-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NGdg7UrVGfY+Aoq0urjkzDKFLjvlVhovpP1+eXeP8SUa1qeiXXagIzbfqbLgHZPi nMVCjFIS0tAVIM4fhvXkAQ== 0000811671-96-000007.txt : 19960329 0000811671-96-000007.hdr.sgml : 19960329 ACCESSION NUMBER: 0000811671-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000811671 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232449551 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16276 FILM NUMBER: 96540248 BUSINESS ADDRESS: STREET 1: NORTH POINTE BANKING CORP STREET 2: 101 NORTH POINTE BLVD CITY: LANCASTER STATE: PA ZIP: 17605-4133 BUSINESS PHONE: 7175816005 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 (I.R.S. Employer incorporation or organization) Identification No.) 101 North Point Boulevard Lancaster, Pennsylvania 17601-4133 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 581-6030 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $5.00 Per Share (Title of class) Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | 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 The aggregate market value of the voting stock held by non-affiliates of the Registrant at February 29, 1996 was approximately $117,317,903. The number of shares of Registrant's Common Stock outstanding on February 29, 1996 was 5,938,110. Documents Incorporated by Reference Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. Sterling Financial Corporation Table of Contents Page Part I Item 1. Business............................................. 1 Item 2. Properties........................................... 3 Item 3. Legal Proceedings.................................... 4 Item 4. Submission of Matters to a Vote of Security Holders.. 4 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................... 4 Item 6. Selected Financial Data.............................. 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 6 Item 8. Financial Statements and Supplementary Data.......... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 50 Part III Item 10. Directors and Executive Officers of the Registrant... 51 Item 11. Executive Compensation............................... 51 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 51 Item 13. Certain Relationships and Related Transactions....... 51 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 52 Signatures...................................................... 53 PART I Item 1 - Business Sterling Financial Corporation Sterling Financial Corporation (the "Corporation") is a Pennsylvania business corporation, based in Lancaster, Pennsylvania. The Corporation was organized on February 23, 1987 and became a bank holding company through the acquisition on June 30, 1987 of all the outstanding stock of The First National Bank of Lancaster County, now by change of name, Bank of Lancaster County, N.A. In addition, the Corporation also owns all of the outstanding stock of a non-bank subsidiary, Sterling Mortgage Services, Inc., a mortgage service company formed by the Corporation as a wholly owned subsidiary that presently is considered inactive. The Corporation provides a wide variety of commercial banking and trust services through its wholly owned subsidiary, Bank of Lancaster County, N.A. (the "Bank"). A partial source of operating funds for the Corporation is dividends provided by the Bank. The Corporation's expenses consist principally of operating expenses. Dividends paid to stockholders are, in part, obtained by the Corporation from dividends declared and paid to it by the Bank. As a bank holding company, the Corporation is registered with the Federal Reserve Board in accordance with the requirements of the Federal Bank Holding Company Act and is subject to regulation by the Federal Reserve Board and by the Pennsylvania Department of Banking. Bank of Lancaster County The Bank is a full service commercial bank operating under charter from the Comptroller of the Currency. On July 29, 1863, authorization was given by the Comptroller of the Currency to The First National Bank of Strasburg to commence the business of banking. On September 1, 1980, the name was changed to The First National Bank of Lancaster County and at the time of the holding company reorganization on June 30, 1987, the name was changed to its present name, Bank of Lancaster County, N.A. At December 31, 1995, the Bank had total assets of $711,123,000 and total deposits of $610,170,000. The main office of the Bank is located at 1 East Main Street, Strasburg, Pennsylvania. In addition to its main office, the Bank had twenty-three (23) branches in Lancaster County and one (1) branch in Chester County, Pennsylvania in operation at December 31, 1995. The Bank provides a full range of banking services. These include demand, savings and time deposit services, NOW (Negotiable Order of Withdrawal) accounts, money market accounts, safe deposit boxes, VISA credit card, and a full spectrum of personal and commercial lending activities. The Bank maintains correspondent relationships with major banks in New York City and Philadelphia. Through these correspondent relationships, the Bank can offer a variety of collection and international services. With the installation of three automated teller machines (ATMs) in April of 1983, the Bank was the first financial institution in Lancaster County to join the MAC (Money Access Center) Network. The Bank now has 17 ATMs in Lancaster County. The Bank became a participating member of the Plus System in the Fall of 1984. This membership entitles the Bank's MAC/Plus cardholders to have access to a nationwide network of over 119,000 ATMs. The Bank introduced Discount Brokerage Service in July, 1983. This service is offered in coordination with TradeStar Investments, Inc., an affiliate of BHC Securities, Inc. and meets the needs of the commission- conscious investor. In 1992 the Bank began offering mutual funds to customers. We believe these services are important additions to our product line and make a statement about our progressive attitude in providing financial services for the future. The Bank was given permission to open a Trust Department by the Comptroller of the Currency on May 10, 1971. The Trust Department provides personal and corporate trust services. These include estate planning, administration of estates and the management of living and testamentary trusts and investment management services. Other services available are pension and profit sharing trusts and self-employed retirement trusts. Trust Department assets totaled nearly $220 million at December 31, 1995. On January 31, 1983, the Bank purchased Town & Country, Inc. which is a vehicle and equipment leasing company operating in Pennsylvania and other states. Its principal office is located at 640 East Oregon Road, Lancaster, PA. Town & Country, Inc. employs thirty six (36) people. The Bank's principal market area is Lancaster County. Lancaster County is the sixth largest county in Pennsylvania, in terms of population, behind Philadelphia, Allegheny, Montgomery, Delaware and Bucks. Lancaster County, with an area of 949 square miles has a population of approximately 443,000 people. Lancaster's tradition of economic stability has continued, with agriculture, industry and tourism all contributing to the overall strength of the economy. Lancaster County has one of the strongest and most stable economies in the state. No single sector dominates the county economy. One of the best agricultural areas in the nation, Lancaster County ranks first among Pennsylvania counties and one of the top 20 farm markets in the country. Lancaster County is also one of the leading industrial areas in the state. The county is considered a prime location for manufacturing, away from congested areas, yet close to major east coast markets. Diversification of industry helps to maintain the economic stability of the county. The unemployment rate of the county in December 1995 was 4.3% which was lower than the state (6.3%) and national (5.4%) levels. The 1995 average county jobless rate was 4.2% of the work force, down from 4.4% in 1994 and 4.5% in 1993. Lancaster County, with its many historic sites, well-kept farmlands and the large Amish community has become very attractive to tourists and is one of the top tourist attractions in the U.S. The Bank is subject to intense competition in all respects and areas of its business from banks and other financial institutions, including savings and loan associations, finance companies, credit unions and other providers of financial services. There are 15 full-service commercial banks with offices in Lancaster County with some of these banks having branches located throughout Lancaster County and beyond. The institutions range in asset size from approximately $173 million to over $41 billion. Five (5) banks in our trade area exceed $5 billion in assets. Several banks are part of bank holding companies. One bank is part of a bank holding company that has assets in excess of $73 billion while another bank is part of a bank holding company that has over $40 billion in assets. Due to our location, we are in direct competition with the larger banks as well as a number of smaller banks. As of December 31, 1995, the Bank ranked, as measured by total deposits, as the fourth largest in market share within Lancaster County of the banks doing business in Lancaster County. The Bank is not, however, the fourth largest bank in Lancaster County. As of December 31, 1995, the Bank had total assets of over $711 million and ranked tenth on this basis among the commercial banks with offices located in Lancaster County. There has not been a material portion of the Bank's deposits obtained from a single person or a few persons, including federal, state or local governments and agencies thereunder and the loss of any single or any few customers would not have a materially adverse effect on the business of the bank. The Bank has no significant foreign sources or applications of funds. As of December 31, 1995, there were 379 persons employed by the Bank, of which 279 were full-time and 100 were part-time. These figures do not include employees of Town & Country, Inc. which employed 36 persons. On August 11, 1995, the Bank and CoreStates Financial Corporation signed a definitive agreement for the Bank to purchase from CoreStates three retail banking offices in Ephrata, Leola and North Catasauqua, Pennsylvania. The acquisition agreement was subsequently amended to remove the North Catasauqua branch from the transaction. On December 1, 1995, the Bank completed the transaction involving the acquisition of the Ephrata and Leola branches of CoreStates. The acquisition involved primarily the assumption of certain deposit liabilities in the approximate amount of $22 million and the acquisition of certain assets in the approximate amount of $700,000. The Bank is subject to regulation and periodic examination by the Comptroller of the Currency. Its deposits are insured by the Federal Deposit Insurance Corporation, as provided by law. Item 2 - Properties The Bank, in addition to its main office, had, at December 31, 1995, a branch network of 24 offices and 2 off-site electronic MAC/ATM installations. All branches are located in Lancaster County with the exception of one office which is located in Chester County. Branches at twelve (12) locations are occupied under leases and at three branches, the Bank owns the building, but leases the land. One off-site MAC/ATM installation is occupied under lease. All other properties were owned in fee. All real estate and buildings owned by the Bank are free and clear of encumbrances. The Corporation owns no real estate. The Administrative Service Center of Bank of Lancaster County, N.A. is owned in fee by the Bank, free and clear of encumbrances. The building occupied by Town & Country, Inc., a wholly owned subsidiary of the Bank, is owned in fee by Town & Country, Inc., free and clear of encumbrances. The leases referred to above expire intermittently over the years through 2022 and most are subject to one or more renewal options. Aggregate annual rentals for real estate paid during 1995 did not exceed three percent of its operating expenses. The Bank completed construction of a new headquarters building in 1995 which includes a branch banking office and also serves as headquarters for Sterling Financial Corporation. Occupancy took place in July of 1995. The three-story building contains approximately 53,000 square feet. The Bank and the Corporation occupy approximately 43,000 square feet while nearly 10,000 square feet has been leased to other tenants. The building is owned in fee by the Bank, free and clear of encumbrances. Item 3 - Legal Proceedings As of December 31, 1995, there were no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation or its subsidiaries are a party or by which any of their property is the subject. Item 4 - Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1995. PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters The common stock of the Corporation is not actively traded. There are 10,000,000 shares of common stock authorized and the total number of shares outstanding as of December 31, 1995 was 5,925,527. As of December 31, 1995, the Corporation had approximately 2,744 holders of record of its common stock. There is no other class of common stock authorized or outstanding. During 1995, the price range of the common stock known by management to have traded was $28.75 to $31.50 per share. A regular $.15 per share dividend, as well as a $.25 per share "Special Dividend", was declared in the second quarter of 1995 and is reflected in the table below. The Corporation is restricted as to the amount of dividends that it can pay holders of its common stock by virtue of the restrictions on the Bank's ability to pay dividends to the Corporation. See Note 17 to the 1995 Consolidated Financial Statements elsewhere herein. The Corporation declared a two-for-one stock split in the form of a 100% stock dividend in 1994. The following table reflects the bid and asked prices reported for the common stock at the end of the period indicated and the cash dividends declared on the common stock for the periods indicated. All information has been retroactively restated to give effect to the two-for-one stock split in 1994. In the absence of an active market, these prices may not reflect the actual market value of the Corporation's stock for the periods reported. 1995 Bid Ask Dividend First Quarter $29.00 $30.25 $.15 Second Quarter 29.50 30.50 .40 Third Quarter 29.25 30.00 .17 Fourth Quarter 28.75 30.00 .17 1994 Bid Ask Dividend First Quarter $23.125 $24.375 $.14 Second Quarter 24.25 25.125 .14 Third Quarter 27.00 28.50 .15 Fourth Quarter 28.75 30.75 .15 The prices used in the previous table represent bid and asked prices furnished by F.J. Morrissey & Company; Hopper Soliday & Co., Inc.; Legg Mason Wood Walker, Inc.; Prudential Securities; Ryan, Beck & Company; Sandler O'Neill & Partners, L.P.; or The National Quotation Bureau. These quotations reflect inter-dealer prices, without retail markup, markdown or commission. The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan for eligible shareholders who elect to participate in the plan. A copy of the Prospectus for this plan can be obtained by writing to: Bank of Lancaster County, N.A. Dividend Reinvestment and Stock Purchase Plan, 101 North Pointe Boulevard, Lancaster, Pennsylvania 17604-4133. Item 6 - Selected Financial Data The following selected financial data should be read in conjunction with the Corporation's consolidated financial statements and the accompanying notes presented elsewhere herein. Summary of Operations (Dollars in thousands, except per share data)
Years Ended 1995 1994 1993 1992 1991 Interest income.............$ 48,850 $ 41,931 $ 40,092 $ 40,284 $ 42,689 Interest expense............ 21,153 14,926 15,042 17,818 22,793 ------ ------ ------ ------ ------ Net interest income......... 27,697 27,005 25,050 22,466 19,896 Provision for loan losses... 534 1,081 2,430 2,296 1,789 ------ ------ ------ ------ ------ Net interest income after provision for loan losses.. 27,163 25,924 22,620 20,170 18,107 Other income................ 8,293 7,043 8,979 7,926 6,721 Other expenses.............. 23,423 22,053 21,048 18,922 16,995 ------ ------ ------ ------ ------ Income before income taxes.. 12,033 10,914 10,551 9,174 7,833 Applicable income taxes..... 3,039 2,637 2,749 2,331 1,929 ------ ------ ------ ------ ------ NET INCOME..................$ 8,994 $ 8,277 $ 7,802 $ 6,843 $ 5,904 ====== ====== ====== ====== ====== Per Common Share:* Net income................ $ 1.52 $ 1.42 $ 1.36 $ 1.21 $ 1.06 Cash dividends declared**. .89 .58 .54 .48 .44 Book value................ 10.79 9.76 8.58 7.56 6.75 Book value (excluding SFAS 115)............... 10.51 9.69 8.58 7.56 6.75 Average shares outstanding 5,909,641 5,837,103 5,728,400 5,635,302 5,551,556 Ratios: Return on average assets.. 1.36% 1.38% 1.41% 1.34% 1.25% Return on average equity.. 15.02% 15.47% 16.90% 16.99% 16.63% Financial Condition at Year-End: Assets.................... $ 711,154 $ 633,395 $ 587,883 $ 544,404 $ 495,234 Loans (net of unearned)... 426,312 392,649 359,365 348,529 317,730 Deposits.................. 610,105 537,002 505,680 473,184 434,523 Stockholders' Equity***... 63,909 57,285 49,467 42,794 37,737 Average Assets............ 659,335 600,263 555,216 510,439 471,488 *Figures prior to 1994 were retroactively restated for various stock dividends, a three-for-two stock split on November 30, 1992, a two-for-one stock split on September 1, 1994 and for comparative purposes. **The dividend in 1995 includes a $.25 per share "Special Dividend" which was declared in the second quarter of 1995. ***Stockholders' Equity prior to 1993 has been restated for the retroactive effect of SFAS No. 109.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion provides management's analysis of the consolidated financial condition and results of operations of Sterling Financial Corporation (the "Corporation") and subsidiaries, Bank of Lancaster County, N.A. (the "Bank") and its subsidiary, Town & Country, Inc. and Sterling Mortgage Services, Inc. (presently inactive). It should be read in conjunction with the audited financial statements and footnotes appearing elsewhere in this report. (All dollar amounts presented in the tables are in thousands, except per share data.) Results of Operations Summary Net income for 1995 was $8,994,000, an increase of $717,000 or 8.7% over the $8,277,000 earned in 1994. The results of 1994 were $475,000 or 6.1% higher than the $7,802,000 reported in 1993. Earnings per share on net income amounted to $1.52, $1.42, and $1.36 for the years ended 1995, 1994 and 1993 respectively. Earnings per share were computed by dividing net income by the weighted average number of shares of common stock outstanding which were 5,909,641, 5,837,103 and 5,728,400 for 1995, 1994 and 1993 respectively. Figures prior to 1994 were retroactively restated to reflect a two-for-one stock split in the form of a 100% stock dividend paid in 1994 and a 5% stock dividend paid in December 1993. Return on average total assets was 1.36% in 1995 compared to 1.38% in 1994 and 1.41% in 1993. Return on average stockholders' equity was 15.02% in 1995 compared to 15.47% in 1994 and 16.90% in 1993. Growth in earning assets was the primary factor contributing to the increased earnings in 1994, while in 1995, both volume and an increase in rates contributed to increased earnings. As of December 31, 1995, earning assets were approximately $629 million compared to $563 million at December 31, 1994 and $522 million at December 31, 1993. Average earning assets for 1995 increased nearly $49 million to approximately $587 million, up 9.1% from the prior year. Similarly, in 1994 average earning assets increased approximately $40 million, up 8% from 1993. The current year increase as well as the increase in 1994 was primarily due to increases in both loans and investments. Average interest-bearing liabilities increased nearly $48 million or 10.2% in 1995 compared to an increase of nearly $29.1 million, or 6.6% in 1994. The increase in average earning assets exceeded the increase in average interest-bearing liabilities in both 1995 and 1994. Provision for loan losses decreased to $534,000 in 1995 from $1,081,000 in 1994. The provision in 1993 was $2,430,000. Non-interest income increased $1,250,000 in 1995. This compares to a decrease of $1,936,000 in 1994. The decrease in 1994 was primarily a result of a decrease in mortgage banking activities due to sudden increases in rates on mortgages originated and sold, as well as decreased volumes of originations and subsequent sales. Non-interest expenses increased $1,370,000 or 6.2% in 1995 compared to an increase of $1,005,000 or 4.8% in 1994 over 1993. The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets and on non-interest expenses, which tend to rise during periods of general inflation. The level of inflation over the last few years has been declining. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "Act") addresses the recapitalization of the bank insurance fund and is designed to limit risk within the banking industry. On August 8, 1995, the Federal Deposit Insurance Corporation (the "FDIC") Board of Directors voted to significantly reduce the deposit premiums paid by most Bank Insurance Fund (the "BIF")-insured institutions to an average of approximately 4.4 cents per $100 of domestic deposits once the FDIC confirmed that the BIF met a reserve ratio of 1.25%. The FDIC determined that the BIF was fully recapitalized at the end of May 1995. As a result, the Bank received a refund in an amount equal to insurance overpayments for the months June through September. Under the new assessment rate schedule for the BIF, the Bank's annual rate went to 4 cents per $100 of assessable deposits, down from the current rate of 23 cents per $100. On November 14, 1995, the FDIC Board of Directors voted to reduce the insurance premiums paid on deposits covered by the BIF, effective for the first semiannual assessment period of 1996. Under the new rate structure for the BIF, assessment rates will be lowered by 4 cents per $100 of assessable deposits for all risk categories, subject to the statutory requirement that all institutions pay at least $2,000 annually for FDIC insurance. Since the Bank is included in the lowest premium paying category, the Bank will pay the statutory annual minimum of $2,000. As a result of the above FDIC action, the Bank experienced a reduction of the FDIC assessment in 1995 over 1994. Under current assessment, the Bank should realize a reduction in 1996 over 1995. The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Riegle Community Development and Regulatory Improvement Act may have a significant impact upon the Corporation. The key provisions pertain to interstate banking and interstate branching as well as a reduction in the regulatory burden on the banking industry. Since September 1995, bank holding companies may acquire banks in other states without regard to state law. In addition, banks can merge with other banks in another state beginning in June 1997. States may adopt laws preventing interstate branching but, if so, no out-of-state bank can establish a branch in such state and no bank in such state may branch outside the state. Pennsylvania recently amended the provisions of its Banking Code to authorize full interstate banking and branching under Pennsylvania law and to facilitate the operations of interstate banks in Pennsylvania. As a result of legal and industry changes, management predicts that consolidation will continue as the financial services industry strives for greater cost efficiencies and market share. Management believes that such consolidation may enhance its competitive position as a community bank. There are numerous proposals before Congress to modify the financial services industry and the way commercial banks operate. However, it is difficult to determine at this time what effect such provisions may have until they are enacted into law. Except as specifically described above, management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources and results of operations of the Corporation will be immaterial. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation, which if they were implemented, would have a material adverse effect upon the liquidity, capital resources or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have and in the future may have a negative impact on the Corporation's results of operations. Aside from those matters described above, management does not believe that there are any trends or uncertainties which would have a material impact on future operating results, liquidity or capital resources nor is it aware of any current recommendations by the regulatory authorities which if they were to be implemented would have such an effect. Net Interest Income The primary component of the Corporation's net earnings is net interest income, which is the difference between interest and fees earned on interest- earning assets and interest paid on deposits and borrowed funds. For presentation and analytical purposes, net interest income is adjusted to a taxable equivalent basis. For purposes of calculating yields on tax-exempt interest income, the taxable equivalent adjustment equates tax-exempt interest rates to taxable interest rates as noted in Table 1. Adjustments are made using a statutory federal tax rate of 34% for 1995, 1994 and 1993. Table 1 presents average balances, taxable equivalent interest income and expense and the yields earned or paid on these assets and liabilities. The increase in net interest income during 1995 resulted from increased volumes and interest rates in average earning assets. The increases in net interest income during 1994 was due primarily to increases in average earning assets. Average earning assets increased 9.1% in 1995 and 8% in 1994. These increases were primarily funded with interest-bearing liabilities which increased 10.2% in 1995 and 6.6% in 1994. Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity Interest Rates and Interest Differential-Tax Equivalent Yields (Unaudited)
Years ended December 31, 1995 1994 1993 Average Annual Average Annual Average Annual Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest bearing deposits with banks..............$ 30 $ 2 6.78% $ 55 $ 2 3.79% $ 690 $ 27 3.84% Federal Funds sold......... 7,583 449 5.92% 6,247 264 4.24% 6,234 191 3.07% Investment securities: U.S. Treasury securities. 28,696 1,675 5.84% 26,560 1,471 5.54% 21,447 1,253 5.84% U.S. Government agencies. 27,999 1,761 6.29% 23,353 1,395 5.97% 21,832 1,458 6.68% State and Municipal securities.............. 48,884 4,083 8.35% 44,442 3,781 8.51% 37,451 3,440 9.18% Other securities......... 66,990 4,294 6.41% 62,476 3,961 6.34% 52,941 3,726 7.04% ------- ------- ------ -------- ------- ------ -------- ------- ----- Total investment securities172,569 11,813 6.85% 156,831 10,608 6.76% 133,671 9,877 7.39% Loans: Commercial...............226,032 21,284 9.42% 207,844 17,743 8.54% 195,562 16,327 8.35% Consumer.................106,171 9,766 9.20% 103,572 8,861 8.56% 99,761 8,878 8.90% Mortgages................ 32,739 2,771 8.46% 26,704 2,274 8.51% 27,714 2,490 8.99% Leases................... 41,974 4,350 10.36% 36,802 3,667 9.96% 34,533 3,658 10.59% ------- ------- ------ -------- ------- ------ -------- ------- ----- Total loans................406,916 38,171 9.38% 374,922 32,545 8.68% 357,570 31,353 8.77% ------- ------- ------ -------- ------- ------ -------- ------- ----- Total earning assets.......587,098 50,435 8.59% 538,055 43,419 8.07% 498,165 41,448 8.32% Allowance for loan losses.. (7,155) (7,472) (5,984) Cash and due from banks.... 27,763 27,746 26,863 Other non-earning assets... 51,629 41,934 36,172 ------- -------- -------- Total non-earning assets... 72,237 62,208 57,051 ------- -------- ------ -------- -------- ------ -------- -------- ------ Total assets..............$659,335 $ 50,435 7.65% $600,263 $ 43,419 7.23% $555,216 $ 41,448 7.47% ======== ======== ====== ======== ======== ====== ======== ======== ====== Liabilities and Stockholders' Equity Deposits: Demand deposits Noninterest-bearing....$ 66,133 0 0.00% $64,446 $ 0 0.00% $ 57,869 $ 0 0.00% Demand deposits Interest-bearing........239,036 7,181 3.00% 229,693 5,375 2.34% 211,406 5,484 2.59% Savings deposits......... 54,982 1,333 2.42% 58,864 1,324 2.25% 45,302 1,222 2.70% Time deposits............194,512 10,579 5.44% 158,994 6,884 4.33% 163,497 7,085 4.33% ------- -------- ------ -------- ------- ------ -------- ------- ------ Total deposits.............554,663 19,093 3.44% 511,997 13,583 2.65% 478,074 13,791 2.88% Other borrowed funds....... 29,143 2,060 7.07% 22,144 1,343 6.06% 20,367 1,251 6.15% Other liabilities.......... 14,856 12,227 10,613 Stockholders' equity....... 60,673 53,895 46,162 ------- -------- ------ -------- ------- ------ -------- ------- ------ Total liabilities and Stockholders' equity....$659,335 $ 21,153 3.21% $600,263 $ 14,926 2.49% $555,216 $ 15,042 2.71% ======== ======== ====== ======== ======== ====== ======== ======== ===== Net interest income/ Average total assets...... $ 29,282 4.44% $ 28,493 4.75% $ 26,406 4.76% Net interest income/ Average earning assets.... $ 29,282 4.99% $ 28,493 5.30% $ 26,406 5.30%
Net interest income on a fully taxable equivalent basis increased by $789,000 in 1995 compared to an increase of $2,087,000 in 1994. Table 2 indicates that of the increase in 1995, $1,803,000 was the result of increased volumes. This figure was reduced by $1,014,000 as a result of increases in interest rates. The increase in interest rates had more of an effect on interest paid on interest-bearing liabilities than on earning assets. The increase in 1994 resulted in $2,453,000 from increased volumes while a reduction of $366,000 was realized from decreases in interest rates. For the year 1995 compared to 1994, loan volumes, on average, increased nearly $32 million and income earned on loans increased $5,626,000, tax adjusted. This compares to a volume increase of over $17.3 million in 1994 over 1993 with an increase in income earned on loans amounting to $1,192,000. As a result of increased volumes in 1995, nearly $2.8 million contributed to the increase in income on loans. Rates charged on loans began to increase in 1994 and into 1995. The increase in rates generated over $2.8 million of the total increase in income earned on loans. Increased volumes in loans in 1994 contributed over $1.5 million to the increase in income while a reduction of $330,000 was realized due to decreases in interest rates. Total investment securities increased over $21.6 million in 1995 over 1994 compared to an increase of over $23.7 million in 1994 over 1993. The increased volumes in both periods were primarily responsible for the increase in interest income on securities. Table 2 indicates that of the increase in interest income in 1995, $1,064,000 was the result of increased volumes while $141,000 resulted from an increase in interest rates. Increased volumes in securities in 1994 contributed over $1.7 million to the increase in income while nearly a $1 million reduction was generated due to decreases in interest rates. Interest-bearing deposits, on average, grew over $41 million in 1995. In addition to an increase in interest expense due to volumes, interest expense also increased due to changes in interest rates. Average deposits grew over $27 million in 1994. The lower cost of funds for this period reflect a decrease in interest expense over the 1993 period. The assumption of certain deposit liabilities as a result of the acquisition of two retail banking offices from CoreStates on December 1, 1995 added over $20 million in interest-bearing deposits. Table 2 - Analysis of Changes in Net Interest Income The rate-volume variance analysis set forth in the table below, which is computed on a tax equivalent basis, analyses changes in net interest income for the periods indicated by their rate and volume components. 1995 Versus 1994 1994 Versus 1993 Increase (Decrease) Increase (Decrease) Due to Changes in Due to Changes in Volume Rate Total Volume Rate Total
Interest Income Interest on deposits with banks...........$ (1) $ 1 $ 0 $ (25) $ 0 $ (25) Interest on federal funds sold........... 57 128 185 0 73 73 Interest on investment securities........... 1,064 141 1,205 1,711 (980) 731 Interest and fees on loans................ 2,777 2,849 5,626 1,522 (330) 1,192 ------- -------- --------- -------- -------- ------- Total interest income...$ 3,897 $ 3,119 $ 7,016 $ 3,208 $ (1,237) $ 1,971 ------- -------- --------- -------- -------- ------- Interest Expense Interest on interest-bearing demand deposits......$ 219 $ 1,587 $ 1,806 $ 474 $ (583) $ (109) Interest on savings deposits...... (87) 96 9 366 (264) 102 Interest on time deposits......... 1,538 2,157 3,695 (195) (6) (201) Interest on borrowed funds........ 424 293 717 110 (18) 92 ------- -------- -------- -------- --------- -------- Total interest expense..$ 2,094 4,133 6,227 $ 755 $ (871) $ (116) ------- -------- -------- -------- --------- -------- Net interest income.....$ 1,803 $ (1,014) $ 789 $ 2,453 $ (366) $ 2,087 ======= ======== ======== ======== ======== ========
Provision for Loan Losses The provision for loan losses charged against earnings was $534,000 in 1995 compared to $1,081,000 in 1994 and $2,430,000 in 1993. The provision reflects the amount deemed appropriate by management to produce an adequate reserve to meet the present and foreseeable risk characteristics of the loan portfolio. Management's judgement is based on the evaluation of individual loans and their overall risk characteristics, past loan loss experience, and other relevant factors. Net charge-offs amounted to $394,000 in 1995, $621,000 in 1994 and $650,000 in 1993. The provision for loan loss was greater during 1993 in order for the Bank to provide an adequate reserve based on the evaluation of individual loans and their current characteristics and current economic condition. The reserve accordingly was increased to 2.00% of net loans outstanding. The allowance for loan losses as a percent of loans at December 31, 1994 was 1.95%, while at December 31, 1995 it was 1.82%. Non-Interest Income Table 3 - Non-Interest Income
1995/1994 1994/1993 Increase Increase (Decrease) (Decrease) 1995 Amount % 1994 Amount % 1993 Income from fiduciary activities..$ 856 $ 114 15.4% $ 742 $ 103 16.1%$ 639 Service charges on deposit accounts....................... 2,010 212 11.8% 1,798 (93) (4.9%) 1,891 Other service charges, commissions and fees....................... 1,716 177 11.5% 1,539 (38) (2.4%) 1,577 Mortgage banking income........... 525 (110) (17.3%) 635 (1,800) (73.9%) 2,435 Other operating income............ 3,186 857 36.8% 2,329 (100) (4.1%) 2,429 Investment securities gains or (losses)....................... 0 0 0% 0 (8)(100.0%) 8 ----- ------ ------ ------ ------- ------ ------ Total.............................$8,293 $ 1,250 17.7% $7,043 $(1,936) (21.6%)$8,979 ====== ======= ====== ====== ====== ====== ======
Non-interest income, recorded as other operating income, consists of income from fiduciary activities, service charges on deposit accounts, other service charges, commissions and fees, mortgage banking income and other income such as safe deposit box rents and income from operating leases. Income from fiduciary activities in the amount of $856,000 in 1995 was $114,000 or 15.4% greater than the $742,000 recorded in 1994. Income in 1994 was $103,000 or 16.1% greater than the $639,000 recorded in 1993. Fees increased primarily due to increased transaction volumes. Service charges on deposit accounts increased to $2,010,000, an increase of $212,000 or 11.8% over 1994 service charge income of $1,798,000. Service charges on deposit accounts in 1994 was $93,000 less than the $1,891,000 reported for 1993. Other service charges, commissions and fees amounted to $1,716,000 in 1995 compared to $1,539,000 in 1994 and $1,577,000 in 1993. A major contributor to the increase in 1995 was certain fees relating to VISA operations. Income from mortgage banking activities in the amount of $525,000 decreased $110,000 over 1994, due primarily to an increase in interest rates which had an effect on the number of refinancings. This compares to a decrease of $1,800,000 in 1994 over 1993. In 1990 the Bank began originating and selling qualified residential mortgage loans in the secondary market. All mortgages sold were originated by the Bank's network of 25 branches within its market area. All mortgages sold were purchased by the Federal Home Loan Mortgage Corporation (Freddie Mac), with the Bank retaining all mortgage servicing rights. No mortgages have been acquired from third parties, nor have any servicing rights been purchased. The Bank's mortgage servicing portfolio totaled $142 million as of December 31, 1995. The year 1993 was outstanding for the Bank's mortgage banking operation, with $72 million in mortgage sales from the Bank's marketplace. These operations contributed $2.4 million of other income in 1993, compared to $635,000 in 1994 and $525,000 in 1995. The falling interest rate environment through most of the 1993 period resulted in extraordinary volumes of mortgage refinancings, coupled with a strong local market for real estate sales. An estimated 65% of this volume involved mortgage refinancings. The decrease in mortgage banking income in 1995 and 1994 was a result of the sudden and continuing increases in rates on mortgages originated and sold, as well as decreased volumes of originations and subsequent sales. The period in 1993 reflects larger volumes due to refinancings. Mortgage sales amounted to approximately $24 million in 1994 and $16.1 million in 1995. Other operating income increased $857,000 to $3,186,000 in 1995 from $2,329,000 in 1994. Other income for 1993 was $2,429,000. A major contributor to other operating income is income generated from operating leases. Income on operating leases increased over $476,000 in 1995 over 1994. Another contributor to the increase in 1995 was nearly a $270,000 gain on other real estate sold. Investment securities transactions reflect a gain of $8,000 in 1993. The gain listed for this year resulted when certain securities were called at a premium. Securities had been written to par when calls were made thus generating a gain on the securities called. There were no securities sold during 1995, 1994 or 1993. The Bank does not engage in trading activities. Therefore, there was no impact on current year earnings or a restatement of previously issued financial statements in connection with the adoption of SFAS 115. As a result of the above, total other operating income increased $1,250,000 in 1995 over 1994 compared to a decrease of $1,936,000 in 1994 over 1993. Non-Interest Expense Table 4 - Non-Interest Expense
1995/1994 1994/1993 Increase Increase (Decrease) (Decrease) 1995 Amount % 1994 Amount % 1993 Salaries and employee benefits...$13,040 $ 776 6.3% $12,264 $ 698 6.0% $11,566 Net occupancy expense............. 1,721 244 16.5% 1,477 122 9.0% 1,355 Furniture & equipment expense..... 1,605 226 16.4% 1,379 126 10.1% 1,253 FDIC insurance assessment......... 622 (506)(44.9%) 1,128 76 7.2% 1,052 Other operating expense........... 6,435 630 10.9% 5,805 (17) (.3%) 5,822 ----- ------ ----- ----- ----- ----- ----- Total............................$23,423 $ 1,370 6.2% $22,053 $1,005 4.8% $21,048 ======= ======= ===== ======= ====== ===== =======
Non-interest expense consists of salaries and employee benefits, net occupancy expense, furniture and equipment expense and other operating expenses. Total operating expenses for 1995 were $23,423,000 compared to $22,053,000 in 1994. This represented an increase of $1,370,000 or 6.2%. This compares to an increase of $1,005,000 or 4.8% in 1994. The largest component of the Corporation's other operating expense is salaries and employee benefits which increased to $13,040,000 in 1995 or $776,000 (6.3%) over the $12,264,000 reported in 1994. In 1994, expenses increased $698,000 (6%) over the $11,566,000 reported in 1993. The increase in 1995 and 1994 was primarily due to increases in staff as well as increases in wages and increased costs of employee benefits. During 1995, three branch offices were opened and two branch offices were acquired from another financial institution. Occupancy expense increased $244,000 or 16.5% to $1,721,000 in 1995 from $1,477,000 in 1994. By comparison, during 1994, there was an increase of $122,000 or 9%. Two new branch facilities were added in late 1993 which added to the expense of 1994. In 1995, the Bank completed construction of a new headquarters building which also includes branch banking facilities. In addition, two new branch offices were opened and two branch offices were acquired from another financial institution in 1995. These additions contributed to the increase in occupancy expense. Furniture and equipment expenses were $1,605,000 for 1995 and $1,379,000 for 1994. This represents an increase of $226,000 or 16.4%. Reflected in this increase is an increase of depreciation expense in 1995 amounting to $138,000. Service contracts on equipment was another major contributor to the increase in 1995. Expenses in 1994 were $126,000 greater than those recorded in 1993. There was a significant reduction in the FDIC insurance assessment in 1995 over 1994. The assessment for 1995 was $622,000 compared to $1,128,000 in 1994. This reduction was a result of a new assessment rate schedule approved by the FDIC. Under the new assessment rate schedule, the Bank's annual rate went to 4 cents per $100 of assessable deposits, down from the rate of 23 cents per $100. The new rate was effective June 1, 1995. Other operating expenses increased $630,000 or 10.9% in 1995 compared to a decrease of $17,000 in 1994. The increase noted in 1995 is in line with rising costs associated with acquiring services covered in this category of expense. Expenses covered in this category include postage, Pennsylvania Shares Tax, advertising and marketing, professional services, telephone, stationery and forms, ATM fees, VISA fees, insurance premiums, expense of other real estate owned and other expense categories not specifically identified on the income statement. Contributing to the increase in 1995 were increases in marketing expense, Pennsylvania Shares Tax, professional services, postage, stationery and forms, VISA fees, telephone expense and expenses related to other real estate owned. Income Taxes Income tax expense totaled $3,039,000 in 1995 compared to $2,637,000 in 1994 and $2,749,000 in 1993. These increases resulted from higher levels of taxable income and increased earnings each year. The Corporation's effective tax rate was 25.3% in 1995 compared with 24.2% in 1994 and 26.1% in 1993. Utilization of tax credits in 1995 and 1994 resulted in a lower effective tax rate than 1993 even though income before taxes increased in each of those two years. Financial Condition Investment Portfolio Table 5 - Investment Securities at Cost The following table shows the amortized cost of the held-to-maturity securities owned by the Corporation as of the dates indicated. Investment securities are stated at cost adjusted for amortization of premiums and accretion of discounts. December 31, 1995 1994 1993 U.S. Treasury securities................$ 18,837 $ 28,225 $ 23,996 Obligations of other U.S. Government agencies and corporations............. 18,473 24,101 22,880 Obligations of states and political subdivisions.......................... 40,212 50,472 43,491 Mortgage-backed securities.............. 3,854 5,122 5,834 Other bonds, notes and debentures....... 38,944 50,811 47,959 --------- --------- --------- Subtotal................................ 120,320 158,731 144,160 Non-marketable securities (1)........... 2,565 2,429 2,305 --------- --------- --------- Total...................................$ 122,885 $ 161,160 $ 146,465 ========= ========= ========= (1) Prior to adoption of SFAS 115 at January 1, 1994, all equity securities were included in this category. The following table shows the amortized cost and fair value of the available-for-sale securities owned as of the dates indicated. During December, 1995 the Corporation was given the opportunity for a one-time transfer of securities from the held-to-maturity category to the available- for-sale category. As the table indicates, securities were moved to the available-for-sale category for U.S. Treasury securities, obligations of other U.S. Government agencies and corporations, obligations of states and political subdivisions and other bonds, notes and debentures. A total of $54,218,000 was moved from held-to-maturity to available-for-sale. December 31, 1995 1994 Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- -------- -------- U.S. Treasury securities............$ 11,046 $ 11,155 $ 1,472 $ 1,457 Obligations of other U.S. Government agencies and corporations.......... 15,489 15,632 none none Obligations of states and political subdivisions....................... 19,622 19,945 none none Mortgage-backed securities........... 1,249 1,242 1,344 1,256 Other bonds, notes and debentures.... 19,013 19,247 5,593 5,501 -------- --------- -------- -------- Subtotal............................. 66,419 67,221 8,409 8,214 Equity securities.................... 88 1,746 7 837 -------- --------- -------- -------- Total................................$ 66,507 $ 68,967 $ 8,416 $ 9,051 ======== ========= ======== ======== Table 6 - Investment Securities (Yields) The following table shows the maturities of held-to-maturity debt securities at amortized cost as of December 31, 1995 and approximate weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% Federal income tax rate.
Over 1 thru Over 5 thru 1 Year and less 5 Years 10 Years Over 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury securities....$ 5,861 6.31% $ 12,976 5.68% $ --- --% $ --- ---% $ 18,837 5.88% Obligations of other U.S. Government agencies and corporations.. 3,742 6.67% 12,237 5.82% 1,994 7.25% 500 7.50% 18,473 6.19% Obligations of states and political sub- divisions..... 3,602 8.85% 14,039 8.36% 16,207 7.97% 6,364 7.77% 40,212 8.15% Mortgage-backed securities.... 475 7.94% 2,569 7.91% 615 8.52% 195 8.07% 3,854 8.02% Other bonds, notes and debentures.... 11,544 6.05% 27,151 6.29% 249 7.04% --- ---% 38,944 6.22% -------- ------ -------- ------ -------- ------ ------- ------ -------- ------ $ 25,224 6.64% $ 68,972 6.57% $ 19,065 7.90% $ 7,059 7.76% $120,320 6.86% ======== ====== ======== ====== ======== ====== ======= ====== ======== ======
The following table shows the maturities of available-for-sale debt securities at amortized cost as of December 31, 1995 and approximate weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% Federal income tax rate.
Over 1 thru Over 5 thru 1 Year and less 5 Years 10 Years Over 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury securities....$ 1,000 7.24% $ 9,537 5.94% $ 509 7.59% $ --- ---% $ 11,046 6.13% Obligations of other U.S. Government agencies and corporations.. 2,002 6.32% 9,389 6.38% 4,098 6.79% --- ---% 15,489 6.48% Obligations of states and political sub- divisions..... --- ---% 1,699 7.62% 11,256 7.71% 6,667 8.20% 19,622 7.87% Mortgage-backed securities.... 248 8.35% 1,001 5.78% --- ---% --- ---% 1,249 6.29% Other bonds, notes and debentures.... 2,359 6.87% 16,654 6.44% --- ---% --- ---% 19,013 6.49% -------- ------ -------- ------ -------- ------ ------- ------ -------- ------ $ 5,609 6.80% $ 38,280 6.34% $ 15,863 7.47% $ 6,667 8.20% $ 66,419 6.83% ======== ====== ======== ====== ======== ====== ======= ====== ======== ======
Loans Table 7 - Loan Portfolio The following table sets forth the composition of the Corporation's loan portfolio as of the dates indicated:
December 31, 1995 1994 1993 1992 1991 Commercial, financial and agricultural..............$ 228,058 $ 208,918 $ 191,431 $ 172,482 $ 152,726 Real estate-construction... 6,378 8,542 10,265 16,044 12,147 Real estate-mortgage....... 33,124 30,505 22,335 30,445 31,943 Consumer................... 116,210 106,921 101,256 99,444 94,404 Lease financing (net of unearned income)......... 43,904 38,771 35,443 32,768 31,283 ---------- ---------- ---------- ---------- ---------- Total loans.................$ 427,674 $ 393,657 $ 360,730 $ 351,183 $ 322,503 ========== ========== ========== ========== ==========
Table 8 - Loan Maturity and Interest Sensitivity The following table sets forth the maturity and interest sensitivity of the loan portfolio as of December 31, 1995:
After one Within but within After one year five years five years Total Commercial, financial and agricultural..$104,193 $ 61,575 $ 62,290 $ 228,058 Real estate-construction................ 5,186 1,192 --- 6,378 --------- --------- --------- --------- $109,379 $ 62,767 $ 62,290 $ 234,436 ========= ========= ========= =========
Loans due after one year totaling $76,957,000 have variable interest rates. The remaining $48,100,000 in loans have fixed rates. Table 9 - Nonaccrual, Past Due and Restructured Loans The following table presents information concerning the aggregate amount of nonaccrual, past due and restructured loans:
December 31, 1995 1994 1993 1992 1991 Nonaccrual loans..........................$ 1,010 $ 2,127 $ 2,960 $ 4,129 $ 1,414 Accruing loans, past due 90 days or more......................... 330 1,127 522 519 409 -------- -------- -------- -------- -------- Total non-performing loans................ 1,340 3,254 3,482 4,648 1,823 Other real estate owned................... 252 759 251 360 250 -------- -------- -------- -------- -------- Total non-performing assets...............$ 1,592 $ 4,013 $ 3,733 $ 5,008 $ 2,073 ======== ======== ======== ======== ======== Ratios: Non-performing loans to total loans......................... .31% .83% .97% 1.33% .57% Non-performing assets to total loans and other real estate owned................... .37% 1.02% 1.04% 1.44% .65% Non-performing assets to total assets........................ .22% .63% .63% .92% .42% Allowance for loan losses to non-performing loans................ 580.6% 234.8% 206.2% 116.1% 241.4%
The economic conditions within the Corporation's market area remained healthy in 1995. This is reflected in the unemployment rate for Lancaster County, which is the Bank's primary market area. The jobless rate has stayed relatively stable during the past year with an average of 4.2%, down from 4.4% in 1994 and 4.5% in 1993. Lancaster County's unemployment rate has historically been and continues to be one of the lowest among Pennsylvania's 14 metropolitan regions. It also remains well below the state unemployment rate of 6.3% that was reported for November 1995. The strength in the employment sector in Lancaster County was also seen at the national level. The nation's unemployment rate spent the year in a narrow band that many analysts believe is close to full employment as the current recovery completes five years of growth. The prediction is for "solid growth" for the local economy this year, some of that because of the political environment in that this is an election year. The Bank's loan delinquency, as a percent of loans outstanding, declined during 1995. At December 31, 1995, this rate stood at .58% compared to 1.33% and 1.45% for December 31, 1994 and December 31, 1993, respectively. The decline in 1995 is attributed to the overall strength in the local and national economies, the installation of a computerized collection system and a substantial decline in non-accrual loans. The .58% is the lowest reported by the Bank in recent history and exceeded expectations. During the year, total nonaccrual loans and other real estate owned declined to $1,262,000 representing a decline of 56% from December 31, 1994. Total non-performing assets declined to $1,592,000 compared to $4,013,000 for December 31, 1994 representing a 60% decline. The significant decline in non-accruals, other real estate and non-performing assets was primarily due to concentrated workout efforts, aided by improved economic conditions and individual borrower performance. These factors resulted in improved payment performance and payoffs. The Bank's reserve coverage continued its improvement during the year as reserves as a percent of non-performing loans increased to 581% compared with 235% for December 31, 1994. A portion of the Bank's loan portfolio consists of loans to agricultural- related borrowers. These loans consist of loans for a variety of purposes within the industry. Agriculture remains strong in the county. Pennsylvania is one of the top 20 farm markets in the country. A barometer of Lancaster County's agricultural health indicates steady growth in most areas. While the Bank is hopeful that this portion of its loan portfolio will continue to show growth, it should be noted that these loans are susceptible to a variety of external factors such as adverse climate, economic conditions, etc., in addition to factors common to other industries. Statistics on the local real estate market indicated residential construction lagged behind the previous year's levels by 21%, while non- residential construction surged 78% in part due to corporate expansions. After a record-setting year in 1993 for home sales, home sales have declined and were down about 4% from 1994, but the third and fourth quarters produced a strong rebound. Declining interest rates have contributed to this rebound which is expected to continue into at least the first half of 1996. Occupancy rates for the best commercial office space remained high, and it is believed good industrial space is in short supply. Most of the Bank's business activity is with customers located within the Bank's defined market area. Since the majority of the Bank's real estate loans are located within this area, a substantial portion of the debtor's ability to honor their obligations and increases and decreases in the market value of the real estate collateralizing such loans may be affected by the level of economic activity in the market area. 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. Loans on a nonaccrual status amounted to $1,010,000 at December 31, 1995 compared to $2,127,000 at December 31, 1994. If interest income had been recorded on all such loans for the years indicated, such interest income would have been increased by approximately $143,997 and $276,956 for 1995 and 1994 respectively. Interest income recorded on non-accrual loans amounted to $93,795 and none for 1995 and 1994 respectively. 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 December 31, 1995 there were no such loans that had to be disclosed as potential problem loans. SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", an amendment of SFAS No. 114, was implemented at the beginning of 1995. The Bank has defined impaired loans as all loans on nonaccrual status, except those specifically excluded from the scope of SFAS No. 114, regardless of the credit grade assigned by loan review. All impaired loans were measured by utilizing the fair value of the collateral for each loan. When the measure of an impaired loan is less than the recorded investment in the loan, the Bank will compare the impairment to the existing allowance assigned to the loan. If the impairment is greater than the allowance, the Bank will adjust the existing allowance to reflect the greater amount or take a corresponding charge to the provision for loan losses. If the impairment is less than the existing allowance for a particular loan, no adjustments to the allowance or the provision for loan and lease losses will be made. There was no adjustment necessary for the impaired loans for the periods indicated. The average amount of nonaccruals for the fourth quarter of 1995 was $1,112,405 while the average for 1995 was $1,476,100. The following table presents information concerning impaired loans at December 31, 1995: Gross impaired loans which have allowances..........$1,010 Less: Related allowances for loan losses......... 349 ------ Net impaired loans..................................$ 661 ====== At December 31, 1995, 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 December 31, 1995. Allowance for Loan Losses Table 10 - Summary of Loan Loss Experience Years ended December 31, 1995 1994 1993 1992 1991 Allowance for Loan Losses: Beginning balance.............$ 7,640 $ 7,180 $ 5,400 $ 4,400 $ 3,375 Loans charged off during year: Commercial, financial and agricultural.............. 50 157 194 843 327 Real estate mortgage........ 252 235 392 201 19 Consumer.................... 360 360 290 471 420 Lease financing............. 14 10 14 97 144 ------- ------- ------- ------- ------- Total charge-offs........... 676 762 890 1,612 910 ------- ------- ------- ------- ------- Recoveries: Commercial, financial and agricultural.............. 117 61 157 232 37 Real estate mortgage........ 72 2 8 none 13 Consumer.................... 91 77 63 76 58 Lease financing............. 2 1 12 8 38 ------- ------- ------- ------- ------- Total recoveries............ 282 141 240 316 146 ------- ------- ------- ------- ------- Net loans charged off......... 394 621 650 1,296 764 Additions charged to operations.................. 534 1,081 2,430 2,296 1,789 ------- ------- ------- ------- ------- Balance at end of year........$ 7,780 $ 7,640 $ 7,180 $ 5,400 $ 4,400 ======= ======= ======= ======= ======= Ratio of net loans charged off to average loans outstanding................. .10% .17% .18% .39% .24% Ratio of net loans charged off to loans at end of year. .09% .16% .18% .37% .24% Net loans charged off to allowance for loan losses.. 5.06% 8.13% 9.05% 24.00% 17.36% Net loans charged off to provision for loan losses.. 73.78% 57.45% 26.75% 56.45% 42.71% Allowance for loan losses as a percent of average loans... 1.91% 2.04% 2.01% 1.64% 1.39% Allowance for loan losses as a percent of loans at end of year................ 1.82% 1.95% 2.00% 1.55% 1.38% Allowance for loan losses as a percent of non-performing loans....... 580.6% 234.8% 206.2% 116.1% 241.4% The Bank experienced an improvement in net charge-offs recorded during 1995. For the year, the Bank recorded net charge-offs of $394,000 or .10% of average loans outstanding, compared to $621,000 or .17% of average loans in 1994 and $650,000 or .18% of average loans in 1993. The low level of net charge-offs is partially attributed to an aggressive collection of previously charged-off loans. The reduction in the provision for loan losses in 1995 reflects the strength in the local economy and the improvements in the Bank's delinquency rate, non-accruals, non-performing assets and problem loans. The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to produce an adequate reserve to meet the present and inherent risk deemed present in the loan portfolio. Management performs a quarterly assessment of the loan portfolio to determine the appropriate level of allowance. The factors considered in this evaluation include, but are not limited to, estimated loan losses identified through a loan review process, general economic conditions, deterioration in pledged collateral, past loan experience and trends in delinquencies and non-accruals. Management uses available information to determine the appropriate level of the allowance for possible loan losses. However, the allowance may be affected in the future based upon changes in the economic conditions and other factors. While there can be no assurance that material amounts of additional loan loss provisions will not be required in the future, management believes that, based upon information presently available, the amount of the allowance for possible loan losses is adequate. Management has not targeted any specific coverage ratio of nonperforming loans by the allowance for loan losses and the coverage ratio may fluctuate based on loans placed into or removed from nonperforming status. Table 11 - Allocation of Allowance for Loan Losses December 31, 1995 1994 Commercial, financial and agricultural..........$ 3,710 $ 4,219 Real estate - mortgage.......................... 3 39 Consumer........................................ 523 677 Leases.......................................... 600 612 Unallocated..................................... 2,944 2,093 ------- ------- Total...........................................$ 7,780 $ 7,640 ======= ======= Deposits Table 12 - Average Deposit Balances and Rates Paid The average amounts of deposits and rates paid for the years indicated, are summarized below:
1995 1994 1993 Amount Rate Amount Rate Amount Rate Demand deposits.....................$ 66,133 --- $ 64,446 --- $ 57,869 --- Interest-bearing demand deposits.... 239,036 3.00% 229,693 2.34% 211,406 2.59% Savings deposits.................... 54,982 2.42% 58,864 2.25% 45,302 2.70% Time deposits....................... 194,512 5.44% 158,994 4.33% 163,497 4.33% -------- ----- -------- ----- -------- ----- $554,663 3.44% $511,997 2.65% $478,074 2.88% ======== ===== ======== ===== ======== =====
Table 13 - Deposit Maturity The maturities of time deposits of $100,000 or more are summarized below: December 31, 1995 1994 Three months or less..........................$ 5,881 $ 6,075 Over three thru six months.................... 3,811 2,889 Over six thru twelve months................... 5,270 6,375 Over twelve months............................ 8,976 5,334 ------- ------- Total.........................................$ 23,938 $ 20,673 ======= ======= Capital Stockholders' equity increased over $6.6 million or 11.6% in 1995 to $63,909,000. Total stockholders' equity at December 31, 1994 in the amount of $57,285,000 represents an increase of $7.8 million or 15.8% over the $49,467,000 reported at December 31, 1993. Net earnings retained after the payment of dividends as well as capital acquired through stock issued pursuant to a dividend reinvestment and stock purchase plan and employee stock plan generated the greatest portion of this growth in stockholders' equity. In addition, stockholders' equity increased $1.2 million in 1995 due to an increase in net unrealized gains on investment securities available-for-sale, net of taxes. Included in dividends declared for 1995 is $1,478,000 which represents a $.25 per share "Special Dividend" which was declared in the second quarter of 1995. Dividends declared amounted to $5,260,000, $3,386,000 and $2,985,000 for 1995, 1994 and 1993 respectively. In 1989, federal regulatory authorities approved 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. In the case of the Bank, 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 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 and in Table 14 reflect the above definition of common stockholders' equity which includes common stock, capital surplus and retained earnings, less net unrealized holding losses on available-for-sale equity securities with readily determinable fair values. The Bank's ratios at December 31, 1995, 1994 and 1993 were above the final risk-based capital standards that require Tier 1 capital of at least 4% and total risk-based capital of 8% of risk-weighted assets. The Tier 1 capital ratio at December 31, 1995 was 10.95% and the total risk-based capital ratio was 12.21%, which exceeds the minimum capital guidelines. Tier 1 capital ratio was 11.05% and the total risk-based capital ratio was 12.30% at December 31, 1994 while Tier 1 capital ratio was 10.67% and the total risk-based capital ratio was 11.92% at December 31, 1993. The Bank began in mid-1994 and continued into 1995 the construction of a new headquarters building which includes a branch banking office and headquarters for the Corporation. The three-story building contains approximately 53,000 square feet with approximately 10,000 square feet of this total leased to other tenants. Land cost for the construction site was $1,570,000. To date, the Bank has paid $5,453,002 of the projected cost of $5,720,000. The capital expenditures relating to this building were financed out of existing capital resources. The Bank did not and does not expect to incur any indebtedness relating to this new facility. The reduction in earning assets and the expenses relating to the new facilities will be offset somewhat to the extent there will be an elimination of expenses relating to the previous headquarters building leased by the Bank. Management does not expect this to have a material impact on future reported results of operations, even though this will result in the application of a material amount of capital. Table 14 - Capital and Performance Ratios The following are selected ratios for the years ended December 31: 1995 1994 1993 Return on average assets...................... 1.36% 1.38% 1.41% Return on average equity...................... 15.02% 15.47% 16.90% Dividend payout ratio......................... 58.48% 40.91% 38.26% Average total equity to average assets........ 9.10% 8.89% 8.31% Total equity to assets at year end............ 8.79% 8.99% 8.41% Primary capital ratio......................... 9.78% 10.07% 9.52% Tier 1 risk-based capital ratio............... 10.95% 11.05% 10.67% Total risk-based capital ratio................ 12.21% 12.30% 11.92% Liquidity and Interest Rate Sensitivity 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. Securities maturing within one year amounted to $30,833,000 at December 31, 1995 compared to $24,840,000 at December 31, 1994. Interest-bearing deposits with banks totaled $24,000 at December 31, 1995 compared to $24,000 at December 31, 1994. Federal funds sold totaled $9,350,000 at December 31, 1995 compared to no funds sold at December 31, 1994. The loan portfolio also provides an additional source of liquidity due to the Bank's participating in the secondary mortgage market. Sales of residential mortgages into the secondary market were approximately $16.1 million in 1995 and $24 million in 1994, which allowed the Bank to meet the needs of customers for new mortgage financing. 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 above provide sufficient liquidity. Interest sensitivity is related to liquidity because each is affected by maturing assets and sources of funds. Interest sensitivity, however, is also concerned with the fact that certain types of assets and liabilities may have interest rates that are subject to change prior to maturity. Management endeavors to manage the exposure of the net interest margin to interest- sensitive assets and liabilities so as to minimize the impact of fluctuating interest rates on earnings. The Bank's asset/liability committee manages interest rate risk by various means including "GAP" management of its asset and liability portfolios. 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 tied to "Treasury Bill" indexes (repricing monthly) and loans tied to "prime" or other indexes subject to immediate change. In addition to assets currently available for repricing there are future scheduled principal repayments on loans, loans available for repricing at future dates and maturities of investments. These investment repayments will have to be reinvested at current market yields. The Bank's funding liabilities (customer deposits and borrowed funds) repricing characteristics have become more complex, since many deposit products that historically were fixed rate deposit products have become deposit products subject to changing interest rates (NOW accounts and savings accounts). Time certificates of deposit and borrowed money are subject to interest rate change at maturity. Interest rate sensitivity relates to changes in the interest rates earned on bank investments (earning assets) when they reprice to current market rate conditions as well as the interest paid on customer deposits (funding) when they reprice to current market rates. The net result of interest rate repricings will impact the Bank's future net interest margins (either in a positive or negative manner) based on the amount of unmatched funding, the amount of rate change, and the direction of rate change. The net volume of assets and liabilities subject to rate change is measured in "gaps" where volumes of assets do not equal liabilities within certain repricing time periods. These gaps are illustrated in Table 15. Also included in Table 15 is a summary of the cumulative gap, as viewed by regulatory authorities, which presents all interest bearing savings and NOW deposit balances as being subject to immediate and full repricing. Management considers factors in addition to volume of liability funding (deposits) subject to rate change to more accurately reflect future impact to the net interest margin. 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. For example, prime base rate has changed 20 times since 1988 (movement from a high of 11.5% to a low of 6.0% - a range of 5.5%). During this period, NOW account deposit rates have also experienced rate changes (movement from a high of 4.85% to a low of 1.73% - a range of 3.12%). Historic pricing correlations have been calculated for all interest-bearing products for rate change repricing impact as - immediate, three month and six month time periods. As illustrated in Table 15, 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. 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. Excluded from the interest rate sensitivity gaps are "matched" funded fixed rate leases and associated fixed rate debt totaling $20.5 million. During 1995, the net interest income tax-equivalent yield on average earning assets dropped to 4.99% from 5.30 % in 1994 and 5.30% in 1993. Prime rate in 1995 started at 8.5%, moving up to 9% in February, down to 8.75% in July and finally dropping to 8.50% in December. The average tax-equivalent yield on earning assets increased in 1995 to 8.59%, up from 8.07% in 1994. Average earning assets increased by $49,000,000 to $587,098,000 in 1995. Deposit funding (average balances) increased nearly $42,700,000 in 1995. Total deposit cost increased to 3.44% from 2.65% in 1994. This cost increase resulted from increased competition locally for certificates of deposit during the first quarter of 1995. Certificate of deposit growth for 1995 was nearly $35,600,000, with an average cost in 1995 of 5.44% compared to 4.33% in 1994. Borrowings also increased by $7,000,000 with an average cost of 7.07% compared to 6.06% in 1994. Table 15 - Interest Rate Sensitivity Gaps
0-30 31-90 91-180 181-365 Over Interest Earning Assets (I.E.A.) Days Days Days Days 1 year Fed Funds sold......................$ 9,350 $ 0 $ 0 $ 0 $ 0 Investment securities................ 2,605 6,535 6,315 14,299 161,137 Loans - Maturities................... 6,070 15,448 23,449 38,026 344,280 Loans - Variable Rate................ 116,251 533 2,655 5,044 0 --------- -------- -------- -------- -------- Total...............................$ 134,276 $ 22,516 $ 32,419 $ 57,369 $ 505,417 Cumulative..........................$ 134,276 $ 156,792 $ 189,211 $ 246,580 $ 751,997 Interest Bearing Liabilities (I.B.L.) C/D's $100,000 and over.............$ 2,621 $ 3,560 $ 2,969 $ 2,411 $ 3,647 Certificates of Deposit - Maturities. 10,426 20,053 30,868 33,835 103,318 Interest Deposits - Variable Rate.... 96,294 31,406 16,776 17,644 156,959 Short-term borrowings................ 2,234 0 0 621 0 -------- -------- ------- -------- -------- Total...............................$ 111,575 $ 55,019 $ 50,613 $ 54,511 $ 263,924 Cumulative..........................$ 111,575 $ 166,594 $ 217,207 $ 271,718 $ 535,642 Period GAP (Dollars)................$ 22,701 $ (32,503) $ (18,194) $ 2,858 $ 241,493 I.E.A./I.B.L.%....................... 120% 41% 64% 105% 192% Cumulative GAP (Dollars)............$ 22,701 $ (9,802) $ (27,996) $ (25,138) $ 216,355 Cumulative I.E.A./I.B.L.%............ 120% 94% 87% 91% 140% Regulatory Presentation Assets (cumulative).................$ 134,276 $ 156,792 $ 189,211 $ 246,580 $ 751,997 Funding (cumulative)................$ 334,360 $ 357,973 $ 391,810 $ 428,056 $ 535,021 -------- -------- -------- -------- -------- Cumulative GAP (Dollars)............$(200,084) $(201,181) $(202,599) $(181,476) $ 216,976 Cumulative I.E.A./I.B.L.%............ 40% 44% 48% 58% 141%
New Financial Accounting Standards The Financial Accounting Standard Board ("FASB") issued its Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in March 1995. This statement applies to long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and to long-lived assets and certain identifiable intangibles to be disposed of. The statement applies to all entities. This statement does not apply to financial instruments, long-term customer relationships of a financial institution, mortgage and other servicing rights, deferred policy acquisitions costs, or deferred tax assets. This statement shall be effective for financial statements for fiscal years beginning after December 15, 1995. The impact that adoption of FASB Statement No. 121 will have on the financial statements is currently under review, but is not expected to have a material effect on the financial statements of the Corporation. FASB Statement No. 122, "Accounting for Mortgage Servicing Rights - an amendment of FASB Statement No. 65", effective for fiscal years beginning after December 15, 1995, establishes accounting standards for recognizing servicing rights on mortgage loans. The Corporation has historically originated mortgage loans as a normal business activity, selling the mortgages on the secondary market to Federal Home Loan Mortgage Corporation and retaining all mortgage servicing. Mortgage sale income has been recorded on a "net" gain/loss basis. FASB No. 122 will require recognition of servicing "value" as an asset and immediate income as though mortgage servicing has been sold rather than retained. The servicing asset valuation will be amortized over the expected servicing life of the mortgage portfolio. In addition, the mortgage servicing asset must be valued periodically for impairment, based upon review of expected servicing life in relation to current market rates. The implementation of FASB No. 122 will result in a greater recognition of income from mortgage origination and sales activity and a corresponding decrease of servicing income over the serviced mortgage portfolio life. FASB Statement No. 123, "Accounting for Stock-Based Compensation", was issued in October 1995. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. An employee stock purchase plan that allows employees to purchase stock at a discount from market price is not compensatory if it satisfies three conditions: (a) the discount is relatively small, (b) substantially all full-time employees may participate on an equitable basis, and (c) the plan incorporates no option features such as allowing the employee to purchase the stock at a fixed discount from the lesser of the market price at grant date or date of purchase. The disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which this statement is initially adopted for recognizing compensation cost. The Corporation has determined that the application of this standard will not have a material effect on earnings. Item 8 - Financial Statements and Supplementary Data (a) The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages: Page Report of Independent Auditors 26 Consolidated Balance Sheets 27 Consolidated Statements of Income 28 Consolidated Statements of Changes in Stockholders' Equity 29 Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements 31 (b) The following supplementary data is set forth in this Annual Report on Form 10-K on the following pages: Summary of Quarterly Financial Data (Unaudited) 49 Trout, Ebersole & Groff, LLP Certified Public Accountants 1705 Oregon Pike Lancaster, Pennsylvania 17601 (717)569-2900 FAX (717) 569-0141 Independent Auditors' Report Board of Directors and Shareholders Sterling Financial Corporation and Subsidiaries Lancaster, Pennsylvania We have audited the accompanying consolidated balance sheets of Sterling Financial Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sterling Financial Corporation and Subsidiaries at December 31, 1995 and 1994 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2, the Corporation changed its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" at January 1, 1994. Trout, Ebersole & Groff, LLP Trout, Ebersole & Groff, LLP Certified Public Accountants January 19, 1996 Lancaster, Pennsylvania
Consolidated Balance Sheets Sterling Financial Corporation and Subsidiaries As of December 31, (Dollars in thousands) 1995 1994 Assets Cash and due from banks...........................................$ 35,414 $ 32,374 Interest-bearing deposits in other banks.......................... 24 24 Federal funds sold................................................ 9,350 none Mortgage loans held for sale...................................... 962 524 Investment Securities: (Note 4) Securities held-to-maturity (market value - $124,066 - 1995 and $156,047 - 1994)........... 122,885 161,160 Securities available-for-sale.................................... 68,967 9,051 Loans (Note 5).................................................... 427,674 393,657 Less: Unearned income........................................... (1,362) (1,008) Allowance for loan losses (Note 6)......................... (7,780) (7,640) -------- ------- Loans, net........................................................ 418,532 385,009 -------- ------- Premises and equipment (Note 7)................................... 16,450 11,977 Other real estate owned........................................... 252 759 Accrued interest receivable and prepaid expenses.................. 11,779 8,954 Other assets (Note 8)............................................. 26,539 23,563 -------- ------- Total Assets..................................................... $711,154 $633,395 ======== ======== Liabilities Deposits: Noninterest-bearing.............................................$ 77,318 $ 73,459 Interest-bearing (Note 9)....................................... 532,787 463,543 -------- -------- Total Deposits.................................................... 610,105 537,002 -------- -------- Federal funds purchased (Note 10)................................. none 6,000 Interest-bearing demand notes issued to U.S. Treasury (Note 10)... 2,234 2,914 Other liabilities for borrowed money (Note 10).................... 21,523 19,173 Accrued interest payable and accrued expenses..................... 8,231 5,737 Other liabilities................................................. 5,152 5,284 -------- -------- Total Liabilities................................................. 647,245 576,110 Stockholders' Equity -------- -------- Common Stock -(par value:$5.00) No. shares authorized: 1995 and 1994 - 10,000,000 No. shares issued: 1995 - 5,932,686; 1994 - 5,874,417 No. shares outstanding: 1995 - 5,925,527; 1994 - 5,868,610...... 29,663 29,372 Capital surplus................................................... 9,987 8,544 Retained earnings................................................. 22,848 19,114 Net unrealized gain on securities available-for-sale, net of taxes 1,624 420 Less: Treasury Stock (7,159 shares in 1995 and 5,807 shares in 1994) - at cost........................... (213) (165) -------- -------- Total Stockholders' Equity........................................ 63,909 57,285 -------- -------- Total Liabilities and Stockholders' Equity........................$711,154 $633,395 ======== ======== See accompanying notes to financial statements
Consolidated Statements of Income Sterling Financial Corporation and Subsidiaries For the years ended December 31, (Dollars in thousands, except per share data) 1995 1994 1993 Interest Income Interest and fees on loans...........................$ 37,975 $ 32,356 $ 31,167 Interest on deposits in other banks.................. 2 2 27 Interest on federal funds sold....................... 449 264 191 Interest and dividends on investment securities: Taxable............................................ 7,526 6,636 6,242 Tax-exempt......................................... 2,695 2,496 2,270 Dividends on stock................................. 203 177 195 --------- --------- --------- Total Interest Income................................ 48,850 41,931 40,092 --------- --------- --------- Interest Expense Interest on time certificates of deposit of $100,000 or more................................... 893 613 488 Interest on all other deposits....................... 18,200 12,970 13,303 Interest on demand notes issued to the U.S. Treasury. 114 77 62 Interest on federal funds purchased.................. 66 10 none Interest on other borrowed money..................... 1,880 1,255 1,183 Interest on mortgage indebtedness and obligations under capitalized leases........................... none 1 6 --------- --------- --------- Total Interest Expense............................... 21,153 14,926 15,042 --------- --------- --------- Net Interest Income.................................. 27,697 27,005 25,050 Provision for loan losses (Note 6)................... 534 1,081 2,430 --------- --------- --------- Net Interest Income after Provision for Loan Losses.. 27,163 25,924 22,620 --------- --------- --------- Other Operating Income Income from fiduciary activities..................... 856 742 639 Service charges on deposit accounts.................. 2,010 1,798 1,891 Other service charges, commissions and fees.......... 1,716 1,539 1,577 Mortgage banking..................................... 525 635 2,435 Other operating income (Note 8)...................... 3,186 2,329 2,429 Investment securities gains or (losses).............. none none 8 --------- --------- --------- Total Other Operating Income......................... 8,293 7,043 8,979 --------- --------- --------- Other Operating Expenses Salaries and employee benefits (Note 11)............. 13,040 12,264 11,566 Net occupancy expense................................ 1,721 1,477 1,355 Furniture and equipment expense (including depreciation of $917 in 1995, $779 in 1994 and $753 in 1993).... 1,605 1,379 1,253 FDIC insurance assessment............................ 622 1,128 1,052 Other operating expenses............................. 6,435 5,805 5,822 --------- --------- --------- Total Other Operating Expenses....................... 23,423 22,053 21,048 --------- --------- --------- Income Before Income Taxes........................... 12,033 10,914 10,551 Applicable income taxes (Note 12).................... 3,039 2,637 2,749 --------- --------- --------- Net Income...........................................$ 8,994 $ 8,277 $ 7,802 ========= ========= ========= Earnings per common share: Net Income.........................................$ 1.52 $ 1.42 $ 1.36 Cash dividends declared per common share.............$ .89 $ .58 $ .54 Average shares outstanding...........................5,909,641 5,837,103 5,728,400 See accompanying notes to financial statements
Consolidated Statements of Changes in Stockholders' Equity Sterling Financial Corporation and Subsidiaries Net Unrealized Gain on Available- Shares for-Sale Common Common Capital Retained Securities, Treasury Stock Stock Surplus Earnings Net of Taxes Stock Total (Dollars in thousands) Balance, January 1, 1993..... 2,702,627 $ 13,513 $ 14,100 $ 15,414 $ 0 $ (233)$ 42,794 Net income.................... 7,802 7,802 Common stock issued Dividend Reinvestment Plan... 34,951 174 1,159 1,333 Employee Stock Plan.......... 8,760 44 252 296 Stock Dividend issued - Common stock - 5% including cash paid in lieu of fractional shares........... 136,582 683 5,293 (6,008) (32) Cash dividends declared - Common stock................. (2,985) (2,985) Purchase of Treasury Stock (7,270 shares)............... (267) (267) Issuance of Treasury Stock for Dividend Reinvestment Plan (15,056 shares).............. 26 500 526 ---------- -------- -------- -------- ---------- ------- -------- Balance, December 31, 1993.... 2,882,920 14,414 20,830 14,223 0 0 49,467 Net income.................... 8,277 8,277 Common stock issued Dividend Reinvestment Plan... 55,255 277 2,005 2,282 Employee Stock Plan.......... 8,830 44 319 363 Two-for-one stock split....... 2,927,412 14,637 (14,637) Cash dividends declared - Common stock................. (3,386) (3,386) Purchase of Treasury Stock (14,471 shares).............. (379) (379) Issuance of Treasury Stock for Dividend Reinvestment Plan (8,664 shares)............... 27 214 241 Net unrealized gain on available-for-sale securities, net of taxes................ 420 420 --------- -------- -------- -------- ---------- ------- -------- Balance, December 31, 1994....5,874,417 29,372 8,544 19,114 420 (165) 57,285 Net income.................... 8,994 8,994 Common stock issued Dividend Reinvestment Plan... 45,121 225 1,115 1,340 Employee Stock Plan.......... 13,148 66 325 391 Cash dividends declared - Common stock................. (5,260) (5,260) Purchase of Treasury Stock (41,880 shares).............. (1,252) (1,252) Issuance of Treasury Stock for Dividend Reinvestment Plan (40,528 shares).............. 3 1,204 1,207 Change in net unrealized gain on available-for-sale securities, net of taxes...... 1,204 1,204 --------- -------- -------- -------- ---------- ------- -------- Balance, December 31, 1995....5,932,686 $ 29,663 $ 9,987 $ 22,848 $ 1,624 $ (213) $ 63,909 ========= ======== ======== ======== ========== ======= ======== See accompanying notes to financial statements
Consolidated Statements of Cash Flows Sterling Financial Corporation and Subsidiaries For the years ended December 31, (Dollars in thousands) 1995 1994 1993 Cash Flows from Operating Activities Net Income...........................................$ 8,994 $ 8,277 $ 7,802 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Depreciation...................................... 1,198 1,014 983 Accretion & amortization of investment securities. 367 661 550 Provision for possible loan losses................ 534 1,081 2,430 Provision for deferred income taxes............... 579 307 (299) (Gain) loss on sale of property and equipment..... (1) (2) none (Gain) loss on maturities/sales of investment securities............................ none none (8) (Gain) on sale of mortgage loans.................. (163) (279) (2,139) Proceeds from sales of mortgage loans............. 16,283 24,284 74,136 Originations of mortgage loans held for sale...... (16,558) (21,098) (75,428) Change in operating assets and liabilities: (Increase) in accrued interest receivable and prepaid expenses............................ (2,825) (138) (705) (Increase) in other assets....................... (2,469) (3,341) (1,235) Increase (decrease) in accrued interest payable and accrued expenses........................... 1,915 324 227 Increase (decrease) in other liabilities........ (753) (140) (98) --------- --------- --------- Net cash provided by/(used in) operating activities.. 7,101 10,950 6,216 Cash Flows from Investing Activities Proceeds from interest-bearing deposits in other banks..................................... 1,052 45,226 3,678 Purchase of interest-bearing deposits in other banks. (1,052) (45,209) (2,818) Proceeds from maturities of investment securities.... 33,016 32,538 36,367 Purchase of investment securities.................... (53,199) (56,310) (54,871) Federal funds sold, net.............................. (9,350) 12,350 (9,150) Net loans and leases made to customers............... (34,057) (33,904) (11,486) Purchases of premises and equipment.................. (5,681) (5,810) (827) Proceeds from sale of premises and equipment......... 11 245 12 --------- --------- --------- Net cash provided by/(used in) investing activities.. (69,260) (50,874) (39,095) Cash Flows from Financing Activities Net increase in demand deposits, NOW and savings accounts................................... 32,041 7,013 43,978 Net increase (decrease) in time deposits............. 41,062 24,309 (11,482) Net (decrease) in interest-bearing demand notes issued to the U.S. Treasury........................ (680) (86) none Proceeds from borrowings............................. 39,180 13,850 14,016 Repayments of borrowings............................. (36,830) (14,088) (9,329) Federal funds purchased, net......................... (6,000) 6,000 none Repayments of mortgages payable and capitalized lease liability.................................... none (11) (207) Proceeds from issuance of common stock............... 1,731 2,645 1,629 Cash dividends paid.................................. (5,260) (3,386) (2,985) Cash paid in lieu of fractional shares............... none none (32) Acquisition of treasury stock........................ (1,252) (379) (267) Proceeds from issuance of treasury stock............. 1,207 241 526 --------- --------- --------- Net cash provided by/(used in) financing activities.. 65,199 36,108 35,847 --------- --------- --------- Increase (decrease) in cash and due from banks....... 3,040 (3,816) 2,968 Cash and due from banks: Beginning............................................ 32,374 36,190 33,222 --------- --------- --------- Ending...............................................$ 35,414 $ 32,374 $ 36,190 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Cash payments for: Interest paid to depositors and on borrowed money..$ 19,937 $ 14,728 $ 15,383 Income taxes....................................... 2,526 2,160 3,110 Supplemental Schedule of Noncash Investing and Financing Activities: Other real estate acquired in settlement of loans....$ 293 $ 638 $ 121 See accompanying notes to financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sterling Financial Corporation and Subsidiaries (All dollar amounts presented in the tables are in thousands, except per share data) Note 1 - Formation of Sterling Financial Corporation As a result of a plan of reorganization, The First National Bank of Lancaster County, now by name change, Bank of Lancaster County, N.A. (Bank), became the wholly owned subsidiary of Sterling Financial Corporation (Parent Company), a new bank holding company, at the close of business June 30, 1987. Each outstanding share of the Bank's common stock (par value $10.00) was converted into two shares of common stock (par value $5.00) Parent Company. The authorized capital of the Parent Company is 10,000,000 shares of common stock. Note 2 - Summary of Significant Accounting Policies The accounting and reporting policies of Sterling Financial Corporation and its subsidiaries (the Corporation) conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from these estimates. The following is a summary of the most significant policies. Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Sterling Financial Corporation and its wholly owned subsidiaries, Bank of Lancaster County, N.A. and its subsidiary Town & Country, Inc., and Sterling Mortgage Services, Inc. (presently inactive). The Corporation through its subsidiaries banking and other financial services to domestic markets. The principal market area is Lancaster County, Pennsylvania. All significant intercompany transactions have been eliminated in the consolidation. Investment Securities - Investment securities include both debt securities and equity securities. Sterling adopted Statement of Financial Accounting Standards Board Statement No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in one of three categories and accounted for as follows: 1) debt securities that a company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with unrealized gains and losses included in earnings; and 3) debt and equity securities not classified as either held-to-maturity or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. Sterling has segregated its investment securities into two categories: those held-to-maturity and those available-for-sale. The effect of adoption resulted in an increase to shareholders' equity of $420,000 at December 31, 1994. In 1995, the Financial Accounting Standards Board (FASB) issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." Effective November 15, 1995, the FASB permitted a one-time opportunity for institutions to reassess the appropriateness of the designations of all securities held upon the initial application of the Special Report. After a reassessment of the current designations of the portfolio, it was determined that an additional $54,218,000 in securities be transferred from the held-to-maturity category to available-for-sale category. The total net unrealized gain on securities available-for-sale, net of taxes, at December 31, 1995 was $1,624,000. There has been no impact on current year earnings or a restatement of previously issued financial statements in connection with the adoption of this new accounting standard. Investment securities in the held-to-maturity category are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the constant yield method. It is management's intent to hold investment account securities until maturity. However, the investment portfolio does serve as an ultimate source of liquidity. In order to acknowledge this function, Sterling has designated certain specific debt securities as being available-for-sale. Premiums and discounts are recognized in interest income computed on the constant yield method. All marketable equity securities are classified as available-for-sale. Realized gains and losses on securities are computed using the specific identification method and are included in Other Operating Income in the Consolidated Statements of Income. Future purchases of securities will be evaluated on an individual basis for classification among the three permissible categories based on management's intent and the ability to hold each security to maturity, on the relative sizes of the security categories in relation to future liquidity needs, on current asset/liability management strategies and other criteria as appropriate. Premises and Equipment - Premises, furniture and equipment, leasehold improvements, and capitalized leases are stated at cost, less accumulated depreciation and amortization. For book purposes, depreciation is computed primarily by using the straight-line method over the estimated useful life of the asset. Charges for maintenance and repairs are expensed as incurred. Gains and losses on dispositions are reflected in current operations. Other Real Estate Owned - Other real estate owned is carried at the lower of cost or an amount not in excess of estimated fair value. Allowance for Loan Losses - The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to produce an adequate reserve to meet the present and foreseeable risk characteristics of the loan portfolio. Management's judgement is based on the evaluation of individual loans and their overall risk characteristics, past loan loss experience, and other relevant factors. Loan losses are charged directly against the allowance and recoveries on previously charged-off loans are added to the allowance. Interest Income - Interest on installment loans is recognized primarily on the simple interest, actuarial and the rule of seventy-eights methods. Interest on other loans is recognized based upon the principal amount outstanding. 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. Loan Origination Fees and Costs - Net loan fees and costs of loan origination are deferred and amortized to interest income over the life of the loan. The amortization of deferred fees and costs is discontinued on non-accrual loans. Federal Income Taxes - Applicable income taxes are based on income as reported in the consolidated financial statements. Deferred income taxes are provided for those elements of income and expense which are recognized in different periods for financial reporting and income tax purposes. Statement of Financial Accounting Statements (SFAS) No. 109 - "Accounting for Income Taxes", which changes the method of accounting for income taxes, was retroactively applied in 1993 which resulted in a decrease of $310,000 in retained earnings beginning January 1, 1991. Earnings after this date have not been restated since the change was not considered material. Trust Department Assets and Income - Trust assets held by the Bank in a fiduciary or agency capacity for customers of the Trust Department are not included in the financial statements since such items are not assets of the Bank. Trust income has been recognized on the cash basis which is not significantly different from amounts that would have been recognized on the accrual basis. Earnings per Share - Earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding which were 5,909,641, 5,837,103 and 5,728,400 for 1995, 1994 and 1993 respectively, after giving retroactive effect to a 5% stock dividend paid in December 1993 and a two-for-one stock split in the form of a 100% stock dividend paid in 1994. Presentation of Cash Flows - For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Reclassifications - Certain income items for prior years have been reclassified in order to conform with the current year presentation with no effect to net income. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of - The Financial Accounting Standard Board ("FASB") issued its Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in March 1995. This statement applies to long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and to long-lived assets and certain identifiable intangibles to be disposed of. The statement applies to all entities. This statement does not apply to financial instruments, long-term customer relationships of a financial institution, mortgage and other servicing rights, deferred policy acquisitions costs, or deferred tax assets. This statement shall be effective for financial statements for fiscal years beginning after December 15, 1995. The impact that adoption of FASB Statement No. 121 will have on the financial statements is currently under review, but is not expected to have a material effect on the financial statements of the Corporation. Accounting for Mortgage Servicing Rights - FASB Statement No. 122, "Accounting for Mortgage Servicing Rights - an amendment of FASB Statement No. 65", effective for fiscal years beginning after December 15, 1995, establishes accounting standards for recognizing servicing rights on mortgage loans. The Corporation has historically originated mortgage loans as a normal business activity, selling the mortgages on the secondary market to Federal Home Loan Mortgage Corporation and retaining all mortgage servicing. Mortgage sale income has been recorded on a "net" gain/loss basis. FASB No. 122 will require recognition of servicing "value" as an asset and immediate income as though mortgage servicing has been sold rather than retained. The servicing asset valuation will be amortized over the expected servicing life of the mortgage portfolio. In addition, the mortgage servicing asset must be valued periodically for impairment, based upon review of expected servicing life in relation to current market rates. The implementation of FASB No. 122 will result in a greater recognition of income from mortgage origination and sales activity and a corresponding decrease of servicing income over the serviced mortgage portfolio life. Accounting for Stock-Based Compensation - FASB Statement No. 123, "Accounting for Stock-Based Compensation", was issued in October 1995. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. An employee stock purchase plan that allows employees to purchase stock at a discount from market price is not compensatory if it satisfies three conditions: (a) the discount is relatively small, (b) substantially all full-time employees may participate on an equitable basis, and (c) the plan incorporates no option features such as allowing the employee to purchase the stock at a fixed discount from the lesser of the market price at grant date or date of purchase. The disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which this statement is initially adopted for recognizing compensation cost. The Corporation has determined that the application of this standard will not have a material effect on earnings. Accounting by Creditors for Impairment of a Loan - FASB Statement No. 118, an amendment of FASB Statement No. 114, addresses the accounting by creditors for impairment of a loan by specifying how allowances for credit losses related to certain loans should be determined. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. This Statement was effective for financial statements for fiscal years beginning after December 15, 1994. The adoption of this Statement did not affect the financial position or results of operations. Accounting for Contributions Received and Contributions Made - FASB Statement No. 116, establishes standards of financial accounting and reporting for contributions received and contributions made. This Statement was effective for financial statements issued for fiscal years beginning after December 15, 1994 and interim periods within those fiscal years. The application of this Statement did not have a material effect on earnings. Mortgage Loans Held for Sale - Mortgage loans held for sale are recorded at the lesser of current secondary market value or the actual book value of loans. Note 3 - Restrictions on Cash and Due From Banks The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of these reserve balances for the year ended December 31, 1995 was approximately $8,185,000. Balances maintained at the Federal Reserve Bank are included in cash and due from banks. Note 4 - Investment Securities As discussed in Note 2, the Corporation adopted SFAS 115 effective January 1, 1994. A one time move from the held-to-maturity category to the available-for-sale category was permitted during 1995. The Corporation took advantage of this opportunity and moved a total of $54,218,000 from the held-to-maturity category to the available-for-sale category. The amount of net unrealized gain on securities available-for-sale, net of taxes, transferred to stockholders' equity amounted to $510,295 on this transfer. Securities pledged to secure government and other public deposits, trust deposits, short-term borrowings, and other balances as required or permitted by law were carried at $54,780,570 in 1995 and $32,982,504 in 1994. The amortized cost and fair values of investment securities held-to-maturity are as follows:
December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities............$ 18,837 $ 158 $ 69 $ 18,926 Obligations of other U.S. Government agencies and corporations......... 18,473 110 65 18,518 Obligations of states and political subdivisions...................... 40,212 796 154 40,854 Mortgage-backed securities.......... 3,854 152 1 4,005 Other bonds, notes and debentures... 38,944 362 108 39,198 ---------- --------- -------- -------- Subtotal............................ 120,320 1,578 397 121,501 Nonmarketable equity securities..... 2,565 none none 2,565 ---------- ---------- --------- -------- Total...............................$ 122,885 $ 1,578 $ 397 $ 124,066 =========== ========== ========= ========
December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities............$ 28,225 $ 10 $ 1,102 $ 27,133 Obligations of other U.S. Government agencies and corporations......... 24,101 15 1,102 23,014 Obligations of states and political subdivisions...................... 50,472 355 1,861 48,966 Mortgage-backed securities.......... 5,122 48 52 5,118 Other bonds, notes and debentures... 50,811 46 1,470 49,387 ---------- --------- --------- -------- Subtotal............................ 158,731 474 5,587 153,618 Nonmarketable equity securities..... 2,429 none none 2,429 ---------- --------- --------- -------- Total...............................$ 161,160 $ 474 $ 5,587 $ 156,047 ========== ========= ========= ========
Included in nonmarketable equity securities is Federal Reserve stock, Federal Home Loan Bank of Pittsburgh stock and Atlantic Central Bankers Bank stock. The amortized cost and fair values of held-to-maturity debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 1995 Amortized Fair Cost Value Due in one year or less................$ 24,749 $ 24,835 Due after one year through five years.. 66,403 67,010 Due after five years through ten years. 18,450 18,742 Due after ten years.................... 6,864 6,909 ----------- ----------- 116,466 117,496 Mortgage-backed securities............. 3,854 4,005 ----------- ----------- $ 120,320 $ 121,501 =========== =========== The amortized cost and fair values of available-for-sale are as follows:
December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities............$ 11,046 $ 148 $ 40 $ 11,154 Obligations of other U.S. Government agencies and corporations......... 15,489 180 37 15,632 Obligations of states and political subdivisions...................... 19,622 455 132 19,945 Mortgage-backed securities.......... 1,249 4 11 1,242 Other bonds, notes and debentures... 19,013 301 67 19,247 ---------- --------- -------- -------- Subtotal............................ 66,419 1,088 287 67,220 Equity securities and corporate stock............................. 88 1,659 none 1,747 ---------- ---------- --------- -------- Total...............................$ 66,507 $ 2,747 $ 287 $ 68,967 =========== ========== ========= ========
December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities..............$ 1,472 $ none $ 15 $ 1,457 Mortgage-backed securities............ 1,344 none 88 1,256 Other bonds, notes and debentures..... 5,593 9 101 5,501 -------- ------- ------ ------- Subtotal.............................. 8,409 9 204 8,214 Equity securities and corporate stock............................... 7 830 none 837 -------- ------- ------ ------- Total.................................$ 8,416 $ 839 $ 204 $ 9,051 ======== ======= ====== =======
The amortized cost and fair values of available-for-sale debt securities at December 31, 1995 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 1995 Amortized Fair Cost Value Due in one year or less...................$ 5,361 $ 5,374 Due after one year through five years..... 37,279 37,753 Due after five years through ten years.... 15,863 15,988 Due after ten years.................... 6,667 6,863 -------- -------- 65,170 65,978 Mortgage-backed securities................ 1,249 1,242 -------- -------- $ 66,419 $ 67,220 ======== ======== There were no sales of investment securities during 1995, 1994 or 1993. Note 5 - Loans Loans outstanding at December 31, are as follows:
1995 1994 Commercial, financial and agricultural.......................$ 228,058 $ 208,918 Real estate - construction................................... 6,378 8,542 Real estate - mortgage....................................... 33,124 30,505 Consumer..................................................... 116,210 106,921 Lease financing receivables (net of unearned income)......... 43,904 38,771 ------------ ------------ Total loans, gross...........................................$ 427,674 $ 393,657 ============ ============
Loans on a non-accrual status amounted to $1,010,000 at December 31, 1995, compared to $2,127,000 at December 31, 1994. If interest income had been recorded on all such loans for the years indicated, such interest income would have increased by approximately $143,997 and $276,956 for 1995 and 1994 respectively. SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", an amendment of SFAS No. 114, was implemented at the beginning of 1995. The Bank has defined impaired loans as all loans on nonaccrual status, except those specifically excluded from the scope of SFAS No. 114, regardless of the credit grade assigned by loan review. All impaired loans were measured by utilizing the fair value of the collateral for each loan. When the measure of an impaired loan is less than the recorded investment in the loan, the Bank will compare the impairment to the existing allowance assigned to the loan. If the impairment is greater than the allowance, the Bank will adjust the existing allowance to reflect the greater amount or take a corresponding charge to the provision for loan losses. If the impairment is less than the existing allowance for a particular loan, no adjustments to the allowance or the provision for loan and lease losses will be made. There was no adjustment necessary for the impaired loans for the periods indicated. The average amount of nonaccruals for the fourth quarter of 1995 was $1,112,405 while the average for 1995 was $1,476,100. The following table presents information concerning impaired loans at December 31, 1995: Gross impaired loans which have allowances..........$1,010 Less: Related allowances for loan losses......... 349 ------ Net impaired loans..................................$ 661 ====== Note 6 - Allowance for Loan Losses Changes in the Allowance for Loan Losses were as follows:
1995 1994 1993 Balance at January 1..................................$ 7,640 $ 7,180 $ 5,400 Recoveries credited to allowance...................... 282 141 240 Provisions for loan losses charged to income.......... 534 1,081 2,430 -------- -------- -------- Total................................................. 8,456 8,402 8,070 Losses charged to allowance........................... 676 762 890 -------- -------- -------- Balance at December 31................................$ 7,780 $ 7,640 $ 7,180 ========= ======== ======== Ratio of Allowance to loans, net of unearned income at end of year..................................... 1.82% 1.95% 2.00%
Note 7 - Premises and Equipment Premises and equipment at December 31, 1995 and 1994 is summarized as follows:
1995 1994 Land.............................................$ 2,482 $ 2,432 Buildings........................................ 11,814 5,931 Buildings under capitalized lease................ 104 104 Leasehold improvements........................... 735 678 Equipment, furniture and fixtures................ 10,597 8,140 Construction in progress......................... 14 2,990 ---------- ---------- 25,746 20,275 Less: Accumulated depreciation................... (9,296) (8,298) ---------- ---------- $ 16,450 $ 11,977 ========== ==========
Contributing to the increase in premises and equipment was the construction costs for the headquarters building of Sterling Financial Corporation and Bank of Lancaster County, as well as furniture and equipment for this building. Depreciation expense amounted to $1,197,980 in 1995, $1,013,830 in 1994, and $983,345 in 1993. Note 8 - Other Assets Included in other assets for 1995 and 1994 is $22,990,784 and $19,722,146 respectively which represents operating leases generated by Town & Country, Inc. The income generated from the leases for 1995 and 1994 amounted to $2,211,700 and $1,735,162 respectively and is reflected in other operating income. The following schedule provides an analysis of Town & Country's investment in property on operating leases and property held for lease by major classes as of December 31, 1995 and 1994: 1995 1994 Construction equipment...........$ 688 $ 704 Transportation equipment......... 12,018 7,277 Automobiles...................... 14,265 12,949 Manufacturing equipment.......... 5,550 5,399 Trucks........................... 12,614 12,245 Other............................ 734 548 ---------- ----------- Total............................ 45,869 39,122 Less: Accumulated depreciation... (22,878) (19,400) ----------- ----------- $ 22,991 $ 19,722 =========== =========== The following is a schedule by years of minimum future rentals on noncancelable operating leases as of December 31, 1995: Year ending December 31: 1996...............................$ 11,612 1997................................ 1,861 1998................................ 178 1999................................ 48 2000................................ 48 ------- Total minimum future rentals.......$ 13,747 ======= Note 9 - Time Certificates of Deposit At December 31, 1995 and 1994, time certificates of deposit of $100,000 or more aggregated $22,938,324 and $19,672,584 respectively. Note 10 - Short-Term Borrowings and Other Liabilities for Borrowed Money The Bank maintains lines of credit with various correspondent banks to use as sources of short-term funds. Federal funds purchased amounted to $6 million at December 31, 1994. There were no Federal funds purchased at December 31, 1995. In addition, the Bank maintains a line of credit in the amount of $62 million with the Federal Home Loan Bank of Pittsburgh. There were no advances on this line at December 31, 1995 or 1994. Borrowings from the Federal Reserve Bank and interest-bearing demand notes issued to U.S. Treasury would also be considered short-term borrowings. Interest-bearing demand notes issued to U.S. Treasury were $2,234,000 and $2,914,000 for 1995 and 1994 respectively. The average balance outstanding for any category of short-term borrowings during the periods reported was less than 30 per cent of stockholders' equity at the end of each period reported. The following represents other liabilities for borrowed money at December 31:
1995 1994 Notes payable-Town & Country, Inc.(Subsidiary of Bank) borrowings from various lenders for leasing operations......$19,283 $17,601 Federal Home Loan Bank advances............................... 2,240 1,572 ------ ------ Total.........................................................$21,523 $19,173 ====== ======
Liabilities in connection with Town & Country, Inc. leasing operations are payable to various lenders at various terms. The estimated current portion of this debt is $7,520,556 at December 31, 1995. The borrowings from the Federal Home Loan Bank of Pittsburgh consist of two advances in 1993 and one in 1995. Of the advances in 1993, one in the amount of $621,450, bears interest monthly at the rate of 4.49% per year and matures July 29, 1996 and the second, in the amount of $950,000 bears interest at the rate of 5.39% per year and matures September 13, 2000. The advance in 1995 in the amount of $668,700, at a rate of 6.41%, matures September 28, 2001. Note 11 - Pension and Employee Stock Bonus Plan The Bank of Lancaster County, N.A. and its subsidiary, Town & Country, Inc. maintains a qualified non-contributory pension plan for their employees. The Plan specifies fixed benefits to provide a monthly pension benefit at age 65 for life equal to one and one-half percent of each participant's final average salary (highest five consecutive years' base compensation preceding retirement) for each year of credited service. Salary in excess of $150,000 (effective in the year 1994) is disregarded in determining a participant's retirement benefit pursuant to IRS regulations. All employees with one year of service who work at least 1,000 hours per year and who are at least age 21 are eligible to participate. A participant becomes 100% vested upon completion of five years with a vesting credit. Net periodic pension cost for 1995, 1994 and 1993 included the following: 1995 1994 1993 Service cost.......................$ 579 $ 577 $ 560 Interest cost...................... 504 428 404 Return on Plan assets.............. (950) 6 (347) Net amortization and deferral...... 417 (463) (42) ----- ----- ----- Net periodic pension cost..........$ 550 $ 548 $ 575 ===== ===== ===== The following table sets forth the Plan's funded status at December 31, 1995, 1994 and 1993:
Actuarial present value of benefit obligations: 1995 1994 1993 Accumulated benefit obligation, including vested benefits of $5,238,774 for 1995, $3,705,229 for 1994 and $3,684,272 for 1993..................................$ 5,275 $ 3,745 $ 3,748 ======= ======= ======= Projected benefit obligation for service rendered to date......................................................$(8,143) $(6,890) $(6,466) Plan assets at fair value.. ............................... 6,728 6,087 5,472 ------- ------- ------- Projected plan assets in excess of or (less than) benefit obligation........................................$(1,415) $ (803) $ (994) Unrecognized net (gain) or loss from past experience different from that assumed and effects of changes in assumptions............................................ 1,495 1,374 1,404 Unrecognized net (asset) or obligation..................... (276) (345) (415) Unrecognized prior service cost............................ (128) none none ------- ------- ------- Prepaid (accrued) pension cost included in other assets (liabilities).............................$ (324) $ 226 $ (5) ======= ======= =======
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7% and 5%, respectively, at December 31, 1995. The expected long-term rate of return on plan assets in 1995 was 9%. The Board of Directors of the Bank adopted an employee stock plan effective July 1, 1981. The assets of the Plan will be entirely invested in Sterling Financial Corporation common stock. The Plan covers all Bank employees who are age 18 and over, are employed for at least 1,000 hours per year and have completed at least one year of service. The Plan has two parts: *The salary deferral portion of the Plan permits any eligible participant to make voluntary contributions to the Plan ranging from 2% to 6% of compensation. The Bank will contribute 25% of what the participant contributes. This portion of the Plan is intended to encourage thrift and investment in Sterling Financial Corporation stock, as well as supplement their retirement. The Plan allows for employees to make their voluntary contributions on a pre-federal income tax basis. *The performance incentive portion of the Plan allows the Bank to make annual contributions to the Plan based on certain overall Bank performance objectives. These contributions will be allocated to the participants based on compensation. Bank contributions to the Plan vest in each participant's account at the rate of 20% for each year of service. Normally, benefits may be paid from the Plan on retirement, termination, disability or death. Participants in the Plan may withdraw their own contribution earlier under several restricted conditions of hardship with approval of the Plan Committee. The Plan provides that each participant may vote the shares in his or her account through the Plan Trustee at any shareholder meeting. The Bank of Lancaster County Trust Department serves as Trustee for the Plan. All dividends received on Sterling Financial Corporation stock are reinvested in additional shares of Sterling Financial Corporation stock. The contribution to the performance incentive portion of the Plan was $216,000, $200,000 and $200,000 for 1995, 1994 and 1993 respectively. The contribution to the salary deferral portion of the Plan was $65,946 in 1995, $51,305 in 1994 and $41,766 in 1993. Effective January 1, 1993, Sterling adopted Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions". Under SFAS No. 106, the cost of postretirement benefits other than pensions must be recognized on an accrual basis as employees perform services to earn the benefits. This is a significant change from the previous generally accepted practice of accounting for these benefits which was on a cash basis. The accumulated postretirement benefit obligation at the date of adoption (the "transition obligation") could have been recognized in operations as the cumulative effect of an accounting change in the period of adoption, which would have resulted in an actuarially determined pre-tax charge to earnings of $1,026,457, or its recognition could be delayed by amortizing the obligation over future periods as a component of the postretirement benefit cost. Sterling adopted SFAS No. 106 by recognizing the transition on a delayed basis. The transition obligation in the amount of $1,026,457 is being amortized on a straight-line basis over a 20 year period which is the average remaining service period of active plan participants. The cost for postretirement benefits other than pensions consisted of the following components at December 31, 1995, 1994 and 1993: 1995 1994 1993 Service cost......................$ 93 $ 93 $ 80 Interest cost..................... 99 87 81 Amortization of unrecognized transition obligation........... 51 51 51 ---- ---- ---- Net periodic postretirement benefit cost....................$243 $231 $212 ==== ==== ==== Sterling's postretirement benefits other than pensions are currently not funded. The status of the plans at December 31, 1995, 1994 and 1993 is as follows: Actuarial valuation of accumulated postretirement benefit obligation: 1995 1994 1993 Retirees..................................$ 324 $ 289 $ 314 Fully eligible active plan participants... 323 258 294 Other active plan participants............ 787 786 653 ------ ------ ------ $1,434 $1,333 $1,261 Unrecognized transition obligation........ (872) (924) (975) Unrecognized net gain (loss).............. 56 (9) (94) ------ ------ ------ Accrued postretirement benefit cost.......$ 618 $ 400 $ 192 ====== ====== ====== Prior to January 1, 1993, Sterling recognized the cost of postretirement benefits, which is primarily retiree health care, as an expense as premiums were incurred. These costs approximated $17,886 and $13,888 for 1992 and 1991, respectively. The postretirement health care plan is contributory, with retiree contributions based on years of service. The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit was 8% in 1995, decreasing by .5% per year to an ultimate rate of 5% in 2001 and remains at that level thereafter. The discount rate used to measure the accumulated postretirement benefit obligation was 7% in 1995. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $325,737 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1995 by $49,860. Note 12 - Applicable Income Taxes The effective income tax rates for financial reporting purposes are less than the Federal statutory rate of 34% for 1995, 1994 and 1993 for reasons shown as follows:
For the years ended December 31, Statutory Statutory Statutory 1995 Rate 1994 Rate 1993 Rate Federal income tax expense at statutory rate............$ 4,091 34.0% $ 3,711 34.0% $ 3,587 34.0% Reduction resulting from: Non-taxable interest income... (1,046) (8.7% (966) (8.8%) (895) (8.5%) Other, net.................... (71) (.6%) (149) (1.4%) 20 .2% ------- ------ ------- ------ ------- ------ Applicable Federal income taxes.$ 2,974 24.7% $ 2,596 23.8% $ 2,712 25.7% State income taxes.............. 65 .6% 41 .4% 37 .4% ------- ------ ------- ------ ------- ------ Applicable income taxes.........$ 3,039 25.3% $ 2,637 24.2% $ 2,749 26.1% ======= ====== ======= ====== ======= ====== Taxes currently payable.........$ 2,460 $ 2,330 $ 3,048 Deferred income taxes........... 579 307 (299) ------- ------- ------- Applicable income taxes.........$ 3 039 $ 2,637 $ 2,749 ======= ======= =======
The Corporation had net deferred tax credits of $3,512,000, $2,312,000 and $1,790,000 at December 31, 1995, 1994 and 1993 respectively. The tax effect of temporary differences that gave use to significant portions of the deferred tax liabilities at December 31, 1995 and 1994, are as follows: Caption> Deferred tax assets: Allowance for loan losses.....................$ 2,756 $ 2,542 Deferred loan fees and costs.................. 57 71 Postretirement benefits other than pensions... 216 140 Foreclosed assets............................. 11 9 Other......................................... 15 12 ------- ------- Total deferred tax assets................... 3,055 2,774 ======= =======
Deferred tax liabilities: Leasing....................................... (5,321) (4,572) Depreciation.................................. (244) (206) Pension....................................... (145) (72) Unrealized gains on investments............... (836) (215) Other......................................... (21) (21) ------- ------- Total deferred tax liabilities.............. (6,567) (5,086) ======= ======= Net deferred tax liability.................. (3,512) (2,312) ======= =======
Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary from amounts shown on the tax return when filed. Accordingly, amounts previously reported for 1994 may change as a result of adjustments to conform to tax returns filed. The Financial Accounting Standards Board has issued Statement No. 109, "Accounting for Income Taxes", which significantly changes the recognition and measurement of deferred income tax assets and liabilities. Statement 109 requires that deferred income taxes be recorded on an asset/ liability method and adjusted when new tax rates are enacted. The corporation adopted Statement No. 109 beginning with its year ending December 31, 1993. The Statement provides that the effect of its adoption may be recorded entirely in the year of adoption or retroactively by restating one or more prior years. The statement was retroactively applied to 1990. Note 13 - Operating Leases The Bank leases certain banking facilities under operating leases which expire on various dates to 2022. Renewal options are available on these leases. Minimum future rental payments as of December 31, 1995 are as follows: Operating Leases 1996.........................$ 519 1997......................... 450 1998......................... 388 1999......................... 333 2000......................... 174 Later years.................. 2,009 ------- Total minimum future rental payments...................$ 3,873 ======= Total rent expense charged to operations amounted to $479,809 in 1995, $413,996 in 1994 and $373,332 in 1993. Note 14 - Disclosures about Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Short-Term Investments - For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Investment Securities - For investment securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans - For certain homogenous categories of loans, such as some residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Lease contracts as defined in FASB Statement No. 13, "Accounting for Leases", are not included in this disclosure statement. Deposit Liabilities - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated using the rates currently offered for deposits of similar remaining maturities. Federal Funds Purchased - The carrying amount of federal funds purchased approximates its fair value due to the overnight maturities of these financial instruments. U.S. Treasury Demand Notes - For U.S. Treasury demand notes, the carrying amount is a reasonable estimate of fair value. Other Borrowings - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the Corporation's financial instruments are as follows:
1995 1994 --------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- Financial Assets: Cash and short-term investments.....$ 35,438 $ 35,438 $ 32,398 $ 32,398 Investment securities held-to-maturity................. 122,885 124,066 161,160 156,047 Investment securities available-for-sale............... 68,967 68,967 9,051 9,051 Loans............................... 384,732 355,410 Less: Allowance for loan losses.... (7,180) (7,028) --------- --------- --------- --------- Net loans...........................$ 377,552 $ 380,131 $ 348,382 $ 340,898 Financial Liabilities: Deposits..........................$ 610,105 $ 612,611 $ 537,002 $ 534,344 Federal funds purchased........... none none 6,000 6,000 U.S. Treasury demand notes........ 2,234 2,234 2,914 2,914 Other borrowings.................. 21,523 21,281 19,173 18,731 Unrecognized financial instruments:* Interest rate swaps: In a net receivable position.....$ none $ none $ none $ none In a net payable position........ (none) (none) (none) (none) Commitments to extend credit...... (72) (72) (86) (86) Standby letters of credit......... (38) (38) (37) (37) Financial guarantees written...... (none) (none) (none) (none) * The amounts shown under "Carrying Amount" represent accruals or deferred income (fees) arising from those unrecognized financial instruments.
Note 15 - Commitments and Contingent Liabilities In the normal course of business, there are various commitments and contingent liabilities which are not reflected in the financial statements. These include lawsuits and commitments to extend credit, guarantees and letters of credit. In the opinion of management, there are no material commitments which represent unusual risks. A summary of the more significant commitments as of December 31, 1995 and 1994 are as follows: Financial instruments whose contract amounts represent credit risk: 1995 1994 Standby letters of credit ....................$ 7,568 $ 5,520 Commitments to extend credit..................$ 76,672 $ 71,265 Standby letters of credit are obligations to make payments under certain conditions to meet contingencies related to customers' contractual agreements and are subject to the same risk, credit review and approval process as loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. Excluded from these amounts are commitments to extend credit in the form of retail credit cards, check credit or related plans. Sterling's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Sterling uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Most of Sterling's business activity is with customers located within Sterling's defined market area. Sterling grants commercial, residential and consumer loans throughout the market area. The loan portfolio is well diversified and Sterling does not have any significant concentrations of credit risk. In 1994, SFAS No. 119 - "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" was issued effective for financial statements issued after December 15, 1994. The Corporation has not entered into any derivatives defined as a future, forward, swap, option, caps, floors, etc. However, the financial instruments listed above as standby letters of credit and commitments to extend credit have characteristics similar to derivatives. The following is a schedule that represents the estimated risk of current interest rates versus committed rates. Due to the uncertainty of when and how much a commitment to extend credit will be exercised, estimates were used. Fixed Rate Commitments 1995 1994 Carrying value at December 31,..............$ 0 0 Commitment available not yet exercised......$ 19,105 10,865 Commitment revalued at existing rates with estimated activity........................$ 19,117 10,823 Note 16 - Related Party Transactions Certain directors and officers of Sterling Financial Corporation and its subsidiaries, their immediate families and companies in which they are principal owners (more than 10%), were indebted to the Bank during 1995 and 1994. All loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and, in the opinion of the management of the Bank, do not involve more than a normal risk of collectibility or present other unfavorable features. Total loans to these persons at December 31, 1995 and 1994 amounted to $6,170,667 and $5,497,545 respectively. During 1995, $2,585,340 of new loans were made and repayments totaled $1,912,218. Note 17 - Dividend and Loan Restrictions Dividends are paid by Sterling Financial Corporation from its assets which are provided in part by dividends from Bank of Lancaster County, N.A. However, certain restrictions exist regarding the ability of the Bank to transfer funds to Sterling Financial Corporation in the form of dividends. The approval of the Comptroller of the Currency shall be required if the total of all dividends declared by the Bank in any calendar year shall exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. Under these restrictions, the Bank can declare dividends in 1996 without approval of the Comptroller of the Currency of approximately $12,676,000 plus an additional amount equal to the Bank's net profits for 1996 up to the date of any such dividend declaration. Under current Federal Reserve regulations, the Bank is limited in the amount it may loan to Sterling Financial Corporation. Loans to Sterling Financial Corporation may not exceed 10% of the Bank's capital stock and surplus. Note 18 - Sterling Financial Corporation (Parent Company Only) Financial Information
Condensed Balance Sheets As of December 31, 1995 1994 Assets Cash.......................................................$ 5 $ 291 Securities available-for-sale.............................. 88 none Investment in subsidiaries at equity....................... 63,994 57,546 Other assets............................................... 847 328 -------- -------- Total Assets.................................................$ 64,934 $ 58,165 ======== ======== Liabilities Other liabilities..........................................$ 1,025 880 Stockholders' Equity Common Stock...............................................$ 29,663 $ 29,372 Capital Surplus............................................ 9,987 8,544 Retained Earnings.......................................... 22,848 19,114 Net Unrealized Gain on securities available-for-sale, net of taxes........................................... 1,624 420 Less: Treasury Stock at cost............................... (213) (165) -------- -------- Total Stockholders' Equity...................................$ 63,909 $ 57,285 -------- -------- Total Liabilities and Stockholders' Equity...................$ 64,934 $ 58,165 ======== ========
Condensed Statements of Income Years Ended December 31, 1995 1994 1993 Income Dividends from subsidiaries...............$ 3,837 $ 966 $ 1,262 Dividends on investment securities........ 2 none none Other income.............................. 1 1 1 -------- -------- -------- Total Income............................ 3,840 967 1,263 -------- -------- -------- Expenses Fees paid to subsidiary................... none none 108 Other expense............................. 141 178 121 -------- -------- -------- Total Expenses.......................... 141 178 229 -------- -------- -------- Income before income taxes and equity in undistributed net income of subsidiaries........................... 3,699 789 1,034 Income taxes (credits)...................... (47) (60) (78) -------- -------- -------- 3,746 849 1,112 Equity in undistributed income of subsidiaries.............................. 5,248 7,428 6,690 -------- -------- -------- Net Income..................................$ 8,994 $ 8,277 $ 7,802 ======== ======== ========
Statements of Cash Flows Years Ended December 31, 1995 1994 1993 Cash flows from operating activities Net income........................................$ 8,994 $ 8,277 $ 7,802 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Undistributed (earnings) loss of subsidiaries.... (5,248) (7,428) (6,690) Changes in operating assets and liabilities: (Increase) decrease in other assets........... (519) (142) 188 (Decrease) increase in other liabilities...... 142 73 91 -------- -------- -------- Net cash provided by/(used in) operating activities......................... 3,369 780 1,391 -------- -------- -------- Cash flows from investing activities Proceeds of interest-bearing deposits in other banks.................................. none none 100 Purchase of investment securities................ (81) none none -------- -------- -------- Net cash provided by/(used in) investing activities................................... (81) none 100 -------- -------- -------- Cash flows from financing activities Proceeds from issuance of common stock........... 1,731 2,645 1,629 Cash dividends paid.............................. (5,260) (3,386) (2,985) Cash dividends paid in lieu of fractional shares............................... none none (32) Acquisition of treasury stock.................... (1,252) (379) (267) Proceeds from issuance of treasury stock......... 1,207 241 526 -------- -------- -------- Net cash provided by/(used in) financing activities.................................... (3,574) (879) (1,129) -------- -------- -------- Increase (decrease) in cash.................... (286) (99) 362 Cash Beginning....................................... 291 390 28 -------- -------- -------- Ending.........................................$ 5 $ 291 $ 390 ========= ======== ========
Summary of Quarterly Financial Data (Unaudited) Sterling Financial Corporation and Subsidiaries The following is a summary of the quarterly results of operations for the years ended December 31, 1995 and 1994. Net income per share of common stock has been restated to retroactively reflect a two-for-one stock split in the form of a 100% stock dividend paid in September 1994.
1995 Quarter Ended March June September December 31 30 30 31 Interest income..................$ 11,536 $ 12,090 $ 12,509 $ 12,715 Interest expense................. 4,776 5,258 5,529 5,590 --------- ------- -------- -------- Net interest income.............. 6,760 6,832 6,980 7,125 Provision for loan losses........ 151 126 182 75 --------- ------- -------- -------- Net interest income after provision for loan losses...... 6,609 6,706 6,798 7,050 Other income..................... 1,905 1,964 2,127 2,297 Other expenses................... 5,687 5,809 5,809 6,118 --------- -------- -------- -------- Income before income taxes....... 2,827 2,861 3,116 3,229 Applicable income taxes.......... 696 718 794 831 --------- -------- -------- -------- Net income.......................$ 2,131 $ 2,143 $ 2,322 $ 2,398 ========= ======== ======== ======== Net income per share of common stock...................$ .36 $ .36 $ .39 $ .41
1994 Quarter Ended March June September December 31 30 30 31 Interest income..................$ 9,810 $ 10,253 $ 10,646 $ 11,222 Interest expense................. 3,421 3,468 3,858 4,179 --------- ------- -------- -------- Net interest income.............. 6,389 6,785 6,788 7,043 Provision for loan losses........ 182 425 309 165 --------- ------- -------- -------- Net interest income after provision for loan losses...... 6,207 6,360 6,479 6,878 Other income..................... 1,778 1,710 1,764 1,791 Other expenses................... 5,354 5,388 5,493 5,818 --------- -------- -------- -------- Income before income taxes....... 2,631 2,682 2,750 2,851 Applicable income taxes.......... 666 686 645 640 --------- -------- -------- -------- Net income.......................$ 1,965 $ 1,996 $ 2,105 $ 2,211 ========= ======== ======== ======== Net income per share of common stock...................$ .34 $ .34 $ .36 $ .38
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10 - Directors and Executive Officers of the Registrant Incorporated by reference is the information appearing under the headings "Information about Nominees and Continuing Directors" and "Officers and Executive Officers" of the 1996 Annual Meeting Proxy Statement. Item 11 - Executive Compensation Incorporated by reference is the information under the headings "Compensation of Directors" and "Executive Compensation" of the 1996 Annual Meeting Proxy Statement. Item 12 - Security Ownership of Certain Beneficial Owners and Management Incorporated by reference is the information appearing under the headings "Principal Holders" and "Beneficial Ownership of Executive Officers, Directors and Nominees" of the 1996 Annual Meeting Proxy Statement. Item 13 - Certain Relationships and Related Transactions Incorporated by reference is the information appearing under the heading "Transactions with Directors and Executive Officers" of the 1996 Annual Meeting Proxy Statement and under "Notes to Consolidated Financial Statements - Note 16 - Related Party Transactions" on page 46 of this Form 10-K. PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports of Form 8-K (a) The following documents are filed as part of this report: 1. The financial statements listed on the index set forth in Item 8 of this Annual Report on Form 10-K are filed as part of this Annual Report. 2. Financial Statement Schedules All schedules are omitted because they are not applicable, the data are not significant or the required information is shown in the financial statements or the notes thereto or elsewhere herein. 3. Exhibits The following is a list of the Exhibits required by Item 601 of Regulation S-K and are incorporated by reference herein or annexed to this Annual Report. 3(i) Articles of Incorporation of Sterling Financial Corporation incorporated by reference to Exhibit 3 of Registration Statement on Form S-4 (No. 33-12635) filed with the Securities and Exchange Commission on March 13,1987. 3(ii) Amended Bylaws of Sterling Financial Corporation incorporated by reference to Exhibit 3(ii) of Form 8-K filed with the Securities and Exchange Commission on March 7, 1996. 10. Material Contracts - 10 a. Employment Agreement of John E. Stefan, Chairman of the Board, President and Chief Executive Officer of Sterling Financial Corporation and Bank of Lancaster County, N.A. - incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1987. 21. Subsidiaries of the Registrant 23. Consent of Auditors 27. Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K dated December 1, 1995 was filed December 7, 1995 pursuant to item 5 of Form 8-K reporting that Bank of Lancaster County, N.A., a wholly-owned subsidiary of Sterling Financial Corporation, completed the acquisition of branches previously announced in August, 1995. A report on Form 8 - K dated March 7, 1996 was filed March 7, 1996 pursuant to item 5 of Form 8-K reporting and filing amended Bylaws of Sterling Financial Corporation. Signatures Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ John E. Stefan John E. Stefan Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title Date Chairman of the Board, /s/ John E. Stefan President and Chief February 27, 1996 (John E. Stefan) Executive Officer; Director /s/ Jere L. Obetz Senior Vice President/Treasurer, February 27, 1996 (Jere L. Obetz) Chief Financial Officer /s/ Ronald L. Bowman Vice President/Secretary, February 27, 1996 (Ronald L. Bowman) Principal Accounting Officer /s/ Richard H. Albright, Jr. Director February 27, 1996 (Richard H. Albright, Jr.) /s/ John E. Burkholder Director February 27, 1996 (John E. Burkholder) /s/ Robert H. Caldwell Director February 27, 1996 (Robert H. Caldwell) /s/ Howard E. Groff, Jr. Director February 27, 1996 (Howard E. Groff, Jr.) /s/ Joan R. Henderson Director February 27, 1996 (Joan R. Henderson) /s/ J. Robert Hess Director February 27, 1996 (J. Robert Hess) Director February 27, 1996 (Calvin G. High) /s/ J. Roger Moyer, Jr. Director February 27, 1996 (J. Roger Moyer, Jr.) /s/ E. Glenn Nauman Director February 27, 1996 (E. Glenn Nauman) /s/ Glenn R. Walz Director February 27, 1996 (Glenn R. Walz)
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.) 640 East Oregon Road Lancaster, PA 17601 Sterling Mortgage Services, Inc. Pennsylvania (Presently inactive) 101 North Pointe Boulevard Lancaster, PA 17601-4133 Trout, Ebersole & Groff, LLP Certified Public Accountants 1705 Oregon Pike Lancaster, Pennsylvania 17061 Exhibit 23 Consent of Independent Certified Public Accountants We hereby consent to the incorporation by reference in Registration Statement No. 33-55131 on Form S-3 filed August 19, 1994 of our opinion dated January 19, 1996, on the consolidated financial statements of Sterling Financial Corporation for the year ended December 31, 1995 as set forth in this form 10-K. /s/ Trout, Ebersole & Groff, LLP Trout, Ebersole & Groff, LLP Certified Public Accountants Lancaster, Pennsylvania March 4, 1996 Exhibit Index Page Exhibits Required Pursuant to (in accordance with Item 601 of Regulation S-K sequential numbering system) 3(i). Articles of Incorporation of Sterling Financial Corporation incorporated by reference to Exhibit 3 of Registration Statement on Form S-4 (No. 33-12635) filed with the Securities and Exchange Commission on March 13, 1987 3(ii). Amended Bylaws of Sterling Financial Corporation incorporated by reference to Exhibit 3(ii) on Form 8-K filed with the Securities and Exchange Commission on March 7, 1996 10. Material Contracts - 10a. Employment Agreement of John E. Stefan, President and Chief Executive Officer of Sterling Financial Corporation and Bank of Lancaster County, N.A. - incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1987 21. List of Subsidiaries 54 23. Consent of Auditors 55 27. Financial Data Schedule EX-27 2
9 0000811671 STERLING FINANCIAL CORP 1000 US YEAR DEC-31-1995 DEC-31-1995 1 35414 24 9350 0 68967 122885 124066 427274 7780 711154 610105 2234 13383 21523 29663 0 0 34246 711154 37975 10875 0 48850 19093 21153 27697 534 0 23423 12033 12033 0 0 8994 1.52 1.52 4.99 1010 330 0 0 7640 676 282 7780 7780 0 0
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