<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________________
to __________________
Commission file number 0-10794
STERLING WEST BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3712404
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3287 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices) (Zip Code)
(213) 384-4444
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the registrant's sole class of common stock at
April 30, 1998: 1,712,419
This Form 10-Q contains 14 pages.
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STERLING WEST BANCORP
MARCH 31, 1998 QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I
FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Sterling West Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 23,791,000 $ 21,836,000
Securities held to maturity 11,632,000 10,735,000
(fair value of $11,741,000 at March 31, 1998
and $10,811,000 at December 31, 1997)
Loans receivable, net 61,295,000 64,817,000
Real estate held for sale 1,076,000 1,780,000
Fixed assets
Land and building 246,000 246,000
Furniture and equipment 3,218,000 3,216,000
Leasehold improvements 1,412,000 1,412,000
------------- -------------
4,876,000 4,874,000
Less: accumulated depreciation (3,889,000) (3,829,000)
------------- -------------
987,000 1,045,000
Accrued interest receivable 620,000 563,000
Other assets 656,000 474,000
------------- -------------
$ 100,057,000 $ 101,250,000
============= =============
LIABILITIES
Deposits
Demand $ 32,457,000 $ 33,331,000
Savings and NOW 44,687,000 47,057,000
Money market 7,013,000 5,073,000
Time deposits $100,000 or greater 5,797,000 5,744,000
Other time deposits 2,815,000 2,869,000
------------- -------------
92,769,000 94,074,000
Notes payable 200,000 400,000
Other liabilities 406,000 390,000
------------- -------------
93,375,000 94,864,000
STOCKHOLDERS' EQUITY
Common stock - authorized 5,000,000
shares without par value; issued and
outstanding 1,712,419 shares in 1998 and 1997 8,697,000 8,697,000
Accumulated deficit, restricted (2,015,000) (2,311,000)
------------- -------------
6,682,000 6,386,000
------------- -------------
$ 100,057,000 $ 101,250,000
============= =============
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
March 31, March 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Interest income
Loans $1,707,000 $1,720,000
Federal funds sold 186,000 165,000
Securities held to maturity 175,000 159,000
---------- ----------
2,068,000 2,044,000
Interest expense
Savings and NOW 446,000 473,000
Money market 28,000 32,000
Time deposits $100,000 or greater 72,000 77,000
Other time deposits 36,000 22,000
Notes payable 9,000 --
---------- ----------
591,000 604,000
---------- ----------
Net interest income 1,477,000 1,440,000
Provision for loan losses 25,000 389,000
---------- ----------
Net interest income after provision for loan 1,452,000 1,051,000
losses
Non-interest income
Service charges on deposit accounts 142,000 174,000
Gain on sale of SBA loans 172,000 228,000
Other 72,000 34,000
---------- ----------
386,000 436,000
Non-interest expenses
Salaries, wages and employee benefits 718,000 714,000
Occupancy 223,000 203,000
Furniture and equipment 43,000 53,000
Real estate operations, net 40,000 --
Other 518,000 456,000
---------- ----------
1,542,000 1,426,000
---------- ----------
Income before income taxes 296,000 61,000
Income tax provision -- 2,000
---------- ----------
Net income $ 296,000 $ 59,000
========== ==========
Net income per share: Basic $ 0.17 $ 0.03
========== ==========
Net income per share: Diluted $ 0.17 $ 0.03
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 296,000 $ 59,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 60,000 65,000
Provision for loan losses 25,000 389,000
Provision for real estate held for sale 40,000 25,000
Increase in accrued interest receivable (57,000) (104,000)
Increase in other assets (182,000) (134,000)
Increase in other liabilities 16,000 79,000
-------------- --------------
Total adjustments: (98,000) 320,000
-------------- --------------
Net cash provided by operating activities 198,000 379,000
Cash flows from investing activities
Proceeds from maturities of securities 999,000 500,000
Purchase of securities (1,896,000) (5,517,000)
Net (increase) decrease in loans receivable 3,497,000 (793,000)
Proceeds from sale of real estate 664,000 849,000
Purchase of fixed assets (2,000) (35,000)
-------------- --------------
Net cash provided by investment(used in)
investing activities 3,262,000 (4,996,000)
Cash flows from financing activities
Net decrease in demand deposits, savings
and other money market accounts (1,304,000) (8,420,000)
Net increase (decrease) in time deposits (1,000) 2,260,000
Repayment of notes payable (200,000) --
-------------- --------------
Net cash used in financing activities (1,505,000) (6,160,000)
-------------- --------------
Net decrease in cash and cash equivalents 1,955,000 (10,777,000)
Cash and cash equivalents at beginning of period 21,836,000 24,322,000
-------------- --------------
Cash and cash equivalents at end of period $ 23,791,000 $ 13,545,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and are in compliance with the instructions
for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. The accompanying unaudited consolidated interim financial statements
should be read in conjunction with the financial statements and the related
Management's Discussion and Analysis of Financial Condition and Results of
Operations filed with the Annual Report on Form 10-K for the year ended December
31, 1997 of Sterling West Bancorp (the "Company"). In the opinion of Management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The Results of Operations
for the three months ended March 31, 1998, are not necessarily indicative of
results that may be expected for the entire year ending December 31, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
NOTE 2. COMMITMENTS TO EXTEND CREDIT
In the ordinary course of business the Company enters into commitments to extend
credit to its customers. These commitments are not reflected in the accompanying
consolidated financial statements and Management does not expect any loss to
result from such commitments. As of March 31, 1998 and December 31, 1997 the
Company had entered into the following commitments:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Letters of Credit $ 145,000 $ 145,000
Undisbursed Loan Commitments $ 7,953,000 $ 5,884,000
</TABLE>
NOTE 3. NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is based on the number of common shares
outstanding, adjusted to reflect any stock splits and stock dividends during the
year. Diluted income (loss) per share includes the dilutive effect of the
issuance of any common stock equivalents. For the period ended March 31, 1998,
the basic and diluted income per share calculation was based upon 1,712,419 and
1,712,419 weighted shares respectively. For the period ended March 31, 1997, the
basic and diluted income per share calculation was based upon 1,710,214 and
1,710,214 weighted shares respectively.
NOTE 4. CASH AND CASH EQUIVALENTS
The cash and cash equivalents at March 31, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash & non-interest bearing deposits $ 6,991,000 $6,,836,000
Federal funds sold $16,800,000 $15,000,000
</TABLE>
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income" as of January 1,
1998. SFAS No. 130 established standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS No.
130 is effective for the fiscal years beginning after December 15, 1997.
Comprehensive income for the quarters ending March 31, 1998 and 1997,
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respectively was the same as net income as the Company had no components of
comprehensive income.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to provide a better understanding of the material changes
in trends relating to the financial condition, results of operations, and
liquidity of the Company. The discussion and analysis for the first quarters
ended March 31, 1998 and March 31, 1997, primarily reflect the operations of
Sterling Bank. The Bank is a wholly-owned subsidiary of the Company. Unless
otherwise specified, the discussion below relates to the Company's consolidated
financial condition and operations.
Discussions of certain matters contained in this Quarterly Report on Form 10-Q
may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") and as such, may
involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance or achievements may differ significantly
from the results, performance, or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Item 1. Business -- Factors That May Affect Future Results"
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
AGREEMENT AND PLAN OF REORGANIZATION
On December 30, 1997, the Company, the Bank and The Pacific Bank, a national
association ("Pacific"), entered into a definitive Agreement and Plan of
Reorganization (the "Reorganization Agreement"). The Reorganization Agreement
provides for, among other things, the merger of a subsidiary corporation to be
organized by Pacific with and into the Company, immediately followed by the
merger of the Company with and into the Bank, immediately followed by the merger
of the Bank with and into Pacific (collectively, the "Merger"). The Merger is
subject to, among other customary conditions to closing, the receipt of
regulatory approvals and the approval of the shareholders of the Company and the
shareholders of Pacific. The Company has scheduled a shareholders' meeting to
consider the Merger on May 27, 1998.
Under the terms of the Reorganization Agreement, the Company's shareholders will
receive aggregate consideration for their shares of the Company equal to one
hundred seventy-five percent (175%) of the consolidated book value of the
Company, as determined in accordance with generally accepted accounting
principles, within three calendar days preceding the proposed effective date of
the Merger. Such amount is subject to certain adjustments set forth in the
definitive Reorganization Agreement.
The foregoing description of the terms of the Reorganization Agreement does not
purport to be a complete statement of the parties' rights and obligations
thereunder, and is qualified in its entirety by reference to the definitive
Reorganization Agreement, a copy of which is contained in the Company's Report
on Form 8-K filed on January 23, 1998.
7
<PAGE> 8
FINANCIAL CONDITION
At March 31, 1998, assets of the Company were $100,057,000, a decrease of $1.2
million or 1.2% from $101,250,000 at December 31, 1997. The change in assets was
primarily attributable to decreases in loans receivable and real estate held for
sale, offset by an increase in federal funds sold and securities held to
maturity.
Federal funds sold increased to $16.8 million at March 31, 1998 from $15.0
million at December 31, 1997. Securities held to maturity increased to $11.6
million at March 31, 1998 from $10.7 million at December 31, 1997. This shift
from loans receivable is primarily the result of loan paydowns and maturities
during the quarter ending March 31, 1998.
Total nonperforming assets at March 31, 1998 decreased 42.5% from December 31,
1997, and 76.1% from March 31, 1997, and represented 1.47%, 2.53% and 6.25% of
total assets, respectively for those periods. The following table summarizes the
nonperforming assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31, March 31,
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Nonaccrual loans $ 396 $ 781 $ 3,839
Real estate held for sale $ 1,076 $ 1,780 $ 2,322
------------ ------------ ------------
Total nonperforming assets $ 1,472 $ 2,561 $ 6,161
============ ============ ============
Nonperforming assets as a % of total assets 1.47% 2.53% 6.25%
Nonaccrual loans as a % of total loans receivable 0.64% 1.19% 5.57%
</TABLE>
Nonaccrual loans decreased to $0.4 million at March 31, 1998 from $0.8 million
and $3.8 million at December 31, 1997 and March 31, 1997, respectively. Real
estate held for sale at March 31, 1998 decreased to $1.1 million from $1.8
million and $2.3 million at December 31, 1997 and March 31, 1997, respectively.
The decline in nonaccrual loans, as well as real estate held for sale is a
result of the Company's continued efforts to liquidate its nonperforming asset
portfolio.
Real estate held for sale at March 31, 1998, is stated at the estimated fair
value less estimated selling costs. Management expects that further foreclosures
may occur and no assurance can be given that additional losses will not occur in
excess of existing allowances.
LIQUIDITY
The Company's most liquid assets are cash and cash equivalents and its federal
funds sold portfolio. The levels of these assets are dependent on the Company's
operating, financing and investing activities during any given period. The
liquidity needs of the Company primarily relate to the Bank. The liquidity needs
of Sterling West Bancorp on a stand alone basis are minimal at this time.
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, the Bank had
available at March 31, 1998 $16.8 million of federal funds sold and $7.0 million
of cash and cash equivalents which could be used as an immediate source of
funds. In addition, the Bank has access to a $3.5 million federal funds purchase
line of credit from Community Bank, subject to
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<PAGE> 9
cancellation, which the Bank can use to meet short term needs. The Bank also has
access to funds through the Federal Reserve Bank discount window. The Bank
maintained at March 31, 1998 approximately 23.8% of its total assets in liquid
assets.
Total deposits decreased by $1.3 million, or 1.4%, consisting of a $0.9 million
decrease in demand deposits and a $2.4 million decrease in savings and NOW
accounts, which were offset by a $1.9 million increase in money market accounts
at March 31, 1998 as compared to December 31, 1997. The changes in these deposit
accounts are the results of what management believes to be normal fluctuations
in these accounts.
NOTES PAYABLE
In June 1997, the Company issued $900,000 of promissory notes to the following
directors of the Company:
<TABLE>
<S> <C>
Timothy G. Behunin $300,000
Michael Wagner $300,000
Allan E. Dalshaug $100,000
Howard M. Borris $100,000
Robert J. Schiller $100,000
--------
$900,000
========
</TABLE>
The proceeds of these notes were used by the Company to reimburse the Bank for a
tax receivable from the Company. It was determined during a Federal Deposit
Insurance Corporation and Department of Financial Institutions ("DFI") joint
regulatory examination in 1997, that a net tax balance on the Bank's books was a
functional receivable from the Company, and should be repaid. This balance
resulted from the filing of consolidated tax returns of the Company, under an
agreement, with its subsidiaries, which has been in effect for many years.
The Notes bore an initial interest rate of 10% per annum and thereafter carried
an adjustable rate equal to 1.5% over Bank of America's prime rate in effect
from time to time. The Notes had an initial maturity of September 18, 1997 with
an automatic 90 day renewal at the option of the Company for a maximum period of
up to one year, unless a change is requested by the Note holder. The Company
believes that the material terms of the Notes issued to the directors, including
renewals of the Notes, were as favorable to the Company as could have been
obtained from unrelated third parties.
At March 31, 1998, the Company had $200,000 of promissory notes outstanding
issued to the following Directors of the Company:
<TABLE>
<S> <C>
Timothy G. Behunin $ 75,000
Michael Wagner $ 75,000
Allan E. Dalshaug $ 25,000
Robert J. Schiller $ 25,000
---------
$ 200,000
=========
</TABLE>
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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 certain 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 following table sets forth the regulatory capital ratios of the Company and
the Bank at March 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
COMPANY BANK
------------------------- -------------------------
RISK WEIGHTED AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 6,682 9.89% $ 6,831 10.11%
Tier 1 Capital
minimum requirement $ 2,702 4.00% $ 2,702 4.00%
------------ ------------ ------------ ------------
Excess $ 3,980 5.89% $ 4,129 6.11%
Total capital $ 7,530 11.14% $ 7,678 11.37%
Total capital
minimum requirement $ 5,405 8.00% $ 5,403 8.00%
------------ ------------ ------------ ------------
Excess $ 2,125 3.14% $ 2,275 3.37%
Risk-weighted assets $ 67,562 $ 67,541
Average Total Assets
Tier 1 capital $ 6,682 6.75% $ 6,831 6.90%
Tier 1 capital
minimum requirement $ 3,962 4.00%
------------ ------------
Memorandum
requirement $ 6,684 6.75%
------------ ------------
Excess $ 2,720 2.75% $ 147 0.15%
Average total assets $ 99,060 $ 99,017
</TABLE>
The leverage ratio consists of tangible Tier 1 capital divided by total average
assets. As of March 31, 1998, the Company and the Bank had leverage ratios of
6.75% and 6.90%, respectively.
In 1995, the Board of Directors of the Company entered into a memorandum of
understanding with the Federal Reserve Bank ("the FRB Memorandum"), and in
November 1997, the Board of Directors of the Bank entered into a joint
memorandum of understanding with the FDIC and the DFI ("Joint Memorandum").
Under these Memorandums, the Company, among other things, 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; and may not pay cash dividends without the prior written consent
of the Federal Reserve Bank. The Bank is also required, among other things, to
achieve
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CAPITAL RESOURCES (CONTINUED)
and maintain Tier 1 capital equal to or above 6.75% of total assets; the Bank
shall have and retain qualified management; establish and maintain an adequate
allowance for loan losses; and not pay cash dividends without the prior written
consent of the FDIC and the DFI.
The Company and the Bank believe they are currently in full compliance, and
management believes that it can continue to comply with the terms of the FRB
Memorandum and the Joint 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 financial condition or results
of operations. However, failure to comply with any Memorandum could result in
regulatory action.
The Company expects that the ability of the Company to pay dividends in the
future will depend on continued profitability and the maintenance of acceptable
financial results.
RESULTS OF OPERATIONS
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
portfolio, investment securities and other earning assets, and its cost of
funds, consisting of interest paid on its deposits and borrowings. The Company's
operating results are also impacted by provisions for loan losses, and to a
lesser extent service charges on deposit accounts and other noninterest income.
In addition, the Company's operating expenses principally consist of salaries,
wages and employee benefits, occupancy expenses, real estate operations expense
and other general noninterest expenses. The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates and actions of regulatory authorities.
NET INCOME
During the first quarter of 1998, the Company had net income of $296,000 or
$0.17 per share compared to net income of $59,000 or $0.03 per share for the
first quarter of 1997. Annualized return on average assets for the three months
ended March 31, 1998 was 1.20% compared to 0.23% for the same period in 1997.
Annualized return on average shareholders' equity for the three months ended
March 31, 1998 and 1997 was 18.25% and 3.26%, respectively. The improved results
for the 1998 period relates primarily to lower provision for loan losses during
the first quarter of 1998 as compared to the same period in 1997.
NET INTEREST INCOME
Net interest income is the difference between interest and fees received on
earning assets and interest paid on deposits and other sources of funds. The
Company's net interest income is affected by the change in the amount and mix of
interest-earning assets and interest-earning liabilities. It is also affected by
the change in the amount and mix of interest-earning assets and rates paid on
deposits and other borrowed funds. Net interest income increased 2.6% for the
first quarter of 1998 as compared to the first quarter of 1997 from $1.4 million
to $1.5 million. The 1998 increase over 1997 primarily reflected a 1.4% increase
in average earning assets to $91.4 million from $90.1 million in for the first
quarter in 1997.
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<PAGE> 12
ALLOWANCE AND 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. 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.
At March 31, 1998, the allowance for loan losses was $1.1 million or 1.70% of
total loans, as compared to $1.1 million or 1.63% of total loans at December 31,
1997 and $1.4 million or 1.98% of total loans at March 31, 1997. The allowance
for loan losses was 267% of nonaccrual loans at March 31, 1998 as compared to
137% at December 31, 1997 and 35% at March 31, 1997. During the first three
months ending March 31, 1998, the Company made additions to the allowance of
$25,000 compared to $389,000 of additions during the same period in 1997. For
the three months ending March 31, 1998, the Company had net charge-offs of
$37,000 compared to $282,000 for the same quarter in 1997.
Management believes that the allowance for loan losses at March 31, 1998, was
adequate to absorb known and inherent risks in the loan portfolio. However, no
assurance can be given that the Company will not incur additional losses on
these loans or that additional provisions for loan losses will not be required.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses.
In addition, the Company has established a separate allowance for losses on real
estate held for sale which amounted to $19,000, $0.1 million and $0.1 million at
March 31, 1998, December 31, 1997 and March 31, 1997, respectively. This
allowance is carried as a reduction of real estate held for sale.
Further, the Company maintains an allowance for losses on loan repurchases which
amounted to $0.1 million at March 31, 1998, $0.1 million at December 31, 1997
and $0.4 million at March 31, 1997. 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 Company to repurchases which takes
into account the Company's past experience with repurchases, the potential for
future repurchases and any losses thereon. Management believes that the
allowance for losses on loan repurchases at March 31, 1998 is adequate to absorb
future losses on loan repurchases. However, no assurance can be given that the
Company will not incur additional losses on such repurchases.
NONINTEREST INCOME
Noninterest income for the first quarter of 1998 was $386,000 compared to
$436,000 for the same period in 1997. The decrease was primarily due to lower
gains recognized on the sale of SBA loans as well as a decrease in service
charges on deposit accounts during the first quarter of 1998 as compared to the
first quarter of 1997.
NONINTEREST EXPENSES
Noninterest expenses increased 8.1% to $1.5 million during the first quarter of
1998 from $1.4 million for the same period in 1997. The increase is primarily
the result of a $40,000 increase in real estate operations
12
<PAGE> 13
NONINTEREST EXPENSES (CONTINUED)
in the first quarter of 1998 over the same period in 1997, as well as a 15%
increase in other noninterest expenses during the first quarter of 1998 as
compared to 1997. The increase in other noninterest expenses in the first
quarter of 1998 as compared to 1997, is mostly associated with additional legal
expenses relating to the pending merger with the Pacific Bank.
INCOME TAXES
Income tax expense for the first quarter of 1998 amounted to $0 compared to
$2,000 for the first quarter in 1997. The provision for income taxes considers
the effect of net operating loss carryforwards available for federal income tax
purposes.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council issued an
interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues.
The Company's critical automated systems have been identified, and related
priorities have been set for Year 2000 compliance. The Company currently
estimates that its Year 2000 project cost should not exceed $100,000. These
costs include estimates for consulting, hardware, software and other expenses
related to infrastructure necessary to prepare the systems for the year 2000.
The Company's management expects that all the systems and operations will be
Year 2000 compliant by the fourth quarter of 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 1998 the Company did not hold any derivative financial instruments.
Reference is made to the information contained under the captions "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Maturities and Sensitivity to Changes in Interest Rates" and "--
Asset/Liability Management and Liquidity" in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, and in this Report on Form 10-Q under
the caption "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Liquidity" and " - Capital Resources," which
information is incorporated by reference.
The Company's interest rate sensitivity "gap" and its net portfolio value have
not materially changed since the information presented as of December 31, 1997
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
13
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 1-5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON 8-K .
(a) EXHIBITS:
EXHIBIT 27 -- Financial Data Schedule
(b) REPORT ON FORM 8-K: A report on Form 8-K was filed on January
23, 1998 reporting on the following items:
Item 5. Other Events - This report discussed the definitive
Agreement and Plan of Reorganization. On December 30, 1997, Sterling West
Bancorp, Sterling Bank and The Pacific Bank entered into an Agreement and Plan
of Reorganization.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING WEST BANCORP
(Registrant)
DATED: May 13, 1998
By /s/ Joseph C. Carona
-------------------------------
Joseph C. Carona
Chief Financial and
Accounting officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (STERLING
WEST BANCORP AND SUBSIDIARIES) CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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