FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 0-16276
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2449551
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
(717) 581-6030
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $5.00 Par Value-6,237,009 shares outstanding as of October
31, 1996.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1996 (Unaudited), December 31, 1995,
and September 30, 1995 (Unaudited). 3
Consolidated Statements of Income
for the Three and Nine Months ended September 30, 1996
and 1995 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 1996 and 1995 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signature Page 21
Subsidiaries of the Registrant 22
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<S> <C> <C> <C>
September 30, December 31, September 30,
1996 1995 1995
ASSETS (Unaudited) (Unaudited)
Cash and due from banks.................$ 39,154,460 $ 35,414,270 $ 32,434,396
Interest-bearing deposits in other banks. 37,910 24,158 24,004
Federal funds sold....................... 5,400,000 9,350,000 4,650,000
Mortgage loans held for sale............. 510,208 961,700 none
Investment Securities::
Securities held to maturity (market value-
$100,050,810;$124,066,770;$174,517,549). 99,982,164 122,885,208 172,499,120
Securities available for sale........... 69,689,993 68,967,132 10,735,327
Loans.................................... 483,724,218 427,674,085 412,300,388
Less: Unearned Income.................. (1,446,024) (1,361,905) (1,224,281)
Allowance for loan losses........ (7,846,113) (7,780,000) (7,861,595)
----------- ----------- -----------
Loans, Net............................... 474,432,081 418,532,180 403,214,512
----------- ----------- -----------
Premises and Equipment................... 16,774,843 16,449,618 15,880,295
Other real estate owned.................. 98,735 251,873 285,728
Accrued interest receivable and prepaid
expenses............................... 10,973,363 11,778,999 8,903,895
Other assets............................. 31,219,648 26,539,066 27,021,686
----------- ----------- -----------
TOTAL ASSETS............................$ 748,273,405 $711,154,204 $ 675,648,963
LIABILITIES ============ ============ ============
Deposits:
Noninterest-bearing...................$ 77,245,650 $ 77,318,207 $ 70,255,443
Interest-bearing...................... 557,030,783 532,786,570 504,040,503
------------ ------------ ------------
TOTAL DEPOSITS.......................... 634,276,433 610,104,777 574,295,946
------------ ------------ ------------
Interest-bearing demand notes issued to
U.S. Treasury........................ 3,000,000 2,233,880 2,875,243
Other liabilities for borrowed money.... 28,897,673 21,523,598 25,317,057
Accrued interest payable and accrued
expenses............................. 8,069,981 8,230,612 6,904,544
Other liabilities....................... 6,352,338 5,151,826 4,985,815
----------- ------------ ------------
TOTAL LIABILITIES....................... 680,596,425 647,244,693 614,378,605
STOCKHOLDERS' EQUITY ----------- ------------ ------------
Common Stock - (Par Value: $5.00)
No. Shares authorized:
35,000,000; 10,000,000; 10,000,000
No. Shares issued:
6,236,743; 5,932,686; 5,910,555
No. Shares outstanding:
6,236,308; 5,925,527; 5,908,655..... 31,183,715 29,663,430 29,552,775
Capital Surplus.......................... 16,319,484 9,987,236 9,442,973
Retained Earnings........................ 19,261,538 22,847,719 21,457,422
Net unrealized gain on securities
available for sale..................... 923,934 1,623,934 874,188
Less: Treasury Stock
(435; 7,159; 1,900) - at cost.......... (11,691) (212,808) (57,000)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 67,676,980 63,909,511 61,270,358
TOTAL LIABILITIES AND STOCKHOLDERS' ----------- ----------- -----------
EQUITY................................$748,273,405 $711,154,204 $675,648,963
=========== =========== ===========
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................$ 10,617,572 $ 9,658,248 $ 30,875,837 $ 28,126,490
Interest on deposits in other banks.............. 747 515 1,983 1,409
Interest on federal funds sold................... 43,363 216,387 112,143 380,973
Interest and dividends on investment securities:
Taxable...................................... 1,800,991 1,904,672 5,697,704 5,497,322
Tax-exempt................................... 709,567 677,663 2,188,371 1,979,072
Dividends on stock........................... 54,607 51,716 161,759 149,952
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME............................. 13,226,847 12,509,201 39,037,797 36,135,218
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more............................... 226,989 210,621 642,057 694,455
Interest on all other deposits.................. 5,078,122 4,790,202 14,734,732 13,250,754
Interest on demand notes issued to the
U.S. Treasury....... ......................... 26,209 32,322 69,011 87,735
Interest on federal funds purchased............. 16,843 none 88,706 57,046
Interest on other borrowed money................ 484,233 495,988 1,397,587 1,473,329
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 5,832,396 5,529,133 16,932,093 15,563,319
----------- ----------- ----------- -----------
NET INTEREST INCOME............................... 7,394,451 6,980,068 22,105,704 20,571,899
Provision for loan losses....................... 50,000 182,000 311,000 459,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.................................... 7,344,451 6,798,068 21,794,704 20,112,899
----------- ----------- ----------- -----------
OTHER OPERATING INCOME
Income from fiduciary activities............... 293,428 231,450 847,197 627,777
Service charges on deposit accounts............ 655,187 515,371 1,799,727 1,487,349
Other service charges, commissions and fees.... 536,697 440,160 1,515,483 1,225,440
Mortgage banking income........................ 237,804 109,743 924,120 371,015
Other operating income......................... 859,386 830,677 2,555,145 2,284,926
Gains (Losses) on securities transactions...... 9,992 none 9,992 none
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING INCOME..................... 2,592,494 2,127,401 7,651,664 5,996,507
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits................ 3,717,314 3,274,246 11,095,307 9,596,390
Net occupancy expense......................... 516,794 456,419 1,578,217 1,242,016
Furniture and equipment expense............... 516,052 412,206 1,509,193 1,151,890
FDIC insurance assessment..................... 500 (29,142) 1,500 566,896
Other operating expenses...................... 1,921,534 1,695,447 5,489,422 4,748,032
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES................... 6,672,194 5,809,176 19,673,639 17,305,224
----------- ----------- ----------- -----------
Income before income taxes.................... 3,264,751 3,116,293 9,772,729 8,804,182
Applicable income taxes....................... 801,731 793,851 2,387,759 2,207,800
----------- ----------- ----------- -----------
NET INCOME.......................................$ 2,463,020 $ 2,322,442 $ 7,384,970 $ 6,596,382
=========== =========== =========== ===========
Earnings per common share:
Net Income..................................... $ .39 $ .37 $ 1.18 $ 1.06
Cash dividends declared per common share...... $ .19 $ .17 $ .55 $ .72
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net Income.................................................$ 7,384,970 $ 6,596,382
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation............................................ 1,203,538 830,135
Accretion and amortization of investment securities..... 281,690 283,733
Provision for possible loan and lease losses............ 311,000 459,000
(Gain) loss on disposition of property and equipment.... 3,272 280
(Gain) loss on sales of securities...................... (9,992) none
(Gain) loss on sale of mortgage loans................... (202,786) (101,041)
Proceeds from sales of mortgage loans................... 26,417,018 10,365,588
Origination of mortgage loans held for sale............. (25,762,740) (9,740,756)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable and prepaid expenses...................... 805,636 50,277
(Increase) decrease in other assets................... (4,527,444) (2,985,181)
Increase (decrease) in accrued interest payable
and accrued expenses................................. (160,631) 932,857
Increase (decrease) in other liabilities............. 1,564,544 (298,416)
----------- ----------
Net cash provided by/(used in) operating activities........ 7,308,075 6,392,858
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks...... 994,357 1,013,870
Purchase of interest-bearing deposits in other banks........ (1,008,109) (1,014,339)
Proceeds from sales of securities available for sale........ 521,250 none
Proceeds from maturities of investment securities........... 36,327,168 25,794,984
Purchase of investment securities........................... (16,003,965) (38,413,467)
Federal funds sold, net..................................... 3,950,000 (4,650,000)
Net loans and leases made to customers...................... (56,210,901) (18,665,087)
Purchases of premises and equipment......................... (1,557,889) (4,746,125)
Proceeds from sale of premises and equipment................ 25,854 12,838
------------ -----------
Net cash provided by/(used in) investing activities........ (32,962,235) (40,667,326)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW and savings accounts................................... 2,132,736 9,829,735
Net increase (decrease) in time deposits.................... 22,038,920 27,464,208
Federal funds purchased, net................................ none (6,000,000)
Net increase (decrease) in interest-bearing demand
notes issued to the U.S. Treasury.......................... 766,120 (38,627)
Proceeds from borrowings.................................... 53,050,385 27,380,700
Repayments of borrowings.................................... (45,676,310) (21,236,169)
Proceeds from issuance of common stock...................... 231,840 1,075,847
Cash dividends paid......................................... (3,322,587) (4,252,919)
Acquisition of treasury stock............................... (111,426) (1,038,601)
Proceeds from issuance of treasury stock.................... 308,249 1,150,552
Cash paid in lieu of fractional shares...................... (23,577) none
------------ -----------
Net cash provided by/(used in) financing activities....... 29,394,350 34,334,726
Increase (decrease) in cash and due from banks............. 3,740,190 60,258
Cash and due from banks::
Beginning................................................... 35,414,270 32,374,138
------------ -----------
Ending......................................................$ 39,154,460 $ 32,434,396
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money..........$ 16,760,948 $ 14,809,182
Income taxes............................................... 1,905,000 1,926,000
Supplemental Schedule of Noncash Investing
and Financing Activities
Other Real Estate acquired in settlement of loans............ 118,910 266,993
See accompanying notes to financial statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of
Sterling Financial Corporation ("Sterling") have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine-month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996.
The consolidated financial statements of Sterling include the accounts
of its wholly owned subsidiary, Bank of Lancaster County, N.A. ("the Bank")
and its wholly owned subsidiary, Town & Country, Inc. All significant
intercompany transactions are eliminated in the consolidation.
Effective January 1, 1994, Sterling adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities". 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.
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 $1,623,934. The total net unrealized gain on securities
available-for-sale, net of taxes, was $923,934 and $874,188 respectively at
September 30, 1996 and September 30, 1995. 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.
The Financial Accounting Standards Board Statement No. 118, an
amendment of FASB Statement No. 114, addresses the accounting by creditors
for impairment of a loan by specifying how allowances for credit losses
related to certain loans should be determined. A loan is impaired when,
based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. This Statement 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.
The Financial Accounting Standards Board issued SFAS No. 116 -
"Accounting for Contributions Received and Contributions Made". This
Statement 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.
The Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards 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 is effective
for financial statements for fiscal years beginning after December 15,
1995. The adoption of FASB Statement No. 121 is not expected to have a
material effect on the financial position or results of operations 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.
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 125 - "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement amends and extends to all servicing assets and liabilities the
accounting standards for mortgage servicing rights now in FASB Statement
No. 65, "Accounting for Certain Mortgage Banking Activities", and
supersedes FASB Statement No. 122, "Accounting for Mortgage Servicing
Rights". This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Sterling has
determined that the application of this Standard will not have a material
effect on earnings.
Note 2 - Earnings Per Share
Earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which were
6,236,476 and 6,198,103 for 1996 and 1995 respectively. Figures for 1995
were retroactively restated to reflect a 5% stock dividend paid in July
1996.
Note 3 - Dividends Declared
The regular cash dividend for the third quarter of 1996 amounted to $.19
per share while the regular cash dividend for the third quarter of 1995
amounted to $.17 per share. In addition, a "special dividend" of $.25 per
share was declared in the second quarter of 1995. This special dividend
reflects in the year to date dividends declared. A 5% stock dividend was
paid July 22, 1996.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets at September 30, 1996 amounted to $748,273,405 which
represents an increase of 10.7% over the $675,648,963 reported at September
30, 1995. Total assets at September 30, 1996 increased $37,119,201 or 5.2%
over the $711,154,204 reported at December 31, 1995.
The investment securities portfolio reflects a 7.4% decrease or
$13,562,290 during the twelve month period September 30, 1995 to September
30, 1996. Effective January 1, 1994, Sterling adopted Statement of
Financial Accounting Standard No. 115 - "Accounting for Certain Investments
in Debt and Equity Securities". SFAS No. 115 requires that these
securities be classified into one of three categories: held-to-maturity,
available-for-sale or trading. Specific accounting treatments apply to
each of the three categories. Securities held-to-maturity will be reported
at amortized cost, trading securities are reported at fair value with
unrealized gains and losses included in earnings and available-for-sale
will be reported at fair value, with unrealized gains and losses excluded
from earnings and reported as a separate component of shareholders' equity.
Sterling has segregated its investment securities into two categories:
those held-to-maturity and those available-for-sale. In 1995, the
Financial Accounting Standards Board issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
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. Included in securities available-for-sale is unrealized gains of
$1,396,475 and $1,324,528 at September 30, 1996 and September 30, 1995
respectively. During the first nine months of 1996, there was a decrease in
investment securities in the amount of $22,180,183 or 11.6% from the
$191,852,340 reported at December 31, 1995. The amount of unrealized gains
included in the available-for-sale category at December 31,1995 was
$2,460,506.
Net loans have grown from $418,532,180 to $474,432,081 during the nine
month period ended September 30, 1996. This represents an increase of
13.4% since December 31, 1995. Net loans increased from $403,214,512 at
September 30, 1995 to $474,432,081 at September 30, 1996. This represents
an increase of $71,217,569 or 17.7%.
Premises and equipment increased $894,548 or 5.6% from $15,880,295 at
September 30, 1995 to $16,774,843 at September 30, 1996. During the first
nine months of 1996, total premises and equipment increased $325,225 or 2%
from $16,449,618 at December 31, 1995. Two branch offices were acquired
from another financial institution in December 1995 and another branch
office was opened in June 1996 contributing to the increase in premises and
equipment.
Total deposits increased $59,980,487 or 10.4% from $574,295,946 at
September 30, 1995 to $634,276,433 at September 30, 1996. During the first
nine months of 1996, total deposits increased $24,171,656 or 4% from the
$610,104,777 reported at December 31, 1995. Noninterest-bearing deposits
increased $6,990,207 or 9.9% from $70,255,443 at September 30, 1995 to
$77,245,650 at September 30, 1996. During the same period,
interest-bearing deposits increased $52,990,280 or 10.5%.
Noninterest-bearing deposits decreased $72,557 or .1% during the first nine
months of 1996 while interest-bearing deposits increased $24,244,213 or
4.6%. On December 1, 1995, the Bank completed a transaction involving the
acquisition of two retail banking offices from CoreStates Financial
Corporation. The acquisition involved primarily the assumption of certain
deposit liabilities in the approximate amount of $22 million.
Stockholders' equity increased $6,406,622 or 10.5% from the
$61,270,358 reported at September 30, 1995 to $67,676,980 at September 30,
1996. There was an increase of $3,767,469 or 5.9% from the $63,909,511
reported at December 31, 1995. Contributing to these increases were net
income from operations and the issuance of stock pursuant to a dividend
reinvestment and stock purchase plan and an employee stock plan. Net
unrealized gain on securities available-for-sale is included in calculating
the increases above. However, regulatory authorities have decided to
exclude the net unrealized holding gains and losses on available-for-sale
securities from the definition of common stockholders' equity for
regulatory capital purposes. The capital ratios reflect that exclusion.
Total stockholders' equity to total assets at the end of September 30, 1996
was 8.94% compared to 8.96% for the same period 1995. At December 31, 1995
the ratio was 8.79%.
Federal regulatory authorities issued 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 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 capital are called Tier 1 and Tier 2
Capital. Tier 1 capital is the shareholders' equity and Tier 2 capital is
the allowance for loan losses. The risk-based capital ratios are computed
by dividing the components of capital by risk-weighted assets.
Risk-weighted assets are determined by assigning various levels of risk to
different categories of assets and off-balance sheet items. The guidelines
require Tier 1 capital of at least 4% and total capital of 8% of
risk-weighted assets. The Tier 1 capital ratio was 10.58% and the total
risk-based capital ratio was 11.83% at September 30, 1996 while the Tier 1
capital ratio was 11.01% and the total risk-based capital ratio was 12.26%
at September 30, 1995.
The following table reflects the various capital ratios for the
periods indicated:
September 30, 1996 December 31, 1995 September 30, 1995
"Statement"
Equity Capital 8.94% 8.79% 8.96%
Primary and
Total Capital 9.88% 9.78% 10.01%
"Risk-based"
Tier 1 Capital 10.58% 10.95% 11.01%
Total Capital 11.83% 12.21% 12.26%
Changes in the Allowance for Loan Losses for the nine months ended
September 30, 1996 and 1995 were as follows:
1996 1995
Balance at January 1 $ 7,780,000 $ 7,640,000
Provision for loan losses
charged to operating expenses 311,000 459,000
----------- -----------
$ 8,091,000 $ 8,099,000
----------- -----------
Losses charged to allowance 365,391 459,920
Recoveries credited to allowance 120,504 222,515
----------- -----------
Net charge-offs 244,887 237,405
----------- -----------
Balance at September 30, $ 7,846,113 $ 7,861,595
=========== ===========
Allowance as a percent of
period-end loans 1.63% 1.91%
The net charge-offs for the first nine months of 1996 were within our
expectations. Management makes a determination no less frequently than
quarterly as to the appropriate provision necessary to maintain an adequate
allowance for potential loan losses. The amount of provision made is based
upon a variety of factors including a specific allocation by individual
credits, loss experience for classified loans using migration analysis,
loss experience for homogenous loan pools, levels and trends in
delinquency, specific non-accruing and problem loans, evaluation of
economic conditions and forecasts and other factors deemed appropriate by
management. While there can be no assurance that material amounts of
additional loan loss provisions will not be required in the future,
management believes that, based upon information presently available, the
amount of the allowance for possible loan losses is adequate.
The following table presents information concerning the aggregate
amount of nonaccrual, past due and restructured loans:
September 30, December 31, September 30,
1996 1995 1995
Nonaccrual loans $1,107,038 $1,009,536 $1,539,967
Accruing loans, past
due 90 days or more $ 713,011 $ 330,470 $ 215,515
Non-performing loans
to total loans .38% .31% .43%
Allowance for loan losses
to non-performing loans 431.09% 580.59% 447.83%
The general policy has been to cease accruing interest on loans when
it is determined that a reasonable doubt exists as to the collectibility of
additional interest. Interest income on these loans is only recognized to
the extent payments are received. If interest income had been recorded on
such loans for the periods indicated, such interest income would have been
increased by approximately $80,587 and $139,653 at September 30, 1996 and
1995 respectively, and $143,997 at December 31, 1995. Interest income
recorded on the nonaccrual loans in 1996 was $21,969 and 1995 was $14,279.
Potential problem loans are loans which are included as performing loans,
but for which possible credit problems of the borrower causes management to
have doubts as to the ability of such borrower to comply with present
repayment terms and which may eventually result in disclosure as a
non-performing loan. At September 30,1996, 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 existing allowance, the Bank will adjust the
existing allowance to reflect the greater amount or take a corresponding
charge to the provision for loan and lease losses. If the impairment is
less than the existing allowance for a particular loan, no adjustments to
the allowance or the provision for loan and lease losses will be made.
There was no adjustment necessary for the impaired loans for the period
indicated.
The average amount of nonaccruals was $1,087,004 for the third quarter
of 1996 and $1,715,664 for the third quarter of 1995, while the average for
1995 was $1,476,100. .
The following table presents information concerning impaired loans for
the periods indicated:
September 30, December 31, September 30,
1996 1995 1995
Gross impaired loans which have
allowances.........................$1,107,038 $1,009,536 $1,539,967
Less: Related allowances for
loan losses........................ (166,055) (348,790) (458,718)
---------- ---------- ----------
Net impaired loans...................$ 940,983 $ 660,746 $1,081,249
========== ========== ==========
At September 30, 1996, there were no concentrations exceeding 10% of
total loans. A concentration is defined as amounts loaned to a multiple
number of borrowers engaged in similar activities which would cause them to
be similarly affected by changes in economic or other conditions. There
were no foreign loans outstanding at September 30, 1996.
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. The loan portfolio also provides an additional
source of liquidity due to the Bank's participating in the secondary
mortgage market. 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 source of funds
mentioned provide sufficient liquidity.
<PAGE>
Results of Operations
The following discussion analyzes the specific components affecting
the changes in net income for the periods analyzed.
Three months ended September 30, 1996 compared to three months ended
September 30, 1995
Net income for the third quarter of 1996 amounted to $2,463,020
compared to $2,322,442 for the third quarter of 1995. This represents an
increase of $140,578 or 6.1%. On a per share basis, income was $.39
compared to $.37.
Total interest income increased $717,646 or 5.7% while total interest
expense increased $303,263 or 5.5%. Increased volumes in loans was
primarily responsible for an increase in interest and fees of $959,324 or
9.9% over 1995. Interest on deposits with banks increased $232, while
interest on federal funds sold decreased $173,024. Income on investment
securities decreased $68,886 or 2.6% in 1996 as a result of decreased
balances of various investment securities.
Total interest expense amounted to $5,832,396 for this period
compared to $5,529,133 for the same period last year. This represents an
increase of $303,263 or 5.5%. Interest paid on time certificates of
deposit of $100,000 or more increased $16,368 or 7.8% in 1996 over the same
period in 1995, while interest paid on all other deposits increased
$287,920 or 6.0%. Interest expense on other interest bearing liabilities
decreased $1,025 during the same period of time. Increased volumes in
deposits was the primary reason for the increase in interest expenses.
The provision for possible loan losses decreased $132,000 from a
charge of $182,000 in 1995 to $50,000 in 1996. The provision reflects the
amount deemed appropriate by management to provide an adequate reserve to
meet the present and foreseeable risk characteristics of the loan
portfolio.
Total other operating income increased $465,093 or 21.9%. An
increase was reflected in all categories of income. Income from fiduciary
activities increased $61,978. Service charges on deposit accounts and
other various service charges increased $236,353. Other operating income
increased $28,709. Mortgage banking income increased $128,061. The
increase in mortgage banking income was a result of increased volumes of
originations and subsequent sales and the implementation of FASB Statement
No. 122. Gains on securities transactions for 1996 was $9,992, whereas in
1995 there were no gains or losses.
Total other operating expenses rose $863,018 or 14.9% over the same
period last year. There were increases of $443,068 in salaries and
employee benefits, $226,087 in other operating expenses and $164,221 in
occupancy and furniture and equipment expense during this period of time.
Effective June 1, 1995, the FDIC approved a 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. As a result, a refund of $29,142
in the FDIC insurance assessment was realized in the third quarter of 1995.
On November 14, 1995, the FDIC Board of Directors voted to reduce the
insurance premiums paid on deposits covered by the Bank Insurance Fund
("BIF"), effective for the first semiannual assessment period of 1996.
Under the new rate structure for the BIF, assessment rates were 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. Therefore, the FDIC insurance assessment for the third quarter of
1996 was $500. The increase in salaries and employee benefits was
primarily due to increases in staff as well as increases in wages and
increased costs of employee benefits. In 1995, the Bank completed
construction of a new headquarters building which also includes branch
banking facilities. In addition, two branch offices were acquired from
another financial institution in December 1995. These additions
contributed to the increase in occupancy and furniture and equipment
expense.
Applicable income taxes increased $7,880 due in part to increases in
taxable income. The effective tax rate was 24.6% for the third quarter of
1996 compared to 25.5% for 1995.
Nine months ended September 30, 1996 compared to nine months ended
September 30, 1995
Net income increased from $6,596,382 in September 30, 1995 to
$7,384,970 in September 30, 1996. This represents an increase of $788,588
or 12%. Net income on a per share basis was $1.18 for nine months ended
September 30, 1996 compared to $1.06 for the same period 1995. Sterling's
return on average assets was 1.36% for 1996 compared to 1.35% for 1995.
Return on average stockholders' equity was 15.22% and 14.50% respectively
for 1996 and 1995.
Total interest income increased $2,902,579 or 8%. Earning assets
increased $58,913,911 or 9.8%. Loans increased over $71 million or 17.3%,
while securities decreased over $13 million or 7.4% over the same period
last year. Increased volumes in loans generated a major portion of the
increase in interest income. Interest and fees on loans increased
$2,749,347. Interest on deposits with banks increased $574 while interest
on federal funds sold decreased $268,830. Interest on investment
securities increased $421,488. During this time the daily average balance
of federal funds sold decreased from $8,534,798 in 1995 to $2,771,350 in
1996. The daily average balance of investment securities was $180,712,298
at September 30, 1996 and $168,429,043 at September 30, 1995.
Total interest expense amounted to $16,932,093 reflecting an increase
of $1,368,774 or 8.8% from the $15,563,319 reported in 1995.
Interest-bearing deposits increased 10.5%. Increased volumes in deposits
resulted in an increase in interest expense of $1,431,580 or 10.3%.
Interest paid on other interest-bearing liabilities decreased $62,806.
The provision for loan loss decreased $148,000 in 1996 over 1995. The
provision for loan losses is based upon the monthly review of the loan
portfolio.
Total other operating income increased $1,655,157 or 27.6% during the
first nine months of 1996 over the same period in 1995. An increase was
reflected in all categories of income. Income from fiduciary activities
increased $219,420 or 35%. Service charges on deposit accounts and other
various service charges increased $602,421 or 22.2%. Other operating
income increased $270,219 or 11.8%. An increase in income generated from
operating leases was a contributor to the increase in other operating
income. Mortgage banking income increased $553,105. The increase in
mortgage banking income was a result of increased volumes of originations
and subsequent sales and the implementation of FASB Statement No. 122.
Gains on securities transactions amounted to $9,992 in 1996. There were no
gains or losses in 1995.
Total other operating expenses rose $2,368,415 or 13.7% reflecting
normal increases experienced through growth. Increases in employee related
expenses of $1,498,917; $693,504 in occupancy and furniture and equipment
expense; $741,390 in other expenses, along with a decrease of $565,396 in
the FDIC assessment comprise the increase in total other operating
expenses. The increase in salaries and employee benefits was primarily due
to increases in staff as well as increases in wages and increased costs of
employee benefits. In 1995, the Bank completed construction of a new
headquarters building which also includes branch banking facilities. In
addition, two branch offices were acquired from another financial
institution in December 1995. A branch office was also opened in June
1996. These additions contributed to the increase in occupancy and
furniture and equipment expense, as well as employee related expenses. The
FDIC insurance assessment reflected a decrease as a result of the new rate
structure effective for 1996. On September 30, 1996, the President signed
into law the Deposit Insurance Funds Act of 1996 to recapitalize the
Savings Association Insurance Fund ("SAIF") administered by the Federal
Deposit Insurance Corporation ("FDIC") and to provide for repayment of the
FICO (Financial Institution Collateral Obligation) bonds issued by the
United States Treasury Department. The FDIC will levy a one-time special
assessment on SAIF deposits equal to 65.7 cents per $100 of the SAIF-assessable
deposit base as of March 31, 1995. During the years 1997, 1998
and 1999, the Bank Insurance Fund ("BIF") will pay $322 million of FICO
debt service, and SAIF will pay $458 million. During 1997, 1998 and 1999,
the average regular annual deposit insurance assessment is estimated to be
about 1.29 cents per $100 of deposits for BIF deposits and 6.44 cents per
$100 of deposits for SAIF deposits. Individual institution's assessments
will continue to vary according to their capital and management ratings.
As always, the FDIC will be able to raise the assessments as necessary to
maintain the funds at their target capital ratios provided by law. After
1999, BIF and SAIF will share the FICO costs equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the rate
of approximately 2.43 cents per $100 of deposits. The FICO bonds will
mature in 2018-2019, ending the interest payment obligation. The law also
provides that BIF and SAIF are to merge to form the Deposit Insurance Fund
("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time. Merger of the Funds will require
state laws to be amended in those states authorizing savings associations
to eliminate that authorization. This provision reflects Congress's
apparent intent to merge thrift and commercial bank charters by January,
1999; however, no law has yet been enacted to achieve that purpose. Based
on current deposit levels, management expects that the increase in the FDIC
assessment rate will adversely impact results of operations in an amount
estimated at $84,000 for 1997. Contributing to the increase in other
operating expenses for this period were increases in professional services,
education and training expenses, VISA and MAC fees, postage, PA Shares Tax,
printing and supplies and various other operating expenses in the normal
course of business.
Applicable income taxes amounted to $2,387,759 in 1996 compared to
$2,207,800 in 1995. The increase in taxes is due in part to increases in
taxable income. The effective tax rate was 24.4% and 25.1% respectively
for 1996 and 1995.
Three Months ended September 30, 1996 compared to three months ended
June 30, 1996
Net income decreased $22,982 or .9% in the third quarter of 1996 over
the second quarter of 1996. Net income for the three months ended
September 30, 1996 was $2,463,020 compared to $2,486,002 for the three
months ended June 30, 1996.
Total interest income increased $213,744 or 1.6% while total interest
expense increased $197,141 or 3.5%. This resulted in an increase in net
interest income of $16,603. Earning assets increased $15,415,385 or 2.4%
while interest-bearing liabilities increased $8,475,565 or 1.5%. Both
interest income and interest expense increased due to these increased
volumes.
The loan loss provision decreased $52,000 over the second quarter of
1996.
Total other operating income increased $41,870 or 1.6% over the second
quarter. Various service charges, commissions and fees increased $40,900
while income from fiduciary activities increased $32,624 and other income
increased $7,862. Mortgage banking income decreased $49,508 over the last
quarter. There were gains on securities transactions in the third quarter
amounting to $9,992.
Total other operating expenses increased $149,262 over the second
quarter. There was a decrease of $5,538 in employee related expenses while
occupancy and furniture and equipment expenses increased $20,049 and other
expenses increased $134,751.
Applicable income taxes decreased $15,807 over the second quarter.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of September 30, 1996, there were no material pending legal
proceedings, other than ordinary routine litigation incidental to business,
to which the Corporation or its subsidiaries are a party or of which any of
their property is the subject.
Item 6 - Exhibits and Reports on Form 8-K
(a) EXHIBITS
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K - There were no reports filed on Form 8-K
during the third quarter of 1996.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: November 8, 1996 By:/s/ John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: November 8, 1996 By:/s/ Jere L. Obetz
Jere L. Obetz
Senior Vice President/Treasurer
Chief Financial Officer
<PAGE>
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
101 North Pointe Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000811671
<NAME> STERLING FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 39,154,460
<INT-BEARING-DEPOSITS> 37,910
<FED-FUNDS-SOLD> 5,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,689,993
<INVESTMENTS-CARRYING> 99,982,164
<INVESTMENTS-MARKET> 100,050,810
<LOANS> 482,278,194
<ALLOWANCE> (7,846,113)
<TOTAL-ASSETS> 748,273,405
<DEPOSITS> 634,276,433
<SHORT-TERM> 31,897,673
<LIABILITIES-OTHER> 14,422,319
<LONG-TERM> 0
<COMMON> 31,183,715
0
0
<OTHER-SE> 36,493,265
<TOTAL-LIABILITIES-AND-EQUITY> 748,273,405
<INTEREST-LOAN> 30,875,837
<INTEREST-INVEST> 8,161,960
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 39,037,797
<INTEREST-DEPOSIT> 15,376,789
<INTEREST-EXPENSE> 1,555,304
<INTEREST-INCOME-NET> 22,105,704
<LOAN-LOSSES> 311,000
<SECURITIES-GAINS> 9,992
<EXPENSE-OTHER> 19,673,639
<INCOME-PRETAX> 9,772,729
<INCOME-PRE-EXTRAORDINARY> 9,772,729
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,384,970
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 7.81
<LOANS-NON> 1,107,038
<LOANS-PAST> 713,011
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<CHARGE-OFFS> 365,391
<RECOVERIES> 120,504
<ALLOWANCE-CLOSE> 7,846,113
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<ALLOWANCE-FOREIGN> 0
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