SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended 12/31/95
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the transition period to
Commission File number 2-78788
CALIFORNIA COMMERCIAL BANKSHARES
--------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3748495
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
4100 NEWPORT PLACE, NEWPORT BEACH, CALIFORNIA 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 863-2300
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Not applicable.
The aggregate market value of voting stock held by non-affiliates of the
registrant was $9,410,000 on March 11, 1995, based on the average bid and
asked price of $5.50 share as reported on the National Daily Quotation
Service "Pink Sheets".
2,944,000
---------
(Number of shares of Common Stock outstanding as of March 13, 1996)
PART I.
ITEM 1. BUSINESS.
BUSINESS OF THE COMPANY
California Commercial Bankshares (the "Company") is a bank holding company,
incorporated under the laws of the State of California on June 16, 1982, and
is registered under the Bank Holding Company Act of 1956, as amended. The
Company's primary purpose is to be a bank holding company for its
wholly-owned subsidiary, National Bank of Southern California, a national
banking association organized under the laws of the United States (the
"Bank"). At December 31, 1995, the Company had total assets of $334 million
and total shareholders' equity of $21 million.
On January 10, 1983, the Company purchased 450,000 shares of the Bank's
common stock, which constituted all of the issued and outstanding capital
stock of the Bank. The Bank's charter was granted by the Comptroller of the
Currency (the "Comptroller") on January 10, 1983, and the Bank began
operations as a full-service commercial bank on that date.
During 1985, the Company activated another subsidiary, Venture Partners,
Inc., a California corporation incorporated on March 11, 1983 ("Venture"),
which acts primarily an intermediary for tax deferred exchanges, a service
function for the escrow department of the Bank.
The Company has no other subsidiaries or affiliated businesses other than the
Bank and Venture. The Company's executive offices are located at 4100
Newport Place, Newport Beach, California 92660. Its telephone number is
714-863-2300.
BUSINESS OF THE BANK
The Bank's accounts are insured by the Federal Deposit Insurance Corporation
("FDIC") and it is a member of the Federal Reserve System. In addition to its
headquarters office in Newport Beach, California, the Bank presently operates
four branches located in Santa Ana, El Toro, Orange and Fountain Valley,
California. At December 31, 1995, the Bank had total assets of $334 million,
gross loans and leases of $195 million, total deposits of $309 million and total
shareholders' equity of $23 million.
The Bank is engaged in substantially all of the services customarily conducted
by community banks in California including checking, savings and time deposit
accounts, commercial, interim construction, personal, home improvement,
mortgage, automobile and other installment and term loans, leasing, traveler's
checks, safe deposit boxes, collection services, night depository facilities,
wire transfers and automatic teller machines.
See distribution of assets, liabilities and shareholders' equity, interest
rates and interest differential at pages 16, 17 and 18.
2
LOANS AND LEASES
The aggregate balances of loans and leases, including loans available for sale
and excluding deferred fees, outstanding at the indicated dates are shown in the
following table according to the type of loan. All loans are domestic loans.
AT DECEMBER 31:
$ in 000's
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Real Estate:
Miniperms (Real estate secured
with 1-5 years maturity) $ 62,466 $ 66,102 $ 62,799 $ 52,479 $ 47,688
Equity Lines 7,039 8,691 10,838 11,191 14,281
Construction 24,954 29,792 38,563 56,703 66,996
------------------------------------------------------------
Total Real Estate 94,459 104,585 112,200 120,373 128,965
Commercial 84,271 82,600 86,887 103,576 128,750
Installment and Other 13,120 10,845 11,290 15,506 20,544
Leases 3,064 3,615 3,970 5,590 8,109
------------------------------------------------------------
Total Loans And Leases $194,914 $201,645 $214,347 $245,045 $286,368
------------------------------------------------------------
------------------------------------------------------------
The declining balance of loans from 1991 through 1995 reflects the Bank's
commitment of its financial and human resources to identifying and collecting
problem loans and leases and to disposing of other real estate owned obtained
through foreclosure.
The Bank concentrates its lending activities in three principal areas:
(1) REAL ESTATE LOANS Real estate loans are comprised of construction loans,
miniperm loans collateralized by first or junior trust deeds on specific
properties and equity lines of credit. The properties collateralizing real
estate loans are principally located in the Bank's primary market area of Orange
County and contiguous communities. The construction loans are comprised of loans
on residential and income producing properties, generally have terms less than
two years and typically bear an interest rate that floats with prime. The
miniperm loans finance the purchase and/or ownership of income producing
properties. Miniperm loans generally are made on a thirty year amortization
schedule with a lump sum, balloon payment due in 1-5 years. Equity lines of
credit are revolving lines of credit collateralized by junior trust deeds on
real properties. They bear a rate of interest that floats with prime and have
maturities of five to seven years. The Bank also makes a small number of loans
on 1-4 family residential properties and 5 or more unit residential properties.
From time to time, the Bank purchases participation interests in loans made by
other institutions. These loans are subject to the same underwriting criteria
and approval processes as loans made directly by the Bank. During 1995, the Bank
purchased $339,000 of participations in real estate loans from other
institutions. At December 31, 1995, the Bank had $2,279,000 outstanding in real
estate participation loans purchased from other institutions.
(2) COMMERCIAL LOANS are granted to finance operations or for specific
purposes, such as to finance the purchase of equipment. Since cash flows from
operations are generally the primary source of repayment, the Bank's policies
provide specific guidelines regarding required debt coverage and other important
financial ratios. Lines of credit are made to businesses or individuals based on
the financial strength and integrity of the borrower, are generally
collateralized by inventory and accounts receivable, but may be
uncollateralized, and generally have a maturity of one year or less. They
generally bear an interest rate that floats with prime.
3
Commercial term loans are typically made to finance the acquisition of fixed
assets, refinance short term debt originally used to purchase fixed assets or,
in rare cases, to finance purchases of businesses. Commercial term loans
generally have a term of from one to five years. Commercial term loans may be
collateralized by the asset being acquired or other available assets.
(3) CONSUMER LOANS include personal loans, auto loans, boat loans, home
improvement loans, equipment loans, revolving lines of credit and other loans
typically made by banks to individual borrowers. The Bank also makes leases on
new and used automobiles. These leases may be closed-end or commercial leases,
have a term of one to five years and bear interest at a fixed rate.
The following tables show the amount of loans of the Bank outstanding as of
December 31, 1995 which, based on remaining scheduled repayments of principal,
(1) are due in the period indicated and (2) for the amounts due after one year,
are fixed rate or floating rate.
MATURING IN MATURING IN MATURING AFTER
1996 1997-2000 2000 TOTAL
$ IN 000'S
----------
Commercial and other $61,926 $37,230 $ 9,415 $108,571
Real Estate and Construction 33,971 32,456 19,916 86,343
----------------------------------------------------
TOTAL $95,897 $69,686 $29,331 $194,914
----------------------------------------------------
----------------------------------------------------
$ IN 000'S INTEREST SENSITIVITY
----------------------------
FIXED RATE VARIABLE RATE
Due After One But Within Five Years $25,498 $44,188
Due After Five Years 14,281 15,050
----------------------------
TOTAL $39,779 $59,238
----------------------------
----------------------------
The prime rate with which the interest rate floats may be the prime rate of a
specific money center bank, the prime rate posted in the Wall Street Journal or
the Bank's own posted prime rate. The Bank's prime rate is set by Bank
management. The Bank's prime rate at December 31, 1995 was 9.50%.
The following table shows the concentration of loans by categories.
$ IN 000'S DECEMBER 31,
1995 1994
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
Real Estate Loans:
Mortgage $62,466 32.05% $66,102 32.78%
Equity Lines 7,039 3.61% 8,691 4.31%
Construction 24,954 12.80% 29,792 14.78%
---------------------------------------------
TOTAL REAL ESTATE LOANS $94,459 48.46% $104,585 51.87%
Commercial Loans 84,271 43.24% 82,600 40.96%
Installment and Other 13,120 6.73% 10,845 5.38%
Leases 3,064 1.57% 3,615 1.79%
---------------------------------------------
TOTAL LOANS & LEASES $194,914 100.00% $201,645 100.00%
Less: Deferred Loan
Origination Fees (702) (782)
Less: Allowance for Loan
and Lease Losses (6,542) (5,660)
---------------------------------------------
NET LOANS & LEASES $187,670 $195,203
---------------------------------------------
---------------------------------------------
4
There are no concentrations of loans exceeding 10% of total loans which were not
otherwise disclosed as a category of loans in the above table.
CLASSIFIED ASSETS AND NONPERFORMING ASSETS. The Company maintains an internal
loan review program. All loans are categorized into one of the five following
groups: Pass loans: loans that contain strong credit quality and ability to
repay. Special mention loans: loans that have an identified weakness which
requires correction to protect the Bank (not considered a classified loan).
Substandard loans: loans that exhibit some weakness and require immediate
attention to correct the deficiency. Doubtful loans: loans that exhibit a
significant weakness and whose full collection is improbable. Loss loans: Loans
that are charged off upon identification of being loss loans. The following
table shows the amounts of special mention loans, classified loans (substandard
or doubtful) and the amount of other real estate owned as of the dates indicated
(see ITEM 1. BUSINESS, BUSINESS OF THE BANK, ALLOWANCE FOR LOAN AND LEASE LOSSES
FOR A DISCUSSION OF LOANS AND LEASES CHARGED OFF):
$ IN 000'S AT DECEMBER 31,
1995 1994 1993
---- ---- ----
Special Mention $10,458 $12,822 $11,988
-----------------------------
Substandard 14,704 37,451 39,314
Doubtful 317 1,505 4,156
-----------------------------
Total Classified Loans 15,021 38,956 43,470
Other Real Estate Owned 2,165 2,676 2,289
-----------------------------
TOTAL SPECIAL MENTION LOANS,
CLASSIFIED LOANS AND OTHER
REAL ESTATE OWNED $27,644 $54,454 $57,747
-----------------------------
Special mention loans, classified loans and other real estate owned decreased
significantly in 1995 as compared to 1994. The balances decreased as a result of
the Bank's high staffing levels of personnel dedicated to problem loan
identification and workout and the disposal of other real estate owned.
It is generally the Company's policy to discontinue the accrual of interest on a
loan when any installment payment of interest or principal is 90 days or more
past due, when management otherwise determines the collectibility of the
interest or principal on the loan is unlikely or when the loan is deemed to be a
potential foreclosure. Accrued but unpaid interest on loans placed on
nonaccrual status is generally reversed from income. In certain cases where the
value of the collateral is sufficiently in excess of the balance of principal
and interest owing, the Bank may continue to accrue interest or may not reverse
accrued but unpaid interest from income.
5
The following table shows the aggregate amount and percentage of the portfolio
of delinquent loans and nonaccrual loans as of December 31, 1995:
LOANS DELINQUENT AT DECEMBER 31, 1995
-------------------------------------
$ IN 000'S 30-89 DAYS 90 DAYS AND OVER TOTAL LOANS
---------- ---------- ---------------- -----------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ ---------- ------ ---------- ------ -----------
NONACCRUAL LOANS
Real Estate $7,688 3.93% $6,111 3.12% $13,799 7.05%
Commercial 205 .10% 735 .38% 940 .48%
Installment and Prime
Equity 171 .09% 636 .33% 80 7.42%
Leases 0 0% 27 .01% 27 .01%
--------------------------------------------------------------------------
Total Nonaccrual Loans $8,064 4.12% $7,509 3.84% $15,573 7.96%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
DELINQUENT ACCRUING LOANS
Real Estate 53 .03% 0 0 53 .03%
Commercial 584 .30% 0 0 584 .30%
Installment and Prime
Equity 606 .31% 0 0 606 .31%
Leases 0 .0% 0 0 0 0
--------------------------------------------------------------------------
Total Accruing Delinquent
Loans 1,243 .64% 0 0 1,243 .64%
--------------------------------------------------------------------------
Total Delinquent Loans $9,307 4.76% $7,509 3.84% $16,816 8.60%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6
The following table sets forth information regarding the Company's nonperforming
assets at December 31, 1995:
$ in 000's
SPECIFIC ALLL
PROPERTY DESCRIPTION LOCATION BALANCE ALLOCATION
- -------------------- -------- ------- ------------
NON-ACCRUAL LOANS
Commercial Building Los Angeles County $859 0
Apartment Complex Orange County 968 0
Commercial Building Orange County 2,576 0
Retail Complex Riverside County 1,698 0
Apartment Complex Riverside County 881 0
Commercial Building &
Finished Lots Los Angeles County 880 0
29 Condos Units Orange County 1,287 0
Medical Center Riverside County 410 0
Commercial Building Orange County 401 0
Commercial Building Los Angeles County 1,381 0
Auto Service Center Orange County 843 0
Motel Orange County 592 0
Retail Center Orange County 824 0
22 Other Loans Various 1,973 0
---------------------------
TOTAL NONACCRUAL $15,573 0
OTHER REAL ESTATE OWNED
Condo Orange County 50
Finished Residential Lots Orange County 184
Commercial Building Orange County 235
Auto Service Center & Los Angeles County 1,232
Car Wash
Vacant Lot Orange County 43
Commercial Building Riverside County 26
Land San Mateo County 395
---------------------------
TOTAL OTHER REAL ESTATE OWNED 2,165
---------------------------
TOTAL NONACCRUAL LOANS AND
OTHER REAL ESTATE OWNED $17,738 0
---------------------------
---------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is
based on an analysis of the portfolio and reflects an amount which, in
management's opinion, is adequate to provide for potential losses after giving
consideration to the portfolio, current economic conditions, past loss
experience and other pertinent factors. Management and the internal credit
review function monitor delinquency reports, new loans, renewals and reports of
on-site inspections to identify credits requiring special attention. Annual
examinations of the loan portfolio are also performed by an independent, third
party credit review professional.
7
On a quarterly basis, senior management, in conjunction with the board of
directors, reviews the adequacy of the allowance for loan and lease losses. Loan
officers prepare Special Asset Credit Reports ("SAC reports") for each loan on
the special asset report. SAC reports include all pertinent details about the
loan, a write-up of current status, steps being taken to correct any problems, a
detailed workout plan and recommendations as to classification of the loans as
pass, special mention, substandard, doubtful or loss (see ITEM 1. BUSINESS,
BUSINESS OF THE BANK, CLASSIFIED ASSETS AND NONPERFORMING ASSETS) and specific
allocation of the Allowance for Loan and Lease Losses. Loans classified as loss
are charged against the Allowance for Loan and Lease Losses. Specific allowances
are established for loans designated by management. Quarterly, the credit review
function is responsible for preparing a historical migration analysis of loans
as part of the determination of the required balance of the Allowance for Loan
and Lease Losses. The migration analysis tracks charged off loans to their
original classifications and assigns a risk factor to each loan in the portfolio
based upon classifications of such loans as pass, special mention, substandard
or doubtful. The amount of the general portion of the allowance is determined by
multiplying the aggregate principal balance of loans in each category by the
specified percentage. The amount of the required general portion of the
allowance is added to the specific allowances previously established to form the
total balance of the allowance. The amount of the allowance is based upon
management's evaluation of this analysis and other factors, including adequacy
of collateral, economic conditions, collateral value trends, nonperforming asset
data, delinquencies and other material.
Management utilizes its best judgement in providing for possible loan losses and
establishing the allowance for loan and lease losses. However, the allowance is
an estimate which is inherently uncertain and depends on the outcome of future
events. Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
could require increased provisions for loan and lease losses that cannot
reasonably be predicted at this date. In January 1994, a severe earthquake
occurred in the San Fernando Valley of Los Angeles, causing over 50 deaths,
destroying property valued in the billions of dollars, causing major impediments
to Southern California transportation networks and affecting the business
community. Damage in the Bank's service area was relatively minimal and, after
contacting customers and investigating its potential exposure, the Bank is not
aware of any of its borrowers who were directly affected by the earthquake.
Since the calculation of the adequacy of the allowance for credit losses is
based largely on loan classification categories and not only whether a loan is
performing or nonperforming, changes in the amount of nonperforming loans will
not necessarily be reflected in corresponding changes in the ratio of the
allowance for loan and lease losses to nonperforming loans. The following table
shows the ratios of the allowance for loan and lease losses to total loans and
the balance of the allowance for loan and lease losses to nonperforming loans as
of December 31:
AT DECEMBER 31,
1995 1994
---- ----
Ratio of the Allowance for Loan and Lease
Losses to Total Loans 3.36% 2.81%
Ratio of the Allowance for Loan and Lease
Losses to Nonperforming Loans 42.01% 38.32%
8
SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes loan and lease
balances of the Bank at December 31, 1995, 1994, 1993, 1992 and 1991, changes in
the allowance for possible loan losses arising from loans charged off, additions
to the allowance for loan and lease losses which have been charged to expense
and the ratio of net charge-offs during the periods to average loans and leases:
$ in 000's December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Amount of Gross Loans and Leases
Outstanding at the End of the Period $194,914 $201,645 $214,347 $245,045 $286,368
Balance of Allowance for Loan and
Lease Losses at the Beginning
of the Period $5,660 $7,221 $6,253 $7,107 $3,705
Loans and Leases Charged Off (1) (6,212) (6,082) (4,664) (6,434) (3,722)
----------------------------------------------------
Recoveries of Previously Charged
Off Loans and Leases (1) 494 1,156 743 805 261
----------------------------------------------------
Net Loans Charged Off (5,718) (4,926) (3,921) (5,629) (3,461)
Additions to the Allowance Charged
to Expense 6,600 3,365 4,889 4,775 6,863
Balance of the Allowance for Loan
and Lease Losses at the Ending of
the Period $6,542 $5,660 $7,221 $6,253 $7,107
----------------------------------------------------
Ratio of Net Charge-offs During the
Period to Average Loans Outstanding 2.93% 2.44% 1.74% 2.08% 1.25%
----------------------------------------------------
----------------------------------------------------
(1) See the table below for summary of the amounts of loans and leases charged
off and recoveries of loans and leases previously charged off.
$ IN 000'S 1995 1994 1993 1992 1991
---------- ---- ---- ---- ---- ----
Loans and Leases Charged Off:
Commercial $1,332 $1,150 $2,763 $5,712 $3,463
Real Estate - Mortgage and
Construction 4,569 4,764 1,274 344 102
Installment & Other 300 120 507 252 131
Leases 11 48 120 126 26
--------------------------------------------------
Total Loans and Leases Charged Off $6,212 $6,082 $4,664 $6,434 $3,722
Recoveries of Loans and Leases
Previously Charged off:
Commercial $35 $593 $669 $795 $255
Real Estate - Mortgage and
Construction 408 461 0 0 0
Installment & Other 17 50 62 7 4
Lease 34 52 13 3 2
--------------------------------------------------
Total Recoveries of Loans and Leases $494 $1,156 $743 $805 $261
--------------------------------------------------
Net Loans and Leases Charged Off $5,718 $4,926 $3,921 $5,629 $3,461
--------------------------------------------------
--------------------------------------------------
9
The allowance for loan and lease losses has been allocated between the following
categories of loans and leases according to the amount deemed adequate to
provide for the possibility of losses being incurred at the dates indicated:
At December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Ratio of Ratio of Ratio of Ratio of Ratio of
Allowance to Allowance to Allowance to Allowance to Allowance to
Outstanding Outstanding Outstanding Outstanding Outstanding
$ in 000's Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
Commercial $1,838 2.14% $1,151 1.39% $2,573 2.96% $4,256 4.11% $3,995 3.10%
Real Estate-
Construction 796 3.27% 2,516 8.45% 3,095 8.03% 1,500 2.65% 1,563 2.33%
Real Estate-
Mortgage 2,122 3.38% 1,355 2.05% 100 .16% 67 .10% 954 1.54%
Installment 556 2.80% 352 1.90% 281 2.50% 250 1.60% 260 1.27%
Leases 47 1.55% 88 2.43% 85 2.14% 125 2.24% 125 1.54%
Not Allocated 1,183 .60% 198 .10% 1,087 55 210
---------------------------------------------------------------------------------------------------------------------
TOTAL $6,542 $5,660 $7,221 $6,253 $7,107
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
In accordance with SFAS 114, as of December 31, 1995, the Company had written
down all its nonperforming loans to the current collateral value or had
established specific reserves that the management believes, are adequate to
cover future exposure.
10
INVESTMENT PORTFOLIO
The following table sets forth the book value and estimated fair value of
investment securities available for sale as of December 31, 1995 and investment
securities of the Company as of December 31, 1994 and 1993:
DESCRIPTION 1995 1994 1993
----------- ---- ---- ----
$ in 000's Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
---------------------------------------------------------------------
U.S. Government securities $35,314 $35,457 $60,099 $58,778 $59,420 $59,946
U.S. Government agencies or
insured obligations 23,611 23,656 9,657 9,262 18,052 18,158
State political subdivisions 423 416 1,509 1,274 619 619
Mortgage-backed securities-
U.S. agencies 1,047 1,070 1,186 1,132 1,644 1,650
Other securities 1,697 1,684 1,653 1,629 1,402 1,443
---------------------------------------------------------------------
Total Securities $62,092 $62,283 $74,104 $72,075 $81,137 $81,816
---------------------------------------------------------------------
---------------------------------------------------------------------
As of January 1, 1995 the Bank had classified all its Debt Securities as
"Available for Sale."
As of December 31, 1995 the Bank had no derivatives.
The following table sets forth the maturities of investment securities of the
Company at December 31, 1995 and the weighted average yields of such securities
(calculated available for sale on the basis of the cost and effective yields
weighted for the scheduled maturity of each security):
$ IN 000'S 1996 1997-2001 2002-2006 OVER 2006
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
U. S. government
securities $25,226 5.29% $10,231 5.81% $0 0 $0 0
U.S. government agencies
or insured obligations 5,000 6.49% 18,657 6.11% 0 0 0 0
State political
subdivisions 0 0 416 4.88% 0 0 0 0
Other 0 0 0 0 0 0 66 .55%
------------------------------------------------------------------
Total $30,226 5.49% $29,304 5.99% $0 0% $66 .55%
------------------------------------------------------------------
------------------------------------------------------------------
DEPOSITS
The Bank's major source of funds for lending and other investment purposes is
deposits. In addition to deposits, the Bank derives funds from principal and
interest repayments on loans, maturities and sales of investment securities, and
Federal funds sold.
The Bank's deposit strategy has been to emphasize business deposits through its
five branch offices and by a network of couriers employed by the Bank. From
time to time retail deposits and time certificates of deposits have also been
gathered through listings in various national publications.
11
Business demand deposits earn credits for collected balances against which the
Bank charges fees for various products and services used by the customer. In
some cases, the Bank pays for data processing fees for business customers with
significant balances. The Bank has four business customers each of which
maintains demand deposit balances in excess of 1% of total deposits. The
balances in these accounts averaged an aggregate of $33 million and $38.7
million during 1995 and 1994, respectively, and totaled an aggregate of $35.7
million and $37.3 million, or 11.6% and 13.4% , respectively, at December 31,
1995 and 1994.
Guidelines by federal regulatory agencies specify that time certificates of
deposit may be considered to be brokered if the rate on the deposit exceeds 75
basis points over (i) the average rate paid locally for certificates of deposit
of similar maturities or (ii) 120% of the rate for treasury bills and notes of
similar maturities. Time certificates of deposit generated through publication
of rates in national publications totaled an aggregate of $895,000 at December
31, 1995.
As of December 31, 1995, the Bank had no brokered deposits. Under the prompt
corrective action provisions of FDICIA, the Bank must obtain prior approval from
the FDIC in order to acquire or roll over brokered time certificates of deposit.
On January 31, 1994, the Bank completed the acquisition of approximately $12.5
million in deposits from a local Bank that decided to no longer be an insured
depository institution. The Bank paid no premium for these demand, savings and
time deposits and has retained most of the core deposits acquired.
The following table shows the average daily amount of deposits and average
interest rates paid for the periods indicated:
For the year 1995 For the year 1994 For the year 1993
$in 000's Daily Average Daily Average Daily Average
Average Interest Average Interest Average Interest
Balance Rate Paid Balance Rate Paid Balance Rate Paid
----------------------------------------------------------------
Demand Deposit $100,526 $101,022 $92,270
Money Market and Saving Deposits 121,110 2.82% 120,120 2.58% 120,600 2.84%
Time Deposits Less than $100,000 31,620 5.55% 37,354 4.23% 67,985 4.42%
Time Deposits $100,000 or More 32,632 5.68% 33,941 3.98% 34,888 3.89%
----------------------------------------------------------------
TOTAL $285,888 $292,437 $315,743
----------------------------------------------------------------
----------------------------------------------------------------
The following table shows the maturities and repricing data of time certificates
of deposit of $100,000 or more at December 31, 1995:
$ in 000's
FIXED RATE MATURITIES
3 Months or Less $9,205
Over 3 Through 6 Months 3,190
Over 6 Through 12 Months 3,030
Over 12 Months 250
----------
Total Fixed 15,675
Variable Rate 19,043
----------
Total $34,718
----------
----------
12
BORROWING ARRANGEMENTS
In December 1988, the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
Bank. The Credit Agreement for this loan was amended pursuant to a Second
Amendment to the credit agreement dated August 25, 1994. The loan, as amended,
bears interest at a fluctuating rate per annum equal to .75% in excess of the
lender's reference rate (8.50% at December 31, 1995). Interest was payable
monthly on the unpaid principal balance of the loan. Principal was to be repaid
on January 1, 1997. At December 31, 1995 and 1994, $2,351,000 remained
outstanding on the loan. The Second Amendment was supported by a Support
Agreement between a shareholder Director of the Company and the Company whereby
the shareholder guaranteed the payment of the loan.
To compensate the shareholder for signing the Support Agreement, the Company
signed a Holding Company Support Agreement whereby the Company: (1) paid the
shareholder a standby fee of $23,500 in 1994 and 1995, and (2) will issue to the
shareholder on or prior to March 31, 1997 warrants to purchase 25,000 shares of
common stock of the Company at an exercise price per share equal to 80% of the
book value per share of the Company on December 31, 1996.
In March of 1996 the shareholder paid off the outstanding balance of $2,350,000
to the lending financial institution to allow the Company to contribute the
maximum amount from the proceeds of the stock offering into the Capital of the
Bank. (See Note 17 to Notes to Consolidated Financial Statements) The new note
bears an interest rate of 3% over prime rate with interest only payable
quarterly for the first year and thereafter $125,000 plus interest payable
quarterly. The remaining principal and interest is due on April 1, 1999.
The Bank maintains three lines of credit with outside financial institutions for
the purpose of purchasing Federal funds. The lines of credit bear interest at a
floating rate and provide for borrowing up to $8,000,000, $5,000,000 and
$2,000,000, respectively. At December 31, 1995 and 1994, no amounts were
outstanding on these lines of credit.
Under an agreement with the Federal Home Loan Bank, the Bank may obtain an
extension of credit of up to 50% of total assets collateralized by real estate
loans. At December 31, 1995, the Bank had pledged loans amounting to $4,413,000
and had available credit of $2,207,000 based on 50% of the outstanding balance
of pledged loans. No amounts were outstanding on this line of credit at December
31, 1995 and 1994.
13
LIQUIDITY AND INTEREST RATE SENSITIVITY
The following table shows the components of the Company's liquidity at the dates
indicated:
AT DECEMBER 31,
IN 000'S 1995 1994 1993
-------- ---- ---- ----
Cash and Due From Bank $28,549 $21,315 $20,781
Federal Funds Sold 45,000 2,000 6,000
Investment Securities 62,283 72,075 81,137
----------------------------
135,832 95,390 107,918
Restricted Balances ( 6,444) (4,029) (4,714)
----------------------------
TOTAL LIQUIDITY $129,388 $91,361 $103,204
----------------------------
----------------------------
Ratio of Liquidity to Total Assets 38.73% 30.39% 31.80%
Reserves Held at the Federal
Reserve Bank $6,720 $8,428 $8,028
The principal sources of asset liquidity are balances due from banks, Federal
funds sold and short term investment securities. Secondary sources of liquidity
are loan repayments, maturing investments, and loans and investments that can be
used as collateral for other borrowings. In addition, in 1995, the Company
obtained $3,200,000 from a private placement of its common stock. The majority
of the Company's loans are short term and if paid in accordance with their
terms, provide continuous additional cash inflow. The following chart shows the
distribution of loans by their maturities and ratio to total loans and total
assets as of December 31, 1995:
$in 000's Under 1 Year 1-5 Years Over 5 Years Total
LOANS AND LEASES $95,896 $69,687 $29,331 $194,914
Ratio to Total Loans and Leases 49.20% 35.75% 15.05% 100.00%
Ratio to Total Assets 28.71% 20.86% 8.78% 58.35%
Liability-based liquidity includes interest bearing and noninterest-bearing
deposits, largely from local businesses and professionals, time deposits from
financial institutions throughout the United States and obtained through
listings in national publications and Federal funds purchased. From time to
time the Bank has used brokered deposits as an additional source of funds;
however, under conditions of its formal agreement (see ITEM 1. BUSINESS,
SUPERVISION AND REGULATION, FORMAL AGREEMENT) and regulations issued by the
Federal banking agencies (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION,
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991, OTHER ITEMS, PASS
THROUGH FDIC INSURANCE PROVISIONS), the Bank is currently precluded from
accepting or rolling over brokered deposits.
The Company maintains an Interest Rate Risk simulation model which enables
management to measure the Bank's Interest Rate Risk (IRR) exposure using various
assumptions and interest rate scenarios, and to incorporate alternative
strategies for the reduction of IRR exposure. The Bank measures its IRR using
several methods to provide a comprehensive view of its IRR from various
perspectives. These methods include analysis of repricing and maturity
mismatches, or gaps, between assets and liabilities, and analysis of the size
and sources of basis risk.
14
Gap analysis measures the difference between financial assets and financial
liabilities scheduled and expected to mature or reprice within a specified time
period. The gap is positive when repricing and maturing assets exceed repricing
and maturing liabilities. The gap is negative when repricing and maturing
liabilities exceed repricing and maturing assets. A positive or negative
cumulative gap indicates in a general way how the Bank's net interest income
should respond to interest rate fluctuations. A positive cumulative gap for a
period generally means that rising interest rates would be reflected sooner in
financial assets than in financial liabilities, thereby increasing net interest
income over that period. A negative cumulative gap for a period would produce
an increase in net interest income over that period if interest rates declined.
The following maturity and interest rate sensitivity analysis summarizes the
asset and liability balances of the Company at December 31, 1995 on the basis of
rate adjustments due to occur within the periods indicated:
REPRICING OPPORTUNITIES
$ in 000'S 3 Months or Less 4 to 12 Months 1 to 5 Years Over 5 Years Total
Interest Earning Assets $197,160 $37,734 $54,790 $12,322 $302,006
Interest-bearing Liabilities 159,997 15,568 2,279 177,844
-------------------------------------------------------------------------
Cumulative Interest Sensitivity Gap $37,163 $59,329 $111,840 $124,162
Interest earning assets include loans and leases on which the accrual of
interest has been discontinued in the amount of $15,573,000.
As of December 31, 1995 the Company had a positive gap of $124,162,000 with a
cumulative positive gap of $59,329,000 over one year period. The Board of
Directors has established limits on total net interest income exposure for a one
year time horizon based on 1% rate change. While the gap analysis is a useful
asset/liability management tool, it does not fully assess IRR. Gap analysis
does not address the effects of customer options (such as early withdrawal of
time deposits, withdrawal of deposits with no stated maturity, and options to
prepay loans) and Bank strategies (such as delaying increases in interest rates
paid on certain interest-bearing demand and money market deposit accounts) on
the Bank's net interest income. In addition, the gap analysis assumes no
changes in the spread relationships between market rates on interest-sensitive
financial instruments (basis risk), or in yield curve relationships. Therefore,
a gap analysis is only one tool with which to analyze IRR, and must be reviewed
in conjunction with other asset/liability management reports.
15
INTEREST RATES AND INTEREST RATE DIFFERENTIAL. The following tables set forth
the average amounts outstanding for major categories of interest earning assets,
interest bearing liabilities, the average interest rates earned thereon and
interest income/expenses for the Bank as of and for the years ended:
DECEMBER 31, 1995 DECEMBER 31, 1994 VARIANCE
----------------- ----------------- --------
AVERAGE AVERAGE AVERAGE
ASSET/ AVERAGE ASSET/ AVERAGE ASSET/ AVERAGE
LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD
$ IN 000'S AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%)
---------------------------------------------------------------------------------------------
ASSETS
Federal Funds Sold $22,855 $1,333 5.83% $13,255 $501 3.78% $9,600 $832 2.05%
Investment Securities 61,727 3,409 5.52% 76,796 3,873 5.04% (15,069) (414) .48%
Loans and Leases (1) 200,757 19,094 9.51% 202,009 17,599 8.71% (1,252) 1,495 .80%
Total Int. Earning Assets $285,339 $23,836 8.35% $292,060 21,973 7.52% (6,721) 1,863 .83%
----------------------------
----------------------------
Due From Banks (Non-int) 22,289 23,326
Other Assets 4,239 3,743
----------------------------------------
TOTAL ASSETS (2) $311,867 $319,129
----------------------------------------
----------------------------------------
LIABILITIES & EQUITY
Savings Deposits $121,110 $3,412 2.82% $120,120 $3,103 2.58% $990 $309 .23%
Time Deposits 64,252 3,610 5.62% 71,295 2,933 4.11% (7,043) 677 1.50%
Securities Sold Under Repo 123 8 6.50% 1,135 59 5.20% (1,012) (51) 1.31%
Capital Note 2,351 259 11.02% 2,351 241 10.25% 0 18 .77%
---------------------------------------------------------------------------------------------
Total Int. Bearing Liab 187,836 7,289 3.88% 194,901 6,336 3.25% (7,065) 953 .63%
---------------- ---------------- ----------------------------
----------------------------
Demand Deposits 100,526 101,022
Other Liabilities 1,810 2,160
Shareholders' Equity (2) 21,695 21,046
----------------------------------------
TOTAL LIAB. &
SHAREHOLDERS' EQUITY $311,867 $319,129
----------------------------------------
----------------------------------------
Net Yield on Int Earn. Assets $16,547 5.80% $15,637 5.35%
-------------------------------------------------
-------------------------------------------------
(1) Average loans and leases include non-performing loans and leases, however,
income does not include foregone interest. In addition, loan fees
have not been included in interest income and in calculating the rate
realized on loans and leases.
(2) Average Assets and Average Equity do not include unrealized gains or losses
on Investment Securities.
16
DECEMBER 31, 1994 DECEMBER 31, 1993 VARIANCE
----------------- ----------------- --------
AVERAGE AVERAGE AVERAGE
ASSET/ AVERAGE ASSET/ AVERAGE ASSET/ AVERAGE
LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD/ LIAB INCOME/ YIELD
$ IN 000'S AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%) AMOUNT EXPENSE COST (%)
---------------------------------------------------------------------------------------------
ASSETS
Federal Funds Sold $13,255 $501 3.78% $17,514 $477 2.72% ($4,259) $24 1.07%
Investment Securities 76,796 3,873 5.04% 70,224 3,261 4.64% 6,572 612 .40%
Loans and Leases (1) 202,009 17,599 8.71% 224,978 18,775 8.35% (22,969) (1,176) .36%
---------------------------------------------------------------------------------------------
Total Int. Earning Assets $292,060 $21,973 7.52% 312,716 22,513 7.20% ($20,656) ($540) .32%
-----------------------------
-----------------------------
Due From Banks (Non-int) 23,326 22,227
Other Assets 3,743 9,577
----------------------------------------
TOTAL ASSETS (2) $319,129 $344,520
----------------------------------------
----------------------------------------
LIABILITIES & EQUITY
Savings Deposits $120,120 $3,103 2.58% $120,600 $3,430 2.84% ($480) ($327) (.26)%
Time Deposits 71,295 2,933 4.11% 102,873 4,360 4.24% (31,578) (1,427) (.13)%
Securities So Under Repo 1,135 59 5.20% 1,615 62 3.84% (480) (3) 1.35%
Capital Note 2,351 241 10.25% 2,837 234 8.25% (486) 7 2.05%
---------------------------------------------------------------------------------------------
Total Int. Bearing Liab. $194,901 6,336 3.25% 227,925 8,086 3.55% ($33,024) ($1,750) (.30)%
---------------- ---------------- -----------------------------
-----------------------------
Demand Deposits 101,022 92,270
Other Liabilities 2,160 4,138
Shareholders' Equity (2) 21,046 20,187
----------------------------------------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $319,129 $344,520
----------------------------------------
----------------------------------------
Net Yield on Int Earn.
Assets $15,637 5.35% $14,427 4.61%
-------------------------------------------------
-------------------------------------------------
(1) Average loans and leases include non-performing loans and leases, however,
income does not include foregone interest. In addition, loan fees have not
been included in interest income and in calculating the rate realized on
loans and leases.
(2) Average Assets and Average Equity do not include unrealized gains or losses
on Investment Securities.
17
INTEREST EARNED AND INTEREST INCURRED RESULTING FROM CHANGES IN VOLUME AND
CHANGES IN RATES. The following table sets forth, for the periods indicated, a
summary of the changes in interest earned and interest incurred resulting from
changes in volume and changes in rates:
1995 COMPARED TO 1994 1994 COMPARED TO 1993
--------------------- ---------------------
$ in 000's Volume Old Volume Net Volume Old Volume Net
Change X Volume X Change Effect Change X Volume Change Effect
Old Rate Rate X Rate Old Rate X Rate X Rate
Change Change Change Change
--------------------------------------------------------------------------------
INTEREST EARNED ON:
Federal Funds Sold $363 $270 $196 $829 ($116) $185 ($45) $24
Investment Securities (760) 372 (73) (461) 305 281 26 612
Loans (109) 1,614 (10) 1,495 (1,917) 825 (84) (1,176)
--------------------------------------------------------------------------------
TOTAL INTEREST
EARNING ASSETS ($506) $2,256 $113 $1,863 ($1,728) $1,291 ($103) ($540)
INTEREST PAID ON:
Savings Deposits $26 $281 $2 $309 ($14) ($314) $1 ($327)
Time Deposits (290) 1,073 (106) 677 (1,338) (128) 39 (1,427)
Securities Sold Under
Agreement to Repurchase (53) 15 (13) (51) (19) 22 (6) (3)
Note Payable 0 19 0 19 (40) 58 (10) 8
--------------------------------------------------------------------------------
TOTAL INTEREST
BEARING LIABILITIES ($317) $1,388 ($117) $954 ($1,411) ($362) $24 ($1,749)
--------------------------------------------------------------------------------
NET INTEREST EARNINGS ($189) $868 $230 $909 ($317) $1,653 ($127) $1,209
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
In calculating interest rates and volumes and related changes, non-performing
loans and leases have been included in loan and lease volumes; however,
foregone interest has been excluded. Loan fees were not included in interest
income in calculating the rate realized on loans.
COMPETITION
The banking business in California generally, and in the Bank's service area in
particular, is highly competitive with respect to both loans and deposits and is
dominated by a relatively small number of major banks which have many offices
operating throughout wide geographic areas. In addition, there are numerous
other independent commercial banks within the Bank's primary service areas.
The primary factors in competing for deposits are interest rates, personalized
services, quality and range of financial services, convenience of office
locations and banking hours. The Bank competes for deposits and loans
principally with banks, savings and loan associations, thrift and loan
associations, credit unions, mortgage companies, insurance companies, other
lending institutions, money market and mutual funds and other investment
alternatives. Competition for loans comes primarily from other commercial
banks, savings institutions, mortgage banking firms, credit unions and other
financial intermediaries. Among the advantages that some of these institutions
have over the Bank is their ability to undertake extensive advertising campaigns
and to allocate their investment assets to areas of highest yield and demand.
Many of the major commercial banks operating in the Bank's service area offer
certain other services which are not offered directly by the Bank, such as
trust, investment and international banking services, and by virtue of their
greater total capitalization, such banks have substantially higher lending
limits than the Bank. In competing for deposits, the Bank is subject to certain
limitations not applicable to non-bank financial institutions.
18
SUPERVISION AND REGULATION
THE COMPANY
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "Act"), and is subject to supervision by the
Federal Reserve Board. As a bank holding company, the Company is required to
file with the Federal Reserve Board an annual report and such other additional
information as the Federal Reserve Board may require pursuant to the Act. The
Federal Reserve Board may also make examinations of the Company and each of its
subsidiaries. The costs of any examination by the Federal Reserve Bank are paid
by the Company.
The Federal Reserve Board has significant supervisory and regulatory authority
over the Company and its subsidiaries. The Federal Reserve Board requires the
Company to maintain certain levels of capital (see ITEM 1. BUSINESS, SUPERVISION
AND REGULATION, CAPITAL ADEQUACY GUIDELINES). The Federal Reserve Board also
has the authority to take enforcement action against any bank holding company
that commits any unsafe or unsound practice, or violates certain laws,
regulations or conditions imposed by the Federal Reserve Board in writing (see
ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE
CORPORATION IMPROVEMENT ACT OF 1991 AND FORMAL AGREEMENT).
The Act requires prior approval of the Federal Reserve Board for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares, or
substantially all the assets, of any bank or for merger or consolidations by a
bank holding company with any other bank holding company. The Act also prohibits
the acquisition by a bank holding company or any of its subsidiaries of voting
shares or substantially all the assets of any bank located in a state other than
the state in which the operations of the bank holding company's bank
subsidiaries are principally conducted, unless the statutes of the state in
which the bank to be acquired is located expressly authorizes such an
acquisition. (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, MEMORANDUM OF
UNDERSTANDING). One shareholder who purchased 289,000 shares at $6.75 per share
(9.9% of the total shares outstanding) through private placement offered in
November, 1995, has an option to purchase an additional 267,000 shares at $6.75
per share (which would bring the total shares owned by the shareholder to
556,000 shares or 17.4% of the total shares which would then be outstanding).
The option is subject to the approval by the Federal Reserve Board and it will
expire on May 1, 1996.
With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking,
managing or controlling banks or furnishing services to or performing services
for its authorized subsidiaries. A bank holding company may, however, engage or
acquire an interest in a company that engages in activities which the Federal
Reserve Board has determined to be closely related to banking or managing or
controlling banks or properly incident thereto. In making such a determination,
the Federal Reserve Board is required to consider whether the performance of
such activities can reasonably be expected to increase competition, or produce
gains in efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The Federal Reserve Board is also
empowered to differentiate between activities commenced de-novo and activities
commenced by acquisition, in whole or in part, of a going concern.
Additional statutory provisions prohibit a bank holding company and any
subsidiary banks from engaging in certain tie-in arrangements in connection with
the extension of credit. Thus, a subsidiary bank may not extend credit, lease or
sell property, or furnish any services, or fix or vary the concentration for any
of the foregoing on the condition that: (i) the customer must obtain or provide
some additional credit, property or
19
service from, or to, such bank other than a loan, discount, deposit or trust
service; (ii) the customer must obtain or provide some additional credit,
property or service from or to the Company or any other subsidiary of the
Company; (iii) the customer may not obtain some other credit, property or
service from competitors, except under reasonable requirements to assure the
soundness of credit extended.
The Federal Reserve Board generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Federal Reserve Board's policy is that a bank holding company
should not continue its existing rate of cash dividends on its common stock
unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
Transactions between the Company and its subsidiaries are subject to a number of
other restrictions. Federal Reserve Board policies forbid the payment by bank
subsidiaries of management fees which are unreasonable in amount or exceed the
fair market value of the services rendered (or, if no market exists, actual
costs plus a reasonable profit). Nor is the holding company allowed to transfer
to the Bank any nonperforming loans or other assets.
As a creditor and a financial institution, the Bank is subject to certain
regulations promulgated by the Federal Reserve Board, including, without
limitation: Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Funds Transfer Act), Regulation F (Interbank
Liabilities), Regulation Z (Truth in Lending), Regulation CC (Expedited Funds
Availability Act) and Regulation DD (Truth in Savings Act). As creditors on
loans secured by real property and as owners of real property, the Bank has
liability under various statutes and regulations applicable to property owners,
generally including statutes and regulations relating to the environmental
condition of the property.
THE BANK
The Bank is a national banking association whose deposits are insured by the
Bank Insurance Fund ("BIF") as administered by the FDIC, up to the maximum legal
limits of the FDIC ($100,000), and is subject to regulation, supervision, and
regular examination by the Comptroller of the Currency.The Bank is a member of
the Federal Reserve System, and as such is subject to certain provisions of the
Federal Reserve Board. The Bank is also subject to applicable provisions of
California law, insofar as they do not conflict with, or are not preempted by,
federal law. The regulations of these various agencies govern most aspects of
the Bank's business, including reserves against deposits, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowing, dividends,
and locations of branch offices. California law exempts banks from the
California usury laws.
LEGISLATIVE AND REGULATORY CHANGES
Over the past few years the volume and complexity of banking regulations and the
intensity of the regulatory examination process have increased dramatically.
Banking institutions are subject to closer scrutiny today than ever before. This
increased scrutiny is designed to reduce the number of failing institutions and
to require immediate corrective actions by troubled institutions. Many of the
recent statutory changes have been directed at giving the various bank
regulatory agencies increased enforcement powers to take "prompt corrective
actions" (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT
INSURANCE CORPORATION IMPROVEMENT ACT OF 1991) when an insured financial
institution's capital falls below certain levels. In addition, more stringent
capital requirements have been imposed to provide more
20
protection against potential losses. Premiums for deposit insurance have
increased to record levels and are now based upon risk evaluations. While the
Company and the Bank have not directly measured the full impact and cost of
compliance with these new requirements, such compliance represents an ever
increasing expense for the Company and the Bank and requires a significant
amount of staff and officer time.
DIVIDEND LIMITATIONS
On January 1, 1991, the Comptroller changed the interpretations of the dividend
regulations to simplify the calculation of a bank's dividend paying capacity and
make them more consistent with generally accepted accounting principles. The
dividend limit is based on retained "net profits" for the current year plus the
two previous years, less any required transfers to surplus or a fund for the
retirement of preferred stock. "Net profits" are defined as the net income as
reported in the bank's call report with no adjustments. The Formal Agreement
also prohibits the payment of any cash dividends by the Bank without the prior
written consent of the Comptroller or by the Company without prior notice to the
Federal Reserve Bank of San Francisco (see ITEM 1. BUSINESS, SUPERVISION AND
REGULATIONS, FORMAL AGREEMENT AND MEMORANDUM OF UNDERSTANDING). In addition, a
national bank may not pay any dividends or make other capital distributions if
the capital distribution would cause the national bank to be undercapitalized,
with the exception of repurchases or redemptions of the national bank's shares
that are made in connection with the issuance of additional shares, or that will
impair the national bank's financial condition.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. Set forth below is a brief discussion of certain
portions of this law and implementing regulations that have been adopted or
proposed by the Federal Reserve Board, Comptroller and the FDIC (collectively,
the "federal banking agencies").
BIF RECAPITALIZATION. FDICIA provides the FDIC with three additional sources
of funds to protect deposits insured by the BIF administered by the FDIC. The
FDIC is authorized to borrow up to $30 billion from the U.S. Treasury; borrow
from the Federal Financing Bank up to 90% of the fair market value of the assets
of institutions acquired by the FDIC as receiver; and borrow from financial
intermediaries that are members of the BIF. Any borrowing not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits.
IMPROVED EXAMINATIONS. All insured depository institutions must undergo a
full-scope, on-site examination by their appropriate federal banking agency at
least once every 12 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate federal
banking agency against each institution or affiliate as it deems necessary or
appropriate.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal banking
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to internal
control, loan documentation, credit underwriting, interest rate exposure and
asset growth. Standards must also be prescribed for classified loans, earnings
and the ratio of market value to book value for publicly traded shares. FDICIA
also requires the federal banking agencies to issue uniform regulations
prescribing standards for real estate lending that are to consider such factors
as the risk to the deposit insurance fund, the need for safe and sound operation
of insured depository institutions and the availability of credit.
Further, FDICIA requires the federal banking agencies to establish standards
prohibiting compensation, fees and benefit arrangements that are excessive or
could lead to financial loss. In 1995 guidelines were adopted in the areas
of excessive compensation, internal controls, information systems,
documentation, credit underwriting, interest risk exposure, asset growth and
compliance with laws and regulations. Under the excessive compensation
standard, the Comptroller will analyze a person's compensation history,
post-employment benefits, the financial condition of the institution,
compensation practices at comparable institutions and other relevant
information. The final rule authorizes, rather than requires, the
Comptroller to seek a compliance plan from institutions failing to meet the
safety and soundness guidelines. Asset quality and earnings standards have
also been proposed that would require monitoring and reporting systems to
identify emerging problems and corrective actions to resolve them.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit collateralized by real estate. The policies must
address loan portfolio management, underwriting standards and loan-to-value
limits that do not exceed the supervisory limits prescribed by the regulations.
In December 1993, pursuant to the mandate of FDICIA, the federal banking
agencies issued an interagency policy statement regarding the allowance for loan
and lease losses ("ALLL"). Insured depository institutions are required to
maintain a level of ALLL that is adequate to absorb "estimated credit losses"
associated with the loan and lease portfolio, including all binding commitments
to lend. "Estimated credit losses" are defined as an estimate of the current
amount of the loan and lease portfolio that is not likely to be collected given
the facts and circumstances as of the evaluation date. These estimated credit
losses should meet the criteria for accrual of a loss contingency set forth in
generally accepted accounting principles as stated in Statement on Financial
Accounting Standards No. 5 ("SFAS 5"). The policy statement describes the
responsibility of the board of directors and management to maintain the ALLL at
an adequate level and prescribes that the ALLL should be no less than the sum of
the following items:
(1) For loans and leases classified substandard or doubtful,whether analyzed
and provided individually or as part of pools, all estimated credit losses
over the remaining effective lives of these loans.
(2) or components of the loan and lease portfolio not classified, all estimated
credit losses over the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
The board of directors and management are also responsible to ensure:
(1) the institution has an effective loan review system;
(2) loans or portions of loans are promptly charged off if determined
uncollectible; and
(3) the process for determining an adequate level for the ALLL is based on a
comprehensive, adequately documented and consistently applied analysis of
the loan and lease portfolio.
22
The policy statement describes components of the portfolio which should be
reviewed and factors to consider in the estimation of credit losses.
Furthermore, the policy statement specifies the steps which will be followed by
examiners of the federal banking agencies in examining the adequacy of the ALLL
for individual institutions. These steps include analyzing an institution's
policies, practices and historical credit loss experience, and a further check
of the reasonableness of management's methodology by comparing the reported ALLL
(after deduction of all loans, or portions thereof, classified as loss) against
the sum of the following amounts:
(1) 50 percent of the portfolio that is classified doubtful;
(2) 15 percent of the portfolio that is classified substandard; and
(3) for the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The policy statement cautions that "the amount is neither a 'floor' nor a 'safe
harbor' level for an institution's ALLL. However, examiners will view a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is reasonable and supported by the
weight of available evidence, and that all relevant factors have been
appropriately considered." The Bank's ALLL is more than that which would be
established under the policy statement guidelines.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires each federal banking
agency to take prompt corrective action to resolve the problems of insured
depository institutions that fall below one or more prescribed minimum capital
ratios. The purpose of this law is to resolve the problems of insured
depository institutions at the least possible long-term cost to the appropriate
deposit insurance fund.
The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized
(significantly exceeding the required minimum capital requirements), adequately
capitalized (meeting the required capital requirements), undercapitalized
(failing to meet any one of the capital requirements), significantly
undercapitalized (significantly below any one capital requirement) and
critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final regulations
implementing the prompt corrective action provisions of FDICIA. Under the
regulations, an insured depository institution will be deemed to be:
-"well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage capital
ratio of 5% or greater and (ii) is not subject to an order, written
agreement capital directive or prompt corrective action directive to meet
and maintain a specific capital level of any capital measure;
-"adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage capital
ratio of 4% or greater (or a leverage ratio of 3% or greater if the
institution is rated composite 1 under the applicable regulatory rating
system in its most recent report of examination);
23
-"undercapitalized" if it has total risk-based capital that is less than
8%, Tier 1 risk-based capital that is less than 5% or a leverage capital
ratio that is less than 4% (or a leverage capital ratio that is less than
3% if the institution is rated composite 1 under the applicable regulatory
rating system in its most recent report of examination);
-"significantly undercapitalized" if it has a total risk-based capital that
is less than 6%, Tier 1 risk-based capital that is less than 3% or a
leverage capital ratio that is less than 3%; and
-"critically undercapitalized " if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified to
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 or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding to deal with it.
The law prohibits insured depository institutions from paying management fees to
any controlling persons or, with certain limited exceptions, making capital
distributions if after such transactions the institutions would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (1)
specifies the steps the institution will take to become adequately capitalized
on an average basis during each of four consecutive calendar quarters and must
otherwise provide adequate assurances of performance. The aggregate liability
of such guarantee is limited to the lesser of (a) an amount equal to 5% of the
depository institutions's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the institution
into compliance with all capital standards applicable to such institution as of
the time the institution fails to comply with its capital restoration plan.
Finally, the appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt corrective provisions.
An insured depository institution that is significantly undercapitalized, or is
undercapitalized and fails to submit, or in a material respect to implement, an
acceptable capital restoration plan, is subject to additional restrictions and
sanctions. These include, among other things: (1) a forced sale of the voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers, subject to certain grandfather provisions for those elected prior to
enactment of FDICIA; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency.
24
Although the appropriate federal banking agency has discretion to determine
which of the foregoing restrictions or sanctions it will seek to impose, it is
required to force a sale of voting shares or merger, impose restrictions on
affiliate transactions and impose restrictions on rates paid on deposits unless
it determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 270 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
As of December 31, 1995, the Bank had a total risk-based capital of 11.36%, a
Tier 1 risk-based capital ratio of 10.11% and a leverage capital ratio of 6.76%
Based solely upon these ratios, the Bank would be deemed to be well capitalized
as of December 31, 1995; however, because the Bank is subject to a written
agreement with the Comptroller and the Company with the Federal Reserve Bank,
the Bank and the Company are deemed to be adequately capitalized. (see ITEM 1.
BUSINESS, SUPERVISION AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION
IMPROVEMENT ACT OF 1991, FORMAL AGREEMENT AND MEMORANDUM OF UNDERSTANDING). In
addition, under the prompt corrective action provision of FDICIA, a subsequent
reduction in the Bank's capital could cause it to fall within a lower capital
category and subject it to the mandatory and discretionary sanctions applicable
to the category.
OTHER ITEMS. FDICIA also, among other things, (i) limits the percentage of
interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires the
FDIC to charge insurance premiums based on the risk profile of each institution;
(iii) eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institutions'
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any national bank may acquire or be acquired by any insured
depository institution.
BROKERED DEPOSITS. FDICIA prohibits "undercapitalized" institutions from
accepting funds obtained, directly or indirectly, by or through a deposit
broker. Undercapitalized institutions also are prohibited from soliciting
deposits by offering rates of interest that are significantly higher than the
prevailing rates of interest on insured deposits in the institutions' normal
market areas, or in the market area in which the deposits would otherwise be
accepted.
25
"Adequately capitalized" institutions may accept brokered funds only if they
first obtain a waiver granted the FDIC. Adequately capitalized institutions
that solicit brokered deposits pursuant to a waiver granted by the FDIC may pay
a rate of interest on brokered funds that significantly exceeds the rate paid on
deposits of similar maturity in the institution's normal market area or the
"national rate" paid on deposits of comparable maturity for deposits accepted
outside the institution's normal market area. The term "deposit broker" also
includes any insured depository institution, or employee thereof, that solicits
deposits by offering rates of interest that are significantly higher than the
prevailing rates of interest offered by other insured depository institutions
having the same type of charter in the offering institution's normal market
area. The effect of this definition, and the other limits on brokered deposits,
is to preclude an institution that is only "adequately capitalized" from
offering rates of interest that are significantly more than local or national
rates.
PASS THROUGH FDIC INSURANCE PROVISIONS. As of December 19, 1992, pro rata, or
"pass through" deposit insurance is available for deposits attributable to
participants in or beneficiaries of certain employee benefit plans, only if the
institution in which the deposits are placed is permitted to accept brokered
deposits or qualifies for a second exception. Under the brokered deposits
exception, deposit insurance "passes through" to the participants or
beneficiaries (i.e., with coverage up to $100,000 per person) only if the
institution is well capitalized, or if the institution was adequately
capitalized with a waiver from the FDIC that allowed it to accept brokered
deposits. In the latter case, at the time the deposit was made the depositor
must receive a written statement from the institution that the deposit was
eligible for insurance coverage on a "pass through" basis. The second exception
is available for deposits placed in an institution that meets each applicable
capital standard set forth by the institution's appropriate Federal banking
agency. The exception is also subject to the requirement that the depositor be
given written notice, at the time the deposit is made that the deposit is
entitled to insurance or a pass-through basis. The Bank has obtained a waiver
from the FDIC under the first exception category.
RISK-BASED DEPOSIT INSURANCE PREMIUMS. As required by FDICIA, the FDIC adopted
a transitional risk-based assessment system for deposit insurance premiums which
became effective January 1, 1993. Under the transitional regulations, insured
depository institutions were required to pay insurance premiums within a range
of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending on
their risk classification. To determine the risk-based assessment for each
institution, the FDIC categorized an institution as well-capitalized,
adequately capitalized or undercapitalized based on its capital ratios, a review
by the institutions' primary federal or state regulator, statistical analyses of
financial statements and other information relevant to evaluating the risk posed
by the institution. As a result, the assessment rates within each of three
capital categories until August 1995 were as follows (expressed as cents per
$100 of deposits):
SUPERVISORY SUBGROUP
--------------------
A B C
-- -- --
WELL CAPITALIZED 23 26 29
ADEQUATELY CAPITALIZED 26 29 30
UNDERCAPITALIZED 29 30 31
In August 1995, the FDIC reduced the deposit insurance premiums paid by most
commercial banks insured by BIF. The new assessment rate within each of three
capital categories are as follows( expressed as cents per $100 of deposits).
SUPERVISORY SUBGROUP
--------------------
A B C
-- -- --
WELL CAPITALIZED 0 03 17
ADEQUATELY CAPITALIZED 03 10 24
UNDERCAPITALIZED 10 24 27
The Bank currently pays deposit insurance to the FDIC at the rate of 17 cents
per $100 of deposits.
26
FORMAL AGREEMENT
An on-site examination of the Bank was conducted by the Comptroller as of July
31, 1991. As a result of that examination, the Comptroller requested the Bank
to take certain actions to improve the condition of the Bank, and the Bank
agreed, pursuant to a formal agreement entered into with the Comptroller on
April 8, 1992 (the "Formal Agreement"), to take such actions. Under the terms
of the Formal Agreement, the Bank agreed to (a) conduct studies of various parts
of its operations and develop written action plans and policies designed to
address any issues raised by those studies, (b) develop and implement a program
designed to reduce the Bank's level of criticized assets, (c) implement an
effective and ongoing loan review system, (d) establish a program for
maintaining an adequate allowance for loan and lease losses, (e) develop and
implement a program to improve the Bank's loan administration, (f) update the
Bank's real estate appraisal program and procedures, (g) develop a program for
the management of the Bank's other real estate owned (OREO), (h) develop a
capital program and maintain total capital at least equal to 9% of risk-weighted
assets, and Tier 1 capital at least equal to 6% of actual adjusted total assets,
(I) maintain liquidity at a level sufficient to sustain the Bank's operations,
and (j) develop a program for Board supervision over the Bank's management team.
The Formal Agreement also prohibits the payment of any cash dividends by the
Bank without the prior written consent of the Comptroller.
The Comptroller conducted another examination of the Bank as of July 31, 1992.
As a result of that examination, the Comptroller requested, and on November 27,
1992, management and the Board of Directors of the Bank agreed to certain
commitments to take specific actions to assure compliance with the Formal
Agreement. The Comptroller conducted its annual examinations as of August 31,
1993 and September 30, 1994 and 1995. The Bank was found to be in full,
substantial or partial compliance with all terms and commitments under the
Formal Agreement. Management believes the Bank is now in substantial compliance
with all the terms of the Formal Agreement.
MEMORANDUM OF UNDERSTANDING
On May 27, 1993, the Company executed a Memorandum of Understanding
("memorandum") with the Federal Reserve Bank of San Francisco (the "Fed") in
which the Company agreed to submit a summary of actions to improve conditions in
the Bank, not declare cash dividends without prior notice to the Fed, and obtain
prior approval of changes in Directors or executive officers. Management of the
Company believes the Company is in substantial compliance with the Memorandum.
CAPITAL ADEQUACY GUIDELINES
The Federal Reserve Board, FDIC and Comptroller have issued guidelines to
implement the new risk-based capital requirements. The guidelines are intended
to establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, takes off-balance sheet items into account in assessing capital
adequacy and minimizes disincentives to holding liquid, low-risk assets. Under
these guidelines, assets and credit equivalent amounts of off-balance sheet
items, such as letters of credit and outstanding loan commitments, are assigned
to one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain U.S. government securities, to 100% for relatively
high-risk assets, such as loans and investments in fixed assets, premises and
other real estate owned.
27
A banking organization's qualifying capital consists of two components: Tier 1
capital (core capital) and Tier 2 capital (supplementary capital). Tier 1
capital consists primarily of common stock, related surplus and retained
earnings, qualifying noncumulative perpetual preferred stock (plus, for bank
holding companies, qualifying cumulative perpetual preferred stock an amount to
25% of Tier 1 capital) and minority interests in the equity accounts of
consolidated subsidiaries. Intangibles, such as goodwill, and deferred tax
assets are generally deducted from Tier 1 capital; however, purchased mortgage
servicing rights and purchased credit card relationships may be included,
subject to certain limitations. At least 50% of the banking organization's
total regulatory capital must consist of Tier 1 capital. The Company has
established an allowance of $1,202,000 against its tax asset of $3,451,000 as of
December 31, 1995.
Tier 2 capital may consist of (i) the allowance for loan and lease losses in an
amount up to 1.25% of risk-weighted assets; (ii) cumulative perpetual preferred
stock and long-term preferred stock (which for bank holding companies must have
an original maturity of 20 years or more) and related surplus; (iii) hybrid
capital instruments (with characteristics of both debt and equity), perpetual
debt and mandatory convertible debt securities; and (iv) eligible term
subordinated debt and intermediate-term preferred stock with an original
maturity of five years or more, including related surplus, in an amount up to
50% of Tier 1 capital. The inclusion of the foregoing elements of Tier 2
capital is subject to certain requirements and limitations of the federal
banking authorities.
The federal banking authorities have also adopted a minimum ratio of Tier 1
capital to average total assets of 3% for the highest rated banks. This risk-
based leverage capital ratio is only a minimum and applies only to the highest
rated banks. Institutions experiencing or anticipating significant growth or
those with other than minimum risk profiles are expected to maintain capital
well above the minimum level. Furthermore, higher leverage capital ratios are
required to be considered well capitalized or adequately capitalized under the
prompt corrective action provisions of FDICIA (see ITEM 1. BUSINESS, SUPERVISION
AND REGULATION, FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991,
PROMPT CORRECTIVE ACTION). Thus, the effective minimum risk-based leverage
ratio, for all practical purposes, is at least 4% or 5%.
The federal banking authorities have issued a joint advance notice of proposed
rule making, in accordance with FDICIA, seeking public comment of methods to
take account of interest rate risk, concentrations of credit risk and the risks
of nontraditional activities in calculating risk-based capital. Although the
notice does not contain any agency proposals relating to concentration of credit
risk and risks of nontraditional activities, the notice includes a general
framework for taking account of interest rate risk. Under that framework,
institutions with interest rate risk exposure in excess of a certain threshold
would be required to hold capital proportionate to that excess risk. Exposures
would be measured in terms of the change in the present value of an
institution's assets minus the change in the present value of its liabilities
and off-balance sheet positions for an assumed 100 basis point parallel shift in
interest rate markets.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each national bank, as well as
other lenders, to identify the communities served by the national bank's offices
and to identify the types of credit the national bank is prepared to extend to
such communities. The CRA also requires the Comptroller to assess the
performance of the national bank in meeting the credit needs of its community
and to take such assessment into consideration in reviewing applications for
mergers, acquisitions and other transactions. An unsatisfactory CRA rating may
be the basis for denying such an application.
28
In connection with its assessment of CRA performance, the Comptroller assigns a
rating of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." Based on an examination conducted during May of 1993 and
February of 1995, the Bank was rated Outstanding.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS No. 122,
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, an amendment to FASB
Statement No. 65. The provisions of these statements are effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company has not completed the process of evaluating the impact that will result
from adopting these statements and is therefore unable to disclose the impact of
adopting such statements. However, the Company does not believe the application
of SFAS Nos. 121 and 122 will have a material impact on its financial condition
and results of operations when adopted.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions no later
than after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and, if presented, earnings per share as if the
company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has not yet determined if it will elect to change to the fair value method, nor
has it determined the effect the new standard will have on net income and
earnings
per share should it elect to make such a change. Adoption of the new standard
will have no effect on the Company's cash flows.
EMPLOYEES
The Bank currently employs approximately 178 persons in varying capacities. The
Company does not have any full-time employees at this time. (See ITEM 11.
EXECUTIVE COMPENSATION, for further information).
29
ITEM 2. PROPERTIES.
On December 29, 1982, the Company entered into a sublease (the "Sublease") for
the premises covering approximately 6,147 square feet on the ground floor of a
building located at 3951 South Coast Plaza Drive, Santa Ana, California 92704.
The Sublease the ("old Sublease") had an initial term of 10 years, which expired
on January 31, 1993. The Sublease was amended effective February 1, 1993 for a
term of 24 months, terminating on January 31, 1995. It has further been amended
to expire on January 31, 1998. The rent for the premises at the end of the term
of the old Sublease was $2.61 per square foot per month. The rent under the
terms of the "new Sublease" is $1.38 per square foot per month. The Company has
assigned the Sublease to the Bank for the purpose of conducting banking
operations on the premises. The Company does not independently occupy any part
of the premises.
On May 4, 1988, the Bank entered into a lease expiring June 30, 2000 for the
branch located at 22831 Lake Forest Drive, El Toro, California. The El Toro
premises consist of approximately 6,672 square feet and the current monthly rent
is $1.73 per square foot.
On September 19, 1989, the Bank entered into a lease expiring September 18, 1993
for the Service Center located at 17252 Armstrong, Suite H, Irvine, California.
These premises consist of approximately 7,900 square feet. On June 20, 1995,
the Company revised and extended the lease for a period of twelve months,
expiring September 17, 1996, at the current monthly rent of $.70 per square
foot.
On October 4, 1989, the Bank entered into a lease expiring December 31, 1999 for
the Orange regional office located at 625 The City Drive, Orange, California.
These premises consist of approximately 8,257 square feet and the current
monthly rent is $2.10 per square foot.
On November 29, 1991, the Bank entered into a lease for a branch facility,
commercial loan department and escrow division space covering approximately
14,866 square feet on the ground floor and 14,103 square feet for its
headquarters office on the ninth floor of a building located at 4100 Newport
Place, Newport Beach, California 92660. The Lease has an initial term of 10
years.
The current rent for the premises is $1.64 per square foot per month on the
ground floor and $1.62 per square foot per month for the ninth floor. Pursuant
to the Lease, the Bank has an option to lease additional space on the ninth
floor. The Bank is using the ground floor for banking operations and is using
the ninth floor for administrative offices.
On November 1, 1995 the Bank entered into a lease expiring October 31, 2005 for
the Beach Cities Regional
Office located at 17330 Brookhurst, Fountain Valley, CA. These premises consist
of approximately 5534 square feet and the currrent monthly rent is $1.25 per
square foot.
All of the premises leased by the Company are used by the Bank and there are no
immediate plans to utilize any of the leased premises for any other purpose.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. As of December 31, 1995, a judgement in the amount of $361,000 plus
interest had been entered against the Bank. The Bank has accrued $440,000 for
the judgement. After taking into consideration information furnished by counsel
to the Company and the Bank as to the current status of various remaining claims
and legal proceedings to which the Company or the Bank is a party, management of
the Company and the Bank believe that the ultimate aggregate liability
represented thereby, if any, will not have a material adverse effect on the
Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to security holders during the fourth quarter of the
fiscal year ended December 31, 1995.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of February 29, 1996, there were approximately 298 shareholders of record of
the Company's common stock. No shares of the Company's preferred stock have
been issued or are outstanding.
Although there are at least four broker/dealers purporting to make a market in
the Company's common stock, there is limited trading activity in the Company's
common stock. No cash dividends have been paid on shares of the Company's
common stock since the formation of the Company, and the Company presently has
no intention to pay cash dividends in the foreseeable future.
The following table lists high and low bid prices of the Company's Common Stock
in the over the counter market. Prices represent quotations by dealers making a
market in the stock and reflect inter-dealer prices without adjustments for
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions. Trading in the Company's common stock is limited in volume and may
not be a reliable indicator of its market value.
1995 1994
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $6.38 $5.00 $4.25 $4.25
Second Quarter $6.63 $6.00 $4.75 $4.25
Third Quarter $7.50 $6.57 $5.00 $4.63
Fourth Quarter $7.97 $7.40 $5.50 $4.63
In November, 1995, the Company sold 474,000 shares of its common stock through a
private placement at $6.75 per share.
31
ITEM 6. SELECTED FINANCIAL DATA.
The following table should be read in conjunction with, and is qualified in its
entirety by, the Company's Consolidated Financial Statements and the notes
thereto contained in Item 8 of this Form 10-K.
For the year ended December 31,
$ in 000's 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Operating Revenue $27,097 $24,849 $25,800 $30,912 $36,137
Interest & Fee Income 24,742 22,721 23,642 28,861 34,378
Net Interest and Fee Income 17,453 16,385 15,556 17,630 18,291
Net Income (Loss) (3,341) 859 (2,815) 507 319
Net Income (Loss) Per Share (1.30) 0.35 (1.14) 0.20 0.12
Cash Dividends Declared Per Share 0 0 0 0 0
=============================================================================================
As of December 31,
$ in 000's 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Total Assets $334,043 $300,665 $324,550 $372,762 $368,159
Total Deposits 308,504 277,389 299,726 343,137 341,607
Total Liabilities 312,924 280,937 304,363 350,067 346,481
Net Loans & Leases 187,670 195,203 206,370 237,884 278,408
Long Term Debt 2,351 2,351 2,351 3,000 3,000
Total Shareholders' Equity 21,119 19,728 20,187 22,695 21,678
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The purpose of this discussion is to provide additional information about the
Company's financial condition and results of operations which is not otherwise
apparent from the consolidated financial statements included in this annual
report. Since the banking subsidiary represents most of the Company's activity
and investment, the following discussion relates primarily to the financial
condition and operations of the Bank. It should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto contained
in Item 8 of this Form 10-K.
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Summary
The following chart shows comparative data for selected items of the financial
statements:
$ in 000's Except Increase Increase
Earnings Per Share Data 1995 (Decrease) 1994 (Decrease) 1993
-------------------------- -------- ---------- ---------- ---------- ----------
Average Total Assets $311,877 ($7,252) $319,129 ($25,391) $344,520
(2.3)% (7.4)%
Average Loans and Leases $200,758 ($1,251) $202,009 ($22,969) $224,978
(0.6)% (10.2)%
Average Deposits $285,888 ($6,549) $292,437 ($23,306) $315,743
(2.2)% (7.4)%
Net Interest Income $ 17,453 $1,068 $16,385 $829 $15,556
6.5% 5.3%
Provision for Loan and Lease
Losses $6,600 $3,235 $3,365 ($1,524) $4,889
96.1% (31.2)%
Net Income (Loss) ($3,341) ($4,200) $859 $3,674 ($2,815)
N/A N/A
Income (Loss) Per Share ($1.30) ($1.65) $0.35 $1.49 ($1.14)
N/A N/A
Return on Average Assets (1.07)% (1.34)% .27% 1.09% ($.82)%
N/A N/A
Return on Average Equity (1) (15.56)% (19.75)% 4.19% 17.14% ($12.95)%
N/A N/A
Ratio of Average Equity to
Average Assets 6.88% $0.42 6.45% .14 6.31%
6.7% 2.20%
Cash Dividends declared 0 N/A 0 N/A 0
1) Average equity computed based on month end balances
The average assets, average loans and leases and average deposits decreased from
1993 through 1995 as the Company continued improving asset quality and
collecting loans rather than on generating new business. Net interest income
increased in 1995 due to improved spreads in interest earning assets. During
1995, the Company made a provision for loan and lease losses in the amount of
$6,600,000 and charged off loans which amounted to $5,718,000 net of recoveries.
Increased legal expenses and losses on foreclosed properties contributed to a
net loss of $3,341,000 in 1995.
Total deposits increased by $31,115,000 on December 31, 1995 from the same
period in 1994. The increase in demand and saving deposit amounted to
$22,341,000 and $8,774,000 in time deposits. No deposits were acquired through
national publications.
33
RESULTS OF OPERATIONS
Increase Increase
$ in 000's 1995 (Decrease) 1994 (Decrease) 1993
---------- ------- ---------- ------- ---------- -------
Total Interest and Fee Income $24,742 $2,021 $22,721 ($921) $23,642
8.9% (3.90)%
Total Interest Expense 7,289 $953 6,336 ($1,750) 8,086
15.0% (21.64)%
- ----------------------------------------------------------------------------------------------
Net Interest Income Before Provision
for Loan and Lease Losses $17,453 $1,068 $16,385 $829 $15,556
6.5% 5.33%
==============================================================================================
Net Interest and Fee Income Earned as a
Percentage of Average Interest Earning
Assets 6.12% .51% 5.61% .64% 4.97%
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES. Net interest
income increased in 1995 and in 1994 from 1993 as the interest spread continued
to improve on interest earning assets due to rising interest rates and increased
average non-interest bearing deposits. The average non-interest bearing deposits
increased from $92,270,000 in 1993 to $101,022,000 in 1994 and $100,525,000 in
1995.
The net yield on interest earning assets increased to 6.12% in 1995 from 5.61%
in 1994. As of December 31, 1995, the Company had a total of $225,358,000 in
interest earning assets that would reprice within one year as compared to
$175,879,000 interest bearing liabilities that would reprice within the same
period of time. The short term impact of any rise or decline in interest rates
would therefore be insignificant.
Increase Increase
$ in 000's 1995 (Decrease) 1994 (Decrease) 1993
---------- ------- ---------- -------- ---------- --------
Average Nonaccrual Loans $12,760 ($4,127) $ 16,887 $3,213 $13,674
(24.4)% 23.5%
Interest Income Not Recognized
During the Period on Nonaccrual
Loans $41,189 $221 $951 ($218) $1,169
22.8% (18.65)%
Interest Income Recognized
During the Period on
Nonaccrual Loans ($20) $20 ($73) $93
(100.0)% (78.49)%
Average Loans and Leases
to Average Deposits 70.2% 1.1% 69.1% (2.2)% 71.3%
1.6% (3.1)%
Average Interest Earning Assets $285,339 ($6,721) $292,060 ($20,656) $312,716
(2.3)% (6.6)%
During the three-year period, loan production and average outstanding loans
declined as the Company focused on monitoring the performance of the outstanding
loans, identifying potential problems and collecting identified problem loans
and real estate owned. At the same time, the Company refined its loan
underwriting and approval process, seeking higher quality credits which reduced
the volume of loans meeting the tightened criteria.
34
Average Balances, Percent Percent Percent
$ in 000's of Total of Total of Total
- ----------------- -------- Interest -------- Interest --------
1995 Rate 1994 Rate 1993 Rate
---- -------- ---- -------- ---- ----
Savings Deposits $121,110 42.36% 2.82% $120,120 41.08% 2.58% $120,600 38.20% 2.84%
Time Deposits 64,252 22.48% 5.62% 71,295 24.38% 4.11% 102,873 32.58% 4.24%
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Deposits 185,362 64.84% 3.79% 191,415 65.46% 3.15% 223,473 70.78% 3.49%
Demand Deposits 100,526 35.16% N/A 101,022 34.54% N/A 92,270 29.22% N/A
- ---------------------------------------------------------------------------------------------------------------------
Total Deposits $285,888 100.00% $292,437 100.00% $315,743 100.00%
=====================================================================================================================
Interest expense declined as interest rates fell in 1994 and interest expense
increased as the interest rates increased in 1995. In addition, during 1993, and
continuing in 1994, the Company established a policy not to renew brokered
certificates of deposit and deposits gathered through listings in national
publications listing the rates offered on time deposits by a large number of
banks around the country. Although the rates paid on the certificates of
deposit approximate the rates paid by the Bank on its other certificates of
deposit, the decline in balances of these deposits caused a concurrent decline
in interest expense.
PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses
creates an allowance for estimated future loan and lease losses. When losses or
recoveries occur, they are charged against or credited to the allowance.
Increase Increase
$ In 000'S 1995 (Decrease) 1994 (Decrease) 1993
- ---------- ------ ---------- ------ ---------- ------
Loan and Lease
Charge-offs
(Net of Recoveries) $5,718 $792 $4,926 $1,005 $3,921
16.1% 25.6%
- --------------------------------------------------------------------------
Provision for Loan
and Lease Losses $6,600 $3,235 $3,365 ($1,524) $4,889
96.14% (31.17)%
==========================================================================
Due to continued high levels of nonperforming and classified loans and lease
charge offs, substantial provisions for loan and lease losses have been
necessitated. In addition to provision for loan and lease losses the Company
incurred $1,070,000 in 1994 and $2,799,000 in 1995 in real estate owned
expenses. Those expenses included, property taxes, selling costs, writedowns
and losses on sale. The total real estate owned at December 31, 1994 and 1995
amounted to $2,676,000 and $2,165,000 respectively. Those properties have
already been written down to their fair market values less estimated selling
costs and therefore the Company does not expect any significant losses during
1996 related to these properties.
35
OTHER INCOME The following table sets forth information by category of other
income and the changes in categories of other income between periods for the
periods indicated:
Increase Increase
$ in 000's 1995 (Decrease) 1994 (Decrease) 1993
---------- ------ ---------- ----- ---------- ------
Escrow Fees $308 $4 $304 ($100) $404
1.30% (24.8)%
Service Charges 983 $14 969 $(5) 974
1.4% (.5)%
Securities (Losses) Gains (72) ($78) 6 $6 0
N/A N/A
Other Income 1,136 $287 849 $69 780
33.8% 8.8%
- -------------------------------------------------------------------------------
Total Other Income (Loss) $2,355 $227 $2,128 $(30) $2,158
10.70% (1.4)%
===============================================================================
The increase in other income (loss) from 1993 as compared to 1994 and 1995 is
principally the result of the increase in rental income on REO properties and
net master card merchant revenue.
OTHER EXPENSE The following table sets forth information by category of other
expense and the changes in categories of other expense between periods for the
periods indicated:
Increase Increase
$ in 000's 1995 (Decrease) 1994 (Decrease) 1993
---------- ------- -------- ------ ---------- ------
Salaries and Employee Benefits $7,513 $1,059 $6,454 ($780) $ 7,234
16.4% (10.8)%
Occupancy, Furniture and equipment 2,129 $121 2,008 ($474) 2,482
6.0% (19.1)%
Data Processing For Customers' 184 $11 173 ($53) 226
6.4% (23.5)%
Legal Fees and Related Costs 1,439 $779 660 $426 1,086
118.0% (39.2)%
Regulatory Assessments 717 ($211) 928 ($28) 956
(22.7)% (2.9)%
Supplies 321 $54 267 ($18) 285
20.2% (6.3)%
Other Real Estate Owned 2,799 $1,729 1,070 ($1,094) 2,164
161.6% (50.6)%
Other 3,377 $1,192 2,185 $23 2,162
54.6% 1.1%
- --------------------------------------------------------------------------------------
Total Other Expenses $18,479 $4,734 $13,745 $2,850 $16,595
34.4% 17.17%
======================================================================================
In November 1993, the Bank reduced staff by 20 personnel at an annualized
savings of salaries and benefits of approximately $700,000 and a one time cost
of approximately $50,000. During 1995 the Company hired additional personnel
for opening of its new branch in Fountain Valley and additional staff in the
business development for its future projected growth. Occupancy expense was
relatively constant during the period with exception of the costs related to the
new headquarter and branch
36
Legal fees, other real estate owned expenses (including losses on sale) and
other expenses have all remained high as a result of increases in delinquent
loans, nonperforming loans and other real estate owned. (see ITEM 1 BUSINESS,
BUSINESS OF THE BANK, LOANS, ALLOWANCE FOR LOAN AND LEASE LOSSES & ASSET
QUALITY). Other real estate owned expenses included provisions for selling
expenses of $177,000 and $243,000 in 1995 and 1994, respectively, and expenses
and losses on sales of other real estate owned of $2,622,000 and $827,000 in
1995 and 1994, respectively.
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. As of December 31, 1995, a judgement in the amount of $361,000 plus
interest has been entered against the Bank. The Bank has accrued $440,000 for
the judgement. After taking into consideration information furnished by counsel
to the Company as to the current status of various remaining claims and legal
proceedings to which the Company or the Bank is a party, management of the
Company believes that the ultimate aggregate liability represented thereby, if
any, will not have a material adverse effect on the Company's consolidated
financial statements.
Regulatory assessments decreased due to the decline in deposit premium rate to
$.17 per $100 in 1995 from $.29 per $100 in 1994 and 1993.
INCOME TAX EXPENSE
The following table shows the Company's income tax expense or benefit, related
effective tax expense or benefit rate for the periods indicated and the changes
between periods:
Increase Increase
$ in 000's 1995 (Decrease) 1994 (Decrease) 1993
---------- ------- ---------- ----- ---------- -------
Income Tax (Benefit)
Expense ($1,930) ($2,474) $ 544 $1,499 ($ 955)
N/A N/A
Effective Income Tax
(Benefit) Expense Rate (36.6)% 38.77% (25.33)%
The effective tax benefit rates are in accordance with the requirements of SFAS
109, adopted by the Company effective January 1, 1993, that limits the amount of
tax benefit a company can recognize.
37
FINANCIAL CONDITION
OVERVIEW
The following table sets forth the book values and changes in book values of
selected assets and liabilities of the Company as of December 31, 1995, 1994 and
1993:
Increase Increase
$ in 000's 1995 (Decrease) 1994 (Decrease) 1993
- ---------- -------- ---------- -------- ---------- --------
Investment Securities $62,283 $(9,792) $72,075 $(9,062) $81,137
(13.6)% (11.17)%
Net Loans and Leases $187,670 $(7,533) $195,203 $(11,167) $206,370
(3.9)% (5.41)%
Other Real Estate Owned $2,165 $(511) $2,676 $387 $2,289
N/A 16.91%
Total Assets $334,043 $33,378 $300,665 $(23,885) $324,550
11.1% (7.36)%
Total Deposits $308,504 $31,115 $277,389 $(22,337) $299,726
11.2% (7.45)%
Total Equity $21,119 $1,391 $19,728 $(459) $20,187
7.1% (2.27)%
During the years from 1993 through 1995 the Bank focused its human and financial
resources on identifying and working our problem loans and other real estate
owned. Other real estate owned remained low as the Bank applied significant
resources to disposing of properties. Total assets and total deposits decreased
significantly in 1994 as the Bank decreased its marketing efforts while
concentrating on resolving asset quality issues. The increase in total assets
and total deposits from 1994 to 1995 was a result of the Bank's business
development efforts.
During 1994 the Company continued its efforts on working out problem loans. The
proceeds from loan collections and maturing investment securities were used to
payoff time certificates of deposits acquired through listings on national
publications resulting in a decline in investment securities, loans and deposits
from 1993 to 1994. The decline in equity was due to unrealized losses on
securities in 1994.
The primary sources of funds for the Bank's lending programs are local deposits,
loan payments and proceeds from the sale or maturity of investment securities.
INFLATION
The impact of inflation on a financial institution is significantly different
from that exerted on an industrial concern, mainly because a financial
institution's assets and liabilities consist almost entirely of monetary items.
The relatively low portion of the Company's fixed assets to total assets reduces
both the potential of inflated earnings resulting from understated depreciation,
and the potential understatement of absolute asset values.
38
CAPITAL RESOURCES
On December 31, 1990, new risk based capital requirements became effective.
Under the requirements, holding companies and banks are required currently to
maintain minimum ratios of total capital and "core" (Tier 1) capital to risk-
weighted assets (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, CAPITAL
ADEQUACY GUIDELINES); however, under the terms of its formal agreement with the
Comptroller, the Bank will be required to maintain capital in excess of this
minimum requirement (see ITEM 1 BUSINESS, SUPERVISION AND REGULATION, FORMAL
REGULATORY AGREEMENT). The regulatory capital requirements, capital
requirements under the formal agreement and the Bank and Company's actual
capital ratios are shown in the following table as of the dates indicated:
AT DECEMBER 31
1995 | 1994
EXCESS | EXCESS
PER EXCESS TO | PER EXCESS TO
MINIMUM FORMAL TO FORMAL | MINIMUM FORMAL TO FORMAL
STATU- AGREE- STATU- AGREE- | STATU- AGREE- STATU- AGREE-
TORY MENT ACTUAL TORY MENT | TORY MENT ACTUAL TORY MENT
------- ------ ------ ------ ------ | ------- ------ ------ ------ ------
|
FOR THE BANK |
RISK-BASED |
CAPITAL: |
TIER 1 4.00% N/A 10.11% 6.11% N/A | 4.00% N/A 10.82% 6.82% N/A
TOTAL RISK-BASED 8.00% 9.00% 11.36% 3.36% 2.36% | 8.00% 9.00% 12.07% 4.07% 3.07%
TIER 1 |
LEVERAGE RATIO (1) 4.00% 6.00% 6.76% 2.76% .76% | 4.00% 6.00% 7.47% 3.47% 1.47%
FOR THE COMPANY |
RISK-BASED |
CAPITAL: |
TIER 1 4.00% N/A 9.45% 5.45% N/A | 4.00% N/A 10.00% 6.00% N/A
TOTAL RISK-BASED 8.00% N/A 10.70% 2.70% N/A | 8.00% N/A 11.24% 3.24% N/A
TIER 1 |
LEVERAGE RATIO 4.00% N/A 6.32% 2.32% N/A | 4.00% N/A 6.97% 2.97% N/A
As of December 31, 1995 and 1994, the Bank and the Company were in compliance
with statutory risk-based capital requirements and the Bank was in compliance
with the more stringent capital requirements imposed by the Formal Agreement.
(1)In some circumstances this minimum ratio may be 3%.
During 1995, the Bank obtained $3,200,000 in proceeds from a private placement
of the Company's common stock. One shareholder who purchased 289,000 shares at
$6.75 per share (9.9% of the total shares outstanding) through private placement
offered in November, 1995, has an option to purchase an additional 267,000
shares at $6.75 per share (which would bring the total shares owned by the
shareholder to 556,000 shares or 17.4% of the total shares which would then be
outstanding). The option is subject to the approval by the Federal Reserve
Board and it will expire on May 1, 1996.
39
8. FINANCIAL STATEMENTS.
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Independent Auditors' Report 42
Consolidated Balance Sheets,
December 31, 1995 and 1994 43
Consolidated Statements of Operations
For The Years Ended December 31,
1995, 1994 and 1993 44
Consolidated Statements of Shareholders'
Equity For The Years Ended December 31,
1995, 1994 and 1993 45
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1995,
1994 and 1993 46
Notes to Consolidated Financial Statements
For The Years Ended December 31, 1995,
1994 and 1993 48
40
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1995, 1994 and
1993 and Independent Auditors' Report
41
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CALIFORNIA COMMERCIAL BANKSHARES:
We have audited the accompanying consolidated balance sheets of California
Commercial Bankshares and subsidiaries (the Company) as of December 31, 1995 and
1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of California Commercial Bankshares
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
FEBRUARY 9, 1996
MARCH 18, 1996 AS TO NOTE 7
LOS ANGELES, CALIFORNIA
42
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
---- ----
CASH AND DUE FROM BANKS
Noninterest bearing (Note 3) $28,549,000 $21,069,000
Interest bearing 246,000
FEDERAL FUNDS SOLD 45,000,000 2,000,000
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 73,549,000 23,315,000
INVESTMENT SECURITIES Available
for sale at estimated fair value (Note 4) 62,283,000 72,075,000
LOANS AND INVESTMENT IN LEASES, net
(Notes 5 and 9) 178,050,000 195,203,000
LOANS AVAILABLE FOR SALE 9,620,000
ACCRUED INTEREST RECEIVABLE 2,649,000 2,846,000
PROPERTY - net (Note 6) 1,150,000 988,000
OTHER REAL ESTATE OWNED 2,165,000 2,676,000
OTHER ASSETS (Notes 8 and 10) 4,577,000 3,562,000
------------ ------------
TOTAL $334,043,000 $300,665,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand:
Noninterest bearing $130,660,000 $98,733,000
Interest bearing 65,301,000 79,695,000
Savings 45,312,000 40,504,000
Time certificates, $100,000 and over 34,718,000 28,896,000
Other time deposits 32,513,000 29,561,000
------------ ------------
Total Deposits 308,504,000 277,389,000
INTEREST PAYABLE 221,000 149,000
NOTE PAYABLE (Note 7) 2,351,000 2,351,000
OTHER LIABILITIES (Note 8) 1,848,000 1,048,000
------------ ------------
Total Liabilities 312,924,000 280,937,000
SHAREHOLDERS' EQUITY
(Notes 7, 8 and 13):
Preferred stock - no par value; authorized, 1,000,000 shares;
outstanding, none
Common stock - no par value; authorized, 10,000,000 shares;
issued and outstanding, 2,922,000 in 1995
and 2,423,000 in 1994 14,077,000 10,782,000
Paid-in capital 470,000 475,000
Retained earnings 6,448,000 9,789,000
Net unrealized gain (loss) on investment securities available for sale,
net of tax of $67,000 in 1995 and $711,000 in 1994 124,000 (1,318,000)
------------ ------------
Total Shareholders' Equity 21,119,000 19,728,000
------------ ------------
TOTAL $334,043,000 $300,665,000
------------ ------------
------------ ------------
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
43
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
INTEREST AND FEE INCOME: 1995 1994 1993
---- ---- ----
Loans and leases, including fees $20,000,000 $18,347,000 $19,904,000
Investment securities 3,409,000 3,873,000 3,261,000
Federal funds sold 1,333,000 501,000 477,000
----------- ----------- -----------
Total Interest and Fee Income 24,742,000 22,721,000 23,642,000
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 7,022,000 6,036,000 7,791,000
Securities sold under agreements
to repurchase 8,000 59,000 62,000
Note payable (Note 7) 259,000 241,000 233,000
----------- ----------- -----------
Total Interest Expense 7,289,000 6,336,000 8,086,000
----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN AND LEASE LOSSES 17,453,000 16,385,000 15,556,000
PROVISION FOR LOAN AND
LEASE LOSSES (NOTE 5) 6,600,000 3,365,000 4,889,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 10,853,000 13,020,000 10,667,000
----------- ----------- -----------
OTHER INCOME (LOSS):
Escrow fees 308,000 304,000 404,000
Service charges 983,000 969,000 974,000
Securities gains (losses), net (72,000) 6,000
Other income 1,136,000 849,000 780,000
----------- ----------- -----------
Total Other Income (Loss) 2,355,000 2,128,000 2,158,000
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits (Note 8) 7,513,000 6,454,000 7,234,000
Occupancy, furniture and equipment (Note 11) 2,129,000 2,008,000 2,482,000
Data processing for customers 184,000 173,000 226,000
Legal fees and related costs (Note 12) 1,439,000 660,000 1,086,000
Loan collection and related costs 414,000 331,000 136,000
Lower of cost or market adjustment
on loans available for sale 756,000
Regulatory assessments 717,000 928,000 956,000
Supplies 321,000 267,000 285,000
Other real estate owned 2,799,000 1,070,000 2,164,000
Other 2,207,000 1,854,000 2,026,000
----------- ----------- -----------
Total Other Expenses 18,479,000 13,745,000 16,595,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) (5,271,000) 1,403,000 (3,770,000)
INCOME TAX EXPENSE (BENEFIT) (NOTE 10) (1,930,000) 544,000 (955,000)
----------- ----------- -----------
NET INCOME (LOSS) ($3,341,000) $ 859,000 ($2,815,000)
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE ($1.30) $0.35 ($1.14)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,564,000 2,427,000 2,459,000
----------- ----------- -----------
----------- ----------- -----------
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
44
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET
UNREALIZED
GAIN (LOSS) ON
INVESTMENT
SECURITIES TOTAL
COMMON STOCK PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS FOR SALE EQUITY
-----------------------------------------------------------------------------
Balance at January 1, 1993 2,345,000 $10,593,000 $357,000 $11,745,000 $22,695,000
Net Loss (2,815,000) (2,815,000)
Stock Options Exercised (Note 8) 78,000 189,000 189,000
Tax Benefit of Stock
Options Exercised 118,000 118,000
-----------------------------------------------------------------------------
Balance at December 31, 1993 2,423,000 10,782,000 475,000 8,930,000 20,187,000
Net Income 859,000 859,000
Change in net Unrealized Loss
On Investment Securities Available
For sale, net of tax of $711,000 ($1,318,000) (1,318,000)
-----------------------------------------------------------------------------
Balance at December 31, 1994 2,423,000 10,782,000 475,000 9,789,000 (1,318,000) 19,728,000
Net Loss (3,341,000) (3,341,000)
Stock Options
Exercised (Note 8) 25,000 95,000 (83,000) 12,000
Tax Benefit of Stock
Options Exercised 78,000 78,000
Common Shares Sold Under
Private Placement (note 17) 474,000 3,200,000 3,200,000
Change in net Unrealized Gain on
Investment Securities Available
For Sale, net of tax of $67,000 1,442,000 1,442,000
-----------------------------------------------------------------------------
Balance at December 31, 1995 2,922,000 $14,077,000 $470,000 $6,448,000 $124,000 $21,119,000
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
45
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($3,341,000) $859,000 ($2,815,000)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 473,000 580,000 610,000
Amortization of discounts and premiums
on investment securities available for sale 850,000 795,000
Amortization of discounts and premiums
on investment securities 449,000
Provision for loan and lease losses 6,600,000 3,365,000 4,889,000
Provision for losses on other real estate owned 177,000 244,000 1,759,000
Deferred income taxes (1,627,000) 621,000 18,000
Loss (gain) on sale of investment securities
available for sale 72,000 (6,000)
Loans originated for sale (9,620,000)
Loss (gain) on sale of other real estate owned 1,675,000 4,000 (167,000)
Loss (gain) on sale of property 2,000 (7,000) (7,000)
Decrease (increase) in accrued interest receivable 197,000 (359,000) 121,000
(Decrease) increase in deferred loan fees (80,000) 27,000 (153,000)
Decrease in unearned lease income (145,000) (19,000) (384,000)
(Increase) decrease in other assets (166,000) 686,000 (714,000)
Net increase (decrease) in interest payable
and other liabilities 872,000 (1,156,000) (385,000)
----------- ----------- ------------
Net cash from operating activities (4,061,000) 5,634,000 3,221,000
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment
securities available for sale 17,232,000 19,350,000
Proceeds from sale of investment
securities available for sale 21,016,000 49,229,000
Purchase of investment securities available for sale (27,158,000) (62,335,000)
Proceeds from maturities of investment securities 168,418,000
Purchases of investment securities (189,395,000)
Net decrease (increase) in loans and
investment in leases 3,260,000 (505,000) 26,159,000
Recoveries of loans and investment in leases 494,000 1,156,000 743,000
Payments received on in-substance foreclosures 93,000 210,000
Purchase of property (661,000) (251,000) (298,000)
Proceeds from sale of property 24,000 18,000 7,000
Proceeds from sale of other real estate owned 5,683,000 6,872,000 9,616,000
Additions to other real estate owned (390,000)
----------- ----------- ------------
Net cash from investing activities 19,890,000 13,237,000 15,460,000
----------- ----------- ------------
46
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
1995 1994 1993
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $31,115,000 ($22,337,000) ($43,411,000)
Decrease in securities sold under
agreements to repurchase (2,500,000)
Proceeds from sale of common stock and 3,290,000 189,000
exercise of common stock options
Payments on note payable (649,000)
----------- ----------- -----------
Net cash from financing activities 34,405,000 (22,337,000) (46,371,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 50,234,000 (3,466,000) (27,690,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 23,315,000 26,781,000 54,471,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $73,549,000 $23,315,000 $26,781,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 7,217,000 $ 6,327,000 $ 8,222,000
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ 627,000 $ 602,000 $ 745,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL INFORMATION ON
NONCASH INVESTING ACTIVITIES:
Property acquired through foreclosure $ 7,024,000 $ 7,143,000 $ 260,000
----------- ----------- -----------
----------- ----------- -----------
Assumption of debt through foreclosure $ $ 67,000 $ 1,359,000
----------- ----------- -----------
----------- ----------- -----------
Tax benefit for exercise of non-qualified stock options $ 78,000 $ $ 118,000
----------- ----------- -----------
----------- ----------- -----------
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
47
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. GENERAL
California Commercial Bankshares (the "Company") was incorporated on June 16,
1982 for the purpose of becoming a bank holding company. National Bank of
Southern California (the "Bank") commenced operations as a wholly-owned
subsidiary of the Company on January 10, 1983. The Bank operates five branches
in Orange County, California. The Bank's primary source of revenue is providing
loans to customers who are predominantly middle market businesses and middle
income individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company, the Bank and Venture Partners, Inc. All significant intercompany
balances and transactions have been eliminated.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cash and cash equivalents for the
purpose of the consolidated statements of cash flows are defined as cash and
due from banks and Federal funds sold.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS - The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and the reported
amounts of liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVESTMENT SECURITIES - The Bank adopted Statement of Financial Accounting
Standards (SFAS) No.115, Accounting for Certain Investments in Debt and Equity
Securities, as of January 1, 1994. SFAS No. 115 requires the classification of
investments in debt and equity securities into three categories: held to
maturity, trading, and available for sale. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity securities and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. The Bank has no trading
securities. Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of equity, net of deferred taxes.
As of January 1, 1994, the cumulative effect of the adoption of the new
statement was not material.
The Bank designates investment securities as held to maturity or available for
sale upon acquisition. Gain or loss on the sales of investment securities is
determined on the specific identification method. Premiums and discounts on
investment securities are amortized or accreted using the interest method over
the expected lives of the related securities.
LOANS AND INVESTMENT IN LEASES - Loans and leases are carried at principal
amounts outstanding, net of deferred net loan origination fees, unearned lease
income and the allowance for loan and lease losses.
48
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
Nonaccrual loans are those for which management has discontinued accrual of
interest because (i) there exists reasonable doubt as to the full and timely
collection of either principal or interest or (ii) such loans have become
contractually past due ninety days with respect to principal or interest.
Interest accruals may be continued for loans that have become contractually
past due ninety days when such loans are well secured and in the process of
collection and, accordingly, management has determined such loans to be fully
collectible as to both principal and interest.
For this purpose, loans are considered well secured if they are collateralized
by property having a realizable value in excess of the amount of principal and
accrued interest outstanding or are guaranteed by a financially capable party.
Loans are considered to be in the process of collection if collection of the
loan is proceeding so that management reasonably expects repayment of the loan
or its restoration to a current status in the near future.
When a loan is placed on nonaccrual status, all interest previously accrued
but uncollected is reversed against current period operating results. Income on
such loans is then recognized only to the extent that cash is received and
where the ultimate collection of the carrying amount of the loan is probable,
after giving consideration to borrowers' current financial condition,
historical repayment performance and other factors. Accrual of interest is
resumed only when (i) principal and interest are brought fully current and
(ii) such loans are either considered, in management's judgement, to be fully
collectible or otherwise become well secured and in the process of collection.
Troubled debt restructured loans are those for which the Company has, for
reasons related to borrowers' financial difficulties, granted concessions to
borrowers (including reductions of either interest or principal) that it would
not otherwise consider, whether or not such loans are secured or guaranteed by
others.
On January 1, 1995, the Bank adopted SFAS No.114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN , and SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN- INCOME RECOGNITION AND DISCLOSURES. SFAS No. 114 generally requires
all creditors to account for impaired loans, except those loans that are
accounted for at fair value or at the lower of cost or fair value, at the
present value of the expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 114 indicates that a creditor should evaluate the
collectibility of both contractual interest and contractual principal when
assessing the need for a loss accrual. The adoption of this statement did not
have a material impact on the results of operations or the financial position
of the Association, taken as a whole.
The Bank considers a loan to be impaired when it is probable that the Bank will
be unable to collect all contractual principal and interest payments in
accordance with the terms of the original loan agreement. The Bank applies the
measurement provisions of SFAS No. 114 to all loans in its portfolio except for
single-family residence and installment loans which are collectively evaluated
for impairment.
LOAN ORIGINATION FEES - Loan origination fees, net of certain related direct
incremental loan origination costs, are deferred and amortized to income over
the term of the loans using the effective interest method.
49
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease losses
is based on an analysis of the loan and lease portfolio and reflects an amount
which, in management's judgment, is adequate to provide for potential loan and
lease losses after giving consideration to the loan and lease portfolio,
current economic conditions, past loan and lease loss experience and other
factors that deserve current recognition in estimating loan and lease losses.
While management uses the best information available to provide for possible
losses, future adjustments to the allowance may be necessary due to economic,
operating, regulatory or other conditions that may be beyond the Company's
control.
In each reporting period, the allowance for loan and lease losses is increased
by provisions for losses charged against operations in that period and
recoveries of loans and leases previously charged off, and is reduced by
charge-offs of loans and leases recognized in that period.
LOANS AVAILABLE FOR SALE - Loans available for sale are recorded at the lower
of cost or estimated market value, determined on an aggregate basis, and
include loan origination costs and related fees. Any transfers of loans
available for sale to the investment portfolio are recorded at the lower of
cost or estimated market value on the transfer date. Gains or losses resulting
from sales of loans are recorded at the time of sale and are determined by the
difference between the net sales proceeds and the carrying value of the loans
sold.
OTHER REAL ESTATE OWNED - Other real estate owned, which represents real estate
acquired in settlement of loans, is carried at fair value less estimated
selling costs. Any subsequent operating expenses or income, reduction in
estimated fair values, or gains or losses on disposition of such properties are
charged or credited to current operations.
PROPERTY - Property is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line basis over the estimated useful lives of the related assets
(estimated to be one to five years) or, if shorter, the term of the lease in
the case of leasehold improvements.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE - Net income (loss)
per common and common equivalent share is based on the weighted average number
of common and common equivalent shares (stock options) outstanding during the
year.
RECLASSIFICATION - Certain items in the previous years' consolidated financial
statements have been reclassified to conform to the current year presentation.
50
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
3. CASH AND DUE FROM BANKS
The Bank is required to meet statutory reserve requirements. In part, the Bank
meets these requirements by maintaining a balance in a non interest-bearing
account at a Federal Reserve Bank. During 1995 and 1994, the average balance in
this account was approximately $6,669,000 and $6,480,000, respectively
4. INVESTMENT SECURITIES
Book value and market value of investment securities (in thousands of
dollars) are summarized as of December 31 as follows:
1995
----------------------------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
----------------------------------------------
AVAILABLE FOR SALE:
U.S. Government
securities $35,314 $35,457 $168 ($25)
U.S. Government agencies
or insured obligations 23,611 23,657 61 (15)
State political subdivisions 423 416 (7)
Mortgage-backed securities-
U.S. agencies 1,047 1,070 25 (2)
Other securities 80 66 (14)
Federal Reserve Bank and
Federal Home Loan
Bank stocks 1,617 1,617
----------------------------------------------
Total $62,092 $62,283 $254 ($63)
----------------------------------------------
----------------------------------------------
1994
------------------------------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gains Losses
------------------------------------------------
AVAILABLE FOR SALE:
U.S. Government
securities $60,099 $58,778 $(1,321)
U.S Government agencies
or insured obligations 9,657 9,262 (395)
State political
subdivisions 1,509 1,274 (235)
Mortgage-backed securities-
U.S. agencies 1,186 1,132 (54)
Other securities 97 73 (24)
Federal Reserve Bank and
Federal Home Loan
Bank stocks 1,556 1,556
------------------------------------------------
Total $74,104 $72,075 $(2,029)
------------------------------------------------
------------------------------------------------
51
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1995, 1994, 1993 (CONTINUED)
The maturity distribution for investment securities available for sale at
December 31,1995 is as follows (in thousands of dollars):
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
ONE YEAR OR LESS $25,165 $25,226
OVER ONE THROUGH FIVE YEARS 34,183 34,303
OVER FIVE YEARS 80 67
------- -------
59,428 59,596
MORTGAGE-BACKED SECURITIES-U.S. AGENCIES 1,047 1,070
FEDERAL RESERVE BANK AND FEDERAL HOME
LOAN BANK STOCKS 1,617 1,617
------- -------
$62,092 $62,283
------- -------
------- -------
Proceeds from sales of investment securities available for sale were $21,016,000
for the year ended December 31, 1995. Gross realized losses from the sales of
investment securities were $72,000 for the year ended December 31,1995.
Proceeds from sale of investment securities available for sale were $49,229,
000 for the year ended December 31, 1994. Gross realized gains were $12,000
and gross realized losses were $6,000 from sales of investment securities
available for sale for the year December 31, 1994.
The carrying value of investment securities pledged as required or permitted
by law amounted to $6,444,000 and $4,040,000 at December 31, 1995 and 1994,
respectively.
52
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
5. LOANS AND INVESTMENT IN LEASES
The loan portfolio and net investment in direct financing leases (in
thousands of dollars) at December 31 is summarized as follows:
1995 1994
-------- --------
REAL ESTATE:
MORTGAGE $ 55,207 $ 66,102
EQUITY LINES 7,039 8,691
CONSTRUCTION 22,593 29,792
COMMERCIAL 84,271 82,600
INSTALLMENT AND OTHER 13,120 10,845
-------- --------
182,230 198,030
LESS:
ALLOWANCE FOR LOAN LOSSES (6,431) (5,572)
DEFERRED LOAN ORIGINATION FEES - NET (702) (782)
-------- --------
LOANS - NET 175,097 191,676
-------- --------
TOTAL MINIMUM LEASE PAYMENTS
RECEIVABLE 3,253 3,778
ESTIMATED UNGUARANTEED RESIDUAL
VALUE OF LEASED PROPERTY 210 381
-------- --------
3,463 4,159
LESS:
UNEARNED LEASE INCOME (399) (544)
ALLOWANCE FOR LEASE LOSSES (111) (88)
-------- --------
NET INVESTMENT IN LEASES 2,953 3,527
-------- --------
TOTAL $178,050 $195,203
-------- --------
-------- --------
The Bank grants loans to customers throughout its primary market area of
Southern California. The Bank makes loans to borrowers from a number of
different industries, the largest of which, including undisbursed amounts,
are as follows at December 31 (in thousands of dollars) (see Note 11):
1995 1994
------- -------
NONRESIDENTIAL CONSTRUCTION $34,717 $47,237
PERSONAL 30,384 26,699
REAL ESTATE AGENTS/DEVELOPERS 37,556 32,584
RESIDENTIAL CONSTRUCTION 22,506 27,242
Loans in the commercial loan portfolio are collateralized primarily by
accounts receivable and inventory.
53
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
The allowance for loan and lease losses is an estimate involving both
subjective and objective factors and its measurement is inherently uncertain,
pending the outcome of future events. Management's determination of the
adequacy of the allowance is based on an evaluation of the loan and lease
portfolio, previous loan and lease loss experience, current economic
conditions, volume, growth and composition of the loan and lease portfolio,
the value of collateral and other relevant factors. The ongoing economic
downturn in Southern California continued to have an adverse impact on the
credit risk profile and performance of the Bank's loan and lease portfolio in
1995. Management believes the level of the allowance as of December 31,
1995 and 1994 is adequate to absorb losses inherent in the loan and lease
portfolio; however, additional deterioration of the economy in the Bank's
lending area could result in levels of loan and lease losses that could not
be reasonably predicted at that date.
A summary of the changes in the allowance for loan and lease losses (in
thousands of dollars) for the years ended December 31 follows:
1995 1994 1993
-------- ------- -------
LOANS:
BALANCE AT BEGINNING OF YEAR $ 5,572 $ 7,137 $ 6,161
RECOVERIES ON LOANS CHARGED OFF 460 1,104 731
PROVISION FOR LOAN LOSSES 6,600 3,365 4,789
LOANS CHARGED OFF (6,201) (6,034) (4,544)
-------- ------- -------
BALANCE AT END OF YEAR 6,431 5,572 7,137
-------- ------- -------
LEASES:
BALANCE AT BEGINNING OF YEAR 88 84 92
RECOVERIES ON LEASES CHARGED OFF 34 52 12
PROVISION FOR LEASE LOSSES 100
LEASES CHARGED OFF (11) (48) (120)
-------- ------- -------
BALANCE AT END OF YEAR 111 88 84
-------- ------- -------
TOTAL $ 6,542 $ 5,660 $ 7,221
-------- ------- -------
-------- ------- -------
Loans and leases on which the accrual of interest has been discontinued
amounted to $15,573,000 and $14,771,000 at December 31, 1995 and 1994,
respectively. If interest on those loans and leases had continued to accrue,
the additional income would have been $625,000 and $968,000 in 1995 and
1994, respectively.
The Bank has pledged real estate loans amounting to $4,413,000 as collateral
for a line of credit with the Federal Home Loan Bank (Note 7).
At December 31, 1995, the Company had classified $1,397,000 of its loans as
impaired with a specific reserve of $390,000 and $15,147,000 of its loans
impaired with no related specific loss reserve determined in accordance with
SFAS No. 114. The Company considers a loan impaired when it is probable that
the Company will be unable to collect all contractual principal and interest
under the terms of the loan agreement. In determining when a loan is
impaired, management considers the following factors: Loans which have delays
in payments of less than 3 months or less than $100,000 are not necessarily
considered impaired unless other factors as described above also apply to the
loans. The average recorded investment in impaired loans during the year
ended December 31, 1995, was $13,101,000. It is generally the Company's
policy to place loans on nonaccrual status when they are 90 days past due.
Thereafter, interest income is no
54
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
longer recognized and the full amount of all payments received, whether
principal or interest, are applied to the principal balance of the loan. As
such, interest income may be recognized on impaired loans to the extent they
are not past due by 90 days or more. Interest income of $236,000 was
recognized on impaired loans during the year ended December 31, 1995, all of
which was collected in cash. The Company will charge-off an impaired loan in
accordance with its established charge off policy.
6. PROPERTY
Property (in thousands of dollars) at December 31 is summarized as follows:
1995 1994
------- -------
FURNITURE, FIXTURES AND EQUIPMENT $ 4,042 $ 3,687
LEASEHOLD IMPROVEMENTS 1,416 1,364
------- -------
5,458 5,051
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (4,308) (4,063)
------- -------
PROPERTY - NET $ 1,150 $ 988
------- -------
------- -------
7. BORROWING ARRANGEMENTS
In December 1988 the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
bank. The credit agreement for this loan was amended pursuant to a Second
Amendment to the credit agreement dated August 25, 1994. The loan as amended
had interest at a fluctuating rate per annum equal to .75% in excess of the
lender's reference rate (8.5% at December 31, 1995). Interest was payable
monthly on the unpaid principal balance of the loan and required prepayment
of 40% of the proceeds of any stock offering or placement of debt or equity.
The Second Amendment was supported by a Support Agreement between a
shareholder director of the Company and the Company whereby the shareholder
guaranteed the payment of the loan.
To compensate the shareholder for signing the Support Agreement and
subsequently paying off the lending institution the Company had signed a
Holding Company Support Agreement whereby the Company: (1) paid the
shareholder $23,500 in 1994 and 1995 and (2) will issue to the shareholder on
or prior to March 31, 1997 warrants to purchase 25,000 shares of common stock
of the Company at an exercise price per share equal to 80% of the book value
per share of the Company on December 31, 1996.
In November 1995, the Company sold 474,000 shares of its common stock through
private placement at $6.75 per share for the purpose of contributing most of
the proceeds into the Bank as additional capital. Of the total proceeds of
$3,200,000 the Company contributed $2,900,000 into the Bank's capital in
December 1995. The shareholder paid off the outstanding balance of
$2,350,000 to the lending institution in March of 1996 and the Company
entered into a new note with the shareholder. The new note bears an interest
rate of 3% over prime rate with interest only payable monthly for the first
year and thereafter $125,000 plus quarterly interest payable monthly. Any
remaining principal and interest is due on April 1, 1999.
55
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
The Bank maintains three lines of credit with outside financial institutions
for the purpose of purchasing Federal funds. The lines of credit bear
interest at a floating rate and provide for borrowing up to $8,000,000,
$5,000,000 and $2,000,000, respectively. At December 31, 1995 and 1994, no
amounts were outstanding on these lines of credit.
Under an agreement with the Federal Home Loan Bank, the Bank may obtain an
extension of credit of up to 50% of total assets collateralized by real
estate loans. At December 31, 1995, the Bank had pledged loans amounting to
$4,413,000 and had available credit of $2,207,000 based on 50% of the
outstanding balance of pledged loans. No amounts were outstanding on this
line of credit at December 31, 1995 and 1994.
8. EMPLOYEE BENEFIT PLANS
The Company had a stock option plan that expired in 1992. Under the plan the
options were granted to directors, officers and employees to purchase shares
at the fair market of the common stock on the date of grant. The outstanding
options become exercisable over a period of ten years.
A summary of stock option transactions under this plan for each of the three
years in the period ended December 31 is as follows:
1995
1995 1994 1993 OPTION PRICE
---------------------------------------------
OPTIONS OUTSTANDING
BEGINNING OF YEAR 229,446 229,446 367,496 $4.33 TO $13.00
OPTIONS EXERCISED (44,249) (96,050)
OPTIONS CANCELED (51,250) (42,000)
---------------------------------------------
OPTIONS OUTSTANDING,
END OF YEAR 133,947 229,446 229,446 $4.67 TO $13.00
---------------------------------------------
---------------------------------------------
At December 31, 1995, options for 132,447 shares were exercisable. During the
year ended December 31, 1995, 44,249 options were exercised and paid for with
cash of $12,000 and 19,198 shares of common stock previously outstanding. No
options were exercised in 1994. During the year ended December 31, 1993,
96,050 options were exercised and paid for with cash of $189,000 and 18,050
shares of common stock previously outstanding.
During 1995 the Company adopted a stock award plan that permits the granting
of options to directors, officers and employees to purchase, at the fair
market value of the common stock on the date of grant, up to 750,000 shares
of the Company's common stock. The outstanding options become exercisable
over a period of ten years.
56
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
A summary of stock option transactions for the stock award plan for the year in
the period ended December 31, 1995 is as follows:
1995
OPTION
1995 PRICE
-----------------------------
OPTIONS OUTSTANDING,
BEGINNING OF YEAR 0
OPTIONS GRANTED 142,000 $5.25 TO $6.50
OPTIONS EXERCISED
OPTIONS CANCELED
-----------------------------
OPTIONS OUTSTANDING, END OF YEAR 142,000 $5.25 TO $6.50
------- --------------
------- --------------
During the year ended December 31, 1995 142,000 options were granted and none
were exercised.
The Company also has stock option plans it uses as a means of compensating
directors in lieu of cash director's fees for services performed. During the
year ended December 31,1995 12,249 options were exercised. During the years
ended December 31, 1995, 1994 and 1993 no options were granted, or canceled.
At December 31, 1995, options for 3,447 shares were outstanding and
exercisable.
The Company maintains a stock bonus plan that covers substantially all
Company employees. The plan provides for the issuance to participating
employees of share units in the plan, which entitles participants to
distributions primarily of common stock of the Company. Contributions to the
plan are held in trust and invested in common stock of the Company (which is
purchased from third parties) or other investments under the terms of
the plan agreement. Contributions are determined based on management's
discretion. The Company's contributions for 1995, 1994 and 1993 were
$45,000, $5,000 and $51,000 respectively.
The Bank has a defined contribution plan, which meets the requirements of
Section 401(k) of the Internal Revenue Code and covers substantially all
employees. The Bank's contributions are determined as a percentage of each
participant's contribution. The amounts contributed to the plan by the Bank
were $108,000, $88,000 and $81,000 for 1995, 1994 and 1993, respectively.
In 1987, the Company purchased cost recovery life insurance with aggregate
death benefits in the amount of $2,473,000 on the lives of the senior
management participants. The Company is the sole owner and beneficiary of
such policies, which were purchased to fund the Company's obligation under
separate deferred compensation arrangements. The cash surrender values and
obligation under deferred compensation agreements at December 31, 1995 and
1994 of $1,231,000 and $1,167,000, respectively, and $317,000 and
$189,000, respectively, have been included in other assets and in other
liabilities, respectively, in the accompanying consolidated balance sheets.
9. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are
associated. All such loans and commitments to loans were made under terms
that are consistent with the Bank's normal lending policies.
57
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
The following is an analysis of the activity of all such loans for the years
ended December 31:
1995 1994
----------- -----------
OUTSTANDING BALANCE, BEGINNING OF YEAR $ 2,623,000 $2,236,000
CREDIT GRANTED, INCLUDING RENEWALS 1,474,000 761,000
REPAYMENTS (2,249,000) (374,000)
----------- -----------
OUTSTANDING BALANCE, END OF YEAR $ 1,848,000 $2,623,000
----------- -----------
----------- -----------
10. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 is as follows:
FEDERAL STATE TOTAL
------------ ---------- ------------
1995:
CURRENT ($341,000) $38,000 ($303,000)
DEFERRED (1,051,000) (576,000) (1,627,000)
------------ ---------- ------------
TOTAL ($1,392,000) ($538,000) ($1,930,000)
------------ ---------- ------------
------------ ---------- ------------
1994:
CURRENT ($79,000) $ 2,000 ($77,000)
DEFERRED 621,000 621,000
------------ ---------- ------------
TOTAL $542,000 $ 2,000 $ 544,000
------------ ---------- ------------
------------ ---------- ------------
1993:
CURRENT ($982,000) $ 9,000 ($973,000)
DEFERRED 18,000 18,000
------------ ---------- ------------
TOTAL ($964,000) $ 9,000 ($955,000)
------------ ---------- ------------
------------ ---------- ------------
Income tax expense (benefit) for the years ended December 31 (in thousands of
dollars) varies from the amounts computed by applying the statutory Federal
income tax rate as a result of the following factors:
1995 1994 1993
--------------------------------------------------
FEDERAL INCOME TAXES AT STATUTORY RATE $(1,845) (35.0%) $491 35.0% $(1,320) (35.0%)
STATE FRANCHISE TAXES - NET OF
FEDERAL INCOME TAX BENEFIT (355) (6.7) 95 6.8 (270) (7.1)
UNBENEFITED STATE NET OPERATING LOSSES 20 1.4 276 7.3
INCREASE (DECREASE) IN DEFERRED TAX ASSET
VALUATION ALLOWANCES - STATE AND FEDERAL 178 3.4 (49) (3.5) 370 9.8
OTHER 92 1.7 (13) (0.9) (11) (.3)
--------------------------------------------------
INCOME TAX (BENEFIT) EXPENSE $(1,930) (36.6%) $544 38.8% $(955) (25.3%)
--------------------------------------------------
--------------------------------------------------
58
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
The Company has recorded net deferred tax assets as of December 31 consisting
principally of the following:
- ---------------------------------------------------------------------
DEFERRED DEFERRED
TAX TAX
1995 1994
- ---------------------------------------------------------------------
DEFERRED TAX ASSETS:
LOAN LOSS RESERVE $2,465,000 $1,373,000
UNREALIZED LOSS ON LOANS 342,000
UNREALIZED LOSS ON
INVESTMENT SECURITIES 711,000
DEPRECIATION 233,000 241,000
NONACCRUAL INTEREST INCOME 171,000 252,000
SELF-INSURANCE RESERVE 106,000 71,000
REO RESERVES 601,000 104,000
CONTINGENCIES 184,000 50,000
OTHER 262,000 361,000
- ---------------------------------------------------------------------
DEFERRED TAX ASSETS 4,364,000 3,163,000
VALUATION ALLOWANCE (1,202,000) (837,000)
- ---------------------------------------------------------------------
DEFERRED TAX ASSETS,
NET OF ALLOWANCE 3,162,000 2,326,000
- ---------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
UNREALIZED GAIN ON
INVESTMENT SECURITIES 67,000
FINANCIAL ACCOUNTING
LEASE DIFFERENCE 846,000 (926,000)
- ---------------------------------------------------------------------
NET DEFERRED TAX ASSETS $2,249,000 $1,400,000
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
In the event the future consequences of difference between financial
accounting bases and the tax bases of the Company's assets and liabilities
result in a deferred tax asset, SFAS 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred asset is recorded when it
is more likely than not that some portion or all of the deferred asset will
not be recognized.
At December 31, 1995, the Company has a California state net loss carry
forward of $1,410,000 which expires primarily in 1996-2000 and a Federal net
loss carry forward of $408,000 which expires primarily in 2010.
59
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
11. COMMITMENTS AND OTHER MATTERS
OPERATING LEASES - At December 31, 1995, the Company and the Bank were
obligated under various noncancelable lease agreements, classified as
operating leases, primarily for the rental of office space. Certain leases
for office space contain provisions for renewal options of one or two
five-year periods. Minimum future rental payments under these lease
agreements are summarized as follows:
1996 $1,155,000
1997 1,139,000
1998 1,099,000
1999 1,118,000
2000 865,000
THEREAFTER 1,478,000
----------
TOTAL $6,854,000
----------
----------
Total rental expense was $1,136,000, $1,072,000 and $1,173,000 in 1995, 1994
and 1993, respectively.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Bank's exposure to credit loss in the event
of nonperformance by the other party to commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. At December 31, 1995 and 1994, the Bank had primarily variable
rate commitments to extend credit of $55,769,000, and $47,920,000,
respectively, and obligations under standby letters of credit of $2,032,000
and $1,629,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Standby letters of
credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to customers. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment or real estate.
60
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
12. LEGAL PROCEEDINGS
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. After taking into consideration information furnished by counsel to
the Company or the Bank as to the current status of various claims and legal
proceedings to which the Company or the Bank is a party, management of the
Company or the Bank believes that the ultimate aggregate liability represented
thereby, if any, will not have a material adverse effect on the Company's
consolidated financial statements.
13. RISK-BASED CAPITAL STANDARDS AND OTHER REGULATORY MATTERS
On April 8, 1992, the Bank executed a Formal Agreement (the "Agreement") with
the Office of the Comptroller of the Currency (the "Comptroller") in which the
Bank agreed to take specific action with respect to classified assets and the
allowance for loan and lease losses, maintain specific minimum capital levels,
obtain prior approval of changes in Directors and executive officers, strengthen
controls over loan administration and real estate loan appraisals, improve
liquidity management, submit a three-year capital program and obtain prior
written approval from the Comptroller before dividends may be declared.
Management believes that the Bank is in substantial compliance with all terms of
the Agreement.
On May 27, 1993, the Company executed a Memorandum of Understanding (the
"memorandum") with the Federal Reserve Bank of San Francisco (the "Fed") under
which the Company submitted a summary plan of action to improve conditions in
the Bank, cannot declare cash dividends without prior notice to the Fed, and
must obtain prior approval of changes in Directors or executive officers.
Management of the Company believes the Company is in substantial compliance with
the terms of the memorandum.
Risk-based capital guidelines require that the Company and the Bank maintain a
minimum total capital of 8% of risk-weighted assets. Further, at least 4% of the
required capital must be "core" (Tier 1) capital. Leverage capital guidelines
require, generally, that the Company and the Bank maintain a minimum ratio of
(Tier 1) capital to total assets of 4%.
61
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
The Agreement requires the Bank to maintain a minimum ratio of total capital to
risk-weighted assets of 9% and a minimum ratio of core capital to adjusted
total assets of 6%. At December 31, 1995, the Company's total capital to
risk-weighted assets and core capital to risk weighted assets were 10.70% and
9.45%, respectively. At December 31, 1995, the Bank's total capital to risk-
weighted assets and core capital to risk weighted assets were 11.36% and
10.11%, respectively. At December 31, 1995, the Company's and the Bank's
leverage ratios were 6.32% and 6.76%, respectively. At December 31, 1995, the
Bank was in compliance with the capital requirements set forth in the Agreement.
Under Federal and California laws and regulations, the Company and the Bank are
subject to restrictions related to the payment of dividends and the transfer of
funds from the Bank to the Company through intercompany loans and advances.
14. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Balance sheets as of December 31:
ASSETS
- ------
1995 1994
---- ----
CASH $ 587,000 $ 489,000
OTHER REAL ESTATE OWNED 83,000 88,000
INVESTMENTS IN SUBSIDIARIES 22,686,000 21,350,000
OTHER ASSETS 122,000 157,000
----------- -----------
TOTAL $23,478,000 $22,084,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOTE PAYABLE $ 2,351,000 $ 2,351,000
OTHER LIABILITIES 8,000 8,000
TOTAL SHAREHOLDERS' EQUITY 21,119,000 19,728,000
----------- -----------
TOTAL $23,478,000 $22,084,000
----------- -----------
----------- -----------
Statements of operations for the years ended December 31:
1995 1994 1993
---- ---- ----
INCOME:
INTEREST $ 21,000 $ 13,000 $ 18,000
---------- ---------- ----------
TOTAL INCOME 21,000 13,000 18,000
---------- ---------- ----------
EXPENSES:
INTEREST 259,000 241,000 233,000
OTHER EXPENSES 45,000 27,000 23,000
---------- ---------- ----------
TOTAL EXPENSES 304,000 268,000 256,000
---------- ---------- ----------
LOSS BEFORE INCOME TAX EXPENSE
(BENEFIT) AND EQUITY IN INCOME
(LOSS) OF SUBSIDIARIES (283,000) (255,000) (238,000)
INCOME TAX EXPENSE (BENEFIT) 52,000 (89,000) (81,000)
---------- ---------- ----------
LOSS BEFORE EQUITY IN
INCOME (LOSS) OF SUBSIDIARIES (335,000) (166,000) (157,000)
EQUITY IN INCOME (LOSS) OF
SUBSIDIARIES (3,006,000) 1,025,000 (2,658,000)
---------- ---------- ----------
NET (LOSS) INCOME ($3,341,000) $ 859,000 ($2,815,000)
---------- ---------- ----------
---------- ---------- ----------
62
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31:
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ($3,341,000) $ 859,000 ($2,815,000)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH FROM OPERATING
ACTIVITIES:
EQUITY IN LOSS (INCOME) OF SUBSIDIARIES
FROM OPERATIONS 3,006,000 (1,025,000) 2,658,000
DECREASE IN OTHER ASSETS 35,000 99,000 167,000
INCREASE (DECREASE) IN OTHER LIABILITIES 3,000 (5,000) (9,000)
---------- ---------- ----------
NET CASH FROM OPERATING ACTIVITIES (297,000) (72,000) 1,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF OTHER REAL ESTATE OWNED 5,000 681,000
---------- ---------- ----------
NET CASH FROM INVESTING ACTIVITIES 5,000 681,000
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM SALE OF COMMON STOCK AND
EXERCISE OF COMMON STOCK OPTIONS 3,290,000 189,000
PAYMENTS ON NOTE PAYABLE (649,000)
INCREASE IN INVESTMENT IN SUBSIDIARIES (2,900,000)
---------- ---------- ----------
NET CASH FROM FINANCING ACTIVITIES 390,000 (460,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 98,000 (72,000) 222,000
CASH AT BEGINNING OF YEAR 489,000 561,000 339,000
---------- ---------- ----------
CASH AT END OF YEAR $ 587,000 $ 489,000 $ 561,000
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
INTEREST $ 259,000 $ 241,000 $ 233,000
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL INFORMATION ON NONCASH INVESTMENT ACTIVITY
TAX BENEFIT FOR EXERCISE OF NON-QUALIFIED STOCK OPTIONS $ 78,000 $ $ 118,000
---------- ---------- ----------
---------- ---------- ----------
63
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments," a summary of the
estimated fair value of the Company's consolidated financial instruments as of
December 31, 1995 and 1994 is presented below. The estimated fair value amounts
have been determined by management using available market information and
appropriate valuation methodologies. However, assumptions are necessary to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
DECEMBER 31, 1995
-----------------
CARRYING ESTIMATED
VALUE FAIR VALUE
ASSETS:
CASH AND DUE FROM BANKS $ 28,549,000 $ 28,549,000
FEDERAL FUNDS SOLD 45,000,000 45,000,000
INVESTMENT SECURITIES 62,283,000 62,283,000
LOANS AND INVESTMENT IN LEASES, NET 171,363,000 170,715,000
ACCRUED INTEREST RECEIVABLE 2,649,000 2,649,000
LIABILITIES:
SAVINGS AND DEMAND DEPOSITS 241,273,000 241,273,000
TIME DEPOSITS 67,231,000 67,234,000
INTEREST PAYABLE 221,000 221,000
NOTE PAYABLE 2,351,000 2,351,000
DECEMBER 31, 1994
-----------------
CARRYING ESTIMATED
VALUE FAIR VALUE
ASSETS:
CASH AND DUE FROM BANKS $ 21,315,000 $ 21,315,000
FEDERAL FUNDS SOLD 2,000,000 2,000,000
INVESTMENT SECURITIES 72,075,000 72,075,000
LOANS AND INVESTMENT IN LEASES, NET 156,247,000 154,814,000
ACCRUED INTEREST RECEIVABLE 2,846,000 2,846,000
LIABILITIES:
SAVINGS AND DEMAND DEPOSITS 218,932,000 218,932,000
TIME DEPOSITS 58,457,000 58,352,000
INTEREST PAYABLE 149,000 149,000
NOTE PAYABLE 2,351,000 2,351,000
The carrying value of cash and due from banks, Federal funds sold, accrued
interest receivable, savings and demand deposits, interest payable, note payable
and commitments is a reasonable estimate of the fair value. The fair value of
investment securities is based on quoted market prices.
64
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
The fair value of loans and investment in leases is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of classified loans with a carrying value of approximately
$16,307,000 and $38,956,000 as of December 31, 1995 and 1994, respectively, was
not estimated because it is not practical to reasonably assess the credit
adjustment that would be applied in the market place for such loans. These
classified loans, which are primarily real estate or construction loans, have a
weighted average interest rate ranging from 8% to 12.5% and from 9.50% to 13.50%
as of December 31, 1995 and 1994, respectively, and are due at various dates
through the year 2025.
The fair value of demand deposit accounts is the amount payable on demand. The
fair value of term deposit accounts is estimated using the rates currently
offered for deposits of similar remaining maturities.
The fair value of commitments is not deemed material at December 31, 1995 and
1994.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995 and 1994. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date and, therefore,
current estimates of fair value may differ significantly from amounts presented
herein.
16. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS No. 122,
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, an amendment to FASB Statement No. 65.
The provisions of these statements are effective for financial statements for
fiscal years beginning after December 15, 1995. The Company has not completed
the process of evaluating the impact that will result from adopting these
statements and is therefore unable to disclose the impact of adopting such
statements. However, the Company does not believe the application of SFAS Nos.
121 and 122 will have a material impact on its financial condition and results
of operations when adopted.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions no later
than after December 15, 1995. The new standard defines a fair value method
of accounting for stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period.
65
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and, if presented, earnings per share as if the
company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has not yet determined if it will elect to change to the fair value method, nor
has it determined the effect the new standard will have on net income and
earnings per share should it elect to make such a change. Adoption of the new
standard will have no effect on the Company's cash flows.
17. STOCK OFFERING
During 1995 the Company sold 474,000 shares of its common stock through private
placement at $6.75 per share, thus increasing its capital in the amount of
$3,200,000. The Company contributed $2,900,000 of the proceeds into the Bank as
additional capital. One shareholder who purchased 289,000 shares (9.9% of the
total shares outstanding), has an option to purchase an additional 267,000
shares at $6.75 per share (which would bring the total shares owned by the
shareholder to 556,000 shares or 17.4% of the total shares which would then be
outstanding). The option is subject to the approval by the Federal Reserve
Board and it will expire on May 1, 1996.
66
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-39926 of California Commercial Bankshares on Form S-8 of our report dated
February 9, 1996 (March 18, 1996 as to Note 7), appearing in this Annual Report
on Form 10-K of California Commercial Bankshares for the year ended December 31,
1995.
LOS ANGELES, CALIFORNIA
MARCH 28, 1996
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following lists information regarding all directors and executive officers
of the Company.
PHILLIP L. BUSH, 59 years of age, has been a Director and Secretary of the
Company since 1982. Mr. Bush has been a practicing attorney with the firm of
Bush, Bush and Larsen, in Fountain Valley, California since 1967. Mr. Bush's
practice is primarily litigation of personal injury matters. He also has
practiced in the areas of real estate development and syndication, and business
enterprise organization and formation.
MICHAEL J. GERTNER, 56 years of age, has been a Director of the Company since
1982. Mr. Gertner is a owner in the law firm of Michael Avey Gertner, a
professional corporation in Newport Beach, California. He is licensed to
practice law in both California and New York. Mr. Gertner is also a Certified
Public Accountant and specializes in the areas of taxation, estate planning and
estate administration.
JAMES W. HAMILTON, 63 years of age, has been a Director of the Company since
1982. Mr. Hamilton is Senior Counsel to the law firm of Paul, Hastings,
Janofsky & Walker of which he has been a partner from 1965 until 1993. His
office is in the firm's Costa Mesa facility. He specializes in securities and
corporate law.
FARRELL G. HINKLE, DDS, MSD, 53 years of age, has been a Director of the Company
since 1982. Dr. Hinkle is an Orthodontist with offices in Newport Beach and
Santa Ana. He has been practicing Orthodontics since 1973. He has a degree in
Mathematics and graduated from the UCLA School of Dentistry as a Regents Scholar
in 1971. He also earned a Certificate in Orthodontics and a Masters Degree from
the University of Washington in 1973.
WILLIAM H. JACOBY, 57 years of age, has been a Director, and the President and
Chief Executive Officer of the Company since 1982 and is also Chairman of the
Board and Chief Executive Officer of the Bank. Mr. Jacoby began his banking
career in 1960 with First Interstate Bank of California. In 1979 Mr. Jacoby
joined Westlands Bank and served in various positions until joining the Company
in June 1982 during its organizational period.
ROBERT L. MCKAY, 65 years of age, is a private investor in Orange County,
California, where he oversees his investments in Venture Capital for business
and real estate. From 1966 to 1981 Mr. McKay was President of Taco Bell, Inc.
MARK H. STUENKEL, 43 years of age, is, and since November 1982 has been,
Executive Vice President of the Company. He is, and since December 1988 has been
President of the Bank. He was previously Executive Vice President of the Bank
since 1982. Mr. Stuenkel was made a Director of the Company in 1987. He
started his banking career in 1974 and prior to joining the Bank held various
positions with Security Pacific National Bank.
DANNIE M. HAYES, 54 years of age, is, and also has been since May 1993,
Executive Vice President and Senior Credit Officer of the Bank. Mr. Hayes began
his banking career in 1963 and prior to joining the Company held various senior
positions with Security Pacific National Bank and City National Bank.
ABDUL S. MEMON, 50 years of age, is, and since 1983 has been, Chief Financial
Officer and Assistant Secretary of the Company and Senior Vice President,
Cashier, Controller and Assistant Secretary of the Bank. Mr. Memon began his
banking career in 1973 and prior to joining the Company held various senior
positions with Westlands Bank.
Effective February 1991, the director's fee paid to non-employee Directors has
been $1,000 per meeting attended and the fee for attending committee meetings
has been $375 per meeting attended. No fee is paid to employee directors.
68
ITEM 11. EXECUTIVE COMPENSATION.
(A) SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information for the fiscal
year ended December 31, 1995 concerning all plan and non-plan compensation
awarded to, earned by, or paid to (I) the Company's Chief Executive Officer
("CEO") at the end of such fiscal year, regardless of compensation level, and
(ii) the Company's four most highly compensated executive officers other than
the CEO who were serving as executive officers at the end of such fiscal year
and whose compensation exceeded $100,000, if any.
SUMMARY COMPENSATION TABLE
Long Term Compensation
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted
and Compen- Stock Options/ LTIP Other
Principal sation Awards(s) SARs Payouts Compen-
Position Year Salary($) Bonus($) ($)* ($) (#) ($) sation($)
William 1995 190,000 0 5,000 0 0 0 0
H. Jacoby 1994 190,000 22,000 4,000 0 0 0 0
CEO 1993 190,000 0 3,000 0 0 0 0
Mark H. 1995 144,000 0 4,000 0 0 0 0
Stuenkel 1994 137,000 16,000 2,000 0 0 0 0
EVP 1993 137,000 0 2,000 0 0 0 0
Dannie 1995 108,000 0 3,000 0 0 0 0
M. Hayes 1994 100,000 5,000 2,000 0 0 0 0
# - Number of units
$ - Dollar amount
* Amounts reported represent Company's matching contribution to the 401-K Plan.
None of the named officers had other annual compensation in excess of $50,000 or
10% of the total annual salary and bonus reported for any of the last three
fiscal years.
The following letter footnotes contain information which relate to the
corresponding lettered columns in the above table:
(c) The dollar value of base salary (cash and non-cash) earned by the named
executive officer.
(d) The dollar value of bonus (cash and non-cash) earned by the named executive
officer during the fiscal year covered, even if deferred at the election of
the executive officer.
(e) The dollar value of other annual compensation not properly categorized as
salary or bonus; including
(i) perquisites and other personal benefits, securities or property unless the
aggregate amount of such compensation is the lesser of either $50,000 or 10%
of the total annual salary and bonus reported for the named executive
officer in columns (c) and (d); (ii) above-market or preferential earnings
on restricted stock, options, stock appreciation rights ("SARs") or deferred
compensation paid during the fiscal year or payable during that period but
deferred at the election of the named executive officer, (iii) earnings on
long-term incentive plan ("LTIP") compensation paid during the fiscal year
or payable during that period but deferred at the election of the named
executive officer; (iv) amounts reimbursed during the fiscal year
69
for the payment of taxes; and (v) the dollar value of the difference between
the price paid by a named executive officer for any security of the Company
or its subsidiaries purchased from the Company or its subsidiaries (through
deferral of salary or bonus, or otherwise), and the fair market value of
such security at the date of purchase, unless that discount is available
generally, either to all security holders or to all salaried employees of
the company.
(D) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS TABLES
Option/SAR Grants in Last Fiscal Year
The following table discloses grants of stock options and stock appreciation
rights ("SARs") to the named executive officers during the year ended December
31, 1995. Multiple grants are aggregated only if they have the same terms, such
as exercise price and expiration dates. The table also discloses information
related to the potential realizable value of the awards at assumed annual rates
of stock price appreciation (5% and 10%) compounded annually over the
option/SAR term.
OPTIONS/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1995
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
for Option
Individual Grants Term
Value*(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
SARs
Options/ Granted to
SARs Employees Exercise Expir-
Granted in Fiscal or Base ation
Name (#) Year Price($/Sh) Date 5%($) 10%($)
William Jacoby 25,000 17.6% $5.25-6.50 2005 $7,000 $14,000
CEO
Mark H. Stuenkel 25,000 17.6% $5.25-6.50 2005 $7,000 14,000
EVP
DannieM. Hayes 10,000 7.0% $ 6.50 2005 $3,000 $ 6,000
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End option/SAR
Values
70
The following table describes the aggregate option/SAR exercised during
fiscal year ended December 31, 1995 and unexercised options/SARs for each
named executive officer at the end of such fiscal year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
- ---- ---------------- ----------- ------------- -------------
William H. Jacoby 4,455 $31,000 30,000/25,000 0/0
Mark H. Stuenkel 2,000 $1,000 26,000/25,000 0/0
Dannie M. Hayes NONE N/A 0/10,000 0/0
During the fiscal year ended December 31, 1995, the Company did not reprice any
options or SARs held by a named executive officer or otherwise reduce the terms
of exercise. No options or SARs held by any executive officer over the last ten
years have been repriced or modified.
(C) LONG-TERM INCENTIVE PLAN ('LTIP") AWARDS TABLE
The following table describes awards to the named executive officers under long-
term incentive plans ("LTIP") during the fiscal year ended December 31, 1995, of
items such as phantom stock, restricted stock units, dividend equivalents, and
performance shares or units. The disclosures encompass plans that are "stock-
based" where the benefits are a function of market price movements, as well as
plans prescribing performance criteria other than or in addition to market
price. For the latter type of plan, the table discloses the estimated payouts
realizable in relation to the performance targets (threshold, target, and
maximum).
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation Threshold Target Maximum
Name Rights (#) of Payout ($ or #) ($ or #) ($ or #)
- ---- -------------- ------------- ---------- -------- --------
William H. Jacoby NONE N/A N/A N/A N/A
CEO
Mark H.Stuenkel NONE N/A N/A N/A N/A
EVP
Dannie M. Hayes NONE N/A N/A N/A N/A
71
(D) DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE
Although the Company has no defined benefit plan or actuarial plan, the Company
has entered into certain executive salary continuation agreements with Messrs.
Jacoby, Stuenkel and Memon. Please see "(F) Employment Contracts and
Termination of Employment and Change-in Control Arrangements".
(E) COMPENSATION OF DIRECTORS
Since February 1991, the director's fee paid to non-employee directors of the
Bank has been $1,000 per board meeting attended and $375 per Committee meeting
attended. The total amounts of director's fees paid and accrued by the Bank
during the fiscal years ended December 31, 1995, 1994 and 1993 were, $140,000,
$130,000 and $147,000 respectively. No director's fees are paid by the Company.
(F) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN CONTROL
ARRANGEMENTS
In 1988, the Bank entered into Executive Salary Continuation Agreements with
Messrs. Jacoby, Stuenkel and Memon. Pursuant to the agreements, each executive
receives benefits upon his retirement or upon termination of service with the
Bank prior to retirement unless such executive's employment with the Bank is
terminated prior to retirement either (i) voluntarily by the executive other
than for "Good Reason" (as defined in the agreements) or (ii) by the Bank for
"Cause" (also defined in the agreements), in which case no benefits or payments
are paid pursuant to the agreements. The agreements also provide each executive
with benefits (to the extent such benefits are vested at the time) if his
employment is terminated by the Bank prior to the executive's retirement for any
reason other than the executives's death, disability, for Cause or is terminated
by the executive for Good Reason. With the exception of Mr. Jacoby whose
benefits vest at the rate of ten percent (10%) per year for each year of
employment that he has been employed by the Bank, benefits vest under the
agreements at the rate of ten percent (10%) per year for each year that the
executive has been employed by the Bank commencing as of January 1, 1988, up to
a maximum of 100%.
Under the agreements, the executives shall receive the following yearly sums for
a period of fifteen (15) years after either their retirement from the Bank or
upon their death: Mr. Jacoby, $80,000; Mr. Stuenkel, $62,500; and Mr. Memon,
$23,000. If one of the executives' employment with the Bank is terminated
because of disability prior to retirement, such executive (or his/her Estate)
shall be entitled to receive the above benefits upon retirement or death or in
lieu thereof, to elect to receive a disability benefit in an amount equal to
the present value of such executive's retirement benefits under the agreement.
Each agreement also has provisions which become effective upon the occurrence of
a "Change in Control" (as defined therein) of the Company or the Bank. In such
event, the agreements become employment agreements with three-year terms for Mr.
Jacoby and Mr. Stuenkel and employment agreements with eighteen month terms for
Mr. Memon. The agreements also provide for the executives' compensation to
increase annually. The executives shall also continue to receive all non-cash
forms of compensation and benefits which they received prior to the Change in
Control for such three year term. Under the agreements, a Change in Control is
deemed to have occurred if (a) any person (other than the Company's directors as
of the date of the agreements) becomes the beneficial owner of more than 40% of
the Company's outstanding Common Stock (exclusive of shares held in the
Company's treasury or by the Company's subsidiaries) which such stock shall have
been acquired after the date of the agreements pursuant to a tender offer,
exchange offer or series of purchases or other acquisitions, or any combination
of such transactions; (b) there is a change in the Company's or the Bank's Board
of Directors at any time within two years after any tender offer, exchange
offer, merger, consolidation, sale of assets or contested election or any
combination of those transactions (the "transaction") so that persons who are
directors of the Company or the Bank immediately before the first
72
transaction cease to constitute a majority of the Board of Directors of the
Company or the Bank any corporation which may be the successor to the Company
of the Bank in any such transaction; or (C) the Company sells, transfers or
otherwise disposes of substantially all of its assets and properties
including the stock of the Bank or the Company shall cause the Bank to sell,
transfer or otherwise dispose of substantially all of the Bank's assets and
properties.
If after a Change in Control one of the executives shall either terminate
his/her employment for a Good Reason or be terminated by the Bank for any reason
other than Cause, then the Bank shall pay such executive the cash compensation
during his/her remaining term (but in the case of Messrs. Jacoby and Stuenkel
such payments shall not be less than two times the executives' annual cash
compensation and in the case of Mr. Memon, not less than one times the
executives' annual cash compensation). Moreover, all employee benefits plans
and programs in which the executives are entitled to participate shall continue
for the remainder of the executives' terms and the executives shall continue to
receive the retirement, death and disability benefits under the agreements.
DISCOUNTED STOCK OPTION AGREEMENT
In January 1988, the Company granted William H. Jacoby an option to purchase
1,980 shares of the Company's Common Stock pursuant to a Discounted Stock Option
Agreement. The option was granted to Mr. Jacoby in consideration of his past
performance as an officer of the Company. The option to purchase shares granted
to Mr. Jacoby was intended to be the equivalent at its inception to a $24,500
bonus. As a result, the option price to be paid upon exercise for the shares is
only $1.00; such price being determined by the difference between the exercise
price and the fair market value of the Company's Common Stock as determined by
the Board of Directors on the date of grant. Subject to the conditions set forth
in the Agreement, the option may be exercised in whole or in part at any time.
Mr. Jacoby exercised his option during 1995.
STOCK OPTION PLAN
The Company had a Stock Option Plan (the "Plan") for its directors, officers and
full time employees. The Company's Board of Directors administers the Plan. The
purpose of the Plan was to compensate certain of the organizers of the Company
and the Bank, and to provide incentives to key employees to remain in the employ
of the Company and the Bank.
Options were not transferable under the Plan other than by will or by the laws
of descent and distribution and during the participant's lifetime were
exercisable only by the participant. The option price per share for options
granted under the Plan had to be at least 100% of the fair market value of the
Common Stock on the date any such options were granted, except that in the case
of a shareholder owning more than 10% of the total combined voting power of all
classes of the outstanding stock of the Company, the option price for incentive
stock options had to be at least 110% of the fair market value on the date of
grant. Upon expiration or termination of any outstanding options, shares
remaining unexercised became available for grant under the Plan. The plan
expired in October 1992.
As of December 31, 1995, options to purchase 133,947 shares of Common Stock were
outstanding at prices ranging from $4.67 to $13.00 per share. During 1995, all
employees as a group exercised options for 44,249 shares of Common Stock which
had a net value (market value less exercise price) of $172,000. Of such
options, Mr. Jacoby and Mr. Stuenkel exercised options and received 4,455 shares
and 2,000 shares, respectively, which had a net value of $31,000 and $1,000,
respectively.
73
STOCK AWARD PLAN
During 1995 the Company adopted a Stock Award Plan (the "Plan") for its
directors, officers and full time employees. The Company's Board of Directors
administers the Plan and decides to whom and upon what terms options shall be
granted. Subject to adjustment by reason of stock splits or similar capital
adjustments, the Plan provides for the granting of nonstatutory stock options as
well as incentive stock options to purchase an aggregate of 750,000 share of the
Company's Common Stock. The purpose of the Plan is to provide incentives to
directors and key employees to remain in the employ of the Company and the Bank.
Options are not transferable under the Plan other than by will or by the laws of
descent and distribution and during the participant's lifetime were exercisable
only by the participant. The option price per share for options granted under
the Plan has to be at least 100% of the fair market value of the Common Stock on
the date any such options are granted, except that in the case of a shareholder
owning more than 10% of the total combined voting power of all classes of the
outstanding stock of the Company 10% of the fair market value on the date of
grant. Upon expiration or termination of any outstanding options, shares
remaining unexercised become available for grant under the Plan.
As of December 31, 1995, options to purchase 142,000 shares of Common Stock were
outstanding at prices ranging form $5.25 to $6.50 per share. No options were
exercised during 1995.
STOCK BONUS PLAN
Effective January 1, 1986, the Company adopted a Stock Bonus Plan (the "Stock
Bonus Plan") and established a related trust. Subject to certain eligibility
requirements for time of service, all of the Company's employees participate in
the Stock Bonus Plan.
The Stock Bonus Plan is a tax-credit employee stock ownership plan and is
administered by the Board of Directors or the Chief Executive Officer. The
amount of the Company's contributions of cash or securities of the Company to
the Stock Bonus Plan is determined by the Board of Directors (or the Chief
Executive Officer). Subject to certain limitations, such contributions are
allocated to each participant's account in proportion to such participant's
compensation earned during the applicable Stock Bonus Plan year. Allocations to
a participant's account vest in accordance with the schedules set forth in the
Stock Bonus Plan. Distributions to participants are made at participants'
death, retirement, disability, or termination of employment. Participants are
not permitted to make voluntary contributions to the Stock Bonus Plan and the
Stock Bonus Plan may not make loans to participants. Any cash amounts
contributed to the Stock Bonus Plan will be used primarily to purchase
securities issued by the Company. The Company contributed $36,000 to the Stock
Bonus Plan for 1995. Of such allocations Mr. Jacoby, Mr. Stuenkel and Mr. Hayes
received $1,000 each.
401-K PLAN
Effective February 1, 1989 the Company established a 401-K Plan which enables
employees to defer a portion of their wages tax free subject to limitations
established by the Internal Revenue Service. All the employees at the
completion of certain eligibility requirements for time of service can elect to
participate in the plan. Under the plan, the Company may make matching
contributions to the plan up to stated limits. Such contributions are determined
by the Board of Directors at the beginning of the year. The vesting of such
contributions to the employees is based on the time of service since the
effective date of the plan.
(G) Additional Information with Respect to Compensation Committee Interlocks
and Insider Participation in Compensation Decision.
74
Not Applicable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The shares of the Company's Common Stock constitute the only class of voting
securities of the Company. As of March 13, 1996 there were 2,944,000 shares of
common stock outstanding and entitled to vote. As of March 13, 1996, there were
approximately 298 shareholders of record.
Set forth in the table on the following page is certain information regarding
persons who according to the Company's records own more than five percent of the
voting securities of the Company as of March 13, 1996, each director of the
Company and all directors and officers of the Company as a group.
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OF BENEFICIAL OF
CLASS OWNER OWNERSHIP (1) CLASS
Common Stock *Phillip L. Bush 102,081(2) 3.5%
(no par value) 10061 Talbert Ave.
Fountain Valley, CA 92708
Common Stock *Michael J. Gertner 33,643(2) 1.1%
(no par value) 4340 Campus Drive Ste. 100
Newport Beach, CA 92660
Common Stock *James W. Hamilton 80,138(2) 2.7%
(no par value) 695 Town Center Drive
Costa Mesa, CA 92626
Common Stock *Farrell G. Hinkle 133,886(2) 4.5%
(no par value) 2740 South Bristol
Santa Ana, CA 92704
Common Stock *William H. Jacoby 221,140(3) 7.4%
(no par value) 4100 Newport Place
Newport Beach, CA 92660
Common Stock *Robert McKay 683,992(2) 23.2%
(no par value) 4100 Newport Place
Newport Beach, CA 92660
Common Stock *Mark H. Stuenkel 45,698(4) 1.5%
(no par value) 4100 Newport Place
Newport Beach, CA 92660
Common Stock All Directors and 1,403,145(5) 45.1%
(no par value) Officers as a Group
(29 in Number)
Common Stock Financial Institutions Partners LP 289,000(6) 9.8%
(no par value) 1110 Lake Cook Road #165
Buffalo Grove, IL 60089
Common Stock Randall Rose & Co. 165,000 5.6%
(no par value) 635 Madison Ave.
New York, NY 1022
*Director of the Company
75
(1) Except as otherwise indicated, each of the persons named in the table has
sole power to vote and dispose of his shares of the Company's Common Stock,
subject to community property laws where applicable.
(2) Includes 3,333 shares of the Company's Common Stock which may be purchased
on the exercise of stock options.
(3) Includes 35,000 shares of the Company's Common Stock which may be
purchased on the exercise of stock options.
(4) Includes 31,250 shares of the Company's Common Stock which may be
purchased on the exercise of stock options.
(5) Includes an aggregate of 168,514 shares of the Company's Common Stock
which may be purchased on the exercise of stock options.
(6) Has an option to purchase an additional 267,000 shares at $6.75 per share
(which would bring the total shares owned by the shareholder to 556,000
shares or 17.4% of the total shares which would then be outstanding).
The option is subject to the approval by the Federal Reserve Board and
it will expire on May 1, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, principal shareholders and their
associates on the same terms, including interest rates and collateral securing
loans, as those prevailing at the time for comparable transactions with
unaffiliated persons, and which do not involve more than a normal risk of
collectibility, nor present other unfavorable features.
Please refer to Note 7 (Borrowing Arrangements) of Item 8 (Financial Statements)
regarding the Support Agreement between a director/shareholder, Robert L.
McKay, and the Company, and the related compensations paid currently or which
will be paid in the future by the Company.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) FINANCIAL STATEMENTS.
Financial statements and schedules of the registrant are listed in
the index to Consolidated Financial Statements contained under
Part II Item 8. Financial Statements and Supplementary Data of
this report.
(2) FINANCIAL STATEMENT SCHEDULES.
All Financial statement schedules are omitted either because the
conditions under which they are required are not applicable or
because the information is included in the Financial Statements.
76
(3) EXHIBITS:
(3) (a) Articles of Incorporation of California Commercial Bankshares as
amended. (Incorporated by reference from Company's Form 10-K filed
on March 31, 990).
(3) (b) By-Laws of California Commercial Bankshares, as amended.
(Incorporated by reference from the Company's Form 10-K
filed on March 31, 1989.)
(10) (A) Office Sublease between First California Associates and the
Company (Incorporated by reference from the Company's Form 10-K
filed on March 31, 1983).
(10) (B) First Amendments to Sublease between First California Associates
and the Bank (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1984).
(10) (C) The Company's Stock Bonus Plan (Incorporated by reference from
the Company's Form 10-K filed on March 31, 1986).
(10) (D) Amendments to Office Sublease between First California Associates
and the Company (Incorporated by reference from the Company's
Form 10-K filed March 31, 1986).
(10) (E) Executive Salary Continuation Agreement between National Bank of
Southern California and William H. Jacoby. (Incorporated by
reference from the Company's Form 10-K filed March 31, 1989).
(10) (F) Executive Salary Continuation Agreements between National Bank of
Southern California and Mark H. Stuenkel. (Incorporated by
reference from the Company's Form 10-K filed March 31, 1987).
(10) (G) Executive Salary Continuation Agreement between National Bank of
Southern California and Abdul S. Memon. (Incorporated by reference
from the Company's Form 10-K filed March 31, 1987).
(10) (H) 401-K Plan. (Incorporated by reference from the Company's
Form 10-K filed March 31, 1989).
(10) (I) Lease for the premises on branch located at 22831 Lake Forest
Drive, El Toro, Ca. (Incorporated by reference from the
Company's Form 10-K filed March 31, 1989).
(10) (J) Lease for the premises on branch located at 625 The City Drive,
Orange, Ca. (Incorporated by reference from Company's Form 10-K
filed on March 31, 1990).
(10) (K) Lease for the property on branch located at 17252 Armstrong Ave.,
Irvine, Ca. (Incorporated by reference from Company's Form 10-K
filed on March 31, 1990).
(10) (L) 1982 Stock Option Plan, as amended. (Incorporated by reference
from Company form 10-K filed on March 31, 1991).
77
(10) (M) Lease for the property located at 4100 Newport Place, Newport
Beach, Ca. (Incorporated by reference from Company's Form 10-K
filed on March 31, 1992).
(10) (N) Credit Agreement dated 12/21/1988 with Security Pacific National
Bank. (Incorporated by reference from Company's Form 10-K filed
on March 31, 1994).
(10) (O) First amendment to Credit Agreement dated March 1993 with Bank of
America National Trust & Savings Association. (Incorporated by
reference from Company's Form 10-K filed on March 31, 1994).
(10) (P) Second amendment to Credit Agreement dated August 24, 1994 with
Bank of America National Trust & Savings Association.
(Incorporated by reference from Company's form 10-K filed on
March 31, 1995).
(10) (Q) Support Agreement dated September 27, 1994 with Robert L. McKay.
(Incorporated by reference from Company's 10-K filed on March 31,
1995).
(10) (R) Holding Company Support Agreement dated October 1, 1994 with
Robert L. McKay. (Incorporated by reference Company's Form 10-K
filed on March 31, 1995)
(10) (S) Lease for the property located at 17330 Brookhurst Ste. 110,
Fountain Valley, CA.
(10) (T) The Company's Stock Option Plan.
(10) (U) Form of Stock Option Agreement
(10) (V) Form of Nonqualified Stock Option Agreement.
(10) (W) Form of Director's Nonqualified Stock Option Agreement.
(22) Subsidiaries of the Company
(24) Independent Auditors' Consent.
(27) Financial Data Schedule.
(B) Reports on Form 8-K.
No report on Form 8-K were filed by the Company during the last
quarter of 1992.
(C) Exhibits Filed.
The following exhibits are filed with this 10-K
(10) (S) Lease for the property located 17330 Brookhurst, Suite. 110,
Fountain Valley, CA.
(10) (T) The Company's Stock Option Plan.
(10) (U) Form of Stock Option Agreement
(10) (V) Form of Nonqualified Stock Option Agreement.
78
(10) (W) Form of Director's Nonqualified Stock Option Agreement.
(22) Subsidiaries of the Company.
(24) Independent Auditors' Consent.
(27) Financial Data Schedule.
(D) Financial Statement Schedules.
Please see paragraph (a)(2) above in this Item 14.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALIFORNIA COMMERCIAL BANKSHARES
BY: William H. Jacoby MARCH 28, 1995
-------------------------------------
WILLIAM H. JACOBY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Phillip L. Bush MARCH 28, 1995
- -----------------------------
PHILLIP L. BUSH
DIRECTOR/SECRETARY
Michael J. Gertner MARCH 28, 1995
- -----------------------------
MICHAEL J. GERTNER
DIRECTOR/TREASURER
James W. Hamilton MARCH 28, 1995
- -----------------------------
JAMES W. HAMILTON
DIRECTOR
Farrell G. Hinkle MARCH 28, 1995
- -----------------------------
FARRELL G. HINKLE
DIRECTOR
William H. Jacoby MARCH 28, 1995
- -----------------------------
WILLIAM H. JACOBY
DIRECTOR/PRESIDENT, C.E.O.
Robert L. McKay MARCH 28, 1995
- -----------------------------
ROBERT L. MCKAY
DIRECTOR/CHAIRMAN OF THE BOARD
Mark H. Stuenkel MARCH 28, 1995
- -----------------------------
MARK H. STUENKEL
EXECUTIVE VICE PRESIDENT
Abdul S. Memon MARCH 28, 1995
- -----------------------------
ABDUL S. MEMON
PRINCIPAL FINANCIAL & ACCOUNTING OFFICER
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
80
Four copies of the following will be furnished to the Securities and Exchange
Commission when sent to the registrant's security holders:
(1) Registrant's annual report to security holders covering the registrant's
last fiscal year; and (2) the registrant's proxy statement and the form of
proxy which will be sent to the registrant's security holders with respect to
the next annual meeting of security holders.
No such reports or proxy materials have yet been sent to the registrant's
security holders.
81
CALIFORNIA COMMERCIAL BANKSHARES
Exhibit Index
Exhibit Number Page Number
(10) (S) Lease for the property located 17330 Brookhurst,
Suite 110, Fountain Valley, CA
(10) (T) The Company's Stock Option Plan.
(10) (U) Form of Stock Option Plan
(10) (V) Form of Nonqualified Stock Option Agreement.
(10) (W) Form of Director's Nonqualified Stock Option Agreement.
(22) Subsidiaries of the Company. 142
(24) Independent Auditor's Consent. 144
(27) Financial Data Schedule. 146
82