<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE FISCAL YEAR ENDED 12/31/96
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD TO
COMMISSION FILE NUMBER 2-78788
------------------------
CALIFORNIA COMMERCIAL BANKSHARES
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3748495
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
4100 NEWPORT PLACE, NEWPORT BEACH,
CALIFORNIA 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 863-2300
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Not applicable.
The aggregate market value of voting stock held by non-affiliates of the
registrant was $38,058,000 on March 6, 1997, based on the average bid and asked
price of $21.75 share as reported on the National Daily Quotation Service "Pink
Sheets".
(Number of shares of Common Stock outstanding as of March 21, 1997)
3,040,000
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
DESCRIPTION PART INTO WHICH INCORPORATED
- ---------------------------------------- --------------------------------------
Joint Proxy Statement/Prospectus Part III
- --------------------------------------------------------------------------------
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1
<PAGE>
PART I.
ITEM 1. BUSINESS.
BUSINESS OF THE COMPANY
California Commercial Bankshares (the "Company") is a bank holding company,
incorporated under the laws of the State of California on June 16, 1982, and is
registered under the Bank Holding Company Act of 1956, as amended. The Company's
primary purpose is to be a bank holding company for its wholly-owned subsidiary,
National Bank of Southern California, a national banking association organized
under the laws of the United States (the "Bank"). At December 31, 1996, the
Company had total assets of $351 million and total shareholders' equity of $25
million.
On January 10, 1983, the Company purchased 450,000 shares of the Bank's
common stock, which constituted all of the issued and outstanding capital stock
of the Bank. The Bank's charter was granted by the Comptroller of the Currency
(the "Comptroller") on January 10, 1983, and the Bank began operations as a
full-service commercial bank on that date.
During 1985, the Company activated another subsidiary, Venture Partners,
Inc., a California corporation incorporated on March 11, 1983 ("Venture"), which
acts primarily as an intermediary for tax deferred exchanges, a service function
for the escrow department of the Bank.
The Company has no other subsidiaries or affiliated businesses other than
the Bank and Venture. The Company's executive offices are located at 4100
Newport Place, Newport Beach, California 92660. Its telephone number is
714-863-2300.
On December 19, 1997, the Company executed an agreement (the "Merger
Agreement") with Monarch Bancorp ("Monarch") for the merger of the Company with
and into Monarch (the "Merger"). The Merger Agreement contemplates that Monarch
Bank, a wholly owned subsidiary of Monarch, will merge with and into the Bank
(the "Bank Merger") immediately following the Merger. The Merger Agreement
provides for the shareholders of the Company to receive 8.5 shares of the common
stock of Monarch for each share of common stock of the Company outstanding,
unless dissenters' rights are exercised and perfected as provided by California
law. The Merger Agreement is subject to satisfaction of certain conditions,
including without limitation, obtaining the requisite vote of the shareholders
of both the Company and Monarch, the designation for quotation of Monarch common
stock on the NASDAQ National Market system and approval of the Merger and Bank
Merger by various regulatory agencies. Following the Merger, the board of
directors of Monarch will consist of seven directors from Monarch and three
directors from the Company. The board of directors of the Bank will be
unchanged. It is contemplated that the Merger and the Bank Merger will be
consummated during the second quarter of 1997, assuming all closing conditions
are either satisfied or waived.
BUSINESS OF THE BANK
The Bank's accounts are insured by the Federal Deposit Insurance Corporation
("FDIC") and it is a member of the Federal Reserve System. In addition to its
headquarters office in Newport Beach, California, the Bank presently operates
five branches located in Santa Ana, El Toro, Orange and Fountain Valley,
California. At December 31, 1996, the Bank had total assets of $351 million,
gross loans and leases of $211 million, total deposits of $320 million and total
shareholders' equity of $26 million.
The Bank is engaged in substantially all of the services customarily
conducted by community banks in California, including checking, savings and time
deposit accounts, commercial, interim construction, personal, home improvement,
mortgage, automobile and other installment and term loans, leasing, traveler's
checks, safe deposit boxes, collection services, night depository facilities,
wire transfers and automatic teller machines.
2
<PAGE>
See distribution of assets, liabilities and shareholders' equity, interest
rates and interest differential at pages 18, 19 and 20.
LOANS AND LEASES
The aggregate balances of loans and leases, including loans available for
sale and excluding deferred fees, outstanding at the indicated dates are shown
in the following table according to the type of loan. All loans are domestic
loans.
<TABLE>
<CAPTION>
AT DECEMBER 31:
----------------------------------------------------------
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Real Estate:
Miniperms (Real estate secured
with 1-5 years maturity)......................... $ 72,984 $ 62,466 $ 66,102 $ 62,799 $ 52,479
Equity Lines....................................... 7,487 7,039 8,691 10,838 11,191
Construction....................................... 26,742 24,954 29,792 38,563 56,703
---------- ---------- ---------- ---------- ----------
Total Real Estate.................................... 107,213 94,459 104,585 112,200 120,373
Commercial........................................... 80,927 84,271 82,600 86,887 103,576
Installment and Other................................ 19,706 13,120 10,845 11,290 15,506
Leases............................................... 2,663 3,064 3,615 3,970 5,590
---------- ---------- ---------- ---------- ----------
Total Loans And Leases............................... $ 210,509 $ 194,914 $ 201,645 $ 214,347 $ 245,045
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The total loans declined from 1992 to 1995 as the Bank concentrated its
resources on identifying and collecting problem loans and leases and on
disposing of other real estate owned obtained through foreclosure. During 1996,
the Company increased its loans outstanding thereby improving its yield by
shifting from lower yielding federal funds to higher yielding loans.
The Bank concentrates its lending activities in three principal areas:
(1) REAL ESTATE LOANS. Real estate loans are comprised of construction
loans, miniperm loans collateralized by first or junior trust deeds on specific
properties and equity lines of credit. The properties collateralizing real
estate loans are principally located in the Bank's primary market area of Orange
County and contiguous communities. The construction loans are comprised of loans
on residential and income producing properties, generally have terms less than
two years and typically bear an interest rate that floats with prime. The
miniperm loans finance the purchase and/or ownership of income producing
properties. Miniperm loans generally are made on a thirty-year amortization
schedule with a lump sum, balloon payment due in 1-5 years. Equity lines of
credit are revolving lines of credit collateralized by junior trust deeds on
real properties. They bear a rate of interest that floats with prime and have
maturities of five to seven years. The Bank also makes a small number of loans
on 1-4 family residential properties and 5 or more unit residential properties.
From time to time, the Bank purchases participation interests in loans made by
other institutions. These loans are subject to the same underwriting criteria
and approval processes as loans made directly by the Bank. During 1996, the Bank
purchased $372,000 of participations in real estate loans from other
institutions. At December 31, 1996, the Bank had $1,257,000 outstanding in real
estate participation loans purchased from other institutions.
(2) COMMERCIAL LOANS. Commercial loans are granted to finance operations
or for specific purposes, such as to finance the purchase of equipment. Since
cash flows from operations are generally the primary source of repayment, the
Bank's policies provide specific guidelines regarding required debt coverage and
other important financial ratios. Lines of credit are made to businesses or
individuals based on the financial strength and integrity of the borrower, are
generally collateralized by inventory and accounts receivable, but may be
uncollateralized, and generally have a maturity of one year or less. They
generally bear an interest rate that floats with prime.
3
<PAGE>
Commercial term loans are typically made to finance the acquisition of fixed
assets, refinance short term debt originally used to purchase fixed assets or,
in rare cases, to finance purchases of businesses. Commercial term loans
generally have terms from one to five years. Commercial term loans may be
collateralized by the asset being acquired or other available assets.
(3) CONSUMER LOANS. Consumer loans include personal loans, auto loans,
boat loans, home improvement loans, equipment loans, revolving lines of credit
and other loans typically made by banks to individual borrowers. The Bank also
makes leases on new and used automobiles. These leases may be closed-end or
commercial leases, have terms of one to five years and bear interest at a fixed
rate.
The following table shows the consumer loans outstanding as of December 31,
1996 by category:
<TABLE>
<S> <C>
Boat............................................................... $ 5,230
Credit Card and Related Plans...................................... 2,574
Automobile Loans................................................... 6,868
Residential Equity................................................. 841
Unsecured.......................................................... 998
Savings............................................................ 773
Other.............................................................. 488
---------
Total.............................................................. $ 17,772
</TABLE>
The consumer loan portfolio grew over $7,000,000 during 1996 due to the
restructuring of the Bank's consumer function into a centralized unit utilizing
new credit scoring techniques to operate more efficiently. In addition, the Bank
began purchasing qualifying contracts from two new boat dealers. These dealers
sold approximately $3,000,000 in new boat contracts to the Bank during the year.
Consumer customers were also added after a new branch was opened to serve a new
marketplace. This added approximately $3,000,000 in auto loans to the portfolio.
The final growth came from the introduction of a new home equity line of credit
product. This no fee, no point product utilizes the equity in customers' homes
as collateral.
The following tables show the amount of loans outstanding as of December 31,
1996 which, based on remaining scheduled repayments of principal, (1) are due in
the period indicated and (2) for the amounts due after one year, are fixed rate
or floating rate.
<TABLE>
<CAPTION>
MATURING IN MATURING IN MATURING AFTER
$ IN 000'S 1997 1998-2001 2001 TOTAL
- ---------------------------------------------------------- ----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Real Estate............................................... $ 16,112 $ 43,263 $ 21,096 $ 80,471
Construction.............................................. 26,338 404 0 26,742
Commercial................................................ 46,478 27,009 7,440 80,927
Credit Card & Related Plans............................... 464 1,455 15 1,934
Other Consumer............................................ 3,946 9,546 4,280 17,772
Leases.................................................... 134 2,529 0 2,663
----------- ----------- ------- ----------
TOTAL................................................... $ 93,472 $ 84,206 $ 32,831 $ 210,509
----------- ----------- ------- ----------
----------- ----------- ------- ----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
-------------------------
VARIABLE
$ IN 000'S FIXED RATE RATE
- ------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Due After One But Within Five Years................................ $ 33,944 $ 3,379
Due After Five Years............................................... 11,601 92
----------- ------------
TOTAL............................................................ $ 45,545 $ 3,471
----------- ------------
----------- ------------
</TABLE>
4
<PAGE>
The prime rate with which the interest rate floats may be the prime rate of
a specific money center bank, the prime rate posted in the Wall Street Journal
or the Bank's own posted prime rate. The Bank's prime rate is set by Bank
management. The Bank's prime rate at December 31, 1996 was 9.25%.
The following table shows the concentration of loans by categories.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1996 1995
----------------------- -----------------------
$IN 000'S BALANCE PERCENTAGE BALANCE PERCENTAGE
- ----------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Real Estate Loans:
Mortgage......................................................... $ 72,984 34.67% $ 62,466 32.05%
Equity Lines..................................................... 7,487 3.56% 7,039 3.61%
Construction..................................................... 26,742 12.70% 24,954 12.80%
---------- ----------- ---------- -----------
TOTAL REAL ESTATE LOANS.......................................... $ 107,213 50.93% $ 94,459 48.46%
Commercial Loans................................................. 80,927 38.44% 84,271 43.24%
Other Installment and Other...................................... 19,706 9.36% 13,120 6.73%
Leases........................................................... 2,663 1.27% 3,064 1.57%
---------- ----------- ---------- -----------
TOTAL LOANS & LEASES............................................. $ 210,509 100.00% $ 194,914 100.00%
Less: Deferred Loan Origination Fee.............................. (442) (702)
Less: Allowance for Loan and Lease Losses........................ (5,417) (6,542)
---------- ----------
NET LOANS & LEASES............................................... $ 204,650 $ 187,670
---------- ----------
---------- ----------
</TABLE>
There are no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table.
CLASSIFIED ASSETS AND NONPERFORMING ASSETS. The Company maintains an
internal loan review program. All loans are categorized into one of the five
following groups: Pass loans: loans that contain strong credit quality and
ability to repay. Special mention loans: loans that have an identified weakness
which requires correction to protect the Bank (not considered a classified
loan). Substandard loans: loans that exhibit some weakness and require immediate
attention to correct the deficiency. Doubtful loans: loans that exhibit a
significant weakness and whose full collection is improbable. Loss loans: Loans
that are charged off upon identification of being loss loans. The following
table shows the amounts of special mention loans, classified loans (substandard
or doubtful) and the amount of other real estate owned as of the dates
indicated. It does not include loans available for sale in the amount of
$1,234,000 and $9,620,000 for the years ended December 31, 1996 and 1995,
respectively. (see ITEM 1. BUSINESS, BUSINESS OF THE BANK, ALLOWANCE FOR LOAN
AND LEASE LOSSES FOR A DISCUSSION OF LOANS AND LEASES CHARGED OFF).
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Special Mention............................................ $ 3,589 $ 10,458 $ 12,822 $ 11,988 21,510
--------- --------- --------- --------- ---------
Substandard................................................ 8,109 14,704 37,451 39,314 53,762
Doubtful................................................... 619 317 1,505 4,156 1,553
--------- --------- --------- --------- ---------
Total Classified Loans..................................... 8,728 15,021 38,956 43,470 55,315
Other Real Estate Owned.................................... 2,657 2,165 2,676 2,289 12,088
--------- --------- --------- --------- ---------
Total Special Mention Loans, Classified Loans And Other
Real Estate Owned........................................ $ 14,974 $ 27,644 $ 54,454 $ 57,747 $ 88,913
</TABLE>
5
<PAGE>
Special mention loans, classified loans and other real estate owned
decreased significantly in 1995 and 1996 as compared to 1994. The balances
decreased as a result of the Bank's high staffing levels of personnel dedicated
to problem loan identification and workout, the disposal of other real estate
owned and improvement in the economy of Southern California.
It is generally the Company's policy to discontinue the accrual of interest
on a loan when any installment payment of interest or principal is 90 days or
more past due, when management otherwise determines the collectibility of the
interest or principal on the loan is unlikely or when the loan is deemed to be a
potential foreclosure. Accrued but unpaid interest on loans placed on nonaccrual
status is generally reversed from income. In certain cases where the value of
the collateral is sufficiently in excess of the balance of principal and
interest owing, the Bank may continue to accrue interest or may not reverse
accrued but unpaid interest from income.
The following table shows the nonaccrual loans, loans past due 90 days and
still accruing and loans restructured during the last 5 years.
<TABLE>
<CAPTION>
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans................................................. 3,995 15,573 14,771 18,068 10,037
Loans past due 90 days and accruing interest..................... 0 0 851 0 0
Impaired Loans................................................... 4,366 16,544 N/A N/A N/A
</TABLE>
The following table shows the aggregate amount and percentage of the portfolio
of delinquent loans and nonaccrual loans as of December 31, 1996:
LOANS DELINQUENT AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
30-89 DAYS 90 DAYS AND OVER TOTAL LOANS
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
--------- ------------- --------- ------------- --------- -------------
($ IN 000'S)
<S> <C> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Real Estate...................................... $ 766 .71% $ 1,803 1.68% $ 2,569 2.39%
Commercial....................................... 0 0% 383 .47% 383 .47%
Installment and Prime Equity..................... 0 0% 1,043 3.83% 1,043 3.83%
Leases........................................... 0 0% 0 0% 0 0%
--------- --- --------- --- --------- ---
Total Nonaccrual Loans....................... $ 766 .36% $ 3,229 1.53% $ 3,995 1.89%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
DELINQUENT ACCRUING LOANS
Real Estate...................................... $ 151 .14% 0 0% $ 151 .14%
Commercial....................................... 894 1.10% 0 0% 894 1.10%
Installment and Prime Equity..................... 138 .50% 0 0% 138 .50%
Leases........................................... 0 0% 0 0% 0 0%
--------- --- --------- --- --------- ---
Total Accruing Delinquent Loans.............. 1,183 .56% 0 0% 1,183 .56%
Total Delinquent Loans....................... $ 1,949 .92% $ 3,229 1.53% $ 5,178 2.45%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
6
<PAGE>
The following table sets forth information regarding the Company's
nonperforming assets at December 31, 1996:
<TABLE>
<CAPTION>
SPECIFIC ALLL
PROPERTY DESCRIPTION LOCATION BALANCE ALLOCATION
- --------------------------------------------------------------- -------------------------- --------- -----------------
($ IN 000'S)
<S> <C> <C> <C>
NON-ACCRUAL LOANS
Ind. Building & Finished Lots.................................. Los Angeles County $ 868 0
Commercial Building............................................ Los Angeles County $ 83 0
Single Family Residential...................................... Orange County 182 0
Single Family Residential...................................... Orange County 294 0
Single Family Residential...................................... Orange County 260 0
Single Family Residential...................................... Los Angeles County 85 0
Vacant Land.................................................... San Bernardino County 117 0
Single Family Residential...................................... Washington State 105 0
Single Family Residential...................................... Orange County 400 0
Motel.......................................................... Orange County 528 0
Retail Center.................................................. Orange County 238 0
Office Building................................................ Orange County 639 0
2 Other Loans.................................................. Various 196 0
-
---------
TOTAL NONACCRUAL............................................. $ 3,995 0
OTHER REAL ESTATE OWNED
29 Condo Units................................................. Orange County 743
Condo.......................................................... Orange County 611
Animal Hospital................................................ Orange County 195
Office Condo................................................... Orange County 531
Office Condo................................................... Los Angeles County 182
Land........................................................... San Mateo County 395
---------
TOTAL OTHER REAL ESTATE OWNED................................ 2,657
TOTAL NONACCRUAL LOANS AND OTHER REAL ESTATE OWNED............. $ 6,652 0
-
-
---------
---------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses
is based on an analysis of the portfolio and reflects an amount which, in
management's opinion, is adequate to provide for potential losses after giving
consideration to the portfolio, current economic conditions, past loss
experience and other pertinent factors. Management and the internal credit
review function monitor delinquency reports, new loans, renewals and reports of
on-site inspections to identify credits requiring special attention. Annual
examinations of a sample of the loan portfolio are also performed by an
independent third party credit review professional.
On a quarterly basis, senior management, in conjunction with the board of
directors, reviews the adequacy of the allowance for loan and lease losses. Loan
officers prepare Special Asset Credit Reports ("SAC reports") for each loan on
the special asset report. SAC reports include all pertinent details about the
loan, a write-up of current status, steps being taken to correct any problems, a
detailed workout plan and recommendations as to classification of the loans as
pass, special mention, substandard, doubtful or loss (see ITEM 1. BUSINESS,
BUSINESS OF THE BANK, CLASSIFIED ASSETS AND NONPERFORMING ASSETS) and specific
allocation of the Allowance for Loan and Lease Losses. Loans classified as loss
are charged against the Allowance for Loan and Lease Losses. Specific allowances
are established for loans designated by management based on a reserve track
migration analysis. Quarterly, the credit administration function is responsible
for preparing a historical migration analysis of loans as part of the
determination of the
7
<PAGE>
required balance of the Allowance for Loan and Lease Losses. The migration
analysis tracks charged off loans to their original classifications and assigns
a risk factor to each loan in the portfolio based upon classifications of such
loans as pass, special mention, substandard or doubtful. The amount of the
general portion of the allowance is determined by multiplying the aggregate
principal balance of loans in each category by the specified percentage. The
amount of the required general portion of the allowance is added to the specific
allowances previously established to form the total balance of the allowance.
The amount of the allowance is based upon management's evaluation of this
analysis and other factors, including adequacy of collateral, economic
conditions, collateral value trends, nonperforming asset data, delinquencies and
other material.
Management utilizes its best judgement in providing for possible loan losses
and establishing the allowance for loan and lease losses. However, the allowance
is an estimate which is inherently uncertain and depends on the outcome of
future events. Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
could require increased provisions for loan and lease losses that cannot
reasonably be predicted at this date. In January 1994, a severe earthquake
occurred in the San Fernando Valley of Los Angeles, causing over 50 deaths,
destroying property valued in the billions of dollars, causing major impediments
to Southern California transportation networks and affecting the business
community. Damage in the Bank's service area was relatively minimal and, after
contacting customers and investigating its potential exposure, the Bank is not
aware of any of its borrowers who were directly affected by the earthquake.
Since the calculation of the adequacy of the allowance for credit losses is
based largely on loan classification categories and not only whether a loan is
performing or nonperforming, changes in the amount of nonperforming loans will
not necessarily be reflected in corresponding changes in the ratio of the
allowance for loan and lease losses to nonperforming loans. The following table
shows the ratios of the allowance for loan and lease losses to total loans and
the balance of the allowance for loan and lease losses to nonperforming loans as
of December 31:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Ratio of the Allowance for Loan and Lease Losses to Total Loans........ 2.57% 3.36%
Ratio of the Allowance for Loan and Lease Losses to Nonperforming
Loans................................................................ 135.59% 42.01%
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes loan and
lease balances of the Bank at December 31, 1996, 1995, 1994, 1993 and 1992,
changes in the allowance for possible loan losses
8
<PAGE>
arising from loans charged off, additions to the allowance for loan and lease
losses which have been charged to expense and the ratio of net charge-offs
during the periods to average loans and leases:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
($ IN 000'S)
<S> <C> <C> <C> <C> <C>
Amount of Gross Loans and Leases Outstanding at the
End of the Period................................ $ 210,509 $ 194,914 $ 201,645 $ 214,347 $ 245,045
Balance of Allowance for Loan and Lease Losses at
the Beginning of the Period...................... $ 6,542 $ 5,660 $ 7,221 $ 6,253 $ 7,107
Loans and Leases Charged Off (1)................... (2,938) (6,212) (6,082) (4,664) (6,434)
Recoveries of Previously Charged Off Loans and
Leases (1)....................................... 553 494 1,156 743 805
---------- ---------- ---------- ---------- ----------
Net Loans Charged Off.............................. (2,385) (5,718) (4,926) (3,921) (5,629)
Additions to the Allowance Charged to Expense...... 1,260 6,600 3,365 4,889 4,775
---------- ---------- ---------- ---------- ----------
Balance of the Allowance for Loan and Lease Losses
at the Ending of the Period...................... $ 5,417 $ 6,542 $ 5,660 $ 7,221 $ 6,253
---------- ---------- ---------- ---------- ----------
Ratio of Net Charge-offs During the Period to
Average Loans Outstanding........................ 1.20% 2.93% 2.44% 1.74% 2.08%
---------- ---------- ---------- ---------- ----------
</TABLE>
(1) See the table below for summary of the amounts of loans and leases
charged off and recoveries of loans and leases previously charged off.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
($ IN 000'S)
<S> <C> <C> <C> <C> <C>
Loans and Leases Charged Off:
Commercial..................................................... $ 663 $ 1,332 $ 1,150 $ 2,763 $ 5,712
Real Estate--Mortgage and Construction......................... 1,943 4,569 4,764 1,274 344
Installment & Other............................................ 305 300 120 507 252
Leases......................................................... 27 11 48 120 126
--------- --------- --------- --------- ---------
Total Loans and Leases Charged Off............................... $ 2,938 $ 6,212 $ 6,082 $ 4,664 $ 6,434
--------- --------- --------- --------- ---------
Recoveries of Loans and Leases
Previously Charged off:
Commercial..................................................... $ 378 $ 35 $ 593 $ 669 $ 795
Real Estate--Mortgage and Construction......................... 126 408 461 0 0
Installment & Other............................................ 49 17 50 62 7
Lease.......................................................... 0 34 52 12 3
--------- --------- --------- --------- ---------
Total Recoveries of Loans and Leases............................. $ 553 $ 494 $ 1,156 $ 743 $ 805
--------- --------- --------- --------- ---------
Net Loans and Leases Charged Off................................. $ 2,385 $ 5,718 $ 4,926 $ 3,921 $ 5,629
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
9
<PAGE>
The allowance for loan and lease losses has been allocated between the
following categories of loans and leases according to the amount deemed adequate
to provide for the possibility of losses being incurred at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------------- ---------------------------- ---------------------------- -----------------
RATIO OF RATIO OF RATIO OF RATIO OF
ALLOWANCE TO % OF ALLOWANCE TO % OF ALLOWANCE TO % OF ALLOWANCE TO
OUTSTANDING LOANS TO OUTSTANDING LOANS TO OUTSTANDING LOANS TO OUTSTANDING
----------------- TOTAL ----------------- TOTAL ----------------- TOTAL -----------------
$ IN 000'S ALLOWANCE LOANS LOANS ALLOWANCE LOANS LOANS ALLOWANCE LOANS LOANS ALLOWANCE LOANS
- -------------------- --------- ----- -------- --------- ----- -------- --------- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.......... $1,144 1.40% 38.44 $1,838 2.14% 43.23 $1,151 1.39% 40.96 $2,573 2.96%
Real
Estate--Construction... 278 1.03% 12.70 796 3.27% 12.80 2,516 8.45% 14.77 3,095 8.03%
Real
Estate--Mortgage... 1,701 2.32% 38.23 2,122 3.38% 32.04 1,355 2.05% 32.78 100 .16%
Installment &
Equity............ 562 2.07% 9.36 556 2.80% 10.34 352 1.90% 9.69 281 2.50%
Leases.............. 47 1.76% 1.27 47 1.55% 1.57 88 2.43% 1.79 85 2.14%
Not Allocated....... 1,685 0.80% 1,183 .60% 198 .10% 1,087
--------- --------- --------- ---------
TOTAL............... $5,417 $6,542 $5,660 $7,221
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1992
----------------------------
RATIO OF
% OF ALLOWANCE TO % OF
LOANS TO OUTSTANDING LOANS TO
TOTAL ----------------- TOTAL
$ IN 000'S LOANS ALLOWANCE LOANS LOANS
- -------------------- -------- --------- ----- --------
<S> <C> <C> <C> <C>
Commercial.......... 40.54 $4,256 4.11% 42.27
Real
Estate--Construction 17.99 1,500 2.65% 23.14
Real
Estate--Mortgage... 29.29 67 .10% 21.41
Installment &
Equity............ 10.32 250 1.60% 10.89
Leases.............. 1.85 125 2.24% 2.28
Not Allocated....... 55
---------
TOTAL............... $6,253
---------
---------
</TABLE>
In accordance with SFAS 114, as of December 31, 1996, the Company had
written down all its nonperforming loans to the current collateral value or had
established specific reserves that the management believes are adequate to cover
future exposure.
10
<PAGE>
Provision for the ALLL are calculated using a combination of migration
analysis and historical loan loss percentages. The loan portfolio is separated
into four loan pools: commercial, real estate, home equity lines of credit and
all other consumer loans. The commercial and real estate pools use migration
analysis techniques to calculate the required percentage while the consumer
pools are considered homogeneous loan pools with reserves calculated using a
historical loss percentage. Migration analysis covers a period of 26 quarters
which is considered sufficient to mitigate any concerns about portfolio
volatility. The ALLL analysis also considers such factors as delinquent loan
percentages, nonaccrual loan totals, off-balance sheet items, and any specific
allocations against certain identified loans. The large loss in 1995 was a one
time event related to the FASB 65 mark to market analysis of loans considered
assets available for sale. This write-down was required during the OCC
examination and was substantially over the normal rate calculated by the ALLL
analysis due to factors outside the normal scope of the analysis.
The adequacy of the ALLL account is analyzed quarterly utilizing migration
analysis, historical loan loss percentages, past due total, nonaccrual totals,
changes in the volume of loans in the portfolio, off-balance sheet items,
specific allocation against certain identified loans, and any other factor that
is deemed pertinent to analyzing portfolio risk. During 1992, the Bank's primary
market place, Orange County, was in the midst of the most prolonged recession
since the Depression. While all sectors of the economy were affected at that
time, the business sector was the hardest hit with the Bank experiencing losses
mostly in the commercial loan portfolio. By 1993, the real estate market was
beginning to feel the slowdown with rapidly rising vacancies in the business
sector leading to a reduction in rental rates and subsequent devaluation of real
estate. The bank began experiencing more losses in the real estate portfolio at
the same time that losses in the commercial portfolio were diminishing.
Throughout this time, the ALLL analysis was considered adequate for the
perceived risk in the portfolio. In 1994, the volume of newly identified problem
credits began to level off and remained static for the year. Losses were also
about the same as the previous year. Toward the end of 1994, the Orange County
economy was beginning to recover from the recession but this recovery had not
even gathered much steam when Orange County declared bankruptcy. The effect was
immediate and not positive. Real estate values stagnated until the results of
the bankruptcy declaration could be evaluated. For the Bank, this meant
continued losses in attempting to resolve problem real estate loans. Novel ways
of disposing of problem real estate loans were explored, resulting in the Bank
entering a small pool of loans into a county-wide auction. The outcome of this
decision was a subsequent ruling by the OCC that those loans were to be
considered as an "asset available for sale" and the notes were to be valued on a
"mark to market" basis. During the ALLL analysis, these loans had been evaluated
on the basis of their collateral value and not their value upon sale of the
note. This ruling had major consequences to the Bank in that the Bank was
required to charge a significant amount to the ALLL. These losses then affected
the migration analysis, therefore requiring higher reserves due to the higher
losses. Normal loan losses for the Bank during 1995 were actually on the same
level as the previous year. In 1996, most of the loans considered as "assets
available for sale" have been favorably resolved resulting in substantial gains
to the Bank. These gains were not realized into ALLL but as gains on the sale of
assets available for sale. A current analysis of the adequacy of the ALLL
account indicates the existence of an overage resulting from the fact that
problem assets continue to be resolved at a much faster rate than new problem
credits are being identified.
11
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the book value and estimated fair value of
investment securities available for sale as of December 31, 1996 and 1995 and
investment securities of the Company as of December 31, 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
DESCRIPTION AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
$ IN 000'S COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
- ------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities................. $ 31,038 $ 31,080 $ 35,314 $ 35,457 $ 60,099 $ 58,778
U.S. Government agencies or insured
obligations.............................. 57,537 57,297 23,611 23,656 9,657 9,262
State political subdivisions............... 413 411 423 416 1,509 1,274
Mortgage-backed securities-
U.S. agencies............................ 880 884 1,047 1,070 1,186 1,132
Other securities........................... 1,841 1,832 1,697 1,684 1,653 1,629
----------- ----------- ----------- ----------- ----------- -----------
Total securities........................... $ 91,709 $ 91,504 $ 62,092 $ 62,283 $ 74,104 $ 72,075
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
As of January 1, 1995 the Bank had classified all its Debt Securities as
"Available for Sale."
As of December 31, 1996 the Bank had no derivatives.
The following table sets forth the maturities of investment securities of
the Company at December 31, 1996 and the weighted average yields of such
securities (calculated available for sale on the basis of the cost and effective
yields weighted for the scheduled maturity of each security):
<TABLE>
<CAPTION>
1997 1998-2001 2002-2006 OVER 2006
---------------------- ---------------------- ------------------------ -----------
$ IN 000'S AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
- ------------------------------------------- --------- ----- --------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities................. $ 25,057 5.84% $ 6,022 5.77% $ 0 0 $ 0
U.S. government agencies or insured
obligations.............................. 21,960 5.28% 35,338 6.17% 466 8.08% 418
State and political subdivisions........... 411 4.88% 0 0 0 0 0
Other...................................... 0 0 0 0 0 0 54
--------- --- --------- --- ----- --- -----
Total...................................... $ 47,428 5.57% $ 41,360 6.11% $ 466 8.08% $ 472
--------- --- --------- --- ----- --- -----
--------- --- --------- --- ----- --- -----
<CAPTION>
$ IN 000'S YIELD
- ------------------------------------------- -----
<S> <C>
U.S. government securities................. 0
U.S. government agencies or insured
obligations.............................. 6.40%
State and political subdivisions........... 0
Other...................................... .55%
---
Total...................................... 5.73%
---
---
</TABLE>
DEPOSITS
The Bank's major source of funds for lending and other investment purposes
is deposits. In addition to deposits, the Bank derives funds from principal and
interest repayments on loans, maturities and sales of investment securities, and
Federal funds sold.
The Bank's deposit strategy has been to emphasize business deposits through
its five branch offices and by a network of couriers employed by the Bank. From
time to time retail deposits and time certificates of deposits have also been
gathered through listings in various national publications.
Business demand deposits earn credits for collected balances against which
the Bank charges fees for various products and services used by the customer. In
some cases, the Bank pays for data processing fees for business customers with
significant balances. The Bank has four business customers, each of which
maintains demand deposit balances in excess of 1% of total deposits. The
balances in these accounts averaged an aggregate of $36.1 million and $33
million during 1996 and 1995, respectively, and totaled an aggregate of $41.5
million and $35.7 million, or 13.0% and 11.6%, respectively, at December 31,
1996 and 1995.
12
<PAGE>
Guidelines by federal regulatory agencies specify that time certificates of
deposit may be considered to be brokered if the rate on the deposit exceeds 75
basis points over (i) the average rate paid locally for certificates of deposit
of similar maturities or (ii) 120% of the rate for treasury bills and notes of
similar maturities.
As of December 31, 1996, the Bank had no brokered deposits.
The following table shows the average daily amount of deposits and average
interest rates paid for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR 1996 FOR THE YEAR 1995 FOR THE YEAR 1994
------------------------- ------------------------- -------------------------
DAILY AVERAGE DAILY AVERAGE DAILY AVERAGE
AVERAGE INTEREST RATE AVERAGE INTEREST RATE AVERAGE INTEREST RATE
$ IN 000'S BALANCE PAID BALANCE PAID BALANCE PAID
- ------------------------------------------- ---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposit............................. $ 133,371 $ 100,526 $ 101,022
Money Market and Saving Deposits........... 127,063 2.86% 121,110 2.82% 120,120 2.58%
Time Deposits Less than $100,000........... 26,286 4.90% 31,620 5.55% 37,354 4.23%
Time Deposits $100,000 or More............. 31,630 5.04% 32,632 5.68% 33,941 3.98%
---------- --- ---------- --- ---------- ---
TOTAL.................................... $ 318,350 $ 285,888 $ 292,437
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
The following table shows the repricing data of time certificates of deposit
of $100,000 or more at December 31, 1996:
<TABLE>
<CAPTION>
3 MONTHS OR 4 MONTHS TO 7 MONTHS TO OVER 12
LESS 6 MONTHS 12 MONTHS MONTHS TOTAL
----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Rate Time Deposits............................ $ 18,707 $ 3,338 $ 3,218 $ 1,211 $ 26,474
Variable Rate Time Deposits......................... 5,850 5,850
----------- ----------- ------ ----------- ---------
Total............................................. $ 24,557 $ 3,338 $ 3,218 $ 1,211 $ 32,324
</TABLE>
The following table shows maturities of time certificates of deposit of
$100,000 or more at December 31, 1996:
<TABLE>
<S> <C> <C> <C> <C> <C>
Fixed Rate Time Deposits................. $ 18,707 $ 3,338 $ 3,218 $ 1,211 $ 26,474
Variable Rate Time Deposits.............. 2,630 1,765 1,100 355 5,850
----------- ----------- ----------- ----------- ---------
Total.................................. $ 21,337 $ 5,103 $ 4,318 $ 1,566 $ 32,324
</TABLE>
BORROWING ARRANGEMENTS
In December 1988, the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
Bank. The Credit Agreement for this loan was amended pursuant to a Second
Amendment to the Credit Agreement dated August 25, 1994. The Second Amendment
was supported by a Support Agreement between a shareholder Director of the
Company and the Company whereby the shareholder guaranteed the payment of the
loan.
To compensate the shareholder for signing the Support Agreement, the Company
signed a Holding Company Support Agreement whereby the Company: (1) paid the
shareholder a standby fee of $23,500 in 1994 and 1995 and 1996, (2) issued to
the shareholder in March 1996 warrants to purchase 25,000 shares of common stock
of the Company at an exercise price per share equal to 80% of the book value per
share of the Company on December 31, 1996.
In March of 1996, the shareholder paid off the outstanding balance of
$2,350,000 to the lending financial institution to allow the Company to
contribute the maximum amount from the proceeds of the stock offering into the
capital of the Bank. (See Note 7 to Notes to Consolidated Financial Statements).
13
<PAGE>
On March 17, 1997, the Company paid down $2,000,000 on the note and based on
the $350,000 remaining balance of the note issued to the shareholder a
proportionate number of warrants to purchase 3,723 shares of the Company's
common stock at an exercise price of $6.60 per share pursuant to the terms of
the Holding Company's Support Agreement. The Company also paid the shareholder a
fee equal to 1% of the unpaid principal balance on March 17, 1997. The remaining
balance of $350,000 is subject to the original terms of the note.
The Bank maintains two lines of credit with outside financial institutions
for the purpose of purchasing Federal funds. The lines of credit bear interest
at a floating rate and provide for borrowing up to $8,000,000 and $5,000,000,
respectively. At December 31, 1996 and 1995, no amounts were outstanding on
these lines of credit.
Under an agreement with the Federal Home Loan Bank, the Bank may obtain an
extension of credit of up to 50% of total assets collateralized by real estate
loans. At December 31, 1996, the Bank had pledged loans amounting to $2,935,000
and had available credit of $1,468,000 based on 50% of the outstanding balance
of pledged loans. No amounts were outstanding on this line of credit at December
31, 1996 and 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The following table shows the components of the Company's liquidity at the
dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------
$ IN 000'S 1996 1995 1994
- -------------------------------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Cash and Due From Bank.............................................. $ 28,849 $ 28,549 $ 21,315
Federal Funds Sold.................................................. 14,500 45,000 2,000
Investment Securities............................................... 91,504 62,283 72,075
---------- ---------- ---------
134,853 135,832 95,390
Restricted Balances................................................. (8,008) (6,444) (4,029)
---------- ---------- ---------
TOTAL LIQUIDITY..................................................... $ 126,845 $ 129,388 $ 91,361
---------- ---------- ---------
Ratio of Liquidity to Total Assets.................................. 36.09% 38.73% 30.39%
Reserves Held at the Federal Reserve Bank........................... $ 8,900 $ 6,720 $ 8,428
</TABLE>
The principal sources of asset liquidity are balances due from banks,
Federal funds sold and short-term investment securities. Secondary sources of
liquidity are loan repayments, maturing investments, and loans and investments
that can be used as collateral for other borrowings. In addition, in 1995, the
Company obtained $3,200,000 from a private placement of its common stock. The
majority of the Company's loans are short-term and if paid in accordance with
their terms, provide continuous additional cash inflow. The following chart
shows the distribution of loans by their maturities and ratio to total loans and
total assets as of December 31, 1996:
<TABLE>
<CAPTION>
$ IN 000'S UNDER 1 YEAR 1-5 YEARS OVER 5 YEARS TOTAL
- --------------------------------------------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
LOANS AND LEASES................................... $ 93,472 $ 84,206 $ 32,831 $ 210,509
Ratio to Total Loans and Leases.................... 44.40% 40.00% 15.60% 100.00%
Ratio to Total Assets.............................. 26.60% 23.96% 9.34% 59.90%
</TABLE>
Liability-based liquidity includes interest-bearing and noninterest-bearing
deposits, largely from local businesses and professionals, time deposits from
financial institutions throughout the United States and obtained through
listings in national publications and Federal funds purchased. From time to time
the
14
<PAGE>
Bank has used brokered deposits as an additional source of funds. As of December
31, 1996, the Bank had no brokered deposits.
The Company maintains an Interest Rate Risk simulation model which enables
management to measure the Bank's Interest Rate Risk (IRR) exposure using various
assumptions and interest rate scenarios, and to incorporate alternative
strategies for the reduction of IRR exposure. The Bank measures its IRR using
several methods to provide a comprehensive view of its IRR from various
perspectives. These methods include analysis of repricing and maturity
mismatches, or gaps, between assets and liabilities, and analysis of the size
and sources of basis risk.
Gap analysis measures the difference between financial assets and financial
liabilities scheduled and expected to mature or reprice within a specified time
period. The gap is positive when repricing and maturing assets exceed repricing
and maturing liabilities. The gap is negative when repricing and maturing
liabilities exceed repricing and maturing assets. A positive or negative
cumulative gap indicates in a general way how the Bank's net interest income
should respond to interest rate fluctuations. A positive cumulative gap for a
period generally means that rising interest rates would be reflected sooner in
financial assets than in financial liabilities, thereby increasing net interest
income over that period. A negative cumulative gap for a period would produce an
increase in net interest income over that period if interest rates declined.
The following maturity and interest rate sensitivity analysis summarizes the
asset and liability balances of the Company at December 31, 1996 on the basis of
rate adjustments due to occur within the periods indicated:
REPRICING OPPORTUNITIES
<TABLE>
<CAPTION>
1 TO 5
$ IN 000'S 3 MONTHS OR LESS 4 TO 12 MONTHS YEARS OVER 5 YEARS TOTAL
- ----------------------------------------- ---------------- -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Investments.............................. $ 29,403 $ 18,417 $ 41,596 $ 2,293 $ 91,709
Fed Funds................................ 14,500 14,500
Real Estate Loans........................ 69,628 8,513 20,175 8,897 107,213
Commercial Loans......................... 67,020 6,988 6,876 43 80,927
Consumer Loans........................... 6,923 2,288 7,742 2,753 19,706
Leasing.................................. 33 100 2,530 2,663
-------- ------- ----------- ------------ ----------
Interest-Earning Assets.................. 187,507 36,306 78,919 13,986 316,718
NOW Deposits............................. 15,438 15,438
Money Market Deposits.................... 57,407 57,407
Savings Deposits......................... 46,179 46,179
Time Deposits less $100,000.............. 13,007 5,851 2,241 21,099
Time Deposits over $100,000.............. 24,557 6,556 1,211 32,324
-------- ------- ----------- ------------ ----------
Interest-bearing Liabilities............. 156,588 12,407 3,452 172,447
-------- ------- ----------- ------------ ----------
Cumulative Interest Sensitivity Gap...... $ 30,919 $ 54,818 $ 130,285 $ 144,271
-------- ------- ----------- ------------ ----------
-------- ------- ----------- ------------ ----------
</TABLE>
Interest-earning assets include loans and leases on which the accrual of
interest has been discontinued in the amount of $3,995,000.
As of December 31, 1996 the Company had a positive gap of $144,271,000 with
a cumulative positive gap of $54,818,000 over a one-year period. The Board of
Directors has established limits on total net interest income exposure for a one
year time horizon based on 1% rate change. While the gap analysis is a useful
asset/liability management tool, it does not fully assess IRR.
15
<PAGE>
In assessing the interest rate risk, the Company assumes federal funds sold,
NOW deposits, money market deposits and savings deposits as repriceable
immediately. Floating rate loans and variable time certificates of deposits are
repriced immediately or on their scheduled rate change date. Fixed rate loans,
fixed rate time certificates of deposit and investment securities are repriced
based on their scheduled paydowns or at maturities. All paid-down matured
investment securities, loans and deposits are repriced at the current prevailing
rate. The Company uses the above method of repricing with the following rate
scenarios.
1. No interest rate change
2. 1% rise in interest rates
3. 2% rise in interest rates
4. 1% decline in interest rates
5. 2% decline in interest rates
As of December 31, 1996 the interest rate exposure for a one year time
horizon was a decline in net interest income of $373,000 in the event the rates
declined by 1% and an increase in net interest income of $373,000 in the event
the rates increased by 1%.
16
<PAGE>
INTEREST RATES AND INTEREST RATE DIFFERENTIAL. The following tables set
forth the average amounts outstanding for major categories of interest-earning
assets, interest bearing liabilities, the average interest rates earned thereon
and interest income/expenses for the Bank as of and for the years ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995 VARIANCE
--------------------------------------- --------------------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME-
$ IN 000'S AMOUNT EXPENSE COST(%) AMOUNT EXPENSE COST(%) AMOUNT EXPENSE
- -------------------- ------------- ------- -------------- ------------- ------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds
Sold.............. $ 32,522 $ 1,733 5.33% $ 22,855 $ 1,333 5.83% $ 9,667 $ 400
Investment
Securities........ 83,309 5,001 6.00% 61,727 3,409 5.52% 21,582 1,592
Loans and Leases
(1)............... 198,615 19,321 9.73% 200,757 19,094 9.51% (2,142) 227
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Earning
Assets............ $314,446 $26,055 8.29% 285,339 23,836 8.35% $ 29,107 $ 2,219
------------- -------
------------- -------
Due From Banks
(Non-int)......... 28,411 22,289
Other Assets........ 3,443 4,239
------------- -------------
TOTAL ASSETS (2).... $346,300 $ 311,867
------------- -------------
------------- -------------
LIABILITIES & EQUITY
Savings Deposits.... $127,063 $ 3,633 2.86% $ 121,110 $ 3,412 2.82% $ 5,953 $ 221
Time Deposits....... 57,916 2,881 4.97% 64,252 3,610 5.62% (6,336) (729)
Securities Sold
Under Agreements
to Repurchase..... 107 5 4.67% 123 8 6.50% (16) (3)
Capital Note........ 2,350 273 11.62% 2,351 259 11.02% )(1 14
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Bearing
Liabilities....... $187,436 6,792 3.62% 187,836 7,289 3.88% $ (400) $ (497)
------- ----- ------- ----- ------------- -------
Demand Deposits..... 133,371 100,526
Other Liabilities... 2,846 1,810
Shareholders' Equity
(2)............... 22,647 21,695
------------- -------------
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............ $346,300 $ 311,867
------------- -------------
------------- -------------
Net Yield on
Interest-Earning
Assets............ $19,263 6.13% $16,547 5.80%
------- ----- ------- -----
------- ----- ------- -----
<CAPTION>
AVERAGE YIELD/
$ IN 000'S COST(%)
- -------------------- --------------
<S> <C>
ASSETS
Federal Funds
Sold.............. (.50)%
Investment
Securities........ .48%
Loans and Leases
(1)............... .22%
-----
Total
Interest-Earning
Assets............ (.06)%
-----
-----
Due From Banks
(Non-int).........
Other Assets........
TOTAL ASSETS (2)....
LIABILITIES & EQUITY
Savings Deposits.... .04%
Time Deposits....... (.64)%
Securities Sold
Under Agreements
to Repurchase..... (1.83)%
Capital Note........ .60%
-----
Total
Interest-Bearing
Liabilities....... (.26)%
-----
Demand Deposits.....
Other Liabilities...
Shareholders' Equity
(2)...............
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............
Net Yield on
Interest-Earning
Assets............
</TABLE>
- ------------------------
(1) Average loans and leases include non-performing loans and leases; however,
income does not include foregone interest. In addition, loan fees have not
been included in interest income and in calculating the rate realized on
loans and leases.
(2) Average Assets and Average Equity do not include unrealized gains or losses
on Investment Securities.
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994 VARIANCE
--------------------------------------- --------------------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME- AVERAGE YIELD/ ASSET/LIAB INCOME-
$ IN 000'S AMOUNT EXPENSE COST(%) AMOUNT EXPENSE COST(%) AMOUNT EXPENSE
- -------------------- ------------- ------- -------------- ------------- ------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds
Sold.............. $ 22,855 $ 1,333 5.83% $ 13,255 $ 501 3.78% $ 9,600 $ 832
Investment
Securities........ 61,727 3,409 5.52% 76,796 3,873 5.04% (15,069) (464)
Loans and Leases
(1)............... 200,757 19,094 9.51% 202,009 17,599 8.71% (1,252) 1,495
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Earning
Assets............ $285,339 $23,836 8.35% $ 292,060 21,973 7.52% (6,721) 1,863
------------- -------
------------- -------
Due From Banks
(Non-int)......... 22,289 23,326
Other Assets........ 4,239 3,743
------------- -------------
TOTAL ASSETS (2).... $311,867 $ 319,129
------------- -------------
------------- -------------
LIABILITIES & EQUITY
Savings Deposits.... $121,110 $ 3,412 2.82% $ 120,120 $ 3,103 2.58% $ 990 $ 309
Time Deposits....... 64,252 3,610 5.62% 71,295 2,933 4.11% (7,043) 677
Securities Sold
Under Agreements
to Repurchase..... 123 8 6.50% 1,135 59 5.20% (1,012) (51)
Capital Note........ 2,351 259 11.02% 2,351 241 10.25% 0 18
------------- ------- ----- ------------- ------- ----- ------------- -------
Total
Interest-Bearing
Liabilities....... 187,836 7,289 3.88% 194,901 6,336 3.25% (7,065) 953
------- ----- ------- ----- ------------- -------
------------- -------
Demand Deposits..... 100,526 101,022
Other Liabilities... 1,810 2,160
Shareholders' Equity
(2)............... 21,695 21,046
------------- -------------
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............ $311,867 $ 319,129
------------- -------------
------------- -------------
Net Yield on
Interest-
Earning Assets.... $16,547 5.80% $15,637 5.35%
------- ----- ------- -----
------- ----- ------- -----
<CAPTION>
AVERAGE YIELD/
$ IN 000'S COST(%)
- -------------------- --------------
<S> <C>
ASSETS
Federal Funds
Sold.............. 2.05%
Investment
Securities........ .48%
Loans and Leases
(1)............... .80%
-----
Total
Interest-Earning
Assets............ .83%
-----
-----
Due From Banks
(Non-int).........
Other Assets........
TOTAL ASSETS (2)....
LIABILITIES & EQUITY
Savings Deposits.... .23%
Time Deposits....... 1.50%
Securities Sold
Under Agreements
to Repurchase..... 1.31%
Capital Note........ .77%
-----
Total
Interest-Bearing
Liabilities....... .63%
-----
-----
Demand Deposits.....
Other Liabilities...
Shareholders' Equity
(2)...............
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............
Net Yield on
Interest-
Earning Assets....
</TABLE>
- ------------------------
(1) Average loans and leases include non-performing loans and leases; however,
income does not include foregone interest. In addition, loans fees have not
been included in interest income and in calculating the rate realized on
loans and leases.
(2) Average Assets and Average Equity do not include unrealized gains or losses
on Investment Securities.
18
<PAGE>
INTEREST EARNED AND INTEREST INCURRED RESULTING FROM CHANGES IN VOLUME AND
CHANGES IN RATES. The following table sets forth, for the periods indicated, a
summary of the changes in interest earned and interest incurred resulting from
changes in volume and changes in rates:
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
------------------------------------------------ ------------------------------------------------
VOLUME OLD VOLUME VOLUME VOLUME OLD VOLUME VOLUME
CHANGE X X RATE CHANGE X NET CHANGE X X RATE CHANGE X NET
$ IN 000'S OLD RATE CHANGE RATE CHANGE EFFECT OLD RATE CHANGE RATE CHANGE EFFECT
- ------------------------ ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Federal Funds Sold...... $ 564 $ (115) $ (49) $ 400 $ 363 $ 270 $ 196 $ 829
Investment Securities... 1,192 296 104 1,592 (760) 372 (73) (461)
Loans................... (204) 437 (5) 228 (109) 1,614 (10) 1,495
----------- ----- --- --------- ----- ----------- ----- ---------
TOTAL INTEREST-EARNING
ASSETS................ $ 1,552 $ 618 $ 50 $ 2,220 $ (506) $ 2,256 $ 113 $ 1,863
INTEREST PAID ON:
Savings Deposits........ $ 168 $ 51 $ 2 $ 221 $ 26 $ 281 $ 2 $ 309
Time Deposits........... (356) (414) 41 (729) (290) 1,073 (106) 677
Securities Sold Under
Agreement to
Repurchase............ (1) (2) 0 (3) (53) 15 (13) (51)
Note Payable............ 0 14 0 14 0 19 0 19
----------- ----- --- --------- ----- ----------- ----- ---------
TOTAL INTEREST-BEARING
LIABILITIES........... $ (189) $ (351) $ 43 $ (497) $ (317) $ 1,388 $ (117) $ 954
----------- ----- --- --------- ----- ----------- ----- ---------
NET INTEREST EARNINGS... $ 1,741 $ 969 $ 7 $ 2,717 $ (189) $ 868 $ 230 $ 909
----------- ----- --- --------- ----- ----------- ----- ---------
----------- ----- --- --------- ----- ----------- ----- ---------
</TABLE>
In calculating interest rates and volumes and related changes,
non-performing loans and leases have been included in loan and lease volumes;
however, foregone interest has been excluded. Loan fees were not included in
interest income in calculating the rate realized on loans.
COMPETITION
The banking business in California generally, and in the Bank's service area
in particular, is highly competitive with respect to both loans and deposits and
is dominated by a relatively small number of major banks which have many offices
operating throughout wide geographic areas. In addition, there are numerous
other independent commercial banks within the Bank's primary service areas, many
of which have greater resources, greater capital and, in some cases, less
stringent regulatory limitations. Certain of its competitors may be better able
to respond to changing capital and other regulatory requirements and better able
to maintain or improve market share.
The primary factors in competing for deposits are interest rates,
personalized services, quality and range of financial services, convenience of
office locations and banking hours. The Bank competes for deposits and loans
principally with banks, savings and loan associations, thrift and loan
associations, credit unions, mortgage companies, insurance companies, other
lending institutions, money market and mutual funds and other investment
alternatives. Competition for loans comes primarily from other commercial banks,
savings institutions, mortgage banking firms, credit unions and other financial
intermediaries. Among the advantages that some of these institutions have over
the Bank is their ability to undertake
19
<PAGE>
extensive advertising campaigns and to allocate their investment assets to areas
of highest yield and demand. Many of the major commercial banks operating in the
Bank's service area offer certain other services which are not offered directly
by the Bank, such as trust, investment and international banking services, and
by virtue of their greater total capitalization, such banks have substantially
higher lending limits than the Bank. In competing for deposits, the Bank is
subject to certain limitations not applicable to non-bank financial
institutions.
SUPERVISION AND REGULATION
THE COMPANY
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, the filing of annual, quarterly and other reports with the Securities and
Exchange Commission.
The Company is a bank holding company subject to regulation under the Bank
Holding Company Act (the "Act"), and is registered with and subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"Board"). The Company is required to obtain the prior approval of the Federal
Reserve Board before it may acquire all or substantially all of the assets of
any bank, or ownership or control of voting shares of any bank if, after giving
effect to such acquisition, the Company would own or control, directly or
indirectly, more than 5% of such bank. The Act prohibits the Company from
acquiring any voting shares of, interest in, or all or substantially all of the
assets of a bank located outside the State of California unless the laws of such
state specifically authorize such acquisition.
Under the Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries. The
Company is also prohibited, with certain exceptions, from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company unless the company is engaged in such activities. The Federal Reserve
Board's approval must be obtained before the shares of any such company can be
acquired and, in certain cases, before any approved company can open new
offices. In making such determinations, the Federal Reserve Board considers
whether the performance of such activities by the Company would offer advantages
to the public, such as greater convenience, increased competition, or gains in
efficiency, which outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. Further, the Federal Reserve Board is empowered to
differentiate between activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern.
Although the entire scope of permitted activities is uncertain and cannot be
predicted, the major non-banking activities that have been permitted to bank
holding companies with certain limitations are: making, acquiring or servicing
loans that would be made by a mortgage, finance, credit card or factoring
company; operating an industrial loan company; leasing real and personal
property; acting as an insurance agent, broker, or principal with respect to
insurance that is directly related to the extension of credit by the bank
holding company or any of its subsidiaries and limited to repayment of the
credit in the event of death, disability or involuntary unemployment; issuing
and selling money orders, savings bonds and travelers checks; performing certain
trust company services; performing appraisals of real estate and personal
property; providing investment and financial advice; providing data processing
services; providing courier services; providing management consulting advice to
non-affiliated depository institutions; arranging commercial real estate equity
financing; providing certain securities brokerage services; underwriting and
dealing in government obligations and money market instruments; providing
foreign exchange advisory and transactional services; acting as a futures
commission merchant; providing investment advice on financial futures and
options on futures; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services; engaging
in collection agency activities; and operating a credit bureau.
20
<PAGE>
The Company's primary sources of income are the receipt of dividends and
management fees from its subsidiaries, and interest income on its investments.
The Bank's ability to make such payments to the Company are subject to certain
statutory and regulatory restrictions.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, the
Bank may not condition an extension of credit on a customer's obtaining other
services provided by it, the Company or any other subsidiary or on a promise by
the customer not to obtain other services from a competitor.
As a bank holding company, the Company is required to file reports with the
Federal Reserve Board and to provide such additional information as the Federal
Reserve Board may require. The Federal Reserve Board also has the authority to
examine the Company and each of its subsidiaries with the cost thereof to be
borne by the Company.
In addition, banking subsidiaries of bank holding companies are subject to
certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in the
Federal Reserve Act, a bank can make a loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an affiliate as collateral security for a loan
or extension of credit to any person or company or issue a guarantee, acceptance
or letter of credit on behalf of an affiliate only if the aggregate amount of
the above transactions of such subsidiary does not exceed 10% of such
subsidiary's capital stock and surplus on a per affiliate basis or 20% of such
subsidiary's capital stock and surplus on an aggregate affiliate basis. Such
transactions must be on terms and conditions that are consistent with safe and
sound banking practices. A bank and its subsidiaries generally may not purchase
a low-quality asset, as that term is defined in the Federal Reserve Act, from an
affiliate. Such restrictions also prevent a holding company and its other
affiliates from borrowing from a banking subsidiary of the holding company
unless the loans are secured by collateral.
The Act also prohibits a bank holding company or any of its subsidiaries
from acquiring voting shares or substantially all the assets of any bank located
in a state other than the state in which the operations of the bank holding
company's banking subsidiaries are principally conducted unless such acquisition
is expressly authorized by statutes of the state in which the bank to be
acquired is located. Legislation recently adopted in California permits
out-of-state bank holding companies to acquire California banks. See "Effect of
Governmental Policies and Recent Legislation" later in this section.
The Act and regulations of the Federal Reserve Board also impose certain
constraints on the redemption or purchase by a bank holding company of its own
shares of stock.
The Federal Reserve Board has cease and desist powers to cover parent bank
holding companies and non-banking subsidiaries where action of a parent bank
holding company or its non-financial institutions represent an unsafe or unsound
practice or violation of law. The Federal Reserve Board has the authority to
regulate debt obligations (other than commercial paper) issued by bank holding
companies by imposing interest ceilings and reserve requirements on such debt
obligations.
The ability of the Company to pay dividends to its shareholders is subject
to the restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. The Corporation Law further
provides that, in the event that sufficient retained earnings are not available
for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally 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
21
<PAGE>
corporation's interest expense for such fiscal years, then the corporation's
current assets equal at least 1 1/4 times its current liabilities.
On May 27, 1993, the Company executed a Memorandum of Understanding
("memorandum") with the Federal Reserve Bank of San Francisco (the "Fed"). On
March 13, 1997, the Fed determined that the continued existence of the
memorandum was no longer necessary and was terminated as of that date.
THE BANK
The Bank is a national banking association whose deposits are insured by the
Bank Insurance Fund ("BIF") as administered by the FDIC, up to the maximum legal
limits of the FDIC $(100,000), and is subject to regulation, supervision, and
regular examination by the Comptroller. The Bank is a member of the Federal
Reserve System, and as such is subject to certain provisions of the Federal
Reserve Board. The Bank is also subject to applicable provisions of California
law, insofar as they do not conflict with, or are not preempted by, federal law.
The regulations of these various agencies govern most aspects of the Bank's
business, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowing, dividends,
and locations of branch offices. California law exempts banks from the
California usury laws.
Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of such affiliates. Such restrictions prevent affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank in any other affiliate is limited to 10 percent of such subsidiary
bank's capital and surplus (as defined by federal regulations) and such secured
loans and investments are limited, in the aggregate, to 20% of such subsidiary
bank's capital and surplus (as defined by federal regulations). Additional
restrictions on transactions with affiliates may be imposed on the Bank under
the prompt corrective action provisions of the FDIC Improvement Act ("FDICIA").
Commercial banking organizations, such as the Bank, may be subject to
potential enforcement actions by the Federal Reserve Board, the FDIC and the
Comptroller for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation or any condition imposed in writing
by the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the termination of
insurance of deposits, the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the imposition of restrictions and sanctions under the prompt
corrective action provisions of FDICIA.
On January 1, 1991, the Comptroller changed the interpretation of the
dividend regulations to simplify the calculation of a bank's dividend-paying
capacity and make them more consistent with generally accepted accounting
principles. The dividend limit is based on retained "net profits" for the
current year plus the two previous years, less any required transfers to surplus
or a fund for the retirement of preferred stock. "Net profits" are defined as
net income as reported in the bank's call report with no adjustments. In
addition, a national bank may not pay any dividends or make other capital
distributions if the capital distribution would cause the national bank to be
undercapitalized, with the exception of repurchases or redemptions of the
national bank's shares that are made in connection with the issuance of
additional shares, or that will impair the national bank's financial condition.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by a bank on its deposits and its
other borrowings and the interest rate received by a bank
22
<PAGE>
on loans extended to its customers and securities held in a bank's portfolio
comprise the major portion of a bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of a bank. Accordingly,
the earnings and growth of a bank are subject to the influence of local,
domestic and foreign economic conditions, including recession, unemployment and
inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress and before various bank
regulatory and other professional agencies. The likelihood of any major changes
and the impact such changes might have on the Company are impossible to predict.
Certain of the potentially significant changes which have been enacted and
proposals which have been made recently are discussed below.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, FDICIA was enacted into law. Set forth below is a
brief discussion of certain portions of this law and implementing regulations
that have been adopted or proposed by the Federal Reserve Board, the
Comptroller, the Office of Thrift Supervision ("OTS") and the FDIC
(collectively, the "federal banking agencies").
STANDARDS FOR SAFETY AND SOUNDNESS
FDICIA requires the federal banking agencies to prescribe, by regulation,
standards for all insured depository institutions and depository institution
holding companies relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, and asset growth. Standards must also be
prescribed for classified loans, earnings and the ratio of market value to book
value for publicly-traded shares. The FDICIA also requires the federal banking
agencies to issue uniform regulations prescribing standards for real estate
lending that are to consider such factors as the risk to the deposit insurance
fund, the need for safe and sound operation of insured depository institutions
and the availability of credit. Further, FDICIA requires the federal banking
agencies to establish standards prohibiting compensation, fees and benefit
arrangements that are excessive or could lead to financial loss.
PROMPT CORRECTIVE REGULATORY ACTION
FDICIA requires each federal banking agency to take prompt corrective action
to resolve the problems of insured depository institutions that fall below one
or more prescribed minimum capital ratios. The purpose of this law is to resolve
the problems of insured depository institutions at the least possible long-term
cost to the appropriate deposit insurance fund.
23
<PAGE>
The law requires each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA.
Under the regulations, an insured depository institution will be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10 percent or
greater, Tier 1 risk-based capital of 6 percent or greater and a leverage
capital ratio of 5 percent or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action directive
to meet and maintain a specific capital level for any capital measure;
- "adequately capitalized" if it has total risk-based capital of 8 percent
or greater, Tier 1 risk-based capital of 4 percent or greater and a
leverage capital ratio of 4 percent or greater (or a leverage capital
ratio of 3 percent or greater if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "undercapitalized" if it has total risk-based capital that is less than 8
percent, Tier 1 risk-based capital that is less than 4 percent or a
leverage capital ratio that is less than 4 percent (or a leverage capital
ratio that is less than 3 percent if the institution is rated composite 1
under the applicable regulatory rating system in its most recent report of
examination);
- "significantly undercapitalized" if it has total risk-based capital that
is less than 6 percent, Tier 1 risk-based capital that is less than 3
percent or a leverage capital ratio that is less than 3 percent; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2 percent.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized, may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is in an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to address the problems associated with such category.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions, and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to
24
<PAGE>
5% of the depository institution's total assets at the time the institution
became undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may impose on significantly
undercapitalized institutions if it determines that such action will further the
purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers, subject to certain grandfather provisions for those elected prior to
enactment of FDICIA; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
The Comptroller and the Federal Reserve Board have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are recorded as
off-balance sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off-balance sheet items are multiplied
by one of several risk adjustment percentages, which range from 0 percent for
assets with low credit risk, such as certain U.S. Treasury securities, to 100
percent for assets with relatively high credit risk, such as business loans.
In addition to the risk-based guidelines, the Comptroller requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the Comptroller to rate banks, the minimum leverage ratio of Tier 1 capital to
total assets is 3 percent. For all banks not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3
percent minimum, or 4 percent to 5 percent. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the
25
<PAGE>
Comptroller has the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss allowances to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
OTHER ITEMS
FDICIA also, among other things, (i) limits the percentage of interest paid
on brokered deposits and limits the unrestricted use of such deposits to only
those institutions that are well capitalized; (ii) requires the FDIC to charge
insurance premiums based on the risk profile of each institution; (iii)
eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; and (iv) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital.
CAPITAL ADEQUACY GUIDELINES
The Comptroller and the Federal Reserve Board have issued guidelines to
implement the risk-based capital requirements. The guidelines are intended to
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, takes off-balance sheet items into account in assessing capital
adequacy and minimizes disincentives to holding liquid, low-risk assets. Under
these guidelines, assets and credit equivalent amounts of off-balance sheet
items, such as letters of credit and outstanding loan commitments, are assigned
to one of several risk categories, which range from 0 percent for risk-free
assets, such as cash and certain U.S. Government securities, to 100 percent for
relatively high-risk assets, such as loans and investments in fixed assets,
premises and other real estate owned. The aggregated dollar amount of each
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock,
26
<PAGE>
related surplus and retained earnings, qualifying non-cumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1
capital; however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50
percent of the banking organization's total regulatory capital must consist of
Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25 percent of risk-weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible-term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50 percent of Tier 1
capital. The inclusion of the foregoing elements of Tier 2 capital are subject
to certain requirements and limitations of the federal banking agencies.
The Comptroller has also adopted a minimum leverage capital ratio of Tier 1
capital to average total assets of 3 percent for the highest rated banks. This
leverage capital ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk profiles
are expected to maintain capital well above the minimum level. Furthermore,
higher leverage capital ratios are required to be considered well capitalized or
adequately capitalized under the prompt corrective action provisions of FDICIA.
The Regulatory Capital Guidelines as well as the actual capitalization for
the Bank and the Company as of December 31, 1996 follow:
<TABLE>
<CAPTION>
ADEQUATELY WELL COMPANY
CAPITALIZED CAPITALIZED BANK CONSOLIDATED
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Detailed computations of
Tier 1 leverage capital ratio................................... a4.00% a5.00% 7.59% 7.25%
Tier 1 risk-based capital ratio................................. a4.00% a6.00% 10.88% 10.36%
Total risk-based capital........................................ a8.00% a10.00% 12.14% 11.62%
</TABLE>
- ------------------------
Based solely on these ratios, the Bank is deemed to be well capitalized as of
December 31, 1996.
SAFETY AND SOUNDNESS STANDARDS
In February 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations require
insured depository institutions to adopt written policies establishing
standards, consistent with such guidelines, for extensions of credit secured by
real estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
27
<PAGE>
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A
state-licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally-related transactions" must
now comply with the federal banking agencies' appraisal standards.
Federally-related transactions include the sale, lease, purchase, investment in,
or exchange of, real property or interests in real property, the financing of
real property, and the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90 percent of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," or 1.25
percent, the total amount raised from BIF members by the risk-based assessment
system may not be less than the amount that would be raised if the assessment
rate for all BIF members were .023 percent of deposits. The FDIC, effective
September 15, 1995, lowered assessments from their rates of $.23 to $.31 per
$100 of insured deposits to rates of $.04 to $.31, depending on the condition of
the bank, as a result of the recapitalization of the BIF. On November 15, 1995,
the FDIC voted to drop its premiums for well-capitalized banks to zero effective
January 1, 1996. Other banks will be charged risk-based premiums up to $.27 per
$100 of deposits. The Bank currently pays deposit insurance premiums to the FDIC
at the rate of $.17 per $100 of deposits.
Congress has recently passed, and President Clinton has signed into law,
provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and
to repay outstanding bonds that were issued to recapitalize the SAIF's successor
as a result of payments made due to the insolvency of savings and loan
associations and other federally-insured savings institutions in the late 1980's
and early 1990's. The new law requires savings and loan associations to bear the
cost of recapitalizing the SAIF and, after January 1, 1997, banks must
contribute towards paying off the financing bonds, including interest. In 2000,
the banking industry will assume the bulk of the payments. The new law also aims
to merge the Bank Insurance Fund and SAIF by 1999 but not until the bank and
savings and loan charters are combined. The Treasury Department has until March
31, 1997 to deliver to Congress comments and recommendations on combining the
charters. Additionally, the new law provides "regulatory relief" for the banking
industry by eliminating approximately 30 laws and regulations. The costs and
benefits of the new law to the Banks can not currently be accurately predicted.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain
28
<PAGE>
regulatory approval to acquire an existing bank located in another state without
regard to state law. A bank holding company would not be permitted to make such
an acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United States
or (b) 30% or more of the deposits in the state in which the bank is located. A
state may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum length
of time that may be prescribed by state law except that a state may not impose
more than a five-year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction. Effective October 2, 1995, California adopted legislation which
"opts California into" the Interstate Act. However, the California Legislation
restricts out-of-state banks from purchasing branches or starting a de novo
branch to enter the California banking market. Such banks may proceed only by
way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Banks' market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such increased competition will likely have
on the Banks' operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low- and moderate-income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. Based on the examination conducted
during May 1993 and February 1995, the Bank is rated "outstanding."
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Tax Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
HAZARDOUS WASTE CLEAN-UP COSTS
Management is aware of recent legislation and cases relating to hazardous
waste clean-up costs and potential liability. Based on a general survey of the
loan portfolios of the Bank, conversations with local authorities and
appraisers, and the type of lending currently and historically done by the Bank
(the Bank has generally not made the types of loans generally associated with
hazardous waste contamination problems), management is not aware of any
potential liability for hazardous waste contamination.
29
<PAGE>
OTHER REGULATIONS AND POLICIES
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal
regulations include requirements to maintain noninterest-bearing reserves
against deposits, limitations on the nature and amount of loans which may be
made, and restrictions on payment of dividends. California law exempts banks
from the usury laws.
ACCOUNTING PRONOUNCEMENTS
On January 1, 1996, the Company adopted a Statement on Special Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of." This Statement requires that long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, or to be disposed of, be reviewed for impairment based on the fair value
of the asset. Furthermore, this Statement requires that certain long-lived
assets and identifiable intangibles to be disposed of, be reported at the lower
of carrying amount or fair value less cost to sell. The Company has determined
that the impact of this Statement on its operations and financial position is
not material for the year ended December 31, 1996.
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. During 1996, the Company has chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principal Board No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock on the date of the grant over the amount an
employee must pay to acquire the stock. The pro forma effects of adoption are
disclosed in Note 8 to the Notes to Consolidated Financial Statements.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as amended in December 1996 by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125." This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 125 applies prospectively to
financial statements for fiscal years beginning after December 31, 1996.
However, SFAS No. 127 defers for one year the effective date of certain
provisions within SFAS No. 125. SFAS No. 125 does not permit earlier or
retroactive application. As of December 31, 1996, the Company has not adopted
SFAS No. 125, as amended by SFAS No. 127; however, the Company does not believe
the impact on its operations and financial position will be material upon
adoption.
30
<PAGE>
EMPLOYEES
The Bank currently employs approximately 156 persons in varying capacities.
The Company does not have any full-time employees at this time. (See ITEM 11.
EXECUTIVE COMPENSATION, for further information).
ITEM 2. PROPERTIES.
On December 29, 1982, the Company entered into a sublease (the "Sublease")
for the premises covering approximately 6,147 square feet on the ground floor of
a building located at 3951 South Coast Plaza Drive, Santa Ana, California 92704.
The Sublease ("old Sublease") had an initial term of 10 years, which expired on
January 31, 1993. The Sublease was amended effective February 1, 1993 for a term
of 24 months, terminating on January 31, 1995. It has further been amended to
expire on January 31, 1998. The rent for the premises at the end of the term of
the old Sublease was $2.61 per square foot per month. The rent under the terms
of the "new Sublease" is $1.23 per square foot per month. The Company has
assigned the Sublease to the Bank for the purpose of conducting banking
operations on the premises. The Company does not independently occupy any part
of the premises.
On May 4, 1988, the Bank entered into a lease expiring June 30, 2000 for the
branch located at 22831 Lake Forest Drive, El Toro, California. The El Toro
premises consist of approximately 6,766 square feet and the current monthly rent
is $1.71 per square foot.
On September 19, 1989, the Bank entered into a lease expiring September 18,
1993 for the Service Center located at 17252 Armstrong, Suite H, Irvine,
California. These premises consist of approximately 7,900 square feet. On
September 18, 1996, the Company revised and extended the lease for a period of
twelve months, expiring September 17, 1997, at the current monthly rent of $.72
per square foot.
On October 4, 1989, the Bank entered into a lease expiring December 31, 1999
for the Orange regional office located at 625 The City Drive, Orange,
California. These premises consist of approximately 8,257 square feet and the
current monthly rent is $2.05 per square foot.
On November 29, 1991, the Bank entered into a lease for a branch facility,
commercial loan department and escrow division space covering approximately
14,866 square feet on the ground floor and 14,103 square feet for its
headquarters office on the ninth floor of a building located at 4100 Newport
Place, Newport Beach, California 92660. The Lease has an initial term of 10
years. The current rent for the premises is $1.72 per square foot per month on
the ground floor and $1.70 per square foot per month for the ninth floor.
Pursuant to the Lease, the Bank has an option to lease additional space on the
ninth floor. The Bank is using the ground floor for banking operations and is
using the ninth floor for administrative offices.
On November 1, 1995 the Bank entered into a lease expiring October 31, 2005
for the Beach Cities Regional Office located at 17330 Brookhurst, Fountain
Valley, CA. These premises consist of approximately 5534 square feet and the
current monthly rent is $1.30 per square foot.
All of the premises leased by the Company are used by the Bank and there are
no immediate plans to utilize any of the leased premises for any other purpose.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. After taking into consideration information furnished by counsel to
the Company or the Bank as to the current status of various claims
31
<PAGE>
and legal proceedings to which the Company or the Bank is a party, management
has accrued $950,000 as a reserve for various litigation pending as of December
31, 1996.
Set forth below is a brief summary of the status of litigation against the
Company or the Bank involving claims in excess of $750,000. Management believes
that the reserves which it has established for these matters is adequate at this
time. However, litigation is inherently uncertain and no assurance can be given
that this or any other litigation will not result in any loss which might be
material to the Company.
PDI LITIGATION. NATIONAL BANK OF SOUTHERN CALIFORNIA V. VINCENT E. GALEWICK,
PERFORMANCE DEVELOPMENT, INC. ET. AL (the "PDI Litigation") is an interpleader
action filed by the Bank on August 22, 1995 in the Orange County Superior Court.
The dispute arose from a demand by the California Department of Corporations
under California Government Code Section 7480 on August 17, 1995 for the
identification of account names and account numbers associated with Vincent
Galewick and Performance Development, Inc. As result of receipt of a declaration
by the California Department of Corporations under California Financial Code
Section 952, the Bank froze $12,301,113.01 in their accounts. On August 21,
1995, a temporary restraining order was issued restraining Performance
Development, Inc., Vincent Galewick and others from transferring funds. The Bank
was thereafter threatened by various parties with lawsuits for refusal to
release the funds, and an attack was made on the applicability of the temporary
restraining order to the funds. The Bank deposited the funds with the Orange
County Superior Court and filed the interpleader action to allow the court to
determine the disposition of the funds. In response, the defendants filed a
cross complaint against the Bank alleging $25 million (the original claim
alleged $45 million and was reduced during discovery) in damages due to lost
opportunities, breach of contract, loss of goodwill and damage to their
reputation due to the inability to use the $12,301,113.01. Additional claims for
an unspecified amount of punitive damages, consequential damages and incidental
damages have been alleged. Discovery has not yet been completed.
A related action was filed by Larry Curran in the Orange County Superior
Court arising out of the same transaction. A request for dismissal, without
prejudice, was filed on behalf of the plaintiff in this action on January 31,
1997.
FIP LITIGATION. In December 1995, Financial Institutions Partners, L.P.
("FIP") purchased 288,888 shares of the Company's Common Stock (the "Initial
Shares") in a private placement at $6.75 per share ($1,949,994 in the
aggregate). Under the terms of the Company's agreements with FIP, FIP agreed to
purchase an additional 266,659 shares of the Company's Common Stock (the
"Additional Shares") on or prior to May 5, 1996, subject to satisfaction of
certain closing conditions.
On April 11, 1996, FIP received confirmation from the Federal Reserve Bank
of San Francisco that no regulatory approval was required for the purchase of
the Additional Shares. On April 24, 1996, Hovde Financial, Inc., the corporate
general partner of FIP, purchased 53,909 shares of the Company's Common Stock in
the open market. FIP thereafter refused to purchase the Additional Shares on the
grounds that the PDI Litigation constituted a material adverse change in the
Company's financial condition and, therefore, the closing conditions were not,
and could not, be satisfied by the Company.
On June 11, 1996, FIP demanded that the Company either (a) extend the
agreement until December 31, 1996 at an increased purchase price based upon the
earnings of the Company from June 1, 1996 through November 30, 1996, or (b)
repurchase the Initial Shares for an amount equal to the purchase price, plus
$6.00 per share, plus nine percent interest, plus FIP's legal, accounting and
due diligence expenses. The Company had periodic discussions with FIP thereafter
regarding the purchase of the Additional Shares, but was unable to reach
agreement with FIP.
FIP filed a complaint dated December 19, 1996 in the United States District
Court for the Central District of California against the Company, the Bank and
certain of their respective officers and directors alleging violation of Section
10(b)(5) promulgated under the Securities Exchange Act of 1934, intentional
misrepresentation, negligent misrepresentation and suppression of fact and
rescission of FIP's purchase of
32
<PAGE>
the Initial Shares, consequential damages in excess of $1,650,000 and punitive
damages due to the alleged failure by the Company to disclose all material facts
regarding the PDI Litigation. In the alternative, FIP seeks a declaratory
judgement requiring the Company to sell the Additional Shares to FIP at $6.75
per share if FIP determines it wishes to purchase such shares following a review
of all information regarding the PDI Litigation.
FIP has informed the Company that it intends to file an amended complaint
and has agreed to postpone the due date for the Company's response to the
complaint until after the amended complaint is filed. The amended complaint has
not yet been received by the Company.
FIRST PENSION LITIGATION. ROUSSEAU. ET. AL. V. RANCHO VISTA NATIONAL BANK
AND OTHERS is an action brought in the San Diego Superior Court on October 23,
1995 by a class of investors who invested pension funds with First Pension, a
pension plan administrator, alleging claims against various banks who dealt with
First Pension. The plaintiffs have stated claims for fraud and deceit, aiding
and abetting fraud and deceit, breach of fiduciary duty, constructive fraud and
aiding and abetting constructive fraud against a number of financial
institutions, including the Bank. The Bank and certain of its officers were
named as defendants, based on the fact that First Pension deposited investor
pension funds into an account at the Bank of which the Bank agreed to be
custodian. The plaintiffs allege losses of over $130 million due to the combined
alleged wrongdoing of the bank defendants. No specific damage claim was alleged
against the Bank.
In January 1997, the Bank offered to settle the matter or, in the
alternative, to seek an order from the court dismissing the action for failure
to prosecute. A tentative settlement has been reached whereby the Bank would pay
$30,000 to be distributed to the class, less certain fees and expenses. Before
this settlement would be final, a settlement agreement must be executed, the
class certified and the settlement agreement approved by the Court.
EVAN V. HOME BANK AND OTHERS is a suit brought by the receiver for First
Pension and related entities in the Central District of California based on the
same allegations as in the ROUSSEAU matter. The receiver alleges that the Bank
improperly delegated its fiduciary duties as a custodian of pension funds to
First Pension and failed to ensure that all pension assets were transferred to
the successor custodian. Plaintiffs have not alleged a specific damage claim
against the Bank. Discovery on this matter has just commenced.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to security holders during the fourth quarter of the
fiscal year ended December 31, 1996.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of December 31, 1996, there were approximately 300 shareholders of record
of the Company's common stock. No shares of the Company's preferred stock have
been issued or are outstanding.
Although there are at least four broker/dealers purporting to make a market
in the Company's common stock, there is limited trading activity in the
Company's common stock. No cash dividends have been paid on shares of the
Company's common stock since the formation of the Company, and the Company
presently has no intention to pay cash dividends in the foreseeable future.
The following table lists high and low bid prices of the Company's Common
Stock in the over-the-counter market. Prices represent quotations by dealers
making a market in the stock and reflect inter-dealer prices without adjustments
for mark-ups, mark-downs or commissions and may not necessarily
33
<PAGE>
represent actual transactions. Trading in the Company's common stock is limited
in volume and may not be a reliable indicator of its market value.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter............................................................... $ 7.40 $ 5.25 $ 6.38 $ 5.00
Second Quarter.............................................................. $ 7.25 $ 5.25 $ 6.63 $ 6.00
Third Quarter............................................................... $ 8.19 $ 7.38 $ 7.50 $ 6.57
Fourth Quarter.............................................................. $ 15.38 $ 8.75 $ 7.97 $ 7.40
</TABLE>
In November, 1995, the Company sold 474,000 shares of its common stock
through a private placement at $6.75 per share.
ITEM 6. SELECTED FINANCIAL DATA.
The following table should be read in conjunction with, and is qualified in
its entirety by, the Company's Consolidated Financial Statements and the notes
thereto contained in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
$ IN 000'S 1996 1995(1) 1994 1993 1992
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Operating Revenue........................................ $ 30,531 $ 27,097 $ 24,849 $ 25,800 $ 30,912
Interest & Fee Income.................................... 26,773 24,742 22,721 23,642 28,861
Interest Expense......................................... 6,809 7,289 6,336 8,086 11,231
Net Interest and Fee Income.............................. 19,964 17,453 16,385 15,556 17,630
Provision for Loan Loss.................................. 1,260 6,600 3,365 4,789 4,775
Net Income (Loss)........................................ 3,796 (3,341) 859 (2,815) 507
Net Income (Loss) Per Share.............................. 1.26 (1.30) 0.35 (1.14) 0.20
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------
$ IN 000'S 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ENDING BALANCE SHEET DATA:
Investment Securities.............................. $ 91,504 $ 62,283 $ 72,075 $ 81,137 $ 60,609
Net Loans & Leases................................. 204,650 187,670 195,203 206,370 237,884
Total Assets....................................... 351,464 334,043 300,665 324,550 372,762
Total Deposits..................................... 318,704 308,504 277,389 299,726 343,137
Total Liabilities.................................. 326,464 312,924 280,937 304,363 350,067
Long-Term Debt..................................... 2,350 2,351 2,351 2,351 3,000
Total Shareholders' Equity......................... 25,000 21,119 19,728 20,187 22,695
PER SHARE DATA AND OTHER SELECTED RATIOS:
Earnings (loss) per common and common equivalent
share............................................ $ 1.26 $ (1.30) $ 0.35 $ (1.14) $ 0.20
Dividends declared per share....................... 0.00 0.00 0.00 0.00 0.00
Book value per share............................... $ 8.38 $ 7.23 $ 8.14 $ 8.33 $ 9.68
Shareholders' equity to assets at period end....... 7.11% 6.32% 6.56% 6.22% 6.09%
Return on average assets........................... 1.10 (1.07) 0.27 (0.82) 0.14
Return on average equity........................... 16.76 (15.56) 4.19 (12.95) 2.24
Average equity/average assets...................... 6.54 6.88 6.45 6.31 6.33
Net interest margin................................ 6.35 6.12 5.61 4.97 5.35
</TABLE>
- ------------------------
(1) In 1995 CCB through a private placement raised approximately $3,200,000 in
additional equity in connection with the issuance of shares of CCB common
stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The purpose of this discussion is to provide additional information about
the Company's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in this
annual report. Since the banking subsidiary represents most of the Company's
activity and investment, the following discussion relates primarily to the
financial condition and operations of the Bank. It should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
contained in Item 8 of this Form 10-K.
35
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following chart shows comparative data for selected items of the
financial statements:
SUMMARY
<TABLE>
<CAPTION>
$ IN 000'S EXCEPT INCREASE INCREASE
EARNINGS PER SHARE DATA 1996 (DECREASE) 1995 (DECREASE) 1994
- ----------------------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average Total Assets........................... $ 346,300 $ 34,423 $ 311,877 $ (7,252) $ 319,129
11.0% (2.3)%
Average Loans and Leases....................... $ 198,615 $ (2,143 ) $ 200,758 $ (1,251 ) $ 202,009
(1.1 )% (0.6 )%
Average Deposits............................... $ 318,350 $ 32,462 $ 285,888 $ (6,549 ) $ 292,437
11.4% (2.2 )%
Net Interest Income............................ $ 19,964 $ 2,511 $ 17,453 $ 1,068 $ 16,385
14.4% 6.5%
Provision for Loan and Lease Losses............ $ 1,260 $ (5,340 ) $ 6,600 $ 3,235 $ 3,365
(80.9 )% 96.1%
Net Income (Loss).............................. $ 3,796 $ 7,137 $ (3,341) $ (4,200 ) $ 859
N/A N/A
Income (Loss) Per Share........................ $ 1.26 $ 2.56 $ (1.30) $ (1.65 ) $ 0.35
N/A N/A
Return on Average Assets....................... 1.10% 2.17% (1.07)% (1.34 )% .27%
N/A N/A
Return on Average Equity (1)................... 16.76% 32.32% (15.56)% (19.75 )% $ 4.19%
N/A N/A
Ratio of Average Equity to Average Assets...... 6.54% $ (0.34 ) 6.88% $ 0.42 6.45%
(4.9 )% 6.7%
Cash Dividends declared........................ 0 N/A 0 N/A 0
</TABLE>
- ------------------------
(1) Average equity computed based on month end balances
During 1996 the Company's non-performing assets declined from $17,738,000 on
December 31, 1995 to $6,652,000 on December 31, 1996. As a result of significant
reduction in non-performing assets and overall improvement in asset quality
requiring less resources on collection of problem loans, the Company applied
additional resources to generating new business. Gross loans and leases
increased from $194,914,000 to $210,509,000 and deposits increased from
$308,504,000 to $318,704,000 from December 31, 1995 to December 31, 1996.
The average assets, average loans and leases and average deposits decreased
from 1994 through 1995 as the Company concentrated on improving asset quality
and collecting loans rather than on generating new business. Net interest income
increased in 1995 due to improved spreads in interest-earning assets. During
1995, the Company made a provision for loan and lease losses in the amount of
$6,600,000 and charged off loans which amounted to $5,718,000 net of recoveries.
Increased legal expenses and losses on foreclosed properties contributed to a
net loss of $3,341,000 in 1995.
36
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------------------------------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total Interest and Fee Income.................... $ 26,773 $ 2,031 $ 24,742 $ 2,021 $ 22,721
8.2% 8.9%
Total Interest Expense........................... 6,809 $ (480) 7,289 $ 953 6,336
(6.6)% 15.0%
Net Interest Income Before Provision for Loan and
Lease Losses................................... $ 19,964 $ 2,511 $ 17,453 $ 1,068 $ 16,385
14.4% 6.5%
Net Interest and Fee Income Earned as a
Percentage of Average Interest-Earning
Assets......................................... 6.35% .23% 6.12% .51% 5.61%
</TABLE>
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES. Net
interest income continued to increase in 1996 from 1995 and 1994 as the interest
spread continued to improve on interest earning assets due to rising interest
rates, increased average noninterest-bearing deposits and decreasing
nonperforming loans. The average noninterest-bearing deposits increased from
$101,022,000 in 1994 to $100,526,000 in 1995 and $133,371,000 in 1996.
The net yield on interest-earning assets including loan fees increased to
6.35% in 1996 from 6.12% in 1995. The net yield on interest-earning assets
excluding loan fees increased to 6.13% in 1996 from 5.80% in 1995. As of
December 31, 1996, the Company had a total of $222,783,000 in interest-earning
assets that would reprice within one year as compared to $170,277,000
interest-bearing liabilities that would reprice within the same period of time.
The short-term impact of any rise or decline in interest rates would therefore
be insignificant.
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- --------------------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average Nonaccrual Loans..................... $ 9,526 $ (3,234) 12,760 $ (4,127) $ 16,887
(25.3)% (24.4 )%
Interest Income Not Recognized During the
Period on Nonaccrual Loans................. $ 327 $ (298 ) $ 625 $ (343 ) $ 968
(47.7 )% (35.4 )%
Interest Income Recognized During the Period
on Nonaccrual Loans........................ (20 ) $ 20
(100.00 )%
Average Loans and Leases to Average
Deposits................................... 62.4% (7.8 )% 70.2% 1.1% 69.1%
(11.1 )% 1.6%
Average Interest-Earning Assets.............. $ 314,446 29,107 285,339 $ (6,721 ) $ 292,060
10.2% (2.3 )%
</TABLE>
Loan production and average outstanding loans declined from 1994 to 1995 as
the Company focused on monitoring the performance of the outstanding loans,
identifying potential problems and collecting identified problem loans and real
estate owned. At the same time, the Company refined its loan underwriting and
approval process, seeking higher-quality credits which reduced the volume of
loans meeting the tightened criteria. During 1996, with a significant decline in
nonperforming assets, the
37
<PAGE>
Company applied its resources to business development, resulting in an
approximately 10% increase in total average assets and average earning assets.
<TABLE>
<CAPTION>
AVERAGE BALANCES, PERCENT INTEREST PERCENT INTEREST PERCENT
$ IN 000'S 1996 OF TOTAL RATE 1995 OF TOTAL RATE 1994 OF TOTAL
- ------------------------------ --------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings Deposits.............. $ 127,063 39.91% 2.86% $ 121,110 42.36% 2.82% $ 120,120 41.08%
Time Deposits................. 57,916 18.19% 4.97% 64,252 22.48% 5.62% 71,295 24.38%
--------- --------- ----- --------- --------- ----- --------- ---------
Total Interest-Bearing
Deposits.................... 184,979 58.11% 3.52% 185,362 64.84% 3.79% 191,415 65.46%
Demand Deposits............... 133,371 41.90% N/A 100,526 35.16% N/A 101,022 34.54%
--------- --------- ----- --------- --------- ----- --------- ---------
Total Deposits................ $ 318,350 100.00% $ 285,888 100.00% $ 292,437 100.00%
--------- --------- ----- --------- --------- ----- --------- ---------
<CAPTION>
AVERAGE BALANCES, INTEREST
$ IN 000'S RATE
- ------------------------------ -----------
<S> <C>
Savings Deposits.............. 2.58%
Time Deposits................. 4.11%
-----
Total Interest-Bearing
Deposits.................... 3.15%
Demand Deposits............... N/A
-----
Total Deposits................
-----
</TABLE>
Interest expense increased as the interest rates increased in 1995 and
interest expense declined as interest rates fell in 1996. In addition, in 1994,
the Company established a policy not to renew brokered certificates of deposit
and deposits gathered through listings in national publications listing the
rates offered on time deposits by a large number of banks around the country.
Although the rates paid on the certificates of deposit approximate the rates
paid by the Bank on its other certificates of deposit, the decline in balances
of these deposits and replacement with noninterest-bearing deposits caused a
concurrent decline in interest expense.
PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses
creates an allowance for estimated future loan and lease losses. When losses or
recoveries occur, they are charged against or credited to the allowance.
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------------------------------------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Loan and Lease Charge-offs (Net of Recoveries)........ $ 2,385 (3,333) $ 5,718 $ 792 $ 4,926
(58.3)% 16.1%
--------- ----------- --------- ----------- ---------
Provision for Loan and Lease Losses................... $ 1,260 $ (5,340 ) $ 6,600 $ 3,235 $ 3,365
(80.9 )% 96.14%
--------- ----------- --------- ----------- ---------
</TABLE>
Due to continued high levels of nonperforming and classified loans and lease
charge-offs, substantial provisions for loan and lease losses have been
necessitated. During 1994 and 1995, the Company charged off $4,926,000 and
$5,718,000 and made a provision for allowance for loan and lease losses in the
amount of $3,365,000 and $6,600,000, respectively. During 1996, as the
nonperforming assets declined, the Company charged off $2,385,000 in loans and
made a provision for loan and lease losses in the amount of $1,260,000. In
addition to provision for loan and lease losses, the Company incurred $1,070,000
in 1994 and $2,799,000 in 1995 in real estate owned expenses. In 1996, the gain
on sale of real estate-owned exceeded the expenses incurred, resulting in a net
gain of $422,000. The expenses on real estate-owned include property taxes,
selling costs, write-downs and losses on sale. These properties have already
been written down to their fair market values less estimated selling costs and
therefore the Company does not expect any significant losses during 1997 related
to these properties.
38
<PAGE>
OTHER INCOME The following table sets forth information by category of
other income and the changes in categories of other income between periods for
the periods indicated:
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ---------------------------------------- --------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Escrow Fees............................. $ 781 $ 473 $ 308 $ 4 $ 304
153.6% 1.30%
Service Charges......................... 1,157 $ 174 983 $ 14 969
17.7% 1.4%
Securities (Losses) Gains............... 0 $ 72 (72) $ (78) 6
N/A N/A
Gain on Sale of Loans................... 665 665 0 N/A 0
Other Income............................ 1,155 $ 19 1,136 $ 287 849
1.7% 33.8%
--------- ------ --------- ----- ---------
Total Other Income (Loss)........... $ 3,758 $ 1,403 $ 2,355 $ 227 $ 2,128
59.6% 10.7%
</TABLE>
OTHER INCOME AND OTHER EXPENSES--Non-interest income increased by $1,403,000
to $3,758,000 in 1996 compared to $2,355,000 in 1995. The changes were due to
the following:
1. Escrow fees increased by $473,000 for the year ended December 31,
1996 compared to 1995. The increase was due to increased marketing efforts
and an increase in staff in the escrow division, along with greater activity
in the local real estate market.
2. Service charges increased by $174,000 for the year ended December
31, 1996 compared to 1995. The increase was due to the increase in deposits.
3. During 1995 the Company sold some securities in the amount of
$21,016,000 at a loss of $72,000. These securities were originally purchased
with very short maturities to meet a projected cash outflow.
4. Gain on sale of loans- During 1996 the Company sold three loans
which were designated as "Available for Sale," at gain of $1,074,000 and
wrote down a loan by $409,000 resulting in net gain of $665,000.
39
<PAGE>
OTHER EXPENSE The following table sets forth information by category of
other expense and the changes in categories of other expense between periods for
the periods indicated:
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ------------------------------------ --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits...... $ 8,546 $ 1,033 $ 7,513 $ 1,059 $ 6,454
13.7% 16.4%
Occupancy, Furniture and
Equipment......................... 2,562 $ 433 2,129 $ 121 2,008
20.3% 6.0%
Data Processing For Customers....... 510 $ 326 184 $ 11 173
177.2% 6.4%
Data Processing For Company......... 587 $ 413 174 $ 44 130
237.4% 33.8%
Legal Fees and Related Costs........ 2,386 $ 947 1,439 $ 779 660
65.8% 118.0%
Regulatory Assessments.............. 576 $ (141) 717 $ (211) 928
(19.7)% (22.7)%
Supplies............................ 420 $ 99 321 $ 54 267
30.8% 20.2%
Other Real Estate Owned............. (422) $ (3,221) 2,799 $ 1,729 1,070
(115.1)% 161.6%
Other............................... 3,390 $ 187 3,203 $ 1,148 2,055
5.8% 55.9%
--------- ----------- --------- ----------- ---------
Total Other Expenses............ $ 18,555 $ 76 $ 18,479 $ 4,734 $ 13,745
0.4% 34.4%
</TABLE>
The total noninterest expense for the year 1996 remained approximately the
same as 1995. However, there were significant variations in individual
categories of noninterest expense between the years 1996 and 1995 as discussed
below:
1. Salaries and benefits increased due to additions to the staff in the
escrow division due to increasing business activity (see Results of
Operation-Other Income), in business development to generate future loan and
deposit growth and opening of a new branch in Fountain Valley.
2. Occupancy expense increased due to an assessment of common area
maintenance charges by the management company for the years 1993 through
1996, which had not been billed for the Newport Beach location. Also,
opening the new branch in Fountain Valley added to the occupancy expense.
3. Data Processing expense for customers increased due to significant
increase in deposits of customers who maintain large profitable accounts.
4. Legal fees remained high as the bank continues to resolve problem
loans and other litigation matters and for that purpose the Company reserved
an additional $950,000 during 1996. Management of the Company evaluates the
Company's or the Bank's exposure to litigation matters individually and in
the aggregate and provides for potential losses on such litigation if, in
management's judgement, the amount of the loss is determinable and the
incurrence of the loss is probable.
5. Regulatory Assessments decreased as FDIC reduced the assessment rate
from .29% per $100 in annualized deposits in 1995 to .17% in 1996.
6. Gain or loss on REO: In 1995, the total losses and expenses on other
real estate owned were $2,799,000. With the reduced amount of other real
estate owned in 1996 the expense declined
40
<PAGE>
significantly. Additionally, in 1996 the Company sold several foreclosed
properties at a gain resulting in a net gain of $422,000 for the year 1996.
INCOME TAX EXPENSE
The following table shows the Company's income tax expense or benefit,
related effective tax expense or benefit rate for the periods indicated and the
changes between periods.
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- ---------------------------------------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Tax Expense (Benefit)............ $ 111 $ 2,041 $ (1,930) $ (2,474) $ 544
N/A N/A
Effective Income Tax....................
Expense (Benefit) Rate................ 2.8% (36.6)% 38.77%
</TABLE>
The effective tax benefit rates are in accordance with the requirements of
SFAS 109, adopted by the Company effective January 1, 1993, that limits the
amount of tax benefit a company can recognize.
During 1996, the Company recognized a tax benefit in the amount of
$1,714,000. The tax benefit could not be recognized in prior years due to
regulatory and accounting limitations.
The major factor affecting the effective tax rate is the Company's valuation
allowance. Each year the valuation allowance is based on analysis of the
Company's probability of realizing the future benefits of its net deferred tax
asset in accordance with SFAS No. 109. To the extent it is not more likely than
not that the Company can recognize its deferred tax asset through a carryback
claim for federal purposes or assumption of future projected income, a valuation
allowance is recorded.
41
<PAGE>
FINANCIAL CONDITION
OVERVIEW
The following table sets forth the book values and changes in book values of
selected assets and liabilities of the Company as of December 31, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
INCREASE INCREASE
$ IN 000'S 1996 (DECREASE) 1995 (DECREASE) 1994
- -------------------------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Investment Securities........... $ 91,504 $ 29,221 $ 62,283 $ (9,792) $ 72,075
46.9% (13.6)%
Net Loans and Leases............ $ 204,650 $ 16,980 $ 187,670 $ (7,533) $ 195,203
9.0% (3.9)%
Other Real Estate Owned......... $ 2,657 $ 492 $ 2,165 $ (511) $ 2,676
22.7% (19.1)%
Total Assets.................... $ 351,464 $ 17,421 $ 334,043 $ 33,378 $ 300,665
5.2% 11.1%
Total Deposits.................. $ 318,704 $ 10,200 $ 308,504 $ 31,115 $ 277,389
3.3% 11.2%
Total Equity.................... $ 25,000 $ 3,881 $ 21,119 $ 1,391 $ 19,728
18.4% 7.1%
</TABLE>
During the years from 1994 and 1995 the Bank focused its human and financial
resources on identifying and working on problem loans and other real estate
owned. Other real estate owned remained low as the Bank applied significant
resources to disposing of properties.
As the nonperforming assets declined and overall asset quality improved, the
Company applied additional resources in 1996 to business development resulting
in increases in all the categories of assets, deposits and equity.
The primary sources of funds for the Bank's lending programs are local
deposits, loan payments and proceeds from the sale or maturity of investment
securities.
INFLATION
The impact of inflation on a financial institution is significantly
different from that exerted on an industrial concern, mainly because a financial
institution's assets and liabilities consist almost entirely of monetary items.
The relatively low portion of the Company's fixed assets to total assets reduces
both the potential of inflated earnings resulting from understated depreciation,
and the potential understatement of absolute asset values.
42
<PAGE>
CAPITAL RESOURCES
On December 31, 1990, new risk-based capital requirements became effective.
Under the requirements, holding companies and banks are required currently to
maintain minimum ratios of total capital and "core" (Tier 1) capital to
risk-weighted assets (see ITEM 1. BUSINESS, SUPERVISION AND REGULATION, Capital
Adequacy Guidelines). The regulatory capital requirements, and the Bank and
Company's actual capital ratios are shown in the following table as of the dates
indicated:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)
Consolidated.............................. $28,185,000 11.62%a $19,404,000a 8.0% N/A
Subsidiary Bank......................... $29,357,000 12.14%a $19,347,000a 8.0%a $24,184,000 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated............................ $25,124,000 10.36%a $9,702,000a 4.0% N/A
Subsidiary Bank......................... $26,304,000 10.88%a $9,674,000a 4.0%a $14,510,000 6.0%
Tier I Capital (to Average Assets) (1)
Consolidated............................ $25,124,000 7.25%a $13,852,000a 4.0% N/A
Subsidiary Bank $26,304,000 7.59%a $13,845,000a 4.0%a $17,306,000 5.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets)
Consolidated............................ $23,817,000 10.70%a $17,766,000a 8.0% N/A
Subsidiary Bank......................... $25,252,000 11.36%a $17,756,000a 8.0%a $22,194,000 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated............................ $20,995,000 9.45%a $8,883,000a 4.0% N/A
Subsidiary Bank......................... $22,431,000 10.11%a $8,878,000a 4.0%a $13,317,000 6.0%
Tier I Capital (to Average Assets) (1)
Consolidated............................ $20,995,000 6.32%a $8,883,000a 4.0% N/A
Subsidiary Bank......................... $22,431,000 6.76%a $8,878,000a 4.0%a $15,583,000 5.0%
</TABLE>
As of December 31, 1996 and 1995, the Bank and the Company were in
compliance with statutory risk-based capital requirements.
(1) In some circumstances this minimum ratio may be 3%.
During 1995, the Company obtained $3,200,000 in proceeds from a private
placement of its common stock at $6.75 per share.
43
<PAGE>
8. FINANCIAL STATEMENTS.
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-----------
<S> <C>
Independent Auditors' Report............................................................................ 46
Consolidated Balance Sheets, December 31, 1996 and 1995................................................. 47
Consolidated Statements of Operations For The Years Ended December 31, 1996, 1995 and 1994.............. 48
Consolidated Statements of Shareholders' Equity For The Years Ended December 31, 1996, 1995 and 1994.... 49
Consolidated Statements of Cash Flows For The Years Ended December 31, 1996, 1995 and 1994.............. 50, 51
Notes to Consolidated Financial Statements For The Years Ended December 31, 1996, 1995 and 1994......... 52
</TABLE>
44
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994 AND INDEPENDENT AUDITORS' REPORT
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of California Commercial Bankshares:
We have audited the accompanying consolidated balance sheets of California
Commercial Bankshares and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the 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 statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of California Commercial
Bankshares and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
January 24, 1997
March 17, 1997 as to Notes 7 and 13
Los Angeles, California
46
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS (Note 3)................................................. $ 28,849,000 $ 28,549,000
FEDERAL FUNDS SOLD............................................................... 14,500,000 45,000,000
-------------- --------------
TOTAL CASH AND CASH EQUIVALENTS.................................................. 43,349,000 73,549,000
INVESTMENT SECURITIES available for sale at estimated fair value (Note 4)........ 91,504,000 62,283,000
LOANS AND INVESTMENT IN LEASES, net (Notes 5 and 9).............................. 203,416,000 178,050,000
LOANS AVAILABLE FOR SALE, net.................................................... 1,234,000 9,620,000
ACCRUED INTEREST RECEIVABLE...................................................... 2,668,000 2,649,000
PROPERTY, net (Note 6)........................................................... 1,435,000 1,084,000
OTHER REAL ESTATE OWNED, net..................................................... 2,657,000 2,165,000
OTHER ASSETS (Notes 8 and 10).................................................... 5,201,000 4,643,000
-------------- --------------
TOTAL........................................................................ $ 351,464,000 $ 334,043,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand:
Noninterest-bearing............................................................ $ 146,257,000 $ 130,660,000
Interest-bearing............................................................... 72,845,000 65,301,000
Savings.......................................................................... 46,179,000 45,312,000
Time certificates, $100,000 and over............................................. 32,324,000 34,718,000
Other time deposits.............................................................. 21,099,000 32,513,000
-------------- --------------
Total Deposits............................................................... 318,704,000 308,504,000
NOTE PAYABLE (Note 7)............................................................ 2,350,000 2,351,000
OTHER LIABILITIES (Notes 8 and 12)............................................... 5,410,000 2,069,000
-------------- --------------
Total Liabilities............................................................ 326,464,000 312,924,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY (Notes 7, 8 and 13):
Preferred stock--no par value; authorized, 1,000,000 shares; outstanding, none
Common stock--no par value; authorized, 10,000,000 shares; issued and
outstanding, 2,984,000 in 1996 and 2,922,000 in 1995........................... 14,382,000 14,077,000
Paid-in capital.................................................................. 497,000 470,000
Retained earnings................................................................ 10,244,000 6,448,000
Net unrealized (loss) gain on investment securities available for sale, net of
tax of $82,000 in 1996 and $67,000 in 1995..................................... (123,000) 124,000
-------------- --------------
Total Shareholders' Equity................................................... 25,000,000 21,119,000
-------------- --------------
TOTAL........................................................................ $ 351,464,000 $ 334,043,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
47
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST AND FEE INCOME:
Loans and leases, including fees.................................... $ 20,022,000 $ 20,000,000 $ 18,347,000
Investment securities............................................... 4,923,000 3,409,000 3,873,000
Federal funds sold.................................................. 1,828,000 1,333,000 501,000
------------- ------------- -------------
Total Interest and Fee Income................................... 26,773,000 24,742,000 22,721,000
INTEREST EXPENSE:
Deposits............................................................ 6,531,000 7,022,000 6,036,000
Note payable and other (Note 7)..................................... 278,000 267,000 300,000
------------- ------------- -------------
Total Interest Expense.......................................... 6,809,000 7,289,000 6,336,000
------------- ------------- -------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES...... 19,964,000 17,453,000 16,385,000
PROVISION FOR LOAN AND LEASE LOSSES (Note 5)........................ 1,260,000 6,600,000 3,365,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES....... 18,704,000 10,853,000 13,020,000
------------- ------------- -------------
OTHER INCOME:
Escrow fees......................................................... 781,000 308,000 304,000
Service charges..................................................... 1,157,000 983,000 969,000
Securities (loss) gain, net......................................... (72,000) 6,000
Gain on sale of loans, net.......................................... 665,000
Other income........................................................ 1,155,000 1,136,000 849,000
------------- ------------- -------------
Total Other Income.............................................. 3,758,000 2,355,000 2,128,000
------------- ------------- -------------
OTHER EXPENSES:
Salaries and employee benefits (Note 8)............................. 8,546,000 7,513,000 6,454,000
Occupancy, furniture and equipment (Note 11)........................ 2,562,000 2,129,000 2,008,000
Advertising......................................................... 347,000 243,000 88,000
Credit card and other losses (recoveries)........................... 329,000 94,000 (39,000)
Data processing for company......................................... 587,000 174,000 130,000
Data processing for customers....................................... 510,000 184,000 173,000
Legal fees and related costs (Note 12).............................. 2,386,000 1,439,000 660,000
Loan collection and related costs................................... 446,000 414,000 331,000
Lower of cost or market adjustment on loans available for sale...... 756,000
Regulatory assessments.............................................. 576,000 717,000 928,000
Supplies............................................................ 420,000 321,000 267,000
Other real estate owned, net........................................ (422,000) 2,799,000 1,070,000
Other............................................................... 2,268,000 1,696,000 1,675,000
------------- ------------- -------------
Total Other Expenses............................................ 18,555,000 18,479,000 13,745,000
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAX............. 3,907,000 (5,271,000) 1,403,000
PROVISION (BENEFIT) FOR INCOME TAX (Note 10)........................ 111,000 (1,930,000) 544,000
------------- ------------- -------------
NET INCOME (LOSS)................................................... $ 3,796,000 $ (3,341,000) $ 859,000
------------- ------------- -------------
------------- ------------- -------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE............ $ 1.26 $ (1.30) $ 0.35
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING....................................................... 3,009,000 2,564,000 2,427,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
48
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET UNREALIZED
(LOSS) GAIN ON
INVESTMENT
COMMON STOCK SECURITIES TOTAL
------------------------- PAID-IN RETAINED AVAILABLE FOR SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SALE EQUITY
---------- ------------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994... 2,423,000 $ 10,782,000 $ 475,000 $ 8,930,000 $ 20,187,000
Net Income................... 859,000 859,000
Net Unrealized Loss On
Investment Securities
Available for Sale......... $ (1,318,000) (1,318,000)
---------- ------------- ---------- ------------- -------------- -------------
Balance at December 31,
1994....................... 2,423,000 10,782,000 475,000 9,789,000 (1,318,000) 19,728,000
Net Loss..................... (3,341,000) (3,341,000)
Stock Options Exercised (Note
8)......................... 25,000 95,000 (83,000) 12,000
Tax Benefit of Stock Options
Exercised.................. 78,000 78,000
Common Shares Sold Under
Private Placement (Note
7)......................... 474,000 3,200,000 3,200,000
Net change in Unrealized Gain
on Investment Securities
Available For Sale......... 1,442,000 1,442,000
---------- ------------- ---------- ------------- -------------- -------------
Balance at December 31,
1995....................... 2,922,000 14,077,000 470,000 6,448,000 124,000 21,119,000
Net Income................... 3,796,000 3,796,000
Stock Options Exercised (Note
8)......................... 62,000 305,000 (24,000) 281,000
Tax Benefit of Stock Options
Exercised.................. 51,000 51,000
Net change in Unrealized Loss
on Investment Securities
Available For Sale......... (247,000) (247,000)
---------- ------------- ---------- ------------- -------------- -------------
Balance at December 31,
1996....................... 2,984,000 $ 14,382,000 $ 497,000 $ 10,244,000 $ (123,000) $ 25,000,000
---------- ------------- ---------- ------------- -------------- -------------
---------- ------------- ---------- ------------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
49
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ 3,796,000 $ (3,341,000) $ 859,000
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization..................................... 419,000 473,000 580,000
Amortization of discounts and premiums on investment securities
available for sale.............................................. 284,000 850,000 795,000
Provision for loan and lease losses............................... 1,260,000 6,600,000 3,365,000
Provision for losses on other real estate owned................... 96,000 177,000 244,000
Deferred income taxes............................................. (143,000) (1,627,000) 621,000
Gain (loss) on sale of investment securities available for sale... 72,000 (6,000)
Loans originated for sale......................................... (9,620,000)
Proceeds from sales of loans originated for sale.................. 3,466,000
(Gain) loss on sale of other real estate owned.................... (1,175,000) 1,675,000 4,000
Gain on sale of loans originated for sale......................... (1,074,000)
Write down of loans available for sale............................ 409,000
(Gain) loss on sale of property................................... (8,000) 2,000 (7,000)
(Increase) decrease in accrued interest receivable................ (19,000) 197,000 (359,000)
(Decrease) increase in deferred loan fees......................... (260,000) (80,000) 27,000
Decrease in unearned lease income................................. (35,000) (145,000) (19,000)
(Increase) decrease in other assets............................... (266,000) (166,000) 686,000
Net increase (decrease) in other liabilities...................... 2,487,000 872,000 (1,156,000)
-------------- ------------- --------------
Net cash provided by (used in) operating activities............... 9,237,000 (4,061,000) 5,634,000
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities available for
sale............................................................ 62,685,000 17,232,000 19,350,000
Proceeds from sale of investment securities available for sale.... 21,016,000 49,229,000
Purchases of investment securities available for sale............. (92,586,000) (27,158,000) (62,335,000)
Net (increase) decrease in loans and investment in leases......... (24,533,000) 3,260,000 (505,000)
Recoveries of loans and investment in leases...................... 553,000 494,000 1,156,000
Payments received on in-substance foreclosures.................... 93,000
Purchase of property.............................................. (771,000) (661,000) (251,000)
Proceeds from sale of property.................................... 9,000 24,000 18,000
Proceeds from sale of other real estate owned..................... 4,675,000 5,683,000 6,872,000
Additions to other real estate owned.............................. (390,000)
-------------- ------------- --------------
Net cash (used in) provided by investing activities............... (49,968,000) 19,890,000 13,237,000
-------------- ------------- --------------
</TABLE>
50
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994 (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net increase (decrease) in deposits............................... $ 10,200,000 $ 31,115,000 $ (22,337,000)
Net proceeds from sale of common stock and exercise of common
stock options................................................... 332,000 3,290,000
Payments on note payable.......................................... (1,000)
-------------- ------------- --------------
Net cash provided by (used in) financing activities............... $ 10,531,000 34,405,000 (22,337,000)
-------------- ------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (30,200,000) 50,234,000 (3,466,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 73,549,000 23,315,000 26,781,000
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 43,349,000 $ 73,549,000 $ 23,315,000
-------------- ------------- --------------
-------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................ $ 6,870,000 $ 7,217,000 $ 6,327,000
-------------- ------------- --------------
-------------- ------------- --------------
Income taxes.................................................... $ 1,107,000 $ 627,000 $ 602,000
-------------- ------------- --------------
-------------- ------------- --------------
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING ACTIVITIES:
Property acquired through foreclosure............................. $ 3,234,000 $ 7,024,000 $ 7,143,000
-------------- ------------- --------------
-------------- ------------- --------------
Assumption of debt through foreclosure............................ $ 854,000 $ $ 67,000
-------------- ------------- --------------
-------------- ------------- --------------
Loan made to facilitate sale of loans available for sale.......... $ 2,593,000 $ $
-------------- ------------- --------------
-------------- ------------- --------------
Tax benefit for exercise of non-qualified stock options........... $ 51,000 $ 78,000 $
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. GENERAL
California Commercial Bankshares (the "Company") was incorporated on June
16, 1982 for the purpose of becoming a bank holding company. National Bank of
Southern California (the "Bank") commenced operations as a wholly-owned
subsidiary of the Company on January 10, 1983. The Bank operates five branches
in Orange County, California. The Bank's primary source of revenue is providing
loans to customers who are predominantly middle market businesses and middle
income individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company, the Bank and Venture Partners, Inc. Venture Partners Inc., a
California corporation, acts primarily as an intermediary for tax deferred
exchanges, a service function of the escrow department of the Bank. All
significant intercompany balances and transactions have been eliminated.
CONSOLIDATED STATEMENTS OF CASH FLOWS--Cash and cash equivalents for the
purpose of the consolidated statements of cash flows are defined as cash and due
from banks and Federal funds sold.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS--The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and the reported
amounts of 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.
INVESTMENT SECURITIES--Debt securities that the Bank has the positive intent
and ability to hold to maturity are classified as held to maturity securities
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings. The Bank has no held to maturity or trading
securities. Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of equity, net of deferred taxes.
The Bank designates investment securities as held to maturity or available
for sale upon acquisition. Gain or loss on the sales of investment securities is
determined on the specific identification method. Premiums and discounts on
investment securities are amortized or accreted using the interest method over
the expected lives of the related securities.
LOANS AND INVESTMENT IN LEASES--Loans and leases are carried at principal
amounts outstanding, net of deferred net loan origination fees, unearned lease
income and the allowance for loan and lease losses.
Nonaccrual loans are those for which management has discontinued accrual of
interest because (i) there exists reasonable doubt as to the full and timely
collection of either principal or interest or (ii) such loans have become
contractually past due ninety days with respect to principal or interest.
Interest accruals may be continued for loans that have become contractually past
due ninety days when such loans are well secured and in the process of
collection and, accordingly, management has determined such loans to be fully
collectible as to both principal and interest.
52
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
For this purpose, loans are considered well secured if they are
collateralized by property having a realizable value in excess of the amount of
principal and accrued interest outstanding or are guaranteed by a financially
capable party. Loans are considered to be in the process of collection if
collection of the loan is proceeding so that management reasonably expects
repayment of the loan or its restoration to a current status in the near future.
When a loan is placed on nonaccrual status, all interest previously accrued
but uncollected is reversed against current period operating results. Income on
such loans is then recognized only to the extent that cash is received and where
the ultimate collection of the carrying amount of the loan is probable, after
giving consideration to borrowers' current financial condition, historical
repayment performance and other factors. Accrual of interest is resumed only
when (i) principal and interest are brought fully current and (ii) such loans
are either considered, in management's judgement, to be fully collectible or
otherwise become well secured and in the process of collection.
Troubled debt restructured loans are those for which the Company has, for
reasons related to borrowers' financial difficulties, granted concessions to
borrowers (including reductions of either interest or principal) that it would
not otherwise consider, whether or not such loans are secured or guaranteed by
others.
The Bank considers a loan to be impaired when it is probable that the Bank
will be unable to collect all contractual principal and interest payments in
accordance with the terms of the original loan agreement. Impaired loans, except
those loans that are accounted for at fair value or at the lower of cost or fair
value, are accounted for at the present value of the expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. The Bank applies the measurement provisions to all
loans in its portfolio except for single-family residence and installment loans
which are collectively evaluated for impairment.
LOAN ORIGINATION FEES--Loan origination fees, net of certain related direct
incremental loan origination costs, are deferred and amortized to income over
the term of the loans using the effective interest method.
ALLOWANCE FOR LOAN AND LEASE LOSSES--The allowance for loan and lease losses
is based on an analysis of the loan and lease portfolio and reflects an amount
which, in management's judgment, is adequate to provide for potential loan and
lease losses after giving consideration to the loan and lease portfolio, current
economic conditions, past loan and lease loss experience and other factors that
deserve current recognition in estimating loan and lease losses. While
management uses the best information available to provide for possible losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory or other conditions that may be beyond the Company's control.
In each reporting period, the allowance for loan and lease losses is
increased by provisions for losses charged against operations in that period and
recoveries of loans and leases previously charged off, and is reduced by
charge-offs of loans and leases recognized in that period.
LOANS AVAILABLE FOR SALE--Loans available for sale are recorded at the lower
of cost or estimated market value, determined on an aggregate basis, and include
loan origination costs and related fees. Any transfers of loans available for
sale to the investment portfolio are recorded at the lower of cost or estimated
market value on the transfer date. Gains or losses resulting from sales of loans
are recorded at
53
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
the time of sale and are determined by the difference between the net sales
proceeds and the carrying value of the loans sold.
OTHER REAL ESTATE OWNED--Other real estate owned, which represents real
estate acquired in settlement of loans, is carried at fair value less estimated
selling costs. Any subsequent operating expenses or income, reduction in
estimated fair values, or gains or losses on disposition of such properties are
charged or credited to current operations.
PROPERTY--Property is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
basis over the estimated useful lives of the related assets (estimated to be one
to five years) or, if shorter, the term of the lease in the case of leasehold
improvements.
INCOME TAXES--The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE--Net income (loss)
per common and common equivalent share is based on the weighted average number
of common and common equivalent shares (stock options) outstanding during the
year.
RECENT ACCOUNTING PRONOUNCEMENTS--On January 1, 1996, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, or to be disposed of, be reviewed for impairment based on
the fair value of the asset. Furthermore, this Statement requires that certain
long-lived assets and identifiable intangibles to be disposed of, be reported at
the lower of carrying amount or fair value less cost to sell. The Company has
determined that the impact of this Statement on its operations and financial
position is not material for the year ended December 31, 1996.
SFAS No. 123, "Accounting for Stock Based Compensation" encourages, but does
not require companies to record compensation cost for stock based employee
compensation plans at fair value. During 1996, the Company has chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principal Board No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The pro forma effects of adoption are
disclosed in Note 8.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as amended in December 1996 by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125." This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 125 applies prospectively to
financial statements for fiscal years beginning after December 31, 1996.
However, SFAS No. 127 defers for one year the effective date of certain
provisions within SFAS No. 125. SFAS No. 125 does not permit earlier or
retroactive application. As of December 31, 1996, the Company has not adopted
SFAS No. 125, as amended by SFAS No. 127;
54
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
however, the Company does not believe the impact on its operations and financial
position will be material upon adoption.
RECLASSIFICATION--Certain items in the previous years' consolidated
financial statements have been reclassified to conform to the current year
presentation.
3. CASH AND DUE FROM BANKS
The Bank is required to meet statutory reserve requirements. In part, the
Bank meets these requirements by maintaining a balance in a noninterest-bearing
account at a Federal Reserve Bank. During 1996 and 1995, the average balance in
this account was approximately $7,522,000 and $6,669,000, respectively.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
Book value and estimated fair value of investment securities available for
sale (in thousands of dollars) are summarized as of December 31 as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
ESTIMATED GROSS UNREALIZED
AMORTIZED FAIR
COST VALUE GAINS LOSSES
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government securities....................................... $ 31,038 $ 31,080 $ 44 $ (2)
U.S. Government agencies or insured obligations.................. 57,537 57,297 17 (257)
State political subdivisions..................................... 413 411 (2)
Mortgage-backed securities--U.S. agencies........................ 880 884 14 (10)
Other securities................................................. 63 54 (9)
Federal Reserve Bank and Federal Home Loan Bank stocks........... 1,778 1,778
--------- --------- ----- ---------
Total............................................................ $ 91,709 $ 91,504 $ 75 $ (280)
--------- --------- ----- ---------
--------- --------- ----- ---------
<CAPTION>
1995
--------------------------------------------
ESTIMATED GROSS UNREALIZED
AMORTIZED FAIR
COST VALUE GAINS LOSSES
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government securities....................................... $ 35,314 $ 35,457 $ 168 $ (25)
U.S. Government agencies or insured obligations.................. 23,611 23,657 61 (15)
State political subdivisions..................................... 423 416 (7)
Mortgage-backed securities--U.S. agencies........................ 1,047 1,070 25 (2)
Other securities................................................. 80 66 (14)
Federal Reserve Bank and Federal Home Loan Bank stocks........... 1,617 1,617
--------- --------- ----- ---------
Total............................................................ $ 62,092 $ 62,283 $ 254 $ (63)
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
55
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
The maturity distribution for investment securities available for sale at
December 31, 1996 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
One year or less....................................................... $ 47,392 $ 47,428
Over one through five years............................................ 41,596 41,360
Over five years........................................................ 63 54
----------- -----------
$ 89,051 $ 88,842
Mortgage-backed securities-US Agencies................................. 880 884
Federal Reserve Bank and Federal Home Loan Bank stocks................. 1,778 1,778
----------- -----------
$ 91,709 $ 91,504
----------- -----------
----------- -----------
</TABLE>
No investment securities were sold during the year 1996.
Proceeds from sales of investment securities available for sale were
$21,016,000 and $49,229,000 for the year ended December 31, 1995 and 1994,
respectively. Gross realized losses from the sales of investment securities were
$72,000 for the year ended December 31, 1995. Gross realized gains were $12,000
and gross realized losses were $6,000 from sales of investment securities
available for sale for the year ended December 31, 1994.
The carrying value of investment securities pledged as required or permitted
by law amounted to $8,008,000 and $6,444,000 at December 31, 1996 and 1995,
respectively.
56
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
5. LOANS AND INVESTMENT IN LEASES
The loan portfolio and net investment in direct financing leases (in
thousands of dollars) at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Real estate:
Mortgage............................................................ $ 72,617 $ 55,207
Equity lines........................................................ 7,487 7,039
Construction.......................................................... 25,875 22,593
Commercial............................................................ 80,927 84,271
Installment and other................................................. 19,706 13,120
---------- ----------
206,612 182,230
---------- ----------
Less:
Allowance for loan losses........................................... (5,333) (6,431)
Deferred loan origination fees - net................................ (442) (702)
---------- ----------
Loans--net............................................................ 200,837 175,097
---------- ----------
Total minimum lease payments receivable............................... 2,848 3,253
Estimated unguaranteed residual value of leased property.............. 179 210
---------- ----------
3,027 3,463
Less:
Unearned lease income............................................... (364) (399)
Allowance for lease losses.......................................... (84) (111)
---------- ----------
Net investment in leases.............................................. 2,579 2,953
---------- ----------
Total............................................................. $ 203,416 $ 178,050
---------- ----------
---------- ----------
</TABLE>
The Bank grants loans to customers throughout its primary market area of
Southern California. The Bank makes loans to borrowers from a number of
different industries, the largest of which, including undisbursed amounts, are
as follows at December 31 (in thousands of dollars) (see Note 11):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Nonresidential construction............................................. $ 22,477 $ 34,717
Personal................................................................ 37,506 30,384
Real estate agents/developers........................................... 34,285 37,556
Residential construction................................................ 19,628 22,506
</TABLE>
Loans in the commercial loan portfolio are collateralized primarily by
accounts receivable and inventory.
The allowance for loan and lease losses is an estimate involving both
subjective and objective factors and its measurement is inherently uncertain,
pending the outcome of future events. Management's determination of the adequacy
of the allowance is based on an evaluation of the loan and lease portfolio,
previous loan and lease loss experience, current economic conditions, volume,
growth and composition of the loan and lease portfolio, the value of collateral
and other relevant factors. Management believes the
57
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
level of the allowance as of December 31, 1996 and 1995 is adequate to absorb
losses inherent in the loan and lease portfolio; however, additional
deterioration of the economy in the Bank's lending area could result in levels
of loan and lease losses that could not be reasonably predicted at that date.
A summary of the changes in the allowance for loan and lease losses (in
thousands of dollars) for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Loans:
Balance at beginning of year................................... $ 6,431 $ 5,572 $ 7,137
Recoveries on loans charged off................................ 553 460 1,104
Provision for loan losses...................................... 1,260 6,600 3,365
Loans charged off.............................................. (2,911) (6,201) (6,034)
--------- --------- ---------
Balance at end of year........................................... 5,333 6,431 5,572
--------- --------- ---------
Leases:
Balance at beginning of year................................... 111 88 84
Recoveries on leases charged off............................... 34 52
Leases charged off............................................. (27) (11) (48)
--------- --------- ---------
Balance at end of year........................................... 84 111 88
--------- --------- ---------
Total...................................................... $ 5,417 $ 6,542 $ 5,660
--------- --------- ---------
--------- --------- ---------
</TABLE>
Loans and leases on which the accrual of interest has been discontinued
amounted to $3,995,000, $15,573,000 and $14,771,000 at December 31, 1996, 1995
and 1994 respectively. If interest on those loans and leases had continued to
accrue, the additional income would have been $327,000, $625,000 and $968,000 in
1996, 1995 and 1994 respectively.
At December 31, 1996, the Bank had pledged real estate loans amounting to
$2,935,000 as collateral for a line of credit with the Federal Home Loan Bank
(See note 7).
At December 31, 1996 and 1995, the Company had classified $45,000 and
$1,397,000 of its loans as impaired with a specific reserve of $34,000 and
$390,000 respectively. In addition, $4,321,000 and $15,147,000 of its loans are
classified as impaired with no related specific loss reserve at December 31,
1996 and 1995, respectively. The Company considers a loan impaired when it is
probable that the Company will be unable to collect all contractual principal
and interest under the terms of the loan agreement. The average recorded
investment in impaired loans during the years ended December 31, 1996 and 1995,
were $5,267,000 and $13,101,000, respectively. It is generally the Company's
policy to place loans on nonaccrual status when they are 90 days past due.
Thereafter, interest income is no longer recognized and the full amount of all
payments received, whether principal or interest, are applied to the principal
balance of the loan. As such, interest income may be recognized on impaired
loans to the extent they are not past due by 90 days or more. Interest income of
$214,000 and $236,000 was recognized on impaired loans during the year ended
December 31, 1996 and 1995, respectively, all of which was collected in cash.
The Company collected cash on impaired loans of $1,432,000 during 1996 and
$2,234,000 during 1995. The Company will charge-off an impaired loan in
accordance with its established charge-off policy.
58
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
6. PROPERTY
Property (in thousands of dollars) at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment........................................ $ 4,266 $ 3,976
Leasehold improvements................................................... 1,452 1,416
--------- ---------
5,718 5,392
Less accumulated depreciation and amortization........................... (4,283) (4,308)
--------- ---------
Property--net............................................................ $ 1,435 $ 1,084
--------- ---------
--------- ---------
</TABLE>
7. BORROWING ARRANGEMENTS
In December 1988 the Company obtained a $3,000,000 term loan from another
financial institution for the purpose of providing additional capital to the
Bank. The credit agreement for this loan was amended pursuant to a Second
Amendment to the credit agreement dated August 25, 1994. Interest was payable
monthly on the unpaid principal balance of the loan and required prepayment of
40% of the proceeds of any stock offering or placement of debt or equity. The
Second Amendment was supported by a Support Agreement between a shareholder
director of the Company and the Company whereby the shareholder guaranteed the
payment of the loan.
To compensate the shareholder for signing the Support Agreement and
subsequently paying off the lending institution the Company had signed a Holding
Company Support Agreement whereby the Company agreed to: (1) pay to the
shareholder a fee equal to 1% of the unpaid principal amount of the note on each
anniversary date and (2) issue to the shareholder on or prior to March 31, 1997,
and there after on each anniversary date, warrants to purchase 25,000 shares of
common stock of the Company at an exercise price per share equal to 80% of the
book value per share of the Company on December 31, 1996 and subsequent ending
periods respectively. The shareholder paid off the outstanding balance of
$2,350,000 to the lending institution in March of 1996 and the Company entered
into a new note with the shareholder. The new note bears an interest rate of 3%
over prime rate with interest only payable monthly for the first year; and
thereafter, quarterly principal payable of $125,000 plus interest payable
monthly. Any remaining principal and interest is due on April 1, 1999. On March,
17, 1997, the Company paid down $2,000,000 on this note and based on the
$350,000 remaining balance of the note issued to the Shareholder a proportionate
number of warrants to purchase 3,723 shares of the Company's common stock at an
exercise price of $6.60 per share pursuant to the terms of the Holding Company's
Support Agreement. The Company also paid the shareholder a fee equal to 1% of
the unpaid principal balance on March 17, 1997. The remaining unpaid principal
balance of $350,000 is subject to the original terms of the note.
In November 1995, the Company sold 474,000 shares of its common stock
through private placement at $6.75 per share for the purpose of contributing
most of the proceeds into the Bank as additional capital. Of the total proceeds
of $3,200,000, the Company contributed $2,900,000 into the Bank's capital in
December 1995.
The Bank maintains two lines of credit with outside financial institutions
for the purpose of purchasing Federal funds. The lines of credit bear interest
at a floating rate and provide for borrowing up to $8,000,000, and $5,000,000
respectively. At December 31, 1996 and 1995, no amounts were outstanding on
these lines of credit.
59
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
Under an agreement with the Federal Home Loan Bank, the Bank may obtain an
extension of credit of up to 50% of total assets collateralized by real estate
loans. At December 31, 1996, the Bank had pledged loans amounting to $2,935,000
and had available credit of $1,468,000 based on 50% of the outstanding balance
of pledged loans. No amounts were outstanding on this line of credit at December
31, 1996 and 1995.
8. EMPLOYEE BENEFIT PLANS
The Company had a stock option plan that expired in 1992. Under the plan the
options were granted to directors, officers and employees to purchase shares at
the fair market of the common stock on the date of grant. The outstanding
options become exercisable over a period of ten years.
A summary of stock option transactions for each of the three years in the
period ended December 31 is as follows:
<TABLE>
<CAPTION>
1996
1996 1995 1994 OPTION PRICE
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year......... 133,947 229,446 229,446 $4.67 to $13.00
Options exercised............................ (72,267) (44,249)
Options canceled............................. (18,000) (51,250)
--------- --------- --------- -----------------
Options outstanding, end of year............... 43,680 133,947 229,446 $5.25 to $5.94
--------- --------- --------- -----------------
--------- --------- --------- -----------------
</TABLE>
At December 31, 1996, options for 43,680 shares were exercisable. During the
year ended December 31, 1996, 72,267 options were exercised and paid for with
cash of $276,000 and 11,255 shares of common stock previously outstanding.
During the year ended December 31, 1995, 44,249 options were exercised and paid
for with cash of $12,000 and 19,198 shares of common stock previously
outstanding. No options were exercised in 1994.
The Company also has a stock option plan it uses as a means of compensating
directors in lieu of cash director's fees for services performed. During the
years ended December 31, 1996 and 1995, 3,447 and 12,249 options were exercised,
respectively. No options were granted or canceled during the years ended
December 31, 1996, 1995 and 1994. At December 31, 1996, no options were
outstanding. All activity from this plan is reflected in the table above.
During 1995 the Company adopted a stock award plan that permits the granting
of options to directors, officers and employees to purchase, at the fair market
value of the common stock on the date of grant, up to 750,000 shares of the
Company's common stock. The outstanding options become exercisable over a period
of ten years.
A summary of stock option transactions for the stock award plan for each of
the two years in the period ended December 31, is as follows:
<TABLE>
<CAPTION>
1996
1996 1995 OPTION PRICE
--------- --------- ----------------
<S> <C> <C> <C>
Options outstanding, beginning of year................ 142,000 $5.25 to $6.50
Options granted..................................... 142,000
Options exercised................................... (1,000)
Options canceled.................................... (7,000)
--------- --------- ----------------
Options outstanding, end of year...................... 134,000 142,000 $5.25 to $6.50
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
60
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
At December 31, 1996, 47,332 options were exercisable. During the year ended
December 31, 1996, 1,000 options were exercised and paid for with cash of
$5,250.
The Company maintains a stock bonus plan that covers substantially all
Company employees. The plan provides for the issuance to participating employees
of share units in the plan, which entitles participants to distributions
primarily of common stock of the Company. Contributions to the plan are held in
trust and invested in common stock of the Company (which is purchased from third
parties) or other investments under the terms of the plan agreement.
Contributions are determined based on the Bank's discretion. The Company's
contributions for 1996, 1995 and 1994 were $45,000, $45,000 and $5,000,
respectively.
The estimated fair value of options granted during 1995 was $3.71 per share.
The estimated fair value of warrants granted during 1996 (See Note 7) was $10.91
per share. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan consistent with the
method of SFAS No. 123, the Company's net income and earnings per share for the
year ended December 31, 1996, and 1995 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net Income (Loss) to Common Shareholders
As Reported.............................................................. $ 3,796,000 $ (3,341,000)
Pro forma................................................................ $ 3,607,000 $ (3,505,000)
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net Income (Loss) per common and common equivalent share
As Reported.............................................................. $ 1.26 $ (1.30)
Pro forma................................................................ $ 1.20 $ (1.37)
</TABLE>
The fair value of warrants and options granted under the Company's fixed
stock option plan during 1996 and 1995, respectively, were estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used: no dividend yield, expected volatility of
approximately 13% for options and 40% for warrants, risk-free interest rate
ranging from 6.0% to 7.9%, and expected lives of 10 years for options and 7
years for warrants.
The Bank has a defined contribution plan, which meets the requirements of
Section 401(k) of the Internal Revenue Code and covers substantially all
employees. The Bank's contributions are determined as a percentage of each
participant's contribution. The amounts contributed to the plan by the Bank were
$121,000, $108,000 and $88,000 for 1996, 1995 and 1994, respectively.
In 1987, the Company purchased cost recovery life insurance with aggregate
death benefits in the amount of $2,473,000 on the lives of the senior management
participants. The Company is the sole owner and beneficiary of such policies,
which were purchased to fund the Company's obligation under separate deferred
compensation arrangements. The cash surrender values and obligation under
deferred compensation agreements at December 31, 1996 and 1995 of $1,296,000 and
$1,231,000, respectively, and $529,000 and $317,000, respectively, have been
included in other assets and in other liabilities, respectively, in the
accompanying consolidated balance sheets.
61
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
9. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are associated.
All such loans and commitments to loans were made under terms that are
consistent with the Bank's normal lending policies.
The following is an analysis of the activity of all such loans for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Outstanding balance, beginning of year.......................... $ 1,848,000 $ 2,623,000
Credit granted, including renewals............................ 1,022,000 1,474,000
Repayments.................................................... (1,120,000) (2,249,000)
------------- -------------
Outstanding Balance, end of year................................ $ 1,750,000 $ 1,848,000
------------- -------------
------------- -------------
</TABLE>
10. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996:
-----------------------------------------
FEDERAL STATE TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current.......................................... $ 206,000 $ 48,000 $ 254,000
Deferred......................................... 31,000 (174,000) (143,000)
------------- ----------- -------------
Total.............................................. $ 237,000 $ (126,000) $ 111,000
------------- ----------- -------------
------------- ----------- -------------
<CAPTION>
1995:
-----------------------------------------
FEDERAL STATE TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current.......................................... $ (341,000) $ 38,000 $ (303,000)
Deferred......................................... (1,051,000) (576,000) (1,627,000)
------------- ----------- -------------
Total.............................................. $ (1,392,000) $ (538,000) $ (1,930,000)
------------- ----------- -------------
------------- ----------- -------------
<CAPTION>
1994:
-----------------------------------------
FEDERAL STATE TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current.......................................... $ (79,000) $ 2,000 $ (77,000)
Deferred......................................... 621,000 621,000
------------- ----------- -------------
Total.............................................. $ 542,000 $ 2,000 $ 544,000
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
62
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
Income tax expense (benefit) for the years ended December 31 (in thousands
of dollars) varies from the amounts computed by applying the statutory Federal
income tax rate as a result of the following factors:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes at statutory rate..................... $ 1,367 35.0% $ (1,845) (35.0)% $ 491 35.0%
State franchise taxes--net of Federal income tax benefit... 227 5.8 (355) (6.7) 95 6.8
Unbenefited state net operating losses..................... 20 1.4
(Decrease) Increase in deferred tax asset valuation
allowances--State and Federal............................ (1,714) (43.9) 178 3.4 (49) (3.5)
Federal taxes on state valuation adjustment................ 160 4.1
Other 71 1.8 92 1.7 (13) (0.9)
--------- --------- --------- --------- --------- ---
Income tax expense (benefit)............................... $ 111 2.8% $ (1,930) (36.6)% $ 544 38.8%
--------- --------- --------- --------- --------- ---
--------- --------- --------- --------- --------- ---
</TABLE>
The Company has recorded net deferred tax assets as of December 31
consisting principally of the following:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
1996 1995
------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Loan Loss Reserve............................................... $ 1,319,000 $ 2,465,000
Unrealized Loss on Loans........................................ 265,000 342,000
Unrealized Loss on Investment Securities........................ 82,000
Depreciation.................................................... 180,000 233,000
Nonaccrual Interest Income...................................... 111,000 171,000
Self-Insurance Reserve.......................................... 128,000 106,000
REO Reserves.................................................... 183,000 601,000
Contingencies................................................... 382,000 184,000
Other........................................................... 74,000 262,000
------------- -------------
Deferred Tax Assets............................................. 2,724,000 4,364,000
Valuation Allowance............................................. (1,202,000)
------------- -------------
Deferred Tax Assets,
Net of Allowance................................................ 2,724,000 3,162,000
------------- -------------
Deferred Tax Liabilities:
Unrealized Gain on Investment Securities........................ (67,000)
Financial Accounting Lease Difference........................... (183,000) (846,000)
------------- -------------
Net Deferred Tax Assets......................................... $ 2,541,000 $ 2,249,000
------------- -------------
------------- -------------
</TABLE>
In the event the future consequences of difference between financial
accounting bases and the tax bases of the Company's assets and liabilities
result in a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded when it
is more likely than not that some portion or all of the deferred tax asset will
not be recognized.
63
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company and the Bank were obligated under various
noncancelable lease agreements, classified as operating leases, primarily for
the rental of office space. Certain leases for office space contain provisions
for renewal options of one or two five-year periods. Minimum future rental
payments under these lease agreements are summarized as follows:
<TABLE>
<S> <C>
1997............................................................ $1,157,000
1998............................................................ 1,139,000
1999............................................................ 1,099,000
2000............................................................ 1,118,000
2001............................................................ 865,000
Thereafter...................................................... 1,478,000
---------
Total........................................................... $6,856,000
---------
---------
</TABLE>
Total rental expense was $1,417,000, $1,136,000 and $1,072,000 in 1996, 1995
and 1994, respectively.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The Bank's exposure to credit loss in the event of
nonperformance by the other party to commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
At December 31, 1996 and 1995, the Bank had primarily variable rate commitments
to extend credit of $77,740,000, and $55,769,000, respectively, and obligations
under standby letters of credit of $1,669,000 and $2,032,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for extending loan facilities to customers. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
held varies but may include accounts receivable, inventory, property, plant and
equipment or real estate.
12. LEGAL PROCEEDINGS
From time to time, the Company or the Bank is a party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's or Bank's exposure to the cases individually and
in the aggregate and provides for potential losses on such litigation if the
amount of the loss is determinable and if the incurrence of the loss is
probable. After taking into consideration information furnished by counsel to
the Company or the Bank as to the current status of various claims
64
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
and legal proceedings to which the Company or the Bank is a party, management
has accrued $950,000 as a reserve for various cases pending as of December 31,
1996.
13. RISK-BASED CAPITAL STANDARDS AND OTHER REGULATORY MATTERS
On April 8, 1992, the Bank executed a Formal Agreement (the "Agreement")
with the Office of the Comptroller of the Currency (the "Comptroller"). On
November 15, 1996, the Comptroller as a result of the examination as of
September 30, 1996, determined that the continued existence of the Formal
Agreement was no longer necessary and the Agreement was terminated as of that
date.
On May 27, 1993, the Company executed a Memorandum of Understanding (the
"Memorandum") with the Federal Reserve Bank of San Francisco (the "Fed"). On
March 13, 1997 the Fed as a result of the examinations of December 31, 1996,
determined that the memorandum was no longer necessary and was terminated as of
that date.
The Bank is subject to various regulatory capital requirements administered
by the 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 direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components,
risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1996, and
1995 that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996 and 1995, the most recent notification from the
Comptroller categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risked-based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
65
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------ -------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- ----- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)
Consolidated........................... $ 28,185,000 11.62%a $ 19,404,000a 8.0% N/A
Subsidiary Bank........................ $ 29,357,000 12.14%a $ 19,347,000a 8.0%a $ 24,184,000a 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated........................... $ 25,124,000 10.36%a $ 9,702,000a 4.0% N/A
Subsidiary Bank........................ $ 26,304,000 10.88%a $ 9,674,000a 4.0%a $ 14,510,000a 6.0%
Tier I Capital (to Average Assets)
Consolidated........................... $ 25,124,000 7.25%a $ 13,852,000a 4.0% N/A
Subsidiary Bank........................ $ 26,304,000 7.59%a $ 13,845,000a 4.0%a $ 17,306,000a 5.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted Assets)
Consolidated........................... $ 23,817,000 10.70%a $ 17,766,000a 8.0% N/A
Subsidiary Bank........................ $ 25,252,000 11.36%a $ 17,756,000a 8.0%a $ 22,194,000a 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated........................... $ 20,995,000 9.45%a $ 8,883,000a 4.0% N/A
Subsidiary Bank........................ $ 22,431,000 10.11%a $ 8,878,000a 4.0%a $ 13,317,000a 6.0%
Tier I Capital (to Average Assets)
Consolidated........................... $ 20,995,000 6.32%a $ 8,883,000a 4.0% N/A
Subsidiary Bank........................ $ 22,431,000 6.76%a $ 8,878,000a 4.0%a $ 15,583,000a 5.0%
</TABLE>
66
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY
Balance sheets as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash........................................................... $ 664,000 $ 587,000
Other real estate owned........................................ 83,000 83,000
Investments in subsidiaries.................................... 26,324,000 22,686,000
Other assets................................................... 284,000 122,000
------------- -------------
Total...................................................... $ 27,355,000 $ 23,478,000
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................... $ 2,350,000 $ 2,351,000
Other liabilities.............................................. 4,000 8,000
Total shareholders' equity..................................... 25,001,000 21,119,000
------------- -------------
Total...................................................... $ 27,355,000 $ 23,478,000
------------- -------------
------------- -------------
</TABLE>
Statements of operations for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Total interest income.................................................. $ 15,000 $ 21,000 $ 13,000
------------ ------------- ------------
Expenses:
Interest............................................................. 273,000 259,000 241,000
Other expenses....................................................... 44,000 45,000 27,000
------------ ------------- ------------
Total expenses......................................................... 317,000 304,000 268,000
------------ ------------- ------------
Loss before provision (benefit) for income tax and equity income (loss)
of subsidiaries...................................................... (302,000) (283,000) (255,000)
Provision (benefit) for income tax..................................... (214,000) 52,000 (89,000)
------------ ------------- ------------
Loss before equity in income (loss) of subsidiaries.................... (88,000) (335,000) (166,000)
Equity in income (loss) of subsidiaries................................ 3,884,000 (3,006,000) 1,025,000
------------ ------------- ------------
Net income (loss)...................................................... $ 3,796,000 $ (3,341,000) $ 859,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
67
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
Statements of cash flows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 3,796,000 $ (3,341,000) $ 859,000
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Equity in (income) loss of subsidiaries from operations.......... (3,884,000) 3,006,000 (1,025,000)
(Increase) decrease in other assets.............................. (162,000) 35,000 99,000
(Decrease) increase in other liabilities......................... (4,000) 3,000 (5,000)
------------- ------------- -------------
Net cash from operating activities............................... (254,000) (297,000) (72,000)
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of other real estate owned...................... 5,000
-------------
Net cash from investing activities................................. 5,000
-------------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of common stock
options.......................................................... 332,000 3,290,000
Payments on note payable........................................... (1,000)
Increase in Investment in subsidiaries............................... (2,900,000)
------------- -------------
Net cash from financing activities................................. 331,000 390,000
------------- -------------
Net increase (decrease) in cash...................................... 77,000 98,000 (72,000)
Cash at beginning of year............................................ 587,000 489,000 561,000
------------- ------------- -------------
Cash at end of year.................................................. $ 664,000 $ 587,000 $ 489,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................... $ 273,000 $ 259,000 $ 241,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL INFORMATION ON NONCASH INVESTMENT ACTIVITY
Tax benefit for exercise of non-qualified stock options............ $ 51,000 $ 78,000 $
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by management using
available market information and appropriate valuation methodologies. However,
assumptions are necessary to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of
68
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
different assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
ESTIMATED
CARRYING VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks.................................... $ 28,849,000 $ 28,849,000
Federal funds sold......................................... 14,500,000 14,500,000
Investment securities available for sale................... 91,504,000 91,504,000
Loans and investment in leases, net........................ 203,416,000 202,853,000
Loans available for sale, net.............................. 1,234,000 1,234,000
Accrued interest receivable................................ 2,668,000 2,668,000
LIABILITIES:
Savings and demand deposits................................ 265,281,000 265,281,000
Time deposits.............................................. 53,423,000 53,434,000
Accrued interest payable................................... 148,000 148,000
Note payable............................................... 2,350,000 2,350,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
ESTIMATED
CARRYING VALUE FAIR VALUE
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks.................................... $ 28,549,000 $ 28,549,000
Federal funds sold......................................... 45,000,000 45,000,000
Investment securities available for sale................... 62,283,000 62,283,000
Loans and investment in leases, net........................ 178,050,000 177,402,000
Loans available for sale, net.............................. 9,620,000 9,620,000
Accrued interest receivable................................ 2,649,000 2,649,000
LIABILITIES:
Savings and demand deposits................................ 241,273,000 241,273,000
Time deposits.............................................. 67,231,000 67,234,000
Accrued Interest payable................................... 221,000 221,000
Note payable............................................... 2,351,000 2,351,000
</TABLE>
The carrying value of cash and due from banks, Federal funds sold, interest
receivable, loans available for sale, savings and demand deposits, time
deposits, interest payable and note payable is a reasonable estimate of the fair
value. The fair value of investment securities is based on quoted market prices.
The fair value of loans and investment in leases is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of classified loans with a carrying value of
approximately $4,659,000 and $16,307,000 as of December 31, 1996 and 1995,
respectively, was not estimated because it is not practical to reasonably assess
the credit adjustment that would be applied in the market place for such loans.
These classified loans, which are primarily real estate or construction loans,
have a weighted average
69
<PAGE>
CALIFORNIA COMMERCIAL BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
interest rate ranging from 7% to 11.0% and from 8% to 12.50% as of December 31,
1996 and 1995, respectively, and are due at various dates through the year 2026.
The fair value of savings and demand deposit accounts is the amount payable
on demand at December 31, 1996. The fair value of time deposit accounts is
estimated using the rates currently offered for deposits of similar remaining
maturities.
The fair value of commitments is not deemed material at December 31, 1996
and 1995.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date and, therefore,
current estimates of fair value may differ significantly from amounts presented
herein.
16. MERGER
On December 18, 1996, California Commercial Bankshares signed a definitive
agreement, subject to regulatory and shareholder approval, whereby Monarch
Bancorp and California Commercial Bankshares will merge.
70
<PAGE>
March 20, 1997
Securities and Exchange Commission
Washington, DC 20549
Dear Sirs/Madams:
We have considered the preliminary proxy material submitted to us by
California Commercial Bankshares and are prepared to permit the use of our
report relating to the consolidated financial statements of California
Commercial Bankshares as of December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996 contained therein.
Yours truly,
Deloitte and Touche LLP
71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors and executive officers of the
Registrant is set forth under headings "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Election of CCB Directors" and "Compensation of Executives of CCB"
in the Joint Proxy Statement/Prospectus of the Company and Monarch Bancorp (the
"Joint Proxy Statement") and incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth under the
heading "THE ANNUAL MEETING OF CCB SHAREHOLDERS--Compensation of Executives of
CCB" in the Joint Proxy Statement and incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth under the heading "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Compensation of Executives of CCB" in the Joint Proxy Statement
and incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is set forth under the heading "THE ANNUAL MEETING OF CCB
SHAREHOLDERS--Compensation of Executives of CCB" in the Joint Proxy Statement
and incorporated by reference herein.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS:
Financial statements and schedules of the registrant are listed in the index to
Consolidated Financial Statements contained under Part II Item 8. Financial
Statements and Supplementary Data of this report.
FINANCIAL STATEMENT SCHEDULES:
All Financial statement schedules are omitted either because the conditions under
which they are required are not applicable or because the information is included
in the Financial Statements.
EXHIBITS:
(2) Amended and Restated Agreement and Plan of Merger dated as of December 19, 1996
between the Company and Monarch Bancorp.
(3)(a) Articles of Incorporation of California Commercial Bankshares, as amended.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1990).
(3)(b) By-Laws of California Commercial Bankshares, as amended. (Incorporated by
reference from the Company's Form 10-K filed on March 31, 1989).
</TABLE>
72
<PAGE>
<TABLE>
<S> <C>
(10)(A) Office Sublease between First California Associates and the Company. (Incorporated
by reference from the Company's Form 10-K filed on March 31,1983).
(10)(B) First Amendments to Sublease between First California Associates and the Bank.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1984).
(10)(C) The Company's Stock Bonus Plan. (Incorporated by reference from the Company's Form
10-K filed on March 31, 1986).
(10)(D) Amendments to Office Sublease between First California Associates and the Company.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1986).
(10)(E) Executive Salary Continuation Agreement between National Bank of Southern
California and William H. Jacoby. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1989).
(10)(F) Executive Salary Continuation Agreements between National Bank of Southern
California and Mark H. Stuenkel. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1987).
(10)(G) Executive Salary Continuation Agreement between National Bank of Southern
California and Abdul S. Memon. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1987).
(10)(H) 401-K Plan. (Incorporated by reference from the Company's Form 10-K filed on March
31, 1989).
(10)(I) Lease for the premises on branch located at 22831 Lake Forest Drive, El Toro, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1989).
(10)(J) Lease for the premises on branch located at 625 The City Drive, Orange, Ca.
(Incorporated by reference from Company's Form 10-K filed on March 31, 1990).
(10)(K) Lease for the property on branch located at 17252 Armstrong Ave., Irvine, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1990).
(10)(L) 1982 Stock Option Plan, as amended. (Incorporated by reference from the Company's
Form 10-K filed on March 31, 1991).
(10)(M) Lease for the property located at 4100 Newport Place, Newport Beach, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31,
1992).
(10)(N) Support Agreement dated September 27, 1994 with Robert L. McKay. (Incorporated by
reference from the Company's 10-K filed on March 31, 1995).
(10)(O) Holding Company Support Agreement dated October 1, 1994 with Robert L. McKay.
(Incorporated by reference from the Company's Form 10-K filed on March 31, 1995)
(10)(P) Lease for the property located at 17330 Brookhurst Ste. 110, Fountain Valley, Ca.
(Incorporated by reference from the Company's Form 10-K filed on March 31, 1996)
(10)(Q) Stock Award Plan. (Incorporated by reference from the Company's Form 10-K filed on
March 31, 1996)
(10)(R) Form of Stock Option Agreement (Incorporated by reference from the Company's Form
10-K filed on March 31, 1996)
(10)(S) Form of Nonqualified Stock Option Agreement. (Incorporated by reference from the
Company's Form 10-K filed on March 31, 1996)
</TABLE>
73
<PAGE>
<TABLE>
<S> <C>
(10)(T) Form of Director's Nonqualified Stock Option Agreement. (Incorporated by reference
from the Company's Form 10-K filed on March 31, 1996)
(10)(U) Stock Option Agreement dated as of December 19, 1996 between the Company and
Monarch Bancorp
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
</TABLE>
(B) REPORTS ON FORM 8-K.
Current Report on Form 8-K filed December 29, 1996
74
<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.
CALIFORNIA COMMERCIAL BANKSHARES
By: WILLIAM H. JACOBY March 21, 1997
---------------------------------
William H. Jacoby
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 date indicated:
PHILLIP L. BUSH
- ------------------------------ Director/Secretary March 21, 1997
Phillip L. Bush
MICHAEL J. GERTNER
- ------------------------------ Director/Treasurer March 21, 1997
Michael J. Gertner
JAMES W. HAMILTON
- ------------------------------ Director March 21, 1997
James W. Hamilton
FARRELL G. HINKLE
- ------------------------------ Director March 21, 1997
Farrell G. Hinkle
WILLIAM H. JACOBY
- ------------------------------ Director/President, C.E.O. March 21, 1997
William H. Jacoby
ROBERT L. MCKAY
- ------------------------------ Director/Chairman of the March 21, 1997
Robert L. McKay Board
MARK H. STUENKEL
- ------------------------------ Executive Vice President March 21, 1997
Mark H. Stuenkel
ABDUL S. MEMON
- ------------------------------ Principal Financial & March 21, 1997
Abdul S. Memon Accounting Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
Four copies of the registrant's proxy statement and the form of proxy which
will be sent to the registrant's security holders with respect to the next
annual meeting of security holders will be furnished to the Securities and
Exchange Commission when sent to the registrant's security holders.
No such reports or proxy materials have yet been sent to the registrant's
security holders. It is anticipated that the Joint Proxy Statement and the
Annual Report on Form 10-K will be sent to the registrant's security holders on
or prior to April 30, 1997.
1
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The Company owns all of the issued and outstanding shares of National Bank
of Southern California which was licensed to do business as a National Bank by
the Comptroller of the Currency on January 10, 1983.
The Company owns all of the issued and outstanding shares of Venture
Partners, Inc., a California corporation.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-39926 of California Commercial Bankshares on Form S-8 of our report dated
January 24, 1997 (March 18, 1997 as to Notes 7 and 13), appearing in this Annual
Report on Form 10-K of California Commercial Bankshares for the year ended
December 31, 1996.
Deloitte & Touche LLP
Los Angeles, California
March 27, 1997
<TABLE> <S> <C>
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