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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number 0-15984
COMBANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3737171
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
6001 E. WASHINGTON BLVD., CITY OF COMMERCE, CA 90040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 724-8800
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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 REGISTRANT'S KNOWLEDGE, IN ANY AMENDMENT TO THIS FORM 10-K. /X/
As of March 22, 1996, there were 565,789 shares of Common Stock, no par
value, issued and outstanding, and the aggregate market value of the Common
Stock, based on the average bid and asked prices, quoted by the National
Quotation Bureau, Inc., held by non-affiliates of the registrant was
approximately $3,513,125. Solely for purposes of this calculation, all directors
and officers were excluded as affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on a date to be established are incorporated by
reference in Part III.
THIS ANNUAL REPORT CONSISTS OF A TOTAL OF 196 PAGES.
THE EXHIBIT INDEX APPEARS ON PAGE 88.
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PART I
ITEM 1. BUSINESS.
General
COMBANCORP (the "Company") was incorporated under the laws of the
State of California on May 25, 1982 to operate as a bank holding company for
Commerce National Bank (the "Bank"). On June 16, 1983, the Bank completed its
organization and the Company acquired all of the Bank's issued and outstanding
shares of common stock. The Bank is the sole subsidiary of the Company and its
principal asset. All references herein to the "Company" include the Bank unless
the context otherwise requires.
The Bank
The Bank was incorporated on May 26, 1982 as a national banking
association. On June 16, 1983, the Bank received its Charter from the
Comptroller of the Currency ("OCC") and commenced operations.
The Bank's main office is located at 6001 East Washington
Boulevard, City of Commerce, California. The Bank also has a branch office
located at 420 N. Montebello Boulevard, Montebello, California, which opened on
June 12, 1989, and a branch office located in Downey, California, which was
acquired on August 26, 1994. The Bank's principal market area includes the City
of Commerce, Downey, Montebello, Bell Gardens, Pico Rivera, Whittier, Lynwood,
South Gate, Santa Fe Springs, Los Angeles and portions of Vernon, all located in
California. This area is estimated to contain in excess of 15,000 businesses
engaged in various phases of commerce, including industrial production and
sales, service businesses and retail and wholesale establishments. The area also
includes residential developments and regional and neighborhood shopping
centers.
On December 3, 1993, the Bank acquired all of the branch deposits
of the Commerce, California branch of Community Bank, at a premium of $138,222.
In conjunction with this transaction, the Bank assumed $12,454,049 of deposit
liabilities. In connection with this transaction, the Bank did not retain the
premises or management of the Commerce Branch of Community Bank, or the majority
of its employees.
On August 26, 1994, the Bank, as part of a consortium with Landmark
Bank, entered into an Insured Deposit Purchase and Assumption Agreement with the
Federal Deposit Insurance Corporation ("FDIC") for the purchase and assumption
of certain assets and liabilities of Capital Bank. The Bank purchased $674,000
of cash assets and assumed $22,536,000 of deposit liabilities of the Downey
Branch of Capital Bank for a premium of
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$185,000, including expenses. In addition, the Bank obtained a lease on the
Downey branch facility of Capital Bank through May 1995, when an option to
purchase the building for $650,000 was exercised. The Bank hired 12 former
employees of Capital Bank, none of which were members of senior management, to
staff the existing facility. See Note 2 to the Notes to the Consolidated
Financial Statements.
Bank Services
The Bank is engaged primarily in the business of providing
commercial banking service to the wholesale market. The Bank offers personal and
business checking accounts and savings accounts (including interest-bearing
negotiable order of withdrawal ("NOW") accounts and/or accounts combining
checking and savings accounts with automatic transfers), and time certificates
of deposit. The Bank also offers night depository, bank-by-mail services and
MasterCard and VISA credit cards, sells travelers' checks (issued by an
independent entity) and cashier's checks, and acts as a merchant depository for
cardholder drafts under both MasterCard and VISA. In addition, it provides note
and collection services, an automatic teller machine network and direct deposit
of social security and other government checks.
The following table sets forth the type and amount of deposits
outstanding as of the dates indicated:
DECEMBER 31, DECEMBER 31,
1995 1994
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Demand Deposits $21,805,536 $23,439,082
NOW Accounts 8,934,606 8,136,486
Money Market 8,553,950 10,902,747
Savings 9,203,336 9,831,453
Time Deposits of $100,000 or greater 5,381,974 4,329,934
Time Deposits of less than $100,000 8,144,395 8,259,595
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Total Deposits $62,023,797 $64,899,297
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DEMAND DEPOSITS. At December 31, 1995, approximately 35% of the
total deposits were non-interest bearing demand deposits, with an average
account balance of approximately $12,000. Approximately 14% of total deposits
were interest-bearing demand deposits, or Negotiable Order of Withdrawal ("NOW")
accounts. The average interest-bearing demand account balance was approximately
$6,000.
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MONEY MARKET. At December 31, 1995, approximately 14% of total
deposits were held in money market accounts, with an average account balance of
approximately $26,000.
SAVINGS. At December 31, 1995, approximately 15% of the total
deposits were held in savings accounts, with an average account balance of
approximately $5,000.
TIME DEPOSITS. At December 31, 1995, approximately 22% of total
deposits were held in time deposits, 83% of which were certificates of deposits
and 17% were individual retirement ("IRA") accounts. Approximately 9% of total
deposits were held in time deposits of $100,000 or greater.
The Bank's lending activities consist primarily of commercial
loans, real estate loans and consumer/installment loans. Commercial lending
activities are directed toward small retail and wholesale establishments,
professional organizations and light industrial and manufacturing companies.
Real estate loans, which consist of interim construction loans and medium-term
mortgages, are directed toward local developers and other wholesale banking
customers. Consumer/installment lending is targeted to the Bank's principal
market area and the Bank's commercial accounts.
The lending activities of the Bank are guided by the basic lending
policy established by the Bank's Board of Directors. Each loan must meet the
tests of a prudent loan encompassing certain criteria, including character of
the borrower, leverage capacity of the borrower, capital, collateral provided
for the loan and prevailing economic conditions. The lending officer, the Loan
Committee or the Board of Directors, depending on the amount of the loan, must
consider all criteria and determine that the risks are appropriate in light of
such evaluation.
A fundamental principle of sound banking is avoiding a loan
concentration in any particular industry or market segment, which would increase
exposure to downturns in the business of such borrowers. Other than as disclosed
herein, as of December 31, 1995 the Bank had no loan concentrations in any
industry.
The following table sets forth the type and amount of loans
outstanding as of the dates indicated:
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DECEMBER 31, DECEMBER 31,
1995 1994
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Commercial $10,474,719 $11,210,049
Real Estate:
Construction 2,338,979 2,998,619
Other 8,062,827 8,541,865
Mortgage loans acquired 1,216,165 1,242,636
Consumer/Installment 1,679,274 1,815,841
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Total loans $23,771,964 $25,809,010
Allowance for possible loan losses 432,559 498,827
Deferred loan fees 65,731 59,280
Unearned discount on acquired loans 84,823 285,827
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Total net loans $23,188,851 $24,965,076
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COMMERCIAL LOANS. At December 31, 1995, approximately 44% of the
Bank's loan portfolio was comprised of commercial loans. Loans in this category,
which amounts averaged approximately $77,000, included loans made to small
businesses and professionals for working capital purposes and equipment
acquisition. Although the Bank typically looks to the borrower's cash flow as
the principal source of repayment for such loans, some of the loans within this
category were secured by real estate.
CONSTRUCTION LOANS. At December 31, 1995, approximately 10% of the
Bank's loan portfolio was comprised of construction loans. The following table
sets forth the composition of such construction loans by type of project as of
the dates indicated:
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DECEMBER 31, DECEMBER 31,
1995 1994
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Residential:
1-4 family units $2,093,989 $1,418,048
Commercial and industrial 244,990 1,580,571
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Total $2,338,979 $2,998,619
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The Bank's loans for construction of residential 1-4 family units,
which amounts averaged approximately $162,000, bear a floating rate of interest
and mature in one year or less. They are typically underwritten at no greater
than a 75% loan-to-value ratio.
As of December 31, 1995, the Bank had one commercial construction
loan for $244,990 for the construction of a multi-family unit. The Bank will
ordinarily advance up to a maximum of 65% of the value of the underlying
property on these types of loans. All loans of this type bear a floating rate of
interest.
OTHER REAL ESTATE LOANS. Approximately 34% of the Bank's commercial
and industrial loans, which ranged in amount from approximately $23 to $803,283
and averaged approximately $169,000, are primarily secured by small office
buildings and industrial buildings that are either owner-occupied or built for
rental purposes. The Bank's commercial and industrial loans generally have a
maturity of three to five years with a 20-25 year amortization, and bear a
floating rate of interest. The Bank generally applies a maximum loan-to-value
ratio of 65% to these loans.
MORTGAGE LOANS. Approximately 5% of the Bank's loan portfolio
consisted of 13 mortgage loans secured by 1-4 family residences, which were
acquired as part of the Bank's acquisition of Liberty Federal Savings Bank in
June 1991. These loans averaged approximately $94,000 and ranged in amount from
$61,112 to $146,349 at December 31, 1995. The majority of these loans have a
30-year amortization and bear a fixed rate of interest.
CONSUMER/INSTALLMENT LOANS. Approximately 7% of the Bank's loan
portfolio consisted of consumer/installment loans. Excluding credit card
receivables, these loans ranged in amounts from $49 to $106,366, and averaged
approximately $10,000. These loans consist principally of automobile loans and
other personal loans and credit card receivables. Except for the credit card
receivables, which represented 16.7% of the total consumer/installment portfolio
at December 31, 1995, these loans typically are secured by liens on real or
personal property.
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Source of Business
The Bank has undertaken an aggressive marketing program which
includes advertising and direct mail to attract business in its market area. In
addition, Business Development and Lending Officers of the Bank are responsible
for making regular calls on existing and potential new customers to solicit
business and client referrals. Promotional efforts are designed to attract
personal banking relationships, small businesses, professional organizations,
and all types of consumer loans in the market area served by the Bank.
In order to expedite decisions on lending transactions, the Bank's
Loan Committee meets on a regular basis and is available for daily telephonic
meetings when immediate lending authorization is needed.
Asset Management
Consistent with the need to maintain adequate liquidity for
anticipated clearings and other cash requirements, management of the Bank seeks
to invest the largest portion of the Bank's assets in loans of the types
described above under "ITEM 1. BUSINESS -- Bank Services." Because of low loan
demand in 1995, total loans have been generally limited to less than 50% of
deposits and capital. The balance of the Bank's funds are invested in government
and other investment grade securities, short-term certificates of deposit,
municipal securities, and Federal funds sold to other financial institutions. In
order to maximize yields, the Bank's investment policy provides for investment
in taxable securities only until such time as the Bank's overall profitability
indicates a higher yield by investing in tax-exempt instruments, after taking
into account the effects of taxes.
The Bank's investment policy provides for a portfolio divided among
issues purchased to meet one or more of the following goals: (1) to maintain a
solid liquidity base in order to manage deposit fluctuations; (2) to maintain
credit quality in order to reduce exposure to low- rated issues; (3) to achieve
maximum yields commensurate with relatively low risk and appropriate maturities;
and (4) to achieve maximum tax benefits. To assure liquidity and a reasonable
income, the Bank's portfolio consists of investments which are subject to
minimal credit risk. Most of the investments will be in government securities
"A" rated or better, corporate bonds and municipal bonds "A" rated or better.
The maturity composition of the investment portfolio, including investment
securities, Federal funds sold and interest bearing deposits with other
financial institutions, as of December 31, 1995 was as follows: 50.6% short term
(under one year), 39.1% medium term (one to five years), and 10.3% long term. On
December 31, 1995, all of the Bank's securities, with the exception of Federal
Reserve Bank stock, were classified as "available for sale."
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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.
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.
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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 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
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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 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.
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
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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 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 national banking association, is subject to primary
supervision, examination and regulation by the OCC. If, as a result of an
examination of a Bank, the OCC 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 OCC. 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, and to
remove officers and directors. The FDIC has similar enforcement authority, in
addition to its authority to terminate a Bank's deposit insurance in the absence
of action by the OCC and upon a finding that a Bank is in an unsafe or unsound
condition, is engaging in unsafe or unsound activities, or that its conduct
poses a risk to the deposit insurance fund or may prejudice the interest of its
depositors.
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.
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Various other requirements and restrictions under the laws of the
United States and the State of California affect the operations of the Bank.
Federal and California 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, capital requirements and disclosure
obliga tions to depositors and borrowers. Further, the Bank is required to
maintain certain levels of capital. See "Item 1. Business - Supervision and
Regulation - Capital Standards."
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 state law.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. 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
prior approval of the OCC is required if the total of all dividends declared by
a national bank in any calendar year exceeds the bank's net profits (as defined)
for that year combined with its retained net profits (as defined) for the
preceding two years, less any transfers to surplus.
The the OCC also has authority to prohibit the Bank from engaging in
activities that, in the OCC'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 OCC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the OCC 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.
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At present, substantially all of the Company's revenues, including
funds available for the payment of dividends and other operating expenses, is,
and will continue to be, primarily dividends paid by the Bank. At December 31,
1995, the Bank had $2,002,105 legally available for the payment of cash
dividends.
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
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 OCC 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
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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%. The Company is currently exempt from the
application of the Federal Reserve Board's capital guidelines under an exemption
for bank holding companies with less than $150 million in consolidated assets.
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 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.
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15
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 reserves 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. See
"Item 1. Business -- Supervision and Regulation -- Accounting Changes." 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.
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.
The following table presents the amounts of regulatory capital and
the capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1995.
At December 31, 1995
-----------------------
Actual Minimum
------ Capital
Requirement
-----------
Leverage ratio ............ 8.4% 4.0%
Tier 1 risk-based ratio ... 17.6 4.0
Total risk-based ratio .... 18.3 8.0
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
15
16
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" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives
the highest rating from its primary regulator)
"Undercapitalized" "Significantly undercapitalized"
---------------- ------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its primary regulator)
"Critically undercapitalized"
Tangible equity to total assets 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.
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
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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.
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,
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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 address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
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19
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
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undercapitalized) and one of three categories based on supervisory evaluations
by its primary 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.
Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C
------- ------- -------
Well Capitalized ......... 23 26 29
Adequately Capitalized ... 26 29 30
Undercapitalized ......... 29 30 31
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C
------- ------- -------
Well Capitalized ......... 4 7 21
Adequately Capitalized ... 7 14 28
Undercapitalized ......... 14 28 31
Assessment Rates Effective January 1, 1996
Group A Group B Group C
------- ------- -------
Well Capitalized ......... 0* 3 17
Adequately Capitalized ... 3 10 24
Undercapitalized ......... 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual
period (which also applies to all other assessment risk
classifications).
At December 31, 1995, the Bank's assessment rate was 0 cents per
$100 of deposits, subject to a statutory minimum assessment of $1,000 per
semi-annual period.
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 SAIF
member institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 basis points on all assessable
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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' 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.
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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 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
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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 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.
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 Developments
In March 1995, the FASB issued Statement No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." Statement No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Statement No. 121 will first be
required for the Bank's year ending December 31, 1996. Based on its preliminary
analysis, the Bank does not anticipate that the adoption of Statement No. 121
will have a material impact on the financial statements as of the date of
adoption.
In 1995 the FASB issued Statement No. 123, "Accounting for
Stock-based Compensation." Statement No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans such as a
purchase plan. The Statement generally suggests stock-based compensation
transactions be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. An enterprise may continue to follow the
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requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to the fair value at the measurement date. If an enterprise elects
to follow APB Opinion No. 25, it must disclose the pro forma effects on net
income as if compensation were measured in accordance with the suggestions of
Statement No. 123. The Company has not determined if it will continue to follow
APB Opinion No. 25 or follow the guidance of Statement No. 123. However,
adoption of this pronouncement in 1996 is not expected to have a material impact
on the financial statements.
Employees
As of December 31, 1995, the Company employed 26 full-time employees
and 16 part-time employees. Management believes that the Company's and the
Bank's relations with its employees are good.
Executive Officers
In addition to the executive officers listed under the caption
"ELECTION OF DIRECTORS" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal
year, which information is incorporated herein by reference, the following
person is considered an executive officer of the Company:
Name ................ Age Principal Occupation
- ---- --- --------------------
Hugh Waddell ............... 56 Mr. Waddell joined Commerce
National Bank on May 25, 1994 as
its Senior Vice President and Credit
Administrator. Mr. Waddell has
over 32 years of experience in all
phases of community banking.
Prior to joining the Bank, Mr.
Waddell served as Executive Vice
President for nine years with
Western Security Bank in Burbank.
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STATISTICAL DISCLOSURE
I. Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential
A. Average Balances
The following table sets forth the Company's consolidated condensed
daily average balances of each major category of assets, liabilities and
shareholders' equity for the periods indicated.
YEAR ENDED YEAR ENDED
ASSETS DECEMBER 31, 1995 DECEMBER 31, 1994
------ ----------------- -----------------
Cash and due from banks $ 5,305,762 7.48% $ 5,628,006 9.08%
Interest-bearing deposits
with financial institutions 9,913,452 13.98% 7,714,864 12.45%
Federal Reserve Bank stock 120,000 0.17% 120,000 0.19%
Investments available for sale 17,729,951 25.01% 14,224,555 22.96%
Federal funds sold 9,821,823 13.85% 9,043,958 14.60%
Loans (net of allowance for credit losses) 23,927,123 33.74% 22,657,720 36.57%
Other assets 4,092,477 5.77% 2,569,986 4.15%
----------- ------ ----------- ------
Total assets $70,910,588 100.00% $61,959,089 100.00%
=========== ====== =========== ======
Liabilities and Shareholders' Equity
Demand deposits $23,878,416 33.67% $20,274,807 32.72%
Interest-bearing deposits 40,444,174 57.04% 35,712,238 57.64%
Other liabilities 438,038 0.62% 182,650 0.30%
----------- ------ ----------- ------
Total liabilities 64,760,628 91.33% 56,169,695 90.66%
Shareholders' equity 6,149,960 8.67% 5,789,394 9.34%
----------- ------ ----------- ------
Total liabilities and shareholders' equity $70,910,588 100.00% $61,959,089 100.00%
=========== ====== =========== ======
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26
B. Analysis of Net Interest Income
The following table sets forth the average amounts outstanding for
each category of interest-earning assets and interest-bearing liabilities, the
average interest rates earned and paid thereon and the net interest margin for
the periods indicated.
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
---------------------------- ----------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield Balance Expense Yield
------- ------- ----- ------- ------- -----
Loans $24,691,646 $2,904,107 11.76% $23,370,301 $2,750,210 11.77%
Interest-bearing deposits
with financial institutions 9,913,452 610,821 6.16% 7,714,864 334,074 4.33%
Federal Reserve Bank stock 120,000 7,200 6.00% 120,000 7,200 6.00%
Securities available for sale 17,729,951 1,111,063 6.27% 14,224,555 699,344 4.92%
Federal funds sold 9,821,823 566,857 5.77% 9,043,958 402,391 4.45%
----------- ---------- ----- ----------- ---------- -----
Total interest-earning assets $62,276,872 $5,200,048 8.35% $54,473,678 $4,193,219 7.70%
=========== ========== ===== =========== ========== =====
Interest-Bearing Liabilities:
Deposits:
Money market demand $ 9,669,341 $ 272,090 2.81% $ 8,820,983 $ 220,407 2.50%
Savings and other interest-
bearing demand 18,090,611 356,992 1.97% 15,802,130 294,018 1.86%
Time deposits 12,684,221 570,329 4.50% 11,089,125 369,996 3.34%
----------- ---------- ----- ----------- ---------- -----
Total interest-bearing liabilities $40,444,173 $1,199,411 2.97% $35,712,238 $ 884,421 2.48%
=========== ========== ===== =========== ========== =====
Net interest income 4,000,637 3,308,798
========== ==========
Net interest margin 6.42% 6.07%
===== =====
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C. Net Interest Income
Information as to the impact of changes in average rates
and average balances on interest-earning assets and interest-bearing liabilities
is set forth in the following table. The variances attributable to simultaneous
balance and rate changes have been allocated to volume.
1995 OVER 1994 1994 OVER 1993
---------------------------------------- ------------------------------------------
Increase (Decrease) Increase (Decrease)
due to changes in: due to changes in:
Volume Net Rate Change Volume Net Rate Change
-------- --------- ---------- --------- --------- ----------
Interest-Earning Assets:
Loans $155,495 $ (1,598) $ 153,897 $ 34,014 $ 486,848 $ 520,862
Interest-bearing deposits
with financial institutions 95,205 181,542 276,747 (3,007) 37,974 34,967
Securities available for sale 172,341 239,378 411,719 635,072 (179,542) 455,530
Federal funds sold 34,609 129,857 164,466 157,504 147,092 304,596
-------- --------- ---------- --------- --------- ----------
Total $457,650 $ 549,179 $1,006,829 $ 823,583 $ 492,372 $1,315,955
======== ========= ========== ========= ========= ==========
Interest-Bearing Liabilities:
Money market demand $ 21,198 $ 30,485 $ 51,683 $ 48,866 $ 8,152 $ 57,018
Savings and other interest-
bearing deposits 42,580 20,394 62,974 136,009 (22,939) 113,070
Time deposits 53,221 147,112 200,333 61,613 11,979 73,592
-------- --------- ---------- --------- --------- ----------
Total $116,999 $ 197,991 $ 314,990 $ 246,488 ($ 2,808) $ 243,680
======== ========= ========== ========= ========= ==========
Interest Differential $340,651 $ 351,188 $ 691,839 $ 577,095 $ 495,180 $1,072,275
======== ========= ========== ========= ========= ==========
II. Investment Portfolio
Effective December 31, 1993, the Bank adopted FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities. The Bank
classified substantially all of its investment portfolio as available for sale
on December 31, 1995.
At December 31, 1995, the Bank recorded an increase to shareholders'
equity of $134,960 net of income taxes of $97,200 to adjust the portfolio
classified as available for sale to its market value.
27
28
The following table sets forth the Bank's investment securities as
of the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
Federal Reserve Bank stock $ 120,000 $ 120,000
----------------- -----------------
Securities available for sale:
U.S. Treasury securities $ 7,988,578 14,024,459
U.S. Government agencies 11,842,739 2,105,067
Corporate notes 317,098 495,020
Municipal securities 898,150 205,858
----------------- -----------------
$ 21,046,565 $ 16,830,404
----------------- -----------------
TOTAL $ 21,166,565 $ 16,950,404
================= =================
The following table sets forth the amounts, term, distribution and
weighted average yields of the Bank's investment securities as of December 31,
1995.
AFTER ONE YEAR
ONE YEAR OR LESS THROUGH FIVE YEARS AFTER FIVE YEARS
---------------------- ----------------------- ------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------------------- ----------------------- ------------------------
Federal Reserve Bank stock -- -- -- -- $ 120,000 6.00%
---------- ----------- ----------
Securities available for sale:
U.S. Treasury securities $2,968,497 6.41% $ 5,020,080 6.87% $ -- --
U.S. Government agencies 453,140 6.46% 8,227,779 6.78% 3,161,823 8.17%
Corporate notes -- -- 208,799 6.94% 108,298 7.75%
Municipal securities 100,017 3.40% 515,502 4.17% 282,630 5.03%
---------- ----------- ----------
$3,521,654 $13,972,160 $3,552,751
---------- ----------- ----------
TOTAL $3,521,654 $13,972,160 $3,672,751
========== =========== ==========
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29
III. Loan Portfolio
A. Types of Loans
The composition of the Company's loan portfolio (all domestic) at
the dates indicated was as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
Commercial: $ 10,474,719 $ 11,210,049
Real Estate:
Construction 2,338,979 2,998,619
Other 8,062,827 8,541,865
Mortgage loans acquired 1,216,165 1,242,636
Consumer / Installment 1,679,274 1,815,841
----------------- -----------------
Total loans $ 23,771,964 $ 25,809,010
================= =================
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30
B. Maturities and Sensitivity to Changes in Interest Rates
The following table sets forth the amount of total loans outstanding
(excluding consumer/installment loans) at December 31, 1995, which are based on
remaining scheduled principal repayments due in one year or less, after one year
through five years and after five years. The amounts outstanding which are due
after one year are classified according to their sensitivity to changes in
interest rates.
One year or less $ 7,719,471
After one year through five years:
Floating interest rate 7,846,631
Fixed interest rate 3,775,596
After five years:
Floating interest rate 862,517
Fixed interest rate 1,888,475
-----------
Total $22,092,690
===========
C. Risk Elements
The following table sets forth the Bank's loans accounted for on a
non-accrual basis and loans accruing which are contractually past due 90 days or
more, as to principal or interest payments. The Bank does not have any loans
which are considered "troubled debt restructurings" as defined in Statement of
Financial Accounting Standards No. 15 ("FAS 15"), "Accounting by Debtors and
Creditors for Troubled Debt Restructurings."
LOANS PAST DUE OVER 90 LOANS ON NON-ACCRUAL
DAYS AND STILL ACCRUING STATUS
----------------------- --------------------
Commercial $ -- $ --
Real Estate:
Construction -- --
Other -- 102,575
Mortgage loans acquired 146,349 --
Consumer / Installment 20,764 --
----------------------- --------------------
Total $ 167,113 $ 102,575
======================= ====================
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31
The gross interest income included in net income on the impaired
loans outstanding at December 31, 1995 and the gross interest income that would
have been reported in the period ending December 31, 1995 if non-accrual loans
had been current in accordance with their original terms are as follows:
Interest income included in net income on
impaired loans $21,732
Interest income excluded from net income
on non-accrual loans $ 8,065
The Company's current policy is to cease accruing interest on loans
which are 90 days or more past due as to principal or interest, except in
instances where management believes that the loan is fully collectible. Each
such loan that is 90 days or more past due is evaluated individually to
determine its collectibility and the adequacy of its collateral.
The loan on non-accrual status is secured by a first trust deed on
commercial property; the borrower has been contacted but the Bank was unable to
obtain a promise to pay. The Bank is currently consulting with counsel regarding
a resolution. The other real estate single family dwelling secured loan in the
amount of $146,349 made a payment on January 5, 1996, and is no longer 90 days
past due. These two loans account for 92.3% of the Bank's non performing loans.
The other three represent a credit card receivable and two loans secured by
commercial vehicles; these loans total $20,763, or 7.7% of non performing loans,
of which $1,600 was charged off in February 1996. The Bank received payoffs on
the two remaining loans in February 1996. Management believes that it has
adequately reserved for those loans representing an above normal degree of risk.
On February 16, 1996, the Bank was made aware of the Chapter 7
bankruptcy filing on two unsecured commercial loans totaling $163,333. These
loans are not included in the non performing asset totals as of December 31,
1995. The Bank has contacted counsel and will prepare a charge off to remove the
loans from its performing assets.
On January 1, 1995, the Bank adopted FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by FASB Statement
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." There was no effect on the Bank's financial statements from
this change. At January 1, 1995, the Bank classified $244,000 of its loans as
impaired with a specific loss reserve of $56,000.
Impairment of loans having recorded investments of $103,000 at
December 31, 1995 has been recognized. The total allowance for loan losses
related to these loans was $5,200 on December 31, 1995. The average recorded
investment for all impaired loans during 1995 was $276,000. Interest income of
$57,000 was recognized on impaired loans in 1995 and was
31
32
recognized using a cash basis method of accounting during the time within that
period that the loans were impaired.
Other than the loan categories disclosed herein, the Bank does not
have any material concentration of loans. Management believes that the loan
portfolio is diversified sufficiently to avoid the impact of significant adverse
changes in economic or other conditions related to any single industry.
IV. Summary of Loan Loss Experience
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
Average net loans outstanding $ 23,927,123 $ 22,657,720
------------ ------------
Balance of allowance for loan losses
at beginning of period 498,827 534,625
Charge-offs:
Commercial loans (768,475) (199,700)
Real Estate loans -- (73,924)
Consumer loans (16,775) (59,549)
Recoveries 69,982 4,575
------------ ------------
Net charge-offs (715,268) (328,598)
------------ ------------
Provisions charged to expense 649,000 292,800
------------ ------------
Balance of allowance for loan losses
at end of period $ 432,559 $ 498,827
------------ ------------
Ratio of net charge-offs to average
net loans outstanding 2.99% 1.45%
------------ ------------
The allowance for loan losses is established through charges to
operations in the form of provisions for loan losses. Loan losses are charged,
and recoveries credited, directly to the allowance.
The Company determines its allowance for loan losses on the basis of
a qualitative and quantitative review of all loans on a quarterly basis. In
determining the adequacy of the
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33
allowance for loan losses, management considers such factors as known problem
loans, evaluations made by bank regulatory authorities and/or independent firms
retained to perform loan reviews, assessment of economic conditions and other
appropriate data in order to identify the risks in the portfolio. The adequacy
of the allowance is evaluated by assessing the risks inherent in each category
of loans. If, following a review of the allowance, the allowance is determined
to be inadequate or supererogatory, the amount of the allowance is adjusted
accordingly. Management believes that the allowance for loan losses was adequate
at December 31, 1995.
At December 31, 1995, the allowance was 1.8% of total outstanding
loans receivables. The allowance for loan losses should not be interpreted as an
indication of future charge-off trends.
Allocation of the Allowance for Loan Losses
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -------------------------
Commercial $266,487 44.06% $275,028 43.43%
Real Estate 139,001 48.87% 185,863 49.53%
Installment 27,071 7.06% 37,936 7.04%
-------- ------ -------- ------
$432,559 100.00% $498,827 100.00%
======== ====== ======== ======
33
34
V. Deposits
The average deposit balances are summarized for the periods
indicated:
YEAR ENDED DECEMBER 31,
1995 1994
----------- -----------
Demand deposits, non-interest bearing $23,878,416 $20,274,807
Money market demand 9,669,341 8,820,983
Savings and other interest-bearing demand 18,090,612 15,802,130
Time deposits 12,684,221 11,089,125
----------- -----------
Total $64,322,590 $55,987,045
=========== ===========
The following table sets forth the maturities of the Company's time
certificates of $100,000 or more at December 31, 1995:
Maturing within:
Three months or less $3,112,000
Over three months to six months 707,000
Over six months to twelve months 1,436,000
Over twelve months 127,000
----------
Total $5,382,000
==========
At December 31, 1995 the Company had no brokered deposits.
VI. Return on Equity and Assets
YEAR ENDED DECEMBER 31,
1995 1994
------ ------
Return on average assets 0.46% 0.76%
Return on average equity 5.35% 8.09%
Average equity to average assets 8.67% 9.34%
Dividend pay-out ratio 42.98% - %
34
35
ITEM 2. PROPERTIES.
Premises
The Company's executive offices and the Bank's Main Office are
located at 6001 E. Washington Blvd., City of Commerce, California, in a
structure which was completed in August 1994. This Bank-owned structure consists
of approximately 15,000 square feet of space and is located on approximately
36,000 square feet of underlying land. The Montebello Office is located on the
first floor of a three story structure at 420 N. Montebello Blvd., Montebello,
California. This office consists of approximately 4,000 square feet and was on a
month to month rental during lease negotiations. The Bank signed a three year
lease effective April, 1995. The Bank's Downey Branch is located at 11101 La
Reina Blvd., Downey, California. This Bank-owned structure consist of a
two-story structure of approximately 10,816 square feet on approximately 28,990
square feet of land. The Bank has recently received approval from the City of
Downey to upgrade this facility.
ITEM 3. LEGAL PROCEEDINGS.
During the ordinary course of its business, the Company and the Bank
may be involved in various legal proceedings and litigation. 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 any such litigation will have a material adverse effect upon the operations
or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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36
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded in the over-the-counter
market since the Company commenced operations in 1983. The below table sets
forth, on a per-share basis for the periods indicated, the range of high and low
bid quotations for the Company's Common Stock reported by the National Quotation
Bureau. The bid quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of December 31, 1995, there were approximately 366 shareholders
of record of the Company's Common Stock. The Company paid a cash dividend of
$0.25 per share in 1995, and did not declare a dividend in 1994.
Under Federal banking law, dividends declared by the Bank (and
payable to the Company) in any calendar year may not, without the approval of
the OCC, exceed its net income, as defined, for that year combined with its
retained net income for the preceding two years.
1995 1994
------------------ ------------------
High Low High Low
---- ---- ---- ----
First Quarter 7.00 6.50 5.50 5.50
Second Quarter 7.38 7.00 6.75 5.50
Third Quarter 8.50 7.00 6.75 6.00
Fourth Quarter 9.50 7.00 7.00 6.50
36
37
ITEM 6. SELECTED FINANCIAL DATA.
Year ended December 31,
1995 1994 1993 1992 1991
-----------------------------------------------------------------------
Statement of Income Data:
Interest income $ 5,200,048 $ 4,193,219 $ 2,877,264 $ 3,369,831 $ 3,882,298
Interest expense 1,199,411 884,421 640,741 924,485 1,555,078
Net interest income 4,000,637 3,308,798 2,236,523 2,445,346 2,327,220
Provision for loan losses (649,000) (292,800) (651,314) (85,000) (107,000)
Net interest income after
provision for loan losses 3,351,637 3,015,998 1,585,209 2,360,346 2,220,220
Other income 609,522 619,498 558,814 517,673 416,088
Other operating expenses (3,399,064) (2,814,859) (2,420,863) (2,465,206) (2,403,478)
Net income before income taxes
and cumulative effect of a
change in accounting 562,095 820,637 (276,840) 412,813 232,830
principle
Provision for income taxes (233,000) (352,000) 87,500 (170,400) (99,500)
Earnings (loss) before
cumulative effect of a change
in accounting principle 329,095 468,637 (189,340) 242,413 133,330
Cumulative effect of a change
in accounting principle -- -- 55,582 -- --
Net earnings (loss) $ 329,095 $ 468,637 $ (133,758) $ 242,413 $ 133,330
Earnings (loss) per common share:
Earnings (loss) before
cumulative effect of a change
in accounting principle $ 0.58 $ 0.83 $ (0.34) $ 0.43 $ 0.24
Cumulative effect of a change
in accounting principle -- -- $ 0.10 -- --
Net earnings (loss)
per common share $ 0.58 $ 0.83 $ (0.24) $ 0.43 $ 0.24
Dividends per common share $ 0.25 -- $ 0.09 $ 0.08 $ 0.07
37
38
Year ended December 31,
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------
Balance Sheet Data:
Interest-bearing deposits in
other banks $11,755,000 $ 8,102,000 $ 7,974,874 $ 6,692,734 $ 6,219,035
Securities 21,166,565 16,950,404 13,030,912 3,038,206 3,342,335
Net loans 23,188,851 24,965,076 21,633,656 24,074,047 27,508,185
Total assets 68,830,029 71,188,448 51,350,657 39,888,021 42,828,966
Total deposits 62,023,797 64,899,298 45,539,681 33,863,116 36,910,549
Shareholders' equity 6,384,910 5,946,627 5,666,825 5,778,344 5,581,194
Book value per share $ 11.29 $ 10.51 $ 10.02 $ 10.21 $ 9.86
Non-performing loans $ 269,688 $ 397,100 $ 1,774,712 $ 733,768 $ 817,875
As a percent of gross loans 1.1% 1.5% 8.0% 3.0% 3.0%
As a percent of total assets 0.4% 0.6% 3.5% 1.8% 1.9%
Risk-based capital ratios:(1)
Tier 1 18.3% 16.7% 19.6% 19.5% 17.1%
Total 17.6% 17.9% 20.8% 20.9% 18.1%
Leverage ratio 8.4% 7.7% 10.0% 13.7% 12.9%
(1) The Company is currently
exempt from the Federal
Reserve Board's risk-based
guidelines because consolidated
assets are under $150 million.
Therefore, the indicated ratios
are those of the Bank only.
38
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Financial Condition
The Company's principal source of growth in recent years has been a
series of deposit and loan acquisitions beginning with the acquisition of
certain assets and all of the deposits of a branch of Liberty Federal Savings
Bank in Montebello, California, in 1991. In 1993, the Bank acquired all of the
branch deposits of the Commerce, California branch of Community Bank at a
premium of approximately $138,000 and assumed approximately $12.5 million in
deposit liabilities. On August 26, 1994, the Bank, as part of a consortium,
entered into an Insured Deposit Purchase and Assumption Agreement with the
Federal Deposit Insurance Corporation ("FDIC") for the purchase and assumption
of certain assets and liabilities of the Downey Branch of Capital Bank (the
"Downey Branch"). In that transaction, the Bank purchased $674,000 of cash
assets and approximately $7,784,000 in face value loans, net of participations
sold of $2,035,000, from various pools of loans at a discount of $203,000. The
deposits purchased totaled $22.5 million.
The Company's total assets at December 31, 1995 decreased by 3.3%
from December 31, 1994, due primarily to the 4.4% decrease in deposits. Gross
loans decreased 7.9%, primarily due to the continued moderate economic growth
and the resulting lack of loan demand during 1995. The Bank will continue to
maintain a conservative approach to new loan generation until the California and
local economies demonstrate definitive signs of improvement.
The components of the decrease in loans as of December 31, 1995 are
as follows:
Total Change compared
to December 31, 1994
---------------------
Commercial loans (6.6)%
Real estate - construction loans (22.0)%
Real estate - primarily loans for
acquisition or improvement of
owner occupied offices and
industrial property (5.6)%
Real estate - mortgage loans acquired (2.1)%
Installment loans (7.5)%
As of December 31, 1995, the Bank had approximately $4.5 million in
net loans outstanding which were initially acquired as part of the Downey Branch
acquisition. Although the Company does not regularly calculate net earnings of
each branch or department utilizing
39
40
strict cost accounting methods, an analysis of the net interest income of the
Bank in the amount of $4,000,637 for the year ended December 31, 1995 indicates
that 23.6% of such amount is attributable to the Downey Branch acquisition in
1995. The average loans to deposits and demand deposits to total deposits for
the Downey Branch were 32.6% and 42.8%, respectively, compared to 38.4% and
37.1%, respectively, for the Company as a whole.
The components of the outstanding loans attributable to the Downey
Branch acquisition are as follows:
August 26, 1994 December 31, 1994 December 31, 1995
-----------------------------------------------------
Commercial loans $3,222,676 $3,406,718 $2,421,277
Real estate - primarily loans for
acquisition or improvement of
owner occupied offices and
industrial property 2,124,541 1,702,456 1,729,700
Installment loans 401,599 457,363 389,483
-----------------------------------------------------
Total $5,748,816 $5,566,537 $4,540,460
The components of the changes in deposits of the Company as of
December 31, 1995 are as follows:
Total Change compared
to December 31, 1994
Increase (Decrease)
---------------------
Demand deposits (7.0)%
Money market demand (21.5)%
NOW accounts 9.8 %
Savings (6.4)%
Time deposits of $100,000 or greater 24.3 %
Time deposits of less than $100,000 (1.4)%
As part of the Downey Branch acquisition, the Bank assumed $22.5
million of deposits, including approximately $2.0 million of uninsured deposits
which the Bank had the right to put back to the FDIC, for a total premium of
$185,000, including expenses. The Bank put back such uninsured deposits to the
FDIC on June 29, 1995. As of December 31, 1995, the Bank had approximately $13.0
million in deposits attributable to such acquisition. Management believes that
the run-off in deposits acquired through this transaction was due primarily to
the normal deposit attrition caused by the change in bank ownership, and that
the Bank will be able to maintain the current level of deposits without
significant further loss of deposits.
The components of the outstanding deposits attributable to the
Downey Branch acquisition are as follows:
40
41
August 26, 1994 December 31, 1994 December 31, 1995
-----------------------------------------------------------------
Demand deposits $ 8,200,638 $ 6,783,201 $ 5,288,941
Interest-bearing deposits 4,915,937 4,286,138 3,664,874
Time certificates of deposit 5,667,724 2,721,154 2,378,134
Savings deposits 3,697,787 2,034,327 1,803,390
Accrued interest payable 53,476 29,327 23,302
-----------------------------------------------------------------
Total $22,535,562 $15,854,147 $13,158,641
The Company's loan to deposit ratio at December 31, 1995, was 38.4%,
compared to 39.8% at December 31, 1994. Total non-performing assets as of
December 31, 1995 amounted to $377,000 or 0.5% of total assets, consisting of
loans of $270,000 and other real estate owned of $107,000. This compares
favorably with total non-performing assets as of December 31, 1994 of $768,000
or 1.1% of total assets, consisting of $397,000 of loans and other real estate
owned of $371,000. Total non-performing loans (i.e., those past due 90 days
and/or on non-accrual status) at December 31, 1995 amounted to approximately
$270,000, a 32% decrease compared to December 31, 1994. Of the five
non-performing loans, one loan in the amount of $102,575 or 38% of the
non-performing loans, is secured by commercial property. Based on the appraisal
and estimated costs associated upon an eventual sale, management does not expect
a loss to be incurred. Foreclosure proceedings will be initiated after the Bank
is granted a relief from the "stay" imposed by the court in this matter. The
Bank received a payment in January on a second loan in the amount of $146,349
which is secured by a single family dwelling. Payments are expected to continue
and no loss is anticipated. This loan represents 54.3% of the non-performing
loans. The remaining three loans total $20,763 or 7.7% of non-performing loans,
and consist of a credit card receivable and two loans secured by commercial
vehicles. The Bank will charge off $1,600 of this amount, and anticipates
payoffs on the remaining amount.
At December 31, 1995, only one loan in the amount of $102,575 was
impaired. The total allowance for loan loss related to this loan was $5,200 as
of December 31, 1995. The average recorded investment for all impaired loans
during 1995 was $276,000. Interest income of $57,000 was recognized on impaired
loans in 1995 and was recognized using a cash basis method of accounting during
the time within that period that the loans were impaired.
As of December 31, 1995 and 1994, the allowance for loan losses as a
percentage of non-performing loans was 160.4% and 125.6%, respectively. The
allowance for loan losses was $432,559 or 1.8% of total outstanding loans at
December 31, 1995, as compared to $498,827 or 1.9% of total outstanding loans at
December 31, 1994. Management believes that the allowance for loan losses was
adequate at December 31, 1995.
On January 1, 1995, the Bank adopted FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by FASB Statement
No. 118, "Accounting by
41
42
Creditors for Impairment of a Loan - Income Recognition and Disclosures." There
was no effect on the Bank's financial statements from this change. At January 1,
1995, the Bank classified $244,000 of its loans as impaired with a specific loss
reserve of $56,000.
The Company maintains a portfolio of securities which provide income
and serve as a source of liquidity for its operations. Changes in liquidity
needs and changes in the economic climate and loan demand may necessitate
restructuring the portfolio from time to time. On December 31, 1993, the Bank
adopted Financial Accounting Standards Board Statement No.115 and classified all
securities except the Federal Reserve Stock as available for sale. The types of
securities held in the Company's portfolio are influenced by several factors
among which are rate of return, maturity and risk. Under the risk based capital
guidelines, the nature of the securities held in the portfolio can affect the
amount of the Company's risk-based assets and consequently, the amount of
required capital the Company must maintain. From time to time, the Company may
alter the composition of its investment portfolio to change its capital position
under the risk-based guidelines. At December 31, 1995, the Company's excess
funds were invested in Federal funds sold, U.S. Treasury and Agency securities,
investment grade corporate notes, municipal bonds, and interest-bearing deposits
with other financial institutions. Note 4 to the consolidated financial
statements sets forth the distribution of, as well as unrealized gains and
losses in, the investment portfolio at December 31, 1995 and 1994.
Cash, unrestricted interest-bearing deposits, Federal funds sold and
investment securities totaled $41,361,328 at December 31, 1995, compared to
$42,402,760 at December 31, 1994, a 2.5% decrease, due primarily to a decrease
of $2,875,500 or 4.4% in deposit liabilities. Federal funds decreased 75.9% from
$11,605,000 in 1994 to $2,800,000 in 1995, offset by increases of $3,653,000 or
45.1%, and $4,216,161 or 25.1%, in interest bearing deposits with other
financial institutions and securities available for sale, respectively, compared
to 1994. Due to the Downey Branch acquisition in August 1994, management sought
to maintain excess funds in Federal funds to provide liquidity for anticipated
run-off of some deposits. As such deposit levels stabilized, excess funds were
shifted to higher yielding securities with longer maturities.
Results of Operations
Year ended December 31, 1995 versus December 31, 1994
Interest income increased by 24.0% during 1995, due to a 14.3%
increase in average interest bearing assets and an increase in average yield of
0.7% during 1995 compared to 1994. Average loans increased by only 5.7% during
1995, with the balance of the increase in average interest bearing assets in
securities, which typically have lower yields than loans. The yield on average
earning assets reflects an increase from 7.7% in 1994 to 8.4% in 1995. The yield
on average earning assets at the Downey Branch was 9.1% at December 31, 1995,
reflecting the higher reference rate utilized on the loan portfolio purchased.
Interest expense increased by 35.6%
42
43
during 1995, due to a 13.3% increase in interest-bearing liabilities during the
year and an increase in the average cost of funds to 3.0% in 1995 from 2.5% in
1994. The cost of funds at the Downey Branch was 2.8% compared to 3.0% for the
entire Bank. Net interest income increased by $691,800 or 20.9%. The Company's
net interest margin increased slightly to 6.4% during 1995 from 6.1% during
1994. The improved totals for 1995 reflect the 7.3% interest margin attributable
to the Downey Branch acquisition in August 1994.
The provision for loan losses which is charged to operations
increased by $356,200 or 121.7% in 1995, compared to 1994. During 1995,
management instigated a program of corrective actions to enhance loan quality.
As a result, the Company charged off three unsecured loans totaling
approximately $721,000, which management considered uncollectible. Although
progress is being made, management believes that completing this program will be
a long process, particularly in the current economy. On February 16, 1996, that
Bank was made aware of the Chapter 7 bankruptcy filing on two unsecured
commercial loans totaling approximately $163,000. These loans were not included
in the non-performing asset totals as of December 31, 1995; accordingly, no
specific reserves were provided at December 31, 1995. The Bank will increase its
provision to keep the allowance constant. Management has contacted counsel and
will take appropriate action to charge off and remove these loans from its
performing assets. Asset quality will continue to receive priority attention
from management. Management believes that the Company has adequately provided an
allowance for loan losses as of December 31, 1995 to cover any potential and
unanticipated loan losses within the existing loan portfolio. At December 31,
1995, the allowance for loan losses was 1.8% of outstanding loans as compared to
1.9% at December 31, 1994.
Other income decreased by 1.6% during 1995, while other operating
expenses increased by 20.8%. The following is a discussion of certain other
expense items which have had significant fluctuations during the year. Salaries
and employee benefits increased $241,832 or 19.7% over 1994, reflecting the
salaries for 12 months in 1995 compared to only four months in 1994 of the
additional employees acquired in the assumption of the Downey Branch of Capital
Bank in August 1994. Equipment expense increased by $91,111 or 66.8% over 1994,
reflecting the growth of the Company and equipping the Bank with computers and
installing a wide-area network. Professional fees increased $106,399 or 101.4%
over 1994, attributable to litigation involving the Bank's other real estate
owned and other problem assets, and professionals utilized in the Bank's
marketing and sales training. Stationery and supplies increased $43,043 or 33.6%
over 1994, reflecting additional supplies necessary for the Downey Branch for
the entire year, compared to only four months in 1994. Amortization of deposit
premium associated with the various acquisitions increased to approximately
$57,000 in 1995 from approximately $39,000 in 1994, and is included in other
operating expenses. Total other operating expenses as a percentage of total
interest income decreased to 65.4% in 1994 from 67.1% in 1994.
43
44
Net income for 1995 was $329,095 or $0.58 per share, compared to
$468,637 or $0.83 per share for 1994.
Year ended December 31, 1994 versus December 31, 1993
Interest income reflects an increase of 45.7% during 1994, primarily
due to an increase of 42.1% in average interest bearing assets at December 31,
1994 over December 31, 1993, principally as a result of the Downey branch
acquisition in August 1994. Average loans increased 1.5% during 1994. The
balance of the increase in average interest bearing assets is in securities
which typically have lower yields than loans. The yield on average earning
assets reflects an increase from 7.5% in 1993 to 7.7% in 1994. Interest expense
also reflects an increase of approximately 38% during 1994, due primarily to a
42.9% increase in interest-bearing liabilities during the year, principally as a
result of the Downey branch acquisition in August 1994. Cost of funds decreased
nominally from 2.6% in 1993 to 2.5% in 1994. Net interest income reflects an
increase of approximately $1,072,275 or 47.9%. The Company's net interest margin
increased slightly from 5.8% during 1993 to 6.1% during 1994. The industry-wide
increase in prime rate of interest during 1994 resulted in the increase of the
yield on average earning assets. However, the average cost of funds for the
Company decreased slightly because the depository rates continued to decline in
1994, lagging behind the increasing prime rate of interest.
The provision for loan losses which is charged to operations
decreased by $358,514 or 55% in 1994 compared to 1993. At December 31, 1994, the
allowance for loan losses was 1.9% of outstanding loans as compared to 2.4% at
December 31, 1993. The 1993 provision for loan losses was higher than the Bank's
experience in recent years due in part to management's action to clean up the
loan portfolio and effects of the California economy. The provision for loan
losses in 1994 declined compared to 1993 because of the improved economy and
improvements in the loan portfolio.
Other income increased approximately 10.9% during 1994 while other
operating expenses increased approximately 16.3%. The following is a discussion
of certain other income and expense items which have had significant
fluctuations during the year. Gain on the sale of securities decreased $62,529
or 100% over 1993. Equipment expense increased $38,357 or 39.1% over 1993
reflecting the growth of the Company and equipping of the new permanent
structure housing the Bank's headquarters built on the City of Commerce property
which was completed in August 1994. Data processing expenses increased $33,313
or 30.1% over 1993, reflecting the additional processing needs due to the
deposit acquisition of the Commerce Branch of Community Bank in December 1993
and the acquisition of the Downey Branch of Capital Bank in August 1994. Other
expenses increased $188,121 or 57.7% over 1993, due primarily to the increase in
correspondent bank fees related to increased activity because of the
acquisitions, and due to the fact that the Bank elected to outsource the proof
processing function in December 1993,
44
45
which resulted in significant additional expense but improved efficiency. Total
other operating expenses as a percentage of total interest income decreased to
67.1% in 1994 from 84.1% in 1993.
Liquidity and Interest Rate Sensitivity
The Company manages its liquidity position to ensure that sufficient
funds are available to meet customers' needs for borrowing and deposit
withdrawals. Liquidity is derived from both the asset and liability sides of the
balance sheet. Asset liquidity arises from the ability to convert assets to cash
and self-liquidation or maturity of assets. Liquid asset balances include cash,
investment securities maturing within one year, Federal funds sold and other
short-term assets. Liability liquidity arises from a diversity of funding
sources, as well as from the ability of the Company to attract deposits of
varying maturities. If the Company were limited to one source of funding or all
its deposits had the same maturity, its liquidity position would be adversely
impacted.
As of December 31, 1995, the Company had cash, unrestricted
interest-bearing deposits, Federal funds sold and investment securities of
approximately $41.4 million or 60.1% of total assets. As of December 31, 1995,
the Company had $22.6 million in liquid assets and its liquidity ratio (i.e.,
liquid assets to total deposits) was 36.5%, compared to 56.2% at December 31,
1994. This decrease reflects the movement away from lower yielding securities
which mature within one year to higher yielding, longer maturity securities.
Except for commitments to extend credit in the amount of $6.6 million, the
Company had no material unrecorded contingencies at December 31, 1995. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Interest-bearing deposits with financial institutions at December
31, 1995 consisted exclusively of time certificates of deposit, all of which
mature within one year. The Company's available for sale securities consisted
primarily of U.S. Treasury and Agency obligations, corporate bonds, and bank
qualified municipal bonds, which were readily marketable. Securities totaling
$1,100,000 were pledged as collateral to secure Treasury Tax and Loan deposits
and public funds. The Company's loan portfolio also was relatively liquid with
approximately 70.2% of the outstanding loans maturing within one year and/or
sensitive to changes in interest rates.
To cushion unanticipated fluctuations in its liquidity position, the
Bank, as all member commercial banks, may borrow from the regional Federal
Reserve Bank, subject to compliance with regulatory requirements. In addition,
the Bank has available a Federal funds facility with one of its correspondent
banks for $1 million. This facility is subject to customary terms for such
arrangements. As of December 31, 1995, the Company, on an unconsolidated basis,
held liquid assets of approximately $248,000. (See Note 15 for the Company's
Condensed Unconsolidated Financial Statements.)
45
46
Interest rate sensitivity management, the management of the risk
associated with fluctuations in interest rates, seeks to stabilize net interest
income during periods of changing interest rates. A change in interest rates may
not affect all interest-earning assets (generally, loans that bear interest at
floating or adjustable rates, interest-bearing deposits and Federal funds sold)
and interest-bearing liabilities (generally, money market savings,
interest-bearing transaction accounts and time certificates of deposit) at the
same time because of differences in the terms and maturities of such assets and
liabilities. The Company believes that its position with respect to interest
rate fluctuations is favorable, in that substantially all of the Company's loans
bear a floating rate of interest and many of its investments have short
maturities.
At December 31, 1995, the Company was in an asset sensitive position
and its 90 day gap, (i.e., the difference between assets and liabilities that
reprice in that period as a percentage of total assets) was (16)% and its
cumulative gap was 28%. Generally, an asset sensitive position will result in
enhanced earnings in a rising interest rate environment and declining earnings
in a falling interest rate environment because larger volumes of assets than
liabilities will reprice in the short term. Conversely, a liability sensitive
position will be detrimental to earnings in a rising interest rate environment
and will enhance earnings in a falling interest rate environment.
The Asset and Liability Maturity Repricing Schedule below sets forth
the distribution of repricing opportunities for the Company's interest earning
assets and liabilities, the interest sensitivity gap and the ratio of cumulative
gap to total assets.
46
47
Interest Sensitivity Period
(IN THOUSANDS)
OVER OVER OVER
3 MONTHS 6 MONTHS 1 YEAR
3 MONTHS THROUGH THROUGH THROUGH OVER
OR LESS 6 MONTHS 1 YEAR 5 YEARS 5 YEARS TOTAL
Interest Earning Assets:
Federal funds sold $ 2,800 $ - $ - $ - $ - $ 2,800
Securities 749 601 2,172 13,972 3673 21,167
Deposits with other institutions 3,945 3,550 4,260 - - 11,755
Loans 15,051 1,259 385 5,002 2,075 23,772
- --------------------------------------------------------------------------------------------------------------------
TOTAL $22,545 $ 5,410 $ 6,817 $18,974 $ 5,748 $59,494
====================================================================================================================
Interest Bearing Liabilities:
Time Deposits:
A) TCD'S less than $100M $3,419 $ 2,107 $ 1,872 $ 745 $ 1 $ 8,144
B) TCD'S $100M and over 3,112 707 1,437 126 - 5,382
Savings 9,203 - - - - 9,203
Money Market 8,554 - - - - 8,554
Now Accounts 8,935 - - - - 8,935
- --------------------------------------------------------------------------------------------------------------------
TOTAL $33,223 $ 2,814 $ 3,309 $ 871 $ 1 $40,218
====================================================================================================================
Interest Sensitivity Gap:
Interval $(10,678) $2,596 $3,508 $18,103 $ 5,747
Cumulative $(10,678) $(8,082) $(4,574) $13,529 $19,276 $19,276
====================================================================================================================
Ratio of cumulative gap
to total assets (16)% (12)% (7)% 20% 28% 28%
- --------------------------------------------------------------------------------------------------------------------
47
48
Capital Resources
Management seeks to maintain capital adequate to support anticipated
asset growth and credit risks, and to ensure that the Company is within
established regulatory guidelines and industry standards. The Company is
currently exempt from the Federal Reserve Board's risk-based guidelines because
consolidated assets are under $150 million. However, the Bank is subject to the
risk-based capital guidelines adopted by the OCC. These guidelines require the
Bank to maintain a minimum ratio of total capital-to-risk-weighted assets of 8%,
of which at least 4% must consist of Tier 1 capital. At December 31, 1995, the
Bank had a total capital-to-risk-weighted assets ratio of 18.3%, with a Tier 1
capital ratio of 17.6%. The Bank's leverage ratio at December 31, 1995 was 8.4%.
During the last two years, capital has been generated primarily
through the retention of earnings. Management believes that it can meet its
present regulatory capital requirements through earnings for at least the next
two years.
Risk Elements
Management believes that the California economy has continued to
improve slowly in 1995, but continues to lag behind the country, particularly in
unemployment rates. Southern California continues to feel the economic pressures
of reductions in government defense spending, overbuilt commercial real estate,
unaffordable housing and high unemployment. Many of these economic factors are
the result of long-term structural adjustments resulting from major changes in
many of the State's basic industries. However, the index of leading economic
indicators has shown signs of improvement as well as an increase in housing
starts. In addition, California's unemployment rate is expected to improve in
1996. Management anticipates that the California economy will continue to
improve in 1996.
The Company has been able to maintain a positive interest margin
even with the decreases in loan yields through tight controls on operating
expenses. Management believes the results reflect favorably in 1995 and will
continue to focus on conservative management policies.
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.
48
49
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.
In the current interest rate environment where the Federal Reserve
has actively used the discount rate as a tool to stimulate the economy, the
Company recognizes the importance of maintaining adequate liquidity and
effectively managing the maturity structure of the Company's interest bearing
assets and liabilities.
Recent Accounting Developments
In March 1995, the FASB issued Statement No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." Statement No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Statement No. 121 will first be
required for the Bank's year ending December 31, 1996. Based on its preliminary
analysis, the Bank does not anticipate that the adoption of Statement No. 121
will have a material impact on the financial statements as of the date of
adoption.
In 1995 the FASB issued Statement No. 123, "Accounting for
Stock-based Compensation." Statement No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans such as a
purchase plan. The Statement generally suggests stock- based compensation
transactions be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. An enterprise may continue to follow the requirements of
Accounting Principles Board (APB) Opinion No. 25, which does not require
compensation to be recorded if the consideration to be received is at least
equal to the fair value at the measurement date. If an enterprise elects to
follow APB Opinion No. 25, it must disclose the pro forma effects on net income
as if compensation were measured in accordance with the suggestions of Statement
No. 123. The Company has not determined if it will continue to follow APB
Opinion No. 25 or follow the guidance of Statement No. 123. However, adoption of
this pronouncement in 1996 is not expected to have a material impact on the
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a) herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
49
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the Company's directors and executive
officers is incorporated herein by reference from the section entitled "ELECTION
OF DIRECTORS" of the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the last fiscal year. See
"ITEM 1. BUSINESS -- Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is incorporated herein
by reference from the section entitled "COMPENSATION OF DIRECTORS AND EXECUTIVE
OFFICERS" of 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 the security ownership of certain beneficial
owners and management is incorporated by reference from the sections entitled
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF
MANAGEMENT" in 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 is incorporated herein by reference from the section entitled
"COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS -- Transactions with
Management" of the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
50
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Schedule
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December
31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. No financial statement schedules are included in this report
on the basis that they are inapplicable, are not material or
the information required to be set forth therein is
contained in the financial statements incorporated herein by
reference.
51
52
3. Exhibits
(i) Executive Compensation Plans and Arrangements
The following is a summary of the Company's executive
compensation plans and arrangements which are required to be filed as exhibits
to this Report on Form 10-K:
A. Amended and Restated COMBANCORP Employee Stock Savings Plan - Annual Report
on Form 10-K for the year ended December 31, 1995 (Commission File No.
0-15984), Exhibit 10.7.2.
B. COMBANCORP Employee Stock Ownership Plan Trust Agreement - Annual Report on
Form 10-K for the year ended December 31, 1988 (Commission File No.
0-15984), Exhibit 4.6.
C. 1993 Stock Option Plan - Annual Report on Form 10-K for the year ended
December 31, 1992 (Commission File No. 0-15984), Exhibit 10.9.
D. Form of Incentive Stock Option Agreement applicable to 1993 Stock Option
Plan - Annual Report on Form 10-K for the year ended December 31, 1993
(Commission File No. 0- 15984), Exhibit 10.10.
E. Form of Non-Qualified Stock Option Agreement applicable to 1993 Stock Option
Plan - Annual Report on Form 10-K for the year ended December 31, 1993
(Commission File No. 0-15984), Exhibit 10.11.
(ii) Exhibit Index
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation (3.1)(1)
3.1.1 Certificate of Amendment of Articles of Incorporation, filed
February 26, 1988 (3.1a)(3)
3.1.2 Certificate of Amendment of Articles of Incorporation, filed May 13,
1988 (3.1b)(4)
3.2 Bylaws (3.2)(1)
3.2.1 Amendment to Article V of the Bylaws, adopted February 17, 1988
(3.2a)(3)
3.2.2 Amendments to Article II and III of the Bylaws, adopted April 18,
1990 (3.2b)(5)
3.2.3 Amendment to Article III of the Bylaws, adopted June 28, 1990
(3.2c)(5)
4.1 Specimen Stock Certificate (4.1)(3)
10.1 Form of Indemnification Agreement entered into with each director
and executive officer of the Registrant (10.1)(4)
52
53
10.2 Form of Indemnification Agreement entered into with each director
and executive officer of the Bank (10.2)(4)
10.3 Reserved
10.4 Reserved
10.5 Reserved
10.6 Reserved
10.7 Reserved
10.7.1 Reserved
10.7.2 Amended and Restated COMBANCORP Employee Stock Savings Plan
10.8 COMBANCORP Employee Stock Ownership Plan Trust Agreement (4.6)(4)
10.9 1993 Stock Option Plan (10.9)(6)
10.10 Form of Incentive Stock Option Agreement applicable to 1993 Stock
Option Plan (10.10)(7)
10.11 Form of Non-Qualified Stock Option Agreement applicable to 1993
Stock Option Plan (10.11)(7)
10.12 Lease between Pace Development Company and Commerce National Bank,
dated November 2, 1995
21.1 Subsidiaries of the Registrant (22.1)(4)
23.1 Consent of McGladrey & Pullen, LLP
99.1 Consortium agreement dated August 26, 1994, among Commerce National
Bank, Landmark Bank, the assuming Bank, the FDIC, receiver of
Capital Bank, and the FDIC in its corporate capacity (99)(8)
- ---------------------------------
(Footnotes commence next page)
53
54
(1) This exhibit was previously included in the Registrant's
Registration Statement on Form S- 18, Registration No. 2-89698,
filed with the Commission on February 29, 1984, under the Exhibit
number indicated in parentheses, and is incorporated herein by
reference.
(2) This exhibit was previously included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1986 (Commission
File No. 2-89698), under the Exhibit number indicated in
parentheses, and is incorporated herein by reference.
(3) This exhibit was previously included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987 (Commission
File No. 2-89698), under the Exhibit number indicated in
parentheses, and is incorporated herein by reference.
(4) This exhibit was previously included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988 (Commission
File No. 0-15984), under the Exhibit number indicated in
parentheses, and is incorporated herein by reference.
(5) This exhibit was previously included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990 (Commission
File No. 0-15984), under the Exhibit number indicated in
parentheses, and is incorporated herein by reference.
(6) This exhibit was previously included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992 (Commission
File No. 0-15984), under the Exhibit number indicated in
parentheses, and is incorporated herein by reference.
(7) This exhibit was previously included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993 (Commission
File No. 0-15984), under the Exhibit number indicated in
parentheses, and is incorporated herein by reference.
(8) This exhibit was previously included in the Registrant's Report on
Form 8-K filed September 12, 1994 (Commission File No. 0-15984),
under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
54
55
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the last
quarter of the period covered by this report.
(c) Exhibits Required by Item 601 of Regulation S-K
See Item 14(a)(3) above.
(d) Additional Financial Statements
Not applicable.
55
56
SIGNATURES
Pursuant to the requirement 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.
COMBANCORP
Date: March 29, 1996 By: /s/ RICHARD F. DEMERJIAN
-------------------------
Richard F. Demerjian
Chairman of the Board, President 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.
Date: March 29, 1996 By: /s/ RICHARD F. DEMERJIAN
-------------------------
Richard F. Demerjian
Chairman of the Board, President and
Chief Executive Officer
Date: March 29, 1996 By: /s/ ESTHER G. WILSON
--------------------
Esther G. Wilson
Chief Financial Officer, Secretary and
Director
Date: March 29, 1996 By: /s/ ROBERT L. GLOVER
--------------------
Robert L. Glover
Director
Date: March 29, 1996 By: /s/ JACK MINASIAN
-----------------
Jack Minasian
Director
Date: March 29, 1996 By: /s/ JAMES C. OPPENHEIM
----------------------
James C. Oppenheim
Director
Date: March 29, 1996 By: /s/ PHILLIP J. PACE
--------------------
Phillip J. Pace
Director
Date: March 29, 1996 By: /s/ RICHARD J. STRAYER
----------------------
Richard J. Strayer
Director
57
[MC GLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
COMBANCORP
City of Commerce, California
We have audited the accompanying consolidated balance sheets of COMBANCORP and
subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 COMBANCORP and
subsidiary at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Pasadena, California
January 26, 1996
F - 1
58
COMBANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
- -------------------------------------------------------------------------------------
Cash and due from banks (Note 2) $ 5,639,763 $ 5,745,356
Federal funds sold 2,800,000 11,605,000
----------- -----------
CASH AND CASH EQUIVALENTS (Note 1) 8,439,763 17,350,356
----------- -----------
Interest bearing deposits in other financial institutions 11,755,000 8,102,000
----------- -----------
Federal Reserve Bank stock (Note 4) 120,000 120,000
----------- -----------
Securities available for sale (Note 4) 21,046,565 16,830,404
----------- -----------
Loans (Notes 5 and 13) 23,771,964 25,809,010
Less:
Deferred loan fees and costs 65,731 59,280
Unearned discount on acquired loans 84,823 285,827
Allowance for loan losses (Note 6) 432,559 498,827
----------- -----------
NET LOANS 23,188,851 24,965,076
----------- -----------
Bank premises and equipment, net (Note 7) 3,291,753 2,526,677
----------- -----------
Accrued income receivable and other assets
(Notes 3 and 9) 881,171 922,922
----------- -----------
Other real estate owned 106,926 371,013
----------- -----------
$68,830,029 $71,188,448
=========== ===========
See Notes to Consolidated Financial Statements.
F - 2
59
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
- ---------------------------------------------------------------------------------------------------------
Liabilities
Deposits (Notes 3, 8 and 13):
Demand noninterest bearing $21,805,536 $ 23,439,082
Savings and other interest bearing accounts 26,691,892 28,870,686
Time 13,526,369 12,589,529
----------- ------------
62,023,797 64,899,297
Accrued interest payable and other liabilities (Note 9) 421,322 342,524
----------- ------------
TOTAL LIABILITIES 62,445,119 65,241,821
----------- ------------
Commitments and Contingencies (Note 11)
Shareholders' Equity (Notes 4, 10, 12 and 14)
Preferred stock, no par value, 5,000,000 shares
authorized; no shares issued
Common stock, no par value, 20,000,000 shares
authorized; 565,789 issued and outstanding 4,453,300 4,453,300
Retained earnings 1,796,650 1,609,002
Unrealized gain (loss) on securities available for sale,
net 134,960 (115,675)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 6,384,910 5,946,627
----------- ------------
$68,830,029 $ 71,188,448
=========== ============
F - 3
60
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- -------------------------------------------------------------------------------------
Interest income:
Loans $2,904,107 $2,750,210 $2,229,348
Deposits in other financial institutions 610,821 334,074 299,107
Securities 1,118,263 706,544 251,014
Federal funds sold 566,857 402,391 97,795
---------- ---------- ----------
5,200,048 4,193,219 2,877,264
Interest expense on deposits 1,199,411 884,421 640,741
---------- ---------- ----------
Net interest income 4,000,637 3,308,798 2,236,523
Provision for loan losses (Note 6) 649,000 292,800 651,314
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,351,637 3,015,998 1,585,209
---------- ---------- ----------
Other income:
Gross gain on sales of investment
securities -- -- 62,529
Other, principally service charges on
deposit accounts 609,522 619,498 496,285
---------- ---------- ----------
609,522 619,498 558,814
---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,469,449 1,227,617 1,142,288
Occupancy (Note 11) 316,599 282,353 249,715
Equipment 227,548 136,437 98,080
Professional fees (Note 13) 211,304 104,905 123,701
Advertising 54,447 48,959 45,287
Business promotion 69,834 78,465 68,019
Supplies and office 171,246 128,203 109,406
Insurance 167,583 149,961 147,842
Data processing 146,924 144,046 110,733
Other 564,130 513,913 325,792
---------- ---------- ----------
3,399,064 2,814,859 2,420,863
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F - 4
61
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- --------------------------------------------------------------------------------------
Income (loss) before income
taxes (benefits) $562,095 $820,637 $(276,840)
Provision for income taxes (benefits)
(Note 9) 233,000 352,000 (87,500)
-------- -------- ---------
Income (loss) before cumulative
effect of a change in accounting
principle 329,095 468,637 (189,340)
Cumulative effect of a change in
accounting principle (Note 9) -- -- (55,582)
-------- -------- ---------
NET INCOME (LOSS) $329,095 $468,637 $(133,758)
======== ======== =========
Earnings (loss) per common share:
Income (loss) before cumulative effect
of a change in accounting principle $ 0.58 $ 0.83 $ (0.34)
Effect of a change in accounting
principle on net income -- -- 0.10
-------- -------- ---------
Earnings (loss) per common share $ 0.58 $ 0.83 $ (0.24)
======== ======== =========
Dividends per common share $ 0.25 $ -- $ 0.09
======== ======== =========
See Notes to Consolidated Financial Statements.
F - 5
62
COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Unrealized
Gain (Loss) on
Number of Securities
Shares Common Retained Available for
Outstanding Stock Earnings Sale, Net Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 565,789 $4,453,300 $1,325,044 $ -- $5,778,344
Cash dividend ($.09 per
common share) -- -- (50,921) -- (50,921)
Cumulative change in
unrealized gain on
securities available for
sale, net -- -- -- 73,160 73,160
Net (loss) -- -- (133,758) -- (133,758)
------- ---------- ----------- --------- -----------
Balance, December 31, 1993 565,789 4,453,300 1,140,365 73,160 5,666,825
Change in unrealized (loss)
on securities available
for sale, net -- -- -- (188,835) (188,835)
Net income -- -- 468,637 -- 468,637
------- ---------- ----------- --------- -----------
Balance, December 31, 1994 565,789 4,453,300 1,609,002 (115,675) 5,946,627
Cash dividend ($.25 per
common share) -- -- (141,447) -- (141,447)
Change in unrealized
gain on securities
available for sale, net -- -- -- 250,635 250,635
Net income -- -- 329,095 -- 329,095
------- ---------- ----------- --------- -----------
Balance, December 31, 1995 565,789 $4,453,300 $ 1,796,650 $ 134,960 $ 6,384,910
======= ========== =========== ========= ===========
See Notes to Consolidated Financial Statements.
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COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- ---------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 329,095 $ 468,637 $(133,758)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Cumulative effect on prior years of
a change in accounting principle
for computing deferred taxes (55,582)
Loss (gain) on sale of premises and
equipment and other real estate
owned 3,924 (24,253) 17,914
Valuation write-down of other real
estate owned 20,000 48,836 30,000
Gain on sale of securities (62,529)
Provision for loan losses 649,000 292,800 651,314
Depreciation and amortization 247,372 136,472 136,031
Amortization of deferred loan fees (68,468) (87,478) (41,027)
Net accretion of discount on
securities (229,474) (337,461) (5,129)
Accretion of unearned discount on
acquired loans (169,611) (341,311) (181,076)
Net increase in accrued income
receivable and other assets (15,209) (65,910) (122,318)
Net increase (decrease) in accrued
interest payable and other
liabilities (99,655) 334,429 (101,168)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 666,974 424,761 132,672
--------- --------- ---------
See Notes to Consolidated Financial Statements.
F - 7
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COMBANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- ----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net increase in interest bearing
deposits with other financial
institutions $ (3,653,000) $ (127,126) $ (1,282,140)
Proceeds from sales of securities
available for sale 462,064
Proceeds from maturities and calls of
securities available for sale 14,500,851 23,759,907 996,587
Purchases of securities available for
sale (18,058,450) (27,662,866) (11,259,699)
Net (increase) decrease in loans 1,219,383 (3,566,444) 1,726,455
Purchases of premises and equipment (956,782) (2,013,119) (123,188)
Proceeds from sale of other real
estate owned and equipment 387,378 36,254 352,616
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (6,560,620) (9,573,394) (9,127,305)
------------ ------------ ------------
Cash Flows from Financing Activities
Net increase (decrease) in deposits (2,875,500) 19,174,616 11,538,343
Dividends paid (141,447) (50,921)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,016,947) 19,174,616 11,487,422
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (8,910,593) 10,025,983 2,492,789
Cash and Cash Equivalents
Beginning of year 17,350,356 7,324,373 4,831,584
------------ ------------ ------------
End of year $ 8,439,763 $ 17,350,356 $ 7,324,373
============ ============ ============
See Notes to Consolidated Financial Statements.
F - 8
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS ACTIVITIES
COMBANCORP (the Company) is a bank holding company located in the City of
Commerce, California, which provides a full range of banking services to its
commercial and consumer customers through three branches located in the cities
of Commerce, Montebello, and Downey, California.
The Bank grants commercial, residential and consumer loans to customers,
substantially all of whom are middle market businesses or residents. The Bank's
business is concentrated in the cities of Commerce, Montebello, Downey and the
surrounding areas and the loan portfolio includes a significant credit exposure
to the real estate industry of this area. As of December 31, 1995, real estate
related loans accounted for approximately 49% of total loans.
Substantially all of these loans are secured by first liens with an initial
loan-to-value ratio of generally no more than 75%.
The loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers. The Bank's policy requires that collateral be
obtained on substantially all loans. Such collateral is primarily first trust
deeds on real estate and business assets.
A SUMMARY OF THE SIGNIFICANT ACCOUNTING POLICIES UTILIZED BY THE COMPANY IS AS
FOLLOWS:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all the accounts of COMBANCORP and
its wholly owned subsidiary, Commerce National Bank (the Bank). All material
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F - 9
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks and federal funds sold. Cash flows from loans
originated by the Bank, interest bearing deposits in other financial
institutions and deposits are reported net.
The Bank, subject to policy guidelines, maintains amounts due from banks which,
at times, may exceed federally insured limits.
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are those debt securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in shareholders' equity, net of the related
deferred tax effect. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings.
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned
discounts and fees and the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans that may become uncollectible based on
evaluation of the collectibility of loans and prior loan loss experience.
F - 10
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
This evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrower's ability to pay. While management uses the best information available
to make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic or other conditions. In addition, the
Office of the Comptroller of the Currency (OCC), as an integral part of their
examination process, periodically reviews the Bank's allowance for loan losses
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their examinations.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
INTEREST AND FEES ON LOANS
Interest on loans is recognized over the terms of the loans and is calculated
using the simple-interest method on principal amounts outstanding. Interest is
accrued daily on the outstanding balances. Accrual of interest is discontinued
on a loan when management believes, after considering collection efforts and
other factors, that the borrower's financial condition is such that collection
of interest is doubtful. When the accrual of interest is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received.
Unearned discounts on acquired loans are amortized to income over the
contractual life of the loans unless certain homogeneous loans have been grouped
as a pool, in which case the discount is amortized to income over the estimated
life of the loans. Management periodically reevaluates the prepayment
assumptions based upon actual payment experience. Any changes in these estimates
are accounted for prospectively.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is amortizing these amounts over the contractual life of
the loan.
F - 11
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets, which range from
three to 30 years.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO), consisting of properties acquired as a result of
foreclosure of loans, are carried at the lower of the loan balance or appraised
value of collateral, net of selling costs. Any write-down to estimated fair
value less cost to sell at the time of transfer to OREO is charged to the
allowance for loan losses. Property is evaluated regularly by management and
reductions of the carrying amount to estimated fair value less estimated costs
to dispose are recorded as necessary.
INTANGIBLES
The premiums paid for the deposits purchased are amortized over a period of
seven years on a straight-line method. At December 31, 1995 and 1994, the
unamortized balances of $215,385 and $330,998, respectively, are included in
other assets in the accompanying consolidated balance sheets.
The Bank periodically reviews the value of its intangibles to determine if
impairment has occurred. The Bank does not believe that an impairment of its
intangibles has occurred based on an evaluation of deposit balances and
operating results.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards. Deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
F - 12
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are computed by dividing applicable amounts by
the weighted average number of shares of common stock outstanding. Stock options
are considered common stock equivalents but were not included in the earnings
per share computation because the effect is immaterial or antidilutive. The
number of shares used in computing earnings per share was 565,789 for 1995, 1994
and 1993.
STATEMENT OF CASH FLOWS
During 1995, 1994 and 1993, the Bank paid interest and income taxes as follows:
1995 1994 1993
--------------------------------------------
Interest $1,210,204 $862,071 $636,967
Income taxes 250,408 115,000 162,012
During the years ended December 31, 1995, 1994 and 1993, $145,921, $444,937 and
$284,725, respectively, of other real estate owned was acquired in settlement of
loans.
In 1993 the Bank acquired deposit liabilities of $12,454,049 for a premium of
$138,222. This transaction is reflected in the consolidated statement of cash
flows in the net change in deposits.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year financial data to
current reporting policies of the Bank. Such reclassifications do not affect net
income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 1995, the Company adopted FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, which requires disclosure
of fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value.
F - 13
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Bank could have realized in a sales transaction at December 31, 1995. The
estimated fair value amounts for 1995 have been measured as of December 31, 1995
and have not been reevaluated or updated for purposes of these consolidated
financial statements subsequent to that date. As such, the estimated fair values
of these financial instruments subsequent to the respective reporting dates may
be different than the amounts reported at December 31, 1995.
This disclosure of fair value amounts does not include the fair values of any
intangibles, including core deposit intangibles, purchased.
Due to the wide range of valuation techniques and the degree of subjectivity
used in making the estimate, comparisons between the Bank's disclosures and
those of other banks may not be meaningful.
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash and due
from banks and federal funds sold approximate their fair values.
SECURITIES
Carrying amounts approximate fair values for securities available for sale.
INTEREST BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
The carrying amount reported in the consolidated balance sheet for interest
bearing deposits in other financial institutions approximates the fair value.
F - 14
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
LOANS
For variable rate loans that reprice frequently and that have experienced no
significant change in credit risk, fair values are based on carrying values. At
December 31, 1995, variable rate loans comprised approximately 63% of the loan
portfolio. Fair values for all other loans are estimated based on discounted
cash flows using interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality. Prepayments prior to the
repricing date are not expected to be significant. Loans are expected to be held
to maturity and any unrealized gains or losses are not expected to be realized.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for off-balance-sheet instruments (guarantees, letters of credit and
lending commitments) are based on quoted fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
DEPOSIT LIABILITIES
Fair values disclosed for demand deposits equal their carrying amounts, which
represent the amounts payable on demand. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregate expected
monthly maturities on time deposits. Early withdrawals of fixed rate
certificates of deposit are not expected to be significant.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The fair values of both accrued interest receivable and payable approximate
their carrying amounts.
F - 15
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of. Statement No.
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. Statement No. 121 will first be required for the Bank's year
ending December 31, 1996. Based on its preliminary analysis, the Bank does not
anticipate that the adoption of Statement No. 121 will have a material impact on
the financial statements as of the date of adoption.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1995 the FASB issued Statement No. 123, Accounting for Stock-based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans such as a purchase plan.
The Statement generally suggests stock-based compensation transactions be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
An enterprise may continue to follow the requirements of Accounting Principles
Board (APB) Opinion No. 25, which does not require compensation to be recorded
if the consideration to be received is at least equal to the fair value at the
measurement date. If an enterprise elects to follow APB Opinion No. 25, it must
disclose the pro forma effects on net income as if compensation were measured in
accordance with the suggestions of Statement No. 123. The Company has not
determined if it will continue to follow APB Opinion No. 25 or follow the
guidance of Statement No. 123. However, adoption of this pronouncement in 1996
is not expected to have a material impact on the financial statements.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash or on deposit with
Federal Reserve Banks. The total of those reserve balances was approximately
$380,000 and $329,000 as of December 31, 1995 and 1994, respectively.
F - 16
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. ACQUISITION OF ASSETS AND ASSUMPTION OF DEPOSITS
On August 26, 1994, the Bank, as part of a consortium with Landmark Bank,
entered into an Insured Deposit Purchase and Assumption Agreement (Agreement)
with the Federal Deposit Insurance Corporation (FDIC) for the purchase and
assumption of certain assets and liabilities of Capital Bank. The Bank purchased
$674,000 of assets consisting of cash and assumed $22,536,000 of deposit
liabilities, principally insured and accrued interest, of the Downey branch for
a premium of $185,000, including expenses. In addition, the Bank obtained a
lease on the Downey branch facility of Capital Bank through May 1995 when an
option to purchase the building for $650,000 was exercised. The Bank hired 12
former employees of Capital Bank, none of which were members of senior
management, to staff the existing facility. The initial transaction is reflected
in the consolidated statement of cash flows in the net change in deposits in
1994. The purchase of the building is reflected in the consolidated statement of
cash flows in the purchases of premises and equipment in 1995.
The Bank purchased approximately $5,352,000 of net loans from the FDIC. The
purchase of these loans is reflected in the consolidated statement of cash flows
in the net increase in loans.
Because it views the Agreement previously described as one in which the Bank
assumed the insured deposit liabilities of the Downey branch of Capital Bank and
acquired certain of the Downey branch assets, management believes that a
continuity of business is substantially lacking and, as a consequence,
historical and pro forma financial information regarding this branch of Capital
Bank would not be meaningful.
NOTE 4. SECURITIES AVAILABLE FOR SALE
Effective December 31, 1993, the Bank adopted FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities. The Bank classified
substantially all of its investment portfolio as available for sale on December
31, 1993.
F - 17
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. SECURITIES AVAILABLE FOR SALE, CONTINUED
Securities available for sale as of December 31, 1995 and 1994 are summarized as
follows:
1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
U.S. Treasury securities $ 7,827,599 $161,197 $ 218 $ 7,988,578
U.S. Government and
agency obligations 11,795,751 53,493 6,505 11,842,739
Other 1,191,055 24,702 509 1,215,248
----------- -------- ----------- -----------
$20,814,405 $239,392 $ 7,232 $21,046,565
=========== ======== =========== ===========
1994
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
U.S. Treasury securities $14,170,967 $122,057 $ 268,565 $14,024,459
U.S. Government and
agency obligations 2,140,402 1,087 36,422 2,105,067
Other 715,963 52 15,137 700,878
----------- -------- ----------- -----------
$17,027,332 $123,196 $ 320,124 $16,830,404
=========== ======== =========== ===========
Securities available for sale as of December 31, 1995 by contractual maturity
are shown below.
Amortized
Cost Fair Value
-----------------------------
Due in one year or less $ 3,494,342 $ 3,521,654
Due after one through five years 13,793,414 13,972,160
Due after five through ten years 3,474,767 3,497,029
Due after ten years 51,882 55,722
----------- -----------
$20,814,405 $21,046,565
=========== ===========
F - 18
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. SECURITIES AVAILABLE FOR SALE, CONTINUED
Securities available for sale with a carrying amount of $1,100,000 and $400,000
at December 31, 1995 and 1994, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
There were no realized gains or losses from the sales of securities classified
as available for sale for the years ended December 31, 1995 and 1994.
Federal Reserve Bank stock is carried at cost which approximates fair value.
NOTE 5. LOANS
Major classifications of loans at December 31 are as follows:
1995 1994
----------------------------
Commercial $10,474,719 $11,210,049
Real estate - construction 2,338,979 2,998,619
Real estate - other 8,062,827 8,541,865
Real estate mortgage loans acquired 1,216,165 1,242,636
Installment 1,679,274 1,815,841
----------- -----------
$23,771,964 $25,809,010
=========== ===========
The majority of loans have variable interest rates based on the Bank's reference
rate.
On January 1, 1995, the Bank adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by FASB Statement No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. There was no effect on the Bank's financial statements from this
change. At January 1, 1995, the Bank classified $244,000 of its loans as
impaired with a specific loss reserve of $56,000.
Impairment of loans having recorded investments of $103,000 at December 31, 1995
has been recognized. The total allowance for loan losses related to these loans
was $5,200 on December 31, 1995. The average recorded investment for all
impaired loans during 1995 was $276,000. Interest income of $57,000 was
recognized on impaired loans in 1995 using a cash-basis method of accounting
during the time within that period that the loans were impaired.
F - 19
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR OTHER REAL ESTATE OWNED
Changes in the allowance for loan losses during each of the three years in the
period ended December 31, 1995 are summarized as follows:
1995 1994 1993
-----------------------------------
Balance, beginning $ 498,827 $ 534,625 $ 451,827
Provision charged to operating expense 649,000 292,800 651,314
Loans charged off (785,250) (333,173) (629,986)
Recoveries on loans previously
charged off 69,982 4,575 61,470
--------- --------- ---------
$ 432,559 $ 498,827 $ 534,625
========= ========= =========
Changes in the reserve for other real estate owned are as follows:
Years Ended December 31,
---------------------------------
1995 1994 1993
---------------------------------
Balance, beginning $ 73,924 $ 30,000 $ --
Provision charged to other real estate
expense 20,000 73,924 30,000
Disposal of other real estate owned (73,924) (30,000) --
-------- -------- -------
Balance, ending $ 20,000 $ 73,924 $30,000
======== ======== =======
F - 20
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation and amortization are as follows:
December 31,
------------------------
1995 1994
------------------------
Land $ 907,143 $ 417,143
Buildings 2,060,222 1,729,986
Building improvements 290,751 407,306
Furniture, fixtures and equipment 842,202 637,590
Construction in progress 24,042
---------- ----------
4,124,360 3,192,025
Less accumulated depreciation and amortization 832,607 665,348
---------- ----------
$3,291,753 $2,526,677
========== ==========
NOTE 8. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000 were $5,381,974 and $4,329,934 in 1995 and
1994, respectively. At December 31, 1995, the scheduled maturities of
certificates of deposits are as follows:
Year Ending December 31, Amount
- ------------------------ -----------
1996 $12,654,400
1997 672,779
1998 and thereafter 199,190
------------
$13,526,369
===========
NOTE 9. INCOME TAXES
On January 1, 1993, the Company changed its method of accounting for income
taxes as a result of the adoption of FASB Statement No. 109, Accounting for
Income Taxes, with a cumulative effect of a benefit of $55,582 to 1993 net
income.
F - 21
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COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES, CONTINUED
The components of income tax expenses (benefits) are as follows:
1995 1994 1993
----------------------------------
Currently paid or payable (refundable):
Federal $ 84,000 $ 193,000 $(35,682)
State 17,000 40,000 1,600
-------- --------- --------
101,000 233,000 (34,082)
-------- --------- --------
Deferred:
Federal 83,000 62,000 (22,818)
State 49,000 57,000 (30,600)
-------- --------- --------
132,000 119,000 (53,418)
-------- --------- --------
$233,000 $ 352,000 $(87,500)
======== ========= ========
The Company's income tax expenses (benefits) differed from the statutory federal
rate of 35% as follows:
1995 1994 1993
----------------------------------
Computed "expected" tax expenses
(benefits) $ 197,000 $ 287,000 $(97,000)
State income tax expenses (benefits),
net of federal income tax benefit 43,000 64,000 (20,000)
Other (7,000) 1,000 29,500
--------- --------- --------
$ 233,000 $ 352,000 $(87,500)
========= ========= ========
F - 22
79
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES, CONTINUED
Net deferred tax assets (liabilities) consist of the following components as of
December 31:
1995 1994
---------------------
Deferred tax assets:
Property and equipment $ 18,000 $ 27,000
Allowance for loan losses 51,000 118,000
Valuation allowance for other real estate owned 8,000 36,000
Unrealized loss on securities available for sale -- 81,000
State taxes 7,000 16,000
Other 32,000 --
--------- --------
116,000 278,000
--------- --------
Deferred tax liabilities:
Accrual to cash basis 217,000 135,000
Unrealized gain on securities available for sale 96,000
Accumulated discount on loans purchased 56,000 54,000
Other -- 5,000
--------- --------
369,000 194,000
--------- --------
$(253,000) $ 84,000
========= ========
NOTE 10. STOCK OPTIONS
The Company's 1993 Stock Option Plan (the Plan) provides for the issuance of up
to 93,501 shares of common stock. The Plan provides for the granting of
nonqualified and incentive stock options to directors, officers and other key
full-time salaried employees of the Company and its subsidiary. Purchase prices
are based on the fair market value of the Company's stock at the time the option
is granted. Options are granted for a term of ten years and are exercisable in
cumulative annual increments as the Board of Directors may determine, commencing
one year after date of grant. All outstanding options are exercisable at $7.00
per share. Unless terminated at an earlier date, the Plan shall terminate ten
years from the effective date of March 17, 1993.
F - 23
80
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. STOCK OPTIONS, CONTINUED
Other pertinent information related to the Plan is as follows:
1995 1994 1993
---------------------------------
Under option, beginning of year 56,250 57,500 60,000
Granted -- 5,000 57,500
Terminated and canceled -- (6,250) (60,000)
------ ------ -------
Under option, end of year 56,250 56,250 57,500
====== ====== =======
Options exercisable, end of year 56,250 56,250 57,500
====== ====== =======
Available for grant, end of year 37,251 37,251 36,001
====== ====== =======
NOTE 11. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT
CONTINGENCIES
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
F - 24
81
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT, CONTINUED
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31 is as follows:
1995 1994
----------------------------
Commitments to extend credit $5,861,829 $3,330,071
Standby letters of credit 210,000 212,000
Credit card commitments 573,886 630,732
---------- ----------
$6,645,715 $4,172,803
========== ==========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, residential real estate and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. They are issued
primarily to support real estate construction projects and other business
related ventures. Collateral held varies as specified above and is required in
instances which the Bank deems necessary. At December 31, 1995, all of the
standby letters of credit were collateralized.
CREDIT CARD COMMITMENTS
Credit card commitments are commitments on credit cards and are unsecured.
F - 25
82
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT, CONTINUED
LEASES AND RELATED PARTY TRANSACTIONS
The Bank leases the Montebello branch facility from a company owned by a
director of the Company under a lease agreement expiring April 1, 1998. The
lease agreement requires monthly rent of $5,191 plus normal repairs and
maintenance, property taxes and insurance. Future minimum annual lease payments
as of December 31, 1995 are as follows:
Year Ending December 31, Amount
- ------------------------ --------
1996 $ 62,000
1997 62,000
1998 16,000
--------
$140,000
========
Lease expense for all operating leases was $73,000, $164,000 and $147,000 in
1995, 1994 and 1993, respectively, substantially all of which was paid to the
related party.
NOTE 12. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan, established in 1987, which
covers substantially all employees. The Company accrued or paid a cash
contribution of $25,000 and $50,000 in 1995 and 1994, respectively. No
contribution was made for 1993. The contribution is at the discretion of the
Board of Directors.
In the event terminated plan participants desire to sell their shares of the
Company's stock, the Company may be required to purchase the shares from the
participants at their fair market value established at the last valuation date.
At December 31, 1995, the Plan owns approximately 22,571 shares of the Company's
common stock, and the Company has a maximum contingent liability of $208,782 to
repurchase all the shares from plan participants. The Company did not purchase
any stock in 1995, 1994 or 1993.
F - 26
83
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. RELATED PARTY TRANSACTIONS
Shareholders of the Company and officers and directors, including their families
and companies of which they are principal owners, are considered to be related
parties. As part of its normal banking activity, the Bank has extended credit to
various executive officers, directors and companies in which they have an
interest. Loans to related parties are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons, and do not involve more than
normal risk of collectibility.
The approximate aggregate dollar amounts and activity of these loans were as
follows:
1995 1994
---------------------------------
Balance, beginning $ 1,066,000 $ 1,247,000
Advances 345,000 101,000
Repayments (519,000) (282,000)
----------- -----------
Balance, ending $ 892,000 $ 1,066,000
=========== ===========
These persons and companies had deposits at the Bank of approximately $1,480,000
and $1,075,000 at December 31, 1995 and 1994, respectively.
During the years ended December 31, 1995, 1994 and 1993, the Company paid to a
company controlled by one of the directors approximately $60,000, $60,000 and
$46,000, respectively, for insurance premiums.
It is the opinion of management that such insurance premiums were no less
favorable to the Company than those which could have been obtained from persons
not affiliated with the Company.
NOTE 14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
F - 27
84
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. REGULATORY MATTERS, CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, the Bank
meets all capital adequacy requirements to which it is subject.
Under federal banking law, dividends declared by the Bank in any calendar year
may not, without the approval of the Comptroller of the Currency, exceed its net
income (as defined) for that year combined with its retained net income for the
preceding two years.
The Bank's actual capital amounts and ratios as of December 31, 1995 and 1994
are presented in the following table:
For Capital
Actual Adequacy Purposes
------------------ ---------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
Total capital (to risk-weighted
assets) $6,196,282 18.3% greater than $2,633,996 greater than 8.0% greater than
or equal to or equal to or equal to
Tier I capital (to risk-weighted
assets) 5,786,720 17.6 greater than 1,316,998 greater than 4.0 greater than
or equal to or equal to or equal to
Tier I capital (to average assets) 5,786,720 8.4 greater than 2,753,319 greater than 4.0 greater than
or equal to or equal to or equal to
As of December 31, 1994:
Total capital (to risk-weighted
assets) 5,868,020 17.9 greater than 2,621,893 greater than 8.0 greater than
or equal to or equal to or equal to
Tier I capital (to risk-weighted
assets) 5,458,350 16.7 greater than 1,310,964 greater than 4.0 greater than
or equal to or equal to or equal to
Tier I capital (to average assets) 5,458,350 7.7 greater than 2,847,538 greater than 4.0 greater than
or equal to or equal to or equal to
To be Well Capitalized
Under Prompt Corrective
Action Provisions
-------------------------------
Amount Ratio
- --------------------------------------------------------------------------
As of December 31, 1995:
Total capital (to risk-weighted
assets) 3,292,495 greater than 10.0%
or equal to
Tier I capital (to risk-weighted
assets) 1,975,497 greater than 6.0
or equal to
Tier I capital (to average assets) 3,441,649 greater than 5.0
or equal to
As of December 31, 1994:
Total capital (to risk-weighted
assets) 3,277,366 greater than 10.0
or equal to
Tier I capital (to risk-weighted
assets) 1,966,419 greater than 6.0
or equal to
Tier I capital (to average assets) 3,559,422 greater than 5.0
or equal to
Federal banking law also restricts the Bank from extending credit to the Company
in excess of 10% of the Bank's capital stock and surplus, as defined. Any such
extensions of credit are subject to strict collateral requirements.
F - 28
85
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following are condensed unconsolidated financial statements of COMBANCORP:
CONDENSED BALANCE SHEETS
December 31,
------------------------
ASSETS 1995 1994
------------------------
Cash and due from banks $ 247,844 $ 272,956
Investment in Commerce National Bank 6,137,066 5,673,671
---------- -----------
TOTAL ASSETS $6,384,910 $ 5,946,627
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity:
Common stock $4,453,300 $ 4,453,300
Retained earnings 1,796,650 1,609,002
Unrealized gain (loss) on securities available
for sale, net 134,960 (115,675)
---------- -----------
TOTAL SHAREHOLDERS' EQUITY 6,384,910 5,946,627
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,384,910 $ 5,946,627
========== ===========
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
Equity in earnings (loss) of subsidiary $ 354,759 $ 496,192 $(143,149)
Other income 7,365 6,893 57,892
Other expense (33,029) (34,448) (48,501)
--------- --------- ---------
NET INCOME (LOSS) $ 329,095 $ 468,637 $(133,758)
========= ========= =========
F - 29
86
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY ONLY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 329,095 $ 468,637 $(133,758)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Equity in (income) loss of subsidiary (354,759) (496,192) 143,149
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (25,664) (27,555) 9,391
--------- --------- ---------
Cash Flows from Investing Activities
Interest bearing deposits in banks -- -- 99,000
Dividends received from subsidiary 141,999 -- --
--------- --------- ---------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 141,999 -- 99,000
--------- --------- ---------
NET CASH (USED IN) FINANCING
ACTIVITIES - DIVIDENDS PAID (141,447) -- (50,921)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND DUE FROM BANK (25,112) (27,555) 57,470
Cash and Due from Bank
Beginning of year 272,956 300,511 243,041
--------- --------- ---------
End of year $ 247,844 $ 272,956 $ 300,511
========= ========= =========
F - 30
87
COMBANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Bank's financial instruments are as follows:
December 31, 1995
-------------------------
Carrying
Amount Fair Value
-------------------------
Financial assets:
Cash and short-term investments $ 8,439,763 $ 8,439,763
Interest bearing deposits in other financial institutions 11,755,000 11,785,000
Federal Reserve Bank stock 120,000 120,000
Securities available for sale 21,046,565 21,046,565
Loans, net 23,188,851 22,598,606
Accrued interest receivable 526,998 526,998
Financial liabilities:
Deposits 62,023,797 61,965,572
Accrued interest payable 71,469 71,469
FAIR VALUE OF COMMITMENTS
The estimated fair value of fee income on letters of credit at December 31, 1995
is insignificant. Loan commitments on which the committed interest rate is less
than the current market rate are also insignificant at December 31, 1995.
F - 31
88
EXHIBIT INDEX
Page Number
Exhibit in Sequential
Number Description Numbering System
- ------- ----------- ----------------
3.1 Articles of Incorporation(3.1)(1)
3.1.1 Certificate of Amendment of Articles of Incorporation, filed
February 26, 1988 (3.1a)(3)
3.1.2 Certificate of Amendment of Articles of Incorporation, filed May 13,
1988 (3.1b)(4)
3.2 Bylaws (3.2)(1)
3.2.1 Amendment to Article V of the Bylaws, adopted February 17, 1988 (3.2a)(3)
3.2.2 Amendments to Article II and III of the Bylaws, adopted April 18, 1990 (3.2b)(5)
3.2.3 Amendment to Article III of the Bylaws, adopted June 28, 1990 (3.2c)(5)
4.1 Specimen Stock Certificate (4.1)(3)
10.1 Form of Indemnification Agreement entered into with each director and
executive officer of the Registrant (10.1)(4)
10.2 Form of Indemnification Agreement entered into with each director and
executive officer of the Bank (10.2)(4)
10.3 Reserved
10.4 Reserved
10.5 Reserved
10.6 Reserved
10.7 Reserved
10.7.1 Reserved
10.7.2 Amended and Restated COMBANCORP Employee Stock Savings Plan
10.8 COMBANCORP Employee Stock Ownership Plan Trust Agreement (4.6)(4)
10.9 1993 Stock Option Plan (10.9)(6)
10.10 Form of Incentive Stock Option Agreement applicable to 1993 Stock Option Plan
(10.10)(7)
10.11 Form of Non-Qualified Stock Option Agreement applicable to 1993 Stock Option
Plan (10.11)(7)
10.12 Lease between Pace Development Company and Commerce National Bank,
dated November 2, 1995
21.1 Subsidiaries of the Registrant (22.1)(4)
23.1 Consent of McGladrey & Pullen, LLP
99.1 Consortium agreement dated August 26, 1994, among Commerce
National Bank, Landmark Bank, the assuming Bank, the FDIC, receiver
of Capital Bank, and the FDIC in its corporate capacity (99)(8)
- ---------------
(Footnotes commence next page)
89
1 This exhibit was previously included in the Registrant's Registration
Statement on Form S-18, Registration No. 2-89698, filed with the Commission
on February 29, 1984, under the Exhibit number indicated in parentheses, and
is incorporated herein by reference.
2 This exhibit was previously included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1986 (Commission File No.
2-89698), under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
3 This exhibit was previously included in the Registrant's Annual Report on
From 10-K for the year ended December 31, 1987 (Commission File No.
2-89698), under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
4 This exhibit was previously included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988 (Commission File No.
0-15984), under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
5 This exhibit was previously included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990 (Commission File No.
0-15984), under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
6 This exhibit was previously included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992 (Commission File No.
0-15984), under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
7 This exhibit was previously included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 (Commission File No.
0-15984), under the Exhibit number indicated in parentheses, and is
incorporated herein by reference.
8 This exhibit was previously included in the Registrant's Report on Form 8-K
filed September 12, 1994 (Commission File No. 0-15984), under the Exhibit
number indicated in parentheses, and is incorporated herein by reference.