FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-16276
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2449551
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
(717) 581-6030
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $5.00 Par Value- 5,932,686 shares outstanding as of October 31,
1995.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1995 (Unaudited), December 31, 1994,
and September 30, 1994 (Unaudited). 3
Consolidated Statements of Income
for the Three and Nine Months ended September 30, 1995
and 1994 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 1995 and 1994 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signature Page 16
Subsidiaries of the Registrant 17
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, December 31, September 30,
<S> 1995 1994 1994
ASSETS (Unaudited) (Unaudited)
<C> <C> <C>
Cash and due from banks..........................................$ 32,434,396 $ 32,374,138 $32,121,974
Interest-bearing deposits in other banks......................... 24,004 23,535 16,477
Federal funds sold............................................... 4,650,000 none 11,750,000
Mortgage loans held for sale..................................... none 523,791 160,641
Investment Securities::
Securities held to maturity (market value-$174,517,549;
$156,046,709; $150,234,400).................................. 172,499,120 161,159,805 151,688,362
Securities available for sale.................................. 10,735,327 9,051,144 8,495,912
Loans............................................................ 412,300,388 393,656,882 381,156,560
Less: Unearned Income.......................................... (1,224,281) (1,008,457) (1,042,640)
Allowance for loan losses................................ (7,861,595) (7,640,000) (7,768,293)
Loans, Net....................................................... 403,214,512 385,008,425 372,345,627
Premises and Equipment........................................... 15,880,295 11,977,423 9,981,817
Other real estate owned.......................................... 285,728 759,372 234,037
Accrued interest receivable and prepaid expenses................. 8,903,895 8,954,172 8,307,872
Other assets..................................................... 27,021,686 23,562,861 22,005,055
TOTAL ASSETS.....................................................$ 675,648,963 $ 633,394,666 $ 617,107,774
============ ============ ============
LIABILITIES
Deposits:
Non-interest bearing..........................................$ 70,255,443 $ 73,458,916 $ 66,841,213
Interest-bearing.............................................. 504,040,503 463,543,087 461,429,063
TOTAL DEPOSITS................................................... 574,295,946 537,002,003 528,270,276
Interest-bearing demand notes issued to U.S. Treasury............ 2,875,243 2,913,870 3,000,000
Other liabilities for borrowed money............................. 25,317,057 19,172,526 20,176,281
Federal funds purchased.......................................... none 6,000,000 none
Mortgages payable and capitalized lease liability................ none none 1,162
Accrued interest payable and accrued expenses.................... 6,904,544 5,737,513 5,489,318
Other liabilities................................................ 4,985,815 5,284,231 4,782,771
TOTAL LIABILITIES................................................ 614,378,605 576,110,143 561,719,808
STOCKHOLDERS' EQUITY
Common Stock - (Par Value: $5.00)
No. Shares authorized: 10,000,000
No. Shares issued: 5,910,555; 5,874,417; 5,854,824
No. Shares outstanding: 5,908,655; 5,868,610 5,846,210........ 29,552,775 29,372,085 29,274,120
Capital Surplus.................................................. 9,442,973 8,544,365 8,072,100
Retained Earnings................................................ 21,457,422 19,113,958 17,783,291
Net unrealized gain on securities available for sale............. 874,188 419,614 470,970
Less: Treasury Stock (1,900, 5,807; 8,614) - at cost............. (57,000) (165,499) (212,515)
TOTAL STOCKHOLDERS' EQUITY....................................... 61,270,358 57,284,523 55,387,966
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................$ 675,648,963 $ 633,394,666 $ 617,107,774
============ ============ ============
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans...........................$ 9,658,248 $ 8,242,140 $ 28,126,490 $ 23,688,557
Interest on deposits in other banks.................. 515 304 1,409 1,653
Interest on federal funds sold....................... 216,387 101,816 380,973 185,581
Interest and dividends on investment securities:
Taxable........................................... 1,904,672 1,636,380 5,497,322 4,852,926
Tax-exempt........................................ 677,663 622,671 1,979,072 1,847,626
Dividends on stock................................ 51,716 43,059 149,952 132,774
TOTAL INTEREST INCOME.................................. 12,509,201 10,646,370 36,135,218 30,709,117
INTEREST EXPENSE
Interest on time certificates of deposit
of $100,000 or more................................ 210,621 190,238 694,455 404,121
Interest on all other deposits....................... 4,790,202 3,318,921 13,250,754 9,346,805
Interest on demand notes issued to the U.S. Treasury. 32,322 21,437 87,735 56,783
Interest on federal funds purchased.................. none none 57,046 1,836
Interest on other borrowed money..................... 495,988 327,308 1,473,329 936,889
Interest on mortgage indebtedness and obligations
under capitalized leases........................... none 93 none 554
TOTAL INTEREST EXPENSE................................. 5,529,133 3,857,997 15,563,319 10,746,988
NET INTEREST INCOME.................................... 6,980,068 6,788,373 20,571,899 19,962,129
Provision for loan losses............................ 182,000 309,000 459,000 916,000
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES......................................... 6,798,068 6,479,373 20,112,899 19,046,129
OTHER OPERATING INCOME
Income from fiduciary activities.................... 231,450 199,815 627,777 546,803
Service charges on deposit accounts................. 515,371 452,535 1,487,349 1,347,066
Other service charges, commissions and fees......... 440,160 410,344 1,225,440 1,108,035
Mortgage banking income............................. 109,743 124,888 371,015 512,973
Other operating income.............................. 830,677 576,370 2,284,926 1,737,262
TOTAL OTHER OPERATING INCOME........................... 2,127,401 1,763,952 5,996,507 5,252,139
OTHER OPERATING EXPENSES
Salaries and employee benefits...................... 3,274,246 3,097,624 9,596,390 8,995,793
Net occupancy expense............................... 456,419 354,917 1,242,016 1,117,661
Furniture and equipment expense..................... 412,206 340,525 1,151,890 1,027,688
FDIC insurance assessment........................... (29,142) 285,796 566,896 842,783
Other operating expenses............................ 1,695,447 1,414,013 4,748,032 4,250,532
TOTAL OTHER OPERATING EXPENSES......................... 5,809,176 5,492,875 17,305,224 16,234,457
Income before income taxes.......................... 3,116,293 2,750,450 8,804,182 8,063,811
Applicable income taxes............................. 793,851 645,953 2,207,800 1,997,900
NET INCOME.............................................$ 2,322,442 $ 2,104,497 $ 6,596,382 $ 6,065,911
=========== =========== =========== ===========
Earnings per common share:
Net Income........................................... $ .39 $ .36 $ 1.13 $ 1.04
Cash dividends declared per common share............. $ .17 $ .15 $ .72 $ .43
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities
Net Income...........................................................$ 6,596,382 $ 6,065,911
Adjustments to reconcile net income to net cash provided by/(used in)
operating activities:
Depreciation...................................................... 830,135 761,878
Accretion and amortization of investment securities............... 283,733 515,136
Provision for possible loan and lease losses...................... 459,000 916,000
(Gain) loss on disposition of premises and equipment.............. 280 (2,452)
(Gain) Loss on sale of mortgage loans............................. (101,041) (246,085)
Proceeds from sales of mortgage loans............................. 10,365,588 21,550,591
Originations of mortgage loans held for sale...................... (9,740,756) (18,033,772)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable and prepaid
expenses..................................................... 50,277 508,464
(Increase) decrease in other assets............................. (2,985,181) (1,257,778)
Increase (decrease) in accrued interest payable and
accrued expenses............................................. 932,857 (167,087)
Increase (decrease) in other liabilities....................... (298,416) (118,146)
Net cash provided by/(used in) operating activities.................... 6,392,858 10,492,660
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks................. 1,013,870 39,205,255
Purchase of interest-bearing deposits in other banks................... (1,014,339) (39,181,137)
Proceeds from maturities of investment securities...................... 25,794,984 24,211,607
Purchase of investment securities...................................... (38,413,467) (37,732,146)
Federal funds sold, net................................................ (4,650,000) 600,000
Net loans and leases made to customers................................. (18,665,087) (21,077,225)
Purchases of premises and equipment.................................... (4,746,125) (3,557,833)
Proceeds from sale of premises and equipment........................... 12,838 240,855
Net cash provided by/(used in) investing activities.................... (40,667,326) (37,290,624)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW and savings accounts... 9,829,735 (1,986,401)
Net increase (decrease) in time deposits............................... 27,464,208 24,576,779
Federal funds purchased, net........................................... (6,000,000) none
Net increase (decrease) in interest-bearing demand notes issued to
the U.S. Treasury.................................................... (38,627) none
Proceeds from borrowings............................................... 27,380,700 8,875,000
Repayments of borrowings............................................... (21,236,169) (8,108,764)
Repayments of mortgages payable and capitalized lease liability........ none (10,026)
Proceeds from issuance of common stock................................. 1,075,847 2,101,436
Cash dividends paid.................................................... (4,252,919) (2,505,274)
Acquisition of treasury stock.......................................... (1,038,601) (212,515)
Proceeds from issuance of treasury stock............................... 1,150,552 none
Net cash provided by/(used in) financing activities.................... 34,334,726 22,730,235
Increase (decrease) in cash and due from banks......................... 60,258 (4,067,729)
Cash and due from banks::
Beginning.............................................................. 32,374,138 36,189,703
Ending.................................................................$ 32,434,396 $ 32,121,974
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money....................$ 14,809,182 $ 10,556,634
Income taxes......................................................... 1,926,000 1,760,000
Supplemental Schedule of Noncash Investing and Financing Activities
Other Real Estate acquired in settlement of loans...................... 266,993 112,955
See accompanying notes to financial statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of
Sterling Financial Corporation (Sterling) have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 1995 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1995.
The consolidated financial statements of Sterling include the
accounts of its wholly owned subsidiary, Bank of Lancaster County, N.A.
and its wholly owned subsidiary, Town & Country, Inc. All significant
intercompany transactions are eliminated in the consolidation.
Effective January 1, 1994, Sterling adopted Statement of Financial
Accounting Standards (SFAS) No. 115 - Accounting for Certain Investments
in Debt and Equity Securities. SFAS No. 115 requires that these
securities be classified into one of three categories: held-to-maturity,
available-for-sale or trading. Specific accounting treatments apply to
each of the three categories. Securities held-to-maturity will be
reported at amortized cost, trading securities are reported at fair
value with unrealized gains and losses included in earnings and
available-for-sale will be reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component
of shareholders' equity. Sterling has segregated its investment
securities into two categories: those held-to-maturity and those
available-for-sale. The effect of adoption resulted in an increase to
shareholders' equity of $470,970 at September 30,1994. The net
unrealized gain on securities available-for-sale, net of taxes at
September 30, 1995 was $874,188 and at December 31, 1994 was $419,614.
There has been no impact on current year earnings or a restatement of
previously issued financial statements in connection with the adoption
of SFAS No. 115.
The Financial Accounting Standards Board (FASB) issued SFAS No. 112
- - Employers' Accounting for Postemployment Benefits which establishes
accounting standards for employers who provide benefits to former or
inactive employees after employment but before retirement. This
Statement was effective for fiscal years beginning after December 15,
1993. Sterling has determined that historically, expenditures for
benefits in this category have been immaterial. Consequently, adoption
of this Statement did not effect the financial position or results of
operations.
The Financial Accounting Standards Board Statement No. 118, an
ammendment of 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 contractural terms of the loan agreement. This Statement is
effective for financial statements for fiscal years beginning after
December 15, 1994. There was no significant impact on the financial
condition and results of operations as a result of adoption of SFAS No.
118 and No. 114.
The Financial Accounting Standards Board issued SFAS No. 116 -
Accounting for Contributions Received and Contributions Made. This
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 1994 and interim periods within those
fiscal years. Sterling has determined that the adoption of this
Statement will not affect its financial position or results of
operations.
In May 1995 the Financial Accounting Standards Board issued
Statement No. 122 - Accounting for Mortgage Servicing Rights - an
amendment of FASB Statement No. 65. Statement No. 122 modifies the
treatment of the capitalization of servicing rights by mortgage banking
enterprises. The change constitutes a simplification in procedures,
eliminating the separate treatment of servicing rights acquired through
loan origination and those acquired through purchase transactions, as
previously required under FASB Statement No. 65 - Accounting for Certain
Mortgage Banking Activities. This Statement prescribes a single
procedure for the capitalization of those rights acquired either through
loan origination or through purchase transactions where a mortgage
banking enterprise buys the servicing rights. The revisions in
Statement No. 122 are to be used in fiscal years beginning after
December 15, 1995. Sterling has not completed the analysis required to
estimate the impact of this statement.
Note 2 - Earnings Per Share
Earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding which
were 5,903,822 and 5,825,827 for 1995 and 1994 respectively. Figures
for 1994 were retroactively restated to reflect a two-for-one stock
split in the form of a 100% stock dividend paid in September 1994.
Note 3 - Dividends Declared
The regular cash dividend for the second quarter amounted to $.15
per share. In addition, a "special dividend" of $.25 per share was
declared in the second quarter of 1995. This special dividend reflects
in the year to date dividends declared.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets at September 30, 1995 amounted to $675,648,963 which
represents an increase of 9.5% over the $617,107,774 reported at
September 30, 1994. Total assets at September 30, 1995 increased
$42,254,297 or 6.7% over the $633,394,666 reported at December 31, 1994.
The investment securities portfolio reflects a 14.4% increase or
$23,050,173 during the twelve month period September 30, 1994 to
September 30, 1995. Effective January 1, 1994, Sterling adopted
Statement of Financial Accounting Standard No. 115 - Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 115
requires that these securities be classified into one of three
categories: held-to-maturity, available-for-sale or trading. Specific
accounting treatments apply to each of the three categories. Securities
held-to-maturity will be reported at amortized cost, trading securities
are reported at fair value with unrealized gains and losses included in
earnings and available-for-sale will be reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. Sterling has segregated its
investment securities into two categories: those held-to-maturity and
those available-for-sale. The effect of adoption resulted in an
increase to shareholders' equity of $470,970 at September 30, 1994. Net
unrealized gain on securities available-for-sale at September 30, 1995
amounted to $874,188. During the first nine months of 1995, there was
an increase of $13,023,498 or 7.7% from the $170,210,949 reported at
December 31, 1994.
Net loans have grown from $385,008,425 to $403,214,512 during the
nine month period ended September 30, 1995. This represents an increase
of 4.7% since December 31, 1994. Net loans increased from $372,345,627
at September 30, 1994 to $403,214,512 at September 30, 1995. This
represents an increase of $30,868,885 or 8.3%.
Premises and equipment increased $5,898,478 or 59.1% from
$9,981,817 at September 30, 1994 to $15,880,295 at September 30, 1995.
During the first nine months of 1995, total premises and equipment
increased $3,902,872 or 32.6% from $11,977,423 at December 31, 1994.
These increases are primarily the result of construction costs for the
new headquarters building for Sterling Financial Corporation and Bank of
Lancaster County, as well as furnishings and equipment for this
building.
Total deposits increased $46,025,670 or 8.7% from $528,270,276 at
September 30, 1994 to $574,295,946 at September 30, 1995. During the
first nine months of 1995, total deposits increased $37,293,943 from the
$537,002,003 reported at December 31, 1994. Noninterest-bearing
deposits increased $3,414,230 or 5.1% from $66,841,213 at September 30,
1994 to $70,255,443 at September 30, 1995. During the same period,
interest-bearing deposits increased $42,611,440 or 9.2%. Noninterest-
bearing deposits decreased $3,203,473 or 4.4% during the first nine
months of 1995 while interest-bearing deposits increased $40,497,416 or
8.7%.
Stockholders' equity increased $5,882,392 or 10.6% from the
$55,387,966 reported at September 30, 1994 to $61,270,358 at September
30, 1995. There was an increase of $3,985,835 or 7% from the
$57,284,523 reported at December 31, 1994. Contributing to these
increases were net income from operations and the issuance of stock
pursuant to a dividend reinvestment and stock purchase plan and an
employee stock plan. Net unrealized gain on securities available-for-
sale is included in calculating the increases above. However, regulatory
authorities have decided to exclude the net unrealized holding gains
and losses on available-for-sale securities from the definition of
common stockholders' equity for regulatory capital purposes. The
capital ratios reflect that exclusion. Total stockholders' equity to
total assets at the end of September 30, 1995 was 8.96% compared to
8.91% for the same period 1994. At December 31, 1993 the ratio was
8.99%.
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
guidelines require that banking organizations meet a minimum risk-based
capital and redefine the components of capital, categorize assets into
different risk classes and include certain off-balance sheet items in
the calculation of capital requirements. The components of capital are
called Tier 1 and Tier 2 capital. Tier 1 capital is the shareholders'
equity and Tier 2 capital is the allowance for loan losses. The risk-
based capital ratios are computed by dividing the components of capital
by risk-weighted assets. Risk-weighted assets are determined by
assigning various levels of risk to different categories of assets and
off-balance sheet items. The guidelines require Tier 1 capital of at
least 4% and total capital of 8% of risk-weighted assets. Tier 1
capital ratio was 11.26% and the total risk-based capital ratio was
12.51% at September 30, 1994 while at September 30, 1995 the Tier 1
risk-based capital ratio was 11.01% and the total capital ratio was
12.26%.
The following table reflects the various capital ratios for the
periods indicated:
September 30, December 31, September 30,
1995 1994 1994
"Statement"
Equity Capital 8.96% 8.99% 8.91%
Primary and
Total Capital 10.01% 10.07% 10.04%
"Risk-based"
Tier 1 Capital 11.01% 11.05% 11.26%
Total Capital 12.26% 12.30% 12.51%
Changes in the Allowance for Loan Losses for the nine months ended
September 30, 1995 and 1994 were as follows:
1995 1994
Balance at January 1, $ 7,640,000 $ 7,180,000
Provision for loan losses
charged to operating expenses 459,000 916,000
8,099,000 8,096,000
Losses charged to allowance 459,920 422,631
Recoveries credited to
allowance 222,515 94,924
Net charge-offs 237,405 327,707
Balance at September 30, $ 7,861,595 $ 7,768,293
=========== ============
Allowance as a percent of
period-end loans 1.99% 2.04%
The net charge-offs for the first nine months of 1995 were within
our expectations. Management makes a determination no less frequently
than quarterly as to the appropriate provision necessary to maintain an
adequate allowance for potential loan losses. The amount of provision
made is based upon a variety of factors including a specific allocation
by individual credits, loss experience for classified loans using
migration analysis, loss experience for homogenous loan pools, levels
and trends in delinquency, specific non-accruing and problem loans,
evaluation of economic conditions and forecasts and other factors deemed
appropriate by management. With respect to the variation in amounts
charged during the period of 1995 in comparison to the corresponding
period in the prior year, the specific reason for the improvement
relates to lower levels of delinquency and non-accruing loans, as well
as an improvement in the local economic conditions. While there can be
no assurance that material amounts of additional loan loss provisions
will not be required in the future, management believes that, based upon
information presently available, the amount of the allowance for
possible loan losses is adequate.
The following table presents information concerning the aggregate
amount of nonaccrual, past due and restructured loans:
September 30, December 31, September 30,
1995 1994 1994
Nonaccrual loans $1,539,967 $2,127,277 $3,071,418
Accruing loans,
past due 90 days
or more $ 215,515 $1,126,534 $ 493,505
Non-performing loans
to Total Loans .43% .83% .94%
Allowance for loan
losses to non-
performing loans 447.83% 234.80% 217.91%
The general policy has been to cease accruing interest on loans
when it is determined that a reasonable doubt exists as to the
collectibility of additional interest. Interest income on these loans
is only recognized to the extent payments are received. If interest
income had been recorded on such loans for the periods indicated, such
interest income would have been increased by approximately $139,653 and
$218,064 at September 30, 1995 and 1994 respectively, and $276,956 at
December 31, 1994. Interest income recorded on the nonaccrual loans in
1995 was $14,279 and 1994 was none. 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
September 30,1995, there were no such loans that had to be disclosed as
potential problem loans.
SFAS No. 118, "Accounting by Creditors for Impairmant of a Loan -
Income Recognition and Disclosures", an amendment of SFAS No. 114, was
implemented at the beginning of 1995. The Bank has defined impaired
loans as all loans on nonaccrual status, except those specifically
excluded from the scope of SFAS No. 114, regardless of the credit grade
assigned by loan review. When the measure of an impaired loan is less
than the recorded investment in the loan, the Bank will compare the
impairment to the existing allowance assigned to the loan. If the
impairment is greater than the existing allowance, the Bank will adjust
the existing allowance to reflect the greater amount or take a
corresponding charge to the provision for loan losses. If the
impairment is less than the existing allowance for a particular loan, no
adjustments to the allowance or the provision for loan and lease losses
will be made. There was no adjustment necessary for the impaired loans
for the period indicated.
The average amount of nonaccruals for the third quarter of 1995 was
$1,715,664.
The following table presents information concerning impaired loans
at September 30,1995:
Gross impaired loans which have allowances..........$1,539,967
Less: Related allowances for loan losses........... 458,718
Net impaired loans..................................$1,081,249
At September 30, 1995, there were no concentrations exceeding 10%
of total loans. A concentration is defined as amounts loaned to a
multiple number of borrowers engaged in similar activities which would
cause them to be similarly affected by changes in economic or other
conditions. There were no foreign loans outstanding at September 30,
1995.
Liquidity is the ability to meet the requirements of customers for
loans and deposit withdrawals in the most economical manner. Liquidity
must constantly be monitored because future customer demands for funds
are uncertain. The liquidity position remains relatively unchanged
since December 31, 1994. Management believes that the funds available
provides the liquidity to meet customer demands for funds.
Results of Operations
The following discussion analyzes the specific components affecting
the changes in net income for the periods analyzed.
Three months ended September 30, 1995 compared to three months ended
September 30, 1994
Net income for the third quarter of 1995 amounted to $2,322,442
compared to $2,104,497 for the third quarter of 1994. This represents
an increase of $217,945 or 10.4%. On a per share basis, income was $.39
compared to $.36.
Total interest income increased $1,862,831 or 17.5% while total
interest expense increased $1,671,136 or 43.3%. Increased volumes in
loans, as well as slightly higher interest rates were responsible for an
increase in interest and fees of $1,416,108 or 17.2% over 1994.
Interest on deposits with banks increased $211, while interest on
federal funds sold increased $114,571. Income on investment securities
increased $331,941 or 14.4% in 1995 as a result of increased volumes of
various investment securities, as well as a moderate increase in
interest rates.
Total interest expense amounted to $5,529,133 for this period
compared to $3,857,997 for the same period last year. This represents
an increase of $1,671,136 or 43.3%. Interest paid on time certificates
of deposit of $100,000 or more increased $20,383 or 10.7% in 1995 over
the same period in 1994, while interest paid on all other deposits
increased $1,471,281 or 44.3%. Interest expense on other interest
bearing liabilities increased $179,472 during the same period of time.
Increased volumes in interest-bearing deposits was the primary reason
for the increase in interest expense.
The provision for possible loan losses decreased $127,000 from a
charge of $309,000 in 1994 to $182,000 in 1995. The provision reflects
the amount deemed appropriate by management to provide an adequate
reserve to meet the present and foreseeable risk characteristics of the
loan portfolio.
Total other operating income increased $363,449 or 20.6%. An
increase was reflected in all categories of income with the exception of
mortgage banking income. Income from fiduciary activities increased
$31,635. Service charges on deposit accounts and other various service
charges increased $92,652. Other operating income increased $254,307.
Mortgage banking income decreased $15,145. The decrease in mortgage
banking income was a result of the increases in rates on mortgages
originated and sold, as well as decreased volumes of originations and
subsequent sales. The period in 1994 reflected larger volumes due to
refinancings. The gain on sales was not as great as the same period
last year.
Total other operating expenses increased $316,301 or 5.8%.
Increases of $176,622 in salaries and employee benefits; $173,183 in
occupancy and furniture and equipment expense; $281,434 in other
operating expenses and a decrease of $314,938 in the FDIC insurance
assessment resulted in the total increase. The decrease in the FDIC
insurance assessment was a result of the FDIC insurance premium refund
received during September 1995. Contributing to the increase in other
operating expenses were increases in marketing expense, professional
services, PA Shares tax, and various other operating expenses in the
normal course of business. Two new branch facilities were added in the
first quarter of 1995. These additions contributed to the increase in
occupancy and furniture and equipment expense.
Applicable income taxes increased $147,898 due in part to increases
in taxable income. The effective tax rate was 25.5% for the third
quarter of 1995 compared to 23.5% for 1994.
Nine months ended September 30, 1995 compared to nine months ended
September 30, 1994
Net income increased from $6,065,911 in September 30, 1994 to
$6,596,382 in September 30, 1995. This represents an increase of
$530,471 or 8.7%. Net income on a per share basis was $1.13 for nine
months ended September 30, 1995 compared to $1.04 for the same period
1994. Sterling's return on average assets was 1.35% for 1995 compared
to 1.36% for 1994. Return on average stockholders' equity was 14.85%
and 15.25% respectively for 1995 and 1994.
Total interest income increased $5,426,101 or 17.7%. Earning
assets increased $46,759,246 or 8.5%. Loans increased nearly $31
million or 8.1%, while securities increased over $23 million or 14.4%
over the same period last year. Increased volumes, as well as slightly
higher interest rates, generated the increase in interest income.
Interest and fees on loans increased $4,437,933. Interest on deposits
with banks decreased $244 while interest on federal funds sold increased
$195,392. Interest on investment securities increased $793,020. The
daily average balance on time deposits with banks was $26,100 in 1995
compared to $62,315 in 1994. During this time the daily average balance
of federal funds sold increased from $6,252,479 in 1994 to $8,534,798 in
1995. The daily average balance of investment securities was
$168,429,043 at September 30, 1995 and $154,819,712 at September 30,
1994.
Total interest expense amounted to $15,563,319 reflecting an
increase of $4,816,331 or 44.8% from the $10,746,988 reported in 1994.
Interest-bearing deposits increased 9.2%. Increased volumes in deposits
deposits resulted in an increase in interest expense of $4,194,283 or
43%. Interest paid on other interest-bearing liabilities increased
$622,048 primarily as a result of increased borrowings by Town &
Country, Inc. for leasing operations.
The provision for loan loss decreased $457,000 in 1995 over 1994.
The provision for loan losses is based upon the monthly review of the
loan portfolio.
Total other operating income increased $744,368 or 14.2% during
the first nine months of 1995 over the same period in 1994. An increase
was reflected in all categories of income with the exception of mortgage
banking income. Income from fiduciary activities increased $80,974 or
14.8%. Service charges on deposit accounts and other various service
charges increased $257,688 or 10.5%. Other operating income increased
$547,664 or 31.5%. Contributing to the increase in other income was
income realized from other real estate owned and an increase in income
from Visa operations. Additionally, an increase in income generated
from operating leases is also a contributor to the increase in other
operating income. Mortgage banking income decreased $141,958. The
decrease in mortgage banking income was a result of the increases in
rates on mortgages originated and sold, as well as decreased volumes of
originations and subsequent sales. The period in 1994 reflected larger
volumes due to refinancings. The gain on sales was not as great as the
same period last year.
Total other operating expenses rose $1,070,767 or 6.6% reflecting
normal increases experienced through growth. Increases in employee
related expenses of $600,597; $248,557 in occupancy and furniture and
equipment expense; $497,500 in other expenses, along with a decrease of
$275,887 in FDIC assessment comprise the increase in total other
operating expenses. Contributing to the increase in other operating
expenses were increases in marketing expense, PA Shares tax, telephone,
Visa fees, professional services, printing and supplies, postage and
various other operating expenses in the normal course of business. Two
new branch facilities were added in the first quarter of 1995. These
additions contributed to the increase in occupancy and furniture and
equipment expense. The decrease in FDIC insurance assessment was a
result of the FDIC insurance premium refund received during September
1995.
Applicable income taxes amounted to $2,207,800 in 1995 compared to
$1,997,900 in 1994. The increase in taxes is due to increases in taxable
income. The effective tax rate was 25.1% and 24.8% respectively for
1995 and 1994.
Three Months ended September 30, 1995 compared to three months ended
June 30, 1995
Net income increased $179,486 or 8.4% in the third quarter of 1995
over the second quarter of 1994. Net income for the three months ended
September 30, 1995 was $2,322,442 compared to $2,142,956 for the three
months ended June 30, 1995.
Total interest income increased $419,203 or 3.5% while total
interest expense increased $271,521 or 5.2%. This resulted in an
increase in net interest income of $147,682. Earning assets increased
$11,920,616 or 2% while interest-bearing liabilities increased
$6,745,087 or 1.3%. Both interest income and interest expense increased
due to these increased volumes.
The loan loss provision increased $56,000 over the second quarter
of 1995.
Total other operating income increased $163,705 or 8.3% over the
second quarter. Various service charges, commissions and fees increased
$47,970 while income from fiduciary activities increased $34,877 and
other income increased $116,871. Mortgage banking income decreased
$36,013 over the last quarter.
Total other operating expenses increased $227 over the second
quarter. There was an increase of $115,663 in employee related expenses
while occupancy and furniture and equipment expenses increased $100,975
and other expenses increased $110,750. The FDIC insurance assessment
decreased $327,161 as a result of the FDIC insurance premium refund
during September 1995.
Applicable income taxes increased $75,674 over the second quarter.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of September 30, 1995, there were no material pending legal
proceedings, other than ordinary routine litigation incidental to
business, to which the Corporation or its subsidiaries are a party or of
which any of their property is the subject.
Item 6 - Exhibits and Reports on Form 8-K
(a) EXHIBITS
21. Subsidiaries of Registrant
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K -
A report on Form 8-K dated August 16, 1995 was filed
August 17, 1995 pursuant to Item 5 of Form 8-K reporting that
Bank of Lancaster County, N.A., a wholly-owned subsidiary of
Sterling Financial Corporation, and CoreStates Bank, N.A., a
wholly-owned subsidiary of CoreStates Financial Corporation,
signed a definitive agreement for Bank of Lancaster County to
purchase three retail banking offices from CoreStates Bank.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: November 10, 1995 By:
John E. Stefan
Chairman of the Board,
President and Chief Executive
Officer
Date: November 10, 1995 By:
Jere L. Obetz
Senior VicePresident/Treasurer
Chief Financial Officer
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
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
101 North Pointe Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 32,434,396
<INT-BEARING-DEPOSITS> 24,004
<FED-FUNDS-SOLD> 4,650,000
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<INVESTMENTS-HELD-FOR-SALE> 10,735,327
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0
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<EXPENSE-OTHER> 17,305,224
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<INCOME-PRE-EXTRAORDINARY> 8,804,182
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<NET-INCOME> 6,596,382
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
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<LOANS-NON> 1,539,967
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