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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, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _______________
COMMISSION FILE NUMBER 0-16276
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STERLING FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2449551
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 NORTH POINTE BOULEVARD
LANCASTER, PENNSYLVANIA 17601-4133
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 581-6030
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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
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(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
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant at February 28, 2001 was approximately $188,460,000.
The number of shares of Registrant's Common Stock outstanding on February
28, 2001 was 12,546,663.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2001 Proxy Statement for the Registrant are incorporated
by reference into Part III of this report.
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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.................................... 43
Item 8. Financial Statements and Supplementary Data.......... 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 80
PART III
Item 10. Directors and Executive Officers of the Registrant... 81
Item 11. Executive Compensation............................... 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 81
Item 13. Certain Relationships and Related Transactions....... 81
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 82
Signatures...................................................... 84
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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 wholly-owned subsidiaries, Bank of
Lancaster County, N.A., First National Bank of North East, Bank of Hanover and
Trust Company, HOVB Investment Company, 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 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 this
report. These risk factors include the following:
- operating, legal and regulatory risks;
- economic, political and competitive forces affecting our banking,
leasing, securities, asset management and credit service businesses;
- the risk that our analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them could
be unsuccessful; and
- the success of our merger of Hanover Bancorp, Inc.
Sterling undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents Sterling files periodically with the Securities and
Exchange Commission, including Quarterly Reports on Form 10-Q 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 when it acquired 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., First
National Bank of North East and Bank of Hanover and Trust Company. Sterling
operates 49 banking locations in south central Pennsylvania and northern
Maryland through its subsidiary banks.
Sterling's major source of operating funds is dividends that it receives
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from its subsidiary banks. Sterling's expenses consist principally of operating
expenses. Dividends that Sterling pays to shareholders 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 First National Bank of North East, based in
North East, Maryland. In 2000, Northeast Bancorp, Inc. was liquidated and First
National Bank of North East became a wholly-owned subsidiary of Sterling.
On July 27, 2000, Sterling consummated the merger with Hanover Bancorp,
Inc., parent company of Bank of Hanover and Trust Company, headquartered in
Hanover, York County, Pennsylvania and HOVB Investment Company. Bank of Hanover
and Trust Company and HOVB Investment Company became wholly-owned subsidiaries
of Sterling.
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.
Bank of Lancaster County, N.A. is a full service commercial bank
operating under charter from the Office of the Comptroller of the Currency. On
July 29, 1863, the Office of 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, 2000, the bank had total assets of $1,071,000,000 and total deposits of
$895,000,000.
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, one (1) branch in Chester County, Pennsylvania and one (1)
branch in Lebanon County, Pennsylvania in operation at December 31, 2000. The
branch located in Lebanon County trades as Bank of Lebanon County.
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
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spectrum of personal and commercial lending activities. The bank can offer a
variety of collection and international services through correspondent
relationships with banks located in major cities in the United States.
The Bank of Lancaster County 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 Office of 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
$659.8 million at December 31, 2000.
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 60 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 466,000 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 livestock. 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 2000 with the second lowest unemployment rate in
Pennsylvania. The unemployment rate of the county in December 2000 was 2.7%
which was significantly lower than the statewide rate of 4.4% and national rate
of 4.0%. Lancaster County's unemployment rate of 2.7% continued to trail only
State College among the 14 metropolitan areas in Pennsylvania. Lancaster
County's jobless rate has been 3.0% or lower for 37 consecutive months.
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The bank is not dependent upon a single customer or a small number of
customers, the loss of which would have a material adverse effect on the bank.
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 Office
of the Comptroller of the Currency. The bank's deposits are insured by the
Federal Deposit Insurance Corporation, as provided by law.
First National Bank of North East
On June 15, 1999, Sterling Financial Corporation acquired Northeast
Bancorp, Inc., which was the parent company of First National Bank of North
East, North East, Maryland. Under the terms of the agreement, Northeast Bancorp
shareholders received two shares of Sterling's 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. In 2000,
Northeast Bancorp was liquidated and First National Bank of North East became a
wholly-owned subsidiary of Sterling.
On December 12, 1903, the Office of the Comptroller of the Currency
authorized 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, 2000, the bank had total assets of
nearly $93.0 million and total deposits of $82.5 million.
The bank offers a wide variety of banking services to all segments of its
service area. These include demand, savings and time deposit services, money
market accounts, and safe deposit boxes. The bank's lending services include
commercial, construction loans, residential mortgage loans and installment and
other personal loans.
The bank is not dependent upon a single customer or a small number of
customers, the loss of which would have a material adverse effect on the bank.
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 Office
of the Comptroller of the Currency. The bank's deposits are insured by the
Federal Deposit Insurance Corporation, as provided by law.
Bank of Hanover and Trust Company
On July 27, 2000, Sterling consummated the merger with Hanover Bancorp,
Inc., parent company of Bank of Hanover and Trust Company. Bank of Hanover
became a wholly-owned subsidiary of Sterling.
Bank of Hanover and Trust Company was first organized in 1835 under the
laws of the Commonwealth of Pennsylvania. The bank conducts its business
principally through fourteen banking offices located in York and Adams Counties,
Pennsylvania and one office located in Westminster, Maryland. At December 31,
2000, the bank had total assets of $550 million and total deposits of $444
million.
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The bank offers a wide variety of banking services to all segments of its
service area. The bank's lending services include commercial, financial and
agricultural revolving lines of credit and term loans, construction loans,
residential mortgage loans and installment and other personal loans. The bank's
deposit services include commercial and personal checking accounts, savings,
time deposits and safety deposit services. The bank is also a member of the MAC
system and offers automated teller machine service at all of its full service
offices, as well as at 8 remote service locations in Hanover, York, Dover, East
Berlin and Carlisle.
Individual trust and investment services offered by the bank include the
administration of estates, trust and agency accounts. Corporate trust services
include acting as trustee for employee benefit plans.
The bank is not dependent upon a single customer or a small number of
customers, the loss of which would have a material adverse effect on the bank.
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 Federal
Deposit Insurance Corporation and Pennsylvania Department of Banking. The bank's
deposits are insured by the Federal Deposit Insurance Corporation, as provided
by law.
HOVB Investment Company
HOVB Investment Company, now a wholly-owned subsidiary of Sterling, was
incorporated in Delaware in 1999, was acquired in the Hanover transaction on
July, 27, 2000. Its principal activity is the holding and investing in equity
securities.
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
competing financial institutions exceed $15 billion in assets while one is in
excess of $253 billion in assets. The increased competition has resulted from a
changing legal and regulatory climate, as well as from the economic climate.
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SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION
Sterling Financial Corporation is 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 corporation
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.
In addition, 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;
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- 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;
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- 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, the Gramm-Leach-Bliley Act of 1999, the Financial
Services Modernization Act, was signed into law, that 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;
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- 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 determined it will seek an election to become a financial holding company
during 2001.
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 capital 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.
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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
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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
insured institution is considered "well capitalized," "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 its subsidiary banks, at
December 31, 2000, 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, the FDIC,
and the Pennsylvania Department of Banking.
The Office of the Comptroller of the Currency, which has primary
supervisory authority over national 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 national 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.
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The FDIC and the Pennsylvania Department of Banking regulates and
examines Pennsylvania state chartered banks in much the same way as the Office
of the Comptroller of the Currency regulates and examines national banks.
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 national 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 Pennsylvania statutes, state chartered
banks are restricted, unless prior regulatory approval is obtained, in the
amount of dividends which it may declare in relation to its accumulated profits,
less any required transfer to surplus. These restrictions have not had, nor are
they expected to have any impact on the corporation's dividend policy. Under the
Federal Deposit Insurance Corporation Insurance Act of 1991, 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 requirement.
A subsidiary bank of a bank holding company, such as Bank of Lancaster
County, First National Bank of North East, and Bank of Hanover 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.
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15
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.
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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.
Management cannot predict whether any of this legislation will have a material
effect on the business of Sterling.
EMPLOYEES
As of December 31, 2000, there were 456 persons employed by the Bank of
Lancaster County, of which 356 were full-time and 100 were part-time employees.
The First National Bank of North East had 47 persons employed at December 31,
2000, of which 41 were full-time and 6 were part-time, while Bank of Hanover had
222 employees, of which 185 were full-time and 37 part-time. Town & Country,
Inc. employed 60 persons.
ITEM 2 - PROPERTIES
Sterling Financial Corporation owns no real estate.
The Bank of Lancaster County, in addition to its main office, had a
branch network of 30 offices and 4 off-site electronic MAC/ATM installations at
December 31, 2000. All branches are located in Lancaster County with the
exception of one office located in Chester County and one office located in
Lebanon County. Branches at 20 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 2000, 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
support groups for the subsidiary banks. Town & Country, Inc. also occupies this
building. At December 31, 2000, approximately 28,438 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.
In addition to its main office located at 14 South Main Street, North
East, Maryland, First National Bank of North East operated three additional
branches at December 31, 2000. All branches are located in Cecil County. All
properties are owned in fee by the bank, free and clear of encumbrances.
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In addition to its main office located at 25 Carlisle Street, Hanover,
Pennsylvania, Bank of Hanover operated thirteen branches located in York and
Adams Counties, Pennsylvania with one branch located in Westminster, Maryland.
Branches at 7 locations are occupied under leases. All other properties were
owned in fee. All real estate and buildings owned by the Bank of Hanover are
free and clear of encumbrances.
The Bank of Hanover's leases expire intermittently over the years through
2021 and most are subject to one or more renewal options. During 2000, aggregate
annual rentals for real estate paid did not exceed 3% of the bank's operating
expenses.
ITEM 3 - LEGAL PROCEEDINGS
As of December 31, 2000, 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 2000.
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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 at December 31, 2000, and 12,546,477 shares outstanding. As of
December 31, 2000, Sterling had approximately 4,730 stockholders of record.
There is no other class of stock authorized or outstanding. Dividends are
restated to give effect to a 5-for-4 stock split, effected in the form of a 25%
stock dividend, paid in November 1999. Sterling is restricted as to the amount
of dividends that it can pay to stockholders by virtue of the restrictions on
the subsidiaries' ability to pay dividends to Sterling.
The following table reflects the quarterly high and low prices of
Sterling'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-for-4 stock split, effected in the form of a
25% stock dividend, paid in November 1999.
Price Range Per Share Per Share
2000 High Low Dividend
---- ---- --- --------
First Quarter $30.50 $16.56 $.185
Second Quarter 20.88 12.25 .185
Third Quarter 19.69 14.19 .190
Fourth Quarter 19.13 15.00 .190
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
Sterling 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.
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ITEM 6 - SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------ ------------ --------------
( Dollars in thousands, except per share data)
SUMMARIES OF INCOME
Results of Operations:
Interest income $ 113,319 $ 101,626 $ 97,054 $ 89,960 $ 82,950
Interest expense 58,501 47,404 45,938 41,136 36,929
------------- ------------- ------------ ------------ ------------
Net interest income 54,818 54,222 51,116 48,824 46,021
Provision for loan losses 605 1,060 2,016 2,039 1,020
Net interest income after ------------- ------------- ------------ ------------ ------------
provision for loan losses 54,213 53,162 49,100 46,785 45,001
Noninterest income 37,508 33,539 31,698 26,187 22,078
Noninterest expenses 70,203 62,459 58,534 52,669 48,206
------------- ------------- ------------ ------------ ------------
Income before income taxes 21,518 24,242 22,264 20,303 18,873
Applicable income taxes 4,951 6,257 5,670 5,340 4,786
------------- ------------- ------------ ------------ ------------
NET INCOME $ 16,567 $ 17,985 $ 16,594 $ 14,963 $ 14,087
============= ============= ============ ============ ============
OPERATING INCOME (1) $ 18,831 $ 18,359 $ 16,594 $ 14,963 $ 14,087
============= ============= ============ ============ ============
FINANCIAL CONDITION AT YEAR END
Assets $1,726,138 $1,556,323 $1,466,105 $1,319,648 $1,183,739
Loans, net 1,021,499 946,583 867,264 831,429 762,470
Deposits 1,420,300 1,288,814 1,218,978 1,113,248 1,004,256
Borrowed money 139,506 125,997 98,688 73,197 57,475
Stockholder's equity 139,347 122,760 125,129 114,776 107,116
PER COMMON SHARE DATA
Earnings per share - basic $ 1.32 $ 1.43 $ 1.32 $ 1.18 $ 1.10
Earnings per share - diluted 1.32 1.43 1.31 1.18 1.09
Operating earnings per share - basic (1) 1.50 1.46 1.32 1.18 1.10
Operating earnings per share - diluted (1) 1.50 1.46 1.31 1.18 1.09
Cash dividends declared 0.750 0.721 0.664 0.625 0.550
Book value 11.11 9.79 9.96 9.14 8.40
Realized book value (3) 10.91 10.30 9.49 8.78 8.24
Weighted average number of
common shares:
Basic 12,545 12,559 12,581 12,654 12,855
Diluted 12,557 12,620 12,645 12,671 12,869
Dividend payout ratio (2) 56.8% 50.4% 50.3% 53.0% 50.0%
PROFITABILITY RATIOS ON EARNINGS
Return on average assets 1.02% 1.19% 1.20% 1.21% 1.23%
Return on average equity 12.99% 14.43% 13.76% 13.48% 13.37%
Average equity to average assets 7.83% 8.23% 8.73% 8.97% 9.20%
PROFITABILITY RATIOS ON OPERATING EARNINGS (1)
Return on average assets 1.16% 1.21% 1.20% 1.21% 1.23%
Return on average equity 14.77% 14.73% 13.76% 13.48% 13.37%
SELECTED ASSET QUALITY RATIOS
Nonperforming loans to total loans 0.59% 0.38% 0.51% 0.64% 0.31%
Net charge-offs to average loans
outstanding 0.08% 0.07% 0.18% 0.20% 0.12%
Allowance for loan losses to total loans 1.13% 1.24% 1.31% 1.31% 1.38%
Allowance for loan losses to
nonperforming loans 192.1% 328.6% 255.2% 204.1% 455.9%
(1) Excludes merger and restructuring charges, net of tax, of $2,264 and $374
for the years ended December 31, 2000 and 1999.
(2) Calculated by taking dividends per share divided by basic earnings per
share.
(3) Excluding unrealized gain (loss) on securities available for sale.
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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 wholly-owned subsidiaries, Bank of Lancaster County, N.A.
and its wholly-owned subsidiary, Town & County, Inc., T & C Leasing, Inc., The
First National Bank of North East, Bank of Hanover and Trust Company, HOVB
Investment Co. 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, 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 report, could affect the future financial results of Sterling
and its subsidiaries, both individually and collectively, and could cause those
results to differ materially from those expressed in this report. These factors
include the following:
- operating, legal and regulatory risks;
- economic, political and competitive forces affecting our banking,
leasing, securities, asset management and credit services businesses;
- the risk that our analysis of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful; and
- the success of our merger of Hanover Bancorp, Inc.
Sterling undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in other documents Sterling files periodically with the Securities and
Exchange Commission, including Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
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 noninterest 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.
One of the greatest external influences that impacts financial
institutions is the interest rate environment. Beginning in the latter half of
1999, which continued through 2000, the Federal Reserve incrementally raised
interest rates. At December 1999, the prime lending rate stood at 8.50%. This
rate was increased three times during 2000, including 25 basis
20
21
points in February and March, and 50 basis points in May. As a result, the prime
lending rate increased 100 basis points during 2000 and finished the year at
9.50%. The rising interest rate environment dictated by the Federal Reserve had
an immediate impact on increasing funding costs and compressing the net interest
margin. Management recognizes that asset/liability management, including the
effect of rate changes on interest earning assets and interest bearing
liabilities, remains a critical responsibility in ensuring continuing
profitability of the corporation.
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
(All dollar amounts presented within tables are in thousands, except per share
data.)
OVERVIEW
Sterling's net income totaled $16,567,000, or $1.32 per diluted share,
compared to $17,985,000, or $1.43 per diluted share in 1999, and $16,594,000 or
$1.31 per diluted share in 1998. Included in reported net income for 2000 were
after-tax merger related restructuring charges of $2,264,000 in 2000 and
$374,000 in 1999. These amounts reduced diluted earnings per share by $.18 in
2000 and $.03 in 1999.
Returns on average equity, excluding merger related and restructuring
charges, were 14.77% in 2000, 14.73% in 1999, and 13.76% in 1998. Returns on
average assets, excluding merger related and restructuring charges, totaled
1.16% in 2000, 1.21% in 1999, and 1.20% in 1998.
During 2000, Sterling made two decisions that will strategically position
the organization to enhance shareholder value. First, the merger with Hanover
Bancorp, Inc, was completed in July 2000, and provided Sterling with an entrance
into York and Adams Counties, Pennsylvania, and Westminster, Maryland. Second,
it was determined that a common core processing system will be implemented at
all three banking subsidiaries, and should be completed by the third quarter of
2001. Once implemented, the system will provide customers increased flexibility,
greater variety of products offered, and a larger network of delivery channels.
Additionally, the common system will allow synergies to be achieved in
administrative and operational areas of the organization. These initiatives
resulted in after-tax merger related and restructuring charges of $2,264,000.
NET INTEREST INCOME
The primary source of Sterling's traditional banking revenue is net
interest income, which represents the difference between interest income on
earning assets and interest expense on liabilities used to fund those assets.
Earning assets include loans, securities, federal funds sold. Interest-bearing
funds include deposits and borrowings. To compare the tax-exempt yields to
taxable yields, amounts are adjusted to pretax equivalents based on
21
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a 35% Federal corporate income tax rate.
Net interest income is affected by changes in interest rates, volume of
interest bearing assets and liabilities, and the composition of those assets and
liabilities. The "interest rate spread" and "net interest margin" are two common
statistics related to changes in net interest income. The interest rate spread
represents the difference between the yields earned on interest earning assets
and the rates paid for interest bearing liabilities. The net interest margin is
defined as the percentage of net interest income to average earning assets. Due
to demand deposits and stockholders equity, the net interest margin exceeds the
interest rate spread, as these funding sources are noninterest bearing.
Table 1 presents net interest income on a fully taxable equivalent basis,
interest rate spread and net interest margin for the years ending December 31,
2000, 1999 and 1998. Table 2 analyzes the changes in net interest income for the
periods broken down by their rate and volume components.
Tax equivalent net interest income in 2000 was $59,976,000, compared to
$58,423,000 in 1999 and $54,264,000 in 1998. Sterling has been able to increase
its net interest income over the last two years primarily through increases in
average earning assets, offset somewhat by higher average interest bearing
liabilities.
The interest rate spread and net interest margin have experienced
compression over the last three years. The interest rate spread was 3.52% in
2000, down from 3.82% in 1999 and 3.86% in 1998. The net interest margin
experienced similar declines, totaling 4.03% in 2000, down from 4.27% in 1999
and 4.35% in 1998. Several factors impacted the net interest margin. Higher
funding costs in a rising rate environment, combined with a liability sensitive
interest rate risk position for all three years were the primary reasons for the
compression in the margin. Additionally, the market area served by Sterling is
highly competitive, resulting in financial institutions pricing quality credits
competitively in order to increase volume. Finally, the decline in net interest
margin is due to greater reliance on third party borrowings to fund both finance
and operating leases. This impacts the margin in two ways. First, third party
funding tends to be more costly than the rates paid on deposit accounts, as
noted by 6.08% rate paid on third party borrowings during 2000. Secondly, the
interest expense associated with funding attributed to the operating lease
portfolio increases interest expense, but the revenues earned on operating
leases appear as rental income, and not interest income.
During the last quarter of 2000, interest rates began decreasing
slightly. Given Sterling's liability sensitive position at December 31, 2000,
the decrease in rates should help reduce the compression in net interest margin
experience in 2001. However, the impact will not be realized immediately, due to
the time lag between increase in rates and when the loan, security and time
deposit portfolios begin seeing the impact of the increase. Additionally,
competitive pricing pressures in the lending portfolio, combined with additional
borrowings to fund operating lease volume will continue to mitigate the gains
realized in the margin due to the decline in rates.
Average earning assets were $1,488,459,000 in 2000, an increase of 8.7%
over 1999's balance of $1,369,308,000. Average earning assets for 1998 totaled
$1,247,549,000. Strong loan growth was the primary contributor to the increase
in average earning assets during these periods.
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Average loans exceeded $1 billion for the first time, and totaled
$1,006,794,000 for the year ended December 31, 2000, compared to $921,062,000 in
1999 and $870,279,000 in 1998. The favorable economic climate in Sterling's
market area has resulted in strong commercial loan demand, fueling the growth in
the loan balances. Additionally, strong marketing efforts to professionals in
the market area has resulted in increased referrals, as these professionals have
a greater awareness of Sterling's products and services. Sterling has also
experienced growth in the consumer loan balances, as marketing campaigns are
designed to increase selling of loan services to retail customers.
Average securities were $452,611,000 in 2000, versus $412,705,000 in 1999
and $346,869,000 in 1998. The increase in securities, in part, reflects the
growth trends in loans and deposits during the years. As deposit growth outpaced
loan growth during the year, excess funding was used in the security portfolio.
Another contributing factor to the growth in securities is that a subsidiary of
Sterling had employed leverage strategies in which funds were borrowed,
primarily through the Federal Home Loan Bank, and invested in securities. These
strategies were implemented to increase net interest income.
Average interest-bearing liabilities were $1,316,687,000 in 2000, up from
$1,211,286,000 in 1999 and $1,102,793,000 in 1998. Funding needs to support loan
and lease growth led to the increase in interest-bearing liabilities in 2000 and
1999, with the continued shift in mix from lower-cost demand and savings
deposits to time deposits and borrowed money.
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TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL-TAX EQUIVALENT YIELDS
(UNAUDITED)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------- ---------- -------- ------------- ------------ --------
ASSETS:
Federal funds sold $ 27,437 $ 1,786 6.51% $ 33,401 $ 1,671 5.00%
Interest-bearing deposits
with banks 1,617 111 6.86% 2,140 139 6.50%
Securities:
U.S. Treasury 30,489 1,802 5.91% 40,860 2,393 5.86%
U.S. Government agencies 146,841 9,623 6.55% 130,250 8,204 6.30%
State and municipal 163,289 12,628 7.73% 131,480 10,331 7.86%
Other 111,992 6,882 6.15% 110,115 6,057 5.50%
-------------- ---------- -------- ------------- ------------ --------
Total securities 452,611 30,935 6.83% 412,705 26,985 6.54%
-------------- ---------- -------- ------------- ------------ --------
Loans:
Commercial 501,154 43,057 8.59% 445,140 37,307 8.38%
Consumer 267,834 23,151 8.64% 257,117 21,513 8.37%
Mortgages 162,335 12,920 7.96% 153,797 12,168 7.91%
Leases 75,471 6,517 8.64% 65,008 6,044 9.30%
-------------- ---------- -------- ------------- ------------ --------
Total loans 1,006,794 85,645 8.51% 921,062 77,032 8.36%
-------------- ---------- -------- ------------- ------------ --------
Total interest earning assets 1,488,459 118,477 7.96% 1,369,308 105,827 7.73%
---------- -------- ------------ --------
Allowance for loan losses (11,779) (11,780)
Cash and due from banks 64,579 49,737
Other assets 87,348 108,198
-------------- -------------
TOTAL ASSETS $1,628,607 $ 1,515,463
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits $ 413,486 $11,930 2.89% $ 420,159 $ 10,262 2.44%
Savings deposits 138,262 2,786 2.02% 129,887 2,587 1.99%
Time deposits 635,765 35,929 5.65% 555,849 28,802 5.18%
Borrowed funds 129,174 7,856 6.08% 105,391 5,753 5.46%
-------------- ---------- -------- ------------- ------------ --------
Total interest-bearing liabilities 1,316,687 58,501 4.44% 1,211,286 47,404 3.91%
-------------- ---------- -------- ------------- ------------ --------
Demand deposits 158,560 148,208
Other liabilities 25,825 31,327
Stockholders' equity 127,535 124,642
TOTAL LIABILITIES AND -------------- -------------
STOCKHOLDERS' EQUITY $1,628,607 $ 1,515,463
============== =============
Net interest rate spread 3.52% 3.82%
Net interest income (FTE)/
Net interest margin 59,976 4.03% 58,423 4.27%
Taxable-equivalent adjustment (5,158) (4,201)
---------- -----------
Net interest income $54,818 $ 54,222
========== ===========
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998
-----------------------------------------
AVERAGE ANNUAL
BALANCE INTEREST RATE
------------- ---------- ----------
ASSETS:
Federal funds sold $ 29,359 $ 1,595 5.43%
Interest-bearing deposits
with banks 1,042 50 4.80%
Securities:
U.S. Treasury 48,843 2,883 5.90%
U.S. Government agencies 105,867 6,704 6.33%
State and municipal 97,716 8,074 8.26%
Other 94,443 5,234 5.54%
------------- ---------- ----------
Total securities 346,869 22,895 6.60%
------------- ---------- ----------
Loans:
Commercial 417,442 36,049 8.64%
Consumer 245,197 21,529 8.78%
Mortgages 152,636 12,846 8.42%
Leases 55,004 5,238 9.52%
------------- ---------- ----------
Total loans 870,279 75,662 8.69%
------------- ---------- ----------
Total interest earning assets 1,247,549 100,202 8.03%
---------- ----------
Allowance for loan losses (11,568)
Cash and due from banks 45,708
Other assets 97,964
-------------
TOTAL ASSETS $1,379,653
=============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits $ 388,602 $ 10,316 2.65%
Savings deposits 127,836 2,832 2.22%
Time deposits 512,943 28,578 5.57%
Borrowed funds 73,412 4,212 5.74%
------------- ---------- ----------
Total interest-bearing liabilities 1,102,793 45,938 4.17%
------------- ---------- ----------
Demand deposits 127,958
Other liabilities 28,327
Stockholders' equity 120,575
TOTAL LIABILITIES AND -----------------
STOCKHOLDERS' EQUITY $1,379,653
=================
Net interest rate spread 3.86%
Net interest income (FTE)/
Net interest margin 54,264 4.35%
Taxable-equivalent adjustment (3,148)
----------
Net interest income $ 51,116
==========
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.
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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.
2000 VERSUS 1999 1999 VERSUS 1998
--------------------------------------- ------------------------------------
Increase/(Decrease) DUE TO CHANGES IN DUE TO CHANGES IN
--------------------------------------- ------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------ ------------- ------------ ----------- ------------ -----------
Interest income:
Federal funds sold $ (298) $ 413 $ 115 $ 220 $ (144) $ 76
Interest-bearing deposits with banks (34) 6 (28) 53 36 89
Securities 2,609 1,341 3,950 4,345 (255) 4,090
Loans 7,170 1,443 8,613 4,415 (3,045) 1,370
------------ ------------- ------------ ----------- ------------ -----------
Total interest income 9,447 3,203 12,650 9,033 (3,408) 5,625
------------ ------------- ------------ ----------- ------------ -----------
Interest expense:
Interest-bearing demand (163) 1,831 1,668 838 (892) (54)
Savings deposits 167 32 199 45 (290) (245)
Time deposits 4,141 2,986 7,127 2,390 (2,166) 224
Borrowed funds 1,298 805 2,103 1,835 (294) 1,541
-------------------------- ------------ ----------- ------------ -----------
Total interest expense 5,443 5,654 11,097 5,108 (3,642) 1,466
-------------------------- ------------ ----------- ------------ -----------
Net interest income $ 4,004 $ (2,451) $ 1,553 $ 3,925 $ 234 $ 4,159
============ ============= ============ =========== ============ ===========
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 $606,000 in
2000, compared to $1,060,000 in 1999 and $2,016,000 in 1998. Sterling adjusts
the provision for loan losses periodically as deemed necessary to maintain the
allowance at a level deemed to meet the risk characteristics of the loan
portfolio. Despite a slight increase of $105,000 in net charge-offs during 2000
compared to 1999, the reduction in the provision was considered appropriate, as
it is reflective of another year of relatively low charge-offs (.08% of average
loans outstanding). See further discussion in the asset quality discussion of
this annual report.
NONINTEREST INCOME
Details of noninterest income follow:
25
26
TABLE 3 - NONINTEREST INCOME
2000 VERSUS 1999 1999 VERSUS 1998
---------------------- --------------------
Increase/(Decrease) 2000 AMOUNT % 1999 AMOUNT % 1998
----------- ----------- ---------- ------------ ---------- --------- -----------
Income from fiduciary activities $ 3,942 $ 437 12.5% $ 3,505 $ 642 22.4% $ 2,863
Service charges on deposit accounts 4,721 (12) (0.3%) 4,733 493 11.6% 4,240
Other service charges, commissions
and fees 3,304 325 10.9% 2,979 284 10.5% 2,695
Mortgage banking income 834 (613) (42.4%) 1,447 (1,004) (41.0%) 2,451
Gain on sale of credit card portfolio - - - - (1,339) (100.0%) 1,339
Gain on sale of real estate 343 343 100.0% - - - -
Rental income on leased property 22,179 3,710 20.1% 18,469 2,504 15.7% 15,965
Other operating income 1,494 303 25.4% 1,191 (5) (0.4%) 1,196
Securities gains 691 (524) (43.1%) 1,215 266 28.0% 949
----------- ----------- ---------- ------------ ---------- --------- -----------
Total $ 37,508 $ 3,969 11.8% $ 33,539 $ 1,841 5.8% $ 31,698
=========== =========== ========== ============ ========== ========= ===========
Noninterest income totaled $37,508,000 for the year ended December 31,
2000, an 11.8% increase over 1999. For the year ended December 31, 1999,
noninterest income totaled $33,539,000, an increase of 5.8% over 1998 totals.
Income from fiduciary activities, which includes both institutional trust
and personal wealth management services, grew to $3,942,000 for the year ended
December 31, 2000, up from $3,505,000 in 1999 and $2,863,000 in 1998. A higher
level of assets under management supported the revenue increases in both 2000
and 1999. At December 31, 2000, Sterling had total assets under administration
of $887,494,000, compared to $856,061,000 at the end of 1999 and $742,057,000 at
the end of 1998. These numbers include assets under management of $662,267,000,
$635,938,000 and $593,764,000 at December 31, 2000, 1999 and 1998. Assets under
management increased in 2000, despite a difficult year for the equity market.
Management continues to believe that the wealth management division
represents a significant growth opportunity for the corporation. Sterling will
continue its concerted efforts to expand this business, including marketing
efforts aimed at cross-selling these services, and the hiring of experienced
professionals. Although wealth management can 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.
Other service charges, commissions and fees totaled $3,304,000 in 2000, a
10.9% increase over 1999's total of $2,979,000. 1999 experienced a similar
increase over 1998's results, which totaled $2,695,000. Increased customer debit
card usage, higher fees implemented in the latter half of 1999 on non-customer
ATM transactions and higher cash management activity has led to the revenue
increases in this category.
Mortgage banking income totaled $834,000 in 2000, compared to $1,447,000
in 1999 and $2,451,000 in 1998. The financial services industry has seen a
significant reduction in mortgage loan refinancing volume over the last two
years, a direct result of increases in fixed interest rates on conventional
mortgage products. The increase in rates, which began in the second half of
26
27
1999, continued through the second quarter of 2000. In the fourth quarter of
2000, interest rates on conventional mortgages started to decline slightly,
resulting in increased refinancing volume in the fourth quarter of 2000 as
compared to previous quarters during the year.
During 2000, Sterling recognized a $343,000 gain on the sale of a parcel
of real estate located in Maryland. In 1998, a bank subsidiary of Sterling sold
its credit card portfolio for a gain of $1,339,000.
Rental income on operating leases has increased 20.1% from $18,469,000 in
1999 to $22,179,000 in 2000. This follows an increase of 15.7% in 1999 over 1998
results. The increase in rental income is primarily due to an increase in the
number of units under operating leases, which totaled 5,330, 4,648, and 3,826 as
of December 31, 2000, 1999 and 1998. 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. Additionally, the strong economy experienced
over the last several years has led to our clients expanding their business
operations, resulting in an increase in the number of new units leased within
our customer base.
Net realized securities gains and losses, all from the available for sale
portfolio, are summarized as follows:
2000 1999 1998
-------- --------- -------
Net realized gains (losses):
Debt securities
Gains $ 291 $ 162 $ 72
Losses (136) (150) -
Equity securities
Gains 751 1,288 877
Losses (215) (85) -
-------- --------- -------
$ 691 $1,215 $949
======== ========= =======
Gains and losses on debt securities are realized as part of ongoing
investment portfolio and balance sheet management strategies. Equity security
gains and losses are generated primarily through Sterling's equity portfolio of
financial institution sector stocks.
NONINTEREST EXPENSES
Details of noninterest expense follow:
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TABLE 4 - NONINTEREST EXPENSES
2000 VERSUS 1999 1999 VERSUS 1998
------------------ --------------------
Increase/(Decrease) 2000 AMOUNT % 1999 AMOUNT % 1998
---------- --------- -------- ---------- ----------- --------- ----------
Salaries and employee benefits $ 27,779 $ 1,530 5.8% $ 26,249 $ 868 3.4% $ 25,381
Net occupancy 3,431 338 10.9% 3,093 (158) (4.9%) 3,251
Furniture & equipment 4,610 (12) (0.3%) 4,622 406 9.6% 4,216
Professional services 1,959 (291) (12.9%) 2,250 748 49.8% 1,502
Depreciation on operating
lease assets 17,469 2,828 19.3% 14,641 2,000 15.8% 12,641
Merger related and
restructuring costs 2,898 2,475 585.1% 423 423 100.0% -
Other 12,057 876 7.8% 11,181 (362) (3.1%) 11,543
---------- --------- -------- ---------- ----------- --------- ----------
Total $ 70,203 $ 7,744 12.4% $ 62,459 $ 3,925 6.7% $ 58,534
========== ========= ======== ========== =========== ========= ==========
The largest component of noninterest expense is salaries and employee
benefits, which increased $1,530,000, or 5.8%, to $27,779,000 in 2000, after
increasing $868,000 or 3.4% in 1999. The increase in salaries and employee
benefits over the last two years is due primarily to normal merit increases and
promotions. Additionally, the cost of health insurance, and in particular,
prescription drug plans, continue to rise consistent with national trends.
Net occupancy expense totaled $3,431,000 in 2000, $3,093,000 in 1999 and
$3,251,000 in 1998. The 10.9% increase experienced in 2000 was primarily the
opening of three offices and moving one branch to a larger, more modern
facility. Additionally, utilities increased for the year ended December 31, 2000
a direct result of rising fuel costs as well as a slightly colder winter. The
decrease in occupancy expense in 1999 versus 1998 was the result of certain
assets becoming fully depreciated in that time frame, combined with only one new
branch office opening during the year.
Professional service expense totaled $1,959,000 for the year ended
December 31, 2000, a 12.9% decrease over 1999 results. This followed a 49.8%
increase in professional service expense experienced in 1999 as compared to
1998. The generally higher levels of professional service expense can be
attributed to Sterling's increased frequency of contracting for specialized
services. Through contracting certain services to third parties, Sterling
benefits from a greater degree of knowledge, experience, and resources than that
which can be obtained internally. During 1999, professional services were
slightly higher than the present levels, due to a banking subsidiary contracting
the PC help desk and network administration functions to a third party, until a
suitable replacement was found. Additionally, services were contracted for other
initiatives, including, but not limited to, Y2K preparations.
Depreciation on operating lease assets totaled $17,469,000 in 2000,
$14,641,000 in 1999, and $12,641,000 in 1998. The 19.3% and 15.8% increases
noted in 2000 and 1999 are consistent with the 20.1% and 15.7% increases noted
in rental income on operating leases, discussed above. Depreciation on operating
lease assets as a percent of rental income on operating leases was approximately
79% for all three years.
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29
During the third quarter of 2000, Sterling completed its merger with
Hanover Bancorp, Inc. and incurred $2,898,000 of merger related and
restructuring charges. The direct costs that resulted from the merger totaled
$1,426,000, and consisted principally of legal, accounting, investment advising
fees, as well as regulatory filing fees and other miscellaneous expenses. In
addition, Sterling incurred restructuring costs totaling $1,472,000, which
primarily consists of severance and related benefits, professional fees,
termination fees related to non-cancelable service contracts and asset
write-offs related to conversion of the banking subsidiaries into a common core
processing system.
Sterling expects the conversion of the banking subsidiaries into one
common core processing system will result in operating efficiencies through
better leveraging of technology, greater array of products being offered to
customers, and better customer service. The conversion to the new core
processing system and resulting reduction in the workforce is expected to result
in an estimated net annual savings of approximately $1.5 million. Of this
amount, approximately 33% will be realized in 2001 and 100% will be realized in
years 2002 and beyond.
The following summarizes the restructuring expenses charged to
operations during 2000, and the remaining restructuring accrual balance at
December 31, 2000. The remaining unpaid expenses will be paid throughout
2001-2002.
Initial Accrual at
Expense Dec.31, 2000
------------- -----------------
Employee termination $ 718 $ 682
Asset disposal/write-downs 334 -
Noncancelable contracts 312 312
Professional fees 88 30
Other 20 20
------------- -----------------
$1,472 $1,044
============= =================
Merger related costs during 1999 totaled $423,000 and was a direct
result of Sterling's acquisition of Northeast Bancorp, Inc. completed in June
1999. These merger expenses consisted entirely of attorney, accountant,
investment advisory and application fees.
Other noninterest expenses totaled $12,057,000 during 2000, versus
$11,181,000 in 1999 and $11,543,000 in 1998. Significant expense components in
this category include marketing and advertising, postage, utilities, MAC fees,
and Pennsylvania Shares Tax. The increase in expense noted during 2000 was the
direct result of Sterling's overall growth, which requires many of these types
of expenses to increase as well. In 1998, a banking subsidiary of Sterling
terminated its defined-benefit pension plan and incurred $252,000 in expense
related to this action and was the primary reason for the decrease experienced
in 1999.
Operating expenses levels are often measured by the efficiency ratio,
which expresses noninterest expense, excluding merger related and restructuring
charges, as a percentage of tax-equivalent net interest income and other income.
Operating leases significantly impact Sterling's consolidated efficiency ratio,
which tends to drive the ratio higher than is
29
30
typically achieved on financial institutions with no similar operating lease
portfolio. In order to effectively monitor the efficiency ratio, Sterling
monitors it on its two operating segments: 1) community banking and related
services and 2) leasing. The community banking segment's efficiency ratio was
63.1% in 2000, 62.1% in 1999 and 64.3% in 1998. The leasing segment's efficiency
ratio was 92.7% in 2000, 92.5% in 1999, and 94.1% in 1998. While the ratios
showed improvements from 1998 to 1999, a decline in the net interest margin and
a higher level of expenses, result in a slight increase in the ratios in 2000.
INCOME TAXES
Sterling recognized income taxes of $4,951,000, or 23.01% of pre-tax
income, in 2000. Income tax expense totaled $6,257,000, or 25.8% of pretax
income in 1999, and $5,670,000 or 25.5% of pre-tax income in 1998. The variances
from the federal statutory rate of 35% are generally due to tax-exempt income,
investments in low-income housing partnerships (which qualify for federal tax
credits), offset somewhat by certain non-deductible merger related costs and
state income taxes.
The decline in the effective tax rate during 2000 is a result of a
significant reduction in pre-tax income due to restructuring charges recorded
during the year and increasing tax-exempt income. As the tax-free income
represents a larger portion of pre-tax income, the effective tax rate was
lowered.
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FINANCIAL CONDITION
Average earning assets increased in 2000 to $1,488,459,000 from
$1,369,308,000 in 1999 and $1,247,549,000 in 1998. Solid growth in commercial
loans, consumer loans, and finance leases contributed greatly to the increase in
average earning assets. Additionally, Sterling's security portfolio increased
over the last three years, as a result of its funding exceeding the loan demand.
Average funding sources, or interest bearing liabilities, increased in 2000 to
$1,316,687,000 from $1,211,286,000 in 1999 and $1,102,793,000 in 1998.
INVESTMENT SECURITIES
Sterling utilizes investment securities to generate interest and
dividend income, to manage interest rate risk, and to provide liquidity. The
growth in the security portfolio, in part, reflects the trends in loans,
deposits, and borrowed funds during 2000. As deposit and borrowing growth
outpaced loan growth during 2000, excess funding was invested in the securities
portfolio. Much of the investment activity focused on U.S. Government agencies,
tax-free municipal, and corporate securities. These securities provide the
appropriate characteristics with respect to yield and maturity relative to the
management of the overall balance sheet.
At December 31, 2000, the securities balance included a net unrealized
gain on available-for-sale securities of $3,851,000, versus an unrealized loss
of $9,861,000 at December 31, 1999. The reduction in long-term interest rates at
December 31, 2000 versus 1999 led to the appreciation in the fair value of
securities during 2000.
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,
------------------------------------------
2000 1999 1998
---------------- ------------ ----------
U.S. Treasury securities $ - $ 501 $ 2,508
U.S. Government agencies 604 1,460 2,479
States and political subdivisions 39,151 42,518 45,953
Mortgage-backed securities 676 1,033 1,219
Corporate securities 2,866 4,757 10,808
------------- ----------- -----------
Subtotal 43,297 50,269 62,967
Non-marketable equity securities 7,788 8,160 6,094
------------- ----------- -----------
Total $ 51,085 $ 58,429 $ 69,061
============= =========== ===========
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The following table shows the amortized cost and fair value of the
available-for-sale securities owned as of the dates indicated.
DECEMBER 31,
----------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- --------------------------- ----------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
---------------- ----------- --------------- ---------- -------------- ------------
U.S. Treasury securities $ 35,835 $ 35,986 $ 37,010 $ 36,814 $ 43,719 $ 44,602
U.S. Government agencies 70,711 70,988 59,081 57,726 45,038 45,696
States and political subdivisions 139,343 139,064 111,969 107,011 80,317 82,516
Mortgage-backed securities 73,447 72,812 83,149 79,975 71,848 72,339
Corporate securities 100,407 100,698 82,346 80,848 70,693 71,557
------------- ----------- ---------- ---------- ---------- -----------
Subtotal 419,743 419,548 373,555 362,374 311,615 316,710
Equity securities 11,702 15,748 8,504 9,824 5,980 9,892
------------- ----------- ---------- ---------- ---------- -----------
Total $ 431,445 $ 435,296 $ 382,059 $ 372,198 $ 317,595 $ 326,602
============= =========== ========== ========== ========== ===========
The following table shows the maturities of held-to-maturity debt
securities at amortized cost as of December 31, 2000 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.
1 YEAR AND LESS OVER 1 THRU 5 YEARS OVER 5 THRU 10 YEARS OVER 10 YEARS TOTAL
------------------- ------------------- -------------------- ------------------ -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ------- --------- -------- --------- -------- -------- ------- --------- -------
U.S. Government agencies $ - 0.00% $ 460 5.97% $ 52 10.05% $ 92 10.03% $ 604 6.94%
States and political
subdivisions 2,791 7.29% 11,157 7.24% 21,839 7.16% 3,364 7.27% 39,151 7.20%
Mortgage-backed
securities 19 6.87% 378 8.09% 149 8.78% 130 8.13% 676 8.22%
Corporate securities 1,612 6.30% 1,003 6.15% - 0.00% 251 9.25% 2,866 6.50%
---------- ------ ---------- ------ --------- ----- --------- ----- --------- -------
Total $ 4,422 6.93% $ 12,998 7.14% $ 22,040 7.18% $ 3,837 7.50% $ 43,297 7.17%
========== ====== ========== ====== ========= ===== ========= ===== ========== =======
The following table shows the maturities of available-for-sale debt
securities at fair value as of December 31, 2000 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.
1 YEAR AND LESS OVER 1 THRU 5 YEARS OVER 5 THRU 10 YEARS OVER 10 YEARS TOTAL
-------------------- --------------------- ---------------------- ------------------ -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------ ------- ----------- --------- ----------- -------- --------- -------- ------------ -------
U.S. Treasury securities $ 21,229 5.78% $ 14,757 5.67% $ - 0.00% $ - 0.00% $ 35,986 5.77%
U.S. Government agencies 6,564 6.05% 44,020 6.27% 18,931 6.91% 1,473 7.30% 70,988 6.44%
States and political
subdivisions 1,834 6.32% 16,290 6.71% 28,094 6.96% 92,846 7.48% 139,064 7.27%
Mortgage-backed
securities 337 6.05% 4,227 6.25% 5,866 6.30% 62,382 6.63% 72,812 6.58%
Corporate securities 18,726 6.77% 74,381 6.77% 2,091 6.94% 5,500 7.34% 100,698 6.68%
------------ ------- ----------- --------- ----------- -------- --------- -------- ------------ -------
Total $ 48,690 5.96% $ 153,675 6.51% $ 54,982 6.87% $ 162,201 7.15% $ 419,548 6.74%
============ ======= =========== ========= =========== ======== ========= ======== ============ =======
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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 $74,757,000, or 7.8% in 2000, compared to an
increase of $79,719,000 in 1999. Commercial loans contributed $53,860,000 of the
2000 increase, while consumer loans increased $14,771,000 and finance leases
increased $5,535,000.
The favorable economic climate in Sterling's market area has resulted in
a strong commercial loan demand, leading to growth in this portfolio.
Additionally, Sterling has been actively marketing its commercial services to
professionals in the target market, leading to increased referrals as these
professionals have greater awareness of Sterling's products and services.
Consumer loans have increased as a direct result of advertising
campaigns designed to attract new customers to the subsidiary banks, as well as
campaigns designed to increase cross-selling of loans services to customers.
The finance lease portfolio continued to grow during 2000, as the strong
national economy fueled growth within our existing lease client base.
Additionally, the salesmen hired have been able to create new client
relationships.
TABLE 7 - LOAN PORTFOLIO
The following table sets forth the composition of Sterling's loan
portfolio as of the dates indicated:
DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ----------- ----------- ----------- -----------
Commercial, financial and agricultural $ 510,818 $ 456,958 $ 418,469 $ 384,343 $ 332,438
Real estate-construction 9,665 9,127 8,164 8,345 7,496
Real estate-mortgage 155,947 155,894 146,515 150,171 142,967
Consumer 278,127 263,356 247,855 246,610 242,523
Lease financing (net of unearned income) 78,658 73,123 57,736 52,566 47,659
------------- ----------- ----------- ------------ ------------
Total $ 1,033,215 $ 958,458 $ 878,739 $ 842,035 $ 773,083
============= =========== =========== ============ ============
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, 2000:
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AFTER ONE
WITHIN ONE BUT WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
--------------- -------------- ---------------- ------------
Commercial, financial and agricultural $ 75,021 $ 131,256 $ 304,541 $ 510,818
Real estate-construction 8,385 - 1,280 9,665
-------------- -------------- -------------- ------------
$ 83,406 $ 131,256 $ 305,821 $ 520,483
============== ============== ============== ============
Loans due after one year totaling $260,005,000 have variable interest
rates. The remaining $177,072,000 in loans have fixed rates.
ASSET QUALITY
Sterling's loan portfolios are subject to varying degrees of credit
risk. Credit risk is mitigated through prudent underwriting standards, on-going
credit review, and monitoring and reporting asset quality measures.
Additionally, loan portfolio diversification, limiting exposure to a single
industry or borrower, and requiring collateral also reduces Sterling's credit
risk.
Sterling's commercial, consumer and residential mortgage loans are
principally to borrowers in south central Pennsylvania and northern Maryland. As
the majority of Sterling's loans are located in 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 unemployment rate in Sterling's market area remained below the
national average during 2000. Additionally, reasonably low interest rates, a
continuing strong economy and minimal inflation continued to support favorable
economic conditions in the area.
Nonperforming assets include nonaccrual and restructured loans, accruing
loans past due 90 days or more and other foreclosed assets. 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.
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35
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,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ------------
Nonaccrual loans $ 3,102 $ 771 $ 1,425 $ 1,645 $ 1,231
Accruing loans, past due 90 days or more 1,145 882 1,079 1,443 918
Restructured loans 1,851 1,961 1,993 2,326 242
------------ --------- --------- --------- ----------
Total non-performing loans 6,098 3,614 4,497 5,414 2,391
Foreclosed assets 469 504 261 577 177
------------ --------- --------- --------- ----------
Total non-performing assets $ 6,567 $ 4,118 $ 4,758 $ 5,991 $ 2,568
============ ========= ========= ========= ==========
Nonaccrual loans:
Interest income that would have been
recorded under original terms $ 196 $ 98 $ 138 $ 221 $ 172
Interest income recorded 94 8 22 59 56
Ratios:
Non-performing loans to total loans .59% 0.38% 0.51% 0.64% 0.31%
Non-performing assets to total loans
and foreclosed assets 0.64% 0.43% 0.54% 0.71% 0.33%
Non-performing assets to total assets 0.38% 0.26% 0.32% 0.45% 0.22%
As of December 31, 2000, total non-performing assets totaled $6,567,000,
an increase of $2,449,000, or 59.4% from December 31, 1999. The increase in
nonaccrual loans is primarily the result of three large credits that moved into
nonaccrual status during 2000. Two of these loans are secured by real estate,
which mitigates the risk of loss associated with these credits. As a result of
the increase in nonaccrual loans, Sterling experienced an increase in
non-performing loans to total loans outstanding, as well as non-performing
assets to total loans and foreclosed assets. However, these levels are within
acceptable limits and are consistent with Sterling's peer group.
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 $6 million at December 31, 2000.
Additionally, outstanding letter of credit commitments totaling approximately
$1.5 million could result in potential problem loans if drawn upon. The majority
of these loans are secured by real estate with acceptable loan-to-value ratios.
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 and 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."
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36
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 loan 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.
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37
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,
----------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------- ----------- ------------- ------------
Allowance for Loan Losses:
Beginning balance $ 11,875 $ 11,475 $ 11,050 $ 10,662 $ 10,544
Loans charged off during year:
Commercial, financial and agricultural 568 350 584 270 258
Real estate mortgage 53 107 116 122 40
Consumer 459 661 1,328 1,639 808
Lease financing 101 31 54 121 24
------------- ------------ ----------- ------------ ------------
Total charge-offs 1,181 1,149 2,082 2,152 1,130
------------- ------------ ----------- ------------ ------------
Recoveries:
Commercial, financial and agricultural 95 198 112 181 45
Real estate mortgage 10 - 34 - -
Consumer 301 247 317 255 175
Lease financing 11 44 28 65 8
------------- ------------ ----------- ------------ ------------
Total recoveries 417 489 491 501 228
------------- ------------ ----------- ------------ ------------
Net loans charged off 764 660 1,591 1,651 902
Provision for loan losses 605 1,060 2,016 2,039 1,020
------------- ------------ ----------- ------------ ------------
Balance at end of year $ 11,716 $ 11,875 $ 11,475 $ 11,050 $ 10,662
============= ============ =========== ============ ============
Ratio of net loans charged off to
average loans outstanding 0.08% 0.07% 0.18% 0.20% 0.12%
Ending allowance for loan losses to
net loans charged off 15.3 X 18.0 X 7.2 X 6.7 X 11.8 X
Net loans charged off to
provision for loan losses 126.2% 62.3% 78.9% 81.0% 88.4%
Allowance for loan losses as a percent
of loans outstanding 1.13% 1.24% 1.31% 1.31% 1.38%
Allowance for loan losses as a percent
of non-performing loans 192.1% 328.6% 255.2% 204.1% 445.9%
The allowance for loan losses decreased $159,000 from $11,875,000 at
December 31, 1999 to $11,716,000 at December 31, 2000. The allowance represents
1.13% of loans outstanding at December 31, 2000, versus 1.24% as of the prior
year-end. Net charge-offs totaled $764,000 for the year ended December 31, 2000,
versus $660,000 in 1999, an increase of 15.9%. Despite the slight increase in
net charge offs, the reduction in the provision was considered appropriate, as
it is reflective of another year of relatively low charge offs. These low levels
of charge offs, particularly in the consumer loan portfolio, resulted in lower
reserve allocations.
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TABLE 11 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- -------------------- --------------------- -------------------- -------------------
LOANS % LOANS % LOANS % LOANS % LOANS %
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- --------- --------- ---------- ---------- -------- --------- -------- --------- ---------
Commercial, financial
and agricultural $ 7,816 49% $ 6,821 48% $ 5,825 47% $ 5,085 46% $ 4,810 43%
Real estate - mortgage
and construction 255 16% 256 17% 291 18% 218 19% 176 20%
Consumer 1,283 27% 1,649 27% 1,585 28% 1,792 29% 1,435 31%
Leases 512 8% 638 8% 527 7% 599 6% 620 6%
Unallocated 1,850 -- 2,511 -- 3,247 -- 3,356 -- 3,621 --
-------- ----- -------- ----- -------- ---- --------- ---- --------- ------
Total $ 11,716 100% $ 11,875 100% $ 11,475 100% $ 11,050 100% $ 10,662 100%
======== ===== ======== ===== ======== ==== ========= ==== ========= ======
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, which represents two-thirds of the reserve balance.
Although the reserve allocation to this portfolio has increased over the last
two years, the reserve allocation as a percent of related loans has remained
fairly consistent. 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 have also been considered in allocating this reserve balance.
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 collection 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 presently represents .46% of the related
December 31, 2000 loan balance. Management believes a decrease in the allocated
reserve to the consumer loan portfolio is warranted, even in light of the
increased consumer loan balances. This reduction in allocated allowance is due
to continued decreases in net charge offs and enhanced performance in this
portfolio.
During 2000, the reserve allocation related to the lease portfolio has
decreased, not only in the dollar allocation, but also the allocation as a
percent of related lease balance. During 2000, several leases were charged-off,
resulting in a lower number of leases requiring a reserve allocation than that
required in 1999.
Over the past several years, the allowance for loan losses as a percent
of outstanding loan balance has declined from 1.38% at December 31, 1996 to
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1.13% at December 31, 2000. The unallocated portion of the allowance reflects
estimated inherent losses within the portfolio that have not been detected. The
unallocated portion of the reserve results due to 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
the time. The unallocated portion has declined from 1998 levels, due to a
greater concentration of loans in the commercial, financial and agricultural
sector, and a lower concentration in the less risky residential mortgage
portfolio. Another factor that led to the reduction in the unallocated reserve
was one particular lending relationship that entered nonaccraul status in 2000,
and resulted in a higher reserve allocation than Sterling has typically
experienced.
While management believes Sterling's allowance for loan losses is
adequate based on information currently available, future adjustments to the
reserve may be necessary due to changes in economic conditions, and management's
assumptions as to future delinquencies or loss rates.
ASSETS HELD FOR OPERATING LEASES
Assets held for operating leases, net of accumulated deprecation,
totaled $54,294,000 at December 31, 2000, an increase of $6,655,000 from the
December 31, 1999 balance of $47,639,000. Assets held for operating leases
totaled $37,171,000 at December 31, 1998. The increase is a direct result of an
increase in the number of units under operating leases, which totaled 5,330,
4,648, and 3,826 as of December 31, 2000, 1999 and 1998. Sterling recognizes
that leasing operations represent a growth opportunity for the corporation and
has committed resources to expand this business.
Operating leases have residual value risk associated with them.
Operating lease terms, including monthly rental payment and length of the lease,
are established based upon the residual value, or the estimate of fair value of
the leased asset at the end of the lease term. If at the end of the lease term,
the fair value of the leased property is less than the residual value calculated
at lease origination, a loss on disposal could result. Sterling mitigates this
risk through the utilization of proven anticipated values published by various
industries, and in some instances, discussions with industry experts. Further,
the lease terms include provisions that the lessee shares the risk of loss on
disposal of equipment, up to 50% of the residual value.
DEPOSITS
Sterling continues to rely heavily on deposit growth as the primary
source of funds for lending activities. Average deposits increased 7.3%, or $92
million, in 2000. This increase is comparable with the growth noted in 1999.
This growth has been achieved through the development of products that meets the
needs of our customers and maintaining a competitive pricing structure. Sterling
will continue to explore new products for its customers, to mitigate increased
consumer preference for higher risk investments, such as mutual funds and equity
securities. An example of this is the development of a cash management product
that was promoted to customers that historically had their balances swept into a
non-deposit product.
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TABLE 12 - AVERAGE DEPOSIT BALANCES AND RATES PAID
The following table summarizes the average amounts of deposits and rates
paid for the years indicated:
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------------
2000 1999 1998
------------------------ ---------------------- -----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------------- ------ ------------- ------ ------------ ------
Noninterest-bearing demand deposits $ 158,560 0.00% $ 148,208 0.00% $ 127,958 0.00%
Interest-bearing demand deposits 413,486 2.89% 420,159 2.44% 388,602 2.65%
Savings deposits 138,262 2.02% 129,887 1.99% 127,836 2.22%
Time deposits 635,765 5.65% 555,849 5.18% 512,943 5.57%
-------------- ------------- ------------
Total $1,346,073 $ 1,254,103 $ 1,157,339
============== ============= ============
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,
----------------------
2000 1999
---------- ----------
Three months or less $ 22,274 $ 17,062
Over three through six months 19,280 12,694
Over six through twelve months 21,995 19,209
Over twelve months 31,853 21,549
---------- ----------
Total $ 95,402 $ 70,514
========== ==========
BORROWINGS
Short-term borrowings are comprised primarily of federal funds
purchased, securities sold under agreements to repurchase, U.S. Treasury demand
notes and lines of credit. As of December 31, 2000, short-term borrowings
totaled $25,656,000, a decline of $14,716,000 from the December 31, 1999 balance
of $40,372,000.
Long-term debt consists primarily of advances from the Federal Home Loan
Bank and borrowings from other financial institutions to fund Sterling's growth
in its finance and operating lease portfolios. Long-term debt totaled
$113,849,000 at December 31, 2000, an increase of $28,224,000 from December 31,
1999. Sterling increased its reliance on long-term debt during 2000, including
utilization of long-term debt to reduce its short-term obligations. The increase
in long-term debt was a direct result of the interest yield curve, in which
rates on short-term investments increased significantly throughout 2000.
Management believes that longer-term obligations resulted in a better match for
funding finance and operating leases and loan growth.
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CAPITAL
The management of capital in a regulated financial services industry
must properly balance return on equity to stockholders while maintaining
sufficient capital levels and related risk-based capital ratios to satisfy
regulatory requirements. Additionally, capital management must also consider
acquisition opportunities that may exist, and the resulting accounting
treatment. Sterling's capital management strategies have been developed to
provide attractive rates of returns to stockholders, while maintaining its
"well-capitalized" position at each of the banking subsidiaries.
The primary source of additional capital to Sterling is earnings
retention, which represents net income less dividends declared. During 2000,
Sterling retained $7,562,000, or 46%, of its net income. Stockholders' equity
also increased as a result of $8,965,000 in other comprehensive income, which
relates exclusively to unrealized gains on securities available for sale.
As mentioned previously, 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, 2000 and 1999 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, 2000 and
1999 are as follows:
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MINIMUM CAPITAL
ACTUAL CAPITAL REQUIREMENT
------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO
--------- -------- --------- ----------
December 31, 2000
Total capital to risked weighted assets $ 148,361 11.5% $ 103,099 8.0%
Tier 1 capital to risked weighted assets 135,086 10.5% 51,549 4.0%
Tier 1 capital to average assets 135,086 7.4% 72,852 4.0%
December 31, 1999
Total capital to risked weighted assets $ 138,404 11.6% $ 95,273 8.0%
Tier 1 capital to risked weighted assets 126,527 10.6% 47,636 4.0%
Tier 1 capital to average assets 126,527 7.7% 66,113 4.0%
LIQUIDITY
Effective liquidity management ensures the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of Sterling are
met.
Sterling's funds are available from a variety of sources, including
assets that are readily convertible to cash (federal funds sold, short-term
investments), securities portfolio, scheduled repayments of loans receivable,
core deposit base, short-term borrowing capacity with a number of correspondent
banks and the FHLB, and the ability to package residential mortgage loans
originated for sale. As of December 31, 2000, capacity to borrow from the FHLB
totaled approximately $142 million.
The liquidity of the parent company also represents an important aspect
of liquidity management. The parent company's cash outflows consist principally
of dividends to shareholders and unallocated corporate expenses. The main source
of funding for the parent company is the dividends it receives from its banking
subsidiaries. Federal and state banking regulations place certain restrictions
on dividends paid to the parent company from the subsidiary banks. The total
amount of dividends that may be paid from the subsidiary banks to Sterling
totals $38,794,000 at December 31, 2000.
Sterling manages liquidity by monitoring projected cash inflows and
outflows on a daily basis, and believes it has sufficient funding sources to
maintain sufficient liquidity under varying degrees of business conditions.
NEW FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, requires all
derivative instruments to be carried at fair value on the balance sheet. This
requirement is in contrast to previous accounting guidance, which does not
require unrealized gains and losses on derivatives used for hedging purposes to
be recorded in the financial statements. The new statement does allow hedge
accounting treatment for derivatives used to hedge various risks and sets forth
specific criteria to be used to determine when hedge accounting can be applied.
Hedge accounting treatment provides for changes in fair value or cash flows of
both the derivative and the hedged item to be recognized in earnings
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43
in the same period. Statement No. 133 does not change the accounting for those
derivative instruments not designated in a hedge accounting relationship,
considered trading derivatives, for which fair value changes are recorded
through earnings as they occur.
On January 1, 2001, Sterling adopted the provisions of Statement No.
133, with no material impact on Sterling's financial condition or results of
operations.
In September 2000, Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities was issued.
This statement replaces Statement No. 125. The guidance in Statement No. 140,
while not changing most of the guidance originally issued in Statement No. 125,
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
related to transferred assets.
Certain provisions of the statement relate to recognition,
reclassification and disclosure of collateral, as well as the disclosure of
securitization transactions, became effective for Sterling for 2000 year-end
reporting. Other provisions related to the transfer and servicing of financial
assets and extinguishments of liabilities are effective for transactions
occurring after March 31, 2001. The application of the new rules will not have a
material impact on Sterling's financial condition or results of operations.
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 2% of corporate assets. Sterling's primary market risk is interest rate
risk.
INTEREST RATE RISK
Interest rate risk is an economic exposure to future net earnings and
future value of equity capital that can occur based on changes in interest
rates. Interest rate risk is inherent, because as a financial institution,
Sterling derives a significant amount of its operating revenue from "purchasing"
funds (customer deposits and borrowings) at various terms and rates, and then
reinvesting those funds into earning assets (loans, leases, investments, etc.)
at various terms and rates. Current pricing can be established to generate a
specific "spread", or net interest margin, of income to cover operating costs
and produce expected profit to its shareholders.
Interest rate risk occurs when financial market rates increase or
decrease in the future. If interest rates increase or decrease, there could be a
positive or negative effect on future income. The net interest margin "spread"
could increase or decrease based on the level of risk taken by the corporation.
If earning assets can reprice faster than its funding sources, the "risk"
position will generate more revenue in the future on the same asset base if
rates increase and less revenue if rates decrease. If funding sources reprice
faster than earning assets, the opposite effect to income will occur on the same
asset base with increasing and decreasing interest rates. Interest rate risk can
also occur when fixed rate commitments are made for
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future dates.
Management endeavors to control the exposure of earnings to changes in
interest rates by understanding, reviewing and making decisions based on its
risk position. The asset/liability committees of each bank subsidiary are
responsible for these decisions. The committees operate under management
policies defining guidelines and limits on levels of risk. These policies are
approved by the Boards of Directors. The committees measure risk exposure with
modeling techniques which involve assumptions and estimates which inherently
cannot measure with complete precision.
The corporation has a negative cumulative "GAP" at one year in the
future in the amount of $138 million (8.9% 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
OVER 1 YEAR
0-90 DAYS 91-365 DAYS TO 3 YEARS OVER 3 YEARS TOTAL
INTEREST EARNING ASSETS
- -----------------------
Federal funds sold $ 42,280 $ -- $ -- $ -- $ 42,280
Interest-bearing deposits in banks 516 -- -- -- 516
Short term investments 603 -- -- -- 603
Securities 49,885 47,029 124,763 260,854 482,531
Loans 215,672 164,416 310,299 344,806 1,035,193
------------- -------------- ------------- -------------- ----------------
Total interest earning assets $ 308,956 $ 211,445 $ 435,062 $ 605,660 $ 1,561,123
Cumulative $ 308,956 $ 520,401 $ 955,463 $ 1,561,123
INTEREST-BEARING LIABILITIES
- ----------------------------
Interest-bearing deposits $ 183,224 $ 10,610 $ 51,976 $ 325,132 $ 570,942
Time deposits 113,769 301,663 245,074 17,482 677,988
Short-term borrowings 25,656 -- -- -- 25,656
Long-term debt 12,905 10,941 59,691 30,313 113,850
------------- -------------- ------------- -------------- ----------------
Total interest-bearing liabilities $ 335,554 $ 323,214 $ 356,741 $ 372,927 $ 1,388,436
Cumulative $ 335,554 $ 658,768 $ 1,015,509 $ 1,388,436
Period GAP (Dollars) $ (26,598) $ (111,769) $ 78,321 $ 232,733
Cumulative GAP (Dollars) $ (26,598) $ (138,367) $ (60,046) $ 172,687
Cumulative GAP as % of total
interest earning assets (1.7)% (8.9)% (3.8)% 11.1%
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 instantaneous interest
rate movements (shocks). Sterling's risk to interest rate movement
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45
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 (0.7)% and (2.2)% with market rate
increases of 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 PROJECTIONS PRESENT VALUE EQUITY
Changes in Changes in
Basis Points % Change Basis Points % Change
----------------------------------- ------------------------------------
-200 3.8% -200 5.2%
-100 2.4% -100 3.4%
0 0.0% 0 0.0%
100 -0.7% 100 -4.0%
200 -2.2% 200 -9.5%
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...........................................46
Consolidated Balance Sheets..............................................47
Consolidated Statements of Income........................................48
Consolidated Statements of Changes in Stockholders' Equity...............49
Consolidated Statements of Cash Flows....................................50
Notes to Consolidated Financial Statements...............................51
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46
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sterling Financial Corporation
We have audited the accompanying consolidated balance sheet of Sterling
Financial Corporation and subsidiaries as of December 31, 2000, and the related
consolidated statement of income, stockholders' equity, and cash flows for the
year ended December 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Sterling Financial Corporation as of December 31, 1999 and 1998, were audited by
other auditors whose report dated January 20, 2000 except for Note 26 as to
which the date is January 25, 2000, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Financial Corporation and subsidiaries at December 31, 2000, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 23, 2001
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47
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
(Dollars in Thousands) 2000 1999
--------------- ---------------
ASSETS
Cash and due from banks $ 61,287 $ 66,429
Federal funds sold 42,280 5,250
--------------- ---------------
Cash and cash equivalents 103,567 71,679
Interest-bearing deposits in banks 516 3,050
Short-term investments 603 29
Mortgage loans held for sale 1,978 1,120
Securities held-to-maturity (fair value 2000 - $51,854; 1999 - $58,139) 51,085 58,429
Securities available-for-sale 435,296 372,198
Loans, net of allowance for loan losses 2000 - $11,716; 1999 - $11,875 1,021,499 946,583
Premises and equipment, net 29,807 30,660
Assets held for operating leases, net 54,294 47,639
Other real estate owned 419 409
Accrued interest receivable 11,987 10,313
Other assets 15,087 14,214
--------------- ---------------
TOTAL ASSETS $ 1,726,138 $ 1,556,323
=============== ===============
LIABILITIES
Deposits:
Noninterest-bearing $ 171,370 $ 155,339
Interest-bearing 1,248,930 1,133,475
--------------- ---------------
Total deposits 1,420,300 1,288,814
--------------- ---------------
Short-term borrowings 25,656 40,372
Long-term debt 113,850 85,625
Accrued interest payable 10,080 7,086
Other liabilities 16,905 11,666
--------------- ---------------
TOTAL LIABILITIES 1,586,791 1,433,563
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock ($5.00 par value) 62,732 62,729
No. of shares authorized: 35,000,000
No. of shares issued: 2000 - 12,546,477; 1999 - 12,545,858
No. of shares outstanding: 2000 - 12,546,477; 1999 - 12,542,638
Capital surplus 17,856 17,895
Retained earnings 56,261 48,704
Accumulated other comprehensive income (loss) 2,498 (6,467)
Common stock in treasury, at cost (2000 - 0 shares; 1999 - 3,220 shares) - (101)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 139,347 122,760
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,726,138 $ 1,556,323
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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48
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------------
(Dollars in Thousands, except per share data) 2000 1999 1998
----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 84,590 $ 76,235 $ 75,189
Debt securities
Taxable 18,477 16,654 14,820
Tax-exempt 7,495 6,322 4,953
Dividends 860 605 447
Federal funds sold 1,786 1,671 1,595
Deposits in other banks 111 139 50
----------- ----------- -----------
Total interest and dividend income 113,319 101,626 97,054
----------- ----------- -----------
INTEREST EXPENSE
Deposits 50,645 41,651 41,726
Short-term borrowings 1,931 1,127 641
Long-term debt 5,925 4,626 3,571
----------- ----------- -----------
Total interest expense 58,501 47,404 45,938
----------- ----------- -----------
Net interest income 54,818 54,222 51,116
----------- ----------- -----------
Provision for loan losses 605 1,060 2,016
----------- ----------- -----------
Net interest income after provision for loan losses 54,213 53,162 49,100
----------- ----------- -----------
NONINTEREST INCOME
Income from fiduciary activities 3,942 3,505 2,863
Service charges on deposit accounts 4,721 4,733 4,240
Other service charges, commissions and fees 3,304 2,979 2,695
Mortgage banking income 834 1,447 2,451
Gain on sale of credit card portfolio - - 1,339
Gain on sale of real estate 343 - -
Rental income on operating leases 22,179 18,469 15,965
Other operating income 1,494 1,191 1,196
Security gains 691 1,215 949
----------- ----------- -----------
Total noninterest income 37,508 33,539 31,698
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 27,779 26,249 25,381
Net occupancy 3,431 3,093 3,251
Furniture and equipment 4,610 4,622 4,216
Professional services 1,959 2,250 1,502
Depreciation on operating lease assets 17,469 14,641 12,641
Merger related and restructuring costs 2,898 423 -
Other 12,057 11,181 11,543
----------- ----------- -----------
Total noninterest expenses 70,203 62,459 58,534
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 21,518 24,242 22,264
Income tax expenses 4,951 6,257 5,670
----------- ----------- -----------
NET INCOME $ 16,567 $ 17,985 $ 16,594
=========== =========== ===========
Per share information:
Basic earnings per share $ 1.32 $ 1.43 $ 1.32
Diluted earnings per share 1.32 1.43 1.31
Dividends declared 0.750 0.721 0.664
The accompanying notes are an integral part of these consolidated financial
statements.
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49
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated
Shares Other
Common Common Capital Retained Comprehensive Treasury
Stock Stock Surplus Earnings Income (Loss) Stock Total
------------ --------- ---------- --------- -------------- -------- ----------
(Dollars in Thousands)
Balance, January 1, 1998 9,656,565 $ 48,283 $ 16,872 $ 47,385 $ 4,499 $ (2,263) $ 114,776
Comprehensive income:
Net income 16,593 16,593
Change in net unrealized gain (loss)
on securities AFS, net of
reclassification adjustment and
tax effects 1,371 1,371
----------
Total comprehensive income 17,964
----------
Common stock issued 24,823 124 439 563
Stock dividend issued - 5% common stock,
including cash paid in lieu of -
fractional shares -
(including 79,332 shares of treasury stock) 403,348 2,017 13,492 (17,723) - 2,168 (46)
Cash dividends declared (7,343) (7,343)
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 transacations of pooled entities (4,714) (24) (43) - (67)
------------ --------- ---------- --------- -------------- -------- ----------
Balance, December 31, 1998 10,080,022 50,400 31,132 38,912 5,870 (1,185) 125,129
Comprehensive income:
Net income 17,985 17,985
Change in net unrealized gain (loss)
on securities AFS, net of
reclassification adjustment and
tax effects (12,337) (12,337)
----------
Total comprehensive income 5,648
----------
Common stock issued 7,555 38 109 147
5-for-4 stock split effected in the form of
a 25% common stock dividend 2,514,878 12,574 (12,574) (32) (32)
Cash dividends declared (8,161) (8,161)
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
Stock transaction of pooled entities (56,597) (283) (784) (1,067)
------------ --------- ---------- --------- -------------- -------- ----------
Balance, December 31, 1999 12,545,858 62,729 17,895 48,704 (6,467) (101) 122,760
Comprehensive income:
Net income 16,567 16,567
Change in net unrealized gain (loss)
on securities AFS, net of
reclassification adjustment and
tax effects 8,965 8,965
----------
Total comprehensive income 25,532
----------
Common stock issued 1,133 5 11 16
Cash dividends declared (9,005) (9,005)
Issuance of treasury stock
Directors' compensation plan (3,220 shares) (49) 101 52
Cash paid in lieu of fractional shares (514) (2) (1) (5) (8)
------------ --------- ---------- --------- -------------- -------- ----------
Balance, December 31, 2000 12,546,477 $ 62,732 $ 17,856 $ 56,261 $ 2,498 $ - $ 139,347
============ ========= ========== ========= ============== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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50
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 16,567 $ 17,985 $ 16,594
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 21,166 18,227 15,942
Accretion & amortization of investment securities 18 620 407
Provision for loan losses 605 1,060 2,016
Provision for deferred income taxes 256 1,269 862
Gain on sale of real estate (343) -- --
Gain on sales of securities available-for-sale (691) (1,215) (949)
Gain on sale of credit card portfolio -- -- (1,338)
Gain on sale of mortgage loans (180) (418) (642)
Proceeds from sales of mortgage loans 35,109 73,619 109,465
Originations of mortgage loans held for sale (35,787) (66,565) (115,344)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable and
other assets (2,557) 888 (4,202)
Increase in accrued interest payable 2,994 275 608
Increase (decrease) in other liabilities (33) 32 1,075
-------------- -------------- --------------
Net cash provided by operating activities 37,124 45,777 24,494
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing
deposits in other banks 2,534 566 (542)
Net increase (decrease) in short-term investments (574) (29) 1,560
Proceeds from sales of securities available-for-sale 21,766 29,360 10,690
Proceeds from maturities or calls of
securities held-to-maturity 8,074 13,022 29,354
Proceeds from maturities or calls of
securities available-for-sale 54,791 46,620 46,494
Purchases of securities held-to-maturity (726) (1,165) (8,614)
Purchases of securities available-for-sale (125,274) (141,010) (159,578)
Net loans and direct finance leases made to customers (75,521) (80,379) (45,929)
Proceeds from sale of credit card portfolio -- -- 9,337
Purchases of equipment acquired for
operating leases, net (24,124) (25,109) (19,162)
Purchases of premises and equipment (3,313) (2,320) (3,963)
Proceeds from sale of premises and equipment 812 32 36
-------------- -------------- --------------
Net cash used by investing activities (141,555) (160,412) (140,317)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 131,486 69,836 105,818
Net increase (decrease) in short-term borrowings (14,716) 24,480 (1,442)
Proceeds from issuance of long-term debt 70,740 25,063 45,982
Repayment of long-term debt (42,515) (22,234) (17,289)
Proceeds from issuance of common stock 16 147 563
Cash dividends (8,736) (7,828) (7,167)
Cash paid in lieu of fractional shares (8) (32) (49)
Purchase of treasury stock -- (1,067) (2,492)
Proceeds from issuance of treasury stock 52 1,096 1,774
Stock transactions of pooled entity -- -- (67)
-------------- -------------- --------------
Net cash provided by financing activities 136,319 89,461 125,631
-------------- -------------- --------------
Net change in cash and cash equivalents 31,888 (25,174) 9,808
Cash and cash equivalents:
Beginning of year 71,679 96,853 87,045
-------------- -------------- --------------
End of year $ 103,567 $ 71,679 $ 96,853
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 55,507 $ 47,129 $ 45,330
Income taxes 5,350 5,218 5,116
The accompanying notes are an integral part of these consolidated financial
statements.
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51
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 Presentation and Consolidation - The consolidated financial
statements include the accounts of Sterling Financial Corporation (Sterling) and
its wholly-owned subsidiaries, Bank of Lancaster County, N.A.(Bank of Lancaster
County), First National Bank of North East (First National), Bank of Hanover and
Trust Company (Bank of Hanover), HOVB Investment Co., T & C Leasing, Inc. (T&C)
and Sterling Mortgage Services, Inc. (inactive). The consolidated financial
statements also include Town & Country, Inc. (Town & Country), a wholly-owned
subsidiary of Bank of Lancaster County. 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
financial services to individual and corporate customers located in south
central Pennsylvania and northeastern Maryland.
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. Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
51
52
reflected in earnings when realized. 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
52
53
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.
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 contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrowers prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
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 loans effective interest rate, the loans 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.
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.
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54
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 2000, 1999 and 1998 were $1,042,000, $947,000 and $943,000.
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, 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, 2000, 1999
and 1998 have been computed based on the following:
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2000 1999 1998
------------------ ------------------ ------------------
Net income available to common stockholders $ 16,567 $ 17,985 $ 16,594
------------------ ------------------ ------------------
Average number of shares outstanding 12,544,533 12,559,580 12,580,963
Effect of dilutive stock options 12,107 60,535 63,607
------------------ ------------------ ------------------
Average number of shares outstanding used to
calculate diluted earnings per common share 12,556,640 12,620,115 12,644,570
================== ================== ==================
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% stock dividend declared in
1999 and the 5% stock dividend declared in 1998.
Comprehensive Income - 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 components of other comprehensive income and related tax effects for
the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
------------- -------------- -----------
Unrealized holding gains (losses) on
available-for-sale securities $ 14,483 $ (17,620) $ 3,069
Reclassification adjustment for gains
realized in income (691) (1,215) (949)
------------- -------------- -----------
Net unrealized gains (losses) 13,792 (18,835) 2,120
Income tax (expense) benefit (4,827) 6,498 (749)
------------- -------------- -----------
Net-of-tax amount $ 8,965 $ (12,337) $ 1,371
============= ============== ===========
Reclassifications - Certain items in the 1999 and 1998 consolidated
financial statements have been reclassified to conform with the 2000
presentation format. Such reclassifications had no impact on net income.
Recent Accounting Pronouncements - Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, requires all derivative instruments to be carried at fair value on
the balance sheet. This requirement is in contrast to previous accounting
guidance, which does not require unrealized gains and losses on derivatives used
for hedging purposes to be recorded in the financial statements. The new
statement does allow hedge accounting treatment for derivatives used to hedge
various risks and sets forth specific criteria to be used to determine when
hedge accounting can be applied. Hedge accounting treatment provides for changes
in fair value or cash flows of both the derivative and the hedged item to be
recognized in earnings in the same period. Statement No. 133 does not change the
accounting for those derivative instruments not designated in a hedge accounting
relationship, considered trading derivatives, for which fair value changes are
recorded through earnings as they occur.
On January 1, 2001, Sterling adopted the provisions of Statement No.
133, with no material impact on Sterling's financial condition or results of
operations.
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56
In September 2000, Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued.
This statement replaces Statement No. 125. The guidance in Statement No. 140,
while not changing most of the guidance originally issued in Statement No. 125,
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
related to transferred assets.
Certain provisions of the statement relating to recognition,
reclassification and disclosure of collateral, as well as the disclosure of
securitization transactions, became effective for Sterling for 2000 year-end
reporting. Other provisions related to the transfer and servicing of financial
assets and extinguishments of liabilities are effective for transactions
occurring after March 31, 2001. The application of the new rules will not have a
material impact on Sterling's financial condition or results of operations.
NOTE 2 - BUSINESS COMBINATIONS
Hanover Bancorp, Inc. - On July 27, 2000, Sterling completed its merger
with Hanover Bancorp, Inc. (Hanover), parent company of Bank of Hanover and
Trust Company, headquartered in Hanover, Pennsylvania. Bank of Hanover, with 13
branches in York and Adams counties, Pennsylvania, and one branch in
Westminster, Maryland, continues to operate as a separate commercial bank.
Under the terms of the agreement, Hanover Bancorp shareholders received
.93 shares of Sterling common stock for each share of Hanover Bancorp's common
stock in a tax-free exchange. Sterling issued 3,611,409 shares of its common
stock in connection with the merger.
Northeast Bancorp, Inc. - On June 15, 1999, Sterling completed the
acquisition of Northeast Bancorp, Inc. (Northeast), the parent company of First
National Bank of North East, headquartered in North East, Maryland. First
National, with four branches in Cecil County, Maryland, continues to operate as
a separate commercial bank.
Under the terms of the agreement, Northeast shareholders received two
shares of Sterling common stock for each share of Northeast's common stock in a
tax-free exchange. Sterling issued 677,624 shares of its common stock in
connection with this merger.
Both transactions were accounted for under the pooling-of-interests
method of accounting. Accordingly, the consolidated financial statements have
been restated to include the consolidated accounts of Hanover Bancorp and
Northeast Bancorp for all periods presented.
The effect of the Northeast and Hanover mergers on Sterling's results of
operations were as follows:
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Sterling Sterling
Historical Northeast (1) Hanover Consolidated
------------------ ---------------- ----------------- ------------------
For the year ended 1999
Net interest income $ 36,029 $ 1,888 $ 16,305 $ 54,222
Net income 12,904 335 4,746 17,985
Dividends declared 6,276 85 1,800 8,161
For the year ended 1998
Net interest income 31,915 3,633 15,568 51,116
Net income 11,552 790 4,252 16,594
Dividends declared 5,356 341 1,646 7,343
(1) Represents Northeast's results through June 30, 1999, the nearest interim
period prior to the merger.
The effect of the Hanover merger on Sterling's financial condition was
as follows:
Reclassifications and Sterling
Sterling Hanover Eliminations Consolidated
--------------- -------------- --------------------------- ------------------
As of December 31, 1999
Assets $ 1,059,374 $ 503,924 $ (6,975) $ 1,556,323
Liabilities 969,356 471,176 (6,969) 1,433,563
Stockholders' equity 90,018 32,748 (6) 122,760
Financial data for Sterling and Hanover from January 1 to July 31,
2000 is presented below. Although the consummation date was July 27, 2000, the
financial data presented is for the nearest interim period.
Sterling
Sterling Hanover Consolidated
---------------- --------------- ---------------
Net interest income $ 22,507 $ 9,652 $ 32,159
Net income 8,603 2,650 11,253
Dividends declared 3,305 932 4,237
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Sterling'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, 2000 and 1999 was approximately $13,491,000 and $12,311,000.
Balances maintained at the Federal Reserve Bank are included in cash and due
from banks.
NOTE 4 - 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 $120,837,000 in 2000 and $126,756,000 in
1999.
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The amortized cost and fair values of securities were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- --------------------- --------------------- -----------------
DECEMBER 31, 2000:
Available-for-sale:
U.S. Treasury securities $ 35,835 $ 170 $ 19 $ 35,986
U.S. Government agencies 70,711 581 304 70,988
States and political subdivisions 139,343 2,071 2,350 139,064
Mortgage-backed securities 73,447 374 1,009 72,812
Corporate securities 100,407 575 284 100,698
----------------- --------------------- --------------------- -----------------
Subtotal 419,743 3,771 3,966 419,548
Equity securities 11,702 4,683 637 15,748
----------------- --------------------- --------------------- -----------------
Total $ 431,445 $ 8,454 $ 4,603 $ 435,296
================= ===================== ===================== =================
Held-to-maturity:
U.S. Government agencies $ 604 $ - $ 5 $ 599
States and political subdivisions 39,151 786 21 39,916
Mortgage-backed securities 676 19 - 695
Corporate securities 2,866 1 11 2,856
----------------- --------------------- --------------------- -----------------
Subtotal 43,297 806 37 44,066
Equity securities 7,788 - - 7,788
----------------- --------------------- --------------------- -----------------
Total $ 51,085 $ 806 $ 37 $ 51,854
================= ===================== ===================== =================
DECEMBER 31, 1999:
Available-for-sale:
U.S. Treasury securities $ 37,010 $ 29 $ 225 $ 36,814
U.S. Government agencies 59,081 114 1,469 57,726
States and political subdivisions 111,969 513 5,471 107,011
Mortgage-backed securities 83,149 6 3,180 79,975
Corporate securities 82,346 5 1,503 80,848
----------------- --------------------- --------------------- -----------------
Subtotal 373,555 667 11,848 362,374
Equity securities 8,504 2,623 1,303 9,824
----------------- --------------------- --------------------- -----------------
Total $ 382,059 $ 3,290 $ 13,151 $ 372,198
================= ===================== ===================== =================
Held-to-maturity:
U.S. Treasury securities $ 501 $ - $ 1 $ 500
U.S. Government agencies 1,460 - 14 1,446
States and political subdivisions 42,518 245 492 42,271
Mortgage-backed securities 1,033 23 4 1,052
Corporate securities 4,757 - 47 4,710
----------------- --------------------- --------------------- -----------------
Subtotal 50,269 268 558 49,979
Equity securities 8,160 - - 8,160
----------------- --------------------- --------------------- -----------------
Total $ 58,429 $ 268 $ 558 $ 58,139
================= ===================== ===================== =================
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, 2000,
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.
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Securities Available- Securities Held-to-
For-Sale Maturities
--------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------- --------------- ---------------- --------------
Due in one year or less $ 48,391 $ 48,355 $ 4,403 $ 4,404
Due after one year through five years 148,739 149,447 12,620 12,799
Due in five years through ten years 48,638 49,116 21,891 22,431
Due after ten years 100,528 99,818 3,707 3,737
----------------- --------------- ---------------- --------------
346,296 346,736 42,621 43,371
Mortgage-backed securities 73,447 72,812 676 695
----------------- --------------- ---------------- --------------
$ 419,743 $ 419,548 $ 43,297 $ 44,066
================= =============== ================ ==============
Proceeds from sales of securities available-for-sale were
$21,766,000, $29,360,000 and $10,690,000 for the years ended December 31,
2000, 1999 and 1998. Gross gains of $1,042,000, $1,450,000 and $949,000 were
realized on these sales for the years ended December 31, 2000, 1999 and 1998.
Gross losses of $351,000 and $235,000 were realized on these sales for the
years ended December 31, 2000 and 1999.
NOTE 5 - LOANS
Loans outstanding at December 31, were as follows:
2000 1999
------------ ----------
Commercial,financial and agricultural $ 510,818 $456,958
Real Estate - construction 9,665 9,127
Real Estate - mortgage 155,947 155,894
Consumer 278,127 263,356
Lease financing receivables (net of unearned income) 78,658 73,123
------------ ----------
Total loans (gross) $1,033,215 $958,458
============ ==========
Changes in the allowance for loan losses for the years ended December
31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
----------- ----------- -----------
Balance at January 1 $ 11,875 $ 11,475 $ 11,050
Provisions for loan losses charged to income 605 1,060 2,016
Loans charged off (1,181) (1,149) (2,082)
Recoveries of loans previously charged off 417 489 491
----------- ----------- -----------
Balance at December 31 $ 11,716 $ 11,875 $ 11,475
=========== =========== ===========
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Information concerning impaired loans at December 31, 2000 and 1999
are as follows:
2000 1999
---------- ---------
Impaired loans with a valuation allowance $ 4,953 $ 2,732
Impaired loans without a valuation allowance -- --
---------- ---------
Total impaired loans $ 4,953 $ 2,732
========== =========
Valuation allowance related to impaired loans $ 1,184 $ 131
========== =========
2000 1999 1998
---------- --------- ---------
Average investment in impaired loans $ 4,505 $ 3,015 $3,510
Interest income recognized on impaired loans 266 168 146
Interest income recognized on a cash basis on
impaired loans 266 168 146
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others were $276,436,000 and $273,981,000 at December 31, 2000
and 1999.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2000 and 1999 is summarized as
follows:
2000 1999
------------ ------------
Land $ 5,320 $ 5,663
Buildings 23,820 23,256
Leasehold improvements 2,331 2,128
Equipment, furniture and fixtures 25,681 23,775
------------ ------------
57,152 54,822
Less: Accumulated depreciation (27,345) (24,162)
------------ ------------
$ 29,807 $ 30,660
============ ============
The subsidiary banks of Sterling leases certain banking facilities
under operating leases which expire on various dates through 2022. Renewal
options are available on these leases. Minimum future rental payments as of
December 31, 2000, under noncancelable real estate leases, are payable as
follows:
Due in 2001 $ 936
Due in 2002 864
Due in 2003 804
Due in 2004 696
Due in 2005 592
Later Years 5,115
---------
Total minimum future rental payments $ 9,007
=========
Total rent expense charged to operations amounted to $961,000,
$900,000 and $894,000 for the years ended December 31, 2000, 1999 and 1998.
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NOTE 7 - LEASES
Sterling's net investment in direct financing leases, included in
loans receivable, at December 31, 2000 and 1999 consisted of the following:
2000 1999
------------- -------------
Minimum lease payments receivable $ 91,574 $ 84,935
Lease origination costs 541 490
Unearned income (13,457) (12,302)
------------- -------------
$ 78,658 $ 73,123
============= =============
The allowance for uncollectible lease payments, included in the
allowance for loan losses, was $767,000 and $737,000 at December 31, 2000 and
1999.
Included in other assets are investments in property on operating
lease and property held for lease. A breakdown of this property by major
classes as of December 31, 2000 and 1999 is as follows:
2000 1999
------------ ------------
Automobiles $ 27,103 $ 24,497
Heavy trucks, trailers and buses 16,878 15,984
Trucks, light and medium duty 37,409 31,335
Other 20,873 16,536
------------ ------------
102,263 88,352
Less: Accumulated depreciation (47,969) (40,713)
------------ ------------
$ 54,294 $ 47,639
============ ============
Minimum future rentals on noncancelable finance and operating leases
as of December 31, 2000 are as follows:
Finance Operating
------------ -----------
Due in 2001 $ 32,181 $ 22,226
Due in 2002 24,260 9,545
Due in 2003 17,295 4,088
Due in 2004 13,545 1,787
Due in 2005 4,171 993
Thereafter 122 80
------------ -----------
Total minimum future rentals $ 91,574 $ 38,719
============ ===========
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NOTE 8 - DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or
more at December 31, 2000 and 1999 was $95,402,000 and $69,538,000.
At December 31, 2000, the scheduled maturities of time deposits are
as follows:
Due in 2001 $ 393,437
Due in 2002 187,020
Due in 2003 63,048
Due in 2004 10,461
Due in 2005 11,373
Thereafter 11,381
------------
$ 676,720
============
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings and weighted average interest rates consist of
the following at December 31, 2000 and 1999:
2000 1999
--------------------- ----------------------
AMOUNT RATE AMOUNT RATE
---------- --------- ----------- ---------
Federal funds purchased $ - 0.00% $ 300 6.00%
Securities sold under repurchase agreements 8,676 5.67% 13,572 4.57%
Interest-bearing demand notes issued
to the U.S. Treasury 5,980 5.74% 6,500 4.74%
Lines of credit 11,000 7.10% 20,000 6.48%
----------- -----------
Total $25,656 $40,372
=========== ===========
The securities sold under repurchase agreements represent collateral
to the lending party and are primarily U.S. Treasury and agency securities.
These securities are maintained under Sterling's control.
NOTE 10 - LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2000 and
1999:
2000 1999
----------- ----------
FHLB redeemable advances, 5.06% - 7.52%, due 2000 - 2014, with a weighted
average interest rate of 6.03% and 5.54% at
December 31, 2000 and 1999. $ 65,669 $45,619
FHLB nonredeemable advances, 3.00% - 7.45%, due 2000 - 2011,
with a weighted average interest rate of 6.37% and 6.13% at
December 31, 2000 and 1999. 25,400 11,306
Notes payable to five 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 6.70% and 8.33%
at December 31, 2000 and 1999. The notes mature through 2004. 22,781 28,700
----------- ----------
$113,850 $85,625
=========== ==========
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The contractual maturities of long-term debt as of December 31, 2000
are shown below. Actual maturities may differ from contractual maturities due
to the convertible features of the FHLB advances, which may be prepaid by
Sterling, in the event the FHLB converts them to adjustable rate.
Due in 2001 $ 15,218
Due in 2002 24,379
Due in 2003 8,947
Due in 2004 14
Due in 2005 14
Thereafter 65,278
-----------
$ 113,850
===========
Under the 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, 2000, Sterling has
additional funding commitments from these financial institutions totaling
$22,720,000.
NOTE 11 - INCOME TAXES
The allocation of income taxes between current and deferred is as
follows for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
----------------- --------------- ---------------
Current $ 4,695 $ 4,988 $ 4,808
Deferred 256 1,269 862
----------------- --------------- ---------------
Total $ 4,951 $ 6,257 $ 5,670
================= =============== ===============
The effective income tax rates for financial reporting purposes are
less than the federal statutory rate of 35% for the years ended December 31,
2000, 1999 and 1998 for reasons shown as follows:
2000 1999 1998
-------------- ------------- --------------
Pretax income 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Tax-exempt interest income (15.6%) (11.4%) (10.5%)
Disallowed interest 2.2% 1.4% 1.3%
Disallowed merger costs 1.8% 0.4% 0.0%
Low-income housing credits (1.0%) (0.9%) (1.0%)
State tax, net of federal tax benefit 0.8% 0.7% 0.8%
Other, net (0.2%) 0.6% (0.1%)
-------------- ------------- --------------
Effective tax rates 23.0% 25.8% 25.5%
============== ============= ==============
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The income tax provision includes $242,000, $421,000 and $323,000 of
income taxes relating to realized securities gains for the years ended
December 31, 2000, 1999 and 1998.
The significant components of Sterling's deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows:
2000 1999
----------- -------------
Deferred tax assets
Allowance for loan losses $ 3,853 $ 3,859
Employee benefit plans 447 317
Accrued directors fees 568 544
State net operating loss carryforwards 333 397
Unrealized loss on securities available-for-sale - 3,394
Restructuring charge reserve 439 -
Other 157 153
----------- -------------
5,797 8,664
----------- -------------
Deferred tax liabilities
Leasing (10,464) (9,881)
Premises and equipment (85) (273)
Deferred loan fees (462) (25)
Securities accretion and mark-to-market (332) (379)
Unrealized gain on securities available for sale (1,349) -
Other (53) (55)
----------- -------------
(12,745) (10,613)
----------- -------------
Net deferred tax liablitity $(6,948) $ (1,949)
=========== =============
A subsidiary of Sterling has generated net operating loss
carryforwards in numerous states, the most significant of which totals
$3,900,000 and expires through the year 2010.
NOTE 12 - 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.
Sterling's exposure to credit loss is represented by the contractual
amount of these commitments. Sterling follows the same credit policies in
making commitments as it does for on-balance sheet instruments.
At December 31, 2000 and 1999, the following instruments were
outstanding whose contract amounts represent credit risk.
2000 1999
---------------- ----------------
Standby letters of credit $ 49,309 $ 23,935
Commitments to extend credit 231,516 227,121
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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.
Standby letters-of-credit are conditional commitments issued by
Sterling to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters-of-credit issued have expiration dates
within one year. The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to
customers. Sterling generally holds collateral supporting those commitments if
deemed necessary.
From time to time, Sterling and its subsidiaries may be named as
defendants in legal proceedings that arise during the normal course of
business. While any litigation has an element of uncertainty, management is of
the opinion that the liability, if any, resulting from these actions will not
have a material effect on the consolidated financial condition or results of
operations of Sterling.
NOTE 13 - 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, 2000, 1,085,595 shares were available
to be issued under the plan.
Sterling also maintains a directors' stock compensation plan
(Directors' Plan). Under the Directors' Plan, each non-employee director is
entitled to receive 250 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, 2000,
20,900 shares were available to be issued under the plan.
Sterling (on a consolidated basis) and its banking subsidiaries are
subject to various regulatory capital requirements administered by 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's 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
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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 in the Regulations).
Management believes, as of December 31, 2000 and 1999, that Sterling and the
banks met all minimum capital adequacy requirements to which they are subject.
As of December 31, 2000, 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 set forth in the
following tables. There are no conditions or events since the notification
that management believes have changed the banks' category. Sterling's and the
banks' actual capital amounts and ratios as of December 31, 2000 and 1999 are
also presented in the table.
Minimum To Be Well
Capitalized Under
Minimum Captial Prompt Corrective
Actual Requirement Action Provisions
-------------------------- ---------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------------- ------------- -------------- ------------- -----------
DECEMBER 31, 2000
Total capital to risk weighted assets
Sterling (consolidated) $ 148,361 11.5% $ 103,099 8.0% $ n/a n/a
Bank of Lancaster County, N.A. 91,608 10.4% 70,791 8.0% 88,489 10.0%
Bank of Hanover and Trust Company 35,334 10.1% 27,885 8.0% 34,856 10.0%
First National Bank of North East 8,655 13.2% 5,240 8.0% 6,550 10.0%
Tier 1 capital to risk weighted assets
Sterling (consolidated) 135,086 10.5% 51,549 4.0% n/a n/a
Bank of Lancaster County, N.A. 82,915 9.4% 35,395 4.0% 53,093 6.0%
Bank of Hanover and Trust Company 31,289 9.0% 13,943 4.0% 20,914 6.0%
First National Bank of North East 8,153 12.4% 2,620 4.0% 3,930 6.0%
Tier 1 capital to average assets
Sterling (consolidated) 135,086 7.4% 72,852 4.0% n/a n/a
Bank of Lancaster County, N.A. 82,915 8.0% 41,590 4.0% 51,988 5.0%
Bank of Hanover and Trust Company 31,289 5.8% 21,673 4.0% 27,091 5.0%
First National Bank of North East 8,153 8.8% 3,718 4.0% 4,648 5.0%
DECEMBER 31, 1999
Total capital to risked weighted assets
Sterling (consolidated) $ 138,404 11.6% $ 95,273 8.0% $ n/a n/a
Bank of Lancaster County, N.A. 86,276 10.5% 65,882 8.0% 82,353 10.0%
Bank of Hanover and Trust Company 33,978 10.9% 24,897 8.0% 31,121 10.0%
First National Bank of North East 8,481 14.5% 4,677 8.0% 5,846 10.0%
Tier 1 capital to risked weighted assets
Sterling (consolidated) 126,527 10.6% 47,636 4.0% n/a n/a
Bank of Lancaster County, N.A. 78,537 9.5% 32,941 4.0% 49,412 6.0%
Bank of Hanover and Trust Company 30,256 9.7% 12,448 4.0% 18,672 6.0%
First National Bank of North East 8,046 13.8% 2,338 4.0% 3,507 6.0%
Tier 1 capital to average assets
Sterling (consolidated) 126,527 7.7% 66,113 4.0% n/a n/a
Bank of Lancaster County, N.A. 78,537 8.1% 38,773 4.0% 48,466 5.0%
Bank of Hanover and Trust Company 30,256 6.0% 20,064 4.0% 25,080 5.0%
First National Bank of North East 8,046 9.2% 3,491 4.0% 4,364 5.0%
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NOTE 14- MERGER RELATED COSTS
During the third quarter of 2000, Sterling completed its merger with
Hanover Bancorp, Inc. and incurred $2,898,000 of merger related and
restructuring charges. The direct costs that resulted from the merger totaled
$1,426,000, and consisted primarily of legal, accounting, investment advising
fees, as well as regulatory filing fees and other miscellaneous expenses. In
addition, Sterling incurred restructuring costs totaling $1,472,000, which
primarily consists of severance and related benefit, professional fees,
termination fees related to non-cancelable service contracts and asset
write-offs related to conversion of the banking subsidiaries into a common
core processing system. The conversion to the new core processing system and
resulting reduction in the workforce is expected to result in an estimated net
annual savings of approximately $1.5 million, of which approximately 33% will
be realized in 2001 and 100% will be realized in years 2002 and beyond.
The following summarizes the restructuring expenses charged to
operations during 2000, and the remaining restructuring accrual balance at
December 31, 2000. The remaining unpaid expenses will be paid throughout
2001-2002.
Initial Expense Remaining Accrual
------------------ -----------------
Employee termination $ 718 $ 682
Asset disposal/write-downs 334 -
Noncancelable contracts 312 312
Professional fees 88 30
Other 20 20
------------------ -----------------
$ 1,472 $ 1,044
================== =================
Merger related costs during 1999 totaled $423,000 and was a direct
result of Sterling's acquisition of Northeast, completed in June 1999. These
merger expenses consisted entirely of attorney, accountant, investment
advisory and application fees.
NOTE 15 - EMPLOYEE BENEFIT PLANS
Sterling's subsidiaries maintain various employee benefits plans for
its employees.
A qualified non-contributory pension plan covers substantially all
employees of the Bank of Lancaster County with one year of service, who work
at least 1,000 hours per year, and are at least 21 years of age. The pension
plan specifies fixed benefits based on years of service and qualifying
compensation during the final years of employment. At December 31, 2000, plan
assets include money market funds, U.S. Government agency, corporate, and
equity securities.
In December 2000, Bank of Lancaster County's board of directors
approved a resolution that will terminate the qualified non-contributory plan
in 2001, including the freezing of benefits effective February 28, 2001. All
excess funds that remain after satisfaction of all liabilities of the plan
will be provided to eligible active participants to provide additional
retirement
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income benefits. As a result of the board's action, Sterling expects to record
a settlement loss in 2001, which will result in net expense of approximately
$350,000. As a result of the plan termination, the discount rate used in
calculating the projected benefit obligation was lowered from 7.00% in 1999 to
5.50% in 2000, to more closely match the short-term nature of the settlement.
The settlement will include lump-sum payments and the purchase of annuity
contracts that will benefit the participants.
The Bank of Hanover's qualified non-contributory pension plan was
curtailed in January 1996, and the plan was administered in frozen status
until the termination date of July 1998, at which time all benefit obligations
were settled through the distribution of plan assets. As a result of Hanover's
plan termination in 1998, a settlement loss of $261,000 was incurred. The
settlement and termination of the plan was accounted for in accordance with
FASB Statement No. 88, Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits.
The Bank of Lancaster County also sponsors a retirement restoration
plan for any officer whose compensation exceeds $170,000. The plan was
designed to "restore" the level of benefits that is lost to these employees
under the qualified retirement plans because of Internal Revenue Code
restrictions. The plan allows for the calculation of benefits on the officers'
salaries in excess of $170,000.
The Bank of Lancaster County sponsors a qualified postretirement
benefit plan that 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 change in benefit obligation and the change in fair value of plan
assets related to the qualified pension plans, nonqualified pension and other
postretirement benefits for each of the years in the two-year period ended
December 31, 2000, follows.
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OTHER
QUALIFIED PENSION NONQUALIFIED PENSION POSTRETIREMENT BENEFITS
------------------------------ ------------------------- ------------------------
2000 1999 2000 1999 2000 1999
-------------- --------------- ------------- ----------- ---------- -------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 10,895 $ 10,864 $ 276 $ 244 $ 1,164 $ 1,180
Service cost 667 683 15 14 65 61
Interest cost 753 698 19 16 80 75
Benefit payments (359) (495) -- -- (57) (38)
Actuarial (gains) losses 623 (855) (1) 2 (26) (114)
Change in discount rate 4,142 --
-------------- --------------- ------------- ----------- ---------- -------------
Benefit obligation at end of year 16,721 10,895 309 276 1,226 1,164
-------------- --------------- ------------- ----------- ---------- -------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year 12,668 11,150 -- -- --
Return on plan assets 1,103 1,287 -- -- --
Employer contributions 477 726 -- -- 57 38
Benefit payments (359) (495) -- -- (57) (38)
-------------- --------------- ------------- ----------- ---------- -------------
Fair value of plan assets at end of year 13,889 12,668 -- -- -- --
-------------- --------------- ------------- ----------- ---------- -------------
RECONCILIATION OF FUNDED STATUS
Funded status of plans (2,832) 1,773 (309) (276) (1,226) (1,164)
Unrecognized net transition obligation -- -- 615 667
Unrecognized prior service costs (85) (94) 87 107 (174) (193)
Unrecognized net (gains) losses 3,229 (1,594) (7) (6) (541) (547)
-------------- --------------- ------------- ----------- ---------- -------------
PREPAID (ACCRUED) BENEFIT EXPENSE $ 312 $ 85 $ (229) $(175) $ (1,326) $(1,237)
============== =============== ============= =========== ========== =============
ASSUMPTIONS
Discount rate 5.50% 7.00% 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00% -- --
Weighted average rate of increase in
future compensation levels 4.50% 4.50% 4.50% 4.50% -- --
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The components of the retirement benefits cost for each of the years
in the three-year period ended December 31, 2000, are presented below.
QUALIFIED PENSION NONQUALIFIED PENSION
--------------------------------------------- -----------------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
--------------------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
------------- -------------- ---------------- ---------- -------------- ---------
RETIREMENT BENEFIT COSTS
Service cost $ 667 $ 683 $ 639 $ 15 $ 14 $ 13
Interest cost 753 698 745 19 16 15
Return on plan assets (1,103) (1,287) (964) -- -- --
Amortization of transition gains -- (69) (105) -- -- --
Amortization of prior service cost (8) (8) (9) 20 20 20
Actuarial gains (losses) (58) 294 (44) -- --
Special and/or contractual termination
benefits -- -- 261 -- --
------------- -------------- ---------------- ---------- -------------- ---------
Net retirement benefits cost $ 251 $ 311 $ 523 $ 54 $ 50 $ 48
============= ============== ================ ========== ============== =========
OTHER POSTRETIREMENT BENEFITS
---------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
------------- ---------------- --------------
RETIREMENT BENEFIT COSTS
Service cost $ 65 $ 61 $ 70
Interest cost 80 75 84
Amortization of transition losses 51 51 51
Amortization of unrecognized prior
service cost (19) (19) (19)
Actuarial losses (31) (24) (16)
------------- ---------------- --------------
Net retirement benefits cost $ 146 $ 144 $ 170
============= ================ ==============
Health care cost trend rates assumed with respect to other
postretirement benefits in measuring the accumulated postretirement benefit
were 5.5% in 2000, decreasing by .5% per year to an ultimate rate of 4.5% in
2002 and later. The health care cost trend rate assumption has a significant
effect on the amounts reported. The following table reflects the effect of a
1% point increase and a 1% point decrease in the health care cost trend rates:
1% Point 1% Point
Increase Decrease
------------- --------------
Effect on total of service and interest cost components $ 30 $ 24
Effect on postretirement benefit obligation 211 169
Sterling's subsidiaries also sponsor three defined contribution
plans. 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 are eligible to
participate in the plan. Employees of Town & Country, a wholly owned
subsidiary of the Bank of Lancaster County, only participate in the salary
deferral portion of the plan. Under the salary deferral feature, the plan
provides a matching employer contribution equal to 25% of the employee's
contribution. While employees can contribute up to 10% of their compensation,
Bank of Lancaster County's match is limited to 1.5% of an employee's
compensation. Under the performance incentive feature of the plan, additional
contributions are made to participant accounts each plan year for an amount
determined by the Board of Directors based on achieving certain performance
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objectives. Matching contributions and the performance incentive feature are
paid entirely in Sterling common stock. Total expense, including the incentive
portion of the plan, totaled $431,000, $427,000, and $393,000 for the years
ended December 31, 2000, 1999 and 1998.
Bank of Hanover maintains a defined contribution 401(k) plan to all
employees who have attained the age of 21, completed one year of service and
worked at least 1,000 hours. Under the salary deferral portion of the plan,
matching employer contributions are made equal to 50% of the employee's
contribution. While employees can contribute up to 15% of their compensation,
Hanover's match is limited to 4% of an employee's compensation. Additionally,
Hanover makes discretionary contribution to the plan as determined annually by
the Board of Directors. Total expense, including discretionary contributions,
related to Bank of Hanover's 401(k) totaled $217,000, $216,000 and $212,000 in
2000, 1999 and 1998.
First National maintains an Employee Stock Ownership plan with 401(k)
provisions (KSOP). All employees of First National, who have attained the age
of 18, have completed one year of service and worked at least 1,000 hours are
eligible to participate in the plan. Under the salary deferral portion of the
plan, the plan provides a matching employer contribution equal to 50% of the
employee's contribution. While employees can contribute up to 15% of their
compensation, First National's match is limited to 6% of an employee's
compensation. Additionally, First National makes discretionary contributions
to the plan as determined annually by the Board of Directors. Total expense,
including the discretionary contribution, related to First National's KSOP
totaled $85,000, $78,000 and $82,000 for the years ended December 31, 2000,
1999 and 1998.
The number of shares owned at December 31, 2000 by Bank of Lancaster
County's Employees Stock Plan, Bank of Hanover's 401(k) plan, and First
National Bank of North East's KSOP plan total 828,006 shares, with an
approximate market value of $12,420,000. Dividends received totaling $588,000
during 2000 were reinvested in additional shares of Sterling common stock.
NOTE 16 - STOCK COMPENSATION
Sterling has an omnibus stock incentive plan under which incentive
and nonqualified stock options, stock appreciation rights, or restricted stock
may be issued. To date, only incentive and nonqualified stock options have
been issued under the plan. The options are granted periodically to key
employees at a price not less than the fair value of the shares at the date of
grant, and have a term of ten years. As of December 31, 2000, Sterling had
approximately 324,000 shares of common stock reserved for issuance under the
stock incentive plans.
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 cost
has been recognized. Sterling has adopted the provisions of FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25 on a prospective basis
beginning July 1, 2000. This Interpretation provided clarification on stock
option repricings, modifications to extend the term, modifications to
accelerate vesting, and other matters. Sterling has been impacted by the
Interpretation on the stock options previously issued by Hanover Bancorp, Inc.
which all became fully vested at the completion of the merger. The impact of
this accelerated
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vesting was not material to Sterling's earnings or stockholders' equity.
If compensation expense for Sterling's stock incentive plans had 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,
Accounting for Stock Based Compensation, net income and earnings per share
would have been adjusted to the proforma amounts indicated below:
2000 1999 1998
------------ ----------- -----------
Net income:
As reported $16,597 $17,985 $16,594
Proforma 15,763 17,492 16,386
Basic earnings per share:
As reported $ 1.32 $ 1.43 $ 1.32
Proforma 1.26 1.39 1.30
Diluted earnings per share:
As reported $ 1.32 $ 1.43 $ 1.31
Proforma 1.26 1.39 1.30
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:
2000 1999 1998
------------------ ------------------ -------------------
Dividend yield 4.45% 2.62% 2.16%
Risk-free interest rate 5.56% 6.44% 4.67%
Expected life 10 10 10
Expected volatility 38.1% 23.3% 22.9%
A summary of the status of Sterling's stock option plans for the
years ended December 31, 2000, 1999 and 1998 is presented below:
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2000 1999 1998
---------------------------- -------------------------- -------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
------------ --------------- ------------ ------------- -------------- ----------
Outstanding at January 1 331,184 $24.06 226,212 $23.04 180,120 $18.45
Granted 23,405 15.83 111,473 25.74 95,174 29.32
Excercised - - (3,783) 15.21 (17,963) 16.33
Forfeited (27,308) 18.83 (2,718) 20.71 (31,119) 19.51
----------- ----------- ------------
Outstanding at December 31 327,281 $23.91 331,184 $24.06 226,212 $23.05
=========== =========== ============
Options excercisable at
December 31 235,883 $22.38 111,418 $21.33 63,925 $17.59
Weighted average fair
value of options granted
during period $ 4.54 $ 9.72 $ 9.02
Information pertaining to options outstanding at December 31, 2000 is
as follows:
Options Outstanding Options Excercisable
------------------------------------------------- ----------------------------------------------
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Average Remaining
Range of Number Excerise Contractual Number Excerise Contractual
Exercise Prices Outstanding Price Life (in Years) Outstanding Price Life (in Years)
- -------------------------- ------------- -------------- -------------------- ------------ ------------ --------------------
$14.92 - $15.75 42,524 $ 15.40 6.6 27,024 $ 15.19 4.9
$16.00 - $22.14 139,112 18.99 7.3 139,112 18.99 7.3
$29.00 - $33.80 145,645 31.10 8.6 69,747 31.92 8.4
----------- -------------
327,281 $ 23.91 7.8 235,883 $ 22.38 7.4
=========== =============
NOTE 17 - 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
2000 and 1999. 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
banks, do not involve more than a normal risk of collectibility or present
other unfavorable features. Total loans to these persons at December 31, 2000
and 1999 amounted to $8,188,000 and $12,135,000. During 2000, $1,452,000 of
new loans were made and repayments totaled $5,399,000.
NOTE 18 - RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
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Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made to Sterling by its subsidiary banks.
The amount of dividends that may be paid from the subsidiary banks to Sterling
totals $38,794,000 at December 31, 2000. However, dividends paid by the
subsidiary banks would be prohibited if the effect thereof would cause the
banks' capital to be reduced below applicable minimum capital requirements.
Under current Federal Reserve regulations, the subsidiary banks are
limited to the amounts they may loan to their affiliates, including Sterling.
Loans to a single affiliate may not exceed 10%, and the aggregate of loans to
all affiliates may not exceed 20% of each bank subsidiaries' capital and
surplus (as defined by regulation). At December 31, 2000, the maximum amount
available for loans to Sterling totaled $13,583,000.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value 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 and short-term investments: The
carrying amounts of interest-bearing deposits and short-term investments
maturing within ninety days approximate their fair values. Fair values of
other interest-bearing deposits and short-term investments are estimated using
discounted cash flows analyses based on current rates for similar type
instruments.
Securities: Fair values for securities, excluding restricted equity
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. The carrying value of restricted stock
approximates fair value based on the redemption provisions of the security.
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: Fair values for 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
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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 flow analyses based on 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 fair values of
off-balance sheet instruments are not significant at December 31, 2000 and
1999.
The estimated fair values and related carrying or notional amounts of
Sterling's financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999
------------------------------------- -----------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------------- --------------- ------------------ ----------------
Financial Assets:
Cash and cash equivalents $ 103,567 $ 103,567 $ 71,679 $ 71,679
Interest-bearing deposits in banks 516 516 3,050 3,050
Short-term investments 603 603 29 29
Mortgage loans held for sale 1,978 1,978 1,120 1,120
Securities held-to-maturity 51,085 51,854 58,429 58,139
Securities available-for-sale 435,296 435,296 372,198 372,198
Loans 943,608 950,146 872,970 871,659
Accrued interest receivable 11,987 11,987 10,313 10,313
Financial Liabilities:
Deposits 1,420,300 1,424,268 1,288,814 1,286,272
Short-term borrowings 25,656 25,656 40,372 40,372
Long-term debt 113,850 118,141 85,625 84,132
Accrued interest payable 10,080 10,080 7,086 7,086
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NOTE 20 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Sterling Financial
Corporation is as follows:
DECEMBER 31,
--------------------------
BALANCE SHEETS 2000 1999
------------ ------------
Assets
Cash $ 1,715 $ 1,634
Securities available-for-sale 1,389 833
Investments in:
Bank subsidiaries 126,189 113,112
Nonbank subsidiaries 11,200 8,337
Other assets 262 289
------------ ------------
Total assets $ 140,755 $ 124,205
============ ============
Liabilities $ 1,408 $ 1,445
Stockholders' equity 13,947 122,760
------------ ------------
Total liabilities and stockholders' equity $ 140,755 $ 124,205
============ ============
YEARS ENDED DECEMBER 31,
----------------------------------------
STATEMENTS OF INCOME 2000 1999 1998
------------ ------------ ------------
Income
Dividends from banking subsidiaries $ 12,489 $ 10,419 $ 11,949
Dividends from nonbanking subsidiaries 155 -- --
Dividends on securities available for sale 35 108 83
Gain on securities available for sale 8 126 725
Other 7 3 4
------------ ------------ ------------
Total income 12,694 10,656 12,761
Operating expenses 1,851 636 350
Income before income taxes and equity in undistributed
------------ ------------ ------------
net income of subsidiaries 10,843 10,020 12,411
Income tax expense (benefit) (252) (112) 177
------------ ------------ ------------
11,095 10,132 12,234
Equity in undistributed net income of
Banking subsidiaries 5,335 7,643 4,359
Other subsidiaries 137 210 1
------------ ------------ ------------
Net Income $ 16,567 $ 17,985 $ 16,594
============ ============ ============
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YEARS ENDED DECEMBER 31
-------------------------------------
STATEMENTS OF CASH FLOWS 2000 1999 1998
---------- ------------- ------------
Cash flows from operating activities
Net Income $ 16,567 $ 17,985 $16,594
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed net income of subsidiaries (5,472) (7,853) (4,360)
Gain on sale of securities available-for-sale (8) (126) (725)
(Increase) decrease in other assets 28 (211) 7
Decrease in other liabilities (351) (328) (340)
---------- ------------- ------------
Net cash provided by operating activities 10,764 9,467 11,176
---------- ------------- ------------
Cash flows from investing activities
Purchase of securities available-for-sale (620) (3,040) --
Proceeds from sales and maturities of securities
available-for-sale 180 1,506 1,473
Investment in nonbanking subsidiary (1,567) (650) (5,739)
---------- ------------- ------------
Net cash used in investing activities (2,007) (2,184) (4,266)
---------- ------------- ------------
Cash flows from financing activities
Proceeds from issuance of common stock 16 147 563
Cash dividends (8,736) (7,828) (7,167)
Cash paid in lieu of fractional shares (8) (32) (49)
Purchase of treasury stock -- (1,067) (2,492)
Proceeds from issuance of treasury stock 52 1,096 1,774
---------- ------------- ------------
Net cash used in financing activities (8,676) (7,684) (7,371)
-------------------------------------
Increase (decrease) in cash 81 (401) (461)
Cash
Beginning of year 1,634 2,035 2,496
---------- ------------- ------------
End of year $ 1,715 $ 1,634 $ 2,035
========== ============= ============
NOTE 21 - SEGMENT REPORTING
Sterling has two reportable segments: 1) community banking and
related services, and 2) leasing operations. The community-banking segment
provides financial services to consumers, businesses, and governmental units
in south central Pennsylvania and northeastern Maryland. These services
include providing various types of loans to customers, wealth management
services, accepting deposits, and other typical banking services. The leasing
segment provides vehicle and equipment financing alternatives to businesses
primarily located in south central Pennsylvania and northeastern Maryland,
although assets are located throughout the United States.
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Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, 2000, 1999 and 1998 is as follows:
Community
Banking and
Related Intersegment Consolidated
Services Leasing Eliminations Totals
---------------- -------------- ------------------ ----------------
YEAR ENDED DECEMBER 31, 2000
Interest income $ 111,616 $ 6,755 $ (5,052) $ 113,319
Interest expense 55,922 7,631 (5,052) 58,501
Provision for loan losses 485 120 - 605
Noninterest income 14,762 22,746 - 37,508
Noninterest expense 49,926 20,277 - 70,203
Pre-tax income 20,045 1,473 - 21,518
Income tax expense 4,334 617 - 4,951
Net income 15,711 856 - 16,567
Assets 1,674,199 135,858 (83,919) # 1,726,138
YEAR ENDED DECEMBER 31, 1999
Interest income $ 99,784 $ 6,066 $ (4,224) $ 101,626
Interest expense 45,256 6,372 (4,224) 47,404
Provision for loan losses 970 90 - 1,060
Noninterest income 14,606 18,933 - 33,539
Noninterest expense 45,238 17,221 - 62,459
Pre-tax income 22,926 1,316 - 24,242
Income tax expense 5,666 591 - 6,257
Net income 17,260 725 - 17,985
Assets 1,491,543 123,190 (58,410) 1,556,323
YEAR ENDED DECEMBER 31, 1998
Interest income $ 95,743 $ 5,237 $ (3,926) $ 97,054
Interest expense 44,333 5,531 (3,926) 45,938
Provision for loan losses 1,956 60 - 2,016
Noninterest income 15,565 16,385 (252) 31,698
Noninterest expense 43,637 15,149 (252) 58,534
Pre-tax income 21,382 882 - 22,264
Income tax expense 5,274 396 - 5,670
Net income 16,108 486 - 16,594
Assets 1,421,465 102,382 (57,742) 1,466,105
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Sterling's reportable segments are strategic business units that
offer different products and services. They are managed separately because
each
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segment appeals to different markets and, accordingly, requires different
technology and marketing strategies. Sterling's chief operating decision maker
utilizes interest income, interest expense, noninterest income, noninterest
expense and the provision for income taxes in making decisions and determining
resources to be allocated to the segments.
Sterling does not have operating segments other than those reported
above. Parent company and treasury function income is included in the
community-banking segment, as the majority of effort of these functions is
related to this segment.
Sterling does not have a single external customer from whom it
derives 10% or more of its revenue.
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 2000 and 1999.
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Three Months Ended
-------------------------------------------------------------
December 31 September 30 June 30 March 31
-------------------------------------------------------------
2000
Interest and dividend income $ 29,738 $ 28,910 $ 27,837 $ 26,834
Interest expense 16,120 15,280 14,064 13,037
Provision for loan losses 158 158 139 150
Securities gains 34 134 263 260
Noninterest income 9,665 9,158 9,362 8,632
Noninterest expense 17,419 19,757 16,656 16,371
Income before income taxes 5,740 3,007 6,603 6,168
Income tax expense 1,236 608 1,618 1,489
Net income 4,504 2,399 4,985 4,679
Per share information:
Basic and diluted earnings per share $ 0.36 $ 0.19 $ 0.40 $ 0.37
Dividends declared 0.190 0.190 0.185 0.185
1999
Interest and dividend income $ 26,390 $ 25,868 $ 24,985 $ 24,383
Interest expense 12,633 12,037 11,403 11,331
Provision for loan losses 137 293 282 348
Securities gains 388 141 409 277
Noninterest income 8,515 7,969 7,946 7,894
Noninterest expense 16,400 15,522 15,430 15,107
Income before income taxes 6,123 6,126 6,225 5,768
Income tax expense 1,618 1,703 1,516 1,420
Net income 4,505 4,423 4,709 4,348
Per share information:
Basic and diluted earnings per share $ 0.36 $ 0.35 $ 0.37 $ 0.35
Dividends declared 0.185 0.184 0.176 0.176
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference is the information appearing in Sterling's
Current Report on Form 8-K dated November 8, 1999.
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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" on pp. 8-11 and
"Executive Officers" on pp. 14-15 in the 2001 Annual Meeting Proxy Statement.
Section 16(a) of the Securities Exchange Act of 1934 requires
Sterling's directors, executive officers and shareholders who beneficially own
more than 10% of Sterling's outstanding equity stock to file initial reports
of ownership and reports of changes in ownership of common stock and other
equity securities of Sterling with the Securities and Exchange Commission.
Based on a review of copies of such reports we received, and on the statements
of the reporting persons, Sterling believes that all Section 16(a) filing
requirements were complied with in a timely fashion during 2000, with the
exception of Mr. Glenn R. Walz, who inadvertently did not timely file one Form
4 relating to one transaction during 2000 and Mr. Howard E. Groff, who
inadvertently did not timely file one Form 4 relating to three transactions
during 2000.
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated by reference is the information under the headings
"Executive Compensation" on pp. 15-17 and "Sterling Financial Corporation
Directors' Compensation" on p. 27 in the 2001 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" on p. 4 and "Beneficial Ownership of Executive
Officers, Directors and Nominees" on p. 5 in the 2001 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" on pp. 27-28 in
the 2001 Annual Meeting Proxy Statement and under "Notes to Consolidated
Financial Statements - Note 17 - Related Party Transactions" located elsewhere
in this Form 10-K.
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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.
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 April 25, 2000.)
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 April 25, 2000.)
10.1 Agreement and Plan of Merger, dated January 25, 2000 by and
between Sterling Financial Corporation and Hanover Bancorp,
Inc.(Incorporated by reference to Annex A to the
Registrant's Registration Statement No. 333-33976 on Form
S-4, as amended, filed with the Securities and Exchange
Commission on May 1, 2000.)
10.2 Agreement and Plan or Reorganization, dated February 10,
1999 by and among Sterling Financial Corporation, Sterling
Financial Interim Acquisition Corporation, Northeast
Bancorp, Inc. and 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.)
10.3 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 September 30, 1999 Form 10-Q, as
amended, filed with the Securities and Exchange Commission,
on April 4, 2000.)
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10.4 Change of Control Agreements, dated July 27, 1999, August 7,
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, J. Roger
Moyer, Jr., Jere L. Obetz and Thomas P. Dautrich.
(Incorporated by reference to Exhibits 10.1, 10.2, 10.3 and
10.4 of the September 30, 1999 Form 10-Q, as amended, filed
with the Securities and Exchange Commission on April 4,
2000.)
10.5 Employment Agreement, dated January 25, 2000, between
Sterling Financial Corporation, Bank of Hanover and Trust
Company and J. Bradley Scovill. (Incorporated by reference
to Exhibit 10.10 to the Registrant's Registration Statement
No. 333-33976 on Form S-4, as amended, filed with the
Securities and Exchange Commission, on May 1, 2000.)
10.6 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, with the Securities and Exchange Commission, on May 30,
1997.)
10.7 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, as amended, filed with the Securities and Exchange
Commission, on January 16, 2001.)
10.8 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.)
10.9 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
99 Independent Auditors' Reports
Copies of the Exhibits referenced above will be provided to
Shareholders without charge by writing to Shareholder Relations, Sterling
Financial Corporation, 101 North Pointe Boulevard, Lancaster, PA 17601-4133.
(b) Reports on Form 8-K
A report on Form 8-K dated October 24, 2000, was filed November 1,
2000 pursuant to Item 5, Other Events, and Item 7, Exhibits. Exhibit 99.1 and
99.2 represents Sterling's Financial Highlights and Earnings Press Release for
Third Quarter 2000.
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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: /s/ John E. Stefan
------------------------------------
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,
/s/ John E. Stefan President and Chief March 27, 2001
------------------------------ Executive Officer; Director
(John E. Stefan)
/s/ J. Roger Moyer, Jr. Senior Executive Vice President, March 27, 2001
------------------------------ Chief Operating Officer,
(J. Roger Moyer, Jr.) Assistant Secretary; Director
/s/ J. Bradley Scovill Executive Vice President, Director March 27, 2001
------------------------------
(J. Bradley Scovill)
/s/ Jere L. Obetz Executive Vice President/Treasurer, March 27, 2001
------------------------------ Chief Financial Officer
(Jere L. Obetz)
/s/ Ronald L. Bowman Vice President/Secretary, March 27, 2001
------------------------------ Principal Accounting Officer
(Ronald L. Bowman)
/s/ Richard H. Albright, Jr. Director March 27, 2001
------------------------------
(Richard H. Albright, Jr.)
/s/ S. Amy Argudo Director March 27, 2001
------------------------------
(S. Amy Argudo)
/s/ Robert H. Caldwell Director March 27, 2001
------------------------------
(Robert H. Caldwell)
/s/ Bertram F. Elsner Director March 27, 2001
------------------------------
(Bertram F. Elsner)
/s/ Howard E. Groff, Jr. Director March 27, 2001
------------------------------
(Howard E. Groff, Jr.)
/s/ Joan R. Henderson Director March 27, 2001
------------------------------
(Joan R. Henderson)
/s/ J. Robert Hess Director, Vice Chairman of the March 27, 2001
------------------------------ Board
(J. Robert Hess)
/s/ Calvin G. High Director March 27, 2001
------------------------------
(Calvin G. High)
/s/ Terrence L. Hormel Director March 27, 2001
------------------------------
(Terrence L. Hormel)
/s/ David E. Hosler Director March 27, 2001
------------------------------
(David E. Hosler)
/s/ E. Glenn Nauman Director March 27, 2001
------------------------------
(E. Glenn Nauman)
/s/ W. Garth Sprecher Director March 27, 2001
------------------------------
(W. Garth Sprecher)
/S/ Glenn R. Walz Director March 27, 2001
------------------------------
(Glenn R. Walz)
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Exhibit Index
Page
Exhibits Required Pursuant to (in accordance with
Item 601 of Regulation S-K sequential numbering system)
3. Exhibits
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 April 25, 2000.)
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 April 25, 2000.)
10.1 Agreement and Plan of Merger, dated January 25, 2000 by and between
Sterling Financial Corporation and Hanover Bancorp,
Inc.(Incorporated by reference to Annex A to the Registrant's
Registration Statement No. 333-33976 on Form S-4, as amended, filed
with the Securities and Exchange Commission on May 1, 2000.)
10.2 Agreement and Plan or Reorganization, dated February 10, 1999 by
and among Sterling Financial Corporation, Sterling Financial
Interim Acquisition Corporation, Northeast Bancorp, Inc. and 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.)
10.3 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 September
30, 1999 Form 10-Q, as amended, filed with the Securities and
Exchange Commission, on April 4, 2000.)
10.4 Change of Control Agreements, dated July 27, 1999, August 7, 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, J. Roger Moyer, Jr., Jere L.
Obetz and Thomas P. Dautrich. (Incorporated by reference
toExhibits 10.1, 10.2, 10.3 and 10.4 of the September 30, 1999 Form
10-Q, as amended, filed with the Securities and Exchange Commission
on April 4, 2000.)
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10.5 Employment Agreement, dated January 25, 2000, between Sterling
Financial Corporation, Bank of Hanover and Trust Company and J.
Bradley Scovill. (Incorporated by reference to Exhibit 10.10 to
the Registrant's Registration Statement No. 333-33976 on Form S-4,
as amended, filed with the Securities and Exchange Commission, on
May 1, 2000.)
10.6 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, with the
Securities and Exchange Commission, on May 30, 1997.)
10.7 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, as amended, filed
with the Securities and Exchange Commission, on January 16, 2001.)
10.8 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.)
10.9 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 at Item
8 at Notes to Consolidated Financial Statements, Note 1.)
21 Subsidiaries of the Registrant. 87
23 Consent of Auditors. 88
99 Independent Auditors' Reports 91
86