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, 1998
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, $5.00 Par Value-6,438,876 shares outstanding as of October
30, 1998.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of September 30, 1998 (Unaudited), December 31, 1997,
and September 30, 1997 (Unaudited). 3
Consolidated Statements of Income
for the Three and Nine Months ended September 30, 1998
and 1997 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 1998 and 1997 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures about Market
Risk 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signature Page 23
Subsidiaries of the Registrant 24
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
[CAPTION]
September 30, December 31, September 30,
1998 1997 1997
ASSETS (Unaudited) (Unaudited)
[S] [C] [C] [C]
Cash and due from banks.................$ 32,358,180 $ 34,291,962 $ 34,741,136
Interest-bearing deposits in other banks. 43,593 14,565 6,768
Federal funds sold....................... 12,890,000 28,150,000 4,000,000
Mortgage loans held for sale............. 1,580,500 791,500 996,700
Investment Securities::
Securities held to maturity (market value-
$70,152,251;$86,465,497;$90,065,675).. 68,239,251 85,155,282 88,976,007
Securities available for sale...........165,363,307 121,474,497 112,044,911
Loans....................................530,079,370 512,073,424 507,432,604
Less: Unearned Income.................. (157,603) (435,979) (574,445)
Allowance for loan losses........ (7,838,254) (7,730,000) (8,020,970)
----------- ----------- -----------
Loans, Net...............................522,083,513 503,907,445 498,837,189
----------- ----------- -----------
Premises and Equipment................... 21,994,417 21,937,626 22,168,252
Other real estate owned.................. 188,629 340,685 179,780
Accrued interest receivable and prepaid
expenses............................... 13,307,280 12,243,207 11,959,023
Other assets............................. 46,060,143 37,181,308 35,875,668
----------- ----------- -----------
TOTAL ASSETS............................$884,108,813 $845,488,077 $809,785,434
=========== =========== ===========
LIABILITIES
Deposits:
Noninterest-bearing...................$ 87,110,897 $ 82,564,955 $ 76,652,517
Interest-bearing...................... 667,775,510 636,095,660 607,770,554
----------- ----------- -----------
TOTAL DEPOSITS.......................... 754,886,407 718,660,615 684,423,071
----------- ----------- -----------
Interest-bearing demand notes issued to
U.S. Treasury........................ 4,453,730 3,000,000 3,000,000
Other liabilities for borrowed money.... 25,473,369 32,312,232 31,415,138
Accrued interest payable and accrued
expenses............................. 10,858,152 10,164,729 9,391,097
Other liabilities....................... 9,023,959 7,363,508 8,420,702
----------- ----------- -----------
TOTAL LIABILITIES....................... 804,695,617 771,501,084 736,650,008
STOCKHOLDERS' EQUITY ----------- ----------- -----------
Common Stock - (Par Value: $5.00)
No. Shares authorized: 35,000,000
No. Shares issued:
6,471,057; 6,237,009; 6,237,009
No. Shares outstanding:
6,439,783; 6,149,795; 6,166,745..... 32,355,285 31,185,045 31,185,045
Capital Surplus.......................... 24,801,575 16,321,050 16,321,050
Retained Earnings........................ 19,303,792 25,827,750 24,470,953
Net unrealized gain on securities
available for sale..................... 4,150,487 2,915,718 2,966,459
Less: Treasury Stock
(31,274; 87,214; 70,264) - at cost..... (1,197,943) (2,262,570) (1,808,081)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 79,413,196 73,986,993 73,135,426
TOTAL LIABILITIES AND STOCKHOLDERS' ----------- ----------- -----------
EQUITY................................$884,108,813 $845,488,077 $809,785,434
============ =========== ===========
See accompanying notes to financial statements
[/TABLE]
<TABLE>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans......................$ 11,597,653 $ 11,345,875 $ 34,676,307 $ 33,229,809
Interest on deposits in other banks.............. 832 745 2,038 12,154
Interest on federal funds sold................... 263,102 226,022 760,045 490,257
Interest and dividends on investment securities:
Taxable...................................... 2,393,045 2,005,531 6,888,398 5,582,591
Tax-exempt................................... 878,991 798,649 2,526,007 2,295,698
Dividends on stock........................... 67,473 56,932 186,686 169,770
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME............................. 15,201,096 14,433,754 45,039,481 41,780,279
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more............................... 485,532 461,139 1,555,137 1,218,210
Interest on all other deposits.................. 6,219,092 5,503,173 17,957,092 15,457,689
Interest on demand notes issued to the
U.S. Treasury....... ......................... 44,984 28,868 104,595 85,996
Interest on federal funds purchased............. none none none 1,285
Interest on other borrowed money................ 447,523 580,805 1,427,539 1,718,907
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 7,197,131 6,573,985 21,044,363 18,482,087
----------- ----------- ----------- -----------
NET INTEREST INCOME............................... 8,003,965 7,859,769 23,995,118 23,298,192
Provision for loan losses....................... 175,000 335,000 881,000 986,100
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.................................... 7,828,965 7,524,769 23,114,118 22,312,092
----------- ----------- ----------- -----------
OTHER OPERATING INCOME
Income from fiduciary activities............... 455,284 379,646 1,395,074 1,148,388
Service charges on deposit accounts............ 741,706 781,546 2,162,418 2,161,846
Other service charges, commissions and fees.... 427,643 391,160 1,312,904 1,083,489
Mortgage banking income........................ 477,941 368,394 1,599,452 877,328
Income from sales of assets.................... 138,507 none 1,338,507 none
Other operating income......................... 1,183,093 1,025,359 3,332,747 3,492,465
Gains (Losses) on securities transactions...... none 3,500 none 208,457
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING INCOME..................... 3,424,174 2,949,605 11,141,102 8,971,973
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits................ 4,318,970 4,242,203 13,295,957 12,294,276
Net occupancy expense......................... 530,731 546,414 1,584,156 1,729,438
Furniture and equipment expense............... 700,722 627,933 2,042,344 1,819,101
FDIC insurance assessment..................... 22,146 19,726 65,082 60,337
Other operating expenses...................... 1,975,572 1,495,873 5,501,898 4,912,732
----------- ----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES................... 7,548,141 6,932,149 22,489,437 20,815,884
----------- ----------- ----------- -----------
Income before income taxes.................... 3,704,998 3,542,225 11,765,783 10,468,181
Applicable income taxes....................... 866,658 892,917 2,878,384 2,653,813
----------- ----------- ----------- -----------
NET INCOME.......................................$ 2,838,340 $ 2,649,308 $ 8,887,399 $ 7,814,368
=========== =========== =========== ===========
Earnings per common share:
Net Income (basic)............................. $ .44 $ .41 $ 1.38 $ 1.20
Net Income (diluted)........................... .44 .41 1.37 1.20
Cash dividends declared per common share........ $ .21 $ .23 $ .62 $ .59
Consolidated Statements of Comprehensive Income (Unaudited)
Net Income...................................... $ 2,838,340 $ 2,649,308 $ 8,887,399 $ 7,814,368
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available-for-sale arising during period...... 645,225 706,336 1,234,769 1,501,442
Reclassification adjustment for (gains) losses
included in net income........................ none (2,310) none (137,582)
----------- ----------- ----------- -----------
Other comprehensive income...................... 645,225 704,026 1,234,769 1,363,860
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME............................ $ 3,483,565 $ 3,353,334 $ 10,122,168 $ 9,178,228
=========== =========== =========== ===========
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,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Income.................................................$ 8,887,399 $ 7,814,368
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation............................................ 1,563,545 1,447,607
Accretion and amortization of investment securities..... 266,282 199,207
Provision for possible loan and lease losses............ 881,000 986,100
(Gain) loss on disposition of property and equipment.... (3,112) (454,689)
(Gain) loss on sales of securities...................... none (208,457)
(Gain) loss on sale of mortgage loans................... (434,145) (211,271)
Proceeds from sales of mortgage loans................... 59,995,791 26,318,981
Origination of mortgage loans held for sale............. (60,350,646) (26,088,310)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable and prepaid expenses...................... (1,064,073) (696,957)
(Increase) decrease in other assets................... (8,726,778) (2,681,240)
Increase (decrease) in accrued interest payable
and accrued expenses................................. 693,423 686,612
Increase (decrease) in other liabilities............. 1,024,359 1,741,358
----------- ----------
Net cash provided by/(used in) operating activities........ 2,733,045 8,853,309
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks...... 331,731 938,508
Purchase of interest-bearing deposits in other banks........ (360,759) (301,778)
Proceeds from sales of securities available for sale........ none 214,000
Proceeds from maturities of investment securities........... 37,641,042 25,496,610
Purchase of investment securities........................... (63,009,243) (51,058,933)
Federal funds sold, net..................................... 15,260,000 20,150,000
Net loans and leases made to customers...................... (19,057,068) (33,790,958)
Purchases of premises and equipment......................... (1,630,996) (2,286,621)
Proceeds from sale of premises and equipment................ 13,772 1,783,119
------------ -----------
Net cash provided by/(used in) investing activities........ (30,811,521) (38,856,053)
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW and savings accounts................................... 9,965,165 2,322,793
Net increase (decrease) in time deposits.................... 26,260,627 35,063,821
Net increase (decrease) in interest-bearing demand
notes issued to the U.S. Treasury.......................... 1,453,730 258,603
Proceeds from borrowings.................................... 6,280,519 27,474,300
Repayments of borrowings.................................... (13,119,382) (26,492,988)
Proceeds from issuance of common stock...................... 60,719 none
Cash dividends paid......................................... (4,003,865) (3,845,871)
Acquisition of treasury stock............................... (2,455,698) (2,847,151)
Proceeds from issuance of treasury stock.................... 1,742,917 1,470,903
Cash paid in lieu of fractional shares...................... (40,038) none
------------ -----------
Net cash provided by/(used in) financing activities....... 26,144,694 33,404,410
Increase (decrease) in cash and due from banks............. (1,933,782) 3,401,666
Cash and due from banks::
Beginning................................................... 34,291,962 31,339,470
------------ -----------
Ending......................................................$ 32,358,180 $ 34,741,136
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money..........$ 20,586,523 $ 17,915,292
Income taxes............................................... 3,140,693 2,100,000
Supplemental Schedule of Noncash Investing
and Financing Activities
Other Real Estate acquired in settlement of loans............ 319,247 369,985
See accompanying notes to financial statement
</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, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
The consolidated financial statements of Sterling include the accounts of
its wholly owned subsidiaries, Bank of Lancaster County, N.A. (the "Bank") and
its wholly owned subsidiary, Town & Country, Inc., and Sterling Mortgage
Services, Inc. (presently inactive). All significant intercompany transactions
are eliminated in the consolidation.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 - "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The 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 incurred and
derivatives obtained by transferors in connection with the transfer of financial
assets are measured at fair value, if practicable. Servicing assets and other
retained interests in transferred assets are measured by allocating any prior
carrying amount between the assets sold, if any, and the interest retained, if
any, and the interest retained, if any, based on the relative fair values of the
assets at the date of transfer. Servicing assets retained are then 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 became aware that the volume and variety of certain transactions
and the related changes to information systems and accounting processes
necessary to comply with the requirements of SFAS No. 125 would make it
extremely difficult, if not impossible, for some affected companies to
comply by January 1, 1997. As a result, in December 1966,
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 certain provisions, as well as accounting
for transfer and servicing for repurchase agreements, dollar-roll,
securities lending and similar transactions. Therefore, this Statement
shall be effective for such
transfers of financial assets after December 31, 1997. Management does not
expect the adoption of SFAS No. 127 to have a material effect on the financial
position or results of operations of the Corporation.
In June 1997, the FASB issued Statement No. 130 - "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement No. 130 requires that all items that are
required to be recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Statement No. 130 is effective for fiscal years
beginning after December 15, 1997.
Sterling adopted SFAS No. 130, effective March 31, 1998. The
adoption of this Statement requires the Corporation to set forth additional
disclosures in the Corporation's financial statements.
In June 1997, the FASB issued SFAS 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. The Statement also establishes standards for
related
disclosures about products and services, geographic areas and major customers.
This Statement supersedes 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. The adoption of this Statement will
require the Corporation to set forth additional disclosures in the Corporation's
financial statements.
In February 1998, the FASB issued SFAS No. 132 - "Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88 and 106." This Statement revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, No. 88 and No. 106 were issued.
The Statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures.
This Statement is effective for fiscal years beginning
after December 15, 1997. Restatement of disclosures for earlier periods
provided for comparative purposes is required unless the information
is not readily
available, in which case the notes to the financial statements should
include all available information and a description of the information not
available. The adoption of this Statement will require
the Corporation to set forth additional
disclosures in the Corporation's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure
of a net investment in a foreign operation,
and unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecaster
transaction. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.
Sterling has not completed the analysis required
to estimate the impact of this statement.
Note 2 - Earnings Per Share
In 1997, the FASB issued Statement No. 128 - "Earnings per Share." The
Statement is effective for periods ending after December 15, 1997. The
Statement is designed to simplify the
computation of earnings per share and requires
disclosure of "basic earnings per share" and if applicable, "diluted
earnings per share." Basic earnings per share
is simply the per share allocation of income
available to common stockholders based only on the weighted average number of
common shares actually outstanding during the period. Diluted earnings per
share represents the per share allocation of income
attributable to common stockholders
based on the weighted average number of common shares actually outstanding plus
all dilutive potential common shares outstanding during the period. The
Statement requires restatement of all prior period earnings per share data when
adopted.
Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding which were
6,462,783 and 6,527,589 for 1998 and 1997 respectively. Diluted earnings per
share were computed by dividing net income by the weighted average number of
shares of common stock outstanding plus all dilutive potential common shares
outstanding during the period which were 6,483,424 and 6,529,666 for 1998 and
1997 respectively.
Figures prior to June 1998 were retroactively restated to reflect the
effect of a 5% stock dividend paid in June 1998.
Note 3 - Dividends Declared
The regular cash dividend declared for the third quarter of 1998 amounted
to $.21 per share while the regular cash dividend for the third quarter of 1997
amounted to $.19 per share. In addition, a "Special Dividend" of $.04 per share
was declared in the third quarter of 1997. Per share dividend amounts have been
retroactively restated to reflect the effect of the 5% stock dividend paid in
June 1998.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion provides management's analysis of the consolidated
financial conditions and results of operations of the Corporation and its
subsidiaries, the Bank and its subsidiary, Town & County, Inc., and Sterling
Mortgage Services, Inc., which is presently inactive.
In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Managements's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update these forward-
looking statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in other
documents the Corporation files from time to time with the Securities and
Exchange Commission, including Quarterly Reports on Form 10-Q and the Annual
Report on Form 10-K Annual Report to be filed by the Corporation, and any
Current Reports on Form 8-K filed by the Corporation.
Financial Condition
Total assets at September 30, 1998 amounted to $884,108,813 which
represents an increase of 9.2% over the $809,785,434 reported at September 30,
1997. Total assets at September 30, 1998 increased $38,620,736 or 4.6% over
the $845,488,077 reported at December 31, 1997.
The investment securities portfolio reflects a 16.2% increase of
$32,581,640 during the twelve month period September 30, 1997 to September 30,
1998. The Corporation accounts for securities under the SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
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 1998, there was in increase
in investment securities in the amount of $26,972,779 or 13.1% from the
$206,629,779 reported at December 31, 1997. The amount of unrealized gains
included in the available-for-sale category at December 31, 1997 was $4,417,755,
while at September 30, 1998 and 1997 it was $6,288,616 and $4,494,635
respectively.
Net loans have grown from $503,907,445 to $522,083,513 during the nine
month period ended September 30, 1998. This represents an increase of 3.6%
since December 31, 1997. Net loans increased from $498,837,189 at
September 30, 1997
to $522,083,513 at September 30, 1998. This represents an increase of
$23,246,324 or 4.7%.
Federal funds sold amounted to $12,890,000 at September 30, 1998 compared
to $4,000,000 at September 30, 1997 and $28,150,000 at December 31, 1997.
Premises and equipment decreased $173,835, or .8%, from $22,168,252 at
September 30, 1997 to $21,994,417 at September 30, 1998. During the first nine
months of 1998, total premises and equipment increased $56,791, or .3%, from
$21,937,626 at December 31, 1997. Depreciation expense for the period September
30, 1997 to September 30, 1998 was greater than the net acquisition of premises
and equipment which resulted in the decrease in premises and equipment for that
period of time.
Total deposits increased $70,463,336 or 10.3% from $684,423,071 at
September 30, 1997 to $754,886,407 at September 30, 1998. During the first
nine months of 1998, total deposits increased $36,225,792 or 5% from the
$718,660,615 reported at December 31, 1997.
Noninterest bearing deposits increased
$10,458,380, or 13.6%, from $76,652,517 at September 30, 1997 to $87,110,897 at
September 30, 1998. During the same period, interest bearing deposits increased
$60,004,956 or 9.9%. Noninterest bearing deposits increased $4,545,942, or
5.5%,
during the first nine months of 1998 while interest bearing
deposits increased $31,679,850, or 5%.
Included in the growth figures above is approximately $6
million in deposits involving the acquisition of the Leola branch deposit
accounts of CoreStates Bank, N.A. which was finalized in May 1998.
Stockholders' equity increased $6,277,770 or 8.6% from the $73,135,426
reported at September 30, 1997 to $79,413,196 at September 30, 1998. There was
an increase of $5,426,203 or 7.3% from the $73,986,993 reported at December 31,
1997. The major contributor to these increases was net income from operations.
Adding to the increase in stockholders' equity was an increase in net unrealized
gains on available-for-sale securities for both periods indicated. 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 September 30, 1998 was 8.57% compared to 8.71% at
September 30, 1997 and 8.45% at December 31, 1997.
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 9.60% and the total
risk-based capital ratio was 10.79% at September 30, 1998
while the Tier 1 capital ratio was 10.32% and the total risk-based
capital ratio was 11.53% at September 30, 1997.
The following table reflects the various capital ratios for the periods
indicated:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
"Statement"
<S> <C> <C> <C>
Equity Capital 8.57% 8.45% 8.71%
Primary and
Total Capital 9.38% 9.28% 9.61%
"Risk-based"
Tier 1 Capital 9.60% 10.23% 10.32%
Total Capital 10.79% 11.38% 11.53%
</TABLE>
Changes in the Allowance for Loan Losses for the nine months ended
September 30, 1998 and 1997 were as follows:
1998 1997
Balance at January 1 $ 7,730,000 $ 7,800,000
Provision for loan losses
charged to operating expenses 881,000 986,100
----------- ------------
8,611,000 8,786,100
----------- -----------
Losses charged to allowance 971,873 1,023,569
Recoveries credited to allowance 199,127 258,439
----------- -----------
Net charge-offs 772,746 765,130
----------- -----------
Balance at September 30, $ 7,838,254 $ 8,020,970
=========== ===========
Allowance as a percent of
period-end loans 1.48% 1.58%
The net charge-offs for the first nine months of 1998 were within the
corporation's expectations and 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,
1998 1997 1997
Nonaccrual loans $1,026,877 $1,313,717 $1,755,282
Accruing loans, past
due 90 days or more $ 670,821 $ 787,402 $ 853,156
Restructured loans $2,000,739 $2,104,560 $2,192,169
Non-performing loans
to total loans .70% .82% .95%
Allowance for loan losses
to non-performing loans 211.93% 183.80% 167.08%
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 $75,065 and $135,037 at September 30, 1998 and 1997 respectively,
and $152,755 at December 31, 1997. Interest income recorded on the nonaccrual
loans in 1998 was $561 and in 1997 was $15,015. 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,
1998, there were no such loans that had to be disclosed as potential problem
loans.
A loan is categorized as restructured if the original interest rate on the
loan, repayment terms or both are restructured due to a deterioration in the
financial condition of the borrower. The restructured loans listed is the
restructure of a series of loans to one borrower. There are no commitments to
lend additional funds to this borrower in relation to the restructured loans.
In the case of the above referenced loans, the Bank is secured by
real estate. The loans are current and have performed in
accordance with contractual terms, both
prior to and after the restructure. Accrual of interest on these loans
continues.
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 $3,019,352 for the third quarter
of 1998 and $2,272,020 for the third quarter of 1997, while the
average for 1997 was $2,203,003. .
The following table presents information concerning impaired loans for the
periods indicated:
September 30, December 31, September 30,
1998 1997 1997
Gross impaired loans which have
allowances.........................$3,027,616 $3,418,277 $3,947,451
Less: Related allowances for
loan losses........................ (151,381) (410,193) (473,694)
---------- ---------- ----------
Net impaired loans...................$2,876,235 $3,008,084 $3,473,757
========== ========== ==========
At September 30, 1998, 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, 1998.
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.
YEAR 2000
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact on the Corporation of the Year 2000
issue could materially differ from that which is anticipated in the
forward-looking statements as a result of certain factors identified below.
The Year 2000 issue ("Y2K") is the result of computer programs being
written using two digits rather than four to define
the applicable year. It is anticipated that most systems
may recognize a date using "00" as the year "1900"
rather than "2000". This could result in system failures, miscalculations,
and disruptions of normal business operations
including, among other things, a
temporary inability to process transactions, send statements, or engage in
similar day to day business activities. At Sterling Financial Corporation, we
recognize the Year 2000 problem is more than just a systems issue. It is a
business issue, and we are dealing with it in that manner.
Corporation's State of Readiness
Sterling Financial Corporation is committed to ensuring that the
Corporation's daily operations suffer little or no impact from the century date
change. The Corporation has applied due diligence throughout the Y2K process,
following the guidelines contained in the series of Federal Financial
Institutions Examination Council's Interagency Guidelines. These guidelines
include the following five phases: awareness, assessment, renovation or
remediation, testing or validation and implementation.
Management has initiated an enterprise-wide program to prepare the
Corporation's computer systems and applications for the Year 2000. The
Corporation has developed a comprehensive inventory of all mainframe and PC
based applications, third-party relationships,
environmental (bank vaults, VCRs, security systems, etc.)
and proprietary programs. This assessment identified 216
systems or processes and 448 proprietary programs, which could be impacted
by the century date change.
The 448 proprietary programs consist of management reporting, interface
programs, and bridge programs. As of September 30, 1998, the Corporation has
remediated 324 or 72% of these programs.
In January of 1997, the Corporation began converting its computer
systems to be Year 2000 ready. As of September 30,1998, approximately
69% of theCorporation's systems were ready, with all systems expected to
be ready by June 1999.
Vendor Type Total # # Y2K Ready % Y2K Ready
PC Based Applications 117 69 59%
Mainframe Applications 49 34 69%
Third-Party Relationships 24 9 38%
Environmental 26 25 96%
Proprietary Programs 448 324 72%
Total 664 461 69%
The Corporation has acquired its core mission-critical systems from a
highly regarded third-party vendor. Thus, even though the Corporation
does not have direct control over the renovation process,
it is monitoring the progress of its third-party vendors to assess
the status of their Y2K readiness efforts.
However, because most computer systems are, by their very nature,
independent, it is possible that noncompliant third-party
computers could impact the Corporation's computer systems.
The Corporation could be adversely affected by
the Y2K problem if it or unrelated parties fail to successfully address the
problem. Steps have been taken to communicate with the unrelated parties with
whom it deals to coordinate Year 2000 readiness. Additionally, we are dependent
on external suppliers, such as, wire transfer systems, telephone systems,
electric companies, and other utility companies for continuation of service.
The Corporation is also assessing the impact, if
any, the century date change may
have on its credit risk. The Corporation is contacting its large
commercial loan customers concerning their level of
readiness for Year 2000. Formal
communications have been initiated with all of its vendors and large commercial
customers to determine the extent to which the Corporation is vulnerable to
those third-parties' failure to remedy their own Year 2000 issues.
The Y2K Project Manager has available each vendors' Y2K
readiness efforts which includes their remediation plan,
renovation approach, testing methodologies and target dates.
A comprehensive testing plan has been developed. The Corporation has
prioritized all mainframe and PC based applications, third-party relationships,
environmental and proprietary programs to be tested. Separate environments for
testing have been defined and established. Beginning in the fourth quarter of
1998, the Corporation will be performing a variety of testing to include
limited unit testing (aging dates forward on files),
system testing (advancing the computer system date forward)
and combined system integration (running
applications dependent on each other together with the data files aged and
computer system date advanced forward) and acceptance testing (user review and
validation). Test scripts have been written which define the type of testing to
be performed, the resources necessary to perform the test, the transactions or
files to be processed, and expected results for each type of testing performed.
Additionally, a testing validation, certification and reporting process has been
established.
Costs of Year 2000
As of September 30, 1998, $182,100 has been expended as Year 2000 costs.
Management expects to spend a total of $310,688 for the entire project. The
estimated Year 2000 project costs include the costs and time associated with the
impact of third-parties' Year 2000 issues, and are based on presently available
information. The total cost of the project is being funded through operating
cash flows. The Corporation continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. Accordingly, the Corporation
does not expect the amounts required to be expensed over the next 15 months to
have a material effect on the financial position or results of operations.
However, if readiness is not achieved in a timely manner by the Corporation or
any of its significant related third-parties, be it a supplier of services or
customer, the Y2K issue could possibly have a material effect on the
Corporation's operations and financial position.
The cost of the projects and the date on which the Corporation plans to
complete both Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results
could differ materially from those plans.
Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Risks of Year 2000
At present, management believes it's progress in remediating the
proprietary programs and installing Y2K upgrades to the third-party
vendor mainframe and PC based computer applications is on target.
The Year 2000 computer problem creates risk for the Corporation
from unforseen problems in its own computer systems and
from third-party vendors who provide the majority of the Corporation's mainframe
and PC based computer applications. Failures of third-party systems
relative to the Y2K issue could have a material
impact on the Corporation's ability to conduct business.
Continency Plans
A contingency plan has been developed for mission-critical and required
mainframe and PC based applications, third-party relationships, environmental
and proprietary programs. The Corporation's contingency
plans involve the use of manual labor and replacement or
update of computer systems to compensate for the
loss or inconveniences caused by the disruption of certain automated computer
systems. The contingency plans define scheduled completion dates, test
dates and trigger dates. The trigger date being the date the
Corporation would implement the continency plan.
A detailed business resumption contingency plan is currently under
development with a target completion date of January 31, 1999. This detailed
business resumption contingency plan will calculate a risk factor for each core
business line and/or product. Based on the calculated risk factor, a specific
business resumption contingency plan will be written and tested.
<PAGE>
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, 1998 compared to three months ended September
30, 1997
Net income for the third quarter of 1998 amounted to $2,838,340 compared to
$2,649,308 for the third quarter of 1997. This represents an increase of
$189,032 or 7.1%. On a per share basis, income was $.44 compared to $.41.
Total interest income increased $767,342 or 5.3% while total interest
expense increased $623,146 or 9.5%. Increased volumes in loans was primarily
responsible for an increase in interest and fees of $251,778 or 2.2% over 1997.
Interest on deposits with banks reflects very little change, while interest on
federal funds sold increased $37,080 as a result of increased volumes. Income on
investment securities increased $478,397 or 16.7% in 1998 as a result of
increased volumes in various investment securities.
Total interest expense amounted to $7,197,131 for this period compared to
$6,573,985 for the same period last year. This represents an increase of
$623,146 or 9.5%. Interest paid on time certificates of deposit of $100,000 or
more increased $24,393 in 1998 over the same period in 1997, while interest paid
on all other deposits increased $715,919 or 13%. Interest expense on other
interest bearing liabilities decreased $117,166 during the same period of time.
Increased volumes in deposits was the primary reason for the increase in
interest expenses.
The provision for possible loan losses decreased $160,000 from a charge of
$335,000 in 1997 to $175,000 in 1998. 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 $474,569 or 16.1%. Income from
fiduciary activities increased $75,638 or 19.9%. Service charges on deposit
accounts decreased $39,840 or 5.1% while other various service charges increased
$36,483 or 9.3%. Mortgage banking income increased $109,547 or 29.7% over the
same period last year. Other operating income reflected an increase of $157,734
or 15.4%. Gains on securities transactions for 1997 was $3,500. There were no
gains in 1998. Included in total other operating income was $138,507, an
additional gain from the sale of the Bank's credit card portfolio in the second
quarter of 1998.
Total other operating expenses rose $615,992 or 8.9% over the same period
last year. There were increases of $76,767 in salaries and employee benefits,
$57,106 in occupancy and furniture and equipment expense and $2,420 in the FDIC
assessment while other operating expenses increased $479,699. Contributing to
the increase in other operating expenses were increases in marketing expense,
professional services, VISA and MAC fees and expenses incurred with investments
in limited partnerships.
Applicable income taxes decreased $26,259. The effective tax rate was
23.4% for the third quarter of 1998 compared to 25.2% for 1997.
Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997
Net income increased from $7,814,368 in September 30, 1997 to $8,887,399 in
September 30, 1998. This represents an increase of $1,073,031 or 13.7%. Net
income on a per share basis (basic) was $1.38 for nine months ended
September 30, 1998 compared to $1.20 for the same period 1997.
Sterling's return on average assets was 1.37% for
1998 compared to 1.34% for 1997. Return on average
stockholders' equity was 16.08% and 14.99% respectively for 1998 and 1997.
Total interest income increased $3,259,202 or 7.8%. Earning assets
increased $65,155,873 or 9.1%. Loans increased over $22.6 million or 4.5%,
while securities increased over $32 million or 16.2% over
the same period last year.
Increased volumes in loans and investment securities generated a major
portion of the increase in interest income.
Interest and fees on loans increased
$1,446,498. Interest on deposits with banks decreased $10,116 while interest on
federal funds sold increased $269,788. Interest on investment securities
increased $1,553,032. During this time the daily average balance of federal
funds sold increased from $11,853,663 in 1997 to $18,112,827 in 1998. The daily
average balance of investment securities was $221,535,549 at September 30, 1998
and $183,422,038 at September 30, 1997.
Total interest expense amounted to $21,044,363 reflecting an increase of
$2,562,276 or 13.9% from the $18,482,087 reported in 1997. Interest-bearing
deposits increased over $60 million or 9.9%. Increased volumes in deposits
generated a major portion of the increase in interest expense of $2,836,330 or
17%. Interest paid on other interest-bearing liabilities decreased $274,054.
The provision for possible loan loss decreased $105,100 in 1998 over 1997.
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 $2,169,129 or 24.2% during the first
nine months of 1998 over the same period in 1997. Income from fiduciary
activities increased $246,686 or 21.5%. Service charges on deposit accounts
increased $572 while other various service charges increased $229,415. Other
operating income decreased $159,718 or 4.6%. Included in other operating income
for 1997 was a gain of $419,000 on the sale of the previously owned
Administrative Service Center and the building occupied by Town & Country.
Mortgage banking income increased $722,124 as a result of increased volumes of
originations and subsequent sales. The major contributor to the increase in
total other operating income was a one-time earnings gain of $1,338,507 as a
result of the sale of the Bank's credit card portfolio. Gains on securities
transactions amounted to $208,457 in 1997 while there were no gains in 1998.
Total other operating expenses rose $1,673,553 or 8% over the same
period last year. Increases of $1,001,681 in salaries and employee
benefits, $77,961 in occupancy and furniture and equipment
expense, $4,745 in FDIC insurance and $589,166 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.
Contributing to the increase in other operating expenses
were increases in education and training expense, VISA and
MAC fees, professional services, PA Shares Tax, printing and
forms expense, telephone expense and expenses incurred with investments in
limited partnerships.
Applicable income taxes amounted to $2,878,384 in 1998 compared to
$2,653,813 in 1997. The increase in taxes is due in part to increases in taxable
income. The effective tax rate was 24.5% and 25.4% respectively for 1998 and
1997.
Three Months ended September 30, 1998 compared to three months ended
June 30, 1998
Net income decreased $385,597 or 12% in the third quarter of 1998 over the
second quarter of 1998. Net income for the three months ended September 30,
1998 was $2,838,340 compared to $3,223,937 for the three months
ended June 30, 1998.
Total interest income increased $84,826 or .6% while total interest expense
increased $173,474 or 2.5%. This resulted in an decrease in net interest income
of $88,648. Earning assets decreased $2,150,013 or .3% while interest-bearing
liabilities decreased $2,129,138 or .3%.
The loan loss provision decreased $171,000 over the second quarter of 1998.
Total other operating income decreased $990,190 over the second quarter.
During the second quarter of 1998, the Bank's credit card portfolio was sold and
a gain of $1,200,000 was recognized in this quarter.
Total other operating expenses decreased $282,849 over the second quarter.
There was a decrease of $383,366 in employee related expenses while occupancy
and furniture and equipment expenses increased $21,940 and
other expenses increased $78,577.
Applicable income taxes decreased $239,392 over the second quarter due to a
decrease in taxable income.
Part I - Financial Information
Quantitative and Qualitative Disclosures About Market Risk
Discussion of Market Risk and Interest Rate Sensitivity
As a financial institution, the primary component of the Bank's market risk
is interest rate volatility. Changes in interest rates will ultimately impact
the Bank's interest income from earning assets and the interest expense from
funding sources (deposits and debt).
Based upon the Bank's nature of operations, the Bank is not subject to
foreign currency exchange or commodity price risk. The Bank's market area for
loans and deposits is concentrated in Lancaster County, Pennsylvania and as such
is subject to risks associated with the local economy. The Bank does not own
any trading assets. The Bank does not have any hedging transactions
in place such as interest rate swaps and caps.
Management endeavors to control the exposure of earnings to changes in
interest rates. The Bank's asset/liability committee manages interest rate risk
by various means including '"Gap" management and internally developed models and
reports. In 1997, the Bank also utilized Sheshunoff Interest Rate Risk
management services and IBAA investment portfolio valuation services to enhance
risk exposure review. Interest repricing of assets and liabilities is measured
over future time periods (interest rate sensitivity gaps). While all time gaps
are measured, management's primary focus is the cumulative gap through six
months, as this time frame directly impacts net interest income in the near term
time horizon and is most difficult to make reactive adjustment to actual rate
movements.
The Bank has various investments structured to change investment yield with
current market conditions. Assets subject to repricing include federal funds
sold (repricing daily), loans floating to "treasury bill" indexes (repricing
monthly) and loans tied to "prime" or other indexes subject to immediate
change. Other factors effecting income are maturing and
contracted repayments and\prepayments of existing
loans and investments. These cash flows will be
re-invested at current market yields.
The Bank's funding liabilities (customer deposits and borrowed funds) have
more complex repricing characteristics, since interest bearing deposits are
subject to rate change but are not specifically indexed to "prime" or "treasury"
indexes. Time certificates and borrowed money are subject to interest rate
change at maturity. The Bank's deposit funding is essentially comprised of
"core" deposits that have been historically loyal and stable, and these
deposits, with the exception of certificates of deposit, have not been
rate sensitive. All interest rates do not move in full
and equal amounts for loans and deposits.
Deposit rates historically lag loans in rate movement, and rate movement occurs
to a smaller degree for deposits than loans. Modeling is used to forecast
projected impact to the net interest margin as a result of
rate movements, either increasing or decreasing. Historic pricing correlations
are calculated for all interest-bearing deposit products for rate change
repricing impact as - immediate, monthly, and annually over a five year time
period. Management's view of interest rate sensitivity reflects a calculated
interpretation of net interest margin exposure to rate changes. Pricing
correlations are constantly refined by management. There is no guarantee that
past history will accurately reflect future changes.
Although the make-up of the balance sheet is subject to change from time to
time, management is of the opinion that there have been no material changes in
reported market risks faced by the company since the end of the most recent
fiscal year. Quantitative and qualitative disclosures about market risk was
listed in Part II, Item 7A, of the Form 10-K for the fiscal year ended December
31, 1997.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of September 30, 1998, 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 July 30,1998 was filed July 30, 1998 pursuant to
Item 5 and Item 7 on Form 8-K filing as Exhibit 99, a copy of a Sterling
Financial Corporation press release announcing a plan to repurchase up to
250,000 shares of the Registrant's outstanding common stock, par
value $5.00 per share.
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, 1998 By:
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: November 12, 1998 By:
Jere L. Obetz
Executive 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)
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<PERIOD-END> SEP-30-1998
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