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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE:
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]
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 Identification No.)
incorporation or organization)
3287 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (213) 384-4444
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of class)
Indicate by check mark 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
As of March 15, 1996, the aggregate market value of the common stock held by
non-affiliates of the Registrant was approximately $4,061,000.
Number of shares of common stock of the Registrant outstanding as of
March 15, 1995:
1,710,214.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement For Annual Meeting of Part III of Form 10-K
Shareholders which will be filed within 120 days
of the fiscal year ended December 31, 1995.
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THIS REPORT INCLUDES A TOTAL OF __ PAGES
EXHIBIT INDEX ON PAGE __
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PART I
ITEM 1. BUSINESS.
Sterling West Bancorp
Sterling West Bancorp (the "Company") is a bank holding company
organized as a California corporation on January 21, 1982 under the name of
Sterling Bancorporation. As a bank holding company, the Company is subject to
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company
commenced business on December 15, 1982 when, pursuant to a reorganization, it
acquired all of the voting stock of Sterling Bank ("Bank"). On September 15,
1983, Sterling Business Credit, Inc., a commercial finance corporation, was
formed as a wholly-owned subsidiary of the Company ("Business Credit"). On
November 11, 1983, BSC Mortgage Corporation ("BSC"), a mortgage banking
subsidiary, commenced operations as a wholly-owned subsidiary of the Bank. In
May 1992, the Company changed its name to Sterling West Bancorp.
During the third quarter of 1995 the Company sold substantially all
of the assets of Sterling Business Credit, Inc. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Sale
of Business Credit Assets." This sale of Business Credit assets was instituted
in order to raise capital to meet capital requirements previously imposed by
regulators on the Bank due to losses in the mortgage banking subsidiary, and to
take advantage of an opportunity to make a substantial premium on the sale. The
Company made the decision to discontinue the mortgage banking operations and
sell the Business Credit assets in order to allow the Company to concentrate on
the core business of banking. In addition, the Company believes that those
actions will provide the basis for improved operating performance in 1996.
During the fourth quarter of 1994 the Company discontinued its mortgage banking
operations, substantially all of which were performed by BSC. "See ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Discontinued Operations."
The Company's principal business is to serve as a holding company for
the Bank, Business Credit and for other banking or finance-related subsidiaries
which the Company may establish or acquire. During 1995, the Company's principal
sources of income were management fees paid by the Company's subsidiaries,
interest income on intercompany debt and dividends paid by Business Credit.
Legal and contractual limitations are imposed on the amount of dividends that
may be paid by the Bank and Business Credit, respectively, to the Company. See
"ITEM 1. BUSINESS -- Supervision and Regulation -- Restrictions on Transfers of
Funds to the Company by the Bank and Business Credit" and "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- Note 15 to Consolidated Financial
Statements." At December 31, 1995, the Company had total consolidated assets of
approximately $122.4 million, total consolidated net loans of approximately
$70.9 million and total consolidated deposits of approximately $112.4 million.
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Sterling Bank
General
The Bank was incorporated under the laws of the State of California
on March 3, 1980, was licensed by the California Superintendent of Banks
("Superintendent") and commenced operations as a California state-chartered bank
on November 5, 1980. The Bank employs a regional banking concept whereby each
regional banking office serves several communities. The Bank currently maintains
a Wilshire Center Office located at 3287 Wilshire Boulevard, Los Angeles,
California ("Wilshire Center Office") and regional branch offices located at
16661 Ventura Boulevard, Suite 110, Encino, California ("West Valley Regional
Office"), 372 East Olive Avenue, Burbank, California ("Mid-Valley Branch
Office"), 550 North Brand Boulevard, Glendale, California ("East Valley Regional
Office"), and 433 North Camden Avenue, Suite 1050, Beverly Hills, California
("Beverly Hills Regional Office"). See "ITEM 1. BUSINESS -- Supervision and
Regulation -- The Bank". At December 31, 1995, the Bank had approximately $119.6
million in total assets, approximately $68.0 million in net loans and
approximately $112.8 million in total deposits.
Banking Services
The Bank provides a wide range of commercial banking services
primarily for professionals and small- and medium-sized businesses. Deposit
services include those traditionally offered by commercial banks, such as
checking accounts, savings accounts, interest-bearing negotiable orders of
withdrawal ("NOW") accounts, money market deposit accounts, and time
certificates of deposit. The Bank engages in a variety of lending activities,
including commercial, asset-based, real estate-construction and development,
real estate-collateralized and mortgage, personal, Small Business Administration
("SBA"), home improvement, and other installment and term loans. The Bank offers
a wide range of traditional services designed to attract and serve the needs of
its customers, such as travelers' checks, safe deposit boxes at the Wilshire
Regional Office, collection services and telephone transfers. All of the
above-mentioned services are offered to the Bank's clients on a personalized
basis, except at the Mid-Valley Branch Office which is a drive-up facility. Each
Bank client is assigned to one "Sterling Banker" who is primarily responsible
for serving the client's banking needs. The Bank does not presently operate nor
does it intend in the near future to operate a trust department. The Bank makes
arrangements with correspondent institutions to provide international banking
services.
BSC
BSC, a wholly-owned mortgage banking subsidiary of the Bank, was
engaged in the business of originating, acquiring, processing, selling in the
secondary market and servicing of first and second trust deed loans secured by
residential properties. During the fourth quarter of 1994 the Company
discontinued its mortgage banking operations, substantially all of which were
performed by BSC. By December 31, 1994 the Company had ceased solicitation of
new
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applications, had funded the mortgages in its pipeline and had completed the
sale of substantially all of its residential mortgage servicing portfolio. BSC's
servicing activities required it to perform certain administrative duties
relating to the loans it originated or acquired and sold under agreements that
provided for payment to BSC of a servicing fee. The servicing fee was generally
based on the outstanding principal balance of the loans. Servicing includes,
among other duties, collecting monthly payments from the borrower, maintaining
escrow accounts and making payments of real estate taxes and insurance premiums.
BSC was licensed by the California Department of Real Estate. During 1995, the
Company settled a dispute over repurchase liability relating to mortgage loans
originated by BSC. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Discontinued Operations."
Business Credit
Business Credit was formed as a wholly-owned subsidiary of the
Company on September 15, 1983 and commenced operations on June 27, 1984.
Business Credit operates as a commercial finance company, financing accounts
receivables, inventory and equipment. Business Credit maintains one office which
is located at the Wilshire Center Office. on September 7, 1995, Business Credit
sold approximately $15.2 million of loans to First Capital Corporation. Business
Credit retained certain assets and at December 31, 1995 had approximately $3.4
million in total assets which included $3.0 million in net loans. The Company is
in the process of liquidating these loans and other assets and has agreed with
the purchaser to not compete within California until September 7, 1997. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Sale of Business Credit Assets."
Competition
The banking and financial services business in California generally,
and in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The Bank
competes for loans and deposits and customers for financial services with other
commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions and other nonbank financial service providers. Many
of these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial
services than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon local promotional activities,
personal relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs. In
those instances where the Bank is unable to accommodate a customer's needs, the
Bank will arrange for those services to be provided by its correspondents.
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Effect of Governmental Policies and Recent Legislation
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Bank. Accordingly, the earnings and
growth of the Company are subject to the influence of domestic and foreign
economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. The Financial
Services Modernization Act recently proposed in the House of Representatives
would generally permit banks to expand activities further into the areas of
securities and insurance, and would reduce the regulatory and paperwork burden
that currently affects banks. Additionally, the proposed legislation would force
the conversion of savings and loan holding companies into bank holding
companies, although unitary savings and loan holding companies authorized to
engage in activities as of January 1, 1995 would be exempted. Similar
legislation has also been proposed in the Senate. In addition, legislation was
recently introduced in Congress that would merge the deposit insurance funds
applicable to commercial banks and savings associations and impose a one-time
assessment on savings associations to recapitalize the deposit insurance fund
applicable to savings associations. The likelihood of any major legislative
changes and the impact such changes might have on the Company are impossible to
predict. See "ITEM 1. BUSINESS -- Supervision and Regulation."
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the
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Company and the Bank. The description does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Company is required to file with the Federal Reserve Board quarterly and
annual reports and such additional information as the Federal Reserve Board may
require pursuant to the BHCA. The Federal Reserve Board may conduct examinations
of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "ITEM 1. BUSINESS -- Supervision and Regulation -- Capital
Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse
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effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced by acquisition, in whole or in part, of a going
concern.
In addition, the Federal Reserve Board is empowered to enter into a
memorandum of understanding with a bank holding company requiring specific
corrective actions. As a result of its examination of the Company in April 1995,
the Federal Reserve Bank of San Francisco proposed that the Board of Directors
of the Company enter into a memorandum of understanding. In November 1995, the
Federal Reserve Bank and the Board of Directors of the Company entered into a
memorandum of understanding (the "FRB Memorandum"). Under the FRB Memorandum,
the Company is required, among other things, to comply with the FDIC Memorandum
(see "ITEM 1. BUSINESS -- Supervision and Regulation -- The Bank"); submit a
written plan designed to enhance the board's supervision of the operations and
management of the consolidated organization, to ensure that the Company has
sufficient cash to pay its expenses and to service its debt; the Company may
not, directly or indirectly, acquire or sell any interest in any entity, line of
business, problem loans or other assets, without the prior written approval of
the Federal Reserve Bank (the sale, by the Company, of substantially all of
Business Credit assets, and the further liquidation of the remaining assets of
Business Credit, shall be exempt); and to not pay cash dividends without the
prior written consent of the Federal Reserve Bank.
The Company was not in compliance with all of the provisions of the FRB
Memorandum as of December 31, 1995 as a result of the Bank's noncompliance with
the Tier 1 capital requirements of the FDIC Memorandum as of such date, which
has since been corrected. Failure to comply with the terms of the FRB Memorandum
could result in further regulatory action by the Federal Reserve Bank, including
issuance of a Cease and Desist Order.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity
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of the source of strength doctrine is likely to continue to be the subject of
litigation until definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank
The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the FDIC. If, as a result of an
examination of a bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of the bank's operations are unsatisfactory or that the bank or
its management is violating or has violated any law or regulation, various
remedies are available to the FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the bank, to assess civil monetary penalties, to remove
officers and directors and ultimately to terminate a bank's deposit insurance,
which for a California state-chartered bank would result in a revocation of the
bank's charter. The Superintendent has many of the same remedial powers.
Additionally, the FDIC is empowered to enter into a memorandum of
understanding with a bank requiring specific corrective actions. As a result of
its examination of the Bank in September 1994, the FDIC proposed that the Board
of Directors of the Bank enter into a memorandum of understanding which would
replace and supersede the provisions of a prior memorandum of understanding
dated January 1992. In March 1995, the FDIC and the Board of Directors of the
Bank entered into a memorandum of understanding (the "FDIC Memorandum"). Under
the FDIC 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 was not in compliance with the Tier 1 capital requirements of the
FDIC Memorandum at December 31, 1995. Such noncompliance was principally the
result of increases
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in write-downs to the Bank's real estate held for sale portfolio as of December
31, 1995. However, the Bank was in compliance with the FDIC Memorandum as of the
month ended March 1996, due to improvements in the Bank's Tier 1 capital to
approximately 6.9%, which was caused by an expected decrease in deposits at the
Bank and offset by a corresponding reduction in average assets. Management
believes that the Bank's prior noncompliance will not result in any material
adverse regulatory action against the Bank. Management believes the Bank can
continue to comply with the terms of the FDIC Memorandum and otherwise meet
regulatory capital requirements, and that any actions taken to so comply in the
future will not have a material adverse effect on the Company's future financial
condition or results of operations. However, failure to comply with the terms of
the FDIC Memorandum could result in further regulatory action, including
issuance of a Cease and Desist Order. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Capital Resources."
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "ITEM 1. BUSINESS -- Supervision and Regulation --
Premiums for Deposit Insurance." Although the Bank is not a member of the
Federal Reserve System, it is nevertheless subject to certain regulations of the
Federal Reserve Board.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, the Bank is
required to maintain certain levels of capital. See "ITEM 1. BUSINESS --
Supervision and Regulation -- Capital Standards."
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "ITEM 1. BUSINESS -- Supervision and Regulation
Premiums for Deposit Insurance." The Bank is also subject to certain regulations
of the Federal Reserve Board and applicable provisions of California law,
insofar as they do not conflict with or are not preempted by federal banking
law.
BSC
BSC, which discontinued operations in the fourth quarter of 1994, is a
California corporation which was engaged in the business of mortgage banking and
was subject to the supervision, examination and regulation of the California
Department of Real Estate. BSC sold the loans it originated to the Bank. BSC
then resold the loans to investors on the Bank's behalf. Many of its loans were
resold to the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA") under agreements providing for the
retention by the Bank of the right to service those loans. BSC then provided the
servicing for the loans under a
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sub-servicing agreement with the Bank. As a result of the discontinuance of the
mortgage banking operations, the Bank, and BSC, have disposed of substantially
all of the loan servicing portfolio and liquidated substantially all of BSC's
assets. During 1995, the Company settled a dispute over repurchase liability
relating to mortgage loans originated by BSC. For a description of the effect of
this action on the Company see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Discontinued Operations."
Business Credit
Business Credit, as a California corporation engaged in commercial
finance, is subject to regulation and supervision by the California Department
of Corporations. As a wholly-owned subsidiary of the Company, it is subject to
examination by the Federal Reserve Board and the Superintendent. During the
third quarter of 1995 the Company sold substantially all of the assets of
Business Credit. The Company is in the process of liquidating the remaining
loans and other assets. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Sale of Business Credit
Assets."
Restrictions on Transfers of Funds to the Company by the Bank
The Company is a legal entity separate and distinct from the Bank. The
Company's ability to pay cash dividends is limited by California law. Under
California law, shareholders of the Company may receive dividends when and as
declared by the Board of Directors out of funds legally available for such
purpose. With certain exceptions, a California corporation may not pay a
dividend to its shareholders unless (i) its retained earnings equal at least the
amount of the proposed dividend or (ii) after giving effect to the dividend, the
corporation's assets would equal at least 1.25 times its liabilities and, for
corporations with classified balance sheets, the current assets of the
corporation would be at least equal to its current liabilities or, if the
average of the earnings of the corporation before taxes on income and before
interest expense for the two preceding fiscal years was less than the average of
the interest expense of the corporation for those fiscal years, at least equal
to 1.25 times its current liabilities.
Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered.
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There are statutory and regulatory limitations on the amount of dividends
which may be paid by the Bank to the Company. California law restricts the
amount available for cash dividends by state chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions to shareholders made during such period). Notwithstanding this
restriction, a bank may, with the prior approval of the Superintendent, pay a
cash dividend in an amount not exceeding the greater of the retained earnings of
the Bank, the net income for such bank's last preceding fiscal year, and the net
income of the bank for its current fiscal year.
The FDIC also has authority to prohibit the Bank from engaging in
activities that, in the FDIC's opinion, constitute unsafe or unsound practices
in conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could assert
that the payment of dividends or other payments might, under some circumstances,
be such an unsafe or unsound practice. Further, the FDIC and the Federal Reserve
Board have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal law could limit the amount of dividends which the Bank or the Company
may pay. The Superintendent may impose similar limitations on the conduct of
California-chartered banks. See "ITEM 1. BUSINESS -- Supervision and Regulation
- -- Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "--
Capital Standards" for a discussion of these additional restrictions on capital
distributions.
At present, substantially all of the Company's revenues, including funds
available for the payment of dividends and other operating expenses, are, and
will continue to be, primarily dividends and certain management and service fees
paid by the Bank and Business Credit, and interest income on any intercompany
debt. At December 31, 1995, the Bank, as a result of losses in the last three
fiscal years, had no retained earnings legally available for the payment of cash
dividends. Under the terms of the FDIC Memorandum, the Bank is prohibited from
paying cash dividends to the Company unless the payment is approved in advance
by the Regional Director of the FDIC and the Superintendent.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving the Company and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt
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corrective action provisions of federal law. See "ITEM 1. BUSINESS --
Supervision and Regulation -- Prompt Corrective Action and Other Enforcement
Mechanisms."
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to risk-
adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted
assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios. In
the case of the Bank, as a result of entering into the FDIC Memorandum, the Bank
is required, among other things, to achieve and maintain Tier 1 capital equal to
or above 6.75% of total assets. Additionally, pursuant to the FRB Memorandum,
the Company is required to maintain the Bank's Tier 1 capital at such level. The
Bank was not in compliance with such capital requirement as of December 31,
1995, but was in compliance with this requirement as of the month ended March
1996. See "ITEM 1. BUSINESS -- Supervision and Regulation -- The Company" and
"-- The Bank."
11
<PAGE> 13
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued, the
Bank currently is unable to predict the impact of the proposal on the Bank if
the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss allowances to
classified assets. The benchmark set forth by such policy statement is the sum
of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c)
15 percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies recently issued final rules, effective April 1, 1995, which
limit the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. The standard has been in effect on an interim
basis since March 1993. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10% of Tier 1 capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 capital and
total assets and regulatory capital calculations.
12
<PAGE> 14
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage
ratio of 5% or greater and (ii) is not subject to an order, written
agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure;
"adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage
ratio of 4% or greater (or a leverage ratio of 3% or greater if the
institution is rated composite I under the applicable regulatory rating
system in its most recent report of examination);
"undercapitalized" if it has total risk-based capital that is less than
8%, Tier 1 risk-based capital that is less than 4% or a leverage ratio
that is less than 4% or greater (or a leverage ratio of 3% if the
institution is rated composite I under the applicable regulatory rating
system in its most recent report of examination;
"significantly undercapitalized" if it has total risk-based capital
that is less than 6%, Tier 1 risk-based capital that is less than 3%
or a leverage ratio that is less than 3%; and
"critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
13
<PAGE> 15
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
14
<PAGE> 16
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
Safety and Soundness Standards
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must
15
<PAGE> 17
address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
Premiums for Deposit Insurance
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required
by FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such
as the Bank is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary
16
<PAGE> 18
federal regulator (in the Bank's case, the FDIC). The three supervisory
categories are: financially sound with only a few minor weaknesses (Group A),
demonstrates weaknesses that could result in significant deterioration (Group
B), and poses a substantial probability of loss (Group C). The capital ratios
used by the FDIC to define well-capitalized, adequately capitalized and
undercapitalized are the same in the FDIC's prompt corrective action
regulations. The BIF assessment rates are summarized below; assessment figures
are expressed in terms of cents per $100 in deposits per year.
<TABLE>
<CAPTION>
Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 23 26 29
Adequately Capitalized...................... 26 29 30
Undercapitalized............................ 29 30 31
<CAPTION>
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 4 7 21
Adequately Capitalized...................... 7 14 28
Undercapitalized............................ 14 28 31
<CAPTION>
Assessment Rates Effective January 1, 1996
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 0* 3 17
Adequately Capitalized...................... 3 10 24
Undercapitalized............................ 10 24 27
</TABLE>
*Subject to a statutory minimum assessment of $1,000 per semi-annual
period (which also applies to all other assessment risk
classifications).
During the first half and second half of 1995, the Bank's annual
assessment rate was 29 cents per $100 of deposits, and at January 1, 1996 was 17
cents per $100 of deposits.
A number of proposals have recently been introduced in Congress to
address the disparity in bank and thrift deposit insurance premiums. On
September 19, 1995, legislation was introduced and referred to the House Banking
Committee that would, among other things: (i) impose a requirement on all
Savings Association Insurance Fund ("SAIF") member institutions to fully
recapitalize the SAIF by paying a one-time special assessment of approximately
85 basis
17
<PAGE> 19
points on all assessable deposits as of March 31, 1995, which assessment would
be due as of January 1, 1996; (ii) spread the responsibility for FICO interest
payments across all FDIC-insured institutions on a pro-rata basis, subject to
certain exceptions; (iii) require that deposit insurance premium assessment
rates applicable to SAIF member institutions be no less than deposit insurance
premium assessment rates applicable to BIF member institutions; (iv) provide for
a merger of the BIF and the SAIF as of January 1, 1998; (v) require savings
associations to convert to state or national bank charters by January 1, 1998;
(vi) require savings associations to divest any activities not permissible for
commercial banks within five years; (vii) eliminate the bad-debt reserve
deduction for savings associations, although savings associations would not be
required to recapture into income their accumulated bad-debt reserves; (viii)
provide for the conversion of savings and loan holding companies into bank
holding companies as of January 1, 1998, although unitary savings and loan
holding companies authorized to engage in activities as of September 13, 1995
would have such authority grandfathered (subject to certain limitations); and
(ix) abolish the OTS and transfer the OTS's regulatory authority to the other
federal banking agencies. The legislation would also provide that any savings
association that would become undercapitalized under the prompt corrective
action regulations as a result of the special deposit premium assessment could
be exempted from payment of the assessment, provided that the institution would
continue to be subject to the payment of semiannual assessments under the
current rate schedule following the recapitalization of the SAIF. The
legislation was considered and passed by the House Banking Committee's
Subcommittee on Financial Institutions on September 27, 1995, and has not yet
been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the
Senate, although the Senate bill does not include a comprehensive approach for
merging the savings association and commercial bank charters. The Senate bill
remains pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by
institutions as of March 31, 1995; (ii) provide an exemption to this rule for
weak institutions, and a 20% reduction in the SAIF-assessable deposits of
so-called "Oakar banks;" (iii) expand the assessment base for FICO payments to
include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1,
1998, only if no insured depository institution is a savings association on that
date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio of any fund at the designated reserve
ratio. The bill does not include a provision to merge the charters of savings
associations and commercial banks.
In light of ongoing debate over the content and fate of the budget
bill, the different proposals currently under consideration and the uncertainty
of the Congressional budget and
18
<PAGE> 20
legislative processes in general, management cannot predict whether any or all
of the proposed legislation will be passed, or in what form. Accordingly, the
effect of any such legislation on the Bank cannot be determined.
Interstate Banking and Branching
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate
19
<PAGE> 21
income neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into account
when regulating and supervising other activities. The FDIC has rated the Bank to
be Satisfactory in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
Recent Accounting Pronouncements
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" ("SFAS
No. 121"). SFAS No. 121 requires that certain long-lived assets and certain
identifiable intangibles be reviewed for impairment when events or changes in
circumstances indicated the carrying amount of such assets may not be
recoverable. The estimated future cash flows to be derived from the use and
disposition of an asset, on an undiscounted basis, is compared to the carrying
amount of the long-lived asset and if the carrying amount exceeds the expected
cash flows, recognition of an impairment loss is required. An impairment loss
for assets subject to SFAS No. 121 shall be reported as a component of income
from continuing operations. Under SFAS No. 121, the Company will be required to
make certain disclosures about impaired, long-lived assets. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 1995 and the Company does not believe that its adoption will have a
material adverse impact upon its financial condition or results of operations.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights," ("SFAS No. 122")
which amends Statement of Financial Accounting Standards No. 65, "Accounting for
Certain Mortgage Banking Activities." SFAS No. 122 eliminates certain accounting
distinctions between rights to service mortgage loans for others that are
acquired through loan origination activities and servicing rights acquired
through purchase transactions under previously-issued accounting standards.
Under SFAS No. 122, entities engaging in mortgage banking activities must
allocate the costs of originating mortgage loans between the mortgage servicing
rights and the mortgage loans based upon their relative values. SFAS No. 122
will require disclosure of the fair value of mortgage servicing rights and the
significant assumptions used to calculate fair value. SFAS No. 122 is effective
for fiscal years beginning after December 15, 1995 and is to be applied
prospectively. The Company
20
<PAGE> 22
does not believe that its adoption will have a material adverse impact upon its
financial condition or results of operations.
In November 1995 the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). This statement establishes financial
accounting standards for stock- based employee compensation plans. SFAS 123
permits the Company to choose either a new fair-value-based method or the
current APB Opinion 25 intrinsic value-based method of accounting for its
stock-based compensation arrangements with pro forma disclosures of net earnings
and earnings per share computed as if the fair-value-based method had been
applied. SFAS 123 is effective for fiscal years beginning after December 15,
1995. The Company will continue to account for stock-based compensation under
APB Opinion No. 25 and, as a result, SFAS 123 will not have a material adverse
effect on the Company's financial condition or results of operations.
Employees
At December 31, 1995, the Company, the Bank, and Business Credit
employed 65 individuals. The Company believes that its employee relations are
excellent.
21
<PAGE> 23
Statistical Disclosure
The following tables and data set forth, for the respective periods
shown, selected statistical information relating to the Company. The following
tables and data relating to certain averages are based on daily averages for the
Bank and on monthly averages for the Company, BSC and Business Credit, which do
not maintain daily balances. Management believes that the difference between
daily and monthly average data (where monthly averages have been used) is not
significant.
Distribution of Assets, Liabilities, and Stockholders' Equity
The following table sets forth the Company's consolidated average
balances of each principal category of assets, liabilities and stockholders'
equity and the percentage distribution of these items for each of the past two
years (dollars in thousands).
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1995 1994
------------------------- -----------------------
Average Percent Average Percent
ASSETS: Balance of Total Balance of Total
- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash and due from banks..................... $ 5,132 4.11% $ 5,752 4.00%
Taxable investment
securities................................ 6,933 5.55 7,578 5.28
Non-taxable investment
securities................................ 395 0.32 433 0.30
Federal funds sold.......................... 14,881 11.90 13,027 9.08
Net loans (1)............................... 82,503 66.01 88,558 61.67
Fixed assets, net........................... 1,296 1.04 1,469 1.02
Other assets................................ 11,709 9.36 19,321 13.45
Assets of discontinued
operations................................. 2,141 1.71 7,457 5.20
-------- ------- -------- ------
Total assets.......................... $124,990 100.00% $143,595 100.00%
======== ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand.................................... $ 30,360 24.29% $ 29,049 20.23%
Savings and NOW accounts.................. 55,088 44.07 50,433 35.12
Money market accounts..................... 7,823 6.26 12,521 8.72
Time deposits............................. 7,623 6.10 19,629 13.67
Notes payable............................... 8,683 6.95 12,130 8.45
Other liabilities (2)....................... 5,417 4.33 7,757 5.40
Total liabilities..................... 114,994 92.00 131,519 91.59
Stockholders' equity........................ 9,996 8.00 12,076 8.41
-------- ------- --------- ------
Total liabilities and
stockholders' equity................... $124,990 100.00% $143,595 100.00%
======== ======= ======== =======
</TABLE>
- ----------------------
(1) Net loans at December 31, 1995 are significantly less than the average
balances shown above as a result of the sale of most of the assets of
Sterling Business Credit, Inc. and planned reduction to meet regulatory
capital requirements.
(2) Other liabilities include time deposits of $5,454 for 1994, for which the
related interest expense is included in loss from discontinued operations.
22
<PAGE> 24
Analysis of Net Interest Income
Certain information concerning average interest-earning assets and
interest-bearing liabilities and yields earned and rates paid thereon is set
forth in the following table (dollars in thousands).
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1995 1994
---------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Taxable investment
securities .......... $ 6,933 $ 525 7.57% $ 7,578 $ 502 6.62%
Non-taxable investment
securities (1) ...... 395 19 4.81 433 18 4.16
Federal funds sold .......... 14,881 839 5.64 13,027 540 4.15
Net loans (2) ............... 82,503 10,997 13.33 88,558 11,376 12.85
-------- ------- -------- -------
Total interest-
earning assets .. $104,712 $12,380 11.82% $109,596 $12,436 11.35%
======== ------- ======== -------
INTEREST-BEARING LIABILITIES:
Savings deposits(3) ......... $ 55,088 $ 2,654 4.82% $ 50,433 $ 1,865 3.70%
Money market accounts ....... 7,823 138 1.76 12,521 231 1.84
Time deposits ............... 7,623 330 4.33 19,629 661 3.37
Notes payable ............... 8,683 1,086 12.51 12,130 1,229 10.13
-------- ------- -------- -------
Total interest-
bearing liabilities $ 79,217 $ 4,208 5.31% $ 94,713 $ 3,986 4.21%
======== ------- ======== -------
Net interest income ......... $ 8,172 $ 8,450
======= =======
Net interest spread ......... 6.51% 7.14%
Net interest margin (4) ..... 7.80% 7.71%
</TABLE>
- --------------------
(1) Yield is computed on a tax equivalent basis assuming a 34% tax rate.
(2) The principal amount of nonaccrual loans is included in the average
balance of net loans but only the actual interest recognized during
the year is included in income/expense.
(3) Includes NOW Accounts.
(4) Net interest margin is net interest income divided by total average
interest-earning assets.
23
<PAGE> 25
Analysis of Changes in Net Interest Income and Expense
The following table presents the dollar amount of changes in
interest income or interest expense for the major categories of interest-earning
assets and interest-bearing liabilities and the amount of change attributable to
changes in volumes and changes in interest rates for 1995 compared to 1994 and
1994 compared to 1993 (dollars in thousands). The change in interest income due
to both volume and yield/rate has been allocated to volume and yield/rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
------------------------ -------------------
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
---------------------------- ----------------------------
Volume Yield/Rate Net Change Volume Yield/Rate Net Change
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Income from Interest-earning assets:
Time certificates
of deposit .................... $ 2 $ 7 $ 9 $ 4 $ -- $ 4
Taxable investment
securities ....................... (50) 64 14 60 (46) 14
Non-taxable
investment
securities (1) .................. (2) 3 1 (14) (1) (15)
Federal funds sold ................ 85 214 299 107 160 267
Net loans ......................... (797) 418 (379) (2,570) 1,340 (1,230)
----- ----- ----- ------- ------- -------
Total interest
income ....................... (762) 706 (56) (2,413) 1,453 (960)
----- ----- ----- ------- ------- -------
Expense on Interest-bearing liabilities:
Savings deposits (2) .............. 184 605 789 151 342 493
Money market accounts ............. (83) (10) (93) (50) (4) (54)
Time deposits ..................... (483) 152 (331) (532) -- (532)
Notes payable ..................... (394) 251 (143) (184) 218 34
----- ----- ----- ------- ------- -------
Total interest
expense ...................... (776) 998 222 (615) 556 (59)
----- ----- ----- ------- ------- -------
Change in net interest
income .......................... $ 14 $(292) $(278) $(1,798) $ 897 $ (901)
===== ===== ===== ======= ======= =======
</TABLE>
- --------------------
(1) Computed on a tax equivalent basis.
(2) Includes NOW Accounts.
24
<PAGE> 26
Investment Portfolio
The following table shows the carrying value of the Company's
portfolio of investment securities held to maturity for each of the past two
years (dollars in thousands). Investment securities held to maturity are stated
at cost, adjusted for amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
------ ------
<S> <C> <C>
Obligations of U.S. and U.S.
government agencies . . . . . . . . . . . . . $7,166 $6,551
Non-taxable municipal bonds . . . . . . . . . . 250 326
Interest-bearing deposits . . . . . . . . . . . 198 97
------ ------
Total investment securities
held to maturity . . . . . . . . . . $7,614 $6,974
====== =======
</TABLE>
Maturity Distributions of Investment Portfolio
The following table shows the maturities of investment securities
held to maturity at December 31, 1995 and the weighted average yields of such
securities (dollars in thousands):
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------
After One After Five
Within But Before But Before
One Year Five Years Ten Years
------------------- ------------------ ----------------
Weighted Weighted Weighted
Book Average Book Average Book Average
Value Yield(1) Value Yield(1) Value Yield(1)
<S> <C> <C> <C> <C> <C> <C>
Obligations of U.S. and U.S.
government agencies............... $2,513 6.28% $3,444 6.81% 1,209 5.94%
Non-taxable municipal bonds......... 250 4.25 -- -- -- --
Interest-bearing deposit............ 198 6.60 -- -- -- --
------ ------ ------
Total............................... $2,961 6.13% $3,444 6.81% $1,209 5.94%
====== ====== ======
</TABLE>
- ------------------
(1) Weighted average yield is computed on a yearly basis and yields on
tax-exempt obligations are computed on a tax equivalent basis.
As of December 31, 1995, the Company held no investment
securities held to maturity of any issuer (other than securities issued by the
U.S. and U.S. government agencies) with an aggregate carrying value which
exceeded 10% of stockholders' equity.
25
<PAGE> 27
Loan Portfolio
The following table sets forth the amount of loans outstanding as
of the dates indicated by major categories (dollars in thousands). Approximately
71% of the Company's loan portfolio, including a substantial portion of its
commercial, industrial and agricultural loans, are secured by real estate
collateral, substantially all of which is in Southern California.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1995 1994
-------------------- -------------------
Amount Percent Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Real estate - construction and
development . . . . . . . . . . . . $ 7,816 10.8% $ 5,924 6.5%
Real estate - mortgage . . . . . . . . . 17,658 24.4 22,514 24.7
Commercial, industrial and
agricultural . . . . . . . . . . . . 42,542 58.7 58,974 64.8
Loans to individuals for personal
expenditures . . . . . . . . . . . . 3,971 5.5 3,382 3.7
All other loans . . . . . . . . . . . 419 0.6 281 0.3
------- ------ ------- -----
Total loans (1). . . . . $72,406 100.0% $91,075 100.0%
======= ====== ======= ======
</TABLE>
- --------------------
(1) Net of undisbursed loan funds and deferred fees and costs.
Almost all of the Company's lending activity is in Southern
California and a substantial majority of its loans are secured by real estate
located in that area. Accordingly, the Company has been adversely affected by
the recessionary environment which has had and may continue to have a generally
adverse effect on that region.
26
<PAGE> 28
Maturities and Sensitivity to Changes in Interest Rates
The following table sets forth the maturity distribution of the
Company's loan portfolio at December 31, 1995 (dollars in thousands).
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------------------------
After One After Five After
Within But Within But Within Ten
One Year Five Years Ten Years Years Total
-------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Real estate -
construction
and development............. $ 6,224 $ 1,592 $ -- $ -- $ 7,816
Real estate -
mortgage . ................. 5,837 5,053 4,471 2,297 17,658
Commercial,
industrial and
agricultural................ 22,974 15,260 2,579 1,729 42,542
Loan to individuals
for personal
expenditures................ 2,493 1,478 -- -- 3,971
All other loans............... 419 -- -- -- 419
------ -------- ------- ------ --------
Total loans (1)............. $37,947 $23,383 $ 7,050 $4,026 $ 72,406
======= ======= ======= ====== ========
</TABLE>
- --------------
(1) Net of undisbursed loan funds and deferred fees and costs.
The following table sets forth the maturity distribution of the
Company's loan portfolio by type of interest rate at December 31, 1995 (dollars
in thousands).
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------------------------------
After One After Five After
Within But Within But Within Ten
One Year Five Years Ten Years Years Total
-------- ---------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Fixed
interest rates.............. $ 9,420 $ 5,073 $ 2,660 $1,911 $ 19,064
Floating or
adjustable
interest rates.............. 28,527 18,310 4,390 2,115 53,342
------- ------- ------- ------ --------
Total loans(1).............. $37,947 $23,383 $ 7,050 $4,026 $ 72,406
======= ======= ======= ====== ========
</TABLE>
- --------------------
(1) Net of undisbursed loan funds and deferred fees and costs.
27
<PAGE> 29
Nonperforming Assets
The Company's consolidated loan portfolio is comprised primarily
of the Bank's loan portfolio. Approximately 4% of the Company's consolidated
loan portfolio at December 31, 1995 is comprised of Business Credit's loan
portfolio. The risk of non-payment of loans is an inherent aspect of commercial
banking. The degree of perceived risk is taken into account in establishing the
structure of, interest rates on and security for specific loans and for various
types of loans, and, in some cases results in the Bank changing its lending
policies. During 1994 the Bank, in response to the recessionary environment in
Southern California and the decline in real estate values, revised its real
estate lending policy to reduce the maximum amount which it would lend on real
estate collateralized loans and to increase the pricing on and reduce the amount
of funds available for loans secured by junior liens on real estate collateral.
The Bank and Business Credit attempt to minimize their credit risk exposure by
using thorough loan application and approval procedures. Lending officers of the
Bank have been assigned lending authority for up to $10,000 on an unsecured
basis. Three executive officers of the Bank have lending authority up to
$50,000. Loans which exceed $50,000 are submitted for approval to the Bank's
Loan Committee. The Bank's loan portfolio is continually reviewed by loan
officers, the Chief Credit Officer, and the Board of Directors' Audit and Loan
Committees. The performance of loans is evaluated on the basis of a thorough
review of each borrower's overall creditworthiness, collateral, and other
elements which in the judgment of officers and senior management demonstrate the
ability of the borrower to continue in business and to meet the repayment terms
of the loan(s). If subsequent events lead to a reasonable doubt as to the
repayment of a loan in accordance with the agreed upon repayment terms, even
though the financial condition of the borrower or the collateral may ultimately
be sufficient to reduce or satisfy the obligation, the loan may be placed on a
non-accrual basis pending sale of any collateral or the determination that other
sources of repayment exist. When a loan is placed on a non-accrual basis, income
recognition is discontinued. No further interest income is recognized on such
loans until a subsequent determination removes doubt as to collectibility.
It is the current policy of the Bank and Business Credit to place
loans which are unpaid 90 days past their maturity date, or loans which have
principal or interest payments 90 days past due, on a non-accrual status unless
a determination is made upon evaluation of the collateral or other circumstances
indicate that the Bank or Business Credit, as the case may be, will be able to
recover all principal and accrued interest.
28
<PAGE> 30
The following table summarizes nonperforming loans by (1) loan
past due 90 days or more and not on non-accrual, (2) loans accounted for on a
non-accrual basis and (3) troubled debt restructured loans on which terms have
been renegotiated and below market concessions granted to debtors for reasons
related to the debtor's financial difficulty at the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
------ ------
<S> <C> <C>
Accruing loans past due 90 days
or more $ 25 $ --
Non-accrual loans 2,539 1,730
------ ------
$2,564 $1,730
====== ======
</TABLE>
Non-performing loans, comprised of non-accrual loans and accruing
loans past due 90 days or more, consisted of six non-accrual loans and one
accruing loan which was past due 90 days or more. One loan for $1.1 million is
secured by junior liens on an office building in Long Beach. During the first
quarter of 1996 this loan was paid down by approximately $0.8 million. Three
loans totaling $0.5 million are secured by single family residences. One loan
for $0.2 million is secured by a second trust deed on a commercial building and
one loan for $0.8 million is secured by a first trust deed on land in Palmdale.
The risk inherent in these loans, the strength of the collateral and guarantees
securing them as well as the stablizing real estate values in Southern
California has been taken into consideration in determining the adequacy of the
allowance for loan losses. A substantial portion of the chargeoffs recorded in
past years has been related to large loans on high-value single family
residences which have decreased substantially in value in Southern California.
The current loan portfolio has a reduced exposure to such losses.
In addition to the loans shown in the above table there were
eleven loans for a total of $2.1 million for which the Bank is concerned about
the ability of the borrower to continue to meet their obligations under the loan
agreement. Two of these loans for a total of $1.3 million are secured by first
trust deeds on apartment buildings, five loans, for a total of $0.5 million, are
unsecured, one loan, for $0.1 million is secured by a junior lien on a single
family residence, one loan, for $0.1 million is secured by a first trust deed on
a commercial property and the remaining two loans for a total of $0.1 million
are secured by liens on other property. There were no other loans at December
31, 1995 where the known credit problems of a borrower caused the Bank, BSC or
Business Credit to have serious doubts as to the borrower's ability to comply
with the present loan repayment terms and which would result in such loan being
included as a non-accrual, past due or restructured loan at some future date.
Neither the Bank, BSC nor Business Credit has made loans to borrowers outside
the United States.
The amount of interest income foregone in 1995 and 1994 on
non-accrual loans was $108,000 and $232,000, respectively. The amount of
interest actually included in income in 1995 and 1994 on non-accrual loans was
$114,000 and $10,000, respectively.
29
<PAGE> 31
In addition to the loans shown above the Company had real estate
held for sale of $4.4 million at December 31, 1995 as compared to $7.8 million
at December 31, 1994. The Company is carrying these properties at fair value,
less estimated selling costs and less a valuation allowance which amounted to
$1,100,000 and $218,000 at December 31, 1995 and 1994, respectively. Most of
these properties were acquired as a result of foreclosures on defaulted loans.
These foreclosures generally occurred as a result of the recessionary
environment in Southern California. Properties held at December 31, 1995 include
three apartment buildings, twelve single family residences, two condominium
apartments, three residential lots, one commercial building, one duplex and one
residential lot development. Subsequent to December 31, 1995 two of the
condominium apartments and four of the single family residences with a total
book value of $0.6 million were sold at amounts approximating book value. While
management does not expect any substantial additional losses on the sale of the
remaining properties in excess of the allowances already provided in the
consolidated financial statements, because of the fact that 73% 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.
Summary of Loan Loss Experience
The Bank and Business Credit each maintain an allowance for loan
losses, which is reduced by net loan charge-offs and increased by the provision
for loan losses charged to operating expense. The amount of additions to the
provision for loan losses and the level of the allowance for loan losses are
based upon the Bank's and Business Credit's loan loss experience, the
performance of loans in the Bank's and Business Credit's respective portfolios,
evaluations of collateral for such loans, the prospects and financial condition
of the respective borrowers or guarantors, general economic conditions, and such
other factors as, in management's judgment, deserve current recognition in the
estimation of probable loan losses.
While management believes it has adequately provided for losses
and does not expect any material loss on the above loans in excess of allowances
already recorded in the consolidated financial statements, no assurance can be
given that additional loans will not become delinquent or that the collateral
for such loans will be sufficient to prevent losses in the event of foreclosure.
Management believes that the allowance for loan losses of $1.5
million or approximately 2.09% of total loans at December 31, 1995 was adequate
to absorb known and inherent risks in the loan portfolio. No assurance can be
given, however, that economic conditions which may adversely affect the Bank's
or Business Credit's service areas or other circumstances will not be reflected
in increased losses in the Bank's or Business Credit's loan portfolio. 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. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Capital Resources."
30
<PAGE> 32
The following tables show the allowance for loan losses, loans
charged off, recoveries on loans previously charged off, the amount of the
provision for loan losses charged to operating expense, the loans outstanding,
and certain pertinent ratios as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at beginning of period ...... $ 1,613 $ 1,899
Less: allowance related to sold
Business Credit loans ...... (550) --
Loans charged-off:
Real estate - mortgage ........... (689) (557)
Loans to individuals for
personal expenditures ......... (26) (10)
-------- --------
Total loans charged-off . (715) (567)
Recoveries on loans charged-off:
Commercial, industrial and
agricultural loans ............ -- 15
Loans to individuals for
personal expenditures ......... 58 --
-------- --------
Total recoveries ........ 58 15
-------- --------
Net charge-offs ..................... (657) (552)
Provision for loan losses ........... 1,104 266
-------- --------
Balance at end of period ............ $ 1,510 $ 1,613
======== ========
Total loans
Average .......................... $ 72,503 $ 90,078
At end of period (1) ............. $ 72,406 $ 91,075
Ratios:
Net charge-offs
to average total loans ........ 0.80% 0.61%
Allowance for loan losses
to total loans at end of period 2.09% 1.77%
Allowance for loan losses
as a % of nonperforming loans .. 59.47% 93.24%
</TABLE>
- ------------------
(1) Net of undisbursed loan funds and deferred fees and costs.
31
<PAGE> 33
The allowance for loan losses should not be interpreted as an
indication that charge-offs will occur in these amounts or proportions, or that
the allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories, since, as previously stated, the
total allocation and provision is a general allocation and provision applicable
to the entire portfolio. The Company has established a separate general
valuation allowance for real estate held for sale which amounted to $1.1 million
at December 31, 1995 and which is not included in the allowance for loan losses.
An allocation of the allowance for loan losses to the major loan
categories has been made for the purposes of this report as set forth in the
following table (dollars in thousands). The allocations are estimates based upon
the same factors as considered by management in determining the amount of
additional provisions to the allowance for loan losses and the aggregate level
of the allowance for loan losses.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1995 1994
------------------------------- ---------------------------------
Percent Percent
of Loans of Loans
Allowance in each Allowance in each
for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Real estate -
construction and
development...................... $ 178 10.9% $ 154 6.0%
Real estate -
mortgage . ...................... 806 24.4 533 24.7
Commercial, industrial
and agricultural................. 468 58.8 869 65.1
Loans to individuals
for personal
expenditures...................... 55 5.5 52 3.7
All other loans..................... 3 0.4 5 0.5
------ ------ ------ ------
Total....................... $1,510 100.0% $1,613 100.00%
====== ====== ====== ======
</TABLE>
32
<PAGE> 34
Deposits
The average amounts of deposits, together with average rates paid
thereon, are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Average Average Average Average
Balance Rate Paid Balance Rate Paid
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Demand deposits................... $ 30,360 -- % $ 29,049 -- %
Savings deposits (1).............. 55,088 4.82 50,433 3.70
Money market accounts............. 7,823 1.78 12,521 1.84
Time deposits..................... 7,623 4.33 19,629 3.36
-------- --------
Total..................... $100,894 3.10% $111,632 2.47%
======== ========
</TABLE>
- ------------------
(1) Includes NOW Accounts.
The remaining maturities of the certificates of deposit $100,000
or more at December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<S> <C>
3 months or less . . . . . . . $ 2,150
Over 3 through 6 months. . . . --
Over 6 through 12 months . . . 1,131
Over 12 months . . . . . . . . --
-------
Total. . . . . . . . . . . . . $ 3,281
=======
</TABLE>
Return on Equity and Assets
The following table sets forth certain information with respect
to the Company's operations.
<TABLE>
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
Ratio of net loss to:
Average stockholders' equity.................... (34.40)% (23.81)%
Average assets.................................. (2.75)% (2.00)%
Ratio of average stockholders'
equity to average total assets ....................... 8.00 % 8.41 %
Ratio of average total assets to
average stockholders' equity.......................... 12.44 X 11.89 X
Ratio of cash dividends declared
per share to net income per share .................... N/A N/A
</TABLE>
33
<PAGE> 35
Short-Term Borrowings
At December 31, 1995, the Company had short-term borrowings in
the form of secured borrowings from financial institutions of $1.4 million. The
weighted average interest rate of such borrowings was approximately 10.54%. At
December 31, 1994, the Company had short-term borrowings in the form of secured
borrowings from financial institutions of $10.1 million and unsecured borrowings
from individuals and non-financial institutions of $0.3 million. The weighted
average interest rate of such borrowings was 10.23% for the year ended December
31, 1994. The short-term borrowings from financial institutions were outstanding
at December 31, 1995 under a $1.5 million line of credit from First Capital
Corporation ("FCC") and at December 31, 1994 under a $15 million line of credit
from SPBC, in both cases collateralized by the loan portfolio of Business
Credit. The loan agreement with FCC provides for interest to be charged at the
rate of 1-3/4% over the prime rate charged, from time to time, by NatWest Bank
N.A. ("NatWest") based on the daily outstanding loan balance of Business Credit.
NatWest's prime rate was 8.50% at December 31, 1995. The line of credit matures
September 7, 1996.
Business Credit is in the process of liquidating its assets and
expects to either not have need of a line of credit after September 7, 1996 or
to be able to renew its line of credit from FCC in September of 1996. Business
Credit believes that other sources of credit are available, but it is not known
whether the terms and conditions that such lenders might require would be more
unfavorable to Business Credit than those existing under the FCC line of credit.
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Sources of Funds -- and -- Sale of Business Credit
Assets."
The short-term borrowings from individuals and non-financial
institutions of $0.3 million at December 31, 1994 represent commercial paper
notes. In the ordinary course of business, the Company from time to time issued
individual commercial paper notes of $25,000 or larger with maturities of 30 to
270 days. Commercial paper notes outstanding at December 31, 1994 paid interest
at variable interest rates of 1% over Bank of America's prime rate and had a
maturity date of January 31, 1995. The Company no longer issues commercial paper
notes and does not expect to resume issuing such notes in the near future.
During 1986 and 1992, the Company privately placed variable rate
notes with three year and seven year maturities. At December 31, 1994, the
Company had outstanding $982,000 of three year notes maturing June 1, 1995,
$184,000 of seven year notes originally maturing September 30, 1993 and extended
to September 30, 1996, $164,000 of seven year notes maturing June 1, 1999 and
$163,000 of seven year convertible notes maturing June 1, 1999. All of these
notes were paid off in June or September of 1995.
The maximum amounts of short-term borrowings at any month end
during 1995 and 1994 were $11.4 million and $11.6 million, respectively. The
approximate average amounts outstanding during 1995 and 1994 were $7.7 million
and $10.7 million, respectively, and the
34
<PAGE> 36
approximate weighted average interest rates thereon during 1995 and 1994 were
10.54% and 10.33%, respectively.
Asset/Liability Management
The Company's policy is to closely match its level of rate
sensitive assets and rate sensitive liabilities within a limited range thereby
reducing its exposure to interest rate fluctuations. In connection with the
asset and liability management objectives, various plans have been put into
effect including changes in the composition of assets and liabilities and the
initiation and emphasis on adjustable and floating rate loan programs to achieve
a closer match between assets and liabilities with various maturities or
repricing characteristics as considered desirable. Generally, when rate
sensitive assets exceed rate sensitive liabilities, the net interest margin is
expected to be positively impacted during periods of increasing interest rates
and negatively impacted during periods of decreasing interest rates, and
conversely when rate sensitive liabilities exceed rate sensitive assets, net
interest margin is expected to be negatively impacted during periods of
increasing interest rates and positively impacted during periods of decreasing
interest rates.
The year 1995 was a period of generally higher interest rates
than 1994 and the Company's rate sensitive assets exceeded its rate sensitive
liabilities at December 31, 1995, and generally throughout 1995. However, the
lower volume of loans, primarily as a result of the sale of substantially all
the loans of Sterling Business Credit, Inc., resulted in a lower net interest
income in 1995 than in 1994. The net interest income was also impacted by the
fact that the Company obtained a larger portion of its funding from higher cost
savings deposits which were tied to the prime rate.
The following table sets forth information concerning interest
rate sensitivity of the Company's consolidated assets and liabilities as of
December 31, 1995 (dollars in thousands). Assets and liabilities are classified
by the earliest possible repricing date or maturity, whichever comes first.
35
<PAGE> 37
<TABLE>
<CAPTION>
Non-rate
Immediate Three Sensitive
Through Three Through Six Through & Over
Months Six Months Twelve Months Twelve Months Total
------ ---------- ------------- ------------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Investment securities ........... $ -- $ 250 $ 2,711 $ 4,653 $ 7,614
Federal funds sold .............. 24,000 -- -- -- 24,000
Loan receivable ................. 51,477 4,323 6,363 10,243 72,406
Allowance for loan losses ....... -- -- -- (1,510) (1,510)
Noninterest-earning assets ...... -- -- -- 19,042 19,042
Assets of discontinued operations -- -- -- 867 867
------ ------- -------- ---------
Total Assets .................. $75,477 $4,573 $ 9,074 $ 33,295 $ 122,419
=========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Noninterest-bearing deposits .... $ -- -- -- 37,598 37,598(1)
Interest-bearing deposits ....... 71,293 204 1,632 1,650 74,779
Short-term borrowings ........... 1,372 -- -- -- 1,372
Other liabilities ............... -- -- -- 1,752 1,752
Stockholders' equity ............ -- -- -- 6,918 6,918
------- ------ ------- -------- ---------
Total liabilities and
stockholders' equity ....... $72,665 $ 204 $ 1,632 $ 47,918 $ 122,419
=========
Interest rate sensitivity
gap ........................... $ 2,812 $4,369 $ 7,442 $(14,623)
======= ====== ======= ========
Cumulative interest rate
sensitivity gap ............... $ 2,812 $7,181 $14,623 --
======= ====== ======= ========
</TABLE>
- -----------------------------
(1) Non-interest earning deposits are categorized as non-rate sensitive & over
twelve months due to the Company's experience with these deposits as
long-term depository relationships and their non-rate sensitive nature.
36
<PAGE> 38
ITEM 2. PROPERTIES.
The Company's, Business Credit's and the Bank's head offices are
located at the Wilshire Center Office at 3287 Wilshire Boulevard, Los Angeles,
California. The Bank leases 16,500 square feet of a three-story building under a
twenty-five year lease which expires June 2, 2005. The Company and Business
Credit occupy office space within the premises leased by the Bank. The total
lease payment is currently $36,663 per month and the total lease expense was
$434,820 and $434,820 for the years 1995 and 1994, respectively.
Except for the Mid-Valley Branch Office, which is owned by the
Bank, all regional branch properties in most instances include options to renew.
For the year ended December 31, 1995, annual rental payments under these leases
aggregated $155,330. The Mid-Valley Branch Office is not subject to any
encumbrances.
The Company's total rental expense for the year ended December 31,
1995, exclusive of furniture and equipment expense, was approximately $0.6
million. Management believes that its existing facilities are adequate for its
present purposes.
ITEM 3. LEGAL PROCEEDINGS.
The Company, BSC, Bank and Business Credit are involved in various
legal proceedings and litigation in the normal course of their business. See
"ITEM 1. BUSINESS Supervision and Regulation -- The Bank" and "-- The Company,"
for a discussion of the FDIC Memorandum between the Board of Directors of the
Bank and the FDIC; and the FRB Memorandum between the Board of Directors of the
Company and the Federal Reserve Bank. While no assurance can be given as to the
likelihood of an unfavorable outcome of any such litigation or the estimated
amount of potential loss, if any, based upon currently available information the
Company does not believe that the outcome of such litigation will have a
material adverse effect on the results of operations or financial condition of
the Company.
37
<PAGE> 39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
ITEM 4(A). EXECUTIVE OFFICERS OF REGISTRANT.
As of March 15, 1996, the executive officers of the Company were:
<TABLE>
<CAPTION>
Current Position with
Name Age Company and its Subsidiaries
---- --- ----------------------------
<S> <C> <C>
Robert A. Brito 44 Executive Vice President-Chief Credit Officer,
Sterling Bank; President, Sterling Business Credit,
Inc.
Joseph C. Carona 54 Executive Vice President, Company; President,
Sterling Bank
James R. Chappell 54 Chief Financial Officer and Cashier, Sterling Bank
Allan E. Dalshaug 63 Chairman of the Board, Chief Executive Officer and
President, Company; Chairman of the Board and
Chief Executive Officer, Sterling Bank; Chairman of
the Board, Chief Executive Officer, Sterling
Business Credit, Inc.
Paul Leichenger 68 Chief Financial Officer, Sterling Business Credit, Inc.
Senior Vice-President, Sterling Bank
</TABLE>
Mr. Brito was Executive Vice President and Chief Credit Officer of
Columbia National Bank, a national banking association located in Santa Monica,
California, from October 1982 until joining Sterling Bank as Executive Vice
President and Chief Credit Officer in August 1989.
Mr. Carona was President of Columbia National Bank, a national
banking association located in Santa Monica, California, from May 1982 until
joining Sterling Bank as President in August 1989. Mr. Carona became an
Executive Vice President of the Company in January 1991.
Mr. Chappell joined Sterling Bank in June of 1988 as
Vice-president-Cashier until March of 1996 at which time he assumed his current
position.
38
<PAGE> 40
Mr. Dalshaug has served as Chairman of the Board, Chief Executive
Officer and President of the Company since 1982. Mr. Dalshaug also serves as
Chief Executive Officer of the Bank and Business Credit, and, prior to 1989,
served in the additional capacity of President of Sterling Bank.
Mr. Leichenger was retired from Standard Capital Corporation, until
joining Sterling Bank as Senior Vice-President of Asset Based Lending in
November 1989, and has served in that capacity until March 1996 at which time he
assumed his current position with Sterling Business Credit, Inc.
39
<PAGE> 41
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Since July 1992 the common stock of the Company has traded on The
Nasdaq Stock Market as a National Market Issue under the symbol SWBC. From
October 1989 to July 1992 Sutro & Co. Incorporated and Wedbush Morgan
Securities, Inc. made a market in the Company's stock. The number of
shareholders of record at March 15, 1996 was approximately 418.
The following table sets forth high and low sales prices for the
Company's common stock for the period from January 1, 1994 to December 31, 1995
as reported by The Nasdaq Stock Market:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 31, 1994 $4.13 $2.00
June 30, 1994 $3.75 $2.00
September 30, 1994 $3.00 $1.75
December 31, 1994 $3.00 $1.25
March 31, 1995 $2.00 $1.25
June 30, 1995 $3.00 $1.25
September 30, 1995 $3.00 $1.75
December 31, 1995 $3.25 $2.25
</TABLE>
The Company declared no cash dividends in 1994 or 1995. The
Board of Directors suspended the quarterly cash dividends of $0.05 per common
share in the third quarter of 1993 in order to conserve capital. The Company
expects that future dividends will depend on a return to profitability and the
maintenance of acceptable financial results in the future. There are
restrictions on the ability of the Company's subsidiaries to transfer funds to
the Company in the form of dividends. See "ITEM 1. BUSINESS -- Supervision and
Regulation -- Restrictions on Transfers of Funds to the Company by the Bank and
Business Credit" and "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Note
15 to Consolidated Financial Statements."
40
<PAGE> 42
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations
Interest income .......................... $ 12,380,000 $ 12,436,000 $ 13,396,000 $ 14,676,000 $ 17,179,000
Interest expense ......................... 4,208,000 3,986,000 4,045,000 4,786,000 7,038,000
Net interest income ..................... 8,172,000 8,450,000 9,351,000 9,890,000 10,141,000
Provision for loan
losses ................................ 1,104,000 266,000 1,025,000 815,000 455,000
Income (loss) from continuing operations . (1,515,000) 29,000 (99,000) (507,000) 567,000
Income (loss) from discontinued operations (1,924,000) (2,904,000) (667,000) 374,000 1,415,000
Net income (loss) (1) .................... (3,439,000) (2,875,000) (366,000) (133,000) 1,982,000
Per share (2)(3):
Net income (loss) (1) ................. (2.01) (1.68) (0.22) (0.08) 1.16
Cash dividends ........................ -- -- 0.10 0.19 0.14
Consolidated Balance Sheets
Total assets ............................. $ 122,419,000 $ 132,491,000 $ 153,018,000 $ 174,752,000 $177,754,000
Total loans (4) .......................... 72,406,000 91,075,000 91,061,000 120,268,000 118,782,000
Allowance for loan losses ................ 1,510,000 1,613,000 1,899,000 1,980,000 1,792,000
Investment securities .................... 7,614,000 6,974,000 7,587,000 7,807,000 8,733,000
Total deposits ........................... 112,377,000 107,098,000 122,511,000 133,238,000 130,946,000
Stockholders' equity ..................... 6,918,000 10,357,000 13,232,000 13,589,000 14,020,000
</TABLE>
- ------------
(1) Net loss for 1993 includes income of $400,000 or $0.23 per share related to
the cumulative effect of a change in accounting for income taxes.
(2) Where appropriate, per share data have been retroactively adjusted to
reflect a 5% stock dividend paid in October 1993, a 5% stock dividend paid
in November 1990.
(3) Income (loss) per share from discontinued operations was $(1.13), $(1.70),
$(0.39) and $0.41 for 1995, 1994, 1993 and 1992, respectively.
(4) Gross loans net of undisbursed loan funds and deferred fees and costs.
41
<PAGE> 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion is intended to provide a better
understanding of the significant changes in trends relating to the Company's
financial condition and results of operations. Management's discussion and
analysis should be read in conjunction with the accompanying Consolidated
Financial Statements of the Company and related notes.
The discussion and analysis for the three years ended December 31,
1995 reflect the operations of the Company's subsidiary companies. See "ITEM 1.
BUSINESS." During the third quarter of 1995, the Company sold substantially all
of the assets of Sterling Business Credit, Inc. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Sale
of Business Credit Assets." This sale of Business Credit assets was instituted
in order to raise capital to meet capital requirements previously imposed by
regulators on the Bank due to losses in the mortgage banking subsidiary, and to
take advantage of an opportunity to make a substantial premium on the sale. The
Company made the decision to discontinue the mortgage banking operations and
sell the Business Credit assets in order to allow the Company to concentrate on
the core business of banking. In addition, the Company believes that those
actions will provide the basis for improved operating performance in 1996.
During the fourth quarter of 1994 the Company discontinued its mortgage banking
operations, substantially all of which were performed by BSC. "See ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Discontinued Operations". Unless otherwise specified, the
discussion below relates to the Company's consolidated financial condition and
operations.
42
<PAGE> 44
Results of Operations
Net Loss
The Company posted a net loss of $3.4 million in 1995 compared with
net losses of $2.9 million in 1994 and $0.4 million in 1993. The primary reasons
for the net loss in 1995 were the $2.1 million charge, excluding income tax
benefit, representing a settlement during 1995 of a dispute over repurchase
liability relating to mortgage loans originated by BSC, whose operations were
discontinued during the fourth quarter of 1994 (see "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Discontinued Operations"), losses of $2.7 million on the sale or writedown of
real estate held for sale, and loan loss provisions of $1.1 million at the Bank.
These losses more than offset the $1.5 million gain on the sale of assets by
Business Credit during 1995. Additionally, the Company chose not to take full
financial statement benefit for operating losses at the Bank because of
uncertainty as to whether such benefit would be realized in the future. The
Company had a loss from continuing operations of $1,515,000 compared with income
from continuing operations of $29,000 in 1994, and a loss from continuing
operations of $99,000 in 1993. The Company's 1993 results also include a $0.4
million income tax benefit recorded upon implementation of SFAS No. 109 in the
first quarter of 1993.
Net Interest Income
A significant component of the Company's operations is net interest
income, which is the difference between interest and fees received on earning
assets and interest paid on deposits and other sources of funds. Net interest
income, when expressed as a percentage of average total interest earning assets,
is referred to as the net interest margin. The Company's net interest income is
affected by the change in the amount and mix of interest-earning assets and
interest-bearing liabilities. It is also affected by changes in yields earned on
interest-earning assets and rates paid on deposits and other borrowed funds.
Approximately 73% of the Bank's loan portfolio adjusts with the prime rate. See
"ITEM 1. BUSINESS -- Statistical Disclosure -- Analysis of Changes in Net
Interest Income and Expense." A comparison of net interest income and net
interest margin for the past three years is shown in the table below (dollars in
thousands).
<TABLE>
<CAPTION>
Incr Incr
1995 (Decr) 1994 (Decr) 1993
------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Interest income $12,380 (0.5)% $12,436 (7.2)% $13,396
Interest expense $ 4,208 5.6 3,986 (1.5) 4,045
------- ------- -------
Net interest income $ 8,172 (3.3) $ 8,450 (9.6) $ 9,351
======= ======= =======
Net interest margin 7.80% 7.71% 7.39%
</TABLE>
The year 1995 was a period of generally higher interest rates than 1994
and the Company's rate sensitive assets exceeded its rate sensitive liabilities
at December 31, 1995, and generally throughout 1995. The 3.9% decrease in net
interest income for the year ended December 31, 1995 from the year ended
December 31, 1994 was due primarily to an increase in the average rate
43
<PAGE> 45
paid on interest bearing liabilities of 1.1%, and a decrease in the average
volume of interest earning assets of $10.7 million. Loans outstanding decreased
primarily as a result of the sale of most of the loans of Business Credit. The
Company obtained a larger portion of its funding from higher cost savings
deposits tied to the prime rate, which was higher in 1995 (4.82%) than 1994
(3.70%). In the fourth quarter of 1995, the Bank changed the rate it pays on
"prime savings accounts" to the prime rate posted in the Wall Street Journal
less 4%; however, during most of 1995 it paid the prime rate less 3.5% on such
deposits.
The 9.6% decrease in net interest income for the year ended December 31,
1994 from the year ended December 31, 1993 was due primarily to the lower volume
of loans outstanding during the year which was only partially offset by a higher
yield on those loans. Average net loans decreased to $88.6 million in 1994
compared to $109.2 million in 1993, a decrease of 19.0%. Loan yield was
increased from 11.53% in 1993 to 12.85% in 1994. The increased yield was
attributable to a lower level of nonaccrual loans and to a rising prime rate
during 1994. A decrease in deposit volume that more than offset an increase in
rates paid contributed to the 1.5% decrease in interest expense.
Provision for 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. See "ITEM 1. BUSINESS --
Statistical Disclosure -- Summary of Loan Loss Experience." 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 Company's loan portfolio, including a
substantial portion of its commercial, industrial and agricultural loans, is
secured by real estate collateral, substantially all of which is located in
Southern California. While in most cases the amount of the loan is less than 75%
of the appraised value of the property or the cost of the project, the Company
has suffered from the effects of the downturn in the real estate market and
continues to be vulnerable to further such downturns. See "ITEM 1. BUSINESS. --
Economic Environment".
The Company recorded a loan loss provision in 1995 of $1,104,000
compared to $266,000 in 1994 and $1,025,000 in 1993. The 1995 provision was
higher than 1994 because of higher levels of non-performing loans, foreclosures
on defaulted loans and charge-offs. The 1994 provision was lower than 1993
because of an improvement in the Company's loan portfolio during 1994, as
demonstrated by a lower level of foreclosures on defaulted loans at the Bank and
at Business Credit and a decrease in non-accrual loans. Net charge-offs for
1995, 1994 and 1993
44
<PAGE> 46
were approximately $657,000, $552,000 and $1,106,000, respectively. The
allowance for loan losses at December 31, 1995 was $1.5 million compared with
$1.6 million and $1.9 million at December 31, 1994 and 1993, respectively. The
ratio of the allowance for loan losses to total loans was 2.09%, 1.77% and 2.09%
at December 31, 1995, 1994 and 1993, respectively.
Non-performing loans, comprised of six non-accrual loans and one
accruing loan past due 90 days or more, increased to $2.6 million at December
31, 1995 from $1.7 million at December 31, 1994. One loan for $1.1 million is
secured by junior liens on an office building in Long Beach. During the first
quarter of 1996 this loan was paid down by approximately $0.8 million. Three
loans totaling $0.5 million are secured by single family residences. One loan
for $0.8 million is secured by a first trust deed on land in Palmdale and one
loan for $0.2 million is secured by a second trust deed on a commercial
building. The risk inherent in these loans, the strength of the collateral and
guarantees securing them as well as changes in real estate values in Southern
California have been taken into consideration in determining the adequacy of the
allowance for loan losses. The allowance for loan losses as a percentage of
nonperforming loans was 59% and 93% on December 31, 1995 and 1994, respectively.
The Company has established a separate allowance for losses on real estate held
for sale which amounted to $1,100,000 and $218,000 at December 31, 1995 and 1994
respectively, which amounts were 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 December 31, 1995 was adequate to absorb known and inherent risks in
the loan portfolio. However, given the uncertainties 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.
45
<PAGE> 47
Non-Interest Income
The following table sets forth information by category of
non-interest income for the Company for the past three years (dollars in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service charges on deposit
accounts ............... $ 319 $278 $ 456
Gain on sale of SBA loans 133 69 420
Gain on sale of
Business Credit Assets 1,504 -- --
Other .................... 518 578 562
------ ---- ------
Total .............. $2,474 $925 $1,438
====== ==== ======
</TABLE>
Non-interest income increased by $1.5 million to 2.5 million in
1995 from $0.9 million in 1994 primarily as a result of the gain on sale of
Business Credit assets. The Company recorded a net gain of $1.5 million on the
sale. See "RESULTS OF OPERATIONS - Sale of Business Credit Assets". In addition,
the Bank recorded an increase in the origination of loans guaranteed by the SBA
and an increase in the gain on sale of such loans to $133,000 in 1995 from
$69,000 in 1994.
Non-interest income decreased by 35.7% in 1994 from 1993 primarily
as a result of a decrease in the origination of loans guaranteed by the SBA and
in the gain on sale of such loans from $420,000 in 1993 to $69,000 in 1994. In
addition service charges from deposit accounts decreased as a result of entering
into balance agreements with clients with abnormally high service charges.
Sale of Business Credit Assets
During the third quarter of 1995, the Company sold substantially
all the assets of Business Credit. The sale of Business Credit assets was
instituted, in order to raise capital to meet capital requirements previously
imposed by regulators on the Bank, due to losses in the mortgage banking
subsidiary, and to take advantage of an opportunity to make a substantial
premium on the sale at this time in the market. Approximately $15.2 million of
Business Credit loans were sold to First Capital Corporation in a transaction
which resulted in a $1.5 million gain, after deducting expenses relating to the
transaction. Business Credit retained approximately $3.4 million of loans and
other assets which it is in the process of liquidating. At December 31, 1995
most of these assets were still retained by Business Credit. However, in the
first quarter of 1996, loan payoffs amounting to approximately $1.7 million were
received. The Company is continuing to pursue liquidation of the remaining
assets and expects to do so at the book value of those assets. During
46
<PAGE> 48
1995 Business Credit was responsible for $0.8 million of the total net revenues
of the Company and 10.19% of the total average assets. See "Financial Condition
- -- Sources of Funds."
Non-Interest Expense
Non-interest expense as a percentage of average total assets was
8.1% in 1995, compared with 6.31% in 1994 and 5.94% in 1993. Excluding real
estate operations, net, non-interest expense as a percentage of average total
assets was 5.92% in 1995, compared with 5.40% in 1994 and 5.28% in 1993.
Non-interest expense increased to $10.1 million in 1995 from 9.1
million in 1994. The Company reduced assets through the sale of most of the
assets of Business Credit, and the Bank reduced assets by $10.1 million, which
was accompanied by reductions in employees, salaries, wages and employee
benefits. Occupancy costs were also reduced as the Bank experienced a full year
of the benefit of branch closures and relocations effected in 1994. However, the
$1.1 million increase in non-interest expense in 1995 was primarily due to $2.7
million of expenses for real estate operations, net, a $1.4 million increase
over 1994. In addition, during 1995 the Company incurred writedowns and losses
of $2.6 million on other real estate owned and expended $75,000 for the
maintenance and operation of such properties. During 1995 the Company sold 10
foreclosed properties and held a valuation allowance on real estate held for
sale at December 31, 1995 of $1.1 million. The increase in furniture and
equipment costs resulted from the Bank's implementation of a remote area network
utilizing personal computers. The increase in other non-interest expense was due
to increases in professional, consulting and legal expenses.
Non-interest expense decreased $0.9 million in 1994 from 1993 as
the Bank reduced assets in order to maintain satisfactory capital ratios. The
asset reduction was accompanied by reductions in employees and in salaries,
wages and employee benefits. Occupancy costs were reduced as the Bank closed its
Santa Monica branch and relocated branches in Encino and Glendale at reduced
rentals. The continued high level of non-interest expense in 1994 was primarily
due to the $1.3 million of expenses for real estate operations, net, a $0.2
million increase over 1993.
Income Taxes
Income tax expense from continuing operations for 1995 amounted to
$929,000 compared to benefits of $17,000 in 1994 and $0.1 million in 1993. The
large income tax provision in 1995 was related to the substantial income from
the sale of assets of Business Credit, which was not offset by income tax
benefits at the Bank because of uncertainty as to the Bank's ability to realize
such benefits in the future.
In February 1992, the FASB issued Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The Statement requires a
change to the liability method of accounting for temporary differences in the
financial and tax bases of assets and
47
<PAGE> 49
liabilities. The effective date of Statement No. 109 is for fiscal years
beginning after 1992. The Company recorded an income statement benefit of
approximately $0.4 million upon implementation of SFAS No. 109 in the first
quarter of 1993. See "ITEM 1. BUSINESS -- Effect of Governmental Policies and
Recent Legislation -- Recent Accounting Pronouncements."
Discontinued Operations
As a result of continued losses from operations, higher interest
rates and the generally poor market for residential mortgage loans, the Company,
in the fourth quarter of 1994, discontinued its mortgage banking operations. The
Company recorded an after tax loss in 1994 from discontinued operations of $2.9
million, which was comprised of a $0.6 million loss from discontinuing the
mortgage banking operation, and $2.3 million in after tax losses incurred by the
mortgage banking operation prior to its closing. Included in the closure charge
and the loss in 1994 was an estimate for future repurchase liability.
During 1995, the Company significantly reduced its exposure to
future repurchase liability, by settling a dispute over repurchase liability
relating to mortgage loans originated by BSC. As a result of the settlement, an
additional $2.1 million charge, excluding income tax benefit, was incurred
representing substantially all of the loss from discontinued operations for
1995.
The Company has reclassified the prior years mortgage banking
operations and presented them as "Loss from discontinued operations" on the
Consolidated Statements of Operations. Assets of the mortgage banking operations
are presented as "Assets of discontinued operations" in the consolidated
financial statements.
The Company will continue to be responsible for representations and
warranties made by the Bank and BSC in the sale of mortgage loans originated by
BSC. At December 31, 1995 the Company had outstanding repurchase requests
relating to loans with a principal balance of $380,000 and requests from
investors to make them whole ("make wholes") for losses on loan foreclosures and
sale of the related real estate which are alleged to be $43,000. At December 31,
1994 the Company had outstanding repurchase requests relating to loans with a
principal balance of $4.7 million and make whole requests for losses on loan
foreclosures and sale of the related real estate which were alleged to be $0.8
million. During 1995 the Company received 5 repurchase requests compared to 45
repurchase requests during 1994. The loans for which repurchases and make wholes
have 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. The Company does not
expect to have a significant amount of repurchase requests in the future. The
Company maintained an allowance for losses on loan repurchases which amounted to
$0.8 million at December 31, 1995 as compared to $1.2 million at December 31,
1994. This allowance is carried in other liabilities on the balance sheet. In
determining the amount of this allowance, the Company considered the exposure of
the
48
<PAGE> 50
Company to repurchases which takes into account the Company's past experience
with repurchases, the potential for future repurchases and the losses thereon.
FINANCIAL CONDITION
Assets
Total assets decreased to $122.4 million at December 31, 1995, compared
with $132.5 million at December 31, 1994, a decrease of 7.6%. The decreasing
asset levels in 1995 reflects the effect of the sale of substantially all of
Business Credit's assets, and the continued downsizing of the balance sheet in
order to satisfy regulatory capital ratio requirements applicable to the Company
and the Bank. The Company's ratio of total earning assets to total assets was
83.6% at December 31, 1995 compared to 88.4% at December 31, 1994.
Net loans decreased to $70.9 million at December 31, 1995, compared with
$89.5 million at December 31, 1994. The decrease is primarily due to the sale of
most of the assets of Business Credit. The ratio of average net loans to average
total assets was 66.0% in 1995 compared with 61.7% in 1994. The primary
components of the Company's loan portfolio net of undisbursed loan funds at
December 31, 1995 were commercial and industrial (the majority of which is real
estate secured), which accounted for 58.7% of total loans, real estate -
mortgage loans, which accounted for approximately 24.4% of total loans and real
estate-construction and development loans, which accounted for 10.8% of total
loans. See "ITEM 1. BUSINESS. -- Statistical Disclosure -- Loan Portfolio." The
Company intends to continue to emphasize secured commercial loans and real
estate loans. Management believes that collateral is necessary in most lending
relationships and the most commonly provided collateral is real estate.
The mix of the Company's liquidity portfolio, which is maintained in
investment securities held to maturity, trading securities and federal funds
sold, shifts as management seeks to maximize yield while maintaining its
liquidity position. The Company established a securities trading account in 1992
to facilitate the use of securities for liquidity and earnings purposes. While
the Company held as much as $6.1 million in this account during 1994, no
securities were held in this account during 1995. The closure of BSC has reduced
the Company's liquidity needs and has allowed the Company to deemphasize the
securities trading account. Investment securities held to maturity were $7.6
million at December 31, 1995 and $7.0 million at December 31, 1994. Federal
funds sold increased to $24.0 million at year end 1995 from $15.7 million at
year end 1994.
Real estate held for sale decreased to $4.4 million at December 31, 1995
from $7.8 million at the end of 1994 as a result of the continued sale of
existing real estate properties, as well as a $0.9 million increase in the
valuation allowance for real estate held for sale. Properties held at December
31, 1995 include three apartment buildings, twelve single family residences, one
duplex, two condominium apartments, three residential lots, two commercial
buildings and one residential lot development. Subsequent to December 31, 1995,
two of the condominium
49
<PAGE> 51
apartments and four of the single family residences with a total book value of
$0.6 million have 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
consolidated financial statements, because of the fact that 71% of the Bank's
loan portfolio is real estate secured, management expects that further
foreclosures will occur and no assurance can be given that losses exceeding
current allowances will not occur.
As a result of the California Northridge earthquake experienced in
January, 1994 the Company sustained damage to two real estate properties held
for sale. The cost of repairs approximated $220,000 which was charged to
operations in 1994.
Sources of Funds
The reduction in assets and the sale of most of the assets of
Business Credit in 1995 reduced the need for additional sources of funds,
however the mix of the Company's funds changed significantly. The principal
changes in the Company's sources of funds for 1995 were a decrease of $12.0
million in average time deposits, from $19.6 million to $7.6 million, a $4.7
million increase in average savings deposits, from $50.4 million for 1994 to
$55.1 million for 1995 and a $4.7 million decrease in average money market
deposits, from $12.5 million to $7.8 million. 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
total assets. In addition, the Company reduced notes payable from $11.9 million
at December 31, 1994 to $1.4 million at December 31, 1995 as a result of the
sale of most of the assets of Business Credit and the related payoff of most of
Business Credit's outstanding debt.
The mix of the Company's funds also changed significantly in 1994
as a result of the reduction in assets. The principal changes in the Company's
sources of funds for 1994 were a decrease of $15.8 million in average time
deposits, from $35.4 million to $19.6 million, a $4.7 million increase in
average savings deposits, from $45.7 million for 1993 to $50.4 million for 1994
and a $2.7 million decrease in average money market deposits, from $15.2 million
to $12.5 million. These deposit changes reflected normal fluctuations in these
accounts, the asset-liability management process at the Bank which considered
reduced funding needs and the efforts of the Bank to reduce its highest cost
deposits in the asset reduction process.
Notes payable, which represent borrowings by the Company used to
fund loans by Business Credit, decreased to $1.4 million at December 31, 1995
compared to $11.9 million at December 31, 1994. All of the notes payable at
December 31, 1995 were due FCC by Business Credit under the terms of a $1.5
million short term revolving credit line collateralized by the loan portfolio of
Business Credit. This credit line provides for interest to be charged based on
the outstanding daily loan balance of Business Credit at the rate of 1-3/4% over
the prime rate, from time to time, of NatWest Bank N.A. (prime was 8.5% at
December 31, 1995). The line of credit matures on September 7, 1996. Business
Credit is in the process of liquidating its assets and expects to either not
require line of credit after September 7, 1996 or to be able to renew its line
50
<PAGE> 52
of credit from FCC in September 1996. Business Credit believes that other
sources of credit are available, but it is not known whether the terms and
conditions that such lenders might require would be more unfavorable to Business
Credit than those existing under the FCC line of credit. See "Results of
Operations - Sale of Business Credit Assets"
The Company has in the past borrowed by issuing individual
commercial paper notes in amounts of $25,000 or larger, with maturity dates of
30 to 270 days. Commercial paper notes outstanding at December 31, 1994 totaled
$0.3 million compared to $1.0 million at December 31, 1993. These notes paid
interest at a variable interest rate equivalent to the prime rate to 1 1/2% over
the prime rate of Bank of America. The Company no longer issues commercial paper
notes and does not expect to resume issuing such notes in the near future. At
December 31, 1994, the Company had outstanding $1.5 million of variable interest
rate notes. The notes were unsecured and generally paid interest at rates from
2% to 2 1/2% over Bank of America's prime rate. The Company had the option to
redeem the notes prior to maturity. All of these notes were paid off in June or
September of 1995.
Liquidity and Asset/Liability Management
The Company relies on asset/liability management to accommodate
changes in loan demand and core deposit levels. A key aspect of asset/liability
management is liquidity, or the Company's ability to meet possible deposit
withdrawals, to provide for the credit needs of its customers and to take
advantage of investment opportunities as they arise.
The Bank's Asset-Liability Management Committee manages a liquidity
position, the parameters of which are approved by the Board of Directors.
Liquidity is derived from both the asset and liability sides of the balance
sheet. While the Bank relies primarily on deposits for its source of funds, it
also had available $24.0 million in federal funds sold and a $7.6 million
investment portfolio at December 31, 1995 which could be used as collateral for
borrowings. In addition, the Bank has access to a $4.0 million federal funds
purchase line of credit from Community Bank which the Bank can use to meet short
term needs. This line is subject to cancellation on short notice. The Bank also
has access to funds through the Federal Reserve Bank discount window. The
Committee members are the Chairman of the Board, the President, the Chief Credit
Officer, who monitors loan funding needs; the Cashier, who monitors sources of
funds; the Chief Financial Officer, who carries out the instructions of the
Committee for securities and large denomination time deposit transactions; and
one outside member of the Board of Directors.
The Company's liquidity position is monitored on a daily basis.
Action may be taken by any two members of the Committee to satisfy daily
liquidity requirements. Recognizing the cost of liquidity, the Bank maintains
approximately 20% of total assets in liquid assets. The remaining assets are
invested to yield higher rates of return with minimized market or credit risk.
51
<PAGE> 53
While the liquidity needs of the Bank are funded primarily by
deposits, the liquidity needs of the Company and Business Credit are funded
primarily by borrowings from outside sources. The Company obtains funds to pay
its short-term obligations by requesting that Business Credit repay amounts
borrowed from the Company. Business Credit normally makes such repayments by
drawing down under its secured line of credit from FCC. Accordingly, the
Company's liquidity needs and ultimate ability to meet its obligations is
dependent on the liquidity position of Business Credit and Business Credit's
ability to meet its obligations to the Company. However, Business Credit is in
the process of liquidating its assets and expects to either not have need of a
line of credit or to be able to renew its existing line of credit from FCC.
In addition to repayment of borrowed funds by Business Credit, the
Company's other sources of liquidity include, to a lesser extent, payment of
dividends from its subsidiary companies. Payment of dividends is subject to
statutory and regulatory limitations. As a result of losses in its last three
fiscal years, at December 31, 1995, the Bank had no retained earnings legally
available for the payment of cash dividends. Under the terms of the FDIC
Memorandum the Bank is prohibited from paying cash dividends to the Company
unless the payment is approved in advance by the Regional Director of the FDIC
and the State Superintendent of Banks. Additionally, under the prompt corrective
action provisions of FDICIA, the Bank is prohibited from paying any cash
dividends that will result in the Bank becoming undercapitalized. See "ITEM 1.
BUSINESS -- Supervision and Regulation - Restrictions on Transfers of Funds to
the Company by the Bank".
52
<PAGE> 54
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 capital ratios of the Company
and the Bank at December 31, 1995 (dollars in thousands).
<TABLE>
<CAPTION>
COMPANY BANK
------------------ ---------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
Tier 1 capital ................. $ 6,918 8.55% $ 7,171 8.94%
Tier 1 capital
minimum require-
ment .......................... 3,237 4.00 3,209 4.00
-------- ---- --------- -----
Excess ......................... 3,681 4.55 3,962 4.94
Total capital .................. $ 7,936 9.81 $ 8,181 10.20
Total capital
minimum require-
ment .......................... 6,474 8.00 6,419 8.00
-------- ---- --------- -----
Excess ......................... 1,462 1.81 1,762 2.20
Risk-weighted
assets ........................ $ 80,920 $ 80,232
Tier 1 capital ................. $ 6,918 5.54% $ 7,171 6.35%
Tier 1 capital
Minimum requirement .. 5,613 4.00
--------- -----
Memorandum requirement 7,620 6.75%
-------- -----
Excess (deficiency) ............ 1,305 1.54 (449) (.40)
Total average assets ........... $124,990 $ 112,893
</TABLE>
53
<PAGE> 55
The leverage ratio consists of tangible Tier 1 capital divided by
total average assets. As of December 31, 1995, the Company and the Bank had
leverage ratios of 5.54% and 6.35%, 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 above ratios do not include the effect of a $510,000 writedown
taken by Business Credit effective in the fourth quarter of 1995 on a specific
real estate property held by the Bank at December 31, 1995. Had this writedown
been taken by the Bank rather than by Business Credit as of December 31, 1995,
the Bank's leverage ratio would have been 5.90%. Business Credit purchased the
aforementioned property from the Bank at the Bank's carrying value in March
1996.
As a result of its examination of the Bank in September 1994, the FDIC
proposed that the Board of Directors of the Bank enter into a memorandum of
understanding which would replace and supersede the provisions of a prior
memorandum of understanding dated January 1992. In March 1995, the FDIC and the
Board of Directors of the Bank entered into FDIC Memorandum. Under the FDIC
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 was not in compliance with the Tier 1 capital requirements of
the FDIC Memorandum at December 31, 1995. Such noncompliance was principally the
result of increases in write-downs to the Bank's real estate held for sale
portfolio effective as of December 31, 1995. However, the Bank was in compliance
with the FDIC Memorandum as of the month ended March 1996, due to improvements
in the Bank's Tier 1 capital to approximately 6.9%, which was the effect of an
expected decrease in deposits at the Bank and offset by a corresponding
reduction in average assets. Management believes that the Bank's prior
noncompliance will not result in any material adverse regulatory action against
the Bank. Management believes the Bank can continue to comply with the terms of
the FDIC Memorandum and otherwise meet regulatory capital requirements, and that
any actions taken to so comply in the future will not have a material adverse
effect on the Company's future financial condition or results of operations.
However, failure to comply with the terms of the FDIC Memorandum could result in
further regulatory action, including issuance of a Cease and Desist Order.
Further, as a result of its examination of the Company in April 1995,
the Federal Reserve Bank of San Francisco proposed that the Board of Directors
of the Company enter into a
54
<PAGE> 56
memorandum of understanding. In November 1995, the Federal Reserve Bank and the
Board of Directors of the Company entered into the FRB Memorandum. Under the FRB
Memorandum, the Company is required, among other things, to comply with the FDIC
Memorandum; submit a written plan designed to enhance the board's supervision of
the operations and management of the consolidated organization, to ensure that
the Company has sufficient cash to pay its expenses and to service its debt; the
Company may not, directly or indirectly, acquire or sell any interest in any
entity, line of business, problem loans or other assets, without the prior
written approval of the Federal Reserve Bank (the sale, by the Company, of
substantially all of Business Credit assets, and the further liquidation of the
remaining assets of Business Credit, shall be exempt); and to not pay cash
dividends without the prior written consent of the Federal Reserve Bank.
The Company was not in compliance with all of the provisions of the
FRB Memorandum as of December 31, 1995 as a result of the Bank's noncompliance
with the Tier 1 capital requirements of the FDIC Memorandum as of such date,
which has since been corrected. Failure to comply with the terms of the FRB
Memorandum could result in further regulatory action by the Federal Reserve
Bank, including issuance of a Cease and Desist Order.
The Company suspended its quarterly cash dividends in the third
quarter of 1993. The Company expects that future dividends will depend on a
return to profitability and the maintenance of acceptable financial results in
the future.
Effects of Inflation
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects of general
levels of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements included at page F-2 of this Report
on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
55
<PAGE> 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year. For information
concerning executive officers of the Company, see "ITEM 4(A). EXECUTIVE OFFICERS
OF REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is incorporated by
reference from the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference from the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
with management and others is incorporated by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.
56
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Financial Statements and Report. Reference is made to the Index to Financial
Statements at page F-2 for a list of financial statements filed as part of this
Report on Form 10-K. Financial Statement schedules have been omitted either
because they are not required or not applicable or the required information is
shown in the consolidated financial statements or related notes thereto.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1995.
(c) Exhibits.
(1)Reference is made to the Index to Exhibits for a list of exhibits filed
as part of this Report on Form 10-K.
(2) Included among the Exhibits filed as part of this Report on Form 10-K are
the following Executive Compensation Plans and Arrangements:
1. 1982 Stock Option Plan, as amended -- Annual Report on Form
10-K for the fiscal year ended December 31, 1988, Exhibit 10.5.
2. Sterling Bancorporation Employee Stock Ownership Plan and Trust
-- Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, Exhibit 10.6.
3. Amended and Restated Sterling Bancorporation Employee Stock
Ownership Plan and Trust -- Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, Exhibit 10.6.1.
4. Employment Agreement, dated July 1, 1989, between Sterling
Business Credit, Inc. and Farhad Motia -- Annual Report on Form
10-K for the fiscal year ended December 31, 1989, Exhibit 10.7.
5. Amendment to Employment Agreement, effective May 1, 1990,
between Sterling Business Credit, Inc. and Farhad Motia --
Annual Report on Form 10-K for the fiscal year ended December
31, 1990, Exhibit 10.7.1.
6. Amendment to Employment Agreement, effective December 30, 1992,
between Sterling Business Credit, Inc. and Farhad Motia --
Annual Report on Form 10-K for the fiscal year ended December
31, 1992, Exhibit 10.7.2.
57
<PAGE> 59
7. Employment Agreement, dated January 1, 1991, between the
Company and Douglas Swets -- Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, Exhibit 10.18.
8. Employment Agreement, dated January 1, 1990, between the
Company and Allan Dalshaug -- Annual Report on Form 10-K for
the fiscal year ended December 31, 1990, Exhibit 10.19.
9. Amendment No. 1, effective September 30, 1990, to Employment
Agreement, dated January 1, 1990 between the Company and Allan
E. Dalshaug -- Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, Exhibit 10.19.1.
10. Amendment No. 2, effective December 30, 1992, to Employment
Agreement, between the Company and Allan E. Dalshaug -- Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, Exhibit 10.19.2.
11. Amendment No. 3, effective May 15, 1995, to Employment
Agreement between the Company and Allan E. Dalshaug -- Annual
Report on Form 10-K for the fiscal year ended December 31,
1995, Exhibit 10.19.3.
12. Employment Agreement, dated March 21, 1996, between the Company
and Allan E. Dalshaug -- Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, Exhibit 10.31.
13. Employment Agreement, dated January 1, 1994, between Sterling
Bank and Joseph Carona -- Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, Exhibit 10.26.
58
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 20th day of
March, 1996.
STERLING WEST BANCORP
(Registrant)
By /s/ Allan E. Dalshaug
--------------------------------------
Allan E. Dalshaug,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allan E. Dalshaug Chairman of the March 20, 1996
- --------------------- Board, President, Chief
Allan E. Dalshaug Executive Officer and
Director (Principal
Executive Officer)
/s/ Joseph C. Carona Chief Financial March 20, 1996
- --------------------- Officer (Principal
Joseph C. Carona Financial and Accounting
Officer)
/s/ Timothy Behunin Director March 20, 1996
- ---------------------
Timothy Behunin
/s/ Howard M. Borris Director March 20, 1996
- --------------------
Howard M. Borris
</TABLE>
59
<PAGE> 61
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Audrey J. Fimpler Director March 20, 1996
- -----------------------
Audrey J. Fimpler
/s/ Hassan Izad Director March 28, 1996
- -----------------------
Hassan Izad
/s/ Robert J. Schiller Director March 20, 1996
- -----------------------
Robert J. Schiller
/s/ Michael Wagner Director March 20, 1996
- -----------------------
Michael Wagner
</TABLE>
60
<PAGE> 62
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS
STERLING WEST BANCORP AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
F-1
<PAGE> 63
INDEX
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors. . . . . F-3
Consolidated balance sheets as of December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated statements of operations for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . F-5
Consolidated statements of stockholders' equity for the
years ended December 31, 1995, 1994, and 1993 . . . . . . . . F-6
Consolidated statements of cash flows for the years
ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . F-7
Notes to consolidated financial statements . . . . . . . . . . F-8
</TABLE>
F-2
<PAGE> 64
Independent Auditors' Report
The Board of Directors
Sterling West Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling West
Bancorp and subsidiaries (the Company) as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling West
Bancorp and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No.109, "Accounting for Income Taxes".
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 8, 1996
F-3
<PAGE> 65
Sterling West Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 35,835,000 $ 20,294,000
Investment securities, held to maturity
(fair value of $7,664,000
in 1995 and $6,832,000 in 1994) (Note 3) 7,614,000 6,974,000
Loans receivable, net (Notes 5 and 9) 70,896,000 89,462,000
Real estate held for sale (Note 7) 4,409,000 7,808,000
Fixed assets
Land and building 227,000 227,000
Furniture and equipment 2,972,000 2,635,000
Leasehold improvements 1,411,000 1,400,000
------------ ------------
4,610,000 4,262,000
Less accumulated depreciation (3,395,000) (3,089,000)
------------ ------------
1,215,000 1,173,000
Accrued interest receivable 725,000 954,000
Other assets (Note 10) 858,000 1,504,000
Assets of discontinued operations (Note 6) 867,000 4,322,000
------------ ------------
$122,419,000 $132,491,000
============ ============
LIABILITIES
Deposits
Demand $ 37,598,000 $ 31,097,000
Savings and NOW 61,316,000 57,652,000
Money market 6,990,000 10,183,000
Time deposits $100,000 or greater 3,281,000 3,505,000
Other time deposits 3,191,000 4,661,000
------------ ------------
112,376,000 107,098,000
Notes payable (Note 9) 1,372,000 11,900,000
Other liabilities (Note 6) 1,753,000 3,136,000
------------ ------------
115,501,000 122,134,000
Commitments and contingencies (Notes 5 and 11)
STOCKHOLDERS' EQUITY
Common stock - authorized 5,000,000
shares without par value; issued
and outstanding 1,710,214 shares
in 1995 and 1994 8,686,000 8,686,000
Retained earnings (accumulated deficit), restricted (1,768,000) 1,671,000
------------ ------------
6,918,000 10,357,000
------------ ------------
$122,419,000 $132,491,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 66
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1995 1994 1993
---------- ----------- ---------
<S> <C> <C> <C>
Interest income
Loans $10,997,000 $11,376,000 $12,606,000
Federal funds sold 839,000 540,000 273,000
Investment securities held to maturity (Note 3) 544,000 451,000 438,000
Trading securities (Note 4) -- 69,000 79,000
----------- ----------- -----------
12,380,000 12,436,000 13,396,000
Interest expense
Savings and NOW 2,654,000 1,865,000 1,372,000
Money market 138,000 231,000 285,000
Time deposits $100,000 or greater 165,000 443,000 525,000
Other time deposits 165,000 218,000 668,000
Notes payable 1,086,000 1,229,000 1,195,000
----------- ----------- -----------
4,208,000 3,986,000 4,045,000
----------- ----------- -----------
Net interest income
8,172,000 8,450,000 9,351,000
Provision for loan losses (Note 5) 1,104,000 266,000 1,025,000
----------- ----------- -----------
Net interest income after provision for loan losses 7,068,000 8,184,000 8,326,000
Non-interest income
Service charges on deposit accounts 319,000 278,000 456,000
Gain on sale of SBA loans 133,000 69,000 420,000
Gain on sale of Business Credit assets 1,504,000 -- --
Other 518,000 578,000 562,000
----------- ----------- -----------
2,474,000 925,000 1,438,000
Non-interest expense
Salaries, wages and employee benefit 3,914,000 4,374,000 4,725,000
Occupancy 841,000 943,000 1,096,000
Furniture and equipment 343,000 224,000 269,000
Real estate operations, net (Note 7) 2,717,000 1,311,000 1,111,000
Other (Note 16) 2,313,000 2,211,000 2,737,000
----------- ----------- -----------
10,128,000 9,063,000 9,938,000
Income (loss) from continuing operations
before income taxes & cumulative effect
of change in accounting principle (586,000) 46,000 (174,000)
Income tax provision (benefit) (Note 10) 929,000 17,000 (75,000)
----------- ----------- -----------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle (1,515,000) 29,000 (99,000)
Loss from discontinued operations,
net of taxes (Note 6) (1,924,000) (2,904,000) (667,000)
----------- ----------- -----------
Cumulative effect of change in accounting for
income taxes -- -- 400,000
NET LOSS $(3,439,000) $(2,875,000) $ (366,000)
=========== =========== ===========
Loss per common share:
From continuing operations $ (0.89) $ 0.02 $ (0.06)
From discontinued operations (1.13) (1.70) (0.39)
From accounting change -- -- 0.23
----------- ----------- -----------
Net loss per share $ (2.01) $ (1.68) $ (0.22)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 67
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1995
<TABLE>
<CAPTION>
Retained
earnings
(accumulated
Shares Common deficit),
outstanding stock restricted Total
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 1,660,209 $8,232,000 $5,357,000 $13,589,000
Net loss -- -- (366,000) (366,000)
Stock options
exercised (Note 14) 50,005 170,000 -- 170,000
5% stock dividend at
fair market value -- 284,000 (285,000) (1,000)
Cash dividend $0.10
per share -- -- (160,000) (160,000)
--------- ---------- ----------- -----------
Balance at December 31, 1993 1,710,214 8,686,000 4,546,000 13,232,000
Net loss -- -- (2,875,000) (2,875,000)
--------- ---------- ----------- -----------
Balance at December 31, 1994 1,710,214 8,686,000 1,671,000 10,357,000
Net loss -- -- (3,439,000) (3,439,000)
--------- ---------- ----------- -----------
Balance at December 31, 1995 1,710,214 $8,686,000 $(1,768,000) $ 6,918,000
========= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 68
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(3,439,000) $(2,875,000) $(366,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 306,000 237,000 213,000
Provision for loan losses 1,104,000 266,000 1,025,000
Net loss on sale of real estate held for sale (17,000) -- 12,000
Provision for deferred taxes 603,000 508,000 221,000
(Increase) decrease in trading securities, net -- 6,037,000 (3,039,000)
Real estate valuation adjustments, net 2,625,000 1,226,000 1,030,000
(Increase) decrease in accrued interest receivable 229,000 (79,000) 226,000
(Increase) decrease in other assets 41,000 (216,000) 106,000
Increase (decrease) in other liabilities (1,384,000) (1,357,000) 3,040,000
(Increase) decrease in assets of discontinued operations 3,455,000 15,638,000 (202,000)
--------- ----------- ----------
Total adjustments 6,962,000 22,260,000 2,632,000
--------- ----------- ----------
Net cash provided by
operating activities 3,523,000 19,385,000 2,266,000
--------- ----------- ----------
Cash flows from investing activities
Proceeds from maturities of investment securities 4,675,000 2,762,000 842,000
Proceeds from sale of investment securities -- -- 432,000
Purchases of investment securities (5,313,000) (2,149,000) (1,054,000)
Net (increase) decrease in loans receivable 18,916,000 (1,981,000) 21,761,000
Proceeds from sale of real estate 966,000 2,590,000 3,237,000
Payments on real estate repurchased from investors (1,629,000) (1,048,000) (823,000)
Purchase of furniture and equipment (348,000) (133,000) (43,000)
---------- ----------- -----------
Net cash provided by
investing activities 17,267,000 41,000 24,352,000
---------- ----------- -----------
Cash flows from financing activities
Net increase (decrease) in demand deposits, savings
and other money market accounts 6,972,000 14,421,000 (16,457,000)
Net decrease in certificates of deposit (1,694,000) (29,834,000) (7,573,000)
Net increase (decrease) in note payable
to financial institution (9,034,000) 172,000 (565,000)
Proceeds from issuance of commercial paper -- 88,000 590,000
Payments on maturing commercial paper -- -- (1,450,000)
Payments on maturing promissory notes (1,493,000) (1,142,000) --
Proceeds from exercise of stock options -- -- 170,000
Cash dividend -- -- (160,000)
---------- ----------- -----------
Net cash used in financing activities (5,249,000) (16,295,000) (25,445,000)
---------- ----------- -----------
Net increase in cash and cash equivalents 15,541,000 3,131,000 1,173,000
---------- ----------- -----------
Cash and cash equivalents at
beginning of period 20,294,000 17,163,000 15,990,000
---------- ---------- ----------
Cash and cash equivalents at end of period $35,835,000 $ 20,294,000 $17,163,000
=========== ============ ===========
</TABLE>
See acompanying notes to consolidated financial statements.
F-7
<PAGE> 69
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sterling West Bancorp (the Company) is a bank holding company organized as a
California corporation in 1982. It is the parent company for its wholly owned
subsidiaries, Sterling Bank (the Bank) and its wholly owned subsidiary, BSC
Mortgage Corporation (BSC) and Sterling Business Credit, Inc. (Business
Credit). Through its subsidiaries the Company continues to conduct banking and
commercial finance business in the state of California. During the fourth
quarter of 1994 the Company discontinued its mortgage banking operations
substantially all of which were performed by BSC. During the third quarter of
1995 the Company sold most of the assets of Business Credit.
Principles of consolidation
The consolidated financial statements include the accounts of Sterling West
Bancorp and its wholly-owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses. Actual results could differ from those estimates.
Certain reclassifications have been made to the consolidated financial
statements for 1994 and 1993 to conform to the 1995 presentation.
Recent accounting pronouncements
In March 1995, the FASB issued statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-lived Assets (SFAS No. 121). SFAS No.
121 requires that certain long-lived assets and certain identifiable
intangibles be reviewed for impairment when events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable. The
estimated future cash flows to be derived from the use and disposition of an
assets, of an undiscounted basis, is compared to the carrying amount of the
long-lived assets and if the carrying amount exceeds the expected cash flows,
recognition of an impairment loss is required. An impairment loss for assets
subject to SFAS No. 121 shall be reported as a component of income from
continuing operations. Under SFAS No. 121, the Company will be required to
make certain disclosures about impaired, long-lived assets. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 1995 and the company does not believe that its adoption will
have a material adverse impact upon its financial condition or result of
operations.
F-8
<PAGE> 70
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights," ("SFAS No. 122") which amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 eliminates certain accounting
distinctions between rights to service mortgage loans for others that are
acquired through loan origination activities and servicing rights acquired
through purchase transactions under previously-issued accounting standards.
Under SFAS No. 122, entities engaging in mortgage banking activities must
allocate the costs of originating mortgage loans between mortgage servicing
rights and the mortgage loans based upon their relative values. SFAS No. 122
will require disclosure of the fair value of mortgage servicing rights and the
significant assumptions used to calculate fair value. SFAS No. 122 is effective
for fiscal years beginning after December 15, 1995 and is to be applied
prospectively. The Company does not believe that its adoption will have a
material adverse impact upon its financial condition or results of operations.
In November 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement establishes financial accounting
standards for stock-based employee compensation plans. SFAS 123 permits the
Company to choose either a new fair-value based method or the current APB
Opinion 25 intrinsic value-based method of accounting for its stock-based
compensation arrangements with pro forma disclosures of net earnings and
earnings per share computed as if the fair value-based method had been
applied. SFAS 123 is effective for fiscal years beginning after December 15,
1995. The Company will continue to account for stock-based compensation under
APB opinion 25 and, as a result, SFAS 123 will not have a material adverse
effect on the Company.
Cash equivalents
Cash and cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds are purchased and sold for a one-day period.
F-9
<PAGE> 71
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment securities held to maturity
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. The amortization and
accretion is based on a method which approximates the interest method. Such
amortization and accretion are reflected in interest income on investment
securities held to maturity in the accompanying consolidated statements of
operations. The carrying value of these assets is not adjusted for temporary
declines in fair value since the Company intends and has the ability to hold
them to their maturity.
Trading securities
Trading positions are taken to benefit from short term movements in market
prices. Trading account securities are carried at fair value. Gains and losses
on trading positions are recognized currently in operations.
Interest and fees on loans
Interest income is accrued daily as earned on all loans. Interest income is not
recognized on loans if collection of the interest is deemed by management to be
unlikely. Loans are generally placed on nonaccrual status after being
delinquent 90 days. Loan origination, commitment and other fees and direct
costs associated with the origination of loans are deferred and amortized into
interest income over the lives of the respective loans using a method which
approximates the interest method.
Provision and allowance for loan losses
The determination of the balance in the allowance for loan losses is based on
analysis of the loan portfolio and reflects an amount which, in management's
judgment, is adequate to provide for probable and estimable loan losses after
giving consideration to the character of the loan portfolio, current economic
conditions, past loan loss experience, geographic and industry concentrations,
delinquency trends and such other factors as deserve current recognition in
estimating loan losses. While management uses available information to
recognize loan losses, future additions to the allowance may be necessary based
on changes in the aforementioned factors. 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 in anticipation of losses.
F-10
<PAGE> 72
Sterling West Bancorp and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Impairment
During 1993, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standards No. 114, entitled "Accounting
by Creditors for Impairment of a Loan" (SFAS 114). Effective January 1, 1995,
the Company adopted SFAS 114, which during the fourth quarter of 1995 was
subsequently amended by SFAS No. 118 entitled "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". A loan is impaired
when, based on current circumstances and events, a creditor will be unable
to collect all amounts contractually due (both principal and interest) under a
loan agreement. Loans are evaluated for impairment as part of the Company's
normal internal asset review process.
When a loan is determined to be impaired, a writedown is taken or an allowance
is established which is based upon the difference between the investment in the
loan and one of the following methodologies as prescribed by SFAS 114: (i) the
present value of expected cash flows from the loan discounted at the loan's
effective interest rate, (ii) an observable market price, or (iii) the fair
value of the loan's underlying collateral. While the measurement of impairment
depends upon the specific facts and circumstances involving each applicable
loan, the Company generally measures such impairment utilizing the latter
methodology. At December 31, 1995, the total recorded investment in impaired
loans was $2.5 million. There were no loans at December 31, 1995 for which an
impairment allowance has been established. During the year ended December 31,
1995, the Company's average investment in impaired loans was $2.0 million, and
income recorded on loans identified as being impaired totaled $0.1 million,
which was recorded utilizing the cash-basis method of accounting. As of December
31, 1995, nonaccrual loans included $2.5 million of impaired loans. All
provisions for losses and any recoveries are recorded as part of the provision
for loan losses in the accompanying consolidated statement of operations.
Impaired loans which are performing under the contractual terms are reported as
performing loans, and cash payments are allocated to principal and interest in
accordance with the terms of the loan.
Fixed assets
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter. The straight-line
method of depreciation is followed for all assets for financial reporting
purposes.
Discontinued operations
In the fourth quarter of 1994 the Company discontinued its mortgage banking
operations which were primarily carried out by its wholly owned subsidiary,
BSC. All revenues and expenses, net of income tax effect, attributable to
mortgage banking operations are included in the accompanying statements of
operations under the caption "Loss from discontinued operations". Assets
related to mortgage banking operations are presented in the accompanying
balance sheets as "Assets of discontinued operations". See Note 6 for further
information. Except where indicated, footnote disclosures relate solely to
continuing operations.
Real estate held for sale
Real estate acquired through foreclosure and investments by the Bank in real
estate development projects are stated at the lower of cost or estimated fair
value less estimated selling costs. Fair value is generally estimated based on
the most recent appraisal received by the Company and adjusted for known trends
in local markets. Any subsequent operating expenses or income, further
reductions to fair values, and gains or losses on disposition of such
properties are charged to current operations and are reflected in real estate
operations, net.
F-11
<PAGE> 73
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
A deferred tax liability is to be recognized on all taxable temporary
differences and a deferred tax asset is to be recognized on all deductible
temporary differences and operating loss and tax credit carryforwards. A
valuation allowance is to be recognized to reduce the potential deferred tax
asset if it is "more likely than not" that all or some portion of that
potential deferred tax asset will not be realized. Other significant changes
made by SFAS No. 109 include: (1) the complex scheduling of temporary
differences will generally not be required, (2) a deferred tax asset may be
recognized for the financial statement general valuation allowance or loans and
REO, while a deferred tax liability must be recognized for that portion of the
tax bad debt reserve exceeding the "base year" reserves, and (3) tax-planning
strategies must be prudent and feasible, and tax benefits recognized as a
result of all tax planning strategies should be net of any expenses or losses.
In February 1992, the Financial Accounting Standards Board issued SFAS 109,
"Accounting for Income Taxes" which superseded SFAS 96 "Accounting for Income
Taxes". SFAS 109 was effective for years beginning after December 15, 1992. The
Company adopted this Statement in the first quarter of 1993 and recorded a
benefit of approximately $0.4 million at that time.
Restricted cash balances
Aggregate reserves in the form of deposits with the Federal Reserve Bank of
approximately $376,000 were maintained to satisfy federal regulatory
requirements at December 31, 1995.
F-12
<PAGE> 74
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for
Interest $4,167,000 $3,686,000 $3,599,000
Income taxes -- -- 394,000
Non-cash investing and
financing activities:
Real estate acquired
through foreclosure 4,309,000 6,701,000 8,235,000
Loans to facilitate
disposition of real
estate 954,000 2,246,000 4,442,000
</TABLE>
F-13
<PAGE> 75
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity at December 31 are as follows:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of U.S.
and U.S.government
agencies $ 7,166,000 $ 50,000 $ -- $7,216,000
Non-taxable municipal
bonds 250,000 -- -- 250,000
Interest-bearing deposit 198,000 -- -- 198,000
----------- -------- ------- ----------
$ 7,614,000 $ 50,000 $ -- $7,664,000
=========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of U.S.
and U.S.government
agencies $ 6,551,000 $ -- $139,000 $6,412,000
Non-taxable municipal
bonds 326,000 -- 3,000 323,000
Interest-bearing deposit 97,000 -- -- 97,000
----------- --------- -------- ----------
$ 6,974,000 $ -- $142,000 $6,832,000
=========== ========= ======== ==========
</TABLE>
Taxable interest income on investment securities held to maturity totaled
$525,000, $433,000 and $405,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Non-taxable interest income on investment securities held
to maturity totaled $19,000, $18,000 and $33,000 for the years ended December
31, 1995, 1994 and 1993, respectively.
F-14
<PAGE> 76
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES HELD TO MATURITY (Continued)
Maturities of investment securities held to maturity at December 31, 1995 were
as follows: (dollars in thousands)
<TABLE>
<CAPTION>
Within one year After one year but After five years but
before five years before ten years
------------------ -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Obligations of U.S. and
U.S. government
agencies $2,513 $2,530 $3,444 $3,473 $1,209 $1,213
Non-taxable municipal
bonds 250 250 -- -- -- --
Interest-bearing deposit 198 198 -- -- -- --
------ ------ ------ ------ ------ ------
$2,961 $2,978 $3,444 $3,473 $1,209 $1,213
====== ====== ====== ====== ====== ======
</TABLE>
NOTE 4 - TRADING SECURITIES
The Company held no trading securities at December 31, 1995 and 1994. During
1995 and 1994, respectively, the Company recorded $0 and $46,000 of losses on
trading securities which are included in other non-interest expense on the
accompanying consolidated statements of operations.
F-15
<PAGE> 77
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE, NET
The composition of the Company's loan portfolio at December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Real estate loans
Construction and development $11,639,000 $ 7,255,000
Mortgage 18,033,000 25,523,000
Commercial, industrial and
agricultural loans 48,735,000 67,529,000
Loans to individuals 3,971,000 3,382,000
All other loans 419,000 281,000
----------- -----------
82,797,000 103,970,000
Less:
Undisbursed loan funds 10,391,000 12,895,000
Allowance for loan losses 1,510,000 1,613,000
----------- -----------
$70,896,000 $89,462,000
=========== ===========
</TABLE>
The unamortized balance of deferred loan origination, commitment and other
fees (net of related direct lending costs), totaling $452,000 and $603,000 as
of December 31, 1995 and 1994, are treated above as a reduction of the
applicable loan balances.
The balance of loans on nonaccrual was approximately $2,539,000 and $1,730,000
at December 31, 1995 and 1994, respectively. Interest income foregone on
non-accrual loans approximated $108,000 in 1995, $232,000 in 1994 and $565,000
in 1993. Interest income recognized on non-accrual loans was approximately
$114,000 in 1995, $10,000 in 1994 and $116,000 in 1993.
F-16
<PAGE> 78
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE, NET (Continued)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $1,613,000 $1,899,000 $1,980,000
Provision 1,104,000 266,000 1,025,000
Sale of Business Credit loans (550,000) -- --
Charge offs (715,000) (567,000) (1,106,000)
Recoveries 58,000 15,000 --
---------- ---------- ----------
Balance at end of year $1,510,000 $1,613,000 $1,899,000
========== ========== ==========
</TABLE>
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit and
forward contracts. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The contract or
notional amounts of forward contacts do not represent exposure to credit loss.
The Company controls the credit risk of its forward contracts through credit
approvals, limits and monitoring procedures. Commitments to extend credit at
December 31, 1995 primarily consisting of undisbursed loan commitments were
$10,391,000. Standby letters of credit at December 31, 1995 totalled
approximately $840,000, of which $75,000 were unsecured and $765,000 were
collateralized. At December 31, 1995 and 1994, the Company had no outstanding
commitments to purchase loans.
The Company grants real estate, commercial and industrial loans to customers
located within Southern California. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the real estate development and construction market
sector and general economic conditions within Southern California.
F-17
<PAGE> 79
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DISCONTINUED OPERATIONS
As a result of continued losses from operations, higher interest rates and the
generally poor market for residential mortgage loans, the Company, in the fourth
quarter of 1994, discontinued its mortgage banking operations which were
primarily carried out by its wholly owned subsidiary, BSC. As a result of the
discontinuation of its mortgage banking operations, the Company recorded an
after tax loss relating to that closure in the fourth quarter of 1994 of $0.6
million in addition to the after tax loss incurred by the mortgage banking
operations for the year 1994 of $2.3 million. The Company will continue to be
responsible for certain representations and warranties made by the Bank or BSC
in the sale of mortgage loans originated or purchased by BSC.
During 1995, the Company settled a dispute over a repurchase liability relating
to mortgage loans originated by BSC. As a result of this settlement the Company
significantly reduced its exposure to future repurchase liability, however, an
additional $2.1 million charge, excluding income tax benefit, was incurred
representing substantially all of the loss from discontinued operations for
1995.
Selected financial data for the discontinued mortgage banking operations are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Gain on sale of mortgage loans $ (3) $1,995 $3,631
Service fee income, net (7) 206 1,174
Net interest income (120) 208 382
Other income 42 175 464
------- ------- ------
(88) 2,584 5,651
Salaries, wages and benefits -- 2,763 3,403
Real estate operations, net 12 2,394 1,676
Other expense 2,108 2,068 1,738
------- ------- ------
2,120 7,225 6,817
------- ------- ------
Loss before taxes (2,208) (4,641) (1,166)
Income tax benefit (284) (1,737) (499)
------- ------- ------
Net loss $(1,924) $(2,904) $ (667)
======= ======= ======
</TABLE>
Included in other expense from discontinued operations for 1995 is a $2.1
million charge relating to a settlement over repurchase liability relating to
certain mortgage loans originated by BSC.
Assets of discontinued operations at December 31, 1995 consisted primarily of
receivables of $0.2 million related to the transfer of servicing in the fourth
quarter of 1995 and tax receivables of $0.3 million as a result of the losses
incurred by the mortgage banking operation. Included in other liabilities in
the ccompanying balance sheet for 1995 is a $0.8 million allowance for losses
on loan repurchases. In determining the amount of this allowance the Company
considered its past experience with repurchases, the potential for further
repurchases and the related losses. While management believes that the balance
of this allowance at December 31, 1995 is adequate to provide for exposure to
losses on loan repurchases, future additions to the allowance may be necessary
as a result of changes in the aforementioned factors.
F-18
<PAGE> 80
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - REAL ESTATE HELD FOR SALE
Real estate held for sale included the following at the dates indicated.
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Acquired through foreclosure $ 4,309,000 $ 6,701,000
Held for development 1,200,000 1,325,000
Valuation allowance (1,100,000) (218,000)
----------- ----------
$ 4,409,000 $ 7,808,000
============ ===========
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, real estate operations,
net was comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Net loss on sale of real
estate $ (17,000) $ -- $ (12,000)
Provision for losses (2,424,000) (1,090,000) (326,000)
Other valuation adjustments
charged to operations (201,000) (136,000) (704,000)
Other holding costs (75,000) (85,000) (69,000)
---------- --------- --------
Real estate operations, net $(2,717,000) $(1,311,000) $(1,111,000)
=========== =========== ===========
</TABLE>
Activity in the allowance for real estate losses is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 218,000 $ 400,000 $ 749,000
Provision for losses 2,424,000 1,090,000 326,000
Charge offs (1,542,000) (1,272,000) (675,000)
--------- ---------- ---------
Balance at end of year $1,100,000 $ 218,000 $ 400,000
========== ========== ==========
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes payable to individuals and non-financial institutions (see Note 9)
included $0 and $ 741,000 due to directors and related parties of the Company
as of December 31, 1995 and 1994, respectively.
In the ordinary course of business, the Bank has granted loans to certain
directors and the companies with which they are associated. In management's
opinion such loans are within applicable regulatory bank lending limitations.
The following is an analysis of the activity of all such loans during 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Balance at beginning of year $2,186,000 $2,587,000
New loans granted, including
renewals 321,000 150,000
Repayments (282,000) (551,000)
----------- -----------
Balance at end of year $2,225,000 $2,186,000
========== ==========
</TABLE>
F-19
<PAGE> 81
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - NOTES PAYABLE
Notes payable at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Notes payable to financial institutions $1,372,000 $10,067,000
Commercial paper, unsecured in amounts of
$25,000 or greater with maturities of 30 to
270 days, Interest rates ranged from prime
to 0.5% over prime -- 340,000
Promissory notes issued through a private
placement are unsecured and bear interest at
prime plus 2% to 2.5% adjusted quarterly. -- 1,493,000
---------- -----------
$1,372,000 $11,900,000
========== ===========
</TABLE>
Notes payable to financial institutions at December 31, 1995 represent draws on
a $1.5 million line of credit secured by the finance receivable portfolio of
Business Credit of approximately $2.9 million at December 31, 1995. Interest is
payable monthly at the rate of NatWest Bank prime plus 1.75% (prime of 8.5% at
December 31, 1995). The line matures on September 7, 1996.
Notes payable to financial institutions at December 31, 1994 represent draws on
a $15,000,000 line of credit secured by the finance receivable portfolio of
Business Credit of approximately $16,605,000 at December 31, 1994. Interest was
payable monthly at a minimum of $10,000 at the rate of Bank of America prime
plus 1.75% (prime of 8.5% at December 31, 1994).
At December 31, 1994 the Company's promissory notes were divided into four
classes: Three year notes maturing June 1, 1995 ($982,000), seven year notes
originally maturing September 30, 1993 and extended to September 30, 1996
($184,000), seven year notes maturing June 1, 1999 ($164,000) and seven year
convertible notes maturing June 1, 1999 ($163,000). The convertible notes were
convertible into common stock of the Company at $8.00 per share. The Company
had the option to redeem the notes prior to maturity. All of these notes were
paid off in June or September of 1995.
The maximum amounts of short-term borrowings at any month end during 1995 and
1994 were $ 12.5 million and $11.6 million, respectively. The approximate
average amounts outstanding during 1995 and 1994 were $ 7.7 million and $10.7
million, respectively, and the approximate weighted average interest rates
thereon during 1995 and 1994 were 10.63 % and 10.33%, respectively.
F-20
<PAGE> 82
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES
The provision for income taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Current
Federal $ (927,000) $(244,000) $ (238,000)
State -- (247,000) (58,000)
--------- -------- ---------
(927,000) (491,000) (296,000)
Deferred
Federal 655,000 226,000 182,000
State -- 282,000 39,000
--------- --------- ---------
655,000 508,000 221,000
Increase in valuation
allowance on deferred
tax assets 1,201,000 -- --
--------- -------- ---------
$ 929,000 $ 17,000 $ (75,000)
========== ========== ==========
</TABLE>
As a result of the following items, total income tax expense was different
than the amount computed by applying the statutory U.S. income tax rate.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal income
tax expense
at statutory
rate $ (199,000) $ 16,000 $ (59,000)
Increase in valuation allowance
on deferred tax
assets 1,201,000 -- --
State tax, net
of federal
benefit 63,000 (3,000) 13,000
Other (136,000) 4,000 (29,000)
---------- -------- -----------
$ 929,000 $ 17,000 $ (75,000)
========== ======== ===========
</TABLE>
F-21
<PAGE> 83
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities which are included in other assets
on the accompanying balance sheet at December 31, 1995 and 1994 are presented
below:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Loan valuation allowances
deferred for taxes purposes $ 438,000 $ 646,000
Valuation allowance for potential
loan repurchases 456,000 210,000
Deferred loan fees 205,000 258,000
Real estate valuation allowances 499,000 220,000
Net operating loss carryforwards 484,000 330,000
Other 298,000 101,000
----------- -----------
Total gross deferred tax assets 2,380,000 1,765,000
less: valuation allowance 1,994,000 793,000
----------- -----------
Net deferred tax assets 386,000 972,000
Deferred tax liabilities:
State franchise tax liability 156,000 93,000
Depreciation 230,000 210,000
Gain on sale of loans -- 66,000
----------- -----------
Total gross deferred tax
liabilities $ 386,000 369,000
----------- -----------
Net deferred tax assets $ -- $ 603,000
=========== ===========
</TABLE>
During 1995 the valuation allowance on gross deferred tax assets increased from
$793,000 at December 31, 1994 to $1,994,000 at December 31, 1995.
In determining the possible realization of deferred tax assets, SFAS No. 109
requires that future taxable income from the following sources be taken into
account: (a) the reversal of taxable temporary differences, (b) future
operations exclusive of temporary differences and (c) tax planning strategies
that, if necessary, would be implemented to accelerate taxable income into
years in which net operating losses might otherwise expire. Management believes
that is more likely than not that the Company will realize the tax benefits
from the remaining deferred tax assets.
F-22
<PAGE> 84
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases facilities under noncancellable operating leases. The
minimum annual rental payments (excluding property taxes and insurance) for the
following periods are approximately:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 $ 601,000
1997 529,000
1998 491,000
1999 459,000
2000 and thereafter 2,420,000
---------
$4,500,000
==========
</TABLE>
The minimum annual rental payments which are included in the above schedule are
for existing lease obligations and are not a forecast of future rental expense.
Total rent expense for 1995, 1994 and 1993 was approximately $841,000,
$1,001,000 and $1,075,000, respectively.
The Company has employment agreements with certain of its executives which
expire through 1996. In addition to a base salary, the agreements provide for
incentive compensation at the discretion of the Company (or subsidiary
applicable to the individual employee).
The Company, BSC, The Bank and Business Credit are involved in various legal
proceedings and litigation in the normal course of their business. While no
assurance can be given as to the likelihood of an unfavorable outcome of any
such litigation or the estimated amount of potential loss, if any, based upon
currently available information, the Company does not believe that the outcome
of such litigation will have a material adverse effect on the results of
operations or financial condition of the Company.
F-23
<PAGE> 85
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - REGULATORY MATTERS
The Federal Reserve Board is empowered to enter into a memorandum of
understanding with a bank holding company requiring specific corrective actions.
As a result of its examination of the Company in April 1995, the Federal Reserve
Bank of San Francisco proposed that the Board of Directors of the Company enter
into a memorandum of understanding. In November 1995, the Federal Reserve Bank
and the Board of Directors of the Company entered into a memorandum of
understanding (the "FRB Memorandum"). Under the FRB Memorandum, the Company is
required, among other things, to comply with the FDIC Memorandum; submit a
written plan designed to enhance the board's supervision of the operations and
management of the consolidated organization, to ensure that the Company has
sufficient cash to pay its expenses and to service its debt; the Company may
not, directly or indirectly, acquire or sell any interest in any entity, line of
business, problem loans or other assets, without the prior written approval of
the Federal Reserve Bank (the sale, by the Company, of substantially all of
Business Credit assets, and the further liquidation of the remaining assets of
Business Credit, shall be exempt); and to not pay cash dividends without the
prior written consent of the Federal Reserve Bank.
The Company was not in compliance with all of the provisions of the FRB
Memorandum as of December 31, 1995 as a result of the Bank's noncompliance with
the Tier 1 capital requirements of the FDIC Memorandum as of such date, which
has since been corrected. Failure to comply with the terms of the FRB Memorandum
could result in further regulatory action by the Federal Reserve Bank, including
issuance of a Cease and Desist Order.
In March 1995, the FDIC and Board of Directors of the Bank entered into a
memorandum of understanding (the "Memorandum"). 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 11, 1995 and 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 pay cash dividends without the prior written
consent of FDIC and the California Superintendent of Banks.
The Bank was not in compliance with the Tier 1 capital requirements of the FDIC
Memorandum at December 31, 1995. Such noncompliance was principally the result
of increases in write-downs to the Bank's real estate held for sale portfolio as
of December 31, 1995. However, the Bank was in compliance with the FDIC
Memorandum as of the month ended March 1996 (unaudited), due to improvements in
the Bank's Tier 1 capital to approximately 6.9% (unaudited), which was caused by
an expected decrease in deposits at the Bank and offset by a corresponding
reduction in average assets. Management believes that the Bank's prior
noncompliance will not result in any material adverse regulatory action against
the Bank. Management believes the Bank can continue to comply with the terms of
the FDIC Memorandum and otherwise meet regulatory capital requirements, and that
any actions taken to so comply in the future will not have a material adverse
effect on the Company's future financial condition or results of operations.
However, failure to comply with the terms of the FDIC Memorandum could result in
further regulatory action, including issuance of a Cease and Desist Order.
On December 19, 1992 the federal regulations implementing the prompt corrective
action provisions of the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") became effective. Those regulations provide for certain
mandatory and discretionary action by federal agencies based upon an
institutions ranking within five capital levels -- well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. All undercapitalized institutions are required to file a
capital restoration plan, undergo close monitoring of their condition and are
subject to restrictions on operations requiring regulatory approval.
Significantly undercapitalized or critically undercapitalized institutions and
undercapitalized institutions which fail to implement an acceptable capital plan
are subject to more severe actions which may include divestiture of subsidiaries
and replacement of senior management and directors. At December 31, 1995 the
Bank's capital ratios were in excess of amounts necessary to be considered
adequately capitalized as defined under FDICIA.
F-24
<PAGE> 86
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement 107 "Disclosures about Fair Values of Financial Instruments"
requires disclosures of fair value information about financial instruments. The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value. Because no market exists for a significant portion of the Company's loan
portfolio, fair value estimates are based on subjective judgments regarding
credit risk, future economic conditions and other risk characteristics which
cannot be determined with precision. The fair value disclosed does not reflect
any gain or loss that could result from offering the instruments for sale.
Potential taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in amounts disclosed.
Cash and cash equivalents
The carrying value of cash and cash equivalents is assumed to be a reasonable
estimate of fair value.
Securities
Fair values of investment securities held to maturity and trading securities
are based on quoted market prices.
Loans
Fair value of loans are estimated for portfolios of loans with similar
financial characteristics. Each loan was further segmented into fixed and
adjustable rate and performing and non-performing categories. The fair value of
performing loans was calculated by discounting estimated cash flows through the
estimated maturity using estimated current replacement discount rates that
reflect the credit and interest rate risk inherent in the loan. Fair value for
nonperforming loans was based on the lower of recent external appraisals and
internal value estimates and related estimated cash flows discounted using a
rate commensurate with the risk and associated with the estimated cash flows.
Credit risk and cash flows are estimated using available market information and
specific borrower information.
Deposits
The fair value of demand, savings, now and money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed maturity time
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities. No benefit has been ascribed to core deposit
intangibles.
Notes payable
Rates currently available to the Company for debt with similar terms are used
to estimate fair value of existing debt.
F-25
<PAGE> 87
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Undisbursed loans and standby letters of credit
The fair value of undisbursed loans and standby letters of credit is estimated
to be equal to the carrying value as portfolio rates and fees are the same as
replacement rates and fees currently charged to enter into similar agreements.
The estimated fair values of the Company's financial instruments at December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $35,835,000 $35,835,000 $20,294,000 $20,294,000
Investment securities 7,614,000 7,664 000 6,974,000 6,832,000
Loans, net 70,896,000 69,376,000 89,462,000 88,896,000
Financial liabilities:
Fixed rate term deposits 6,472,000 5,900,000 8,166,000 8,198,000
Other deposits 105,904,000 105,904,000 98,932,000 98,932,000
Notes payable 1,372,000 1,372,000 11,900,000 11,900,000
</TABLE>
NOTE 14 - STOCKHOLDERS' EQUITY
Stock dividends - A 5% stock dividend was declared on August 11, 1993 and
distributed on October 14, 1993 to shareholders of record on September 14,
1993. All share amounts and per share amounts included in the consolidated
financial statements and notes give retroactive effect to the stock dividend.
Cash dividends - Cash dividends of $0.10 per share were declared and paid in
1993. No cash dividend was paid in 1995 or in 1994.
Earnings per share - Net earnings per share amounts have been computed using
the weighted-average number of common shares and dilutive common stock
equivalent shares outstanding.
F-26
<PAGE> 88
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCKHOLDERS' EQUITY (Continued)
Stock ownership plan - In 1986, the Company adopted a non-contributory
non-leveraged employee stock ownership plan (Stock Plan) to provide benefits to
all eligible employees upon termination of employment. The Stock Plan invests
primarily in Company stock. Equivalent full-time employees as defined by the
Stock Plan become participants in the Stock Plan after completing three months
of service with the Company. Participant accounts vest in increments over a
seven year period of service at which time full vesting occurs.
The Company's contributions may be made in cash or common stock of the Company
and are determined annually by the Board of Directors in their sole discretion.
Company expense for contributions to the Stock Plan totaled $66,000 for the
year ended December 31, 1993. No contribution was made for 1994 and 1995. At
December 31, 1995, the Stock Plan held 98,103 shares of common stock of the
Company.
Stock options - The stock option plan (Plan) of the Bank was adopted by the
Company in 1982 and amended to provide for the issuance of both incentive stock
options and nonqualified stock options. Directors, officers and employees were
eligible to receive stock options upon approval of the Board of Directors or
the Stock Option Committee. Option prices may not be less than the fair market
value of the stock at the date of grant. Incentive stock options expire ten
years after the date of grant. Options are exercisable in installments of 20%
per year commencing on the grant dates and are cumulative from year to year. In
accordance with the Plan, an additional 6,296 shares were added (options
outstanding) under the Plan as a result of the 1993 stock dividend. No more
options may be granted under the Plan as it expired December 8, 1992.
F-27
<PAGE> 89
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCKHOLDERS' EQUITY (Continued)
Activity for the three years ended December 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
Options Options
Available Outstanding Price per share
--------- ----------- ---------------
<S> <C> <C> <C>
Balance - January 1, 1993 -- 205,293 $3.40 to $5.50
Options granted -- --
Options cancelled -- (37,772) $3.92
Options exercised -- (50,005) $3.40
--------- ---------
Balance - December 31, 1993 -- 117,516 $3.40 to $5.50
Options granted -- --
Options cancelled -- 48,484 $3.40 to $5.36
Options exercised -- --
--------- --------
Balance - December 31, 1994 -- 69,032 $3.40 to $5.50
Options granted -- --
Options cancelled -- (27,966) $3.40 to $5.36
Options exercised -- --
--------- --------
Balance - December 31, 1995 -- 41,066 $3.40 to $5.50
========= =======
</TABLE>
At December 31, 1995, 41,066 shares were exercisable and 41,066 shares of
common stock are reserved for future issuance under the Plan. No options are
available for grant as the Plan expired on December 8, 1992.
F-28
<PAGE> 90
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - DIVIDEND RESTRICTIONS
Section 23A of the Federal Reserve Act restricts the Bank from making loans or
advances to the Company and its affiliates in excess of 20% of its capital
stock and surplus. The prompt corrective action provisions of FDICIA prohibit
the Bank from making a capital distribution to the Company if, after such a
transaction, the Bank would be undercapitalized. In addition, California
Banking law limits the amount of dividends which a bank can pay without
obtaining prior approval from bank regulators. At December 31, 1995, these
provisions would allow the Bank to make loans of approximately $1,650,000 to
the Company and its affiliates. No dividends would be permitted without
regulatory approval. In addition, under an agreement with the Federal Reserve
Bank of San Francisco ("FRB") the Company is prohibited from paying dividends
to shareholders without the prior written approval of the FRB. Under an
agreement with the FDIC the Bank is prohibited from paying dividends to the
Company without the prior written approval of the FDIC. No dividend was paid
by the Bank to the Company in 1993, 1994 or 1995.
Business Credit is prohibited from paying dividends to the Company under the
terms of its line of credit without the prior written consent of the lender
(see Note 9). In 1995 and 1994, Business Credit paid dividends to the Company
totaling $4,100,000 and $500,000, respectively, with such approval. No dividend
was paid by Business Credit to the Company in 1993.
NOTE 16 - OTHER NONINTEREST EXPENSE
Other noninterest expense is comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Professional fees $ 827,000 $ 276,000 $ 490,000
Office supplies and
expense 157,000 150,000 148,000
Communications 265,000 382,000 384,000
Insurance 525,000 614,000 696,000
Directors fees 128,000 295,000 294,000
Depreciation 305,000 237,000 213,000
Other 106,000 257,000 512,000
--------- --------- ---------
$2,313,000 $2,211,000 $2,737,000
========== ========== ==========
</TABLE>
F-29
<PAGE> 91
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed financial information of the parent company only is presented below.
STERLING WEST BANCORP
BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Cash in Sterling bank $ 38 $ 6
Loan to non-bank subsidiary -- 1,339
Investment in Sterling Bank 7,171 8,248
Investment in non-bank subsidiary 412 3,211
Other assets 84 361
------ ------
$ 7,705 $13,165
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ -- $ 1,493
Other liabilities 787 1,315
Common stock 8,686 8,686
Retained earnings (accumulated
deficit), restricted (1,768) 1,671
------- ------
$ 7,705 $13,165
======= =======
</TABLE>
In addition to repayment of borrowed funds by Business Credit, the Company's
other sources of liquidity include, to a lesser extent, payment of dividends
from its subsidiary companies. Payment of dividends is subject to statutory and
regulatory limitations. As a result of losses in its last three fiscal years,
at December 31, 1995, the Bank had no retained earnings legally available for
the payment of cash dividends. Under the terms of the FDIC Memorandum and the
FRB Memorandum the Bank, BSC and Business Credit are prohibited from paying
cash dividends to the Company unless the payment is approved in advance by the
Regional Director of the FDIC and the State Superintendent of Banks, as well as
the Federal Reserve Bank, respectively. Additionally, under the prompt
corrective action provisions of FDICIA, the Bank is prohibited from paying any
cash dividends that will result in the Bank becoming undercapitalized.
F-30
<PAGE> 92
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (Continued)
STERLING WEST BANCORP
STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Equity in net
loss of subsidiaries $(3,428) (2,392) (378)
Other income 458 776 863
Other expense (474) (809) (841)
------- ------- --------
Loss before taxes (3,444) (2,425) (356)
Income tax provision (benefit) (5) 450 10
-------- ------- -------
Net loss $(3,439) $(2,875) $ (366)
======= ======= ======
</TABLE>
F-31
<PAGE> 93
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (Continued)
STERLING WEST BANCORP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,439) $(2,875) $ (366)
Adjustments to reconcile net income to
net cash from operating activities:
Equity in loss
of subsidiaries 3,428 2,392 378
Dividends paid by non-bank subsidiary 4,100 500 --
Other, net (253) 1,066 198
------- ------- ------
Total adjustments 7,275 3,958 576
------- ------- ------
Net cash provided by operating activities 3,836 1,083 210
Cash from investing activities:
Payment for investment in bank subsidiary (3,650) (1,330) (500)
------- ------- ------
Net cash used in investing activities (3,650) (1,330) (500)
Cash flows from financing activities:
Proceeds from issuance of commercial paper -- -- 590
Payments of commercial paper (1,493) (1,054) (1,450)
Decrease in
loans to subsidiary 1,339 1,303 1,127
Proceeds from exercise of stock options -- -- 170
Cash dividends paid -- -- (160)
------- ------- ------
Net cash provided by (used in)
financing activities (154) 249 277
------- ------- ------
Net increase (decrease)
in cash and cash equivalents 32 2 (13)
Cash and cash equivalents at beginning of year 6 4 17
------- ------- ------
Cash and cash equivalents at end of year $ 38 $ 6 $ 4
======= ======= ======
Supplemental cash flow information
Cash paid during the year for interest $152 $172 $210
Cash paid for income taxes -- -- --
======= ======== ======
</TABLE>
F-32
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit
No. Description Page
- ------- ----------- ----
<S> <C> <C>
3.1 Articles of Company (1) *
3.1.1 Certificates of Amendment to Articles (13) *
3.2.1 Bylaws of Company, as amended (2) *
4.1 RESERVED *
4.1.1 RESERVED *
4.1.2 RESERVED *
4.1.3 RESERVED *
4.2 Form of Seven Year Registered Variable
Interest Rate Note (3) *
4.3 Form of Three Year Registered Variable
Interest Rate Note due June 1, 1995 (13) *
4.4 Form of Seven Year Registered Variable
Interest Rate Note due June 1, 1999 (13) *
4.5 Form of Seven Year Registered
Convertible Variable Interest Rate Note
due June 1, 1999 (13) *
10.1 RESERVED *
10.2 RESERVED *
10.3 RESERVED *
10.4 Lease, dated June 2, 1980, between
Wilshire-Berendo Building Company, a
Limited Partnership, and Sterling Bank
and Lease amendment, effective
July 30, 1981 (1) *
10.5 Company's 1982 Stock Option plan, as
amended (5) *
10.6 Sterling Bancorporation Employee
Stock Ownership Plan and Trust (3) *
10.6.1 Amended and Restated Sterling West Bancorp
Employee Stock Ownership Plan and Trust (14) *
10.7 Employment Agreement, dated July 1, 1989,
between Sterling Business Credit, Inc.
and Farhad Motia (4) *
10.7.1 Amendment to Employment Agreement,
effective May 1, 1990, between Sterling
Business Credit, Inc. and Farhad Motia (2) *
10.7.2 Amendment to Employment Agreement,
effective December 30, 1992, between
</TABLE>
<PAGE> 95
<TABLE>
<S> <C> <C>
Sterling Business Credit, Inc. and Farhad
Motia (13) *
10.8 Lease, dated January 29, 1986 between
George E. Moss and Sterling Bank (6) *
10.9 Lease, effective June 1, 1986, between
Del Rey Properties and Sterling Bank (6) *
10.9.1 Amendment, dated May 15, 1986, to Lease,
effective June 1, 1986, between Del Rey
Properties and Sterling Bank (6) *
10.9.2 Amendment, dated October 2, 1986, to
Lease, effective June 1, 1986, between
Del Rey Properties and Sterling Bank (7) *
10.10.1 Amendment, dated April 14, 1986, to Lease
between 425 West Broadway Associates and
Sterling Bank (6) *
10.10.2 Addendum, dated December 10, 1986 to
Lease between 425 West Broadway Associates
and Sterling Bank (3) *
10.11 Office Lease, dated April 13, 1987, by
and between Benefit Savings Corporation and
Torrance Investment Co. (8) *
10.12 Lease Agreement, dated November 19, 1986,
between Santa Ana Company and Penn National
Mortgage Corporation and Assignment letter,
dated February 4, 1987, from law offices of
Pittman & Yoshimura (9) *
10.13 Lease, dated April 14, 1986, between
425 West Broadway Associates and
Sterling Bank (6) *
10.14 RESERVED *
10.15 Sublease, dated October 25, 1989, between
Jaffe & Clemens and Sterling Bank (4) *
10.16 RESERVED *
10.17 RESERVED *
10.18 Agreement, dated January 1, 1991, between
Sterling Bancorporation and Douglas Swets (2) *
10.19 Employment Agreement, dated January 1,
1990, between Sterling Bancorporation and
Allan E. Dalshaug (2) *
10.19.1 Amendment No. 1, effective September 30, 1990,
to Employment Agreement, dated January 1, 1990,
between Sterling Bancorporation and
Allan E. Dalshaug (13)
10.19.2 Amendment No. 2, effective December 30, 1992,
to Employment Agreement, dated January 1, 1990,
</TABLE>
<PAGE> 96
<TABLE>
<S> <C> <C>
between Sterling West Bancorp and
Allan E.Dalshaug (13) *
10.19.3 Amendment No. 3, effective May 15, 1995, to
Employment Agreement dated Januuary 1, 1990
between Sterling West Bancorp and Allan E.
Dalshaug
10.20 Standard Office Lease, dated February 18,
1990, between Del Rey Properties and
Sterling Bank (2) *
10.20.1 Sublease, dated February 15, 1992, between
Sterling Bank and Skylark Financial
Corporation (10) *
10.21.2 Employment Agreement, dated January 1, 1994,
between Sterling Bank and Joseph Carona (11) *
10.23 Lease, dated March 31, 1991, between
Pacific Court Holdings and Sterling Bank (10) *
10.24 Sublease, dated December 31, 1991, between
Hewitt Associates and BSC Mortgage
Corporation (10) *
10.25 Sublease, dated January 2, 1992, between
Computerland Corporation and BSC Mortgage
Corporation (10) *
10.29 Sublease, dated February 2, 1994, between
Wells Fargo Bank, N.A. and Sterling Bank (14) *
10.30 Lease, dated March 31, 1991, between The Yashouafars,
A General Partnership and Sterling Bank (14) *
10.31 Employment Agreement, dated March 21, 1996,
between the Company and Allan E. Dalshaug
11 Statement of Computation of Net Income
per Share of Common Stock
21 Subsidiaries of Company (12) *
23.1 Consent of KPMG Peat Marwick LLP,
Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 97
(1) These documents were previously filed as Exhibits 3.1 and 10.4,
respectively, to the Company's Registration Statement on Form S-14
(registration No.2-77211), effective June 1, 1982, and are
incorporated herein by this reference.
(2) These documents were previously filed as Exhibits 3.2.1, 10.7.1,
10.18, 10.19 and 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990, and are incorporated
herein by this reference.
(3) These documents were previously filed as Exhibits 4.2, 10.6, and
10.10.2, respectively, to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, and are incorporated
herein by this reference.
(4) These documents were previously filed as Exhibits 10.7, and 10.15,
respectively, to Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, and are incorporated herein by
this reference.
(5) This document was previously filed as Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988, and is incorporated herein by this reference.
(6) These documents were previously filed as Exhibits 10.1, 10.2, 10.3,
10.5 and 10.4, respectively, to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1986, and are incorporated
herein by this reference.
(7) This document was previously filed as Exhibit 10.9.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, pursuant to Amendment No. 1 thereto filed by the
Company on Form 8 dated June 4, 1986, and is incorporated herein by
this reference.
(8) This document was previously filed as Exhibit 10.11 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1987, and is incorporated herein by this reference.
(9) This document was previously filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1987, and is incorporated herein by this reference.
(10) These documents were previously filed as Exhibits 10.20.1, 10.21,
10.22, 10.23, 10.24, and 10.25, respectively, to the Company's
Annual Report on Form 10-K for fiscal year ended December 31, 1991,
and are incorporated herein by this reference.
(11) This document was previously filed as Exhibit 10.21.2
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and are incorporated herein by this
reference.
(12) This document was previously filed as Exhibit 22 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1984, and is incorporated herein by this reference.
<PAGE> 98
(13) These documents were previously filed as Exhibits 3.1.1,
4.3, 4.4, 4.5, 10.7.2, 10.19.1 and 10.19.2, respectively, to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, and are incorporated herein by this reference.
(14) These documents were previously filed as Exhibits 10.6.1, 10.29 and
10.30, respectively, to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, and are incorporated
herein by this reference.
<PAGE> 1
EXHIBIT 10.19.3
AMENDMENT NUMBER 3
This Third Amendment to Employment Agreement dated January 1,
1990 as amended effective September 30, 1990 (the "1990 Amendment") and amended
effective December 30, 1992 (the "Extension") between Sterling West Bancorp and
Allan E. Dalshaug (collectively, with the 1990 Amendment and the Extension, the
"Agreement") is dated as of May 15, 1995.
WHEREAS, the annualized results for the first quarter of 1992
resulted in the payment of a cash bonus to Employee of $96,034 under the terms
of the Agreement;
WHEREAS, after tax net income of Employer for the full fiscal
year 1992 did not entitle Employee to any 1992 cash bonus;
WHEREAS, the parties wish to provide for the refund of the
cash bonus paid to Employee in the first quarter of 1992;
WHEREAS, under the terms of the Agreement, 5.8% of the loss
suffered by the Employer in 1992 shall be credited against Incentive
Compensation payable to Employer (the "Offset");
WHEREAS, the parties wish to provide for the Offset;
WHEREAS, the parties have agreed that the intent of the
Extension was to create a new three (3) year period for purposes of determining
Incentive Compensation payable to, and forfeitable by, Employee;
WHEREAS, the parties agree that no Incentive Compensation will
have been earned by Employee during the three (3) year period covered by the
Extension; and
WHEREAS, the parties recognize that ambiguities in the
Agreement need clarification;
NOW, THEREFORE, on the basis of the foregoing recitals and
other good and valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the Agreement is hereby amended as follows:
1. Capitalized terms used herein and not otherwise
defined shall have the same meaning as set forth in the Agreement.
2. Section 2.1 is hereby amended by adding the following
at the end of the current provision:
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<PAGE> 2
"Notwithstanding anything to the contrary contained in this Agreement, if
Employee elects to forego receiving any portion of the salary to which he is
entitled under this Agreement, including any increases in salary to which he
would be entitled under this Agreement, the aggregate amount of such foregone
salary which would have otherwise been paid to Employee will be applied
against, and be deemed to be a refund of, payments made to Employee under the
provisions of Section 2.2(b)(i)(bb) which were found not to be earned during
the fiscal year in question because Employer's after tax net income for such
fiscal year did not exceed a twelve and one-half percent (12.5%) return on
beginning of the year stockholders' equity or otherwise, and (ii) which were
not refunded under Section 2.2(b)(i)(bb). The amount of salary so foregone
shall be calculated at the earlier to occur of (i) the expiration date of this
Agreement, or (ii) Employee's termination of employment."
3. Section 2.2(a) is hereby amended by adding the
following phrase after "during the term of this Agreement, if any":
"and ending prior to January 1, 1993;"
4. Section 2.2(b)(i)(aa) is hereby amended by deleting
the last sentence thereof and replacing it with the following sentence:
"Said newly issued Incentive Compensation Shares shall be issued in Employee's
name, but shall be subject to the full risk of forfeiture pursuant to the
provisions set forth in Section 2.2(k) and restrictions on transfer pursuant to
the provisions set forth in Section 2.4."
5. Section 2.2(b)(i)(bb) is hereby amended by deleting
the last two sentences thereof and replacing them with the following sentence:
"Any amounts overpaid for the full fiscal year shall be offset against
Incentive Compensation earned in each subsequent quarter until such overpayment
is repaid."
6. Section 2.2 (b)(ii) is hereby amended by (i)
inserting the term '(the "Pledged Shares")' after the word "shares" in line 2
of said section, and (ii) deleting the last two sentences thereof and replacing
them with the following:
"The Pledged Shares shall be held (physically) by Employer, subject to the full
risk of forfeiture provided for in Section 2.2(k). Employee agrees and
acknowledges that Employee shall have no unconditional right to the Pledged
Shares until not less than one day after the expiration of the term of this
Agreement (i.e. January 3, 1996). Employee and Employer agree that Employee
shall remain the beneficial shareholder with respect to the Pledged Shares and
shall be entitled to the Pledged Shares, and shall be entitled to receive all
dividends (cash or stock) and distributions, payable with respect to the
Pledged Shares, which amounts received as stock dividends or other
distributions in the form of Employer shares (stock) shall not be subject to
any of the provisions contained in this Agreement applicable to the Pledged
Shares. Employee
2
<PAGE> 3
understands and acknowledges that the certificates representing any Pledged
Shares of Employer's common stock shall bear the following legend, or
other required legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
FORFEITURE PROVISIONS CONTAINED IN AN EMPLOYMENT AGREEMENT BETWEEN
ALLAN E. DALSHAUG AND THE COMPANY DATED AS OF JANUARY 1, 1990, AS
AMENDED. A COPY OF THE EMPLOYMENT AGREEMENT IS AVAILABLE FOR
INSPECTION DURING NORMAL BUSINESS HOURS AT THE PRINCIPAL OFFICE OF THE
COMPANY, 3287 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010,
ATTENTION: CORPORATE SECRETARY. ALL THE TERMS AND PROVISIONS OF THE
EMPLOYMENT AGREEMENT ARE HEREBY INCORPORATED BY REFERENCE AND MADE A
PART OF THIS CERTIFICATE."
7. Section 2.2(c) is hereby amended by (i) deleting the
term "One Hundred and Fifty Thousand Dollars ($150,000.00)"and replacing it
with the term "One Hundred Thousand Dollars ($100,000.00)"; (ii) deleting the
phrase "provided for in Sections 2.2(h) and 2.2(j) hereinabove" and replacing
such phrase with the phrase "set forth in Section 2.2(k)"; (iii) deleting the
phrase "forfeiture provisions set forth in Sections 2.2(h) and 2.2(j)" and
replacing such phrase with the phrase "forfeiture provisions set forth in
Section 2.2(k)"; and (iv) replacing the date "January 1, 1993" with "January 3,
1996";
8. Section 2.2(e) is hereby amended by deleting the term
"One Hundred and Fifty Thousand Dollars ($150,000.00)" and replacing it with
the term "One Hundred Thousand Dollars ($100,000.00)."
9. Section 2.2(h) is hereby deleted in its entirety and
replaced with the term "RESERVED."
10. Section 2.2(j) is hereby deleted in its entirety and
replaced with the term "RESERVED."
11. New Section 2.2(k) is hereby added to the Agreement
to read as follows:
"(k) Notwithstanding the issuance of the Incentive
Compensation Shares in Employee's name pursuant to Section 2.2(b)(i)(aa) and
the deposit of the Pledged Shares pursuant to Section 2.2(b)(ii), it is agreed
and understood that any overpayment or any portion of any overpayment of
Incentive Compensation that is not refunded to Employer by Employee under the
provisions of the last sentence of Section 2.1, the last sentence of Section
2.2.(b)(i)(bb) or otherwise shall be refunded to Employer by Employee by
crediting first, the fair market value of the Incentive Compensation Shares
payable to Employee under Section 2.2(b)(i)(aa) and then, the fair market value
of the Pledged Shares deposited under Section 2.2(b)(ii). Thereafter, and
only to extent there shall remain any Incentive Compensation Shares or Pledged
Shares, five and eight tenths percent (5.8%) of the loss suffered by Employer
in 1992 shall, unless otherwise
3
<PAGE> 4
provided for by Employee, reduce total Incentive Compensation earned by
Employee under the Agreement by crediting first, the fair market value of any
remaining Incentive Compensation Shares payable to Employee under Section
2.2(b)(i)(aa) and then, the fair market value of any remaining Pledged Shares
deposited under Section 2.2(b)(ii). For purposes of this Section 2.2(k), "fair
market value" of the Pledged Shares and the Incentive Compensation Shares shall
be established by the average price paid per share of such common shares of
Employer during trading activity for the thirty (30) day period preceding the
expiration date of this Agreement."
[SIG] 5/15/95
______________________________ Dated:__________________
EMPLOYER
STERLING WEST BANCORP
[SIG] May 15, 1995
______________________________ Dated:__________________
EMPLOYEE
ALLAN E. DALSHAUG
4
<PAGE> 1
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into effective as of March 1, 1996 by and between STERLING WEST
BANCORP, a California corporation, hereinafter referred to as the "Employer,"
and ALLAN E. DALSHAUG, hereinafter referred to as the "Employee."
The parties contract with reference to the following facts:
A. The Employer desires to appoint and employ the Employee in the
capacities of Chairman of the Board of Directors, Chief Executive Officer and
President of the Employer, and the Employee desires to accept such appointment
and employment with the Employer.
B. The parties are willing to enter into an agreement providing
for such appointment and employment upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
1. EMPLOYMENT. The Employer hereby agrees to appoint
and employ, and does hereby appoint and employ, the Employee as its Chairman,
Chief Executive Officer and President for and during the Employment Period (as
defined in Section 5 herein), and the Employee agrees to accept and hereby
accepts such appointment and employment by the Employer, on the terms and
subject to the conditions set forth in this Agreement.
2. COMPENSATION.
2.1 Salary. As compensation for the services to
be rendered by the Employee hereunder, the Employer agrees to pay to the
Employee during the Employment Period a salary at the rate of One Hundred and
Sixty-Six Thousand Five Hundred Dollars ($166,500) per year, subject to
applicable law respecting withholding of federal, state and/or local taxes or
their equivalent. All salary, less income tax and other applicable
withholding, shall be prorated and paid out periodically in accordance with the
Employer's normal payroll procedures with respect to executive officers.
2.2 Incentive Compensation. In addition to the
salary provided for in Section 2.1 above, the Employee may receive, during the
Employment Period, such incentive compensation as the Board of Directors of the
Employer (the "Board") may, in its sole and absolute discretion, determine to
pay to the Employee from time to time, in a form and in an amount to be
determined solely by the Board. However, the Board is under no obligation to
provide for any such incentive compensation.
1
<PAGE> 2
3. DUTIES, TIME AND EFFORTS.
3.1 Duties. During the Employment Period, the
Employee shall serve as Chairman of the Board, Chief Executive Officer and
President of the Employer and shall report to the Board, and his duties shall
include generally, but without limitation, authority and responsibility for the
overall management of the affairs and business of the Employer, serving as
Chairman of the Board and Chief Executive Officer of Sterling Bank, serving as
Chairman of the Board and Chief Executive Officer of Sterling Business Credit,
Inc., and such additional duties as may be assigned by the Board to the
Employee. It is specifically understood that the Employee may be required to
provide services to other subsidiaries of the Employer not presently in
existence or for businesses not presently conducted by the Employer, consistent
with his status as an executive officer.
3.2 Time. The Employee shall devote his full
productive time, energies, and abilities to the proper and efficient
performance of the duties, responsibilities and authorities described above.
However, the expenditure of reasonable amounts of time by the Employee for
educational, charitable and professional activities that do not otherwise
conflict with the terms of this Agreement or the duties and responsibilities of
the Employee, including without limitation, serving as a member of the Board of
Directors of L.A. Gear, Inc. and Jalate, Ltd. (or related companies), shall not
be deemed a breach of this Agreement, provided that such activities do not
materially interfere with the services required of the Employee under this
Agreement, and shall not require the prior consent of the Employer.
3.3 Non-Competition. During the Employment
Period, the Employee may not, without the prior express authorization of the
Board, directly or indirectly engage in any activity competitive with the
Employer's businesses or those of any of its subsidiaries, whether acting alone
or as an officer, director, owner or employee of any other corporation or
business, whether professional or otherwise. Nothing contained in this Section
3.3, however, shall prevent the Employee from purchasing and/or holding less
than one-tenth of one percent (0.10%) of the issued and outstanding stock of a
publicly-held corporation.
3.4 Other. The Employee shall, at all times
during the Employment Period, be furnished with such office, stenographic and
other necessary and secretarial assistance, and such facilities, amenities and
services as are suitable to the Employee's position as an executive officer and
adequate for the performance of the Employee's duties under this Agreement.
Unless otherwise agreed to by the Employee, the Employee's offices shall be
maintained at the premises of the principal place of business of the Employer
in Los Angeles, California; provided, however, that in connection with the
performance of his duties and responsibilities, the Employee acknowledges that
he may be required to undertake significant travel as the needs of his position
may reasonably require.
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<PAGE> 3
4. VACATION. The Employee shall be entitled to take
vacation at the rate of five (5) weeks during each twelve (12) month period
during the Employment Period. The date or dates of said vacation shall be
determined by the Employee and the Board. To the extent the Employee does not
use the full amount of such vacation as provided above, the unused balance, up
to a maximum of one (1) week, shall accrue and be carried over into the
following year, if any, during which the Employee is employed by the Employer.
Under no circumstances, regardless of the Employee's failure to take vacations,
may the Employee take more than six (6) weeks vacation during any twelve (12)
month period.
5. TERM.
5.1 Term. The term of the Employee's employment
and the Employer's obligations pursuant to this Agreement shall commence upon
the date of this Agreement and terminate on January 2, 1997, unless sooner
extended by agreement between the parties or sooner terminated upon the
happening of any of the following events (the "Employment Period"):
(a) If the Employer and the Employee
shall mutually agree to such sooner termination;
(b) Conviction of the Employee for any
crime involving a dishonest act or any behavior not befitting the Employee's
position as an executive officer of a bank or bank holding company, which could
reasonably make the continued employment of the Employee by the Employer
damaging to the Employer or its public reputation;
(c) Death of the Employee;
(d) The Employee is prevented, by reason
of any accident, illness, or mental or physical disability, not arising out of
an injury sustained while on the Employer's business, from fully performing his
duties and responsibilities under this Agreement for a period of ninety (90)
consecutive days or an aggregate of ninety (90) days during any three hundred
and sixty-five (365) day period (not limited to any calendar or fiscal year).
(e) Commission of any dishonest or
fraudulent act by the Employee in the course of his employment;
(f) For Good Cause, as defined in
Section 5.2 below, and pursuant to the procedures described therein and in
Section 5.3; or
(g) Due to governmental restrictions on
continued operations of the Employer or its banking subsidiary, as more fully
set forth and provided for in Section 5.4 herein.
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<PAGE> 4
5.2 Termination for Good Cause After Notice and
Failure to Cure. The Employer may, at any time during the Employment Period,
terminate the employment of the Employee and its obligations under this
Agreement for good cause, by written notice to the Employee in accordance with
the notice requirements and restrictions contained in Section 5.3 herein. For
purposes of illustration, good cause shall include, but shall not be limited
to, the following (collectively, "Good Cause"):
(a) The persistent unwillingness or
inability of the Employee to perform his duties or responsibilities hereunder;
(b) The persistent malfeasance,
misfeasance or nonfeasance in connection with the performance of the Employee's
duties, such conduct to be determined solely by the Employer;
(c) Willful and intentional acts having
the effect or consequence of injuring the reputation, business or business
relationships of the Employer;
(d) Breach of any material provision of this Agreement.
Notwithstanding the foregoing, however, Good Cause shall not exist solely due
to the financial performance or results of operation of the Employer.
5.3 Notice Requirement and Restrictions. Prior
to terminating the Employee's employment pursuant to Sections 5.1(f) or 5.2
herein, the Employer shall provide the Employee with a written notice
specifying in reasonable detail (i) the duties or responsibilities which it
contends that the Employee has not been adequately performing, (ii) why the
Employer believes that it has good cause to terminate the Employee's employment
and (iii) what actions the Employee should perform to adequately execute his
obligations under this Agreement. If the Employee corrects such performance
failure within thirty (30) days of receipt of such notice or otherwise modifies
his performance to correct the matters indicated in the notice, the Employee's
breach will be deemed cured and his employment shall not be terminated;
provided, however, that if the nature of any material performance failure by
the Employee described in the notice are such that more than thirty (30) days
are reasonably required to correct such failure, then the Employee's breach
will be deemed cured and the Employee's employment shall not be terminated if
the Employee substantially commences to correct such performance failure within
thirty (30) days of receipt of the notice and thereafter diligently prosecutes
such corrective actions. Otherwise, the Employer shall have the right to
terminate the Employee's employment and its obligations under this Agreement at
the end of the thirty (30) day period following receipt of such notice by the
Employee.
5.4 Governmental Restrictions on Continued
Operations. The Employee understands that the conduct of the Employer's
business and that of its banking subsidiary, Sterling Bank, is, and during the
term of this Agreement shall be, subject to the laws, rules, regulations,
permits and licenses of various governmental bodies and agencies, including
without limitation, the
4
<PAGE> 5
California State Banking Department, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System. Notwithstanding
anything to the contrary contained herein, if the commencement or continuation
of the Employer's business or that of Sterling Bank is, for any reason,
prohibited, prevented or substantially restricted by a court of law or any such
governmental body or agency, the Employer shall thereafter have the right to
terminate the employment of the Employee and its obligations under this
Agreement, at its sole option, by giving written notice of such termination to
the Employee, with no further liability on the part of the Employer other than
for any accrued but unpaid compensation to the Employee.
6. EMPLOYER'S AUTHORITY. To the extent not inconsistent
with other terms of this Agreement, the Employee agrees to observe and comply
with the reasonable rules and regulations of the Employer, as adopted by the
Board, respecting performance of his duties and to carry out and perform the
reasonable orders, directions and policies of the Employer as they may be, from
time to time, stated to him either orally or in writing.
7. EXPENSES AND FRINGE BENEFITS.
7.1 Automobile Allowances. The Employer and
Employee agree that the proper discharge of the duties of the Employee will
require the frequent use of an automobile. The Employer hereby agrees to
provide the Employee with the use of an automobile chosen jointly by the
Employee and the Employer, and suitable for use by an executive officer of a
bank or bank holding company. Such automobile shall be purchased or leased by
the Employer and provided to the Employee for his exclusive use, and at the
termination of the Employment Period, the Employee shall have the right to
purchase such automobile from the Bank for its depreciated book value or have
the Employer take steps to transfer such lease to him as lessee or sublessee.
In lieu of the right to the use of an automobile as provided for in this
paragraph, however, at the Employee's option he may directly purchase or lease
an automobile and the Employer shall, during the Employment Period, pay to the
Employee additional compensation of $750.00 per month and pay or reimburse all
reasonable expenses incurred by the Employee in connection with the use and
operation of such automobile, including, but not limited to, insurance,
licensing, taxes and other operating expenses.
7.2 Business Expenses. Subject to Section 7.3
below, the Employer shall pay or reimburse all expenses reasonably incurred by
the Employee in discharge of the Employee's duties hereunder. Such expenses
shall include, without limitation, the following:
(a) Educational expenses incurred for
the purpose of maintaining or improving the Employee's skills;
(b) Expenses for travel, lodging, and
related expenses in connection with conventions or meetings, attendance at
which is necessary or appropriate in connection with the performance by the
Employee of his duties required hereunder;
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<PAGE> 6
(c) Expenses for meals, entertainment
and similar items reasonably incurred by the Employee in connection with the
business of the Employer; and
(d) Such other expenses incurred by the
Employee reasonably related to the discharge by the Employee of his duties set
forth herein.
7.3 Expense Documentation. The Employer reserves
the right to require, as a condition of payment or reimbursement for any item
pursuant to Section 7.2, that the Employee furnish the Employer with reasonable
written evidence of such expense and documentation of the relationship of such
item to the business of the Employer or the duties of the Employee.
7.4 Fringe Benefits. The Employee shall be
entitled to participate in any group life and health insurance plans offered by
the Employer to its employees. Such participation shall be on the same basis
as the majority of the other employees participating in such plan. Also, if
the Employer implements any new benefit plan for its employees generally, the
Employee will be allowed to participate in such benefit plan on the same basis
as the other employees. In addition, the Employer will provide to the Employee
a $250,000 whole life insurance policy, payable as designated by the Employee.
The premiums on such policy will be paid by the Employer.
7.5 Club Fees. The Employer and the Employee
agree that it is necessary and proper for the Employee to maintain membership
in the Wilshire Country Club, and that such membership is in the best interests
of the Employer and in furtherance of the Employee's obligations hereunder.
The Employer agrees to pay or reimburse the initial and ongoing costs of an
equity membership in such club and understands that the initial cost of an
equity membership in such club was approximately $14,500. Such equity
membership shall be held in the name of the Employee during the term of the
Employment Period and, upon the termination thereof, the Employee shall have
the right to retain such equity membership upon payment to the Employer of an
amount equal to the initial cost thereof incurred by the Employer.
8. ADDITIONAL RIGHTS OF THE EMPLOYEE. As an additional
incentive to the Employee, it is agreed that upon any termination, prior to
January 2, 1997, of this Agreement or the Employment Period for any reason
other than as set forth in Sections 5.1(b), 5.1(e), 5.1(f) or the Employee's
voluntary termination, the Employee shall receive a lump sum payment equal to
four (4) months of his then current salary, plus any accrued and unpaid
compensation.
9. CONFIDENTIAL DISCLOSURE. Except in the proper
performance of the Employee's duties pursuant to this Agreement, the Employee
agrees that he will not for any reason or at any time during or subsequent to
the Employment Period disclose to any person any secret, confidential or
proprietary information relating to the products or services of the Employer or
any trade secrets of the Employer. The Employee agrees that the remedy at law
for any breach of the foregoing will be inadequate, and that the Employer shall
be entitled to injunctive relief for
6
<PAGE> 7
any such breach. The obligations of the Employee pursuant to this Section 9
shall survive a termination of the Employment Period and this Agreement.
10. MISCELLANEOUS.
10.1 Assignability of Agreement. The provisions
of this Agreement shall inure to the benefit of the parties hereto, and their
respective permitted heirs, legal representatives, successors and assigns. The
obligations of the Employee under this Agreement shall be personal and not
delegable by him in any manner whatsoever.
10.2 Notices. Any notice, request, instruction or
other document to be given hereunder by either party hereto to the other shall
be in writing and delivered personally or sent by certified or registered mail,
postage prepaid, addressed as follows:
If to the Employee:
Mr. Allan Dalshaug
3346 Deer Creek Lane
Glendale, California 91208
If to the Employer:
Corporate Secretary
Sterling West Bancorp
3287 Wilshire Boulevard
Los Angeles, California 90010
Any notice so given shall be deemed received when delivered
personally, or (if mailed) when dispatched. Any party may change the address
to which notices are to be sent by giving written notice of such change of
address to the other party in the manner herein provided for giving of notice.
10.3 Waiver. No waiver of any breach of any
warranty, representation, covenant or other term or provision of this Agreement
shall be deemed to be a waiver of any preceding or succeeding breach of same or
any warranty, representation, covenant, term or provision. No extension of the
time for performance of any obligation or other act shall be deemed to be an
extension of the time for the performance of any other obligation or any other
act.
10.4 Amendment to Agreement. This Agreement
contains the entire agreement between the parties hereto with respect to the
subject matter contemplated herein, and may not be amended, supplemented or
discharged except by an instrument in writing signed by both parties hereto.
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<PAGE> 8
10.5 Dispute/Attorney's Fees. Should any dispute
arise concerning the terms or the interpretation of this Agreement, the
prevailing party shall be entitled to and be awarded reasonable attorney's fees
and costs, in addition to any other relief to which it may be entitled.
10.6 Time of the Essence. Time is of the essence
of each provision of this Agreement in which time is an element.
10.7 Arbitration. Any controversy or claim
arising out of or relating to this Agreement will, at the written request of
any party, be determined by binding arbitration under the auspices and rules
then in effect of the American Arbitration Association (the "Association") in
Los Angeles, California, as the same may be modified by the statues of
California then in effect. Such arbitration shall be conducted by a single
arbitrator if the parties shall agree upon one, or else by one arbitrator
appointed by each party and a third arbitrator appointed by the two
arbitrators. In case of any failure of a party to make any such appointment
within two (2) weeks after written notice of the controversy, such appointment
shall be made by the Association. All arbitration proceedings shall be held in
Los Angeles, California, and each party agrees to comply in all respects with
any award made in such proceeding and to the entry of a judgment in any
jurisdiction of any award rendered in such proceeding. All costs and expenses
of the arbitration (including costs of preparation and reasonable attorney's
fees) of the party prevailing in such arbitration shall be borne by the losing
party to such arbitration, unless directed otherwise by the arbitrators.
Notwithstanding any other provision of this paragraph, however, no party may
make a request for arbitration hereunder with respect to any matter, at any
time following the expiration of thirty (30) days after notice of filing of a
legal action with respect to such matter in a court of competent jurisdiction.
10.8 Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which taken together shall
constitute one instrument.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
STERLING WEST BANCORP ALLAN E. DALSHAUG
"Employer" "Employee"
[SIG] [SIG]
By: _______________________________ By:_________________________________
Name:______________________________
Chairman, Compensation Com.
Title:_____________________________
8
<PAGE> 1
EXHIBIT 11
STERLING WEST BANCORP
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Weighted-average shares outstanding
(used in the computation of primary
earnings per share . . . . . . . . . . . . . . . 1,710,214 1,710,214 $1,690,260
Assumed exercise of options at
average market price . . . . . . . . . . . . . . -- -- --
----------- ----------- ----------
Weighted-average shares outstanding
and common stock equivalents
(used in the computation of primary
earnings per share . . . . . . . . . . . . . . . 1,710,214 1,710,214 $1,690,260
Additional shares issuable upon the
assumed exercise of options at
period-end market price . . . . . . . . . . . . -- -- --
Additional shares issuable upon the
assumed conversion of convertible
notes at period-end market price . . . . . . . . 0 20,453 20,453
----------- ----------- ----------
Total shares outstanding assuming
full dilution . . . . . . . . . . . . . . . . . 1,710,214 1,730,667 $1,710,713
=========== =========== ==========
Net income (loss) . . . . . . . . . . . . . . . . $(3,439,000) $(2,875,000) $ (366,000)
Interest, net of tax, on variable interest
rate convertible notes assumed
to be converted to common stock . . . . . . . . 0 8,000 8,000
----------- ----------- ----------
Earnings applicable to common stock
used in the computation of fully
diluted earnings per share . . . . . . . . . . . $(3,439,000) $(2,867,000) $ (358,000)
=========== =========== ==========
Primary earnings per share . . . . . . . . . . . . $ (2.01) $ (1.68) $ (0.22)
=========== =========== ==========
Fully diluted earnings per share . . . . . . . . . $ (2.01) $ (1.66) $ (0.21)
=========== =========== ==========
</TABLE>
Exhibit 11
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sterling West Bancorp
We consent to incorporation by reference in the registration statement (No.
2-77211) on Form S-8 of Sterling West Bancorp of our report dated March 8,
1996, relating to the consolidated balance sheets of Sterling West Bancorp and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1995, which report appears
in the December 31, 1995 annual report on Form 10-K of Sterling West Bancorp.
Our report dated March 8, 1996, contains an explanatory paragraph referring to
a change in Sterling West Bancorp's method of accounting for income taxes in
1993 to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
March 8, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTENT SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (STERLING
WEST BANCORP AND SUBSIDIARIES) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 35,835
<INT-BEARING-DEPOSITS> 198
<FED-FUNDS-SOLD> 24,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 7,614
<INVESTMENTS-MARKET> 7,664
<LOANS> 72,406
<ALLOWANCE> 1,510
<TOTAL-ASSETS> 122,419
<DEPOSITS> 112,377
<SHORT-TERM> 1,372
<LIABILITIES-OTHER> 1,752
<LONG-TERM> 0
0
0
<COMMON> 8,686
<OTHER-SE> (1,768)
<TOTAL-LIABILITIES-AND-EQUITY> 122,419
<INTEREST-LOAN> 10,977
<INTEREST-INVEST> 839
<INTEREST-OTHER> 544
<INTEREST-TOTAL> 12,380
<INTEREST-DEPOSIT> 3,122
<INTEREST-EXPENSE> 4,208
<INTEREST-INCOME-NET> 8,172
<LOAN-LOSSES> 1,104
<SECURITIES-GAINS> 2,474
<EXPENSE-OTHER> 10,128
<INCOME-PRETAX> (586)
<INCOME-PRE-EXTRAORDINARY> (1,924)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,439)
<EPS-PRIMARY> (2.01)
<EPS-DILUTED> (2.01)
<YIELD-ACTUAL> 7.96
<LOANS-NON> 2,539
<LOANS-PAST> 25
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,613
<CHARGE-OFFS> 715
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 1,510
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
