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 September 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 November 7, 1994, there were issued and outstanding 12,514,075 shares of
the issuer's Common Stock.
This report contains 31 pages.
The exhibit index is on page 30.
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Item 1. Financial Statements.
(Dollars in thousands) September 30, December 31,
1994 1993
------------- ------------
Cash and due from banks $ 87,659 $ 23,155
Interest-bearing deposits with
financial institutions 714 1,990
Federal funds sold 20,000 -
Investment securities (market value
of $30,536 at September 30, 1994 and
$29,221 at December 31, 1993):
U.S. Treasury 29,422 24,279
State and municipal 720 4,336
Federal Reserve Bank stock 1,067 464
-------- --------
Total investment securities 31,209 29,079
-------- --------
Short-term investments - 179,948
Loans:
Real estate 122,008 147,039
Construction 37,992 87,829
Commercial 60,485 86,260
Installment 1,080 2,046
Deferred loan fees (535) (426)
-------- --------
Loans, net of deferred loan fees 221,030 322,748
Less allowance for loan losses ( 15,061) (18,200)
-------- --------
Net loans 205,969 304,548
-------- --------
Premises and equipment, net 1,367 1,808
Deferred income taxes 954 3,574
Other real estate owned and assets
held for accelerated disposition 34,993 13,949
Accrued interest receivable and
other assets 2,832 9,495
-------- --------
$385,697 $567,546
-------- --------
-------- --------
Deposits:
Noninterest-bearing demand $201,613 $322,900
Savings and interest-bearing demand 51,238 53,285
Money market 43,636 47,603
Time certificates of deposit 69,334 101,886
-------- --------
Total deposits 365,821 525,674
11-3/4% subordinated debentures 3,000 3,000
Other borrowed money - 15,000
Accrued interest payable and other
liabilities 2,125 2,571
-------- --------
Total liabilities 370,946 546,245
-------- --------
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) (18,983) 5,465
-------- --------
14,751 21,301
-------- --------
$385,697 $567,546
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
-2-
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Three months Nine months
ended September 30, ended September 30,
--------------------------- -------------------------
(dollars in thousands, 1994 1993 1994 1993
-------- -------- -------- --------
except per share data)
Interest Income:
Loans $ 5,354 $ 6,708 $16,404 $ 20,926
Deposits with financial
institutions 12 9 40 24
Investment securities 383 505 1,128 1,437
Short-term Investments 103 154 308 729
Federal funds sold 258 748 964 1,944
------- ------- -------- --------
6,110 8,124 18,844 25,060
------- ------- -------- --------
Interest expense:
Deposits 1,363 1,712 4,149 5,513
Borrowed funds 161 107 423 329
------- ------- -------- --------
1,524 1,819 4,572 5,842
------- ------- -------- --------
Net interest income 4,586 6,305 14,272 19,218
Provision for loan losses 6,450 4,500 21,450 13,250
------- ------- -------- --------
Net interest income (loss)
after provision for loan losses (1,864) 1,805 (7,178) 5,968
------- ------- -------- --------
Noninterest Income 451 380 1,231 1,068
Noninterest expense:
Salaries and employee benefits 1,961 2,378 6,305 6,389
Occupancy 262 311 885 962
Furniture and equipment 204 214 610 647
Customer service 943 1,444 2,905 4,269
Data processing 197 119 501 350
Other real estate owned 1,060 702 3,501 1,883
Professional 611 421 1,748 1,438
Other 1,046 1,501 3,746 4,326
------- ------- -------- --------
Total noninterest expense 6,284 7,090 20,201 20,264
------- ------- -------- --------
Loss before income taxes (7,697) (4,905) (26,148) (13,228)
Benefit for income taxes (1,700) (1,002) (1,700) (2,999)
------- ------- -------- --------
Net loss $(5,997) $(3,903) $(24,448) $(10,229)
------- ------- -------- --------
------- ------- -------- --------
Net loss per share $ (0.48) $ (1.04) $ (2.12) $ (2.76)
------- ------- -------- --------
------- ------- -------- --------
See accompanying notes to consolidated financial statements.
-3-
GUARDIAN BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands) Nine months
ended September 30,
--------------------------
1994 1993
-------- --------
Cash flows from operating activities:
Net loss $( 24,448) $(10,229)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Provision for loan losses 21,450 13,250
Depreciation and amortization 621 617
Provision for deferred
income taxes 2,620 733
Amortization of net deferred
loan fees (1,367) (339)
Amortization of net premium
on securities 160 240
Amortization of discount on
short-term investments (177) (406)
Loss on sales of short-term
investments - 10
Net (gain) loss on sale of other
real estate owned (57) 187
Other real estate owned
valuation adjustments 1,837 336
Gain on sale of premises and
equipment (27) -
Net change in accrued interest
receivable and other assets 6,663 (3,325)
Net change in accrued interest
payable and other liabilities (446) 6,985
--------- -------
Net cash provided by
operations 6,829 8,059
--------- -------
Cash flows from investing activities:
Proceeds from maturities of
investment securities transactions 23,109 10,450
Purchases of investment securities (25,399) (16,444)
Proceeds from short-term investment
securities transactions:
Sales - 239,882
Maturities 380,000 271,385
Purchases of short-term investments (199,875) (620,286)
Net change in loans 48,168 13,970
Proceeds from sale of other real estate 7,504 10,594
Purchases of premises and equipment (180) (173)
Proceeds from sale of premises
and equipment 27 -
--------- -------
Net cash provided by (used in)
investing activities 233,354 (90,622)
--------- -------
Cash flows from financing activities:
Net change in deposits (159,853) 73,721
Change in other borrowed money ( 15,000) (10,000)
Issuance of common stock 17,898 280
--------- -------
Net cash provided by (used in)
financing activities (156,955) 64,001
--------- -------
Net increase (decrease) in cash
and cash equivalents 83,228 (18,562)
Cash and cash equivalents at beginning
of year 25,145 109,853
--------- -------
Cash and cash equivalents at end of
period 108,373 $ 91,291
--------- -------
--------- -------
Supplemental disclosures:
Interest paid $ 4,669 $ 5,771
Taxes paid (refund) (8,933) 22
Significant non-cash transactions:
Transfer of loans to other
real estate owned and assets
held for accelerated disposition 30,328 $ 13,134
Loans made to facilitate sale
of real estate owned 2,029 5,265
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 September 30, 1994
and December 31, 1993, results of operations for the three
and nine months ended September 30, 1994 and 1993 and cash
flows for the nine months ended September 30, 1994 and 1993.
The results of operations for the three and nine months
ended September 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. During the three months ended
September 30, 1994, Guardian Bancorp contributed $1,440,000
to the Bank for the Bank's general corporate purposes.
-5-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 3 ACCELERATED ASSET DISPOSITION
During the second quarter of 1994, management and the Board
of Directors announced the Company's decision to sell up to
approximately $50 million of nonperforming and subperforming
residential and commercial real estate loans and foreclosed
properties. At June 30, 1994, an $11.0 million provision
for loan losses to reflect the market valuation associated
with the accelerated disposition was recorded and the
Company charged-off approximately $14.0 milion associated
with such assets at the time they were transferred to other
real estate owned and assets held for accelerated
disposition. In October 1994, the Company consummated the
bulk loan sale phase of the Company's accelerated asset
disposition plan and ultimately sold approximately $40
million of such assets. No additional provision for loan
losses for market valuation discount was necessary during
the three months ended September 30, 1994 to accomplish the
sale.
NOTE 4 PER SHARE DATA AND COMMON STOCK
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 nine
months ended September 30, 1994 of 12,514,000 and
11,550,000, 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 nine months
ended September 30, 1993 were 3,738,000 and 3,709,000,
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 nine months
of 1994, the Bank was required to maintain average reserves
of approximately $17.2 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
-6-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Bancorp has agreed not to incur additional debt or pay any
dividends, and the Bank cannot pay or declare dividends to
Guardian Bancorp without prior regulatory approval. State
banking law also restricts the Bank from extending credit
to Guardian Bancorp in excess of 10% of the capital stock
and surplus, as defined, of the Bank or approximately $1.8
million at September 30, 1994.
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 February, 1995. 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 interest payments beyond
February 1995 nor the $3.0 million principal amount of such
securities that will become due on the stated maturity date.
Guardian Bancorp's ability to receive additional funds
through Bank dividends or the issuance of debt at the
holding company level is limited by regulatory and statutory
restrictions. In the event that Guardian Bancorp is unable
to raise additional funds or restructure the debentures, it
is anticipated that it will be unable to meet its current
obligations and could be forced to restructure or pursue
other legal relief. Ongoing discussions are currently
underway with the debt holder to address a possible
restructuring.
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 September 30, 1994 (Dollars in
thousands):
-7-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- ---------
U.S. Treasury
securities $29,422 $ - $(685) $28,737
State and
municipal
securities 720 12 - 732
Federal Reserve
Bank stock 1,067 - - 1,067
------- ----- ------ -------
$31,209 $ 12 $(685) $30,536
------- ----- ------ -------
------- ----- ------ -------
The following table shows the carrying value and estimated
market value of investment securities by contractual
maturity at September 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 $ 7,742 5.77% $ 7,732
After one year but
within five years 21,680 4.58 21,005
------- ---- -------
29,422 4.90 28,737
------- ---- -------
State and municipal
securities:
Within one year
After one year but
within five years 695 5.98 706
------- ---- -------
25 8.74 26
------- ---- -------
720 6.08 732
------- ---- -------
Corporate securities:
Federal Reserve Bank
stock 1,067 6.00 1,067
------- ---- -------
$31,209 4.97% $30,536
------- ---- -------
------- ---- -------
U.S. Treasury and Government agency securities carried at
approximately $3.4 million at September 30, 1994 were
pledged to secure public deposits or for other purposes as
required or permitted by law.
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 shareholders' equity. At
September 30, 1994, there was no unrealized holding gain or
loss.
-8-
GUARDIAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 8 COMMITMENTS
At September 30, 1994, the Company had total unfunded loan
commitments of approximately $57.1 million and standby
letters of credit amounting to approximately $1.2 million.
-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
nine months ended September 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 nine months of 1994 the Company has concentrated on
restructuring its balance sheet in light of its capital levels, reducing
nonperforming and subperforming loans and foreclosed properties, limiting loan
growth, reducing operating costs and augmenting both the management team and the
Board of Directors. The Company ultimately made the decision to sell
approximately $40,000,000 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
transaction was substantially completed in October 1994. As a consequence,
nonperforming loans and other real estate owned, excluding assets held for
accelerated disposition were $27.9 million and $15.2 million, respectively, at
September 30, 1994. No additional provision for loan losses relating to market
valuation discount was necessary during the three months ended September 30,
1994 to accomplish the sale.
The Bank's tier 1 and total risk-based capital ratios at September 30, 1994 were
6.76% and 8.10%, respectively, and its leverage ratio was 4.70%. The Bank's
proforma tier 1 and total risk-based capital ratios and its leverage ratio, as
adjusted to give effect to the bulk asset sale had it occurred at September 30,
1994 were 7.03%, 8.34% and 4.70%, respectively.
The Company recorded a net loss of $6.0 million and $24.4 million for the three
and nine months ended September 30, 1994, respectively, which compared to a net
loss of $3.9 million and $10.2 million, respectively, for the comparable periods
in 1993. The net loss recorded in the third quarter of 1994 and for the first
nine months of 1994 was principally attributable to increases in the provision
for loan losses, expenses associated with holding other real estate owned,
declines in net interest income, partially offset by decreases in other
noninterest expenses. Approximately $11.0 million of the provision for loan
losses for the nine months ended September 30, 1994 relates to market valuation
discount on assets included for accelerated disposition. Excluding this market
valuation discount, the provision for loan losses during the nine months ended
September 30, 1994 was $10.5 million as compared to $13.3 million for the
comparable period in 1993. Net interest income during the third quarter and for
the first nine 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, offset by a modest increase in
the yields earned thereon. The decline in outstanding loans reflects a
management decision to limit loan growth in light of weak loan demand, the
Company's efforts at controlling its size given its current capital levels and
an overall weak economic conditions in Southern California. Net interest income
-10-
was positively affected by a decline in average interest-bearing deposits and
rates paid thereon.
Noninterest expense decreased during the three and nine months ended
September 30, 1994 from amounts reported for the comparable periods in 1993.
Total noninterest expense during the three months ended September 30, 1994
decreased approximately $806,000 from the comparable quarter in 1993 and $63,000
from the comparable nine month period in 1993. The decrease in total
noninterest expense for both the three and nine months ended September 30, 1994
from the same periods in 1993 was primarily to declines in salaries and employee
benefits, occupancy, customer service and other expenses. These declines were
partially offset by increases in direct holding costs and valuation adjustments
associated with foreclosed properties and increases in professional expenses.
At September 30, 1994, total assets and deposits of $385.7 million and $365.8
million, respectively, had decreased 32.0% and 30.4%, respectively, from amounts
reported at the close of 1993. Loans, net of deferred loan fees, were $221.0
million, a decrease of 31.5% 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, is attempting to diversify the loan portfolio mix to include
more non-real estate related credits, and continues to manage its size in light
of its capital levels.
Total average assets, deposits and loans, net of deferred loan fees, of $424.4
million, $387.1 million and $287.7 million, respectively, during the first nine
months of 1994 declined 29.0%, 29.1% and 18.5%, 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 nine months of 1994 as noninterest-bearing demand accounts decreased
as a percentage of total average deposits to 54.5% compared to 59.3% during all
of 1993. Average interest-bearing deposits during the nine months ended
September 30, 1994, expressed as a percentage of total average deposits were
45.4%, compared to 40.7% during all of 1993.
Total nonperforming assets, defined as loans on nonaccrual and loans past due 90
days or more and other real estate owned and assets held for accelerated
disposition, were $62.9 million at September 30, 1994. Nonperforming loans and
other real estate owned, excluding assets included in the accelerated asset
disposition, were $27.9 million and $15.2 million, respectively, at Septembr 30,
1994 which compared to $34.8 million and $13.9 million, respectively, at the
close of 1993. The majority of nonperforming loans are supported by real estate
collateral which reduces, but does not eliminate, exposure to loss of principal.
The ratio of the allowance for loan losses to nonperforming loans, excluding
loans included in the accelerated asset disposition, was 53.9% at September 30,
1994 compared to 52.3% at December 31, 1993.
At September 30, 1994 and December 31, 1993, the Company's allowance for loan
losses was $15.1 million and $18.2 million, respectively, or 6.8% and 5.6%,
respectively, of loans outstanding. During the three and nine months ended
September 30, 1994, net charge-offs were $5.0 million and $24.6 million,
respectively, which, for the nine months ended September 30, 1994, includes
-11-
charge-offs of approximately $14.0 million related to assets sold in the bulk
sale. Net charge-offs were $6.9 million and $11.3 million, respectively, during
the three and nine months ended September 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. During the three months ended September 30,
1994, Guardian Bancorp contributed $1,440,000 to the Bank for the Bank's general
corporate purposes. At September 30, 1994, Guardian Bancorp, on an
unconsolidated parent company only basis, had cash and cash equivalents
available of approximately $171,000. It is currently anticipated that absent a
cash infusion from the sale of equity or debt securities or a restructuring of
the debentures, Guardian Bancorp will be unable to meet its current obligations
(see "Financial Conditions-Liquidity and Interest Rate Sensitivity")
The following table reflects certain information regarding the Company's net
loss for the three and nine months ended September 30, 1994 and 1993 (dollars in
thousands, except earnings per share data):
Three Months Ended September 30,
1994 1993
------ ------
Net loss $(5,997) $(3,903)
Net loss per share (0.48) (1.04)
Nine Months Ended September 30,
1994 1993
------ ------
Net loss $(24,448) $(10,229)
Net loss per share (2.12) (2.76)
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 nine months ended September 30, 1994 and 1993
is shown in the table below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
Interest income $6,110 $8,124 $18,844 $25,060
Interest expense 1,524 1,819 4,572 5,842
------ ------ ------- -------
Net interest income $4,586 $6,305 $14,272 $19,218
------ ------ ------- -------
------ ------ ------- -------
Annualized net interest
margin 5.59% 5.04% 5.16% 5.05%
------ ------ ------- -------
------ ------ ------- -------
-12-
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.
The following table sets forth certain information concerning average interest-
earning assets and interest-bearing liabilities and the yields and rates
thereon.
Nine months ended
September 30, 1994
------------------------------------------------
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
- - - --------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Interest-bearing deposits
with financial institutions $ 1,580 $ 40 3.38%
Federal funds sold 34,561 964 3.72
Investment securities(1) 32,835 1,128 4.75
Short-term investments 12,465 308 3.30
Gross loans(2) 288,319 16,404 7.59
-------- ------- -----
Total interest-earning
assets 369,760 $18,844 6.81%
------- -----
Noninterest-earning assets 54,642
--------
Total assets $424,402
--------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Borrowed funds $ 6,723 $ 423 8.39%
Interest-bearing demand
and savings deposits 50,697 913 2.40
Money market deposits 44,554 822 2.46
Time certificates of deposit 80,998 2,414 3.97
-------- ------- -----
Total interest-bearing
liabilities 182,972 $ 4,572 3.33
------- -----
Noninterest-bearing deposits 210,895
Other liabilities 1,757
Shareholders' equity 28,778
--------
Total liabilities and
shareholders' equity $424,402
--------
--------
Net interest income(2) $14,272
--------
--------
Net interest margin(2) 5.16%
-----
-----
Nine months ended
September 30, 1994
------------------------------------------------
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
- - - --------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Interest-bearing deposits
with financial institutions $ 1,080 $ 24 2.96%
Federal funds sold 89,330 1,944 2.90
Investment Securities 31,290 1,437 6.48
Short-term investments(1) 33,906 729 2.87
Gross loans(2) 354,302 20,926 7.88
-------- ------- -----
Total interest-earning
assets 509,908 $25,060 6.57%
------- -----
Noninterest-bearing assets 79,527
--------
Total assets $589,435
--------
--------
-13-
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Borrowed funds $ 4,997 $ 329 8.78%
Interest-bearing demand
and savings deposits 53,676 961 2.39
Money market deposits 52,292 988 2.52
Time certificates of deposit 120,800 3,564 3.93
-------- ------- -----
Total interest-bearing
liabilities 231,765 $ 5,842 3.36
------- -----
Noninterest-bearing deposits 322,820
Other liabilities 2,246
Shareholders' equity 32,604
--------
Total liabilities and
shareholders' equity $589,435
--------
--------
Net interest income(2) $19,218
-------
-------
Net interest margin(2) 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 $1.4 million and $465,00 during
the nine months ended September 30, 1994 and 1993, respectively.
Average deferred loan fees during the nine months ended September 30,
1994 and 1993 were $587,000 and $339,000, respectively.
(3) If customer service expense were classified as interest expense,
then the Company's reported net interest income and noninterest
expense for the nine months ended September 30, 1994 and 1993
would be reduced by $2,905,000 and $4,269,000, respectively, and
the net interest margin would be 4.11% and 3.93%, respectively.
-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.
Nine months ended
September 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 $ 12 $ 4 $ 16
Federal funds sold (1,422) 442 (980)
Investment Securities 68 (377) (309)
Short-term investments (517) 96 (421)
Gross loans, net of
unearned income (3,778) (744) (4,522)
------- ------ -------
Total interest-earning
assets (5,637) (579) (6,216)
------- ------ -------
Interest bearing liabilities:
Borrowed funds 109 (15) 94
Interest-bearing demand
and savings deposits (54) 6 (48)
Money market deposits (143) (23) (166)
Time certificates of deposit (1,186) 36 (1,150)
------- ------ -------
Total interest-bearing
liabilities (1,274) 4 (1,270)
------- ------ -------
Net interest income $(4,363) $(583) $(4,946)
------- ------ -------
------- ------ -------
Net interest income for the three and nine months ended September 30, 1994
decreased approximately $1.7 million and $4.9 million, respectively, from the
amount reported for the comparable periods in 1993. These declines are
principally attributable to a 27.5% decline in average interest earning assets
experienced during the first nine months of 1994 when compared to the same
period in 1993 and an increase in average loans on nonaccrual during the first
nine months of 1994 as compared to 1993. Contributing to the decline in
interest income during the first nine months of 1994 was a decrease in yield on
investment securities which was partially offset by higher yields on short-term
investments and federal funds sold. Net interest income was positively affected
by a decrease in average interest-bearing deposit volumes and generally lower
rates on interest-bearing liabilities, partially offset by higher yields on time
certificates of deposit.
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
September 30, 1994, there was no interest accrued which had not been reversed on
nonaccrual loans. During the three and nine months ended September 30, 1994,
the level of foregone interest on nonaccrual loans was approximately $1.4
million and $4.0 million, respectively, which compares to $1.1 million and $2.7
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
-15-
the level of its nonaccrual loans and increase the volume of new loan
origination. During the nine months ended September 30, 1994, the Company's
average interest-earning assets in general and average loans outstanding in
particular declined from the average amounts reported at September 30, 1993,
which, in turn, has contributed to the decline in net interest income. Average
interest-earning assets and average gross loans were $369.8 million and $288.3
million, respectively, during the first nine 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 business and industrial lending as part of its efforts to
originate new loans and to diversify the loan portfolio.
During the first nine months of 1994, the composition of average deposits
changed as average noninterest-bearing deposits decreased as a percentage of
total average deposits to 54.5% from 59.3% during all of 1993 and average
interest-bearing deposits increased as a percentage of total average deposits to
45.5% 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 the first nine months of 1994 when compared
to the same period in 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 nine months ended September 30, 1994
and 1993 would be reduced by $943,000 and $2.9 million, respectively, and $1.4
million and $4.3 million, respectively. Net interest margin for the three and
nine months ended September 30, 1994 and 1993 would have been 4.44% and 4.11%,
respectively, and 3.89% and 3.93%, 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.
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 nine months ended September 30,
1994 and 1993 was $6.5 million and $21.5 million, respectively, and $4.5 million
and $13.3 million, respectively. The significant increase in the provision for
loan losses during the nine months ended September 30, 1994 over the comparable
period in 1993 is due to an approximate $11.0 million provision relating to
market valuation discount for assets included in the accelerated asset
disposition. The bulk sale was substantially completed in October 1994, and no
additional provision for loan losses relating to market valuation discount was
necessary in the third quarter of 1994.
-16-
In addition to the provision related to the accelerated asset disposition, the
provision for loan losses for the nine months ended September 30, 1994 reflects
management's current assessment of 1) recent appraisals on certain collateral
reflecting a continuation of distressed asset sales in the Company's
marketplace; 2) the impact recessionary conditions continue to 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 January 1994 Northridge
earthquakes.
The increase in net charge-offs during the first nine months 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 nine months ended September 30, 1994, net charge-
offs were $5.0 million and $24.6 million, respectively, which, for the nine
months ended September 30, 1994, includes charge-offs of approximately $14.0
million related to assets included in the bulk sale. Net charge-offs were $6.9
million and $11.3 million, respectively, during the three and nine months ended
September 30, 1993.
NONINTEREST INCOME
Total noninterest income for the three and nine months ended September 30, 1994
and 1993 was $451,000 and $1.2 million, respectively, and $380,000 and $1.1
million, respectively. The modest increases for the third quarter and first
nine months 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 nine months ended September 30, 1994 and 1993 (dollars
in thousands):
Three Months Ended September 30,
-------------------------------------
Increase Change
1994 1993 Decrease %
------ ------ -------- ------
Salaries and employee
benefits $1,961 $2,378 $ (417) (17.5)
Occupancy 262 311 (49) (15.8)
Furniture and equipment 204 214 (10) (4.7)
Customer service 943 1,444 (501) (13.9)
Data processing 197 119 78 65.5
Other real estate owned 1,060 702 358 51.0
Professional 611 421 190 45.1
Other 1,046 1,501 (455) (30.3)
------ ------ ------ ------
$6,284 $7,090 $ (806) (11.4)
------ ------ ------ ------
------ ------ ------ ------
-17-
Nine Months Ended September 30,
---------------------------------------
Increase Change
1994 1993 Decrease %
------ ------ -------- ------
Salaries and employee
benefits $ 6,305 $ 6,389 $ (84) (1.3)
Occupancy 885 962 (77) (8.0)
Furniture and equipment 610 647 (37) (5.7)
Customer service 2,905 4,269 (1,364) (32.0)
Data processing 501 350 151 43.1
Other real estate owned 3,501 1,883 1,618 85.9
Professional 1,748 1,438 310 21.6
Other 3,746 4,326 (580) (13.4)
------- ------- ------ -----
$20,201 $20,264 $ (63) (.3)
------- ------- ------ -----
------- ------- ------ -----
The following table summarizes the components of salaries and employee benefits
for the three and nine months ended September 30, 1994 and 1993 (dollars in
thousands):
Months Ended September 30, Nine Months Ended September 30,
1994 1993 1994 1993
------ ------ ------ ------
Salaries, wages and
payroll taxes $1,786 $1,943 $5,672 $6,017
Deferred direct
incremental
underwriting costs (73) (112) (257) (654)
Medical and other
insurance benefits 174 113 658 458
Other 74 434 232 568
------- ------- ------- -------
$1,961 $2,378 $6,305 $6,389
------- ------- ------- -------
------- ------- ------- -------
Direct compensation decreased approximately $157,000 and $345,000 during the
three and nine months ended September 30, 1994 from the amounts reported for the
comparable period in 1993. The decrease in direct compensation is attributable
to the elimination of approximately 20% of the authorized positions within the
Company during the second quarter of 1994. This action is part of management's
plan designed to reduce 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
$39,000 and $397,000 during the three and nine months ended September 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 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 $61,000 and
$200,000 for the three and nine months ended September 30, 1994 over the same
periods in 1993 is attributable to increases in costs passed on to the Company
from the health care provider. Other expenses, excluding severance agreement
accruals for former Company executives, comprised principally of temporary help,
recruiting, employee education and Company provided transit costs, were down in
the third quarter and the first nine months of 1994 from the levels reported in
the comparable periods of 1993 due principally to reductions in the amounts of
transit allowances provided to employees and to the reduced use of outside
placement firms and temporary help in 1994 compared to 1993. During the third
quarter of 1993, two executive officers of the Company ceased to serve as
employees. These executives were serving pursuant to three year contracts that
were entered into during 1992 and initially provided for aggregate annual base
salaries of $451,000. Each
-18-
agreement stipulates grounds for its termination and provides for alternative
severance payments that depend upon the circumstances of the termination.
During the third quarter of 1993, the Company accrued an aggregate of $350,000
associated with the subsequent negotiation and subsequent settlement of
severance arrangements with these former executives. Such accrual is included
in other, above, for the three and nine months ended September 30, 1993.
Occupancy expense decreased approximately $49,000 and $77,000 during the three
and nine months ended September 30, 1994, respectively, from the amounts
reported during the similar period in 1993 which reflects the renegotiated terms
of the lease of the space it occupies in Los Angeles.
The decreases in furniture and equipment expense for the three and nine months
ended September 30, 1994 over similar periods in the 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 daily balance of title insurance company and escrow
company deposits during the three months and nine months ended September 30,
1994 and 1993 was $133.5 million and $162.4 million, and $284.3 million and
$277.1 million, respectively. Customer service expense decreased $501,000 and
$1.4 million during the third quarter and the first nine months of 1994 from the
amounts reported in comparable prior periods. The decrease 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 September 30, 1994 was
$56.0 million and $105.7 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 nine months ended September 30, 1994 and
1993 would be reduced by $943,000 and $2.9 million, respectively, and $1.4
million and $4.3 million, respectively. Net interest margin for the three and
nine months ended September 30, 1994 and 1993 would be 4.44% and 4.11%,
respectively, and 3.89% and 3.93%, respectively.
Data processing expense increased approximately $78,000 and $151,000 for the
three and nine months ended September 30, 1994 from the comparable periods in
1993 which reflects the renegotiation of the Company's contract with its primary
data processor.
Other real estate owned (OREO) expense increased during the three and nine
months ended September 30, 1994 by $358,000 and $1.6 million, respectively, from
the amounts reported for the three and nine months ended September 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 $1.8 million resulted from writedowns of existing
OREO to reflect a reduction in fair market values brought about as a result of
weaknesses in the 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
-19-
adversely affect the Company's results of operations until such time as such
asset levels are reduced.
OREO expense for the three and nine months ended September 30, 1994 and 1993 is
comprised of the following (dollars in thousands):
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1994 1993 1994 1993
------ ------ ------ ------
Direct holding cost $ 410 $540 $1,721 $1,360
Losses on sale 83 238 114 291
Gains on sale (70) (76) (171) (104)
Valuation adjustments 637 - 1,837 336
------ ---- ------ ------
$1,060 $702 $3,501 $1,883
------ ---- ------ ------
------ ---- ------ ------
During the three and nine months ended September 30, 1994, professional fees
increased by $190,000 and $310,000, respectively, over the comparable periods in
1993. The increase over the prior year's comparable periods 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 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 further
reduced.
Other noninterest expense for the three and nine months ended September 30, 1994
and 1993 is comprised of the following (dollars in thousands):
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ ------
Promotional $ 140 $ 179 $ 518 $ 575
FDIC assessments 309 458 1,111 1,332
Other 737 864 2,117 2,419
------ ------ ------ ------
$1,046 $1,501 $3,746 $4,326
------ ------ ------ ------
------ ------ ------ ------
For the three and nine month periods ended September 30, 1994, promotional
expenses decreased $57,000 and $39,000, respectively, from the same periods in
1993. The decreases are 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 nine months ended
September 30, 1994 by $149,000 and $221,000, respectively, from similar periods
in 1993 resulting from a decline in average deposits subject to FDIC insurance
premiums.
INCOME TAXES
The Company files consolidated federal income and combined California State
franchise tax returns. Amounts provided for income taxes are based upon the
income reported in the consolidated financial statements at current tax rates.
Such amounts include taxes deferred to future periods resulting from temporary
-20-
differences in the recognition of items for tax and financial purposes. The
Company's effective tax rate of (6.5)% during the nine months ended
September 30, 1994, compared to (22.7)% for the same period in 1993, which in
turn, compared to the applicable statutory rates in such periods, and reflects
benefits for valuation allowances on its deferred tax assets.
FINANCIAL CONDITION
TOTAL ASSETS
At September 30, 1994, total assets were approximately $385.7 million, as
compared to $567.5 million at December 31, 1993, a decrease of approximately
$181.8 million. The decrease in assets at the end of the third quarter of 1994
from year-end 1993 reflects management's efforts at controlling its size in
light of current economic conditions, weak loan demand and the Company's current
capital levels. Lower deposit volumes resulted in lower short-term investments
which were offset with higher cash and due from balances and federal funds sold.
Loan balances were significantly lower at September 30, 1994 compared to
December 31, 1993 resulting from loans included in the accelerated asset
disposition that are classified as other real estate owned and assets held for
accelerated disposition, and reflects slower growth rates experienced in new
loan origination due to lower loan demand in the Company's marketplace.
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 nine months ended September 30, 1994 were $424.4
million, down $173.1 million, or 29.0%, from the $597.5 million average for the
year ended December 31, 1993. The decline in average assets during the first
nine months 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 $158.8 million decrease during the first
nine months of 1994 in total average deposits, the Company's primary source of
funds, as the Company managed its average balance sheet in light of its capital
levels.
CASH AND DUE FROM BANKS
A high percentage of the Company's assets are maintained in cash and due from
banks directly reflecting the volume and size of clearings related to its title
insurance company and escrow company deposits. At September 30, 1994, cash and
due from banks was up approximately $64.5 million from the balances reported at
December 31, 1993, primarily to accommodate the liquidity needs of the Company's
deposit customers. The average balance of cash and due from banks for the nine
months ended September 30, 1994 was approximately $47.1 million, down $20.8
million, or 30.6%, from the comparable $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 company 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.
-21-
Federal Funds Sold
Average federal funds sold were approximately $34.6 million during the first
nine months of 1994, down $54.7 million, or 61.3%, 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 September 30, 1994, the Company's federal funds sold was $20 million. At
December 31, 1993, there was no position taken in federal funds sold as the
Company placed available funds into other form of liquid investments.
Short-term Investments
At September 30, 1994, the Company elected not to take a position in short-term
investments as compared to the $179.9 million in such investments reported at
December 31, 1993. During the first nine months of 1994, the Company purchased
short-term investments of $200 million and retired approximately $379.9 million
of matured investments. During the first nine months of 1994, average short-
term investments were $12.5 million as compared to $33.0 million during all of
1993. 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 is to
exclude any unrealized holding gains or losses on short-term securities from
income and report such amounts, net of related tax effect, in a separate
component of shareholders' equity.
INVESTMENT SECURITIES
At September 30, 1994, the Company's investment securities portfolio aggregated
$31.2 million, up approximately $2.1 million from the $29.1 million reported by
the Company at December 31, 1993. The Company purchased approximately $25.4
million of investment securities for its portfolio and retired $23.1 million of
matured securities during the first nine months of 1994. Total average
investment securities for the nine months ended September 30, 1994 were $32.9
million, compared to $33.0 million during the year ended December 31, 1993.
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 September 30, 1994, real estate, construction and commercial loans comprised
approximately 55.2%, 17.2% and 27.4%, 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
September 30, 1994, loans, net of deferred loan fees, were $221.0 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
-22-
slow down in California's economic activity which impacted all segments of the
loan portfolio.
Average gross loans were $288.3 million for the nine months ended September 30,
1994, a decrease of $65.1 million, or 18.4%, 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, and the
transfer of loans to other real estate owned and assets held for accelerated
disposition. The Company's average loan-to-deposit ratio was 74.3% during the
first nine 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.
At September 30, 1994 and December 31, 1993, the Company's allowance for loan
losses was $15.1 million and $18.2 million, or 6.8% and 5.6%, respectively, of
loans outstanding. During the three and nine months ended September 30, 1994,
net charge-offs were $5.0 million and $24.6 million, respectively, which, for
the nine months ended September 30, 1994, includes charge-offs of approximately
$14.0 million related to assets sold in the bulk sale. Net charge-offs were
$6.9 million and $11.3 million, respectively, during the three and nine months
ended September 30, 1993.
Management believes that the allowance for loan losses at September 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),
excluding assets classified as other real estate owned and assets held for
accelerated disposition, at September 30, 1994 and December 31, 1993 follows
(dollars in thousands):
-23-
Sept. 30, December 31,
1994 1993
-------- -----------
Loans on nonaccrual $25,535 $29,056
Loans past due 90 days
and still accruing 2,404 5,769
------- -------
Total nonperforming
loans $27,939 $34,825
Loans with modified terms 2,242 9,539
------- -------
Nonperforming loans and
loans with modified terms $30,181 $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 nine months ended September 30, 1994
and year ended December 31, 1993 are as follows (dollars in thousands):
Nine Months Ended Year Ended
SEPTEMBER 30, 1994 DECEMBER 31, 1993
--------------------- ------------------
Balance, beginning of period $13,949 $ 4,359
Additions 30,442 24,209
Sales (8,011) (13,905)
Valuation adjustment (1,387) (714)
------- -------
Balance, end of period $34,993 $13,949
------- -------
------- -------
Additions to other real estate owned and assets held for accelerated disposition
during the first nine months of 1994 reflects primarily the transfer of loans,
net of estimated market valuation, associated with the bulk sale. Other real
estate owned, excluding such assets held for accelerated disposition, was $15.2
million at September 30, 1994.
Total nonperforming assets, defined as nonperforming loans and other real estate
owned and assets held for accelerated disposition, were $62.9 million at
September 30, 1994 compared to $48.7 million at December 31, 1993.
Nonperforming loans and other real estate owned, excluding assets held for
accelerated disposition, were $27.9 million and $15.2 million, respectively, at
September 30, 1994, compared to $34.8 million and $13.9 million, respectively,
at the close of 1994. The Company continues to experience nonperforming asset
levels higher than historical amounts 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. The Company's
period end deposit balances traditionally reflect increases in noninterest-
bearing demand deposits from title insurance company and escrow company
customers. These deposits increase at or near each month end as the underlying
real estate transactions being handled by such deposit customers are nearing
consummation.
-24-
At September 30, 1994, total deposits of $365.8 million were comprised of $201.6
million and $164.2 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 $159.9 million decrease in total
deposits since December 31, 1993 is comprised of decreases of $121.3 million and
$38.6 million in noninterest-bearing and interest-bearing deposits,
respectively.
The decrease in noninterest-bearing deposits at September 30, 1994 as compared
to December 31, 1993 was primarily in title insurance company and escrow company
deposits and reflects the significantly lower volume of residential mortgage
refinancing occurring in the Company's marketplace currently as compared to late
1993 when such activity peaked, as well as the operating results of the Bank.
The decrease in interest-bearing deposits since December 31, 1993 reflects a
$32.6 million and a $6.1 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 September 30, 1994 from the
levels reported at the close of 1993, total average deposits for the nine months
ended September 30, 1994 were $387.1 million, down $159.1 million, or 29.1%,
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 $210.9 million and $176.2 million, respectively, which compares to
$323.7 million and $222.5 million, respectively, for the year ended December 31,
1993. The $112.8 million decrease in average noninterest-bearing deposits
during the first nine months 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 as a result of current economic conditions as
well as the operating results of the Bank. The decrease in average
interest-bearing deposits of $46.2 million during the first nine months from
the 1993 average is comprised of an approximate $35.6 million decrease in
average time certificates of deposit and an approximate $10.6 million decline
in savings and interest-bearing demand deposits due to depositors seeking
yields in other investment alternatives.
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 September 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 29.6%. The ratio
of average total liquid assets to average total deposits was 22.2% during the
first nine months of 1994.
At September 30, 1994, $157.8 million of the Company's noninterest-bearing
demand deposits, or 43.1% of total deposits, were from title insurance companies
and escrow companies and $67.8 million of such deposits, or 18.5% of total
deposits, were maintained by six title insurance and escrow company customers;
one such
-25-
customer accounted for 3.6%, and another accounted for 3.4%, 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 of September 30, 1994, labor union deposits were $96.4 million, or 26.4% of
total deposits, and 40.6% of these deposits were demand deposits. All demand
deposit accounts, including title insurance company, escrow company and labor
union deposits, are subject to turnover. At September 30, 1994, $201.6 million
or 55.1% of the Company's total deposits were noninterest-bearing demand
deposits, and time certificates of deposit of $100,000 or more were $13.9
million, which represented 3.8% 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
September 30, 1994, loans outstanding in the amount of approximately $26.2
million were pledged as collateral to secure advances with the Federal Reserve
Bank.
At September 30, 1994, Guardian Bancorp, on an unconsolidated basis, had cash
and cash equivalents available of approximately $171,000. In accordance with
the terms of the agreements entered into with the Federal Reserve Bank, the
Company 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 February, 1995. 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 interest payments
beyond February, 1995 nor the $3.0 million principal amount of such securities
that will become due on the stated maturity date. Preliminary discussions with
the note holder have been had to address potential ways to renegotiate 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. In the event that
Guardian Bancorp is unable to raise additional funds or restructure the
debentures, it is anticipated that it will be unable to meet its current
obligations and could be forced to restructure or pursue other legal relief.
At September 30, 1994, approximately $177.3 million of the Company's accruing
loans outstanding mature within one year and approximately $159.6 million, or
66.5% 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 $58.4 million, including
commitments under
-26-
standby letters of credit, the Company had no material unrecorded commitments or
contingencies at September 30, 1994.
CAPITAL RESOURCES
Management seeks to maintain capital adequate to support its asset base 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.
During the three months ended September 30, 1994, Guardian Bancorp contributed
$1,440,000 to the Bank for the Bank's 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 September 30, 1994 (dollars in thousands):
COMPANY
----------------------------------
(DOLLARS IN THOUSANDS) $ %
- - - ---------------------- ----------------- ---------------
Risk-based ratios:
Tier 1 Capital(1)(2) $ 14,751 5.37%
Total Capital(2)(3) 18,479 6.73
Risk-weighted assets 274,765
Leverage ratio (3+% minimum)(4) 3.94
BANK
---------------------------------
(DOLLARS IN THOUSANDS) $ %
- - - ---------------------- ---------------- ---------------
Risk-based ratios:
Tier 1 Capital(1)(2) $ 17,575 6.76%
Total Capital(2)(3) 21,071 8.10
Risk-weighted assets 260,118
Leverage ratio (3+% minimum)(4) 4.70
In October, 1994, the Bank substantially consummated the bulk sale phase of its
accelerated asset disposition plan of certain nonperforming and subperforming
assets. The following tables set forth the Company's and the Bank's respective
proforma risk-based and leverage ratios, as adjusted to give effect to the sale
had it occurred at September 30, 1994:
COMPANY BANK
----------- -----------
PROFORMA(5) PROFORMA(5)
----------- -----------
Tier 1 capital ratio 5.75% 7.03%
Total capital ratio 7.11 8.34
Leverage ratio 3.94 4.70
-27-
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.
The Bank's capital ratios as of September 30, 1994 are consistent with those of
an "adequately capitalized institution" under the prompt corrective action
provisions of the Federal Deposit Insurance Act of 1991. However, if the Bank
continues to experience losses in the future it is possible that its capital
levels could fall below the minimum requirements to be considered "adequately
capitalized". As previously reported in the Company's Annual Report on Form
10K for the year ended December 31, 1993, an insured depository institution
is subject to increased regulatory scrutiny and certain other restrictions and
sanctions if it falls below the "adequately capitalized" category. At each
successive lower capital category an insured depository institution is subject
to more restrictions. In addition, an institution that, based upon its
capital levels, is classified as "adequately capitalized" may be required to
comply with certain mandatory or discretionary supervisory actions as if such
institution were in the next lower capital category if the appropriate Federal
banking agency, after notice and opportunity for hearing, (i) determines that
the institution is in an unsafe or unsound condition or (ii) deems the
institution to be engaging in an unsafe
- - - ---------------------------------
(1) Includes common shareholders' equity.
(2) Commencing December 19, 1992, insured institutions such as
the Bank must, among other things, maintain a Tier 1 Capital
ratio of at least 4% and a Total Capital 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 plus subordinated debentures
and the allowance for loan losses, subject to applicable
limitations.
(4) Tier 1 capital divided by average assets for the quarter
ended September 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 advised 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 provisions of FDICIA.
(5) Assumes that the proceeds realized in the sale had been
invested in zero risk-weighted assets at September 30,
1994 in lieu of the 100% risk-weighted assets subsequently
sold at September 30, 1994.
-28-
or unsound practice and not to have corrected the deficiency. The Company has
received no such notice.
As previously reported in the Company's Annual Report on Form 10K for the year
ended December 31, 1993, among the restrictions to which an insured depository
institution is subject if its capital level falls below that of an "adequately
capitalized" institution is the elimination of "pass through" deposit
insurance for new or renewed deposits into certain employee benefit accounts.
The elimination of such "pass-through" insurance may prompt affected account
holders, to withdraw balances from the Bank. In such circumstances the Bank
would be required to seek alternative sources of funding. If the volume of
such withdrawals exceeds that of existing sources of liquidity and such
alternative funding sources, the Bank's liquidity could be strained. See,
"Financial Condition-Liquidity and Interest Rate Sensitivity."
As of September 30, 1994, the Bank's capital became technically impaired for
the first time in the amount of approximately $4.6 million. As of the date
of this filing the Superintendent has not issued an order to the Bank to
correct this impairment; however, the Bank expects such an order to be issued
in the ordinary course. In the event Guardian Bancorp cannot pay the
statutory assessment on the Bank shares it owns, or otherwise correct the
impairment, the Bank shares, or a portion thereof, could be sold to a bidder
who is willing to pay the assessment and penalty thereon or could be forfeited
to the Bank if no such bidder is willing to pay such amount. Any such sale of
the Bank's common stock would, in turn, result in a substantial diminution or
the elimination of value of Guardian Bancorp's shareholders' interest in the
Company. The Company is exploring various strategic and financial
alternatives contemplating a possible investment in or a business combination
with the Company which, if such a transaction occurs, could correct this
impairment. No agreement with any third party has been reached for any such
transaction, and no assurance can be made that such a transaction will occur.
-29-
PART II - OTHER INFORMATION
Item 1-3. Inapplicable.
Item 4. Inapplicable.
Item 5. Other Information.
On September 26, 1994, Guardian Bancorp announced the appointment of
Mr. Dale E. Walter as President and Chief Executive Officer of
Guardian Bank. Mr. Walter's appointment was subject to the
finalization of the normal regulatory approval process which was
subsequently concluded and reported upon by Guardian Bancorp on
October 24, 1994.
On November 4, 1994, Mr. Howard A. Shields, Executive Vice President
and Chief Credit Officer, ceased to serve in his capacity with the
Company.
The Company announced that four additional individuals, Dan C. Aardal,
Esq., a partner in the Los Angeles office of Brown, Raysman &
Millstein; Mr. John C. Loring, a private investor from Chicago,
Illinois; Mr. William S. Criss, President of Data Display Products in
El Segundo; and, the Bank's President and Chief Executive Officer, Mr.
Walter, all received regulatory approval to serve on, and were elected
to, the Board of Directors bringing the total membership to twelve.
These recent appointments fill existing vacancies on the Company's
Board of Directors.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 27 Financial Data Schedules
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1994 and no events have occurred which would
require one to be filed.
-30-
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: November 11, 1994 By /s/ Paul M. Harris
-----------------------------------
Paul M. Harris
Chairman of the Board of
Directors
Dated: November 11, 1994 By /s/ James F. Lewin
-----------------------------------
James F. Lewin
President and Chief Executive
Officer
Dated: November 11, 1994 By /s/ Jon D. Van Deuren
-----------------------------------
Jon D. Van Deuren
Executive Vice President and
Chief Financial Officer
-31-