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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

     
(Mark One)
x
  QUARTERLY REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2004
     
OR    
     
o
  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)
  (ZipCode)

Registrant’s Telephone number, including area code: (717) 581-6030

     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 o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes x No o

     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 – 21,803,558 shares outstanding as of July 30, 2004.

 

Sterling Financial Corporation and Subsidiaries

Index

         
    Page
       
       
Item 1. Financial Statements (Unaudited)
        
       
    3  
       
    4  
       
    5  
       
    6  
       
    7  
       
    14  
       
    31  
       
    33  
       
       
       
    34  
       
    34  
       
    34  
       
    34  
       
    35  
       
    35  
       
    36  
 SUBSIDIARIES OF THE REGISTRATN
 CERTIFICATION OF CEO
 CERTIFICATION OF CFO
 CERTIFICATION OF CEO PURSUANT TO 906
 CERTIFICATION OF CFO PURSUANT TO 906

2

Table of Contents

Part I – Financial Information

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)
                 
    June 30,   December 31,
(In thousands except share and per share data)
   2004
   2003
Assets
                
Cash and due from banks
   $ 52,666     $ 64,996  
Federal funds sold
     76       19,102  
 
    
 		      
 		  
Cash and cash equivalents
     52,742       84,098  
Interest-bearing deposits in banks
     5,207       4,102  
Short-term investments
     3,348       11,275  
Mortgage loans held for sale
     9,374       11,520  
Securities held-to-maturity (fair value 2004 - $36,401 ; 2003 - $37,405)
     35,228       35,956  
Securities available-for-sale
     471,113       540,049  
Loans, net of allowance for loan losses (2004 - $15,566; 2003 - $14,656)
     1,603,733       1,481,369  
Premises and equipment, net
     38,110       38,720  
Assets held for operating lease, net
     57,474       57,891  
Other real estate owned
     403       520  
Goodwill
     40,779       30,490  
Intangible assets
     10,959       5,083  
Mortgage servicing rights
     2,878       2,908  
Accrued interest receivable
     10,912       11,236  
Other assets
     34,187       28,300  
 
    
 		      
 		  
Total assets
   $ 2,376,447     $ 2,343,517  
 
    
 		      
 		  
Liabilities
                
Deposits:
                
Noninterest-bearing
   $ 253,534     $ 249,929  
NOW and money market
     593,376       577,486  
Savings
     223,775       210,347  
Time
     734,547       740,635  
 
    
 		      
 		  
Total deposits
     1,805,232       1,778,397  
 
    
 		      
 		  
Short-term borrowings
     59,759       43,878  
Long-term debt
     193,724       195,762  
Subordinated notes payable
     56,702       56,702  
Accrued interest payable
     5,795       6,273  
Other liabilities
     28,152       42,494  
 
    
 		      
 		  
Total liabilities
     2,149,364       2,123,506  
 
    
 		      
 		  
Stockholders’ equity
                
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued and outstanding
     —       —  
Common stock - $5.00 par value, 70,000,000 shares authorized; issued 2004 – 22,057,806 shares; 2003 – 21,776,551 shares
     110,289       108,883  
Capital surplus
     49,546       44,615  
Escrowed shares (2004 –216,356 shares; 2003 – 240,002 shares)
     (4,389 )     (4,877 )
Retained earnings
     68,147       58,874  
Accumulated other comprehensive income
     4,583       13,827  
Common stock in treasury, at cost (2004 –47,850 shares; 2003 – 59,310 shares)
     (1,093 )     (1,311 )
 
    
 		      
 		  
Total stockholders’ equity
     227,083       220,011  
 
    
 		      
 		  
Total liabilities and stockholders’ equity
   $ 2,376,447     $ 2,343,517  
 
    
 		      
 		  

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

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
                                 
    Three Months Ended   Six Months Ended
    June 30,
   June 30,
(Dollars in thousands, except per share data)
   2004
   2003
   2004
   2003
Interest and dividend income
                                
Loans, including fees
   $ 27,189     $ 24,500     $ 53,156     $ 48,491  
Debt securities
                                
Taxable
     3,216       4,081       6,698       8,593  
Tax-exempt
     2,635       2,451       5,253       4,891  
Dividends
     150       150       288       304  
Federal funds sold
     12       82       36       146  
Short-term investments
     3       7       16       19  
 
    
 		      
 		      
 		      
 		  
Total interest and dividend income
     33,205       31,271       65,447       62,444  
 
    
 		      
 		      
 		      
 		  
Interest expense
                                
Deposits
     6,386       7,628       12,934       15,672  
Short-term borrowings
     429       397       836       777  
Long-term debt
     1,916       1,782       3,873       3,698  
Subordinated debt
     754       287       1,517       549  
 
    
 		      
 		      
 		      
 		  
Total interest expense
     9,485       10,094       19,160       20,696  
 
    
 		      
 		      
 		      
 		  
Net interest income
     23,720       21,177       46,287       41,748  
Provision for loan losses
     915       909       1,629       1,944  
 
    
 		      
 		      
 		      
 		  
Net interest income after provision for loan losses
     22,805       20,268       44,658       39,804  
 
    
 		      
 		      
 		      
 		  
Noninterest income
                                
Trust and investment management income
     2,202       1,099       4,356       2,238  
Service charges on deposit accounts
     1,498       1,440       2,972       2,814  
Other service charges, commissions and fees
     915       938       1,790       1,808  
Brokerage fees and commissions
     910       255       1,738       423  
Insurance commissions and fees
     654       88       721       181  
Mortgage banking income
     629       920       1,038       1,715  
Rental income on operating leases
     6,166       6,434       12,401       12,854  
Other operating income
     827       533       1,471       1,102  
Securities gains
     514       40       1,031       44  
 
    
 		      
 		      
 		      
 		  
Total noninterest income
     14,315       11,747       27,518       23,179  
 
    
 		      
 		      
 		      
 		  
Noninterest expenses
                                
Salaries and employee benefits
     11,401       9,438       22,441       18,586  
Net occupancy
     1,319       1,152       2,748       2,463  
Furniture and equipment
     1,726       1,540       3,448       3,073  
Professional services
     1,317       862       2,082       1,616  
Depreciation on operating lease assets
     5,210       5,327       10,446       10,612  
Taxes other than income
     483       442       1,073       807  
Intangible asset amortization
     298       37       548       73  
Other
     4,165       3,937       8,105       7,417  
 
    
 		      
 		      
 		      
 		  
Total noninterest expenses
     25,919       22,735       50,891       44,647  
 
    
 		      
 		      
 		      
 		  
Income before income taxes
     11,201       9,280       21,285       18,336  
Income tax expenses
     2,985       2,336       5,440       4,767  
 
    
 		      
 		      
 		      
 		  
Net income
   $ 8,216     $ 6,944     $ 15,845     $ 13,569  
 
    
 		      
 		      
 		      
 		  
Per share information:
                                
Basic earnings per share
   $ 0.38     $ 0.33     $ 0.74     $ 0.64  
Diluted earnings per share
     0.37       0.33       0.72       0.64  
Dividends declared
     0.15       0.14       0.30       0.27  

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

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity
                                                         
                                    Accumulated        
                                    Other   Treasury    
    Shares                           Comprehensive   and    
    Common   Common   Capital   Retained   Income   Escrowed    
(Dollars in thousands)
   Stock
   Stock
   Surplus
   Earnings
   (Loss)
   Shares
   Total
Balance, December 31, 2002
     16,923,069     $ 84,615     $ 34,949     $ 63,521     $ 14,299     $ (551 )   $ 196,833  
Comprehensive income:
                                                        
Net Income
                             13,569                       13,569  
Other comprehensive income:
                                                        
Change in net unrealized loss on securities AFS, net of reclassification adjustment and tax effects
                                     6,513               6,513  
Change in unrealized loss on interest rate swaps
                                     (453 )             (453 )
 
                                                    
 		  
Total comprehensive income
                                                     19,629  
 
                                                    
 		  
Issuance of common stock
                                                        
Stock options
     5,621       28       50                               78  
Issuance of treasury stock
                                                        
Dividend Reinvestment Plan (29,548 shares)
                     (20 )                     720       700  
Stock options (50,827 shares)
                     (376 )                     1,140       764  
Purchase of treasury stock (64,500 shares)
                                             (1,454 )     (1,454 )
Cash dividends declared
                             (6,377 )                     (6,377 )
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance, June 30, 2003
     16,928,690     $ 84,643     $ 34,603     $ 70,713     $ 20,359     $ (145 )   $ 210,173  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance, December 31, 2003
     21,776,551     $ 108,883     $ 44,615     $ 58,874     $ 13,827     $ (6,188 )   $ 220,011  
Comprehensive income:
                                                        
Net Income
                             15,845                       15,845  
Other comprehensive income:
                                                        
Change in net unrealized gain on securities AFS, net of reclassification adjustment and tax effects
                                     (9,203 )             (9,203 )
Change in unrealized loss on interest rate swaps
                                     (41 )             (41 )
 
                                                    
 		  
Total comprehensive income
                                                     6,601  
 
                                                    
 		  
Cash paid in lieu of fractional shares
     (1,402 )     (7 )             (26 )                     (33 )
Issuance of common stock
                                                       
Acquisition of StoudtAdvisors
     282,657       1,413       5,749                               7,162  
Issuance of treasury stock
                                                        
Directors’ compensation plan (188 shares)
                                             4       4  
Stock options (86,272 shares)
                     (818 )                     1,921       1,103  
Purchase of treasury stock (75,000 shares)
                                             (1,707 )     (1,707 )
Issuance of escrowed stock (23,646 shares)
                                             488       488  
Cash dividends declared
                             (6,546 )                     (6,546 )
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance, June 30, 2004
     22,057,806     $ 110,289     $ 49,546     $ 68,147     $ 4,583     $ (5,482 )   $ 227,083  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  

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

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STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
                 
    Six Months Ended
    June 30,
(Dollars in thousands)
   2004
   2003
Cash Flows from Operating Activities
                
Net income
   $ 15,845     $ 13,569  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation
     12,711       12,661  
Accretion and amortization of investment securities
     397       415  
Amortization of intangible assets
     548       44  
Provision for loan losses
     1,629       1,944  
Gains on sale of securities available-for-sale
     (853 )     (44 )
Gains on sale of mortgage loans
     (432 )     (1,264 )
Proceeds from sales of mortgage loans
     60,045       145,294  
Originations of mortgage loans held for sale
     (57,467 )     (145,104 )
Change in operating assets and liabilities:
                
(Increase) decrease in accrued interest receivable
     324       831  
(Increase) decrease in other assets
     (5,708 )     (6,129 )
Increase (decrease) in accrued interest payable
     (478 )     442  
Increase (decrease) in other liabilities
     (10,110 )     (1,774 )
Other
     (125 )     (67 )
 
    
 		      
 		  
Net cash provided by operating activities
     16,326       20,818  
 
    
 		      
 		  
Cash Flows From Investing Activities
                
Net (increase) decrease in interest-bearing deposits in other banks
     (1,105 )     (853 )
Net (increase) decrease in short-term investments
     7,927       10,132  
Proceeds from sales of securities available-for-sale
     17,022       19,789  
Proceeds from maturities or calls of securities held-to-maturity
     2,123       3,129  
Proceeds from maturities or calls of securities available-for-sale
     55,213       77,549  
Purchases of securities held-to-maturity
     (1,392 )     (1,215 )
Purchases of securities available-for-sale
     (16,862 )     (49,028 )
Increase in net loans and direct finance leases made to customers
     (123,876 )     (111,632 )
Purchases of equipment acquired for operating leases, net
     (10,029 )     (9,181 )
Purchases of premises and equipment, net
     (1,591 )     (2,749 )
Cash paid for business combination, net
     (7,850 )     —  
 
    
 		      
 		  
Net cash used by investing activities
     (80,420 )     (64,059 )
 
    
 		      
 		  
Cash Flows From Financing Activities
                
Net increase in deposits
     27,205       32,142  
Net increase (decrease) in short-term borrowings
     14,966       (1,133 )
Proceeds from issuance of long-term debt
     15,000       —  
Repayment of long-term debt
     (17,420 )     (18,039 )
Proceeds from issuance of common stock
     —       78  
Proceeds from issuance of subordinated notes payable
     —       35,000  
Cash dividends
     (6,380 )     (6,377 )
Cash paid in lieu of fractional shares
     (33 )     —  
Purchase of treasury stock
     (1,707 )     (1,454 )
Proceeds from issuance of treasury stock
     1,107       1,464  
 
    
 		      
 		  
Net cash provided by financing activities
     32,738       41,681  
 
    
 		      
 		  
Net change in cash and cash equivalents
     (31,356 )     (1,560 )
Cash and Cash Equivalents
                
Beginning of period
     84,098       107,339  
 
    
 		      
 		  
End of period
   $ 52,742     $ 105,779  
 
    
 		      
 		  

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

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Table of Contents

Notes to Consolidated Financial Statements

(All dollar amounts presented in the footnotes are in thousands, except per share data)

Note 1 — Summary of Significant Accounting Policies

     Basis of Presentation – The accompanying unaudited consolidated financial statements of Sterling Financial Corporation and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. genera