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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB/A3
General Form for Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
BUSINESS BANCORP
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(Name of Small Business Issuer as specified in its charter)
California 330884369
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(State of Incorporation) (I.R.S. Employer
Identification Number)
140 South Arrowhead Avenue
San Bernardino, California 92408
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (909) 888-2265
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of Class)
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TABLE OF CONTENTS
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PART I.............................................................................. 1
Item 1. Description of Business............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14
Item 3. Description of Property............................................. 54
Item 4. Security Ownership of Certain Beneficial Owners and Management...... 55
Item 5. Directors, Executive Officers, Promoters and Control Persons........ 55
Item 6. Executive Compensation.............................................. 59
Item 7. Certain Relationships and Related Transactions...................... 62
Item 8. Description of Securities........................................... 63
PART II............................................................................. 64
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters........................... 64
Item 2. Legal Proceedings................................................... 65
Item 3. Changes in and Disagreements with Accountants....................... 65
Item 4. Recent Sales of Unregistered Securities............................. 65
Item 5. Indemnification of Directors and Officers........................... 66
PART F/S (FINANCIAL STATEMENTS).................................................... 68
PART III............................................................................ 70
Item 1. Index to Exhibits................................................... 70
Item 2. Description of Exhibits............................................. 70
SIGNATURES.......................................................................... 71
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PART I
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Item 1. Description of Business
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The Company
Business Bancorp (the "Company") is a California corporation registered as
a bank holding company under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), and is headquartered in San Bernardino, California. The Company
was incorporated in October, 1999 and acquired all of the outstanding shares of
Business Bank of California (the "Bank") in January, 2000. The Company's
principal subsidiary is the Bank. The Company exists primarily for the purpose
of holding the stock of this subsidiary and of such other subsidiaries as it may
acquire or establish.
The Company's principal source of income will initially be dividends from
the Bank, but the Company intends to explore alternative sources of income in
the future. The expenditures of the Company, including (but not limited to) the
payment of dividends to stockholders, if and when declared by the Board of
Directors, and the cost of servicing debt will generally be paid from such
payments made to the Company by the Bank. At June 30, 2000, the Company had
consolidated assets of $255.4 million, deposits of $192.6 million and
stockholders' equity of $20.0 million.
The Company's strategic goal is to increase shareholder and franchise value
by continuing to grow the Bank's business in its current markets in Southern
California through the opening of de novo branches or the acquisition of other
existing institutions or branches. As of the date hereof, the Company has not
identified any additional institutions or branches to be acquired, and there can
be no assurance that the Company will be able to identify any suitable
acquisition candidates in the future or, should suitable acquisition candidates
be identified, there can be no assurance that the Company will be able to
consummate such acquisitions. See "Risk Factors -- Risks Related to Growth."
In the fourth quarter of 2000 the Company intends to file an application
for listing of its common stock on Nasdaq's SmallCap Market. The Company
believes that by filing this Registration Statement and becoming subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and by having its securities quoted for trading on Nasdaq's SmallCap
Market, the liquidity of the Company's stock will be enhanced, both enabling
shareholders to buy and sell the Company's securities in a more active trading
market and making it more likely that the Company will be able to use its common
stock for any future acquisitions which the Company may seek to pursue, although
no such future acquisitions have been identified to date. In addition, there can
be no assurance that the Company's common stock will be approved for quotation
on the Nasdaq SmallCap Market, or that even if the listing is approved, that a
more liquid trading market for the common stock will develop, or if developed,
will continue. See "Risk Factors -- Limited Prior Market for Common Stock and
Possible Volatility of Stock Price."
The Bank
Business Bank of California is a California state-chartered commercial bank
which was incorporated under the laws of the State of California on June 15,
1983, and opened for business in April, 1984. The Bank's Administrative Office
is located at 140 South Arrowhead Avenue, San Bernardino, California 92408. The
Bank is an insured bank under the Federal Deposit Insurance Act up to the
maximum limits thereof. The Bank is not a member of the Federal Reserve System.
At June 30, 2000, the Bank had approximately $255.1 million in assets, $134.3
million in loans and $202.3 million in deposits. The Bank was originally
incorporated under the name Bank of San Bernardino and changed its name to
Business Bank of California in August, 1996.
The Bank currently operates its main office in San Bernardino, which was
established in 1984, and seven additional branch offices. The Bank's branch
offices are located in the following communities: City of San Bernardino (opened
December 1986), Corona (opened August 1994), Redlands (opened October 1996),
Hesperia (acquired December 1997), Phelan (acquired December 1997), Ontario
(opened August 1999) and Hemet (acquired August 2000). All of the Bank's
offices are located in the counties of Riverside and San Bernardino, in an area
of Southern California commonly known as the "Inland Empire."
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In December, 1997 the Bank completed the acquisition of the assets of High
Desert National Bank, a two-branch national bank located in Hesperia, California
(the Bank's current Hesperia and Phelan branch offices) for a purchase price of
approximately $3.8 million. In August 2000 the Bank completed the acquisition
of Valley Merchants Bank, N.A. ("VMB"), a national banking association (the
Bank's current Hemet branch office for a purchase price of approximately $12.2
million). See "Recent Developments".
The Bank has experienced steady balance sheet growth in the past several
years, including growth in total assets from $152.5 million at December 31, 1997
to $225.1 million at December 31, 1999, an increase of approximately 47.6%, and
additional growth to $255.1 million at June 30, 2000, representing an additional
increase of approximately 13.3%. Deposits increased from $136.7 million at
December 31, 1997 to $186.8 million at December 31, 1999, an increase of
approximately 36.7%, and deposits further increased to $202.3 at June 30, 2000,
an additional increase of approximately 8.3%. This growth in the Bank's balance
sheet has been generated both internally, primarily through increased deposits
and loans as a result of increased marketing and focus on sales training, and
through the acquisition and opening of new branch offices. The Bank's earnings
increased from $1.86 million or $.97 per share in 1998 to $1.94 million or $ .99
per share in 1999. Earnings for the six months ended June 30, 2000 were $1.3
million or $ .55 per share.
The Bank is a community bank conducting a general commercial banking
business. Each of its branch offices is a full service office offering a wide
range of commercial banking services. The Bank provides numerous deposit
products, including demand deposit accounts, Money Market accounts, savings and
Super Now accounts, time certificates of deposit and fixed rate, fixed maturity
installment savings. The Bank makes various types of commercial, installment and
real estate loans, including the origination of government-guaranteed Small
Business Administration Loans ("SBA Loans"). In addition, the Bank provides safe
deposit, collection, travelers checks, notary public and other customary non-
deposit banking services. The Bank also offers electronic "home banking" through
its " EZ Banker" program and maintains an Internet web site
(www.businessbank.com) for its customers. Other services offered include ATM
machines located at branch offices, customer access to an ATM network, and
armored carrier and courier services. The Bank does not offer trust services.
Recent Developments
On August 31, 2000, the Bank completed the acquisition of VMB. At June 30,
2000, VMB had total assets of $58.6 million and total deposits of $50.8 million.
The acquisition was accomplished in a two step process. In the first step, the
"Consolidation," BBOC Interim Bank, a California banking corporation formed as a
wholly owned subsidiary of the Bank for the sole purpose of facilitating the
acquisition ("Consolidation Sub"), was consolidated with and into VMB. In the
second step, which occurred immediately after the effectiveness of the
Consolidation, the consolidated VMB was merged with and into the Bank, with the
Bank being the surviving bank in the merger. The Bank paid consideration of
$22.69 per share, or an aggregate of approximately $12.2 million (the "merger
consideration"), for the issued and outstanding shares of VMB. The determination
of the merger consideration was based upon arms length negotiations between the
parties. VMB's sole office, in Hemet, in the San Jacinto Valley of Southern
California, will be operated as a branch of the Bank. The acquisition of VMB
increased the Company's assets by approximately 23%.
Management believes the acquisition of VMB by the Bank will benefit the
Company in a variety of ways. The main office of VMB, which the Bank now
operates as a branch office, is located in Hemet in the eastern section (San
Jacinto Valley) of Riverside County, an area in which the Bank did not
previously have an office. The Bank's Main Office is located in the City of San
Bernardino in San Bernardino County, which adjoins Riverside County. The Bank
also currently has one additional branch office in Riverside County, in the City
of Corona. Management believes that the acquisition of VMB will effectively
expand its current geographical market area to encompass all of San Bernardino
and Riverside Counties. Management believes that the acquisition of VMB, by
expanding the Bank's geographic market, and by increasing its asset size by
approximately 23% (which will allow the Bank to increase its legal lending
limit, which is generally 25% of the Bank's capital), will enable the Bank to
compete more effectively with banks which are larger than the Bank by
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offering the Bank's customers a larger branch network, and enabling the Bank to
meet the needs of its customers who need loans larger than the Bank could
previously offer. In addition, VMB offered substantially similar consumer and
commercial lending products to those of the Bank, and by combining the two
Bank's complementary operations, management believes the Bank will recognize
savings through consolidation of functions and economies of scale.
In order to fund a substantial portion of the acquisition price of VMB, on
March 23, 2000, Business Capital Trust I, a newly formed Delaware statutory
business trust and a wholly-owned subsidiary of the Company (the "Trust"),
issued an aggregate of $10,000,000 of principal amount of 10-7/8% Fixed Rate
Capital Trust Pass-through Securities of the Trust (the "Trust Preferred
Securities"). Salomon Smith Barney, Inc. acted as placement agent in connection
with the offering of the trust securities. The securities issued by the Trust
are fully guaranteed by the Company with respect to distributions and amounts
payable upon liquidation, redemption or repayment. The entire proceeds to the
Trust from the sale of the Trust Preferred Securities were used by the Trust in
order to purchase $10,000,000 in principal amount of the Fixed Rate Junior
Subordinated Deferrable Interest Debentures due 2030 issued by the Company (the
"Subordinated Debt Securities"). The Company contributed to the Bank
approximately $9 million of the approximately $9.7 million in net proceeds which
it received from the sale of the Subordinated Debt Securities in order to fund
the acquisition of VMB. The balance of the purchase price for the acquisition of
VMB was paid out of the working capital of the Bank.
Competition
The banking business in California generally, and specifically in the
Bank's market areas, is highly competitive with respect to virtually all
products and services and has become increasingly so in recent years. The
industry continues to consolidate, and strong, unregulated competitors have
entered banking markets with focused products targeted at highly profitable
customer segments. Many largely unregulated competitors are able to compete
across geographic boundaries and provide customers increasing access to
meaningful alternatives to banking services in nearly all significant products.
These competitive trends are likely to continue.
With respect to commercial bank competitors, the business is largely
dominated by a relatively small number of major banks with many offices
operating over a wide geographical area, which banks have, among other
advantages, the ability to finance wide-ranging and effective advertising
campaigns and to allocate their investment resources to regions of highest yield
and demand. Many of the major banks operating in the area offer certain services
which the Bank does not offer directly (but some of which the Bank offers
through correspondent institutions). By virtue of their greater total
capitalization, such banks also have substantially higher lending limits than
does the Bank/1/.
In addition to other banks, competitors include savings institutions,
credit unions, and numerous non-banking institutions, such as finance companies,
leasing companies, insurance companies, brokerage firms, and investment banking
firms. In recent years, increased competition has also developed from
specialized finance and non-finance companies that offer money market and mutual
funds, wholesale finance, credit card, and other consumer finance services,
including on-line banking services and personal finance software. Strong
competition for deposit and loan products affects the rates of those products as
well as the terms on which they are offered to customers. Mergers between
financial institutions have placed additional pressure on banks within the
industry to streamline their operations, reduce expenses, and increase revenues
to remain competitive. Competition has also intensified due to federal and state
interstate banking laws, which permit banking organizations to expand
geographically, and the California market has been particularly attractive to
out-of-state institutions.
Technological innovations have also resulted in increased competition in
the financial services market. Such innovations have, for example, made it
possible for non-depository institutions to offer customers automated
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/1./ Legal lending limits to each customer are restricted to a percentage of
the Bank's total shareholders' equity, the exact percentage depending upon the
nature of the loan transaction.
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transfer payment services that previously have been considered traditional
banking products. In addition, many customers now expect a choice of several
delivery systems and channels, including telephone, mail, home computer, ATM's,
self-service branches, and/or in-store branches. In addition to other banks, the
sources of competition for such products include savings associations, credit
unions, brokerage firms, money market and other mutual funds, asset management
groups, finance and insurance companies, and mortgage banking firms.
In order to compete effectively, the Bank provides quality, personalized
service and fast, local decision making which its major bank competitors are
generally unable to offer. For customers whose loan demands exceed the Bank's
lending limit, the Bank attempts to arrange for such loans on a participation
basis with its correspondent banks. The Bank also assists customers requiring
services not offered by the Bank in obtaining such services from its
correspondent banks.
The market for the origination of SBA Loans is highly competitive. With
respect to its origination of SBA Loans, the Bank competes with other small,
mid-size and major banks which originate these loans in the geographic areas in
which the Bank's branches are located. In addition, because these loans are
largely broker-driven, the Bank also competes to a large extent with banks which
originate SBA Loans outside of the Bank's immediate geographic area. Further,
because these loans may be written out of loan production offices specifically
set up to write SBA Loans rather than out of full service branches, the barriers
to entry in this area, after approval of a bank as an SBA lender, are relatively
low. Unlike the market for the origination of SBA Loans, the market for the
resale of SBA Loans is currently a seller's market, and to date the Bank has had
no difficulty in finding buyers for its SBA Loans. However, there can be no
assurance that the resale market for SBA Loans may not become more competitive
in the future.
Risk Factors
An investment in securities issued by the Company involves various risks.
Existing and prospective investors in any securities issued by the Company
should consider carefully the factors summarized below in making a decision
whether to buy, sell or hold such securities. In addition, this Form 10-SB
contains certain forward-looking statements regarding the Company's future
plans, operations and prospects, which involve risks and uncertainties. Those
forward-looking statements are inherently uncertain, and actual results may
differ significantly from the Company's expectations. Capitalized terms used
and not otherwise defined in this section have the respective meanings set forth
elsewhere in this Form 10-SB.
Geographic Concentration
Substantially all of the Company's business is located in California, with
a particular concentration in Southern California. As a result, the Company's
financial condition and operating results are subject to changes in economic
conditions in that region. In the early to mid-1990s, California experienced a
significant and prolonged downturn in its economy, which adversely affected
financial institutions, including the Company. Although the general economy in
California has recovered from that prolonged recession, the Company is subject
to changes in economic conditions in that region. We can provide no assurance
that conditions in the California economy will not deteriorate in the future and
that such deterioration will not adversely effect the Company.
In addition, a substantial portion of the Company's assets consist of loans
secured by real estate in California. At June 30, 2000 approximately 61.5% of
the Bank's loans, or $82.6 million in loans, were secured by first deeds of
trust on real estate. See Part I -- Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Loan Portfolio."
Historically, California has experienced, on occasion, significant natural
disasters, including earthquakes, brush fires and, during early 1998, flooding
attributed to the weather phenomenon known as "El Nino." Accordingly, the
availability of insurance for losses from such catastrophes is limited. The
occurrence of one or more of such catastrophes could impair the value of the
collateral for the Company's real estate secured loans and adversely affect the
Company.
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Potential Impact of Changes in Interest Rates
The Company's profitability is significantly dependent on its net interest
income. Net interest income is the difference between its interest income on
interest-earning assets, such as loans and leases, and its interest expense on
interest-bearing liabilities, such as deposits. Therefore, changes in general
market interest rates, whether as a result of changes in the monetary policies
of the Federal Reserve or otherwise, can have a significant effect on the
Company's net interest income. The Company's assets and liabilities may react
differently to changes in overall market rates or conditions because of
mismatches between the repricing or maturity characteristics of its assets and
liabilities. As a result, changes in interest rates can affect the Company's
net interest income in either a positive or a negative way.
Lack of Diversification of Loan Portfolio
The Bank's loan portfolio is heavily concentrated in real estate loans,
both commercial and residential. At June 30, 2000, approximately 69% of the
Bank's loan portfolio is real estate-related. Conditions in the California real
estate market can and historically have strongly influenced the level of the
Bank's non-performing loans and its results of operations. Another real estate
recession in California, or the occurrence of a natural disaster, could have a
material adverse effect on the Company.
Dependence on Key Personnel
The Company's future success depends, in large part upon the continuing
contributions of its key management personnel. If the Company loses the services
of one or more key employees within a short period of time, the Company could be
adversely affected. The Company's future success is also dependent upon its
continuing ability to attract and retain other highly qualified personnel.
Competition for such employees among financial institutions in California is
intense. The Company's inability to attract and retain additional key personnel
could adversely affect the Company. We can provide no assurance that the Company
will be able to retain any of its key officers and employees or attract and
retain qualified personnel in the future. Mr. Lane, the Company's President and
Chief Executive Officer, has an employment agreement which expires on March 31,
2004. See Item 6. "Executive Compensation -- Employment Agreements."
Risks Related to Growth
The Company consummated its acquisition of VMB on August 31, 2000. The
acquisition of VMB increased the Company's total assets by approximately 23%.
In addition, the Company intends to investigate other opportunities to acquire
or combine with additional financial institutions that would complement the
Company's existing business as such opportunities may arise. No assurance can be
provided, however, that the Company will be able to identify additional suitable
acquisition targets or consummate any such acquisition.
The Company's ability to manage its growth will depend primarily on its
ability to
. monitor operations;
. control costs;
. maintain positive customer relations;
. attract, assimilate and retain additional qualified personnel.
See "---Dependence on Key Personnel." If the Company fails to achieve those
objectives in an efficient and timely manner, it may experience interruptions
and dislocations in its business. Any such problems could adversely affect the
Company's existing operations, as well as its ability to retain the customers of
the acquired businesses or operate any such businesses profitably. In addition,
such concerns may cause the Company's federal
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and state banking regulators to require the Company to delay or forgo any
proposed acquisition until such problems have been addressed to the satisfaction
of those regulators.
The Company's failure to manage its growth effectively would adversely
affect the Company.
No Present Intention to Pay Dividends; Regulatory Restrictions on Payment
of Dividends
The Company has never paid common stock dividends and does not plan on
paying a dividend in the foreseeable future. The Company's ability to declare a
dividend on the common stock will depend upon, among other things, on future
earnings, its operating and financial condition, its capital requirements and
general business conditions, and receipt of regulatory approvals, if then
required.
The Company is a legal entity separate and distinct from the Bank.
Substantially all of the Company's revenue and cash flow, including funds
available for the payments of dividends and other operating expenses, is
dependent upon the payment of dividends to the Company from the Bank. Dividends
payable by the Bank are restricted under California and federal laws and
regulations. See Part II -- Item 1. "Market Price of Dividends on the
Registrant's Common Equity and other Shareholder Matters -- Dividends."
No Assurances as to Adequacy of Allowance for Loan Losses
The Company believes that the allowance for loan losses maintained by the
Bank is at a level adequate to absorb any inherent losses in its loan portfolio.
Depending on changes in economic, operating and other conditions, including
changes in interest rates, that are generally beyond the Bank's control, the
Bank's actual loan losses could increase significantly. As a result, such losses
could exceed the Bank's current allowance estimates. The Company can provide no
assurance that the Bank's allowance is sufficient to cover actual loan losses
should such losses be realized.
In addition, the Federal Reserve Board and the California Department of
Financial Institutions ("DFI"), as an integral part of their respective
supervisory functions, periodically review the Bank's allowance for loan losses.
Such regulatory agencies may require the Bank's to increase its provision for
loan losses or to recognize further loan charge-off's, based upon judgments
different from those of management. Any increase in the Bank's allowance
required by the Federal Reserve Board or the DFI could adversely effect the
Company. See Part I -- Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Loan Losses."
Control by Directors and Executive Officers
As of June 30, 2000, the Company's directors and executive officers
together with their affiliates, beneficially owned approximately 45% of the
shares of the voting Common Stock then outstanding. As a result, if such
shareholders take a common position, they could most likely control the outcome
of corporate actions requiring shareholder approval, including the election of
directors and the approval of significant corporate transactions, such as a
merger of sale of all or substantially all of the Company's assets. We can
provide no assurance that the investment objectives of such shareholders will be
the same as the Company's other shareholders. See Part I -- Item 5. "Directors,
Executive Officers, Promoters and Control Persons."
Employment Contracts, Change in Control Provisions and Employee Severance
Compensation
The Company has entered into employment agreements with Alan J. Lane and
certain other of the Company's executive officers, and severance agreements with
certain executive officers of the Company and the Bank, which agreements provide
for severance payments if their respective employment arrangements are
terminated in connection with a change in control of the Company or the Bank.
Those provisions may have the effect of increasing the cost of acquiring the
Company, thereby discouraging future attempts to take over the Company or the
Bank. See Part I -- Item 6. "Executive Compensation -- Employment Agreements."
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Limited Prior Market for Common Stock and Possible Volatility of Stock Price
Trading in the Common Stock has been limited and cannot be characterized as
amounting to an established public trading market. Although the Company intends
to file an application for listing of its Common Stock on Nasdaq's SmallCap
Market, no assurance can be given that such application will be approved, or if
approved, there can be no assurance that an active public market for the Common
Stock will develop or continue if such a market develops. If such a public
market develops, the market price of the Common Stock may be subject to
significant fluctuation in response to numerous factors, including variations in
the annual or quarterly financial results of the Company or its competitors,
changes by financial research analysts in their financial results of the Company
or its competitors, or the failure of the Company or its competitors to meet
such estimates, conditions in the economy in general or the banking industry in
particular, or unfavorable publicity affecting the Company or the banking
industry. In addition, the equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and have been unrelated to the operating
performance of those companies. Any such fluctuations may adversely affect the
prevailing market price of the Common Stock. See Part II -- Item 1. "Market
Price of and Dividends on the Registrant's Common Equity and other Shareholder
Matters."
Competition
The banking business in the Bank's market areas is highly competitive with
respect to virtually all products and services. In California generally, major
banks dominate the commercial banking industry. By virtue of their larger
capital bases, such institutions have substantially greater lending limits than
the Bank has and perform certain functions for their customers, including trust
services, investment services and international banking, which the Bank is not
equipped to offer directly, although it does offer certain of these services
through correspondent banks. In the Bank's primary service area, major banks
and other independent banks larger than the Bank dominate the commercial banking
business. In addition to commercial banks, the Bank competes with other
financial companies, as well as offers of monetary market accounts and other
institutions offering financial services, in obtaining lendable funds and in
making loans. See Part I -- Item 1. "Description of Business Competition."
Government Regulation and Legislation
The Company and the Bank are subject to extensive state and federal
regulation, supervision and legislation, and the laws that govern the Company
and the Bank and their respective operations are subject to change from time to
time. These laws and regulations increase the cost of doing business and have an
adverse impact on the Company's ability to compete efficiently with other
financial services providers that are not similarly regulated. Changes in
regulatory policies or procedures could result in Management determining that a
higher provision for loan losses was necessary and could cause higher loan
charge-offs, thus adversely affecting the Bank's net earnings. There can be no
assurance that future regulation or legislation will not impose additional
requirements and restrictions on the Company and the Bank in a manner that could
adversely affect their results of operations, cash flows, financial condition
and prospects. See "Regulation and Supervision."
Regulation and Supervision
The Company and the Bank are subject to significant regulation by federal
and state regulatory agencies. The following discussion of statutes and
regulations is only a brief summary and does not purport to be complete. This
discussion is qualified in its entirety by reference to such statutes and
regulations. No assurance can be given that such statutes or regulations will
not change in the future.
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The Company
Upon the effective date of this Registration Statement, the Company will be
subject to the periodic reporting requirements of Section 13 of the Securities
Exchange Act of 1934 (the "Exchange Act") which will require the Company to file
annual, quarterly and other current reports with the Securities and Exchange
Commission (the "Commission"). The Company will also be subject to additional
regulations including, but not limited to, the proxy and tender offer rules
promulgated by the Commission under Sections 13 and 14 of the Exchange Act; the
reporting requirements of directors, executive officers and principal
shareholders regarding transactions in the Company's Common Stock and short-
swing profits rules promulgated by the Commission under Section 16 of the
Exchange Act; and certain additional reporting requirements by principal
shareholders of the Company promulgated by the Commission under Section 13 of
the Exchange Act.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 and is registered as such with the Board of
Governors of the Federal Reserve System (the "FRB"). A bank holding company is
required to file with the FRB annual reports and other information regarding its
business operations and those of its subsidiaries. It is also subject to
examination by the FRB and is required to obtain FRB approval before acquiring,
directly or indirectly, ownership or control of any voting shares of any bank
if, after such acquisition, it would directly or indirectly own or control more
than 5% of the voting stock of that bank, unless it already owns a majority of
the voting stock of that bank.
The FRB has by regulation determined certain activities in which a bank
holding company may or may not conduct business. A bank holding company must
engage, with certain exceptions, in the business of banking or managing or
controlling banks or furnishing services to or performing services for its
subsidiary banks. The permissible activities and affiliations of certain bank
holding companies have recently been expanded. (See " -- Financial Modernization
Act" below.)
General
As a California state-chartered bank whose accounts are insured by the FDIC
up to a maximum of $100,000 per depositor, the Bank is subject to regulation,
supervision and regular examination by the DFI and the FDIC. In addition, while
the Bank is not a member of the Federal Reserve System, it is subject to certain
regulations of the FRB. The regulations of these agencies govern most aspects of
the Bank's business, including the making of periodic reports by the Bank, and
the Bank's activities relating to dividends, investments, loans, borrowings,
capital requirements, certain check-clearing activities, branching, mergers and
acquisitions, reserves against deposits and numerous other areas. Supervision,
legal action and examination of the Bank by the FDIC is generally intended to
protect depositors and is not intended for the protection of shareholders.
The earnings and growth of the Bank are largely dependent on its ability to
maintain a favorable differential or "spread" between the yield on its interest-
earning assets and the rate paid on its deposits and other interest-bearing
liabilities. As a result, the Bank's performance is influenced by general
economic conditions, both domestic and foreign, the monetary and fiscal policies
of the federal government, and the policies of the regulatory agencies,
particularly the FRB. The FRB implements national monetary policies (such as
seeking 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 its reserve requirements and by varying
the discount rate applicable to borrowings 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 deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
Capital Adequacy Requirements
The Bank and the Company are subject to the regulations of the FDIC and the
FRB, respectively, governing capital adequacy. Those regulations incorporate
both risk-based and leverage capital requirements. Each of the federal
regulators has established risk-based and leverage capital guidelines for the
banks or bank holding companies it regulates, which set total capital
requirements and define capital in terms of "core capital elements," or Tier 1
8
<PAGE>
capital; and "supplemental capital elements," or Tier 2 capital. Tier 1 capital
is generally defined as the sum of the core capital elements less goodwill and
certain other deductions, notably the unrealized net gains or losses (after tax
adjustments) on available for sale investment securities carried at fair market
value. The following items are defined as core capital elements: (i) common
stockholders' equity; (ii) qualifying noncumulative perpetual preferred stock
and related surplus; and (iii) minority interests in the equity accounts of
consolidated subsidiaries. Supplementary capital elements include: (i) allowance
for loan and lease losses (but not more than 1.25% of an institution's risk-
weighted assets); (ii) perpetual preferred stock and related surplus not
qualifying as core capital; (iii) hybrid capital instruments, perpetual debt and
mandatory convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus. The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
100% of Tier 1 capital, net of goodwill.
The minimum required ratio of qualifying total capital to total risk-
weighted assets is 8.0% ("Total Risk-Based Capital Ratio"), at least one-half of
which must be in the form of Tier 1 capital, and the minimum required ratio of
Tier 1 capital to total risk-weighted assets is 4.0% ("Tier 1 Risk-Based Capital
Ratio"). Risk-based capital ratios are calculated to provide a measure of
capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets, and transactions, such as letters of credit and recourse arrangements,
which are recorded as off-balance sheet items. Under the risk-based capital
guidelines, the nominal dollar amounts of assets and credit-equivalent amounts
of off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U. S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans. As of December 31, 1999 and 1998, the
Bank's Total Risk-Based Capital Ratios were 12.23% and 12.17%, respectively and
its Tier 1 Risk-Based Capital Ratios were 11.41% and 11.07%, respectively. As of
June 30, 2000, the Company's and the Bank's Total Risk-Based Capital Ratios were
17.84% and 11.91%, respectively, and the Company's and the Bank's Tier 1 Risk-
Based Capital Ratios were 15.25% and 11.17%, respectively.
The risk-based capital requirements also take into account concentrations
of credit (i.e., relatively large proportions of loans involving one borrower,
industry, location, collateral or loan type) and the risks of "non-traditional"
activities (those that have not customarily been part of the banking business).
The regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards, and authorize the regulators to
review an institution's management of such risks in assessing an institution's
capital adequacy.
The risk-based capital regulations also include exposure to interest rate
risk as a factor that the regulators will consider in evaluating a bank's
capital adequacy. Interest rate risk is the exposure of a bank's current and
future earnings and equity capital arising from adverse movements in interest
rates. While interest risk is inherent in a bank's role as financial
intermediary, it introduces volatility to bank earnings and to the economic
value of the bank.
The FDIC and the FRB also require the maintenance of a leverage capital
ratio designed to supplement the risk-based capital guidelines. Banks and bank
holding companies that have received the highest rating of the five categories
used by regulators to rate banks and are not anticipating or experiencing any
significant growth must maintain a ratio of Tier 1 capital (net of all
intangibles) to adjusted total assets ("Leverage Capital Ratio") of at least 3%.
All other institutions are required to maintain a leverage ratio of at least 100
to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant to
federal regulations, banks must maintain capital levels commensurate with the
level of risk to which they are exposed, including the volume and severity of
problem loans, and federal regulators may, however, set higher capital
requirements when a bank's particular circumstances warrant. As of December 31,
1999 and 1998, the Bank's Leverage Capital Ratios were 7.85% and 8.28%,
respectively. As of June 30, 2000, the Company's and the Bank's leverage capital
ratios were 10.35% and 7.62%, respectively, exceeding regulatory minimums. (See
"Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Capital Resources" herein.)
Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured financial institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The federal banking agencies have by regulation defined the following
five capital categories: "well
9
<PAGE>
capitalized" (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital
Ratio of 6%; and Leverage Ratio of 5%); "adequately capitalized" (Total Risk-
Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage
Ratio of 4%) (or 3% if the institution receives the highest rating from its
primary regulator); "undercapitalized" (Total Risk-Based Capital Ratio of less
than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio of
less than 4%) (or 3% if the institution receives the highest rating from its
primary regulator); "significantly undercapitalized" (Total Risk-Based Capital
Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or
Leverage Ratio less than 3%); and "critically undercapitalized" (tangible equity
to total assets less than 2%). A bank may be treated as though it were in the
next lower capital category if after notice and the opportunity for a hearing,
the appropriate federal agency finds an unsafe or unsound condition or practice
so warrants, but no bank may be treated as"critically undercapitalized" unless
its actual capital ratio warrants such treatment.
At each successively lower capital category, an insured bank is subject to
increased restrictions on its operations. For example, a bank is generally
prohibited from paying management fees to any controlling persons or from making
capital distributions if to do so would make the bank "undercapitalized." Asset
growth and branching restrictions apply to undercapitalized banks, which are
required to submit written capital restoration plans meeting specified
requirements (including a guarantee by the parent holding company, if any).
"Significantly undercapitalized" banks are subject to broad regulatory
authority, including among other things, capital directives, forced mergers,
restrictions on the rates of interest they may pay on deposits, restrictions on
asset growth and activities, and prohibitions on paying certain bonuses without
FDIC approval. Even more severe restrictions apply to critically
undercapitalized banks. Most importantly, except under limited circumstances,
not later than 90 days after an insured bank becomes critically
undercapitalized, the appropriate federal banking agency is required to appoint
a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action
provisions, insured banks may be subject to potential actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the issuance of cease and desist orders, termination of insurance of
deposits (in the case of a bank), the imposition of civil money penalties, the
issuance of directives to increase capital, formal and informal agreements, or
removal and prohibition orders against "institution-affiliated" parties.
Safety and Soundness Standards
The federal banking agencies have also adopted guidelines establishing
safety and soundness standards for all insured depository institutions. Those
guidelines relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan and institute enforcement proceedings if
an acceptable compliance plan is not submitted.
Premiums for Deposit Insurance
The FDIC regulations also implement a risk-based premium system, whereby
insured depository institutions are required to pay insurance premiums depending
on their risk classification. Under this system, institutions such as the Bank
which are insured by the Bank Insurance Fund ("BIF"), are categorized into one
of three capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three supervisory categories based on federal
regulatory evaluations. The three supervisory categories are: financially sound
with only a few minor weaknesses (Group A), demonstrates weaknesses that could
result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C). The capital ratios used by the FDIC to define
well capitalized, adequately capitalized and undercapitalized are the same in
the FDIC's prompt corrective action regulations. The current BIF base assessment
rates (expressed as cents per $100 of deposits) are summarized as follows:
10
<PAGE>
<TABLE>
<CAPTION>
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............... 0 3 17
Adequately Capitalized......... 3 10 24
Undercapitalized............... 10 24 27
</TABLE>
In addition, BIF member banks (such as the Bank) must pay an amount which
fluctuates but is currently 2.08 basis points, or cents per $100 of insured
deposits, towards the retirement of the Financing Corporation bonds issued in
the 1980's to assist in the recovery of the savings and loan industry.
Community Reinvestment Act
The Bank is subject to certain requirements and reporting obligations
involving Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of its local communities, including low
and moderate income neighborhoods. The CRA further requires the agencies to take
a financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions, or holding company formations. In
measuring a bank's compliance with its CRA obligations, the regulators utilize a
performance-based evaluation system which bases CRA ratings on the bank's actual
lending service and investment performance, rather than on the extent to which
the institution conducts needs assessments, documents community outreach
activities or complies with other procedural requirements. In connection with
its assessment of CRA performance, the FDIC assigns a rating of "outstanding,"
"satisfactory," "needs to improve" or "substantial noncompliance." The Bank was
last examined for CRA compliance in October, 1999, and received an "outstanding"
CRA Assessment Rating.
Other Consumer Protection Laws and Regulations
The bank regulatory agencies are increasingly focusing attention on
compliance with consumer protection laws and regulations. Examination and
enforcement has become intense, and banks have been advised to carefully monitor
compliance with various consumer protection laws and their implementing
regulations. The federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in home mortgage lending describing three methods
that federal agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment, and evidence of disparate
impact. In addition to CRA and fair lending requirements, the Bank is subject
to numerous other federal consumer protection statutes and regulations. Due to
heightened regulatory concern related to compliance with consumer protection
laws and regulations generally, the Bank may incur additional compliance costs
or be required to expend additional funds for investments in the local
communities it serves.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") regulates the interstate activities of banks and
bank holding companies and establishes a framework for nationwide interstate
banking and branching. Since June 1, 1997, a bank in one state has generally
been permitted to merge with a bank in another state without the need for
explicit state law authorization. However, states were given the ability to
prohibit interstate mergers with banks in their own state by "opting-out"
(enacting state legislation applying equality to all out-of-state banks
prohibiting such mergers ) prior to June 1, 1997.
Since 1995, adequately capitalized and managed bank holding companies have
been permitted to acquire banks located in any state, subject to two exceptions:
first, any state may still prohibit bank holding companies from acquiring a bank
which is less than five years old; and second, no interstate acquisition can be
consummated by a bank holding company if the acquiror would control more than
10% of the deposits held by insured depository institutions nationwide or 30%
percent or more of the deposits held by insured depository institutions in any
state in which the target bank has branches.
11
<PAGE>
A bank may establish and operate de novo branches in any state in which the
bank does not maintain a branch if that state has enacted legislation to
expressly permit all out-of-state banks to establish branches in that state.
In 1995 California enacted legislation to implement important provisions of
the Interstate Banking Act discussed above and to repeal California's previous
interstate banking laws, which were largely preempted by the Interstate Banking
Act.
The changes effected by Interstate Banking Act and California laws have
increased competition in the environment in which the Bank operates to the
extent that out-of-state financial institutions directly or indirectly enter the
Bank's market areas. It appears that the Interstate Banking Act has contributed
to the accelerated consolidation of the banking industry. While many large out-
of-state banks have already entered the California market as a result of this
legislation, it is not possible to predict the precise impact of this
legislation on the Bank and the Company and the competitive environment in which
they operate.
Financial Modernization Act
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act which, effective March 11, 2000, eliminated most barriers to
affiliations among banks and securities firms, insurance companies, and other
financial service providers, and enabled full affiliations to occur between such
entities. This new legislation permits bank holding companies to become
"financial holding companies" and thereby acquire securities firms and insurance
companies and engage in other activities that are financial in nature. A bank
holding company may become a financial holding company if each of its subsidiary
banks is well capitalized under the FDICIA prompt corrective action provisions,
is well managed, and has at least a satisfactory rating under the CRA by filing
a declaration that the bank holding company wishes to become a financial holding
company. No regulatory approval will be required for a financial holding company
to acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the FRB. The Company has no current
intention of becoming a financial holding company, but may do at some point in
the future if deemed appropriate in view of opportunities or circumstances at
the time.
The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Board has determined to be closely related
to banking. A national bank (and therefore, a state bank as well) may also
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory CRA rating. Subsidiary banks of a financial
holding company or national banks with financial subsidiaries must continue to
be well capitalized and well managed in order to continue to engage in
activities that are financial in nature without regulatory actions or
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or
the bank has a CRA rating of satisfactory or better.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the
Company, the Bank and the banking industry in general are pending, and
additional initiatives may be proposed or introduced, before the United States
Congress, the California legislature and other governmental bodies in the
future. Such proposals, if enacted, may further alter the structure, regulation
and competitive relationship among financial institutions, and may subject the
Bank to increased regulation, disclosure and reporting requirements. In
addition, the various banking regulatory agencies often adopt new rules and
regulations to implement and enforce existing legislation. It cannot be
predicted whether, or in what form, any such legislation or regulations may be
enacted or the extent to which the business of the Company or the Bank would be
affected thereby.
12
<PAGE>
Employees
As of December 31, 1999 the Bank had a total of 75 full-time and 56 part-
time employees. As of June 30, 2000, the Company had 81 full-time employees and
58 part-time employees. None of the Bank's or the Company's employees are
currently represented by a union or covered by a collective bargaining
agreement. Management of the Company believes that its employee relations are
satisfactory.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
This discussion presents Management's analysis of the results of operations
and financial condition of the Company and the Bank as of and for the six months
ended June 30, 2000 and 1999 and as of and for the years ended December 31,
1999, 1998 and 1997./1/ As of the date of this Registration Statement, the
Company's principal subsidiary is the Bank. The Company also wholly owns
Business Capital Trust I, a Delaware statutory business trust (see "Part II,
Item 4 -- Recent Sales of Unregistered Securities"). The discussion should be
read in conjunction with the financial statements of the Company and the Bank
and the notes related thereto presented elsewhere in this Registration
Statement. (See "Part F/S" below.)
Overview
General
Throughout the reporting periods covered the Company has experienced steady
growth in assets and deposits and has accordingly achieved increased net income.
Total net loans/2/ increased to $133.0 million at June 30, 2000, from $115.1
million, $104.5 million and $99.6 million at December 31, 1999, 1998 and 1997,
respectively. Investments including Fed Funds sold and investment securities
increased to $88.8 million at June 30, 2000 from $83.3 million, $51.0 million
and $32.4 million at December 31, 1999, 1998 and 1997, respectively. The primary
source of funds, deposits from customers, were $192.6 million as of June 30,
2000, compared to $186.8 million, $163.8 million, $136.7 million at December 31,
1999, 1998 and 1997, respectively.
Net income was $1.1 million and $926,000 for the six months ended June 30,
2000 and 1999, respectively, and $1,940,000, $1,857,000 and $842,000 and for
1999, 1998 and 1997, respectively.
The most significant occurrence impacting the Company's operations during
these time frames was the acquisition of High Desert National Bank in December,
1997, which accounts for a substantial portion of the increases in assets,
liabilities and net income from 1997 to 1998. The increase in net income is
primarily attributable to (i) growth in net interest income (the difference
between interest and fees derived from earning assets and interest paid on
liabilities carried to provide for those assets) as a result of the
aforementioned growth in assets and liabilities; and (ii) reductions in required
provisions for loan losses per the Bank's analysis of its loan portfolio.
On November 27, 1998 the Bank acquired a forty-nine percent equity
investment in Financial Data Solutions Incorporated ("FDSI"). FDSI provides a
variety of data processing services to the financial services industry. FDSI is
co-owned by the Bank (49%) and by Southwest Community Bank (51%) ("SWCB"). The
Bank and SWCB made contributions aggregating $500,000 to FDSI in January 2000
and contributions aggregating $300,000 in August 2000. The additional
contributions were made to accommodate the rapid growth associated with FDSI.
Additional contributions were made to acquire, among other things; additional
machinery and equipment as well as licenses associated with adding additional
customers. All contributions were made based on the respective ownership
percentages of each of the institutions. The Bank made contributions of $245,000
and $147,000, and SWCB made contributions of $255,000 and $153,000 during
January 2000 and August 2000, respectively.
On August 31, 2000, the Company consummated its acquisition of VMB. In
order to fund a substantial portion of the approximately $12.2 million
acquisition price of VMB, on March 23, 2000, Business Capital Trust I, a newly
formed Delaware statutory business trust and a wholly-owned subsidiary of the
Company, issued an aggregate of $10,000,000 of principal amount of 10-7/8% Fixed
Rate Capital Trust Pass-through Securities of the Trust. The
______________________________
1. As the holding company reorganization pursuant to which the Company became
the sole shareholder of the Bank was effective in January, 2000, all financial
information as of and for the years ended December 31, 1999 and any earlier
years or periods relates to the Bank rather than the Company. Information as of
and for the three months ended March 31, 2000 is provided for the Bank and the
Company on a consolidated basis.
2. Total net loans are net of the allowance for loan losses and unearned income.
14
<PAGE>
securities issued by the Trust are fully guaranteed by the Company with respect
to distributions and amounts payable upon liquidation, redemption or repayment.
The entire proceeds to the Trust from the sale of the Trust Preferred Securities
were used by the Trust in order to purchase $10,000,000 in principal amount of
the Fixed Rate Junior Subordinated Deferrable Interest Debentures due 2030
issued by the Company. In the third quarter of 2000, the Company contributed to
the Bank approximately $9 million of the approximately $9.7 million in net
proceeds which it received from the sale of the Subordinated Debt Securities in
order to fund the acquisition of VMB. The balance of the purchase price for the
acquisition of VMB was paid out of the working capital of the Bank. See "Item 1.
Description of Business-- Recent Developments."
Results of Operations
Net Interest Income
The Bank's earnings depend significantly upon the difference or spread
between the income received from its loans and other interest-earning assets and
the interest paid on interest-bearing liabilities. This computed difference is
the Bank's net interest income. The net interest income, when expressed as a
percentage of average total interest-earning assets, is referred to as the net
interest margin. The Bank's net interest income is affected by the change in the
level and the mix of interest-earning assets and interest-bearing liabilities,
referred to as volume changes. The Bank's net interest margin is also affected
by changes in the yield earned on assets and rates paid on liabilities, referred
to as rate changes. Interest rates charged on the Bank's loans are affected
principally by the demand for such loans, the supply of money available for
lending purposes and competitive factors. These factors are in turn affected by
general economic conditions and other factors frequently beyond the Bank's
control, such as governmental economic policies, money supply, governmental tax
policies and actions of the Federal Reserve Board.
Net interest income was $11.2 million for the year ended December 31, 1999,
an increase of $1.0 million or 9.8% over 1998. Net interest income in 1998
increased $2.7 million or 36.0% from $7.5 million for 1997. The increase during
1999 was due to internal growth through operations while the increase in 1998
was mainly due to the acquisition of High Desert National Bank.
During 1999 average interest-earning assets increased $28.2 million or
19.7% to $171.3 million compared to 1998, while average interest-bearing
liabilities for the same period increased $17.3 million or 19.3% to $107.1
million. Average loans, the Bank's highest yielding asset, grew by $8.3 million
or 8.5% to $105.9 million for the same period. The average yield on interest-
earning assets was 8.63%, down 69 basis points from 9.32% in 1998. This decline
was mainly due to the lower level of the national prime rate, on average, in
1999 compared to 1998. The average rates paid on interest-bearing liabilities
decreased 20 basis points from 3.54% to 3.34% during the aforementioned period.
Accordingly, the net interest spread (the difference between the yield on
interest-earning assets versus the rates paid on interest-bearing deposits)
decreased to 5.29% in 1999 from 5.78% in 1998.
During 1998 average interest-earning assets increased $45.8 million or
47.1% to $143.1 million, while average interest-bearing liabilities increased
$29.5 million or 48.9%. Average loans grew by $27.6 million or 39.4%, which was
primarily attributable to the acquisition of High Desert National Bank. The
average yield on interest-earning assets for 1998 was 9.32%, which was a
decrease of 49 basis points from the yield of 9.81% for 1997. This decline was
due mainly to a lower national prime rate, on average over 1997. The average
rates paid on deposits increased 13 basis points to 3.54% from 3.41% for 1998
compared to 1997. As a result, the net interest spread decreased to 5.78% in
1998 from 6.40% in 1997.
For the six months ended June 30, 2000, net interest income was $6.5
million, an increase of 26.4% or $1.4 million over the six months ended June 30,
1999. This increase closely approximated the growth in average interest-earning
assets of 33.1 % or $52.5 million from the second quarter of 1999 to the second
quarter of 2000.
The tables on the following pages show the Bank's average balances of
assets, liabilities and shareholders' equity; the amount of interest income or
interest expense; the average yield or rate for each category of interest-
15
<PAGE>
earning assets and interest-bearing liabilities; and the net interest spread and
the net interest margin for the periods indicated:
Distribution, Yield and Rate Analysis of Net Income
<TABLE>
<CAPTION>
As of and For the Six Months Ended June 30, 2000
---------------------------------------------------------
Interest Income/ Average
Average Balance Expense Rate/Yield
--------------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net/1/........................... $ 123,019 $ 6,783 11.03%
Taxable investment securities:
U. S. government securities........... 1,011 28 5.61
Obligations of other
U. S. governmental agencies......... 0 0 0.00
Mortgage backed securities............ 65,410 2,063 6.31
Other securities........................ 2,816 100 7.09
Tax-exempt investment securities:/2/
Obligations of state and
political subdivisions.............. 16,410 452 5.51
Federal funds sold...................... 787 24 6.21
Interest-earning deposits............... 0 0 0.00
---------- ----------
Total interest-earning assets............. 209,453 9,450 9.02
Non-interest earning assets:
Cash and due from banks................. 17,695
Premises and equipment, net............. 4,291
Other real estate owned................. 826
Accounts receivable..................... 0
Accrued interest receivable............. 1,334
Other assets............................ 6,159
Total non-interest earning assets......... 30,305
----------
Total assets........................ $ 239,758
==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market........................ 30,613 547 3.57
NOW................................. 26,481 253 1.91
Savings............................. 19,398 259 2.67
Time certificates of deposit in
denominations of $100,000
or more........................... 17,212 444 5.16
Other time deposits................. 20,485 477 4.66
Other borrowings.................... 21,060 714 6.78
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Junior
Subordinated Debentures................... 5,603 302 10.78
---------- ----------
</TABLE>
____________________
1. Loan fees have been included in the calculation of interest income. Loan
fees were approximately $502,000 and $450,000 for the six months ended June
30, 2000 and 1999, respectively. Loans are net of the allowance for loan
losses, deferred fees and related direct costs.
2. Yields on tax-exempt income have not been computed on a tax equivalent
basis.
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total interest-bearing liabilities.............. 140,852 2,996 4.25
Non-interest-bearing liabilities:
Demand deposits.................................. 75,904
Other liabilities................................ 3,172
-----------
Total non-interest-bearing
liabilities.................................. 79,076
Stockholders' equity.............................. 19,830
Total liabilities and stockholders' equity..... $ 239,758
===========
Net interest income............................... $ 6,454
==========
Net interest spread/1/............................ 4.77%
====
Net interest margin/2/............................ 6.16%
====
</TABLE>
______________________
1. Represents the annualized average rate earned on interest-earning assets
less the average rate paid on interest-bearing liabilities.
2. Represents the interest income (after provision for loan losses) as a
percentage of average interest-earning assets.
17
<PAGE>
Distribution, Yield and Rate Analysis of Net Income
(continued)
<TABLE>
<CAPTION>
As and For the Six Months Ended June 30, 1999
------------------------------------------------------------------
Interest Income/
Average Balance Expense Average Rate/Yield
---------------- ---------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net/1/...................................... $104,402 $5,329 10.21%
Taxable investment securities:
U. S. government securities....................... 580 15 5.32
Obligations of other.............................. 1,103 35 6.30
U. S. governmental agencies
Mortgage backed securities........................ 24,129 653 5.41
Other securities................................... 152 5 7.22
Tax-exempt investment securities:/2/
Obligations of state and
political subdivisions........................... 8,793 226 5.13
Federal funds sold................................. 19,266 459 4.77
Interest-earning deposits.......................... 0 0 0.00
-------- ------
Total interest-earning assets...................... 158,425 6,722 8.49
Non-interest earning assets:
Cash and due from banks............................ 17,689
Premises and equipment, net........................ 3,809
Other real estate owned............................ 1,011
Accounts receivable................................ 0
Accrued interest receivable........................ 833
Other assets....................................... 3,372
Total non-interest earning assets.................. 26,714
--------
Total assets...................................... $185,139
========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market...................................... 23,067 335 2.90
NOW............................................... 22,970 233 2.03
Savings........................................... 19,144 254 2.66
Time certificates of deposit in
denominations of $100,000 or more................ 11,856 283 4.77
Other time deposits............................... 20,891 474 4.54
Other borrowings.................................. 0 0 0.00
</TABLE>
_______________________________
1. Loan fees have been included in the calculation of interest income. Loan
fees were approximately $502,000 and $450,000 for the six months ended June 30,
2000 and 1999, respectively. Loans are net of the allowance for loan losses,
deferred fees and related direct costs.
2. Yields on tax-exempt income have not been computed on a tax equivalent
basis.
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Junior Subordinated.............. 0 0 0.00
--------- ------
Debentures
Total interest-bearing liabilities................ 97,928 1,579 3.23
Non-interest-bearing liabilities:
Demand deposits....................................... 67,697
Other liabilities..................................... 1,416
--------
Total non-interest-bearing liabilities............ 69,113
Stockholders' equity.................................. 18,098
--------
Total liabilities and............................. $185,139
stockholders' equity........................... ========
Net interest income................................... $5,143
======
Net interest spread/1/................................ 5.26%
====
Net interest margin/2/................................ 6.49%
====
</TABLE>
_________________________
1. Represents the annualized average rate earned on interest-earning assets
less the average rate paid on interest-bearing liabilities.
2. Represents the interest income (after provision for loan losses) as a
percentage of average interest-earning assets.
19
<PAGE>
Distribution, Yield and Rate Analysis of Net Income
(continued)
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate/Yield Balance Expense Rate/Yield
--------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net/1/.............................. $105,922 $11,227 10.60% $ 97,660 $10,798 11.06%
Taxable investment securities:
U. S. government securities............. 799 44 5.51 824 54 6.57
Obligations of other
U. S. governmental agencies............ 556 36 6.53 10,409 631 6.06
Mortgage backed securities.............. 40,382 2,273 5.63 1,122 61 5.40
Other securities.......................... 1,238 71 5.76 339 23 6.86
Tax-exempt investment securities:/2/
Obligations of state and
political subdivisions................. 9,685 502 5.18 5,782 333 5.76
Federal funds sold........................ 12,668 618 4.88 26,959 1,433 5.32
Interest-earning deposits................. 0 0 0.00 0 0 0.00
-------- ------- -------- -------
Total interest-earning assets.............. 171,250 14,771 8.63 143,095 13,333 9.32
Non-interest earning assets:
Cash and due from banks................... 17,695 14,748
Premises and equipment, net............... 3,795 3,919
Other real estate owned................... 1,057 1,298
Accounts receivable....................... 0 0
Accrued interest receivable............... 938 768
Other assets.............................. 4,070 4,122
Total non-interest earning assets.......... 27,555 24,855
-------- --------
Total assets............................ $198,805 $167,950
======== ========
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market............................ 28,720 817 2.85 20,719 607 2.93
NOW..................................... 21,612 489 2.26 20,862 491 2.35
Savings................................. 19,610 529 2.70 17,663 508 2.87
Time certificates of deposit in
denominations of $100,000 or more...... 12,825 604 4.71 9,903 528 5.33
Other time deposits..................... 20,611 925 4.49 20,658 1,044 5.05
Other borrowings........................ 3,756 213 5.67 0 0 0.00
Total interest-bearing liabilities...... 107,134 3,577 3.34 89,805 3,178 3.54
Non-interest-bearing liabilities:
</TABLE>
________________________________
1. Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,092,075, $953,258 and $634,942 for the years ended
December 31, 1999, 1998 and 1997, respectively. Loans are net of the allowance
for loan losses, deferred fees and related direct costs.
2. Yields on tax-exempt income have not been computed on a tax equivalent
basis.
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Demand deposits........................... 71,726 60,398
Other liabilities......................... 2,881 2,676
Total non-interest-bearing
liabilities............................ 74,607 63,074
Stockholders' equity....................... 17,064 15,071
Total liabilities and
stockholders' equity................... $198,805 $167,950
======== ========
Net interest income........................ $11,194 $10,155
======= =======
Net interest spread/1/..................... 5.29% 5.78%
==== ====
Net interest margin/2/..................... 6.54% 7.10%
==== ====
</TABLE>
_________________________________
1. Represents the annualized average rate earned on interest-earning assets
less the average rate paid on interest-bearing liabilities.
2. Represents the interest income (after provision for loan losses) as a
percentage of average interest-earning assets.
21
<PAGE>
Distribution, Yield and Rate Analysis of Net Income
(continued)
<TABLE>
<CAPTION>
As of and for the Year Ended December 31, 1997
-----------------------------------------------------------------------
Average Balance Interest Income/ Expense Average Rate/Yield
--------------- ------------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net/1/............................... $ 70,110 $7,976 11.38%
Taxable investment securities:
U. S. government securities............... 2,483 140 5.64
Obligations of other
U. S. governmental agencies............... 4607 251 5.45
Mortgage backed securities................ 0 0 0.00
Other securities.......................... 520 61 11.73
Tax-exempt investment securities:/2/
Obligations of state and
political subdivisions.................... 6,112 381 6.23
Federal funds sold........................ 13,066 710 5.43
Interest-earning deposits................. 398 22 5.53
-------- ------ -----
Total interest-earning assets............. 97,296 9,541 9.81
Non-interest earning assets:
Cash and due from banks................... 11,168
Premises and equipment, net............... 3,206
Other real estate owned................... 2,183
Accounts receivable....................... 0
Accrued interest receivable............... 548
Other assets.............................. 2,064
Total non-interest earning assets......... 19,169
--------
Total assets.............................. $116,465
========
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market.............................. 16,317 489 3.00
NOW....................................... 15,332 388 2.53
Savings................................... 14,175 421 2.97
Time certificates of deposit in
denominations of $100,000 or more......... 5,189 271 5.22
Other time deposits....................... 9,274 488 5.26
Other borrowings.......................... 0 0 0.00
Total interest-bearing liabilities........ 60,287 2,057 3.41
Non-interest-bearing liabilities:
</TABLE>
________________________________________
1. Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,092,075, $953,258 and $634,942 for the years ended
December 31, 1999, 1998 and 1997, respectively. Loans are net of the allowance
for loan losses, deferred fees and related direct costs.
2. Yields on tax-exempt income have not been computed on a tax equivalent
basis.
22
<PAGE>
<TABLE>
<S> <C> <C> <C>
Demand deposits.................................. 40,939
Other liabilities................................ 792
Total non-interest-bearing liabilities........... 41,731
Stockholders' equity............................. 14,447
Total liabilities and............................ $116,465
stockholders' equity............................. ========
Net interest income.............................. $7,484
======
Net interest spread/1/........................... 6.40%
====
Net interest margin/2/........................... 7.69%
====
</TABLE>
The following table sets forth, for the periods indicated, the dollar
amount of changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average daily balances (volume) or changes in average daily interest rates
(rate). The variances attributable to both the volume and rate changes have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amount of the changes in each:
_____________________________
1. Represents the annualized average rate earned on interest-earning assets
less the average rate paid on interest-bearing liabilities.
2. Represents the interest income (after provision for loan losses) as a
percentage of average interest-earning assets.
23
<PAGE>
Rate/Volume Analysis of Net Interest Income
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
2000 vs. 1999 1999 vs. 1998
----------------------------- -----------------------------
Increases (Decreases) Increases (Decreases)
Due to Change In Due to Change In
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
-------- ------ -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest income:
Loans, net/1/.................................... $ 950 $ 504 $ 1,454 $ 914 $ (485) $ 429
Taxable investment securities:
U. S. government securities.................... 12 1 13 (2) (8) (10)
Obligations of other U. S.
governmental agencies........................ (34) (1) (35) (597) 2 (595)
Mortgage backed securities..................... 1,116 294 1,410 2,121 91 2,212
Other securities................................. 97 (2) 95 62 (14) 48
Tax-exempt securities:/2/
Obligations of state and
political subdivisions....................... 195 31 226 225 (56) 169
Federal funds sold............................... (441) 6 (435) (760) (55) (815)
Interest-earning deposits........................ 0 0 0 0 0 0
Total.......................................... $ 1,895 $ 833 $ 2,728 $ 1,963 $ (525) $ 1,438
-------- ------ -------- -------- ------- --------
Interest expense:
Demand deposits, interest-bearing
Money market deposits............................ $ 110 $ 102 $ 212 $ 234 $ (24) $ 210
NOW deposits..................................... 35 (15) 20 18 (20) (2)
Savings deposits................................. 3 2 5 56 (35) 21
Time certificates of deposit in
denominations of $100,000
or more........................................ 128 33 162 156 (80) 76
Other time deposits.............................. (9) 12 3 (2) (117) (119)
Other borrowings................................. 714 0 714 213 0 213
Solely Junior Subordinated.....................
Debt............................................... 302 0 302 0 0 0
Total.......................................... $ 1,283 $ 134 $ 1,417 $ 675 $ (276) $ 399
-------- ------ -------- -------- ------- --------
Change in net interest income...................... $ 612 $ 699 $ 1,311 $ 1,288 $ (249) $ 1,039
======== ====== ======== ======== ======= ========
</TABLE>
____________________________________
1. Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,092,075, $953,258 and $634,942 for the years ended
December 31, 1999, 1998 and 1997, respectively and $502,000 and $450,000 for the
six months ended June 30, 2000 and 1999, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
2. Yields on tax-exempt income have not been computed on a tax equivalent
basis.
24
<PAGE>
Rate/Volume Analysis of Net Interest Income
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 vs. 1997
----------------------------------------------------
Increases (Decreases)
Due to Change In
---------------------------------------------------
Volume Rate Total
---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income:
Loans, net/1/ $ 3,134 $ (312) $ 2,822
Taxable investment securities:
U. S. government securities................ (94) 8 (86)
Obligations of other U. S
governmental agencies..................... 316 64 380
Mortgage backed securities................. 61 0 61
Other securities............................. (21) (17) (38)
Tax-exempt securities:/2/
Obligations of state and
political subdivisions.................... (21) (27) (48)
Federal funds sold........................... 755 (32) 723
Interest-earning deposits.................... (22) 0 (22)
Total...................................... $ 4,108 $ (316) $ 3,792
---------- --------- ---------
Interest expense:
Demand deposits, interest-bearing
Money market deposits....................... $ 132 $ (14) $ 118
NOW deposits................................ 140 (37) 103
Savings deposits............................ 104 (17) 87
Time certificates of deposit in
denominations of $100,000 or more.......... 246 11 257
Other time deposits......................... 599 (43) 556
Other borrowings............................ 0 0 0
Solely Junior Subordinated Debt............ 0 0 0
Total...................................... $ 1,221 $ (100) $ 1,121
---------- --------- ---------
Change in net interest income................ $ 2,887 $ (216) $ 2,671
========== ========= =========
</TABLE>
__________________________________
1. Loan fees have been included in the calculation of interest income. Loan
fees were approximately $1,092,075, $953,258 and $634,942 for the years ended
December 31, 1999, 1998 and 1997, respectively and $502,000 and $450,000 for the
six months ended June 30, 2000 and 1999, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
2. Yields on tax-exempt income have not been computed on a tax equivalent
basis.
25
<PAGE>
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Bank sets
aside an allowance for loan losses ("ALLL") through charges to earnings, which
charges are reflected in the income statement as the provision for loan losses.
The provision for loan losses represents the amount charged against current
period earnings to achieve an allowance for loan losses that in Management's
judgment is adequate to absorb losses inherent in the Bank's loan portfolio.
The Bank's formally assesses the ALLL in a multi-step process on a
quarterly basis. The determination of the ALLL begins with Management reviewing
each individual classified or criticized loan in detail, evaluating, among other
things, the adequacy of collateral, payment record, current loan status and
borrower financial capacity. A loan loss reserve is assigned each classified and
criticized loan (Loans categorized as "Substandard", "Doubtful" and "Loss" as
well as "Special Mention" ) from this quarterly review based upon the specifics
of the loan's circumstances, including updated collateral value, borrower's or
guarantor's financial capacity, payment record and recent conversations with the
borrower. Additionally, each quarter the Bank updates its eight-quarter loss
migration analysis to derive a rolling, 2-year loan loss experience percentage
by loan category. Specific loan pools by type (e.g., commercial loans, consumer
loans) are assigned an appropriate reserve factor based upon the Bank's
historical charge off experience or a minimum "floor", whichever is greater, and
then factors are adjusted for current conditions. The Bank then applies the
minimum percentage reserve factors in determining the ALLL. These reserve
factors have floors that range from 0.40% to 0.80% depending on the particular
loan category.
The ALLL can be further impacted (increased or decreased) by Management's
assessment of risk. Management's risk assessment consists of a variety of
factors. These factors are required to be considered when determining the ALLL.
The factors considered by Management include items such as: changes in lending
policies and procedures; changes in national/local economic conditions; changes
in the nature and volume of the portfolio; changes in experience, ability and
depth of lending staff, changes in past dues, classified and non-accruals;
changes in quality of loan review systems; existence and effect of loan
concentrations as well as the effect of external factors (competition, legal,
regulatory policies, etc.). Although all of these factors are consistently
considered and applied, the combined management risk assessment has a relatively
nominal effect on the provision and allowance. These factors are considered and
evaluated, but do not readily determine the provision or allowance.
After management's assessment of risk is factored into consideration, the
resulting loan loss factor of each loan category is then applied to the existing
loan portfolio by category and added to the loan loss reserve total from the
review of the criticized and classified loans to conclude a total ALLL. This
concluded ALLL is then compared to a regulatory reasonableness test to ensure
that the Bank's concluded ALLL compares favorably.
The Bank applies a regulatory reasonableness test in determining both the
current provision as well as the overall allowance. The test begins by using a
three year weighted average net charge-offs to beginning total loans, with the
highest weight being placed on the most current year. The calculated weighting
is then applied to non-classified loans. Classified loans (Substandard,
Doubtful, Loss) are also risk weighted to determine an allowance amount. The
risk weighted totals for the classified and non-classified assets are then added
together to determine the regulatory reasonableness amount. In summary, this is
a "quick and dirty" migration analysis that is used to test the allowance for
reasonableness. This test is not used as a "driver" of the allowance. See
"Allowance for Loan Losses," below.
The provision for loan losses was $180,000 for the year ended December 31,
1999, compared to $150,000 for the year ended December 31, 1998. The Bank
increased the provision primarily to compensate for the growth in the loan
portfolio. The ratio of the allowance for loan losses to total loans at the end
of period was 1.06% and 1.35% as of December 31, 1999 and 1998, respectively.
During 1998 the provision for loan losses decreased to $150,000 from
$487,000 in 1997. This decrease was primarily attributable to management's
concerted efforts to reduce charged-off loans and continue to improve overall
conditions within the loan portfolio. The ratio of the allowance for loan losses
to total loans at the end of the period was 1.35% and 1.74% as of December 31,
1998 and 1997, respectively.
26
<PAGE>
The provision for loan losses was $80,000 for the first six months of 2000
compared to $105,000 for the first six months of 1999. This decrease was mainly
attributable to net recoveries of $14,000 for the six months ended June 30, 2000
and a reduction in the number and dollar amount of classified loans. The ratio
of the allowance for loan losses to total loans at the end of period was 1.00%
and 1.30% as of June 30, 2000 and 1999, respectively. See "Allowance for Loan
Losses," below
Noninterest IncomeNoninterest IncomeNoninterest Income
The following table sets forth the various components of the Bank's
Noninterest income for the periods indicated:
Noninterest Income
<TABLE>
<CAPTION>
For the Six
Months Ended For the Years
June 30, Ended December 31,
-------------------- -----------------------------------
2000 1999 1999 1998 1997
------ ------ ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposits............................ $1,008 $ 868 $1,872 $1,581 $ 981
Gain on sale of SBA loans.............................. 12 98 154 331 100
Gain on sale of OREO................................... 173 7 38 136 52
All other Noninterest income........................... 170 251 292 722 450
------ ------ ------ ------ ------
Total................................................. $1,363 $1,224 $2,356 $2,770 $1,583
====== ====== ====== ====== ======
</TABLE>
As denoted in the previous table, the Bank has few primary areas of
Noninterest income. Service charges on deposits represent amounts charged to
customers in the form of transactional fees and other charges imposed for
providing services normally associated with account services. Gains from the
sale of SBA loans are premiums recognized on sales of loans generated by the
Bank and sold in the secondary market. Gains on the sale of Other Real Estate
Owned (real estate acquired through foreclosure or similar means) ("OREO")
represent gains recognized when the Bank sells OREO property.
Noninterest income was $2.4 million for the year ended December 31, 1999, a
decrease of $414,000 or 15.0% from 1998. Service charges on deposits increased
$291,000 or 18.41%, which closely mirrored the average growth in total deposits
of 16.58% or $24.9 million. Gain on the sale of SBA loans decreased $177,000 or
53.4%, primarily as a result of lower premiums being offered by the secondary
market. As a result, the Bank (i) realized less income on the loans it sold; and
(ii) chose to sell fewer loans because of the aforementioned diminished
premiums. Gain on the sale of OREO decreased $98,000 or 72.1% from $136,000 to
$38,000. This decrease was primarily attributable to the reduction in the OREO
portfolio from December 31, 1997 to December 31, 1998 of $291,000 or 21.4%,
which provided for fewer properties to be sold in 1999. This reduction has
improved the overall asset quality of the Bank (see "FINANCIAL CONDITION --
Nonperforming Assets" below).
On November 27, 1998 the Bank acquired a 49% equity investment in Financial
Data Solutions, Inc.("FDSI"), an affiliate which provides a variety of data
processing services to the financial services industry. The gain (loss) on this
investment is included in "all other Noninterest income." All other Noninterest
income decreased by $430,000 in 1999 compared to 1998; $308,000 of this amount
consisted of continued losses on FDSI for the year 1999.
Noninterest income in 1998 was $2.8 million compared to $1.6 million in
1997. Service charges on deposits increased $600,000 due to an overall increase
in accounts serviced, which in turn was due to a combination of the acquisition
of High Desert National Bank and internal growth. Gain on the sale of SBA loans
increased $231,000 or 231.0% in 1998 compared to 1997. Gain on the sale of OREO
increased to $136,000 for the year ended December 31, 1998 from $52,000 for the
year ended December 31, 1997.
27
<PAGE>
Noninterest income for the six months ended June 30, 2000 was $1.4 million,
compared to $1.2 million for the same period in 1999, an increase of $139,000 or
11.36%. Gain on the sale of OREO increased by $166,000 for the second quarter of
2000 compared to $7,000 for the second quarter of 1999, due primarily to the
sale of one large OREO property, which accounted for $144,000 of the overall
gain.
Noninterest Expense
The following table sets forth the break-down of Noninterest expense for
the periods indicated:
Noninterest Expense
<TABLE>
<CAPTION>
For the Six
Months Ended For the Years
June 30, Ended December 31,
-------------------- -----------------------------------
2000 1999 1999 1998 1997
------ ------ ------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Advertising and promotion.............................. $ 213 $ 134 $ 286 $ 242 $ 113
Insurance assessments.................................. 81 57 124 118 138
Data processing........................................ 426 261 683 407 269
Stationery and supplies................................ 136 120 291 266 264
Professional........................................... 271 180 440 353 387
Office................................................. 200 213 427 420 256
Administrative......................................... 448 349 783 722 452
Other real estate owned................................ 48 37 109 195 258
Salary and employee benefits........................... 3,147 2,536 5,291 4,852 3,621
Occupancy and F.F.& E.................................. 793 738 1,522 1,485 1,226
Other.................................................. 543 456 633 603 352
------ ------ ------- ------ ------
Total................................................ $6,306 $5,081 $10,589 $9,663 $7,336
====== ====== ======= ====== ======
</TABLE>
Noninterest expense consists of salary and employee benefits, occupancy and
furniture and equipment, advertising, insurance assessments, data processing,
stationery and supplies, professional service fees, office supplies,
administrative, OREO expenses and other expenses. Noninterest expense for 1999
was $10.6 million, compared to $9.7 million and $7.3 million for 1998 and 1997,
respectively
The increase in 1999 of $926,000 consisted mainly of increases in the
following categories: $439,000 in salaries and benefits, $276,000 in data
processing, $87,000 in professional expenses and $61,000 in administrative
expenses. As the Bank's average assets grew by 18.4%, salaries and benefits
increased by only 9.1% or $439,000. The increase in data processing was a result
of outsourcing the Bank's item processing, which was previously in-house, to the
Bank's affiliate, Financial Data Solutions, Inc. (FDSI). On November 27, 1998
the Bank acquired a forty-nine percent equity investment in FDSI. The subsidiary
provides a variety of data processing services to the financial services
industry. In May, 1999 the Bank began to incur expenses related to the opening
of its de novo branch located in Ontario California. The Noninterest expense
associated with this venture for 1999 was $268,000. The remaining increases were
due to general growth in assets and their associated cost levels.
The acquisition of the High Desert National Bank in December, 1997 caused
the majority of the increase in Noninterest expense to $9.6 million in 1998 over
$7.3 million in 1997. Salary and benefits accounted for $1.2 million of the 1998
increase, while data processing increased by $138,000, due to increased volumes
in relationship to the larger customer base. Other categories contributing to
the increase were: $270,000 in administrative costs, $259,000 in occupancy and
furniture and equipment, $129,000 in advertising, $164,000 in office supplies,
and $251,000 in other expenses.
Noninterest expense increased $1.2 million or 24.1% for the six months
ended June 30, 2000 compared to the same period for 1999. Salary and employee
benefits, the main contributor, increased by $611,000 as the
28
<PAGE>
Company continued to grow in general. Data processing increased by $165,000 as
the Bank did not outsource item processing until April, 1999. The opening of the
Ontario branch, in May of 1999, contributed $98,000 to this increase. The total
increase of 24.1% closely approximated the average growth of the Bank's assets
of 31.3% for the same periods.
Provision for Income Taxes
Income tax expense was $841,000 for 1999 as compared to $1,255,000 and
$402,000 for 1998 and 1997, respectively. Accordingly, the Bank accrued taxes at
an approximate 30.2% rate for 1999 as opposed to an approximate 40.3% and 32.3%
rate for 1998 and 1997, respectively. The decrease in the effective tax rate in
1999 compared to 1998 is primarily the result of (i) increasing tax benefits
from tax exempt securities in the investment portfolio; and (ii) recognition of
additional net deferred tax assets due to a $100,000 decrease in the valuation
reserve against such assets.
The valuation reserve on deferred tax assets is an amount that has been
established due to the unprojected turn-around of certain timing differences
between book expense and tax deductions. Primarily, the provision for loan
losses expensed on the books has been accrued at a much higher level than
allowed for (or anticipated) on the tax returns. The valuation reserve at June
30, 2000 remains at $350,000, although there has been a slight change in the
elements of the valuation due to changes in asset composition.
Financial Condition
Loan Portfolio
Overview. The Bank has realized steady growth in its loan portfolio
throughout the periods discussed in this Registration Statement. Total gross
loans were $134.9 million as of June 30, 2000 compared to $117.2 million as of
December 31, 1999, which represents an increase of 15.1% from December 31, 1999.
Total gross loans increased by $10.6 million or 9.9% in 1999 and by $4.6 million
or 4.5% in 1998. Throughout the aforementioned periods the increases have been
reflected in basically all categories of loans in the portfolio. Limits on loans
to one borrower are imposed by regulation and currently stand at $5.3 million
secured and $3.2 million unsecured; however, the Bank generally will not lend to
one borrower the maximum under either category, choosing instead to self-impose
a margin of safety.
The Bank's real estate mortgage loans consist primarily of loans made based
on the borrower's cash flow and which are secured by deeds of trust on
commercial and residential property to provide another source of repayment in
the event of default. These loans are the largest single component of the Bank's
loan portfolio accounting for approximately $62 million of the Bank's total loan
portfolio or approximately 45.9% of its loan portfolio at June 30, 2000. It is
the Bank's policy to restrict real estate loans to no more than a range of fifty
to eighty percent of the value of the property, depending on the type of
property and its utilization. The Bank offers both floating and fixed rate
loans. Maturities on such loans are generally limited to five to seven years,
although applicable amortization periods may range significantly longer.
The Bank's commercial loans are made for the purpose of providing working
capital, financing the purchase of equipment or for other business purposes.
Approximately $32.6 million of the Bank's loan portfolio, or 24.2% of the Bank's
loan portfolio at June 30, 2000 was made up of commercial loans. Such loans
include short term loans with maturities ranging from thirty days to one year
and term loans which are loans with maturities normally ranging from one to
several years. Short term business loans are generally intended to finance
current transactions and typically provide for periodic principal payments, with
interest payable monthly. Term loans normally provide for floating interest
rates, with monthly payments of both principal and interest.
The Bank's real estate construction loans are primarily interim loans made
by the Bank to finance the construction of commercial and single family
residential property. Approximately $30.6 million of the Bank's loan portfolio,
or 22.7% of the Bank's loan portfolio at June 30, 2000 was made up of real
estate construction loans. These loans are typically short term. The Bank
generally pre-qualifies construction loan borrowers for permanent
29
<PAGE>
take out financing as a condition to making the construction loan.
Installment loans are consumer loans made for the purpose of financing
automobiles, various types of consumer goods, and other personal purposes
including overdrafts. Consumer loans generally provide for the monthly payment
of principal and interest. Most of these loans are secured by the personal
property being purchased.
The Bank identifies its lending marketplace in terms of a Primary and
Secondary marketplace. The Bank's Primary marketplace is that which is commonly
referred to as the "Inland Empire" and which the Bank defines as San Bernardino
and Riverside counties. Its Secondary marketplace is that which is commonly
referred to as Southern California which the Bank defines as that area south of
the merging lines of Los Angeles and San Bernardino counties. All real estate
loans are collateralized by deeds of trust on properties located in California,
primarily in San Bernardino and Riverside counties.
By policy, the Bank tracks its loan categories to ensure a balance to the
portfolio both by type (e.g., real estate construction, commercial real estate,
consumer loans, commercial loans, etc.) as well as by interest rate (variable
versus fixed rate). At June 30, 2000, of the Bank's total loan portfolio
(including consumer loans), 41.20% was in fixed rate product producing an
average gross yield of 8.97%. The total loan portfolio gross yield at June 30,
2000 was 11.03% and net interest margin was 6.16%.
Loan Approval Policies. Loan approval authority is delegated by the Board
of Directors of the Bank to the Chief Executive Officer ("CEO") and Chief Credit
Officer ("CCO") under Board resolution that is reviewed and approved annually.
Only the CEO, with recommendations from the CCO, is empowered to delegate
lending authority to Bank officers. That delegated authority is documented under
a specific written credit authority provided to each lending officer and
maintained and monitored by the CCO. Because unsecured loans present greater
risk, unsecured lending authorities are tightly controlled and kept to a
practical minimum. The highest level of unsecured lending authority outside of
the Loan Committee is $200,000 which is delegated to both the CEO and CCO.
Regional Vice Presidents and Branch Managers generally operate at unsecured
lending levels of $100,000 or less. Secured lending activity meets the
regulatory definition of "secured" requiring as collateral either cash,
marketable securities or a first trust deed. Maximum secured lending authority
is $750,000 and rests with the CEO and CCO, with lesser amounts of secured
lending authority delegated to each lending officer. All new loans which exceed
$100,000, or which would make the aggregate of any loans to one borrower in
excess of $100,000, are reviewed by the Bank's Loan Committee prior to funding.
The following table sets forth the amount of total loans outstanding in
each category and the percentage of total loans in each category as of the dates
indicated:
30
<PAGE>
Loan Portfolio Composition
<TABLE>
<CAPTION>
Outstanding as of June 30,
----------------------------------------------------
2000 1999
----------------------------------------------------
Percent Percent
Amount of Total Amount of Total
-------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction.................................................. $ 30,631 22.70% $ 22,054 21.02%
Mortgage...................................................... $ 62,018 45.96% $ 45,574 43.43%
Commercial......................................................... $ 32,613 24.17% $ 29,233 27.86%
Installment/All other loans........................................ $ 9,673 7.17% $ 8,064 7.69%
-------- ------ -------- ------
Total gross loans........................................ $134,935 100.00% $104,925 100.00%
====== ======
Unearned income.................................................... $ 684 $ 807
Allowance for loan losses.......................................... $ 1,234 $ 1,354
-------- --------
Total net loans $133,017 $102,764
======== ========
</TABLE>
<TABLE>
<CAPTION>
Outstanding as of December 31,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Construction.......................... $ 25,102 21.42% $ 20,888 19.60% $ 17,930 17.59%
Mortgage.............................. $ 53,344 45.52% $ 46,190 43.34% $ 46,753 45.87%
Commercial................................ $ 30,456 25.99% $ 30,810 28.91% $ 28,825 28.28%
Installment/All other loans............... $ 8,275 7.07% $ 8,691 8.15% $ 8,426 8.26%
-------- ------ -------- ------ -------- ------
Total gross loans................ $117,177 100.00% $106,579 100.00% $101,934 100.00%
====== ====== ======
Unearned income........................... $ 794 $ 675 $ 607
Allowance for loan losses................. $ 1,242 $ 1,439 $ 1,773
-------- -------- --------
Total net loans.................. $115,141 $104,465 $ 99,554
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Outstanding as of December 31,
---------------------------------------------------------
1996 1995
---------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
----------- ------------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction.................................................... $ 4,043 6.85% $ 4,096 6.58%
Mortgage........................................................ $28,532 48.36% $30,032 48.24%
Commercial......................................................... $21,331 36.15% $22,043 35.41%
Installment/All other loans........................................ $ 5,094 8.64% $ 6,080 9.77%
------ ------
Total gross loans......................................... $59,000 100.00% $62,251 100.00%
====== ======
Unearned income.................................................... $ 476 $ 296
Allowance for loan losses.......................................... $ 1,298 $ 1,395
------- -------
Total net loans $57,226 $60,560
======= =======
</TABLE>
As of December 31, 1999, the Bank had commitments to extend credit of $46.9
million, obligations under standby letters of credit of $795,100, and
obligations under commercial letters of credit of $726,028.
31
<PAGE>
The following table shows the maturity distribution and repricing intervals
of the Bank's outstanding loans as of June 30, 2000. In addition, the table
shows the distribution of such loans as between those with variable or floating
interest rates and those with fixed or predetermined interest rates.
Loan Maturities and Repricing Intervals/1/
<TABLE>
<CAPTION>
At June 30, 2000
-------------------------------------------------------------
After One
Within One But Within After Five
Year Five Years Years Total
--------------- --------------- -------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction.............................................. $ 29,099 $ 307 $ 1,225 $ 30,631
Mortgage.................................................. 11,163 30,388 20,467 62,018
Commercial.................................................. 24,768 6,848 979 32,613
Installment/All other loans................................. 2,128 4,739 2,806 9,673
--------- --------- --------- ----------
Total.................................................. $ 67,176 $ 42,282 $ 25,477 $ 134,935
========= ========= ========= ==========
Loans with variable (floating) interest rates............... $ 56,709 $ 16,771 $ 5,867 $ 79,347
Loans with predetermined (fixed) interest rates............. $ 10,467 $ 25,511 $ 19,610 $ 55,588
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------
After One
Within One But Within After Five
Year Five Years Years Total
--------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Real estate:
Construction.............................................. $ 22,905 $ 768 $ 1,429 $ 25,102
Mortgage.................................................. 6,137 30,146 17,061 53,344
Commercial.................................................. 20,956 8,503 997 30,456
Installment/All other loans................................. 1,958 4,430 1,887 8,275
--------- --------- --------- ----------
Total.................................................. $ 51,956 $ 43,847 $ 21,374 $ 117,177
========= ========= ========= ==========
Loans with variable (floating) interest rates............... $ 45,881 $ 19,972 $ 6,093 $ 71,946
Loans with predetermined (fixed) interest rates............. $ 6,075 $ 23,875 $ 15,281 $ 45,231
</TABLE>
Loans Secured by Real Estate -- General. At June 30, 2000, $82.6 million,
or approximately 61.5% of the Bank's loans were secured by first deeds of trust
on real estate. Loans which are secured by real estate are included within all
of the various loan categories discussed above other than installment loans.
All of the Bank's loans which are secured by real estate are monitored and taken
into account in the quarterly computation of the adequacy of the allowance for
loan and lease losses. Historical loan losses are tracked by loan category on a
rolling, eight-quarter loss experience and used to determine the adequacy of the
Bank's allowance for loan and lease losses.
The Bank requires title insurance insuring the status of the lien on all of
the real estate secured loans. The Bank also requires that fire and extended
coverage casualty insurance (and, if the property is located in a designated
flood zone, flood insurance) is maintained in an amount equal to the outstanding
loan balance, subject to applicable law that in some instances may limit the
required amount of hazard insurance to the cost to replace the insured
improvements
Real Estate Mortgage Loans. The value of real estate collateral for
commercial mortgage loans is supported by formal appraisals performed by Bank-
approved appraisers and conducted in accordance with
_________________
1. Excludes non-accrual loans of $255,000 and $477,000, and includes unearned
income and deferred fees totaling $684,000 and $794,000 at June 30, 2000 and
December 31, 1999, respectively.
32
<PAGE>
applicable state and federal regulations. Generally, these types of loans are
made for a period of up to five to seven years, amortization may be up to 25
years, loan-to-value ratios are 75% or less, and debt service coverage ratios
are 1.20:1 or better. As with any loan category, the creditworthiness of the
borrower and a proven track record are primary considerations in the review of
all loan requests. In general, the borrower should provide a verifiable primary
source of repayment and a viable secondary source through either personal or
business cash flow, or personal or business assets, and should be current on all
outstanding debts.
Repayment on loans secured by commercial mortgages generally depends on
successful management of operations of the collateral properties. The market
value of the collateral is subject to the vagaries of the real estate market and
general economic conditions. The Bank addresses these risks through its
underwriting criteria, including loan-to-value ratios and debt service coverage
ratios described above. The borrowers/guarantors must demonstrate
creditworthiness and, in general, have a credit history that is free from past
delinquencies or default. The collateral quality and type must meet the Bank's
standards and, where applicable, tenant leases are reviewed and paying capacity
evaluated.
Risks associated with commercial mortgage loans will vary in accordance
with local, state and national economic vagaries and the cyclical nature of real
estate markets. The Bank attempts to mitigate these risks by utilizing
underwriting criteria referenced above as well as by monitoring the performance
of the portfolio. The Bank has not experienced losses on its commercial real
estate loans during the past eight quarters; however, there can be no assurance
that this will continue to be the case.
Real estate construction loans. The Bank finances the construction of
residential, commercial and industrial properties. The Bank's construction
loans typically have the following characteristics:
. First mortgages on the collateral real estate;
. Maturities of one year or less;
. A floating rate of interest based on the Bank's prime rate;
. Minimum cash equity of 15% of project cost;
. Maximum loan-to-value of 80% on tract construction loans and 75% on
commercial/industrial loans;
. Appraisals by Bank-approved appraisers are required;
. Reserve for anticipated interest costs during construction;
. Recourse against the borrower or guarantor;
. Construction costs are verified using a Bank-approved, outside construction
cost estimator;
. Construction progress inspections are documented using a Bank-approved,
outside inspection company;
. Loan disbursements are controlled in accordance with progress inspections
and lien releases obtained.
For commercial and industrial properties, the Bank typically issues a
stand-by commitment for a "take-out" mini-perm loan on the property. The Bank
does not participate in joint ventures or take an equity interest in connection
with its construction lending.
Construction loans involve additional risks compared with loans secured by
existing improved real property. These include: 1) the uncertainty of value
prior to completion; 2) the inherent uncertainty in estimating construction
costs; 3) weather, municipal or other governmental-caused delays during
construction; and 4) the inherent uncertainty of the market value of the
completed project. As a result of these uncertainties, repayment is dependent,
in a large part, on the success of the ultimate project. If the Bank is forced
to foreclose on a project prior to or at completion because of a default, the
Bank may not be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as the related foreclosure and holding costs. In
addition, the Bank may be required to fund additional amounts to complete a
project and may have to hold the property for an indeterminate period of time.
Further, future local, state or national economic conditions could have an
adverse impact on the potential success of construction projects financed by the
Bank and on collateral securing these loans. The Bank has not experienced losses
on its real estate construction loans in the last eight quarters; however, there
can be no assurance that this will continue to be the case.
Commercial Loans. The Bank provides short-term (30 days to one year) and
long-term (up to five years)
33
<PAGE>
commercial loans that may be either unsecured, partially secured or fully
secured. Commercial lines of credit have a maturity of one year or less. A
complete re-analysis is required prior to renewing a commercial line of credit.
All commercial loans and lines of credit are to businesses, professionals or
individuals located in California with the vast majority of those being in San
Bernardino and Riverside counties. Borrower income and/or cash flow is analyzed
and substantiated in support of the primary source of repayment. The Bank will
collateralize the loans or lines of credit whenever appropriate to secure a
secondary source of repayment. Collateral may include cash, liens on accounts
receivable and/or equipment, marketable securities and first or junior liens on
real estate. As a matter of policy, the Bank generally requires all principals
of a business to guarantee the commercial loan or line of credit. All borrowers
must demonstrate, on the basis of historical cash flow and/or the conversion of
assets, the ability to service and repay the Bank debt as well as all other
outstanding debt. The Ban's SBA Loans are included within its commercial loan
category and are discussed in more detail below in "SBA Loans."
Risks associated with commercial loans and lines of credit may vary in
accordance with concentrations in any one or group of industries and market
locations. The Bank has no material grouping or concentration of commercial
loans to any one or group of industries. However, all of the Bank's commercial
loans and lines of credit are to borrowers located in Southern California; more
specifically, most are in San Bernardino and Riverside counties. Accordingly, it
is expected that an economic downturn impacting Southern California to a greater
degree than the rest of the state or country would have a correspondingly
greater impact to the Bank's commercial loan portfolio. The Bank's eight-quarter
loss experience incorporating the year of 1994 (commonly thought to be the
height of California's recent recession) was .86%. The Bank's loss experience on
commercial loans and lines of credit over the past eight quarters is 1.08%.
Consumer Loans. As of June 30, 2000, the total of all of the Bank's
consumer loans, which are included within the Bank's "installment and all other
loan" category, was $9.7 million or 7.2% of total loans. Consumer loans may be
secured or unsecured, and are extended for a variety of purposes, including the
purchase or refinance of automobiles, home improvement, home equity lines of
credit and overdraft protection. Consumer loan underwriting standards include an
examination of the applicant's credit history and payment record on other debts
and an evaluation of the borrower's ability to meet existing obligations and
payments on the proposed loan. Although credit worthiness of the applicant is of
primary importance, the underwriting process also includes a comparison of the
value of the security, if any, to the proposed loan amount. For instance, the
Bank limits its home equity lines of credit to a maximum total loan-to-value
(including the first mortgage) of 80% calculated on a current appraisal. New car
loans are generally advanced up to 80% of the purchase price although advances
are permitted up to 90% should the applicant meet higher underwriting standards
and for which the Bank receives a premium on the interest rate. By policy, the
Bank does not provide 100% financing on any consumer loans nor does the Bank
engage in sub-prime lending in any way.
Consumer loans entail moderate risk, particularly loans that are unsecured
or secured by rapidly depreciating assets such as automobiles. Repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of damage to the
collateral or depreciation. The remaining deficiency may not warrant further
collection efforts against the borrower beyond obtaining a deficiency judgment.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. Over the last eight quarters, the Bank's loss
experience on consumer loans has been .96%.
SBA Loans. At June 30, 2000, approximately $11.0 million, or 8.2% of the
Bank's total loan portfolio, consisted of SBA loans. The Bank is a Preferred
("PLP") SBA Lender and actively engages in making SBA 7a loans, 504 loans,
Express and 7a Low Doc loans. SBA 7a and 504 loans made for the purchase or
refinance of commercial, retail or industrial loans may have maturities ranging
up to 25 years, fully amortized. Equipment or working capital loans will have
maturities of up to 7 or 10 years, depending upon the eligibility for the
applicable SBA loan program. The SBA provides guaranties of up to 75% of the
loan amount, not to exceed $750,000 on SBA 7a loans. The Bank's real estate
collateral position on SBA 504 loans is generally 50% LTV or less. SBA
guaranties on the Express and Low Doc loan programs will range between 50% and
80% of the gross loan amount.
Until late 1999, the Bank generally sold the guaranteed portion of its SBA
loan originations to the
34
<PAGE>
secondary market on a non-recourse basis. Beginning in late 1999, the pricing in
the secondary market declined. As a result, the Bank made a strategic decision
to hold more of its SBA loan originations. Consequently, the SBA loan portfolio
has grown since late 1999. These loans are classified as held-for-sale. As a
result of this strategic decision, Loans held for sale increased from $1.7
million at December 31, 1999 to $6.8 million at June 30, 2000.
Risk to the Bank associated with SBA loans is greatly mitigated by the
government guarantee or the low loan-to value under the 504 loan program. The
Bank's historical eight-quarter loss experience on its SBA loan portfolio at
June 30, 2000 is .03%.
When a loan in any of the foregoing categories is deemed to be
uncollectible by management, it is charged off against the allowance for loan
losses. Conversely, when a previously charged-off loan is subsequently
collected, such recoveries are additions to the allowance for loan losses. The
difference between the total amount of loans charged-off and the total amount of
recoveries collected on previously charged-off loans is referred to as net loan
charge-offs (or net loan recoveries if recoveries are larger than charge-offs).
The net difference between the charged-off amount and the total amount of
recoveries is tracked quarterly by loan type (e.g., commercial business loans,
consumer loans, etc.) and is taken as a percentage of the then existing loan
portfolio. The percentage loan loss experience over the last eight quarters by
loan category as set forth above was calculated in this manner. Because
historical loan loss experience can and has been very low or even non-existent
in some loan categories, the Bank has established a minimum net loan charge off
experience percentage or "floor" to ensure a reasonable loan loss reserve factor
by loan type. For instance, a "floor" factor of .75% exists for commercial
business loans. These "floor" factors are used should historical net loan charge
offs be below the "floor" factor in any given quarter for a specific loan
category.
Nonperforming Assets
Nonperforming assets are comprised of loans on non-accrual status, loans 90
days or more past due and still accruing interest, loans restructured where the
terms of repayment have been renegotiated resulting in a reduction or deferral
of interest or principal, and OREO. Loans are generally placed on non-accrual
status when they become 90 days past due unless Management believes the loan is
adequately collateralized and in the process of collection. Loans may be
restructured by Management when a borrower has experienced some change in
financial status, causing an inability to meet the original repayment terms, and
where the Bank believes the borrower will eventually overcome those
circumstances and repay the loan in full. OREO consists of properties acquired
by foreclosure or similar means that Management intends to offer for sale.
Management's classification of a loan as non-accrual is an indication that
there is reasonable doubt as to the full collectibility of principal or interest
on the loan; at this point, the Bank stops recognizing income from the interest
on the loan and reverses any uncollected interest that had been accrued but
unpaid. These loans may or may not be collateralized, but collection efforts are
continuously pursued.
Interest on performing loans is accrued and taken into income daily.
Interest received on nonaccrual loans is credited to income only upon receipt
and in certain circumstances may be applied to principal until the loan has been
repaid in full, at which time the interest received is credited to income. At
June 30, 2000 the Bank had $975,000 of nonperforming loans, which included
$255,000 of nonaccrual loans, $0 in loans past due 90 days and still accruing
and $720,000 in restructured loans.
When appropriate or necessary to protect the Bank's interests, real estate
taken as collateral on a loan may be taken by the Bank through foreclosure or a
deed in lieu of foreclosure. Real property acquired in this manner is known as
OREO. The OREO is carried on the books of the Bank as an asset, at the lesser of
the recorded investment or the fair value less estimated selling costs (net
realizable value). The Bank periodically revalues the OREO properties and
charges other expenses for any required write-downs. The OREO represents another
category of nonperforming assets. As of June 30, 2000 the Bank had $528,000 of
OREO on its books.
Total nonperforming assets amounted to .59% of the Bank's total assets at
June 30, 2000.
35
<PAGE>
The following table provides information with respect to the components of
the Bank's nonperforming assets as of the dates indicated:
Nonperforming Assets
<TABLE>
<CAPTION>
Amount Outstanding
as of June 30,
-------------------------
2000 1999
------ ------
(Dollars in Thousands)
<S> <C> <C>
Nonaccrual loans:/1/
Real estate:
Construction.................................... $ 0 $ 0
Mortgage........................................ 191 1,327
Commercial........................................ 59 342
Installment....................................... 5 5
All other loans (including overdrafts)............ 0 0
------ ------
Total.......................................... 255 1,674
Loans 90 days or more past due and still
accruing (as to principal or interest):
Real estate:
Construction.................................. $ 0 $ 0
Mortgage...................................... 0 0
Commercial...................................... 0 11
Installment 0 18
All other loans (including overdrafts).......... 0 0
------ ------
Total......................................... 0 29
Restructured loans:/2/,/3/
Real estate:
Construction.................................. $ 39 $ 42
Mortgage...................................... 681 970
Commercial...................................... 0 80
Installment..................................... 0 0
All other loans (including overdrafts).......... 0 0
Total......................................... 720 1,092
Total nonperforming loans......................... 975 2,795
Other real estate owned........................... 528 992
------ ------
Total nonperforming assets.................... $1,503 $3,787
====== ======
</TABLE>
_____________________________
1. During the six months ended June 30, 2000 and the year ended December 31,
1999, approximately $3,700 and $16,200 of interest income related to these loans
was included in net income. Additional interest income of approximately $16,000
and $52,800 would have been recorded for the six months ended June 30, 2000 and
the year ended December 31, 1999, if these loans had been paid in accordance
with their original terms and had been outstanding throughout the applicable
period then ended or, if not outstanding throughout the applicable period then
ended, since origination.
2. A "restructured loan" is one where the terms of which were renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
3. During the six months ended June 30, 2000 and the year ended December 31,
1999, approximately $3,000 and $3,300 of interest income related to these loans
was included in net income. Additional interest income of approximately $36,000
and $64,000 would have been recorded in the six months ended June 30, 2000 and
the year ended December 31, 1999, if these loans had been paid in accordance
with their original terms and had been outstanding throughout the applicable
period then ended or, if not outstanding throughout the applicable period then
ended, since origination.
36
<PAGE>
(table continued)
<TABLE>
<CAPTION>
As of June 30, As of June 30,
-------------- --------------
2000 1999
---- ----
<S> <C> <C>
Nonperforming loans as a percentage
of total gross loans.................. 0.72% 2.66%
Nonperforming assets as a percentage
of total assets....................... 0.59 1.92
Nonperforming assets as a percentage
of total gross loans and other real
estate owned......................... 1.11 3.58
</TABLE>
37
<PAGE>
Nonperforming Assets
(continued)
<TABLE>
<CAPTION>
Amount Outstanding as of December 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:/1/
Real estate:
Construction............................... $ 0 $ 0 $ 0 $ 97 $ 441
Mortgage................................... 229 1,026 354 689 494
Commercial................................... 247 196 8 555 11
Installment.................................. 1 13 97 86 97
All other loans (including overdrafts)....... 0 0 0 1 0
------ ------ ------ ------ ------
Total...................................... 477 1,235 459 1,428 1,043
Loans 90 days or more past due and still
accruing (as to principal or interest):
Real estate:
Construction............................... $ 0 $ 0 $ 0 $ 0 $ 162
Mortgage................................... 0 0 0 0 0
Commercial................................... 0 0 10 0 12
Installment 2 0 59 4 0
All other loans (including overdrafts)....... 5 0 0 0 0
------ ------ ------ ------ ------
Total...................................... 7 0 69 4 174
Restructured loans:/2/,/3/
Real estate:
Construction............................... $ 40 $ 43 $ 46 $ 49 $ 130
Mortgage................................... 683 1,026 1,123 709 371
Commercial................................... 0 83 15 18 76
Installment.................................. 0 0 0 0 60
All other loans (including overdrafts)....... 0 0 0 0 0
Total...................................... 723 1,152 1,184 776 637
Total nonperforming loans..................... 1,207 2,387 1,712 2,208 1,854
Other real estate owned....................... 1,036 1,069 1,360 2,037 1,161
------ ------ ------ ------ ------
Total nonperforming assets................. $2,243 $3,456 $3,072 $4,245 $3,015
====== ====== ====== ====== ======
</TABLE>
_________________
1. During the six months ended June 30, 2000 and the year ended December 31,
1999, approximately $3,700 and $16,200 of interest income related to these loans
was included in net income. Additional interest income of approximately $16,000
and $52,800 would have been recorded for the six months ended June 30, 2000 and
the year ended December 31, 1999, if these loans had been paid in accordance
with their original terms and had been outstanding throughout the applicable
period then ended or, if not outstanding throughout the applicable period then
ended, since origination.
2. A "restructured loan" is one where the terms of which were renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
3. During the six months ended June 30, 2000 and the year ended December 31,
1999, approximately $3,000 and $3,300 of interest income related to these loans
was included in net income. Additional interest income of approximately $36,000
and $64,000 would have been recorded in the six months ended June 30, 2000 and
the year ended December 31, 1999, if these loans had been paid in accordance
with their original terms and had been outstanding throughout the applicable
period then ended or, if not outstanding throughout the applicable period then
ended, since origination.
38
<PAGE>
(table continued)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonperforming loans as a percentage
of total gross loans................. 1.03% 2.24% 1.68% 3.74% 2.98%
Nonperforming assets as a percentage
of total assets...................... 1.00 1.89 2.01 4.16 3.07
Nonperforming assets as a percentage
of total gross loans and other real
estate owned......................... 1.90 3.21 2.97 6.95 4.75
</TABLE>
39
<PAGE>
Allowance for Loan Losses
The Bank maintains an ALLL at a level which, in Management's judgment, is
adequate to cover the inherent risk of loss associated with its loan portfolio.
The provision for loan losses is an expense charged against income and added to
the ALLL in amounts deemed appropriate by Management to maintain the ALLL at an
adequate level. Management's judgement of the ALLL, as discussed below, is based
on the evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio credit concentrations, trends in historic loss
experience, specific impaired loans and economic conditions. It is only a
judgement based on estimates, and no assurance can be given that the judgement
and estimates will accurately predict losses in the future.
On an ongoing basis, the Bank performs monthly assessments of the ALLL to
determine its adequacy. Specifically categorized and "watch list" credits are
reviewed to denote sufficiency of any specific reserves established on such
credits. Management evaluates and establishes an estimate of the loss potential
on each such loan while considering industry risk factors, economic
circumstances, and related matters. This analysis/process involves extensive
judgement and eventual losses may therefore differ from even the most recent
estimates.
The Bank's formally assesses the ALLL in a multi-step process on a
quarterly basis. The determination of the ALLL begins with Management reviewing
each individual classified or criticized loan in detail, evaluating, among other
things, the adequacy of collateral, payment record, current loan status and
borrower financial capacity. A loan loss reserve is assigned each classified and
criticized loan (Loans categorized as "Substandard", "Doubtful" and "Loss" as
well as "Special Mention") from this quarterly review based upon the specifics
of the loan's circumstances, including updated collateral value, borrower's or
guarantor's financial capacity, payment record and recent conversations with the
borrower. Additionally, each quarter the Bank updates its eight-quarter loss
migration analysis to derive a rolling, 2-year loan loss experience percentage
by loan category. Specific loan pools by type (e.g., commercial loans, consumer
loans) are assigned an appropriate reserve factor based upon the Bank's
historical charge off experience or a minimum "floor", whichever is greater, and
then factors are adjusted for current conditions. The Bank then applies the
minimum percentage reserve factors in determining the ALLL. These reserve
factors have floors that range from 0.40% to 0.80% depending on the particular
loan category.
The ALLL can be further impacted (increased or decreased) by Management's
assessment of risk. Management's risk assessment, which is a mandatory, consists
of a variety of factors. These factors are required to be considered when
determining the ALLL. The factors considered by Management include items such
as: changes in lending policies and procedures; changes in national/local
economic conditions; changes in the nature and volume of the portfolio; changes
in experience, ability and depth of lending staff, changes in past dues,
classified and non-accruals; changes in quality of loan review systems;
existence and effect of loan concentrations as well as the effect of external
factors (competition, legal, regulatory policies, etc.). Although all of these
factors are consistently considered and applied, the combined management risk
assessment has a relatively nominal effect on the provision and allowance. These
factors are considered and evaluated, but do not readily determine the provision
or allowance.
After management's assessment of risk is factored into consideration, the
resulting loan loss factor of each loan category is then applied to the existing
loan portfolio by category and added to the loan loss reserve total from the
review of the criticized and classified loans to conclude a total ALLL. This
concluded ALLL is then compared to a regulatory reasonableness test to ensure
that the Bank's concluded ALLL compares favorably.
The Bank applies a regulatory reasonableness test in determining both the
current provision as well as the overall allowance. The test begins by using a
three year weighted average net charge-offs to beginning total loans, with the
highest weight being placed on the most current year. The calculated weighting
is then applied to non-classified loans. Classified loans (Substandard,
Doubtful, Loss) are also risk weighted to determine an allowance amount. The
risk weighted totals for the classified and non-classified assets are then added
together to determine the regulatory reasonableness amount. In summary, this is
a "quick and dirty" migration analysis that is used to test the allowance for
reasonableness. This test is not used as a "driver" of the allowance.
Although various factors go into the determination of the ALLL, different
factors have greater or lesser weights associated with them. For example,
although the impact of economic factors is a consideration in
40
<PAGE>
determining the ALLL, it generally has a minimal or nominal effect on the total
allowance in comparison to actual losses which have a much greater effect on the
determination of the ALLL.
Because specific loan circumstances are reviewed together with broader
total historical loan loss experience which may be further impacted by
Management's evaluation of internal and external factors, changes in asset
quality can have a beneficial impact to one component of the ALLL without unduly
influencing the other components.
The process of determining ALLL involves judgmental discretion, and
eventual losses may therefore differ from even the most recent estimates.
Accordingly, the Bank attempts to provide for additional potential losses not
yet identified as known concerns in order to establish and maintain the
allowance at a level that should be sufficient on an ongoing basis.
The Bank has policies, designed primarily for internal use, to analyze the
risk factors associated with the loan portfolio and to enable the Bank to assess
such risk factors prior to granting new loans, and to assess the sufficiency of
the allowance.
When a loan is deemed to be uncollectible by management, it is charged off
against the allowance for loan losses. Conversely, when a previously charged-off
loan is subsequently collected, such recoveries are additions to the allowance
for loan losses. The difference between the total amount of loans charged-off
and the total amount of recoveries collected on previously charged-off loans is
referred to as net loan charge-offs (or net loan recoveries if recoveries are
larger than charge-offs).
For the year ended December 31, 1999, the Bank had net charge-offs of
$377,000 as compared to $484,000 and $567,000 in 1998 and 1997, respectively.
For the six months ended June 30, 2000, the Bank had net charge-offs of
$88,000, a decrease of $102,000 from $190,000 for the six months ended June 30,
1999.
The net loan charge-offs as a percentage of average loans has improved over
the past two and one-half years as management has continued to improve credit
quality. Additionally, continued economic growth and general national and local
economic conditions have led to a decrease in charge-offs.
As of June 30, 2000 the allowance for loan loss was $1.2 million or 0.91%
of total loans as of that date. As of December 31, 1999, the allowance was $1.2
million or 1.06% of total loans as of that date. The allowance was $1.4 million
or 1.35% of total loans and $1.8 million or 1.74% of total loans as of December
31, 1998 and 1997, respectively. Although these levels are deemed adequate by
management, no assurance can be given that further economic difficulties or
other circumstances which would adversely affect the Bank's borrowers and their
ability to repay outstanding loans will not occur which would be reflected in
increased losses in the Bank's loan portfolio, which losses could possibly
exceed the amount then reserved for loan losses.
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No.114, Accounting by Creditors for Impairment of a Loan
(SFAS 114), as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures. These pronouncements provide
that when it is probable that a creditor will be unable to collect all amounts
due in accordance with the terms of the loan that such loan is deemed impaired.
Impaired loans are accounted for differently in that the amount of the
impairment is measured and reflected in the records of the creditor.
The table below summarizes, for the periods indicated, loan balances at the
end of each period and the daily averages during the period; changes in the
allowance for loan losses arising from loans charged off, recoveries on loans
previously charged off, and additions to the allowance which have been charged
against earnings; and certain ratios related to the allowance for loan losses:
41
<PAGE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,
--------------------------------------------------
June 30,
-------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances:
Average total loans outstanding $123,019 $104,402 $105,922 $ 97,660 $ 70,110 $61,966 $60,719
during period........................ ======== ======== ======== ======== ======== ======= =======
Total loans outstanding................ $134,935 $104,925 $117,177 $106,579 $101,934 $59,000 $62,251
at end of period..................... ======== ======== ======== ======== ======== ======= =======
Allowance for Loan Losses:
Balances at beginning of period........ $ 1,242 $ 1,439 $ 1,439 $ 1,773 $ 1,298 $ 1,395 1,394
Adjustments/1/......................... 0 0 0 0 555 0 0
Charge-offs:
Real estate:
Construction........................ 0 0 0 0 0 0 0
Mortgage............................ 0 10 10 179 169 597 65
Commercial........................... 163 169 482 231 389 201 276
Installment.......................... 6 34 39 174 82 282 69
All other loans...................... 22 9 31 51 8 9 96
(including overdrafts)...........
Total............................ 191 222 562 635 648 1,089 506
Recoveries:
Real estate:
Construction........................ 0 0 0 0 0 0 0
Mortgage............................ 18 2 2 43 39 34 0
Commercial............................. 74 17 166 72 18 6 22
Installment............................ 3 3 4 17 16 35 8
All other loans........................ 8 10 13 19 8 0 0
(including overdrafts).............
Total............................ 103 32 185 151 81 75 30
Net loan charge-offs (recoveries)....... 88 190 377 484 567 1,014 476
Provision charged to................... 80 105 180 150 487 917 477
operating expenses...............
Balance at end of period............... $ 1,234 $ 1,354 $ 1,242 $ 1,439 $ 1,773 $ 1,298 $ 1,395
======== ======== ======== ======== ======== ======= =======
Ratios:
Net loan charge-offs to................. 0.07% 0.18% 0.36% 0.50% 0.81% 1.64% 0.78%
average loans.......................
Net loan charge-offs to................. 0.07 0.18 0.32 0.45 0.56 1.72 0.76
loans at end of period..............
Allowance for loan losses to............ 1.00 1.30 1.17 1.47 2.53 2.09 2.30
average loans.......................
Allowance for loan losses............... 0.91 1.29 1.06 1.35 1.74 2.20 2.24
to loans at end of period...........
Net loan charge-offs to allowance....... 7.13 14.03 30.35 33.63 31.98 78.12 34.12
for loan losses at end of period....
Net loan charge-offs to provision....... 110.00 180.95 209.44 322.67 116.43 110.58 99.79
charged to operating expenses.......
</TABLE>
_________________
1. Acquired $555,000 in reserves in connection with acquisition of High
Desert National Bank in 1997.
42
<PAGE>
The following table provides a breakdown of the allowance for loan losses
as of the dates indicated:
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------
2000 1999
----------------------------- ----------------------------
% of Loans %of Loans
Balance at End of Period in Category in Category
Applicable to Amount to Total Loans Amount to Total Loans
------------------------ ------ -------------- ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction................... $ 273 22.12% $ 191 14.11%
Mortgage....................... 365 29.58 257 18.98
Commercial............................ 272 22.04 205 15.14
Installment/All other loans
(including overdrafts)............. 324 26.26 701 51.77
------ ------ ------ ------
Total........................ $1,234 100.00% $1,354 100.00%
====== ====== ====== ======
</TABLE>
Allocation of Allowance for Loan Losses
(continued)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1999 1998 1998
----------------------------- ---------------------------- ----------------------------
% of Loans %of Loans %of Loans
Balance at End of Period in Category in Category in Category
Applicable to Amount to Total Loans Amount to Total Loans Amount to Total Loans
------------------------ ------ -------------- ------ -------------- ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Construction..................... $ 215 17.31% $ 179 12.44% $ 115 6.49%
Mortgage......................... 326 26.25 267 18.55 778 43.88
Commercial....................... 246 19.81 265 18.42 371 20.92
Installment/All other loans
(including overdrafts).......... 455 36.63 728 50.59 509 28.71
------ ------ ------ ------ ------ ------
Total............................ $1,242 100.00% $1,439 100.00% $1,773 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
43
<PAGE>
Allocation of Allowance for Loan Losses
(continued)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
% of Loans %of Loans
Balance at End of Period in Category in Category
Applicable to Amount to Total Loans Amount to Total Loans
------------------------ ------ -------------- ------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction............... $ 21 1.62% $ 79 5.66%
Mortgage................... 425 32.74 347 24.87
Commercial.................. 611 47.07 546 39.14
Installment/All other loans 241 18.57 423 30.32
(including overdrafts)..... ------ ------ ------ ------
Total...................... $1,298 100.00% $1,395 100.00%
====== ====== ====== ======
</TABLE>
Investment Portfolio
The Bank's investment portfolio represents 34.8% of the Bank's total assets
as of June 30, 2000. At year end 1999, 1998 and 1997 the investment portfolio
was 37.0%, 15.0% and 7.6%, respectively, of the Bank's total assets at those
respective dates. The Bank invests in governmental, mortgage back, municipal and
corporate securities and categorizes those securities as hold to maturity or
available for sale depending upon the circumstances in place as to the Bank's
intent and ability to hold such securities. The Bank invests its liquid funds in
excess of loan requirements in the investment portfolio and fed funds sold,
which is a cash equivalent. During 1999 the Bank's securities portfolio
increased by $55.8 million or 203% over December 31, 1998. This increase was the
result of a shift from investing excess funds, net of loan funding, in fed funds
sold to securities (namely mortgage-backed) to realize the higher yield on said
instruments. The $55.8 million was funded through the following; (i) $23.5
million in matured fed funds; (ii) $16.0 million in other borrowings and (iii)
the balance in deposit growth net of loan growth.
44
<PAGE>
The following table summarizes the book value and market value and
distribution of the Bank's investment securities as of the dates indicated:
Investment Portfolio
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
2000 1999
------------------------------ -----------------------------
Book Market Book Market
Value Value Value Value
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale:
U. S. Treasury securities........... $ 0 $ 0 $ 0 $ 0
Obligations of other U. S.
government agencies................ 0 0 0 0
Mortgage backed securities.......... 63,737 63,042 37,597 37,199
Obligations of states and political
subdivisions...................... 22,060 21,689 5,258 4,930
Other securities.................... 3,117 3,013 1,021 994
Total available-for-sale......... $ 88,914 $ 87,744 $ 43,876 $ 43,123
============== ============== ============= ==============
Held-to-Maturity:
U. S. government securities......... $ 1,009 $ 1,000 $ 1,008 $ 1,007
Obligations of other U. S.
governmental agencies.............. 0 0 0 0
Obligations of state and
political subdivisions............. 0 0 4,701 4,781
Other securities.................... 0 0 0 0
-------------- -------------- ------------- --------------
Total held-to-maturity........... $ 1,009 $ 1,000 $ 5,709 $ 5,788
============== ============== ============= ==============
Total investment securities...... $ 89,923 $ 88,744 $ 49,585 $ 48,911
============== ============== ============= ==============
</TABLE>
45
<PAGE>
Investment Portfolio
(continued)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ----------------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale:
U. S. Treasury securities........... $ 0 $ 0 $ 0 $ 0 $ 1,000 $ 1,000
Obligations of other U. S.
government agencies............... 0 0 19,339 19,351 1,114 1,114
Mortgage backed securities.......... 69,017 68,331 21 22 0 0
Obligations of states and political
subdivisions...................... 12,648 11,963 2,330 2,320 0 0
Other securities.................... 2,044 2,000 302 304 484 484
Total available-for-sale........ $ 83,709 $ 82,294 $ 21,922 $ 21,997 $ 2,598 $ 2,598
============== ============== ============= ============== ============== =============
Held-to-Maturity:
U. S. government securities......... $ 1,012 $ 1,003 $ 501 $ 504 $ 500 $ 502
Obligations of other U. S.
governmental agencies.............. 0 0 0 0 2,450 2,443
Obligations of state and
political subdivisions............. 0 0 5,041 5,256 6,003 6,202
Other securities.................... 0 0 0 0 0 0
-------------- -------------- ------------- -------------- -------------- -------------
Total held-to-maturity.......... $ 1,012 $ 1,003 $ 5,542 $ 5,760 $ 8,953 $ 9,147
============== ============== ============= ============== ============== =============
Total investment securities..... $ 84,721 $ 83,297 $ 27,534 $ 27,757 $ 11,551 $ 11,745
============== ============== ============= ============== ============== =============
</TABLE>
46
<PAGE>
The following table summarizes the maturity of the Bank's investment
securities and their weighted average yield at June 30, 2000/1/:
Investment Maturities and Weighted Average Yields
<TABLE>
<CAPTION>
After One But
Within One Within Five After Five But
---------- -----------
Year Years Within Ten Years After Ten Years Total
---- ----- ---------------- --------------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale:
U. S. government securities... $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
Obligations of other U. S.
government agencies.......... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Mortgage backed securities.... 0 0.00 3,172 7.32 8,793 7.19 51,077 7.58 63,042 7.51
Obligations of state and
political subdivisions....... 90 6.91 283 5.43 0 0.00 21,316 5.34 21,689 5.35
Other securities.............. 0 0.00 0 0.00 1,072 8.88 1,941 7.17 3,013 7.78
Total available-for-sale... 90 6.91 3,455 7.17 9,865 7.37 74,334 6.93 87,744 6.99
Held-to-Maturity:
U. S. government securities... 0 0.00 1,009 6.38 0 0.00 0 0.00 1,009 6.38
Obligations of other U. S.
government agencies.......... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Obligations of state and
political subdivisions....... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Other securities.............. 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Total held-to-maturity..... 0 0.00 1,009 6.38 0 0.00 0 0.00 1,009 6.38
Total investment
securities.................... $ 90 6.91% $4,464 6.99% $9,865 7.37% $74,334 6.93% $88,753 6.98%
====== ==== ====== ==== ====== ==== ======= ==== ======= ====
</TABLE>
________________________
1. Yields on tax-exempt obligations have not been computed on a tax
equivalent basis.
47
<PAGE>
The following table summarizes the securities for which the aggregate book value
exceeds 10% of shareholder equity as of June 30, 2000.
Investments Securities Exceeding 10% of Shareholders' Equity
<TABLE>
<CAPTION>
Issuer's Name Aggregate Book Value Market Value
------------- -------------------- ------------------
<S> <C> <C>
FHLMC CMO 2117 HD $ 4,573,339 $ 4,550,815
VENDEE MTG TR 1997-1 4,027,006 3,995,120
FHLMC CMO 2184 PG 3,868,047 3,775,680
FNMA REMIC 1997-69 C 2,786,633 2,849,786
FNMA 1992-163 K 2,538,431 2,488,575
FNMA CMO 1197-71 BD 2,235,337 2,260,101
FHLMC CMO 2061 PH 2,230,340 2,209,680
---------------- --------------
TOTAL: $ 22,259,133 $ 22,129,757
</TABLE>
Deposits
Deposits are the Bank's primary source of funds. At June 30, 2000 the Bank
had a deposit mix of 43.6% in Noninterest-bearing demand deposits, 37.6% in NOW,
money market and savings deposits, and 18.8% in time deposits. The Bank's net
interest income is enhanced by its large percentage of Noninterest-bearing
deposits. The Bank's deposits are obtained from a cross-section of the
communities it serves. No material portion of the deposits has been obtained or
is dependent upon any one person or industry. The Bank's business is not
seasonal in nature. The Bank accepts deposits in excess of $100,000 from
customers. Those deposits are priced to remain competitive. As of each of the
reporting periods covered the Bank had no brokered funds on deposit.
The Bank is not dependent upon funds from sources outside of the United
States nor does it have any and has not made loans to any foreign entities. The
Bank has not made any loans to finance leveraged buyouts or for highly leveraged
transactions.
As of June 30, 2000 the Bank had total deposits of $202.3 million an
increase of 8.3% or $15.5 million from December 31, 1999. Total deposits at
December 31, 1999, 1998 and 1997 were $186.8 million, $163.8 million and $136.7
million, respectively, representing growth of 14.0% and 19.8% in 1999 and 1998,
respectively. The increase in 1999 was due to internal growth through
operations, while the growth in 1998 was due primarily to the acquisition of
High Desert National Bank in December, 1997.
48
<PAGE>
The following tables summarize the distribution of average daily deposits
and the average daily rates paid for the periods indicated:
Average Deposits & Other Borrowings
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------
2000 1999
------------------------------ ----------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Demand, Noninterest-bearing............... $ 81,507 0.00% $ 67,697 0.00%
Money market.............................. 30,613 3.57 23,067 2.90
NOW....................................... 26,481 1.91 22,970 2.03
Savings................................... 19,398 2.67 19,144 2.66
Time certificates of deposit in
denominations of $100,000 or more........ 17,212 5.16 11,856 4.77
Other time deposits....................... 20,485 4.66 20,891 4.54
Total deposits 195,696 2.02 165,625 1.91
Other borrowings.......................... 21,060 6.78 0 0.00
Total deposits and borrowed funds..... $216,756 2.49% $165,625 1.91%
======== ===================== ====
</TABLE>
Average Deposits & Other Borrowings
(continued)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ----------------------------
Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Demand, Noninterest-bearing......... $ 71,726 0.00% $ 60,398 0.00% $ 40,939 0.00%
Money market........................ 28,720 2.85 20,719 2.93 16,317 3.00
NOW................................. 21,612 2.26 20,862 2.35 15,332 2.53
Savings............................. 19,610 2.70 17,663 2.87 14,175 2.97
Time certificates of deposit in 12,825 4.71 9,903 5.33 5,189 5.22
denominations of $100,000 or more..
Other time deposits................. 20,611 4.49 20,658 5.05 9,274 5.26
Total deposits 175,104 1.92 150,203 2.12 101,226 2.03
Other borrowings.................... 3,756 5.67 0 0.00 0 0.00
Total deposits and borrowed
funds.......................... $ 178,860 2.00% $ 150,203 2.12% $ 101,226 2.03%
============= ==== ============= ==== ============= ====
</TABLE>
49
<PAGE>
The scheduled maturities of the Bank's time deposits in denominations of
$100,000 or greater at June 30, 2000:
Maturities of Time Deposits of $100,000 or More
<TABLE>
<CAPTION>
June 30, 2000
------------------------
(Dollars in Thousands)
<S> <C>
Three months or less........................................... $ 9,433
Over three months through six months........................... 3,867
Over six months through twelve months.......................... 2,870
Over twelve months............................................. 394
-------
Total........................................................ $16,564
=======
</TABLE>
Short Term Borrowings
Due to the fact that the Bank's growth in loans had exceeded the Bank's
growth in deposits, the Bank began to employ short term borrowings from the
Federal Home Loan Bank (FHLB) during 1999. The Bank was first approved to
borrow under the programs offered by the FHLB in July 1999. The terms offered to
the Bank by the Federal Home Loan Bank are financing availability up to 25% of
total assets, secured by acceptable collateral, for terms less than 5 years. For
terms greater than 5 years through 30 years, financing availability is limited
to residential assets being pledged as collateral. Overnight borrowings are also
available at the daily quoted rates.
At year-end 1999, the Bank had $18.2 million in advances against its line
of credit from the Federal Home Loan Bank (FHLB) due at various times during
2000 with a weighted average rate of 6.1%. The average balance of this short-
term borrowing was $3.8 million with an average rate of 5.7%. As of June 30,
2000 the balance was $31.0 million, all due in 2000, with an average balance of
$23.1 million, a high balance of $34.7 million and a weighted average rate of
6.1% for the six months ended. The outstanding balance is composed of both
overnight borrowings and short-term borrowings. The balance may vary by millions
of dollars on any given day depending on fluctuating demand deposit balances as
of a particular day.
Liquidity and Interest Rate Risk Management
Liquidity management for banks requires that funds always be available to
pay anticipated deposit withdrawals and maturing financial obligations promptly
and fully in accordance with their terms. The balance of the funds required is
generally provided by payments on loans, sale of loans, liquidation of assets
and the acquisition of additional deposit liabilities. One-method banks utilize
for acquiring additional liabilities is through the acceptance of brokered
deposits, which are deposits that bear interest in excess of 75 basis points
over prevailing market rates. As part of its acquisition of High Desert
National Bank in 1997, the Bank received approximately $1.5 million in deposits
typically classified as brokered deposits by banking regulators. These deposits
have been carried on the books and have been run off as they matured over the
reporting periods and as of June 30, 2000 the Bank no longer carries these in
its portfolio. The Bank has not accepted nor needed to accept brokered deposits
as part of its normal operations.
In order to meet liquidity needs, the Bank maintains a portion of its funds
in cash deposits in other banks, fed funds sold, and investment securities
categorized as available for sale. As of June 30, 2000 the Bank's liquidity
ratio was 29.2%, defined as $20.2 million in cash and cash equivalents and $38.8
million in investment securities available for sale (net of those pledged to
secure treasury, tax and loan items and public monies) as a percentage of
deposits of $202.3 million.
Effective planning of asset and liability maturities and the matching of
interest rates to correspond with this maturity matching is an integral part of
the active management of an institution's net yield. To the extent maturities
50
<PAGE>
of assets and liabilities do not match in a changing interest rate environment,
net yields may be affected. Even with accurately matched repricing of assets
and liabilities, risk remains in the form of prepayment of assets, timing lags
in adjusting certain assets and liabilities that have varying sensitivities to
market interest rates and basis risk. In its overall attempt to match assets
and liabilities, management takes into account rates and maturities to be
offered in connection with its certificate of deposit program and offers
variable rate loans. The Bank has generally been able to control its exposure
to changing interest rates by managing the mix of floating rate to fixed rate
instruments within its portfolio.
The sensitivity to interest rate fluctuations is measured in several time
frames. Various strategies such as liability cost administration and
redeployment of asset maturities are utilized to preserve interest income from
the effect of changes in interest rates. The gap positions are monitored as a
function of the ALCO process. The monitoring process includes the use of
periodic simulated business forecast, which incorporate various interest rate
environments. Financial modeling is utilized to assist management in
maintaining consistent earnings in an environment of changing interest rates.
At June 30, 2000, the Bank had approximately $75 million of interest-
bearing liabilities (NOW's, Savings, and Money Market accounts) maturing in zero
to three months. Although this short maturity indicates that these interest-
bearing liabilities are sensitive to adjustments in interest rates, the Bank
believes this sensitivity is significantly lessened due to the fact that
approximately $78.4 million of these interest bearing liabilities consist of low
cost/low turnover demand deposits. In addition, the Bank's pays competitive
rates on its interest-bearing liabilities, and, accordingly, even though they
are shown as maturing in zero to three months, Management believes the
substantial majority of these accounts should continue to roll-over at maturity.
At June 30, 2000 approximately 46.4% of the Bank's interest-earning assets
were subject to repricing after 5 years. The majority of these assets are
Collateralized Mortgage Obligations (CMO's). The Bank's interest rate
sensitivity analysis with respect to CMOs takes into account the maturity of
these obligations, but does not take into account mandatory payments on the
underlying mortgage payment obligations, which pay primarily interest in early
years, or prepayments of the underlying mortgages, which significantly reduce
the maturity, and therefore the risks, of these obligations. Similarly, the
Bank's other loans which reprice after 5 years also only take into account only
stated maturities of these loans and not prepayments of these loans or monthly
required payments which are primarily interest in early years. The Bank
anticipates that significantly less than 46.4% of its interest-earning assets
which contractually reprice after five years will actually reprice after five
years.
At any given time, the market value of the Bank's securities portfolio may
be above, at, or below market value. While there is a possibility that there
will be an impact on net income should the Bank need to sell securities whose
fair value is less than the amortized cost, the Bank is able to mitigate this
risk by borrowing against the securities to raise liquidity versus having to
sell the securities. Since the Bank does a monthly mark-to-market on the
securities portfolio, there would be no impact on the Balance Sheet if the Bank
was forced to sell securities whose fair value is less than the amortized cost.
51
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities as of June 30, 2000
using the interest rate sensitivity gap ratio. For purposes of the following
table, an asset or liability is considered rate-sensitive within a specified
period when it can be repriced or matures within its contractual terms. Actual
payment patterns may differ from contractual payment patterns.
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
At June 30, 2000
Amounts Subject to Repricing Within
------------------------------------------------------------------
After 5
-------
0-3 Months 3-12 Months 1-5 Years Years Total
---------- ----------- --------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans/1/.................................... $ 84,290 $ 5,524 $ 25,511 $ 19,610 $ 134,935
Investment securities....................... 85 5 4,464 84,199 88,753
Federal funds sold.......................... 0 0 0 0 0
Interest-bearing deposits 0 0 0 0 0
at other banks............................ ---------- ----------- --------- ---------- ----------
Total................................... 84,375 5,529 29,975 103,809 223,688
Interest-bearing liabilities:
Interest-bearing demand (NOW)............... 24,180 0 0 0 24,180
Savings deposits............................ 21,167 0 0 0 21,167
Money market................................ 30,840 0 0 0 30,840
Time deposits of 9,433 6,737 394 0 16,564
$100,00 or more...........................
Other time deposits......................... 8,579 10,920 1,878 0 21,377
Other borrowings............................ 23,000 8,000 0 0 31,000
---------- ----------- --------- ---------- ----------
Total................................... $ 117,199 $ 25,657 $ 2,272 $ 0 $ 145,128
Interest rate sensitivity gap................ $ (32,824) $ (20,128) $ 27,703 $ 103,809
Cumulative interest rate
sensitivity gap............................. $ (32,824) $ (52,952) $ (25,249) $ 78,560
Cumulative interest rate
sensitivity gap ratio based
on total earning assets...................... (14.67)% (23.67)% (11.29)% 35.12%
</TABLE>
Liquidity and Capital Resources
In 1990, the banking industry began to phase in new regulatory capital
adequacy requirements based on risk-adjusted assets. These requirements take
into consideration the risk inherent in investments, loans, and other assets for
both on-balance sheet and off-balance sheet items. Under these requirements,
the regulatory agencies have set minimum thresholds for Tier 1 capital, total
capital and leverage ratios.
The risk-based guidelines are used to evaluate capital adequacy and are
based on the institution's asset risk profile and off-balance sheet exposures,
such as unused loan commitments and standby letters of credit. The guidelines
require that a portion of total capital be core, or Tier 1, capital consisting
of common shareholders' equity and noncumulative perpetual preferred stock, less
goodwill and certain other deductions, with the remaining, or Tier 2, capital
consisting of other elements, primarily certain other forms of preferred stock,
subordinated debt and
________________
1. Excludes non-accrual loans of $477,000 and deferred fees and unearned
income of $794,000.
52
<PAGE>
mandatory convertible debt, plus the allowance for loan losses, subject to
certain limitations. The leverage ratio is Tier 1 capital divided by adjusted
average assets.
At June 30, 2000, the Bank's and the Company's capital exceeded all minimum
regulatory requirements and the Bank was considered to be "well capitalized" as
defined in the regulations issued by the FDIC. In connection with the pending
acquisition of Valley Merchants Bank it was anticipated that the Bank would
require additional capitalization. On March 21, 2000, the Company raised
approximately $9.7 million in net proceeds from an offering of $10.0 million of
principal amount of 10-7/8% Fixed Rate Capital Trust Pass-through Securities. A
portion of the proceeds will be downstreamed to the Bank to maintain its "well
capitalized" position and the balance will be used for general corporate
purposes.
Accounting Matters
During 1997, the Bank adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." This statement establishes standards
for computing and presenting earnings per share ("EPS") and applies to all
entities with publicly held common stock. This statement provides a
presentation of basic EPS and diluted EPS. Basic EPS excludes dilution and is
computed by dividing earnings available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Based on current accounting
standards, this new accounting standard is not expected to have a material
impact of the Bank's financial statements. The Bank adopted this accounting
standard on January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
this new accounting standard did not have a material impact on the Bank's
financial statement disclosures.
Impact of Inflation; Seasonality
The primary impact of inflation on the Bank is its effect on interest
rates. The Bank's primary source of income is net interest income, which is
affected by changes in interest rates. The Bank attempts to limit the impact of
inflation on its net interest margin through management of rate-sensitive assets
and liabilities and the analysis of interest rate sensitivity. The effect of
inflation on premises and equipment as well as Noninterest expenses has not been
significant for the periods covered in this Registration Statement. The Bank's
business is generally not seasonal.
Year 2000 Compliance
The concern over the Year 2000 ("Y2K") issue resulted from computer
programs being written using two rather than four digits to identify a year in
the date field. Throughout the world, there was a concern that this issue could
cause computer systems to fail or create erroneous results at the rollover to
the Year 2000. Beginning in 1998, the Bank took various steps to mitigate the
potential impact of a Y2K problem. The Bank followed the guidelines established
by the banking regulators, which were to identify, assess, renovate, validate,
implement and design contingency plans to mitigate the risks that the Bank may
have encountered relative to the Y2K problem. The total
53
<PAGE>
cost of the Bank's plan to address Y2K issues was not material.
Selected Performance Ratios
The following table sets forth certain ratios for the Bank for the six
months ended June 30, 2000 and 1999 and for the years ended December 31, 1999,
1998 and 1997. These ratios should be read in conjunction with the audited
Financial Statements and notes thereto which appear at the end of this
Registration Statement (see "Part F/S" herein).
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
------------------ -------------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average equity/1/............................ 12.70% 10.23% 11.37% 12.32% 5.83%
Return on average assets/2/............................ 1.05% 1.00% 0.98% 1.11% 0.72%
Average stockholders' equity
to average total assets.............................. 8.27% 9.78% 8.58% 8.97% 12.42%
Dividend payout ratio/3/............................... 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
Item 3. Description of Property
-----------------------
The following properties (real properties and/or improvements thereon)
are owned by the Company/4/ and are unencumbered. In the opinion of Management,
all properties are adequately covered by insurance.
<TABLE>
<CAPTION>
Square Feet of Land and
Location Use of Facilities Office Space Building Cost
-------- ----------------- ------------ -------------
<S> <C> <C> <C>
140 South Arrowhead Avenue Administrative Office 9,800 $275,000
San Bernardino, California 92408
1380 Highland Avenue Branch Office 2,280 $250,000
San Bernardino, California 92404
321 East Sixth Street Branch Office 9,449 N/A/5/
Corona, California 91719
4022 Phelan Road Branch Office 5,281 N/A/6/
Phelan, California 92371
</TABLE>
______________
1. Net income (loss) divided by average stockholders' equity.
2. Net income (loss) divided by average total assets.
3. Represents dividends declared per share divided by net income per share.
4. As used throughout this Registration Statement, the term "Company" includes,
where appropriate, both the Company and its consolidated subsidiary.
5. Acquired in connection with acquisition of Western Community Bank in Corona,
California in 1994.
6. Acquired in connection with acquisition of High Desert National Bank in
Hesperia, California in 1997.
54
<PAGE>
The following facilities are leased by the Company:
<TABLE>
<CAPTION>
Square Fee of Monthly Rent Term of
Location Use of Facilities Office Space as of 3/31/00 Lease
-------- ----------------- ------------ ------------- -----
<S> <C> <C> <C> <C>
505 West 2nd Street Main Office 10,247 $5,825 2/16/13
San Bernardino, California 92401
173 Orange Street Branch Office 4,624 $6,494 12/31/06
Redlands, California 92374
16869 Main Street Branch Office 5,152 $3,607 7/31/01
Hesperia, California 92345
4141 Inland Empire Boulevard Branch Office 1,912 $3,155 6/14/04
Ontario, California 91764
</TABLE>
Currently the Bank's Ontario office is temporally operated out of the
second floor of a professional office suite. On January 13, 2000 the Bank
purchased a one acre parcel of land for a price of $608,000, located in Ontario,
to be developed into a permanent branch office. Outside of the aforementioned
development, Management believes that the Company's existing facilities are
adequate to accommodate the Bank's and the Company's operations for the
immediately foreseeable future.
Item 4. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
Management knows of no person who owned beneficially more than five
percent (5%) of the outstanding Common Stock of the Bank as of June 30, 2000,
except for Neal T. Baker and Arnold H. Stubblefield, both of whom are directors
of the Bank (see Item 5 -- "Directors, Executive Officers, Promoters and Control
Persons" herein).
Item 5. Directors, Executive Officers, Promoters and Control Persons
----------------------------------------------------------------------
The table on the following page sets forth certain information as of
June 30, 2000 with respect to each of the directors and executive officers of
the Bank and the directors and executive officers as a group.
55
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned on
June 30, 2000/1/
----------------------------------------
Year First
Elected or Vested Percentage
Names and Offices Principal Occupation Appointed Number Option of Shares
Held with Company for the Past Five Years Age Director of Shares Shares/2/ Outstanding
----------------- ----------------------- --- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
D. William Bader President/General Manager, 79 1999 66,282 20,118 4.33%/4/
Director Crest Chevrolet (1983)/3/
Neal T. Baker/5/ 76 1999 125,785/6/ 20,118 7.31%/4/
Director President, Neal T. Baker (1983)/3/
Enterprises, Inc. (Owner of
Baker's Burgers, Inc.)
William Cozzo Retired (formerly Vice 85 1999 3,688 -0- 0.19%
Director President-Director of (1999)/3/
Public Relations, Business
Bank of California)/7/
John E. Duckworth Real Estate Developer 57 1999 72,769/8/ 20,118 4.65%/4/
Chairman of the Board (1983)/3/
</TABLE>
_________________________
1. Except as otherwise noted, may include shares held by such person's spouse
(except where legally separated) and minor children, and by any other relative
of such person who has the same home; shares held in "street name" for the
benefit of such person; shares held by a family trust as to which such person is
a trustee and primary beneficiary with sole voting and investment power (or
shared power with a spouse); or shares held in an Individual Retirement Account
or pension plan as to which such person is the sole beneficiary and has pass-
through voting rights and investment power.
2. Consists of shares which the applicable individual or group has the right to
acquire upon the exercise of stock options which are vested or will vest within
60 days of April 28, 2000 pursuant to the Company's Stock Option Plan. (See
"Item 6 -- Executive Compensation -- Compensation of Directors, and Stock
Options" herein.)
3. Date first elected or appointed a director of the Bank.
4. The percentages are based on the total number of shares of the Company's
common stock outstanding, plus the number of option shares which the individual
or group, as applicable, has the right to acquire upon the exercise of stock
options which are vested or will vest within 60 days of April 28, 2000 pursuant
to the Company's Stock Option Plan (see "Item 6 --Executive Compensation --Stock
Options, and Compensation of Directors" herein).
5. Mr. Baker's address is 30570 Sunset Drive, Redlands, California 92373 and Mr.
Stubblefield's address is Post Office Box 327, Meridian, Idaho 83642.
6. Includes 8,294 shares held by the Neal T. Baker Enterprises Pension Trust and
the Baker's Burgers, Inc. Pension Trust of which Mr. Baker is trustee; 5,669
shares held by Baker's Burgers, Inc. and Neal T. Baker Enterprises Profit
Sharing Plan of which Mr. Baker is trustee; 35,539 shares held by Neal T. Baker
Enterprises, a corporation of which Mr. Baker is President; and 12,237 shares
owned by Baker's Burgers, Inc., a corporation of which Mr. Baker is President.
Mr. Baker has sole voting and investment power as to all of these shares.
7. Mr. Cozzo served as Vice President-Director of Public Relations of the Bank
from November, 1997 until December 31, 1998, when he retired as an employee and
was simultaneously appointed a director of the Bank. Previously, Mr. Cozzo
served as Vice President-Public Relations of the Bank from September, 1996 to
November, 1997; and as Business Development Officer of the Bank from 1993 to
1996.
8. Includes 37,291 shares held by Mr. Duckworth together with certain extended
family members; and 9,072 shares held by Arr. 1865, a limited partnership of
which Mr. Duckworth is a general partner; as to all of which shares Mr.
Duckworth has shared voting and investment power.
56
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned on
June 30, 2000/1/
----------------------------------------
Year First
Elected or Vested Percentage
Names and Offices Principal Occupation Appointed Number Option of Shares
Held with Company for the Past Five Years Age Director of Shares Shares/2/ Outstanding
----------------- ----------------------- --- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Lane/9/ President and Chief 38 1999 312 31,612 1.57%/4/
President, Chief Executive Officer, Business (1998)/3/
Executive Officer and Bancorp and Business Bank
Director of California/10/
Robert L. Nottingham Senior Vice President, CHJ, Inc., 59 1999 26,657/11/ 15,295 2.10%/4/
Director (Consulting/Engineering) (1996)/3/
John L. Riddell President/Founder, CHJ, Inc. 68 1999 65,212/11/ 15,295 4.03%/4/
Director and (Consulting/Engineering) (1983)/3/
Corporate Secretary
Arnold H. Stubblefield/5/,/12/ President, Stubblefield 66 1999 380,343/13/ 37,193 20.74%/4/
Director Construction Company; General (1992)/3/
Partner, Stubblefield Properties
John L. Stubblefield/12/ Vice President/Managing 48 1999 44,207/14/ 20,118 3.22%/4/
Director Supervisor, Stubblefield (1983)/3/
Companies-California
(Real Estate Development)
</TABLE>
_______________
9. In February, 1994, Mr. Lane joined Fornaca Bakeries, Inc., a financially
troubled company in Escondido, California, in an attempt to assist the company
in resolving its financial problems. As a result of disagreements concerning
business philosophy, Mr. Lane left the company in June, 1994 to pursue other
interests, and the company filed for bankruptcy protection under Chapter 11 of
the federal bankruptcy laws in September, 1994. Two months later, Mr. Lane
agreed to rejoin the company as President, Chief Executive Officer and a
director, and he then led the company through and out of the bankruptcy
reorganization, a name change to Pacific Pride Baking Company, and the
subsequent sale of the company to an international food processing company.
10. Mr. Lane was appointed President and Chief Executive Officer of the Company
on October 7, 1999 and of the Bank on April 1, 1998. Previously, he served as
Executive Vice President and Chief Financial Officer of the Bank since August,
1996; as President and Chief Executive Officer of Pacific Pride Banking Company
in Escondido, California from 1994 to 1996; and as Chief Financial Officer of
Independence One Bank in Mission Viejo, California from 1992 to 1993.
11. Includes 15,584 shares held by the CHJ, Inc. Profit Sharing Plan (of which
Messrs. Nottingham and Riddell are both trustees) for Mr. Riddell's account, as
to which shares Messrs. Nottingham and Riddell share voting and investment power
with two additional co-trustees.
12. Arnold H. Stubblefield and John L. Stubblefield are father and son,
respectively.
13. Includes 31,436 shares held by the Stubblefield Construction Co. Employee
Pension Trust of which Mr. Stubblefield is trustee; 7,455 shares owned by
Stubblefield Construction Co., a corporation of which Mr. Stubblefield is
President; 41,689 shares owned by Stubblefield Properties, a partnership of
which Mr. Stubblefield is a General Partner; and 1,233 shares held by Mr.
Stubblefield as custodian for his minor grandchildren (including the shares
described in footnote 14 below). Mr. Stubblefield has sole voting and investment
power as to 80,580 of such shares and shared voting and investment power as to
1,233 of such shares.
14. Includes 364 shares held by Arnold Stubblefield as custodian for John
Stubblefield's children, as to which shares John Stubblefield has shared voting
and investment power with Arnold Stubblefield.
57
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned on
June 30, 2000/1/
----------------------------------------
Year First
Elected or Vested Percentage
Names and Offices Principal Occupation Appointed Number Option of Shares
Held with Company for the Past Five Years Age Director of Shares Shares/2/ Outstanding
----------------- ----------------------- --- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
James W. Andrews Executive Vice President 50 n/a -0- 23,300 1.17%/4/
Executive Vice President and Chief Credit Officer,
and Chief Credit Officer Business Bank of California/15/
Ruth E. Adell Executive Vice President 45 n/a 7,463 11,225 0.94%/4/
Executive Vice President and Cashier, Business Bank
and Chief Financial of California/16/
Officer
Directors and 776,770 214,080 45.04%/4/
Executive Officers as a
Group (11 in number)
</TABLE>
All present directors of the Company serve for a term of one year and hold
office until the next Annual Meeting of Shareholders of the Company or until
their successors are duly elected and qualified. The executive officers of the
Company are appointed annually by the Board of Directors following the Annual
Meeting of Shareholders and serve at the pleasure of the Board of Directors. An
amendment to the Company's Articles of Incorporation providing for directors to
serve staggered terms of two years each was approved by the Company's
shareholders on June 21, 2000. This provision will become effective only if the
Company's stock becomes listed on the Nasdaq National Market (see "Part II, Item
1 -- Market Price of and Dividends on the Registrant's Common Equity and Other
Shareholder Matters" herein). Although the Company ultimately intends to list
its common stock for trading on Nasdaq's National Market, since the Company has
initially determined to list its stock on Nasdaq's SmallCap Market and not on
its National Market, it is not anticipated that the provision of the Company's
Articles of Incorporation with respect to a staggered Board of Directors will
become effective in the near future.
The Board of Directors and Committees
The Board of Directors of the Bank has, among others, a standing Audit
Committee, of which directors Arnold Stubblefield (Chairman), Bader, Nottingham,
Riddell and Duckworth (ex-officio) are members. The Company does not have a
separate Audit Committee. During the fiscal year ended December 31, 1999, the
Audit Committee held a total of six (6) meetings. The purpose of the Audit
Committee is to meet with the outside auditors of the Bank and the Company in
order to fulfill the legal and technical requirements necessary to adequately
protect the directors, shareholders, employees and depositors of the Bank and
the Company. It is also the responsibility of the Audit Committee to recommend
to the Board of Directors the selection of independent accountants and to make
certain that the independent accountants have the necessary freedom and
independence to freely examine all Company and Bank records.
________________
15. Mr. Andrews has served as Executive Vice President and Chief Credit Officer
of the Company since October 7, 1999 and of the Bank since June, 1996.
Previously, he served as Executive Vice President, Chief Operating and Credit
Officer of International Savings Bank in San Diego, California from 1992 to
1995.
16. Ms. Adell has served as Executive Vice President and Chief Financial Officer
of the Company since October 7, 1999 and as Executive Vice President and Cashier
of the Bank since April, 1998. She has worked for the Bank in various capacities
since 1984, including Senior Vice President and Cashier from June, 1996 to
April, 1998; Senior Vice President/Operations from August, 1994 to May, 1996;
and Vice President/Operations from March, 1988 to August, 1994.
58
<PAGE>
While the Board of Directors of the Bank has no standing "compensation"
committee, it has a Personnel Committee of which Directors Riddell (Chairman),
Baker, Lane and Duckworth (ex officio) are members. The Company does not have a
separate compensation or similar committee. The primary function of the
Personnel Committee, which met four (4) times during 1999, is to approve the
employment of officers and recommend the compensation for all officers.
Additionally, the Personnel Committee reviews and/or approves personnel policies
recommended by senior management of the Bank.
The Company has no standing nominating committee; however, the procedures
for nominating directors, other than by the Board of Directors itself, are set
forth in the Company's Bylaws and in the Notice of Annual Meeting of
Shareholders.
During the fiscal year ended December 31, 1999, the Board of Directors of
the Bank held a total of thirteen (13) meetings. The Board of Directors of the
Company did not meet during 1999, as the initial organizational acts of the
Company's directors in 1999 were taken by unanimous written consent, and the
holding company reorganization was not effectuated until January, 2000. Each
person who served as a director of the Bank during 1999 attended at least 75% of
the aggregate of (1) the total number of such meetings, and (2) the total number
of meetings held by all committees of the Board on which such director served
during 1999 (or during such shorter period as such person served as a director
during 1999).
Item 6. Executive Compensation
-------------------------------
The table on the following page sets forth certain summary compensation
information with respect to the only three executive officers of the Bank as of
December 31, 1999 whose total annual compensation paid, accrued or distributed
for the fiscal year ended December 31, 1999, exceeded $100,000 (the "Named
Executive Officers"). As the holding company reorganization pursuant to which
the Company became the sole shareholder of the Bank was effective in January,
2000, all compensation information in the table relates to the Bank rather than
the Company.
59
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Stock Options
-------------------
Granted (Number All Other
Name and Principal Position Year Salary/1/ Bonus Other/2/ of Shares)/3/ Compensation/4/
-------------------------------- ------ ------------ ---------- ---------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Lane 1999 $ 168,750 $47,099/6/ -0- -0- $ 4,247
President and 1998 143,233 30,490/7/ -0- 32,500 3,476
Chief Executive Officer/5/ 1997 121,049 -0- -0- 12,500 1,950
James W. Andrews 1999 133,792 28,539/6/ -0- -0- 4,954
Executive Vice President 1998 128,333 26,603/7/ -0- 12,500 5,000
and Chief Credit Officer 1997 112,639 -0- -0- 12,500 4,750
Ruth E. Adell 1999 94,250 28,539/6 -0- -0- 5,000
Executive Vice President 1998 85,800 23,286/7/ -0- 12,500 5,000
and Cashier 1997 73,045 -0- -0- 4,375 4,023
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Employment Agreements
The Bank has entered into an Employment Agreement with Alan J. Lane,
President and Chief Executive Officer of the Bank, for a term of six (6) years
commencing April 1, 1998 (the "Agreement"). Mr. Lane's current base salary under
the Agreement is $210,000 per annum. In addition, Mr. Lane is entitled to
receive payment of bonuses in accordance with such bonus programs as may be
approved by the Board of Directors from time to time. The Agreement also calls
for the issuance of stock options, reimbursement for business expenses, the use
of a Bank-owned automobile and certain insurance benefits (see " -- Executive
Compensation" above and " -- Stock Options" below). In the event of termination
without cause, Mr. Lane is entitled to receive nine (9) months' severance pay.
In the event of termination within two (2) years after a merger, reorganization
or similar transaction in which there is a change in ownership of at least
fifty-one percent (51%) except as the result of a transfer of shares in exchange
for at least eighty percent (80%) control of another corporation, Mr. Lane will
be entitled to receive two (2) years' severance pay if the Bank's total assets
immediately prior to the transaction are $250 million or greater, and nine (9)
months' severance pay if the Bank's total assets are less than $250 million. The
severance payments in the event of a merger or similar transaction apply whether
termination is by Mr. Lane or by the surviving entity or acquiror in the
transaction.
_________________
1. Includes portions of these individuals' salaries which were deferred pursuant
to the Bank's 401(k) Plan (the "401(k) Plan"). The 401(k) Plan permits all
participants to contribute up to fifteen percent (15%) of their annual salary on
a pre-tax basis (subject to a statutory maximum). The Bank's policy is to match
fifty percent (50%) of employee contributions which do not exceed six percent
(6%) of such employee's annual compensation.
2. Excludes the cost to the Bank of personal benefits which, with respect to the
Named Executive Officers, in the aggregate did not exceed the lesser of $50,000
or 10% of the total annual salary and bonus reported.
3. As adjusted to reflect the 25% stock distribution declared by the Bank in
July, 1999.
4. Consists entirely of the Bank's contributions to these individuals' accounts
pursuant to the 401(k) Plan.
5. Mr. Lane was appointed President and Chief Executive Officer of the Bank on
April 1, 1998. Previously, he served as Executive Vice President and Chief
Financial Officer of the Bank since August 20, 1996.
6. Represents bonuses accrued in 1999 and paid in 2000.
7. Represents the full amount of bonuses accrued in 1998, small portions of
which were paid in 1998, and the remainders of which were paid in 1999.
60
<PAGE>
The Bank has also entered into an Employment Agreement with James W.
Andrews, Executive Vice President and Chief Credit Officer, for an unspecified
term commencing March 24, 1997 ("Mr. Andrews' Agreement"). Mr. Andrews' current
base salary under his agreement is $136,500 per annum. Mr. Andrews' Agreement
also calls for payment of bonuses in accordance with such bonus programs as may
be approved by the Board of Directors from time to time. Mr. Andrews' Agreement
also provides for the issuance of stock options, reimbursement for business
expenses, the use of a Bank-owned automobile and certain insurance benefits (see
" -- Executive Compensation" above and " -- Stock Options" below). In the event
of termination without cause, Mr. Andrews is entitled to receive six (6) months'
severance pay. In the event of termination within two (2) years after a merger,
reorganization or similar transaction in which there is a change in ownership of
at least fifty-one percent (51%) except as the result of a transfer of shares in
exchange for at least eighty percent (80%) control of another corporation, Mr.
Andrews will also be entitled to receive six (6) months' severance pay.
The Bank has also entered into an Employment Agreement with Ruth E. Adell,
Executive Vice President and Cashier, for an unspecified term commencing April
15, 1998 ("Ms. Adell's Agreement"). Ms. Adell's current base salary under her
agreement is $100,800 per annum. Ms. Adell's Agreement also calls for payment of
bonuses in accordance with such bonus programs as may be approved by the Board
of Directors from time to time. Ms. Adell's Agreement also provides for the
issuance of stock options, reimbursement for business expenses, the use of a
Bank-owned automobile and certain insurance benefits (see " -- Executive
Compensation" above and " -- Stock Options" below). In the event of termination
without cause, Ms. Adell is entitled to receive six (6) months' severance pay.
In the event of termination within two (2) years after a merger, reorganization
or similar transaction in which there is a change in ownership of at least
fifty-one percent (51%) except as the result of a transfer of shares in exchange
for at least eighty percent (80%) control of another corporation, Ms. Adell will
also be entitled to receive six (6) months' severance pay.
Stock Options
The Company's Stock Option Plan (the "Plan"), intended to advance the
interests of the Company and the Bank by encouraging stock ownership on the part
of key employees, was adopted by the shareholders of the Bank on May 16, 1995,
and amended by the Bank's shareholders on August 20, 1997 to increase the number
of shares subject thereto. As part of the holding company reorganization
effective in January, 2000, the Company assumed the Plan from the Bank, so that
the Plan now covers authorized but unissued shares of the Company's Common
Stock. The Plan provides for the issuance of both "incentive" and "non-
qualified" stock options to full-time salaried officers and employees, and "non-
qualified" stock options to non-employee directors, of the Company and its
subsidiaries. All options are granted at an exercise price of not less than 100%
of the fair market value of the stock on the date of grant./1/ Each option
expires not later than ten (10) years from the date the option was granted.
Options are exercisable in installments as provided in individual stock option
agreements; provided, however, that if an optionee fails to exercise his or her
rights under the options within the year such rights arise, the optionee may
accumulate them and exercise the same at any time thereafter during the term of
the option. In addition, in the event of a "Terminating Event," i.e., a merger
or consolidation of the Company as a result of which the Company will not be the
surviving corporation, a sale of substantially all of the Company's assets, or a
change in ownership of at least 25% of the Company's stock (subject to certain
exceptions such as a holding company formation), all outstanding options under
the Plan shall become exercisable in full (subject to certain notification
requirements), and shall terminate if not exercised within a specified period of
time, unless provision is made in connection with the Terminating Event for
assumption of such options, or substitution of new options covering stock of a
successor corporation. As of December 31, 1999, the Bank had options outstanding
to purchase a total of 374,222/2/ shares of its common stock under the Plan,
with an average exercise price of $9.09 per share/2/ with respect to all such
options.
____________
1. Exercise price per share is equivalent to market price per share on the date
of grant, as determined by the Board of Directors of the Company, based upon
trades in the Bank's common stock known to the Company and "bid" and "asked"
prices received by brokers dealing in the Company's common stock.
2. As the holding company reorganization pursuant to which the Company became
the sole shareholder of the Bank was not effective until January, 2000, stock
option information provided for 1999 relates to the Bank rather than the
Company.
61
<PAGE>
As of that same date, the fair market value of the Bank's common stock was
approximately $8.25 per share./2/
No stock options were granted to or exercised by the Named Executive
Officers during 1999. The following information is furnished with respect to
stock options held by the Named Executive Officers at December 31, 1999:
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised in-the-Money Options/2/
Options at December 31, 1999/1/ at December 31, 1999
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan J. Lane 24,800 38,200 $4,860 $3,240
James W. Andrews 20,800 22,200 4,860 3,240
Ruth E. Adell 8,725 11,750 9,684 -0-
</TABLE>
Information concerning stock options granted to and held by the Company's
non-employee directors is included under "Compensation of Directors" immediately
below.
Compensation of Directors
Non-employee directors of the Bank receive $750 per Board meeting whether
or not they attend the meeting, but a director is not paid for more than three
meetings per year that he has not attended. Such directors are also paid $200
per meeting for attendance at Board committee meetings. These individuals have
the option of taking such fees as immediate compensation, or of allocating any
or all of such fees to a deferred payment plan. Directors currently receive no
additional compensation for their services as directors of the Company. No
stock options were granted to or exercised by any non-employee directors of the
Bank or the Company during 1999. As of December 31, 1999, each non-employee
director of the Bank and the Company (with the exception of director Cozzo) held
stock options to purchase 20,118/1/ shares each of common stock, at an average
exercise price of $8.88 per share,/1/ all with expiration dates in 2007. As of
that same date, the fair market value of the Bank's Common Stock was $8.25 per
share./1/ As of December 31, 1999, all of such options were outstanding and
exercisable in full. In addition, as of December 31, 1999, Arnold Stubblefield
held a fully vested stock option covering an additional 17,075 shares1 of common
stock at an exercise price of $5.66,/1/ with an expiration date in 2005.
Item 7. Certain Relationships and Related Transactions
-------------------------------------------------------
Some of the executive officers and directors of the Bank and the Company
and the companies with which they are associated have been customers of, and
have had banking transactions with, the Bank in the ordinary course of the
Bank's business since January 1, 1999, and the Bank expects to continue to have
such banking transactions in the future. All loans and commitments to lend
included in such transactions have been made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with persons of similar creditworthiness, and in the
opinion of Management of the Bank, have not involved more than the normal risk
of repayment or presented any other unfavorable features.
________________
1. As the holding company reorganization pursuant to which the Company became
the sole shareholder of the Bank was not effective until January, 2000, stock
option information provided for 1999 relates to the Bank rather than the
Company.
2. Represents the difference between the aggregate exercise price and the
aggregate fair market value of the shares at December 31, 1999.
62
<PAGE>
Item 8. Description of Securities
----------------------------------
The authorized capital stock of the Company consists of 2,000,000 shares of
Preferred Stock, no par value, and 10,000,000 shares of Common Stock, no par
value. As of June 30, 2000, there were issued and outstanding no shares of the
Company's Preferred Stock and 1,985,679 shares of the Company's Common Stock.
The Preferred Stock may be issued from time to time in one or more series. The
Board of Directors of the Company is authorized to determine the rights,
preferences, privileges and restrictions of each such series. No such
determination has yet been made. A summary of the rights, preferences,
privileges and restrictions of the Company's Common Stock is set forth below.
Common Stock
Each share of Common Stock has the same rights, preferences, and privileges
as every other share, and is entitled to one vote at any meeting of shareholders
(except as described below). The Common Stock has no preemptive, conversion or
redemption rights or sinking fund provisions applicable thereto. All of the
shares of Common Stock outstanding are fully paid and non-assessable. After the
requirements with respect to preferential dividends upon all classes and series
of stock entitled thereto, if any, shall have been paid or declared and set
apart for payment and after the Company shall have complied with all
requirements, if any, with respect to the setting aside of sums as a sinking
fund or for a redemption account on any class of stock, then, and not otherwise,
the holders of Common Stock shall be entitled to receive, subject to the
applicable provisions of the California Corporations Code, such dividends as may
be declared from time to time by the Board of Directors. Each share of Common
Stock shares equally in any dividends declared on the Common Stock. (See "Part
II, Item 1 -- Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters" herein.)
All voting rights are vested in the holders of the Common Stock. Each
holder of Common Stock is entitled to one vote for each share of Common Stock
standing in his name on the books of the Company on any matter submitted to the
vote of the shareholders, except that in connection with the election of
directors, shares are entitled to be voted cumulatively if a candidate's name
has been placed properly in nomination prior to the voting and a shareholder
present at the meeting gives notice of his or her intention to vote
cumulatively. Cumulative voting entitles a shareholder to give one nominee as
many votes as is equal to the number of directors to be elected multiplied by
the number of shares owned by such shareholder, or to distribute his or her
votes on the same principle between or among two or more nominees as he or she
deems appropriate. The candidates receiving the highest number of votes, up to
the number of directors to be elected, will be elected under cumulative voting.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the corporation, after distribution in full of the preferential
amounts to be distributed to the holders of all classes and series of stock
entitled thereto and to the holders of capital notes, if any, the holders of the
Common Stock shall be entitled to receive all the remaining assets of the
corporation.
California law prohibits a California state-chartered bank from lending on
the security of, or for the purpose of purchasing, its own stock and from
purchasing shares of its own or a parent company's stock unless approved in
advance by the Commissioner or unless such purchase in necessary to prevent loss
to the bank on debts previously contracted in good faith.
The Company utilizes U. S. Stock Transfer, Glendale, California, as its
transfer agent.
63
<PAGE>
PART II
-------
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
---------------------------------------------------------------------------
Other Shareholder Matters
-------------------------
Management is aware of the following securities dealers which make a market
in the Company's stock: Western Financial Corporation, San Diego, California and
Gorian Investment Group, Inc., San Bernardino, California (the "Securities
Dealers"). The Securities Dealers have no obligation to continue to make such a
market and may discontinue making a market at any time. The Company's Common
Stock is not listed on any exchange; however, the Company intends to file an
application for listing of its Common Stock on the Nasdaq SmallCap Market in the
fourth quarter of 2000. No assurance can be given that such application will be
approved, or if approved, that an active trading market will develop or be
sustained for the Common Stock.
The information in the following table indicates the high and low "bid" and
"asked" quotations and approximate volume of trading for the Common Stock for
each quarterly period since January 1, 1998, and is based upon information
provided by the ADP Quotation Services, Historical Data Base./1/ These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, do not reflect actual transactions and do not include nominal
amounts traded directly by shareholders or through other dealers and not through
the Securities Dealers.
<TABLE>
<CAPTION>
Sale Price of Approximate Approximate
the Bank's Trading Number of
Calendar Quarter Ended Common Stock/2/ Volume/2/ Transactions
---------------------- ------------ ------ ------------
High Low
---- ---
<S> <C> <C> <C> <C>
March 31, 1998..................................... 12.80 10.30 111,875 29
June 30, 1998...................................... 12.40 11.20 23,875 11
September 30, 1998................................. 12.40 10.80 17,700 13
December 31, 1998.................................. 12.00 11.00 28,625 11
March 31, 1999..................................... 12.40 10.20 25,500 34
June 30, 1999...................................... 11.00 9.60 97,200 27
September 30, 1999................................. 13.50 10.00 23,800 14
December 31, 1999.................................. 11.00 8.00 20,400 17
March 31, 2000..................................... 9.50 8.62 6,200 6
June 30, 2000...................................... 9.75 8.00 49,900 19
</TABLE>
As of June 30, 2000, there were approximately 291 shareholders of record of
the Common Stock.
Dividends
As a bank holding company which currently has no significant assets other
than its equity interest in the Bank, the Company's ability to pay dividends
primarily depends upon the dividends it receives from the Bank. As with the
Company, the Bank's dividend practices will depend upon the Bank's earnings,
financial position, current and anticipated cash requirements and other factors
deemed relevant by the Bank's Board of Directors at that time. In addition,
during any period in which the Company has deferred payment of interest
otherwise due and payable on its Subordinated Debt Securities, the Company may
not make any dividends or distributions with respect to its
__________________
1. Inasmuch as the Company did not acquire the outstanding shares of the Bank
until January, 2000, the information contained herein for 1998 and 1999 is for
the Bank's stock. As of the effective date of the holding company
reorganization (January 21, 2000), each outstanding share of common stock of the
Bank was converted into one outstanding share of common stock of the Company.
2. Figures in the table have been retroactively adjusted to give effect to the
25% stock distribution declared by the Bank in July, 1999.
64
<PAGE>
capital stock. (See "Part I, Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources" herein.)
The Bank's ability to pay dividends to the Company is also subject to
certain legal limitations. Under California law, the Bank may declare a cash
dividend out of the Bank's net profits up to the lesser of the Bank's retained
earnings or the Bank's net income for the last three (3) fiscal years (less any
distributions made to stockholders during such period), or, with the prior
written approval of the Commissioner, in an amount not exceeding the greatest of
(i) the retained earnings of the Bank, (ii) the net income of the Bank for its
last fiscal year, or (iii) the net income of the Bank for its current fiscal
year. In addition, under federal law, the Bank is prohibited from paying any
dividends if after making such payment the Bank would fail to meet any of its
minimum capital requirements. (See "Part I, Item 1 -- Description of Business --
Regulation and Supervision -- Capital Adequacy Requirements"). The federal
regulators also have the authority to prohibit the Bank from engaging in any
business practices which are considered to be unsafe or unsound, and in some
circumstances the regulators might prohibit the payment of dividends on that
basis even though such payments would otherwise be permissible.
The Company's ability to pay dividends is also limited by state corporation
law. The California General Corporation Law prohibits the Company from paying
dividends on the Common Stock unless: (1) its retained earnings, immediately
prior to the dividend payment, equals or exceeds the amount of the dividend or
(2) immediately after giving effect to the dividend the sum of the Company's
assets (exclusive of goodwill and deferred charges) would be at least equal to
125% of its liabilities (not including deferred taxes, deferred income and other
deferred liabilities) and the current assets of the Company would be at least
equal to its current liabilities, or, if the average of its earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of its interest expense for the two preceding fiscal
years, at least equal to 125% of the current liabilities.
The Bank's practice has been to retain earnings to provide funds for the
operation and expansion of its business. Accordingly, prior to the holding
company reorganization, the Bank had not paid any cash dividends on its Common
Stock. Management has no current plans for the Company to pay cash dividends in
the foreseeable future. However, the Board's practice is to review annually the
advisability of paying cash dividends based upon the Company's earnings,
financial position, current and anticipated cash requirements and other factors
deemed relevant by the Board of Directors at that time. In making any such
assessment, the Board of Directors of the Company would have to consider among
other things the capital requirements of the Bank and other factors concerning
the Bank, including the dividend guidelines and maintenance of an adequate
allowance for loan losses.
Item 2. Legal Proceedings
--------------------------
From time to time, the Company and the Bank are defendants in legal
proceedings arising in the ordinary course of business. After taking into
consideration information furnished by counsel to the Company as to the current
status of these claims or proceedings to which the Bank or the Company are
parties, Management is of the opinion that the ultimate aggregate liability
represented thereby, if any, will not have a material adverse affect on the
financial condition of the Company.
Item 3. Changes in and Disagreements with Accountants
------------------------------------------------------
Not applicable.
Item 4. Recent Sales of Unregistered Securities
------------------------------------------------
The Company was formed on October 4, 1999 in order to become the one bank
holding company of the Bank. On October 7, 1999, solely for purposes of
facilitating the holding company reorganization, 100 shares of the common stock
of the Company were issued to Alan J. Lane for aggregate cash consideration of
$100. There shares
65
<PAGE>
were not registered under the Securities Act of 1933, as amended, in reliance on
the exemption set forth in Section 4(2) thereof. These shares were subsequently
repurchased by the Company for $1.00 per share in accordance with the terms of
the Agreement of Merger discussed below.
On January 21, 2000, in connection with effecting a one-bank holding
company reorganization, and in accordance with the terms of an Agreement of
Merger dated as of January 7, 2000, by and among the Company, the Bank and BBOC
Merger Corporation, each of the 1,976,033 issued and outstanding shares of
Business Bank of California as of that date were exchanged, on a one-for-one
basis, for 1,976,033 shares of the Company. These shares were not registered
under the Securities Act of 1933, as amended, in reliance on the exemption set
forth in Section 3(12) thereof.
From the effective date of the reorganization through June 30, 2000, the
Company has issued an aggregate of 9,646 shares of its common stock upon the
exercise of options issued pursuant to the Company's Stock Option Plan. The
average weighted exercise price of all of the shares exercised such year period
was $7.90 per share. The issuance of these options was not registered under the
Securities Act in reliance on the exemption set forth in Rule 701 promulgated
thereunder.
On March 23, 2000, the Company issued an aggregate of $10,000,000 in
principal amount of its Fixed Rate Junior Subordinated Deferrable Interest
Debentures due 2030 (the "Subordinated Debt Securities"). All of the
Subordinated Debt Securities were issued to Business Capital Trust I, a Delaware
statutory business trust and a wholly-owned subsidiary of the Company (the
"Trust"). The Subordinated Debt Securities were not registered under the
Securities Act in reliance on the exemption set forth in Section 4(2) thereof.
The Subordinated Debt Securities were issued to the Trust in consideration for
the receipt of the net proceeds (approximately $9.7 million) raised by the Trust
from the sale of $10,000,000 in principal amount of the Trust's 10-7/8% Fixed
Rate Capital Trust Pass-through Securities (the "Trust Preferred Securities").
Salomon Smith Barney, Inc. ("SSB") acted as the placement agent in connection
with the offering of the Trust Preferred Securities for aggregate commissions of
$300,000 payable by the Trust. The sale of the Trust Preferred Securities was
part of a larger transaction arranged by SSB pursuant to which the Trust
Preferred Securities were deposited into a special purpose vehicle along with
similar securities issued by a number of other banks and the special purpose
vehicle then issued its securities to the public (the "Pooled TRUPS"). The
Pooled TRUPS were sold by SSB only (i) to those entities SSB reasonably believed
were qualified institutional buyers (as defined in Rule 144A under the
Securities Act), (ii) to "accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) or Regulation D promulgated under the Securities Act) or (iii)
in offshore transactions in compliance with Rule 903 of Regulation S under the
Securities Act. The Trust Preferred Securities were not registered under the
Securities Act in reliance on exemptions set forth in Rule 144A, Regulation D
and Regulation S, as applicable.
Item 5. Indemnification of Directors and Officers
--------------------------------------------------
Section 317 of the California Corporations Code governs indemnification of
the directors and officers of the Company. Under this section, officers and
directors may be indemnified against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with proceedings
other than derivative suits, in which such persons were parties or threatened to
be made parties. In order for the corporation to make indemnification, there
must be a determination by (a) a majority vote of a quorum of the Board of
Directors, consisting of directors who are not parties to such proceeding, (b)
approval of the stockholders pursuant to Section 153 of the California
Corporations Code, with the shares owned by the person to be indemnified not
being entitled to vote thereon, or an order of the court in which such
proceeding is or was pending that the officer or director acted in good faith in
a manner such person reasonably believed to be in the best interests of the
corporation, and in the case of a criminal proceeding, such person had no
reasonable cause to believe the conduct of such person was unlawful. This
section further provides that indemnification may be paid in connection with
derivative suits, in the same manner as described above, except that (a) with
respect to derivative suits, the authority authorizing the indemnification must
find that such person acted in good faith, in a manner such person believed to
be in the best interests of the corporation and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under the circumstances, and (b) court approval is required for indemnification
of expenses or amounts incurred in respect of any claim or matter in which a
director or officer has been adjudged to be liable to the
66
<PAGE>
corporation in the performance of such person's duty to the corporation; in
settling or otherwise disposing of a threatened or pending action, with or
without action which is settled or otherwise disposed of without court approval.
The Company's Articles of Incorporation and Bylaws provide, among other
things, for the indemnification of the Company's directors, officers and agents,
and authorize the Board to pay expenses incurred by, or to satisfy a judgment or
fine rendered or levied against, such agents in connection with any personal
legal liability incurred by that individual while acting for the Company within
the scope of his or her employment. Such provisions of the Company's Articles of
Incorporation and Bylaws are subject to certain limitations imposed under state
and federal law. It is the policy of the Board of Directors that the Company's
executive officers and directors shall be indemnified to the maximum extent
permitted under applicable law and the Company's Articles of Incorporation and
Bylaws, and the Company has obtained liability insurance covering all of the
Company's officers and directors.
The Company's Articles of Incorporation also currently provide for the
limitation or elimination of personal liability of the Company's directors to
the Company or its stockholders for monetary damages, to the extent permitted by
California law. However, under federal law, the FDIC may seek monetary damages
from bank or holding company directors in cases involving gross negligence or
any greater disregard of the duty of care, notwithstanding any provisions of
state law which may permit limitations on director liability in such
circumstances.
There are no other provisions in the Articles of Incorporation of the
Company or in any contract or arrangement between the Company and any director
or officer regarding insurance or indemnification against any liability that
such director or officer may incur in his capacity as such.
67
<PAGE>
PART F/S (FINANCIAL STATEMENTS)
--------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business Bank of California/Business Bancorp
Independent Auditors' Report........................................................ F-1
Balance Sheets
December 31, 1999 and 1998......................................................... F-2
Statements of Income
Years Ended December 31, 1999 and 1998............................................. F-3
Statement of Changes in Stockholders' Equity
Years Ended December 31, 1999 and 1998............................................ F-4
Statements of Cash Flows
Years Ended December 31, 1999 and 1998............................................. F-5
Notes to Financial Statements...................................................... F-7
Balance Sheet at June 30, 2000, December 31, 1999 and June 30, 1999 (Unaudited)..... F-31
Statements of Income (Unaudited)
Six Months Ended June 30, 2000 and June 30, 1999................................... F-32
Statement of Changes in Stockholders' Equity (Unaudited)
Six Months Ended June 30, 2000..................................................... F-33
Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and June 30, 1999................................... F-34
Notes to Interim Financial Statements.............................................. F-35
Valley Merchants Bank, NA
Independent Auditors' Report........................................................ F-36
Balance Sheets
December 31, 1999 and 1998......................................................... F-37
Statements of Income
Years Ended December 31, 1999 and 1998............................................. F-38
Statement of Changes in Stockholders' Equity
Years Ended December 31, 1999 and 1998............................................ F-39
Statements of Cash Flows
Years Ended December 31, 1999 and 1998............................................. F-40
Notes to Financial Statements...................................................... F-41
</TABLE>
68
<PAGE>
<TABLE>
<S> <C>
Balance Sheets as of June 30, 2000 and
December 31, 1999.................................................................. F-55
Statements of Income for the Six Months
Ended June 30, 2000 and 1999....................................................... F-56
Statement of Changes in Stockholders' Equity
For the Quarter and Year Ended
June 30, 2000 and December 31, 1999................................................ F-57
Statement of Cash Flows for the Quarters
Ended June 30, 2000 and 1999...................................................... F-58
Pro Forma Financial Statements
Introduction to Pro Forma Financial Statements...................................... F-59
Pro Forma Balance Sheet as of June 30, 2000......................................... F-60
Pro Forma Statement of Income for the
Years Ended December 31, 1999.................................................... F-61
Pro Forma Statement of Income for the
Six Months Ended June 30, 2000................................................... F-62
</TABLE>
69
<PAGE>
BUSINESS BANK OF CALIFORNIA
DECEMBER 31, 1999 AND 1998
Independent Auditors' Report
Board of Directors and Stockholders
Business Bank of California
San Bernardino, California
We have audited the accompanying balance sheets of Business Bank of California
as of December 31, 1999 and 1998, and the related statements of income, changes
in stockholders' equity and cash flows for the years then ended. 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 audits 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.
As discussed in Note #24 to the financial statements, certain errors regarding
the understatement of net deferred tax assets and retained earnings were
discovered by management of the Bank during the year. Accordingly, the 1999
and1998 financial statements have been restated to correct the error.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Business Bank of California as
of December 31, 1999 and 1998, and the results of its operations, changes in its
stockholders' equity, and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Vavriniek, Trine, Day & Co., LLP
Rancho Cucamonga, California
March 3, 2000
(Except for Note #23 to which the
date is March 23, 2000, and Note #24
to which the date is November 8, 2000)
F-1
<PAGE>
BUSINESS BANK OF CALIFORNIA
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Assets
1999 1998
------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 13,971,280 $ 16,388,860
Federal funds sold - 23,500,000
------------------- -------------------
Cash and Cash Equivalents 13,971,280 39,888,860
Investment securities (Notes #1C and #2)
Available-for-sale 82,294,167 21,997,145
Held-to-maturity, fair value of $1,002,500 in 1999,
and $5,759,699 in 1998 1,012,076 5,542,357
Federal Home Loan Bank stock, at cost 1,200,000 -
Loans held for sale (Notes #1E and #3) 1,689,783 2,030,555
Loans, net of unearned income (Notes #1D and #3) 114,693,359 103,873,754
Less allowance for loan losses (Notes #1F and #4) (1,241,733) (1,439,308)
------------------- -------------------
Net Loans 115,141,409 104,465,001
Bank premises and equipment (Notes #1G and #6) 3,885,119 3,990,837
Accrued interest receivable 1,440,602 813,071
Deferred tax asset (Note #8) 1,053,000 727,000
Other real estate owned, net (Notes #1L and #17) 1,036,227 1,068,987
Other assets (Note # 7) 4,409,585 4,311,420
------------------- -------------------
Total Assets $ 225,443,465 $ 182,804,678
=================== ===================
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand deposits 74,533,528 67,614,024
NOW deposits 27,284,559 23,128,762
Money market and savings deposits 49,840,556 40,211,625
Time deposits $100,000 and over 15,274,884 11,723,009
Other time deposits 19,874,439 21,165,225
------------------- -------------------
186,807,966 163,842,645
Accrued interest and other liabilities 1,404,086 1,519,107
Borrowed funds (Note #9) 18,200,000 -
------------------- -------------------
206,412,052 165,361,752
------------------- -------------------
Commitments and Contingencies
Stockholders' Equity
Serial preferred stock - no par value, 2,000,000
shares authorized but unissued
Common stock - no par value, authorized 10,000,000
shares, issued and outstanding, 1,975,961 and 1,559,175
shares in 1999 and 1998, respectively 6,256,854 5,726,269
Retained earnings 13,652,558 11,713,655
Accumulated other comprehensive income (877,999) 3,002
------------------- -------------------
Total Stockholders' Equity 19,031,413 17,442,926
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 225,443,465 $ 182,804,678
=================== ===================
</TABLE>
F-2
<PAGE>
BUSINESS BANK OF CALIFORNIA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 11,226,876 $ 10,798,298
Interest on investment securities
Taxable 2,424,171 768,892
Exempt from Federal taxes 501,619 332,783
Interest on Federal funds sold 617,758 1,433,152
----------------- ----------------
Total Interest Income 14,770,424 13,333,125
----------------- ----------------
Interest Expense
Interest on deposits
NOW and Money Market accounts 1,305,793 1,098,157
Savings 528,636 508,693
Time deposits over $100,000 604,028 527,637
Other time deposits 925,486 1,043,797
Other borrowings 212,790 -
----------------- ----------------
Total Interest Expense 3,576,733 3,178,284
----------------- ----------------
Net Interest Income 11,193,691 10,154,841
Provision for Loan Losses 180,000 150,000
----------------- ----------------
Net Interest Income After Provision
for Loan Losses 11,013,691 10,004,841
----------------- ----------------
Other Income
Service fees 2,261,995 2,295,814
Gain on sale of SBA loans 154,246 330,855
Gain on sale of other real estate owned 38,168 136,465
(Loss) gain on sale of investments (98,041) 6,822
----------------- ----------------
Total Other Income 2,356,368 2,769,956
----------------- ----------------
Other Expenses
Salaries and employee benefits 5,290,708 4,851,793
Occupancy, net 746,684 706,058
Furniture and equipment 775,536 778,763
Other operating expenses (Note #13) 3,775,799 3,326,745
----------------- ----------------
Total Other Expenses 10,588,727 9,663,359
----------------- ----------------
Income Before Income Taxes 2,781,332 3,111,438
----------------- ----------------
Income Taxes (Note #8)
Current 1,019,999 1,256,850
Deferred (178,972) (2,340)
----------------- ----------------
841,027 1,254,510
----------------- ----------------
Net Income $ 1,940,305 $ 1,856,928
================= ================
Earnings Per Share (Note #15)
Basic $ 0.99 $ 0.97
================= ================
Diluted $ 0.97 $ 0.93
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
BUSINESS BANK OF CALIFORNIA
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Number of Other
Shares Common Comprehensive Retained Comprehensive
Outstanding Stock Income Earnings Income
--------------- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 1,459,657 $ 5,125,883 $ 9,856,727 $ 64,404
Stock options exercised 93,497 516,538
Stock issued to 401-K Plan 6,021 83,848
Comprehensive income:
Net income for the period $ 1,856,928 1,856,928
Unrealized security holding losses
(net of $41,598 tax) (57,445) (57,445)
Reclassification adjustment for realized gains
(net of $2,865 tax) (3,957) (3,957)
----------------
Total comprehensive income $ 1,795,526
--------------- ------------ ================ ------------- ---------------
Balance, December 31, 1998 1,559,175 5,726,269 11,713,655 3,002
Stock options exercised 13,264 77,550
Stock issued to 401-K Plan 11,650 142,945
Five-for-four stock split (Note #11) 391,872
Cash in lieu of fractional shares (1,402)
Tax effect of Directors' options exercised 310,090
Comprehensive Income
Net income for the period $ 1,940,305 1,940,305
Unrealized security holding losses
(net of $539,908 tax) (943,355) (943,355)
Reclassification adjustment for realized losses
(net of $35,687 tax benefit) 62,354 62,354
----------------
Total comprehensive income $ 1,059,304
--------------- ------------- ================ ------------- ---------------
Balance, December 31, 1999 1,975,961 $ 6,256,854 $ 13,652,558 $ (877,999)
=============== ============= ============= ===============
<CAPTION>
Total
Stockholder
Equity
--------------
<S> <C>
Balance, January 1, 1998 $ 15,047,014
Stock options exercised 516,538
Stock issued to 401-K Plan 83,848
Comprehensive income:
Net income for the period 1,856,928
Unrealized security holding losses
(net of $41,598 tax) (57,445)
Reclassification adjustment for realized gains
(net of $2,865 tax) (3,957)
Total comprehensive income
--------------
Balance, December 31, 1998 17,442,926
Stock options exercised 77,550
Stock issued to 401-K Plan 142,945
Five-for-four stock split (Note #11)
Cash in lieu of fractional shares (1,402)
Tax effect of Directors' options exercised 310,090
Comprehensive Income
Net income for the period 1,940,305
Unrealized security holding losses
(net of $539,908 tax) (943,355)
Reclassification adjustment for realized losses
(net of $35,687 tax benefit) 62,354
Total comprehensive income
--------------
Balance, December 31, 1999
$ 19,031,413
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BUSINESS BANK OF CALIFORNIA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 1,940,305 $ 1,856,928
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization of premises and equipment 625,220 561,257
Amortization of intangibles 286,942 295,716
Provision for loan losses 180,000 150,000
Provision for losses on other real estate owned 24,415 112,768
Net loss/(gain) on sale of assets 78,137 (474,142)
(Increase)/decrease in accrued interest receivable (627,531) 49,375
(Increase)/decrease in deferred assets (400,273) 72,273
Net amoritization/accretion of premiums/discounts
on investment securities 696,379 22,334
FHLB stock dividend (6,000) -
(Increase)/decrease in other assets (102,398) 75,194
Increase in interest payable and other liabilities 115,021 433,371
(Increase)/decrease in prepaid taxes (383,027) 297,041
-------------- --------------
Net Cash Provided By Operating Activities 2,427,190 3,452,115
-------------- --------------
Cash Flows From Investing Activities
Proceeds from maturities of available-for-sale securities 3,301,800 10,257,417
Proceeds from maturities of held-to-maturity securities 1,055,000 8,925,067
Purchase of investment securities available-for-sale (75,146,074) (33,018,186)
Purchase of investment securities held-to-maturity (1,513,906) (5,514,108)
Proceeds from sales of securities 6,994,039 3,350,000
Principal reduction of mortgage-backed securities 6,134,290 61,257
Net increase in loans to customers (10,931,034) (5,742,592)
Recoveries of loans previously written off 184,906 150,518
Capital expenditures (521,905) (561,612)
Proceeds from sale of equipment 15,044 146,155
Proceeds from sale of other real estate owned 388,566 726,615
-------------- --------------
Net Cash Used In Investing Activities (70,039,274) (21,219,469)
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BUSINESS BANK OF CALIFORNIA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in demand deposits, NOW accounts,
savings accounts, and money market deposits 20,704,232 23,024,696
Net increase in certificates of deposit 2,261,089 4,132,578
Net increase in FHLB borrowing 18,200,000 -
Stock options exercised, net of tax effect 530,585 516,538
Cash paid in lieu of fractional shares (1,402) -
----------------- ------------------
Net Cash Provided By Financing Activities 41,694,504 27,673,812
----------------- ------------------
Net (Decrease)/Increase in Cash and Cash Equivalents (25,917,580) 9,906,458
Cash and Cash Equivalents, Beginning of Year 39,888,860 29,982,402
----------------- ------------------
Cash and Cash Equivalents, End of Year $ 13,971,280 $ 39,888,860
================= ==================
Supplemental Disclosure of Cash Flows Information
Cash paid for interest $ 3,598,157 $ 2,744,913
================= ==================
Cash paid for taxes $ 769,986 $ 1,289,245
================= ==================
Non-Cash Investing Activities
Net change in accumulated other comprehesive income $ 881,001 $ 61,402
================= ==================
Transfer from loans to OREO $ 548,758 $ 268,601
================= ==================
Origination of loans to facilitate OREO $ 175,800 $ 752,440
================= ==================
Transfer from investments held-to-maturity to
available-for-sale $ 1,065,000 $ -
================= ==================
</TABLE>
Note #1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Business Bank of California (the
"Bank") conform to generally accepted accounting principles and to general
practice within the banking industry. A summary of the significant accounting
and reporting policies consistently applied in the preparation of the
accompanying financial statements follows:
A. Nature of Operations
--------------------
The Bank has been organized as a single operating segment and operates
branches in the Inland Empire region of Southern California. The Bank's
primary source of revenue is providing loans to customers, who are
predominately small and middle-market businesses and individuals.
B. Use of Estimates
-- ----------------
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals
for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on loans
and foreclosed real estate may change.
Note #1 - Summary of Significant Accounting Policies, Continued
C. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
which addresses the accounting for investments in equity securities that
have readily determinable fair values and for investments in all debt
securities, securities are classified in three categories and accounted for
as follows: debt, equity, and mortgage-backed securities that the Bank has
the positive intent and ability to hold to maturity are classified as held-
to-maturity and are measured at amortized cost; debt, equity and mortgage
backed securities bought and held principally for the purpose of selling in
the near term are classified as trading securities and are measured at fair
value, with unrealized gains and losses included in earnings; debt, equity
and mortgage-backed securities not classified as either held-to-maturity or
trading securities are deemed as available-for-sale and are measured at
fair value, with unrealized gains and losses, net of applicable taxes,
reported in a separate component of stockholders' equity. Gains or losses
on sales of investment securities and mortgage-backed securities are
determined on the specific identification method. Premiums and discounts
are amortized or accreted using the interest method over the expected lives
of the related securities.
D. Loans and Interest on Loans
---------------------------
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. The Bank
recognizes loan origination fees as income over the term of the loan.
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by
Creditors for
F-7
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Impairment of a Loan." The statement generally requires those loans
identified as "impaired" to be measured on the present value of expected
future cash flows discounted at the loan's effective interest rate, except
that as a practical expedient, a creditor may measure impairment based on a
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable the
creditor will not be able to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
E. Loans Held-for-Sale
-------------------
Loans held for sale are carried at the lower of aggregate cost or market,
which is determined by the specific value in the commitments. Net
unrealized losses, if any, are required through a valuation allowance by
charges to income.
Note #1 - Summary of Significant Accounting Policies, Continued
F. Provision and Allowance for Loan Losses
---------------------------------------
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
The Bank's ALLL is a multi-step process that is reviewed and updated
quarterly. It begins with Management reviewing each individual classified
or criticized loan in detail, evaluating the adequacy of collateral,
payment record, current loan status and borrower financial capacity. A loan
loss reserve is assigned each classified and criticized loan from this
quarterly review based upon the specifics of the loan's circumstances such
as updated collateral value, borrower's or guarantor's financial capacity,
payment record and recent conversations with the borrower. Additionally,
each quarter the Bank updates its eight-quarter loan loss migration
analysis to derive a rolling, 2-year loan loss experience percentage by
loan category. Management's risk assessment consists of a variety of
factors. These factors are considered for all periods and are not optional.
The factors include items such as: changes in lending policies &
procedures, changes in national/local economic conditions, changes in the
nature & volume of the portfolio, changes in experience, ability & depth of
lending staff, changes in past dues, classified & non-accruals, changes in
quality of loan review systems, existence & effect of concentrations, as
well as the effect of external factors (competition,
F-8
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
legal, regulatory, etc.). Although all of these factors are consistently
considered and applied, the combined management risk assessment has a
relatively nominal effect on the provision and allowance. These factors are
considered and evaluated, but do not readily determine the provision or
allowance. The resulting loan loss factor of each loan category is then
applied to the existing loan portfolio by category and added to the loan
loss reserve total from the review of the criticized and classified loans
to conclude a total allowance for loan and lease losses. Business Bank of
California also applies a regulatory reasonableness test in determining
both the current provision as well as the overall allowance. The test
begins by using a three year weighted average net charge-offs to beginning
total loans, with the highest weight being placed on the most current year.
The calculated weighting is then applied to non-classified loans.
Classified loans (Substandard, Doubtful, and Loss) are also risk weighted
to determine an allowance amount. The risk weighted totals for the
classified and non-classified assets are then added together to determine
the regulatory reasonableness amount. In summary, this is a "quick and
dirty" migration analysis that is used to test the allowance for
reasonableness. This test is not used as a "driver" of the allowance.
Note #1 - Summary of Significant Accounting Policies, Continued
Specific loan pools by type are assigned an appropriate reserve factor
based upon the Bank's historical charge off experience or a minimum floor,
whichever is greater, and then factors are adjusted for current conditions.
The Bank then applies the minimum percentage reserve factors in determining
the allowance for loan losses. These reserve factors have floors that range
from 0.40% to 0.80% depending on the particular loan category. The Bank's
quarterly ALLL breaks down the Bank's total loan portfolio by component
parts (classified loans, criticized loans and pass loans) and further
differentiates by loan categories (commercial loans, consumer loans, etc.).
Specific loan circumstances are reviewed together with broader total
historical loan loss experience which may be further impacted by
Management's evaluation of internal and external factors. Accordingly,
changes in asset quality can have a beneficial impact to one component of
the ALLL without unduly influencing the other components.
G. Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Repairs and maintenance are expensed as incurred.
Depreciation is computed on the straight-line basis over the estimated
useful lives of the related assets, which range from three to thirty years.
Depreciation expense was $625,220 and $561,257 for the years ended December
31, 1999 and 1998, respectively.
H. Goodwill and Core Deposit Intangible Purchased
----------------------------------------------
Goodwill represents the excess of the assets purchased, during 1994 and
1997, over the fair value of their net assets at dates of acquisition and
is being amortized on the straight-line method over five years and ten
years, respectively. Amortization expense charged to operations for 1999
and 1998 was $156,783 and $165,557, respectively.
Core deposit intangibles purchased during 1994 and 1997 are amortized on a
straight-line method over fifteen years and ten years, respectively.
Amortization expense charged to operations for 1999 and 1998 was $130,159
and $130,159, respectively. Goodwill and core deposit intangibles are
F-9
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
included in other assets on the balance sheet.
I. Cash and Cash Equivalents
-------------------------
For the purpose of the statements of cash flows, cash and cash equivalents
includes cash and due from banks, cash items in transit, and federal funds
sold balances as of the year-end.
The Bank maintains amounts due from banks that may periodically exceed
federally insured limits. The Bank has not experienced any losses in these
accounts.
Note #1 - Summary of Significant Accounting Policies, Continued
J. Loan Sales and Servicing
------------------------
Gains and losses from the sale of participating interests in loans
guaranteed by the Small Business Administration (SBA) are recognized based
on the premium received or discount paid and the cost basis of the portion
of the loan sold. The cost basis of the portion of the loan sold was
arrived at by allocating the total cost of each loan between the guaranteed
portion of the loan sold and the unguaranteed portion of the loan retained,
based on their relative fair values. The book value allocated to the
unguaranteed portion of the loan, if less than the principal amount, is
recorded as a discount on the principal amount retained. The discount is
accreted to income over the remaining estimated life of the loan. The Bank
retains the servicing on the portion of the loans sold and recognizes
income on the servicing fees that are received.
K. Income Taxes
------------
Provisions for income taxes are based on amounts reported in the statements
of income (after exclusion of non-taxable income such as interest on state
and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed on the liability method as
prescribed in SFAS No. 109, "Accounting for Income Taxes."
L. Other Real Estate Owned
-----------------------
Other real estate owned, which represents real estate acquired by
foreclosure, is recorded at the lesser of the outstanding loan balance or
the fair value less selling costs of the property at the time of
foreclosure. Any valuation adjustments required at the time of foreclosure
are charged to the allowance for loan losses. Any subsequent valuation
adjustments, operating expenses or income, and gains and losses on
disposition of such properties are recognized in current operations.
M. Earning Per Shares (EPS)
------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
F-10
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #1 - Summary of Significant Accounting Policies, Continued
N. Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock. The pro forma effects
of adoption are disclosed in Note #12.
O. Current Accounting Pronouncements
---------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard was originally
effective for 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." This Statement establishes the
effective date of SFAS No. 133 for 2001 and is not expected to have a
material impact on the Bank's financial statements.
P. Reclassifications
-----------------
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
Note #2 - Investment Securities
At December 31, 1999 and 1998, the investment securities portfolio was comprised
of securities classified as available-for-sale and held-to-maturity, in
conjunction with the adoption of SFAS No. 115, resulting in investment
securities available-for-sale being carried at fair value and investment
securities held-to-maturity being carried at cost, adjusted for amortization of
premiums and accretions of discounts.
F-11
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #2 - Investment Securities, Continued
Available-for-Sale Securities
-----------------------------
The amortized cost and estimated fair value of available-for-sale securities at
December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Municipal agencies $12,647,483 $ 14,744 $ (699,438) $ 11,962,789
Mortgage backed securities 69,017,559 93,557 (779,738) 68,331,378
Corporate bonds 2,043,988 - (43,988) 2,000,000
----------- ---------- ----------- ------------
Total $83,709,030 $ 108,301 $(1,523,164) $ 82,294,167
=========== ========== =========== ============
<CAPTION>
December 31, 1998
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Securities of other U.S.
government agencies $ 3,509,110 $ 6,515 $ - $ 3,515,625
Municipal agencies 2,330,551 3,053 (14,153) 2,319,451
Mortgage backed securities 15,850,858 67,299 (60,588) 15,857,569
Equity securities 301,800 2,700 - 304,500
----------- ---------- ----------- ------------
Total $21,992,319 $ 79,567 $ (74,741) $ 21,997,145
=========== ========== =========== ============
</TABLE>
F-12
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #2 - Investment Securities, Continued
Held-to-Maturity Securities
---------------------------
The amortized cost and estimated fair value of held-to-maturity securities at
December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 1,012,076 $ - $ (9,576) $ 1,002,500
=========== ========== ========== ============
<CAPTION>
December 31, 1998
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 501,461 $ 2,602 $ - $ 504,063
Municipal agencies 5,040,896 214,740 - 5,255,636
----------- ---------- ----------- ------------
Total $ 5,542,357 $ 217,342 $ - $ 5,759,699
=========== ========== =========== ============
</TABLE>
The amortized cost and fair values of investment securities available-for-sale
and held-to-maturity at December 31, 1999, by expected maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Securities Securities
Held-to-Maturity Available-for-Sale
------------------------ --------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Amounts maturing in
One year or less $ - $ - $ 530,000 $ 535,814
After one year through five years 1,012,076 1,002,500 2,745,495 2,712,803
After five years through ten years - - 13,500,395 13,287,080
After ten years - - 66,933,140 65,758,470
----------- ---------- ----------- -----------
$ 1,012,076 $1,002,500 $83,709,030 $82,294,167
=========== ========== =========== ===========
</TABLE>
F-13
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #2 - Investment Securities, Continued
Proceeds from sales and maturities of investment securities available-for-sale
during 1999 and 1998, were $4,904,367 and $3,350,000, respectively. In 1999,
gross gains and gross losses on those sales were $2,200 and $88,659,
respectively. In 1998, gross gains on those sales were $6,822; there were no
gross losses. Proceeds from principal reductions of mortgage-backed securities
in 1999 and 1998, were $6,134,290 and $61,257, respectively.
Proceeds from sales of held-to-maturity investment securities during 1999 and
1998, were $5,391,472 and $0, respectively. Amortized costs for the held-to-
maturity investment securities sold during 1999 were $3,838,257. In 1999, gross
gains and gross losses on those sales were $46,751 and $58,333, respectively.
Amortized cost for held-to-maturity investment securities transferred to
available-for-sale investment securities during 1999 were $1,066,043, resulting
in an unrealized gain of $1,043. There were no transfers in 1998. Proceeds from
maturities of investment securities held-to-maturity during 1999 and 1998, were
$1,055,000 and $8,925,067, respectively. There were no gains or losses
recognized.
During 1999, the Bank sold the majority of the held-to-maturity investment
securities, with the remaining investments transferred to the available for sale
portfolio to comply with SFAS 115. The sale and subsequent transfer was effected
by a change of the investment policy of the Bank's management.
Included in shareholders equity at December 31, 1999, and 1998, is $877,999 of
net unrealized losses (net of $536,865 estimated tax expense), and $3,002 of net
unrealized gains (net of $2,174 estimated tax benefit) in investment securities
available-for-sale.
Securities having a carrying value of $81,701,686 and $7,371,447 and a market
value of $81,236,888 and $7,575,088 at December 31, 1999 and 1998, respectively,
were pledged to secure treasury, tax and loan items and public monies, as
required by law, and for other purposes.
Note #3 - Loans
The composition of the loan portfolio at December 31, 1999 and 1998, was as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Real estate $ 77,477,402 $ 68,780,116
Commercial 29,249,502 28,779,850
Installment 7,514,696 5,901,765
All other (including overdrafts) 1,246,097 1,086,583
------------ ------------
115,487,697 104,548,314
Less: Unearned income (794,338) (674,560)
------------ ------------
Loans, Net of Unearned Income $114,693,359 $103,873,754
============ ============
Loans held-for-sale $ 1,689,783 $ 2,030,555
============ ============
</TABLE>
F-14
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #3 - Loans, Continued
At December 31, 1999 and 1998, the Bank had loans amounting to approximately
$477,000 and $809,000, respectively, that were specifically classified as
impaired. The allowance for loan losses related to impaired loans amounted to
approximately $141,000 and $116,000 at December 31, 1999 and 1998, respectively.
Average recorded investment in impaired loans amounted to approximately $842,000
and $674,000 during 1999 and 1998, respectively. The following is a summary of
cash receipts on these loans and how they were applied in 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Cash receipts applied to reduce principal balance $147,953 $ 30,226
Cash receipts recognized as interest income 1,717 24,861
-------- --------
Total Cash Receipts $149,670 $ 55,087
======== ========
</TABLE>
At December 31, 1999 and 1998, the Bank had approximately $7,000 and $0,
respectively in loans past due 90 days or more in interest or principal and
still accruing interest.
Note #4 - Allowance for Loan Losses
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance, Beginning of Year $1,439,308 $1,773,389
Provision charged to expense 180,000 150,000
Loans charged-off (562,481) (634,599)
Recoveries 184,906 150,518
---------- ----------
Balance, End of Year $1,241,733 $1,439,308
========== ==========
</TABLE>
F-15
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #5 - Transactions with Related Parties
In the ordinary course of business, the Bank has granted loans to, and accepted
deposits from, certain directors, officers, principal shareholders and the
companies with which they are associated. All such loans and deposits were made
under terms which are consistent with the Bank's normal lending and deposit
policies.
An analysis of the activity with respect to aggregate loans to related parties
during 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Outstanding Balance, beginning of year $ 1,119,866 $ 1,316,932
Credit granted, including renewals 2,695,226 946,261
Repayments (974,883) (1,143,327)
----------- ------------
Outstanding Balance, end of year $ 2,840,209 $ 1,119,866
=========== ============
</TABLE>
Undisbursed loan amounts to related parties amounted $1,667,297 and $1,202,387
at December 31, 1999 and 1998, respectively.
At December 31, 1999, the Bank held deposits from related parties of $5,757,537.
Note #6 - Bank Premises and Equipment
Major classifications of bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Buildings and improvements $ 2,831,799 $ 2,793,306
Furniture, equipment, and software 3,681,696 3,558,561
----------- ------------
6,513,495 6,351,867
Less: accumulated depreciation and amortization (3,470,710) (3,163,364)
----------- ------------
3,042,785 3,188,503
Land 842,334 802,334
----------- ------------
$ 3,885,119 $ 3,990,837
=========== ============
</TABLE>
F-16
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #7 - Other Assets
The following is a composition of other assets for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Cash surrender value of life insurance $ 799,673 $ 762,333
Core deposit intangibles 1,097,356 1,227,515
Investment in unconsolidated affiliate 157,229 473,407
Goodwill 1,138,215 1,294,998
Prepaid expenses 610,081 260,495
Other 607,031 292,672
----------- ------------
$ 4,409,585 $ 4,311,420
=========== ============
</TABLE>
On November 27, 1998, the Bank acquired a forty-nine percent equity investment
in Financial Data Solutions, Inc., an affiliate which provides a variety of data
processing services to the financial services industry. This investment, which
is accounted for using the equity method, amounted to $157,229 at December 31,
1999. The condensed results of operations and financial position of Financial
Data Solutions, Inc. at December 31, 1999, are summarized as follows:
<TABLE>
<S> <C>
Condensed Results of Operations
Revenues $ 381,200
Expenses (1,035,143)
------------
Net loss $ (653,943)
============
Condensed Financial Position
Total assets $ 1,116,918
Total liabilities $ 796,043
</TABLE>
Note #8 - Income Taxes
The provision for income taxes is comprised of the following current and
deferred amounts:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Federal Income Tax
Current $ 714,270 $ 925,800
Deferred (174,739) (22,922)
----------- -------------
539,531 902,878
----------- -------------
State Franchise Tax
Current 305,729 331,050
Deferred (4,233) 20,582
----------- -------------
301,496 351,632
----------- -------------
Total $ 841,027 $ 1,254,510
=========== =============
</TABLE>
F-17
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #8 - Income Taxes, Continued
Deferred tax expense/(credits) result from timing differences in the recognition
of revenues and expenses for tax and financial statement purposes. The sources
of these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -----------------------
Federal State Federal State
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Tax effect of
Revenue and expenses recognized on a
different basis for book than for tax
purposes $ (233,375) $ (23,490) $ (75,995) $ 3,661
Depreciation and amortization computed
differently on tax returns than for
financial statements (8,540) (2,160) (43,179) (13,766)
Provision for loan loss deduction in tax
return less than amount charged for
financial statement purposes 67,176 21,417 96,252 30,687
----------- ----------- --------- ----------
Total $ (174,739) $ (4,233) $ (22,922) $ 20,582
=========== =========== ========= ==========
</TABLE>
As a result of the following items, the total tax expense for 1999 and 1998, was
different than the amount computed by applying the statutory U.S. Federal income
tax rate to income before taxes and extraordinary item:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Percent of Percent of
Pretax Pretax
Amount Income Amount Income
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Federal rate $ 945,653 34.0 % $1,057,889 34.0 %
Changes due to State Franchise tax,
net of Federal tax benefit 198,987 7.1 232,077 7.5
Exempt interest (172,380) (6.2) (60,796) (2.0)
Other (131,233) (4.7) 25,340 0.8
---------- ------ ---------- ------
$ 841,027 30.2 % $1,254,510 40.3 %
========== ====== ========== ======
</TABLE>
F-18
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #8 - Income Taxes, Continued
Net deferred tax assets are determined from the following cumulative timing
differences between book and tax return recognition as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets
Allowance for loan losses $ 84,000 $ 171,000
Other real estate 83,000 130,000
Deferred income 327,000 278,000
State Taxes 3,000 117,000
Accruals not currently deductible 38,000 149,000
Other 4,000 23,000
Valuation allowance for investment securities 536,000 41,000
----------- -----------
1,075,000 909,000
- (100,000)
Less: Valuation reserve ----------- -----------
1,075,000 809,000
Deferred Tax Liabilities
Fixed assets (22,000) (82,000)
----------- -----------
Net Deferred Tax Assets $ 1,053,000 $ 727,000
=========== ===========
</TABLE>
The valuation allowance is an amount which, in management's judgment, is less
than likely of subsequent realization. The valuation reserve of $100,000 was
fully recognized during 1999 resulting in no valuation reserve as of December
31, 1999.
Note #9 - Federal Home Loan Bank (FHLB) Advances and Other Borrowings
Pursuant to collateral agreements with the FHLB, advances are secured by all
capital stock in the FHLB and certain mortgage-backed securities. FHLB advances
of $18,200,000 at December 31, 1999 mature in 2000 and bear interest at a
weighted-average rate of 6.1 percent.
F-19
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #10 - Commitments and Contingencies
The Bank leases from nonaffiliates the land on which a branch building is
located through September 30, 2002, with options to extend the lease to 2022.
The lease rate is subject to adjustment proportional to changes in the consumer
price index. However, the monthly rate shall not fall below $2,200. The Bank has
also entered into leases for two additional branch buildings. The future minimum
annual rental payments (excluding property taxes and insurance) under these
leases are as follows at December 31, 1999:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
----------------- ----------
<S> <C>
2000 $ 222,948
2001 210,474
2002 192,671
2003 201,010
2004 189,904
Thereafter 831,113
----------
Total $1,848,120
==========
</TABLE>
The above information is given for the existing lease commitments and is not a
forecast of future rental expense. The total rental expenditure by the Bank was
$198,596 and $185,162 for 1999 and 1998, respectively.
The Bank is involved in various litigation. In the opinion of Management and the
Bank's legal counsel, the disposition of the litigation pending will not have a
material effect on the Bank's financial statements.
In the normal course of business, the Bank is a party to financial instruments
with off-balance-sheet risk. These financial instruments include commitments to
extend credit and standby letters of credit. To varying degrees, these
instruments involve elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. The Bank's exposure to credit loss in
the event of non-performance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. At December 31, 1999, the Bank had
commitments to extend credit of approximately $45,592,000 including standby
letters of credit of approximately $1,521,000.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing commercial
properties, residential properties and properties under construction.
F-20
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #10 - Commitments and Contingencies, Continued
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
Note #11 - Stock Split
On July 21, 1999, the Board of Directors approved a five-for-four stock split of
its common stock. For purposes of calculating earnings per share, the stock
split has been applied retroactively.
Note #12 - Stock Option Plan
The Bank's incentive stock option and nonqualified plan ratified by the
stockholders in 1994 and amended in 1997 provides for issuance of up to 612,956
shares (after giving retroactive effect for a five-for-four stock split in 1999
and a 20% stock dividend in 1996) of the Bank's unissued common stock to be
granted to certain officers, key employees and directors at prices not less than
the fair market value of such shares at the dates of grant, with an option's
maximum term as ten years.
The Bank applies APB Opinion No. 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
fixed stock option plan. Had compensation costs for the plan been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, net income for 1998 would have been reduced by $77,826, net of taxes,
resulting in earnings per share of $.95 and dilutive earnings per share of $.93.
In 1998, net income would have been reduced by $34,797, net of taxes, resulting
in earnings per share of $.95 and dilutive earnings per share of $.91.
F-21
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #12 - Stock Option Plan, Continued
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1999
and 1998, respectively; risk-free rates of 6.58% and 4.63%, dividend yield of
zero percent for all years, volatility of 35% and 35%, and expected life of
seven years for all years.
A summary of the status of the Bank's fixed stock option plan as of December 31,
1999 and 1998, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------- -----------------------------------------
Number of Shares Weighted Number of Shares Weighted
----------------------------- -----------------------------
Available Average Available Average
For Exercise For Exercise
Granting Outstanding Price Granting Outstanding Price
------------- ------------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 247,070 365,886 $8.55 277,949 451,878 $ 7.01
Granted (26,875) 26,875 $8.64 (89,375) 89,375 $11.06
Exercised - (13,664) $5.68 - (116,871) $ 8.80
Cancelled 4,875 (4,875) $8.73 58,496 (58,496) $ 6.59
------------ ------------- ------------- -------------
Outstanding, end of year 225,070 374,222 $8.77 247,070 365,886 $ 8.55
============ ============= ============= =============
Options exercisable at year-end 210,839 218,786
Weighted-average fair value of
options granted during the year $ 3.12 $ 2.98
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted
Range of Number Average Average Number
Exercise Outstanding Life In Exercise Outstanding Average
Price 12/31/99 Years Price 12/31/99 Price
---------------------- ------------- ------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
$ 5.56-5.67 24,271 4.62 $ 5.63 24,271 $ 5.63
$ 7.80 36,000 6.77 $ 7.80 20,160 $ 6.77
$ 7.90-9.20 198,326 7.54 $ 8.75 147,158 $ 8.77
$ 10.80-11.20 88,750 8.39 $ 11.07 19,250 $ 11.05
$ 9.75-10.20 26,875 9.70 $ 8.64 - $ -
------------- -------------
374,222 7.63 $ 9.09 210,839 $ 8.53
============= =============
</TABLE>
F-22
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #12 - Stock Option Plan, Continued
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted
Range of Number Average Average Number
Exercise Outstanding Life In Exercise Outstanding Average
Price 12/31/98 Years Price 12/31/98 Price
---------------------- ------------- ------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
$ 5.21-5.56 18,864 3.68 $ 5.34 18,864 $ 5.34
$ 5.66 17,075 6.85 $ 5.66 17,075 $ 5.66
$ 7.80-7.90 69,757 7.99 $ 7.85 48,157 $ 7.86
$ 8.40-9.20 170,815 8.61 $ 8.90 132,565 $ 9.05
$ 10.80-11.20 89,375 9.39 $ 11.06 2,125 $ 10.86
------------- ------------- -------
365,886 8.34 $ 7.50 218,786 $ 8.22
============ =============
</TABLE>
Note #13 - Other Operating Expenses
The following is a composition of other operating expenses for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Advertising and promotion $ 285,940 $ 242,090
Insurance and assessments 123,959 118,139
Data processing 682,773 406,498
Stationery and supplies 290,847 266,282
Professional 439,670 352,989
Office 426,772 420,289
Administrative 783,485 722,370
Other real estate owned 109,013 194,898
Other 633,340 603,190
------------ -------------
$ 3,775,799 $ 3,326,745
============ =============
</TABLE>
Note #14 - Deferred Directors' Fees
The Bank offers an option to its directors whereby they may choose to defer all
or part of their fees into a market rate time certificate of deposit on their
behalf. The Bank has no additional commitment or funding requirement for this
arrangement.
F-23
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #15 - Earnings Per Share
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
Income Shares Income Shares
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Income as Reported $ 1,940,305 $ 1,856,928
Shares Outstanding at Year End 1,975,961 1,948,969
Impact of Weighting Shares
Purchased During the Year (20,287) (25,370)
---------------- ---------------- ---------------- ----------------
Used in Basic EPS 1,940,305 1,955,674 1,856,928 1,923,599
Dilutive Effect of Outstanding
Stock Options 41,592 78,808
---------------- ---------------- ---------------- ----------------
Used in Dilutive EPS $ 1,940,305 1,997,266 $ 1,856,928 2,002,407
================ ================ ================ ================
</TABLE>
Note #16 - Profit Sharing Plan
In 1990 the Bank sponsored a defined contribution section 401(K) profit sharing
plan that covers all eligible employees. In 1999, contributions to the plan were
based upon an amount equal to 50% of each participant's eligible contribution
for the plan year not to exceed 6% of the employee's compensation. Future
contributions are at the discretion of management and the board of directors.
The Bank contributed $106,918 and $111,346 to the Plan for 1999 and 1998,
respectively.
Note #17 - Other Real Estate Owned
As discussed in Note #1L, Other Real Estate Owned is carried at the lesser of
the outstanding loan balance or estimated fair value of the real estate less
selling costs. An analysis of the transactions for the years ended December 31
is as follows:
1999 1998
---------- ----------
Balance, Beginning of Year $1,068,987 $1,359,575
Additions 560,586 577,720
Sales (554,990) (590,149)
Valuation adjustment and other reductions (38,356) (278,159)
---------- ----------
Balance, End of Year $1,036,227 $1,068,987
========== ==========
F-24
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #18 - Reserve for Losses on Other Real Estate Owned
Transactions in the reserve for other real estate owned are summarized for the
years ended December 31:
1999 1998
---------- ----------
Balance, Beginning of Year $ 317,389 $ 305,797
Provision charged to other expense 38,356 278,159
Charge-offs and other reductions (152,049) (266,567)
---------- ----------
Balance, End of Year $ 203,696 $ 317,389
========== ==========
Note #19 - Regulatory Matters
A. Capital Requirements
--------------------
The Bank is subject to various regulatory capital requirements administered
by Federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. 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 (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital to average assets
(as defined). Management believes, as of December 31, 1999, that the Bank
exceeds all capital adequacy requirements to which it is subject.
F-25
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #19 - Regulatory Matters, Continued
As of October 18, 1999, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action
(there are no conditions or events since that notification that management
believes have changed the Bank's category). To be categorized as well
capitalized, the Bank must maintain minimum ratios as set forth in the table
below. The following table also sets forth the Bank's actual capital amounts
and ratios (dollar amounts in thousands):
<TABLE>
<CAPTION>
Amount of Capital Required
-------------------------------------------
To Be Adequately To Be
Actual Capital Capitalized Well Capitalized
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital to risk-weighted assets $ 18,490 12.2% $ 12,095 8.0% $ 15,118 10.0%
Tier 1 capital to risk-weighted assets 17,248 11.4% 6,047 4.0% 9,071 6.0%
Tier 1 capital to average assets 17,248 7.8% 8,793 4.0% 10,991 5.0%
As of December 31, 1998
Total capital to risk-weighted assets $ 15,921 12.2% $ 10,425 8.0% $ 13,031 10.0%
Tier 1 capital to risk-weighted assets 14,482 11.1% 5,212 4.0% 7,819 6.0%
Tier 1 capital to average assets 14,482 8.3% 6,994 4.0% 6,516 5.0%
</TABLE>
B. Dividend Restrictions
---------------------
The FDIC and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks under
their jurisdiction. Compliance with the standards set forth in such
guidelines limits the amount of dividends which the Bank may pay.
C. Reserve Requirements
--------------------
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank.
The Bank complied with the reserve requirements as of December 31, 1999 and
1998.
F-26
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #20 - Servicing Assets
A summary of the changes in servicing assets follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Balance, Beginning of Year $ 65,958 $17,946
Increase from loan sales 39,276 53,156
Amortization and other decreases charged to income (29,282) (5,144)
------------- -------------
Balance, End of Year $ 75,952 $65,958
============= =============
</TABLE>
The estimated fair value of the servicing assets aggregated $74,956 at December
31, 1999. Fair value is estimated by discounting estimated future cash flows
from the servicing assets using discount rates that approximate current market
rates over the expected lives of the loans being serviced.
For purposes of measuring impairment, the Bank has identified each servicing
asset with the underlying loan being serviced. A direct write down is recorded
where the fair value is below the carrying amount of a specific servicing asset.
The amount of loans being serviced by the Bank for the benefit of others
amounted to $27,581,462 and $16,828,844 for the years ended December 31, 1999
and December 31, 1998, respectively.
Note #21 - Salary Continuation Plan
On December 4, 1997, Business Bank of California acquired all of the assets and
liabilities of High Desert National Bank. As a result of the acquisition, the
Bank has a salary continuation plan for certain key management personnel. The
plan provides for payments for thirteen years commencing within one month upon
reaching age 69 or death. The salary continuation expense was $33,082 (net of
tax) for the year ended December 31, 1999. The Bank is committed to pay
$520,000, (on a future value basis) over the pay-out periods on the plan.
Note #22 - Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
F-27
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #22 - Fair Value of Financial Instruments, Continued
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1999 and 1998. SFAS 107 defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale.
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 13,971,280 $ 13,971,280 $ 39,888,860 $ 39,888,860
Investment securities 84,506,243 84,496,667 27,539,502 27,756,844
Loans 115,141,409 114,628,996 104,465,001 105,735,793
Accrued interest receivable 1,440,602 1,440,602 813,071 813,071
CSV of Life Insurance 799,673 799,673 762,333 762,333
Liabilities
Non-interest bearing deposits $ 74,533,528 $ 74,533,528 $ 67,614,024 $ 67,611,959
Interest bearing deposits 112,274,438 111,707,348 96,228,621 96,203,483
Accrued interest payable 387,290 387,290 408,713 408,713
Other borrowings 18,200,000 18,200,000 - -
Notional Cost to Cede Notional Cost to Cede
Amount or Assume Amount or Assume
------------- ------------- ------------- -------------
Off-balance Sheet Instruments
Commitments to extend credit
and standby letters of credit $ 45,592,000 $ 455,920 $ 35,397,000 $ 353,970
</TABLE>
The following methods and assumptions were used by the Bank in estimating fair
value disclosures:
. Cash and Cash Equivalents
-------------------------
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term nature
of the assets.
. Investment Securities
---------------------
Fair values are based upon quoted market prices, where available.
F-28
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #22 - Fair Value of Financial Instruments, Continued
. Loans
-----
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying amounts. The fair values
for other loans (for example, fixed rate commercial real estate and rental
property mortgage loans and commercial and industrial loans) are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued interest
receivable approximates its fair value.
. Cash Surrender Value of Life Insurance
--------------------------------------
The cash surrender value of life insurance is the value of the policy
receivable net of surrender charges.
. Deposits
--------
The fair values disclosed for demand deposits (for example, interest-bearing
checking accounts and passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits. The carrying amount of accrued interest payable
approximates fair value.
. Off-balance Sheet Instruments
-----------------------------
Fair values of loan commitments and financial guarantees are based upon fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
Note #23 - Subsequent Events
On January 26, 2000, the Bank invested an additional $245,000 in an
unconsolidated affiliate, Financial Data Solutions, Inc. (Footnote #7).
On January 21, 2000, all of the outstanding stock of the Bank was acquired by a
newly formed bank holding company, Business Bancorp (the "Bancorp") in a
statutory merger.
In March of 2000, Business Bancorp issued $10,000,000 in trust preferred
securities with a maturity date of March 8, 2030, bearing interest at 10 7/8%
and callable by the Bancorp in 2010.
The Bank has agreed in principle with another bank to acquire it for cash. The
transaction is subject to shareholder and regulatory approval.
F-29
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #24 - Restatement of Financial Statements
The Bank restated its 1999 and 1998 financial statements for recognition of
deferred tax assets previously reserved for as originally stated. The valuation
reserve on deferred tax assets of $350,000 was recognized into a prior period
which resulted in $350,000 of additional deferred tax assets and $350,000 of
additional retained earnings for each of the reporting periods.
F-30
<PAGE>
BUSINESS BANCORP
BALANCE SHEETS
June 30, 2000 AND DECEMBER 31, 1999
Assets
<TABLE>
<CAPTION>
(unaudited) (audited) (unaudited)
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
------------ ------------ ------------
Cash and due from banks $ 20,195,331 $ 13,971,280 $ 20,299,596
Federal funds sold - - 14,036,816
------------ ------------ ------------
Cash and Cash Equivalents 20,195,331 13,971,280 34,336,412
Investment securities
Available-for-sale 87,743,933 82,294,167 43,123,127
Held-to-maturity 1,008,724 1,012,076 5,708,590
Federal Home Loan Bank stock, at cost 1,735,000 1,200,000 -
Loans held for sale 6,755,243 1,689,783 1,927,797
Loans, net of unearned income 127,495,328 114,693,359 102,190,255
Less allowance for loan losses (1,233,908) (1,241,733) (1,353,558)
------------ ------------ ------------
Net loans 133,016,663 115,141,409 102,764,494
Bank premises and equipment 4,384,443 3,885,119 3,925,163
Accrued interest receivable 1,670,007 1,440,602 1,018,307
Deferred tax asset 610,463 703,000 671,249
Other real estate owned, net 527,772 1,036,227 991,787
Other assets 4,550,529 4,409,585 4,771,596
------------ ------------ ------------
Total Assets $255,442,865 $225,093,465 $197,310,725
============ ============ ============
Liabilities
Deposits
Demand deposits 78,426,159 74,533,528 77,452,191
NOW deposits 24,179,808 27,284,559 23,062,451
Money market and savings deposits 52,006,859 49,840,556 43,332,888
Time deposits $100,000 and over 16,564,278 15,274,884 13,362,635
Other time deposits 21,376,553 19,874,439 20,517,563
------------ ------------ ------------
Total deposits 192,553,657 186,807,966 177,727,728
Accrued interest and other liabilities 1,902,096 1,404,086 1,617,489
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures 10,000,000 - -
Borrowed funds 31,000,000 18,200,000 -
------------ ------------ ------------
235,455,753 206,412,052 179,345,217
------------ ------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common Stock 6,333,621 6,256,854 5,829,212
Retained Earnings 14,380,153 13,302,558 12,599,722
Accumulated other comprehensive income (726,662) (877,999) (463,426)
------------ ------------ ------------
Total Stockholders' Equity 19,987,112 18,681,413 17,965,508
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $255,442,865 $225,093,465 $197,310,725
============ ============ ============
</TABLE>
F-31
<PAGE>
BUSINESS BANCORP
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDING JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
(unaudited) (unaudited)
2000 1999
-------------- -------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 6,783,035 $ 5,328,518
Interest on investment securities
Taxable 2,189,956 708,332
Exempt from Federal taxes 452,118 225,706
Interest on Federal funds sold 24,427 459,461
----------- ------------
Total Interest Income 9,449,536 6,722,017
----------- ------------
Interest Expense
Interest on deposits
NOW and Money Market accounts 799,184 567,993
Savings 259,326 255,393
Time deposits over 100,000 444,380 282,508
Other time deposits 477,441 474,479
Trust preferred securities 302,083 -
Other Borrowings 713,991 -
----------- ------------
Total Interest Expense 2,996,405 1,580,373
----------- ------------
Net Interest Income 6,453,131 5,141,644
Provision for Loan Losses 80,000 105,000
----------- ------------
Net Interest Income After Provision
for Loan Losses 6,373,131 5,036,644
----------- ------------
Other Income
Service Fees 1,177,069 1,125,241
Gain on sale of SBA loans 11,967 97,703
Gain on sale of other real estate owned 173,362 6,988
(Loss) gain on sale of investments 1,592 (4,481)
----------- ------------
Total Other Income 1,363,990 1,225,451
----------- ------------
Other Expenses
Salaries and employee benefits 3,147,157 2,535,624
Occupancy, net 394,362 360,903
Furniture and equipment 398,169 377,346
Other operating expenses 2,287,055 1,702,152
----------- ------------
Total Other Expenses 6,226,743 4,976,025
----------- ------------
Income Before Income Taxes 1,510,378 1,286,070
----------- ------------
----------- ------------
Income Taxes 432,783 360,090
----------- ------------
Net Income $ 1,077,595 $ 925,980
=========== ============
Earnings Per Share
Basic $ 0.54 $ 0.47
=========== ============
Diluted $ 0.52 $ 0.45
=========== ============
</TABLE>
F-32
<PAGE>
BUSINESS BANK OF CALIFORNIA
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AND YEAR ENDED JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
Accumulated
Other
Number of Compre- Compre- Total
Shares Common hensive Retained hensive Stockholders'
Outstanding Stock Income Earnings Income Equity
----------- ---------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BUSINESS BANK OF CALIFORNIA
Balance, December 31, 1998 1,559,175 $5,726,269 $11,363,655 $ 3,002 $17,092,926
Stock options exercised 13,264 77,550 77,550
Stock issued to 401-K Plan 11,650 142,945 142,945
Five-for-four stock split 391,872
Cash in lieu of fractional shares (1,402) (1,402)
Tax effect of Directors' options exercised 310,090 310,090
Comprehensive Income
Net income for the period $1,940,305 1,940,305 1,940,305
Unrealized security holding losses
(net of 539,908 tax) (943,355) (943,355) (943,355)
Reclassification adjustment for realized losses
(net of 35,687 tax benefit) 62,354 62,354 62,354
----------
Total comprehensive income $1,059,304
---------- ---------- ========== ----------- --------- -----------
Balance, December 31, 1999 1,975,961 6,256,854 13,302,558 (877,999) 18,681,413
Stock issued to 401-K Plan 72 610 610
Comprehensive Income
Net income for the period 34,053 34,053 34,053
Unrealized security holding gains
(net of 173,823 tax) (369,375) (369,375) (369,375)
----------
Total comprehensive income $ (335,322)
---------- ---------- ========== ----------- --------- -----------
Balance, January 21, 2000 1,976,033 6,257,464 13,336,611 (1,247,374) 18,346,701
REORGANIZATION TO BUSINESS BANCORP
Balance, January 21, 2000 1,976,033 6,257,464 13,336,611 (1,247,374) 18,346,701
Stock options exercised 9,646 76,157 76,157
Comprehensive Income
Net income for the period $1,043,542 1,043,542 1,043,542
Unrealized security holding gains
(net of 192,663 tax) 520,712 520,712 520,712
----------
Total comprehensive income $1,564,254
---------- ---------- ========== ----------- --------- -----------
Balance, June 30, 2000 1,985,679 $6,333,621 $14,380,153 $(726,662) $19,987,112
========== ========== =========== ========= ===========
</TABLE>
F-33
<PAGE>
BUSINESS BANCORP
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 1,077,595 $ 925,980
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization of premises and equipment 330,796 305,048
Amortization of intangibles 71,887 83,038
Provision for loan losses 80,000 105,000
Writedowns on other real estate owned 20,000 15,000
Net loss/(gain) on sale of securities (1,592) 4,464
Net loss on sale of oreo (173,362) 20,094
Net loss/(gain) on sale of assets (17,900) (13,315)
Increase in accrued interest receivable (229,405) (205,236)
(Increase)/decrease in deferred assets 92,537 (294,249)
Net amortization/accretion of premiums/discounts
on investment securities 400,996 195,681
(Increase)/decrease in other assets (212,832) (543,217)
Increase/(decrease) in other liabilities 893,220 292,954
------------ ------------
Net Cash Provided By Operating Activities 2,331,940 891,242
------------ ------------
Cash Flows From Investing Activities
Proceeds from maturities of available-for-sale securities 3,301,800
Proceeds from maturities of held-to-maturity securities 340,000
Purchase of investment securities available-for-sale (12,293,758) (31,115,787)
Purchase of investment securities held-to-maturity securities (508,359)
Proceeds from sales of securities 3,179,605 503,125
Principal reduction of mortgage-backed securities 3,024,462 5,325,861
Net increase in FHLB stock (535,000)
Net (increase)/decrease in loans to customers (18,058,089) 1,451,463
Recoveries of loans previously written off 102,835 32,652
Capital expenditures (831,858) (288,175)
Proceeds from sale of equipment 19,639 62,116
Proceeds from sale of other real estate owned 661,817 153,498
------------ ------------
Net Cash Used In Investing Activities (24,730,347) (20,741,806)
------------ ------------
Cash Flows From Financing Activities
Net increase in demand deposits, NOW accounts,
savings accounts, and money market deposits 2,954,183 12,893,119
Net increase in certificates of deposit 2,791,508 991,964
Net increase in FHLB borrowing 12,800,000
Issuance of company obligated mandatorily
redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures 10,000,000
Stock options exercised, net of tax effect 76,767 413,033
------------ ------------
Net Cash Provided By Financing Activities 28,622,458 14,298,116
------------ ------------
Net (Decrease)/Increase in Cash and Cash Equivalents 6,224,051 (5,552,448)
Cash and Cash Equivalents, Beginning of Year 13,971,280 39,888,860
------------ ------------
Cash and Cash Equivalents, End of Year $ 20,195,331 $ 34,336,412
============ ============
Supplemental Disclosure of Cash Flows Information
Cash paid for interest $ 2,955,276 $ 1,634,877
============ ============
Cash paid for taxes $ 380,196 $ 329,932
============ ============
Non-Cash Investing Activities
Net change in accumulated other comprehensive income $ 151,337 $ (466,428)
============ ============
Transfer from loans to OREO - $ 111,392
============ ============
Origination of loans to facilitate OREO - $ 76,800
============ ============
</TABLE>
F-34
<PAGE>
BUSINESS BANCORP
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 2000
Note #1 - Investment in Affiliate
---------------------------------
On January 26, 2000, the Bank invested an additional $245,000 in an
unconsolidated affiliate, Financial Data Solutions, Inc.
Note #2 - Issuance of Securities
--------------------------------
In March of 2000, the Company issued $10,000,000 in trust preferred securities
with a maturity date of March 8, 2030, bearing interest at 10 7/8% and callable
by the Company in 2010. The Company anticipates contributing to the Bank
approximately $9 million of the approximately $9.7 million in net proceeds which
it received from the sale of the Subordinated Debt Securities in order to fund
the acquisition of Valley Merchants Bank ("VMB").
Note #3 - Acquisition Agreement
-------------------------------
On April 4, 2000, the Company and Valley Merchants Bank ("VMB"), entered into an
Agreement and Plan of Merger, pursuant to which VMB will be merged with and into
the Bank. The transaction is subject to receipt of shareholder and regulatory
approval.
Note #4 -- Subsequent Events
----------------------------
On August 31, 2000 the merger of the Bank and Valley Merchants Bank was
consummated. At the effective time of merger each share of common stock of VMB
was converted into the right to receive $22.69 per share in cash. The total
consideration paid for the acquisition of VMB was approximately $12.2 million.
An additional contribution of $147,000 was made by the Bank on August 17, 2000
to Financial Data Solutions, Inc.
F-35
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
Valley Merchants Bank
Hemet, California
We have audited the accompanying balance sheets of Valley Merchants Bank as of
December 31, 1999 and 1998, and the related statements of income, changes in
stockholders' equity, and cash flows for the years then ended. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Merchants Bank as of
December 31, 1999 and 1998, and the results of its operations, changes in its
stockholders' equity and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
January 21, 2000
F-36
<PAGE>
VALLEY MERCHANTS BANK
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Assets
1999 1998
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 2,153,010 $ 3,750,410
Federal funds sold 2,815,000 6,000,000
----------------- -----------------
Total Cash and Cash Equivalents 4,968,010 9,750,410
Interest-bearing deposits in other financial institutions 5,944,000 5,844,000
Investment securities Held-to-maturity (Notes #1E and #2) 5,646,244 5,345,253
Federal Reserve Bank stock and other investments at cost 215,562 131,242
Loans, net of unearned income (Notes #1F and #3) 38,374,042 26,083,149
Less reserve for possible loan losses (Notes #1G and #4) (264,025) (239,519)
----------------- -----------------
38,110,017 25,843,630
Bank premises and equipment (Notes #1H and #7) 1,477,719 1,508,518
Cash surrender value of life insurance (Note #11) 585,743 560,546
Accrued interest 344,869 162,922
Other assets 115,086 72,241
----------------- -----------------
Total Assets $ 57,407,250 $ 49,218,762
================= =================
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand deposits 28,414,859 25,550,289
Money market deposits 3,635,018 3,551,414
Savings deposits 7,416,558 6,364,345
Time deposits over 100,000 (Note #8) 3,695,301 2,108,519
Other time deposits (Note #8) 7,228,342 5,989,916
----------------- -----------------
50,390,078 43,564,483
Accrued interest and other liabilities 807,647 260,592
----------------- -----------------
Total Liabilities 51,197,725 43,825,075
----------------- -----------------
Commitments and Contingencies (Note #9) - -
Stockholders' Equity
Contributed capital
Common stock - 4,000,000 shares authorized; 5 par value;
487,359 and 455,546 shares issued and outstanding at
December 31, 1999 and 1998, respectively 2,436,795 2,277,730
Additional paid-in capital 3,094,499 2,657,056
Retained earnings 678,231 458,901
---------------- -----------------
Total Stockholders' Equity 6,209,525 5,393,687
---------------- -----------------
Total Liabilities and Stockholders' Equity $ 57,407,250 $ 49,218,762
================ =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
VALLEY MERCHANTS BANK
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Interest Income
Interest and fees on loans (Note #1F) $ 3,139,839 $ 2,433,458
Investments (Note #1E)
Corporate bonds, municipals, Federal Reserve stock 83,832 8,928
Securities 235,370 162,956
Deposits in other financial institutions 364,645 337,596
Federal funds sold 175,247 205,089
----------- -----------
3,998,933 3,148,027
----------- -----------
Interest Expense
Savings deposits 321,517 303,829
Time deposits over 100,000 128,647 79,605
Other time deposits 290,554 245,641
----------- -----------
740,718 629,075
----------- -----------
Net Interest Income 3,258,215 2,518,952
Provision for Loan Losses - (Notes #1G and #4) (43,487) (62,788)
----------- -----------
Net Interest Income After Provision
for Loan Losses 3,214,728 2,456,164
----------- -----------
Other Income
Fees and service charges 427,932 415,039
Premiums and loan fees on SBA and other loans sold 154,215 17,372
----------- -----------
582,147 432,411
----------- -----------
Other Expenses
Salaries and benefits 1,421,942 1,216,119
Occupancy 105,121 105,918
Promotional 86,752 61,578
Furniture, equipment and office 152,946 136,942
Professional and data processing 181,663 191,744
Office supplies and postage 142,331 116,321
Other operating costs 327,945 289,652
Loss on sale of OREO 8,221
----------- -----------
2,418,700 2,126,495
----------- -----------
Income Before Income Taxes 1,378,175 762,080
Income Taxes (Note #13) 560,914 260,801
----------- -----------
Net Income $ 817,261 $ 501,279
=========== ===========
Earnings Per Share of Common Stock (Note #12)
Basic $ 1.68 $ 1.13
=========== ===========
Diluted $ 1.59 $ 1.03
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
VALLEY MERCHANTS BANK
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Number of Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
----------- ---------- ---------- ---------
<S> <C> <C> <C>
Balance, January 1, 1998 371,979 $ 1,859,895 1,909,705 $ 389,589
Cash paid to stockholders
in lieu of fractional shares
on stock dividend (1,306)
Stock dividends paid 25,712 128,560 302,116 (430,661)
Stock options exercised 57,855 289,275 445,235
Net income 501,279
-------- ---------- ---------- ----------
Balance, December 31, 1998 455,546 2,277,730 2,657,056 458,901
Cash paid to stockholders
in lieu of fractional shares
on stock dividend (1,423)
Stock dividends paid 31,813 159,065 437,443 (596,508)
Net income 817,261
-------- ----------- ----------- ----------
Balance, December 31, 1999 487,359 $ 2,436,795 $ 3,094,499 $ 678,231
======== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
VALLEY MERCHANTS BANK
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income 817,261 501,279
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 117,563 112,454
Provision for loan losses 43,487 62,788
Amortization of securities premium
and accretion of discounts 39,795 (1,535)
(Increase)/decrease in accrued interest receivable (181,947) 8,661
(Increase)/decrease in other assets (42,845) 26,389
Loss on sale of OREO 8,221
Increase/(decrease) in accrued interest and other liabilities 547,055 (154,206)
------------ ------------
Net Cash Provided by Operating Activities 1,340,369 564,051
------------ ------------
Cash Flows From Investing Activities
Net increase in interest-bearing deposits at
other financial institutions (100,000) (102,000)
Purchase of other investments at cost (85,788)
Proceeds from principal reductions of other investments
at cost 1,468 1,858
Purchase of held-to-maturity securities (4,161,528) (6,340,389)
Proceeds from maturities of held-to-maturity securities 3,820,742 4,020,214
Recoveries on loans previously charged off 900 3,829
Net increase in loans to customers (12,310,774) (5,033,550)
Proceeds from sale of OREO 372,518
Capital expenditures (86,764) (209,461)
Increase in cash surrender value of life insurance (25,197) (21,855)
------------ ------------
Net Cash Used in Investing Activities (12,946,941) (7,308,836)
------------ ------------
Cash Flows From Financing Activities
Net increase in dem and deposits, savings
and NOW accounts 6,825,595 10,776,553
Cash paid in lieu of fractional shares (1,423) (1,306)
Stock options exercised 734,510
------------ ------------
Net Cash Provided by Financing Activities 6,824,172 11,509,757
------------ ------------
Net (Decrease)/Increase in Cash and Cash Equivalents (4,782,400) 4,764,972
Cash and Cash Equivalents, Beginning of period 9,750,410 4,985,438
------------ ------------
Cash and Cash Equivalents, End of period 4,968,010 9,750,410
============ ============
Supplemental Cash Flow Information
Interest paid 692,525 620,539
============ ============
Income taxes paid 133,800 238,850
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #1 - Summary of Significant Accounting Policies
The accounting policies of Valley Merchants Bank conform to generally accepted
accounting principles and to general practices within the banking industry. A
summary of the Bank's significant accounting and reporting policies consistently
applied in the preparation of the accompanying financial statements follows.
A. Nature of Operations
--------------------
The Bank has been organized as a single operating segment and operates one
branch in Hemet, California, one loan production office in Anaheim,
California and another loan production office in Corona, California. The
Bank's primary source of revenue is interest income from providing loans to
customers, who are predominately small and middle-market business and
individuals.
B. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Estimates that are particularly susceptible to change relate to the
determination of the allowance for losses on loans and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans.
In connection with the determination of the allowances for losses on loans
and foreclosed real estate, management obtains independent appraisals for
significant properties.
C. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold. Generally, federal funds are
sold for one day periods.
D. Cash and Due From Banks
-----------------------
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank.
The Bank complied with the reserve requirements as of December 31, 1999.
The Bank maintains amounts due from banks that exceed federally insured
limits. The Bank has not experienced any losses in such accounts.
F-41
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #1 - Summary of Significant Accounting Policies, Continued
E. Investment Securities
---------------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115"Accounting for Certain Investments in Debt and Equity Securities," which
addressed the accounting for investments in equity securities that have
readily determinable fair values and for investments in all debt securities,
securities are classified in three categories and accounted for as follows:
debt and equity securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are
measured at amortized cost; debt and equity securities bought and held
principally for the purpose of selling in the near term are classified as
trading securities and are measured at fair value with unrealized gains and
losses included earnings; debt and equity securities not classified as
either held-to- maturity or trading securities are deemed as available-for-
sale and are measured at fair value, with unrealized gains and losses, net
of applicable taxes, reported in separate component of stockholders' equity.
Gain or losses on sales of investments securities are determined on the
specific method. Premiums and discounts are amortized or accreted using the
interest method over the expected lives of the related securities.
F. Loans and Interest on Loans
---------------------------
SFAS No. 114, (as amended by SFAS No. 118),"Accounting by Creditors for
Impairment of a Loan," generally requires those loans identified as
"impaired" to be measured on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor will not be
able to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement.
Loans are stated at unpaid principal balances, less the reserve for possible
loan losses and net deferred loan fees and unearned discounts. The Bank
recognizes loan origination fees to the extent they represent reimbursement
for initial direct costs, as income at the time of loan boarding. The excess
of fees over costs, if any, is deferred and credited to income over the term
of the loan.
In accordance with SFAS No. 114, (as amended by SFAS No. 118),"Accounting by
Creditors for Impairment of a Loan," those loans identified as "impaired"
are measured on the present value of expected future cash flows, discounted
at the loan's effective interest rate or the fair value of the collateral if
the oan is collateral dependent. A loan is impaired when it is probable the
creditors will not be able to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
All loans on nonaccural are measured for impairment. The Bank applies the
measurement provisions of SFAS No. 114 to all loans in its portfolio. All
loans are generally charged off at such time the loan is classified loss.
F-42
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #1 - Summary of Significant Accounting Policies, Continued
G. Provision and Reserve for Possible Loan Losses
----------------------------------------------
The reserve for possible loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the reserve is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Reserves for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The reserve is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
H. Premises and Equipment
----------------------
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives, which ranges from
three to ten years for furniture and fixtures and forty years for buildings.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the improvements or the remaining lease term,
whichever is shorter. Expenditures for betterments or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred. Depreciation expense was$117,563 and$112,454 for the
years ended December 31, 1999 and 1998, respectively.
I. Income Taxes
------------
Provisions for income taxes are based on amounts reported in the statements
of income (after exclusion of non-taxable income such as interest on state
and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed on the liability method as
prescribed in SFAS No. 109, "Accounting for Income Taxes".
J. Other Comprehensive Income
--------------------------
Beginning in 1998, the Bank adopted SFAS No. 130,"Reporting Other
Comprehensive Income," which requires the disclosure of comprehensive income
and its components. As of December 31, 1999 and December 31, 1998 the Bank
had no accumulated other comprehensive income.
F-43
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #1 - Summary of Significant Accounting Policies, Continued
K. Loan Sales and Servicing
------------------------
Gains and losses from the sale of participating interests in loans
guaranteed by the Small Business Administration (SBA) are recognized based
on the premium received or discount paid and the cost basis of the portion
of the loan sold. The cost basis of the portion of the loan sold was arrived
at by allocating the total cost of each loan between the guaranteed portion
of the loan sold and the unguaranteed portion of the loan retained, based on
their relative fair values. The book value allocated to the unguaranteed
portion of the loan, if less than the principal amount, is recorded as a
discount on the principal amount retained. The discount is accreted to
income over the remaining life of the loan. The Bank retains the servicing
on the portion of the loans sold and recognizes income on the servicing fees
that are received.
L. Other Real Estate Owned
-----------------------
Other real estate owned (OREO) represents real estate obtained through
foreclosure. OREO is recorded at the lower of the Bank's cost or the asset's
fair value less costs to sell. Any write-downs based on the asset's fair
value at the date of acquisition are charged to the allowance for loan
losses. After foreclosure, these assets are carried at the lower of their
new cost basis or fair value less costs to sell. Costs incurred in
maintaining OREO and subsequent write-downs to reflect declines in the fair
value of the property are charged to current operations. The Bank had no
OREO at December 31, 1999 and 1998.
M. Earnings Per Share (EPS)
------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
N. New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133,"Accounting for Derivative Instruments and Hedging Activities". This
Statement established accounting and reporting standards for derivative
instruments and for hedging activities. This new standard was originally
effective for 2000. In June 1999, the FASB issued SFAS No. 137,"Accounting
for Derivatives Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". This Statement established the
effective date of SFAS 133 for 2001 and is not expected to have a material
impact on the Bank's financial statements.
O. Reclassifications
-----------------
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
F-44
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #2 - Investment Securities
At December 31, 1999 and 1998, the investment securities portfolio was comprised
of securities classified as held-to-maturity resulting in investment securities
being carried at cost, adjusted for amortization of premiums and accretions of
discounts.
The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1999, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of U.S. government
agencies and corporations $ 3,922,307 834 (74,531) 3,848,610
Obligations of state and
political subdivisions 101,236 (4,658) 96,578
Corporate Bonds 1,622,701 (47,861) 1,574,840
----------- --------- ---------- -----------
$ 5,646,244 $ 834 $ (127,050) $ 5,520,028
=========== ========= ========== ===========
</TABLE>
The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1998, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of U.S. government
agencies and corporations $ 5,236,779 $ 13,877 $ (10,224) $ 5,240,432
Corporate Bonds 108,474 1,503 109,977
------------- --------- --------- -----------
$ 5,345,253 $ 15,380 $ (10,224) $ 5,350,409
============= ========= ========= ===========
</TABLE>
F-45
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #2 - Investment Securities, Continued
The amortized cost and fair values of investment securities available-for-sale
and held-to-maturity at December 31, 1999, by expected maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities
Held-to-Maturity
-------------------------
Amortized
Cost Fair Value
---------- -----------
Due within one year $ 307,961 $ 307,631
Due after one year through five years 4,963,291 4,843,925
Due after ten years 374,992 368,472
---------- -----------
Total Securities $5,646,244 $5,520,028
========== ===========
Proceeds from maturities of investment securities held-to-maturity during 1999
and 1998 were $3,820,742 and$4,020,214, respectively. There were no gains or
losses recognized for 1999 and 1998.
Securities with a carrying value of$1,098,405 and$549,282 and a fair value
of$1,075,210 and $551,109 at December 31, 1999 and 1998, respectively, were
pledged to secure public monies as required by law.
Note #3 - Loans
The composition of the Bank's loan portfolio at December 31, 1999, was as
follows:
1999 1998
----------- -----------
Commercial and industrial $ 4,713,288 $ 3,344,800
Real estate - construction 4,287,780 3,239,456
Real estate - mortgage
Commercial 22,927,471 14,018,268
Residential 5,209,210 4,037,730
Loan to individuals for household, family
and other personal expenditures 1,441,255 1,537,992
----------- -----------
38,579,004 26,178,246
Unearned income on loans (204,962) (95,097)
----------- -----------
Loans, Net of Unearned Income $38,374,042 $26,083,149
=========== ===========
F-46
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #4 - Provision and Reserve for Possible Loan Losses
Transactions in the reserve for possible loan losses are summarized as follows:
1999 1998
--------- ---------
Balance, Beginning of Year $ 239,519 $ 195,099
Provision charged to operating expense 43,487 62,788
Loans charged off (19,881) (22,197)
Recoveries on previously charged off loans 900 3,829
--------- ---------
Balance, End of Year $ 264,025 $ 239,519
========= =========
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and the average recorded investment as of December
31:
1999 1998
--------- ---------
Recorded investment in impaired loans $ 47,000 $ 396,000
Related allowance for loan losses 5,000 60,000
Average recorded investment in impaired loans 196,000 454,000
Cash receipts applied to reduce principal balance 7,582 0
Interest income that would have been recognized on impaired loans if they had
performed in accordance with the terms of the loan was approximately$7,000
and$45,000 for 1999 and 1998, respectively. There was no interest income
recognized during the period in which the underlying loans were impaired for
1999 or 1998. All impaired loans at December 31, 1999 and 1998 have related
reserves for possible loan losses.
Note #5 - Profit Sharing Plan
In 1995, the Bank implemented a contributory profit sharing plan ("the Plan")
covering all full-time employees who qualify as to age and length of service
according to the Plan. It is the Bank's policy to make contributions to the Plan
as provided annually by the Board of Directors. The total contributions to the
Plan were$17,199 and$18,308 in 1999 and 1998, respectively.
F-47
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #6 - Related Party Transactions
In the ordinary course of business, the Bank has granted loans to certain
directors and executive officers. All such loans and commitments to lend were
made under terms which are consistent with the Bank's normal lending policies.
The following is an analysis of the activity with respect to the approximate
aggregate amount of loans to related parties:
1999 1998
----------- ----------
Balance, Beginning of Year $ 1,554,650 $ 680,221
Loans granted 93,764 949,374
Repayments (140,890) (74,945)
----------- ----------
Balance, End of Year $ 1,507,524 $1,554,650
=========== ==========
Excluded from the balance outstanding at December 31, 1999 and 1998, are
undisbursed commitments to lend of 84,314 and 30,171, respectively.
Note #7 - Bank Premises and Equipment
Major classifications of fixed assets are summarized as follows:
1999 1998
----------- -----------
Building and land $ 1,164,411 $ 1,164,411
Furniture, fixtures and equipment 816,714 744,108
Leasehold improvements 328,799 328,799
Construction in progress 14,158
----------- -----------
2,324,082 2,237,318
Less: Accumulated depreciation and amortization (846,363) (728,800)
----------- -----------
Net Book Value of Fixed Assets $ 1,477,719 $ 1,508,518
=========== ===========
Note #8 - Deposits
At December 31, 1999, the scheduled maturities of time deposits are as follows:
Due in one year $ 10,866,748
Due in one to five years 56,895
------------
$ 10,923,643
============
F-48
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #9 - Commitments and Contingent Liabilities
In the normal course of business, the Bank is a party to financial instruments
with off-balance-sheet risk. These financial instruments include commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial position. The Bank's exposure to credit loss in the event of non-
performance by the other party to the financial instruments for commitments to
extend credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments as it does for on-
balance-sheet instruments. At December 31, 1999 and 1998, the Bank had
commitments to extend credit of approximately $4,998,000 and $6,770,000 and
obligations under standby letters of credit of approximately $25,000 and
$119,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation. The type of collateral may include accounts receivable,
inventory, plant and equipment, commercial properties, residential properties
and properties under construction. The Bank does not anticipate any losses as a
result of these commitments.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Bank was not involved in any litigation as December 31, 1999 and 1998.
Note #10 - Stock Option Plan
At December 31, 1999, the Bank has a stock option plan, which is described
below. The Bank applies Accounting Principals Board ("APB") Opinion No. 25 and
related interpretations in accounting for its plan. Accordingly, no compensation
cost has been recognized for its stock option plan. There were no options
granted during 1999 or 1998.
In 1990, the stockholders of the Bank approved a stock option plan. Under the
plan, options for 138,000 shares of the Bank's unissued common stock may be
granted to officers, directors and employees at prices not less than the fair
market value of such shares at dates of grantings. The options expire at such
date as the Board of Directors determines, but in no event later than ten years
from date of grant. The plan is comprised of incentive stock options (33,126
shares outstanding) and non-qualified stock options (18,746 shares outstanding)
after giving retroactive effect for the 7% and 6% stock dividends in 1999 and
1998, respectively.
F-49
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #10 - Stock Option Plan, Continued
Stock options for each of the two years ended December 31, 1999, are as follows,
after giving retroactive effect for the 7% and 6% stock dividend in 1999 and
1998, respectively.
<TABLE>
<CAPTION>
1999 1998
-------------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 51,872 $ 8.31 117,486 $ 8.31
Exercised (65,614) (8.31)
---------- --------- --------- --------
Outstanding, end of year 51,872 $ 8.31 51,872 $ 8.31
========== ========= ========= ========
Options exercisable at year-end 51,872 51,872
Available for granting 30,164 30,164
Weighted-average remaining life
of options granted 0.5 Years 1.5 Years
</TABLE>
Note #11 - Salary Continuation Plan
The Bank maintains a salary continuation plan agreement with three of its
officers, as authorized by the Board of Directors. This agreement provides for
annual cash payments to each participant for a period not to exceed 30 years,
beginning at the normal retirement date (age 65). In the event of death prior to
normal retirement age, annual cash payments would be made to the beneficiaries
for a determined number of years. The present value of the Bank's liability
under this Agreement was $273,993 and $216,341 at December 31, 1999 and 1998,
respectively, and is included in other liabilities in the Banks' financial
statements. The Bank maintains life insurance policies, which are intended to
fund all costs of the plan. The cash surrender values of these life insurance
policies totaled $585,743 and $560,546 at December 31, 1999 and 1998,
respectively.
F-50
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #12 - Earnings Per Share (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ----------------------------
Income Shares Income Shares
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income as used in Basic EPS $ 817,261 $ 501,279
Shares outstanding at year end 487,359 487,359
Impact of weighting shares
purchased during the year (45,043)
------------ ------------- ------------ ------------
Used in Basic EPS 817,261 487,359 501,279 442,316
Dilutive effect of outstanding
stock options 26,979 43,791
------------ ------------- ------------ ------------
Used in Dilutive EPS $ 817,261 514,338 $ 501,279 486,107
============ ============= ============ ============
</TABLE>
Note #13 - Income Taxes
The provision for income taxes is comprised of the following current and
deferred amounts:
1999 1998
--------- ---------
Federal Income Tax
Current $ 396,894 $ 133,089
Deferred 16,276 47,322
--------- ---------
413,170 180,411
--------- ---------
State Franchise Tax
Current 126,623 51,250
Deferred 21,121 29,140
--------- ---------
147,744 80,390
--------- ---------
Total $ 560,914 $ 260,801
========= =========
F-51
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #13 - Income Taxes, Continued
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the
potential deferred tax asset at December 31, relate to the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Allowance for credit losses due to tax limitations $ 66,422 $ 65,804
Other assets/liabilities 2,163 15,802
--------- ---------
68,585 81,606
--------- ---------
Deferred tax liabilities:
Premises and Equipment Due to Depreciation Difference (10,341) (8,041)
Other assets/liabilities (27,390) (5,314)
--------- ---------
(37,731) (13,355)
--------- ---------
Net deferred tax asset $ 30,854 $ 68,251
========= =========
</TABLE>
As a result of the following items, the total tax expense for 1999 and 1998 was
different than the amount computed by applying the statutory US Federal income
tax rate to income before taxes:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Federal rate $468,580 34.0 $251,361 34.0
Changes due to State Franchise tax,
net of Federal tax benefit 99,229 7.2 52,892 7.2
Other (6,895) (0.5) (43,452) (5.9)
-------- --------- -------- ---------
$560,914 40.7 $260,801 35.3
======== ========= ======== =========
</TABLE>
F-52
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #14 - Regulatory Matters
Valley Merchants Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of the Comptroller of
the Currency (OCC). Failure to meet the minimum regulatory capital requirements
can initiate certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the
Bank's financial statements. Under the regulatory capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines involving 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
under the prompt corrective action guidelines are also subject to qualitative
judgements 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 risk-based
capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to
adjusted total assets. Management believes, as of December 31, 1999, that the
Bank meets all the capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will have
to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as disclosed in the table below. There are no conditions or events since
the most recent notification that management believes have changed the Bank's
prompt corrective action category.
<TABLE>
<CAPTION>
To Be 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, 1999
Total Capital
(to Risk-Weighted Assets) 6,473,549 14.37% 3,602,709 8.0% 4,503,386 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 6,209,524 13.79% 1,801,342 4.0% 2,702,013 6.0%
Tier 1 Capital
(to Average Assets) 6,209,524 10.46% 2,374,723 4.0% 2,968,403 5.0%
As of December 31, 1998
Total Capital
(to Risk-Weighted Assets) 5,444,206 16.78% 2,595,920 8.0% 3,244,900 10.0%
Tier 1 Capital
(to Risk-W eighted Assets) 5,204,687 16.04% 1,297,960 4.0% 1,946,940 6.0%
Tier 1 Capital
(to Average Assets) 5,204,687 10.92% 1,905,960 4.0% 2,382,450 5.0%
</TABLE>
F-53
<PAGE>
VALLEY MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Note #15 - Common Stock
The Bank declared a 6% stock dividend for holders of record on November 1, 1998.
Cash was paid in lieu of fractional shares at the rate of $16.75 per share and
amounted to $1,306.
The Bank declared a 7% stock dividend for holders of record on October 1, 1999.
Cash was paid in lieu of fractional shares at the rate of $23.75 per share and
amounted to $1,423.
Average shares outstanding and all per share amounts included in the financial
statements are based on the increased number of shares giving retroactive effect
to the stock dividend.
F-54
<PAGE>
VALLEY MERCHANTS BANK
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
Assets
<TABLE>
<CAPTION>
(unaudited) (audited) (unaudited) (audited)
June 30, December 31, June 30, December 31,
2000 1999 1999 1998
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 9,061,643 $ 8,097,010 12,456,070 3,750,410
Federal funds sold 2,910,000 2,815,000 2,000,000 6,000,000
----------- ----------- ------------ -------------
Cash and Cash Equivalents 11,971,643 10,912,010 14,456,070 9,750,410
Interest bearing deposits 5,844,000
Investment securities
Available-for-sale 231,865 215,562 216,493 131,242
Held-to-maturity 6,751,294 5,646,244 5,705,480 5,345,253
Loans, net of unearned income 37,447,303 38,374,042 31,393,924 26,083,149
Less allowance for loan losses (264,825) (264,025) (272,977) (239,519)
----------- ----------- ------------ -------------
Net loans 37,182,478 38,110,017 31,120,947 25,843,630
Bank premises and equipment 1,419,959 1,477,719 1,514,080 1,508,518
Accrued interest receivable 338,073 344,869 268,940 162,922
Other real estate owned, net - - -
cash surrender of life insurance 598,724 585,743 573,053 560,546
Other assets 111,904 115,086 104,725 72,241
------------ ----------- ------------ -------------
Total Assets $ 58,605,940 $57,407,250 $ 53,959,788 $ 49,218,762
============ =========== ============ =============
Liabilities
Deposits
Demand deposits
Money market and savings deposits 29,011,539 28,414,859 27,257,009 2,550,289
Time deposits $100,000 and over 11,374,147 11,051,576 10,322,983 9,915,759
Other time deposits 3,078,847 3,695,301 3,059,679 2,108,519
7,347,992 7,228,342 6,882,342 5,989,916
------------ ----------- ------------ -------------
Total deposits 50,812,525 50,390,078 47,522,013 43,564,483
Accrued interest and other liabilities 673,755 807,647 654,262 260,592
Borrowed funds - - -
------------ ----------- ------------ -------------
51,486,280 51,197,725 48,176,275 43,825,075
Commitments and Contingencies ------------ ----------- ------------ -------------
Stockholders' Equity
Common Stock 2,696,155 2,436,795 2,277,725 2,277,730
Additional Paid in Capital 3,266,195 3,094,499 2,657,056 2,657,056
Retained Earnings 1,157,310 678,231 848,732 458,901
------------ -------------
Total Stockholders' Equity 7,119,660 6,209,525 5,783,513 5,393,687
------------ ----------- ------------ -------------
Total Liabilities and Stockholders' Equity $ 58,605,940 $57,407,250 $ 53,959,788 $ 49,218,762
============ =========== ============ =============
</TABLE>
F-55
<PAGE>
VALLEY MERCHANTS BANK
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
(unaudited) (unaudited)
June 30, June 30,
2000 1999
----------------- ------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 1,922,134 $ 1,455,686
Interest on investment securities
Taxable 361,549 324,686
Exempt from Federal taxes 1,855 705
Interest on Federal funds sold 111,717 80,277
----------------- ------------------
Total Interest Income 2,397,255 1,861,354
----------------- ------------------
Interest Expense
Interest on deposits
DDA's 194,380 153,120
Time deposits over $100,000 84,722 57,455
Other time deposits 170,141 135,428
Other Borrowings - -
----------------- ------------------
Total Interest Expense 449,243 346,003
----------------- ------------------
Net Interest Income 1,948,012 1,515,351
Provision for Loan Losses - 35,487
----------------- ------------------
Net Interest Income After Provision
for Loan Losses 1,948,012 1,479,864
----------------- ------------------
Other Income
Service Fees 213,146 324,443
Gain/Loss on sale of OREO's - -
----------------- ------------------
Total Other Income 213,146 324,443
----------------- ------------------
Other Expenses
Salaries and employee benefits 842,796 681,210
Occupancy, net 55,034 48,962
Furniture and equipment 68,402 70,716
Other operating expenses 388,123 356,304
----------------- ------------------
Total Other Expenses 1,354,355 1,157,192
----------------- ------------------
Income Before Income Taxes 806,803 647,115
----------------- ------------------
----------------- ------------------
Income Taxes 327,724 265,607
----------------- ------------------
Net Income $ 479,079 $ 381,508
================= ==================
Earnings Per Share
Basic $ 0.89 $ 0.78
================= ==================
Diluted $ 0.89 $ 0.74
================= ==================
</TABLE>
F-56
<PAGE>
VALLEY MERCHANTS BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE QUARTER AND YEAR ENDED JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
Number of Additional Total
Shares Common Paid In Retained Stockholders'
Outstanding Stock Capital Earnings Equity
----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
VALLEY MERCHANTS BANK
Balance, December 31, 1998 455,546 $ 2,277,730 $ 2,657,056 $ 458,901 $ 5,393,687
Cash in lieu of fractional shares (1,423) (1,423)
Stock dividends paid 31,813 159,065 437,443 (596,508) 0
Net income for the period 817,261 817,261
----------- ----------- ----------- ---------- -------------
Balance, December 31, 1999 487,359 2,436,795 3,094,499 678,231 6,209,525
Exercise of Stock Options 51,872 259,360 171,696 431,056
Net income for the period 479,079 479,079
----------- ----------- ----------- ---------- -------------
Balance, June 30, 2000 539,231 $ 2,696,155 $ 3,266,195 $1,157,310 $ 7,119,660
=========== =========== =========== ========== =============
</TABLE>
F-57
<PAGE>
VALLEY MERCHANTS BANK
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 479,079 $ 381,508
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 58,925 55,881
Provision for loan losses 35,487
Amortization of securities premium
and accretion of discounts 15,716 14,944
(Increase)/decrease in accrued interest receivable 6,796 (106,018)
(Increase)/decrease in other assets 3,182 (32,484)
Increase/(decrease) in accrued interest and other liabilities (133,892) 401,988
-------------- --------------
Net Cash Provided by Operating Activities 429,806 751,306
-------------- --------------
Cash Flows From Investing Activities
Net decrease in interest-bearing deposits at
other financial institutions 5,844,000
Purchase of other investments at cost (17,968) (85,502)
Proceeds from principal reductions of other investments
at cost 1,665 251
Purchase of held-to-maturity securities (1,200,000) (3,110,025)
Proceeds from maturities of held-to-maturity securities 79,234 2,734,854
Recoveries on loans previously charged off 800 1,029
Net (increase)/decrease in loans to customers 926,739 (5,313,833)
Capital expenditures (1,165) (61,443)
Increase in cash surrender value of life insurance (12,981) (12,507)
-------------- --------------
Net Cash Used in Investing Activities (223,676) (3,176)
-------------- --------------
Cash Flows From Financing Activities
Net increase in demand deposits, savings
and NOW accounts 302,797 2,113,944
Net increase in time deposits 119,650 1,843,586
Exercise of stock options 431,056
-------------- --------------
Net Cash Provided by Financing Activities 853,503 3,957,530
-------------- --------------
Net (Decrease)/Increase in Cash and Cash Equivalents 1,059,633 4,705,660
Cash and Cash Equivalents, Beginning of period 10,912,010 9,750,410
-------------- --------------
Cash and Cash Equivalents, End of period $ 11,971,643 $ 14,456,070
============== ==============
Supplemental Cash Flow Information
Interest paid $ 434,233 $ 656,109
============== ==============
Income taxes paid $ 560,581 $ 339,362
============== ==============
</TABLE>
F-58
<PAGE>
BUSINESS BANCORP
PROFORMA FINANCIAL STATEMENTS
BUSINESS BANCORP & VALLEY MERCHANTS BANK
AS OF JUNE 30, 2000
On August 31, 2000, Business Bank of California (the "Bank") completed the
acquisition of Valley Merchants Bank ("VMB"). At June 30, 2000, VMB had total
assets of $58.6 million and total deposits of $50.8 million. The acquisition was
accomplished in a two step process. In the first step, the "Consolidation," BBOC
Interim Bank, a California banking corporation formed as a wholly owned
subsidiary of the Bank for the sole purpose of facilitating the acquisition
("Consolidation Sub"), was consolidated with and into VMB. In the second step,
which occurred immediately after the effectiveness of the Consolidation, the
consolidated VMB was merged with and into the Bank, with the Bank being the
surviving bank in the merger. The Bank paid consideration of $22.69 per share,
or an aggregate of approximately $12.2 million (the "merger consideration"), for
the issued and outstanding shares of VMB. The determination of the merger
consideration was based upon arms length negotiations between the parties. VMB's
sole office, in Hemet, in the San Jacinto Valley of Southern California, will be
operated as a branch of the Bank. The acquisition of VMB increased the Company's
assets by approximately 23%.
The following proforma financial statements for the Bank and VMB combine the
historical financial statements of the two entities giving effect to the
acquisition as of the dates of the respective balance sheet and income
statements. The proforma balance sheet is as of June 30, 2000, while the
proforma income statements cover the twelve months ended December 31, 1999 and
the six months ended June 30, 2000.
The following significant assumptions were used in the preparation of the
following proforma financial statements:
(1) Additional $6 million of goodwill as a result of the acquisition.
(2) Increased net income of approximately $180,000 per year.
(3) A reduction of salary expense of approximately $400,000 per year due to the
elimination of two executive level positions and their related bonuses'.
(4) Annual savings of $150,000 due to elimination/reduction of expenses (i.e.
directors fees, OCC assessment, insurance, audit fees, salary continuation
agreements, etc.).
(5) Increased annual amortization of goodwill of approximately $400,000
annually.
(6) Increased interest expense of approximately $1,087,500 annually on Trust
Preferred Securities.
F-59
<PAGE>
BUSINESS BANCORP
PROFORMA BALANCE SHEETS
BUSINESS BANCORP & VALLEY MERCHANTS BANK
As Of June 30, 2000
<TABLE>
<CAPTION>
Valley Proforma
Business Merchants Adjustments Balance
----------------
Bancorp Bank Debit/(Credit) Sheet
-------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ 20,195,331 $ 9,061,643 (A) $ (12,235,151) $ 17,021,823
Federal funds sold - 2,910,000 2,910,000
-------------- --------------- -------------
Cash and Cash Equivalents 20,195,331 11,971,643 32,166,974
Investment securities
Available-for-sale 87,743,933 231,865 87,975,798
Held-to-maturity 1,008,724 6,751,294 7,760,018
Federal Home Loan Bank stock, at cost 1,735,000 1,735,000
Loans held for sale 6,755,243 6,755,243
Loans, net of unearned income 127,495,328 37,447,303 164,942,631
Less allowance for loan losses (1,233,908) (264,825) (1,498,733)
-------------- --------------- -------------
Net loans 133,016,663 37,182,478 170,199,141
Bank premises and equipment 4,384,443 1,419,959 5,804,402
Accrued interest receivable 1,670,007 338,073 2,008,080
Deferred tax asset 610,463 610,463
Other real estate owned, net 527,772 527,772
Other assets 4,550,529 710,628 (B) 6,071,491 11,332,648
-------------- --------------- ---------------- -------------
Total Assets $ 255,442,865 $ 58,605,940 $ (6,163,660) $ 307,885,145
============== =============== ================ =============
Liabilities
Deposits
Demand deposits 78,426,159 29,011,539 107,437,698
NOW deposits 24,179,808 24,179,808
Money market and savings deposits 52,006,859 11,374,147 63,381,006
Time deposits $100,000 and over 16,564,278 3,078,847 19,643,125
Other time deposits 21,376,553 7,347,992 28,724,545
-------------- --------------- ---------------- -------------
Total deposits 192,553,657 50,812,525 - 243,366,182
Accrued interest and other liabilities 1,902,096 673,755 (C) 866,000 3,441,851
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
junior subordinated debentures 10,000,000 10,000,000
Borrowed funds 31,000,000 31,000,000
-------------- --------------- ---------------- -------------
Total Liabilities 235,455,753 51,486,280 866,000 287,808,033
-------------- --------------- ---------------- -------------
Stockholders' Equity
Common Stock 6,333,621 2,696,155 (D) (2,696,155) 6,333,621
Retained Earnings 14,380,153 4,423,505 (D) & (E) (4,333,505) 14,470,153
Accumulated other comprehensive income (726,662) - - (726,662)
-------------- --------------- ---------------- -------------
Total Stockholders' Equity 19,987,112 7,119,660 (7,029,660) 20,077,112
-------------- --------------- ---------------- -------------
Total Liabilities and Stockholders'
Equity $ 255,442,865 $ 58,605,940 $ (6,163,660) $ 307,885,145
============== =============== ================ =============
</TABLE>
(A) - Includes the following adjustments: ($12,235,151) - Total consideration to
be paid to the shareholders of Valley Merchants Bank; and
(B) - Purchase Goodwill resulting from transaction.
(C) - Includes the following adjustments:$270,000 - Liability to fund Salary
Continuation Agreements for
3 Senior Managers
$ 45,000 - Severance payments for
certain employees
$184,000 - Liability for data
processing conversion
$367,000 - Investment advisory fee
(D) - Purchase Accounting adjustment to eliminate shareholders' equity of other
institution.
(E) - Increased Net Income($ 90,000) as a result of consolidated savings (See
Proforma Income Statement).
F-60
<PAGE>
BUSINESS BANCORP
PROFORMA INCOME STATEMENTS
BUSINESS BANK OF CALIFORNIA & VALLEY MERCHANTS BANK
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Business Valley Proforma
Bank of Merchants Adjustments Income
----------------
California Bank Debit/(Credit) Statement
-------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 11,226,876 $ 3,139,839 14,366,715
Interest on investment securities
Taxable 2,424,171 683,847 3,108,018
Exempt from Federal taxes 501,619 501,619
Interest on Federal funds sold 617,758 175,247 793,005
-------------- --------------- -------------
Total Interest Income 14,770,424 3,998,933 18,769,357
-------------- --------------- -------------
Interest Expense
Interest on deposits
NOW and Money Market accounts 1,305,793 1,305,793
Savings 528,636 321,517 850,153
Time deposits over $100,000 604,028 128,647 732,675
Other time deposits 925,486 290,554 1,216,040
Other Borrowings 212,790 (D) 1,087,500 1,300,290
-------------- --------------- ---------------- -------------
Total Interest Expense 3,576,733 740,718 1,087,500 5,404,951
-------------- --------------- -------------
Net Interest Income 11,193,691 3,258,215 (1,087,500) 13,364,406
Provision for Loan Losses 180,000 43,487 223,487
-------------- --------------- -------------
Net Interest Income After Provision
for Loan Losses 11,013,691 3,214,728 (1,087,500) 13,140,919
-------------- --------------- -------------
Other Income
Service Fees 2,261,995 582,147 2,844,142
Gain on sale of SBA loans 154,246 154,246
Gain on sale of other real estate owned 38,168 38,168
(Loss) gain on sale of investments (98,041) (98,041)
-------------- --------------- -------------
Total Other Income 2,356,368 582,147 2,938,515
-------------- --------------- -------------
Other Expenses
Salaries and employee benefits 5,290,708 1,421,942 (A) (400,000) 6,312,650
Occupancy, net 746,684 105,121 851,805
Furniture and equipment 775,536 152,946 928,482
Other operating expenses 3,775,799 738,691 (B) 100,000 4,614,490
-------------- --------------- ---------------- -------------
Total Other Expenses 10,588,727 2,418,700 (300,000) 12,707,427
-------------- --------------- ---------------- -------------
Income Before Income Taxes 2,781,332 1,378,175 (787,500) 3,372,007
-------------- --------------- ---------------- -------------
-------------- --------------- ---------------- -------------
Income Taxes 841,027 560,914 (C) (318,500) 1,083,441
-------------- --------------- ---------------- -------------
Net Income $ 1,940,305 $ 817,261 $ (469,000) $ 2,288,566
============== =============== ================ =============
Earnings Per Share
Basic $ 0.99 $ 1.68 $ 1.17
============== =============== =============
Diluted $ 0.97 $ 1.59 $ 1.15
============== =============== =============
</TABLE>
(A) - Reduction in 2 Executive Officers, several staff positions and executive
bonus of 12.5% of income before bonus and taxes.
(B) - Includes the following adjustments: ($300,000)-Elimination/Reduction of
directors expense, salary
continuation expense, OCC
assessment, insurance,
audit fees, etc.
$400,000 -Annual amortization of
goodwill ($6 million/15
years).
(C) - Decrease in taxes due to lower income realization.
(D) - Interest expense on Trust Preferred Securities(Annualized)
F-61
<PAGE>
BUSINESS BANCORP
PROFORMA INCOME STATEMENTS
BUSINESS BANK OF CALIFORNIA & VALLEY MERCHANTS BANK
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Valley Proforma
Business Merchants Adjustments Income
--------------
Bancorp Bank Debit/(Credit) Statement
---------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $6,783,035 $1,922,134 $ 8,705,169
Interest on investment securities
Taxable 2,189,956 361,549 2,551,505
Exempt from Federal taxes 452,118 1,855 453,973
Interest on Federal funds sold 24,427 111,717 136,144
---------- ---------- -----------
Total Interest Income 9,449,536 2,397,255 11,846,791
---------- ---------- -----------
Interest Expense
Interest on deposits
NOW and Money Market accounts 799,184 194,380 993,564
Savings 259,326 84,722 344,048
Time deposits over $100,000 444,380 170,141 614,521
Other time deposits 477,441 - 477,441
Trust preferred securities 302,083 302,083
Other Borrowings 713,991 713,991
---------- ---------- -----------
Total Interest Expense 2,996,405 449,243 3,445,648
---------- ---------- -----------
Net Interest Income 6,453,131 1,948,012 8,401,143
Provision for Loan Losses 80,000 - 80,000
---------- ---------- -----------
Net Interest Income After Provision
for Loan Losses 6,373,131 1,948,012 8,321,143
---------- ---------- -----------
Other Income
Service Fees 1,177,069 213,146 1,390,215
Gain on sale of SBA loans 11,967 - 11,967
Gain on sale of other real estate owned 173,362 173,362
(Loss) gain on sale of investments 1,592 1,592
---------- ---------- -----------
Total Other Income 1,363,990 213,146 1,577,136
---------- ---------- -----------
Other Expenses
Salaries and employee benefits 3,147,157 842,796 (A) (200,000) 3,789,953
Occupancy, net 394,362 55,034 449,396
Furniture and equipment 398,169 68,402 466,571
Other operating expenses 2,287,055 388,123 (B) 50,000 2,725,178
---------- ---------- -------------- -----------
Total Other Expenses 6,226,743 1,354,355 (150,000) 7,431,098
---------- ---------- -------------- -----------
Income Before Income Taxes 1,510,378 806,803 150,000 2,467,181
---------- ---------- -------------- -----------
---------- ---------- -------------- -----------
Income Taxes 432,783 327,724 (D) 60,000 820,507
---------- ---------- -------------- -----------
Net Income $1,077,595 $ 479,079 $ 90,000 $ 1,646,674
========== ========== ============== ===========
Earnings Per Share
Basic $ 0.54 $ 0.89 $ 0.74
========== ========== ===========
Diluted $ 0.52 $ 0.89 $ 0.72
========== ========== ===========
</TABLE>
(A) - Reduction in 2 Executive Officers, several staff positions and executive
bonus of 12.5% of income before bonus and taxes.
(B) - Includes the following adjustments: ($150,000) - Elimination/Reduction of
directors expense, salary
continuation expense, OCC
assessment, insurance,
audit fees, etc.
$200,000 - Annual amortization of
goodwill ($6 million/15
years).
(C) - Increase in taxes due to higher income realization.
F-62
<PAGE>
PART III
--------
Item 1. Index to Exhibits
--------------------------
<TABLE>
<CAPTION>
Exhibit No. Description Numbered Page
----------- ----------- -------------
<S> <C> <C>
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Indenture dated as of March 23, 2000 (1)
10.1 Employment Agreement between the Bank and Alan J. Lane (1)
10.2 Employment Agreement between the Bank and James W. Andrews (1)
10.3 Employment Agreement between the Bank and Ruth E. Adell (1)
10.4 Stock Option Plan (1)
10.5 Lease for Main Office (1)
10.6 Sublease for Hesperia Branch (1)
10.7 Lease for Ontario Branch (1)
10.8 Lease for Redlands Branch (1)
10.9 Guarantee Agreement dated as of March 23, 2000 (1)
10.10 Amended and Restated Declaration of Trust of Business Capital
Trust I dated March 23, 2000 (1)
21 Subsidiaries of Registrant (1)
</TABLE>
Item 2. Description of Exhibits
--------------------------------
See Item 1 above.
(1) Incorporated by reference to Form 10-SB Registration Statement as filed on
June 26, 2000.
<PAGE>
SIGNATURES
----------
In accordance with Section 12 of the Securities and Exchange Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: November 10, 2000 BUSINESS BANCORP,
a California corporation
By: /s/ Alan J. Lane
-------------------------------------
Alan J. Lane
President and Chief Executive Officer
