in the fourth quarter of 1999. Prior to this time, this
role was filled by a third party service provider, resulting in higher
professional services in 1999 versus 2000.
Merger related and restructuring costs incurred in the third quarter of
2000 totaled $2,881,000 versus $14,000 for the third quarter of 1999.
The remaining increase in noninterest expenses is consistent with the
overall growth of Sterling Financial Corporation.
Income Taxes
Income tax expense for the three months ended September 30, 2000 was
$608,000, resulting in an effective tax rate of 20.2%, versus 27.8% for 1999.
The primary difference between the effective tax rate and the statutory tax
rate of 35% is due to tax exempt interest income, offset somewhat by Maryland
state income taxes. The decline in the effective tax rate in the third quarter
2000 as compared to 1999 is a result of a significant reduction in pretax
income due to the restructuring charges recorded in the third quarter of 2000.
As tax-free income represents a larger portion of pre-tax income, the
effective tax rate was lowered.
Nine months ended September 30, 2000 compared to nine months ended September
30, 1999
Overview
Operating income, as defined below, was $14,316,000 for the nine
months ending September 30, 2000, a $462,000, or 3.3%, increase from 1999.
Basic and diluted earnings per share on an operating basis
totaled $1.14 for the nine months ended September 30, 2000 verus
$1.10 for the same period in 1999, an increase of 3.6%. The operating
return on average realized equity totaled 14.32% for the nine months ended
September 30, 2000, versus 14.98% for the same period in 1999.
Operating earnings for the nine months ended September 30, 2000 and 1999
exclude tax-effected merger-related costs and restructuring charges of
$2,252,000 and $374,000. These expenses relate to the merger integration
of the operations of Hanover Bancorp, Inc., which was acquired in the
third quarter of 2000, and the merger of North East Bancorp, Inc. in the
second quarter of 1999. Including merger related and restructuring charges,
net income totaled $12,063,000 and $13,480,000 for the nine months ended
September 30, 2000 and 1999. Basic and diluted earnings per share totaled
$.96 for the nine months ended September 30, 2000, versus $1.07 for 1999.
The return on average realized equity totaled 12.07% for the nine months ended
September 30, 2000, versus 14.58% for the same period in 1999.
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 nine months
ended September 30, 2000 and 1999:
(Dollars in thousands)
2000 1999
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest earning assets:
Securities, federal funds sold
and short-term investments $ 463,599 $24,279 6.98% $ 441,966 $21,263 6.42%
Loans 996,717 63,260 8.48% 908,961 57,181 8.40%
--------- ------ ---- --------- ------ ----
1,460,316 87,539 8.00% 1,350,927 78,444 7.76%
--------- ------ ---- --------- ------ ----
Interest bearing liabilities:
Deposits 1,175,036 36,745 4.18% 1,094,904 30,703 3.75%
Borrowings 124,861 5,636 6.03% 101,453 4,069 5.36%
--------- ------ ---- --------- ------ ----
1,299,897 42,381 4.36% 1,196,357 34,772 3.89%
--------- ------ ---- --------- ------ -----
Interest rate spread 3.64% 3.87%
==== ====
Net interest income/
average earning assets $45,158 4.13% $43,672 4.31%
====== ==== ====== ====
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 $87,539,000 for the nine months ended September
30, 2000, an increase of $9,095,000 from 1999. This increase in interest
income was a result of an 8.1% increase in average interest earning assets
combined with an approximate 24 basis points increase in yield earned on those
assets. Contributing factors to the increase in the yield was generally
higher interest rates in the first nine months of 2000 and a shift in the
composition of interest earning assets. Loans increased from 67.3% of total
interest earning assets in 1999 to 72.3% in 2000. Loans generally have higher
interest rates associated with them than securities and short-term
investments.
Interest expense amounted to $42,381,000 reflecting an increase of
$7,609,000 from the $34,772,000 reported in 1999. This increase was a result
of a $103,540,000 increase in average interest bearing liabilities and an
increase in rates paid of 47 basis points. 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 decline in its net interest margin as the
increase in 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 in yields on 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 totaled $447,000 for the nine months ended
September 30, 2000 a decrease of $476,000 from 1999. The provision for loan
losses is based upon the quarterly review of the loan portfolio and reflects
the amount deemed appropriate by management to provide an adequate reserve to
meet the present and foreseeable risk characteristics of the loan portfolio.
The decrease in the provision reflects consistency in asset quality ratios net
charge-offs as a percent of average loans outstanding.
Noninterest Income
Total noninterest income amounted to $27,809,000 for the nine months
ended September reflecting an increase of $3,173,000, or 12.9% from the
$24,636,000 reported in 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 the wealth
management division and leasing subsidiaries. These increases were offset by
a decline in mortgage banking revenue.
Income from fiduciary activities increased from $2,583,000 in 1999 to
$2,892,000 in 2000 which represents an increase of 12.0%. This increase was
achieved primarily due to increased transaction volume and growth in assets
under management.
Mortgage banking income totaled $521,000 for the nine months ended
September 30, 2000, reflecting a decrease of $700,000, or 57.3%, 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 during this
period of time and expect to see similar results throughout the remainder of
the year as long as interest rates remain at the current levels.
Rental income on operating leases has increased 23.3% from $13,329,000
for the nine months ended September 30, 1999 to $16,392,000 in 2000. The
increase in rental income is primarily due to an increase in the number of
units under operating leases, which totaled 5,155 as of September 30, 2000,
versus 4,387 at September 30, 1999.
Reflected in noninterest income for the nine months ended September 30,
2000, is $343,000 generated from the sale of real estate in Maryland.
Noninterest Expenses
Noninterest expenses totaled $52,784,000 for the nine months ended
September 30, 2000, an increase of $6,725,000 from 1999. A primary
contributor to the increase was depreciation on leased property, which
increased 22.4% to $12,923,000 for the nine months ended September 30, 2000
compared to September 30, 1999. This increase is consistent with the increase
noted in rental income on leased property.
During the third quarter of 2000, Sterling completed its merger with
Hanover Bancorp, Inc. and incurred $2,881,000 of merger related and
restructuring charges. The direct costs that resulted from the merger totaled
$1,409,000, and consisted primarily of legal, accounting, investment advising
fees, as well as regulatory filing fees and other miscellaneous expenses.
In addition, Sterling incurred restructuring costs totaling
$1,472,000, which primarily consists of severance and related benefit,
professional fees, termination fees related to non-cancelable service contracts
and asset write-offs related to conversion of the banking
subsidiaries into a common core processing system.
Sterling expects the conversion of the banking subsidiaries into one
common core processing system will result in operating efficiencies through
better leveraging of technology, greater array of products being offered to
customers, and better customer service. The conversion to the new core
processing system and resulting reduction in the workforce is expected to
result in an estimated net annual savings of approximately
$1.5 million, of which approximately 33% will be realized in 2001 and
100% will be realized in years 2002 and beyond.
The following summarizes the restructuring expenses charged to operations
in third quarter of 2000, and the remaining balance in restructuring accrual
at September 30, 2000. The remaining unpaid expenses are expected to be paid
throughout 2000-2002.
Initial Accrual at
Expense September 30, 2000
Employee termination $ 718,000 $ 718,000
Asset disposals/write-downs 334,000 ---
Noncancelable contracts 312,000 312,000
Professional fees 88,000 88,000
Other 20,000 20,000
--------- ---------
$1,472,000 $1,138,000
========= =========
Merger related costs during 1999 totaled $423,000 and was a direct result
of Sterling's acquisition of Northeast Bancorp, Inc. completed in June 1999.
These merger expenses consisted entirely of attorney, accountant, investment
advisory and application fees.
The remaining increase in noninterest expenses is consistent with the
overall growth of 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:
community banking and related services, and
leasing.
Sterling's efficiency ratio for the community banking segment was 62.6%
for the nine months ended September 30, 2000 compared to 61.5% for the same
period 1999. The leasing segment's efficiency ratio increased slightly from
92.3% in 1999 to 92.7% in 2000. The slight deterioration in the banking
segments efficiency ratio is a result of increased noninterest expenses to
support the increased growth in interest-earning assets, combined with a
decline in the net interest margin.
Income Taxes
Income tax expense for the nine months ended September 30, 2000 amounted
to $3,715,000 compared to $4,639,000 in 1999. This resulted in an effective
tax rate of 23.6% in 2000, versus 25.6% in 1999. The difference between the
effective tax rate and the statutory tax rate of 35% is primarily due to tax
exempt interest income, offset somewhat by state income taxes. The
decline in the effective tax rate is a result of a significant reduction in
pre-tax income due to restructuring charges recorded in the third quarter of
2000. As the tax-free income represents a larger portion of pre-tax income,
the effective tax rate was lowered.
FINANCIAL CONDITION
Total assets at September 30, 2000 amounted to $1,668,222,000 compared to
$1,556,323,000 at December 31, 1999. This represents an increase of
$111,899,000 or 7.2% over that period of time.
Securities
The security portfolio increased $30,896,000, or 7.2% for the nine months
ended September 30, 2000. Within the security portfolio, Sterling has
continued to shift its investment methodology towards investment in tax-free
securities and away from other corporate bonds. This is due to the fact the
interest rate curve presently makes tax free securities slightly more
attractive. Additionally, there has also been a migration to U. S. government
agency securities versus U. S. treasuries, since these securities have a
slightly better yield. This strategy has been implemented to mitigate the
declining net interest margin.
Loans
Net loans have grown from $947,413,000 at December 31, 1999 to
$1,023,260,000 at September 30, 2000. This represents an increase of
$75,847,000, or 8.0%. This increase was almost entirely funded through an
increase in deposits, which grew by $86,089,000. Commercial loans continue to
represent a significant portion of this growth, and is a direct result of
demand remaining strong during the first nine months of 2000. The strong
economy in Southcentral Pennsylvania and Northern Maryland has fueled the
commercial loan demand.
Allowance for Loan Losses
Sterling's allowance for loan losses was $11,722,000 at September 30,
2000. This represents 1.13% of loans outstanding which is slightly lower than
the 1.24% ratio at December 31, 1999. Net charge-offs to average loans
outstanding totaled .08% for the first nine months of 2000 compared to .06%
for the same period in 1999. These percentages are favorable in relation to
Sterling's peer group.
The following table presents information concerning the aggregate amount
of nonaccrual, past due and restructured loans as of September 30, 2000 and
December 31, 1999:(In thousands)
September 30, December 31,
2000 1999
Nonaccrual loans $ 2,058 $ 771
Accruing loans, past due 90 days or more 992 882
Restructured loans 1,936 1,961
------- -------
Total non-performing loans 4,986 3,614
Other real estate and other repossessed
assets 381 504
------- -------
Total non-performing assets $ 5,367 $ 4,118
======= =======
Non-performing loans to total loans .48% .38%
Allowance for loan losses to
non-performing loans 235% 329%
The increase in the nonaccrual loan balance is primarily the result of
two relationships, totaling $934,000, which were moved to nonaccrual status
during 2000. These borrowings are secured by real estate and in the opinion
of management, do not represent a significant chargeoff exposure to Sterling.
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 $4,405,000 at September 30, 2000.
Additionally, letter of credit commitments totaling approximately $3,103,000
are outstanding to one of these borrowers.
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.
Sterling utilizes a defined methodology on a quarterly basis to 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 an allowance consisting of two components, "allocated" and "unallocated".
For a more thorough discussion of the allowance for loan losses methodology,
please refer to Sterling Financial Corporation's Annual Report on Form 10-K
for the year ended December 31, 1999.
Management believes 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 consideration the
methodology discussed above.
A rollforward of the allowance for loan losses for the nine months ended
September 30, 2000 and 1999 were as follows:
(In thousands)
2000 1999
Balance at January 1 $11,875 $11,475
Provision for loan losses charged to income 447 923
Loans charged-off (923) (905)
Recoveries of loans previously charged-off 323 441
------- -------
Balance at September 30 $11,722 $11,934
======= =======
Net charge-offs to average loans outstanding .08% .06%
Asset Held for Operating Leases
During the first nine months of 2000, Sterling increased the balance of
assets held for operating leases from $47,639,000 at year-end 1999 to
$53,078,000 at September 30, 2000. Management recognizes that leasing
operations represent a growth opportunity for Sterling 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
Total deposits at September 30, 2000 totaled $1,374,903,000 compared to
$1,288,814,000 at December 31, 1999. This represents an increase of
$86,089,000, or 6.71% during this period of time. The increase in deposits is
attributable to competitive pricing, particularly in time deposits and cash
management accounts, and marketing campaigns to increase deposit growth.
Borrowings
Short term borrowings totaled $29,328,000 at September 30, 2000, a
decrease of $16,044,000 from December 31, 1999. Long-term debt increased by
$29,027,000 from December 31, 1999 to $109,652,000 at September 30, 2000. The
decrease in short-term borrowings was almost exclusively funded through
proceeds from long-term debt. Due to the increase in the short-term borrowing
ratio, management elected to reduce its short-term borrowing exposure in favor
of longer-term rates. The remaining growth in long-term debt was used to fund
growth in the finance and operating lease portfolios.
Capital
Total stockholders' equity increased $8,153,000 or 6.64% from the
$122,760,000 at December 31, 1999. The increase was primarily a result of
operating activities which consisted of net income for the nine months ended
September 30, 2000 of $12,063,000, less dividends declared of $6,620,000 and
unrealized gains on securities available for sale, net of tax, in the amount
of $2,651,000.
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 September 30, 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 September 30, 2000 and December 31, 1999
and related regulatory minimum requirements are as follows:
Per Regulation
(1)
September 30, December 31, Minimum Well
2000 1999 Requirement Capitalized
Total capital to
risk weighted assets 11.4% 11.6% 8.0% 10.0%
Tier 1 capital to
risk weighted assets 10.5% 10.6% 4.0% 6.0%
Tier 1 capital to
average assets 8.0% 8.1% 4.0% 5.0%
(1) represents amounts for the banking subsidiaries and not Sterling Financial
Corporation, as prompt corrective action provisions are not applicable to bank
holding companies.
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
Financial institutions can be exposed to several market risks which may
impact the value of future earnings capacity of an organization. These risks
involve interest rate risk, foreign currency exchange risk, commodity price
risk and equity price risk. Equity investments on a cost basis comprise less
than 2% of corporate assets. Sterling's primary market risk is interest rate
risk.
Interest Rate Risk
Interest rate risk is an economic exposure to future net earnings and
future value of equity capital that can occur based on changes in interest
rates. Interest rate risk is inherent, because as a financial institution,
Sterling derives a significant amount of its operating revenue from
"purchasing" funds(customer deposits and borrowings) at various terms and
rates, and then reinvesting those funds into earning assets (loans, leases,
investments, etc.) at various terms and rates. Current pricing can be
established to generate a specific "spread", or net interest margin, of income
to cover operating costs and produce expected profit to its shareholders.
Interest rate risk occurs when financial market rates increase or
decrease in the future. If interest rates increase or decrease, there could
be a positive or negative effect on future income. The net interest margin
"spread" could increase or decrease based on the level of risk taken by the
corporation. If earning assets can reprice faster than its funding sources,
the "risk" position will generate more revenue in the future on the same asset
base if rates increase and less revenue if rates decrease. If funding sources
reprice faster than earning assets, the opposite effect to income will occur
on the same asset base with increasing and decreasing interest rates. Interest
rate risk can also occur when fixed rate commitments are made for future
dates.
Management endeavors to control the exposure of earnings to changes in
interest rates by understanding, reviewing and making decisions based on its
risk position. The asset/liability committees of each subsidiary are
responsible for these decisions. The committees operate under management
policies defining guidelines and limits on levels of risk. These policies are
approved by the Board of Directors. The committees measure risk exposure with
internal models, which involve assumptions and estimates which inherently
cannot measure with complete precision.
The corporation has a negative cumulative GAP at one year in the future
in the amount of $144 million (9.5% of earning assets). This risk position
would result in a decreasing net interest margin in the next year if market
rates increase, since this volume of funding liabilities in excess of the
volume of earning assets repricing in the next year would have a negative
effect on income. This position will generate more income or widen the net
interest margin if rates decrease in the next year. Beyond one year the risk
position is recaptured. This position is not materially changed from December
31, 1999.
<TABLE>
Interest Rate Sensitivity Gaps
<CAPTION>
0-90 91-365 Over 1 Year Over
Days Days to 3 Years 3 Years Total
<S> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal funds sold........$ 21,535 $ 0 $ 0 $ 0 $ 21,535
Interest bearing deposits
in banks and short-term
investments.............. 1,236 300 0 0 1,536
Securities................ 39,395 44,217 113,070 270,812 467,494
Loans..................... 228,024 158,167 285,571 363,719 1,035,481
-------- -------- -------- --------- ---------
Total interest earning
assets..................$ 290,190 $ 202,684 $ 398,641 $ 634,531 $1,526,046
-------- -------- -------- --------- ---------
Cumulative................ 290,190 492,874 891,515 1,526,046
Interest-Bearing Liabilities
Interest-bearing deposits.$ 168,736 $ 2,848 $ 96,789 $ 289,970 $ 558,343
Time deposits............. 108,435 303,609 189,544 56,271 657,859
Short-term borrowings..... 29,328 --- --- --- 29,328
Long-term debt............ 10,330 13,877 48,933 36,512 109,652
-------- -------- -------- ------- ---------
Total interest-bearing
liabilities............. 316,829 320,334 335,266 382,753 1,355,182
-------- -------- -------- --------- ---------
Cumulative................ 316,829 637,163 972,429 1,355,182
Period GAP (Dollars)...... (26,639) (117,650) 63,375 251,778 170,864
Cumulative GAP (Dollars).. (26,639) (144,289) (80,914) 170,864
Cumulative GAP as % of
total interest earning
assets.................. (1.7)% (9.5)% (5.3)% 11.2%
</TABLE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As of September 30, 2000, there were no material pending legal
proceedings, other than ordinary routine litigation incidental to business,
to which Sterling or its subsidiaries area 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
The following is a list of the Exhibits required by Item 601
of Regulation S-K and are incorporated by reference herein
or annexed to this Quarterly Report:
2.1 Agreement and Plan of Merger dated January 25, 2000 between
Sterling Financial Corporation and Hanover Bancorp, Inc.
(Incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 8, 2000).
2.2 Investment Agreement dated January 25, 2000 between Sterling
Financial Corporation and Hanover Bancorp, Inc. (Incorporated
by reference to Exhibit 99.2 to the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on February 8, 2000).
2.3 Option Agreement dated January 25, 2000 between Sterling
Financial Corporation and Hanover Bancorp, Inc.(Incorporated
by reference to Exhibit 99.3 to the Registrant's Current Report
on Form 8-K filed with the Securities and Exchange Commission
on February 8, 2000).
2.4 Agreement and Plan or Reorganization, dated February 10, 1999
by and among Sterling Financial Corporation, Sterling Financial
Interim Acquisition Corporation, Northeast Bancorp, Inc. and
The First National Bank of North East. (Incorporated by
reference to Annex A to the Registrant's Registration Statement
No. 333-76821 on Form S-4 filed with the Securities and Exchange
Commission on April 22, 1999 and as amended on May 12, 1999.)
3(i) Amended Articles of Incorporation of Sterling Financial
Corporation. (Incorporated by reference to Exhibit 3(i) of
the Current Report on Form 8-K, filed with the Securities and
Exchange Commission, on June 14, 1996.)
3(ii) Amended and Restated Bylaws of Sterling Financial Corporation.
(Incorporated by reference to Exhibit 3 (ii) of the Current
Report on Form 8-K, filed with the Securities and Exchange
Commission on April 25, 2000.
10a Employment Agreement, dated as of July 27, 1999, between
Sterling Financial Corporation, Bank of Lancaster County, N.A.
and John E. Stefan. (Incorporated by reference to Exhibit
10.5 of the Form 10-Q, filed with the Securities and Exchange
Commission, on November 15, 1999, as amended April 4, 2000.)
10b Change of Control Agreements, dated July 7, 1999, July 27, 1999,
July 30, 1999 and August 4, 1999 between Sterling Financial
Corporation, Bank of Lancaster County, N.A. and the following
executive officers: John E. Stefan, Thomas P. Dautrich, J. Roger
Moyer, Jr. and Jere L. Obetz. (Incorporated by reference to
Exhibits 10.1, 10.2, 10.3 and 10.4 of the Form 10-Q, filed with
the Securities and Exchange Commission on November 15, 1999, as
amended April 4, 2000.)
10c Sterling Financial Corporation 1996 Stock Incentive Plan.
(Incorporated by reference to Exhibit 4.3 to the Corporation's
Registration Statement No. 333-28065 on Form S-8, filed with the
Securities and Exchange Commission, on May 30, 1997.)
10d Sterling Financial Corporation Dividend Reinvestment and
Stock Purchase Plan. (Incorporated by reference to the
corporation's Registration Statement No. 33-55131 on Form S-3,
filed with the Securities and Exchange Commission on
August 18, 1994, and amended by the registrant's Rule 424 (b)
prospectus filed with the Commission on December 23, 1998.)
10e Letter Agreement between Sterling Financial Corporation and
Howard E. Groff, Sr., dated June 30, 1994. (Incorporated by
reference to Exhibit 99 on Form 8-K, filed with the Securities
and Exchange Commission, on March 28, 2000.)
10f Sterling Financial Corporation 1997 Directors Stock
Compensation Plan and Policy. (Incorporated by reference to
Exhibit 4.3 to the Corporation's Registration Statement
No. 333-28101 on Form S-8, filed with the Securities and
Exchange Commission on May 30, 1997.)
11 Statement re: Computations of Earnings Per Share (included
herein at Item 1 at Notes to Consolidated Financial
Statements, Note 1.)
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, the registrant filed
the following reports on Form 8-K.
Date of Report Item Description
July 27, 2000 2 Registrant and Hanover Bancorp,
Inc. complete affiliation
transaction
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: November 13, 2000 By:
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: November 13, 2000 By:
Jere L. Obetz
Executive Vice President/Treasurer
and 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
Bank of Hanover and Trust Company Pennsylvania
25 Carlisle Street
Hanover, PA 17331
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
HOVB Investment Co. Delaware
103 Foulk Road
Suite 202
Wilmington, DE 19803
Sterling Mortgage Services, Inc. Pennsylvania
101 North Point Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
