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 June 30, 1994 or
[ ] Transition report pursuant to Section 35 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- -----------------------
Commission file number 1-9757
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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 August 8, 1994, there were issued and outstanding 12,514,075 shares of the
issuer's Common Stock.
This report contains 30 pages.
The exhibit index is on page 29.
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Item 1. Financial Statements.
(Dollars in thousands) June 30, December 31,
1994 1993
-------- ------------
Cash and due from banks $ 71,052 $ 23,155
Interest-bearing deposits with
financial institutions 1,595 1,990
Investment securities (market value
of $31,519 at June 30, 1994 and
$29,221 at December 31, 1993):
U.S. Treasury 30,528 24,279
State and municipal 1,091 4,336
Federal Reserve Bank stock 464 464
-------- --------
Total investment securities 32,083 29,079
-------- --------
Short-term investments 89,951 179,948
Loans:
Real estate 117,059 147,039
Construction 47,090 87,829
Commercial 70,959 86,260
Installment 1,640 2,046
Deferred loan fees (537) (426)
-------- --------
Loans, net of deferred loan fees 236,211 322,748
Less allowance for loan losses (13,587) (18,200)
-------- --------
Net loans 222,624 304,548
-------- --------
Premises and equipment, net 1,517 1,808
Deferred income taxes 390 3,574
Other real estate owned and assets
held for accelerated disposition 43,514 13,949
Accrued interest receivable and
other assets 10,516 9,495
-------- --------
$473,242 $567,546
-------- --------
-------- --------
Deposits:
Noninterest-bearing demand $279,237 $322,900
Savings and interest-bearing demand 44,161 53,285
Money market 44,392 47,603
Time certificates of deposit 78,883 101,886
-------- --------
Total deposits 446,673 525,674
11-3/4% subordinated debentures 3,000 3,000
Other borrowed money -- 15,000
Accrued interest payable and other
liabilities 2,821 2,571
-------- --------
Total liabilities 452,494 546,245
-------- --------
-------- --------
Shareholders' equity:
Common stock, without par value.
Authorized 29,296,875 shares;
issued and outstanding
12,514,075 and 3,740,000
shares in 1994 and 1993,
respectively. 33,734 15,836
Retained earnings (deficit) (12,986) 5,465
-------- --------
20,748 21,301
-------- --------
$473,242 $567,546
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
-2-
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three months Six months
ended June 30, ended June 30,
----------------------- -----------------------
(dollars in thousands, 1994 1993 1994 1993
except per share data) -------- ------- -------- --------
Interest Income:
Loans $ 5,481 $ 7,149 $ 11,050 $ 14,218
Deposits with financial
institutions 12 8 28 15
Investment securities 388 496 745 932
Short-term Investments 126 334 205 575
Federal funds sold 314 805 706 1,196
-------- ------- -------- -------
6,321 8,792 12,734 16,936
-------- ------- -------- -------
Interest expense:
Deposits 1,347 1,910 2,786 3,801
Borrowed funds 121 96 262 222
-------- ------- -------- -------
1,468 2,006 3,048 4,023
-------- ------- -------- -------
Net interest income 4,853 6,786 9,686 12,913
Provision for loan losses 11,000 3,750 15,000 8,750
-------- ------- -------- -------
Net interest income (loss)
after provision for loan losses (6,147) 3,036 (5,314) 4,163
-------- ------- -------- -------
Noninterest Income 417 375 780 688
Noninterest expense:
Salaries and employee benefits 2,087 1,941 4,344 4,011
Occupancy 304 179 623 651
Furniture and equipment 218 218 406 433
Customer service 904 1,491 1,962 2,825
Data processing 159 106 304 231
Other real estate owned 874 546 2,441 1,181
Professional 635 467 1,137 1,017
Other 1,357 1,301 2,700 2,825
-------- ------- -------- -------
Total noninterest expense 6,538 6,249 13,917 13,174
-------- ------- -------- -------
Loss before income taxes (12,268) (2,838) (18,451) (8,323)
Benefit for income taxes -- (591) -- (1,997)
-------- ------- -------- -------
Net loss $(12,268) $(2,247) $(18,451) $(6,326)
-------- ------- -------- -------
-------- ------- -------- -------
Net loss per share $ (0.98) $ (0.61) $ (1.67) $ (1.72)
-------- ------- -------- -------
-------- ------- -------- -------
See accompanying notes to consolidated financial statements.
-3-
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(dollars in thousands) Six months
ended June 30,
-------------------------
1994 1993
-------- ---------
Cash flows from operating activities:
Net loss $(18,451) $ (6,326)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Provision for loan losses 15,000 8,750
Depreciation and amortization 410 425
Benefit for deferred income taxes 3,184 829
Amortization of net deferred
loan fees (758) (948)
Amortization of net premium
on securities 119 124
Amortization of discount on
short-term investments (128) (361)
Loss on sales of short-term
investments -- 10
Net (gain) loss on sale of other
real estate owned (70) 25
Other real estate owned
valuation adjustments 1,200 336
Gain on sale of premises and
equipment (27) --
Net change in accrued interest
receivable and other assets (1,021) (5,413)
Net change in accrued interest
payable and other liabilities 250 6,264
-------- --------
Net cash provided by
(used in) operations (292) 3,715
-------- --------
Cash flows from investing activities:
Proceeds from maturities of
investment securities transactions 16,975 3,066
Purchases of investment securities (20,098) (13,223)
Proceeds from short-term investment
securities transactions:
Sales -- 219,900
Maturities 290,000 60,000
Purchases of short-term investments (199,875) (375,414)
Net change in loans 31,411 13,322
Proceeds from sale of other real estate 5,576 6,568
Purchases of premises and equipment (119) (104)
Proceeds from sale of premises
and equipment 27 --
-------- --------
Net cash provided by (used in)
investing activities 123,897 (85,885)
-------- --------
Cash flows from financing activities:
Net change in deposits (79,001) 110,575
Change in other borrowed money (15,000) (10,000)
Net proceeds from issuance of
common stock 17,898 250
-------- --------
Net cash provided by (used in)
financing activities (76,103) 100,825
-------- --------
Net increase in cash
and cash equivalents 47,502 18,655
Cash and cash equivalents at beginning
of year 25,145 109,853
-------- --------
Cash and cash equivalents at end of
period 72,647 $128,508
-------- --------
-------- --------
Supplemental disclosures:
Interest paid $ 3,081 $ 3,958
Taxes paid -- --
Significant non-cash transactions:
Transfer of loans to other
real estate owned and assets
held for accelerated disposition 36,272 $ 6,954
Loans made to facilitate sale
of real estate owned 1,423 2,797
See accompanying notes to consolidated financial statements.
-4-
GUARDIAN BANCORP
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 to
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 June 30, 1994 and
December 31, 1993, results of operations for the three and
six months ended June 30, 1994 and 1993 and cash flows for
the six months ended June 30, 1994 and 1993. The results of
operations for the three and six months ended June 30, 1994
are not necessarily indicative of the results of operations
for the full year ended 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 $229,000 for
costs it incurred in the capital raising effort. Guardian
Bancorp retained the remaining net proceeds for its own
general corporate purposes.
NOTE 3 ACCELERATED ASSET DISPOSITION
During the second quarter of 1994, management and the Board
of Directors announced the Company's decision to sell
approximately $50 million of nonperforming and
-5-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
subperforming residential and commercial real estate loans
and foreclosed properties. A provision for loan losses to
reflect the market valuation associated with the accelerated
disposition was made and the loans at estimated market value
were transferred to other real estate owned and assets held
for accelerated disposition.
NOTE 4 PER SHARE DATA
Net loss 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 and six
months ended June 30, 1994 of 12,514,000 and 11,060,000,
respectively, were used to compute loss per share for the
periods then ended. The weighted average number of common
shares and common share equivalents used to compute earnings
per share for the three and six months ended June 30, 1993
were 3,697,000 and 3,681,000, respectively.
NOTE 5 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 six months
of 1994, the Bank was required to maintain average reserves
of approximately $18.7 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 $2.2 million at June 30, 1994.
At June 30, 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.
-6-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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.
NOTE 6 STATEMENTS OF CASH FLOWS
For the purpose of the accompanying consolidated statements
of cash flows, the Company considers cash and due from
banks, and 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 7 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 June 30, 1994 (Dollars in
thousands):
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- -------
U.S. Treasury
securities $30,528 $ 16 $(598) $29,946
State and
municipal
securities 1,091 19 (1) 1,109
Federal Reserve
Bank stock 464 -- -- 464
------- ---- ------ -------
$32,083 $ 35 $(599) $31,519
------- ---- ------ -------
------- ---- ------ -------
-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 June 30, 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 $ 6,768 5.2% $ 6,780
After one year but
within five years 23,760 4.6 23,166
------- ---- -------
30,528 4.8 29,946
------- ---- -------
State and municipal
securities:
Within one year 872 8.0 881
After one year but
within five years 219 10.6 228
------- ---- -------
1,091 8.5 1,109
------- ---- -------
Corporate securities:
Federal Reserve Bank
stock 464 6.0 464
------- ---- -------
$32,083 4.91% $31,519
------- ---- -------
------- ---- -------
U.S. Treasury and Government agency securities carried at
approximately $2.4 million at June 30, 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 June 30, 1994 (Dollars in thousands):
Gross Gross
Historical Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
U.S. Treasury
securities $89,951 -- -- $89,951
------- ------ ------ -------
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
-8-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
component of shareholders' equity. At June 30, 1994, there
was no unrealized holding gain or loss.
NOTE 8 COMMITMENTS
At June 30, 1994, the Company had total unfunded loan
commitments of approximately $47.7 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 and
six months ended June 30, 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
During the first six months of 1994 the Company has concentrated on
restructuring its balance sheet, identifying and reducing nonperforming and
subperforming loans and foreclosed properties, limiting growth of new real
estate related credits and enhancing the Company's capital. The Company made
the decision to sell approximately $50,000,000 in book value of its
nonperforming and subperforming residential and commercial real estate loans and
foreclosed properties by means of an accelerated disposition program. This
decision was based on management's evaluation of current market conditions and
the potential cost savings opportunities which would be realized as a result of
the transaction.
The Company recorded a net loss of $12.3 million and $18.5 million for the three
and six months ended June 30, 1994, respectively, which compared to a net loss
of $2.2 million and $6.3 million, respectively, for the comparable periods in
1993. The net loss recorded in the second quarter of 1994 and for the first
half of 1994 was principally attributable to increases in the provision for loan
losses and declines in net interest income. The majority of the provision for
loan losses relates to market valuation discount on assets included in the
accelerated asset disposition plan. The provision for loan losses during the
three and six months ended June 30, 1994 also reflects management's assessment
of continuing weak economic conditions, the actual and potential impact those
conditions have had and may have on the Company's loan portfolio, and the level
of net charge-offs in the first half of 1994. Net interest income during the
second quarter and for the first six months of 1994 is down from amounts
reported for the comparable periods in 1993 due principally to a decline in
average interest-earning assets in general, and outstanding loans in particular,
and, to a lesser extent, the yields earned thereon. This decline in outstanding
loans reflects a management decision to limit growth in new real estate related
credits as well as overall weak economic conditions in Southern California
during this period. Net interest income was positively affected by a decline in
average interest-bearing deposits and rates paid thereon.
Noninterest expense increased during the three and six months ended June 30,
1994 from amounts reported for the comparable periods in 1993. Total
noninterest expense during the three months ended June 30, 1994 increased
approximately $300,000 from the comparable quarter in 1993 and $700,000 from the
comparable six month period in 1993. The increase in noninterest expense for
both the three and six month periods ended June 30, 1994 was primarily due to
the continuing high level of direct holding costs and valuation adjustments
associated with foreclosed properties and increases in salaries and employee
benefits resulting from decreases in deferred incremental underwriting costs.
These increases were partially offset by reductions in customer service
expenses.
-10-
At June 30, 1994, total assets and deposits of $473.2 million and $446.7
million, respectively, had decreased 16.6% and 15.0%, respectively, from amounts
reported at the close of 1993. Loans, net of deferred loan fees, were $236.2
million, a decrease of 26.8% from the amounts reported at December 31, 1993.
The majority of the decline is the result of the transfer of loans to other real
estate owned and assets held for accelerated disposition as part of the
accelerated disposition program. The remaining decline in the loan portfolio
reflects the result of general economic conditions in the Company's marketplace,
and a slow down in real estate activity in Southern California. 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.
Total average assets, deposits and loans, net of deferred loan fees, of $448.2
million, $408.5 million and $300.9 million, respectively, during the first six
months of 1994 declined 23.5%, 25.2% and 10.9%, respectively, from the calendar
year 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 half of 1994 as noninterest-bearing demand accounts decreased as a
percentage of total average deposits to 55.2% compared to 59.3% during all of
1993. Although those funds were replaced with more costly interest-bearing
deposits, the mix of interest-bearing deposits changed thereby lowering the
overall rates paid on interest-bearing deposits.
Nonperforming loans decreased approximately $27.9 million between June 30, 1994
and March 31, 1994 and were approximately $17.5 million at June 30, 1994. The
decrease is substantially the result of the transfer of loans to other real
estate owned and assets held for accelerated disposition. 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, excluding loans included in the
accelerated asset disposition plan, was 77.8% at June 30, 1994 compared to 52.2%
at December 31, 1993.
At June 30, 1994, the Company's allowance for loan losses was $13.6 million and
$18.2 million, respectively, or 5.8% and 5.6%, respectively, of loans
outstanding. During the three and six months ended June 30, 1994, net charge-
offs were $17.9 million and $19.6 million, respectively, which includes the
charge to the allowance for loan losses for the market valuation adjustments
associated with assets transferred to held for sale. Net charge-offs were
$700,000 and $4.4 million, respectively, during the three and six months ended
June 30, 1993.
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 $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for its
own general corporate purposes.
The following table reflects certain information regarding the Company's net
loss for the three and six months ended June 30, 1994 and 1993 (dollars in
thousands, except earnings per share data):
-11-
Three Months Ended June 30,
1994 1993
------ ------
Net loss $(12,268) $(2,247)
Net loss per share (0.98) (0.61)
Six Months Ended June 30,
1994 1993
------ ------
Net loss $(18,451) $(6,326)
Net loss per share (1.67) (1.72)
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. A comparison of net interest income and net
interest margin for the three and six months ended June 30, 1994 and 1993 is
shown in the table below (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1994 1993 1994 1993
------ ------ ------ ------
Interest income $6,321 $8,792 $12,734 $16,936
Interest expense 1,468 2,006 3,048 4,023
------ ------ ------- -------
Net interest income $4,853 $6,786 $ 9,686 $12,913
------ ------ ------- -------
------ ------ ------- -------
Annualized net interest
margin 5.26% 5.23% 4.98% 5.07%
------ ------ ------- -------
------ ------ ------- -------
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 yields and rates
thereon.
Six months ended
June 30, 1994
---------------------------------------------
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
- - -------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Interest-bearing deposits
with financial institutions $ 1,724 $ 28 3.25%
Federal funds sold 40,807 706 3.46
Investment Securities(1) 35,248 745 4.42
Short-term investments 11,369 205 3.61
Gross loans(2) 301,481 11,050 7.33
-------- ------- ----
Total interest-earning
assets 390,629 $12,734 6.54%
------- ----
Noninterest-bearing assets 57,616
--------
Total assets $448,245
--------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Borrowed funds $ 6,624 $ 262 7.91%
Interest-bearing demand
and savings deposits 51,911 628 2.42
Money market deposits 45,163 537 2.38
Time certificates of deposit 85,785 1,621 3.78
-------- ------- ----
Total interest-bearing
liabilities 189,483 $ 3,048 3.22
------- ----
Noninterest-bearing deposits 225,680
Other liabilities 1,402
Shareholders' equity 31,680
--------
Total liabilities and
shareholders' equity $448,245
--------
--------
Net interest income(3) $ 9,686
-------
-------
Net interest margin(3) 4.98%
----
----
Six months ended
June 30, 1994
---------------------------------------------
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
- - -------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Interest-bearing deposits
with financial institutions $ 1,015 $ 15 2.96%
Federal funds sold 82,840 1,196 2.89
Investment Securities(1) 29,390 932 6.76
Short-term investments 40,204 575 2.86
Gross loans(2) 358,563 14,218 7.93
-------- ------- ----
Total interest-earning
assets 512,012 $16,936 6.64%
------- ----
Noninterest-bearing assets 85,472
--------
Total assets $597,484
--------
-13-
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Borrowed funds $ 4,594 $ 222 9.66%
Interest-bearing demand
and savings deposits 52,395 606 2.31
Money market deposits 53,445 687 2.57
Time certificates of deposit 126,680 2,508 3.96
-------- ------- ----
Total interest-bearing
liabilities 237,114 $ 4,023 3.39
------- ----
Noninterest-bearing deposits 320,540
Other liabilities 5,557
Shareholders' equity 34,273
--------
Total liabilities and
shareholders' equity $597,484
--------
--------
Net interest income(3) $12,913
-------
-------
Net interest margin(3) 5.07%
----
----
<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 $758,000 and $356,000 during
the six months ended June 30, 1994 and 1993, respectively. Average
deferred loan fees during the six months ended June 30, 1994 and
1993 were $556,000 and $369,000, respectively.
(3) If customer service expense were classified as interest expense,
then the Company's reported net interest income and noninterest
expense for the six months ended June 30, 1994 and 1993 would be
reduced by $1,962,000 and $2,825,000, respectively, and the net
interest margin would be 3.97% and 3.94%, respectively.
[This space intentionally left blank]
-14-
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 period 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.
Six months ended
June 30, 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 $ 11 $ 2 $ 13
Federal funds sold (693) 203 (490)
Investment Securities 163 (350) (187)
Short-term investments (491) 121 (370)
Gross loans, net of
unearned income (2,148) (1,020) (3,168)
------- ------- -------
Total interest-earning
assets (3,158) (1,044) (4,202)
------- ------- -------
Interest bearing liabilities:
Borrowed funds 85 (45) 40
Interest-bearing demand
and savings deposits (6) 28 22
Money market deposits (101) (49) (150)
Time certificates of deposit (777) (110) (887)
------- ------- -------
Total interest-bearing
liabilities (799) (176) (975)
------- ------- -------
Net interest income $(2,359) $ (868) $(3,227)
------- ------- -------
------- ------- -------
Net interest income for the three and six months ended June 30, 1994 decreased
approximately $1.9 million and $3.2 million, respectively, from the amounts
reported for the comparable periods in 1993. These declines are principally
attributable to a 23.7% decline in average interest earning assets experienced
during the first half of 1994 when compared to the same period in 1993 and an
increase in average nonperforming assets during the first half of 1994 as
compared to 1993. Also contributing to the declines was an overall decline in
the yield on investment securities and interest-bearing deposits with financial
institutions which was partially offset by higher yields on federal funds sold
and short-term investments. Net interest income was positively affected by a
decrease in average interest-bearing deposit volumes and 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
June 30, 1994, there was no interest accrued which had not been reversed on
nonaccrual loans. During the three and six months ended June 30, 1994, the
level of foregone interest on nonaccrual loans was approximately $1.3 million
and $2.6 million, respectively, which compares to $900,000 and $1.6 million,
respectively, for the comparable periods in 1993. Interest income will continue
to be adversely affected until such time as the Company is able to further
reduce the level of its nonaccrual loans and increase the volume of new loan
origination.
-15-
During the six months ended June 30, 1994, the Company's average
interest-earning assets in general and average loans outstanding in particular
declined from the average amounts reported at June 30, 1993, which, in turn, has
contributed to the decline in net interest income. Average interest-earning
assets and average gross loans were $390.6 million and $301.5 million,
respectively, during the first six months of 1994 compared to $512.0 million and
$358.6 million, respectively, for the year ended 1993. This decline and any
further decline in interest-earning 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 six months of 1994, the composition of average deposits changed
as average noninterest-bearing deposits decreased as a percentage of total
average deposits to 55.2% from 59.3% during all of 1993 and average interest-
bearing deposits increased as a percentage of total average deposits to 44.8%
from 40.7% during all of 1993. The effect of a higher percentage of interest-
bearing liabilities was partially offset by lower rates paid on interest-bearing
liabilities during 1994 when compared to 1993. This increased reliance on
interest-bearing sources of funds has and will continue to negatively affect net
interest income.
Customer service expense, primarily costs related to external accounting, data
processing and courier services provided to title insurance company and escrow
company depositors, are incurred by the Company to the extent that certain
average noninterest-bearing deposits are maintained by such depositors and such
deposit relationships are determined to be profitable. Customer service expense
is classified as noninterest-expense. If customer service expense was
classified as interest expense, then the Company's reported net interest income
and noninterest-expense for the three and six months ended June 30, 1994 and
1993 would be reduced by $900,000 and $2.0 million, respectively, and $1.5
million and $2.8 million, respectively. Net interest margin for the three and
six months ended June 30, 1994 and 1993 would have been 4.44% and 3.97%,
respectively, and 3.91% and 3.94%, respectively.
PROVISION FOR LOAN LOSSES
The amounts provided for loan losses are determined by management after
quarterly evaluations of the loan portfolio. This evaluation process 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 and
the accelerated asset disposition program. While management considers the
amounts provided 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 for the three and six months ended June 30, 1994
and 1993 was $11.0 million and $15.0 million, respectively, and $3.8 million and
$8.8 million, respectively. The significant increase in the provision for loan
losses in 1994 over that in 1993 is in response to the Company's decision to
sell by means of a sealed bid approximately $50 million of its nonperforming and
subperforming residential and commercial real estate loans and foreclosed
properties. The decision to adopt an accelerated disposition program is based
upon management's evaluation of current market conditions and the potential cost
saving opportunities which could be realized as a result of such a transaction.
-16-
Appraisals received during the first half of 1994 reflect both continued
deterioration in certain asset values and a relatively high level of distressed
sales in the Company's marketplace. At the same time, management had been
advised that there is an increased institutional demand for distressed real
estate assets and a corresponding reduction in the market discount applied in
such asset sales. The combination of these factors, coupled with significant
costs associated with managing and carrying troubled assets, has led the Board
of Directors to conclude that implementing the asset disposition program in 1994
is in the best interests of the Company and its shareholders. The costs
associated with managing the portfolio of nonperforming assets continue to have
a significant negative impact on operating earnings. In light of changes in the
marketplace, the proposed sale is designed to reduce the bulk of these troubled
assets and their related costs and allow management to focus on opportunities
which lie ahead.
In addition to the provision related to the accelerated asset disposition
program, the provision for loan losses for the six months ended June 30, 1994
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; and 3) reduced values of
real estate projects resulting from being located in areas impacted by
the Northridge earthquakes.
The increase in net charge-offs during the first half of 1994 from those
reported a year earlier primarily resulted from losses recognized upon transfer
of assets to other real estate owned and assets held for accelerated
disposition, losses taken on certain real estate related loans due to economic
conditions and other charge-offs related to loans deemed uncollectible by the
Company. During the three and six months ended June 30, 1994, net charge-offs
were $17.9 million and $19.6 million, respectively, which includes the charge to
the allowance for loan losses for the market valuation adjustments associated
with assets transferred to held for sale. Net charge-offs were $700,000 and
$4.4 million, respectively, during the three and six months ended June 30, 1993.
NONINTEREST INCOME
Total noninterest income for the three and six months ended June 30, 1994 and
1993 was $417,000 and $780,000, respectively, and $375,000 and $680,000,
respectively. The modest increases for the second quarter and first half of
1994 over the comparable periods in 1993 are attributable principally to
increases in service charges on deposit accounts and escrow fees earned by the
Bank.
NONINTEREST EXPENSE
The following tables set forth information on the noninterest expense of the
Company for the three and six months ended June 30, 1994 and 1993 (dollars in
thousands):
[This space intentionally left blank]
-17-
Three Months Ended June 30,
------------------------------------------
Increase Change
1994 1993 Decrease %
------ ------ -------- ------
Salaries and employee
benefits $2,087 $1,941 $ 146 7.52
Occupancy 304 179 125 69.83
Furniture and equipment 218 218 -- --
Customer service 904 1,491 (587) (39.37)
Data processing 159 106 53 50.00
Other real estate owned 874 546 328 60.07
Professional 635 467 168 35.97
Other 1,357 1,301 56 4.30
------ ------ ------ ------
$6,538 $6,249 $ 289 4.62
------ ------ ------ ------
------ ------ ------ ------
Six Months Ended June 30,
------------------------------------------
Increase Change
1994 1993 Decrease %
------ ------ -------- ------
Salaries and employee
benefits $4,344 $4,011 $ 333 8.30
Occupancy 623 651 (28) (4.30)
Furniture and equipment 406 433 (27) (6.24)
Customer service 1,962 2,825 (863) (30.55)
Data processing 304 231 73 31.60
Other real estate owned 2,441 1,181 1,260 106.69
Professional 1,137 1,017 120 11.80
Other 2,700 2,825 (125) (4.42)
------- ------- ------ ------
$13,917 $13,174 $ 743 5.64
------- ------- ------ ------
------- ------- ------ ------
The following table summarizes the components of salaries and employee benefits
for the three and six months ended June 30, 1994 and 1993 (dollars in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
1994 1993 1994 1993
------ ------ ------ ------
Salaries, wages and
payroll taxes $1,898 $1,989 $3,886 $4,074
Deferred direct
incremental
underwriting costs (70) (264) (184) (542)
Medical and other
insurance benefits 201 166 484 345
Other 58 50 158 134
------ ------ ------ ------
$2,087 $1,941 $4,344 $4,011
------ ------ ------ ------
------ ------ ------ ------
Direct compensation decreased approximately $91,000 and $188,000 during the
three and six months ended June 30, 1994 over the amounts reported for the
comparable period in 1993. The decrease in direct compensation is attributable
to the elimination of approximately 20% of the currently authorized positions
within the Company during the second quarter of 1994. This action is 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
$194,000 and $358,000 during the three and six months ended June 30, 1994,
respectively, from the levels reported in the comparable periods in 1993. The
level of such deferred costs is directly related to the volume of new loan
originations which, since
-18-
mid-1991, have been declining as part of management's strategic goal of reducing
real estate loan growth, particularly construction lending. The increase in
medical and other insurance benefits of $35,000 and $139,000 for the three and
six months ended June 30, 1994 over the same periods in 1993 is attributable to
increases in costs passed on to the Company from the health care provider.
Occupancy expense increased approximately $125,000 and decreased approximately
$28,000, respectively, during the three and six months ended June 30, 1994 from
the amounts reported during the similar period in 1993 which reflects
renegotiating the terms of the lease of the space it occupies in Los Angeles.
The decreases in furniture and equipment expense for the three and six months
ended June 30, 1994 over similar periods in prior year are principally the
result of lower depreciation expense as Company owned furniture and equipment
becomes fully depreciated.
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 and six months ended June 30, 1994 and 1993 was
$162.6 million and $177.2 million, and $314.4 million and $273.4 million,
respectively, contributing to a decrease in customer service expense of $587,000
and $863,000 during the second quarter and the first six months of 1994 from the
level reported in comparable prior periods. 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 amounts,
thereby decreasing the level and cost of outside services provided. The balance
of title insurance company and escrow company deposits at June 30, 1994 was
$114.5 million and $108.4 million, respectively. If customer service expense
were classified as interest expense, then the Company's net interest income and
noninterest expense for the three and six months ended June 30, 1994 and 1993
would be reduced by $900,000 and $2.0 million, respectively, and $1.5 million
and $2.8 million, respectively. Net interest margin for the three and six
months ended June 30, 1994 and 1993 would be 4.44% and 3.97%, respectively, and
3.91% and 3.94%, respectively.
Data processing expense increased approximately $53,000 and $73,000 for the
three and six months ended June 30, 1994 from the comparable period in 1993
which reflects 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 and six months
ended June 30, 1994 by $328,000 and $1.3 million, respectively, from the amounts
reported for the three and six months ended June 30, 1993. OREO levels are up
over 1993 which has resulted in increased direct holding costs. Direct holding
costs are comprised principally of property taxes, insurance, security,
foreclosure costs, marketing and other miscellaneous costs. The valuation
adjustment of $1.2 million resulted from a $900,000 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
and a valuation adjustment of $300,000 made to reflect a reduction in the fair
market value of one other real estate property. Due to weaknesses in the
-19-
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 until such time as such asset levels are
reduced.
OREO expense for the three and six months ended June 30, 1994 and 1993 is
comprised of the following (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
------ ------ ------ ------
Direct holding costs $ 629 $ 526 $1,311 $ 820
Losses on sale 25 48 31 53
Gains on sale (80) (28) (101) (28)
Valuation adjustments 300 --- 1,200 336
----- ----- ------ ------
$ 874 $ 546 $2,441 $1,181
----- ----- ------ ------
----- ----- ------ ------
During the three and six months ended June 30, 1994, professional fees increased
by $168,000 and $120,000, respectively. The increase over prior year
principally reflects 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 current economy, and which typically involve complex legal and
other issues. To a much lesser extent, professional related expenses have also
increased as a result of increases in 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 affect negatively noninterest expenses until nonperforming asset
levels are reduced.
Other noninterest expense for the three and six months ended June 30, 1994 and
1993 is comprised of the following (dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
------ ------ ------ ------
Promotional $ 226 $ 225 $ 378 $ 396
FDIC assessments 401 438 802 874
Other 730 638 1,520 1,555
------ ------ ------ ------
$1,357 $1,301 $2,700 $2,825
------ ------ ------ ------
------ ------ ------ ------
For the three and six month periods ended June 30, 1994, promotional expenses
increased $1,000 and decreased $18,000, respectively, over the same periods in
1993. The year-to-date decrease is primarily as a result of management's
decreased emphasis in 1994 on marketing related activities.
Premiums paid for FDIC have decreased for the three and six months ended
June 30, 1994 by $37,000 and $72,000, respectively, over similar periods in 1993
resulting from a decline in average deposits subject to FDIC insurance premiums.
FINANCIAL CONDITION
TOTAL ASSETS
At June 30, 1994, total assets were approximately $473.2 million, as compared to
$567.5 million at December 31, 1993, a decrease of approximately $94.3 million.
The decrease in assets at the end of the second quarter of 1994 over year-end
1993 was primarily the result of period-end decreases in noninterest-bearing
-20-
deposits from title insurance and escrow customers and, to a lesser extent,
lower volumes in interest-bearing deposits. The lower deposit volumes resulted
in lower short-term investments which were partially offset with higher cash and
due from balances. Loan balances were significantly lower at June 30, 1994
resulting from assets included in the accelerated disposition plan transferred
to other real estate owned and assets held for accelerated disposition and
reflects management's decision to limit growth of new real estate related
credits and slower growth rates experienced in new loan origination due to lower
loan demand.
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 results of operation. Accordingly, such information is
used in the discussion which follows to assist in providing information relevant
to the Company.
Total average assets for the six months ended June 30, 1994 were $448.2 million,
down $149.3 million, or 32.3%, from the $597.5 million average for the year
ended December 31, 1993. The decline in average assets during the first half of
1994 reflects management's decision to limit growth of new real estate related
credits, slower growth rates experienced in other new loan origination due to
weak loan demand and generally lower levels of investment activity brought on by
an approximate $144.5 million decrease during the first half 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 and escrow company deposits. At June 30, 1994, cash and due
from banks was up approximately $47.9 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 six months ended June 30, 1994 was approximately $47.7
million, down $20.2 million, or 29.8%, from the $67.9 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 $40.8 million during the first
half of 1994, down $48.5 million, or 54.3%, from the $89.3 million average for
all of 1993. The decrease was primarily due to having, on an average basis,
less funds available to invest in the form of federal funds sold. At June 30,
1994 and December 31, 1993, there was no position taken in fed funds sold. The
Company placed available funds into other form of liquid investments.
Short-term Investments
At June 30, 1994, the Company's short-term investments aggregated $90.0 million,
down approximately $89.9 million, or 50.0%, from the $179.9 million reported at
December 31, 1993. During the first half of 1994, the Company purchased short-
term investments of $200.0 million and retired approximately $290.0 million of
matured investments. During the first half of 1994, average short-term
investments were $11.4 million as compared to $33.0 million during all of 1993.
The Company adopted Financial Accounting Standards Board Statement No. 115,
-21-
"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
shareholders' equity.
INVESTMENT SECURITIES
At June 30, 1994, the Company's investment securities portfolio aggregated $32.1
million, up approximately $3.0 million from the $29.1 million reported by the
Company at December 31, 1993. The Company purchased approximately $20.0 million
of investment securities for its portfolio and retired $17.0 million of matured
securities during the first half of 1994. Total average investment securities
for the six months ended June 30, 1994 were $35.2 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, 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 June 30, 1994, real estate, construction and commercial loans comprised
approximately 49.4%, 19.9% and 29.9%, 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
June 30, 1994, loans, net of deferred loan fees, were $236.2 million, as
compared to $322.7 million at December 31, 1993, a decline of approximately
$86.5 million. The decrease includes the transfer of loans identified for
inclusion in the accelerated asset disposition program to OREO and assets held
for accelerated disposition. The remainder of the decrease 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.
Average gross loans were $301.5 million for the six months ended June 30, 1994,
a decrease of $51.9 million, or 14.7%, 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 69.1% during the first half of 1994,
as compared to 61.8% for all of 1993.
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 1993 Form
10-K discusses the factors and methodology used by management in determining the
allowance for loan losses.
-22-
At June 30, 1994 and December 31, 1993, the Company's allowance for loan losses
was $13.6 million and $18.2 million, or 5.8% and 5.6%, respectively, of loans
outstanding. During the three and six months ended June 30, 1994, net charge-
offs were $17.9 million and $19.6 million, respectively, which includes the
charge to the allowance for loan losses for the market valuation adjustments
associated with assets transferred to held for sale. Net charge-offs were
$700,000 and $4.4 million, respectively, during the three and six months ended
June 30, 1993.
Management believes that the allowance for loan losses at June 30, 1994 is
adequate to absorb the known and inherent risks in the loan portfolio. 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, and other circumstances will not result in increased
losses in the Company's loan portfolio in the future. In addition, various
regulatory agencies, as an integral part of the 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.
NONPERFORMING ASSETS
NONACCRUAL, PAST DUE AND MODIFIED LOANS
A summary of the Company's nonperforming loans (defined as shown below) at
June 30, 1994, March 31, 1994 and December 31, 1993 follows (dollars in
thousands):
June 30, March 31, December 31,
1994 1994 1993
-------- -------- ------------
Loans on nonaccrual $17,426 $38,527 $29,056
Loans past due 90 days
and still accruing 46 4,642 5,769
------- ------- -------
Total nonperforming
loans $17,472 $43,169 $34,825
Loans with modified terms 3,704 3,960 9,539
------- ------- -------
Nonperforming loans and
loans with modified terms $21,176 $47,129 $44,364
------- ------- -------
------- ------- -------
While no assurances can be given as to the ultimate collectibility of
nonperforming loans, the Company believes that its current collateral position
on such loans reduces exposure to a substantial loss of principal.
OTHER REAL ESTATE OWNED AND ASSETS HELD FOR ACCELERATED DISPOSITION
Activity in other real estate owned for the six months ended June 30, 1994 and
year ended December 31, 1993 are as follows (dollars in thousands):
-23-
Six Months Ended Year Ended
June 30, 1994 December 31, 1993
---------------- -----------------
Balance, beginning of period $13,949 $ 4,359
Additions 36,272 24,209
Sales (5,507) (13,905)
Valuation adjustment (1,200) (714)
------- -------
Balance, end of period $43,514 $13,949
------- -------
------- -------
Additions to other real estate owned and assets held for accelerated disposition
during the second quarter of 1994 reflects primarily the transfer of loans, net
of estimated market valuation, associated with the bulk sale.
Total nonperforming assets, defined as nonperforming loans and other real estate
owned and assets held for accelerated disposition, were $61.0 million at June
30, 1994 compared to $48.8 million at December 31, 1993. The Company continues
to experience increases in nonperforming assets as a result of weaknesses in the
Company's marketplace and economy and the related effect on the Company's
borrowers.
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 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 June 30, 1994, total deposits of $446.7 million were comprised of $279.2
million and $167.5 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 $79.0 million decrease in total
deposits since December 31, 1993 is comprised of decreases of $43.7 million and
$35.3 million in noninterest-bearing and interest-bearing deposits,
respectively.
The decrease in noninterest-bearing deposits at June 30, 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 as well as the operating results of the
Bank. The decrease in interest-bearing deposits since December 31, 1993
reflects a $23.0 million and a $12.3 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 yield
alternatives in the marketplace.
Consistent with the decrease in total deposits at June 30, 1994 from the levels
reported at the close of 1993, total average deposits for the six months ended
June 30, 1994 were $408.5 million, down $137.7 million, or 25.2%, from the
$546.2 million average for all of 1993. Average noninterest-bearing deposits
and average interest-bearing deposits during the first six months of 1994 were
$225.7 million and $182.8 million, respectively, which compares to $323.7
million and $222.5 million, respectively, for the year ended December 31, 1993.
The $98.0 million decrease in average noninterest-bearing deposits during the
first half 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 company and escrow company
depositors
-24-
as a result of current economic conditions as well as the operating results of
the Bank. The decrease in average interest-bearing deposits of $39.7 million
during the first six months from the 1993 average is comprised of an approximate
$30.8 million decrease in average time certificates of deposit an approximate
$8.9 million decline in savings due to deposits seeking yields in other
investment alternatives 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 June 30, 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 36.4%. The ratio of
average total liquid assets to average total deposits was 25.3% during the first
half of 1994.
At June 30, 1994, $239.6 million of the Company's noninterest-bearing demand
deposits, or 53.6% of total deposits, were from title insurance companies and
escrow companies and $101.4 million of such deposits, or 22.7% of total
deposits, were maintained by five title insurance and escrow company customers;
one such customer accounted for 9.6%, and another accounted for 4.2%, 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. In addition as of June 30, 1994, labor union deposits
were $85.1 million, or 19.1% of total deposits, and 71.3% 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 June 30, 1994, $279.2 million or 62.5% of the Company's total
deposits were noninterest-bearing demand deposits, and time certificates of
deposit of $100,000 or more were $14.3 million, which represented 3.2% 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.
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 June 30,
1994, loans outstanding in the amount of approximately $40.5 million were
pledged as collateral to secure advances with the Federal Reserve Bank. In
addition, the Bank has federal funds facilities available with its major
correspondent aggregating $15.0 million. This facility is subject to customary
terms for such arrangements.
At June 30, 1994, Guardian Bancorp, on an unconsolidated basis, had cash and
cash equivalents available of approximately $1.8 million, which is considered
sufficient for meeting its short-term liquidity needs. In accordance with the
terms of the agreements entered into with the Federal Reserve Bank, the Company
-25-
has agreed not to incur additional debt, and the Bank has agreed not to pay or
declare dividends to Guardian Bancorp, without prior regulatory approval.
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.
Preliminary discussions were had in the second quarter of 1994 with the note
holder to address renegotiation of the terms of the subordinated debt. 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 June 30, 1994, approximately $114.5 million of the Company's accruing loans
outstanding mature within one year and approximately $183.0 million, or 83.5% of
the outstanding 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 $50.0 million, including commitments under
standby letters of credit, the Company had no material unrecorded commitments or
contingencies at June 30, 1994.
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. 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 $229,000 for costs it incurred in the capital raising effort.
Guardian Bancorp retained the remaining net proceeds for its own general
corporate purposes.
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 June 30, 1994 (dollars in thousands):
[This space intentionally left blank]
-26-
Company
------------------------
(Dollars in thousands) $ %
- - ---------------------- -------- -------
Risk-based ratios:
Tier 1 Capital(1) $ 20,748 6.83%
Tier 1 Capital minimum requirement(2) 12,152 4.00
-------- ----
Excess $ 8,596 2.83%
-------- ----
-------- ----
Total Capital(3) $ 25,840 8.51%
Total Capital minimum requirement(2)2 24,304 8.00
-------- ----
Excess $ 1,536 0.51%
-------- ----
-------- ----
Risk-weighted assets $303,805
--------
--------
Leverage ratio (3+% minimum)(4) 4.86%
----
----
Bank
------------------------
(Dollars in thousands) $ %
- - ---------------------- -------- -------
Risk-based ratios:
Tier 1 Capital(1) $22,039 7.64%
Tier 1 Capital minimum requirement(2) 11,543 4.00
-------- ----
Excess $10,496 3.64%
-------- ----
-------- ----
Total Capital(3) $25,943 8.99%
Total Capital minimum requirement(2) 23,086 8.00
-------- ----
Excess $ 2,857 0.99%
-------- ----
-------- ----
Risk-weighted assets $288,573
--------
--------
Leverage ratio (3+% minimum)(4) 5.17%
----
----
<FN>
- - ---------------
(1) Includes common shareholders' equity.
(2) Reflects the minimum ratio applicable for December 31, 1992.
Commencing December 19, 1992, insured institutions such as
the Bank must, among other things, maintain a Tier 1 Capital
ratio of at least 4% and a Total Capital or ratio of at least
8% to be considered "adequately capitalized"under the prompt
corrective action provisions of the Federal Deposit
Insurance Improvement Act of 1991 ("FDICIA").
(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 quarter
ended June 30, 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 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% to be considered
"adequately capitalized" under the prompt corrective
action provisions of FDICIA.
-27-
Assuming that the proposed accelerated asset disposition plan had been
consummated at June 30, 1994 and the proceeds from the sale invested in 20%
risk-weighted assets, the Bank's tier 1 and total risk-based capital ratios
would be 8.40% and 9.70%, respectively. The Company's respective risk-based
capital ratios would be 7.49% and 9.14%, respectively.
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]
-28-
PART II - OTHER INFORMATION
Item 1-3. Inapplicable.
Item 4. Submission of Matters to Vote of Security Holders.
(a) The 1994 Annual Meeting of Shareholders of the Company (the
"Annual Meeting") was held on June 1, 1994.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There
was no solicitation in opposition to management's nominees as
listed in the proxy statement, dated April 28, 1994, and the
following individuals were duly elected to the Board of Directors
of the Company by the vote set forth below:
SHARES VOTED
---------------------------
Authority
For Withheld
----- ---------
Marilyn M. Cohen 7,859,621 581,633
Howard C. Fletcher, III 7,959,936 481,318
Robert D. Frandzel 7,977,299 463,955
Paul M. Harris 7,957,546 483,708
Saul Socoloske 7,972,305 468,949
Vincent A. Bell 7,967,514 473,740
James F. Lewin 7,977,123 464,131
Michael J. Welch 7,994,220 447,034
Jon D. Van Deuren 7,997,005 444,249
(c) The Company's new 1994 Long-Term Incentive Plan was approved.
(d) No other matters were voted upon at the Annual Meeting.
Item 5. Other Information.
On July 28, 1994, Mr. Howard C. Fletcher III ceased serving as
President and Chief Executive Officer of Guardian Bank and as
President of Guardian Bancorp. On the same date, Messrs. James F.
Lewin and Michael J. Welch announced their resignations from the Board
of Directors of Guardian Bancorp. Subsequently, on August 12, 1994,
Guardian Bancorp announced the appointment of James F. Lewin as
President and Chief Executive Officer of Guardian Bancorp, effective
immediately. It was also announced that Messrs. Lewin and Welch have
reassumed their positions with the Board of Directors immediately.
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
June 30, 1994 and no events have occurred which would require one
to be filed.
-29-
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: August 15, 1994 By /s/ Paul M. Harris
-----------------------------------
Paul M. Harris
Chairman and Chief Executive
Officer
Dated: August 15, 1994 By /s/ Jon D. Van Deuren
-----------------------------------
Jon D. Van Deuren
Executive Vice President and
Chief Financial Officer
-30-