<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
Commission file number 0-10794
STERLING WEST BANCORP
(Exact name of registrant as specified in its charter)
California 95-3712404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3287 Wilshire Boulevard, Los Angeles, California 90010 (Address of
principal executive offices) (Zip Code)
(213) 384-4444
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 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
1,710,429
(Number of shares of common stock outstanding August 10, 1995)
This Form 10-Q contains 15 pages.
Exhibit Index: None
<PAGE>
<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Sterling West Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,520,000 $ 20,294,000
Investment securities
(market value of $7,072,000)
in 1995 and $6,832,000 in 1994 7,064,000 6,974,000
Loans Receivable, net 88,377,000 89,462,000
Fixed assets
Land and building 227,000 227,000
Furniture and equipment 3,436,000 2,635,000
Leasehold improvements 1,411,000 1,400,000
5,074,000 4,262,000
Less accumulated depreciation (3,832,000) (3,089,000)
1,242,000 1,173,000
Accrued interest receivable 905,000 954,000
Real estate held for sale 6,084,000 7,808,000
Other assets 1,766,000 1,504,000
Assets of discontinued operations 3,254,000 4,322,000
Total assets $125,212,000 $132,491,000
LIABILITIES
Deposits
Demand $ 30,308,000 $ 31,097,000
Savings and NOW 52,426,000 57,652,000
Money market 6,874,000 10,183,000
Time deposits $100,000 or greater 4,340,000 3,505,000
Other time deposits 3,843,000 4,661,000
97,791,000 107,098,000
Notes payable 13,508,000 11,900,000
Other liabilities 3,711,000 3,136,000
Total liabilities 115,010,000 122,134,000
STOCKHOLDERS' EQUITY
Common stock - authorized 5,000,000
shares without par value; issued
and outstanding 1,710,429 shares at
June 30, 1995 and December 31, 1994 8,686,000 8,686,000
Retained earnings 1,516,000 1,671,000
10,202,000 10,357,000
Total liabilities and Stockholders Equity $125,212,000 $132,491,000
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest income
Loans $ 3,238,000 $ 2,806,000 $ 6,325,000 $ 5,472,000
Federal funds sold 147,000 98,000 299,000 157,000
Investment securities held
to maturity 150,000 113,000 247,000 225,000
Trading Securities -- 55,000 -- 68,000
3,535,000 3,072,000 6,871,000 5,922,000
Interest expense
Savings and NOW 656,000 385,000 1,314,000 664,000
Money market 34,000 53,000 77,000 114,000
Time deposits $100,000
or greater 44,000 131,000 70,000 235,000
Other time deposits 41,000 43,000 85,000 81,000
Notes Payable 419,000 270,000 793,0000 508,000
1,194,000 882,000 2,339,000 1,602,000
Net interest income 2,341,000 2,190,000 4,532,000 4,320,000
Provision for loan losses -- -- 200,000 25,000
Net interest income
after provision for
loan losses 2,341,000 2,190,000 4,332,000 4,295,000
Non-interest income
Service charges on deposit
accounts 88,000 79,000 162,000 154,000
Gain on sale of SBA loans 82,000 4,000 103,000 49,000
Other 143,000 128,000 291,000 246,000
313,000 211,000 556,000 449,000
Non-interest expense
Salaries, wages and employee
benefits 1,177,000 1,121,000 2,286,000 2,271,000
Occupancy 216,000 256,000 411,000 508,000
Furniture and equipment 86,000 59,000 172,000 118,000
Real estate operations, net 187,000 196,000 272,000 410,000
Other 720,000 541,000 1,268,000 1,034,000
2,386,000 2,173,000 4,409,000 4,341,000
Income from continuing operations
before income taxes 268,000 228,000 479,000 403,000
Income tax provision 116,000 168,000 200,000 237,000
Income from continuing operations 152,000 60,000 279,000 166,000
Loss from discontinued operations (434,000) (636,000) (434,000) (1,420,000)
NET INCOME (LOSS) $ (282,000) $ (576,000) (155,000) (1,254,000)
============ =========== ========== ===========
Income (loss) per common share:
From continuing operations $ 0.09 $ 0.04 0.16 0.10
From discontinued operations (0.25) (0.37) (0.25) (0.83)
Net income (loss) per share $ (0.16) $ (0.33) (0.09) (0.73)
============ =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE> 4
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (155,000) $(1,254,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 176,000 133,000
Provision for loan losses 200,000 25,000
Provision (benefit) for deferred taxes 514,000 (259,000)
Decrease in trading securities, net -- 6,038,000
Real estate valuation adjustments, net 347,000 266,000
Decrease in interest receivable 49,000 (64,000)
Decrease (increase) other assets (776,000) 660,000
Increase in other liabilities 575,000 182,000
Decrease in assets of discontinued operations 850,000 5,668,000
Total adjustments 1,935,000 12,649,000
Net cash provided by
operating activities 1,780,000 11,395,000
Cash flows from investing activities
Proceeds from maturities of investment securities 1,096,000 1,000,000
Purchases of investment securities (1,185,000) (2,069,000)
Net (increase) decrease in loans receivable 1,182,000 (2,344,000)
Proceeds from sale of real estate 1,080,000 2,312,000
Purchase of furniture and equipment (29,000) (85,000)
Net cash provided by (used in)
investing activities 2,144,000 (1,186,000)
Cash flows from financing activities
Net increase in demand deposits, savings
and other money market accounts (9,324,000) 1,111,000
Net decrease in certificates of deposit 18,000 (12,128,000)
Net increase (decrease) in note payable to
financial institution 1,662,000 189,000
Proceeds from issuance of commercial paper -- 70,000
Payments of maturing commercial paper -- (414,000)
Payments on maturing promissory notes (54,000) --
Net cash used in
financing activities (7,698,000) (11,172,000)
Net decrease in cash and cash equivalents (3,774,000) (936,000)
Cash and cash equivalents at beginning of period 20,294,000 17,163,000
Cash and cash equivalents at end of period $16,520,000 $16,200,000
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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PART I: FINANCIAL INFORMATION
Notes to Financial Statements of Registrant
June 30, 1995
1. The consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which are, in the opinion of
Management, necessary for a fair presentation of the results of
operations for the interim period. The results of operations and cash
flows for the interim period ended June 30, 1995 are not necessarily
indicative of results which may be expected for any other interim
period or the year as a whole.
2. In the ordinary course of business the Company enters into
commitments to extend credit to its customers. These commitments are
not reflected in the accompanying consolidated financial statements
and Management does not expect any loss to result from such
commitments. As of June 30, 1995 and December 31, 1994 the Company had
entered into the following commitments:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
Letters of Credit $ 726,000 $ 1,641,000
Undisbursed Loan Commitments $ 12,992,000 $ 12,895,000
</TABLE>
3. Earnings per share amounts have been computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. The number of such primary shares are 1,710,429 for June
30, 1995 and 1994.
4. Certain reclassifications have been made in the 1994 financial
statements to conform to the presentation used in 1995.
<PAGE>
<PAGE> 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to provide a better understanding
of the material changes in trends relating to the financial condition,
results of operations, and liquidity of Sterling West Bancorp (the
"Company"). The discussion and analysis for the second quarter ended
June 30, 1995 reflect the operations of the Company's two subsidiary
companies, Sterling Bank ("Bank") and Sterling Business Credit, Inc.
("Business Credit"). The Bank and Business Credit are wholly-owned
subsidiaries of the Company. During the fourth quarter of 1994 the
Company decided to discontinue its mortgage banking operations which
were performed substantially by BSC Mortgage Corporation, a wholly
owned subsidiary of the Bank. Unless otherwise specified, the
discussion below relates to the Company's consolidated financial
condition and operations.
During the second quarter of 1995, the Company had a net loss of
$282,000 as compared to a net loss of $576,000 in the same quarter in
1994. Income from continuing operations was $152,000 in the second
quarter of 1995 compared to income from continuing operations of
$60,000 for the same period of 1994. The increase resulted from higher
net interest income and gain on sale of SBA loans and lower occupancy
costs. The Company's real estate held for sale and nonaccrual loans
decreased to $7.9 million at June 30, 1995 from $12.9 million at June
30, 1994 as compared to $9.5 million at December 31, 1994. The loss
from discontinued operations resulted from an increased provision for
expected losses related to repurchased loans which were originated by
BSC Mortgage Corporation.
FINANCIAL CONDITION
Assets
At June 30, 1995 assets of the Company were $125,212,000, a decrease
of 5.5% from the $132,491,000 at December 31, 1994. The decreased
asset levels reflect the slow economic environment and the need to
reduce size in order to satisfy regulatory capital ratio requirements
applicable to the Company and the Bank. Significant changes in the
distribution of assets included a $3.8 million decrease in cash and
cash equivalents as required liquidity levels were reduced in the Bank
as a result of the discontinued mortgage banking operations.
The Company's real estate held for sale consists of real estate owned
and real estate investments, and decreased to $6.1 million at June 30,
1995 from $7.8 million at December 31, 1994 as compared to $10.6
million at June 30, 1994. During the second quarter no properties were
added to real estate held for sale. One single family residence with
a book value of $0.1 million and one commercial building with a book
value of $0.7 million were sold. Properties held at June 30, 1995
consisted of six single family residences, three apartment buildings,
<PAGE> 7
one four unit condominium development, one residential lot
development, four residential lots and one commercial building. All
properties are stated at the lower of cost or estimated fair market
value less estimated selling costs. Subsequent to June 30, 1995 one
of the commercial buildings, one residential lot and one of the single
family residences with a total book value of $0.4 million were in
escrow or had been sold at amounts approximating book value.
While management does not expect any substantial additional material
losses on the sale of these properties in excess of the allowances
already provided in the financial statements, because of the fact that
78% of the Bank's loan portfolio is real estate secured, management
expects that further foreclosures will occur and no assurance can be
given that additional losses will not occur. See "RESULTS OF
OPERATIONS - Net Interest Income" and "RESULTS OF OPERATIONS -
Noninterest Expense" for a description of the effect of these assets
on net interest income and noninterest expense.
The Bank is a party to an arbitration proceeding which may result in
the Bank being required to repurchase REO or residential mortgage
loans in the third quarter of 1995. See "RESULTS OF OPERATIONS - Net
Income" for a description of this proceeding.
Source of Funds
Total deposits were $97.8 million at June 30, 1995 compared to $107.1
million at December 31, 1994. The decrease primarily consisted of a
$5.2 million decrease in savings and NOW accounts and a $3.3 million
decrease in money market deposits. These deposit changes reflect
normal fluctuations in these accounts and the asset-liability
management process at the Bank which considered reduced funding needs
as a result of the drop in assets. Notes payable increased from $11.9
million at December 31, 1994 to $13.5 million at June 30, 1995 as a
result of higher loans outstanding at Business Credit and higher
borrowings under its line of credit from Security Pacific Business
Credit, Inc. to finance the increase in loans.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank as well as
statutory and contractual limitations on the amount of dividends which
may be paid to the Company by Business Credit. At June 30, 1995 the
Bank is prohibited from paying dividends under these provisions. The
Bank is also prohibited from paying cash dividends to the Company
under the terms of a memorandum of understanding with the FDIC unless
the payment is approved in advance by the Regional Director of the
FDIC and the California Superintendent of Banks. Please see "CAPITAL
RESOURCES" below for a discussion of the terms of this memorandum of
understanding. Business Credit is prohibited from the payment of
dividends to the Company by the terms of a $15 million line of credit
outstanding with Security Pacific Business Credit, Inc. ("SPBC")
without prior approval of SPBC. The line of credit matures on July
18, 1996 with automatic annual renewals, subject to sixty day
termination rights.
<PAGE>
<PAGE> 8
RESULTS OF OPERATIONS
Net Income
During the second quarter of 1995, the Company had a net loss of
$282,000 as compared to a net loss of $576,000 in the same quarter in
1994. The net loss resulted from losses from discontinued mortgage
banking operations of $434,000 in 1995 and $636,000 in 1994. The loss
from discontinued operations resulted from an increased provision for
expected losses related to repurchase requests on loans which were
originated by BSC Mortgage Corporation. The increased provision
relates to a recent advice of the Company's legal counsel on the
strength of the Company's legal position in a pending arbitration
proceeding. Income from continuing operations was $152,000 in the
second quarter of 1995 compared to income from continuing operations
of $60,000 for the same period of 1994. The increase resulted from
higher net interest income and gain on sale of SBA loans and lower
occupancy costs. Interest income at the Bank increased significantly
in the second quarter of 1995 as compared to the same period of 1994
as a result of a higher prime rate, and the increase was only
partially offset by similar increases in interest expense.
For the six months ended June 30, 1995 the Company reported a net loss
of $155,000 compared to a net loss of $1,254,000 in the same period
in 1993. Income from continuing operations was $279,000 in the first
six months of 1995 compared to income from continuing operations of
$166,000 for the same period of 1994. The increase resulted from
higher net interest income and gain on sale of SBA loans and lower
occupancy costs. Interest income at the Bank increased significantly
in the first six months of 1995 as compared to the same period of 1994
as a result of a higher prime rate, and the increase was only
partially offset by similar increases in interest expense. The
decrease in real estate operations, net was more than offset by an
increase in the loan loss provision. The Company's real estate held
for sale decreased to $6.1 million at June 30, 1995 from $7.8 million
for December 31, 1994.
The Company's discontinued mortgage banking operation was in the
business of originating and selling in the secondary market first and
second trust deed loans secured by residential properties. In the
ordinary course of business the Company made representations and
warranties to the purchasers and insurers of mortgage loans and the
purchasers of mortgage servicing rights regarding compliance with
laws, regulations and program standards and as to accuracy of
information. Under certain circumstances the Company may become
liable for certain damages or may be required to repurchase a loan if
there has been a breach of representations or warranties. Although
the repurchase obligations are not triggered by defaults the investor
does not usually request a repurchase unless there is a default.
The Company continues to have a potential liability for
representations and warranties made to FHLMC and other investors in
loans originated by BSC. The loans were sold in Sterling Bank's name
<PAGE> 9
and Sterling Bank made the representations and warranties to the
purchaser. No assurance can be given that such requests will not
continue or that other requests will not be received from other
investors. The discontinuance of BSC operations will not effect the
Bank's responsibility for representations and warranties in the sale
of such mortgage loans.
Since the suspension by FHLMC, in August of 1993, of BSC's eligibility
to sell mortgages to and service mortgages for FHLMC the number of
repurchase requests has increased. Currently the Company has
outstanding requests, on loans sold to FHLMC, to repurchase 12 loans
or foreclosed properties totaling $2.0 million and 27 requests to make
FHLMC whole ("make wholes") for losses on loan foreclosures and sale
of related real estate which are alleged to be $2.2 million. The
Company has outstanding from other investors requests to repurchase
3 foreclosed properties totaling $247,000 and 9 make whole requests
which are alleged to be $0.6 million. The loans for which repurchase
has been requested were generally originated in 1989, 1990 and the
first half of 1991, a period of high real estate prices in Southern
California and a period during which most of BSC's originations were
sold to FHLMC. As a result of the real estate recession in Southern
California these repurchases frequently result in losses.
The repurchase and make whole requests relating to loans sold to FHLMC
are the subject of a dispute between the Bank and a mortgage servicer
to whom the Bank sold the related residential mortgage servicing
rights. FHLMC has required the servicer to repurchase the loans or to
otherwise make them whole and the servicer has requested the Bank to
indemnify it. The Bank and the mortgage servicer had agreed to
arbitrate this dispute. See "RESULTS OF OPERATIONS - Subsequent
Events."
Subsequent Events
In August, 1995 the Bank settled this dispute with the servicer. The
Bank will pay $3.8 million to the Servicer and receive loans and REOs
with a principal balance of $1,976,000. The Bank maintained at June
30, 1995, in addition to its allowance for loan losses, an allowance
for repurchase losses of $1.5 million to cover this repurchase
contingency, contingencies related to repurchase requests received
from other investors and contingencies related to repurchase requests
which may be received in the future. As a result of this settlement
the Company will book a charge to expense in the third quarter of 1995
of approximately $1.6 million.
In August, 1995 the Company signed a letter of intent to sell the
assets of Sterling Business Credit, Inc to First Capital Corporation.
The purchase price amounts to a net premium of $1.7 million over the
net book value of Sterling Business Credit, Inc. at June 30, 1995. The
Company expects to complete this transaction in the third quarter of
1995. See "CAPITAL RESOURCES" below.
<PAGE>
<PAGE> 10
Net Interest Income
Net interest income is the difference between interest and fees earned
on earning assets and interest paid on deposits and other sources of
funds. Net interest income increased 6.9% for the second quarter of
1995 as compared to the same period in 1994. The increase in the
Company's net interest income for the second quarter was due
substantially to a $0.5 million increase in interest income on loans
which more than offset a $0.3 million increase in interest expense.
The increase in interest income on loans resulted from the generally
higher level of interest rates, including the prime rate, during the
second quarter of 1995 as compared to the second quarter of 1994. The
increase in interest expense also resulted from the higher level of
interest rates. The increase in interest income was greater than the
increase in interest expense because the Company's earning assets
repriced faster than its interest bearing liabilities.
The Bank's deposit mix also changed as a result of the normal asset-
liability changes directed by Bank management. These changes, which
were influenced by the discontinuance of the Company's mortgage
banking operations in the fourth quarter of 1994 and the need to
reduce asset size for capital ratio purposes, resulted in an increase
in savings accounts with interest rates tied to the prime rate and a
decrease in time deposits $100,000 or greater. The interest expense
related to those types of deposits changed accordingly.
Net interest income increased 4.9% for the first six months of 1995
as compared to the same period in 1994. The increase in the Company's
net interest income was due substantially to a $0.8 million increase
in interest income on loans and a $0.6 million increase in interest
expense. The increase in interest income on loans resulted from the
generally higher level of interest rates, including the prime rate,
during the second quarter of 1995 as compared to the second quarter
of 1994. The increase in interest expense also resulted from the
higher level of interest rates. The increase in interest income was
greater than the increase in interest expense because the company's
earning assets repriced faster than its interest bearing liabilities.
Nonperforming assets, consisting of nonaccrual loans and real estate
held for sale, amounted to $7.9 million at June 30, 1995 compared to
$9.5 million at December 31, 1994 and $11.6 million at June 30, 1994.
Nonaccrual loans amounted to $1.8 million at June 30, 1995 as compared
to $1.7 million at December 31, 1994 and $1.9 million at June 30,
1994. Real estate held for sale decreased from $9.6 million at June
30, 1994 and $7.8 million at December 31, 1994 and to $6.1 million at
June 30, 1995. The decrease in real estate held for sale in the first
six months is due to the sale of five properties with an aggregate
book value of $1.7 million. The high level of nonaccrual loans and
real estate held for sale results from the recessionary environment
in Southern California.
The Company expects that the continued ownership of these generally
non-earning assets will have a negative impact on net interest margin
<PAGE> 11
and on net earnings of the Company in the short run. A high level of
non-earning assets negatively effects net interest income because the
Company incurs interest expense to finance the ownership of the asset
but earns no corresponding interest income. See "RESULTS OF
OPERATIONS - Allowance and Provision for Possible Loan Losses" below
for a description of the nonaccrual loans and see "FINANCIAL CONDITION
- Assets" above for a description of the real estate held for sale.
Allowance and Provision for Possible Loan Losses
The provision for loan losses is determined by management based upon
the Company's loan loss experience, the performance of loans in the
Company's portfolio, the quality of loans in the Company's portfolio,
evaluation of collateral for such loans, the economic conditions
affecting collectibility of loans, the prospects and financial
condition of the respective borrowers or guarantors and such other
factors which in management's judgment deserve recognition in the
estimation of probable loan losses. In addition, regulatory agencies,
as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance or to take charge-offs
(reductions in the allowance) in anticipation of losses.
A substantial portion of the balance of the Company's loan portfolio,
including a substantial portion of its commercial, industrial and
agricultural loans, is secured by real estate collateral, almost all
of which is located in Southern California. While in most cases the
amount of the loan is less than 75% of the original appraised value
of the property or the cost of the project, the Company has suffered
from the recent effects of the downturn in the real estate market and
continues to be vulnerable to further such downturns.
At June 30, 1995, the allowance for possible loan losses was
$1,692,000 or 1.87% of total loans, as compared to $1,613,000, or
1.77% of total loans at December 31, 1994 and $1,726,000, or 1.93% of
total loans at June 30, 1994. The allowance for loan losses was 94%
of nonaccrual loans at June 30, 1995 as compared to 93% at December
31, 1994 and 91% at June 30, 1994. The Company generally maintains a
15% allocation in its allowance for loan losses for nonaccrual loans
based on its historical loss ratio. During the first six months of
1995 the Company made additions to the allowance of $200,000 compared
to $25,000 during the same period in 1994. Reductions from the reserve
in the form of net charge-offs amounted to $222,000 for the first six
months of 1995 as compared to $213,000 for the same period in 1994.
Nonaccrual loans amounted to $1.8 million at June 30, 1995 as compared
to $1.7 million at December 31, 1994 and $1.9 million at June 30,
1994. These loans, at June 30, 1995 include six loans which were more
than 90 days past due at that date. One loan for $1.1 million is
secured by junior liens on an office building in Long Beach and a
hotel in Los Angeles. Three loans for a total of $0.5 million are
secured by first trust deeds on single family residences. One loan
for $0.2 million is secured by a second trust deed on a commercial
<PAGE> 12
property. The remaining loan is for less than $0.1 million and is
unsecured. The risk inherent in these loans, the strength of the col-
lateral and guarantees securing them as well as the decrease in real
estate values in Southern California has been taken into consideration
in determining the adequacy of the allowance for loan losses.
The Company has established a separate allowance for repurchase losses
which amounted to $1.8 million at June 30, 1995 which is not included
in the allowance for loan losses but is carried in other liabilities.
The Company has also established a separate allowance for losses on
real estate held for sale which amounted to $0.1 million at June 30,
1995 which is not included in the allowance for loan losses but is
carried as a reduction of real estate held for sale.
Taking into account economic trends in Southern California and the
condition of the loan portfolio management believes that the allowance
for loan losses at June 30, 1995 was adequate to absorb known and
inherent risks in the loan portfolio. However, given the
deterioration in the market for real estate in the Southern California
area, no assurance can be given that the Company will not incur
additional losses on these loans.
Noninterest Income
Noninterest income for the second quarter of 1995 increased 48% to
$313,000 compared to $211,000 for the second quarter of 1994. This
increase is due primarily to a $78,000 increase in gain on the sale
of loans guaranteed by the Small Business Administration.
Noninterest income for the first six months of 1995 increased 24% to
$556,000 compared to $449,000 for the first six months of 1994. This
increase is due primarily to a $54,000 increase in gains on the sale
of loans guaranteed by the Small Business Administration. Other
noninterest income increased by $45,000 in 1995 primarily as a result
of loss on trading account securities in 1994.
Noninterest Expense
Noninterest expense increased 10% for the second quarter of 1995 to
$2,386,000 as compared to $2,173,000 for the same period of 1994
primarily as a result of the increase in other noninterest expense
which consisted primarily of increases in legal fees related to the
pending arbitration proceeding and consulting fees in connection with
personnel matters. These increases were partially offset by lower
directors fees. In addition occupancy costs were lower as a result of
the move of two branches to improved locations at lower rent.
Noninterest expense increased 16% for the first six months of 1995 as
compared to the same period of 1994 as a result of the $0.2 million
increase in other noninterest expense which consisted primarily of
legal and consulting fees. Real estate operations, net for 1994
included the $0.2 million of estimated repairs for two properties
damaged by the California Northridge earthquake experienced in
<PAGE> 13
January, 1994. Occupancy costs were lower as a result of the move of
two branches to improved locations at lower rent and a one time credit
related to lower property taxes on the headquarters location.
The continued high level of real estate operations, net results from
the high level of real estate held for sale. During the second quarter
of 1995 the Company incurred expenses of $32,000 for writedowns and
losses on other real estate owned and $200,000 for the maintenance and
operation of such properties. The Company sold two foreclosed
properties and three other properties were placed in escrow.
CAPITAL RESOURCES
Management seeks to maintain a level of capital adequate to support
asset growth and credit risks and to ensure that the Company is within
established regulatory guidelines and industry standards. The Company
and the Bank are required to achieve risk-based capital standards and
leverage capital standards. The risk-based capital standards
establish capital requirements that are more sensitive to risk
differences between various assets, consider off balance sheet
activities in assessing capital adequacy and minimize the disincentive
to holding liquid, low risk assets. The Company and the Bank are
required to achieve a minimum 8.0% total capital to risk-weighted
assets ratio (of which at least 4.0% must be Tier 1 Capital consisting
primarily of common stock and retained earnings, less goodwill). The
following table sets forth the Company's and the Bank's risk based
capital ratios at June 30, 1995 (dollars in thousands).
<TABLE>
<CAPTION>
Company Bank
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
Tier 1 Capital $10,202 10.33% $ 7,308 9.12%
Tier 1 Capital
minimum requirement 3,949 4.00 3,204 4.00
Excess 6,253 6.33 4,104 5.12
Total capital $ 11,435 11.58 $ 8,310 10.37
Total capital
minimum requirement 7,898 8.00 6,409 8.00
Excess 3,537 3.58 1,902 2.37
Risk-weighted
assets $ 98,727 $80,108
</TABLE>
The leverage ratio consists of tangible Tier 1 Capital divided by
total average assets. As of June 30, 1995, the Company and the Bank
had leverage ratios of 8.15% and 6.93%, respectively. Regulators have
established a minimum leverage ratio of 3.0% for the highest rated
banks. However, institutions experiencing or anticipating significant
growth, or those with other than minimum risk profiles, will be
expected to maintain capital well above the minimum.
The Bank is subject to the provisions of a memorandum of understanding
<PAGE> 14
entered into in March, 1995 with the FDIC (the "Memorandum") which
replaced and superseded the provisions of a previous memorandum of
understanding. Under the Memorandum the Bank is required, among other
things, to achieve and maintain Tier 1 capital equal to or above 6.75%
of total assets; charge off all assets classified "Loss" as of
September 26, 1994; reduce assets classified as "Substandard" as of
September 26, 1994 to not more than $7,500,000 by June 13, 1995, not
more than $6,500,000 by September 11, 1995 and not more than
$4,500,000 by March 10, 1996; establish and maintain an adequate
allowance for loan losses; develop a plan to control overhead and
other expenses; install procedures to correct certain internal routine
and control deficiencies; and not pay cash dividends without the prior
written consent of the FDIC and the California Superintendent of Banks.
The Bank is currently in compliance with the provisions of the
Memorandum. Management believes that continued compliance with the
terms of the Memorandum and otherwise meeting regulatory capital
requirements may depend on the Company's settlement of the arbitration
proceeding, and other investor repurchase requests, at satisfactory
amounts or raising capital through the sale of Sterling Business
Credit, Inc., sale of stock or other securities of the Company, or sale
of stock at the Bank. Management believes that it will be able to
complete one or more of these alternatives and remain in compliance
with the Memorandum. Sale of Sterling Business Credit, Inc. could have
a negative effect on net income of the Company in future periods and
sale of securities of the Bank or of the Company would have a dilutive
effect on shareholders interest in those companies.
The Company suspended its quarterly cash dividends in the third quarter
of 1993. The Company expects that future cash dividends will depend on
a return to profitability and the maintenance of acceptable financial
results in the future.
The provision for income taxes for the six month period ended June 30,
1995 is as follows:
<TABLE>
<CAPTION>
Federal State Total
<S> <C> <C> <C>
Current $ (64,000) $ 43,000 $(21,000)
Deferred -- -- --
$ (64,000) $ 43,000 $(21,000)
The provision for income taxes reflects an effective tax rate of 42%
on income before income taxes. The components of income tax expense
causing the variation from the expected statutory federal tax rate are
not significantly different than the amounts disclosed in the prior
year.
The following table shows the components of the current and deferred
tax asset recorded in the balance sheet at June 30, 1995:
Current $2,435,000
Deferred 598,000
Total $3,033,000
<PAGE>
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Securities Holders.
The following matters were submitted to a vote of the security holders
of the Registrant, by the solicitation of proxies for Registrant's
Annual Meeting:
(A) Annual Meeting of Shareholders held on May 25, 1995.
(B) The following seven persons were re-elected as directors at the
Meeting and constitute all of the members of the Board of
Directors:
Timothy Behunin Robert J. Schiller
Allan E. Dalshaug Audrey J. Fimpler
John G. Sperling Hassan Izad
Michael Wagner
ITEM 6. Exhibits and Reports on 8-K.
(A) Exhibits: Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirement 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 WEST BANCORP
(Registrant)
DATED: August 10, 1995 By:/s/Douglas B. Swets
Douglas B. Swets
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
WEST BANCORP AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> JUN-30-1995 DEC-31-1994
<CASH> 16520 20294
<INT-BEARING-DEPOSITS> 198 97
<FED-FUNDS-SOLD> 12564 15742
<TRADING-ASSETS> 0 226
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 6866 6974
<INVESTMENTS-MARKET> 6874 6832
<LOANS> 90068 91075
<ALLOWANCE> 1692 1613
<TOTAL-ASSETS> 125212 132491
<DEPOSITS> 97791 107098
<SHORT-TERM> 13508 11900
<LIABILITIES-OTHER> 2272 1643
<LONG-TERM> 1439 1493
<COMMON> 8686 8686
0 0
0 0
<OTHER-SE> 1516 1671
<TOTAL-LIABILITIES-AND-EQUITY> 125212 132491
<INTEREST-LOAN> 6325 11376
<INTEREST-INVEST> 299 540
<INTEREST-OTHER> 247 520
<INTEREST-TOTAL> 6871 12436
<INTEREST-DEPOSIT> 1546 2757
<INTEREST-EXPENSE> 2339 3986
<INTEREST-INCOME-NET> 4532 8450
<LOAN-LOSSES> 200 266
<SECURITIES-GAINS> 556 925
<EXPENSE-OTHER> 4409 9063
<INCOME-PRETAX> 479 46
<INCOME-PRE-EXTRAORDINARY> 479 46
<EXTRAORDINARY> (434) (2904)
<CHANGES> 0 0
<NET-INCOME> (155) (2875)
<EPS-PRIMARY> 0.16 (1.68)
<EPS-DILUTED> 0.16 (1.68)
<YIELD-ACTUAL> 0.080 0.073
<LOANS-NON> 1790 1730
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1613 2031
<CHARGE-OFFS> 29 729
<RECOVERIES> 7 47
<ALLOWANCE-CLOSE> 1692 1613
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
