SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1995, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __ to ___.
Commission file number 0-10773
SUNRISE BANCORP
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(Exact name of registrant as specified in its character)
California 94-2819328
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Sierragate Plaza, Roseville, CA 95678
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (916) 783-2800
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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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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained
to the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates of Sunrise
Bancorp at March 27, 1996 was $11,337,284, computed on the basis of the last
sale price reported on The Nasdaq National Market.
Number of shares of Common Stock outstanding at March 27, 1996: 4,263,298
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS.
Cautionary Statement Regarding Forward Looking Statements
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The statements in Part I of this Form 10-K that are forward looking are
based on management's expectations and actual results may differ materially.
The forward looking statements include the future impact of Supervision and
Regulation and Recent Legislation, the improvement in asset quality, manage-
ment's determination that there are adequate loan loss provisions, the ability
of the Company to manage its balance sheet with greater flexibility and
improved interest rate risk and liquidity position. Forward looking statements
involve numerous risks and uncertainties that could cause actual results to
differ materially, including the impact of competition with other financial
institutions for products and services, the impact of interest rate movement
and asset quality as it relates to changing economic factors.
GENERAL
Sunrise Bancorp (the "Company") is a California corporation and a bank
holding company registered with and subject to supervision and regulation by
the Board of Governors of the Federal Reserve System (the "FRB").
Sunrise Bank of California (the "Bank"), a wholly-owned subsidiary of the
Company, is a full service commercial bank chartered by the State of California.
The Bank has banking offices in the California cities of Roseville and Citrus
Heights and a loan production office in San Francisco. The Company has no
other subsidiaries.
Western Sunrise Mortgage Corporation ("Western"), sold by the Company
in 1992, was a wholly-owned subsidiary of the Company, providing mortgage
banking services including originating, selling and servicing residential real
estate mortgage loans.
Sunrise Funding Corporation, was a wholly owned subsidiary of the Company,
that was dissolved in 1995. Sunrise Funding Corporation had been an inactive
corporation.
The Company itself does not engage in any business activities other than
the ownership of the Bank. The Company's principal offices are located at
5 Sierragate Plaza, Roseville, California 95678. Its telephone number is
(916) 783-2800.
SUNRISE BANK OF CALIFORNIA
General Banking Services
The Bank conducts a commercial banking business, which includes accepting
demand, savings, time deposits and IRA accounts and making commercial, real
estate and consumer loans. The Bank also offers installment note collection,
issues cashier's checks and money orders, sells traveler's checks and provides
cash management, escrow accounting and other customary banking services. The
Bank is a member of the Federal Deposit Insurance Corporation (the "FDIC") and
the deposits of each depositor are insured up to $100,000. The Bank does not
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currently offer, nor does it have plans to offer, trust services.
The Bank's business plan emphasizes service to businesses and professional
firms located in Sacramento, Placer, Yolo, and El Dorado Counties. These areas
include the communities of Roseville, Rocklin and Loomis in Placer County and
the communities of Sacramento, Citrus Heights, Folsom, Orangevale and Rancho
Cordova in Sacramento County. Through its loan production office in San
Francisco, the Bank serves business and professional firms located in the
financial district of San Francisco and nonprofit organizations, in particular,
homeowner associations throughout the state. The Bank also draws business
from other portions of California.
The Bank's main office is located at 5 Sierragate Plaza, Roseville,
California. The Bank has one branch office located in Citrus Heights,
California and a loan production office in San Francisco. The Bank has no
applications pending to open additional branch offices.
Lending Activities
The Bank has concentrated its lending activities in three areas: real
estate loans (including interim construction loans as well as permanent
financing) commercial loans and other loans including consumer loans. At
December 31, 1995, these three categories accounted for approximately 53%, 42%
and 5%, respectively, of the Bank's loan portfolio. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -
"Results of Operations" and "Liquidity Management" for discussion concerning
the changes in the composition and maturities of the loan portfolio. The
interest rates charged by the Bank vary with the degree of risk and the size
and maturity of the loans involved and are generally affected by competition,
governmental regulation and by current money market rates. Beginning in 1990
the Bank adopted a strategy of limiting the origination of real estate cons-
truction loans. As a result, the outstanding balance of real estate construc-
tion and land development loans declined from $12,680,000 at December 31, 1992
to $4,383,000 at December 31, 1995.
Commercial loans consist chiefly of loans and revolving lines of credit to
middle-market local business concerns for their short-term financing require-
ments. It is the Bank's policy to emphasize the granting of commercial loans
of $150,000 to $750,000 to well-established businesses which have annual sales
of $2,000,000 to $10,000,000. Commercial loan customers also generally main-
tain a deposit relationship with the Bank.
Real estate mortgage loans in the Bank's portfolio are generally secured
by substantially or fully leased commercial buildings, and generally mature
within five years. The Bank's emphasis in construction lending is on single
family dwellings (both pre-sold and on a speculative basis) being constructed
by well established builders in Sacramento, Placer and El Dorado counties.
The Bank may also grant construction loans for commercial buildings, provided
the project is pre-leased or a permanent take-out loan is in place. Construc-
tion loan customers generally also maintain a deposit relationship with the
Bank.
At December 31, 1995 the Bank had loans outstanding of $66,765,000.
Inherent in the lending function is the fact that loan losses will be
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experienced and that the risk of loss will vary with the type of loan being
made and the creditworthiness of the borrower over the term of the loan. To
reflect the currently perceived risks of loss associated with its loan port-
folio, the Bank maintains an allowance for loan losses. At December 31, 1995
the Bank's allowance for loan losses was $2,505,000 or 4% of total loans.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS - Loan Portfolio Risk Elements and Summary of Loan Loss
Experience" for a discussion of management's policy for establishing and
maintaining the allowance for loan losses.
The Bank extends credit, from time to time, to executive officers,
directors, and their related interests, subject to prior approval of the
Board of Directors of the Bank. It is the Bank's policy that any extension
of credit to a director, executive officer, or their related interests must
be made under terms and conditions (including interests rates and collateral)
no more favorable than those available for comparable transactions to other
customers with similar qualifications, and that the extension of credit must
not involve more than the normal risk of collectability.
Deposits
The Bank's deposits are generally obtained from middle-market businesses,
small businesses, professionals, and individuals. The Bank has concentrated
on servicing middle market companies including those in the title insurance
business and homeowner associations and their management companies. Demand
deposits were 13% of total deposits at December 31, 1995, compared to 25% at
December 31, 1994, and 67% at December 31, 1993. Demand deposits from title
companies totaled $3,969,000, $15,363,000 and $157,944,000 at December 31,
1995, 1994, and 1993. These decreases were due to the Bank restructuring its
deposit mix and decreasing its concentration of title company deposits. As
of December 31, 1995 and 1994 deposits included $38,693,000 and $34,063,000,
or 37% and 29% of total deposits, of homeowner associations and thier
management companies. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Correspondent Banks
The Bank has correspondent relationships with three major commercial banks
and with the Federal Reserve Bank of San Francisco. These relationships are
a result of the Bank's efforts to obtain a wide range of services for the
Bank and its customers, including arranging loan participations, sale of
federal funds, trust services, and obtaining international letters of credit.
The Bank maintains such correspondent relationships to minimize the risk of
undue concentration of its resources with a few entities. The Bank does
not currently serve, nor does it have plans to serve, as a correspondent to
other banks.
The Bank is eligible to borrow funds on an overnight basis from the
Federal Reserve Bank of San Francisco. The maximum available advance is
dependent upon the dollar total of the Bank's loans pledged to collateralize
such borrowings. The Bank may also borrow funds by selling investment
securities under agreements to repurchase.
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Mortgage Banking Activities
General
The sale of Western Sunrise Mortgage Corporation ("Western") in 1992 had
a significant impact on the Company's mortgage banking activities and
resulting revenues. Subsequent to the sale the Bank created a mortgage
department to continue its mortgage banking operations. The Company's long-
term business plan called for the loan production to be similar with Western's
historical results. The Company did not achieve similar financial performance
results in 1993 and 1994. The Bank's mortgage activity,which include funding
loans, were substantially wound-up at December 31, 1994. The Bank currently
originates, and services residential real estate mortgage loans. The source
of revenues from the Company's mortgage banking operations as of December 31,
1994 and 1993 are as follows:
1994 1993
Gain on sales of mortgage loans $75,000 $2,888,000
Gain on sale of servicing rights $1,753,000 $2,365,000
Interest income $519,500 $1,617,000
Service fee revenue $71,900 $60,000
Loans Funded $123,500,000 $335,000,000
Loan Production
After the sale of Western the Company conducted all mortgage banking
activity through the Bank. The Bank originated and purchased conventional
mortgage loans and loans insured by the Federal Housing Administration
("FHA") or guaranteed by the Veterans Administration ("VA"). Substantially
all of the conventional loans originated by the Bank are conforming loans,
which qualify for inclusion in programs sponsored by Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC").
The Bank's guidelines for underwriting FHA insured loans and VA guaranteed
loans comply with the criteria established by those agencies. The Bank's
guidelines for underwriting conventional conforming loans comply with the
criteria employed by FNMA or FHLMC. The Bank's underwriting guidelines for
conventional non-conforming mortgage loans (e.g. loans for single family homes
with original balances in excess of the maximum amounts set by FNMA or FHLMC,
or for loans that do not otherwise meet the criteria established by FNMA or
FHLMC) are based on the underwriting standards required by institutional
investors to whom such loans are sold.
Loan Servicing
Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance, making advances to
cover delinquent payments, contacting delinquent mortgagors, supervising
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foreclosures and property dispositions in the event of unremedied defaults,
and generally administering the loans. The Bank received fees for servicing
mortgage loans, ranging generally from .25% to .50% per annum on the out-
standing principal balances of the loans. During 1994, the Bank sold all of
its remaining mortgage loan servicing rights recording a gain of $411,000
on the sale.
EMPLOYEES
At December 31, 1995, the Company and its subsidiary employed 59 full-
time equivalent officers and employees.
COMPETITION
The banking business in California and in the Bank's primary service area
is highly competitive. The Bank competes directly with major banks, other
independent banks, savings and loan associations, and credit unions. In
California and in the Bank's primary service area, major banks dominate the
commercial banking industry. Among the advantages which these banks have over
the Bank are their ability to finance wide-ranging advertising campaigns and to
allocate their investment assets, including loans, to regions of higher yield
and demand. By virtue of their larger amounts of capital, such institutions
have substantially greater lending limits than the Bank and perform certain
functions, including trust services and international banking, which are not
presently offered directly by the Bank, but are offered indirectly by the Bank
through correspondent institutions.
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest rate paid by the Bank to obtain
its deposits and its other borrowings and the interest rate received by the
Bank on loans extended to its customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings. Commercial banks
compete with savings and loan associations, credit unions, other financial
institutions and other entities for both deposits and loans.
The interest rate differentials of the Bank, and therefore its earnings,
are affected not only by general economic conditions, both domestic and
foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. This agency implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open market
operations in United States government securities, adjustments in the amount
of interest free reserves that banks and other financial institutions are
required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Bank. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any
future changes in monetary policies and their impact on the Bank are not
predictable.
California law and regulations of the Superintendent authorize California
licensed banks, subject to applicable limitations and approvals of the
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Superintendent, to (1) provide real estate appraisal services, management
consulting and advice services, and electronic data processing services;
(2) engage directly in real property investment or acquire and hold voting
stock of one or more corporations, the primary activities of which are
engaging in real property investment; (3) organize, sponsor, operate or
render investment advice to an investment company or to underwrite,
distribute or sell securities in California; and (4) invest in the capital
stock, obligations or other securities of corporations not acting as
insurance companies, insurance agents or insurance brokers. The
Superintendent has established certain procedures to be followed by banks
desiring to engage in insurance activities which include filing a report
describing (1) a proposed business plan and information regarding the
types of insurance products intended to be offered; (2) insurance
companies with which the banks intend to conduct business; (3) organ-
ization plans; (4) locations at which activities will be conducted;
and (5) proposed operational and compliance procedures and policies.
The California Department of Insurance regulates application processing,
licensing and supervision of insurance activities. National banks
(whether a holding company subsidiary or not) are limited under applicable
provisions of the National Bank Act to acting as an agent for fire, life
or other insurance only in locations with a population of 5,000 or less.
In recent years, banks and bank holding companies have increasingly
sought authorization to expand their product base to include insurance
activities. The Federal Deposit Insurance Corporation Improvement Act
of 1991 discussed below, generally restricts an insured state bank from
engaging as a principal in any activity that is impermissible for a
national bank. On January 18, 1995, the United States Supreme Court
unanimously upheld a ruling by the Office of the Comptroller of the
Currency (the "Comptroller") that permitted sale of fixed and variable
annuities by a national bank and confirmed the authority of the
Comptroller to interpret the powers of national banks under the National
Bank Act. The Comptroller determined that annuities are not insurance
products, but rather a type of investment instrument and that the sale
of annuities is incidental to the business of banking. It is not certain
what impact the decision will have upon the continuing effort of banks
and bank holding companies to engage in insurance related activities.
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995, effective October 2, 1995 (the "Caldera Act"),
amends the California Financial Code to, among other matters, regulate
the operations of state banks to eliminate conflicts with and to implement
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
discussed below. The Caldera Act includes (1) an election to permit
early interstate merger transactions; 2) a prohibitition against interstate
branching through the acquisition of a branch business unit located in
California without acquisition of the whole business unit of the California
bank; and (3) a prohibition against interstate branching through de nova
establishment of California branch offices. The Caldera Act mandates that
initial entry into California by an out-of-state institution be accomplished
by acquisition of or merger with an existing whole bank which has been in
existence for at least five years.
The State Bank Parity Act (the "Parity Act"), effective January 1,
1996, eliminates certain existing disparities between California state
chartered banks and federally chartered national banks by authorizing
the Superintendent to address such disparities through a streamlined rule
baking process. The Superintendent has taken action pursuant to the Parity
Act to, among other matters, authorize previously impermissible share
repurchases by state banks, subject to the prior approval of the
Superintendent.
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The Competitive Equality Banking Act of 1987 (the "1987 Banking Act")
also has affected the balance of competition among banks and other non-bank
financial institutions. Among other things, the 1987 Banking Act has
restricted the growth and formation of so-called "limited service" or
"non-bank" banks (institutions which accept deposits or make commercial
loans, but do not do both). Other key provisions of the 1987 Banking Act
included: (1) the expansion of the FDIC's authority in arranging
supervisory interstate acquisitions and acquisitions of failing banks;
(2) the renewal of emergency acquisition authorities; (3) the exemption
of assessment income of federal banking agencies from budget restrictions
imposed by the Office of Management and Budget and from the budget
balancing requirements of the Gramm-Rudman-Hollings Act; (4) a moratorium
(which ended on March 1, 1988), prohibiting commercial banks from engaging
in insurance or securities activities not approved prior to March 5, 1987;
(5) the application of the Glass-Steagall Act to state-chartered banks,
prohibiting affiliations with companies principally engaged in securities
activities; and (6) new check hold schedules which were implemented on
September 1, 1990.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the quali-
fication requirements of the California Corporate Securities Law of 1968,
as amended. The Bank's common stock, however, is exempt from such
requirements. The Company is also subject to the periodic reporting
requirements of Section 13 of the Securities Exchange Act of 1934, as
amended, which include, but are not limited to, annual, quarterly and other
current reports with the Securities and Exchange Commission.
The Bank is licensed by the California State Superintendent of Banks
("Superintendent"), its deposits are insured by the FDIC, and it has chosen
not to become a member of the Federal Reserve System. The Bank has no
subsidiaries. Consequently, the Bank is subject to the supervision of, and
is regularly examined by, the Superintendent and the FDIC. Such supervision
and regulation include comprehensive reviews of all major aspects of the Bank's
business and condition, including its capital ratios, allowance for possible
loan losses and other factors. However, no inference should be drawn that
such authorities have approved any such factors. The Company and the Bank are
required to file reports with the Superintendent, the FDIC and the Board of
Governors, and to provide such additional information as may be required.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"),
and is registered as such with, and subject to the supervision of, the
Board of Governors. The Company is required to obtain the approval of the
Board of Governors before it may acquire all or substantially all of the
assets of any bank, or ownership or control of the voting shares of any
bank if, after giving effect to such acquisition of shares, the Company
would own or control more than 5% of the voting shares of such bank. The
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Bank Holding Company Act prohibits the Company from acquiring any voting
shares of, or interest in, all or substantially all of the assets of, a
bank located outside the State of California unless such an acquisition
is specifically authorized by the laws of the state in which such bank
is located. Any such interstate acquisition is also subject to the pro-
visions of the Riegle-Neal Interstate Banking andBranching Efficiency Act
of 1994 discussed below.
The Company, and any subsidiaries which it may acquire or organize,
are deemed to be "affiliates" of the Bank within the meaning of that
term as defined in the Federal Reserve Act. This means, for example, that
there are limitations (a) on loans by the Bank to affiliates, and (b) on
investments by the Bank in affiliates' stock as collateral for loans to
any borrower. The Company and its subsidiary are also subject to certain
restrictions with respect to engaging in the underwriting, public sale
and distribution of securities.
In addition, regulations of the Board of Governors promulgated under
the Federal Reserve Act require that reserves be maintained by the Bank
in conjunction with any liability of the Company under any obligation
(promissory note, acknowledgement of advance, banker's acceptance or
similar obligation) with a weighted average maturity of less than seven
(7) years to the extent that the proceeds of such obligations are used
for the purpose of supplying funds to the Bank for use in its banking
business, or to maintain the availability of such funds.
The Company and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, sale or
lease of property or furnishing of services. Section 106(b) of the
Bank Holding Company Act Amendments of 1970 generally prohibits a bank
from tying a product or service to another product or service offered by
the bank, or by any of its affiliates. A prohibited tie-in arrangement
would exist where a bank varies the consideration for a product or service
on the condition that the customer obtain some additional product or
service from the bank or from any of its affiliates, or where as a
condition for providing a customer a product or service, the bank requires
the customer to purchase another product or service from the bank or from
any of its affiliates. These anti-tying restrictions also apply to bank
holding companies and their non-bank subsidiaries as if they were banks.
Section 106 contains a "traditional bank product" exception permitting a
bank to tie a product to a traditional bank product offered by the bank
itself, but not by any affiliated bank or non-bank. For example, a bank
may offer a discount on a loan on the condition that a customer maintain
a deposit account at that bank, however, the bank may not offer a discount
on a loan on the condition that a customer maintain a deposit account at
an affiliated bank. Effective September 2, 1994, the Board of Governors
adopted a rule permitting a bank or a bank holding company to offer a
discount on a traditional bank product, or on securities brokerage services
to a customer on condition that the customer obtain a traditional bank
product from an affiliate. Effective January 23, 1995, the Board of
Governors adopted a rule permitting a bank holding company or its
non-bank subsidiary to offer a discount on its product or service on
condition that a customer obtain any other product or service from that
holding company or from any of its non-bank affiliates. The rule permits
bank holding companies and their non-bank subsidiaries to offer discounts
on packaged products when no affiliated bank is involved in the arrangement
(both the tying and tied products are offered by bank holding companies or
their non-bank subsidiaries only), and both the tying and tied products are
separately available for purchase at competitive prices.
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Capital Requirements
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies
and banks. The guidelines are designed to make capital requirements
sensitive to differences in risk profiles among banking organizations, to
take into account off-balance sheet exposures and to aid in making the
definition of bank capital uniform internationally. Under the guidelines,
the Company and the Bank are required to maintain capital equal to at
least 8.0% of its assets and commitments to extend credit, weighted by
risk, of which at least 4.0% must consist primarily of common equity
(including retained earnings) and the remainder may consist of sub-
ordinated debt, cumulative preferred stock, or a limited amount of loan
loss reserves.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk and certain assets considered to present less
risk than others permit maintenance of capital at less than the 8% ratio.
For example, most home mortgage loans are placed in a 50% risk category
and therefore require maintenance of capital equal to 4% of such loans,
while commercial loans are placed in a 100% risk category and therefore
require maintenance of capital equal to 8% of such loans.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements, and Tier 2 comprising supple-
mentary capital requirements. At least one-half of the required capital
must be maintained in the form of Tier 1 capital. Tier 1 capital includes
common shareholders' equity and qualifying perpetual preferred stock.
However, no more than 25% of the Company's total Tier 1 capital may
consist of perpetual preferred stock. The definition of Tier 1 capital
for the Bank is the same, except that perpetual preferred stock may be
included only if it is noncumulative. Tier 2 capital includes, among other
items, limited life (and in the case of banks, cumulative) preferred stock,
mandatory convertible securities, subordinated debt and a limited amount
of reserve for credit losses.
The Board of Governors and the FDIC also adopted minimum leverage ratios
for banking organizations as a supplement to the risk-weighted capital guide-
lines. The leverage ratio is generally calculated using Tier 1 capital (as
defined under risk-based capital guidelines) divided by quarterly average
net total assets (excluding intangible assets and certain other adjustments).
The leverage ratio establishes a limit on the ability of banking organizations,
including the Company and the Bank, to increase assets and liabilities without
increasing capital proportionately.
The Board of Governors emphasized that the leverage ratio constitutes
a minimum requirement for well-run banking organizations having diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and a composite rating of 1 under the regu-
latory rating system for banks and 1 under the regulatory rating system
for bank holding companies. Banking organizations experiencing or antici-
pating significant growth, as well as those organizations which do not
exhibit the characteristics of a strong, well-run banking organization
described above, will be required to maintain minimum capital ranging
generally from 100 to 200 basis points in excess of the leverage ratio.
The FDIC adopted a substantially similar leverage ratio for state non-
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member banks which established (i) a 3% Tier 1 minimum capital leverage ratio
for highly-rated banks (those with a composite regulatory rating of 1 and not
experiencing or anticipating significant growth); and (ii) a 4% Tier 1 minimum
capital leverage ratio for all other banks, as a supplement to the risk-based
capital guidelines.
At December 31, 1995 the Company's total capital to total risk-based
assets ratio was 18.31% (16.95% for the Bank).
RECENT LEGISLATION
Prompt Corrective Action
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was enacted. FIRREA contains provisions'
which among other things: (1) established two separate financial industry
insurance funds, both administered by the Federal Deposit Insurance
Corporation ("FDIC") - the Bank Insurance Fund and the Savings Association
Insurance Fund; (2) abolished the Federal Home Loan Bank Board and the
Federal Savings and Loan Insurance Corporation and established the Office
of Thrift Supervision as an office of the Treasury Department, with
responsibility for examination and supervision of all savings and loan
associations; (3) increased the premiums paid by FDIC-insured institu-
tions; (4) permitted bank holding companies to acquire healthy savings
and loan associations; (5) enhanced federal banking agencies' enforcement
authority over the operations of all insured depository institutions and
increased the civil and criminal penalties that may be imposed in con-
nection with violations of laws and regulations; (6) curtailed investments
and certain other activities of state-chartered savings and loan associ-
ations; and (7) increased the capital requirements of savings and loan
associations.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. The FDICIA substantially
revised banking regulations, certain aspects of the Federal Deposit
Insurance Act and established a framework for determination of
capital adequacy of financial institutions, among other matters. Under
the FDICIA, financial institutions are placed into five capital adequacy
categories as follows: (1) well capitalized, (2) adequately capitalized,
(3) undercapitalized, (4) significantly undercapitalized, and (5)
critically undercapitalized. The FDICIA authorized the Board of
Governors, the Comptroller, and FDIC, to establish limits below which
financial institutions will be deemed critically undercapitalized,
provided that such limits can not be less than two percent (2%) of the
ratio of tangible equity to total assets or sixty-five percent (65%)
of the minimum leverage ratio established by regulation. Financial
institutions classified as undercapitalized or below are subject to
limitations including restrictions related to (i) growth of assets,
(ii) payment of interest on subordinated indebtedness, (iii) capital
distributions, and (iv) payment of management fees to a parent holding
company.
The FDICIA requires the Board of Governors and FDIC to initiate
corrective action regarding financial institutions which fail to meet
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minimum capital requirements. Such action may result in orders to
augment capital such as through sale of voting stock, reduction in total
assets, and restrictions related to correspondent bank deposits. Criti-
cally undercapitalized financial institutions may also be subject to
appointment of a receiver or conservator unless the financial institution
submits an adequate capitalization plan.
The FDIC adopted a regulation pursuant to Section 302(a) of the FDICIA,
effective on November 2, 1992, amending its regulations on insurance
assessments to, among other matters, adopt a recapitalization schedule for
the Bank Insurance Fund and establish a transitional risk-based insurance
assessment system to replace the uniform assessment rate system previously
applicable to insured financial institution members of the Bank Insurance
Fund. The regulation requires that each insured institution be assigned
to one of three capital groups and one of three supervisory subgroups
within each capital group, based upon financial data reported by each
institution in its Report of Income and Condition, as well as supervisory
evaluations by the institution's primary federal regulatory agency. The
three capital groups have the following characteristics: (1) "Well
capitalized" - consisting of institutions having a total risk-based capital
ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater,
and a Tier 1 leverage ratio of 5% or greater; (2) "Adequately capitalized"
- - consisting of institutions that are not "well capitalized," but have a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater, and a Tier 1 leverage ratio of 4% or greater; and
(3) "Undercapitalized" - consisting of institutions that do not qualify as
either "well capitalized" or "adequately capitalized." The three supervisory
subgroups have the following characteristics: (A) Subgroup "A" - consisting
of financially sound institutions with only a few minor weaknesses; (B)
Subgroup "B" - consisting of institutions that demonstrate deterioration of
the institution and increased risk of loss to the Bank Insurance Fund;
and (C) Subgroup "C" - consisting of institutions that pose a substantial
probability of loss to the Bank Insurance Fund unless effective corrective
action is taken.
The annual assessment rate for each insured institution continued at the
rate of $0.23 per $100 of deposits through year-end December 31, 1992.
Commencing January 1, 1993, the assessment rate was based upon a risk
assessment schedule with rates ranging from $0.23 to $0.31 per $100 of deposits
utilizing the capital group and supervisory subgroup analysis. On June 25,
1993, the FDIC adopted a permanent risk-based insurance assessment system
which retained the transitional system without substantial modification. In
late 1994 and early 1995, the FDIC proposed two significant changes to the
deposit insurance assessment system to (1) redefine the deposit assessment
base which has been defined to equal an institution's total domestic deposits,
plus or minus certain adjustments, but without significantly impacting total
industry-wide assessments (although significant changes in assessments of
individual institutions may occur); and (2) establish a new assessment rate
schedule, using the present group and subgroup categories, but with assessment
rates varying from $0.04 to $0.31 per $100 of deposits, resulting in a spread
between the minimum and maximum rates of $0.27 rather than the present $0.08.
On August 8, 1995, the FDIC voted to reduce the deposit insurance assessment
rates to a range from $0.04 to $0.31 per $100 of deposits and subsequently,
on November 14, 1995, the FDIC voted again to further reduce the assessment
rates to a range form $0 to $0.27 per $100 of deposits, subject to a minimum
$2,000.00 annual assessment for all institutions regardless of classification
within the capital groups and supervisory subgroups as follows:
<PAGE>
Supervisory Subgroup
Capital Group A B C
1 $0.00 $0.03 $0.17
2 0.03 0.10 0.24
3 0.10 0.24 0.27
The above assessment rates are effective for the first semiannual
assessment period of 1996. Based upon the above risk-based assessment
rate schedule, the Company's and Bank's current capital ratios, the Bank's
current level of deposits, and assuming no change in the assessment rate
applicable to the Bank during 1996, the Company estimates that its annual
noninterest expense attributed to assessments will decrease by approxi-
mately $118,000 during 1996.
The Board of Governors and FDIC adopted regulations effective
December 19, 1992, implementing a system of prompt corrective action
pursuant to Section 38 of the Federal Deposit Insurance Act and Section
131 of the FDICIA. The regulations establish five capital categories
with the following characteristics: (1) "Well capitalized" - consist-
ing of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage
ratio of 5% or greater, and the institution is not subject to an order,
written agreement, capital directive or prompt corrective action directive;
(2) "Adequately capitalized" - consisting of institutions with a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well capitalized" institu-
tion; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio
of less than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-based
capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less
than 3%, or a leverage ratio of less than 3%; (5) "Critically undercap-
italized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of
financial institutions within the capital categories, filing and
reviewing capital restoration plans required under the regulations and
procedures for issuance of directives by the appropriate regulatory agency,
among other matters. The regulations impose restrictions upon all institu-
tions to refrain from certain actions which would cause an institution to
be classified within any one of the three "undercapitalized" categories,
such as declaration of dividends or other capital distributions or payment
of management fees, if following the distribution or payment the institution
would be classified within one of the "undercapitalized" categories. In
addition, institutions which are classified in one of the three "under-
capitalized" categories are subject to certain mandatory and discretionary
supervisory actions. Mandatory supervisory actions include (1) increased
monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion,
<PAGE>
and new business activities without prior approval of the appropriate
federal banking agency. Discretionary supervisory actions may include
(1) requirements to augment capital; (2) restrictions upon affiliate
transactions; (3) restrictions upon deposit gathering activities and
interest rates paid; (4) replacement of senior executive officers and
directors; (5) restrictions upon activities of the institution and its
affiliates; (6) requiring divestiture or sale of the institution; and
(7) any other supervisory action that the appropriate federal banking
agency determines is necessary to further the purposes of the regulations.
Further, the federal banking agencies may not accept a capital restora-
tion plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration
plan to be acceptable, the depository institution's parent holding company
must guarantee that the institution will comply with such capital restor-
ation plan. The aggregate liability of the parent holding company under
the guaranty is limited to the lesser of (i) an amount equal to 5 percent
of the depository institution's total assets at the time it became
undercapitalized, and (ii) the amount that is necessary (or would have
been necessary) to bring the institution into compliance with all
capital standards applicable with respect to such institution as of
the time it fails to comply with the plan. If a depository institution
fails to submit an acceptable plan, it is treated as if it were "signi-
ficantly undercapitalized." The FDICIA also restricts the solicitation
and acceptance of and interest rates payable on brokered deposits by
insured depository institutions that are not "well capitalized." An
"undercapitalized" institution is not allowed to solicit deposits by
offering rates of interest that are significantly higher than the
prevailing rates of interest on insured deposits in the particular
institution's normal market areas or in the market areas in which such
deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership
within 90 days of such determination unless it is also determined that
some other course of action would better serve the purposes of the regu-
lations. Critically undercapitalized institutions are also prohibited
from making (but not accruing) any payment of principal or interest on
subordinated debt without the prior approval of the FDIC and the FDIC
must prohibit a critically undercapitalized institution from taking
certain other actions without its prior approval, including (1) entering
into any material transaction other than in the usual course of business,
including investment expansion, acquisition, sale of assets or other
similar actions; (2) extending credit for any highly leveraged trans-
action; (3) amending articles or bylaws unless required to do so to
comply with any law, regulation or order; (4) making any material change
in accounting methods; (5) engaging in certain affiliate transactions;
(6) paying excessive compensation or bonuses; and (7) paying interest
on new or renewed liabilities at rates which would increase the weighted
average costs of funds beyond prevailing rates in the institution's normal
market areas.
Under the FDICIA, the federal banking agencies have adopted
regulations which require institutions to establish and maintain compre-
hensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative
policies, portfolio diversification standards, and documentation,
approval and reporting requirements. The FDICIA further generally
prohibits an insured state bank from engaging as a principal in any
activity that is impermissible for a national bank, absent FDIC
determination that the activity would not pose a significant risk to
the Bank Insurance Fund, and that the bank is, and will continue to
<PAGE?
be, within applicable capital standards. Similar restrictions apply to
subsidiaries of insured state banks. The Company does not currently
intend to engage in any activities which would be restricted or
prohibited under the FDICIA.
As required by the FDICIA, the federal banking agencies have
solicited comments on a proposed method of incorporating an interest
rate risk component into the current risk-based capital guidelines,
with the goal of ensuring that institutions with high levels of interest
rate risk have sufficient capital to cover their exposures. Interest
rate risk is the risk that changes in market interest rates might
adversely affect a bank's financial condition. Under the proposal,
interest rate risk exposures would be quantified by weighing assets,
liabilities and off-balance sheet items by risk factors which approx-
imate sensitivity to interest rate fluctuations. Institutions identified
as having an interest rate risk exposure greater than a defined threshold
would be required to allocate additional capital to support this higher
risk. Higher individual capital allocations could be required by the bank
regulators based on supervisory concerns. The agencies adopted a final
rule effective September 1, 1995 which is substantially similar to the
proposed rule, except that the final rule does not establish (1) a
measurement framework for assessing the level of a bank's interest rate
exposure; nor (2) a minimum level of exposure above which a bank will
be required to hold additional capital for interest rate risk if it has
a significant exposure or a weak interest rate risk management process.
The agencies also solicited comments on and are continuing their analysis
of a proposed policy statement which would establish a framework to
measure and monitor interest rate exposure.
The federal financial institution agencies published a final rule
on July 10, 1995 to be effective on August 9, 1995, implementing safety
and soundness standards. The FDICIA added a new Section 39 to the
Federal Deposit Insurance Act which required the agencies to establish
safety and soundness standards for insured financial institutions
covering (1) internal controls, information systems and internal audit
systems; (2) loan documentation; (3) credit underwriting; (4) interest
rate exposure; (5) asset growth; (6) compensation, fees and benefits;
(7) asset quality, earnings and stock valuation; and (8) excessive com-
pensation for executive officers, directors or principal shareholder
which could lead to material financial loss. The agencies issued the
final rule in the form of guidelines only for operational, managerial
and compensation standards and reissued for comments proposed standards
related to asset quality and earnings which are less restrictive than
the earlier proposal in November 1993. Unlike the earlier proposal,
the guidelines under the final rule do not apply to depository institution
holding companies and the stock valuation standard was eliminated. If an
agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial
institution to submit to the agency an acceptable plan to achieve
compliance with the standard. If the agency requires submission of a
compliance plan and the institution fails to timely submit an acceptable
plan or to implement an accepted plan, the agency must require the
institution to correct the deficiency. Under the final rule, an institution
must file a compliance plan within 30 days of a request to do so from the
institution's primary federal regulatory agency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an
existing plan particularly where failure to meet one or more of the
standards could threaten the safe and sound operation of the institution.
The Board of Governors issued final amendments to its risk-based
capital guidelines to be effective December 31, 1994, requiring that net
unrealized holding gains and losses on securities available for sale
<PAGE>
determined in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," are not to be included in
the Tier 1 capital component consisting of common stockholders' equity.
Net unrealized losses on marketable equity securities (equity securities
with a readily determinable fair value), however, will continue to be
deducted from Tier 1 capital. This rule has the general effect of valuing
available for sale securities as amortized cost (based on historical cost)
rather than at fair value (generally at market value) for purposes of
calculating the risk-based and leverage capital ratios.
On December 13, 1994, the Board of Governors issued amendments to
its risk-based capital guidelines regarding concentration of credit risk
and risks of non-traditional activities, which were effective January 17,
1995. As amended, the risk-based capital guidelines identify concentrations
of credit risk and evaluate an institution's ability to manage such risks
and the risk posed by non-traditional activities as important factors in
assessing an institution's overall capital adequacy.
Since 1986, California has permitted California banks and bank
holding companies to be acquired by banking organizations based in other
states on a "reciprocal" basis (i.e., provided the other state's laws
permit California banking organizations to acquire banking organizations
in that state on substantially the same terms and conditions applicable to
local banking organizations). Some increase in merger and acquisition
activity among California and out-of-state banking organizations has
occurred as a result of this law, as well as increased competition for
loans and deposits.
President Clinton signed the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Banking Act")
on September 29, 1994. The Interstate Banking Act authorizes the Board
of Governors to approve interstate acquisitions of banks or bank branch
offices, generally without regard to conflicting requirements of state
law, by adequately capitalized and managed bank holding companies, after
September 29, 1995, and authorizes the other federal banking agencies to
approve similar acquisitions by banks after June 1, 1997, unless prior to
that date states enact laws prohibiting such acquisitions. Such so-called
"opt out" measures are pending or have been passed in a number of states.
States also may "opt in" to this authority at an earlier date if they
enact laws specifically permitting such acquisitions. After March 29,
1996, the Interstate Banking Act authorizes the appropriate federal agency
to approve the consolidation of banks located in different states but
operated by the same bank holding company.
The Interstate Banking Act imposes several limitations on the
Board of Governors' general authority to approve such acquisitions
including (1) preservation of state laws requiring acquisition target
banks to have been chartered for minimum time periods not in excess
of five years; (2) precluding acquisitions which would result in a con-
centration of deposits greater than 10% of total United States deposits,
or 30% of total deposits in the state in which the acquired bank or branch
office is located, subject to a state's right to either increase or decrease
the 30% threshold and, in the absence of legislation, the right of a
state banking regulatory agency to approve a transaction under certain
circumstances; (3) Board of Governors' assessment of compliance with
antitrust and community reinvestment laws, including a separate community
reinvestment act analysis for each state in which a multi-state banking
operation approved under the Interstate Banking Act exists; and (4)
maintenance of state contingency laws requiring a bank acquisition target
<PAGE>
to maintain assets available for call by state-sponsored housing entities
established under state law, provided (i) the state law does not discriminate
against out-of-state banks, holding companies or their subsidiaries, (ii)
the state law was in effect at the enactment date of the Interstate
Banking Act, (iii) the FDIC has not determined that compliance with the
state law would result in an unacceptable risk to the deposit insurance
fund, and (iv) compliance with the state law would not place the bank in
an unsafe or unsound condition.
The federal banking agencies are required to adopt regulations
effective June 1, 1997 which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit
production. Such regulations will require the appropriate federal agency
of an out-of-state bank or bank holding company to review such bank's
operations in the host state in order to determine whether it is meeting
the credit needs of the host state communities in which it operates,
whenever it determines that such bank's ratio of loans to deposits in the
host state is less than one-half the average of the total loans to total
deposits for banks domiciled in the host state. If the agency reaches a
negative conclusion, it is authorized to restrict the opening of new branch
offices and to order the closure of the host state branch offices of the
out-of-state bank. Before an agency may exercise authority to close such
a branch office or offices, the Interstate Banking Act requires that it
notify the bank and schedule a hearing. Banks which determine to close
branches located in low or moderate income areas acquired under the
Interstate Banking Act must notify their customers how to contact the
appropriate federal agency to complain about the closing. If the agency
determines that any such complaint is not frivolous, it must convene a
meeting of concerned organizations and individuals to explore the feasibi-
lity of adequate alternative sources of banking services for the affected
communities.
In October 1994, the federal financial institution regulatory
agencies jointly proposed a comprehensive revision of their regulations
implementing the Community Reinvestment Act ("CRA"), enacted in 1977 to
promote lending by financial institutions to individuals and businesses
located in low and moderate income areas. In May 1995, the proposed CRA
regulations were published in final form effective as of July 1, 1995.
The revised regulations included transitional phase-in provisions which
generally require mandatory compliance not later than July 1, 1997,
although earlier voluntary compliance is permissible.
Under the former CRA regulations, compliance was evaluated by an
assessment of the institution's method for determining, and efforts to
meet, the credit needs of such borrowers. The system was highly
criticized by depository institutions and their trade groups as subjective,
inconsistent and burdensome, and by consumer representatives for its
alleged failure to aggressively penalize poor CRA performance by financial
institutions, the revised CRA regulations emphasize an assessment of
actual performance rather than of the procedures followed by a bank, to
evaluate compliance with the CRA. Overall CRA compliance continues to
be rated across a four-point scale from "outstanding" to "substantial
noncompliance," and continues to be a factor in review of applications to
merge, establish new branches or form bank holding companies. In addition,
any bank rated in "substantial noncompliance" with the revised CRA
regulations may be subject to enforcement proceedings.
The regulations provide that "small banks," which are defined to
include any independent bank with total assets of less than $250 million,
are to be evaluated by means of a so-called "streamlined assessment method"
unless such a bank elects to be evaluated by one of the other methods
provided in the regulations. The differences between the evaluation
methods may be summarized as follows:
<PAGE>
(1) The "streamlined assessment method" presumptively applicable
to small banks requires that a bank's CRA compliance be evaluated pursuant
to five "assessment criteria," including its (i) loan-to-deposit ratio (as
adjusted for seasonal variations and other lending-related activities, such
as sales to the secondary market or community development lending); (ii)
percentage of loans and other lending-related activities in the bank's
service area(s); (iii) distribution of loans and other lending-related
activities among borrowers of different income levels, given the demographic
characteristics of its service area(s); (iv) geographic distribution of
loans and other lending-related activities within its service area(s); and
(v) record of response to written complaints, if any, about its CRA per-
formance.
(2) The "lending, investments and service tests method" is
applicable to all banks larger than $250 million which are not wholesale or
limited purpose banks and do not elect to be evaluated by the "strategic
plan assessment method." Central to this method is the requirement that
such banks collect and report to their primary federal banking regulators
detailed information regarding home mortgage, small business and farm and
community development loans which is then used to evaluate CRA compliance.
At the bank's option, data regarding consumer loans and any other loan
distribution it may choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its
community development loans, the innovativeness or flexibility of its
lending practices to meet low and moderate income credit needs and, at
the bank's election, lending by affiliates or through consortia or third-
parties in which the bank has an investment interest; (ii) investment
performance by measure of the bank's "qualified investments," that is,
the extent to which the bank's investments, deposits, membership shares
in a credit union, or grants primarily benefit low or moderate income
individuals and small businesses and farms, address affordable housing or
other needs not met by the private market, or assist any minority or
women-owned depository institution by donating, selling on favorable
terms or providing on a rent-free basis any branch of the bank located
in a predominantly minority neighborhood; and (iii) service performance
by evaluating the demographic distribution of the bank's branches and
ATMs, its record of opening and closing them, the availability of alter-
native retail delivery systems (such as telephone banking, banking by
mail or at work, and mobile facilities) in low and moderate income
geographies and to low and moderate income individuals, and (given the
characteristics of the bank's service areas and its capacity and cons-
traints) the extent to which the bank provides "community development
services" (services which primarily benefit low and moderate income
individuals or small farms and businesses or address affordable housing
needs not met by the private market) and their innovativeness and res-
ponsiveness.
(3) Wholesale or limited purpose banks which do not make home
mortgage, small farm or business or consumer loans to retail customers
may elect, subject to agency approval of their status, to be evaluated
by the "community development test method," which assesses the number
and amount of the bank's community development loans, qualified invest-
ments and community development services and their innovativeness and
complexity.
<PAGE>
(4) Any bank may request to be evaluated by the "strategic plan
assessment method" by submitting a strategic plan for review and approval.
Such a plan must involve public participation in its preparation, and
contain measurable goals for meeting low and moderate income credit needs
through lending, investments and provision of services. Such plans
generally would be evaluated by measuring strategic plan goals against
standards similar to those which would be applied in evaluating a bank
according to the "lending, investments and service tests method."
The federal financial institution regulatory agencies jointly
issued a final rule effective as of January 1, 1996 to make certain
technical corrections to the revised CRA regulations. Among other
matters, the rule clarifies the transition from the former CRA regulations
to the revised CRA regulations by confirming that when an institution either
voluntarily or mandatorily becomes subject to the performance test and
standards of the revised regulations, the institution must comply with all
of the requirements of the revised regulations and is no longer subject
to the provisions of the former CRA regulations.
The Bank has a current rating of "satisfactory" CRA compliance,
and believes that it would not have received any lower rating if the regu-
lations had been in effect when the Bank was last examined for CRA
compliance in the fourth quarter of 1994.
The United States Congress has periodically considered legislation
which could result in further deregulation of banks and other financial
institutions. Such legislation could result in further relaxation or
elimination of geographic restrictions on banks and bank holding companies
and increase the level of direct competition with other financial
institutions, including mutual funds, securities brokerage firms, investment
banking firms and other entities. The effect of such legislation on the
Company and the Bank cannot be determined at this time.
ACCOUNTING PRONOUNCEMENTS
In December 1991, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments." SFAS No. 107
requires entities such as the Company to disclose, either in the body of
its financial statements or in accompanying notes, the "fair value" of
financial instruments for which it is "practicable to estimate that value."
Most deposit and loan instruments issued by financial institutions, however,
are subject to SFAS No. 107, and its effect on the Company is to require
financial statement disclosure, in addition to their carrying value, of the
fair value of most of the assets and liabilities of the Company. These
disclosures apply to off-balance sheet financial instruments as well as
those recorded on the balance sheet. Excluded from the disclosure
requirement, among other types of instruments, are most employee benefit
plan obligations, insurance contracts, leases, warranties, minority and
equity interests in consolidated subsidiaries, and other investments
accounted for under the equity method. The provisions of SFAS 107 were
effective for the Company as of December 31, 1994.
The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". The cumulative effect of
<PAGE>
adopting SFAS No. 109 on the Company's financial statements as of
January, 1993 was to increase income from continuing operations by
$250,000($.06 per share).
SFAS 109 applies the asset and liability method in accounting for
income taxes. The provision for income tax is comprised of the current
year tax expense and the net change in deferred tax assets and liabilities
as of the balance sheet date. Deferred tax assets and liabilities are
calculated by applying the income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Deferred
tax assets are reduced by a valuation allowance for any tax benefits to
the extent that, in the opinion of management, are unlikely to be
realized.
In October, 1994, the FASB issued SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
The Company adopted SFAS No. 119 as of December 31, 1994. SFAS No. 119
requires disclosures about derivative financial instruments----futures,
forward, swap, and option contracts, and other financial instruments with
similar characteristics. It requires disclosures about amounts, nature,
and terms of derivative financial instruments that are not subject to
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk", because they do not result in off-balance-sheet risk of
accounting loss. This statement requires disaggregation of information about
financial instruments with off-balance-sheet risk of accounting loss by class,
business activity, risk, or other category that is consistent with the
management of those instruments. It also requires that fair value infor-
mation be presented without combining, aggregating, or netting the fair value
of derivative financial instruments with the fair value of nonderivative
financial instruments. As of December 31, 1994, the Bank has no derivative
financial instruments that would be subject to such disclosures.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 establishes standards for accounting for the impairment of long-
lived assets, certain identifiable intangibles and goodwill. It does not
apply to financial instruments, long-term customer relationships of a
financial institution (e.g. core deposit intangibles), mortgage and other
servicing rights, or deferred tax assets. This standard ill be effective
for the Company beginning January 1, 1996. The Company has determined that
the effect of adoption of this standard will not be material.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which must be adopted by the Company effective January
1, 1996. SFAS No. 122 requires that the Company recognize as separate
assets rights to service mortgage loans for others, whether those servicing
rights are originated or purchased. Previously, only purchased servicing
rights were capitalizable as an asset whereas internally originated rights
were expensed. SFAS No. 122 also requires that capitalized servicing
rights be assessed for impairment based on fair market value, rather than
an estimate of undiscounted future cash flows. The Company has determined
that the effect of adoption of this standard will not be material.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes accounting and
disclosure requirements using a fair value method of accounting for stock
based employee compensation plans. Under SFAS No. 123, the Company may
either adopt the new fair value based accounting method or continue the
intrinsic value based method and provide proforma disclosures of net
income and earnings per share as if the accounting provisions of SFAS
No. 123 has been adopted. The Company plans to adopt only the disclosure
requirements of SFAS No. 123 and such adoption will have no effect on the
Company's consolidated net earnings or cash flows.
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal office, the main office of the Bank, and
other administrative offices of the Company and the Bank are located at
5 Sierragate Plaza, Roseville, California in a three-story office building.
The Company leases approximately 40,000 square feet of space pursuant to a
triple net lease maturing in May of 1999 which provides for monthly rental of
$59,605 with annual increases based on increases in the Consumer Price
Index (not to exceed 6% per year) for the balance of the term. The lease
was entered into on June 9, 1989, and may be extended by the Company for an
additional period of ten years at the fair market rental at that time.
The Bank subleases the rentable square feet from the Company at the same
triple net rental rate.
The Citrus Heights office of the Bank is located at 7777 Sunrise
Boulevard, Citrus Heights, California. The Company entered into a
seven-year lease commencing January 16, 1989, with an option to renew for
an additional five years. The banking is a free-standing facility of
approximately 3,969 square feet in a shopping center. The lease provides
for a monthly rental of $8,552 with annual increases based on increases in
the Consumer Price Index (not to exceed 6% per year) for the balance of the
term. The Company is also responsible for its pro-rata share of the
operating costs of the shopping center. In January 1996, the Company
extended the lease for one-year expiring in January 1997, at which time
the term of the lease will be month to month terminable by either party with
a ninety day notice.
The San Francisco loan production office is located at 220 Sansome
Street, Suite 220, San Francisco, California. This 3,229 square feet of
office space is leased by the Bank pursuant to a month to month lease which
calls for rental payments of $5,187 per month. The lease is terminable by
either party with one month notice.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor any of its subsidiaries is a party to, nor is
any of their property the subject of, any material pending legal proceedings
other than ordinary routine litigation incidental to their respective busi-
nesses nor are any such proceedings known to be contemplated by governmental
authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by the report.
<PAGE>
PART II
ITEM 5
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER' MATTERS
The Company's common stock (symbol: "SRBC") is traded on the Nasdaq
National Market (NNM). The common stock was first included in the Nasdaq
stock market on May 25, 1989, and was first quoted on October 3, 1989. The
prices shown below are high and low sale prices.
Price of Common Stock
1995 1994
Quarter High Low High Low
First $2.00 $1.50 $3.75 $3.25
Second 2.88 1.63 3.38 2.00
Third 3.63 2.50 2.75 2.00
Fourth 3.00 2.25 2.25 1.50
At December 31, 1995, there were approximately 1000 holders of record
of the Company's common stock.
The Company has not paid any cash dividend on its common stock since
1984. The shareholders of the Company are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally available
therefor, subject to the restrictions set forth in the California General
Corporation Law ("Corporation Law"). The Corporation Law provides that
a corporation may make a distribution to its shareholders if the corpor-
ation's retained earnings equal at least the amount of the proposed distri-
bution. The Corporation Law further provides that, if sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it meets two condi-
tions, which generally stated are as follows: (i) the corporation's assets
equal at least 1 1/4 times its liabilities; and (ii) the corporation's current
assets equal at least its current liabilities or, if the average of the
corporation's earnings before taxes on income and before interest expense for
the two preceding fiscal years was less than the average of the corporation's
interest expense for such fiscal years, then the corporation's current assets
must equal at least 1 1/4 times its current liabilities.
<PAGE>
The Federal Reserve Board has issued a policy statement that a bank
holding company should not declare or pay a cash dividend to its shareholders
if the dividend would place undue pressure on the capital of its subsidiary
banks or if the dividend could be funded only through additional borrowings or
other arrangements that might adversely affect the financial position of the
bank holding company. In addition, a bank holding company may not continue
its existing rate of cash dividends on its common stock unless its net income
is sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality, and over-
all financial conditions.
The payment of cash dividends by the Company is also further restricted
by the terms of the voluntary agreement with the regulators as discussed in
"Management's Discussion and Analysis - of Financial Condition and Results of
Operations - Regulatory Matters."
The primary source of funds for payment of dividends by the Company
is the receipt of dividends from the Company's subsidiaries. Under California
law, the Board of Directors of the Bank may declare a cash dividend up to an
amount which is equal to the lesser of (i) retained earnings of the bank or
(ii) the bank's net income for its last three fiscal years, less the amount
of any distributions made to shareholders during such period. If the above
test is not met, cash dividends may be paid with the prior approval of the
California Superintendent of Banks in an amount which does not exceed the
greater 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. Under these restrictions, the Bank cannot currently pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA
<PAGE>
<TABLE>
SUNRISE BANCORP AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(dollar amounts in thousands, except per share amounts)
<CAPTION>
1995 1994 1993 1992 1991
Operations for the period: ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total interest income $10,134 $12,200 $13,749 $15,697 $21,126
Total interest expense 3,622 3,373 2,618 4,485 9,852
Net interest income 6,512 8,827 11,131 11,212 11,274
Provision for loan losses -- (2,668) (7,700) (1,720) (1,250)
Non Interest income (1) 111 2,587 4,547 11,907 6,919
Non Interest expenses (8,142) (13,249) (15,211) (14,920) (13,684)
Provision for income taxes (1) 1,461 3,065 (2,876) (1,339)
Net income (loss) before
extraordinary item and cumulative effect
of change in accounting principle (1,520) (3,042) (4,168) 3,603 1,920
Cumulative effect of a change in
accounting principle (2) (250) - -
Net income (loss) ($1,520) ($3,042) ($3,918) $3,603 $1,920
Per share amounts:
Net income (loss) before cumulative effect
of change in accounting principle ($0.36) ($0.71) ($0.98) $0.85 $0.49
Net income (loss) ($0.36) ($0.71) ($0.92) $0.85 $0.49
Weighted average shares outstanding 4,263 4,263 4,263 4,252 3,915
Balances at end of period:
Interest bearing deposits,
federal funds sold and
securities purchased under
agreement to resell, and
investment securities $49,273 $54,040 $127,891 $96,862 $41,890
Mortgage loans held for sale - - $35,812 $163 $59,474
Net loans $64,260 $77,189 $110,529 $116,957 $124,546
Total assets $120,984 $146,500 $307,155 $245,251 $268,662
Time deposits of
$100,000 or more $10,183 $7,637 $18,572 $6,161 $7,123
Total deposit liabilities $103,883 $116,943 $284,869 $219,244 $203,401
Shareholders' equity $16,489 $18,009 $21,051 $24,972 $21,129
Book value per share $3.87 $4.22 $4.93 $5.87 $5.40
Financial ratios:
Return on average assets (1.13)% (1.52)% (1.57)% 1.48 % 0.84 %
Return on average equity (8.49)% (15.27)% (15.55)% 16.16 % 10.26 %
Net interest margin 5.16 % 4.88 % 5.14 % 5.30 % 5.40 %
Average equity to average assets 13.29 % 9.93 % 10.12 % 9.19 % 8.18 %
Leverage ratio (Bank) 0.00 % 8.42 % 6.71 % 10.29 % 9.21 %
Net chargeoffs to average loans 2.21 % 3.98 % 4.31 % 0.42 % 0.86 %
Non performing loans to total loans 4.97 % 9.05 % 4.57 % 3.89 % 3.01 %
Allowance for loan losses to
total loans 3.75 % 5.11 % 4.83 % 2.67 % 1.71 %
Earnings to fixed changes (18.67)% (22.96)% (25.76)% 24.15 % 14.03 %
<FN>
(1) In 1992 the Company sold its wholly-owned subsidiary Western Sunrise Mortgage Corporation,
gain of $7,242,000 on the sale.
(2) Adoption of Statement of Financial Accounting Standards No. 109 "Accounting for Income Ta
</TABLE>
<PAGE>
<PAGE>
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
<CAPTION>
FOR THE QUARTER ENDED
(Dollar Amounts in Thousands) 03/31/95 06/30/95 09/30/95 12/31/95 03/31/94 06/30/94
09/30/94 12/31/94
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Interest income $2,679 $2,659 $2,505 $2,291 $3,439 $3,213
$2,842 $2,705
Interest expense 879 892 940 911 750 760
923 940
net interest income 1,800 1,767 1,565 1,380 2,689 2,453
1,919 1,765
Provision for loan losses - - - - 401 2,007
100 160
Other income 93 118 117 117 1,187 688
664 48
Other expense (1) 1,802 1,929 1,827 2,918 3,909 3,285
3,810 2,245
income (loss) before provision
for income taxes and
cummulative effect of a change
in accounting principle 91 (44) (145) (1,421) (434) (2,151)
(1,326) (592)
Provision (Benefit) for income taxes 38 (3) (34) -- (179) (777)
(420) (85)
Net income (loss) $53 ($41) ($111) ($1,421) ($255) ($1,374)
($906) ($507)
Net Income (loss) per share $0.01 ($0.01) ($0.03) ($0.33) ($0.06) ($0.32)
($0.21) ($0.12)
<FN>
(1) The increase in other expenses for the quarter ended 12-31-95 was attributable to a
valuation reserve of $70
a loss on securities sold of $348,000.
</TABLE>
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following information concerns the consolidated financial condi-
tion and results of operations of Sunrise Bancorp and its subsidiary (together
the "Company") for the years ended December 31, 1995, 1994 and 1993. Sunrise
Bancorp's wholly-owned subsidiary is Sunrise Bank of California ("Bank").
This information should be read in conjunction with the Selected Consolidated
Financial Data and the Consolidated Financial Statements and Notes thereto
set forth in this report.
Summary of Operations
The Company recorded a consolidated net loss of $1,520,000 ($0.36 per
share), for the year ended December 31, 1995, as compared to a net loss of
$3,042,000 ($0.71 per share) in 1994, and a net loss of $3,918,000 ($0.92 per
share) in 1993. The pretax net loss of $1,520,000 in 1995, as compared to
$4,503,000 in 1994, was due to a reduction in non interest expenses of
$5,107,000, a reduction in the provision for loan losses of $2,668,000, offset
by a decrease in net interest income of $2,315,000 and a decrease in interest
income of $2,476,000. The decrease in pretax net loss of $2,730,000 in 1994
from 1993 in was due to a reduction in the provision for loan losses of
$5,032,000, offset by a decrease in net interest income of $2,304,000, a
decrease in non interest income of $1,960,000 and a decrease in non interest
expenses of $1,962,000.
The following table illustrates the net income (loss) of the Company
and the Bank on a stand-alone basis for the years ended December 31, 1995,
1994 and 1993:
(dollar amounts in thousands) 1995 1994 1993
Sunrise Bancorp $ ( 73) $ ( 49) $(125)
Sunrise Bank of California (1,447) (2,993) (3,793)
Net Interest Income
Net interest income, the difference between interest earned by the
Company on its earning assets, and interest paid on deposits and other
borrowings, is the most significant component of the Company's revenue.
Net interest income decreased $2,315,000, or 26% between 1995 and 1994.
This decrease was the result of a decrease in total interest income of
$2,066,000 and an increase in interest expense of $249,000. In 1994, net
interest income decreased by $2,304,000, or 21%, over 1993. This decrease
was the result of a decrease in total interest income of $1,549,000 and a
decrease in interest expense of $1,867,000.
The decrease in total interest income of $2,066,000 in 1995 from 1994
was comprised of approximately $3,984,000 attributable to the $54,940,000
decrease in average interest earning assets in 1995. This was offset by a
$1,918,000 increase attributable to increased yields on interest earning
<PAGE>
assets of 130 basis points (100 basis points is equal to 1%). The decrease
in total interest income of $1,549,000 in 1994 over 1993 consisted of a
$2,516,000 decrease associated with a $35,540,000 decrease in average
interest earning assets and an increase of $967,000 associated with the
increase in yield of 40 basis points. The total yield on average earning
assets in 1995 was 8.0% compared to 6.7% in 1994 and 6.3% in 1993. In 1995,
average loans, including mortgage loans held for sale, were 59% of average
earning assets compared to 62% in 1994 and 68% in 1993. In 1995 and 1994,
average loans declined as a percentage of earning assets as a result of
decreased mortgage banking activities, a concentrated effort to reduce
problem loans and generally weak loan demand.
In 1995, the Bank restructured its deposit mix. The increase of
$249,000 in total interest expense in 1995 over 1994 was comprised of a
$380,000 decrease related to the $10,715,000 decrease in total average
interest bearing liabilities and an increase of $629,000 related to an
increase of 60 basis points in the effective interest costs on deposits.
In 1994 total interest expense increased by $755,000 from 1993. This
increase was comprised of a $787,000 increase related to the $25,594,000
increase in average interest bearing liabilities and a decrease of 10 basis
points or $32,000 related to the effective interest costs on deposits.
The average balances of noninterest bearing deposits decreased to $21,004,000
in 1995, from $73,332,000 in 1994, and from $142,855,000 in 1993. The
decreases in noninterest bearing deposits are mainly due to decreases in
balances of entities that by nature of their businesses have fluctuations in
their deposits, such as title companies.
Also impacting interest income was the relatively high level of
nonperforming assets which amounted to $4,009,000 at December 31, 1995,
compared to $10,563,000 at December 31, 1994, and $8,100,000 at December 31,
1993. The negative impact of the Company's nonperforming assets resulted in
a reduction in interest income as interest foregone on nonperforming assets
totaled $340,000 in 1995, $516,000 in 1994, and $603,000 in 1993.
<PAGE>
<TABLE>
ANALYSIS OF NET INTEREST EARNINGS
<CAPTION>
The following table sets forth average assets, major deposit categories, other liabilities and
shareholders' equity; interest income earned and interest expense paid; average rates earned and
expensed and the net interest margin for the years ended December 31, 1995, 1994, and 1993:
(dollar amounts in thousands) 1995 1994
Average Average Average Average
Balance Interest Yield Balance Interest Yield
-------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Loans (1) $74,341 $7,110 9.6 % $103,916 $8,120 7.9 %
Mortgage loans held for sale - - - 8,436 519 6.2
Investment securities 46,830 2,747 5.9 57,281 3,161 5.6
Federal funds sold and securities
purchased under agreements to
resell 4,949 277 5.6 11,367 398 3.6
Interest bearing deposits - - - 60 2 2.4
------- ------ ---- -------- ----- ---
Total interest earning assets 126,120 10,134 8.0 % 181,060 2,200 6.7
------ ---- ------ ---
Allowance for loan losses (3,624) (5,795)
Cash and due from banks 5,700 15,743
Premises and equipment and other
assets 6,520 9,718
-------- --------
$134,716 $200,726
======== ========
Liabilities and Shareholders' Equity:
Interest bearing liabilities:
Savings accounts $1,037 $28 2.7 % $1,801 $48 2.7 %
Interest checking accounts 35,227 960 2.7 24,966 694 2.8
Money market deposit accounts 28,049 862 3.1 45,154 1,131 2.6
Time deposits of $100,000 or more 9,355 549 5.9 11,675 481 4.2
Other time deposits 19,447 1,104 5.7 14,971 623 4.2
Other borrowings 2,155 119 5.5 7,418 396 5.4
------ ----- --- ------- ----- ---
Total interest bearing
liabilities 95,270 3,622 3.8 105,985 3,373 3.2
------ --- ----- ---
Demand deposits 21,004 73,332
Other liabilities 536 1,484
------- -------
Total liabilities 116,810 180,801
Shareholders' equity 17,906 19,925
-------- --------
$134,716 $200,726
======== ========
--- ---
Net interest income and margin (2) $6,512 5.2 % $8,827 4.9 %
====== === ====== ===
(dollar amounts in thousands) 1995
Average Average
Balance Interest Yield
-------- -------- -------
<S> <C> <C> <C>
Assets:
Interest earning assets:
Loans (1) $122,639 $9,203 7.5 %
Mortgage loans held for sale 24,400 1,616 6.6
Investment securities 42,651 2,127 5.0
Federal funds sold and securities
purchased under agreements to
resell 28,823 799 3.0
Interest bearing deposits 87 4 4.6
------- ------ ----
Total interest earning assets 216,600 13,749 6.3 %
------ ----
Allowance for loan losses (3,256)
Cash and due from banks 27,703
Premises and equipment and other
assets 8,003
--------
$249,050
========
Liabilities and Shareholders' Equity:
Interest bearing liabilities:
Savings accounts $1,894 $62 3.3 %
Interest checking accounts 4,292 90 2.1
Money market deposit accounts 45,789 1,288 2.8
Time deposits of $100,000 or more13,182 531 4.0
Other time deposits 13,654 591 4.3
Other borrowings 1,580 56 3.5
------ ----- ---
Total interest bearing
liabilities 80,391 2,618 3.3
------ ---
Demand deposits 142,855
Other liabilities 603
-------
Total liabilities 223,849
Shareholders' equity 25,201
--------
$249,050
========
---
Net interest income and margin (2) $11,131 5.1 %
======= ===
<FN>
(1) Average loans includes nonaccrual loans.
(2) Net interest margin is computed by dividing net interest income by total average interest
earning assets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table shows the approximate effect of volume and rate changes on net interest
income for the years ended December 31, 1995, 1994, and 1993. Changes which are the combined
result of volume and rate changes are allocated proportion to the volume and rate changes.
(dollar amounts in thousands) 1995 vs. 1994 1994 vs. 1993
----------------------- ----------------------
Volume Rate Total Volume Rate Total
------ ------- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans ($2,587) $1,577 ($1,010) ($1,663) $580 ($1,083)
Mortgage loans held for sale (519) - (519) (1,004) (93) (1,097)
Investment securities (586) 172 (414) 766 268 1,034
Federal funds sold and securities
purchased under agreements to resell (290) 169 (121) (614) 213 (401)
Interest bearing deposits (2) - (2) (1) (1) (2)
------- ----- ------- ------- ---- -------
(3,984) 1,918 (2,066) (2,516) 967 (1,549)
------- ----- ------- ------- ---- -------
Increase (decrease) in interest expense:
Savings accounts (20) - (20) (3) (11) (14)
Interest checking accounts 291 (25) 266 566 38 604
Money market deposit accounts (478) 209 (269) (26) (131) (157)
Time deposits of $100,000 or more (108) 176 68 (88) 38 (50)
Other time deposits 219 262 481 42 (10) 32
Other borrowings (284) 7 (277) 296 44 340
-------- ------ -------- -------- ----- --------
(380) 629 249 787 (32) 755
-------- ------ -------- -------- ----- --------
Change in net interest income ($3,604) $1,289 ($2,315) ($3,303) $999 ($2,304)
======== ====== ======== ======== ===== ========
</TABLE>
<PAGE>
Provision for Loan Losses
At December 31, 1995, the allowance for loan losses was $2,505,000 or
3.75% of outstanding loans. Due to the decrease in total loans and improved
asset quality, no provisions were added to the allowance for loan losses in
1995. Provisions for loan losses amounted to $2,668,000 in 1994 and
$7,700,000 in 1993. Net charge-offs of $1,646,000 were recognized in 1995
as compared to $4,132,000 in 1994 and $529,000 in 1993. For further
discussion of the Bank's loan portfolio, see "Loan Portfolio Risk Elements
and Summary of Loan Loss Experience".
Non Interest Income
Non interest income is comprised of service charges and fees and various
non-recurring items. Service charges and fees and other income decreased
$242,000 or 35% in 1995 compared to a decrease of $684,000 or 50% in 1994.
These decreases were primarily due to decreased deposit accounts. In 1993,
other income included $614,000 in non-recurring income relating to a settlement
between the Company and its former independent auditors.
Prior to 1995, the Company's mortgage banking operations generated
gains on sales of mortgage loans and loan servicing income. Due to the
decline in real estate refinancing activity in California, the Company
strategically chose to cease these operations in 1994. Total mortgage loans
originated in 1994 were $123,537,000, total mortgage loans sold were
$162,168,000 and the total gains on the sale of these mortgage loans and
their servicing were $1,828,000. These same totals for 1993 were
$334,633,000, $281,908,000 and $2,888,000, respectively.
Losses on sales of investment securities were $334,000 for 1995, none
for 1994, and there was a gain of $228,000 in 1993. The losses in 1995 were
due to the sale of $28,000,000 in investment securities. The sale of these
long-term mortgage-backed securities in 1995 was a strategic decision to
restructure the investment portfolio. The Company is now able to manage the
balance sheet with greater flexibility and improved interest rate risk and
liquidity positions.
Non Interest Expense
Non interest expense is comprised of salaries and employee benefits,
occupancy, furniture and fixture and other overhead related expenses. Total
non interest expense decreased $5,107,000 or 39% in 1995 when compared to
1994, and decreased $1,962,000 or 13% in 1994 when compared to 1993.
Salaries and employee benefit expenses represent one of the largest
components of non interest expense. In 1995, salaries and employee benefits
expense decreased $2,366,000 or 44% over 1994. In 1994, salaries and employee
benefits costs decreased $1,184,000 or 18% when compared to 1993. The
decreases in both 1995 and 1994, were due to the restructuring of the Bank's
mortgage banking operations and other reductions in personnel costs.
Occupancy expense increased by $115,000 or 10% in 1995, when compared
to 1994. This increase is attributable to the write-down to market value on
office spaces subleased to outside parties. In 1994, occupancy expense
decreased $123,000 or 9% when compared to 1993, which decrease was related to
the restructuring of the Bank's mortgage banking operations.
<PAGE>
Furniture and equipment expense decreased $384,000 or 40% in 1995 when
compared to 1994, attributable to decreased depreciation expense and decreased
equipment maintenance and repairs. In 1994, furniture and equipment expense
increased by $26,000 or 3% when compared to 1993, attributable to increased
equipment maintenance.
Other expense decreased by $2,472,000 or 43% in 1995 compared to 1994.
All categories of other expenses, except other real estate owned expenses,
decreased due to an aggressive expense reduction plan and the decreased asset
size of the Bank. Other real estate owned expenses increased $343,000 due to
increasing a valuation allowance for possible other real estate owned losses.
Other expense decreased by $681,000 or 10% in 1994 compared to 1993. The
major components of this decrease include a decrease of $975,000 or 55% in
professional fees which included legal, accounting and consulting fees, and
an increase of $166,000 or 10% in other expenses mainly due to increased
expenses on other real estate owned.
Income Taxes
Due to a limitation on the utilization of tax benefits, no tax benefit
was recorded for 1995. The Company's effective tax rate (benefit) was zero in
1995, (32.47%) in 1994 and (42.4%) in 1993.
The 1994 income tax benefit was attributable to a loss of $4,503,000
before income taxes. In 1993, the income tax benefit was attributable to a
loss of $7,233,000 before income taxes and the cumulative effect of a change
in accounting principle. As more fully discussed in Notes 2 and 11 to the
Consolidated Financial Statements, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes", on a prospective
basis in 1993. Included within the Consolidated Statement of Operations for
the year ended December 31, 1993 is a tax benefit of $250,000 which represents
the cumulative effect of this change in accounting principle.
Loan Portfolio Risk Elements and Summary of Loan Loss Experience
The risk of loss is intrinsic to the lending process. While manage-
ment endeavors to minimize this risk, management also recognizes that loan
losses will be experienced and that the amount of losses will fluctuate
depending upon economic conditions and other factors. The Company manages
the risk of its loan portfolio through various control procedures. In addi-
tion to the initial credit evaluation of an individual borrower, risk is
monitored and controlled by the ongoing review of the portfolio by lending
officers, the credit administration department and senior management. Risk
is further mitigated through the application of lending procedures such as
the holding of adequate collateral, establishment of contractual guarantees
and maintenance of compensating balances.
The allowance for loan losses is maintained at a level that management
of the Bank considers to be adequate to provide for losses that reasonably
can be anticipated. The allowance is increased by charges to operating
expense and reduced by net charge-offs. The level of the allowance for loan
losses is based on management's evaluation of potential losses in the loan
portfolio, as well as prevailing and anticipated economic conditions. Ongoing
internal and external reviews of the loan portfolio are designed to identify
problem loans and to periodically reevaluate the adequacy of the allowance.
<PAGE>
The reviews take into consideration both current and anticipated developments
applicable to the borrowers and to the economy. In its quarterly evaluation
of the adequacy of the allowance, the Board of Directors, in consultation with
senior management, considers the conclusions reached in these reviews and also
considers the results of examinations made by regulatory agencies and the
reviews of the Company's independent public accountants.
Management's judgement as to the adequacy of the allowance is necessar-
ily based upon approximation of factors which are beyond the control of the
Bank, including economic conditions. In assessing adequacy and the alloca-
tion of reserves to loan categories, management considers the Bank's histor-
ical loan loss experience, the amount of past due and non-performing loans,
internal loan status reports, the current size and composition of the loan
portfolio, evaluations made by Bank regulatory authorities, expectations of
future economic conditions and their impact on particular industries and
specific borrowers, and evaluation of the collateral underlying secured loans.
Set forth below is an analysis of the allowance for loan losses for each of the
last five years ending December 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
(dollar amounts in thousands) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $4,151 $5,615 $3,205 $2,174 $2,129
Charge-offs:
Commercial 17 1,482 2,426 239 602
Real estate:
Construction and land development 1,266 1,894 2,291 686 441
Mortgage 301 132 442 20 -
Other - 512 - 179 -
Consumer installment 208 161 175 120 259
Direct lease financing - - - - 1
Other loans 29 15 21 34 17
Total charge-offs 1,821 4,196 5,355 1,278 1,320
Recoveries:
Commercial 24 6 - 472 110
Real estate - Construction and
land development 51 36 30 90 3
Consumer installment 100 21 28 40 1
Other loans - 1 7 2 1
Total recoveries 175 64 65 604 115
Net charge-offs 1,646 4,132 5,290 674 1,205
Provision charged to operations - 2,668 7,700 1,720 1,250
Allowance disposed in sale of Western - - - (15) -
Balance at end of period $2,505 $4,151 $5,615 $3,205 $2,174
Net chargeoffs as a percentage of
average loans 2.22% 3.98% 4.31% 0.42% 0.86%
Allowance for loan losses as a
percentage of total outstanding loans 3.75% 5.11% 4.83% 2.67% 1.71%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The table below sets forth the allocation of the allowance for loan losses by loan type as of
December 31 for the years specified. The allocation to individual categories of loans includes
amounts applicable to specifically identified as well as unidentified losses inherent in that
segment of the loan portfolio and will necessarily change whenever management determines that
the
risk characteristics of the loan portfolio have changed. Management believes that any breakdown
or
allocation of the allowance for loan losses into loan categories lends an appearance of
exactness
which does not exist, in that the allowance is utilized as a single unallocated allowance
available
for all loans and undisbursed commitments. The allocation below should not be interpreted as an
indication of the specific amounts of loan categories in which future charge-offs may occur.
<S> <C> <C> <C> <C> <C> <C>
(dollar amounts in thousands) 1995 1994 1993
% of loans % of loans $ of loans
in each in each in each
Amount category Amount category Amount category
Balance applicable to:
Commercial, consumer installment,
direct lease financing and
other loans $898 46.7% $1,432 49.6% $3,406 55.5%
Real estate loans (including
mortgage loans held for sale) 1,473 53.3% 2,521 50.4% 1,883 44.5%
Unallocated 134 - 198 - 326 -
------ ----- ------ ------ ------ ------
$2,505 100.0% $4,151 100.0% $5,615 100.0%
====== ====== ====== ====== ====== ======
====== ====== ====== ======
(dollar amounts in thousands) 1992 1993
% of loans % of loans
in each in each
Amount category Amount category
<S> <C> <C> <C> <C>
Balance applicable to:
Commercial, consumer installment,
direct lease financing and
other loans $2,125 49.1% $728 30.7%
Real estate loans (including
morgage loans held for sale) 530 50.9% 336 69.3%
Unallocated 550 - 1,110 -
------ ------ ----- ------
$3,205 100.0% $2,174 100.0%
====== ====== ====== ======
</TABLE>
<PAGE>
Interest income on loans is normally accrued on the principal balance
outstanding. When reasonable doubt arises as to the ability of the
borrowers to meet their contractual interest payment schedule, the Bank's
policy is generally to discontinue the accrual of interest and reverse any
accrued but unpaid amounts not viewed as ultimately collectible. Loans,
where payments are past due ninety days or more, continue to accrue interest
only when management believes collectability of principal and interest is
probable, and the loan is well collaterized and in the process of collec-
tion. Loans are restored to an accrual basis only when the borrower has
demonstrated the ability to make future payments of principal and interest.
The following table sets forth certain information concerning all
nonperforming assets at December 31 for each of the last five years:
<TABLE>
(dollar amounts in thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,228 $7,347 $5,300 $4,504 $3,310
Loans past due 90 days or
more and still accruing
interest 89 8 10 171 515
Total nonperforming loans $3,317 $7,355 $5,310 $4,675 $3,825
Nonperforming loans as a
percentage of total loans 4.97% 9.05% 4.57% 3.89% 3.02%
Other real estate owned $692 $3,208 $2,790 $4,785 $7,535
</TABLE>
At December 31, 1995, nonaccrual loans were comprised of loans to
19 borrowers. Five of the nonaccrual loans totaling $2,409,000 or 75% of
total nonaccrual loans are secured by real estate. Four nonaccruing
commercial loans total $210,000, or 6% of all nonaccrual loans. One real
estate secured commercial loan in the amount of $145,000, or 69% of the
commercial nonaccruing loans, was transferred to other real estate owned
("OREO") and liquidated with no loss of principal subsequent to 1995 year
end. The remaining 10 loans totaling $609,000 or 19% of nonaccrual loans
consist of loans to non-related borrowers. Of these loans, five totaling
$540,000, are secured by residential real estate, of which one for $125,000
was transferred to OREO and liquidated with no loss of principal subsequent
to 1995 year end. The remaining loans are to borrowers none of whose
individual aggregate liability exceeds $30,000.
The balance of OREO consists of three single family residences, one
commercial office condominium, and one undeveloped parcel of land.
The classification of a loan as nonaccrual does not necessarily
indicate that the ultimate collection of the principal and interest is
doubtful, particularly among secured real estate and commercial loans.
However, management recognizes the lower quality and above-normal risk
characteristics of these loans and therefore considers the potential risk
of principal loss included in this category in evaluating the adequacy of
the allowance for loan losses.
Liquidity
The objective of liquidity management is to maintain sufficient cash
flow to satisfy both changes in loan demand and deposit fluctuations while
maximizing the yield available from the instruments being used. Liquidity
is managed from both sides of the balance sheet. Liquid assets consist of cash
and due from banks, federal funds sold, securities purchased under repurchase
agreements and investment securities, that can be used as collateral for other
borrowings. On the liability side of the balance sheet, liquidity is provided
by core deposits, lines of credit, and other borrowings.
<PAGE>
Cash and cash equivalents equaled $32,726,000 and $6,367,000 at December
31, 1995 and 1994, and investment securities equaled $20,273,000 and
$54,040,000 respectively. The increase in cash and cash equivalents in 1995
over 1994 was due to the sale of long-term mortgage-backed securities which
enabled the Company greater flexibility to manage the balance sheet and
improved interest rate risk and liquidity positions.
One of the most important sources of the Bank's liquidity is its access
to low cost demand deposits of businesses and consumers. These deposits
totaled $13,808,000 and $29,206,000 at December 31, 1995 and 1994, and averaged
$21,004,000 and $73,332,000 during 1995 and 1994, respectively. The decrease
in core deposits is mainly due to decreases in average balances of entities
that by the nature of their businesses have fluctuations in the amounts of core
deposits, such as title companies.
As an additional source of liquidity, the Bank is eligible to borrow
funds on an overnight basis from the Federal Reserve Bank of San Francisco and
several broker/dealers. The maximum available advance is dependent upon the
amount of the Bank's investment securities and loans pledged to collateralize
such borrowings. At December 31, 1994 the Bank had $10,548,000 borrowed
against these lines. There were no borrowings against these lines at December
31, 1995.
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the relationship between a
change in market interest rates and a resultant change in net interest income
due to the repricing and/or maturity characteristics of the assets and
liabilities of the Company. As a result of industry deregulation, banks can
vary the rates and, to a limited degree, the terms of the deposits they offer
in order to acquire the funds necessary for lending and other operations.
The rate the Bank pays on these deposits varies, but generally is set at a
slight premium over the rates paid by large commercial banks. While the Bank
cannot match each of its assets with specific funding sources, it does monitor
the aggregate maturities and interest rate sensitivities of all its invest-
ments, loans and deposits within specific time frames.
Management attempts to adjust the interest rates paid on various rate-
sensitive deposits in order to regulate the volume of such deposits in maturity
ranges that correspond to the Bank's needs and interest rate expectations.
In developing strategies to minimize interest rate risk and maximize the net
interest margin, management considers such external factors as current and
projected economic conditions.
The following table illustrates the repricing/maturity intervals of all
interest earning assets and interest bearing liabilities over several time-
frames. The table does not include noninterest-bearing accounts as they
involve no explicit payment of interest. The table does not necessarily
indicate the impact of general interest rate movement on net interest income
since the repricing of various categories of assets and liabilities is subject
to competitive pressures. Interest earning assets include (i) variable rate
instruments which are presented in timeframes that correspond to the earlier
of initial repricing dates or scheduled principal amortization maturity dates
and (ii) fixed rate instruments which are presented in timeframes that
correspond to scheduled principal amortization or maturity dates. All interest
bearing liabilities other than time deposit carry variable rates of interest
that are repriceable immediately. Time deposits are presented in timeframes
that correspond to scheduled maturity dates.
<PAGE>
<TABLE>
(dollar amounts in thousands)
<CAPTION>
3 months 3 - 12 1 to 5 after
December 31, 1995 One day or less months years 5 years
Totals
------- -------- ------- ------ -------
- ------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $34,491 $18,052 $1,345 $9,347 $3,702
$66,937
Investment securities - 506 1,350 18,417 -
$20,273
Federal funds sold and securities
purchased under resale agreements 5,000 24,000 - - -
29,000
------- ------- ------ ------- -------
- --------
Total interest earning assets $39,491 $42,558 $2,695 $27,764 $3,702
$116,210
------- ------- ------ ------- ------
- --------
Interest bearing liabilities:
Savings accounts $1,131 - - - -
$1,131
Interest checking accounts 33,062 - - - -
33,062
Money market deposit accounts 25,721 - - - -
25,721
Time deposits of $100,000 or more - 5,755 3,437 991 -
10,183
Other time deposits - 7,268 10,057 2,653 -
19,978
Other borrowings - - - - -
- -
------- ------- ------- ------- -------
- -------
Total interest bearing
liabilities $59,914 $13,023 $13,494 $3,644 -
$90,075
Current gap ($20,423) $29,535 ($10,799) $24,120 $3,702
$26,135
------- ------- ------- ------- -------
- -------
Cumulative gap ($24,423) $9,112 ($1,687) $22,433 $26,135
$26,135
======= ======= ======= ======= =======
=======
</TABLE>
<PAGE>
<TABLE>
Maturities and interest sensitivies of the loan portfolio at December 31, 1995, are
<CAPTION>
One year After one year Greater than
or less but before five five years Total
-------- --------------- ------------ -------
Fixed and Floating Rate Loans
<S> <C> <C> <C> <C>
Fixed rate $1,691 $9,347 $3,702 $14,740
Variable rate 52,197 - - $52,197
------- --------------- ---------- -------
Total $53,888 $9,347 $3,702 $66,937
======= =============== ========== =======
</TABLE>
<PAGE>
Impact of Inflation
The consolidated financial statements and related financial information
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and results of operations
in terms of historical dollars without regard to changes in the relative
purchasing power of money over time. Unlike most industrial companies, all of
the Company's assets and liabilities, other than premises and equipment, are
monetary, and the Company has an excess of monetary assets over liabilities.
While inflation causes a loss of purchasing power in the value of
shareholders' equity for all banking organizations, of greater importance is
the ability of a company, financial or industrial, to earn a real return on
equity. The short-term monetary nature of the Company's assets and
liabilities allows flexibility to adjust its required return on equity in
relation to the level of inflation. Management does not believe that
Inflation has had a substantial impact on the Company's operations to date.
Capital Resources
The Federal Reserve Board established final risk-based and leverage
capital guidelines for bank holding companies effective September 7, 1990.
These guidelines are substantially similar to the regulations published by
the Federal Deposit Insurance Corporation (the "FDIC") in March 1989 for
state nonmember banks such as the Bank. The Federal Reserve Board ("FRB")
guidelines and FDIC regulations created a framework wherein balance sheet
assets and certain off-balance sheet commitments are weighted by risk and
compared to capital. Capital is assigned to tiers with common equity
included in Tier 1 capital and a portion of the allowance for credit losses
included in Tier 2 capital or total capital. On December 31, 1995, the
minimum required ratio for qualifying total capital was 8.0%, of which 4.0%
must be Tier 1 capital. As of December 31, 1995, the Company's total capital
and Tier 1 capital to risk-weighted asset ratios were 18.31% and 17.05%,
respectively.
As a supplement to the risk-based capital guidelines, the FRB and the
FDIC adopted a 3% minimum leverage ratio of Tier 1 capital to average total
assets. Banking organizations anticipating significant asset growth or which
are not highly rated by their regulators are expected to maintain leverage
ratios 1% to 2% in excess of minimum requirements. At December 31, 1995,
the leverage ratios of the Company and the Bank were 11.75% and 10.98%,
respectively.
During 1992 and 1991, the Company issued 328,002 shares of common stock
and warrants to purchase 218,668 shares of common stock through a private
offering. On December 31, 1991, the Bank acquired the assets of an escrow
accounting concern in exchange for 75,000 shares of common stock of the Company
and warrants to purchase 50,000 shares of common stock of the Company. After
adjusting for stock dividends, there are 296,206 shares subject to outstanding
warrants at an exercise price of $4.54 per share. All the outstanding warrants
expire on December 31, 1997. See Note 15 to the Consolidated Financial
Statements for further discussion of these transactions.
The Board of Directors is continuing to consider various strategies
designed to enhance shareholder value, relating to a possible sale, merger or
consolidation transaction with a third party. Smith and Crowley Inc., an
investment banking firm, consultants and other professionals advise the Board
of Directors in the process of determining the best interests of the Company
and the Company's shareholders with respect to such possible transactions.
The Company is currently engaged in discussions of expressions of interest
from third parties relative to a possible sale, merger or consolidation
transaction.
<PAGE>
Regulatory Matters
On April 14, 1993, the Bank entered into a Memorandum of Understanding
with the Federal Deposit Insurance Corporation (the "FDIC") and the
Superintendent of Banks of the State of California (the "Superintendent") to
address various matters arising from an examination of the Bank conducted
by the FDIC as of October 5, 1992. This Memorandum of Understanding super-
seded the previous Memorandum of Understanding with the Bank dated July 16,
1991. As a result of a joint examination of the Bank conducted by the FDIC
and the Superintendent as of the close of business October 25, 1993, and the
conclusion of the FDIC and the Superintendent that the Bank was not in compli-
ance with the requirements of the Memorandum of Understanding dated April 14,
1993, the Bank entered into a revised Memorandum of Understanding with the
FDIC on May 17, 1994 (the "FDIC Memorandum") and the Bank entered into a
regulatory agreement with the Superintendent on May 24, 1994, as amended on
October 31, 1994 (the "State Agreement"). (The FDIC Memorandum and the State
Agreement are referred to collectively as the "Agreements."). As a result
of a joint examination of the Bank conducted by the FDIC and the
Superintendent as of the close of business December 18, 1995, both Agreements
were terminated.
As a result of an examination of the Company conducted by the Federal
Reserve Bank ("Reserve Bank") as of December 31, 1993, the Company entered
into a Memorandum of Understanding with the Reserve Bank on September 2, 1994
(the "Reserve Bank Memorandum"). The Reserve Bank Memorandum requires the
Company: (i) to submit a policy for receiving dividends from the Bank; (ii)
to submit a capital plan to improve and maintain an adequate capital position
for the Company and the Bank; (iii) to submit a plan to manage the Company's
and the Bank's growth; (iv) to submit annual budgets for the Company and
the Bank; (v) to submit an explanation of certain management and service fees
and other payments assessed or paid by the Bank to the Company since January
1, 1993, and adopt a policy addressing inter-corporate management and service
fees and other payments and make any reimbursements to the Bank as may be
required by the Reserve Bank; (vi) to obtain prior approval to declare or pay
any dividends, engage in certain financial transactions, increase borrowings
or incur debt, increase director fees, pay executive bonuses or execute renew
or modify any employment or service contracts with executive officers, or
otherwise acquire any of its shares of common stock; and (vii) to submit
quarterly written progress reports and certain financial statements. The
Reserve Bank Memorandum also requires the Company's Board of Directors; (i)
to review performance on a quarterly basis, and to submit such reviews to the
Reserve Bank; (ii) to submit a plan to improve the condition of the Bank and
the Company; and (iii) to complete a study of employment contracts and
executive officer compensation paid during 1993 and 1994. As a result of an
examination of the Company conducted by the Reserve Bank as of December 31,
1994, the Reserve Bank memorandum remains in effect and unchanged. Management
believes the Company is in substantial compliance with the terms and conditions
of the Reserve Bank Memorandum.
<PAGE>
<TABLE>
SUNRISE BANCORP
Consolidated Statements of Condition
December 31, 1995 and December 31, 1994
<CAPTION>
(dollar amounts in thousands)
December 31 December 31
1995 1994
----------- -----------
<S> <C> <C>
Assets
- ------
Cash and due from banks $3,726 $6,367
Federal funds sold 1,000 -
Securities purchased under agreements to resell 28,000 -
------ ------
Total cash and cash equivalents 32,726 6,367
Investment securities held to maturity (market value of 20,273 54,040
$19,944 in 1995 and $49,803 in 1994)
Loans 66,765 81,340
Less allowance for loan losses 2,505 4,151
------ ------
Net loans 64,260 77,189
------ ------
Premises and equipment 873 1,406
Other real estate owned 692 3,208
Other assets 2,160 4,290
-------- --------
$120,984 $146,500
======== ========
Liabilities and Shareholders' Equity
Deposit liabilities:
Noninterest bearing $13,808 $29,206
Interest bearing 90,075 87,737
------- -------
Total deposit liabilities 103,883 116,943
Borrowings - 10,548
Other liabilities 612 1,000
------- -------
Total liabilities 104,495 128,491
Shareholders' equity:
Preferred stock, no par value. Authorized
20,000,000 shares; none issued - -
Common stock, no par value. Authorized
20,000,000 shares; issued 4,263,298 shares
in 1995 and 1994 18,327 18,327
Deficit (1,838) (318)
------ ------
Total shareholders' equity 16,489 18,009
------- -------
$120,984 $146,500
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SUNRISE BANCORP
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
(dollar amounts in thousands,
except per share data)
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans $7,110 $8,120 $9,203
Interest on mortgage loans held for sale - 519 1,616
Interest on investment securities 2,747 3,161 2,127
Interest on Federal funds sold and repurchase
agreements 277 400 803
------ ------ ------
Total interest income 10,134 12,200 13,749
------ ------ ------
Interest expense:
Interest on deposit liabilities 3,503 2,977 2,566
Interest on other borrowings 119 396 52
----- ----- -----
Total interest expense 3,622 3,373 2,618
----- ----- -----
Net interest income 6,512 8,827 11,131
Provision for loan losses - 2,668 7,700
----- ----- -----
Net interest income after provision for
loan losses 6,512 6,159 3,431
----- ----- -----
Other income:
Gain on sale of mortgage loans and servicing - 1,828 2,888
Service charges and fees 402 584 747
Loan servicing income - 72 60
(Loss) gain on sale of investment securities (334) - 228
Other 43 103 624
----- ----- -----
Total other income 111 2,587 4,547
Other expenses:
Salaries and employee benefits 2,954 5,320 6,504
Occupancy 1,306 1,191 1,314
Furniture and equipment 579 963 937
Other 3,303 5,775 6,456
----- ------ ------
Total other expenses 8,142 13,249 15,211
Net loss before provision for income taxes (1,519) (4,503) (7,233)
Provision (benefit) for income taxes 1 (1,461) (3,065)
------ ------ ------
Net loss before cumulative effect of a change
in accounting principle (1,520) (3,042) (4,168)
Cumulative effect of a change in accounting
principle - - 250
------- ------- -------
Net loss ($1,520) ($3,042) ($3,918)
======= ======= =======
Net loss per share before cumulative effect of a
change in accounting principle ($0.36) ($0.71) ($0.98)
Cumulative effect of a change in accounting
principle -- -- 0.06
------ ------ ------
Net loss per share ($0.36) ($0.71) ($0.92)
====== ====== ======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SUNRISE BANCORP
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
Number of Total
Shares Common Shareholders'
(dollar amounts in thousands) Outstanding Stock Deficit Equity
----------- ------- ------- -------------
<C> <S> <C> <S> <C>
Balances at December 31, 1992 4,060,637 $17,770 $7,202 $24,972
Common Stock Dividend including
cash in lieu of fractional shares 202,661 557 (560) (3)
Net loss -- -- (3,918) (3,918)
--------- ------ ------- -------
Balances at December 31, 1993 4,263,298 18,327 2,724 21,051
Net loss -- -- (3,042) (3,042)
--------- ------ ------- -------
Balances at December 31, 1994 4,263,298 18,327 (318) 18,009
Net loss -- -- (1,520) (1,520)
--------- ------- -------- --------
Balances at December 31, 1995 4,263,298 $18,327 ($1,838) $16,489
========= ======= ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SUNRISE BANCORP
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
(dollar amounts in thousands) Years Ended
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) ($1,520) ($3,042) ($3,918)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Accretion of deferred loan fees and costs (104) (144) (209)
Mortgage loans originated for sale -- (123,537) (314,669)
Proceeds from sale of mortgage loans -- 162,168 281,908
Gain on sale of mortgage loans -- (1,828) (2,888)
Loss on sale of available for sale securities 348 -- (223)
Gain on sale of OREO (121) -- --
Provision for loan and other real estate owned 1,005 3,168 7,840
Depreciation and amortization 770 1,124 10,143
Net change in other assets 2,130 2,348 (3,900)
Net change in other liabilities (388) (235) 204
----- ------ ------
Net cash provided (used) by operating
activities 2,120 40,022 (25,712)
----- ------ ------
Investing activities:
Purchases of investment securities -- (4,000) (67,569)
Proceeds for sales of available for sale securities 24,040 -- 17,292
Proceeds from maturities of held to maturities
securities 9,142 7,484 9,278
Net decrease (increase) in loans 9,450 29,091 (4,017)
Sale of other real estate owned 5,215 807 4,809
Net purchases of premises and equipment -- (85) (750)
----- ------ ------
Net cash used in (provided by) investing
activities 47,847 33,297 (40,957)
------ ------ -------
Financing activities:
(Decrease) Increase in deposit liabilities (13,060) (167,926) 65,625
Increase (decrease) in other borrowings (10,548) 10,548 --
Cash paid in lieu of fractional shares -- -- (3)
------ ------- ------
Net cash provided by (used in) financing
activities (23,608) (157,378) 65,622
------ ------- ------
Increase (decrease) in cash and cash equivalents 26,359 (84,059) (1,052)
Cash and cash equivalents at beginning of period 6,367 90,426 91,478
------- ------ -------
Cash and cash equivalents at end of period $32,726 $6,367 $90,426
======= ====== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 3,607 3,343 2,619
====== ====== =====
Income taxes paid (refunded) ($1,320) ($2,503) $3
====== ====== =====
Supplemental schedule of noncash investing and financing
activities:
Other real estate owned acquired through foreclosure $3,583 $1,788 $2,954
securing loans ====== ====== ======
Stock Dividend 557
Transfer of securities from held to maturity to ======= ====== ======
available for sale $24,388 $-- $--
======= ====== ======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Sunrise Bancorp (the Company) is a bank holding company headquartered
in Roseville, California. Sunrise Bank of California (the Bank), a wholly-
owned subsidiary of the Company, is a full-service commercial bank chartered
by the State of California with branches in Roseville and Citrus Heights and
a loan production office in San Francisco. The Bank's business plan
emphasizes service to the central California counties of Sacramento, Placer,
Yolo and El Dorado. The Bank has concentrated on servicing middle market
companies including those in the title insurance business and homeowner
association management companies. One of the Bank's primary target markets
is small to medium sized businesses, "small" is defined as revenues of less
than $2.5 million, "medium" is defined as businesses with revenues between
$2.5 million and $10 million. The Company itself does not engage in any
business activities other than the ownership of the Bank.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and prevailing practices within the
banking industry. The Company follows the accrual method of accounting.
Such principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a
summary of the most significant of the policies.
(a) Financial Statement Presentation
The consolidated financial statements include the accounts of Sunrise
Bancorp and its wholly-owned subsidiary, Sunrise Bank of California. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications to the 1994 and 1993 financial statements were made
to conform to the classifications used in the 1995 financial statements.
(b) Investment Securities
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". This standard requires investment
securities to be classified as either held to maturity, trading or available
for sale. Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held to maturity when
the Company has the intent and ability to hold the securities to maturity.
Held to maturity securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts. Such amortization together with interest
earned is included in interest income. Debt and equity securities that are
bought and held for the purpose of selling them in the near term are classi-
fied as trading securities and are reported at fair value, with unrealized
gains and losses included in income. Debt and equity securities not classified
as either held to maturity or trading securities are classified as available
for sale securities and are reported at fair value, with unrealized gains and
losses included as a separate component of shareholders' equity, net of tax.
Gain or loss on sale of investment securities is recognized based on the
specific identification method.
<PAGE>
(c) Loans, Loan Fees and Interest Income
Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or payoff are reported at their
outstanding principal balances reduced by any charge-offs and net of any
deferred fees or costs or unamortized premiums or discounts on purchased
loans.
Interest on loans is accrued as earned except where reasonable doubt
exists as to the collectability of the interest, in which case the accrual
of income is discontinued and any interest accrued but unpaid is reversed
against current income. Interest on loans with principal past due ninety
days or more continues to accrue only when management believes collectability
of principal and interest is certain. Cash payments received on non-accrual
loans are recognized as income only where the future collection of the
recorded value of the loan is considered by management to be probable.
The Company defers loan fees and certain direct loan origination
costs, and subsequently recognizes such fees and costs as an adjustment of
yield by the interest method based on the contractual terms of the loans.
(d) Allowance for Loan Losses
The allowance for loan losses is established through a provision
charged to expense. Loans are charged off against the allowance when
management believes the collection of loan principal is unlikely. The
allowance is maintained at a level which management estimates to be adequate
to provide for losses that can be reasonably anticipated, although ultimate
losses may vary from estimates. In evaluating the adequacy of this allowance
and in determining the provision to be charged to operating expense for each
period, management considers such factors as historical loan loss experience,
known problem loans, evaluations made by bank regulatory authorities and the
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio.
The Company adopted SFAS No. 114 "Accounting by Creditors for Impair-
ment of a Loan" and SFAS 118 "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure" on January 1, 1995. SFAS No. 114
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or as a practical expedient at the loan's observable market rate or the
fair value of the collateral if the loan is collateral dependent. SFAS
No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans and requires certain information
to be disclosed. Because the Company had previously calculated its allowance
for loan and lease losses using methods approximating those prescribed in
SFAS 114, the adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
(e) Premises and Equipment
Premises and equipment owned are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed on a straight-line
basis over the estimated useful lives of three to ten years.
<PAGE>
(f) Other Real Estate Owned
Property acquired by the Company through foreclosure is initially
recorded at the lower of (i) estimated fair market value less the cost to
sell or (ii) cost at the date of foreclosure. At the time a property is
acquired if the fair market value is less than the outstanding loan
amount, any difference is charged against the allowance for possible loan
losses. After acquisition, valuations of the properties are periodically
performed and, if the carrying value of the property exceeds the fair market
value less estimated costs to sell, a valuation allowance is established by
a charge to operations. Subsequent increases in the fair market value may
reduce or eliminate the allowance.
Operating costs on foreclosed real estate are expensed as incurred.
Costs incurred for physical improvements to foreclosed real estate are
capitalized if the value is recoverable through a future sale.
(g) Income Taxes
The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". The cumulative effect of adopting
SFAS No. 109 on the Company's financial statements as of January 1, 1993
was to increase income from continuing operations by $250,000 ($.06 per
share).
SFAS 109 applies the asset and liability method in accounting for
income taxes. The provision for income tax is comprised of the current
year tax expense and the net change in deferred tax assets and liabilities
as of the balance sheet date. Deferred tax assets and liabilities are
calculated by applying the income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Deferred
tax assets are reduced by a valuation allowance for any tax benefits to
the extent that, in the opinion of management, are unlikely to be realized.
(h) Net Loss Per Share
Net loss per share is computed based on the weighted average number
of shares of common stock outstanding. The total number of shares of
outstanding common stock was 4,263,298 as of December 31, 1995, 1994, and
1993 respectively. Weighted average shares have been adjusted retroactively
to give effect to the 5% stock dividend in 1993. The inclusion of stock
options and warrants as common stock equivalents have no effect on the
earnings per share calculations as they are antidilutive.
(i) New Accounting Pronouncements
Accounting for the Impairment of Long-lived Assets - In March 1995,
the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121
establishes standards for accounting for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. It does not apply to financial
instruments, long-term customer relationships of a financial institution (e.g.
core deposit intangibles), mortgage and other servicing rights, or deferred
tax assets. This standard will be effective for the Company beginning
January 1, 1996. The Company has determined that the effect of adoption of
this standard will not be material.
<PAGE>
Mortgage Servicing Rights - In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which must be adopted by the
Company effective January 1, 1996. SFAS No. 122 requires that the Company
recognize as separate assets rights to service mortgage loans for others,
whether those servicing rights are originated or purchased. Previously, only
purchased servicing rights were capitalizable as an asset whereas internally
originated rights were expensed. SFAS No. 122 also requires that capitalized
servicing rights be assessed for impairment based on fair market value, rather
than an estimate of undiscounted future cash flows. The Company has
determined that the effect of adoption of this standard will not be material.
Accounting for Stock-Based Compensation - In October 1995, the FASB
issued SFAS No. 123, "Accounting for Stock-Based Compensation." The new
standard defines a fair market value method of accounting for stock options
and other equity instruments, such as stock purchase plans. Under this
method, compensation costs are measured based on the fair value of the stock
award when granted and are recognized as an expense over the service period,
which is usually the vesting period. This standard will be effective for
the Company beginning January 1, 1996, and requires measurement of awards
made beginning in 1995.
The new standard permits companies to account for equity transactions
with employees under existing accounting rules, but requires disclosure in a
note to the financial statements of the pro forma net income and earnings per
share as if the Company had applied the new method of accounting. The Company
intends to follow these disclosure requirements for its stock option plans.
Adoption of the new standard will not impact reported earnings or earnings per
share, and will have no effect on the Company's cash flows.
(3) CASH AND DUE FROM BANKS
The Bank maintains balances at the Federal Reserve Bank to comply with
reserve requirements set forth by Regulation D of the Federal Reserve Act, as
amended. At December 31, 1995 and 1994, the Bank was required to maintain
average balances of approximately $1,199,000 and $5,902,800 respectively, to
comply with these regulations. For the purposes of reporting cash flows, cash
and cash equivalents on the Consolidated Statements of Cash Flows include cash
and due from banks, interest bearing deposits with maturities of 90 days or
less, federal funds sold, and securities purchased under agreements to resell.
(4) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Company purchases securities under agreements to resell to invest
excess liquidity. The purchases are typically collateralized by U.S. Treasury
securities, U.S. government securities, mortgage-backed securities or whole
loans. These agreements generally mature on the next business day. There were
$28,000,000 in outstanding securities purchased under agreements to resell as
of December 31, 1995. Securities purchased under agreements to resell averaged
$1,641,000, $8,530,000, and $19,652,000 during 1995, 1994 and 1993; and the
maximum amounts outstanding at any month end during the years ended December
31, 1995, 1994 and 1993 were $28,000,000, $24,500,000, and $49,000,000,
respectively.
<PAGE>
<TABLE>
(5) INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and estimated market value of
investment securities are as follows:
Estimated
Amortized Unrealized Unrealized Market
(dollar amounts in thousands) Cost Gains (Losses) Value
<CAPTION>
<S> <C> <S> <C> <C>
December 31, 1995:
U.S. treasury securities $999 $- ($1) $998
Mortgage-backed securities 19,274 - (328) 18,946
------- --- ------ -------
Total Investment Securities $20,273 $- ($329) $19,944
------- --- ------ -------
December 31, 1994:
U.S. treasury securities $4,998 $- ($59) $4,939
Mortgage-backed securities 49,037 - (4,197) 44,840
Other securities 5 19 - 24
------- --- ------ -------
Total Investment Securities $54,040 $19 ($4,256) $49,803
======= === ====== =======
The following is a summary of the estimated maturities of investment securities
which are principally mortgage-backed securities held as of December 31, 1995:
(dollar amounts in thousands)
Amortized Fair
Cost Value Yield
--------- ------ -----
Due in One Year or Less $2,136 $2,099 5.62%
Due in One Year Through Five Years 18,137 17,845 5.60%
------- ------- -----
$20,273 $19,944 5.60%
======= ======= =====
</TABLE>
Maturities of mortgage-backed securities are classified in accordance
with contractual repayment schedules. Actual maturities may differ from the
contractual maturities reported above because debt security issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Proceeds from the sale of investment securities amounted to $28,057,000,
$0, and $17,292,000 in 1995, 1994 and 1993 respectively, which resulted in a
gross realized loss of $334,000 in 1995 and a gross realized gain of $228,000
in 1993.
Investment securities with an amortized cost of $400,000 at December
31, 1995, and $12,037,000 at December 31, 1994, were pledged to secure
treasury tax and loan accounts and other borrowing facilities.
In November 1995, the FASB issued additional implementation guide lines
regarding previously issued SFAS No. 115. In accordance with this guidance
and prior to December 31, 1995, companies were allowed a one-time reassessment
of their classification of securities and were required to account for any
resulting transfers at fair value. Transfers from the held to maturity
category that result from this one-time reassessment will not call into
question the intent to hold other securities to maturity in the future. The
Company transferred approximately $24,388,000 of securities from the held to
maturity portfolio to the available for sale portfolio. These securities were
then sold and resulted in a net loss of $348,000. This transfer was made
to allow the Company greater flexibility in managing its interest rate risk
and liquidity.
<PAGE>
(6) LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are summarized as follows:
(dollar amounts in thousands)
December 31,
1995 1994
Commercial $26,359 $34,635
Agricultural 1,375 --
Real Estate:
Construction and land development 4,383 5,997
Mortgage 31,267 35,165
Consumer instalment 3,149 5,268
Other loans 404 551
------ ------
66,937 81,616
Deferred fees and costs (172) (276)
------- -------
Net Loans $66,765 $81,340
======= =======
The Bank's customers are located throughout Northern California with
the majority concentrated in the greater Sacramento and San Francisco Bay
regions. The Bank's real estate construction and land development loans,
which represent approximately 7% of total loans, consist primarily of loans
made to finance residential projects in Placer, El Dorado and Sacramento
counties. The Company's real estate mortgage loans, which represent 47% and
43% of total loans as of December 31, 1995 and 1994, consist mainly of loans
made to finance owner occupied and commercial income property in Placer, El
Dorado, and Sacramento counties. A significant portion of these residential
real estate mortgage loans resulted from the Bank providing take-out financing
on the Bank's construction and land development loan portfolio.
At December 31, 1995, approximately 93% of the total loans were collat-
eralized. Generally, real estate loans are secured by real property while
commercial and other loans are secured by bank deposits, real property,
business assets, or personal assets. Repayment is generally expected from
the sale of the related property for real estate construction loans, and
from cash flow of the borrower for other loans.
Changes in the allowance for loan losses for each of the three years
ended December 31, 1995, 1994 and 1993 are summarized as follows:
(dollars amounts in thousands) 1995 1994 1993
Balance at beginning of $4,151 $5,615 $3,205
Provision for loan losses -- 2,668 7,700
Loan chargeoffs (1,821) (4,196) (5,355)
Loan recoveries 175 64 65
Balance at end of year $2,505 $4,151 $5,615
Nonaccrual loans totaled $3,228,000, $7,347,000 and $5,300,000 at
December 31, 1995, 1994 and 1993. Additional interest income that would
have been recognized from nonaccrual loans had they performed in accordance
with their original contractual terms, totaled $340,000, $516,000 and
$603,000 in 1995, 1994 and 1993 respectively.
At December 31, 1995, the Company's recorded investment in loans for
which an impairment has been recognized totaled $5,248,000. Included in
this amount were $3,008,000 of impaired loans for which a SFAS 114 allowance
<PAGE>
of $484,500 is included in the allowance for loan losses, as well as
$2,240,000 of impaired loans that as a result of write downs on the fair
value of collateral, did not have a SFAS 114 allowance. The average recorded
investment in impaired loans was $5,746,500 for 1995. Except for non-accrual
loans, interest is recognized on impaired loans when cash is received and
the future collection of principal is considered by management to be probable.
For the year ended December 31, 1995, the Company recognized $127,500 in
interest on such loans.
(7) PREMISES AND EQUIPMENT
The major classifications of premises and equipment are as follows:
(dollar amounts in thousands) December 31,
1995 1994
Furniture, fixtures and equipment $2,146 $3,567
Leasehold improvements 1,199 1,331
----- -----
3,345 4,898
Accumulated depreciation and
amortization 2,472 3,492
----- -----
$873 $1,406
===== ======
Depreciation and amortization of $521,000, $745,000 and $742,000 was
recorded for the years ended December 31, 1995, 1994 and 1993 respectively.
(8) OTHER REAL ESTATE OWNED
Other real estate owned was $692,000 and $3,208,000 at December 31,
1995 and 1994 respectively. These balances are net of the allowance for
losses on other real estate owned of $1,113,000 and $392,000 respectively.
During 1995, $1,005,000 was added as a provision and $284,000 was charged
off. During 1994, $500,000 was added as a provision and $248,000 was
charged off.
(9) DEPOSIT LIABILITIES
Time deposits of $100,000 or more amounted to $9,610,000 and $7,637,000
at December 31, 1995 and 1994 respectively. Interest expense on time deposits
of $100,000 or more totaled $549,000, $482,000 and $531,000 for 1995, 1994
and 1993 respectively. As of December 31, 1995 and 1994 deposits included
$38,693,000 and $34,063,000 or 37% and 29% of total deposits of homeowner
association management companies.
(10) BORROWINGS
Sunrise Bank of California is eligible to borrow funds on a secured
basis from the Federal Reserve Bank of San Francisco and several broker/
dealers. The maximum available advance is dependent upon the dollar total
of the Bank's investment securities and loans pledged to collateralize such
borrowings. As of December 31, 1994, the Bank had $10,548,000 in short
term borrowings and had $12,037,000 in securities pledged under these
borrowing facilities. As of December 31, 1995, there were no amounts out-
standing under these arrangements. There were average borrowings for the
years ended December 31, 1995 and 1994 of $2,155,000 and $7,418,000
respectively with average interest rates of 5.5% and 5.4% respectively.
<PAGE>
(11) INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
(dollar amounts in thousands) 1995 1994 1993
Current:
Federal $ 70 ($838) ($2,251)
State 85 (83) 2
--- --- -----
155 (921) (2,249)
--- --- -----
Deferred:
Federal (70) (526) (466)
State (84) (14) (350)
--- --- -----
(154) (540) (816)
----- ------ ------
$ 1 ($1,461) ($3,065)
----- ------ ------
The total income tax rate differs from the amount computed by applying
the U.S. Federal statutory income tax rate to income before income taxes and
the cumulative effect of adopting SFAS No. 109. A reconciliation of the
statutory income tax rate to the effective income tax rate of the Company
is as follows:
(dollar amounts in thousands) 1995 1994 1993
---- ---- ----
Statutory rate (35.0%) (35.0%) (35.0%)
State franchise tax rate (net of
federal income tax benefit) .1% (1.8%) (7.3%)
Reversal of tax reserves
provided in previous years
no longer required -- -- (8.1%)
Limitation on the utilization of
tax benefits 34.1% 3.2% 6.1%
Other .8% 1.2% 1.9%
----- ------ -----
Effective rate 0% (32.47%) (42.4%)
===== ====== =====
At December 31, 1995, the Company had operating loss carryforwards for
federal tax purposes of approximately $1,303,000 which expire in 2009. In
addition, the Company had operating loss carryforwards for state tax pur-
poses of approximately $5,819,000 which begin to expire in 1998. Federal
and state operating loss carryforward differ primarily because the State
of California disallows the carryback of operating losses and limits
carryforward amounts to 50% of the reported tax loss.
The Tax Reform Act of 1986, as amended and the California Conformity
Act of 1987 impose substantial restrictions on the utilization of net
operating loss carryforwards in the event of an ownership change," as defined
by the Internal Revenue Code. If there should be a significant ownership
change of Sunrise Bancorp, the ability to utilize the stated federal and
state loss carryforwards could be significantly reduced.
Deferred income taxes reflect the tax effect of temporary differences
existing between the financial statement basis and tax basis of assets and
liabilities recognized in the financial statements. Under SFAS No. 109,
deferred tax assets are reduced by a valuation allowance when it has been
determined that is unlikely such assets will be realized.
<PAGE>
The Company has recorded a net deferred tax asset of $2,492,000 with a
corresponding valuation allowance of $1,267,000 for a net carrying value of
$1,225,000. This asset is primarily attributable to loss carryforwards,
which expire between 1998 and 2009, and timing differences. For the loss
carryforwards, realization is dependent on generating sufficient taxable
income prior to expiration of loss carryforwards. In addition, upon reversal
of timing differences, if sufficient taxable income is unavailable, addi-
tional loss carryforwards would be created. Therefore, the ultimate
realization of the carrying value of the deferred tax asset is dependent
on generating sufficient taxable income in the future. Although realization
is not assured, management believes it is more likely than not that the net
carrying value of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income are reduced.
The tax effect of the principal temporary items creating the Company's
net deferred tax benefit included in other assets at December 31, 1995 and
1994 are as follows:
(dollar amounts in thousands) 1995 1994
Writedown of investments ($136) ($1,483)
Allowance for loan losses 702 1,468
Loan origination costs (39) (71)
California franchise tax (134) (132)
Premises and equipment 91 54
California net operating loss 658 548
Other real estate owned 526 178
Federal net operating loss 443 1,096
Alternative minimum tax credit 291 137
Other 90 (64)
----- -----
2,492 1,731
----- -----
Less valuation allowance 1,267 660
------ ------
Total net deferred tax benefit $1,225 $1,071
====== ======
(12) OTHER EXPENSE
The composition of other operating expenses for the years ended
December 31, 1995, 1994, and 1993 respectively is set forth below:
(dollar amounts in thousands) 1995 1994 1993
---- ---- ----
Stationery and supplies $79 $229 $308
OREO expense 977 634 562
Communications 234 565 540
Professional fees 586 801 1,776
State Banking Department and FDIC
insurance assessments 317 712 667
Other outside service fees 599 1,041 976
Other 511 1,793 1,627
------ ------ ------
$3,303 $5,775 $6,456
====== ====== ======
Included within other outside service fees are amounts incurred for
outside vendors to perform various banking services for depositors that
are in real estate related industries. Their services include data
processing, courier, and other deposit related services. Total amounts
paid to outside vendors amounted to $297,000, $592,000 and $709,000 in
1995, 1994, and 1993, respectively. These services were discontinued with
the reduction of title company deposits.
<PAGE>
(13) COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments
The future minimum lease payments for noncancelable operating leases, and
the minimum sublease rental receipts for noncancelable subleases, with
remaining terms in excess of one year are as follows:
(dollar amounts in thousands) Leases Subleases
Year ending December 31,
1996 818 163
1997 715 163
1998 715 163
1999 299 68
Later years -- --
------ ----
$2,547 $557
====== ====
Net rental expense aggregated $844,000, $760,000 and $789,000 in 1995,
1994, and 1993, respectively.
Commitments to Extend Credit
In the ordinary course of business, the Company enters into trans-
actions which involve financial instruments which are not reflected in the
consolidated financial statements. These financial instruments consist of
undisbursed loan commitments of $9,987,000 and stand-by letters of credit
of $510,000 at December 31, 1995. The Company applies the same credit
policies in making these "off balance sheet" commitments as it does for
"on balance sheet" instruments. The Bank's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
loan commitments and stand-by letters of credit is equal to the contractual
amount of those instruments. The undisbursed loan commitments relate
primarily to undisbursed portions of commercial lines of credit.
The loan commitments are typically contingent upon the borrower meeting
certain financial requirements and other covenants, and such commitments
typically have fixed expiration dates and require payment of a fee. Since
a portion of these commitments are expected to expire without being drawn
upon, the total commitments do not necessarily represent future cash
requirements. The Bank evaluates each potential borrower and the necessary
collateral on an individual basis. Collateral varies, but may include real
property, bank deposits, debt or equity securities or business assets.
Stand-by letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk is similar to that involved in extending loan commitments to customers,
and the Bank accordingly uses evaluation and collateral requirements similar
to those for loan commitments. At December 31, 1995, $500,000 of the standby
letters of credit were unsecured.
<PAGE>
Litigation
The Company and the Bank are at times subject to threatened or filed
legal actions with regard to matters arising out of the course of their
businesses. It is the opinion of management, after consulting with legal
counsel, that the resulting liability, if any, as a result of these
legal actions will not materially affect the consolidated financial
position of the Company.
(14) EMPLOYEE BENEFIT PLANS
The Company has two Stock Option Plans (the "Plans") for full-time
salaried officers and employees who have significant responsibility for the
successful operation of the Company and the Bank. The Plans provide for the
grant of incentive and nonstatutory stock options. The options may be granted
to purchase up to a remaining aggregate of 778,649 shares (as adjusted for
stock dividends) of the Company's authorized but unissued common stock. The
exercise price of all options granted under the Plans may not be less than
100% of the fair market value of the Company's common stock on the date of
the grant, and must be paid in full in cash or shares of the Company's common
stock at the time the option is exercised. Under the Plans, all options
expire no later than ten years after the date of the grant.
A summary of changes in outstanding options follows:
Average
Number of Price per
Shares Share
--------- ---------
Balance at December 31, 1992 410,949 $3.39
Granted 231,534 3.27
Canceled 249,596 3.35
-------
Balance at December 31, 1993 392,887 3.35
Granted 217,000 2.65
Canceled 96,162 3.55
-------
Balance at December 31, 1994 513,725 3.35
Granted 75,000 1.56
Canceled 329,097 3.40
-------
Balance at December 31, 1995 259,628 $2.29
=======
Options covering 85,629 shares, at an average price of $2.98 per share,
were exercisable at December 31, 1995.
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary as a contribution
to the plan. The Company matches the employee contributions at a rate set
by the board of directors (currently 50% of the first 6% of deferral of an
individual's salary). The matching contribution vests ratably over six
years. The Company contributed $51,000, $47,000 and $69,000 in 1995,
1994 and 1993.
(15) SHAREHOLDERS' EQUITY
The Company commenced a private offering of its common stock in 1991. Under
the offering, a total of 328,002 shares valued at $5.00 per share were issued
and warrants to purchase a total of 218,668 shares of common stock of the
<PAGE>
Company at $5.00 per share were issued. Proceeds received under this offering,
net of costs incurred, amount to $1,529,000. On December 31, 1991, the
Company acquired the assets of an escrow accounting company in exchange for
75,000 shares of common stock of the Company and warrants to purchase 50,000
shares of common stock of the Company at $5.00 per share. This asset pur-
chase was valued at $375,000. Warrants issued in connection with these
transactions became exercisable on July 2, 1993 and expire on December 31,
1997. Total shares exercisable under these warrants amount to 296,206 at a
price of $4.54 per share after adjusting for 1992 and 1993 stock dividends.
(16) RELATED PARTY TRANSACTIONS
The Company has granted in the ordinary course of business, loans to certain
of its directors, executive officers, and to associates of such persons
(collectively referred as "related parties"). The aggregate dollar amount of
loans to related parties was $1,732,000 and $2,228,000 at December 31, 1995
and 1994. During 1995, $224,000 of new loans to related parties were advanced
and principal repayments totaled $720,000. During 1994, $1,097,000 of new
loans to related parties were advanced and principal repayments totaled
$616,000. None of the loans outstanding at December 31, 1995 and 1994 were
contractually past due as to principal or interest, nor were they classified
as nonperforming or potential problem loans.
(17) REGULATORY MATTERS
Regulatory Agreements
On April 14, 1993, the Bank entered into a Memorandum of Understanding
with the Federal Deposit Insurance Corporation (the "FDIC") and the Super-
intendent of Banks of the State of California (the "Superintendent") to
address various matters arising from an examination of the Bank conducted
by the FDIC as of October 5, 1992. This Memorandum of Understanding super-
seded the previous Memorandum of Understanding with the Bank dated July 16,
1991. As a result of a joint examination of the Bank conducted by the FDIC
and the Superintendent as of the close of business October 25, 1993, and the
conclusion of the FDIC and the Superintendent that the Bank was not in
compliance with the requirements of the Memorandum of Understanding dated
April 14, 1993, the Bank entered into a revised Memorandum of Understanding
with the FDIC on May 17, 1994 (the "FDIC Memorandum") and the Bank entered
into a regulatory agreement with the Superintendent on May 24, 1994, as
amended on October 31, 1994 (the "State Agreement"). (The FDIC Memorandum
and the State Agreement are referred to collectively as the "Agreements.")
As a result of a joint examination of the Bank conducted by the FDIC and
the Superintendent as of the close of business December 18, 1995, both
Agreements were terminated.
As a result of an examination of the Company conducted by the Federal
Reserve Band ("Reserve Bank") as of December 31, 1993, the Company entered
into a Memorandum of Understanding with the Reserve Bank on September 2,
1994 (the "Reserve Bank Memorandum"). The Reserve Bank Memorandum requires
the Company: (i) to submit a policy for receiving dividends from the Bank;
<PAGE>
(ii) to submit a capital plan to improve and maintain an adequate capital
position for the Company and the Bank; (iii) to submit a plan to manage the
Company's and the Bank's growth; (iv) to submit annual budgets for the
Company and the Bank; (v) to submit an explanation of certain management
and service fees and other payments assessed or paid by the Bank to the
Company since January 1, 1993, and adopt a policy addressing inter-corporate
management and service fees and other payments and make any reimbursements
to the Bank as may be required by the Reserve Bank; (vi) to obtain prior
approval to declare or pay any dividends, engage in certain financial trans-
actions, increase borrowings or incur debt, increase director fees, pay
executive bonuses or execute renew or modify any employment or service
contracts with executive officers, or otherwise acquire any of its shares
of common stock; and (vii) to submit quarterly written progress reports and
certain financial statements. The Reserve Bank Memorandum also requires
the Company's Board of Directors; (i) to review performance on a quarterly
basis, and to submit such reviews to the Reserve Bank; (ii) to submit a plan
to improve the condition of the Bank and the Company; and (iii) to complete
a study of employment contracts and executive officer compensation paid
during 1993 and 1994. As a result of an examination of the Company con-
ducted by the Reserve Bank as of December 31, 1994, the Reserve Bank
memorandum remains in effect and unchanged. Management believes the
Company is in substantial compliance with the terms and conditions of the
Reserve Bank Memorandum.
Capital Guidelines
The Company and the Bank are subject to various regulatory capital
requirements administered by federal 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 Company's financial statements. The
regulations require the Company and the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of assets, liabilities
and certain "off balance sheet" items as calculated under regulatory
accounting practices. The Company's and the Bank's capital classifications
are also subject to qualitative judgements by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined)
and a minimum leverage ratio of Tier 1 capital to average assets (as defined).
Management believes, as of December 31, 1995, that the Company meets all
capital adequacy requirements to which it is subject.
The following table shows the Company's and the Bank's capital ratios at
December 31, as well as the minimum regulatory capital ratios:
Minimum
Capital Ratios: 1995 1994 Capital Ratios
Company:
Total risk-based capital ratio 18.31% 17.27% 8.00%
Tier 1 capital to risk-weighted assets 17.05% 16.02% 4.00%
Leverage ratio 11.75% 8.98% 4.00%
Bank:
Total risk-based capital ratio 16.95% 16.28% 8.00%
Tier 1 capital to risk-weighted assets 15.69% 15.04% 4.00%
Leverage ratio 10.98% 8.42% 4.00%
<PAGE>
Dividend Limitations
California law restricts the amount of net profits of the Bank avail-
able for distribution to the Company in the form of cash dividends to the
lesser of retained earnings or the Bank's net income for its last three
fiscal years (less any distributions to shareholders made during such
period). Where this test is met, cash dividends may, with the prior
approval of the California Superintendent of Banks, be paid in an amount
which does not exceed the greater 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. As of December 31, 1995,
the Bank had no retained earnings.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107,
"Disclosures About Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by using available market infor-
mation and appropriate valuation methodologies. However, considerable
judgement is required to interpret market data to develop the estimates
of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The following estimates and assumptions were used on December 31, 1995 to
estimate the fair value of each class of financial instruments for which such
an estimation was practicable.
Cash and Cash Equivalents - For cash and equivalents, the carrying amount is
a reasonable estimate of fair value.
Investment Securities - The fair value of investment securities is based on
quoted market prices, dealer quotes, and prices obtained from independent
pricing services.
Loans - The fair value of performing loans is estimated by discounting the
future cash flows using the current interest rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of nonperforming loans of approximately
$2,684,000 and $6,115,000 at December 31, 1995 and 1994, was based on
estimated net realizable value.
Demand deposits and time deposits - The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for deposits with similar
remaining maturities.
Commitment to extend credit and standby letters of credit - The fair value of
commitments and letters of credit is estimated using the fees currently
charged to enter into similar agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The difference between the carrying value is not signi-
ficant and therefor not included in the following table.
<PAGE>
<TABLE>
The summaries of these financial instruments and their related fair values
at December 31, 1995 and 1994 are as follows (in thousands):
<CAPTION>
1995 1994
Carrying Estmiated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $32,726 $32,726 $6,367 $6,367
Investment and securities $20,273 $19,944 $54,040 $49,803
Loans $64,260 $63,360 $77,189 $75,045
Liabilities:
Noninterest-bearing deposits $13,808 $13,808 $29,206 $29,206
Interest-bearing deposits $90,075 $89,969 $87,737 $87,768
Other borrowings $-- $-- $10,548 $10,548
</TABLE>
(19) SUNRISE BANCORP (PARENT COMPANY ONLY)
Condensed Statements of Condition
December 31, 1995 and 1994
(dollar amounts in thousands) 1995 1994
Cash and interest bearing deposits . . $894 $1,449
Investment in bank subsidiary . . . . .15,430 16,877
Premises and equipment, net . . . . . . 40 65
Other assets. . . . . . . . . . . . . . 138 208
------ ------
$16,502 $18,599
======= =======
Other liabilities . . . . . . . . . 13 590
Shareholders' equity . . . . . . . . . 16,489 18,009
------ ------
$16,502 $18,599
======= =======
<PAGE>
Condensed Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
[CAPTION]
(dollar amounts in thousands) 1995 1994 1993
Income:
Interest . . . . . . . . . . . . . . $27 $23 $48
Other. . . . . . . . . . . . . . . . 49 98 --
--- --- ---
76 121 48
--- --- ---
Expenses:
Salaries and benefits . . . . . . . . 26 65 272
Net occupancy expense . . . . . . . . -- 31 192
Other . . . . . . . . . . . . . . . . 122 86 692
Income tax (benefit) provision . . . 1 (12) (983)
--- --- ---
149 170 173
Loss before equity in undistributed
income of subsidiary. . . . . . . . . (73) (49) (125)
Equity in undistrubted loss of subsidiary. (1,447) (2,993) (4,043)
Cumulative effect of a change in accounting
principle of subsidiary. . . . . . . . -- -- 250
------ ------ ------
Net Loss . . . . . . . . . . . . . .($1,520)($3,042)($3,918)
====== ====== ======
Condensed Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
(dollar amounts in thousands) 1995 1994 1993
Operating activities:
Net loss ($1,520) ($3,042) ($3,918)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Undistributed loss of subsidiaries 1,447 2,993 3,793
Gain on sale of investments (17) -- --
Depreciation and amortization 24 34 34
Net change in other assets and
liabilities (512) 462 (1,312)
---- ---- -----
Net cash (used) provided by operating
activities (578) 447 (1,403)
---- ---- -----
Investing activities:
Proceeds from sale of investments 23 -- --
Acquisition of premises and equipment -- (11) (1)
---- ---- -----
Net cash provided (used) by investing
activities 23 (11) (1)
Financing activities:
Cash paid in lieu of fractional shares -- -- (3)
---- ---- -----
Net cash used by financing activities -- -- (3)
(Decrease) increase in cash and cash
equivalents (555) 436 (1,407)
Cash and cash equivalents at beginning of
year 1,449 1,013 2,420
----- ------ ------
Cash and cash equivalents at end of year $894 $1,449 $1,013
===== ====== ======
<PAGE>
INDEPENDENT AUDITORS REPORT
Board of Directors and Shareholders
Sunrise Bancorp
Roseville, California
We have audited the accompanying consolidated statements of condition of
Sunrise Bancorp and Subsidiary (Company) as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statements presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all materials respects, the financial position of Sunrise Bancorp and
Subsidiary at December 31, 1995 and 1994 and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 17 to the consolidated financial statements, the Company
is subject to a Memorandum of Understanding with the Federal Reserve Board.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to conform with Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities.
DELOITTE & TOUCHE LLP
Sacramento, California
February 9, 1996
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, OF THE REGISTRANT.
Directors of the Company
WILLIAM EAMES was the President and Chief Executive Officer of Bill's
Drugs in excess of thirty years, a chain of drug stores in Northern
California. He has been a director of the Rod McLellan Company from 1991
to present. He is a member of the Contra Costa Grand Jury. He is the
Chairman of the Tri Valley Junior Achievement, and he is a member of
Lafayette Rotary.
DONALD LEARY has been Assistant to the President of Progressive Circuit
Products, Inc., a manufacturer of circuit boards for the electronics industry,
since 1985. From 1983 to 1985, he was a consultant for McClellan Air Force
Base where he trained personnel and developed policies and procedures for
printed circuit operation. From 1978 to 1983, he was Vice President of
Operations for Progressive Circuit Products, Inc.
LEON LEWIS has been the Secretary-Treasurer of Bestway Investments, Ltd.,
since 1991, and he has owned Bestway Travel since 1977. He started an insur-
ance agency in 1964 which is now known as Albano, Dale, Dunn & Lewis Insurance
Services, Inc. In 1993, Mr. Lewis retired from active management of Albano,
Dale, Dunn & Lewis.
SEAN McCARTHY, ESQ., Chairman of the Board of the Company and the Bank, is
a partner in the firm of Washburn, Briscoe & McCarthy. His legal practice
focuses on legislative and regulatory matters, major civil litigation
pertaining to wetlands, and the formation and licensing of underwritten title
companies. Prior to joining the law firm in 1985, he served as Executive Vice
President and Counsel for the California Land Title Association in Sacramento.
ANTHONY PESCETTI has served on the Board of the Sacramento Municipal
Utilities District ("SMUD") since January 1993. In 1995, he served a one-year
term in the additional capacity of President of SMUD. Since January 1994, he
has been a principal of the Joan Milke Flores Group, a corporate consulting
firm specializing in local and state government relations as well as community
relations. From 1987 to 1994 he was the Chief of Staff at the Division of
the State Architect, a Governor's Appointee office.
RON PITAMBER is the owner and operator of the Heritage Inn in Roseville
and other hotels. He has been associated with the hotel industry for the past
seventeen years.
MICHAEL "RANDY" RANDAZZO, M.D., is a retired physician. From 1982 to
1989, he was the Medical Director and Administrator of the San Juan Surgery
Center.
<PAGE>
PAUL WAGNER was the President of Richardson-Wagner Corporation from 1972
through 1992. Richardson-Wagner is a retail clothing chain. He currently
acts as a consultant to Richardson-Wagner Corporation, which is managed by
Mr. Wagner's sons.
DORIS WARD was an owner of W.F. Ward's Furnishings from 1980 until her
retirement in 1994. Ms. Ward has been Secretary-Treasurer of Melvin J. Ward,
Inc., a general contracting firm, since 1969.
No director or nominee for director of the Company is a director of
any other company with a class of securities registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended, or subject to the
requirements of Section 15(d) of such Act or of any company registered as an
investment company under the Investment Company Act of 1940, as amended.
Executive Officers
The following information regarding the executive officers of the
Company and/or the Bank has been furnished to the Company by the respective
named individuals.
HAL GIOMI has been President and Chief Executive Officer of the Bank
since November of 1994, and he was appointed to the additional positions of
President and Chief Executive Officer of the Company effective April of 1995.
Prior to joining the Bank, he was the Chief Credit Officer of Pacific Valley
National Bank in Modesto. He has over 27 years of experience in banking,
including positions of CEO, President, Senior Vice President, Senior Credit
Administrator, and other positions in banking. He is a graduate of the Senior
Management Program at Lloyd's Bank Staff College of London, and holds a
degree in business administration and agricultural business management from
California State Polytechnic University in San Luis Obispo.
SARAH THOMPSON has been Senior Vice President, Chief Financial Officer
and Secretary of the Company and the Bank since March of 1995. Ms. Thompson
worked at Pacific Valley National Bank for over 13 years, where she was
promoted from Assistant Cashier to Controller and then Chief Financial
Officer.
No director or executive officer of the Company or its subsidiaries
has any family relationship with any other director or executive officer
of the Company or its subsidiaries.
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, its executive officers, and any persons holding more
than ten percent of the Company's Common Stock to file reports disclosing
their initial beneficial ownership of the Company's Common Stock and any
subsequent changes in their beneficial ownership to the Securities and
Exchange Commission. To the Company's knowledge, all of these filing
requirements were satisfied, except that Mr. Pescetti's Initial Statement
of Beneficial Ownership on Form 3 was filed 32 days late. In making these
disclosures, the Company has relied on written representations of its
directors and executive officers and copies of the reports they have filed
with the Commission which have been provided to the Company by the persons
required to file reports.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth for the last three fiscal years ended
December 31, 1993, 1994, and 1995, the compensation paid for services
rendered to the Company and its subsidiary to Hal Giomi, who has been
President and Chief Executive Officer of the Bank since November 1, 1994,
and President and Chief Executive Officer of the Company since April 7,
1995. Mr. Giomi is the only executive officer at December 31, 1995, whose
salary and bonus in 1995 exceeded $100,000.
<TABLE>
Annual Compensation Long Term Compensation
Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year Salary(1) Bonus Other Restricted Securities LTIP All
Principal Annual Stock Underlying Pay Other
Position Compen- Award(s) Options/ Outs
Compen-
sation SARs(#)(2)
sation
Hal Giomi, 1995 $149,164 $0 $0 0 0 $0
$3,313
President and $23,750(4)
Chief Executive 1994 $0 $0 $0 0 80,000 $0 $0
Officer of the
Company and 1993 $0 $0 0 0 $0 40
the Bank
<FN>
(1) Amounts shown include cash and non-cash compensation earned and received and amounts earned
but deferred at the election under the 401(k) Plan.
(2) The Company has a 1981 Amended and Restated Stock Option Plan (the "1981 Plan") and a 1991
Stock Option Plan (the "1991 Plan") pursuant to which options are granted to full-time employees
of the Company and its subsidiaries.
(3) In 1995, the Company matched deferrals to the 401(k) Plan on behalf of Mr. Giomi in the
amount of $3,133.
(4) Mr. Giomi commenced employment as President and Chief Executive Officer of Sunrise Bank of
California on November 1, 1994, and assumed the same positions for Sunrise Bancorp on April 7,
1995. The amount shown in the table represents two months' salary; Mr. Giomi's current
annualized
salary in all capacities is $152,496.
</TABLE>
<PAGE>
The following table sets forth information concerning the aggregate
value of all unexercised options held by Mr. Giomi, the only officer listed
in the Summary Compensation Table as of December 31, 1995. The Company has
never granted stock appreciation rights to its directors or executive officers.
No stock options were exercised during 1995.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Name Number of Securities Underlying Value Unexercised In-the-Money
Unexercised Options/SARs at Options at Fiscal Year End ($)
Fiscal Year End (#)
- --------- ------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Hal Giomi 20,000 60,000 $17,400 $52,200
Employment Contracts,
Termination of Employment
and Change in Control Arrangements
Hal Giomi has been President and Chief Executive Officer of the Bank
since November of 1994, and he was appointed to the additional positions of
President and Chief Executive Officer of the Company effective April of 1995.
The following discussion describes the employment agreement with Mr. Giomi.
In October of 1995, the Company and Bank entered into an agreement with
Hal Giomi providing for Mr. Giomi's continued employment as the President and
Chief Executive Officer of the Company and the Bank (the "Agreement"). The
commencement of the Agreement was retroactive to November 1, 1994, and
continued until February 28, 1995; and on February 28, 1995, it was continued
until February 28, 1996; thereafter, the Agreement is deemed extended for an
additional year, unless notice of nonrenewal is provided by the Company prior
to February 28. The Agreement provided for base salary in the amount of
$11,875 per month until May 1, 1995, when Mr. Giomi's salary was increased to
$12,708 per month. The issue of salary level and/or salary increases shall
be negotiated during February of each year. The Agreement provides for an
automobile allowance for Mr. Giomi of $625 per month.
The Agreement also provides for Mr. Giomi's participation in employee
benefit programs sponsored by the Company, and severance pay in the event of
termination of Mr. Giomi's employment contract without cause equal to six
months' salary at Mr. Giomi's rate of annual base salary in effect immediately
preceding such termination, among other provisions.
The 1981 Stock Option Plan and the 1991 Stock Option Plan provide that
outstanding options become fully exercisable on a Change in Control which is
defined as a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or in
response to any other form to the Securities and Exchange Commission or any
stock exchange on which the Company's shares are listed which requires the
<PAGE>
reporting of a change in control. A Change in Control is deemed to have
occurred if (i) any "person" (as defined in the Exchange Act) is or becomes
the beneficial owner of securities of the Company representing 20% or more
of the voting power of the Company's then outstanding voting securities;
or (ii) in any one-year period, individuals who at the beginning of such
period constitute the Board of Directors of the Company cease for any
reason to constitute at least a majority thereof, unless the election, or
the nomination for election by the Company's shareholders, of each new
director is approved by a vote of at least three quarters of the directors
then in office or who were directors at the beginning of the period; or
(iii) a majority of the Board of Directors of the Company in office prior
to the happening of any event determines in its sole discretion that as a
result of such event there has been a Change in Control.
Compensation of Directors
All directors of the Company are also directors of the Bank. During
1995, directors were entitled to receive $650 for attendance at each regular
meeting and $350 for each special meeting of the Board of Directors of the
Company and the Bank. Directors who serve on committees of the Boards also
were entitled to receive payments of $150 for each committee meeting which
they attended. The total amount of fees paid to or deferred by all directors
of the Company and the Bank during 1995 was $111,800.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Principal Shareholders
The following table shows the name, address, number of shares held, and
percentage of shares held as of March 22, 1996, by the only person or entity
known to the Company to be the beneficial owner of more than five percent of
the Company's Common Stock.
Amount of Percent
Name and Address Ownership of Class
Varian Associates 265,482 6.23%
1726 Cedar Wood Drive
Minden, Nevada 89423
Arthur Hall, in his capacity as the sole general partner of Valarian
Associates, has the power to vote and dispose of the shares owned by Valarian
Associates. Mr. Hall's business address is the same as that of Valarian
Associates.
<PAGE>
Stock Ownership Table
The following table sets forth certain information with respect to the
number and percentage of shares of the Company's common stock beneficially
owned as of March 22, 1996, by (i) each of the directors of the Company, (ii)
each of the executive officers named in the Summary Compensation Table
included in Item II above, and (iii) all current directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Beneficial Owner Age Position(s) Held with Director or Amount of Percent
Company Officer Since Shares of Class
- ---------------- --- --------------------- ------------- --------- --------
William Eames 61 Director Feb. 20, 1996 141,137 3.27%
Donald Leary 52 Director 1987 27,562 (1) 0.64%
Leon Lewis 70 Director 1981 85,349 (2) 1.98%
Sean McCarthy 56 Director 1991 78,745 (3) 1.82%
Anthony Pescetti 44 Director 1995 0 0%
Ron Pitamber 44 Director 1986 73,867 1.71%
Michael Randy
Randazzo, M.D. 73 Director 1981 87,194 (4) 2.02%
Paul Wagner 74 Director 1981 120,801 (5) 2.80%
Doris Ward 62 Director 1981 50,110 (6) 1.16%
Hal Giomi 53 President and 1994 20,000 (7) 0%
CEO of the
Company and
the Bank
Current Directors and
Executive Officers as a
Group (11 in number) 688,515(8) 15.95%
<PAGE>
<FN>
(1) Includes 26,460 shares held by The Leary Living Trust, 551 shares held in Mr. Leary's
individual retirement account ("IRA"), and 551 shares held in Mr. Leary's spouse's IRA.
(2) Includes 77,139 shares held by Bestway Investments, Ltd., as to which Mr. Lewis has voting
power, and 8,210 shares held in trust by Mr. Lewis as trustee for his minor grandchildren. Mr.
Lewis disclaims beneficial ownership as to all such shares.
(3) Includes 29,398 shares subject to currently exercisable warrants.
(4) Includes 72,765 shares held by The M. Randy Randazzo, M.D., Inc., Retirement Trust; 11,466
shares in joint tenancy with his spouse, and 882 shares held by Dr. Randazzo's sons as to which
he exercises voting control.
(5) Includes 62,369 shares held by Mr. Wagner's IRA, 57,881 shares held by The Paul C. Wagner
1976 Revocable Family Trust, and 551 shares held by Mr. Wagner's spouse's IRA.
(6) Includes 7,607 shares held by The Melvin J. Ward, Inc., Profit Sharing Plan, of which Ms.
Ward is Trustee.
(7) Includes 20,000 shares subject to options which are currently exercisable or exercisable
within sixty days after March 22, 1996.
(8) Includes 23,750 shares subject to options which are currently exercisable or exercisable
within sixty days after March 22, 1996, and 29,398 shares subject to warrants which are
currently exercisable.
</FN>
</TABLE>
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Directors and Others
The Company paid $112,699 in premiums during 1995 for the purchase of
fidelity, liability and workers compensation insurance coverage from Albano,
Dale, Dunn & Lewis Insurance Services, Inc., Leon Lewis, a director of the
Company is not directly involved with Albano, Dale, Dunn & Lewis. However a
son of Director Lewis is an officer of Albano, Dale, Dunn & Lewis. There were
no other material transactions since January 1, 1995, nor are thereany
currently proposed transactions, to which the Company or any of its sub-
sidiaries was or is to be a party, in which the amount involved exceeds
$60,000 and in which any director, executive officer, nominee as a director,
5% shareholder, or member of the immediate family of any of the foregoing
persons had, or will have, a direct or indirect material interest.
Indebtedness of Management
Some of the directors and executive officers of the Company and members
of their immediate families and the companies with which they have been
associated have been customers of and have had banking transactions with the
Bank in the ordinary course of business since January 1, 1995, and the Bank
expects to have such banking transactions in the future. Loans to such persons
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A) 1. Financial Statements
This information is contained on the pages indicated below of this
Form 10-K.
Consolidated Statement of Condition at December 31, 1995
and 1994
For the years ended December 31, 1995, 1994 and 1993:
Consolidated Statements of Operations
Consolidated Statements of Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
(A) 2. Financial Statements Schedules
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the consolidated
financial statements on pages through and/or the notes thereto, or are
not material.
<PAGE>
(A) 3. The exhibits listed in the accompanying index to exhibits are filed
or incorporated by reference as part of this Annual Report. The following
is a list of such exhibits.
Exhibit No. Description of Exhibits
3.1 Articles of Incorporation as filed with the California
Secretary of State on November 20, 1981, filed as Exhibit 3.1 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.2 Amendment to Articles of Incorporation as filed with the California
Secretary of State on March 25, 1982, filed as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.3 Amendment to Articles of Incorporation as filed with the California
Secretary of State on January 16, 1984, filed as Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.4 Amendment to Articles of Incorporation as filed with the California
Secretary of State on March 26, 1987, filed as Exhibit 3.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.5 Amendment to Articles of Incorporation as filed with the California
Secretary of State on June 15, 1988, filed as Exhibit 3.5 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, is hereby incorporated by reference.
3.6 Bylaws of Sunrise Bancorp currently in effect filed as Exhibit 3.6 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, is hereby incorporated by reference.
<PAGE>
Exhibit No. Description of Exhibits
10.1 Lease dated as of June 1, 1988, between Sunrise Bank of California
and Jim Dismukes filed as Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, is hereby incor-
porated by reference.
10.2 Lease extension dated as of November 10, 1995 between Sunrise Bank of
California and Jim Dismukes.
10.3 Lease dated as of June 9, 1989, by and between Sunrise Bancorp and
Marin County Employees Retirement Association filed as Exhibit 10.3
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, is hereby incorporated by reference.
10.4 *Sunrise Bancorp 401(k) Profit Sharing Plan and Trust Agreement filed
as Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the
fiscal year-ended December 31, 1994, is hereby incorporated by
reference.
10.5 *Sunrise Bancorp 1981 Amended and Restated Stock Option Plan, filed
as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986, is hereby incorporated by
reference.
10.6 *Sunrise Bancorp 1991 Stock Option Plan filed as Exhibit 10.10 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990 is hereby incorporated by reference.
10.7 *Form of Sunrise Bancorp Nonstatutory Stock Option Agreement filed
as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990, is hereby incorporated by
reference.
10.8 *Form of Sunrise Bancorp Incentive Stock Option Agreement filed as
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, is hereby incorporated by
reference.
_________________
*Indicates management
contract or compensatory
plan or arrangement.
<PAGE>
Exhibit No. Description of Exhibits
10.9 *Amendment No. 1 to the Sunrise Bancorp 1981 Amended and Restated
Stock Option Plan files as exhibit 10.9 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, is
hereby incorporated by reference.
10.10 Forms of Sunrise Bancorp Stock Purchase Warrant.
10.11 Agreement between the Superintendent of Banks of the State of
California and Sunrise Bank of California, dated May 24, 1994,
filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, is hereby incorporated by
reference. Agreement was terminated following an examination on
December 18, 1995.
10.12 Memorandum of Understanding between the Federal Deposit Insurance
Corporation and Sunrise Bank of California, dated May 17, 1994 filed
as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, is hereby incorporated by
reference. Memorandum was terminated following an examination on
December 10, 1995.
10.13 Memorandum of Understanding between the Federal Reserve Bank of San
Francisco and Sunrise Bancorp dated September 2, 1994, filed as exhibit
10.13 to the registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, is hereby incorporated by reference.
10.14 *Employment agreement dated May 1, 1995 between Sunrise Bancorp,
Sunrise Bank of California and Hal Giomi.
21 Registrant's only subsidiary is Sunrise Bank of California.
23 Consent of Deloitte & Touche.
27 Financial Data Schedule.
_________________
*Indicates management
contract or compensatory
plan or arrangement.
<PAGE>
(B) REPORTS ON FORM 8-K
None.
<PAGE>
Exhibit No. Description of Exhibits
3.1 Articles of Incorporation as filed with the California
Secretary of State on November 20, 1981, filed as Exhibit 3.1 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.2 Amendment to Articles of Incorporation as filed with the California
Secretary of State on March 25, 1982, filed as Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.3 Amendment to Articles of Incorporation as filed with the California
Secretary of State on January 16, 1984, filed as Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.4 Amendment to Articles of Incorporation as filed with the California
Secretary of State on March 26, 1987, filed as Exhibit 3.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, is hereby incorporated by reference.
3.5 Amendment to Articles of Incorporation as filed with the California
Secretary of State on June 15, 1988, filed as Exhibit 3.5 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, is hereby incorporated by reference.
3.6 Bylaws of Sunrise Bancorp currently in effect filed as Exhibit 3.6 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, is hereby incorporated by reference.
<PAGE>
Exhibit No. Description of Exhibits
10.1 Lease dated as of June 1, 1988, between Sunrise Bank of California
and Jim Dismukes filed as Exhibit 10.1 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, is hereby incor-
porated by reference.
10.2 Lease extension dated as of November 10, 1995 between Sunrise Bank of
California and Jim Dismukes.
10.3 Lease dated as of June 9, 1989, by and between Sunrise Bancorp and
Marin County Employees Retirement Association filed as Exhibit 10.3
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, is hereby incorporated by reference.
10.4 *Sunrise Bancorp 401(k) Profit Sharing Plan and Trust Agreement filed
as Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the
fiscal year-ended December 31, 1994, is hereby incorporated by
reference.
10.5 *Sunrise Bancorp 1981 Amended and Restated Stock Option Plan, filed
as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986, is hereby incorporated by
reference.
10.6 *Sunrise Bancorp 1991 Stock Option Plan filed as Exhibit 10.10 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990 is hereby incorporated by reference.
10.7 *Form of Sunrise Bancorp Nonstatutory Stock Option Agreement filed
as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990, is hereby incorporated by
reference.
10.8 *Form of Sunrise Bancorp Incentive Stock Option Agreement filed as
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, is hereby incorporated by
reference.
_________________
*Indicates management
contract or compensatory
plan or arrangement.
<PAGE>
Exhibit No. Description of Exhibits
10.9 *Amendment No. 1 to the Sunrise Bancorp 1981 Amended and Restated
Stock Option Plan files as exhibit 10.9 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, is
hereby incorporated by reference.
10.10 Forms of Sunrise Bancorp Stock Purchase Warrant.
10.11 Agreement between the Superintendent of Banks of the State of
California and Sunrise Bank of California, dated May 24, 1994,
filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, is hereby incorporated by
reference. Agreement was terminated following an examination on
December 18, 1995.
10.12 Memorandum of Understanding between the Federal Deposit Insurance
Corporation and Sunrise Bank of California, dated May 17, 1994 filed
as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, is hereby incorporated by
reference. Memorandum was terminated following an examination on
December 10, 1995.
10.13 Memorandum of Understanding between the Federal Reserve Bank of San
Francisco and Sunrise Bancorp dated September 2, 1994, filed as exhibit
10.13 to the registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, is hereby incorporated by reference.
10.14 *Employment agreement dated May 1, 1995 between Sunrise Bancorp,
Sunrise Bank of California and Hal Giomi.
21 Registrant's only subsidiary is Sunrise Bank of California.
23 Consent of Deloitte & Touche.
27 Financial Data Schedule.
_________________
*Indicates management
contract or compensatory
plan or arrangement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 1996 SUNRISE BANCORP
By:/s/ Harold G. Giomi
Harold G. Giomi
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Harold G. Giomi Date: March 26, 1996
HAROLD G. GIOMI
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Sarah Thompson Date: March 26, 1996
SARAH THOMPSON
Senior Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting
Officer).
/s/ Sean E. McCarthy Date: March 26, 1996
SEAN E. MCCARTHY
Chairman of the Board
<PAGE>
/s/ William M. Eames Date: March 26, 1996
WILLIAM M. EAMES
/s/ Leon D. Lewis Date: March 26, 1996
LEON D. LEWIS
Director
/s/ Donald E. Leary Date: March 26, 1996
DONALD E. LEARY
Director
/s/ Anthony Pescetti Date: March 26, 1996
ANTHONY PESCETTI
Director
/s/ Ron Pitamber Date: March 26, 1996
RON PITAMBER
Director
/s/ Michael R. Randazzo, M. Date: March 26, 1996
MICHAEL RANDY RANDAZZO, M.D.
Director
/s/ Paul C. Wagner Date: March 26, 1996
PAUL C. WAGNER
Director
/S/ Doris A. Ward Date: March 26, 1996
DORIS A. WARD
Director
<PAGE>
SUNRISE PLAZA SHOPPING CENTER
c/o JIM B. DISMUKES
1610 ARDEN WAY, SUITE 102
SACRAMENTO, CALIFORNIA 95815
TELEPHONE: (916) 920-1471
November 10, 1995
Via Facsimile & U.S. Mail
Hal Giomi, President and CEO
Sunrise Bank of California
#5 Sierragate Plaza
Roseville, California 95678
Re: Citrus Heights Lease
Dear Mr. Giomi:
Thank you for your letter of November 8, 1995. In connection therewith, I
am not able to accept your offer of a one (1) year lease extension at One
Dollar and Sixty-Five Cents ($1.65) per square foot with a provision
requiring a one hundred twenty (120) day notice for cancellation.
I am very interested in having the Sunrise Bank of California continue to
lease the office and I certainly understand your concern over committing to
a long term lease. As I explained to Paul Wagner when we met to discuss
the lease, I am currently faced with renewing my loan o the shopping center.
Accordingly, long term leases are extremely important in my lease negotia-
tions with the lender. However, a tenant with the credentials of the Sunrise
Bank of California is also extremely important in my loan negotiations.
Accordingly, I am prepared to offer you one (1) of two (2) options for a
lease renewal.
Option 1. I would enter into a one (1) year lease extension at the current
rent, including common area maintenance, with a provision requiring a one
hundred twenty (120) day notice for either party to cancel the lease after
the expiration of one (1) year. Accordingly, the minimum rental period would
be one (1) year but Sunrise Bank of California could continue on a month
to month basis after the one (1) year period of time with the provision
of a one hundred twenty (120) day notice for cancellation.
Option 2. I would agree to into a three (3) year lease extension at One
Dollar and Sixty-Five Cents ($1.65) per square foot, plus common area
maintenance for 1996, with an annual increase equal to the Consumer Price
Index over the base year. I can afford to lower the rent to One Dollar
and Sixty-Five Cents ($1.65) per square foot to obtain the three (3) year
leases term.
I am leaving town Saturday, November 11, 1995. Accordingly, I will only
be available on Monday, November 13, 1995, to talk to you by telephone
after which I will be going into the wilderness are for a week and will
be unreachable by phone or mail for that week. Due to the fact that I do
have a potential tenant and I am certain that Sunrise Bank of California
would like to make a decision, it is necessary that I receive your
acceptance or rejection by 5:00 p.m. on November 13, 1995 so that I can
inform the real estate broker handling the transaction if the building is
available. According, your prompt response would be very much appreciated.
You can contact my secretary Ruth Minder, at (916) 920-1324. My fax number
is (916) 920-5273.
<PAGE>
I certainly hope that Sunrise Bank of California decides to remain at the
Sunrise Plaza Shopping Center. You have been a very valuable and excellent
tenant and I do not want to lose you. I do hope that you understand my
predicament in connection with renewing my loan. Unfortunately, I will not
be able to modify from the two (2) options set forth herein.
Than you very much for your time and attention to this matter.
Very truly yours,
SUNRISE PLAZA SHIPPING CENTER
BY: JIM B. DISMUKES
Jim B. Dismukes
JBD:ram
__X___ Sunrise Bank of California hereby accepts Option 1 set forth
hereinabove.
______ Sunrise Bank of California hereby accepts Option 2 set forth
hereinabove.
______ Sunrise Bank of California hereby rejects Option 1 and Option 2 set
forth hereinabove and will vacate the premises when the Lease expires
on January 17, 1996.
SUNRISE BANK OF CALIFORNIA
Date: November 20, 1995 By: Hal GiomI
<PAGE>
THIS WARRANT MAY NOT BE TRANSFERRED, ASSIGNED, PLEDGED OR OTHERWISE
ENCUMBERED AND ANY ATTEMPTED TRANSFER, ASSIGNMENT, PLEDGE OR
OTHER HYPOTHECATION SHALL BE VOID.
------- Warrants
SUNRISE BANCORP
STOCK PURCHASE WARRANT
(Void after December 31, 1997)
Certificate Evidencing _____ Warrants
(One Warrant is required for the purchase of two shares,
subject to adjustment as provided below.)
This is to certify that, for value received and subject to the conditions
herein set forth, _________________________ (the "Warrantholder"), is entitled
to purchase, at any time after July 1, 1993 and before December 31, 1997,
such number of shares of the Common Stock ("Common Stock") of Sunrise Bancorp
(the "Company") (the "Warrants") as shall equal the number of Warrants
evidenced by this certificate times two (such Shares purchasable upon
exercise of the Warrants are herein called the "Warrant Shares"). The
Purchase Price of each Warrant Share shall be determined and shall be
adjusted from time to time, pursuant to the provisions hereinafter set forth
(the "Purchase Price").
1. Method of Exercise; Payment; Issuance of New Warrant.
The purchase right represented by this Warrant may be exercised by the
holder hereof, in whole or in increments for not less than ten shares, by
the surrender of this Warrant (with the notice of exercise form attached
hereto as Exhibit 1 duly executed) at the principal office of the Company
and by the payment to the Company, by cash or a certified or official bank
check, of an amount equal to the then applicable Purchase Price per share
multiplied by the number of shares then being purchased. In the event of
any exercise of the rights represented by this Warrant, certificates for
the shares of stock so purchased shall be delivered to the holder thereof
within a reasonable time and, unless this Warrant has been fully exercised
or expired, a new Warrant representing the portion of the Shares, if any,
with respect to which this Warrant shall not then have been exercised shall
also be issued to the holder hereof within such reasonable time.
2. Purchase Price; Expiration Date.
This Warrant may be exercised at any time during the period beginning
on July 1, 1993 and ending on December 31, 1997 at a Purchase Price of
$5.00 per Warrant Share. This Warrant shall expire at 5:00 p.m. on
December 31, 1997.
3. Stock Fully Paid; Reservation of Shares.
All Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and nonassess-
able, and free from all taxes, liens and charges with respect to the issue
thereof. During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized, and reserved
for the purpose of the issue upon exercise of the purchase rights evidenced
by this Warrant, a sufficient number of shares of its Common Stock to provide
for the exercise of the rights represented by this Warrant.
<PAGE>
4. Adjustment of Purchase Price and Number of Shares.
The number and kind of securities purchasable upon the exercise of
this Warrant and the Purchase Price shall be subject to adjustment from
time to time upon the occurrence of certain events, as follows:
a. Reclassification, Consolidation or Merger. In case of any reclassifi-
cation or change of outstanding securities of the class issuable upon exercise
of this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or in case of any sale of all or substantially all of the assets
of the Company, the Company, or such successor or purchasing corporation, as
the case may be, shall execute a new Warrant, providing that the holder of
this Warrant shall have the right to exercise such new Warrant and procure upon
such exercise in lieu of each share of Common Stock theretofore issuable upon
exercise of this Warrant the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification, change,
consolidation, or merger by a holder of one share of Common Stock. Such new
Warrant shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 4. The
provisions of this subjection (a) shall similarly apply to successive
reclassifications, changes, consolidations, mergers and transfers.
b. Subdivision or Combination of Shares. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or
combine its Common Stock, the Purchase Price shall be proportionately
decreased in the case of subdivision or increased in the case of a
combination.
c. Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to Common Stock
payable in, or make any other distribution with respect to Common Stock
(except any distribution specifically provided for in the foregoing sub-
section (a) or (b)) of, Common Stock, then the Purchase Price shall be
adjusted, from and after the date of determination of shareholders entitled
to receive such dividend or distribution, to that price determined by
multiplying the Purchase Price in effect immediately prior to such date of
determination by a fraction (a) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (b) the denominator of which shall be the
total number of shares of Common Stock outstanding immediately after
such dividend or distribution.
d. Adjustment of Number of Shares. Upon each adjustment in the Purchase
Price, the number of shares of Common Stock purchasable hereunder shall be
adjusted, to the nearest whole share, to the product obtained by multiplying
the number of shares purchasable immediately prior to such adjustment in the
Purchase Price by a fraction, the numerator of which shall be the Purchase
Price immediately prior to such adjustment and the denominator of which shall
be the Purchase Price immediately thereafter.
<PAGE>
5. Notice of Adjustment.
Whenever any Purchase Price shall be adjusted pursuant to Section 4 hereof,
the Company shall make a certificate signed by its chief financial officer
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the Purchase Price or Prices after giving effect to such adjustment, and
shall cause copies of such certificate to be mailed (by first class mail,
postage prepaid) to the holder of this Warrant.
6. Fractional Shares.
No fractional shares of Common Stock will be issued in connection with
any exercise hereunder, but in lieu of such fractional shares the Company
shall make a cash payment therefor upon the basis of the Warrant price then
in effect.
7. Compliance with Securities Act; Non-transferability of Warrant;
Disposition of Shares of Common Stock.
a. Compliance with Securities Act. The holder of this Warrant, by
acceptance hereof, agrees that if this Warrant is exercised the Warrant
Shares will be acquired for investment and that he will not offer, sell or
otherwise dispose of the Warrant Shares except under circumstances which
will not result in a violation of the Securities Act of 1933, as amended
(the "Act") or the California Corporation Securities Law of 1968, as
amended (the "Law"). Concurrently with the exercise of this Warrant, the
holder hereof shall execute and deliver to the Company a copy of the
Investment Representation Statement which is attached to this Warrant
as Exhibit 2. All Warrant Shares shall (unless registered under the Act
or qualified under the Law) be stamped or imprinted with a legend in
substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") NOR QUALIFIED PURSUANT TO
THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968
(THE "LAW") BASED UPON AVAILABLE EXEMPTIONS
FROM REGISTRATION UNDER THE ACT AND
QUALIFICATION UNDER THE LAW. SUCH SHARES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION AND QUALIFICATION, UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL OR
OTHER EVIDENCE REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT AND FROM THE
QUALIFICATION REQUIREMENTS UNDER THE LAW.
b. Non-transferable Warrant. This Warrant is exercisable only by
the original purchaser and may not be transferred, assigned, pledged or
otherwise encumbered.
c. Disposition of Shares of Common Stock. With respect to any offer,
sale or other disposition of any Warrant Shares prior to registration or
qualification of such shares, the holder thereof and holder of this Warrant
agrees to give written notice to the Company prior thereto, describing briefly
the proposed manner of offer, sale or other disposition, together with a
written opinion of such holder's counsel, if requested by the Company, to the
effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal
or state law then in effect) of such Warrant Shares. The Company may issue
stop transfer instructions it its transfer agent in connection with such
restrictions.
<PAGE>
8. Rights of Shareholders.
The holder of this Warrant shall not be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of
the Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained herein be construed to confer upon the
holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance
of stock, reclassification of stock, change of par value or change of stock to
no par value, consolidation, merger, conveyance, or otherwise) or to receive
notice of meetings, or to receive dividends or subscription rights or otherwise
until the Warrant or Warrants shall have been exercised and the Warrant Shares
purchasable upon the exercise hereof shall have been issued as provided herein.
<PAGE>
SUNRISE BANCORP
BY:____________________________________
James R. Daley
President and
Chief Executive Officer
__________________, 1991
<PAGE>
NOTICE OF EXERCISE
The undersigned hereby exercises, according to the terms and conditions
in the within Sunrise Bancorp Stock Purchase Warrant, ________________ of
the Warrants evidenced thereby to acquire ________________ Shares of the
Common Stock of Sunrise Bancorp at the Purchase Price of $5.00 per share,
and herewith makes payment in full as required by the terms of the Stock
Purchase Warrant of the total Purchase Price payable upon such exercise.
Date:_____________________, 19__.
________________________________
Signature of Registered Owner
EXHIBIT 1
<PAGE> INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
COMPANY: SUNRISE BANCORP
SECURITY: COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANT
DATED ________, 1991
AMOUNT:
DATE: __________, 199_
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase
or decrease in the market price of the Securities, or for a period of one
year or any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an
exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In
addition, I understand that the certificate evidencing the Securities will
be imprinted with a legend which prohibits the transfer of the Securities
unless they are registered or such registration is not required in the
opinion of counsel for the Company.
(d) "I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable,
including, among other things: the availability of certain public
information about the Company; the resale occurring not less than two
years after the party has purchased and paid for the securities to be
sold; the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a "market maker"; and
the amount of securities being sold during any three-month period not
exceeding the specified limitations.
<PAGE>
(e) I further understand that in the event all of the requirements
of Rule 144 are not satisfied, registration under the Securities Act,
compliance with Regulation A, or some other registration exemption
will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than
in a registered offering and otherwise than pursuant to Rule 144
will have a substantial burden of proof in establishing that an
exemption form registration is available for such offers or sales,
and that such persons and their respective brokers who participate
in such transactions do so at their own risk.
SIGNATURE OF PURCHASER:
______________________________
Date:___________, 19__
EXHIBIT 2
PAGE
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into this 25th day of October, 1995, by and
between SUNRISE BANK OF CALIFORNIA, a California banking corporation ("Bank"),
SUNRISE BANCORP, a California Corporation ("Bancorp") (collectively referred
to herein after as "Employer"), and HAL GIOMI ("Employee"), and is effective
retroactively to November 1, 1994.
WHEREAS the parties hereto desire to enter into an agreement
("Agreement") for the purposes of engaging the services of Employee by reason
of his experience, training and ability in the financial institution industry;
Now, Therefore, it is mutually agreed as follows:
1. Employment and Duties. Subject to receipt of either approval or
non-disapproval of Employee from the banking regulatory agencies having
jurisdiction over Employer, if required, Employer hereby employs Employee, and
Employee hereby accepts employment with Employer, upon the terms and conditions
hereinafter set forth. Employee is hereby employed as the President and
Chief Executive Officer of Bank and Bancorp and shall perform the customary
duties of a person in that position with a California financial institution and
such other duties as may, from time to time, be reasonably requested of him by
the boards of directors of either Employer.
2. Appointment to Board of Directors. At the election of Employee,
he shall be appointed to the Bank s and/or Bancorp s boards of directors as a
director of Bank and/or Bancorp and shall remain as such for so long as
Employee is elected to a position on the board by the shareholders of Bank
and/or Bancorp, or until this Agreement has been terminated. During the
term of Employee'selection to the boards of directors, Employee shall serve
as a member of any or all committees to which he is appointed. Employee
hereby agrees to accept these appointments to the boards of directors and
to any committees of the boards and to fulfill all of Employee's duties as
a board and committee member without additional compensation. Upon the
termination of this Agreement by either Employee or Employer, Employee agrees
to immediately resign from the board of directors of Bank and/or Bancorp.
Further, all fringe benefits, such as insurance, shall be terminated on the
last day of service of Employee, unless otherwise mandated by the terms of
this Agreement, Employer's personnel policy, or any other benefit policies
in effect at the time of such termination.
3. Extent of Services. Employee shall donate his full time,
attention and energies to the business of Employer, and shall not during the
term of this Agreement be engaged in any other business activities, except
personal investments, without the prior written consent of Employer.
4. Term. The commencement of the Agreement shall be retroactive to
November 1, 1994, and shall continue until February 28, 1995. Thereafter, the
Agreement is deemed automatically extended for an additional term of one year,
unless written notice of nonrenewal is provided by Employer by February 28th
of the succeeding year.
<PAGE>
5. Regular Compensation. In consideration for services rendered
under this Agreement, Employer shall pay to Employee a salary of eleven
thousand eight hundred seventy-five dollars ($11,875) per month until May 1,
1995, when Employee's salary shall be increased to twelve thousand seven
hundred eight dollars ($12,708) per month. Such compensation shall be payable
in equal bi-weekly installments during the period of employment, prorated for
any partial employment period. The issue of salary level and/or salary
increases shall be negotiated with Employer during February of each year.
employer, in its sole discretion, will determine the merit of the level of
the salary and any proposed increases. The allocation between Bank and
Bancorp for their respective share of Employee's salary shall be determined
by the Bank's board of directors, in its sole discretion.
6. Business Expenses. Employee shall be reimbursed for all ordinary
and necessary documented expenses incurred by Employee in connection with his
employment associated with managing the business of Employer which may be
authorized from time to time by the boards of directors of Employer, including
expenses for club membership, entertainment, travel and similar items. Travel
and other expenses for attendance at conventions and banking education programs
that are approved in advance by the board of directors shall also be reim-
bursed. Employer will pay for or will reimburse Employee for such expenses
upon presentation by Employee from time to time of receipts evidencing such
expenditures and Employee's appropriate allocation between Bank and Bancorp.
7. Automobile Allowance. Bank shall pay six hundred twenty-five
dollars ($625) per month, at the beginning of each month, to Employee as an
automobile allowance and to cover the expenses of maintaining Employee's
automobile.
8. Vacation. Employee shall be entitled to annual vacation leave
at full pay at the discretion of Employee as time allows, so long as it is
reasonable and does not jeopardize his responsibilities, of four (4) weeks
during each full year of employment; provided that Employee each calendar
year shall take as a portion of his vacation leave ten (10) consecutive
business days. Employee shall be entitled to annual vacation on a pro rata
bases in the event this Agreement is terminated prior to its term, as such
term is defined in Section 4, herein. In no event may vacation to which
Employee is entitled during one calendar year, but which in fact is not taken
in a succeeding calendar year, be taken by Employee without obtaining the
prior written approval of Employer by their boards of directors. Unless
specified in this Agreement, the treatment of untaken vacation shall be
governed by the personnel policies of Bank as set forth in the personal
manual of Bank.
9. Disability. If Employee becomes "temporarily disabled" during
the employment term because of sickness, physical or mental disability, so
that Employee is unable to perform Employee's duties hereunder, Employer
agrees to integrate Employee's state disability insurance or worker's
compensation insurance in order to ensure Employee will receive an amount
equal to his total monthly salary for whichever of the following periods
is the shortest: (a) sixty (60) days from the onset of the disability,
or (b) until Employee is able to return to work. Employee shall be required
to utilize all accrued and unpaid sick leave during the integration period.
(For purposes of this Agreement, the term "temporarily disabled" shall mean
the inability of Employee to substantially complete his duties and fulfill
his obligations as set forth herein for a period of two (2) consecutive
months.)
10. Insurance. Bank hereby agrees to provide optional Employee/
Bank shared cost health insurance (including medical, dental, and vision
coverage), long-term disability insurance, and a dependant care account
during the term of this Agreement.
11. 401K Program. Bank hereby agrees that Employee is eligible
to participate in Bank's established 401K program in effect.
<PAGE>
12. Stock Options. In accordance with the Nonstatutory Stock
Option Agreement between Bancorp and Employee dated November 7, 1994,
(attached hereto as Exhibit A, the terms of which are incorporated herein
by reference), Employee has been granted options to purchase eighty
thousand (80,000) shares of the Common Stock of Bancorp under Bancorp's
1981 Amended and Restated Stock Option Plan. This agreement shall vest
in accordance with the terms as stated in the Nonstatutory Stock Option
Agreement. The issue of any additional incentive stock options shall be
negotiated with Employer during February of each year, prior to renewal
of this Agreement. Employer, in its sole discretion and subject to
appropriate approvals, will determine the merit of awarding any additional
stock options. Employee shall not have any of the rights of, nor be
treated as a shareholder with respect to the shares subject to this
option until he has exercised the option and has become shareholder of
record for those shares.
13. Printed Material. All written, printed, visual or audio
materials used by Employee in performing duties for Employer, other
than Employee's personal notes and diaries, are and shall remain the
property of Employer. Upon termination of employment, Employee shall
return all such materials to Employer.
14. Disclosure of Information. In the course of employment,
Employee may have access to confidential information and trade secrets
relating to Employer's business. Except as required in the course of
employment of Employer, Employee shall not, without Employer's prior
written consent, during employment by Employer or after termination of
such employment, directly or indirectly disclose to anyone any
confidential information relating to Employer or Sunrise Bancorp, or any
financial information, trade secrets or "know-how" which is germane to
the business and operations of Employer or Sunrise Bancorp. Employee
recognizes and acknowledges that any financial information concerning any
of Employer's customers, as it may exist from time to time, is strictly
confidential and is a valuable, special and unique asset of Employers's
business. Employee shall not, either before or after termination of this
Agreement, disclose to anyone said financial information, or any part
thereof, for any reason or purposes whatsoever.
15. Noncompetition by Employee. During the term of this Agreement,
Employee shall not, directly or indirectly, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer,
directly, or in any other individual or representative capacity, engage
or participate in any banking business competitive with that of Employer.
16. Surety Bond. Employee agrees to furnish all information
and take any other steps necessary to enable Employer to obtain or maintain
a fidelity bond conditional on the rendering of a true account by Employee
of all moneys, goods, or other property which may come into the custody,
charge, or possession of Employee during the term of Employee's employment.
The surety company issuing the bond and the amount of the bond must be
acceptable to Employer. All premiums on the bond are to be paid by Employer.
If Employee cannot personally qualify for a surety bond at any time during
the term of this Agreement, Employer shall have the option to terminate this
Agreement immediately.
17. Moral Conduct. Employee agrees to conduct himself at all times
with due regard to public conventions and morals, and in accordance with
Employer's Conflict of Interest policy. He further agrees not to do or commit
any act that would reasonably tend to degrade him or to bring him into public
hatred, contempt or ridicule, or that will reasonably tend to shock or offend
the community, or to prejudice Employer or the banking industry in general.
18. Termination of Agreement.
(a) Termination for Cause. Employer reserves the right to
terminate this Agreement "for cause." Termination for cause shall include,
but not be limited to, termination because of Employee's (i) personal
dishonesty, (ii) incompetence, (iii) willful misconduct, (iv) breach of
fiduciary duty involving personal profit, (v) material breach of any of the
terms of this Agreement, (vii) willful or negligent violation of any law
(other than minor traffic violations or similar offenses), rule, regulation,
cease-and-desist order or any other regulatory order or agreement Employer
enters into with their banking regulatory agencies. In addition, Employer
reserves the right to terminate this Agreement "for cause" in the event that
actions are affected by any regulatory agency having jurisdiction to remove
or suspend Employee from office, whether or not such actions have become final.
<PAGE>
(b) Statutory Grounds for Termination. This Agreement shall
terminate immediately upon the occurrence of any of the following events,
which events are described in sections 2290 and 2921 of the California
Labor Code:
(1) The occurrence of circumstances that make it impossible or
impractical for the business of Employer to be continued;
(2) The death of Employee;
(3) The loss of Employee of legal capacity. This does not affect
Employee's rights under Paragraph 9 of this Agreement;
(4) The loss by Employer of legal capacity to contract;
(5) Subject to Paragraph 9 of this Agreement, the continued
incapacity on the part of Employee under this Agreement,
unless waived by Employer; or
(6) The willful or permanent breach by Employee of the obligations
owed to Employer.
(c) Termination for Bankruptcy. This Agreement may be terminated
immediately by either party at the option of either party and without prejudice
to any other remedy to which either party may be entitled at law, in equity or
under this Agreement, if either party:
(1) Files a petition in bankruptcy court or is adjudicated a
bankrupt;
(2) Institutes or suffers to be instituted against him any
procedure in bankruptcy court for reorganization or
rearrangement of his financial affairs;
(3) Has a receiver of his assets or property appointed because of
insolvency; or
(4) Makes a general assignment for the benefit of creditors.
(d) Death of Employee. If Employee dies during the Term of this
Agreement, this Agreement shall be terminated as of the date of his death.
19. Severance Pay. Upon termination of this Agreement (i) by Employee
for any reason or (ii) by Employer pursuant to Paragraphs 18(a), (b) or (c)
of this Agreement, Employee shall not receive any severance payment of any
sort or any bonus for the calendar year in which termination is effected.
However, upon termination of this Agreement by Employer on any basis other
than pursuant to Paragraphs 18(a), (b) or (c), Employee shall receive a cash
severance payment in the amount equal to six (6) months' salary at the
current salary rate of Employee in effect immediately preceding such termina-
tion. The allocation between Bank and Bancorp for their respective share
of Employee's severance payment shall be determined by the Bank's board of
directors, in its sole discretion.
<PAGE>
20. Notices. Any notice to Employer required or permitted under this
Agreement shall be given in writing to Employer, either by personal service or
by certified mail, postage prepaid, addressed to the respective Chairman of
the board of directors of Bank and Bancorp at their then principal places of
business. Any such notice to Employee shall be given in like manner and, if
mailed, shall be addressed to Employee at Employee's home address then shown
on Employer's files. For the purpose of determining compliance with any time
limit in this Agreement, a notice shall be deemed to have been duly given (a)
on the date of service, if personally served on the party to whom notice is to
be given, or (b) the second business day after mailing, if mailed to the
party to whom notice is to be given in the manner provided in this Paragraph.
21. Nonassignability. Neither this Agreement nor any right or interest
hereunder shall be assignable by Employee, his beneficiaries or legal
representatives without Employer's prior written consent; provided, however,
that nothing in this Paragraph 21 shall preclude (i) Employee from designa-
ting a beneficiary to receive any benefit payable hereunder upon his death,
or (ii) the executors, administrators, or other legal representatives of
Employee or his estate from assigning any rights hereunder to the person or
persons entitled thereto.
22. No Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or
to execution, attachment, levy or similar process or assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any such action
shall be null, void and of no effect.
23. Binding Agreement. This Agreement shall be binding upon, and
inure to the benefit of, Employee and Employer and their respective permitted
successors and assigns.
24. Modification and Waiver.
(a) Amendment of Agreement. This Agreement may not be modified
or amended except by an instrument in writing signed by the parties hereto.
(b) Waiver. No term or condition of this Agreement shall be deemed
to have been waived nor shall there be any estoppel against the enforcement
of any provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition for the future or as
to any act other than that specifically waived. No delay in exercising any
rights shall be construed as a waiver nor shall a waiver on one such occasion
operate as a waiver of such right on any future occasion.
25. Entire Agreement. This Agreement supersedes any other agreements,
either oral or in writing, between the parties hereto with respect to the
employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements, orally or otherwise, have been made by
any party, or anyone acting on behalf of any party, which are not embodied
herein, and that no other agreement, statement or promise not contained in
this Agreement shall be valid and binding. Any modification of this Agreement
will be effective only if it is in writing signed by the party to be charged.
26. Partial Invalidity. If any provision in this Agreement is held
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
27. Governing Law. This Agreement shall be governed by, and con-
strued in accordance with, the laws of the State of California.
28. Injunctive Relief. Employer and Employee acknowledge and agree
that the services to be performed under this Agreement are of a special,
unique, unusual, extraordinary and intellectual character which give them a
peculiar value, the loss of which cannot be reasonably or adequately compen-
sated in damages in an action at law. Employer and Employee therefore expressly
agree that Employer and Employee, in addition to any other rights or remedies
which Employer and Employee may possess, shall be entitled to injunctive and
other equitable relief to prevent a breach of this Agreementby Employee
and Employer.
<PAGE>
29. Ambiguities. The Agreement has been negotiated at arm's length
between persons sophisticated and knowledgeable in the matters dealt with
herein. Each party has cooperated and participated in the drafting and
preparation of this Agreement. Any rule of law, including, without limitation,
Civil Code Section 1654, or legal decision that would require interpretation of
any ambiguities in this Agreement against the drafting party is not applicable
and is waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the purpose of the parties. In the interpretation
of this Agreement or any of its terms, both parties shall be construed to be
equally responsible for the drafting and preparation of the same.
30. Advice of Legal Counsel. Each party to this Agreement has
consulted with, or had the opportunity to consult with, legal counsel
concerning all paragraphs of this Agreement. Each party has read this
Agreement, and has been fully advised by legal counsel with respect to the
rights and obligations under the Agreement, or has had the opportunity to
obtain such advice. Each party is fully aware of the intent and legal effect
of the Agreement, and has not been influenced to any extent whatsoever by
any representation or consideration other than as stated herein. After
consultation with and advice from, or the opportunity for consultation
with and advice from, legal counsel, each and every party voluntarily
enters into this Agreement.
31. Resolution of Disputes and Waiver of Jury Trial.
31.1. Definition of Disputes. Any and all claims or
controversies arising out of, relating to, or pertaining to this Agreement,
the Nonstatutory Stock Option Agreement, or the breach thereof of either
agreement ("dispute") shall be resolved as provided in this paragraph. The
parties agree that no party shall have the right to sue any other party
regarding a dispute except as provided in this paragraph. The parties
further agree, to the fullest extent permitted by law, that each party waives
any right to a trial by jury in any action, proceeding or counterclaim of
any kind arising out of, relating to, or pertaining to this Agreement or the
Nonstatutory Stock Option Agreement.
31.2. Binding Arbitration. Any dispute between the parties
shall be submitted to, and be conclusively determined by, binding arbitration
in accordance with this paragraph. The provisions of this paragraph shall
not preclude any party from seeking injunctive or other provisional or
equitable relief in order to preserve the status quo of the parties pending
resolution of the dispute, and the filing of an action seeking injunctive or
other provisional relief shall not be construed as a waiver of that party's
arbitration rights. Any party seeking such relief, must immediately file
a motion for preliminary injunction and following a determination of the
motion, the action shall be stayed pending completion of the arbitration.
31.3. Selection of Arbitrator(s). The parties shall endeavor
in good faith to select a single arbitrator. If they fail to do so within ten
(10) days of the notice demanding arbitration, each party shall have
an additional period of ten (10) days in which to appoint an arbitrator
and those arbitrators within ten (10) days shall select an additional arbi-
trator. If any party fails to appoint an arbitrator or if the arbitrators
initially selected by the parties fail to appoint an additional arbitrator
within the time specified herein, any party may apply to have an arbitrator
appointed for the party who has failed to appoint, or to have the additional
arbitrator appointed in accordance with California Code of Civil Procedure
section 1281.6.
31.4. Location of Arbitration. Any arbitration hearing shall
be conducted in Sacramento or Placer County, California.
31.5. Applicable Law. The law applicable to the arbitration
of any dispute shall be the law of the State of California, excluding its
conflicts of law rules, its rules of civil procedure (unless otherwise
incorporated in this paragraph) and its laws of evidence.
<PAGE>
31.6. Arbitration Procedures. Except as otherwise provided
in this paragraph, the arbitration shall be governed by the following:
(a) The parties shall submit to the arbitration all
written, documentary or other evidence and oral testimony as is reasonably
necessary for a proper resolution of the dispute. Copies of all written
submittals shall be provided to the arbitrator(s) and all parties. Neither
party shall be entitled to conduct discovery and the discovery provisions
in California Civil Code of Procedure sections 1283.1 and 1283.05 are waived.
The arbitrator(s) shall conduct such hearings as they consider necessary,
may require the submission of briefs or points and authorities and may submit
written questions to the parties. The parties shall respond to such questions
in writing. If a question is addressed to an individual or fewer than all
parties, copies of the question and the answer thereto shall be served on
the other parties.
(b) At the hearing, any relevant evidence may be presented
by any party, and the formal rules of evidence applicable to judicial
proceedings shall not govern. Evidence may be admitted or excluded in the
sole discretion of the arbitrator(s). Except as provided above, the arbi-
tration procedures set forth in the California Arbitration Act (Code Civ.
Proc., #1282 et seq.) shall apply to the arbitration.
(c) The arbitration shall proceed with due dispatch and a
decision shall be rendered within sixty (60) days after the appointment of the
final arbitrator. Such decision shall be in such written form that a judgment
may be entered on it in any court of competent jurisdiction in the State of
California. Any decision of the arbitrators shall be subject to the limitations
set forth in paragraph 31.7.
31.7. Limitation on Scope of Arbitrators' Award or Decision.
The arbitrators' decision shall pertain and be limited to the claims submit-
ted to the arbitrators in the demand for arbitration. In no event shall the
arbitrator(s)' award include any component of punitive or exemplary damages.
The arbitrators award may be reviewed by the appropriate superior and appellate
courts for errors in law. Such errors in law would not include the arbi-
trator(s)' rulings concerning procedural or evidentiary matters, but may only
be a review of errors in application of the substantive law at issue in the
dispute.
31.8. Costs of Arbitration. Each party shall pay the costs of
the arbitrator chosen by it and the losing party shall bear all other costs of
arbitration.
32. Attorneys' Fees; Prejudgment Interest. If the services of an
attorney are required by any party to secure the performance of this Agreement
or otherwise upon the breach or default of another party to this Agreement, or
if any judicial remedy or arbitration is necessary to enforce or interpret any
provision of this Agreement or the rights and duties of any person in relation
thereto, the prevailing party shall be entitled to reasonable attorneys' fees,
costs and other expenses, in addition to any other relief to which such party
may be entitled. Any award of damages following judicial remedy or arbitration
as a result of the breach of this Agreement or any of its provisions shall
include an award of prejudgment interest from the date of the breach at the
maximum amount of interest allowed by law. If the services of an attorney are
required by any party to secure the performance of this Agreement or otherwise
upon the breach or default of another party to this Agreement, or if any judi-
cial remedy or arbitration is necessary to enforce or interpret any provision
of this Agreement or the rights and duties of any person in relation thereto,
the prevailing party shall be entitled to reasonable attorneys' fees, costs and
other expenses, in addition to any other relief to which such party may be
entitled. Any award of damages following judicial remedy or arbitration as a
result of the breach of this Agreement or any of its provisions shall include
an award of prejudgment interest from the date of the breach at the maximum
amount of interest allowed by law.
<PAGE>
33. Banking Regulatory Agencies. The obligations and rights of
the parties hereunder are expressly conditioned upon the approval or non-
disapproval of (i) this Agreement and/or (ii) Employee, in the event such
approvals are required, by those banking regulatory agencies which have
jurisdiction over Employer.
Dated: ____________________ EMPLOYER
SUNRISE BANK OF CALIFORNIA
By:
Paul C. Wagner
Director and Chairman of the
Compensation Committee
Dated: ____________________ SUNRISE BANCORP
By:
Paul C. Wagner
Director and Chairman of the
Compensation Committee
Dated: ____________________ EMPLOYEE
By:
Hal Giomi
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos, 2-90780, 33-21694 and 33-80460 of Sunrise Bancorp on Form S-8 of our
report dated February 9, 1996 appearing in this Annual Report on Form 10-K
of Sunrise Bancorp for the year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Sacramento, California
March 29, 1996
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