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, 1994
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
(State or other jurisdiction of incorporation or organization)
23-2449551
(I.R.S. Employer Identification No.)
525 Greenfield Road, P.O. Box 10608
Lancaster, Pennsylvania 17605-0608
(Address of principal executive offices) (Zip Code)
(717) 295-7551
(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 date.
Common Stock, $5.00 Par Value- 5,868,560 shares outstanding as of October 31,
1994.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1994 (Unaudited), December 31, 1993,
and September 30, 1993 (Unaudited). 3
Consolidated Statements of Income
for the Three and Nine Months ended September 30, 1994
and 1993 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 1994 and 1993 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signature Page 14
Material Contracts of the Registrant 15
Subsidiaries of the Registrant 17
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, December 31, September 30,
<S> 1994 1993 1993
ASSETS (Unaudited)
(Unaudited) <C> <C> <C>
Cash and due from banks..................................$ 32,121,974 $ 36,189,703 $ 26,623,857
Interest-bearing deposits in other banks................. 16,477 40,595 27,575
Federal funds sold....................................... 11,750,000 12,350,000 15,000,000
Mortgage loans held for sale............................. 160,641 3,431,375 none
Investment Securities::
Securities held to maturity (market value-$150,234,400;
$151,443,866; $140,513,076).......................... 151,688,362 146,465,280 134,273,921
Securities available for sale.......................... 8,495,912 none none
Loans.................................................... 381,156,560 360,730,048 367,960,749
Less: Unearned Income.................................. (1,042,640) (1,365,646) (1,622,391)
Allowance for loan losses........................ (7,768,293) (7,180,000) (7,100,437)
Loans, Net............................................... 372,345,627 352,184,402 359,237,921
Premises and Equipment................................... 9,981,817 7,424,265 7,279,502
Other real estate owned.................................. 234,037 250,608 370,608
Accrued interest receivable and prepaid expenses......... 8,307,872 8,816,336 8,671,341
Other assets............................................. 22,005,055 20,730,706 19,593,120
TOTAL ASSETS.............................................$617,107,774 $587,883,270 $571,077,845
============ ============ ============
LIABILITIES
Deposits:
Non-interest bearing..................................$ 66,841,213 $ 68,197,423 $ 62,528,931
Interest-bearing...................................... 461,429,063 437,482,475 427,041,634
TOTAL DEPOSITS........................................... 528,270,276 505,679,898 489,570,565
Interest-bearing demand notes issued to U.S. Treasury.... 3,000,000 3,000,000 3,000,000
Other liabilities for borrowed money..................... 20,176,281 19,410,045 20,755,494
Mortgages payable and capitalized lease liability........ 1,162 11,188 14,353
Accrued interest payable and accrued expenses............ 5,489,318 5,413,784 5,538,450
Other liabilities........................................ 4,782,771 4,900,917 4,558,130
TOTAL LIABILITIES........................................ 561,719,808 538,415,832 523,436,992
STOCKHOLDERS' EQUITY
Common Stock - (Par Value: $5.00)
No. Shares authorized: 10,000,000
No. Shares issued: 5,854,824; 2,882,920; 2,734,305
No. Shares outstanding: 5,846,210; 2,882;920 2,733,212. 29,274,120 14,414,600 13,671,525
Capital Surplus.......................................... 8,072,100 20,830,185 15,083,116
Retained Earnings........................................ 17,783,291 14,222,653 18,929,385
Net unrealized gain on securities available for sale..... 470,970 none none
Less: Treasury Stock (8,614, none; 1,093) - at cost...... (212,515) none (43,173)
TOTAL STOCKHOLDERS' EQUITY............................... 55,387,966 49,467,438 47,640,853
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...............$617,107,774 $587,883,270 $571,077,845
============ ============ ============
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
<S> 1994 1993 1994 1993
INTEREST INCOME <C> <C> <C> <C>
Interest and fees on loans..................$ 8,242,140 $ 7,782,818 $ 23,688,557 $ 23,220,856
Interest on deposits in other banks......... 304 7,000 1,653 25,520
Interest on federal funds sold.............. 101,816 37,489 185,581 109,945
Interest and dividends on investment securities:
Taxable.................................. 1,636,380 1,529,146 4,852,926 4,706,642
Tax-exempt............................... 622,671 576,234 1,847,626 1,677,678
Dividends on stock....................... 43,059 52,938 132,774 144,996
TOTAL INTEREST INCOME......................... 10,646,370 9,985,625 30,709,117 29,885,637
INTEREST EXPENSE
Interest on time certificates of deposit
of $100,000 or more....................... 190,238 124,934 404,121 375,585
Interest on all other deposits.............. 3,318,921 3,300,648 9,346,805 10,121,737
Interest on demand notes issued to the
U.S. Treasury............................. 21,437 18,208 56,783 49,795
Interest on federal funds purchased......... none none 1,836 none
Interest on other borrowed money............ 327,308 316,913 936,889 853,643
Interest on mortgage indebtedness and
obligations under capitalized leases...... 93 447 554 5,637
TOTAL INTEREST EXPENSE........................ 3,857,997 3,761,150 10,746,988 11,406,397
NET INTEREST INCOME........................... 6,788,373 6,224,475 19,962,129 18,479,240
Provision for loan losses................... 309,000 469,000 916,000 2,037,000
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES................................ 6,479,373 5,755,475 19,046,129 16,442,240
OTHER OPERATING INCOME
Income from fiduciary activities........... 199,815 164,378 546,803 460,926
Service charges on deposit accounts........ 452,535 468,777 1,347,066 1,398,672
Other service charges, commissions and fees 410,344 438,852 1,108,035 1,160,043
Mortgage banking income.................... 124,888 728,589 512,973 1,900,163
Other operating income..................... 576,370 582,583 1,737,262 1,771,799
Investment securities gains and (losses)... none 1,000 none 8,160
TOTAL OTHER OPERATING INCOME.................. 1,763,952 2,384,179 5,252,139 6,699,763
OTHER OPERATING EXPENSES
Salaries and employee benefits............. 3,097,624 2,936,602 8,995,793 8,531,979
Net occupancy expense...................... 354,917 346,423 1,117,661 1,009,942
Furniture and equipment expense............ 340,525 308,401 1,027,688 919,023
FDIC insurance assessment.................. 285,796 266,398 842,783 786,073
Other operating expenses................... 1,414,013 1,526,008 4,250,532 4,200,534
TOTAL OTHER OPERATING EXPENSES................ 5,492,875 5,383,832 16,234,457 15,447,551
Income before income taxes................. 2,750,450 2,755,822 8,063,811 7,694,452
Applicable income taxes.................... 645,953 744,090 1,997,900 2,000,972
NET INCOME....................................$ 2,104,497 $ 2,011,732 $ 6,065,911 $ 5,693,480
============ ============ =========== ============
Earnings per common share:
Net Income...................................$ .36 $ .35 $ 1.04 $ 1.00
Cash dividends declared per common share......$ .15 $ .14 $ .43 $ .40
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
<S> 1994 1993
<C> <C>
Cash Flows from Operating Activities
Net Income...........................................................$ 6,065,911 $ 5,693,480
Adjustments to reconcile net income to net cash provided by/(used in)
operating activities:
Depreciation...................................................... 761,878 734,547
Provision for possible loan and lease losses...................... 916,000 2,037,000
(Gain) loss on maturities/sales of investment securities.......... none (8,160)
(Gain) loss on disposition of premises and equipment.............. (2,452) none
(Gain) Loss on sale of mortgage loans............................. (246,085) (1,695,754)
Proceeds from sales of mortgage loans............................. 21,550,591 47,113,533
Originations of mortgage loans held for sale...................... (18,033,772) (45,417,779)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable and prepaid
expenses..................................................... 508,464 (560,487)
(Increase) decrease in other assets............................. (1,257,778) (216,929)
Increase (decrease) in accrued interest payable and
accrued expenses............................................. (167,087) 52,834
Increase (decrease) in other liabilities....................... (118,146) (440,582)
Net cash provided by/(used in) operating activities.................... 9,977,524 7,291,703
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks................. 39,205,255 1,900,000
Purchase of interest-bearing deposits in other banks................... (39,181,137) (1,027,575)
Proceeds from maturities of investment securities...................... 24,809,419 26,549,464
Purchase of investment securities...................................... (37,814,822) (32,311,748)
Federal funds sold, net................................................ 600,000 (11,800,000)
Net loans and leases made to customers................................. (21,077,225) (18,146,357)
Purchases of premises and equipment.................................... (3,557,833) (430,185)
Proceeds from sale of premises and equipment........................... 240,855 8,125
Net cash provided by/(used in) investing activities.................... (36,775,488) (35,258,276)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW and savings accounts... (1,986,401) 23,440,379
Net increase (decrease) in time deposits............................... 24,576,779 (7,053,312)
Proceeds from borrowings............................................... 8,875,000 12,816,450
Repayments of borrowings............................................... (8,108,764) (6,783,928)
Repayments of mortgages payable and capitalized lease liability........ (10,026) (204,133)
Proceeds from issuance of common stock................................. 2,101,436 1,118,603
Cash dividends paid.................................................... (2,505,274) (2,177,489)
Acquisition of treasury stock.......................................... (212,515) (267,222)
Proceeds from issuance of treasury stock............................... none 479,140
Net cash provided by/(used in) financing activities.................... 22,730,235 21,368,488
Increase (decrease) in cash and due from banks......................... (4,067,729) (6,598,085)
Cash and due from banks::
Beginning.............................................................. 36,189,703 33,221,942
Ending.................................................................$ 32,121,974 $ 26,623,857
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money....................$ 10,556,634 $ 11,705,784
Income taxes......................................................... 1,760,000 2,295,000
Supplemental Schedule of Noncash Investing and Financing Activities
Other Real Estate acquired in settlement of loans...................... 112,955 121,082
See accompanying notes to financial statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Sterling
Financial Corporation (Sterling) have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 1994 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1994.
The consolidated financial statements of Sterling include the accounts of
its wholly owned subsidiary, Bank of Lancaster County, N.A. and its wholly
owned subsidiary, Town & Country, Inc. All significant intercompany
transactions are eliminated in the consolidation.
Effective January 1, 1993, Sterling adopted Statement of Financial
Accounting Standards No. 106 - Employer's Accounting for Postretirement
Benefits Other Than Pensions. Under SFAS No. 106, the cost of postretirement
benefits other than pensions must be recognized on an to earn the benefits.
This is a significant change from the previous generally accepted practice of
accounting for these benefits which was on a cash basis.
The accumulated postretirement benefit obligation at the date of adoption
(the "transition obligation") could have been recognized in operations as the
cumulative effect of an accounting change in the period of adoption, which
would have resulted in an actuarially determined pre-tax charge to earnings of
approximately $1,026,457, or its recognition could be delayed by amortizing
the obligation over future periods as a component of the postretirement benefit
cost. Sterling adopted SFAS No. 106 by recognizing the transition on a
delayed basis. The net periodic postretirement benefit cost was $212,339 for
the year 1993. It has been determined that the cost for 1994 will be $231,222.
The Financial Accounting Standards Board issued SFAS No. 109 - Accounting
for Income Taxes. This Statement changes the method of accounting for income
taxes. SFAS No. 109 was retroactively applied in 1993 and resulted in a
decrease of $310,000 in retained earnings beginning January 1, 1991.
Earnings after this date have not been restated since the change is not
considered material.
Effective January 1, 1994, Sterling adopted Statement of Financial
Accounting Standards No. 115 - Accounting for Certain Investments in Debt and
Equity Securities. SFAS No. 115 requires that these securities be classified
into one of three categories: held-to-maturity, available-for-sale or trading.
Specific accounting treatments apply to each of the three categories.
Securities held-to-maturity will be reported at amortized cost, trading
securities are reported at fair value with unrealized gains and losses
included in earnings and available-for-sale will be reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. Sterling has segregated its
investment securities into two categories: those held-to-maturity and those
available-for-sale. The effect of adoption has resulted in an increase to
shareholders' equity of $470,970 as of September 30,1994. There has been no
impact on current year earnings or a restatement of previously issued
financial statements in connection with the adoption of SFAS No. 115.
The Financial Accounting Standards Board issued SFAS No. 112 - Employers'
Accounting for Postemployment Benefits which establishes accounting standards
for employers who provide benefits to former or inactive employees after
employment but before retirement. This Statement is effective for fiscal years
beginning after December 15, 1993. Sterling has determined that the adoption
of this Statement will not have an effect on earnings.
The Financial Accounting Standards Board issued SFAS No. 114 - Accounting
by Creditors for Impairment of a Loan. This Statement, which becomes effective
for fiscal years beginning after December 15, 1994, will require that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's observable
market price or the fair value of collateral if the loan is collateral
dependent. Sterling has not completed the complex analysis required to
estimate the impact of this Statement.
The Financial Accounting Standards Board issued SFAS No. 116 - Accounting
for Contributions Received and Contributions Made. This Statement becomes
effective for financial statements issued for fiscal years beginning after
December 15, 1994 and interim periods within those fiscal years. Sterling has
determined that the adoption of this Statement will not affect its financial
position or results of operations.
Note 2 - Earnings Per Share
Earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which were
5,825,827 and 5,715,782 for 1994 and 1993 respectively. Figures for 1994 and
1993 were retroactively restated to reflect a two-for-one stock split in the
form of a 100% stock dividend paid in September 1994 and a 5%
stock dividend paid in December 1993.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets at September 30, 1994 amounted to $617,107,774 which
represents an increase of 8.1% over the $571,077,845 reported at September
30, 1993. Total assets at September 30, 1994 increased $29,224,504 or 5%
over the $587,883,270 reported at December 31, 1993.
The investment securities portfolio reflects a 19.3% increase or
$25,910,353 during the twelve month period September 30, 1993 to September
30, 1994. Of this increase, $713,591 resulted due to adoption of SFAS
No. 115. Effective January 1, 1994, Sterling adopted Statement of Financial
Accounting Standard No. 115 - Accounting for Certain Investments in Debt and
Equity Securities. SFAS No. 115 requires that these securities be classified
into one of three categories: held-to-maturity, available-for-sale or
trading. Specific accounting treatments apply to each of the three
categories. Securities held-to-maturity will be reported at amortized cost,
trading securities are reported at fair value with unrealized gains and
losses included in earnings and available-for-sale will be reported at fair
value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity. Sterling has
segregated its investment securities into two categories: those held-to-maturity
and those available-for-sale. The effect of adoption has resulted in an
increase to shareholders' equity of $470,970 as of September 30, 1994.
During the first nine months of 1994, there was an increase of $13,718,994 or
9.4% from the $146,465,280 reported at December 31, 1993.
Net loans have grown from $352,184,402 to $372,345,627 during the nine
month period ended September 30, 1994. This represents an increase of 5.7%
since December 31, 1993. Net loans increased from $359,237,921 at September
30, 1993 to $372,345,627 at September 30, 1994. This represents an increase
of $13,107,706 or 3.6%.
Premises and equipment increased $2,702,315 or 37% from $7,279,502
at September 30, 1993 to $9,981,817 at September 30, 1994. During the first
nine months of 1994, total premises and equipment increased $2,557,552 or
34% from $7,424,265 at December 31, 1993. This increase is the result of the
purchase of land for Sterling Financial's headquarters and initial advances
for construction of the headquarters building.
Total deposits increased $38,699,711 or 7.9% from $489,570,565 at September
30, 1993 to $528,270,276 at September 30, 1994. During the first nine months of
1994, total deposits increased $22,590,378 from the $505,679,898 reported at
December 31, 1993. Noninterest-bearing deposits increased $4,312,282 or 6.9%
from $62,528,931 at September 30, 1993 to $66,841,213 at September 30, 1994.
During the same period, interest-bearing deposits increased $34,387,429 or 8.1%.
Noninterest-bearing deposits decreased $1,356,210 or 2% during the first nine
months of 1994 while interest-bearing deposits increased $23,946,588 or 5.5%.
Stockholders' equity increased $7,747,113 or 16.3% from the $47,640,853
reported at September 30, 1993 to $55,387,966 at September 30, 1994. There was
an increase of $5,920,528 or 12% from the $49,467,438 reported at December 31,
1993. Contributing to these increases were net income
issuance of stock pursuant to a dividend reinvestment and stock purchase plan
and an employee stock plan. Net unrealized gain on securities available-for
- - -sale in the amount of $470,970 at September 30, 1994, as a result of adoption
of SFAS No. 115, also contributed to this increase. Total stockholders'
equity to total assets at the end of September 30, 1994 was 8.98% compared to
8.34% for the same period 1993. At December 31, 1993 the ratio was 8.41%.
During 1989, federal regulatory authorities approved risk-based capital
guidelines applicable to banks and bank holding companies in an effort to make
regulatory capital more responsive to the risk exposure related to various
categories of assets and off-balance sheet items. These new guidelines
required that banking organizations meet a minimum risk-based capital by
December 31, 1992 and redefine the components of capital, categorize assets
into different risk classes and include certain off- balance sheet items
in the calculation of capital requirements. The components of capital are
called Tier 1 and Tier 2 capital. Tier 1 capital is the shareholders'
equity and Tier 2 capital is the allowance for loan losses. The risk-based
capital ratios are computed by dividing the components of capital by
risk-weighted assets. Risk-weighted assets are determined by assigning
various levels of risk to different categories of assets and off-balance
sheet items. The guidelines require Tier 1 capital of at least 4% and total
capital of 8% of risk-weighted assets. Tier 1 capital ratio was 10.51%
and the total capital ratio was 11.77% at September 30, 1993 while at
September 30, 1994 the Tier 1 capital ratio was 11.26% and the total
capital ratio was 12.51%.
The following table reflects the various capital ratios for the
periods indicated:
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993 September 30, 1993
<S> <C> <C> <C>
"Statement"
Equity Capital 8.98% 8.41% 8.34%
Primary and
Total Capital 10.11% 9.52% 9.47%
"Risk-based"
Tier 1 Capital 11.26% 10.67% 10.51%
Total Capital 12.51% 11.92% 11.77%
</TABLE>
Changes in the Allowance for Loan Losses for the nine months ended
September 30, 1994 and 1993 were as follows:
1994 1993
Balance at January 1, $ 7,180,000 $ 5,400,000
Provision for loan losses
charged to operating expenses 916,000 2,037,000
$ 8,096,000 $ 7,437,000
Losses charged to allowance 422,631 510,495
Recoveries credited to allowance 94,924 173,932
Net charge-offs 327,707 336,563
Balance at June 30, $ 7,768,293 $ 7,100,437
========== ==========
Allowance as a percent of
period-end loans 2.04% 1.94%
The net charge-offs for the first nine months of 1994 were within
our expectations. Management makes a determination no less frequently than
quarterly as to the appropriate provision necessary to maintain an adequate
allowance for potential loan losses. The amount of provision made is based
upon a variety of factors including a specific allocation by individual
credits, loss experience for classified loans using migration analysis,
loss experience for homogenous loan pools, levels and trends in delinquency,
specific non-accruing and problem loans, evaluation of economic conditions
and forecasts and other factors deemed appropriate by management. With
respect to the variation in amounts charged during the period of 1994 in
comparison to the corresponding period in the prior year, the specific
reason for the improvement relates to lower levels of delinquency and
non-accruing loans, as well as an improvement in the local economic conditions.
While there can be no assurance that material amounts of additional
loan loss provisions will not be required in the future, management believes
that, based upon information presently available, the amount of the allowance
for possible loan losses is adequate.
The following table presents information concerning the aggregate amount
of nonaccrual, past due and restructured loans:
September 30, December 31, September 30,
1994 1993 1993
Nonaccrual loans $3,071,418 $2,960,038 $4,143,624
Accruing loans, past due
90 days or more $ 493,505 $ 522,024 $ 832,362
The general policy has been to cease accruing interest on loans when it is
determined that a reasonable doubt exists as to the collectibility of
additional interest. Interest income on these loans is only recognized to
the extent payments are received. If interest income had been recorded on
such loans for the periods indicated, such interest income would have been
increased by approximately $218,064 and $265,492 at September 30, 1994 and
1993 respectively, and $267,295 at December 31, 1993. Interest income
recorded on the nonaccrual loans in 1994 and 1993 was none. Potential
problem loans are loans which are included as performing loan
which possible credit problems of the borrower causes management to have
doubts as to the ability of such borrower to comply with present repayment
terms and which may eventually result in disclosure as a non-performing loan.
At September 30,1994, there was one commercial loan totalling $484,000
which was considered a potential problem loan which was not included as a
nonaccrual loan.
At September 30, 1994, there were no concentrations exceeding 10% of total
loans. A concentration is defined as amounts loaned to a multiple number of
borrowers engaged in similar activities which would cause them to be similarly
affected by changes in economic or other conditions. There were no foreign
loans outstanding at September 30, 1994.
Liquidity is the ability to meet the requirements of customers for loans and
deposit withdrawals in the most economical manner. Liquidity must constantly
be monitored because future customer demands for funds are uncertain. The
liquidity position remains relatively unchanged since December 31, 1993.
Management believes that the funds available provides the liquidity to meet
customer demands for funds.
Results of Operations
The following discussion analyzes the specific components affecting the
changes in net income for the periods analyzed.
Three months ended September 30, 1994 compared to three months ended
September 30, 1993
Net income for the third quarter of 1994 amounted to $2,104,497 compared
to $2,011,732 for the third quarter of 1993. This represents an increase of
$92,765 or 4.6%. On a per share basis, income was $.36 compared to $.35.
Total interest income increased $660,745 or 6.6% while total interest
expense increased $96,847 or 2.6%. Increased volumes in loans was primarily
responsible for an increase in interest and fees of $459,322 or 5.9% over
1993. Interest on deposits with banks decreased $6,696, while interest on
federal funds sold increased $64,327. Income on investment securities
increased $143,792 or 6.7% in 1994 as a result of increased volumes of
various investment securities. Increased volumes in loans and investment
securities was the primary reason for the increase
in interest income.
Total interest expense amounted to $3,857,997 for this period compared to
$3,761,150 for the same period last year. This represents an increase of
$96,847 or 2.6%. Interest paid on time certificates of deposit of $100,000 or
more increased $65,304 or 52.2% in 1994 over the same period in 1993, while
interest paid on all other deposits increased $18,273 or .6%. Interest
expense on other interest bearing liabilities increased $13,270 during the
same period of time. Increased volumes in interest-bearing deposits was the
primary reason for the increase in interest expense.
The provision for possible loan losses decreased $160,000 from a charge
of $469,000 in 1993 to $309,000 in 1994. The provision reflects the amount
deemed appropriate by management to provide an adequate reserve to meet the
present and foreseeable risk characteristics of the loan portfolio.
Total other operating income decreased $620,227 or 26%. An increase was
reflected in income from fiduciary activities while other areas of income
decreased. Income from fiduciary activities increased $35,437. Service
charges on deposit accounts and other various service charges decreased $44,750.
Other operating income decreased $6,213. Mortgage banking income
decreased $603,701. There were gains on investment securities of $1,000 in
1993 compared to none in 1994. The decrease in mortgage banking income was
a result of the sudden and continuing increases in rates on mortgages
originated and sold, as well as decreased volumes of originations and
subsequent sales. The period in 1993 reflected larger volumes due to
refinancings. The gain on sales was not as great as the same period last year.
Total other operating expenses increased $109,043 or 2%. Increases
of $161,022 in salaries and employee benefits; $40,618 in occupancy and
furniture and equipment expense; $19,398 in FDIC insurance assessment;
and a decrease of $111,995 in other operating expenses constitute the
total increase. Two new branch facilities were added in late 1993. One of
the facilities was a branch relocation. These additions contributed to
the increase in occupancy and furniture and equipment expense.
Applicable income taxes decreased $98,137 due to tax credits
utilized. The effective tax rate was 23.5% for the third quarter of 1994
compared to 27% for 1993.
Nine months ended September 30, 1994 compared to nine months ended
September 30, 1993
Net income increased from $5,693,480 in September 30, 1993 to $6,065,911
in September 30, 1994. This represents an increase of $372,431 or 6.5%. Net
income on a per share basis was $1.04 for nine months ended September 30, 1994
compared to $1.00 for the same period 1993. Sterling's return on average
assets was 1.36% for 1994 compared to 1.38% for 1993. Return on average
stockholders' equity was 15.25% and 16.75% respectively for 1994 and 1993.
Total interest income increased $823,480 or 2.8%. Earning assets increased
$36,005,707 or 7%. Loans increased over $13 million or nearly 3.6%, while
securities increased nearly $26 million or 19.3% over the same period last
year. Increased volumes generated the increase in interest income. Interest
and fees on loans increased $467,701. Interest on deposits with banks decreased
$23,867 while interest on federal funds sold increased $75,636. Interest on
investment securities increased $304,010. The daily average balance on time
deposits with banks was $62,315 in 1994 compared to $908,591 in 1993. During
this time the daily average balance of federal funds sold increased from
$4,767,032 in 1993 to $6,252,479 in 1994. The daily average balance of
investment securities was $154,819,712 at September 30, 1994 and $131,396,992
at September 30, 1993.
Total interest expense amounted to $10,746,988 reflecting a decrease of
$659,409 or 5.8% from the $11,406,397 reported in 1993. Interest-bearing
deposits increased 8.1%. However, lower interest rates paid on deposits
resulted in a decrease in interest expense of $746,396 or 7.1%. Interest
paid on other interest-bearing liabilities increased $86,987 primarily
as a result of increased borrowings by Town & Country, Inc. for leasing
operations.
The provision for loan loss decreased $1,121,000 in 1994 over 1993. The
provision for loan losses is based upon the monthly review of the loan
portfolio.
Total other operating income decreased $1,447,624 during the first nine
months of 1994 over the same period in 1993. Contributing to this decrease
was a decrease in income from service charges on deposit accounts and
other various service charges and fees in the amount of $103,614. Another
significant contributor to the decrease was a decrease of $1,387,190 in
mortgage banking income due to rising interest rates as well as decreased
volumes in originations. Other income decreased $34,537 during this
period of time while income from fiduciary activities increased $85,877.
There were investment securities gains of $8,160 in 1993 compared to none
in 1994.
Total other operating expenses rose $786,906 or 5.1% reflecting
normal increases experienced through growth. Increases in employee related
expenses of $463,814; $216,384 in occupancy and furniture and equipment
expense; $56,710 in FDIC insurance assessment and $49,998 in other expenses
comprise the increase in total other operating expenses. Contributing
to the increase in other operating expenses were increases in marketing
expense, education and training, MAC fees, printing and supplies, postage
and various other operating expenses in the normal course of business.
Two new branch facilities were added in late 1993. One of the facilities
was a branch relocation. These additions contributed to the increase in
occupancy and furniture and equipment expense.
Applicable income taxes amounted to $1,997,900 in 1994 compared to
$2,000,972 in 1993. The decrease in taxes is due to utilization of tax
credits. The effective tax rate was 24.8% and 26% respectively for 1994
and 1993.
Three Months ended September 30, 1994 compared to three months ended
June 30, 1994
Net income increased $108,230 or 5.4% in the third quarter of 1994 over
the second quarter of 1994. Net income for the three months ended
September 30, 1994 was $2,104,497 compared to $1,996,267 for the three months
ended June 30, 1994.
Total interest income increased $393,794 or 3.8% while total interest
expense increased $390,307 or 11.3%. This resulted in an increase in net
interest income of $3,487. Earning assets increased $15,027,500 or 2.8% while
interest-bearing liabilities increased $14,762,689 or 3.1%. Both interest
income and interest expense increased due to this increased volumes as
well as rising interest rates.
The loan loss provision decreased $116,000 over the second quarter of 1994.
Total other operating income increased $53,893 or 3.2% over the second
quarter. Various service charges, commissions and fees increased $30,221
while income from fiduciary activities increased $20,709 and other income
decreased $17,211. Mortgage banking income increased $20,174 over the last
quarter.
Total other operating expenses increased $104,886 or 1.9% over the second
quarter. There was an increase of $80,868 in employee related expenses while
occupancy and furniture and equipment expenses decreased $24,592 and other
expenses increased $48,610.
Applicable income taxes decreased $39,736 over the second quarter as a
result of utilization of tax credits.<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of September 30, 1994, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to business, to which the
Corporation or its subsidiaries are a party or of which any of their property
is the subject.
Item 6 - Exhibits and Reports on Form 8-K
(a) EXHIBITS
10b. Letter Agreement Between Sterling Financial Corporation and
Howard E. Groff, Sr., dated June 30,1994
21. Subsidiaries of Registrant
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K -
A report on Form 8-K dated July 26, 1994 was filed August 3, 1994
pursuant to Item 5 of Form 8-K relating to a two-for-one stock split
declared July 26, 1994, effected in the form of a 100% stock dividend
payable September 1, 1994, to stockholders of record on August 15, 1994.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: November 11, 1994 By: John E. Stefan
John E. Stefan
Chairman of the Board,
President
and Chief Executive Officer
Date: November 11, 1994 By: Jere L. Obetz
Jere L. Obetz
Senior Vice President/
Treasurer
Chief Financial Officer
EXHIBIT 10.b
June 30, 1994
Howard E. Groff, Sr.
111 East State Street
Quarryville, PA 17566
Dear Howard:
The purpose of this letter is to set forth our mutual understanding
relating to the future disposition of shares of Sterling Financial Corporation
common stock which will be owned by you at the time of your death and become
part of your estate. These shares shall be referred to within this letter
as "shares."
What is to be accomplished by this letter of understanding is that Sterling
Financial Corporation (hereinafter referred to as "Sterling") is afforded an
opportunity to distribute the shares in a manner that best suits its corporate
objectives. Your estate is afforded an orderly disposition of the shares which
should achieve a fair market price of the shares sold. This process will
provide liquidity to your estate and funds for the payment of taxes.
Based on the above , the following will apply:
1. In the event of your death, Sterling will within 90 days file with
the Securities & Exchange Commission a registration statement for 25% - 45% of
all shares owned by you at the time of death with the exact percentage to be
determined by mutual agreement between the executor of the estate and the bank.
In no case, however, shall the percentage be less than 25%.
2. Sterling will use its reasonable best effort to effect the
registration of such shares under the Securities & Exchange Commission Act of
1993 as quickly as possible.
3. Upon effectiveness of the registration statement Sterling together
with your estate representative will take the necessary steps to sell the shares
covered by the registration statement. It will be Sterling's intention to offer
the shares first to its existing shareholders. If all shares fail to sell, the
remaining shares will be offered to the following in descending order: Bank
of Lancaster County, N.A. customers; management of Sterling and Bank of
Lancaster County, N.A.; residents within Lancaster County; and any others as
determined solely by Sterling. The sale of the shares will be accomplished
either directly\or through one or more investment banks selected by Sterling.
The offering and sale price shall be the then share market value of the
shares as determined by Sterling in consultation with investment bankers.
4. Sterling reserves the right to acquire at fair market value for its
own as some or all of the shares would be offered. If Sterling exercises this
right, the fair market value shall be the average between the low bid and high
ask prices for shares of Sterling common stock in the over-the-counter market as
reported by the National Quotation Bureau for the trading days preceding the
acquisition.
5. Sterling will pay all costs and expenses associated with the
performance of its obligations as required by this letter except for usual and
customary underwriting fees, discounts and commissions, which will be for the
account of the seller.
6. This agreement shall be in lieu of, and shall replace and supersede
all other understandings and agreements between you and Sterling relating to
the purchase or sale of the shares. This letter is for the benefit of and
will be binding upon Sterling, its successors and assigns and upon you and
your successors and personal representatives unless revoked in writing
signed by both parties.
Very truly yours,
STERLING FINANCIAL CORPORATION
John E. Stefan
John E. Stefan
Chairman of the Board,
President & Chief Executive Officer
Accepted, intending to be legally bound
on this 30 day of June 1994.
Howard E. Groff
Howard E. Groff
EXHIBIT 21
LIST OF SUBSIDIARIES
The following are the subsidiaries of Sterling Financial Corporation:
Subsidiary State of Incorporation or Organization
Bank of Lancaster County, N.A. Pennsylvania (National Banking Association)
1 East Main Street
P.O. Box 0300
Strasburg, PA 17579
Town & Country, Inc. (Wholly owned Pennsylvania
Subsidiary of Bank of Lancaster
County, N.A.)
640 East Oregon Road
Lancaster, PA 17601
Sterling Mortgage Services, Inc. Pennsylvania
525 Greenfield Road P.O. Box 10608
Lancaster, PA 17605-0608
(Presently inactive)
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 32,121,974
<INT-BEARING-DEPOSITS> 16,477
<FED-FUNDS-SOLD> 11,750,000
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<INVESTMENTS-HELD-FOR-SALE> 8,495,912
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<TOTAL-ASSETS> 617,107,774
<DEPOSITS> 528,270,276
<SHORT-TERM> 3,000,000
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<LONG-TERM> 20,177,443
<COMMON> 29,274,120
0
0
<OTHER-SE> 26,113,846
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<EXPENSE-OTHER> 16,234,457
<INCOME-PRETAX> 8,063,811
<INCOME-PRE-EXTRAORDINARY> 8,063,811
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<NET-INCOME> 6,065,911
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<LOANS-NON> 3,071,418
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