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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-16276
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2449551
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 581-6030
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $5.00 Per Share
(Title of class)
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this
Form 10-K. | |
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
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 29, 2000 was approximately $122,528,000.
The number of shares of Registrant's Common Stock outstanding on February 29,
2000 was 8,931,568.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.
Sterling Financial Corporation
Table of Contents
Page
Part I
Item 1. Business............................................. 3
Item 2. Properties........................................... 16
Item 3. Legal Proceedings.................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.. 17
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 18
Item 6. Selected Financial Data.............................. 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 20
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk.................................... 46
Item 8. Financial Statements................................. 49
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 86
Part III
Item 10. Directors and Executive Officers of the Registrant... 86
Item 11. Executive Compensation............................... 86
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 86
Item 13. Certain Relationships and Related Transactions....... 86
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 87
Signatures...................................................... 90
PART I
The management of Sterling Financial Corporation has made forward-looking
statements in this annual report on Form 10-K. 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 annual report, management is making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this annual 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 annual report on
Form 10-K. These factors include the following:
operating, legal and regulatory risks;
economic, political and competitive forces affecting our banking,
securities, asset management and credit service businesses; 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 to be filed by
Sterling Financial Corporation, and any Current Reports on Form 8-K.
Item 1 - Business
Sterling Financial Corporation
Sterling Financial Corporation is a Pennsylvania business corporation,
based in Lancaster, Pennsylvania. Sterling was organized on
February 23, 1987 and became a bank holding company on June 30, 1987 through
the acquisition of all the outstanding stock of Bank of Lancaster
County, N.A., formerly The First National Bank of Lancaster County.
Sterling provides a wide variety of commercial banking and trust services
through its wholly owned subsidiaries, Bank of Lancaster County, N.A. and The
First National Bank of North East.
Sterling's major source of operating funds is dividends that it receives
from its subsidiary banks. Sterling's expenses consist principally of operating
expenses. Dividends that Sterling pays to stockholders consist, in part, of
dividends declared and paid to Sterling by the subsidiary banks.
As a bank holding company, Sterling is registered with the Federal Reserve
Board under the Bank Holding Company Act. The Federal Reserve Board and the
Pennsylvania Department of Banking, both regulate Sterling's operations.
On July 21, 1998, Sterling organized T & C Leasing, Inc., a Pennsylvania
corporation. T & C Leasing, Inc. is a nationwide vehicle and equipment leasing
company operating primarily in Pennsylvania. Its principal office is located at
1097 Commercial Avenue, East Petersburg, Pennsylvania.
On June 15, 1999, Sterling completed its acquisition of Northeast Bancorp,
Inc., the parent company of The First National Bank of North East, based in
North East, Maryland.
In addition, Sterling also owns all of the outstanding stock of a non-bank
subsidiary, Sterling Mortgage Services, Inc. which Sterling organized. Sterling
Mortgage Services, Inc. is presently inactive.
The common stock of Sterling is listed on The Nasdaq Stock Market under the
symbol SLFI.
Bank of Lancaster County, N.A.
The Bank of Lancaster County, N.A. is a full service commercial bank
operating under charter from the Comptroller of the Currency. On July 29, 1863,
the Comptroller of the Currency authorized The First National Bank of Strasburg
to commence the business of banking. On September 1, 1980, we changed the name
to The First National Bank of Lancaster County. On June 30, 1987, the date the
bank reorganized as a bank holding company, the bank changed its name to Bank of
Lancaster County, N.A. At December 31, 1999, the bank had total assets of
$975,647,000 and total deposits of $815,706,000.
The main office of the bank is located at 1 East Main Street, Strasburg,
Pennsylvania. In addition to its main office, the bank had 28 branches in
Lancaster County and one (1) branch in Chester County, Pennsylvania in operation
at December 31, 1999.
The bank provides a full range of banking services. These include demand,
savings and time deposit services, NOW (Negotiable Order of Withdrawal)
accounts, money market accounts, safe deposit boxes, and a full spectrum
of personal and commercial lending activities. The bank maintains
correspondent relationships with major banks in New York City and
Philadelphia. Through these correspondent relationships, the bank
can offer a variety of collection and international services.
With the installation of three automated teller machines in April, 1983,
the bank was the first financial institution in Lancaster County
to join the MAC Network. The bank now has 27 ATM
locations located in Lancaster County. Additionally, Bank of Lancaster
County customers can use their personal computers for services such as bill
paying, loan applications and transfer of funds through BLC OnLine.
The bank introduced Discount Brokerage Service in July, 1983. The bank
offers this service in coordination with Fiserv Investor Services, Inc. and
meets the needs of the commission-conscious investor. In 1992, the bank
began offering mutual funds to customers. In mid-year 1998,
the Bank of Lancaster County began offering fixed annuities in addition
to mutual funds as an alternative investment vehicle for appropriate
customers. The annuities are available from three insurance companies,
AIG, Jackson National and CIGNA, with BankMark Corporation,
Morris Plains, New Jersey, providing marketing support services. As required,
the bank obtained an insurance license from the Commonwealth of Pennsylvania.
Management believes these services are important additions to our product line
and make a statement about our progressive attitude in providing financial
services for the future.
The Comptroller of the Currency gave the bank permission to open a Trust
Department on May 10, 1971. The Trust Department provides personal and
corporate trust services. These include estate planning, administration
of estates and the management of living and testamentary trusts and
investment management services. Other services available are pension and
profit sharing trusts and self-employed retirement trusts. Trust Department
assets were over $611.5 million at December 31, 1999.
On January 31, 1983, the bank purchased Town & Country, Inc., which is a
vehicle and equipment leasing company operating in Pennsylvania and other
states. Its principal office is located at 1097 Commercial
Avenue, East Petersburg, PA. Town & Country employs 55 people.
On May 18, 1999, Bank of Lancaster County, N.A. and Murray Insurance
Associates, Inc. formed the Lancaster Insurance Group, L.L.C., a limited
liability company under the laws of the Commonwealth of Pennsylvania.
Regulatory approval was received July 27, 1999 to commence business.
Lancaster Insurance Group offers comprehensive personal insurance coverage
as well as a complete range of business insurance programs.
The bank's principal market area is Lancaster County, Pennsylvania.
Lancaster County is the sixth largest county in Pennsylvania, in terms of
population, behind Philadelphia, Allegheny, Montgomery, Delaware and Bucks.
Lancaster County, with an area of 949 square miles, has a population of
approximately 455,000 people. Lancaster's tradition of economic stability has
continued, with agriculture, industry and tourism all contributing to the
overall strength of the economy. Lancaster County has one of
the strongest and most stable economies in the state. No single sector
dominates the county economy.
One of the best agricultural areas in the nation, Lancaster continues to be
the top agricultural county in the state, leading Pennsylvania in production of
most crops and all livestock, with the exception of sheep. Lancaster County is
also one of the leading industrial areas in the state. The county is considered
a prime location for manufacturing, away from congested areas, yet close to
major east coast markets. Diversification of industry has
helped to maintain the economic stability of the county. Lancaster County
ended 1999 with the second lowest unemployment rate in Pennsylvania.
The unemployment rate of the county in December 1999 was 2.6%
which was significantly lower than the statewide and national rate of 4.1%.
Lancaster County's December unemployment rate of 2.6%
continued to trail only State College among the 14 metropolitan areas in
Pennsylvania. Lancaster County, with its many historic sites, well-kept
farmlands and the large Amish community has become very attractive to tourists
and is one of the top tourist attractions in the United States.
The bank does not depend on foreign sources of funds, nor does it make
foreign loans.
The bank is subject to regulation and periodic examination by the
Comptroller of the Currency. The bank's deposits are insured by the Federal
Deposit Insurance Corporation, as provided by law.
Northeast Bancorp, Inc.
Northeast Bancorp, Inc. is a Delaware bank holding company based in Newark,
Delaware. The corporation was organized in 1983 and is parent company of The
First National Bank of North East, North East, Maryland.
A major source of operating funds for Northeast Bancorp, Inc., is dividends
provided by The First National Bank of North East.
Northeast Bancorp, Inc. is a one-bank holding company and is registered
with the Federal Reserve Board in accordance with the requirements
of the Bank Holding Company Act and is subject to regulation
by the Federal Reserve Board.
On June 15, 1999, Sterling Financial Corporation acquired Northeast
Bancorp, Inc. Under the terms of the agreement, Northeast Bancorp
shareholders received two shares of Sterling common stock for
each share of Northeast Bancorp's common stock in a tax-free
exchange. The transaction was accounted for under the
pooling-of-interests method of accounting
The First National Bank of North East
On December 12, 1903, the Comptroller of the Currency authorized The First
National Bank of North East to commence the business of banking. The main
office of the bank is located at 14 South Main Street,
North East, Maryland. In addition to the main office, there are
three branches located in Cecil County, Maryland. At December 31, 1999,
the bank had total assets of nearly $87.0 million and total deposits
of $78.5 million.
The bank does not depend on foreign sources of funds, nor does it make
foreign loans.
The bank is subject to regulation and periodic examination by the
Comptroller of the Currency. The bank's deposits are insured by the Federal
Deposit Insurance Corporation, as provided by law.
Under the merger agreement between Sterling Financial Corporation and the
Northeast Bancorp, Inc., The First National Bank of North East continues to
operate as a separate commercial bank.
Competition
The financial services industry in Sterling's service area is extremely
competitive. Sterling's competitors within its service area include multi-bank
holding companies, with resources substantially greater than those of the
corporation. Many competitor financial institutions have legal lending limits
substantially higher than the subsidiary banks' legal lending limits. The
subsidiary banks are subject to intense competition in all respects and areas of
their business from commercial banks, savings banks, credit unions, finance
companies and other nonbank providers of financial services. Several of the
financial institution competitors exceed $15 billion in assets while one is in
excess of $230 billion in assets. The increased competition has resulted from a
changing legal and regulatory climate, as well as, from the economic climate.
As of December 31, 1999, the Bank of Lancaster County ranked, as
measured by total deposits, as the second largest in market
share within Lancaster County of the banks doing business
in Lancaster County, Pennsylvania. The bank is not, however, the second
largest bank in Lancaster County. As of December 31, 1999,
The First National Bank of North East ranked, as measured by total deposits, as
the fourth largest in market share within Cecil County, Maryland.
Neither Sterling nor the subsidiary banks rely on a single customer or a
few customers, including federal, state or local governments and
agencies thereunder the loss of which would have a material adverse
effect on the business of the bank.
Supervision and Regulation
Bank Holding Company Regulation
Sterling Financial Corporation and Northeast Bancorp, Inc. are subject to
the regulations of the Board of Governors of the Federal Reserve System under
the Bank Holding Company Act. Bank holding companies are required
to file periodic reports with and are subject to examination
by the Federal Reserve. The Federal Reserve has issued regulations
under the Bank Holding Company Act that require a bank holding company
to serve as a source of financial and managerial strength to
its subsidiary banks. As a result, the Federal Reserve may require the
corporations to stand ready to use its resources to provide adequate capital
funds to the banks during periods of financial stress or adversity.
Under the Bank Holding Company Act, the Federal Reserve may require a bank
holding company to end a non-banking business if the non-banking business
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
The Bank Holding Company Act prohibits a bank holding company from
acquiring a bank or merging or consolidating with another bank holding
company without prior approval of the Federal Reserve. The Pennsylvania
Department of Banking must also approve acquisitions and mergers.
Pennsylvania law permits Pennsylvania bank holding companies to control
an unlimited number of banks.
Additionally, the Bank Holding Company Act prohibits a bank holding company
from engaging in most non-banking businesses or from owning more than 5% of the
voting shares of most non-bank businesses.
The Federal Reserve has determined that the following activities are
permissible:
making, acquiring, or servicing loans or other extensions of
credit for its own account or for the account of others;
operating an industrial bank, Morris Plan bank, or industrial loan
company, in the manner authorized by state law, so long as the
institution is not a bank;
operating as a trust company in the manner authorized by federal
or state law so long as the institution is not a bank and does not
make loans or investments or accept deposits, except as may be
permitted by the Federal Reserve;
subject to limitations, acting as an investment or financial
advisor:
to a mortgage or real estate investment trust;
to certain registered investment companies;
by providing portfolio investment advice to
other persons;
by furnishing general economic information and
advice, general economic statistical forecasting services,
and industry studies;
by providing financial advice to state
and local governments; or
by providing financial and transaction advice to
corporations, institutions, and persons in the
areas of mergers, acquisitions, and other
financial transactions;
subject to limitations, leasing real or personal property or
acting as agent, broker, or adviser in leasing such property in
accordance with prescribed conditions;
investing in corporations or projects designed primarily to
promote community welfare;
providing to others data processing services and data transmission
services, data bases, and facilities, within certain limitations;
subject to limitations, engaging in agency and underwriting
activities concerning credit insurance, and certain other insurance
activities as permitted by the Federal Reserve;
owning, controlling, or operating a savings association, if the
savings association engages only in deposit-taking activities and
lending and other activities that are permissible for bank holding
companies under Federal Reserve regulations;
providing courier services for certain financial documents;
subject to limitations, providing management consulting advice to
nonaffiliated bank and nonbank depository institutions;
retail selling of money orders and similar consumer-type payment
instruments having a face value of $1,000 or less, selling U.S.
Savings Bonds, and issuing and selling traveler's checks;
performing appraisals of real estate and personal property;
subject to limitations, acting as intermediary for the financing
of commercial or industrial income-producing real estate by
arranging for the transfer of the title, control, and risk of such
a real estate project to one or more investors;
providing certain securities brokerage services;
subject to limitations, underwriting and dealing in government
obligations and certain other instruments;
subject to limitations, providing foreign exchange and
transactional services;
subject to limitations, acting as a futures commission merchant
for nonaffiliated persons;
subject to limitations, providing investment advice on financial
futures and options to futures;
subject to limitations, providing consumer financial counseling;
subject to limitations, tax planning and preparation;
providing check guaranty services;
subject to limitations, operating a collection agency; and
operating a credit bureau.
Federal Reserve approval may be required before the corporation or its
nonbank subsidiaries may begin to engage in any such activity and before
any such business may be acquired.
The Federal Deposit Insurance Corporation Improvement Act requires a bank
holding company to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized", as defined by
regulations, with the terms of any capital restoration plan
filed by such subsidiary with its appropriate federal
banking agency, up to specified limits.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, the Financial Services Modernization Act,
which repealed provisions of the Depression-era Glass-Steagall Act.
The Glass-Steagall Act prohibited banks from engaging in securities
and insurance business.
The general effect of the law is to establish a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms and other financial service providers.
Generally, the Financial Services Modernization Act:
repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies and other financial service providers;
provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries to include banking, insurance and securities activities,
but also merchant banking and additional activities that the Federal
Reserve, in consultation with the Secretary of the Treasury,
determines;
provides an enhanced framework for protecting the privacy of consumer
information;
adopts a number of provisions related to the capitalization,
membership, corporate governance and the other measures designed to
modernize the Federal Home Loan Bank system;
modifies the laws governing the implementation of the Community
Reinvestment Act;
addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions; and
expressly preempts state insurance laws.
In order for Sterling to take advantage of the new law, it must become a
financial holding company. To become a financial holding company, Sterling
would file a declaration with the Federal Reserve, electing to engage
in activities permissible for financial holding companies and certifying
that it is eligible to do so because all of its insured depository
institution subsidiaries are well-capitalized and well-managed. In addition,
the Federal Reserve must determine that each insured depository
institution subsidiary of Sterling has at least a
"satisfactory" CRA rating. Sterling currently meets the requirements to make an
election to become a financial holding company. Sterling's management has not
determined at this time whether it will seek an election to become a financial
holding company. Sterling is examining its strategic business plan to determine
whether, based on market conditions, the relative financial conditions of the
company and its subsidiaries, regulatory capital requirements, general economic
conditions and other factors, Sterling desires to utilize any of its expanded
powers provided in the Financial Service Modernization Act.
The Financial Services Modernization Act also permits banks to engage in
expanded activities through the formation of financial subsidiaries. A national
bank may have a subsidiary engaged in any activity authorized for national banks
directly or any financial activity, except for insurance underwriting, insurance
investments, real estate investment or development or merchant banking, which
may only be conducted through a subsidiary of a financial holding company.
Financial activities include all activities permitted under
new sections of the Bank Holding Company Act or permitted
by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed". The total assets of all financial subsidiaries may not
exceed the lesser of 45% of a bank's total assets or $50 billion. A
national bank must exclude from its assets and equity all
equity investments, including retained earnings, in a financial
subsidiary. The assets of the subsidiary may not be consolidated with
the bank's assets. The bank must also have policies and procedures to assess
financial subsidiary risk and protect the bank from such risks and potential
liabilities.
Sterling and its subsidiary banks do not believe that the Financial
Services Modernization Act will have a material effect on our
operations in the near-term. However, to the extent that it permits
banks, securities firms and insurance companies to affiliate,
the financial services industry may experience further
consolidation. The Financial Service Modernization Act is intended to
grant to community banks certain powers as a matter of right that
larger institutions have accumulated on an ad hoc basis.
Nevertheless, this act may have the result of increasing the amount of
competition that the company and the banks face from
larger institutions and other types of companies offering financial products,
many of which may have substantially more financial resources than Sterling and
its subsidiary banks.
Dividend Restrictions
Sterling is a legal entity separate and distinct from the subsidiary banks
and nonbank subsidiaries. Sterling's revenues, on a parent company only basis,
result almost entirely from dividends paid to the corporation by its
subsidiaries.
Federal and state laws regulate the payment of dividends by Sterling's
subsidiaries. See "Supervision and Regulation - Regulation of the Banks",
below.
Further, it is the policy of the Federal Reserve that bank holding
companies should pay dividends only out of current earnings. Federal banking
regulators also have the authority to prohibit banks and bank holding companies
from paying a dividend if they should deem such payment to be an unsafe or
unsound practice.
Capital Adequacy
The Federal Reserve requires bank holding companies to comply with its
risk-based capital guidelines. The required minimum ratio of total capital to
risk-weighted assets, including certain off-balance sheet activities, such as
standby letters of credit, is 8%. At least half of the total capital is
required to be "Tier 1 capital," consisting principally of:
common shareholders' equity,
noncumulative perpetual preferred stock,
a limited amount of cumulative perpetual preferred stock,
minority interests in the equity accounts of consolidated
subsidiaries, and
a deduction for certain intangible assets.
The remainder, "Tier 2 capital", may consist of:
a limited amount of subordinated debt and intermediate-term
preferred stock,
certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and
a limited amount of the general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal Reserve
requires a bank holding company to maintain a minimum "leverage ratio." This
requires a minimum level of Tier 1 capital, as determined under the risk-based
capital rules, to average total consolidated assets of 3% for those bank holding
companies that have the highest regulatory examination ratings and are not
contemplating or experiencing significant growth or expansion. All other bank
holding companies are expected to maintain a ratio of at least 1% to 2% above
the stated minimum. Further, the Federal Reserve has indicated
that it will consider a "tangible Tier 1 capital leverage ratio",
deducting all intangibles, and other indicia of capital strength
in evaluating proposals for expansion or new activities. The Federal Reserve
has not advised Sterling of any specific minimum leverage ratio applicable
to the corporation.
Under the Federal Deposit Insurance Corporation Insurance Act, the federal
banking agencies have specified, by regulation, the levels at which an nsured
institution is considered "wellcapitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under these regulations, an institution is considered "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of
5% or greater, and is not subject to any order or written
directive to meet and maintain a specific capital level. Sterling
and the subsidiary banks, at December 31, 1999,
qualify as "well capitalized" under these regulatory standards.
FDIC Insurance
The subsidiary banks are subject to Federal Deposit Insurance Corporation
assessments. The FDIC has adopted a risk-related premium assessment system for
both the Bank Insurance Fund for banks and the Savings Association Insurance
Fund for savings associations. Under this system, FDIC insurance
premiums are assessed based on capital and supervisory measures.
Under the risk-related premium assessment system, the FDIC, on a semiannual
basis, assigns each institution to one of three capital groups, well
capitalized, adequately capitalized, or undercapitalized, and further
assigns such institution to one of three subgroups within a capital
group corresponding to the FDIC's judgment of its strength
based on supervisory evaluations, including examination
reports, statistical analysis, and other information relevant to gauging
the risk posed by the institution. Only institutions with a total
risk-based capital to risk-adjusted assets ratio of 10% or greater,
a Tier 1 capital to risk-adjusted assets ratio of 6% or
greater, and a Tier 1 leverage ratio of 5% or greater, are
assigned to the well-capitalized group.
Regulation of Banks
The operations of the subsidiary banks are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System, and to banks whose deposits
are insured by the FDIC. The banks' operations are also subject
to regulations of the Office of the Comptroller of the Currency,
the Federal Reserve, and the FDIC.
The Office of the Comptroller of the Currency, which has primary
supervisory authority over the subsidiary banks, regularly examines banks
in such areas as reserves, loans, investments, management
practices, and other aspects of operations. These examinations are
designed for the protection of the banks' depositors rather than
Sterling's shareholders. The subsidiary banks must
furnish annual and quarterly reports to the Office of the Comptroller of the
Currency, which has the authority under the Financial Institutions Supervisory
Act to prevent a national bank from engaging in an unsafe or unsound practice in
conducting its business.
Federal and state banking laws and regulations govern, among other things:
the scope of a bank's business,
the investments a bank may take,
the reserves against deposits a bank must maintain,
the types and terms of loans a bank may make and
the collateral it may take,
the activities of a bank with respect to mergers and
consolidations, and
the establishment of branches.
Pennsylvania and Maryland laws permit statewide branching.
The National Bank Act requires the subsidiary banks to obtain the prior
approval of the Office of the Comptroller of the Currency for the payment of
dividends if the total of all dividends declared by the banks in one year would
exceed the banks' net profits, as defined and interpreted by regulation, for the
two preceding years, less any required transfers to surplus. In addition, the
banks may only pay dividends to the extent that their retained net profits,
including the portion transferred to surplus, exceed statutory bad debts, as
defined by regulation. Under the Federal Deposit Insurance Corporation
Insurance Act, any depository institution, including the banks are
prohibited from paying any dividends, making other distributions or
paying any management fees if, after such payment, it would
fail to satisfy their minimum capital requirements.
A subsidiary bank of a bank holding company, such as the Bank of Lancaster
County and The First National Bank of North East, is subject to certain
restrictions imposed by the Federal Reserve Act, including:
extensions of credit to the bank holding company or its
subsidiaries,
investments in the stock or other securities of the bank
holding company or its subsidiaries,
taking such stock or securities as collateral for loans.
The Federal Reserve Act and Federal Reserve regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to the
principal shareholders of its parent holding company, among others, and to
related interests of principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
The subsidiary banks, and the banking industry in general, are affected by
the monetary and fiscal policies of government agencies, including the Federal
Reserve. Through open market securities transactions and changes in its discount
rate and reserve requirements, the Board of Governors of the Federal Reserve
exerts considerable influence over the cost and availability of funds for
lending and investment.
Interstate Banking Legislation
In September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act. The Interstate Banking Act facilitates the interstate
expansion and consolidation of banking organizations:
by permitting bank holding companies that are adequately
capitalized and adequately managed, beginning September 29, 1995,
to acquire banks located in states outside their home states
regardless of whether such acquisitions are authorized under the
law of the host state;
by permitting the interstate merger of banks after June 1, 1997,
subject to the right of individual states to "opt in" or "opt out" of
this authority before that date;
by permitting banks to establish new branches on an interstate
basis provided that such action is specifically authorized by the
law of the host state;
by permitting, beginning September 29, 1995, a bank to engage in
certain agency relationships (i.e., to receive deposits, renew time
deposits, close loans (but not including loan approvals or
disbursements), service loans, and receive payments on loans and
other obligations) as agent for any bank or thrift affiliate, whether
the affiliate is located in the same state or a different state than
the agent bank; and
by permitting foreign banks to establish, with approval of the
regulators in the United States, branches outside their "home" states
to the same extent that national or state banks located in the home
state would be authorized to do so.
One effect of this legislation will be to permit Sterling to acquire banks
and bank holding companies located in any state and to permit qualified banking
organizations located in any state to acquire banks and bank holding companies
located in Pennsylvania, irrespective of state law.
In July 1995, the Pennsylvania Banking Code was amended to authorize full
interstate banking and branching under Pennsylvania law. Specifically, the
legislation:
eliminates the "reciprocity" requirement previously applicable to
interstate commercial bank acquisitions by bank holding companies,
authorizes interstate bank mergers and reciprocal interstate
branching into Pennsylvania by interstate banks, and
permits Pennsylvania institutions to branch into other states with
the prior approval of the Pennsylvania Department of Banking.
Overall, this federal and state legislation had the effect of increasing
consolidation and competition and promoting geographic diversification in the
banking industry.
Proposed Legislation and Regulations
From time to time, various federal and state legislation is proposed that
could result in additional regulation of, and restrictions on, the business of
Sterling and the subsidiary banks, or otherwise change the business environment.
Bank stocks also may be depressed in the future by a new accounting rule
which is expected to become effective on January 1, 2001, by constraining or
eliminating the merger premium currently reflected in bank stock prices. The
new rule will eliminate the pooling-of-interests accounting method
and mandate the use of purchase accounting for all business
combinations. Pooling-of-interests has always been the
method of choice for financial services sector combinations
because it is simple to apply and avoids recognition of expense associated
with the intangible asset goodwill. An overview of the new accounting
rule can be found in "New Financial Accounting Standards" located
in item 7 of this Annual Report.
Management cannot predict whether any of this legislation, if enacted, will
have a material effect on the business of Sterling.
Employees
As of December 31, 1999, there were 455 persons employed by the Bank of
Lancaster County, of which 326 were full-time and 129 were part-time employees.
The First National Bank of North East had 45 persons employed at December 31,
1999, of which 39 were full-time and 6 were part-time. These figures do not
include employees of Town & Country, Inc. which employed 55 persons.
Item 2 - Properties
The Bank of Lancaster County, in addition to its main office, had a branch
network of 29 offices and 4 off-site electronic MAC/ATM installations at
December 31, 1999. All branches are located in Lancaster County with the
exception of one office located in Chester County. Branches
at 19 locations are occupied under leases and at three branches,
the bank owns the building, but leases the land. One off-site MAC/ATM
installation is occupied under lease. All other properties
were owned in fee. All real estate and buildings owned by the bank are free and
clear of encumbrances.
The leases expire intermittently over the years through 2022 and most are
subject to one or more renewal options. During 1999, aggregate annual rentals
for real estate paid did not exceed 3% of the bank's operating expenses.
On December 4, 1996, the bank purchased a property located at 1097
Commercial Avenue, East Petersburg, PA, situated on 12.7 acres with a building
containing approximately 123,000 square feet. The building is used to house the
Bank of Lancaster County's Administrative Service Center as well as other
departments of the bank. Town & Country, Inc. also occupies this building. At
December 31, 1999, approximately 24,000 square feet of this building was leased
to outside parties. The building is owned in fee by the bank, free and clear of
encumbrances.
In 1995, the bank completed construction of a new headquarters building
including a branch banking office. The building also serves as headquarters for
Sterling. Occupancy took place in July of 1995. The three-story building
contains approximately 53,000 square feet. Bank of Lancaster County and
Sterling Financial Corporation occupy approximately 39,281 square feet
while nearly 13,719 square feet has been leased to other tenants.
The building is owned in fee by the bank, free and
clear of encumbrances.
Sterling Financial Corporation owns no real estate.
In addition to it main office located at 14 South Main Street, North East,
Maryland, The First National Bank of North East operated three additional
branches at December 31, 1999. All branches are located in Cecil County. All
properties are owned in fee by the bank, free and clear of encumbrances.
Item 3 - Legal Proceedings
As of December 31, 1999, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which
Sterling or its subsidiaries are a party or by which any of their property is
the subject.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
Sterling Financial Corporation's common stock trades on The NASDAQ Stock
Market under the symbol SLFI. There are 35,000,000 shares of common stock
authorized and at December 31, 1999, there were 8,931,568 shares outstanding.
As of December 31, 1999, Sterling had approximately 3,300
stockholders of record. There is no other class of stock authorized
or outstanding. Dividends are restated to give effect
to a 5% stock dividend paid in June, 1998 and a 5-for-4
stock split effected on the form of a 25% stock dividend, paid in
November 1999. Sterling Financial Corporation is restricted as to the
amount of dividends that it can pay to stockholders by virtue of
the restrictions on the subsidiary banks' ability to pay dividends
to Sterling Financial Corporation.
The following table reflects the quarterly high and low prices of the
Sterling Financial Corporation's common stock for the periods indicated and the
cash dividends declared on the common stock for the periods indicated. All
information has been restated to give effect to the 5% stock dividend paid in
June, 1998 and the 5-for-4 stock split, effected in the form of a 25% stock
dividend, paid in November 1999.
Price Range Per Share Per Share
1999 High Low Dividend
First Quarter $36.80 $26.80 $.176
Second Quarter 29.80 26.00 .176
Third Quarter 32.48 24.70 .184
Fourth Quarter 32.00 25.00 .185
Price Range Per Share Per Share
1998 High Low Dividend
First Quarter $27.81 $23.81 $.160
Second Quarter 45.60 27.05 .168
Third Quarter 39.90 28.00 .168
Fourth Quarter 35.20 31.70 .168
Sterling Financial Corporation maintains a Dividend Reinvestment and Stock
Purchase Plan for eligible shareholders who elect to participate in the plan.
You may obtain a copy of the prospectus for the plan by writing to: Bank of
Lancaster County, N.A., Dividend Reinvestment and Stock Purchase Plan, 101 North
Pointe Boulevard, Lancaster, Pennsylvania 17601-4133.
As of December 31, 1999, the following firms made a market in Sterling
Financial Corporation's common stock:
Legg Mason Wood Walker, Inc.
F.J. Morrissey & Co., Inc.
Prudential Securities, Inc.
Tucker Anthony Cleary Gull (division of Tucker Anthony Incorporated)
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with
Sterling's consolidated financial statements and the accompanying notes
presented elsewhere herein.
(Dollars in thousands, except per share data)
Years Ended 1999 1998 1997 1996 1995
Results of Operations:
Interest income...........$ 67,714 $ 65,763 $ 61,784 $ 57,530 $ 53,807
Interest expense........... 29,797 30,215 27,338 24,781 23,140
------ ------ ------ ------ ------
Net interest income........ 37,917 35,548 34,446 32,749 30,667
Provision for loan losses.. 420 956 1,129 540 276
------ ------ ------ ------ ------
Net interest income after
provision for loan losses. 37,497 34,592 33,317 32,209 30,391
Noninterest income......... 29,497 27,193 22,928 19,166 16,246
Noninterest expenses....... 48,831 45,250 41,120 37,220 33,538
------ ------ ------ ------ ------
Income before income taxes. 18,163 16,535 15,125 14,155 13,099
Applicable income taxes.... 4,924 4,193 3,969 3,648 3,356
------ ------ ------ ------ ------
NET INCOME..............$ 13,239 $ 12,342 $ 11,156 $ 10,507 $ 9,743
====== ====== ====== ====== ======
Per Common Share:(1)
Net income - basic.......$ 1.48 $ 1.38 $ 1.24 $ 1.16 $ 1.08
Net income - diluted...... 1.48 1.38 1.24 1.16 1.08
Cash dividends declared(2) .721 .664 .625 .550 .650
Book value................ 10.08 9.91 9.02 8.34 7.66
Realized book value (3)... 10.24 9.39 8.70 8.17 7.49
Average shares outstanding:
Basic................... 8,912,120 8,922,343 8,997,973 9,082,046 9,041,306
Diluted..................8,934,945 8,949,086 9,002,026 9,082,143 9,041,306
Ratios:
Return on average assets.. 1.29% 1.29% 1.30% 1.31% 1.34%
Return on average equity.. 14.86% 14.59% 14.23% 14.17% 14.47%
Return on average
realized equity (3)..... 15.17% 15.23% 14.62% 14.69% 14.87%
Dividend payout ratio..... 48.05% 46.16% 47.55% 44.62% 56.57%
Average equity to average
assets................... 8.69% 8.87% 9.11% 9.17% 9.18%
Financial Condition at
Year-End:
Assets....................$1,059,374 $ 997,882 $ 915,173 $ 829,283 $ 776,593
Loans, net................ 654,834 584,590 558,737 511,967 459,374
Deposits.................. 892,432 855,056 783,297 707,252 671,418
Borrowed money............ 59,291 35,661 35,312 33,175 23,757
Stockholders' equity...... 90,018 88,191 80,468 75,581 69,821
(1) Per common share data has been restated to reflect all stock dividends and splits.
(2) The 1997 dividend includes a $.031 per share "Special Dividend", declared in the third quarter.
The 1995 dividend includes an $.18 per share "Special Dividend" declared in the second quarter.
(3) Excluding unrealized gain (loss) on securities available-for-sale.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion provides management's analysis of the
consolidated financial condition and results of operations of Sterling
Financial Corporation and its subsidiaries, Bank of Lancaster County, N.A.
and its subsidiary, Town & County, Inc., T & C Leasing, Inc., Northeast
Bancorp, Inc and its subsidiary, The First National Bank of North East
and Sterling Mortgage Services, Inc., which is presently inactive.
Management's discussion and analysis should be read in conjunction with
the audited financial statements and footnotes appearing
elsewhere in this report.
In addition to historical information, the Management's Discussion
and Analysis contains forward-looking statements. The 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, and its
subsidiaries, or the combined company. When we use words such
as "believes", "expects", "anticipates" or similar expressions, we are
making forward-looking statements.
Shareholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents that we
incorporate by reference, could affect the future financial results
of Sterling and its subsidiaries or the combined company and
could cause those results to differ materially from those expressed
in our forward-looking statements contained or incorporated by
reference in this document. These factors include
the following:
operating, legal and regulatory risks;
economic, political and competitive forces affecting
our banking, securities, asset management
and credit services businesses; and
the risk that our analyses 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 to be filed by Sterling Financial Corporation, and
any Current Reports on Form 8-K.
On June 15, 1999, Sterling completed the acquisition of Northeast
Bancorp, Inc., the parent company of The First National Bank of North
East, based in North East, Maryland. Northeast Bancorp is an
$86 million bank holding company for The First National Bank of
North East, with four branches located in Cecil County, Maryland. The
First National Bank of North East will continue to operate as
a separate bank.
Under the terms of the agreement, Northeast Bancorp shareholders
received two (2) shares of Sterling common stock for each share of
Northeast Bancorp's common stock in a tax-free exchange. 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 for Northeast Bancorp for
all periods presented.
On January 25, 2000, Sterling entered into an agreement with
Hanover Bancorp, Inc., based in Hanover, Pennsylvania, in which Hanover
Bancorp would merge with Sterling. Hanover Bancorp is the
holding company of Bank of Hanover and Trust Company. It had
assets of $504 million at December 31, 1999, and ten full-service offices
located in York and Adams County, Pennsylvania. Under the terms of the
agreement, Hanover Bancorp shareholders will receive .93 shares
of Sterling common stock for each share of Hanover
Bancorp's common stock in a tax-free stock exchange. The merger,
which is subject to shareholder and regulatory approvals, is expected
to be accounted for as a pooling of interests. The transaction is
expected to be completed in mid 2000. Bank of Hanover will
continue to operate as a separate subsidiary after the merger.
The majority of assets and liabilities of a financial institution
are monetary in nature and, therefore, differ greatly from most
commercial and industrial companies that have significant
investments in fixed assets or inventories. However, inflation does have
an important impact on the growth of total assets and on non-interest
expenses, which tend to rise during periods of general inflation.
Inflationary pressures over the last few years have been modest,
although the potential for future inflationary pressure is always
present given changing trends in the economy. The rate of inflation in
1999 was 2.7%.
At its meeting held on June 29-30, 1999, the Federal Open Market
Committee adopted a directive that called for a slight tightening of conditions
in reserve markets consistent with an increase of 1/4 percentage point
in the federal funds rate to an average of 5%. At its meeting in
August 1999, the Committee adopted a directive that called for an
increase of 1/4 percentage point in the federal funds rate, to an average
of 5 1/4 % and at its November 1999 meeting, the Committee
adopted a directive that called for increasing the federal funds
rate by 25 basis points to 5 1/2%. These rate increases resulted in
corresponding increases in the prime lending rate during the same time
period. Long term, which is defined as five years, market
rates began the year at approximately 5 1/2% and ended the year at
nearly 7%. This trend in interest rates has yielded a market
expectation that interest rates will continue to increase during
the year 2000.
Aside from those matters described above, management does not believe
that there are any trends or uncertainties which would have a
material impact on future operating results, liquidity or
capital resources nor is it aware of any current recommendations by
the regulatory authorities which, if they were to be implemented,
would have such an effect.
Results of Operations
Overview
Sterling's net income for 1999 totaled $13.2 million, a 7.3%
increase from the $12.3 million earned in 1998. The results of 1998
were 10.6% greater than the $11.2 million reported in 1997. The 1999
net income performance produced a return on realized average
stockholders' equity of 15.17% compared to 15.23 % in 1998 and 14.62%
in 1997. The return on average assets was 1.29% in 1999 and 1998
compared to 1.30% in 1997. Basic and diluted earnings per share
was $1.48 in 1999 compared to $1.38 in 1998 and $1.24 in 1997.
During 1999, Sterling incurred $374,000 (net of tax) of merger
costs related to the acquisition of Northeast Bancorp,
Inc. Excluding the impact of these nonrecurring charges, net income
for 1999 totaled $13.6 million, an increase of 10.30% from 1998.
Basic and diluted earnings per share, excluding nonrecurring charges,
totaled $1.52, a 10.14% increase from 1998's basic and diluted earnings
per share of $1.38. Excluding the merger related charges, return
on average realized equity was 15.60% while return on
average assets was 1.33%.
While conducting its year-end closing process in the fourth
quarter of 1999, management reviewed its accounting policies to
ensure conformity with generally accepted accounting principles,
including recent pronouncements by the American Institute of
Certified Public Accountants and the SEC concerning audit differences
and materiality. Upon completion of this review, management
determined that appropriate consideration had not been given
to origination costs for loans and leases, investments in affordable
housing projects, director deferred compensation arrangements and
income taxes. Management has restated Sterling's consolidated
financial statements to reflect the impact of the adjustments
made due to the interpretations of accounting principles related to
these items. Management believes that the overall result of the
adjustments has not had a material impact on Sterling's
financial statements.
The impact of the restatements was a $592,000 reduction at
January 1, 1997 of retained earnings and $48,000 and $81,000 reduction
in net income from the years ended December 31, 1998 and 1999.
This resulted in a decrease in earnings per share of $.01 for
each of the years ended December 31, 1998 and 1997 from amounts
previously reported.
Growth in interest earning assets was the primary factor
contributing to the increased earnings in 1999 and 1998. As of
December 31, 1999, interest earning assets were approximately
$922 million compared to $877 million at December 1998. Average
interest earning assets for 1999 increased nearly $60 million to
over $905 million, up 7.1% from the prior year. In 1998, average
interest earning assets increased nearly $82 million, up 10.7%
from 1997. The current year increase, as well as the increase in 1998,
was primarily due to increases in both loans and investment securities.
Average interest bearing liabilities increased approximately
$52 million, or 6.9%, in 1999 compared to an
increase of approximately $73 million, or 10.9% in 1998.
The increase in interest earning assets and interest bearing
liabilities during 1999 and 1998 was a direct result of Sterling's
ability to attract new customers and relationships from
some competitors. These competitors have been experiencing a decline
in customer service due to merger integration issues, which has led to
their customers seeking financial services from
alternative institutions.
The provision for loan losses decreased to $420,000 in 1999 from
$956,000 in 1998. The provision for loan losses in 1997 was $1,129,000.
The decline in the provision for loan losses is a result of
improvement in credit quality, particularly within the consumer
loan portfolio.
Noninterest income increased $2,304,000 in 1999 compared to an
increase of $4,265,000 in 1998. The increase in 1998 included $1,338,000
income from the sale of the credit card portfolio. Noninterest
expense increased to nearly $48.8 million in 1999 from $45.2
million 1998. Contributing to the increase in 1999 was the merger
related expenses involved with Northeast Bancorp, Inc. and increased
depreciation on operating lease assets.
Net Interest Income
The primary component of Sterling Financial Corporation's net
earnings is net interest income, which is the difference between
interest and fees earned on interest-earning assets and interest paid on
deposits and borrowed funds. For presentation and analytical purposes,
net interest income is adjusted to a taxable equivalent bases. For
purposes of calculating yields on tax-exempt interest income, the
taxable equivalent adjustment equates tax-exempt interest rates to taxable
interest rates as noted in Table 1. Adjustments are made using a
statutory federal tax rate of 35% for 1999, 1998 and 1997.
Tax equivalent net interest income was $40.8 million in 1999
compared to $38.2 million in 1998, an increase of $2.6 million or 6.9%. This
was an increase from the $1.8 million or 4.8% increase realized
in 1998. As depicted in Table 2, the increase in 1999
was primarily the result of increased volumes which generated $2.4
million of additional net interest income, supplemented by $.2 million
due to changes in interest rates. The net interest margin
was 4.51% compared to 4.52% in 1998 and 4.77% in 1997. Table 1-
Distribution of Assets, Liabilities and Stockholders' Equity - Interest
Rates and Interest Differential - Tax Equivalent Yields and Table 2 -
Analysis of Changes in Net Interest Income summarize the components
of net interest income and illustrate variances as a
result of changes in interest rates versus growth in assets and liabilities.
During 1999, Sterling's net interest margin remained fairly stable,
as management was able to reprice its interest bearing liabilities in a manner
that offset the decline in the yield earned on interest earning
assets. The decline in the yield earned on interest
earning assets was primarily the result of the continual decline
in the yields earned on the loan portfolio, which declined from 8.81% in
1998 to 8.42% in 1999. This decline can be attributed to competitive
pressures within Sterling's market territory, in which
financial institutions are pricing quality credits in a manner which
attracts new customers.
Although there can be no assurances, management believes there
will be pressure to maintain its net interest margin at its
historical levels as interest rates have increased over the last third
of 1999, which will increase the cost of funding sources. We believe
it will be difficult to gain similar increases on yields in interest bearing
assets due to competitive pressures discussed above.
Interest income increased over $2.2 million or 3.3% from $68.4
million in 1998. Of this increase, $4.9 million was a result of a $59.9
million or 7.1% increase in average interest earning assets. This
increase was offset by a $2.7 million decrease due to a drop in the
average yield from 8.09% in 1998 to 7.80% in 1999. The increase in interest
income in 1998 over 1997 was $4.6 million. Of this increase, $6.3 million
was a result of increased volumes in average interest earning
assets, offset by a $1.7 million decrease due to a drop in
the average yield from 8.35% in 1997 to 8.09% in 1998. Average loans
increased $39.8 million in 1999 compared to an increase of $39.5 million
in 1998. Securities increased $25.2 million in 1999 compared
to the $32.8 increase in 1998. The average for federal funds sold was $17.9
million, $23.0 million and $13.6 million for 1999, 1998 and 1997.
Interest expense decreased $418,000 or 1.4% in 1999 from $30.2
million in 1998. Increased volumes increased interest expense by $2.4
million but this was offset by a decrease of $2.9 million as a result of a
decline in rates from 4.04% in 1998 to 3.73% in 1999. Interest expense
increased $2.9 million in 1998 over 1997. Increased volumes
generated an increase of $3.4 million which was offset by a decrease
of $.5 million as a result of a decline in rates from 4.05%
in 1997 to 4.04% in 1998. Average interest bearing deposits
increased $40.3 million in 1999 over 1998 compared to an increase of
$77.2 in 1998 over 1997. Other borrowed funds, on average, increased
$11.5 million in 1999 compared to a decrease of $3.8 in 1998.
The average rate on other interest bearing liabilities was
6.03%, 6.29% and 6.80% in 1999, 1998 and 1997.
Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Yields
(Unaudited)
Years ended December 31,
1999 1998 1997
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Federal funds sold........$ 17,871 $ 891 4.98% $ 22,967 $ 1,243 5.41% $ 13,600 $ 770 5.66%
-------- ------ ----- ------- ------ ------ ------- ------ ------
Securities:
U.S. Treasury securities. 29,807 1,720 5.77% 32,581 1,910 5.86% 28,330 1,679 5.93%
U.S. Government agencies. 52,171 3,232 6.19% 43,630 2,682 6.15% 43,193 2,771 6.42%
State and municipal
securities.............. 82,195 6,194 7.54% 70,469 5,395 7.66% 62,775 4,941 7.87%
Other securities......... 95,496 5,758 6.03% 87,814 5,374 6.12% 67,360 4,166 6.18%
-------- ------ ----- ------- ------ ------ ------- ------ ------
Total securities........... 259,669 16,904 6.51% 234,494 15,361 6.55% 201,658 13,557 6.72%
-------- ------ ----- ------- ------ ------ ------- ------ ------
Loans:
Commercial............... 319,407 27,101 8.48% 303,826 26,858 8.84% 274,738 24,913 9.07%
Consumer................. 147,652 12,092 8.19% 137,966 12,097 8.77% 138,675 12,337 8.90%
Mortgages................ 95,568 7,597 7.95% 91,028 7,603 8.35% 84,129 7,164 8.52%
Leases................... 65,008 6,043 9.30% 55,004 5,238 9.52% 50,811 5,022 9.88%
--------- ------ ------ ------- ------- ------- ------- ------- ------
Total loans................ 627,635 52,833 8.42% 587,824 51,796 8.81% 548,353 49,436 9.02%
--------- ------ ----- ------- ------- ------ ------- ------- ------
Total interest earning
assets................... 905,175 70,628 7.80% 845,285 68,400 8.09% 763,611 63,763 8.35%
--------- ----- ------- ----- ------- -----
Allowance for loan losses.. (8,141) (8,335) (8,298)
Cash and due from banks.... 34,970 31,708 29,841
Other assets............... 93,756 85,294 75,265
--------- ------- -------
Total non interest
earning assets........... 120,585 108,667 96,808
--------- ------- ------- ------- ------- -------
Total assets..............$1,025,760 $70,628 $953,952 $ 68,400 $860,419 $63,763
========== ======= ======== ======= ======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Demand deposits.........$ 321,769 $ 7,279 2.26% $302,062 $ 7,562 2.50% $280,197 $ 7,205 2.57%
Savings deposits........ 70,733 1,223 1.73% 73,082 1,580 2.16% 73,549 1,638 2.23%
Time deposits........... 363,872 18,699 5.14% 340,969 19,089 5.60% 285,191 16,093 5.64%
Other borrowed funds...... 43,022 2,596 6.03% 31,550 1,984 6.29% 35,317 2,402 6.80%
--------- ------ ----- ------- -------- ------ -------- ------- ------
Total interest bearing
liabilities.............. 799,396 29,797 3.73% 747,663 30,215 4.04% 674,254 27,338 4.05%
--------- ------ ----- ------- -------- ------ -------- ------- ------
Demand deposits .......... 113,208 98,957 87,248
Other liabilities......... 24,046 22,729 20,527
Stockholders' equity...... 89,110 84,603 78,390
--------- ------ ------- ------- -------- -------
Total liabilities and
stockholders' equity.....$1,025,760 $29,797 $953,952 $ 30,215 $860,419 $27,338
========== ======= ======== ======== ======== =======
Interest rate spread....... 4.07% 4.05% 4.30%
===== ===== =====
Net interest income/
Average earning assets.... $40,831 4.51% $ 38,185 4.52% $36,425 4.77%
Yields on tax-exempt assets have been computed on a fully taxable equivalent
basis assuming a 35% tax rate.
For yield calculation purposes, nonaccruing loans are included
in the average loan balance.
Table 2 - Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below,
which is computed on a taxable equivalent basis, compares changes
in net interest income for the periods indicated by their
rate and volume components. The change in interest income/expense due
to both volume and rate has been allocated to change in rate.
1999 Versus 1998 1998 Versus 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
Interest income:
Federal funds sold.....$ (276) $ (76) $ (352) $ 530 $ (57) $ 473
Securities............. 1,649 (106) 1,543 2,206 (402) 1,804
Loans.................. 3,507 (2,470) 1,037 3,577 (1,217) 2,360
------- ------- ------ ------ ------- -------
Total interest income... 4,880 (2,652) 2,228 6,313 (1,676) 4,637
------- ------- ------ ------ ------- -------
Interest expense:
Interest-bearing demand$ 494 (777) (283) $ 562 $ (205) $ 357
Savings deposits....... (51) (306) (357) (11) (47) (58)
Time deposits.......... 1,282 (1,672) (390) 3,148 (152) 2,996
Borrowed funds......... 721 (109) 612 (256) (162) (418)
------- ------- ------ ------- ------- -------
Total interest expense.. 2,446 (2,864) (418) 3,443 (566) 2,877
------- ------- ------ ------- ------- -------
Net interest income..... $ 2,434 $ 212 $ 2,646 $ 2,870 $ (1,110) $ 1,760
======= ======= ======= ======= ======= =======
For yield calculation purposes, nonaccruing loans are included in the average
loan balances.
Provision for Loan Losses
The provision for loan losses charged against earnings was $420,000 in
1999 compared to $956,000 in 1998 and $1,129,000 in 1997. The provision
reflects the amount deemed appropriate by management to produce an
adequate reserve to meet the present risk characteristics of the
loan portfolio. Management's judgement is based on the evaluation
of individual loans and their overall risk characteristics, past loan
loss experience, and other relevant factors. Net charge-offs amounted
to $316,000 in 1999, $1,028,000 in 1998 and $1,246,000 in 1997.
Gross charge-offs for 1999 were $521,000, a 60% decline from the
$1,311,000 reported in 1998. The decline in the provision for loan losses,
gross and net charge-offs was a result of improvement in credit
quality, particularly in the consumer portfolio. A strong economy, a tightening
of certain underwriting criteria during 1997 and 1998 and strong
collection efforts contributed to the improvement. Loan quality remains
high in the commercial loan portfolio as evidenced by the continuing low
levels of delinquency, charge-offs and non-accruals. The net
losses to average loans and leases in 1999 were significantly
lower than the bank's peer group.
The allowance for loan losses as a percent of loans at
December 31, 1998 was 1.36%, while at December 31, 1999 it was 1.23%.
Noninterest Income
Table 3 - Noninterest Income
1999/1998 1998/1997
Increase Increase
(Decrease) (Decrease)
1999 Amount % 1998 Amount % 1997
Income from fiduciary activities.$ 2,349 $ 470 25.0% $ 1,879 $ 366 24.2% $ 1,513
Service charges on deposit
accounts....................... 3,380 167 5.2% 3,213 18 0.6% 3,195
Other service charges, commissions
and fees....................... 1,978 84 4.4% 1,894 438 30.1% 1,456
Mortgage banking income........... 1,291 (520) (28.7%) 1,811 506 38.8% 1,305
Income from sale of credit card
portfolio...................... --- (1,338)(100.0%) 1,338 1,338 100.0% ---
Rental income on operating leases. 18,469 2,504 15.7% 15,965 2,348 17.2% 13,617
Other operating income............ 1,200 107 9.8% 1,093 (534) (32.8%) 1,627
Securities gains.................. 830 830 100.0% none (215)(100.0%) 215
------ ------ ------ ------ ------ ------ ------
Total............................$ 29,497 $2,304 8.5% $27,193 $ 4,265 18.6% $22,928
====== ====== ====== ====== ====== ====== ======
Noninterest income consists of income from fiduciary activities,
service charges on deposit accounts, other service charges, commissions and
fees, mortgage banking income and other income such as safe deposit box rents
and income from operating leases. Investment securities gains are
also reflected in noninterest income.
Income from fiduciary activities, which is investment management and
trust services income, reached a record level of over $2.3 million, an
increase of nearly $.5 million or 25.0%. This follows an increase of 24.2%
in 1998 over 1997. Fees increased primarily due to increased transaction
volumes and growth in assets under management, which increased
from $379 million in 1997, to $531 million in 1998, to $611 million in 1999.
This growth in assets resulted from new relationships developed, as
well as market appreciation on existing assets under management.
Management continues to feel that the wealth management division, or
trust services, represents a significant growth opportunity for the
corporation. Sterling will continue its concerted efforts to expand
the business, which includes marketing activities and the
hiring of experienced professionals. Although wealth management
professionals can continue to generate new business, the value of assets
under management is directly related to the stock market.
Declines in the stock market could have an adverse impact on
income from fiduciary activities.
Service charges on deposit accounts increased $167,000 or 5.2%
during 1999. This follows an increase of $18,000 or .6% in 1998.
General increases in service charges on various accounts, as
well as transaction volume produced the increase in 1999 over 1998.
Management continuously monitors the fee structure and makes changes
where appropriate. Other service charges, commissions and fees
increased $84,000 or 4.4% in 1999 compared to 1998. The increase
in 1998 over 1997 was $438,000 or 30.1%. Contributing to the increase
in 1999 as well as 1998 were the fees received on mutual funds
transactions and fees on the debit card product
offered by subsidiary banks.
Income from mortgage banking activities was $1.3 million, $1.8
million and $1.3 million for the years ended December 31, 1999,
1998 and 1997. The fluctuation in mortgage banking income
is directly related to the residential mortgage interest rate
environment and the mortgage products offered. In 1998, the
relatively low residential mortgage interest rate environment
combined with an expansion of products and services
offered resulted in an increase in the volume of loans sold on
the secondary market, from $40.9 million in 1997 to $88.9 million
in 1998. During 1999, residential mortgage interest rates increased
resulting in a slow down in mortgage loan originations as
evidenced by $58.8 million in loans sold in the secondary market. As a
result of this volume, gains on sales of mortgage loans
totaled $418,000, $642,000 and $319,000 for the
years ended December 31, 1999, 1998 and 1997.
Another component of the decrease in mortgage banking income is
mortgage servicing rights capitalized and included as mortgage
banking income. Amounts capitalized are directly related
to the volume of loans sold in the secondary market. Mortgage servicing
rights capitalized for the years ended December 31, 1999, 1998 and 1997
totaled $569,000, $840,000 and $563,000. Sterling originated
all mortgages sold on the secondary market. No mortgages were
acquired from third parties, nor have servicing rights been purchased
from third parties. The mortgage servicing portfolio totaled $244
million as of December 31, 1999 compared to $221 million
on December 31, 1998.
During 1998, the Bank of Lancaster County sold its credit card
portfolio for a gain of $1.3 million.
Rental income on operating leases has increased 15.7% from $15,965,000
in 1998 to $18,469,000 in 1999. This follows an increase
of 17.2% in 1998 over 1997. The increase in rental income
is primarily due to an increase in the number of units under operating
leases which totaled 4,648, 3,826 and 3,205 as of December 31, 1999, 1998
and 1997. 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 new customer relationships, but also
in maintaining existing customer relationships. With the hiring of
additional employees to perform operational functions, salesmen
are able to devote more of their time to business development
and less time performing operational activities. Additionally, the
strong national and local economy has led to our clients expanding
their business operations, resulting in an increase in the number
of new units leased within our customer base.
Other operating income totaled $1.2 million in 1999, which was
consistent with $1.1 million earned in 1998. Other operating income
declined 32.8% in 1998 compared to the $1.6 million earned
in 1997 due primarily to a $450,000 gain recognized on the sale of
real estate in 1997. The corporation was able to sell this real estate,
which formerly housed the leasing operations, with the purchase of the
123,000 square foot administrative service center in 1996.
Investment securities gains totaled $830,000 in 1999, $0 in 1998
and $215,000 in 1997. The securities sold in 1999 and 1997 were equity
securities from the available-for-sale securities portfolio.
Sterling does not engage in trading activities.
Noninterest Expenses
Table 4 - Noninterest Expenses
1999/1998 1998/1997
Increase Increase
(Decrease) (Decrease)
1999 Amount % 1998 Amount % 1997
Salaries and employee benefits...$19,302 $ 674 3.6% $18,628 $ 1,185 6.8% $17,443
Net occupancy .................... 2,143 (213) (9.0%) 2,356 (185) (7.3%) 2,541
Furniture & equipment............. 3,242 244 8.1% 2,998 293 10.8% 2,705
Professional services............. 1,089 106 10.8% 983 291 42.1% 692
Depreciation on operating lease
assets...........................14,641 2,000 15.8% 12,641 1,943 18.2% 10,698
Merger related costs.............. 423 423 100.0% --- --- --- ---
Other operating expense........... 7,991 347 4.5% 7,644 603 8.6% 7,041
----- ------ ----- ------ ------ ----- -------
Total............................$48,831 $ 3,581 7.9% $45,250 $ 4,130 10.0% $41,120
======= ======= ===== ======= ====== ===== =======
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 acheived 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 ration for each significant segment has shown
improvement in 1999 compared to the prior two years. Excluding non-recurring
items, the operating efficiency ratio for community banking and related
services moved down to 61.3% in 1999, versus 63.0% in 1998 and 62.8% in
1997. The leasing segment's ratio was reduced to 92.5% in 1999, versus 94.2%
in 1998 and 94.5% in 1997.
The largest component of noninterest expense is salaries and employee
benefits which increased $674,000 or 3.6% to $19.3 million from $18.6
million in 1998, after increasing $1.2 million or 6.8% during 1998.
The number of full-time equivalent employees at year-end 1999 and 1998
was 480. The 1999 salary expense increase was due primarily to normal
merit increases and promotions. Also included in the increase for 1999
and 1998 are the increased costs of benefits such as health
insurance and additional benefit plans.
Net occupancy expense decreased $213,000 or 9% to $2.1 million
in 1999 from $2.4 million in 1998. This compares to a decrease of
$185,000 in 1998 from 1997. Furniture and equipment expense
experienced an increase of $244,000 or 8.1% to $3.2 million in 1999
from $3 million in 1998, compared to an increase of $293,000 or 10.8%
in 1998. Included in the increase of furniture and equipment
expense in 1999 is an increase in depreciation of approximately
$180,000.
Professional services increased $106,000 or 10.8% in 1999 to
$1.1 million after increasing $291,000 or 42.1% in 1998.
The increase in professional services over the last
two years can be attributed to Sterling's increased reliance on
services outsourced to third parties. These third parties bring a
greater degree of knowledge and experience to
the organization than that which can be obtained internally.
Merger related costs incurred in 1999 totaled $423,000 and
was a direct result of Sterling's acquisition of Northeast Bancorp, Inc.
completed during the second quarter of 1999. These merger expenses
consisted entirely of attorney, accountant, investment
advisory and application fees.
Depreciation on operating leases increased $2,000,000 or 15.8%
in 1999 from 1998 compared to $1,943,000 increase or 18.1% from 1998
compared to 1997. The increase is directly related to the increase
in number of units on operating lease to customers discussed above, and the
percent increase each year is consistent with the increase in rental income
on operating leases.
Other expenses increased $346,000 or 4.5% to nearly $8 million
during 1999 after increasing $604,000 or 8.6% during 1998.
The 1999 increase is consistent with rising costs associated
with acquiring services covered in this category of expense. Expenses
in this category include advertising and marketing, postage, telephone,
stationery and forms, ATM fees, insurance premiums, training and
education, Pennsylvania Shares Tax and other expense categories
not specifically identified on the income statement. Contributing to the
increase in 1999 were increases in Pennsylvania Shares Tax, MAC fees,
telephone expense, postage, marketing, and training and education.
Income Taxes
Sterling recognized income tax of $4.9 million, or 27.1% of
pretax income, for the year 1999 compared to $4.2 million, or 25.4% of
pretax income, for the year 1998. The variances from the federal statutory
rate of 35% are generally due to tax exempt income, investments in low
and moderate income housing partnerships (which qualify for federal tax
credits), offset somewhat by certain merger-related expenses in 1999
which are not deductible. The income tax recognized in 1997 was $4
million, or 26.2% of pretax income. Additional information related
to income taxation is presented in the Notes to Consolidated
Financial Statements.
Financial Condition
Investment Portfolio
Table 5 - Investment Securities
The following table shows the amortized cost of the
held-to-maturity securities owned by Sterling as of the dates
indicated. Securities are stated at cost adjusted for
amortization of premiums and accretion of discounts.
December 31,
1999 1998 1997
U.S. Treasury securities................$ 501 $ 2,508 $ 6,537
U.S. Government agencies and corporations 1,460 2,208 9,696
States and political subdivisions....... 41,030 44,465 45,816
Mortgage-backed securities.............. 851 1,219 1,575
Corporate securities.................... 4,757 10,808 18,574
--------- --------- ---------
Subtotal................................ 48,599 61,208 82,198
Non-marketable equity securities........ 3,793 3,547 3,277
--------- --------- ---------
Total...................................$ 52,392 $ 64,755 $ 85,475
========= ========= =========
The following table shows the amortized cost and fair value of the
available-for-sale securities owned as of the dates indicated.
December 31,
1999 1998 1997
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- -------- -------- ----------- --------
U.S. Treasury securities............$ 28,961 $ 28,758 $ 29,265 $ 29,930 $ 24,435 $ 24,625
U.S. Government agencies and
corporations....................... 50,290 49,017 37,713 38,285 26,821 27,008
States and political subdivisions.... 53,617 51,755 38,671 39,761 23,976 24,726
Mortgage-backed securities........... 4,989 4,829 6,732 6,761 8,603 8,542
Corporate securities................. 70,878 69,711 66,215 67,312 42,955 43,178
-------- --------- -------- -------- --------- --------
Subtotal............................. 208,735 204,070 178,596 182,049 126,790 128,079
Equity securities.................... 704 3,113 174 3,904 174 3,263
-------- --------- -------- -------- --------- --------
Total................................$209,439 $ 207,183 $178,770 $185,953 $ 126,964 $131,342
======== ========= ======== ======== ========== ========
Table 6 - Investment Securities (Yields)
The following table shows the maturities of held-to-maturity debt
securities at amortized cost as of December 31, 1999 and approximate weighted
average yields of such securities. Yields on states and political
subdivision securities are shown on a tax equivalent basis,
assuming a 35% Federal income tax rate.
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury
securities....$ 501 5.84% $ --- ---% $ --- ---% $ --- ---% $ 501 5.84%
U.S. Government
agencies and
corporations.. 1,000 6.41% 460 5.98% --- ---% --- ---% 1,460 6.28%
States and
political sub-
divisions..... 2,694 5.21% 11,994 5.27% 22,292 5.08% 4,050 4.83% 41,030 5.12%
Mortgage-backed
securities.... 230 8.30% 534 8.39% 51 8.08% 36 7.28% 851 8.30%
Corporate
securities.... 2,156 6.30% 2,601 6.28% --- ---% --- ---% 4,757 6.29%
------- ----- ------- ------ -------- ----- ------- ----- ------- -----
$ 6,581 5.91% $15,589 5.57% $ 22,343 5.07% $ 4,086 4.85% $48,599 5.32%
======= ===== ======= ====== ======== ===== ======= ===== ======= =====
The following table shows the maturities of available-for-sale debt
securities at fair value as of December 31, 1999 and approximate weighted
average yields of such securities. Yields on states and political
subdivision securities are shown on a tax equivalent basis,
assuming a 35% Federal income tax rate.
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury
securities....$ 6,797 5.59% $ 21,961 5.87% $ --- ---% $ --- ---% $ 28,758 5.80%
U.S. Government
agencies and
corporations.. 8,036 6.17% 27,018 5.98% 13,031 6.29% 932 7.00% 49,017 6.12%
States and
political sub-
divisions..... 1,750 5.73% 12,365 5.31% 18,861 4.80% 18,779 4.61% 51,755 4.88%
Mortgage-backed
securities.... 200 5.44% 170 7.29% 1,130 7.21% 3,329 6.71% 4,829 6.79%
Corporate
securities.... 13,508 6.18% 56,203 6.13% --- ---% --- ---% 69,711 6.14%
------- ------ ------- ------ ------- ----- ------- ----- -------- ------
$30,291 5.91% $117,717 5.96% $33,022 5.48% $23,040 5.00% $204,070 5.78%
======= ====== ======= ====== ======= ===== ======= ===== ======== ======
There is no issuer of securities in which the aggregate book value of
that issuer, other than securities of the U.S. Treasury, U.S. Government
agencies or corporations, exceeds 10% of stockholders' equity.
Loans
Loans outstanding increased $70.3 million or 11.9% in 1999,
compared to an increase of $25.8 million or 4.5% in 1998. All categories
of loans reflect an increase in 1999 over 1998. Commercial loans
increased over $29 million or 9.6% in 1999 while consumer
loans increased $16 million or 11.8%. Lease financing reflects an
increase of $15.4 million or 26.7% in 1999. The loan growth in
1998 was realized mainly in commercial loans which reflects
an increase of $20.2 million or 7.2%.
Table 7 - Loan Portfolio
The following table sets forth the composition of Sterling's
loan portfolio as of the dates indicated:
December 31,
1999 1998 1997 1996 1995
Commercial, financial and
agricultural..............$ 331,510 $ 302,497 $ 282,287 $ 244,538 $ 232,282
Real estate-construction... 7,872 6,633 7,053 6,421 6,628
Real estate-mortgage....... 97,631 89,021 88,212 83,168 66,981
Consumer................... 152,872 136,773 136,760 138,439 117,626
Lease financing (net of
unearned income)......... 73,123 57,736 52,566 47,659 44,181
---------- ---------- ---------- ---------- ---------
Total loans.................$ 663,008 $ 592,660 $ 566,878 $ 520,225 $ 467,698
========== ========== ========== ========== =========
Table 8 - Loan Maturity and Interest Sensitivity
The following table sets forth the maturity and interest
sensitivity of the loan portfolio as of December 31, 1999:
After one
Within but within After
one year five years five years Total
Commercial, financial and agricultural..$ 150,521 $ 165,864 $ 15,125 $ 331,510
Real estate-construction................ 5,545 1,062 1,265 7,872
--------- --------- -------- ---------
$ 156,066 $ 166,926 $ 16,390 $ 339,382
========= ========= ======== =========
Loans due after one year totaling $103,246,000 have variable
interest rates. The remaining $80,070,000 in loans have fixed rates.
Asset Quality
Sterling has policies and procedures designed to manage credit risk
and to maintain the quality of its loan portfolio. These include prudent
underwriting standards for new loan originations and ongoing
monitoring and reporting of asset quality measures and the
adequacy of the allowance for loan losses.
Sterling's commercial, consumer and residential mortgage loans
are principally to borrowers within Lancaster County, Pennsylvania,
Cecil County, Maryland, and surrounding counties. Since the
majority of Sterling's real estate loans are located within this
area, a substantial portion of the debtor's ability to honor their
obligations may be affected by the level of economic
activity in the market area.
The economic conditions within Sterling's market area remained
healthy in 1999. The unemployment rate for Lancaster County,
Pennsylvania and Cecil County, Maryland, Sterling's primary
market area, both remained below than 4%. In fact, Lancaster County
has now had an unemployment rate of less than 3% for 24 consecutive months.
Additionally, reasonably low interest rates, a continuing strong economy
and minimal inflation resulted in a record number of sales of existing homes.
A portion of Sterling's loan portfolio consists of loans to
agricultural-related borrowers. This industry experienced a difficult year
in 1999, with low crop yields as a result of a drought and
low milk prices in late 1999 due to oversupply. While Sterling
continues to pursue quality loans to the dairy industry and the
agricultural community in general, it should be noted that these loans are
susceptible to a variety of external factors such as adverse
climate, economic conditions, etc. in addition to factors common
in other industries.
The loan portfolio is well diversified with no industry
concentrations comprising greater than 10% of total loans outstanding.
A concentration is defined as amounts loaned to multiple number of
borrowers engaged in similar activities which would cause them to be
similarly affected by changes in economic or other conditions. There
were no foreign loans outstanding at December 31, 1999.
Nonperforming assets include nonaccrual and restructured loans,
accruing loans past due 90 days or more and other real estate
owned. Sterling's general policy has been to cease accruing interest
on loans when management determines that a reasonable doubt exists
as to the collectibility of additional interest. When management
places a loan on nonaccrual status, it reverses unpaid
interest credited to income in the current year, and charges unpaid
interest accrued in prior years to the allowance for loan losses.
Sterling recognizes income on these loans only to the extent that
it receives cash payments. Sterling typically returns
nonaccrual loans to performing status when the borrower brings
the loan current and performs in accordance with contractual terms for a
reasonable period of time. Sterling categorizes a loan as restructured
if it changes the terms of the loan such as interest rate,
repayment schedule or both, to terms which it otherwise would
not have granted originally.
Table 9 - Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
December 31,
1999 1998 1997 1996 1995
Nonaccrual loans........... $ 325 $ 908 $ 1,314 $ 1,193 $ 1,386
Accruing loans, past due
90 days or more......... 751 654 1,269 752 369
Restructured loans........ 1,961 1,993 2,105 none none
------- -------- -------- -------- --------
Total non-performing loans. 3,037 3,555 4,688 1,945 1,755
Other real estate owned.... 163 180 341 81 252
------- -------- -------- -------- --------
Total non-performing assets $ 3,200 $ 3,735 $ 5,029 $ 2,026 $ 2,007
======= ======== ======== ======== ========
Nonaccrual loans:
Interest income that
would have been
recorded under
original terms......... $ 59 $ 88 $ 173 $ 144 $ 238
Interest income recorded. --- 1 20 28 94
Ratios:
Non-performing loans to
total loans.......... .46% .60% .83% .37% .38%
Non-performing assets to
total loans and other
real estate owned.... .48% .63% .89% .39% .43%
Non-performing assets to
total assets.......... .30% .37% .55% .24% .26%
Allowance for loan losses to
non-performing loans.. 269.1% 227.0% 173.7% 424.6% 474.3%
As of December 31, 1999, total non-performing assets totaled
$3,200,000, a decline of $535,000, or 14%, from the December 31, 1998
balance of $3,735,000. The decline in nonaccrual loans and
accruing loans past due 90 days or more during the year is consistent
with the downward trend Sterling has experienced since 1997. The
restructured loans included in nonperforming loans represents 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.
Sterling's loan delinquency (past due greater than 30 days)
as a percent of loans outstanding declined during 1999. At
December 31, 1999, this rate stood at .31% compared
to .49% and .90% for December 31, 1998 and 1997. The average
delinquency rate for 1999 of .41% declined from .56% in 1998. The
decline in the delinquency rate was primarily attributed to
improvement in the consumer loan portfolio, and is partially attributed to
the sale of the credit card portfolio in 1998. The credit card portfolio
tended to have higher delinquencies associated with it
than the remainder of the consumer loan balances.
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 $3 million at December 31, 1999. The majority of these
loans are secured by real estate with acceptable loan-to-value ratios.
Sterling has implemented SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an amendment
of SFAS No. 114, at the beginning of 1995. A loan is considered impaired
when, based on current information and events, it is probable that
Sterling will be unable to collect the scheduled payments of principal or
interest when due according to the original contractual terms of the
loan agreement. Generally, this definition includes all loans on
nonaccrual status and restructured loans, except those specifically
excluded from the scope of SFAS No. 114. Factors considered by
management in determining impairment include payment status,
collateral value and the probability of collecting scheduled
principal and interest payments when due. Impairment is measured on a
loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price
or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, Sterling does not
separately identify individual consumer and residential loans
for impairment disclosures.
The following table presents information concerning impaired
loans at December 31, 1999 and 1998:
1999 1998
Impaired loans with a valuation allowance.......$ 2,286 $ 2,901
Impaired loans without a valuation allowance.... --- ---
------ ------
Total impaired loans..........................$ 2,286 $ 2,901
====== ======
Valuation allowance related to impaired loans...$ 111 $ 140
====== ======
The decline in impaired loans is primarily attributed to a $583,000
reduction in non-accrual loans at December 31, 1999 versus December 31, 1998.
A large portion of the impaired loans is attributed to the restructure
of a series of loans to one borrower as previously discussed.
Allowance for Loan Losses
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, the company 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 an allowance consisting of
two components, "allocated" and "unallocated".
Management assigns internal risk ratings to all commercial
relationships with aggregate borrowings or commitments to
extend credit in excess of $100,000. Utilizing migration analysis
for the previous eight quarters, management develops a loss factor test
which it then uses to estimate losses on impaired loans, potential problem
loans and non-classified loans. When management finds loans with uncertain
collectibility of principal and interest, it places those loans on the
"problem list", and evaluates them on a quarterly basis in order to
estimate potential losses. Management's analysis considers:
adverse situations that may affect the borrower's ability to repay;
estimated value of underlying collateral; and
prevailing market conditions.
If management determines that a specific reserve allocation is not
required, it assigns the general loss factor to determine the reserve.
For homogeneous loan types, such as consumer and residential
mortgage loans, management bases specific allocations on the
average loss ratio for the previous two years for each specific loan pool.
Additionally, management adjusts projected loss ratios for other
factors, including the following:
trends in delinquency levels,
trends in non-performing and potential problem loans,
trends in composition, volume and terms of loans,
effects in changes in lending policies or underwriting procedures,
experience ability and depth of management,
national and local economic conditions,
concentrations in lending activities,
other factors that management may deem appropriate.
Management determines the unallocated portion of the allowance for
loan losses based on the following criteria:
risk of error in the specific and general reserve allocations;
other potential exposure in the loan portfolio;
variances in management's assessment of national and local economic
conditions; and
other internal or external factors that management believes
appropriate at that time.
Management feels the above methodology accurately reflects losses
inherent in the portfolio. Management charges actual losses to the
allowance for loan losses. Management periodically updates the methodology
discussed above, which reduces the difference between actual losses
and estimated losses.
Management bases the provision for loan losses, or lack of provision,
on the overall analysis taking into account the methodology discussed above.
A summary of the activity in the allowance for loan losses is as follows:
Table 10 - Summary of Loan Loss Experience
Years ended December 31,
1999 1998 1997 1996 1995
Allowance for Loan Losses:
Beginning balance.............$ 8,070 $ 8,142 $ 8,259 $ 8,324 $ 8,429
------ ------ ------ ------ ------
Loans charged off during year:
Commercial, financial and
agricultural.............. 137 479 198 139 187
Real estate mortgage........ 107 96 122 40 ---
Consumer.................... 246 682 1,125 567 487
Lease financing............. 31 54 121 24 14
------- ------- ------- ------- -------
Total charge-offs........... 521 1,311 1,566 770 688
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and
agricultural.............. 44 63 94 13 157
Real estate mortgage........ --- 32 --- --- ---
Consumer.................... 117 160 161 144 148
Lease financing............. 44 28 65 8 2
------- ------- ------- ------- -------
Total recoveries............ 205 283 320 165 307
------- ------- ------- ------- -------
Net loans charged off......... 316 1,028 1,246 605 381
Provision for loan losses..... 420 956 1,129 540 276
------- ------- ------- ------- -------
Balance at end of year........$ 8,174 $ 8,070 $ 8,142 $ 8,259 $ 8,324
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding................. .05% .17% .23% .12% .09%
Ratio of net loans charged
off to loans at end of year. .05% .17% .22% .12% .08%
Net loans charged off to
allowance for loan losses.. 3.87% 12.74% 15.30% 7.33% 4.58%
Net loans charged off to
provision for loan losses.. 75.24% 107.53% 110.36% 112.04% 138.04%
Allowance for loan losses as a
percent of average loans... 1.30% 1.37% 1.48% 1.63% 1.88%
Allowance for loan losses
as a percent of loans at
end of year................ 1.23% 1.36% 1.44% 1.59% 1.78%
Allowance for loan losses
as a percent of
non-performing loans....... 269.1% 227.0% 173.7% 424.6% 474.3%
The allowance for loan losses increased slightly from $8,070,000 at
December 31, 1998 to $8,174,000 at December 31, 1999. Despite
this increase, the allowance for loan losses as a percent of
outstanding loans continued to decline, and was 1.23% at December 31, 1999
versus 1.36% at December 31, 1998. This decrease is reflective of
Sterling's improving asset quality ratios.
Net charge-offs over the last three years were $316,000,
$1,028,000 and $1,246,000 for the years ended December 31, 1999,
1998 and 1997. The decrease in net charge-offs was a direct result
of a strong economy, the tightening of certain underwriting criteria in
1997 and 1998 along with strong collection efforts in all loan portfolios.
Additionally, the significant improvements in the consumer loan
portfolio were partially the result of Sterling selling
its credit card portfolio in 1998, which consistently had higher
delinquencies and charge-offs than the remainder of the consumer loan
portfolio. As a result, similar improvements were noted in
the allowance for loan losses as a percent of non-performing
loans, which increased from 173.7% in 1997, to 227.0% in 1998, to 269.1% in
1999. Finally, loan delinquencies as percent of loans outstanding
declined to .31% at December 31, 1999, well below the levels of
Sterling's peer group.
Table 11 - Allocation of Allowance for Loan Losses (dollars in thousands)
1999 1998 1997 1996 1995
Loans Loans Loans Loans Loans
% to % to % to % to % to
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
Commercial, financial
and agricultural.......$5,578 50% $4,992 51% $3,802 50% $3,836 47% $4,000 50%
Real estate - mortgage
and construction....... 109 16% 144 16% 60 17% 24 17% 143 16%
Consumer.................. 779 23% 693 23% 923 24% 596 27% 532 25%
Leases.................... 638 11% 527 10% 599 9% 620 9% 600 9%
Unallocated............... 1,070 -- 1,714 -- 2,758 -- 3,183 -- 3,049 --
------ --- ------ --- ----- --- ----- --- ----- ---
Total....................$8,174 100% $8,070 100% $8,142 100% $8,259 100% $8,324 100%
====== === ====== === ===== === ===== === ===== ===
The allocation of the allowance for loan losses between the various
loan portfolios has changed over the past few years, consistent with the
historical net loss experience in each of the portfolios.
The largest reserve allocation is to the commercial, financial
and agricultural loan portfolio and represents 68.21% of the
reserve. Although the reserve allocation to this portfolio has
increased over the last two years, the reserve allocation as a percent of
related loans remained at approximately 1.60% to 1.70%. This nonhomogeneous
loan portfolio continues to represent the greatest risk
exposure to Sterling, as the credits generally are significantly
larger than the remainder of the portfolio and the related
collateral is not as marketable. Additionally, other external factors
such as competition for high rated credits has also been considered
in allocating this reserve balance.
As mentioned previously, Sterling sold its credit card
portfolio in 1998, which resulted in a significant improvement in net
charge-offs within the consumer loan portfolio. The sale of
the credit card portfolio combined with increased collections
efforts also resulted in a decline in the consumer loan delinquencies.
As a result, the allocation of the allowance for loan losses for the
consumer loan portfolio has declined since the 1997 allocation,
and has remained at approximately .51% of the related loan
balance as of December 31, 1999 and 1998.
The increase in the reserve allocation related to the
lease portfolio from 1998 to 1999 is a direct result of the growth in
this portfolio as well as an increase in problem credits within this
portfolio. However, the 1999 reserve allocation as a percent of
average loans outstanding remains below the 1995-1997 levels, consistent
with the decrease in net charge-offs and lower delinquency ratios.
Over the past several years, the allowance for loan losses to
outstanding loans has declined. Similarly, the unallocated portion of the
allowance for loan losses has also shown a steady decline,
both in the dollar amount and as a percent of the total reserve.
The unallocated portion totaled $1,071,000 at December 31, 1999,
or 13.1% of the allowance for loan losses balance. These trends are closely
related to improvements in asset quality ratios, including the following:
An increase in the allowance for loan losses to non-performing
loans from 174% at December 31, 1997 to 269% at December 31, 1999.
A decline in the non-performing loans to total loans from .83% at
December 31, 1997 to .46% at December 31, 1999.
A decline in loan delinquencies as a percent of total loans outstanding
from .90% at December 31, 1997 to .31% at December 31, 1999.
A reduction in the ratio of net loans charged off to average loans
outstanding from .23% for the year ended December 31, 1997 to .05%
for the year ended December 31, 1999.
Based upon the improvements noted above, management feels the decrease
in the allowance for loan losses as a percent of total loans outstanding
as well as the unallocated portion of the reserve is justified. Management
has not targeted any specific coverage ratio of nonperforming loans by
the allowance for loan losses, and this ratio may fluctuate based
on loans placed into or removed from nonperforming status. Based upon
information presently available, management believes that the
allowance for loan losses is adequate.
Deposits
The subsidiary banks of Sterling continue to rely heavily on
deposit growth as the primary source of funds for lending activities.
In 1999, total deposits grew nearly $37.4 million or 4.4% to
$892.4 million. Noninterest bearing deposits grew $9.7 million or 8.9%
while interest bearing deposits grew $27.7 million or 3.7%. The total
deposit growth in 1998 was $71.7 million or 9.2% over the deposits of 1997.
Table 12 - Average Deposit Balances and Rates Paid
The following table summarizes the average amounts of deposits and
rates paid for the years indicated:
1999 1998 1997
Amount Rate Amount Rate Amount Rate
Noninterest-bearing demand deposits. $113,208 --- $ 98,957 --- $ 87,248 ---
Interest bearing demand deposits.... 321,769 2.26% 302,062 2.50% 280,197 2.57%
Savings deposits.................... 70,733 1.73% 73,082 2.16% 73,549 2.23%
Time deposits....................... 363,872 5.14% 340,969 5.60% 285,191 5.64%
-------- ----- -------- ----- -------- -----
$869,582 3.13% $815,070 3.46% $726,185 3.43%
======== ===== ======== ===== ======== =====
Table 13 - Deposit Maturity
The following table summarizes the maturities of time deposits of
$100,000 or more as of the dates indicated:
December 31,
1999 1998
Three months or less..........................$ 13,154 $ 9,647
Over three thru six months.................... 8,989 8,052
Over six thru twelve months................... 15,754 10,465
Over twelve months............................ 9,670 9,430
------- -------
Total.........................................$ 47,567 $ 37,594
======= =======
Borrowings
As of December 31, 1999, short-term borrowings totaled $25.0 million,
an increase of $23.4 million from the December 31, 1998 balance of $1.6
million. Long-term debt remained at approximately $34 million. The
primary reason for the significant increases in short-term borrowings is
due to management's decision to fund its growth in its finance and
operating lease portfolios through short-term borrowings. The
short-term borrowings have floating interest rates primarily
indexed to federal funds or the 30 day LIBOR rate. Management turned to
short-term borrowings as a source of funds in order to effectively
manage interest rate risk. Typically, long-term borrowings have maturities
of 3 years. During 1999, the 3 year U.S.
Treasury yield rose at a faster rate than federal funds
borrowing rate and LIBOR. As a result, management elected to
fund a portion of its lease operating activities through short-term
borrowings in order to capitalize on the disparity in rates offered.
At no time during the year, did short-term borrowings exceed 30% of
stockholders' equity.
Capital
The management of capital provides the foundation for future
asset and profitability growth and represents a major funding source to
Sterling. As of December 31, 1999, stockholders' equity
increased $1,827,000 or 2.1% from December 31, 1998. The increase
was the result of net income, less dividends declared of $6,846,000
(dividend pay-out ratio of 48.05%), plus proceeds from issuance of
treasury shares of $1,096,000, offset by a decrease in unrealized
gain (loss) on securities available-for-sale, net of tax,
totaling $6,115,000.
Sterling and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on Sterling and the subsidiary banks' financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Sterling and its banking subsidiaries
must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
amounts and reclassifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure
capital adequacy require Sterling and its banking subsidiaries
to maintain minimum amounts and ratios of total and
Tier 1 capital to average assets. Management believes, as of
December 31, 1999 and 1998, that Sterling and the subsidiary
banks met all minimum capital adequacy requirements to
which they are subject and are categorized as "well capitalized".
There are no conditions or events since the notification
that management believes have changed the subsidiary
banks' category.
Table 14 - Risked-Based Capital
Sterling's actual capital amount and ratios of December 31, 1999
and 1998 are as follows:
Minimum Capital
Actual Capital Requirement
Amount Ratio Amount Ratio
December 31, 1999
Total capital to risked weighted assets....$ 97,667 11.1% $ 70,091 8.0%
Tier 1 capital to risked weighted assets... 89,491 10.2% 35,045 4.0%
Tier 1 capital to average assets........... 89,491 8.5% 42,293 4.0%
December 31, 1998
Total capital to risked weighted assets....$ 90,311 11.5% $ 63,079 8.0%
Tier 1 capital to risked weighted assets... 80,619 10.2% 31,539 4.0%
Tier 1 capital to average assets........... 80,619 8.3% 39,032 4.0%
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 assets that are readily convertible
to cash such as federal funds sold, noninterest bearing and interest
bearing balances with banks. In addition the investment portfolio and
the loan/leasing portfolio generate a constant stream of cash flows
from maturities and scheduled repayments. Securities maturing within
one year amounted to $36.9 million.
Sterling's security portfolio is composed of $207 million in
securities available-for-sale. Scheduled loan repayments within the
next year total about $110 million. Additional liquidity is generated
by mortgage sales. In 1999, $59.2 million in mortgage originations were
sold on the secondary market, which provides for an ongoing ability to
meet the needs of customers for new mortgage financing.
Deposit growth is another source of liquidity. Sterling has a
relatively stable core deposit base for funding investment assets.
Deposit balance levels are usually predictable and grew
by $37.4 million in 1999.
Sterling maintains short-term borrowing capacity with several
correspondent banks and has the availability to immediately borrow
approximately $30 million from the Federal Home Loan Bank.
Sterling manages liquidity daily by monitoring the projected
cash inflows and outflows.
Impact of Year 2000
During 1999, Sterling maintained its commitment to ensure that
its daily operations suffered little or no impact from the century date
change. The Year 2000 project team continued to assess Sterling's Year 2000
readiness, addressing not only computer and technology areas, but
all aspects of the corporation's business. The Year 2000 action
plan had five key project phases:
awareness,
assessment,
renovation or remediation,
testing or validation and
implementation addressing systems for both Sterling and its
third party processors.
Sterling completed all five phases well in advance of December 31, 1999.
During the process, Sterling inventoried and assessed all software,
hardware and systems for Year 2000 readiness. Any noncompliant
hardware or software were upgraded or replaced. Testing ensured that all
mission-critical systems would function correctly in
the Year 2000 and beyond and would properly handle all date-sensitive data.
Utilizing information from written vendor surveys, Internet sites
and internal testing, Sterling assessed the Year 2000 readiness of
vendors and service providers to determine the extent to which its
systems would need to be modified or replaced or were
vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Additionally, through written surveys and loan
officer contact, Sterling assessed the Year 2000 readiness of
customers holding significant commercial loans. Sterling's subsidiary
banks established Year 2000 compliance as a factor in its credit
decisions and loan documentation.
During 1999, Sterling finalized its comprehensive Year 2000
contingency plan which encompassed all mission critical mainframe
and PC applications, third party relationships and environmental systems.
This plan also addresses aspects outside the corporation's
control, such as telecommunications, electric companies and other
utility companies. Despite passing the century date change,
Sterling's contingency plans continue to be maintained and reassessed
for thoroughness on an on-going basis in the event of unexpected
Year 2000 problems.
To date, Sterling has successfully managed its Year 2000
transition and has experienced no significant problems. Limited exposure
remains with certain specific future dates. However, those dates have
already been tested and verified as part of the overall Year 2000 assessment.
Management will continue monitoring all areas to ensure that business
will not be disrupted.
Failure of Sterling or third parties whom the corporation relies
upon to correct Year 2000 issues which remain could cause disruption
of operations resulting in increased operating costs and
other adverse effects. In addition, if customers' financial positions
were weakened as a result of Year 2000 issues, credit quality could be
affected. It is not possible to predict with certainty all of the
adverse effects that may result from a failure of Sterling or third
parties to become fully compliant or whether such effects
could have a material impact on the corporation.
Through December 31, 1999, the cost of the Year 2000 project
totaled $334,000 and included approximately $235,000 in capitalized costs
incurred to replace non-compliant hardware and software. In 1999, project
costs totaled $88,000 and included approximately $60,000 in capitalized costs.
Final project costs expected to be incurred in 2000 for
ongoing monitoring and support activities are not expected to be material.
The total cost of the project was funded through operating cash flows.
One additional cost that resulted from the century date change,
was the accumulation of approximately $7 million in excess cash on hand in
order to prepare for possible customer demands. Once we passed January
1, 2000, our cash on hand was reduced to normal levels within the
first few weeks of the new year.
New Financial Accounting Standards
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement
No. 137, which will become effective for Sterling on January 1, 2001.
This statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain
derivative instruments embedded in other contracts and requires that
an entity recognize all derivatives as assets or liabilities in
the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as
follows:
a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment,
a hedge of the exposure to variable cash flows of a forecasted
transaction, or
a hedge of the foreign currency exposure of an exposure of an
unrecognized firm commitment, available-for-sale security, a foreign
currency denominated forecasted transaction or a net investment in a
foreign operation.
The impact of this standard will not have a material impact on
Sterling's financial condition or results of operations.
In October 1998, the FASB issues Statement No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, which became effective
for Sterling on January 1, 1999. This statement requires that after
the securitization of mortgage loans, the classification of
the resulting mortgage-basked securities be based on the ability and
intent to sell or hold the securities. Sterling does not presently
securitize its mortgage loans sold into mortgage-backed securities,
and as such, the impact of this standard had no effect on
Sterling's financial condition or results of operations.
In September 1999, the FASB issued its Exposure Draft, Business
Combinations and Intangible Assets, that would change
the accounting for business combinations, goodwill and intangible
assets. In summary, the exposure draft eliminates the pooling-of-interests
method of accounting for business combinations, as the FASB believes this
method:
gives investors less relevant information;
ignores the values exchanged in a business combination; and
artificially boosts future earnings because pooling-of-interests
reflects assets at historical cost.
As a result, the Exposure Draft would require companies to account
for all business combinations using the purchase method.
As a general rule, in accounting for acquisitions under the
purchase method, a new accounting basis is established for the assets and
liabilities acquired based upon their fair value and recognizes
goodwill. Goodwill is the intangible asset that results from
the difference between the purchase price and total fair value of
assets and liabilities obtained and is required to be amortized over
future periods. In another major change from current practice,
the Exposure Draft requires that the maximum period for goodwill
amortization be reduced from 40 years to 20 years.
Under the proposed statement, the use of the purchase method of
accounting would be required for all business combinations initiated
after the date the final statement is issued. The other accounting
provisions (e.g. amortization requirements) generally also
would be effective on a prospective basis immediately after issuance
of the final statement.
Adoption of this statement may depress bank stocks by
constraining or eliminating the merger premium in bank stock prices.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Financial institutions can be exposed to several market risks
which may impact the value or future earnings capacity of an organization.
These risks involve interest rate risk, foreign currency exchange
risk, commodity price risk and equity market price risk.
Equity investments on a cost basis comprise less than 1% 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 committee
is responsible for these decisions, which operates under
management policies defining guidelines and limits on levels of risk.
These policies are approved by the Board of Directors. The committee
measures risk exposure by internal models, which involves
assumptions and estimates which inherently cannot measure with
complete precision. Core deposit repricing is modeled based on
historic pricing correlations to rate movement. The
internal models are supplemented by Risk Analytics,
Inc., an external service specializing in risk assessment.
The corporation has a negative cumulative GAP at one year in the
future in the amount of $147 million (15.8% of earning assets). This
risk position would result in a decreasing net interest margin in
the next year if market rates increase, since this volume of funding
liabilities in excess of the volume of earning assets repricing in the
next year would have a negative effect on income. This position
will generate more income or widen the net interest margin if rates
decrease in the next year. Beyond one year the risk position
is recaptured.
Table 15 - Interest Rate Sensitivity Gaps
0-90 91-365 Over 1 Year Over
Days Days to 3 Years 3 Years Total
Interest Earning Assets
Federal funds sold........$ 5,250 $ 0 $ 0 $ 0 $ 5,250
Interest bearing
deposits in banks........ 210 799 0 0 1,009
Securities................ 16,447 27,404 81,406 134,318 259,575
Loans..................... 124,831 80,742 213,937 244,334 663,844
-------- -------- -------- -------- --------
Total interest earning
assets..................$ 146,738 $ 108,945 $ 295,343 $ 378,652 $ 929,678
Cumulative................ 146,738 255,683 551,026 929,678
Interest-Bearing Liabilities
Interest bearing deposits.$ 95,359 $ 878 $ 30,728 $ 254,859 $ 381,824
Time deposits............. 62,531 201,808 105,004 22,871 392,214
Short-term borrowings..... 25,000 --- --- --- 25,000
Long-term debt............ 4,335 13,022 16,615 319 34,291
-------- -------- -------- ------- --------
Total interest-bearing
liabilities............. 187,225 215,708 152,347 278,049 833,329
Cumulative................ 187,225 402,933 555,280 833,329
Period GAP (Dollars)...... (40,487) (106,763) 142,996 100,603
Cumulative GAP (Dollars).. (40,487) (147,250) (4,254) 96,349
Cumulative GAP as % of
total interest earning
assets.................. (4.4)% (15.8)% (0.5)% 10.4%
During 1999, rates increased by 75 basis points between June and
November. The resulting reduction of the net interest margin between
May 1999 and December 1999 was 1.75%.
The company presents future change in net interest income as a
result of interest rate movement in the graph in Table 15a. This
analysis estimates the projected change to net interest
income resulting from interest rate movements. Sterling's risk to
interest rate movement illustrates that the future income will
decrease with increasing market rates, and future income
will increase with decreasing market rates during the next fiscal year.
Negative income exposure, resulting from increasing market rates,
as an impact to the interest margin is (0.9)%, (1.5)% and
(4.0)% with market rate increases of 50, 100 and 200 basis points.
The risk position of Sterling is within the guidelines
set by the asset/liability policies.
Present value of equity as a result of interest rate change is
presented in the graph in Table 15b. This analysis estimates the
projected change in the value of equity as a result of interest
rate movements. Future value of equity would decrease with increasing
market rates, and increase with decreasing market rates. The risk
position of Sterling is within the guidelines set by asset/liability
policies.
Table 15a Table 15b
Net Interest Income Present Value Equity
Projections
Changes in Changes in
Basis Points % Change Basis Points % Change
-200 9.9% -200 8.0%
-100 5.0% -100 4.9%
-50 3.0% -50 2.5%
0 0.0% 0 0.0%
50 -0.9% 50 -0.5%
100 -1.5% 100 -2.2%
200 -4.0% 200 -4.0%
Item 8 - Financial Statements
(a) The following audited consolidated financial statements and
related documents are set forth in this Annual Report on
Form 10-K on the following pages:
Page
Report of Independent Auditors 50
Consolidated Balance Sheets 51
Consolidated Statements of Income 52
Consolidated Statements of Changes in Stockholders' Equity 53
Consolidated Statements of Cash Flows 54
Notes to Consolidated Financial Statements 55
Trout, Ebersole & Groff, LLP
Certified Public Accountants
1705 Oregon Pike
Lancaster, Pennsylvania 17601
(717)569-2900
FAX (717) 569-0141
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Sterling Financial Corporation and Subsidiaries
Lancaster, Pennsylvania
We have audited the accompanying consolidated balance sheets of
STERLING FINANCIAL CORPORATION and SUBSIDIARIES as of December 31, 1999
and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audits.
The consolidated financial statements as of December 31, 1998
and 1997 have been restated to reflect the pooling of interests with
Northeast Bancorp, Inc. as described in Note 3 to the
consolidated financial statements. We did not audit the 1998 and
1997 financial statements of Northeast Bancorp, Inc., which
statements reflect assets representing 8.2% and 8.0% of total
assets for the years ended December 31, 1998 and 1997. Revenues
represent 8.1% and 8.0% of total revenues for the years ended
December 31, 1998 and 1997. Those statements were audited by
other auditors whose reports have been furnished to us, and in
our opinion, insofar as it relates to the amounts included for
Northeast Bancorp, Inc. as of December 31, 1998 and 1997 and
for the years then ended, is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other
auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Sterling Financial Corporation and Subsidiaries at December 31, 1999 and
1998 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting
principles.
Trout, Ebersole & Groff, LLP
Trout, Ebersole & Groff, LLP
Certified Public Accountants
January 20, 2000 except for Note 26
as to which the date is January 25, 2000
Lancaster, Pennsylvania
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
(Dollars in thousands) 1999 1998
Assets
Cash and due from banks..........................................$ 47,674 $ 38,716
Federal funds sold................................................ 5,250 31,830
--------- --------
Cash and cash equivalents....................................... 52,924 70,546
Interest-bearing deposits in banks................................ 1,009 3,557
Mortgage loans held for sale...................................... 836 6,005
Securities held-to-maturity(fair value 1999-$52,099;1998-$66,636). 52,392 64,755
Securities available-for-sale..................................... 207,183 185,953
Loans, net of allowance for loan losses 1999-$8,174; 1998-$8,070.. 654,834 584,590
Assets held for operating leases, net............................. 47,639 37,171
Premises and equipment, net....................................... 23,675 24,722
Other real estate owned........................................... 163 180
Accrued interest receivable....................................... 6,847 6,524
Other assets...................................................... 11,872 13,879
--------- -------
Total assets...................................................$1,059,374 $997,882
========= ========
Liabilities
Deposits:
Noninterest-bearing............................................$ 118,394 $108,709
Interest-bearing................................................ 774,038 746,347
--------- --------
Total deposits................................................ 892,432 855,056
--------- --------
Short-term borrowings................................ ............ 25,000 1,558
Long-term debt.................................................... 34,291 34,103
Accrued interest payable.......................................... 4,700 4,358
Other liabilities................................................. 12,933 14,616
--------- --------
Total liabilities.............................................. 969,356 909,691
--------- --------
Stockholders' equity
Common Stock -($5.00 par value)................................... 44,674 35,743
No. shares authorized: 1999 and 1998 - 35,000,000
No. shares issued: 1999 - 8,934,788; 1998 - 7,148,681
No. shares outstanding: 1999 - 8,931,568; 1998 - 7,117,795
Capital surplus................................................... 14,461 23,380
Retained earnings................................................. 32,432 25,586
Accumulated other comprehensive income (loss)..................... (1,448) 4,667
Common stock in treasury, at cost (1999 - 3,220; 1998 - 30,886)... (101) (1,185)
--------- --------
Total stockholders' equity..................................... 90,018 88,191
--------- --------
Total liabilities and stockholders' equity.......................$1,059,374 $997,882
========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
(Dollars in thousands, except per share data) 1999 1998 1997
Interest and dividend income
Loans, including fees................................$ 52,087 $ 51,047 $ 49,186
Debt securities
Taxable.......................................... 10,279 9,643 8,345
Tax-exempt....................................... 4,026 3,507 3,211
Dividends............................................ 295 275 247
Federal funds sold................................... 891 1,243 770
Deposits in other banks.............................. 136 48 25
--------- --------- ---------
Total interest and dividend income.............. 67,714 65,763 61,784
--------- --------- ---------
Interest expense
Deposits............................................. 27,201 28,231 24,936
Short-term borrowings................................ 604 143 114
Long-term debt....................................... 1,992 1,841 2,288
--------- --------- ---------
Total interest expense.......................... 29,797 30,215 27,338
--------- --------- ---------
Net interest income.................................. 37,917 35,548 34,446
--------- --------- ---------
Provision for loan losses............................ 420 956 1,129
--------- --------- ---------
Net interest income after
provision for loan losses..................... 37,497 34,592 33,317
--------- --------- ---------
Noninterest income
Income from fiduciary activities..................... 2,349 1,879 1,513
Service charges on deposit accounts.................. 3,380 3,213 3,195
Other service charges, commissions and fees.......... 1,978 1,894 1,456
Mortgage banking income.............................. 1,291 1,811 1,305
Income from sale of credit card portfolio............ --- 1,338 ---
Rental income on operating leases.................... 18,469 15,965 13,617
Other operating income............................... 1,200 1,093 1,627
Securities gains..................................... 830 --- 215
--------- --------- ---------
Total noninterest income........................ 29,497 27,193 22,928
--------- --------- ---------
Noninterest expenses
Salaries and employee benefits....................... 19,302 18,628 17,443
Net occupancy........................................ 2,143 2,356 2,541
Furniture and equipment.............................. 3,242 2,998 2,705
Professional services................................ 1,089 983 692
Depreciation on operating lease assets............... 14,641 12,641 10,698
Merger related costs................................. 423 --- ---
Other................................................ 7,991 7,644 7,041
--------- --------- ---------
Total noninterest expenses..................... 48,831 45,250 41,120
--------- --------- ---------
Income before income taxes........................... 18,163 16,535 15,125
Income tax expense................................... 4,924 4,193 3,969
--------- --------- ---------
Net income...........................................$ 13,239 $ 12,342 $ 11,156
========= ========= =========
Per share information:
Basic and diluted earnings per share................$ 1.48 $ 1.38 $ 1.24
Dividends declared..................................$ .721 $ .664 $ .625
The accompanying notes are an integral part of these consolidated
financial statements.
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Shares Other
Common Common Capital Retained Comprehensive Treasury
Stock Stock Surplus Earnings Income Stock Total
(Dollars in thousands)
Balance,January 1,1997,as previously reported..6,922,449 $ 34,612 $ 14,028 $ 26,421 $ 1,571 $ (436) $76,196
Effect of restatement-See Note 2 .............. (592) (24) (616)
--------- -------- -------- -------- ------- ------- -------
Balance, January 1, 1997.......................6,922,449 $ 34,612 $ 14,028 $ 25,829 $ 1,547 $ (436) $75,580
Comprehensive income:
Net income................................ 11,156 11,156
Change in net unrealized gain (loss)
on securities AFS, net of reclassification
adjustment and tax effects............... 1,300 1,300
Total comprehensive income............. 12,456
Cash dividends declared...................... (5,305) (5,305)
Purchase of treasury stock (121,751 shares).. (3,302) (3,302)
Issuance of treasury stock
Dividend reinvestment plan (55,868 shares) (4) 1,434 1,430
Directors' compensation plan (1,600 shares) 41 41
Stock transactions of pooled entity.......... (37,499) (187) (106) (139) (432)
--------- ------- ------- ------- ------- ------- ------
Balance, December 31, 1997......................6,884,950 34,425 13,918 31,541 2,847 (2,263) 80,468
Comprehensive income:
Net income....................... 12,342 12,342
Change in net unrealized gain (loss)
on securities AFS, net of reclassification
adjustment and tax effects................ 1,820 1,820
Total comprehensive income.............. 14,162
Common stock issued........................... 4,528 23 60 83
Stock dividend issued- 5% common stock,
including cash paid in lieu of fractional
shares (231,424 shares including 79,332
shares of treasury stock................. 263,917 1,319 9,073 (12,600) 2,168 (40)
Cash dividends declared....................... (5,697) (5,697)
Purchase of treasury stock (70,260 shares).... (2,492) (2,492)
Issuance of treasury stock
Dividend reinvestment plan (36,448 shares). 301 1,080 1,381
Employee stock plan (7,414 shares)......... 73 190 263
Directors' compensation plan (2,000 shares) 18 79 97
Stock options (1,400 shares)............... (20) 53 33
Stock transactions of pooled entity......... (4,714) (24) (43) (67)
---------- ------- ------- -------- ------- ------- -------
Balance, December 31, 1998..................... 7,148,681 35,743 23,380 25,586 4,667 (1,185) 88,191
Comprehensive income:
Net income................................ 13,239 13,239
Change in net unrealized gain (loss)
on securities AFS, net of reclassification
adjustment and tax effects............... (6,115) (6,115)
Total comprehensive income............. 7,124
Cash dividends declared...................... (6,361) (6,361)
5-for-4 stock split effected in the form of
a 25% stock dividend....................... 1,786,107 8,931 (8,931) (32) (32)
Issuance of treasury stock
Dividend reinvestment plan (26,248 shares) 19 1,007 1,026
Directors' compensation plan (2,000 shares) (6) 74 68
Stock options (80 shares)................ (1) 3 2
---------- ------- -------- -------- ------- ------- -------
Balance, December 31, 1999.................... 8,934,788 $44,674 $14,461 $32,432 $(1,448) $ (101)$90,018
========== ======= ======== ======== ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31,
(Dollars in thousands) 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income...........................................$ 13,239 $ 12,342 $ 11,156
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation...................................... 17,132 14,934 12,816
Accretion & amortization of investment securities. 620 407 269
Provision for loan losses......................... 420 956 1,129
Provision for deferred income taxes............... 887 763 593
(Gain) on sale of property and equipment.......... (7) (5) (456)
(Gain) on sales of securities available-for-sale.. (830) --- (215)
(Gain) on sale of mortgage loans.................. (418) (642) (319)
(Gain) on sale of credit card portfolio........... --- (1,338) ---
Proceeds from sales of mortgage loans............. 59,177 89,517 41,188
Originations of mortgage loans held for sale...... (53,590) (94,088) (40,645)
Change in operating assets and liabilities:
Increase (decrease) in accrued interest
receivable and other assets.................... 2,007 (4,344) (661)
Increase in accrued interest payable............ 342 489 822
Increase in other liabilities................... 689 1,031 1,012
--------- --------- ---------
Net cash provided by operating activities........ 39,668 20,022 26,689
CASH FLOWS FROM INVESTING ACTIVITIES --------- --------- ---------
Proceeds from interest-bearing deposits
in other banks..................................... 4,945 361 968
Purchase of interest-bearing deposits in other banks. (2,397) (903) (339)
Proceeds from sales of securities available-for-sale. 844 --- 221
Proceeds from maturities or calls of
securities held-to-maturity......................... 13,022 29,354 30,541
Proceeds from maturities or calls of
securities available-for-sale....................... 28,720 24,784 14,647
Purchases of securities held-to-maturity............. (1,165) (8,614) (22,185)
Purchases of securities available-for-sale........... (59,452) (80,128) (49,681)
Net loans and direct finance leases made to customers (70,970) (34,809) (47,928)
Proceeds from sale of credit card portfolio.......... --- 9,337 ---
Purchases of equipment acquired for
operating leases, net.............................. (25,109) (19,162) (14,815)
Purchases of premises and equipment.................. (1,469) (2,730) (2,786)
Proceeds from sale of premises and equipment......... 32 36 1,790
--------- --------- ---------
Net cash used by investing activities............ (112,999) (82,474) (89,567)
CASH FLOWS FROM FINANCING ACTIVITIES --------- --------- ---------
Net increase (decrease)in demand deposits, NOW and
savings accounts................................... (6,522) 44,447 20,401
Net increase in time deposits........................ 43,898 27,314 55,644
Net increase (decrease) in short-term borrowings..... 23,442 (1,442) 259
Proceeds from issuance of long-term debt............. 19,529 19,080 25,652
Repayment of long-term debt.......................... (19,341) (17,289) (23,774)
Proceeds from issuance of common stock............... --- 83 ---
Cash dividends....................................... (6,361) (5,697) (5,305)
Cash paid in lieu of fractional shares............... (32) (40) ---
Purchase of treasury stock........................... --- (2,492) (3,302)
Proceeds from issuance of treasury stock............. 1,096 1,774 1,471
Stock transactions of pooled entity.................. --- (67) (432)
--------- --------- ---------
Net cash provided by financing activities........ 55,709 65,671 70,614
--------- --------- ---------
Net change in cash and cash equivalents.............. (17,622) 3,219 7,736
Cash and cash equivalents:
Beginning of year.................................... 70,546 67,327 59,591
--------- --------- ---------
End of year..........................................$ 52,924 $ 70,546 $ 67,327
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Other real estate acquired in settlement of loans....$ 306 $ 353 $ 630
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest to depositors and on borrowed money.......$ 29,455 $ 29,892 $ 26,715
Income taxes....................................... 3,788 3,686 2,961
The accompanying notes are an integral part of these consolidated financial
statements.
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands,
except per share data)
Note 1 - Summary of Significant Accounting Policies
Basis of Financial Statement Presentation - The consolidated financial
statements include the accounts of Sterling Financial Corporation (Sterling) and
its wholly-owned subsidiaries, Bank of Lancaster County, N.A., Northeast
Bancorp, Inc., T&C Leasing, Inc. and Sterling Mortgage Services,
Inc. (inactive). The consolidated financial statements also include
Town & Country, Inc., a wholly-owned subsidiary of Bank of Lancaster County,
N.A., and The First National Bank of North East, a wholly-owned
subsidiary of Northeast Bancorp, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates - In preparing consolidated financial statements in
conformity with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
Business - Sterling, through its subsidiaries, provides a full range of
banking services to individual and corporate customers located in Lancaster
County, Pennsylvania, Cecil County, Maryland and surrounding counties.
Concentration of Credit Risk - Sterling operates primarily in its defined
market area and, accordingly, the banks have extended credit primarily to
commercial entities and individuals in this area whose ability to honor their
contracts is influenced by the region's economy. The loan portfolio is well
diversified and Sterling does not have any significant concentrations of credit
risk. The Banks are limited in extending credit by legal lending limits to any
single group of borrowers.
Cash and Cash Equivalents - For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash and balances due from banks
and federal funds sold, generally which mature in one day.
Interest-bearing Deposits in Banks - Interest-bearing deposits in banks
mature within one year and are carried at cost.
Securities - Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held-to-maturity" and recorded at
amortized cost. Securities not classified as held to maturity, including equity
securities with readily determinable fair values, are classified as "available-
for-sale" and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over terms of the securities using the constant yield method.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Mortgage Loans Held for Sale - Loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair
value in the aggregate. Net unrealized losses, if any, are recognized through
a valuation allowance by charges to income.
Loans - Sterling grants mortgage, commercial and consumer loans to
customers and leasing alternatives to companies. The ability of Sterling's
debtors to honor their contracts is dependent upon the real estate and
general economic conditions in the market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off, generally are reported at
their outstanding principal balance adjusted for charge-offs, the allowance for
loan losses and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance.
Income on direct financing leases is recognized on a basis to achieve a
constant periodic rate of return on the outstanding investment. Income on
operating leases is recognized as the difference between rental payment and
depreciation. Depreciation on investments in operating leases is calculated
generally on a straight line or present value method over the minimum lease term
to a residual value.
Loan and lease origination fees and loan origination costs are deferred and
recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on loans is generally discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in the process
of collection. Loans are placed on nonaccrual status or charged-off at an
earlier date if collection of principal or interest is considered doubtful. All
interest accrued but not collected for loans that are placed on nonaccrual
status or charged-off is reversed against interest income. The interest
on these loans is accounted for on the cash-basis until qualifying for return
to accrual status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for Loan Losses - 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, the company 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 an allowance
consisting of two components, "allocated" and "unallocated".
Management assigns internal risk ratings to all commercial relationships
with aggregate borrowings or commitments to extend credit in excess of
$100,000. Utilizing migration analysis for the previous eight quarters,
management develops a loss factor test which it then uses to estimate
losses on impaired loans, potential problem loans and
non-classified loans. When management finds loans with uncertain
collectibility of principal and interest, it places those
loans on the "problem list", and evaluates them on a quarterly
basis in order to estimate potential losses. Management's analysis
considers adverse situations that may affect the borrower's
ability to repay, estimated value of underlying collateral, and
prevailing market conditions. If management determines that a
specific reserve allocation is not required, it assigns the
general loss factor to determine the reserve. For homogeneous loan types,
such as consumer and residential mortgage loans, management bases
specific allocations on the average loss ratio for the previous two years
for each specific loan pool. Additionally, management projected loss
ratios for other factors, including trends in delinquency levels, trends
in non-performing and potential problem loans, trends in composition,
volume and terms of loans, effects in changes in lending policies or
underwriting procedures, experience ability and depth of
management, national and local economic conditions, concentrations in lending
activities, and other factors that management may deem appropriate.
Management determines the unallocated portion of the allowance for loan
losses based on the following criteria: risk of error in the specific and
general reserve allocations; other potential exposure in the loan portfolio;
variances in management's assessment of national and local economic conditions;
and other internal or external factors that management believes appropriate at
that time.
Management feels the above methodology accurately reflects losses inherent
in the portfolio. Management charges actual losses to the allowance for loan
losses. Management periodically updates the methodology discussed above, which
reduces the difference between actual losses and estimated losses.
Management bases the provision for loan losses, or lack of provision,
on the overall analysis taking into account the methodology discussed above.
A loan is considered impaired when, based on current information and
events, it is probable that Sterling will be unable to collect the
scheduled payments of principal or interest when due according to the
original contractual terms of the loan agreement. Generally, this definition
includes all loans on nonaccrual status and restructured loans,
except those specifically excluded from the scope
of Statement of Financial Accounting Standards (SFAS) No. 114. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments when due. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment.
Servicing - Servicing assets are recognized as separate assets when rights
are acquired through purchase or through the sale of financial assets.
Capitalized servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing
assets are evaluated for impairment based upon the fair value of
the rights compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such
as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance, to the extent that fair value is less
than the capitalized amount.
Credit related financial instruments - In the ordinary course of business,
Sterling has entered into commitments to extend credit, commercial letters of
credit and standby letters of credit. Such financial instruments are recorded
when they are funded.
Foreclosed Assets - Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at the lower
of fair value or carrying value at the date of foreclosure.
Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower
of carrying amount or fair value less cost to sell. Revenues and expenses
from operations and changes in the valuation allowance are
included in other non-interest expenses.
Premises and Equipment - Land is carried at cost. Buildings, furniture,
equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed primarily on the
straight-line method over the estimated useful lives of the asset.
Income taxes - Deferred income tax assets and liabilities are determined
using the liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the various balance
sheet assets and liabilities and gives current recognition to
changes in tax rates and laws.
Advertising - Sterling expenses advertising costs as incurred.
The expenses for 1999, 1998 and 1997 were $607,000, $576,000 and $614,000.
Stock Compensation Plans - Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
Stock options issued under Sterling's stock incentive plan have no intrinsic
value at the grant date, and under Opinion No. 25, no compensation cost is
recognized for them. Sterling has elected to continue with the accounting
methodology in Opinion No. 25 and, as a result, has provided pro forma
disclosures of net income and earnings per share and other disclosures, as if
the fair value based method of accounting had been applied.
Earnings Per Share - Basic earnings per share represents income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued.
Potential common shares that may be issued by Sterling
consist solely of outstanding stock options and are determined using
the treasury stock method.
Earnings per common share for the years ending December 31, 1999, 1998 and
1997 have been computed based on the following:
1999 1998 1997
Net income available to common stockholders..$ 13,239 $ 12,342 $ 11,156
-------- -------- --------
Average number of shares outstanding.........8,912,120 8,922,343 8,997,973
Effect of dilutive stock options............. 22,825 26,743 4,053
--------- --------- ---------
Average number of shares outstanding used to
calculate dilute earnings per common share..8,934,945 8,949,086 9,002,026
========= ========= =========
All prior year per share amounts have been properly restated to reflect the
5-for-4 stock split effected in the form of a 25% dividend declared in 1999 and
the 5% stock dividend declared in 1998.
Comprehensive Income - Sterling adopted SFAS No. 130, Reporting
Comprehensive Income, as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income. The adoption of SFAS No. 130
had no effect on Sterling's net income or stockholders' equity.
The components of other comprehensive income and related tax effects for
the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
Unrealized holding gains (losses) on
available-for-sale securities.........$ (8,577) $ 2,800 $ 2,215
Reclassification adjustment for
gains realized in income.............. (830) --- (215)
----------- --------- ---------
Net unrealized gains................... (9,407) 2,800 2,000
Income tax (expense) benefit........... 3,292 (980) (700)
----------- --------- ---------
Net-of-tax amount......................$ (6,115) $ 1,820 $ 1,300
=========== ========= =========
Reclassifications - Certain items in the 1998 and 1997 consolidated
financial statements have been reclassified to conform with the 1999
presentation format. Such reclassifications had no impact on net income.
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statement No. 137, which will
become effective for Sterling on January 1, 2001. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as
assets or liabilities in the balance sheet and measure them at fair value.
If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
an unrecognized firm commitment, available-for-sale security, a foreign currency
denominated forecasted transaction or a net investment in a foreign operation.
The impact of this standard is not expected to have a material impact on
Sterling's financial condition or results of operations.
In October 1998, the FASB issues Statement No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise, which
became effective for Sterling on January 1, 1999. This statement requires
that after the securitization of mortgage loans, the classification
of the resulting mortgage-backed securities be based on the
ability and intent to sell or hold the securities. Sterling does
not presently securitize its mortgage loans sold into mortgage-backed
securities, and as such, the impact of this standard
had no effect on Sterling's financial condition or results of operations.
Note 2 - Restatement
Management regularly reviews its accounting policies to ensure conformity
with generally accepted accounting principles, including recent pronouncements
by the AICPA and SEC with respect to audit differences and materiality. Upon
completion of this review in the fourth quarter in connection with the year-end
closing process, management determined that appropriate consideration had not
previously been given with respect to origination costs for loans and leases,
investments in affordable housing projects, director deferred compensation
arrangements and income taxes. Sterling's management has elected to adjust
these items previously considered as not having a material effect on the
financial statements.
Accordingly, the accompanying consolidated financial statements have been
restated to reflect the impact of the adjustments Sterling has made due to the
interpretations of accounting principles related to loan and lease origination
costs, investments in affordable housing projects, deferred compensation
arrangements and income taxes.
The impact of the restatements was a $592,000 reduction at January 1, 1997
of retained earnings and a $48,000 and $81,000 reduction in net income for the
years ended December 31, 1998 and 1997. This resulted in a decrease in earnings
per share of $.01 for each of the years ended December 31, 1998 and 1997 from
amounts previously reported.
Note 3 - Merger
On June 15, 1999, Sterling completed the acquisition of Northeast Bancorp,
Inc., the parent company of The First National Bank of North East, based in
Maryland. The First National Bank of North East, with four branches in Cecil
County, Maryland, continues to operate as a separate commercial bank.
Under the terms of the agreement, Northeast Bancorp shareholders received
two shares of Sterling common stock for each share of Northeast Bancorp's common
stock in a tax-free exchange. Sterling issued 677,624 shares of its common
stock in connection with this merger. The transaction was accounted for
under the pooling-of-interest method of accounting. Accordingly, the
consolidated financial statements have been restated to include the
consolidated accounts of Northeast Bancorp for all periods presented.
Financial data for Sterling and Northeast Bancorp, Inc. from January 1,
1999 to June 30, 1999 is presented below. Although the date of the
consummation was June 15, 1999, the financial information presented is
for the nearest interim period.
For the six months ended June 30, 1999:
Sterling
Sterling Northeast Consolidated
Net interest income.......$ 16,756 $ 1,888 $ 18,644
Net income................ 6,513 335 6,848
Dividends declared........ 2,986 85 3,071
The effect of the Northeast merger on Sterling's financial condition and
results of operations were as follows:
Sterling
Sterling Northeast Consolidated
For the year ended 1998:
Net interest income......$ 31,915 $ 3,633 $ 35,548
Net income............... 11,552 790 12,342
Dividends declared....... 5,356 341 5,697
For the year ended 1997:
Net interest income...... 30,975 3,471 34,446
Net income............... 10,321 835 11,156
Dividends declared....... 5,075 230 5,305
As of December 31, 1998:
Assets................... 916,093 81,789 997,882
Liabilities.............. 835,573 74,118 909,691
Stockholders' equity..... 80,520 7,671 88,191
Note 4 - Restrictions on Cash and Due From Banks
Sterling Financial Corporation's subsidiary banks are required to maintain
reserves, in the form of cash and balances with the Federal Reserve Bank,
against their deposit liabilities. The average amount of these reserve
balances for the years ended December 31, 1999 and 1998 was approximately
$5,950,000 and $4,302,000. Balances maintained at the Federal
Reserve Bank are included in cash and due from banks.
Note 5 - Securities
Securities pledged to secure government and other public deposits, trust
deposits, short-term borrowings, and other balances as required or permitted by
law were carried at $59,613,000 in 1999 and $66,354,000 in 1998.
The amortized cost and fair values of securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1999:
Available-for-sale:
U.S. Treasury securities............$ 28,961 $ 15 $ 218 $ 28,758
U.S. Government agencies............ 50,290 7 1,280 49,017
States and political subdivisions... 53,617 223 2,085 51,755
Mortgage-backed securities.......... 4,989 3 163 4,829
Corporate securities................ 70,878 5 1,172 69,711
---------- --------- -------- --------
Subtotal............................ 208,735 253 4,918 204,070
Equity securities................... 704 2,427 18 3,113
---------- --------- -------- --------
Total...............................$ 209,439 $ 2,680 $ 4,936 $ 207,183
========== ========= ======== ========
Held-to-maturity:
U.S. Treasury securities............$ 501 $ --- $ 1 $ 500
U.S. Government agencies............ 1,460 --- 14 1,446
States and political subdivisions... 41,030 228 482 40,776
Mortgage-backed securities.......... 851 23 --- 874
Corporate securities................ 4,757 --- 47 4,710
---------- --------- -------- ---------
Subtotal............................ 48,599 251 544 48,306
Equity securities................... 3,793 --- --- 3,793
---------- --------- -------- ---------
Total...............................$ 52,392 $ 251 $ 544 $ 52,099
========== ========= ======== ========
December 31, 1998:
Available-for-sale:
U.S. Treasury securities............$ 29,265 $ 666 $ 1 $ 29,930
U.S. Government agencies............ 37,713 613 41 38,285
States and political subdivisions... 38,671 1,116 26 39,761
Mortgage-backed securities.......... 6,732 29 --- 6,761
Corporate securities................ 66,215 1,119 22 67,312
---------- --------- -------- --------
Subtotal............................ 178,596 3,543 90 182,049
Equity securities................... 174 3,730 --- 3,904
---------- --------- -------- --------
Total...............................$ 178,770 $ 7,273 $ 90 $ 185,953
========== ========= ======== ========
Held-to-maturity:
U.S. Treasury securities............$ 2,508 $ 20 $ --- $ 2,528
U.S. Government agencies............ 2,208 30 --- 2,238
States and political subdivisions... 44,465 1,642 4 46,103
Mortgage-backed securities.......... 1,219 64 --- 1,283
Corporate securities................ 10,808 129 --- 10,937
---------- --------- -------- ---------
Subtotal............................ 61,208 1,885 4 63,089
Equity securities................... 3,547 --- --- 3,547
---------- --------- -------- ---------
Total...............................$ 64,755 $ 1,885 $ 4 $ 66,636
========== ========= ======== ========
Included in held-to-maturity equity securities are Federal Reserve
stock, Federal Home Loan Bank of Pittsburgh stock and Atlantic
Central Bankers Bank stock.
The amortized cost and fair value of securities at December 31, 1999, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities or call dates because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
Securities-Available- Securities Held-
for-Sale to-Maturity
--------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- -------- ---------- ---------
Due in one year or less................$ 30,132 $ 30,091 $ 6,351 $ 6,352
Due after one year through five years.. 119,507 117,547 15,055 15,068
Due after five years through ten years. 32,863 31,892 22,292 22,129
Due after ten years.................... 21,244 19,711 4,050 3,883
-------- -------- -------- --------
203,746 199,241 47,748 47,432
Mortgage-backed securities............. 4,989 4,829 851 874
-------- -------- -------- --------
$208,735 $204,070 $ 48,599 $ 48,306
======== ======== ========= ========
Proceeds from sales of securities available-for-sale were $844,000, $0
and $221,000 for the years ended December 31, 1999, 1998 and 1997. Gross
gains of $830,000, $0 and $215,000 were realized on these sales for the
years ended December 31, 1999, 1998 and 1997.
Note 6 - Loans
Loans outstanding at December 31, are as follows:
1999 1998
Commercial, financial and agricultural.......................$ 331,510 $ 302,497
Real estate - construction................................... 7,872 6,633
Real estate - mortgage....................................... 97,631 89,021
Consumer..................................................... 152,872 136,773
Lease financing receivables (net of unearned income)......... 73,123 57,736
-------- --------
Total loans, gross...........................................$ 663,008 $ 592,660
======== ========
The following table presents information concerning impaired loans at
December 31, 1999 and 1998:
1999 1998
Impaired loans with a valuation allowance.......$ 2,286 $ 2,901
Impaired loans without a valuation allowance.... --- ---
------ ------
Total impaired loans..........................$ 2,286 $ 2,901
====== ======
Valuation allowance related to impaired loans...$ 111 $ 140
====== ======
The following is a summary of information pertaining to impaired
loans for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
Average investment in impaired loans..........$ 2,573 $ 3,139 $ 2,203
Interest income recognized on impaired loans.. 129 136 58
Interest income recognized on a cash basis
on impaired loans........................... 129 136 58
Note 7 - Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 were as follows:
1999 1998 1997
Balance at January 1..................................$ 8,070 $ 8,142 $ 8,259
Provisions for loan losses charged to income.......... 420 956 1,129
Loans charged off..................................... (521) (1,311) (1,566)
Recoveries of loans previously charged off............ 205 283 320
--------- -------- --------
Balance at December 31................................$ 8,174 $ 8,070 $ 8,142
========= ======== ========
Note 8 - Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of mortgage loans serviced for
others were $243,950,000 and $221,172,000 at December 31, 1999 and 1998.
The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at December 31, 1999 and 1998 was $1,465,000 and
$1,341,000. The fair values of these rights were $2,099,000 and $1,525,000.
The fair value of servicing rights as of December 31, 1999 was determined
using a 9.5% discount rate and prepayment speeds ranging from 7.9%
to 21.5%, depending upon the stratification of the specific
right. The weighted average prepayment speed in the fair value
determination was 9.4%.
The following summarizes mortgage servicing rights capitalized and
amortized, along with the related valuation allowances:
1999 1998 1997
Balance, beginning of the year before
valuation allowance...............................$ 1,382 $ 892 $ 442
Amounts capitalized............................... 569 840 563
Amounts amortized................................. (471) (350) (113)
------ ------ ------
Balance, end of the year before valuation allowance. 1,480 1,382 892
Valuation allowance............................... (15) (41) ---
------ ------ ------
Net mortgage servicing right asset...................$ 1,465 $ 1,341 $ 892
====== ====== ======
Note 9 - Premises and Equipment
Premises and equipment at December 31, 1999 and 1998 is summarized as follows:
1999 1998
Land...........................................$ 4,617 $ 4,617
Buildings...................................... 18,651 18,302
Leasehold improvements......................... 849 830
Equipment, furniture and fixtures.............. 15,968 15,117
---------- ----------
40,085 38,866
Less: Accumulated depreciation................ (16,410) (14,144)
---------- ----------
$ 23,675 $ 24,722
========== ==========
Note 10 - Leases
Sterling's net investment in direct financing leases, included in loans
receivable, at December 31, 1999 and 1998 consisted of the following:
1999 1998
Minimum lease payments receivable...$ 84,935 $ 66,400
Lease origination costs............. 490 408
Unearned income..................... (12,302) (9,072)
------- -------
$ 73,123 $ 57,736
======= =======
The allowance for uncollectible lease payments, included in allowance
for loan losses, was $737,000 and $634,000 at December 31, 1999 and 1998.
A breakdown of investments in operating lease assets by major classes as of
December 31, 1999 and 1998 is as follows:
1999 1998
Automobiles............................$ 24,497 $ 21,051
Heavy trucks, trailers and buses....... 15,984 14,409
Trucks, light and medium duty.......... 31,335 26,630
Other.................................. 16,536 11,214
---------- -----------
88,352 73,304
Less: Accumulated depreciation... (40,713) (36,133)
---------- -----------
$ 47,639 $ 37,171
========== ===========
Minimum future rentals on noncancelable finance and operating leases as of
December 31, 1999 are as follows:
Finance Operating
Due in 2000......................$ 29,320 $ 19,312
Due in 2001...................... 21,713 7,523
Due in 2002...................... 15,990 2,793
Due in 2003...................... 9,606 1,499
Due in 2004...................... 7,614 596
Due thereafter................... 692 572
------- -------
Total minimum future rentals...$ 84,935 $ 32,295
======= =======
Note 11 - Time Certificates of Deposit
At December 31, 1999, scheduled maturities of certificates of deposit
are as follows:
Years ended December 31,
2000 2001 2002 2003 2004 Thereafter Total
Amount $263,339 $ 84,664 $ 20,340 $ 13,807 $ 9,064 $ --- $ 391,214
======= ======= ======= ======= ====== ========= ========
At December 31, 1999 and 1998, time certificates of deposit of $100,000
or more aggregated $46,591,000 and $36,594,000. Interest expense on
certificates of deposits of $100,000 or more amounted to $2,028,000 in
1999, $2,273,000 in 1998 and $2,106,000 in 1997.
Note 12 - Short-Term Borrowings
Short-term borrowings and weighted average interest rates consisted of the
following at December 31, 1999 and 1998:
1999 1998
Amount Rate Amount Rate
Interest-bearing demand notes
issued to U.S. Treasury.....................$ 5,000 4.78% $ 1,558 4.26%
Lines of credit............................... 20,000 6.48% --- ---
------- -------
Total.........................................$ 25,000 $ 1,558
======= =======
The Bank of Lancaster County, N.A. has an arrangement with the
Federal Home Loan Bank (FHLB) in which it could borrow an additional
$75,300,000 under a blanket collateral agreement. Advances under this
agreement are limited by available and qualifying collateral,
including the amount of FHLB stock held by the bank.
Note 13 - Long-Term Debt
Long-term debt consisted of the following at December 31, 1999 and 1998:
1999 1998
FHLB loan, due in 2000, with an interest rate of 5.39%.......$ 950 $ 950
FHLB loan, due in 2001, with an interest rate of 6.41%....... 669 669
FHLB amortizing loan, including interest at 3.0%, with a
final maturity in 2011..................................... 357 369
Notes payable to six financial institutions, generally with
an original maturity of 36 months. Interest rates on
the notes range from 5.39% to 8.00%, with a weighted
average interest rate of 6.32% and 6.31% at December 31,
1999 and 1998. The notes mature through 2003.............. 32,315 32,115
------- -------
$34,291 $34,103
======= =======
The contractual maturities of long-term debt as of December 31, 1999 are as
follows:
Due in 2000..............$ 17,357
Due in 2001.............. 12,377
Due in 2002.............. 4,238
Due in 2003.............. 13
Due in 2004.............. 14
Thereafter............... 292
----------
$ 34,291
==========
Under terms of the notes payable to financial institutions, Sterling is
required to meet certain conditions, including specific financial ratios, as
measured on a periodic basis. Sterling was in compliance with these covenants
during the periods presented. As of December 31, 1999, Sterling has additional
funding commitments from these financial institutions totaling $37,700,000.
Note 14- Income Taxes
The allocation of income taxes between current and deferred is as follows
for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
Current..................$ 4,037 $ 3,430 $ 3,376
Deferred................. 887 763 593
------ ------ ------
$ 4,924 $ 4,193 $ 3,969
====== ====== ======
The effective income tax rates for financial purposes are less than the
federal statutory rate of 35% for the years ended December 31, 1999, 1998 and
1997 for reasons shown as follows:
1999 1998 1997
Federal statutory income tax rate...... 35.0% 35.0% 35.0%
Tax exempt interest income............. -10.5% -10.4% -8.5%
Disallowed interest expense............ 1.2% 1.3% 1.0%
Low-income housing credits............. -1.2% -1.3% -1.3%
State tax, net of federal tax benefit.. 0.9% 0.7% 0.8%
Other, net............................. 1.7% 0.1% -0.8%
------ ------ ------
Effective tax rates.................... 27.1% 25.4% 26.2%
====== ====== ======
The income tax provision includes $290,000, $0 and $73,000 of income taxes
relating to realized securities gains for the years ended December 31, 1999,
1998 and 1997.
The significant components of Sterling's deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
1999 1998
Deferred tax assets
Allowance for loan losses.............$ 2,850 $ 2,808
Employee benefit plans................ 483 322
Accrued directors fees................ 323 307
State net operating loss carryforwards 698 508
Unrealized loss on securities available-
for-sale............................. 808 ---
Other................................. 115 47
------- -------
5,277 3,992
------- -------
Deferred tax liabilities
Leasing............................... (10,523) (9,054)
Accumulated depreciation.............. (130) (235)
Unrealized gain on securities available-
for-sale............................. --- (2,517)
------- -------
(10,653) (11,806)
------- -------
Net deferred tax liability............$ (5,376) $ (7,814)
======= =======
A subsidiary of Sterling has generated net operating losses
carryforwards in numerous states, the most significant of which totals
$5,634,000 and expires through the year 2009.
Note 15 - Stockholders' Equity and Regulatory Matters
Sterling maintains a dividend reinvestment and stock purchase plan.
Under the Plan, shareholders may purchase additional shares of
Sterling's common stock at the prevailing market prices with reinvested
dividends and voluntary cash payments. Sterling has reserved 1,378,125 shares
of the corporation's common stock to be issued under the dividend
reinvestment and stock purchase plan. As of December 31, 1999, 812,676
shares were available to be issued under the plan.
Sterling also maintains a directors' stock compensation plan. Under the
Director's Plan, each non-employee director is entitled to receive 200 shares
of Sterling's common stock each July 1. Sterling has reserved 31,500 shares
of the corporation's common stock to be issued under the director's stock
compensation plan. As of December 31, 1999, 24,400 shares were available
to be issued under the plan.
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 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 (set forth in the following table) of total and
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999 and 1998, that Sterling and the
banks met all minimum capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the
Federal Deposit Insurance Corporation categorized the banks as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, institutions must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as forth in the following tables. There are no conditions
or events since the notification that management believes have
changed the bank's category.
Sterling's and the banks' actual capital amounts and ratios as of
December 31, 1999 and 1998 are as follows:
Minimum
To Be Well
Capitalized
Under Prompt
Corrective
Minimum Capital Action
Actual Requirement Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 1999
Total capital to risk weighted
assets:
Sterling (consolidated).........$ 97,667 11.1% $ 70,091 8.0% $ n/a n/a
Bank of Lancaster County, N.A.... 86,276 10.5% 65,882 8.0% 82,353 10.0%
First National Bank of Northeast. 8,481 14.5% 4,677 8.0% 5,846 10.0%
Tier 1 capital to risk weighted
assets:
Sterling (consolidated).........$ 89,491 10.2% $ 35,045 4.0% $ n/a n/a
Bank of Lancaster County, N.A.... 78,537 9.5% 32,941 4.0% 49,412 6.0%
First National Bank of Northeast. 8,046 13.8% 2,338 4.0% 3,507 6.0%
Tier 1 capital to average assets:
Sterling (consolidated).........$ 89,491 8.5% $ 42,293 4.0% $ n/a n/a
Bank of Lancaster County, N.A.... 78,537 8.1% 38,773 4.0% 48,466 5.0%
First National Bank of Northeast. 8,046 9.2% 3,491 4.0% 4,364 5.0%
December 31, 1998
Total capital to risk weighted
assets:
Sterling (consolidated).........$ 90,311 11.5% $ 63,079 8.0% $ n/a n/a
Bank of Lancaster County, N.A.... 80,148 11.2% 57,004 8.0% 71,255 10.0%
First National Bank of Northeast. 7,368 13.7% 4,292 8.0% 5,365 10.0%
Tier 1 capital to risk weighted
assets:
Sterling (consolidated).........$ 80,619 10.2% $ 31,539 4.0% $ n/a n/a
Bank of Lancaster County, N.A.... 70,908 10.0% 28,502 4.0% 42,753 6.0%
First National Bank of Northeast. 6,916 12.9% 2,146 4.0% 3,219 6.0%
Tier 1 capital to average assets:
Sterling (consolidated).........$ 80,619 8.3% $ 39,032 4.0% $ n/a n/a
Bank of Lancaster County, N.A.... 70,907 7.9% 35,792 4.0% 44,740 5.0%
First National Bank of Northeast. 6,916 8.6% 3,230 4.0% 4,038 5.0%
Note 16 - Pension and Employee Stock Bonus Plan
The Bank of Lancaster County, N.A. and its subsidiary, Town & Country,
Inc. maintains a qualified non-contributory pension plan for
their employees. The plan specifies fixed benefits to provide a
monthly pension benefit at age 65 for life equal to one and one-half
percent of each participant's final average salary (highest five
consecutive years' base compensation preceding retirement) for each year
of credited service. Salary in excess of $160,000 is disregarded
in determining a participant's retirement benefit pursuant to IRS
regulations. All employees with one year of service
who work at least 1,000 hours per year and who are at least age 21
are eligible to participate. A participant becomes 100% vested
upon completion of five years with a vesting credit.
The following represents the components of net periodic benefit cost
for the years ended December 31,1999, 1998 and 1997:
1999 1998 1997
Service cost......................................$ 683 $ 639 $ 583
Interest cost..................................... 698 672 608
Actual return on assets...........................(1,287) (918) (2,208)
Amortization of unrecognized net transition asset. (69) (69) (69)
Amortization of unrecognized prior service cost... (8) (9) (9)
Asset gain or (loss) deferred .................... 294 (44) 1,429
------ ------ ------
Net periodic benefit cost.........................$ 311 $ 271 $ 334
====== ====== ======
The following table sets forth the plan's change in benefit obligation,
change in plan assets and funded status at December 31, 1999 and 1998:
Change in Benefit Obligation: 1999 1998
Benefit obligation at beginning of year..................$ 10,864 $ 9,670
Service cost............................................. 683 639
Interest cost ........................................... 698 672
Actuarial (gain) or loss................................. (855) 205
Benefits paid............................................ (495) (322)
------- -------
Benefit obligation at end of year........................ 10,895 10,864
------- -------
Change in Plan Assets:
Fair value of plan assets at beginning of year........... 11,150 10,554
Actual return on plan assets............................. 1,287 918
Employer contribution ................................... 726 none
Benefits paid ........................................... (495) (322)
------- -------
Fair value of plan assets at end of year ................ 12,668 11,150
------- -------
Funded status ........................................... 1,773 286
Unrecognized net (gain) or loss ......................... (1,594) (445)
Unrecognized net transition (asset) or obligation ....... --- (69)
Unrecognized prior service cost ......................... (94) (102)
------- -------
Prepaid (accrued) benefit cost .......................... $ 85 $ (330)
======= =======
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation for 1999 and 1998 are as follows:
Weighted-Average Assumptions as of December 31: 1999 1998
Discount rate........................................ 7.00% 6.50%
Expected return on plan assets....................... 9.00% 9.00%
Rate of compensation increase........................ 4.50% 4.00%
Additionally, Bank of Lancaster County maintains an Employee Stock Plan
with 401(k) provisions. All employees of the bank who have
attained the age of 18, have completed one year of service and
worked at least 1,000 hours per year are eligible to participate
in the plan. Employees of Town & Country, Inc., a wholly-owned subsidiary
of the bank, participate only in the salary deferral feature of the plan.
The plan has two components, a salary deferral feature and a performance
feature. Under the salary deferral feature of the plan, a participant may make
voluntary contributions to the plan each year of between 2% and 10% of
compensation. The bank will make a matching contribution equal to 25% of each
participant's voluntary contributions, up to the first 6%. Under the
performance incentive feature of the plan, the bank contributes to the
plan each year an amount determined by the Board of Directors on
the basis of the achievement by the bank of certain performance objectives.
Contributions made by the bank to the plan pursuant to the performance
incentive feature are allocated to participants in the same proportion
that each participant's compensation bears to the aggregate compensation
of all participants.
The matching contributions and the performance incentive feature are
invested in Sterling's common stock. The number of shares owned by the E
mployees Stock Plan at December 31, 1999 was 677,162 with an
approximate market value of $20,992,000. All dividends received on
Sterling common stock are reinvested in additional shares. The amount
of dividends received during 1999 amounted to $483,000.
Bank contributions to the plan vest in each participant's account at the
rate of 20% for each year of service. Normally, benefits may be paid from the
plan on retirement, termination, disability or death. Participants in the plan
may withdraw their own contributions earlier under several restricted conditions
of hardship with approval of the Plan Committee. The plan provides that each
participant may vote the shares in his or her account through the Plan Trustee
at any shareholder meeting. The Bank of Lancaster County Trust
Department serves as Trustee for the plan.
The contribution to the performance incentive portion of the plan was
$298,000, $273,000 and $245,000 for the years ended December 31, 1999, 1998 and
1997. The contribution to the salary deferral portion of the plan was $129,000
in 1999, $120,000 in 1998 and $101,000 in 1997.
Sterling also provides certain health care insurance benefits for retired
employees who have attained the age of 60 and have completed 10 years of full
time or limited benefits employment. The cost for these postretirement benefits
consisted of the following components for the years ended December 31, 1999,
1998 and 1997:
1999 1998 1997
Service cost...................................... $ 61 $ 70 $ 77
Interest cost..................................... 75 84 86
Amortization of unrecognized net
transition obligation.......................... 51 51 51
Amortization of unrecognized prior service cost... (19) (19) (19)
Amortization of unrecognized net gain............. (24) (16) (4)
---- ---- ----
Net periodic benefit cost......................... $144 $170 $191
==== ==== ====
Sterling's postretirement benefits are currently not funded. The status of
the plans at December 31, 1999 and 1998 is as follows:
Change in Benefit Obligation: 1999 1998
Benefit obligation at beginning of year...$ 1,180 $ 1,219
Service cost ............................. 61 70
Interest cost ............................ 75 84
Actuarial (gain) or loss ................. (114) (158)
Benefits paid ............................ (38) (35)
----- -----
Benefit obligation at end of year ........ 1,164 1,180
----- -----
Change in Plan Assets:
Fair value of plan assets at beginning of
year ................................... --- ---
Actual return on plan assets ............. --- ---
Employer contribution .................... 38 35
Benefits paid ............................ (38) (35)
----- -----
Fair value of plan assets at end of year.. --- ---
----- -----
Funded Status ............................ (1,164) (1,180)
Unrecognized net gain..................... (547) (457)
Unrecognized net transition obligation.... 667 719
Unrecognized prior service cost........... (193) (213)
----- -----
Accrued benefit cost......................$(1,237) $(1,131)
===== =====
Weighted-Average Assumptions as of
December 31:
Discount rate............................ 7.00% 6.50%
The health care cost trend rate assumption has a significant effect on the
amounts reported. The following table reflects the effect of a 1-percentage-
point increase and a 1-percentage-point decrease in the health care cost trend
rates:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and
interest cost components...................... $ 30 $ 23
Effect on postretirement benefit obligation ..... 199 159
The Bank of Lancaster County also maintains a Retirement Restoration Plan
for any officer whose compensation exceeded $160,000. The plan was designed to
"restore" the level of benefits which is lost to these employees under the
organization's qualified retirement plans because of Internal Revenue Code
restrictions.
The plan is designed to mirror the provisions set forth in the qualified
retirement plans available to all Bank of Lancaster County employees, which are
the defined benefit pension plan and the employee stock or 401(k) plan. The
plan allows for the calculation of benefits on the officer's
salary in excess of $160,000. The Retirement Restoration
Plan is not currently funded.
The net periodic pension cost for the Retirement Restoration Plan for the
years ended December 31, 1999, 1998 and 1997 included the following:
1999 1998 1997
Service cost................................. $ 14 $ 13 $ 13
Interest cost................................ 16 15 15
Amortization of unrecognized prior service
cost ...................................... 20 20 20
----- ----- -----
Net periodic benefit cost.................... $ 50 $ 48 $ 48
===== ===== =====
The following table sets forth the change in benefit obligation, change in
plan assets and funded status for the Retirement Restoration Plan at
December 31, 1999 and 1998.
Change in Benefit Obligation: 1999 1998
Benefit obligation at beginning of year............ $ 244 $ 216
Service cost ...................................... 14 13
Interest cost ..................................... 16 15
Actuarial (gain) or loss .......................... 2 ---
Benefits paid ..................................... --- ---
---- ----
Benefit obligation at end of year ................. 276 244
---- ----
Fair value of plan assets at end of year........... --- ---
---- ----
Fund Status ....................................... (276) (244)
Unrecognized net gain ............................. (6) (8)
Unrecognized prior service cost ................... 107 126
---- ----
Accrued benefit cost .............................. $(175) $(126)
==== ====
Weighted-Average Assumptions as of
December 31:
Discount rate .................................... 7.00% 6.50%
Expected return on plan assets ................... 9.00% 9.00%
Rate of compensation increase .................... 4.50% 4.00%
The First National Bank of Northeast maintains its own Employee Stock
Ownership Plan with 401(k) Provisions (KSOP). The plan covers employees who
meet the eligibility requirements of having worked 1000 hours in a
plan year and have attained the age of 18. Under the Plan, participants are
permitted to contribute up to 15% of their compensation. The Bank will
match 50% of the participant's contribution up to a maximum 6% of
compensation. Additionally, the Bank will make basic contributions
for all participants and make additional discretionary
contributions determined by the Board of Directors. Employer contributions vest
ratably over six years.
Total expense related to First National's KSOP totaled $78,000, $82,000 and
$82,000 for the years ended December 31, 1999, 1998 and 1997. The number of
shares of Sterling's common stock owned by First National's KSOP was 69,210,
with an approximate market value of $2,146,000. All dividends received
in Sterling's common stock are reinvested in additional
shares. The amount of dividends received during 1999 totaled $36,000.
Note 17 - Stock Compensation
Sterling adopted a stock incentive plan whose stated purpose is to advance
the development, growth and financial condition of the corporation. The Stock
Incentive Plan provides an opportunity for employees to purchase shares of the
corporation's common stock at a grant price established by market conditions on
the date of the grant. The shares of common stock that may be issued under the
Stock Incentive Plan shall not exceed in the aggregate 656,250 shares of common
stock.
The Stock Incentive Plan is administered by a disinterested committee of
the corporation's Board of Directors. Incentive awards can be made in
the form of incentive stock options, nonqualified stock options,
stock appreciation rights or restricted stock as the disinterested
committee deems appropriate. The exercise price of each option equals
the market price of Sterling's stock on the date of grant and an
option's maximum term is ten years.
Sterling applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
employee stock options. Accordingly, no compensation has been recognized. Had
compensation cost for Sterling's Stock Incentive Plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB Statement No. 123, net income and earnings per share
would have been adjusted to the proforma amounts indicated below for the years
ended December 31, 1999, 1998 and 1997:
Net Income: 1999 1998 1997
As reported ................................ $13,239 $12,342 $11,156
Proforma ................................... 12,845 12,216 11,083
Basic and diluted earnings per share:
As reported ................................ $ 1.48 $ 1.38 $ 1.24
Proforma ................................... 1.44 1.37 1.23
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1999 1998 1997
Dividend Yield .......................... 2.39% 2.01% 2.53%
Risk-Free Interest Rate ................. 6.45% 4.58% 5.78%
Expected Life ........................... 10 years 10 years 10 years
Expected Volatility ..................... 26.11% 26.61% 12.11%
A summary of the status of Sterling's stock incentive plan for the years
ended December 31, 1999, 1998 and 1997 is presented below:
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at January 1.... 133,843 $27.17 89,394 $20.47 43,122 $18.51
Granted ...... 82,350 29.00 67,095 33.80 48,241 22.14
Exercised .... (100) 18.51 (5,033) 18.57 --- ----
Forfeited .... (375) 33.80 (17,613) 20.88 (1,969) 18.51
---------- --------- --------
Outstanding at December 31 . 215,718 27.86 133,843 27.17 89,394 20.47
========== ========= ========
Options Exercisable
at December 31............. 76,665 24.10 32,036 19.91 13,716 18.51
Weighted average fair value
of options granted during
period..................... $11.81 $11.08 $6.44
Information pertaining to options outstanding at December 31, 1999 is
as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable Price
$18.51 - $22.14 66,648 7.51 $20.51 54,425 $20.14
$29.00 82,350 9.96 29.00 ---- ---
$33.80 66,720 8.96 33.80 22,240 33.80
Outstanding at --------- --------
end of year 215,718 8.89 $27.86 76,665 $24.10
========= ========
Note 18 - Operating Leases
The subsidiary banks of Sterling leases certain banking facilities under
operating leases which expire on various dates to 2022. Renewal options are
available on these leases. Minimum future rental payments as of December 31,
1999 are as follows:
Operating
Leases
Due in 2000......................... $ 538
Due in 2001......................... 538
Due in 2002......................... 483
Due in 2003......................... 394
Due in 2004......................... 318
Later years......................... 1,481
-------
Total minimum future rental payments $ 3,752
=======
Total rent expense charged to operations amounted to $573,000 in 1999,
$600,000 in 1998 and $587,000 in 1997.
Note 19 - Dividend and Loan Restrictions
The dividends that may be paid by subsidiary banks to Sterling Financial
Corporation are subject to certain legal and regulatory limitations. Under such
limitations, the total amount available for payments of dividends by subsidiary
banks is approximately $12,150,000 plus an additional amount equal to the
subsidiary banks' net profits for 2000, up to the date of any such dividend
declaration.
Note 20 - Commitments and Contingent Liabilities
Sterling is a party to credit related financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Such commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets.
A summary of the more significant commitments as of December 31, 1999 and
1998 are as follows:
Financial instruments whose contract amounts
represent credit risk:
1999 1998
Standby letters of credit ....................$ 21,784 $ 8,042
Commitments to extend credit.................. 177,068 137,330
Standby letters of credit are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements
and are subject to the same risk, credit review and approval process as loans.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. Since many
of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer's creditworthiness is
evaluated on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the customer and generally consists of real estate. Excluded
from these amounts are commitments to extend credit in the form of
check credit or related plans.
Sterling's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. Sterling uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments. The
Bank holds collateral, when deemed necessary, supporting those commitments.
Various legal claims also arise from time to time in the normal course of
business, which in the opinion of management, will have no material effect on
Sterling's consolidated financial statements.
Note 21 - Related Party Transactions
Certain directors and officers of Sterling Financial Corporation and its
subsidiaries, their immediate families and companies in which they are principal
owners (more than 10%), were indebted to the subsidiary banks during 1999 and
1998. All loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and, in the opinion of the management
of the bank, do not involve more than a normal risk of collectibility
or present other unfavorable features. Total loans to these persons
at December 31, 1999 and 1998 amounted to $7,479,000 and $9,798,000.
During 1999, $912,000 of new loans were made and repayments
totaled $3,231,000.
Note 22 - Fair Value of Financial Instruments
The fair vale of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for Sterling's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
FASB Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of Sterling.
The following methods and assumptions were used by Sterling in estimating
fair value disclosures for financial instruments.
Cash and Cash Equivalents: The carrying amounts of cash, due from banks and
federal funds sold approximate fair value.
Interest-bearing deposits in banks: The carrying amounts of
interest-bearing deposits maturing with ninety days approximate their
fair values. Fair values of other interest-bearing deposits are
estimated using discounted cash flows analyses based on current
rates for similar type instruments.
Securities: Fair values for securities are based on quoted market
prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
Mortgage loans held for sale: Fair values of mortgage loans held for sale
are based on commitments on hand from investors or prevailing market prices.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying values.
Fair values for certain homogeneous loans, such as residential mortgages and
other consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. Fair values for other loans (e.g. commercial real estate,
commercial and industrial loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Lease contracts are specifically
exempt from fair value reporting and are not included in this table.
Deposit Liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amount). Fair values for fixed-rate
certificates of deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-term Borrowings: The carrying amounts of short-term borrowings
maturing within ninety days and floating rate short-term borrowings approximate
their fair values. Fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on Sterling's current incremental
borrowing rates for similar types of borrowing arrangements.
Long-term debt: The fair values of Sterling's long-term debt are estimated
using discounted cash flows analyses based on its current incremental borrowings
rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate
fair value.
Off-balance sheet instruments: Fair values for off-balance sheet,
credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing.
The estimated fair values and related carrying or notional amounts of
Sterling's financial instruments at December 31, 1999 and 1998 are as follows:
1999 1998
--------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- --------
Financial Assets:
Cash and cash equivalents............$ 52,924 $ 52,924 $ 70,546 $ 70,546
Interest-bearing deposits in banks.... 1,009 1,005 3,557 3,557
Securities held to maturity........... 52,392 52,099 64,755 66,636
Securities available for sale......... 207,183 207,183 185,953 185,953
Loans and mortgage loans held for sale 582,057 572,622 533,604 538,768
Accrued interest receivable........... 6,847 6,847 6,524 6,524
Financial Liabilities:
Deposits..............................$892,432 $ 891,810 $855,056 $855,056
Short-term borrowings................. 25,000 25,000 1,558 1,558
Long-term borrowings.................. 34,291 33,969 34,103 34,243
Accrued interest payable.............. 4,700 4,700 4,358 4,358
Off-balance sheet credit related
financial instruments:
Commitments to extend credit..........$ (181) $ (181) $ (69) $ (69)
Standby letters of credit............. (137) (137) (72) (72)
Note 23 - Condensed Financial Statements of Parent Company
Financial information pertaining only to Sterling Financial Corporation at
December 31, 1999 and 1998 is as follows:
As of December 31,
1999 1998
Balance Sheets
Assets
Cash.......................................................$ 1,511 $ 1,901
Securities available-for-sale.............................. 681 237
Investment in:
Bank subsidiaries........................................ 87,121 85,350
Nonbank subsidiaries..................................... 1,563 1,561
Other assets............................................... 121 70
-------- -------
Total assets.................................................$ 90,997 $ 89,119
======== ========
Liabilities..................................................$ 979 $ 928
Stockholders' equity......................................... 90,018 88,191
-------- --------
Total liabilities and stockholders' equity...................$ 90,997 $ 89,119
======== ========
Statements of Income
Years Ended December 31,
1999 1998 1997
Income:
Dividends from banking subsidiaries.......$ 5,769 $ 8,289 $ 8,106
Dividends on securities available for sale. 10 6 4
Gain on securities available for sale...... 25 --- 4
Other...................................... 3 4 1
-------- ------- -------
Total income............................. 5,807 8,299 8,115
-------- ------- -------
Operating expenses............................ 508 215 210
Income before income taxes and equity
in undistributed net income -------- ------- -------
of subsidiaries........................... 5,299 8,084 7,905
Income tax benefit............................ (111) (70) (68)
-------- ------- -------
5,410 8,154 7,973
Equity in undistributed income of:
Banking subsidiaries....................... 7,827 4,187 3,183
Other subsidiaries......................... 2 1 ---
-------- ------- -------
Net income....................................$ 13,239 $12,342 $11,156
======== ======= =======
Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
Cash flows from operating activities
Net income........................................$ 13,239 $ 12,342 $ 11,156
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income
of subsidiaries............................... (7,829) (4,188) (3,183)
Gain on sale of securities available for sale.. (25) --- (4)
(Increase) decrease in other assets............ (46) (2) (17)
Increase (decrease) in other liabilities....... 75 (117) (165)
-------- -------- --------
Net cash provided by operating activities.... 5,414 8,035 7,787
-------- -------- --------
Cash flows from investing activities
Purchase of securities available for sale....... (544) --- (9)
Proceeds from sale of securities
available-for sale............................. 37 --- 9
Investment in non-banking subsidiary ........... --- (1,500) ---
-------- -------- --------
Net cash used by investing activities........ (507) (1,500) ---
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of common stock.......... --- 61 ---
Cash dividends on common stock.................. (6,361) (5,697) (5,305)
Cash dividends paid in lieu of fractional shares (32) (40) ---
Acquisition of treasury stock................... --- (2,492) (3,302)
Proceeds from issuance of treasury stock........ 1,096 1,774 1,471
-------- -------- --------
Net cash used in financing activities........ (5,297) (6,394) (7,136)
-------- -------- --------
Increase (decrease) in cash....................... (390) 141 651
Cash
Beginning of year............................... 1,901 1,760 1,109
-------- -------- --------
End of year....................................$ 1,511 $ 1,901 $ 1,760
======== ======== ========
Note 24 - Segment Reporting
Effective January 1, 1998, Sterling adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement 131 established
standards for the way that public business enterprise report information about
operating segments in annual financial statements and requires that those
enterprises report selected 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 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of Statement
131 did not affect results of operations or financial position, but did affect
the disclosure of segment information.
During 1999, Sterling re-evaluated its basis for segmentation to properly
include the acquisition of Northeast Bancorp, Inc. and to more accurately
reflect financial results that are used by the decision makers in
assessing operating performance. Sterling's chief decision makers continue
to primarily assess performance and make operating decisions based
on two operating segments. These segments include 1) providing
community banking and related financial services to
consumers, business and governmental units in the Lancaster County, PA, Cecil
County, MD and surrounding counties; and 2) providing vehicle and equipment
financing alternatives to business primarily located in Pennsylvania, although
assets are located throughout the entire 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 years ended December 31 is as follows:
Community
Banking and
Related Intersegment Consolidated
Services Leasing Eliminations Totals
Year ended
December 31, 1999
Interest income......$ 65,663 $ 6,066 $ (4,015) $ 67,714
Interest expense..... 27,440 6,372 (4,015) 29,797
Provision for loan
losses.............. 330 90 --- 420
Noninterest income... 10,564 18,933 --- 29,497
Noninterest expenses. 31,610 17,221 --- 48,831
Income before taxes.. 16,847 1,316 --- 18,163
Income tax expense... 4,333 591 --- 4,924
Net income........... 12,514 725 --- 13,239
Assets............... 990,979 123,190 (54,795) 1,059,374
Year ended
December 31, 1998
Interest income......$ 64,321 $ 5,237 $ (3,795) $ 65,763
Interest expense..... 28,479 5,531 (3,795) 30,215
Provision for loan
losses.............. 896 60 --- 956
Noninterest income... 11,060 16,385 (252) 27,193
Noninterest expenses. 30,353 15,149 (252) 45,250
Income before taxes.. 15,653 882 --- 16,535
Income tax expense... 3,797 396 --- 4,193
Net income........... 11,856 486 --- 12,342
Assets............... 951,482 102,382 (55,982) 997,882
Year ended
December 31, 1997
Interest income......$ 59,768 $ 5,023 $ (3,007) $ 61,784
Interest expense..... 25,226 5,119 (3,007) 27,338
Provision for loan
losses.............. 1,093 36 --- 1,129
Noninterest income... 8,922 14,258 (252) 22,928
Noninterest expenses. 28,415 12,957 (252) 41,120
Income before taxes.. 13,956 1,169 --- 15,125
Income tax expense... 3,442 527 --- 3,969
Net income........... 10,514 642 --- 11,156
Assets............... 872,964 85,027 (42,818) 915,173
Note 25 - Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998. Per share information properly
reflects all stock dividends that have been paid in 1999 and 1998.
Three Months Ended
December September June March
31 30 30 31
1999
Interest and dividend income....$ 17,540 $ 17,233 $ 16,646 $ 16,295
Interest expense................ 7,967 7,533 7,139 7,158
Provision for loan losses....... 38 142 88 152
Securities gains................ 255 50 325 200
Noninterest income.............. 7,534 7,102 7,044 6,987
Noninterest expense............. 12,931 12,112 12,018 11,770
Income before income taxes...... 4,393 4,598 4,770 4,402
Income tax expense.............. 1,226 1,374 1,206 1,118
Net income...................... 3,167 3,224 3,564 3,284
Per share information:
Basic and diluted earnings
per share....................$ .35 $ .36 $ .40 $ .37
Dividends declared............. .185 .184 .176 .176
1998
Interest and dividend income....$ 16,451 $ 16,667 $ 16,534 $ 16,111
Interest expense................ 7,471 7,793 7,587 7,364
Provision for loan losses....... 15 205 361 375
Securities gains................ --- --- --- ---
Noninterest income.............. 6,497 6,751 7,582 6,363
Noninterest expense............. 11,709 11,413 11,458 10,670
Income before income taxes...... 3,753 4,007 4,710 4,065
Income tax expense.............. 884 1,000 1,263 1,046
Net income...................... 2,869 3,007 3,447 3,019
Per share information:
Basic and diluted earnings
per share....................$ .32 $ .33 $ .39 $ .34
Dividends declared............. .168 .168 .168 .160
The quarterly information presented above differs from amounts previously
reported due to the restatement of prior financial information as more fully
discussed in Note 2.
Note 26 - Subsequent Event
On January 25, 2000, Sterling signed a definitive agreement to merge with
Hanover Bancorp, Inc., a commercial bank holding company with total assets of
$504 million, headquartered in Hanover, Pennsylvania. Under the terms of the
agreement, each Hanover shareholder will receive .93 shares of Sterling's common
stock for each Hanover share outstanding (subject to possible adjustment under
certain circumstances). This transaction will be accounted for under the
pooling-of-interests method of accounting and is subject to regulatory and
stockholder approvals. The merger is expected to be consummated in the second
quarter of 2000.
The following table provides a summary of consolidated operating results and
financial condition on a proforma basis as of and for the year ended December
31, 1999:
Sterling Sterling
(As reported) Hanover (Proforma)
Net interest income...........$ 37,917 $ 16,092 $ 54,009
Net income.................... 13,239 4,746 17,985
Total assets.................. 1,059,374 503,924 1,563,298
Total stockholders' equity.... 90,018 32,748 122,766
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Incorporated by reference is the information appearing in the Corporation's
Current Report on Form 8-K dated November 8, 1999.
PART III
Item 10 - Directors and Executive Officers of the Registrant
Incorporated by reference is the information appearing under the headings
"Information about Nominees and Continuing Directors" and "Executive
Officers" in the 2000 Annual Meeting Proxy Statement.
Item 11 - Executive Compensation
Incorporated by reference is the information under the headings
"Sterling Financial Corporation Directors' Compensation" and "Executive
Compensation" in the 2000 Annual Meeting Proxy Statement.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference is the information appearing under the headings
"Principal Holders" and "Beneficial Ownership of Executive Officers, Directors
and Nominees" in the 2000 Annual Meeting Proxy Statement.
Item 13 - Certain Relationships and Related Transactions
Incorporated by reference is the information appearing under the heading
"Transactions with Directors and Executive Officers" in the 2000 Annual Meeting
Proxy Statement and under "Notes to Consolidated Financial Statements - Note
21 - Related Party Transactions" located elsewhere in this Form 10-K.
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports of Form 8-K
(a) The following documents are filed as part of this report:
1. The financial statements listed on the index set forth in Item 8 of
this Annual Report on Form 10-K are filed as part of this Annual
Report.
2. Financial Statement Schedules
All schedules are omitted because they are not either applicable, the
data are not significant or the required information is shown in the
financial statements or the notes thereto or elsewhere herein.
3. 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 Annual 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 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 March 7, 1996.)
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.)
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.)
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 8 at Notes to Consolidated Financial
Statements, Note 1.)
21 Subsidiaries of the Registrant
23 Consent of Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated November 4, 1999, was filed November 8,
1999 pursuant to Item 4, Changes in Registrant's Certifying Accountant and
Item 7 on Form 8-K filing, as Exhibit 16, a copy of Trout, Ebersole &
Groff, LLP's letter directed to the Securities and Exchange
Commission regarding their dismissal as the registrant's principal
accountants.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
By:
John E. Stefan
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Title Date
Chairman of the Board,
President and Chief March 28, 2000
(John E. Stefan) Executive Officer; Director
Senior Executive Vice President, March 28, 2000
(J. Roger Moyer, Jr.) Assistant Secretary, Director
Executive Vice President/Treasurer, March 28, 2000
(Jere L. Obetz) Chief Financial Officer
Vice President/Secretary, March 28, 2000
(Ronald L. Bowman) Principal Accounting Officer
Director March 28, 2000
(Richard H. Albright, Jr.)
Director March 28, 2000
(S. Amy Argudo)
Director March 28, 2000
(Robert H. Caldwell)
Director March 28, 2000
(Howard E. Groff, Jr.)
Director March 28, 2000
(Joan R. Henderson)
Director, Vice Chairman of the March 28, 2000
(J. Robert Hess) Board
Director March 28, 2000
(Calvin G. High)
Director March 28, 2000
(David E. Hosler)
Director March 28, 2000
(E. Glenn Nauman)
Director March 28, 2000
(W. Garth Sprecher)
Director March 28, 2000
(Glenn R. Walz)
Exhibit Index
Page
Exhibits Required Pursuant to (in accordance with
Item 601 of Regulation S-K sequential numbering system)
3. 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 Annual 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 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
March 7, 1996.)
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.)
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.)
10c Sterling Financial Corporation 1996 Stock
Incentive Plan. (Incorporated by reference
to Exhibit 4.3 of 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 8 at Notes to
Consolidated Financial Statements, Note 1.)
21 Subsidiaries of the Registrant 94
23 Consent of Auditors 95
27 Financial Data Schedule 97
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
1 East Main Street (National Banking Association)
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
Sterling Mortgage Services, Inc. Pennsylvania
(Presently inactive)
101 North Pointe Boulevard
Lancaster, PA 17601-4133
T & C Leasing, Inc. Pennsylvania
1097 Commercial Avenue
East Petersburg, PA 17520
Northeast Bancorp, Inc. Delaware
14 South Main Street
North East, MD 21901
The First National Bank of North East Maryland
(Wholly owned subsidiary of
Northeast Bancorp, Inc.)
14 South Main Street
North East, MD 21901
Exhibit 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference in Sterling Financial
Corporation's Registration Statements on Form S-3 (No. 33-55131) and Form S-8
(No. 333-28101 and 333-28065) of our report dated January 20, 2000, except for
Note 26 as to which the date is January 25, 2000, on the consolidated financial
statements of Sterling Financial Corporation for the year ended December 31,
1999 as set forth in this form 10-K.
/s/ Trout, Ebersole & Groff, LLP
Lancaster, Pennsylvania
March 23, 2000
Exhibit 23.1
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference in Sterling Financial
Corporation's Registration Statements on Form S-3 (No. 33-55131) and Form S-8
(No. 333-28101 and No. 333-28065) of our report dated January 15, 1999, with
respect to the consolidated statement of condition of Northeast Bancorp, Inc.
and subsidiary as of December 31, 1998, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the years in the two-year period ended December 31, 1998.
/s/ Whisman, Grygiel & Giordano, P.A.
Wilmington, Delaware
March 23, 2000