FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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, $5.00 Par Value-6,236,743 shares outstanding as of July 31, 1996.
<PAGE>
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of June 30, 1996 (Unaudited), December 31, 1995,
and June 30, 1995 (Unaudited). 3
Consolidated Statements of Income
for the Three and Six Months ended June 30, 1996
and 1995 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Six Months ended
June 30, 1996 and 1995 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signature Page 18
Subsidiaries of the Registrant 19
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
ASSETS (Unaudited) (Unaudited)
Cash and due from banks.................$ 41,006,471 $ 35,414,270 $ 37,716,095
Interest-bearing deposits in other banks. 12,540 24,158 17,786
Federal funds sold....................... none 9,350,000 17,700,000
Mortgage loans held for sale............. 953,500 961,700 none
Investment Securities::
Securities held to maturity (market value-
$106,951,123;$124,066,770;$154,387,301.. 107,243,915 122,885,208 153,524,817
Securities available for sale........... 69,478,755 68,967,132 10,893,491
Loans.................................... 466,262,636 427,674,085 406,007,825
Less: Unearned Income.................. (1,468,262) (1,361,905) (1,079,977)
Allowance for loan losses........ (7,922,353) (7,780,000) (7,785,170)
----------- ----------- -----------
Loans, Net............................... 456,872,021 418,532,180 397,142,678
----------- ----------- -----------
Premises and Equipment................... 16,746,690 16,449,618 14,342,451
Other real estate owned.................. 181,660 251,873 601,071
Accrued interest receivable and prepaid
expenses............................... 13,580,680 11,778,999 9,961,270
Other assets............................. 29,744,595 26,539,066 25,733,701
----------- ----------- -----------
TOTAL ASSETS............................$ 735,820,827 $ 711,154,204 $ 667,633,360
LIABILITIES ============ ============ ============
Deposits:
Noninterest-bearing...................$ 74,954,531 $ 77,318,207 $ 68,824,141
Interest-bearing...................... 541,959,471 532,786,570 492,588,923
------------ ------------ ------------
TOTAL DEPOSITS.......................... 616,914,002 610,104,777 561,413,064
------------ ------------ ------------
Interest-bearing demand notes issued to
U.S. Treasury........................ 3,000,000 2,233,880 3,000,000
Other liabilities for borrowed money.... 35,493,420 21,523,598 29,898,793
Accrued interest payable and accrued
expenses............................. 9,320,955 8,230,612 7,989,692
Other liabilities....................... 4,921,747 5,151,826 5,991,391
----------- ------------ ------------
TOTAL LIABILITIES....................... 669,650,124 647,244,693 608,292,940
STOCKHOLDERS' EQUITY ----------- ------------ ------------
Common Stock - (Par Value: $5.00)
No. Shares authorized:
35,000,000; 10,000,000; 10,000,000
No. Shares issued:
5,938,110; 5,932,686; 5,905,143
No. Shares outstanding:
5,938,082; 5,925,527; 5,890,552..... 29,690,550 29,663,430 29,525,715
Reserve for stock dividend payable....... 7,645,317 none none
Capital Surplus.......................... 10,117,165 9,987,236 9,308,423
Retained Earnings........................ 17,986,633 22,847,719 20,140,803
Net unrealized gain on securities
available for sale..................... 731,801 1,623,934 803,959
Less: Treasury Stock
(28; 7,159; 14,591) - at cost.......... (763) (212,808) (438,480)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 66,170,703 63,909,511 59,340,420
TOTAL LIABILITIES AND STOCKHOLDERS' ----------- ----------- -----------
EQUITY................................$735,820,827 $711,154,204 $667,633,360
=========== =========== ===========
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................$10,338,963 $ 9,475,042 $20,258,265 $18,468,242
Interest on deposits in other banks.............. 596 424 1,236 894
Interest on federal funds sold................... 8,847 138,440 68,780 164,586
Interest and dividends on investment securities:
Taxable...................................... 1,888,774 1,782,533 3,896,713 3,592,650
Tax-exempt................................... 722,136 643,494 1,478,804 1,301,409
Dividends on stock........................... 53,787 50,065 107,152 98,236
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME............................. 13,013,103 12,089,998 25,810,950 23,626,017
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more............................... 215,692 246,098 415,068 483,834
Interest on all other deposits.................. 4,862,473 4,451,066 9,656,610 8,460,552
Interest on demand notes issued to the
U.S. Treasury....... ......................... 19,444 25,484 42,802 55,413
Interest on federal funds purchased............. 55,884 none 71,863 57,046
Interest on other borrowed money................ 481,762 534,964 913,354 977,341
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 5,635,255 5,257,612 11,099,697 10,034,186
----------- ----------- ----------- -----------
NET INTEREST INCOME............................... 7,377,848 6,832,386 14,711,253 13,591,831
Provision for loan losses....................... 102,000 126,000 261,000 277,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.................................... 7,275,848 6,706,386 14,450,253 13,314,831
----------- ----------- ----------- -----------
OTHER OPERATING INCOME
Income from fiduciary activities............... 260,804 196,573 553,769 396,327
Service charges on deposit accounts............ 591,565 513,435 1,144,540 971,978
Other service charges, commissions and fees.... 559,419 394,126 978,786 785,280
Mortgage banking income........................ 287,312 145,756 686,316 261,272
Other operating income......................... 851,524 713,806 1,695,759 1,454,249
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING INCOME..................... 2,550,624 1,963,696 5,059,170 3,869,106
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits................ 3,722,852 3,158,583 7,377,993 6,322,144
Net occupancy expense......................... 502,360 395,678 1,061,423 785,597
Furniture and equipment expense............... 510,437 371,972 993,141 739,684
FDIC insurance assessment..................... 500 298,019 1,000 596,038
Other operating expenses...................... 1,786,783 1,584,697 3,567,888 3,052,585
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES................... 6,522,932 5,808,949 13,001,445 11,496,048
----------- ----------- ----------- -----------
Income before income taxes.................... 3,303,540 2,861,133 6,507,978 5,687,889
Applicable income taxes....................... 817,538 718,177 1,586,028 1,413,949
----------- ----------- ----------- -----------
NET INCOME.......................................$ 2,486,002 $ 2,142,956 $ 4,921,950 $ 4,273,940
=========== =========== =========== ===========
Earnings per common share:
Net Income..................................... $ .42 $ .36 $ .83 $ .72
Cash dividends declared per common share...... $ .18 $ .40 $ .36 $ .55
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net Income...........................................$ 4,921,950 $ 4,273,940
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 787,227 524,665
Accretion and amortization of investment securities 190,283 203,900
Provision for possible loan and lease losses...... 261,000 277,000
(Gain) loss on disposition of property and equipment 2,223 66
(Gain) loss on sale of mortgage loans............. (154,391) (81,941)
Proceeds from sales of mortgage loans............. 20,109,925 4,988,122
Origination of mortgage loans held for sale....... (19,947,334) (4,382,390)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable and prepaid expenses................ (1,801,681) (1,007,098)
(Increase) decrease in other assets............. (3,135,316) (2,012,539)
Increase (decrease) in accrued interest payable
and accrued expenses........................... 1,090,343 2,054,184
Increase (decrease) in other liabilities....... 232,930 707,160
----------- -----------
Net cash provided by/(used in) operating activities.. 2,557,159 5,545,069
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks 338,224 318,923
Purchase of interest-bearing deposits in other banks.. (326,606) (313,174)
Proceeds from maturities of investment securities..... 26,071,687 16,388,870
Purchase of investment securities..................... (12,487,442) (10,217,789)
Federal funds sold, net............................... 9,350,000 (17,700,000)
Net loans and leases made to customers................ (38,600,841) (12,411,253)
Purchases of premises and equipment................... (1,103,374) (2,889,759)
Proceeds from sale of premises and equipment.......... 16,852 none
------------ ------------
Net cash provided by/(used in) investing activities.. (16,741,500) (26,824,182)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW and savings accounts............................. (24,940,160) 1,118,562
Net increase (decrease) in time deposits.............. 31,749,385 23,292,499
Federal funds purchased, net.......................... none (6,000,000)
Net increase (decrease) in interest-bearing demand
notes issued to the U.S. Treasury.................... 766,120 86,130
Proceeds from borrowings.............................. 44,150,000 25,212,000
Repayments of borrowings.............................. (30,180,178) (14,485,733)
Proceeds from issuance of common stock................ 161,364 913,486
Cash dividends paid................................... (2,137,719) (3,247,095)
Acquisition of treasury stock......................... (99,735) (981,601)
Proceeds from issuance of treasury stock.............. 307,465 712,822
------------ -----------
Net cash provided by/(used in) financing activities. 19,776,542 26,621,070
Increase (decrease) in cash and due from banks....... 5,592,201 5,341,957
Cash and due from banks::
Beginning............................................. 35,414,270 32,374,138
------------ -----------
Ending................................................$ 41,006,471 $ 37,716,095
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money....$11,169,326 $ 9,387,639
Income taxes......................................... 1,555,000 1,276,000
Supplemental Schedule of Noncash Investing
and Financing Activities
Other Real Estate acquired in settlement of loans...... 118,910 246,092
See accompanying notes to financial notes to accompanying statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Sterling
Financial Corporation ("Sterling") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 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 $731,801 and
$803,959 respectively at June 30, 1996 and June 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.
Note 2 - Earnings Per Share
Earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which were
5,937,919 and 5,901,196 for 1996 and 1995 respectively.
Note 3 - Dividends Declared
The regular cash dividend for the second quarter of 1996 amounted to $.18
per share while the regular cash dividend for the second quarter of 1995
amounted to $.15 per share. In addition, a "special dividend" of $.25
per share was declared in the second quarter of 1995. This special dividend
reflects in the year to date dividends declared.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets at June 30, 1996 amounted to $735,820,827 which represents
an increase of 10.2% over the $667,633,360 reported at June 30, 1995.
Total assets at June 30, 1996 increased $24,666,623 or 3.5% over the
$711,154,204 reported at December 31, 1995.
The investment securities portfolio reflects a 7.5% increase or
$12,304,362 during the twelve month period June 30, 1995 to June 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 losse 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 $1,105,364
and $1,218,120 at June 30, 1996 and June 30, 1995 respectively.
During the first six months of 1996, there was a decrease in investment
securities in the amount of $15,129,670 or 7.9% 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 $456,872,021 during the
six month period ended June 30, 1996. This represents an
increase of 9.2% since December 31, 1995. Net loans
increased from $397,142,678 at June 30, 1995 to $456,872,021 at June
30, 1996. This represents an increase of $59,729,343 or 15%.
Premises and equipment increased $2,404,239 or 16.8% from $14,342,451
at June 30, 1995 to $16,746,690 at June 30, 1996. During the first six
months of 1996, total premises and equipment increased $297,072 or 1.8% from
$16,449,618 at December 31, 1995. Contributing to the increase in
premises and equipment during the period June 30, 1995 to June 30, 1996,
was the construction costs for the new headquarters building for Sterling
Financial Corporation and Bank of Lancaster County, as well as
furnishings and equipment for this building.
Total deposits increased $55,500,938 or 9.9% from $561,413,064 at
June 30, 1995 to $616,914,002 at June 30, 1996. During the first six
months of 1996, total deposits increased $6,809,225 or 1.1%
from the $610,104,777 reported at December 31, 1995. Noninterest-bearing
deposits increased $6,130,390 or 8.9% from $68,824,141 at June 30,
1995 to $74,954,531 at June 30, 1996. During the same period,
interest-bearing deposits increased $49,370,548 or 10%. Noninterest-bearing
deposits decreased $2,363,676 or 3.1% during the first six months of 1996
while interest-bearing deposits increased $9,172,901 or 1.7%.
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 $6,830,283 or 11.5% from the $59,340,420
reported at June 30, 1995 to $66,170,703 at June 30, 1996. There was an
increase of $2,261,192 or 3.5% 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 June 30, 1996 was 8.91% compared to 8.78%
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 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 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 11.45% and the total risk-based capital ratio was
12.70% at June 30, 1996 while the Tier 1 capital ratio was 10.99%
and the total risk-based capital ratio was 12.24% at June 30, 1995.
The following table reflects the various capital ratios for the periods
indicated:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995 June 30, 1995
<S> <C> <C> <C>
"Statement"
Equity Capital 8.91% 8.79% 8.78%
Primary and
Total Capital 9.88% 9.78% 9.84%
"Risk-based"
Tier 1 Capital 11.45% 10.95% 10.99%
Total Capital 12.70% 12.21% 12.24%
</TABLE>
Changes in the Allowance for Loan Losses for the six months ended
June 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 261,000 277,000
$ 8,041,000 $ 7,917,000
Losses charged to allowance 216,034 306,864
Recoveries credited to allowance 97,387 175,034
Net charge-offs 118,647 131,830
Balance at June 30, $ 7,922,353 $ 7,785,170
=========== ===========
Allowance as a percent of
period-end loans 1.70% 1.92%
The net charge-offs for the first six 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.
<TABLE>
<CAPTION>
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
<S> <C> <C> <C>
June 30, December 31, June 30,
1996 1995 1995
Nonaccrual loans $1,098,339 $1,009,536 $1,879,675
Accruing loans, past
due 90 days or more $ 315,832 $ 330,470 $ 207,337
Non-performing loans
to total loans .30% .31% .52%
Allowance for loan losses
to non-performing loans 560.2% 580.06% 373.0%
</TABLE>
The general policy has been to cease accruing interest on loans when
it is determined that a reasonable doubt exists as to the collectibility
of additional interest. Interest income on these loans is only recognized
to the extent payments are received. If interest income had been recorded on
such loans for the periods indicated, such interest income would have been
increased by approximately $53,501 and $112,147 at June 30, 1996 and 1995
respectively, and $143,997 at December 31, 1995. Interest income
recorded on the nonaccrual loans in 1996 was $15,924 and 1995 was
$6,008. Potential problem loans are loans which are included as performing
loans, but for which possible credit problems of the borrower causes
management to have doubts as to the ability of such borrower to comply with
present repayment terms and which may eventually result in disclosure
as a non-performing loan. At June 30,1996, 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 $1,131,563 for the second quarter
of 1996 and $1,909,523 for the second quarter of 1995, while the
average for 1995 was $1,476,100.
<TABLE>
<CAPTION>
.
The following table presents information concerning impaired loans for the
periods indicated:
June 30, December 31, June 30,
1996 1995 1995
------ ------ ------
<S> <C> <C> <C>
Gross impaired loans which have allowances..$1,098,339 $1,009,536 $1,879,675
Less: Related allowances for loan losses.. (164,752) (348,790) (537,821)
---------- ---------- ----------
Net impaired loans..........................$ 933,587 $ 660,746 $1,341,854
========== ========== ==========
</TABLE>
At June 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 June 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 immediatly 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 aditional source of liquity
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.
Results of Operations
The following discussion analyzes the specific components affecting
the changes in net income for the periods analyzed.
Three months ended June 30, 1996 compared to three months ended June 30, 1995
Net income for the second quarter of 1996 amounted to $2,486,002 compared
to $2,142,956 for the second quarter of 1995. This represents an increase of
$343,046 or 16%. On a per share basis, income was $.42 compared to $.36.
Total interest income increased $923,105 or 7.6% while total interest
expense increased $377,643 or 7.2%. Increased volumes in loans generated an
increase in interest and fees of $863,921 or 9.1% over 1995. Interest on
deposits with banks increased $172, while interest on federal funds
sold decreased $129,593. Income on investment securities increased $188,605
or 7.6% in 1996 as a result of increased volumes of various
investment securities.
Total interest expense amounted to $5,635,255 compared to $5,257,612.
This represents an increase of $377,643 or 7.2%. Interest paid on time
certificates of deposit of $100,000 or more decreased $30,406 or 12.4% in
1996 over the same period in 1995, while interest paid on
all other deposits increased $411,407 or 9.2%. Interest expense on other
interest bearing liabilities decreased $3,358 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 $24,000 from a charge
of $126,000 in 1995 to $102,000 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 $586,928 or 29.9%. An increase
was reflected in all categories of other income. Income from fiduciary
activities increased $64,231. Service charges on deposit accounts
and other various service charges increased $243,423, other operating
income increased $137,718 and mortgage banking income increased
$141,556. An increase in income generated from operating
leases was a major contributor to the increase in other operating income.
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.
Total other operating expenses rose $713,983 or 12.3% over the same
period last year. Increases of $564,269 in salaries and employee benefits,
$202,086 in other operating expenses, $245,147 in occupancy and
furniture and equipment expense and a decrease of $297,519 in FDIC
insurance constitute the total increase. 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 new
branch offices were opened in early 1995 and 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. Contributing to the increase in other
operating expenses were increases in professional services, education
and training expense, VISA and MAC fees and other operating expenses in
the normal course of business. 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. 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. As a result, the Bank
experienced a reduction in the FDIC assessment in 1996 over 1995.
Applicable income taxes increased $99,361 due in part to increased
taxable income. The effective tax rate was 24.7% for the second quarter
of 1996 compared to 25.1% for 1995.
Six months ended June 30, 1996 compared to six months ended June 30, 1995
Net income increased from $4,273,940 in June 30, 1995 to $4,921,950 in
June 30, 1996. This represents an increase of $648,010 or 15.2%. Net income
on a per share basis was $.83 for six months ended June 30, 1996
compared to $.72 for the same period 1995. Sterling's return on average
assets was 1.37% for 1996 compared to 1.34% for 1995. Return on average
stockholders' equity was 15.43% and 14.51% respectively for 1996 and 1995.
Total interest income increased $2,184,933 or 9.2%. Earning assets
increased $55,807,427 or 9.5% during this time. Loans increased
approximately $60 million or 14.8%, while securities increased over $12
million or 7.5% over the same period last year. Increased volumes generated
the increase in interest income. Interest and fees on loans increased
$1,790,023. Interest on deposits with banks increased $342 while
interest on federal funds sold decreased $95,806. Interest on investment
securities increased $490,374. The daily average balance on time deposits
with banks was $41,592 in 1996 compared to $21,929 in 1995.
During this time the daily average balance of federal funds sold
decreased from $5,451,657 in 1995 to $2,523,351 in 1996. The daily
average balance of investment securities was $184,475,536 at June 30, 1996
and $165,47,039 at June 30, 1995.
Total interest expense amounted to $11,099,697 reflecting an
increase of $1,065,511 or 9.7% from the $10,034,186 reported in 1995.
Interest-bearing deposits increased 10%. Increased volumes in deposits
generated a major portion of the increase in interest expense
of $1,127,292 or 12.6%. Interest paid on other interest-bearing
liabilities decreased $61,781 primarily as a result of decreased average
borrowings during this period of time.
The provision for loan loss decreased $16,000 in 1996 over 1995. The
provision for loan losses is based upon the monthly review of the loan
portfolio.
Total other operating income increased $1,190,064 or 30.8% during the
first six months of 1996 over the same period in 1995. An increase
was reflected in all categories of income. Income from fiduciary
activities increased $157,442 or 39.7%. Service charges on deposit accounts
and other various service charges increased $366,068 or 20.8%. Other
operating income increased $241,510 or 16.6%. An increase in
income generated from operating leases was a major contributor to the
increase in other operating income. Mortgage banking income increased
$425,044. 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.
Total other operating expenses rose $1,505,397 or 13.1% over the same
period last year. Increases in employee related expenses of
$1,055,849; $529,283 in occupancy and furniture and equipment
expense; $515,303 in other expenses and a decrease of $595,038 in
the FDIC insurance assessment comprise the increase in total
other operating expenses. The increase in salaries and employee benefits
was primarily due to increses 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 new branch
offices were opened in early 1995 and 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 the first semiannual assessment period of 1996.
Contributing to the increse in other operating expenses were increases
in professional services, education and training expenses, VISA and MAC fees,
postage, PA Shares Tax, printing and supplies and various other
ooperating expenses in the normal course of business.
Applicable income taxes amounted to $1,586,028 in 1996 compared to
$1,413,949 in 1995. The increase in taxes is due in part to increases in
taxable income. The effective tax rate was 24.4% and 24.9%
respectively for 1996 and 1995.
Three Months ended June 30, 1996 compared to three months ended March 31, 1996
Net income increased $50,054 or 2.1% in the second quarter of 1996
over the first quarter of 1996. Net income for the three months
ended June 30, 1996 was $2,486,002 compared to $2,435,948 for the
three months ended March 31, 1996. Net income on a per share
basis was $.42 for the second quarter of 1996, compared to $.41
for the first quarter of 1996. Return on average assets was 1.37% for the
second quarter of 1996 compared to 1.36% for the first quarter of 1996.
Total interest income increased $215,256 or 1.7% while total interest
expense increased $170,813 or 3.1%. This resulted in an increase in
net interest income of $44,443. Earning assets increased
$3,660,074 or .6% while interest-bearing liabilities increased
$9,734,511 or 1.7%. Both interest income and interest expense
increased due to these increased volumes as well as moderate rising interest
rates.
The loan loss provision decreased $57,000 over the first quarter of 1996.
Total other operating income increased $42,078 or 1.7% over the first
quarter. Various service charges, commissions and fees increased $178,642
while income from fiduciary activities decreased $32,161 and other
income increased $7,289. Mortgage banking income decreased $111,692.
Total other operating expenses increased $44,419 or .7% over the first
quarter. There was an increase of $67,711 in employee related expenses
while occupancy and furniture and equipment expenses decreased
$28,970 and other expenses increased $5,678.
Applicable income taxes increased $49,048 over the first quarter as
a result of an increase in taxable income.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of June 30, 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 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Sterling Financial Corporation
was held on April 30, 1996. The following individuals were elected to
Sterling's Board of Directors to hold office for the term specified:
For a Term of Three Years
Nominee In Favor Withheld
John E. Burkholder 4,725,091 20,759
Joan R. Henderson 4,733,797 12,053
Calvin G. High 4,737,084 8,766
E. Glenn Nauman 4,736,636 9,214
There are seven continuing directors whose terms of office will expire
at the 1997 or 1998 Annual Meeting. They are as follows:
Richard H. Albright, Jr. J. Roger Moyer, Jr.
Robert H. Caldwell John E. Stefan
Howard E. Groff, Jr. Glenn R. Walz
J. Robert Hess
The results of the voting on the following additional items were as
follows:
Proposal to amend Article 5 of the Corporations' Amended Articles
of Incorporation to increase the number of authorized shares
of the Corporation's common stock, par value $5.00 per share
from 10,000,000 to 35,000,000 shares.
Votes For Votes Against Abstentions
4,628,968 39,084 77,792
Proposal to ratify the selection of Trout, Ebersole & Groff as
the Corporation's independent certified public accountants for the
year ending December 31, 1996.
Votes For Votes Against Abstentions
4,701,500 24,484 19,864
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 - A report on Form 8-K dated May 28, 1996 was
filed May 31, 1996 pursuant to Item 5 of Form 8-K announcing that an $.18
per share cash dividend on common stock was declared on May 28,
1996 to shareholders of record as of June 17, 1996 and payable July 1, 1996
and in addition, a 5% stock dividend was declared on May 28, 1996,
to shareholders of record, July 10, 1996 and payable July 22, 1996.
A report on Form 8-K dated June 14, 1996 was filed June 14, 1996
pursuant to Item 5 of Form 8-K reporting and filing amended Articles of
Incorporation of Sterling Financial Corporation.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: August 9, 1996 By: John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: August 9, 1996 By: Jere L. Obetz
Jere L. Obetz
Senior Vice President/Treasurer
Chief Financial Officer
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
The following are the subsidiaries of Sterling Financial Corporation:
Subsidiary State of Incorporation or Organization
<S> <C>
Bank of Lancaster County, N.A. Pennsylvania (National Banking Association)
1 East Main Street
P.O. Box 0300
Strasburg, PA 17579
Town & Country, Inc. (Wholly owned Pennsylvania
Subsidiary of Bank of Lancaster
County, N.A.)
640 East Oregon Road
Lancaster, PA 17601
Sterling Mortgage Services, Inc. Pennsylvania
101 North Pointe Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000811671
<NAME> STERLING FINANCIAL CORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 41,006
<INT-BEARING-DEPOSITS> 13
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 107,244
<INVESTMENTS-CARRYING> 176,723
<INVESTMENTS-MARKET> 176,430
<LOANS> 465,748
<ALLOWANCE> (7,922)
<TOTAL-ASSETS> 735,821
<DEPOSITS> 616,914
<SHORT-TERM> 38,493
<LIABILITIES-OTHER> 14,243
<LONG-TERM> 0
<COMMON> 29,691
0
0
<OTHER-SE> 36,480
<TOTAL-LIABILITIES-AND-EQUITY> 735,821
<INTEREST-LOAN> 20,258
<INTEREST-INVEST> 5,553
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,811
<INTEREST-DEPOSIT> 10,072
<INTEREST-EXPENSE> 11,100
<INTEREST-INCOME-NET> 14,711
<LOAN-LOSSES> 261
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,001
<INCOME-PRETAX> 6,508
<INCOME-PRE-EXTRAORDINARY> 6,508
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,922
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 7.854
<LOANS-NON> 1,099
<LOANS-PAST> 315
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,780
<CHARGE-OFFS> 216
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 7,922
<ALLOWANCE-DOMESTIC> 7,922
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,922
</TABLE>
