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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
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-16276
STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2449551
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Pointe 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. |X|
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 28, 1997 was approximately $120,131,630.
The number of shares of Registrant's Common Stock outstanding on February 28,
1997 was 6,224,830.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 1997 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............................................. 3
Item 2. Properties........................................... 5
Item 3. Legal Proceedings.................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.. 6
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 7
Item 6. Selected Financial Data.............................. 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
Item 8. Financial Statements and Supplementary Data.......... 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 64
Part III
Item 10. Directors and Executive Officers of the Registrant... 64
Item 11. Executive Compensation............................... 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 64
Item 13. Certain Relationships and Related Transactions....... 64
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 65
Signatures...................................................... 67
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 major 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, 1996, the Bank had total assets of
$763,966,000 and total deposits of $648,205,000.
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-seven (27)
branches in Lancaster County and one (1) branch in Chester County, Pennsylvania
in operation at December 31, 1996.
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
over $273 million at December 31, 1996.
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 1097 Commercial Avenue,
East Petersburg, PA.
Town & Country, Inc. employs thirty eight (38) 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 448,000 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 1996 was 2.8% which was lower than
the statewide rate (4.9%) and national (5.3%) level. 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 14 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 $203
million to over $57 billion. Four (4) 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 $45 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, 1996, 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, 1996, the Bank had
total assets of over $763 million and ranked ninth 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, 1996, there were 422 persons employed by the Bank, of
which 319 were full-time and 103 were part-time. These figures do not include
employees of Town & Country, Inc. which employed 38 persons.
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, 1996, a
branch network of 28 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 fifteen (15) 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 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 1996 did not exceed three percent of the
Bank's operating expenses.
On December 4, 1996, the Bank purchased a property located at 1097
Commercial Avenue, East Petersburg, PA, situated on 12.7 acres with a building
containing approximately 123,000 square feet. The building is used to house the
Bank's Administrative Service Center as well as other departments of the Bank.
Town & Country, Inc., a wholly owned subsidiary of the Bank, also occupies this
building. The building is owned in fee by the Bank, free and clear of
encumbrances.
The building which previously housed the Administrative Service Center was
sold and settlement took place on February 21, 1997.
The building formerly occupied by Town & Country, Inc. is under agreement
of sale and settlement should take place on or before April 1, 1997.
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, 1996, 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 1996.
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
35,000,000 shares of common stock authorized and the total number of shares
outstanding as of December 31, 1996 was 6,220,078. As of December 31, 1996, the
Corporation had approximately 2,915 holders of record of its common stock.
There is no other class of common stock authorized or outstanding.
During 1996, the price range of the common stock known by management to have
traded was $23.875 to $28.25 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 18 to the 1996
Consolidated Financial Statements elsewhere herein. The Corporation paid a 5%
stock dividend in July 1996. 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 5% stock
dividend in 1996. 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.
1996 Bid Ask Dividend
First Quarter $25.18 $26.13 $.18
Second Quarter 26.36 26.60 .18
Third Quarter 26.25 26.75 .19
Fourth Quarter 25.25 26.25 .19
1995 Bid Ask Dividend
First Quarter $27.55 $28.74 $.15
Second Quarter 28.03 28.98 .40
Third Quarter 27.79 28.50 .17
Fourth Quarter 27.31 28.50 .17
The prices used in the previous table represent bid and asked prices
furnishe by F.J. Morrissey & Company; Hopper Soliday & Co., Inc.; Legg Mason
Wood Walker, Inc.; Prudential Securities; Ryan, Beck & Company;
or The National Quotation Bureau. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission.
The Corporation maintains a Dividend Reinvestment and Stock Purchase Plan
for eligible shareholders who elect to participate in the plan. A copy of the
Prospectus for this plan can be obtained by writing to: Bank of Lancaster
County, N.A. Dividend Reinvestment and Stock Purchase Plan, 101 North
Pointe Boulevard, Lancaster, Pennsylvania 17601-4133.
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with
the Corporation's consolidated financial statements and the accompanying
notes presented elsewhere herein.
Summary of Operations
(Dollars in thousands, except per share data)
Years Ended 1996 1995 1994 1993 1992
Interest income.............$ 52,558 $ 48,850 $ 41,931 $ 40,092 $ 40,284
Interest expense............ 22,823 21,153 14,926 15,042 17,818
------ ------ ------ ------ ------
Net interest income......... 29,735 27,697 27,005 25,050 22,466
Provision for loan losses... 580 534 1,081 2,430 2,296
------ ------ ------ ------ ------
Net interest income after
provision for loan losses.. 29,155 27,163 25,924 22,620 20,170
Other income................ 10,572 8,293 7,043 8,979 7,926
Other expenses.............. 26,769 23,423 22,053 21,048 18,922
------ ------ ------ ------ ------
Income before income taxes.. 12,958 12,033 10,914 10,551 9,174
Applicable income taxes..... 3,147 3,039 2,637 2,749 2,331
------ ------ ------ ------ ------
NET INCOME..................$ 9,811 $ 8,994 $ 8,277 $ 7,802 $ 6,843
====== ====== ====== ====== ======
Per Common Share:*
Net income..................$ 1.57 $ 1.45 $ 1.35 $ 1.30 $ 1.15
Cash dividends declared**. .74 .89 .58 .54 .48
Book value................ 11.12 10.79 9.76 8.58 7.56
Book value (excluding
SFAS 115)............... 10.86 10.51 9.69 8.58 7.56
Average shares outstanding 6,235,257 6,204,212 6,128,058 6,013,937 5,916,198
Ratios:
Return on average assets.. 1.34% 1.36% 1.38% 1.41% 1.34%
Return on average equity.. 15.01% 15.02% 15.47% 16.90% 16.99%
Financial Condition at
Year-End:
Assets.................... $ 764,072 $ 711,154 $ 633,395 $ 587,883 $ 544,404
Loans (net of unearned)... 473,832 426,312 392,649 359,365 348,529
Deposits.................. 647,036 610,105 537,002 505,680 473,184
Stockholders' Equity***... 69,179 63,909 57,285 49,467 42,794
Average Assets............ 732,226 659,335 600,263 555,216 510,439
*Figures prior to 1996 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 1996 was $9,811,000, an increase of $817,000 or 9.1% over
the $8,994,000 earned in 1995. The results of 1995 were $717,000 or
8.7% higher than the $8,277,000 reported in 1994.
Earnings per share on net income amounted to
$1.57, $1.45, and $1.35 for the years ended 1996, 1995 and 1994 respectively.
Earnings per share were computed by dividing net income by the weighted average
number of shares of common stock outstanding which were 6,235,257, 6,204,212 and
6,128,058 for 1996, 1995 and 1994 respectively. Figures prior to 1996 were
retroactively restated to reflect a 5% stock dividend paid in July 1996 and a
two-for-one stock split in the form of a 100% stock dividend paid in 1994.
Return on average total assets was 1.34% in 1996 compared to 1.36% in 1995
and 1.38% in 1994. Return on average stockholders' equity was 15.01% in 1996
compared to 15.02% in 1995 and 15.47% in 1994.
Growth in earning assets was the primary factor contributing to the
increased earnings in 1996, while in 1995, both volume and an increase in rates
contributed to increased earnings. As of December 31, 1996, earning assets were
approximately $673 million compared to $629 million at December 31, 1995 and
$563 million at December 31, 1994. Average earning assets for 1996
increased nearly $61 million to approximately $648 million,
up 10.3% from the prior year. Similarly, in 1995 average earning
assets increased approximately $49 million, up 9.1% from 1994.
The current year increase was primarily due to an increase in
loans while in 1995 it was primarily due to increases in both loans and
investments.
Average interest-bearing liabilities increased nearly $59 million or 11.3%
in 1996 compared to an increase of nearly $48 million, or 10.2% in 1995.
The increase in average earning assets exceeded the increase in average
interest-bearing liabilities in both 1996 and 1995.
Provision for loan losses increased to $580,000 in 1996 from $534,000 in
1995. The provision in 1994 was $1,081,000.
Non-interest income increased $2,279,000 in 1996. This compares to an
increase of $1,250,000 in 1995. In 1996, all categories of non-interest income
reflected increases over the previous year.
Non-interest expenses increased $3,346,000 or 14.3% in 1996 compared to an
increase of $1,370,000 or 6.2% in 1995 over 1994.
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 1995 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 then 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 were 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 was included in the
lowest premium paying category, the Bank anticipated paying the statutory annual
minimum of $2,000 in 1996. However, the Deposit Insurance Funds Act of 1996
eliminated the minimum assessment, resulting in a $500 refund (representing the
minimum assessment for the fourth quarter of 1996). As a result of the above
FDIC action, the Bank experienced a reduction of the FDIC assessment in 1996
over 1995 as well as a reduction in 1995 over 1994.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 to recapitalize the Savings Association Insurance Fund
("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC")
and to provide for repayment of the FICO (Financial Institution
Collateral Obligation) bonds issued by the United States Treasury
Department. The FDIC will levy a one-time special assessment on SAIF
deposits equal to 65.7 cents per $100 of the SAIF-assessable deposit base as of
March 31, 1995. During the years 1997, 1998 and 1999, the Bank Insurance Fund
("BIF") will pay $322 million of FICO debt service, and SAIF will pay
$458 million.
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institution's assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the
assessments as necessary to maintain the funds at their target capital
ratios provided by law. After 1999, BIF and SAIF will share the
FICO costs equally. Under current estimates, BIF and SAIF assessment
bases would each be assessed at the rate of approximately 2.43 cents
per $100 of deposits. The FICO bonds will mature in 2018-2019, ending the
interest payment obligation.
The law provides that BIF and SAIF are to merge to form the Deposit
Insurance Fund ("DIF") at the beginning of 1999, provided that there are no SAIF
institutions in existence at that time. Merger of the Funds will require state
laws to be amended in those states authorizing savings associations to eliminate
that authorization. This provision reflects Congress's apparent intent to merge
thrift and commercial bank charters by January 1999; however, no law has yet
been enacted to achieve that purpose.
Based on current deposit levels, management expects that the increase in
the FDIC assessment rate will adversely impact results of operations in an
amount estimated at $82,000 for 1997.
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 1996, 1995 and 1994.
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 1996 resulted from increased volumes in
average earning assets. The increases in net interest income during 1995 was
due primarily to increased volumes and interest rates in average earning
assets. Average earning assets increased 10.3% in 1996 and 9.1% in 1995.
These increases were primarily funded with interest-bearing
liabilities which increased 11.3% in 1996 and 10.2% in 1995.
Table 1 - Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential-Tax Equivalent Yields
(Unaudited)
Years ended December 31,
1996 1995 1994
Average Annual Average Annual Average Annual
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Interest bearing deposits
with banks..............$ 103 $ 6 5.72% $ 30 $ 2 6.78% $ 55 $ 2 3.79%
Federal Funds sold......... 7,376 398 5.39% 7,583 449 5.92% 6,247 264 4.24%
Investment securities:
U.S. Treasury securities. 28,789 1,686 5.86% 28,696 1,675 5.84% 26,560 1,471 5.54%
U.S. Government agencies. 33,895 2,192 6.47% 27,999 1,761 6.29% 23,353 1,395 5.97%
State and Municipal
securities.............. 57,966 4,615 7.96% 48,884 4,083 8.35% 44,442 3,781 8.51%
Other securities......... 57,189 3,535 6.18% 66,990 4,294 6.41% 62,476 3,961 6.34%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total investment securities177,839 12,028 6.76% 172,569 11,813 6.85% 156,831 10,608 6.76%
Loans:
Commercial...............245,018 22,276 9.09% 226,032 21,284 9.42% 207,844 17,743 8.54%
Consumer.................130,044 11,401 8.77% 106,171 9,766 9.20% 103,572 8,861 8.56%
Mortgages................ 41,046 3,330 8.11% 32,739 2,771 8.46% 26,704 2,274 8.51%
Leases................... 46,420 4,865 10.48% 41,974 4,350 10.36% 36,802 3,667 9.96%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total loans................462,528 41,872 9.05% 406,916 38,171 9.38% 374,922 32,545 8.68%
------- ------- ------ -------- ------- ------ -------- ------- -----
Total earning assets.......647,846 54,304 8.38% 587,098 50,435 8.59% 538,055 43,419 8.07%
Allowance for loan losses.. (7,863) (7,155) (7,472)
Cash and due from banks.... 30,238 27,763 27,746
Other non-earning assets... 62,005 51,629 41,934
------- -------- --------
Total non-earning assets... 84,380 72,237 62,208
------- -------- ------ -------- -------- ------ -------- -------- -----
Total assets..............$732,226 $ 54,304 7.42% $659,335 $ 50,435 7.65% 600,263 $ 43,419 7.23%
======== ======== ====== ======== ======== ====== ======== ======= ======
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits
Noninterest-bearing....$ 72,052 $ 0 0.00% $ 66,133 $ 0 0.00% $64,446 $ 0 0.00%
Demand deposits
Interest-bearing........257,622 6,726 2.61% 239,036 7,181 3.00% 229,693 5,375 2.34%
Savings deposits......... 58,232 1,288 2.21% 54,982 1,333 2.42% 58,864 1,324 2.25%
Time deposits............229,835 12,695 5.52% 194,512 10,579 5.44% 158,994 6,884 4.33%
------- -------- ------ -------- ------- ------ -------- ------- -----
Total deposits.............617,741 20,709 3.35% 554,663 19,093 3.44% 511,997 13,583 2.65%
Other borrowed funds....... 30,578 2,114 6.91% 29,143 2,060 7.07% 22,144 1,343 6.06%
Other liabilities.......... 17,122 14,856 12,227
Stockholders' equity....... 66,785 60,673 53,895
------- -------- ------ -------- ------- ------ -------- ------- -----
Total liabilities and
Stockholders' equity....$732,226 $ 22,823 3.12% $659,335 $ 21,153 3.21% $600,263 $ 14,926 2.49%
======== ======== ====== ======== ======== ====== ======== ======== =====
Net interest income/
Average total assets...... $ 31,481 4.30% $ 29,282 4.44% $ 28,493 4.75%
Net interest income/
Average earning assets.... $ 31,481 4.86% $ 29,282 4.99% $ 28,493 5.30%
Net interest income on a fully taxable equivalent basis increased by
$2,199,000 in 1996 compared to an increase of $789,000 in 1995. Table 2
indicates that of the increase in 1996, $2,910,000 was the result of increased
volumes. This figure was reduced by $711,000 as a result of decreases in
interest rates. The decrease in interest rates had more of an effect on
interest paid on earning assets than on interest-bearing liabilities. The
increase in 1995 resulted in $1,803,000 from increased volumes
while a reduction of $1,014,000 was realized from
increases in interest rates.
For the year 1996 compared to 1995, loan volumes, on average, increased
nearly $56 million and income earned on loans increased $3,701,000, tax
adjusted. This compares to a volume increase of nearly $32 million in 1995
over 1994 with an increase in income earned on loans
amounting to $5,626,600. As a result of increased volumes in 1996,
nearly $5.2 million contributed to the increase in
income on loans. Rates charged on loans decreased in late 1995 and into 1996.
The decrease in rates reduced interest over $1.5 million in income earned on
loans. Increased volumes in loans in 1995 contributed over $2.8 million to the
increase in income while $2.8 million was realized due to increases in interest
rates.
Total investment securities, on average, increased over $5.2 million in
1996 over 1995 compared to an increase of over $15.7 million in 1995 over 1994.
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 1996, $361,000 was the
result of increased volumes while a $146,000 reduction resulted
from a decrease in interest rates. Increased volumes
in securities in 1995 contributed nearly $1.1 million to the increase while
$141,000 was generated from an increase in rates.
Interest-bearing deposits, on average, grew over $57 million in 1996. The
major portion of the increase in interest expense on deposits was generated on
time deposits as a result of increased volumes and rates paid for these
deposits. Although there were increased volumes on the other deposits,
the decrease in rates paid on these deposits reduced
the total interest expense by $500,000. In
addition to an increase in interest expense due to volumes, interest expense
increased due to increases in rates paid on these deposits in 1995. The
asssumption of certain deposit liabilities as a result of the acquisition of two
retail banking offices from CoreStates on December 1, 1995 added over $20
million in interest-bearing deposits at that particular time.
Table 2 - Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below, which is
computed on a tax equivalent basis, analyses changes in net interest income for
the periods indicated by their rate and volume components.
1996 Versus 1995 1995 Versus 1994
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
Interest Income
Interest on deposits
with banks...........$ 5 $ (1) $ 4 $ (1) $ 1 $ 0
Interest on federal
funds sold........... (12) (39) (51) 57 128 185
Interest on investment
securities........... 361 (146) 215 1,064 141 1,205
Interest and fees on
loans................ 5,216 (1,515) 3,701 2,777 2,849 5,626
------- -------- --------- -------- -------- -------
Total interest income...$ 5,570 $ (1,701) $ 3,869 $ 3,897 $ 3,119 $ 7,016
------- -------- --------- -------- -------- -------
Interest Expense
Interest on
interest-bearing
demand deposits......$ 558 $ (1,013) $ (455) $ 219 $ 1,587 $ 1,806
Interest on
savings deposits...... 79 (124) (45) (87) 96 9
Interest on
time deposits......... 1,921 195 2,116 1,538 2,157 3,695
Interest on
borrowed funds........ 102 (48) 54 424 293 717
------- -------- -------- -------- -------- --------
Total interest expense..$ 2,660 $ (990) $ 1,670 $ 2,094 $ 4,133 $ 6,227
------- -------- -------- -------- -------- --------
Net interest income.....$ 2,910 $ (711) $ 2,199 $ 1,803 $ (1,014) $ 789
======= ======== ======== ======== ======== ========
Provision for Loan Losses
The provision for loan losses charged against earnings was $580,000 in 1996
compared to $534,000 in 1995 and $1,081,000 in 1994. 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 $560,000 in 1996, $394,000 in 1995 and
$621,000 in 1994. The 1996 increase in net charge-offs compared to 1995 was due
to substantial recoveries in 1995 that were not present in 1996. Gross charge-
offs for 1996 were $703,000, a slight increase over the $676,000 reported in
1995.
The allowance for loan losses as a percent of loans at December 31, 1995
was 1.82%, while at December 31, 1996 it was 1.65%.
Non-Interest Income
Table 3 - Non-Interest Income
1996/1995 1995/1994
Increase Increase
(Decrease) (Decrease)
1996 Amount % 1995 Amount % 1994
Income from fiduciary activities.$ 1,139 $ 283 33.1% $ 856 $ 114 15.4% $ 742
Service charges on deposit
accounts....................... 2,485 475 23.6% 2,010 212 11.8% 1,798
Other service charges, commissions
and fees....................... 2,074 358 20.9% 1,716 177 11.5% 1,539
Mortgage banking income........... 1,192 667 127.0% 525 (110) (17.3%) 635
Other operating income............ 3,524 338 10.6% 3,186 857 36.8% 2,329
Investment securities gains or
(losses)....................... 158 158 -- 0 0 .0% 0
------ ------ ------ ------ ------- ------ ------
Total............................$10,572 $ 2,279 27.5% $8,293 $ 1,250 17.7% $7,043
======= ======= ====== ====== ======= ====== ======
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 $1,139,000 in 1996 was
$283,000 or 33.1% greater than the $856,000 recorded in 1995. Income in 1995
was $114,000 or 15.4% greater than the $742,000 recorded in 1994. Fees
increased primarily due to increased transaction volumes.
Service charges on deposit accounts increased to $2,485,000, an increase of
$475,000 or 23.6% over 1995 service charge income of $2,010,000. Service
charges on deposit accounts in 1995 was $212,000 more than the $1,798,000
reported for 1994.
Other service charges, commissions and fees amounted to $2,074,000 in 1996
compared to $1,716,000 in 1995 and $1,539,000 in 1994. Major contributors to
the increase in 1996 were certain fees relating to VISA operations and
fees received on mutual funds transactions.
Income from mortgage banking activities increased to $1,192,000 in 1996
from $525,000 in 1995 due to two factors. Mortgages sold in the secondary
market in 1996 increased to $33.2 million from $16.1 million in 1995.
All mortgages sold were originated by the Bank's mortgage operation and
branch network. No mortgages were acquired from third parties,
nor have servicing rights been purchased from third parties.
A low and reasonably stable interest rate environment in 1996, as well as an
expansion in mortage products and services, resulted in the increase in volume
in 1996. The Bank retains mortgage servicing rights on the majority of
mortgages originated and sold on the secondary market.
The Bank's mortgage servicing portfolio totaled $155 million as of December 31,
1996 compared to $142 million on December 31, 1995.
The other component of mortgage banking profitability increase was a direct
result of the implementation of FASB 122 (subsequently replaced by FASB 125)
which required that mortgage servicing rights be recognized for their economic
value, as of January 1, 1996. Mortgage servicing has a value because of future
servicing income over the life of the mortgage. The value of servicing rights
is available through third party purchasers in private transactions.
The Bank has developed a business relationship with a third
party mortgage company and values mortgage servicing from their
price offerings. The Bank recognized $470,805 in mortgage servicing values
in 1996 for its originated servicing portfolio, when in
previous years no value was recognized. Mortgage servicing rights are recorded
as an asset and recognized directly to income as if the servicing had been
sold. The asset is amortized as a charge to earnings over the estimated
servicing life of the associated mortgage. Mortgage servicing
assets as of December 31, 1996 totaled $442,037. Actual pay-off of mortgages
serviced with a recorded asset value are immediately charged against earnings.
Other operating income increased $338,000 to $3,524,000 in 1996 from
$3,186,000 in 1995. Other income for 1994 was $2,329,000. A major contributor
to other operating income is income generated from operating leases. Income on
operating leases increased over $430,000 in 1996 over 1995. This compares to an
increase of over $476,000 in 1995 over 1994. Another contributor to the
increase in 1995 was a gain on other real estate
sold of nearly $270,000.
Investment securities transactions reflect a gain of $158,000 in 1996 on
securities sold, from the available-for-sale securities. There were no
securities sold during 1995 or 1994.
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 $2,279,000
in 1996 over 1995 compared to an increase of $1,250,000 in 1995 over 1994.
Non-Interest Expense
Table 4 - Non-Interest Expense
1996/1995 1995/1994
Increase Increase
(Decrease) (Decrease)
1996 Amount % 1995 Amount % 1994
Salaries and employee benefits...$15,027 $ 1,987 15.2% $13,040 $ 776 6.3% $12,264
Net occupancy expense............. 2,109 388 22.5% 1,721 244 16.5% 1,477
Furniture & equipment expense..... 2,044 439 27.4% 1,605 226 16.4% 1,379
FDIC insurance assessment......... 2 (620)(99.7%) 622 (506) (44.9%) 1,128
Other operating expense........... 7,587 1,152 17.9% 6,435 630 10.9% 5,805
----- ------ ----- ------ ----- ----- -------
Total............................$26,769 $ 3,346 14.3% $23,423 $1,370 6.2% $22,053
======= ======= ===== ====== ====== ===== =======
Non-interest expense consists of salaries and employee benefits, net
occupancy expense, furniture and equipment expense and other operating expenses.
Total operating expenses for 1996 were $26,769,000 compared to $23,423,000
in 1995. This represented an increase of $3,346,000 or 14.3%. This compares to
an increase of $1,370,000 or 6.2% in 1995.
The largest component of the Corporation's other operating expense is
salaries and employee benefits which increased to $15,027,000 in 1996 or
$1,987,000 (15.2%) over the $13,040,000 reported in 1995. In 1995, expenses
increased $776,000 (6.3%) over the $12,264,000 reported in 1994. The increase
in 1996 and 1995 was primarily due to increases in staff as well
as increases in wages and increased costs of employee benefits.
During 1996 four branch offices were opened and two branch offices
were acquired from another financial institution in December 1995.
Occupancy expense increased $388,000 or 22.5% to $2,109,000 in 1996 from
$1,721,000 in 1995. By comparison, during 1995, there was an increase of
$244,000 or 16.5%. The Bank added four branch facilities to its network in
1996. In addition, the Bank completed construction of a new
headquarters building in 1995 which also includes branch banking
facilities and two branch offices were acquired from another
financial institution in December 1995. These additions
along with expenses relating to occupancy such as real estate taxes, insurance,
utilities, maintenance and janitor services contributed to the increase in
occupancy expense.
Furniture and equipment expenses were $2,044,000 for 1996 and $1,605,000
for 1995. This represents an increase of $439,000 or 27.4%. Reflected in this
increase is an increase of depreciation expense in 1996 amounting to $339,000.
Service contracts on equipment was another major contributor to the increase in
1996. Expenses in 1995 were $226,000 greater than those recorded in 1994.
There was a significant reduction in the FDIC insurance assessment in 1996
over 1995 as well as 1995 over 1994. Those reductions were a result of a new
assessment rate schedule approved by the FDIC.
Other operating expenses increased $1,152,000 or 17.9% in 1996 compared to
an increase of $630,000 in 1995. The increase noted in 1996 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 1996 were increases in marketing
expense, Pennsylvania Shares Tax, professional services, postage, stationery and
forms, VISA fees, MAC fees, telephone expense and training and development
expense.
Income Taxes
Income tax expense totaled $3,147,000 in 1996 compared to $3,039,000 in 1995
and $2,637,000 in 1994. These increases resulted from higher levels of taxable
income and increased earnings each year. The Corporation's effective tax rate
was 24.3% in 1996 compared with 25.3% in 1995 and 24.2% in 1994. Utilization of
tax credits in 1996 resulted in a lower effective tax rate than 1995 even though
income before taxes increased. Additional information related to income
taxation is presented in the Notes to Consolidated Financial Statements.
Financial Condition
Investment Portfolio
Table 5 - Investment Securities at Cost
The following table shows the amortized cost of the held-to-maturity
securities owned by the Corporation as of the dates indicated. Investment
securities are stated at cost adjusted for amortization of premiums and
accretion of discounts.
December 31,
1996 1995 1994
U.S. Treasury securities................$ 12,888 $ 18,837 $ 28,225
Obligations of other U.S. Government
agencies and corporations............. 11,607 18,473 24,101
Obligations of states and political
subdivisions.......................... 37,584 40,212 50,472
Mortgage-backed securities.............. 2,076 3,854 5,122
Other bonds, notes and debentures....... 27,269 38,944 50,811
--------- --------- ---------
Subtotal................................ 91,424 120,320 158,731
Non-marketable securities............... 2,798 2,565 2,429
--------- --------- ---------
Total...................................$ 94,222 $ 122,885 $ 161,160
========= ========= =========
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 $54,218,000 was moved from held-to-maturity to available-for-sale.
December 31,
1996 1995 1994
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- -------- -------- ----------- --------
U.S. Treasury securities............$ 13,611 $ 13,598 $ 11,046 $ 11,155 $ 1,472 $ 1,457
Obligations of other U.S. Government
agencies and corporations.......... 18,800 18,718 15,489 15,632 none none
Obligations of states and political
subdivisions....................... 20,488 20,819 19,622 19,945 none none
Mortgage-backed securities........... 1,125 1,117 1,249 1,242 1,344 1,256
Other bonds, notes and debentures.... 22,752 22,771 19,013 19,247 5,593 5,501
-------- --------- -------- -------- --------- --------
Subtotal............................. 76,776 77,023 66,419 67,221 8,409 8,214
Equity securities.................... 171 2,352 88 1,746 7 837
-------- --------- -------- -------- --------- --------
Total................................$ 76,947 $ 79,375 $ 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, 1996 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....$ 7,322 5.56% $ 5,566 5.84% $ --- ---% $ --- ---% $ 12,888 5.68%
Obligations of
other U.S.
Government
agencies and
corporations.. 1,903 5.72% 8,709 5.90% 994 7.02% --- ---% 11,606 5.97%
Obligations of
states and
political sub-
divisions..... 3,380 8.51% 12,486 6.52% 16,512 7.79% 5,206 7.48% 37,584 7.39%
Mortgage-backed
securities.... 114 8.34% 1,006 7.48% 577 8.45% 195 7.81% 1,892 7.86%
Other bonds,
notes and
debentures.... 11,259 6.22% 16,195 6.35% --- ---% --- ---% 27,454 6.30%
------- ----- -------- ------ -------- ------ ------- ------ -------- -----
$23,978 6.31% $43,962 6.27% $ 18,083 7.77% $ 5,401 7.49% $91,424 6.65%
======= ===== ======= ====== ======== ===== ======= ====== ======== =====
The following table shows the maturities of available-for-sale debt
securities at amortized cost as of December 31, 1996 and approximate weighted
average yields of such securities. Yields are shown on a tax equivalent basis,
assuming a 34% Federal income tax rate.
Over 1 thru Over 5 thru
1 Year and less 5 Years 10 Years Over 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury
securities....$ 500 6.52% $ 12,793 5.95%$ 318 6.21% $ --- ---% $ 13,611 5.98%
Obligations of
other U.S.
Government
agencies and
corporations.. 509 5.40% 12,485 6.23% 4,809 6.79% 997 8.15% 18,800 6.45%
Obligations of
states and
political sub-
divisions..... 258 6.89% 2,712 7.35% 14,087 7.93% 3,431 7.86% 20,488 7.83%
Mortgage-backed
securities.... 624 6.12% 501 5.99% --- ---% --- ---% 1,125 6.06%
Other bonds,
notes and
debentures.... 1,300 5.95% 21,452 6.43% --- ---% --- ---% 22,752 6.40%
------- ------ ------- ------ ------- ----- ------- ----- -------- ------
$ 3,191 6.06% $49,943 6.30% $ 19,214 7.62% $ 4,428 7.93% $ 76,776 6.71%
======= ====== ======== ====== ======== ====== ======= ====== ======== ======
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,
1996 1995 1994 1993 1992
Commercial, financial and
agricultural..............$ 239,701 $ 228,058 $ 208,918 $ 191,431 $ 172,482
Real estate-construction... 5,608 6,378 8,542 10,265 16,044
Real estate-mortgage....... 45,373 33,124 30,505 22,335 30,445
Consumer................... 136,989 116,210 106,921 101,256 99,444
Lease financing (net of
unearned income)......... 47,346 43,904 38,771 35,443 32,768
---------- ---------- ---------- ---------- ---------
Total loans.................$ 475,017 $ 427,674 $ 393,657 $ 360,730 $ 351,183
========== ========== ========== ========== =========
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, 1996:
After one
Within but within After
one year five years five years Total
Commercial, financial
and agricultural..........$ 103,588 $ 116,403 $ 19,710 $ 239,701
Real estate-construction..... 1,807 1,280 2,521 5,608
--------- --------- --------- ---------
$ 105,395 $ 117,683 $ 22,231 $ 245,309
========= ========= ========= =========
Loans due after one year totaling $86,853,000 have variable interest
rates. The remaining $53,061,000 in loans have fixed rates.
Table 9 - Nonaccrual, Past Due and Restructured Loans
The following table presents information concerning the aggregate amount of
nonaccrual, past due and restructured loans:
December 31,
1996 1995 1994 1993 1992
Nonaccrual loans...........$ 1,193 $ 1,010 $ 2,127 $ 2,960 $ 4,129
Accruing loans, past due
90 days or more......... 737 330 1,127 522 519
------- -------- -------- -------- --------
Total non-performing loans. 1,930 1,340 3,254 3,482 4,648
Other real estate owned.... 81 252 759 251 360
------- -------- -------- -------- --------
Total non-performing assets$ 2,011 $ 1,592 $ 4,013 $ 3,733 $ 5,008
======= ======== ======== ======== ========
Ratios:
Non-performing loans to
total loans.......... .41% .31% .83% .97% 1.33%
Non-performing assets to
total loans and other
real estate owned.... .42% .37% 1.02% 1.04% 1.44%
Non-performing assets to
total assets.......... .26% .22% .63% .63% .92%
Allowance for loan losses to
non-performing loans.. 404.1% 580.6% 234.8% 206.2% 116.1%
The economic conditions within the Corporation's market area remained
healthy in 1996. This is reflected in the unemployment rate for Lancaster
County, which is the Bank's primary market area. The jobless rate remained low
during the past year with fluctuations between 3.8% and 2.8%. 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 4.79%
that was reported for November 1996. The 2.8% reported in November is the
lowest rate since 1989. Predictions for the local
economy range from "solid improvement" to a "flat economy with declining
interest rates and low inflation".
The strength in the employment sector in Lancaster County was also seen at
the national level. Jobs grew by a strong 2.6 million in 1996 and the
employment rate held steady at 5.3% for December. The unemployment rate for
December 1995 stood at 5.6%. The strong job growth, particularly
evidenced in December 1996, provided further evidence that the
economy ended 1996 at a faster clip than analysts had expected. Economists are
predicting the U.S. economy will grow about the same rate as 1996.
The Bank's loan delinquency, as a percent of loans outstanding increased
during 1996. At December 31, 1996, this rate stood at .96% compared to .58% and
1.33% for December 31, 1995 and December 31, 1994, respectively. The increase
in the delinquency rates was primarily experienced in the retail portfolio,
particularly in the installment and credit card portfolios. The Bank is not
immune to the rising number of bankruptcies that occurred in 1996 nationwide.
While management believes delinquency rates could continue to trend upward
during 1997, expectations are that they will not approach the national
delinquency rates. The .96% remains well below the accepted level
established by management.
During the year, total nonaccrual loans and other real estate owned increased
slightly to $1,274,000 from $1,262,000 at December 31, 1995. Total non-
performing assets increased to $2,011,000 compared to $1,592,000 for December
31, 1995 representing a 26% increase. The increase was primarily
attributed to increases in the 90 day delinquency categories.
Other real estate declined while nonaccruals increased slightly.
Management is taking steps to ensure non-performing assets do not reach
unacceptable levels.
The Bank's reserve coverage declined during the year as reserves, as a
percent of non-performing loans, declined to 404% compared with 581% for
December 31, 1995 and 235% for 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. Lancaster County continues to be the top agricultural
county in the state, leading Pennsylvania in production of
most crops and all livestock with the exception of sheep.
Dairy production remains Lancaster County's number
one agricultural industry. Indications are that some segments of Lancaster
County farming are showing promising growth while others are moving ahead at a
steady pace. 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.
The residential real estate market in 1996 for Lancaster County produced a
strong performance. Home sales rose more than 6% from the previous year.
Reasonably low interest rates and a strong economy accounted for the
performance. Strong home sales are predicted through at least the first
half of 1997. Compared to 1995, 1996 was a soft year for
non-residential construction. In 1995, Lancaster County experienced
a non-residential construction boom when contracts
jumped 79%. Builders expect 1997 to be a very good year for non-residental
construction.
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 $1,193,000 at
December 31, 1996 compared to $1,010,000 at December 31, 1995.
If interest income had been recorded on all such loans for the
years indicated, such interest income would have been increased by
approximately $116,567 and $143,997 for 1996
and 1995 respectively. Interest income recorded on non-accrual loans
amounted to $27,532 and $93,795 for 1996 and 1995 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, 1996 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 following table presents information concerning impaired loans at
December 31:
1996 1995
Gross impaired loans which have allowances..........$1,193 $1,010
Less: Related allowances for loan losses......... (179) (349)
------ ------
Net impaired loans..................................$1,014 $ 661
====== ======
At December 31, 1996, 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, 1996.
Allowance for Loan Losses
Table 10 - Summary of Loan Loss Experience
Years ended December 31,
1996 1995 1994 1993 1992
Allowance for Loan Losses:
Beginning balance.............$ 7,780 $ 7,640 $ 7,180 $ 5,400 $ 4,400
Loans charged off during year:
Commercial, financial and
agricultural.............. 37 50 157 194 843
Real estate mortgage........ 184 252 235 392 201
Consumer.................... 458 360 360 290 471
Lease financing............. 24 14 10 14 97
------- ------- ------- ------- -------
Total charge-offs........... 703 676 762 890 1,612
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and
agricultural.............. 5 117 61 157 232
Real estate mortgage........ 42 72 2 8 none
Consumer.................... 88 91 77 63 76
Lease financing............. 8 2 1 12 8
------- ------- ------- ------- -------
Total recoveries............ 143 282 141 240 316
------- ------- ------- ------- -------
Net loans charged off......... 560 394 621 650 1,296
Additions charged to
operations.................. 580 534 1,081 2,430 2,296
------- ------- ------- ------- -------
Balance at end of year........$ 7,800 $ 7,780 $ 7,640 $ 7,180 $ 5,400
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding................. .12% .10% .17% .18% .39%
Ratio of net loans charged
off to loans at end of year. .12% .09% .16% .18% .37%
Net loans charged off to
allowance for loan losses.. 7.18% 5.06% 8.13% 9.05% 24.00%
Net loans charged off to
provision for loan losses.. 96.55% 73.78% 57.45% 26.75% 56.45%
Allowance for loan losses as a
percent of average loans... 1.69% 1.91% 2.04% 2.01% 1.64%
Allowance for loan losses
as a percent of loans at
end of year................ 1.65% 1.82% 1.95% 2.00% 1.55%
Allowance for loan losses
as a percent of
non-performing loans....... 404.1% 580.6% 234.8% 206.2% 116.1%
The Bank experienced a 4% increase in gross charge-offs, while net charge-
offs increased 42%. 1995 was an exceptionally good year for recoveries, thus
the substantial difference between the increase in gross charge-offs and net
charge-offs. For the year, the Bank recorded net charge-offs of
$560,000 or .12% of average loans outstanding, compared to $394,000 or .10% of
average loans in 1995 and $621,000 or .17% of average loans in 1994.
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and inherent risk deemed present in the loan portfolio. Management
performs a quarterly assessment of the loan portfolio to determine the
appropriate level of allowance. The factors considered in this evaluation
include, but are not limited to, estimated loan losses identified through a loan
review process, general economic conditions, deterioration in pledged
collateral, past loan experience and trends in delinquencies and
non-accruals. Management uses available information to determine the
appropriate level of the allowance
for possible loan losses. However, the allowance may be affected in the
future based upon changes in the economic conditions and
other factors. While there can
be no assurance that material amounts of additional loan loss provisions will
not be required in the future, management believes that, based upon information
presently available, the amount of the allowance for possible loan losses is
adequate.
Management has not targeted any specific coverage ratio of non-performing
loans by the allowance for loan losses and the coverage ratio may fluctuate
based on loans placed into or removed from non-performing status.
Table 11 - Allocation of Allowance for Loan Losses
December 31,
1996 1995
Commercial, financial and agricultural..........$ 3,471 $ 3,710
Real estate - mortgage.......................... 5 3
Consumer........................................ 590 523
Leases.......................................... 620 600
Unallocated..................................... 3,114 2,944
------- -------
Total...........................................$ 7,800 $ 7,780
======= =======
Deposits
Table 12 - Average Deposit Balances and Rates Paid
The average amounts of deposits and rates paid for the years indicated are
summarized below:
1996 1995 1994
Amount Rate Amount Rate Amount Rate
Demand deposits.....................$ 72,052 --- $ 66,133 --- $ 64,446 ---
Interest-bearing demand deposits.... 257,622 2.61% 239,036 3.00% 229,693 2.34%
Savings deposits.................... 58,232 2.21% 54,982 2.42% 58,864 2.25%
Time deposits....................... 229,835 5.52% 194,512 5.44% 158,994 4.33%
-------- ----- -------- ----- -------- -----
$617,741 3.35% $554,663 3.44% $511,997 2.65%
======== ===== ======== ===== ======== =====
Table 13 - Deposit Maturity
The maturities of time deposits of $100,000 or more are summarized below:
December 31,
1996 1995
Three months or less..........................$ 6,095 $ 5,881
Over three thru six months.................... 6,112 3,811
Over six thru twelve months................... 9,026 5,270
Over twelve months............................ 5,963 8,976
------- -------
Total.........................................$ 27,196 $ 23,938
======= =======
Capital
Stockholders' equity increased nearly $5.3 million or 8.2% in 1996 to
$69,179,000. Total stockholders' equity at December 31, 1995 in the amount of
$63,909,000 represents an increase of $6.6 million or 11.6% over the $57,285,000
reported at December 31, 1994. 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. There was no
significant change in equity as a result of change in net unrealized gain on
securities available-for-sale, net of taxes. 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
$4,508,000, $5,260,000 and $3,386,000 for 1996, 1995 and 1994 respectively.
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, 1996, 1995 and 1994 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, 1996 was 10.68% and the total risk-based
capital ratio was 11.93%,
which exceeds the minimum capital guidelines. Tier 1 capital ratio was 10.95%
and the total risk-based capital ratio was 12.21% at December 31, 1995
while Tier 1 capital ratio was 11.05% and the total risk-based
capital ratio was 12.3% at December 31, 1994.
On December 4, 1996, the Bank purchased a property located at 1097
Commercial Avenue, East Petersburg, PA situated on 12.7 acres with a building
containing approximately 123,000 square feet. The building is used to house the
Bank's Administrative Service Center, as well as other departments of the Bank.
Town & Country, Inc., a wholly owned subsidiary of the Bank, also occupies this
building. The purchase price of the property was approximately $5.3 million.
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 the building which previously housed the Administrative Service
Center was sold for approximately $1.2 million and settlement took
place on February 21, 1997. In addition, the building formerly occupied
by Town & Country, Inc. is also under
agreement of sale and settlement should take place on or before April 1, 1997.
Efforts are being made to secure tenants for the additional available space in
the recently purchased Administrative Service Center building. 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. The opportunity to acquire the Commercial Avenue facility came at a
time when management had been considering options to expand its current
Administrative Service Center. While exceeding the Bank's current space needs,
the Commercial Avenue facility purchase was financially superior to expanding
the existing facility. At the same time, it also provides significant
future growth capacity.
Table 14 - Capital and Performance Ratios
The following are selected ratios for the years ended December 31:
1996 1995 1994
Return on average assets...................... 1.34% 1.36% 1.38%
Return on average equity...................... 15.01% 15.02% 15.47%
Dividend payout ratio......................... 45.95% 58.48% 40.91%
Average total equity to average assets........ 8.95% 9.10% 8.89%
Total equity to assets at year end............ 8.87% 8.79% 8.99%
Primary capital ratio......................... 9.80% 9.78% 10.07%
Tier 1 risk-based capital ratio............... 10.68% 10.95% 11.05%
Total risk-based capital ratio................ 11.93% 12.21% 12.30%
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 $27,169,000 at December 31, 1996 compared to $30,833,000 at
December 31, 1995. Interest-bearing deposits with banks totaled $643,498 at
December 31, 1996 compared to $24,158 at December 31, 1995. Federal funds sold
totaled $24,150,000 at December 31, 1996 compared to $9,350,000 sold at December
31, 1995. Securities available-for-sale as of December 31, 1996 were
$79,374,627 compared to $68,967,132 as of December 31, 1995.
The loan portfolio also provides an additional source of liquidity due to
Bank of Lancaster County participating in the secondary mortgage market. Sales
of residential mortgages into the secondary market were approximately $33.2
million in 1996 and $16.1 million in 1995, 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. Federal Home Loan Bank available borrowing
capacity as of December 31, 1996 was $15,910,000 with existing capital stock
ownership and $21,500,000 in federal funds purchased lines are in place.
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 pricing changes of assets and liabilities not maturing, and
values of assets and liabilities as a result of rate changes. Also, future
income may be impacted as a result of rate change valuations on
non-balance sheet commitments.
Management endeavors to manage the exposure of earnings to changes in
interest rates. The Bank's asset/liability committee manages interest rate risk
by various means including "GAP" management and internally developed reporting.
Management has committed to supplement this process in 1997 with Sheshunoff
Interest Rate Risk management services.
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 repricable assets are maturing
and contracted repayments and prepayments of existing loans and investments.
These cash flows will be re-invested at current market yields.
The Bank's funding liabilities (customer deposits and borrowed funds) have
more complex repricing characteristics, since interest bearing deposits are
subject to rate change but are not specifically indexed to "prime" or "treasury"
indexes. Time certificates and borrowed money are subject to interest rate
change at maturity.
Interest rate sensitivity relates to earnings and economic impact to the
Bank with changing interest rates. Earning assets and funding can be subject to
interest rate repricing with changing market conditions. In addition,
investments, loans, time deposits and debt maturities and prepayments will be
subject to current market rates with reinvestment. 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 earning assets and deposit funding subject to rate
change is measured in time period
"gaps" where volumes of earning assets and deposit funding are measured to
determine the amount of the unmatched position. These gaps are illustrated in
Table 15. The regulatory presentation depicts all interest bearing deposits 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 21 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 1.40% - a range of 3.45%). Historic pricing correlations
have been calculated for all interest-bearing products for
rate change repricing impact as - immediate,
monthly and annually over one year 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.
During 1996, the net interest income tax-equivalent yield on average
earning assets dropped to 4.86% from 4.99% in 1995. The prime rate in
1996 started at 8.50%, moving down in February to 8.25%
and staying at that level for the remainder of the year.
The average tax-equivalent yield on earning assets
decreased in 1996 to 8.38%, down from 8.59% in 1995. Average earning assets
increased by $60,750,000 to $647,846,871 in 1996. Deposit funding (average
balances) increased $63,000,000 in 1996. Total deposit cost decreased to 3.35%
from 3.44% in 1995. The net interest margin (tax equivalent) decreased to 4.86%
in 1996 from 4.99% in 1995. Compression of the net interest margin was
primarily a result of a competitive lending environment,
with tax equivalent yields on loans decreasing to 9.05% in 1996
from 9.38% in 1995, while lending volume increased $55,600,000.
Table 15 - Interest Rate Sensitivity Gaps
0-30 31-90 91-180 181-365 Over 1 Over 2 Over 3 Over 4 Over
Interest Earning Days Days Days Days to 2 Yrs to 3 Yrs to 4 Yrs to 5 Yrs 5 Yrs
Assets (I.E.A.)
Fed Funds sold......$ 24,150 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Investment securities-
Maturities.......... 2,833 5,070 6,453 13,959 32,185 25,007 21,686 9,420 57,627
Loans - Maturities... 5,087 8,662 12,399 21,225 41,882 35,655 25,090 16,439 54,522
Loans - Variable Rate 98,652 1,402 3,512 8,501 13,085 10,727 3,451 13,407 53,967
Leases - Finance..... 1,016 2,083 3,170 6,461 13,699 9,589 6,712 4,616 0
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total...............$ 131,738 $ 17,217 $ 25,534 $ 50,146 $ 100,851 $ 80,978 $ 56,939 $ 43,882 $166,116
Cumulative..........$ 131,738 148,955 174,489 224,635 325,486 406,464 463,403 507,285 673,401
Interest Bearing
Liabilities(I.B.L.)
C/D's $100,000 and
over...............$ 402 $ 3,454 $ 7,301 $ 4,463 $ 0 $ 965 $ 133 $ 0 $ 200
C/D - Maturities.... 12,354 23,971 46,636 46,061 43,774 32,685 10,117 4,750 1,557
Interest Deposits -
Variable Rate..... 75,915 22,725 4,414 9,448 14,772 14,772 16,772 14,771 152,449
Short-term
borrowings........ 2,741 0 0 0 0 0 0 0 0
Borrowings - Leasing
Operations......... 1,100 1,920 2,610 4,360 8,080 6,040 3,740 1,584 1,001
-------- -------- -------- -------- -------- -------- -------- -------- -------
Total...............$ 92,512 $ 52,070 $ 60,961 $ 64,332 $ 66,626 $ 54,462 $ 30,762 $ 21,105 $155,207
Cumulative..........$ 92,512 $ 144,582 $ 205,543 $ 269,875 $ 336,501 390,963 421,725 442,830 598,037
Period GAP (Dollars)$ 39,226 $ (34,853)$ (35,427)$ (14,186)$ 34,225 $ 26,516 $ 26,177 $ 22,777 $ 10,909
I.E.A./I.B.L.%...... 142% 33% 42% 78% 151% 149% 185% 208% 107%
Cumulative GAP
(Dollars)..........$ 39,226 $ 4,373 $ (31,054)$ (45,240)$ (11,015)$ 15,501 $ 41,678 $ 64,455 $ 75,364
Cumulative
I.E.A./I.B.L.%...... 142% 103% 85% 83% 97% 104% 110% 115% 113%
Regulatory
Presentation
Assets (cumulative).$ 131,738 $ 148,955 $ 174,489 $ 224,635 $ 325,486 $ 406,464 $ 463,403 $ 507,285 $673,401
Funding (cumulative)$ 342,635 $ 371,980 $ 428,527 $ 483,411 $ 535,265 574,955 588,945 595,279 598,037
-------- -------- -------- -------- -------- -------- -------- -------- -------
Cumulative GAP
(Dollars)..........$(210,897)$(223,025)$(254,038)$(258,776)$(209,779)$(168,491)$(125,542)$ (87,994)$ 75,364
Cumulative
I.E.A./I.B.L.%..... 38% 40% 41% 46% 61% 71% 79% 85% 113%
New Financial Accounting Standard
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 - "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities".
This Statement amends and extends to all servicing assets and libilities the
accounting standards for mortgage servicing rights now in FASB Statement No. 65,
"Accounting for Certain Mortgage Banking Activities", and supercedes FASB
Statement No. 122, "Accounting for Mortgage Servicing Rights". SFAS No. 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. Liabilities and deriviatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if
practicable. Servicing assets and other retained interests in
transferred assets are required to be measured by allocating the
previous carrying amount between the assets sold, if
any, and the interest that is retained, if any, based on the relative
fair values of the assets at the date of the transfer. Servicing
assets retained are
subsequently subject to amortization and assessment for impairment. As issued,
this Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively.
The FASB was made aware that the volume and variety of certain transactions
and the related changes to information systems and accounting processes that are
necessary to comply with the requirement of SFAS No. 125 would make it extremely
difficult, if not impossible, for some affected enterprises to apply the
transfer and collateral provisions of the Statement to those
transactions as soon as
January 1, 1997. As a result, in December 1996, the FASB issued FASB No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
that defers for one year the effective date of these provisions, as well as
accounting for transfers and servicing for repurchase agreement, dollar-roll,
securities lending and similar transactions. Therefore, this Statement shall be
effective for such transfers of financial assets after December 31, 1997.
Sterling has determined that the adoption of SFAS No. 127 is not expected
to have a material effect on the financial position or results of
operations of the Corporation.
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 33
Consolidated Balance Sheets 34
Consolidated Statements of Income 35
Consolidated Statements of Changes in Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 39
(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) 63
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 2, the Corporation changed its method of accounting
for mortgage servicing rights to adopt the provisions of the Financial
Accounting Standards Board's SFAS No. 122, "Accounting for Mortgage
Servicing Rights", at January 1, 1996.
Trout, Ebersole & Groff, LLP
Trout, Ebersole & Groff, LLP
Certified Public Accountants
January 24, 1997
Lancaster, Pennsylvania
Consolidated Balance Sheets
Sterling Financial Corporation and Subsidiaries
As of December 31,
(Dollars in thousands) 1996 1995
Assets
Cash and due from banks...........................................$ 31,339 $ 35,414
Interest-bearing deposits in other banks.......................... 644 24
Federal funds sold................................................ 24,150 9,350
Mortgage loans held for sale...................................... 1,016 962
Investment Securities: (Note 4)
Securities held-to-maturity
(market value - $94,778 - 1996 and $124,066 - 1995)............ 94,222 122,885
Securities available-for-sale.................................... 79,375 68,967
Loans (Note 5).................................................... 475,017 427,674
Less: Unearned income........................................... (1,185) (1,362)
Allowance for loan losses (Note 6)......................... (7,800) (7,780)
-------- -------
Loans, net........................................................ 466,032 418,532
-------- -------
Premises and equipment (Note 7)................................... 22,658 16,450
Other real estate owned........................................... 81 252
Accrued interest receivable and prepaid expenses.................. 11,262 11,779
Other assets (Note 8)............................................. 33,293 26,539
-------- -------
Total Assets..................................................... $764,072 $711,154
======== ========
Liabilities
Deposits:
Noninterest-bearing.............................................$ 82,175 $ 77,318
Interest-bearing (Note 9)....................................... 564,861 532,787
-------- --------
Total Deposits.................................................... 647,036 610,105
-------- --------
Interest-bearing demand notes issued to U.S. Treasury (Note 10)... 2,741 2,234
Other liabilities for borrowed money (Note 10).................... 30,434 21,523
Accrued interest payable and accrued expenses..................... 8,705 8,231
Other liabilities................................................. 5,977 5,152
-------- --------
Total Liabilities................................................. 694,893 647,245
Stockholders' Equity -------- --------
Common Stock -(par value:$5.00)
No. shares authorized: 1996 - 35,000,000; 1995 - 10,000,000
No. shares issued: 1996 - 6,237,009; 1995 - 5,932,686
No. shares outstanding: 1996 - 6,220,078; 1995 - 5,925,527...... 31,185 29,663
Capital surplus................................................... 16,325 9,987
Retained earnings................................................. 20,502 22,848
Net unrealized gain on securities available-for-sale, net of taxes 1,603 1,624
Less: Treasury Stock (16,931 shares in 1996 and
7,159 shares in 1995) - at cost........................... (436) (213)
-------- --------
Total Stockholders' Equity........................................ 69,179 63,909
-------- --------
Total Liabilities and Stockholders' Equity........................$764,072 $711,154
======== ========
See accompanying notes to financial statements
Consolidated Statements of Income
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
(Dollars in thousands, except per share data) 1996 1995 1994
Interest Income
Interest and fees on loans...........................$ 41,611 $ 37,975 $ 32,356
Interest on deposits in other banks.................. 6 2 2
Interest on federal funds sold....................... 398 449 264
Interest and dividends on investment securities:
Taxable............................................ 7,442 7,526 6,636
Tax-exempt......................................... 2,882 2,695 2,496
Dividends on stock................................. 219 203 177
--------- --------- ---------
Total Interest Income................................ 52,558 48,850 41,931
--------- --------- ---------
Interest Expense
Interest on time certificates of deposit of
$100,000 or more................................... 934 893 613
Interest on all other deposits....................... 19,775 18,200 12,970
Interest on demand notes issued to the U.S. Treasury. 95 114 77
Interest on federal funds purchased.................. 89 66 10
Interest on other borrowed money..................... 1,930 1,880 1,255
Interest on mortgage indebtedness and obligations
under capitalized leases........................... none none 1
--------- --------- ---------
Total Interest Expense............................... 22,823 21,153 14,926
--------- --------- ---------
Net Interest Income.................................. 29,735 27,697 27,005
Provision for loan losses (Note 6)................... 580 534 1,081
--------- --------- ---------
Net Interest Income after Provision for Loan Losses.. 29,155 27,163 25,924
--------- --------- ---------
Other Operating Income
Income from fiduciary activities..................... 1,139 856 742
Service charges on deposit accounts.................. 2,485 2,010 1,798
Other service charges, commissions and fees.......... 2,074 1,716 1,539
Mortgage banking..................................... 1,192 525 635
Other operating income (Note 8)...................... 3,524 3,186 2,329
Investment securities gains or (losses).............. 158 none none
--------- --------- ---------
Total Other Operating Income......................... 10,572 8,293 7,043
--------- --------- ---------
Other Operating Expenses
Salaries and employee benefits (Note 11)............. 15,027 13,040 12,264
Net occupancy expense................................ 2,109 1,721 1,477
Furniture and equipment expense (including depreciation
of $1,256 in 1996, $917 in 1995 and $779 in 1994).. 2,044 1,605 1,379
FDIC insurance assessment............................ 2 622 1,128
Other operating expenses............................. 7,587 6,435 5,805
--------- --------- ---------
Total Other Operating Expenses....................... 26,769 23,423 22,053
--------- --------- ---------
Income Before Income Taxes........................... 12,958 12,033 10,914
Applicable income taxes (Note 12).................... 3,147 3,039 2,637
--------- --------- ---------
Net Income...........................................$ 9,811 $ 8,994 $ 8,277
========= ========= =========
Earnings per common share:
Net Income.........................................$ 1.57 $ 1.45 $ 1.35
Cash dividends declared per common share.............$ .74 $ .89 $ .58
Average shares outstanding...........................6,235,257 6,204,212 6,128,058
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, 1994..... 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
Net income.................... 9,811 9,811
Common stock issued
Dividend Reinvestment Plan... 2,517 13 58 71
Employee Stock Plan.......... 5,690 28 140 168
Stock dividend issued -
Common stock - 5%, including
cash paid in lieu of
fractional shares........... 296,116 1,481 6,144 (7,649) (24)
Cash dividends declared -
Common stock................. (4,508) (4,508)
Purchase of Treasury Stock
(21,026 shares).............. (547) (547)
Issuance of Treasury Stock
Dividend Reinvestment Plan
(8,435 shares)............... (3) 247 244
Employee Stock Plan
(2,819 shares)............... (1) 77 76
Change in net unrealized gain
on available-for-sale
securities, net of taxes...... (21) (21)
--------- -------- -------- -------- ---------- ------- -------
Balance, December 31, 1996....6,237,009 $ 31,185 $ 16,325 $ 20,502 $ 1,603 $ (436) $69,179
========= ======== ======== ======== ========== ======= =======
See accompanying notes to financial statements
Consolidated Statements of Cash Flows
Sterling Financial Corporation and Subsidiaries
For the years ended December 31,
(Dollars in thousands) 1996 1995 1994
Cash Flows from Operating Activities
Net Income...........................................$ 9,811 $ 8,994 $ 8,277
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation...................................... 1,625 1,198 1,014
Accretion & amortization of investment securities. 356 367 661
Provision for possible loan losses................ 580 534 1,081
Provision for deferred income taxes............... 824 579 307
(Gain) on sale of property and equipment.......... (2) (1) (2)
(Gain) on sales of investment securities.......... (158) none none
(Gain) on sale of mortgage loans.................. (262) (163) (279)
Proceeds from sales of mortgage loans............. 33,480 16,283 24,284
Originations of mortgage loans held for sale...... (33,272) (16,558) (21,098)
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
and prepaid expenses............................ 517 (2,825) (138)
(Increase) in other assets....................... (6,583) (2,469) (3,341)
Increase (decrease) in accrued interest payable
and accrued expenses........................... (350) 1,915 324
Increase (decrease) in other liabilities........ 836 (753) (140)
--------- --------- ---------
Net cash provided by/(used in) operating activities.. 7,402 7,101 10,950
Cash Flows from Investing Activities
Proceeds from interest-bearing deposits
in other banks..................................... 1,023 1,052 45,226
Purchase of interest-bearing deposits in other banks. (1,643) (1,052) (45,209)
Proceeds from sales of investment securities
available-for-sale.................................. 670 none none
Proceeds from maturities or calls of investment
securities held-to-maturity.... .................... 37,508 30,095 31,435
Proceeds from maturities or calls of investment
securities available-for-sale....................... 8,948 2,921 1,103
Purchases of investment securities held-to-maturity.. (9,791) (46,273) (54,338)
Purchases of investment securities available-for-sale (19,310) (6,926) (1,972)
Federal funds sold, net.............................. (14,800) (9,350) 12,350
Net loans and leases made to customers............... (48,080) (34,057) (33,904)
Purchases of premises and equipment.................. (7,880) (5,681) (5,810)
Proceeds from sale of premises and equipment.........