FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, $5.00 Par Value-6,159,773 shares outstanding as of October
31, 1997.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1997 (Unaudited), December 31, 1996,
and September 30, 1996 (Unaudited). 3
Consolidated Statements of Income
for the Three and Nine Months ended September 30, 1997
and 1996 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 1997 and 1996 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signature Page 19
Subsidiaries of the Registrant 20
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash and due from banks.................$ 34,741,136 $ 31,339,470 $ 39,154,460
Interest-bearing deposits in other banks. 6,768 643,498 37,910
Federal funds sold....................... 4,000,000 24,150,000 5,400,000
Mortgage loans held for sale............. 996,700 1,016,100 510,208
Investment Securities::
Securities held to maturity (market value-
$90,065,675;$94,778,086;$100,050,810).. 88,976,007 94,222,263 99,982,164
Securities available for sale........... 112,044,911 79,374,627 69,689,993
Loans.................................... 507,432,604 475,017,288 483,724,218
Less: Unearned Income.................. (574,445) (1,184,957) (1,446,024)
Allowance for loan losses........ (8,020,970) (7,800,000) (7,846,113)
----------- ----------- -----------
Loans, Net............................... 498,837,189 466,032,331 474,432,081
----------- ----------- -----------
Premises and Equipment................... 22,168,252 22,657,668 16,774,843
Other real estate owned.................. 179,780 80,969 98,735
Accrued interest receivable and prepaid
expenses............................... 11,959,023 11,262,066 10,973,363
Other assets............................. 35,875,668 33,293,239 31,219,648
----------- ----------- -----------
TOTAL ASSETS............................$ 809,785,434 $764,072,231 $ 748,273,405
LIABILITIES ============ ============ ============
Deposits:
Noninterest-bearing...................$ 76,652,517 $ 82,175,110 $ 77,245,650
Interest-bearing...................... 607,770,554 564,861,347 557,030,783
------------ ------------ ------------
TOTAL DEPOSITS.......................... 684,423,071 647,036,457 634,276,433
------------ ------------ ------------
Interest-bearing demand notes issued to
U.S. Treasury........................ 3,000,000 2,741,397 3,000,000
Other liabilities for borrowed money.... 31,415,138 30,433,826 28,897,673
Accrued interest payable and accrued
expenses............................. 9,391,097 8,704,485 8,069,981
Other liabilities....................... 8,420,702 5,976,749 6,352,338
------------ ------------ ------------
TOTAL LIABILITIES....................... 736,650,008 694,892,914 680,596,425
STOCKHOLDERS' EQUITY ------------ ------------ ------------
Common Stock - (Par Value: $5.00)
No. Shares authorized: 35,000,000
No. Shares issued:
6,237,009; 6,237,009; 6,236,743
No. Shares outstanding:
6,166,745; 6,220,078; 6,236,308..... 31,185,045 31,185,045 31,183,715
Capital Surplus.......................... 16,321,050 16,325,040 16,319,484
Retained Earnings........................ 24,470,953 20,502,456 19,261,538
Net unrealized gain on securities
available for sale..................... 2,966,459 1,602,599 923,934
Less: Treasury Stock
(70,264; 16,931; 435) - at cost........ (1,808,081) (435,823) (11,691)
------------ ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 73,135,426 69,179,317 67,676,980
TOTAL LIABILITIES AND STOCKHOLDERS' ------------ ----------- -----------
EQUITY.................................$809,785,434 $764,072,231 $748,273,405
============ =========== ===========
See accompanying notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans......................$ 11,345,875 $ 10,617,572 $ 33,229,809 $ 30,875,837
Interest on deposits in other banks.............. 745 747 12,154 1,983
Interest on federal funds sold................... 226,022 43,363 490,257 112,143
Interest and dividends on investment securities:
Taxable...................................... 2,005,531 1,800,991 5,582,591 5,697,704
Tax-exempt................................... 798,649 709,567 2,295,698 2,188,371
Dividends on stock........................... 56,932 54,607 169,770 161,759
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME............................. 14,433,754 13,226,847 41,780,279 39,037,797
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more............................... 461,139 226,989 1,218,210 642,057
Interest on all other deposits.................. 5,503,173 5,078,122 15,457,689 14,734,732
Interest on demand notes issued to the
U.S. Treasury....... ......................... 28,868 26,209 85,996 69,011
Interest on federal funds purchased............. none 16,843 1,285 88,706
Interest on other borrowed money................ 580,805 484,233 1,718,907 1,397,587
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 6,573,985 5,832,396 18,482,087 16,932,093
----------- ----------- ----------- -----------
NET INTEREST INCOME............................... 7,859,769 7,394,451 23,298,192 22,105,704
Provision for loan losses....................... 335,000 50,000 986,100 311,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.................................... 7,524,769 7,344,451 22,312,092 21,794,704
----------- ----------- ----------- -----------
OTHER OPERATING INCOME
Income from fiduciary activities............... 379,646 293,428 1,148,388 847,197
Service charges on deposit accounts............ 781,546 655,187 2,161,846 1,799,727
Other service charges, commissions and fees.... 391,160 536,697 1,083,489 1,515,483
Mortgage banking income........................ 368,394 237,804 877,328 924,120
Other operating income......................... 1,025,359 859,386 3,492,465 2,555,145
Gains (Losses) on securities transactions...... 3,500 9,992 208,457 9,992
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING INCOME..................... 2,949,605 2,592,494 8,971,973 7,651,664
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits................ 4,242,203 3,717,314 12,294,276 11,095,307
Net occupancy expense......................... 546,414 516,794 1,729,438 1,578,217
Furniture and equipment expense............... 627,933 516,052 1,819,101 1,509,193
FDIC insurance assessment..................... 19,726 500 60,337 1,500
Other operating expenses...................... 1,495,873 1,921,534 4,912,732 5,489,422
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES................... 6,932,149 6,672,194 20,815,884 19,673,639
----------- ----------- ----------- -----------
Income before income taxes.................... 3,542,225 3,264,751 10,468,181 9,772,729
Applicable income taxes....................... 892,917 801,731 2,653,813 2,387,759
----------- ----------- ----------- -----------
NET INCOME.......................................$ 2,649,308 $ 2,463,020 $ 7,814,368 $ 7,384,970
=========== =========== =========== ===========
Earnings per common share:
Net Income..................................... $ .43 $ .39 $ 1.26 $ 1.18
Cash dividends declared per common share...... $ .24 $ .19 $ .62 $ .55
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities
Net Income.................................................$ 7,814,368 $ 7,384,970
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation............................................ 1,447,607 1,203,538
Accretion and amortization of investment securities..... 199,207 281,690
Provision for possible loan and lease losses............ 986,100 311,000
(Gain) loss on disposition of property and equipment.... (454,689) 3,272
(Gain) loss on sales of securities...................... (208,457) (9,992)
(Gain) loss on sale of mortgage loans................... (211,271) (202,786)
Proceeds from sales of mortgage loans................... 26,318,981 26,417,018
Origination of mortgage loans held for sale............. (26,088,310) (25,762,740)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable and prepaid expenses...................... (696,957) 805,636
(Increase) decrease in other assets................... (2,681,240) (4,527,444)
Increase (decrease) in accrued interest payable
and accrued expenses................................. 686,612 (160,631)
Increase (decrease) in other liabilities............. 1,741,358 1,564,544
----------- ----------
Net cash provided by/(used in) operating activities........ 8,853,309 7,308,075
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks...... 938,508 994,357
Purchase of interest-bearing deposits in other banks........ (301,778) (1,008,109)
Proceeds from sales of securities available for sale........ 214,000 521,250
Proceeds from maturities of investment securities........... 25,496,610 36,327,168
Purchase of investment securities........................... (51,058,933) (16,003,965)
Federal funds sold, net..................................... 20,150,000 3,950,000
Net loans and leases made to customers...................... (33,790,958) (56,210,901)
Purchases of premises and equipment......................... (2,286,621) (1,557,889)
Proceeds from sale of premises and equipment................ 1,783,119 25,854
------------ -----------
Net cash provided by/(used in) investing activities........ (38,856,053) (32,962,235)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW and savings accounts................................... 2,322,793 2,132,736
Net increase (decrease) in time deposits.................... 35,063,821 22,038,920
Net increase (decrease) in interest-bearing demand
notes issued to the U.S. Treasury.......................... 258,603 766,120
Proceeds from borrowings.................................... 27,474,300 53,050,385
Repayments of borrowings.................................... (26,492,988) (45,676,310)
Proceeds from issuance of common stock...................... none 231,840
Cash dividends paid......................................... (3,845,871) (3,322,587)
Acquisition of treasury stock............................... (2,847,151) (111,426)
Proceeds from issuance of treasury stock.................... 1,470,903 308,249
Cash paid in lieu of fractional shares...................... none (23,577)
------------ -----------
Net cash provided by/(used in) financing activities....... 33,404,410 29,394,350
Increase (decrease) in cash and due from banks............. 3,401,666 3,740,190
Cash and due from banks::
Beginning................................................... 31,339,470 35,414,270
------------ -----------
Ending......................................................$ 34,741,136 $ 39,154,460
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money..........$ 17,915,292 $ 16,760,948
Income taxes............................................... 2,100,000 1,905,000
Supplemental Schedule of Noncash Investing
and Financing Activities
Other Real Estate acquired in settlement of loans............ 369,985 118,910
See accompanying notes to financial statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Sterling
Financial Corporation ("Sterling") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the nine-month period ended September 30, 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 6,217,791 and
6,236,476 for 1997 and 1996 respectively. Figures for 1996 were retroactively
restated to reflect a 5% stock dividend paid in July 1996.
Note 3 - Dividends Declared
The regular cash dividend declared for the third quarter of 1997 amounted to
$.20 per share while the regular cash dividend for the third quarter of
1996 amounted to $.19 per share. In addition, a "Special Dividend"
of $.04 per share was declared in the third quarter of 1997.
The "Special Dividend" reflects in the year to date dividends declared.
A 5% stock dividend was paid July 22, 1996.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets at September 30, 1997 amounted to $809,785,434 which
represents an increase of 8.2% over the $748,273,405 reported at
September 30, 1996. Total assets at September 30, 1997 increased
$45,713,203 or 6% over the $764,072,231 reported at December 31, 1996.
The investment securities portfolio reflects an 18.5% increase or
$31,348,761 during the twelve month period September 30, 1996 to September 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 nine months of 1997, there was an increase in investment securities in the
amount of $27,424,028 or 15.8% 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 September 30, 1997 and 1996, it was
$4,494,635 and $1,396,475 respectively.
Net loans have grown from $466,032,331 to $498,837,189 during the nine
month period ended September 30, 1997. This represents an
increase of 7% since December 31, 1996. Net loans increased
from $474,432,081 at September 30, 1996 to $498,837,189 at September 30, 1997.
This represents an increase of $24,405,108 or 5.1%.
Premises and equipment increased $5,393,409 or 32.2% from $16,774,843 at
September 30, 1996 to $22,168,252 at September 30, 1997. During the first nine
months of 1997, total premises and equipment decreased $489,416 or 2.2% from
$22,657,668 at December 31, 1996. Contributing to the increase in premises and
equipment during the period September 1996 to September 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 nine months of 1997.
Total deposits increased $50,146,638 or 7.9% from $634,276,433 at September
30, 1996 to $684,423,071 at September 30, 1997. During the first nine months of
1997, total deposits increased $37,386,614 or 5.8% from the $647,036,457
reported at December 31, 1996. Noninterest-bearing deposits decreased
$593,133 or .8% from $77,245,650 at September 30, 1996
to $76,652,517 at September 30, 1997. During the same period, interest-bearing
deposits increased $50,739,771 or 9.1%. Noninterest-bearing deposits
decreased $5,522,593 or 6.7% during the first nine
months of 1997 while interest-bearing deposits increased $42,909,207 or 7.6%.
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
nine
months of 1997.
Stockholders' equity increased $5,458,446 or 8.1% from the $67,676,980
reported at September 30, 1996 to $73,135,426 at September 30, 1997. There was
an increase of $3,956,109 or 5.7% 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
September 30, 1997 was 8.71% compared to 8.94% 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 10.32% and the total risk
- -based capital ratio was 11.53% at September 30, 1997 while the Tier 1 capital
ratio was 10.58% and the total risk-based capital ratio was 11.83% at
September 30, 1996.
The following table reflects the various capital ratios for the periods
indicated:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
"Statement"
<S> <C> <C> <C>
Equity Capital 8.71% 8.87% 8.94%
Primary and
Total Capital 9.61% 9.80% 9.88%
"Risk-based"
Tier 1 Capital 10.32% 10.68% 10.58%
Total Capital 11.53% 11.93% 11.83%
</TABLE>
Changes in the Allowance for Loan Losses for the nine months ended
September 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 986,100 311,000
----------- ------------
8,786,100 8,091,000
----------- -----------
Losses charged to allowance 1,023,569 365,391
Recoveries credited to allowance 258,439 120,504
----------- -----------
Net charge-offs 765,130 244,887
----------- -----------
Balance at September 30, $ 8,020,970 $ 7,846,113
=========== ===========
Allowance as a percent of
period-end loans 1.58% 1.63%
Although the net charge-offs for the first nine months of 1997 were slightly
greater than expectations, management is of the opinion 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:
September 30, December 31, September 30,
1997 1996 1996
Nonaccrual loans $1,755,282 $1,192,881 $1,107,038
Accruing loans, past
due 90 days or more $ 853,156 $ 736,891 $ 713,011
Restructured loans $2,192,169 $ none $ none
Non-performing loans
to total loans .95% .41% .38%
Allowance for loan losses
to non-performing loans 167.08% 404.19% 431.09%
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 $135,037 and $80,857 at September 30, 1997 and 1996 respectively,
and $116,567 at December 31, 1996. Interest income recorded on the nonaccrual
loans in 1997 was $15,015 and 1996 was $21,969. Potential problem loans are
loans which are included as performing loans, but for which possible
credit problems of the borrower causes management to have doubts as to the
ability of such borrower to comply with present repayment terms and which may
eventually result in disclosure as a non-performing loan. At September 30,1997,
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 and troubled debt restructured loans, 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 impaired loans was $2,272,020 for the third quarter
of 1997 and $1,087,004 for the third quarter of 1996, while the average for
1996 was $1,119,305. .
The following table presents information concerning impaired loans for the
periods indicated:
September 30, December 31, September 30,
1997 1996 1996
Gross impaired loans which have
allowances.........................$3,947,451 $1,192,881 $1,107,038
Less: Related allowances for
loan losses........................ (473,694) (178,932) (166,055)
---------- ---------- ----------
Net impaired loans...................$3,473,757 $1,013,949 $ 940,983
========== ========== ==========
At September 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 September 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 September 30, 1997 compared to three months ended September
30, 1996
Net income for the third quarter of 1997 amounted to $2,649,308 compared to
$2,463,020 for the third quarter of 1996. This represents an increase of
$186,288 or 7.6%. On a per share basis, income was $.43 compared to $.39.
Total interest income increased $1,206,907 or 9.1% while total interest
expense increased $741,589 or 12.7%. Increased volumes in loans was primarily
responsible for an increase in interest and fees of $728,303 or 6.9% over 1996.
Interest on deposits with banks reflects very little change, while interest on
federal funds sold increased $182,659. Income on investment securities increased
$295,947 or 11.5% in 1997 as a result of increased volumes in various investment
securities.
Total interest expense amounted to $6,573,985 for this period compared to
$5,832,396 for the same period last year. This represents an increase of
$741,589 or 12.7%. Interest paid on time certificates of deposit of $100,000 or
more increased $234,150 in 1997 over the same period in 1996, while interest
paid on all other deposits increased $425,051 or 8.4%.
Interest expense on other interest bearing liabilities increased $82,388
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 $285,000 from a charge of
$50,000 in 1996 to $335,000 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 $357,111 or 13.8%. Income from
fiduciary activities increased $86,218 or 29.4%. Service charges on deposit
accounts increasaed $126,359 or 19.3% while other various service charges
decreased $145,537 or 27.1%. Mortgage banking income increased $130,590 or
54.9% over the same period last year. Other operating income reflected
an increase of $165,973 or 19.3%. Gains on securities
transactions for 1997 was $3,500 compared to $9,992 for the same period
in 1996.
Total other operating expenses rose $259,955 or 3.9% over the same
period last year. There were increases of $524,889 in salaries and employee
benefits, $141,501 in occupancy and furniture and equipment expense and $19,226
in the FDIC assessment while other operating expenses decreased $425,661. 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 is occupied 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 $91,186 due in part to increases in
taxable income. The effective tax rate was 25.2% for the third quarter of 1997
compared to 24.6% for 1996.
Nine months ended September 30, 1997 compared to nine months ended
September 30, 1996
Net income increased from $7,384,970 in September 30, 1996 to $7,814,368 in
September 30, 1997. This represents an increase of $429,398 or 5.8%. Net income
on a per share basis was $1.26 for nine months ended September 30, 1997 compared
to $1.18 for the same period 1996. Sterling's return on average assets was
1.34% for 1997 compared to 1.36% for 1996. Return on average
stockholders' equity was 14.99% and 15.22% respectively
for 1997 and 1996.
Total interest income increased $2,742,482 or 7%. Earning assets increased
$54,112,497 or 8.2%. Loans increased over $23.7 million or 4.9%, while
securities increased over $31 million or 18.5% over the same period last year.
Increased volumes in loans generated a major portion of the increase in interest
income. Interest and fees on loans increased $2,353,972. Interest on deposits
with banks increased $10,171 while interest on federal funds sold increased
$378,114. Interest on investment securities increased $225. During this time
the daily average balance of federal funds sold increased from $2,771,350 in
1996 to $11,853,663 in 1997. The daily average balance of
investment securities was $183,422,038 at September 30, 1997 and
$180,712,298 at September 30, 1996.
Total interest expense amounted to $18,482,087 reflecting an increase of
$1,549,994 or 9.2% from the $16,932,093 reported in 1996. Interest-bearing
deposits increased $50.7 million or 9.1%. Increased volumes in deposits
generated a major portion of the increase in interest expense of $1,299,110 or
8.5%. Interest paid on other interest-bearing liabilities increased $250,884.
The provision for possible loan loss increased $675,100 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 $1,320,309 or 17.3% during the first
nine months of 1997 over the same period in 1996. Income from fiduciary
activities increased $301,191 or 35.6%. Service charges on deposit accounts
increased $362,119 while other various service charges decreased $431,994.
Other operating income increased $937,320 or 36.7%. 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. An
increase in income generated from operating leases was also a contributor to the
increase in other operating income. Mortgage banking income decreased $46,792.
The decrease in mortgage banking income was a result of decreased volumes of
originations and subsequent sales. Gains on securities transactions amounted to
$208,457 in 1997 compared to $9,992 in 1996.
Total other operating expenses rose $1,142,245 or 5.8% over the same
period last year. Increases of $1,198,969 in salaries and employee
benefits, $461,129 in occupancy and furniture and equipment expense,
$58,837 in FDIC insurance and a decrease of $576,690 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 levied 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 $2,653,813 in 1997 compared to
$2,387,759 in 1996. The increase in taxes is due in part to increases in taxable
income. The effective tax rate was 25.5% and 24.4% respectively for 1997 and
1996.
Three Months ended September 30, 1997 compared to three months ended
June 30, 1997
Net income increased $72,770 or 2.8% in the third quarter of 1997 over the
second quarter of 1997. Net income for the three months ended September 30,
1997 was $2,649,308 compared to $2,576,538 for the three months
ended June 30, 1997.
Total interest income increased $483,633 or 3.5% while total interest
expense increased $401,219 or 6.5%. This resulted in an increase in net
interest income of $82,414. Earning assets increased $13,558,351 or 1.9% while
interest-bearing liabilities increased $19,437,612 or 3.1%. Both interest
income and interest expense increased due to these increased volumes.
The loan loss provision decreased $118,000 over the second quarter of 1997.
Total other operating income decreased $334,023 or 10.2% over the second
quarter. Various service charges, commissions and fees increased $42,670 while
income from fiduciary activities decreased $19,086 and other income decreased
$255,030. During the second quarter of 1997, a gain of $267,000 was realized on
the sale of real estate owned by Town & Country. Mortgage banking income
increased $78,880 over the last quarter. There were gains on securities
transactions in the third quarter amounting to $3,500 compared to $204,957 in
the second quarter.
Total other operating expenses decreased $188,978 over the second quarter.
There was an increase of $143,862 in employee related expenses while occupancy
and furniture and equipment expenses increased $17,308 and other expenses
decreased $350,148. The Corporation experienced decreases in several expense
categories in the third quarter.
Applicable income taxes decreased $17,401 over the second quarter.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of September 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 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 August 26, 1997 was
filed August 26, 1997 pursuant to Item 5 on Form 8-K announcing the declaration
of a $.20 quarterly cash dividend and a $.04 "Special Dividend" on the
Registrant's common stock.
A report on Form 8-K dated September 29, 1997 was filed September 29, 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 the decision to apply to
the National Association of Securities Dealers for quotation of the Company's
common stock on the NASDAQ National Market System.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: November 12, 1997 By:/s/ John E. Stefan
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: November 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
1 East Main Street (National Banking Association)
P.O. Box 0300
Strasburg, PA 17579
Town & Country, Inc. (Wholly owned Pennsylvania
Subsidiary of Bank of Lancaster
County, N.A.)
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 34,741,136
<INT-BEARING-DEPOSITS> 6,768
<FED-FUNDS-SOLD> 4,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,044,911
<INVESTMENTS-CARRYING> 88,976,007
<INVESTMENTS-MARKET> 90,065,675
<LOANS> 507,854,859
<ALLOWANCE> 8,020,970
<TOTAL-ASSETS> 809,785,434
<DEPOSITS> 684,423,071
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 17,811,799
<LONG-TERM> 31,415,138
0
0
<COMMON> 31,185,045
<OTHER-SE> 41,950,381
<TOTAL-LIABILITIES-AND-EQUITY> 809,785,434
<INTEREST-LOAN> 33,229,809
<INTEREST-INVEST> 8,550,470
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 41,780,279
<INTEREST-DEPOSIT> 16,675,899
<INTEREST-EXPENSE> 18,482,087
<INTEREST-INCOME-NET> 23,298,192
<LOAN-LOSSES> 986,100
<SECURITIES-GAINS> 208,457
<EXPENSE-OTHER> 20,815,884
<INCOME-PRETAX> 10,468,181
<INCOME-PRE-EXTRAORDINARY> 10,468,181
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,814,368
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 7.893
<LOANS-NON> 1,755,282
<LOANS-PAST> 3,323,422
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,800,000
<CHARGE-OFFS> 1,023,569
<RECOVERIES> 258,739
<ALLOWANCE-CLOSE> 8,020,970
<ALLOWANCE-DOMESTIC> 8,020,970
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,020,970
</TABLE>
