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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, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------ SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _______________
COMMISSION FILE NUMBER 0-16276
------------
STERLING FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2449551
- -------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 NORTH POINTE BOULEVARD
LANCASTER, PENNSYLVANIA 17601-4133
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 581-6030 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $5.00 PER SHARE
---------------------------------------
(Title of class)
Indicate by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ___
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 1, 2002 was approximately $300,053,000.
The number of shares of Registrant's Common Stock outstanding on
March 1, 2002 was 13,467,811.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2002 Proxy Statement for the Registrant are
incorporated by reference into Part III of this report.
1
Sterling Financial Corporation
Table of Contents
Page
----
PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 8
Item 3. Legal Proceedings.......................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........................................ 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................. 9
Item 6. Selected Financial Data.................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 11
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 32
Item 8. Financial Statements and Supplementary Data................................................ 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 66
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 66
Item 11. Executive Compensation..................................................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 66
Item 13. Certain Relationships and Related Transactions............................................. 66
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 67
Signatures.................................................................................................. 70
2
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., Pennbanks Insurance Company SPC, Sterling Mortgage Services,
Inc. (inactive), Town & Country, Inc. and Sterling Financial Trust Company.
When words such as "believes," "expects," "anticipates," "may," "could,"
"should," "estimates" 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 impacting our various
lines of business;
- 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;
- The possibility that increased demand or prices for Sterling's
financial services and products may not occur;
- Volatility in interest rates;
- The success of our merger of Hanover Bancorp, Inc. and pending
acquisition of Equipment Finance Inc.; and
- Other risks and uncertainties.
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 $1.861 billion financial holding
company headquartered in Lancaster, Pennsylvania. Through its banking and
nonbanking subsidiaries, Sterling provides a full range of banking and
financial services to individuals and businesses, including commercial and
retail banking, leasing, wealth management and insurance. Sterling's
operations are conducted through its primary operating subsidiaries including
Bank of Lancaster County, N.A., Bank of Hanover and Trust Company, First
National Bank of North East, Town & Country, Inc. and Sterling Financial Trust
Company. The Company's footprint is its 51 branch banking offices in south
central Pennsylvania and northern Maryland, although its leasing subsidiary
conducts business in virtually every state.
Sterling's major source of operating funds is dividends that it
receives from its subsidiary banks. Sterling's expenses consist principally of
operating expenses. Dividends that Sterling pays to shareholders consist, in
part, of dividends declared and paid to Sterling by the subsidiary banks.
Sterling and its subsidiaries are not dependent upon a single
customer or a small number of customers, the loss of which would not have a
material adverse effect on the Company. Sterling does not depend on foreign
sources of funds, nor does it make foreign loans.
The common stock of Sterling is listed on The Nasdaq Stock Market
under the symbol SLFI.
Banking Subsidiaries
Bank of Lancaster County, N.A.
Bank of Lancaster County, N.A. is a full service commercial bank
operating under charter from
3
the Office of the Comptroller of the Currency. The bank's principal market
area is Lancaster County, Pennsylvania, which is the sixth largest county in
Pennsylvania in terms of population. Lancaster County has one of the strongest
and most stable economies in the state, with agriculture, industry and tourism
all contributing to the overall strength of the economy. No single sector
dominates the county's economy. At December 31, 2001, Bank of Lancaster County
had total assets of $1.15 billion, net loans of $682 million and total
deposits of $976 million.
The main office of the bank is located at 1 East Main Street,
Strasburg, Pennsylvania. In addition to its main office, the bank has 30
branches in Lancaster County, 1 branch in Chester County, Pennsylvania and 2
branches in Lebanon County (operating as Bank of Lebanon County). Bank of
Lancaster County's delivery channels of services to its customers also include
the ATM network, Internet and telephone banking.
Bank of Lancaster County has two wholly owned operating subsidiaries,
Town & Country, Inc., and Sterling Financial Trust Company.
Town & Country, Inc., is a small to mid-sized national lessor with a
significant presence in the fleet management and equipment leasing industry.
Its principal office is located in East Petersburg, PA, although it leases to
companies located throughout the United States. Assets totaled $146 million at
December 31, 2001, including approximately $83 million of finance lease
assets, and $56 million in assets held for operating leases.
In 2001, Sterling Financial Trust Company was incorporated as a
state-charted trust company. Effective January 1, 2002, the wealth management
divisions of Bank of Lancaster County and Bank of Hanover were combined into
this single entity. Through the formation of a separate trust company,
Sterling believes it will be able to increase revenue generation
opportunities, while increasing operating efficiencies.
On May 18, 1999, Bank of Lancaster County, N.A. and Murray Insurance
Associates, Inc. formed the Lancaster Insurance Group, LLC, a limited
liability company under the laws of the Commonwealth of Pennsylvania.
Lancaster Insurance Group offers comprehensive personal insurance coverage as
well as a complete range of business insurance programs. The Bank of Lancaster
County and Murray each own 50% of the organization.
The bank is subject to regulation and periodic examination by the
Office of the Comptroller of the Currency. The Federal Deposit Insurance
Corporation, as provided by law, insures the bank's deposits.
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. 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. First National's delivery
channels of its services also include the ATM network, Internet and telephone
banking. At December 31, 2001, the bank had total assets of approximately $102
million, loans of $70 million and total deposits of $92 million.
The bank is subject to regulation and periodic examination by the
Office of the Comptroller of the Currency. The Federal Deposit Insurance
Corporation, as provided by law, insures the bank's deposits.
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 conducts its business principally
through fourteen banking offices located in York and Adams Counties,
Pennsylvania and one office located in Westminster, Maryland. Bank of
Hanover's delivery channels of services to its customers also include the ATM
network, Internet and telephone banking. At December 31, 2001, the bank had
total assets of $559 million, total loans of $337 million and total deposits
of $471 million.
The bank is subject to regulation and periodic examination by the
Federal Deposit Insurance
4
Corporation and Pennsylvania Department of Banking. The Federal Deposit
Insurance Corporation, as provided by law, insures the bank's deposits.
Nonbanking Subsidiaries
HOVB Investment Company
HOVB Investment Company became a wholly owned subsidiary of Sterling
upon the completion of the merger with Hanover Bancorp, Inc. It is a Delaware
investment company whose principal activity is managing an equity securities
portfolio. Total assets totaled $7.9 million at December 31, 2001.
T&C Leasing, Inc.
Sterling owns all of the outstanding stock of a second leasing
company, T&C Leasing, Inc., which was incorporated in 1998. T&C Leasing is
also a fleet management and equipment leasing company is headquartered in East
Petersburg, Pennsylvania. This leasing company was formed to facilitate the
fleet management and equipment leasing needs of our existing customer base.
Pennbanks Insurance Co., SPC Segregated Portfolio Cells #5 and #8
Pennbanks Insurance Co., SPC and its segregated portfolios, including
Segregated Portfolios #5 and #8 that Sterling owns, holds an unrestricted
Class "B" Insurer's License under Cayman Islands Insurance Law. The segregated
portfolios are engaged in the business of reinsuring credit life and credit
accident and disability risks of their respective shareholders. Total assets
of the segregated portfolios as of December 31, 2001 totaled $1.5 million.
COMPETITION
The financial services industry in Sterling's market area is highly
competitive, including competition from commercial banks, savings banks,
credit unions, finance companies and nonbank providers of financial services.
Several of Sterling's competitors have legal lending limits that exceed
Sterling's subsidiaries, as well as funding sources on the capital markets
that exceeds Sterling's availability. The increased competition has resulted
from a changing legal and regulatory climate, as well as from the economic
climate.
SUPERVISION AND REGULATION
Bank Holding Company Regulation
Sterling is a financial holding company and, as such, is subject to
the regulations of the Board of Governors of the Federal Reserve System under
the Bank Holding Company Act of 1956. 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 requires a financial holding company to serve as a source of
financial and managerial strength to its subsidiary banks. As a result, the
Federal Reserve may require Sterling 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
financial holding company to end a non-banking business if the nonbanking
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 Sterling from acquiring direct
or indirect control of more than 5% of the outstanding voting stock of any
bank, or substantially all of the assets of any bank, or merger with another
bank holding company, without the prior approval of the Federal Reserve. The
Bank Holding Company Act allows interstate bank acquisitions and interstate
branching by acquisition and consolidation in those states that had not
elected out by the required deadline. The Pennsylvania Department of Banking
also must approve any similar consolidation. Pennsylvania law permits
Pennsylvania financial holding companies to control an unlimited number of
banks.
In addition, the Bank Holding Company Act restricts Sterling's
nonbanking activities to those that are determined by the Federal Reserve
Board to be financial in nature, incidental to such financial activity,
5
or complementary to a financial activity. The Bank Holding Company Act does
not place territorial restrictions on the activities of nonbank subsidiaries
of financial holding companies.
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
The Gramm-Leach-Bliley Act, also known as the Financial Services
Modernization Act, was signed into law in 1999, and amended the Bank Holding
Company Act of 1956. The law repeals Depression-era banking laws and permits
banks, insurance companies and securities firms to engage in each other's
business after complying with certain conditions and regulations. Accordingly,
the legislation allows for a single financial organization to offer customers
a more complete array of financial products and services.
The Gramm-Leach-Bliley Act provides an enhanced regulatory framework
through the Federal Reserve Board, which is an umbrella regulatory for
financial holding companies. However, the subsidiaries of a financial holding
company are still subject to the rules and regulations of their primary
functional regulator. In order to engage in new activities, the
Gramm-Leach-Bliley Act requires "satisfactory" or higher Community
Reinvestment Act compliance for insured depository institutions and their
financial holding companies.
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, the act may result in increased competition from larger
financial service companies, many of which have substantially more financial
resources than Sterling, and now may offer banking services in addition to
insurance and brokerage services. The act also modifies current law related to
financial privacy and community reinvestment. The new privacy provisions will
generally prohibit financial institutions, including Sterling and its
subsidiaries, from disclosing nonpublic personal financial information to
nonaffiliated third parties unless customers have the opportunity to opt out of
the disclosure.
Dividends
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.
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. Sterling and its subsidiary banks, at December 31,
2001, qualify as "well capitalized" under these regulatory standards.
6
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, and the FDIC which is the primary
regulator of the state charted bank, regularly examines banks in such areas as
reserves, loans, investments, management practices, and other aspects of
operations. These examinations are designed for the protection of the banks'
depositors rather than Sterling's shareholders. The subsidiary banks must file
quarterly and annual reports to the FDIC.
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; and
- 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.
Sterling and its subsidiary banks are affected by the monetary and
fiscal policies of government agencies, including the Federal Reserve and
FDIC. 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. The nature of monetary and fiscal policies on future
business and earnings of Sterling cannot be predicted at this time.
Other
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, 2001, Sterling had 725 full-time equivalent
employees. None of these
7
employees are represented by a collective bargaining agreement, and Sterling
believes it enjoys good relations with its personnel.
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 31 offices and 4 off-site electronic MAC/ATM installations
at December 31, 2001. All branches are located in Lancaster County with the
exception of one office located in Chester County and two offices located in
Lebanon County. Branches at 21 locations are occupied under leases and at
three branches, the bank owns the building, but leases the land.
In addition to the branch locations, Bank of Lancaster County owns a
building which houses its administrative service center as well as other
support groups of the subsidiary banks and Town & Country, Inc. Another
building is owned by Bank of Lancaster County, which serves as the corporate
headquarters of Sterling Financial Corporation and houses the executive
offices of the Corporation and the Bank, as well as a branch office. In
addition, a certain amount of space in each of the building is leased to third
parties.
In addition to its main office located at 14 South Main Street, North
East, Maryland, First National Bank of North East owns the property for three
other branches in Cecil County.
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 10 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.
All real estate owned by the subsidiary banks is free and clear of
encumbrances. The leases of the subsidiary banks expire intermittently over
the years through 2021 and most are subject to one or more renewal options.
During 2001, aggregate annual rentals for real estate paid did not exceed 3%
of the any bank's operating expenses.
ITEM 3 - LEGAL PROCEEDINGS
As of December 31, 2001, 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 2001.
8
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, 2001, and 12,511,953 shares outstanding. As
of December 31, 2001, Sterling had approximately 4,645 stockholders of record.
There is no other class of stock authorized or outstanding. 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.
Price Range Per Share Per Share
High Low Dividend
--------------- -------------- ---------------
2001
----
First Quarter $20.88 $15.13 $.190
Second Quarter 24.33 19.00 .190
Third Quarter 26.00 20.20 .200
Fourth Quarter 25.00 20.85 .200
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
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,
-------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- --------------- ---------------- ---------------- ----------------
(Dollars in thousands, except per share data)
SUMMARIES OF INCOME
Interest income $115,916 $113,319 $101,626 $97,054 $89,960
Interest expense 57,274 58,501 47,404 45,938 41,136
---------------- --------------- ---------------- ---------------- ----------------
Net interest income 58,642 54,818 54,222 51,116 48,824
Provision for loan losses 1,217 605 1,060 2,016 2,039
---------------- --------------- ---------------- ---------------- ----------------
Net interest income after provision
for loan losses 57,425 54,213 53,162 49,100 46,785
Noninterest income 43,925 37,508 33,539 31,698 26,187
Noninterest expenses 75,172 70,203 62,459 58,534 52,669
---------------- --------------- ---------------- ---------------- ----------------
Income before income taxes 26,178 21,518 24,242 22,264 20,303
Applicable income taxes 5,844 4,951 6,257 5,670 5,340
---------------- --------------- ---------------- ---------------- ----------------
NET INCOME $20,334 $16,567 $17,985 $16,594 $14,963
================ =============== ================ ================ ================
OPERATING INCOME (1) $20,334 $18,831 $18,359 $16,594 $14,963
================ =============== ================ ================ ================
FINANCIAL CONDITION AT YEAR END
Assets $1,861,439 $1,726,138 $1,556,323 $1,466,105 $1,319,648
Loans, net 1,087,102 1,021,499 946,583 867,264 831,429
Deposits 1,535,649 1,420,300 1,288,814 1,218,978 1,113,248
Borrowed money 141,378 139,506 125,997 98,688 73,197
Stockholders' equity 152,111 139,347 122,760 125,129 114,776
PER COMMON SHARE DATA
Earnings per share - basic $1.62 $1.32 $1.43 $1.32 $1.18
Earnings per share - diluted 1.62 1.32 1.43 1.31 1.18
Operating earnings per share - basic (1) 1.62 1.50 1.46 1.32 1.18
Operating earnings per share - diluted (1) 1.62 1.50 1.46 1.31 1.18
Cash dividends declared 0.780 0.750 0.721 0.664 0.625
Book value 12.16 11.11 9.79 9.96 9.14
Realized book value (3) 11.72 10.91 10.30 9.49 8.78
Weighted average number of common shares:
Basic 12,529 12,545 12,559 12,581 12,654
Diluted 12,580 12,557 12,620 12,645 12,671
Dividend payout ratio (2) 48.1% 56.8% 50.4% 50.3% 53.0%
PROFITABILITY RATIOS ON EARNINGS
Return on average assets 1.14% 1.02% 1.19% 1.20% 1.21%
Return on average equity 13.74% 12.99% 14.43% 13.76% 13.48%
Return on average realized equity (3) 14.41% 12.36% 14.46% 14.36% 13.82%
Average equity to average assets 7.94% 7.83% 8.23% 8.73% 8.97%
PROFITABILITY RATIOS ON OPERATING EARNINGS (1)
Return on average assets 1.14% 1.16% 1.21% 1.20% 1.21%
Return on average equity 13.74% 14.77% 14.73% 13.76% 13.48%
Return on average realized equity (3) 14.41% 14.05% 14.76% 14.36% 13.82%
SELECTED ASSET QUALITY RATIOS
Nonperforming loans to total loans 0.80% 0.59% 0.38% 0.51% 0.64%
Net charge-offs to average loans
outstanding 0.17% 0.08% 0.07% 0.18% 0.20%
Allowance for loan losses to total loans 1.01% 1.13% 1.24% 1.31% 1.31%
Allowance for loan losses to
nonperforming loans 125.8% 192.1% 328.6% 255.2% 204.1%
(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 gains (losses) on securities available-for-sale.
10
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.,
First National Bank of North East, Bank of Hanover and Trust Company, HOVB
Investment Co., T&C Leasing, Inc. (T&C), Pennbanks Insurance Company, SPC and
Sterling Mortgage Services, Inc. (inactive). The consolidated financial
statements also include Town & Country, Inc. and Sterling Financial Trust
Company, wholly-owned subsidiaries of Bank of Lancaster County. Sterling
Financial Trust Company was incorporated in 2001; however, it commenced
operations on January 1, 2002. 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 impacting our various
lines of business;
- 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;
- the possibility that increased demand or prices for Sterling's
financial services and products may not occur;
- volatility in interest rates;
- the success of our merger of Hanover Bancorp, Inc. and pending
acquisition of Equipment Finance, Inc.; and
- other risks and uncertainties.
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. During 2001, the Federal Reserve
aggressively reduced interest rates during the year in order to mitigate the
effects of a slumping national economy. Interest rates were cut 11 times during
2001, resulting in a reduction of the prime-lending rate from 9.50% at January
1, 2001 to 4.75% at December 31, 2001. The prime rate of 4.75% represents a
thirty year low in this key interest rate indicator. The declines in interest
rates experienced in 2001 were in contrast to interest rate movements in 2000,
in which the Federal Reserve incrementally raised interest rates four times, for
a total increase in the prime lending rate of 100 basis points (b.p.). The
declining interest rate environment dictated by the Federal Reserve had an
immediate impact on repricing variable interest rate interest earning assets and
interest bearing liabilities, which led to some compression in 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.
11
RESULTS OF OPERATIONS
(All dollar amounts presented within tables are in thousands, except per share
data.)
OVERVIEW
Sterling's net income totaled $20,334,000, or $1.62 per diluted share,
compared to $16,567,000, or $1.32 per diluted share in 2000, and $17,985,000 or
$1.43 per diluted share in 1999. 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 realized equity, excluding merger related and
restructuring charges, were 14.41% in 2001, 14.05% in 2000, and 14.76% in 1999.
Returns on average assets, excluding merger related and restructuring charges,
totaled 1.14% in 2001, 1.16% in 2000, and 1.21% in 1999.
On November 5, 2001, Sterling announced that it had reached an agreement
to acquire Equipment Finance, Inc., a commercial finance company that
specializes in financing forestry, and land clearing equipment. Under the terms
of the agreement, shareholders of Equipment Finance will receive consideration
of $30 million of which approximately 70% will be paid in stock and 30% in cash.
Sterling issued approximately 955,000 shares of its common stock to acquire
Equipment Finance. The transaction closed on February 28, 2002 and was accounted
for under the provisions of Statement No. 142. The Equipment Finance acquisition
will add approximately $90 million in assets to Sterling and is expected to be
accretive to earnings per share during 2002.
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, and 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 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, 2001, 2000 and 1999. 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 2001 was $64,295,000, compared to
$59,976,000 in 2000 and $58,423,000 in 1999. 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 a declining net interest rate spread.
The interest rate spread and net interest margin have experienced
compression over the last three years. The interest rate spread was 3.47% in
2001, down from 3.52% in 2000 and 3.82% in 1999. The net interest margin
experienced similar declines, totaling 3.95% in 2001, down from 4.03% in 2000
and 4.27% in 1999. Several factors impacted 2001's net interest margin. First,
Sterling is in a liability sensitive interest rate risk position, and in a
rapidly falling rate environment like that experienced in 2001, interest earning
assets tend to reprice quicker than interest bearing liabilities, as a greater
portion of
12
assets are variable rate. Longer-term funding sources, including certificates of
deposits, have to reach their maturity date to reprice. Second, Sterling had a
less profitable interest earning asset mix, in which federal funds sold carried
significantly higher balances as the Corporation tried to increase liquidity to
fund loan growth 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 was due to increased 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 average rates paid on deposit
accounts, and 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.
Average earning assets were $1,629,482,000 in 2001, an increase of 9.5%
over 2000's balance of $1,488,459,000. Average earning assets for 1999 totaled
$1,369,308,000. Loan growth was the primary contributor to the increase in
average earning assets during these periods.
Average loans totaled $1,071,157,000 for the year ended December 31,
2001, compared to $1,006,794,000 in 2000 and $921,062,000 in 1999. 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, due to effective marketing campaigns.
Average securities were $493,591,000 in 2001, versus $452,611,000 in
2000 and $412,705,000 in 1999. The increase in securities, in part, reflects the
growth trends in deposits during the years. Strong deposit growth, which
outpaced loan growth during the year, resulted in additional funding sources
being invested in the security portfolio. Many of the securities have a
relatively short duration that should provide sufficient liquidity to assist in
the funding of loan demand during 2002.
Average interest-bearing liabilities were $1,436,190,000 in 2001, up
from $1,316,687,000 in 2000 and $1,211,286,000 in 1999. Funding needs to support
loan and lease growth partially led to the increase in interest-bearing
liabilities in 2001 and 2000, with the continued shift in mix from lower-cost
demand and savings deposits to time deposits and borrowed money.
13
TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL-TAX EQUIVALENT YIELDS
(UNAUDITED)
Years Ended December 31,
----------------------------------------------------------
2001
----------------------------------------------------------
Average Balance Interest Annual Rate
------------------- ---------------- -----------------
Assets:
Federal funds sold $63,070 $2,040 3.23%
Interest-bearing deposits with banks 1,664 61 3.68%
Securities:
U.S. Treasury 25,374 1,322 5.21%
U.S. Government agencies 138,173 8,726 6.32%
State and municipal 191,773 14,336 7.48%
Other 138,271 8,755 6.33%
------------------- ---------------- -----------------
Total securities 493,591 33,139 6.71%
------------------- ---------------- -----------------
Loans:
Commercial 552,534 43,527 7.88%
Consumer 279,057 23,346 8.37%
Mortgages 154,083 12,147 7.88%
Leases 85,483 7,309 8.55%
------------------- ---------------- -----------------
Total loans 1,071,157 86,329 8.06%
------------------- ---------------- -----------------
Total interest earning assets 1,629,482 121,569 7.46%
------------------- ---------------- -----------------
Allowance for loan losses (11,374)
Cash and due from banks 47,915
Other assets 111,390
-------------------
TOTAL ASSETS $1,777,413
===================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Demand deposits $435,199 $8,606 1.98%
Savings deposits 167,978 3,520 2.10%
Time deposits 689,797 37,486 5.43%
Borrowed funds 143,216 7,662 5.35%
------------------- ---------------- -----------------
Total interest-bearing liabilities 1,436,190 57,274 3.99%
------------------- ---------------- -----------------
Demand deposits 168,678
Other liabilities 24,533
Stockholders' equity 148,012
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,777,413
===================
Net interest rate spread 3.47%
Net interest income (FTE)
Net interest margin 64,295 3.95%
Taxable-equivalent adjustment (5,653)
----------------
Net interest income $58,642
================
Years Ended December 31,
-----------------------------------------------------------------
2000
-----------------------------------------------------------------
Average Balance Interest Annual Rate
--------------- -------------- -----------------
Assets:
Federal funds sold $27,437 $1,786 6.51%
Interest-bearing deposits with banks 1,617 111 6.86%
Securities:
U.S. Treasury 30,489 1,802 5.91%
U.S. Government agencies 146,841 9,623 6.55%
State and municipal 163,289 12,628 7.73%
Other 111,992 6,882 6.15%
--------------- -------------- -----------------
Total securities 452,611 30,935 6.83%
--------------- -------------- -----------------
Loans:
Commercial 501,154 43,057 8.59%
Consumer 267,834 23,151 8.64%
Mortgages 162,335 12,920 7.96%
Leases 75,471 6,517 8.64%
--------------- -------------- -----------------
Total loans 1,006,794 85,645 8.51%
--------------- -------------- -----------------
Total interest earning assets 1,488,459 118,477 7.96%
--------------- -------------- -----------------
Allowance for loan losses (11,779)
Cash and due from banks 64,579
Other assets 87,348
---------------
TOTAL ASSETS $1,628,607
===============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Demand deposits $413,486 $11,930 2.89%
Savings deposits 138,262 2,786 2.02%
Time deposits 635,765 35,929 5.65%
Borrowed funds 129,174 7,856 6.08%
--------------- -------------- -----------------
Total interest-bearing liabilities 1,316,687 58,501 4.44%
--------------- -------------- -----------------
Demand deposits 158,560
Other liabilities 25,825
Stockholders' equity 127,535
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,628,607
===============
Net interest rate spread 3.52%
Net interest income (FTE)
Net interest margin 59,976 4.03%
Taxable-equivalent adjustment (5,158)
--------------
Net interest income $54,818
==============
Years Ended December 31,
------------------------------------------------------------
1999
------------------------------------------------------------
Average Balance Interest Annual Rate
----------------- ------------------ ----------------
Assets:
Federal funds sold $33,401 $1,671 5.00%
Interest-bearing deposits with banks 2,140 139 6.50%
Securities:
U.S. Treasury 40,860 2,393 5.86%
U.S. Government agencies 130,250 8,204 6.30%
State and municipal 131,480 10,331 7.86%
Other 110,115 6,057 5.50%
----------------- ------------------ ----------------
Total securities 412,705 26,985 6.54%
----------------- ------------------ ----------------
Loans:
Commercial 445,140 37,307 8.38%
Consumer 257,117 21,513 8.37%
Mortgages 153,797 12,168 7.91%
Leases 65,008 6,044 9.30%
----------------- ------------------ ----------------
Total loans 921,062 77,032 8.36%
----------------- ------------------ ----------------
Total interest earning assets 1,369,308 105,827 7.73%
----------------- ------------------ ----------------
Allowance for loan losses (11,780)
Cash and due from banks 49,737
Other assets 108,198
-----------------
TOTAL ASSETS $1,515,463
=================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Demand deposits $420,159 $10,262 2.44%
Savings deposits 129,887 2,587 1.99%
Time deposits 555,849 28,802 5.18%
Borrowed funds 105,391 5,753 5.46%
----------------- ------------------ ----------------
Total interest-bearing liabilities 1,211,286 47,404 3.91%
----------------- ------------------ ----------------
Demand deposits 148,208
Other liabilities 31,327
Stockholders' equity 124,642
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,515,463
=================
Net interest rate spread 3.82%
Net interest income (FTE)
Net interest margin 58,423 4.27%
Taxable-equivalent adjustment (4,201)
------------------
Net interest income $54,222
==================
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.
14
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.
2001 VERSUS 2000 2000 Versus 1999
--------------------------------------- ----------------------------------------
Increase/(Decrease) DUE TO CHANGES IN Due to Changes in
--------------------------------------- ----------------------------------------
VOLUME RATE TOTAL Volume Rate Total
-------- -------- -------- -------- -------- --------
Interest income:
Federal funds sold $2,320 $(2,066) $254 $(298) $413 $115
Interest-bearing deposits
with banks 3 (53) (50) (34) 6 (28)
Securities 2,801 (597) 2,204 2,609 1,341 3,950
Loans 5,475 (4,791) 684 7,170 1,443 8,613
-------- -------- -------- -------- -------- --------
Total interest income 10,599 (7,507) 3,092 9,447 3,203 12,650
-------- -------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand 626 (3,950) (3,324) (163) 1,831 1,668
Savings deposits 599 135 734 167 32 199
Time deposits 3,054 (1,497) 1,557 4,141 2,986 7,127
Borrowed funds 854 (1,048) (194) 1,298 805 2,103
-------- -------- -------- -------- -------- --------
Total interest expense 5,133 (6,360) (1,227) 5,443 5,654 11,097
-------- -------- -------- -------- -------- --------
Net interest income $5,466 $(1,147) $4,319 $4,004 $(2,451) $1,553
======== ======== ======== ======== ======== ========
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 $1,217,000 in
2001, compared to $605,000 in 2000 and $1,060,000 in 1999. 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. The $612,000, or 101%, increase in the provision for loan losses
during 2001 compared to 2000, was reflective of increases in net charge-offs and
some deterioration in asset quality ratios.
See further discussion in the asset quality discussion of this annual
report.
15
NONINTEREST INCOME
Details of noninterest income follow:
TABLE 3 - NONINTEREST INCOME
2001 VERSUS 2000
---------------------------------------------------------------------------
Increase/(Decrease) 2001 AMOUNT % 2000
--------------- ------------------ ------------- -----------------
Income from fiduciary activities $4,166 $224 5.7% $3,942
Service charges on deposit
accounts 4,897 176 3.7% 4,721
Other service charges,
commissions and fees 4,188 548 15.1% 3,640
Mortgage banking income 2,222 1,388 166.4% 834
Gain on sale of real estate 21 (322) (93.9)% 343
Rental income on leased property 24,319 2,140 9.6% 22,179
Other operating income 1,402 244 21.1% 1,158
Securities gains 2,710 2,019 292.2% 691
--------------- ------------------ ------------- -----------------
Total $43,925 $6,417 17.1% $37,508
=============== ================== ============= =================
2000 VERSUS 1999
----------------------------------------------------------
Increase/(Decrease) AMOUNT % 1999
------------------ ------------- -----------------
Income from fiduciary activities $437 12.5% $3,505
Service charges on deposit
accounts (12) (0.3%) 4,733
Other service charges,
commissions and fees 327 9.9% 3,313
Mortgage banking income (613) (42.4)% 1,447
Gain on sale of real estate 343 100% -
Rental income on leased property 3,710 20.1% 18,469
Other operating income 301 35.1% 857
Securities gains (524) (43.1)% 1,215
------------------ ------------- -----------------
Total $3,969 11.8% $33,539
================== ============= =================
Noninterest income totaled $43,925,000 for the year ended December 31,
2001, a 17.1% increase over 2000. For the year ended December 31, 2000,
noninterest income totaled $37,508,000, an increase of 11.8% over 1999 totals.
Income from fiduciary activities, which includes both institutional
trust and personal wealth management services, grew to $4,166,000 for the year
ended December 31, 2001, up from $3,942,000 in 2000 and $3,505,000 in 1999. A
higher level of assets under management supported the revenue increases in both
2001 and 2000. At December 31, 2001, Sterling had total assets under
administration of approximately $980 million compared to $887 million at the end
of 2000 and $856 million at the end of 1999. These numbers include assets under
management of $737 million, $662 million and $636 million at December 31, 2001,
2000 and 1999. The positive effects of new business development were able to
offset the market declines in the past two years that would negatively influence
fee-based income. This resulted in the positive gains noted in both income from
fiduciary activities and assets under administration.
Management strongly believes that wealth management business 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. In
addition, effective January 1, 2002, the wealth management divisions of Bank of
Lancaster County and Bank of Hanover were combined into a single entity,
Sterling Financial Trust Company. Through the formation of a separate trust
company, Sterling believes it will be able to increase revenue generation
opportunities, while increasing operating efficiencies.
Other service charges, commissions and fees totaled $4,188,000 in 2001,
a 15.1% increase over 2000's total of $3,640,000. 2000 experienced a similar
increase over 1999's results, which totaled $3,313,000. Increased customer debit
card usage, higher fees implemented in the latter half of 1999 on non-customer
ATM transactions and higher volumes of customers enrolled in cash management
programs have led to the revenue increases in this category.
Mortgage banking income totaled $2,222,000 in 2001, compared to $834,000
in 2000 and $1,447,000 in 1999. Mortgage banking income has been favorably
influenced by the trend noted in the financial services industry, which has seen
an increased volume of mortgage loan originations/refinancing
16
during 2001. This increase in originations/refinancing volumes is the direct
result of lower interest rates on mortgage loan products offered in 2001 versus
2000. This lower interest rate environment has accelerated prepayment speeds.
During 2001, Sterling recognized a $21,000 gain on the sale of Maryland
real estate, versus a $343,000 gain in 2000.
Rental income on operating leases has increased 9.6% from $22,179,000 in
2000 to $24,319,000 in 2001. This follows an increase of 20.1% in 2000 over 1999
results. The increase in rental income is primarily due to an increase in the
number of units under operating leases, which totaled 5,864, 5,330 and 4,648 as
of December 31, 2001, 2000 and 1999. Sterling recognizes that leasing operations
represent a growth opportunity for the corporation and has committed resources
to expand this line of business. These resources include increased marketing
efforts, not only in developing new customer relationships, but also in
maintaining existing customer relationships.
Other operating income totaled $1,402,000 for the year ended December
31, 2001, an increase of $244,000, or 21.1%, over 2000's operating of
$1,158,000. The 2000 increase is primarily attributable to the revenues
generated from reinsurance credit life and disability activities that began in
2001, through Sterling's Cayman Island captive reinsurance company. The $301,000
increase in other operating income in 2000 over 1999 is the result of normal
increases in other operating income levels that have been supplemented in the
current year with the reinsurance activities.
Securities gains and losses, all from the available-for-sale portfolio,
are summarized as follows:
2001 2000 1999
-------------------- --------------- -----------------
Net realized gains (losses):
Debt securities
Gains $728 $291 $162
Losses (51) (136) (150)
Equity securities
Gains 2,442 751 1,288
Losses ( 409) (215) (85)
-------------------- --------------- ----------------
$2,710 $691 $1,215
==================== =============== ================
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:
17
TABLE 4 - NONINTEREST EXPENSES
2001 VERSUS 2000 2000 VERSUS 1999
---------------------- --------------------
Increase/(Decrease) 2001 AMOUNT % 2000 AMOUNT % 1999
------- ------- ------- ------- ------- ----- -------
Salaries and employee benefits $30,990 $3,211 11.6% $27,779 $1,530 5.8% $26,249
Net occupancy 3,826 395 11.5% 3,431 338 10.9% 3,093
Furniture & equipment 5,081 471 10.2% 4,610 (12) (0.3)% 4,622
Professional services 2,412 453 23.1% 1,959 (291) (12.9)% 2,250
Depreciation on operating
lease assets 19,217 1,748 10.0% 17,469 2,828 19.3% 14,641
Merger related and restructuring
costs -- (2,898) (100)% 2,898 2,475 585.1% 423
Other 13,646 1,589 13.2% 12,057 876 7.8% 11,181
------- ------- ------- ------- ------- ------- -------
Total $75,172 $4,969 7.1% $70,203 $7,744 12.4% $62,459
======= ======= ======= ======= ======= ======= =======
The largest component of noninterest expense is salaries and employee
benefits, which increased $3,211,000, or 11.6%, to $30,990,000 in 2001, after
increasing $1,530,000 or 5.8% in 2000. The increase in salaries and employee
benefits during 2001 is attributable to the following factors:
- Normal merit increases for employees;
- The growth that Sterling has experienced, including several
branches opened throughout 2000 which were fully operational for
the entire year and two new branches opened in the fourth
quarter of 2001;
- Duplication of a limited number of positions, in anticipation of
operations staff relocating from Hanover to Lancaster. As a
result, training had to be completed for new employees, while
severed employees worked through their arranged dates resulting
in some redundancy of positions;
- Increased overtime pay and temporary help incurred as result of
the additional efforts required to ensure four successful core
processing system conversions that occurred throughout 2001; and
- Increases in employee benefit costs, particularly health and
welfare benefit plans, consistent with the increased health care
cost trend noted nationwide.
Net occupancy expense totaled $3,826,000 in 2001, $3,431,000 in 2000 and
$3,093,000 in 1999. The 11.5% increase experienced in 2001 was primarily the
result of several branches that opened throughout 2000, which were fully
operational for the entire 2001 year. Additionally, expansion and renovations
made at other existing branches led to the increase in occupancy expense.
Similarly, the 10.2%, or $471,000 increase in furniture and equipment
expense during 2001 versus 2000 was the result of an increase in number of
locations, as well as the increased maintenance costs associated with more
sophisticated delivery channels offered to our customer base.
Professional service expense totaled $2,412,000 for the year ended
December 31, 2001, a 23.1% increase over 2000 results. This followed a 12.9%
decrease in professional service expense experienced in 2000 as compared to
1999. The increase in professional services can be attributed to the following
factors:
- Sterling's continued reliance on services outsourced to third
parties who can bring a greater degree of knowledge and
experience to the organization that can be obtained internally;
- Obtain temporary professional resources to assist in the four
core processing conversions that took place throughout 2001;
- Legal and other consulting fees associated with the formation of
two new business ventures, including Sterling Financial Trust
Company and Professional Services Group; and
- Management's desire to increase awareness of the parent
company's name. As a result,
18
professional service fees were incurred in establishing,
reserving and preserving the "Sterling" name in the communities
served.
Depreciation on operating lease assets totaled $19,217,000 in 2001,
$17,469,000 in 2000, and $14,641,000 in 1999. The 10.0% and 19.3% increases
noted in 2001 and 2000 are consistent with the 9.6% and 20.1% increases noted in
rental income on operating leases discussed above. Depreciation on operating
lease assets as a percent of rental income on operating leases remained at
approximately 79% for all three years.
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 a
better leveraging of technology, a 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% was 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, 2001. The remaining unpaid expenses will be paid throughout
2001-2002.
Initial Remaining
Expense Accrual
----------------------------- ----------------------------
Employee termination $718 $355
Asset disposal/write-downs 334 -
Noncancelable contracts 312 121
Professional fees 88 28
Other 20 -
----------------------------- ----------------------------
$1,472 $504
============================= ============================
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 $13,646,000 during 2001, versus
$12,057,000 in 2000 and $11,181,000 in 1999. Significant expense components in
this category include marketing and advertising, postage, utilities, MAC fees,
and Pennsylvania Shares Tax. The increase in expense noted during 2001 and 2000
was the direct result of Sterling's overall growth, which requires many of these
types of expenses to increase as well.
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.
In calculating its efficiency ratio, Sterling nets depreciation on operating
leases with the related rental income to more consistently present operating
results with the banking industry. The efficiency ratio was 63.9%, 62.9% and
62.3% for the years ended December 31, 2001, 2000 and 1999. The deterioration in
the efficiency ratio can be attributed to compression in the net interest
margin, certain redundancies in operational staffing related to centralizing
19
support units, and the opening of five denovo branches throughout 2000 and 2001
whose revenue streams are growing.
INCOME TAXES
Sterling recognized income taxes of $5,844,000, or 22.3% of pre-tax
income, in 2001. Income tax expense totaled $4,951,000, or 23.0% of pretax
income in 2000, and $6,257,000 or 25.8% of pre-tax income in 1999. 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 2001 is a result of
non-deductible merger costs expensed in 2000, with no similar costs incurred in
2001. The downward trend in the effective tax rate from 1999 to 2001 is
consistent with the increase in tax-free investment securities during this
period.
FINANCIAL CONDITION
Average earning assets increased in 2001 to $1,629,482,000 from
$1,488,459,000 in 2000 and $1,369,308,000 in 1999. 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 2001 to
$1,436,190,000 from $1,316,687,000 in 2000 and $1,211,286,000 in 1999.
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 2001. As deposit and borrowing growth
outpaced loan growth during 2001, 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, 2001, the securities balance included a net unrealized
gain on available-for-sale securities of $8,357,000, versus a net unrealized
gain of $3,851,000 at December 31, 2000. The reduction in long-term interest
rates at December 31, 2001 versus 2000 led to the appreciation in the fair value
of securities during 2001.
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.
20
DECEMBER 31,
----------------------------------------------
2001 2000 1999
-------------- --------------- ---------------
U.S. Treasury securities $- $- $501
U.S. Government agencies 109 604 1,460
States and political subdivisions 33,757 39,151 42,518
Mortgage-backed securities 497 676 1,033
Corporate securities 1,540 2,866 4,757
-------------- --------------- ---------------
Subtotal 35,903 43,297 50,269
Non-marketable equity securities 5,885 7,788 8,160
-------------- --------------- ---------------
Total $41,788 $51,085 $58,429
============== =============== ===============
The following table shows the amortized cost and fair value of the
available-for-sale securities owned as of the dates indicated.
DECEMBER 31,
-----------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
AMORTIZED AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
U.S. Treasury securities $15,188 $15,685 $35,835 $35,986 $37,010 $36,814
U.S. Government agencies 87,714 89,569 70,711 70,988 59,081 57,726
States and political
subdivisions 164,357 164,746 139,343 139,064 111,969 107,011
Mortgage-backed securities 57,232 57,781 73,447 72,812 83,149 79,975
Corporate securities 148,734 151,044 100,407 100,698 82,346 80,848
----------- ----------- ----------- ----------- ----------- -----------
Subtotal 473,225 478,825 419,743 419,548 373,555 362,374
Equity securities 9,373 12,130 11,702 15,748 8,504 9,824
----------- ----------- ----------- ----------- ----------- -----------
Total $482,598 $490,955 $431,445 $435,296 $382,059 $372,198
=========== =========== =========== =========== =========== ===========
TABLE 6 - INVESTMENT SECURITIES (YIELDS)
The following table shows the maturities of held-to-maturity debt
securities at amortized cost as of December 31, 2001 and approximate weighted
average yields of such securities. Yields on states and political subdivision
securities are shown on a tax equivalent basis, assuming a 35% federal income
tax rate.
OVER 1 THRU 5 OVER 5 THRU
1 YEAR AND LESS YEARS 10 YEARS OVER 10 YEARS TOTAL
---------------- ------------------ ----------------- ------------------ ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ------- --------- ------- -------- ------- --------- ------- --------- -------
U.S. Government agencies $- 0.00% $- 0.00% $44 5.71% $65 6.10% $109 5.94%
States and political
subdivisions 2,021 6.66% 11,897 7.40% 18,443 7.08% 1,396 7.67% 33,757 7.19%
Mortgage-backed securities 18 7.92% 272 7.59% 156 8.67% 51 6.21% 497 7.80%
Corporate securities 526 6.04% 501 6.05% - - 513 9.36% 1,540 7.15%
------- ------- --------- ------- -------- ------- --------- ------- --------- -------
Total $2,565 6.54% $12,670 7.35% $18,643 7.09% $ 2,025 8.02% $35,903 7.20%
======= ======= ========= ======= ======== ======= ========= ======= ========= =======
The following table shows the maturities of available-for-sale debt
securities at fair value as of December 31, 2001 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.
21
OVER 1 THRU 5 OVER 5 THRU 10
1 YEAR AND LESS YEARS YEARS OVER 10 YEARS TOTAL
---------------- ------------------ ----------------- --------- ------- ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ------- --------- ------- -------- ------- --------- ------- --------- -------
U.S. Treasury securities $7,423 5.48% $8,262 5.55% $- .00% $- .00% $15,685 5.52%
U.S. Government agencies 5,326 5.59% 58,800 5.32% 22,013 6.03% 3,430 6.33% 89,569 5.55%
States and political
subdivisions 2,073 6.56% 21,479 6.54% 33,675 6.69% 107,519 7.29% 164,746 7.06%
Mortgage-backed securities 192 4.80% 6,161 5.85% 7,033 5.32% 44,395 6.58% 57,781 6.34%
Corporate securities 27,722 6.36% 109,440 6.06% 7,891 5.81% 5,991 4.75% 151,044 6.05%
------- ------- --------- ------- -------- ------- --------- ------- --------- -------
Total $42,736 6.11% $204,142 5.87% $70,612 6.25% $161,335 6.98% $478,825 6.32%
======= ======= ========= ======= ======== ======= ========= ======= ========= =======
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 $64,958,000, or 6.3% in 2001, compared to
7.8% growth experienced in 2000. The growth in loans is consistent with a
stable local economy, and continued for loans to support existing customers'
growth. The commercial loan portfolio experienced strong growth during the
period, increased by $75,461,000, or 14.4%. This growth trend is consistent
with the trend noted in prior years, and is the result of actively marketing
commercial services to professionals in the target market, leading to an
increased referral base. Additionally, Sterling has been able to develop a
network of regional community banks to participate loans.
The $25,421,000 decrease in real estate mortgage loans has been a
result of increasing our emphasis on commercial loan products, combined with
holding fewer mortgage loans for portfolio. As mentioned previously, interest
rates hit 30 year lows, which produced a great deal of refinancings of
portfolio loans. Given the low interest rates on newly originated loans,
management has sold a higher percentage of mortgage loans in the secondary
market than in the past in order to manage its interest rate risk position.
TABLE 7 - LOAN PORTFOLIO
The following table sets forth the composition of Sterling's loan
portfolio as of the dates indicated:
DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- --------------
Commercial, financial and
agricultural $598,174 $522,713 $456,958 $418,469 $384,343
Real estate-construction 19,710 9,665 9,127 8,164 8,345
Real estate-mortgage 117,293 142,534 155,894 146,515 150,171
Consumer 279,139 279,645 263,356 247,855 246,610
Lease financing (net of unearned
income) 83,857 78,658 73,123 57,736 52,566
------------- ------------- ------------- ------------- --------------
Total $1,098,173 $1,033,215 $958,458 $878,739 $842,035
============= ============= ============= ============= ==============
22
TABLE 8 - LOAN MATURITY AND INTEREST SENSITIVITY
The following table sets forth the maturity of the loan portfolio as of
December 31, 2001:
AFTER ONE
WITHIN ONE BUT WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
------------- ------------- ------------- --------------
Commercial, financial and agricultural $73,910 $158,079 $366,185 $598,174
Real estate-construction 11,370 2,842 5,498 19,710
------------- ------------- ------------- --------------
$85,280 $160,921 $371,683 $617,884
============= ============= ============= ==============
Loans due after one year totaling $176,066,000 have variable interest
rates. The remaining $356,538,000 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 2001. Additionally, reasonably low interest rates, a
stable local economy and minimal inflation continued to support favorable
economic conditions in the area.
Non-performing 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. 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 that it otherwise would not have granted originally.
23
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,
--------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ------------ ----------- -----------
Nonaccrual loans $6,707 $3,102 $771 $1,425 $1,645
Accruing loans, past due 90 days or more 1,562 1,145 882 1,079 1,443
Restructured loans 531 1,851 1,961 1,993 2,326
----------- ----------- ------------ ----------- -----------
Total non-performing loans 8,800 6,098 3,614 4,497 5,414
Foreclosed assets 74 469 504 261 577
----------- ----------- ------------ ----------- -----------
Total non-performing assets $8,874 $6,567 $4,118 $4,758 $5,991
=========== =========== ============ =========== ===========
Nonaccrual loans:
Interest income that would have
been recorded under original terms $429 $196 $98 $138 $221
Interest income recorded 43 94 8 22 59
Ratios:
Non-performing loans to total loans 0.80% 0.59% 0.38% 0.51% 0.64%
Non-performing assets to total loans
and foreclosed assets 0.81% 0.64% 0.43% 0.54% 0.71%
Non-performing assets to total assets 0.48% 0.38% 0.26% 0.32% 0.45%
As of December 31, 2001, total non-performing assets totaled
$8,874,000, an increase of $2,307,000 or 35.1% from December 31, 2000. The
increase in nonaccrual loans is primarily the result of two large credits that
moved into nonaccrual status during 2001. One of these loans is fully secured
by real estate, while the other loan is partially secured by real estate. 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 that 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 $1.8 million at December 31, 2001.
Additionally, outstanding letter of credit commitments totaling approximately
$1.4 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."
24
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 believes 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.
25
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,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- --------------- ------------- ------------
Beginning balance $11,716 $11,875 $11,475 $11,050 $10,662
------------- ------------- --------------- ------------- ------------
Loans charged off during year:
Commercial, financial and agricultural 1,152 568 350 584 270
Real estate mortgage 1 53 107 116 122
Consumer 864 459 661 1,328 1,639
Lease financing 577 101 31 54 121
------------- ------------- --------------- ------------- ------------
Total charge-offs 2,594 1,181 1,149 2,082 2,152
------------- ------------- --------------- ------------- ------------
Recoveries:
Commercial, financial and agricultural 436 95 198 112 181
Real estate mortgage - 10 - 34 -
Consumer 269 301 247 317 255
Lease financing 27 11 44 28 65
------------- ------------- --------------- ------------- ------------
Total recoveries 732 417 489 491 501
------------- ------------- --------------- ------------- ------------
Net loans charged off 1,862 764 660 1,591 1,651
Provision for loan losses 1,217 605 1,060 2,016 2,039
------------- ------------- --------------- ------------- ------------
Balance at end of year $11,071 $11,716 $11,875 $11,475 $11,050
============= ============= =============== ============= ============
Ratio of net loans charged off
to average loans outstanding 0.17% 0.08% 0.07% 0.18% 0.20%
Ending allowance for loan losses to
net loans charged off 5.9x 15.3x 18.0x 7.2x 6.7x
Net loans charged off to provision
for loan losses 152.9% 126.2% 62.3% 78.9% 81.0%
Allowance for loan losses as a
percent of total loans outstanding 1.01% 1.13% 1.24% 1.31% 1.31%
Allowance for loan losses as a
percent of non-performing loans 125.8% 192.1% 328.6% 255.2% 204.1%
The allowance for loan losses decreased $645,000 from $11,716,000 at
December 31, 2000 to $11,071,000 at December 31, 2001. The allowance
represents 1.01% of loans outstanding at December 31, 2001, versus 1.13% as of
the prior year-end.
Net charge-offs totaled $1,862,000 for the year ended December 31,
2001, versus $764,000 in 2000, an increase of 143.7%. A primary reason for the
increase in charge-offs was a charge-off of approximately $770,000 in loans
that were determined to have had fraudulent collateral associated with them.
During the first quarter of 2002, Sterling recovered $598,000 in insurance
proceeds, which represents a large portion of the fraudulent loans.
Additionally, consumer loan charge-offs increased 88%, primarily the result of
our higher consumer debt and delinquencies.
The increase in the lease financing charge-offs during 2001 as
compared to previous years is the result of rising fuel prices, escalating
insurance costs, and a downturn in the economy, which has led to increased
delinquencies and subsequent charge-offs of certain transportation industry
lease receivables.
As a result of the increased net loan charge-offs, Sterling increased
its provision for loan losses by $612,000, or 101%.
26
TABLE 11 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------