UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K A
Ammendment # 1
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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.)
525 Greenfield Road, P.O. Box 10608
Lancaster, Pennsylvania 17605-0608
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 295-7551
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. |X|
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 February 28, 1994 was approximately $100,314,638.
The number of shares of Registrant's Common Stock outstanding on February 28,
1994 was 2,900,746.
Documents Incorporated by Reference
Portions of the Proxy Statement of Registrant dated March 31, 1994 are
incorporated by reference into Part III of this report.
Sterling Financial Corporation
Table of Contents
Page
Part I
Item 1. Business............................................. 1
Item 2. Properties........................................... 4
Item 3. Legal Proceedings.................................... 4
Item 4. Submission of Matters to a Vote of Security Holders.. 4
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 5
Item 6. Selected Financial Data.............................. 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 7
Item 8. Financial Statements and Supplementary Data.......... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 45
Part III
Item 10. Directors and Executive Officers of the Registrant... 46
Item 11. Executive Compensation............................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 46
Item 13. Certain Relationships and Related Transactions....... 46
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 47
Signatures...................................................... 48
PART I
Item 1 - Business
Sterling Financial Corporation
Sterling Financial Corporation (the "Corporation") is a Pennsylvania
business corporation, based in Lancaster, Pennsylvania, which was organized on
February 23, 1987 and became a bank holding company through the acquisition of
all the outstanding stock of The First National Bank of Lancaster County, now
by change of name, Bank of Lancaster County, N.A., on June 30, 1987.
In addition, Sterling Financial Corporation also owns all of the
outstanding stock of a non-bank subsidiary, Sterling Mortgage Services, Inc.
Sterling Mortgage Services, Inc. is a mortgage service company formed by
Sterling Financial Corporation as a wholly owned subsidiary. Approval was
received September 13, 1988, pursuant to Section 4 of the Bank Holding Company
Act for Sterling Financial Corporation to operate Sterling Mortgage Services,
Inc. as a mortgage service company. This information was reported in Form 10-
Q dated November 10, 1988. However, during the third quarter of 1989,
Sterling Financial Corporation took action to shutdown the mortgage company
subsidiary and presently it is considered inactive. This information was
reported in Form 10-Q dated November 10, 1989.
Sterling Financial Corporation provides a wide variety of commercial
banking and trust services through the foregoing wholly owned subsidiary, Bank
of Lancaster County, N.A.
The principal source of operating funds for the Corporation is dividends
provided by the Bank of Lancaster County, N.A. The Corporation's expenses
consist principally of operating expenses. Dividends paid to stockholder's
are, in general, primarily obtained by the Corporation from dividends declared
and paid to it by Bank of Lancaster County, N.A.
As a bank holding company, Sterling Financial Corporation is registered
with the Federal Reserve Board in accordance with the requirements of the
Federal Bank Holding Company Act and is subject to regulation by the Federal
Reserve Board and by the Pennsylvania Department of Banking.
Bank of Lancaster County
Bank of Lancaster County, N.A., a full service commercial bank operating
under charter from the Comptroller of the Currency, was organized in 1863. On
July 29, 1863, authorization was given by the Comptroller of the Currency to
The First National Bank of Strasburg to commence the business of banking. On
September 1, 1980, the title of this association was changed to The First
National Bank of Lancaster County and at the time of the holding company
reorganization, June 30, 1987, the bank name was changed to its present name,
Bank of Lancaster County, N.A. At December 31, 1993, the bank had total
assets of $587,883,000 and total deposits of $506,131,000.
The main office of the Association is located at 1 East Main Street,
Strasburg, Pennsylvania. In addition to its main office, the Bank had
eighteen (18) branches in Lancaster County and one (1) branch in Chester
County in operation at December 31, 1993.
Bank of Lancaster County provides a full range of banking services.
These include demand, savings and time deposit services, NOW (Negotiable Order
of Withdrawal) accounts, money market accounts, safe deposit boxes, VISA
credit card, and a full spectrum of personal and commercial lending activities.
The Bank maintains correspondent relationships with major banks in New York and
Philadelphia. Through these correspondent relationships, the Bank can offer a
variety of collection and international services.
With the installation of three automated teller machines (ATMs) in April of
1983, Bank of Lancaster County was the first financial institution in Lancaster
County to join the MAC (Money Access Center) Network. Presently the Bank has 16
ATMs in Lancaster County. The Bank became a participating member of the Plus
System in the Fall of 1984. This membership entitles our MAC/Plus cardholders
to have access to a nationwide network of over 80,000 ATMs.
The Bank introduced Discount Brokerage Service in July, 1983. This service
is offered in coordination with Trade Saver, Inc., a subsidiary of PNC Bank
Corporation of Philadelphia, Pennsylvania and meets the needs of the commission-
conscious, independent-minded investor. In 1992 we began offering mutual funds
to customers. We believe these services are important additions to our product
line and make a statement about our aggressive attitude in providing financial
services for the future.
The Bank was given permission to open a Trust Department by the Comptroller
of the Currency on May 10, 1971. The Trust Department provides personal and
corporate trust services. These include estate planning, administration of
estates and the management of living and testamentary trusts and investment
management services. Other services available are pension and profit sharing
trusts and self-employed retirement trusts. Trust Department assets totaled
over $126 million at December 31, 1993.
On January 31, 1983, Bank of Lancaster County purchased Town & Country,
Inc. which is a vehicle and equipment leasing company operating in
Pennsylvania and other states. Its principal office is located at 640 East
Oregon Road, Lancaster, PA. Town & Country, Inc. employs thirty (30) people.
Bank of Lancaster County's principal market area is Lancaster County, which
continues to be one of the fastest growing counties in Pennsylvania. Lancaster
County is now the sixth largest county in Pennsylvania, behind Philadelphia,
Allegheny, Montgomery, Delaware and Bucks. Lancaster County, with an area of
946 square miles has a population of approximately 430,000. The county's
tradition of economic stability has continued, with agriculture, industry
and tourism all contributing to the overall strength of the economy.
One of the best agricultural areas in the nation, Lancaster County ranks
first among Pennsylvania counties and one of the top 20 farm markets in the
country. Lancaster County is also one of the leading industrial areas in the
state. The county is considered a prime location for manufacturing, away from
congested areas, yet close to major east coast markets. Diversification of
industry helps to maintain the economic stability of the county. The
unemployment rate of the county in December 1993 was 4.5% which was lower than
the state (6.3%) and national (6.4%) levels. Lancaster County, with its many
historic sites, well-kept farmlands and the large Amish community has become
very attractive to tourists and is one of the top tourist attractions in the
U.S.
The Bank and its subsidiaries are subject to intense competition in all
respects and areas of their business from banks and other financial institutions
including savings and loan associations, finance companies, credit unions and
other providers of financial services. There are 15 full-service commercial
banks with offices in Lancaster County with some of these banks having branches
located throughout the County. The banks range in asset size from approximately
$112 million to over $29 billion. Of these banks, eight (8) exceed $700 million
in assets and seven (7) of the eight (8) exceed $1.3 billion in total assets.
Four (4) banks in our trade area exceed $3.8 billion. Several banks are part of
bank holding companies. One bank is part of a bank holding company that has
assets in excess of $36 billion while another bank is part of a bank holding
company that has over $23 billion in assets. Due to our location, we are in
direct competition with the larger banks as well as a number of smaller banks.
As of December 31, 1993, the Bank ranked, as measured by total deposits, as the
fourth largest in county market share of the banks doing business in Lancaster
County. The Bank is not, however, the fourth largest bank in Lancaster County.
As of December 31, 1993, the Bank had total assets of over $587 million and
ranked ninth on this basis among the commercial banks with offices located in
Lancaster County.
There has not been a material portion of the Bank's deposits obtained from
a single person or a few persons, including federal, state or local governments
and agencies thereunder and the loss of any single or any few customers would
not have a materially adverse effect on the business of the bank.
The Bank has no significant foreign sources or applications of funds.
As of December 31, 1993, there were 342 persons employed by Bank of
Lancaster County-263 full-time and 79 part-time. These figures listed do not
include employees of Town & Country, Inc. which are listed elsewhere in this
report.
Bank of Lancaster County, N.A. is subject to regulation and periodic
examination by the Comptroller of the Currency. Its deposits are insured by the
Federal Deposit Insurance Corporation as provided by law.
Item 2 - Properties
Bank of Lancaster County, N.A., in addition to its main office, had at
December 31, 1993, a branch network of 19 offices and 2 off-site electronic
MAC/ATM installations. All branches are located in Lancaster County with the
exception of one office which is located in Chester County. Branches at 7
locations are occupied under leases and at three branches, Bank of Lancaster
County owns the building, but leases the land. One off-site MAC/ATM
installation is occupied under lease.
The Administrative Service Center of Bank of Lancaster County, N.A. is
owned in fee by the bank, free and clear of encumbrances.
The building occupied by Town & Country, Inc., a wholly owned subsidiary of
Bank of Lancaster County, N.A. is owned in fee by Town & Country, Inc., free and
clear of encumbrances.
The leases referred to above expire intermittently over the years through
2022 and most are subject to one or more renewal options.
Item 3 - Legal Proceedings
As of December 31, 1993, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which the
Corporation or its subsidiaries are a party or of 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 1993.
Part II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The common stock of Sterling Financial Corporation is not actively
traded. There are 10,000,000 shares of common stock authorized and the total
number of shares outstanding as of December 31, 1993 was 2,882,920. As of
December 31, 1993, the Corporation had approximately 1,969 holders of record
of its common stock. There is no other class of common stock authorized or
outstanding. During 1993, the price range of the common stock known to
management was $31.50 to $46.00 per share. During the last quarter of 1993,
prices known to management were $42.50 to $46.00 per share. The Corporation
declared a three-for-two stock split in 1992. The following table reflects
the bid and asked prices reported for the common stock at the end of the
period indicated and the cash dividends declared on the common stock for the
periods indicated. In the absence of an active market, these prices may not
reflect the actual market value of Sterling Financial Corporation's stock for
the periods reported.
1993 Bid Ask Dividend
First Quarter $35.00 $36.50 $.26
Second Quarter 38.00 39.75 .26
Third Quarter 41.00 44.00 .28
Fourth Quarter 44.50 46.00 .28
1992 Bid Ask Dividend
First Quarter $23.33 $26.00 $.23 1/3
Second Quarter 24.83 26.17 .23 1/3
Third Quarter 28.00 30.00 .23 1/3
Fourth Quarter 30.00 33.00 .26
The prices used in the previous table represent bid and asked prices
furnished by F.J. Morrissey & Company; Prudential Securities; Ryan, Beck &
Company; or The National Quotation Bureau.
Sterling Financial Corporation maintains a Dividend Reinvestment and
Stock Purchase Plan for eligible shareholders who elect to participate in the
plan. A copy of the Prospectus for this plan can be obtained by writing to:
Bank of Lancaster County, N.A. Dividend Reinvestment and Stock Purchase Plan,
25 North Duke Street, Lancaster, Pennsylvania 17602.
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with
the Corporation's consolidated financial statements and the accompanying notes
presented elsewhere herein.
<TABLE>
Summary of Operations
<CAPTION>
<S>
Years Ended 1993 1992 1991 1990 1989
(Dollars in Thousands, except per share data)
<C> <C> <C> <C> <C>
Interest income.............$ 40,092 $ 40,284 $ 42,689 $ 42,049 $ 37,715
Interest expense............ 15,042 17,818 22,793 23,522 21,269
------ ------ ------ ------ ------
Net interest income......... 25,050 22,466 19,896 18,527 16,446
Provision for loan losses... 2,430 2,296 1,789 1,661 691
------ ------ ------ ------ ------
Net interest income after
provision for loan losses.. 22,620 20,170 18,107 16,866 15,755
Other income................ 8,979 7,926 6,721 4,925 5,042
Other expenses.............. 21,048 18,922 16,995 14,917 14,466
------ ------ ------ ------ ------
Income before income taxes.. 10,551 9,174 7,833 6,874 6,331
Applicable income taxes..... 2,749 2,331 1,929 1,609 1,513
------ ------ ------ ------ ------
NET INCOME..................$ 7,802 $ 6,843 $ 5,904 $ 5,265 $ 4,818
====== ====== ====== ====== ======
Per Common Share:*
Net income................ $ 2.72 $ 2.43 $ 2.12 $ 1.93 $ 1.79
Dividends................. 1.08 .96 .88 .88 .73
Book value................ 17.16 15.13 13.50 12.03 10.79
Average shares outstanding 2,864,200 2,817,651 2,775,778 2,724,985 2,693,750
Ratios:
Return on average assets.. 1.41% 1.34% 1.25% 1.21% 1.24%
Return on average equity.. 16.90% 16.99% 16.63% 16.92% 17.77%
Financial Condition at
Year-End:
Assets.................... $ 587,883 $ 544,404 $ 495,234 $ 457,886 $ 418,116
Loans (net of unearned)... 359,365 348,529 317,730 310,830 287,426
Deposits.................. 505,680 473,184 434,523 399,823 364,229
Stockholders' Equity**.... 49,467 42,794 37,737 32,941 29,236
Average Assets............ 555,216 510,439 471,488 433,558 388,231
*Figures prior to 1993 were retroactively restated for various stock dividends, a three-
for-two stock split on November 30, 1992 and for comparative purposes.
**Stockholders' Equity prior to 1993 has been restated for the retroactive effect of
SFAS No. 109.
</TABLE>
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
(the Corporation) and subsidiaries, Bank of Lancaster County, N.A. (the Bank)
and its subsidiary, Town & Country, Inc. and Sterling Mortgage Services, Inc.
(presently inactive). It should be read in conjunction with audited financial
statements and footnotes appearing elsewhere in this report.
Results of Operations Summary
Net income for 1993 was $7,802,000, an increase of $959,000 or 14% over the
$6,843,000 earned in 1992. The results of 1992 were $939,000 or 15.9% higher
than the $5,904,000 reported in 1991. Earnings per share on net income amounted
to $2.72, $2.43, and $2.12 for the years ended 1993, 1992 and 1991
respectively. Earnings per share were computed by dividing net in
number of shares of common stock outstanding which were 2,864,200, 2,817,651 and
2,775,778 for 1993, 1992 and 1991 respectively. Figures prior to 1993 were
retroactively restated to reflect a three-for-two stock split in the form of a
50% stock dividend paid in 1992 and a 5% stock dividend paid in December 1993.
Return on average total assets was 1.41% in 1993 compared with 1.34% in
1992 and 1.25% in 1991. Return on average stockholders' equity was 16.90% in
1993 compared with 16.99% in 1992 and 16.63% in 1991.
Growth in earning assets was the primary factor contributing to the
increased earnings for both 1993 and 1992. As of December 31, 1993, earning
assets were approximately $522 million compared to $481 million at December 31,
1992 and $445 million at December 31, 1991. Average earning assets for 1993
increased nearly $43 million to approximately $498 million, up 9.5% from the
prior year. Similarly, in 1992 average earning assets increased approximately
$31 million, up 7.3% from 1991. The current year increase as well as the
increase in 1992 was primarily due to increases in both loans and investments.
Average interest-bearing liabilities increased nearly $31.5 million or 7.7%
in 1993 compared to an increase of nearly $27 million, or 7% in 1992.
The increase in average earning assets exceeded the increase in average
interest-bearing liabilities in both 1993 and 1992. These increases along with
lower cost of funds contributed to strong net interest margins in each period.
Provision for loan losses increased to $2,430,000 in 1993 from $2,296,000
in 1992. The provision in 1991 was $1,789,000.
Non-interest income increased $1,053,000 in 1993. This compares to an
increase of $1,205,000 in 1992. These increases are primarily a result of
mortgage banking activities.
Non-interest expenses increased $2,126,000 or 11.2% in 1993, up slightly
from the comparable period last year. The increase in 1992 over 1991 was
$1,927,000 or 11.3%.
Net Interest Income
The primary component of the Corporation's net earnings is net interest
income, which is the difference between interest and fees earned on interest-
earning assets and interest paid on deposits and borrowed funds. For
presentation and analytical purposes, net interest income is adjusted to a
taxable equivalent basis. For purposes of calculating yields on tax-exempt
interest income, the taxable equivalent adjustment equates tax-exempt interest
rates to taxable interest rates as noted in Table 1. Adjustments are made using
a statutory federal tax rate of 34% for 1993, 1992 and 1991.
Table 1 presents average balances, taxable equivalent interest income and
expense and the yields earned or paid on these assets and liabilities. The
increase in net interest income during 1993 and 1992 was due primarily to
increases in average earning assets. Average earning assets increased 9.5% in
1993 and 7.3% in 1992. These increases were primarily funded with interest-
bearing liabilities which increased 7.7% in 1993 and 7% in 1992.
Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Yields
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31, 1993
1993 1992 1991
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets (Dollars in Thousands)
Interest bearing deposits
with banks................$ 690 $ 27 3.84% $ 1,366 $ 89 6.52% $ 4,820 $ 351 7.28%
Federal Funds sold.......... 6,234 191 3.07% 6,279 220 3.50% 7,481 422 5.64%
Investment securities:
U.S. Treasury securities.. 21,447 1,253 5.84% 16,782 1,129 6.73% 9,997 813 8.13%
U.S. Government agencies.. 21,832 1,458 6.68% 26,387 2,027 7.68% 22,634 1,963 8.67%
State and Municipal
securities............... 37,451 3,440 9.18% 30,271 3,041 10.05% 28,002 2,928 10.46%
Other securities.......... 52,941 3,726 7.04% 44,642 3,463 7.76% 35,534 3,056 8.60%
------- ------ ----- -------- ------- ------ ------- ------ ------
Total investment securities 133,671 9,877 7.39% 118,082 9,660 8.18% 96,167 8,760 9.11%
Loans:
Commercial............... 195,562 16,327 8.35% 172,097 15,649 9.09% 162,191 17,266 10.65%
Consumer................. 99,761 8,878 8.90% 96,854 9,464 9.77% 89,874 9,951 11.07%
Mortgages................ 27,714 2,490 8.99% 28,932 2,767 9.56% 31,589 3,149 9.97%
Leases................... 34,533 3,658 10.59% 31,321 3,702 11.82% 32,042 4,111 12.83%
-------- ------ ------ ------- ------- ------ ------- ------ ------
Total loans................ 357,570 31,353 8.77% 329,204 31,582 9.59% 315,696 34,477 10.92%
-------- ------ ------ ------- ------- ------ ------- ------ ------
Total earning assets....... 498,165 41,448 8.32% 454,931 41,551 9.13% 424,164 44,010 10.38%
Allowance for loan losses.. (5,984) (4,969) (3,848)
Cash and due from banks.... 26,863 24,382 21,029
Other non-earning assets... 36,172 36,095 30,143
-------- ------- -------
Total non-earning assets... 57,051 55,508 47,324
-------- ------ ------ ------- ------- ------ ------- ------ ------
Total assets...............$555,216$ 41,448 7.47%$510,439 $ 41,551 8.14%$471,488 $44,010 9.33%
====================== ======================= ======================
Liabilities and Stockholders' Equity
Deposits:
Demand deposits
Noninterest-bearing.....$ 57,869$ 0 0.00%$ 50,601 $ 0 0.00%$ 44,721 $ 0 0.00%
Demand deposits
Interest-bearing........ 211,406 5,484 2.59% 184,959 6,207 3.36% 154,564 7,331 4.74%
Savings deposits......... 45,302 1,222 2.70% 34,927 1,199 3.43% 27,914 1,358 4.87%
Time deposits............ 163,497 7,085 4.33% 175,590 9,423 5.37% 186,968 12,929 6.92%
-------- ------ ------ ------- ------ ------ ------- ------ ------
Total deposits............. 478,074 13,791 2.88% 446,077 16,829 3.77% 414,167 21,618 5.22%
Other borrowed funds....... 20,367 1,251 6.15% 13,659 989 7.24% 12,803 1,175 9.17%
Other liabilities.......... 10,613 10,439 9,022
Stockholders' equity....... 46,162 40,264 35,496
-------- ------ ------ ------- ------ ------ ------- ------ ------
Total liabilities and
Stockholders' equity.....$555,216$ 15,042 2.71%$510,439$ 17,818 3.49%$471,488$ 22,793 4.83%
======================= ======================= ======================
Net interest income/
Average total assets...... $ 26,406 4.76% $ 23,733 4.65% $ 21,217 4.50%
Net interest income/
Average earning assets.... $ 26,406 5.30% $ 23,733 5.22% $ 21,217 5.00%
</TABLE>
Net interest income on a fully taxable equivalent increased by $2,673,000
in 1993 compared to an increase of $2,516,000 in 1992. Table 2 indicates that
of the increase in 1993, $2,872,000 was the result of increased volumes while
$199,000 of the increase was the result of overall rate decreases. Likewise,
the increase in 1992 was a result of increased volumes totaling $2,078,000 while
$438,000 of the increase was a result of rate decreases.
Table 2 - Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below, which is
computed on a tax equivalent basis, analyses changes in net interest income for
the periods indicated by their rate and volume components.
<TABLE>
<CAPTION>
1993 Versus 1992 1992 Versus 1991
(Dollars in Thousands)
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Interest on deposits
with banks.........$ (44) $ (18) $ (62) $ (252) $ (10) $ (262)
Interest on federal
funds sold......... (2) (27) (29) (68) (134) (202)
Interest on investment
securities......... 1,275 (1,058) 217 1,997 (1,097) 900
Interest and fees on
loans.............. 2,722 (2,951) (229) 1,475 (4,370) (2,895)
--------- ---------- ---------- --------- ---------- ----------
Total interest income.$ 3,951 $ (4,054) $ (103) $ 3,152 $ (5,611) $ (2,459)
--------- ---------- ---------- --------- ---------- ----------
Interest Expense
Interest on
interest-bearing
demand deposits....$ 887 $ (1,610) $ (723) $ 1,442 $ (2,566) $ (1,124)
Interest on
savings deposits.... 356 (333) 23 341 (500) (159)
Interest on
time deposits....... (649) (1,689) (2,338) (787) (2,719) (3,506)
Interest on
borrowed funds...... 485 (223) 262 78 (264) (186)
--------- ---------- --------- --------- --------- ---------
Total interest expense$ 1,079 $ (3,855) $ (2,776) $ 1,074 $ (6,049) $ (4,975)
--------- ---------- ---------- ---------- ---------- ----------
Net interest income...$ 2,872 $ (199) $ 2,673 $ 2,078 $ 438 $ 2,516
========= ========== ========== ========== ========== ==========
</TABLE>
For the year 1993 compared to 1992, loan volumes, on average, increased
over $28.3 million and income earned on loans decreased $229,000, tax
adjusted. This compares to a volume increase of nearly $13.5 million in 1992
over 1991 with a decrease in income earned on loans amounting to $2,895,000.
During both periods compared, the decrease in interest income due to lower
rates exceeded the increase in interest income generated by increased volumes of
loans.
Loan demand declined in both 1993 and 1992 due primarily to a slowing
economy. Consequently, the loan growth rate was not as great as previous
years. However, the loan growth in 1993 was an improvement over 1992. With the
decline in loan demand, the Bank increased its holdings in investment
securities. The increase in investment securities, on average, was nearly
$15.6 million in 1993 compared to nearly $22 million in 1992. As a result of
these increased volumes, interest income increased. Table 2 indicates that of
the increase in 1993, $1,275,000 was the result of increased volumes while there
was a decrease of $1,058,000 due to decreases in rates resulting in a total
increase of $217,000. In 1992 interest income increased $900,000.
Interest-bearing deposits, on average, grew nearly $25 million in 1993.
However, the lower cost of funds reflect a decrease in interest expense.
Provision for Loan Losses
The provision for loan losses charged against earnings was $2,430,000 in
1993 compared to $2,296,000 in 1992 and $1,789,000 in 1991. The provision
reflects the amount deemed appropriate by management to produce an adequate
reserve to meet the present and foreseeable risk characteristics of the loan
portfolio. Management's judgement is based on the evaluation of individual
loans and their overall risk characteristics, past loan loss experience, and
other relevant factors. Net charge-offs amounted to $650,000 in 1993,
$1,296,000 in 1992 and $764,000 in 1991.
The provision for loan loss was increased during 1993 in order for the Bank
to provide an adequate reserve based on the evaluation of individual loans and
their current characteristics and current economic condition. The reserve
accordingly was increased to 2.00% of net loans outstanding from 1.55%. Net
charge-offs for the year 1994 should range between $700,000 and $1,300,000.
Additions to the loan loss provision are expected to be between $800,000 and
$1,400,000.
Non-Interest Income
Non-interest income, recorded as other operating income, consists of
income from fiduciary activities, service charges on deposit accounts, other
service charges, commissions and fees, mortgage banking income and other income
such as safe deposit box rents and income from operating leases.
Income from fiduciary activities in the amount of $639,000 in 1993 was
$43,000 or 7.2% over the $596,000 recorded in 1992. Income in 1992 was $28,000
or 5% greater than the $568,000 recorded in 1991.
Service charges on deposit accounts increased to $1,891,000, an increase of
$10,000 or .5% over 1992 service charge income of $1,881,000. The increase in
1993 income resulted primarily from a higher volume of activity on certain
deposit transactions. Service charges on deposit accounts in 1992 exceeded the
1991 income of $1,654,000 by $227,000 or 13.7%.
Other service charges, commissions and fees amounted to $1,577,000 in 1993
compared to $1,370,000 in 1992 and $1,234,000 in 1991. A major contributor to
the increase in 1993 was certain fees relating to VISA operations as well as
fees generated from mutual funds sales, a new product introduced in 1992.
Income from mortgage banking activities in the amount of $2,435,000
increased $934,000 over 1992.
Other operating income decreased $122,000 to $2,429,000 in 1993 from
$2,551,000 in 1992. Other income for 1991 was $2,349,000. A major contributor
to other operating income is income generated from operating leases.
Investment securities transactions reflect a gain of $8,000 in 1993
compared to $27,000 in 1992 and $3,000 in 1991. The gains listed for these
years resulted when certain securities were called at a premium. Securities
had been written to par when calls were made thus generating a gain on the
securities called. There were no securities sold for the periods listed.
As a result of the above, total other operating income increased $1,053,000
in 1993 over 1992 compared to an increase of $1,205,000 in 1992 over 1991.
In 1990 the Bank of Lancaster County began originating and selling
qualified residential mortgage loans in the secondary market. All mortgages
sold were originated by the Bank's network of 20 branches within its market
area. All mortgages sold were purchased by the Federal Home Loan Mortgage
Corporation (Freddie Mac), with the Bank retaining all mortgage servicing
rights. No mortgages have been acquired from third parties, nor have any
servicing rights been purchased. The Bank's mortgage servicing portfolio
totaled $132 million as of December 31, 1993.
1993 was an outstanding year for the bank's mortgage banking operation,
with $72.2 million in mortgage sales from the Bank's marketplace. These
operations contributed $2.4 million of other income in 1993, as opposed to
$1.5 million or $.9 million in 1992 and 1991, respectively. The falling
interest rate environment through most of this period resulted in
extraordinary volumes of mortgage refinancings, coupled with a strong local
market for real estate sales. An estimated 65% of this volume involved
mortgage refinancings. Because of rising interest rates, the Bank does not
expect this trend to continue.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefits, net
occupancy expense, furniture and equipment expense and other operating expenses.
Total operating expenses for 1993 were $21,048,000 compared to $18,922,000
in 1992. This represented an increase of $2,126,000 or 11.2%. This compares to
an increase of $1,927,000 or 11.3% in 1992.
Salaries and employee benefits expense increased to $11,566,000 in 1993 or
$1,212,000 (11.7%) over the $10,354,000 reported in 1992. In 1992, expenses
increased $1,096,000 (11.8%) over the $9,258,000 reported in 1991. The increase
in 1993 and 1992 was primarily due to increases in staff as well as increases in
wages and increased costs of employee benefits.
Beginning in 1993, Sterling adopted Financial Accounting Standards Board
Standard 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 accrual basis as employees perform services 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.
As a result of the adoption of the Standard No. 106, an additional expense of
$192,060 was required to comply with the Standard.
Occupancy expense increased $136,000 or 11.2% to $1,355,000 in 1993 from
$1,219,000 in 1992. By comparison, during 1992, there was an increase of
$223,000 or 22.4%. A new branch was opened in late 1991 and one was opened in
early 1992. This contributed to the increase in 1992. Two new branch
facilities were added in late 1993. One of the facilities was a branch
relocation.
Furniture and equipment expenses were $1,253,000 for 1993 and $1,177,000
for 1992. This represents an increase of $76,000 or 6.5%. Reflected in this
increase is an increase of depreciation expense in 1993 amounting to $39,000.
Expenses in 1992 were $87,000 greater than those recorded in 1991.
Another contributor to the increase in total other operating expenses was
the increase in the assessment for FDIC insurance. The assessment for 1993 was
$1,052,000 which was $68,000 or 6.9% greater than the $984,000 reported in
1992. The assessment in 1992 was $143,000 or 17% greater than the $841,000
reported in 1991. The Bank expects continued costly increases in the
assessment rate as the Federal Deposit Insurance Corporation attempts to
maintain the solvency of the bank insurance fund.
Other operating expenses increased $634,000 or 12.2% in 1993 compared to an
increase of $378,000, or 7.9% in 1992. The increase noted in both years is in
line with rising costs associated with acquiring services covered in this
category of expense. Expenses covered in this category include postage, PA
Shares Tax, advertising and marketing, professional services, telephone,
stationery and forms, ATM fees, Visa fees, insurance premiums and other expense
categories not specifically identified on the income statement.
Income Taxes
Income tax expense totaled $2,749,000 in 1993 compared to $2,331,000 in
1992 and $1,929,000 in 1991. These increases result from higher levels of
taxable income and increased earnings each year. The Corporation's effective
tax rate was 26.1% in 1993 compared with 25.4% in 1992 and 24.6% in 1991.
Financial Condition
Investment Portfolio
Table 3 - Investment Securities at Cost
The following table shows the carrying value of Sterling Financial
Corporation's investment portfolio as of the dates indicated. Investment
securities are stated at cost adjusted for amortization of premiums and
accretion of discounts.
December 31,
1993 1992 1991
(Dollars in Thousands)
U.S. Treasury securities..............$ 23,996 $ 20,732 $ 13,430
Obligations of other U.S. Government
agencies and corporations........... 27,903 26,405 24,776
Obligations of states and political
subdivisions........................ 43,491 35,119 29,413
Other bonds, notes and debentures..... 48,770 44,089 39,269
------------ ---------- ---------
Subtotal.............................. 144,160 126,345 106,888
Federal Reserve and corporate stock... 2,305 2,158 1,904
------------ ---------- ---------
Total.................................$ 146,465 $ 128,503 $ 108,792
============ ========== =========
Table 4 - Investment Securities (Yields)
The following table shows the maturities of debt securities at carrying
value as of December 31, 1993 and weighted average yields of such securities.
Yields are shown on a tax equivalent basis, assuming a 34% federal income tax
rate.
<TABLE>
<CAPTION>
(Dollars to Thousands)
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities....$ 6,091 5.53% $ 17,082 5.44% $ 823 6.32% $ none 0% $ 23,996 5.49%
Obligations of
other U.S.
Government
agencies and
corporations.. 5,018 6.53% 15,195 6.56% 5,779 6.55% 1,911 6.88% 27,903 6.57%
Obligations of
states and
political sub-
divisions..... 2,441 9.90% 14,209 9.07% 19,413 8.38% 7,428 8.24% 43,491 8.67%
Other bonds,
notes and
debentures.... 9,151 6.93% 38,069 6.01% 1,426 7.49% 124 5.80% 48,770 6.23%
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
$ 22,701 6.79% $ 84,555 6.51% $ 27,441 7.89% $ 9,463 7.93% $144,160 6.91%
======== ====== ======== ====== ======== ====== ======= ====== ======== ======
</TABLE>
Loans
Table 5 - Loan Portfolio
The following table sets forth the composition of Sterling Financial
Corporation's loan portfolio as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
1993 1992 1991 1990 1989
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural..............$ 191,431 $ 172,482 $ 152,726 $ 144,837 $ 127,641
Real estate-construction... 10,265 16,044 12,147 9,330 7,582
Real estate-mortgage....... 22,335 30,445 31,943 35,109 39,988
Consumer................... 101,256 99,444 94,404 96,298 89,223
Lease financing (net of
unearned income)......... 35,443 32,768 31,283 31,358 29,171
---------- ---------- ---------- ---------- ----------
Total loans.................$ 360,730 $ 351,183 $ 322,503 $ 316,932 $ 293,605
========== ========== ========== ========== ==========
Table 6 - Loan Maturity and Interest Sensitivity
The following table sets forth the maturity and interest sensitivity of the
loan portfolio as of December 31, 1993:
</TABLE>
<TABLE>
<CAPTION>
After one
Within but within After
one year five years five years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural..$ 114,117 $ 66,757 $ 10,557 $ 191,431
Real estate-construction................ 9,446 819 none 10,265
--------- --------- --------- ---------
$ 123,563 $ 67,576 $ 10,557 $ 201,696
========= ========= ========= =========
</TABLE>
Loans due after one year totaling $45,661,000 have variable interest
rates. The remaining $32,472,000 in loans have fixed rates.
Table 7 - Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
<TABLE>
December 31,
1993 1992 1991 1990 1989
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans....................$ 2,960 $ 4,129 $ 1,414 $ 631 $ 585
Accruing loans, past due
90 days or more.................... 522 519 409 540 299
-------- -------- -------- -------- -------
Total non-performing loans..........$ 3,482 4,648 1,823 1,171 884
Other real estate owned.............. 251 360 250 350 400
-------- -------- -------- -------- -------
Total non-performing assets.........$ 3,733 $ 5,008 $ 2,073 $ 1,521 $ 1,284
======== ======== ======== ======== =======
Ratios:
Non-performing loans to
total loans.................... .97% 1.33% .57% .38% .31%
Non-performing assets to
total loans and other
real estate owned.............. 1.04% 1.44% .65% .49% .45%
Non-performing assets to
total assets................... .63% .92% .42% .33% .31%
Allowance for loan losses to
non-performing loans........... 206.2% 116.1% 241.4% 288.2% 339.4%
</TABLE>
As with the rest of the nation, economic conditions within the
Corporation's operating area deteriorated during the 1991-1992 time frame.
The unemployment rate for Lancaster County, the Corporation's primary market
area, was 5.8% at December 31, 1991. For the most part, corporate profits
were down in 1992 compared to 1991. Although the unemployment rate improved
to 4.8% at December 31, 1992, the rate of unemployment reached 6% levels at
times during the year.
Loan delinquency as a percent of loans outstanding was 2.4% at December 1992
compared to 1.39% at December 31, 1991. At the same time, the Corporation
experienced an increase in non-performing loans as a result of local economic
conditions. In the fall of 1992, the Corporation reached a decision to expand
and improve the loan review process. Additional loans were placed on a
nonaccrual status and the Corpation's funding of the loan loss provision
remained high. The unemployment rate in Lancaster County in December 1993
improved to 4.5% which was lower than the State (6.3%) and national (6.4%)
levels. Loan delinquency as a percent of loans outstanding at December 1993
improved to 1.45%.
Earlier recognition of potential loan problems has led to reduced charge-offs
for 1993 compared to 1992. At the same time, the Corporation experienced a
decrease in non-performing assets.
A significant portion of the Corporation's loan portfolio consists of loans
to agricultural-related borrowers. These loans consist of loans for a variety
of purposes within the industry. Lancaster County ranks first in agriculture
among Pennsylvania counties and is one of the top 20 farm markets in the
country. Total agricultural receipts continue to show increases. While the
Corporation is hopeful that this portion of its loan portfolio will continue
to show improvement, it should be noted that these loans are susceptible to a
variety of external factors such as adverse climate, economic conditions, etc.,
in addition to factors common to other industries.
Statistics on the local housing market at the end of 1993 indicate
continued strengthening. Most of the Corporation's business activity is with
customers located within the Corporation's defined market area. Since the
majority of the Corporation's real estate loans are located within this area, a
substantial portion of the debtors' ability to honor their obligations, and
increases and decreases in the market value of the real estate
collateralizing such loans, may be affected by the level of economic activity in
the market area.
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. Loans on a nonaccrual status amounted to $2,960,000 at
December 31, 1993 compared to $4,129,000 at December 31, 1992. If interest
income had been recorded on all such loans for the years indicated, such
interest income would have been increased by approximately $267,295 and
$293,967 for 1993 and 1992 respectively. Interest income recorded on the
nonaccrual loans in 1993 and 1992 was none and $47,858 respectively.
Potential problem loans are loans which are included as performing loans, but
for 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 December 31, 1993 there were commercial loans to two related borrowers
aggregating $1.6 million which were considered as potential problem loans
which were not included as nonaccrual loans.
At December 31, 1993, there were no concentrations exceeding 10% of total
loans. A concentration is defined as amounts loaned to a multiple number of
borrowers engaged in similar activities which would cause them to be similarly
affected by changes in economic or other conditions. There were no foreign
loans outstanding at December 31, 1993.
Allowance for Loan Losses
Table 8 - Summary of Loan Loss Experience
Years ended December 31,
1993 1992 1991 1990 1989
(Dollars in Thousands)
Allowance for Loan Losses:
Beginning balance.............$ 5,400 $ 4,400 $ 3,375 $ 3,000 $ 2,651
Loans Charged off during year:
Commercial, financial and
agricultural.............. 194 843 327 1,043 98
Real estate mortgage........ 392 201 19 none none
Consumer.................... 290 471 420 283 278
Lease financing............. 14 97 144 35 21
------- ------- ------- ------- -------
Total charge-offs........... 890 1,612 910 1,361 397
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and
agricultural.............. 157 232 37 27 10
Real estate mortgage........ 8 none 13 none none
Consumer.................... 63 76 58 37 33
Lease financing............. 12 8 38 11 12
------- ------- ------- ------- -------
Total recoveries............ 240 316 146 75 55
------- ------- ------- ------- -------
Net loans charged off......... 650 1,296 764 1,286 342
Additions charged to
operations.................. 2,430 2,296 1,789 1,661 691
------- ------- ------- ------- -------
Balance at end of period......$ 7,180 $ 5,400 $ 4,400 $ 3,375 $ 3,000
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding................. .18% .39% .24% .43% .13%
Ratio of net loans charged
off to loans at end of year. .18% .37% .24% .41% .12%
Net loans charged off to
allowance for loan losses.. 9.05% 24.00% 17.36% 38.10% 11.40%
Net loans charged off to
provision for loan losses.. 26.75% 56.45% 42.71% 77.42% 49.49%
Allowance for loan losses as a
percent of average loans... 2.01% 1.64% 1.39% 1.12% 1.12%
Allowance for loan losses
as a percent of loans at
end of period.............. 2.00% 1.55% 1.38% 1.09% 1.04%
The Corporation experienced an improvement over the prior two years in net
charge-offs recorded during 1993. For the year, the Corporation recorded net
charge-offs of $650,000 or .18% of average loans outstanding. This represents
both a dollar and percentage decline from the levels realized during the last
three years.
The net charge-offs in 1992 resulted mainly from economic conditions within
the Corporation's market area. For 1992, net charge-offs of commercial loans
totalled $611,000 of which $558,000 was related to a single borrower. There
were no agricultural-related loans charged off in 1992.
The provision for loan losses for 1993 was based on, among other things,
1992 trends. However, during the second half of 1993, local economic conditions
showed improvement. Subsequently, trends in loan delinquency and non-performing
loans showed signs of improvemnet in 1993 over 1992 which is reflected by the
positive ratios in Table 8.
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and inherent risk deemed present in the loan portfolio. Management
performs a quarterly assessment of the loan portfolio to determine the
appropriate level of allowance. The factors considered in this evaluation
include, but are not limited to, estimated loan losses identified through a loan
review process, general economic conditions, deterioration in pledged collateral
past loan experience and trends in delinquencies and non-accruals. Management
uses available information to determine the appropriate level of the allowance
for possible loan losses. However, the allowance may be affected in the
future based upon changes in the economic conditions and other factors.
Management did not allocate specific portions of the allowance to specific
loan categories prior to 1993. Moreover, the 1993 allocation is somewhat
arbitrary and, as such, management considers the entire allowance available as
needed among the various categories of loans.
Table 9 - Allocation of Allowance for Loan Losses
December 31, 1993
(Dollars in Thousands)
Commercial, financial and agricultural..........$ 5,286
Real estate - mortgage.......................... 28
Consumer........................................ 727
Leases.......................................... 576
Unallocated..................................... 563
--------
Total...........................................$ 7,180
========
Deposits
Table 10 - Average Deposit Balances and Rates Paid
The average amounts of deposits and rates paid for the years indicated, are
summarized below:
<TABLE>
<CAPTION>
1993 1992 1991
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Demand deposits.....................$ 57,869 --- $ 50,601 --- $ 44,721 ---
Interest-bearing demand deposits.... 211,406 2.59% 184,959 3.36% 154,564 4.74%
Savings deposits.................... 45,302 2.70% 34,927 3.43% 27,914 4.87%
Time deposits....................... 163,497 4.33% 175,590 5.37% 186,968 6.92%
-------- ----- -------- ----- -------- -----
$478,074 2.88% $446,077 3.77% $414,167 5.22%
======== ===== ======== ===== ======== =====
</TABLE>
Table 11 - Deposit Maturity
The maturities of time deposits of $100,000 or more at December 31, 1993
are summarized below:
Three months or less..........................$ 5,979,739
Over three thru six months.................... 2,836,688
Over six thru twelve months................... 4,248,148
Over twelve months............................ 1,094,591
-----------
Total.........................................$ 14,159,166
===========
Capital
Stockholders' equity increased by nearly $6.7 million or 15.6% in 1993 to
$49,467,000. Total stockholders' equity at December 31, 1992 in the amount of
$42,794,000 represents an increase of $5,057,000 or 13.4% over the $37,737,000
reported at December 31, 1991. Strong earnings as well as capital acquired
through stock issued pursuant to a dividend reinvestment and stock purchase plan
and employee stock plan generated this fine growth in stockholders' equity.
Dividends declared amounted to $2,985,000, $2,575,000 and $2,245,000 for 1993,
1992 and 1991 respectively. In 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. Required minimum levels of
risk-adjusted capital were phased in during the time period December 31, 1990
and December 31, 1992. During this period, the minimum for Tier 1 capital
was 3.625% and the total capital ratio minimum was 7.25%. Sterling's ratios
at December 31, 1992 and 1991 were above the final risk-based capital
standards which had to be reached by December 31, 1992 that require Tier 1
capital of at least 4% and total capital of 8% of risk-weighted assets. The
Tier 1 capital ratio at December 31, 1993 was 10.67% and the total capital
ratio was 11.92%, which exceeds the minimum capital guidelines. Tier 1
capital ratio was 10.04% and the total capital ratio was 11.29% at December
31, 1992 while Tier 1 capital ratio was 9.71% and the
total capital ratio was 10.84% at December 31, 1991.
Table 12 - Capital and Performance Ratios
The following are selected ratios for the years ended December 31:
1993 1992 1991
Return on average assets....................... 1.41% 1.34% 1.25%
Return on average equity....................... 16.90% 16.99% 16.63%
Dividend payout ratio.......................... 38.26% 37.64% 38.02%
Average total equity to average assets......... 8.31% 7.89% 7.53%
Total equity to assets at year end............. 8.41% 7.86% 7.62%
Primary capital ratio.......................... 9.52% 8.77% 8.43%
Tier 1 risk-based capital ratio................ 10.67% 10.04% 9.71%
Total risk-based capital ratio................. 11.92% 11.29% 10.84%
Liquidity and Interest Rate Sensitivity
Liquidity is the ability to meet the requirements of customers for loans
and deposit withdrawals in the most economical manner. Some liquidity is
ensured by maintaining assets which may be immediately converted into cash
at minimal cost. Liquidity from asset categories is provided through cash,
noninterest-bearing and interest-bearing deposits with banks, federal funds
investment securities maturing within one year. Securities maturing within one
year amounted to $22,701,000 at December 31, 1993 compared to $20,767,000 at
December 31, 1992. Interest-bearing deposits with banks totaled $40,000 at
December 31, 1993 compared to $900,000 at December 31, 1992. Federal funds sold
was $12,350,000 and $3,200,000 at December 31, 1993 and 1992 respectively. The
loan portfolio also provides an additional source of liquidity due to the Bank
of Lancaster County participating in the secondary mortgage market. Sales of
residential mortgages into the secondary market of approximately $72 million and
$53 million respectively for 1993 and 1992 provided funding which allowed the
bank to meet the needs of customers for new mortgage financing. A favorable low
interest rate environment in 1993 resulted in significant mortgage loan
refinancing which increased liquidity within the bank's loan portfolio.
Mortgage loans held for investment and non-conforming for secondary market
sale in the amount of approximately $5.5 million were refinanced and sold on
the secondary market. Additional liquidity is provided by other sources such as
maturing loans.
On the liability side, liquidity is available through customer deposits.
Federal funds purchased and other forms of short term borrowings are also
sources of liquidity.
Liquidity must constantly be monitored because future customer demands for
funds are uncertain. The amount of liquidity needed is determined by the
changes in levels of deposits and in the demand for loans. Management
believes that the sources of funds mentioned above provide the liquidity to
meet customer demands for funds.
Interest sensitivity is related to liquidity because each is affected by
maturing assets and sources of funds. Interest sensitivity, however, is also
concerned with the fact that certain types of assets and liabilities may have
interest rates that are subject to change prior to maturity. Management
endeavors to manage the exposure of the net interest margin to interest-
sensitive assets and liabilities so as to minimize the impact of fluctuating
interest rates on earnings.
The Bank of Lancaster County's asset/liability committee manages interest
rate risk by various means including "GAP" management of its asset and liability
portfolios.
The Bank has various investments structured to change investment yield with
current market conditions. Assets subject to repricing include federal funds
sold (repricing daily), loans tied to "Treasury Bill" indexes (repricing
monthly) and loans tied to "prime" or other indexes subject to immediate
change. In addition to assets currently available for repricing there are
future scheduled principal repayments on loans, loans available for repricing at
future dates and maturities of investments. These investment repayments will
have to be reinvested at current market yields.
The Bank's funding liabilities (customer deposits and borrowed funds)
repricing characteristics have become more complex, since many deposit products
that historically were fixed rate deposit products have become deposit products
subject to changing interest rates (NOW Accounts and savings accounts). Time
certificates of deposit and borrowed money are subject to interest rate change
at maturity.
Interest rate sensitivity relates to changes in the interest rates earned
on bank investments (relates to earning assets) when they reprice to current
market rate conditions as well as the interest paid on customer deposits
(funding) when they reprice to current market rates. The net result of
interest rate repricings will impact the Corporation's future net interest
margins (either in a positive or negative manner) based on the amount of
unmatched funding, the amount of rate change, and the direction of rate
change. The net volume of assets and liabilities subject to rate change is
measured in "gaps" where volumes of assets do not equal liabilities within
certain time periods. These gaps are illustrated in Table 13. Also included
in Table 13 is a summary of the cumulative gap, as viewed by certain
regulatory authorities, which presents all interest bearing
savings and NOW deposit balances as being subject to immediate and full
repricing.
In addition to the volume of liability funding (deposits) subject to rate
change, additional factors need to be considered. All interest rates do not
move in full and equal amounts for loans and deposits. To more accurately
reflect earnings risk to rate change, management compensates for inequalities
in rate repricing of deposit products to rate repricings of loans (change in
prime base rate) by historic tracking of rate movements within all deposit
products over a span of time where prime base rate was as high as 11.50% and as
low as 6.00%. Deposit rates for each deposit product are measured as a
relationship to changes in the prime base rate. As an example, NOW account
deposits totaling $98 million historically have a rate movement equal to 39%
of corresponding rate change in prime base rate. While the entire balance is
subject to interest rate change, to equate a more accurate impact to earnings,
management considers $37 million (39%) as interest sensitive to quantify
"full and equal" impact to profitability by changes in market rates. There
is no guarantee that past history will accurately reflect future changes.
Pricing correlations are constantly refined by management.
Interest repricing of assets and liabilities is measured over future time
periods (interest rate sensitivity gaps). While all time gaps are measured, the
Bank's primary focus is the cumulative gaps through six months, as these gaps
directly affect net interest income in the short time horizon and are harder to
make reactive adjustment to actual interest rate movements.
Excluded from the interest rate sensitivity gaps are "matched" funded fixed
rate leases and associated fixed rate debt totaling $17.8 million.
Table 13 - Interest Rate Sensitivity Gaps
<TABLE>
<CAPTION>
(Dollars in Thousands)
0-30 31-90 91-180 181-365 Over
<S> <C> <C> <C> <C> <C>
Interest Earning Assets (I.E.A.) Days Days Days Days 1 year
Fed Funds sold.......................$ 12,350 $ none $ none $ none $ none
Investment securities................ 1,580 4,280 5,325 11,374 123,906
Loans................................ 141,127 10,562 13,596 26,426 167,654
--------- -------- -------- -------- --------
Total................................$155,057 $ 14,842 $ 18,921 $ 37,800 $291,560
Cumulative...........................$155,057 $169,899 $188,820 $226,620 $518,180
Interest Bearing Liabilities (I.B.L.)
C/D's $100,000 and over..............$ 3,051 $ 3,729 $ 1,540 $ 3,651 $ 784
Certificates of Deposit.............. 12,871 21,809 26,710 28,435 45,798
Interest Deposits.................... 148,961 none none none 138,273
Short-term borrowings................ 3,000 none none none none
-------- -------- ------- -------- --------
Total................................$167,883 $ 25,538 $ 28,250 $ 32,086 $184,854
Cumulative...........................$167,883 $193,421 $221,671 $253,757 $438,611
Period GAP (Dollars).................$(12,826) $(10,696) $ (9,329) $ 5,714 $106,706
I.E.A./I.B.L.%....................... 92% 58% 67% 118% 158%
Cumulative GAP (Dollars).............$(12,826) $(23,522) $(32,851) $(27,137) $ 79,569
Cumulative I.E.A./I.B.L.%............ 92% 88% 85% 89% 118%
Regulatory Presentation
Assets (cumulative).................$ 155,057 $ 169,899 $ 188,820 $ 226,620 $518,180
Funding (cumulative)................$ 306,156 $ 331,694 $ 359,944 $ 392,030 $438,611
-------- -------- -------- -------- --------
Cumulative GAP (Dollars)............$(151,099) $(161,795) $(171,124) $(165,410) $ 79,569
Cumulative I.E.A./I.B.L.%........... 51% 51% 52% 58% 118%
</TABLE>
New Financial Accounting Standards
The Financial Accounting Standards Board (FASB) issued Standard No. 112
which establishes accounting standards for employers who provide benefits to
former or inactive employees after employment but before retirement. This
standard is effective for fiscal years beginning after December 15, 1993.
Sterling Financial Corporation has determined that the application of this
standard will not have a material effect on earnings.
FASB Statement No. 114 addresses the accounting by creditors for impairment
of a loan by specifying how allowances for credit losses related to certain
loans should be determined. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. This statement shall be effective for financial statements for
fiscal years beginning after December 15, 1994. Sterling has not completed
the complex analysis required to estimate the impact of this statement.
The Financial Accounting Standard Board issued Standard No. 115 which
addresses the accounting and reporting for certain investments in debt
securities and equity securities. It 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. The statement shall be effective for fiscal years beginning after
December 15, 1993. Sterling will apply this statement beginning January 1, 1994
at which time securities will be categorized as required.
It is anticipated that approximately $7.2 million of securities will be
classified as available-for-sale and the balance of the investment securities
will be classified as held-to-maturity. This change will result in an increase
in investment securities of nearly $1.3 million and an increase in stockholders'
equity of $882,605, net of deferred taxes of $454,675. The adoption of SFAS 115
will initially increase the capital to assets ratio. At the same time, there
will be a slight negative impact on return on equity ratios. The effects on
future financial statements will be to increase the volatility of capital and
capital ratios due to increases or decreases in interest rates. Future
purchases of securities will be evaluated on an individual basis for
classification among the three permissible categories based on management's
intent and ability to hold each security to maturity, on the relative sizes
of the security categories in relation to future liquidity needs, on current
asset/liability management strategies and other criteria as appropriate.
Management anticipates that SFAS 115 will have no material impact on earnings.
The Financial Accounting Standards Board issued Standard No. 116. This
Statement establishes standards of financial accounting and reporting for
contributions received and contributions made. This Statement shall be
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 application of this standard will not have a material
effect on earnings.
Item 8 - Financial Statements and Supplementary Data
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
Page
Report of Independent Auditors 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Changes in Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
(b) The following supplementary data is set forth in this Annual Report on
Form 10-K on the following pages:
Summary of Quarterly Financial Data (Unaudited) 45
Trout, Ebersole & Groff
Certified Public Accountants
1705 Oregon Pike
Lancaster, Pennsylvania 17601
(717)569-2900
FAX (717) 569-0141
Independent Auditors' Report
Board of Directors and Shareholders
Sterling Financial Corporation and Subsidiaries
Lancaster, Pennsylvania
We have audited the accompanying consolidated balance sheets of Sterling
Financial Corporation and Subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sterling Financial Corporation and Subsidiaries at December 31, 1993 and 1992
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
Trout, Ebersole & Groff
Trout, Ebersole & Groff
Certified Public Accountants
January 21, 1994
Lancaster, Pennsylvania
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Sterling Financial Corporation and Subsidiaries
As of December 31,
1993 1992
<S>
Assets (Dollars in Thousands)
<C> <C>
Cash and due from banks...........................................$ 36,190 $ 33,222
Interest-bearing deposits in other banks.......................... 40 900
Federal funds sold................................................ 12,350 3,200
Mortgage loans held for sale...................................... 3,431 none
Investment Securities: (Note 4)
U.S. Treasury securities........................................ 23,996 20,732
Obligations of other U.S. Government agencies and corporations.. 27,903 26,405
Obligations of states and political subdivisions................ 43,491 35,119
Other bonds, notes and debentures............................... 48,770 44,089
Federal Reserve and corporate stock............................. 2,305 2,158
-------- --------
Total investment securities
(market value - $151,444 - 1993 and $133,400 - 1992)........... 146,465 128,503
-------- --------
Loans (Note 5).................................................... 360,730 351,183
Less: Unearned income........................................... (1,365) (2,654)
Allowance for loan losses (Note 6)........................ (7,180) (5,400)
-------- -------
Loans, net........................................................ 352,185 343,129
-------- -------
Premises and equipment (Note 7)................................... 7,424 7,592
Other real estate owned........................................... 251 360
Accrued interest receivable and prepaid expenses.................. 8,816 8,111
Other assets (Note 8)............................................. 20,731 19,387
-------- -------
Total Assets..................................................... $587,883 $544,404
======== ========
Liabilities
Deposits:
Noninterest-bearing.............................................$ 68,197 $ 60,370
Interest-bearing (Note 9)....................................... 437,483 412,814
-------- --------
Total Deposits.................................................... 505,680 473,184
-------- --------
Interest-bearing demand notes issued to U.S. Treasury............. 3,000 3,000
Other liabilities for borrowed money (Note 10).................... 19,410 14,723
Mortgages payable and capitalized lease liability (Note 11)....... 11 218
Accrued interest payable and accrued expenses..................... 5,414 5,486
Other liabilities................................................. 4,901 4,999
-------- --------
Total Liabilities................................................. 538,416 501,610
-------- --------
Stockholders' Equity
Common Stock -(par value:$5.00)
No. shares authorized: 1993 and 1992 - 10,000,000
No. shares issued: 1993 - 2,882,920 and 1992 - 2,702,627
No. shares outstanding: 1993 - 2,882,920 and 1992 - 2,694,841...$ 14,414 $ 13,513
Capital surplus................................................... 20,830 14,100
Retained earnings................................................. 14,223 15,414
Less: Treasury Stock (none in 1993 and 7,786 shares in 1992)-
at cost..................................................... none (233)
-------- --------
Total Stockholders' Equity........................................ 49,467 42,794
-------- --------
Total Liabilities and Stockholders' Equity........................$587,883 $544,404
======== ========
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
<S> 1993 1992 1991
Interest Income (Dollars in thousands except per share data)
<C> <C> <C>
Interest and fees on loans...........................$ 31,167 $ 31,349 $ 34,152
Interest on deposits and loans....................... 27 89 351
Interest on federal funds sold....................... 191 220 422
Interest and dividends on investment securities:
Taxable............................................ 6,242 6,428 5,750
Tax-exempt......................................... 2,270 2,007 1,932
Dividends on stock................................. 195 191 82
--------- --------- ---------
Total Interest Income................................ 40,092 40,284 42,689
--------- --------- ---------
Interest Expense
Interest on time certificates of deposit of
$100,000 or more................................... 488 642 1,249
Interest on all other deposits....................... 13,303 16,187 20,369
Interest on demand notes issued to the U.S. Treasury. 62 77 137
Interest on other borrowed money..................... 1,183 893 1,015
Interest on mortgage indebtedness and obligations
under capitalized leases........................... 6 19 23
--------- --------- ---------
Total Interest Expense............................... 15,042 17,818 22,793
--------- --------- ---------
Net Interest Income.................................. 25,050 22,466 19,896
Provision for loan losses (Note 6)................... 2,430 2,296 1,789
--------- --------- ---------
Net Interest Income after Provision for Loan Losses.. 22,620 20,170 18,107
--------- --------- ---------
Other Operating Income
Income from fiduciary activities..................... 639 596 568
Service charges on deposit accounts.................. 1,891 1,881 1,654
Other service charges, commissions and fees.......... 1,577 1,370 1,234
Mortgage banking..................................... 2,435 1,501 913
Other operating income (Note 8)...................... 2,429 2,551 2,349
Investment securities gains or (losses).............. 8 27 3
--------- --------- ---------
Total Other Operating Income......................... 8,979 7,926 6,721
--------- --------- ---------
Other Operating Expenses
Salaries and employee benefits (Note 12)............. 11,566 10,354 9,258
Net occupancy expense................................ 1,355 1,219 996
Furniture and equipment expense (including depreciation
of $753 in 1993, $714 in 1992 and $648 in 1991).... 1,253 1,177 1,090
FDIC insurance assessment............................ 1,052 984 841
Other operating expenses............................. 5,822 5,188 4,810
--------- --------- ---------
Total Other Operating Expenses....................... 21,048 18,922 16,995
--------- --------- ---------
Income Before Income Taxes........................... 10,551 9,174 7,833
Applicable income taxes (Note 13).................... 2,749 2,331 1,929
--------- --------- ---------
Net Income...........................................$ 7,802 $ 6,843 $ 5,904
========= ========= =========
Earnings per common share:
Net Income.........................................$ 2.72 $ 2.43 $ 2.12
Cash dividends declared per common share.............$ 1.08 $ .96 $ .88
Average shares outstanding...........................2,864,200 2,817,651 2,775,778
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Sterling Financial Corporation and Subsidiaries
Shares (Dollars in Thousands)
Common Common Capital Retained Treasury
<S> Stock Stock Surplus Earnings Stock Total
Balance, January 1, 1991 <C> <C> <C> <C> <C> <C>
(as previously stated)...... 1,657,100 $ 8,286 $ 14,345 $ 10,620 $ 0$ 33,251
Cumulative effect of change in
accounting principle......... (310) (310)
Balance, January 1, 1991
(as restated)............... 1,657,100 8,286 14,345 10,310 0 32,941
Net income.................... 5,904 5,904
Common stock issued
Dividend Reinvestment Plan... 27,510 137 781 918
Employee Stock Plan.......... 7,012 35 202 237
Stock dividend issued -
Common stock - 5% including
cash paid in lieu of
fractional shares........... 84,019 420 2,374 (2,812) (18)
Cash dividends declared -
common stock................. (2,245) (2,245)
--------- ------- ------- ------- ------- -------
Balance, December 31, 1991.... 1,775,641 8,878 17,702 11,157 0 37,737
Net income.................... 6,843 6,843
Common stock issued
Dividend Reinvestment Plan... 18,934 95 660 755
Employee Stock Plan.......... 7,433 37 229 266
Three-for-two stock split and
cash paid in lieu of
fractional shares............ 900,619 4,503 (4,503) (11) (11)
Cash dividends declared
common stock................. (2,575) (2,575)
Purchase of Treasury Stock
(19,007 shares).............. (643) (643)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(11,221 shares).............. 12 410 422
--------- ------- ------- ------- ------- ------
Balance, December 31, 1992.... 2,702,627 13,513 14,100 15,414 (233) 42,794
Net income.................... 7,802 7,802
Common stock issued
Dividend Reinvestment Plan... 34,951 174 1,159 1,333
Employee Stock Plan.......... 8,760 44 252 296
Stock Dividend issued -
Common stock - 5% including
cash paid in lieu of
fractional shares........... 136,582 683 5,293 (6,008) (32)
Cash dividends declared
Common stock................. (2,985) (2,985)
Purchase of Treasury Stock
(7,270 shares)............... (267) (267)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(15,056 shares).............. 26 500 526
--------- ------- ------- ------- ------- ------
Balance, December 31, 1993.... 2,882,920 $ 14,414 $ 20,830 $ 14,223 $ 0 $49,467
========= ======= ======= ======= ======= ======
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
1993 1992 1991
(Dollars in Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income...........................................$ 7,802 $ 6,843 $ 5,904
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 983 941 854
Provision for possible loan losses................ 2,430 2,296 1,789
Provision for deferred income taxes............... (299) (705) (457)
(Gain) loss on sale of property and equipment..... none 5 (1)
(Gain) loss on maturities/sales of
investment securities............................ (8) (27) (3)
(Gain) loss on sale of mortgage loans............. (212) 164 88
Proceeds from sales of mortgage loans............. 72,209 52,995 32,921
Originations of mortgage loans held for sale...... (75,428) (53,159) (33,009)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and prepaid expenses............................ (705) (734) (2,187)
(Increase) decrease in other assets.............. (1,235) (1,139) (1,397)
Increase (decrease) in accrued interest payable
and accrued expenses........................... 227 (564) 1,071
Increase (decrease) in other liabilities........ (98) 1,271 (283)
--------- --------- ---------
Net cash provided by/(used in) operating activities.. 5,666 8,187 5,290
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits
in other banks..................................... 3,678 4,214 7,131
Purchase of interest-bearing deposits in other banks. (2,818) (900) (5,743)
Proceeds from maturities of investment securities.... 37,019 35,340 23,443
Purchase of investment securities.................... (54,973) (55,025) (47,666)
Federal funds sold, net.............................. (9,150) 11,250 (8,450)
Net loans and leases made to customers............... (11,486) (32,094) (7,665)
Purchases of premises and equipment.................. (827) (1,577) (1,274)
Proceeds from sale of premises and equipment......... 12 34 33
--------- --------- ---------
Net cash provided by/(used in) investing activities.. (38,545) (38,758) (40,191)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW and
savings accounts................................... 43,978 54,138 35,422
Net increase (decrease) in time deposits............. (11,482) (15,477) (721)
Net increase in interest-bearing demand notes
issued to the U.S. Treasury........................ none none none
Proceeds from borrowings............................. 14,016 12,800 6,020
Repayments of borrowings............................. (9,329) (7,300) (8,454)
Repayments of mortgages payable and capitalized
lease liability.................................... (207) (50) (46)
Proceeds from issuance of common stock............... 1,629 1,021 1,155
Cash dividends paid.................................. (2,985) (2,575) (2,245)
Cash paid in lieu of fractional shares............... (32) (11) (18)
Acquisition of treasury stock........................ (267) (643) none
Proceeds from issuance of treasury stock............. 526 422 none
--------- --------- ---------
Net cash provided by/(used in) financing activities.. 35,847 42,325 31,113
--------- --------- ---------
Increase (decrease) in cash and due from banks....... 2,968 11,754 (3,788)
Cash and due from banks:
Beginning............................................ 33,222 21,468 25,256
--------- --------- ---------
Ending...............................................$ 36,190 $ 33,222 $ 21,468
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money..$ 15,383 $ 18,549 $ 23,123
Income taxes....................................... 3,110 2,675 1,970
Supplemental Schedule of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans....$ 121 $ 810 $ none
See accompanying notes to financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sterling Financial Corporation and Subsidiaries
Note 1 - Formation of Sterling Financial Corporation
As a result of a plan of reorganization, The First National Bank of
Lancaster County, now by name change, Bank of Lancaster County, N.A. (Bank),
became the wholly owned subsidiary of Sterling Financial Corporation (Parent
Company), a new bank holding company, at the close
of business June 30, 1987. Each outstanding share of the Bank's common stock
(par value $10.00) was converted into two shares of common stock (par value
$5.00) of the Parent Company. The authorized capital of the Parent Company
is 10,000,000 shares of common stock.
Note 2 - Summary of Significant Accounting Policies
The accounting and reporting policies of Sterling Financial Corporation
and its subsidiaries conform to generally accepted accounting principles and to
general practices within the banking industry. The following is a summary of
the most significant policies.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Sterling Financial Corporation and its
wholly owned subsidiaries, Bank of Lancaster County, N.A. and its subsidiary
Town & Country, Inc., and Sterling Mortgage Services, Inc. (presently
inactive). All significant intercompany transactions have been
eliminated in the consolidation.
Investment Securities - Investment securities are carried at cost adjusted
for amortization of premiums and accretion of discounts, both computed on the
constant yield method.
Investment securities primarily consist of debt securities which are carried at
amortized cost. It is management's intent to hold investment account
securities until maturity. Gains and losses on the sale of investment
securities are determined on the specific identification
basis and are included in Other Operating Income in the Consolidated Statements
of Income. Permanent impairments of market value are reflected in the period
ascertained. No securities were considered available for sale or held for
trading purposes at December 31, 1993 and 1992.
Premises and Equipment - Premises, furniture and equipment, leasehold
improvements, and capitalized leases are stated at cost, less accumulated
depreciation and amortization. For book purposes, depreciation is computed
primarily by using the straight-line method over the
estimated useful life of the asset. Charges for maintenance and repairs are
expensed as incurred. Gains and losses on dispositions are reflected in
current operations.
Other Real Estate Owned - Other real estate owned is carried at the lower of
cost or an amount not in excess of estimated fair value.
Allowance for Loan Losses - The provision for loan losses charged to
operating expense reflects the amount deemed appropriate by management to
produce an adequate reserve to meet the present and foreseeable risk
characteristics of the loan portfolio. Management's
judgement is based on the evaluation of individual loans and their overall risk
characteristics, past loan loss experience, and other relevant factors. Loan
losses are charged directly against the allowance and recoveries on
previously charged-off loans are added to the allowance.
Interest Income - Interest on installment loans is recognized primarily on the
simple interest, actuarial and the rule of seventy-eights methods. Interest
on other loans is recognized based upon the principal amount outstanding.
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.
Federal Income Taxes - Applicable income taxes are based on income as reported
in the consolidated financial statements. Deferred income taxes are provided
for those elements of income and expense which are recognized in different
periods for financial reporting and income tax purposes. Statement of
Financial Accounting Statements (SFAS) No. 109 -Accounting for Income Taxes,
which changes the method of accounting for income taxes
retroactively applied in 1993 which 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.
Trust Department Assets and Income - Trust assets held by the Bank in a
fiduciary or agency capacity for customers of the Trust Department are not
included in the financial statements since such items are not assets of the
Bank. Trust income has been recognized on the cash
basis which is not significantly different from amounts that would have been
recognized on the accrual basis.
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 2,864,200, 2,817,651, and 2,775,778 for 1993, 1992 and 1991
respectively, after giving retroactive effect to a three-for-two stock split
in the form of a 50% stock dividend paid in 1992 and
a 5% stock dividend paid in December 1993.
Presentation of Cash Flows - For purposes of reporting cash flows, cash and
due from banks includes cash on hand and amounts due from banks (including
cash items in process of clearing).
Reclassifications - Certain income items for prior years have been
reclassified in order to conform with the current year presentation with no
effect to net income.
Employers' Accounting for Postemployment Benefits - The Financial Accounting
Standards Board (FASB) issued Standard No. 112 which establishes accounting
standards for employers who provide benefits to former or inactive employees
after employment but before retirement.
This standard is effective for fiscal years beginning after December 15, 1993.
Sterling Financial Corporation has determined that the application of this
standard will not have a material effect on earnings.
Accounting by Creditors for Impairment of a Loan - FASB Statement No. 114
addresses the accounting by creditors for impairment of a loan by specifying
how allowances for credit losses related to certain loans should be
determined. A loan is impaired when, based on allowances for credit losses
related to certain loans should be determined. A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. This statement shall be effective
for financial statements for fiscal years
beginning after December 15, 1994. Sterling has not completed the complex
analysis required to estimate the impact of this statement.
Accounting for Contributions Received and Contributions Made - FASB Statement
No. 116, establishes standards of financial accounting and reporting for
contributions received and contributions made. This Statement shall be
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 application of this Statement will not have a
material effect on earnings.
Mortgage Loans Held for Sale - Mortgage loans held for sale are recorded at
the lessor of current secondary market value or the actual book value of loans.
Note 3 - Restrictions on Cash and Due From Banks
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these reserve balances for the year
ended December 31, 1993 was approximately $6,658,000. Balances maintained at
the Federal Reserve Bank are included in cash and due from banks.
Note 4 - Investment Securities
Securities pledged to secure government and other public deposits, trust
deposits, short-term borrowings, and other balances as required or permitted
by law were carried at $28,295,144 in 1993 and $22,463,103 in 1992.
The amortized cost and estimated market values of investment securities are
as follows:
<TABLE>
<CAPTION>
December 31, 1993
(Dollars in Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities............$ 23,996 $ 475 $ 46 $ 24,425
Obligations of other U.S. Government
agencies and corporations......... 22,880 422 17 23,285
Obligations of states and political
subdivisions...................... 43,491 1,825 47 45,269
Mortgage-backed securities.......... 5,834 243 3 6,074
Other bonds, notes and debentures... 47,959 1,066 56 48,969
----------- ---------- ---------- --------
Subtotal............................ 144,160 4,031 169 148,022
Federal Reserve and corporate stock. 2,305 1,117 none 3,422
----------- ---------- ---------- --------
Total...............................$ 146,465 $ 5,148 $ 169 $ 151,444
=========== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992
(Dollars in Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of other U.S. Government
agencies and corporations......... 19,853 520 20 20,353
Obligations of states and political
subdivisions...................... 35,119 1,250 92 36,277
Mortgage-backed securities.......... 7,175 306 1 7,480
Other bonds, notes and debentures... 43,466 899 96 44,269
---------- --------- -------- --------
Subtotal............................ 126,345 3,407 237 129,515
Federal Reserve and corporate stock. 2,158 1,727 none 3,885
---------- ---------- --------- --------
Total...............................$ 128,503 $ 5,134 $ 237 $ 133,400
=========== ========== ========= =========
</TABLE>
The balance sheet lists Investment Securities by major categories while
certain footnotes or tables list mortgage-backed securities as a separate
category. Mortgage-backed securities are either Obligations of Other U.S.
Government Agencies or Other (Corporate)
Securities. In 1993, such securities were listed at $5,834,000 of which
$5,023,000 were Obligations of Other U.S. Government Agencies and $811,000 were
listed in Other Securities.
In 1992, $7,175,000 were listed as mortgage-backed securities of which
$6,552,000 were Obligations of Other U.S. Government Agencies and $623,000 were
listed in Other Securities.
The amortized cost and estimated market value of debt securities at
December 31, 1993, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without
call or prepayment penalties.
(Dollars in Thousands)
Estimated
Amortized Market
Cost Value
Due in one year or less................$ 22,489 $ 22,757
Due after one year through five years.. 85,170 87,385
Due after five years through ten years. 24,764 25,662
Due after ten years.................... 5,903 6,144
----------- -----------
138,326 141,948
Mortgage-backed securities............. 5,834 6,074
=========== ===========
$ 144,160 $ 148,022
=========== ===========
There were no sales of investments in debt securities during 1993, 1992
or 1991.
Sterling will adopt Statement of Financial Accounting Standards Board
Statement No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities" as of January 1, 1994.
SFAS 115 addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. These investments are to be classified in one of
three categories and accounted for as follows: 1) debt securities that a
company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities
and reported at amortized cost; 2) debt and equity securities that
are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at
value, with unrealized gains and losses included in earnings; and
3) debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity. It is anticipated that approximately $7.2 million of securities will
be classified as available-for-sale and the balance of the investment
securities will be classified as held-to-maturity.
This change will result in an increase in investment securities of nearly
$1.3 million and an increase in stockholders' equity of $882,605,
net of deferred taxes of $454,675. The adoption of SFAS 115 will initially
increase the capital to assets ratio. At the same time,
there will be a slight negative impact on return on equity ratios.
The effects of adoption on future financial statements will be to
increase the volatility of capital and capital ratios
due to increases or decreases in interest rates. Future purchases of
securities will be evaluated on an individual basis for classification
among the three permissible categories based on management's intent and
ability to hold each security to maturity, on the relative
sizes of the security categories in relation to future liquidity needs,
on current asset/liability management strategies and other criteria as
appropriate. Management anticipates that SFAS 115 will have no material
impact on earnings.
Note 5 - Loans
Loans outstanding at December 31, are as follows:
1993 1992
(Dollars in Thousands)
Commercial, financial and agricultural.............$ 191,431 $ 172,482
Real estate - construction......................... 10,265 16,044
Real estate - mortgage............................. 22,335 30,445
Consumer........................................... 101,256 99,444
Lease financing receivables (net of unearned income) 35,443 32,768
--------- ---------
Total loans, gross.................................$ 360,730 $ 351,183
========= =========
Loans on a non-accrual status amounted to $2,960,038 at December 31, 1993,
compared to $4,129,295 at December 31, 1992. If interest income had been
recorded on all such loans for the years indicated, such interest
income would have increased by approximately $267,295 and
$293,967 for 1993 and 1992 respectively.
Note 6 - Allowance for Loan Losses
Changes in the Allowance for Loan Losses were as follows:
1993 1992 1991
(Dollars in Thousands)
Balance at January 1..........................$ 5,400 $ 4,400 $ 3,375
Recoveries credited to allowance............... 240 316 146
Provisions for loan losses charged to income... 2,430 2,296 1,789
-------- --------- --------
Total.......................................... 8,070 7,012 5,310
Losses charged to allowance.................... 890 1,612 910
-------- --------- --------
Balance at December 31........................$ 7,180 $ 5,400 $ 4,400
======== ========= =========
Note 7 - Premises and Equipment
Premises and equipment at December 31, 1993 and 1992 is summarized as follows:
1993 1992
(Dollars in Thousands)
Land.............................................$ 885 $ 885
Buildings....................................... 5,718 5,718
Buildings under capitalized lease................ 104 104
Leasehold improvements........................... 553 553
Equipment, furniture and fixtures................ 7,577 6,798
----------- -----------
14,837 14,058
Less: Accumulated depreciation................... (7,413) (6,466)
----------- -----------
$ 7,424 $ 7,592
=========== ===========
Depreciation expense amounted to $983,345 in 1993, $940,843 in 1992 and
$854,252 in 1991.
Note 8 - Other Assets
Included in other assets for 1993 and 1992 is $17,186,239 and $16,809,324
respectively which represents operating leases generated by Town & Country, Inc.
The income generated from the leases for 1993 and 1992 amounted to $1,736,814
and $1,824,796 respectively and is reflected in other operating income.
The following schedule provides an analysis of Town & Country's investment
in property on operating leases and property held for lease by major classes
as of December 31, 1993 and 1992:
1993 1992
(Dollars in Thousands)
Construction equipment...........$ 1,049 $ 436
Transportation equipment......... 7,235 7,357
Automobiles...................... 12,106 10,673
Manufacturing equipment.......... 4,376 4,292
Trucks........................... 8,075 6,441
Other............................ 362 277
----------- -----------
Total............................ 33,203 29,476
Less: Accumulated depreciation... (16,017) (12,667)
----------- -----------
$ 17,186 $ 16,809
=========== ===========
The following is a schedule by years of minimum future rentals on
noncancelable operating leases as of December 31, 1993:
Year ending December 31: (Thousands)
1994...............................$ 9,022
1995................................ 1,413
1996................................ 201
1997................................ 37
1998................................ none
Later years......................... none
-------
Total minimum future rentals.......$ 10,673
=======
Note 9 - Time Certificates of Deposit
At December 31, 1993 and 1992, time certificates of deposit of $100,000 or
more aggregated $13,159,166 and $13,681,887 respectively.
Note 10 - Other Liabilities for Borrowed Money
The following represents other liabilities for borrowed money at December 31:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Notes payable-Town & Country, Inc.(Subsidiary of Bank)
borrowings from various lenders for leasing operations......$17,838,595 $14,722,972
Federal Home Loan Bank advances............................... 1,571,450 none
----------- -----------
Total.........................................................$19,410,045 $14,722,972
</TABLE>
Liabilities in connection with Town & Country, Inc. leasing operations are
payable to various lenders at various terms. The estimated current portion of
this debt is $8,027,368 at December 31, 1993. The borrowings from the Federal
Home Loan Bank of Pittsburgh consist of two advances in 1993. One in the
amount of $621,450, bears interest monthly at the rate of 4.49% per year and
matures July 29, 1996. The second, in the amount of $95,000 bears
interest at the rate of 5.39% per year and matures September 13, 2000.
Note 11 - Mortgages Payable and Capitalized Lease Liability
The Bank entered into a transaction with the Lancaster Industrial
Development Authority in 1976 through The First Federal Savings and Loan
Association of Lancaster, which became Penn Savings Bank, which has now
become Sovereign Bank, to finance the construction of the
Millersville office. The balance on this obligation was $85,292 on December
31, 1992. This obligation was paid in full in 1993. The rate of interest
was 7 1/2%.
In 1978, the Bank entered into another transaction with the Lancaster
Industrial Development Authority through The First Federal Savings and Loan
Association of Lancaster, which became Penn Savings Bank, which has now
become Sovereign Bank, to purchase the building for our Duke Street
(Lancaster) Office. The balance on this obligation was $109,844 on
December 31, 1992. This obligation was paid in full in 1993. The rate of
interest was 7%.
The Bank leases the Fruitville Pike Office building. This lease was
entered into in 1979. This is a capitalized lease and is
accounted for and depreciated as bank-owned property, with lease payments
accounted for as interest and debt reduction. The obligation
under capitalized lease liability amounted to $11,188 on
December 31, 1993 and $23,350 on December 31, 1992. Lease payments amount
to $1,676 monthly of which $1,175.61 is applied as interest and debt
reduction and the remaining $500.39 is for land rental and treated as an
operating lease. The term of this lease is 15 years with renewal options
available.
The following is a schedule of the total future minimum lease payments
together with the present value of the net minimum lease
payments related to the capitalized lease payments as of December 31, 1993.
Capitalized
Lease
1994..................................$ 11,753
1995.................................. none
1996.................................. none
1997.................................. none
1998.................................. none
Later years........................... none
--------
Total minimum lease payments..........$ 11,753
Less: Amount representing interest.... (565)
--------
Net obligations under capitalized
lease..............................$ 11,188
========
Note 12 - Pension and Employee Stock Bonus Plan
The Bank of Lancaster County, N.A. and its subsidiary, Town & Country, Inc.
maintains a qualified non-contributory pension plan for their employees. The
Plan specifies fixed benefits to provide a monthly pension benefit at age 65
for life (with payments guaranteed for 10 years) equal to one and one-half
percent of each participant's final average salary
(highest five consecutive years' base compensation preceding retirement) for
each year of credited service. All employees with one year of service who
work at least 1,000 hours per year and who are at least age 21 are eligible
to participate. A participant becomes 100% vested upon completion of five
years of service.
Sterling Financial Corporation has adopted the provision of Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions",
for the year ended December 31, 1987. The net periodic pension cost for
1993, 1992 and 1991 was $574,627, $328,019 and $257,444 respectively.
Net periodic pension cost for 1993, 1992 and 1991 included the following:
1993 1992 1991
Service cost.......................$ 559,665 $ 407,609 $ 345,032
Interest cost...................... 404,381 315,831 258,764
Return on Plan assets.............. (346,736) (465,122) (546,687)
Net amortization and deferral...... (42,683) 69,701 200,335
--------- --------- ---------
Net periodic pension cost..........$ 574,627 $ 328,019 $ 257,444
========= ========= =========
The following table sets forth the Plan's funded status at December 31, 1993,
1992 and 1991:
<TABLE>
<CAPTION>
<S>
Actuarial present value of benefit obligations:
1993 1992 1991
Accumulated benefit obligation, including vested
benefits of $3,684,272 for 1993, $2,761,915 for 1992<C> <C> <C>
and $2,048,650 for 1991.............................$ 3,748,356 $ 2,858,390 $ 2,154,937
========== ========== ==========
Projected benefit obligation for service rendered to
date................................................ $(6,466,414)$(5,630,730)$(3,978,681)
Plan assets at fair value.. ......................... 5,472,414 4,511,618 3,724,979
---------- ---------- ----------
Projected plan assets in excess of or (less than)
benefit obligation...................................$ (994,000)$(1,119,112)$ (253,702)
Unrecognized net (gain) or loss from past experience
different from that assumed and effects of changes
in assumptions....................................... 1,404,004 1,410,150 496,241
Unrecognized net (asset) or obligation................ (414,546) (483,638) (552,730)
---------- ---------- ----------
Prepaid (accrued) pension cost included
in other assets (liabilities)........................ $ (4,542)$ (192,600)$ (310,191)
========== ========== ==========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.5% and 5%, respectively, at December 31,
1993. The expected long-term rate of return on plan assets in 1993 was 9%.
The Board of Directors of the Bank adopted an employee plan
effective July 1, 1981. The assets of the Plan will be entirely
invested in Sterling Financial Corporation common stock. The Plan covers all
Bank employees who are age 18 and over, are employed for
at least 1,000 hours per year and have completed at least one year
of service. The Plan has two parts:
*The Thrift Incentive portion of the Plan permits any eligible participant
to make voluntary contributions to the Plan ranging from
2% to 6% of compensation. The Bank will contribute 25% of what the
participant contributes. This portion of the Plan is intended to encourage
thrift and investment in Sterling Financial Corporation stock.
*The Performance Incentive portion of the Plan allows the Bank to make
annual contributions to the Plan based on certain overall Bank
performance objectives. These contributions will be allocated to the
participants based on compensation.
Bank contributions to the Plan vest in each participant's account at the
rate of 20% for each year of service. Normally, benefits may be paid
from the Plan on retirement, termination, disability or death. Participants
in the Plan may withdraw their own contribution earlier under several
restricted conditions of hardship with approval of thePlan Committee.
The Plan provides that each participant may vote the shares in his or her
account through the Plan Trustee at any shareholder meeting. The Bank of
Lancaster County Trust Department serves as Trustee for the Plan. All
dividends received on Sterling Financial Corporation stock are reinvested
in additional shares of Sterling Financial Corporation stock.
The contribution to the Performance Incentive portion of the Plan was
$200,000, $165,000 and $150,000 for 1993, 1992 and 1991 respectively.
The contribution to the Thrift Incentive portion of the Plan was $41,766
in 1993, $37,291 in 1992 and $32,685 in 1991.
Effective January 1, 1993, Sterling adopted Statement of Financial
Accounting Standards No. 106 - Employers' Accounting for Postretirement
Benefits Other Than Pensions. Under SFAS No. 106, the cost of postretirement
benefits other than pensions must be recognized on an
accrual basis as employees perform services 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 $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 transition obligation in the amount of $1,026,457 is
being amortized on a straight-line basis over a 20 year period which is
the average remaining service period of active plan participants.
The 1993 cost for postretirement benefits other than pensions consisted
of the following components:
Service cost..........................$ 79,808
Interest cost.......................... 81,208
Amortization of unrecognized
transition obligation.............. 51,323
-------
Net periodic postretirement
benefit cost......................$212,339
=======
Sterling's postretirement benefits other than pensions are currently not
funded. The status of the plans at December 31, 1993 is as follows:
Actuarial valuation of accumulated postretirement benefit obligation:
Retirees.................................$ 314,495
Fully eligible active plan participants... 294,307
Other active plan participants............ 652,737
---------
$1,261,539
Unrecognized transition obligation....... (975,134)
Unrecognized net loss.................... (94,345)
---------
Accrued postretirement benefit cost......$ 192,060
=========
Prior to January 1, 1993, Sterling recognized the cost of postretirement b
enefits, which is primarily retiree health care and life insurance benefits,
as an expense as premiums were incurred. These costs approximated $17,886
and $13,888 for 1992 and 1991, respectively. The postretirement health care
and life insurance plans are contributory, with retiree
contributions based on years of service.
The assumed postretirement health care cost trend rate used in measuring
the accumulated postretirement benefit was 9% in 1993, the year of adoption,
decreasing by .5% per year to an ultimate rate of 5% in 2001 and remains at
that level thereafter. The discount rate used to measure the accumulated
postretirement benefit obligation was 7% in 1993.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1993 by
$283,700 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year ended
December 31, 1993 by $44,952.
Note 13 - Applicable Income Taxes
The effective income tax rates for financial reporting purposes are less
than the Federal statutory rate of 34% for 1993, 1992 and 1991 for reasons
shown as follows:
For the years ended December 31,
1993 1992 1991
(Dollars in Thousands)
Federal income tax expense at statutory rate.$ 3,587 $ 3,119 $ 2,663
Reduction resulting from:
Non-taxable interest income.................. (895) (837) (872)
Other, net................................. 20 12 105
----------- ---------- ---------
Applicable Federal income taxes..............$ 2,712 $ 2,294 $ 1,896
State income taxes........................... 37 37 33
----------- --------- --------
Applicable income taxes....................$ 2,749 $ 2,331 $ 1,929
=========== ========= ========
Taxes currently payable....................$ 3,048 $ 3,036 $ 2,386
Deferred income taxes....................... (299) (705) (457)
----------- --------- --------
Applicable income taxes....................$ 2,749 $ 2,331 $ 1,929
=========== ========= ========
<TABLE>
<CAPTION>
The deferred income tax provision consists of the following items:
Years ended December 31,
1993 1992 1991
(Dollars in Thousands)
<S> <C> <C> <C>
Difference between loan loss provision
charged to operating expense and bad
debt deduction taken for income tax
purposes....................................$ (687) $ (755) $ (363)
Difference between the depreciation
methods used for financial statements
and for income tax purposes................. (64) 199 (19)
Income on leases recognized by the
direct finance method for financial
statements but recognized by the
operating method for income tax purposes.... 526 333 327
Difference in gains and losses on
disposal of leased assets due to the
use of direct finance method for
financial statements and operating
method for income tax purposes.............. (215) (398) (260)
Difference due to the amount of pension
expense deductible for financial
statement purposes and that which is
deductible for income tax purposes.......... 64 47 (88)
Various deferral items....................... 77 (131) (54)
--------- --------- ---------
$ (299) $ (705) $ (457)
========= ========= =========
The Financial Accounting Standards Board has issued Statement No. 109,
Accounting for Income Taxes, which significantly changes the
recognition and measurement of deferred income tax assets and liabilities.
Statement 109 requires that deferred income taxes be recorded
on an asset/liability method and adjusted when new tax rates are enacted.
The Company adopted Statement No. 109 beginning with its year ending
December 31, 1993. The Statement provides that the effect of its adoption
may be recorded entirely in the year of adoption or
retroactively by restating one or more prior years. The statement was
retroactively applied in 1993.
Note 14 - Operating Leases
The Bank leases certain banking facilities under operating leases which
expire on
various dates to 2022. Renewal options are available on these leases. Minimum
future rental payments as of December 31, 1993 are as follows:
Operating
Leases
(Dollars in Thousands)
1994.........................$ 395
1995......................... 390
1996......................... 383
1997......................... 337
1998......................... 285
Later years.................. 2,165
---------
Total minimum future rental
payments...................$ 3,955
=========
Total rent expense charged to operations amounted to $373,332 in 1993,
$334,654 in 1992 and $282,760 in 1991.
Note 15 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
Cash and Short-Term Investments- For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities- For investment securities, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans- For certain homogenous categories of loans, such as some residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Lease contracts as defined in FASB Statement No. 13, Accounting for Leases, are
not included in this disclosure statement.
Deposit Liabilities- The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposits
is estimated using the rates currently offered for deposits of similar
remaining maturities.
U.S. Treasury Demand Notes- For U.S. Treasury demand notes, the carrying
amount is a reasonable estimate of fair value.
Other Borrowings- Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
Commitments to Extend Credit and Standby Letters of Credit- The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference
between current levels of interest rates and committed rates. The fair value
of guarantees and letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
The estimated fair values of the Corporation's financial instruments are
as follows:
1993 1992
(Dollars in Thousands)
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Financial Assets:
Cash and short-term investments.$ 48,580 $ 48,580 $ 37,322 $ 37,322
Investment Securities............146,465 151,444 128,503 133,400
Loans............................328,718 318,415
Less: Allowance for Loan Losses. (6,604) (4,916)
---------- -------- --------- ---------
Net Loans.......................$322,114 $326,468 $313,499 $320,091
Financial Liabilities:
Deposits........................$505,680 $507,651 $473,184 $475,871
U.S. Treasury Demand Notes...... 3,000 3,000 3,000 3,000
Other borrowings................ 19,421 19,404 14,941 15,035
Unrecognized Financial Instruments:*
Interest Rate Swaps:
In a net receivable position.... none none none none
In a net payable position....... (none) (none) (none) (none)
Commitments to extend credit.... (76) (76) (69) (69)
Standby Letters of Credit....... (36) (36) (10) (10)
Financial Guarantees written.... (none) (none) (none) (none)
* The amounts shown under "Carrying Amount" represent accruals or deferred
income (fees) arising from those unrecognized financial instruments.
Note 16 - Commitments and Contingent Liabilities
In the normal course of business, there are various commitments and
contingent liabilities which are not reflected in the financial statements.
These include lawsuits and commitments to extend credit, guarantees and
letters of credit. In the opinion of management, there are no material
commitments which represent unusual risks.
A summary of the more significant commitments as of December 31, 1993 and
1992 are as follows:
Financial instruments whose contract amounts
represent credit risk:
1993 1992
(Dollars in Thousands)
Standby letters of credit ..................$ 8,845 $ 6,525
Commitments to extend credit................$ 60,479 $ 73,324
Standby letters of credit are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements
and are subject to the same risk, credit review and approval process as loans.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitmant
amounts do not necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis.
Excluded from these amounts are commitments to extend credit in the form of
retail credit cards, check credit or related plans.
Sterling's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
notional amount of those instruments. Sterling uses the
same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Most of Sterling's business activity is with customers located within
Sterling's defined market area. Sterling grants commercial,
residential and consumer loans throughout the market area. The loan portfolio
is well diversified and Sterling does not have any significant
concentrations of credit risk.
Sterling has not entered into any futures and forward contracts,
interest rate swaps or other derivative activities.
Note 17 - Related Party Transactions
Certain directors and officers of Sterling Financial Corporation and its
subsidiaries, their immediate families and companies in which they are
principal owners (more than 10%), were indebted to the Bank during 1993 and
1992. All loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and, in the opinion of the
management of the Bank, do not involve more than a normal risk of collectibility
or present other unfavorable features. Total loans to these persons
at December 31, 1993 and 1992 amounted to $6,418,156
and $6,074,919 respectively. During 1993, $9,525,106 of new loans were
made and repayments totaled $9,181,869.
Note 18 - Dividend and Loan Restrictions
Dividends are paid by Sterling Financial Corporation from its assets which
are mainly provided by dividends from Bank of Lancaster County, N.A. However,
certain restrictions exist regarding the ability of the Bank to transfer
funds to Sterling Financial Corporation in the form of dividends.
The approval of the Comptroller of the Currency shall be required
if the total of all dividends declared by the Bank in any calendar year
shall exceed the total of its net profits of that year combined with its
retained net profits of the preceding two years. Under these restrictions,
the Bank can declare dividends in 1994 without approval
of the Comptroller of the Currency of approximately $11,920,000
plus an additional amount equal to the Bank's net profits for 1994
up to the date of any such dividend declaration.
Under current Federal Reserve regulations, the Bank is limited in the
amount it may loan to Sterling Financial Corporation. Loans to
Sterling Financial Corporation may not exceed 10% of the Bank's capital
stock and surplus.
Note 19 - Sterling Financial Corporation (Parent Company Only) Financial
Information
Condensed Balance Sheets
As of December 31,
1993 1992
(Dollars in Thousands)
Assets
Cash..........................................$ 390 $ 28
Interest-bearing deposits in other banks...... none 100
Investment in subsidiaries at equity.......... 49,699 43,009
Other assets.................................. 185 373
---------- ---------
Total Assets....................................$ 50,274 $ 43,510
========== =========
Liabilities
Other liabilities.............................$ 807 716
Stockholders' Equity
Common Stock..................................$ 14,414 $ 13,513
Capital Surplus............................... 20,830 14,100
Retained Earnings............................. 14,223 15,414
Less: Treasury Stock at cost.................. none (233)
---------- ---------
Total Stockholders' Equity......................$ 49,467 $ 42,794
---------- ---------
Total Liabilities and Stockholders' Equity......$ 50,274 $ 43,510
========== =========
Condensed Statements of Income
Years Ended December 31,
1993 1992 1991
Income (Dollars in Thousands)
Dividends from subsidiaries..........$ 1,262 $ 1,731 $ 1,413
Other income......................... 1 1 1
---------- ----------- ----------
Total Income....................... 1,263 1,732 1,414
---------- ----------- ----------
Expenses
Fees paid to subsidiary.............. 108 84 70
Other expense........................ 121 96 92
---------- ----------- ----------
Total Expense...................... 229 180 162
---------- ----------- ----------
Income before income taxes and equity
in undistributed net income
of subsidiaries...................... 1,034 1,552 1,252
Income taxes (credits)................. (78) (61) (55)
---------- ----------- ----------
1,112 1,613 1,307
Equity in undistributed income of
subsidiaries......................... 6,690 5,230 4,597
---------- ----------- ----------
Net Income.............................$ 7,802 $ 6,843 $ 5,904
========== =========== ==========
Statements of Cash Flows
Years Ended December 31,
1993 1992 1991
(Dollars in Thousands)
Cash flows from operating activities
Net income....................................$ 7,802 $ 6,843 $ 5,904
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Undistributed (earnings) loss of subsidiaries. (6,690) (5,230) (4,597)
Changes in operating assets and liabilities:
(Increase) decrease in other assets....... 188 242 (312)
(Decrease) increase in other liabilities.. 91 52 105
---------- --------- --------
Net cash provided by/(used in)
operating activities.................... 1,391 1,907 1,100
---------- --------- ---------
Cash flows from investing activities
Proceeds of interest-bearing deposits
in other banks............................. 100 none none
Purchase of interest-bearing deposits
in other banks............................. none (100) none
---------- --------- --------
Net cash provided by/(used in) investing
activities.............................. 100 (100) none
---------- --------- --------
Cash flows from financing activities
Proceeds from issuance of common stock...... 1,629 1,021 1,155
Cash dividends paid......................... (2,985) (2,575) (2,245)
Cash dividends paid in lieu of
fractional shares.......................... (32) (11) (18)
Acquisition of treasury stock............... (267) (643) none
Proceeds from issuance of treasury stock.... 526 422 none
---------- --------- --------
Net cash provided by/(used in) financing
activities............................... (1,129) (1,786) (1,108
---------- --------- ---------
Increase (decrease) in cash............... 362 21 (8)
Cash
Beginning.................................. 28 7 15
--------- --------- --------
Ending....................................$ 390 $ 28 $ 7
========== ========= ========
Summary of Quarterly Financial Data (Unaudited)
Sterling Financial Corporation and Subsidiaries
The following is a summary of the quarterly results of operations for the
years ended December 31, 1993 and 1992. Net income per share of common
stock has been restated to retroactively reflect a three-for-two stock split
in the form of a 50% stock dividend paid in 1992 and a 5% stock dividend
in 1993.
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share)
1993
Quarter Ended
March June September December
31 30 30 31
<S> <C> <C> <C> <C>
Interest income..................$ 9,891 $ 10,009 $ 9,985 $ 10,207
Interest expense................. 3,870 3,775 3,761 3,636
-------- ------- -------- --------
Net interest income.............. 6,021 6,234 6,224 6,571
Provision for loan losses........ 820 748 469 393
-------- ------- -------- --------
Net interest income after
Provision for loan losses...... 5,201 5,486 5,755 6,178
Other income..................... 2,129 2,187 2,384 2,279
Other expenses.................. 4,904 5,160 5,383 5,601
-------- ------- -------- --------
Income before income taxes...... 2,426 2,513 2,756 2,856
Applicable income taxes......... 615 642 744 748
-------- ------- -------- --------
Net income......................$ 1,811 $ 1,871 $ 2,012 $ 2,108
======== ======== ======== ========
Net income per share of
common stock..................$ .64 $ .65 $ .70 $ .73
1992
Quarter Ended
March June September December
31 30 30 31
Interest income.................$ 10,414 $ 9,950 $ 9,973 $ 9,947
Interest expense................. 4,823 4,605 4,318 4,072
------- ------- ------- -------
Net interest income.............. 5,591 5,345 5,655 5,875
Provision for loan losses........ 557 785 536 418
------- ------- ------- -------
Net interest income after
provision for loan losses...... 5,034 4,560 5,119 5,457
Other income..................... 1,577 2,166 2,033 2,150
Other expenses................... 4,462 4,441 4,830 5,189
------- ------- ------- -------
Income before income taxes....... 2,149 2,285 2,322 2,418
Applicable income taxes.......... 551 603 550 627
------- ------- ------- -------
Net income......................$ 1,598 $ 1,682 $ 1,772 $ 1,791
======= ======= ======= =======
Net income per share of
common stock..................$ .57 $ .59 $ .63 $ .64
</TABLE>
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Incorporated by reference is the information appearing under the heading
"Information about Nominees and Continuing Directors" on pages 5 and 6 of the
1994 Proxy Statement and under the heading "Officers and Executive Officers"
on page 7 of the 1994 Proxy Statement.
Item 11 - Executive Compensation
Incorporated by reference is the information under the heading
"Compensation of Directors" on page 11 of the 1994 Proxy Statement and
under the heading "Executive Compensation" on page 7 of the 1994 Proxy
Statement.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference is the information appearing under the heading
"Voting of Shares of Principal Holders Thereof" on page 3 of the 1994 Proxy
Statement and under the heading "Information about Nominees and Continuing
Directors" on pages 5 and 6 of the 1994 Proxy Statement.
Item 13 - Certain Relationships and Related Transactions
Incorporated by reference is the information appearing under the heading
"Transactions with Directors and Executive Officers" on page 12 of the 1994
Proxy Statement and under "Notes to Consolidated Financial Statements - Note 17
- - Related Party Transactions" on page 34 of the Form 10-K for the year ended
December 31, 1993.
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports of Form 8-K
(a) The following documents are filed as part of this report:
1. The financial statements listed on the index set forth in Item 8 of
this Annual Report on Form 10-K are filed as part of this Annual
Report.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable, the data
are not significant or the required information is shown in the
financial statements or the notes thereto or elsewhere herein.
3. Exhibits
The following is a list of the Exhibits required by Item 601 of
Regulation S-K and are incorporated by reference herein or
annexed to this Annual Report.
1. Articles of Incorporation and Bylaws of Sterling Financial
Corporation incorporated by reference to Exhibit 3 of
Registration Statement on Form S-4(No. 33-12635) filed
with the Securities and Exchange Commission on
March 13, 1987.
2. Material Contracts - Employment Agreement of John E. Stefan,
President and Chief Executive Officer of Sterling
Financial Corporation and Bank of Lancaster County, N.A. -
incorporated by reference to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1987.
3. List of Subsidiaries
4. Consent of Auditors
(b) Reports on Form 8-K
A report on Form 8-K dated October 26, 1993 was filed during the third
quarter of 1993 pursuant to Item 5 of Form 8-K relating to a 5% stock
dividend declared on October 26, 1993, to shareholders of record,
November 17, 1993 and payable December 6, 1993.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
By:
John E. Stefan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Title Date
John E. Stefan President and Chief November 1, 1994
(John E. Stefan) Executive Officer; Director
Ronald L. Bowman Secretary/Treasurer November 1, 1994
(Ronald L. Bowman)
Director November 1, 1994
(Richard H. Albright, Jr.)
John E. Burkholder Director November 1, 1994
(John E. Burkholder)
Director November 1, 1994
(Robert H. Caldwell)
Howard E. Groff, Jr. Director November 1, 1994
(Howard E. Groff, Jr.)
J. Robert Hess Director November 1, 1994
(J. Robert Hess)
Calvin G. High Director November 1, 1994
(Calvin G. High)
Director November 1, 1994
(E. Glenn Nauman)
Glenn R. Walz Director November 1, 1994
(Glenn R. Walz)
EXHIBIT 22
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
1 East Main Street (National Banking Association)
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
(Presently inactive)
525 Greenfield Road
P.O. Box 10608
Lancaster, PA 17605-0608
Exhibit Index
Page
Exhibits Required Pursuant to (in accordance with
Item 601 of Regulation S-K sequential numbering system)
3. Articles of Incorporation and Bylaws of
Sterling Financial Corporation incorporated
by reference to Exhibit 3 of Registration
Statement on Form S-4 (No. 33-12635)
filed with the Securities and Exchange
Commission on March 31, 1987
10. Material Contracts - Employment Agreement of
John E. Stefan, President and Chief Executive Officer
of Sterling Financial Corporation
and Bank of Lancaster County, N.A. -
incorporated by reference to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1987
22. List of Subsidiaries 49
24. Consent of Auditors 23
