STERLING FINANCIAL CORP /PA/ - 10-Q Quarterly Report

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FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

[ ] 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 it charter)


Pennsylvania (State or other jurisdiction of incorporation or organization)		23-2449551 (I.R.S. Employer Identification No.)









101 North Pointe Boulevard Lancaster, Pennsylvania (Address of principal executive offices)		17601-4133 (Zip Code)

(717) 581-6030

(Registrant’s telephone number including area code)

Not Applicable

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical data.

Common Stock, $5.00 Par Value - 16,922,233 shares outstanding as of October 31, 2002.

TABLE OF CONTENTS


Consolidated Balance Sheets (Unaudited)
Consolidated Statements of Income (Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3 – Quantitative and Qualitative Disclosures About Market Risk
	Item 4 – Internal Control Evaluation
Part II – OTHER INFORMATION
	Item 1 – Legal Proceedings
	Item 2 – Changes in Securities and Use of Proceeds
	Item 3 – Defaults Upon Senior Securities
	Item 4 – Submission of Matters to a Vote of Security Holders
	Item 5 – Other Information
	Item 6 – Exhibits and Reports on Form 8-K
Signatures
CERTIFICATION
CERTIFICATION
SUBSIDIARIES OF THE REGISTRANT
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

Index


PART I — FINANCIAL INFORMATION		Page




Item 1 -	Financial Statements (Unaudited)




	Consolidated Balance Sheets As of September 30, 2002 and December 31, 2001.		3




	Consolidated Statements of Income For the Three Months and Nine Months ended September 30, 2002 and 2001.		4




	Consolidated Statements of Comprehensive Income For the Three Months and Nine Months ended September 30, 2002 and 2001.		4




	Consolidated Statements of Cash Flows For the Nine Months ended September 30, 2002 and 2001.		5




	Notes to Consolidated Financial Statements		6




Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10




Item 3 -	Quantitative and Qualitative Disclosure about Market Risk		22




Item 4 -	Internal Control Evaluation		22




Part II — Other Information




Item 1 -	Legal Proceedings		23




Item 2 -	Changes in Securities and Use of Proceeds		23




Item 3 -	Defaults Upon Senior Securities		23




Item 4 -	Submission of Matters to a Vote of Securities Holders		23




Item 5 -	Other Information		23




Item 6 -	Exhibits and Reports on Form 8-K		23




Signature Page			26




Certification			27




Certification			28

Part I — Financial Information
STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)


			September 30,		December 31,
(Dollars in thousands)			2002		2001

Assets:




Cash and due from banks			$	76,021	$	68,926




Federal funds sold				49,988		25,606

	Cash and cash equivalents			126,009		94,532




Interest-bearing deposits in banks				13,604		2,367




Short-term investments				2,070		1,277




Mortgage loans held for sale				16,021		21,024




Securities held-to-maturity (fair value 2002 - $38,881; 2001 - $42,763)				37,044		41,788




Securities available-for-sale				532,444		490,955




Loans, net of allowance for loan losses (2002 - $12,508; 2001 $11,071)				1,271,228		1,087,102




Assets held for operating leases, net				61,652		58,996




Premises and equipment, net				34,472		32,186




Other real estate owned				331		74




Goodwill				18,382		1,228




Accrued interest receivable				11,917		12,116




Other assets				21,206		17,794

Total Assets			$	2,146,380	$	1,861,439

Liabilities:




Deposits:




	Noninterest-bearing		$	203,314	$	193,318




	Interest-bearing			1,483,737		1,342,331

		Total deposits		1,687,051		1,535,649

Short-term borrowings				42,050		20,285




Long-term debt				161,749		121,093




Company obligated mandatorily redeemable preferred securities of subsidiary trust				20,000		—




Accrued interest payable				8,604		8,747




Other liabilities				32,863		23,554

Total Liabilities				1,952,317		1,709,328

Stockholders’ equity




Common Stock — (5.00 par value)				84,599		62,733




	No. shares authorized: 70,000,000
	No. shares issued: 2002 - 16,919,733; 2001 - 12,546,663
	No. shares outstanding: 2002 - 16,919,733; 2001 - 12,511,953
Capital surplus				34,750		17,849




Retained earnings				59,598		66,823




Accumulated other comprehensive income				15,116		5,433




Common stock in treasury, at cost (2002 - 0 - ; 2001 - 34,710)				—		(727	)

Total Stockholders’ Equity				194,063		152,111

Total Liabilities and Stockholders’ Equity			$	2,146,380	$	1,861,439

The accompanying notes are an integral part of these financial statements.

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

(Dollars in thousands, except per share data)		2002			2001			2002			2001

Interest and dividend income




Loans, including fees		$	24,034		$	21,373		$	69,572		$	64,382




Debt securities




	Taxable		4,977			4,710			14,710			14,382




	Tax-exempt		2,233			2,213			6,713			6,336




Dividends			116			160			384			584




Federal funds sold			275			547			630			1,807




Deposits in other banks			11			14			34			55

Total interest and dividend income			31,646			29,017			92,043			87,546

Interest expense




Deposits			9,557			12,243			29,324			38,850




Short-term borrowings			408			107			1,066			543




Long-term debt			2,449			1,790			6,596			5,327

	Total interest expense		12,414			14,140			36,986			44,720

Net interest income			19,232			14,877			55,057			42,826




Provision for loan losses			218			290			1,018			1,087

	Net interest income after provision for loan losses		19,014			14,587			54,039			41,739

Noninterest income




Income from fiduciary activities			969			1,022			3,072			3,099




Service charges on deposit accounts			1,262			1,206			3,653			3,621




Other service charges, commissions and fees			1,307			1,089			3,820			2,971




Mortgage banking income			365			651			1,832			1,321




Rental income on operating leases			6,480			6,153			19,232			18,129




Other			486			367			1,413			977




Securities gains (losses)			(89	)		538			(480	)		2,479

	Total noninterest income		10,780			11,026			32,542			32,597

Noninterest expenses




Salaries and employee benefits			9,439			8,025			27,969			22,523




Net occupancy			1,054			910			3,060			2,876




Furniture and equipment			1,490			1,261			4,192			3,699




Professional services			599			540			2,158			1,647




Depreciation on operating lease assets			5,276			4,862			15,556			14,290




Other			3,348			3,464			11,184			9,940

Total noninterest expenses			21,206			19,062			64,119			54,975

Income before income taxes			8,588			6,551			22,462			19,361




Income tax expense			2,323			1,484			4,516			4,312

Net income		$	6,265		$	5,067		$	17,946		$	15,049

	Per share information:




	Basic earnings per share	$	0.37		$	0.32		$	1.08		$	0.96




	Diluted earnings per share		0.37			0.32			1.07			0.96




	Dividends declared		0.17			0.16			0.49			0.46




Other Comprehensive Income (Unaudited)




Net income		$	6,265		$	5,067		$	17,946		$	15,049

Other comprehensive income, net of tax




Unrealized gains (losses) on securities available for sale arising during the period			5,669			3,102			10,252			8,778




	Reclassification adjustment for gains included in net income		58			(350	)		312			(1,598	)




	Unrealized loss on interest rate swap, net of reclassification adjustment		(625	)		—			(881	)		—

	Other comprehensive income		5,102			2,752			9,683			7,180

	Comprehensive income	$	11,367		$	7,819		$	27,629		$	22,229

The accompanying notes are an integral part of these consolidated financial statements.

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)


			Nine Months Ended
			September 30,

(Dollars in thousands)			2002			2001

Cash Flows from Operating Activities




Net Income			$	17,946		$	15,049




Adjustments to reconcile net income to net cash provided by operating activities:




	Depreciation			18,549			17,505




	Accretion and amortization of investment securities			527			(43	)




	Provision for loan losses			1,018			1,087




	(Gain) losses on sales of securities available-for-sale			480			(2,479	)




	(Gain) on sale of mortgage loans			(723	)		(579	)




	Proceeds from sales of mortgage loans			107,308			94,276




	Origination of mortgage loans held for sale			(101,582	)		(101,733	)




	Change in operating assets and liabilities:




		(Increase) decrease in accrued interest receivable		199			16




		(Increase) decrease in other assets		(3,338	)		1,317




		Increase (decrease) in accrued interest payable		(148	)		427




		Increase (decrease) in other liabilities		2,270			(1,328	)




	Other			375			—

	Net cash provided by operating activities			42,881			23,515

Cash Flows from Investing Activities

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