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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
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................................. 9
Item 3. Description of Property......................................... 30
Item 4. Security Ownership of Certain Beneficial Owners and Management.. 31
Item 5. Directors, Executive Officers, Promoters and Control Persons.... 31
Item 6. Executive Compensation.......................................... 34
Item 7. Certain Relationships and Related Transactions.................. 37
Item 8. Description of Securities....................................... 37
PART II......................................................................... 39
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters.................... 39
Item 2. Legal Proceedings............................................... 40
Item 3. Changes in and Disagreements with Accountants................... 40
Item 4. Recent Sales of Unregistered Securities......................... 40
Item 5. Indemnification of Directors and Officers....................... 41
PART F/S (FINANCIAL STATEMENTS)................................................ 43
PART III........................................................................ 78
Item 1. Index to Exhibits............................................... 78
Item 2. Description of Exhibits......................................... 78
SIGNATURES...................................................................... 79
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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 March 31, 2000, the Company had
consolidated assets of $243.9 million, deposits of $197.0 million and
stockholders' equity of $19.3 million.
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. Like most state-chartered banks of its size in
California, the Bank is not a member of the Federal Reserve System. At March 31,
2000, the Bank had approximately $243.6 million in assets, $123.6 million in
loans and $206.7 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 and six
branch offices, one in the city of San Bernardino, and one each in the cities of
Corona, Hesperia, Phelan, Ontario and Redlands, California, all of which offices
are located in the counties of Riverside and San Bernardino, in an area of
Southern California commonly known as the "Inland Empire."
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.
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 $243.6 million at March 31, 2000, representing an
additional increase of approximately 8.2%. Deposits increased from $136.7
million at December 31, 1997 to $186.8 million at December 31, 1999, an increase
of approximately 36.6%, and deposits further increased to $206.7 at March 31,
2000, an additional increase of approximately 10.7%. This growth in the Bank's
balance sheet has been generated both internally and through the acquisition of
two new branch offices in December, 1997. 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 three months ended March 31, 2000 were $543,000 or $ .27
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 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
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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 April 4, 2000, the Company and Valley Merchants Bank, N.A., a national
banking association ("VMB"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") which provides that the Bank will acquire VMB in a two step
process. In the first step, the "Consolidation," BBOC Interim Bank, a to-be-
formed California banking corporation, which will be a wholly-owned subsidiary
of the Bank (the "Consolidation Sub"), will consolidate with VMB. In the second
step, which will occur immediately after the effectiveness of the Consolidation,
the consolidated bank will be merged with and into the Bank, with the Bank being
the surviving bank (the "Merger"). The Consolidation and the Merger are referred
to collectively herein as the "Transaction."
At the effective time of the Consolidation, each share of common stock of
VMB (except for shares, if any, which shall then or thereafter constitute
perfected dissenting shares within the meaning of Section 215(b) of the National
Bank Act), shall be converted into the right to receive $22.69 per share in
cash. There are currently 487,359 shares of VMB common stock outstanding.
Options to purchase shares of the common stock of VMB ("VMB Options") which are
not exercised prior to the consummation of the Transaction, will terminate.
There are currently outstanding VMB Options to purchase an aggregate of 51,872
shares of the common stock of VMB with an average weighted exercise price of
$8.31 per share. The terms of the Transaction were arrived at by arms' length
negotiations between the parties.
Consummation of the Transaction is contingent upon and subject to the
approval of the shareholders of VMB and of state and federal regulatory
authorities.
At March 31, 2000, VMB had total assets of $61.6 million and total deposits
of $54.5 million. VMB has one full service office located in Hemet, in the San
Jacinto Valley of Southern California.
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 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 VMB. The balance of the purchase price for the
acquisition of VMB will be 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
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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 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, ATMs, 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.
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.
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
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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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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 California Department of Financial
Institutions (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
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
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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
March 31, 2000, the Company's and the Bank's Total Risk-Based Capital Ratios
were 18.35% and 11.81%, respectively, and the Company's and the Bank's Tier 1
Risk-Based Capital Ratios were 15.45% and 11.01%, 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 March 31, 2000, the Company's and the Bank's leverage
capital ratios were 10.68% and 7.79%, 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 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.
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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:
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Group A Group B Group C
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Well Capitalized........ 0 3 17
Adequately Capitalized.. 3 10 24
Undercapitalized........ 10 24 27
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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.
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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.
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.
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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.
Employees
As of December 31, 1999 the Bank had a total of 75 full-time and 56 part-
time employees. As of March 31, 2000, the Company had 77 full-time employees and
56 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.
8
<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 three
months ended March 31, 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.)
Statements contained in this Registration Statement that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's or the Bank's expectations,
intentions, beliefs or strategies regarding the future. All forward-looking
statements included in this document are based on information available to the
Company on the date thereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those in such forward-looking statements. Factors that could
cause actual results to differ materially from those in such forward-looking
statements include, but are not limited to, changes in the performance of the
financial markets; changes in the demand for and market acceptance of the
Company's products; changes in general economic conditions including interest
rates, presence of competitors with greater financial resources, and the impact
of competitive products and pricing; the effect of the Company's policies; the
continued availability of adequate funding sources; the effect of changes in
market interest rates on the spread between earning assets and interest bearing
liabilities; and various legal, regulatory and litigation risks. All forward-
looking statements contained in this Registration Statement are qualified in
their entirety by this cautionary statement.
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 $122.3 million at March 31, 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 $89.7 million at March 31, 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 $197.0 million as of March 31,
2000, compared to $186.8 million, $163.8 million, $136.7 million at December 31,
1999, 1998 and 1997, respectively.
Net income was $526,000 and $455,000 for the three months ended March 31,
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.
----------------
/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.
9
<PAGE>
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 three months ended March 31, 2000, net interest income was $3.2
million, an increase of 25.6% or $644,000 over the three months ended March 31,
1999. This increase closely approximated the growth in average interest-earning
assets of 31.6 % or $48.8 million from the first quarter of 1999 to the first
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-
earning assets and interest-bearing liabilities; and the net interest spread and
the net interest margin for the periods indicated:
10
<PAGE>
Distribution, Yield and Rate Analysis of Net Income
<TABLE>
<CAPTION>
As of and For the Three Months Ended March 31,
---------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
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/.......................................... $ 118,471 $ 3,198 10.80% $ 105,318 $ 2,654 10.08%
Taxable investment securities:
U. S. government securities.......................... 1,011 14 5.65 501 7 5.34
Obligations of other U.S. government agencies........ 0 0 0.00 1,858 31 6.59
Mortgage backed securities........................... 66,623 1,034 6.21 20,343 282 5.54
Other securities....................................... 3,912 56 5.77 156 1 3.84
Tax-exempt investment securities:/2/
Obligations of state and political subdivisions..... 12,005 164 5.47 8,220 109 5.28
Federal funds sold..................................... 1,018 14 5.52 17,849 218 4.89
Interest-earning deposits.............................. 0 0 0.00 0 0 0.00
Total interest-earning assets............................ 203,040 4,480 8.83 154,245 3,302 8.56
Non-interest earning assets:
Cash and due from banks................................ 17,805 17,003
Premises and equipment, net............................ 4,252 3,825
Other real estate owned................................ 963 1,034
Accounts receivable.................................... 0 0
Accrued interest receivable............................ 1,227 802
Other assets........................................... 5,812 4,146
Total non-interest earning assets........................ 30,059 26,810
Total assets......................................... $ 233,099 $ 181,055
========= =========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Money market......................................... 31,367 278 3.55 23,055 167 2.89
NOW.................................................. 26,481 127 1.92 22,558 113 2.01
Savings.............................................. 18,977 127 2.67 18,640 123 2.63
Time certificates of deposit in
denominations of $100,000 or more................... 17,039 216 5.08 11,254 142 5.03
Other time deposits.................................. 20,227 227 4.49 21,025 239 4.54
Other borrowings..................................... 21,060 316 6.01 0 0 0.00
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
junior subordinated debentures...................... 933 27 10.88 0 0 0
Total interest-bearing liabilities................... 136,084 1,318 3.87 96,532 784 3.25
Non-interest-bearing liabilities:
Demand deposits........................................ 76,121 65,336
Other liabilities...................................... 2,188 2,054
--------- ---------
Total non-interest-bearing liabilities............... 78,309 67,390
Stockholders' equity..................................... 18,646 17,133
Total liabilities and stockholders' equity........... $ 233,099 $ 181,055
========= =========
Net interest income...................................... $ 3,162 $ 2,518
======== ========
Net interest spread/3/................................... 4.96% 5.31%
====== ======
Net interest margin/4/................................... 6.23% 6.53%
====== ======
</TABLE>
------------------
/1/Loan fees have been included in the calculation of interest income. Loan fees
were approximately $267,000 and $228,000 for the three months ended March 31,
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.
/3/Represents the annualized average rate earned on interest-earning assets less
the average rate paid on interest-bearing liabilities.
/4/Represents net interest income as a percentage of average interest-earning
assets.
11
<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
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
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:
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/3/.................... 5.29% 5.78%
==== ====
Net interest margin/4/.................... 6.54% 7.10%
==== ====
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
1997
--------------------------------------
Interest
Average Income/ Average
Balance Expense Rate/Yield
------- -------- ----------
<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:
Demand deposits......................... 40,939
Other liabilities....................... 792
Total non-interest-bearing
liabilities......................... 41,731
Stockholders' equity...................... 14,447
Total liabilities and
stockholders' equity................ $116,465
========
Net interest income....................... $7,484
======
Net interest spread/3/.................... 6.40%
=====
Net interest margin/4/.................... 7.69%
=====
</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.
/3/Represents the annualized average rate earned on interest-earning assets less
the average rate paid on interest-bearing liabilities.
/4/Represents net interest income as a percentage of average interest-earning
assets.
12
<PAGE>
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:
<TABLE>
<CAPTION>
Rate/Volume Analysis of Net Interest Income
Three Months Ended Year Ended Year Ended
March 31, December 31, December 31,
2000 vs. 1999 1999 vs. 1998 1998 vs. 1997
--------------------- ----------------------- ----------------------
Increases (Decreases) Increases (Decreases) Increases (Decreases)
Due to Change In Due to Change In Due to Change
--------------------- ----------------------- -----------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ------ ------- ----- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest income: $ 331 $213 $ 544 $ 914 $(485) $ 429 $3,134 $(312) $2,822
Loans, net/1/....................
Taxable investment securities:
U. S. government securities.... 6 1 7 (2) (8) (10) (94) 8 (86)
Obligations of other U. S.
governmental agencies........ (31) 0 (31) (597) 2 (595) 316 64 380
Mortgage backed securities..... 641 111 752 2,121 91 2,212 61 0 61
Other securities................. 36 19 55 62 (14) 48 (21) (17) (38)
Tax-exempt securities:/2/
Obligations of state and
political subdivisions....... 50 5 55 225 (56) 169 (21) (27) (48)
Federal funds sold................. (206) 2 (204) (760) (55) (815) 755 (32) 723
Interest-earning deposits.......... 0 0 0 0 0 0 (22) 0 (22)
Total.......................... $ 827 $351 $1,178 $1,963 $(525) $1,438 $4,108 $(316) $3,792
----- ---- ------ ------ ----- ------ ------ ----- ------
Interest expense:
Demand deposits, interest-bearing
Money market deposits............ $ 60 $ 51 $ 111 $ 234 $ (24) $ 210 $ 132 $ (14) $ 118
NOW deposits..................... 20 (6) 14 18 (20) (2) 140 (37) 103
Savings deposits................. 2 2 4 56 (35) 21 104 (17) 87
Time certificates of deposit in
denominations of $100,000
or more........................ 72 2 74 156 (80) 76 246 11 257
Other time deposits................ (10) (2) (12) (2) (117) (119) 599 (43) 556
Other borrowings................... 316 0 316 213 0 213 0 0 0
Company obligated mandatorily
redeemable preferred
securities of subsidiary
trust holding solely junior
subordinated debentures.......... 27 0 27 0 0 0 0 0 0
Total.......................... $ 487 $ 47 $ 534 $ 675 $(276) $ 399 $1,221 $(100) $1,121
----- ---- ------ ------ ----- ------ ------ ----- ------
Change in net interest income...... $ 340 $304 $ 644 $1,288 $(249) $1,039 $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 $267,000 and $228,000 for the
three months ended March 31, 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.
13
<PAGE>
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Bank sets
aside an allowance for loan losses 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, after taking
into consideration various factors such as the Bank's historical experience with
loan losses, the volume of the portfolio, types of credits entered into,
nonperforming loans, accounting matters, economic conditions, regulatory
policies and other factors related to the performance of the loans in the Bank's
portfolio.
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.
The provision for loan losses was $25,000 for the first quarter of 2000
compared to $55,000 for the first quarter of 1999. This decrease was mainly
attributable to net recoveries of $32,000 for the three months ended March 31,
2000. The ratio of the allowance for loan losses to total loans at the end of
the period was 1.05% and 1.30% as of March 31, 2000 and 1999, respectively.
Noninterest 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 For the
Three Years
Months Ended Ended
March 31, December 31,
-------------------- ----------------------------------
2000 1999 1999 1998 1997
----- ----- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposits.................... $ 501 $ 413 $1,872 $1,581 $ 981
Gain on sale of SBA loans...................... 12 71 154 331 100
Gain on sale of other real estate owned........ 154 0 38 136 52
All other noninterest income................... 51 123 292 722 450
----- ----- ------ ------ ------
Total........................................ $ 718 $ 607 $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 18.4%, which closely mirrored the average growth in total deposits
of 16.6% or $24.9 million. Gain on the sale of SBA loans decreased $177,000 or
53.3%, 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
14
<PAGE>
$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 losses on the Bank's investment in FDSI in 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.
Noninterest income for the three months ended March 31, 2000 was $718,000,
compared to $607,000 for the same period in 1999, an increase of $111,000 or
18.3%, despite a loss on the Bank's investment in FDSI of $82,000. Gain on the
sale of OREO increased by $154,000 for the first quarter of 2000 compared to
zero for the first 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 Three
Months Ended For the Years
March 31, Ended December 31,
-------------------- -----------------------------------
2000 1999 1999 1998 1997
------ ------ ------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Advertising and promotion...................... $ 98 $ 70 $ 286 $ 242 $ 113
Insurance assessments.......................... 40 29 124 118 138
Data processing................................ 213 92 683 407 269
Stationery and supplies........................ 66 57 291 266 264
Professional................................... 171 86 440 353 387
Office......................................... 96 104 427 420 256
Administrative................................. 197 138 783 722 452
Other real estate owned........................ 28 34 109 195 258
Salary and employee benefits................... 1,566 1,268 5,291 4,852 3,621
Occupancy and F.F.& E.......................... 390 369 1,522 1,485 1,226
Other.......................................... 223 173 633 603 352
------ ------ ------- ------ ------
Total........................................ $3,088 $2,420 $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
15
<PAGE>
processing was a result of outsourcing the Bank's item processing, which was
previously in-house, to the Bank's affiliate, FDSI (see " -- Noninterest Income"
above). In May, 1999 the Bank also 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 $9.7 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 expense, and $251,000 in other expenses.
Noninterest expense increased $668,000 or 27.6% for the three months ended
March 31, 2000 compared to the same period for 1999. Data processing, the main
contributor, increased by $121,000 as the Bank did not outsource item processing
until April, 1999. The opening of the Ontario branch in May, 1999, contributed
$98,000 to the increase in noninterest expense during the first quarter of 2000.
The total increase of 27.6% closely approximated the average growth of the
Bank's assets of 28.2% for the same periods.
Provision for Income Taxes
Income tax expense was $841,000 for 1999 as compared to $1.3 million 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.
Financial Condition
Loan Portfolio
The Bank has realized steady growth in its loan portfolio throughout the
periods discussed in this Registration Statement. Total gross loans were $123.6
million as of March 31, 2000 compared to $116.4 million as of December 31, 1999,
which represents an increase of 6.2% from December 31, 1999. Total gross loans
increased by $10.5 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.
The Bank's commercial loans are made for the purpose of providing working
capital, financing the purchase of equipment or for other business purposes.
Such loans include 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. These loans are typically short term. The Bank generally
prequalifies construction loan borrowers for permanent take out financing as a
condition to making the construction loan.
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. 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 years, although applicable amortization periods may range significantly
longer.
16
<PAGE>
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 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:
Loan Portfolio Composition
<TABLE>
<CAPTION>
Outstanding as of March 31,
----------------------------------------
2000 1999
------------------- -------------------
Percent Percent
Amount of Total Amount of Total
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Construction.............................................. $ 29,582 23.81% $ 21,773 20.90%
Mortgage.................................................. 57,729 46.47 44,799 43.00
Commercial....................................................... 28,135 22.65 29,068 27.90
Installment/All other loans...................................... 8,776 7.07 8,550 8.20
-------- ------ -------- ------
Total gross loans........................................ $124,222 100.00% $104,190 100.00%
====== ======
Less:
Unearned income........................................... 669 702
Allowance for loan losses................................. 1,299 1,353
-------- --------
Total net loans.......................................... $122,254 $102,135
======== ========
</TABLE>
<TABLE>
<CAPTION>
Outstanding as of December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- ------------------- ------------------- ------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
-------- --------- -------- --------- -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Construction.................. $ 25,102 21.42% $ 20,888 19.60% $ 17,930 17.59% $ 4,043 6.85%
Mortgage...................... 53,344 45.52 46,190 43.34 46,753 45.87 28,532 48.36
Commercial...................... 30,456 25.99 30,810 28.91 28,825 28.28 21,331 36.15
Installment/All other loans..... 8,275 7.07 8,691 8.15 8,426 8.26 5,094 8.64
-------- ------ -------- ------ -------- ------ ------- ------
Total gross loans.......... $117,177 100.00% $106,579 100.00% $101,934 100.00% $59,000 100.00%
====== ====== ====== ======
Less:
Unearned income............... 794 675 607 476
Allowance for loan losses..... 1,242 1,439 1,773 1,298
-------- -------- -------- -------
Total net loans............ $115,141 $104,465 $ 99,554 $57,226
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
------------------
1995
------------------
Percent
Amount of Total
------- ---------
<S> <C> <C>
Real estate:
Construction.................. $ 4,096 6.58%
Mortgage...................... 30,032 48.24
Commercial...................... 22,043 35.41
Installment/All other loans..... 6,080 9.77
------- ------
Total gross loans.......... $62,251 100.00%
======
Less:
Unearned income............... 296
Allowance for loan losses..... 1,395
-------
Total net loans............ $60,560
=======
</TABLE>
As of December 31, 1999, the Bank had commitments to extend credit of $45.6
million, obligations under standby letters of credit of $795,100, and
obligations under commercial letters of credit of $726,028.
17
<PAGE>
The following table shows the maturity distribution and repricing intervals
of the Bank's outstanding loans as of March 31, 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 March 31, 2000
-------------------------------------------------------------
After One
Within One But Within After Five
Year Five Years Years Total
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate:
Construction..................................... $27,175 $ 520 $ 1,887 $ 29,582
Mortgage......................................... 5,841 24,460 27,428 57,729
Commercial......................................... 19,527 6,694 1,914 28,135
Installment/All other loans........................ 1,993 3,971 2,812 8,776
------- ------- ------- --------
Total...................................... $54,536 $35,645 $34,041 $124,222
======= ======= ======= ========
Loans with variable (floating) interest rates...... 48,596 16,271 9,624 74,491
Loans with predetermined (fixed) interest rates.... $ 5,940 $19,374 $24,417 $ 49,731
</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>
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.
----------------
/1/Excludes non-accrual loans of $492,000 and $477,000, and includes unearned
income and deferred fees totaling $669,000 and $794,000, at March 31, 2000 and
December 31, 1999, respectively.
18
<PAGE>
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
March 31, 2000 the Bank had $1.2 million of nonperforming loans, which included
$492,000 of nonaccrual loans, $1,000 in loans past due 90 days and still
accruing and $722,000 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 March 31, 2000 the Bank had $741,000 of
OREO on its books.
Total nonperforming assets amounted to .80% of the Bank's total assets at
March 31, 2000.
19
<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 March 31, Amount Outstanding as of December 31,
------------------ ------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:/1/
Real estate:
Construction.......................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 97 $ 441
Mortgage.............................. 237 1,048 229 1,026 354 689 494
Commercial.............................. 255 161 247 196 8 555 11
Installment............................. 0 43 1 13 97 86 97
All other loans (including overdrafts) 0 0 0 0 0 1 0
------ ------ ------ ------ ------ ------ ------
Total................................. 492 1,252 477 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 $ 0 $ 0 $ 162
Mortgage.............................. 0 0 0 0 0 0 0
Commercial....,,........................ 0 0 0 0 10 0 12
Installment 1 0 2 0 59 4 0
All other loans (including overdrafts) 0 6 5 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Total................................. 1 6 7 0 69 4 174
Restructured loans:/2//3/,
Real estate:
Construction.......................... $ 40 $ 42 $ 40 $ 43 $ 46 $ 49 $ 130
Mortgage.............................. 682 979 682 1,026 1,123 709 371
Commercial.............................. 0 81 0 83 15 18 76
Installment............................. 0 0 0 0 0 0 60
All other loans (including overdrafts) 0 0 0 0 0 0 0
------ ------ ------ ------ ------ ------ ------
Total................................. 722 1,102 722 1,152 1,184 776 637
Total nonperforming loans................. 1,215 2,360 1,206 2,387 1,712 2,208 1,854
Other real estate owned................... 741 962 1,036 1,069 1,360 2,037 1,161
------ ------ ------ ------ ------ ------ ------
Total nonperforming assets............ $1,956 $3,322 $2,242 $3,456 $3,072 $4,245 $3,015
====== ====== ====== ====== ====== ====== ======
Nonperforming loans as a percentage
of total gross loans.................... .98% 2.27% 1.03% 2.24% 1.68% 3.74% 2.98%
Nonperforming assets as a percentage
of total assets......................... .80 1.76 1.00 1.89 2.01 4.16 3.07
Nonperforming assets as a percentage
of total gross loans and other real
estate owned............................ 1.57 3.16 1.90 3.21 2.97 6.95 4.75
</TABLE>
Allowance for Loan Losses
The Bank maintains an allowance for loan losses at a level the Bank
considers adequate to cover the inherent risk of loss associated with its loan
portfolio under prevailing and anticipated economic conditions. The Bank
maintains an allowance for loan losses at a level judged by Management to be
adequate to absorb currently estimated losses in the loan portfolio on an
ongoing basis. The provision for loan losses is an expense charged against
income and added to the
----------------
/1/ During the three months ended March 31, 2000 and the year ended December 31,
1999, approximately $3,600 and $16,200 of interest income related to these loans
was included in net income. Additional interest income of approximately $15,500
and $52,800 would have been recorded for the three months ended March 31, 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 three months ended March 31, 2000 and the year ended December 31,
1999, approximately $1,500 and $3,300 of interest income related to these loans
was included in net income. Additional interest income of approximately $18,600
and $64,000 would have been recorded in the three months ended March 31, 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.
20
<PAGE>
allowance for loan losses, in amounts deemed appropriate by Management to
maintain the allowance at an adequate level. Management's judgement of the
allowance is based on the evaluation of individual loans, the risk
characteristics and size of the loan portfolio, the assessment of economic
conditions, estimates of the current value of underlying collateral and other
considerations. 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. Management takes into consideration growth trends in the portfolio,
historical loss experience, any identified risk in any credit concentrations,
regulatory issues as they relate to the portfolio, internal and external credit
reviews and analysis, as well as specific characteristics of the loans such as
delinquency or other concerns.
On an ongoing basis, the Bank performs monthly assessments of the allowance
for loan losses 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 formally assesses the adequacy of the allowance on a quarterly
basis. In determining the adequacy of the allowance for loan losses, Management
takes into consideration growth trends in the portfolio, examination by
financial institution supervisory authorities, prior loan loss experience by the
Bank, concentrations of credit risk, delinquency trends, general economic
conditions, the interest rate environment and internal and external credit
reviews, including (i) detailed analysis of individual loans for which full
recovery may not be assured, (ii) loss migration methodology results and (iii)
peer group loan loss allowance data.
This process 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 $486,000 and $567,000 in 1998 and 1997, respectively.
For the three months ended March 31, 2000, the Bank had net charge-offs of
$(32,000), a decrease of $173,000 from $141,000 for the three months ended March
31, 1999.
As of March 31, 2000 the allowance for loan loss was $1.3 million or 1.05%
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.
21
<PAGE>
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 on the following page 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:
22
<PAGE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------- ----------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances:
Average total loans outstanding
during period........................... $118,471 $105,318 $105,922 $ 97,660 $ 70,110 $61,966 $60,719
======== ======== ======== ======== ======== ======= =======
Total loans outstanding
at end of period........................ $124,222 $104,190 $117,177 $106,579 $101,934 $59,000 $62,251
======== ======== ======== ======== ======== ======= =======
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.............................. 1 112 482 231 389 201 276
Installment............................. 0 23 39 174 82 282 69
All other loans
(including overdrafts)................ 15 5 31 51 8 9 96
-------- -------- -------- -------- -------- ------- -------
Total.............................. 16 150 562 635 648 1,089 506
Recoveries:
Real estate:
Construction.......................... 0 0 0 0 0 0 0
Mortgage.............................. 0 0 2 43 39 34 0
Commercial................................ 42 2 166 72 18 6 22
Installment............................... 1 0 4 17 16 35 8
All other loans
(including overdrafts).................. 5 7 13 19 8 0 0
-------- -------- -------- -------- -------- ------- -------
Total.............................. 48 9 185 151 81 75 30
-------- -------- -------- -------- -------- ------- -------
Net loan charge-offs (recoveries)......... (32) 141 377 484 567 1,014 476
Provision charged to
operating expenses.................... 25 55 180 150 487 917 477
-------- -------- -------- -------- -------- ------- -------
Balance at end of period................ $ 1,299 $ 1,353 $ 1,242 $ 1,439 $ 1,773 $ 1,298 $ 1,395
======== ======== ======== ======== ======== ======= =======
Ratios:
Net loan charge-offs to (0.03)% 0.13% 0.36% 0.50% 0.81% 1.64% 0.78%
average loans...........................
Net loan charge-offs to (0.03) 0.14 0.32 0.45 0.56 1.72 0.76
loans at end of period..................
Allowance for loan losses to
average loans........................... 1.10 1.28 1.19 1.49 2.53 2.09 2.30
Allowance for loan losses 1.05 1.30 1.06 1.35 1.74 2.20 2.24
to loans at end of period...............
Net loan charge-offs to allowance (2.46) 10.42 30.35 33.63 31.98 78.12 34.12
for loan losses at end of period........
Net loan charge-offs to provision
charged to operating expenses........... (128.00) 256.36 209.44 322.67 116.43 110.58 99.79
</TABLE>
------------------------------
/1/Acquired $555,000 in reserves in connection with acquisition of High Desert
National Bank in 1997.
23
<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>
Three Months Ended March 31,
-------------------------------------------------
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....................................... $ 247 19.01% $ 184 13.60%
Mortgage........................................... 351 27.02 268 19.81
Commercial........................................... 219 16.86 287 21.21
Installment/All other loans (including overdrafts)... 482 37.11 614 45.38
------ ------ ------ ------
Total......................................... $1,299 100.00% $1,353 100.00%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
Balance at End of Period to Total to Total to Total to Total to Total
Applicable to Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------ ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate:
Construction............. $ 215 17.31% $ 179 12.44% $ 115 6.49% $ 21 1.62% $ 79 5.66%
Mortgage................. 326 26.25 267 18.55 778 43.88 425 32.74 347 24.87
Commercial................... 246 19.81 265 18.42 371 20.92 611 47.07 546 39.14
Installment/All other loans
(including overdrafts).... 455 36.63 728 50.59 509 28.71 241 18.57 423 30.33
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................ $1,242 100.00% $1,439 100.00% $1,773 100.00% $1,298 100.00% $1,395 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investment Portfolio
The Bank's investment portfolio represented 34.8% of the Bank's total
assets as of March 31, 2000. At year-end 1999, 1998 and 1997 the investment
portfolio represented 37.0%, 15.1% and 7.6%, respectively, of the Bank's total
assets. The Bank invests in governmental, mortgage backed, municipal and
corporate securities and categorizes those securities as held-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 investing instead in securities (namely mortgage-backed) to realize the
higher yield on said instruments. The $55.8 million increase was funded through
the following; (i) $23.5 million in matured Fed Funds; (ii) $23.0 million in
deposit growth less funding of $10.5 million in loan growth; and (iii) $18.2
million in other borrowings.
24
<PAGE>
The following table summarizes the amortized cost, fair value and
distribution of the Bank's investment securities as of the dates indicated:
Investment Portfolio
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997
---------------- ---------------- ------------------ ---------------- ------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Available-for-Sale:
U. S. Treasury securities....... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,000 $ 1,000
Obligations of other U. S.
government agencies........... 0 0 509 505 0 0 3,509 3,516 1114 1114
Mortgage backed securities...... 65,874 65,089 22,473 22,479 69,017 68,331 15,851 15,857 0 0
Obligations of states and
political subdivisions........ 16,048 15,567 3,824 3,762 12,648 11,963 2,330 2,320 0 0
Other securities................ 3,120 3,048 0 0 2,044 2,000 302 304 484 484
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total available-for-sale...... $85,042 $83,704 $26,806 $26,746 $83,709 $82,294 $21,922 $21,997 $ 2,598 $ 2,598
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Held-to-Maturity:
U. S. government securities..... $ 1,010 $ 997 $ 501 $ 502 $ 1,012 $ 1,003 $ 501 $ 504 $ 500 $ 502
Obligations of other U. S.
governmental agencies......... 0 0 0 0 0 0 0 0 2,450 2,443
Obligations of state and
political subdivisions........ 0 0 4,856 5,062 0 0 5,041 5,256 6,003 6,202
Other securities................ 0 0 0 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total held-to-maturity........ $ 1,010 $ 997 $ 5,357 $ 5,564 $ 1,012 $ 1,003 $ 5,542 $ 5,760 $ 8,953 $ 9,147
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total investment securities... $86,052 $84,701 $32,163 $32,310 $84,721 $83,297 $27,534 $27,757 $11,551 $11,745
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table summarizes the maturity of the Bank's investment
securities and their weighted average yield/1/ at March 31, 2000:
Investment Maturities and Weighted Average Yields
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
---------------- ----------------- ---------------- ---------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
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 3,290 7.07 9,041 7.15 52,758 7.59 65,089 7.50
Obligations of state and
political subdivisions....... 532 7.03 284 5.30 0 0.00 14,751 5.21 15,567 5.27
Other securities............... 0 0.00 0 0.00 1,969 7.09 1,079 8.12 3,048 7.45
---- ---- ------ ---- ------- ---- ------- ---- ------- ----
Total available-for-sale..... $532 7.03 $3,574 6.93 $11,010 7.14 $68,588 7.09 $83,704 7.08
==== ==== ====== ==== ======= ==== ======= ==== ======= ====
Held-to-Maturity:
U. S. government securities.... 0 0.00 1,010 5.67 0 0.00 0 0.00 1,010 5.67
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 1,010 5.67 0 0.00 0 0.00 1,010 5.67
==== ==== ====== ==== ======= ==== ======= ==== ======= ====
Total investment securities.. $532 7.03% $4,584 6.65% $11,010 7.14% $68,588 7.09% $84,714 7.06%
==== ==== ====== ==== ======= ==== ======= ==== ======= ====
</TABLE>
----------------
/1/ Yields on tax-exempt obligations have not been computed on a tax equivalent
basis.
25
<PAGE>
Deposits
Deposits are the Bank's primary source of funds. At March 31, 2000 the
Bank had a deposit mix of 43.6% in noninterest-bearing demand deposits, 37.9% in
NOW, money market and savings deposits, and 18.5% in time deposits. The Bank's
net interest income is enhanced by its relatively 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 March 31, 2000 the Bank had total deposits of $206.7 million an
increase of 10.7% or $19.9 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.
The following tables summarize the distribution of average daily deposits
and other borrowings and the average daily rates paid for the periods indicated:
Average Deposits & Other Borrowings
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
----------------------------------- -----------------------------------------------------
2000 1999 1999 1998 1997
----------------- ---------------- ---------------- ---------------- -----------------
Average Average Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
-------- ------- ------- ------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Demand, noninterest-bearing............ $ 76,121 0.00% $ 65,336 0.00% $ 71,726 0.00% $ 60,398 0.00% $ 40,939 0.00%
Money market........................... 31,367 3.55 23,055 2.89 28,720 2.85 20,719 2.93 16,317 3.00
NOW.................................... 26,481 1.92 22,558 2.01 21,612 2.26 20,862 2.35 15,332 2.53
Savings................................ 18,977 2.67 18,640 2.63 19,610 2.70 17,663 2.87 14,175 2.97
Time certificates of deposit in
denominations of $100,000 or more.... 17,039 5.08 11,254 5.03 12,825 4.71 9,903 5.33 5,189 5.22
Other time deposits.................... 20,227 4.49 21,025 4.54 20,611 4.49 20,658 5.05 9,274 5.26
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total deposits..................... 190,212 2.05 161,868 1.93 175,104 1.92 150,203 2.11 101,226 2.03
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Other borrowings....................... 21,060 6.01 0 0.00 3,756 5.67 0 0.00 0 0.00
Total deposits and borrowed funds.. $211,272 2.45% $161,868 1.93% $178,860 2.00% $150,203 2.11% $101,226 2.03%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The scheduled maturities of the Bank's time deposits in denominations of
$100,000 or greater at March 31, 2000 were as follows:
Maturities of Time Deposits of $100,000 or More
<TABLE>
<CAPTION>
March 31, 2000
----------------------
(Dollars in Thousands)
<S> <C>
Three months or less....................................................... $11,369
Over three months through six months....................................... 2,955
Over six months through twelve months...................................... 3,053
Over twelve months......................................................... 281
-------
Total.................................................................. $17,658
=======
</TABLE>
26
<PAGE>
Short Term Borrowings
At year-end 1999, the Bank had $18.2 million in advances against its line
of credit from the Federal Home Loan Bank due at various times during 2000 with
a weighted average rate of 6.1%. For the year ended December 31, 1999, the
average balance of this short-term borrowing was $3.8 million, the average rate
was 5.7% and the highest month-end balance was $24.0 million. As of March 31,
2000 the balance was $16.0 million, all due in 2000. For the three months ended
March 31, 2000, the average balance was $21.1 million, the weighted average rate
was 6.0% and the highest month-end balance was $23.8 million.
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 March 31, 2000 the Bank no longer carried 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 March 31, 2000 the Bank's liquidity
ratio was 30.5%, defined as $23.4 million in cash and cash equivalents and $39.6
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 $206.7 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
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 Asset Liability Management 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.
27
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities as of March 31, 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 March 31, 2000 Amounts Subject to Repricing Within
-----------------------------------------------------------
0-3 Months 3-12 Months 1-5 Years After 5 Years Total
---------- ----------- --------- ------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans/1/.................................. $ 75,484 $ 4,947 $ 19,374 $ 24,417 $124,222
Investment securities..................... 441 91 4,584 79,598 84,714
Federal funds sold........................ 5,000 0 0 0 5,000
Interest-bearing deposits
at other banks.......................... 0 0 0 0 0
-------- -------- -------- -------- --------
Total................................... 80,925 5,038 23,958 104,015 213,936
Interest-bearing liabilities:
Interest-bearing demand (NOW)............. 25,010 0 0 0 25,010
Savings deposits.......................... 19,423 0 0 0 19,423
Money market.............................. 33,910 0 0 0 33,910
Time deposits of $100,00 or more.......... 11,369 6,008 281 0 17,658
Other time deposits....................... 8,701 9,920 1,872 0 20,493
Other borrowings.......................... 0 16,000 0 0 16,000
-------- -------- -------- -------- --------
Total................................... $ 98,413 $ 31,928 $ 2,153 $ 0 $132,494
Interest rate sensitivity gap............... $(17,488) $(26,890) $ 21,805 $104,015
Cumulative interest rate sensitivity gap.... $(17,488) $(44,378) $(22,573) $ 81,442
Cumulative interest rate sensitivity gap
ratio based on total earning assets....... (8.17)% (20.74)% (10.55)% 38.07%
</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 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.
----------------
/1/Excludes non-accrual loans of $477,000 and deferred fees and unearned income
of $794,000.
28
<PAGE>
At March 31, 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. (See "Part I, Item 1 -- Description of Business -- Recent
Developments" herein.) A portion of the proceeds will be downstreamed to the
Bank to maintain its "well capitalized" position and the balance will be
retained by the Company 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 cost of the Bank's plan
to address Y2K issues was not material.
29
<PAGE>
Selected Performance Ratios
The following table sets forth certain ratios for the Bank for the three
months ended March 31, 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>
Three Months Ended Years Ended
March 31, December 31,
-------------------- ------------------------------------
2000 1999 1999 1998 1997
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Return on average equity/1/.................... 11.64% 10.62% 11.37% 12.32% 5.83%
Return on average assets/2/.................... 0.94% 1.00% 0.98% 1.11% 0.72%
Average stockholders' equity
to average total assets...................... 8.00% 9.46% 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.
30
<PAGE>
The following facilities are leased by the Company:
<TABLE>
<CAPTION>
Use of Square Feet of Monthly Rent Term of
Location 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 April 28, 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 April
28, 2000 with respect to each of the directors and executive officers of the
Bank and the directors and executive officers as a group.
31
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned on
April 28, 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/ President, Neal T. Baker 76 1999 125,785/6/ 20,118 7.31%/4/
Director Enterprises, Inc. (Owner of (1983)/3/
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 (1983)/3/
Board
Alan J. Lane/9/ President and Chief 38 1999 312 31,612 1.57%/4/
President, Chief Executive Officer, Business (1998)/3/
Executive Bancorp and Business Bank
Officer and of California/10/
Director
</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.
/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.
(Table and footnotes continued on following page.)
32
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned on
April 28, 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>
Robert L. Senior Vice President, CHJ, 59 1999 21,834/11/ 20,118 2.10%/4/
Nottingham Inc., (1996)/3/
Director (Consulting/Engineering)
John L. Riddell President/Founder, CHJ, 68 1999 60,389/11/ 20,118 4.03%/4/
Director and Inc. (1983)/3/
Corporate (Consulting/Engineering)
Secretary
Arnold H. President, Stubblefield 66 1999 380,343/13/ 37,193 20.74%/4/
Stubblefield/5/,/12/ Construction Company; (1992)/3/
Director General Partner,
Stubblefield Properties
John L. Vice President/Managing 48 1999 44,207/14/ 20,118 3.22%/4/
Stubblefield/12/ Supervisor, Stubblefield (1983)/3/
Director Companies-California
(Real Estate Development)
James W. Andrews Executive Vice President 50 n/a -0- 23,300 1.17%/4/
Executive Vice and Chief Credit Officer,
President Business Bank of California/15/
and Chief Credit
Officer
Ruth E. Adell Executive Vice President 45 n/a 7,463 11,225 0.94%/4/
Executive Vice and Cashier, Business Bank
President of California/16/
and Chief
Financial Officer
Directors and 767,124 223,726 45.04%/4/
Executive
Officers as a
Group (11 in
number)
--------------------
</TABLE>
(Certain footnotes appear on previous page.)
/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.
/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.
33
<PAGE>
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 when 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). It is anticipated that the election of directors
at the Company's 2001 Annual Meeting of Shareholders will be for two classes of
directors with staggered terms, initially for terms of one and two years each.
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.
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.
34
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------------
Annual Compensation Stock Options
Name and Principal ------------------------------------ Granted (Number All Other
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.
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'
----------------
/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, 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.
35
<PAGE>
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 share2 with respect to all
such options. As of that same date, the fair market value of the Bank's common
stock was approximately $8.25 per share./2/
----------------
/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.
36
<PAGE>
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 20,1181 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.
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 April 28, 2000, there were issued and outstanding no shares of the
Company's Preferred Stock and 1,976,033 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,
----------------
/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.
37
<PAGE>
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.
38
<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 National Market to
become effective on or shortly after the effectiveness of this Registration
Statement. 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
the Bank's
Common Stock/2/ Approximate Approximate
--------------- Trading Number of
Calendar Quarter Ended High Low Volume/2/ Transactions
---------------------- ----- ----- ----------- ------------
<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
</TABLE>
As of March 31, 2000, there were approximately 295 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 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
----------------
/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.
39
<PAGE>
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 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
40
<PAGE>
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 15, 2000, the
Company has issued an aggregate of 4,823 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"), 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. 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. Neither
the Subordinated Debt Securities nor the Trust Preferred Securities were
registered under the Securities Act in reliance on the exemption set forth in
Section 4(2) thereof.
Item 5. Indemnification of Directors and Officers
Section 317 of the California Corporations Code governs indemnification of
the directors and officers of the Company./1/ 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 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
----------------
/1/ As used throughout this Registration Statement, the term "Company"
includes, where appropriate, both the Company and its consolidated
subsidiary.
41
<PAGE>
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.
42
<PAGE>
<TABLE>
<CAPTION>
PART F/S (FINANCIAL STATEMENTS)
--------------------------------
Page
----
<S> <C>
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 March 31, 2000 and December 31, 1999 (Unaudited).. F-30
Statements of Income (Unaudited)
Three Months Ended March 31, 2000 and March 31, 1999.............. F-31
Statement of Changes in Stockholders' Equity
and Comprehensive Income (Unaudited)
Three Months Ended March 31, 2000................................. F-32
Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2000 and March 31, 1999.............. F-33
</TABLE>
43
<PAGE>
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.
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.
Vavrinek, Trine, Day & Company
Rancho Cucamonga, California
March 3, 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) 703,000 377,000
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 $ 225,093,465 $ 182,454,678
====================== ======================
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 13,302,558 11,363,655
Accumulated other comprehensive income (877,999) 3,002
---------------------- ----------------------
Total Stockholders' Equity 18,681,413 17,092,926
---------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 225,093,465 $ 182,454,678
====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 integal 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 Total
Shares Common Comprehensive Retained Comprehensive Stockholders'
Outstanding Stock Income Earnings Income Equity
----------- ------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 1,459,657 $5,125,883 $ 9,506,727 $ 64,404 $ 14,697,014
Stock options exercised 93,497 516,538 516,538
Stock issued to 401-K Plan 6,021 83,848 83,848
Comprehensive income:
Net income for the period $1,856,928 1,856,928 1,856,928
Unrealized security holding losses
(net of $41,598 tax) (57,445) (57,445) (57,445)
Reclassification adjustment for
realized gains (net of $2,865 tax) (3,957) (3,957) (3,957)
----------
Total comprehensive income $1,795,526
--------- ---------- ========== ----------- ---------- -----------
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 (Note #11) 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
========= ========== =========== =========== ===========
</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) -
Net change in other assets and liabilities (808,882) 730,953
------------ ------------
Net Cash Provided By Operating Activities 1,988,712 3,377,462
------------ -------------
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 (10,492,556) (5,667,939)
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 (69,600,796) (21,144,816)
------------ ------------
</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>
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>
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
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 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.
F-7
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 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.
F-8
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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.
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
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.
F-9
<PAGE>
BUSINESS BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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
=========== ========= =========== ============
December 31, 1998
--------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ------------ ------------
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
=================== ================= ================= ===================
December 31, 1998
--------------------------------------------------------------- -------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------- ----------------- ----------------- -------------------
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>
1999Financial Printing GroupFinancial Printing Group 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>
<CAPTION>
<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
----------------- -----------------
Federal Income Tax
<S> <C> <C>
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
Other 45,000 289,000
Valuation allowance for investment securities 536,000 41,000
------------------ ----------------
1,075,000 909,000
Less: Valuation reserve (350,000) (450,000)
------------------ ----------------
725,000 459,000
Deferred Tax Liabilities
Fixed assets (22,000) (82,000)
------------------ ----------------
Net Deferred Tax Assets $ 703,000 $ 377,000
================== ================
</TABLE>
The valuation allowance is an amount which, in management's judgment, is less
than likely of subsequent realization. The balance decreased during 1999 by
$100,000 due to recognition of such tax benefits as a result of continued
earnings reported by the Bank.
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 Number of Shares
----------------------------- Weighted ---------------------------- 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
</TABLE>
<TABLE>
<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:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
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
=============== ===============
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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.
A. 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
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 - -
<CAPTION>
Notional Cost to Cede Notional Cost to Cede
Amount or Assume Amount or Assume
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
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.
. 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.
This statement has not been reviewed, or confirmed for accuracy or relevance,
by the Federal Deposit Insurance Corporation.
F-29
<PAGE>
BUSINESS BANCORP
BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
Assets
<TABLE>
<CAPTION>
(unaudited) (audited) (unaudited)
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
------------ ------------ ------------
Cash and due from banks $ 18,360,837 $ 13,971,280 $ 16,812,905
Federal funds sold 5,000,000 - 26,195,000
------------ ------------ ------------
Cash and Cash Equivalents 23,360,837 13,971,280 43,007,905
Investment securities
Available-for-sale 83,703,558 82,294,167 26,746,023
Held-to-maturity 1,010,520 1,012,076 5,356,457
Federal Home Loan Bank stock, at cost 1,500,000 1,200,000 -
Loans held for sale 3,246,557 1,689,783 1,395,246
Loans, net of unearned income 120,306,185 114,693,359 102,093,034
Less allowance for loan losses (1,298,656) (1,241,733) (1,353,260)
------------ ------------ ------------
Net loans 122,254,086 115,141,409 102,135,020
Bank premises and equipment 4,470,057 3,885,119 3,942,057
Accrued interest receivable 1,491,226 1,440,602 895,311
Deferred tax asset 674,095 703,000 386,358
Other real estate owned, net 740,750 1,036,227 962,110
Other assets 4,657,558 4,409,585 4,259,110
------------ ------------ ------------
Total Assets $243,862,687 $225,093,465 $187,690,351
============ ============ ============
Liabilities
Deposits
Demand deposits 80,380,493 74,533,528 70,359,119
NOW deposits 25,009,722 27,284,559 22,689,692
Money market and savings deposits 53,334,931 49,840,556 42,603,735
Time deposits $100,000 and over 17,657,065 15,274,884 13,107,002
Other time deposits 20,606,221 19,874,439 19,878,769
------------ ------------- ------------
Total deposits 196,988,432 186,807,966 168,638,317
Accrued interest and other liabilities 1,618,718 1,404,086 1,467,066
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
junior subordinated debentures 10,000,000 - -
Borrowed funds 16,000,000 18,200,000 -
------------ ------------- ------------
224,607,150 206,412,052 170,105,383
------------ ------------- ------------
Commitments and Contingencies
Stockholders' Equity
Common Stock 6,257,464 6,256,854 5,800,261
Retained Earnings 13,828,800 13,302,558 11,819,090
Accumulated other comprehensive income (830,727) (877,999) (34,383)
------------ ------------- ------------
Total Stockholders' Equity 19,255,537 18,681,413 17,584,968
------------ ------------- ------------
Total Liabilities and Stockholders' Equity $243,862,687 $ 225,093,465 $187,690,351
============ ============= ============
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS BANCORP
STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
(unaudited) (unaudited)
March 31, March 31,
2000 1999
------------ -----------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 3,198,326 $ 2,654,255
Interest on investment securities
Taxable 1,103,811 320,705
Exempt from Federal taxes 164,101 108,560
Interest on Federal funds sold 14,038 218,005
----------- -----------
Total Interest Income 4,480,276 3,301,525
----------- -----------
Interest Expense
Interest on deposits
NOW and Money Market accounts 404,696 279,913
Savings 126,766 123,679
Time deposits over $100,000 216,216 141,617
Other time deposits 227,070 238,525
Trust preferred securities 27,188 -
Other Borrowings 316,317 -
----------- -----------
Total Interest Expense 1,318,253 783,734
----------- -----------
Net Interest Income 3,162,023 2,517,791
Provision for Loan Losses 25,000 55,000
----------- -----------
Net Interest Income After Provision
for Loan Losses 3,137,023 2,462,791
----------- -----------
Other Income
Service Fees 550,215 536,048
Gain on sale of SBA loans 11,967 71,313
Gain on sale of other real estate owned 154,121 -
(Loss) gain on sale of investments 1,592 -
----------- -----------
Total Other Income 717,895 607,361
----------- -----------
Other Expenses
Salaries and employee benefits 1,565,712 1,268,447
Occupancy, net 196,142 181,507
Furniture and equipment 193,941 187,418
Other operating expenses 1,132,665 782,678
----------- -----------
Total Other Expenses 3,088,460 2,420,050
----------- -----------
Income Before Income Taxes 766,458 650,102
----------- -----------
Income Taxes 240,216 194,667
----------- -----------
Net Income $ 526,242 $ 455,435
=========== ===========
Earnings Per Share
Basic $ 0.27 $ 0.23
=========== ===========
Diluted $ 0.26 $ 0.22
=========== ===========
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
BUSINESS BANK OF CALIFORNIA
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE QUARTER AND YEAR ENDED MARCH 31, 2000 AND DECEMBER 31, 1999
Accumulated
Number of Other Total
Shares Common Comprehensive Retained Comprehensive 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
Comprehensive Income
Net income for the period $ 492,189 492,189 492,189
Unrealized security holding gains
(net of $196,069 tax) 416,647 416,647 416,647
----------
Total comprehensive income $ 492,189
---------- ---------- ========== ----------- ----------- -----------
Balance, March 31, 2000 1,976,033 $6,257,464 $13,828,800 $ (830,727) $19,255,537
========== ========== =========== =========== ===========
</TABLE>
F-32
<PAGE>
BUSINESS BANK OF CALIFORNIA
STATEMENTS OF CASH FLOWS
MARCH 31, 2000 AND MARCH 31, 1999
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 526,242 $ 455,435
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization of premises and equipment 163,540 154,416
Amortization of intangibles 35,944 41,519
Provision for loan losses 25,000 55,000
Provision for losses on other real estate owned 15,000
Net loss/(gain) on sale of assets (173,613) 27,081
Increase in accrued interest receivable (50,624) (82,240)
Decrease in deferred assets - 17,364
Net amoritization/accretion of premiums/discounts
on investment securities 222,263 66,890
Net change in other assets and liabilities (69,253) (41,250)
------------ ------------
Net Cash Provided By Operating Activities 679,499 709,215
------------ ------------
Cash Flows From Investing Activities
Proceeds from maturities of available-for-sale securities - 3,301,800
Proceeds from maturities of held-to-maturity securities 1,556 185,000
Purchase of investment securities available-for-sale (6,141,637) (11,413,848)
Proceeds from sales of securities 2,706,621
Principal reduction of mortgage-backed securities 1,581,095 3,233,073
Net (increase)/decrease in loans to customers (7,185,512) 2,157,494
Recoveries of loans previously written off 47,835 149,652
Capital expenditures (748,475) (105,636)
Proceeds from sale of equipment 17,900 -
Proceeds from sale of other real estate owned 449,599 32,631
------------ ------------
Net Cash Used In Investing Activities (9,271,018) (2,459,834)
------------ ------------
Cash Flows From Financing Activities
Net increase in demand deposits, NOW accounts,
savings accounts, and money market deposits 7,066,503 4,698,135
Net increase in certificates of deposit 3,113,963 97,537
Net decrease in FHLB borrowing (2,200,000) -
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 610 73,992
------------ ------------
Net Cash Provided By Financing Activities 17,981,076 4,869,664
------------ ------------
Net (Decrease)/Increase in Cash and Cash Equivalents 9,389,557 3,119,045
Cash and Cash Equivalents, Beginning of Year 13,971,280 39,888,860
----------- ------------
Cash and Cash Equivalents, End of Year $23,360,837 $ 43,007,905
=========== ============
Supplemental Disclosure of Cash Flows Information
Cash paid for interest $ 1,301,093 $ 1,361,074
=========== ============
Cash paid for taxes - -
=========== ============
Non-Cash Investing Activities
Net change in accumulated other comprehesive income $ 47,272 $ (37,385)
=========== ============
Transfer from loans to OREO - $ 44,635
=========== ============
Origination of loans to facilitate OREO - $ 76,800
=========== ============
</TABLE>
F-33
<PAGE>
PART III
--------
Item 1. Index to Exhibits
--------------------------
<TABLE>
<CAPTION>
Exhibit No. Description Numbered Page
----------- ----------- -------------
<C> <S> <C>
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Indenture dated as of March 23, 2000
10.1 Employment Agreement between the Bank and Alan J. Lane
10.2 Employment Agreement between the Bank and James W. Andrews
10.3 Employment Agreement between the Bank and Ruth E. Adell
10.4 Stock Option Plan
10.5 Lease for Main Office
10.6 Sublease for Hesperia Branch
10.7 Lease for Ontario Branch
10.8 Lease for Redlands Branch
10.9 Guarantee Agreement dated as of March 23, 2000
10.10 Amended and Restated Declaration of Trust of Business Capital
Trust I dated March 23, 2000
21 Subsidiaries of Registrant
</TABLE>
Item 2. Description of Exhibits
--------------------------------
See Item 1 above.
78
<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: June 23, 2000 BUSINESS BANCORP,
a California corporation
By: /s/ Alan J. Lane
--------------------------------------
Alan J. Lane
President and Chief Executive Officer
79
