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, 1997
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, $5.00 Par Value-6,215,895 shares outstanding as of July 31, 1997.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of June 30, 1997 (Unaudited), December 31, 1996,
and June 30, 1996 (Unaudited). 3
Consolidated Statements of Income
for the Three and Six Months ended June 30, 1997
and 1996 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Six Months ended
June 30, 1997 and 1996 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signature Page 20
Subsidiaries of the Registrant 21
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and due from banks.................$ 30,549,585 $ 31,339,470 $ 41,006,471
Interest-bearing deposits in other banks. 51,210 643,498 12,540
Federal funds sold....................... 21,450,000 24,150,000 none
Mortgage loans held for sale............. 1,074,305 1,016,100 953,500
Investment Securities::
Securities held to maturity (market value-
$87,777,576;$94,778,086;$106,951,123.... 87,032,544 94,222,263 107,243,915
Securities available for sale........... 96,673,639 79,374,627 69,478,755
Loans.................................... 493,616,941 475,017,288 466,262,636
Less: Unearned Income.................. (744,730) (1,184,957) (1,468,262)
Allowance for loan losses........ (7,979,022) (7,800,000) (7,922,353)
----------- ----------- -----------
Loans, Net............................... 484,893,189 466,032,331 456,872,021
----------- ----------- -----------
Premises and Equipment................... 22,145,264 22,657,668 16,746,690
Other real estate owned.................. 368,345 80,969 181,660
Accrued interest receivable and prepaid
expenses............................... 13,136,480 11,262,066 13,580,680
Other assets............................. 34,890,795 33,293,239 29,744,595
----------- ----------- -----------
TOTAL ASSETS............................$ 792,265,356 $ 764,072,231 $ 735,820,827
LIABILITIES ============ ============ ============
Deposits:
Noninterest-bearing...................$ 80,969,311 $ 82,175,110 $ 74,954,531
Interest-bearing...................... 585,396,868 564,861,347 541,959,471
------------ ------------ ------------
TOTAL DEPOSITS.......................... 666,366,179 647,036,457 616,914,002
------------ ------------ ------------
Interest-bearing demand notes issued to
U.S. Treasury........................ 3,000,000 2,741,397 3,000,000
Other liabilities for borrowed money.... 34,351,212 30,433,826 35,493,420
Accrued interest payable and accrued
expenses............................. 10,112,242 8,704,485 9,320,955
Other liabilities....................... 6,167,624 5,976,749 4,921,747
----------- ------------ ------------
TOTAL LIABILITIES....................... 719,997,257 694,892,914 669,650,124
STOCKHOLDERS' EQUITY ----------- ------------ ------------
Common Stock - (Par Value: $5.00)
No. Shares authorized: 35,000,000
No. Shares issued:
6,237,009; 6,237,009; 5,938,110
No. Shares outstanding:
6,205,484; 6,220,078; 5,938,082..... 31,185,045 31,185,045 29,690,550
Reserve for stock dividend payable....... none none 7,645,317
Capital Surplus.......................... 16,322,245 16,325,040 10,117,165
Retained Earnings........................ 23,303,653 20,502,456 17,986,633
Net unrealized gain on securities
available for sale..................... 2,262,433 1,602,599 731,801
Less: Treasury Stock
(31,525; 16,931; 28) - at cost......... (805,277) (435,823) (763)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 72,268,099 69,179,317 66,170,703
TOTAL LIABILITIES AND STOCKHOLDERS' ----------- ----------- -----------
EQUITY................................ $792,265,356 $764,072,231 $735,820,827
=========== =========== ===========
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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................$11,215,796 $10,338,963 $21,883,934 $20,258,265
Interest on deposits in other banks.............. 3,603 596 11,409 1,236
Interest on federal funds sold................... 122,790 8,847 264,235 68,780
Interest and dividends on investment securities:
Taxable...................................... 1,794,033 1,888,774 3,577,060 3,896,713
Tax-exempt................................... 756,444 722,136 1,497,049 1,478,804
Dividends on stock........................... 57,455 53,787 112,838 107,152
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME............................. 13,950,121 13,013,103 27,346,525 25,810,950
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more............................... 392,332 215,692 757,071 415,068
Interest on all other deposits.................. 5,109,624 4,862,473 9,954,516 9,656,610
Interest on demand notes issued to the
U.S. Treasury....... ......................... 32,146 19,444 57,128 42,802
Interest on federal funds purchased............. 1,178 55,884 1,285 71,863
Interest on other borrowed money................ 637,486 481,762 1,138,102 913,354
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 6,172,766 5,635,255 11,908,102 11,099,697
----------- ----------- ----------- -----------
NET INTEREST INCOME............................... 7,777,355 7,377,848 15,438,423 14,711,253
Provision for loan losses....................... 453,000 102,000 651,100 261,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.................................... 7,324,355 7,275,848 14,787,323 14,450,253
----------- ----------- ----------- -----------
OTHER OPERATING INCOME
Income from fiduciary activities............... 398,732 260,804 768,742 553,769
Service charges on deposit accounts............ 742,660 591,565 1,380,300 1,144,540
Other service charges, commissions and fees.... 387,376 559,419 692,329 978,786
Mortgage banking income........................ 269,514 287,312 508,934 686,316
Other operating income......................... 1,280,389 851,524 2,467,106 1,695,759
Gains/(Losses) on securities transactions...... 204,957 none 204,957 none
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING INCOME..................... 3,283,628 2,550,624 6,022,368 5,059,170
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits................ 4,098,341 3,722,852 8,052,073 7,377,993
Net occupancy expense......................... 554,920 502,360 1,183,024 1,061,423
Furniture and equipment expense............... 602,119 510,437 1,191,168 993,141
FDIC insurance assessment..................... 20,529 500 40,611 1,000
Other operating expenses...................... 1,845,218 1,786,783 3,416,859 3,567,888
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES................... 7,121,127 6,522,932 13,883,735 13,001,445
----------- ----------- ----------- -----------
Income before income taxes.................... 3,486,856 3,303,540 6,925,956 6,507,978
Applicable income taxes....................... 910,318 817,538 1,760,896 1,586,028
----------- ----------- ----------- -----------
NET INCOME.......................................$ 2,576,538 $ 2,486,002 $ 5,165,060 $ 4,921,950
=========== =========== =========== ===========
Earnings per common share:
Net Income..................................... $ .41 $ .40 $ .83 $ .79
Cash dividends declared per common share...... $ .19 $ .18 $ .38 $ .36
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,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities
Net Income...........................................$ 5,165,060 $ 4,921,950
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 950,245 787,227
Accretion and amortization of investment securities 140,508 190,283
Provision for possible loan and lease losses...... 651,100 261,000
(Gain) loss on sale of investment securities...... (204,957) none
(Gain) loss on disposition of property and equipment (451,397) 2,223
(Gain) loss on sale of mortgage loans............. (114,438) (154,391)
Proceeds from sales of mortgage loans............. 15,067,118 20,109,925
Origination of mortgage loans held for sale....... (15,010,885) (19,947,334)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable and prepaid expenses................ (1,874,414) (1,801,681)
(Increase) decrease in other assets............. (1,884,932) (3,135,316)
Increase (decrease) in accrued interest payable
and accrued expenses........................... 1,407,757 1,090,343
Increase (decrease) in other liabilities....... (149,040) 232,930
----------- -----------
Net cash provided by/(used in) operating activities.. 3,691,725 2,557,159
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks 857,017 338,224
Purchase of interest-bearing deposits in other banks.. (264,729) (326,606)
Proceeds from sale of investment securities........... 205,400 none
Proceeds from maturities of investment securities..... 15,645,939 26,071,687
Purchase of investment securities..................... (24,896,434) (12,487,442)
Federal funds sold, net............................... 2,700,000 9,350,000
Net loans and leases made to customers................ (19,511,958) (38,600,841)
Purchases of premises and equipment................... (1,764,089) (1,103,374)
Proceeds from sale of premises and equipment.......... 1,777,645 16,852
------------ -----------
Net cash provided by/(used in) investing activities.. (25,251,209) (16,741,500)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW and savings accounts............................. (1,052,522) (24,940,160)
Net increase (decrease) in time deposits.............. 20,382,244 31,749,385
Federal funds purchased, net.......................... none none
Net increase (decrease) in interest-bearing demand
notes issued to the U.S. Treasury.................... 258,603 766,120
Proceeds from borrowings.............................. 25,774,300 44,150,000
Repayments of borrowings.............................. (21,856,914) (30,180,178)
Proceeds from issuance of common stock................ none 161,364
Cash dividends paid................................... (2,363,863) (2,137,719)
Acquisition of treasury stock......................... (1,261,472) (99,735)
Proceeds from issuance of treasury stock.............. 889,223 307,465
------------ -----------
Net cash provided by/(used in) financing activities. 20,769,599 19,776,542
Increase (decrease) in cash and due from banks....... (789,885) 5,592,201
Cash and due from banks::
Beginning............................................. 31,339,470 35,414,270
------------ -----------
Ending................................................$ 30,549,585 $ 41,006,471
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money....$ 11,878,956 $ 11,169,326
Income taxes......................................... 1,750,000 1,555,000
Supplemental Schedule of Noncash Investing
and Financing Activities
Other Real Estate acquired in settlement of loans...... 342,110 118,910
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, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
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.
Financial Accounting Standards Board ("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
had been recorded on a "net" gain/loss basis. FASB Statement No. 122 requires
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 Statement No. 122
results 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.
In June 1996, the FASB issued Statement of Financial Accounting Standards
("SFAS") 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". SFAS No. 125 establishes accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on the consistent application of the financial-components
approach. This approach requires the recognition of financial assets and
servicing assets that are controlled by the reporting entity, the derecognition
of financial assets when control is surrendered and the derecognition of
liabilities when they are extinguished. Specific criteria are established for
determining when control has been surrendered in the transfer of financial
assets. Liabilities and derivatives incurred or obtained by transferors in
conjunction with the transfer of financial assets are required to be measured at
fair value, if practicable. Servicing assets and other retained interests in
transferred assets are required to be measured by allocating the previous
carrying amount between the assets sold, if any, and the interest that is
retained, if any, based on the relative fair values of the assets at the date of
the transfer. Servicing assets retained are subsequently subject to amortization
and assessment for impairment. As issued, 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.
The FASB was made aware that the volume and variety of certain transactions
and the related changes to information systems and accounting processes that are
necessary to comply with the requirement of SFAS No. 125 would make it extremely
difficult, if not impossible, for some affected enterprises to apply the
transfer and collateral provisions of the Statement to those transactions as
soon as January 1, 1997. As a result, in December 1996, the FASB issued FASB
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125" that defers for one year the effective date of these provisions as well
as accounting for transfers and servicing for repurchase agreement, dollar-roll,
securities lending and similar transactions. Therefore, this Statement shall be
effective for such transfers of financial assets after December 31, 1997.
Sterling has determined that the adoption of SFAS No. 127 is not expected
to have a material effect on the financial position or results of operations of
the Corporation.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share". This statement establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. After the effective date, all prior-period EPS
data presented shall be restated to conform with the provisions of this
Statement. The adoption of this Statement is not expected to have a material
effect on the financial position or results of operations of the Corporation.
The FASB also issued in February 1997, Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure". This
Statement establishes standards for disclosing information about an entity's
capital structure. This Statement is effective for financial statements for
periods ending after December 15, 1997. The adoption of this Statement is not
expected to have a material effect on the financial position or results of
operations of the Corporation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This Statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. Sterling has not completed the analysis
required to estimate the impact of this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement supercedes FASB No. 14,
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
The Statement is effective for fiscal years beginning after December 15, 1997.
Sterling has not completed the analysis required to estimate the impact of this
statement.
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 6,226,004 and
6,233,899 for 1997 and 1996 respectively. Figures for 1996 were retroactively
restated to reflect a 5% stock dividend paid in July 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 June 30, 1997 amounted to $792,265,356 which represents an
increase of 7.7% over the $735,820,827 reported at June 30, 1996. Total assets
at June 30, 1997 increased $28,193,125 or 3.7% over the $764,072,231 reported at
December 31, 1996.
The investment securities portfolio reflects a 4% increase or $6,983,513
during the twelve month period June 30, 1996 to June 30, 1997. 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. During the
first six months of 1997, there was an increase in investment securities in the
amount of $10,109,293 or 5.8% from the $173,596,890 reported at December 31,
1996. The amount of unrealized gains included in the available-for-sale
category at December 31,1996 was $2,428,180, while at June 30, 1997 and 1996, it
was $3,427,929 and $1,105,364 respectively.
Net loans have grown from $466,032,331 to $484,893,189 during the six month
period ended June 30, 1997. This represents an increase of 4.1% since December
31, 1996. Net loans increased from $456,872,021 at June 30, 1996 to
$484,893,189 at June 30, 1997. This represents an increase of $28,021,168 or
6.1%.
Premises and equipment increased $5,398,574 or 32.2% from $16,746,690 at
June 30, 1996 to $22,145,264 at June 30, 1997. During the first six months of
1997, total premises and equipment decreased $512,404 or 2.3% from $22,657,668
at December 31, 1996. Contributing to the increase in premises and equipment
during the period June 1996 to June 1997, was the purchase of a property
located at 1097 Commercial Avenue, East Petersburg, PA situated on 12.7 acres
with a building containing approximately 123,000 square feet. This building is
used to house the Bank's Administrative Service Center, as well as other
departments of the Bank. Town & Country, Inc., a wholly owned subsidiary of the
Bank, also occupies this building. The purchase price of the property was
approximately $5.3 million. The purchase took place on December 4, 1996. The
building that previously housed the Administrative Service Center was sold for
approximately $1.2 million and settlement took place on February 21, 1997. The
building formerly occupied by Town & Country, Inc. was sold for approximately
$426,000 and settlement took place on April 1, 1997. These two transactions
contributed to the decrease during the first six months of 1997.
Total deposits increased $49,452,177 or 8% from $616,914,002 at June 30,
1996 to $666,366,179 at June 30, 1997. During the first six months of 1997,
total deposits increased $19,329,722 or 3% from the $647,036,457 reported at
December 31, 1996. Noninterest-bearing deposits increased $6,014,780 or 8% from
$74,954,531 at June 30, 1996 to $80,969,311 at June 30, 1997. During the same
period, interest-bearing deposits increased $43,437,397 or 8%. Noninterest-
bearing deposits decreased $1,205,799 or 1.5% during the first six months of
1997 while interest-bearing deposits increased $20,535,521 or 3.6%.
Historically, the Bank has seen noninterest-bearing deposits increase
significantly in December each year. The increase is generally in deposits from
business or commercial customers. These same deposits then flow out of the Bank
during the first quarter of each year. In December 1996, deposits from business
and commercial customers increased nearly $7 million. During the first quarter
of 1997, these same deposits decreased nearly $9 million. This was the major
contributor to the decrease in noninterest-bearing deposits during the first six
months of 1997.
Stockholders' equity increased $6,097,396 or 9.2% from the $66,170,703
reported at June 30, 1996 to $72,268,099 at June 30, 1997. There was an
increase of $3,088,782 or 4.5% from the $69,179,317 reported at December 31,
1996. The major contributor to these increases was net income from operations.
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, 1997 was 8.87% compared to 8.91%
for the same period 1996. At December 31, 1996 the ratio was 8.87%.
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 total 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.
Regulatory authorities have decided to exclude the net unrealized holding gains
and losses on available-for-sale securities from the definition of common
stockholders' equity for regulatory capital purposes. However, national banks
will continue to deduct unrealized losses on equity securities in their
computation of Tier 1 capital. Therefore, national banks will continue to
report the net unrealized holding gains and losses on available-for-sale
securities in the reports of condition and income submitted to federal
regulators as required by SFAS No. 115 and the financial reports prepared in
accordance with generally accepted accounting principles, but will exclude these
amounts from calculations of Tier 1 capital. In addition, national banks should
use the amortized cost of available-for-sale debt securities (as opposed to fair
value) to determine the average total assets as well as the risk-weighted assets
used in the calculations of the leverage and risk-based capital ratios. The
ratios below reflect the above definition of common stockholders' equity which
included common stock, capital surplus and retained earnings, less net realized
holding losses on available-for-sale equity securities with readily determinable
fair values. 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 10.57% and
the total risk-based capital ratio was 11.81% at June 30, 1997 while the Tier 1
capital ratio was 11.45% and the total risk-based capital ratio was 12.70% at
June 30, 1996.
The following table reflects the various capital ratios for the periods
indicated:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 June 30, 1996
<S> <C> <C> <C>
"Statement"
Equity Capital 8.87% 8.87% 8.91%
Primary and
Total Capital 9.79% 9.80% 9.88%
"Risk-based"
Tier 1 Capital 10.57% 10.68% 11.45%
Total Capital 11.81% 11.93% 12.70%
</TABLE>
Changes in the Allowance for Loan Losses for the six months ended June 30,
1997 and 1996 were as follows:
1997 1996
Balance at January 1 $ 7,800,000 $ 7,780,000
Provision for loan losses
charged to operating expenses 651,100 261,000
$ 8,451,100 $ 8,041,000
Losses charged to allowance 660,886 216,034
Recoveries credited to allowance 188,808 97,387
Net charge-offs 472,078 118,647
Balance at June 30, $ 7,979,022 $ 7,922,353
=========== ===========
Allowance as a percent of
period-end loans 1.62% 1.70%
Although the net charge-offs for the first six months of 1997 were slightly
greater than expectations, management believes that the allowance for loan
losses is adequate. 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:
June 30, December 31, June 30,
1997 1996 1996
Nonaccrual loans $1,911,820 $1,192,881 $1,098,339
Accruing loans, past
due 90 days or more $ 669,820 $ 736,891 $ 315,832
Non-performing loans
to total loans .52% .41% .30%
Allowance for loan losses
to non-performing loans 309.1% 404.1% 560.2%
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 $82,290 and $53,501 at June 30, 1997 and 1996 respectively, and
$116,567 at December 31, 1996. Interest income recorded on the nonaccrual loans
in 1997 was $10,010 and 1996 was $15,924. 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 30,1997, 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 $1,630,989 for the second quarter of
1997 and $1,131,563 for the second quarter of 1996, while the average for the
year 1996 was $1,119,305. .
The following table presents information concerning impaired loans for the
periods indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
------ ------ ------
<S> <C> <C> <C>
Gross impaired loans which have allowances..$1,911,820 $1,192,881 $1,098,339
Less: Related allowances for loan losses.... (287,043) (178,932) (164,752)
---------- ---------- ----------
Net impaired loans........................$1,624,777 $1,013,949 $ 933,587
========== ========== ==========
</TABLE>
At June 30, 1997, 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, 1997.
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.
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, 1997 compared to three months ended June 30, 1996
Net income for the second quarter of 1997 amounted to $2,576,538 compared
to $2,486,002 for the second quarter of 1996. This represents an increase of
$90,536 or 3.6%. On a per share basis, income was $.41 compared to $.40.
Total interest income increased $937,018 or 7.2% while total interest
expense increased $537,511 or 9.5%. Increased volumes in loans generated an
increase in interest and fees of $876,833 or 8.5% over 1996. Interest on
deposits with banks increased $3,007, while interest on federal funds sold
increased $113,943. Income on investment securities decreased $56,765 or 2.1% in
1997 as a result of a decrease in average volumes of various investment
securities.
Total interest expense amounted to $6,172,766 compared to $5,635,255.
This represents an increase of $537,511 or 9.5%. Interest paid on time
certificates of deposit of $100,000 or more increased $176,640 or 81.9% in 1997
over the same period in 1996, while interest paid on all other deposits
increased $247,151 or 5.1%. Interest expense on other interest bearing
liabilities increased $113,720 during the same period of time. Increased
volumes in deposits, as well as liabilities for borrowed money, was the primary
reason for the increase in interest expenses.
The provision for possible loan losses increased $351,000 from a charge of
$102,000 in 1996 to $453,000 in 1997. 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 $733,004 or 28.7%. Income from
fiduciary activities increased $137,928. Service charges on deposit accounts
increased $151,095 while other various service charges decreased $172,043.
Other operating income increased $428,865 and mortgage banking income decreased
$17,798. A major contributor to the increase in other operating income was a
gain of $267,000 on the sale of the building that had been occupied by Town &
Country. Gains on securities transactions amounted to $204,957 in 1997 while
there were none in 1996.
Total other operating expenses rose $598,195 or 9.2% over the same period
last year. Increases of $375,489 in salaries and employee benefits, $58,435 in
other operating expenses, $144,242 in occupancy and furniture and equipment
expense and $20,029 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.
Three new branch offices were opened in the last quarter of 1996. In addition,
the Bank purchased a property located at 1097 Commercial Avenue, East
Petersburg, PA which will be used by the Bank's Administrative Service Center
and Town & Country, Inc., a wholly owned subsidiary of the Bank. These
additions contributed to the increase in occupancy and furniture and equipment
expense. On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 which had an impact on the FDIC assessment of the
Bank.
Applicable income taxes increased $92,780 due in part to increased taxable
income. The effective tax rate was 26.1% for the second quarter of 1997
compared to 24.8% for 1996.
Six months ended June 30, 1997 compared to six months ended June 30, 1996
Net income increased from $4,921,950 in June 30, 1996 to $5,165,060 in
June 30, 1997. This represents an increase of $243,110 or 4.9%. Net income on a
per share basis was $.83 for six months ended June 30, 1997 compared to $.79 for
the same period 1996. Sterling's return on average assets was 1.35% for 1997
compared to 1.37% for 1996. Return on average stockholders' equity was 14.95%
and 15.43% respectively for 1997 and 1996.
Total interest income increased $1,535,575 or 5.9%. Earning assets
increased $55,947,293 or 8.7% during this time. Loans increased approximately
$27 million or 5.9%, while securities increased nearly $7 million or 4% over the
same period last year. Federal funds sold amounted to $21 million at June 30,
1997 compared to none at June 30, 1996. Increased volumes generated the
increase in interest income. Interest and fees on loans increased $1,625,669.
Interest on deposits with banks increased $10,173 while interest on federal
funds sold increased $195,455. Interest on investment securities decreased
$295,722. The daily average balance on time deposits with banks was $402,071 in
1997 compared to $41,592 in 1996. During this time the daily average balance of
federal funds sold increased from $2,523,351 in 1996 to $9,709,392 in 1997. The
daily average balance of investment securities was $177,427,108 at June 30, 1997
and $184,475,536 at June 30, 1996.
Total interest expense amounted to $11,908,102 reflecting an increase of
$808,405 or 7.3% from the $11,099,697 reported in 1996. Interest-bearing
deposits increased 8%. Increased volumes in deposits generated a major portion
of the increase in interest expense of $639,909 or 6.4%. Interest paid on
other interest-bearing liabilities increased $168,496 primarily as a result of
increased average borrowings during this period of time.
The provision for possible loan loss increased $390,100 in 1997 over 1996.
The provision for loan losses is based upon the monthly review of the loan
portfolio and 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 $963,198 or 19% during the first six
months of 1997 over the same period in 1996. Income from fiduciary activities
increased $214,973 or 38.8%. Service charges on deposit accounts increased
$235,760 while other various service charges decreased $286,457. Mortgage
banking income decreased $177,382 as a result of decreased volumes of
originations and subsequent sales. Other operating income increased $771,347.
A major contributor to this increase was a gain of $419,000 on the sale of the
previously owned Administrative Service Center and the building occupied by Town
& Country. Income generated from operating leases also contributed to the
increase in other operating income. Gains on securities transactions amounted
to $204,957 in 1997 while there were none in 1996.
Total other operating expenses rose $882,290 or 6.8% over the same period
last year. Increases of $674,080 in salaries and employee benefits, $319,628 in
occupancy and furniture and equipment expense, $39,611 in FDIC insurance and a
decrease of $151,029 in other operating expenses 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.
Three new branch offices were opened in the last quarter of 1996. In addition,
the Bank purchased property located at 1097 Commercial Avenue, East Petersburg,
PA situated on 12.7 acres with a building containing approximately 123,000
square feet. The building is used to house the Bank's Administrative Service
Center, as well as other departments of the Bank. Town & Country, Inc., a
wholly owned subsidiary of the Bank, also occupies this building. These
additions contributed to the increase in occupancy and furniture and equipment
expense. 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. Based on the above legislation, the Bank experienced an increase in
the FDIC assessment in 1997 over 1996.
Applicable income taxes amounted to $1,760,896 in 1997 compared to
$1,586,028 in 1996. The increase in taxes is due in part to increases in taxable
income. The effective tax rate was 25.4% and 24.4% respectively for 1996 and
1995.
Three Months ended June 30, 1997 compared to three months ended March 31, 1997
Net income decreased $11,984 or .5% in the second quarter of 1997 over the
first quarter of 1997. Net income for the three months ended June 30, 1997 was
$2,576,538 compared to $2,588,522 for the three months ended March 31, 1997.
Net income on a per share basis was $.41 for the second quarter of 1997,
compared to $.42 for the first quarter of 1997. Return on average assets was
1.33% for the second quarter of 1997 compared to 1.37% for the first quarter of
1997.
Total interest income increased $553,717 or 4.1% while total interest
expense increased $437,430 or 7.6%. This resulted in an increase in net
interest income of $116,287. Earning assets increased $28,140,218 or 4.2% while
interest-bearing liabilities increased $22,551,382 or 3.8%. Both interest
income and interest expense increased due mainly to these increased volumes.
However, there was a moderate increase on rates paid on interest-bearing
deposits.
The loan loss provision increased $254,900 over the first quarter of 1997.
Total other operating income increased $544,888 or 19.9% over the first
quarter. All categories of other operating income reflect increases over the
first quarter. Increases of $28,722 in fiduciary activities, $105,020 in
service charges on deposit accounts, $82,423 in other service charges, $30,094
in mortgage banking income, $93,672 in other operating income and a gain of
$204,957 on securities transactions represents the total increase in other
operating income.
Total other operating expenses increased $358,519 or 5.3% over the first
quarter. There was an increase of $144,609 in salaries and employee benefits,
$13,070 in furniture and equipment expenses, $447 in FDIC insurance and $273,577
in other operating expenses. Net occupancy expense decreased $73,184 as a
result of a decrease in utilities expense and an increase in rental income.
Contributing to the increase in other operating expenses were increases in
education and training expense, telephone expense and marketing expense.
Applicable income taxes increased $59,740 over the first quarter as a
result of an increase in taxable income as well as a decrease in tax credits.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of June 30, 1997, 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 29, 1997. 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
Robert H. Caldwell 4,606,649 17,696
J. Robert Hess 4,607,988 16,357
J. Roger Moyer, Jr. 4,609,539 14,806
There are seven continuing directors whose terms of office will expire at
the 1998 or 1999 Annual Meeting. They are as follows:
Richard H. Albright, Jr. E. Glenn Nauman
Howard E. Groff, Jr. John E. Stefan
Joan R. Henderson Glenn R. Walz
Calvin G. High
The results of the voting on the following additional items were as
follows:
Proposal to approve and ratify the adoption of the Sterling
Financial Corporation 1996 Stock Incentive Plan.
Votes For Votes Against Abstentions
4,226,314 118,965 93,908
Proposal to ratify the selection of Trout, Ebersole & Groff as the
Corporation's independent certified public accountants for the year ending
December 31, 1997.
Votes For Votes Against Abstentions
4,594,076 8,270 21,998
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 June 3, 1997 was filed
June 12, 1997 pursuant to Item 5 and Item 7 on Form 8-K filing, as Exhibit 99, a
copy of a Sterling Financial Corporation press release announcing a plan to
repurchase up to 140,000 shares of the Registrant's outstanding common stock.
<PAGE>
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 12, 1997 By: /s/John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: August 12, 1997 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.)
1097 Commercial Avenue
East Petersburg, PA 17520
Sterling Mortgage Services, Inc. Pennsylvania
101 North Pointe Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 30549585
<INT-BEARING-DEPOSITS> 51210
<FED-FUNDS-SOLD> 21450000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96673639
<INVESTMENTS-CARRYING> 87032544
<INVESTMENTS-MARKET> 87777576
<LOANS> 493946516
<ALLOWANCE> 7979022
<TOTAL-ASSETS> 792265356
<DEPOSITS> 666366179
<SHORT-TERM> 3000000
<LIABILITIES-OTHER> 16279866
<LONG-TERM> 34351212
0
0
<COMMON> 31185045
<OTHER-SE> 41083054
<TOTAL-LIABILITIES-AND-EQUITY> 792265356
<INTEREST-LOAN> 21883934
<INTEREST-INVEST> 5462591
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<INTEREST-TOTAL> 27346525
<INTEREST-DEPOSIT> 10711587
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<INTEREST-INCOME-NET> 15438423
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<EXPENSE-OTHER> 13883735
<INCOME-PRETAX> 6925956
<INCOME-PRE-EXTRAORDINARY> 6925956
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5165060
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 7.93
<LOANS-NON> 1911820
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