<PAGE> 1
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 March 31, 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
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 March 31, 1997
----- --------------------------------
Common Stock ($1.00 par value) 5,543,007
<PAGE> 2
STERLING FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1997
--------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - Financial Information 1
Item 1 - Financial Statements (Unaudited) 1
Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 1
Consolidated Statements of Income -
Three Months Ended March 31, 1997 and 1996 2
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Statement of Changes in Shareholders' Equity -
Three Months Ended March 31, 1997 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - Other Information 16
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE> 3
PART I - Financial Information
Item 1 - Financial Statements
STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
--------
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------------
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Interest bearing $ 216 $ 6,253
Non-interest bearing and vault 24,742 26,422
Restricted 4,578 3,230
Loans receivable (net of allowance for losses of
$7,999 and $7,891) 966,948 934,340
Loans held-for-sale 7,520 6,116
Investments and mortgage-backed securities:
Available-for-sale 460,020 469,790
Held-to-maturity 11,866 11,871
Accrued interest receivable (including $987 and $1,394 on investments) 10,087 10,690
Office properties and equipment, net 39,261 39,861
Real estate owned 4,011 3,974
Core deposit premium, net 7,811 8,303
Other intangibles, net 1,635 1,725
Purchased mortgage servicing rights, net 1,390 1,474
Prepaid expenses and other assets 17,131 12,295
----------- -----------
Total assets $ 1,557,216 $ 1,536,344
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 935,590 $ 902,278
Advances from FHLB Seattle 279,736 259,626
Securities sold subject to repurchase agreements 183,829 229,797
Federal funds purchased 12,055 0
Notes payable 15,000 15,000
Subordinated notes payable 17,240 17,240
Cashiers checks issued and payable 6,662 5,723
Borrowers' reserves for taxes and insurance 2,212 1,126
Accrued interest payable 5,015 5,095
Accrued expenses and other liabilities 13,042 11,239
----------- -----------
Total liabilities 1,470,381 1,447,124
----------- -----------
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;
5,543,007 and 5,539,178 shares issued and outstanding 5,543 5,539
Additional paid-in capital 70,474 70,462
Unrealized loss on investments and mortgage-backed securities
available-for-sale, (net of deferred income tax benefits of
$5,505 and $3,239) (10,224) (6,020)
Retained earnings 20,002 18,199
----------- -----------
Total shareholders' equity 86,835 89,220
----------- -----------
Total liabilities and shareholders' equity $ 1,557,216 $ 1,536,344
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE> 4
STERLING FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
--------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
----------- -----------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans $ 21,724 $ 19,862
Mortgage-backed securities 5,986 6,954
Investments and cash equivalents 1,938 1,164
----------- -----------
Total interest income 29,648 27,980
----------- -----------
Interest expense:
Deposits 10,501 10,917
Short-term borrowings 4,527 4,340
Long-term borrowings 3,568 3,526
----------- -----------
Total interest expense 18,596 18,783
----------- -----------
Net interest income 11,052 9,197
Provision for loan losses (550) (400)
----------- -----------
Net interest income after provision for loan losses 10,502 8,797
----------- -----------
Other income:
Fees and service charges 1,209 1,009
Mortgage banking operations 506 974
Loan servicing fees 336 319
Net gain on sales of securities 85 7
Net loss on sale and operation of real estate owned (82) (35)
----------- -----------
Total other income 2,054 2,274
----------- -----------
Operating expenses 8,888 8,124
----------- -----------
Income before income taxes 3,668 2,947
Income tax provision 1,394 1,076
----------- -----------
Net income 2,274 1,871
Less preferred stock dividends declared (471) (471)
----------- -----------
Net income available to common shares $ 1,803 $ 1,400
=========== ===========
Income per common and common equivalent share $ 0.33 $ 0.26
=========== ===========
Weighted average common shares outstanding 5,540,765 5,422,854
=========== ===========
Income per common share assuming full dilution $ 0.30 $ 0.25
=========== ===========
Weighted average common shares outstanding assuming full dilution 7,696,996 7,525,160
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 5
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
--------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,274 $ 1,871
Adjustments to reconcile net income to net cash provided by
operating activities:
Provisions for loan and real estate owned losses 584 400
Stock dividends on FHLB Seattle stock (463) (446)
Net gain on sales of loans and securities (210) (832)
Net gain on sales of real estate owned (19) 0
Depreciation and amortization 1,876 2,371
Deferred income tax provision 0 539
Change in:
Accrued interest receivable 603 197
Prepaid expenses and other assets (2,623) (442)
Cashiers checks issued and payable 939 (1,359)
Accrued interest payable (80) (412)
Accrued expenses and other liabilities 1,803 (219)
Proceeds from sales of loans 25,467 54,991
Loans originated for sale (26,746) (52,826)
--------- ---------
Net cash provided by operating activities 3,405 3,833
--------- ---------
Cash flows from investing activities:
Loans disbursed (173,795) (132,902)
Loan principal payments 140,185 117,872
Purchase of investments (25,019) 0
Proceeds from maturities of investments 10,000 1,070
Mortgage-backed securities principal payments 13,334 14,724
Proceeds from sale of mortgage-backed securities 5,295 7
Purchase of office properties and equipment (184) (5,996)
Proceeds from sales of real estate owned 400 175
--------- ---------
Net cash used in investing activities (29,784) (5,050)
--------- ---------
</TABLE>
(continued)
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 6
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Unaudited)
--------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Cash flows from financing activities:
Net change in checking, passbook and money market deposits 17,625 34,231
Proceeds from sales of certificates of deposit 76,834 95,913
Payments for maturing certificates of deposit (71,644) (140,683)
Interest credited to deposits 10,497 11,433
Advances from FHLB Seattle 30,000 0
Repayment of FHLB Seattle advances (10,020) (25,018)
Net change in securities sold subject to repurchase agreements
and funds purchased (33,913) 20,082
Cash dividends on preferred stock (471) (471)
Proceeds from exercise of stock options and warrants,
net of repurchases 16 97
Other 1,086 1,627
--------- ---------
Net cash provided by (used in) financing activities 20,010 (2,789)
--------- ---------
Net decrease in cash and cash equivalents (6,369) (4,006)
Cash and cash equivalents, beginning of period 35,905 27,152
--------- ---------
Cash and cash equivalents, end of period $ 29,536 $ 23,146
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 18,676 $ 19,195
========= =========
Income taxes $ 15 $ 813
========= =========
Non-cash financing and investing activities:
Loans converted into real estate owned $ 452 $ 501
========= =========
Loans exchanged for mortgage-backed securities $ 0 $ 1,116
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 7
STERLING FINANCIAL CORPORATION
Consolidated Statement of Changes in Shareholders' Equity
For the Three Months Ended March 31, 1997
(Unaudited)
--------
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock 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 7,750 8 74 82
Shares acquired and retired upon
exercise of stock options (3,921) (4) (62) (66)
Dividends declared and paid on
preferred stock ($0.45 per share) (471) (471)
Change in unrealized loss, net of
income taxes (4,204) (4,204)
Net income 2,274 2,274
---------- ------ ---------- ------ ------ --------- ------- --------
Balance, March 31, 1997 1,040,000 $1,040 5,543,007 $5,543 $70,474 $(10,224) $ 20,002 $86,835
========== ====== ========== ====== ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 8
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 months ended March 31, 1997 and are not repeated
here. All financial statements presented are unaudited except for the
December 31, 1996 consolidated 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 March 31, 1996 balances have been reclassified to conform with the
March 31, 1997 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
------ ------
(Dollars in thousands)
<S> <C> <C>
Employee compensation and benefits $3,902 $3,196
Occupancy and equipment 1,446 1,344
Depreciation 784 718
Amortization of unidentified intangibles 199 236
Amortization of core deposit premium 383 596
Advertising 237 400
Data processing 638 417
Insurance 313 580
Travel and entertainment 244 216
Legal and accounting 380 276
Other 362 145
------ ------
Total operating expenses $8,888 $8,124
====== ======
</TABLE>
5. OTHER ACCOUNTING POLICIES
In February 1997, Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" was issued. 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.
In June 1996, the Financial Accounting Standards Board 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 adopted the provisions of this standard on January 1, 1997
and such adoption did not have a material effect on its consolidated
financial statements.
6
<PAGE> 9
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 March 31, 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 $1.56 billion in total assets at March 31, 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 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. Recently, Sterling has reorganized and
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 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 recapitalization of the Savings Association
Insurance Fund ("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.
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. See "Federal Deposit Insurance Corporation."
7
<PAGE> 10
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
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. 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.
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 March 31, 1997, Sterling
calculated that its NPV was $106.2 million, compared with $97.4 million at
December 31, 1996, and that its NPV would decrease by 24.8% and 52.5%,
respectively, if interest rate levels generally were to increase by 2% and 4%,
respectively. This compares with an NPV of $75.0 million at March 31, 1996,
which would decline by approximately 29.3% and 66.3%, respectively, if interest
rate levels generally were to increase by 2% and 4%, respectively. During the
three months ended March 31, 1997, NPV increased due primarily to an increase in
the value of non-mortgage assets and an increase in retail deposits. These
calculations, which are highly subjective and technical, may differ materially
from regulatory calculations.
8
<PAGE> 11
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
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 and three-year
cumulative gap position to be negative 5.90% and negative 7.14% at March 31,
1997, respectively. Sterling calculated its one-year and three-year gap position
to be negative 4.4% and negative 14.9% at December 31, 1996, compared with
negative 12.4% and negative 9.9% at March 31, 1996. The narrowing in the
negative gap positions at March 31, 1997, 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 pursuing strategies to
reduce its cumulative gap positions in future periods. There can be no assurance
that Sterling will be successful in reducing 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 with the Federal Funds rate at approximately 5.25%. On March
26, 1997, however, 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 volatile and generally rising during this period, with the
30-year Treasury bond having yields ranging between approximately 5.50% and
7.00%. During this period, management pursued strategies to increase its NPV and
to reduce the level of interest rate risk ("IRR") while also endeavoring 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.
RESULTS OF OPERATIONS
OVERVIEW. Sterling reported net income of $2.3 million and
$1.9 million for the three months ended March 31, 1997 and 1996, respectively.
Fully diluted earnings per share was $0.30 for the three months ended March 31,
1997 compared with $0.25 for the prior year's comparable period. The increase in
net income and earnings per share primarily reflects the increase in net
interest income.
The annualized return on average assets was 0.60% and 0.50%
for the three months ended March 31, 1997 and 1996, respectively. The increase
is primarily attributable to an increase in net income. The annualized return on
average equity was 11.14% and 8.24% for the three months ended March 31, 1997
and 1996, respectively. The increase is primarily attributable to an increase in
net income coupled with a decrease in the average equity.
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 March 31,
1997 and 1996, net interest income was $11.1 million and $9.2 million,
respectively. 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 three months ended March 31, 1997 and 1996, the volume
of average interest-earning assets was $1.47 billion and $1.42 billion,
respectively. Net interest spread during these periods was 2.77% and 2.37%,
respectively.
9
<PAGE> 12
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
During these same periods, the net interest margin was 3.05% and 2.60%,
respectively. During the three months ended March 31, 1997, the increase in net
interest income was due primarily to a change in interest-earning assets towards
higher yielding assets, which helped increase the net interest margin and
spread. Net interest income of $11.1 million for the three months ended March
31, 1997 reflects a 20% increase from the $9.2 million reported for the
comparable prior year period.
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 March 31, 1997 and 1996, respectively.
Sterling increased its provision for loan losses in anticipation of potentially
higher levels of loss from its expanded consumer and business lending activity.
At March 31, 1997, Sterling's loan delinquency rate as a percentage of total
loans was 0.45%, compared with 0.60% at March 31, 1996. Total nonperforming
loans were $2.7 million at March 31, 1997, compared with $4.8 million at March
31, 1996. As a percentage of total loans, nonperforming loans were 0.25% at
March 31, 1997, compared with 0.48% at March 31, 1996. Management believes the
provisions for the three months ended March 31, 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 economic factors affecting the Pacific
Northwest economy.
OTHER INCOME. The following table summarizes the components
of other income for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
------- ------
(Dollars in thousands)
<S> <C> <C>
Fees and service charges $ 1,209 $ 1,009
Mortgage banking operations 506 974
Loan servicing fees 336 319
Net gain on sales of securities 85 7
Net loss on sales and operations of real estate owned (82) (35)
------- -------
$ 2,054 $ 2,274
======= =======
</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,
commissions on sales of mutual funds and annuity products. The increase was due
primarily to an increase in service charges on deposit accounts.
The decrease in income from mortgage banking operations for
the three months ended March 31, 1997, compared with the three months ended
March 31, 1996, primarily resulted from a decrease in the volume of residential
loans sold of approximately $28.8 million.
10
<PAGE> 13
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
The following table summarizes residential loan originations
and sales of loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
(Dollars in millions)
<S> <C> <C>
Originations of one- to four-family mortgage loans $ 85.1 $ 81.8
Sales of residential loans 25.3 54.1
Loans swapped for FHLMC certificates 0.0 1.1
Principal balances of mortgage loans serviced for others 522.2 794.7
</TABLE>
Loan servicing fees increased for the three months ended March
31, 1997, compared with the prior year's comparable quarter, 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 three months ended March 31, 1997 and 1996 was
approximately $532.2 million and $808.5 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.
OPERATING EXPENSES. Operating expenses were $8.9 million and
$8.1 million for the three months ended March 31, 1997 and 1996, respectively.
The increase is due primarily to increases in employee compensation and
benefits, data processing expenses, legal and accounting, and other expenses.
Employee compensation and benefits were $3.9 million and $3.2 million for the
quarters ended March 31, 1997 and 1996, respectively. The increase primarily
reflects an increase in lending staff related to Sterling's efforts to increase
its commercial real estate and consumer lending areas. Data processing costs
were $638,000 and $417,000, for the three months ended March 31, 1997 and 1996,
respectively. The increase reflects expanded applications to meet the needs of
business and consumer customers. Legal and accounting expense was $380,000 and
$276,000 during the quarters ended March 31, 1997 and 1996, 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 costs
associated with the change in fiscal year end. Other expenses were $606,000 and
$361,000 for the quarters ended March 31, 1997 and 1996, respectively. The
increase in other expenses primarily reflects increased business and occupation
taxes, and increased loan and transaction account processing charges.
INCOME TAX PROVISION. Income tax provisions were $1.4 million
and $1.1 million for the three months ended March 31, 1997 and 1996,
respectively. The effective tax rates on income before income taxes were
approximately 38.0% and 36.5% for the three months ended March 31, 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.
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. Deposits increased $33.3 million to $935.6 million at March 31,
1997, from $902.3 million at December 31, 1996. At March 31, 1997, approximately
$44.9 million of deposits consisted of public funds that generally have
maturities of 60 days or less. Advances from the FHLB Seattle increased to
$279.7 million at March 31, 1997 from $259.6 million at December 31, 1996. At
March 31, 1997 and December 31, 1996, securities sold subject to repurchase
agreements were $183.8 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.
11
<PAGE> 14
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
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. Management plans to continue to rely upon the FHLB Seattle
advances and reverse repurchase agreements to help fund its operations.
Cash provided or used by investing activities consists
primarily of principal 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 March 31, 1997 and 1996, net cash was used in investing activities
primarily to fund new loans and to purchase investments.
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 and reverse
repurchase agreements 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 March 31, 1997, this credit line represented a total
borrowing capacity of approximately $547.2 million, of which $279.7 million was
outstanding. Sterling Savings also borrows on a secured basis from major
broker/dealers and financial entities by selling securities subject to
repurchase agreements. At March 31, 1997, Sterling Savings had $183.8 million in
outstanding borrowings under reverse repurchase agreements and securities
available for additional secured borrowings of approximately $188.3 million.
Sterling Savings also had a secured line of credit agreement from a commercial
bank of approximately $10.0 million as of March 31, 1997. At March 31, 1997,
Sterling Savings had no funds drawn on this line of credit.
Excluding its subsidiaries, Sterling Financial had cash and
other resources of approximately $14.5 million and a line of credit from a
commercial bank of approximately $5.0 million at March 31, 1997. At March 31,
1997, Sterling Financial had no funds drawn on this line of credit. At March 31,
1997, Sterling Financial had an investment of $51.1 million in the Preferred
Stock of Sterling Savings. Sterling Financial received cash dividends on
Sterling Savings Preferred Stock of $1.4 million during the three months ended
March 31, 1997. These resources were sufficient to meet the operating needs of
Sterling Financial, including interest expense on the Subordinated Notes and
dividends on the Preferred Stock. 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 March 31, 1997, Sterling Savings'
liquidity ratio was 11.3%, compared with 10.9% at December 31, 1996. The higher
level of liquidity at March 31, 1997 was due primarily to the 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.
12
<PAGE> 15
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
CAPITAL RESOURCES
Sterling's total shareholders' equity was $86.8 million at
March 31, 1997, compared with $89.2 million at December 31, 1996. At
March 31, 1997 and December 31, 1996, shareholders' equity was 5.6% and 5.8%,
respectively, of total assets. The decrease in total shareholders' equity
primarily reflects the lower market value associated with the available-for-sale
securities, partially offset by an increase in retained earnings.
Sterling recorded at March 31, 1997, an unrealized loss of
$10.2 million, net of related income taxes, on investment and debt securities
classified as available-for-sale. The increase in the unrealized loss of $4.2
million from the December 31, 1996 balance of a $6.0 million primarily reflects
a decrease in the market valuation of mortgage-backed securities and treasury
securities due to the increase in long-term interest rates. Fluctuations in
prevailing interest rates could continue to cause volatility in this component
of shareholders' equity in future periods.
At March 31, 1997, Sterling has 1.04 million shares of
Preferred Stock. The Preferred Stock has a liquidation value of $25 per share,
plus any accumulated and unpaid dividends, and each share is convertible at any
time at a rate of 1.9516 shares of Common Stock, subject to adjustment under
certain conditions. Annual dividends of $1.8125 per share of Preferred Stock are
cumulative and payable quarterly in arrears and must be paid before any
distributions to holders of Common Stock. The Preferred Stock is non-voting
except under certain limited circumstances. The Preferred Stock is also
redeemable, in whole or in part, at the option of Sterling at any time on or
after April 30, 1997 at a price of $26 per share, which gradually declines each
year to $25 per share on or after April 30, 2001.
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
anticipates that its future capital expenditures will be approximately $1.0
million to $2.0 million for the year ended December 31, 1997. Sterling intends
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 March 31, 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. 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 or when an award, if any, will be appropriated
by Congress.
13
<PAGE> 16
STERLING FINANCIAL CORPORATION
Comparison of the Three Months Ended March 31, 1997 and 1996
--------
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 required SAIF-insured savings institutions, like Sterling
Savings, to pay a one-time special assessment of $0.657 for every $100 of
deposits as of March 31, 1995. The special assessment capitalized the SAIF up to
the prescribed 1.25% of SAIF-insured deposits.
Deposits insured by SAIF are currently assessed at the rate of
zero to $0.27 per $100 of domestic deposits. The SAIF assessment rate may
increase or decrease as is necessary to maintain the designated SAIF reserve
ratio of 1.25% of insured deposits.
Effective January 1, 1997, all FDIC-insured depository
institutions must pay an annual assessment to provide funds for the payment of
interest on bonds issued by the Financing Corporation, a federal corporation
chartered under the authority of the Federal Housing Finance Board. The FICO
Bonds were issued to capitalize the Federal Savings and Loan Insurance
Corporation. Until December 31, 1999 or when the last savings and loan
association ceases to exist, whichever occurs first, depository institutions
will pay approximately $.064 per $100 of SAIF-assessable deposits and
approximately $.013 per $100 of the Bank Insurance Fund ("BIF")-assessable
deposits.
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 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.
14
<PAGE> 17
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
<TABLE>
<CAPTION>
(a) Exhibit No. Exhibit
----------- -------
<S> <C>
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.
3.2 Articles of Amendment of Restated Articles of Incorporation
of Registrant. Filed as Exhibit 3.2 to Registrant's Form S-4
dated November 7, 1994 and incorporated by reference herein.
3.3 Copy of Amended and Restated Bylaws of Registrant. Filed
herewith.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Copies of instruments with respect to long-term debt will be
furnished to the Commission upon request.
10.1 Copy of Sterling Savings Association Incentive Stock Option
Plan dated July 25, 1984, including a copy of Form of
Incentive Stock Option Plan Letter Agreement. Filed as
Exhibit 10.1 to Registrant's Form S-4 dated August 28, 1992
and incorporated by reference herein.
10.2 Copy of Sterling Savings Association 1992 Incentive Stock
Option Plan. Filed as Exhibit 10.2 to Registrant's Form S-4
dated August 28, 1992 and incorporated by reference herein.
10.3 Copy of Sterling Savings Association Deferred Compensation
Plan, effective July 1, 1984. Filed as Exhibit 10.3 to
Registrant's Form S-4 dated August 28, 1992 and incorporated
by reference herein.
10.4 Copy of Sterling Savings Association Employment Savings and
Incentive Plan and Trust dated September 21, 1990. Filed as
Exhibit 10.4 to Registrant's Form S-4 dated August 28, 1992
and incorporated by reference herein.
10.5 Copy of Employment Agreement, dated July 1, 1995, between
Registrant and Harold B. Gilkey. Filed as Exhibit 10.1 to
Registrant's Form 10-Q dated March 30, 1996 (file no.
0-20800) and incorporated by reference herein.
10.6 Copy of Amendment to Employment Agreement, dated June 30,
1996, between Registrant and Harold B. Gilkey. Filed
herewith.
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.7 Copy of Employment Agreement, dated July 1, 1995, between
Registrant and William W. Zuppe. Filed as Exhibit 10.2 to
Registrant's Form 10-Q dated March 30, 1996 (file no.
0-20800) and incorporated by reference herein.
10.8 Copy of Amendment to Employment Agreement, dated June 30,
1996, between Registrant and William W. Zuppe. Filed
herewith.
11.1 Statement regarding Computation of Per Share Earnings. Filed
herewith.
12.1 Statement regarding Computation of Return on Average Common
Shareholders' Equity. Filed herewith.
12.2 Statement regarding Computation of Return on Average Assets.
Filed herewith.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended March 31, 1997.
16
<PAGE> 19
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)
May 8, 1997 /s/ Daniel G. Byrne
- ----------------------------------- -------------------------
Date Daniel G. Byrne
Senior Vice President - Finance;
Treasurer and Assistant
Secretary; Principal Financial
Officer and Chief
Accounting Officer
17
<PAGE> 20
<TABLE>
<CAPTION>
(a) Exhibit No. Exhibit Index
----------- -------------
<S> <C>
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.
3.2 Articles of Amendment of Restated Articles of Incorporation
of Registrant. Filed as Exhibit 3.2 to Registrant's Form S-4
dated November 7, 1994 and incorporated by reference herein.
3.3 Copy of Amended and Restated Bylaws of Registrant. Filed
herewith.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Copies of instruments with respect to long-term debt will be
furnished to the Commission upon request.
10.1 Copy of Sterling Savings Association Incentive Stock Option
Plan dated July 25, 1984, including a copy of Form of
Incentive Stock Option Plan Letter Agreement. Filed as
Exhibit 10.1 to Registrant's Form S-4 dated August 28, 1992
and incorporated by reference herein.
10.2 Copy of Sterling Savings Association 1992 Incentive Stock
Option Plan. Filed as Exhibit 10.2 to Registrant's Form S-4
dated August 28, 1992 and incorporated by reference herein.
10.3 Copy of Sterling Savings Association Deferred Compensation
Plan, effective July 1, 1984. Filed as Exhibit 10.3 to
Registrant's Form S-4 dated August 28, 1992 and incorporated
by reference herein.
10.4 Copy of Sterling Savings Association Employment Savings and
Incentive Plan and Trust dated September 21, 1990. Filed as
Exhibit 10.4 to Registrant's Form S-4 dated August 28, 1992
and incorporated by reference herein.
10.5 Copy of Employment Agreement, dated July 1, 1995, between
Registrant and Harold B. Gilkey. Filed as Exhibit 10.1 to
Registrant's Form 10-Q dated March 30, 1996 (file no.
0-20800) and incorporated by reference herein.
10.6 Copy of Amendment to Employment Agreement, dated June 30,
1996, between Registrant and Harold B. Gilkey. Filed
herewith.
</TABLE>
15
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
10.7 Copy of Employment Agreement, dated July 1, 1995, between
Registrant and William W. Zuppe. Filed as Exhibit 10.2 to
Registrant's Form 10-Q dated March 30, 1996 (file no.
0-20800) and incorporated by reference herein.
10.8 Copy of Amendment to Employment Agreement, dated June 30,
1996, between Registrant and William W. Zuppe. Filed
herewith.
11.1 Statement regarding Computation of Per Share Earnings. Filed
herewith.
12.1 Statement regarding Computation of Return on Average Common
Shareholders' Equity. Filed herewith.
12.2 Statement regarding Computation of Return on Average Assets.
Filed herewith.
27.1 Financial Data Schedule.
</TABLE>
16
<PAGE> 1
EXHIBIT 10.6
AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of June 30, 1996, by and between STERLING
FINANCIAL CORPORATION ("Sterling") and HAROLD B. GILKEY (the "Executive"),
WITNESSETH:
WHEREAS, the Executive and Sterling entered into an Employment
Agreement as of July 1, 1995; and
WHEREAS, the parties desire to amend the existing Employment Agreement
(the "Employment Agreement");
NOW THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. ELIMINATION OF STOCK APPRECIATION RIGHTS. The Executive hereby
waives the right under the Employment Agreement to receive stock
appreciation rights (SARs).
2. RELEASE OF STOCK APPRECIATION RIGHTS. The Executive hereby
releases all SARs currently held by the Executive, including the
right to exercise such SARs.
3. CONSIDERATION. In consideration of the said waiver and release
the Executive will receive from Sterling the sum of $137,489. The
said sum shall be paid hereunder by an immediate payment of
$27,489 in cash to the Executive and by a contribution of $110,000
to Sterling's Deferred Compensation Plan for the benefit of the
Executive. Beginning in Sterling's fiscal year 1997 and for each
fiscal year thereafter during the remaining term of the Employment
Agreement, the Executive shall also be granted a minimum of 5,000
stock options under Sterling's current stock option plan. This
grant of stock options shall be in addition to any other grant of
stock options to which the Executive is or may be entitled.
4. MISCELLANEOUS. Except as modified by this Agreement, the terms
and conditions of the Employment Agreement shall remain in full
force and effect. Terms used but not otherwise defined herein
<PAGE> 2
shall have the meanings ascribed to such terms in the Employment
Agreement.
<PAGE> 3
IN WITNESS WHEREOF, and intending to be legally bound, Sterling has caused this
Amendment to Employment Agreement to be executed by its duly authorized
representatives and the Executive has signed this Amendment to Employment
Agreement, all as of the first date above written.
STERLING FINANCIAL CORPORATION
BY: /s/ Robert B. Larrabee
----------------------------------
ROBERT B. LARRABEE, Director and
Chairman of Personnel Committee
ATTEST:
STERLING FINANCIAL CORPORATION
BY: /s/ Daniel G. Byrne
----------------------------------
DANIEL G. BYRNE
Senior Vice President-Finance
EXECUTIVE:
/s/ Harold B. Gilkey
--------------------------------------
HAROLD B. GILKEY
<PAGE> 1
EXHIBIT 10.8
AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of June 30, 1996, by and between STERLING
FINANCIAL CORPORATION ("Sterling") and WILLIAM W. ZUPPE (the "Executive"),
WITNESSETH:
WHEREAS, the Executive and Sterling entered into an Employment
Agreement as of July 1, 1995; and
WHEREAS, the parties desire to amend the existing Employment Agreement
(the "Employment Agreement");
NOW THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. ELIMINATION OF STOCK APPRECIATION RIGHTS. The Executive hereby
waives the right under the Employment Agreement to receive stock
appreciation rights (SARs).
2. RELEASE OF STOCK APPRECIATION RIGHTS. The Executive hereby
releases all SARs currently held by the Executive, including the
right to exercise such SARs.
3. CONSIDERATION. In consideration of the said waiver and release
the Executive will receive from Sterling the sum of $203,926. The
said sum shall be paid hereunder by an immediate payment of
$33,926 in cash to the Executive and by a contribution of $170,000
to Sterling's Deferred Compensation Plan for the benefit of the
Executive. Beginning in Sterling's fiscal year 1997 and for each
fiscal year thereafter during the remaining term of the Employment
Agreement, the Executive shall also be granted a minimum of 5,000
stock options under Sterling's current stock option plan. This
grant of stock options shall be in addition to any other grant of
stock options to which the Executive is or may be entitled.
4. MISCELLANEOUS. Except as modified by this Agreement, the terms
and conditions of the Employment Agreement shall remain in full
force and effect. Terms used but not otherwise defined herein
<PAGE> 2
shall have the meanings ascribed to such terms in the Employment
Agreement.
<PAGE> 3
IN WITNESS WHEREOF, and intending to be legally bound, Sterling has caused this
Amendment to Employment Agreement to be executed by its duly authorized
representatives and the Executive has signed this Amendment to Employment
Agreement, all as of the first date above written.
STERLING FINANCIAL CORPORATION
BY: /s/ Robert B. Larrabee
-------------------------------
ROBERT B. LARRABEE, Director and
Chairman of Personnel Committee
ATTEST:
STERLING FINANCIAL CORPORATION
BY: /s/ Daniel G. Byrne
----------------------------------
DANIEL G. BYRNE
Senior Vice President-Finance
EXECUTIVE:
/s/ William W. Zuppe
-----------------------------------
WILLIAM W. ZUPPE
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
THREE MONTHS DAILY
SHARES OUTSTANDING WEIGHTED AVERAGE
----------------------------------------- -----------------------------
COMMON NUMBER FULLY
COMMON EQUIVALENT OF DAYS PRIMARY DILUTED
-------------- ----------- ------- ------------ ------------
<S> <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
----------------------------
498,668,821 681,338,581
Divide by Number of Days Included in Period 90 90
----------------------------
Weighted Average Shares Outstanding 5,540,765 7,570,429
Adjustment for Other Common Stock Equivalents
(Stock Options) 126,567
----------------------------
Total 5,540,765 7,696,996
============================
Net Income $ 2,274,000 $ 2,274,000
Dividends Declared on Preferred Shares (471,000)
----------------------------
Net Income Available to Common Shareholders $ 1,803,000 $ 2,274,000
============================
Net Income Per Share $0.33 $0.30
============================
</TABLE>
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
---------------------------- NUMBER
TOTAL COMMON OF DAYS TOTAL COMMON
---------- ---------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997 89,220,449 64,595,576 14 1,249,086,286 904,338,064
January 15, 1997 89,861,130 65,236,257 9 808,750,170 587,126,313
January 24, 1997 89,863,767 65,238,894 22 1,977,002,874 1,435,255,668
February 15, 1997 90,682,794 66,057,921 12 1,088,193,528 792,695,052
February 27, 1997 90,696,354 66,071,481 16 1,451,141,664 1,057,143,696
March 15, 1997 91,510,773 66,885,900 16 1,464,172,368 1,070,174,400
March 31, 1997 86,834,771 62,209,898 1 86,834,771 62,209,898
--------------------------------------
Total 90 8,125,181,661 5,908,943,091
Divide by Number of Days 90 90
--------------------------------------
Average 90,279,796 65,654,923
--------------------------------------
Net Income Available to Common Shares $1,803,000
Divide by Average Common Shareholders' Equity 65,654,923
-----------
Return on Average Common Shareholders' Equity 11.14%
===========
</TABLE>
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RETURN ON AVERAGE ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
TOTAL ASSETS
------------
<S> <C>
December 31, 1996 1,536,344,000
January 31, 1997 1,547,807,000
February 28, 1997 1,555,935,000
March 31, 1997 1,557,216,000
--------------
6,197,302,000
--------------
Divide by Number of Months 4
--------------
Average $1,549,325,500
==============
Net Income $ 2,274,000
Divide by Average Assets 1,549,325,500
--------------
Return on Average Assets 0.60%
==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 29,320
<INT-BEARING-DEPOSITS> 216
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 460,020
<INVESTMENTS-CARRYING> 11,866
<INVESTMENTS-MARKET> 11,766
<LOANS> 974,947
<ALLOWANCE> 7,999
<TOTAL-ASSETS> 1,557,216
<DEPOSITS> 935,590
<SHORT-TERM> 0
<LIABILITIES-OTHER> 502,551
<LONG-TERM> 32,240
0
1,040
<COMMON> 5,543
<OTHER-SE> 81,292
<TOTAL-LIABILITIES-AND-EQUITY> 1,557,216
<INTEREST-LOAN> 21,724
<INTEREST-INVEST> 7,924
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 29,648
<INTEREST-DEPOSIT> 10,501
<INTEREST-EXPENSE> 18,596
<INTEREST-INCOME-NET> 11,052
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 85
<EXPENSE-OTHER> 8,888
<INCOME-PRETAX> 3,668
<INCOME-PRE-EXTRAORDINARY> 2,274
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,274
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.05
<LOANS-NON> 2,467
<LOANS-PAST> 0
<LOANS-TROUBLED> 211
<LOANS-PROBLEM> 8,896
<ALLOWANCE-OPEN> 7,891
<CHARGE-OFFS> 470
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 7,999
<ALLOWANCE-DOMESTIC> 7,999
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
