FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 Identification
or organization) No.)
101 North Pointe Boulevard
Lancaster, Pennsylvania 17601-4133
(Address of principal executive offices) (Zip Code)
(717) 581-6030
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $5.00 Par Value-6,161,454 shares outstanding as of April 30,
1998.
Sterling Financial Corporation and Subsidiaries
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of March 31, 1998 (Unaudited), December 31, 1997,
and March 31, 1997 (Unaudited). 3
Consolidated Statements of Income
for the Three Months ended March 31, 1998
and 1997 (Unaudited). 4
Consolidated Statements of Cash Flows
for the Three Months ended
March 31, 1998 and 1997 (Unaudited). 5
Notes to Consolidated Financial
Statements (Unaudited). 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signature Page 17
Subsidiaries of the Registrant 18
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
<S> <C> <C> <C>
ASSETS (Unaudited) (Unaudited)
Cash and due from banks....................$ 35,918,835 $ 34,291,962 $ 28,720,443
Interest-bearing deposits in other banks... 23,005 14,565 348,924
Federal funds sold......................... 33,690,000 28,150,000 800,000
Mortgage loans held for sale............... 836,100 791,500 1,574,050
Investment Securities::
Securities held to maturity (market value-
$81,282,542; $86,465,497; $89,323,230).... 79,986,406 85,155,282 89,059,256
Securities available for sale............. 130,989,907 121,474,497 87,146,936
Loans...................................... 520,680,500 512,073,424 492,829,256
Less: Unearned Income..................... (323,666) (435,979) (951,766)
Allowance for loan losses........... (7,918,187) (7,730,000) (7,800,133)
Loans, Net................................. 512,438,647 503,907,445 484,077,357
Premises and Equipment..................... 21,666,747 21,937,626 21,945,430
Other real estate owned.................... 553,479 340,685 249,810
Accrued interest receivable and
prepaid expenses.......................... 12,788,623 12,243,207 11,412,661
Other assets............................... 40,866,621 37,181,308 33,849,758
TOTAL ASSETS...............................$ 869,758,370 $ 845,488,077 $ 759,184,625
============ ============ ============
LIABILITIES
Deposits:
Non-interest bearing......................$ 85,302,676 $ 82,564,955 $ 72,537,890
Interest-bearing.......................... 655,732,215 636,095,660 567,257,440
TOTAL DEPOSITS............................. 741,034,891 718,660,615 639,795,330
Interest-bearing demand notes issued to
U.S. Treasury............................. 2,275,706 3,000,000 2,829,016
Other liabilities for borrowed money....... 30,889,011 32,312,232 30,110,242
Accrued interest payable and accrued
expenses.................................. 11,200,819 10,164,729 9,127,616
Other liabilities.......................... 8,423,843 7,363,508 6,837,048
TOTAL LIABILITIES.......................... 793,824,270 771,501,084 688,699,252
STOCKHOLDERS' EQUITY
Common Stock - (Par Value: $5.00)
No. Shares authorized: 35,000,000;35,000,000;
35,000,000
No. Shares issued: 6,237,009; 6,237,009;
6,237,009
No. Shares outstanding: 6,149,716; 6,149,795;
6,224,830................................ 31,185,045 31,185,045 31,185,045
Capital Surplus............................. 16,454,590 16,321,050 16,325,040
Retained Earnings........................... 27,359,482 25,827,750 21,908,260
Net unrealized gain on securities available
for sale................................... 3,363,433 2,915,718 1,380,387
Less: Treasury Stock (87,293; 87,214; 12,179)-
at cost.................................... (2,428,450) (2,262,570) (313,359)
TOTAL STOCKHOLDERS' EQUITY.................. 75,934,100 73,986,993 70,485,373
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$ 869,758,370 $ 845,488,077 $ 759,184,625
============ ============ ============
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part 1 - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans............................$ 11,421,051 $ 10,668,138
Interest on deposits in other banks................... 541 7,806
Interest on federal funds sold........................ 295,025 141,445
Interest and dividends on investment securities:
Taxable............................................ 2,146,634 1,783,027
Tax-exempt......................................... 798,489 740,605
Dividends on stock................................. 60,375 55,383
TOTAL INTEREST INCOME................................... 14,722,115 13,396,404
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more................................... 541,607 364,739
Interest on all other deposits........................ 5,760,619 4,844,892
Interest on demand notes issued to the U.S. Treasury.. 24,439 24,982
Interest on federal funds purchased................... none 107
Interest on other borrowed money...................... 496,910 500,616
TOTAL INTEREST EXPENSE.................................. 6,823,575 5,735,336
NET INTEREST INCOME..................................... 7,898,540 7,661,068
Provision for loan losses............................. 360,000 198,100
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES.......................................... 7,538,540 7,462,968
OTHER OPERATING INCOME
Income from fiduciary activities..................... 477,385 370,010
Service charges on deposit accounts.................. 700,136 637,640
Other service charges, commissions and fees.......... 424,058 304,953
Mortgage banking income.............................. 646,728 239,420
Other operating income............................... 1,054,257 1,186,717
TOTAL OTHER OPERATING INCOME............................ 3,302,564 2,738,740
OTHER OPERATING EXPENSES
Salaries and employee benefits....................... 4,274,651 3,953,732
Net occupancy expense................................ 536,820 628,104
Furniture and equipment expense...................... 648,714 589,049
FDIC insurance assessment............................ 21,052 20,082
Other operating expenses............................. 1,629,069 1,571,641
TOTAL OTHER OPERATING EXPENSES.......................... 7,110,306 6,762,608
Income before income taxes........................... 3,730,798 3,439,100
Applicable income taxes.............................. 905,676 850,578
NET INCOME..............................................$ 2,825,122 $ 2,588,522
============ ===========
Earnings per common share:
Net Income (basic and diluted).........................$ .46 $ .42
Cash dividends declared per common share...............$ .21 $ .19
Consolidated Statements of Comprehensive Income (Unaudited)
NET INCOME..............................................$ 2,825,122 $ 2,588,522
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available-
for-sale arising during the period..................... 447,715 (222,212)
COMPREHENSIVE INCOME....................................$ 3,272,837 2,366,310
============ ==========
See accompanying notes to financial statements
</TABLE>
<TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Income..............................................$ 2,825,122 $ 2,588,522
Adjustments to reconcile net income to net cash
provided by/(used in)operating activities:
Depreciation.......................................... 505,331 472,456
Accretion and amortization of investment securities... 72,848 73,668
Provision for possible loan and lease losses.......... 360,000 198,100
(Gain) loss on disposition of property and equipment.. (75) (161,274)
(Gain) loss on sale of mortgage loans................. (184,494) (48,043)
Proceeds from sales of mortgage loans................. 26,275,721 6,237,258
Origination of mortgage loans held for sale........... (26,135,827) (6,747,165)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and prepaid expenses................................ (545,416) (150,595)
(Increase) decrease in other assets.................. (3,898,107) (725,360)
Increase (decrease) in accrued interest payable
and accrued expenses................................ 805,449 423,131
Increase (decrease) in other liabilities............. 1,060,335 978,811
Net cash provided by/(used in) operating activities. 1,140,887 3,139,509
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits in other banks.. 28,929 487,458
Purchase of interest-bearing deposits in other banks.... (37,369) (192,884)
Proceeds from maturities of investment securities....... 13,801,823 9,406,116
Purchase of investment securities....................... (17,542,849) (12,429,810)
Federal funds sold, net................................. (5,540,000) 23,350,000
Net loans and leases made to customers.................. (8,891,202) (18,243,126)
Purchases of premises and equipment..................... (234,452) (835,362)
Proceeds from sale of premises and equipment............ 75 1,236,418
Net cash provided by/(used in) investing activities. (18,415,045) 2,778,810
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW
and savings accounts................................... 9,344,942 (22,561,868)
Net increase (decrease) in time deposits................ 13,029,334 15,320,741
Net increase (decrease) in interest-bearing demand
notes issued to U.S. Treasury.......................... (724,294) 87,619
Proceeds from borrowings................................ 3,320,555 3,750,000
Repayments of borrowings................................ (4,743,776) (4,073,584)
Cash dividends paid...................................... (1,293,391) (1,182,718)
Acquisition of treasury stock............................ (614,190) (313,359)
Proceeds from issuance of treasury stock................. 581,851 435,823
Net cash provided by/(used in) financing activities.. 18,901,031 (8,537,346)
Increase (decrease) in cash and due from banks......... 1,626,873 (2,619,027)
Cash and due from banks::
Beginning............................................... 34,291,962 31,339,470
Ending..................................................$ 35,918,835 $ 28,720,443
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest paid to depositors and on borrowed money......$ 6,429,684 $ 5,713,632
Income taxes........................................... none none
Supplemental Schedule of Noncash Investing and Financing Activities
Other Real Estate acquired in settlement of loans........ 239,824 207,075
See accompanying notes to financial statements
</TABLE>
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Sterling
Financial Corporation ("Sterling") have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three-month period ended March 31, 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 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.
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.
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 earning per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding
which were 6,160,144 and 6,231,167 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 6,175,778 and 6,232,642 for
1998 and 1997 respectively.
Part I - Financial Information
Sterling Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets at March 31, 1998 amounted to $869,758,370 compared to
$759,184,625 at March 31, 1997. This represents an increase of $110,573,745, or
14.6% over that period of time. Total assets at March 31, 1998 increased
$24,270,293 or 2.9% over the $845,488,077 reported at December 31, 1997.
The investment securities portfolio reflects an 19.7% increase of
$34,770,121 during the twelve month period March 31, 1997 to
March 31, 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 three
months of 1998, there was in increase in investment securities in
the amount of $4,346,534 or 2.1% 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 March 31, 1998 and 1997 it was $5,096,111 and
$2,087,455 respectively.
Net loans have grown from $484,077,357 at March 31, 1997 to $512,438,647 at
March 31, 1998. This represents an increase of $28,361,290 or 5.9%. Net loans
have grown from $503,907,445 to $512,438,647 during the three month period ended
March 31, 1998. This represents an increase of 1.7% since December 31, 1997.
Federal funds sold amounted to $33,690,000 at March 31, 1998 compared to
$800,000 at March 31, 1997 and $28,150,000 at December 31, 1997.
Premises and equipment decreased $278,683 from $21,945,430 at March 31,
1997 to $21,666,747 at March 31, 1998. During the first three
months of 1998, total premises and equipment decreased $270,879 from
$21,937,626 at December 31, 1997. Depreciation expense during these
periods was greater than the net acquisition of premises and equipment
which resulted in the decrease in premises and equipment.
Total deposits increased $101,239,561 or 15.8% from $639,795,330 at
March 31, 1997 to $741,034,891 at March 31, 1998. During the first three
months of 1998, total deposits increased $22,374,276 or
3.1% from the $718,660,615 reported at December 31, 1997.
Noninterest bearing deposits increased $12,764,786 from
$72,537,890 at March 31, 1997 to $85,302,676 at March 31, 1998.
This represents an increase of 17.6%. During the same period, interest
bearing deposits increased $88,474,775 or 15.6%. Noninterest bearing
deposits increased $2,737,721 during the first three months of 1998
while interest bearing deposits increased $19,636,555.
Stockholders' equity increased $5,448,727 or 7.7% from the $70,485,373
reported at March 31, 1997 to $75,934,100 at March 31, 1998. There was an
increase of $1,947,107 or 2.6% 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. These increases were to
some degree offset by the repurchase of outstanding common stock throughout
both periods indicated. Regulatory authorities have decided to
exclude the net unrealized holding gains and losses on available-for-sale
securities from the definition of common stockholders'
equity for regulatory capital purposes. The capital ratios reflect
that exclusion. Total stockholders' equity to total assets
at March 31, 1998 was 8.39% compared to 9.13% at March 31, 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 9.78%
and the total risk-based capital ratio was 10.88% at March 31, 1998
while the Tier 1 capital ratio was 10.64% and the total risk-based
capital ratio was 11.88% at March 31, 1997.
<PAGE>
The following table reflects the various capital ratios for the periods
indicated:
March 31, 1998 December 31, 1997 March 31, 1997
"Statement"
Equity Capital 8.39% 8.45% 9.13%
Primary and
Total Capital 9.22% 9.28% 10.05%
"Risk-based"
Tier 1 Capital 9.78% 10.23% 10.64%
Total Capital 10.88% 11.38% 11.88%
Changes in the Allowance for Loan Losses for the three months ended
March 31, 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 360,000 198,100
---------- ----------
8,090,000 7,998,100
---------- ----------
Losses charged to allowance 234,856 321,260
Recoveries credited to allowance 63,043 123,293
---------- ----------
Net charge-offs 171,813 197,967
---------- ----------
Balance at March 31, $7,918,187 $7,800,133
========== ==========
Allowance as a percent of
period-end loans 1.52% 1.59%
The net charge-offs for the first three months of 1998 were within the
Corporation's expectations and management believes that the allowance for loan
losses is adequate. Management makes a determination no less frequently than
quarterly as to the appropriate provision necessary to maintain an adequate
allowance for potential loan losses. The amount of provision made is based
upon a variety of factors including a specific allocation by
individual credits, loss experience for classified loans
using migration analysis, loss experience for
homogenous loan pools, levels and trends in delinquency, specific
non-accruing and problem loans, evaluation of economic conditions and
forecasts and other factors deemed appropriate by management.
While there can be no assurance that material
amounts of additional loan loss provisions will not be required in
the future, management believes that, based upon information
presently available, the amount of
the allowance for possible loan losses is adequate.
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
March 31, December 31, March 31,
1998 1997 1997
Nonaccrual loans $1,143,155 $1,313,717 $1,359,052
Accruing loans, past due 90 days or more $1,295,519 $ 787,402 $1,006,359
Restructured loans $2,129,314 $2,104,560 $ none
Non-performing loans to total loans .88% .82% .48%
Allowance for loan losses to
non-performing loans 173.3% 183.8% 329.8%
The general policy has been to cease accruing interest on loans when it is
determined that a reasonable doubt exists as to the collectibility of additional
interest. Interest income on these loans is only recognized to the extent
payments are received. If interest income had been recorded on such
loans for the periods indicated, such interest income would have
been increased by approximately $25,923 and $32,648 at March 31, 1998
and 1997 respectively, and $152,755 at December 31,
1997. There was no interest income recorded on the nonaccrual loans in 1998,
while in 1997 there was $5,005. Potential problem loans are loans which are
included as performing loans, but for which possible credit problems of the
borrower causes management to have doubts as to the ability of such borrower to
comply with present repayment terms and which may eventually result in
disclosure as a non-performing loan. At March 31,1998, there were no
such loans that had to be disclosed as potential problem loans.
The increase in the total nonperforming assets over March 31, 1997
is primarily attributed to the restructure of a series
of loans to one borrower involving $2,129,314. There are no commitments to lend
additional funds to this borrower in relation to the restructured 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. 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 the
contractural 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 restructured, 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 adjustment to the allowance or the
provision for loan and lease losses will be made. There was no adjustment
necessary for the impaired loans for the periods indicated.
The average amount of impaired loans was $3,286,510 for the first
quarter of 1998 and $1,322,948 for the first quarter of 1997, while
the average for the year 1997 was $2,203,003.
The following table presents information concerning impaired loans for the
periods indicated:
March 31, December 31, March 31,
1998 1997 1997
Gross impaired loans which have allowances...$3,272,469 $3,418,277 $1,359,052
Less: Related allowances for loan loss..... (163,623) (410,193) (203,858)
---------- ---------- ----------
Net impaired loans..........................$3,108,846 $3,008,084 $1,155,194
At March 31, 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 March 31, 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 sources of funds mentioned provide sufficient liquidity.
Results of Operations
The following discussion analyzes the specific components affecting the
changes in net income for the periods analyzed.
Three months ended March 31, 1998 compared to three months ended March 31, 1997
Net income for the first quarter of 1998 amounted to $2,825,122 compared to
$2,588,522 for the first quarter of 1997. This represents an increase of
$236,600 or 9.1%. On a per share basis, both basic and diluted, income was
$.46 compared to $.42.
Return on average assets for the first quarter of 1998 was 1.34%
compared to 1.37% for the first quarter of 1997. Return on equity
was 15.32% for the first quarter of 1998 compared to
15.14% for the same period in 1997.
Total interest income increased $1,325,711 or 9.9% while total interest
expense increased $1,088,239 or 19.0%. Therefore, the interest differential
increased $237,472. Loans increased nearly $28 million over the same period in
1997. Increased volumes was the primary reason for the increase of $752,913 in
interest and fees on loans. Interest on deposits with banks decreased $7,265.
Interest on federal funds sold increased $153,580. The daily average of federal
funds sold was $21,462,000 in 1998 compared to $10,622,222 in 1997. Income on
investment securities increased $426,483 or 22.2% in 1998. The daily average of
investment securities in 1998 was $208,324,948 compared to $176,719,031 in 1997.
Total interest expense amounted to $6,823,575 reflecting an increase of
$1,088,239 or 19.9% over the $5,735,336 reported in 1997. Interest paid on
interest-bearing deposits increased $1,092,595 or 21% in 1998 over the same
period in 1997. Increased volumes in interest-bearing deposits generated
a major portion of this increase. Interest expense on other
interest bearing liabilities decreased $4,356 during the same period of
time primarily as a result of decreased volumes in
this category of liabilities.
The provision for possible loan losses increased $161,900 from a charge of
$198,100 in 1997 to $360,000 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 $563,824 or 20.6%. Income from
fiduciary activities increased $107,375 or 29%. Service charges on deposit
accounts increased $62,496 while other various service charges increased
$119,105. Other operating income decreased $132,460. Included in other
operating income in 1997 was a gain of $152,000 realized
on the sale of the previously owned Administrative Service Center.
Mortgage banking income increased $407,308 as a
result of increased volumes of originations and subsequent sales.
Total other operating expenses rose $347,698 or 5.1% over the same period
last year. Increases of $320,919 in salaries and employee benefits, $970
in FDIC insurance, $57,428 in other operating expenses, $59,665 in
furniture and equipment expense and a decrease of $91,284 in net
occupancy expense consitute 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. One new branch office was opened in the
last quarter of 1997.
Applicable income taxes amounted to $905,676 in 1998 compared to
$850,578 in 1997. The increase in taxes is due in part to
increases in taxable income.
Three months ended March 31, 1998 compared to three months ended
December 31, 1997
Net income increased $238,326 or 9.2% in the first quarter of 1998 over the
fourth quarter of 1997. Net income at March 31, 1998 was $2,825,122 compared to
$2,586,796 for the quarter ending December 31, 1997. Net income on a per share
basis, both basic and diluted, was $.46 for the first quarter of 1998
compared to $.42 for the last quarter of 1997. Return on average assets
for the first quarter of 1998 was 1.34% compared to 1.26%
for the last quarter of 1997. Return on equity
was 15.32% and 14.65% respectively for March 31, 1998 and December 31, 1997.
Total interest income increased $2,775 or .02%. Interest and fees on loans
decreased $92,956 while interest on investment securities increased $40,466.
Interest on other earning assets increased $55,265. Earning assets increased
approximately $18.5 million during the first three months of 1998. The most
significant increase in earning assets was in loans. Loans increased over $8.6
million the first three months of 1998. Federal funds sold increased over $5.5
million while the securities increased over $4.3 million.
Total interest expense decreased $21,279 or .3% during the first quarter of
1998. Total interest-bearing liabilities increased nearly $17.5 million in the
first quarter of 1998 over the last quarter of 1997. Interest-bearing deposits
increased over $19.6 million during this period of time, while all other
interest-bearing liabilities decreased $2.1 million.
Net interest income increased $24,054 as a result of the decrease in
interest expense along with the increase in interest income.
The loan loss provision for the first quarter of 1998 was $360,000
compared to $142,905 for the last quarter of 1997.
Total other operating income increased $344,341 or 11.6% in the first
quarter of 1998 over the last quarter of 1997. Income from
fiduciary activities contributed nearly $113,000 to this increase,
while mortgage banking income contributed over $219,000 of this increase.
Total other operating expenses decreased $155,701 or 2.1% over the fourth
quarter of 1997. Salaries and employee benefits increased $170,925.
Occupancy and furniture and equipment expense decreased $35,555 and
other operating expenses decreased $291,539. The FDIC insurance
assessment reflected an increase of $468.
Applicable income taxes were $68,675 greater than those recorded for the
fourth quarter of 1997.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
As of March 31, 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 January 27, 1998 was filed January
27, 1998 pursuant to Item 5 and Item 7 on Form 8-K filing,
as Exhibit 99, a copy of the press release announcing that the
common stock of Sterling Financial Corporation would begin trading
on January 29, 1998 in the NASDAQ National Market.
A report on Form 8-K dated February 3, 1998 was filed February 3,
1998 pursuant to Item 5 and Item 7 on Form 8-K filing, as Exhibit 99,
a copy of the press release announcing that Bank of Lancaster
County, N.A., a wholly-owned subsidiary of Sterling Financial
Corporation, plans to purchase the accounts of the Leola Branch
of CoreStates Bank, N.A.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sterling Financial Corporation
Date: May 12, 1998 By:
John E. Stefan
Chairman of the Board, President
and Chief Executive Officer
Date: May 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 (National Banking Association)
1 East Main Street
P.O. Box 0300
Strasburg, PA 17579
Town & Country, Inc. (Wholly owned Pennsylvania
Subsidiary of Bank of Lancaster
County, N.A.)
1097 Commercial Avenue
East Petersburg, PA 17520
Sterling Mortgage Services, Inc. Pennsylvania
101 North Point Boulevard
Lancaster, PA 17601-4133
(Presently inactive)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 35918835
<INT-BEARING-DEPOSITS> 23005
<FED-FUNDS-SOLD> 33690000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130989907
<INVESTMENTS-CARRYING> 79986406
<INVESTMENTS-MARKET> 81282542
<LOANS> 521192934
<ALLOWANCE> 7918187
<TOTAL-ASSETS> 869758370
<DEPOSITS> 741034891
<SHORT-TERM> 33164717
<LIABILITIES-OTHER> 19624662
<LONG-TERM> 0
0
0
<COMMON> 31185045
<OTHER-SE> 44749055
<TOTAL-LIABILITIES-AND-EQUITY> 869758370
<INTEREST-LOAN> 11421051
<INTEREST-INVEST> 3301064
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14722115
<INTEREST-DEPOSIT> 6302226
<INTEREST-EXPENSE> 6823575
<INTEREST-INCOME-NET> 7898540
<LOAN-LOSSES> 360000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7110306
<INCOME-PRETAX> 3730798
<INCOME-PRE-EXTRAORDINARY> 2825122
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2825122
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 7.728
<LOANS-NON> 1143155
<LOANS-PAST> 2271283
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7730000
<CHARGE-OFFS> 234856
<RECOVERIES> 63043
<ALLOWANCE-CLOSE> 7918187
<ALLOWANCE-DOMESTIC> 7918187
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2793070
</TABLE>
