UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1995
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.)
101 North Point Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 581-6030
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. | |
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 29, 1996 was approximately $117,317,903.
The number of shares of Registrant's Common Stock outstanding on February 29,
1996 was 5,938,110.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting
of Shareholders 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........................................... 3
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.......................... 4
Item 6. Selected Financial Data.............................. 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 6
Item 8. Financial Statements and Supplementary Data.......... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 50
Part III
Item 10. Directors and Executive Officers of the Registrant... 51
Item 11. Executive Compensation............................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 51
Item 13. Certain Relationships and Related Transactions....... 51
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 52
Signatures...................................................... 53
PART I
Item 1 - Business
Sterling Financial Corporation
Sterling Financial Corporation (the "Corporation") is a Pennsylvania
business corporation, based in Lancaster, Pennsylvania. The Corporation was
organized on February 23, 1987 and became a bank holding company through the
acquisition on June 30, 1987 of all the outstanding stock of The First
National Bank of Lancaster County, now by change of name, Bank of Lancaster
County, N.A.
In addition, the Corporation also owns all of the outstanding stock of a
non-bank subsidiary, Sterling Mortgage Services, Inc., a mortgage service
company formed by the Corporation as a wholly owned subsidiary that presently
is considered inactive.
The Corporation provides a wide variety of commercial banking and trust
services through its wholly owned subsidiary, Bank of Lancaster County, N.A.
(the "Bank").
A partial source of operating funds for the Corporation is dividends
provided by the Bank. The Corporation's expenses consist principally of
operating expenses. Dividends paid to stockholders are, in part, obtained by
the Corporation from dividends declared and paid to it by the Bank.
As a bank holding company, the 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
The Bank is a full service commercial bank operating under charter from
the Comptroller of the Currency. 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 name was changed
to The First National Bank of Lancaster County and at the time of the holding
company reorganization on June 30, 1987, the name was changed to its present
name, Bank of Lancaster County, N.A. At December 31, 1995, the Bank had total
assets of $711,123,000 and total deposits of $610,170,000.
The main office of the Bank is located at 1 East Main Street, Strasburg,
Pennsylvania. In addition to its main office, the Bank had twenty-three (23)
branches in Lancaster County and one (1) branch in Chester County,
Pennsylvania in operation at December 31, 1995.
The Bank 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 City
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, the Bank was the first financial institution in Lancaster County to
join the MAC (Money Access Center) Network. The Bank now has 17 ATMs in
Lancaster County. The Bank became a participating member of the Plus System
in the Fall of 1984. This membership entitles the Bank's MAC/Plus cardholders
to have access to a nationwide network of over 119,000 ATMs.
The Bank introduced Discount Brokerage Service in July, 1983. This
service is offered in coordination with TradeStar Investments, Inc., an
affiliate of BHC Securities, Inc. and meets the needs of the commission-
conscious investor. In 1992 the Bank began offering mutual funds to
customers. We believe these services are important additions to our product
line and make a statement about our progressive 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 nearly $220 million at December 31, 1995.
On January 31, 1983, the Bank 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 six (36) people.
The Bank's principal market area is Lancaster County. Lancaster County is
the sixth largest county in Pennsylvania, in terms of population, behind
Philadelphia, Allegheny, Montgomery, Delaware and Bucks. Lancaster County,
with an area of 949 square miles has a population of approximately 443,000
people. Lancaster's tradition of economic stability has continued, with
agriculture, industry and tourism all contributing to the overall strength of
the economy. Lancaster County has one of the strongest and most stable
economies in the state. No single sector dominates the county 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 1995 was 4.3% which was lower than
the state (6.3%) and national (5.4%) levels. The 1995 average county jobless
rate was 4.2% of the work force, down from 4.4% in 1994 and 4.5% in 1993.
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 is subject to intense competition in all respects and areas of
its 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 Lancaster County and beyond. The institutions range in asset size
from approximately $173 million to over $41 billion. Five (5) banks in our
trade area exceed $5 billion in assets. Several banks are part of bank
holding companies. One bank is part of a bank holding company that has assets
in excess of $73 billion while another bank is part of a bank holding company
that has over $40 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, 1995, the Bank ranked, as measured by total deposits, as the
fourth largest in market share within Lancaster County of the banks doing
business in Lancaster County. The Bank is not, however, the fourth largest
bank in Lancaster County. As of December 31, 1995, the Bank had total assets
of over $711 million and ranked tenth 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, 1995, there were 379 persons employed by the Bank, of
which 279 were full-time and 100 were part-time. These figures do not include
employees of Town & Country, Inc. which employed 36 persons.
On August 11, 1995, the Bank and CoreStates Financial Corporation signed
a definitive agreement for the Bank to purchase from CoreStates three retail
banking offices in Ephrata, Leola and North Catasauqua, Pennsylvania. The
acquisition agreement was subsequently amended to remove the North Catasauqua
branch from the transaction. On December 1, 1995, the Bank completed the
transaction involving the acquisition of the Ephrata and Leola branches of
CoreStates. The acquisition involved primarily the assumption of certain
deposit liabilities in the approximate amount of $22 million and the
acquisition of certain assets in the approximate amount of $700,000.
The Bank 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
The Bank, in addition to its main office, had, at December 31, 1995, a
branch network of 24 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 twelve (12) locations are
occupied under leases and at three branches, the Bank owns the building, but
leases the land. One off-site MAC/ATM installation is occupied under lease.
All other properties were owned in fee. All real estate and buildings owned
by the Bank are free and clear of encumbrances. The Corporation owns no real
estate.
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 the Bank, 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. Aggregate annual
rentals for real estate paid during 1995 did not exceed three percent of its
operating expenses.
The Bank completed construction of a new headquarters building in 1995
which includes a branch banking office and also serves as headquarters for
Sterling Financial Corporation. Occupancy took place in July of 1995. The
three-story building contains approximately 53,000 square feet. The Bank and
the Corporation occupy approximately 43,000 square feet while nearly 10,000
square feet has been leased to other tenants. The building is owned in fee by
the Bank, free and clear of encumbrances.
Item 3 - Legal Proceedings
As of December 31, 1995, 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 by 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 1995.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The common stock of the 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, 1995 was 5,925,527. As of December 31, 1995,
the Corporation had approximately 2,744 holders of record of its common stock.
There is no other class of common stock authorized or outstanding. During
1995, the price range of the common stock known by management to have traded
was $28.75 to $31.50 per share. A regular $.15 per share dividend, as well as
a $.25 per share "Special Dividend", was declared in the second quarter of
1995 and is reflected in the table below. The Corporation is restricted as to
the amount of dividends that it can pay holders of its common stock by virtue
of the restrictions on the Bank's ability to pay dividends to the Corporation.
See Note 17 to the 1995 Consolidated Financial Statements elsewhere herein.
The Corporation declared a two-for-one stock split in the form of a 100% stock
dividend in 1994. 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. All
information has been retroactively restated to give effect to the two-for-one
stock split in 1994. In the absence of an active market, these prices may not
reflect the actual market value of the Corporation's stock for the periods
reported.
1995 Bid Ask Dividend
First Quarter $29.00 $30.25 $.15
Second Quarter 29.50 30.50 .40
Third Quarter 29.25 30.00 .17
Fourth Quarter 28.75 30.00 .17
1994 Bid Ask Dividend
First Quarter $23.125 $24.375 $.14
Second Quarter 24.25 25.125 .14
Third Quarter 27.00 28.50 .15
Fourth Quarter 28.75 30.75 .15
The prices used in the previous table represent bid and asked prices
furnished by F.J. Morrissey & Company; Hopper Soliday & Co., Inc.; Legg Mason
Wood Walker, Inc.; Prudential Securities; Ryan, Beck & Company; Sandler
O'Neill & Partners, L.P.; or The National Quotation Bureau. These quotations
reflect inter-dealer prices, without retail markup, markdown or commission.
The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan
for eligible shareholders who elect to participate in the plan. A copy of the
Prospectus for this plan can be obtained by writing to: Bank of Lancaster
County, N.A. Dividend Reinvestment and Stock Purchase Plan, 101 North Pointe
Boulevard, Lancaster, Pennsylvania 17604-4133.
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with
the Corporation's consolidated financial statements and the accompanying notes
presented elsewhere herein.
<TABLE>
Summary of Operations
(Dollars in thousands, except per share data)
<CAPTION>
Years Ended 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Interest income.............$ 48,850 $ 41,931 $ 40,092 $ 40,284 $ 42,689
Interest expense............ 21,153 14,926 15,042 17,818 22,793
------ ------ ------ ------ ------
Net interest income......... 27,697 27,005 25,050 22,466 19,896
Provision for loan losses... 534 1,081 2,430 2,296 1,789
------ ------ ------ ------ ------
Net interest income after
provision for loan losses.. 27,163 25,924 22,620 20,170 18,107
Other income................ 8,293 7,043 8,979 7,926 6,721
Other expenses.............. 23,423 22,053 21,048 18,922 16,995
------ ------ ------ ------ ------
Income before income taxes.. 12,033 10,914 10,551 9,174 7,833
Applicable income taxes..... 3,039 2,637 2,749 2,331 1,929
------ ------ ------ ------ ------
NET INCOME..................$ 8,994 $ 8,277 $ 7,802 $ 6,843 $ 5,904
====== ====== ====== ====== ======
Per Common Share:*
Net income................ $ 1.52 $ 1.42 $ 1.36 $ 1.21 $ 1.06
Cash dividends declared**. .89 .58 .54 .48 .44
Book value................ 10.79 9.76 8.58 7.56 6.75
Book value (excluding
SFAS 115)............... 10.51 9.69 8.58 7.56 6.75
Average shares outstanding 5,909,641 5,837,103 5,728,400 5,635,302 5,551,556
Ratios:
Return on average assets.. 1.36% 1.38% 1.41% 1.34% 1.25%
Return on average equity.. 15.02% 15.47% 16.90% 16.99% 16.63%
Financial Condition at
Year-End:
Assets.................... $ 711,154 $ 633,395 $ 587,883 $ 544,404 $ 495,234
Loans (net of unearned)... 426,312 392,649 359,365 348,529 317,730
Deposits.................. 610,105 537,002 505,680 473,184 434,523
Stockholders' Equity***... 63,909 57,285 49,467 42,794 37,737
Average Assets............ 659,335 600,263 555,216 510,439 471,488
<FN>
<F1>*Figures prior to 1994 were retroactively restated for various stock dividends, a
three-for-two stock split on November 30, 1992, a two-for-one stock split on September
1, 1994 and for comparative purposes.
<F2>**The dividend in 1995 includes a $.25 per share "Special Dividend" which was declared
in the second quarter of 1995.
<F3>***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 the audited financial statements and footnotes appearing
elsewhere in this report.
(All dollar amounts presented in the tables are in thousands, except per share
data.)
Results of Operations Summary
Net income for 1995 was $8,994,000, an increase of $717,000 or 8.7% over
the $8,277,000 earned in 1994. The results of 1994 were $475,000 or 6.1%
higher than the $7,802,000 reported in 1993. Earnings per share on net income
amounted to $1.52, $1.42, and $1.36 for the years ended 1995, 1994 and 1993
respectively. Earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which were
5,909,641, 5,837,103 and 5,728,400 for 1995, 1994 and 1993 respectively.
Figures prior to 1994 were retroactively restated to reflect a two-for-one
stock split in the form of a 100% stock dividend paid in 1994 and a 5% stock
dividend paid in December 1993.
Return on average total assets was 1.36% in 1995 compared to 1.38% in
1994 and 1.41% in 1993. Return on average stockholders' equity was 15.02% in
1995 compared to 15.47% in 1994 and 16.90% in 1993.
Growth in earning assets was the primary factor contributing to the
increased earnings in 1994, while in 1995, both volume and an increase in
rates contributed to increased earnings. As of December 31, 1995, earning
assets were approximately $629 million compared to $563 million at December
31, 1994 and $522 million at December 31, 1993. Average earning assets for
1995 increased nearly $49 million to approximately $587 million, up 9.1% from
the prior year. Similarly, in 1994 average earning assets increased
approximately $40 million, up 8% from 1993. The current year increase as well
as the increase in 1994 was primarily due to increases in both loans and
investments.
Average interest-bearing liabilities increased nearly $48 million or
10.2% in 1995 compared to an increase of nearly $29.1 million, or 6.6% in
1994.
The increase in average earning assets exceeded the increase in average
interest-bearing liabilities in both 1995 and 1994.
Provision for loan losses decreased to $534,000 in 1995 from $1,081,000
in 1994. The provision in 1993 was $2,430,000.
Non-interest income increased $1,250,000 in 1995. This compares to a
decrease of $1,936,000 in 1994. The decrease in 1994 was primarily a result
of a decrease in mortgage banking activities due to sudden increases in rates
on mortgages originated and sold, as well as decreased volumes of originations
and subsequent sales.
Non-interest expenses increased $1,370,000 or 6.2% in 1995 compared to an
increase of $1,005,000 or 4.8% in 1994 over 1993.
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth
of total assets and on non-interest expenses, which tend to rise during
periods of general inflation. The level of inflation over the last few years
has been declining.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act") addresses the recapitalization of the bank insurance fund and is
designed to limit risk within the banking industry. On August 8, 1995, the
Federal Deposit Insurance Corporation (the "FDIC") Board of Directors voted to
significantly reduce the deposit premiums paid by most Bank Insurance Fund
(the "BIF")-insured institutions to an average of approximately 4.4 cents per
$100 of domestic deposits once the FDIC confirmed that the BIF met a reserve
ratio of 1.25%. The FDIC determined that the BIF was fully recapitalized at
the end of May 1995. As a result, the Bank received a refund in an amount
equal to insurance overpayments for the months June through September. Under
the new assessment rate schedule for the BIF, the Bank's annual rate went to 4
cents per $100 of assessable deposits, down from the current rate of 23 cents
per $100. On November 14, 1995, the FDIC Board of Directors voted to reduce
the insurance premiums paid on deposits covered by the BIF, effective for the
first semiannual assessment period of 1996. Under the new rate structure for
the BIF, assessment rates will be lowered by 4 cents per $100 of assessable
deposits for all risk categories, subject to the statutory requirement that
all institutions pay at least $2,000 annually for FDIC insurance. Since the
Bank is included in the lowest premium paying category, the Bank will pay the
statutory annual minimum of $2,000. As a result of the above FDIC action, the
Bank experienced a reduction of the FDIC assessment in 1995 over 1994. Under
current assessment, the Bank should realize a reduction in 1996 over 1995.
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and Regulatory
Improvement Act may have a significant impact upon the Corporation. The key
provisions pertain to interstate banking and interstate branching as well as a
reduction in the regulatory burden on the banking industry. Since September
1995, bank holding companies may acquire banks in other states without regard
to state law. In addition, banks can merge with other banks in another state
beginning in June 1997. States may adopt laws preventing interstate branching
but, if so, no out-of-state bank can establish a branch in such state and no
bank in such state may branch outside the state. Pennsylvania recently
amended the provisions of its Banking Code to authorize full interstate
banking and branching under Pennsylvania law and to facilitate the operations
of interstate banks in Pennsylvania. As a result of legal and industry
changes, management predicts that consolidation will continue as the financial
services industry strives for greater cost efficiencies and market share.
Management believes that such consolidation may enhance its competitive
position as a community bank. There are numerous proposals before Congress to
modify the financial services industry and the way commercial banks operate.
However, it is difficult to determine at this time what effect such provisions
may have until they are enacted into law. Except as specifically described
above, management believes that the effect of the provisions of the
aforementioned legislation on the liquidity, capital resources and results of
operations of the Corporation will be immaterial. Management is not aware of
any other current specific recommendations by regulatory authorities or
proposed legislation, which if they were implemented, would have a material
adverse effect upon the liquidity, capital resources or results of operations,
although the general cost of compliance with numerous and multiple federal and
state laws and regulations does have and in the future may have a negative
impact on the Corporation's results of operations.
Aside from those matters described above, management does not believe
that there are any trends or uncertainties which would have a material impact
on future operating results, liquidity or capital resources nor is it aware of
any current recommendations by the regulatory authorities which if they were
to be implemented would have such an effect.
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 1995, 1994 and 1993.
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 1995 resulted from increased volumes
and interest rates in average earning assets. The increases in net interest
income during 1994 was due primarily to increases in average earning assets.
Average earning assets increased 9.1% in 1995 and 8% in 1994. These increases
were primarily funded with interest-bearing liabilities which increased 10.2%
in 1995 and 6.6% in 1994.
Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Yields
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S>
Assets <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits
with banks..............$ 30 $ 2 6.78% $ 55 $ 2 3.79% $ 690 $ 27 3.84%
Federal Funds sold......... 7,583 449 5.92% 6,247 264 4.24% 6,234 191 3.07%
Investment securities:
U.S. Treasury securities. 28,696 1,675 5.84% 26,560 1,471 5.54% 21,447 1,253 5.84%
U.S. Government agencies. 27,999 1,761 6.29% 23,353 1,395 5.97% 21,832 1,458 6.68%
State and Municipal
securities.............. 48,884 4,083 8.35% 44,442 3,781 8.51% 37,451 3,440 9.18%
Other securities......... 66,990 4,294 6.41% 62,476 3,961 6.34% 52,941 3,726 7.04%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total investment securities172,569 11,813 6.85% 156,831 10,608 6.76% 133,671 9,877 7.39%
Loans:
Commercial...............226,032 21,284 9.42% 207,844 17,743 8.54% 195,562 16,327 8.35%
Consumer.................106,171 9,766 9.20% 103,572 8,861 8.56% 99,761 8,878 8.90%
Mortgages................ 32,739 2,771 8.46% 26,704 2,274 8.51% 27,714 2,490 8.99%
Leases................... 41,974 4,350 10.36% 36,802 3,667 9.96% 34,533 3,658 10.59%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total loans................406,916 38,171 9.38% 374,922 32,545 8.68% 357,570 31,353 8.77%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total earning assets.......587,098 50,435 8.59% 538,055 43,419 8.07% 498,165 41,448 8.32%
Allowance for loan losses.. (7,155) (7,472) (5,984)
Cash and due from banks.... 27,763 27,746 26,863
Other non-earning assets... 51,629 41,934 36,172
------- -------- --------
Total non-earning assets... 72,237 62,208 57,051
------- -------- ------ -------- -------- ------ -------- -------- ------
Total assets..............$659,335 $ 50,435 7.65% $600,263 $ 43,419 7.23% $555,216 $ 41,448 7.47%
======== ======== ====== ======== ======== ====== ======== ======== ======
Liabilities and Stockholders' Equity
Deposits:
Demand deposits
Noninterest-bearing....$ 66,133 0 0.00% $64,446 $ 0 0.00% $ 57,869 $ 0 0.00%
Demand deposits
Interest-bearing........239,036 7,181 3.00% 229,693 5,375 2.34% 211,406 5,484 2.59%
Savings deposits......... 54,982 1,333 2.42% 58,864 1,324 2.25% 45,302 1,222 2.70%
Time deposits............194,512 10,579 5.44% 158,994 6,884 4.33% 163,497 7,085 4.33%
------- -------- ------ -------- ------- ------ -------- ------- ------
Total deposits.............554,663 19,093 3.44% 511,997 13,583 2.65% 478,074 13,791 2.88%
Other borrowed funds....... 29,143 2,060 7.07% 22,144 1,343 6.06% 20,367 1,251 6.15%
Other liabilities.......... 14,856 12,227 10,613
Stockholders' equity....... 60,673 53,895 46,162
------- -------- ------ -------- ------- ------ -------- ------- ------
Total liabilities and
Stockholders' equity....$659,335 $ 21,153 3.21% $600,263 $ 14,926 2.49% $555,216 $ 15,042 2.71%
======== ======== ====== ======== ======== ====== ======== ======== =====
Net interest income/
Average total assets...... $ 29,282 4.44% $ 28,493 4.75% $ 26,406 4.76%
Net interest income/
Average earning assets.... $ 29,282 4.99% $ 28,493 5.30% $ 26,406 5.30%
</TABLE>
Net interest income on a fully taxable equivalent basis increased by
$789,000 in 1995 compared to an increase of $2,087,000 in 1994. Table 2
indicates that of the increase in 1995, $1,803,000 was the result of increased
volumes. This figure was reduced by $1,014,000 as a result of increases in
interest rates. The increase in interest rates had more of an effect on
interest paid on interest-bearing liabilities than on earning assets. The
increase in 1994 resulted in $2,453,000 from increased volumes while a
reduction of $366,000 was realized from decreases in interest rates.
For the year 1995 compared to 1994, loan volumes, on average, increased
nearly $32 million and income earned on loans increased $5,626,000, tax
adjusted. This compares to a volume increase of over $17.3 million in 1994
over 1993 with an increase in income earned on loans amounting to $1,192,000.
As a result of increased volumes in 1995, nearly $2.8 million contributed to
the increase in income on loans. Rates charged on loans began to increase in
1994 and into 1995. The increase in rates generated over $2.8 million of the
total increase in income earned on loans. Increased volumes in loans in 1994
contributed over $1.5 million to the increase in income while a reduction of
$330,000 was realized due to decreases in interest rates.
Total investment securities increased over $21.6 million in 1995 over
1994 compared to an increase of over $23.7 million in 1994 over 1993. The
increased volumes in both periods were primarily responsible for the increase
in interest income on securities. Table 2 indicates that of the increase in
interest income in 1995, $1,064,000 was the result of increased volumes while
$141,000 resulted from an increase in interest rates. Increased volumes in
securities in 1994 contributed over $1.7 million to the increase in income
while nearly a $1 million reduction was generated due to decreases in interest
rates.
Interest-bearing deposits, on average, grew over $41 million in 1995. In
addition to an increase in interest expense due to volumes, interest expense
also increased due to changes in interest rates. Average deposits grew over
$27 million in 1994. The lower cost of funds for this period reflect a
decrease in interest expense over the 1993 period. The assumption of certain
deposit liabilities as a result of the acquisition of two retail banking
offices from CoreStates on December 1, 1995 added over $20 million in
interest-bearing deposits.
Table 2 - Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below, which is
computed on a tax equivalent basis, analyses changes in net interest income
for the periods indicated by their rate and volume components.
<TABLE>
1995 Versus 1994 1994 Versus 1993
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Interest on deposits
with banks...........$ (1) $ 1 $ 0 $ (25) $ 0 $ (25)
Interest on federal
funds sold........... 57 128 185 0 73 73
Interest on investment
securities........... 1,064 141 1,205 1,711 (980) 731
Interest and fees on
loans................ 2,777 2,849 5,626 1,522 (330) 1,192
------- -------- --------- -------- -------- -------
Total interest income...$ 3,897 $ 3,119 $ 7,016 $ 3,208 $ (1,237) $ 1,971
------- -------- --------- -------- -------- -------
Interest Expense
Interest on
interest-bearing
demand deposits......$ 219 $ 1,587 $ 1,806 $ 474 $ (583) $ (109)
Interest on
savings deposits...... (87) 96 9 366 (264) 102
Interest on
time deposits......... 1,538 2,157 3,695 (195) (6) (201)
Interest on
borrowed funds........ 424 293 717 110 (18) 92
------- -------- -------- -------- --------- --------
Total interest expense..$ 2,094 4,133 6,227 $ 755 $ (871) $ (116)
------- -------- -------- -------- --------- --------
Net interest income.....$ 1,803 $ (1,014) $ 789 $ 2,453 $ (366) $ 2,087
======= ======== ======== ======== ======== ========
</TABLE>
Provision for Loan Losses
The provision for loan losses charged against earnings was $534,000 in
1995 compared to $1,081,000 in 1994 and $2,430,000 in 1993. 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 $394,000 in 1995,
$621,000 in 1994 and $650,000 in 1993.
The provision for loan loss was greater during 1993 in order for the Bank
to provide an adequate reserve based on the evaluation of individual loans and
their current characteristics and current economic condition. The reserve
accordingly was increased to 2.00% of net loans outstanding. The allowance for
loan losses as a percent of loans at December 31, 1994 was 1.95%, while at
December 31, 1995 it was 1.82%.
Non-Interest Income
Table 3 - Non-Interest Income
<TABLE>
<CAPTION>
1995/1994 1994/1993
Increase Increase
(Decrease) (Decrease)
1995 Amount % 1994 Amount % 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Income from fiduciary activities..$ 856 $ 114 15.4% $ 742 $ 103 16.1%$ 639
Service charges on deposit
accounts....................... 2,010 212 11.8% 1,798 (93) (4.9%) 1,891
Other service charges, commissions
and fees....................... 1,716 177 11.5% 1,539 (38) (2.4%) 1,577
Mortgage banking income........... 525 (110) (17.3%) 635 (1,800) (73.9%) 2,435
Other operating income............ 3,186 857 36.8% 2,329 (100) (4.1%) 2,429
Investment securities gains or
(losses)....................... 0 0 0% 0 (8)(100.0%) 8
----- ------ ------ ------ ------- ------ ------
Total.............................$8,293 $ 1,250 17.7% $7,043 $(1,936) (21.6%)$8,979
====== ======= ====== ====== ====== ====== ======
</TABLE>
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 $856,000 in 1995 was
$114,000 or 15.4% greater than the $742,000 recorded in 1994. Income in 1994
was $103,000 or 16.1% greater than the $639,000 recorded in 1993. Fees
increased primarily due to increased transaction volumes.
Service charges on deposit accounts increased to $2,010,000, an increase
of $212,000 or 11.8% over 1994 service charge income of $1,798,000. Service
charges on deposit accounts in 1994 was $93,000 less than the $1,891,000
reported for 1993.
Other service charges, commissions and fees amounted to $1,716,000 in
1995 compared to $1,539,000 in 1994 and $1,577,000 in 1993. A major
contributor to the increase in 1995 was certain fees relating to VISA
operations.
Income from mortgage banking activities in the amount of $525,000
decreased $110,000 over 1994, due primarily to an increase in interest rates
which had an effect on the number of refinancings. This compares to a
decrease of $1,800,000 in 1994 over 1993. In 1990 the Bank began originating
and selling qualified residential mortgage loans in the secondary market. All
mortgages sold were originated by the Bank's network of 25 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 $142 million as of December 31, 1995.
The year 1993 was outstanding for the Bank's mortgage banking operation,
with $72 million in mortgage sales from the Bank's marketplace. These
operations contributed $2.4 million of other income in 1993, compared to
$635,000 in 1994 and $525,000 in 1995. The falling interest rate environment
through most of the 1993 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. The decrease in
mortgage banking income in 1995 and 1994 was a result of the sudden and
continuing increases in rates on mortgages originated and sold, as well as
decreased volumes of originations and subsequent sales. The period in 1993
reflects larger volumes due to refinancings. Mortgage sales amounted to
approximately $24 million in 1994 and $16.1 million in 1995.
Other operating income increased $857,000 to $3,186,000 in 1995 from
$2,329,000 in 1994. Other income for 1993 was $2,429,000. A major
contributor to other operating income is income generated from operating
leases. Income on operating leases increased over $476,000 in 1995 over 1994.
Another contributor to the increase in 1995 was nearly a $270,000 gain on
other real estate sold.
Investment securities transactions reflect a gain of $8,000 in 1993. The
gain listed for this year 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
during 1995, 1994 or 1993.
The Bank does not engage in trading activities. Therefore, there was no
impact on current year earnings or a restatement of previously issued
financial statements in connection with the adoption of SFAS 115.
As a result of the above, total other operating income increased
$1,250,000 in 1995 over 1994 compared to a decrease of $1,936,000 in 1994 over
1993.
Non-Interest Expense
Table 4 - Non-Interest Expense
<TABLE>
<CAPTION>
1995/1994 1994/1993
Increase Increase
(Decrease) (Decrease)
1995 Amount % 1994 Amount % 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits...$13,040 $ 776 6.3% $12,264 $ 698 6.0% $11,566
Net occupancy expense............. 1,721 244 16.5% 1,477 122 9.0% 1,355
Furniture & equipment expense..... 1,605 226 16.4% 1,379 126 10.1% 1,253
FDIC insurance assessment......... 622 (506)(44.9%) 1,128 76 7.2% 1,052
Other operating expense........... 6,435 630 10.9% 5,805 (17) (.3%) 5,822
----- ------ ----- ----- ----- ----- -----
Total............................$23,423 $ 1,370 6.2% $22,053 $1,005 4.8% $21,048
======= ======= ===== ======= ====== ===== =======
</TABLE>
Non-interest expense consists of salaries and employee benefits, net
occupancy expense, furniture and equipment expense and other operating
expenses.
Total operating expenses for 1995 were $23,423,000 compared to
$22,053,000 in 1994. This represented an increase of $1,370,000 or 6.2%.
This compares to an increase of $1,005,000 or 4.8% in 1994.
The largest component of the Corporation's other operating expense is
salaries and employee benefits which increased to $13,040,000 in 1995 or
$776,000 (6.3%) over the $12,264,000 reported in 1994. In 1994, expenses
increased $698,000 (6%) over the $11,566,000 reported in 1993. The increase
in 1995 and 1994 was primarily due to increases in staff as well as increases
in wages and increased costs of employee benefits. During 1995, three branch
offices were opened and two branch offices were acquired from another
financial institution.
Occupancy expense increased $244,000 or 16.5% to $1,721,000 in 1995 from
$1,477,000 in 1994. By comparison, during 1994, there was an increase of
$122,000 or 9%. Two new branch facilities were added in late 1993 which added
to the expense of 1994. In 1995, the Bank completed construction of a new
headquarters building which also includes branch banking facilities. In
addition, two new branch offices were opened and two branch offices were
acquired from another financial institution in 1995. These additions
contributed to the increase in occupancy expense.
Furniture and equipment expenses were $1,605,000 for 1995 and $1,379,000
for 1994. This represents an increase of $226,000 or 16.4%. Reflected in
this increase is an increase of depreciation expense in 1995 amounting to
$138,000. Service contracts on equipment was another major contributor to the
increase in 1995. Expenses in 1994 were $126,000 greater than those recorded
in 1993.
There was a significant reduction in the FDIC insurance assessment in
1995 over 1994. The assessment for 1995 was $622,000 compared to $1,128,000
in 1994. This reduction was a result of a new assessment rate schedule
approved by the FDIC. Under the new assessment rate schedule, the Bank's
annual rate went to 4 cents per $100 of assessable deposits, down from the
rate of 23 cents per $100. The new rate was effective June 1, 1995.
Other operating expenses increased $630,000 or 10.9% in 1995 compared to
a decrease of $17,000 in 1994. The increase noted in 1995 is in line with
rising costs associated with acquiring services covered in this category of
expense. Expenses covered in this category include postage, Pennsylvania
Shares Tax, advertising and marketing, professional services, telephone,
stationery and forms, ATM fees, VISA fees, insurance premiums, expense of
other real estate owned and other expense categories not specifically
identified on the income statement. Contributing to the increase in 1995 were
increases in marketing expense, Pennsylvania Shares Tax, professional
services, postage, stationery and forms, VISA fees, telephone expense and
expenses related to other real estate owned.
Income Taxes
Income tax expense totaled $3,039,000 in 1995 compared to $2,637,000 in
1994 and $2,749,000 in 1993. These increases resulted from higher levels of
taxable income and increased earnings each year. The Corporation's effective
tax rate was 25.3% in 1995 compared with 24.2% in 1994 and 26.1% in 1993.
Utilization of tax credits in 1995 and 1994 resulted in a lower effective tax
rate than 1993 even though income before taxes increased in each of those two
years.
Financial Condition
Investment Portfolio
Table 5 - Investment Securities at Cost
The following table shows the amortized cost of the held-to-maturity
securities owned by the Corporation as of the dates indicated. Investment
securities are stated at cost adjusted for amortization of premiums and
accretion of discounts.
December 31,
1995 1994 1993
U.S. Treasury securities................$ 18,837 $ 28,225 $ 23,996
Obligations of other U.S. Government
agencies and corporations............. 18,473 24,101 22,880
Obligations of states and political
subdivisions.......................... 40,212 50,472 43,491
Mortgage-backed securities.............. 3,854 5,122 5,834
Other bonds, notes and debentures....... 38,944 50,811 47,959
--------- --------- ---------
Subtotal................................ 120,320 158,731 144,160
Non-marketable securities (1)........... 2,565 2,429 2,305
--------- --------- ---------
Total...................................$ 122,885 $ 161,160 $ 146,465
========= ========= =========
(1) Prior to adoption of SFAS 115 at January 1, 1994, all equity securities
were included in this category.
The following table shows the amortized cost and fair value of the
available-for-sale securities owned as of the dates indicated. During
December, 1995 the Corporation was given the opportunity for a one-time
transfer of securities from the held-to-maturity category to the available-
for-sale category. As the table indicates, securities were moved to the
available-for-sale category for U.S. Treasury securities, obligations of other
U.S. Government agencies and corporations, obligations of states and political
subdivisions and other bonds, notes and debentures. A total of $54,218,000
was moved from held-to-maturity to available-for-sale.
December 31,
1995 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- -------- --------
U.S. Treasury securities............$ 11,046 $ 11,155 $ 1,472 $ 1,457
Obligations of other U.S. Government
agencies and corporations.......... 15,489 15,632 none none
Obligations of states and political
subdivisions....................... 19,622 19,945 none none
Mortgage-backed securities........... 1,249 1,242 1,344 1,256
Other bonds, notes and debentures.... 19,013 19,247 5,593 5,501
-------- --------- -------- --------
Subtotal............................. 66,419 67,221 8,409 8,214
Equity securities.................... 88 1,746 7 837
-------- --------- -------- --------
Total................................$ 66,507 $ 68,967 $ 8,416 $ 9,051
======== ========= ======== ========
Table 6 - Investment Securities (Yields)
The following table shows the maturities of held-to-maturity debt
securities at amortized cost as of December 31, 1995 and approximate weighted
average yields of such securities. Yields are shown on a tax equivalent
basis, assuming a 34% Federal income tax rate.
<TABLE>
<CAPTION>
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....$ 5,861 6.31% $ 12,976 5.68% $ --- --% $ --- ---% $ 18,837 5.88%
Obligations of
other U.S.
Government
agencies and
corporations.. 3,742 6.67% 12,237 5.82% 1,994 7.25% 500 7.50% 18,473 6.19%
Obligations of
states and
political sub-
divisions..... 3,602 8.85% 14,039 8.36% 16,207 7.97% 6,364 7.77% 40,212 8.15%
Mortgage-backed
securities.... 475 7.94% 2,569 7.91% 615 8.52% 195 8.07% 3,854 8.02%
Other bonds,
notes and
debentures.... 11,544 6.05% 27,151 6.29% 249 7.04% --- ---% 38,944 6.22%
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
$ 25,224 6.64% $ 68,972 6.57% $ 19,065 7.90% $ 7,059 7.76% $120,320 6.86%
======== ====== ======== ====== ======== ====== ======= ====== ======== ======
</TABLE>
The following table shows the maturities of available-for-sale debt
securities at amortized cost as of December 31, 1995 and approximate weighted
average yields of such securities. Yields are shown on a tax equivalent
basis, assuming a 34% Federal income tax rate.
<TABLE>
<CAPTION>
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities....$ 1,000 7.24% $ 9,537 5.94% $ 509 7.59% $ --- ---% $ 11,046 6.13%
Obligations of
other U.S.
Government
agencies and
corporations.. 2,002 6.32% 9,389 6.38% 4,098 6.79% --- ---% 15,489 6.48%
Obligations of
states and
political sub-
divisions..... --- ---% 1,699 7.62% 11,256 7.71% 6,667 8.20% 19,622 7.87%
Mortgage-backed
securities.... 248 8.35% 1,001 5.78% --- ---% --- ---% 1,249 6.29%
Other bonds,
notes and
debentures.... 2,359 6.87% 16,654 6.44% --- ---% --- ---% 19,013 6.49%
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
$ 5,609 6.80% $ 38,280 6.34% $ 15,863 7.47% $ 6,667 8.20% $ 66,419 6.83%
======== ====== ======== ====== ======== ====== ======= ====== ======== ======
</TABLE>
Loans
Table 7 - Loan Portfolio
The following table sets forth the composition of the Corporation's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural..............$ 228,058 $ 208,918 $ 191,431 $ 172,482 $ 152,726
Real estate-construction... 6,378 8,542 10,265 16,044 12,147
Real estate-mortgage....... 33,124 30,505 22,335 30,445 31,943
Consumer................... 116,210 106,921 101,256 99,444 94,404
Lease financing (net of
unearned income)......... 43,904 38,771 35,443 32,768 31,283
---------- ---------- ---------- ---------- ----------
Total loans.................$ 427,674 $ 393,657 $ 360,730 $ 351,183 $ 322,503
========== ========== ========== ========== ==========
</TABLE>
Table 8 - Loan Maturity and Interest Sensitivity
The following table sets forth the maturity and interest sensitivity of
the loan portfolio as of December 31, 1995:
<TABLE>
<CAPTION>
After one
Within but within After
one year five years five years Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural..$104,193 $ 61,575 $ 62,290 $ 228,058
Real estate-construction................ 5,186 1,192 --- 6,378
--------- --------- --------- ---------
$109,379 $ 62,767 $ 62,290 $ 234,436
========= ========= ========= =========
</TABLE>
Loans due after one year totaling $76,957,000 have variable interest
rates. The remaining $48,100,000 in loans have fixed rates.
Table 9 - Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount
of nonaccrual, past due and restructured loans:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Nonaccrual loans..........................$ 1,010 $ 2,127 $ 2,960 $ 4,129 $ 1,414
Accruing loans, past due
90 days or more......................... 330 1,127 522 519 409
-------- -------- -------- -------- --------
Total non-performing loans................ 1,340 3,254 3,482 4,648 1,823
Other real estate owned................... 252 759 251 360 250
-------- -------- -------- -------- --------
Total non-performing assets...............$ 1,592 $ 4,013 $ 3,733 $ 5,008 $ 2,073
======== ======== ======== ======== ========
Ratios:
Non-performing loans to
total loans......................... .31% .83% .97% 1.33% .57%
Non-performing assets to
total loans and other
real estate owned................... .37% 1.02% 1.04% 1.44% .65%
Non-performing assets to
total assets........................ .22% .63% .63% .92% .42%
Allowance for loan losses to
non-performing loans................ 580.6% 234.8% 206.2% 116.1% 241.4%
</TABLE>
The economic conditions within the Corporation's market area remained
healthy in 1995. This is reflected in the unemployment rate for Lancaster
County, which is the Bank's primary market area. The jobless rate has stayed
relatively stable during the past year with an average of 4.2%, down from 4.4%
in 1994 and 4.5% in 1993. Lancaster County's unemployment rate has
historically been and continues to be one of the lowest among Pennsylvania's
14 metropolitan regions. It also remains well below the state unemployment
rate of 6.3% that was reported for November 1995.
The strength in the employment sector in Lancaster County was also seen
at the national level. The nation's unemployment rate spent the year in a
narrow band that many analysts believe is close to full employment as the
current recovery completes five years of growth. The prediction is for "solid
growth" for the local economy this year, some of that because of the political
environment in that this is an election year.
The Bank's loan delinquency, as a percent of loans outstanding, declined
during 1995. At December 31, 1995, this rate stood at .58% compared to 1.33%
and 1.45% for December 31, 1994 and December 31, 1993, respectively. The
decline in 1995 is attributed to the overall strength in the local and
national economies, the installation of a computerized collection system and a
substantial decline in non-accrual loans. The .58% is the lowest reported by
the Bank in recent history and exceeded expectations. During the year, total
nonaccrual loans and other real estate owned declined to $1,262,000
representing a decline of 56% from December 31, 1994. Total non-performing
assets declined to $1,592,000 compared to $4,013,000 for December 31, 1994
representing a 60% decline. The significant decline in non-accruals, other
real estate and non-performing assets was primarily due to concentrated
workout efforts, aided by improved economic conditions and individual borrower
performance. These factors resulted in improved payment performance and
payoffs.
The Bank's reserve coverage continued its improvement during the year as
reserves as a percent of non-performing loans increased to 581% compared with
235% for December 31, 1994.
A portion of the Bank's loan portfolio consists of loans to agricultural-
related borrowers. These loans consist of loans for a variety of purposes
within the industry. Agriculture remains strong in the county. Pennsylvania
is one of the top 20 farm markets in the country. A barometer of Lancaster
County's agricultural health indicates steady growth in most areas. While the
Bank is hopeful that this portion of its loan portfolio will continue to show
growth, 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 real estate market indicated residential
construction lagged behind the previous year's levels by 21%, while non-
residential construction surged 78% in part due to corporate expansions.
After a record-setting year in 1993 for home sales, home sales have declined
and were down about 4% from 1994, but the third and fourth quarters produced a
strong rebound. Declining interest rates have contributed to this rebound
which is expected to continue into at least the first half of 1996. Occupancy
rates for the best commercial office space remained high, and it is believed
good industrial space is in short supply.
Most of the Bank's business activity is with customers located within the
Bank's defined market area. Since the majority of the Bank's real estate
loans are located within this area, a substantial portion of the debtor's
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
$1,010,000 at December 31, 1995 compared to $2,127,000 at December 31, 1994.
If interest income had been recorded on all such loans for the years
indicated, such interest income would have been increased by approximately
$143,997 and $276,956 for 1995 and 1994 respectively. Interest income
recorded on non-accrual loans amounted to $93,795 and none for 1995 and 1994
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, 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. All impaired
loans were measured by utilizing the fair value of the collateral for each
loan. 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
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
periods indicated.
The average amount of nonaccruals for the fourth quarter of 1995 was
$1,112,405 while the average for 1995 was $1,476,100.
The following table presents information concerning impaired loans at
December 31, 1995:
Gross impaired loans which have allowances..........$1,010
Less: Related allowances for loan losses......... 349
------
Net impaired loans..................................$ 661
======
At December 31, 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 December 31, 1995.
Allowance for Loan Losses
Table 10 - Summary of Loan Loss Experience
Years ended December 31,
1995 1994 1993 1992 1991
Allowance for Loan Losses:
Beginning balance.............$ 7,640 $ 7,180 $ 5,400 $ 4,400 $ 3,375
Loans charged off during year:
Commercial, financial and
agricultural.............. 50 157 194 843 327
Real estate mortgage........ 252 235 392 201 19
Consumer.................... 360 360 290 471 420
Lease financing............. 14 10 14 97 144
------- ------- ------- ------- -------
Total charge-offs........... 676 762 890 1,612 910
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and
agricultural.............. 117 61 157 232 37
Real estate mortgage........ 72 2 8 none 13
Consumer.................... 91 77 63 76 58
Lease financing............. 2 1 12 8 38
------- ------- ------- ------- -------
Total recoveries............ 282 141 240 316 146
------- ------- ------- ------- -------
Net loans charged off......... 394 621 650 1,296 764
Additions charged to
operations.................. 534 1,081 2,430 2,296 1,789
------- ------- ------- ------- -------
Balance at end of year........$ 7,780 $ 7,640 $ 7,180 $ 5,400 $ 4,400
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding................. .10% .17% .18% .39% .24%
Ratio of net loans charged
off to loans at end of year. .09% .16% .18% .37% .24%
Net loans charged off to
allowance for loan losses.. 5.06% 8.13% 9.05% 24.00% 17.36%
Net loans charged off to
provision for loan losses.. 73.78% 57.45% 26.75% 56.45% 42.71%
Allowance for loan losses as a
percent of average loans... 1.91% 2.04% 2.01% 1.64% 1.39%
Allowance for loan losses
as a percent of loans at
end of year................ 1.82% 1.95% 2.00% 1.55% 1.38%
Allowance for loan losses
as a percent of
non-performing loans....... 580.6% 234.8% 206.2% 116.1% 241.4%
The Bank experienced an improvement in net charge-offs recorded during
1995. For the year, the Bank recorded net charge-offs of $394,000 or .10% of
average loans outstanding, compared to $621,000 or .17% of average loans in
1994 and $650,000 or .18% of average loans in 1993. The low level of net
charge-offs is partially attributed to an aggressive collection of previously
charged-off loans.
The reduction in the provision for loan losses in 1995 reflects the
strength in the local economy and the improvements in the Bank's delinquency
rate, non-accruals, non-performing assets and problem loans.
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and inherent risk deemed present in the loan portfolio.
Management performs a quarterly assessment of the loan portfolio to determine
the appropriate level of allowance. The factors considered in this evaluation
include, but are not limited to, estimated loan losses identified through a
loan review process, general economic conditions, deterioration in pledged
collateral, past loan experience and trends in delinquencies and non-accruals.
Management uses available information to determine the appropriate level of
the allowance for possible loan losses. However, the allowance may be
affected in the future based upon changes in the economic conditions and other
factors. While there can be no assurance that material amounts of additional
loan loss provisions will not be required in the future, management believes
that, based upon information presently available, the amount of the allowance
for possible loan losses is adequate.
Management has not targeted any specific coverage ratio of nonperforming
loans by the allowance for loan losses and the coverage ratio may fluctuate
based on loans placed into or removed from nonperforming status.
Table 11 - Allocation of Allowance for Loan Losses
December 31,
1995 1994
Commercial, financial and agricultural..........$ 3,710 $ 4,219
Real estate - mortgage.......................... 3 39
Consumer........................................ 523 677
Leases.......................................... 600 612
Unallocated..................................... 2,944 2,093
------- -------
Total...........................................$ 7,780 $ 7,640
======= =======
Deposits
Table 12 - Average Deposit Balances and Rates Paid
The average amounts of deposits and rates paid for the years indicated,
are summarized below:
<TABLE>
<CAPTION>
1995 1994 1993
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Demand deposits.....................$ 66,133 --- $ 64,446 --- $ 57,869 ---
Interest-bearing demand deposits.... 239,036 3.00% 229,693 2.34% 211,406 2.59%
Savings deposits.................... 54,982 2.42% 58,864 2.25% 45,302 2.70%
Time deposits....................... 194,512 5.44% 158,994 4.33% 163,497 4.33%
-------- ----- -------- ----- -------- -----
$554,663 3.44% $511,997 2.65% $478,074 2.88%
======== ===== ======== ===== ======== =====
</TABLE>
Table 13 - Deposit Maturity
The maturities of time deposits of $100,000 or more are summarized below:
December 31,
1995 1994
Three months or less..........................$ 5,881 $ 6,075
Over three thru six months.................... 3,811 2,889
Over six thru twelve months................... 5,270 6,375
Over twelve months............................ 8,976 5,334
------- -------
Total.........................................$ 23,938 $ 20,673
======= =======
Capital
Stockholders' equity increased over $6.6 million or 11.6% in 1995 to
$63,909,000. Total stockholders' equity at December 31, 1994 in the amount of
$57,285,000 represents an increase of $7.8 million or 15.8% over the
$49,467,000 reported at December 31, 1993. Net earnings retained after the
payment of dividends as well as capital acquired through stock issued pursuant
to a dividend reinvestment and stock purchase plan and employee stock plan
generated the greatest portion of this growth in stockholders' equity. In
addition, stockholders' equity increased $1.2 million in 1995 due to an
increase in net unrealized gains on investment securities available-for-sale,
net of taxes. Included in dividends declared for 1995 is $1,478,000 which
represents a $.25 per share "Special Dividend" which was declared in the
second quarter of 1995. Dividends declared amounted to $5,260,000, $3,386,000
and $2,985,000 for 1995, 1994 and 1993 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 guidelines require that banking organizations
meet a minimum risk-based capital, 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
total capital are called Tier 1 and Tier 2 capital. In the case of the Bank,
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. 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. However, national banks will continue to deduct unrealized
losses on equity securities in their computation of Tier 1 capital.
Therefore, national banks will continue to report the net unrealized holding
gains and losses on available-for-sale securities in the reports of condition
and income submitted to federal regulators as required by SFAS 115 and the
financial reports prepared in accordance with generally accepted accounting
principles, but will exclude these amounts from calculations of Tier 1
capital. In addition, national banks should use the amortized cost of
available-for-sale debt securities (as opposed to fair value) to determine the
average total assets as well as the risk-weighted assets used in the
calculations of the leverage and risk-based capital ratios. The ratios below
and in Table 14 reflect the above definition of common stockholders' equity
which includes common stock, capital surplus and retained earnings, less net
unrealized holding losses on available-for-sale equity securities with readily
determinable fair values. The Bank's ratios at December 31, 1995, 1994 and
1993 were above the final risk-based capital standards that require Tier 1
capital of at least 4% and total risk-based capital of 8% of risk-weighted
assets. The Tier 1 capital ratio at December 31, 1995 was 10.95% and the
total risk-based capital ratio was 12.21%, which exceeds the minimum capital
guidelines. Tier 1 capital ratio was 11.05% and the total risk-based capital
ratio was 12.30% at December 31, 1994 while Tier 1 capital ratio was 10.67%
and the total risk-based capital ratio was 11.92% at December 31, 1993.
The Bank began in mid-1994 and continued into 1995 the construction of a
new headquarters building which includes a branch banking office and
headquarters for the Corporation. The three-story building contains
approximately 53,000 square feet with approximately 10,000 square feet of this
total leased to other tenants. Land cost for the construction site was
$1,570,000. To date, the Bank has paid $5,453,002 of the projected cost of
$5,720,000. The capital expenditures relating to this building were financed
out of existing capital resources. The Bank did not and does not expect to
incur any indebtedness relating to this new facility. The reduction in
earning assets and the expenses relating to the new facilities will be offset
somewhat to the extent there will be an elimination of expenses relating to
the previous headquarters building leased by the Bank. Management does not
expect this to have a material impact on future reported results of
operations, even though this will result in the application of a material
amount of capital.
Table 14 - Capital and Performance Ratios
The following are selected ratios for the years ended December 31:
1995 1994 1993
Return on average assets...................... 1.36% 1.38% 1.41%
Return on average equity...................... 15.02% 15.47% 16.90%
Dividend payout ratio......................... 58.48% 40.91% 38.26%
Average total equity to average assets........ 9.10% 8.89% 8.31%
Total equity to assets at year end............ 8.79% 8.99% 8.41%
Primary capital ratio......................... 9.78% 10.07% 9.52%
Tier 1 risk-based capital ratio............... 10.95% 11.05% 10.67%
Total risk-based capital ratio................ 12.21% 12.30% 11.92%
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
sold and marketable investment securities maturing within one year.
Securities maturing within one year amounted to $30,833,000 at December 31,
1995 compared to $24,840,000 at December 31, 1994. Interest-bearing deposits
with banks totaled $24,000 at December 31, 1995 compared to $24,000 at
December 31, 1994. Federal funds sold totaled $9,350,000 at December 31, 1995
compared to no funds sold at December 31, 1994.
The loan portfolio also provides an additional source of liquidity due to
the Bank's participating in the secondary mortgage market. Sales of
residential mortgages into the secondary market were approximately $16.1
million in 1995 and $24 million in 1994, which allowed the Bank to meet the
needs of customers for new mortgage financing. The loan portfolio also
provides significant liquidity by repayment of loans by maturity or scheduled
amortization payments.
On the liability side, liquidity is available through customer deposit
growth and short term borrowings.
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 sufficient
liquidity.
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'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 (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 Bank'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 repricing time
periods. These gaps are illustrated in Table 15. Also included in Table 15
is a summary of the cumulative gap, as viewed by regulatory authorities, which
presents all interest bearing savings and NOW deposit balances as being
subject to immediate and full repricing.
Management considers factors in addition to volume of liability funding
(deposits) subject to rate change to more accurately reflect future impact to
the net interest margin. All interest rates do not move in full and equal
amounts for loans and deposits. Deposit rates historically lag loans in rate
movement, and rate movement occurs to a smaller degree for deposits than
loans. Modeling is used to forecast projected impact to the net interest
margin as a result of rate movements, either increasing or decreasing. For
example, prime base rate has changed 20 times since 1988 (movement from a high
of 11.5% to a low of 6.0% - a range of 5.5%). During this period, NOW account
deposit rates have also experienced rate changes (movement from a high of
4.85% to a low of 1.73% - a range of 3.12%). Historic pricing correlations
have been calculated for all interest-bearing products for rate change
repricing impact as - immediate, three month and six month time periods. As
illustrated in Table 15, management's view of interest rate sensitivity
reflects a calculated interpretation of net interest margin exposure to rate
changes. Pricing correlations are constantly refined by management. There is
no guarantee that past history will accurately reflect future changes.
Interest repricing of assets and liabilities is measured over future time
periods (interest rate sensitivity gaps). While all time gaps are measured,
management's primary focus is the cumulative gap through six months, as this
time frame directly impacts net interest income in the near term time horizon
and is most difficult to make reactive adjustment to actual rate movements.
Excluded from the interest rate sensitivity gaps are "matched" funded
fixed rate leases and associated fixed rate debt totaling $20.5 million.
During 1995, the net interest income tax-equivalent yield on average
earning assets dropped to 4.99% from 5.30 % in 1994 and 5.30% in 1993. Prime
rate in 1995 started at 8.5%, moving up to 9% in February, down to 8.75% in
July and finally dropping to 8.50% in December. The average tax-equivalent
yield on earning assets increased in 1995 to 8.59%, up from 8.07% in 1994.
Average earning assets increased by $49,000,000 to $587,098,000 in 1995.
Deposit funding (average balances) increased nearly $42,700,000 in 1995.
Total deposit cost increased to 3.44% from 2.65% in 1994. This cost increase
resulted from increased competition locally for certificates of deposit during
the first quarter of 1995. Certificate of deposit growth for 1995 was nearly
$35,600,000, with an average cost in 1995 of 5.44% compared to 4.33% in 1994.
Borrowings also increased by $7,000,000 with an average cost of 7.07% compared
to 6.06% in 1994.
Table 15 - Interest Rate Sensitivity Gaps
<TABLE>
<CAPTION>
0-30 31-90 91-180 181-365 Over
Interest Earning Assets (I.E.A.) Days Days Days Days 1 year
<S> <C> <C> <C> <C> <C>
Fed Funds sold......................$ 9,350 $ 0 $ 0 $ 0 $ 0
Investment securities................ 2,605 6,535 6,315 14,299 161,137
Loans - Maturities................... 6,070 15,448 23,449 38,026 344,280
Loans - Variable Rate................ 116,251 533 2,655 5,044 0
--------- -------- -------- -------- --------
Total...............................$ 134,276 $ 22,516 $ 32,419 $ 57,369 $ 505,417
Cumulative..........................$ 134,276 $ 156,792 $ 189,211 $ 246,580 $ 751,997
Interest Bearing Liabilities (I.B.L.)
C/D's $100,000 and over.............$ 2,621 $ 3,560 $ 2,969 $ 2,411 $ 3,647
Certificates of Deposit - Maturities. 10,426 20,053 30,868 33,835 103,318
Interest Deposits - Variable Rate.... 96,294 31,406 16,776 17,644 156,959
Short-term borrowings................ 2,234 0 0 621 0
-------- -------- ------- -------- --------
Total...............................$ 111,575 $ 55,019 $ 50,613 $ 54,511 $ 263,924
Cumulative..........................$ 111,575 $ 166,594 $ 217,207 $ 271,718 $ 535,642
Period GAP (Dollars)................$ 22,701 $ (32,503) $ (18,194) $ 2,858 $ 241,493
I.E.A./I.B.L.%....................... 120% 41% 64% 105% 192%
Cumulative GAP (Dollars)............$ 22,701 $ (9,802) $ (27,996) $ (25,138) $ 216,355
Cumulative I.E.A./I.B.L.%............ 120% 94% 87% 91% 140%
Regulatory Presentation
Assets (cumulative).................$ 134,276 $ 156,792 $ 189,211 $ 246,580 $ 751,997
Funding (cumulative)................$ 334,360 $ 357,973 $ 391,810 $ 428,056 $ 535,021
-------- -------- -------- -------- --------
Cumulative GAP (Dollars)............$(200,084) $(201,181) $(202,599) $(181,476) $ 216,976
Cumulative I.E.A./I.B.L.%............ 40% 44% 48% 58% 141%
</TABLE>
New Financial Accounting Standards
The Financial Accounting Standard Board ("FASB") issued its Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
in March 1995. This statement applies to long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and to long-lived assets and certain identifiable intangibles to be
disposed of. The statement applies to all entities. This statement does not
apply to financial instruments, long-term customer relationships of a
financial institution, mortgage and other servicing rights, deferred policy
acquisitions costs, or deferred tax assets. This statement shall be effective
for financial statements for fiscal years beginning after December 15, 1995.
The impact that adoption of FASB Statement No. 121 will have on the financial
statements is currently under review, but is not expected to have a material
effect on the financial statements of the Corporation.
FASB Statement No. 122, "Accounting for Mortgage Servicing Rights - an
amendment of FASB Statement No. 65", effective for fiscal years beginning
after December 15, 1995, establishes accounting standards for recognizing
servicing rights on mortgage loans. The Corporation has historically
originated mortgage loans as a normal business activity, selling the mortgages
on the secondary market to Federal Home Loan Mortgage Corporation and
retaining all mortgage servicing. Mortgage sale income has been recorded on a
"net" gain/loss basis. FASB No. 122 will require recognition of servicing
"value" as an asset and immediate income as though mortgage servicing has been
sold rather than retained. The servicing asset valuation will be amortized
over the expected servicing life of the mortgage portfolio. In addition, the
mortgage servicing asset must be valued periodically for impairment, based
upon review of expected servicing life in relation to current market rates.
The implementation of FASB No. 122 will result in a greater recognition of
income from mortgage origination and sales activity and a corresponding
decrease of servicing income over the serviced mortgage portfolio life.
FASB Statement No. 123, "Accounting for Stock-Based Compensation", was
issued in October 1995. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. An employee
stock purchase plan that allows employees to purchase stock at a discount from
market price is not compensatory if it satisfies three conditions: (a) the
discount is relatively small, (b) substantially all full-time employees may
participate on an equitable basis, and (c) the plan incorporates no option
features such as allowing the employee to purchase the stock at a fixed
discount from the lesser of the market price at grant date or date of
purchase. The disclosure requirements of this statement are effective for
financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year for which this statement is initially adopted for
recognizing compensation cost. The Corporation 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 26
Consolidated Balance Sheets 27
Consolidated Statements of Income 28
Consolidated Statements of Changes in Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
(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) 49
Trout, Ebersole & Groff, LLP
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, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995.
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, 1995 and 1994
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 2, the Corporation changed its method of accounting
for investments to adopt the provisions of the Financial Accounting Standards
Board's SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" at January 1, 1994.
Trout, Ebersole & Groff, LLP
Trout, Ebersole & Groff, LLP
Certified Public Accountants
January 19, 1996
Lancaster, Pennsylvania
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Sterling Financial Corporation and Subsidiaries
As of December 31,
(Dollars in thousands) 1995 1994
<S> <C> <C>
Assets
Cash and due from banks...........................................$ 35,414 $ 32,374
Interest-bearing deposits in other banks.......................... 24 24
Federal funds sold................................................ 9,350 none
Mortgage loans held for sale...................................... 962 524
Investment Securities: (Note 4)
Securities held-to-maturity
(market value - $124,066 - 1995 and $156,047 - 1994)........... 122,885 161,160
Securities available-for-sale.................................... 68,967 9,051
Loans (Note 5).................................................... 427,674 393,657
Less: Unearned income........................................... (1,362) (1,008)
Allowance for loan losses (Note 6)......................... (7,780) (7,640)
-------- -------
Loans, net........................................................ 418,532 385,009
-------- -------
Premises and equipment (Note 7)................................... 16,450 11,977
Other real estate owned........................................... 252 759
Accrued interest receivable and prepaid expenses.................. 11,779 8,954
Other assets (Note 8)............................................. 26,539 23,563
-------- -------
Total Assets..................................................... $711,154 $633,395
======== ========
Liabilities
Deposits:
Noninterest-bearing.............................................$ 77,318 $ 73,459
Interest-bearing (Note 9)....................................... 532,787 463,543
-------- --------
Total Deposits.................................................... 610,105 537,002
-------- --------
Federal funds purchased (Note 10)................................. none 6,000
Interest-bearing demand notes issued to U.S. Treasury (Note 10)... 2,234 2,914
Other liabilities for borrowed money (Note 10).................... 21,523 19,173
Accrued interest payable and accrued expenses..................... 8,231 5,737
Other liabilities................................................. 5,152 5,284
-------- --------
Total Liabilities................................................. 647,245 576,110
Stockholders' Equity -------- --------
Common Stock -(par value:$5.00)
No. shares authorized: 1995 and 1994 - 10,000,000
No. shares issued: 1995 - 5,932,686; 1994 - 5,874,417
No. shares outstanding: 1995 - 5,925,527; 1994 - 5,868,610...... 29,663 29,372
Capital surplus................................................... 9,987 8,544
Retained earnings................................................. 22,848 19,114
Net unrealized gain on securities available-for-sale, net of taxes 1,624 420
Less: Treasury Stock (7,159 shares in 1995 and
5,807 shares in 1994) - at cost........................... (213) (165)
-------- --------
Total Stockholders' Equity........................................ 63,909 57,285
-------- --------
Total Liabilities and Stockholders' Equity........................$711,154 $633,395
======== ========
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
(Dollars in thousands, except per share data) 1995 1994 1993
<S> <C> <C> <C>
Interest Income
Interest and fees on loans...........................$ 37,975 $ 32,356 $ 31,167
Interest on deposits in other banks.................. 2 2 27
Interest on federal funds sold....................... 449 264 191
Interest and dividends on investment securities:
Taxable............................................ 7,526 6,636 6,242
Tax-exempt......................................... 2,695 2,496 2,270
Dividends on stock................................. 203 177 195
--------- --------- ---------
Total Interest Income................................ 48,850 41,931 40,092
--------- --------- ---------
Interest Expense
Interest on time certificates of deposit of
$100,000 or more................................... 893 613 488
Interest on all other deposits....................... 18,200 12,970 13,303
Interest on demand notes issued to the U.S. Treasury. 114 77 62
Interest on federal funds purchased.................. 66 10 none
Interest on other borrowed money..................... 1,880 1,255 1,183
Interest on mortgage indebtedness and obligations
under capitalized leases........................... none 1 6
--------- --------- ---------
Total Interest Expense............................... 21,153 14,926 15,042
--------- --------- ---------
Net Interest Income.................................. 27,697 27,005 25,050
Provision for loan losses (Note 6)................... 534 1,081 2,430
--------- --------- ---------
Net Interest Income after Provision for Loan Losses.. 27,163 25,924 22,620
--------- --------- ---------
Other Operating Income
Income from fiduciary activities..................... 856 742 639
Service charges on deposit accounts.................. 2,010 1,798 1,891
Other service charges, commissions and fees.......... 1,716 1,539 1,577
Mortgage banking..................................... 525 635 2,435
Other operating income (Note 8)...................... 3,186 2,329 2,429
Investment securities gains or (losses).............. none none 8
--------- --------- ---------
Total Other Operating Income......................... 8,293 7,043 8,979
--------- --------- ---------
Other Operating Expenses
Salaries and employee benefits (Note 11)............. 13,040 12,264 11,566
Net occupancy expense................................ 1,721 1,477 1,355
Furniture and equipment expense (including depreciation
of $917 in 1995, $779 in 1994 and $753 in 1993).... 1,605 1,379 1,253
FDIC insurance assessment............................ 622 1,128 1,052
Other operating expenses............................. 6,435 5,805 5,822
--------- --------- ---------
Total Other Operating Expenses....................... 23,423 22,053 21,048
--------- --------- ---------
Income Before Income Taxes........................... 12,033 10,914 10,551
Applicable income taxes (Note 12).................... 3,039 2,637 2,749
--------- --------- ---------
Net Income...........................................$ 8,994 $ 8,277 $ 7,802
========= ========= =========
Earnings per common share:
Net Income.........................................$ 1.52 $ 1.42 $ 1.36
Cash dividends declared per common share.............$ .89 $ .58 $ .54
Average shares outstanding...........................5,909,641 5,837,103 5,728,400
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Sterling Financial Corporation and Subsidiaries
Net
Unrealized
Gain on
Available-
Shares for-Sale
Common Common Capital Retained Securities, Treasury
Stock Stock Surplus Earnings Net of Taxes Stock Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993..... 2,702,627 $ 13,513 $ 14,100 $ 15,414 $ 0 $ (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 0 49,467
Net income.................... 8,277 8,277
Common stock issued
Dividend Reinvestment Plan... 55,255 277 2,005 2,282
Employee Stock Plan.......... 8,830 44 319 363
Two-for-one stock split....... 2,927,412 14,637 (14,637)
Cash dividends declared -
Common stock................. (3,386) (3,386)
Purchase of Treasury Stock
(14,471 shares).............. (379) (379)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(8,664 shares)............... 27 214 241
Net unrealized gain on
available-for-sale securities,
net of taxes................ 420 420
--------- -------- -------- -------- ---------- ------- --------
Balance, December 31, 1994....5,874,417 29,372 8,544 19,114 420 (165) 57,285
Net income.................... 8,994 8,994
Common stock issued
Dividend Reinvestment Plan... 45,121 225 1,115 1,340
Employee Stock Plan.......... 13,148 66 325 391
Cash dividends declared -
Common stock................. (5,260) (5,260)
Purchase of Treasury Stock
(41,880 shares).............. (1,252) (1,252)
Issuance of Treasury Stock for
Dividend Reinvestment Plan
(40,528 shares).............. 3 1,204 1,207
Change in net unrealized gain
on available-for-sale
securities, net of taxes...... 1,204 1,204
--------- -------- -------- -------- ---------- ------- --------
Balance, December 31, 1995....5,932,686 $ 29,663 $ 9,987 $ 22,848 $ 1,624 $ (213) $ 63,909
========= ======== ======== ======== ========== ======= ========
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,
(Dollars in thousands) 1995 1994 1993
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income...........................................$ 8,994 $ 8,277 $ 7,802
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 1,198 1,014 983
Accretion & amortization of investment securities. 367 661 550
Provision for possible loan losses................ 534 1,081 2,430
Provision for deferred income taxes............... 579 307 (299)
(Gain) loss on sale of property and equipment..... (1) (2) none
(Gain) loss on maturities/sales of
investment securities............................ none none (8)
(Gain) on sale of mortgage loans.................. (163) (279) (2,139)
Proceeds from sales of mortgage loans............. 16,283 24,284 74,136
Originations of mortgage loans held for sale...... (16,558) (21,098) (75,428)
Change in operating assets and liabilities:
(Increase) in accrued interest receivable
and prepaid expenses............................ (2,825) (138) (705)
(Increase) in other assets....................... (2,469) (3,341) (1,235)
Increase (decrease) in accrued interest payable
and accrued expenses........................... 1,915 324 227
Increase (decrease) in other liabilities........ (753) (140) (98)
--------- --------- ---------
Net cash provided by/(used in) operating activities.. 7,101 10,950 6,216
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits
in other banks..................................... 1,052 45,226 3,678
Purchase of interest-bearing deposits in other banks. (1,052) (45,209) (2,818)
Proceeds from maturities of investment securities.... 33,016 32,538 36,367
Purchase of investment securities.................... (53,199) (56,310) (54,871)
Federal funds sold, net.............................. (9,350) 12,350 (9,150)
Net loans and leases made to customers............... (34,057) (33,904) (11,486)
Purchases of premises and equipment.................. (5,681) (5,810) (827)
Proceeds from sale of premises and equipment......... 11 245 12
--------- --------- ---------
Net cash provided by/(used in) investing activities.. (69,260) (50,874) (39,095)
Cash Flows from Financing Activities
Net increase in demand deposits, NOW and
savings accounts................................... 32,041 7,013 43,978
Net increase (decrease) in time deposits............. 41,062 24,309 (11,482)
Net (decrease) in interest-bearing demand notes
issued to the U.S. Treasury........................ (680) (86) none
Proceeds from borrowings............................. 39,180 13,850 14,016
Repayments of borrowings............................. (36,830) (14,088) (9,329)
Federal funds purchased, net......................... (6,000) 6,000 none
Repayments of mortgages payable and capitalized
lease liability.................................... none (11) (207)
Proceeds from issuance of common stock............... 1,731 2,645 1,629
Cash dividends paid.................................. (5,260) (3,386) (2,985)
Cash paid in lieu of fractional shares............... none none (32)
Acquisition of treasury stock........................ (1,252) (379) (267)
Proceeds from issuance of treasury stock............. 1,207 241 526
--------- --------- ---------
Net cash provided by/(used in) financing activities.. 65,199 36,108 35,847
--------- --------- ---------
Increase (decrease) in cash and due from banks....... 3,040 (3,816) 2,968
Cash and due from banks:
Beginning............................................ 32,374 36,190 33,222
--------- --------- ---------
Ending...............................................$ 35,414 $ 32,374 $ 36,190
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money..$ 19,937 $ 14,728 $ 15,383
Income taxes....................................... 2,526 2,160 3,110
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans....$ 293 $ 638 $ 121
See accompanying notes to financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sterling Financial Corporation and Subsidiaries
(All dollar amounts presented in the tables are in thousands,
except per share data)
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)
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 (the Corporation) conform to generally accepted
accounting principles and to general practices within the banking industry.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from these estimates. 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). The Corporation through its subsidiaries
banking and other financial services to domestic markets. The principal
market area is Lancaster County, Pennsylvania. All significant intercompany
transactions have been eliminated in the consolidation.
Investment Securities - Investment securities include both debt securities
and equity securities. Sterling adopted 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 fair 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.
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 $420,000 at
December 31, 1994. In 1995, the Financial Accounting Standards Board
(FASB) issued a Special Report, "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities."
Effective November 15, 1995, the FASB permitted a one-time opportunity for
institutions to reassess the appropriateness of the designations of all
securities held upon the initial application of the Special Report.
After a reassessment of the current designations of the portfolio, it was
determined that an additional $54,218,000 in securities be transferred
from the held-to-maturity category to available-for-sale
category. The total net unrealized gain on securities available-for-sale,
net of taxes, at December 31, 1995 was $1,624,000. There has been no impact
on current year earnings or a restatement of previously issued financial
statements in connection with the adoption of this new accounting standard.
Investment securities in the held-to-maturity category are carried at
cost adjusted for amortization of premiums and accretion of discounts,
both computed on the constant yield method. It is management's intent
to hold investment account securities until maturity. However, the
investment portfolio does serve as an ultimate source of liquidity.
In order to acknowledge this function, Sterling has designated certain
specific debt securities as being available-for-sale. Premiums and
discounts are recognized in interest income computed on the constant
yield method. All marketable equity securities are classified
as available-for-sale. Realized gains and losses on
securities are computed using the specific identification method
and are included in Other Operating Income in the Consolidated Statements
of Income.
Future purchases of securities will be evaluated on an individual
basis for classification among the three permissible categories
based on management's intent and the 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.
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.
Loan Origination Fees and Costs - Net loan fees and costs of loan
origination are deferred and amortized to interest income over the life of the
loan. The amortization of deferred fees and costs is discontinued
on non-accrual loans.
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, was 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 was 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 5,909,641, 5,837,103 and 5,728,400 for
1995, 1994 and 1993 respectively, after giving retroactive effect to a 5%
stock dividend paid in December 1993 and a two-for-one stock split in the
form of a 100% stock dividend paid in 1994.
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.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of - The Financial Accounting Standard Board ("FASB")
issued its Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" in March 1995. This statement
applies to long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and to long-lived
assets and certain identifiable intangibles to be disposed of.
The statement applies to all entities. This statement
does not apply to financial instruments, long-term customer relationships
of a financial institution, mortgage and other servicing rights, deferred
policy acquisitions costs, or deferred tax assets. This statement shall be
effective for financial statements for fiscal years beginning after
December 15, 1995. The impact that adoption of FASB
Statement No. 121 will have on the financial statements is currently under
review, but is not expected to have a material effect on the
financial statements of the Corporation.
Accounting for Mortgage Servicing Rights - FASB Statement No. 122,
"Accounting for Mortgage Servicing Rights - an amendment of FASB
Statement No. 65", effective for fiscal years beginning
after December 15, 1995, establishes accounting standards for recognizing
servicing rights on mortgage loans. The Corporation has historically
originated mortgage loans as a normal business activity, selling
the mortgages on the secondary market to Federal Home Loan
Mortgage Corporation and retaining all mortgage servicing. Mortgage
sale income has been recorded on a "net" gain/loss basis. FASB No. 122
will require recognition of servicing "value" as an asset and immediate
income as though mortgage servicing has been sold rather than retained.
The servicing asset valuation will be amortized over the expected
servicing life of the mortgage portfolio. In addition, the mortgage servicing
asset must be valued periodically for impairment, based upon review of
expected servicing life in relation to current market rates.
The implementation of FASB No. 122 will result in a greater recognition
of income from mortgage origination and sales activity and a corresponding
decrease of servicing income over the serviced mortgage portfolio life.
Accounting for Stock-Based Compensation - FASB Statement No. 123,
"Accounting for Stock-Based Compensation", was issued in October 1995.
This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans.
Those plans include all arrangements by which employees receive
shares of stock or other equity instruments of the employer
or the employer incurs liabilities to employees in amounts based on
the price of the employer's stock. An employee stock purchase plan that
allows employees to purchase stock at a discount from market price is not
compensatory if it satisfies three conditions: (a) the
discount is relatively small, (b) substantially all full-time employees
may participate on an equitable basis, and (c) the plan incorporates
no option features such as allowing the employee to purchase the stock
at a fixed discount from the lesser of the market price at grant date or
date of purchase. The disclosure requirements of this
statement are effective for financial statements for fiscal years
beginning after December 15, 1995, or for an earlier fiscal year for
which this statement is initially adopted for recognizing compensation
cost. The 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. 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 was effective for financial statements for fiscal years
beginning after December 15, 1994. The adoption of this
Statement did not affect the financial position or results of operations.
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 was effective for financial statements issued for
fiscal years beginning after December 15, 1994 and interim periods
within those fiscal years. The application of this Statement did not
have a material effect on earnings.
Mortgage Loans Held for Sale - Mortgage loans held for sale are recorded
at the lesser 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, 1995 was approximately $8,185,000.
Balances maintained at the Federal Reserve Bank are included in cash
and due from banks.
Note 4 - Investment Securities
As discussed in Note 2, the Corporation adopted SFAS 115 effective
January 1, 1994. A one time move from the held-to-maturity
category to the available-for-sale category was permitted during 1995.
The Corporation took advantage of this opportunity and moved a
total of $54,218,000 from the held-to-maturity category to the
available-for-sale category. The amount of net unrealized gain
on securities available-for-sale, net of taxes, transferred to stockholders'
equity amounted to $510,295 on this transfer.
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 $54,780,570 in 1995 and $32,982,504
in 1994.
The amortized cost and fair values of investment securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities............$ 18,837 $ 158 $ 69 $ 18,926
Obligations of other U.S. Government
agencies and corporations......... 18,473 110 65 18,518
Obligations of states and political
subdivisions...................... 40,212 796 154 40,854
Mortgage-backed securities.......... 3,854 152 1 4,005
Other bonds, notes and debentures... 38,944 362 108 39,198
---------- --------- -------- --------
Subtotal............................ 120,320 1,578 397 121,501
Nonmarketable equity securities..... 2,565 none none 2,565
---------- ---------- --------- --------
Total...............................$ 122,885 $ 1,578 $ 397 $ 124,066
=========== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities............$ 28,225 $ 10 $ 1,102 $ 27,133
Obligations of other U.S. Government
agencies and corporations......... 24,101 15 1,102 23,014
Obligations of states and political
subdivisions...................... 50,472 355 1,861 48,966
Mortgage-backed securities.......... 5,122 48 52 5,118
Other bonds, notes and debentures... 50,811 46 1,470 49,387
---------- --------- --------- --------
Subtotal............................ 158,731 474 5,587 153,618
Nonmarketable equity securities..... 2,429 none none 2,429
---------- --------- --------- --------
Total...............................$ 161,160 $ 474 $ 5,587 $ 156,047
========== ========= ========= ========
</TABLE>
Included in nonmarketable equity securities is Federal Reserve stock,
Federal Home Loan Bank of Pittsburgh stock and Atlantic Central
Bankers Bank stock.
The amortized cost and fair values of held-to-maturity debt securities
at December 31, 1995, 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.
December 31, 1995
Amortized Fair
Cost Value
Due in one year or less................$ 24,749 $ 24,835
Due after one year through five years.. 66,403 67,010
Due after five years through ten years. 18,450 18,742
Due after ten years.................... 6,864 6,909
----------- -----------
116,466 117,496
Mortgage-backed securities............. 3,854 4,005
----------- -----------
$ 120,320 $ 121,501
=========== ===========
The amortized cost and fair values of available-for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities............$ 11,046 $ 148 $ 40 $ 11,154
Obligations of other U.S. Government
agencies and corporations......... 15,489 180 37 15,632
Obligations of states and political
subdivisions...................... 19,622 455 132 19,945
Mortgage-backed securities.......... 1,249 4 11 1,242
Other bonds, notes and debentures... 19,013 301 67 19,247
---------- --------- -------- --------
Subtotal............................ 66,419 1,088 287 67,220
Equity securities and corporate
stock............................. 88 1,659 none 1,747
---------- ---------- --------- --------
Total...............................$ 66,507 $ 2,747 $ 287 $ 68,967
=========== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities..............$ 1,472 $ none $ 15 $ 1,457
Mortgage-backed securities............ 1,344 none 88 1,256
Other bonds, notes and debentures..... 5,593 9 101 5,501
-------- ------- ------ -------
Subtotal.............................. 8,409 9 204 8,214
Equity securities and corporate
stock............................... 7 830 none 837
-------- ------- ------ -------
Total.................................$ 8,416 $ 839 $ 204 $ 9,051
======== ======= ====== =======
</TABLE>
The amortized cost and fair values of available-for-sale debt securities
at December 31, 1995 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.
December 31, 1995
Amortized Fair
Cost Value
Due in one year or less...................$ 5,361 $ 5,374
Due after one year through five years..... 37,279 37,753
Due after five years through ten years.... 15,863 15,988
Due after ten years.................... 6,667 6,863
-------- --------
65,170 65,978
Mortgage-backed securities................ 1,249 1,242
-------- --------
$ 66,419 $ 67,220
======== ========
There were no sales of investment securities during 1995, 1994 or 1993.
Note 5 - Loans
Loans outstanding at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commercial, financial and agricultural.......................$ 228,058 $ 208,918
Real estate - construction................................... 6,378 8,542
Real estate - mortgage....................................... 33,124 30,505
Consumer..................................................... 116,210 106,921
Lease financing receivables (net of unearned income)......... 43,904 38,771
------------ ------------
Total loans, gross...........................................$ 427,674 $ 393,657
============ ============
</TABLE>
Loans on a non-accrual status amounted to $1,010,000 at December 31,
1995, compared to $2,127,000 at December 31, 1994. If
interest income had been recorded on all such loans for the years indicated,
such interest income would have increased by approximately
$143,997 and $276,956 for 1995 and 1994 respectively.
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. All impaired loans were measured by utilizing the fair value of
the collateral for each loan. 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 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 periods indicated.
The average amount of nonaccruals for the fourth quarter of 1995 was
$1,112,405 while the average for 1995 was $1,476,100.
The following table presents information concerning impaired loans
at December 31, 1995:
Gross impaired loans which have allowances..........$1,010
Less: Related allowances for loan losses......... 349
------
Net impaired loans..................................$ 661
======
Note 6 - Allowance for Loan Losses
Changes in the Allowance for Loan Losses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at January 1..................................$ 7,640 $ 7,180 $ 5,400
Recoveries credited to allowance...................... 282 141 240
Provisions for loan losses charged to income.......... 534 1,081 2,430
-------- -------- --------
Total................................................. 8,456 8,402 8,070
Losses charged to allowance........................... 676 762 890
-------- -------- --------
Balance at December 31................................$ 7,780 $ 7,640 $ 7,180
========= ======== ========
Ratio of Allowance to loans, net of unearned income
at end of year..................................... 1.82% 1.95% 2.00%
</TABLE>
Note 7 - Premises and Equipment
Premises and equipment at December 31, 1995 and 1994 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land.............................................$ 2,482 $ 2,432
Buildings........................................ 11,814 5,931
Buildings under capitalized lease................ 104 104
Leasehold improvements........................... 735 678
Equipment, furniture and fixtures................ 10,597 8,140
Construction in progress......................... 14 2,990
---------- ----------
25,746 20,275
Less: Accumulated depreciation................... (9,296) (8,298)
---------- ----------
$ 16,450 $ 11,977
========== ==========
</TABLE>
Contributing to the increase in premises and equipment was the
construction costs for the headquarters building of Sterling Financial
Corporation and Bank of Lancaster County, as well as furniture and
equipment for this building.
Depreciation expense amounted to $1,197,980 in 1995, $1,013,830 in
1994, and $983,345 in 1993.
Note 8 - Other Assets
Included in other assets for 1995 and 1994 is $22,990,784 and
$19,722,146 respectively which represents operating leases generated
by Town & Country, Inc. The income generated from the leases for
1995 and 1994 amounted to $2,211,700 and $1,735,162 respectively
and is reflected in other operating income.
The following schedule provides an analysis of Town & Country's
investment in property on operating leases and property held for lease
by major classes as of December 31, 1995 and 1994:
1995 1994
Construction equipment...........$ 688 $ 704
Transportation equipment......... 12,018 7,277
Automobiles...................... 14,265 12,949
Manufacturing equipment.......... 5,550 5,399
Trucks........................... 12,614 12,245
Other............................ 734 548
---------- -----------
Total............................ 45,869 39,122
Less: Accumulated depreciation... (22,878) (19,400)
----------- -----------
$ 22,991 $ 19,722
=========== ===========
The following is a schedule by years of minimum future rentals on
noncancelable operating leases as of December 31, 1995:
Year ending December 31:
1996...............................$ 11,612
1997................................ 1,861
1998................................ 178
1999................................ 48
2000................................ 48
-------
Total minimum future rentals.......$ 13,747
=======
Note 9 - Time Certificates of Deposit
At December 31, 1995 and 1994, time certificates of deposit of $100,000
or more aggregated $22,938,324 and $19,672,584 respectively.
Note 10 - Short-Term Borrowings and Other Liabilities for Borrowed Money
The Bank maintains lines of credit with various correspondent banks to
use as sources of short-term funds. Federal funds purchased amounted
to $6 million at December 31, 1994. There were no Federal funds purchased
at December 31, 1995. In addition, the Bank maintains a line of credit
in the amount of $62 million with the Federal Home Loan Bank of
Pittsburgh. There were no advances on this line at December 31, 1995 or
1994. Borrowings from the Federal Reserve Bank and interest-bearing demand
notes issued to U.S. Treasury would also be considered short-term
borrowings. Interest-bearing demand notes issued to U.S. Treasury
were $2,234,000 and $2,914,000 for 1995 and 1994 respectively.
The average balance outstanding for any category of short-term borrowings
during the periods reported was less than 30 per cent of stockholders'
equity at the end of each period reported.
The following represents other liabilities for borrowed money at
December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Notes payable-Town & Country, Inc.(Subsidiary of Bank)
borrowings from various lenders for leasing operations......$19,283 $17,601
Federal Home Loan Bank advances............................... 2,240 1,572
------ ------
Total.........................................................$21,523 $19,173
====== ======
</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 $7,520,556 at December 31, 1995. The
borrowings from the Federal Home Loan Bank of Pittsburgh consist of
two advances in 1993 and one in 1995. Of the 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 and the second, in the amount
of $950,000 bears interest at the rate of 5.39% per year
and matures September 13, 2000. The advance in 1995 in the amount of
$668,700, at a rate of 6.41%, matures September 28, 2001.
Note 11 - 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 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. Salary in excess of $150,000
(effective in the year 1994) is disregarded in determining a participant's
retirement benefit pursuant to IRS regulations. All employees
with one year of service who work at least 1,000 hours per year
and who are at least age 21 are eligible to participate. A participant
becomes 100% vested upon completion of five years with a vesting credit.
Net periodic pension cost for 1995, 1994 and 1993 included the following:
1995 1994 1993
Service cost.......................$ 579 $ 577 $ 560
Interest cost...................... 504 428 404
Return on Plan assets.............. (950) 6 (347)
Net amortization and deferral...... 417 (463) (42)
----- ----- -----
Net periodic pension cost..........$ 550 $ 548 $ 575
===== ===== =====
The following table sets forth the Plan's funded status at December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
Actuarial present value of benefit obligations:
1995 1994 1993
<S> <C> <C> <C>
Accumulated benefit obligation, including vested
benefits of $5,238,774 for 1995, $3,705,229 for 1994
and $3,684,272 for 1993..................................$ 5,275 $ 3,745 $ 3,748
======= ======= =======
Projected benefit obligation for service rendered to
date......................................................$(8,143) $(6,890) $(6,466)
Plan assets at fair value.. ............................... 6,728 6,087 5,472
------- ------- -------
Projected plan assets in excess of or (less than)
benefit obligation........................................$(1,415) $ (803) $ (994)
Unrecognized net (gain) or loss from past experience
different from that assumed and effects of changes
in assumptions............................................ 1,495 1,374 1,404
Unrecognized net (asset) or obligation..................... (276) (345) (415)
Unrecognized prior service cost............................ (128) none none
------- ------- -------
Prepaid (accrued) pension cost included
in other assets (liabilities).............................$ (324) $ 226 $ (5)
======= ======= =======
</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 7% and 5%, respectively,
at December 31, 1995. The expected long-term rate of return on
plan assets in 1995 was 9%.
The Board of Directors of the Bank adopted an employee stock 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 salary deferral 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, as well as supplement their retirement.
The Plan allows for employees to make their voluntary contributions
on a pre-federal income tax basis.
*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 the
Plan 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
$216,000, $200,000 and $200,000 for 1995, 1994 and 1993
respectively. The contribution to the salary deferral portion of the
Plan was $65,946 in 1995, $51,305 in 1994 and $41,766 in 1993.
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 $1,026,457 is being amortized on a straight-line basis
over a 20 year period which is the average remaining service period of
active plan participants.
The cost for postretirement benefits other than pensions consisted
of the following components at December 31, 1995, 1994 and 1993:
1995 1994 1993
Service cost......................$ 93 $ 93 $ 80
Interest cost..................... 99 87 81
Amortization of unrecognized
transition obligation........... 51 51 51
---- ---- ----
Net periodic postretirement
benefit cost....................$243 $231 $212
==== ==== ====
Sterling's postretirement benefits other than pensions are currently
not funded.
The status of the plans at December 31, 1995, 1994 and 1993 is as follows:
Actuarial valuation of accumulated postretirement benefit obligation:
1995 1994 1993
Retirees..................................$ 324 $ 289 $ 314
Fully eligible active plan participants... 323 258 294
Other active plan participants............ 787 786 653
------ ------ ------
$1,434 $1,333 $1,261
Unrecognized transition obligation........ (872) (924) (975)
Unrecognized net gain (loss).............. 56 (9) (94)
------ ------ ------
Accrued postretirement benefit cost.......$ 618 $ 400 $ 192
====== ====== ======
Prior to January 1, 1993, Sterling recognized the cost of postretirement
benefits, which is primarily retiree health care, as an expense as
premiums were incurred. These costs approximated $17,886 and $13,888 for 1992
and 1991, respectively. The postretirement health care plan is 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 8% in 1995, 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 1995.
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, 1995 by
$325,737 and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year ended
December 31, 1995 by $49,860.
Note 12 - Applicable Income Taxes
The effective income tax rates for financial reporting purposes are less
than the Federal statutory rate of 34% for 1995, 1994 and 1993
for reasons shown as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
Statutory Statutory Statutory
1995 Rate 1994 Rate 1993 Rate
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
at statutory rate............$ 4,091 34.0% $ 3,711 34.0% $ 3,587 34.0%
Reduction resulting from:
Non-taxable interest income... (1,046) (8.7% (966) (8.8%) (895) (8.5%)
Other, net.................... (71) (.6%) (149) (1.4%) 20 .2%
------- ------ ------- ------ ------- ------
Applicable Federal income taxes.$ 2,974 24.7% $ 2,596 23.8% $ 2,712 25.7%
State income taxes.............. 65 .6% 41 .4% 37 .4%
------- ------ ------- ------ ------- ------
Applicable income taxes.........$ 3,039 25.3% $ 2,637 24.2% $ 2,749 26.1%
======= ====== ======= ====== ======= ======
Taxes currently payable.........$ 2,460 $ 2,330 $ 3,048
Deferred income taxes........... 579 307 (299)
------- ------- -------
Applicable income taxes.........$ 3 039 $ 2,637 $ 2,749
======= ======= =======
</TABLE>
The Corporation had net deferred tax credits of $3,512,000, $2,312,000 and
$1,790,000 at December 31, 1995, 1994 and 1993 respectively. The
tax effect of temporary differences that gave use to significant portions of
the deferred tax liabilities at December 31, 1995 and 1994, are as follows:
<TABLE>
Caption>
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses.....................$ 2,756 $ 2,542
Deferred loan fees and costs.................. 57 71
Postretirement benefits other than pensions... 216 140
Foreclosed assets............................. 11 9
Other......................................... 15 12
------- -------
Total deferred tax assets................... 3,055 2,774
======= =======
</TABLE>
<TABLE>
<CAPTION>
Deferred tax liabilities:
<S> <C> <C>
Leasing....................................... (5,321) (4,572)
Depreciation.................................. (244) (206)
Pension....................................... (145) (72)
Unrealized gains on investments............... (836) (215)
Other......................................... (21) (21)
------- -------
Total deferred tax liabilities.............. (6,567) (5,086)
======= =======
Net deferred tax liability.................. (3,512) (2,312)
======= =======
</TABLE>
Amounts for the current year are based upon estimates and assumptions as
of the date of this report and could vary from amounts shown on the
tax return when filed. Accordingly, amounts previously reported for 1994
may change as a result of adjustments to conform to tax returns filed.
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
corporation 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 to 1990.
Note 13 - 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, 1995
are as follows:
Operating
Leases
1996.........................$ 519
1997......................... 450
1998......................... 388
1999......................... 333
2000......................... 174
Later years.................. 2,009
-------
Total minimum future rental
payments...................$ 3,873
=======
Total rent expense charged to operations amounted to $479,809 in 1995,
$413,996 in 1994 and $373,332 in 1993.
Note 14 - 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.
Federal Funds Purchased - The carrying amount of federal funds
purchased approximates its fair value due to the overnight maturities
of these financial instruments.
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:
<TABLE>
<CAPTION>
1995 1994
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments.....$ 35,438 $ 35,438 $ 32,398 $ 32,398
Investment securities
held-to-maturity................. 122,885 124,066 161,160 156,047
Investment securities
available-for-sale............... 68,967 68,967 9,051 9,051
Loans............................... 384,732 355,410
Less: Allowance for loan losses.... (7,180) (7,028)
--------- --------- --------- ---------
Net loans...........................$ 377,552 $ 380,131 $ 348,382 $ 340,898
Financial Liabilities:
Deposits..........................$ 610,105 $ 612,611 $ 537,002 $ 534,344
Federal funds purchased........... none none 6,000 6,000
U.S. Treasury demand notes........ 2,234 2,234 2,914 2,914
Other borrowings.................. 21,523 21,281 19,173 18,731
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...... (72) (72) (86) (86)
Standby letters of credit......... (38) (38) (37) (37)
Financial guarantees written...... (none) (none) (none) (none)
<FN>
<F1>* The amounts shown under "Carrying Amount" represent accruals or deferred income (fees)
arising from those unrecognized financial instruments.
</TABLE>
Note 15 - 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, 1995
and 1994 are as follows:
Financial instruments whose contract amounts
represent credit risk:
1995 1994
Standby letters of credit ....................$ 7,568 $ 5,520
Commitments to extend credit..................$ 76,672 $ 71,265
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
commitment 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.
In 1994, SFAS No. 119 - "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" was issued effective for
financial statements issued after December 15, 1994. The Corporation has not
entered into any derivatives defined as a future, forward, swap, option, caps,
floors, etc. However, the financial instruments listed above as standby
letters of credit and commitments to extend credit have
characteristics similar to derivatives. The following is a
schedule that represents the estimated risk of current interest rates versus
committed rates. Due to the uncertainty of when and how much a commitment
to extend credit will be exercised, estimates were used.
Fixed Rate Commitments
1995 1994
Carrying value at December 31,..............$ 0 0
Commitment available not yet exercised......$ 19,105 10,865
Commitment revalued at existing rates with
estimated activity........................$ 19,117 10,823
Note 16 - 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 1995
and 1994. 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, 1995 and 1994 amounted to $6,170,667 and
$5,497,545 respectively. During 1995, $2,585,340 of new loans were made
and repayments totaled $1,912,218.
Note 17 - Dividend and Loan Restrictions
Dividends are paid by Sterling Financial Corporation from its assets
which are provided in part 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 1996
without approval of the Comptroller of the Currency of approximately
$12,676,000 plus an additional amount equal to the Bank's net profits for
1996 up to the date of any such dividend declaration.
Under current Federal Reserve regulations, the Bank is limited in the
amount it may loan to Sterling Financial Corporation. Loans to Sterling
Financial Corporation may not exceed 10% of the Bank's capital stock and
surplus.
Note 18 - Sterling Financial Corporation (Parent Company Only) Financial
Information
<TABLE>
<CAPTION>
Condensed Balance Sheets
As of December 31,
1995 1994
<S> <C> <C>
Assets
Cash.......................................................$ 5 $ 291
Securities available-for-sale.............................. 88 none
Investment in subsidiaries at equity....................... 63,994 57,546
Other assets............................................... 847 328
-------- --------
Total Assets.................................................$ 64,934 $ 58,165
======== ========
Liabilities
Other liabilities..........................................$ 1,025 880
Stockholders' Equity
Common Stock...............................................$ 29,663 $ 29,372
Capital Surplus............................................ 9,987 8,544
Retained Earnings.......................................... 22,848 19,114
Net Unrealized Gain on securities available-for-sale,
net of taxes........................................... 1,624 420
Less: Treasury Stock at cost............................... (213) (165)
-------- --------
Total Stockholders' Equity...................................$ 63,909 $ 57,285
-------- --------
Total Liabilities and Stockholders' Equity...................$ 64,934 $ 58,165
======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Years Ended December 31,
1995 1994 1993
<C> <C> <C>
<S>
Income
Dividends from subsidiaries...............$ 3,837 $ 966 $ 1,262
Dividends on investment securities........ 2 none none
Other income.............................. 1 1 1
-------- -------- --------
Total Income............................ 3,840 967 1,263
-------- -------- --------
Expenses
Fees paid to subsidiary................... none none 108
Other expense............................. 141 178 121
-------- -------- --------
Total Expenses.......................... 141 178 229
-------- -------- --------
Income before income taxes and equity
in undistributed net income
of subsidiaries........................... 3,699 789 1,034
Income taxes (credits)...................... (47) (60) (78)
-------- -------- --------
3,746 849 1,112
Equity in undistributed income of
subsidiaries.............................. 5,248 7,428 6,690
-------- -------- --------
Net Income..................................$ 8,994 $ 8,277 $ 7,802
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................$ 8,994 $ 8,277 $ 7,802
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Undistributed (earnings) loss of subsidiaries.... (5,248) (7,428) (6,690)
Changes in operating assets and liabilities:
(Increase) decrease in other assets........... (519) (142) 188
(Decrease) increase in other liabilities...... 142 73 91
-------- -------- --------
Net cash provided by/(used in)
operating activities......................... 3,369 780 1,391
-------- -------- --------
Cash flows from investing activities
Proceeds of interest-bearing deposits
in other banks.................................. none none 100
Purchase of investment securities................ (81) none none
-------- -------- --------
Net cash provided by/(used in) investing
activities................................... (81) none 100
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of common stock........... 1,731 2,645 1,629
Cash dividends paid.............................. (5,260) (3,386) (2,985)
Cash dividends paid in lieu of
fractional shares............................... none none (32)
Acquisition of treasury stock.................... (1,252) (379) (267)
Proceeds from issuance of treasury stock......... 1,207 241 526
-------- -------- --------
Net cash provided by/(used in) financing
activities.................................... (3,574) (879) (1,129)
-------- -------- --------
Increase (decrease) in cash.................... (286) (99) 362
Cash
Beginning....................................... 291 390 28
-------- -------- --------
Ending.........................................$ 5 $ 291 $ 390
========= ======== ========
</TABLE>
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, 1995 and 1994. Net income per share of common
stock has been restated to retroactively reflect a two-for-one stock split
in the form of a 100% stock dividend paid in September 1994.
<TABLE>
<CAPTION>
1995
Quarter Ended
March June September December
31 30 30 31
<S> <C> <C> <C> <C>
Interest income..................$ 11,536 $ 12,090 $ 12,509 $ 12,715
Interest expense................. 4,776 5,258 5,529 5,590
--------- ------- -------- --------
Net interest income.............. 6,760 6,832 6,980 7,125
Provision for loan losses........ 151 126 182 75
--------- ------- -------- --------
Net interest income after
provision for loan losses...... 6,609 6,706 6,798 7,050
Other income..................... 1,905 1,964 2,127 2,297
Other expenses................... 5,687 5,809 5,809 6,118
--------- -------- -------- --------
Income before income taxes....... 2,827 2,861 3,116 3,229
Applicable income taxes.......... 696 718 794 831
--------- -------- -------- --------
Net income.......................$ 2,131 $ 2,143 $ 2,322 $ 2,398
========= ======== ======== ========
Net income per share of
common stock...................$ .36 $ .36 $ .39 $ .41
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter Ended
March June September December
31 30 30 31
<S> <C> <C> <C> <C>
Interest income..................$ 9,810 $ 10,253 $ 10,646 $ 11,222
Interest expense................. 3,421 3,468 3,858 4,179
--------- ------- -------- --------
Net interest income.............. 6,389 6,785 6,788 7,043
Provision for loan losses........ 182 425 309 165
--------- ------- -------- --------
Net interest income after
provision for loan losses...... 6,207 6,360 6,479 6,878
Other income..................... 1,778 1,710 1,764 1,791
Other expenses................... 5,354 5,388 5,493 5,818
--------- -------- -------- --------
Income before income taxes....... 2,631 2,682 2,750 2,851
Applicable income taxes.......... 666 686 645 640
--------- -------- -------- --------
Net income.......................$ 1,965 $ 1,996 $ 2,105 $ 2,211
========= ======== ======== ========
Net income per share of
common stock...................$ .34 $ .34 $ .36 $ .38
</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
headings "Information about Nominees and Continuing Directors" and
"Officers and Executive Officers" of the 1996 Annual
Meeting Proxy Statement.
Item 11 - Executive Compensation
Incorporated by reference is the information under the headings
"Compensation of Directors" and "Executive Compensation" of the 1996 Annual
Meeting Proxy Statement.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference is the information appearing under the headings
"Principal Holders" and "Beneficial Ownership of Executive Officers,
Directors and Nominees" of the 1996 Annual Meeting 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" of the
1996 Annual Meeting Proxy Statement and under "Notes to Consolidated
Financial Statements - Note 16 - Related Party Transactions" on page 46
of this Form 10-K.
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.
3(i) Articles of Incorporation 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.
3(ii) Amended Bylaws of Sterling Financial Corporation incorporated
by reference to Exhibit 3(ii) of Form 8-K filed with the
Securities and Exchange Commission on March 7, 1996.
10. Material Contracts - 10 a. Employment Agreement of John E.
Stefan, Chairman of the Board, 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.
21. Subsidiaries of the Registrant
23. Consent of Auditors
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated December 1, 1995 was filed December 7,
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, completed the acquisition of branches previously
announced in August, 1995.
A report on Form 8 - K dated March 7, 1996 was filed March 7,
1996 pursuant to item 5 of Form 8-K reporting and filing amended
Bylaws of Sterling Financial Corporation.
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: /s/ John E. Stefan
John E. Stefan
Chairman of the Board,
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board,
/s/ John E. Stefan President and Chief February 27, 1996
(John E. Stefan) Executive Officer; Director
/s/ Jere L. Obetz Senior Vice President/Treasurer, February 27, 1996
(Jere L. Obetz) Chief Financial Officer
/s/ Ronald L. Bowman Vice President/Secretary, February 27, 1996
(Ronald L. Bowman) Principal Accounting Officer
/s/ Richard H. Albright, Jr. Director February 27, 1996
(Richard H. Albright, Jr.)
/s/ John E. Burkholder Director February 27, 1996
(John E. Burkholder)
/s/ Robert H. Caldwell Director February 27, 1996
(Robert H. Caldwell)
/s/ Howard E. Groff, Jr. Director February 27, 1996
(Howard E. Groff, Jr.)
/s/ Joan R. Henderson Director February 27, 1996
(Joan R. Henderson)
/s/ J. Robert Hess Director February 27, 1996
(J. Robert Hess)
Director February 27, 1996
(Calvin G. High)
/s/ J. Roger Moyer, Jr. Director February 27, 1996
(J. Roger Moyer, Jr.)
/s/ E. Glenn Nauman Director February 27, 1996
(E. Glenn Nauman)
/s/ Glenn R. Walz Director February 27, 1996
(Glenn R. Walz)
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE 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
(Presently inactive)
101 North Pointe Boulevard
Lancaster, PA 17601-4133
Trout, Ebersole & Groff, LLP
Certified Public Accountants
1705 Oregon Pike
Lancaster, Pennsylvania 17061
Exhibit 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference in Registration
Statement No. 33-55131 on Form S-3 filed August 19, 1994 of our
opinion dated January 19, 1996, on the consolidated financial statements
of Sterling Financial Corporation for the year ended December 31, 1995 as
set forth in this form 10-K.
/s/ Trout, Ebersole & Groff, LLP
Trout, Ebersole & Groff, LLP
Certified Public Accountants
Lancaster, Pennsylvania
March 4, 1996
Exhibit Index
Page
Exhibits Required Pursuant to (in accordance with
Item 601 of Regulation S-K sequential numbering system)
3(i). Articles of Incorporation 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
3(ii). Amended Bylaws of Sterling Financial Corporation
incorporated by reference to Exhibit 3(ii) on
Form 8-K filed with the Securities and Exchange
Commission on March 7, 1996
10. Material Contracts - 10a. 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
21. List of Subsidiaries 54
23. Consent of Auditors 55
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
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<NAME> STERLING FINANCIAL CORP
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0
0
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