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 March 31, 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 Ident No.)
or organization)
101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
(717) 581-6030
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $5.00 Par Value-5,938,082 shares outstanding as of April 30, 1996.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of March 31, 1996 (Unaudited), December 31, 1995,
and March 31, 1995 (Unaudited). 3
Consolidated Statements of Income
for the Three Months ended March 31, 1996
and 1995 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Three Months ended
March 31, 1996 and 1995 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signature Page 18
Subsidiaries of the Registrant 19
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
<S>
March 31, December 31, March 31,
1996 1995 1995
ASSETS (Unaudited) (Unaudited)
<C> <C> <C>
Cash and due form banks....................$ 34,543,438 $ 35,414,270 $ 34,262,036
Interest-bearing deposits in other banks... 25,842 24,158 15,874
Federal funds sold......................... none 9,350,000 5,250,000
Mortgage loans held for sale............... 3,563,849 961,700 404,200
Investment Securities::
Securities held to maturity (market value-
$115,731,775; $124,066,770; $152,265,384). 115,200,009 122,885,208 154,132,964
Securities available for sale............. 70,641,850 68,967,132 10,794,571
Loans...................................... 450,859,722 427,674,085 400,248,149
Less: Unearned Income..................... (1,465,219) (1,361,905) (1,051,026)
Allowance for loan losses........... (7,893,921) (7,780,000) (7,733,307)
Loans, Net................................. 441,500,582 418,532,180 391,463,816
Premises and Equipment..................... 16,496,058 16,449,618 12,857,095
Other real estate owned.................... 63,100 251,873 473,446
Accrued interest receivable and
prepaid expenses.......................... 9,499,500 11,778,999 9,341,229
Other assets............................... 31,491,766 26,539,066 24,314,752
TOTAL ASSETS...............................$ 723,025,994 $ 711,154,204 $ 643,309,983
============ ============ ============
LIABILITIES
Deposits:
Non-interest bearing......................$ 73,569,403 $ 77,318,207 $ 65,369,054
Interest-bearing.......................... 539,646,316 532,786,570 477,369,804
TOTAL DEPOSITS............................. 613,215,719 610,104,777 542,738,858
Interest-bearing demand notes issued to
U.S. Treasury............................. 2,548,881 2,233,880 1,426,780
Other liabilities for borrowed money....... 26,373,183 21,523,598 28,184,148
Federal funds purchased.................... 2,150,000 none none
Accrued interest payable and accrued
expenses.................................. 8,227,117 8,230,612 6,754,902
Other liabilities.......................... 5,220,962 5,151,826 5,149,225
TOTAL LIABILITIES.......................... 657,735,862 647,244,693 584,253,913
STOCKHOLDERS' EQUITY
Common Stock - (Par Value: $5.00)
No. Shares authorized: 10,000,000
No. Shares issued: 5,938,110; 5,932,686; 5,900,250
No. Shares outstanding: 5,934,450; 5,925,527;
5,882,020................................ 29,690,550 29,663,430 29,501,250
Capital Surplus............................. 10,118,073 9,987,236 9,190,990
Retained Earnings........................... 24,214,808 22,847,719 20,359,905
Net unrealized gain on securities available
for sale................................... 1,366,436 1,623,934 547,046
Less: Treasury Stock (3,660; 7,159; 18,230 )-
at cost.................................... (99,735) (212,808) (543,121)
TOTAL STOCKHOLDERS' EQUITY.................. 65,290,132 63,909,511 59,056,070
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$ 723,025,994 $ 711,154,204 $ 643,309,983
============ ============ ============
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
March 31,
1996 1995
INTEREST INCOME
<S> <C> <C>
Interest and fees on loans.......................$ 9,919,302 $ 8,993,200
Interest on deposits in other banks.............. 640 470
Interest on federal funds sold................... 59,933 26,146
Interest and dividends on investment securities:
Taxable....................................... 2,007,939 1,810,117
Tax-exempt.................................... 756,668 657,915
Dividends on stock............................ 53,365 48,171
TOTAL INTEREST INCOME.............................. 12,797,847 11,536,019
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more.............................. 199,376 237,736
Interest on all other deposits................... 4,794,137 4,009,486
Interest on demand notes issued to the U.S. Treas 23,358 29,929
Interest on federal funds purchased.............. 15,979 57,046
Interest on other borrowed money................. 431,592 442,377
TOTAL INTEREST EXPENSE............................. 5,464,442 4,776,574
NET INTEREST INCOME................................ 7,333,405 6,759,445
Provision for loan losses........................ 159,000 151,000
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES..................................... 7,174,405 6,608,445
OTHER OPERATING INCOME
Income from fiduciary activities................ 292,965 199,754
Service charges on deposit accounts............. 552,975 458,543
Other service charges, commissions and fees..... 419,367 391,154
Mortgage banking income......................... 399,004 115,516
Other operating income.......................... 844,235 740,443
TOTAL OTHER OPERATING INCOME....................... 2,508,546 1,905,410
OTHER OPERATING EXPENSES
Salaries and employee benefits.................. 3,655,141 3,163,561
Net occupancy expense........................... 559,063 389,919
Furniture and equipment expense................. 482,704 367,712
FDIC insurance assessment....................... 500 298,019
Other operating expenses........................ 1,781,105 1,467,888
TOTAL OTHER OPERATING EXPENSES..................... 6,478,513 5,687,099
Income before income taxes...................... 3,204,438 2,826,756
Applicable income taxes......................... 768,490 695,772
NET INCOME.........................................$ 2,435,948 $ 2,130,984
============ ===========
Earnings per common share:
Net Income........................................$ .41 $ .36
Cash dividends declared per common share..........$ .18 $ .15
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash Flows from Operating Activities
Net Income..............................................$ 2,435,948 $ 2,130,984
Adjustments to reconcile net income to net cash
provided by/(used in)operating activities:
Depreciation.......................................... 383,957 258,530
Accretion and amortization of investment securities... 86,253 111,167
Provision for possible loan and lease losses.......... 159,000 151,000
(Gain) loss on disposition of property and equipment.. 418 66
(Gain) loss on sale of mortgage loans................. (104,126) (20,289)
Proceeds from sales of mortgage loans................. 11,909,007 1,869,480
Origination of mortgage loans held for sale........... (14,407,030) (1,729,600)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and prepaid expenses................................ 2,279,499 (387,057)
(Increase) decrease in other assets.................. (4,763,927) (465,965)
Increase (decrease) in accrued interest payable
and accrued expenses................................ (3,495) 1,017,389
Increase (decrease) in other liabilities............. 201,787 (200,651)
Net cash provided by/(used in) operating activities. (1,822,709) 2,735,054
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks.. 664,540 241,776
Purchase of interest-bearing deposits in other banks.... (666,224) (234,115)
Proceeds from maturities of investment securities....... 15,788,130 8,584,095
Purchase of investment securities....................... (10,254,051) (3,218,771)
Federal funds sold, net................................. 9,350,000 (5,250,000)
Net loans and leases made to customers.................. (23,127,402) (6,606,391)
Purchases of premises and equipment..................... (431,496) (1,138,268)
Proceeds from sale of premises and equipment............ 681 none
Net cash provided by/(used in) investing activities. (8,675,822) (7,621,674)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW
and savings accounts................................... (12,025,474) (8,313,321)
Net increase (decrease) in time deposits................ 15,136,416 14,050,176
Federal funds purchased, net............................ 2,150,000 (6,000,000)
Net increase (decrease) in interest-bearing demand
notes issued to U.S. Treasury.......................... 315,001 (1,487,090)
Proceeds from borrowings................................ 7,900,000 17,975,000
Repayments of borrowings................................ (3,050,415) (8,963,378)
Proceeds from issuance of common stock................... 161,364 768,532
Cash dividends paid...................................... (1,068,859) (885,037)
Acquisition of treasury stock............................ (99,735) (543,121)
Proceeds from issuance of treasury stock................. 209,401 172,757
Net cash provided by/(used in) financing activities.. 9,627,699 6,774,518
Increase (decrease) in cash and due from banks......... (870,832) 1,887,898
Cash and due from banks::
Beginning............................................... 35,414,270 32,374,138
Ending..................................................$ 34,543,438 $ 34,262,036
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money......$ 5,582,836 $ 4,396,282
Income taxes........................................... none none
Supplemental Schedule of Noncash Investing and Financing Activities
Other Real Estate acquired in settlement of loans........ none 39,459
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 three-month period ended March
31, 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 (SFAS) 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 vale, 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 $1,366,436 and $547,046 respectively at March 31, 1996
and March 31, 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 is 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 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 FAB 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 31, 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 5,937,755 and 5,899,008 for 1996 and 1995 respectively.
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 March 31, 1996 amounted to $723,025,994 compared
to $643,309,983 at March 31, 1995. This represents an increase of
$79,716,011 or 12.4% over that period of time. Total assets at
March 31, 1996 increased $11,871,790 or 1.7% over the $711,154,204
reported at December 31, 1995.
The investment securities portfolio reflects a 12.7% increase of
$20,914,324 during the twelve month period March 31, 1995 to March 31, 1996.
Effective January 1, 1994, Sterling adopted SFAS No. 115 - "Accounting
for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that these securities be classified into one of three categories:
held-to-maturity, available-for-sale or trading. Specific
accounting treatments apply to each of the three categories. Securities
held-to-maturity will be reported at amortized cost, trading securities
are reported at fair value with unrealized gains and losses
included in earnings and available-for-sale will be reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. Sterling has
segregated its investment securities into two categories:
those held-to-maturity and those available-for-sale. In 1995,
the Financial Accounting Standards Board 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. Included
in securities available-for-sale is unrealized gains of
$2,070,358 and $828,857 for March 31,1996 and March 31, 1995
respectively. During the first three months of 1996, there was a
decrease in investment securities in the amount of $6,010,481 or 3.1%
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 $391,468,816 at March 31, 1995 to
$441,500,582 at March 31, 1996. This represents an increase
of $50,036,766 or 12.8%. Net loans have grown from $418,532,180 to
$441,500,582 during the three month period ended March 31, 1996.
This represents an increase of 5.5% since December 31, 1995.
Premises and equipment increased $3,638,963 or 28.3% from $12,857,095
at March 31, 1995 to $16,496,058 at March 31, 1996. During the first
three months of 1996, total premises and equipment increased
$46,440 or .3% from $16,449,618 at December 31, 1995. Contributing to
the increase in premises and equipment during the period March
1995 to March 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 $70,476,861 or 13% from $542,738,858 at
March 31, 1995 to $613,215,719 at March 31, 1996. During the first
three months of 1996, total deposits increased $3,110,942 from the
$610,104,777 reported at December 31, 1995. Noninterest-bearing deposits
increased $8,200,349 from $65,369,054 at March 31, 1995 to $73,569,403 at
March 31, 1996. During the same period, interest-bearing deposits
increased $62,276,512 or 13%. Noninterest-bearing deposits decreased
$3,748,804 during the first three months of 1996 while
interest-bearing deposits increased $6,859,746 or 1.3%. 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 $6,234,062 or 10.6% from the $59,056,070
reported at March 31, 1995 to $65,290,132 at March 31, 1996. There
was an increase of $1,380,621 or 2.2% 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 March 31, 1996
was 8.87% compared to 9.11% at March 31, 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 10.84% and the total risk-based capital ratio
was 12.09% at March 31, 1996 while the Tier 1 capital ratio
was 11.14% and the total risk-based capital ratio was 12.39% at March 31,
1995.
The following table reflects the various capital ratios for the periods
indicated:
March 31, 1996 December 31, 1995 March 31, 1995
"Statement"
Equity Capital 8.87% 8.79% 9.11%
Primary and
Total Capital 9.85% 9.78% 10.19%
"Risk-based"
Tier 1 Capital 10.84% 10.95% 11.14%
Total Capital 12.09% 12.21% 12.39%
Changes in the Allowance for Loan Losses for the three months ended
March 31, 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 159,000 151,000
---------- ----------
7,939,000 7,791,000
---------- ----------
Losses charged to allowance 104,208 118,418
Recoveries credited to allowance 59,129 60,725
---------- ----------
Net charge-offs 45,079 57,693
---------- ----------
Balance at March 31, $7,893,921 $7,733,307
========== ==========
Allowance as a percent of
period-end loans 1.76% 1.94%
The net charge-offs for the first three 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:
March 31, December 31, March 31,
1996 1995 1995
Nonaccrual loans $1,182,769 $1,009,536 $2,260,291
Accruing loans, past due 90 days or more $ 308,115 $ 330,470 $ 367,043
Non-performing loans to total loans .33% .31% .66%
Allowance for loan losses to
non-performing loans 529.5% 580.6% 294.3%
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 $25,345 and
$63,252 at March 31, 1996 and 1995 respectively, and $143,997 at December 31,
1995. Interest income recorded on the nonaccrual loans in 1996 was $5,823
and 1995 was $2,712. 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 March 31,1996, 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
periods indicated.
The average amount of nonaccruals was $1,087,052 for the first
quarter of 1996 and $2,246,809 for the first quarter of 1995, while the
average for 1995 was $1,476,100.
The following table presents information concerning impaired loans
for the periods indicated:
Gross impaired loans which have allowances...$1,182,769 $1,009,536 $2,260,291
Less: Related allowances for loan loss...... (351,628) (348,790) (717,131)
---------- ---------- ----------
Net impaired loans...........................$ 831,141 $ 660,746 $1,543,160
At March 31, 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 March 31, 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 sources 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 March 31, 1996 compared to three months
ended March 31, 1995
Net income for the first quarter of 1996 amounted to $2,435,948 compared
to $2,130,984 for the first quarter of 1995. This represents an increase
of $304,964 or 14.3%. On a per share basis, income was $.41 compared to
$.36.
Return on average assets for the first quarter of 1996 was 1.36%
compared to 1.35% for the first quarter of 1995. Return on equity was 15.02%
for the first quarter of 1996 compared to 14.51% for the same period in 1995.
Total interest income increased $1,261,828 or 10.9% while total interest
expense increased $687,868 or 14.4%. Therefore, the interest
differential increased $573,960. Loans increased over $50 million over the
same period in 1995. Increased volumes was the primary reason
for the increase of $926,102 in interest and fees on loans. Interest on
deposits with banks increased $170. Interest on federal funds sold
increased $33,787. The daily average of federal funds sold was $4,380,219
in 1996 compared to $1,754,444 in 1995. Income on investment securities
increased $301,769 or 12% in 1996. The daily average of investment
securities in 1996 was $188,769,504 compared to $167,276,427 in 1995.
Total interest expense amounted to $5,464,442 reflecting an increase
of $687,868 or 14.4% over the $4,776,574 reported in 1995. Interest
paid on interest-bearing deposits increased $746,291 or 17.6% in 1996
over the same period in 1995. Increased volumes in interest-bearing
deposits generated a major portion of this increase. Interest expense on
other interest bearing liabilities decreased $58,423 during the
same period of time primarily as a result of decreased volumes in this
category of liabilities.
The provision for possible loan losses increased $8,000 from a
charge of $151,000 in 1995 to $159,000 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 $603,136 or 31.7%. An increase
was reflected in all categories of income. Income from fiduciary
activities increased $93,211 or 46.7%. Service charges on deposit
accounts and other various service charges increased $122,645 or 14.4%.
Other operating income increased $103,792 which represents a 14% increase.
Income generated from operating leases was the major contributor to
the increase in other operating income. Mortgage banking income
increased $283,488. 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 $791,414 or 13.9% over the same
period last year. Increases of $491,580 in salaries and employee
benefits, $313,217 in other operating expenses, $284,136 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 marketing expense, 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 amounted to $768,490 in 1996 compared to
$695,772 in 1995. The increase in taxes is due in part to increases
in taxable income.
Three months ended March 31, 1996 compared to three months ended
December 31, 1995
Net income increased $38,310 or 1.6% in the first quarter of 1996 over
the fourth quarter of 1995. Net income at March 31, 1996 was $2,435,948
compared to $2,397,638 for the quarter ending December 31, 1995.
Net income on a per share basis was $.41 for the first quarter of
1996 as well as the last quarter of 1995. Return on average
assets for the first quarter of 1996 was 1.36% compared to 1.40% for
the last quarter of 1995. Return on equity was 15.02% and 15.50%
respectively for March 31, 1996 and December 31, 1995.
Total interest income increased $82,649 or .7%. Interest and fees
on loans increased $71,183 while interest on investment
securities increased $19,478. Interest on other earning assets decreased
$8,012. Earning assets increased approximately $10.3 million during the
first three months of 1996. The most significant increase in earning
assets was in the loan portfolio. Loans, net of unearned income,
increased over $23 million the first three months of 1996. Federal
funds sold decreased $9,350,000 while the securities decreased over
$6 million.
Total interest expense decreased $125,957 or 2.3% during the first
quarter of 1996. Total interest-bearing liabilities increased nearly
$14.2 million in the first quarter of 1996 over the last quarter
of 1995. Interest-bearing deposits increased over $6.8 million during
this period of time. Lower interest rates contributed to the decrease in
interest expense.
Net interest income increased $208,606 as a result of an increase in
interest income over the decrease in interest expense.
The loan loss provision for the first quarter of 1996 was $159,000
compared to $74,867 for the last quarter of 1995.
Total other operating income increased $212,045 or 9.2% in the first
quarter of 1996 over the last quarter of 1995. Contributing
to this increase was an increase in income from fiduciary activities
and service charges on deposit accounts and mortgage banking income.
Other service charges, commissions and fees and other income reflect
a decrease. The major contributor to the increase was the increase in
mortgage banking income.
Total other operating expenses increased $360,904 or 5.9% over the
fourth quarter of 1995. Salaries and employee benefits increased $211,490,
occupancy and furniture and equipment expense increased $109,944
and other operating expenses increased $93,705. The FDIC insurance
assessment reflected a decrease of $54,235 as a result of the new rate
structure effective for the first semiannual assessment period of 1996.
Applicable income taxes were $62,696 less than those recorded for the
fourth quarter of 1995 due mainly to tax credits applied in the
first quarter of 1996.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of March 31, 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
A report on Form 8-K dated March 7, 1996 was filed March 7,
1996 pursuant to Item 5 on Form 8-K reporting and
filing amended Bylaws 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: May 13, 1996 By:/s/ John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: May 13, 1996 By:/s/ Jere L. Obetz
Jere L. Obetz
Senior Vice President/Treasurer
Chief Financial Officer
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 (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 Point Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
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<NAME> STERLING FINANCIAL CORP
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<PERIOD-END> MAR-31-1996
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