-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EiDLJXE8GX8ZV4ngAKVEDmIylrm+Ao3mmXhQ4aIOfWcc6nG9TcJoyG1toWOk3cwK uRmBoN0Wd1Dq4m4jyykPvg== 0000891020-97-000783.txt : 19970512 0000891020-97-000783.hdr.sgml : 19970512 ACCESSION NUMBER: 0000891020-97-000783 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970509 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING FINANCIAL CORP /WA/ CENTRAL INDEX KEY: 0000891106 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911572822 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20800 FILM NUMBER: 97599908 BUSINESS ADDRESS: STREET 1: 111 NORTH WALL ST CITY: SPOKANE STATE: WA ZIP: 99201 BUSINESS PHONE: 5094582711 MAIL ADDRESS: STREET 1: 111 NORTH WALL STREET CITY: SPOKANE STATE: WA ZIP: 99201 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 03/31/97 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 2 STERLING FINANCIAL CORPORATION FORM 10-Q For the Quarter Ended March 31, 1997 -------- TABLE OF CONTENTS
Page ---- 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
3 PART I - Financial Information Item 1 - Financial Statements STERLING FINANCIAL CORPORATION Consolidated Balance Sheets (Unaudited) --------
March 31, December 31, ----------------------------- 1997 1996 ----------- ----------- (Dollars in thousands) 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 1 4 STERLING FINANCIAL CORPORATION Consolidated Statements of Income (Unaudited) --------
Three Months Ended March 31, ----------------------------- 1997 1996 ----------- ----------- (Dollars in thousands, except per share data) 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 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 2 5 STERLING FINANCIAL CORPORATION Consolidated Statements of Cash Flows (Unaudited) --------
Three Months Ended March 31, ------------------------- 1997 1996 --------- --------- (Dollars in thousands) 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) --------- ---------
(continued) The accompanying notes are an integral part of the consolidated financial statements. 3 6 STERLING FINANCIAL CORPORATION Consolidated Statements of Cash Flows (continued) (Unaudited) --------
Three Months Ended March 31, ---------------------- 1997 1996 --------- --------- (Dollars in thousands) 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 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 7 STERLING FINANCIAL CORPORATION Consolidated Statement of Changes in Shareholders' Equity For the Three Months Ended March 31, 1997 (Unaudited) --------
Additional Total Preferred Stock Common Stock Paid-in Unrealized Retained Shareholders' Shares Amount Shares Amount Capital Loss Earnings Equity --------- ------ --------- ------- --------- ---------- -------- ------------- (Dollars in thousands) 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 ========== ====== ========== ====== ======= ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements. 5 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:
Three Months Ended March 31, ---------------------- 1997 1996 ------ ------ (Dollars in thousands) 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 ====== ======
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 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 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 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 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.
Three Months Ended March 31, --------------------- 1997 1996 ------- ------ (Dollars in thousands) 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 ======= =======
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 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.
Three Months Ended March 31, ---------------------- 1997 1996 --------- --------- (Dollars in millions) 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
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 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 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 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 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
(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 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.
15 18
Exhibit No. Exhibit ----------- ------- 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.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1997. 16 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 20
(a) Exhibit No. Exhibit Index ----------- ------------- 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.
15 21
Exhibit No. Exhibit ----------- ------- 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.
16 EX-10.6 2 EMPLOYMENT AGREEMENT, DATED JUNE 30, 1996 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 2 shall have the meanings ascribed to such terms in the Employment Agreement. 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 EX-10.8 3 EMPLOYMENT AGREEMENT, DATED JULY 1, 1995 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 2 shall have the meanings ascribed to such terms in the Employment Agreement. 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 EX-11.1 4 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 COMPUTATION OF NET INCOME PER SHARE FOR THE THREE MONTHS ENDED MARCH 31, 1997
THREE MONTHS DAILY SHARES OUTSTANDING WEIGHTED AVERAGE ----------------------------------------- ----------------------------- COMMON NUMBER FULLY COMMON EQUIVALENT OF DAYS PRIMARY DILUTED -------------- ----------- ------- ------------ ------------ 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 ============================
EX-12.1 5 COMPUTATION OF RETURN ON SHAREHOLDERS EQUITY 1 EXHIBIT 12.1 COMPUTATION OF RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1997
SHAREHOLDERS' EQUITY ---------------------------- NUMBER TOTAL COMMON OF DAYS TOTAL COMMON ---------- ---------- ------- ------------- ------------- 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% ===========
EX-12.2 6 COMPUTATION OF RETURN ON AVERAGE ASSETS 1 EXHIBIT 12.2 COMPUTATION OF RETURN ON AVERAGE ASSETS FOR THE THREE MONTHS ENDED MARCH 31, 1997
TOTAL ASSETS ------------ 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% ==============
EX-27.1 7 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1997 MAR-31-1997 29,320 216 0 0 460,020 11,866 11,766 974,947 7,999 1,557,216 935,590 0 502,551 32,240 0 1,040 5,543 81,292 1,557,216 21,724 7,924 0 29,648 10,501 18,596 11,052 550 85 8,888 3,668 2,274 0 0 2,274 0.33 0.30 3.05 2,467 0 211 8,896 7,891 470 28 7,999 7,999 0 0
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