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, 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 Identification
or organization) 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, $5.00 Par Value-6,223,738 shares outstanding as of April 30,
1997.<PAGE>
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of March 31, 1997 (Unaudited), December 31, 1996,
and March 31, 1996 (Unaudited). 3
Consolidated Statements of Income
for the Three Months ended March 31, 1997
and 1996 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Three Months ended
March 31, 1997 and 1996 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signature Page 19
Subsidiaries of the Registrant 20
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and due from banks....................$ 28,720,443 $ 31,339,470 $ 34,543,438
Interest-bearing deposits in other banks... 348,924 643,498 25,842
Federal funds sold......................... 800,000 24,150,000 none
Mortgage loans held for sale............... 1,574,050 1,016,100 3,563,849
Investment Securities::
Securities held to maturity (market value-
$89,323,230; $94,778,086; $115,731,775)... 89,059,255 94,222,263 115,200,009
Securities available for sale............. 87,146,936 79,374,627 70,641,850
Loans...................................... 492,829,256 475,017,288 450,859,722
Less: Unearned Income..................... (951,766) (1,184,957) (1,465,219)
Allowance for loan losses........... (7,800,133) (7,800,000) (7,893,921)
Loans, Net................................. 484,077,357 466,032,331 441,500,582
Premises and Equipment..................... 21,945,430 22,657,668 16,496,058
Other real estate owned.................... 249,810 80,969 63,100
Accrued interest receivable and
prepaid expenses.......................... 11,412,661 11,262,066 9,499,500
Other assets............................... 33,849,758 33,293,239 31,491,766
TOTAL ASSETS...............................$ 759,184,625 $ 764,072,231 $ 723,025,994
============ ============ ============
LIABILITIES
Deposits:
Non-interest bearing......................$ 72,537,890 $ 82,175,110 $ 73,569,403
Interest-bearing.......................... 567,257,440 564,861,347 539,646,316
TOTAL DEPOSITS............................. 639,795,330 647,036,457 613,215,719
Interest-bearing demand notes issued to
U.S. Treasury............................. 2,829,016 2,741,397 2,548,881
Other liabilities for borrowed money....... 30,110,242 30,433,826 26,373,183
Federal funds purchased.................... none none 2,150,000
Accrued interest payable and accrued
expenses.................................. 9,127,616 8,704,485 8,227,117
Other liabilities.......................... 6,837,048 5,976,749 5,220,962
TOTAL LIABILITIES.......................... 688,699,252 694,892,914 657,735,862
STOCKHOLDERS' EQUITY
Common Stock - (Par Value: $5.00)
No. Shares authorized: 35,000,000;35,000,000;
10,000,000
No. Shares issued: 6,237,009; 6,237,009;
5,938,110
No. Shares outstanding: 6,224,830; 6,220,078;
5,934,450................................ 31,185,045 31,185,045 29,690,550
Capital Surplus............................. 16,325,040 16,325,040 10,118,073
Retained Earnings........................... 21,908,260 20,502,456 24,214,808
Net unrealized gain on securities available
for sale................................... 1,380,387 1,602,599 1,366,436
Less: Treasury Stock (12,179; 16,931; 3,660 )-
at cost.................................... (313,359) (435,823) (99,735)
TOTAL STOCKHOLDERS' EQUITY.................. 70,485,373 69,179,317 65,290,132
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$ 759,184,625 $ 764,072,231 $ 723,025,994
============ ============ ============
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,
1997 1996
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans............................$ 10,668,138 $ 9,919,302
Interest on deposits in other banks................... 7,806 640
Interest on federal funds sold........................ 141,445 59,933
Interest and dividends on investment securities:
Taxable............................................ 1,783,027 2,007,939
Tax-exempt......................................... 740,605 756,668
Dividends on stock................................. 55,383 53,365
TOTAL INTEREST INCOME................................... 13,396,404 12,797,847
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more................................... 364,739 199,376
Interest on all other deposits........................ 4,844,892 4,794,137
Interest on demand notes issued to the U.S. Treasury.. 24,982 23,358
Interest on federal funds purchased................... 107 15,979
Interest on other borrowed money...................... 500,616 431,592
TOTAL INTEREST EXPENSE.................................. 5,735,336 5,464,442
NET INTEREST INCOME..................................... 7,661,068 7,333,405
Provision for loan losses............................. 198,100 159,000
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.......................................... 7,462,968 7,174,405
OTHER OPERATING INCOME
Income from fiduciary activities..................... 370,010 292,965
Service charges on deposit accounts.................. 637,640 552,975
Other service charges, commissions and fees.......... 304,953 419,367
Mortgage banking income.............................. 239,420 399,004
Other operating income............................... 1,186,717 844,235
TOTAL OTHER OPERATING INCOME............................ 2,738,740 2,508,546
OTHER OPERATING EXPENSES
Salaries and employee benefits....................... 3,953,732 3,655,141
Net occupancy expense................................ 628,104 559,063
Furniture and equipment expense...................... 589,049 482,704
FDIC insurance assessment............................ 20,082 500
Other operating expenses............................. 1,571,641 1,781,105
TOTAL OTHER OPERATING EXPENSES.......................... 6,762,608 6,478,513
Income before income taxes........................... 3,439,100 3,204,438
Applicable income taxes.............................. 850,578 768,490
NET INCOME..............................................$ 2,588,522 $ 2,435,948
============ ===========
Earnings per common share:
Net Income.............................................$ .42 $ .39
Cash dividends declared per common share...............$ .19 $ .18
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,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities
Net Income..............................................$ 2,588,522 $ 2,435,948
Adjustments to reconcile net income to net cash
provided by/(used in)operating activities:
Depreciation.......................................... 472,456 383,957
Accretion and amortization of investment securities... 73,668 86,253
Provision for possible loan and lease losses.......... 198,100 159,000
(Gain) loss on disposition of property and equipment.. (161,274) 418
(Gain) loss on sale of mortgage loans................. (48,043) (104,126)
Proceeds from sales of mortgage loans................. 6,237,258 11,909,007
Origination of mortgage loans held for sale........... (6,747,165) (14,407,030)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and prepaid expenses................................ (150,595) 2,279,499
(Increase) decrease in other assets.................. (725,360) (4,763,927)
Increase (decrease) in accrued interest payable
and accrued expenses................................ 423,131 (3,495)
Increase (decrease) in other liabilities............. 978,811 201,787
Net cash provided by/(used in) operating activities. 3,139,509 (1,822,709)
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks.. 487,458 664,540
Purchase of interest-bearing deposits in other banks.... (192,884) (666,224)
Proceeds from maturities of investment securities....... 9,406,116 15,788,130
Purchase of investment securities....................... (12,429,810) (10,254,051)
Federal funds sold, net................................. 23,350,000 9,350,000
Net loans and leases made to customers.................. (18,243,126) (23,127,402)
Purchases of premises and equipment..................... (835,362) (431,496)
Proceeds from sale of premises and equipment............ 1,236,418 681
Net cash provided by/(used in) investing activities. 2,778,810 (8,675,822)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW
and savings accounts................................... (22,561,868) (12,025,474)
Net increase (decrease) in time deposits................ 15,320,741 15,136,416
Federal funds purchased, net............................ none 2,150,000
Net increase (decrease) in interest-bearing demand
notes issued to U.S. Treasury.......................... 87,619 315,001
Proceeds from borrowings................................ 3,750,000 7,900,000
Repayments of borrowings................................ (4,073,584) (3,050,415)
Proceeds from issuance of common stock................... none 161,364
Cash dividends paid...................................... (1,182,718) (1,068,859)
Acquisition of treasury stock............................ (313,359) (99,735)
Proceeds from issuance of treasury stock................. 435,823 209,401
Net cash provided by/(used in) financing activities.. (8,537,346) 9,627,699
Increase (decrease) in cash and due from banks......... (2,619,027) (870,832)
Cash and due from banks::
Beginning............................................... 31,339,470 35,414,270
Ending..................................................$ 28,720,443 $ 34,543,438
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money......$ 5,713,632 $ 5,582,836
Income taxes........................................... none none
Supplemental Schedule of Noncash Investing and Financing Activities
Other Real Estate acquired in settlement of loans........ 207,075 none
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, 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 supercedes 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.
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
6,231,167 and 6,233,727 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 March 31, 1997 amounted to $759,184,625 compared to
$723,025,994 at March 31, 1996. This represents an increase of $36,158,631 or
5% over that period of time. Total assets at March 31, 1997 decreased
$4,887,606 or .6% over the $764,072,231 reported at December 31, 1996.
The investment securities portfolio reflects a 5.2% decrease of
$9,635,668 during the twelve month period March 31, 1996 to March 31, 1997.
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. During the first three months
of 1997, there was an increase in investment securities in the amount of
$2,609,301 or 1.5% 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 March 31, 1997 and 1996 it was
$2,087,455 and $2,460,506 respectively.
Net loans have grown from $441,500,582 at March 31, 1996 to $484,077,357
at March 31, 1997. This represents an increase of $42,576,775 or 9.6%. Net
loans have grown from $466,032,331 to $484,077,357 during the three month
period ended March 31, 1997. This represents an increase of 3.9% since
December 31, 1996.
Premises and equipment increased $5,449,372 or 33% from $16,496,058 at
March 31, 1996 to $21,945,430 at March 31, 1997. During the first three
months of 1997, total premises and equipment decreased $712,238 or 3.1% from
$22,657,668 at December 31, 1996. Contributing to the increase in premises
and equipment during the period March 1996 to March 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 approximatley $1.2 and settlement took place on
February 21, 1997. This contributed to the decrease during the first three
months of 1997. The building formerly occupied by Town & Country, Inc. was
sold and settlement took place on April 1, 1997.
Total deposits increased $26,579,611 or 4.3% from $613,215,719 at March
31, 1996 to $639,795,330 at March 31, 1997. During the first three months of
1997, total deposits decreased $7,241,127 from the $647,036,457 reported at
December 31, 1996. Noninterest-bearing deposits decreased $1,031,513 from
$73,569,403 at March 31, 1996 to $72,537,890 at March 31, 1997. During the
same period, interest-bearing deposits increased $27,611,124 or 5.1%.
Noninterest-bearing deposits decreased $9,637,220 during the first three
months of 1997 while interest-bearing deposits increased $2,396,093.
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 deposits during the first
three months of 1997.
Stockholders' equity increased $5,195,241 or 8% from the $65,290,132
reported at March 31, 1996 to $70,485,373 at March 31, 1997. There was an
increase of $1,306,056 or 1.9% 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 March 31, 1997 was 9.13%
compared to 8.87% at March 31, 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 vale) 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 10.64% and the
total risk-based capital ratio was 11.88% at March 31, 1997 while the Tier 1
capital ratio was 10.84% and the total risk-based capital ratio was 12.09% at
March 31, 1996.
The following table reflects the various capital ratios for the periods
indicated:
March 31, 1997 December 31, 1996 March 31, 1996
"Statement"
Equity Capital 9.13% 8.87% 8.87%
Primary and
Total Capital 10.05% 9.80% 9.85%
"Risk-based"
Tier 1 Capital 10.64% 10.68% 10.84%
Total Capital 11.88% 11.93% 12.09%
Changes in the Allowance for Loan Losses for the three months ended March
31, 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 198,100 159,000
---------- ----------
7,998,100 7,939,000
---------- ----------
Losses charged to allowance 321,260 104,208
Recoveries credited to allowance 123,293 59,129
---------- ----------
Net charge-offs 197,967 45,079
---------- ----------
Balance at March 31, $7,800,133 $7,893,921
========== ==========
Allowance as a percent of
period-end loans 1.59% 1.76%
Although the net charge-offs for the first three months of 1997 were
slightly greater than our 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:
March 31, December 31, March 31,
1997 1996 1996
Nonaccrual loans $1,359,052 $1,192,881 $1,182,769
Accruing loans, past due 90 days or more $1,006,359 $ 736,891 $ 308,115
Non-performing loans to total loans .48% .41% .33%
Allowance for loan losses to
non-performing loans 329.8% 404.1% 529.5%
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 $32,648 and $25,345 at March 31, 1997 and 1996
respectively, and $116,567 at December 31, 1996. Interest income recorded on
the nonaccrual loans in 1997 was $5,005 and 1996 was $5,823. 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
31,1997, 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 periods indicated.
The average amount of nonaccruals was $1,322,948 for the first quarter of
1997 and $1,087,052 for the first quarter of 1996, while the average for 1996
was $1,119,305.
The following table presents information concerning impaired loans for
the periods indicated:
March 31, December 31, March 31,
1997 1996 1996
Gross impaired loans which have allowances...$1,359,052 $1,192,881 $1,182,769
Less: Related allowances for loan loss..... (203,858) (178,932) (351,628)
---------- ---------- ----------
Net impaired loans..........................$1,155,194 $1,013,949 $ 831,141
At March 31, 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 March 31, 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 sources of funds
mentioned provide sufficient liquidity.
<PAGE>
Results of Operations
The following discussion analyzes the specific components affecting the
changes in net income for the periods analyzed.
Three months ended March 31, 1997 compared to three months ended March 31,
1996
Net income for the first quarter of 1997 amounted to $2,588,522 compared
to $2,435,948 for the first quarter of 1996. This represents an increase of
$152,574 or 6.3%. On a per share basis, income was $.42 compared to $.39.
Return on average assets for the first quarter of 1997 was 1.37% compared
to 1.37% for the first quarter of 1996. Return on equity was 15.14% for the
first quarter of 1997 compared to 15.02% for the same period in 1996.
Total interest income increased $598,557 or 4.7% while total interest
expense increased $270,894 or 5.0%. Therefore, the interest differential
increased $327,663. Loans increased nearly $42 million over the same period in
1996. Increased volumes was the primary reason for the increase of $748,836
in interest and fees on loans. Interest on deposits with banks increased
$7,166. Interest on federal funds sold increased $81,512. The daily average
of federal funds sold was $10,622,222 in 1997 compared to $4,380,219 in 1996.
Income on investment securities decreased $238,957 or 8.5% in 1997. The daily
average of investment securities in 1997 was $176,719,031 compared to
$188,769,504 in 1996.
Total interest expense amounted to $5,735,336 reflecting an increase of
$270,894 or 5.0% over the $5,464,442 reported in 1996. Interest paid on
interest-bearing deposits increased $216,118 or 4.3% in 1997 over the same
period in 1996. Increased volumes in interest-bearing deposits generated a
major portion of this increase. Interest expense on other interest bearing
liabilities increased $54,776 during the same period of time primarily as a
result of increased volumes in this category of liabilities.
The provision for possible loan losses increased $39,100 from a charge
of $159,000 in 1996 to $198,100 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 $230,194 or 9.2%. Income from
fiduciary activities increased $77,045 or 26.3%. Service charges on deposit
accounts increased $84,665 while other various service charges decreased
$114,414. Other operating income increased $342,482. A major contributor to
this increase was a gain of $152,000 on the sale of the previously owned
Administrative Service Center. Income generated from operating leases also
contributed to the increase in other operating income. Mortgage banking
income decreased $159,584 as a result of decreased volumes of originations and
subsequent sales.
Total other operating expenses rose $284,095 or 4.4% over the same
period last year. Increases of $298,591 in salaries and employee benefits,
$175,386 in occupancy and furniture and equipment expense, $19,582 in FDIC
insurance and a decrease of $209,464 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 a 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,
ther 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 Assessments 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 $850,578 in 1997 compared to
$768,490 in 1996. The increase in taxes is due in part to increases in
taxable income.
Three months ended March 31, 1997 compared to three months ended December 31,
1996
Net income increased $162,571 or 6.7% in the first quarter of 1997 over
the fourth quarter of 1996. Net income at March 31, 1997 was $2,588,522
compared to $2,425,951 for the quarter ending December 31, 1996. Net income
on a per share basis was $.42 for the first quarter of 1997 compared to $.39
for the last quarter of 1996. Return on average assets for the first quarter
of 1997 was 1.37% compared to 1.29% for the last quarter of 1996. Return on
equity was 15.14% and 14.40% respectively for March 31, 1997 and December 31,
1996.
Total interest income decreased $123,988 or .9%. Interest and fees on
loans decreased $67,128 while interest on investment securities increased
$83,561. Interest on other earning assets decreased $140,421. Earning
assets decreased approximately $2.4 million during the first three months of
1997. The most significant decrease in earning assets was in federal funds
sold. Loans, net of unearned income, increased over $18 million the first
three months of 1997. Federal funds sold decreased over $23 million while the
securities increased over $2.6 million.
Total interest expense decreased $155,712 or 2.6% during the first
quarter of 1997. Total interest-bearing liabilities increased nearly $2.2
million in the first quarter of 1997 over the last quarter of 1996.
Interest-bearing deposits increased over $2.4 million during this period of
time.
Net interest income increased $31,724 as a result of a larger decrease in
interest expense over the decrease in interest income.
The loan loss provision for the first quarter of 1997 was $198,100
compared to $268,871 for the last quarter of 1996.
Total other operating income decreased $181,283 or 6.2% in the first
quarter of 1997 over the last quarter of 1996. There was a gain on securities
transactions in the last quarter of 1996 in the amount of $148,381, whereas,
there were no gains in the first quarter of 1997.
Total other operating expenses decreased $332,227 or 4.7% over the fourth
quarter of 1996. Salaries and employee benefits increased $22,271, occupancy
and furniture and equipment expense increased $151,630 and other operating
expenses decreased $526,210. The FDIC insurance assessment reflected an
increase of $20,082 as a result of new regulation signed into law September
30, 1996.
Applicable income taxes were $90,868 greater than those recorded for
the fourth quarter of 1996.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of March 31, 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 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 November 19, 1996 was filed February
5, 1997 pursuant to Item 5 and Item 7 on Form 8-K filing,
as Exhibit 99, a copy of the Sterling Financial Corporation
1996 Stock Incentive Plan.
A report on Form 8-K dated March 19, 1997 was filed March 19,
1997 pursuant to Item 7 on Form 8-K filing, as Exhibit 10a,
a copy of the Employment Agreement between The First National
Bank of Lancaster County and John E. Stefan, dated as of April
30, 1983 and, as Exhibit 10b, a copy of the Assumption and
Modification Agreement between the Registrant, Bank of
Lancaster County and John E. Stefan, dated July 14, 1987.
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, 1997 By:/s/ John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: May 13, 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 Point Boulevar
Lancaster, PA 17601-4133
(Presently inactive)
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