SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT: July 23 , 1998
----------------------------------
Community West Bancshares
-----------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California
------------------------------------------------------------------
(State or other jurisdiction of incorporation)
0-23575 77-0446957
------------------------ --------------------------
(Commission File Number) (IRS Employer I.D. Number)
5638 Hollister Avenue, Goleta, California 93117
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(Address of principal executive offices) (Zip Code)
(805) 692-1862
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(Registrant's telephone number, including area code)
ITEM 5. Other Events
On April 23, 1998, Community West Bancshares ("Community West") entered
into an Agreement and Plan of Reorganization with Palomar Savings and Loan
Association ("Palomar"), pursuant to which CWB Merger Corp, a wholly-owned
subsidiary of Community West, will merge with and into Palomar whereby the
separate corporate existence of CWB Merger Corp will cease and Palomar will
become a wholly-owned subsidiary of Community West.
Goleta National Bank, a national banking association ("Goleta"), is a
wholly-owned subsidiary and predecessor institution of Community West.
Community West was formed as a holding company for Goleta on December 31, 1997.
In connection herewith, Community West Bancshares hereby files in each case
as filed with the Office of the Comptroller of the Currency, (i) Goleta's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 as Exhibit 99.1
hereto; (ii) Goleta's Quarterly Reports on Form 10-Q for the quarters ended June
30 and September 30, 1996 as Exhibits 99.2 and 99.3, respectively; (iii)
Goleta's Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30 and September 30, 1997 as Exhibits 99.4, 99.5 and 99.6, respectively.
<PAGE>
ITEM 7. Financial Statements, Pro forma Financial Statements and Exhibits.
(c) Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ---------------------------------------------------------------------------------
<C> <S>
99.1 Goleta's Annual Reports on Form 10-K for the fiscal year ended December 31, 1996.
99.2 Goleta's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
99.3 Goleta's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
99.4 Goleta's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
99.5 Goleta's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
99.6 Goleta's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
</TABLE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunder duly authorized.
Dated: July 23, 1998
COMMUNITY WEST BANCSHARES
By: /S/ C. Randy Shaffer
--------------------
C. Randy Shaffer
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
- ------- ---------------------------------------------------------------------------------
<C> <S>
99.1 Goleta's Annual Reports on Form 10-K for the fiscal year ended December 31, 1996.
99.2 Goleta's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
99.3 Goleta's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
99.4 Goleta's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
99.5 Goleta's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
99.6 Goleta's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
</TABLE>
FORM 10-K
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from ______ to ______
Commission File Number:
GOLETA NATIONAL BANK
(Exact name of registrant as specified in its charter)
California 77-0194455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5827 Hollister Ave., Goleta, California 93117
Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 683-4944
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered: NASDAQ
Common Stock National Market tier of The NASDAQ Stock Market
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act and 12CFR16.3 during the
past 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[ ]
by section 13 or 15(d) of the Securities Exchange Act of 1934 and 12CFR16.3
during the preceeding 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.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
There were 1,478,862 shares of common stock for the registrant issued and
outstanding as of March 27, 1997. The aggregate market value of the voting
stock, based on the closing price of the stock on the NASDAQ National Market on
March 27, 1997, held by nonaffiliates of the registrant was approximately
$18,778,237
December 31, 1996
This Form 10-K contains 52 pages.
<PAGE>
GOLETA NATIONAL BANK
FORM 10-K
INDEX
<TABLE>
<CAPTION>
PART I PAGES
<S> <C>
ITEM 1. Description of Business 3
ITEM 2. Description of Property 4
ITEM 3. Legal Proceedings 5
ITEM 4. Submission of Matters to a Vote of Security Holders 6
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
ITEM 6. Selected Financial Data 7
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
ITEM 8. Financial Statements 29
PART III
ITEM 9. Changes in and Disagreements with Accountants on 48
Accounting and Financial Disclosure
ITEM 10. Directors and Executive Officers of the Registrant 48
ITEM 11. Executive Compensation 49
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 50
ITEM 13. Certain Relationships and Related Transactions 51
PART IV
ITEM 14. Exhibits and Reports of Form 8-K 51
SIGNATURES 52
</TABLE>
3
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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General
The Bank opened for business as a national banking association on August 21,
1989. The deposits of the Bank are insured up to the applicable limits by the
FDIC, and the Bank is a member of the Federal Reserve System. The Bank's main
office is located at 5827 Hollister Avenue, Goleta, California.
The Bank currently has no parents, affiliates or subsidiaries. However, on
March 26, 1997 the Bank announced the signing of a letter of intent to merge
with Los Robles Bancorp for the purpoes of creating a multi-bank holding
company. Under the proposed agreement Los Robles Bancorp ("LRBC") will be
renamed Community West Bancshares ("CWB"). Upon completion of the merger, the
Bank and Los Robles Bank, an existing subsidiary of LRBC, will become member
bank subsidiaries of CWB.
The letter of intent, subject to the preparation and execution of definitive
agreement to merge, requires the approval of the shareholders of both the Bank
and LRBC, as well as state and federal regulatory agencies. The transaction is
expected to be consumated during the fourth quarter of 1997.
The Bank offers a full range of commercial banking services, including the
acceptance of demand savings and time deposits, and the origination of
commercial, U.S. Small Business Administration ("SBA"), accounts receivable,
real estate, construction, home improvement, and other installment and term
loans. It also offers cash management, remittance processing, electronic
banking, merchant credit card processing, and other customary bank services to
its customers.
The banking industry as a whole offers a broad range of products and services.
Few banks today can effectively offer every product and service available.
Accordingly, the Bank continually investigates products and services where it
can attain a competitive advantage over others in the banking industry. In this
way, management positions the Bank to offer those products and services
requested by its customers ahead of its competition.
The Bank has been an approved lender/servicer of loans guaranteed by the SBA
since late 1990. The Bank originates SBA loans, sells the guaranteed portion
into the secondary market, and services the loans. During 1995, the Bank was
designated as a Preferred Lender by the SBA. As a Preferred Lender, the Bank
has the ability to move loans through the approval process at the SBA much more
quickly than financial institutions which do not have such a designation. As of
December 31, 1996, the Bank was the only SBA Preferred Lender Headquartered in
Santa Barbara County.
During 1994, the Bank established a Mortgage Loan Processing Center. Through
the Mortgage Loan Processing Center, the Bank takes applications for residential
real estate loans and processes those loans for a fee, for lenders located
throughout the nation. At any point in time, the Bank processes loans for 50-70
such lenders. Because it has so many lenders for which it processes, the Bank
can offer many more loan programs than normally offered by any single
institution. By virtue of the large number of loan programs being offered, the
Bank has developed the ability to remain ahead of its competition.
Also in 1994, the Bank began offering home improvement loans under Title 1 of
FHA regulations. This is the oldest government insured loan program in
existence, having begun in 1934. The Bank originates Title 1 loans and sells
them into the secondary market and retains the servicing. In early 1995, the
Bank was approved as one of a small number of financial institutions to be able
to sell Title I loans directly to the Federal National Mortgage Association
("FNMA"). FNMA is now the largest buyer of Title 1 loans in the country. This
approval has given the Bank a competitive advantage over nonapproved lenders
because it can price loans at lower rates to customers and reduce or eliminate
fees normally charged to customers, while at the same time increasing the
profitability to the Bank.
In 1996, the Bank began accounts receivable financing, providing working capital
to small and mid-sized manufacturers, distributors and merchants throughout
Southern California. This division complements the Bank's SBA and commercial
lending products, in addition to generating a high annual yield.
Because of the development costs involved, most small community banks have
difficulty providing electronic
banking services to their customers. From its inception, the Bank has invested
heavily in the hardware and software
necessary to offer today's electronic banking services. In addition to the
normal banking services, the Bank offers such services as on-line cash
management, automated clearinghouse origination, electronic data interchange,
remittance processing, draft preparation and processing, and merchant credit
card processing. Not only do these services generate significant fee income,
they attract companies with large deposit balances. These services have helped
the Bank remain at a competitive advantage over most institutions its size and
many which are significantly larger than the Bank.
Competition and Service Area
The banking business in California, is highly competitive with respect to both
loans and deposits and is dominated overall by a relatively small number of
major banks with many offices operating over wide geographic areas. Some of the
major commercial banks operating in the communities nearby the Bank's service
area offer certain services such as trust and investment services and
international banking which are not offered directly by the Bank, and by virtue
of their greater total capitalization, such banks have substantially higher
lending limits than the Bank. To help offset the numerous branch offices of
banks, thrifts, and credit unions, as well as competition from mortgage brokers,
insurance companies, credit card companies, and brokerage houses within the
Bank's service area, the Bank has established loan production offices in Fresno,
Bakersfield, Santa Maria, Santa Barbara, Ventura/Oxnard, and Huntington Beach in
California, and in Las Vegas, Nevada. The Bank's on-line capabilities allow it
to support these offices from its main computer center in Goleta. Part of the
Bank's strategy is to establish loan production offices in areas where there is
high demand for the loan product which it originates and sells to others.
In order to compete for loans and deposits within its primary service area, the
Bank uses to the fullest extent possible the flexibility which its independent
status permits. This includes an emphasis on meeting the specialized banking
needs of its customers, including personal contact by the Bank's directors,
officers, and employees, newspaper publications, direct mailings and other local
advertising, and by providing experienced management and staff trained to deal
with the specific banking needs of the Bank's customer. Management has
established a highly personal banking relationship with the Bank's customers and
is attuned and responsive to their financial and service requirements. In the
event there are customers whose loan demands exceed the Bank's lending limits,
the Bank seeks to arrange for such loans on a participation basis with other
financial institutions and intermediaries. The Bank also assists those few
customers requiring highly specialized services not offered by the Bank to
obtain such services from correspondent institutions.
Employees
As of December 31, 1996, the Bank employed 135 persons, including 2 principal
officers. The Bank's employees are not represented by a union or covered by a
collective bargaining agreement. Management of the Bank believes that, in
general, its employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
- -----------------------------------
The Bank owns the following property:
The Goleta Branch office, located at 5827 Hollister Ave, Goleta, California.
This 4,000 square foot facility houses the Bank's main office. An adjacent
200 square foot buiding houses the Accounts Receivable Financing department.
The Bank leases the following properties:
The Bank leases, under three separate leases, four suites in an office building
at 5638 Hollister Avenue, Goleta, California from an independent third
party. The leases are for a term expiring May 31, 1998 with a current monthly
rent of $7,953 per month for all four suites. The leases also provide the Bank
with two additional consecutive options of three years each to extend the
leases. The suites consist of approximately 5,435 square feet of office space.
These suites house the Finance, Data Processing, and HUD Title 1 lending
departments.
The Bank leases approximately 1,500 square feet of office space located at 310
South Pine Avenue, Goleta, California from an independent third party. The
lease is for a term expiring October 1, 1998 with a current monthly rent of
$800 per month. The lease also provides the Bank with two additional
consecutive options of three years each to extend the lease. This facility
houses the Small Business Administration ("SBA") Lending department.
The Bank leases approximately 2,718 square feet of office space located at 3891
State Street, Santa Barbara, California from an independent third party. The
lease is for a term expiring November 1, 1999 with a current monthly rent of
$4,077 per month. The lease also provides the Bank with two additional
consecutive options of three years each to extend the lease. This facility
houses the Mortgage Lending department.
The Bank leases approximately 1,500 square feet of office space located at 1300
Eastman Avenue, Ventura, California from an independent third party. The
lease is for a term expiring August 31, 1997 with a current monthly rent of
$2,363 per month. The lease also provides the Bank with one option of three
years to extend the lease. This facility houses the Ventura County Loan
Production office.
The Bank leases approximately 630 square feet of storefront space located at
2222 South Broadway, Suite E, Santa Maria, California from an independent third
party. The lease is for a term expiring October 31, 1998 with a current monthly
rent of $900 per month. The lease also provides the Bank with one option of 12
months to extend the lease. This facility houses the Santa Maria Loan
Production office.
The Bank leases approximately 1,032 square feet of storefront space located at
4170 South Decatur, Unit D-4, Las Vegas, Nevada from an independent third party.
The lease is for a term expiring February 28, 2000 with a current monthly rent
of $1,806 per month. This facilitiy houses the Las Vegas, Nevada Loan
Production office.
The Bank also leases small executive suites on a month-to-month basis in
Bakersfield, Fresno, and Huntington Beach, California. These offices allow the
Bank to have a local presence for the production of loans while controlling the
underwriting and funding of the loans at the main office in Goleta.
The Bank's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 1996 was $574,000. Management believes
that its existing facilities are adequate for its present purposes. However,
management currently intends to increase the Bank's assets over the next several
years and anticipates that a portion of this growth may be accomplished through
acquisition or de novo opening of additional banking offices.
ITEM 3. LEGAL PROCEEDINGS
- ----------------------------
From time to time the Bank is party to claims and legal proceedings arising in
the ordinary course of business. After taking into consideration information
furnished by counsel to the Bank, management believes that the ultimate
aggregate liability represented thereby, if any, will not have a material
adverse effect on the Bank's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
No matters were submitted to shareholders during the fourth quarter of 1996.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------------
MATTERS
- -------
The common stock was listed on the NASDAQ National Market ("NASDAQ") on November
19, 1996 under the symbol "GLTB". Prior to listing the stock was traded
Over-the-Counter ("OTC") under the same symbol. OTC quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. During the secondary stock offering which took
place in the third quarter of 1996, warrants were issued. Each warrant entitles
the holder to purchase one share of common stock at an exercise price of $8.75.
The warrants expire on June 30, 1998, and are traded OTC under the symbol
"GLTBW". The following table sets forth the high and low sales prices on a per
share basis for the common stock or a per warrant basis for the warrants as
reported by the respective exchanges for the period indicated:
<TABLE>
<CAPTION>
Common Stock(1) Stock Warrants
Low High Low High
--------------- ----------- ---------- ----------
<C> <S> <C> <C> <C> <C>
1995 First Quarter No Activity No Activity Not Issued Not Issued
Second Quarter 5 1/2 6.00 Not Issued Not Issued
Third Quarter 6.00 6.00 Not Issued Not Issued
Fourth Quarter No Activity No Activity Not Issued Not Issued
1996 First Quarter 6.00 6 7/16 Not Issued Not Issued
Second Quarter 7.00 7.00 Not Issued Not Issued
Third Quarter 7 1/4 9 1/2 1 1/8
Fourth Quarter 8 3/4 10 3/4 2.00 4.00
1997 First Quarter 10 1/2 16 1/2 3 1/2 7 1/4
<FN>
(1) As adjusted for the 1995 10% stock dividend and the 1996 2-for-1 stock
split.
</TABLE>
On March 27, 1997 the last reported sale price per share for the Bank's stock
and warrants were $16 1/2 and $6 1/4 respectively.
The Bank has declared and paid cash dividends per share of $.05, $.05, and $.07
in 1994, 1995 and 1996, respectively. The Bank declared and issued a 10% stock
dividend in 1995, and effected a 2-for-1 stock split in 1996.
The Bank had approximately 520 shareholders of record of its common stock as of
March 27, 1997.
ITEM 6. SELECTED FINANCIAL DATA
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SUMMARY OF EARNINGS
The following Summary of Earnings of the Bank for the three years ended December
31, 1996 has been derived from the audited financial statements of the Bank
included elsewhere in this document. This summary should be read in conjunction
with Financial Statements and Notes relating thereto which appear herein.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
----------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 6,812 $ 6,504 $ 5,180
Interest expense 2,425 2,451 1,680
---------- ---------- ----------
Net interest income 4,387 4,053 3,500
Provision for possible loan losses 435 360.00 700.00
---------- ---------- ----------
Net interest income after provision for possible loan losses 3,952 3,693 2,800
Other operating income 6,620 4,481 2,514
Other operating expense 8,667 6,436 4,204
---------- ---------- ----------
Earnings before income taxes 1,905 1,738 1,110
Provision for income taxes 800 730 463
---------- ---------- ----------
Net income $ 1,105 $ 1,008 $ 647
========== ========== ==========
Earnings per common share $ .86 $ .95 $ .63
Number of shares used in earnings per share calculation (2) 1,281,744 1,064,106 1,033,629
<FN>
(1) See Notes to Financial Statements for a summary of significant accounting policies and other related data.
(2) Earnings per common share information is based on the weighted average number of common shares and
common stock equivalents outstanding during each period assuming full dilution. Earnings per share
amounts have been retroactively restated to reflect the 10% stock dividend issued in 1995 and the
2-for-1
stock split in 1996.
</TABLE>
The following table sets forth selected ratios for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
(Unaudited) YEAR ENDED DECEMBER 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net earnings to average stockholder equity 13.67% 17.89% 13.17%
Net earnings to average total assets 1.52% 1.57% 1.13%
Total interest expense to total interest income 35.59% 37.69% 32.43%
Other operating income to other operating expense 76.39% 69.63% 59.78%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------
The following is management's discussion and analysis of the significant changes
in income and expense accounts presented in the Summary of Earnings for the
three years ended December 31, 1996, 1995 and 1994.
INTRODUCTION
- ------------
This discussion is designed to provide a better understanding of significant
trends related to the Bank's financial condition, results of operations,
liquidity, capital resources and interest rate sensitivity. It should be read
in conjunction with the Bank's audited financial statements and notes thereto
and the other financial information appearing elsewhere in this Filing.
NET INTEREST INCOME AND NET INTEREST MARGIN
- -------------------------------------------------
Total interest income increased from $5,179,800 in 1994 to $6,504,315 in 1995,
and to $6,812,072 in 1996, representing a 25.6% increase in 1995 over 1994 and a
4.7% increase in 1996 over 1995. The increase in 1995 over 1994 was reflected
by a 14.4% increase because of an increase in interest-earning assets and 11.2%
increase because of higher interest rates. The increase in 1996 over 1995 was
reflected by a 7.1 % increase because of an increase in interest-earning assets
offset by a 2.4% decrease because of lower rates. Total interest expense
increased from $1,679,877 in 1994 to $2,451,472 in 1995 and decreased to
$2,424,730 in 1996, representing a 45.9% increase in 1995 over 1994 and a 1.1%
decrease in 1996 compared to 1995. The increase in 1995 over 1994 was reflected
by a 11.1% increase because of an increase in interest-bearing liabilities and a
34.8% increase because of higher interest rates paid on deposits. The decrease
in 1996 from 1995 was reflected by a 6.0 % increase because of an increase in
interest-bearing liabilities offset by a 7.1% decrease because of lower rates
paid on deposits. The result of these changes was that net interest income
increased from $3,499,923 in 1994 to $4,052,843 in 1995 and to $4,387,342 in
1996. It should be noted, as a benchmark rate, the prime interest rate as
quoted in the Wall Street Journal was 8.5% at December 31, 1994. Prime
continued to climb so that by mid-1995 it was 9.0%, and by year-end 1995 it had
fallen to 8.50%. In 1996, prime decreased slightly to 8.25%
The Bank's net interest margin (net interest income divided by average
interest-earning assets) was 6.8% in 1994, 7.0% in 1995, and 6.8% in 1996. The
differences in net interest margins in 1995 over 1994 and in 1996 over 1995
were primarily because of increases in volumes of earning assets. The following
table sets forth the changes in interest income and expense attributable to
changes in rates and volumes:
Analysis of Changes in Net Interest Income
- ------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1996 Versus 1995 1995 Versus 1994
Change Change Change Change
Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume
-------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Time deposits in other financial institutions $ (86) $ (15) $ (71) $ 24 $ 53 $ (29)
Federal Funds sold 22 (28) 6 105 81 24
Investment securities 52 (6) 58 33 3 30
Loans, net 364 (150) 514 1,163 388 775
-------- -------- -------- ------- ------- --------
Total interest-earnings assets 308 (154) 462 1,324 580 744
-------- -------- -------- ------- ------- --------
Interest bearing demand (NOW, MMDA) 21 (24) 3 107 89 18
Savings 27 (62) 35 184 62 122
Time certificates of deposit 22 (93) 115 481 435 46
-------- -------- -------- ------- ------- --------
Total interest-bearing liabilities (26) (172) 146 772 586 186
-------- -------- -------- ------- ------- --------
Net interest income $ 334 $ 35 $ 299 $ 553 $ 70 $ 483
======== ======== ======== ======= ======= ========
</TABLE>
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
The following is a summary of changes in earnings of the Bank for the years
ended December 31, 1996 and 1995. This summary of changes in earnings should
be read in conjunction with the Financial Statements and Notes relating thereto
appearing elsewhere herein.
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
The following is a summary of changes in earnings of the Bank for the years
ended December 31, 1996 and 1995. This summary of changes in earnings should
be read in conjunction with the Financial Statements and Notes relating thereto
appearing elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands) 1996 over 1995 1995 over 1994
Amount of % of Amount % of
Change Change(1) of Change Change(1)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 364 6.1% $ 1,163 24.2%
Interest on federal funds sold (22) (7.2) 105 51.7
Interest on time deposits in other
financial institutions (86) 49.4 24 16.0
Interest on investment securities 52 108.3 33 200.0
Total interest income 308 4.7 1,325 25.5
INTEREST EXPENSE
Interest on deposits (26) (1.1) 772 45.9
Net interest income 334 8.2 553 15.8
PROVISION FOR LOAN LOSSES 75 20.8 (340) (48.6)
Net interest income after provision for loan losses 259 7.0 893 31.9
OTHER INCOME
Gains from loan sales (313) (21.8) 63 4.7
Excess servicing from loan sales 405 37.1 1,089 N/A
Loan origination fees - sold or brokered loans 1,326 181.40 477 187.8
Loan servicing fees 96 16.60 95 19.6
Service charges 218 58.60 85 29.6
Document processing fees 426 507.10 35 71.4
Other income (19) (9.8) 124 179.7
Total other income 2,139 47.7 1,969 78.2
OTHER EXPENSE
Salaries and employee benefits 1,528 38.9 1,532 64
Occupancy expenses 199 20.2 269 37.5
Other operating expenses 139 21.5 197 43.5
Postage & freight 378 229.1 110 200.0
Advertising expense 29 10.3 117 70.9
Professional services (72) (22.6) (8) (2.5)
Office supplies 31 27.9 15 15.6
Total other expenses 2,231 34.7 2,232 53.1
Income before provision for income taxes 167 9.7 629 56.7
PROVISION FOR INCOME TAXES 70 9.6 267 57.7
NET INCOME $ 97 9.6% $ 362 55.8%
<FN>
(1) Increase or (decrease) over previous year amount.
</TABLE>
OTHER INCOME
- -------------
Other income increased from $2,513,844 in 1994 to $4,481,256 in 1995 and to
$6,620,491, representing a 78.2% increase in 1995 over 1994 and a 47.7% increase
in 1996 over 1995. These year-to year gains are a reflection of the increases
in SBA loan originations, sales, and servicing, as well as the development of
the mortgage loan processing center in 1994 and the significant growth in the
origination, sales, and servicing of home improvement loans during both 1995 and
1996. In addition, fees from electronic banking services have increased
dramatically over the last two years. The Bank's percentage coverage of other
expenses with other income rose from 59.8% in 1994 to 69.6% in 1995 and 76.4% in
1996.
OTHER EXPENSES
- ---------------
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Bank required
additional staff and overhead expense to support the continued high level of
customer service and increased the cost of occupying the Bank's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Bank personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other expenses
increased from $4,204,380 in 1994 to $6,436,271 in 1995 and to $8,666,933 in
1996, representing a 53.1% in 1995 over 1994 and a 34.7% increase in 1996 over
1995. The increases in other expenses for the periods compared were primarily
because of compensation related to loan originations and sales, the upgrading of
data processing hardware and software, and the increase in the number of loan
production and processing offices.
The following table compares the various elements of other expenses as a
percentage of average assets for the three years ended December 31, 1996. (in
thousands except percentage amounts.)
<TABLE>
<CAPTION>
Salaries Other
Average and Employee Occupancy Operating
Period Assets(1) Benefits Expenses Expenses
Year Ended
December 31,
<S> <C> <C> <C> <C>
1996 $ 72,718 7.50% 1.63% 2.79%
1995 $ 64,245 6.11% 1.54% 2.37%
1994 $ 57,136 4.19% 1.26% 1.91%
<FN>
(1) Based on the average of daily balances.
</TABLE>
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision for loan losses corresponds directly to the level of the allowance
that management deems sufficient to offset potential loan losses. The balance
in the loan loss allowance reflects the amount which, in management's judgement,
is adequate to provide for these potential loan losses, after weighing the mix
of the loan portfolio, current economic conditions, past loan experience and
such other factors as deserve recognition in estimating loan losses.
Management allocated $435,000 as a provision for loan losses in 1996, $360,000
in 1995 and $700,000 in 1994. Loans charged off, net of recoveries, in 1996
were $488,618, in 1995 were $288,377 and in 1994 were $377,248. The ratio of
the allowance for loan losses to total gross loans was 2.4% at December 3l,
1996, 2.7% at December 31, 1995, and 2.9% at December 31, 1994.
In management's opinion, the balance of the allowance for loan losses at
December 31, 1996 was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
INCOME TAXES
- -------------
Income taxes were $800,478 in 1996, $730,000 in 1995, and $462,500 in 1994.
NET INCOME
- -----------
The net income of the Bank was $1,105,422 or $.86 per share in 1996, $1,007,828
or $.95 per share in 1995, and $646,887 or $.63 per share in 1994, as adjusted
to reflect the 1996 2-for-1 stock split and the 1995 10% stock dividend. The
increases in net income for the past two years were the result of several
factors. First, the earning assets of the Bank have increased, resulting in an
increase in net interest income. Second, the origination and sale of SBA loans
has continued to grow, resulting in increased gains on sales and increased
servicing income. Third, the addition of the Mortgage Loan Processing Center
and Home Improvement Lending Department increased fee income, income from loan
sales, and servicing income. Offsetting the income increase was an overall
increase in expenses related to the production of income.
LIQUIDITY
- ---------
The Bank has an asset and liability management program allowing the Bank to
maintain its interest margins during times of both rising and falling interest
rates and to maintain sufficient liquidity. Liquidity of the Bank at December
31, 1996 was 29.7%, at December 31, 1995 was 23.8%, and at December 31, 1994 was
21.2% based on liquid assets (consisting of cash and due from banks, deposits in
other financial institutions, investments not pledged, federal funds sold and
loans available for sale) divided by total liabilities. Management believes it
maintains adequate liquidity levels.
CAPITAL RESOURCES
- ------------------
The shareholders' equity accounts of the Bank increased from $5,095,526 at
December 31, 1994, to $6,113,041 at December 31, 1995 and to $10,159,141 at
December 31, 1996. In 1996, the Bank raised approximately $2,800,000 through
a secondary stock offering. This increased capital will be used for merger or
acquisition activity as well as to allow continued growth. As part of the
secondary offering, the Bank issued 472,653 warrants which entitle each holder
to acquire one share of common stock at an exercise price of $8.75. The
warrants expire on June 30, 1998.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1996, that the Bank exceeds all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well as capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events since that
notification which management believes have changed the Bank's category.
The Bank's actual capital ratios are presented below.
<PAGE>
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets) $9,406,022 14.88% $ 5,057,001 >=8% $ 6,321,251 >=10%
Tier I Capital (to Risk
Weighted Assets) 8,608,032 13.61% 2,529,914 >=4% 3,794,871 >=6%
Tier I Capital (to Average
Assets) 8,608,032 11.33% 3,039,023 >=4% 3,798,778 >=5%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk
Weighted Assets) 6,149,829 10.99% 4,476,673 >=8% 5,595,841 >=10%
Tier I Capital (to Risk
Weighted Assets) 5,441,181 9.73% 2,236,868 >=4% 3,355,302 >=6%
Tier I Capital (to Average
Assets) 5,441,181 7.62% 2,856,263 >=4% 3,570,329 >=5%
</TABLE>
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------
The following schedule shows the unaudited average balances of the Bank's
assets, liabilities and shareholders' equity accounts and the percentage
distribution of the items, computed using the daily average balances, for the
periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Amount Percent(1) Amount Percent(1) Amount Percent(1)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ---------------------------------------------
Cash and due from banks $ 2,726 3.7% $ 2,378 3.7% $ 2,219 3.9%
Federal funds sold 5,632 7.7 5506.00 8.6 4964.00 8.7
Time deposits in other financial institutions 1,524 2.1 2,763 4.3 3,342 5.8
Investment Securities 1,636 2.2 672.00 1.0 250.00 0.4
Loans:
Commercial 14,300 19.7 13821.00 21.5 13908.00 24.3
Real estate 19,418 26.7 14546.00 22.6 12382.00 21.7
Unguaranteed portions of loans
insured by the SBA 15,617 21.5 15,886 24.7 11,427 20.0
Installment 5,925 8.1 3532.00 5.5 3029.00 5.3
Loan participations purchased - real
estate 746 1.0 876 1.4 1,688 3.0
Less allowance for loan losses (1,351) (1.9) (1,484) (2.3) (735) (1.3)
Less net deferred loan fees and
premiums (26) - (41) (.1) (168) (.3)
Less discount on loan pool purchase (423) (.6) (664) (1.0) (779) (1.4)
Net Loans 54,206 74.5 46472.00 72.3 40752.00 71.3
Loans held for sale 1,682 2.3 2668.00 4.2 2081.00 3.7
Other real estate owned 173 0.2 408.00 0.6 228.00 0.4
Premises and equipment, net 1,856 2.6 1384.00 2.2 1248.00 2.2
Excess servicing asset 1,705 2.2 271.00 0.4 - N/A
Accrued interest receivable and other assets 1,578 2.2 1,994 2.7 2,052 3.6
TOTAL ASSETS $72,718 100.0% $ 64,245 100.0% $ 57,136 100.0%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Amount Percent(1) Amount Percent(1) Amount Percent(1)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 13,862 19.1% $ 10,292 16.0% $ 8,208 14.4%
Interest-bearing demand 12277.00 16.9 12185.00 19.0 11599.00 20.3
Savings 10699.00 14.7 9703.00 15.1 6858.00 12.0
Time certificates, $100,000 or more 10336.00 14.2 7651.00 11.9 6597.00 11.5
Other time certificates 17858.00 24.6 18425.00 28.7 18450.00 32.3
Total deposits 65032.00 89.4 58256.00 90.7 51712.00 90.5
Accrued interest payable and other
liabilities 137 0.2 354 0.5 511 0.9
Total Liabilities 65169.00 89.6 58610.00 91.2 52223.00 91.4
Stockholders' equity
Common Stock 2946.00 4.1 2376.00 3.7 2282.00 4
Additional paid-in capital 3261.00 4.5 2411.00 3.8 2270.00 4
Retained earnings 1342.00 1.8 848.00 1.3 361.00 0.6
Total stockholders' equity 7549.00 10.4 5635.00 8.8 4913.00 8.6
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 72,718 100.0% $ 64,245 100.0% $ 57,136 100.0%
</TABLE>
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
- ----------------------
distributions and yields of the Bank's investment securities as of December 31,
1996. (Dollars in thousands)
<PAGE>
<TABLE>
<CAPTION>
One Year After One Year
or Less to Five Years Total
December 31, 1996 Amount Yield Amount Yield Amount Yield
------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury & Government Agencies $ 1,998 5.59% $ - N/A $ 1,998 5.59%
------- ------ ------- ----- ------- ------
Total $ 1,998 5.59% $ - N/A $ 1,998 5.59%
======= ====== ======= ===== ======= ======
</TABLE>
The following table summarizes the year-end balances and distributions of the
Bank's investment securities held on December 31, 1996, 1995 and 1994. (Dollars
in thousands):
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
U.S. Treasury & Government Agencies $1,998 $ 994 $ 486
------ ----- -----
Total $1,998 $ 994 $ 486
====== ===== =====
</TABLE>
LOAN PORTFOLIO
The Bank's largest lending categories are commercial loans, real estate loans,
unguaranteed portion of loans insured by the SBA, installment loans, loans held
for sale and real estate loan participations purchased. These categories
accounted for approximately 23.7%, 32.4%, 24.8%, 6.4%, 11.5% and 1.2%
respectively, of the Bank's total loan portfolio at December 31, 1996 and
approximately 27.3%, 32.6%, 25.4%, 8.1%, 5.1% and 1.5%, respectively, at
December 31, 1995. Loans are carried at face amount, less payments collected,
the allowance for possible loan losses, deferred loan fees and discounts on
loans purchased. Interest on all loans is accrued daily on primarily a simple
interest basis. It is generally the Bank's policy to place loans on nonaccrual
status when they are 90 days past due. Thereafter, interest income is no longer
recognized and the full amount of all payments received, whether principal or
interest, are applied to the principal balance of the loan. Problem loans are
maintained on accrual status only when management of the Bank is confident of
full repayment within a very short period of time.
The rates of interest charged on variable rate loans are set at specified
increments in relation to the Bank's published prime lending rate or other
appropriate indices and vary as those indices vary. At December 31, 1996,
approximately 62% of the Bank's loan portfolio was comprised of variable
interest rate loans. At December 31, 1995, variable rate loans comprised
approximately 70% of the Bank's loan portfolio.
DISTRIBUTION OF LOANS
- -----------------------
The distribution of the Bank's total loans by type of loan as of the dates
indicated is shown in the following table (dollars in thousands):
<PAGE>
<TABLE>
<CAPTION>
December 31,
Type of loan 1996 1995 1994
- ----------------------------------- ------- ------- -------
<S> <C> <C> <C>
Commercial $14,017 $14,615 $12,407
Real estate 19,172 17,442 10,579
Unguaranteed portion of
loans insured by SBA 14,708 13,581 12,341
Installment 3,777 4,345 3,295
Loan participations
purchased 709 833 970
TOTAL 52,383 50,816 39,592
Less:
Allowance for
loan losses 1,409 1,463 1,391
Deferred loan fees
and premiums 39 32 66
Discount on loan
pool purchase 344 490 1,015
NET LOANS $50,591 $48,831 $37,120
Guaranteed and unguaranteed
portion of certain loans insured by
SBA and FHA Title I loans held-
for-sale $ 6,809 $ 2,743 $ 8,225
</TABLE>
COMMERCIAL LOANS
- -----------------
In addition to traditional commercial loans made to business customers, the Bank
occasionally extends lines of credit. On business credit lines, the Bank
specifies a maximum amount which it stands ready to lend to the customer during
a specified period, in return for which the customer agrees to maintain its
primary banking relationship with the Bank. The purpose for which such loans
will be used and the security therefor, if any, are generally determined before
the Bank's commitment is extended. Normally, the Bank does not make loan
commitments in material amounts for periods in excess of one year.
REAL ESTATE LOANS
- -------------------
Real estate loans are primarily made for the purpose of purchasing, improving or
constructing single family residences, and commercial and industrial properties.
Approximately 67% of the Bank's real estate construction loans consist of loans
secured by first trust deeds on the construction of owner-occupied single family
dwellings and approximately 13% of the Bank's construction loans consist of
loans secured by second trust deeds on the construction of owner-occupied single
family dwellings. Approximately 7% of the Bank's construction loans consist of
first trust deeds on commercial properties, and approximately 13% of the Bank's
construction loans consist of second trust deeds on commercial properties.
Construction loans are generally written with terms of six to twelve months and
usually do not exceed a loan to appraised value of 80%.
UNGUARANTEED PORTION OF LOANS GUARANTEED BY THE SBA
- ----------------------------------------------------------
The Bank is approved as a Preferred Lender by the SBA. Loans made by the Bank
under programs offered by the SBA are generally made to small businesses for the
purchase of businesses, purchase or construction of facilities, purchase of
equipment or working capital. The loans generally carry guarantees from the SBA
ranging from 75% - 90% of the balance loaned. Borrowers usually are required to
provide adequate collateral for these loans, similar to for other commercial
loans. The SBA does allow less-collateralized loans for its "Low Doc" program,
loans of less than $100,000. When the Bank originates SBA loans, it sells the
guaranteed portion of the loans into the secondary market. The Bank retains the
unguaranteed portion of the loans as well as the servicing on the loans, for
which it is paid a fee. The loans are all variable rate based upon Wall Street
Journal Prime Rate. The servicing spread is a minimum of 1.00% on all loans.
The gains recognized by the Bank on the sales of the guaranteed portion of these
loans and the ongoing servicing income received, are significant revenue streams
for the Bank.
INSTALLMENT LOANS
- ------------------
While not a large portion of its loan portfolio, the Bank does originate
installment loans. These loans are comprised of automobile, small equity lines
of credit and general personal loans. These loans are primarily variable rate
with terms of five years or less.
LOAN PARTICIPATIONS PURCHASED
- -------------------------------
When the Bank first opened, in an effort to generate earnings for the Bank as
quickly as possible, management made the decision to purchase several packages
of commercial real estate loans. As these loans have been repaid, the Bank has
had the ability to utilize the funds elsewhere and these loans have become a
very small portion of the portfolio. The Bank occasionally participates in a
loan with another community bank in an overline capacity.
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------------
The following table sets forth the amounts of loans outstanding of the Bank as
of December 31, 1996 which, based on the remaining scheduled repayments of
principal, have the ability to be repriced or are due in less than one year, in
one to five years, or in more than five years.
<TABLE>
<CAPTION>
One Year
Less than to Five After Five
(Dollars in thousands) one year Years Years Total
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Fixed rate $ 6,269 $ 9,011 $ 6,901 $22,181
Variable 37,011 - - 37,011
Total $ 43,280 $ 9,011 $ 6,901 $59,192
</TABLE>
The following table shows the Bank's loan commitments at the dates indicated:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Commercial $ 7,412 $ 6,077 $ 2,863
Real estate 2781.00 2,349 2,246
Loans insured by the SBA 1195.00 142.00 642.00
Installment loans 1429.00 1,304 878.00
Standby letters of credit 50.00 96.00 26.00
Total commitments $ 12,867 $ 9,968 $ 6,655
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Impaired loans without specific valuation allowances $ 764,388 $1,531,318
Impaired loans with specific valuation allowances 1,178,435 1,432,783
Specific Valuation allowance allocated to impaired loans (432,853) (583,600)
Impaired loans, net $1,509,970 $2,380,501
Average investment in impaired loans $1,945,236 $1,805,251
Interest Income recognized on impaired loans $ 85,559 $ 66,919
</TABLE>
It is generally the Bank's policy to place loans on nonaccrual status when they
are 90 days past due. Thereafter, interest income is no longer recognized and
the full amount of all payments received, whether principal or interest, are
applied to the principal balance of the loan. As such, interest income may be
recognized on impaired loans to the extent they are not past due by 90 days or
more.
At December 31, 1996, loans on nonaccrual status totaled $618,095, compared to
$1,036,782 at December 31, 1995. Upon the adoption of SFAS No. 114, the Bank
classified all loans on nonaccrual status as impaired. Accordingly, the
impaired loans disclosed above include all loans that were on nonaccrual status
as of December 31, 1996 and 1995.
Financial difficulties encountered by certain borrowers may cause the Bank to
restructure the terms of their loans to facilitate loan payments. As of
December 31, 1996 and 1995, gross troubled debt restructured loans totaled
$843,000 and $436,000. In accordance with the provisions of SFAS No. 114, a
troubled loan that is restructured subsequent to the adoption of SFAS No. 114
would generally be considered impaired, while a loan restructured prior to
adoption would not be considered impaired if, at the date of measurement, it was
probable that the Bank will collect all amounts due under the restructured
terms. Accordingly, the balance of impaired loans disclosed above includes all
troubled debt restructured loans that, as of December 31, 1996, and 1995 are
considered impaired.
Interest foregone on nonaccrual loans and troubled debt restructurings
outstanding during the years ended December 31, 1996, 1995 and 1994 amounted to
approximately $225,955, $96,036, and $46,191, respectively.
The Bank charges off that portion of any loan which management considers to
represent a loss. A loan is generally considered by management to represent a
loss in whole or in part when an exposure beyond any collateral value is
apparent, servicing of the unsecured portion has been discontinued or collection
is not anticipated based on the borrower's financial condition and general
economic conditions in the borrower's industry. The principal amount of any
loan which is declared a loss is charged against the Bank's allowance for loan
losses.
The following table sets forth the amount of loans which were 30 to 89 days past
due at the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1996 1995 1994
----- ------- -----
<S> <C> <C> <C>
Commercial $ 786 $ 567 $2,622
Real estate 52.00 468.00 25.00
Total $ 838 $ 1,035 $2,647
</TABLE>
The following table sets forth the amount of loans which were on nonaccrual
status at the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1996 1995 1994
----- ------- -----
<S> <C> <C> <C>
Commercial $ 618 $ 595 $ 640
Real estate - 442.00 -
Total $ 618 $ 1,037 $ 640
</TABLE>
The following table summarizes the Bank's loan loss experience for the periods
indicated:
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
BALANCES
Loans:
Average gross loans $57,688 $51,329 $44,515
Gross loans at end of period 59,192 53,559 47,817
Loans charged off 510.00 308.00 386.00
Recoveries of loans previously
charged off 22 20 9
-------- -------- --------
Net loans charged off 489.00 288.00 377.00
-------- -------- --------
Allowance for possible loan losses 1,409 1,463 1,391
Provisions for possible loan losses 435.00 360.00 700.00
Ratios:
Net loan charge-offs to
average loans .8% .6% .8%
Net loan charge-offs to
loans at end of period .9% .5% .8%
Allowance for possible loan
losses to average loans 2.4% 2.9% 3.1%
Allowance for possible loan
losses to loans at end of period 2.4% 2.7% 2.9%
Net loan charge-offs to allowance
for possible loan losses 34.7% 19.7% 27.1%
Net loan charge-offs to provision
for possible loan losses 112.4% 80.0% 53.9%
</TABLE>
The Bank's allowance for loan losses is designed to provide for loan losses
which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Provisions for possible loan losses amounted to $435,000 in 1996
and $360,000 in 1995. Actual loan losses or recoveries are charged or credited,
directly to the allowance for loan losses. The amount of the allowance is
determined by management of the Bank. Among the factors considered in
determining the allowance for loan losses are the current financial condition of
the Bank's borrowers and the value of the security , if any ,for their loans.
Estimates of future economic conditions and their impact on various industries
and individual borrowers are also taken into consideration, as are the Bank's
historical loan loss experience and reports of banking regulatory authorities.
Because these estimates, factors and evaluations are primarily judgmental, no
assurance can be given as to whether or not the Bank will sustain loan losses
substantially higher in relation to the size of the allowance for loan losses or
that subsequent evaluation of the loan portfolio may not require substantial
changes in such allowance.
At December 31, 1996, 1995 and 1994, the allowance was 2.4%, 2.7%, and 2.9%, of
the gross loans then outstanding, respectively. Although the current level of
the allowance is deemed adequate by management, future provisions will be
subject to continuing reevaluation of risks in the loan portfolio.
Management of the Bank reviews with the Board of Directors the adequacy of the
allowance for possible loan losses on a quarterly basis and adjusts the loan
loss provision where specific items reflect a need for such an adjustment.
Management of the Bank charged off loans totaling $510,494 in 1996, $308,287 in
1995 and $385,821 in 1994. Recoveries of loans previously charged off were
$21,876 in 1996, $19,910 in 1995 and $8,573 in 1994. Management believes that
there were no material loan losses during the last fiscal year that have not
been charged off. Management also believes that the Bank has adequately
reserved for all individual items in its portfolio which may result in a
material loss to the Bank. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
SUMMARY OF EARNINGS - Provision for Loan Losses".
INVESTMENT SECURITIES
- ----------------------
The Investment Policy of the Bank sets forth the types and maturities of
investments the Bank may hold. The policy is quite conservative and allows no
derivative type investments. As a practical matter, because the Bank originates
such a high volume of loans and, therefore uses most of its resources to fund
those loans, the Banks investment portfolio is short term in nature and of high
quality. As of December 31, 1996, the only investment securities held by the
Bank were the Federal Reserve Bank stock required to be held by the Bank and
four $500,000 U.S. Treasury notes pledged as collateral for the Bank's Treasury,
Tax & Loan Account. The Bank's investment portfolio is reviewed by the Chief
Financial Officer of the Bank on a daily basis and by the Investment Committee
of the Board of directors on a quarterly basis.
INTEREST RATES AND DIFFERENTIALS
- -----------------------------------
Certain information concerning interest-earning assets and interest-bearing
liabilities and yields thereon is set forth in the following table. Amounts
outstanding are daily average balances:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Time deposits in other financial
institutions:
Average outstanding $ 1,524 $ 2,763 $ 3,342
Average yield 5.8% 6.3% 4.5%
Interest income $ 88 $ 174 $ 150
Federal funds sold:
Average outstanding $ 5,632 $ 5,506 $ 4,964
Average yield 5.0% 5.5% 4.0%
Interest income $ 283 $ 305 $ 201
Investment securities:
Average outstanding $ 1,636 $ 672 $ 250
Average yield 6.1% 7.1% 6.0%
Interest income $ 100 $ 48 $ 15
Loans:
Average net outstanding $55,888 $49,140 $42,833
Average yield 11.3% 12.2% 11.2%
Interest income $ 6,341 $ 5,977 $ 4,814
TOTAL INTEREST-EARNING ASSETS:
Average outstanding $64,680 $58,081 $51,389
Average Yield 10.5% 11.2% 10.1%
Interest income $ 6,812 $ 6,504 $ 5,180
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
accounts:
Average outstanding $12,277 $12,185 $11,599
Average yield 3.5% 3.7% 3.0%
Interest expense $ 434 $ 455 $ 348
Savings deposits:
Average outstanding $10,699 $ 9,703 $ 6,858
Average yield 3.9% 4.5% 3.7%
Interest expense $ 414 $ 441 $ 257
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Time certificates of deposit:
Average outstanding $28,194 $26,076 $25,047
Average yield 5.6% 6.0% 4.3%
Interest expense $ 1,577 $ 1,555 $ 1,075
TOTAL INTEREST-BEARING
LIABILITIES:
Average outstanding $51,170 $47,964 $43,504
Average yield 4.7% 5.1% 3.9%
Interest expense $ 2,425 $ 2,451 $ 1,680
Net interest income $ 4,387 $ 4,053 $ 3,500
AVERAGE NET INTEREST MARGIN
ON INTEREST-EARNING ASSETS 6.8% 7.0% 6.8%
</TABLE>
LIQUIDITY MANAGEMENT
- ---------------------
The Bank has federal funds lines of credit with its correspondent bank, of
$1,200,000. This line has never been used. At times when the Bank has more
funds than it needs for its reserve requirements or short term liquidity needs,
the Bank increases its securities investments and sells federal funds. It is
management's policy to maintain a substantial portion of its portfolio of assets
and liabilities on a short-term or highly liquid basis in order to maintain rate
flexibility and to meet loan funding and liquidity needs.
The following table shows the Bank's average deposits for each of the periods
indicated below, based upon average daily balances:
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
----- ----- -----
(Unaudited) Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand. $ 13,853 21.3% $ 10,292 17.7% $ 8,208 15.9%
Interest-bearing demand. . . 12,277 18.9% 12,185 20.9% 11,599 22.4%
Savings. . . . . . . . . . . 10,699 16.5% 9,703 16.7% 6,858 13.3%
TCDs of $100,000 or more . . 10,336 15.9% 7,651 13.1% 6,597 12.8%
Other TCDs. . . . . . . . . 17,858 27.4% 18,425 31.6% 18,450 35.6%
-------- --------- -------- --------- -------- ---------
Total deposits . . . . . . . $ 65,023 100.0% $ 58,256 100.0% $ 51,712 100.0%
======== ========= ======== ========= ======== =========
</TABLE>
DEPOSITS
- --------
The maturities of time certificates of deposit ("TCDs") were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
TCDs TCDs TCDs
over Other over Other over Other
(Unaudited) $100,000 TCDs $100,000 TCDs $100,000 TCDs
(Dollars in thousands). . over Other over Other over Other
<S> <C> <C> <C> <C> <C> <C>
Less than three months. . $ 5,512 $ 9,704 $ 5,218 $ 6,942 $ 4,589 $ 8,777
Over three months
through six months . . 2,796 7,439 1,956 4,387 1,009 6,461
Over six months
through twelve months. 2,941 4,188 1,917 3,982 1,991 4,302
Over twelve months
through five years . . 100 749 100 1,315 - 499
Total. . . . . . . . $ 11,349 $22,080 $ 9,191 $16,626 $ 7,589 $20,039
</TABLE>
While the deposits of the Bank may fluctuate up and down somewhat with local and
national economic conditions, management of the Bank does not believe that such
deposits, or the business of the Bank in general, are seasonal in nature.
Liability management is monitored by the Chief Financial Officer daily and by
the Asset/Liability Committee of the Bank's Board of directors which meets
quarterly,
SUPERVISION AND REGULATION
The Bank, as a national banking association, is subject to primary supervision,
examination and regulation by the Office of the Comptroller of the Currency
(OCC). The deposits of the Bank are insured by the FDIC to the maximum extent
provided by law. The Bank is also subject to applicable regulations of the FDIC
and the FRB, and in addition the provisions of California law, insofar as they
do not conflict with or are not preempted by federal banking law. As a
consequence of the extensive regulation of commercial banking activities in
California and the United States, the Bank's business is particularly
susceptible to changes in California and federal legislation and regulations,
which may have the effect of increasing the cost of doing business, limiting
permissible activities or increasing competition.
Various other requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal and
California 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, capital requirements and disclosure obligations to
depositors and borrowers. The OCC regulates the number and locations of the
branch offices of a national bank, but may only permit a national bank to
maintain branches in locations and under the conditions imposed by state laws
upon state banks. California law presently permits a bank to locate a branch
office in any locality in the state. Additionally, California law exempts
banks, including national banks, from California usury laws.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
- ------------------------------------------------------------
Banking is a business which 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, comprises a major
portion of the Bank's earnings. These rates are highly sensitive to many
factors which are beyond the control of the Bank. Accordingly, the earnings and
growth of the Bank are subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment.
The earnings and growth of the Bank are affected not only by general economic
conditions, both domestic and foreign, but also by the monetary and fiscal
policies of the United States government and its agencies, particularly the FRB.
The FRB implements national monetary policies (with objectives such as to curb
inflation and combat recession) by its open market operations in United States
Government securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements, and by
varying the discount rates applicable to borrowing by banks which are members of
the Federal Reserve System. The actions of the FRB 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 that future
changes in fiscal or monetary policies or economic controls may have on the
Bank's business and earnings cannot be predicted. In addition, adverse economic
conditions could make a higher provision for loan losses a prudent course and
could cause higher loan charge-offs, thus adversely affecting the Bank's net
income.
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 and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. The likelihood of any major changes and the impact such
changes might have on the Bank are impossible to predict. Certain of the
potentially significant changes which have been enacted recently by Congress and
others which are currently under consideration by Congress or various regulatory
or professional agencies are discussed below.
RECENT ACCOUNTING PRONOUNCEMENTS:In October, 1995, the Financial Accounting
- -----------------------------------
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Companies"
("SFAS 123"), which encourages companies to account for stock compensation
awards based on their fair value at the date the awards are granted. SFAS 123
does not require the application of the fair value method and allows the
continuance of current accounting method, which requires accounting for stock
compensation awards based on their intrinsic value as of the grant date.
However, SFAS 123 requires pro forma disclosure of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined in
this statement had been applied.
The accounting and disclosure requirements of this statement are effective for
financial statements for fiscal years beginning after December 15, 1995, though
earlier adoption is encouraged. The Bank has chosen not to adopt the fair value
provisions of this statement.
Beginning January 1, 1997, the Bank is required to prospectively adopt SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement supercedes SFAS No. 122
"Accounting for Mortgage Servicing Rights." Under SFAS No. 125 the Bank will be
required to identify the servicing and 'interest only strip' asset components of
each loan sold. The 'interest only strip' represents the difference between
the right to future interest and the contractual servicing rate. At the date of
sale, gains or losses are recorded based on the relative fair market values of
the components. The remaining components are then valued based on their
classification under SFAS No. 115. The Bank does not anticipate that the
adoption of SFAS No. 125 will have a significant impact on earnings or capital.
The adoption of portions of this statement have been deferred by the issuance of
SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125," however, the portion of the statement which is applicable
to the Bank was not deferred.
RECENT LEGISLATION AND OTHER CHANGES:On September 28, 1995, Governor Pete Wilson
- -------------------------------------
signed Assembly Bill 1482 (known as the Caldera, Weggeland, and Killea
California Interstate Banking and Branching Act of 1995 and referred to herein
as the "CIBBA") which allows for early interstate branching in California.
Under the federally enacted Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("IBBEA"), discussed in more detail below, individual
states could "opt-out" of the federal law that would allow banks on an
interstate basis to engage in interstate branching by merging out-of-state banks
with host state banks after June 1, 1997. In addition under IBBEA, individual
states could also "opt-in" and allow out-of-state banks to merge with host state
banks prior to June 1, 1997. The host state is allowed under IBBEA to impose
certain nondiscriminatory conditions on the resulting depository institution
until June 1, 1997. California in enacting CIBBA authorizes out-of-state banks
to enter California by the acquisition of or merger with a California bank that
has been in existence for at least five years. Section 3824 of the California
Financial Code ("Section 3824") as added by CIBBA provides for the election of
California to "opt-in" under IBBEA allowing interstate bank merger transactions
prior to July 1, 1997, of an out-of-state bank with a California bank that has
been in existence for at least five years. The early "opt in" has the
reciprocal effect of allowing California banks to merge with out-of-state banks
where the states of such out-of-state banks have also "opted in" under IBBEA.
The five year age limitation is not required when the California bank is in
danger of failing or in certain other emergency situations,
Under IBBEA, California may also allow interstate branching through the
acquisition of a branch in California without the acquisition of an entire
California bank. Section 3824 provides an express prohibition against
interstate branching through the acquisition of a branch in California without
the acquisition of the entire California bank. IBBEA also has a provision
allowing states to opt-in with respect to permitting interstate branching
through the establishment of de novo or new branches by out-of-state banks.
Section 3824 provides that California expressly prohibits interstate branching
through the establishment of de novo branches of out-of-state banks in
California, or in other words, California did not "opt-in" this aspect of IBBEA.
CIBBA also amends the California Financial Code to include agency provisions to
allow California banks to establish affiliated insured depository institution
agencies out of state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws, govern the use of
shared ATM's, and amend intrastate branch acquisition and bank merger laws.
Another banking bill enacted in California in 1995 was Senate Bill 855 (known as
the State Bank Parity Act and is referred to herein as the "SBPA"). SBPA went
into effect on January 1, 1996, and its purpose is to allow a California state
bank to be on a level playing field with a national bank by the elimination of
certain disparities and allowing the California Superintendent of Banks
("Superintendent") authority to implement certain changes in California banking
law which are parallel to changes in national banking law such as closer
conformance of California's version of Regulation O to the FRB's version of
Regulation O and other changes including allowing the repurchase of stock with
the prior written consent of the Superintendent.
On September 29, 1994, IBBEA was enacted which has eliminated many of the
current restrictions to interstate banking and branching. IBBEA permits full
nationwide interstate banking to adequately capitalized and adequately managed
bank holding companies beginning September 29, 1995, without regard to whether
such transaction is expressly prohibited under the laws of any state. IBBEA's
branching provisions permit full nationwide interstate bank merger transactions
to adequately capitalized and adequately managed banks beginning June 1, 1997.
However, states retain the right to completely opt out of interstate bank
mergers and to continue to require that out-of-state banks comply with the
states' rules governing entry.
The states that opt out must enact a law after September 29, 1994, and before
June 1, 1997, that (i) applies equally to all out-of-state banks and (ii)
expressly prohibits merger transactions with out-of-state banks. States which
opt out of allowing interstate bank merger transactions will preclude the
mergers of banks in the opting out state with banks located in other states. In
addition, banks located in states that opt out are not permitted to have
interstate branches. States can also "opt in" which means states can permit
interstate branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers provide that
transactions, which result in the bank holding company or bank controlling or
holding in excess of ten percent of the total deposits nationwide or thirty
percent of the total deposits statewide, will not be permitted except under
certain specified conditions. However, any state may waive the thirty percent
provision for such state. In addition, a state may impose a cap of less than
thirty percent of the total amount of deposits held by a bank holding company or
bank provided such cap is not discriminatory to out-of-state bank holding
companies or banks.
On September 23, 1994, the President signed into law the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "1994 Act") which covers
a wide range of topics including small business and commercial real estate loan
securitization, money laundering, flood insurance, consumer home equity loan
disclosure and protection as well as the funding of community development
projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act include an
examination schedule that has been eased for the top rated banks and will be
every 18 months for CAMEL 1 banks with less than $250 million in total assets
and CAMEL 2 banks with less than $100 million in total assets (after two years
the $100 million amount may be increased to $175 million, if the appropriate
federal banking regulatory agency so permit). The 1994 Act amends Federal
Deposit Insurance Corporation Improvement Act of 1991 with respect to Section
124, the mandate to the federal banking agencies to issue safety and soundness
regulations, including regulations concerning executive compensation allowing
the federal banking regulatory agencies to issue guidelines instead of
regulations.
Further regulatory relief is provided in the 1994 Act, as each of the federal
regulatory banking agencies including the National Credit Union Administration
Board is required to establish an internal regulatory appeals process for
insured depository institutions within 6 months. In addition, the Department of
Justice 30 day waiting period for mergers and acquisitions is reduced by the
1994 Act to 15 days for certain acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act requires the Secretary
of the Treasury to allow financial institutions to file such reports
electronically. The 1994 Act also requires the Secretary of the Treasury to
publish written rulings concerning the Bank Secrecy Act, and staff commentary on
Bank Secrecy Act regulations must also be published on an annual basis.
The procedures for forming a bank holding company have also been simplified.
The formal application process for many holding company formations is now a
simplified 30 day notice procedure. In addition, the Securities Act of 1933 has
been amended by the 1994 Act to further simplify the securities issuance in
connection with a bank holding company formation.
On December 17, 1993, the President signed into law legislation to provide
additional funding for failed savings associations under the jurisdiction of the
Resolution Trust Corporation. In addition to providing such funding, the
legislation, among other things, makes it more difficult for the federal banking
agencies to obtain prejudgment injunctive relief against depository institutions
and parties affiliated with such institutions, extends the moratorium on
depository institutions converting from Savings Association Insurance Fund
insurance to Bank Insurance Fund insurance or vice versa, and prohibits the FDIC
from using any deposit insurance funds to benefit the shareholders of a failed
or failing depository institution.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"), which was
signed into law on August 10, 1993, contains numerous tax and other provisions
which may affect financial institutions and their businesses. The Budget Act
contains a provision that establishes a priority for depositors, or the FDIC as
subrogee thereof, in the event of a liquidation or other resolution of an
insured depository institution for which a receiver is appointed after August
10, 1993. In addition, under the existing cross-guarantee provisions of federal
banking law, the FDIC has the power to estimate the cost of the failure of an
insured depository institution and assess a charge against any financial
institution affiliated with the failed institution.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was signed into law. FDICIA provides for the
recapitalization and funding of the Bank Insurance Fund of the FDIC. In
addition FDICIA includes many changes to banking law. Supervisory reforms
provided under FDICIA include annual on-site full scope examinations of most
insured institutions, additional audit and audit report requirements imposed on
most insured institutions and a new annual report requirement for most insured
institutions. Accounting reforms, including the prescription of accounting
principles no less stringent than generally accepted accounting principles, and
prescription of standards for the disclosure of off-balance sheet items, market
value information and capital adequacy, are also provided for in FDICIA. In
addition, FDICIA provides for a new rating system for insured institutions based
on capital adequacy. Institutions will be categorized as critically
under-capitalized, significantly undercapitalized, undercapitalized, adequately
capitalized and well capitalized.
The FDIC has adopted definitions of how institutions will be ranked for prompt
corrective action purposes. These definitions are as follows; (i) a well
capitalized institution is one that has a leverage ratio of 5%, a Tier I
risk-based capital ratio of 6%, a total risk-based capital ratio of 10% and is
not subject to any written order or final directive by the FDIC to meet and
maintain a specific capital level; (ii) an adequately capitalized institution is
one that meets the minimum required capital adequacy levels but not that of a
well capitalized institution; (iii) an undercapitalized institution is one that
fails to meet any one of the minimum required capital adequacy levels but not as
undercapitalized as a significantly undercapitalized institution; (iv) a
significantly undercapitalized institution is one that has a total risk-based
capital ratio of less than 6% and/or a leverage ratio of less than 3%; and (v) a
critically undercapitalized institution is one with a leverage ratio of less
than 2%.
The banking regulators will have broad powers to regulate under-capitalized
institutions. Undercapitalized institutions must file capital restoration plans
and are automatically subject to restrictions on dividends, management fees and
asset growth. In addition, the institution is prohibited from opening new
branches, making acquisitions or engaging in new lines of business without the
approval of its appropriate banking regulator. Holding companies with
undercapitalized institutions will be prohibited from capital distributions
without the prior approval of the FRB. Definite drop dead dates are mandated
under FDICIA for when critically undercapitalized insured institutions must go
under receivership or conservatorship.
FDICIA also requires the regulators to prescribe safety and soundness standards
as to internal controls, asset quality, earnings, stock valuation and executive
compensation. Least cost resolution is mandated by FDICIA which will require
the FDIC to use the least cost method case resolution. Beginning in 1995, the
FDIC generally will not be permitted to cover uninsured depositors or creditors
unless the President, Secretary of Treasury and the FDIC jointly determine that
such is necessary to avoid systemic risk.
FDICIA also contains miscellaneous provisions including additional regulation of
foreign banks, notification of branch closures, reduced assessments for lifeline
account products, FDIC affordable housing program Truth in Savings disclosure
provisions, limitations on brokered deposits, restrictions on state bank
nonbanking activities, risk-based assessments and deposit insurance limitations
for certain accounts.
FDICIA mandated regulations in many areas of banking including, prescribing
accounting principles, limiting brokered deposits, expanding Regulation 0,
establishing Truth in Savings, establishing a risk-based assessments system,
limiting equity investments by state banks, expanding the amount of purchased
mortgage servicing rights that may be included with respect to determining
capital adequacy, limiting certain banking activities that national banks are
permitted to conduct, incorporating interest rate risk with respect to the
risk-based capital standards, establishing capital levels when prompt corrective
action is required (as discussed above), and establishing safety and soundness
standards including compensation standards, standards for real estate lending,
standards for loan documentation, interbank liabilities, underwriting, asset
growth, interest rate exposure and others as appropriate.
The FDIC also adopted a risk-based assessment system for purposes of determining
the insurance premium to be paid by a bank for FDIC deposit insurance. In order
to reach a risk-based assessment for each bank and thrift, the FDIC will place
an institution in one of nine risk categories using a two-step process based
first on capital ratios, then on other relevant information. The capital
definitions are the same as those being used by regulatory agencies for prompt
corrective action regulations. The FDIC will also assign each institution to
one of three subgroups based on an evaluation of the risk posed by the
institution.
The Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of
1990 (the "Crime Bill"), signed into law on November 29, 1990, also expanded the
enforcement powers of regulatory authorities. The Crime Bill contains a number
of sweeping provisions. Among other things, this legislation: increases fines
and prison terms for various financial institution related crimes; appoints
additional prosecutors; establishes a system of rewards for people providing
information leading to the prosecution of financial institution crimes; mandates
prison terms of ten years to life for "kingpins" of financial institution
crimes; makes it a crime to obstruct the examination of a financial institution
to conceal assets from a conservator or to impede conservatorship operations;
provides for the forfeiture of assets obtained through bank crimes; prohibits
persons convicted of bank crimes from engaging in certain transactions with
financial institutions or regulatory agencies; and provides that liabilities
arising from a breach of fiduciary duty to a financial institution or the breach
of an agreement to maintain the institution's capital cannot be discharged in
bankruptcy. Additionally, the Crime Bill gives regulatory authorities the
ability to obtain attachments of the assets of financial institution affiliated
parties prior to obtaining a judgment against any such party. Further, the
Crime Bill prohibits a financial institution from prepaying the salary,
liabilities or legal expenses of an affiliated party if such prepayments are
made in contemplation of an institution's insolvency or if such prepayments will
prevent normal payments from being made to the institution's creditors, Golden
parachute and indemnification payments can also be prohibited by regulatory
authorities in certain circumstances if the institution is insolvent, is in
conservatorship or receivership, is in troubled condition, or has received a
regulatory rating in one of the two lowest rating categories (or in
contemplation of such events).
It is impossible to predict what effect the enactment of the above-mentioned
legislation will have on the Bank and on the financial institutions industry in
general. Moreover, it is likely that other bills affecting the business of
banks may be introduced in the future by the United States Congress or
California legislature.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Goleta National Bank:
We have audited the accompanying balance sheets of Goleta National Bank (the
"Bank") as of December 31, 1996 and 1995, and the related statements of income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Goleta National Bank at December 31, 1996
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
January 31, 1997
Los Angeles, California
29
<PAGE>
(INTENTIONALLY BLANK)
<PAGE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 3,776,649 $ 3,273,224
Federal funds sold 9,015,000 7,873,000
----------- -----------
Cash and cash equivalents 12,791,649 11,146,224
Time deposits in other financial institutions 2,378,000 1,378,000
Federal reserve bank stock 155,650 137,200
Investment securities held to maturity, at cost; fair value of $1,988,450
in 1996 and $994,376 in 1995 (Note 2) 1,997,705 993,937
Loans (Notes 3 and 4)
Held for investment, net of allowance for loan losses of $1,409,321
in 1996 and $1,462,939 in 1995 50,590,863 48,830,777
Held for sale, at lower of cost or fair value 6,808,800 2,742,969
Other real estate owned, net 59,524 -
Premises and equipment, net (Note 5) 2,406,837 1,575,641
Excess servicing assets (Note 3) 2,233,641 1,042,492
Accrued interest receivable and other assets (Note 7) 1,460,877 2,267,581
----------- -----------
TOTAL $80,883,546 $70,114,821
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: (Note 6)
Noninterest-bearing demand $15,235,335 $13,195,486
Interest-bearing demand 11,578,510 11,306,104
Savings 10,361,875 13,274,436
Time certificates of $100,000 or more 11,349,493 9,190,529
Other time certificates 22,080,385 16,625,503
----------- -----------
Total deposits 70,605,598 63,592,058
Accrued interest payable and other liabilities (Note 7) 218,807 409,722
----------- -----------
Total liabilities 70,824,405 64,001,780
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (Notes 8, 9, and 11)
Common stock, $2.50 par value; 4,000,000 shares authorized;
1,473,492 and 1,018,300 shares issued and outstanding at
December 31, 1996 and 1995 3,683,730 2,545,750
Additional paid-in capital 4,405,797 2,631,664
Retained earnings 1,969,614 935,627
----------- -----------
Total stockholders' equity 10,059,141 6,113,041
----------- -----------
TOTAL $80,883,546 $70,114,821
----------- -----------
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1996
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $6,340,842 $5,977,282 $4,813,687
Federal funds sold 283,137 305,249 200,608
Time deposits in other financial institutions 87,793 173,571 149,952
Investment securities 100,300 48,213 15,553
---------- ---------- ----------
Total interest income 6,812,072 6,504,315 5,179,800
INTEREST EXPENSE ON DEPOSITS 2,424,730 2,451,472 1,679,877
---------- ---------- ----------
NET INTEREST INCOME 4,387,342 4,052,843 3,499,923
PROVISION FOR LOAN LOSSES (Note 3) 435,000 360,000 700,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,952,342 3,692,843 2,799,923
---------- ---------- ----------
OTHER INCOME:
Gains from loan sales 1,121,312 1,433,737 1,370,497
Excess loan servicing fees 1,493,048 1,088,618 -
Loan origination fees - sold or brokered loans 2,057,282 731,249 253,727
Loan servicing fees 674,598 578,943 484,474
Service charges 590,239 371,511 287,343
Document processing fees 509,650 83,786 49,265
Other income 174,362 193,412 68,538
---------- ---------- ----------
Total other income 6,620,491 4,481,256 2,513,844
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits (Note 12) 5,452,981 3,925,434 2,393,227
Occupancy expenses (Note 10) 1,185,502 986,986 717,654
Other operating expenses 787,064 647,967 451,178
Postage & Freight 542,890 165,110 54,547
Advertising Expense 311,187 281,561 165,498
Professional Services 245,766 317,920 326,417
Office Supplies 141,543 111,293 95,859
---------- ---------- ----------
Total other expenses 8,666,933 6,436,271 4,204,380
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,905,900 1,737,828 1,109,387
PROVISION FOR INCOME TAXES (Note 7) 800,478 730,000 462,500
---------- ---------- ----------
NET INCOME $1,105,422 $1,007,828 $ 646,887
========== ========== ==========
NET INCOME PER COMMON SHARE AND COMMON EQUIVALENT SHARE $ 0.91 $ 0.97 $ 0.63
========== ========== ==========
NET INCOME PER COMMON SHARE -- ASSUMING FULL DILUTION $ 0.86 $ 0.95 $ 0.63
========== ========== ==========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
UNREALIZED
GAIN ON
RETAINED INVESTMENT
ADDITIONAL EARNINGS SECURITIES
COMMON STOCK PAID-IN (ACCUMULATED AVAILABLE-
SHARES AMOUNT CAPITAL DEFICIT) FOR-SALE
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 912,642 $2,281,605 $ 2,246,605 ($43,939) -
Transfer to additional paid in-capital - - 35,000 (35,000) -
Effect of adopting new accounting standard - - - - 4,200
Sale of available-for-sale security, net of tax - - - - (4,200)
Cash dividend - - - (45,632) -
Exercise of stock options 2,000 5,000 5,000 - -
Net income - - - 646,887 -
BALANCE, DECEMBER 31, 1994 914,642 2,286,605 2,286,605 522,316 -
Stock dividend 91,452 228,630 320,094 (548,724) -
Cash dividend - - - (45,793) -
Exercise of stock options 12,206 30,515 24,965 - -
Net income - - - 1,007,828 -
BALANCE, DECEMBER 31, 1995 1,018,300 2,545,750 2,631,664 935,627 -
Secondary offering of common stock and warrants 429,684 1,074,210 1,713,838 - -
Cash dividend - - - (71,435) -
Exercise of warrants 1,924 4,810 12,025 - -
Exercise of stock options 23,584 58,960 48,270 - -
Net income - - - 1,105,422 -
BALANCE, DECEMBER 31, 1996 1,473,492 $3,683,730 $ 4,405,797 $ 1,969,614 $ -
See notes to financial statements.
TOTAL
STOCK-
HOLDERS'
EQUITY
<S> <C>
BALANCE, JANUARY 1, 1994 $ 4,484,271
Transfer to additional paid in-capital -
Effect of adopting new accounting standard 4,200
Sale of available-for-sale security, net of tax (4,200)
Cash dividend (45,632)
Exercise of stock options 10,000
Net income 646,887
BALANCE, DECEMBER 31, 1994 5,095,526
Stock dividend -
Cash dividend (45,793)
Exercise of stock options 55,480
Net income 1,007,828
BALANCE, DECEMBER 31, 1995 6,113,041
Secondary offering of common stock and warrants 2,788,048
Cash dividend (71,435)
Exercise of warrants 16,835
Exercise of stock options 107,230
Net income 1,105,422
BALANCE, DECEMBER 31, 1996 $10,059,141
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,105,422 $ 1,007,828 $ 646,887
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 435,000 360,000 700,000
Deferred income taxes provision (benefit) 203,094 (117,174) (15,444)
Depreciation and amortization 477,101 309,154 241,615
(Gain) loss on sale of other real estate owned (41,430) 27,106 (21,762)
Write-down of other real estate owned - - 35,000
Gain on sale of investment securities - - (7,181)
Gain on sale of loans held for sale (1,121,312) (1,433,737) (1,370,497)
Purchase of loans held for sale - - (11,486,911)
Origination of excess servicing assets, net of amortization (1,191,149) (1,042,492) -
Net change in deferred loan fees and premiums 6,549 (33,708) (150,210)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 800,155 (552,770) (469,382)
Accrued interest payable and other liabilities (394,009) (372,409) 685,817
------------ ------------ -------------
Net cash provided by (used in) operating activities 279,421 (1,848,202) (11,212,068)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock (2,022,218) (993,581) (484,708)
Maturities of held-to-maturity investment securities 1,000,000 485,052 -
Proceeds from sale of available-for-sale investment securities - - 1,640,809
Net (increase) decrease in time deposits in other financial institutions (1,000,000) 2,474,000 (909,000)
Net (increase) decrease in loans (5,551,129) (5,120,625) 9,675,015
Proceeds from sale of other real estate owned 393,430 625,964 101,662
Purchase of premises and equipment (1,308,297) (658,263) (343,645)
------------ ------------ -------------
Net cash (used in) provided by investing activities (8,488,214) (3,187,453) 9,680,133
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, and savings accounts (600,306) 10,499,382 3,051,713
Net increase (decrease) in time certificates 7,613,846 (1,811,112) (994,016)
Proceeds from the secondary offering of common stock and warrants 2,788,048 - -
Proceeds from the exercise of stock options and warrants 124,065 55,480 10,000
Cash dividends paid (71,435) (45,793) (45,632)
------------ ------------ -------------
Net cash provided by financing activities 9,854,218 8,697,957 2,022,065
------------ ------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,645,425 3,662,302 490,130
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,146,224 7,483,922 6,993,792
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $12,791,649 $11,146,224 $ 7,483,922
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid during the year for:
Interest $ 2,386,367 $ 2,483,069 $ 1,639,412
Income taxes 460,000 1,469,000 30,421
NONCASH INVESTING ACTIVITY -
Loans transferred to other real estate owned 411,524 - 550,403
See notes to financial statements.
</TABLE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
None
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------
<TABLE>
<CAPTION>
YEAR FIRST
APPOINTED PRINCIPAL OCCUPATION
DIRECTOR DURING THE
NAME AND TITLE AGE OR OFFICER PAST FIVE YEARS
- -------------------------- ----- ---------- ----------------------------
<S> <C> <C> <C>
Michael A. Alexander 66 Re-elected Chief Executive Officer of
Chairman of the Board 1992 Utilicom Corp. since 1994.
Prior to that time, Director
of Programs of Delco
Electronics.
Mounir R. Ashamalla 59.00 1989 Oral-Maxillo-Facial
Director Surgeon
Robert H. Bartlein 49.00 1989 President of Bartlein
Director and Secretary Group, Inc. and President
of Bartlein & Company,
Inc.
Jean W. Blois 69.00 1989 Independent consultant.
Director
John D. Illgen 52.00 1989 President and Chairman of
Director Illgen Simulation
Technologies, Inc.
John D. Markel 53 1989 President of Smart Star
Director Corporation and President
Of Mark IV, Inc.
Michel Nellis 50.00 1989 Partner with Nellis
Director Associates.
William R. Peeples 53.00 1989 Private investor.
Director
C. Randy Shaffer 50 1992 Executive Vice President
Executive Vice President and Chief Financial Officer
of the Bank.
James R. Sims, Jr. 61 1989 Realtor.
Director
Llewellyn W. Stone 54 1989 President and Chief
President, Chief Executive Executive Officer of the
Officer and Director Bank.
</TABLE>
<PAGE>
None of the directors or executive officers were selected pursuant to any
arrangement or understanding other than with the directors and executive
officers of the Bank acting within their capacities as such. There are no
family relationships between any of the directors and executive officers ot the
Bank.
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
The persons serving as excutive officers of the Bank received during 1996, and
will receive in 1997, cash compensation in their capacities as excutive officers
of the Bank .
SUMMARY COMPENSATION TABLE
----------------------------
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name and Annual Restricted Op- LTIP Other
Principal Compen- Stock tions/ PayOuts Compen-
Position Year Salary Bonus sation Award(s) SARs sation
($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -
1996 127,123 51,000 - - - - -
Llewellyn W. Stone 1995 124,600 51,000 - - - - 636
President and Chief Executive Officer 1994 120,895 35,000 - - -
C. Randy Shaffer 1996 90,973 30,000 - - - - -
Executive Vice 1995 87,744 25,000 - - - - 1,867
President 1994 80,073 12,000 - - - - -
</TABLE>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
---------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUE
<PAGE>
<TABLE>
<CAPTION>
(A) (b) (c) (d) (e)
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-end (#) Year-End ($)
Value Realized Exercisable/ Exercisable/
Name Shares Acquired on Exercise (#) ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Options Only Options Only
Llewellyn W. Stone N/A N/A 39,500/- $ 158,875/-
Options Only Options Only
C. Randy Shaffer N/A N/A 18,200/3,300 $ 75,690/$17,985
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------------------------
The following table sets forth, as of March 15, 1997, the number and percentage
of shares of the Bank's Common Stock beneficially owned, directly or indirectly,
by each of the Bank's directors, named officers and principal shareholders , and
by the directors and named officers of the Bank as a group. The shares
"beneficially owned " are determined under Securities and Exchange Commission
Rules, and do not necessarily indicate ownership for any other prupose, In
general, beneficial ownership includes shares over which the director, named
officer or principal shareholder has sole or shared voting or investment power
and shares which such person has the right to acquire within 60 days of March
15, 1997. Unless otherwise indicated, the persons listed below have sole voting
and investment powers of the shares beneficially owned. Management is not aware
of any arrangements which may, at a subsequent date, result in a change of
control of the Bank.
<PAGE>
<TABLE>
<CAPTION>
Beneficial Amount and Nature Percent
Owner of Beneficial Ownership of Class(1)
<S> <C> <C>
Michael A. Alexander 36,892(2) 2.5%
Mounir R. Ashamalla 37,428(3) 2.5%
Robert H. Bartlein 43,236(4) 2.9%
Jean W. Blois 30,102(5) 2.0%
John D. Illgen 21,040(6) 1.4%
John D. Markel 147,332(7) 10.0%
Michel Nellis 20,752(8) 1.4%
William R. Peeples 171,416(9) 11.6%
C. Randy Shaffer 22,150(10) 1.5%
James R. Sims, Jr. 8,700(11) .6%
Llewellyn W. Stone 42,712(12) 2.9%
All Directors and Named Officers as a Group (11 in all) 581,760(1) 39.5%
======================== ===========
<FN>
(1) Includes shares subject to options held by each director and named officer and the
directors and named officers as a group that are exercisable within 60 days of
March 27, 1997. These are treated as issued and outstanding for the purpose of
computing the percentage of each director and the directors and named officers as a
group but not for the purpose of computing the percentage of class of any other person.
(2) Mr. Alexander has shared voting and investment powers as to 19,816 of these shares, has
8,030 shares acquirable by exercise of stock options, and has 6,769 Shares acquirable
by exercise of stock warrants.
(3) Dr. Ashamalla has 5,082 shares acquirable by exercise of stock options and has 6,493
shares acquirable by exercise of stock warrants.
(4) Mr. Bartlein has 11,902 shares acquirable by exercise of stock options and has 6,911
shares acquirable by exercise of stock warrants.
(5) Ms. Blois has shared voting and no investment powers as to 1,716 of these shares, has
12,122 shares acquirable by exercise of stock options and has 1,532 shares acquirable
by exercise of stock warrants.
(6) Mr. Illgen has 7,722 shares acquirable by exercise of stock options and has 2,787
shares acquirable by exercise of stock warrants.
(7) Mr. Markel has shared voting and investment powers as to 13,860 of these shares,
has 7,920 shares acquirable by exercise of stock options and has 60,236 shares
acquirable by exercise of stock warrants.
(8) Ms. Nellis has shared voting and investment powers as to 3,623 of these shares, has
7,722 shares acquirable by exercise of stock options and has 995 shares acquirable by
exercise of stock warrants.
<PAGE>
(9) Mr. Peeples has 1,430 shares acquirable by exercise of stock options and has 27,422
shares acquirable by exercise of stock warrants.
(10) Mr. Shaffer has shared and voting investment powers as 650 of these shares and
has 21,500 shares acquirable by exercise of stock options.
(11) Mr. Sims has 4,576 shares acquirable by exercise of stock options and 232 shares
acquirable by exercise of stock warrants.
(12) Mr. Stone has shared voting and investment powers as to 792 of these shares and
has 39,500 shares acquirable by exercise of stock options.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------
Some of the directors and executive officers of the Bank, members of their
immediate families, and the companies with which they are associated are
customers of the Bank, and have banking transactions with the Bank in the
ordinary course of the Bank's business, and the Bank expects to continue to have
such banking transactions with such persons in the future. In management's
opinion, all loans and commitments to lend included in such transactions have
been made in the ordinary course of the Bank's business, have been made on
substantially the same terms, including interest rates and collateral as those
prevailing at the Bank at the time for comparable transactions with other
persons of similar credit worthiness and, in the opinion of the management of
the Bank, have not involved more than the normal risk of collectibility or
presented any other unfavorable features. The maximum aggregate amount of all
such loans during the period January 1, 1996 to December 31, 1996 was
approximately $2,254,000, which represented approximately 23% of the Bank's
total equity capital accounts as of that date.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1) The following financial statements of Goleta National Bank are filed
as part of this Annual Report.
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the three years ended
December 31, 1996
Statements of Shareholders' Equity for the three years ended
December 31, 1996
Statements of Cash Flows for the three years ended
December 31, 1996
Notes to Consolidated Financial Statements
(b) On December 3, 1996 Goleta National Bank filed Form 8-K regarding changes in
the control of the registrant. A description of the changes is included in item
1 of this filling.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 27th day of
March, 1997.
GOLETA NATIONAL BANK
(Registrant)
By: /S/ Llewellyn W. Stone
------------------------
Llewellyn W. Stone
President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- -------------------- ---------------------------------------- --------------
<S> <C> <C>
Chairman of the Board March 27, 1997
Michael A. Alexander
Director March 27, 1997
Mounir R. Ashamalla
Director and Vice Chairman of the Board March 27, 1997
Robert H. Bartlein
Director March 27, 1997
Jean W. Blois
Director March 27, 1997
John D. Illgen
Director March 27, 1997
John D. Markel
Director and Secretary March 27, 1997
Michel Nellis
Director March 27, 1997
William R. Peeples
Executive Vice President and Principal March 27, 1997
Financial and Accounting Officer
C. Randy Shaffer
Director March 27, 1997
James R. Sims Jr.
Director, President and Chief Executive March 27, 1997
Officer (Principal Executive Officer)
Llewellyn W. Stone
</TABLE>
FORM 10-Q
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
For the Quarter Ended June 30, 1996 Commission File Number:
GOLETA NATIONAL BANK
(Exact name of registrant as specified in its charter)
California 77-0194455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5827 Hollister Ave., Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 683-4944
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 and 12CFR16.3 during the preceeding 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
Number of shares of common stock of the registrant: 1,020,500 outstanding as of
July 31, 1996
This Form 10-Q contains 14 pages.
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
GOLETA NATIONAL BANK
BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
June 30, 1996 December 31, 1995
--------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,307 $ 3,273
Federal funds sold 3,345 7,873
Time deposits in other financial institutions 1,288 1,378
Federal reserve bank stock 156 137
Investment securities held to maturity, at cost,
fair value of $xxxx in 1996 and $994
in 1995 1,497 994
Loans
Held for investment, net of allowance for loan
losses of $xxxx in 1996 and $1,463
in 1995 51,786 48,831
Held for sale, at lower of cost or fair value 4,043 2,743
Other real estate owned, net 286 -
Premises and equipment, net 1,907 1,576
Excess servicing assets 1,975 1,042
Accrued interest receivable and other assets 1,703 2,268
--------------- ------------------
TOTAL ASSETS $ 71,293 $ 70,115
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 13,549 $ 13,195
Interest-bearing demand 12,818 11,306
Savings 10,080 13,274
Time certificates of $100,000 or more 6,712 9,191
Other time certificates 21,528 16,626
--------------- ------------------
Total deposits 64,687 63,592
Accrued interest payable and other liabilities 52 410
Total liabilities 64,739 64,002
--------------- ------------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value: 4,000,000 shares authorized:
xxxxx and 1,018,300 shares issued and outstanding at September 30, 2,551 2,546
1996 and December 31, 1995, respectively
Additional paid-in capital 2,636 2,631
Retained earnings 1,367 936
--------------- ------------------
Total stockholder's equity 6,554 6,113
--------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,293 $ 70,115
=============== ==================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF EARNINGS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
For the Three Months For the Six Months
Ended June 30, Ended June 30
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $1,585 4289 $3,153 2767
Federal funds sold 65 78 115 137
Time deposits in other financial institutions 20 57 38 111
Investment securities 21 11 53 22
------ ------ ------ ------
Total interest income 1,691 1,435 3,359 3,037
INTEREST EXPENSE ON DEPOSITS 609 609 1,180 1,198
------ ------ ------ ------
NET INTEREST INCOME 1,082 826 2,179 1,839
PROVISION FOR LOAN LOSSES 105 90 225 180
------ ------ ------ ------
NET INTEREST AFTER PROVISION FOR LOAN
LOSSES 977 736 1,954 1,659
OTHER INCOME:
Gains from loan sales 355 638 529 896
Loan servicing fees 491 328 1,023 328
Service charges, fees and other income 763 502 1518 934
------ ------ ------ ------
Total other income 1,609 1,468 3,070 2,158
------ ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,374 888 2,668 1,682
Occupancy expenses 248 238 547 459
Other operating expenses 499 377 944 648
------ ------ ------ ------
Total other expenses 2,121 1,503 4,159 2,789
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME
TAXES 465 701 865 1,028
PROVISION FOR INCOME TAXES 195 300 364 425
------ ------ ------ ------
NET INCOME $ 270 $ 401 $ 501 $ 603
====== ====== ====== ======
NET INCOME PER COMMON SHARE $ 0.25 $ 0.38 $ 0.46 $ 0.57
====== ====== ====== ======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
FOR THE SIX MONTHS
ENDED JUNE 30
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 501 $ 603
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 225 180
Depreciation and amortization 227 139
Loss on OREO - 2
Origination of excess servicing assets (932) (317)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 565 (505)
Accrued interest payable and other liabilities (358) (506)
-------- --------
Net cash provided by (used in) operating activities 228 (404)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock (522) (7)
Net decrease in time deposits in other financial institutions 90 593
Net increase in loans (4,843) (1,412)
Proceeds from sale of other real estate owned 76 181
Purchase of premises and equipment (558) (222)
-------- --------
Net cash used in investing activities (5,757) (867)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, and savings accounts (1,329) 3,539
Net increase (decrease) in time certificates 2,424 (3,406)
Exercise of stock options 10 4
Cash dividends paid (71) (46)
-------- --------
Net cash provided by financing activities 1,034 91
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,494) (1,180)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,146 7,484
-------- --------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30. $ 6,652 $ 6,304
======== ========
See notes to financial statements.
</TABLE>
GOLETA NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
For the six months ended June 30, 1996 and 1995
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Financial Statements in Goleta National Bank's 1995 Annual Report.
Loans Held for Sale - The guaranteed portion of loans insured by the SBA
and HUD Title I home improvement loans, which are originated and are intended
for sale in the secondary market, are carried at the lower of cost or estimated
market value. Funding for SBA and HUD programs depends on annual appropriations
by the U.S. Congress, and accordingly, the sale of loans under these programs is
dependent on the continuation of such programs.
On January 1, 1995 the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114
prescribes that a loan is impaired when it is probable that the creditor will be
unable to collect all contractual principal and interest payments under the
terms of the loan agreement. SFAS No. 114 generally requires impaired loans to
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as an expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Creditors may select the measurement method on a
loan-by-loan basis, except that collateral-dependent loans must be measured at
the fair value of the collateral if foreclosure is probable. SFAS No. 114 also
prescribes measuring impairment of a restructured loan by discounting the total
expected future cash flows at the loan's effective rate of interest in the
original loan agreement. The effect of initially adopting SFAS No. 114 is
reported as part of the provision for loan losses. The adoption of SFAS No. 114
did not have a material impact on the results of operations or the financial
position of the Bank taken as a whole.
The Bank sells SBA and HUD Title I loans with servicing retained. At the
time of the sale, an evaluation is made of the contractual servicing fee that is
represented by the differential between the contractual interest rate of the
loan and the interest rate payable to the investor. The present value of the
amount by which the contractual servicing fee exceeds a normal servicing fee, or
the Bank's cost of servicing such loans plus a normal profit, whichever is
greater, after evaluation of estimated prepayments on such loans, is considered
to be an adjustment of the sales
proceeds, which in turn increases the gain recognized at the time of the sale.
Such gains are only recognized to the extent they do not exceed the amount
deferred as yield enhancement on the unguaranteed portion of the SBA loan sold.
The resultant amount of deferred loan sales proceeds is amortized using a method
that approximates a level yield over the estimated remaining lives of such
loans. The contractual servicing fee is recognized as income over the lives of
the related loans, net of the estimated normal amortization of the deferred loan
sales proceeds. Loan servicing costs are charged to expense as incurred. When
actual loan repayment experience differs from original estimates, amortization
is adjusted accordingly through operations.
2. Certain reclassifications have been made in the 1995 financial
information to conform to the presentation used in 1996.
3. In the ordinary course of business, the Bank enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of June 30, 1996, the Bank had entered
into commitments with certain customers amounting to $9.7 million compared to
$9.9 million at December 31, 1995. Letters of credit at June 30, 1996 and
December 31, 1995 were $86,000 and $96,000, respectively.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management, are
necessary for a fair statement of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ending June 30, 1996 are
not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
5. Net income per share has been computed based on the weighted average
number of common shares and common stock equivalents outstanding during each
period. All share and earnings per share amounts have been retroactively
restated to reflect the 10% stock dividend issued in 1995 and the 2 for 1 stock
split in 1996.
6. Supplemental cash flow information. During the three-month and six month
period ended June 30, 1996, loans amounting to $347,000 and $362,000,
respectively were transferred to Other Real Estate Owned ("OREO") as a result of
foreclosure on the real properties held as collateral. OREO sold during the
three-month and six month periods ended June 30, 1996, amounted to $0 and
$76,000, respectively.
7. On March 15, 1996, the shareholders of the Bank approved a 2 for 1 stock
split effective for shareholders of record on February 18, 1996. Furthermore,
at that date the shareholders authorized an additional 2,000,000 shares of the
Bank's common stock to be held for future issuance.
8. During the three months ended June 30, 1996, the Bank filed an S-1
registration statement which became effective on May 17, 1996. The registration
statement was filed in conjunction with a secondary offering of the Bank's
stock. The offering was closed on July 17, 1996, and will result in the
issuance of 429,684 shares of common stock and 472,653 warrants. Each warrant
will entitle the holder to purchase one share of common stock at $8.75. The
warrants expire June 30, 1998.
GOLETA NATIONAL BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Goleta National Bank.
For a more complete understanding of Goleta National Bank and its operations,
reference should be made to the financial statements included in this report and
the Bank's 1995 Annual Financial Statements.
RESULTS OF OPERATIONS
The Bank reported net earnings of $270,000, or $.25 per share, and $501,000, or
$.36 per share for the three and six months ended June 30, 1996, compared to
$401,000, or $.38 per share and $603,000 or $.57 per share, for the three and
six months ended June 30, 1995. This represented a decrease in earnings of
$131,000, or 33% and $102,000, or 17%, for the three and six months ended June
30, 1996. This is because of a one time sale of a portfolio of loans that
resulted in a $500,000 gain in 1995. This portfolio sale was not repeated in
1996. For the three and six months ended June 30, 1996, the annualized return
on average assets was 1.49% and 1.42%, compared to 2.56% and 1.98% in 1995. The
annualized return on average equity was 16.7% and 15.8% for the three and six
months ended June 30, 1996 and 29.3% and 22.4% for the three and six months
ended June 30, 1995.
Pre-tax operating earnings totaled $465,000 and $865,000 for the three and six
months ended June 30, 1996. This represented an increase of $264,000 or 131.3%
and $337,000 or 63.8%, over pre-tax operating income of $201,000 and $528,000
for the three and six months ended June 30, 1995 which excludes the impact of
the one time gain on the sale of a portfolio.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments, and
the interest paid for deposits and borrowed funds. The net interest margin is
net interest income expressed as a percentage of average earning assets.
The net interest margin was 5.06% and 7.02% for the three and six months ended
June 30, 1996, compared to a net interest margin of 5.67% and 6.53% for the
three and six months ended June 30, 1995. The increase in the net interest
margin resulted as both net interest income and average earning assets
increased. Net interest income totaled $1.1 million and $2.2 million for the
three and six months ended June 30, 1996. This represented an increase of $.3
million, or 37.5% and $.4 million or 22.2%, from net interest income of $.8
million and $1.8 million for the three and six months ended June 30, 1995.
Earning assets averaged $64.2 million and $62.1 million for the three and six
months ended June 30, 1996. This represented an increase of $7.8 million, or
13.8% and $7.0 million or 12.7%, over average earning
assets of $56.4 million and $55.1 million for the three and six months ended
June 30, 1995.
For the three and six months ended June 30, 1996, the Bank earned interest and
fees of $1.7 million and $3.4 million on average loans of $55.6 million and
$54.6 million, representing an annualized yield of 12.2% and 12.5%. For the
three and six months ended June 30, 1995, the Bank earned interest and fees of
$1.3 million and $2.8 million on average loans of $46.4 million and 46.8
million, for an annualized yield of 11.2% and 12.0%.
CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for potential credit losses. The allowance is
increased by a provision for credit losses charge against operating results and
from recoveries on loans previously charge off. The allowance is reduced by
loan losses charged to the allowance. The allowance for credit losses was $1.3
million at June 30, 1996 versus $1.5 million at December 31, 1995. At June 30,
1996, the allowance for credit losses was equal to 2.26% of gross loans, as
compared to 2.76% of gross loans at December 31, 1995.
For the three and six months ended June 30, 1996, the provision for credit
losses was $105,000 and $225,000, representing an increase of $15,000, or 16.7%,
and $45,000, or 25.0% from a provision for credit losses of $90,000 and $180,000
for the three and six months ended June 30, 1995. Loans charged to the
allowance for credit losses, net of recoveries, totaled $411,000 and $425,000
for the three and six months ended June 30, 1996, compared to net loans charged
to the allowance for credit losses of $7,000 and $41,000 for the three and six
months ended June 30, 1995.
Nonaccrual loans declined to $1 million at June 30, 1996, compared to $1.2
million at December 31, 1995. This represented a decrease of $200,000, or
16.7%. The Company has adopted the methods prescribed by Statement of Financial
Accounting Standards No. 114 for determining the fair value of specific loans
for which the eventual collection of all principal and interest is considered
impaired.
While management believes that the allowance was adequate at June 30, 1996 to
absorb losses from any known or inherent risks in the portfolio, no assurance
can be given that economic conditions which adversely affect the Bank's service
areas or other circumstances will not be reflected in increased provisions or
credit losses in the future.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gains on
sale of loans, servicing fees, and other revenues not derived from interest on
earning assets. Other operating income for the three and six months ended June
30, 1996 was $1,609,000 and $3,070,000. This represented an increase of
$141,000, or 9.6%, and $912,000 or 42.3%, over other operating income of
$1,468,000 and $2,158,000 for the three and six months ended June 30, 1995. The
increase was due to an increase in mortgage fee income, slightly offset by the
one time gain on the sale of loans taken during the second quarter of 1995.
OTHER OPERATING EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Bank required
additional staff and overhead expense to support the continued high level of
customer service which increased the cost of occupying the Bank's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Bank personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other operating
expenses totaled $2,121,000 and $4,159,000 for the three and six months ended
June 30, 1996. This represented an increase of $618,000, or 41.1% and
$1,370,000 or 49.1%, over other operating expenses of $1,503,000 and $2,789,000
for the three and six months ended June 30, 1995. The increases in other
expenses for the periods compared were primarily because of compensation related
to loan originations and sales, the purchase of data processing hardware and
software, and the increase in the number of loan production and processing
offices.
BALANCE SHEET ANALYSIS
At June 30, 1996, total assets were $71.3 million, representing an increase of
$1.2 million, or 1.7%, from total assets of $70.1 million at December 31, 1995.
Total deposits of $64.7 million at June 30, 1996, increased $1.1 million, or
1.7% from $63.6 million at December 31, 1995. Net loans increased $4.3 million,
or 8.3%, from $51.6 million at December 31, 1995, to $55.8 million at June 30,
1996.
INVESTMENT SECURITIES
At June 30, 1996, investment securities (including federal funds sold) totaled
$6.3 million. This represented a decrease of $4.1 million, or 39.5%, over total
investments of $10.4 million at December 31, 1995. This decrease is a result of
a shift from investments to higher yielding loans.
DEPOSITS AND OTHER BORROWINGS
At June 30, 1996, deposits totaled $64.7 million. This represented an increase
of $1.1 million, or 1.7%, over total deposits of $63.6 million at December 31,
1995.
Non-interest bearing demand deposits totaled $13.5 million at June 30, 1996.
This represented an increase of $300,000, or 2.3%, over non-interest bearing
demand deposits of $13.2 million at December 31, 1995.
LIQUIDITY
The Bank has an asset and liability management program allowing the Bank to
maintain its interest margins during times of both rising and falling interest
rates and to maintain sufficient liquidity. Liquidity of the Bank at June 30,
1996 was 21.5% and at December 31, 1995 was 23.8%, based on liquid assets
(consisting of cash and due from banks, deposits in other financial
institutions, investments not pledged, federal funds sold and loans available
for sale) divided by total liabilities. Management believes it maintains
adequate liquidity levels.
CAPITAL RESOURCES
The Bank's equity capital was $6.6 million at June 30, 1996. The primary source
of capital for the Bank has been the retention of net income. However,
subsequent to June 30, 1996, the Bank raised approximately $2.7 million through
a secondary stock offering. This increased capital will be used for possible
merger or acquisition activity as well as to allow continued growth. The Bank's
1995 annual report (note 6 of such accompanying financial statements) describes
the regulatory capital requirements of the Bank.
The Bank is required to meet risk-based capital standards set by the respective
regulatory authorities. The risk-based capital standards require the
achievement of a minimum ratio of total capital to risk-weighted assets of 8.0%
(of which at least 4.0% must be Tier 1 capital). In addition, the regulatory
authorities require the highest rated institutions to maintain a minimum
leverage ratio of 4.0%. At June 30, 1996, the Bank exceeded the minimum
risk-based capital ratio and leverage ratio required to be considered "Well
Capitalized".
Table 1 below presents the Bank's risk-based and leverage capital ratios as
of June 30, 1996, and December 31, 1995:
TABLE 1 - REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
MINIMUM
MINIMUM WELL
CAPITAL RATIOS REQUIREMENT CAPITALIZED JUNE 30, 1996 DECEMBER 31, 1995
- --------------- ------------ ------------ -------------- ------------------
<S> <C> <C> <C> <C>
Risk-based
Capital Ratios:
Tier I 4.00% 6.00% 9.67% 11.08%
Total 8.00% 10% 10.73% 12.36%
Leverage Ratio 4.00% 5% 7.94% 8.53%
</TABLE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The date of the meeting and whether it was an annual
or special meeting
May 23, 1996 Annual Meeting
(b) The name of each director elected at the meeting
Michael A. Alexander
Dr. Mounir R. Ashamalla
Robert H. Bartlein
Jean W. Blois
John D. Illgen
John D. Markel
Michel Nellis
William R. Peeples
James R. Sims, Jr
Llewellyn W. Stone
(c) Description of each matter voted upon and the number
of votes cast for, against or withheld
Proposal 1 - election of the Board of Directors
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
Michael A. Alexander 699,272 0 26,092
Dr. Mounir R. Ashamalla 695,222 0 30,142
Robert H. Bartlein 695,312 0 30,052
Jean W. Blois 695,222 0 30,142
John D. Illgen 699,272 0 26,092
John D. Markel 695,222 0 30,142
Michel Nellis 699,272 0 26,092
William R. Peeples 677,140 0 48,224
James R. Sims, Jr 677,140 0 48,224
Llewellyn W. Stone 695,222 0 30,142
</TABLE>
Proposal 2 - ratification of Deloitte & Touche LLP
As the Bank's independent auditors 720,612 votes for,
0 votes against, and 4,752 votes withheld
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLETA NATIONAL BANK
--------------------
(Registrant)
By: /S/ C. Randy Shaffer
--------------------
Date: August 14, 1996 C. Randy Shaffer
Executive Vice President
Chief Financial Officer
<PAGE>
FORM 10-Q
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
For the Quarter Ended September 30, 1996 Commission File Number:
GOLETA NATIONAL BANK
(Exact name of registrant as specified in its charter)
California 77-0194455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5827 Hollister Ave., Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 683-4944
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 and 12CFR16.3 during the preceeding 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
Number of shares of common stock of the registrant: 1,450,416 outstanding as of
September 30, 1996
This Form 10-Q contains 13 pages.
<PAGE>
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
GOLETA NATIONAL BANK
BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS
September 30, 1996 December 31, 1995
-------------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,322 $ 3,273
Federal funds sold 5,780 7,873
Time deposits in other financial institutions 2,072 1,378
Federal reserve bank stock 156 137
Investment securities held to maturity, at cost,
fair value of $1,498 in 1996 and $994
in 1995 1,498 994
Loans
Held for investment, net of allowance for loan
losses of $1,381 in 1996 and $1,463
in 1995 49,385 48,831
Held for sale, at lower of cost or fair value 4,388 2,743
Other real estate owned, net 42 -
Premises and equipment, net 1,906 1,576
Excess servicing assets 2,097 1,042
Accrued interest receivable and other assets 1,575 2,268
-------------------- ------------------
TOTAL ASSETS $ 71,221 $ 70,115
==================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 12,103 $ 13,195
Interest-bearing demand 13,003 11,306
Savings 11,200 13,274
Time certificates of $100,000 or more 10,891 9,191
Other time certificates 14,078 16,626
-------------------- ------------------
Total deposits 61,275 63,592
Accrued interest payable and other liabilities 297 410
Total liabilities 61,572 64,002
-------------------- ------------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value: 4,000,000 shares authorized:
1,450,416 and 1,018,300 shares issued and outstanding at September 30, 3,626 2,546
1996 and December 31, 1995, respectively
Additional paid-in capital 4,351 2,631
Retained earnings 1,672 936
-------------------- ------------------
Total stockholder's equity 9,649 6,113
-------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,221 $ 70,115
==================== ==================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF EARNINGS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $1,648 $1,465 $4,615 $4,232
Federal funds sold 85 53 200 190
Time deposits in other financial institutions 22 43 60 154
Investment securities 23 11 77 33
------ ------ ------ ------
Total interest income 1,778 1,572 4,952 4,609
INTEREST EXPENSE ON DEPOSITS 610 612 1,790 1,809
------ ------ ------ ------
NET INTEREST INCOME 1,168 960 3,162 2,800
PROVISION FOR LOAN LOSSES 110 90 335 270
------ ------ ------ ------
NET INTEREST AFTER PROVISION FOR LOAN 1058 870 2,827 2,530
LOSSES
OTHER INCOME:
Gains from loan sales 325 359 854 1,255
Loan servicing fees 1,084 596 2,788 1,540
Service charges, fees and other income 224 335 1247 653
------ ------ ------ ------
Total other income 1,633 1,290 4,889 3,448
------ ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,340 1,026 4,009 2,709
Occupancy expenses 306 255 852 714
Other operating expenses 527 401 1,471 1,050
------ ------ ------ ------
Total other expenses 2,173 1,682 6,332 4,473
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME 518 478 1,384 1,505
TAXES
PROVISION FOR INCOME TAXES 213 194 577 618
------ ------ ------ ------
NET INCOME $ 305 $ 284 $ 807 $ 887
====== ====== ====== ======
NET INCOME PER COMMON SHARE $ .25 $ .28 $ .75 $ .88
====== ====== ====== ======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 807 $ 887
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses 335 270
Depreciation and amortization 349 214
Gain on OREO (41) -
Origination of excess servicing assets (1,054) (636)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 692 (612)
Accrued interest payable and other liabilities (113) (540)
-------- --------
Net cash provided by (used in) operating activities 975 (417)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock (1,522) (11)
Maturity of held-to-maturity investment securities 1,000 -
Net decrease (increase) in time deposits in other financial institutions (694) 1,880
Net increase in loans (2,928) (5,582)
Proceeds from sale of other real estate owned 393 653
Purchase of premises and equipment (680) (583)
-------- --------
Net cash used in investing activities (4,431) (3,643)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, and savings accounts (1,470) 7,344
Net (decrease) in time certificates (847) (916)
Net Proceeds of Secondary Stock Offering 2,800 -
Exercise of stock options - 4
Cash dividends paid (71) (46)
-------- --------
Net cash provided by financing activities 412 6,386
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,044) 2,326
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,146 7,484
-------- --------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30. $ 8,102 $ 9,810
======== ========
See notes to financial statements.
</TABLE>
GOLETA NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1996 and 1995
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Financial Statements in Goleta National Bank's 1995 Annual Report.
Loans Held for Sale - The guaranteed portion of loans insured by the SBA
and HUD Title I home improvement loans, which are originated and are intended
for sale in the secondary market, are carried at the lower of cost or estimated
market value. Funding for SBA and HUD programs depends on annual appropriations
by the U.S. Congress, and accordingly, the sale of loans under these programs is
dependent on the continuation of such programs.
On January 1, 1995 the Bank adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114
prescribes that a loan is impaired when it is probable that the creditor will be
unable to collect all contractual principal and interest payments under the
terms of the loan agreement. SFAS No. 114 generally requires impaired loans to
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as an expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Creditors may select the measurement method on a
loan-by-loan basis, except that collateral-dependent loans must be measured at
the fair value of the collateral if foreclosure is probable. SFAS No. 114 also
prescribes measuring impairment of a restructured loan by discounting the total
expected future cash flows at the loan's effective rate of interest in the
original loan agreement. The effect of initially adopting SFAS No. 114 is
reported as part of the provision for loan losses. The adoption of SFAS No. 114
did not have a material impact on the results of operations or the financial
position of the Bank taken as a whole.
The Bank sells SBA and HUD Title I loans with servicing retained. At the
time of the sale, an evaluation is made of the contractual servicing fee that is
represented by the differential between the contractual interest rate of the
loan and the interest rate payable to the investor. The present value of the
amount by which the contractual servicing fee exceeds a normal servicing fee, or
the Bank's cost of servicing such loans plus a normal profit, whichever is
greater, after evaluation of estimated prepayments on such loans, is considered
to be an adjustment of the sales
proceeds, which in turn increases the gain recognized at the time of the sale.
Such gains are only recognized to the extent they do not exceed the amount
deferred as yield enhancement on the unguaranteed portion of the SBA loan sold.
The resultant amount of deferred loan sales proceeds is amortized using a method
that approximates a level yield over the estimated remaining lives of such
loans. The contractual servicing fee is recognized as income over the lives of
the related loans, net of the estimated normal amortization of the deferred loan
sales proceeds. Loan servicing costs are charged to expense as incurred. When
actual loan repayment experience differs from original estimates, amortization
is adjusted accordingly through operations.
2. Certain reclassifications have been made in the 1995 financial
information to conform to the presentation used in 1996.
3. In the ordinary course of business, the Bank enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of September 30, 1996, the Bank had
entered into commitments with certain customers amounting to $12.2 million
compared to $9.9 million at December 31, 1995. Letters of credit at September
30, 1996 and December 31, 1995 were $81,000 and $96,000, respectively.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management, are
necessary for a fair statement of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ending September 30, 1996
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
5. Net income per share has been computed based on the weighted average
number of common shares and common stock equivalents outstanding during each
period. All share and earnings per share amounts have been retroactively
restated to reflect the 10% stock dividend issued in 1995 and the 2 for 1 stock
split in 1996.
6. Supplemental cash flow information. During the three-month and nine
month period ended September 30, 1996, loans amounting to $31,000 and $393,000,
respectively were transferred to Other Real Estate Owned ("OREO") as a result of
foreclosure on the real properties held as collateral. OREO sold during the
three-month and nine month periods ended September 30, 1996, amounted to
$276,000 and $352,000, respectively.
7. On March 15, 1996, the shareholders of the Bank approved a 2 for 1 stock
split effective for shareholders of record on February 18, 1996. Furthermore,
at that date the shareholders authorized an additional 2,000,000 shares of the
Bank's common stock to be held for future issuance.
8. During the second quarter, the Bank filed an S-1 registration statement
which became effective on May 17, 1996. The registration statement was filed in
conjunction with a secondary offering of the Bank's stock. The offering was
closed on July 17, 1996, and resulted in the issuance of 429,684 shares of
common stock and the issuance of 472,653 warrants. Each warrant will entitle
the holder to purchase one share of common stock at $8.75. The warrants expire
June 30, 1998.
GOLETA NATIONAL BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Goleta National Bank.
For a more complete understanding of Goleta National Bank and its operations,
reference should be made to the financial statements included in this report and
the Bank's 1995 Annual Financial Statements.
RESULTS OF OPERATIONS
The Bank reported net earnings of $305, or $.25 per share, and $807, or $.75 per
share for the three and nine months ended September 30, 1996, compared to $284,
or $.28 per share and $887 or $.88 per share, for the three and nine months
ended September 30, 1995. While net earnings for the three months ended
September 30, 1996 increased by $21, or 7.4%, net earnings for the nine months
ended September 30, 1996 decreased by $80, or 9.0%. This is because of a one
time sale of a portfolio of loans that resulted in a $500 gain in 1995. This
portfolio sale was not repeated in 1996. For the three and nine months ended
September 30, 1996, the annualized return on average assets was 1.7% and 1.5%,
compared to 1.8% and 1.9% in 1995. The annualized return on average equity was
15.1% and 14.5% for the three and nine months ended September 30, 1996 and 19.7%
and 21.3% for the three and nine months ended September 30, 1995.
Pre-tax operating earnings totaled $518 and $1,384 for the three and nine months
ended September 30, 1996. This represented an increase of $40 or 8.4% and $379
or 37.7%, over pre-tax operating income of $478 and $1,005, excluding the one
time gain on the sale of a portfolio, for the three and nine months ended
September 30, 1995.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments, and
the interest paid for deposits and borrowed funds. The net interest margin is
net interest income expressed as a percentage of average earning assets.
The net interest margin was 7.1% and 6.4% for the three and nine months ended
September 30, 1996, compared to a net interest margin of 6.4% and 6.3% for the
three and nine months ended September 30, 1995. The increase in the net
interest margin resulted as both net interest income and average earning assets
increased. Net interest income totaled $1,168 and $3,162 for the three and nine
months ended September 30, 1996. This represented an increase of $208, or 21.7%
and $362 or 12.9%, from net interest income of $960 and $2800 for the three and
nine months ended September 30, 1995. Earning assets averaged $65,512 and
$65,417 for the three and nine months ended September 30, 1996. This
represented an increase of $5,589, or 9.3% and $6,367 or 10.8%, over average
earning assets of $59,923 and $59,050 for the three and nine months ended
September 30, 1995.
For the three and nine months ended September 30, 1996, the Bank earned interest
and fees of $1,778 and $4,952 on average loans of $54,801 and $53,725,
representing an annualized yield of 13.0% and 12.3%. For the three and nine
months ended September 30, 1995, the Bank earned interest and fees of $1,572 and
$4,609 on average loans of $48,618 and $47,527, for an annualized yield of 12.9%
and 12.9%.
CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for potential credit losses. The allowance is
increased by a provision for credit losses charge against operating results and
from recoveries on loans previously charge off. The allowance is reduced by
loan losses charged to the allowance. The allowance for credit losses was
$1,381 at September 30, 1996 versus $1,463 at December 31, 1995. At September
30, 1996, the allowance for credit losses was equal to 2.5% of gross loans, as
compared to 2.8% of gross loans at December 31, 1995.
For the three and nine months ended September 30, 1996, the provision for credit
losses was $110 and $335, representing an increase of $20, or 22.2%, and $65, or
24.1% over a provision for credit losses of $90 and $270 for the three and nine
months ended September 30, 1995. Loans charged to the allowance for credit
losses, net of recoveries, totaled $20 and $423 for the three and nine months
ended September 30, 1996, compared to net loans charged to the allowance for
credit losses of $68 and $99 for the three and nine months ended September 30,
1995.
Nonaccrual loans declined to $632 at September 30, 1996, compared to $1,037 at
December 31, 1995. This represented a decrease of $405, or 39.0%. The Company
has adopted the methods prescribed by Statement of Financial Accounting
Standards No. 114 for determining the fair value of specific loans for which the
eventual collection of all principal and interest is considered impaired.
While management believes that the allowance was adequate at September 30, 1996
to absorb losses from any known or inherent risks in the portfolio, no assurance
can be given that economic conditions which adversely affect the Bank's service
areas or other circumstances will not be reflected in increased provisions or
credit losses in the future.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gains on
sale of loans, servicing fees, and other revenues not derived from interest on
earning assets. Other operating income for the three and nine months ended
September
30, 1996 was $1,633 and $4,889. This represented an increase of $343, or 26.6%,
and $1,441 or 41.9%, over other operating income of $1,290 and $3,448 for the
three and nine months ended September 30, 1995. The increase was because of an
increases in fee and excess servicing income, slightly offset by the one time
gain on the sale of loans taken during the second quarter of 1995.
OTHER OPERATING EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Bank required
additional staff and overhead expense to support the continued high level of
customer service which increased the cost of occupying the Bank's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Bank personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other operating
expenses totaled $2,173 and $6,332 for the three and nine months ended September
30, 1996. This represented an increase of $491, or 29.2% and $1,859 or 41.6%,
over other operating expenses of $1,682 and $4,473 for the three and nine months
ended September 30, 1995. The increases in other expenses for the periods
compared were primarily because of compensation related to loan originations and
sales, the purchase of data processing hardware and software, and the increase
in the number of loan production and processing offices.
BALANCE SHEET ANALYSIS
At September 30, 1996, total assets were $71,221, representing an increase of
$1,106, or 1.6%, from total assets of $70,115 at December 31, 1995. Total
deposits of $61,276 at September 30, 1996, decreased $2,316, or 3.6% from
$63,592 at December 31, 1995. Net loans increased $2,199, or 4.3%, from $51,574
at December 31, 1995, to $53,773 at September 30, 1996.
INVESTMENT SECURITIES
At September 30, 1996, investment securities (including federal funds sold)
totaled $9,506. This represented a decrease of $876, or 8.4%, over total
investments of $10,382 at December 31, 1995. This decrease is a result of a
shift from investments to higher yielding loans.
DEPOSITS AND OTHER BORROWINGS
At September 30, 1996, deposits totaled $61,276. This represented a decrease of
$2,316, or 3.6%, over total deposits of $63,592 at December 31, 1995.
Non-interest bearing demand deposits totaled $12,103 at September 30, 1996.
This represented a decrease of $1,092, or 8.3%, over non-interest bearing demand
deposits of $13,195 at December 31, 1995.
LIQUIDITY
The Bank has an asset and liability management program which aids management in
maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Bank
at September 30, 1996 was 22.8% and at December 31, 1995 was 23.8%, based on
liquid assets (consisting of cash and due from banks, deposits in other
financial institutions, investments not pledged, federal funds sold and loans
available for sale) divided by total liabilities. Management believes it
maintains adequate liquidity levels.
CAPITAL RESOURCES
The Bank's equity capital was $9,649 at September 30, 1996. The primary source
of capital for the Bank has been the retention of net income. In addition, the
Bank raised $2.8 million through a secondary stock offering. This increased
capital will be used for possible merger or acquisition activity as well as to
allow continued growth. The Bank's 1995 annual report (note 6 of such
accompanying financial statements) describes the regulatory capital requirements
of the Bank.
The Bank is required to meet risk-based capital standards set by the respective
regulatory authorities. The risk-based capital standards require the
achievement of a minimum ratio of total capital to risk-weighted assets of 8.0%
(of which at least 4.0% must be Tier 1 capital). In addition, the regulatory
authorities require the highest rated institutions to maintain a minimum
leverage ratio of 4.0%. At September 30, 1996, the Bank exceeded the minimum
risk-based capital ratio and leverage ratio required to be considered "Well
Capitalized".
Table 1 below presents the Bank's risk-based and leverage capital ratios as
of September 30,
1996, and December 31, 1995:
TABLE 1 - REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
MINIMUM
MINIMUM WELL
CAPITAL RATIOS REQUIREMENT CAPITALIZED SEPTEMBER 30, 1996 DECEMBER 31, 1995
- --------------- ------------ ------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Risk-based
Capital Ratios:
Tier I 4.00% 6.00% 13.21% 11.08%
Total 8.00% 10.00% 14.48% 12.36%
Leverage Ratio 4.00% 5.00% 11.31% 8.53%
</TABLE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
At the Strategic Planning Meeting of the Board of Directors of the Registrant
held on September 19, 1996, a plan of reorganization was approved pursuant to
which Registrant would become a wholly-owned subsidiary of a newly-formed
California Corporation, Community West Bancshares ("CWB").
Under the terms of the plan of reorganization, CWB will be formed under the laws
of the State of California and Goleta Interim National Bank (the "Interim Bank")
will also be formed as a wholly-owned subsidiary of CWB. Under the plan of
reorganization, the Registrant will be merged with and into Interim Bank with
the Interim Bank as the surviving entity changing its name to "Goleta National
Bank". As a result of the reorganization, the Registrant will become the
wholly-owned subsidiary of CWB and each shareholder of the Registrant will
receive one share of CWB Common Stock for each share of the Registrant's Common
Stock held as of the record date of the reorganization.
Consummation of the reorganization is subject to the receipt of various
regulatory approvals, including but not limited to, approvals of the Office of
the Comptroller of the Currency and the Board of Governors of the Federal
Reserve System. The affirmative vote of the holders of not less than two-thirds
of the outstanding shares of the Registrant's Common Stock is also required. It
is anticipated that the reorganization will be consummated during the first
quarter of 1997.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLETA NATIONAL BANK
--------------------
(Registrant)
By: /S/ C. Randy Shaffer
----------------------
Date: November 14, 1996 C. Randy Shaffer
Executive Vice President
Chief Financial Officer
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
<PAGE>
FORM 10-Q
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
For the Quarter Ended March 31, 1997 Commission File Number:
GOLETA NATIONAL BANK
(Exact name of registrant as specified in its charter)
California 77-0194455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5827 Hollister Ave., Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 683-4944
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 and 12CFR16.3 during the preceeding 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
Number of shares of common stock of the registrant: 1,496,982 outstanding as of
April 30, 1997
This Form 10-Q contains 12 pages.
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
GOLETA NATIONAL BANK
BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
March 31, December 31,
1997 1996
------------ -------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,075 $ 3,777
Federal funds sold 8,640 9,015
------------ -------
Total cash and cash equivalents 11,715 12,792
Time deposits in other financial institutions 1,982 2,378
Federal reserve bank stock 156 156
Investment securities held to maturity, at cost,
fair value of $2,017 in 1997 and $1,998 in 1996 1,997 1,998
Investment securities held for trading, at fair value, 2,340 -
Loans
Held for investment, net of allowance for loan
losses of $1,377 in 1997 and $1,409 in 1996 59,070 50,591
Held for sale, at lower of cost or fair value 4,947 6,809
Other real estate owned, net 256 60
Premises and equipment, net 2,437 2,407
Servicing assets 173 2,232
Accrued interest receivable and other assets 1,195 1,461
------------ -------
TOTAL ASSETS $ 86,268 $80,884
============ =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 16,820 $15,235
Interest-bearing demand 13,379 11,579
Savings 12,267 10,362
Time certificates of $100,000 or more 6,712 11,349
Other time certificates 26,332 22,080
------------ -------
Total deposits 75,510 70,605
Accrued interest payable and other liabilities 356 219
------------ -------
Total liabilities 75,866 70,824
------------ -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value: 4,000,000 shares authorized:
1,478,962 and 1,473,492 shares issued and outstanding at March 31,
1997 and December 31, 1996 3,697 3,684
Additional paid-in capital 4,426 4,406
Retained earnings 2,279 1,970
------------ -------
Total stockholder's equity 10,402 10,060
------------ -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,268 $80,884
============ =======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF INCOME
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
For the Three Months
Ended March 31
1997 1996
------ ------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $1,680 $1,487
Federal funds sold 85 50
Time deposits in other financial institutions 32 18
Investment securities 30 33
------ ------
Total interest income 1,827 1,588
INTEREST EXPENSE ON DEPOSITS 666 572
------ ------
NET INTEREST INCOME 1,161 1,016
PROVISION FOR LOAN LOSSES 80 120
------ ------
NET INTEREST AFTER PROVISION FOR LOAN 1,081 896
------ ------
LOSSES
OTHER INCOME:
Gains from loan sales 652 706
Loan origination fees 633 405
Loan servicing income 209 127
Document processing fees 183 81
Service charges 181 131
Other income 33 92
------ ------
Total other income 1,891 1,542
------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,591 1,294
Occupancy expenses 330 298
Postage and freight 182 109
Other operating expenses 336 336
------ ------
Total other expenses 2,439 2,037
------ ------
INCOME BEFORE PROVISION FOR INCOME 533 401
TAXES
PROVISION FOR INCOME TAXES 224 169
------ ------
NET INCOME $ 309 $ 232
====== ======
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT $ 0.18 $ 0.23
====== ======
NET INCOME PER COMMON SHARE - ASSUMING FULL DILUTION $ 0.17 $ 0.23
====== ======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
For the Three Months
Ended March 31,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 309 $ 232
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses 80 120
Depreciation and amortization 134 110
Gain on sale of other real estate owned (3) -
Gain on sale of loans held for sale (652) (174)
Origination of servicing and interest only strip assets, net of amortization (277) (235)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets 266 490
Accrued interest payable and other liabilities 137 (279)
-------- --------
Net cash (used in) provided by operating activities (6) 264
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock - (502)
Net decrease in time deposits in other financial institutions 396 198
Net increase in loans (6,261) (4,079)
Proceeds from sale of other real estate owned 21 -
Purchase of premises and equipment (164) (95)
-------- --------
Net cash used in investing activities (6,008) (4,478)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, and savings accounts 5,290 (1,183)
Net (decrease) increase in time certificates (385) 4,815
Exercise of stock options 33 10
-------- --------
Net cash provided by financing activities 4,938 3,642
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,076) (572)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,792 11,146
-------- --------
CASH AND CASH EQUIVALENTS, MARCH 31. $11,716 $10,574
======== ========
See notes to financial statements.
</TABLE>
GOLETA NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
For the three months ended March 31, 1997 and 1996
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Financial Statements in Goleta National Bank's 1996 Annual Report on form 10-K.
Loans Held for Sale - The guaranteed portion of loans insured by the SBA
and HUD Title I home improvement loans, which are originated and are intended
for sale in the secondary market, are carried at the lower of cost or estimated
market value. Funding for SBA and HUD programs depends on annual appropriations
by the U.S. Congress, and accordingly, the sale of loans under these programs is
dependent on the continuation of such programs.
The Bank sells SBA and HUD Title I loans with servicing retained. On
January 1, 1997, the Bank adopted Statement of Financial Accounting Standard
("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement supersedes SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Under SFAS No. 125, the Bank is
required to identify the servicing and 'interest only strip' asset components of
each loan sold. The 'interest only strip' represents the difference between
the right to future interest and the contractual servicing rate. At the date of
sale, gains or losses are recorded based on the relative fair market values of
the components. The remaining components are then valued based on their
classification under SFAS No. 115. Loan servicing costs are charged to expense
as incurred. The adoption of SFAS No. 125 did not have a significant impact on
earnings or capital for financial statement purposes.
2. Certain reclassifications have been made in the 1996 financial
information to conform to the presentation used in 1997.
3. In the ordinary course of business, the Bank enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of March 31, 1997, the Bank had entered
into commitments with certain customers amounting to $12.6 million compared to
$12.8 million at December 31, 1996. Letters of credit at March 31, 1997 and
December 31, 1996 were $177,000 and $50,000.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management, are
necessary for a fair presentation of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ending March 31, 1997 are
not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
5. Net income per share has been computed based on the weighted average
number of common shares and common share equivalents outstanding during each
period, which was 1,748,796 and 1,054,037 in 1997 and 1996. Net income per
share - assuming full dilution has been computed based on the weighted average
number of common shares and common share equivalents outstanding during each
period, which was 1,791,337 and 1,069,248 in 1997 and 1996
6. Supplemental cash flow information. During the three-month period ended
March 31, 1997, loans amounting to $216,000 were transferred to Other Real
Estate Owned ("OREO") as a result of foreclosure on the real properties held as
collateral. During the three-month period ended March 31, 1997, the Bank sold
OREO with a book value of $18,000. In addition, the Bank transfered $2,340,000
from an excess servicing asset to an interest-only strip asset in accordance
with SFAS No. 125.
7. On March 26, 1997, the Bank announced the signing of a letter of intent
to merge with Los Robles Bancorp for the purpose of creating a multi-bank
holding company. Under the proposed agreement Los Robles Bancorp ("LRBC") will
be renamed Community West Bancshares ("CWB"). Upon completion of the merger,
the Bank and Los Robles Bank, an existing subsidiary of LRBC, will become member
bank subsidiaries of CWB.
The merger requires the preparation and execution of a definitive agreement
to merge, and the approval of the shareholders of both the Bank and LRBC, as
well as state and federal regulatory agencies. This transaction is expected to
be consummated during the fourth quarter of 1997.
GOLETA NATIONAL BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Goleta National Bank.
For a more complete understanding of Goleta National Bank and its operations,
reference should be made to the financial statements included in this report and
the Bank's 1996 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The Bank reported net earnings of $309, or $.17 per share, for the three months
ended March 31, 1997, compared to $232, or $.23 per share, for the three months
ended March 31, 1996. The earnings per share decrease is because of the
increased number of shares outstanding as a result of a stock offering completed
in August 1996. The book value per share increased from $6.23 at March 31,
1996, to $7.03 at March 31, 1997. Net earnings for the three months ended March
31, 1997 increased by $77, or 33.2%, compared to the first three months of 1996.
For the three months ended March 31, 1997, the annualized return on average
assets was 1.5%, compared to 1.3% in 1996. The annualized return on average
equity was 12.1% for the three months ended March 31, 1997 and 14.9% for the
three months ended March 31, 1996.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
The net interest margin was 5.9% for the three months ended March 31, 1997,
compared to a net interest margin of 6.1% for the three months ended March 31,
1996. Net interest income totaled $1,161 for the three months ended March 31,
1997. This represented an increase of $145, or 14.3%, from net interest income
of $1,016 for the three months ended March 31, 1996. Earning assets averaged
$78,465 for the three months ended March 31, 1997. This represented an increase
of $11,477, or 17.1%, over average earning assets of $66,988 for the three
months ended March 31, 1996.
For the three months ended March 31, 1997, the Bank earned interest and fees of
$1,680 on average loans of $60,708, representing an annualized yield of 11.7%.
For the three months ended March 31, 1996, the Bank earned interest and fees of
$1,487 on average loans of $53,467, for an annualized yield of 11.12%.
CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for potential credit losses. The allowance is
increased by a provision for credit losses charged against operating results and
from recoveries on loans previously charged off. The allowance is reduced by
loan losses charged to the allowance. The allowance for credit losses was
$1,377 at March 31, 1997, versus $1,409 at December 31, 1996. At March 31,
1997, the allowance for credit losses was equal to 2.1% of gross loans as
compared to 2.4% of gross loans at December 31, 1996.
For the three months ended March 31, 1997, the provision for credit losses was
$80, representing a decrease of $40, or 33.3%, over a provision for credit
losses of $120 for the three months ended March 31, 1996. Loans charged to the
allowance for credit losses, net of recoveries, totaled $113 for the three
months ended March 31, 1997, compared to net loans charged to the allowance for
credit losses of $410 for the three months ended March 31, 1996.
Nonaccrual loans increased to $688 at March 31, 1997 compared to $617 at
December 31, 1996. This represented an increase of $71, or 11.5%. The Company
has adopted the methods prescribed by SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan" for for determining the fair value of specific loans for
which the eventual collection of all principal and interest is considered
impaired.
While management believes that the allowance was adequate at March 31, 1997, to
absorb losses from any known or inherent risks in the portfolio, no assurance
can be given that economic conditions which adversely affect the Bank's service
areas or other circumstances will not be reflected in increased provisions or
credit losses in the future.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gains on
sale of FHA Title 1 home improvement loans, Gains on the sale of the guaranteed
portion of US Small Business Administration loans, servicing fees, and other
revenues not derived from interest on earning assets. Other operating income
for the three months ended March 31, 1997 was $1,891. This represented an
increase of $349, or 22.6%, over other operating income of $1,542 for the three
months ended March 31, 1996. The increase was because of an increase in fees
and gains on sales of loans.
OTHER OPERATING EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Bank required
additional staff and overhead expense to support the continued high level of
customer service, which increased the cost of occupying the Bank's offices.
Although
compensation expenses have grown significantly, approximately 40% of the Bank's
personnel derive some or all of their compensation based on income production.
This means that a significant portion of compensation is tied to increases in
revenues instead of being a fixed expense. Other operating expenses totaled
$2,439 for the three months ended March 31, 1997. This represented an increase
of $402, or 19.7%, over other operating expenses of $2,037 for the three months
ended March 31, 1996. The increase in other operating expense of 19.7% is
offset by the 22.6% increase in other operating income. The increase in other
expenses for the periods compared was primarily because of compensation related
to loan originations and sales, the purchase of data processing hardware and
software, and the increase in the number of loan production and processing
offices.
BALANCE SHEET ANALYSIS
At March 31, 1997 total assets were $86,268, representing an increase of
$5,384, or 6.7%, from total assets of $80,884 at December 31, 1996. Total
deposits of $75,510 at March 31, 1997 increased $4,905, or 6.9% from $70,605 at
December 31, 1996. Net loans increased $6,617, or 11.5%, from $57,400 at
December 31, 1996 to $64,017 at March 31, 1997.
INVESTMENT SECURITIES
At March 31, 1997, investment securities (including federal funds sold) totaled
$15,115. This represented an increase of $1,568, or 11.6%, over total
investments of $13,547 at December 31, 1996. This increase is a result of the
implementation of the SFAS No. 125. Under SFAS No. 125, the Bank is required to
recognize the present value of the right to receive future interest less the
contractual servicing rate. The asset created, an 'interest only strip', is
classified as an 'investment security - held for trading'. Subsequent changes
in the fair market value of the asset, are adjusted through current earnings.
DEPOSITS AND OTHER BORROWINGS
At March 31, 1997, deposits totaled $75,510. This represented an increase of
$4,905, or 6.9%, over total deposits of $70,605 at December 31, 1996.
Non-interest bearing demand deposits totaled $16,820 at March 31, 1997. This
represented an increase of $1,585, or 10.4%, over non-interest bearing demand
deposits of $15,235 at December 31, 1996.
LIQUIDITY
The Bank has an asset and liability management program which aids management in
maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Bank
at March 31, 1997 was 30.9% and at December 31, 1996 was 29.7%, based on liquid
assets (consisting of cash and due from banks, deposits in other
financial institutions, investments not pledged, federal funds sold and loans
available for sale) divided by total assets. Management believes it maintains
adequate liquidity levels.
CAPITAL RESOURCES
The Bank's equity capital was $10,402 at March 31, 1997. The primary source of
capital for the Bank has been the retention of net income. In addition, the
Bank raised $2.8 million through a secondary stock offering in 1996. During the
stock offering, 472,653 warrants were issued; these warrants are exercisable at
$8.75 and expire June 30, 1998. As of March 31, 1997, 2,774 warrants have been
exercised, leaving 469,879, or $4,111,441, that may be be exercised. This
increased capital, if obtained, will be used for possible merger or acquisition
activity, as well as to allow continued growth.
The Bank has signed a letter of intent to merge with Los Robles Bancorp., parent
company of Los Robles Bank, based in Thousand Oaks, California. The resulting
multibank holding company will be named Community West Bancshares. The merger
is expected to be completed later this year.
The Bank is required to meet risk-based capital standards set by the respective
regulatory authorities. The risk-based capital standards require the
achievement of a minimum ratio of total capital to risk-weighted assets of 8.0%
(of which at least 4.0% must be Tier 1 capital). In addition, the regulatory
authorities require the highest rated institutions to maintain a minimum
leverage ratio of 4.0%. At March 31, 1997, the Bank exceeded the minimum
risk-based capital ratio and leverage ratio required to be considered "Well
Capitalized."
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
On March 26, 1997, the Bank announced the signing of a letter of intent to merge
with Los Robles Bancorp for the purpose of creating a multibank holding company.
Under the proposed agreement Los Robles Bancorp ("LRBC") will be renamed
Community West Bancshares ("CWB"). Upon completion of the merger, the Bank and
Los Robles Bank, an existing subsidiary of LRBC, will become member bank
subsidiaries of CWB.
Each shareholder of the Registrant will receive approximately .55 shares of CWB
Common Stock for each share of the Registrant's Common Stock held as of the
record date of the merger.
Consummation of the merger is subject to the receipt of various regulatory
approvals, including but not limited to, approvals of the Office of the
Comptroller of the Currency and the Board of Governors of the Federal Reserve
System. The affirmative vote of the holders of not less than two-thirds of the
outstanding shares of each entity is also required. It is anticipated that the
merger will be consummated during the fourth quarter of 1997.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLETA NATIONAL BANK
--------------------
(Registrant)
By: /S/ C. Randy Shaffer
----------------------
Date: May 10, 1997 C. Randy Shaffer
Executive Vice President
Chief Financial Officer
<PAGE>
FORM 10-Q
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
For the Quarter Ended June 30, 1997 Commission File Number:
GOLETA NATIONAL BANK
(Exact name of registrant as specified in its charter)
California 77-0194455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5827 Hollister Ave., Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 683-4944
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 and 12CFR16.3 during the preceeding 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
Number of shares of common stock of the registrant: 1,519,943 outstanding as of
August 10, 1997
This Form 10-Q contains 14 pages.
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
GOLETA NATIONAL BANK
BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
June 30, December 31,
1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,038 $ 3,777
Federal funds sold 9,160 9,015
------- -------
Total cash and cash equivalents 12,198 12,792
Time deposits in other financial institutions 2,082 2,378
Federal reserve bank stock 244 156
Investment securities held to maturity, at cost,
fair value of $1,987 at June 30, 1997 and $1,998 at December 31, 1996 1,996 1,998
Investment securities held for trading, at fair value 2,462 -
Loans
Held for investment, net of allowance for loan
losses of $1,301 in 1997 and $1,409 in 1996 53,445 50,591
Held for sale, at lower of cost or fair value 8,741 6,809
Other real estate owned, net 272 60
Premises and equipment, net 2,501 2,407
Servicing assets 327 2,232
Accrued interest receivable and other assets 1,586 1,461
------- -------
TOTAL ASSETS $85,854 $80,884
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $15,714 $15,235
Interest-bearing demand 12,164 11,579
Savings 10,684 10,362
Time certificates of $100,000 or more 15,437 11,349
Other time certificates 19,515 22,080
------- -------
Total deposits 73,514 70,605
Accrued interest payable and other liabilities 1,282 219
------- -------
Total liabilities 74,796 70,824
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value: 4,000,000 shares authorized:
1,515,719 and 1,473,492 shares issued and outstanding at June 30,
1997 and December 31, 1996 3,789 3,684
Additional paid-in capital 4,586 4,406
Retained earnings 2,683 1,970
------- -------
Total stockholder's equity 11,058 10,060
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $85,854 $80,884
======= =======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF INCOME
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
For the Three Months For the Six Months
Ended June 30 Ended June 30
1997 1996 1997 1996
----- ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $1,873 $1,481 $3,553 $2,968
Federal funds sold 79 65 163 115
Time deposits in other financial institutions 31 20 64 38
Investment securities 31 21 61 53
----- ------ ------ ------
Total interest income 2,014 1,587 3,841 3,174
INTEREST EXPENSE ON DEPOSITS 674 609 1,340 1,180
----- ------ ------ ------
NET INTEREST INCOME 1,340 978 2,501 1,994
PROVISION FOR LOAN LOSSES 80 105 160 225
----- ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,260 873 2,341 1,769
OTHER INCOME:
Gains from loan sales 977 846 1,630 1,552
Loan origination fees 1049 546 1,865 1,032
Loan servicing income 156 153 365 340
Service charges and other income 250 168 463 331
----- ------ ------ ------
Total other income 2,432 1,713 4,323 3,255
----- ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,856 1,374 3,448 2,668
Occupancy expenses 385 248 715 547
Postage and freight 163 142 345 251
Other operating expenses 591 357 926 693
----- ------ ------ ------
Total other expenses 2,995 2,121 5,434 4,159
----- ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME
TAXES 697 465 1,230 865
PROVISION FOR INCOME TAXES 293 195 517 364
----- ------ ------ ------
NET INCOME $ 404 $ 270 $ 713 $ 501
===== ====== ====== ======
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT $ 0.23 $ 0.25 $ 0.41 0.47
===== ====== ====== ======
NET INCOME PER COMMON SHARE - ASSUMING FULL DILUTION $ 0.22 $ 0.25 $ 0.40 0.46
===== ====== ====== ======
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
GOLETA NATIONAL BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
For the Six Months
Ended June 30,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 713 $ 501
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses 160 225
Depreciation and amortization 276 227
Gain on sale of other real estate owned (3) -
Gain on sale of loans held for sale (1,630) (1,552)
Origination of servicing and interest only strip assets, net of amortization (315) (932)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (317) 565
Accrued interest payable and other liabilities 1,015 (358)
-------- --------
Net cash used in operating activities (101) (1,324)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock (1,086) (522)
Maturities of HTM securities 1,000 -
Net decrease in time deposits in other financial institutions 296 90
Net increase in loans (3,589) (3,290)
Proceeds from sale of other real estate owned 62 76
Purchase of premises and equipment (370) (558)
-------- --------
Net cash used in investing activities (3,687) (4,204)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, and savings accounts 1,385 (1,329)
Net increase in time certificates 1,523 2,424
Cash dividends paid - (71)
Exercise of Stock Warrants 185 -
Exercise of stock options 101 10
-------- --------
Net cash provided by financing activities 3,194 1,034
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (594) (4,494)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,792 11,146
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $12,198 $ 6,652
======== ========
See notes to financial statements.
</TABLE>
GOLETA NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
For the six months ended June 30, 1997 and 1996
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Financial Statements in Goleta National Bank's 1996 Annual Report on form 10-K.
Loans Held for Sale - The guaranteed portion of loans insured by the SBA
and FHA Title I home improvement loans, which are originated and are intended
for sale in the secondary market, are carried at the lower of cost or estimated
market value. Funding for SBA and FHA programs depends on annual appropriations
by the U.S. Congress, and accordingly, the sale of loans under these programs is
dependent on the continuation of such programs.
The Bank sells SBA and FHA Title I loans with servicing retained. On
January 1, 1997, the Bank adopted Statement of Financial Accounting Standard
("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" This statement supersedes SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Under SFAS No. 125, the Bank is
required to identify the servicing and 'interest only strip' asset components of
each loan sold. The 'interest only strip' represents the difference between
the right to future interest and the contractual servicing rate. At the date of
sale, gains or losses are recorded based on the relative fair market values of
the components. The remaining components are then valued based on their
classification under SFAS No. 115. Loan servicing costs are charged to expense
as incurred. The adoption of SFAS No. 125 did not have a significant impact on
earnings or capital for financial statement purposes.
2. Certain reclassifications have been made in the 1996 financial
information to conform to the presentation used in 1997.
3. In the ordinary course of business, the Bank enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of June 30, 1997, the Bank had entered
into commitments with certain customers amounting to $13.8 million compared to
$12.8 million at December 31, 1996. Letters of credit at June 30, 1997 and
December 31, 1996 were $177,000 and $50,000.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management, are
necessary for a fair presentation of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ending June 30, 1997 are
not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
5. Net income per share has been computed based on the weighted average
number of common shares and common share equivalents outstanding during each
period, which was 1,768,802 and 1,068,070 for the three months and 1,750,716 and
1,065,184 for the six months ended June 30, 1997 and 1996. Net income per share
- - assuming full dilution has been computed based on the weighted average number
of common shares and common share equivalents outstanding during each period,
which was 1,795,832 and 1,082,073 for the three months and 1,778,247 and
1,081,735 for the six months ended June 30, 1997 and 1996.
6. Supplemental cash flow information. During the six-month period ended
June 30, 1997, loans amounting to $272,000 were transferred to Other Real Estate
Owned ("OREO") as a result of foreclosure on the real properties held as
collateral. During the six-month period ended June 30, 1997, the Bank sold OREO
with a book value of $60,000. In addition, the Bank transfered $2,340,000 from
an excess servicing asset to an interest-only strip asset in accordance with
SFAS No. 125.
7. On March 26, 1997, the Bank announced the signing of a letter of intent
to merge with Los Robles Bancorp based in Thousand Oaks, California for the
purpose of creating a multi-bank holding company. Under the proposed agreement
Los Robles Bancorp ("LRBC") would have been renamed Community West Bancshares
("CWB"). Upon completion of the merger, the Bank and Los Robles Bank, an
existing subsidiary of LRBC, would have become member bank subsidiaries of CWB.
However, subsequent to to the letter of intent, differences arose between the
two parties, including the strategic direction of the holding company. On June
27, 1997 the Bank announced the cancellation of the letter of intent to merge
with Los Robles Bancorp. The Bank will continue its plans to form Community West
Bancshares, and follow its strategy of bringing on additional community banks
under its umbrella so they can take advantage of the wide range of financial
services available at the holding company level.
GOLETA NATIONAL BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Goleta National Bank.
For a more complete understanding of Goleta National Bank and its operations,
reference should be made to the financial statements included in this report and
the Bank's 1996 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The Bank reported net earnings of $404, and $713, for the three and six months
ended June 30, 1997, an increase of $134, or 49.6%, and $212, or 42.3% compared
to $270, and $501, for the three and six months ended June 30, 1996. The
primary earnings per share were $.23, and $.41 for the three and six months
ended June 30, 1997, compared to $.25 per share and $.47 per share in 1996.
Fully diluted earnings per share were $.22 and $.40 per share for the three and
six months ended June 30, 1997, compared to $.25 and $.46 per share for the same
period in 1996. Primary earnings per share is calculated using weighted average
number of shares outstanding for the period, plus the net effect of outstanding
warrants and vested options using the treasury stock method. Fully diluted
earnings per share is calculated the same way except the number of granted stock
options is used in place of vested stock options. Although earnings were up by
42.3%, earnings per share decreased as a result of a stock offering completed in
August 1996, which increased the number of shares going into the 1997 earnings
per share calculation by 64.3%. The book value per share increased from $6.42
at June 30, 1996, to $7.30 at June 30, 1997. For the three and six months ended
June 30, 1997, the annualized return on average assets was 1.9% and 1.7%
compared to 1.5% and 1.4% in 1996. The annualized return on average equity was
15.1% and 13.6% for the three and six months ended June 30, 1997, and 16.7% and
15.8% for the three and six months ended June 30, 1996.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
The net interest margin was 6.6% and 6.3% for the three and six months ended
June 30, 1997, compared to a net interest margin of 6.5% and 6.6% for the three
and six months ended June 30, 1996. Net interest income totaled $1,340 and
$2,501 for the three and six months ended June 30, 1997. This represented an
increase of $362, or 37.0%, and $507, or 25.4% from net interest income of $978
and $1,994 for the three and six months ended June 30, 1996. Earning assets
averaged $81,688 and $79,366 for the three and six months ended June 30, 1997.
This represented an increase of $14,603, or 21.8%, and $12,900, or 19.4% over
average earning assets of $67,085 and $66,466 for the three and six months ended
June 30, 1996.
For the three and six months ended June 30, 1997, the Bank earned interest and
fees of $2,014 and $3,841 on average loans of $63,101 and $61,201, representing
an annualized yield of 12.8% and 12.6%. For the three and six months ended June
30, 1996, the Bank earned interest and fees of $1,587 and $3,174 on average
loans of $55,595 and $54,254, for an annualized yield of 11.4% and 11.7%.
CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for potential credit losses. The allowance is
increased by a provision for credit losses charged against operating results and
from recoveries on loans previously charged off. The allowance is reduced by
loan losses charged to the allowance. The allowance for credit losses was
$1,301 at June 30, 1997, versus $1,409 at December 31, 1996. At June 30, 1997,
the allowance for credit losses was equal to 2.1% of gross loans as compared to
2.4% of gross loans at December 31, 1996.
For the three and six months ended June 30, 1997, the provision for credit
losses was $80, and $160 representing a decrease of $25, or 23.8% and $65, or
28.9%, over a provision for credit losses of $105 and $225 for the three and six
months ended June 30, 1996. Loans charged to the allowance for credit losses,
net of recoveries, totaled $154 and $267 for the three and six months ended
June 30, 1997, compared to net recovery of $14, and $396 net charge for the
three and six months ended June 30, 1996.
Nonaccrual loans increased to $998 at June 30, 1997, compared to $617 at
December 31, 1996. This represented an increase of $381, or 61.8%. The Company
has adopted the methods prescribed by SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan" for determining the fair value of specific loans for
which the eventual collection of all principal and interest is considered
impaired.
While management believes that the allowance was adequate at June 30, 1997, to
absorb losses from any known or inherent risks in the portfolio, no assurance
can be given that economic conditions which adversely affect the Bank's service
areas or other circumstances will not be reflected in increased provisions or
credit losses in the future.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gains on
sale of FHA Title 1 home improvement loans, gains on the sale of the guaranteed
portion of US Small Business Administration loans, servicing fees, and other
revenues not derived from interest on earning assets. Other operating income
for the three and six months ended June 30, 1997, was $2,432 and $4,323. This
represented an increase of $719, or 42.0%, and $1,068, or 32.8% over other
operating income of $1,713 and $3,255 for the three and six months ended June
30, 1996. The increase was due to continued emphasis by the Bank on generating
noninterest income. Plus, the Bank has opened additional loan production
offices since June 1996, creating an increase in fees and gains on loan sales.
OTHER OPERATING EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Bank required
additional staff and overhead expense to support the continued high level of
customer service, which increased the cost of occupying the Bank's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Bank's personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other operating
expenses totaled $2,995 and $5,434 for the three and six months ended June 30,
1997. This represented an increase of $874, or 41.2%, and $1,275, or 30.7% over
other operating expenses of $2,121 and $4,159 for the three and six months ended
June 30, 1996. The increase in other expenses for the periods compared was
primarily because of compensation related to loan originations and sales, the
purchase of data processing hardware and software, and an increase in
advertising. The increase on other operating expense of 30.7% is offset by the
32.8% increase in other operating income. The Bank's ratio on noninterest
income to noninterest expense for the first six months of 1997 was 79.6%, versus
78.3% for the same period of 1996.
BALANCE SHEET ANALYSIS
At June 30, 1997, total assets were $85,854, representing an increase of
$4,970, or 6.1%, from total assets of $80,884 at December 31, 1996. Total
deposits of $73,514 at June 30, 1997, increased $2,909 or 4.1% from $70,605 at
December 31, 1996. Net loans increased $4,786, or 8.3%, from $57,400 at
December 31, 1996, to $62,186 at June 30, 1997.
INVESTMENT SECURITIES
At June 30, 1997, investment securities (including federal funds sold) totaled
$15,944. This represented an increase of $2,397, or 17.7%, over total
investments of $13,547 at December 31, 1996. This increase is a result of the
implementation of the SFAS No. 125. Under SFAS No. 125, the Bank is required to
recognize the present value of the right to receive future interest on loans
sold less the contractual servicing rate. The 'interest only strip' created is
classified as an 'investment security - held for trading'. Subsequent changes
in the fair market value of the asset, are adjusted through current earnings.
DEPOSITS AND OTHER BORROWINGS
At June 30, 1997, deposits totaled $73,514. This represented an increase of
$2,909, or 4.1%, over total deposits of $70,605 at December 31, 1996.
Non-interest bearing demand deposits totaled $15,714 at June 30, 1997. This
represented an increase of $479, or 3.1%, over non-interest bearing demand
deposits of $15,235 at December 31, 1996.
LIQUIDITY
The Bank has an asset and liability management program which aids management in
maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Bank
at June 30, 1997, was 32.2% and at December 31, 1996, was 29.7%, based on liquid
assets (consisting of cash and due from banks, deposits in other financial
institutions, investments not pledged, federal funds sold and loans available
for sale) divided by total assets. Management believes it maintains adequate
liquidity levels.
CAPITAL RESOURCES
The Bank's equity capital was $11,058 at June 30, 1997. The primary source of
capital for the Bank has been the retention of net income. In addition, the
Bank raised $2.8 million through a secondary stock offering in 1996. During the
stock offering, 472,653 warrants were issued; these warrants are exercisable at
$8.75 and expire June 30, 1998. As of June 30, 1997, 23,031 warrants have been
exercised, leaving 449,622, or $3.9 million, that may be exercised. This
increased capital, if obtained, will be used for possible merger or acquisition
activity, as well as to allow continued growth.
The Bank is required to meet risk-based capital standards set by the respective
regulatory authorities. The risk-based capital standards require the
achievement of a minimum ratio of total capital to risk-weighted assets of 8.0%
(of which at least 4.0% must be Tier 1 capital). In addition, the regulatory
authorities require the highest rated institutions to maintain a minimum
leverage ratio of 4.0%. At June 30, 1997, the Bank exceeded the minimum
risk-based capital ratio and leverage ratio required to be considered "Well
Capitalized."
Table 1 below presents the Bank's risk-based and leverage capital ratios as of
June 30,
1997 and December 31, 1996:
TABLE 1 - REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
MINIMUM
MINIMUM WELL
CAPITAL RATIOS REQUIREMENT CAPITALIZED JUNE 30, 1997 DECEMBER 31, 1996
- --------------- ------------ ------------ -------------- ------------------
<S> <C> <C> <C> <C>
Risk-based
Capital Ratios:
Tier I 4.00% 6.00% 16.53% 13.61%
Total 8.00% 10.00% 17.79% 14.88%
Leverage Ratio 4.00% 5.00% 12.81% 11.33%
</TABLE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
On March 26, 1997, the Bank announced the signing of a letter of intent to merge
with Los Robles Bancorp for the purpose of creating a multibank holding company.
Under the proposed agreement Los Robles Bancorp ("LRBC") will be renamed
Community West Bancshares ("CWB"). Upon completion of the merger, the Bank and
Los Robles Bank, an existing subsidiary of LRBC, will become member bank
subsidiaries of CWB.
Each shareholder of the Registrant will receive approximately .55 shares of CWB
Common Stock for each share of the Registrant's Common Stock held as of the
record date of the merger.
Consummation of the merger is subject to the receipt of various regulatory
approvals, including but not limited to, approvals of the Office of the
Comptroller of the Currency and the Board of Governors of the Federal Reserve
System. The affirmative vote of the holders of not less than two-thirds of the
outstanding shares of each entity is also required.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLETA NATIONAL BANK
--------------------
(Registrant)
By: /S/ C. Randy Shaffer
----------------------
Date: August 12, 1997 C. Randy Shaffer
Executive Vice President
Chief Financial Officer
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The date of the meeting and whether it was an annual
or special meeting
May 22, 1997 Annual Meeting
(b) The name of each director elected at the meeting
Michael A. Alexander
Dr. Mounir R. Ashamalla
Robert H. Bartlein
Jean W. Blois
John D. Illgen
John D. Markel
Michel Nellis
William R. Peeples
James R. Sims, Jr
Llewellyn W. Stone
(c) Description of each matter voted upon and the number
of votes cast for, against or withheld
Proposal 1 - election of the Board of Directors
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C> <C>
Michael A. Alexander 861,577 8,257
Dr. Mounir R. Ashamalla 859,467 10,367
Robert H. Bartlein 861,577 8,257
Jean W. Blois 859,540 10,294
John D. Illgen 859,467 10,367
John D. Markel 859,467 10,367
Michel Nellis 859,467 10,367
William R. Peeples 848,884 20,950
James R. Sims, Jr 848,884 20,950
Llewellyn W. Stone 861,504 8,330
</TABLE>
Proposal 2 - ratification of Deloitte & Touche LLP
As the Bank's independent auditors 857,680 votes
for, 200 votes against, and 11,954 votes withheld
Item 5 - Other Information
On March 26, 1997, the Bank announced the signing of a
letter of intent to merge with Los Robles Bancorp for the
purpose of creating a multibank holding company. Under the
proposed agreement Los Robles Bancorp ("LRBC") would be
renamed Community West Bancshares ("CWB"). Upon completion
of the merger, the Bank and Los Robles Bank, an existing
subsidiary of LRBC, would become member bank subsidiaries
of CWB.
On June 27, 1997 the Bank announced the cancellation of the
letter of intent to merge with Los Robles Bankcorp. The
Bank will continue its plans to form Community West
Bancshares, and follow its strategy of bringing on
Additional community banks under its umbrella so they can
take advantage of the wide range of financial services
available at the holding company level.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
<PAGE>
FORM 10-Q
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 12CFR16.3
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
For the Quarter Ended September 30, 1997 Commission File Number:
GOLETA NATIONAL BANK
(Exact name of registrant as specified in its charter)
California 77-0194455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5827 Hollister Ave., Goleta, California 93117
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (805) 683-4944
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 and 12CFR16.3 during the preceeding 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
Number of shares of common stock of the registrant: 1,521,423 outstanding as of
October 30, 1997
This Form 10-Q contains 12 pages.
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PART 1 - FINANCIAL INFORMATION
GOLETA NATIONAL BANK
BALANCE SHEETS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
September 30, December 31,
1997 1996
------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,633 $ 3,777
Federal funds sold 15,955 9,015
Total cash and cash equivalents 19,588 12,792
Time deposits in other financial institutions 1,783 2,378
Federal reserve bank stock 244 156
Investment securities held to maturity, at cost,
fair value of $1,497 at September 30, 1997 and $1,998 at December 31, 1996 1,497 1,998
Investment securities held for trading, at fair value 2,674 -
Loans
Held for investment, net of allowance for loan
losses of $1,320 in 1997 and $1,409 in 1996 56,507 50,591
Held for sale, at lower of cost or fair value 10,500 6,809
Other real estate owned, net 231 60
Premises and equipment, net 2,577 2,407
Servicing assets 485 2,232
Accrued interest receivable and other assets 1,695 1,461
------- --------
TOTAL ASSETS $97,781 $80,884
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $18,277 $15,235
Interest-bearing demand 13,213 11,579
Savings 12,438 10,362
Time certificates of $100,000 or more 16,589 11,349
Other time certificates 24,697 22,080
------- --------
Total deposits 85,214 70,605
Accrued interest payable and other liabilities 1,026 219
------- --------
Total liabilities 86,240 70,824
------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value: 4,000,000 shares authorized:
1,521,423 and 1,473,492 shares issued and outstanding at September 30,
1997 and December 31, 1996 3,804 3,684
Additional paid-in capital 4,616 4,406
Retained earnings 3,121 1,970
------- --------
Total stockholders' equity 11,541 10,060
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,781 $80,884
======= ========
See notes to financial statements.
</TABLE>
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GOLETA NATIONAL BANK
STATEMENTS OF INCOME
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $1,909 $1,648 $5,461 $4,615
Federal funds sold 89 85 253 200
Time deposits in other financial institutions 26 22 89 60
Investment securities 29 23 91 77
------ ------ ------ ------
Total interest income 2,053 1,778 5,894 4,952
INTEREST EXPENSE ON DEPOSITS 747 610 2,087 1,790
------ ------ ------ ------
NET INTEREST INCOME 1,306 1,168 3,807 3,162
PROVISION FOR LOAN LOSSES 100 110 260 335
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,206 1,058 3,547 2,827
OTHER INCOME:
Gains from loan sales 1,239 549 2,869 2,101
Loan origination fees 892 721 2,756 1,754
Loan servicing income 139 120 504 459
Service charges and other income 239 243 703 575
------ ------ ------ ------
Total other income 2,509 1,633 6,832 4,889
------ ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,897 1,340 5,345 4,009
Occupancy expenses 373 306 1,087 852
Postage and freight 244 134 591 386
Advertising 137 96 396 218
Other operating expenses 316 297 982 867
------ ------ ------ ------
Total other expenses 2,967 2,173 8,401 6,332
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME
TAXES 748 518 1,978 1,384
PROVISION FOR INCOME TAXES 310 213 827 577
------ ------ ------ ------
NET INCOME $ 438 $ 305 $1,151 $ 807
====== ====== ====== ======
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT $ 0.25 $ 0.25 $ 0.66 0.75
====== ====== ====== ======
NET INCOME PER COMMON SHARE - ASSUMING FULL DILUTION $ 0.25 $ 0.25 $ 0.65 0.75
====== ====== ====== ======
See notes to financial statements.
</TABLE>
<TABLE>
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GOLETA NATIONAL BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLAR AMOUNTS IN THOUSANDS
For the Nine Months
Ended September 30,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,151 $ 807
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses 260 335
Depreciation and amortization 427 349
Gain (loss) on sale of other real estate owned 31 (41)
Gain on sale of loans held for sale (1,944) (854)
Origination of servicing and interest only strip assets, net of amortization (925) (1,054)
Changes in operating assets and liabilities:
Accrued interest receivable and other assets (235) 692
Accrued interest payable and other liabilities 808 (113)
-------- --------
Net cash (used in) provided by operating activities (427) 121
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of held-to-maturity investment securities
and Federal Reserve Bank stock (87) (1,522)
Maturities of HTM securities 500 1,000
Net decrease in time deposits in other financial institutions 595 (694)
Net increase in loans (8,196) (2,074)
Proceeds from sale of other real estate owned 69 393
Purchase of premises and equipment (597) (680)
-------- --------
Net cash used in investing activities (7,716) (3,577)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, and savings accounts 6,752 (1,470)
Net increase (decrease) in time certificates 7,857 (847)
Cash dividends paid - (71)
Net proceeds of Secondary Stock Offering - 2,800
Exercise of Stock Warrants 223 -
Exercise of Stock Options 107 -
-------- --------
Net cash provided by financing activities 14,939 412
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,796 (3,044)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,792 11,146
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $19,588 $ 8,102
======== ========
See notes to financial statements.
</TABLE>
GOLETA NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1997 and 1996
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Financial Statements in Goleta National Bank's 1996 Annual Report on form 10-K.
Loans Held for Sale - The guaranteed portion of loans insured by the SBA
and FHA Title I home improvement loans, which are originated and are intended
for sale in the secondary market, are carried at the lower of cost or estimated
market value. Funding for SBA and FHA programs depends on annual appropriations
by the U.S. Congress, and accordingly, the sale of loans under these programs is
dependent on the continuation of such programs.
The Bank sells SBA and FHA Title I loans with servicing retained. On
January 1, 1997, the Bank adopted Statement of Financial Accounting Standard
("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" This statement supersedes SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Under SFAS No. 125, the Bank is
required to identify the servicing and 'interest only strip' asset components of
each loan sold. The 'interest only strip' represents the difference between
the right to future interest and the contractual servicing rate. At the date of
sale, gains or losses are recorded based on the relative fair market values of
the components. The remaining components are then valued based on their
classification under SFAS No. 115. Loan servicing costs are charged to expense
as incurred. The adoption of SFAS No. 125 did not have a significant impact on
earnings or capital for financial statement purposes.
2. Certain reclassifications have been made in the 1996 financial
information to conform to the presentation used in 1997.
3. In the ordinary course of business, the Bank enters into commitments to
extend credit to its customers. These commitments are not reflected in the
accompanying financial statements. As of September 30, 1997, the Bank had
entered into commitments with certain customers amounting to $16.6 million
compared to $12.8 million at December 31, 1996. Letters of credit at September
30, 1997 and December 31, 1996 were $207,000 and $50,000.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management, are
necessary for a fair presentation of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are of
a normal and recurring nature. Results for the period ending September 30, 1997
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
5. Net income per share has been computed based on the weighted average
number of common shares and common share equivalents outstanding during each
period, which was 1,755,269 and 1,265,017 for the three months and 1,753,432 and
1,138,291 for the nine months ended September 30, 1997 and 1996. Net income per
share - assuming full dilution has been computed based on the weighted average
number of common shares and common share equivalents outstanding during each
period, which was 1,777,252 and 1,287,391 for the three months and 1,775,055 and
1,166,213 for the nine months ended September 30, 1997 and 1996.
6. Supplemental cash flow information. During the nine-month period ended
September 30, 1997, loans amounting to $272,000 were transferred to Other Real
Estate Owned ("OREO") as a result of foreclosure on the real properties held as
collateral. During the nine-month period ended September 30, 1997, the Bank
sold OREO with a book value of $101,000. In addition, the Bank transferred
$2,340,000 from an excess servicing asset to an interest-only strip asset in
accordance with SFAS No. 125.
7. On October 16, 1997, the Bank paid $570,000 for a 70% interest in
Electronic Paycheck, LLC, a California company that has developed systems to
allow companies to pay their employees by issuing them a card or "electronic
paycheck". The systems were originally developed to pay factory workers in
Kazakhstan. The card is currently being used by companies in the agricultural
sector to pay their workers, many of whom do not have bank accounts. Goleta
National provides access to ATM and Point-of-Sale (POS) networks so that the
cardholders have access to their cash at thousands of locations virtually
worldwide.
8. On October 30, 1997, the shareholders of the Bank approved a merger
whereby the Bank will become a wholly owned subsidiary of Community West
Bancshares ("CWB"). Under the plan of reorganization, shareholders of the Bank
would receive shares in CWB on a share for share basis without recognition of
gain or loss for tax purposes. It is contemplated that the reorganization,
which is subject to regulatory approval, will be consummated prior to year end
and that the holding company stock will be listed on the NASDAQ National Market
("NASDAQ") after the consolidation is effective.
4
GOLETA NATIONAL BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
Management's discussion and analysis is written to provide greater insight into
the results of operations and the financial condition of Goleta National Bank.
For a more complete understanding of Goleta National Bank and its operations,
reference should be made to the financial statements included in this report and
the Bank's 1996 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The Bank reported net earnings of $438, and $1,151, for the three and nine
months ended September 30, 1997, an increase of $133, or 43.6%, and $344, or
42.6% compared to $305, and $807, for the three and nine months ended September
30, 1996. Primary earnings per share were $.25 and $.66 for the three and nine
months ended September 30, 1997, compared to $.25 per share and $.75 per share
in 1996. Primary earnings per share is calculated using weighted average number
of shares outstanding for the period, plus the net effect of outstanding
warrants and vested options using the treasury stock method. Fully diluted
earnings per share were $.25 and $.65 for the three and nine months ended
September 30, 1997, compared to $.25 per share and $.75 per share in 1996.
Fully diluted earnings per share is calculated the same way, as primary earnings
per share, except the number of granted stock options is used in place of
vested stock options. Although earnings were up by 43.6%, earnings per share,
for the nine month period, decreased as a result of a stock offering completed
in August 1996; which increased the number of shares going into the 1997
earnings per share calculation by 52.2%. The book value per share increased
from $6.83 at December 31, 1996, to $7.58 at Septemer 30, 1997. For the three
and nine months ended September 30, 1997, the annualized return on average
assets was 1.9% and 1.8% compared to 1.7% and 1.5% in 1996. The annualized
return on average equity was 15.5% and 14.3% for the three and nine months ended
September 30, 1997, and 15.1% and 15.0% for the three and nine months ended
September 30, 1996.
NET INTEREST INCOME/NET INTEREST MARGIN
One component of the Company's earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid for deposits and borrowed funds. The net interest margin is net
interest income expressed as a percentage of average earning assets.
The net interest margin was 6.0% and 6.1% for the three and nine months ended
September 30, 1997, compared to a net interest margin of 7.1% and 6.4% for the
three and nine months ended September 30, 1996. Net interest income totaled
$1,306 and $3,807 for the three and nine months ended September 30, 1997. This
represented an increase of $138, or 11.8%, and $645, or 20.4% from net interest
income of $1,168 and $3,162 for the three and nine months ended September 30,
1996. Earning assets averaged $86,981 and $82,723 for the three and nine months
ended September 30, 1997. This represented an increase of $21,469, or 32.8%,
and $16,473, or 24.9% over average earning assets of $65,512 and $66,250 for the
three and nine months ended September 30, 1996.
For the three and nine months ended September 30, 1997, the Bank earned interest
and fees of $2,053 and $5,894 on average loans of $64,597 and $62,652,
representing an annualized yield of 12.7% and 12.5%. For the three and nine
months ended September 30, 1996, the Bank earned interest and fees of $1,778 and
$4,952 on average loans of $54,801 and $54,134, for an annualized yield of 13.0%
and 12.2%.
CREDIT LOSS EXPERIENCE
The Bank maintains an allowance for potential credit losses. The allowance is
increased by a provision for credit losses charged against operating results and
from recoveries on loans previously charged off. The allowance is reduced by
loan losses charged to the allowance. The allowance for credit losses was
$1,320 at September 30, 1997, versus $1,409 at December 31, 1996. At September
30, 1997, the allowance for credit losses was equal to 1.9% of gross loans as
compared to 2.4% of gross loans at December 31, 1996.
For the three and nine months ended September 30, 1997, the provision for credit
losses was $100 and $260 representing a decrease of $10, or 9.1% and $75, or
22.4% over a provision for credit losses of $110 and $335 for the three and nine
months ended September 30, 1996. Losses charged to the allowance for credit
losses, net of recoveries, totaled $81 and $348 for the three and nine months
ended September 30, 1997, compared to a net charge of $21, and $417, for the
three and nine months ended September 30, 1996.
Nonaccrual loans increased to $925 at September 30, 1997, compared to $617 at
December 31, 1996. This represented an increase of $308, or 49.9%. The
nonaccrual loans decreased during the third quarter from $998 at June 30, 1997,
a decrease of $73, or 7.3% compared to September 30, 1997. The Company has
adopted the methods prescribed by SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan" for determining the fair value of specific loans for which
the eventual collection of all principal and interest is considered impaired.
While management believes that the allowance was adequate at September 30, 1997,
to absorb losses from any known or inherent risks in the portfolio, no assurance
can be given that economic conditions which adversely affect the Bank's service
areas or other circumstances will not be reflected in increased provisions or
credit losses in the future.
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gains on
sale of loans, servicing fees, and other revenues not derived from interest on
earning assets. Other operating income for the three and nine months ended
September 30, 1997, was $2,509 and $6,832. This represented an increase of
$876, or 53.6%, and $1,943, or 39.7% over other operating income of $1,633 and
$4,889 for the three and nine months ended September 30, 1996. The increase was
because of continued emphasis by the Bank on generating noninterest income. The
Bank has opened additional loan production offices since September 1996,
creating an increase in loan originations and sales volume. The Bank continues
to see increased revenue from electronic commerce.
OTHER OPERATING EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. The continued growth of the Bank required
additional staff and overhead expense to support the continued high level of
customer service, which increased the cost of occupying the Bank's offices.
Although compensation expenses have grown significantly, approximately 40% of
the Bank's personnel derive some or all of their compensation based on income
production. This means that a significant portion of compensation is tied to
increases in revenues instead of being a fixed expense. Other operating
expenses totaled $2,967 and $8,401 for the three and nine months ended September
30, 1997. This represented an increase of $794, or 36.5%, and $2,069, or 32.7%
over other operating expenses of $2,173 and $6,332 for the three and nine months
ended September 30, 1996. The increase in other expenses for the periods
compared was primarily because of compensation related to loan originations and
sales, the purchase of data processing hardware and software, and an increase in
advertising. The increase on other operating expense of 32.7% is offset by the
39.7% increase in other operating income. The Bank's ratio on noninterest
income to noninterest expense for the first nine months of 1997 was 81.3%,
versus 77.2% for the same period of 1996.
BALANCE SHEET ANALYSIS
At September 30, 1997, total assets were $97,781, representing an increase of
$16,897, or 20.9%, from total assets of $80,884 at December 31, 1996. Total
deposits of $85,214 at September 30, 1997, increased $14,609, or 20.7% from
$70,605 at December 31, 1996. Net loans increased $9,607, or 16.7%, from
$57,400 at December 31, 1996, to $67,007 at September 30, 1997.
INVESTMENT SECURITIES
At September 30, 1997, investment securities (including federal funds sold)
totaled $22,153. This represented an increase of $8,606, or 63.5%, over total
investments of $13,547 at December 31, 1996. This increase is, in part, a
result of the implementation of the SFAS No. 125. Under SFAS No. 125, the Bank
is required to recognize the present value of the right to receive future
interest on loans sold less the contractual servicing rate. The 'interest only
strip' created is classified as an 'investment security - held for trading'.
Subsequent changes in the fair market value of the asset are adjusted through
current earnings.
DEPOSITS AND OTHER BORROWINGS
At September 30, 1997, deposits totaled $85,214. This represented an increase
of $14,609, or 20.7%, over total deposits of $70,605 at December 31, 1996.
Noninterest bearing demand deposits totaled $18,277 at September 30, 1997. This
represented an increase of $3,042, or 20.0% over noninterest bearing demand
deposits of $15,235 at December 31, 1996.
LIQUIDITY
The Bank has an asset and liability management program which aids management in
maintaining its interest margins during times of both rising and falling
interest rates and in maintaining sufficient liquidity. Liquidity of the Bank
at September 30, 1997, was 32.4% and at December 31, 1996, was 29.7%, based on
liquid assets (consisting of cash and due from banks, deposits in other
financial institutions, investments not pledged, federal funds sold and loans
available for sale) divided by total assets. Management believes it maintains
adequate liquidity levels.
CAPITAL RESOURCES
The Bank's equity capital was $11,541 at September 30, 1997. The primary source
of capital for the Bank has been the retention of net income. In addition, the
Bank raised $2.8 million through a secondary stock offering in 1996. During the
stock offering, 472,653 warrants were issued; these warrants are exercisable at
$8.75 and expire June 30, 1998. As of September 30, 1997, 27,415 warrants have
been exercised, leaving 445,238, or $3.9 million that may be exercised. This
increased capital, if obtained, will be used for possible merger or acquisition
activity, as well as to allow continued growth.
The Bank is required to meet risk-based capital standards set by the respective
regulatory authorities. The risk-based capital standards require the
achievement of a minimum ratio of total capital to risk-weighted assets of 8.0%
(of which at least 4.0% must be Tier 1 capital). In addition, the regulatory
authorities require the highest rated institutions to maintain a minimum
leverage ratio of 4.0%. At September 30, 1997, the Bank exceeded the minimum
risk-based capital ratio and leverage ratio required to be considered "Well
Capitalized."
Table 1 below presents the Bank's risk-based and leverage capital ratios as of
September 30,
1997 and December 31, 1996:
TABLE 1 - REGULATORY CAPITAL RATIOS
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MINIMUM
MINIMUM WELL
CAPITAL RATIOS REQUIREMENT CAPITALIZED SEPTEMBER 30, 1997 DECEMBER 31, 1996
- --------------- ------------ ------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Risk-based
Capital Ratios:
Tier I 4.00% 6.00% 15.49% 13.61%
Total 8.00% 10.00% 16.75% 14.88%
Leverage Ratio 4.00% 5.00% 12.63% 11.33%
</TABLE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
On March 26, 1997, the Bank announced the signing of a letter of intent to merge
with Los Robles Bancorp for the purpose of creating a multibank holding company.
Under the proposed agreement Los Robles Bancorp ("LRBC") will be renamed
Community West Bancshares ("CWB"). Upon completion of the merger, the Bank and
Los Robles Bank, an existing subsidiary of LRBC, will become member bank
subsidiaries of CWB.
Each shareholder of the Registrant will receive approximately .55 shares of CWB
Common Stock for each share of the Registrant's Common Stock held as of the
record date of the merger.
Consummation of the merger is subject to the receipt of various regulatory
approvals, including but not limited to, approvals of the Office of the
Comptroller of the Currency and the Board of Governors of the Federal Reserve
System. The affirmative vote of the holders of not less than two-thirds of the
outstanding shares of each entity is also required.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
12CFR16.3, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GOLETA NATIONAL BANK
--------------------
(Registrant)
By: /S/ C. Randy Shaffer
----------------------
Date: November 7, 1997 C. Randy Shaffer
Executive Vice President
Chief Financial Officer
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The date of the meeting and whether it was an annual
or special meeting
October 30, 1997 Special Meeting
(b) The name of each director elected at the meeting
Not Applicable
(c) Description of each matter voted upon and the number
of votes cast for, against or withheld
Proposal 1 - Merger of the Bank into Community West
Bancshares 1,102,128 votes for, 2,431 votes against
and 14,043 votes withheld
Proposal 2 - approval of stock option plan 1,073,838
votes for, 19,932 votes against, and 24,832 votes
withheld
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable,
<PAGE>
