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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
MARK ONE:
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee required)
For the transition period _____ to _____.
Commission File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3657758
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806
(address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (310) 988-9600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
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
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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 the Form 10-K or any amendment to this
Form 10-K. / /
As of JANUARY 26, 1996, the aggregate market value of the voting shares
held by non-affiliates (all persons other than executive officers, directors or
greater than 10% shareholders) of the Registrant was approximately
$47,023,976.
An aggregate of 4,212,280 shares of common stock were
outstanding at JANUARY 26, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
1996 Proxy Statement Part III
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PART I
ITEM 1. BUSINESS
THE COMPANY
Home Interstate Bancorp (the "Company") is a corporation which was
organized under the laws of the State of California on September 17, 1979 and
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). The Company's principal asset is the capital stock of
Home Bank (the "Bank"), which became its wholly-owned subsidiary on November 8,
1982.
The Company's principal business is to serve as a holding company for the
Bank and its principal source of income is derived from dividends paid by the
Bank. The payment of dividends to the Company by the Bank is subject to
restrictions that could limit the Company's payment of dividends to its
shareholders. As of December 31, 1995, the Company had total consolidated assets
of approximately $424,000,000, total consolidated net loans and leases of
approximately $208,000,000 and total consolidated deposits of approximately
$369,000,000.
THE BANK
The Bank is a corporation which was organized under the laws of the State
of California on February 10, 1950. The Bank was licensed by the California
State Banking Department and commenced operations as a state-chartered bank on
October 28, 1950. The Bank is a member of the Federal Reserve System. The
deposits of each of the Bank's clients are insured up to the maximum extent
permitted by law. The Bank provides a wide range of banking services to
individuals and business concerns located in and around its primary service
areas. Those services include personal and business checking accounts, NOW and
savings accounts and time certificates of deposit. The Bank offers a variety of
special banking and financial services to its customers, which include
collection accounting, telephone transfers between accounts, travelers' checks,
money orders, safe deposit boxes, discount stock brokerage and notary services.
The Bank acts as a merchant depository for cardholder drafts. The Bank also has
walk-up, drive-through and ATM facilities with extended hours for customers'
convenience.
The Bank's primary service areas are southern Los Angeles County and
certain portions of Orange County. The Bank's service areas encompass a diverse
economy which includes commercial, retail, manufacturing, agricultural, health
care, recreational and governmental sectors. The Bank conducts its business
through fifteen full service branches in Los Angeles County and Orange County.
Ten of those offices are located in Los Angeles County in the cities of Signal
Hill, Redondo Beach, Paramount, Hacienda Heights, Lynwood, Manhattan Beach,
Torrance, Lomita and two in San Pedro. The other five offices are located in
Orange County in the cities of Los Alamitos, Westminster, Fountain Valley, Brea
and Irvine. The Bank's main office is located in Signal Hill, California.
Most of the Bank's deposits are obtained from small and medium-sized
businesses, professionals and individuals. As of December 31, 1995, the Bank had
approximately 44,763 deposit accounts, representing 23,331 non-interest bearing
(demand) accounts with balances totaling approximately $132,208,000, for an
average balance per account of approximately $5,667; 17,407 savings,
interest-bearing demand and money market accounts with balances totaling
approximately $153,891,000 for an average balance per account of approximately
$8,841; and 4,025 time certificate of deposit accounts with balances totaling
approximately $82,932,000 for an average balance per account of approximately
$20,604.
The Bank's lending activities are concentrated in four primary areas:
commercial loans, real estate construction loans, other real estate loans and
installment loans. At December 31, 1995, these four categories accounted for
approximately 37%, 8%, 39% and 16%, respectively, of the Bank's loan portfolio.
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY -- Financial Condition --
Loans."
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The Bank's commercial loan department provides personalized financial
services to the diverse commercial and professional businesses in its primary
service areas. However, it does not concentrate on any single industry. The
Bank's commercial credit services include accounts receivable financing,
equipment financing, working capital and growth loans, SBA loans and letters of
credit. Significant emphasis is placed on the borrower's earning history,
capitalization, secondary sources of financing repayment (e.g., accounts
receivable) and highly liquid collateral (e.g., time deposits or marketable
securities).
The Bank makes real estate construction loans and a variety of other real
estate loans. The primary focus of the Bank's real estate construction activity
is to provide short-term loans (less than one year) to local individuals and
developers for the construction of single family residences and small commercial
developments in the Bank's primary service areas. The Bank also provides limited
short term real estate financing to individuals and corporations in its primary
service areas. The Bank further offers home improvement and real estate equity
loans to individuals in its primary service areas. Also, the Bank's installment
and consumer loans include automobile, home improvement, home equity loans and
other secured and unsecured lines of credit.
Although the Bank does not directly offer trust or international banking
services, such services are offered by the Bank indirectly through correspondent
institutions.
Neither the Company nor the Bank holds any patents, licenses (other than
licenses obtained by the Bank from bank regulatory authorities), franchises or
concessions.
RECENT EVENTS
On January 10, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") by and among the Company, the Bank, CU Bancorp
("CU") and California United Bank, National Association ("CUB"), a wholly-owned
subsidiary of CU pursuant to which the Company will merge (the "Merger") with
and into CU. Under the terms of the Agreement, shareholders of the Company will
receive 1.409 shares of CU common stock for each share of the Company's common
stock. It is anticipated that the Merger will qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code and will be
accounted for as a pooling of interests. The exchange of stock is expected to
result in the Company's shareholders owning approximately 52% of the combined
company, and CU shareholders owning approximately 48%.
The combined company will be under the management of the current CU
Chairman and Chief Executive Officer, Stephen G. Carpenter, as Chairman and
Chief Executive Officer, the Company's President and Chief Executive Officer,
James P. Staes, as Vice Chairman, and current CU President, David I. Rainer, as
President. It is anticipated that the Board of Directors of the combined company
will be comprised of five of the current directors from each of the Company and
CU. At December 31, 1995, CU had total assets of $325,309,000 and total
shareholders' equity of $33,006,000.
COMPETITION
The banking and financial services business in California generally,
and in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The Bank
competes for loans and deposits and customers for financial services with other
commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions and other nonbank financial service providers. Many
of these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial
services than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon local promotional activities,
personal relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs. In
those instances where the Bank is unable to accommodate a customer's needs, the
Bank will arrange for those services to be provided by its correspondents.
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EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio comprise
the major portion of the Company's earnings. These rates are highly sensitive to
many factors that are beyond the control of the Bank. Accordingly, the earnings
and growth of the Company are subject to the influence of domestic and foreign
economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). The Federal Reserve Board implements national monetary policies (with
objectives such as curbing inflation and combating recession) by its open-market
operations in United States Government securities, by adjusting the required
level of reserves for financial institutions subject to its reserve requirements
and by varying the discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these areas influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of any future
changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. For example,
legislation was recently introduced in Congress that would merge the deposit
insurance funds applicable to commercial banks and savings associations and
impose a one-time assessment on savings associations to recapitalize the deposit
insurance fund applicable to savings associations. In addition, legislation has
been proposed that would repeal the current statutory restrictions on
affiliations between commercial banks and securities firms. Under the proposed
legislation, bank holding companies would be allowed to control both a
commercial bank and a securities affiliate, which could engage in the full range
of investment banking activities, including corporate underwriting. The
likelihood of any major legislative changes and the impact such changes might
have on the Company are impossible to predict. See "ITEM 1. BUSINESS -
Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
THE COMPANY
The Company, as a registered bank holding company, is subject to
regulation under the BHCA. The Company is required to file with the Federal
Reserve Board quarterly and annual reports and such additional information as
the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve
Board may conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve
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requirements on such debt. Under certain circumstances, the Company must file
written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "ITEM 1. BUSINESS -- Supervision and Regulation - Capital
Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or 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.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiary are subject to examination by, and may be required to file reports
with, the California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
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THE BANK
The Bank, as a California state chartered bank and a member of the
Federal Reserve System, is subject to primary supervision, periodic examination
and regulation by the California Superintendent of Banks ("Superintendent") and
the Federal Reserve Board. If, as a result of an examination of a bank, the
Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the bank's operations are unsatisfactory or that the bank or its
management is violating or has violated any law or regulation, various remedies
are available to the Federal Reserve Board. Such remedies include the power to
enjoin "unsafe or unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the bank, to assess civil money penalties, to
remove officers and directors and ultimately to terminate a bank's deposit
insurance, which for a California state-chartered bank would result in a
revocation of the bank's charter. The Superintendent has many of the same
remedial powers.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") in the manner and to the extent provided by law. For
this protection, the Bank pays a semiannual statutory assessment. See "ITEM 1.
BUSINESS - Supervision and Regulation - Premiums for Deposit Insurance." Because
the Bank's deposits are insured by the FDIC, the Bank is also subject to certain
FDIC rules and regulations.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, the Bank is
required to maintain certain levels of capital. See "ITEM 1. BUSINESS -
Supervision and Regulation - Capital Standards."
RESTRICTIONS ON DIVIDENDS BY THE COMPANY AND TRANSFERS OF FUNDS TO THE COMPANY
BY THE BANK
The Company is a legal entity separate and distinct from the Bank. The
Company's ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. California law restricts
the amount available for cash dividends by state-chartered banks to the lesser
of retained earnings or the bank's net income for its last three fiscal years
(less any distributions to shareholders made during such period).
Notwithstanding this restriction, a bank may, with the prior approval of the
Superintendent, pay a cash dividend in an amount not exceeding the greater of
the retained earnings of the Bank, the net income for such bank's last preceding
fiscal year, and the net income of the bank for its current fiscal year.
As a Federal Reserve Board member bank, there are separate limitations
imposed under applicable Federal Reserve Board regulations with respect to the
Bank's ability to pay dividends to the Company. In particular, the prior
approval of the Federal Reserve Board is required if the total of all dividends
declared by a Federal Reserve Board member bank in any calendar year exceeds the
bank's net profits (as defined) for that year combined with its retained net
profits (as defined) for the preceding two years, less any transfers to surplus
or to a fund for the retirement of preferred stock. Such authority may be
delegated to the local Federal Reserve Bank under certain circumstances.
The Federal Reserve Board also has the authority to prohibit the Bank
from engaging in activities that, in the Federal Reserve Board's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the Federal Reserve Board could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice. Further, the Federal Reserve Board has established
guidelines with respect to the maintenance of appropriate levels of capital by
banks or bank holding
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companies under its jurisdiction. Compliance with the standards set forth in
such guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of federal law could limit the amount of dividends
which the Bank or the Company may pay. The Superintendent may impose similar
limitations on the conduct of California-chartered banks. See "ITEM 1. BUSINESS
- - Supervision and Regulation - Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and - "Capital Standards" for a discussion of these
additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving the Company and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See "ITEM 1. BUSINESS -- Supervision and Regulation -
Prompt Corrective Regulatory Action and Other Enforcement Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board has adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with relatively
high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of tier 1 capital and limited
amounts of tier 2 capital) and tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not
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include a measurement framework for assessing the level of a bank's exposure to
interest rate risk, which is the subject of a proposed policy statement issued
by the federal banking agencies concurrently with the final regulations. The
proposal would measure interest rate risk in relation to the effect of a 200
basis point change in market interest rates on the economic value of a bank.
Banks with high levels of measured exposure or weak management systems generally
will be required to hold additional capital for interest rate risk. The specific
amount of capital that may be needed would be determined on a case-by-case basis
by the examiner and the appropriate federal banking agency. Because this
proposal has only recently been issued, the Bank currently is unable to predict
the impact of the proposal on the Bank if the policy statement is adopted as
proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements, as of December 31, 1995.
December 31, 1995
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Minimum
Actual Capital
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(In thousands) Amount Ratio Requirement
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Leverage ratio ..................... $44,793 10.69% 4.0%
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Tier 1 risk-based ratio ............ $44,793 16.42% 4.0%
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Total risk-based ratio ............. $47,906 17.56% 8.0%
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PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. 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, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives
the highest rating from its primary regulator)
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its primary regulator)
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
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 transaction the institution 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 (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital.
In addition, each company controlling an undercapitalized depository
institution must guarantee that the institution will comply with the capital
plan until the depository institution has been 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 institution'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
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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 correction action 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: (i) a
forced sale of 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; (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.
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 90 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.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"). The guidelines set forth
operational and managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth and compensation, fees and benefits.
Guidelines for asset quality and earnings standards will be adopted in the
future. The guidelines establish the safety and soundness standards that the
agencies will use to identify and
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address problems at insured depository institutions before capital becomes
impaired. If an institution fails to comply with a safety and soundness
standard, the appropriate federal banking agency may require the institution to
submit a compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured 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.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings 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. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required
by FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
the Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the Bank's case,
the FDIC). The three supervisory categories are: financially sound with only a
few minor weaknesses (Group A), demonstrates weaknesses that could result in
significant deterioration (Group B), and poses a substantial probability of loss
(Group C). The capital ratios used by the FDIC to define well-capitalized,
adequately capitalized and undercapitalized are the same in the FDIC's prompt
corrective action regulations. The BIF assessment rates are summarized below;
assessment figures are expressed in terms of cents per $100 in deposits.
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Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C
Well Capitalized ........... 23 26 29
Adequately Capitalized ..... 26 29 30
Undercapitalized ........... 29 30 31
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C
Well Capitalized ........... 4 7 21
Adequately Capitalized ..... 7 14 28
Undercapitalized ........... 14 28 31
Assessment Rates Effective January 1, 1996
Group A Group B Group C
Well Capitalized .......... 0* 3 17
Adequately Capitalized .... 3 10 24
Undercapitalized .......... 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual
period (which also applies to all other assessment risk
classifications).
A number of proposals have recently been introduced in Congress to
address the disparity in bank and thrift deposit insurance premiums. On
September 19, 1995, legislation was approved by the House Banking Committee that
would, among other things: (i) impose a requirement on all Savings Association
Insurance Fund ("SAIF") member institutions to fully recapitalize the SAIF by
paying a one-time special assessment of approximately 85 basis points on all
assessable deposits as of March 31, 1995, which assessment would be due as of
January 1, 1996, (ii) spread the responsibility for Financing Corporation
("FICO") interest payments across all FDIC-insured institutions on a pro-rata
basis, subject to certain exceptions, (iii) require that deposit insurance
premium assessment rates applicable to SAIF member institutions be no less than
deposit insurance premium assessment rates applicable to BIF member
institutions, (iv) provide for a merger of the BIF and the SAIF as of January 1,
1998, (v) require savings associations to convert to state or national bank
charters by January 1, 1998, (vi) require savings associations to divest any
activities not permissible for commercial banks within five years, (vii)
eliminate the bad-debt reserve deduction for savings associations, although
savings associations would not be required to recapture into income their
accumulated bad-debt reserves, (viii) provide for the conversion of savings and
loan holding companies into bank holding companies as of January 1, 1998,
although unitary savings and loan holding companies authorized to engage in
activities as of September 13, 1995 would have such authority grandfathered
(subject to certain limitations) and (ix) abolish the Office of Thrift
Supervision ("OTS") and transfer the OTS's regulatory authority to the other
federal banking agencies. The legislation would also provide that any savings
association that would become undercapitalized under the prompt corrective
action regulations as a result of the special deposit premium assessment could
be exempted from payment of the assessment, provided that the institution would
continue to be subject to the payment of semiannual assessments under the
current rate schedule following the recapitalization of the SAIF.
On September 20, 1995, similar legislation was introduced in the Senate.
The Senate proposal would similarly impose a one-time special assessment on
savings associations in order to recapitalize the SAIF, and includes provisions
similar to certain others contained in the House legislation. Unlike the House
legislation,
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however, the Senate bill does not include a comprehensive approach for merging
the savings association and commercial bank charters. The Senate bill remains
pending before the Senate Banking Committee.
The future of both of these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act (the
"Reconciliation Act"). The Reconciliation Act, which was passed by both the
House and Senate on November 17, 1995 and vetoed by the President on December 6,
1995, would: (i) recapitalize the SAIF through a special assessment of between
70 and 80 basis points on deposits held by SAIF member institutions as of March
31, 1995; (ii) provide an exemption from this requirement for certain weaker
institutions and a 20% reduction in the SAIF-assessable deposits of so-called
"Oakar banks"; (iii) expand the assessment base for FICO payments to include all
FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1, 1998, but
only if no insured depository institution is a savings association on that date;
(v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio of any fund at the designated reserve
ratio. The Reconciliation Act does not include a provision to merge the charters
of savings associations and commercial banks.
In light of the different proposals currently under consideration and
the uncertainty of the legislative process generally, management cannot predict
whether the proposed legislation will be passed or in what form. Accordingly,
the effect of any such legislation on the Bank cannot be determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations.
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COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The Federal Reserve Board has rated
the Bank "satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
ACCOUNTING CHANGES
In October 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." This
statement addresses additional disclosure requirements for derivatives and other
complex financial instruments. The Company adopted SFAS No. 119 on December 31,
1994. The disclosure required by SFAS No. 119 at December 31, 1995 is presented
in Note 3 to the Company's Consolidated Financial Statements. SEE "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
COMPLIANCE WITH ENVIRONMENTAL REGULATION
Management of the Company and its subsidiary is unaware of any material
effect upon the Company's and the Bank's capital expenditures, earnings or
competitive position as a result of compliance with Federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. Based on current Federal, state and local environmental laws and
regulations, the Company does not intend to make any material capital
expenditures for environmental control facilities for either the remainder of
its current fiscal year or its succeeding fiscal year.
EMPLOYEES
As of December 31, 1995, the Company and its wholly-owned subsidiary had a
total of 198 full-time employees and 58 part-time/flex employees. The management
of the Company believes that its employee relations are satisfactory.
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ITEM 2. PROPERTIES
The Bank owns both the land and the buildings at its office facilities at
the following locations:
LOCATION USE OF FACILITIES SQUARE FEET OF OFFICE SPACE
- -------- ----------------- ---------------------------
Redondo Beach Branch Office 7,774
1217 North Catalina Avenue
Redondo Beach, California
Paramount Branch Office 9,706
15943 Paramount Boulevard
Paramount, California
Paramount Warehouse 12,353
15625 Lakewood Boulevard
Paramount, California
Hacienda Heights Branch Office 7,623
2040 South Hacienda Boulevard
Hacienda Heights, California
Fountain Valley Branch Office 6,978
17010 Magnolia Avenue
Fountain Valley, California
Lynwood Branch Office 8,134
3645 Imperial Highway
Lynwood, California
Signal Hill Branch Office/Administration 36,369
2633 Cherry Avenue
Signal Hill, California
Los Alamitos Branch Office 7,915
10942 Pine Street
Los Alamitos, California
Torrance Branch Office 6,112
2860 W. Sepulveda Boulevard
Torrance, California
Lomita Branch Office 2,160
2270 Pacific Coast Highway
Lomita, California
San Pedro Branch Office 7,318
740 S. Gaffey Street
San Pedro, California
The Bank owns in fee the buildings and leases the land at its office
facilities at the following locations:
MONTHLY RENT OF
SQUARE FEET GROUND LEASE TERM OF
LOCATION USE OF FACILITIES OF OFFICE SPACE AS OF 12/31/95 GROUND LEASE
- -------- ----------------- --------------- -------------- ------------
Brea Branch Office 6,483 $ 1,556 2/9/76 to 2/9/2001
1643 East Imperial Highway with two ten year
Brea, California options
Manhattan Beach Branch Office 6,050 $ 6,541 5/1/80 to 4/30/2000
3300 North Sepulveda Boulevard with two ten year
Manhattan Beach, California options
Westminster Branch Office 8,094 $ 1,902 1/1/74 to 12/31/2011
535 Westminster Mall with two ten year
Westminster, California options
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The Bank leases its office facilities at the following locations:
MONTHLY RENT OF
SQUARE FEET GROUND LEASE TERM OF
LOCATION USE OF FACILITIES OF OFFICE SPACE AS OF 12/31/95 LEASE
- -------- ----------------- --------------- -------------- -----
Irvine Branch Office 6,278 $14,031 11/1/80 to 11/1/2009
4180 Barranca Parkway
Irvine, California
North San Pedro Branch Office 4,000 $ 7,970 7/15/94 to 2/12/99
1090 N. Western Ave with three five year
San Pedro, California options
The Company does not directly own or lease any property. Its
administrative offices are located at the Bank's headquarters in Signal
Hill.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of doing business, the Company and the Bank
occasionally becomes a party to litigation. Currently, there are two cases
pending against the Bank which relate to certain depository accounts that
were opened for varying periods from twenty-nine days to four months. In the
opinion of management, and the Bank's legal counsel, the disposition of all
pending litigation involving the Company and the Bank will have no adverse
material effect upon its financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter market, but is
not included for quotation on the National Association of Securities Dealers
Automated Quotation System, nor is it listed on any exchange. Trading in the
Company's Common Stock has been infrequent, and such trades cannot be
characterized as constituting an active trading market. Management is aware of
six securities dealers which make a market for the Company's Common Stock: (1)
Burford Capital/GBS, La Crescenta, California; (2) Crowell Weedon & Co., Los
Angeles, California; (3) Dean Witter Reynolds, Inc., Long Beach, California;
(4) Hoefer & Arnett, Inc., San Francisco, California; (5) Ryan, Beck & Co., West
Orange, New Jersey; and (6) Smith Barney, Harris Upham & Co., Inc., Los Angeles,
California.
The information set forth in the table below summarizes high and low bid
prices as reported by Crowell Weedon & Co., a market maker for the Company's
Common Stock and the volume of trading as reported by Bloomberg, for the periods
indicated. The prices below do not include retail markups, mark-downs or
commissions and may not necessarily have represented actual transactions.
Additionally, there may have been transactions at prices other than those shown
during that time.
HIGH LOW TRADING VOLUME
---------- --------- ----------------
1995
First Quarter 9.625 9.625 27,720
Second Quarter 9.75 9.625 83,265
Third Quarter 12.00 9.75 165,690
Fourth Quarter 12.25 11.25 32,175
1994
First Quarter 10.25 9.50 70,311
Second Quarter 10.25 9.50 70,000
Third Quarter 10.50 9.875 82,700
Fourth Quarter 10.75 9.625 66,600
On December 31, 1995, there were approximately 1,067 shareholders of record
of the Company's Common Stock.
DIVIDENDS
During 1995 the Company declared cash dividends in the aggregate of
$1,654,754 or $.41 per share and paid cash dividends in the aggregate of
$1,298,778 or $.325 per share. In January 1996, the Company paid cash dividends
in the aggregate of $358,008 or $.085 per share. During 1994 the Company paid
cash dividends of $1,141,305 or $.30 per share. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Capital Resources." All per share amounts disclosed in this Annual
Report, except cash dividends per share, are adjusted to give effect to five
percent stock dividends declared in the fourth quarters of 1995, 1994 and 1991.
As a bank holding company without significant assets other than its equity
interest in the Bank, the Company's ability to pay dividends primarily depends
upon the dividends it receives from the Bank which, in turn, are subject to
certain limitations. The Company's ability to pay dividends is also limited by
state corporation law. See "ITEM 1. BUSINESS-- Supervision and Regulation --
Restrictions on Dividends by the Company and Transfers of Funds to the Company
by the Bank."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial data
for the Company as of and for each of the years in the five-year period ended
December 31, 1995. This table is qualified in its entirety by the detailed
information and financial statements presented elsewhere herein and should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes related thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained herein (dollars in thousands,
except per share data).
1995 1994 1993 1992 1991
------------ ----------- ---------- ----------- -----------
SUMMARY STATEMENT OF INCOME DATA
Interest income $ 31,651 $ 28,983 $ 27,118 $ 31,851 $ 38,895
Interest expense 7,155 6,415 6,736 10,054 16,607
---------- ---------- ---------- ---------- ----------
Net interest income before loss provision 24,496 22,568 20,382 21,797 22,288
Provision for possible loan losses 2,100 800 750 6,000 2,150
Non-interest income 5,213 4,507 7,758 5,636 5,644
Non-interest expense 21,872 21,299 20,341 20,466 25,646
Net gain (loss) on other real estate owned (614) (488) (1,209) (337) 0
----------- ----------- ---------- ---------- ----------
Earnings before income taxes 5,123 4,488 5,840 630 136
Provision (benefit) for income taxes 1,359 1,169 2,215 188 (879)
----------- ----------- ---------- ---------- ----------
Net income $ 3,764 $ 3,319 $ 3,625 $ 442 $ 1,015
=========== =========== ========== ========== ==========
SUMMARY BALANCE SHEET DATA (YEAR END)
Net loans $ 208,110 $ 195,831 $ 196,471 $ 233,290 $ 255,757
Allowance for loan losses 3,113 2,818 3,573 4,011 3,782
Investment securities:
Taxable 125,814 166,055 108,501 79,968 55,887
Non-Taxable 7,082 6,881 10,685 17,979 39,055
Unrealized gains (losses), net 990 (5,056) 1,935 0 0
Earning assets 358,719 378,485 333,230 344,647 354,680
Total assets 423,792 439,632 391,300 408,974 422,956
Interest-bearing deposits 236,823 256,860 229,725 252,108 273,389
Total deposits 369,031 392,269 335,800 361,907 375,123
Shareholders' equity (6) 51,416 45,654 47,411 43,649 45,156
PER SHARE DATA
Net Income (1) $ .90 $ .80 $ .87 $ .10 $ .24
Book value (1)(2) 12.28 10.93 11.35 10.35 10.59
Cash dividends declared .41 .30 .225 .30 .60
Weighted average shares outstanding (1) 4,177,865 4,175,207 4,175,084 4,214,630 4,272,609
SELECTED FINANCIAL RATIOS
Return on average shareholders' equity 7.78% 7.14% 8.04% 1.01% 2.21%
Return on average assets .89% .77% .90% .11% .23%
Net interest spread (3) 5.76% 5.37% 5.20% 5.17% 4.31%
Net interest yield (4) 6.76% 6.18% 5.98% 6.13% 5.80%
Nonaccrual loans to total loans 1.53% 3.32% 2.05% 1.29% .73%
Nonperforming assets (5) to average
total assets 1.94% 2.26% 2.00% 2.84% 3.09%
Net charge-offs to average loans .87% .78% .55% 2.32% .46%
Tier 1 Capital to risk weighted assets 16.96% 16.25% 16.07% 13.28% 12.32%
Total capital to risk weighted assets 18.09% 17.30% 17.32% 14.53% 13.51%
Leverage ratio (Tier 1 Capital to
total average assets) 11.05% 10.17% 10.38% 9.21% 8.94%
Average total shareholders' equity to
average total assets 11.38% 10.82% 11.23% 10.49% 10.46%
Total interest expense to gross
interest income 22.61% 22.13% 24.84% 31.57% 42.70%
Loans to deposits at period end 56.39% 49.92% 58.51% 64.46% 68.18%
Cash dividends declared to net income 43.97% 34.38% 23.50% 258.22% 221.52%
- --------------------------
(footnotes on the following page)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the Company's consolidated financial condition
and results of operations should be read in conjunction with the consolidated
financial statements of the Company and the notes related thereto presented
elsewhere in this Annual Report.
FINANCIAL CONDITION
GENERAL
The Company's consolidated assets were approximately $423,792,000 at
December 31, 1995, a decrease of 3.60% or $15,840,000 from December 31, 1994,
which had consolidated assets of approximately $439,632,000. Cash and cash
equivalents increased 8.98% or $4,401,000, of which federal funds sold increased
$7,800,000 and cash and due from banks decreased $3,399,000. Securities held to
maturity at December 31, 1995, totaled $13,131,000, as compared to $-0- at
December 31, 1994. Securities available for sale, net of unrealized gains
(losses) decreased 28.07% or $47,125,000 and net loans increased 6.27% or
$12,279,000 when comparing December 31, 1995 to December 31, 1994. Deposits
decreased 5.92% or $23,238,000 when comparing the same periods. The reduction in
securities available for sale reflects the sale of such securities to fund the
contraction in deposits, primarily in the area of savings and interest bearing
demand deposits as deposit customers sought alternatives for higher yields on
their investment dollars. Securities available for sale were also utilized to
expand the loan portfolio and to replenish overnight federal funds that had
experienced a drop earlier in the year as a result of the contraction in
deposits. Management utilizes overnight federal funds as a vehicle that allows
immediate funding for loan commitments and potentially large deposit withdrawals
while earning interest income. Real estate owned at December 31, 1995 increased
126.11% or $2,743,000 compared to December 31, 1994. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition -- Nonperforming Loans and Real Estate Owned."
The allowance for possible loan losses at December 31, 1995 increased 10.47% or
$295,000 compared to December 31, 1994. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Financial Condition -- Allowance for Possible Loan Losses." At December 31,
1994, assets increased 12.35% or $48,332,000 from December 31, 1993, which had
total assets of $391,300,000. The increase in total assets for the year ended
December 31, 1994 compared to December 31, 1993, was primarily in securities
available for sale which increased 38.61%, loans decreased 0.70% and deposits
increased 16.82%. As the demand for loans remained low in 1994, the cash flow
from the increase in deposits was used to purchase securities. The significant
increase in deposits was a result of two purchase and assumption agreements with
the FDIC in 1994. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --
Note 15 Purchase and Assumption of Certain Assets and Liabilities."
- ----------------------------
(footnotes from the previous page)
(1) Net income per share and book value per share were restated to reflect the
effect of a 5% stock dividend issued in 1995, 1994 and 1991.
(2) Represents common shareholders' equity divided by the number of shares
outstanding at period end without giving effect to the possible dilutive
effect of the exercise of outstanding stock options which is deemed by
management to be immaterial.
(3) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities. The net interest spread
is not computed on a tax equivalent basis.
(4) Represents net interest income as a percentage of average interest-earning
assets. The net interest yield is not computed on a tax equivalent basis.
(5) Nonperforming assets consist of non-accrual loans, loans past due 90 days
or more, restructured loans, non-accrual securities and real estate owned.
(6) Shareholders' equity includes $580,000, $(2,956,000) and $989,000 of
unrealized gains (losses), net of deferred taxes at December 31, 1995, 1994
and 1993, respectively.
19
20
Shareholders' equity was $51,416,000 at December 31, 1995, which reflects
an increase of 12.62% or $5,762,000 from December 31, 1994. This increase
includes a change of $3,536,000 in net unrealized gains on securities available
for sale, net of deferred taxes. Shareholders' equity was $45,654,000 at
December 31, 1994, which reflects a decrease of 3.71% or $1,757,000 from
December 31, 1993. This decrease includes a change of $3,945,000 in net
unrealized losses on securities available for sale, net of deferred taxes. The
Company's regulatory capital to assets ratios at December 31, 1995 continued to
remain at levels well above regulatory requirements. The Company's capital to
asset ratios at December 31, 1995 and December 31, 1994, were 16.96% and 16.25%
for tier 1 capital to risk weighted assets, 18.09% and 17.30% for total capital
to risk weighted assets and 11.05% and 10.17% for the leverage ratio (tier 1
capital to total average assets), respectively.
MERGERS AND ACQUISITIONS
On January 10, 1996, the Company entered into a definitive agreement to
merge with and into CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the definitive
agreement, shareholders of the Company will receive 1.409 shares of CU Bancorp
stock for each share of the Company's stock. The definitive agreement is subject
to shareholder and regulatory approval and is expected to be completed by the
end of the second quarter 1996. At December 31, 1995 CU Bancorp had total assets
of $325,309,000 and total shareholders' equity of $33,006,000.
In October 1995, the Bank entered into a deposit purchase agreement with
Southern California Bank to purchase the deposits of their Signal Hill office.
Upon regulatory approval the Bank consummated the purchase on February 20, 1996.
The deposits purchased in the transaction totaled in aggregate $1,656,000 which
reflects less than 1% of total deposits and assets of the Bank.
In April and July of 1994, the Bank entered into Purchase and Assumption
Agreements (P & A Agreements) with the FDIC. See "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- Note 15 Purchase and Assumption of Certain Assets and
Liabilities." Under the terms of the P & A Agreement for the Mechanics National
Bank (MNB) and the FDIC Consortium Agreement effective April 1, 1994, the Bank
was named as lead bank. As lead bank, a fee was paid to the Bank and the Bank
was allowed to collect certain other administrative fees from the other
Consortium Members. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations -- Other Operating Revenue." Two branch operations of MNB were
acquired creating a new Paramount office facility into which the Bank then
merged its existing Paramount office and the MNB Torrance office was merged into
the Bank's existing Torrance office. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Results of Operations -- Other Operating Expense." The Bank's old Paramount
office is currently being used as a warehouse facility and the Bank opted not to
keep the Torrance facility of MNB.
Under the terms of the P & A Agreement for the Bank of San Pedro effective
July 15, 1994, the Bank was the sole institution involved. The Bank of San Pedro
originally had six branch locations of which the Bank opted to keep two
facilities open and merged the other four into other offices depending on their
location. Some of the employees of the Bank of San Pedro were hired to staff the
two new locations.
LOANS
Net loans totaled $208,110,000 at December 31, 1995, an increase of 6.27%
or $12,279,000 from December 31, 1994, which totaled $195,831,000. This modest
increase is primarily in the areas of real estate construction and other real
estate loans. Other real estate loans primarily consists of commercial loans
secured by first trust deeds on commercial real estate. Due to the easing of
interest rates by the Federal Reserve Board in 1995 loan requests shifted into
real estate commercial and construction loans. Some commercial customers felt
that it was the right time to purchase their own facility or expand into larger
facilities. Notwithstanding the purchase of loans under the P & A Agreement for
the Bank of San Pedro, net loans decreased 0.33% or $640,000 from December 31,
1994 to December 31, 1993. The decrease from December 31, 1993 to December 31,
1994 reflected a slow demand for loans. Net loans to total assets comprised
49.11%, 44.54% and 50.21% at December 31, 1995, 1994 and 1993, respectively. The
ratio of total
20
21
average loans to total average deposits was 55.58%, 52.55% and 61.72% for the
years ended December 31, 1995, 1994 and 1993, respectively.
Commercial loans totaled approximately $79,600,000 at December 31, 1995, a
decrease of 17.85% or $17,300,000, which totaled approximately $96,900,000 at
December 31, 1994. Commercial loans increased 9.99% or $8,800,000 at December
31, 1994 from December 31, 1993, which totaled approximately $88,100,000.
Commercial lending is on a non-speculative basis primarily to professionals and
companies with sales from less than $1,000,000 to $15,000,000 or more annually.
The commercial loan portfolio is diversified with no major concentration in any
specific industry. The decrease of commercial loans in 1995, is primarily due to
an apparent shifting of loan demand to real estate commercial. Management cannot
predict what effect new regulatory issues, Federal Reserve Board's monetary
policies or consumer confidence in the economy will have on the loan portfolio.
Accounts receivable loans, (which are included in commercial loans),
totaled approximately $7,100,000 at December 31, 1995, a decrease of 16.47% or
$1,400,000 from December 31, 1994, which had accounts receivable loans of
approximately $8,500,000. These loans increased 88.89% or $4,000,000 from
December 31, 1993, which had accounts receivable loans of approximately
$4,500,000. The decrease in 1995 was due to payments on outstanding balances
exceeding the advances on available lines. The increase in 1994 was primarily
due to the lifting of a self imposed moratorium in the fourth quarter of 1993
which allowed for new accounts receivable lending. Accounts receivable loans are
administered by a separate department of professionals who periodically audit
and examine each borrower.
Real estate construction loans totaled approximately $16,900,000 at
December 31, 1995, an increase of 69.00% or $6,900,000 from December 31, 1994,
which totaled approximately $10,000,000. Real estate construction loans
decreased 58.51% or $14,100,000 at December 31,1994 from December 31, 1993,
which totaled approximately $24,100,000. The increase in 1995 was due to new
construction lending stimulated by lower interest rates. The decrease in 1994
was due primarily to the decline in demand for construction loans reflecting the
weak real estate market in Southern California in 1994 and 1993. The Company's
real estate construction loans are primarily for single family homes located
within its market area. The majority of these homes are designed for first time
and middle income buyers. The Company provides interim construction financing
for both residential and commercial projects.
Other real estate loans totaled approximately $83,000,000 at December 31,
1995, an increase of 27.30% or $17,800,000 from December 31, 1994, which totaled
approximately $65,200,000. Other real estate loans increased 2.68% or $1,700,000
at December 31, 1994 from December 31, 1993, which had other real estate loans
that totaled approximately $63,500,000. This category of loans includes
commercial loans secured by first trust deeds on commercial real estate. Such
loans totaled approximately $66,000,000 and $43,700,000 or 79.52% and 67.02% of
all other real estate loans at December 31, 1995 and 1994, respectively. The
increase in 1995 was primarily due to the desire of commercial customers to own
their facility or expand into larger facilities. These loans are not intended as
permanent financing of real estate, but are secured by commercial real estate
with maturity dates normally running from three to seven years with certain
exceptions for exceptional borrowers, properties and purposes. At the conclusion
of the term of these loans, approximately 50% of them are refinanced for short
terms after reevaluating the loan to ensure that it meets the Bank's current
lending and pricing standards.
Another segment of the real estate loan portfolio is home equity lines of
credit tied to the prime rate which totaled approximately $8,400,000 or 10.12%
of other real estate loans at December 31, 1995. This is a decrease of 6.66% or
$600,000 from December 31, 1994, which totaled approximately $9,000,000 or
13.80%. Home equity lines of credit decreased 19.64% or $2,200,000 at December
31, 1994 from December 31, 1993, which had home equity lines of credit that
totaled approximately $11,200,000 or 17.64%. The decreases in 1995 and 1994 were
due to payoffs from refinances as consumers took advantage of the lower interest
rate environment. The interest rates began to rise in March 1994 and then began
to drop in 1995, as a direct result of Federal Reserve Board's monetary policy
which has influenced the amount of refinancing activity. These lines of credit
are to individuals secured by first or second deeds of trust on their primary
single family residences. The Bank uses third party appraisers who are either
state licensed or certified to appraise such properties. The Bank
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does not make long term conventional real estate mortgage loans and as such does
not offer adjustable rate mortgages.
The Company is subject generally to the fluctuations in the California
residential and commercial real estate market and in particular to the markets
in Los Angeles and Orange County. Current general economic conditions and, more
specifically, real estate market conditions could have a significant impact on
the Company's real estate and construction loan portfolio. A continued decline
in real estate values and/or the demand for residential and commercial real
estate in California or in the Los Angeles and Orange County areas could have an
adverse impact upon the financial condition and results of operations of the
Company. The Company has underwriting procedures designed to identify what it
believes to be acceptable levels of risk.
Installment loans totaled approximately $33,600,000 at December 31, 1995,
an increase of 24.44% or $6,600,000 from December 31, 1994, which totaled
approximately $27,000,000. Installment loans increased 9.31% or $2,300,000 at
December 31, 1994 from December 31, 1993, which had installment loans that
totaled approximately $24,700,000. Dealer originated automobile loans totaled
approximately $21,400,000 at December 31, 1995, an increase of 57.35% or
$7,800,000 from December 31, 1994, which had loans of $13,600,000. December 31,
1994 dealer originated automobile loans showed an increase of 24.77% or
$2,700,000 from December 31, 1993. The Company attributes the increase of these
loans to improved efficiencies of the centralized consumer loan department and
increased focus on dealer financing. The Company offers a wide variety of direct
new and used automobile financing whose loan terms vary depending upon the
length and amount of the loan, the type and value of the automobile and the
creditworthiness of the borrower.
In addition, the Company offers other types of consumer installment loans
such as personal loans, fixed rate home equity loans and home improvement loans.
These loans are made on a direct simple interest basis and totaled approximately
$12,200,000 at December 31, 1995, compared with approximately $13,400,000 at
December 31, 1994, a decrease of 8.96% or $1,200,000. At December 31, 1994,
these loans decreased 2.19% or $300,000 compared with approximately $13,700,000
at December 31, 1993. These decreases were attributed to the interest rate
environment and significant amounts of home mortgage refinancing activities.
Under regulations governing California state-chartered banks, the Bank may
lend up to 15% of its adjusted capital on an unsecured basis and 25% of its
adjusted capital on a secured basis to any one borrower; however, the total of
such secured and unsecured loans cannot exceed 25% of the Bank's adjusted
capital. As of December 31, 1995, the Bank's loan limits under these regulations
were $7,935,000 on an unsecured basis and $13,225,000 on a secured basis. As of
December 31, 1994, the Bank's loan limits under these regulations were
$6,800,000 on an unsecured basis and $11,400,000 on a secured basis.
In the ordinary course of doing business, the Bank has granted loans to
certain officers, directors and their affiliates. These loans were made on
substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the same time for comparable transactions
with other customers. They did not involve more than the normal risk of
collectibility or present other unfavorable features. All loans to insiders are
submitted to the Loan Committee prior to being presented to the Bank's Board of
Directors for their approval. The Bank's Board of Directors has adopted a policy
that all director loans must be collateralized to the extent of the amount of
credit approved. The outstanding balances of such loans totaled approximately
$1,100,000, $1,200,000 and $1,300,000 at December 31, 1995, 1994 and 1993,
respectively. All present loans are current as to interest and principal.
The Company had standby and commercial letters of credit aggregating
$2,800,000 at December 31, 1995 compared with $5,000,000, $5,200,000, $5,200,000
and $6,200,000 at December 31, 1994, 1993, 1992 and 1991, respectively. In
addition, the Bank had commitments to grant real estate construction loans and
commercial loans plus the undisbursed portions of existing construction loans,
lines of credit and optional advance notes totaling $49,500,000 and $38,900,000
at December 31, 1995 and 1994, respectively.
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The following table sets forth the amount of total loans outstanding in
each category at the dates indicated (dollars in thousands):
DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Commercial $ 79,567 $ 96,900 $ 88,138 $106,154 $121,241
Real estate-- construction 16,933 10,000 24,133 34,018 28,067
Real estate-- other 82,992 65,174 63,540 63,397 59,151
Installment 33,588 27,007 24,659 34,735 52,486
All other loans (including overdraft) 1,635 1,771 1,640 1,707 1,682
-------- -------- -------- -------- --------
Total gross loans 214,715 200,852 202,110 240,011 262,627
Less: Unearned discounts and fees 3,492 2,203 2,066 2,710 3,088
Less: Allowance for possible loan losses 3,113 2,818 3,573 4,011 3,782
-------- -------- -------- -------- --------
Total net loans $208,110 $195,831 $196,471 $233,290 $255,757
======== ======== ======== ======== ========
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NONPERFORMING LOANS AND REAL ESTATE OWNED
Nonperforming loans totaled $3,338,000 at December 31, 1995, a decrease of
49.77% or $3,307,000 compared to $6,645,000 at December 31, 1994. The $3,338,000
represents 1.58% of total loans. Of the $6,645,000 at December 31, 1994,
$579,000 was charged-off, $3,526,000 was transferred to real estate owned and
$2,228,000 was received in payments. The $3,338,000 includes $3,232,000 in
non-accrual loans and $106,000 in loans past due 90 days or more and still
accruing interest. The $3,232,000 in non-accrual on December 31, 1995, includes
$2,972,000 added since December 31, 1994. Of the $3,232,000 in non-accrual
loans, $3,207,000 is secured by deeds of trust and $25,000 is secured by other
collateral. Of loans in non-accrual status $1,910,000 is represented by loans to
related entities which are secured by real estate, having an approximate loan to
value ratio of 70% (based on appraisals of various dates which have been
discounted to reflect current market condition and/or actual pending sales
transactions). Management has set a specific reserve of $251,000 on the
$1,910,000 and it is believed to be sufficient to absorb any anticipated loss.
The next largest non-accrual loan had a balance of $466,000 at December 31, 1995
with a specific reserve of $50,000. This loan is participated with another
financial institution and it is secured by a deed of trust. Loans 90 days or
more past due and still accruing increased $54,000 compared to December 31,
1994.
The Company considers a loan to be nonperforming when any one of the
following events occur: (a) any installment of principal or interest is 90 days
past due; or (b) the loan is placed on non accrual status. The Company's policy
is to classify loans which are delinquent in interest or principal for a period
of 90 days as non-accrual loans unless management determines that the loan is
adequately collateralized and in the process of collection or other
circumstances exist which would justify the treatment of the loan as fully
collectable. Accrual of interest on loans and leases is discontinued when
management believes, after considering economic and business conditions, and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Interest income is subsequently recognized
on non-accrual loans only to the extent cash payments are received or until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is no longer doubtful, in which case the credit is returned
to accrual status.
Under the provisions of SFAS No. 114, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Creditors are required to measure impairment of a loan based on the
present value of 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.
The Bank has defined impaired loans as individual loans or relationships of
$250,000 or more and not currently accruing interest. As permitted by these new
standards, the Bank excludes from its calculations smaller balance, homogeneous
loans such as consumer installment loans and lines of credit, and direct finance
leases. In determining whether a loan is impaired or not, the Bank applies its
normal loan review procedures in making that judgment. Loans which the Bank
expects to collect in full and for which an insignificant delay, i.e., 45 days
past due, or an insignificant shortfall in amount of payments is anticipated are
not considered impaired. The Bank measures impairment on a loan-by-loan basis
using either the present value of expected future cash flows discounted at the
loan's effective interest rate, or the fair value of the collateral if the loan
is collateral dependent.
At December 31, 1995, the Bank had $2,868,000 in impaired loans and a
related loss allowance of $356,000. Of the $2,868,000 of impaired loans, all of
which were non-accruing, $200,000 was measured using the present value method
and $2,668,000 was measured using the fair value of the collateral. The average
balance of impaired loans for the year ended December 31, 1995 was $4,626,000.
No income was recognized in 1995 on impaired loans.
Problem loans and nonperforming loans are monitored on a regular basis by
Credit Administration. In addition, a Special Assets Committee, which includes
members of senior management and the Board of Directors, reviews these loans as
does the Bank's Directors Audit Committee. Periodic review is also performed by
a third party auditor.
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Real estate owned totaled $4,918,000 at December 31, 1995, an increase of
126.11% or $2,743,000 from the $2,175,000 at December 31, 1994. The increase is
primarily due to the foreclosure of five properties. Three of the these
foreclosure actions resulted in properties representing 66% of the total real
estate owned balance at December 31, 1995. One is a 60 unit manufactured housing
complex valued at $2,300,000, the second is made up of two theaters valued at
$675,000 and the third is a gas station valued at $250,000. During 1995, seven
other properties were transferred to real estate owned and subsequently sold.
They included a theater in Newport Beach, Ca., an auto repair facility in San
Pedro, Ca., a single family residence in Long Beach, Ca., an unimproved lot in
Cota de Caza, an office complex in Lawndale, Ca., a single family residence in
Westchester and a four unit condominium project in Venice Beach. The proceeds
from the sales were approximately $2,964,000. Additionally, the office complex
in Torrance, Ca. which was contained in real estate owned at December 31, 1994,
was sold during 1995. The proceeds from its sale was $381,000 with its related
loss of approximately $94,000. Writedowns due to deterioration in value of
certain properties totaled approximately $605,000 for the year ended December
31, 1995. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of Operations -- Other
Operating Expense." Other real estate owned properties in the amount of
$1,693,000 consists of 161 acres of unimproved land in Orange County, a
condominium in Lomita, Ca. and office condominiums in Lawndale, Ca. Real estate
owned is carried at the lower of cost or fair market value less estimated
carrying costs and cost of disposition. Cost is determined at the date of
acquisition as the result of a foreclosure sale and is equal to the receivable
balance at that date. If the cost (plus any liabilities assumed at foreclosure)
exceeds the appraised value, the carrying value of the property is written down
to its fair value. During the time the property is held, all related carrying
costs and losses on revaluation are expensed as incurred. Gains or losses on
sales are recorded in conformity with standards that apply to the accounting for
sales of real estate.
All properties transferred into real estate owned are marketed aggressively
but prudently in order to reduce exposure to unnecessary loss.
The following table provides information with respect to the components of
the Company's nonperforming loans at the dates indicated (dollars in thousands):
DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Nonaccrual loans (1)
Commercial $1,412 $1,665 $ 319 $1,448 $ 328
Real estate - construction 0 1,595 3,261 1,282 1,200
Real estate - other 1,795 3,322 512 334 88
Installment and other 25 11 4 0 282
------ ------ ------ ------ ------
Total 3,232 6,593 4,096 3,064 1,898
------ ------ ------ ------ ------
Loans 90 days or more past
due and still accruing (2):
Commercial 0 0 506 118 1,626
Real estate - construction 0 0 0 199 803
Real estate - other 79 0 0 194 131
Installment and other 27 52 92 159 377
------ ------ ------ ------ ------
Total 106 52 598 670 2,937
------ ------ ------ ------ ------
Total nonperforming loans $3,338 $6,645 $4,694 $3,734 $4,835
====== ====== ====== ====== ======
Nonperforming loans as a
percentage
of total loans 1.58% 3.35% 2.35% 1.57% 1.86%
====== ====== ====== ====== ======
- -----------------------------------
(1) During the fiscal year ended December 31, 1995, 1994 and 1993,
approximately $103,000, $292,000 and $240,000, respectively, of interest
income related to these loans was included in net income. Additional
interest income of $221,700, $412,600 and $170,400 would have been recorded
for the year ended December 31, 1995, 1994 and 1993, respectively, if these
loans had been paid in accordance with their original terms and had been
outstanding throughout the applicable period then ended or, if not
outstanding throughout the applicable period then ended, since origination.
(2) During the fiscal year ended December 31, 1995, 1994 and 1993,
approximately $126,000, $1,500 and $18,300, respectively, of interest
income related to these loans was included in net income.
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ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses was $3,113,000 at December 31, 1995,
compared to $2,818,000, $3,573,000, $4,011,000 and $3,782,000 at December 31,
1994, 1993, 1992 and 1991, respectively. The ratio of the allowance to total
loans was 1.47% at December 31, 1995, compared to 1.42%, 1.79%, 1.69% and 1.46%
at December 31, 1994, 1993, 1992 and 1991, respectively. Net charge-offs to
average loans, averaged 1.01% over the same five year period. The ratio of
allowance to nonperforming loans ("coverage ratio") was 93.26% at December 31,
1995, compared to 42.41%, 76.12%, 107.42% and 78.22% at December 31, 1994, 1993,
1992 and 1991, respectively. The improved coverage ratio reflects both the
decline in nonperforming loans from $6,645,000 at December 31, 1994 to
$3,338,000 at December 31, 1995, and an increase in the provision for loan loss
of $1,300,000 in 1995, compared to 1994. See "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Financial Condition -- Nonperforming Loans and Real Estate Owned."
Management maintains a problem loan list. This list includes those loans
that are identified as having varying degrees of risk in excess of loans having
a normal amount of risk. It is the policy of the Company to put a loan on the
problem loan list if the loan develops any weakness in cash flow or security
regardless of whether the loan is in a current status or not. The Company's
grading system drives the loan loss reserve calculation on these loans.
Nonperforming loans are contained in the problem loan list. As of December 31,
1995, the allowance for possible loan losses represented 23% of total problem
loans as compared to 19% at December 31, 1994. The following table details the
category distribution of management's problem loan list as of December 31, 1995
and 1994.
DECEMBER 31,1995 DECEMBER 31,1994
---------------- ----------------
Commercial $ 7,555,000 $ 3,887,000
Real estate - construction 2,952,000 3,269,000
Real estate - other 2,416,000 7,184,000
Installment and other 584,000 369,000
----------- -----------
Total $13,507,000 $14,709,000
=========== ===========
The Company has approximately $52,300,000 in commitments to make loans and
extend additional credit under lines of credit it does not generally consider
these items as a group in the analysis of the allowance for possible loan loss
adequacy. Of this $52,300,000, approximately $45,500,000 is cancelable
immediately or have maturities of one year or less. These commitments are
conditional upon the continued financial strength of the borrower or defined
collateral values in the case of accounts receivable, construction loans, or
home equity loans.
All loans in the portfolio are graded as to quality when the loan is made,
each time it is renewed and when it is reviewed by the Company's external
examiners. Any loan not falling into the highest quality grouping is
specifically reviewed for loss potential and is given a specific dollar amount
reserve. Only on loans with the highest quality rating is a historical
perspective used to give a general allowance percentage.
The allowance is based on estimates and ultimate losses may vary from the
current estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported against earnings in the periods in which
they become known. The allowance is increased by a provision charged to
operating expense and reduced by net charge-offs. The Company's current
allowance for loan losses reflects monthly evaluation by management of the known
risks in the portfolio and risks inherent in the present general economic
outlook. These results reflect management's continuing concerted efforts at
reducing potential losses and monitoring and controlling problem loans.
Management believes that the current level of the allowance is adequate.
The Company's policy as it relates to recognizing losses and charging bad
debts to the allowance is determined by the secured position of the related
loan. Unsecured loans are generally charged to the allowance for possible loan
losses when they become 90 days or more past due and management believes that it
is probable that the loan will not be collected. Secured loans are evaluated by
analyzing the customers' ability to
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pay and the underlying current collateral values. Secured loans are internally
classified as a loss and charged-off when management concludes that the value of
the underlying collateral is impaired and that the borrower is unable to repay
the loan.
The following table summarizes, for the periods indicated, loan balances at
the end of each period and daily averages during the period; changes in the
allowance for possible loan losses arising from loans charged-off, recoveries on
loans previously charged-off and additions to the allowance which have been
charged to operating expense; and certain ratios relating to the allowance for
possible loan losses (dollars in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
BALANCES:
Average loans during period $207,577 $199,036 $217,150 $248,357 $268,385
Loans at end of period 211,223 198,649 200,044 237,301 259,539
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at beginning of period $ 2,818 $ 3,573 $ 4,011 $ 3,782 $ 2,872
-------- -------- -------- -------- --------
ACTUAL CHARGE-OFFS:
Commercial 704 1,351 2,718 7,736 920
Real estate - construction 232 421 809 100 104
Real estate - other 1,146 0 20 0 140
Installment 349 172 297 506 217
Other (including overdrafts) 52 81 47 66 40
-------- -------- -------- -------- --------
Total 2,483 2,025 3,891 8,408 1,421
RECOVERIES ON LOANS PREVIOUSLY CHARGED-OFF:
Commercial 160 249 2,628 2,572 116
Real estate - construction 24 175 0 0 0
Real estate - other 454 0 0 0 0
Installment 31 42 73 60 60
Other (including overdrafts) 9 4 2 5 5
-------- -------- -------- -------- --------
Total 678 470 2,703 2,637 181
Net loan charge-offs 1,805 1,555 1,188 5,771 1,240
Provision charged to operating expense 2,100 800 750 6,000 2,150
-------- -------- -------- -------- --------
Balance at end of period $ 3,113 $ 2,818 $ 3,573 $ 4,011 $ 3,782
======== ======== ======== ======== ========
RATIOS:
Net loan charge-offs to average loans .87% .78% .55% 2.32% .46%
Allowance for possible loan losses to
loans at end of period 1.47 1.42 1.79 1.69 1.46
Allowance for possible loan losses to
nonperforming loans 93.26 42.41 76.12 107.42 78.22
Net loan charge-offs to allowance for
possible loan losses 57.98 55.18 33.25 143.88 32.79
Net loan charge-offs to provision
charged to operating expense 86.00 194.38 158.40 96.18 57.67
27
28
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
loans loans loans loans loans
to to to to to
Dollar total Dollar total Dollar total Dollar total Dollar total
Amount loans Amount loans Amount loans Amount loans Amount loans
---------------------------------------------------------------------------------------------------
Commercial $ 488 37.0% $ 334 48.0% $1,248 44.0% $2,218 45.0% $2,451 47.0%
Real estate -
construction 256 8.0% 371 5.0% 600 12.0% 425 14.0% 43 11.0%
Real estate -
other 221 39.0% 889 33.0% 900 32.0% 43 26.0% 20 23.0%
Installment
and other 63 16.0% 50 14.0% 145 12.0% 15 15.0% 56 19.0%
Unallocated 2,085 N/A 1,174 N/A 680 N/A 1,310 N/A 1,212 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $3,113 100.0% $2,818 100.0% $3,573 100.0% $4,011 100.0% $3,782 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Although management believes the allowance is adequate to absorb losses as
they arise, there can be no assurance that the Company will not sustain losses
in any given period which could be substantial in relation to the size of the
allowance.
28
29
SECURITIES PORTFOLIO
The Company complies with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The Company holds securities in two categories,
available for sale and held to maturity. Securities available for sale may be
held for indefinite periods of time and may be sold in response to changes in
interest rates and/or other economic conditions. These securities are, in the
aggregate, carried at market value. Unrealized gains or losses are calculated
based on adjusted cost as described below. Unrealized gains or losses, net of
deferred taxes, are recorded as a separate component of shareholders' equity.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and accounted for at cost, adjusted
for amortization of premium and accretion of discount. During 1995, $13,158,916
of securities were purchased and added to the held to maturity portfolio.
The Company's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, which are computed on the
straight-line method that approximates the effective interest method. Such
amortization and accretion are reflected in interest on securities. Realized
gains or losses recognized on the sales of securities are based upon the
adjusted cost and computed on the specific identification method and are
classified in other operating revenue, securities gains or losses, net.
At December 31, 1995, securities totaled $133,886,000 or 31.59% of assets,
a decrease of 20.25% or $33,994,000 from December 31, 1994, which totaled
$167,880,000 or 38.19% of assets. The $133,886,000 is made up of $13,131,000
classified as held to maturity and $120,755,000 classified as available for
sale. At December 31, 1994, securities increased 38.61% from December 31, 1993,
which totaled $121,121,000 or 30.95% of assets. The proceeds from the sale of
securities in 1995 was utilized to fund a contraction in deposits, expand the
loan portfolio and replenish overnight federal funds that had experienced a drop
earlier in the year as a result of the contraction in deposits. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Financial Condition -- Deposits." The increase in 1994,
was primarily due to funds made available from the acquisition of two banks in
1994, see "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- Note 15 --
Purchase and Assumption of Certain Assets and Liabilities," and decreased loan
demand.
Proceeds from sales of securities available for sale during 1995, 1994 and
1993 were $30,336,537, $5,392,285 and $7,501,774 and the proceeds from calls of
securities during 1995, 1994 and 1993 were $3,970,276, $2,224,550 and
$6,117,249, respectively. Gross gains on sales for 1995, 1994 and 1993 were
$162,639, $-0- and $3,181,894 and gross gains on calls were $17,898, $14,550 and
$66,193 for 1995, 1994 and 1993, respectively. Gross losses on sales were
$127,947, $144,819 and $377 for 1995, 1994 and 1993, respectively.
Included in states and political subdivisions securities at December 31,
1992 were $8,625,000 par value of eight separate issues of taxable municipal
securities (the Bonds) purchased at $8,356,728. At the time of purchase, the
Bonds were rated "Triple-A" by a nationally recognized rating agency and issued
by Executive Life of California (Executive Life). Executive Life was seized by
the California Insurance Commission on April 11, 1991 and placed in
conservatorship. Executive Life subsequently defaulted on payments due the
issuers because of a moratorium on all payments imposed by the California
Insurance Commission. In turn, since April 15, 1991, all issues defaulted on
regular interest payments. The Company placed all issues on non-accrual in 1991.
At December 31, 1992 and 1991, the reported market values of the Bonds were
approximately $4,416,850 and $3,450,000, respectively. Management concluded that
the value of the Bonds could remain impaired for an uncertain period of time due
to the possibility of potential extended litigation. Accordingly, at December
31, 1991, management elected to charge-off that portion of the Bonds which
exceeded the approximate market value of $3,450,000. The amount charged-off in
1991 was $5,027,441, reducing the bonds from their book value of $8,477,441, to
their market value. During 1993, the Company sold all of the Bonds for
$6,623,124, resulting in a gain on sale of $3,173,124.
29
30
Market values vary due to current interest rate fluctuations, resulting in
increases and/or decreases in the underlying market price. Market values may
also fluctuate due to changes in a security's credit rating or insurance
backing. The Federal Reserve Bank's active management of monetary policy
resulted in one increase in February 1995 and two decreases during the remainder
of 1995 in the Federal Fund rates. These rates increased five times in 1994. The
impact of changes in the Federal Fund rates has created broad swings in the
market valuation of securities. The resulting changes in unrealized gains
(losses) as mandated under SFAS No. 115 positively impacted the carrying value
of securities available for sale in 1995 and negatively impacted the carrying
value of securities available for sale in 1994. Capital has been impacted by
these changes as well. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial
Condition -- General." Management's philosophy during this period has been to
keep additions to the securities available for sale portfolio relatively short
in maturity and additions with longer maturities added to held to maturity to
minimize long term effects of interest rate fluctuations. Gross unrealized gains
and losses in the securities portfolio at December 31, 1995 and 1994, were as
follows:
HELD TO MATURITY 1995 1994
---------------- ----------- -----------
Unrealized gains $ 73,000 $ 0
Unrealized losses (25,000) 0
----------- -----------
Net unrealized gains (losses) $ 48,000 $ 0
=========== ===========
AVAILABLE FOR SALE 1995 1994
------------------ ----------- -----------
Unrealized gains $ 1,183,000 $ 238,000
Unrealized losses (193,000) (5,295,000)
----------- -----------
Net unrealized gains (losses) $ 990,000 $(5,057,000)
=========== ===========
The tables below summarizes the cost and market value, and the distribution
of the Company's investment securities as of the dates indicated (dollars in
thousands):
DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
MARKET MARKET MARKET
COST VALUE COST VALUE COST VALUE
-------- -------- -------- -------- -------- --------
HELD TO MATURITY
U.S. Treasury securities $ 2,094 $ 2,114 $ 0 $ 0 $ 0 $ 0
Obligations of other U.S.
government agencies (1) 3,253 3,295 0 0 0 0
-
Obligations of states and
political sub-divisions 6,414 6,394 0 0 0 0
Corporate securities 653 658 0 0 0 0
Equity securities 718 718 0 0 0 0
-------- -------- -------- -------- -------- --------
Total securities held to maturity $ 13,132 $ 13,179 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======== ======== ========
AVAILABLE FOR SALE
U.S. Treasury securities $ 70,108 $ 70,876 $112,183 $109,155 $ 69,280 $ 70,395
Obligations of other U.S.
government agencies (1) 22,971 23,080 24,690 23,758 16,566 16,647
-
Obligations of states and
political sub-divisions 7,165 7,158 13,625 13,456 20,384 21,050
Corporate securities 19,140 19,216 22,059 21,121 12,576 12,602
Equity securities 380 424 380 390 380 427
-------- -------- -------- -------- -------- --------
Total securities available for sale $119,764 $120,754 $172,937 $167,880 $119,186 $121,121
======== ======== ======== ======== ======== ========
- ---------------------------------
(footnotes on the following page)
30
31
The following tables summarizes the contractual maturity of the Company's
securities and their weighted average yields at December 31, 1995 (dollars in
thousands):
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
--------------- ----------------- ---------------- --------------- -----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
HELD TO MATURITY
U.S. Treasury
securities $ 0 0% $ 2,094 5.76% $ 0 0% $ 0 0% $ 2,094 5.76%
Obligations of
other U.S.
government
agencies (1) 0 0 2,006 5.76 1,247 6.85 0 0 3,253 6.17
_
Obligations of
states and
political
subdivisions (2) 0 0 1,000 6.12 840 4.76 4,574 3.94 6,414 4.39
_
Corporate
securities 0 0 653 5.17 0 0 0 0 653 5.17
Equity securities 0 0 0 0 0 0 718 0 718 0
-------- -------- -------- -------- --------
Total securities
held to maturity $ 0 0% $ 5,753 5.75% $ 2,087 6.01% $ 5,292 3.94% $ 13,132 5.13%
======== ======== ======== ======== ========
AVAILABLE FOR SALE
U.S. Treasury
securities $ 34,275 5.48% $ 35,833 6.32% $ 0 0% $ 0 0% $ 70,108 5.91%
Obligations of
other U.S.
government
agencies (1) 4,035 5.54 16,635 5.75 180 8.02 2,121 7.87 22,971 5.93
_
Obligations of
states and
political
subdivisions (2) 3,935 6.06 2,153 5.58 974 5.72 103 10.25 7,165 5.93
_
Corporate
securities 8,306 5.83 10,728 6.02 106 6.18 0 0 19,140 5.94
Equity securities 0 0 0 0 0 0 380 0 380 0
-------- -------- -------- -------- --------
Total securities
available
for sale $ 50,551 5.59% $ 65,349 6.10% $ 1,260 6.08% $ 2,604 7.98% $119,764 5.92%
======== ======== ======== ======== ========
- -----------------------------------
(1) Included in Obligations of other U.S. government agencies are $3,661,000
and $5,217,000 of mortgage backed securities at December 31, 1995 and 1994
and $0 at December 31, 1993, respectively.
(2) Yields on tax-exempt obligations have not been computed on a tax equivalent
basis.
31
32
DEPOSITS
Average deposits were $373,470,000 during the year ended December 31, 1995,
which was a decrease of 1.43% or $5,420,000 from average deposits during 1994,
which were $378,890,000. During 1994, average deposits increased 7.68% or
$27,031,000 over 1993, when average deposits were $351,859,000. The composition
of deposit accounts as a percent of total average deposits for December 31,
1995, 1994 and 1993 were (i) demand deposits, non-interest bearing: 36%, 34%,
and 31%, respectively, (ii) interest-bearing demand deposits: 27%, 29% and 28%,
respectively, (iii) savings deposits: 15%, 16% and 17%, respectively, (iv) time
certificates deposit of $100,000 and over: 4%, 3% and 5%, respectively, and (v)
other time deposits: 18%, 18% and 19%, respectively. Deposits totaled
$369,031,000 at December 31, 1995, a decrease of 5.92% or $23,238,000 from
December 31, 1994, which totaled $392,269,000. Strong growth in the equities
markets and related strength in the mutual funds markets attracted customer
deposits away from financial institutions as evidenced by the outflow of
$19,963,000 from savings and interest bearing demand deposits. During 1995, the
Bank offered slightly higher rates in time certificates of deposit of $100,000
and over which was attractive to some deposit customers as indicated by an
increase of $5,452,000 when compared to December 31, 1994. Other time deposits
decreased $5,527,000 and demand deposits, non-interest bearing decreased
$3,201,000 compared to December 31, 1994. Total deposits at December 31, 1994
increased $56,469,000 from December 31, 1993, which totaled $335,800,000. The
increase in 1994 was primarily due to the assumed deposits from Mechanics
National Bank and the Bank of San Pedro, see "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- Note 15 -- Purchase and Assumption of Certain Assets and
Liabilities." During 1994, time certificates of deposit of $100,000 and over
customers sought other alternatives for their investment dollars such as mutual
funds and equity securities as interest rates remained low from their decline in
1993.
The Company still enjoys a substantial base of non interest-bearing demand
and savings and interest bearing demand accounts which help to maintain the net
interest margin at an acceptable level, although no assurances can be given that
the Company will maintain such levels of non interest-bearing deposits in the
future.
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated (dollars in thousands):
DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993
--------------------- ----------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
Demand deposits, non-interest
bearing $132,922 $129,186 $107,977
Interest bearing demand deposits 102,769 2.13% 107,875 2.13% 99,268 2.40%
Savings deposits 55,215 2.23 61,562 2.28 61,963 2.51
Time certificates of deposit of
$100,000 and over 14,962 4.80 12,644 3.16 16,762 2.90
Other time deposits 67,602 4.42 67,623 3.42 65,889 3.49
-------- -------- --------
Total deposits $373,470 1.91% $378,890 1.69% $351,859 1.91%
======== ======== ========
The scheduled maturity of the Company's time deposits in denominations of
$100,000 and over as of December 31, 1995 were as follows (dollars in
thousands):
DEPOSITS MATURING IN 1995
-------------------- ----
Three months or less $10,839
Over three months through six months 5,571
Over six months through twelve months 1,540
Over twelve months 155
-------
Total $18,105
=======
32
33
RESULTS OF OPERATIONS
NET INCOME
For the year ended December 31, 1995, net income totaled $3,764,000, which
was an increase of 13.41% or $445,000 compared to the year ended December 31,
1994, which had net income of $3,319,000. During 1994, net income decreased
8.44% or $306,000 compared to the year ended December 31, 1993, which had net
income of $3,625,000. In 1995, the increase was primarily due to the increase in
net interest income of $1,928,000. Total other operating revenue increased
$647,000, provision for possible loan losses increased $1,300,000, total other
operating expenses increased $640,000 and provision for income taxes increased
$190,000. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Allowance for Possible Loan Losses and Results of Operations -- Net Revenue from
Earning Assets." In 1994, the decrease in net income was primarily due to
securities gains (losses), net of ($130,000) compared to $3,248,000 in 1993.
This negative effect was partially offset by an increase in net interest income
of approximately $2,200,000 and a decrease in provision for income taxes of
$1,100,000. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Securities Available for Sale and Results of Operations -- Net Revenue from
Earning Assets."
The Company, while experiencing an increase in net interest income of 8.54%
from December 31, 1994 to December 31, 1995, also improved its net interest
spread and net interest yield to 5.76% and 6.76% at December 31, 1995 from 5.37%
and 6.18% at December 31, 1994, respectively. In 1995, the increase in net
interest income was a result of improved yields in most loan categories. This
improvement was based upon reductions in non-accrual loans, focus on collection
of loan related fees and a shift to more fixed rate loans that provide sustained
earnings in a declining rate environment. Additionally some improvements in
overall investment portfolio yields were realized during 1995. Interest rates on
savings and interest bearing demand accounts remained virtually unchanged from
the prior year. While the rates on time deposits increased over 1994, the
overall increase in interest bearing liabilities did not overshadow the gains
made in yields on earning assets. In 1994, the increase in net interest income
was primarily due to the increase in volume of average earning assets of 7.15%
compared to the increase in volume of average interest bearing liabilities of
2.33%. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Securities Available for Sale."
The average yield on earning assets and average cost of funds on interest
bearing liabilities was 8.73% and 2.97% compared to 7.94% and 2.57% for the
years ended December 31, 1995 and 1994, respectively.
Earnings per share for the year ended December 31, 1995, 1994 and 1993 was
$.90, $.80 and $ .87, respectively. Earnings per share for 1994 and 1993 have
been restated to reflect the effect of a five percent stock dividend issued in
1995 and 1994.
NET REVENUE FROM EARNING ASSETS
Net revenue from earning assets (net interest income), which constitutes
the principal source of income for the Company, is the amount by which interest
earned on assets exceeds the interest paid on deposits and other borrowed funds.
Changes in net interest income from period to period result from increases or
decreases in the average balances (volume) of interest-earning assets and
interest-bearing liabilities, increases or decreases in the average rates earned
and paid on such assets and liabilities, the Company's ability to manage its
earning asset portfolio and the availability of particular sources of funds.
For the period ending December 31, 1995, net interest income increased
8.54% or $1,928,000 compared to the period ending December 31, 1994. Average
earning assets decreased only .68 % or $2,479,000 with its related interest
income increasing 9.21% or $2,668,000 when comparing the same periods. Average
interest bearing liabilities decreased 3.57% or $8,923,000 with its related
interest expense increasing 11.54% or $740,000. The annualized yield on average
earning assets increased to 8.73% from 7.94% while annualized
33
34
cost of funds on average interest bearing liabilities increased to 2.97% from
2.57%. The net interest margin or yield increased to 6.76% from 6.18%. Average
non-interest bearing demand deposits increased 2.89% or $3,736,000 along with
its portion of total deposits increasing to 35.59% from 34.09%. During 1995,
while rates were declining based upon actions of the Federal Reserve Board,
yields actually rose as the Bank improved levels of non-accrual loans and booked
more fixed rate loans (increased from 27% of portfolio to 43% of the portfolio)
which held their yield in the declining interest rate environment. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Financial Condition -- Net Income." The purchase and
assumption agreements of the two banks during 1994 enabled the Company to
increase earning assets, primarily securities, and the liabilities assumed were
primarily in non-interest demand deposits with little impact on interest bearing
deposits.
A portion of the Company's net interest income is derived from fees on
loans. The Company defers these fees and their associated origination costs over
the life of the loan. These amounts are amortized on the interest yield method.
The interest yield method mirrors the interest recognition on the loan itself
and provides a more constant yield over the life of the loan. Since in excess of
eighty percent (80%) of all loan fees collected are related to commercial loans
and real estate construction loans with a duration of one year or less, the
amortization of the related fees also corresponds to a period of 12 months or
less.
34
35
The following table shows the Company's consolidated daily average balances
of assets, liabilities and shareholders' equity; the amount of interest income
or interest expense; and the average yield or rate for each category of
interest-earning assets and interest-bearing liabilities, the net interest
spread and net interest yield for the periods indicated (dollars in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- ----------------------------- ---------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
Earning assets:
Net Loans (1)(2):
Commercial $ 87,527 $ 9,669 11.05% $ 89,872 $ 8,836 9.83% $ 95,656 $ 8,451 8.83%
Real estate and construction 87,500 9,910 11.33 84,807 8,441 9.95 92,050 8,624 9.37
Installment 30,856 2,775 8.99 22,770 2,375 10.43 27,845 3,314 11.90
Other 1,694 289 17.06 1,669 276 16.54 1,599 282 17.64
Taxable securities 139,982 8,099 5.79 136,975 7,532 5.50 86,325 4,762 5.52
Tax-exempt securities (3) 4,162 290 6.97 9,400 717 7.63 17,297 1,143 6.61
Federal funds sold 10,788 618 5.73 19,405 801 4.13 19,882 542 2.73
Interest-bearing deposits 22 1 4.55 112 5 0 0 0 0
-------- -------- -------- -------- -------- --------
Total earning assets 362,531 31,651 8.73% 365,010 28,983 7.94% 340,654 27,118 7.96%
-------- -------- -------- -------- -------- --------
Non-interest-earning assets:
Cash and due from banks 39,560 41,995 38,381
Premises and equipment, net 14,364 11,486 10,820
Other assets 12,048 14,507 15,520
-------- -------- --------
Total non-interest-earning
assets 65,972 67,988 64,721
-------- -------- --------
Less allowance for possible
loan and investment
securities losses 3,372 3,285 4,055
-------- -------- --------
Total assets $425,131 $429,713 $401,320
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $102,769 2,188 2.13% $107,875 2,296 2.13% $99,268 2,386 2.40%
Savings 55,215 1,230 2.23 61,562 1,404 2.28 61,963 1,556 2.51
Time certificates of deposit
of $100,000 and over 14,962 718 4.80 12,644 399 3.16 16,762 486 2.90
Other time deposits 67,602 2,991 4.42 67,623 2,311 3.42 65,889 2,299 3.49
Federal funds purchased and
securities sold under
agreements to repurchase 460 28 6.09 227 5 2.20 353 9 2.55
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 241,008 7,155 2.97% 249,931 6,415 2.57% 244,235 6,736 2.76%
-------- -------- -------- -------- -------- --------
Non-interest-bearing liabilities:
Demand deposits 132,922 129,186 107,977
Other liabilities 2,840 4,118 4,020
-------- -------- --------
Total non-interest-
bearing liabilities 135,762 133,304 111,997
-------- -------- --------
Shareholders' equity 48,361 46,478 45,088
-------- -------- --------
Total liabilities and
shareholders' equity $425,131 $429,713 $401,320
======== ======== ========
Net interest income $24,496 $22,568 $ 20,382
======= ======= ========
Net interest spread 5.76% 5.37% 5.20%
==== ==== ====
Net interest yield 6.76% 6.18% 5.98%
==== ==== ====
- -----------------------------
(Footnotes on following page)
35
36
The following table sets forth the dollar amount of changes in interest
earned and paid for each major category of interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average balances (volume) or changes in average interest rates. The variances
attributable to both balance and rate changes have been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the changes in each (dollars in thousands):
Year ended December 31, Year ended December 31, Year ended December 31,
1995 vs. 1994 1994 vs. 1993 1993 vs. 1992
--------------------------- --------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
Due to changes in Due to changes in Due to changes in
--------------------------- --------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- ------- ------- ------- -------
EARNING ASSETS -- INTEREST INCOME:
Net Loans (1)(2):
- -
Commercial $ (245) $ 1,078 $ 833 $ (569) $ 954 $ 385 $(1,518) $ (503) $(2,021)
Real estate and construction 287 1,182 1,469 (721) 538 (183) (185) (575) (760)
Installment 785 (385) 400 (604) (335) (939) (1,495) (70) (1,565)
Other 4 9 13 12 (18) (6) (20) 8 (12)
Taxable securities 174 393 567 2,794 (24) 2,770 1,448 (722) 726
Non-taxable securities (3) (400) (27) (427) (602) 176 (426) (965) (232) (1,197)
-
Federal funds sold (425) 242 (183) (16) 275 259 165 (69) 96
Interest-bearing deposits (4) 0 (4) 5 0 5 0 0 0
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 176 $ 2,492 $ 2,668 $ 299 $ 1,566 $ 1,865 $(2,570) $(2,163) $(4,733)
======= ======= ======= ======= ======= ======= ======= ======= =======
DEPOSITS AND BORROWED FUNDS--
INTEREST EXPENSE:
Interest-bearing demand
deposits $ (109) $ 1 $ (108) $ 207 $ (297) $ (90) $ 50 $ (621) $ (571)
Savings deposits (142) (32) (174) (9) (143) (152) 229 (598) (369)
Time deposits of $100,000 and over 73 246 319 (130) 43 (87) (457) (237) (694)
Other time deposits (1) 681 680 61 (49) 12 (735) (955) (1,690)
Federal funds purchased and
securities sold under
agreements to repurchase 14 9 23 (3) (1) (4) 8 (2) 6
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ (165) $ 905 $ 740 $ 126 $ (447) $ (321) $ (905) $(2,413) $(3,318)
======= ======= ======= ======= ======= ======= ======= ======= =======
- ----------------------
(Footnotes for the table above and on the previous page)
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,559,000, $1,604,000, and $1,712,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
(2) Net of unamortized deferred fees and discounts. Non-accrual loans have been
included for the purposes of this table.
(3) Yields on tax-exempt income have not been computed on a tax equivalent
basis.
36
37
PROVISION FOR POSSIBLE LOAN LOSSES
Provisions are made to the allowance for possible loan losses in amounts
necessary to maintain the allowance at a level considered by management to be
sufficient to provide for risks of loss inherent in the loan portfolio. To
establish an adequate reserve, the evaluation of collectibility of loans is, for
the most part, based upon consideration of the financial condition of the
borrowers and the current general economic conditions rather than viewing loan
loss potential from a historical perspective. For the year ended December 31,
1995, the provision totaled $2,100,000 compared to $800,000 for the year ended
December 31, 1994. Management remained guardedly optimistic regarding the
Southern California economy but it still has concerns in light of defense
cutbacks and housing industry during 1995. Management will continue to review
the economic conditions for Southern California and will monitor and adjust the
provision for loan losses accordingly. See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Financial Condition -- Loans; Nonperforming Loans and Real Estate Owned;
Allowance for Possible Loan Losses and Results of Operations -- Net Income."
OTHER OPERATING REVENUE
Other operating revenue (other income) is comprised mainly of service
charges and other types of fees on deposit accounts. Competitive pressures in
the area of deposit account pricing have been significant since deregulation
and, while service charges are the major portion of this income category, their
annual increase has been modest. Management further believes that this trend
will continue for the foreseeable future. Net gains and losses on the sale of
securities, gross gains on the sale of real estate owned and fees on non-deposit
account services comprise the remaining portion of this category.
For the year ended December 31, 1995, other income totaled $5,226,000 which
reflects an increase of 14.13% or $647,000 from December 31, 1994, which totaled
$4,579,000. Service charges increased 18.67% or $763,000, securities gains
(losses) increased $183,000 and other income decreased $300,000. Service charges
increased due to restructuring of fees on deposit services and a 7.5% increase
in check processing volumes and other transactions volumes. Other income
decreased due to the nonrecurring fees collected under a contractual arrangement
with the consortium members of the Mechanics National Bank acquisition. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Mergers and
Acquisitions."
For the year ended December 31, 1994, other income totaled $4,579,000 which
reflects a decrease of 40.98% or $3,179,000 from December 31, 1993, which
totaled $7,758,000. Securities gains (losses), net decreased $3,378,000. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Securities
Portfolio." All other income totaling $623,000 increased 40.63% or
$180,000 compared to 1993, primarily due to fees collected under a contractual
arrangement with the consortium members of the Mechanics National Bank
acquisition. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Mergers
and Acquisitions." Service charges and fees only increased 0.47% or $19,000 due
to three months free service charges initially given to the customers of the
Mechanics National Bank and the Bank of San Pedro when the Bank assumed their
insured deposits from the FDIC.
OTHER OPERATING EXPENSE
Other operating expenses (other expense) are comprised of several
categories: salaries and employee benefits, net occupancy, legal and
professional services, outside data processing, other outside services,
stationery and supplies, gross losses on real estate owned and other operating
expenses.
For the year ended December 31, 1995, other expense totaled $22,499,000
which represented an increase of 2.93% or $640,000 from the year ended December
31, 1994. The primary increase was related to occupancy expense increases of
14.35% or $377,000 and salaries and employee benefits increases of 2.52% or
$254,000 when comparing the same periods. These increases are related to the
depreciation for the new building of the Torrance office as well as a full year
of operation for the two San Pedro locations. During September the Bank
37
38
completed a restructuring program designed to improve productivity. Through
further centralization of repetitive tasks the Bank eliminated 41 full time
equivalent positions of the 277 full time equivalent positions at December 31,
1994. Approximately $1,500,000 in annual salaries and employee benefits savings
are projected for 1996, with a restructuring cost of less than $250,000 taken in
the third quarter of 1995. Gross losses on real estate owned totaled $627,000
compared to $560,000 at December 31, 1994. The $627,000 of gross losses on real
estate owned is comprised of $605,000 in writedowns on property values and
$22,000 of actual losses on sales transactions of real estate owned. See "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Financial Condition -- Loans; Nonperforming Loans and
Real Estate Owned". Transactional activity levels such as ATM activity was up by
16.7% and telephone response activity was up 33% from the prior year as examples
of increase processing activity.
For the year ended December 31, 1994, other expense totaled $21,859,000
which was an increase of 1.43% or $309,000 from the year ended December 31,
1993. The primary increase was related to salaries and employee benefits
increase of 4.01% or $389,000 and occupancy expense increase of 5.63% or
$140,000 when comparing the same periods. These increases are directly related
to the purchase and assumption the Mechanics National Bank and the Bank of San
Pedro. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Mergers
and Acquisitions." Losses on real estate owned decreased 53.68% or $649,000 in
1994, compared to 1993, however, future amounts cannot be determined with
certainty. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA-- Note 11 --
Other operating expenses" for further detail of other expenses.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under tax
laws. Deferred taxes, which arise from temporary differences between the period
in which certain income and expenses are recognized for financial accounting
purposes and the period in which they affect taxable income, are included in the
amounts provided for income taxes. See "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA-- Note 1 -- Summary of Significant Accounting Policies --
Income Taxes."
For the year ended December 31, 1995, a provision of $1,359,000 in taxes
was accrued resulting in an effective tax rate for the Company 26.5% as compared
to 26.0% at December 31, 1994. Tax exempt income decreased 59.55% at December
31, 1995, compared to December 31, 1994. The Company's percentage of tax exempt
income generated from the state and municipal bonds in the securities portfolio
to gross revenue decreased to .79% from 2.14% when comparing the same periods.
The Company actively managed the utilization of California State Enterprise Zone
credits as they related to State tax benefits. Net income before taxes totaled
$5,123,000 at December 31, 1995, compared to $4,488,000 at December 31, 1994.
For the year ended December 31, 1994, a provision of $1,169,000 in taxes
was accrued resulting in an effective tax rate for the Company of 26.0% as
compared to 37.9% at December 31, 1993. The reduction in the effective rate from
1993 to 1994 is primarily due to the utilization of AMT credits in 1994. Tax
exempt income decreased 37.27% at December 31, 1994, compared to December 31,
1993. The Company's percentage of tax exempt income generated from the state and
municipal bonds in the securities portfolio to gross revenue decreased to 2.14%
from 3.28% when comparing the same periods. Net income before taxes totaled
$4,488,000 at December 31, 1994, compared to $5,840,000 at December 31, 1993.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The asset/liability management process determines the size and composition
of the balance sheet and focuses on the management of liquidity and interest
rate exposures. The purpose of liquidity and balance sheet management is to
reflect the Company's ability to provide funds for day-to-day operations, meet
customer needs, take advantage of interest rate market opportunities and meet
the financial commitments of the Company. Funding of loan requests and
commitments, purchase of attractive securities opportunities,
38
39
providing for liability outflow and management of interest rate risk requires
continuous analysis in order to match the maturities of categories of loans and
securities with the maturities of deposits and bank-related borrowings. The
Company's ability to obtain funds to replace maturing liabilities and to finance
asset growth depends upon its reputation as well as the diversity and liquidity
of the markets in which it participates. The Company's liquidity is normally
viewed in terms of the nature and composition of the Company's sources and uses
of funds. Cash, maturing securities, reductions in Federal funds sold and loan
maturities and repayments provide liquidity. Purchase of Federal funds, sale of
securities, sale of loan participations or sale of the Company's loans on the
secondary market and utilization of other short-term borrowing facilities are
all available to provide additional liquidity vehicles. Liquid assets comprised
of cash and cash equivalent assets (cash, cash due from other financial
institutions and Federal funds sold), U.S. Treasury securities and U.S.
Government agencies securities comprised 36.03%, 41.38% and 34.88%, of total
assets for the years ended December 31, 1995, 1994 and 1993, respectively.
In addition to the foregoing, liquidity management must address any
unfunded commitments to make loans, the undisbursed amounts under lines of
credit and contingent liabilities under letter of credit arrangements. The
commitments for unfunded loans and the undisbursed amounts under lines of credit
were $49,539,000 and $38,916,000 for the years ended December 31, 1995 and 1994,
respectively. Contingent liabilities under standby and commercial letter of
credit arrangements were $2,806,000 and $4,950,000, for the years ended December
31, 1995 and 1994, respectively.
In order to meet liquidity needs should normal funding sources not be
readily available, the Company has established unsecured lines of credit for the
purchase of Federal funds from other financial institutions. See "ITEM 1.
BUSINESS -- Effect of Governmental Policies and Recent Legislation." In
addition, the Company may borrow funds at the Federal Reserve Board discount
window, subject to the Company's ability to supply collateral.
As shown in the December 31, 1995, 1994 and 1993 Consolidated Statements of
Cash Flows the Company's primary source of funds are deposits. Average total
deposits decreased 1.43% or $5,420,000 for the year ended December 31, 1995,
compared to an increase of 7.67% or $26,978,000 at December 31, 1994 and a
decrease of 5.38 % or $19,998,000 at December 31, 1993. Average core deposits,
the least volatile funding source (total deposits less time deposits of $100,000
and over) decreased 2.11% or $7,738,000 for the year ended December 31, 1995,
compared to an increase of 9.28% or $31,096,000 for the year ended December 31,
1994 and a decrease of 1.92% or $6,575,000 for the year ended December 31, 1993.
Average time deposits of $100,000 and over increased 18.33% or $2,318,000 for
the year ended December 31, 1995 and decreased 24.57% or $4,118,000 for the year
ended December 31, 1994, compared to a decrease 44.47% or $13,423,000 for the
year ended December 31, 1993.
The asset/liability management process involves structuring the amount,
composition and repricing periods of the rate sensitive assets and rate
sensitive liabilities to minimize the impact of interest rate changes on the
Company's earnings. The Company places emphasis on maintaining a rate sensitive
position within its guidelines to avoid broad swings in spreads and to minimize
risk due to changes in interest rate. At December 31, 1995, approximately 57.06%
of the Company's loans were tied to the Company's base lending rate, prime rate
or were maturing within one year.
The following table shows the amounts of gross commercial loans, real
estate loans-construction, real estate loans-other and installment loans
outstanding as of December 31, 1995, which, based on remaining scheduled
repayments of principal, were due within one year, after one but within five
years and in more than five years (dollars in thousands):
MATURING
-------------------------------------------------------------
AFTER ONE BUT
WITHIN WITHIN FIVE MORE THAN FIVE
ONE YEAR YEARS YEARS TOTAL
-------- -------- -------- --------
Commercial $ 33,521 $ 29,751 $ 14,884 $ 78,156
Real estate - construction 16,933 0 0 16,933
Real estate - other 10,497 38,830 31,869 81,196
Installment 1,186 28,046 4,331 33,563
Other loans 1,635 0 0 1,635
-------- -------- -------- --------
Total $ 63,772 $ 96,627 $ 51,084 $211,483
======== ======== ======== ========
39
40
The following table sets forth the sensitivity of the amounts due after one
year to changes in interest rates as of December 31, 1995. (dollars in
thousands):
MATURING
---------------------------------------------
AFTER ONE BUT
WITHIN FIVE MORE THAN FIVE
YEARS YEARS TOTAL
----- ----- -----
Loans:
With fixed rate interest $ 59,897 $ 21,046 $ 80,943
With floating rate interest 36,730 30,038 66,768
-------- -------- ---------
Total $ 96,627 $ 51,084 $147,711
======== ======== ========
The following table sets forth the rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1995, the interest rate sensitivity gap (interest rate sensitive assets less
interest rate sensitive liabilities), cumulative interest rate sensitivity gap
and the Company's interest rate sensitivity gap ratio (interest rate sensitive
assets less interest rate sensitive liabilities divided by total earning assets)
and the Company's cumulative interest rate sensitivity gap ratio. For the
purposes of the following table, an asset or liability is considered rate
sensitive within a specified period when it can be repriced or matures within
such period in accordance with its contractual terms (dollars in thousands):
AFTER THREE AFTER SIX AFTER ONE
MONTHS BUT MONTHS BUT YEAR BUT
WITHIN WITHIN SIX WITHIN ONE WITHIN FIVE AFTER
THREE MONTHS MONTHS YEAR YEARS FIVE YEARS TOTAL
--------- --------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS:
Loans $ 128,331 $ 2,634 $ 4,728 $ 59,276 $ 16,514 $ 211,483
Securities 15,240 7,115 32,387 68,322 9,831 132,895
Federal funds sold 14,600 0 0 0 0 14,600
--------- --------- --------- --------- --------- ---------
Total $ 158,171 $ 9,749 $ 37,115 $ 127,598 $ 26,345 $ 358,978
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits $ 98,935 $ 0 $ 0 $ 0 $ 0 $ 98,935
Savings deposits 52,492 0 45 0 0 52,537
Time deposits of $100,000
and over 10,839 5,572 1,539 155 0 18,105
Other time deposits 28,117 16,994 13,568 6,167 0 64,846
--------- --------- --------- --------- --------- ---------
Total $ 190,383 $ 22,566 $ 15,152 $ 6,322 $ 0 $ 234,423
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap (32,212) (12,817) 21,963 121,276 26,345 124,555
Cumulative interest rate
sensitivity gap $ (32,212) $ (45,029) $ (23,066) $ 98,210 $ 124,555 $ 0
Interest rate sensitivity
gap ratio (8.97)% (3.57)% 6.12% 33.78% 7.34% 34.70%
Cumulative interest rate
sensitivity gap ratio (8.97)% (12.54)% (6.43)% 27.36% 34.70% 0
As of December 31, 1995, the Company was asset sensitive overall and
liability sensitive for periods of less than one year. Asset sensitive means
that rate sensitive assets exceed rate sensitive liabilities. An asset sensitive
position will result in enhanced earnings in a rising interest rate environment
and declining earnings in a falling interest rate environment because larger
volumes of assets than liabilities will reprice. Conversely, a liability
sensitive position will be detrimental to earnings in a rising interest rate
environment and enhance earnings in a falling interest rate environment. The
preceding table does not necessarily indicate the impact of general interest
rate movement on the Company's net interest rate yield because the repricing of
various asset and liability categories are discretionary, subject to competition
from other financial and non-financial institutions as well as other outside
pressures. Consequently, various assets and liabilities reflected may not be
subject to repricing within the same period, but may in fact reprice at
different times and rate levels.
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41
CAPITAL RESOURCES
Shareholders' equity increased 12.62% or $5,762,000 when comparing December
31, 1995 to December 31, 1994 and decreased 3.71% or $1,757,000 when comparing
December 31, 1994 to December 31, 1993. The increase in shareholders' equity in
1995, was primarily due to an increase in net unrealized gains (losses) on
securities related to SFAS No. 115 of $3,536,000. The decrease in 1994, was
primarily due to the decrease of 398.89% in net unrealized gains (losses) on
securities available for sale, net of deferred taxes. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition -- General; and Results of Operations -- Net
Income."
As a bank holding company, the Company is subject to capital requirements
adopted by the Federal Reserve Board. The Bank, a state-chartered, member bank,
is also subject to the capital requirements of the Federal Reserve Board. See
"ITEM 1. BUSINESS -- Supervision and Regulation." During 1991, the Federal
Reserve Board adopted capital guidelines that, among other things, established a
new minimum leverage ratio for tier 1 Capital to total average assets of 3.0%
for institutions with a composite CAMEL rating of 1 and 4-5% for all other
institutions. The Company's leverage ratio was 11.05%, 10.17% and 10.38% at
December 31, 1995, 1994 and 1993, respectively. The Bank's leverage ratio was
10.69%, 9.93% and 10.21% at December 31, 1995, 1994 and 1993, respectively. See
"ITEM 1. BUSINESS -- Supervision and Regulation -- The Company; -- The Bank."
In December 1988, the Federal Reserve Board adopted final guidelines for
"risk-based capital" which apply to banks and bank holding companies. Effective
December 31, 1992, the guidelines consist of a definition of capital and a
system of assigning assets and off-balance sheet items to risk categories. See
"ITEM 1. BUSINESS -- Supervision and Regulation." Under the guidelines, the
Company and the Bank are required to have a minimum ratio of total capital to
risk-weighted assets of 8.0% and tier 1 Capital must equal 4.0% of total
risk-weighted assets. At December 31, 1995, 1994 and 1993, the Company's tier 1
Capital was 16.96%, 16.25% and 16.07% and total capital was 18.09%, 17.30% and
17.32%, respectively. At December 31, 1995, 1994 and 1993, the Bank's tier 1
Capital was 16.42%, 15.89% and 15.83% and total capital was 17.56%, 16.94% and
17.08%, respectively. See "ITEM 1. BUSINESS -- Supervision and Regulation -- The
Company; -- The Bank."
Effective November 1995, the Bank became a member of the Federal Reserve
System and, thereby became subject to regulation by the Federal Reserve Board in
addition to the California State Banking Department. Prior to becoming a member
of the Federal Reserve System, the Bank was subject to supervision and
regulation by the FDIC and the California State Banking Department. As a result
of the examination completed by the representatives of the FDIC in the fourth
quarter of 1992, the FDIC and the Bank agreed to enter into an informal
agreement in the form of a memorandum of understanding (the Memorandum),
effective March 1993. Pursuant to the Memorandum, the Bank, among other things
agreed to maintain a minimum ratio of tier 1 Capital to total average assets of
7.5%. Additionally, in regards to the other items which will be required under
the Memorandum, the Bank undertook steps to implement certain actions or
restrictions with respect to its lending and dividend activities and to adopt or
revise certain internal policies and procedures. The FDIC released the Bank of
the Memorandum on February 9, 1994. See "ITEM 1. BUSINESS -- Supervision and
Regulation -- The Bank."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following pages contain the Company's consolidated financial
statements, the accompanying notes and the Report of Independent Public
Accountants.
41
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF HOME INTERSTATE BANCORP AND
SUBSIDIARY:
We have audited the accompanying consolidated statements of financial
condition of HOME INTERSTATE BANCORP (a California Corporation) and subsidiary
(the Company) as of December 31, 1995 and 1994, and the related consolidated
statements of income, 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of Home
Interstate Bancorp and subsidiary 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.
ARTHUR ANDERSEN LLP
Orange County, California
January 26, 1996
42
43
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
HOME INTERSTATE BANCORP AND SUBSIDIARY
DECEMBER 31, 1995 AND 1994
1995 1994
------------ ------------
ASSETS: Cash and due from banks $ 38,797,333 $ 42,196,448
Federal funds sold 14,600,000 6,800,000
------------ ------------
Total of cash and cash equivalents 53,397,333 48,996,448
Securities held to maturity
(Approximate market value at December 31,
1995 was $13,179,412) 13,131,498 0
Securities available for sale at market value 120,754,575 167,879,862
------------ ------------
Total Securities 133,886,073 167,879,862
Loans 211,222,744 198,649,133
Allowance for possible loan losses 3,112,544 2,818,078
------------ ------------
Loans, net 208,110,200 195,831,055
Real estate owned 4,918,150 2,175,000
Premises, furniture and equipment, net 14,365,244 13,533,471
Accrued interest receivable and other assets 9,114,621 11,216,160
------------ ------------
TOTAL ASSETS $423,791,621 $439,631,996
============ ============
LIABILITIES: Deposits:
Demand deposits, non-interest bearing $132,208,231 $135,408,787
Savings and interest bearing demand deposits 153,891,411 173,853,766
Time certificates of deposit of $100,000
and over 18,104,735 12,652,699
Other time deposits 64,826,978 70,353,992
------------ ------------
Total Deposits 369,031,355 392,269,244
Securities sold under agreements to
repurchase 0 100,000
Accrued interest payable and other
liabilities 3,344,304 1,609,126
------------ ------------
TOTAL LIABILITIES 372,375,659 393,978,370
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY: Common stock (no par value)
Authorized 20,000,000 shares; issued and
outstanding 4,187,954 shares in 1995 and
3,976,722 shares in 1994 42,858,814 40,454,004
Retained earnings 7,977,308 8,156,001
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 579,840 (2,956,379)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 51,415,962 45,653,626
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $423,791,621 $439,631,996
============ ============
The accompanying notes are an integral part of these consolidated statements.
43
44
CONSOLIDATED STATEMENTS OF INCOME
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---------- ---------- ----------
REVENUE FROM EARNING Interest and fees on loans $22,642,694 $19,928,454 $20,671,245
ASSETS: Interest on securities 8,388,656 8,248,956 5,905,304
Interest on federal funds sold 618,072 800,807 542,157
Interest on time deposits with
other financial institutions 1,112 4,547 0
----------- ----------- -----------
TOTAL REVENUE FROM
EARNING ASSETS 31,650,534 28,982,764 27,118,706
----------- ----------- -----------
COST OF FUNDS: Interest on savings and interest
bearing demand deposits 3,418,623 3,699,676 3,941,414
Interest on time certificates of
deposit of $100,000 and over 717,921 398,959 486,441
Interest on other time deposits 2,990,712 2,310,616 2,299,093
Interest on securities sold
under agreements to repurchase 27,755 5,625 9,290
----------- ----------- -----------
TOTAL COST OF FUNDS 7,155,011 6,414,876 6,736,238
----------- ----------- -----------
Net revenue from earning assets before
provision for possible loan losses 24,495,523 22,567,888 20,382,468
Provision for possible loan losses 2,100,000 800,000 750,000
----------- ----------- -----------
Net revenue from earning assets 22,395,523 21,767,888 19,632,468
----------- ----------- -----------
OTHER OPERATING REVENUE: Service charges and fees 4,849,974 4,086,949 4,067,524
Securities gains (losses), net 52,590 (130,269) 3,247,710
Other operating revenue 323,163 622,538 442,643
----------- ----------- -----------
TOTAL OTHER
OPERATING
REVENUE 5,225,727 4,579,218 7,757,877
----------- ----------- -----------
OTHER OPERATING EXPENSES: Salaries and employee benefits 10,340,576 10,087,384 9,697,957
Occupancy expense, net 3,005,437 2,628,039 2,487,745
Other operating expenses 9,152,531 9,143,185 9,363,914
----------- ----------- -----------
TOTAL OTHER OPERATING
EXPENSES 22,498,544 21,858,608 21,549,616
----------- ----------- -----------
Income before provision for
income taxes 5,122,706 4,488,498 5,840,729
Provision for income taxes 1,358,950 1,169,100 2,215,300
----------- ----------- -----------
NET INCOME $ 3,763,756 $ 3,319,398 $ 3,625,429
=========== =========== ===========
EARNINGS PER SHARE $.90 $.80 $.87
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
44
45
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED
GAINS
(LOSSES) ON
COMMON STOCK SECURITIES
------------------------ AVAILABLE FOR TOTAL
NUMBER OF RETAINED SALE, NET OF SHAREHOLDERS'
SHARES AMOUNT EARNINGS DEFERRED TAXES EQUITY
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1992 3,786,925 $ 38,556,034 $ 5,093,255 $ 0 $ 43,649,289
Net income 0 0 3,625,429 0 3,625,429
Cash dividends declared ($.225) 0 0 (852,066) 0 (852,066)
Unrealized gains on securities available for sale,
net of deferred taxes 0 0 0 988,834 988,834
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1993 3,786,925 38,556,034 7,866,618 988,834 47,411,486
Net income 0 0 3,319,398 0 3,319,398
Exercise of stock options 926 9,260 0 0 9,260
Cash dividends declared ($.30) 0 0 (1,141,305) 0 (1,141,305)
Stock dividend issued 188,871 1,888,710 (1,888,710) 0 0
Unrealized losses on securities available for sale,
net of deferred taxes 0 0 0 (3,945,213) (3,945,213)
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1994 3,976,722 40,454,004 8,156,001 (2,956,379) 45,653,626
Net income 0 0 3,763,756 0 3,763,756
Exercise of stock options 12,302 117,115 0 0 117,115
Cash dividends declared ($.41) 0 0 (1,654,754) 0 (1,654,754)
Stock dividend issued 198,930 2,287,695 (2,287,695) 0 0
Unrealized gains on securities available
for sale, net of deferred taxes 0 0 0 3,536,219 3,536,219
--------- ------------ ------------ ------------ ------------
Balance at December 31, 1995 4,187,954 $ 42,858,814 $ 7,977,308 $ 579,840 $ 51,415,962
========= ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
45
46
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ------------ ------------
CASH FLOWS Net income $ 3,763,756 $ 3,319,398 $ 3,625,429
----------- ------------ ------------
FROM OPERATING Adjustments to reconcile net income to
net cash provided by operating
activities:
ACTIVITIES: Provision for depreciation and amortization 897,162 713,201 740,670
Provision for possible loan losses 2,100,000 800,000 750,000
Amortization of securities premiums 1,625,676 1,415,114 668,506
Accretion of securities discounts (101,984) (104,438) (210,789)
Amortization of deferred loan fees and costs (964,401) (977,666) (1,018,539)
Net (gain) loss on sale of securities
available for sale (52,590) 130,269 (3,247,710)
Net loss on sale of premises, furniture
and equipment 26,156 1,965 4,137
Net loss on sale of real estate owned 614,217 487,828 1,209,340
Net (increase) decrease in accrued
interest receivable and other assets 2,101,539 (1,421,095) 1,534,931
Net increase (decrease) in accrued
interest payable and other liabilities (775,755) 566,266 (2,077,475)
----------- ------------ ------------
Total adjustments 5,470,020 1,611,444 (1,646,929)
----------- ------------ ------------
Net cash provided by operating activities 9,233,776 4,930,842 1,978,500
----------- ------------ ------------
CASH FLOWS Proceeds from sales of securities
available for sale 30,336,537 5,392,285 7,501,774
FROM INVESTING Proceeds from maturities / calls of
ACTIVITIES: securities available for sale 30,962,510 29,126,421 39,639,602
Purchase of securities held to maturity (13,158,916) 0 0
Purchase of securities available for sale (9,570,292) (89,710,019) (65,590,863)
Net (increase) decrease in loans (20,292,613) (192,770) 33,885,924
Proceeds from sale of real estate owned 3,520,503 1,693,411 3,298,010
Proceeds from sale of premises,
furniture and equipment 11,434 502 2,908
Purchase of premises, furniture and equipment (1,766,526) (3,130,911) (339,924)
----------- ------------ ------------
Net cash provided by (used in) investing activities $20,042,637 $(56,821,081) $ 18,397,431
----------- ------------ ------------
46
47
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME INTERSTATE BANCORP AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Continued)
1995 1994 1993
---- ---- ----
CASH FLOWS Net increase (decrease) in demand deposits
FROM FINANCING and savings $(23,162,911) $ 46,125,752 $ (4,456,136)
ACTIVITIES: Net increase (decrease) in time certificates
of deposit of $100,000 and over 5,452,036 459,587 (9,699,638)
Net increase (decrease) in other time deposits (5,527,014) 9,884,212 (11,951,737)
Net increase (decrease) in securities
sold under agreements to repurchase (100,000) (3,900,000) 4,000,000
Proceeds from stock options exercised 117,115 9,260 0
Cash dividends declared (1,654,754) (1,141,305) (852,066)
------------ ------------ ------------
Net cash provided by (used in)
financing activities (24,875,528) 51,437,506 (22,959,577)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 4,400,885 (452,733) (2,583,646)
Cash and cash equivalents at beginning of year 48,996,448 49,449,181 52,032,827
------------ ------------ ------------
Cash and cash equivalents at end of year $ 53,397,333 $ 48,996,448 $ 49,449,181
============ ============ ============
Supplemental disclosure of non-cash investing
activities:
Adjustment for SFAS No. 109:
Increase in land and improvements $ 0 $ 0 $ (1,803,542)
Increase in deferred tax liabilities 0 0 1,803,542
Real estate acquired in settlement of loans 6,877,870 1,009,945 3,201,627
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 7,156,031 $ 6,304,019 $ 6,869,153
Income taxes 2,880,500 1,583,700 2,169,000
The accompanying notes are an integral part of these consolidated statements.
47
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HOME INTERSTATE BANCORP AND SUBSIDIARY
DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Home Interstate Bancorp (HIB), a bank holding company (the Company) is a
California corporation, and parent of Home Bank (the Bank) which is a state
chartered financial institution. The Bank primarily accepts deposits from and
makes loans to individuals and businesses in Orange County and Los Angeles
County, California.
On January 10, 1996, the Company entered into a definitive agreement (the
Agreement) to merge with CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the Agreement,
shareholders of the Company will receive 1.409 shares of CU Bancorp stock for
each share of the Company's stock. The Agreement is subject to shareholder and
regulatory approval and is expected to be completed by the end of the second
quarter 1996.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice within the banking industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and 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.
The following are descriptions of the more significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
HIB and its subsidiary, the Bank. All material intercompany balances and
transactions have been eliminated in the consolidated financial statements.
SECURITIES
The Company complies with the Financial Accounting Standards Board SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company holds securities in two categories, available for sale and held to
maturity. Securities available for sale may be held for indefinite periods of
time and may be sold in response to changes in interest rates and/or other
economic conditions. These securities are, in the aggregate, carried at market
value. Unrealized gains or losses are calculated based on adjusted cost as
described below. Unrealized gains or losses, net of deferred taxes, are recorded
as a separate component of shareholders' equity. Securities that the Company has
the positive intent and ability to hold to maturity are classified as held to
maturity and accounted for at cost, adjusted for amortization of premium and
accretion of discount. During 1995, $13,158,916 of securities were purchased and
added to the held to maturity portfolio.
The Company's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, of which both are computed on the
straight-line method that approximates the effective interest method. Such
amortization and accretion are reflected in interest on securities. Realized
gains or losses recognized on the sales of securities are based upon the
adjusted cost and computed on the specific identification method and are
classified in other operating revenue, securities gains or losses, net.
48
49
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
LOANS
Loans are stated at face amount, less payments collected, the allowance for
possible loan losses, unearned discounts and unamortized deferred fees. Interest
on commercial, real estate and simple interest loans is computed on the
principal balance outstanding. Interest on discounted installment loans is
computed on the rule of 78's method over the outstanding periods of the related
loans. Such methods of interest recognition generally result in level rates of
return on principal balances outstanding. The general policy of the Bank is to
discontinue the accrual of interest and transfer loans to non-accrual
(cash-basis) status when loans become 90 days past due or when reasonable doubt
exists with respect to the timely collectibility of interest or principal.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment. As unearned revenue, the net unrecognized fees and
costs are reported as reductions of the loan balance.
The allowance for possible loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. Management
makes periodic credit reviews of the loan portfolio and considers current
economic conditions, historical loan loss experience, assessments of future
potential problem loans and other factors in determining the adequacy of the
allowance. The allowance is based on estimates, and losses may vary from the
current estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which they
become known. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs.
On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", which was amended by SFAS No. 118, in October 1994.
Under the new standards, the allowance for credit losses for loans that are
impaired as defined, is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for collateral
dependent loans. Prior to the adoption of these new standards, the Bank
established reserves for impaired loans based on undiscounted cash flows or
based on the fair value of collateral for collateral dependent loans. The
adoption of these new standards did not have a significant impact on the level
of allowances allocated to impaired loans.
As permitted by these new standards, the Bank excludes from their
calculations smaller balance, homogeneous loans such as consumer installment
loans and lines of credit, and direct finance leases. In determining whether a
loan is impaired or not, the Bank applies its normal loan review procedures in
making that judgment. Loans which the Bank expects to collect in full and for
which an insignificant delay, i.e., 45 days past due, or an insignificant
shortfall in amount of payments is anticipated are not considered impaired. The
Bank measures impairment on a loan-by-loan basis using either the present value
of expected future cash flows discounted at the loan's effective interest rate,
or the fair value of the collateral if the loan is collateral dependent.
REAL ESTATE OWNED
Real estate owned represents real estate acquired through foreclosure or
deed in lieu of foreclosure. Real estate owned is carried at the lower of cost
or fair value less estimated carrying costs and costs of disposition. Cost is
determined at the date of acquisition as the result of a foreclosure sale and is
equal to the receivable balance at that date. If the cost (plus any liabilities
assumed at foreclosure) exceeds the appraised value, the carrying value of the
property is written down to its fair value. During the time the property is
held, all related carrying costs and losses on revaluation are expensed as
incurred. Gains or losses on sales are recorded in conformity with standards
that apply to the accounting for sales of real estate.
49
50
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated on
the straight-line method over the estimated useful life of the asset or the term
of the related lease, whichever is shorter. Maintenance and repairs are charged
directly to other operating expense. Construction costs, including remodeling,
improvements and the cost of funds to finance major projects are capitalized.
INTANGIBLE ASSETS
On October 19, 1990, HIB consummated a merger which was accounted for as a
purchase transaction, in which The Torrance National Bank (TTNB), a nationally
chartered bank, was merged with and into the Bank. Goodwill resulting from the
acquisition represents the excess purchase price over the fair market value of
net assets acquired. Under generally accepted accounting principles, goodwill is
recorded as an asset and will be amortized to expense using the straight-line
method over 15 years. The total amount of goodwill resulting from this
acquisition was approximately $6,562,000. The balance of $4,374,360 and
$4,811,796 is included in accrued interest receivable and other assets at
December 31, 1995 and 1994, respectively. Amortization of approximately $437,000
is reflected in other operating expenses for the years ended 1995, 1994 and
1993, respectively.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes rather than amounts currently payable under tax
laws. Deferred taxes, which arise from temporary differences between the period
in which certain income and expenses are recognized for financial accounting
purposes and the period in which they affect taxable income, are included in the
amounts provided for income taxes. The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes", which requires an
asset and liability approach in accounting for income taxes payable or
refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted tax laws. Additionally, SFAS No. 109 requires that
deferred tax assets be evaluated and a valuation allowance be established if it
is "more likely than not" that all or a portion of the deferred tax asset will
not be realized. The Company adopted SFAS No. 109 in 1993. Adoption of SFAS No.
109 did not have a material impact on the Company's consolidated statement of
operations; however, adoption of SFAS No. 109 did result in a reclassification
of deferred taxes related to real estate acquired in the 1990 merger. Under APB
11, the real estate was recorded net of its associated deferred tax liability.
Under SFAS No. 109, the real estate is required to be booked at full value with
the associated deferred tax liability included with other deferred tax items.
POSTRETIREMENT HEALTH BENEFITS
The Company provides certain health care benefits for retirees. Effective
July 15, 1992, the Company made significant changes to the benefits including
decreases in the benefits provided and elimination of all benefits for employees
who retire after December 31, 1994. The benefits require that retirees make
contributions that vary by years of service and are adjusted annually. Prior to
1993, the Company recognized the cost of providing the benefits on a cash basis
by expensing the insurance premiums less the required retiree contributions.
In December of 1990, the FASB issued SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions". Under SFAS No. 106, the
Company must recognize the cost of postretirement health benefits on an accrual
basis instead of the current cash basis. During 1993, the Company adopted SFAS
No. 106. Adoption of SFAS No. 106 did not have a material impact on the 1993
results of operations of the Company.
50
51
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number
of shares of common stock outstanding during the period. The weighted average
number of shares have been retroactively adjusted to reflect a stock dividend in
1995 and 1994. If all stock options were exercised, they would not have a
material dilutive effect and, therefore, have been excluded from the
computation. The weighted average number of shares used to compute earnings per
share was 4,177,865, 4,175,207 and 4,175,084 for 1995, 1994 and 1993,
respectively.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior years to conform to the
current year presentation.
NOTE 2. AVERAGE FEDERAL RESERVE BALANCES:
The average cash reserve balances required to be maintained by the Federal
Reserve Bank were approximately $10,879,000 and $10,255,000 for the years ended
December 31, 1995 and 1994, respectively.
51
52
NOTE 3. SECURITIES:
A summary of securities held to maturity at December 31, 1995 is as
follows:
1995
---------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 5,347,290 $ 61,718 $ 0 $ 5,409,008
Obligations of states and political
subdivisions 6,413,525 5,661 (25,109) 6,394,077
Corporate securities 652,783 5,644 0 658,427
Equity securities 717,900 0 0 717,900
----------- ----------- ----------- -----------
Total securities held to maturity $13,131,498 $ 73,023 $ (25,109) $13,179,412
=========== =========== =========== ===========
A summary of securities available for sale at December 31, 1995 and 1994 is
as follows:
1995
----------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 93,078,552 $ 963,359 $ (85,794) $ 93,956,117
Obligations of states and political
subdivisions 7,165,362 32,694 (39,792) 7,158,264
Corporate securities 19,139,801 121,280 (44,700) 19,216,381
Equity securities 380,391 66,143 (22,721) 423,813
------------ ------------ ------------ ------------
Total securities available for sale $119,764,106 $ 1,183,476 $ (193,007) $120,754,575
============ ============ ============ ============
1994
-------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $136,872,468 $ 19,473 $ (3,979,188) $132,912,753
Obligations of states and political
subdivisions 13,624,894 169,515 (338,159) 13,456,250
Corporate securities 22,058,793 0 (938,371) 21,120,422
Equity securities 380,391 49,143 (39,097) 390,437
------------ ------------ ------------ ------------
Total securities available for sale $172,936,546 $ 238,131 $ (5,294,815) $167,879,862
============ ============ ============ ============
Included in U. S. Treasury securities and obligations of U. S. government
agencies and corporations available for sale at December 31, 1995 and 1994 are
several mortgage backed securities which have a cost of $3,661,375 and
$5,217,111 and a market value of $3,689,384 and $4,954,170 with gross unrealized
gains of $35,264 and $10,384 and gross unrealized losses of $7,255 and $273,325,
respectively.
52
53
NOTE 3. SECURITIES: (Continued)
The cost and market value of securities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
HELD TO MATURITY COST MARKET VALUE
----------- -----------
Due in one year or less $ 0 $ 0
Due after one year through
five years 5,753,118 5,794,683
Due after five years through
ten years 2,086,591 2,106,150
Due after ten years 5,291,789 5,278,579
----------- -----------
Total securities held to maturity $13,131,498 $13,179,412
=========== ===========
AVAILABLE FOR SALE COST MARKET VALUE
------------ ------------
Due in one year or less $ 50,551,232 $ 50,637,772
Due after one year through
five years 65,349,127 66,146,258
Due after five years through
ten years 1,259,484 1,256,776
Due after ten years 2,604,263 2,713,769
------------ ------------
Total securities available for sale $119,764,106 $120,754,575
============ ============
Proceeds from sales of securities during 1995, 1994 and 1993 were
$30,336,537, $5,392,285 and $7,501,774 and the proceeds from calls of securities
during 1995, 1994 and 1993 were $3,970,276, $2,224,550 and $6,117,249,
respectively. Gross gains on sales for 1995, 1994 and 1993 were $162,639, $-0-
and $3,181,894 and gross gains on calls were $17,898, $14,550 and $66,193 for
1995, 1994 and 1993, respectively. Gross losses on sales were $127,947, $144,819
and $377 for 1995, 1994 and 1993, respectively.
As of December 31, 1995 and 1994, securities carried at $17,075,620 and
$18,089,066, respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
Included in interest on securities in 1995, 1994 and 1993 is $290,114,
$717,161 and $1,142,785, respectively, from obligations of states and political
subdivisions which are exempt from federal tax.
Included in states and political subdivisions securities at December 31,
1992 were $8,625,000 par value of eight separate issues of taxable municipal
securities (the Bonds) purchased at $8,356,728. At the time of purchase, the
Bonds were rated "Triple-A" by a nationally recognized rating agency and issued
by Executive Life of California (Executive Life). Executive Life was seized by
the California Insurance Commission on April 11, 1991 and placed in
conservatorship. Executive Life subsequently defaulted on payments due the
issuers because of a moratorium on all payments imposed by the California
Insurance Commission. In turn, since April 15, 1991, all issues defaulted on
regular interest payments. The Company placed all issues on non-accrual in 1991.
At December 31, 1992 and 1991, the reported market values of the Bonds were
approximately $4,416,850 and $3,450,000, respectively. Management concluded that
the value of the Bonds could remain impaired for an uncertain period of time due
to the possibility of potential extended litigation. Accordingly, at December
31, 1991, management elected to charge-off that portion of the Bonds which
exceeded the approximate market value of $3,450,000. The amount charged-off in
1991 was $5,027,441, reducing the bonds from their book value of $8,477,441, to
their market value. During 1993, the Company sold all of the Bonds for
$6,623,124, resulting in a gain on sale of $3,173,124.
53
54
NOTE 4. LOANS:
The loan portfolio at December 31, 1995 and 1994, consisted of the
following:
1995 1994
------------ ------------
Commercial loans $ 78,155,048 $ 95,235,410
Real estate loans - construction 16,933,018 8,404,509
Real estate loans - other 81,196,881 61,851,756
Installment loans 33,562,662 26,996,400
Other loans 1,634,602 1,771,182
Non-accrual loans 3,232,288 6,592,877
------------ ------------
214,714,499 200,852,134
Less: Unearned discounts and fees 3,491,755 2,203,001
------------ ------------
Total loans 211,222,744 198,649,133
Less: Allowance for possible loan losses 3,112,544 2,818,078
------------ ------------
Loans, net $208,110,200 $195,831,055
============ ============
The Company has concentrated its lending activity almost exclusively to
customers within the Los Angeles, Orange, Riverside and San Bernardino counties
of California. Commercial and industrial loans to small and medium size
companies in widely diversified industries and commercial real estate loans
represent the largest component of the portfolio. These groupings of loans are
followed by loans to individuals for household, family and other personal
expenditures. It is judged that none of these lending activities expose the Bank
to undue credit risk; however, economic conditions and real estate markets in
Southern California may affect the Company's loan portfolio and underlying
collateral values.
The Company has various types of real estate loans both for development and
long term financing. As of December 31, 1995 and 1994, the Company's real estate
loan portfolio, excluding non-accrual loans of $1,632,355 and $4,971,000,
respectively, is as follows:
1995 1994
---------- ----------
Construction and land development $16,933,018 $ 8,404,509
Mortgage - commercial 65,273,064 43,687,269
Mortgage - residential 15,923,817 18,164,487
---------- ----------
Total $98,129,899 $70,256,265
=========== ===========
The construction sector of the loan portfolio is widely diversified in a
number of projects with an emphasis on loans for the construction of single
family residential properties in the Los Angeles Basin. Substantially all the
construction loans are concentrated within a close proximity to the Company's 15
locations.
Within the diversified commercial and industrial loan portfolio there
exists approximately $15,525,000 of loan commitments which are secured by
accounts receivable lending loan arrangements of which approximately $7,050,000
represents the balance outstanding at December 31, 1995. These loans are closely
monitored on a monthly basis by a trained asset-lending group with periodic
audits performed by the Company's internal audit staff under agreements which
require additional lending disciplines should any credit weakness be detected.
Non-accruing loans totaled approximately, $3,232,288 and $6,592,877 at
December 31, 1995 and 1994, respectively. Interest income that would have been
recognized on non-accrual loans if they had performed in accordance with the
terms of the loans was approximately $221,700 and $412,600, respectively. At
December 31, 1995 and 1994, the Bank had $106,000 and $52,000 loans past due 90
days or more in interest or principal and still accruing interest.
54
55
NOTE 4. LOANS: (Continued)
An analysis of the activity in the allowance for possible loan losses for
the years ended December 31, 1995, 1994 and 1993, is as follows:
1995 1994 1993
----------- ----------- -----------
Balance at beginning of year $ 2,818,078 $ 3,573,446 $ 4,011,176
Provision for possible loan
losses 2,100,000 800,000 750,000
Loans charged-off (2,483,502) (2,026,835) (3,891,205)
Recoveries on loans previously
charged-off 677,968 471,467 2,703,475
----------- ----------- -----------
Balance at end of year $ 3,112,544 $ 2,818,078 $ 3,573,446
=========== =========== ===========
At December 31, 1995, the recorded investment in loans that are considered
to be impaired was $2,867,862, all of which were non-accruing, with a related
loss allowance of $355,563. Of the $2,867,862 of impaired loans, $200,001 was
measured using the present value method and $2,667,861 was measured using the
fair value of the collateral.
NOTE 5. LOANS TO RELATED PARTIES:
An analysis of the activity with respect to aggregate loan balances of
$60,000 or more involving related parties (Officers, Directors and their
affiliates) is as follows:
BALANCE AT NEW LOANS BALANCE AT
DECEMBER 31, 1994 AND ADDITIONS REPAYMENTS DECEMBER 31, 1995
----------------- ------------- ---------- -----------------
$1,211,017 $0 $(151,806) $1,059,211
All related party loans were current as to principal and interest as of
December 31, 1995. In management's opinion, these loans were made in the
ordinary course of business at prevailing rates and terms.
55
56
NOTE 6. PREMISES, FURNITURE AND EQUIPMENT:
Premises, furniture and equipment consisted of the following:
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
Land and improvements $ 7,701,241 $ 7,630,658
Building and improvements 8,561,109 8,388,387
Furniture, fixtures and equipment 7,351,654 6,814,443
Leasehold improvements 273,937 257,151
----------- -----------
23,887,941 23,090,639
Less: Accumulated depreciation and
amortization 9,522,697 9,557,168
----------- -----------
$14,365,244 $13,533,471
=========== ===========
The amounts of depreciation and amortization included in net occupancy
expense were $897,162, $713,201 and $740,670 in 1995, 1994 and 1993,
respectively, and are based on the following estimated useful lives:
Building and improvements 5 to 40 years
Furniture, fixtures and equipment 5 to 10 years
Leasehold improvements 10 to 30 years
NOTE 7. INCOME TAXES:
The provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
CURRENT
Federal $ 1,417,700 $ 976,900 $ 1,923,800
State 497,900 174,700 784,400
----------- ----------- -----------
1,915,600 1,151,600 2,708,200
----------- ----------- -----------
DEFERRED
Federal (320,300) 15,000 (390,600)
State (236,400) 2,500 (102,300)
----------- ----------- -----------
(556,700) 17,500 (492,900)
----------- ----------- -----------
$ 1,358,900 $ 1,169,100 $ 2,215,300
=========== =========== ===========
The provision for income taxes includes tax of $21,600, $(54,200) and
$1,342,300, related to net securities gains (losses) for 1995, 1994 and 1993,
respectively. At December 31, 1995, there are no accrued federal and state
income taxes. Accrued federal and state income taxes at December 31, 1994, are
approximately $279,500.
56
57
NOTE 7. INCOME TAXES: (Continued)
Deferred taxes arise from temporary differences in the recognition of the
revenues, expenses and tax credits for tax and financial reporting purposes. The
tax effects of principal temporary differences are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
Allowance for possible loan losses $(117,000) $ 391,500 $ 137,100
Real estate owned (145,300) (187,900) (246,100)
Mark to market, IRC Section 475 (65,700) (65,800) 263,000
Accretion/amortization of discounts/premiums
on securities (30,700) 61,000 (88,800)
Depreciation (43,700) (24,700) (6,300)
Vacation accrual 7,300 4,900 (102,700)
Pension cost (55,700) (167,300) 52,900
Depreciation of leverage leases (18,100) (15,000) (263,400)
State franchise taxes (79,200) 256,100 (231,400)
Other (8,600) (235,300) (7,200)
--------- --------- ---------
$(556,700) $ 17,500 $(492,900)
========= ========= =========
The provisions for income taxes varied from the Federal statutory rate of
34% for 1995, 1994 and 1993 for the following reasons:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ---------------------- ------------------------
AMOUNT % Amount % Amount %
----------- ---- ----------- ---- ----------- ----
Provision for income
taxes at statutory rate $ 1,741,800 34.0 % $ 1,526,100 34.0 % $ 1,985,800 34.0 %
Tax exempt interest (125,500) (2.5) (233,400) (5.2) (369,000) (6.3)
State franchise taxes,
net of federal tax benefit 172,600 3.4 83,900 1.9 450,200 7.7
Goodwill 153,000 3.0 149,800 3.3 148,700 2.5
AMT 0 0 (367,000) (8.2) 0 0
California enterprise
zone exclusion (200,000) (3.9) 0 0 0 0
Reversal of contingent
reserve (377,000) (7.4) 0 0 0 0
Other, net (6,000) (0.1) 9,700 0.2 (400) 0
----------- ---- ----------- ---- ----------- ----
$ 1,358,900 26.5% $ 1,169,100 26.0 % $ 2,215,300 37.9 %
=========== ==== =========== ==== =========== ====
The cumulative temporary differences comprising the net deferred tax asset
and (liability) are as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994
----------- -----------
Allowance for possible loan losses $ 547,000 $ 430,000
Real estate owned 717,700 572,400
Mark to market, IRC Section 475 (131,500) (197,200)
Accretion/amortization of discounts/premiums
on securities 0 (30,700)
Depreciation (87,700) (131,400)
Vacation accrual 91,300 98,600
Pension cost 0 (55,700)
Safe harbor leases (157,200) (175,300)
State franchise taxes 200,000 120,800
Step-up of land acquired in TTNB merger (1,814,400) (1,819,300)
Other 35,100 31,400
----------- -----------
(599,700) (1,156,400)
Unrealized (gains) losses on securities
available for sale (410,700) 2,100,300
----------- -----------
$(1,010,400) $ 943,900
=========== ===========
57
58
NOTE 8. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING
The Bank offers a trusteed profit sharing plan to employees with one year
of continuous service. Contributions are determined by the Board of Directors
based upon annual profits. Contributions were $496,600, $441,200 and $150,000 in
1995, 1994 and 1993, respectively.
RETIREMENT
The Company has a non-contributory pension plan covering all employees over
21 years of age with one year of continuous service. Pension benefits are
payable upon normal or early retirement and in accordance with the appropriate
payment option as defined in the plan. Benefits are based on the participant's
salary and years of service. Effective January 31, 1994, the Company
discontinued further accrual of benefits. In January 1995, the Company notified
all participants of the intent to terminate the plan effective April 13, 1995.
Plan assets are currently invested in an immediate participation guarantee
contract (fixed dollar account) with an insurance company.
The pension costs for the years ended December 31, 1995, 1994 and 1993
included the following components:
1995 1994 1993
---------- ---------- -----------
Service cost -- benefits earned during the period $ 0 $ 0 $197,316
Interest cost on projected benefits obligation 162,864 130,044 221,318
Actual return on plan assets (370,451) 26,945 (691,145)
Net amortization and deferral 136,661 (239,827) 451,425
-------- -------- --------
Total pension costs $(70,926) $(82,838) $178,914
======== ======== ========
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated statements of financial condition at
December 31, 1995 and 1994:
1995 1994
----------- ------------
Actuarial present value of benefits
obligations:
Accumulated benefit obligation $ 2,507,907 $ 2,253,501
=========== ===========
Vested benefit obligation $ 2,432,675 $ 2,166,804
=========== ===========
Plan assets at fair value 3,734,847 3,419,862
Projected benefit obligation 2,507,907 2,253,501
----------- -----------
Plan assets in excess of projected
benefit obligation 1,226,940 1,166,361
Unrecognized net (gain) loss 143,078 140,564
Unrecognized prior service cost 0 0
Unrecognized net transition asset
existing at the date of initial
application of SFAS 87 (38,002) (45,835)
----------- -----------
Prepaid pension cost included in plan assets $ 1,332,016 $ 1,261,090
=========== ===========
The principal assumptions were:
Discount rates 7.25% 7.25%
Rates of increase in compensation levels 5.76% 5.76%
Expected long-term rate of return on plan assets 7.50% 7.50%
58
59
NOTE 8. EMPLOYEE BENEFIT PLANS: (Continued)
STOCK OPTIONS
The Bank adopted a stock option plan in 1985. The 1985 plan authorized the
issuance of up to 566,549 shares of common stock at the discretion of the Board
of Directors, and has an expiration date of March 12, 1995. On May 16, 1989, the
shareholders approved an amendment to the 1985 plan providing the addition of
220,500 shares for future grants. Options are granted at a price not less than
the fair market value of the stock at the date of grant. Options expire five
years from the date granted and become exercisable at the date of grant. There
were no options canceled in 1995, 1994 or 1993. The plan provides for the
retroactive adjustments of options granted for the effect of stock dividends and
stock splits. Stock options have been adjusted to reflect the five percent stock
dividend declared in 1995 and 1994. A summary of stock option activity during
1993, 1994 and 1995 for the plan is as follows:
STOCK OPTIONS
----------------------------
NUMBER RANGE OF
OF PRICES PER
SHARES OPTION SHARE
------- ---------------
Shares under option and excercisable at December 31, 1992 196,737 $10.00 - $13.82
Options forfeited (22,167) 10.00 - 13.82
Options exercised 0
Options granted 0
-------
Shares under option and exercisable at December 31, 1993 174,570 10.00
Options forfeited (6,841) 10.00
Options exercised (926) 10.00
Options granted(1) 13,340 9.52 - 9.88
-------
Shares under option and exercisable at December 31, 1994 180,143 9.52 - 9.88
Options forfeited (7,713) 9.52 - 9.53
Options exercised (12,302) 9.52
Options granted(2) 8,006 9.06 - 9.40
-------
Shares under option and exercisable at December 31, 1995,
with expiration dates ranging from
July 17, 1997 through August 18, 1997 168,134 $ 9.06 - $9.40
=======
Shares available for future grant at December 31, 1995 0
(1) Grant of 5,000 shares, new options at $9.875 and 8,340 as a result of 5%
stock dividend in 1994.
(2)All shares granted were as a result of the 5% stock dividend in 1995.
NOTE 9. SHAREHOLDERS' EQUITY:
On November 15, 1995 and October 19, 1994, the Company declared a five
percent stock dividend to all shareholders of record as of December 1, 1995 and
1994 payable on December 20, 1995 and 1994. As a result of the dividend, the
Company issued 198,930 and 188,871 shares of common stock (fractional shares
were paid in the form of cash dividends) and capitalized retained earnings of
$2,287,695 and $1,888,710 which is equal to the number of shares issued at a
market value of $11.50 and $10.00 per share as of the declaration dates,
respectively. No stock dividends were declared to shareholders of record during
the year ended December 31, 1993. During 1995, the Company declared cash
dividends in the aggregate of $1,654,754 or $.41 per share and paid cash
dividends in the aggregate of $1,298,778 or $.325 per share. In January 1996,
the Company paid cash dividends in the aggregate of $358,008 or $.085 per share.
Under the Federal Reserve Board's capital guidelines, the Company is
required to have a minimum ratio of total capital to risk-weighted assets of
8.0%, tier 1 capital to total risk-weighted assets of 4.0% and a leverage ratio
of 3.0%. At December 31, 1995 and 1994, the Company's ratios were 18.09%, 16.96%
and 11.05% and 17.30%, 16.25% and 10.17%, respectively.
59
60
NOTE 10. COMMITMENTS AND CONTINGENCIES:
In order to meet the financing needs of its customers in the normal course
of business, the Company is a party to financial instruments with "off-balance
sheet" risk. Those financial instruments consist of commitments to extend credit
and standby letters of credit. 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. Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. The
Company does not enter into any interest rate swaps or caps or forward or
futures contracts.
The off-balance sheet risk inherent in these instruments is the possibility
of loss from (1) the failure of another party to perform according to the terms
of a contract that would cause a draw on a standby letter of credit, or (2)
changes in market rates of interest for those few commitments and undisbursed
loans which have fixed rates of interest. To minimize this risk, the Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The decision as to whether
collateral should be required is based on the circumstances of each specific
commitment or conditional obligation.
Loan commitments are not usually made for more than 30 days. If rates are
quoted, they are generally stated in relation to the prime rate.
These financial instruments involve, to varying degrees, exposure to credit
risk in excess of the amounts recognized in the statement of financial
condition. This exposure is represented by the contractual notional amount of
those instruments. As of December 31, 1995 and 1994, the contractual notional
amount of these instruments was as follows:
1995 1994
----------- -----------
Standby and commercial letters of credit $ 2,806,000 $ 4,950,000
Unused consumer loans secured by real estate 6,625,000 7,376,000
Unused commercial loans secured by real estate 18,959,000 7,894,000
Other loan commitments 23,955,000 23,646,000
----------- -----------
Total commitments $52,345,000 $43,866,000
=========== ===========
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash requirements.
In the normal course of doing business, the Company occasionally becomes a
party to litigation. Currently, there are two cases pending against the Company
which relate to certain depository accounts that were opened for varying periods
from twenty-nine days to four months. In the opinion of management, and the
Company's legal counsel, the disposition of all pending litigation involving the
Company will have no adverse material effect upon its financial condition and
results of operations.
The Company is committed through June 1998 for payments under a data
processing service agreement and through March 1997 for payments under a service
center processing agreement. Minimum annual payments are approximately
$1,335,360 and $1,123,000, escalating over the term of the agreements to
approximately $1,729,000 and $1,265,000, respectively.
60
61
NOTE 11. OTHER OPERATING EXPENSES:
Other operating expenses include the following:
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
Legal and professional services $ 641,343 $ 579,793 $ 606,451
Other data processing expense 1,807,308 1,819,979 1,804,829
Service center processing expense 1,233,847 1,165,701 1,111,355
Other outside services 73,295 521,679 258,952
Stationery and supplies 386,607 477,545 413,996
Operating losses 396,124 280,412 214,343
Losses on real estate owned 626,944 559,634 1,209,340
Other operating expense 3,987,063 3,738,442 3,744,648
---------- ---------- ----------
$9,152,531 $9,143,185 $9,363,914
========== ========== ==========
NOTE 12. REGULATORY MATTERS:
The Bank is subject to regulation by the Federal Reserve Board, Federal
Deposit Insurance Corporation (FDIC) and the California State Banking
Department. As a result of the examination completed by the representatives of
the FDIC in the fourth quarter of 1992, the FDIC and the Bank agreed to enter
into an informal agreement in the form of a memorandum of understanding (the
Memorandum), effective March 1993. Pursuant to the Memorandum, the Bank, among
other things agreed to maintain a minimum ratio of tier 1 capital to total
average assets of 7.5%. Additionally, in regards to the other items which were
required under the Memorandum, the Bank undertook steps to implement certain
actions or restrictions with respect to its lending and dividend activities and
to adopt or revise certain internal policies and procedures. The FDIC released
the Bank of the Memorandum on February 9, 1994.
NOTE 13. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values for its financial
instruments.
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instruments.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
current economic conditions, risk characteristics of various financial
instruments, prepayment assumptions, future expected loss experience and other
such factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Additionally, the Company intends to hold the majority of its assets and
liabilities to their stated maturities. Therefore, the Company does not intend
to realize any significant differences between carrying value and fair value
through sale or other disposition. No attempt should be made to adjust
shareholders' equity to reflect the following fair value disclosures required by
the standard as management believes them to be inconsistent with their
philosophies and the operations of this Company.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of existing and anticipated future customer relationships and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include the branch network, deferred tax assets and liabilities,
real estate owned, land, furniture, fixtures and equipment and goodwill.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments as of December 31, 1995 and 1994.
61
62
NOTE 13. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: (Continued)
CASH AND FEDERAL FUNDS SOLD (SHORT-TERM INVESTMENTS)
For cash and federal funds sold (short-term investments), the carrying
amount (book value) is a reasonable estimate of fair value.
SECURITIES
For securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices of similar securities.
LOANS
For certain homogeneous categories of loans, such as loans secured by real
estate, auto loans and other consumer loans, fair value 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. For loans which are immediately repriceable, the carrying
value is a reasonable estimate of fair value. The allowance for possible loan
losses, plus additional discounts on certain classified loans are estimated to
be a market discount of the credit risks inherent in the portfolio based upon a
bulk sale concept.
DEPOSITS
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (SHORT-TERM BORROWINGS)
The carrying amount (book value) of securities sold under agreements to
repurchase is a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments and standby letters of credit is estimated
using the fees currently charged to enter into similar agreements, taking into
account remaining terms of the agreements. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates. The fair value of these unrecorded financial instruments is
not material to the Company's financial position or fair value disclosures at
December 31, 1995 and 1994. (See Note 10. Commitments and Contingencies, for
contractual notional amounts of the instruments, contained herein).
The estimated fair values of the Company's financial instruments are as
follows:
DECEMBER 31, 1995 December 31, 1994
--------------------------------- ----------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
-------------- --------------- --------------- --------------
Financial Assets:
Cash and federal funds sold $ 53,397,000 $ 53,397,000 $ 48,996,000 $ 48,996,000
Securities 133,886,000 133,934,000 167,880,000 167,880,000
Loans, net 208,110,000 207,116,000 195,831,000 191,691,000
------------ ------------ ------------ ------------
$395,393,000 $394,447,000 $412,707,000 $408,567,000
============ ============ ============ ============
Financial Liabilities:
Deposits $369,031,000 $369,230,000 $392,269,000 $391,620,000
Securities sold under agreements to repurchase 0 0 100,000 100,000
------------ ------------ ------------ ------------
$369,031,000 $369,230,000 $392,369,000 $391,720,000
============ ============ ============ ============
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63
NOTE 14. CONDENSED FINANCIAL INFORMATION OF HOME INTERSTATE BANCORP (PARENT
COMPANY ONLY):
At December 31, 1995 and 1994, the condensed unconsolidated Statements of
Financial Condition of the Parent Company are as follows:
1995 1994
------------ ------------
ASSETS:
Cash and cash equivalents $ 1,011,446 $ 224,687
Securities available for sale 932,563 892,687
Investment in the Bank 49,784,997 44,536,588
Other assets 6,850 6,850
------------ ------------
TOTAL ASSETS $ 51,735,856 $ 45,660,812
============ ============
LIABILITIES:
Dividends payable and other liabilities $ 319,894 $ 7,186
------------ ------------
SHAREHOLDERS' EQUITY:
Contributed capital 42,858,814 40,454,004
Retained earnings 7,977,308 8,156,001
Unrealized gains (losses) on
securities available for sale, net of
deferred taxes, and equity in
unrealized gains (losses) on
securities of the Bank 579,840 (2,956,379)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 51,415,962 45,653,626
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 51,735,856 $ 45,660,812
============ ============
For years ended December 31, 1995, 1994 and 1993, the condensed
unconsolidated Statements of Income are as follows:
1995 1994 1993
---------- ---------- --------
Dividends from the Bank $2,125,000 $1,281,659 $600,000
Securities gains 0 0 2,307
Interest and other income 75,218 78,438 65,458
---------- ---------- --------
Total Income 2,200,218 1,360,097 667,765
Legal and other expenses 271,283 163,791 151,181
---------- ---------- --------
Income before income taxes and equity in
undistributed income of subsidiary 1,928,935 1,196,306 516,584
Allocated income tax benefit 96,400 41,600 40,800
Equity in undistributed income of
subsidiary 1,738,421 2,081,492 3,068,045
---------- ---------- ----------
NET INCOME $3,763,756 $3,319,398 $3,625,429
========== ========== ==========
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64
NOTE 14. CONDENSED FINANCIAL INFORMATION OF HOME INTERSTATE BANCORP (PARENT
COMPANY ONLY): (Continued)
For the years ended December 31, 1995, 1994 and 1993, the condensed
unconsolidated Statements of Cash Flows are as follows:
1995 1994 1993
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 3,763,756 $ 3,319,398 $ 3,625,429
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of securities premiums 4,926 4,927 5,711
Net gain on sale of securities 0 0 (2,307)
Equity in affiliated subsidiary (1,738,421) (2,081,492) (3,068,045)
Net decrease other assets 0 0 99,307
Net increase (decrease) in dividends
payable and other liabilities 294,137 (642) (41,300)
----------- ----------- -----------
Total adjustments (1,439,358) (2,077,207) (3,006,634)
----------- ----------- -----------
Net cash provided by operating activities 2,324,398 1,242,191 618,795
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities 0 0 104,895
----------- ----------- -----------
Net cash provided by investing activities 0 0 104,895
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from stock options exercised 117,115 9,260 0
Cash dividends declared (1,654,754) (1,141,305) (852,066)
----------- ----------- -----------
Net cash used in financing activities (1,537,639) (1,132,045) (852,066)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 786,759 110,146 (128,376)
Cash and cash equivalents at beginning of year 224,687 114,541 242,917
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,011,446 $ 224,687 $ 114,541
=========== =========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
Adjustment for SFAS No. 115:
(Increase) decrease in unrealized
gains on securities available for sale $ (44,802) $ 68,511 $ (72,824)
(Increase) decrease in investment in
the Bank for unrealized gains
(losses) on securities available for sale, net (3,509,988) 3,910,511 (951,610)
Increase (decrease) in deferred tax
liabilities related to unrealized
gains on securities available for sale 18,571 (33,809) 35,600
Increase (decrease) in shareholders'
equity for unrealized gains (losses),
net of deferred taxes 3,536,219 (3,945,213) 988,834
Under California banking law, the Bank is limited in its ability to declare
dividends to the Company to the lesser of the retained earnings of the Bank or
the net income of the Bank for its last three fiscal years, less distributions
made by the Bank to the Company during such period. The effect of this law is to
limit the dividends the Bank may declare at December 31, 1995 to approximately
$6,841,000.
Federal law also restricts the Bank from extending credit to the Company
since any such extensions of credit are subject to strict collateral
requirements.
64
65
NOTE 15. PURCHASE AND ASSUMPTION OF CERTAIN ASSETS AND LIABILITIES:
On April 1, 1994, the Bank entered into an Insured Deposit Purchase and
Assumption Agreement (P&A Agreement) with the FDIC for the purchase and
assumption of certain assets and liabilities of Mechanics National Bank,
Paramount, California. Mechanics National Bank was declared insolvent and closed
by the Office of the Comptroller of the Currency on April 1, 1994 and the FDIC
was appointed the receiver thereof. Concurrent with the execution of the P & A
Agreement, the Bank entered into a FDIC Consortium Agreement with the FDIC and
California United Bank, N.A., Pacific Western National Bank, Foothill
Independent Bank, Landmark Bank, Cerritos Valley Bank and De Anza National Bank
(Consortium Members).
The Bank, as agent for the Consortium Members, purchased approximately
$22,535,000 of certain assets consisting principally of cash and cash
equivalents, securities and Fed funds sold and assumed approximately $99,355,000
of certain liabilities consisting of deposit liabilities and accrued interest
from the FDIC. The Bank purchased approximately $21,700,000 of such assets and
assumed $17,100,000 of such deposits of two former Mechanics National Bank
branches located in Torrance and Paramount, California. All remaining acquired
assets and assumed liabilities were transferred to the Consortium Members.
On July 15, 1994, the Bank entered into a P & A Agreement with the FDIC for
certain assets and liabilities of the Bank of San Pedro (San Pedro), San Pedro,
California. San Pedro was closed by the California Superintendent of Banks on
July 15, 1994 and the FDIC was appointed the receiver thereof.
The Bank purchased $12,884,000 of certain assets consisting principally of
loans, cash and cash equivalents and investment securities, and assumed
approximately $74,200,000 of certain liabilities consisting of insured deposit
liabilities and accrued interest from the FDIC.
65
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors and Executive
Officers of the Registrant is contained in the Company's definitive Proxy
Statement for the Company's 1996 Annual Meeting of Shareholders under the
heading Directors, Nominees and Executive Officers of the Company which the
Company intends to file with the Commission within 120 days following the end of
the Company's 1995 fiscal year pursuant to the Commission's Rule 14A promulgated
under the Securities Exchange Act of 1934, as amended. Such information is
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item regarding Executive Compensation is
contained in the Company's definitive Proxy Statement for the Company's 1996
Annual Meeting of Shareholders under the heading Directors, Nominees and
Executive Officers of the Company which the Company intends to file with the
Commission within 120 days following the end of the Company's 1995 fiscal year
pursuant to the Commission's Rule 14A promulgated under the Securities Exchange
Act of 1934, as amended. Such information is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item regarding Security Ownership of
Certain Beneficial Owners and Management is contained in the Company's
definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders
under the heading Principal Shareholders and Election of Directors which the
Company intends to file with the Commission within 120 days following the end of
the Company's 1995 fiscal year pursuant to the Commission's Rule 14A promulgated
under the Securities Exchange Act of 1934, as amended. Such information is
incorporated herein by this reference.
66
67
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item regarding Certain Relationships and
Transactions is contained in the Company's definitive Proxy Statement for the
Company's 1996 Annual Meeting of Shareholders under the heading Certain
Transactions which the Company intends to file with the Commission within 120
days following the end of the Company's 1995 fiscal year pursuant to the
Commission's Rule 14A promulgated under the Securities Exchange Act of 1934, as
amended. Such information is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company, the
accompanying notes and the Report of Independent Public Accountants are included
in Item 8 of this Annual Report on Form 10-K at the pages referenced below:
ITEM PAGE NO.
---- --------
1. Report of Independent Public Accountants................................................................... 42
2. Consolidated Statements of Financial Condition as of December 31, 1995 and 1994............................ 43
3. Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993..................... 44
4. Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993....................................................... 45
5. Consolidated Statement of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.................. 46
6. Notes to Consolidated Financial Statements................................................................. 48
(a)(2) SCHEDULES.
No Schedules are listed because they are not applicable, not material or
because the information required by such schedules is included in the
consolidated financial statements or the notes thereto.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the last
quarter of the Company's fiscal year ended December 31, 1995.
(c) EXHIBITS.
Exhibits required to be filed hereunder are indexed on sequentially
numbered page 70 hereof.
The following is a list of management contracts and compensatory plans and
arrangements required to be filed hereunder:
1. The Company's 1985 Stock Option Plan, as amended; form of Incentive
Stock Option Agreement; and form of Non-Qualified Stock Option
Agreement, at Exhibit 4 to Registration Statement on Form S-8, No.
33-30573.
2. Change of Control Agreement, James P. Staes.
3. Change of Control Agreement, Bill Neal.
4. Change of Control Agreement, Keith W. Barnes.
67
68
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 dates indicated:
SIGNATURE AND TITLE DATE
- -------------------------------------------------------------------- -----------------
/s/ Ruth A. Martin February 21, 1996
- --------------------------------------------------------------------
Ruth A. Martin, Director
Chairman of the Board
/s/ James P. Staes February 21, 1996
- --------------------------------------------------------------------
James P. Staes, Director
President
/s/ D. A. Buschenfield February 21, 1996
- --------------------------------------------------------------------
D. A. Buschenfield, Director
Vice President
/s/ J. Richard Denham February 21, 1996
- --------------------------------------------------------------------
J. Richard Denham, Director
Vice President
/s/ Randall G. Elston February 21, 1996
- --------------------------------------------------------------------
Randall G. Elston, Director
/s/ Roger K. Freeman February 21, 1996
- --------------------------------------------------------------------
Roger K. Freeman, Director
/s/ Bill Neal February 21, 1996
- --------------------------------------------------------------------
Bill Neal, Director
/s/ Donald G. Martin February 21, 1996
- --------------------------------------------------------------------
Donald G. Martin, Director
/s/ George W. Post February 21, 1996
- --------------------------------------------------------------------
George W. Post, Director
/s/ Keith W. Barnes February 21, 1996
- --------------------------------------------------------------------
Keith W. Barnes, Senior Vice President,
Chief Financial Officer, Controller and Principal Accounting Officer
68
69
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.
Home Interstate Bancorp by
/s/ Keith W. Barnes
- --------------------------------------------------------------------
Keith W. Barnes, Senior Vice President, Dated February 21, 1996
Chief Financial Officer, Controller and Principal Accounting Officer
69
70
INDEX TO EXHIBITS
PAGE NUMBER IN
SEQUENTIALLY
EXHIBIT DESCRIPTION OF DOCUMENT NUMBERED SYSTEM
- ---------------- ------------------------------------------------------------------------------- ----------------
1.1 Agreement and Plan of Reorganization by and among the Company, the Bank, CU
Bancorp and California United Bank, National Association dated January 10,
1996 (1) .
3.1 Articles of Incorporation of the Company filed with the Secretary of State
of the State of California on September 17, 1979, as amended by Certificate
of Amendment of Articles of Incorporation filed May 20, 1988 (2). In
addition, Certificate of Amendment of Articles of Incorporation of the
Bancorp filed with the Secretary of State of the State of
California on November 9, 1981 (2).
3.2 Bylaws of the Company, adopted November 17, 1987 (amended and restated) (3).
4. Specimen of Common Stock Certificate (4).
10.1 The Company's 1985 Stock Option Plan, as amended, form of
Incentive Stock Option Agreement, and form of
Non-Qualified Stock Option Agreement (5).
10.2 Ground Lease dated February 9, 1976, by and between Brea Plaza Development
Company, a partnership, and the Bank, for the land upon
which the Brea Branch Office of the Bank is located (3).
10.3 Ground Lease dated May 16, 1980, by and between Manhattan
Beach Commercial Properties, a California general
partnership, and Bank of Manhattan, for the land upon
which the Manhattan Beach Branch Office of the Bank is
located (3).
10.4 Lease dated December 13, 1973, by and between Homart Development Co., a
Delaware corporation, and the Bank for the land upon which
the Westminster Branch Office of the Bank is located (3).
10.5 Lease dated December 10, 1979, by and between Margaret Hills Land and
Exploration Company, as Lessor, and Irvine National Bank, as Lessee,
assigned in February 1980 to Heritage Bank, as Lessee, and assigned on March
9, 1984 to the Bank, as Lessee, for the lease of office
facilities for the Irvine Branch Office (3).
10.6 Reserved
10.7 Remote Outsourcing Agreement dated September 14, 1993, by
and between Systematics, Inc., an Arkansas corporation,
and the Bank (6).
10.8 Item Processing Agreement dated March 9, 1992, by and
between Systematics, Inc., an Arkansas corporation, and
the Bank (6).
10.9 Lease, proposed to be assigned to the Bank, dated July 1,
1978, by and between Lanikai Investment Company, LTD., as
Lessor, and Bank of San Pedro, as Lessee, and assumed on
July 15, 1994 by the FDIC, as Lessee, for the lease of
office facilities for the North San Pedro Branch Office
(7).
10.10 Change of Control Agreement, James P. Staes (8).
10.11 Change of Control Agreement, Bill Neal (8).
10.12 Change of Control Agreement, Keith W. Barnes (8).
21.0 Subsidiary of the Registrant (7).
23.0 Consent of Arthur Andersen LLP 72
27.0 Financial Data Schedule 73
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(1) Incorporated by reference to the Exhibits to the Registrant's Form 8-K as
filed with the Commission on February 9, 1996.
(2) Incorporated by reference to the Exhibits to the Registrant's S-4
Registration Statement, Registration No. 33-35622, as filed with the
Commission on June 28, 1990.
(3) Incorporated by reference to the Registrant's 1989 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 31, 1990.
(4) Incorporated by reference to Exhibit 7 to Registrant's Registration
Statement on Form S-14, Registration No. 2-75660, as filed with the
Commission on January 12, 1982 and amended on August 6, 1982
(5) Incorporated by reference to Exhibit 4 to Registrant's Registration
Statement on Form S-8, Registration No. 33-30573, as filed with the
Commission on August 17, 1989.
(6) Incorporated by reference to the Registrant's 1993 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 29, 1994.
(7) Incorporated by reference to the Registrant's 1994 Annual Report on Form
10-K, File No. 0-11160, as filed with the Commission on March 31, 1995.
(8) Incorporated by reference to the Exhibits 10.10, 10.11 and 10.12 to
Registrant's June 30, 1995 Quarterly Report on Form 10-Q, File No. 0-11160,
as filed with the Commission on July 31, 1995.
71