SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 1996
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Commission File Number 2-78788
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CALIFORNIA COMMERCIAL BANKSHARES
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CALIFORNIA 95-3819471
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(State of Other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
4100 NEWPORT PLACE, NEWPORT BEACH, CA 92660
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(Address of principal executive offices)
Registrant's Telephone Number (714) 863-2300
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Former name, former address and former fiscal year if changed from last report
Indicate by check (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date 2,949,572.
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1
CALIFORNIA COMMERCIAL BANKSHARES
INDEX
PART 1. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Condensed Statements of Income
for three months and nine months ended
September 30, 1996 and 1995.
Consolidated Condensed Balance Sheets
September 30, 1996 and December 31, 1995.
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995.
Notes to Consolidated Financial Statements,
September 30, 1996.
Item 2. Management Discussion and Analysis of the Financial
Condition and Results of Operations.
2
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
-------- -------- -------- ---------
INTEREST AND FEE INCOME:
Loans and Leases 15,032 15,150 4,950 4,931
Investment Securities 3,558 2,390 1,385 851
Federal Funds Sold 1,402 834 394 415
------ ------ ----- -----
Total Interest and Fee Income 19,992 18,374 6,729 6,197
INTEREST EXPENSE:
Deposits 4,903 5,192 1,631 1,832
Securities Sold Under Agreement
to Repurchase 0 8 0 0
Note Payable 199 146 68 51
------ ------ ----- -----
Total Interest Expense 5,102 5,346 1,699 1,883
NET INTEREST INCOME 14,890 13,028 5,030 4,314
PROVISION FOR LOAN / LEASE LOSSES 700 4,274 0 3,274
NET INTEREST INCOME AFTER PROVISION
FOR LOAN / LEASE LOSSES 14,190 8,754 5,030 1,040
OTHER INCOME:
Escrow Fees 564 177 253 91
Service Charges 888 712 291 236
Gain (Loss) on Loans Available for Sale 665 0 (338) 0
Other Income 843 773 242 324
------ ------ ----- -----
Total Other Income 2,960 1,662 448 651
OTHER EXPENSES:
Salaries and Employee Benefits 6,224 5,413 1,948 1,710
Occupancy, Furniture and Equipment 1,751 1,517 591 486
Data Processing 816 195 334 56
Supplies 305 236 95 68
Legal Fees 1,595 759 572 344
Regulatory Assessments 426 553 144 59
Losses and Expenses on Oreo (200) 1,967 67 1,106
Securities Losses 0 72 0 0
Loss on Loans Available for sale 0 756 0 756
Other 2,298 1,748 825 609
------ ------ ----- -----
Total Other Expenses 13,215 13,216 4,576 5,194
INCOME BEFORE INCOME TAXES 3,935 (2,800) 902 (3,503)
INCOME TAXES 1,575 (1,120) 362 (1,400)
NET INCOME 2,360 (1,680) 540 (2,103)
EARNINGS PER COMMON SHARE $0.78 $(0.67) $0.18 $(0.83)
3
CALIFORNIA COMMERCIAL BANKSHARES
CONSOLIDATED CONDENSED BALANCE SHEETS
(000'S OMITTED)
ASSETS
September 30 December 31
1996 1995
Cash and Due From Banks
Non Interest-bearing $ 25,151 $ 28,549
Investment Securities - Available for Sale 101,916 62,283
Federal Funds Sold 15,000 45,000
Loans, net of unearned interest:
Commercial 75,257 84,271
Real Estate - Construction 23,148 22,593
Real Estate - Equity Line 6,484 7,039
Real Estate - Mortgage 70,578 55,207
Installment and Other 20,117 13,120
Lease Contracts Receivable 2,671 3,064
-------- --------
198,255 185,294
Less: Deferred Loan Fees & Costs (373) (702)
-------- --------
197,882 184,592
Less: Reserve for Loan Loss (4,803) (6,542)
-------- --------
Total Loans, net 193,079 178,050
Loans Available for Sale 3,416 9,620
Real Estate Owned 2,836 2,165
Bank Premises, Furniture & Equipment 1,420 1,150
Accrued Interest Receivable 2,537 2,649
Deferred Income Taxes 2,249 2,249
Prepaid Expenses and Other Assets 1,872 2,328
-------- --------
Total Assets $349,476 $334,043
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Deposits:
Demand Deposit
Non Interest Bearing 137,413 $130,660
Interest Bearing 72,813 65,301
Savings Deposits 54,689 45,312
Time Certificates $100,000 and over 32,133 34,718
Other Time Deposits 23,316 32,513
-------- --------
Total Deposits 320,364 308,504
Note Payable 2,350 2,351
Interest Payable 138 221
Other Liabilities 3,384 1,848
Shareholders Equity:
Capital Stock - Authorized 10,000,000 shares;
Issued and outstanding 2,950,000 in 1996 and
2,922,000 in 1995 14,232 14,077
Paid in Capital 446 470
Retained Earnings 8,809 6,448
Unrealized Gain (Loss) on investment securities
available for sale (net of tax) (247) 124
-------- --------
Total Liabilities and Shareholders Equity $349,476 $334,043
======== ========
4
CALIFORNIA COMMERCIAL BANKSHARES
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(000'S OMITTED)
(UNAUDITED)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) 2,360 (1,680)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and Amortization 320 351
Net Amort. Of Security Discounts and Premiums 300 654
Provision for loan and lease losses 700 4,274
Provision for selling exp. on other Real Estate
Owned 82 453
Loss (Gain) on sale of Investment Securities 0 72
Loss (Gain) on Sale of Property (8) (12)
Gain on Sale of Other Real Estate Owned (570) 522
Loss on loans Available for Sale 0 756
Decrease (increase) in accrued Interest
Receivable 112 676
Decrease (Increase) on Other Assets 656 (1,800)
Net Increase (Decrease) in Interest Accrued
Compensation Payable, and Other Liabilities 837 1,182
-------- -------
Total Adjustments 2,429 7,128
-------- -------
Net cash from operating activities 4,789 5,448
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of Investment Securities 29,161 8,190
Purchase of investment securities (69,665) (26,141)
Proceeds from Sale of Investment Securities 0 21,016
Net Decrease (Increase) in Loans and Leases (11,376) (7,753)
Increase / (Decrease) in Deferred Loan Fees (329) (24)
Increase / (Decrease) in Unearned Lease Income (30) (108)
Recoveries of Loans and Leases Charged Off 328 388
Purchases of Property (590) (458)
Proceeds from Sale of Property 8 26
Proceeds from Sale of Other Real Estate Owned 2,458 3,753
Additions to other real estate owned (142) 0
-------- --------
Net cash used in Investing Activities (50,177) (1,111)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase / (Decrease) in Deposits 11,860 23,379
Proceeds from Exercise of Common Stock Options 131 8
Paydown on Capital Note (1) 0
-------- --------
Net cash from financing activities 11,990 23,387
Increase (Decrease) In Cash and Cash Equivalents (33,398) 27,724
Cash And Cash Equivalents At Beginning Of Year 73,549 23,315
-------- --------
Cash And Cash Equivalents At September 30, 1996 40,151 51,039
======== ========
5
CALIFORNIA COMMERCIAL BANKSHARES
Notes To Consolidated Condensed Financial Statements:
- -----------------------------------------------------
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996.
Note 2 - Earnings per share were computed based on the following weighted
average outstanding shares:
Nine months ended September 30, 1996..........3,016,000
Nine months ended September 30, 1995..........2,490,000
6
CALIFORNIA COMMERCIAL BANKSHARES
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations.
The purpose of this discussion is to provide additional information about the
Company's financial condition and results of operations which is not otherwise
apparent from the consolidated financial statements included in this interim
report. Since the banking subsidiary represents most of the Company's activity
and investment, the following discussion relates primarily to the financial
condition and operations of the Bank.
The following chart shows comparative data for selected items of the financial
statements:
Averages for the
three months ended
Percent
September 30 September 30 Increase/
1996 1995 (Decrease)
(in thousands) ------------ ------------ ----------
Total Assets: $356,874 $321,415 11.03
Investment securities: 92,272 63,581 45.12
Fed funds sold: 28,656 28,492 .57
Gross loans: 202,065 200,388 .84
Total deposits: 328,101 295,578 11.00
Interest bearing deposits 187,011 191,562 (2.38)
Other interest bearing liabilities: 2,406 2,351 2.34
Averages for the
nine months ended
Percent
September 30 September 30 Increase/
1996 1995 (Decrease)
(in thousands) ------------ ------------ ----------
Total Assets: $343,348 $305,391 12.43
Investment securities: 79,799 59,210 34.77
Fed funds sold: 35,365 19,104 85.12
Gross loans: 197,547 200,938 (1.69)
Total deposits: 310,130 279,214 11.07
Interest bearing deposits 183,475 183,195 .15
Other interest bearing
liabilities: 2,368 2,600 (8.92)
During 1995 the Company employed additional staff in its business development
department. As a result, the deposits and total assets continued to increase in
1995 and 1996. However, the total loans remained stable as the Bank continued
to work on collecting problem loans and economic growth in the area remained
modest while competition remained strong for high quality loans. The
combination of increased deposits and lower loans outstanding, resulted in
increased liquidity which was invested in investment securities and Fed Funds
sold. Other interest bearing liabilities are comprised of note payable in the
amount of $2,350,000, securities sold under agreement to repurchase, and Fed
Funds purchased. During 1996, no securities were sold under repurchase
agreement.
7
The following table shows average earning assets and interest bearing
liabilities and their relative cost and yield without loan fees and loan costs.
For the three months ended September 30,
1996 1995
-------------- ---------------
Percent
Increase/ Yield
(in thousands) Amt Yld Amt Yld (Decrease) Diff
-------- ---- -------- ---- ---------- ------
Average Earning
Assets $322,993 8.05 $292,461 8.06 10.44 (.01)
Average interest
bearing liabilities $189,416 3.56 $193,913 3.85 (2.32) (.29)
For the nine months ended September 30,
1996 1995
-------------- ---------------
Percent
Increase/ Yield
(in thousands) Amt Yld Amt Yld (DECREASE) Diff
-------- ---- -------- ---- --------- ------
Average Earning
Assets $312.711 8.29 $279,252 8.48 11.98 (.19)
Average interest
bearing liabilities $187,038 3.64 $185,795 3.85 .67 (.21)
During the second quarter of 1996 the Company sold three loans which had been
designated as "Available for Sale" during the third quarter of 1995. The sale
resulted in a gain of $1,003,000 and collection of unrecognized interest income
of $120,000. Additionally the Company placed three loans on accrual which had
been on non-accrual and recognized interest income of $319,000. Of the total
interest recognized on loans sold and loans placed on accrual during the nine
months ended September 30, 1996, $272,000 interest pertains to the year 1995.
The foregoing items increased the stated yield as reflected in the charts above.
(See results of operations.)
According to Company policy loans past due 90 days or more as to interest or
principal payments are placed on non-accrual. Loans accounted for on a non-
accrual basis amounted to $6,833,000 on September 30, 1996 as compared to
$7,751,000 on September 30, 1995. Other real estate owned totaled $2,836,000 on
September 30, 1996 as compared to $4,906,000 on September 30, 1995.
The Company follows SFAS 114 with respect to impaired loans which states - "A
loan is impaired when, based on current financial 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 - All amounts due according to the
contractual terms means that both the contractual interest payments and the
contractual principal payments of a loan will be collected as scheduled in the
loan agreement." (See Accounting Pronouncements)
A loan is not considered impaired during a period of delay in payment if the
Company expects to collect all amounts due including interest accrued at the
contractual interest rate for the period of delay. Six months is the maximum
period of delay allowed before a loan is considered impaired. As of September
30, 1996 the aggregate amount of impaired loans measured under present value
method and fair value methods were $4,197,000.
The following loans are exempt from SFAS 114 due to their characteristics as
smaller balance homogeneous loans; credit card loans, leases, overdraft
protection loans and consumer loans. Risk in these loans is accounted for by
applying an historic loss percentage to the loan pool.
Difference between non-accrual and impaired loans:
Non-Accrual Loans - These loans are on non accrual primarily for one of two
reasons; 1) the loan is past due in interest or principal payments for 90 days
or more but sufficient collateral is held to offset any potential loss, or 2)
full payment of all principal plus interest is doubtful.
Impaired Loan - A loan can be impaired also for two reasons; 1) a restructure of
the original note has occurred resulting in a reduced interest rate. Then the
loan is considered impaired due to present value calculations, or 2) full
collection of all principal and interest as currently scheduled is not expected.
The Company's policy with respect to the recognition of interest income for
impaired loans is to recognize the income on an accrual basis for only those
loans that are not on non-accrual. If the loan is on non-accrual the interest
received is
8
generally not recognized as income, however it is applied as reduction to the
principal. Income may be recognized on a cash basis on non-accrual loans only if
the net principal balance is adequately covered by collateral and has shown a
minimum of six months performance to current program.
The following table shows the total charge offs, recoveries and the net result
for the three months and nine months ended September 30, 1996 and 1995.
For the three months ended For the nine months ended
September 30 September 30
1996 1995 1996 1995
-------- ---------- ---------- -----------
Charge Offs $1,060 $4,111 $2,766 $5,909
Recoveries 100 250 328 387
Net charge Offs
(recoveries) $ 960 $3,861 $2,438 $5,522
For the three months and nine months ended September 30, 1996 the Company added
$0 and $700,000 respectively to its reserve which compares with $3,274,000 and
$4,274,000 for the same periods in 1995. The reserve balance as of September
30, 1996 was $4,803,000 which was 2.39% of total loans and leases which compares
with $4,454,000 and 2.24%, respectively, on September 30, 1995.
RESULTS OF OPERATIONS
Interest Income and Interest Expense
- ------------------------------------
The Company's primary source of revenue is interest income. The net yield
without the loan fees on interest earning assets increased to 5.96% and 6.11%
for the third quarter and nine months ended September 30, 1996 from 5.51% and
5.92% during the same periods of 1995. The net interest income without the
loan fees increased to $4,856,000 and $14,296,000 for the three and nine months
ending September 30, 1996 from $4,059,000 and $12,359,000 for the same periods
of 1995. The average yield on earning assets remained approximately the same
for the third quarter of 1996 and 1995. The average yield on earning assets for
the nine months ending September 30, 1996 declined to 8.29% from 8.48% in 1995.
This is due to increased deposits and low growth in loans resulting in excess
liquidity invested in low yielding investment securities and fed funds sold.
The average interest rate paid on interest bearing liabilities decreased by .29%
from 3.85% in the third quarter of 1995 to 3.56% in 1996 and by .21% from 3.85%
for the nine months ending September 30, 1995 to 3.64% for the same periods of
1996.
During 1996 the Company sold one loan and placed two loans on accrual which had
been on non-accrual and recognized interest income of $439,000. Of the total
interest recognized on loans sold and loans placed on accrual during 1996,
$40,000 pertains to the second quarter of 1996, $126,000 pertains to the first
quarter of 1996 and $272,000 pertains to the year 1995. If adjusted for the
above the yield on earning assets for the third quarter and nine months ending
September 30, 1996 would have been 8.17% and 8.61% respectively.
The average outstanding loans have remained stable as the Company focused on
monitoring the performance of the outstanding loans, identifying potential
problems and collecting identified problem loans and selling real estate owned.
At the same time, the Company has maintained its loan underwriting and approval
process, seeking higher quality credits which reduced the volume of loans
meeting the tightened criteria. The lower loan growth combined with significant
increase in non - interest bearing demand deposits resulted in excess liquidity
which was invested in low yielding short term securities and Fed Funds.
9
The following table shows the average balances of interest earning assets and
interest bearing liabilities and interest earned and paid on those balances.
Three months ended
September 30, 1996 September 30, 1995
----------------------------- -----------------------------
Average Interest Average Interest
Assets Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- --------
Securities 92,272 1,385 5.96 63,581 850 5.31
Fed Funds 28,656 394 5.45 28,492 415 5.78
Loans 202,065 4,776 9.38 200,388 4,677 9.26
------- ------ ----- ------- ------ ----
TOTAL 322,993 6,555 8.05 292,461 5,942 8.06
------- ------ ----- ------- ------ ----
Liabilities
Savings 131,946 952 2.86 124,115 856 2.74
Time 55,064 678 4.88 67,448 976 5.74
Other 2,406 69 11.38 2,350 51 8.66
------- ------ ----- ------- ------ ----
TOTAL 189,416 1,699 3.56 193,913 1,883 3.85
------- ------ ----- ------- ------ ----
Net Interest
Income 4,856 4,059
Yield on Earning
Assets 5.96 5.51
Nine months ended
September 30, 1996 September 30, 1995
----------------------------- -----------------------------
Average Interest Average Interest
Assets Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- --------
Securities 79,799 3,558 5.96 59,210 2,390 5.40
Fed Funds 35,365 1,402 5.30 19,104 834 5.84
Loans 197,547 14,438 9.76 200,938 14,481 9.64
------- ------ ----- ------- ------ ----
TOTAL 312,711 19,398 8.29 279,252 17,705 8.48
------- ------ ----- ------- ------ ----
Liabilities
Savings 125,761 2,693 2.86 121,316 2,548 2.81
Time 58,909 2,210 5.01 61,879 2,644 5.71
Other 2,368 199 11.23 2,600 154 7.91
------- ------ ----- ------- ------ ----
TOTAL 187,038 5,102 3.64 185,795 5,346 3.85
------- ------ ----- ------- ------ ----
Net Interest
Income 14,296 12,359
Yield on Earning
Assets 6.11 5.92
Other Income and Other Expenses - Non-interest income decreased by $203,000 to
- -------------------------------
$448,000 in the third quarter of 1996 compared to $651,000 in the same period a
year ago. For the nine months ending September 30, 1996 the non-interest income
increased by $1,298,000 to $2,960,000 from $1,662,000 a year ago. The changes
were due to the following:
1. Escrow fees increased by $162,000 for the quarter and $387,000 for the nine
months ending September 30, 1996. The increase was due to increased marketing
efforts and an increase in staff in the escrow division, along with greater
activity in the local real estate market.
2. Service charges increased by $55,000 for the quarter and $176,000 for the
nine months ending September 30, 1996. The increase was due to the increase in
deposits.
3. During first quarter of 1995 the Company sold some securities in the amount
of approximately $21,000,000 at a loss of $72,000. These securities were
originally purchased with very short maturities to meet a projected cash outflow
during the first quarter of 1995.
4. Gain on sale of loans - During second quarter of 1996 the Company sold three
loans which were designated as "Available for Sale", at gain of $1,003,000.
During third quarter of 1996 the company wrote down a loan by $338,000 resulting
in net gain of $665,000 for the nine months ending September 30, 1996 on loans
designated as "Available for Sale."
5. Other income decreased by $82,000 for the quarter and increased by $70,000
for the nine months ending September 30, 1996. The changes were in various
categories.
10
Non-interest expense increased by $138,000 from $4,438,000 in the third quarter
of 1995 to $4,576,000 in 1996. For the nine months ending September 30, 1996
the expense increased by $827,000 from $12,388,000 in 1995 to $13,215,000 in
1996. Following is a summary of changes in various categories of non-interest
expense for the third quarter of 1996 and nine months ending September 30, 1996
compared to the same periods of 1995.
Summary of Changes
---------------------------
Nine months Three months
----------- ------------
Salaries & Benefits $ 811,000 $ 238,000
Occupancy, Furniture & Eq. 236,000 107,000
Date Processing 621,000 278,000
Supplies 69,000 27,000
Legal Fees 836,000 307,000
Regulatory Assessments (127,000) 6,000
Losses (Gain) on OREO (2,162,000) (1,034,000)
Other 543,000 209,000
----------- -----------
Total $ 827,000 $ 138,000
The major increases or decreases were in the following categories:
1. Salaries and benefits increased due to additions to the staff in the escrow
division due to increasing business activity(see Results of Operation-Other
Income), in business development to generate future loan and deposit growth
and opening of a new branch in Fountain Valley.
2. Occupancy expense increased due to an assessment of common area maintenance
charges by the management company for the years 1993, through September of
1996, which had not been billed for the Newport Beach location. Also,
opening the new branch in Fountain Valley added to the occupancy expense.
3. Data Processing increased due to upgrading the Bank's data processing systems
and increases related to data processing expenses that the Bank incurs for
its customers who maintain large profitable accounts.
4. Legal fees remained high as the Bank continues to resolve problem loans and
other litigation matters and for that purpose the Company reserved $400,000
during 1996. Management of the Company evaluates the Company's or the Bank's
exposure to litigation matters individually and in the aggregate and provides
for potential losses on such litigation if, in management's judgment, the
amount of the loss is determinable and the incurrence of the loss is
probable.
There are currently two legal matters described below which involve a claim
of damages in excess of $750,000.
National Bank adv. Rousseau et al is a class action lawsuit filed, in San
Diego Superior Court on July 7, 1995 for aggregate losses exceeding
$130,000,000 by investors with accounts administered by First Pension
Corporation. The Bank, in its custodial capacity has been named as a
defendant in the action. Additionally, a receiver for First Pension
Corporation has filed a similar action in the U. S. District Court for the
Central District of California. An answer to the complaint in the U.S.
District Court is due by November 21, 1996. No discovery has been undertaken
on the actions.
National Bank of Southern California, plaintiff, vs. Vincent E.
Galewick/Performance Development, Inc. Is an interpleader action filed by the
Bank on August 22, 1995 in the Orange County Superior Court in response to an
order to freeze the defendant's account and claims against such accounts
received from other parties. The defendant filed a cross complaint against
the Bank claiming damages for lost profits of $45,000,000 arising from the
Bank's freezing the accounts. A related action, Larry L. Curran VS. National
Bank of Southern California, alleges damages of $3,960,000 and has been
consolidated with the Galewick action.
5. Regulatory Assessments decreased as FDIC reduced the assessment rate from
.29% per $100 in annualized deposits in 1995 to .17% in 1996.
6. Gain or loss on REO: In 1995, the total losses and expenses on other real
estate owned were $1,101,000 for the third quarter and $1,962,000 for the
nine months. With the reduced amount of other real estate owned in 1996 the
expense has declined significantly. Additionally, in the second quarter of
1996 the Company sold two foreclosed properties at a gain of $425,000
resulting in gain of $200,000 for the nine months ending September 30, 1996.
11
Accounting Pronouncements
- -------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets to Be Disposed Of and SFAS No. 122, Accounting for Mortgage
Servicing Rights, an amendment to FASB Statement No. 65. The provisions of
these statements are effective for financial statements for fiscal years
beginning after December 15, 1995. The Company does not believe the application
of SFAS Nos. 121 and 122 will have a material impact on its financial condition
and results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which requires adoption of the disclosure provisions no later than
fiscal years beginning after December 15, 1995 and adoption of the recognition
and measurement provisions for non-employee transactions no later than after
December 15, 1995. The new standard defines a fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period.
Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and, if presented, earnings per share as if the
company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has not yet determined if it will elect to change to fair value method, nor has
it determined the effect the new standard will have on net income and earnings
per share should it elect to make such a change. Adoption of the new standard
will have no effect on the Company's cash flow.
Liquidity and Capital Resources
- -------------------------------
It is the Company's policy to always maintain adequate liquidity in cash,
federal funds and in readily marketable government securities. The Company's
total liquid assets on September 30, 1996 were: Cash and Due From Banks
$25,151,000, Federal Funds Sold $15,000,000, and Investment Securities free of
collateral $92,938,000; totaling $133,089,000 or 38% of total assets.
Additionally, the majority of the Company's loans are on a short term basis,
maturing in approximately one year, which, combined with lines of credit with
correspondent banks, provides additional liquidity.
In December 1988, the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
Bank. The Credit Agreement for this loan was amended pursuant to a Second
Amendment to the credit agreement dated August 25, 1994. The loan, as amended,
bears interest at a fluctuating rate per annum equal to .75% in excess of the
lender's reference rate. Interest was payable monthly on the unpaid principal
balance of the loan and required prepayment of 40% of the proceeds of any stock
offering or placement of debt or equity. Principal was to be repaid January 1,
1997. The Second Amendment was supported by a Support Agreement between a
shareholder Director of the Company and the Company whereby the shareholder
guaranteed the payment of the loan.
To compensate the shareholder Director for signing the Support Agreement, the
Company signed a Holding Company Support Agreement whereby the Company: (1)
paid the shareholder a standby fee of $23,500 in 1994 and 1995, and (2) will
issue to the shareholder on or prior to March 31, 1997 warrants to purchase
25,000 shares of common stock of the Company at an exercise price per share
equal to 80% of the book value per share of the Company on December 31, 1996.
In March of 1996 the Company obtained a loan for $2,350,000 from the shareholder
Director and paid off the outstanding balance of $2,350,000 to the lending
financial institution. The new note bears an interest rate of 3% over prime
rate with interest only payable quarterly for the first year and thereafter
$125,000 plus interest payable quarterly. The remaining principal and interest
is due on April 1, 1999.
During the third quarter of 1995, the Company obtained $3,200,000 in proceeds
from a private placement of the Company's common stock. The Company contributed
$2,900,000 of the proceeds into the Bank as additional capital.
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On December 31, 1990, new risk based capital requirements became effective.
Under the requirements, holding companies and banks are required currently to
maintain minimum ratios of total capital and "core" (Tier 1) capital to risk-
weighted assets; however, under the terms of its formal agreement with the
Comptroller, the Bank is required to maintain capital in excess of this minimum
requirement. The regulatory capital requirements, capital requirements under
the formal agreement and the Bank and Company's actual capital ratios are shown
in the following table as of the dates indicated:
At September 30
1996 1995
Excess Excess
Per Excess to Per Excess to
Minimum Formal to Formal Minimum Formal to Formal
Statutory Agreement Actual Statutory Agreement Statutory Agreement Actual Statutory Agreement
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FOR THE BANK
Risk-based Capital:
Tier 4.00% n/a 11.00% 7.01% n/a 4.00% n/a 9.32% 5.32% n/a
Total Risk-based 8.00% 9.00% 12.25% 4.25% 3.25% 8.00% 9.00% 10.57% 2.57% 1.57%
Tier 1 leverage
Ratio(1) 4.00% 6.00% 7.13% 3.13% 1.13% 4.00% 6.00% 6.45% 2.45% .45%
FOR THE COMPANY
Risk-based Capital:
Tier 4.00% n/a 10.33% 6.33% n/a 4.00% n/a 8.55% 4.55% n/a
Total Risk-based 8.00% n/a 11.58% 3.58% n/a 8.00% n/a 9.79% 1.79% n/a
Tier 1 leverage/a
Ratio 4.00% n/a 6.72% 2.72% n/a 4.00% n/a 5.96% 1.96% n/a
(1) In some circumstances this minimum ratio may be 3%.
As of September 30, 1996 and 1995, the Bank and the Company were in compliance
with statutory risk-based capital requirements and the Bank was in compliance
with the more stringent capital requirements imposed by the Formal Agreement.
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CALIFORNIA COMMERCIAL BANKSHARES
SIGNATURES:
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALIFORNIA COMMERCIAL BANKSHARES
(Registrant)
Date: November 13, 1996 /s/ WILLIAM H. JACOBY
-------------------- ------------------------
William H. Jacoby
President, CEO
Date: November 13, 1996 /s/ ABDUL S. MEMON
------------------- ------------------------
Abdul S. Memon
Chief Financial Officer
14