Prepared by MERRILL CORPORATION

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10–Q

 

(Mark One)

 

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2001

 

OR

 

o           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 incorporation or organization)

 

(I.R.S. Employer 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  ý  No  o

 

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 October 31, 2001

Common Stock ($1.00 par value)

 

9,586,745

 

 


STERLING FINANCIAL CORPORATION

 

FORM 10-Q

For the Quarter Ended September 30, 2001

 

TABLE OF CONTENTS

 

PART I - Financial Information

 

 

Item 1 -

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2 -

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3 -

Quantitative and Qualitative Disclosures About Market Risk

 

PART II - Other Information

 

 

Item 1 -

Legal Proceedings

 

 

 

 

Item 2 -

Changes in Securities and Use of Proceeds

 

 

 

 

Item 3 -

Defaults Upon Senior Securities

 

 

 

 

Item 4 -

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5 -

Other Information

 

 

 

 

Item 6 -

Exhibits and Reports on Form 8-K

 

 

 

Signatures

 

 


PART I - Financial Information

Item I - Financial Statements

STERLING FINANCIAL CORPORATION

Consolidated Balance Sheets

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

ASSETS:

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Interest bearing

 

$

7,087

 

$

3,466

 

Non-interest bearing and vault

 

59,814

 

57,129

 

Restricted

 

2,173

 

1,915

 

Investments and asset-backed securities ("ABS"):

 

 

 

 

 

Available for sale

 

701,012

 

476,732

 

Held to maturity

 

8,668

 

9,450

 

Loans receivable, net

 

1,992,242

 

1,965,927

 

Leases receivable, net

 

6,231

 

0

 

Loans held for sale

 

8,996

 

1,489

 

Accrued interest receivable (including $4,095 and $3,479 on investmentsand ABS)

 

16,428

   

18,455

 

Real estate owned, net

 

3,961

 

6,407

 

Office properties and equipment, net

 

48,715

 

50,220

 

Other intangibles, net

 

45,960

 

49,998

 

Mortgage servicing rights, net

 

1,536

 

349

 

Prepaid expenses and other assets, net

 

12,255

 

11,172

 

Bank-owned life insurance ("BOLI")

 

30,532

 

0

 

 

 

 

 

 

 

Total assets

 

$

2,945,610

 

$

2,652,709

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Deposits

 

$

1,746,594

 

$

1,724,219

 

Advances from Federal Home Loan Bank of Seattle ("FHLB Seattle")

 

638,621

 

530,652

 

Securities sold subject to repurchase agreements and funds purchased

 

191,500

 

110,326

 

Other borrowings

 

158,015

 

110,000

 

Cashiers checks issued and payable

 

16,501

 

17,529

 

Borrowers' reserves for taxes and insurance

 

2,339

 

1,649

 

Accrued interest payable

 

7,908

 

9,616

 

Accrued expenses and other liabilities

 

15,096

 

7,380

 

 

 

 

 

 

 

Total liabilities

 

2,776,574

 

2,511,371

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

Preferred stock, $1 par value; 10,000,000 shares authorized;  no shares issued and outstanding

 

0

 

0

 

Common stock, $1 par value; 20,000,000 shares authorized;  9,586,781 and 8,911,150 shares issued and outstanding

 

9,587

 

8,911

 

Additional paid-in capital

 

86,578

 

78,035

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

Unrealized gains and (losses) on investments and ABS  available-for-sale, net of deferred income taxes of ($1,866) and $1,915

 

3,466

 

(3,558

)

Retained earnings

 

69,405

 

57,950

 

 

 

 

 

 

 

Total shareholders' equity

 

169,036

 

141,338

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,945,610

 

$

2,652,709

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


STERLING FINANCIAL CORPORATION

Consolidated Statements of Income

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in thousands, except per share data)

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

39,714

 

$

44,932

 

$

126,050

 

$

126,746

 

ABS

 

8,617

 

5,300

 

19,924

 

16,478

 

Investments and cash equivalents

 

1,361

 

2,634

 

5,174

 

8,099

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

49,692

 

52,866

 

151,148

 

151,323

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

15,347

 

19,248

 

51,049

 

53,705

 

Short-term borrowings

 

2,390

 

1,146

 

6,100

 

6,569

 

Long-term borrowings

 

11,350

 

12,131

 

32,851

 

31,343

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

29,087

 

32,525

 

90,000

 

91,617

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

20,605

 

20,341

 

61,148

 

59,706

 

 

 

 

 

 

 

 

 

 

 

Provision for losses on loans and leases

 

(1,525

)

(1,100

)

(4,400

)

(3,300

)

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for losses on loans  and leases

 

19,080

 

19,241

 

56,748

   

56,406

   

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

Fees and service charges

 

3,416

 

3,064

 

9,799

 

8,995

 

Mortgage banking operations

 

723

 

293

 

2,451

 

994

 

Loan servicing fees

 

314

 

215

 

899

 

657

 

Net gains on sales of securities

 

1,072

 

0

 

1,429

 

1

 

Real estate owned operations

 

(138

)

9

 

(445

)

97

 

Other noninterest income

 

355

 

0

 

439

 

0

 

 

 

 

 

 

 

 

 

 

 

Total other income

 

5,742

 

3,581

 

14,572

 

10,744

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

18,757

 

17,307

 

53,918

 

51,016

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

6,065

 

5,515

 

17,402

 

16,134

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

1,994

 

2,050

 

5,947

 

5,979

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,071

 

$

3,465

 

$

11,455

 

$

10,155

 

 

 

 

 

 

 

 

 

 

 

Income per share - basic

 

$

0.41

 

$

0.35

 

$

1.17

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

Income per share - diluted

 

$

0.40

 

$

0.35

 

$

1.15

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

9,845,922

 

9,801,569

 

9,822,386

 

9,798,801

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

10,061,805

 

9,828,104

 

9,971,520

 

9,821,837

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


STERLING FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

11,455

 

$

10,155

 

Adjustments to reconcile net income to net cash provided by (used in)  operating activities:

 

 

 

 

 

Provisions for losses on loans and real estate owned

 

4,734

 

3,300

 

Stock dividends on FHLB Seattle stock

 

(3,468

)

(1,719

)

Net gain on sales of loans, investments and ABS

 

(1,928

)

(407

)

Net gain on sales of real estate owned

 

(95

)

(180

)

Depreciation and amortization

 

9,243

 

8,015

 

Change in:

 

 

 

 

 

Accrued interest receivable

 

1,354

 

(649

)

Prepaid expenses and other assets

 

(2,574

)

634

 

Cashiers checks issued and payable

 

(1,028

)

(1,435

)

Accrued interest payable

 

(1,510

)

2,214

 

Accrued expenses and other liabilities

 

5,920

 

2,614

 

Proceeds from sales of loans

 

220,680

 

47,305

 

Real estate loans originated for sale

 

(218,642

)

(46,901

)

 

 

 

 

 

 

Net cash provided by operating activities

 

24,141

 

22,946

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Change in restricted cash

 

(258

)

(2,771

)

Loans disbursed

 

(730,809

)

(892,191

)

Loan principal received

 

722,201

 

674,449

 

Purchase of investments

 

(24

)

(19,912

)

Proceeds from maturities of investments

 

82,396

 

20,237

 

Proceeds from sales of available-for-sale investments

 

9,953

 

2,138

 

Purchase of BOLI

 

(30,000

)

0

 

Cash and cash equivalents acquired as part of acquisitions

 

1,498

 

0

 

Purchase of ABS

 

(520,428

)

0

 

Principal payments on ABS

 

74,066

 

32,065

 

Proceeds from sales of ABS

 

143,240

 

0

 

Purchase of office properties and equipment

 

(1,797

)

(1,083

)

Improvements and other changes to real estate owned

 

180

 

(904

)

Proceeds from sales and liquidation of real estate owned

 

7,158

 

5,616

 

 

 

 

 

 

 

Net cash used in investing activities

 

(242,624

)

(182,356

)

 


 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Cash flows from financing activities:

 

 

 

 

 

Net change in checking, passbook and money market deposits

 

$

67,803

 

$

(12,427

)

Proceeds from issuance of certificates of deposit

 

530,261

 

425,852

 

Payments for maturing certificates of deposit

 

(630,166

)

(398,313

)

Interest credited to deposits

 

52,980

 

52,778

 

Advances from FHLB Seattle

 

184,000

 

285,000

 

Repayment of FHLB Seattle advances

 

(76,031

)

(254,100

)

Net change in securities sold subject to repurchase agreements and funds purchased

 

81,174

 

18,789

 

Proceeds from other borrowings

 

54,000

 

7,000

 

Repayment of other borrowings

 

(40,000

)

(4,000

)

Proceeds from exercise of stock options, net of repurchases

 

78

 

56

 

Other

 

690

 

1,906

 

Net cash provided by financing activities

 

224,789

 

122,541

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

6,306

 

(36,869

)

Cash and cash equivalents, beginning of period

 

60,595

 

95,586

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

66,901

 

$

58,717

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

88,292

 

$

89,404

 

Income taxes

 

4,377

 

4,282

 

 

 

 

 

 

 

Noncash financing and investing activities:

 

 

 

 

 

Loans converted into real estate owned

 

$

4,722

 

$

3,807

 

Common stock issued upon business combination

 

9,141

 

0

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


STERLING FINANCIAL CORPORATION

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Net income

 

$

4,071

 

$

3,465

 

$

11,455

 

$

10,155

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in unrealized gains on investments and  ABS available-for-sale

 

9,283

   

4,560

   

10,806

   

3,188

   

Less deferred income taxes

 

3,249

 

1,597

 

3,782

 

1,117

 

 

 

 

 

 

 

 

 

 

 

Net other comprehensive income

 

6,034

 

2,963

 

7,024

 

2,071

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

10,105

 

$

6,428

 

$

18,479

 

$

12,226

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


STERLING FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

 

1.             Basis of Presentation:

The foregoing unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission.  Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2000.  In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period.  Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Sterling Financial Corporation's ("Sterling's") consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Sterling's consolidated financial position and results of operations.

 

2.             Interim Financial Statements:

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.             Other Borrowings:

The following table details Sterling's other borrowings:

 

 

September 30,

 

December 31,

 

 

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Term note payable (1)

 

$

30,000

 

$

0

 

Advances on revolving line of credit (2)

 

0

 

0

 

Sterling obligated mandatorily redeemable preferred capital securities
of subsidiary Trust-I holding solely junior subordinated
deferrable interest debentures of Sterling (3)

 

40,000

 

40,000

  

Floating Rate Notes Due 2006 (4)

 

30,000

 

30,000

 

Convertible Subordinated Debentures Due 2008 (5)

 

3,500

 

0

 

Sterling obligated mandatorily redeemable preferred capital securities
of subsidiary Trust-II holding solely junior subordinated
deferrable interest debentures of Sterling (6)

 

24,000

 

0

 

Short-term revolving lines of credit (7)

 

30,515

 

0

 

Advances on non-revolving note (8)

 

0

 

40,000

 

 

 

 

 

 

 

Total other borrowings

 

$

158,015

 

$

110,000

 

 


(1)  Sterling has a $30.0 million variable-rate term note with U.S. Bank, N.A. ("U.S. Bank") of which $30.0 million was outstanding at September 30, 2001.  This note matures on September 17, 2007.  Interest will accrue at the 30-day London Interbank Offering Rate ("LIBOR") plus 2.50% (5.88% at September 30, 2001) and is payable monthly.  This note is collateralized by stock of Sterling Savings Bank.

 

(2)  Sterling has a $5.0 million revolving line-of-credit agreement with U.S. Bank.  This line of credit matures on September 16, 2002.  The interest rate is adjustable monthly at the 30-day LIBOR plus 2.50% (5.88% at September 30, 2001) and is payable monthly.  At September 30, 2001, there were no amounts outstanding under this agreement.

 

(3)  Sterling has outstanding $41.2 million of 9.50% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures-I") to Sterling Capital Trust I ("Trust-I"), a Delaware business trust, in which Sterling owns all of the common equity.  The sole asset of Trust-I is the Junior Subordinated Debentures-I. Trust-I issued $40.0 million of 9.50% Cumulative Capital Securities (the "Trust-I Preferred Securities") to investors.  Sterling's obligations under the Junior Subordinated Debentures-I and related documents, taken together, constitute a full and unconditional guarantee by Sterling of Trust-I's obligations under the Trust-I Preferred Securities.  The Trust-I Preferred Securities are treated as debt of Sterling.  Although Sterling, as a savings and loan holding company, is not subject to the Federal Reserve capital requirements for bank holding companies, the Trust-I Preferred Securities have been structured to qualify as Tier 1 capital, subject to certain limitations, if Sterling were to become regulated as a bank holding company.  The Junior Subordinated Debentures-I and related Trust-I Preferred Securities mature in June 2027 and are redeemable at the option of Sterling in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted or certain other contingencies arise.  The Trust-I Preferred Securities must be redeemed upon maturity of the Junior Subordinated Debentures-I in 2027.

 

(4)  Sterling has outstanding $30.0 million of Floating Rate Notes Due 2006.  These notes are unsecured general obligations of Sterling and are subordinated to certain other existing and future indebtedness.  Under the terms of the notes, Sterling is limited in the amount of certain long-term debt that it may incur and the notes restrict Sterling, under certain circumstances, as to the amount of cash dividends on its preferred or common stock and capital distributions which can be made.  At September 30, 2001, Sterling could incur approximately $25.4 million of additional long-term debt, and Sterling would have been limited to the payment of up to approximately $12.8 million in additional dividends.  Interest accrues at the 90-day LIBOR plus 2.50% (6.39% until December 15, 2001) and is adjustable and payable quarterly.  The notes mature on June 15, 2006 and may be redeemed under certain conditions after June 15, 2002.

 

(5)  In September 2001, Sterling assumed $3.5 million of 7.50% Convertible Subordinated Debentures due 2008 (the "Debentures") as a result of a business combination.  The Debentures are redeemable in whole or in part, at Sterling's option at any time at fixed redemption prices plus accrued interest to the redemption date.  Unless previously redeemed, the Debentures are convertible at any time before maturity into common stock of Sterling at a price of $16.86 per share, subject to adjustment in certain events.  Fractional shares will be paid in cash at the time of conversion.  The Debentures are unsecured general obligations of Sterling, subordinate in right of payment to all existing and future senior indebtedness of Sterling.

 

(6)  Sterling has outstanding $24.7 million of 10.25% junior subordinated deferrable interest debentures ("Junior Subordinated Debentures-II") to Sterling Capital Trust II ("Trust-II"), a Delaware business trust, in which Sterling owns all of the common equity.  The sole asset of Trust-II is the Junior Subordinated Debentures–II.  Trust-II issued $24.0 million of 10.25% Cumulative Capital Securities (the "Trust-II Preferred Securities") to investors.  Sterling's obligations under the Junior Subordinated Debentures-II and related documents, taken together, constitute a full and unconditional guarantee by Sterling of Trust-II's obligations under the Trust-II Preferred Securities.  The Trust-II Preferred Securities are treated as debt of Sterling.  Although Sterling, as a savings and loan holding company, is not subject to the Federal Reserve capital requirements for bank holding companies, the Trust-II Preferred Securities have been structured to qualify as Tier 1 capital, subject to certain limitations, if Sterling were to become regulated as a bank holding company.  The Junior Subordinated Debentures-II and related Trust-II Preferred Securities mature in July 2031 and are redeemable at the option of Sterling in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted or certain other contingencies arise.  The Trust-II Preferred Securities must be redeemed upon maturity of the Junior Subordinated Debentures-II in 2031.

 

(7)  In September 2001, Sterling assumed two short-term lines of credit with Bank of America as a result of a business combination.  These lines were subsequently paid off on October 1, 2001.

 

(8)  Sterling had a $50.0 million non-revolving, variable-rate, line-of-credit agreement with KeyBank National Association ("KeyBank"), of which $0 was outstanding at September 30, 2001.

 

4.             Income Per Share:

The following table presents the basic and diluted income per share computations, including the effects of the 10% stock dividend which was declared on October 23, 2001:

 

 

 

Three Months Ended September 30,

 

 

 

2001

 

2000

 

 

 

Net Income

 

Weighted Avg. Shares

 

Per Share Amount

 

Net Income

 

Weighted Avg. Shares

 

Per Share Amount

 

Basic computations

 

$

4,071,000

 

9,845,922

 

$

0.41

 

$

3,465,000

 

9,801,569

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock options

 

0

 

215,883

 

(0.01

)

0

 

26,535

 

0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted computations

 

$

4,071,000

 

10,061,805

 

$

0.40

 

$

3,465,000

 

9,828,104

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive options not included in diluted  income per share

 

 

 

83,628

 

 

 

 

 

649,086

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2001

 

2000

 

 

 

Net Income

 

Weighted Avg. Shares

 

Per Share Amount

 

Net Income

 

Weighted Avg. Shares

 

Per Share Amount

 

Basic computations

 

$

11,455,000

 

9,822,386

 

$

1.17

 

$

10,155,000

 

9,798,801

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock options

 

0

 

149,134

 

(0.02

)

0

 

23,036

 

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted computations

 

$

11,455,000

 

9,971,520

 

$

1.15

 

$

10,155,000

 

9,821,837

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive options not included in diluted  income per share

 

 

 

196,282

 

 

 

 

 

649,086

 

 

 

 


5.             Operating Expenses:

The following table details Sterling's components of total operating expenses:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Employee compensation and benefits

 

$

8,927

 

$

8,096

 

$

25,453

 

$

24,228

 

Occupancy and equipment

 

2,796

 

2,635

 

8,319

 

7,760

 

Depreciation

 

1,142

 

1,147

 

3,396

 

3,401

 

Amortization of intangible assets

 

1,339

 

1,346

 

4,038

 

4,141

 

Advertising

 

973

 

689

 

2,190

 

1,891

 

Data processing

 

1,297

 

1,321

 

3,955

 

4,183

 

Insurance

 

187

 

181

 

557

 

533

 

Legal and accounting

 

407

 

403

 

1,283

 

1,140

 

Acquisition and conversion costs

 

185

 

0

 

185

 

0

 

Travel and entertainment

 

434

 

351

 

1,264

 

1,125

 

Goodwill litigation costs

 

255

 

250

 

770

 

600

 

Other

 

815

 

888

 

2,508

 

2,014

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

18,757

 

$

17,307

 

$

53,918

 

$

51,016

 

 

6.             Business Segments:

Sterling operates residential loan production offices primarily in the Spokane and Seattle, Washington; Portland, Oregon; and Boise, Idaho metropolitan areas through its subsidiary Action Mortgage Company.  Residential mortgage banking operations include revenues from servicing-released and servicing-retained sales of originated residential loans, bulk sales of loan servicing rights and other fees.

 

                The following table summarizes information related to Sterling's residential mortgage banking operations:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Gains on sales of residential loans

 

$

305

 

$

108

 

$

780

 

$

292

 

Other fees and income

 

1,839

 

1,722

 

5,386

 

5,094

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

2,144

 

1,830

 

6,166

 

5,386

 

Identifiable expenses

 

(1,203

)

(960

)

(3,141

)

(3,120

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

941

 

$

870

 

$

3,025

 

$

2,266

 

 

 

 

 

 

 

 

 

 

 

Identifiable assets

 

$

9,703

 

$

13,555

 

$

9,703

 

$

13,555

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

$

34

 

$

30

 

$

103

 

$

89

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for office properties and equipment

 

$

75

 

$

9

 

$

91

 

$

127

 

 


Sterling also operates commercial real estate loan production offices primarily in the Spokane and Seattle, Washington; and Portland, Oregon metropolitan areas through its subsidiary INTERVEST-Mortgage Investment Company.  Commercial real estate mortgage banking operations include revenues from sales of commercial real estate loans and participation interests in commercial real estate loans, loan fees and servicing fees.

 

The following table summarizes information related to Sterling's commercial real estate mortgage banking operations:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Gains on sales of commercial real estate loans

 

$

104

 

$

30

 

$

330

 

$

263

 

Other fees and income

 

1,625

 

1,079

 

4,101

 

2,934

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

1,729

 

1,109

 

4,431

 

3,197

 

Identifiable expenses

 

(611

)

(449

)

(1,570

)

(1,226

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

1,118

 

$

660

 

$

2,861

 

$

1,971

 

 

 

 

 

 

 

 

 

 

 

Identifiable assets

 

$

11,912

 

$

18,905

 

$

11,912

 

$

18,905

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

$

4

 

$

4

 

$

13

 

$

12

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for office properties and equipment

 

$

1

 

$

2

 

$

10

 

$

35

 

 

Sterling has determined that its reportable business segments are those that are based on its method of disaggregated internal reporting.

 


The following is a reconciliation of certain segment operations to the amounts reported in the consolidated financial statements:

 

 

 

Mortgage Banking Operations

 

 

 

Banking

Operations

 

Residential

 

Commercial
Real
Estate

 

Total

 

 

 

(Dollars in thousands)

 

As of and for the three months ended September 30, 2001:

 

 

 

 

 

 

 

 

 

Interest income

 

$

46,938

 

$

1,471

 

$

1,283

 

$

49,692

 

Other income

 

5,019

 

292

 

431

 

5,742

 

Income before taxes

 

3,860

 

1,087

 

1,118

 

6,065

 

Total assets

 

2,923,995

 

9,703

 

11,912

 

2,945,610

 

 

 

 

 

 

 

 

 

 

 

As of and for the three months ended September 30, 2000:

 

 

 

 

 

 

 

 

 

Interest income

 

$

50,537

 

$

1,464

 

$

865

 

$

52,866

 

Other income

 

3,288

 

127

 

166

 

3,581

 

Income before taxes

 

3,985

 

870

 

660

 

5,515

 

Total assets

 

2,644,724

 

13,555

 

18,905

 

2,677,184

 

 

 

 

 

 

 

 

 

 

 

As of and for the nine months ended September 30, 2001:

 

 

 

 

 

 

 

 

 

Interest income

 

$

143,511

 

$

4,434

 

$

3,203

 

$

151,148

 

Other income

 

12,121

 

1,475

 

976

 

14,572

 

Income before taxes

 

11,516

 

3,025

 

2,861

 

17,402

 

Total assets

 

2,923,995

 

9,703

 

11,912

 

2,945,610

 

 

 

 

 

 

 

 

 

 

 

As of and for the nine months ended September 30, 2000:

 

 

 

 

 

 

 

 

 

Interest income

 

$

144,709

 

$

4,308

 

$

2,306

 

$

151,323

 

Other income

 

9,750

 

351

 

643

 

10,744

 

Income before taxes

 

11,897

 

2,266

 

1,971

 

16,134

 

Total assets

 

2,644,724

 

13,555

 

18,905

 

2,677,184

 

 


7.             Business Combination:

                The Source Capital Corporation business combination was completed on September 28, 2001.  This combination increased Sterling's total capital by approximately $9.1 million.  The transaction was accounted for using the purchase method.  Therefore, Sterling's results do not include the operating results of Source Capital prior to the effective date.  Below is summary financial information for the transaction.

 

 

 

At

 

 

 

 

 

September 30,

 

 

 

 

 

2001

 

Yield/Cost

 

 

 

(Dollars in thousands)

 

ASSETS:

 

 

 

 

 

Loans receivable

 

$

36,419

 

15.76

%

Leases receivable

 

10,542

 

18.92

%

Loan and lease discounts/unearned income

 

(6,393

)

 

 

Real estate owned, net

 

408

 

 

 

Other assets

 

3,235

 

 

 

 

 

 

 

 

 

Total assets

 

$

44,211

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

Notes payable

 

$

30,515

 

7.48

%

Subordinated debt

 

3,500

 

7.50

%

Other liabilities

 

1,055

 

 

 

 

 

 

 

 

 

Total liabilities

 

35,070

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

9,141

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

44,211

 

 

 

 

 

 

 

 

 

Shares issued

 

627,859

 

 

 

 

8.             New Accounting Policies:

                In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations."  This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001.  In addition, SFAS No. 141 addresses the accounting for intangible assets and goodwill acquired in a business combination.  This portion of SFAS No. 141 is effective for business combinations completed after June 30, 2001.  Sterling does not expect SFAS No. 141 to have a material effect on Sterling's financial position or results of operations.

 

                In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets," which revises the accounting for purchased goodwill and intangible assets.  Under SFAS No. 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator.  Sterling will adopt SFAS No. 142 on January 1, 2002.  Sterling anticipates that the adoption of SFAS No. 142 will decrease annual operating expenses by approximately $3.8 million.

 


                In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued.  SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities.  It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair value.  As required, Sterling adopted the provisions of SFAS No. 133, as amended, effective January 1, 2001.  The adoption of this standard did not have a material effect on the consolidated financial statements.

 

                In October 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140").  SFAS No. 140 replaces SFAS No. 125.  SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures.  SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001.  However, SFAS No. 140 also requires recognition and reclassification of collateral and certain additional disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000.  Sterling has implemented the disclosure requirements of SFAS No. 140.  Since SFAS No. 140 requirements are prospectively applied to future transactions, there was no effect on the financial statements of adopting SFAS No. 140.

 


                                                                          STERLING FINANCIAL CORPORATION

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2001 and 2000

 

This report contains forward-looking statements, which are not historical facts and pertain to our future operating results.  These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts.  When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements.  These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  Actual results may differ materially from the results discussed in these forward-looking statements because of 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; shifts in the demand for Sterling's loan and other products; lower than expected revenue or cost savings in connection with acquisitions; changes in accounting policies; changes in the monetary and fiscal policies of the federal government; and changes in laws, regulations and the competitive environment.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere 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 Bank.  The significant operating subsidiaries of Sterling Savings Bank are Action Mortgage Company ("Action Mortgage"), INTERVEST–Mortgage Investment Company ("INTERVEST") and Harbor Financial Services, Inc. ("Harbor Financial").

 

Sterling provides personalized, quality financial services to its customers as exemplified by its "Hometown Helpful" philosophy.  Sterling believes that this dedication to personalized service has enabled it to maintain a stable retail deposit base.  With $2.95 billion in total assets at September 30, 2001, Sterling attracts Federal Deposit Insurance Corporation ("FDIC") insured deposits from the general public through 77 retail branches located primarily in rural and suburban communities in Washington, Oregon, Idaho and Montana.  Sterling originates loans through its branch offices as well as Action Mortgage residential loan production offices in the metropolitan areas of Spokane and Seattle, Washington; Portland, Oregon; and Boise, Idaho; and through INTERVEST commercial real estate lending offices located in the metropolitan areas of Spokane and Seattle, Washington; and Portland, Oregon.  Sterling also markets tax–deferred annuities, mutual funds and other financial products through Harbor Financial.

 

In September 2001, Sterling completed the business combination with Source Capital Corporation.  This combination increased Sterling's total capital by approximately $9.1 million.  The transaction was accounted for using the purchase method.  Therefore, Sterling's results do not include the operating results of Source Capital prior to the effective date.  See Note 7 of "Notes to Consolidated Financial Statements."

 

In July 2001, Sterling, through its Sterling Capital Trust II, issued $24.0 million of the Trust-II Preferred Securities to investors. The Trust-II Preferred Securities are treated as debt of Sterling and mature in July 2031. Sterling used $15.0 million of the proceeds to pay down its KeyBank debt and contributed approximately $9.0 million in capital to Sterling Savings Bank to fund its growth.

 


Sterling continues to enhance its presence as a community bank by increasing its commercial real estate, business banking, consumer and construction lending while increasing its retail deposits, particularly transaction accounts.  Commercial real estate, business banking, consumer and construction loans generally produce higher yields than residential loans.  Such loans, however, generally involve a higher degree of risk than financing residential real estate.  Sterling's revenues are derived primarily from interest earned on loans, investments and asset–backed securities ("ABS"), from fees and service charges and from mortgage banking operations.  The operations of Sterling Savings Bank, and savings institutions generally, are influenced significantly by general economic conditions and by policies of its primary regulatory authorities, the Office of Thrift Supervision ("OTS"), the FDIC and the State of Washington Department of Financial Institutions ("Washington Supervisor").

 

Management believes that a community bank mix of assets and liabilities will enhance its net interest income ("NII") (the difference between the interest earned on loans and investments and the interest paid on liabilities) and other fee income will increase, although there can be no assurance in this regard.  Sterling intends to continue to pursue an aggressive growth strategy, which may include acquiring other financial institutions or branches thereof or other substantial assets or deposit liabilities.  Sterling may not be successful in identifying further acquisition candidates, integrating acquired institutions or preventing deposit erosion or loan quality deterioration at acquired institutions.  There is significant competition for acquisitions in Sterling's market area, and Sterling may not be able to acquire other institutions on attractive terms.  Furthermore, the success of Sterling's growth strategy will depend on increasing and maintaining sufficient levels of regulatory capital, obtaining necessary regulatory approvals, generating appropriate growth and favorable economic and market conditions.  There can be no assurance that Sterling will be successful in implementing its growth strategy.

 

On October 23, 2001, the Board of Directors declared a 10% stock dividend, payable November 30, 2001 to shareholders of record at November 8, 2001.  Post stock dividend earnings per diluted share were $0.40 for the three months ended September 30, 2001, compared with $0.35 per diluted share for the prior year's comparable quarter.  Post stock dividend book value per share was $16.03 at September 30, 2001 and $13.26 at September 30, 2000.

 

Results of Operations

 

Overview.  Sterling recorded net income of $4.1 million, or $0.40 per diluted share, for the three months ended September 30, 2001, compared with net income of $3.5 million, or $0.35 per diluted share, for the three months ended September 30, 2000.  Sterling recorded net income of $11.5 million, or $1.15 per diluted share, for the nine months ended September 30, 2001.  This compares with net income of $10.2 million, or $1.03 per diluted share, for the nine months ended September 30, 2000.  The earnings per share reflect the effects of the 10% stock dividend which was declared on October 23, 2001.  The increase in net income for both periods reflected an increase in other income and net interest income.

 

                Financial highlights for the quarter are:

 

                      Post dividend operating cash earnings per diluted share were $0.48 for the quarter ended September 30, 2001, compared to $0.41 for the period ended September 30, 2000, an increase of 14.6%.

 

                      Sterling completed the combination with Source Capital Corporation on September 28, 2001.  Source Capital is now an operating subsidiary of Sterling Savings Bank.

 

                      Loan originations increased 61.5% to $351.2 million during the three months ended September 30, 2001, compared with $217.4 million during the same period last year.

 

                      Asset quality measures remained at acceptable levels as the allowance for loan losses to loans remained at 0.92%.

 

                      Book value per outstanding share prior to the October 2001 dividend increased to $17.63 at September 30, 2001 from $16.04 at September 30, 2000.

 

                      Sterling issued $24.0 million in Trust-II Preferred Securities.  These Trust-II Preferred Securities are treated as debt to Sterling and mature in June 2031.

 

                      Sterling refinanced its bank line with U.S. Bank on a term basis, extending the maturity by five years.

 

                      Consumer-based fee and service charges increased by 11.5% to $3.4 million during the third quarter versus the prior year's comparable period.

 

                      Transaction account deposits increased to $788.0 million from $701.0 million at September 30, 2000, an increase of 12.5%.


 

                Operating cash earnings per common share excludes pro-forma amortization of SFAS 142 intangible assets of $641,000, $607,000, $1,907,000 and $1,822,000 which are net of related income taxes for the three months ended September 30, 2001 and 2000, and for the nine months ended September 30, 2001 and 2000, respectively.  It also excludes merger and acquisition costs of $124,000 and $122,000 which are net of related income taxes for the three and nine months ended September 30, 2001, respectively.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

Operating cash earnings (dollars in thousands)

 

$

4,835

 

$

4,072

 

$

13,484

 

$

11,977

 

Operating cash earnings per common share – diluted

 

0.53

 

0.46

 

1.49

 

1.34

 

Post dividend operating cash earnings per common  share - diluted

 

0.48

   

0.41

   

1.35

   

1.22

   

Operating cash return on average assets (annualized)

 

0.66

%

0.61

%

0.66

%

0.61

%

Operating cash return on average common  shareholders' equity (annualized)

 

12.3

  %

12.9

  %

12.0

  %

13.2

  %

 

                The annualized return on average assets was 0.57% and 0.52% for the three months ended September 30, 2001 and 2000, respectively.  For the nine months ended September 30, 2001 and 2000, the annualized return on average assets was 0.56% and 0.52%, respectively.  The increases in the ratios were primarily due to the increase in net income.

 

                The annualized return on average equity was 10.6% and 11.0% for the three months ended September 30, 2001 and 2000, respectively.  For the nine months ended September 30, 2001 and 2000, the annualized return on average equity was 10.3% and 11.2%, respectively.  The decreases in the ratios were primarily due to the increase in average equity reflecting the increase in the market values of available-for-sale securities, net of tax.

 

                Net Interest Income.  The most significant component of earnings for a financial institution typically is NII, which is the difference between interest income, primarily from loan, ABS and investment portfolios, and interest expense, primarily on deposits and borrowings.  During the three months ended September 30, 2001 and 2000, NII was $20.6 million and $20.3 million, respectively.  During the nine months ended September 30, 2001 and 2000, NII was $61.1 million and $59.7 million, respectively.

 


                Changes in NII 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 NII divided by total interest–earning assets and is influenced by the level and relative mix of interest–earning assets and interest–bearing liabilities.  The increase in NII during the nine months ended September 30, 2001 was primarily due to an increase in earning assets which was offset by a more rapid reduction in loan rates and a decrease in the cost of deposits and borrowings.

 

                During the three months ended September 30, 2001 and 2000, average interest-earning assets were $2.61 billion and $2.49 billion, respectively.  For the three months ended September 30, 2001, average loans decreased by $42.6 million, while average investments and ABS increased by $165.1 million over the same period in 2000.  Net interest spread during these periods was 2.90% and 3.02%, respectively.  The net interest margin for the three months ended September 30, 2001 and 2000 was 3.13% and 3.25%, respectively.  Net interest spread decreased primarily because the yield on loans declined more rapidly than the costs of deposits and borrowings.

 

                During the nine months ended September 30, 2001 and 2000, the average interest-earning assets were $2.53 billion and $2.44 billion, respectively.  Net interest spread during these periods was 2.97% and 3.09%, respectively.  The net interest margin for the nine months ended September 30, 2001 and 2000 was 3.23% and 3.27%, respectively.  The decrease in the net interest spread for the nine months ended September 30, 2001, compared with the same period in 2000, was primarily due to a more rapid decrease in the loan rates relative to deposits and borrowings.

 

                Management believes that recent interest rate reductions will have a positive impact on net interest margin and NII in future periods, although there can be no assurance in this regard.  The impact of recent interest rate reductions was minimal on the third quarter results because of the magnitude of interest rate reductions over a relatively short period of time.  Interest rate changes have a greater initial impact on loan yields than on the cost of deposits and borrowings as variable-rate loans tend to reprice sooner while borrowings and certificates of deposit reprice according to maturity schedules.

 

                Provision for Losses on Loans.  Management's policy is to establish valuation allowances for estimated losses by charging corresponding provisions against income.  The evaluation of the adequacy of specific and general valuation allowances is an ongoing process.

 

                Sterling recorded provisions for losses on loans of $1.5 million and $1.1 million for the three months ended September 30, 2001 and 2000, respectively.  Sterling recorded provisions for losses on loans of $4.4 million and $3.3 million for the nine months ended September 30, 2001 and 2000, respectively.  Management anticipates that its provisions for losses on loans will continue to increase in the future as Sterling originates more commercial real estate, construction, business banking and consumer loans.  At September 30, 2001, Sterling's total classified assets were $46.0 million, compared with $25.8 million at September 30, 2000.  At September 30, 2001, Sterling's loan delinquency rate (60 days or more) as a percentage of total loans was 0.51%, compared with 0.50% at September 30, 2000.  Total nonperforming loans were $12.6 million at September 30, 2001, compared with $10.2 million at September 30, 2000.  The increase in nonperforming loans and classified assets was primarily attributable to the $2.5 million in nonperforming loans from the business combination with Source Capital Corporation.  Management believes that Sterling's asset quality remains at acceptable levels despite the greater emphasis on originating higher-risk commercial real estate, construction, business banking and consumer loans.

 

                Management believes the provisions for losses on loans for the three and nine months ended September 30, 2001 are appropriate based upon its evaluation of factors affecting the adequacy of valuation allowances, although there can be no assurance in this regard.  Such factors include locations and concentrations of loans, loan loss experience 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in thousands)

 

Fees and service charges

 

$

3,416

 

$

3,064

 

$

9,799

 

$

8,995

 

Mortgage banking operations

 

723

 

293

 

2,451

 

994

 

Loan servicing fees

 

314

 

215

 

899

 

657

 

Net gains on sales of securities

 

1,072

 

0

 

1,429

 

1

 

Real estate owned operations

 

(138

)

9

 

(445

)

97

 

Other noninterest income

 

355

 

0

 

439

 

0

 

 

 

 

 

 

 

 

 

 

 

Total other income

 

$

5,742

 

$

3,581

 

$

14,572

 

$

10,744

 

 

                Fees and service charges primarily consist of service charges on deposit accounts, fees for certain customer services, commissions on sales of credit life insurance, commissions on sales of mutual funds and annuity products and late charges on loans.  The increase for the three and nine months ended September 30, 2001, compared with the three and nine months ended September 30, 2000, was primarily due to the increases in service charges and a greater number of transaction accounts.

 

                The following table summarizes loan originations and sales of loans for the periods indicated.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

2001

 

2000

 

 

 

(Dollars in millions)

 

Originations of one- to four-family permanent mortgage loans

 

$

43.8

 

$

25.8

 

$

115.1

 

$

79.5

 

Sales of residential loans

 

25.0

 

12.4

 

173.5

 

32.5

 

Sales of commercial real estate loans

 

6.9

 

2.6

 

45.2

 

14.4

 

Principal balances of mortgage loans serviced for others

 

317.9

 

205.3

 

317.9

 

205.3

 

 

                The increase in income from mortgage banking operations, for the three and nine months ended September 30, 2001 compared to the same period in 2000, was primarily due to increased residential mortgage activity.

 

                During the three and nine months ended September 30, 2001, Sterling sold approximately $124.6 million and $151.8 million of investments and ABS, resulting in net gains of $1.1 million and $1.4 million, respectively.

 

                During the three and nine months ended September 30, 2001, the increase in other noninterest income over the prior year's comparable periods was primarily due to earnings from changes in the cash surrender value of bank-owned life insurance ("BOLI").

 

                Operating Expenses.  Operating expenses were $18.8 million and $17.3 million for the three months ended September 30, 2001 and 2000, respectively.  During the nine months ended September 30, 2001 and 2000, operating expenses were $53.9 million and $51.0 million, respectively.  The higher level of operating expenses was primarily a result of expanded staffing in Sterling's branch delivery network and mortgage banking operations, an increase in employee benefits and increased occupancy costs.

 


                Employee compensation and benefits were $8.9 million and $8.1 million for the three months ended September 30, 2001 and 2000, respectively.  During the nine months ended September 30, 2001 and 2000, employee compensation and benefits were $25.5 million and $24.2 million, respectively.  The increases reflected increased mortgage banking and Internet banking staff and costs associated with the opening of the new Portland Corporate Banking Office.  At September 30, 2001, full-time-equivalent employees were 872, compared with 809 at September 30, 2000.

 

                Goodwill litigation expenses were $255,000 and $250,000 for the three months ended September 30, 2001 and 2000, respectively.  During the nine months ended September 30, 2001 and 2000, goodwill litigation expenses were $770,000 and $600,000, respectively.  The increases primarily reflected the completion of the fact discovery phase and commencement of the expert discovery phase of Sterling's goodwill litigation.  Because of the increased level of effort required to bring the case to conclusion, Sterling will likely incur similar costs over the next few years.

 

                Occupancy and equipment expenses were $2.8 million and $2.6 million for the three months ended September 30, 2001 and 2000, respectively.  During the nine months ended September 30, 2001 and 2000, occupancy and equipment expenses were $8.3 million and $7.8 million, respectively.  The increase primarily reflected higher utility costs.

 

                Other expenses were $815,000 and $888,000 for the three months ended September 30, 2001 and 2000, respectively.  The decrease was primarily due to lower costs realized from in-house check and statement processing.  For the nine months ended September 30, 2001 and 2000, other expenses were $2.5 million and $2.0 million, respectively.  The increase in other expenses for the nine-month period ended September 30, 2001, compared with last year's comparable period, was primarily due to lower loan processing expenses in the June 2000 period, offset by lower costs for check and statement processing.

 

                Income Tax Provision.  Sterling recorded federal and state income tax provisions of $2.0 million and $2.1 million for the three months ended September 30, 2001 and 2000, respectively.  Tax provisions were $5.9 million and $6.0 million for the nine months ended September 30, 2001 and 2000, respectively.  The effective tax rates for the three-month periods ended September 30, 2001 and 2000 were 33.0% and 37.0% and reflected a tax exemption on earnings from BOLI in the current period.

 

Financial Position

 

                Assets.  At September 30, 2001, Sterling's assets were $2.95 billion, up $292.9 million from $2.66 billion at December 31, 2000.

 

                Investments and ABS.  Sterling's investment and ABS portfolio at September 30, 2001 was $709.7 million, an increase of $223.5 million from the December 31, 2000 balance of $486.2 million.  The increase was primarily due to net purchases of ABS.

 

                Loans and Leases Receivable.  At September 30, 2001, gross loans and leases receivable were $2.02 billion, up $37.0 million from $1.99 billion at December 31, 2000.  The increase was primarily due to $40.6 million in net loans and leases acquired from Source Capital Corporation.  During the three months ended September 30, 2001, total loan originations were $351.2 million compared with $217.4 million for the prior year's comparable quarter.  Approximately 72% of the total loan originations were construction, business banking and consumer loans.  During the nine months ended September 30, 2001 and 2000, total loan originations were $971.5 million and $771.9 million, respectively.  The most significant increase in loan originations during the nine-month period was in commercial real estate lending.  See the loan origination table below.

 


The following table sets forth the composition of Sterling's loan and lease portfolio at the dates indicated.  Loan and lease balances exclude unearned yield discounts and premiums, deferred loan and lease origination costs and fees or allowances for loan and lease losses.

 

 

 

September 30, 2001

 

December 31, 2000

 

 

 

Amount

 

%

 

Amount

 

%

 

 

 

(Dollars in thousands)

 

Residential

 

$

303,777

 

15.0

 

$

410,548

 

20.7

 

Multifamily

 

143,961

 

7.1

 

163,675

 

8.2

 

Commercial real estate

 

442,513

 

21.9

 

348,367

 

17.5

 

Construction

 

379,627

 

18.7

 

377,206

 

19.0

 

Consumer - direct

 

243,629

 

12.0

 

235,423

 

11.8

 

Consumer - indirect

 

52,736

 

2.6

 

17,368

 

0.9

 

Business banking

 

450,005

 

22.2

 

435,284

 

21.9

 

Commercial leases receivable

 

8,644

 

0.5

 

0

 

0.0

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases receivable

 

$

2,024,892

 

100.0

 

$

1,987,871

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at end of period

 

7.82

%

 

 

8.86

%

 

 

 

The following table sets forth Sterling's loan originations for the periods indicated.

 

 

 

Three Months Ended

 

Nine  Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2001

 

2000

 

% Change

 

2001

 

2000

 

%Change

 

 

 

(Dollars in thousands)

 

Residential

 

$

43,819

 

$

25,797

 

69.9

 

$

115,052

 

$

79,453

 

44.8

 

Multifamily

 

7,400

 

3,720

 

98.9

 

18,436