U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 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, 1997
------------------
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 0-20800
-------
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. Yes X No
--- ---
<PAGE>
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, 1997
------------------------------ ------------------------------------
Common Stock ($1.00 par value) 7,567,091
<PAGE>
STERLING FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1997
TABLE OF CONTENTS
PART I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statement of Changes in Shareholders' Equity
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>
PART I - Financial Information
Item 1 - Financial Statements
STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest bearing $ 20,633 $ 6,253
Non-interest bearing and vault 30,793 26,422
Restricted 4,400 3,230
Loans receivable (net of allowance for
losses of $8,566 and $7,891) 1,032,937 934,340
Loans held-for-sale 5,490 6,116
Investments and mortgage-backed
securities:
Available-for-sale 687,673 469,790
Held-to-maturity 12,589 11,871
Accrued interest receivable (including
$1,597 and $1,394 on investments) 12,276 10,690
Office properties and equipment, net 38,511 39,861
Real estate owned 4,196 3,974
Core deposit premium, net 7,154 8,303
Other intangibles, net 1,172 1,725
Purchased mortgage servicing rights, net 1,238 1,474
Prepaid expenses and other assets 11,451 12,295
---------- ----------
Total assets $1,870,513 $1,536,344
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 999,505 $ 902,278
Advances from FHLB Seattle 364,965 259,626
Securities sold subject to repurchase
agreements 303,573 229,797
Other borrowings 72,240 32,240
Cashiers checks issued and payable 9,987 5,723
Borrowers' reserves for taxes and insurance 2,415 1,126
Accrued interest payable 5,740 5,095
Accrued expenses and other liabilities 13,838 11,239
---------- ----------
Total liabilities 1,772,263 1,447,124
---------- ----------
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets, Continued
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY,
CONTINUED
Shareholders' equity:
Capital stock:
Preferred stock, $1 par value;
10,000,000 shares authorized; 0 and
1,040,000 shares issued and out-
standing ($0 and $26,000 liquidation
preference value) 0 1,040
Common stock, $1 par value; 20,000,000
shares authorized; 7,567,091 and
5,539,178 shares issued and
outstanding 7,567 5,539
Additional paid-in capital 69,400 70,462
Unrealized loss on investments and
mortgage-backed securities available-
for-sale, net of deferred income tax
benefits of $1,647 and $3,239 (3,058) (6,020)
Retained earnings 24,341 18,199
---------- ----------
Total shareholders' equity 98,250 89,220
---------- ----------
Total liabilities and shareholders'
equity $1,870,513 $1,536,344
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 23,400 $ 20,193 $ 67,410 $ 59,829
Mortgage-backed securities 7,872 6,371 20,184 19,979
Investments and cash equivalents 3,529 1,292 7,624 3,611
--------- --------- --------- ---------
Total interest income 34,801 27,856 95,218 83,419
--------- --------- --------- ---------
Interest expense:
Deposits 11,852 10,525 33,547 32,117
Short-term borrowings 7,979 7,306 17,600 16,065
Long-term borrowings 3,413 509 10,425 7,283
--------- --------- --------- ---------
Total interest expense 23,244 18,340 61,572 55,465
--------- --------- --------- ---------
Net interest income 11,557 9,516 33,646 27,954
Provision for loan losses (675) (550) (1,775) (1,350)
--------- --------- --------- ---------
Net interest income after provision
for loan losses 10,882 8,966 31,871 26,604
--------- --------- --------- ---------
Other income:
Fees and service charges 1,264 1,155 3,761 3,277
Mortgage banking operations 442 715 1,530 2,517
Loan servicing fees 311 118 968 580
Net gain on sales of securities 582 0 1,154 7
Net gain (loss) on sale and oper-
ation of real estate owned 33 (167) (60) (224)
--------- --------- --------- ---------
Total other income 2,632 1,821 7,353 6,157
--------- --------- --------- ---------
Operating expenses 9,432 15,972 27,783 32,141
--------- --------- --------- ---------
Income (loss) before income taxes 4,082 (5,185) 11,441 620
Income tax provision (benefit) 1,551 (1,887) 4,348 332
--------- --------- --------- ---------
Net income (loss) 2,531 (3,298) 7,093 288
Less preferred stock dividends
declared 0 (471) (940) (1,414)
--------- --------- --------- ---------
Net income (loss) available to common
shares $ 2,531 $ (3,769) $ 6,153 $ (1,126)
========= ========= ========= =========
</TABLE>
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Income, Continued
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Income (loss) per common and common
equivalent share $ 0.41 $ (0.68) $ 1.07 $ (0.21)
========= ========= ========= =========
Weighted average common shares
outstanding 6,148,920 5,518,724 5,748,837 5,456,057
========= ========= ========= =========
Income (loss) per common share
assuming full dilution $ 0.33 $ (0.68) $ 0.92 $ (0.21)
========= ========= ========= =========
Weighted average common shares out-
standing assuming full dilution 7,712,628 7,613,869 7,711,949 7,551,202
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
---------- ----------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 7,093 $ 288
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provisions for loan and real estate
owned losses 1,832 1,378
Stock dividends on FHLB Seattle stock (1,499) (1,422)
Net gain on sales of loans and securities (2,332) (2,269)
Net loss on sales of office property
and equipment 6 0
Net gain on sales of real estate owned (185) (83)
Depreciation and amortization 5,742 6,881
Deferred income tax provision 0 1,253
Change in:
Accrued interest receivable (1,586) 291
Prepaid expenses and other assets (923) (4,303)
Cashiers checks issued and payable 4,264 1,348
Accrued interest payable 645 (1,069)
Accrued expenses and other liabilities 2,449 4,617
Proceeds from sales of loans 88,468 152,473
Loans originated for sale (86,665) (135,629)
--------- ---------
Net cash provided by operating
activities 17,309 23,754
--------- ---------
Cash flows from investing activities:
Loans disbursed (617,407) (485,201)
Loan principal payments 515,677 430,170
Purchase of investments (155,450) (41,119)
Proceeds from maturities of investments 80,000 1,196
Purchase of mortgage-backed securities (385,086) 0
Mortgage-backed securities principal
payments 44,017 49,067
Proceeds from sales of mortgage-backed
securities 204,371 7
Purchase of office properties and equipment (993) (6,950)
Proceeds from sales of office properties
and equipment 12 0
Proceeds from sales of real estate owned 1,745 909
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
---------- ----------
(Dollars in thousands)
Cash flows from investing activities,
continued:
Improvements and other changes to real
estate owned (480) 8
Proceeds from sales of purchased
mortgage servicing rights 0 741
--------- ---------
Net cash used in investing activities (313,594) (51,172)
--------- ---------
Cash flows from financing activities:
Net change in checking, passbook and money
market deposits 39,481 39,061
Proceeds from sales of certificates of
deposit 310,624 297,887
Payments for maturing certificates of
deposit (286,492) (357,369)
Interest credited to deposits 33,614 28,336
Advances from FHLB Seattle 355,000 90,000
Repayment of FHLB Seattle advances (250,061) (176,056)
Net change in securities sold subject
to repurchase agreements and funds
purchased 73,776 88,940
Proceeds from other borrowings 40,000 15,000
Cash dividends on preferred stock (940) (1,414)
Proceeds from exercise of stock options
and warrants, net of repurchases 28 1,351
Payments to redeem preferred stock (112) 0
Cash-in-lieu of fractional shares on
conversion of preferred stock (1) 0
Other 1,289 1,285
--------- ---------
Net cash provided by (used in)
financing activities 316,206 27,021
--------- ---------
Net increase (decrease) in cash and cash
equivalents 19,921 (397)
Cash and cash equivalents, beginning of
period 35,905 27,152
--------- ---------
Cash and cash equivalents, end of period $ 55,826 $ 26,755
========= =========
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
---------- ----------
(Dollars in thousands)
Supplemental disclosures:
Cash paid during the period for:
Interest $ 60,927 $ 56,534
========= =========
Income taxes $ 2,850 $ 3,289
========= =========
Non-cash financing and investing activities:
Loans converted into real estate owned $ 1,359 $ 1,712
========= =========
Loans exchanged for mortgage-backed
securities $ 0 $ 1,116
========= =========
Common stock issued for preferred stock $ 24,522 $ 0
========= =========
Preferred stock converted to common stock $ (24,523) $ 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 Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
----------------------- ---------------------- Paid-in Unrealized Retained Shareholders'
Shares Amount Shares Amount Capital Loss Earnings Equity
----------- ---------- ---------- ---------- ---------- ---------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,040,000 $ 1,040 5,539,178 $ 5,539 $ 70,462 $ (6,020) $ 18,199 $ 89,220
Shares issued upon
exercise of stock
options 11,932 12 106 118
Shares acquired and
retired upon exercise
of stock options (5,209) (5) (84) (89)
Preferred shares con-
verted to common stock (1,035,700) (1,036) 2,021,190 2,021 (986) (1)
Preferred shares
redeemed (4,300) (4) (98) (11) (113)
Dividends declared and
paid on preferred
stock ($0.45 per
share) (940) (940)
Change in unrealized
loss, net of income
taxes 2,962 2,962
Net income 7,093 7,093
---------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30,
1997 0 $ 0 7,567,091 $ 7,567 $ 69,400 $ (3,058) $ 24,341 $ 98,250
========== ========= ========= ========= ========= ========= ========= =========
</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 December 31, 1996 consolidated financial statements,
as set forth in Sterling's December 31, 1996 Annual Report on
Form 10-K, substantially apply to these interim consolidated
financial statements as of and for the three and nine months ended
September 30, 1997 and are not repeated here. All financial
statements presented are unaudited. However, the December 31,
1996 consolidated balance sheet 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, 1996 balances have been reclassified to
conform with the September 30, 1997 presentation. These
reclassifications had no effect on net loss or retained earnings
as previously reported.
4. Other Borrowings:
-----------------
The following table details Sterling's other borrowings.
September 30, December 31,
1997 1996
------------- ------------
(Dollars in thousands)
Term note payable $15,000 $15,000
8.75% Subordinated Notes Due 2000 17,240 17,240
Sterling obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely junior subordinated
deferrable interest debentures
of Sterling (1) 40,000 0
------- -------
$72,240 $32,240
======= =======
<PAGE>
STERLING FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, Continued
(1) On June 4, 1997, Sterling issued $41.2 million of 9.50%
junior subordinated deferrable interest debentures (the
"Junior Subordinated Debentures") to Sterling Capital Trust I
(the "Trust"), a Delaware business trust, in which Sterling
owns all of the common equity. The sole asset of the Trust
is the Junior Subordinated Debentures. The Trust issued
$40.0 million of 9.50% Cumulative Capital Securities (the
"Trust Preferred Securities") to investors. Sterling's
obligations under the Junior Subordinated Debentures and
related documents, taken together, constitute a full and
unconditional guarantee by Sterling of the Trust's
obligations under the Trust Preferred Securities. The Trust
Preferred Securities are treated as debt of Sterling.
Although Sterling, as a savings and loan holding company, is
not subject to the Federal Reserve capital requirements for
bank holding companies, the Trust Preferred Securities have
been structured to qualify as Tier 1 capital, subject to
certain limitations, if Sterling were to become regulated as
a bank holding company. The Junior Subordinated Debentures
and related Trust Preferred Securities mature on June 30,
2027 or are redeemable earlier in the event the deduction of
related interest for federal income taxes is prohibited,
treatment as Tier 1 capital is no longer permitted, or
certain other contingencies arise. The Trust Preferred
Securities must be redeemed upon maturity of the Junior
Subordinated Debentures in 2027.
5. Shareholders' Equity:
---------------------
During the three months ended September 30, 1997, the $1.8125
Series A Cumulative Convertible Preferred Stock (the "Preferred
Stock") was called for redemption at $26.07 per share plus any
accrued but unpaid dividends. During this period, 1,035,700
shares of Preferred Stock were converted to 2,021,190 shares of
common stock as a result of the call for redemption. During this
same period, 4,300 shares of Preferred Stock were redeemed for
$113,000.
<PAGE>
STERLING FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, Continued
6. Operating Expenses:
-------------------
The following table details Sterling's components of total
operating expenses.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Employee compensation and benefits $ 4,026 $ 3,171 $11,872 $ 9,188
Occupancy and equipment 1,562 1,471 4,460 4,174
Depreciation 767 763 2,325 2,247
Amortization of unidentified
intangibles 157 208 553 689
Amortization of core deposit premium 379 585 1,149 1,767
Advertising 452 440 1,362 1,289
Data processing 521 619 1,747 1,463
Insurance 286 660 882 1,827
SAIF assessment 0 5,800 0 5,800
Travel and entertainment 267 360 789 832
Legal and accounting 346 996 1,104 1,654
Other 669 899 1,540 1,211
------- ------- ------- -------
Total operating expenses $ 9,432 $15,972 $27,783 $32,141
======= ======= ======= =======
</TABLE>
7. Other Accounting Policies:
--------------------------
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 131, Disclosures about Segments for an Enterprise and
Related Information ("SFAS 131"). This Statement will change the
way public companies report information about segments of their
business in their annual financial statements and requires them to
report selected segment information in their quarterly reports
issued to shareholders. It also requires entity-wide disclosures
about the products and services an entity provides, and its major
customers. This Statement is effective for fiscal years beginning
after December 15, 1997. Sterling has not yet determined the
effect, if any, of SFAS 131 on its consolidated financial
statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, Continued
7. Other Accounting Policies, Continued:
-------------------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. This Statement requires that comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement
does not require a specific format for the financial statement but
requires that an enterprise display net income as a component of
comprehensive income in the financial statement. Comprehensive
income is defined as the change in equity of a business enterprise
arising from non-owner sources. The classifications of
comprehensive income under current accounting standards include
foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and
equity securities. This Statement will affect Sterling's
reporting of unrealized gains and losses on available-for-sale
investments and mortgage-backed securities, requiring reporting of
these items on the financial statement that reports comprehensive
income. Management has not yet determined which format it will
choose to display comprehensive income. This Statement is
effective for fiscal years beginning after December 15, 1997.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share
("SFAS 128"). SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS") and simplifies the existing
standards. This standard replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires the dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997,
including interim periods, and requires restatement of all prior-
period EPS data presented. Sterling does not believe the
application of this standard will have a material effect on the
presentation of its EPS.
<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 and Nine Months Ended September 30, 1997 and
1996
ANY TREND OR FORWARD-LOOKING INFORMATION DISCUSSED IN THIS REPORT IS
SUBJECT TO NUMEROUS POSSIBLE RISKS AND UNCERTAINTIES. THESE INCLUDE
BUT ARE NOT LIMITED TO: THE POSSIBILITY OF ADVERSE ECONOMIC
DEVELOPMENTS WHICH MAY, AMONG OTHER THINGS, INCREASE DEFAULT AND
DELINQUENCY RISKS IN STERLING'S LOAN PORTFOLIOS; SHIFTS IN INTEREST
RATES WHICH MAY RESULT IN LOWER INTEREST RATE MARGINS; CHANGING
ACCOUNTING POLICIES; CHANGES IN THE MONETARY AND FISCAL POLICIES OF
THE FEDERAL GOVERNMENT; THE CONSTANTLY CHANGING REGULATORY AND
COMPETITIVE ENVIRONMENT, AND OTHER RISKS. STERLING'S FUTURE RESULTS
MAY DIFFER MATERIALLY FROM HISTORICAL RESULTS AS WELL AS FROM ANY
TREND OR FORWARD-LOOKING INFORMATION INCLUDED IN THIS REPORT.
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
$1.87 billion in total assets at September 30, 1997, 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. Sterling
originates loans through its branch offices as well as 9 Action
Mortgage residential loan production offices in the Spokane and
Seattle, Washington; Portland, Oregon and Boise, Idaho metropolitan
areas and four 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.
Recently, Sterling has focused its efforts on becoming more like a
community retail bank by increasing its construction, business banking
and consumer lending while increasing its retail deposits. Sterling's
revenues are derived primarily from interest earned on loans,
investments 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.
<PAGE>
Sterling intends to continue to pursue its growth strategy by focusing
on internal growth as well as acquisition opportunities. As part of
this strategy, Sterling is changing the mix of its assets and
liabilities to become more like a community-based retail bank. During
the past twelve months, Sterling's construction, business banking and
consumer loans, which are higher yielding, have increased by 23.1%
while residential permanent loans have decreased by 10.8%. From time
to time, Sterling augments its internal growth with investments in
mortgage-backed securities and other securities classified as
available-for-sale. These securities increased by $227.7 million in
the second and third quarters of 1997. This was in response to the
Trust Preferred Securities offering that occurred in June 1997. See
"Asset and Liability Management," "Results of Operations - Net
Interest Income," and "Capital Resources." Further, 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, all of which would be subject to prior regulatory
approval. As part of this growth strategy, Sterling engages from time
to time in discussions concerning possible acquisitions. Sterling
also monitors capital market conditions in its efforts to increase its
capital resources to fund its growth. 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.
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 NPV (the net present value of assets, liabilities and
off-balance sheet contracts) 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;
however, such an asset/liability structure 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.
Sterling maintains an asset and liability management program intended
to manage net interest income through interest rate cycles and to
protect its NPV by controlling its exposure to changing interest
rates.
<PAGE>
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 also is 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, 1997, Sterling calculated that its NPV was
$114.7 million and that its NPV would decrease by 35.0% and 75.7%,
respectively, if interest rate levels generally were to increase by 2%
and 4%, respectively. This compares with an NPV of $98.6 million at
September 30, 1996, which would decline by approximately 28.2% and
61.7%, respectively, if interest rate levels generally were to
increase by 2% and 4%, respectively. During the three and nine months
ended September 30, 1997, NPV increased due primarily to an increase
in interest-sensitive assets and a decrease in long-term interest
rates which increased the value of longer term assets. 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 calculated its one-
year and three-year cumulative gap positions to be negative 12.2% and
negative 12.8%, respectively, at September 30, 1997. This compares
with Sterling's one- and three-year gap position of negative 9.2% and
negative 8.0% at September 30, 1996. The widening of the negative gap
positions at September 30, 1997, was due primarily to an increase in
mortgage-backed securities, other securities and short-term
liabilities. Management attempts to maintain Sterling's gap position
between negative 5% and negative 20%. At September 30, 1997,
Sterling's gap positions are within limits established by its Board of
Directors. Management is pursuing strategies to increase its net
interest income without significantly increasing its cumulative gap
positions in future periods. There can be no assurance that Sterling
will be successful in managing its gap positions and that its net
interest income will not decline.
During the past 12 months, short-term interest rates have been
relatively stable, although on March 1997, the Federal Reserve Board
implemented a policy to tighten credit by increasing the Federal Funds
rate to 5.50%. Longer term interest rates have been somewhat more
volatile with 30-year Treasury bond yields ranging between 6.30% and
7.17%. During June 1997, Sterling increased its capital resources
through the issuance of $40.0 million of Trust Preferred Securities.
Sterling subsequently increased its investments in mortgage-backed
securities and other securities classified as available-for-sale by
$227. 7 million. Sterling has funded this asset growth with short-
term borrowings. These activities are intended to increase net
<PAGE>
interest income, but they have also resulted in an increase in
interest rate risk ("IRR"). Sterling is also endeavoring to balance
its IRR and to increase its net interest income through the
origination and retention of variable-rate construction, business
banking, consumer and commercial real estate loans which generally
have higher yields than residential permanent loans. There can be no
assurance that Sterling will be successful in implementing any of
these strategies or that, if these strategies are implemented, they
will have the intended effect of reducing IRR and increasing net
interest income.
Results of Operations
---------------------
OVERVIEW. Sterling reported net income of $2.5 million, or $0.33 per
fully diluted share, for the three months ended September 30, 1997.
This compares with a net loss of $3.3 million, or ($0.68) per share,
for the prior year's comparable period, which reflected a one-time
Savings Association Insurance Fund ("SAIF") assessment of $5.8 million
and other charges of $2.5 million. Net income for the nine months
ended September 30, 1997, was $7.1 million, or $0.92 per fully diluted
share. This compares with approximately $288,000 for the nine months
ended September 30, 1996. After deducting dividends on Preferred
Stock, the net income (loss) available to common shareholders for the
nine months ended September 30, 1997 and 1996 was $1.07 and ($0.21),
respectively, per fully diluted share. The comparison to last year is
difficult because of the one-time SAIF assessment and other charges.
However, earnings for the current three- and nine-month periods
reflect an increase in net interest income and other income.
The annualized return on average assets was 0.56% and negative 0.88%
for the three months ended September 30, 1997 and 1996, respectively.
For the nine months ended September 30, 1997 and 1996, the annualized
return on average assets was 0.57% and 0.02%, respectively. The
increase is primarily attributable to an increase in net income from
the prior year's comparable period. The annualized return on average
equity was 13.02% and negative 23.84% for the three months ended
September 30, 1997 and 1996, respectively. The annualized return on
average equity was 11.96% and negative 2.32% for the nine months ended
September 30, 1997 and 1996, respectively. The increase is primarily
attributable to an increase in net income.
NET INTEREST INCOME. The most significant component of earnings for a
financial institution typically is net interest income. 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. During the
three months ended September 30, 1997 and 1996, net interest income
was $11.6 million and $9.5 million, respectively, an increase of
21.5%. For the nine months ended September 30, 1997 and 1996, net
interest income was $33.6 million and $28.0 million, respectively, an
increase of 20.4%. Changes in net interest income result from changes
in volume, net interest spread and net interest margin. Volume refers
<PAGE>
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. The increase in net interest income during the quarter
ended September 30, 1997 was due primarily to an increase in the
volume of interest-earning assets. During the three months ended
September 30, 1997 and 1996, the volume of average interest-earning
assets was $1.72 billion and $1.41 billion, respectively. Net interest
spread during these periods was 2.41% and 2.46%, respectively. The net
interest margin for the three months ended September 30, 1997 and 1996
was 2.66% and 2.67%, respectively.
The decreases in net interest spread and net interest margin were due
primarily to an increase in the volume of lower yielding mortgage-
backed securities and other investments funded by FHLB advances and
other borrowings. During the nine months ended September 30, 1997 and
1996, the volume of average earning assets was $1.58 billion and
$1.42 billion, respectively. Net interest spread during these periods
was 2.60% and 2.42%, respectively. During the nine months ended
September 30, 1997 and 1996, the net interest margin was 2.85% and
2.64%, respectively. The increase in net interest income, net
interest spread and net interest margin during these periods was due
primarily to an increase in the volume of interest-earning assets.
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 $675,000 and $550,000
for the three months ended September 30, 1997 and 1996, respectively.
Sterling recorded provisions of $1.8 million and $1.4 million for the
nine months ended September 30, 1997 and 1996, respectively. Sterling
increased its provision for loan losses in anticipation of potentially
higher levels of loss from its expanded construction, business banking
and consumer lending activity. At September 30, 1997, Sterling's loan
delinquency rate as a percentage of total loans was 0.85%, compared
with 0.53% at December 31, 1996 and 0.53% at September 30, 1996.
Total nonperforming loans was $4.7 million at September 30, 1997,
compared with $2.5 million at December 31, 1996 and $3.7 million at
September 30, 1996.
As a percentage of total loans, nonperforming loans were 0.41% at
September 30, 1997, compared with 0.25% at December 31, 1996 and 0.36%
at September 30, 1996. Management believes the provisions for the
three and nine months ended September 30, 1997 and 1996, 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
other factors affecting the Pacific Northwest economy.
<PAGE>
OTHER INCOME. The following table summarizes the components of other
income for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fees and service charges $ 1,264 $ 1,155 $ 3,761 $ 3,277
Mortgage banking operations 442 715 1,530 2,517
Loan servicing fees 311 118 968 580
Net gain on sales of securities 582 0 1,154 7
Net gain (loss) on sales and operations
of real estate owned 33 (167) (60) (224)
------- ------- ------- -------
$ 2,632 $ 1,821 $ 7,353 $ 6,157
======= ======= ======= =======
</TABLE>
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 and commissions on sales of mutual funds and annuity
products. The increase was due primarily to growth in checking
accounts and an increase in service charges and fees on deposit
accounts.
The decrease in income from mortgage banking operations for the three
and nine months ended September 30, 1997, compared with the three and
nine months ended September 30, 1996, primarily resulted from
decreases in the volume of residential loans sold of approximately
$14.5 million and $62.9 million, respectively. This partially
reflects a higher retention of loans for the permanent loan portfolio.
The following table summarizes residential permanent loan originations
and sales of these loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- -------- ------- -------
(Dollars in millions)
<S> <C> <C> <C> <C>
Originations of one- to four-family
permanent mortgage loans $ 52.0 $ 40.7 $ 113.5 $ 133.4
Sales of residential loans 26.5 40.9 87.3 150.2
Principal balances of mortgage loans
serviced for others 484.4 565.8 484.4 565.8
</TABLE>
<PAGE>
Loan servicing fees increased for the three and nine months ended
September 30, 1997 compared with the prior year's comparable periods,
reflecting a decrease in the balance of loans serviced that have
amortization of a related acquisition premium offsetting the loan
servicing income. Sterling's average loan servicing portfolio for the
nine months ended September 30, 1997 and 1996 was approximately $516.5
million and $677.5 million, respectively. Sterling continues to
anticipate retaining a significant portion of the current balance of
loans serviced for others, although there can be no assurances in this
regard.
During the nine months ended September 30, 1997, Sterling sold
approximately $203.1 million of mortgage-backed securities, resulting
in a gain of $1.2 million. No such sales were made in the same period
in 1996.
OPERATING EXPENSES. Operating expenses were $9.4 million and $16.0
million for the three months ended September 30, 1997 and 1996,
respectively. Operating expenses for the nine months ended
September 30, 1997 and 1996 were $27.8 million and $32.1 million,
respectively. The decrease during the three and nine months ended
September 30, 1997, is due primarily to a one-time SAIF assessment
charge of $5.8 million and $1.8 million in other one-time expenses in
September 1996. Employee compensation and benefits were $4.0 million
and $3.2 million for the quarters ended September 30, 1997 and 1996,
respectively. During the nine months ended September 30, 1997 and
1996, employee compensation and benefits were $11.9 million and
$9.2 million, respectively. The increase primarily reflects an
increase in lending staff related to Sterling's efforts to increase
its commercial real estate, business banking and consumer lending
areas. It also reflects a reduction in the amount of personnel cost
deferred as the mix of loan originations is shifting away from
residential permanent mortgage to construction, business banking and
consumer loans. Data processing costs were $521,000 and $619,000, for
the three months ended September 30, 1997 and 1996, respectively. The
decrease reflects a number of credits received from Sterling's
financial processing servicer. Insurance expense decreased to
$882,000 for the nine months ended September 30, 1997 from $1.8
million for the nine months ended September 30, 1996. The decrease is
due primarily to the reduction in the SAIF assessment rate on deposits
during 1997. Legal and accounting expenses decreased $650,000 for the
nine months ended September 30, 1997 from the prior year's comparable
period. The decrease was due primarily to a decrease in legal fees
for the period.
INCOME TAX PROVISION. Sterling recorded a $1.6 million income tax
provision and a $1.9 million income tax benefit for the three months
ended September 30, 1997 and 1996, respectively. Income tax
provisions were $4.3 million and $332,000 for the nine months ended
September 30, 1997 and 1996, respectively. The effective tax rates
were approximately 38.0% and 36.4% for the three months ended
September 30, 1997 and 1996, respectively. These rates were higher
than the federal statutory rate of 35.0%, due primarily to state
income taxes and the nondeductible amortization of intangible assets.
<PAGE>
Liquidity and Sources of Funds
------------------------------
As a financial institution, 0Sterling's primary sources of funds are
its financing and investing activities. Financing activities consist
primarily of customer deposits, advances from the FHLB Seattle,
securities sold subject to repurchase agreements ("reverse repurchase
agreements") and other borrowings. Deposits increased $97.2 million
to $999.5 million at September 30, 1997, from $902.3 million at
December 31, 1996. At September 30, 1997, approximately $75.1 million
of deposits consisted of public funds that generally have maturities
of 60 days or less. Advances from the FHLB Seattle increased to
$365.0 million at September 30, 1997 from $259.6 million at December
31, 1996. At September 30, 1997 and December 31, 1996, reverse
repurchase agreements were $303.6 million and $229.8 million,
respectively. These borrowings are secured by investments and
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.
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. Other borrowings
consist of a term note, 8.75% Subordinated Notes Due 2000
("Subordinated Notes") and Trust Preferred Securities. See Note 4 of
Notes to Consolidated Financial Statements. These obligations are all
long-term borrowings. Management plans to continue to rely upon the
FHLB Seattle advances and reverse repurchase agreements to help fund
its operations to the extent loan originations exceed increases in
deposits.
During the nine months ended September 30, 1997, cash provided or used
by investing activities consisted primarily of loan disbursements,
principal payments on loans, purchases of mortgage-backed securities
and investments, 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.
Sterling Savings' credit line with the FHLB Seattle is 35% of its
total assets. At September 30, 1997, this credit line represented a
total borrowing capacity of approximately $657.0 million, of which
$292.0 million was available. Sterling Savings also borrows on a
secured basis from major broker/dealers and financial entities by
selling reverse repurchase agreements. At September 30, 1997,
Sterling Savings had $303.6 million in outstanding borrowings under
reverse repurchase agreements and securities available for additional
secured borrowings of approximately $236.3 million. Sterling Savings
also had a secured line of credit from a commercial bank of
approximately $10.0 million as of September 30, 1997. At
September 30, 1997, Sterling Savings had no funds drawn on this line
of credit.
<PAGE>
Excluding its subsidiaries, Sterling Financial had cash and other
resources of approximately $21.1 million and a line of credit from a
commercial bank of approximately $5.0 million at September 30, 1997.
At September 30, 1997, Sterling Financial had no funds drawn on this
line of credit. At September 30, 1997, Sterling Financial had an
investment of $115.5 million in the stock of Sterling Savings.
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. Sterling Financial received cash
dividends on Sterling Savings stock of $4.3 million during the nine
months ended September 30, 1997. These resources were sufficient to
meet the operating needs of Sterling Financial, including interest
expense on the $40.0 million Trust Preferred Securities and other
borrowings and dividends on the Preferred Stock. The conversion and
redemption of all of the outstanding Preferred Stock has eliminated
the future payment of dividends on the Preferred Stock. See "Capital
Resources."
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, 1997, Sterling Savings' liquidity ratio was 14.8%,
compared with 10.9% at December 31, 1996. The higher level of
liquidity at September 30, 1997 was due primarily to the purchase and
retention of qualifying 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 take into account 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 $98.3 million at
September 30, 1997, compared with $89.2 million at December 31, 1996.
The increase in total shareholders' equity primarily reflects an
increase in retained earnings and a decrease in the unrealized loss on
available-for-sale securities. At September 30, 1997 and December 31,
1996, shareholders' equity was 5.3% and 5.8%, respectively, of total
assets.
During the quarter, the Preferred Stock was called for redemption at
$26.07 per share plus any accrued but unpaid dividends. During the
nine months ended September 30, 1997, 1,035,700 shares of Preferred
Stock were converted to 2,021,190 shares of common stock as a result
of the call for redemption. During the same period, 4,300 shares of
Preferred Stock were redeemed for $113,000. See "Statement of Changes
in Shareholders Equity."
<PAGE>
Sterling recorded at September 30, 1997, an unrealized loss of $3.1
million, net of related income taxes, on investment and debt
securities classified as available-for-sale. The decrease in the
unrealized loss of $3.0 million from the December 31, 1996 balance of
$6.0 million primarily reflects an increase in the market valuation of
mortgage-backed securities and treasury securities due to a decrease
in long-term interest rates. Fluctuations in prevailing interest
rates could continue to cause volatility in this component of
shareholders' equity in future periods.
Sterling has issued and outstanding $40.0 million of Trust Preferred
Securities. The indenture governing the Trust Preferred Securities
limits the ability of Sterling under certain circumstances to pay
dividends or make other capital distributions. The Trust Preferred
Securities are treated as debt of Sterling. The Trust Preferred
Securities mature on June 30, 2027 and are redeemable earlier in the
event the deduction of related interest for federal income taxes is
prohibited, treatment as Tier 1 capital is no longer permitted, or
certain other contingencies arise.
Sterling has issued and outstanding $17.2 million of 8.75%
Subordinated Notes due on January 31, 2000. These notes are unsecured
general obligations of Sterling and are subordinated to certain other
existing and future indebtedness. The indenture governing the
Subordinated Notes limits the ability of Sterling under certain
circumstances to incur additional indebtedness, to pay cash dividends
or to make other capital distributions.
In order to improve and expand branch locations, Sterling has incurred
capital expenditures of approximately $1.0 million as of September 30,
1997. Sterling anticipates total capital expenditures for the year
ended December 31, 1997 to be approximately $1.2 million. Sterling
anticipates continuing to fund these capital expenditures from various
sources, including retained earnings and borrowings with various
maturities. Sterling is exploring opportunities to sell certain
developed properties and enter into lease arrangements, but there can
be no assurance that any of these transactions will occur.
Sterling Savings is required by applicable regulations to maintain
certain minimum capital levels with respect to tangible capital, core
leverage capital and risk-based capital. At September 30, 1997,
Sterling Savings exceeded all such regulatory capital requirements.
Sterling continues to monitor capital markets and look for
opportunities to increase its capital resources.
Sterling continues to proactively manage its claim against the U.S.
government for breach of contract on three supervisory goodwill
acquisition contracts. It is uncertain when a trial to determine
Sterling's damages will be held or when an award, if any, will be
appropriated by Congress.
<PAGE>
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.
On September 30, 1996, federal legislation was enacted which included
provisions regarding the recapitalization of the SAIF, which is
operated by the FDIC and provides deposit insurance for thrift
institutions. The new legislation contemplates a unification of the
charters presently available to banks and thrifts. 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.
Sterling Savings may be required to convert its charter to either a
national bank charter, a state depository institution charter, or a
newly designed charter. Sterling may also become regulated at the
holding company level by the Federal Reserve rather than by the OTS.
Regulation by the Federal Reserve could subject Sterling to capital
requirements that are not currently applicable to Sterling as a thrift
holding company under OTS regulation and may result in statutory
limitations on the type of business activities in which Sterling may
engage at the holding company level, which business activities
currently are not restricted. At this time, Sterling Savings is
unable to predict whether a charter change will be required and, if it
is, whether the charter change will significantly impact Sterling
Savings' operations.
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 No. Exhibit
----------- ------------------------------------------------
11.1 Statement regarding Computation of Per Share
Earnings. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K. A report on Form 8-K was filed on August 5,
1997, announcing the conversion of substantially all of the
remaining issued and outstanding shares of its Preferred Stock.
<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, 1997 By: /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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 35193
<INT-BEARING-DEPOSITS> 20633
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 687673
<INVESTMENTS-CARRYING> 12589
<INVESTMENTS-MARKET> 12672
<LOANS> 1041503
<ALLOWANCE> 8566
<TOTAL-ASSETS> 1870513
<DEPOSITS> 999505
<SHORT-TERM> 0
<LIABILITIES-OTHER> 755518
<LONG-TERM> 72240
0
0
<COMMON> 7567
<OTHER-SE> 90683
<TOTAL-LIABILITIES-AND-EQUITY> 1870513
<INTEREST-LOAN> 23400
<INTEREST-INVEST> 11401
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34801
<INTEREST-DEPOSIT> 11852
<INTEREST-EXPENSE> 11392
<INTEREST-INCOME-NET> 11557
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 582
<EXPENSE-OTHER> 9432
<INCOME-PRETAX> 4082
<INCOME-PRE-EXTRAORDINARY> 2531
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2531
<EPS-PRIMARY> .41
<EPS-DILUTED> .33
<YIELD-ACTUAL> 2.66
<LOANS-NON> 4470
<LOANS-PAST> 0
<LOANS-TROUBLED> 192
<LOANS-PROBLEM> 18220
<ALLOWANCE-OPEN> 8139
<CHARGE-OFFS> 332
<RECOVERIES> 84
<ALLOWANCE-CLOSE> 8566
<ALLOWANCE-DOMESTIC> 8566
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME PER SHARE
For the Three and Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Three Months Daily Nine Months Daily
Shares Outstanding Weighted Average Weighted Average
---------------------- ----------------------------- -----------------------------
Common Number Fully Fully
Common Equivalent of Days Primary Diluted Primary Diluted
--------- ---------- ------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997 5,539,178 7,568,842 23 127,401,094 174,083,366
January 24, 1997 5,539,575 7,569,239 32 177,266,400 242,215,648
February 25, 1997 5,541,048 7,570,712 2 11,082,096 15,141,424
February 27, 1997 5,543,007 7,572,671 33 182,919,231 249,898,143
April 1, 1997 5,543,007 7,572,671 15 83,145,105 113,590,065
April 16, 1997 5,543,507 7,573,171 29 160,761,703 219,621,959
May 15, 1997 5,550,618 7,573,168 15 83,259,270 113,597,526
May 30, 1997 5,552,252 7,574,802 7 38,865,764 53,023,617
June 6, 1997 5,555,471 7,574,801 6 33,332,826 45,448,808
June 12, 1997 5,556,641 7,574,800 5 27,783,205 37,874,002
June 17, 1997 5,556,651 7,574,810 1 5,556,651 7,574,810
June 18, 1997 5,564,201 7,574,810 2 11,128,402 15,149,619
June 20, 1997 5,566,152 7,574,809 6 33,396,912 45,448,854
June 26, 1997 5,566,652 7,575,309 5 27,833,260 37,876,545
July 1, 1997 5,566,652 7,575,309 27 150,299,604 204,533,342 150,299,604 204,533,342
July 28, 1997 5,566,902 7,575,559 4 22,267,608 30,302,236 22,267,608 30,302,236
August 1, 1997 5,568,072 7,575,558 31 172,610,232 234,842,299 172,610,232 234,842,299
September 1, 1997 5,774,651 7,575,556 3 17,323,953 22,726,669 17,323,953 22,726,669
September 4, 1997 6,454,906 7,575,538 1 6,454,906 7,575,538 6,454,906 7,575,538
Septmeber 5, 1997 7,567,091 7,567,091 26 196,744,366 196,744,366 196,744,366 196,744,366
------------- ------------- ------------- -------------
565,700,669 696,724,450 1,569,432,588 2,067,268,836
Divide by Number of Days Included in Period 92 92 273 273
------------- ------------- ------------- -------------
Weighted Average Shares Outstanding 6,148,920 7,573,092 5,748,837 7,572,413
Adjustment for Other Common Stock Equivalents (Stock
Options) 139,536 139,536
------------- ------------- ------------- -------------
Total 6,148,920 7,712,628 5,748,837 7,711,949
============= ============= ============= =============
</TABLE>
<PAGE>
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME PER SHARE, CONTINUED
For the Three and Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Three Months Daily Nine Months Daily
Shares Outstanding Weighted Average Weighted Average
---------------------- ----------------------------- -----------------------------
Common Number Fully Fully
Common Equivalent of Days Primary Diluted Primary Diluted
--------- ---------- ------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income $ 2,531,000 $ 2,531,000 $ 7,093,000 $ 7,093,000
Dividends Declared on Preferred Shares 0 (940,000)
------------- ------------- ------------- -------------
Net Income Available to Common Shareholders $ 2,531,000 $ 2,531,000 $ 6,153,000 $ 7,093,000
============= ============= ============= =============
Net Income Per Share $ 0.41 $ 0.33 $ 1.07 $ 0.92
============= ============= ============= =============
</TABLE>
<PAGE>
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME (LOSS) PER SHARE, CONTINUED
For the Three and Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Three Months Daily Nine Months Daily
Shares Outstanding Weighted Average Weighted Average
---------------------- ----------------------------- -----------------------------
Common Number Fully Fully
Common Equivalent of Days Primary Diluted Primary Diluted
--------- ---------- ------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996 5,411,022 7,440,686 17 91,987,374 126,491,662
January 18, 1996 5,424,944 7,454,608 8 43,399,552 59,636,864
January 26, 1996 5,425,648 7,455,312 66 358,092,768 492,050,592
April 1, 1996 5,425,648 7,455,312 60 325,538,880 447,318,720
May 31, 1996 5,426,398 7,456,062 31 168,218,338 231,137,922
July 1, 1996 5,426,398 7,456,062 9 48,837,582 67,104,558 48,837,582 67,104,558
July 10, 1996 5,462,054 7,491,718 1 5,462,054 7,491,718 5,462,054 7,491,718
July 11, 1996 5,483,264 7,512,928 4 21,933,056 30,051,712 21,933,056 30,051,712
July 15, 1996 5,498,370 7,528,034 2 10,996,740 15,056,068 10,996,740 15,056,068
July 17, 1996 5,502,836 7,532,500 5 27,514,180 37,662,500 27,514,180 37,662,500
July 22, 1996 5,513,970 7,543,634 1 5,513,970 7,543,634 5,513,970 7,543,634
July 23, 1996 5,526,724 7,556,388 1 5,526,724 7,556,388 5,526,724 7,556,388
July 24, 1996 5,531,968 7,561,632 2 11,063,936 15,123,264 11,063,936 15,123,264
July 26, 1996 5,532,469 7,562,132 5 27,552,340 37,810,660 27,662,340 37,810,660
July 31, 1996 5,532,592 7,562,256 12 66,391,104 90,747,072 66,391,104 90,747,072
August 12, 1996 5,533,342 7,563,006 1 5,533,342 7,563,006 5,533,342 7,563,006
August 13, 1996 5,534,342 7,564,006 8 44,274,736 60,512,048 44,274,736 60,512,048
August 21, 1996 5,534,958 7,564,622 5 27,674,790 37,823,110 27,674,790 37,823,110
August 26, 1996 5,535,208 7,564,872 2 11,070,416 15,129,744 11,070,416 15,129,744
August 28, 1996 5,535,828 7,565,492 1 5,535,828 7,565,492 5,535,828 7,565,492
August 29, 1996 5,537,328 7,566,992 33 182,731,824 249,710,736 182,731,824 249,710,736
------------- ------------- ------------- -------------
507,722,622 694,451,710 1,494,959,534 2,051,087,470
Divide by Number of Days Included in Period 92 92 274 274
------------- ------------- ------------- -------------
Weighted Average Shares Outstanding 5,518,724 7,548,388 5,456,057 7,485,721
Adjustment for Other Common Stock Equivalents (Stock
Options 65,481 65,481
------------- ------------- ------------- -------------
Total 5,518,724 7,613,869 5,456,057 7,551,202
============= ============= ============= =============
</TABLE>
<PAGE>
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME (LOSS) PER SHARE, CONTINUED
For the Three and Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Three Months Daily Nine Months Daily
Shares Outstanding Weighted Average Weighted Average
---------------------- ----------------------------- -----------------------------
Common Number Fully Fully
Common Equivalent of Days Primary Diluted Primary Diluted
--------- ---------- ------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $ (3,298,000) $ (3,298,000) $ 288,000 $ 288,000
Dividends Declared on Preferred Shares (471,000) (1,414,000)
------------- ------------- ------------- -------------
Net Inoome (Loss) Available to Common Shareholders $ (3,769,000) $ (3,298,000) $ (1,126,000) $ 288,000
============= ============= ============= =============
Net Income (Loss) Per Share $ (0.68) $ (0.68) $ (0.32) $ (0.21)
============= ============= ============= =============
</TABLE>
Note: Convertible Preferred Stock was antidilutive at September 30,
1996; therefore, primary income (loss) per share was used.
<PAGE>
