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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(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, 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
  17601-4133
Lancaster, Pennsylvania
  (ZipCode)
(Address of principal executive offices)
    

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 – 21,819,764 shares outstanding as of October 29, 2004.

 

Sterling Financial Corporation and Subsidiaries
Index

             
        Page
Part I – Financial Information        
Item 1.
  Financial Statements (Unaudited)        
  Consolidated Balance Sheets As of September 30, 2004 and December 31, 2003     3  
  Consolidated Statements of Income For the Three Months and Nine Months ended September 30, 2004 and 2003     4  
  Consolidated Statements of Changes in Stockholders’ Equity For the Nine Months ended September 30, 2004 and 2003     5  
  Consolidated Statements of Cash Flows For the Nine Months ended September 30, 2004 and 2003     6  
  Notes to Consolidated Financial Statements     7  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
  Quantitative and Qualitative Disclosures About Market Risk     31  
  Controls and Procedures     33  
Part II – Other Information        
  Legal Proceedings     34  
  Changes in Securities, Use of Proceeds and Equity Securities     34  
  Defaults Upon Senior Securities     34  
  Submission of Matters to a Vote of Security Holders     34  
  Other Information     35  
  Exhibits and Reports on Form 8-K     35  
        36  
 SUBSIDIARIES OF THE REGISTRANT
 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES-OXLEY
 CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES-OXLEY

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Part I – Financial Information

STERLING FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)
                 
    September 30,   December 31,
(In thousands except share and per share data)
   2004
   2003
Assets
                
Cash and due from banks
   $ 58,764     $ 64,996  
Federal funds sold
     77       19,102  
 
    
 		      
 		  
Cash and cash equivalents
     58,841       84,098  
Interest-bearing deposits in banks
     4,864       4,102  
Short-term investments
     6,972       11,275  
Mortgage loans held for sale
     7,381       11,520  
Securities held-to-maturity (fair value 2004 - $36,227 ; 2003 - $37,405)
     35,237       35,956  
Securities available-for-sale
     451,617       540,049  
Loans, net of allowance for loan losses (2004 - $16,605; 2003 - $14,656)
     1,689,150       1,481,369  
Premises and equipment, net
     38,077       38,720  
Assets held for operating lease, net
     59,445       57,891  
Other real estate owned
     80       520  
Goodwill
     40,927       30,490  
Intangible assets
     10,540       5,083  
Mortgage servicing rights
     2,971       2,908  
Accrued interest receivable
     10,194       11,236  
Other assets
     35,346       28,300  
 
    
 		      
 		  
Total assets
   $ 2,451,642     $ 2,343,517  
 
    
 		      
 		  
Liabilities
                
Deposits:
                
Noninterest-bearing
   $ 249,115     $ 249,929  
NOW and money market
     616,827       577,486  
Savings
     216,191       210,347  
Time
     725,683       740,635  
 
    
 		      
 		  
Total deposits
     1,807,816       1,778,397  
 
    
 		      
 		  
Short-term borrowings
     84,262       43,878  
Long-term debt
     224,721       195,762  
Subordinated notes payable
     56,702       56,702  
Accrued interest payable
     6,143       6,273  
Other liabilities
     32,445       42,494  
 
    
 		      
 		  
Total liabilities
     2,212,089       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
     49,429       44,615  
Escrowed shares (2004 –216,356 shares; 2003 – 240,002 shares)
     (4,389 )     (4,877 )
Retained earnings
     73,122       58,874  
Accumulated other comprehensive income
     11,645       13,827  
Common stock in treasury, at cost (2004 –23,720 shares; 2003 – 59,310 shares)
     (543 )     (1,311 )
 
    
 		      
 		  
Total stockholders’ equity
     239,553       220,011  
 
    
 		      
 		  
Total liabilities and stockholders’ equity
   $ 2,451,642     $ 2,343,517  
 
    
 		      
 		  

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

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Consolidated Statements of Income (Unaudited)
                                 
    Three Months Ended   Nine Months Ended
    September 30,
   September 30,
(Dollars in thousands, except per share data)
   2004
   2003
   2004
   2003
Interest and dividend income
                                
Loans, including fees
   $ 29,273     $ 25,302     $ 82,429     $ 73,793  
Debt securities Taxable
     2,987       4,073       9,685       12,666  
Tax-exempt
     2,615       2,555       7,868       7,446  
Dividends
     146       155       434       459  
Federal funds sold
     9       41       45       187  
Short-term investments
     11       31       27       50  
 
    
 		      
 		      
 		      
 		  
Total interest and dividend income
     35,041       32,157       100,488       94,601  
 
    
 		      
 		      
 		      
 		  
Interest expense
                                
Deposits
     6,671       6,989       19,605       22,661  
Short-term borrowings
     589       407       1,437       1,184  
Long-term debt
     2,035       2,007       5,896       5,705  
Subordinated debt
     789       751       2,306       1,300  
 
    
 		      
 		      
 		      
 		  
Total interest expense
     10,084       10,154       29,244       30,850  
 
    
 		      
 		      
 		      
 		  
Net interest income
     24,957       22,003       71,244       63,751  
Provision for loan losses
     2,030       872       3,659       2,816  
 
    
 		      
 		      
 		      
 		  
Net interest income after provision for loan losses
     22,927       21,131       67,585       60,935  
 
    
 		      
 		      
 		      
 		  
Noninterest income
                                
Trust and investment management income
     2,230       1,258       6,586       3,496  
Service charges on deposit accounts
     1,528       1,482       4,500       4,296  
Other service charges, commissions and fees
     910       928       2,700       2,736  
Brokerage fees and commissions
     749       405       2,487       828  
Insurance commissions and fees
     2,044       80       2,765       261  
Mortgage banking income
     567       1,054       1,605       2,769  
Rental income on operating leases
     6,225       6,496       18,626       19,350  
Other operating income
     770       686       2,241       1,788  
Securities gains
     1,025       346       2,056       390  
 
    
 		      
 		      
 		      
 		  
Total noninterest income
     16,048       12,735       43,566       35,914  
 
    
 		      
 		      
 		      
 		  
Noninterest expenses
                                
Salaries and employee benefits
     12,531       10,425       34,972       29,011  
Net occupancy
     1,336       1,209       4,084       3,672  
Furniture and equipment
     1,739       1,655       5,187       4,728  
Professional services
     1,044       718       3,126       2,334  
Depreciation on operating lease assets
     5,280       5,417       15,726       16,029  
Taxes other than income
     598       445       1,671       1,252  
Intangible asset amortization
     522       36       1,070       109  
Other
     4,324       3,876       12,429       11,293  
 
    
 		      
 		      
 		      
 		  
Total noninterest expenses
     27,374       23,781       78,265       68,428  
 
    
 		      
 		      
 		      
 		  
Income before income taxes
     11,601       10,085       32,886       28,421  
Income tax expenses
     3,101       2,588       8,541       7,355  
 
    
 		      
 		      
 		      
 		  
Net income
   $ 8,500     $ 7,497     $ 24,345     $ 21,066  
 
    
 		      
 		      
 		      
 		  
Per share information:
                                
Basic earnings per share
   $ 0.39     $ 0.35     $ 1.13     $ 1.00  
Diluted earnings per share
     0.38       0.35       1.11       0.99  
Dividends declared
     0.16       0.14       0.46       0.42  

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

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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
                             21,066                       21,066  
Other comprehensive income:
                                                        
Change in net unrealized loss on securities AFS, net of reclassification adjustment and tax effects
                                     (2,361 )         (2,361 )
Change in unrealized loss on interest rate swaps
                                     (95 )         (95 )
 
                                                    
 		  
Total comprehensive income
                                                     18,610  
 
                                                    
 		  
Issuance of common stock
                                                       
Stock options
     17,947       90       210                               300  
Directors’ compensation plan
     225       1       20                               21  
Issuance of treasury stock
                                                       
Dividend Reinvestment Plan (29,548 shares)
                     (20 )                     720       700  
Stock options (59,905 shares)
                     (389 )                     1,356       967  
Directors’ compensation plan (6,225 shares)
                     5                       137       142  
Purchase of treasury stock (89,500 shares)
                                             (2,078 )     (2,078 )
Cash dividends declared
                             (8,795 )                     (8,795 )
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance, September 30, 2003
     16,941,241     $ 84,706     $ 34,775     $ 75,792     $ 11,843     $ (416 )   $ 206,700  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance, December 31, 2003
     21,776,551     $ 108,883     $ 44,615     $ 58,874     $ 13,827     $ (6,188 )   $ 220,011  
Comprehensive income:
                                                        
Net income
                             24,345                       24,345  
Other comprehensive income:
                                                        
Change in net unrealized gain on securities AFS, net of reclassification adjustment and tax effects
                                     (2,472 )             (2,472 )
Change in unrealized gains (losses)
on interest rate swaps
                                     290               290  
 
                                                    
 		  
Total comprehensive income
                                                     22,163  
 
                                                    
 		  
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 (9,438 shares)
                     19                       214       233  
Stock options (101,152 shares)
                     (954 )                     2,261       1,307  
Purchase of treasury stock (75,000 shares)
                                             (1,707 )     (1,707 )
Issuance of escrowed stock (23,646 shares)
                                             488       488  
Cash dividends declared
                             (10,071 )                     (10,071 )
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balance, September 30, 2004
     22,057,806     $ 110,289     $ 49,429     $ 73,122     $ 11,645     $ (4,932 )   $ 239,553  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		  

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

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Consolidated Statements of Cash Flows (Unaudited)
<
                 
    Nine Months Ended
    September 30,
(Dollars in thousands)
   2004
   2003
Cash Flows from Operating Activities
                
Net income
   $ 24,345     $ 21,066  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation
     19,105       19,128  
Accretion and amortization of investment securities
     (91 )     573  
Amortization of intangible assets
     1,070       109  
Provision for loan losses
     3,659       2,816  
Gains on sale of finance leases
     (146 )     —  
Gains on sale of securities available-for-sale
     (2,056 )     (390 )
Gains on sale of mortgage loans
     (606 )     (1,909 )
Proceeds from sales of mortgage loans
     91,886       211,872  
Originations of mortgage loans held for sale
     (87,141 )     (224,631 )
Change in operating assets and liabilities:
                
Decrease in accrued interest receivable
     1,042       806  
Increase in other assets
     (6,960 )     (6,254 )
Decrease in accrued interest payable
     (130 )     (1,002 )
Increase (decrease) in other liabilities
     (9,004 )     7,034  
Other
     11       (67 )
 
    
 		      
 		  
Net cash provided by operating activities
     34,984       29,151  
 
    
 		      
 		  
Cash Flows From Investing Activities
                
Net increase in interest-bearing deposits in other banks
     (762 )     (692 )
Net decrease in short-term investments
     4,303       4,393  
Proceeds from maturities or calls of securities held-to-maturity
     2,653       4,110  
Proceeds from sales, maturities or calls of securities available-for-sale
     109,037       141,116  
Purchases of securities held-to-maturity
     (1,932 )     (4,811 )
Purchases of securities available-for-sale
     (22,271 )     (146,785 )
Loan and finance lease originations, net of repayments
     (220,932 )     (163,654 )
Proceeds from sales of finance leases
     10,078       —  
Purchases of equipment acquired for operating leases, net
     (17,280 )     (14,497 )
Purchases of premises and equipment, net
     (2,669 )     (4,306 )
Cash paid for business combination, net
     (8,050 )     —  
 
    
 		      
 		  
Net cash used by investing activities
     (147,825 )     (185,126 )
 
    
 		      
 		  
Cash Flows From Financing Activities
                
Net increase in deposits
     29,419       40,256  
Net increase (decrease) in short-term borrowings
     39,469       (1,046 )
Proceeds from issuance of long-term debt
     64,751       75,038  
Repayment of long-term debt
     (36,174 )     (23,883 )
Proceeds from issuance of common stock
     —       321  
Proceeds from issuance of subordinated notes payable
     —       36,083  
Cash dividends
     (9,681 )     (8,632 )
Cash paid in lieu of fractional shares
     (33 )     —  
Purchase of treasury stock
     (1,707 )     (2,078 )
Proceeds from issuance of treasury stock
     1,540       1,809  
 
    
 		      
 		  
Net cash provided by financing activities
     87,584       117,868  
 
    
 		      
 		  
Net change in cash and cash equivalents
     (25,257 )     (38,107 )
Cash and Cash Equivalents
                
Beginning of period