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, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
TO .
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Commission file number 0-20800
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STERLING FINANCIAL CORPORATION
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(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
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(Address of principal executive offices) (Zip Code)
(509) 458-2711
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
<PAGE>
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
Class Outstanding as of April 30, 1998
------------------------------ ------------------------------------
Common Stock ($1.00 par value) 7,601,112
<PAGE>
STERLING FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1998
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
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
Signature
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
1998 1997
---------- ------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Interest bearing $ 199 $ 15,858
Non-interest bearing and vault 33,342 33,564
Restricted 4,680 2,988
Loans receivable (net of allowance for
losses of $9,365 and $8,959) 1,100,161 1,069,591
Loans held-for-sale 13,757 5,225
Investments and mortgage-backed securities
("MBS"):
Available-for-sale 644,589 656,236
Held-to-maturity 13,421 12,750
Accrued interest receivable (including
$1,991 and $3,555 on investments) 12,609 14,058
Office properties and equipment, net 37,384 37,956
Real estate owned, net 9,409 8,817
Core deposit premium, net 6,388 6,771
Other intangibles, net 864 1,018
Purchased mortgage servicing rights, net 860 1,170
Prepaid expenses and other assets 10,551 10,248
---------- ----------
Total assets $1,888,214 $1,876,250
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $1,026,101 $1,036,408
Advances from the Federal Home Loan Bank
of Seattle ("FHLB Seattle") 430,204 455,085
Securities sold subject to repurchase
agreements 239,883 180,077
Other borrowings (note 4) 57,240 72,240
Cashiers checks issued and payable 8,192 11,260
Borrowers' reserves for taxes and insurance 2,432 1,264
Accrued interest payable 5,058 5,855
Accrued expenses and other liabilities 13,278 11,198
---------- ----------
Total liabilities 1,782,388 1,773,387
---------- ----------
<PAGE>
PART I - Financial Information
Item 1 - Financial Statements
STERLING FINANCIAL CORPORATION
Consolidated Balance Sheets, Continued
(Unaudited)
March 31, December 31,
1998 1997
---------- ------------
(Dollars in thousands)
Preferred stock, $1 par value; 10,000,000
shares authorized; 0 shares issued and
outstanding
Common stock, $1 par value; 20,000,000
shares authorized; 7,596,062 and
7,569,791 shares issued and outstanding 7,596 7,570
Additional paid-in capital 69,667 69,412
Accumulated comprehensive loss:
Unrealized loss on investments and MBS
available-for-sale, net of deferred
income tax benefits of $538 and $540 (1,000) (1,003)
Retained earnings 29,563 26,884
---------- ----------
Total shareholders' equity 105,826 102,863
---------- ----------
Total liabilities and shareholders'
equity $1,888,214 $1,876,250
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands,
except per share data)
Interest income:
Loans $ 24,591 $ 21,724
MBS 7,025 5,986
Investments and cash equivalents 3,154 1,938
---------- ----------
Total interest income 34,770 29,648
---------- ----------
Interest expense:
Deposits 11,926 10,501
Short-term borrowings 8,292 4,527
Long-term borrowings 2,682 3,568
---------- ----------
Total interest expense 22,900 18,596
---------- ----------
Net interest income 11,870 11,052
Provision for loan losses (800) (550)
---------- ----------
Net interest income after provision
for loan losses 11,070 10,502
---------- ----------
Other income:
Fees and service charges 1,379 1,209
Mortgage banking operations 668 506
Loan servicing fees 246 336
Net gain on sales of securities 711 85
Net loss on sale and operation of real
estate owned (82) (82)
---------- ----------
Total other income 2,922 2,054
---------- ----------
Operating expenses 9,840 8,888
---------- ----------
Income before income taxes 4,152 3,668
Income tax provision 1,473 1,394
---------- ----------
Net income 2,679 2,274
Less preferred stock dividends 0 (471)
---------- ----------
Net income available to common shares $ 2,679 $ 1,803
========== ==========
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Income, Continued
(Unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands,
except per share data)
Income per common share - basic $ 0.35 $ 0.33
========== ==========
Weighted average common shares
outstanding - basic 7,576,865 5,540,765
========== ==========
Income per common share - diluted $ 0.35 $ 0.30
========== ==========
Weighted average common shares
outstanding - diluted 7,743,850 7,696,996
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 2,679 $ 2,274
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provisions for loan and real estate
owned losses 806 584
Stock dividends on FHLB Seattle stock (535) (463)
Net gain on sales of loans, securities
and mortgage servicing rights (1,300) (210)
Net gain on sales of real estate owned (23) (19)
Depreciation and amortization 1,868 1,876
Change in:
Accrued interest receivable 1,449 603
Prepaid expenses and other assets (360) (2,623)
Cashiers checks issued and payable (3,068) 939
Accrued interest payable (797) (80)
Accrued expenses and other
liabilities 2,080 1,803
Proceeds from sales of loans 26,693 25,467
Loans originated for sale (34,844) (26,746)
---------- ----------
Net cash provided by (used in)
operating activities (5,352) 3,405
---------- ----------
Cash flows from investing activities:
Change in restricted cash (1,692) (1,348)
Loans disbursed (236,747) (173,638)
Loan principal received 204,240 140,185
Purchase of investments (64,432) (25,019)
Proceeds from maturities of investments 64,689 10,000
Purchase of MBS (189,717) 0
Principal payments on MBS 27,254 13,334
Proceeds from sales of MBS 174,107 5,295
Purchase of office properties and equipment (170) (184)
Improvements and other changes to real
estate owned 263 (157)
Proceeds from sales of real estate owned 300 400
Proceeds from sales of mortgage servicing
rights 449 0
---------- ----------
Net cash used in investing
activities (21,456) (31,132)
---------- ----------
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands)
Cash flows from financing activities:
Net change in checking, passbook and
money market deposits 15,402 17,625
Proceeds from issuance of certificates
of deposit 313,992 76,834
Payments for maturing certificates of
deposit (351,700) (71,644)
Interest credited to deposits 11,999 10,497
Advances from FHLB Seattle 30,000 30,000
Repayment of FHLB Seattle advances (55,021) (10,020)
Net change in securities sold subject to
repurchase agreements and funds
purchased 59,806 (33,913)
Repayment of other borrowings (15,000) 0
Proceeds from exercise of stock options,
net of repurchases 281 16
Cash dividends on preferred stock 0 (471)
Other 1,168 1,086
---------- ----------
Net cash provided by financing
activities 10,927 20,010
---------- ----------
Net change in cash and cash equivalents (15,881) (7,717)
Cash and cash equivalents, beginning of
period 49,422 32,675
---------- ----------
Cash and cash equivalents, end of period $ 33,541 $ 24,958
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 23,697 $ 18,676
Income taxes $ 1,164 $ 15
Non-cash financing and investing
activities:
Loans converted into real estate
owned $ 1,137 $ 295
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands)
Net income $ 2,679 $ 2,274
Other comprehensive income (loss), before
income taxes:
Change in unrealized losses on invest-
ment and MBS available-for-sale 5 (6,303)
---------- ----------
Other comprehensive income (loss),
before income taxes 5 (6,303)
Less deferred income tax (benefit)
provision 2 (2,099)
---------- ----------
Net other comprehensive income (loss) 3 (4,204)
---------- ----------
Comprehensive income (loss) $ 2,682 $ (1,930)
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Notes to the December 31, 1997 consolidated financial statements,
as set forth in Sterling Financial Corporation's ("Sterling's")
December 31, 1997 Annual Report on Form 10-K, substantially apply
to these interim consolidated financial statements as of and for
the three months ended March 31, 1998 and are not repeated here.
All financial statements presented are unaudited. However, the
December 31, 1997 consolidated balance sheet was derived from the
audited balance sheet as of that date.
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. RECLASSIFICATIONS:
Certain March 31, 1997 balances have been reclassified to conform
with the March 31, 1998 presentation. These reclassifications had
no effect on net income or retained earnings as previously
reported.
4. OTHER BORROWINGS:
The following table details Sterling's other borrowings.
March 31, December 31,
1998 1997
--------- ------------
(Dollars in thousands)
Term note $ 0 $15,000
8.75% Subordinated Notes Due 2000 17,240 17,240
Sterling-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated deferrable
interest debentures of Sterling (1) 40,000 40,000
------- -------
$57,240 $72,240
======= =======
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER BORROWINGS:
(1) Sterling has outstanding $41.2 million of 9.50% junior
subordinated deferrable interest debentures (the "Junior
Subordinated Debentures") to Sterling Capital Trust I (the
"Trust"), a Delaware business trust in which Sterling owns
all of the common equity. The sole asset of the Trust is the
Junior Subordinated Debentures. The Trust issued $40.0
million of 9.50% Cumulative Capital Securities (the "Trust
Preferred Securities") to investors. Sterling's obligations
under the Junior Subordinated Debentures and related
documents, taken together, constitute a full and
unconditional guarantee by Sterling of the Trust's
obligations under the Trust Preferred Securities. The Trust
Preferred Securities are treated as debt of Sterling.
Although Sterling, as a savings and loan holding company, is
not subject to the Federal Reserve capital requirements for
bank holding companies, the Trust Preferred Securities have
been structured to qualify as Tier 1 capital, subject to
certain limitations, if Sterling were to become regulated as
a bank holding company. The Junior Subordinated Debentures
and related Trust Preferred Securities mature on June 30,
2027, or are redeemable at the option of Sterling on June 30,
2002, or earlier in the event the deduction of related
interest for federal income taxes is prohibited, treatment as
Tier 1 capital is no longer permitted, or certain other
contingencies arise. The Trust Preferred Securities must be
redeemed upon maturity of the Junior Subordinated Debentures
in 2027.
In April 1998, Sterling obtained a commitment from a commercial
bank for a $40 million line of credit. Interest accrues at the
London InterBank Offering Rate index plus 2.0% and is payable
quarterly. This loan is for twelve months and may be renewed for
an additional six months.
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME PER SHARE:
The following table presents the basic and diluted income per
share computations.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Weighted Per Share Weighted Per Share
Net Income Avg. Shares Amount Net Income Avg. Shares Amount
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $2,679,000 $2,274,000
Less preferred stock
dividends 0 (471,000)
---------- ----------
Income per common share -
basic 2,679,000 7,576,865 $ 0.35 1,803,000 5,540,765 $ 0.33
Effect of dilutive
securities:
Convertible Preferred
Stock 0 0 471,000 2,029,664
Common stock options 0 166,985 0 126,567
---------- ----------- ---------- -----------
Income per common share -
diluted $2,679,000 7,743,850 $ 0.35 $2,274,000 7,696,996 $ 0.30
========== =========== ========== ===========
</TABLE>
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. OPERATING EXPENSES:
The following table details Sterling's components of total
operating expenses.
Three Months Ended
March 31,
------------------
1998 1997
------- --------
(Dollars in
thousands)
Employee compensation and benefits $ 4,560 $ 3,902
Occupancy and equipment 1,556 1,446
Depreciation 742 784
Amortization of unidentified intangibles 154 199
Amortization of core deposit premium 383 383
Advertising 271 237
Data processing 721 638
Insurance 235 313
Legal and accounting 376 380
Travel and entertainment 293 244
Other 549 362
------- -------
Total operating expenses $ 9,840 $ 8,888
======= =======
7. OTHER ACCOUNTING POLICIES:
In June 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 131, Disclosures about Segments for an Enterprise and
Related Information. Sterling adopted this Statement effective
January 1, 1998 with no material effect on its consolidated
financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. This Statement requires that comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive
income is defined as the change in equity arising from non-owner
sources. Comprehensive income under current accounting standards
includes foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. This Statement was
adopted on January 1, 1998. See "Consolidated Statements of
Comprehensive Income."
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. SUBSEQUENT EVENTS:
Acquisition
-----------
On April 23, 1998, Sterling entered into a definitive merger
agreement ("Agreement") with Big Sky Bancorp, Inc. ("Big Sky"),
pursuant to which Big Sky will be merged into Sterling and Big
Sky's wholly owned subsidiary, First Federal Savings and Loan
Association of Montana ("First Federal"), will be merged into
Sterling's wholly owned subsidiary Sterling Savings Association
("Sterling Savings"). At December 31, 1997, First Federal had
three branch offices in western Montana with deposits of
approximately $48 million and approximately $63 million in total
assets.
The Agreement provides that each share of Big Sky's common stock
will be exchanged for 1.384 shares of Sterling's common stock,
or up to 497,545 shares of Sterling common stock, depending on
the exercise of Big Sky options. The merger is intended to
constitute a tax-free reorganization and to be accounted for as
a pooling of interests.
The merger is subject to regulatory approvals, approval of Big
Sky's shareholders and other conditions of closing and is
scheduled to be completed in the fall of 1998. Management
anticipates securing regulatory approvals, Big Sky shareholders'
approval and meeting other conditions of closing, although there
can be no assurance in this regard.
Name Change
-----------
Sterling's wholly owned subsidiary Sterling Savings has taken
steps to change its name to Sterling Savings Bank. This name
change is expected to become effective in June 1998.
<PAGE>
PART I - Financial Information (continued)
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
STERLING FINANCIAL CORPORATION
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
------------------------------------------------------------
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; CHANGES IN THE
QUALITY OR COMPOSITION OF STERLING'S LOAN AND INVESTMENT PORTFOLIOS;
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; CHANGES IN LAWS REGULATIONS AND
THE COMPETITIVE ENVIRONMENT. STERLING'S FUTURE RESULTS MAY DIFFER
MATERIALLY FROM HISTORICAL RESULTS AS WELL AS FROM ANY TREND OR
FORWARD-LOOKING INFORMATION INCLUDED IN THIS REPORT.
Results of Operations
---------------------
OVERVIEW. Sterling Financial Corporation ("Sterling") reported net
income of $2.7 million, or $0.35 per diluted share, for the three
months ended March 31, 1998. This compares with net income of
$2.3 million, or $0.30 per diluted share, for the prior year's
comparable period. The increase in net income was due primarily to an
increase in net interest income and gains on sales of securities.
The annualized return on average assets was 0.59% and 0.60% for the
three months ended March 31, 1998 and 1997, respectively. The
decrease was due primarily to a larger increase in average assets
relative to earnings from the prior year's comparable period. The
annualized return on average equity was 10.4% and 11.1% for the three
months ended March 31, 1998 and 1997, respectively. The decrease was
due primarily to a 58.5% increase in average common equity, reflecting
the conversion of preferred stock to common stock in September 1997.
To further enhance its presence in the Pacific Northwest market,
Sterling has been working to expand its community bank delivery
system, focusing primarily on deposit gathering and lending. On
February 2, 1998, Sterling signed an agreement to acquire 33 branch
offices in Washington, Idaho and Oregon from KeyBank National
Association ("KeyBank"). Based upon information provided as of
April 29, 1998, the purchase will include approximately $536 million
of deposit balances, the owned branch facilities, branch furniture,
fixtures and certain equipment and approximately $125 million of loan
balances. To acquire these branches, Sterling will pay approximately
$56 million based upon a premium on deposits plus the value of the
<PAGE>
assets related to these branches. Sterling anticipates using the net
proceeds of approximately $340 million from this transaction to reduce
its borrowings and wholesale liabilities. As a result of this
transaction, Sterling's total assets are expected to increase.
The acquisition is subject to regulatory approvals and other
conditions of closing and is scheduled to close in June 1998.
Management anticipates securing regulatory approvals, meeting other
conditions of closing, and obtaining appropriate financing, although
there can be no assurance in this regard.
RECENT DEVELOPMENTS. On April 23, 1998, Sterling entered into a
definitive merger agreement ("Agreement") with Big Sky Bancorp, Inc.
("Big Sky"), pursuant to which Big Sky will be merged into Sterling
and Big Sky's wholly owned subsidiary, First Federal Savings and Loan
Association of Montana ("First Federal"), will be merged into
Sterling's wholly owned subsidiary Sterling Savings Association
("Sterling Savings"). At December 31, 1997, First Federal had three
branch offices in western Montana with deposits of approximately
$48 million and approximately $63 million in total assets.
The Agreement provides that each share of Big Sky's common stock will
be exchanged for 1.384 shares of Sterling's common stock, or up to
497,545 shares of Sterling common stock, depending on the exercise of
Big Sky options. The merger is intended to constitute a tax-free
reorganization and to be accounted for as a pooling of interests.
The merger is subject to regulatory approvals, approval of Big Sky's
shareholders and other conditions of closing and is scheduled to be
completed in the fall of 1998. Management anticipates securing
regulatory approvals, Big Sky shareholders' approval and meeting other
conditions of closing, although there can be no assurance in this
regard.
Sterling's wholly owned subsidiary Sterling Savings has taken steps to
change its name to Sterling Savings Bank. This name change is
expected to become effective in June 1998.
NET INTEREST INCOME. The most significant component of earnings for a
financial institution typically is net interest income, which is the
difference between interest income, primarily from loan, mortgage-
backed securities ("MBS") and investment portfolios, and interest
expense, primarily on deposits and borrowings ("NII"). During the
three months ended March 31, 1998 and 1997, NII was $11.9 million and
$11.1 million, respectively, an increase of 7.4%. 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
<PAGE>
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 quarter ended
March 31, 1998 was due primarily to an increase in the volume of
average interest-earning assets offset somewhat by a reduction in the
net interest margin.
During the three months ended March 31, 1998 and 1997, the volume of
average interest-earning assets was $1.74 billion and $1.47 billion,
respectively. Net interest spread during these periods was 2.56% and
2.81%, respectively. The net interest margin for the three months
ended March 31, 1998 and 1997 was 2.77% and 3.05%, respectively. The
decreases in net interest spread and net interest margin were due
primarily to an increase in the volume of lower yielding MBS and other
investments funded by the Federal Home Loan Bank of Seattle ("FHLB
Seattle") advances and other borrowings.
PROVISION FOR LOAN LOSSES. 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 loan losses of $800,000 and $550,000
for the three months ended March 31, 1998 and 1997, respectively.
Sterling increased its provision for loan losses reflecting the
potentially higher levels of loss from its expanded construction,
business banking and consumer lending activities. Management
anticipates that its provisions for loan losses will increase in the
future as Sterling continues to expand its portfolio of higher
yielding, higher risk loans. At March 31, 1998, Sterling's loan
delinquency rate as a percentage of total loans was 0.57%, compared
with 0.71% at December 31, 1997 and 0.45% at March 31, 1997. Total
nonperforming loans were $4.2 million at March 31, 1998, compared with
$2.7 million at March 31, 1997.
As a percentage of total loans, nonperforming loans were 0.35% at
March 31, 1998, compared with 0.25% at March 31, 1997. Management
believes the loan loss provisions for the three months ended
March 31, 1998 and 1997, represented appropriate additions based upon
its evaluation of factors affecting the adequacy of valuation
allowances, although there can be no assurance 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.
<PAGE>
OTHER INCOME. The following table summarizes the components of other
income for the periods indicated.
Three Months Ended
March 31,
------------------
1998 1997
------- --------
(Dollars in
thousands)
Fees and service charges $ 1,379 $ 1,209
Mortgage banking operations 668 506
Loan servicing fees 246 336
Net gain on sales of securities 711 85
Net loss on sales and operations of real
estate owned (82) (82)
------- -------
$ 2,922 $ 2,054
======= =======
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 for the three months ended March 31, 1998,
compared with the three months ended March 31, 1997 was due primarily
to an increase in service charges on deposit accounts, fees on deposit
accounts and fees for certain customer services. The increase in
service charges on deposit accounts and fees for certain customer
services was due primarily to increases in the fee structure for most
services.
The increase in income from mortgage banking operations for the three
months ended March 31, 1998, compared with the three months ended
March 31, 1997 was due primarily to the bulk sale of $57.5 million of
loan servicing rights during the quarter ended March 31, 1998, which
resulted in a gain of approximately $207,000.
The following table summarizes loan originations and sales of loans
for the periods indicated.
Three Months Ended
March 31,
------------------
1998 1997
------- --------
(Dollars in
millions)
Originations of one- to four-family permanent
mortgage loans $ 46.4 $ 26.2
Sales of residential loans 26.3 25.3
Principal balances of mortgage loans serviced
for others 360.9 522.2
<PAGE>
Loan servicing fees decreased for the three months ended
March 31, 1998, compared with the prior year's comparable period,
reflecting the $161.3 million decrease in the balance of mortgage
loans serviced for others since March 1997. Sterling's average loan
servicing portfolios for the three months ended March 31, 1998 and
1997, were approximately $374.4 million and $532.2 million,
respectively.
During the three months ended March 31, 1998, Sterling sold
approximately $173.4 million of MBS, resulting in net gains of
$711,000. Sterling sold approximately $5.2 million of MBS in the
prior year's comparable period, resulting in net gains of $85,000.
OPERATING EXPENSES. Operating expenses were $9.8 million and
$8.9 million for the three months ended March 31, 1998 and 1997,
respectively. The increase during the three months ended
March 31, 1998 was due primarily to employee compensation and benefits
and other expenses. Employee compensation and benefits were
$4.6 million and $3.9 million for the first quarters ended
March 31, 1998 and 1997, respectively. The increase was due primarily
to a lower rate of deferral for loan origination costs. Sterling also
increased its lending staff for its commercial real estate, business
banking and consumer lending areas. The increase in other expenses
was due primarily to expenses related to transaction deposit accounts.
As a result of converting the KeyBank branches, Sterling anticipates
conversion related expenses to be incurred in the quarter ending June
30, 1998, and for operating expenses to increase in future periods.
See "- Overview."
INCOME TAX PROVISION. Federal and state income tax provisions were
$1.5 million and $1.4 million for the three months ended
March 31, 1998 and 1997, respectively. The effective tax rates were
35.5% and 38.0% for the three months ended March 31, 1998 and 1997,
respectively, which approximated the applicable statutory rates. The
decrease reflected in the three months ended March 31, 1998, was due
to lower state income tax provisions.
Financial Position
------------------
ASSETS. At March 31, 1998, Sterling's assets were $1.89 billion, up
10.1% from $1.88 billion at December 31, 1997. The increase was due
primarily to a high volume of loan originations during the quarter.
INVESTMENTS AND MBS. Sterling's investment and MBS portfolio at
March 31, 1998 was $658.0 million, down $11.0 million from the
December 31, 1997 balance of $669.0 million. The decrease was due
primarily to net sales of MBS during the period.
<PAGE>
LOANS RECEIVABLE. At March 31, 1998, net loans receivable were
$1.10 billion, up $30.5 million from $1.07 billion at December 31,
1997. During the three months ended March 31, 1998, total loan
originations were $206.2 million, compared with $171.3 million for the
prior year's comparable quarter. Most of the increase was in
Sterling's business banking, consumer and construction lending
portfolios.
The following table sets forth the composition of Sterling's loan
portfolio at the dates indicated. Loan balances do not include
undisbursed loan proceeds, unearned discounts, deferred loan
origination costs and fees, or allowances for loan losses.
March 31, 1998 December 31, 1997
------------------ ------------------
Amount % Amount %
---------- ------ ---------- ------
(Dollars in thousands)
Residential $ 273,399 22.5% $ 283,025 24.2%
Multifamily 71,846 5.9 64,862 5.6
Commercial real estate 124,965 10.3 119,250 10.1
Construction 316,842 26.0 302,279 25.9
Consumer 168,268 13.9 157,277 13.5
Business banking 259,580 21.4 241,808 20.7
---------- ----- ---------- -----
Total loans receivable $1,214,900 100.0% $1,168,501 100.0%
========== ===== ========== =====
DEPOSITS. Total deposits decreased $10.3 million to $1.03 billion at
March 31, 1998 from $1.04 billion at December 31, 1997. During this
period, transaction accounts, which have lower interest costs than
other sources of funds, increased $18.3 million. This partially
offset a $28.6 million decrease in higher-cost time deposits during
the quarter. At March 31, 1998, time deposit, savings and money
market and checking accounts represented 62.5%, 24.7% and 12.8%,
respectively, of deposits which compares with 64.7%, 23.8% and 11.5%,
respectively, at December 31, 1997. As a result of the KeyBank
acquisition, management expects the mix of deposits to shift from time
deposits to money market and checking deposits. See "- Overview."
BORROWINGS. Sterling's primary sources of borrowing are FHLB Seattle
advances, securities sold under agreements to repurchase and other
borrowings. At March 31, 1998, total borrowings were $727.3 million,
compared with $707.4 million at December 31, 1997, an increase of
$19.9 million. See "Liquidity and Sources of Funds."
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
<PAGE>
market values and the monetary and fiscal policies of the federal
government. Like all financial institutions, Sterling's NII and the
net present value of assets, liabilities and off-balance sheet
contracts ("NPV") or estimated fair value, are subject to fluctuations
in interest rates. For example, Sterling's adjustable rate mortgages
("ARMs") are indexed to the weekly average yield on one-year U.S.
Treasury securities. When interest-earning assets such as loans are
funded by interest-bearing liabilities such as deposits, FHLB Seattle
advances and other borrowings a changing interest rate environment may
have a dramatic effect on Sterling's results of operations.
Currently, Sterling's interest-bearing liabilities, consisting
primarily of savings deposits, 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 NII 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
NII.
Sterling maintains an asset and liability management program intended
to manage NII 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 NII and NPV to
changes in interest rates. This simulation model is designed to
enable Sterling to generate a forecast of NII 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. The model calculates the
present value of assets, liabilities, off-balance sheet financial
instruments, and equity at current interest rates and at hypothetical
higher and lower interest rates at various intervals. The present
value of each major category of financial instruments is calculated
using estimated cash flows based on weighted-average contractual rates
and terms, then discounted at the estimated current market interest
rate for similar financial instruments. The present value of longer
term fixed rate financial instruments is more difficult to estimate
because such instruments are susceptible to changes in market interest
rates. Present value estimates of adjustable rate financial
instruments are more reliable since they represent the difference
between the contractual and discounted rates until the next interest
rate repricing date.
<PAGE>
The calculations of present value have certain shortcomings. The
discount rates utilized for loans and MBS are based on estimated
nationwide market interest rate levels for similar loans and
securities, with prepayment assumptions based on historical experience
and market forecasts. The unique characteristics of Sterling's loans
and MBS may not necessarily parallel those in the model. The discount
rates utilized for deposits and borrowings are based upon available
alternative types and sources of funds which are not necessarily
indicative of the market value of deposits and FHLB Seattle advances
since such deposits and advances are unique to, and have certain price
and customer relationship advantages for, depository institutions.
The present values are determined based on the discounted cash flows
over the remaining estimated lives of the financial instruments on the
assumption that the resulting cash flows are reinvested in financial
instruments with virtually identical terms.
The total measurement of Sterling's exposure to interest rate risk
("IRR") as presented in the following table may not be representative
of the actual values which might result from a higher or lower
interest rate environment. A higher or lower interest rate
environment will most likely result in different investment and
borrowing strategies by Sterling designed to further mitigate the
effect on the value of, and the net earnings generated from,
Sterling's net assets from any change in interest rates.
During the quarter ended March 31, 1998, Sterling sold certain MBS and
reinvested a substantial portion of the proceeds into MBS with lower
stated interest rates in an effort to mitigate prepayment risk. These
activities coupled with a shortening of maturities on a substantial
portion of borrowings in anticipation of the KeyBank acquisition,
resulted in an increase in IRR at March 31, 1998. Management believes
that the KeyBank acquisition, when completed, will reduce Sterling's
IRR, although there can be no assurance of this happening.
Sterling is continuing to pursue strategies to manage the level of its
IRR while increasing its NII and NPV through the origination and
retention of variable rate consumer, business banking, construction
and commercial real estate loans, which generally have higher yields
than residential permanent loans. There can be no assurance that
Sterling will be successful implementing any of these strategies or
that, if these strategies are implemented, they will have the intended
effect of reducing IRR or increasing NII.
The following table presents Sterling's estimates of changes in NPV as
of March 31, 1998. The results indicate the impact of instantaneous,
parallel shifts in the market yield curve. These calculations are
relative measurements of IRR and do not reflect any expected rate
movement.
<PAGE>
<TABLE>
<CAPTION>
Change in Interest Ratio of NPV to
Rates in Basis Points the Present Value
(Rate Shock) NPV of Total Assets Change in Ratio
--------------------- -------- ----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
+400 $ 21,434 1.22 (4.96)
+200 73,483 4.01 (2.17)
+100 95,504 5.11 (1.07)
Static 117,535 6.18 N/A
-100 113,914 5.95 (0.23)
-200 100,713 5.25 (0.93)
-400 90,807 4.67 (1.51)
</TABLE>
At March 31, 1998, Sterling calculated that its NPV was $117.5 million
and that its NPV would decrease by 37.5% and 81.8% if interest rate
levels generally were to increase by 2% and 4%, respectively. This
compares with an NPV of $106.2 million at March 31, 1997, which would
decline by 24.8% and 52.5% if interest rates were to increase by 2%
and 4%, respectively. These calculations, which are highly subjective
and technical, may differ materially from regulatory calculations.
Sterling also uses gap analysis, a traditional analytical tool
designed to measure the difference between the amount of interest-
earning assets and the amount of interest-bearing liabilities expected
to mature or reprice in a given period. Sterling calculated its one-
and three-year cumulative gap positions to be a negative 14.6% and
12.0% at March 31, 1998. This compares with Sterling's one- and three-
year gap positions of negative 5.9% and negative 7.1% at
March 31, 1997. The widening in the negative one- and three-year gap
positions was due primarily to an increase in MBS and other securities
funded with short-term borrowings. Management attempts to maintain
Sterling's gap position between negative 5% and negative 20%. At
March 31, 1998, Sterling's gap positions were within limits
established by its Board of Directors. Management is pursuing
strategies to increase its NII without significantly increasing its
cumulative gap positions in future periods.
Liquidity and Sources of Funds
------------------------------
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 decreased to $1.03 billion at March 31, 1998,
from $1.04 billion at December 31, 1997. Advances from the FHLB
Seattle decreased to $430.2 million at March 31, 1998 from
$455.1 million at December 31, 1997. At March 31, 1998 and
December 31, 1997, securities sold subject to repurchase agreements
were $239.9 million and $180.1 million, respectively. These
borrowings are collateralized by investments and MBS with a market
value exceeding the face value of the borrowings. Under certain
<PAGE>
circumstances, Sterling could be required to pledge additional
securities or reduce the borrowings. 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.
During 1997, Sterling instituted a program of entering into repurchase
agreements with selected retail customers. These borrowings are
generally overnight borrowings.
Management continues to rely upon FHLB Seattle advances and reverse
repurchase agreements to help fund its operations. With the planned
acquisition of KeyBank branches, Sterling anticipates substantially
reducing its FHLB Seattle advances and reverse repurchase agreements.
Sterling has obtained a commitment from KeyBank for a $40 million line
of credit. The line of credit is collateralized by all of the stock
of Sterling Savings.
In connection with its Year 2000 compliance plan, Sterling is focusing
on identifying potential risks in its customer deposit base and other
short-term sources of funds. See "Year 2000 Issues."
During the three months ended March 31, 1998, cash provided by
investing activities consisted primarily of principal and interest
payments on loans and MBS and sales of MBS. The levels of these
payments and sales increase or decrease depending on the size of the
loan and MBS 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, 1998, net cash
was used in investing activities primarily to repurchase investments
and MBS and to fund loans.
Sterling Savings' credit line with the FHLB Seattle provides for
borrowings up to 35% of its total assets. At March 31, 1998, this
credit line represented a total borrowing capacity of approximately
$663.0 million, of which $232.8 million was available. 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, 1998, Sterling Savings had $239.9 million in
outstanding borrowings under reverse repurchase agreements and
securities available for additional secured borrowings of
approximately $156.1 million. Sterling Savings also had a secured
line of credit agreement from a commercial bank of approximately
$10.0 million as of March 31, 1998, but had no funds drawn on this
line of credit.
Excluding its subsidiaries, Sterling had cash and other resources of
approximately $6.4 million and a line of credit from a commercial bank
of approximately $5.0 million at March 31, 1998, but had no funds
drawn on this line of credit. At March 31, 1998, Sterling had an
investment of $66.1 million in the Preferred Stock of Sterling
Savings. Sterling received cash dividends on Sterling Savings
Preferred Stock of $1.8 million during the three months ended
March 31, 1998. These resources were sufficient to meet the operating
<PAGE>
needs of Sterling, including interest expense on its 8.75%
Subordinated Notes Due 2000 (the "Subordinated Notes") and other
borrowings. 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 Office of Thrift Supervision
("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 4%) 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, 1998 and December 31, 1997, Sterling Savings' liquidity
ratios were 12.0% and 13.0%, respectively. The lower level of
liquidity at March 31, 1998 was due primarily to funding loan growth
with short-term borrowings. Sterling Savings' strategy generally is
to maintain its liquidity ratio at or near the level necessary to
support expected and potential loan fundings and deposit withdrawals.
Sterling tries to minimize liquidity levels 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 MBS or investment securities and other potential
financing alternatives. The required minimum liquidity ratio may vary
from time to time, depending on economic conditions, savings flows and
loan funding needs.
Capital Resources
-----------------
Sterling's total shareholders' equity was $105.8 million at
March 31, 1998 compared with $102.9 million at December 31, 1997. At
March 31, 1998 and December 31, 1997, shareholders' equity was 5.6%
and 5.5% of total assets, respectively. The increase in total
shareholders' equity was due primarily to an increase in retained
earnings.
At March 31, 1998 and December 31, 1997, Sterling had an unrealized
loss of $1.0 million, net of related income taxes, on investments and
MBS classified as available-for-sale. Fluctuations in prevailing
interest rates could continue to cause volatility in this component of
shareholders' equity in future periods.
Sterling has issued and outstanding $40.0 million of Trust Preferred
Securities. The indenture governing the Trust Preferred Securities
limits the ability of Sterling under certain circumstances to pay
dividends or make other capital distributions. The Trust Preferred
Securities are treated as debt of Sterling. The Trust Preferred
Securities mature on June 30, 2027 and are redeemable at the option of
Sterling on June 30, 2002, or earlier in the event the deduction of
related interest for federal income taxes is prohibited, treatment as
Tier 1 capital is no longer permitted, or certain other contingencies
arise.
<PAGE>
Sterling has issued and outstanding $17.2 million of 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 integrate the KeyBank branches and expand branch
locations, Sterling anticipates total capital expenditures of
approximately $13.0 million to $15.0 million for the year ended
December 31, 1998. Sterling anticipates continuing to fund these
capital expenditures from various sources, including retained earnings
and borrowings with various maturities. There can be no assurance
that Sterling's estimates of capital expenditures or the funding
thereof are accurate.
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. Sterling Savings anticipates
that it will continue to enhance its capital resources and regulatory
capital ratios through sales of stock to Sterling, the retention of
earnings, the amortization of intangible assets and the management of
the level and mix of assets, although there can be no assurance in
this regard. At March 31, 1998, Sterling Savings exceeded all
applicable regulatory capital requirements. Sterling intends to
contribute $45 million to Sterling Savings in order to enhance the
regulatory capital ratios and to substantially offset the intangible
asset paid in connection with the KeyBank branch acquisition. See
"Liquidity and Sources of Funds."
Sterling continues to proactively manage its claim against the U.S.
government for breach of contract on three supervisory goodwill
acquisition contracts. In July 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 savings 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 a judgment, if any, will be received.
Year 2000 Issues
----------------
Throughout the information technology industry, the use of two-digit
year fields was common practice in the design of hardware, system
software, proprietary applications and system interfaces. The Year
2000 problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-
digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to
2000. Systems that do not properly recognize such information could
generate erroneous data or fail. The potential failure on January 1,
2000 of computer systems that use two-digit calendar notations has
<PAGE>
developed into a major concern for financial institutions. Sterling
has created a Year 2000 compliance plan that focuses on identifying,
testing and implementing solutions for Year 2000 processing. A
preliminary estimate of the total cost to complete the Year 2000
compliance plan is approximately $825,000. Maintenance or
modification costs will be expensed as incurred, while the costs of
new software will be capitalized and amortized over the software's
useful life.
At March 31, 1998, Sterling had completed the awareness training and
issue assessment phases of its Year 2000 compliance plan and was well
into the testing phase. The awareness phase included gaining
understanding and support, committing resources to the plan,
establishing a project team consisting of senior managers and
department heads, and developing a strategy to address all internal
and external systems.
The assessment phase involved attempting to identify and determine all
critical business processes and determining the impact of the Year
2000 issues on all computer systems throughout the organization.
Vendors were contacted and asked to submit certification letters
stating that they are in compliance with Year 2000 conversion issues.
To ensure compliance, third-party reviews of vendors that provide
critical services to Sterling may be required.
Sterling estimates that testing programming changes (including
converting, replacing or eliminating all software and databases as
necessary) will be largely completed by December 31, 1998.
Contingency plans are being developed in the event modifications
cannot be completed in time.
Financial institutions must also consider the possibility of some
level of reduction in deposits during the month of December 1999.
Sterling has developed a contingency plan for potential additional
liquidity needs during this period.
Sterling will assess its deposit base over the next twelve months to
identify potential problems due to concentrations. If such
concentrations are identified, Sterling will assess whether those
concentrations are at risk due to Year 2000 problems. Management
estimates that this deposit assessment will be largely completed by
September 30, 1998. Sterling has determined that several borrowing
sources are and will be available so that adequate funding in December
1999 will not be a problem. Sterling is also evaluating its allowance
for loan losses in conjunction with its review of Year 2000 issues.
Management believes that its Year 2000 plan will be effective in
identifying and resolving any Year 2000 problems although there can be
no assurance in this regard.
<PAGE>
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
For a discussion of Sterling's market risks, see "Management's
Discussion and Analysis - Asset and Liability Management."
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.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit No. Exhibit
----------- ----------------------------------------
27.1 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K. A report on Form 8-K (Item 5) was filed
on February 17, 1998.
<PAGE>
STERLING FINANCIAL CORPORATION
Signature
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 14, 1998 By: /s/ Daniel G. Byrne
------------ --------------------------------------------
Date Daniel G. Byrne, Senior Vice President -
Finance; Treasurer and Assistant Secretary;
Principal Financial Officer and Chief
Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 38022
<INT-BEARING-DEPOSITS> 199
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 644589
<INVESTMENTS-CARRYING> 13421
<INVESTMENTS-MARKET> 13636
<LOANS> 1109526
<ALLOWANCE> 9365
<TOTAL-ASSETS> 1888214
<DEPOSITS> 1026101
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1725148
<LONG-TERM> 57240
0
0
<COMMON> 7596
<OTHER-SE> 98230
<TOTAL-LIABILITIES-AND-EQUITY> 1888214
<INTEREST-LOAN> 24591
<INTEREST-INVEST> 10179
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34770
<INTEREST-DEPOSIT> 11926
<INTEREST-EXPENSE> 22900
<INTEREST-INCOME-NET> 11870
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 711
<EXPENSE-OTHER> 9840
<INCOME-PRETAX> 4152
<INCOME-PRE-EXTRAORDINARY> 4152
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2679
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 2.77
<LOANS-NON> 4068
<LOANS-PAST> 0
<LOANS-TROUBLED> 146
<LOANS-PROBLEM> 7025
<ALLOWANCE-OPEN> 8959
<CHARGE-OFFS> 434
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 9365
<ALLOWANCE-DOMESTIC> 9365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
