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
June 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 .
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Commission file number 0-20800
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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 June 30, 1997
------------------------------ -------------------------------
Common Stock ($1.00 par value) 5,566,652
<PAGE>
STERLING FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended June 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
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 4 - Submission of Matters to a Vote of Security Holders
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)
June 30, December 31,
1997 1996
---------- ------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest bearing $ 7 $ 6,253
Non-interest bearing and vault 26,058 26,422
Restricted 900 3,230
Loans receivable (net of allowance for
losses of $8,139 and $7,891) 980,818 934,340
Loans held-for-sale 8,060 6,116
Investments and mortgage-backed securities:
Available-for-sale 577,760 469,790
Held-to-maturity 12,594 11,871
Accrued interest receivable (including
$2,330 and $1,394 on investments) 12,334 10,690
Office properties and equipment, net 38,784 39,861
Real estate owned 4,271 3,974
Core deposit premium, net 7,537 8,303
Other intangibles, net 1,326 1,725
Purchased mortgage servicing rights, net 1,306 1,474
Prepaid expenses and other assets 14,640 12,295
---------- ----------
Total assets $1,686,395 $1,536,344
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $963,898 $ 902,278
Advances from FHLB Seattle 374,848 259,626
Securities sold subject to repurchase
agreements 155,347 229,797
Other borrowings 72,240 32,240
Cashiers checks issued and payable 7,378 5,723
Borrowers' reserves for taxes and insurance 1,321 1,126
Accrued interest payable 5,896 5,095
Accrued expenses and other liabilities 11,987 11,239
---------- ----------
Total liabilities 1,592,915 1,447,124
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<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets, Continued
(Unaudited)
June 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;
1,029,236 and 1,040,000 shares issued
and outstanding ($25,731 and $26,000
liquidation preference value) 1,029 1,040
Common stock, $1 par value; 20,000,000
shares authorized; 5,566,652 and
5,539,178 shares issued and
outstanding 5,567 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 $2,914
and $3,239 (5,411) (6,020)
Retained earnings 21,821 18,199
---------- -----------
Total shareholders' equity 93,480 89,220
---------- -----------
Total liabilities and shareholders'
equity $1,686,395 $ 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 Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 22,286 $ 19,774 $ 44,010 $ 39,636
Mortgage-backed securities 6,325 6,654 12,311 13,608
Investments and cash equivalents 2,158 1,155 4,096 2,319
--------- --------- --------- ---------
Total interest income 30,769 27,583 60,417 55,563
--------- --------- --------- ---------
Interest expense:
Deposits 11,195 10,675 21,696 21,592
Short-term borrowings 5,094 4,419 9,621 8,759
Long-term borrowings 3,443 3,248 7,011 6,774
--------- --------- --------- ---------
Total interest expense 19,732 18,342 38,328 37,125
--------- --------- --------- ---------
Net interest income 11,037 9,241 22,089 18,438
Provision for loan losses (550) (400) (1,100) (800)
--------- --------- --------- ---------
Net interest income after provision
for loan losses 10,487 8,841 20,989 17,638
--------- --------- --------- ---------
Other income:
Fees and service charges 1,288 1,113 2,497 2,122
Mortgage banking operations 582 828 1,088 1,802
Loan servicing fees 320 144 656 462
Net gain on sales of securities 487 0 572 7
Net loss on sale and operation of
real estate owned (10) (23) (92) (57)
--------- --------- --------- ---------
Total other income 2,667 2,062 4,721 4,336
--------- --------- --------- ---------
Operating expenses 9,463 8,045 18,351 16,169
--------- --------- --------- ---------
Income before income taxes 3,691 2,858 7,359 5,805
Income tax provision 1,403 1,143 2,797 2,219
--------- --------- --------- ---------
Net income 2,288 1,715 4,562 3,586
Less preferred stock dividends declared (469) (472) (940) (943)
--------- --------- --------- ---------
Net income available to common shares $ 1,819 $ 1,243 $ 3,622 $ 2,643
========= ========= ========= =========
</TABLE>
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Income, Continued
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C> <C>
Income per common and common
equivalent share $ 0.33 $ 0.23 $ 0.65 $ 0.49
========= ========= ========= =========
Weighted average common shares
outstanding 5,550,144 5,425,903 5,545,480 5,424,379
========= ========= ========= =========
Income per common share assuming full
dilution $ 0.30 $ 0.23 $ 0.59 $ 0.47
========= ========= ========= =========
Weighted average common shares
outstanding assuming full dilution 7,707,818 7,562,022 7,706,196 7,560,498
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------------------
1997 1996
--------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 4,562 $ 3,586
Adjustments to reconcile net income to net
cash provided by operating activities:
Provisions for loan and real estate
owned losses 1,148 828
Stock dividends on FHLB Seattle stock (957) (921)
Net gain on sales of loans and
securities (1,385) (1,554)
Net loss on sales of office property
and equipment 6 0
Net gain on sales of real estate owned (72) (1)
Depreciation and amortization 3,825 4,722
Deferred income tax provision 0 1,253
Change in:
Accrued interest receivable (1,644) 123
Prepaid expenses and other assets (2,779) (1,085)
Cashiers checks issued and payable 1,655 (2,046)
Accrued interest payable 801 (1,183)
Accrued expenses and other liabilities 748 (1,984)
Proceeds from sales of loans 61,642 110,812
Loans originated for sale (62,774) (94,793)
--------- ---------
Net cash provided by operating
activities 4,776 17,757
--------- ---------
Cash flows from investing activities:
Loans disbursed (400,324) (292,194)
Loan principal payments 351,972 265,182
Purchase of investments (55,438) 0
Proceeds from maturities of investments 10,000 1,196
Purchase of mortgage-backed securities (174,825) 0
Mortgage-backed securities principal payments 26,785 33,539
Proceeds from sales of mortgage-backed
securities 86,684 7
Purchase of office properties and equipment (499) (6,300)
Proceeds from sales of office properties
and equipment 12 0
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Six Months Ended
June 30,
--------------------
1997 1996
--------- ---------
(Dollars in thousands)
Cash flows from investing activities,
Continued
Proceeds from sales of real estate owned 869 382
Improvements and other changes to real
estate owned (367) 8
Proceeds from sales of purchased mortgage
servicing rights 0 741
--------- ---------
Net cash provided by (used in)
investing activities (155,131) 2,561
--------- ---------
Cash flows from financing activities:
Net change in checking, passbook and money
market deposits 21,814 36,436
Proceeds from sales of certificates of deposit 216,249 208,024
Payments for maturing certificates of deposit (198,134) (252,389)
Interest credited to deposits 21,691 17,670
Advances from FHLB Seattle 175,000 0
Repayment of FHLB Seattle advances (60,041) (86,036)
Net change in securities sold subject to
repurchase agreements and funds purchased (74,450) 58,457
Proceeds from other borrowings 40,000 0
Cash dividends on preferred stock (940) (943)
Proceeds from exercise of stock options and
warrants, net of repurchases 29 102
Other 197 137
--------- ---------
Net cash provided by (used in)
financing activities 141,415 (18,542)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (8,940) 1,776
Cash and cash equivalents, beginning of period 35,905 27,152
--------- ---------
Cash and cash equivalents, end of period $ 26,965 $ 28,928
========= =========
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Six Months Ended
June 30,
--------------------
1997 1996
--------- ---------
(Dollars in thousands)
Supplemental disclosures:
Cash paid during the period for:
Interest $ 37,527 $ 38,308
========= =========
Income taxes $ 1,576 $ 2,381
========= =========
Non-cash financing and investing activities:
Loans converted into real estate owned $ 775 $ 982
========= =========
Loans exchanged for mortgage-backed
securities $ 0 $ 1,116
========= =========
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 Six Months Ended June 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 11,432 12 102 114
Shares acquired and
retired upon exercise
of stock options (4,959) (5) (80) (85)
Preferred shares con-
verted to common
stock (10,764) (11) 21,001 21 (10) 0
Dividends declared and
paid on preferred
stock ($0.45 per
share) (940) (940)
Change in unrealized
loss, net of income
taxes 609 609
Net income 4,562 4,562
--------- --------- --------- --------- ---------- ---------- --------- ---------
Balance, June 30, 1997 1,029,236 $ 1,029 5,566,652 $ 5,567 $ 70,474 $ (5,411) $ 21,821 $ 93,480
========= ========= ========= ========= ========== ========== ========= =========
</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 six months ended June 30,
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 June 30, 1996 balances have been reclassified to conform
with the June 30, 1997 presentation. These reclassifications had
no effect on net income or retained earnings as previously
reported.
4. OTHER BORROWINGS:
The following table details Sterling's other borrowings.
June 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
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
junior subordinated deferrable
interest debentures (1) 40,000 0
------- -------
$72,240 $32,240
======= =======
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 Trust issued $40.0 million of 9.50%
Cumulative Capital Securities (the "Trust Preferred Securities")
<PAGE>
STERLING FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, Continued
4. OTHER BORROWINGS, CONTINUED:
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 will be 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 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.
5. OPERATING EXPENSES:
The components of total operating expenses are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Employee compensation and benefits $ 3,944 $ 2,820 $ 7,846 $ 6,017
Occupancy and equipment 1,452 1,360 2,898 2,703
Depreciation 774 765 1,558 1,484
Amortization of unidentified
intangibles 201 254 402 481
Amortization of core deposit premium 377 577 767 1,182
Advertising 673 449 910 849
Data processing 588 427 1,226 844
Insurance 283 588 596 1,167
Travel and entertainment 279 256 522 472
Legal and accounting 378 382 758 658
Other 514 167 868 312
------- ------- ------- -------
Total operating expenses $ 9,463 $ 8,045 $18,351 $16,169
======= ======= ======= =======
</TABLE>
<PAGE>
STERLING FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, Continued
6. 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.
<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 Six Months Ended June 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
$1.69 billion in total assets at June 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 10 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 ("Washington Supervisor").
<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 29.9%
while residential permanent loans have decreased by 17.6%. 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.
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
<PAGE>
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 June 30, 1997, Sterling calculated that its NPV was
$111.7 million, compared with $97.4 million at December 31, 1996, and
that its NPV would decrease by 24.3% and 53.4%, respectively, if
interest rate levels generally were to increase by 2% and 4%,
respectively. This compares with an NPV of $80.7 million at
June 30, 1996, which would decline by approximately 32.9% and 70.3%,
respectively, if interest rate levels generally were to increase by 2%
and 4%, respectively. During the three and six months ended June 30,
1997, NPV increased due primarily to a decrease in long-term interest
rates which increase 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 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 6.1% and negative 10.7% at June 30, 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 14.9% and negative 11.3% at June 30, 1996. The narrowing in
the negative gap positions at June 30, 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 more volatile
with 30-year Treasury bond yields ranging between approximately 6.50%
and 7.10%. 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.
<PAGE>
RESULTS OF OPERATIONS
---------------------
OVERVIEW. Sterling reported net income of $2.3 million and $4.6
million for the three and six months ended June 30, 1997, compared
with $1.7 million and $3.6 million during the three and six months
ended June 30, 1996. Fully diluted earnings per share were $0.30 for
the three months ended June 30, 1997, compared with $0.23 for the
prior year's comparable period. Fully diluted earnings per share were
$0.59 and $0.47 for the six months ended June 30, 1997 and 1996,
respectively. The increase in net income and earnings per share is
due primarily to the increase in net interest income.
The annualized return on average assets was 0.57% and 0.46% for the
three months ended June 30, 1997 and 1996, respectively. For the six
months ended June 30, 1997 and 1996, the annualized return on average
assets was 0.58% and 0.48%, respectively. The increase is primarily
attributable to an increase in net income which was due primarily to
an increase in net interest income. The annualized return on average
equity was 11.51% and 7.87% for the three months ended June 30, 1997
and 1996, respectively. The annualized return on average equity was
11.32% and 8.06% for the six months ended June 30, 1997 and 1996,
respectively. The increase is primarily attributable to an increase
in net income which was due primarily to an increase in net interest
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 June 30, 1997 and 1996, net interest income was
$11.0 million and $9.2 million, respectively. For the six months
ended June 30, 1997 and 1996, net interest income was $22.1 million
and $18.4 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
June 30, 1997 and 1996, the volume of average interest-earning assets
was $1.52 billion and $1.41 billion, respectively. Net interest
spread during these periods was 2.61% and 2.45%, respectively. The
net interest margin for the three months ended June 30, 1997 and 1996
was 2.91% and 2.64%, respectively. During the six months ended June
30, 1997 and 1996, the volume of average earning assets was $1.50
billion and $1.42 billion, respectively. Net interest spread during
these periods was 2.68% and 2.40%, respectively. During the six
months ended June 30, 1997 and 1996, the net interest margin was 2.97%
and 2.62%, respectively. The increase in net interest income was due
primarily to an increase in the volume of interest-earning assets and
a shift towards higher yielding assets, which helped increase the net
interest margin and spread. Net interest income of $11.0 million for
<PAGE>
the three months ended June 30, 1997 reflects a 19.4% increase from
the $9.2 million reported for the comparable prior year period. For
the six months ended June 30, 1997, net interest income was $22.1
million, a 19.8% increase from 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 June 30, 1997 and 1996, respectively.
Sterling recorded provisions of $1.1 million and $800,000 for the six
months ended June 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 June 30, 1997, Sterling's loan
delinquency rate as a percentage of total loans was 0.61%, compared
with 0.53% at December 31, 1996 and 0.36% at June 30, 1996. Total
nonperforming loans were $6.0 million at June 30, 1997, compared with
$2.5 million at December 31, 1996 and $3.6 million at June 30, 1996.
As a percentage of total loans, nonperforming loans were 0.53% at
June 30, 1997, compared with 0.25% at December 31, 1996 and 0.36% at
June 30, 1996. Management believes the provisions for the three and
six months ended June 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.
OTHER INCOME. The following table summarizes the components of other
income for the periods indicated.
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
(Dollars in thousands)
Fees and service charges $1,288 $1,113 $2,497 $2,122
Mortgage banking operations 582 828 1,088 1,802
Loan servicing fees 320 144 656 462
Net gain on sales of securities 487 0 572 7
Net loss on sales and operations
of real estate owned (10) (23) (92) (57)
------ ------ ------ ------
$2,667 $2,062 $4,721 $4,336
====== ====== ====== ======
<PAGE>
Fees and service charges consist primarily of service charges on
deposit accounts, fees for certain customer services, commissions on
sales of credit life insurance and late charges on loans, as well as
escrow fees and 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
and six months ended June 30, 1997, compared with the three and six
months ended June 30, 1996, primarily resulted from decreases in the
volume of residential loans sold of approximately $19.4 million and
$48.5 million, respectively.
The following table summarizes residential loan originations and sales
of loans for the periods indicated.
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
(Dollars in millions)
Originations of one- to four-
family permanent mortgage loans $ 35.3 $ 45.2 $ 61.5 $ 92.7
Sales of residential loans 35.7 55.1 60.8 109.3
Principal balances of mortgage
loans serviced for others 512.4 587.8 512.4 587.8
Principal balances of servicing
portfolios sold in bulk 0.0 172.2 0.0 172.2
Loan servicing fees increased for the three and six months ended
June 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
six months ended June 30, 1997 and 1996 was approximately $525.2
million and $730.2 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 six months ended June 30, 1997, Sterling sold approximately
$86.1 million of mortgage-backed securities, resulting in a gain of
$572,000. No such sales were made in the same period in 1996.
OPERATING EXPENSES. Operating expenses were $9.5 million and $8.0
million for the three months ended June 30, 1997 and 1996,
respectively. Operating expenses for the six months ended June 30,
1997 and 1996 were $18.4 million and $16.2 million, respectively. The
increase during the three and six months ended June 30, 1997 and 1996,
is due primarily to increases in employee compensation and benefits,
data processing expenses, advertising and other expenses. Employee
compensation and benefits were $3.9 million and $2.8 million for the
quarters ended June 30, 1997 and 1996, respectively. During the six
<PAGE>
months ended June 30, 1997 and 1996, employee compensation and
benefits were $7.8 million and $6.0 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
$588,000 and $427,000, for the three months ended June 30, 1997 and
1996, respectively. The increase reflects expanded applications to
meet the needs of business and consumer customers. Advertising
expenses were $673,000 and $449,000 for the three months ended June
30, 1997 and 1996, respectively. The increase reflects higher levels
of promotion for retail deposits. Other expenses were $514,000 and
$167,000 for the quarters ended June 30, 1997 and 1996, respectively.
The increase in other expenses primarily reflects a reduction in the
deferral of loan origination costs. Partially offsetting the
increases described above, insurance expense decreased to $596,000 for
the six months ended June 30, 1997 from $1.2 million for the six
months ended June 30, 1996. The decrease is due primarily to the
reduction in the Savings Association Insurance Fund ("SAIF")
assessment rate on deposits.
INCOME TAX PROVISION. Income tax provisions were $1.4 million and
$1.1 million for the three months ended June 30, 1997 and 1996,
respectively. Income tax provisions were $2.8 million and
$2.2 million for the six months ended June 30, 1997 and 1996,
respectively. The effective tax rates were approximately 38.0% and
40.0% for the three months ended June 30, 1997 and 1996, respectively.
The effective tax rate for the six months ended June 30, 1997 and 1996
was 38.0%. 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
its financing and operating 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 $61.6 million
to $963.9 million at June 30, 1997, from $902.3 million at December
31, 1996. At June 30, 1997, approximately $64.2 million of deposits
consisted of public funds that generally have maturities of 60 days or
less. Advances from the FHLB Seattle increased to $374.8 million at
June 30, 1997 from $259.6 million at December 31, 1996. At June 30,
1997 and December 31, 1996, reverse repurchase agreements were $155.3
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.
<PAGE>
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.
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 six months ended June 30, 1997, net cash was
used in investing activities primarily to fund new loans and to
purchase investments and mortgage-backed securities.
Cash provided or used by operating activities is determined largely by
changes in the level of loan sales. The level of loans held for sale
depends on the level of loan originations and the time within which
investors fund the purchase of loans from Sterling. A majority of
conventional loans held for sale are sold within 10 days of the
closing while the sale of certain Federal Housing Administration
("FHA") and Veteran's Administration ("VA")- insured loans may take up
to 60 days. Sterling typically offsets fluctuations in the level of
loans held for sale by changing the level of advances from the FHLB
Seattle, reverse repurchase agreements or cash. Management believes
that proceeds from loans sold and advances from the FHLB Seattle,
reverse repurchase agreements and other borrowings 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 June 30, 1997, this credit line represented a total
borrowing capacity of approximately $592.0 million, of which
$374.8 million was outstanding. Sterling Savings also borrows on a
secured basis from major broker/dealers and financial entities by
selling reverse repurchase agreements. At June 30, 1997, Sterling
Savings had $155.3 million in outstanding borrowings under reverse
repurchase agreements and securities available for additional secured
borrowings of approximately $299.6 million. Sterling Savings also had
a secured line of credit from a commercial bank of approximately $10.0
million as of June 30, 1997. At June 30, 1997, Sterling Savings had
no funds drawn on this line of credit.
Excluding its subsidiaries, Sterling Financial had cash and other
resources of approximately $27.3 million and a line of credit from a
commercial bank of approximately $5.0 million at June 30, 1997. At
June 30, 1997, Sterling Financial had no funds drawn on this line of
credit. At June 30, 1997, Sterling Financial had an investment of
$109.5 million in the stock of Sterling Savings. Sterling Financial
received cash dividends on Sterling Savings stock of $2.7 million
during the six months ended June 30, 1997. These resources were
sufficient to meet the operating needs of Sterling Financial,
including interest expense on other borrowings 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.
<PAGE>
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 June 30,
1997, Sterling Savings' liquidity ratio was 11.3%, compared with 10.9%
at December 31, 1996. The higher level of liquidity at June 30, 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.
CAPITAL RESOURCES
-----------------
Sterling's total shareholders' equity was $93.5 million at June 30,
1997, compared with $89.2 million at December 31, 1996. The increase
in total shareholders' equity primarily reflects an increase in
retained earnings. At June 30, 1997 and December 31, 1996,
shareholders' equity was 5.5% and 5.8%, respectively, of total assets.
At June 30, 1997, Sterling had issued and outstanding 1.03 million
shares of $1.8125 Series A Cumulative Convertible Preferred Stock (the
"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
at a price of $25.75 per share, which gradually declines each year to
$25 per share on or after April 30, 2001, plus any accrued but unpaid
dividends. During the six months ended June 30, 1997, 10,764 shares
of Preferred Stock were converted to 21,001 shares of Common Stock.
See "Subsequent Developments."
Sterling recorded at June 30, 1997, an unrealized loss of $5.4
million, net of related income taxes, on investment and debt
securities classified as available-for-sale. The decrease in the
unrealized loss of $600,000 from the December 31, 1996 balance of a
$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.
On June 4, 1997, Sterling issued $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. See Note 4 of Notes to
Consolidated Financial Statements.
<PAGE>
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 $1.2 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 June 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. 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.
SUBSEQUENT DEVELOPMENTS
-----------------------
On August 5, 1997, Sterling notified the holders of its Preferred
Stock that all shares of the outstanding Preferred Stock would be
called for redemption on September 5, 1997 at a cash redemption price
of $26.07 per share.
In lieu of redemption, holders of the Preferred Stock have the option
to convert their Preferred Stock into Common Stock of Sterling
provided they elect to do so, pursuant to the notice of redemption, on
or before September 5, 1997. The holders of the Preferred Stock have
an incentive to convert their Preferred Stock into Common Stock of
Sterling as long as the market price for the Common Stock remains at
$13.37 or more per share. The market price for the Common Stock, as
quoted on the Nasdaq National Market, on August 7, 1997 was $17.88 per
share.
If all holders of the Preferred Stock elected to convert their shares
into shares of Common Stock of Sterling, Sterling would have an
additional 2.0 million shares of Common Stock outstanding. If all of
the holders of Preferred Stock elected instead to have their Preferred
Stock redeemed by Sterling, the cost of redemption for Sterling would
be approximately $26.8 million. Sterling currently has sufficient
<PAGE>
liquidity to pay the cost of redemption, although management believes
that substantially all of the holders of Preferred Stock will choose
to convert their Preferred Stock into Common Stock instead of
accepting redemption. There can be, however, no assurances regarding
the number of shares of Preferred Stock, if any, that will be
converted into Common Stock as opposed to being redeemed.
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 Federal Deposit Insurance
Corporation (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, 3 and 5 are omitted from this report as inapplicable.
----------------
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
Sterling's Annual Meeting of Shareholders ("the Meeting") was held on
April 22, 1997. The following matters were submitted to a vote of the
security holders of Sterling at the Meeting:
(1) Elect three Directors to serve for terms of three years expiring
at the Meeting in 2000. The Directors received the following
votes:
Term expiring in the year 2000 at the Meeting:
William W. Zuppe For: 4,888,451 Withheld: 43,085
Approximate Broker Non-votes: 0
Rodney W. Barnett For: 4,888,451 Withheld: 43,085
Approximate Broker Non-votes: 0
David O. Wallace For: 4,888,451 Withheld: 43,085
Approximate Broker Non-votes: 0
(2) Ratify the selection of Coopers & Lybrand L.L.P. as independent
public accountants for the year ending 1997 and any interim
periods. The proposal received the following votes:
For: 4,897,957 Against: 4,982
Abstain: 28,597 Approximate Broker Non-votes: 0
There was no solicitation in opposition to management's proposals
or nominees.
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibit No. Exhibit
----------- --------------------------------------------------
3.1 Restated Articles of Incorporation of Registrant.
Filed as Exhibit 3.1 to Registrant's Form S-4 dated
November 7, 1994 and incorporated by reference
herein.
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 as Exhibit 3.3 to Registrant's Form 10-Q
dated March 31, 1997 (File No. 0-20800) and
incorporated by reference herein.
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 31, 1996 (File No. 0-20800) and incorporated
by reference herein.
<PAGE>
(a) Exhibit No. Exhibit
----------- --------------------------------------------------
10.6 Copy of Amendment to Employment Agreement, dated
June 30, 1996, between Registrant and Harold B.
Gilkey. Filed as Exhibit 10.6 to Registrant's Form
10-Q dated March 31, 1997 (File No. 0-20800) and
incorporated by reference herein.
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 31, 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 as Exhibit 10.8 to Registrant's Form
10-Q dated March 31, 1997 (File No. 0-20800) and
incorporated by reference herein.
11.1 Statement regarding Computation of Per Share
Earnings. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended June 30, 1997.
<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)
August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 26958
<INT-BEARING-DEPOSITS> 7
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 577760
<INVESTMENTS-CARRYING> 12594
<INVESTMENTS-MARKET> 12629
<LOANS> 988957
<ALLOWANCE> 8139
<TOTAL-ASSETS> 1686395
<DEPOSITS> 963898
<SHORT-TERM> 0
<LIABILITIES-OTHER> 566077
<LONG-TERM> 72240
0
1029
<COMMON> 5567
<OTHER-SE> 86884
<TOTAL-LIABILITIES-AND-EQUITY> 1686395
<INTEREST-LOAN> 22286
<INTEREST-INVEST> 8483
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30769
<INTEREST-DEPOSIT> 11195
<INTEREST-EXPENSE> 19732
<INTEREST-INCOME-NET> 11037
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 487
<EXPENSE-OTHER> 9463
<INCOME-PRETAX> 3691
<INCOME-PRE-EXTRAORDINARY> 2288
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2288
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 2.91
<LOANS-NON> 5969
<LOANS-PAST> 0
<LOANS-TROUBLED> 207
<LOANS-PROBLEM> 19713
<ALLOWANCE-OPEN> 7999
<CHARGE-OFFS> 438
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 8139
<ALLOWANCE-DOMESTIC> 8139
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME PER SHARE
For the Three and Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Three Months Daily Six 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 83,145,105 113,590,065
April 16, 1997 5,543,507 7,573,171 29 160,761,703 219,621,959 160,761,703 219,621,959
May 15, 1997 5,550,618 7,573,168 15 83,259,270 113,597,526 83,259,270 113,597,526
May 30, 1997 5,552,252 7,574,802 7 38,865,764 53,023,617 38,865,764 53,023,617
June 6, 1997 5,555,471 7,574,801 6 33,332,826 45,448,808 33,332,826 45,448,808
June 12, 1997 5,556,641 7,574,800 5 27,783,205 37,874,002 27,783,205 37,874,002
June 17, 1997 5,556,651 7,574,810 1 5,556,651 7,574,810 5,556,651 7,574,810
June 18, 1997 5,564,201 7,574,809 2 11,128,402 15,149,619 11,128,402 15,149,619
June 20, 1997 5,566,152 7,574,809 6 33,396,912 45,448,854 33,396,912 45,448,854
June 26, 1997 5,566,652 7,575,309 5 27,833,260 37,876,545 27,833,260 37,876,545
------------- ------------- ------------- -------------
505,063,098 689,205,805 1,003,731,919 1,370,544,386
Divide by Number of Days Included in Period 91 91 181 181
------------- ------------- ------------- -------------
Weighted Average Shares Outstanding 5,550,144 7,573,690 5,545,480 7,572,068
Adjustment for Other Common Stock Equivalents
(Stock Options) 134,128 134,128
------------- ------------- ------------- -------------
Total 5,550,144 7,707,818 5,545,480 7,706,196
============= ============= ============= =============
Net Income $ 2,288,000 $ 2,288,000 $ 4,562,000 $ 4,562,000
Dividends Declared on Preferred Shares (469,000) (940,000)
------------- ------------- ------------- -------------
Net Income Available to Common Shareholders $ 1,819,000 $ 2,288,000 $ 3,622,000 $ 4,562,000
============= ============= ============= =============
Net Income Per Share $ 0.33 $ 0.30 $ 0.65 $ 0.59
============= ============= ============= =============
</TABLE>
<PAGE>
EXHIBIT 11.1
------------
COMPUTATION OF NET INCOME PER SHARE, CONTINUED
For the Three and Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Three Months Daily Six 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 5,441,022 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 60 325,538,880 447,318,720 325,538,880 447,318,720
May 31, 1996 5,426,398 7,456,062 31 168,218,338 231,137,922 168,218,338 231,137,922
------------- ------------- ------------- -------------
493,757,218 678,456,642 987,236,912 1,356,635,760
Divide by Number of Days Included in Period 91 91 182 182
------------- ------------- ------------- -------------
5,425,903 7,455,567 5,424,379 7,454,043
Adjustment for Other Common Stock Equivalents
(Stock Options) 106,455 106,455
------------- ------------- ------------- -------------
Total 5,425,903 7,562,022 5,424,379 7,560,498
============= ============= ============= =============
Net Income $ 1,715,000 $ 1,715,000 $ 3,586,000 $ 3,586,000
Dividends Declared on Preferred Shares (472,000) (943,000)
------------- ------------- ------------- -------------
Net Income Available to Common Shareholders $ 1,243,000 $ 1,715,000 $ 2,643,000 $ 3,586,000
============= ============= ============= =============
Net Income Per Share $ 0.23 $ 0.23 $ 0.49 $ 0.47
============= ============= ============= =============
</TABLE>
<PAGE>
