8 GUARDIAN BANCORP
................................................................................
EXHIBIT 13.1
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statement of operations for the years ended
December 31, 1993, 1992 and 1991 are derived from the consolidated
financial statements, which have been audited by KPMG Peat Marwick,
independent auditors, included in this report. The selected consolidated
statement of operations data for the years ended December 31, 1990 and
1989 are derived from audited consolidated financial statements which
are not included in this report.
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS DATA:
Interest income $ 32,769 41,295 50,223 42,553 34,090
Interest expense (7,505) (9,010) (14,334) (10,857) (7,739)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 25,264 32,285 35,889 31,696 26,351
Provision for loan losses (18,250) (9,395) (5,946) (1,160) (1,236)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,014 22,890 29,943 30,536 25,115
Noninterest income 1,419 1,039 923 611 554
Noninterest expense (27,436) (26,356) (24,749) (19,288) (16,631)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (19,003) (2,427) 6,117 11,859 9,038
Provision (benefit) for income tax (4,546) (109) 2,900 4,744 3,615
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (14,457) (2,318) 3,217 7,115 5,423
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net earnings (loss) $ (3.90) (.64) .77 1.61 1.31
Fully diluted net earnings (loss) (3.90) (.64) .77 1.61 1.31
Book value(1) 5.70 9.70 10.47 9.66 7.06
Weighted average shares outstanding (in thousands)(2) 3,710 3,624 4,194 4,413 4,130
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Federal funds sold $ 89,318 61,950 63,372 20,575 25,698
Investment securities 31,429 44,048 41,102 31,845 45,165
Short-term investments 33,003 27,823 -- -- --
Loans, net of deferred loan fees 353,032 420,192 392,997 291,741 203,090
Allowance for loan losses (15,419) (9,924) (4,681) (2,916) (2,107)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 337,613 410,268 388,316 288,825 200,983
- ---------------------------------------------------------------------------------------------------------------------
Total assets 585,716 652,580 575,987 414,934 353,343
Total deposits 546,217 602,845 531,588 374,965 326,016
Shareholders' equity 30,888 39,590 37,147 31,819 20,823
- ---------------------------------------------------------------------------------------------------------------------
ASSET QUALITY(5):
Nonperforming loans $ 34,825 34,863 28,784 2,671 2,739
Other real estate owned 13,949 4,359 2,945 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans and other real estate owned 48,774 39,222 31,729 2,671 2,739
- ---------------------------------------------------------------------------------------------------------------------
Loans with modified terms 9,539 2,149 8,124 -- 103
Net charge-offs to average loans 3.83% 1.21 .07 .07 .22
Nonperforming loans to total period-end loans 10.79 8.92 6.71 .78 1.11
Allowance for loan losses to period-end loans 5.64 3.45 2.13 1.01 1.01
Allowance for loan losses to period-end nonperforming loans 52.26 38.63 31.74 130.03 91.46
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average assets (2.47)% (.36) .56 1.71 1.53
Return on average shareholders' equity (46.80) (5.86) 8.66 22.36 26.04
Average shareholders' equity to average assets 5.27 6.07 6.45 7.67 5.89
Net interest margin(4) 4.99 5.83 7.21 9.23 9.49
Capital Ratios:(3)
Company:
Tier 1 6.00 8.26 7.99 10.73 NA
Total 8.15 10.23 10.14 11.80 NA
Leverage 3.74 5.34 5.74 6.86 NA
Bank:
Tier 1 7.02 8.36 7.89 9.10 NA
Total 8.33 10.36 10.04 11.03 NA
Leverage 4.19 5.21 5.69 6.75 NA
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1)All book value per share numbers are based on the number of shares
outstanding at period end.
(2)The weighted average number of shares of common stock outstanding during 1993
and 1992 was used to compute loss per share as the use of average shares
outstanding including common stock equivalents would be antidilutive.
(3)Based upon the capital adequacy guidelines that are in effect at December 31,
1993.
(4)Computed on a tax equivalent basis. If customer service expenses were
deducted in computing net interest income, net interest margin would have
been 3.90%, 4.39%, 5.38%, 7.21% and 6.80%, respectively.
(5)Prior years have been restated to be consistent with 1993 reclassification of
in-substance foreclosed assets from other real estate owned to loans.
GUARDIAN BANCORP 9
................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to
facilitate the understanding and assessment of significant changes in
trends related to the financial condition of the Company and its results
of operations. It should be read in conjunction with the audited
consolidated financial statements and footnotes appearing elsewhere in
this report.
OVERVIEW
The Company recorded a net loss of $14.5 million in 1993 compared to a
net loss of $2.3 million in 1992 and net earnings of $3.2 million in
1991. The net loss recorded in 1993 was attributable to increases in the
Company's provision for loan losses and the related allowance for loan
losses, a decline in net interest income and an increase in noninterest
expense. The increased provision for loan losses during 1993 reflects
management's assessment of the economic conditions that were prevailing
and the actual and potential impact those conditions have had and may
have on the Company's loan portfolio, including a continuing high level
of nonperforming loans and loan charge-offs. Net interest income during
1993 decreased from the amount reported for 1992 due principally to a
decline in average interest-earning assets and the yields earned
thereon. Net interest income for 1993 was also negatively affected by an
increase in nonperforming assets and a change in the composition of the
funding sources used by the Company, as average noninterest-bearing
deposits declined as a percentage of average total deposits. The decline
in net interest income for 1992 compared to 1991 was largely
attributable to a decline in the yield on interest-earning assets.
Noninterest expense during 1993 increased approximately $1.1 million
over the amount reported in 1992. This increase was largely attributable
to expenses associated with other real estate owned (OREO), which
increased approximately $2.3 million, a decrease of $969,000 in the
deferral of loan origination costs due to declines in the volume of new
loan originations and, to a lesser extent, a $750,000 increase in
professional expenses. These increases were partially offset by a $2.5
million decrease in customer service expense and a $540,000 decrease in
occupancy expense. Noninterest expense increased in 1992 over amounts
reported in 1991 primarily due to increased staffing needs, legal and
professional costs and other direct costs associated with carrying OREO.
The increase attributable to these factors was partially offset by
reductions in customer service expense and promotional costs.
At December 31, 1993, total assets, deposits and net loans of $567.5
million, $525.7 million and $322.7 million, respectively, had declined
12.8%, 12.4% and 17.4%, respectively, from amounts reported at the close
of 1992. At December 31, 1992, total assets, deposits and net loans of
$650.8 million, $599.9 million and $390.8 million, respectively, had
declined 10.5%, 12.1%, and 8.9%, respectively, from amounts reported at
the close of 1991. The decline in the loan portfolio during 1993 and
1992 from prior years' levels reflects the result of general economic
conditions in the Company's marketplace, a slow down in real estate
activity in Southern California and a shift in the Company's growth
patterns which started in 1991 and continued in 1993. In light of the
recessionary economic environment and the impact which it has had and
continues to have on the real estate sector, as well as a regulatory
recommendation regarding growth in the Company's real estate related
loans prior to 1992, management has moved to limit growth in the
Company's real estate related loans, particularly construction loans,
and has commenced the diversification of the loan portfolio mix to
include more non-real estate related credits. These actions are
consistent with the provisions of the Bank's regulatory agreement that
requires it to monitor and control the concentration of construction,
land development and land acquisition loans. Offsetting the decline in
the loan portfolio has been an increase at December 31, 1993 and 1992 in
the Company's lower yielding investment securities and short-term
investments, as management positioned the balance sheet mix to attain
acceptable yields, and an increase in its cash balances to meet
liquidity needs.
The Company's period end deposit balances traditionally reflect
increases in noninterest-bearing demand deposits from its title
insurance company and escrow company customers. These deposits generally
increase at or near each month end as the underlying real estate
transactions being handled by such deposit customers are nearing
consummation. In turn, the Company invests a substantial amount of these
funds in securities of the U.S.
10 GUARDIAN BANCORP
................................................................................
Treasury and other short-term money market instruments which increases
its period end asset levels. Subsequent to each period end, such
short-term investments are converted into cash and used to meet such
customers' withdrawal needs as the underlying transactions are
consummated.
Total average assets, deposits and loans, net of deferred loan fees, of
$585.7 million, $546.2 million and $353.0 million, respectively, during
the year ended 1993 declined 10.3%, 9.4% and 16.0%, respectively, from
the averages for calendar year 1992. During the year ended December 31,
1992, average assets were $652.6 million, average deposits were $602.8
million and average loans, net of deferred loan fees, were $420.2
million, representing increases of 13.3%, 13.4% and 6.9%, respectively,
over the 1991 average amounts of $576.0 million, $531.6 million and
$393.0 million, respectively.
The composition of the Company's average deposit base changed during
1993 as average noninterest-bearing demand accounts decreased as a
percentage of total average deposits to 59.3% compared to 63.6% during
1992 and increased from the reported 54.9% in 1991. Those funds were
replaced with more costly interest-bearing deposits and partially
contributed to the decline in the Company's net interest margin during
1993. During 1993, average interest-bearing deposits comprised 40.7% of
total average deposits compared with 36.4% in 1992.
Nonperforming loans were essentially flat between December 31, 1993 and
1992 and were approximately $34.8 million at December 31, 1993, compared
with $34.9 million at the close of 1992. The current economic
environment has had and is expected to continue to have an adverse
impact on the Company's level of nonperforming loans, and management's
assessment of this existing and potential impact contributed to its
decision to increase the provision for loan losses and the related
allowance for loan losses during 1993. The majority of nonperforming
loans are supported by real estate collateral which reduces, but does
not eliminate, exposure to loss of principal. The ratio of the allowance
for loan losses to nonperforming loans increased to 52.26% at December
31, 1993 from the 38.63% reported at December 31, 1992.
OREO was $13.9 million at December 31, 1993, compared to $4.4 million at
the close of 1992. During 1993, the Company foreclosed on $24.2 million,
recorded valuation adjustments of $714,000, and sold $13.9 million of
such assets, realizing a net loss on sale of $266,000. Commencing in
1993, the Company reclassified in-substance foreclosed assets from other
real estate owned to loans if it does not have physical possession of
the underlying collateral. This practice is consistent with regulatory
reporting requirements and with changing trends evolving in the
financial reporting practices. Accordingly, related prior years'
financial information has been reclassified to be consistent with 1993's
presentation.
At December 31, 1993 and 1992, the allowance for loan losses was 5.64%
and 3.45% of loans, net of deferred fees, respectively. The Company's
level of net charge-offs, expressed as a percentage of average loans
outstanding, was 3.83%, as compared to 1.21% for the year ended December
31, 1992.
On October 14, 1992, the Federal Reserve Bank of San Francisco (the
"FRB") entered into a separate written agreement with each of the
Company and the Bank. These agreements require, among other things, the
Company and the Bank to: (a) develop a plan to maintain adequate
capital; (b) maintain an allowance for loan losses that is equal to or
greater than 1.7% of the Bank's total loans; (c) refrain from paying any
cash dividends to the Company or the Company's shareholders without the
prior approval of the FRB; (d) refrain from incurring any debt, other
than in the ordinary course of business, at the holding company level
without the prior approval of the Federal Reserve Bank; and (e) develop,
update and otherwise adopt various policies, procedures and plans to
improve the financial condition of the Bank. Both before and after
entering these agreements, management of the Company and the Bank have
taken various steps, including the Company's successful capital raising
effort which closed in early 1994, that are designed to facilitate
compliance with the terms thereof. However, compliance with the terms of
the agreements will be determined by the FRB during subsequent
examinations of the Company and the Bank.
On January 28, 1994, Guardian Bancorp consummated its rights offering of
common stock ("the Offering"), and raised gross proceeds of
approximately $19,700,000 through the issuance of 8,774,000 shares of
common stock. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. In early February 1994,
Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank
for the Bank's general corporate purposes and subsequently reimbursed
the Bank approximately $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds of
approximately $1.2 million for its own general corporate purposes.
GUARDIAN BANCORP 11
................................................................................
The following table sets forth certain information regarding the
Company's results of operations for the three years indicated. Average
balances are computed using average daily balances.
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1993 1992 1991
- ---------------------------------------------------------------------------------
Return on average assets (2.47)% (.36)% .56%
Return on average shareholders' equity (46.80) (5.86) 8.66
Net earnings (loss) $ (14,457) $ (2,318) $ 3,217
Net earnings (loss) per share (3.90) (.64) .77
Total average assets $ 585,716 $ 652,580 $ 575,987
- ---------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME
The principal component of the Company's net earnings is net interest
income, which is the difference between interest and fees earned on
interest-earning assets and interest paid on deposits and borrowed
funds. Net interest income, when expressed as a percentage of total
average interest-earning assets, is referred to as the net interest
margin. A comparison of net interest income and net interest margin for
the last three years is shown in the table below. Net interest margin is
shown on a tax equivalent basis at the incremental tax rate of 34% for
the three year period ended December 31, 1993.
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 (DECREASE) 1992 (DECREASE) 1991
- --------------------------------------------------------------------------------------------------
Interest income $ 32,769 (20.6)% $41,295 (17.8)% $50,223
Interest expense 7,505 (16.7) 9,010 (37.1) 14,334
- --------------------------------------------------------------------------------------------------
Net interest income 25,264 (21.7) 32,285 (10.0) 35,889
Net interest margin 4.99% 5.83% 7.21%
- --------------------------------------------------------------------------------------------------
The Company's net interest income is affected by the change in the
amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as "volume change." It is also affected by
changes in yields earned on assets and rates paid on deposits and other
borrowed funds, referred to as "rate change." The following table sets
forth changes in interest income and interest expense for each major
category of interest-earning assets and interest-bearing liabilities and
the amount of change attributable to volume change and rate change for
the years indicated. The change in interest income due to both volume
change and rate change has been allocated to volume change and rate
change pro rata.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1993 AND 1992 1992 AND 1991
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
- -------------------------------------------------------------------------------------------------------------------------------
NET NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest-bearing deposits with financial institutions $ (18) (28) (46) (40) (47) (87)
Federal funds sold 819 (273) 546 (75) (1,276) (1,351)
Investment securities (762) (354) (1,116) 200 (149) 51
Short-term investments 151 (101) 50 873 -- 873
Loans, net (5,386) (2,574) (7,960) 2,830 (11,244) (8,414)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (5,196) (3,330) (8,526) 3,788 (12,716) (8,928)
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Borrowed funds $ (104) 45 (59) 233 (216) 17
Interest-bearing demand and savings deposits (288) (197) (485) 252 (465) (213)
Money market deposits 16 (400) (384) 200 (1,023) (823)
Time certificates of deposit 662 (1,239) (577) (1,978) (2,327) (4,305)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 286 (1,791) (1,505) (1,293) (4,031) (5,324)
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ (5,482) (1,539) (7,021) 5,081 (8,685) (3,604)
- -------------------------------------------------------------------------------------------------------------------------------
12 GUARDIAN BANCORP
................................................................................
Net interest income for the year ended December 31, 1993 decreased
approximately $7.0 million from the comparable period in 1992. Net
interest margin for the year ended December 31, 1993 decreased 84 basis
points from the comparable period in 1992 and was 4.99% in 1993 compared
to 5.83% in 1992. These declines are primarily attributable to a
reduction in average interest-earning assets in general and average
loans in particular and an overall decline in the yield on average
interest-earning assets. Net interest income was also negatively
affected by a change in the composition of the Company's deposits.
Average interest-earning assets and average loans, the Company's highest
yielding assets, were $508.5 million and $353.4 million, respectively,
during 1993 compared to $556.6 million and $421.0 million for 1992. This
decline and any further decline in interest-earning assets in general
and loans in particular has and could continue to adversely affect net
interest income in the future. In light of the high level of the
Company's average noninterest-bearing deposits, declining interest rates
have adversely affected the Company's net interest income as interest
income has been reduced without a corresponding reduction in interest
expense. Average interest rates have continued to decline during 1993 as
the Company's prime rate dropped to 7.0% at December 31, 1993 from 7.5%
at June 30, 1992. Until such time as interest rates increase, the
Company's net interest income will continue to be adversely affected by
the current level of, or any future decline in, interest rates.
Additionally, loans on nonaccrual have increased during the three years
ended December 31, 1993 and had the negative impact on net interest
margin by reducing it by 113, 69 and 48 basis points, during 1993, 1992
and 1991, respectively. Net interest margin will continue to be
adversely effected by the level of, or any future increases in loans on
nonaccrual. During the year ended December 31, 1993, the composition of
average deposits changed as average noninterest-bearing deposits
decreased as a percentage of total average deposits to 59.3% from 63.6%
during 1992 and average interest-bearing deposits increased as
percentage of total average deposits to 40.7% from 36.4% during 1992. It
is likely that increased reliance will be placed on interest-bearing
deposit sources in light of management's decision to diversify its
funding sources and a newly issued interpretive release by the Federal
Reserve Board which limits the payment of customer service expense to
certain instances. See "Financial Condition -- Liquidity." This
increased reliance on interest-bearing sources of funds has and will
continue to adversely affect net interest income, offset; in part, by
decreases in noninterest customer service expense attributable to
certain noninterest-bearing account relationships.
The $3.6 million decrease in net interest income for the year ended
December 31, 1992 from the comparable period in 1991 was principally due
to a 260 basis point decline in the yield on average interest-earning
assets. This decline is largely attributable to an increase in average
loans on nonaccrual during 1992 as compared to 1991, an overall decline
in the yield on average interest-earning assets and, to a lesser extent,
a reduction in loans outstanding, the Company's highest yielding asset,
as a percentage of total average earning assets. The decrease was
partially offset by an increase in the volume of average loans and a
decrease in the volume of average time certificates of deposit and the
rates paid on all interest-bearing deposits. Net interest margin was
5.83% in 1992 compared to 7.21% in 1991 and reflects the increase in
average earning assets and a decline in yields on virtually all such
assets that exceeded the decline in rates paid on the Company's
interest-bearing liabilities during 1992.
GUARDIAN BANCORP 13
................................................................................
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields
and rates thereon. Average balances are computed using daily average
balances.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
- ---------------------------------------------------------------------------------------------------------------
INTEREST INTEREST INTEREST
- ---------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Interest-bearing deposits with
financial institutions $ 1,317 42 3.2% 1,742 88 5.1% 2,383 175 7.3%
Federal funds sold 89,318 2,594 2.9 61,950 2,048 3.3 63,372 3,399 5.4
Investment securities(1) 31,429 1,811 6.1 44,048 2,927 7.0 41,102 2,876 7.6
Short-term investments 33,003 923 2.8 27,823 874 3.3 -- -- --
Gross loans(2) 353,388 27,399 7.8 421,031 35,358 8.4 394,127 43,773 11.1
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 508,455 32,769 6.5 556,594 41,295 7.4 500,984 50,223 10.0
- ---------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 77,261 95,986 75,003
Total assets $585,716 652,580 575,987
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Borrowed funds $ 4,805 397 8.3% 6,104 456 7.5% 3,567 439 12.3%
Interest-bearing demand and
savings deposits 53,626 1,257 2.3 65,242 1,742 2.7 57,187 1,955 3.4
Money market deposits 52,327 1,289 2.5 51,813 1,673 3.2 47,701 2,496 5.2
Time certificates of deposit 116,603 4,562 3.9 102,210 5,139 5.0 134,621 9,444 7.0
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 227,361 7,505 3.3 225,369 9,010 4.0 243,076 14,334 5.9
- ---------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 323,661 383,580 292,079
Other liabilities 3,806 4,041 3,685
Shareholders' equity 30,888 39,590 37,147
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $585,716 652,580 575,987
- ---------------------------------------------------------------------------------------------------------------
Net interest income(3) $25,264 32,285 35,889
- ---------------------------------------------------------------------------------------------------------------
Net interest margin(3) 4.99% 5.83% 7.21%
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1)Yields are presented on a tax equivalent basis at the incremental tax rate of
34% for the three year period ended December 31, 1993.
(2)Includes loans on nonaccrual. Interest income on loans includes net loan fees
amortized to income of $648,000, $529,000 and $2.0 million during 1993, 1992 and
1991, respectively.
(3)If customer service expense were classified as interest expense, then the
Company's reported net interest income and noninterest expense for each of the
years in the three year period ended December 31, 1993 would be reduced by $5.5
million, $8.0 million and $9.2 million, respectively. Net interest margin for
each year would have been 3.90%, 4.39% and 5.38%, respectively.
The level of nonperforming loans in the Company's portfolio affects the
amount of interest income. If a loan is placed on nonaccrual status,
interest income that had been accrued to the date a loan is placed on
nonaccrual is reversed and income is not recognized until the payment
has actually been received. At December 31, 1993, there was no interest
accrued which had not been reversed on nonaccrual loans. The amount of
net interest income foregone for the years ended December 31, 1993, 1992
and 1991, assuming nonaccrual loans at December 31, 1993, 1992 and 1991
complied with their original terms, was $4.0 million, $2.9 million and
$1.9 million, respectively. The amount of interest income foregone for
the years ended December 31, 1993, 1992 and 1991, assuming loans with
modified terms at December 31, 1993, 1992 and 1991 complied with their
original terms, was $318,000, $124,000 and $106,000, respectively.
Interest income will continue to be adversely affected until such time
as the Company is able to reduce the level of its nonaccrual loans. See
Note 4 to the Company's Consolidated Financial Statements.
14 GUARDIAN BANCORP
................................................................................
PROVISION FOR LOAN LOSSES
The amounts provided for loan losses are determined by management after
quarterly evaluations of the loan portfolio. This evaluation processs
requires that management apply various judgments, assumptions and
estimates concerning the impact certain factors may have on amounts
provided. Factors considered by management in its evaluation process
include known and inherent losses in the loan portfolio, the current
economic environment, the composition of and risk in the loan portfolio,
prior loss experience and underlying collateral values. While management
considers the amounts provided for loan losses for the year ended
December 31, 1993 to be adequate, subsequent changes in these factors
and related assumptions may warrant significant adjustments in amounts
provided, based on conditions prevailing at the time. In addition,
various regulatory agencies, as an integral part of the examination
process, review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additions to the allowance based on their
judgments of information available to them at the time of their
examination.
The provision for loan losses in 1993, 1992 and 1991 was approximately
$18.3 million, $9.4 million and $5.9 million, respectively. The
significant increase in the 1993 provision for loan losses over that in
1992 is in response to management's assessment of current economic
conditions in California, particularly those in the southern portion of
the state, which point to continuation of persistent recessionary
conditions that continue to affect the financial capabilities and
liquidity of the Company's borrowers and the values of the underlying
collateral supporting the Company's loans. Due to the general economic
decline, the level of the Company's nonperforming loans (See "Financial
Condition -- Loans") and net loan charge-offs continue to remain high by
the Company's historical levels. Furthermore, the information analyzed
by the Company throughout 1993, including appraisal data, in connection
with management's quarterly reviews of loans and the adequacy of the
allowance for loan loss disclosed further deterioration in the value of
collateral for real estate related loans. Moreover, the valuation of
certain loans in the process of foreclosure was further adjusted
downward to reflect subsequent market value data which exacerbated the
impact of charge-offs during 1993. Finally, management's perspective on
the general economic conditions in the Company's marketplace at December
31, 1993 was based in part upon a then recent economic report indicating
that the current recessionary environment would continue through at
least the third quarter of 1994. There can be no assurance that the
recession will not persist beyond the third quarter of 1994.
The increase in the provision for loan losses has resulted in an
increase in the allowance for loan losses from $13.5 million at the
close of 1992 to $18.2 million at December 31, 1993.
NONINTEREST INCOME
The following table sets forth information by category of noninterest
income of the Company for the years indicated:
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -----------------------------------------------------------------------------------------
Gain on sale of securities $ 3 42 2
Service charges on deposits 315 270 209
Escrow fees and other service charges 283 292 397
Trust fees 627 186 14
Other 191 249 301
- -----------------------------------------------------------------------------------------
Total $ 1,419 1,039 923
- -----------------------------------------------------------------------------------------
The increase in noninterest income in 1993 over 1992 is due to increases
in trust fee income and modest increases in service charges on deposit
customers offset by a decrease in escrow fees due to a decline in the
number of escrows handled by the Company in 1993 as compared to 1992 and
decreases in other miscellaneous fee income. The increase in noninterest
income in 1992 from 1991 is due to modest increases in service charges
on deposit customers and trust fee income offset by a decrease in escrow
fees resulting from a decline in the number of escrows handled by the
Company in 1992.
GUARDIAN BANCORP 15
................................................................................
NONINTEREST EXPENSE
The following table sets forth information by category of noninterest
expense of the Company for the years indicated:
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------
Salaries and employee benefits $ 8,621 7,271 6,118
Occupancy 1,238 1,778 1,783
Furniture and equipment 851 1,004 884
Customer service 5,539 7,989 9,189
Data processing 351 831 568
Promotional 758 1,120 1,436
Professional 2,416 1,666 1,033
Office supplies 416 416 444
FDIC assessments 1,791 1,365 1,025
Other real estate owned 2,957 667 41
Other 2,498 2,249 2,228
- -------------------------------------------------------------------------------------
Total $ 27,436 26,356 24,749
- -------------------------------------------------------------------------------------
The following table summarizes the components of salaries and employee
benefits for the years indicated:
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
Salaries, wages and payroll taxes $ 8,337 7,780 7,240
Deferred direct incremental underwriting costs (770) (1,739) (2,223)
Medical and other insurance benefits 672 847 743
Other 382 383 358
- --------------------------------------------------------------------------------------------------------------
$ 8,621 7,271 6,118
- --------------------------------------------------------------------------------------------------------------
Direct compensation increased approximately $557,000 for the year ended
December 31, 1993, or 7.2% over the amount for 1992. The increase in
direct compensation is attributable to the net increase in the number of
employees, particularly in the credit administration and special assets
departments, within the Company during 1993 over that of 1992 and
severance arrangements partially offset by decreases in the compensation
levels of certain executive officers. During the third quarter of 1993,
two executive officers of the Company ceased to serve as employees.
These executives were serving pursuant to three year contracts that were
entered into during 1992 and initially provided for aggregate annual
base salaries of $451,000. Each agreement stipulates grounds for its
termination and provides for alternative severance payments that depend
upon the circumstances of the termination. The Company accrued an
aggregate of $350,000 associated with the negotiation and settlement of
severance arrangements with these former executives and such expense is
included in direct compensation for the year ended December 31, 1993.
Substantially all of the severance arrangements were paid in 1993. The
increase in direct compensation of $540,000, or 7.5%, in 1992 over 1991
is principally attributable to new employee additions at Guardian Trust
Company, increased staff levels at the Company to accommodate 1991
growth and, to a lesser extent, salary increases during that year.
Deferred direct incremental underwriting compensatory costs decreased
$969,000, or 55.7%, during 1993 from the amounts reported for 1992. The
level of such deferred costs is directly related to the volume of new
loan originations which, since the second half of 1991, has been
declining as part of management's goal of reducing real estate loan
growth, particularly construction lending, in light of softness in the
real estate sector. The decrease in medical and other insurance benefits
of $175,000 during the year ended December 31, 1993 from the level
reported for 1992 is attributable to plan changes implemented by the
Company in the type of benefit package offered to employees which
reduced the costs associated with such benefits. Increases in medical
and other insurance benefits of $104,000 during 1992 over 1991 are
attributable to an increase in cost pass-throughs to the Company from
its health care providers and the higher number of
16 GUARDIAN BANCORP
................................................................................
employees with the Company. Other expenses in 1993, comprised
principally of temporary help, recruiting, employee education and
Company provided transit costs, are consistent with 1992 levels which,
in turn, were up modestly over those in 1991 due to the higher number of
employees in the Company.
The decrease in occupancy costs for the year ended December 31, 1993
from the amount reported in the comparable period of 1992 was directly
attributable to the Company renegotiating the terms of the lease of the
space it occupies in Los Angeles. Terms of the new lease will reduce the
base rent expense for that space over the next nine years by an
aggregate amount of approximately $2.3 million as compared to previously
existing terms. Occupancy expense was $5,000 lower in 1992 over the
level reported in 1991 and reflects the decision to close the Bank's San
Fernando Valley loan production office during the first quarter of 1992,
offset by escalations in rent for other leased space occupied by the
Company.
The decrease in furniture and equipment expense for the year ended
December 31, 1993 from the amount reported in 1992 is the result of
lower depreciation expense as Company owned furniture and equipment
becomes fully depreciated. The increase during 1992 in furniture and
equipment expense from expense amounts reported in 1991 were
attributable to scheduled depreciation and the maintenance on the
Company's premises and equipment.
Customer service expense, primarily attributable to accounting, data
processing and courier services provided to title insurance company and
escrow company depositors, is incurred by the Company to the extent that
certain average balances of noninterest-bearing deposits are maintained
by such depositors and such deposit relationships are determined to be
profitable. The Company seeks to control its customer service expense by
continuously monitoring the earnings performance of its account
relationships and, on that basis, limiting the amount of services
provided. The average balance of title insurance company and escrow
company deposits for the years ended December 31, 1993 and 1992 were
$277.6 million and $334.3 million, respectively. At December 31, 1993
and 1992, the actual balance of such deposits was $287.3 million and
$374.1 million, respectively. The decline in average balances during
1993 from 1992 contributed to the decrease in customer service expense
for the year ended December 31, 1993 of $2.5 million from the comparable
1992 period. Despite higher average balances in title insurance company
and escrow company deposits during 1992, the growth in the level of such
deposits slowed during the latter half of 1992, contributing to a
decrease in customer service expense of $1.2 million in 1992 from
amounts reported in 1991. The decreases also reflects management's
efforts at monitoring the earnings performance of such accounts, thereby
decreasing the level and cost of outside services provided. If customer
service expense was classified as interest expense, then the Company's
net interest income and noninterest expense for the years ended December
31, 1993 and 1992 would have been reduced by $5.5 million and $7.9
million, respectively. During the first quarter of 1994, the Board of
Governors of the Federal Reserve System issued a new interpretive
release which is applicable to all member banks, such as the Bank, and
other entities, which limits the payment of customer service expense to
certain prescribed instances. As a result of the issuance of this
interpretive release, it is expected that certain balances of accounts
of certain customers to whom these services are provided will decline
and, in turn, customer service expense will decline in 1994.
Data processing expense decreased approximately $480,000 during the year
ended December 31, 1993 from the comparable period in 1992 as a result
of the Company's renegotiation, in the first quarter of 1993, of its
contract with its primary data services provider. This renegotiated
contract is expected to reduce data processing costs by approximately
$320,000 annually for each of the years from 1994 through 1997.
Promotional expense decreased to $362,000 during 1993 from levels
reported in 1992, consistent with the Company's emphasis on reduced
marketing efforts during 1993. Such expenses declined $316,000 during
1992 from 1991, also reflecting less emphasis on promotional activities.
Professional fees increased by $750,000 during 1993 from amounts
reported for the year ended December 31, 1992 which, in turn, was a
$633,000 increase over professional fees reported for 1991. These
increases principally reflect the Company's increased use of legal
counsel and others for assistance in the resolution of problem real
estate credits, which have increased in the recessionary economy and
typically involve complex legal and other issues. Included in
professional expense are appraisal related costs of $436,000, $314,000
and $93,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Such expenses have increased since 1991 due to the
Company's increased use of appraisal related services in light of the
recessionary economic environment and its impact on real estate
collateral values. To a lesser extent, professional expenses have also
increased as a result of increases in
GUARDIAN BANCORP 17
................................................................................
outside professional assistance rendered to the Company for other
corporate related matters. Management expects that professional fees
incurred in connection with problem asset resolution will continue to
negatively affect noninterest expense in 1994, until the level of such
assets decline, and are likely to increase if problem assets increase.
Premiums paid for FDIC insurance increased for year ended December 31,
1993 by $426,000 over the similar period in 1992. Under existing
regulations, FDIC insurance premiums have increased in 1993 over levels
applicable to 1992, and these increased premiums have resulted in a
corresponding increase in the Company's noninterest expense. Absent a
significant decline in average deposits, FDIC insurance premiums will
continue to contribute to increased noninterest expense. Premiums paid
for FDIC deposit insurance increased in 1992 over 1991 due primarily to
increased average deposits and a higher level of assessments which
became applicable to all banks during 1991. Deposit insurance premiums
increased in the second half of 1991 from prior periods, and the higher
assessment was applicable throughout all of 1992.
OREO expense increased during the year ended December 31, 1993 by $2.3
million from the amount reported for 1992 which was $667,000, and in
turn, OREO expense increased $626,000 during 1992 over the amount
reported in 1991. During the year ended December 31, 1993, the level of
OREO was significantly higher than during 1992, which has resulted in an
increase in direct holding costs and valuation adjustments of $1.5
million and $674,000, respectively, in 1993 from 1992. Direct holding
costs are comprised principally of property taxes, insurance, security,
foreclosure costs, marketing and other miscellaneous costs. Valuation
adjustments result from write-downs of existing OREO to reflect
reductions in fair market value. Due to weaknesses in the Southern
California real estate market and the high level of the Company's
nonperforming assets, OREO expense is expected to continue to adversely
affect the Company's results of operations. (See "Financial Condition --
Nonperforming Assets".
The principal component contributing to the increase in other
noninterest expense of $249,000 during 1993 over the amount reported in
1992 is the expenses associated with the outsourcing of item processing
which are classified in other noninterest expense in 1993 whereas prior
to 1993, internal item processing costs were principally in the form of
salaries and benefits. Other noninterest expense decrease was comparable
between 1992 and 1991.
INCOME TAXES
The Company files consolidated federal income and combined California
state franchise tax returns. Amounts provided for income taxes are based
on the income reported in the consolidated financial statements at
current tax rates. Such amounts include taxes deferred to future periods
resulting from timing differences in the recognition of items for tax
and financial purposes. Income tax expense (benefit) reflects effective
rates on earnings (loss) before income taxes of (23.9)%, (4.5)% and
47.4% for each of the years in the three year period ended December 31,
1993. The Company's effective tax rate reflected an increase in the
valuation allowance established due to certain net deductible temporary
differences that cannot be realized through carryback to prior periods.
The Company has not considered income from future periods in evaluating
the realizability of its deferred tax assets. During the first quarter
of 1993, the Company implemented Statement of Financial Accounting
Standards (SFAS) 109 "Accounting For Income Taxes" by applying such
statement on a retroactive basis to year-end 1991 in its consolidated
financial statements. The cumulative impact at January 1, 1991 of the
implementation of FASB 109 was not material. The impact of the
restatement was to reduce the tax benefit and to increase the net loss
by $492,000 for the year ended December 31, 1992 and to increase the
provision for income taxes and reduce net earnings by $493,000 for the
year ended December 31, 1991.
18 GUARDIAN BANCORP
................................................................................
FINANCIAL CONDITION
The following table sets forth the Company's consolidated average
assets, liabilities and shareholders' equity and the percentage
distribution of these items for the years indicated.
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
- -------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 67,900 11.6% 90,825 13.9% 70,799 12.3%
Interest-bearing deposits with financial
institutions 1,317 0.2 1,742 0.3 2,383 0.4
Federal funds sold 89,318 15.2 61,950 9.5 63,372 11.0
Investment securities 31,429 5.4 44,048 6.7 41,102 7.1
Short-term investments 33,003 5.6 27,823 4.3 -- --
Loans, net 337,613 57.6 410,268 62.9 388,316 67.4
Premises and equipment, net 2,088 0.4 2,700 0.4 3,280 0.6
Other real estate owned 11,559 2.0 3,652 0.6 1,473 0.3
Other assets 11,489 2.0 9,572 1.4 5,262 0.9
- -------------------------------------------------------------------------------------------------------------
Total assets $ 585,716 100.0% 652,580 100.0% 575,987 100.0%
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand deposits $ 323,661 55.2% 383,580 58.8% 292,079 50.7%
Interest-bearing demand and savings
deposit 105,953 18.1 117,055 17.9 104,888 18.2
Time certificates of deposit 116,603 19.9 102,210 15.7 134,621 23.4
- -------------------------------------------------------------------------------------------------------------
Total average deposits 546,217 93.2 602,845 92.4 531,588 92.3
Subordinated debt 3,000 0.5 3,000 0.5 3,000 0.5
Other liabilities 5,611 1.0 7,145 1.0 4,252 0.7
Shareholders' equity 30,888 5.3 39,590 6.1 37,147 6.5
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 585,716 100.0% 652,580 100.0% 575,987 100.0%
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS
In the opinion of management, average balances are meaningful to a
discussion and analysis of the Company's consolidated financial
condition and results of operations. Accordingly, such information,
which is based on daily average balances, is included in the following
discussion.
At December 31, 1993, total assets were approximately $567.5 million as
compared to $650.8 million at December 31, 1992 and $727.9 million at
December 31, 1991. Total average assets for the year ended December 31,
1993 were $585.7 million, down $66.9 million, or 10.3%, from the $652.6
million average for the year ended December 31, 1992. The $83.3 million
decrease in assets at December 31, 1993 was primarily the result of year
end decreases in noninterest-bearing deposits from title insurance
company and escrow company customers. The reduction in average assets
during 1993 and year end assets from 1992 to 1993 reflected the results
of the recessionary economic conditions in the Company's marketplace, a
slow down of real estate activity in Southern California and
management's decision to limit the growth of new real estate related
loans, which was based in part upon a regulatory recommendation and is
consistent with the provision of the Bank's regulatory agreement that
requires it to monitor and control the concentration of construction,
land development and land acquisition loans.
The $652.6 million in total average assets for the year ended December
31, 1992 represents a 13.3% increase from $576.0 million for 1991, and
this increase was due primarily to increases in the Company's average
mortgage and construction loan portfolios that were achieved primarily
during the second half of 1991. The shift in the mix of
GUARDIAN BANCORP 19
................................................................................
average assets during 1992 from loans and federal funds sold to
investment securities and short-term investments reflects management's
decision, as discussed above, to limit growth of new real estate related
credits, slower growth rates experienced in new loan origination and
management's direction of available funds toward higher yielding liquid
investments.
CASH AND DUE FROM BANKS
A high percentage of the Company's assets are maintained in cash and due
from banks directly reflecting the large volume and size of clearings
associated with the Company's title company and escrow company deposits.
Average cash and due from banks for the year ended December 31, 1993 was
$67.9 million, a 25.2% decrease from the $90.8 million of such assets
for the year ended December 31, 1992. The 1992 average balance of cash
and due from banks represents a 28.2% increase from the $70.8 million
average during 1991.
At December 31, 1993, cash and due from banks was $23.2 million down
approximately $25.6 million from $48.8 million at December 31, 1992,
primarily as a result of the Company's lower level of demand deposits
and the placement of excess funds into short-term investments. Due to
the lower level of demand deposits placed with the Company at the end of
1992, cash and due from banks at December 31, 1992 was $48.8 million,
down $35.1 million from the $83.9 million reported at December 31, 1991.
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
Federal Funds Sold
Average federal funds sold were approximately $89.3 million during the
year ended December 31, 1993, up $27.3 million, or 44.0%, from the $62.0
million average for all of 1992. The increase was primarily due to
having, on an average basis, excess funds available to invest in the
form of federal funds sold. At December 31, 1993, the Company did not
take a position in federal funds sold as compared to the $60.0 million
reported at December 31, 1992, as the Company placed available funds
into other forms of liquid investments.
The $62.0 million of average federal funds sold during 1992 represents a
decline of $1.4 million from the $63.4 million average for 1991. The
decrease was primarily due to the Company's placement of available
excess funds into other forms of liquid investments during 1992. At
December 31, 1992, federal funds sold decreased $55.0 million to $60.0
million from the $115.0 million reported at December 31, 1991.
Short-Term Investments
During 1992, and in response to trends developing in the banking
industry, the Company commenced the practice of classifying securities
and investments in money market funds held for purposes of managing its
overall liquidity as short-term investments. Such short-term investments
are carried at the lower of cost or market. At December 31, 1993, the
Company's short-term investments aggregated $179.9 million, up
approximately $59.4 million, or 49.3%, from the $120.5 million reported
at December 31, 1992. During the year ended December 31, 1993, the
Company purchased short-term investments of $815.2 million, retired
approximately $386.4 million of matured investments and sold
approximately $369.9 million of such securities for a gain of $3,000.
During the year ended December 31, 1993, average short-term investments
were $33.0 million as compared to $27.8 million during 1992. There were
no lower of cost or market adjustments charged to income during 1993 or
1992. During 1992, the Company purchased short-term investments of
$254.5 million, retired approximately $90.5 million of matured
short-term investments and sold $14.9 million of such securities to meet
liquidity needs for a gain of $31,000.
The Company's period end deposit balances traditionally reflect
increases in noninterest-bearing demand deposits from its title
insurance company and escrow company customers. These deposits generally
increase at or near each month end as the underlying real estate
transactions being handled by such deposit customers are nearing
consummation. In turn, the Company invests a substantial amount of these
funds in securities of the U.S. Treasury and other short-term money
market instruments which increases its period end asset levels.
Subsequent to each period end, such short-term investments are converted
into cash and used to such customers' withdrawal needs as the underlying
transactions are consummated.
20 GUARDIAN BANCORP
................................................................................
See Note 3 to the Company's December 31, 1993 consolidated financial
statements for the maturity distribution, carrying value, estimated
market value and weighted average yields of the Company's short-term
investments as of December 31, 1993, 1992 and 1991, respectively.
INVESTMENT SECURITIES
At December 31, 1993, the Company's investment securities portfolio
aggregated $29.1 million, up $2.2 million from the $26.9 million
reported by the Company at December 31, 1992. The Company purchased
$20.7 million of investment securities for its portfolio and retired
$18.2 million of matured securities during the year ended December 31,
1993.
Total average investment securities for the year ended December 31, 1993
were $31.4 million, down $12.6 million from the average during 1992 of
$44.0 million. During 1993, the Company placed greater emphasis on the
placement of available funds in short-term investments. During the year
ended December 31, 1992, the Company purchased $97,000 of securities for
its investment portfolio and retired $72.3 million of matured
securities. During the first quarter of 1992 and prior to the practice
of segregating certain investments as short-term during the second
quarter of 1992, the Company sold $20.1 million of investment
securities, realizing a gain of $11,000.
See Note 3 to the Company's December 31, 1993 consolidated financial
statements for the maturity distribution, carrying value, estimated
market value and weighted average yields of the Company's investment
securities as of December 31, 1993, 1992 and 1991, respectively.
LOANS
The Company engages in real estate lending through construction and term
mortgage loans, all of which are secured by deeds of trust on underlying
real estate. The Company also engages in commercial lending to
businesses, and although the Company looks principally to the borrowers'
cash flow as source of repayment, many commercial loans are secured by
real estate as a secondary source of repayment. The Company's real
estate and construction loans are diversified by type of collateral and
concentrated geographically throughout the five counties it serves in
Southern California. In addition to the collateralized position on
certain of its lending activities, all lending transactions are subject
to the Bank's credit evaluation, underwriting criteria and monitoring
standards.
At December 31, 1993, loans, net of deferred loan fees, were $322.7
million, down $68.1 million, or 17.4% from the $390.8 million reported
at December 31, 1992. This decline is attributable to management's
decision to limit real estate related loans generally to existing
customers and to the funding of previously existing commitments, which
was based in part upon a regulatory recommendation and is consistent
with the provision of the Bank's regulatory agreement that requires it
to monitor and control the concentration of construction, land
development and land acquisition loans. The declines also reflect the
slowdown in California's economic activity which impacted all segments
of the loan portfolio.
At December 31, 1993, real estate, construction and commercial loans
comprised approximately 45.5%, 27.2% and 26.7%, respectively, of total
outstanding loans in the portfolio. This compares to 35.4%, 42.0% and
21.9% categorized as real estate, construction and commercial loans,
respectively, at December 31, 1992. Although real estate loans increased
by $8.6 million in 1993, this increase is primarily attributable to an
increase in mini-permanent loans made to the Company's existing
customers. The Company's mini-permanent loans represent loans that have
a term of three to five years, are amortized over 20 to 25 years and
provide for a balloon payment at the end of the term. Most of these
loans provide intermediate term financing for construction loans that
were originated by the Company. Construction loans declined $76.4
million and commercial loans increased $642,000 at December 31, 1993
when compared to the respective balances outstanding at the close of
1992.
Average gross loans were $353.4 million for the year ended December 31,
1993, a decrease of $67.6 million, or 16.1%, from the $421.0 million
average for the year ended December 31, 1992. This decline reflects the
downward trend in the level of gross loans outstanding due to
California's economic activity in 1993 and earlier which has impacted
all segments of the loan portfolio. The Company's average
loan-to-deposit ratio was 64.7% during 1993 as compared to 69.8% and
74.1% during 1992 and 1991, respectively.
GUARDIAN BANCORP 21
................................................................................
In light of the current economy, management's decision to limit real
estate lending, principally construction financing, is expected to
continue during 1994. This may have the effect of reducing the size of
the Company's loan portfolio unless the Company is able to successfully
market other loan products.
ALLOWANCE FOR LOAN LOSSES
A certain degree of risk is inherent in the extension of credit.
Management has credit policies in place to monitor and attempt to
control the level of loan losses and nonperforming loans. One product of
the Company's credit risk management is the maintenance of the allowance
for loan losses at a level considered by management to be adequate to
absorb estimated known and inherent losses in the existing portfolio,
including commitments and standby letters of credit. The allowance for
loan losses is established through charges to operations in the form of
provisions for loan losses.
The allowance is based upon a regular review of current economic
conditions, which might affect a borrower's ability to pay, underlying
collateral values, risk in and the composition of the loan portfolio,
prior loss experience and industry averages. In addition, the Bank's
primary regulators, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and may
recommend additions to the allowance based on their assessment of
information available to them at the time of their examination. Loans
that are deemed to be uncollectible are charged-off and deducted from
the allowance. The provision for loan losses and recoveries on loans
previously charged-off are added to the allowance.
The allowance for loan losses was approximately $18.2 million, $13.5
million and $9.1 million at December 31, 1993, 1992 and 1991,
respectively. Net charge-offs were approximately $13.5 million, $5.1
million and $284,000 during the years ended December 31, 1993, 1992 and
1991, respectively. The increase in net charge-offs during 1993 from
those reported in prior periods primarily resulted from losses
recognized upon transfer of loans to OREO, losses taken on certain real
estate loans due to economic conditions and other charge-offs related to
loans deemed uncollectible by the Company, including charge-offs taken
on the restructuring of loans with modified terms. As a percentage of
average loans outstanding, net charge-offs were 3.83%, 1.21% and .07% in
1993, 1992 and 1991, respectively. The ratio of the allowance for loan
losses to loans, net of deferred loan fees, was 5.64%, 3.45% and 2.13%
at December 31, 1993, 1992 and 1991, respectively.
Management believes that the allowance for loan losses at December 31,
1993 was adequate to absorb the known and inherent risks in the loan
portfolio at that time. However, no assurance can be given that
continuation of current recessionary factors, future changes in economic
conditions that might adversely affect the Company's principal market
area, borrowers or collateral values, and other circumstances, including
regulatory agencies' assessment of information available to them at the
time of their future examinations, will not result in increased losses
in the Company's loan portfolio in the future.
NONPERFORMING ASSETS
Nonaccrual, Past Due and Modified Loans
The following is a summary of the Company's nonperforming loans
(nonaccrual loans and loans past due 90 days or more and still accruing
interest) and loans with modified terms at years indicated:
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Loans on nonaccrual $ 29,056 33,316
Loans past due 90 days or more and still accruing interest 5,769 1,547
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 34,825 34,863
Loans with modified terms 9,539 2,149
- ------------------------------------------------------------------------------------------------------------------
Nonperforming loans and loans with modified terms $ 44,364 37,012
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual and past due loans as a percentage of total loans 10.79% 8.92
- ------------------------------------------------------------------------------------------------------------------
At December 31, 1993, approximately 92.2% of the Company's outstanding
nonperforming loans were secured by deeds of trust on a portfolio of
real estate which reduces, but does not eliminate, the risk of loss. At
December 31,
22 GUARDIAN BANCORP
................................................................................
1993 and 1992, loans on nonaccrual are shown net of participations sold
of approximately $576,000 and $4.8 million, respectively. The ratio of
the Company's allowance for loan losses to nonperforming loans was 52.3%
and 38.6% at December 31, 1993 and 1992, respectively.
The following table sets forth the composition of potential problem
credits by broad collateral type at December 31, 1993 (dollars in
thousands):
Real estate:
Residential:
1-4 Family units...................................................................... $ 10,360
Multifamily units..................................................................... 9,856
Land.................................................................................. 1,875
Commercial and industrial:
Units................................................................................. 11,101
Business and Consumer................................................................... 2,122
---------
$ 35,314
---------
---------
Since 1991, the Company has been impacted by the slowdown in
California's economic activity. One result of the current recessionary
environment has been the weakening of real estate values in certain
sectors of the Company's target markets which, in turn, has affected
certain borrowers' financial capabilities and liquidity. The significant
increase in amounts reported as nonperforming loans since 1991 is
attributable to the existing economic climate, and a substantial portion
of the loans are real estate mortgage and construction credits. While it
is management's current intention to resolve nonperforming loans and
sell other real estate owned on an asset by asset basis, management is
also exploring additional alternatives, including the possible sale of
part or all of such assets to a select number of outside investors. If
consummated, such a sale likely would entail further provisions to the
allowance for loan losses and writedowns of the carrying value of
certain assets sold in recognition of the administrative expenses and
the cost of money assumed by the buyer, together with the requirement
imposed by typical buyers in such transactions that they be able to
achieve a substantial return on their investment. The amount of such
additional provisions and writedowns should the Company decide to pursue
this strategy cannot be determined at this time. In determining whether
or not to pursue this strategy management will consider, among other
factors, the relative magnitude of the possible additional provisions to
the allowance for loan losses and writedowns which could result from
such a sale and the anticipated level of both interest income and
noninterest expense attributable to continuing to hold such assets for
sale on an asset by asset basis; and the level of income reasonably
anticipated from the investment of any proceeds received from such a
sale. While management is considering proposals from financial advisors,
and is in active discussions with a potential financial advisor, to
assist in the design and implementation of such a sale, it has not yet
entered into a contract with an advisor. Moreover, management has not
yet determined the specific assets that may be included in such a sale
and, accordingly, cannot reasonably estimate anticipated sales proceeds
or additional provisions for loan losses. No assurance can be given that
the Bank will implement a sale of problem assets or the likely impact of
such a sale on the consolidated financial condition or results of
operations of the Company.
Loans with modified terms approximated $9.5 million and $2.1 million at
December 31, 1993 and 1992, respectively. The average yield on loans
with modified terms during 1993 was approximated 5.5% compared to the
Company's average cost of funds for 1993 of 3.3%.
Other Real Estate Owned
At December 31, 1993, OREO amounted to $13.9 million, an increase of
$9.5 million from the $4.4 million reported at December 31, 1992. During
1993, the Company acquired $24.2 million of real estate through
foreclosure, recorded valuation charges of $714,000 and sold $13.9
million of such real estate incurring a net loss upon sale of $266,000.
The increase in OREO reflects the impact on foreclosure levels brought
about by the general economic decline and depressed real estate market
in Southern California. During 1992, the Company acquired and sold $6.1
million and $4.7 million, respectively, of OREO incurring a net loss
upon sale of $173,000, after valuation charges of $40,000. (See "Results
of Operations -- Noninterest Expense").
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 114 (SFAS 114), "Accounting for Loan
Impairment". The Company plans to adopt SFAS 114 on January 1, 1995
GUARDIAN BANCORP 23
................................................................................
by reporting the effect of initial application as an adjustment to the
provision for loan losses in the period of adoption. To comply with
regulatory requirements regarding SFAS 114 effective in 1993,
in-substance foreclosed assets are classified as loans if the Company
does not have physical possession of the underlying collateral. December
31, 1992 in-substance foreclosed assets in the amount of $11.8 million
have been reclassified to loans to effect this change in classification.
DEPOSITS
At December 31, 1993, total deposits of $525.7 million were comprised of
$322.9 million and $202.8 million of noninterest-bearing and
interest-bearing deposits, respectively. At December 31, 1992, total
deposits of $599.9 million were comprised of $414.2 million and $185.7
million of noninterest-bearing and interest-bearing deposits,
respectively. The $74.2 million decrease in total deposits since
December 31, 1992 is comprised of a decrease of $91.3 million and an
increase of $17.1 million in noninterest-bearing and interest-bearing
deposits, respectively.
The decrease in noninterest-bearing deposits at December 31, 1993 as
compared to December 31, 1992 was primarily in title insurance company
and escrow company deposits and reflects the current declining trends in
the volume of residential mortgage refinancing occurring in the
Company's marketplace and the Company's decreased reliance upon such
funding sources. The increase in interest-bearing deposits since
December 31, 1992 reflects a $17.7 million increase and a $656,000
decrease in the Company's time certificates of deposits and the
Company's savings and interest-bearing demand deposit balances,
respectively, and reflects management's efforts at diversifying the
Company's deposit mix. It is likely that noninterest-bearing deposits
will continue to represent a decreasing percentage of total deposits
reflecting management's efforts to diversify the Company's funding
sources and the effect of a recent Federal Reserve Board interpretation
which limits the payment of customer service expense in connection with
noninterest-bearing deposits.
Total average deposits for the year ended December 31, 1993 were $546.2
million, down $56.6 million, or 9.4%, from the $602.8 million average
for all of 1992. Average noninterest-bearing deposits and average
interest-bearing deposits during 1993 were $323.7 million and $222.5
million, respectively, which compares to averages of $383.6 million and
$219.2 million, respectively, for the year ended December 31, 1992. The
$59.9 million decrease in average noninterest-bearing deposits during
1993 from the average for all of 1992 primarily reflects the general
decline from historical levels in real estate transaction activity
handled by the Company's title insurance company and escrow company
depositors as a result of current economic conditions and a decreased
reliance on such funding sources. The increase in average
interest-bearing deposits of $3.3 million during 1993 from the 1992
average is comprised of a $14.4 million increase in average time
certificates of deposit offset by a $11.1 million decline in savings and
other interest-bearing demand accounts.
The total average deposits of $602.8 million for the year ended December
31, 1992 were up $71.2 million, or 13.4%, from the $531.6 million
reported for the year ended December 31, 1991. Average
noninterest-bearing deposits were up $91.5 million to $383.6 million
during 1992 over the $292.1 million average for 1991. This increase was
primarily in title insurance company and escrow company deposits and
reflects the higher volume of residential refinancing that occurred in
the Company's marketplace during 1992.
The Company experienced a decline in total average interest-bearing
deposits during 1992 as compared to 1991. Average time certificates of
deposit decreased approximately $32.4 million during 1992 from 1991 but
that decrease was partially offset by an increase in average
interest-bearing demand and savings deposits of approximately $12.2
million during the same period.
The decreases in average time certificates of deposit during 1992 from
the averages during 1991 and the decrease in such deposits and
noninterest-bearing demand and savings deposits at December 31, 1992
from the close of 1991 is, in management's opinion, attributable to
those depositors seeking higher yields on their funds than were being
offered by the Company as a result of the lower interest rate
environment prevailing in the marketplace. The increase in average
interest-bearing demand and savings deposits reflects the Company's
efforts to diversify its deposit sources, especially among labor unions
and related clientele.
ASSET/LIABILITY MANAGEMENT
The Company's policy is to match its level of rate sensitive assets and
rate sensitive liabilities thereby reducing its exposure to interest
rate fluctuations. Generally, where rate sensitive assets exceed rate
sensitive liabilities, the net
24 GUARDIAN BANCORP
................................................................................
interest margin is expected to be positively impacted during periods of
increasing interest rates and negatively impacted during periods of
decreasing interest rates. When rate sensitive liabilities exceed rate
sensitive assets, generally, the net interest margin will be negatively
affected during periods of increasing interest rates and positively
affected during such periods of decreasing interest rates.
The following table sets forth information concerning interest rate
sensitivity of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 1993. Such assets and
liabilities are classified by the earliest possible repricing date or
maturity.
- ----------------------------------------------------------------------------------------------------------
OVER OVER ONE
THREE YEAR
THREE THROUGH THROUGH
MONTHS OR TWELVE FIVE OVER FIVE
(DOLLARS IN THOUSANDS) LESS MONTHS YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest-bearing deposits with financial
institutions $ 1,396 594 -- -- 1,990
Investment securities 5,464 9,241 14,374 -- 29,079
Short-term investments 179,948 -- -- -- 179,948
Loans, net 283,507 5,236 28,180 5,825 322,748
- ----------------------------------------------------------------------------------------------------------
Total interest-earnings assets $ 470,315 15,071 42,554 5,825 533,765
- ----------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand and savings deposits $ 100,888 -- -- -- 100,888
Time certificates of deposit 10,063 75,815 16,008 -- 101,886
Other borrowings 15,000 -- 3,000 -- 18,000
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 125,951 75,815 19,008 -- 220,774
- ----------------------------------------------------------------------------------------------------------
Interest rate-sensitivity gap $ 344,364 (60,744) 23,546 5,825
Cumulative interest rate-sensitivity gap 344,364 283,620 307,166 312,991
Cumulative interest rate-sensitivity gap as a
percentage of total interest-bearing assets 64.52% 53.14% 57.55% 58.64%
- ----------------------------------------------------------------------------------------------------------
Approximately 86.9% of the Company's loan portfolio at December 31, 1993
bears a floating rate of interest.
The Company's funding source is primarily its deposit base which is
comprised of interest-bearing and noninterest-bearing accounts. On
occasion, the Company augments its funding needs through federal funds
purchased, securities sold under repurchase agreements and other
short-term borrowings, which are all interest-bearing. The Company's
noninterest-bearing demand deposits are, by their very nature, subject
to withdrawal upon demand. Noninterest-bearing demand deposits include
title insurance company and escrow company deposits which are subject to
fluctuation caused by general economic factors affecting the demand for,
sales of, and settlement activity relating to residential and other
forms of real estate which, in turn, are sensitive to prevailing
interest rates. Declines in one form of funding source requires the
Company to obtain funds from another source. If the Company were to
experience a decline in noninterest-bearing demand deposits and was to
have a significant increase in loan volume without a commensurate
increase in such deposits, it would utilize alternative sources of
funds, probably at higher cost, to maintain its liquidity and to meet
its loan funding needs. This would place downward pressure on the
Company's net interest margin and have a negative impact on the
Company's liquidity position.
LIQUIDITY
The Company manages its liquidity position to seek 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, interest-bearing deposits
with financial institutions, short-term investments and federal funds
sold. Liability liquidity arises from a diversity of funding sources as
well as from the ability of the Company to attract deposits of varying
maturities.
GUARDIAN BANCORP 25
................................................................................
At December 31, 1993, the Company's ratio of liquid assets, defined as
cash and due from banks, interest-bearing deposits with financial
institutions, federal funds sold and short-term investments, to total
deposits was 39.0%. This compares to ratios of 38.4% and 29.6% at year
end 1992 and 1991, respectively. The ratio of average total liquid
assets to average total deposits was 35.1% during 1993 compared to 30.2%
and 25.7% during 1992 and 1991, respectively.
At December 31, 1993, $287.3 million of the Company's
noninterest-bearing demand deposits, or 54.7% of total deposits, were
from title insurance companies and escrow companies and $129.5 million
of such deposits, or 24.6% of total deposits, were maintained by five
title insurance and escrow company customers; one such customer
accounted for 8.5%, and another accounted for 6.3%, of total deposits.
Title insurance company and escrow company deposits generally fluctuate
with the volume of real estate activity, which, in turn, are affected by
fluctuations in the general level of interest rates and other economic
factors affecting the real estate market. During the first quarter of
1994, the Board of Governors of the Federal Reserve System issued a new
interpretive release which is applicable to all member banks, such as
the Bank, and other entities, which limits the payment of customer
service expense to certain prescribed instances. As a result of the
issuance of this interpretive release, it is expected that certain
balances of accounts of customers to whom these services are provided
will decline and, in turn, customer service expense will decline in
1994, the exact amount of which cannot be predicted. In addition as of
December 31, 1993, labor union deposits were $91.5 million, or 17.4% of
total deposits, and 64.2% of these deposits were demand deposits.
Further, all demand deposit accounts, including title insurance company,
escrow company and labor union deposits, are subject to turnover. At
December 31, 1993, $322.9 million or 61.4% of the Company's total
deposits were noninterest-bearing demand deposits, and time certificates
of deposit of $100,000 or more were $22.2 million, which represented
4.2% of total deposits. Time certificates of deposit of $100,000 or more
may be subject to fluctuation as they are generally more sensitive to
changes in interest rates than other types or amounts of deposits.
In an effort to address the potential fluctuations in the Company's
deposit base, management seeks to limit loans to no more than 75% of
deposits to attempt to ensure that sufficient funds are available to
meet customers' needs for borrowing and deposit withdrawals. A
substantial amount of these funds are invested in securities of the U.S.
Treasury and other short-term money market instruments, including
federal funds sold, money market mutual funds and interest-bearing
deposits with other financial institutions. To further cushion any
unanticipated fluctuation in its liquidity position, the Bank, as with
all commercial banks who are members of the Federal Reserve System, may
borrow from the regional Federal Reserve Bank subject to compliance with
regulatory requirements. In addition, the Bank has federal funds
facilities available with its major correspondent banks aggregating
$15.0 million. These facilities are subject to customary terms for such
arrangements and are terminable at any time in the discretion of the
correspondent bank. Notwithstanding these precautionary steps, there can
be no assurance that the Company will not experience substantial
fluctuations in its deposit base or otherwise adversely affect its net
interest income by requiring the Bank to replace such deposits with
higher costing funds.
At December 31, 1993, Guardian Bancorp, on an unconsolidated parent
company only basis, had cash and cash equivalents available of
approximately $402,000. On January 28, 1994, Guardian Bancorp
consummated the Offering of common stock raising gross proceeds of
approximately $19,700,000. After deducting expenses incurred in the
Offering, net proceeds were approximately $17,958,000. Guardian Bancorp
contributed $16,500,000 of the net proceeds to the Bank, subsequently
reimbursed the Bank approximately $229,000 for costs it incurred and
retained approximately $1.2 million for its own general corporate
purposes. In addition, on September 30, 1993, Guardian Bancorp exercised
its right to convert the entire $3.0 million principal amount of Bank
Convertible Debentures into common stock of the Bank, thereby converting
this security into Tier 1 capital and eliminating the Bank as a
liquidity source through interest payments.
On December 22, 1988, Guardian Bancorp issued to an unaffiliated
purchaser $3.0 million in aggregate principal amount of 11 3/4%
Subordinated Debentures that mature on December 30, 1995. Interest on
the Bancorp Debentures accrues and is payable quarterly, and the
principal is due on maturity. Guardian Bancorp is not currently in
default with respect to any of the interest payments due on the Bancorp
Debentures, and management believes that Guardian Bancorp currently has
sufficient liquid assets to make such payments through to maturity.
However, absent a restructuring of the Bancorp Debentures or the receipt
of additional funds from Bank dividends, the issuance of debt or equity
or otherwise, Guardian Bancorp will not have sufficient liquid assets to
26 GUARDIAN BANCORP
................................................................................
pay the $3.0 million principal amount of such securities that will
become due on the stated maturity date. Guardian Bancorp's ability to
receive additional funds through Bank dividends or the issuance of debt
at the holding company level is limited by regulatory and statutory
restrictions.
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 1992
risk-based capital guidelines adopted by the Federal Reserve Board
require the Company and the Bank to achieve certain minimum ratios of
capital to risk-weighted assets. In addition, the Federal Reserve Board
has adopted a leverage ratio that requires a minimum ratio of Tier 1
capital to average assets. The following table sets forth the Company's
and the Bank's risk-based capital and leverage ratios at December 31,
1993 (dollars in thousands):
COMPANY BANK
-------------------- --------------------
(DOLLARS IN THOUSANDS) BALANCE % BALANCE %
- -----------------------------------------------------------------------------------------------------------------
Tier 1 Capital(1) $ 21,301 6.00% 23,839 7.02%
Tier 1 Capital minimum requirement(2) 14,195 4.00 13,575 4.00
- -----------------------------------------------------------------------------------------------------------------
Excess $ 7,106 2.00 10,264 3.02
- -----------------------------------------------------------------------------------------------------------------
Total Capital(3) $ 28,907 8.15 28,254 8.33
Total Capital minimum requirement(2) 28,389 8.00 27,150 8.00
- -----------------------------------------------------------------------------------------------------------------
Excess $ 518 0.15 1,104 0.33
- -----------------------------------------------------------------------------------------------------------------
Leverage ratio (3% + minimum)(4) 3.74 4.19
- -----------------------------------------------------------------------------------------------------------------
Risk-weighted assets $ 354,866 339,377
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1)Includes common shareholders' equity.
(2)Commencing December 19, 1992, insured institutions such as the Bank must,
among other things, maintain a Tier 1 capital ratio of at least 4% or 6% and
a Total capital ratio of at least 8% or 10% to be considered "adequately
capitalized" or "well capitalized", respectively, under the prompt corrective
action provisions of the FDIC Improvement Act.
(3)Includes common shareholders' equity, subordinated debt, plus allowance for
loan losses, subject to certain limitations.
(4)Tier 1 capital divided by average assets for the period. Under the current
rules, a minimum leverage ratio of 3% is required for institutions which have
been determined to be in the highest of five categories used by regulators to
rate financial institutions. All other institutions, including the Company
and the Bank, are required to maintain leverage ratios of at least 100 to 200
basis points above the 3% minimum. Commencing December 9, 1992, insured
institutions such as the Bank must, among other things, maintain a leverage
ratio of at least 4% or 5% to be considered "adequately capitalized" or "well
capitalized", respectively, under the prompt corrective action provisions of
the FDIC Improvement Act.
On January 28, 1994, Guardian Bancorp consummated its rights offering of
common stock ("the Offering"), and raised gross proceeds of
approximately $19,700,000 through the issuance of 8,774,000 shares of
common stock. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. In early February 1994,
Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank
for the Bank's general corporate purposes and subsequently reimbursed
the Bank approximately $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for
its own general corporate purposes.
GUARDIAN BANCORP 27
................................................................................
The following tables set forth the consolidated capitalization of the
Company and the capitalization of the Bank at December 31, 1993, and the
proforma consolidated capitalization of the Company and the
capitalization of the Bank, as adjusted to give effect to the offering
as consummated:
DECEMBER 31, 1993
----------------------
PROFORMA ACTUAL
- -------------------------------------------------------------------------------------------------------------------
COMPANY
Shareholders' equity:
Preferred stock $ -- --
Common stock 33,794(1) 15,836
Retained earnings 5,465 5,465
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 39,259 21,301
- -------------------------------------------------------------------------------------------------------------------
Book value $ 3.14 (2) 5.70
- -------------------------------------------------------------------------------------------------------------------
BANK
Equity capital:
Common Stock $ 35,565 (3) 19,065
Undivided profits 4,774 4,774
- -------------------------------------------------------------------------------------------------------------------
Equity capital $ 40,339 23,839
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1)Assumes net proceeds of approximately $17,958,000 raised in the Offering were
received at December 31, 1993.
(2)Adjusted to give effect to the additional 8,774,000 shares issued in the
Offering.
(3)Assumes $16.5 million in new equity capital contributed to the Bank was
contributed at December 31, 1993.
The following tables set forth the Company's and the Bank's risk-based
and leverage ratios at December 31, 1993 and their respective proforma
risk-based and leverage ratios, as adjusted to give effect to the
Offering.
COMPANY BANK
------------------------ ------------------------
PROFORMA(1) ACTUAL PROFORMA(2) ACTUAL
- ----------------------------------------------------------------------------------------------------------------------------
Tier 1 capital ratio 10.95% 6.00% 11.77% 7.02%
Total capital ratio 13.08 8.15 13.07 8.33
Leverage ratio 6.68 3.74 6.89 4.19
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(1)Assumes net proceeds raised in the Offering had been invested in 20%
risk-weighted assets at December 31, 1993.
(2)Assumes $16.5 million in new equity capital was contributed to the Bank at
December 31, 993 which, in turn, invested the proceeds in 20% risk-weighted
assets at December 31, 1993.
With the exception of the capital raising efforts discussed above, and,
on a much smaller scale, the periodic exercise of employee stock
options, retained earnings from operations have been the Company's
primary source of new capital. Management is committed to maintaining
capital at a sufficient level to assure shareholders, customers and
regulators that the Company is financially sound.
EFFECTS OF NORTHRIDGE EARTHQUAKE
On January 17, 1994, an earthquake of approximately 6.7 magnitude on the
Richter scale struck the Southern California area. The earthquake and
related aftershocks caused significant damage to certain areas of Los
Angeles and Ventura Counties. While the full extent of damage in this
area is not yet known, management's preliminary assessment of damage to
collateral securing loans indicates that there should not be a material
impact on the Company's consolidated financial position or results of
operations. However, it remains uncertain if whether or not the
earthquake will have additional negative impact on the Southern
California economy and the Company's customers.
28 GUARDIAN BANCORP
................................................................................
CONSOLIDATED BALANCE SHEET
GUARDIAN BANCORP AND SUBSIDIARY
DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
- ------------------------------------------------------------------------------
ASSETS 1993 1992
- ------------------------------------------------------------------------------
Cash and due from banks $ 23,155 48,763
Interest-bearing deposits with financial institutions 1,990 1,090
Federal funds sold -- 60,000
Investment securities (market value of $29,221 and
$27,604 in 1993 and 1992, respectively) 29,079 26,939
Short-term investments (market value of $179,948 and
$120,535 in 1993 and 1992, respectively) 179,948 120,487
Loans 322,748 390,835
Less allowance for loan losses (18,200) (13,466)
- ------------------------------------------------------------------------------
Net loans 304,548 377,369
- ------------------------------------------------------------------------------
Premises and equipment, net 1,808 2,372
Deferred income taxes 3,574 3,642
Other real estate owned, net 13,949 4,359
Accrued interest receivable and other assets 9,495 5,780
- ------------------------------------------------------------------------------
$ 567,546 650,801
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Deposits $ 525,674 599,903
Subordinated debentures 3,000 3,000
Other borrowed money 15,000 10,000
Accrued interest payable and other liabilities 2,571 2,420
- ------------------------------------------------------------------------------
546,245 615,323
- ------------------------------------------------------------------------------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, without par value;
Authorized 10,000,000 shares; none issued -- --
Common stock, without par value;
Authorized 29,296,875 shares; issued and outstanding
3,740,000 and 3,659,000 shares in 1993 and 1992,
respectively 15,836 15,556
Retained earnings 5,465 19,922
- ------------------------------------------------------------------------------
Total shareholders' equity 21,301 35,478
- ------------------------------------------------------------------------------
$ 567,546 650,801
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
GUARDIAN BANCORP 29
................................................................................
CONSOLIDATED STATEMENT OF OPERATIONS
GUARDIAN BANCORP AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
Interest income:
Loans $ 27,399 35,358 43,773
Deposits with financial institutions 42 88 175
Investment securities:
Taxable 1,614 2,605 2,434
Nontaxable 197 322 442
Short-term investments 923 874 --
Federal funds sold 2,594 2,048 3,399
- ------------------------------------------------------------------------------
32,769 41,295 50,223
- ------------------------------------------------------------------------------
Interest expense:
Deposits 7,108 8,554 13,895
Borrowed funds 397 456 439
- ------------------------------------------------------------------------------
7,505 9,010 14,334
- ------------------------------------------------------------------------------
Net interest income 25,264 32,285 35,889
Provision for loan losses 18,250 9,395 5,946
- ------------------------------------------------------------------------------
Net interest income after provision for
loan losses 7,014 22,890 29,943
- ------------------------------------------------------------------------------
Noninterest income:
Gain on sale of securities 3 42 2
Trust 627 186 14
Other 789 811 907
- ------------------------------------------------------------------------------
1,419 1,039 923
- ------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 8,621 7,271 6,118
Occupancy 1,238 1,778 1,783
Furniture and equipment 851 1,004 884
Customer service 5,539 7,989 9,189
Data processing 351 831 568
Promotional 758 1,120 1,436
Professional 2,416 1,666 1,033
Office supplies 416 416 444
FDIC assessments 1,791 1,365 1,025
Other real estate owned 2,957 667 41
Other 2,498 2,249 2,228
- ------------------------------------------------------------------------------
27,436 26,356 24,749
- ------------------------------------------------------------------------------
Earnings (loss) before income taxes (19,003) (2,427) 6,117
Provision (benefit) for income taxes (4,546) (109) 2,900
- ------------------------------------------------------------------------------
Net earnings (loss) $ (14,457) (2,318) 3,217
- ------------------------------------------------------------------------------
Net earnings (loss) per common share $ (3.90) (.64) .77
- ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30 GUARDIAN BANCORP
................................................................................
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
GUARDIAN BANCORP AND SUBSIDIARY COMMON STOCK
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 ---------------------- RETAINED
(IN THOUSANDS) SHARES AMOUNT EARNINGS TOTAL
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1990 3,607 $ 15,825 19,023 34,848
Retirement of common stock (93) (940) -- (940)
Stock options exercised 49 167 -- 167
Net earnings -- -- 3,217 3,217
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 3,563 15,052 22,240 37,292
Stock options exercised 96 345 -- 345
Tax benefit of stock options exercised -- 159 -- 159
Net loss -- -- (2,318) (2,318)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 3,659 15,556 19,922 35,478
Stock options exercised 81 280 -- 280
Net loss -- -- (14,457) (14,457)
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 3,740 $ 15,836 5,465 21,301
- -------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
GUARDIAN BANCORP 31
................................................................................
CONSOLIDATED STATEMENT OF CASH FLOWS
GUARDIAN BANCORP AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS) 1993 1992 1991
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (14,457) (2,318) 3,217
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Provision for loan losses 18,250 9,395 5,946
Depreciation and amortization 854 935 813
Provision for deferred income taxes 68 (563) (1,935)
Amortization of deferred loan fees (648) (529) (2,005)
Amortization of net premium (discount) on investment
securities 347 (139) 207
Amortization of discount on short-term investments (525) (874) --
Gain on sales of securities (3) (42) (2)
Gain on sale of premises and equipment (22) -- --
Net loss on sales of other real estate owned 266 173 --
Valuation of other real estate owned 714 40 --
Net (increase) decrease in accrued interest receivable
and other assets (3,715) 1,267 930
Net increase (decrease) in accrued interest payable and
other liabilities 151 (2,356) 1,147
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,280 4,989 8,318
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from investment securities transactions:
Sales -- 20,112 1,000
Maturities 18,189 72,335 11,400
Purchases of investment securities (20,676) (97) (75,042)
Proceeds from short-term investment transactions:
Sales 369,865 14,881 --
Maturities 386,385 90,492 --
Purchases of short-term investments (815,183) (254,463) --
Net change in loans 31,010 28,165 (92,691)
Proceeds from sale of other real estate owned 13,639 4,084 --
Proceeds from sale of premises and equipment 32 -- --
Purchases of premises and equipment (300) (194) (859)
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,039) (24,685) (156,192)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (74,229) (82,724) 243,676
Increase in other borrowed money 5,000 10,000 --
Net proceeds from issuance of common stock 280 504 167
Retirement of common stock -- -- (940)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (68,949) (72,220) 242,903
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (84,708) (91,916) 95,029
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 109,853 201,769 106,740
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 25,145 109,853 201,769
- ------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32 GUARDIAN BANCORP
................................................................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GUARDIAN BANCORP AND SUBSIDIARY
DECEMBER 31, 1993, 1992 AND 1991
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accounting and reporting policies of Guardian Bancorp and subsidiary
(collectively, the Company) are in accordance with generally accepted
accounting principles and conform to general practices within the
banking industry. The consolidated financial statements are prepared on
the accrual basis of accounting.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Guardian
Bancorp, its wholly owned subsidiary Guardian Bank and Guardian Bank's
wholly owned subsidiary, Guardian Trust Company (the Bank). All material
intercompany accounts and transactions have been eliminated in the
consolidated financial statements. Certain reclassifications of prior
years' data have been made to conform to the current year's
presentation.
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS
Investment securities are carried at cost, net of the amortization of
premiums and accretion of discounts. Amortized premiums and accreted
discounts are included in interest on investment securities. The
carrying value of investment securities is not adjusted for temporary
declines in market values as the Bank has the positive intent and
ability to hold the securities to maturity. However, the Company may
sell such securities if it determines that collectibility is in doubt.
In such cases, gains and losses realized are determined using the
specific-identification method.
Securities which the Company does not intend to hold to maturity are
classified as short-term investments. These securities are carried at
the lower of cost or market, net of accreted discounts which are
included in interest on short-term investments. Adjustments to carrying
value, if any, and realized gains or losses upon sale of the securities
are included in gain on sale of securities.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are recorded in the consolidated balance sheet at principal
amounts outstanding, net of deferred loan fees. Interest on loans is
accrued monthly as earned. When, in the opinion of management, a
reasonable doubt exists as to the collection of principal or interest,
such loans are evaluated individually to determine both the
collectibility and the adequacy of collateral. Loans are generally
placed on nonaccrual status when principal or interest is past due 90
days or more or management has reasonable doubt as to the full
collection of principal and interest, the accrual of income is
discontinued and previously accrued but unpaid interest is reversed
against income. Subsequent interest payments are generally credited to
income when received, except when the ultimate collectibility of
principal is uncertain, in which case all collections are applied as
principal reductions. Loans with modified terms are those with
restructured contractual terms due to borrowers' financial difficulty in
meeting original terms.
The allowance for loan losses is maintained at a level deemed adequate
by management to provide for known and inherent losses in the loan
portfolio. The allowance is based upon a quarterly review of past loan
loss experience, loan portfolio composition and risk, current economic
conditions that may affect the borrower's ability to pay and the
underlying collateral value. While management uses available information
to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic and other conditions. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to make additions to the
allowance based on their judgments of information available to them at
the time of their examination.
Loans that are deemed to be uncollectible are charged off and deducted
from the allowance. The provision for loan losses and recoveries on
loans previously charged off are added to the allowance.
GUARDIAN BANCORP 33
................................................................................
LOAN ORIGINATION AND CREDIT-RELATED FEES
Loan origination fees and certain direct costs associated with the
origination or purchase of loans are deferred and recognized over the
lives of the related loans as an adjustment of the loan's yield on a
basis which approximates the interest method. Nonrefundable fees
associated with the issuance of loan commitments are deferred and
recognized over the life of the loan as an adjustment of yield. Fees for
commitments that expire unexercised are recognized in noninterest income
upon expiration of the commitment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation on furniture, fixtures and equipment is
computed on the straight-line method over the estimated useful lives of
the related assets, which range from three to ten years. Leasehold
improvements are capitalized and amortized over the term of the lease or
the estimated useful lives of the improvements, whichever is shorter,
calculated on the straight-line method.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the lower of estimated fair
value, less estimated costs of disposition, or the outstanding loan
amount, and any difference between fair value and the loan amount is
charged to the allowance for loan losses. In 1993, the Company
reclassified in-substance foreclosed assets from other real estate owned
to loans in cases where it did not have physical possession of the
underlying collateral. This is consistent with regulatory reporting
requirements and with changing trends evolving in financial reporting
practices. Related prior years' data have been reclassified to conform
with the current year's presentation. Gains and losses from the sale of
such assets, any subsequent valuation adjustments and net operating
expenses are included in noninterest expense.
INCOME TAXES
The Company files consolidated Federal and combined state income tax
returns. Amounts provided for income taxes are based on the income
reported in the consolidated financial statements at current tax rates.
Such amounts include taxes deferred to future periods resulting from
temporary differences in the recognition of items for tax and financial
reporting purposes. Current and deferred components of the total tax
provision are redetermined each year when tax returns are filed which
results in an adjustment to the previously reported components.
In the first quarter of 1993, the Company implemented Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 changed the Company's method of accounting for
income taxes from the deferred method to the asset and liability method.
Under the deferred method, annual income tax expense was matched with
pretax accounting income by providing deferred taxes at current tax
rates for temporary differences between the determination of net income
for financial reporting and tax purposes. Under the asset and liability
method deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. In
implementing SFAS 109, the Company elected to restate prior years and,
therefore, the consolidated financial statements and related notes for
prior years have been restated to apply the new method of accounting
retroactively to 1991. The cumulative impact at January 1, 1991 of the
implementation was not material. The effect of the accounting change was
an increase in the net loss in 1992 of $492,000, or $0.14 per share, and
a decrease in 1991 net earnings of $493,000, or $0.11 per share.
PER SHARE DATA
Primary and fully diluted earnings (loss) per common share are computed
using the weighted average number of shares of common stock and common
stock equivalents outstanding. Stock options and warrants are considered
to be common stock equivalents, except when their effect is antidilutive
or immaterial. The weighted average number of shares of common stock
outstanding used to compute loss per share for the years ended December
31, 1993 and 1992 was 3,710,000 and 3,624,000, respectively. The
weighted average number of shares of common stock outstanding, including
common stock equivalents, used to compute earnings per share for the
year ended December 31, 1991 was 4,194,000.
34 GUARDIAN BANCORP
................................................................................
In 1993, 1992 and 1991, the weighted average number of shares including
common stock equivalents for fully diluted earnings (loss) per share was
not materially different than the number of shares used to compute
primary earnings (loss) per share.
STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, the Company considers
cash and due from banks, interest-bearing deposits with financial
institutions having maturities of less than three months and Federal
funds sold as cash and cash equivalents. Supplemental information
regarding the accompanying consolidated statement of cash flows for the
years ended December 31, 1993, 1992 and 1991 is as follows (in
thousands):
1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
Interest paid $ 7,507 9,418 14,429
- --------------------------------------------------------------------------------------------------------------------
Income taxes (received) paid $ (920) 2,203 4,422
- --------------------------------------------------------------------------------------------------------------------
Other real estate owned acquired in satisfaction of loans $ 24,209 5,922 6,245
- --------------------------------------------------------------------------------------------------------------------
Senior liens assumed upon acquisition of other real estate owned $ -- 149 --
- --------------------------------------------------------------------------------------------------------------------
Loans made to facilitate sale of other real estate owned $ 5,855 400 2,774
- --------------------------------------------------------------------------------------------------------------------
Transfer of investment securities to short-term investments $ -- 29,508 --
- --------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" ("SFAS 107"). SFAS 107 is effective
for fiscal years ending after December 15, 1992, and requires the
disclosure of the fair value of financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate
the value. Financial instruments are defined under SFAS 107 as cash,
evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either
receive or deliver cash or another financial instrument. A significant
portion of the Company's assets and liabilities are financial
instruments as defined under SFAS 107. Additionally, the Company is also
a party to financial instruments that are not reported on the balance
sheet ("off-balance sheet financial instruments"). Such off-balance
sheet financial instruments include commitments to originate loans and
standby letters of credit.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, premises and
equipment and other real estate owned are not considered financial
instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in these
estimates. Since the fair value is estimated as of December 31, 1993 and
1992, the amounts that will actually be realized or paid at settlement
or maturity of the instruments could be significantly different.
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments which are contained in the notes to the consolidated
financial statements that describe each financial instrument.
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH FINANCIAL
INSTITUTIONS AND FEDERAL FUNDS SOLD
The book value of cash and due from banks, interest-bearing deposits
with financial institutions and federal funds sold approximates the
estimated fair value of such assets.
GUARDIAN BANCORP 35
................................................................................
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS
The Company has utilized market quotes for similar or identical
securities in an actively traded market, where such a market exists, or
has obtained quotes from independent security brokers or dealers to
determine the estimated fair value of its investment securities and
short-term investments.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and consumer. Each loan
category is further segmented into fixed and adjustable rate interest
terms, by performing and nonperforming categories and by maturity.
Loans which are either maturing or subject to repricing in the short
term are valued for fair market value purposes by using the carrying
amount for such loans. For other loans, fair value is estimated by
discounting scheduled cash flows through estimated maturity using
estimated market discount rates adjusted for the cost to administer and
the credit and interest rate risk inherent in the loan.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, and NOW accounts, and
money market and checking accounts, is estimated to equal the amount
payable on demand as of December 31, 1993 and 1992. The fair value of
certificates of deposit is based on the estimated discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
BORROWINGS
The fair value of the Company's subordinated debentures was based upon
alternative borrowing costs. Book value of the Company's other
borrowings approximates the fair value of such liabilities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Company's commitments to extend credit and the
fair value of letters of credit are estimated based upon terms currently
offered for similar agreements and approximates their carrying value.
CHANGES IN ACCOUNTING PRINCIPLES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan
is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to
the contractual terms of the loan agreement. The measurement of
impairment may be based on (1) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (2) the observable market price of the impaired
loan or (3) the fair value of the collateral of a collateral-dependent
loan. The amount by which the recorded investment of the loan exceeds
the measure of the impaired loan is recognized by recording a valuation
allowance with a corresponding charge to provision for loan losses.
Additionally, SFAS 114 eliminates the requirement that a creditor
account for certain loans as foreclosed assets until the creditor has
taken possession of the collateral. SFAS 114 is effective for financial
statements issued for fiscal years beginning after December 15, 1994.
Earlier adoption is permitted. To comply with regulatory requirements
regarding SFAS No. 114 effective in 1993, in-substance foreclosed assets
are classified as loans in cases where the Company does not have
physical possession of the underlying collateral. Although the Company
has not yet adopted SFAS 114, management does not expect implementation
to have a material impact on the Company's financial position or results
of operations.
In May 1993, the FASB issued Statement of Financial Standards No. 115
"Accounting For Certain Investments in Debt and Equity Securities"
addressing the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. Those investments would be classified in
three categories and accounted for as follows: (i) debt and equity
securities that the entity has the positive intent and ability to hold
to maturity would be classified as "held to maturity" and reported at
amortized cost; (ii) debt and equity securities that are held for
current resale would be classified as trading securities and reported at
fair value, with unrealized gains and losses included in operations; and
(iii) debt and equity securities not classified as either securities
held to maturity or trading securities would be classified as securities
available for sale, and reported at fair value, with unrealized gains
and losses excluded from operations and reported as a
36 GUARDIAN BANCORP
................................................................................
separate component of shareholders' equity. The statement is effective
for financial statements for calendar year 1994, but may be applied to
an earlier fiscal year for which annual financial statements have not
been issued. The Bank has both investment securities classified as
"available to maturity" and investment securities classified as
"available for sale". Securities classified as available for sale will
be reported at their fair value at the end of each fiscal quarter.
Accordingly, the value of such securities fluctuates based on changes in
interest rates. Generally, an increase in interest rates would result in
a decline in the value of investment securities held for sale, while a
decline in interest rates would result in an increase in the value of
such securities. Therefore, the value of investment securities available
for sale and the Bank's shareholders' equity could be subject to
fluctuation based on changes in interest rates.
(2) CONSUMMATION OF RIGHTS OFFERING
On January 28, 1994, Guardian Bancorp consummated its rights offering of
common stock ("the Offering"), and raised gross proceeds of
approximately $19,700,000 through the issuance of 8,774,000 shares of
common stock. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. In early February 1994,
Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank
for the Bank's general corporate purposes and subsequently reimbursed
the Bank approximately $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for
its own general corporate purposes.
GUARDIAN BANCORP 37
................................................................................
(3) INVESTMENT AND SHORT-TERM SECURITIES
The carrying value, gross unrealized gains and losses and estimated
market values of investment securities at December 31, 1993, 1992 and
1991 are as follows (in thousands):
1993
- ---------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $24,279 123 36 24,366
State and municipal securities 4,336 55 -- 4,391
Federal Reserve Bank stock 464 -- -- 464
- ---------------------------------------------------------------------------------------------------------------
$29,079 178 36 29,221
- ---------------------------------------------------------------------------------------------------------------
1992
- ---------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $20,327 579 -- 20,906
U.S. Government agency securities 164 6 -- 170
State and municipal securities 4,984 75 -- 5,059
Corporate bonds 1,000 5 -- 1,005
Federal Reserve Bank stock 464 -- -- 464
- ---------------------------------------------------------------------------------------------------------------
$26,939 665 -- 27,604
- ---------------------------------------------------------------------------------------------------------------
1991
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $79,020 937 34 79,923
U.S. Government agency securities 360 22 -- 382
State and municipal securities 7,129 100 8 7,221
Corporate bonds 2,755 32 -- 2,787
Federal Reserve Bank stock 367 -- -- 367
- ------------------------------------------------------------------------------------------------------------
$89,631 1,091 42 90,680
- ------------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities in 1992 were $20,112,000
and the gain recognized upon sale was $11,000. There were no sales of
investment securities in 1993.
38 GUARDIAN BANCORP
................................................................................
The following table shows the carrying value and estimated market value
of investment securities by contractual maturity at December 31, 1993.
Also shown are the weighted average yields by investment category, and
such yields for state and municipal securities are stated on a tax
equivalent basis at the incremental rate of 34% (dollars in thousands):
- --------------------------------------------------------------------------------------------------------
WEIGHTED ESTIMATED
CARRYING AVERAGE MARKET
AMOUNT YIELD VALUE
- --------------------------------------------------------------------------------------------------------
U.S. Treasury securities:
Within one year $ 10,528 4.9% 10,595
After one year but within five years 13,751 4.5 13,771
- --------------------------------------------------------------------------------------------------------
24,279 4.7 24,366
- --------------------------------------------------------------------------------------------------------
State and municipal securities:
Within one year 3,737 4.3 3,764
After one year but within five years 599 11.4 627
- --------------------------------------------------------------------------------------------------------
4,336 5.3 4,391
- --------------------------------------------------------------------------------------------------------
Corporate bonds:
Federal Reserve Bank stock 464 6.0 464
- --------------------------------------------------------------------------------------------------------
$ 29,079 4.8% 29,221
- --------------------------------------------------------------------------------------------------------
U.S. Treasury and Government agency securities carried at approximately
$4,222,000 at December 31, 1993 were pledged to secure public deposits
or for other purposes as required or permitted by law.
Since the second quarter of 1992, the Company has categorized as
short-term investments, securities and other investments that may be
sold in response to changes in interest rates, increases in loan demand,
liquidity needs or other similar instances. Such short-term investments
are carried at the lower of cost or market and during 1993 had a
weighted average yield of approximately 2.8% and mature within one year.
The following table shows carrying value, gross unrealized gains and
losses and estimated market values of short-term investments at December
31, 1993 and 1992 (in thousands):
1993
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 179,948 -- -- 179,948
- -------------------------------------------------------------------------------------------------------------
$ 179,948 -- -- 179,948
- -------------------------------------------------------------------------------------------------------------
1992
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 119,887 48 -- 119,935
Cash management funds 600 -- -- 600
- -------------------------------------------------------------------------------------------------------------
$ 120,487 48 -- 120,535
- -------------------------------------------------------------------------------------------------------------
Proceeds from the sale of short-term investments were $369,865,000 and
$14,881,000 during 1993 and 1992, respectively, and the gains realized
upon sale were $3,000 and $31,000, respectively. During 1993 and 1992,
there were no lower of cost or market adjustments charged to income.
GUARDIAN BANCORP 39
................................................................................
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of the composition of the Company's loan
portfolio by type of loan at December 31, 1993 and 1992 (in thousands):
1993 1992
- -------------------------------------------------------------------------------------------------------------
Real estate $ 147,039 138,430
Construction 87,829 164,194
Commercial 86,260 85,618
Installment 2,046 2,938
- -------------------------------------------------------------------------------------------------------------
$ 323,174 391,180
Deferred loan fees (426) (345)
- -------------------------------------------------------------------------------------------------------------
$ 322,748 390,835
- -------------------------------------------------------------------------------------------------------------
The Company emphasizes real estate and construction lending for
contractors and real estate developers in its Southern California market
area. A significant portion of the Company's loan portfolio is secured
with deeds of trust on real estate. Commercial loans are loans made to
professionals and small businesses for trade and general financing
purposes and also include loans made to companies involved in the real
estate industry, such as real estate brokers, title insurance and escrow
companies and real estate developers for working capital and equipment
acquisitions. Although the Company looks primarily to the borrower's
cash flow as the principal source of repayment for such loans, 34.4% of
the loans within this category at December 31, 1993 were secured by real
estate. The Company's lending policy, established by the Board of
Directors, requires that each loan meet certain underwriting criteria,
including loans to customers who have significant cash investment in
their projects and have the ability to provide additional cash flows, if
necessary, as well as collateral underlying the loan, and capital and
leverage capacity of the borrower.
The following table sets forth the composition of real estate and
construction loans by broad type of collateral as of December 31, 1993
(in thousands):
REAL ESTATE CONSTRUCTION
-------------------- --------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------------------------------------
Residential:
1-4 family units $ 24,298 16.5% $ 50,530 57.5%
Multifamily units 16,309 11.1 8,437 9.6
Commercial and industrial units 79,398 54.0 19,324 22.0
Land:
Residential 15,204 10.3 8,820 10.1
Commercial and industrial 11,830 8.1 718 .8
- ------------------------------------------------------------------------------------------------------------
Total $ 147,039 100.0% $ 87,829 100.0%
- ------------------------------------------------------------------------------------------------------------
At December 31, 1993, the Company had total unfunded loan commitments of
approximately $46,181,000 of which $1,579,000, $20,312,000 and
$24,290,000 were related to real estate, construction and commercial
loans, respectively.
A summary of nonperforming loans at December 31, 1993 and 1992 follows
(in thousands):
1993 1992
- ---------------------------------------------------------------------------------------------------------------
Loans on nonaccrual $ 29,056 33,316
Loans past due greater than 90 days and still accruing 5,769 1,547
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 34,825 34,863
- ---------------------------------------------------------------------------------------------------------------
40 GUARDIAN BANCORP
................................................................................
The following tables set forth the Company's nonperforming loans by type
at December 31, 1993 and 1992 (in thousands):
1993 1992
- ---------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Real estate-mortgage $ 13,804 15,578
Construction 9,214 16,416
Commercial 6,005 1,320
Installment 33 2
- ---------------------------------------------------------------------------------------------------------------
$ 29,056 33,316
- ---------------------------------------------------------------------------------------------------------------
1993 1992
- ---------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and still accruing interest:
Real estate-mortgage $ 4,486 70
Construction -- 1,363
Commercial 1,247 100
Installment 36 14
- ---------------------------------------------------------------------------------------------------------------
$ 5,769 1,547
- ---------------------------------------------------------------------------------------------------------------
Loans with modified terms approximated $9,539,000 and $2,149,000 at
December 31, 1993 and 1992, respectively.
The effect of loans on nonaccrual and loans with modified terms on
interest income for the years ended December 31, 1993, 1992 and 1991 is
presented below (in thousands):
1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
Gross interest income that would have been recorded at original terms:
Loans on nonaccrual $ 5,716 4,832 2,487
Loans with modified terms 1,105 288 231
- ----------------------------------------------------------------------------------------------------------
6,821 5,120 2,718
Interest reflected in income:
Loans on nonaccrual 1,703 1,933 608
Loans with modified terms 787 164 125
- ----------------------------------------------------------------------------------------------------------
2,490 2,097 733
Interest foregone:
Loans on nonaccrual 4,013 2,899 1,879
Loans with modified terms 318 124 106
- ----------------------------------------------------------------------------------------------------------
$ 4,331 3,023 1,985
- ----------------------------------------------------------------------------------------------------------
At December 31, 1993, commitments to lend additional funds to borrowers
whose loans were on nonaccrual or had modified terms were approximately
$182,000.
At December 31, 1993 and 1992, the estimated fair value of the Company's
loan portfolio was $319,411,000 and $379,937,000, respectively, which
compares to the carrying value of net loans of $304,548,000 and
$377,369,000, respectively. At December 31, 1993 and 1992, the fair
value of the Company's commitments to extend credit and letters of
credit approximates their carrying value. The assumptions inherent in
these fair value estimates are in Note 1 to the consolidated financial
statements.
GUARDIAN BANCORP 41
................................................................................
The following is a summary of the activity within the allowance for loan
losses for the years ended December 31, 1993, 1992 and 1991 (in
thousands):
1993 1992 1991
- --------------------------------------------------------------------------------
Balance at beginning of year $ 13,466 9,135 3,473
Provision charged to operations 18,250 9,395 5,946
Loans charged off (13,569) (5,115) (288)
Recoveries 53 51 4
- --------------------------------------------------------------------------------
Net charge-offs (13,516) (5,064) (284)
- --------------------------------------------------------------------------------
Balance at end of year $ 18,200 13,466 9,135
- --------------------------------------------------------------------------------
(5) PREMISES AND EQUIPMENT, NET
The following is a summary of the major components of premises and
equipment at December 31, 1993 and 1992 (in thousands):
1993 1992
- ------------------------------------------------------------------------------------
Furniture and equipment $ 4,386 4,285
Leasehold improvements 1,666 1,624
- ------------------------------------------------------------------------------------
Total premises and equipment 6,052 5,909
Less accumulated depreciation and amortization (4,244) (3,537)
- ------------------------------------------------------------------------------------
Premises and equipment, net $ 1,808 2,372
- ------------------------------------------------------------------------------------
Depreciation and amortization expense on premises and equipment
approximated $854,000, $909,000, and $813,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
(6) OTHER REAL ESTATE OWNED, NET
Activity in other real estate owned during the year ended December 31,
1993 and 1992 follows (in thousands):
1993 1992
- ------------------------------------------------------------------------------------
Balance at beginning of year $ 4,359 2,945
Additions 24,209 6,071
Sales (13,905) (4,617)
Valuation adjustments (714) (40)
- ------------------------------------------------------------------------------------
Balance at end of year $ 13,949 4,359
- ------------------------------------------------------------------------------------
Consistent with regulatory reporting requirements and with changing
trends evolving in financial reporting practices, in the fourth quarter
of 1993 the Company reclassified $1,269,000 of in-substance foreclosed
property to loans as it did not have physical possession of the
underlying collateral. To be consistent with the 1993 presentation,
in-substance foreclosed property of $11,817,000 has been reclassified to
loans in 1992, where the Company did not have physical possession of the
underlying collateral.
Components of other real estate owned expense included in the
accompanying consolidated statement of operations for the years ended
December 31, 1993, 1992 and 1991 were as follows (in thousands):
1993 1992 1991
- --------------------------------------------------------------------------------------------------------
Gain upon sale $ (123) -- --
Loss upon sale 389 173 --
Direct holding costs 1,977 454 41
Valuation adjustments 714 40 --
- --------------------------------------------------------------------------------------------------------
$ 2,957 667 41
- --------------------------------------------------------------------------------------------------------
42 GUARDIAN BANCORP
................................................................................
(7) DEPOSITS
The following summarizes deposits outstanding at December 31, 1993 and
1992 (in thousands):
1993 1992
- --------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 322,900 414,163
Savings and interest-bearing demand 53,285 48,374
Money market 47,603 53,170
Certificates of deposit under $100,000 79,644 55,768
Certificates of deposit of $100,000 and over 22,242 28,428
- --------------------------------------------------------------------------------------------------------
Total deposits $ 525,674 599,903
- --------------------------------------------------------------------------------------------------------
Interest expense related to deposits for the years ended December 31,
1993, 1992 and 1991 amounted to the following (in thousands):
1993 1992 1991
- -------------------------------------------------------------------------------------------------------
Money market, savings and interest-bearing demand deposits $ 2,547 3,415 4,451
Time certificates of deposit under $100,000 3,451 2,028 2,667
Time certificates of deposit of $100,000 and over 1,110 3,111 6,777
- -------------------------------------------------------------------------------------------------------
Total interest expense on deposits $ 7,108 8,554 13,895
- -------------------------------------------------------------------------------------------------------
The Company has attracted a substantial portion of its deposit base from
large balance depositors by offering a high level of customer services.
A significant amount of such deposits are from Southern California based
title insurance companies and escrow companies. While these deposits are
noninterest-bearing, they are not cost free funds. As shown in the
accompanying consolidated statement of operations, the Company incurs
customer service expenses in the form of payments to third parties to
provide accounting, data processing, courier and other permissible
banking related services for certain of these customers. At December 31,
1993 and 1992, such arrangements were applicable to approximately
$287,300,000 and $374,100,000 of noninterest-bearing demand deposits,
respectively. During 1993 and 1992, the average balance of such accounts
were $277,600,000 and $334,300,000, respectively.
At December 31, 1993 and 1992, the estimated fair value of the Company's
deposits was determined to be $525,740,000 and $600,341,000,
respectively. The estimate of fair value does not include any amount
that relates to core deposit intangible, since such intangibles are not
defined as financial instruments under SFAS 107. The assumptions
inherent in these fair value estimates are in Note 1 to the consolidated
financial statements.
(8) SUBORDINATED DEBENTURES
On December 22, 1988, the Company issued $3,000,000 of 11 3/4%
subordinated debentures that mature in December, 1995. In connection
with the issuance of the debentures, the Company issued a nondetachable
warrant that expires in 1995 to purchase 56,250 shares of the Company's
common stock at $9.60 per share. Interest on the debentures is payable
quarterly. The debentures have certain covenants, such as restrictions
on the incurrence of certain debt and mergers, requirement of the
maintenance of not less than $14 million in tangible net worth and
restrictions on the payment of cash dividends. In the opinion of
management, none of these restrictions effectively limit the operations
of the Company and the Company was in compliance with the covenants at
December 31, 1993.
At December 31, 1993 and 1992, the estimated fair value of the Company's
subordinated debentures was determined to be $3,090,000 and $3,129,000,
respectively and the assumptions inherent to this estimate are in Note 1
to the consolidated financial statements.
GUARDIAN BANCORP 43
................................................................................
(9) OTHER BORROWED MONEY
The Company's principal source of funds has been and continues to be
deposits. However, on occasion, the Company will borrow funds to augment
its funding needs in forms which may include federal funds purchased,
securities sold under repurchase agreements and other short-term
borrowings. At December 31, 1993, other borrowed money of $15,000,000
consisted of unsecured overnight borrowings under the Company's federal
funds line which was settled shortly after year end. At December 31,
1993, loans outstanding in the amount of approximately $52 million were
pledged to secure future advances with the Federal Reserve Bank as
collateral. At December 31, 1992, other borrowed money of $10,000,000
consisted of overnight borrowings from the Federal Reserve Bank, were
secured by U.S. Treasury securities with a carrying value of $10,000,000
and were settled shortly after year end.
(10) INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1993, 1992 and 1991 includes the following (in thousands):
1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
Current tax expense (benefit):
Federal $ (4,614) 454 3,490
State -- -- 1,345
Tax benefit of stock options exercised -- (159) --
- ---------------------------------------------------------------------------------------------------------
Total (4,614) 295 4,835
- ---------------------------------------------------------------------------------------------------------
Deferred tax benefit:
Federal (2,188) (1,405) (1,763)
State (518) (524) (665)
- ---------------------------------------------------------------------------------------------------------
Total (2,706) (1,929) (2,428)
- ---------------------------------------------------------------------------------------------------------
Change in valuation allowance 2,774 1,366 493
Tax benefit of stock options -- 159 --
- ---------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (4,546) (109) 2,900
- ---------------------------------------------------------------------------------------------------------
The income tax provision (benefit) reflected an effective rate of
(23.9)%, (4.5)% and 47.4% for the years ended December 31, 1993, 1992
and 1991 on the earnings (loss) before income taxes, respectively. The
income tax provision (benefit) differed from the amounts computed by
applying the statutory Federal income tax rate of 34% for 1993, 1992 and
1991 to the earnings (loss) before income taxes for the following
reasons (in thousands):
1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
Tax expense (benefit) at statutory Federal income tax rate $ (6,461) (825) 2,080
California franchise tax, net of Federal benefit (518) (524) 449
State and municipal securities interest (63) (104) (137)
Valuation allowance for deferred tax assets 2,774 1,366 493
Other, net (278) (22) 15
- ---------------------------------------------------------------------------------------------------------
$ (4,546) (109) 2,900
- ---------------------------------------------------------------------------------------------------------
44 GUARDIAN BANCORP
................................................................................
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1992 and 1991 are presented below (in thousands):
1993 1992
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Provision for loan losses $ 8,041 5,876
Cash basis tax reporting method 269 73
Depreciation 136 95
Other, net 78 1
- -------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 8,524 6,045
Valuation allowance (4,854) (2,080)
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 3,670 3,965
- -------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan fees (96) (200)
Capitalized sign rights -- (13)
California franchise tax -- (110)
- -------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (96) (323)
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 3,574 3,642
- -------------------------------------------------------------------------------------------------------------
The Company had sufficient tax carryback availability at December 31,
1993 and 1992 to realize the entire net deferred tax asset. At December
31, 1993, the Company had a net operating loss carryforward for state
income tax purposes of $1,490,000, of which one-half, or $745,000, is
available to offset any future state taxable income through 1998.
Included in accrued interest receivable and other assets in the
accompanying consolidated balance sheet at December 31, 1993 and 1992
was approximately $4,841,000 and $1,147,000, respectively, of income
taxes currently receivable.
During 1992, 93,309 unqualified stock options granted under the 1984
Stock Incentive Plan were exercised. If such shares acquired through the
exercise of such options are subsequently sold within prescribed time
periods, applicable tax regulation permits the Company to reduce its
current tax liability to the extent of the tax effect on the difference
between the exercise price of the shares acquired and the selling price
of the shares sold. During 1992, the effect of these transactions was a
decrease to income taxes payable and an increase to shareholders' equity
of $159,000.
(11) STOCK OPTIONS AND COMMON STOCK
The Company has adopted two stock option plans, the 1984 Stock Incentive
Plan and the 1990 Stock Incentive Plan, under which nonemployee
directors, officers and other key employees of the Company have and may
be granted nonqualified or incentive stock options. The Company
authorized the issuance of up to 1,189,000 shares of common stock under
both plans. Option prices under both plans may not be less than the fair
market value at the date of the grant and all options granted expire not
more than ten years after the grant date, except that options
exercisable in installments become fully exercisable upon a change of
control of the Company, as defined. The following summarizes stock
option activity for the years ended December 31, 1993 and 1992 (in
thousands):
1993 1992
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 881 989
Options granted 136 5
Options cancelled and exercised (305) (113)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 712 881
- -------------------------------------------------------------------------------------------------------------------
At December 31, 1993, there were approximately 547,000 options
exercisable at option prices ranging from $3.42 to $19.20 per share;
those options not exercisable had option prices ranging from $2.875 to
$19.20. Approximately 81,000 options were exercised during 1993 at
prices ranging from $3.42 to $3.93.
GUARDIAN BANCORP 45
................................................................................
The 1987 Stock Appreciation Rights Plan (SAR Plan) and awards thereunder
expired in 1992. Reversals of previous expense accruals for benefits
payable under the SAR Plan reduced compensation expense in 1991 by
approximately $171,000. Cash payments made under exercise of outstanding
rights in 1991 were approximately $22,000.
(12) EMPLOYEE STOCK OWNERSHIP PLAN
In July 1988, the Board of Directors adopted the Guardian Bancorp
Employee Stock Ownership Plan (the Plan), which constitutes a qualified
plan under Section 401(a) of the Internal Revenue Code (IRC). The Plan
also contains a cash-or-deferred arrangement under Section 401(k) of the
IRC. The Plan is a defined contribution plan that is available to
substantially all employees. Employee contributions are voluntary, as
the employee elects to defer from 1% to 6% of compensation, exclusive of
overtime, bonuses or other special payment (qualifying compensation).
The Company makes a matching contribution to the Plan equal to 50% of
the amount that eligible participants have contributed to the Plan,
other than executive officers for whom no matching contributions are
made. In addition, the Company may contribute an additional amount to
the Plan each year based on the performance of the Company. The decision
to make the additional contribution and the amount of such contribution
is at the discretion of the Board of Directors. For the years ended
December 31, 1993, 1992 and 1991, the Plan's administrative expenses,
which were paid by the Bank, approximated $12,000, $17,000 and $13,000,
respectively; and the Company contributed approximately $24,000, $66,000
and $96,000, respectively, to the Plan.
Activity in the number of shares of the Company's common stock held by
the Plan for the years ended December 31, 1993 and 1992 follows (in
thousands):
1993 1992
- -------------------------------------------------------------------------------------------------------------------
Shares held at beginning of year 109 85
Shares acquired 18 24
Shares distributed to Plan participants (3) --
- -------------------------------------------------------------------------------------------------------------------
Shares held at end of year 124 109
- -------------------------------------------------------------------------------------------------------------------
(13) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding
commitments and contingencies, such as financial instruments with
off-balance sheet risk, which are not reflected in the accompanying
consolidated financial statements. These financial instruments primarily
consist of commitments to extend credit and standby letters of credit
issued to meet the financing needs of the Company's customers.
Management does not anticipate any material losses as a result of these
transactions.
Commitments to extend credit, standby letters of credit and other
letters of credit only represent exposure to off-balance sheet risk in
the event the contract is drawn upon and the other party to the contract
defaults. The actual credit risk of these transactions depends upon the
creditworthiness of the customer and on the value of any related
collateral. The Company uses the same credit policies in making
commitments and conditional obligations as its does for on-balance sheet
instruments.
The Company has total unfunded loan commitments of approximately
$46,181,000 at December 31, 1993. 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 certain of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company minimizes its exposure
to loss under these commitments by requiring that customers meet certain
conditions prior to disbursing funds. The amount of collateral obtained,
if any, is based on a credit evaluation of the borrower and may include
accounts receivable, inventory, property, plant and equipment, and real
property.
Standby letters of credit amounting to $2,989,000 were outstanding at
December 31, 1993. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support 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. Where appropriate, cash or other security
support is held as collateral.
46 GUARDIAN BANCORP
................................................................................
In the ordinary course of business, the Company becomes involved in
litigation. In the opinion of management, based upon opinions of legal
counsel, the disposition of suits pending against the Company would not
have any material adverse effect on its results of operations or
financial position.
The Company leases its premises and certain equipment under several
noncancelable operating leases that expire on various dates through
March 31, 2003. The building lease commitments are subject to
cost-of-living adjustments to reflect future changes in the consumer
price index. Rent expense of its premises of approximately $921,000,
$1,551,000 and $1,430,000 is included in occupancy expense in the
accompanying 1993, 1992 and 1991 consolidated statement of operations,
respectively.
At December 31, 1993, minimum rental commitments for the noncancelable
lease terms are as follows (in thousands):
COMMITMENTS
- ---------------------------------------------------------------------------------------------------------------
1994 $ 725
1995 777
1996 810
1997 765
1998 719
Thereafter 2,746
- ---------------------------------------------------------------------------------------------------------------
Total $6,542
- ---------------------------------------------------------------------------------------------------------------
(14) TRANSACTIONS INVOLVING OFF ICERS AND DIRECTORS
As part of its normal banking activities, the Company has provided
credit facilities to certain officers, directors, and the entities with
which they are associated. In the opinion of management, such credit
extensions are on terms similar to transactions with nonaffiliated
parties and involve only normal credit risk. The following table
summarizes such lending activity in 1993 and 1992 (in thousands):
1993 1992
- ---------------------------------------------------------------------------------------------------------------
Aggregate loan balance at beginning of year $ 6,635 10,662
Additions 242 689
Repayments (702) (2,149)
Other (2,795) (2,567)
- ---------------------------------------------------------------------------------------------------------------
Aggregate loan balance at end of year $ 3,380 6,635
- ---------------------------------------------------------------------------------------------------------------
At December 31, 1993, there were no commitments to lend additional
amounts to the aforementioned parties, however, the Company had issued
$326,000 of stand-by letters of credit on behalf of one director.
Interest and fee income earned on the foregoing transactions was
$556,000, $765,000, and $1,247,000 for the years ended December 31,
1993, 1992 and 1991, respectively. Included in other are loans with
officers, directors and the entities with which they are associated
which, due to resignation, are no longer deemed affiliated parties. At
December 31, 1993, $278,000 of the aforementioned loans were on
nonaccrual and $2,570,000 of such loans were current as to interest but
were past due 90 days or more as to principal.
The Company has engaged a law firm with which a director is affiliated
to address certain of its corporate, credit documentation and
collection, on-going litigation and other matters. Management believes
that such services are rendered at market terms consistent within the
industry. During the years ended December 31, 1993, 1992 and 1991
related legal fees were $379,000, $357,000 and $115,000, respectively.
(15) AVAILABILITY OF FUNDS FROM BANK, RESTRICTIONS ON CASH BALANCES AND
OTHER REGULATORY MATTERS
The Bank is required to maintain certain minimum reserve balances on
deposit with the Federal Reserve Bank. Cash balances maintained to meet
reserve requirements are not available for use by the Bank. During 1993,
the Bank was required to maintain average reserves of approximately
$27,745,000.
GUARDIAN BANCORP 47
................................................................................
The source of substantially all the revenues of Guardian Bancorp, on an
unconsolidated basis, including funds available for the payment of
dividends, is, and is expected to continue to be, dividends paid by the
Bank. Under state banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the California
Superintendent of Banks, exceed its net income, as defined, for that
year combined with its retained earnings for the preceding two years.
Guardian Bancorp has agreed not to incur additional debt or pay any
dividends, and the Bank cannot pay or declare dividends to Guardian
Bancorp without prior regulatory approval. State banking law also
restricts the Bank from extending credit to Guardian Bancorp in excess
of 10% of the capital stock and surplus, as defined, of the Bank or
approximately $1.9 million at December 31, 1993.
At December 31, 1993, Guardian Bancorp, on an unconsolidated parent
company only basis, had cash and cash equivalents available of
approximately $402,000. On January 28, 1994, Guardian Bancorp
consummated the Offering by raising gross proceeds of approximately
$19,700,000. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. Guardian Bancorp contributed
$16,500,000 of the net proceeds to the Bank, subsequently reimbursed the
Bank approximately $229,000 for costs it incurred and retained
approximately $1.2 million for its own general corporate purposes. In
addition, on September 30, 1993, Guardian Bancorp exercised its right to
convert the entire $3.0 million principal amount of Bank Convertible
Debentures into common stock of the Bank, thereby converting this
security into Tier 1 capital and eliminating the Bank as a liquidity
source through interest payments.
On December 22, 1988, Guardian Bancorp issued to an unaffiliated
purchaser $3.0 million in aggregate principal amount of 11 3/4%
Subordinated Debentures that mature on December 30, 1995. Interest on
the Bancorp Debentures accrues and is payable quarterly, and the
principal is due on maturity. Guardian Bancorp is not currently in
default with respect to any of the interest payments due on the Bancorp
Debentures, and management believes that Guardian Bancorp currently has
sufficient liquid assets to make such payments through to maturity.
However, absent a restructuring of the Bancorp Debentures or the receipt
of additional funds from Bank dividends, the issuance of debt or equity
or otherwise, Guardian Bancorp will not have sufficient liquid assets to
pay the $3.0 million principal amount of such securities that will
become due on the stated maturity date. Guardian Bancorp's ability to
receive additional funds through Bank dividends or the issuance of debt
at the holding company level is limited by regulatory and statutory
restrictions.
In October 1992, each of the Company and the Bank entered into a written
agreement with the Federal Reserve Bank of San Francisco ("FRB"). Among
other things, the agreements require the Company and the Bank to a)
maintain an allowance for loan losses that is equal to or greater than
1.7% of the Bank's outstanding loans, b) develop formalized strategic,
operating and capital plans, including a plan to maintain adequate
capital, c) develop a plan and take steps to monitor and decrease its
level of nonperforming or otherwise classified assets, d) establish
policies designed to monitor the type, growth and amounts of credit
concentration, e) refrain from incurring any debt at the Company level
without prior FRB approval, other than in the ordinary course of
business, f) develop or update, as necessary, various operating policies
and procedures, and g) refrain from declaring or paying any cash
dividends without prior FRB approval. Both before and after entering
these agreements, management of the Company and the Bank have taken
various steps, including the Company's successful capital raising effort
which closed in early 1994, that are designed to facilitate compliance
with the terms thereof. However, compliance with the terms of the
agreements will be determined by the FRB during subsequent examinations
of the Company and the Bank.
48 GUARDIAN BANCORP
................................................................................
(16) PARENT COMPANY INFORMATION (CONDENSED)
The balance sheet of Guardian Bancorp (parent company only) as of
December 31, 1993 and 1992 and the related statements of operations and
cash flows for the years ended December 31, 1993, 1992 and 1991 follow
(in thousands):
BALANCE SHEET
ASSETS 1993 1992
- ------------------------------------------------------------------------------------------------------------
Interest-bearing deposit with Guardian Bank $ 402 68
Short-term investments (market value of $600,000) -- 600
Investment in Guardian Bank 23,839 34,612
Receivable from Guardian Bank -- 3,000
Accrued interest receivable and other assets 298 198
- ------------------------------------------------------------------------------------------------------------
$ 24,539 38,478
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Accrued interest payable and other liabilities $ 238 --
Subordinated debentures 3,000 3,000
- ------------------------------------------------------------------------------------------------------------
3,238 3,000
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock; without par value; Authorized 10,000,000 shares; none issued -- --
Common stock; without par value; Authorized 29,296,875 shares, issued and
outstanding 3,740,000 and 3,659,000 in 1993 and 1992, respectively. 15,836 15,556
Retained earnings 5,465 19,922
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 21,301 35,478
- ------------------------------------------------------------------------------------------------------------
$ 24,539 38,478
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
1993 1992 1991
- ------------------------------------------------------------------------------------------------------
Interest income $ 287 369 467
Other income 12 95 106
- ------------------------------------------------------------------------------------------------------
Total income 299 464 573
- ------------------------------------------------------------------------------------------------------
Interest expense 352 352 352
Other expense 31 27 304
- ------------------------------------------------------------------------------------------------------
Total expense 383 379 656
- ------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (benefit) and equity in
undistributed net earnings (loss) of Guardian Bank (84) 85 (83)
Provision (benefit) for income taxes -- 35 (28)
- ------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in undistributed net earnings (loss)
of Guardian Bank (84) 50 (55)
Equity in undistributed net earnings (loss) of Guardian Bank (14,373) (2,368) 3,272
- ------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (14,457) (2,318) 3,217
- ------------------------------------------------------------------------------------------------------
GUARDIAN BANCORP 49
................................................................................
STATEMENT OF CASH FLOWS
1993 1992 1991
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (14,457) (2,318) 3,217
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Equity in undistributed net (earnings) loss of Guardian Bank 14,373 2,368 (3,272)
Net decrease (increase) in accrued interest receivable and
other assets (100) (143) 1,403
Net increase (decrease) in accrued interest payable and other
liabilities 238 (731) 731
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 54 (824) 2,079
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiary (600) -- (2,431)
Principal collected on loan participations purchased -- 306 66
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (600) 306 (2,365)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 280 504 167
Retirement of common stock -- -- (940)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 280 504 (773)
- ------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (266) (14) (1,059)
Cash and cash equivalents at beginning of year 668 682 1,741
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 402 668 682
- ------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Conversion to equity capital of receivable from Guardian Bank $ 3,000 -- --
Interest paid 352 352 352
Income taxes (received) paid (97) 846 350
50 GUARDIAN BANCORP
................................................................................
(17) QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited quarterly operating results for the years ended
December 31, 1993 and 1992 follows (in thousands, except per share
data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------
1993:
INTEREST INCOME $ 8,144 8,792 8,124 7,709
NET INTEREST INCOME 6,127 6,786 6,305 6,046
PROVISION FOR LOAN LOSSES 5,000 3,750 4,500 5,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,127 3,036 1,805 1,046
LOSS BEFORE INCOME TAXES (5,485) (2,838) (4,905) (5,775)
NET LOSS (4,079) (2,247) (3,903) (4,228)
NET LOSS PER COMMON SHARE (1.11) (.61 ) (1.04 ) (1.13 )
- ---------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------
1992:
Interest income $ 11,035 10,801 10,262 9,197
Net interest income 8,343 8,556 8,072 7,314
Provision for loan losses 995 150 1,750 6,500
Net interest income after provision for loan losses 7,348 8,406 6,322 814
Earnings (loss) before income taxes 1,047 1,799 372 (5,645)
Net earnings (loss) 609 1,042 215 (4,184)
Net earnings (loss) per common share .15 .26 .05 (1.14 )
- ---------------------------------------------------------------------------------------------------------------
The Company recorded larger provisions for loan losses in the latter
half of 1992 than were recorded in the first half of the year. There
were several reasons for this occurrence. In general, the information
analyzed by the Company in the second half in connection with its
quarterly review of loans and the allowance for loan loss adequacy
disclosed declines in the value of collateral for real estate related
loans, particularly in the non-residential sectors. This was further
supported by the most recent appraisal data received during the latter
part of the year. In addition, the valuation of loans in the process of
foreclosure and in-substance foreclosed was adjusted to reflect recent
market data and changes in the Company's strategies for ultimate
disposition of the collateral which impacted charge-offs in the second
half of the year. These trends continued in the fourth quarter along
with other events occurring which included unexpected deeds-in-lieu of
foreclosure received by the Company, declared bankruptcies by borrowers
and the continuing deterioration in most real estate sectors in Southern
California. Finally, management's perspective on the general economic
conditions in the Company's marketplace were based upon the then most
recent economic reports which indicate that the current environment
would persist throughout and perhaps beyond 1993.
(18) NORTHRIDGE EARTHQUAKE
On January 17, 1994, a large earthquake struck the Southern California
area. The earthquake and related aftershocks caused significant damage
to certain areas of Los Angeles and Ventura Counties. While the full
extent of damage in this area is not yet known, management's preliminary
assessment of damage to collateral securing loans indicates that there
should be no material impact on the Company's consolidated financial
position or results of operations.
GUARDIAN BANCORP 51
................................................................................
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
GUARDIAN BANCORP:
We have audited the accompanying consolidated balance sheet of Guardian
Bancorp and subsidiary (the Company) as of December 31, 1993 and 1992
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Guardian Bancorp and subsidiary as of December 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1993 in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 10 to the consolidated financial statements,
the Company changed its method of accounting for income taxes in 1993 to
adopt the provisions of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes".
______/s/_KPMG Peat Marwick______
KPMG Peat Marwick
Los Angeles, California
February 15, 1994
52 GUARDIAN BANCORP
................................................................................
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Company's common stock is listed on the American Stock Exchange
under the symbol "GB". The following table sets forth, on a per share
basis for the periods indicated, the high and low closing sales prices
for the common stock as reported by the American Stock Exchange.
HIGH LOW
- ---------------------------------------------------------------------
1992:
First Quarter $ 9 7/8 6 3/4
Second Quarter 8 1/4 6 5/8
Third Quarter 7 7/8 5 1/2
Fourth Quarter 7 1/8 5
1993:
First Quarter $ 7 1/8 5 1/2
Second Quarter 5 3/4 3 7/8
Third Quarter 5 3/8 2 3/4
Fourth Quarter 3 3/16 2 1/8
1994:
FIRST QUARTER (THROUGH MARCH 15, 1994) $ 2 1/16 $ 1 11/16
- ---------------------------------------------------------------------
On December 31, 1993, the Company had approximately 463 shareholders of
record of its common stock which does not include beneficial owners
whose shares are held by brokers, banks and other nominees.
The Company has never paid a cash or stock dividend on its common stock
and does not intend to pay any cash dividends until such time as
internally generated profits are not needed to support growth or enhance
shareholders' equity of the Company. At present, the source of
substantially all of Guardian Bancorp's revenues, including funds
available for the payment of dividends, is, and is expected to continue
to be, dividends paid by the Bank. The Bank's ability to pay dividends
to Guardian Bancorp is subject to statutory and regulatory restrictions.
In addition, the Company's ability to pay cash dividends is limited by
the terms of the Subordinated Debenture Purchase Agreement pursuant to
which the Company's 11 3/4% Subordinated Debentures were issued and the
terms of its written agreement with the Federal Reserve Bank of San
Francisco. See "Capital Resources" and Notes 8 and 15 to the Company's
Consolidated Financial Statements filed within.