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 June 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 incorporation (I.R.S. Employer
or organization) Identification No.)
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)
Former Address: 525 Greenfield Road, P.O. Box 10608,Lancaster, PA 17605-0608
(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, $5.00 Par Value-5,910,555 shares outstanding as of July 31, 1995.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of June 30, 1995 (Unaudited), December 31, 1994,
and June 30, 1994 (Unaudited). 3
Consolidated Statements of Income
for the Three and Six Months ended June 30, 1995
and 1994 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Six Months ended
June 30, 1995 and 1994 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signature Page 17
Subsidiaries of the Registrant 18
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
<S> <C> <C> <C>
ASSETS (Unaudited) (Unaudited)
Cash and due form banks.................$ 37,716,095 $ 32,374,138 $ 29,964,363
Interest-bearing deposits in other banks. 17,786 23,535 10,293
Federal funds sold....................... 17,700,000 none 9,000,000
Mortgage loans held for sale............. none 523,791 74,456
Investment Securities::
Securities held to maturity (market value-
$154,387,301;$156,046,709;$143,774,572.. 153,524,817 161,159,805 144,788,869
Securities available for sale........... 10,893,491 9,051,144 7,647,916
Loans.................................... 406,007,825 393,656,882 376,718,918
Less: Unearned Income.................. (1,079,977) (1,008,457) (1,034,605)
Allowance for loan losses........ (7,785,170) (7,640,000) (7,544,625)
----------- ----------- -----------
Loans, Net............................... 397,142,678 385,008,425 368,139,688
----------- ----------- -----------
Premises and Equipment................... 14,342,451 11,977,423 9,247,633
Other real estate owned.................. 601,071 759,372 121,082
Accrued interest receivable and prepaid
expenses............................... 9,961,270 8,954,172 10,848,880
Other assets............................. 25,733,701 23,562,861 22,058,312
----------- ----------- -----------
TOTAL ASSETS............................$ 667,633,360 $ 633,394,666 $ 601,901,492
LIABILITIES ============ ============ ============
Deposits:
Non-interest bearing.................$ 68,824,141 $ 73,458,916 $ 66,072,367
Interest-bearing..................... 492,588,923 463,543,087 446,858,492
----------- ------------ ------------
TOTAL DEPOSITS.......................... 561,413,064 537,002,003 512,930,859
----------- ------------ ------------
Interest-bearing demand notes issued to
U.S. Treasury........................ 3,000,000 2,913,870 3,000,000
Other liabilities for borrowed money.... 29,898,793 19,172,526 19,980,730
Federal funds purchased................. none 6,000,000 none
Mortgages payable and capitalized lease
liability............................ none none 4,595
Accrued interest payable and accrued
expenses............................. 7,989,692 5,737,513 7,266,504
Other liabilities....................... 5,991,391 5,284,231 4,853,656
----------- ------------ ------------
TOTAL LIABILITIES....................... 608,292,940 576,110,143 548,036,344
STOCKHOLDERS' EQUITY ----------- ------------ ------------
Common Stock - (Par Value: $5.00)
No. Shares authorized: 10,000,000
No. Shares issued:
5,905,143; 5,874,417; 2,914,739
No. Shares outstanding:
5,890,552; 5,868,610; 2,914,739..... 29,525,715 29,372,085 14,573,695
Capital Surplus.......................... 9,308,423 8,544,365 22,146,796
Retained Earnings........................ 20,140,803 19,113,958 16,555,724
Net unrealized gain on securities
available for sale..................... 803,959 419,614 588,933
Less: Treasury Stock
(14,591; 5,807; none) - at cost........ (438,480) (165,499) none
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 59,340,420 57,284,523 53,865,148
TOTAL LIABILITIES AND STOCKHOLDERS' ----------- ----------- -----------
EQUITY................................$667,633,360 $633,394,666 $601,901,492
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<TABLE>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................$ 9,475,042 $ 7,952,266 $18,468,242 $15,446,417
Interest on deposits in other banks.............. 424 603 894 1,349
Interest on federal funds sold................... 138,440 26,082 164,586 83,765
Interest and dividends on investment securities:
Taxable...................................... 1,782,533 1,620,690 3,592,650 3,216,546
Tax-exempt................................... 643,494 607,834 1,301,409 1,224,955
Dividends on stock........................... 50,065 45,101 98,236 89,715
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME............................. 12,089,998 10,252,576 23,626,017 20,062,747
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more............................... 246,098 117,253 483,834 213,883
Interest on all other deposits.................. 4,451,066 3,022,185 8,460,552 6,027,884
Interest on demand notes issued to the
U.S. Treasury....... ......................... 25,484 17,810 55,413 35,346
Interest on federal funds purchased............. none 1,836 57,046 1,836
Interest on other borrowed money................ 534,964 308,420 977,341 609,581
Interest on mortgage indebtedness and
obligations under capitalized leases.......... none 186 none 461
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 5,257,612 3,467,690 10,034,186 6,888,991
----------- ----------- ----------- -----------
NET INTEREST INCOME............................... 6,832,386 6,784,886 13,591,831 13,173,756
Provision for loan losses....................... 126,000 425,000 277,000 607,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.................................... 6,706,386 6,359,886 13,314,831 12,566,756
----------- ----------- ----------- -----------
OTHER OPERATING INCOME
Income from fiduciary activities............... 196,573 179,106 396,327 346,988
Service charges on deposit accounts............ 513,435 453,992 971,978 894,531
Other service charges, commissions and fees.... 394,126 378,666 785,280 697,691
Mortgage banking income........................ 145,756 104,714 261,272 388,085
Other operating income......................... 713,806 593,581 1,454,249 1,160,892
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING INCOME..................... 1,963,696 1,710,059 3,869,106 3,488,187
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits................ 3,158,583 3,016,756 6,322,144 5,898,169
Net occupancy expense......................... 395,678 368,128 785,597 762,744
Furniture and equipment expense............... 371,972 351,906 739,684 687,163
FDIC insurance assessment..................... 298,019 278,494 596,038 556,987
Other operating expenses...................... 1,584,697 1,372,705 3,052,585 2,836,519
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES................... 5,808,949 5,387,989 11,496,048 10,741,582
----------- ----------- ----------- -----------
Income before income taxes.................... 2,861,133 2,681,956 5,687,889 5,313,361
Applicable income taxes....................... 718,177 685,689 1,413,949 1,351,947
----------- ----------- ----------- -----------
NET INCOME.......................................$ 2,142,956 $ 1,996,267 $ 4,273,940 $ 3,961,414
=========== =========== =========== ===========
Earnings per common share:
Net Income..................................... $ .36 $ .34 $ .72 $ .68
Cash dividends declared per common share...... $ .40 $ .14 $ .55 $ .28
</TABLE>
See accompanying notes to financial statements
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended
June 30,
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities
Net Income...........................................$ 4,273,940 $ 3,961,414
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 524,665 512,102
Accretion and amortization of investment securities 203,900 351,126
Provision for possible loan and lease losses...... 277,000 607,000
(Gain) loss on disposition of property and equipment 66 (1,352)
(Gain) loss on sale of mortgage loans............. (81,941) (212,062)
Proceeds from sales of mortgage loans............. 4,988,122 18,770,711
Origination of mortgage loans held for sale....... (4,382,390) (15,201,730)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable and prepaid expenses................ (1,007,098) (2,032,544)
(Increase) decrease in other assets............. (2,012,539) (1,198,080)
Increase (decrease) in accrued interest payable
and accrued expenses........................... 2,054,184 1,549,331
Increase (decrease) in other liabilities....... 707,160 (47,261)
----------- -----------
Net cash provided by/(used in) operating activities.. 5,545,069 7,058,655
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks 318,923 39,184,752
Purchase of interest-bearing deposits in other banks.. (313,174) (39,154,450)
Proceeds from maturities of investment securities..... 16,388,870 17,486,279
Purchase of investment securities..................... (10,217,789) (22,916,588)
Federal funds sold, net............................... (17,700,000) 3,350,000
Net loans and leases made to customers................ (12,411,253) (16,562,286)
Purchases of premises and equipment................... (2,889,759) (2,547,429)
Proceeds from sale of premises and equipment.......... none 213,311
------------ ------------
Net cash provided by/(used in) investing activities.. (26,824,182) (20,946,411)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW and savings accounts............................. 1,118,562 (6,040,083)
Net increase (decrease) in time deposits.............. 23,292,499 13,291,044
Federal funds purchased, net.......................... (6,000,000) none
Net increase (decrease) in interest-bearing demand
notes issued to the U.S. Treasury.................... 86,130 none
Proceeds from borrowings.............................. 25,212,000 25,375,000
Repayments of borrowings.............................. (14,485,733) (24,804,315)
Repayments of mortgages payable and capitalized lease
liability............................................ none (6,593)
Proceeds from issuance of common stock................ 913,486 1,475,706
Cash dividends paid................................... (3,247,095) (1,628,343)
Acquisition of treasury stock......................... (981,601) none
Proceeds from issuance of treasury stock.............. 712,822 none
------------ -----------
Net cash provided by/(used in) financing activities. 26,621,070 7,662,416
Increase (decrease) in cash and due from banks....... 5,341,957 (6,225,340)
Cash and due from banks::
Beginning............................................. 32,374,138 36,189,703
------------ -----------
Ending................................................$ 37,716,095 $ 29,964,363
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money....$ 9,387,639 $ 7,014,597
Income taxes......................................... 1,276,000 1,660,000
Supplemental Schedule of Noncash Investing
and Financing Activities
Other Real Estate acquired in settlement of loans...... 246,092 none
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 six-month period ended June 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
increase to shareholders' equity of $588,933 at June 30,1994. The net
unrealized gain on securities available-for-sale, net of taxes at June 30,
1995 was $803,959. 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 is 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 affect the financial
position or results of operations.
The Financial Accounting Standards Board Statement No. 118, an amendment 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 contractual 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.
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
5,901,196 and 5,815,174 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 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 June 30, 1995 amounted to $667,633,360 which represents an
increase of 10.9% over the $601,901,492 reported at June 30, 1994. Total assets
at June 30, 1995 increased $34,238,694 or 5.4% over the $633,394,666 reported at
December 31, 1994.
The investment securities portfolio reflects a 7.9% increase or $11,981,523
during the twelve month period June 30, 1994 to June 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
$588,933 at June 30, 1994. The net unrealized gain on
securities available-for-sale at June 30, 1995 amounted to $803,959. During the
first six months of 1995, there was a decrease of $5,792,641 or 3.4% from the
$170,210,949 reported at December 31, 1994.
Net loans have grown from $385,008,425 to $397,142,678 during the six month
period ended June 30, 1995. This represents an increase of 3.2% since December
31, 1994. Net loans increased from $368,139,688 at June 30, 1994 to
$397,142,678 at June 30, 1995. This represents an increase of $29,002,990 or
7.9%.
Premises and equipment increased $5,094,818 or 55.1% from $9,247,633 at
June 30, 1994 to $14,342,451 at June 30, 1995. During the first six months of
1995, total premises and equipment increased $2,365,028 or 19.7% from
$11,977,423 at December 31, 1994. Contributing to the increase in premises and
equipment was the construction costs for the new headquarters building for
Sterling Financial Corporation and Bank of Lancaster County.
Total deposits increased $48,482,205 or 9.5% from $512,930,859 at June 30,
1994 to $561,413,064 at June 30, 1995. During the first six months of 1995,
total deposits increased $24,411,061 or 4.5% from the $537,002,003 reported at
December 31, 1994. Noninterest-bearing deposits increased $2,751,774 or 4.2%
from $66,072,367 at June 30, 1994 to $68,824,141 at June 30, 1995. During the
same period, interest-bearing deposits increased $45,730,431 or 10.2%.
Noninterest-bearing deposits decreased $4,634,775 or 6.3% during the first
six months of 1995 while interest-bearing deposits increased $29,045,836 or
6.3%.
Stockholders' equity increased $5,475,272 or 10.2% from the $53,865,148
reported at June 30, 1994 to $59,340,420 at June 30, 1995. There was an
increase of $2,055,897 or 3.6% 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 June 30,
1995 was 8.78% compared to 8.86% for the same period 1994. At December 31, 1994
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 define 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. The Tier 1 capital ratio was 10.99% and the total risk-based capital
ratio was 12.24% at June 30, 1995 while at June 30, 1994 the Tier 1 capital
ratio was 11.00% and the total capital ratio was 12.26%.
The following table reflects the various capital ratios for the periods
indicated:
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994 June 30, 1994
<S> <C> <C> <C>
"Statement"
Equity Capital 8.78% 8.99% 8.86%
Primary and
Total Capital 9.84% 10.07% 9.99%
"Risk-based"
Tier 1 Capital 10.99% 11.05% 11.00%
Total Capital 12.24% 12.30% 12.26%
</TABLE>
Changes in the Allowance for Loan Losses for the six months ended June 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 277,000 607,000
$ 7,917,000 $ 7,787,000
Losses charged to allowance 306,864 287,841
Recoveries credited to allowance 175,034 45,466
Net charge-offs 131,830 242,375
Balance at June 30, $ 7,785,170 $ 7,544,625
=========== ===========
Allowance as a percent of
period-end loans 1.92% 2.01%
The net charge-offs for the first six 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 amount
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:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
<S> <C> <C> <C>
Nonaccrual loans $1,879,675 $2,127,277 $2,770,677
Accruing loans, past
due 90 days or more $ 207,337 $1,126,534 $ 740,890
Non-performing loans
to total loans .52% .83% .93%
Allowance for loan losses
to non-performing loans 373.0% 234.8% 214.9%
</TABLE>
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 $112,147 and $133,381 at June 30, 1995 and 1994 respectively,
and $276,956 at December 31, 1994. Interest income recorded on the nonaccrual
loans in 1995 was $6,008 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 June 30,1995,
there were no such loans that had to be disclosed as potential problem loans.
SFAS No. 118, "Accounting by Creditors for Impairment 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 and lease 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 second quarter of 1995 was
$1,909,523. .
The following table presents information concerning impaired loans at June
30, 1995:
Gross impaired loans which have allowances...............$1,879,675
Less: Related allowances for loan losses............... 537,821
----------
Net impaired loans.......................................$1,341,854
At June 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 June 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 June 30, 1995 compared to three months ended June 30, 1994
Net income for the second quarter of 1995 amounted to $2,142,956 compared
to $1,996,267 for the second quarter of 1994. This represents an increase of
$146,689 or 7.3%. On a per share basis, income was $.36 compared to $.34.
Total interest income increased $1,837,422 or 17.9% while total interest
expense increased $1,789,922 or 51.6%. Increased volumes in loans, as well as
an increase in interest rates generated an increase in interest and fees of
$1,522,776 or 19.1% over 1994. Interest on deposits with banks decreased
$179, while interest on federal funds sold increased $112,358. Income on
investment securities increased $202,467 or 8.9% 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 $5,257,612 compared to $3,467,690.
This represents an increase of $1,789,922 or 51.6%. Interest paid on time
certificates of deposit of $100,000 or more increased $128,845 or 109.9% in 1995
over the same period in 1994, while interest paid on all other deposits
increased $1,428,881 or 47.3%. Interest expense on other interest bearing
liabilities increased $232,196 during the same period of time. Increased
volumes in deposits and higher rates paid for these deposits was the primary
reason for the increase in interest expenses.
The provision for possible loan losses decreased $299,000 from a charge of
$425,000 in 1994 to $126,000 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 $253,637 or 14.8%. An increase was
reflected in all categories of other income. Income from fiduciary activities
increased $17,467. Service charges on deposit accounts and other various
service charges increased $74,903, other operating income increased $120,225 and
mortgage banking income increased $41,042. An increase in income from Visa
operations and an increase in income generated from operating leases contributed
to the increase in other operating income.
Total other operating expenses increased $420,960 or 7.8%. Increases of
$141,827 in salaries and employee benefits; $47,616 in occupancy and furniture
and equipment expense; $19,525 in FDIC insurance assessment and $211,992 in
other operating expenses constitute the total increase. Two new branch
facilities were added in the first quarter of 1995.
Applicable income taxes increased $32,488 due in part to increased taxable
income. The effective tax rate was 25.1% for the second quarter of 1995
compared to 25.6% for 1994.
Six months ended June 30, 1995 compared to six months ended June 30, 1994
Net income decreased from $3,961,414 in June 30, 1994 to $4,273,940 in June
30, 1995. This represents an increase of $312,526 or 7.9%. Net income on a per
share basis was $.72 for six months ended June 30, 1995 compared to $.68 for the
same period 1994. Sterling's return on average assets was 1.34% for 1995
compared to 1.35% for 1994. Return on average stockholders' equity was 14.51%
and 15.18% respectively for 1995 and 1994.
Total interest income increased $3,563,270 or 17.8%. Earning assets
increased $49,903,467 or 9.3% during this time. Loans increased approximately
$29.3 million or 7.8%, while securities increased nearly $12 million or 7.9%
over the same period last year. Increased volumes, as we generated the
increase in interest income. Interest and fees on loans increased
$3,021,825. Interest on deposits with banks decreased $455 while interest on
federal funds sold increased $80,821. Interest on investment securities
increased $461,079. The daily average balance on time deposits with banks was
$21,929 in 1995 compared to $80,100 in 1994. During this time the daily average
balance of federal funds sold increased from $4,878,453 in 1994 to $5,451,657 in
1995. The daily average balance of investment securities was $165,497,039 at
June 30, 1995 and $153,860,476 at June 30, 1994.
Total interest expense amounted to $10,034,186 reflecting an increase of
$3,145,195 or 45.7% from the $6,888,991 reported in 1994. Interest-bearing
deposits increased 10.2%. Higher interest rates paid and increased volumes in
deposits resulted in an increase in interest expense of $2,702,619 or 43.3%.
Interest paid on other interest-bearing liabilities increased $442,576 primarily
as a result of increased borrowings by Town & Country, Inc. for leasing
operations.
The provision for loan loss decreased $330,000 in 1995 over 1994. The
provision for loan losses is based upon the monthly review of the loan
portfolio.
Total other operating income increased $380,919 or 10.9% during the first
six 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 $49,339 or 14.2%. Service charges on
deposit accounts and other various service charges increased $165,036 or 10.4%.
Other operating income increased $293,357 or 25.2%. 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 $126,813. The decrease in mortgage
bankin income was a result of the continuing 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 sale was not as great as the same period last year.
Total other operating expenses rose $754,466 or 7% reflecting normal
increases experienced through growth. Increases in employee related expenses of
$423,975; $75,374 in occupancy and furniture and equipment expense; $39,051 in
FDIC insurance assessment and $216,066 in other expenses comprise the increase
in total other operating expenses. Contributing to the increase in other
operating expenses were increases in marketing expense, professional services,
Visa fees, telephone, PA Shares tax, 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.
Applicable income taxes amounted to $1,413,949 in 1995 compared to
$1,351,947 in 1994. The increase in taxes is due in part to increases in taxable
income. The effective tax rate was 24.9% and 25.4% respectively for 1995 and
1994.
Three Months ended June 30, 1995 compared to three months ended March 31, 1995
Net income increased $11,972 or .6% in the second quarter of 1995 over the
first quarter of 1995. Net income for the three months ended June 30, 1995 was
$2,142,956 compared to $2,130,984 for the three months ended March 31, 1995.
Net income on a per share basis was $.36 for the second quarter of 1995, as well
as the first quarter of 1995. Return on average assets was 1.32% for the second
quarter of 1995 compared to 1.35% for the first quarter of 1995.
Total interest income increased $553,979 or 4.8% while total interest
expense increased $481,038 or 10.1%. This resulted in an increase in net
interest income of $72,941. Earning assets increased $17,2
bearing liabilities increased $18,506,984 or 3.7%. Both interest income and
interest expense increased due to this increased volumes as well as rising
interest rates.
The loan loss provision decreased $25,000 over the first quarter of 1995.
Total other operating income increased $58,286 or 3.1% over the first
quarter. Various service charges, commissions and fees increased $57,864 while
income from fiduciary activities decreased $3,181 and other income decreased
$26,637. Mortgage banking income increased $30,240.
Total other operating expenses increased $121,850 or 2.1% over the first
quarter. There was a decrease of $4,978 in employee related expenses while
occupancy and furniture and equipment expenses increased $10,019 and other
expenses increased $116,809.
Applicable income taxes increased $22,405 over the first quarter as a
result of an increase in taxable income.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of June 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 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Sterling Financial Corporation was
held on April 28, 1995. The following individuals were elected to Sterling's
Board of Directors to hold office for the terms specified:
For a Term of One Year
Nominee In Favor Withheld
Joan R. Henderson 4,591,699 21,411
For a Term of Two Years
Nominee In Favor Withheld
J. Roger Moyer, Jr. 4,604,092 9,018
For a Term of Three Years
Nominee In Favor Withheld
Richard A. Albright, Jr. 4,604,657 8,453
Howard E. Groff, Jr. 4,604,698 8,412
John E. Stefan 4,604,700 8,410
Glenn R. Walz 4,604,700 8,410
There are five continuing directors whose terms of office will expire at
the 1996 or 1997 Annual Meeting. They are as follows:
John E. Burkholder Calvin G. High
Robert H. Caldwell E. Glenn Nauman
J. Robert Hess
The results of the voting on the following additional item were as follows:
Proposal to ratify the selection of Trout, Ebersole & Groff as the
Corporation's independent certified public accountants for the year ending
December 31, 1995.
Votes For Votes Against Abstentions
4,581,518 12,636 18,954
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 June 27, 1995 was
filed June 27, 1995 pursuant to Item 5 of Form 8-K announcing that a $.25
"Special Dividend" on common stock was declared on June 27, 1995 to
shareholders of record as of July 25, 1995 and payable August 15, 1995.
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: August 11, 1995 By: John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: August 11, 1995 By: Jere L. Obetz
Jere L. Obetz
Senior Vice President/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 (National Banking Association)
1 East Main Street
P.O. Box 0300
Strasburg, PA 17579
Town & Country, Inc. (Wholly owned Pennsylvania
Subsidiary of Bank of Lancaster
County, N.A.)
640 East Oregon Road
Lancaster, PA 17601
Sterling Mortgage Services, Inc. Pennsylvania
101 North Pointe Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
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