SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1994 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------------- ------------------
Commission file number
----------------------------------------------------
GUARDIAN BANCORP
- - ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3686137
- - -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 South Figueroa Street, Los Angeles, California 90017
- - ---------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (213) 239-0800
------------------------
N/A
- - ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of May 10, 1994, there were issued and outstanding 12,514,075 shares of the
issuer's Common Stock.
This report contains 29 pages.
The exhibit index is on page 28.
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Item 1. Financial Statements.
(Dollars in thousands) March 31, December 31,
1994 1993
--------- -----------
Cash and due from banks $ 65,726 $ 23,155
Interest-bearing deposits with
financial institutions 1,595 1,990
Federal funds sold 20,000 -
Investment securities (market value of
$35,020 at March 31, 1994 and
$29,221 at December 31, 1993):
U.S. Treasury 30,517 24,279
State and municipal 4,333 4,336
Federal Reserve Bank stock 464 464
--------- ---------
Total investment securities 35,314 29,079
--------- ---------
Short-term investments (Market value of
$81,758 at March 31, 1994 and
$179,948 at December 31, 1993): 81,758 179,948
Loans:
Real estate 157,471 147,039
Construction 69,679 87,829
Commercial 70,355 86,260
Installment 1,819 2,046
Deferred loan fees (518) (426)
--------- ---------
Loans, net of deferred loan fees 298,806 322,748
Less allowance for loan losses (20,505) (18,200)
--------- ---------
Net loans 278,301 304,548
--------- ---------
Premises and equipment, net 1,694 1,808
Deferred income taxes 3,574 3,574
Other real estate owned 15,477 13,949
Accrued interest receivable
and other assets 9,078 9,495
--------- ---------
$512,517 $567,546
--------- ---------
--------- ---------
Deposits:
Noninterest-bearing demand $301,343 $322,900
Savings and interest-bearing demand 46,761 53,285
Money market 42,151 47,603
Time certificates of deposit 83,852 101,886
--------- ---------
Total deposits 474,107 525,674
11-3/4% subordinated debentures 3,000 3,000
Other borrowed money - 15,000
Accrued interest payable and other
liabilities 2,394 2,571
--------- ---------
Total liabilities 479,501 546,245
--------- ---------
Shareholders' equity:
Common stock, without par value.
Authorized 29,296,875 shares;
issued and outstanding
12,714,075 and 3,740,000
shares in 1994 and 1993,
respectively. 33,734 15,836
Retained earnings (deficit) (718) 5,465
--------- ---------
33,016 21,301
--------- ---------
$512,517 $567,546
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
-2-
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, Three Months
except per share data) Ended March 31,
----------------------
1994 1993
------- -------
Interest income:
Loans $5,569 $7,069
Deposits with financial institutions 16 7
Investment securities 357 436
Short-term investments 79 241
Federal funds sold 392 391
------- -------
6,413 8,144
------- -------
Interest expense:
Deposits 1,439 1,891
Borrowed funds 141 126
------- -------
1,580 2,017
------- -------
Net interest income 4,833 6,127
Provision for loan losses 4,000 5,000
------- -------
Net interest income after
provision for loan losses 833 1,127
------- -------
Noninterest income 363 313
Noninterest expense:
Salaries and employee benefits 2,257 2,070
Occupancy 319 472
Furniture and equipment 188 215
Customer service 1,058 1,334
Data processing 145 125
Other real estate owned 1,567 661
Other 1,845 2,048
------- -------
Total noninterest expense 7,379 6,925
------- -------
Loss before income taxes (6,183) (5,485)
Income tax benefit - (1,406)
------- -------
Net loss $ (6,183) $(4,079)
------- -------
------- -------
Net loss per share $ (0.64) $ (1.11)
------- -------
------- -------
See accompanying notes to consolidated financial statements.
-3-
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) Three Months
Ended March 31,
---------------------
1994 1993
-------- --------
Cash flows from operating activities:
Net loss $ (6,183) $ (4,079)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Provision for loan losses 4,000 5,000
Depreciation and amortization 211 210
Amortization of net deferred
loan fees (257) (165)
Amortization of net premium
on securities 97 40
Amortization of discount on
short-term investments (64) (125)
Loss on sale of
short-term investments - 10
Net loss on sale of other
real estate owned 15 5
Other real estate owned
valuation adjustments 900 336
Gain on sale of premises
and equipment (27) -
Net change in accrued interest
receivable and other assets 417 (2,068)
Net change in accrued interest
payable and other liabilities (177) 1,603
------- --------
Net cash provided by (used in)
operations (1,068) 767
------- --------
Cash flows from investing activities:
Proceeds from maturities of investment
securities 2,000 3,000
Purchases of investment securities (8,332) (4,313)
Proceeds from short-term investments
transactions:
Sales - 100,526
Maturities 195,000 20,000
Purchases of short-term investments (96,746) (160,439)
Net change in loans 17,546 17,666
Proceeds from sale of other
real estate owned 2,515 763
Purchases of premises and equipment (97) (47)
Proceeds from the sale of premises
and equipment 27 -
------- --------
Net cash provided by (used in)
investing activities 111,913 (22,844)
------- --------
Cash flows from financing activities:
Net change in deposits (51,567) 111,903
Change in other borrowed money (15,000) (10,000)
Net proceeds from issuance of
common stock 17,898 48
------- --------
Net cash provided by (used in)
financing activities (48,669) 101,951
------- --------
Net increase in cash
and cash equivalents 62,176 79,874
Cash and cash equivalents at beginning
of period 25,145 109,853
------- --------
Cash and cash equivalents at end
of period $ 87,321 $189,727
------- --------
------- --------
Supplemental disclosures:
Interest paid $ 1,554 $ 1,849
Taxes paid - -
Significant non-cash transactions:
Transfer of loans into
other real estate owned $ 4,958 5,980
Loans made to facilitate sale of
real estate owned 1,270 -
See accompanying notes to consolidated financial statements.
-4-
GUARDIAN BANCORP
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements include the accounts
of Guardian Bancorp and its wholly-owned subsidiary, Guardian Bank
(the "Bank"), together referred to as the "Company". All significant
intercompany transactions and balances have been eliminated. The
accounting and reporting policies of the Company conform with
generally accepted accounting principles and general practices within
the banking industry.
The consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not
include all footnotes normally required for complete financial
statement disclosure. While management believes that the disclosures
presented are sufficient to make the information not misleading,
reference may be made to the consolidated financial statements and
the notes thereto included at "Item 8. Financial Statements" of the
Company's Annual Report on Form 10-K for the year ended December 31,
1993.
The accompanying consolidated balance sheet, statements of operations
and cash flows reflect, in the opinion of management, all material
adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the Company's financial position as of
March 31, 1994 and December 31, 1993 and results of operations and
cash flows for the three months ended March 31, 1994 and 1993. The
results of operations for the three months ended March 31, 1994 are
not necessarily indicative of the results of operations for the full
year ending December 31, 1994.
NOTE 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 $17,898,000. 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 $299,000 for costs it incurred in
the capital raising effort. Guardian Bancorp retained the remaining
net proceeds for its own general corporate purposes.
-5-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 3 PER SHARE DATA
Net earnings per share is computed using the weighted average number
of common shares and common share equivalents outstanding during the
period. Stock options and warrants are considered to be common stock
equivalents except when their effect is antidilutive. The weighted
average number of shares of common stock outstanding for the three
months ended March 31, 1994 and 1993 of 9,589,000 and 3,665,000,
respectively, was used to compute loss per share for the quarter then
ended.
NOTE 4 AVAILABILITY OF FUNDS FROM BANK AND RESTRICTIONS ON CASH BALANCES
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 the first quarter of 1994, the Bank was required to maintain
average reserves of approximately $19.9 million.
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 $2.3 million at March 31, 1994.
At March 31, 1994, Guardian Bancorp, on an unconsolidated parent
company only basis, had cash and cash equivalents available of
approximately $1.8 million. On January 28, 1994, Guardian Bancorp
consummated the Offering by raising gross proceeds of approximately
$17,898,000. 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.
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
-6-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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.
NOTE 5 STATEMENTS OF CASH FLOWS
For the purpose of the accompanying consolidated statements of cash
flows, the Company considers cash and due from banks,
interest-bearing deposits with financial institutions and federal
funds sold having maturities at the date of purchase of three months
or less to be cash equivalents.
NOTE 6 INVESTMENT AND SHORT-TERM SECURITIES
The following table shows the carrying value, gross unrealized gains
and losses and estimated market values of investment securities at
March 31, 1994 (Dollars in thousands):
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury
securities $30,517 $ 32 $(353) $30,196
State and
municipal
securities 4,333 28 (1) 4,360
Federal Reserve
Bank stock 464 - - 464
--------- ---------- ---------- ---------
$35,314 $ 60 $(354) $35,020
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
-7-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
The following table shows the carrying value and estimated market
value of investment securities by contractual maturity at March 31,
1994. 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 35%
(Dollars in thousands):
Weighted
Carrying Average Market
Value Yield Value
--------- --------- -------
U.S. Treasury securities:
Within one year $13,896 4.4% $13,863
After one year but
within five years 16,621 4.6 16,333
------- ----- -------
30,517 4.5 30,196
------- ----- -------
State and municipal
securities:
Within one year 3,735 5.1 3,745
After one year but
within five years 598 11.5 615
------- ----- -------
4,333 5.0 4,360
------- ----- -------
Corporate securities:
Federal Reserve Bank
stock 464 6.0 464
------- ----- -------
$35,314 4.7% $35,020
------- ----- -------
------- ----- -------
U.S. Treasury and Government agency securities carried at
approximately $1,306,000 million at March 31, 1994 were pledged to
secure public deposits or for other purposes as required or
permitted by law.
The following table shows historical cost, gross unrealized gains
and losses and estimated market values of short-term investments at
March 31, 1994 (Dollars in thousands):
Gross Gross
Historical Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
U.S. Treasury
securities $81,758 - - $81,758
------- ----- ------- -------
------- ---- - ------- -------
The Company adopted Financial Accounting Standards Board Statement
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (FASB 115) as of January 1, 1994. The impact of the
adoption of FASB 115 was that any unrealized holding gains or losses
on short-term securities are excluded from income and reported, net
of related tax effect, in a separate component of
-8-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
shareholders' equity. At March 31, 1994, there was no unrealized
holding gain or loss.
NOTE 7 COMMITMENTS
At March 31, 1994, the Company had total unfunded loan commitments
of approximately $53.7 million and standby letters of credit
amounting to approximately $2.3 million.
[This space intentionally left blank]
-9-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This section presents management's discussion and analysis of the consolidated
financial condition and operating results of Guardian Bancorp and its
subsidiary, Guardian Bank (the "Bank", together the "Company") for the three
months ended March 31, 1994 and updates the discussion provided at "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 (the "1993 Form 10-K"). The discussion should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes to the consolidated financial statements appearing in this
report (see "Item 1. Financial Statements") and in the 1993 Form 10-K.
Averages presented in this section are daily average balances.
OVERVIEW
The Company recorded a net loss of approximately $6.2 million for the three
months ended March 31, 1994 compared to a net loss of $4.1 million for the
comparable period in 1993. The net loss recorded in the first quarter of 1994
was attributable to the Company's provision for loan losses which increased the
related allowance for loan losses, a decline in net interest income and an
increase in noninterest expense, primarily costs associated with holding other
real estate owned. Additionally, as the Company had a first quarter operating
loss, it did not have the ability to utilize its available net operating loss
carryforward.
The provision for loan losses during the three months ended March 31, 1994
reflects management's current assessment of continuing depressed economic
conditions, the actual and the potential impact those conditions have had and
may have on the Company's loan portfolio, the results of appraisals received
during the first quarter of 1994, the current level of nonperforming loans and
the impact of the Northridge earthquakes. Net interest income during the first
quarter of 1994 is down from amounts reported for the first three months of 1993
due to a lower yield on average interest-earning assets resulting from an
increase in the level of average loans on nonaccrual which has accompanied the
economic downturn, and a decrease in average loans outstanding. Net interest
income was also negatively affected by a change in the composition of the
funding sources as average noninterest-bearing deposits declined as a percentage
of average total deposits. Noninterest expense increased during the three
months ended March 31, 1994 over amounts reported for the first quarter of 1993
primarily due to the continuing high level of direct holding costs associated
with foreclosed properties, partially offset by reductions in customer service,
occupancy and data processing costs.
At March 31, 1994, total assets and deposits of $512.5 million and $474.1
million, respectively, had decreased 9.7% and 9.8%, respectively, from amounts
reported at the close of 1993. Loans, net of deferred loan fees were $298.8
million, a decrease of 7.4% from the amounts reported at December 31, 1993. The
decline in the loan portfolio 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 through the first quarter of 1994. In light of the current
economic environment and the impact which it has had and continues to have on
the real estate sector as well as regulatory recommendations regarding growth in
the Company's real estate related loans prior to 1993, management has moved to
limit growth of new real estate related loans, particularly construction loans,
and is attempting to diversify the loan portfolio mix to include more non-real
estate related credits.
-10-
Total average assets, deposits and loans, net of deferred loan fees of $476.0
million, $430.0 million and $312.9 million, respectively, during the first three
months of 1994 declined 18.7%, 21.2% and 11.4%, respectively, from the 1993
averages reflecting the results of economic conditions in the Company's
marketplace and management's strategies discussed in the immediately preceding
paragraph.
The mix in the composition of the Company's average deposit base changed during
the first quarter of 1994 as average noninterest-bearing demand accounts
decreased as a percentage of total average deposits to 55.6% compared to 59.3%
during all of 1993. Those funds were replaced with more costly interest-bearing
deposits and partially contributed to the decline in the Company's net interest
margin during the first quarter of 1994. During the three months ended March
31, 1994, average interest-bearing deposits comprised 44.4% of total average
deposits compared with 40.7% in all of 1993.
Nonperforming loans increased approximately $8.4 million between December 31,
1993 and March 31, 1994 and were approximately $43.2 million at March 31,
1994. As mentioned in the 1993 Form 10-K, 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 and the effects of the Northridge earthquakes contributed to
its decision to increase the provision for loan losses and the related allowance
for loan losses during the first quarter of 1994.
On April 18, 1994, the Company announced that it had retained a financial
advisor in connection with evaluating and selling by means of competitively
sealed bids of up to approximately $50 million of its nonperforming and
subperforming residential and commercial real estate loans.
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 was 47.5% at March 31,
1994 compared to 52.2% at December 31, 1993.
At March 31, 1994 and December 31, 1993, the allowance for loan losses was
6.9% and 5.6% of loans, net of deferred fees, respectively. The Company's
level of net charge-offs, expressed as a percentage of average loans
outstanding, was 2.2% and 3.8% for the three months ended March 31, 1994 and
the year ended December 31, 1993, respectively.
Total noninterest expense during the three months ended March 31, 1994 increased
approximately $454,000 over the comparable quarter in 1993. The increase in
noninterest expense was largely attributable to the continuing high level of
direct holding costs associated with foreclosed properties and increases in
professional expenses and other costs associated with nonperforming assets.
These increases were partially offset by declines in customer service, occupancy
and data processing costs.
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 $17,898,000.
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 $299,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for its
own general corporate purposes.
-11-
The following table reflects certain information regarding the results of the
Company's operations for the three months ended March 31, 1994 and 1993 (Dollars
in thousands, except earnings per share data):
Three Months Ended March 31,
1994 1993
---------- -------
Net loss $(6,183) $(4,079)
Net loss per share (0.64) (1.11)
Annualized return on
average assets (5.20%) (2.91%)
Annualized return on
average shareholders'
equity (73.41%) (44.64%)
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 net interest margin. The difference between net interest margin
on a tax equivalent basis as compared to non-tax equivalent basis is immaterial.
A comparison of net interest income and net interest margin for the three months
ended March 31, 1994 and 1993 is shown in the table below (Dollars in
thousands):
Three Months Ended March 31,
1994 1993
---------- -------
Interest income $ 6,413 $ 8,144
Interest expense 1,580 2,017
------- -------
Net interest income $ 4,833 $ 6,127
------- -------
------- -------
Annualized net interest margin 4.71% 5.05%
------- -------
The Company's net interest income is affected by the change in the amount and
mix of interest-earning assets and interest-bearing liabilities. It is also
affected by changes in yields earned on assets and rates paid on deposits and
other borrowed funds.
[This space intentionally left blank]
-12-
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the annualized
yields and rates thereon.
Three months ended
March 31, 1994
--------------------------------------------
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
- - ------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Interest-bearing deposits
with financial institutions $ 1,855 $ 16 3.45%
Federal funds sold 50,267 392 3.12
Investment securities (1) 31,407 357 4.79
Short-term investments 15,132 79 2.09
Gross loans(2) 313,468 5,569 7.11
Total interest-earning -------- ------- -----
assets 412,129 6,413 6.24
Noninterest-bearing assets 63,857 ------- -----
--------
Total assets $475,986
--------
--------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Borrowed funds $ 8,580 141 6.57
Interest-bearing demand
and savings deposits 54,977 339 2.47
Money market deposits 45,430 256 2.25
Time certificates of deposit 90,419 844 3.73
-------- ------- -----
Total interest-bearing
liabilities 199,406 1,580 3.17
Noninterest-bearing deposits 239,155 ------- -----
Other liabilities 3,734
Shareholders' equity 33,691
--------
Total liabilities and
shareholders' equity $475,986
--------
--------
Net interest income(3) $ 4,833
-------
-------
Net interest margin(3) 4.71%
-----
-----
-13-
Three months ended
March 31, 1993
---------------------------------------------
Average Income/ Yield/
(Dollars In Thousands) Balance Expense Rate
- - -------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Interest-bearing deposits
with financial institutions $ 1,041 $ 7 2.69%
Federal funds sold 55,367 391 2.82
Investment securities (1) 26,645 436 7.04
Short-term investments 33,086 241 2.91
Gross loans(2) 371,760 7,069 7.61
-------- ------- -----
Total interest-earning
assets 487,899 8,144 6.70%
Noninterest-bearing assets 72,137 ------- -----
--------
Total assets $560,036
--------
--------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Borrowed funds $ 6,206 126 8.12%
Interest-bearing demand
and savings deposits 51,896 308 2.37
Money market deposits 55,385 369 2.66
Time certificates of deposit 121,379 1,214 4.00
-------- ------- -----
Total interest-bearing
liabilities 234,866 2,017 3.44
Noninterest-bearing deposits 283,566 ------- -----
Other liabilities 5,056
Shareholders' equity 36,548
--------
Total liabilities and
shareholders' equity $560,036
--------
--------
Net interest income(3) $ 6,127
-------
-------
Net interest margin(3) 5.05%
-----
-----
<FN>
- - -------------------------------
(1) Yields are presented on a tax equivalent basis at the incremental tax rate
of 35%.
(2) Includes loans on nonaccrual. Interest income on loans includes net loan
fees amortized to income of $257,000 and $176,000 during the three months
ended March 31, 1994 and 1993, respectively. Average deferred loan fees
during the three months ended March 31, 1994 and 1993 were $536,000 and
$398,000, respectively.
(3) If customer service expense were classified as interest expense, then the
Company's reported net interest income and noninterest expense for the
three months ended March 31, 1994 and 1993 would be reduced by $1,058,000
and $1,334,000, respectively, and the net interest margin would be 3.68%
and 3.95%, respectively.
-14-
The following tables set 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 periods 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.
Three months ended
March 31, 1994 and 1993
Increase (Decrease)
due to changes in
----------------------------------------
Net
(Dollars in thousands) Volume Rate Change
- - -----------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest-bearing deposits with
financial institutions $ 7 $ 2 $ 9
Federal funds sold (38) 39 1
Investment Securities 69 (148) (79)
Short-term investments (106) (56) (162)
Gross loans, net of
unearned income (1,057) (443) (1,500)
------- ------ ------
Total interest-earning
assets (1,125) (606) (1,731)
------- ------ ------
INTEREST-BEARING LIABILITIES:
Borrowed funds 42 (27) 15
Interest-bearing demand
and savings deposits 19 12 31
Money market deposits (61) (52) (113)
Time certificates of deposit (293) (77) (370)
------- ------ ------
Total interest-bearing
liabilities (293) (144) (437)
------- ------ ------
Net interest income $ (832) $ (462) $(1,294)
------- ------ ------
------- ------ ------
Net interest income for the three months ended March 31, 1994 decreased $1.3
million, or 21.2%, from the amount reported for the comparable three month
period in 1993. The decline is primarily attributable to a decrease in average
loans outstanding and to an increase in average loans on nonaccrual during the
first quarter of 1994 as compared to the first quarter of 1993, an overall
decline in the yield on investment securities and short-term investments which
was partially offset by higher yields on federal funds sold and, to a lesser
extent, interest-bearing deposits with financial institutions. Net interest
income was negatively affected by a change in the composition of the Company's
deposits which was offset by lower rates on interest-bearing deposit
liabilities.
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 March
31, 1994, there was no interest accrued which had not been reversed on
nonaccrual loans. Had nonaccrual loans complied with the original terms,
interest income would have increased by $1,335,000 and $695,000 during the
three months ended March 31, 1994 and 1993, respectively, which would have
increased the net interest margin by 1.29% and .57%, 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 and increase the volume of new
loan origination. During the three months ended March 31, 1994, the Company's
average interest-earning assets in general and average loans in particular
declined from the average amounts reported at March 31, 1993, which, in turn,
has partially
-15-
contributed to the decline in net interest income. Average interest-earning
assets and average gross loans were $412.1 million and $312.5 million,
respectively, during the first quarter of 1994 compared to $487.9 million and
$371.8 million for the three months ended 1993. This decline and any further
decline in interest-earnings assets could continue to adversely affect net
interest income in the future. Management has augmented lending staff levels in
the commercial and industrial loan area as part of its efforts to originate new
loans and to diversify the loan portfolio.
During the first quarter of 1994, the composition of average deposits changed as
average noninterest-bearing deposits decreased as a percentage of total average
deposits to 55.6% from 59.3% during all of 1993 and average interest-bearing
deposits increased as percentage of total average deposits to 44.4% from 40.7%
during all of 1993. This increased reliance on interest-bearing sources of
funds has and will continue to adversely affect net interest income.
PROVISION FOR LOAN LOSSES
The amounts provided for loan losses are determined by management after
quarterly evaluations of the loan portfolio and the level of the allowance for
loan losses. This evaluation process requires that management apply various
judgements, 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 to be adequate for the three months ended March 31, 1994,
subsequent changes in the aforementioned factors and related assumptions may
warrant adjustments in amounts provided, based on conditions prevailing at the
time.
During the three months ended March 31, 1994, the Company's provision for loan
losses was $4.0 million, a decline of $1.0 million from the $5.0 million
reported for the same period in 1993. The first quarter 1994 provision reflects
management's current assessment of: 1) recent appraisals on certain collateral
reflecting an increased level of distressed asset sales in the Company's
marketplace; 2) the impact recessionary conditions has had and may have on
certain of the Company's borrowers; 3) reduced values of two real estate
projects resulting from being located in areas impacted by the Northridge
earthquakes; and 4) disruption in overall business activity in the earthquake
affected areas. Approximately $850,000 of the provision for loan losses for the
three months ended March 31, 1994 was earthquake related.
Net charge-offs during the three months ended March 31, 1994 were $1.7 million
compared to $2.2 million for the three months ended December 31, 1993 and $3.7
million for the three months ended March 31, 1993. The Company has begun to see
some signs of stabilization in real estate values in certain segments of its and
its borrowers' marketplace, resulting in lower provisions for loan losses.
Despite such signs of stabilization, the higher levels of the provisions for
loan losses experienced by the Company since the onset of the distressed
economic environment are expected to continue until such time as the Company
experiences a reduction in the migration of loans to nonperforming status, and a
reduction in its overall level of nonperforming loans. However, there can be no
assurance that the recent stabilization of certain real estate values will
continue and that the Company will not have increased provisions as a result.
Management's perspective on the general economic conditions in the Company's
marketplace particularly the continuing deterioration in certain real estate
sectors continue to be based upon most currently available economic reports
which indicate that the current environment could continue to persist throughout
and beyond 1994. In light of this perspective, management is seeking to
expedite the
-16-
disposition of up to approximately $50 million of nonperforming and
subperforming assets. See Financial Condition--Accelerated Asset Disposition
Plan.
NONINTEREST INCOME
Total noninterest income for the three months ended March 31, 1994 and 1993 was
$363,000 and $313,000, respectively. The increase of $50,000 during the first
quarter of 1994 over that in the comparable period in 1993 is due to increases
in service charges and trust fee income.
NONINTEREST EXPENSE
The following tables set forth information on noninterest expense of the Company
for the three months ended March 31, 1994 and 1993 (Dollars in thousands):
Three Months Ended March 31,
Increase
1994 1993 (Decrease)
------ ------- -----------
Salaries and employee benefits $2,257 $2,070 $ 187
Occupancy 319 472 (153)
Furniture and equipment 188 215 (27)
Customer service 1,058 1,334 (276)
Data processing 145 125 20
Other real estate owned 1,567 661 906
Other 1,845 2,048 (203)
----- ----- -----
$7,379 $6,925 $ 454
----- ----- -----
----- ----- -----
The following table summarizes the components of salaries and employee benefits
for the three months ended March 31, 1994 and 1993 (Dollars in thousands):
Three Months Ended March 31,
1994 1993
------ -----
Salaries, wages and payroll taxes $1,988 2,085
Deferred direct incremental
underwriting costs (114) (278)
Medical and other insurance benefits 283 179
Other 100 84
------ -----
2,257 2,070
------ -----
------ -----
Direct compensation decreased approximately $97,000 during the three months
ended March 31, 1994 over the amounts reported for the comparable period in
1993. The decrease is attributable to a lower number of employees within the
Company during the three months ended March 31, 1994 as compared to the
comparable period in 1993. During the three months ended March 31, 1994, the
Company accrued $90,000 of compensation related expenses associated with the
reorganization of its operations. Approximately 20% of the currently authorized
positions within the Company have been eliminated as part of management's plan
of reducing operating costs, increasing efficiency and making expense levels
consistent with the Company's size and earnings capacity. Deferred direct
incremental underwriting costs have decreased approximately $164,000 in the
first quarter of 1994 from the levels reported in the comparable period in 1993.
The level of such deferred costs is directly related to the volume of new loan
originations which, since mid-1991, have been declining as part of management's
strategic goal of reducing real estate loan growth, particularly construction
lending, in light of softness
-17-
in the real estate sector and weakness in loan demand. The $104,000 increase in
medical and other insurance benefits of is attributable to an increase in costs
passed on to the Company from its health care providers.
Occupancy expense decreased approximately $153,000 during the three months ended
March 31, 1994 from the amounts reported during the similar period in 1993 and
was due to the renegotiation of the terms for the space it occupies in Los
Angeles. The renegotiated lease terms will reduce the Company's occupancy
expense for that space over the next nine years.
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. Additionally, 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. The average balance of title insurance company and escrow company
deposits during the three months ended March 31, 1994 and 1993 was $189.6
million and $232.5 million, respectively, contributing to a decrease in customer
service expense of $276,000 during the first quarter of 1994 from the level
reported a year earlier. The decrease also reflects the limiting of expenses
based on the interpretive release discussed above and management's efforts at
monitoring the earnings performance of such accounts, thereby decreasing the
level and cost of outside services provided. The balance of title insurance
company and escrow company deposits at March 31, 1994 was $132.5 million and
$132.3 million, respectively. If customer service expense were classified as
interest expense, then the Company's net interest income and noninterest expense
for the months ended March 31, 1994 and 1993 would be reduced by $1.1 million
and $1.3 million, respectively. Net interest margin would be 3.68% and 3.95%
for the three months ended March 31, 1994 and 1993, respectively.
Data processing expense increased approximately $20,000 for the three months
ended March 31, 1994 from the comparable period in 1993 as a result of one-time
credits received in 1993 from the renegotiation of the Company's contract with
its primary data processor. The renegotiated contract is expected to reduce
data processing costs by approximately $320,000 annually for each of the years
1994 through 1997.
Other real estate owned (OREO) expense increased during the three months ended
March 31, 1994 by $906,000 from the amount reported for the same period in 1993.
During the three months ended March 31, 1994, the level of OREO was
significantly higher than during 1993, which has resulted in an increase in
direct holding costs and valuation adjustments of $342,000 and $564,000,
respectively, in 1994 from 1993. During the three months ended March 31, 1994,
direct holding costs were $667,000 and were comprised principally of property
taxes, insurance, security, foreclosure costs, and, to a lesser extent,
marketing and other miscellaneous costs. During the three months ended March
31, 1994, a valuation adjustment of $900,000 resulted from the writedown of one
existing OREO to reflect a reduction in its fair market value brought about as a
result of weaknesses in that project's real estate segment of the Company's
marketplace. 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.
-18-
Other noninterest expense for the three months ended March 31, 1994 and 1993 are
comprised of the following (Dollars in thousands):
Three Months Ended
March 31,
1994 1993
----- -----
Promotional $ 152 171
Professional 605 745
FDIC assessments 401 437
Other 687 695
------ -----
$1,845 2,048
------ -----
------ -----
Promotional expenses decreased $19,000 during the three months ended March 31,
1994 as compared to the comparable period in 1993 primarily as a result of
management's decreased emphasis on marketing related activities.
Professional related expenses decreased $140,000 during the first quarter of
1994 from the amounts reported for the three months ended March 31, 1993. The
decrease principally reflects the Company's reduction in appraisal expense and
to a lesser extent, decreases in the use of outside professional assistance.
Management expects that professional fees incurred in connection with problem
asset resolution will continue to affect negatively noninterest expenses in
1994.
Premiums paid for FDIC insurance decreased $36,000 during the three months ended
March 31, 1994 from the amounts reported for the three months ended March 31,
1993 resulting from the decline in average deposit balances subject to FDIC
insurance premiums.
The principal components contributing to the decrease in other noninterest
expense of $8,000 during 1994 over the amount reported in 1993 are the lower
operating losses and lower check printing charges. This decrease was offset by
the expenses associated with the outsourcing of item processing which are
classified in other noninterest expense in 1994, whereas, in the first quarter
of 1993, internal item processing costs were principally in the form of salaries
and benefits.
FINANCIAL CONDITION
TOTAL ASSETS
At March 31, 1994, total assets were approximately $512.5 million, as compared
to $567.5 million at December 31, 1993, a decrease of approximately $55.0
million. The decrease in assets at the close of the first quarter of 1994 from
year-end 1993, was centered primarily in short-term investments and loans,
offset partially by increases in cash and due from banks and, to a lesser
extent, in federal funds sold. The decrease in asset growth during the first
quarter of 1994 resulted from an approximate $51.6 million decrease in deposits
from the levels existing at December 31, 1993.
In the opinion of management, daily average balance information also provides a
meaningful basis for purposes of its discussion and analysis of consolidated
financial condition and operating results. Accordingly, such information is
used in the discussion which follows to assist in providing information relevant
to the Company.
Total average assets for the three months ended March 31, 1994 were $476.0
million, down 18.7%, from the $585.7 million average for the year ended December
31, 1993. The decline in average assets during the first quarter of 1994
reflects management's decision to limit growth of new real estate related
credits, slower growth rates experienced in new loan origination due to lower
loan demand and generally lower levels of investment activity brought on by an
-19-
approximate $116.2 million decrease during the first quarter in total average
deposits, the Company's primary source of funds.
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 related to its
title insurance company and escrow company deposits. At March 31, 1994, cash
and due from banks was up approximately $45.2 million from the balances reported
at December 31, 1993, primarily to accommodate the Company's requirements to
meet the liquidity needs of its deposit customers. The average balance of cash
and due from banks for the three months ended March 31, 1994 was approximately
$55.7 million, down $13.5 million, or 19.5%, from the comparable $69.2 million
of average cash and due from banks for the year ended December 31, 1993.
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
The extent and mix of the Company's short-term investments and federal funds
sold generally has been a function of the Company's title insurance and escrow
company deposits and the liquidity requirements of such customers. In addition,
as loan demand has increased or decreased, federal funds sold and short-term
investments have moved inversely to accommodate the funding needs of the
Company.
Federal Funds Sold
Average federal funds sold were approximately $50.3 million during the first
quarter of 1994, down $39.0 million, or 43.7%, from the $89.3 million average
for all of 1993. The decrease was primarily due to having, on an average basis,
less excess funds to invest and the Company's placement of available excess
funds into other forms of liquid investments. At March 31, 1994, federal funds
sold were $20 million. At December 31, 1993, the Company did not take a
position in federal funds sold as it placed available funds in other forms of
liquid investments.
Short-term Investments
At March 31, 1994, the Company's short-term investments aggregated $81.8
million, down approximately $98.1 million, or 54.5%, from the $179.9 million
reported at December 31, 1993. During the first quarter, the Company purchased
short-term investments of $96.7 million and retired approximately $195.0 million
of matured short-term investments. During the first quarter of 1994, average
short-term investments were $15.1 million as compared to $33.0 million during
all of 1993. Short-term investments are carried at market and there were no
unrealized holding gain or loss adjustments to shareholders' equity during the
three months ended March 31, 1994.
INVESTMENT SECURITIES
At March 31, 1994, the Company's investment securities portfolio aggregated
$35.3 million, up approximately $6.2 million from the $29.1 million reported by
the Company at December 31, 1993. During the first quarter of 1994, the Company
purchased approximately $8.3 million of investment securities for its portfolio
and retired $2.0 million of matured securities. Total average investment
securities for the three months ended March 31, 1994 were $31.4 million.
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,
-20-
many commercial loans are real estate secured. 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 its lending activities, all
lending transactions are subject to the Bank's credit evaluation, underwriting
criteria and monitoring standards.
At March 31, 1994, real estate, construction and commercial loans comprised
approximately 52.6%, 23.3% and 23.5%, respectively, of total loans in the
portfolio. This compares to 45.5%, 27.2% and 26.7% categorized as real estate,
construction and commercial loans, respectively, at December 31, 1993. At March
31, 1994, loans, net of deferred loan fees were $298.8 million, as compared to
$322.7 million at December 31, 1993, a decline of approximately $23.9 million.
This decline is attributable to management's decision to limit real estate
related loan growth generally to existing customers and to the funding of
previously existing commitments and to regulatory recommendations regarding
growth and concentration in real estate related credits, particularly
construction loans. The decline also reflects the slow down in California's
economic activity which impacted all segments of the loan portfolio. Management
has augmented lending staff levels in the commercial and industrial loan area
but faces keen competition in the marketplace which is exacerbated by overall
weaknesses in the local economy. Real estate loans, principally mini-permanent
loans to the Bank's existing customers, increased $10.4 million, and
construction and commercial loans to businesses declined $18.2 million and $15.9
million, respectively, at March 31, 1994 when compared to the respective
balances outstanding at the close of 1993.
Average gross loans were $313.5 million for the three months ended March 31
1994, a decrease of $39.9 million, or 11.3%, from the $353.4 million average for
the year ended December 31, 1993. The decline reflects the downward trend in
the level of gross loans outstanding due to California's economic activity in
1994 and earlier which has impacted all segments of the loan portfolio. The
Company's average loan-to-deposit ratio was 72.8% during the first three months
of 1994, as compared to 64.7% for all of 1993.
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.
ACCELERATED ASSET DISPOSITION PLAN
On April 18, 1994, the Company announced that it had retained a financial
advisor in connection with evaluating and selling by means of competitively
sealed bids of up to approximately $50 million of its nonperforming and
sub-performing residential and commercial real estate loans, which may include
some foreclosed properties. Based upon its preliminary assessment of assets
that are being considered for inclusion in the sale, management estimates that
the Company will incur a charge to income at the time of consummation of up to
$10 million. Approximately $9.3 million of this estimated charge would
represent the estimated market discount from the accelerated disposition of
these assets and the balance reflects the estimated costs of the transaction.
The timing and amount of the charge will depend on, among other things, the
actual assets that are identified for sale, the date this determination is made
and the then current market conditions. There can be no assurance that the
estimated charge will not be higher or that the resulting impact on
nonperforming loans and capital will not be different. However, should market
conditions change and, in turn, cause the economics of the proposed trasnsaction
to be unacceptable to the Company, management has the discretion to terminate
the sale.
-21-
Management and its advisor are in the process of identifying the assets to be
included in the sale, and management expects to finalize the identification
process and to commence the offering process in June, with bids expected in
July. The sale is expected to be consummated in the third quarter of 1994.
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 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 1993 Form 10-K discusses the factors and
methodology used by management in determining the allowance for loan losses.
At March 31, 1994, the allowance for loan losses was $20.5 million, or 6.90% of
loans, net of deferred loan fees, compared to $18.2 million, or 5.64% of net
loans outstanding at December 31, 1993. The provision for loan losses was $4.0
million and $5.0 million for the three months ended March 31, 1994 and 1993,
respectively. Net charge-offs were $1.7 million and $3.7 million for the three
months ended March 31, 1994 and 1993, respectively. As a percentage of average
loans, annualized net charge-offs were 2.20% for the three months ended March
31, 1994 compared to 3.83% for 1993. Net charge-offs during the first quarter
of 1994 primarily resulted from losses recognized upon transfer of assets to
other real estate owned, losses taken on certain real estate related loans due
to economic conditions and other charge-offs related to loans deemed
uncollectible by the Company.
Management believes that the allowance for loan losses at March 31, 1994 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 March 31, 1994 and December 31, 1993 (dollars in
thousands):
March 31, December 31,
1994 1993
-------- -----------
Loans on nonaccrual $38,527 $29,056
Loans past due 90 days or more and
still accruing interest 4,642 5,769
------- ------
Total nonperforming loans 43,169 34,825
Loans with modified terms 3,960 9,539
------- ------
Nonperforming loans and loans with
modified terms $47,129 $44,364
------- ------
------- ------
Nonaccrual and past due loans as
a percentage of total loans 14.45% 10.79%
------- ------
------- ------
-22-
At March 31, 1994, approximately 87.4% 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. The ratio of the
Company's allowance for loan losses to nonperforming loans was 47.5% and 52.3%
at March 31, 1994 and December 31, 1993, respectively.
OTHER REAL ESTATE OWNED
At March 31, 1994 and December 31, 1993, other real estate owned amounted to
$15.5 million and $13.9 million, respectively. Activity in other real estate
owned for the three months ended March 31, 1994 and year ended December 31, 1993
is as follows (Dollars in thousands):
Three months
ended Year-ended
3/31/94 12/31/93
------------ ----------
Balance, beginning of period 13,949 4,359
Additions 4,958 24,209
Sales (2,530) (13,905)
Valuation adjustment (900) (714)
--------- ---------
Balance, end of period 15,477 13,949
--------- ---------
--------- ---------
The sale of $2.5 million of other real estate owned during the first three
months of 1994, resulted in a net loss upon sale of $15,000. For the three
months ended March 31, 1993, the Company's net gain upon sale of real estate
owned was $13,000.
DEPOSITS
The Company has generated a substantial portion of its deposits from large
balance depositors by offering a high level of customer services primarily
through outside contractors. A significant amount of such deposits are from
Southern California based title insurance companies and escrow companies. By
focusing on these types of accounts, the Company's total deposits and, in
particular, noninterest-bearing demand deposits have historically grown
steadily.
At March 31, 1994, total deposits of $474.1 million were comprised of $301.3
million and $172.8 million of noninterest-bearing and interest-bearing deposits,
respectively. 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. The $51.6 million decrease in total
deposits since December 31, 1993 is comprised of decreases of $21.6 million and
$30.0 million in noninterest-bearing and interest-bearing deposits,
respectively. The decrease in noninterest-bearing deposits at March 31, 1994 as
compared to December 31, 1993 was primarily in title insurance company and
escrow company deposits and reflects the current lower volume of residential
refinancing occurring in the Company's marketplace. The decrease in
interest-bearing deposits since December 31, 1993 reflects a $18.0 million and
an $12.0 million decrease in the Company's time certificates of deposits and the
Company's savings and interest-bearing demand deposit balances, respectively.
Such decreases in interest-bearing deposit levels are consistent with the
management of deposit levels in relation to loan levels and, to a lesser extent,
a result of depositors seeking higher yields in the marketplace.
Consistent with the decrease in total deposits at March 31, 1994 from the levels
reported at the close of 1993, total average deposits for the three months ended
March 31, 1994 were $430.0 million, down $116.2 million, or 21.3%, from the
$546.2 million average for all of 1993. Average noninterest-bearing deposits
and average interest-bearing deposits during the first quarter of 1994 were
$239.2 million and $190.8 million, respectively, which compares to $323.7
million and
-23-
$222.5 million, respectively, for the year ended December 31, 1993. The $84.5
million decrease in average noninterest-bearing deposits during the first
quarter of 1994 from comparable averages applicable to 1993 primarily reflects
the general decline from historical levels in real estate transaction activity
handled by the Company's title insurance and escrow company depositors as a
result of current economic conditions. The decrease in average interest-bearing
deposits of $31.7 million during the first quarter from the 1993 average is
comprised of an approximate $26.2 million decrease in average time certificates
of deposit an approximate $5.5 million decline in savings run off due to
depositors seeking yields in other investment forms and other interest-bearing
demand accounts.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company manages its liquidity position to ensure that sufficient funds are
available to meet customers' needs for borrowing and deposit withdrawals.
Liquidity is derived from both the asset and liability sides of the balance
sheet. Asset liquidity arises from the ability to convert assets to cash and
self-liquidation or maturity of assets. Liquid asset balances include cash,
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. If the Company were limited to only one source of funding
or all its deposits had the same maturity, its liquidity position would be
adversely impacted.
At March 31, 1994, 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 35.7%. The ratio of
average total liquid assets to average total deposits was 28.2% during the
first quarter of 1994.
At March 31, 1994, $264.8 million of the Company's noninterest-bearing demand
deposits, or 55.9% of total deposits, were from title insurance companies and
escrow companies and $106.3 million of such deposits, or 22.4% of total
deposits, were maintained by five title insurance and escrow company customers;
one such customer accounted for 10.1%, and another accounted for 6.0%, 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,
customer service expense declined. In addition as of March 31, 1994, labor
union deposits were $83.6 million, or 17.6% of total deposits, and 47.4% 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 March 31, 1994, $301.3 million or 63.6% of the
Company's total deposits were noninterest-bearing demand deposits, and time
certificates of deposit of $100,000 or more were $15.7 million, which
represented 3.3% 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.
To further cushion any unanticipated fluctuation in its liquidity position, the
Bank, as with all member commercial banks may borrow from the regional Federal
Reserve Bank subject to compliance with regulatory requirements. At March 31,
1994, loans outstanding in the amount of $49.9 million were pledged as
collateral to secure future advances with the Federal Reserve Bank. In
addition, the Bank has federal funds facilities available with its major
correspondent aggregating
-24-
$15.0 million. These facilities are subject to customary terms for such
arrangements.
At March 31, 1994, Guardian Bancorp, on an unconsolidated parent company only
basis, had cash and cash equivalents available of approximately $1.8 million.
On January 28, 1994, Guardian Bancorp consummated the Offering by raising gross
proceeds of approximately $17,898,000. 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.
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.
At March 31, 1994, approximately $138.2 million of the Company's accruing
loans outstanding mature within one year and approximately $211.1 million, or
81.1%, of the outstanding accruing loan portfolio bears a floating rate of
interest. While such a floating interest rate structure might result
temporarily in declining spreads when general interest rates fall (until
deposits are repriced at lower interest rates), the Company believes that such
loan pricing minimizes interest rate risk and that its exposure to declining
spread is immaterial considering the maturities of its interest-bearing
deposits. Other than normal commitments to lend in the amount of approximately
$56.0 million, including commitments under standby letters of credit, the
Company had no material unrecorded commitments or contingencies at March 31,
1994.
CAPITAL RESOURCES
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 $17,898,000.
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 $299,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for its
own general corporate purposes.
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 table on the following
page sets forth the Company's and the Bank's risk-based capital and leverage
ratios at March 31, 1994 (dollars in thousands):
-25-
Company
-----------------------------------------
(Dollares in thousands) $ %
- - --------------------- --------- -----------
Risk-based ratios:
Tier 1 Capital(1) $ 33,016 9.71%
Tier 1 Capital minimum requirement(2) 13,602 4.00
-------- -----
Excess $ 19,414 5.71%
-------- -----
-------- -----
Total Capital(3) $ 40,467 11.90%
Total Capital minimum requirement(2) 27,203 8.00
-------- -----
Excess $ 13,264 3.90%
-------- -----
-------- -----
Risk-weighted assets $340,039
--------
--------
Leverage ratio (3+% minimum)(4) 6.94%
-----
-----
BANK
-----------------------------------------
(Dollars in thousands) $ %
------- ------
Risk-based ratios:
Tier 1 Capital(1) $ 34,225 10.55%
Tier 1 Capital minimum requirement(2) 12,978 4.00
-------- -----
Excess $ 21,247 6.55%
-------- -----
-------- -----
Total Capital(3) $ 38,484 11.86%
Total Capital minimum requirement(2) 25,955 8.00
-------- -----
Excess $ 12,529 3.86%
-------- -----
-------- -----
Risk-weighted assets $324,441
--------
--------
Leverage ratio (3+% minimum)(4) 7.21%
-----
-----
<FN>
- - ------------------------
(1.) Includes common shareholders' equity.
(2.) 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 or ratio of at least 8% or
10% to be considered "adequately capitalized" or "well
capitalized", respectively, under the prompt corrective
action provisions of the Federal Deposit Insurance
Improvement Act of 1991 ("FDICIA").
(3.) Includes common shareholders equity plus allowance for
loan losses, subject to certain limitations. For Guardian
Bancorp's risk-based capital ratios, subordinated debt is
included.
(4.) Tier 1 capital divided by average assets for the quarter ended
March 31, 1994. The 3% minimum applies to highest rated
organizations. Others, including those anticipating or
experiencing significant growth internally or through
acquisitions, are expected to maintain higher minimum ratios.
Although the Company and the Bank has not been informed by
bank regulators of a specific minimum which must be maintained,
it is anticipated that if any specified minimum is required, it
will be greater than 3%. Commencing December 19, 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 FDICIA.
-26-
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 historically been the primary source of new
capital for the Company. Management is committed to maintaining capital at a
sufficient level to assure shareholders, customers and regulators that the
Company is financially sound.
[This space intentionally left blank]
-27-
PART II - OTHER INFORMATION
Item 1-5. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - Inapplicable.
(b) No reports on Form 8-K have been filed during the
quarter ended March 31, 1994.
-28-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder authorized.
GUARDIAN BANCORP
Dated: May 13, 1994 By /s/ PAUL M. HARRIS
----------------------------------
Paul M. Harris
Chairman of the Board and
Chief Executive Officer
Dated: May 13, 1994 By /s/ HOWARD C. FLETCHER III
---------------------------------
Howard C. Fletcher III
President
Dated: May 13, 1994 By /s/ JON D. VAN DEUREN
----------------------------------
Jon D. Van Deuren
Executive Vice President and
Chief Financial Officer
-29-