U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 1996 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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Commission file number 0-20800
STERLING FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1572822
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 North Wall Street
Spokane, Washington 99201
--------------------------
(Address of principal executive offices) (Zip Code)
(509) 458-2711
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 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. (X) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding as of September 30, 1996
----- -------------------------------------
Common Stock ($1.00 par value) 5,537,328
<PAGE>
STERLING FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended September 30, 1996
INDEX
-----
PART I - Financial Information:
Item 1 - Financial Statements (Unaudited):
Consolidated Balance Sheets -
September 30, 1996 and June 30, 1996
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1996 and 1995
Consolidated Statement of Changes in Shareholders' Equity -
Three Months Ended September 30, 1996
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - Other Information:
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, 1996 and June 30, 1996
(Dollars in thousands)
September 30, June 30,
1996 1996
------------- ----------
ASSETS
Cash and cash equivalents:
Interest bearing $ 453 $ 2,308
Non-interest bearing and vault 22,372 24,395
Restricted 3,930 2,225
Loans receivable (net of allowance for
losses of $8,219 and $7,889) 913,406 886,667
Loans held-for-sale 7,346 7,456
Investments and mortgage-backed securities:
Available-for-sale 487,494 460,061
Held-to-maturity 11,875 11,879
Accrued interest receivable (including
$513 and $711 on investments) 8,912 9,080
Office properties and equipment 40,357 40,471
Real estate owned 5,160 4,874
Core deposit premium 8,889 9,474
Other intangibles 1,923 2,131
Purchased mortgage servicing rights 1,564 1,642
Prepaid expenses and other assets 17,614 15,035
---------- ----------
TOTAL ASSETS $1,531,295 $1,477,698
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 896,568 $ 898,394
Advances from FHLB Seattle 259,517 259,410
Securities sold subject to repurchase
agreements 201,558 195,785
Federal funds purchased 24,710 0
Other borrowings 15,000 0
Subordinated notes payable 17,240 17,240
Cashier's checks issued and payable 10,146 6,751
Borrowers' reserves for taxes and insurance 2,866 1,718
Accrued interest payable 3,692 3,578
Accrued expenses and other liabilities 15,678 9,077
---------- ----------
TOTAL LIABILITIES 1,446,975 1,391,953
---------- ----------
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited), Continued
September 30, 1996 and June 30, 1996
(Dollars in thousands)
September 30, June 30,
1996 1996
------------- ----------
LIABILITIES AND SHAREHOLDERS'
EQUITY, CONTINUED
Capital stock:
Preferred Stock, $1 par value;
10,000,000 shares authorized;
1,040,000 shares issued and
outstanding ($26,000 liquidation
preference value) $ 1,040 $ 1,040
Common stock, $1 par value; 20,000,000
shares authorized; 5,537,328 and
5,426,398 shares issued and
outstanding 5,537 5,426
Additional paid-in capital 70,463 69,325
Unrealized loss on investments and
mortgage-backed securities available-
for-sale, net of deferred income tax
benefits of $4,952 and $5,542 (9,195) (10,290)
Retained earnings 16,475 20,244
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 84,320 85,745
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,531,295 $1,477,698
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, 1996 and 1995
(Dollars in thousands, except per share data)
Three Months Ended
September 30,
----------------------
1996 1995
---------- ----------
Interest income:
Loans $ 20,193 $ 23,051
Mortgage-backed securities 6,371 4,275
Investments and cash equivalents 1,292 1,288
---------- ----------
27,856 28,614
---------- ----------
Interest expense:
Deposits 10,525 11,437
Short-term borrowings 7,306 5,511
Long-term borrowings 509 3,366
---------- ----------
18,340 20,314
---------- ----------
Net interest income 9,516 8,300
Provision for loan losses (550) (400)
---------- ----------
Net interest income after provision for
loan losses 8,966 7,900
---------- ----------
Other income:
Fees and service charges 1,155 977
Mortgage banking operations 715 693
Loan servicing fees 118 241
Net loss on sale and operation of
real estate owned (167) (88)
---------- ----------
Total other income 1,821 1,823
---------- ----------
Operating expenses 15,972 7,619
---------- ----------
Income (loss) before income taxes (5,185) 2,104
Income tax provision (benefit) (1,887) 768
---------- ----------
Net income (loss) (3,298) 1,336
Less Preferred Stock dividends (471) (471)
---------- ----------
Net income (loss) available to common
shares $ (3,769) $ 865
========== ==========
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited), Continued
Three Months Ended September 30, 1996 and 1995
(Dollars in thousands, except per share data)
Three Months Ended
September 30,
----------------------
1996 1995
---------- ----------
Earnings (loss) per common and common
equivalent share $ (0.68) $ 0.16
========== ==========
Weighted average common shares outstanding 5,518,724 5,406,037
========== ==========
Earnings (loss) per common share assuming
full dilution $ (0.68) $ 0.16
========== ==========
Weighted average common shares outstanding
assuming full dilution 7,613,869 7,517,520
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended September 30, 1996 and 1995
(Dollars in thousands)
Three Months Ended
September 30,
----------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net income (loss) $ (3,298) $ 1,336
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Provisions for loan and real estate
owned losses 550 440
Stock dividends on FHLB Seattle stock (501) (693)
Net gain on sales of loans and
securities (715) (408)
Net gain on sales of real estate owned (82) 0
Depreciation and amortization 2,159 2,120
Deferred income tax provision (benefit) 0 384
Change in:
Accrued interest receivable 168 (43)
Accrued interest payable 114 1,903
Cashier's checks issued and payable 3,395 (810)
Prepaid expenses and other assets (3,218) (997)
Accrued expenses and other
liabilities 6,601 (127)
Proceeds from sales of loans 41,661 61,324
Loans originated for sale (40,836) (64,436)
---------- ----------
Net cash provided by (used in)
operating activities 5,997 (7)
---------- ----------
Cash flows from investing activities:
Loans disbursed (193,007) (109,851)
Loan principal payments 164,998 90,773
Purchase of loans receivable 0 0
Purchase of investments 41,119 0
Mortgage-backed securities principal
payments 15,128 10,338
Purchase of office properties and equipment (649) (680)
Proceeds from sales of real estate owned 527 609
Improvements to real estate owned 0 (32)
---------- ----------
Net cash used in investing
activities (53,733) (8,843)
---------- ----------
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), Continued
Three Months Ended September 30, 1996 and 1995
(Dollars in thousands)
Three Months Ended
September 30,
----------------------
1996 1995
---------- ----------
Cash flows from financing activities:
Net change in NOW, passbook and money
market deposits $ 2,625 $ 13,176
Proceeds from sales of certificates of
deposit 89,863 171,349
Payments for maturing certificates of
deposit (104,980) (191,367)
Interest credited to deposits 10,666 8,270
Advances from FHLB Seattle 90,000 35,000
Repayment of FHLB Seattle advances (90,020) (30,015)
Net change in securities sold subject to
repurchase agreements 5,773 3,247
Fractional shares of stock dividend paid
in cash 0 (2)
Cash dividends on Preferred Stock (471) (471)
Proceeds from exercise of stock options
and warrants 1,249 54
Net change in borrowers' reserves 1,148 1,969
Purchase of Federal Funds 24,710 0
Proceeds from other borrowings 15,000 0
---------- ----------
Net cash provided by financing
activities 45,563 11,210
---------- ----------
Net increase (decrease) in cash and cash
equivalents (2,173) 2,360
Cash and cash equivalents at beginning of
period 28,928 20,721
---------- ----------
Cash and cash equivalents at end of period $ 26,755 $ 23,081
========== ==========
Supplemental disclosures:
Cash paid during the period for interest $ 18,226 $ 18,411
Cash paid during the period for income
taxes 908 905
Loans converted into real estate owned 730 0
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended September 30, 1996 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------------- --------------------- Paid-in Unrealized Retained Shareholders'
Shares Amount Shares Amount Capital Gain (Loss) Earnings Equity
--------- ---------- --------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 1,040,000 $ 1,040 5,426,398 $ 5,426 $ 69,325 $ (10,290) $ 20,244 $ 85,745
Shares issued upon
exercise of stock
options 96,812 97 854 951
Shares acquired and
retired upon exercise
of stock options (1,725) (2) (25) (27)
Shares issued upon
exercise of warrants,
net of related costs 15,843 16 309 325
Dividends declared and
paid on Preferred
Stock ($0.45 per
share) (471) (471)
Change in unrealized
gain (loss), net of
income taxes 1,095 1,095
Net loss (3,298) (3,298)
--------- ---------- --------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1996 1,040,000 $ 1,040 5,537,328 $ 5,537 $ 70,463 $ (9,195) $ 16,475 $ 84,320
========= ========== ========= ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Notes to the June 30, 1996 consolidated financial statements, as
set forth in Sterling's 1996 Annual Report to Shareholders,
substantially apply to these interim consolidated financial
statements as of and for the three months ended September 30, 1996
and are not repeated here. All financial statements presented are
unaudited except for the June 30, 1996 balance sheet which was
derived from the audited balance sheet as of that date.
2. INTERIM ADJUSTMENTS:
The financial information set forth in the unaudited interim
consolidated financial statements reflects the adjustments, all of
which are of a normal and recurring nature, which, in the opinion
of management, are necessary for a fair presentation of the
periods reported.
3. RECLASSIFICATIONS:
Certain September 30, 1995 balances have been reclassified to
conform with the September 30, 1996 presentation. These
reclassifications had no effect on net income or retained earnings
as previously reported.
4. OPERATING EXPENSES:
The components of total operating expenses are as follows:
Three Months Ended
September 30,
------------------
1996 1995
-------- -------
(Dollars in thousands)
Employee compensation and benefits $3,171 $3,004
Occupancy and equipment 1,471 1,245
Depreciation 763 642
Amortization of unidentified intangibles 208 236
Amortization of core deposit premium 585 594
Advertising 440 101
Data processing 619 576
Insurance 660 564
SAIF one-time assessment 5,800 0
Legal and accounting 996 262
Other 1,259 395
------- ------
$15,972 $7,619
======= ======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OPERATING EXPENSES, CONTINUED:
For a discussion of Operating Expenses, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
5. OTHER ACCOUNTING POLICIES:
In March 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets and certain identifiable
intangibles being held and used by an entity be reviewed for
impairment by estimating future cash flows from the use and
disposition of the assets whenever circumstances indicate that the
carrying amount of such assets may not be recoverable. Sterling
adopted this new standard on July 1, 1996, and such adoption did
not have any effect on its consolidated financial statements.
The FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights." This standard applies to transactions involving sales or
securitizations of mortgage loans with servicing rights retained.
This standard must also be applied to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including
those purchased before adoption of this statement. Sterling
adopted this standard on July 1, 1996, and such adoption did not
have any effect on its consolidated financial statements. In June
1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities."
This standard also applies to transactions involving sales or
securitizations of financial assets, such as mortgage loans.
Sterling must adopt the provisions of this standard on July 1,
1997. Management does not believe that adoption of this statement
will have a material effect on the consolidated financial
statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee
compensation plans and encourages all entities to adopt the fair
value method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue
to measure compensation costs for those plans using the intrinsic
value method of accounting. Entities electing to retain the
current accounting under the intrinsic method must make pro forma
disclosures of net income and earnings per share, as if the fair
value method of accounting under SFAS No. 123 had been applied.
Sterling intends to continue using the intrinsic method of
accounting for employee stock options and will provide required
pro forma disclosures in its June 30, 1997 consolidated financial
statements.
<PAGE>
PART I - Financial Information, continued
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended September 30, 1996 and 1995
GENERAL
Sterling Financial Corporation ("Sterling") is a unitary savings and
loan holding company, the significant operating subsidiary of which is
Sterling Savings Association ("Sterling Savings"). The significant
operating subsidiaries of Sterling Savings are Action Mortgage Company
("Action Mortgage"), INTERVEST-Mortgage Investment Company
("INTERVEST") and Harbor Financial Services, Inc. ("Harbor
Financial"). Sterling Savings commenced operations in 1983 as a State
of Washington-chartered, federally insured stock savings and loan
association headquartered in Spokane, Washington. Sterling, with
$1.5 billion in total assets at September 30, 1996, attracts Federal
Deposit Insurance Corporation ("FDIC") insured deposits from the
general public through 41 retail branches located primarily in rural
and suburban communities in Washington and Oregon and originates loans
through its branch offices as well as 10 Action Mortgage residential
loan production offices in the Spokane and Seattle, Washington,
Portland, Oregon and Boise, Idaho metropolitan areas and three
INTERVEST commercial real estate lending offices located in the
metropolitan areas of Seattle and Spokane, Washington and Portland,
Oregon. Sterling also markets tax-deferred annuities, mutual funds
and other financial products through Harbor Financial. Sterling's
revenues are derived primarily from interest earned on loans and
mortgage-backed securities, from fees and service charges and from
mortgage banking operations. The operations of Sterling Savings, and
savings institutions generally, are influenced significantly by
general economic conditions and by policies of its primary thrift
regulatory authorities, the Office of Thrift Supervision ("OTS"), the
FDIC and the State of Washington Department of Financial Institutions
("Washington Supervisor").
On September 30, 1996, federal legislation was enacted which included
provisions regarding the Savings Association Insurance Fund ("SAIF")
which is operated by the FDIC and provides deposit insurance for
thrift institutions. The new legislation requires SAIF-insured
savings institutions, like Sterling, to pay a one-time special
assessment of $0.657 for every $100 of deposits as of March 31, 1995.
The special assessment is designed to capitalize the SAIF up to the
prescribed 1.25% of SAIF-insured deposits.
<PAGE>
Sterling's SAIF assessment resulted in a pre-tax charge to earnings of
$5.8 million during the quarter ended September 30, 1996. As a result
of this special assessment, the deposit insurance premium is scheduled
to significantly decline, effective January 1, 1997. Also, the
legislation provides that banks will begin sharing the responsibility
of paying the Financing Corporation ("FICO") bonds as of January 1,
1997.
The new legislation contemplates a unification of the charters
presently available to banks and thrifts. The Treasury Department is
required to make recommendations regarding unification of the
available charters and the merger of the insurance funds by March 31,
1997. The legislation requires a merger of the SAIF with the Bank
Insurance Fund ("BIF") on January 1, 1999 if the unification of the
charters for all insured-institutions has, in fact, occurred. SAIF
and BIF will continue to operate as separate funds if this unification
of charters has not taken place, until such time as additional federal
legislation is passed requiring a merger of the funds.
During the quarters ended September 30, 1996 and 1995, Sterling was
impacted by a very volatile interest rate environment. During the
quarter ended September 30, 1996, prevailing long-term interest rates
were rising, primarily in response to an anticipated shift in policies
of the Federal Reserve Board (the "Fed") toward a tightening of short-
term interest rates. During this period, the 30-year Treasury Bond
rate fluctuated in a range between 6.70% and 7.19%. As a consequence
of this rising interest rate environment, the market value of longer-
term assets has significantly declined. In contrast, during the
quarter ended September 30, 1995, short- and long-term interest rates
were falling as the Fed had adopted a policy of easing short-term
interest rates. During the past year, in anticipation of the BIF/SAIF
legislation and to improve its net interest income, Sterling
reorganized and focused its efforts on becoming more like a community-
retail bank by increasing its business banking, consumer and
construction lending while increasing its retail deposits. See
"Asset & Liability Management," "Mortgage-Backed Securities," "Net
Interest Income," and "Capital Resources."
Sterling intends to continue to pursue its growth strategy for the
future by focusing on internal growth, as well as acquisition
opportunities. As part of this strategy, Sterling is rapidly changing
the mix of its assets and liabilities, to become more like a
community-based retail bank. Sterling may acquire (i) other financial
institutions or branches thereof, (ii) branch facilities,
(iii) mortgage loan servicing portfolios or mortgage banking
operations, or (iv) other substantial assets or deposit liabilities.
As part of this growth strategy, Sterling engages from time to time in
discussions concerning possible acquisitions. There can be no
assurance, however, that Sterling will be successful in identifying,
acquiring or assimilating appropriate acquisition candidates or be
successful in implementing its internal growth strategy or that these
activities will result in improved financial performance.
<PAGE>
ASSET AND LIABILITY MANAGEMENT
The results of operations for savings institutions may be materially
and adversely affected by changes in prevailing economic conditions,
including rapid changes in interest rates, declines in real estate
market values and the monetary and fiscal policies of the federal
government. Like all financial institutions, Sterling's net interest
income and its net portfolio value (the net present value of assets,
liabilities and off-balance sheet contracts, or "NPV") are subject to
fluctuations in interest rates. Currently, Sterling's interest-
bearing liabilities, consisting primarily of savings deposits, Federal
Home Loan Bank of Seattle ("FHLB Seattle") advances and other
borrowings, mature or reprice more rapidly, or on different terms,
than do its interest-earning assets. The fact that liabilities mature
or reprice more frequently on average than assets may be beneficial in
times of declining interest rates. Such an asset/liability structure,
however, may result in declining net interest income during periods of
rising interest rates. Additionally, the extent to which borrowers
prepay loans is affected by prevailing interest rates. When interest
rates increase, borrowers are less likely to prepay loans, whereas
when interest rates decrease, borrowers are more likely to prepay
loans. Prepayments may affect the levels of loans retained in an
institution's portfolio, as well as its net interest income and loan
servicing fee income. Sterling maintains an asset and liability
management program which is intended to manage net interest income
through interest rate cycles and to protect its NPV by controlling its
exposure to changing interest rates.
Sterling uses a simulation model designed to measure the sensitivity
of net interest income and NPV to changes in interest rates. This
simulation model is designed to enable Sterling to generate a forecast
of net interest income and NPV given various interest rate forecasts
and alternative strategies. The model is also designed to measure the
anticipated impact that prepayment risk, basis risk, customer maturity
preferences, volumes of new business and changes in the relationship
between long- and short-term interest rates have on the performance of
Sterling. At September 30, 1996, Sterling calculated that its NPV was
$98.6 million, as compared to $92.4 million at September 30, 1995, and
that its NPV would decrease by 28.2% and 61.7% if interest rate levels
generally were to increase by 2% and 4%, respectively. These
calculations, which are highly subjective and technical, may differ
materially from regulatory calculations.
Sterling also uses gap analysis, a traditional analytical tool
designed to measure the difference between the amount of interest-
earning assets and the amount of interest-bearing liabilities expected
to mature or reprice in a given period. Sterling attempts to maintain
its asset and liability gap position between positive 10% and negative
25% at both the one-year and three-year pricing intervals. Sterling
calculated its one-year cumulative gap position to be a negative 9.17%
and negative 18.2% at September 30, 1996 and 1995, respectively.
Sterling calculated its three-year gap position to be a negative 7.96%
<PAGE>
and negative 18.6% at September 30, 1996 and 1995, respectively. The
narrowing in the negative gap positions at September 30, 1996 was due
primarily to a reduction in longer term fixed rate assets. While
Sterling's gap positions are within limits established by its Board of
Directors, management is evaluating strategies to reduce its
cumulative gap positions in future periods. There can be no assurance
that Sterling will be successful in either decreasing its liability
costs or reducing its gap positions or that its net interest income
will not decline. See "Capital Resources" and "Results of Operations
- Net Interest Income."
During fiscal years 1996 and 1995, management pursued strategies to
increase Sterling's NPV and to reduce the impact of changes in
interest rates on the NPV. These strategies included extending
maturities of deposits and borrowings, originating and retaining
variable-rate mortgages and non-mortgage loans with frequent repricing
features, selling fixed-rate loans and mortgage-backed securities
currently held in the available-for-sale portfolio, and acquiring
servicing portfolios. During fiscal year 1996, these strategies
helped to increase the NPV. Sterling is continuing to pursue
strategies to reduce the level of interest rate risk but is also
endeavoring to increase its net interest income through the
origination and retention of variable-rate consumer, business banking,
construction and commercial real estate loans which generally have
higher yields than residential permanent loans. There can be no
assurance that Sterling will be successful implementing any of these
strategies or that, if these strategies are implemented, they will
have the intended effect of reducing interest rate risk or increasing
net interest income or NPV. See "Capital Resources" and "Results of
Operations - Net Interest Income."
MORTGAGE-BACKED SECURITIES
Sterling classifies specific mortgage-backed securities and
investments as available-for-sale and periodically sells these
securities to assist in managing its interest rate risk. These
securities may be sold in response to changes in market interest rates
and related changes in the securities' prepayment risk, needs for
liquidity, changes in the availability and of the yield on alternative
investments and changes in funding sources and terms. Securities
classified as available-for-sale are carried at fair value.
Unrealized gains and losses are excluded from earnings and are
reported net of deferred income tax, as a separate component of
shareholders' equity until such securities mature or are actually
sold. Fluctuations in prevailing interest rates had the effect of
reducing the fair value of these securities and shareholders' equity
at September 30, 1996, and will likely cause volatility in this
component of shareholders' equity in future periods. At September 30,
1996 and 1995, mortgage-backed securities and investments classified
as available-for-sale were $487.5 million and $116.7 million,
respectively. The carrying value of these securities included net
unrealized losses of $9.2 million (net of a $5.0 million related tax
benefit) at September 30, 1996, and $10.3 million (net of a $5.5
million related tax benefit) at June 30, 1996.
Mortgage-backed securities and investments that management has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost.
<PAGE>
NET INTEREST INCOME
The most significant component of earnings for a financial institution
typically is net interest income. During the quarters ended
September 30, 1996 and 1995, net interest income was $9.5 million and
$8.3 million, respectively. Net interest income is the difference
between interest income, primarily from loans, mortgage-backed
securities and investment portfolios, and interest expense, primarily
on deposits and borrowings.
Changes in net interest income result from changes in volume, net
interest spread and net interest margin. Volume refers to the dollar
level of interest-earning assets and interest-bearing liabilities.
Net interest spread refers to the difference between the yield on
interest-earning assets and the rate paid on interest-bearing
liabilities. Net interest margin refers to net interest income
divided by total interest-earning assets and is influenced by the
level and relative mix of interest-earning assets and interest-bearing
liabilities. During the quarters ended September 30, 1996 and 1995,
the volume of average interest-earning assets was $1.41 billion and
$1.47 billion, respectively. Net interest spread during these periods
was 2.46% and 2.00%, respectively. During these same periods, the net
interest margin was 2.67% and 2.25%, respectively. The increases in
net interest income, net interest margin and net interest spread were
due primarily to a decrease in the costs of deposits and borrowings.
See "General" and "Results of Operations - Net Interest Income."
RESULTS OF OPERATIONS
OVERVIEW. The legislation enacted on September 30, 1996 to
recapitalize the Savings Association Insurance Fund ("SAIF") requires
SAIF-insured savings institutions, like Sterling, to pay a one-time
special assessment. Sterling's assessment resulted in a pre-tax
charge to earnings of $5.8 million during the quarter ended September
30, 1996. Primarily as a result of this charge and an increase of
approximately $2.5 million in other operating expenses, Sterling
reported a net loss of $3.3 million, or $0.68 per fully diluted share
for the quarter ended September 30, 1996, compared with net income of
$1.3 million, or $0.16 per fully diluted share, for the same period
one year ago. See " - Operating Expenses."
The return on average assets was negative 0.88% and positive 0.34% for
the three months ended September 30, 1996 and 1995, respectively. The
return on equity was negative 23.8% and positive 5.2% for the three
months ended September 30, 1996 and 1995, respectively. These
decreases are primarily attributable to the decrease in net income.
<PAGE>
NET INTEREST INCOME. Net interest income of $9.5 million for the
three months ended September 30, 1996 reflects a 15% increase from the
$8.3 million reported for the comparable prior year period. The
increase in net interest income primarily reflects an increase in the
net interest margin to 2.67% from 2.25% and partially offsets a $57.1
million reduction in average earning assets. The increase in net
interest margin is primarily due to a reduction in Sterling's cost of
deposits and borrowings.
PROVISION FOR LOAN LOSSES. Management's policy is to establish
valuation allowances for estimated losses on loans by charging income.
The evaluation of the adequacy of specific and general valuation
allowances is an ongoing process.
Sterling recorded provisions for loan losses of $550,000 and $400,000
for the three months ended September 30, 1996 and 1995, respectively.
The increase was partially in response to an increase in loan
delinquency rates and an increase of loans in Sterling's business
banking and consumer portfolios. At September 30, 1996, Sterling's
loan delinquency rate was 0.53%, compared to 0.36% at June 30, 1996
and 0.48% at September 30, 1995. Total nonperforming loans were $3.7
million at September 30, 1996, compared to $3.6 million at June 30,
1996 and $5.4 million at September 30, 1995. As a percentage of total
loans, nonperforming loans were 0.36% at September 30, 1996, compared
to 0.36% at June 30, 1996 and 0.47% at September 30, 1995. Management
believes the provisions for the three months ended September 30, 1996
and 1995 represented appropriate additions based upon its evaluation
of the factors affecting the adequacy of valuation allowances,
although there can be no assurances in this regard. Such factors
include concentrations of the types of loans and associated risks
within the loan portfolio and economic factors affecting the Pacific
Northwest economy.
OTHER INCOME. The following table summarizes the components of other
income for the periods indicated.
Three months ended
September 30,
--------------------
1996 1995
------- --------
(Dollars in millions)
Fees and service charges $1,155 $ 977
Mortgage banking operations 715 693
Loan servicing fees 118 241
Net loss on sales and operations
of real estate owned (167) (88)
------ ------
$1,821 $1,823
====== ======
<PAGE>
Fees and service charges consist primarily of service charges on
deposit accounts, fees for certain customer services, commissions on
sales of credit life insurance and late charges on loans, as well as
escrow fees, commissions on sales of mutual funds and annuity
products. The fiscal year 1996 increase was primarily due to an
increase in service charges.
Although the volume of loans sold decreased, the income from mortgage
banking operations increased for the three months ended September 30,
1996, compared to the three months ended September 30, 1995, primarily
as result of higher margins on loans sold.
The following table summarizes residential loan originations and sales
of loans for the periods indicated.
Three months ended
September 30,
------------------
1996 1995
------ ------
(Dollars in millions)
Originations of one-to-four
family mortgage loans $ 95.3 $104.2
Sales of residential loans 40.9 60.6
Principal balances of mortgage
loans serviced for others 565.8 625.6
Loan servicing fees declined for the three months ended September 30,
1996 compared to the prior year's comparable quarter reflecting a
decrease in the average loan servicing portfolio and an increase in
expenses associated with one loan repurchased from FHLMC during the
period. Sterling's average loan servicing portfolio for the three
months ended September 30, 1996 and 1995 was approximately $573.2
million and $636.4 million, respectively. Sterling anticipates
retaining a significant portion of the current balance of loans
serviced for others, although there can be no assurances in this
regard.
The increase in loss from sales and operations of real estate owned
primarily reflects a higher provision in 1996 for losses on real
estate owned properties.
OPERATING EXPENSES. Operating expenses were $16.0 million and $7.6
million for the three months ended September 30, 1996 and 1995,
respectively. The significant increase is primarily due to the one-
time SAIF assessment and increases in occupancy and equipment,
advertising, legal and other expenses. Employee compensation and
benefits were $3.2 million and $3.0 million for the quarters ended
September 30, 1996 and 1995, respectively. The increase primarily
reflects an increase in the number of employees. Occupancy and
<PAGE>
equipment expenses were $1.5 million and $1.2 million for the quarters
ended September 30, 1996 and 1995, respectively. Depreciation expense
was $763,000 and $642,000 for the quarters ended September 30, 1996
and 1995, respectively. The increases in occupancy and equipment and
depreciation expense primarily reflect higher personal computer and
processing costs following a conversion to a new data processing
system in October 1995. Advertising expenses increased to $440,000
during the quarter ended September 30, 1996 compared to $101,000
during the prior year's comparable quarter. The increase was
primarily due to an increase in advertising campaigns. Insurance
expenses were $660,000 and $564,000 for the quarters ended September
30, 1996 and 1995, respectively. The increase primarily represents
the initiation of coverage for directors and officers and for
increased premiums on property and casualty policies. The one-time
SAIF assessment of $5.8 million represents $0.657 for every $100 of
deposits as of March 31, 1995. See "General." Legal and accounting
expense was $996,000 and $262,000 during the quarters ended September
30, 1996 and 1995, respectively. The increase primarily reflects
costs incurred to pursue Sterling's breach of contract claim against
the U.S. Government and higher levels of accounting and regulatory
examination costs. See "Capital Resources." Other expenses were $1.3
million and $395,000 for the quarters ended September 30, 1996 and
1995, respectively. The increase in other expenses primarily reflects
increased valuation allowances due to market-price declines for
servicing rights, increased business and occupation taxes, and
increased provisions for various other expense items.
INCOME TAX PROVISION. Sterling recorded a $1.9 million income tax
benefit and a $768,000 income tax provision for the three months ended
September 30, 1996 and 1995, respectively. The effective tax rates on
income (loss) before income taxes were approximately 36.4% and 36.5%
for the three months ended September 30, 1996 and 1995, respectively.
These rates were higher than the federal statutory rate of 35.0%,
primarily due to state income taxes and the nondeductible amortization
of intangible assets.
LIQUIDITY AND SOURCES OF FUNDS
As a financial institution, Sterling's primary sources of funds are
derived from financing and operating activities. Financing activities
consist primarily of customer deposits, advances from the FHLB Seattle
and other borrowings. The borrowings consist of securities sold
subject to reverse repurchase agreements, loans from commercial banks,
the Subordinated Notes and Federal Funds purchased. Deposits
decreased $1.8 million to $896.6 million at September 30, 1996 from
$898.4 million at June 30, 1996. At September 30, 1996, approximately
$54.1 million of deposits consisted of public funds that generally
have maturities of 60 days or less. Advances from the FHLB Seattle
increased to $259.5 million at September 30, 1996 from $259.4 million
at June 30, 1996. At September 30, 1996 and June 30, 1996,
<PAGE>
securities sold subject to reverse repurchase agreements were $201.6
million and $195.8 million, respectively. These borrowings are
secured by mortgage-backed securities with a market value exceeding
the face value of the borrowings. Under certain circumstances,
Sterling could be required to pledge additional securities or reduce
the borrowings. At September 30, 1996 and June 30, 1996, loans from
commercial banks amounted to $15 million and $0 million, respectively.
Sterling had $17.2 million of Subordinated Notes outstanding as of
September 30, 1996 and June 30, 1996, respectively. Additionally, the
maturities of reverse repurchase agreements are generally less than
twelve months and are subject to more frequent repricing than are
other types of borrowings. Also, during the quarter ended September
30, 1996, Sterling increased its Federal Funds purchases by $39.7
million.
Cash provided or used by investing activities consists primarily of
principal and interest payments on loans and mortgage-backed
securities and sales of mortgage-backed securities. The levels of
these payments and sales increase or decrease depending on the size of
the loan and mortgage-backed securities portfolios and the general
trend and level of interest rates, which influences the level of
refinancing and mortgage prepayments. During the three months ended
September 30, 1996 and 1995, net cash was provided by investing
activities primarily from principal payments and proceeds from sales
of mortgage-backed securities.
Cash provided or used by operating activities is determined largely by
changes in the level of loan sales. The level of loans held for sale
depends on the level of loan originations and the time within which
investors fund the purchase of loans from Sterling. A majority of
conventional loans held for sale are sold within 10 days of the
closing while the sale of certain Federal Housing Administration
("FHA") and Veteran's Administration ("VA") insured loans may take up
to 60 days. Sterling typically offsets fluctuations in the level of
loans held for sale by changing the level of advances from the FHLB
Seattle, reverse repurchase agreements or cash. Management believes
that proceeds from loans sold and advances from the FHLB Seattle will
be sufficient to fund loan commitments in the future.
Sterling Savings' credit line with the FHLB Seattle is 35% of its
total assets. At September 30, 1996, this credit line represented a
total borrowing capacity of approximately $535.6 million, of which
$259.5 million was outstanding in term-advances and $24.7 million was
outstanding as Fed Funds purchased. Sterling Savings also borrows on
a secured basis from major broker/dealers and financial entities by
selling securities subject to repurchase agreements. At September 30,
1996, Sterling Savings had $201.6 million in outstanding borrowings
under reverse repurchase agreements and securities available for
additional secured borrowings of approximately $141.7 million.
Sterling Savings also had a secured line of credit agreement from a
commercial bank of approximately $10.0 million as of September 30,
1996. At September 30, 1996, Sterling Savings had no funds drawn on
this line of credit.
<PAGE>
Excluding its subsidiaries, Sterling Financial had a line of credit
from a commercial bank of approximately $5.0 million at September 30,
1996. At September 30, 1996, Sterling Financial had no funds drawn on
this line of credit. During the quarter ended September 30, 1996,
Sterling Financial also secured a $15.0 million six-year term loan
which requires interest to be paid quarterly at the London Interbank
Offering Rate ("LIBOR") plus 1.5% for the first two years, increasing
to LIBOR plus 2.5% for the third through sixth years. At the end of
the second year, principal payments commence so as to fully amortize
the loan by the end of the sixth year. Proceeds of $10.0 million of
this term loan were contributed to Sterling Savings to enhance its
capital.
At September 30, 1996, Sterling Financial had short-term investments
of $11.4 million and an investment of $51.1 million in the Preferred
Stock of Sterling Savings. Sterling Financial received cash dividends
on Sterling Savings Preferred Stock of $1.2 million during the three
months ended September 30, 1996. These resources and dividends were
sufficient to provide for the operating needs of Sterling Financial,
including interest expense on the Subordinated Notes and dividends on
the Preferred Stock of Sterling Financial. Sterling Savings' ability
to pay dividends is limited by its earnings, financial condition and
capital requirements, as well as rules and regulations imposed by the
OTS.
OTS regulations require savings institutions such as Sterling Savings
to maintain an average daily balance of liquid assets equal to or
greater than a specific percentage (currently 5%) of the average daily
balance of net withdrawable accounts and borrowings payable on demand
in one year or less during the preceding calendar month. At September
30, 1996, Sterling Savings' liquidity ratio was 8.82%, compared with
7.31% at June 30, 1996. The higher level of liquidity at September
30, 1996 was primarily due to the retention and purchase of qualifying
investment securities. Sterling Savings' strategy generally is to
maintain its liquidity ratio at or near the required minimum in order
to maximize its yield on alternative investments. The regulatory
liquidity ratio does not consider certain other sources of liquidity,
such as funds invested through Sterling Savings' subsidiaries,
potential borrowings against mortgage-backed securities or investment
securities and other potential financing alternatives. The required
minimum liquidity ratio may vary from time to time, depending on
economic conditions, savings flows and loan funding needs.
CAPITAL RESOURCES
Sterling's total shareholders' equity was $84.3 million at
September 30, 1996, compared to $85.7 million at September 30, 1996.
At June 30, 1996, shareholders' equity was 5.51% of total assets
compared to 5.80% of total assets at June 30, 1996.
<PAGE>
At September 30, 1996, Sterling recorded an unrealized loss of $9.2
million, net of related deferred income taxes, on investments in debt
securities classified as available-for-sale. The change from the June
30, 1996 balance of a $10.3 million unrealized loss reflects an
increase in the market valuation of mortgage-backed securities and
investments which is primarily due to falling interest rates.
Fluctuations in prevailing interest rates likely will cause volatility
in this component of shareholders' equity in future periods.
In order to improve and expand branch locations, Sterling anticipates
that its future capital expenditures will be approximately $3.0
million to $3.5 million during fiscal year 1997, although this amount
may change materially depending on the evolving need for capital
expenditures. Sterling intends to fund these capital expenditures
from various sources, including retained earnings and borrowings with
various maturities.
Sterling Savings is required by its regulators to maintain certain
minimum capital levels with respect to tangible capital, core leverage
capital and risk-based capital. At September 30, 1996, Sterling
Savings exceeded all regulatory capital requirements and was
considered "well-capitalized" under applicable regulations.
Sterling continues to proactively manage its claim against the U.S.
government for breach of contract on three "supervisory goodwill"
acquisition contracts. On July 1, 1996, the U.S. Supreme Court ruled
in three similar cases that the U.S. Government was liable for having
breached its acquisition contracts with certain thrift associations.
Sterling is encouraged by the Supreme Court's decision, although it is
uncertain when a trial to determine Sterling's damages will be held,
whether Sterling will obtain a judgment, or if and when the funds to
pay such a judgment, if any, will be appropriated by Congress.
FEDERAL DEPOSIT INSURANCE CORPORATION
Sterling's deposits are insured up to $100,000 per insured depositor
(as defined by law and regulations) by the FDIC through the SAIF. The
SAIF is administered and managed by the FDIC. The FDIC is authorized
to conduct examinations of and to require reporting by SAIF member
institutions. The FDIC may prohibit any SAIF member institution from
engaging in any activity the FDIC determines by regulation or order
poses a serious threat to the SAIF. The FDIC also has the authority
to initiate enforcement actions against savings associations.
Legislation enacted on September 30, 1996 requires SAIF-insured
savings institutions, like Sterling, to pay a one-time special
assessment of $0.657 for every $100 of deposits as of March 31, 1995.
Sterling's SAIF assessment resulted in a pre-tax charge to earnings of
$5.8 million during the quarter ended September 30, 1996. As a result
of this special assessment, the deposit insurance premium is scheduled
to significantly decline, effective January 1, 1997. Also, the
legislation provides that banks will begin sharing the responsibility
of paying the Financing Corporation ("FICO") bonds as of January 1,
1997.
<PAGE>
The new legislation contemplates a unification of the charters
presently available to banks and thrifts. The Treasury Department is
required to make recommendations regarding unification of the
available charters and the merger of the insurance funds by March 31,
1997. The legislation requires a merger of the SAIF with the Bank
Insurance Fund ("BIF") on January 1, 1999 if the unification of the
charters for all insured-institutions has, in fact, occurred. SAIF
and BIF will continue to operate as separate funds if this unification
of charters has not taken place, until such time as additional federal
legislation is passed requiring a merger of the funds.
EFFECTS OF INFLATION AND CHANGING PRICES
A savings institution has an asset and liability structure that is
interest rate sensitive. As a holder of monetary assets and
liabilities, a savings institution's performance may be significantly
influenced by changes in interest rates. Although changes in the
prices of goods and services do not necessarily move in the same
direction as interest rates, increases in inflation generally have
resulted in increased interest rates, which may have an adverse effect
on Sterling's business.
<PAGE>
PART II - Other Information
---------------------------
STERLING FINANCIAL CORPORATION
Item 1 - Legal Proceedings.
Periodically, various claims and lawsuits are brought against Sterling
and its subsidiaries, such as claims to enforce liens, condemnation
proceedings involving properties on which Sterling holds security
interests, claims involving the making and servicing of real property
loans and other issues incidental to Sterling's business. No material
loss is expected from any of such pending claims or lawsuits.
Items 2 through 5 are omitted from this report as inapplicable.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibit 3.1, Restated Articles of Incorporation of Registrant.
Filed as Exhibit 3.1 to Registrant's Form S-4 dated November 7,
1994 and incorporated by reference herein.
(b) Exhibit 3.2, Articles of Amendment of Restated Articles of
Incorporation. Filed as Exhibit 3.2 to Registrant's Form S-4
dated November 7, 1994 and incorporated by reference herein.
(c) Exhibit 3.3, Bylaws of Registrant. Filed as Exhibit 3.3 to
Registrant's Form S-4 dated November 7, 1994 and incorporated by
reference herein.
(d) Exhibit 11.1, Statement Regarding Computation of Net Income
(Loss) Per Share for the three months ended September 30, 1996
and 1995. Filed herewith.
(e) Exhibit 12.1, Statement Regarding Computation of Annualized
Return on Average Common Shareholders' Equity for the three
months ended September 30, 1996 and 1995. Filed herewith.
(f) Exhibit 12.2, Statement Regarding Computation of Annualized
Return on Average Assets for the three months ended September
30, 1996 and 1995. Filed herewith.
(g) Exhibit 27, Financial Data Schedule. Filed herewith.
(h) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
<PAGE>
STERLING FINANCIAL CORPORATION
S I G N A T U R E S
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STERLING FINANCIAL CORPORATION
(Registrant)
November 12, 1996 /s/Daniel G. Byrne
------------------ --------------------------------------
Date Daniel G. Byrne
Senior Vice President - Finance,
Treasurer and Assistant Secretary,
Principal Financial Officer and
Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 26302
<INT-BEARING-DEPOSITS> 453
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 487494
<INVESTMENTS-CARRYING> 11875
<INVESTMENTS-MARKET> 11744
<LOANS> 921625
<ALLOWANCE> 8219
<TOTAL-ASSETS> 1531295
<DEPOSITS> 896568
<SHORT-TERM> 0
<LIABILITIES-OTHER> 535407
<LONG-TERM> 15000
0
1040
<COMMON> 5537
<OTHER-SE> 77743
<TOTAL-LIABILITIES-AND-EQUITY> 1531295
<INTEREST-LOAN> 20193
<INTEREST-INVEST> 7663
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 27856
<INTEREST-DEPOSIT> 10525
<INTEREST-EXPENSE> 18340
<INTEREST-INCOME-NET> 9516
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15972
<INCOME-PRETAX> (5185)
<INCOME-PRE-EXTRAORDINARY> (3298)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3298)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
<YIELD-ACTUAL> 2.67
<LOANS-NON> 3438
<LOANS-PAST> 0
<LOANS-TROUBLED> 231
<LOANS-PROBLEM> 4267
<ALLOWANCE-OPEN> 7889
<CHARGE-OFFS> 264
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 8219
<ALLOWANCE-DOMESTIC> 8219
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ending September 30, 1996
Three Months Daily
Shares Outstanding Weighted Average
------------------------- -------------------------
Common Fully
Common Equivalents Days Primary Diluted
------------ ----------- ---- ------------ -----------
<S> <C> <C> <C> <C> <C>
July 9, 1996 5,426,398 7,456,062 9 48,837,582 67,104,558
July 10, 1996 5,462,054 7,491,718 1 5,462,054 7,491,718
July 11, 1996 5,483,264 7,512,928 4 21,933,056 30,051,712
July 15, 1996 5,498,370 7,528,034 2 10,996,740 15,056,068
July 17, 1996 5,502,836 7,532,500 5 27,514,180 37,662,500
July 22, 1996 5,513,970 7,543,634 1 5,513,970 7,543,634
July 23, 1996 5,526,724 7,556,388 1 5,526,724 7,556,388
July 24, 1996 5,531,968 7,561,632 2 11,063,936 15,123,264
July 26, 1996 5,532,468 7,562,132 5 27,662,340 37,810,660
July 31, 1996 5,532,592 7,562,256 12 66,391,104 90,747,072
August 12, 1996 5,533,342 7,563,006 1 5,533,342 7,563,006
August 13, 1996 5,534,342 7,564,006 8 44,274,736 60,512,048
August 21, 1996 5,534,958 7,564,622 5 27,674,790 37,823,110
August 26, 1996 5,535,208 7,564,872 2 11,070,416 15,129,744
August 28, 1996 5,535,828 7,565,492 1 5,535,828 7,565,492
August 29, 1996 5,537,328 7,566,992 33 182,731,824 249,710,736
----------- -----------
507,722,622 694,451,710
Divide by number of days included in period 92 92
----------- -----------
Weighted average shares outstanding 5,518,724 7,548,388
Adjustment for other common stock equivalents
(stock options) 65,481
----------- -----------
Total 5,518,724 7,613,869
=========== ===========
Net income (loss) $(3,298,000) $(3,298,000)
Dividends paid on preferred shares (471,000)
----------- -----------
Net income (loss) available to common shareholders $(3,769,000) $(3,298,000)
=========== ===========
Earnings (loss) per share $ (0.68) $ (0.68)
=========== ===========
</TABLE>
NOTE: Convertible preferred stock is antidilutive at September 30,
1996; therefore primary earnings per share is used.
<PAGE>
EXHIBIT 11.1 (CONTINUED)
COMPUTATION OF NET INCOME (LOSS) PER SHARE, CONTINUED
<TABLE>
<CAPTION>
Three Months Ending September 30, 1996
Three Months Daily
Shares Outstanding Weighted Average
------------------------- -------------------------
Common Fully
Common Equivalents Days Primary Diluted
------------ ----------- ---- ------------ -----------
<S> <C> <C> <C> <C> <C>
July 16, 1995 5,399,283 7,428,947 16 86,388,528 118,863,152
July 31, 1995 5,404,287 7,433,951 15 81,064,305 111,509,265
August 1, 1995 5,405,787 7,435,451 1 5,405,787 7,435,451
August 20, 1995 5,406,787 7,436,451 19 102,728,953 141,292,569
August 24, 1995 5,407,282 7,436,946 4 21,629,128 29,747,784
August 28, 1995 5,407,532 7,437,196 4 21,630,128 29,748,784
August 29, 1995 5,407,777 7,437,441 1 5,407,777 7,437,441
September 14, 1995 5,408,777 7,438,441 16 86,540,432 119,015,056
September 30, 1995 5,410,022 7,439,686 16 86,560,352 119,034,976
----------- -----------
497,355,390 684,084,478
Divide by number of days included in period 92 92
----------- -----------
Weighted average shares outstanding 5,406,037 7,435,701
Adjustment for other common stock equivalents
(stock options) 81,819
----------- -----------
Total 5,406,037 7,517,520
=========== ===========
Net income $ 1,336,000 $ 1,336,000
Dividends paid on preferred shares (471,000)
----------- -----------
Net income available to common shareholders $ 865,000 $ 1,336,000
=========== ===========
Earnings per share $ 0.16 $ 0.16
=========== ===========
</TABLE>
NOTE: CONVERTIBLE PREFERRED STOCK IS ANTIDILUTIVE AT SEPTEMBER 30,
1995; THEREFORE PRIMARY EARNINGS PER SHARE IS USED.
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY
FOR THE QUARTER ENDING SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shareholders' Equity
------------------------ Number
Total Common of Days Total Common
----------- ----------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C>
July 9, 1996 $85,745,299 $61,118,514 9 $ 771,707,691 $ 550,066,626
July 10, 1996 86,142,936 61,516,151 1 86,142,936 61,516,151
July 11, 1996 86,393,594 61,766,809 4 345,574,376 247,067,236
July 15, 1996 87,083,794 62,457,009 2 174,167,588 124,914,018
July 17, 1996 87,136,582 62,509,797 5 435,682,910 312,548,985
July 22, 1996 87,261,875 62,635,090 1 87,261,875 62,635,090
July 23, 1996 87,412,627 62,785,842 1 87,412,627 62,785,842
July 24, 1996 87,474,611 62,847,826 2 174,949,222 125,695,652
July 26, 1996 87,479,876 62,853,091 5 437,399,380 314,265,455
July 31, 1996 87,479,876 62,853,091 12 1,049,758,512 754,237,092
August 12, 1996 87,486,564 62,859,779 1 87,486,564 62,859,779
August 13, 1996 87,493,494 62,866,709 2 174,986,988 125,733,418
August 15, 1996 88,043,732 63,416,947 6 528,262,392 380,501,682
August 21, 1996 88,044,563 63,417,778 5 440,222,815 317,088,890
August 26, 1996 88,046,295 63,419,510 2 176,092,590 126,839,020
August 28, 1996 88,046,295 63,419,510 1 88,046,295 63,419,510
August 29, 1996 88,056,691 63,429,906 17 1,496,963,747 1,078,308,402
September 15, 1996 87,296,323 62,669,538 15 1,309,444,845 940,043,070
September 30, 1996 84,319,754 59,692,969 1 84,319,754 59,692,969
-- -------------- --------------
Total 92 8,035,883,107 5,770,218,887
Divide by number of days 92 92
-------------- --------------
Average $ 87,346,556 $ 62,719,771
============== ==============
Net income (loss) available to common shares $ (3,769,000)
Divide by average common shareholders' equity 62,719,771
--------------
Return on average common shareholders' equity (23.84)%
==============
</TABLE>
<PAGE>
EXHIBIT 12.1, CONTINUED
COMPUTATION OF RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY, CONTINUED
FOR THE QUARTER ENDING SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shareholders' Equity
------------------------ Number
Total Common of Days Total Common
----------- ----------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C>
July 14, 1995 $89,906,411 $65,279,626 14 $1,258,689,754 $ 913,914,764
July 16, 1995 90,069,699 65,442,914 2 180,139,398 130,885,828
July 31, 1995 90,086,403 65,459,618 15 1,351,296,045 981,894,270
August 1, 1995 90,096,423 65,469,638 1 90,096,423 65,469,638
August 14, 1995 90,103,103 65,476,318 13 1,171,340,339 851,192,134
August 20, 1995 90,693,248 66,066,463 6 544,159,488 396,398,778
August 24, 1995 90,694,759 66,067,974 4 362,779,036 264,271,896
August 28, 1995 90,696,262 66,069,477 4 362,785,048 264,277,908
August 29, 1995 90,696,271 66,069,486 1 90,696,271 66,069,486
August 30, 1995 90,702,281 66,075,496 1 90,702,281 66,075,496
September 14, 1995 90,698,388 66,071,603 15 1,360,475,820 991,074,045
September 29, 1995 91,295,784 66,668,999 15 1,369,436,760 1,000,034,985
September 30, 1995 90,976,495 66,349,710 1 90,976,495 66,349,710
-- -------------- --------------
Total 92 8,323,573,158 6,057,908,938
Divide by number of days 92 92
-------------- --------------
Average $ 90,473,621 $ 65,846,836
============== ==============
Net income available to common shares $ 865,000
Divide by average common shareholders' equity 65,846,836
--------------
Return on average common shareholders' equity 5.23%
==============
</TABLE>
<PAGE>
EXHIBIT 12.2
COMPUTATION OF RETURN ON AVERAGE ASSETS
QUARTER ENDING SEPTEMBER 30, 1996
Total Assets
--------------
June 30, 1996 $1,477,698,000
July 31, 1996 1,480,342,000
August 31, 1996 1,487,950,000
September 30, 1996 1,531,295,000
--------------
5,977,285,000
Divide by number of months 4
==============
Average $1,494,321,250
==============
Net income (loss) $ (3,298,000)
Divide by average assets 1,494,321,250
--------------
Return on average assets 0.88%
==============
<PAGE>
EXHIBIT 12.2, CONTINUED
COMPUTATION OF RETURN ON AVERAGE ASSETS, CONTINUED
QUARTER ENDING SEPTEMBER 30, 1995
Total Assets
--------------
June 30, 1995 $1,540,784,000
July 31, 1995 1,545,273,000
August 31, 1995 1,553,855,000
September 30, 1995 1,554,614,000
--------------
6,194,526,000
Divide by number of months 4
--------------
Average $1,548,631,500
==============
Net income $ 1,336,000
Divide by average assets 1,548,631,500
--------------
Return on average assets 0.34%
==============
<PAGE>
