<PAGE>
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission file number 2-79912
HARBOR BANCORP
(Name of small business issuer in its charter)
California 95-3764395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 Golden Shore Long Beach, California 90802
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (310) 491-1111
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.[X]
State issuer's revenues for its most recent fiscal year: $14,097,765
As of February 29, 1996, the aggregate market value of the common stock held by
non-affiliates of the registrant was: $13,395,959
Number of shares of common stock of the registrant outstanding of February 29,
1996: 1,348,021
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Harbor Bancorp (the "Company") is a corporation that was organized under
the laws of the State of California on July 23, 1982 and commenced business
on December 17, 1982 when, pursuant to a reorganization, the Bancorp acquired
all of the voting stock of Harbor Bank (the "Bank"). As a bank holding
company the Company is subject to the Bank Holding Company Act of 1956, as
amended (the "BHC Act"). A general description of the business of each of
the Company's subsidiaries is set forth below.
The Company's principal business is to serve as a holding company for
the Bank and its subsidiaries and for other banking or banking-related
subsidiaries which the Company may establish or acquire. The Company's
principal source of income is dividends from its subsidiaries. Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank and its subsidiaries to the Company. As of
December 31, 1995, the Company had total consolidated assets of approximately
$195 million, total consolidated net loans of approximately $127 million,
total consolidated deposits of approximately $179 million and total
stockholder's equity of approximately $15 million. The Company does not have
any industry segments.
Harbor Bank Properties was incorporated under the laws of the State of
California on September 11, 1975 and is a wholly-owned subsidiary of the
Company. This company is presently inactive.
Harbor Bank was incorporated under the laws of the State of California
on December 3, 1973, and was licensed by the California Superintendent of
Banks (the "Superintendent") and commenced operations as a California
state-chartered bank on May 13, 1974. It currently operates six (6) offices,
two offices in Long Beach, one office in Los Alamitos, one office in Irvine,
one office in Fountain Valley and one office in Huntington Beach, California.
As of December 31, 1995, the Bank had approximately $195 million in assets,
approximately $127 million in net loans,
- 1 -
<PAGE>
and approximately $179 million in deposits.
H.B. Funding is a California corporation that was incorporated on
February 17, 1983 and is wholly-owned by the Bank. H.B. Funding operated as a
mortgage company and is currently inactive.
The Bank provides a wide range of commercial banking services primarily
for professionals and small and medium-sized businesses. Services include
those traditionally offered by commercial banks of similar size and character
in California, such as checking, interest-bearing checking ("NOW") and
savings accounts, Money Market Deposit Accounts and Super NOW accounts,
commercial, real estate, personal, home improvement, automobile, and other
installment and term loans, travelers checks, safe deposit boxes, collection
services, and telephone transfers; however, the Bank places special emphasis
on services tailored to meet the needs of the professional and business
market, such as Small Business Administration ("SBA") loans, and payroll and
accounting packages and billing programs. As part of the Bank's wholesale
orientation, it makes few consumer loans and does not actively solicit
personal as opposed to business accounts. The Bank does not have a trust
department; however, the Bank makes arrangements with correspondent
institutions to provide trust services as well as investment and
international banking services.
As a result of the Federal Deposit Insurance Corporation ("FDIC")
examination at December 31, 1993, the Bank and FDIC executed a Memorandum of
Understanding ("FDIC Memorandum") dated August 3, 1994. In accordance with
the terms of the FDIC Memorandum, the Bank has agreed to take certain actions
including the following: (i) the Board of Directors shall increase its
participation in the affairs of the Bank; (ii) the Bank shall maintain Tier 1
capital equal to or exceeding six and one-half (6.5) percent of the Bank's
total assets; (iii) the Bank shall eliminate from its books, by charge-off or
collection, all assets classified "Loss" that have not been previously
collected or charged-off, and reduce the assets classified "Substandard" that
have not previously been charged-off in accordance with the reduction
schedule contained in the FDIC Memorandum; (iv) the Bank shall not extend,
any additional credit to any borrower who has a loan or other extension of
credit from the Bank that has been charged-off or classified "Loss" and is
uncollected, or "Substandard" without
- 2 -
<PAGE>
the prior written approval of a majority of the Board of Directors or the
Loan Committee of the Bank; (v) the Bank shall revise, adopt, and implement
the following: written lending and collection policies; a profit plan; a
written business/strategic plan covering the overall operation of the Bank, a
liquidity and funds management policy; and a policy for the operation of the
Bank in such a manner as to provide adequate internal routine and control
policies consistent with safe and sound banking practices; (vi) the Bank
shall review the adequacy of the reserve for loan losses and establish a
comprehensive policy for determining the adequacy of the reserve for loan
losses; (vii) the Bank shall eliminate and/or correct any and all violations
of law, and take all necessary steps to ensure future compliance with all
applicable laws and regulations; (viii) the Bank shall file with the FDIC
amended Consolidated Reports of Condition and Income as of December 31, 1993;
and (ix) the FDIC shall be furnished written progress reports detailing the
compliance with the FDIC Memorandum and the results thereof.
The Bank believes it is currently in compliance with the FDIC
Memorandum. The FDIC has recently completed an examination of the Bank, and
although the Report of Examination has not yet been received, the FDIC has
indicated that the Bank appears to have met all of the requirements of the
FDIC Memorandum. Nevertheless, the decision to remove the FDIC Memorandum
depends upon the contents of the Report of Examination and other items in the
discretion of the FDIC, and no assurances can be given when, or if, the FDIC
Memorandum will be removed.
As a result of an examination conducted by the California State Banking
Department (the "Department") as of December 31, 1993, the Bank and the
Department executed a Memorandum of Understanding ("Department's Memorandum")
dated January 31, 1995. In accordance with the terms of the Department's
Memorandum, the Bank has agreed to take certain actions including the
following: (i) the Bank shall have and retain management acceptable to the
Superintendent of Banks; (ii) the Bank shall maintain tangible shareholders
equity in an amount which equals or exceeds six and one-half (6.5) percent of
total tangible assets; (iii) the Bank shall eliminate from its books by
charge-off or collection, all assets classified "Loss" that have not been
previously collected or charged-off, and reduce the assets classified
"Substandard" and "Doubtful" according to the reduction schedule contained in
the Department's Memorandum; (iv) the Bank shall have and maintain an
adequate allowance for loan
- 3 -
<PAGE>
losses, and the Board of Directors shall review the adequacy of the allowance
prior to the end of each calendar quarter; (v) the Bank shall maintain an
adequate valuation allowance for other real estate owned; (vi) the Bank shall
correct all violations of law detailed in the Report of Examination, and the
Bank shall take necessary steps to ensure future compliance with all
applicable laws, rules and regulations; (vii) the Bank shall revise, adopt
and implement the following: written lending and collection policies, a
written investment policy, an adequate internal loan and operations audit
policy, a written liquidity policy, a profit plan and month-to-month budget
for 1995, and an annual schedule to review and adopt all policies; (viii) the
Bank shall not make any distributions to its shareholder without the prior
written consent of the Superintendent of Banks (the "Superintendent"); and
(ix) the Bank shall also furnish written progress reports to the
Superintendent on a quarterly basis.
The Bank believes that it has complied with each item that is contained
in the Department's Memorandum. However, the decision to remove the
Department's Memorandum is discretionary, and no assurance can be given when,
or if, the Department's Memorandum will be removed.
SUPERVISION AND REGULATION
HARBOR BANCORP
The capital stock of the Company is subject to the registration
requirements of the Securities Act of 1933. The common stock of the Bank is
exempt from such requirements. The Company is also subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, which include,
but are not limited to, the filing of annual, quarterly and other reports
with the Securities and Exchange Commission.
The Company, as a bank holding company, is subject to regulation under
the BHC Act and is registered with and subject to the supervision of the
Federal Reserve Board. Under the BHC Act, a bank holding company is defined
as any company which directly or indirectly owns, controls or holds with
power to vote, 25% or more of the voting shares of any bank or company that
is or becomes a bank holding company under the BHC Act or which controls the
election of a majority of the directors of the bank or company. The Company
is required to obtain the prior approval of the Federal Reserve Board before
it may acquire all
- 4 -
<PAGE>
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 BHC 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 BHC Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries,
except that it may engage in certain activities which, in the opinion of the
Federal Reserve Board, are so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. 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 a bank holding 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
- 5 -
<PAGE>
of real estate and personal property; providing investment and financial
advice; providing data processing services; providing courier services;
providing management consulting advice to nonaffiliated 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.
The Company's primary source of income (other than interest income
earned on Company capital) is the receipt of dividends and management fees
from its subsidiaries. The Bank's ability to make such payments to the
Company is subject to certain statutory and regulatory restrictions.
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 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 the Bank and its subsidiaries
does not exceed 10% of the Bank's capital stock and surplus on a per
affiliate basis or 20% of the Bank's capital stock and surplus on an
aggregate affiliate basis. In addition, such transaction 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
- 6 -
<PAGE>
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 BHC 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 adopted in California
permits out-of-state bank holding companies to acquire California banks on a
regional basis as of July 1, 1987, and on a nationwide reciprocal basis as of
January 1, 1991.
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.
The BHC 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 nonbanking 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
- 7 -
<PAGE>
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
corporation's interest expense for such fiscal years then the corporation's
current assets equal at least 1-1/4 times its current liabilities.
HARBOR BANK
Banks are extensively regulated under both federal and state law. The
Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the Superintendent and
the FDIC.
The Bank is insured by the FDIC, which currently insures deposits of
each member bank to a maximum of $100,000 per depositor. For this
protection, the Bank, as is the case with all insured banks, pays a
semi-annual statutory assessment and is subject to the rules and regulations
of the FDIC. Although the Bank is not a member of the Federal Reserve
System, it is nevertheless subject to certain regulations of the Federal
Reserve Board.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State
and federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Further, the Bank is required to maintain
certain levels of capital.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the stockholders by the Bank. California law
restricts the amount available for cash dividends by state-chartered banks to
the lesser of retained earnings or the bank's net income for its last three
fiscal years (less any distributions to stockholders made during such
period). In the event a bank has no retained earnings or net income for its
last three fiscal years, cash dividends may be paid in an
- 8 -
<PAGE>
amount not exceeding the net income for such bank's last preceding fiscal
year only after obtaining the prior approval of the Superintendent.
The FDIC also has authority to prohibit the Bank from engaging in what,
in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could
assert that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice.
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% of the
Bank's capital and surplus (as defined by federal regulations) and such
secured loans and investments are limited, in the aggregate, to 20% of the
Bank's capital and surplus (as defined by federal regulations). California
law also imposes certain restrictions with respect to transactions involving
other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of the FDIC Improvement Act.
POTENTIAL AND EXISTING ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, may be subject to
potential enforcement actions by the FDIC and the Superintendent 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
- 9 -
<PAGE>
parties and the imposition of restrictions and sanctions under the prompt
corrective action provisions of the FDIC Improvement Act.
The regulations of these various agencies govern most aspects of the
Bank's business, including required reserves on deposits, investments, loans,
certain of their check clearing activities, issuance of securities, payment
of dividends, opening of branches, and numerous other areas. As a
consequence of the extensive regulation of commercial banking activities in
the United States, the Bank's business is particularly susceptible to changes
in California and the Federal legislation and regulations which may have the
effect of increasing the cost of doing business, limiting permissible
activities, or increasing competition.
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 the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly the earnings and growth of the 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.
- 10 -
<PAGE>
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, in the
California legislature and before various bank regulatory and other
professional agencies. The likelihood of any major changes and the impact
such changes might have on the Bank are impossible to predict. Certain of
the potentially significant changes which have been enacted and proposals
which have been made recently are discussed below.
CAPITAL STANDARDS
The FDIC has adopted risk-based 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% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high
credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital
consists primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank
holding companies) and minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock,
long-term preferred stock, eligible term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital is subject to certain other requirements and limitations of
the federal banking agencies.
- 11 -
<PAGE>
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital
to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets is 3%. For all banking organizations not rated in the
highest category, the minimum leverage ratio must be at least 100 to 200
basis points above the 3% minimum, or 4% to 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum
capital requirements for specific institutions at rates significantly above
the minimum guidelines and ratios.
Effective January 17, 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 reserves 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.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies recently issued
- 12 -
<PAGE>
final rules governing banks and bank holding companies, which became
effective April 1, 1995, which limit the amount of deferred tax assets that
are allowable in computing an institutions regulatory capital. The standard
has been in effect on an interim basis since March 1993. Deferred tax assets
that can be realized for taxes paid in prior carry back years and from future
reversals of existing taxable temporary differences are generally not
limited. Deferred tax assets that can only be realized through future
taxable earnings are limited for regulatory capital purposes to the lesser of
(i) the amount that can be realized within one year of the quarter-end report
date, or (ii) 10% of Tier 1 capital. The amount of any deferred tax in
excess of this limit would be excluded from Tier 1 capital and total assets
and regulatory capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends. As of December 31,
1995, the Company and the Bank had total risk-based capital ratios of 11.56%
and 11.55%, Tier 1 risk-based capital ratios of 10.31% and 10.30% and
leverage capital ratios of 7.09% and 7.04%, respectively. Based upon these
ratios, the Bank was deemed well capitalized as of December 31, 1995 under
the prompt corrective action provisions of the FDIC Improvement Act.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required 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, adequately capitalized, undercapitalized,
significant undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal
law. An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
- 13 -
<PAGE>
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5% Leverage ratio of 4%
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less Total risk-based capital less
than 8% than 6%;
Tier 1 risk-based capital less Tier 1 risk-based capital less
than 4%; or than 3%; or
Leverage ratio less than 4% Leverage ratio less than 3%
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital level, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or an unsafe or unsound
practice warrants such treatment. At each successive lower capital category,
an insured depository institution is subject to more restrictions. The
federal banking agencies, however, may not treat an institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
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,
- 14 -
<PAGE>
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 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 corrective 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 acquisition;
(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; (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
- 15 -
<PAGE>
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 institution 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.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses or for violations of any law, rule, regulation
or any condition imposed in writing by the agency or any written agreement
with the agency. Enforcement actions may include the 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 (in the case of
a depository institution), the imposition of civil money penalties, the
- 16 -
<PAGE>
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 enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The
standards, which were issued in the form of guidelines rather than
regulations, relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal
banking agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to
meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan
may result in enforcement proceedings. Additional standards on earnings and
classified assets are expected to be issued in the near future.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations,
which became effective on March 19, 1993, 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.
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 or
"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
- 17 -
<PAGE>
agencies appraisal standards. Federally related transactions include the
sale, lease, purchase, investment in, or exchange 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% 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 has adopted final regulations implementing a risk-based premium
system required by federal law. Under the regulations which cover the
assessment periods commencing on and after January 1, 1994, insured
depository institutions are required to pay insurance premiums within a range
of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending
on their risk classification. The FDIC, effective September 30, 1995,
lowered assessments from their rates of $.23 to $.31 per $100 of insured
deposits to rates of $.04 to $.31, depending on the health 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.
Congress is expected to act soon on 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 1980s and early 1990s. Costs for
these measures could be passed along, in part, to the banking industry.
- 18 -
<PAGE>
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed in 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 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 requirement and
conditions as for a merger transaction.
The Interstate Act is likely to increase competition in the Bank's
market areas especially from larger financial institutions and their holding
companies. It is difficult to asses the impact such likely increased
competition will have on the Bank' operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the
other state's law permit
- 19 -
<PAGE>
California banking organizations to acquire banking organizations in that
state on substantially the same terms and conditions applicable to banking
organizations solely within that state). The law took effect in two states.
The first state allowed acquisitions on a "reciprocal" basis within a region
consisting of 11 western states. The second stage, which became effective
January 1, 1991, allows interstate acquisitions on a national "reciprocal"
basis. California has also adopted similar legislation applicable to savings
associations and their holding companies.
On September 28, 1995, Governor Pete Wilson signed Assembly Bill No.
1482, the Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "1995 Act"). The 1995 Act, which was filed with
the Secretary of State as Chapter 480 of the Statutes of 1995, became
operative on October 2, 1995.
The 1995 Acts opts in early for interstate branching, allowing
out-of-state banks to enter California by merging or purchasing a California
bank or industrial loan company which is at least five years old. Also, the
1995 Act repeals the California Interstate (National) Banking Act of 1986,
which regulated the acquisition of California banks by out-of-state bank
holding companies. In addition, the 1995 Act permits California state banks,
with the approval of the Superintendent of Banks, to establish agency
relationships with FDIC-insured banks and savings associations. Finally, the
1995 Act provides for regulatory relief, including (i) authorization for the
Superintendent to exempt banks from the requirement of obtaining approval
before establishing or relocating a branch office or place of business, (ii)
repeal of the requirement of directors' oaths (Financial Code Section 682),
and (iii) repeal of the aggregate limit on real estate loans (Financial Code
Section 1230).
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
- 20 -
<PAGE>
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.
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 institutions' 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.
CHANGES IN ACCOUNTING PRINCIPLES
In February 1992, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 109 "Accounting for Income Taxes," which supersedes SFAS No.
96 of the same title. SFAS No. 109 is effective for fiscal years beginning
after December 31, 1992, or earlier at the Bank's option. SFAS No. 109
employs an asset and liability approach in accounting for income taxes
payable or refundable at the date of the financial statements as a result of
all events that have been recognized in the financial statements and as
measured by the provisions of enacted tax laws. SFAS No. 109 was adopted by
the Bank in 1993 and there is no material impact on the Bank's financial
statements.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," which is effective for fiscal years ending
after December 15, 1992 (December 15, 1995 in the case of entities with less
than $150 million in total assets such as the Bank). SFAS No. 107 requires
financial intermediaries to disclose, either in the body of their financial
statements or in the accompanying notes, the "fair value" of financial
instruments for which it is "practicable to estimate that value." SFAS No.
107 defines "fair value" as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other
- 21 -
<PAGE>
than in a forced or liquidation sale. Quoted market prices, if available,
are deemed the best evidence of the fair value of such instruments. Most
deposit and loan instruments issued by financial intermediaries are subject
to SFAS No. 107 and its effect will be to require financial statement
disclosure of the fair value of most of the assets and liabilities of
financial intermediaries such as the Bank. Management is unable to predict
what effect, if any, such disclosure requirements could have on the market
price of the common stock of the Bank or its ability to raise funds in the
financial markets.
In May 1993, the FASB issued Statement of Financial Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"). Under
the provisions of SFAS No. 114, a loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires creditors to measure impairment of a loan
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. If the measure of the impaired loan is less
than the recorded investment in the loan, a creditor shall recognize an
impairment by creating a valuation allowance with a corresponding charge to
bad debt expense. This statement also applies to restructured loans and
changes the definition of in-substance foreclosures to apply only to loans
where the creditor has taken physical possession of the borrower's assets.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish
that it eliminated the provisions in SFAS No. 114 that described how a
creditor should report income on an impaired loan. SFAS No. 118 did not
change the provisions in SFAS No. 114 that require a creditor to measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of
the collateral if the loan is collateral dependent. SFAS No. 118 amends the
disclosure requirements in SFAS No. 114 to require information about the
recorded investments in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. SFAS No. 114 is
effective for financial statements issued for fiscal years beginning after
December 15, 1994. Implementation of this standard will not have a material
impact on the Company's financial position.
- 22 -
<PAGE>
In May 1993, the FASB issued SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" addressing the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments
would be classified in three categories and accounted for as follows: (i)
debt securities that the entity has the positive intent and ability to hold
to maturity would be classified as "held to maturity" and reported at
amortized cost; (ii) debt and equity securities that are held for current
resale would be classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either securities held to maturity or
trading securities would be classified as securities available for sale, and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. The
rule is effective for financial statements for calendar year 1994, but may be
applied to an earlier fiscal year for which annual financial statements have
not been issued.
Effective for 1994, the Bank has implemented SFAS No. 115 regarding its
investment securities. Accordingly, all of the securities have been
classified as either "held to maturity" or "available for sale".
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA which requires federal banking agencies to adopt
uniform regulations prescribing standards for real estate lending. Each
insured depository institution must adopt and maintain a comprehensive
written real estate lending policy, developed in conformance with prescribed
guidelines, and each agency has specified loan-to-value limits in guidelines
concerning various categories of real estate loans.
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 non-interest bearing
reserves against deposits, limitations on the nature and amount of loans
which may be made, and restrictions on payment of dividends. The California
Superintendent of Banks approves the number and locations of the
- 23 -
<PAGE>
branch offices of a bank. California law exempts banks from the usury laws.
MONETARY POLICY
Banking is a business which depends on rate differentials. In general,
the difference between the interest paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended
to its customers and securities held in the Bank investment portfolios will
comprise the major portion of the Bank's earnings.
The earnings and growth of the Bank will be affected not only by general
economic conditions, both domestic and international, but also by the
monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve Board. The Federal Reserve Board can and
does implement national monetary policy, such as seeking to curb inflation
and combat recession, by its open market operations in U.S. Government
securities, limitations upon savings and time deposit interest rates, and
adjustments to the discount rates applicable to borrowings by banks which are
members of the Federal Reserve System. The actions of the Federal Reserve
Board influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact that future changes in fiscal or monetary policies or economic
controls may have on the Bank's businesses and earnings cannot be predicted.
COMPETITION
The banking business in California generally, and in the Bank's primary
service areas specifically, is highly competitive with respect to both loans
and deposits, and is dominated by a relatively small number of major banks
with many offices and operations over a wide geographic area. Among the
advantages such major banks have over the Bank are their ability to finance
and wide-ranging advertising campaigns and to allocate their investment
assets to regions of higher yield and demand. Such banks offer certain
services such as trust services and international banking which are not
offered directly by the Bank (but which can be offered indirectly by the Bank
through correspondent institutions). In addition, by virtue of their greater
total capitalization, such banks have substantially higher lending limits
than the Bank. (Legal lending limits to an
- 24 -
<PAGE>
individual customer are based upon a percentage of a bank's total capital
accounts.) Other entities, both governmental and in private industry, seeking
to raise capital through the issuance and sale of debt or equity securities
also provide competition for the Bank in the acquisition of deposits. Banks
also compete with money market funds and other money market instruments which
are not subject to interest rate ceilings.
In order to compete with other competitors in their primary service
areas, the Bank attempts to use to the fullest extent the flexibility which
their independent status permits. This includes an emphasis on specialized
services, local promotional activity, and personal contacts by their
respective officers, directors and employees. In particular, each of the
banks offers highly personalized banking services.
EMPLOYEES
At December 31, 1995, the Company and the Bank employed 95 individuals,
all on a full-time basis. The Company believes that its employee relations
are excellent.
STATISTICAL DISCLOSURE
The following tables and data set forth, for the respective periods
shown, statistical information relating to the Company and its subsidiaries.
This statistical data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the Financial Statements and Notes thereto incorporated by reference herein
from the Company's 1994 Annual Report. See "ITEM 6. SELECTED FINANCIAL
DATA, "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS," and "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA." Average balances in all tables are computed using daily
average balances for each month divided by the number of months in the
period. Unless the context indicates otherwise, all references to the
Company in the following tables and data include the Company and its
subsidiaries on a consolidated basis.
- 25 -
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1995 Year ended December 31, 1994
Interest Average Interest Average
Average Income Yields Average Income Yields
Balance Or Expense Or Rates Balance Or Expense Or Rates
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Deposits $ 495 $ 31 6.26% $ 1,445 $ 85 5.88%
Taxable Securities 29,357 1,739 6.13 20,405 989 4.85
Non-taxable Securities 341 21 6.16 356 22 6.18
Federal Funds Sold 14,696 805 5.48 12,996 537 4.13
Loans (1) 118,986 11,502 9.67 116,535 10,320 8.86
TOTAL EARNING ASSETS/ -------- ------- ----- -------- ------- -----
INTEREST INCOME 162,875 14,098 8.66% 151,737 11,953 7.88%
Reserve for Loan Losses (3,044) (3,228)
Other Assets 21,539 25,061
-------- --------
TOTAL ASSETS $181,370 $173,570
-------- --------
-------- --------
LIABILITIES &
STOCKHOLDERS' EQUITY
Savings & Interest-bearing
Demand Deposits $ 65,702 $ 1,413 2.15% $ 60,854 $ 1,207 1.98%
Time Deposits 24,473 1,185 4.84 21,170 727 3.43
Borrowed Funds 767 44 5.74 1,135 72 6.34
--------- ------- ----- --------- ------- -----
TOTAL INT-BEARING
LIABILITIES/INTEREST
EXPENSE 90,942 2,642 2.91% 83,159 2,006 2.41%
Demand Deposits 75,823 75,253
Other Liabilities 829 1,818
-------- --------
TOTAL LIABILITIES 167,594 160,230
STOCKHOLDERS' EQUITY 13,776 13,340
TOTAL LIABILITIES & -------- --------
STOCKHOLDERS' EQUITY $181,370 $173,570
-------- --------
-------- --------
Net Interest Income $11,456 $ 9,947
Net Interest Income to Earning Assets ------- -------
------- 7.03% ------- 6.56%
----- -----
----- -----
</TABLE>
(1) Included in interest income on loans are fees of $433,019 in 1995 and
$464,313 in 1994.
Note: Interest income on nonaccrual loans is not included in interest income.
Interest income on non-taxable securities is not stated on a
tax-equivalent basis. Due to rounding individual amounts may not agree
to audited statements by $1 - 2.
- 26 -
<PAGE>
The following table sets forth changes in interest income and interest
expense and the amount of change attributable to variances in volume and
variance in interest rates. The change in interest due to both rate and
volume has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1995 OVER 1994 1994 OVER 1993
-------------- --------------
Amount of Change Amount of Change
Attributed to: Attributed to:
-------------- --------------
Total Increase Total Increase
or (Decrease) Volume Rate or (Decrease) Volume Rate
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands) (in thousands)
Interest Income:
Interest on taxable securities $ 750 $ 437 $ 313 $ 258 $ 202 $ 56
Interest on nontaxable securities (1) (1) (0) (8) (7) (1)
Interest on deposits with banks (54) (58) 4 (7) (2) (5)
Federal funds sold 268 82 186 (170) (409) 239
Interest & fees on loans(1) 1,182 227 955 (378) 415 (793)
------ ------ ------ ------ ------ ------
TOTAL INTEREST INCOME 2,145 687 1,458 (305) 199 (504)
Interest Expense:
Interest on Deposits:
Savings & Interest bearing demand 206 100 106 21 179 (158)
Other time deposits 458 137 321 99 116 (17)
Interest on short-term borrowing (28) 0 (28) (30) 0 (30)
------ ------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE 636 237 399 90 295 (205)
------ ------ ------ ------ ------ ------
Net Interest Spread $1,509 $ 450 $1,059 $ (395) $ (96) $ (299)
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
Note: Individual line items may not agree exactly to changes apparent from the
audited statements by $1 - 2 due to rounding.
(1) Included in interest & fees on loans are fees of $433,019 in 1995 and
$464,313 in 1994.
(2) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the dollar
amounts of the change in each. The following table shows the distribution
of assets, liabilities and stockholders' equity; interest rates and
interest differential (dollars in thousands).
- 27 -
<PAGE>
INVESTMENT PORTFOLIO
The Bank positions its investment portfolio to maintain a level of
liquidity considered adequate within the prevailing economic climate. Under
this policy, purchases of investment securities as well as the sale of
federal funds are made after consideration of liquidity requirements.
Maturities of the investment portfolio by investment categories is as
follows at December 31, 1995 (in thousands):
------------------------------------------------
Less than One Year Five Thru After
One Year Thru Ten Years Ten Years
Five Years
------------------------------------------------
Book
Value
-------
U.S. gov't
& agency
obligations(1) $33,812 $28,977 $1,260 $1,650 $1,924
Obligations of
- 28 -
<PAGE>
state/political
subdivisions (2) 338 - 137 201 -
Mutual funds, net 832 - - - 832
------- ------- ------- ------- -------
$34,982 $28,977 $ 1,397 $ 1,852 $ 2,756
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Yield-Weighted Average 5.85% 7.68% 6.42% 8.69%
(1) Carrying value of $34,819 at December 31, 1994
(2) Carrying value of $341 at December 31, 1994
NOTE: Interest income on non-taxable securities is not stated
on a tax-equivalent basis.
- 29 -
<PAGE>
LOAN PORTFOLIO
(in thousands)
Commercial Real Estate
Loans
(Construction)
Maturity Distribution:
- --------------------------------------
Due within one year $30,075 $ 1,080
Due after one but before five
years 21,016 2,049
Due after five years 437 283
------- -------
TOTAL AT DECEMBER 31, 1995 $51,528 $ 3,412
------- -------
------- -------
Interest Sensitivity: Loans Due
After One Year
Fixed-rate loans $14,578 $ 1,500
Prime-tied loans 6,889 831
------- -------
TOTAL AT DECEMBER 31, 1995 $21,467 $ 2,331
------- -------
------- -------
Loans Contractually Past Due
all domestic)
Total Loans Past Due 90 Days(2) Loans On
Outstanding Amount % of Total Non Accrual(1)
--------------------------------------------------
(in thousands)
December 31, 1995:
Commercial $ 51,528 $ 46 .09% $ 1,190
Real Estate-secured 69,561 35 .05% 5,497
Real Estate-
construction 3,412 - - -
Installment 5,911 40 .67% 59
-------- -------- ---- -------
TOTAL $130,412 $ 121 .09% $ 6,746
-------- -------- ---- -------
-------- -------- ---- -------
December 31, 1994:
Commercial $ 46,502 $ 97 .21% $ 2,041
Real Estate-secured 60,412 0 .00% 3,636
Real Estate-
construction 4,329 0 .00% 0
Installment 3,607 0 .00% 63
--------- ---------- ---- -------
TOTAL $114,850 $ 97 .08% $ 5,740
--------- ---------- ---- -------
--------- ---------- ---- -------
- 30 -
<PAGE>
(1) Interest income which would have been recognized in 1995 and 1994 on
nonperforming loans was approximately $260,264 and $166,308 respectively.
The amount of interest income on nonperforming loans that was included in net
income in 1995 was approximately $194,925.
(2) Loans on Non Accrual have been excluded from the Past Due 90 Day column.
SUMMARY OF LOAN LOSS EXPIERENCE
(in thousands)
1995 1994
Loans outstanding at year-end, net of ------- -------
unearned interest income
$130,412 $114,850
-------- --------
-------- --------
Average loans outstanding, net of
unearned interest income
$118,986 $116,535
-------- --------
-------- --------
Reserve balance, beginning of year $ 3,224 $ 3,667
Recoveries:
Commercial 17 20
Real Estate-mortgage -0- -0-
Installment 2 24
------ ------
TOTAL 19 44
Loans charged off:
Commercial (393) (1,401)
Real Estate-mortgage (137) (126)
Real Estate-construction -0- -0-
Installment (22) (48)
------ ------
TOTAL (552) (1,575)
------ ------
Net loans charged off (533) (1,531)
Provision charged to expense 312 1,088
------- ------
Allowance balance, end of year $ 3,003 $ 3,224
------- ------
------- ------
- 31 -
<PAGE>
Ratio of net loans charged off to
average loans outstanding .45% 1.31%
------- ------
------- ------
Ratio of allowance for loan
losses to loans at year end 2.30% 2.81%
------- ------
------- ------
The Company does not anticipate charge-offs in 1996 for any loan categories,
however, the Company gives no assurance that charge-offs will not occur in
1996.
- 32 -
<PAGE>
POLICY FOR NON-ACCRUAL LOANS
The policy of Harbor Bank is that all loans that are past due for ninety (90)
days must be placed on a non-accrual status. In addition, loans in which it
is probable that full collection of principal will not occur are placed on
non-accrual status.
RISK ELEMENTS IN LOAN PORTFOLIO
AND
DETERMINATION OF THE ALLOWANCES FOR LOAN LOSSES
The allowance for loan losses represents management's recognition of the
quality of the loan portfolio. The allowance is maintained at a level
considered to be adequate for potential loan losses based on management's
assessment of various factors affecting the loan portfolio, which includes a
review of problem loans, business conditions and the overall quality of the
loan portfolio.
The allowance is increased by the provision for loan losses charged to
operations and reduced by loans charged off to the allowance, net of
recoveries. During 1995, $312,596 was provided for loan losses compared to
$1,088,000 provided during 1994 and $2,958,359 provided in 1993. In
addition, the Company acquired $606,356 in additional loan loss reserve from
the FDIC as part of the purchase of loan pools in 1993. The substantial
provision for loan losses in 1994 and 1993 has been necessitated by high
levels of non-performing and classified loans and loan charge-offs.
-33-
<PAGE>
The following table shows an allocation of the allowance for loan losses as
of the end of 1994 and 1995.
<TABLE>
<CAPTION>
Percent of
Loans in Each
Category to
Amount Total Loans
---------- ---------------
<S> <C> <C>
December 31, 1995:
Commercial $ 1,059 39.5%
Real Estate-secured
mortgage 1,795 53.3
Real Estate-construction 116 2.6
Installment 33 4.5
-------- ------
$ 3,003 100.0%
-------- ------
-------- ------
December 31, 1994:
Commercial $ 1,863 59.7%
Real Estate-secured
mortgage 1,151 31.7
Real Estate-construction 165 4.2
Installment 45 4.4
-------- ------
$ 3,224 100.0%
-------- ------
-------- ------
</TABLE>
Management believes that the allowance for loan and lease losses is adequate
for potential loan losses. In addition, the Bank has undertaken a number of
actions including restructuring loan administration, developing and adopting
new or revised policies, procedures and systems that are designed to improve
the credit, review and classification processes, and reduction of classified
assets and nonperforming assets.
-34-
<PAGE>
RETURN ON EQUITY AND ASSETS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
------------------------
1995 1994
-------- ---------
<S> <C> <C>
Net Income $ 1,238 $ 158
Average Total Assets 181,370 173,570
RETURN ON AVERAGE ASSETS 0.68% 0.09%
Net Income $ 1,238 $ 158
Average Equity 13,776 13,340
RETURN ON AVERAGE EQUITY 8.99% 1.18%
Average Total Equity $ 13,776 $ 13,340
Average Total Assets 181,370 173,570
AVERAGE TOTAL EQUITY TO ASSET
RATIO 7.60% 7.69%
Dividend Declared Per Share $ - $ -
Net Income Per Share 0.92 0.12
DIVIDEND PAYOUT RATIO - -
</TABLE>
The FDIC, based upon their examination dated November 30, 1995, believes that
capital levels have been maintained above prescribed regulatory minimums for
well capitalized banks and those specified in the FDIC Memorandum dated
August 3, 1994.
-35-
<PAGE>
DEPOSITS
The following table sets forth by time remaining to maturity, domestic time
certificates of deposit in amounts of $100,000 or more at December 31, 1995
(in thousands):
<TABLE>
<S> <C>
Less than three months $11,901
Three to six months 2,489
Six to twelve months 888
Over twelve months -
-------
$15,278
-------
-------
</TABLE>
-36-
<PAGE>
ITEM 2. PROPERTIES
The Company's Corporate offices and the Bank's Main office are located
at 11 Golden Shore, Long Beach, California, 90802, within a six-story modern
free-standing structure. The banking facilities are located on the main
floor and contain 7,500 square feet. The premises include three walk-up
windows, a vault, safe deposit boxes and a parking lot for approximately 60
cars. The administrative offices are located on the sixth floor and use
approximately 12,000 square feet of that floor. The Bank has under lease the
remaining 4,000 square feet of the sixth floor, which has been subleased to
other tenants. The office building is named and signed Harbor Bank. There are
two levels of parking below ground which provide adequately for Bank personnel
and other personnel within the building.
In connection with its Golden Shore office, the Bank entered into a
Lease Agreement for a term of ten years, renewable by the Bank for an
additional ten year term to expire December 2002. The Lease Agreement
(lease) is a triple net lease, and the Bank is responsible for nearly every
cost and expense associated with renting its premises. The annual cost of
the lease in 1996 is expected to be $805,000. Annual increases in the
Bank's rental obligations under the Lease will not exceed 7% or the cost of
living index each year, and will be reviewed every three years.
The Bank's Marina office is located in a one-story, free-standing
structure with approximately 7,500 square feet of area located at 6265 E.
Second Street, Long Beach, California 90803. The building was converted in
part for the Bank's use of approximately 16,000 square feet, of which 6,000
is currently leased to M & W Financial and 2,400 square feet is leased to
Bancap Investment Group. The facility is located within a retail
-37-
<PAGE>
business complex with all parking as joint use. The premises include a
vault, safe deposit boxes, a two-lane drive-up facility and two walk-up
windows. The lease term expires in December 2000 and the expected annual
cost in 1996 is $295,000.
The Bank's Los Alamitos office is located in a one-story, modern
free-standing structure with approximately 7,500 square feet of area located
at 5252 Katella Avenue, Los Alamitos, California 90720. The Bank leases the
land at a monthly cost of $6,360 (for an annual rental of $76,320) and the
lease expires in 1999. There is parking for approximately 35 cars. These
premises also include a vault, safe deposit boxes, a four-lane drive-up
facility and a walk-up window.
-38-
<PAGE>
The Bank's Huntington Harbour office is located within a retail
shopping and business complex, and has approximately 3,700 square feet of
area at 16400 Pacific Coast Highway, Huntington Beach, California 92649.
The space is leased with an annual cost of $122,320 and an expiration date of
November 1999. There is ample parking which is shared with other tenants.
The premises include a vault, safe deposit boxes, a two-lane drive-up
facility and two walk-up windows.
The Bank's Fountain Valley office is located in a free-standing, modern,
two-story structure located at 10760 Warner Avenue, Fountain Valley,
California 92708. The Bank owns the building and land which has a fair
market value of approximately $850,000. The Bank occupies 4,000 square feet
of the ground floor and has approximately 3,400 square feet of rental space
available. The Bank premises include a vault, safe deposit boxes, three
drive-up tellers and a walk-up teller.
The Bank's South Coast office is located in a free-standing, modern
building and is part of a business complex at 9 Executive Circle, Irvine,
California 92714. The bank leases the ground floor of the building which is
approximately 22,940 square feet and occupies approximately 13,870 square
feet which includes a branch office and also a Service Center operation at a
monthly cost of $40,000 (for an annual rental of $ 480,000). The lease
expires in March of 2005. The Bank premises include a vault, safe deposit
boxes, two drive-up tellers and a walk-up teller window. The remaining 9,073
square feet is subleased to OPERA PACIFIC and the Building Industry
Association of Orange County.
-39-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Due to the nature of their business, the Company, the Bank, and
their subsidiaries are subject to legal actions threatened or filed which
arise from the normal course of their business. Management believes that
such litigation is incidental to the business of the Company and the Bank and
the eventual outcome of all currently pending legal proceedings against the
Bank will not be material to the Company's or the Bank's financial position
or results of operations.
-40-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
-41-
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of Harbor Bancorp is not listed on any stock exchange
nor with the NASDAQ. Although there is a relatively limited trading market in
the common stock of Harbor Bancorp, Management is aware that Kemper
Securities,Inc., Smith Barney, Ryan, Beck & Co., Elmer E. Powell & Company,
Burford Capital and Hoefer and Arnett make a market in the Company's stock.
The number of stockholders of record on December 31, 1995 was approximately
434.
The following table, which summarizes stock activity during the
Company's two fiscal years is based upon information provided by Kemper
Securities, Inc. and Hoefer & Arnett.
<TABLE>
<CAPTION>
Sales Price
-----------
Quarter Ended: High Low Dividend
- -----------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1994 $ 7.00 $ 5.50
June 30, 1994 7.00 5.50
September 30, 1994 7.50 5.50
December 31, 1994 7.50 6.00 (1)
March 31, 1995 $ 7.75 $ 6.50
June 30, 1995 8.50 7.00
September 30, 1995 10.00 7.50
December 31, 1995 11.00 8.875
</TABLE>
(1) 5% stock dividend at 10/1/94
-42-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1995 1994 1993 1992 1991
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Operating results:
Net interest income $ 11,456,120 $ 9,946,446 $ 10,341,090 $ 10,167,942 $ 8,764,671
Provision for loan losses 312,596 1,088,000 2,958,359 484,000 235,233
Net income 1,238,534 157,940 (660,710) 842,828 821,771
Earnings per share 0.92 0.12 (0.49) 0.64 0.59
Cash dividends -0- -0- -0- 291,259 -0-
Balance sheet total:
Total assets $195,092,129 $176,465,496 $191,051,914 $168,115,137 $161,577,947
Net loans 127,408,913 111,625,771 116,840,943 108,925,048 101,285,497
Deposits 179,204,795 162,111,914 176,001,561 153,397,098 146,933,902
Notes payable -0- -0- -0- -0- -0-
Total stockholders'equity 14,556,427 13,134,930 13,095,952 13,750,862 13,131,163
</TABLE>
43
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to provide a better understanding of the
significant changes and trends relating to the financial condition, results
of operations, capital resources, liquidity and interest rate sensitivity of
the Company during the three-year period ended December 31, 1995. The
following discussion will focus on Harbor Bancorp's goals in conjunction with
current events and trends. Reference should be made to the accompanying
Consolidated Financial Statements of the Company and related notes for an
understanding of the following discussion and analysis.
FINANCIAL CONDITION
ASSETS
Total assets increased $18,626,633, or 10.56%, from $176,465,496 at
December 31, 1994 to $195,092,129 at December 31, 1995. The increase in
total assets results primarily from an increase in cash and cash equivalents
and loans. Total earning assets also experienced an increase of $15,925,381,
or 9.31%, from $155,164,416 at December 31, 1994 to $171,089,797 at December
31, 1995. The increase in total assets and total earning assets from
December 31, 1994 to December 31, 1995, is primarily the result of strong
growth in loans and an increase in core deposits.
Total loans increased by $15,561,905, or 13.55%, from $114,850,239 at
December 31, 1994 to $130,412,144 at December 31, 1995. In 1995, the Company
benefited from a continued consolidation in the banking industry in Southern
California due to bank mergers, acquisitions and closures. The increase in
the loan portfolio is primarily a result of additional volume generated due
to the industry consolidation. Management continues to emphasize funding
only the best credits and there has been no change in the Company's
philosophy of no growth for growth's sake. Cash and cash equivalents
increased $4,787,665,
- 44 -
<PAGE>
or 22.40% from $21,376,547 at December 31, 1994 to $26,164,212 at December
31, 1995. The increase in cash and cash equivalents is primarily due to an
overall increase in deposits and an increase of $1,623,000 in the balances
the Bank is required to maintain at the Federal Reserve Bank. This
requirement, which is based on a percentage of deposits, increased from
$2,536,000 at December 31, 1994 to $4,159,000 at December 31, 1995.
SOURCES OF FUNDS
The principal source of funds for the Company in 1995 was in noninterest
bearing deposits which increased $19,854,588, or 27.52%, to $92,003,263 at
December 31, 1995. Interest bearing deposits decreased $2,761,707, or 3.07%,
to $87,201,532 at December 31, 1995 from $89,963,239 at December 31, 1994.
Overall total deposits increased 10.54%, or $17,092,881, from $162,111,914 to
$179,204,795 for December 31, 1994 and 1995, respectively. The principal
source of the overall increase was growth in core deposits. The Company
continues to maintain local commercial deposits by providing a secure, stable
presence in its market area. Substantially all of the Company's deposits are
local, core deposits. The Company does not have any out-of-area brokered
deposits included in the deposit base. The Company continues to emphasize
core deposits and has elected not to compete for volatile deposits with
increased rates.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the difference between interest and fees earned on
earning assets and interest paid on deposits and other sources of funds, has
continued to be challenged by deregulation through increased competition and
market conditions. The Company's net interest income is affected by the
change in the amount and mix of interest-earning assets and interest-bearing
liabilities. It is also affected by changes in yields earned on
interest-earning assets and ates paid on deposits and borrowed funds. Net
interest income in 1995 was $11,456,120 compared to $9,946,446 in 1994 and
$10,341,090 in 1993. The Company is
- 45 -
<PAGE>
consistent in its ability to maintain a strong net interest income position
with the increase in 1995 a result of an increase in earning assets. Interest
earning assets averaged $162,875,000 in 1995 compared to $151,737,000 in
1994, which represents a increase of $11,138,000, or 7.34%. Loans, the
largest component of interest earning assets, averaged $118,986,000 for the
year ended December 31, 1995 compared to $116,535,000 for the year ended
December 31, 1994. Net interest income, when expressed as a percentage of
average total interest earning assets, is referred to as the net interest
margin. The Company's net interest margin increased slightly to 7.03% in
1995 from 6.56% in 1994 and 6.68% in 1993. Net interest spread, the
effective rate of interest income on earning assets less the effective rate
of interest expense on deposits, decreased to 4.1% in 1995 from 4.2% in 1994
and 5.2% in 1993.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is a general reserve established by
Management to absorb potential losses inherent in the entire loan portfolio.
In evaluating the adequacy of the allowance, Management gives consideration
to the Company's loan loss experience, the performance of loans in the
Company's portfolio, the quality of the loans in the Company's portfolio,
evaluation of collateral for such loans, the economic conditions affecting
collectibility of loans, the prospects and financial condition of the
respective borrowers or guarantors and such other factors which in
Management's judgment deserve recognition in the estimation of loan losses.
During 1995, $312,596 was provided for loan losses compared to $1,088,000
provided during 1994 and $2,958,359 provided during 1993. In 1993, the
Company acquired $606,356 in additional loan loss reserve from the FDIC as
part of the purchase of loan pools. The substantial provision for loan
losses in 1994 and 1993 compared to 1995 was necessitated by high levels of
non-performing and classified loans and loan charge-offs. Net charge-offs
for 1995, 1994 and 1993 were approximately $533,832, $1,530,355, and
$1,253,350, respectively. The allowance for loan losses at December 31, 1995
was approximately $3,003,000, or 2.30% of total loans, as compared to
$3,224,000, or 2.81% of total loans at December 31, 1994. Non-performing
loans, loans which are no longer accruing
- 46 -
<PAGE>
interest, increased $1,006,461, or 17.54,% to $6,745,972 at December 31,
1995 compared to $5,739,511 at December 31, 1994. The primary reason for the
increase in non-performing loans was the addition of two loans totaling
approximatly $1.5 million.
As a result of the Federal Deposit Insurance Corporation examination at
December 31, 1993, the Bank and FDIC executed a Memorandum of Understanding
("FDIC Memorandum") dated August 3, 1994. In accordance with the terms of
the FDIC Memorandum, the Bank has agreed to take certain actions including
the following: maintaining capital requirements; reducing classified assets
in accordance with the reduction schedule; revise, adopt, and implement
policy and procedures; and review and maintain and adequate allowance for
loan losses.
The Bank believes it is currently in compliance with the FDIC Memorandum.
OTHER OPERATING INCOME
Other operating income, which includes income derived from service
charges on deposit accounts, loan servicing fees and other fees and charges,
and gain (loss) on sale of securities, overall increased modestly to
$1,145,756 in 1995, from $1,131,210 in 1994 after decreasing from $1,249,261
in 1993. Service charges on deposit accounts improved slightly. However,
the net increase from 1994 to 1995 is primarily a result of gains on sale of
securities in 1995 which did not occur in 1994. The gain on sale of
securities of $54,044 in year ended December 31, 1995 and the loss of $734 in
year ended December 31, 1994 is a result of the sale of a security held in
the available for sale category for the purpose of improving liquidity. The
gain of $146,096 in 1993 was a result of Management's continued efforts to
restructure the investment portfolio to improve the maturity distribution and
diversification. Management intends to hold all existing investment
securities to maturity.
NONINTEREST EXPENSE
The Company's continued emphasis on expense control during 1995, as in
1994 and 1993, is part of an overall corporate strategy which resulted in
noninterest expense as a percentage of average total assets remaining stable
at 5.72% in 1995, compared to 5.65% in 1994 and 5.53% in 1993. The 5.7%
increase in
- 47 -
<PAGE>
noninterest expense during 1995 to $10,371,746 from $9,811,716 in 1994 was
primarily due to salaries, wages and employee benefits and other operating
expense. Salaries, wages and employee benefits increased $361,179 from
$3,244,680 for the year ended December 31, 1994 to $3,605,859 for the year
ended December 31, 1995. Other operating expense increased $201,805 to
$3,289,631 in 1995 compared to $3,087,826 in 1994 and $3,396,531 in 1993,
primarily due to a loss of approximately $295,000 which resulted from the
settlement of a lawsuit.
NET INCOME
The Company reported net income of $1,238,534 in 1995 or $0.92 per
share, which represents an increase of $1,080,594 from 1994. Net loss was
$660,710, or $0.49 per share, in 1993. The share and per share data
information has been adjusted for 5% stock dividends issued on October 1,
1994, October 1, 1993, April 1, 1993. Despite a slow regional economic
recovery, the Company's earnings performance in 1995 was achieved as a result
of several factors. Strong growth in average interest earning assets helped
maintain a strong net interest income coupled with improved credit quality,
operating efficiencies and tough cost control.
INCOME TAXES
In 1995 and 1994, the Company recorded a tax provision of $679,000 and
$20,000, respectively, compared to a tax benefit of $497,000 in 1993.
ASSET -- LIABILITY MANAGEMENT
The Company relies on asset - liability management to assure adequate
liquidity, maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities, and plan and control asset and
liability mixes, volumes, maturities, yields and rates for maximization of
interest margins. Liquidity management and interest rate
- 48 -
<PAGE>
sensitivity management are key factors in asset - liability management.
Liquidity management involves the ability to meet expected and potential
cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurances that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management
seeks to avoid fluctuating interest margins and to enhance consistent growth
of net interest income through periods of changing interest rates.
The Company's Asset -- Liability Management Committee manages the
liquidity position, the parameters of which are approved by the Board of
Directors. The liquidity position of the Company is monitored daily and the
Company had liquid assets (cash, federal funds sold, securities purchased
under agreements to resale, deposits in other financial institutions and
investment securities) as a percent of total deposits of 34% and 35% as of
December 31, 1995 and 1994, respectively. The Company's Investment Committee
manages the investment portfolio, based upon the Investment Policy which is
approved by the Board of Directors.
The Bank's goal is to maintain federal funds sold at $7 to $10 million
dollars on an average with minimum daily investments monitored closely.
Deposits with other institutions and securities purchased under agreements to
resale will be maintained as alternative short-term investment products.
Management's intention is to maintain an investment portfolio which
contributes an adequate rate of return with minimal market or credit risk.
Interest rate sensitivity varies with different types of interest
earning assets and interest bearing liabilities. Harbor Bank intends to
maintain interest-earning assets, comprised of both loans and investments,
and interest-bearing liabilities, comprised primarily of deposits, maturing
or repricing evenly in order to eliminate any impact from interest rate
changes. In the event of a change in interest rates, 37% of the loan
portfolio at December 31, 1995 would immediately reprice, with 15% repricing
within the next twelve months. Forty-eight percent of the deposit
liabilities would reprice immediately or within twelve months, with the
remaining 52% of deposit liabilities being in noninterest bearing demand
accounts.
- 49 -
<PAGE>
CAPITAL RESOURCES
Management seeks to maintain a level of capital adequate to support
anticipated asset growth and credit risks and to ensure that the Company is
within established regulatory guidelines and industry standards. The
Company's capital plan for 1996 contemplates continued growth in
stockholders' equity through the retention of net income. Minimum capital
ratios required under the risk-based capital regulations are 6.0% for Tier 1
Capital and 8.0% for Total Capital. As of December 31, 1995, the Company had
Tier 1 Capital of 10.31% and Total Capital of 11.56%.
- 50 -
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
- 51 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
Covered by Report of Independent Public Accountants.
Page
REFERENCE
- ---------
Report of Ernst & Young, LLP, Auditors 45
Consolidated Balance Sheets at
December 31, 1994 and 1995 46-47
Consolidated Statements of Income for the
years ended December 31, 1995, 1994 and 1993 48-49
Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1995,
1994 and 1993 50
Consolidated Statements of Cash Flows
for the years ended December 31, 1995
1994 and 1993 51-52
Notes to Consolidated Financial Statements 53-72
- 52 -
<PAGE>
All schedules are omitted since the required information is not present or
not present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Statements
or Notes thereto.
- 53 -
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Harbor Bancorp
We have audited the accompanying consolidated balance sheets of Harbor
Bancorp and subsidiaries at December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Harbor Bancorp and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the
- 54 -
<PAGE>
Company changed its method of accounting for investment securities.
Los Angeles, California Ernst & Young LLP
March 1, 1996
HARBOR BANCORP
CONSOLIDATED BALANCE SHEETS
December 31,
1995 1994
---- ----
ASSETS
Cash and due from banks $ 20,964,212 $ 16,376,547
Federal funds sold and securities
purchased under resale agreements 5,200,000 5,000,000
------------ ------------
Cash and cash equivalents 26,164,212 21,376,547
Time certificates of deposit 495,000 495,000
Investment securities:
Held to maturity 10,187,147 9,672,912
Available for sale 24,795,506 25,146,265
Loans (Note 3) 130,412,144 114,850,239
Less allowance for
loan losses (Notes 1 and 4) 3,003,231 3,224,468
------------ ------------
Net loans 127,408,913 111,625,771
Bank premises and equipment (Note 1):
Land 159,000 159,000
Buildings and improvements 4,068,049 4,008,294
Furniture, fixtures and equipment 3,427,932 3,014,503
------------ ------------
7,654,981 7,181,797
Less accumulated depreciation
and amortization 5,726,982 5,385,463
------------ ------------
- 55 -
<PAGE>
1,927,999 1,796,334
Other real estate 516,431 2,814,285
Accrued interest receivable 997,564 972,327
Other assets 2,599,357 2,566,055
------------ ------------
Total assets $ 195,092,129 $176,465,496
------------ ------------
------------ ------------
HARBOR BANCORP
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31,
1995 1994
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest bearing (Note 1) $ 87,201,532 $ 89,963,239
Noninterest bearing 92,003,263 72,148,675
------------- ------------
Total deposits 179,204,795 162,111,914
Accrued expenses and other liabilities 1,330,907 1,218,652
------------- ------------
Total liabilities 180,535,702 163,330,566
Commitments and contingencies (Note 8) - -
Stockholders' equity (Notes 1, 6, and 7):
Common stock, no par value; 5,000,000
shares authorized; issued and out-
- 56 -
<PAGE>
standing, 1,348,021 shares in 1995
and 1994 13,257,875 13,257,875
Retained earnings 1,381,899 143,365
Net unrealized securities losses ( 83,347) (266,310)
------------ -----------
Total stockholders' equity 14,556,427 13,134,930
------------ -----------
Total liabilities and
stockholders' equity $195,092,129 $176,465,496
------------ -----------
------------ -----------
See notes to consolidated financial statements.
- 57 -
<PAGE>
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $11,502,305 $10,319,644 $10,697,896
Interest on investment
securities 1,760,002 1,010,920 760,865
Other interest 835,458 621,999 799,195
----------- ----------- ----------
Total interest income 14,097,765 11,952,563 12,257,956
Interest expense:
Interest on deposits 2,597,912 1,933,993 1,814,945
Interest on other
borrowed funds 43,733 72,124 101,921
----------- ---------- ----------
Total interest expense 2,641,645 2,006,117 1,916,866
----------- ---------- ----------
Net interest income 11,456,120 9,946,446 10,341,090
Provision for loan
losses (Notes 1 and 4) 312,596 1,088,000 2,958,359
----------- ---------- ----------
Net interest income after
provision for loan
losses 11,143,524 8,858,446 7,382,731
Other operating income:
Service charges on deposit
accounts 920,240 905,017 886,792
Loan servicing fees and other
fees and charges 171,472 226,927 216,373
Gain (loss) on sale of
securities 54,044 (734) 146,096
---------- ---------- ---------
Total other operating
income 1,145,756 1,131,210 1,249,261
</TABLE>
- 58 -
<PAGE>
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Noninterest expense:
Salaries, wages and employee
benefits 3,605,859 3,244,680 3,229,904
Occupancy expenses 2,152,163 1,969,795 2,104,459
Equipment expenses 306,689 331,410 369,422
Data processing expenses 630,077 585,606 478,447
Other real estate expense 387,327 592,399 210,939
Other operating expenses 3,289,631 3,087,826 3,396,531
---------- ---------- ----------
Total noninterest
expense 10,371,746 9,811,716 9,789,702
---------- --------- ---------
Income (loss) before taxes
based on income 1,917,534 177,940 (1,157,710)
Provision (benefit) for taxes
based on income (Notes 1 and 5): 679,000 20,000 (497,000)
---------- ---------- ----------
Net income (loss) $ 1,238,534 $ 157,940 $ (660,710)
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per share
(Note 1) $0.92 $0.12 $(0.49)
----- ----- ------
----- ----- ------
</TABLE>
See notes to consolidated financial statements.
59
<PAGE>
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Number of Unrealized
shares out- Common Retained securities
standing stock earnings gains (losses) Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December
31, 1992 1,165,036 $11,860,974 $2,047,813 $(157,925) $13,750,862
5% stock
dividend
at 4/1/93 58,036 493,306 (495,141) -- (1,835)
5% stock
dividend
at 10/1/93 60,951 487,608 (489,229) -- (1,621)
Net unrealized
securities
gains -- -- -- 9,256 9,256
Net (loss) -- -- (660,710) -- (660,710)
--------- ---------- ---------- ---------- -------------
Balance at
December
31, 1993 1,284,023 $12,841,888 $ 402,733 $(148,669) $13,095,952
Adjustment to
beginning
balance for
change in
accounting
method,
net of tax -- -- -- 11,175 11,175
5% stock
dividend
at 10/1/94 63,998 415,987 (417,308) -- (1,321)
Net unrealized
securities
losses -- -- -- (128,816) (128,816)
Net income -- -- 157,940 -- 157,940
-------- ----------- ---------- ---------- ----------
Balance at
December
31, 1994 1,348,021 $13,257,875 $ 143,365 $(266,310) $13,134,930
Net unrealized
securities
gains -- -- -- 182,963 182,963
Net income -- -- 1,238,534 -- 1,238,534
--------- ----------- ---------- ---------- ----------
Balance at
December
31, 1995 1,348,021 $13,257,875 $1,381,899 $(83,347) $14,556,427
--------- ----------- ---------- ---------- ----------
--------- ----------- ---------- ---------- ----------
</TABLE>
-60-
<PAGE>
See notes to consolidated financial statements.
-61-
<PAGE>
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1995 1994 1993
---- ---- ----
Operating activities:
Net income (loss) $ 1,238,534 $ 157,940 $(660,710)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Provision for depreciation and
amortization 480,108 539,259 515,182
Provision for loan losses 312,596 1,088,000 2,958,359
Gain on sale of
investment securities -- -- (146,096)
(Increase) decrease in
interest receivable (25,237) 1,542 114,060
(Decrease ) increase in
interest payable (4,023) 38,649 (40,847)
Provision for deferred income
taxes 142,000 10,000 (803,000)
Other (635,554) (832,220) (310,466)
---------- -------- ----------
Net cash provided by operating
activities 1,508,424 1,003,170 1,626,482
Investing activities:
Proceeds from maturities
and calls of investment
securities held to maturity 15,688,858 -- 9,160,448
Purchases of
investment securities
held to maturity (16,295,523) (1,598,633) (32,935,616)
Proceeds from maturities
and calls of investment
securities available for sale 29,000,000 42,274,008 --
Proceeds from sales of
investment securities
available for sale 6,941,506 4,978,734 --
Purchases of investment
securities available for
sale (34,877,417) (38,324,772) --
Net decrease (increase) in
short-term securities -- 396,000 (297,000)
Net (increase) decrease
in loans (16,095,734) 4,127,171 (11,348,658)
- 62 -
<PAGE>
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1995 1994 1993
---- ---- ----
Capital expenditures (473,184) (230,240) (163,326)
Sales of other real estate 2,297,854 770,403 --
----------- ----------- -----------
Net cash (used in) provided by
investing activities (13,813,640) 12,392,671 (35,584,152)
Financing activities:
Net (decrease) increase in commercial
and other demand deposits, savings,
money market deposits, and
certificates of deposit 17,092,881 (13,889,647) 22,604,463
Cash dividends and cash paid
in lieu of fractional shares -- (1,321) (3,456)
------------- ------------ ------------
Net cash provided by (used in)
financing activities 17,092,881 (13,890,968) 22,601,007
Increase (decrease) in cash and
cash equivalents 4,787,665 (495,127) (11,356,663)
Cash and cash equivalents at
beginning of year 21,376,547 21,871,674 33,228,337
------------- ------------ ------------
Cash and cash equivalents at
end of year $26,164,212 $21,376,547 $21,871,674
------------ ----------- ------------
------------ ----------- ------------
See notes to consolidated financial statements.
- 63 -
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all the accounts of Harbor
Bancorp ("Company") and its wholly owned subsidiaries, Harbor Bank ("Bank")
and Harbor Bank Properties. All intercompany accounts and transactions have
been eliminated.
Certain reclassifications have been made in the 1993 and 1994 financial
statements to conform to the presentations used in 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
-64-
<PAGE>
INVESTMENT SECURITIES
The Company adopted Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.
Investment securities held to maturity are securities which the Company has
the ability and intent to hold until maturity. Accordingly, these securities
are stated at cost adjusted for amortization of premiums and accretion of
discounts. Unrealized gains and losses are not reported in the financial
statements until realized or until a decline in fair value below cost is
deemed to be other than temporary.
Investment securities available for sale include debt securities and mutual
funds. These securities are stated at fair value with unrealized gains and
losses reflected as a component of stockholders' equity, net of applicable
income taxes. Gains and losses are determined on the specific
indentification method.
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
IMPAIRED LOANS
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended, effective January 1, 1995. This statement requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rates or the fair value of
the underlying collateral, and specifies alternative methods for recognizing
interest income on loans that are impaired or for which there are credit
concerns. For purposes of applying
-65-
<PAGE>
this standard, impaired loans have been defined as all nonaccrual loans. The
Company's policy for income recognition was not affected by adoption of the
standard. The adoption of SFAS No. 114 did not have any effect on the total
reserve for credit losses or related provision.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's evaluation of the
quality of the loan portfolio. The allowance is maintained at a level
considered to be adequate for potential loan losses based on management's
assessment of various factors affecting the loan portfolio, which includes a
review of problem loans and general business conditions. The allowance is
increased by the provision for loan losses charged to operations and reduced
by loans charged off to the allowance, net of recoveries.
OTHER REAL ESTATE
Other real estate ("ORE") is stated at the lower of cost or fair market
value, net of estimated selling costs.
INCOME TAXES
Income tax expense (benefit) is the current and deferred tax consequence, of
events that have been recognized in the financial statements, as measured by
the provisions of enacted tax law.
-66-
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets
which range from 10 to 30 years for buildings and improvements and 3 to 10
years for furniture, fixtures and equipment.
EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted
average number of common shares outstanding during each year, adjusted
retroactively to reflect stock dividends. The number of shares used in the
per share calculations for the years ended December 31, 1995, 1994 and 1993
was 1,348,021.
TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 or more totaled $15,278,000 at
December 31, 1995 and $14,967,000 at December 31, 1994.
RESERVE REQUIREMENTS
The Bank is required to maintain a balance with the Federal Reserve Bank
based on a percentage of deposit liabilities. At December 31, 1995, the
required balance was $4,159,000.
CASH AND CASH EQUIVALENTS
Cash equivalents include amounts due from banks, federal funds sold and
securities purchased under resale agreements. Generally, federal funds are
purchased and sold for one-day periods. Securities purchased under resale
agreements generally have a contracted term of one day. The Company paid
cash interest of $2,639,602, $1,968,348 and $1,957,713 and
-67-
<PAGE>
cash income taxes of $700,000, $244,211 and $598,772 in 1995, 1994 and 1993,
respectively.
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
Noncash investing activities include transfer of assets to ORE of $725,000 in
1995 and $1,377,593 in 1994 and net unrealized securities gains of $182,963
in 1995 and losses of $128,816 in 1994. These noncash transactions have been
excluded from the Consolidated Statements of Cash Flows.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
INVESTMENT SECURITIES: Estimated fair values are based on quoted market
prices.
LOANS: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans (e.g., commercial real estate and commercial
and industrial loans) are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued interest
approximates its fair
-68-
<PAGE>
value.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term money market accounts and certificates
of deposits approximate their fair values at the reporting date. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
-69-
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities held to
maturity are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
US Treasury
securities and
obligations of
US government
corporations
and agencies $ 9,848,726 $ 46,677 $ 43,320 $ 9,852,083
Obligations of
states and
political
subdivisions 338,421 7,343 7,174 338,590
------------ ----------- ------------ -----------
Totals $10,187,147 $ 54,020 $ 50,494 $10,190,673
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
US Treasury
securities and
obligations of
US government
corporations
and agencies $ 9,331,899 $ 4,354 $ 361,578 $ 8,974,675
Obligations of
states and
political
subdivisions 341,013 1,526 19,176 323,363
------------ ----------- ------------ -----------
Totals $ 9,672,912 $ 5,880 $ 380,754 $ 9,298,038
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
-70-
<PAGE>
-71-
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. INVESTMENT SECURITIES (CONT'D.)
The amortized cost and estimated fair value of investment securities held to
maturity at December 31, 1995, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ -----------
<S> <C> <C>
Due in one year or less $ 5,014,476 $ 5,029,126
Due after one year through five years 1,396,915 1,374,675
Due after five years through ten years 1,851,832 1,876,129
Due after ten years 1,923,924 1,910,743
------------ -----------
$10,187,147 $10,190,673
------------ -----------
------------ -----------
</TABLE>
There were no sales of investment securities in 1995 and 1994. Gross gains
of $146,096 were realized on sales in 1993 (taxes related in investment
securities gains in 1993 were $60,280). Proceeds from the sale of investment
securities were $3,765,154 for the year ended December 31, 1993.
-72-
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. INVESTMENT SECURITIES (CONT'D.)
The amortized cost and estimated fair values of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
US Treasury
securities and
obligations of
US government
corporations
and agencies $23,921,790 $ 53,059 $ 12,271 $23,962,578
Mutual funds 1,000,000 - 167,072 832,928
------------ ------------- --------------- -----------
Totals $24,921,790 $ 53,059 $ 179,343 $24,795,506
------------ ------------- --------------- -----------
------------ ------------- --------------- -----------
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
US Treasury
securities and
obligations of
</TABLE>
-73-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
US government
corporations
and agencies $24,549,765 $ 711 $ 160,887 $24,389,589
Mutual funds 1,000,000 - 243,324 756,676
------------ ------------- --------------- -----------
Totals $25,549,765 $ 711 $ 404,211 $25,146,265
------------ ------------- --------------- -----------
------------ ------------- --------------- -----------
</TABLE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. INVESTMENT SECURITIES (CONT'D.)
The amortized cost and estimated fair value of investment securities
available for sale at December 31, 1995, by contractual maturity, are shown
below.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------- -----------
<S> <C> <C>
Due in one year or less $23,921,790 $23,962,578
Due after one year through five years -0- -0-
Mutual Funds 1,000,000 832,928
------------ -----------
</TABLE>
-74-
<PAGE>
<TABLE>
<S> <C> <C>
$24,921,790 $24,795,506
------------ -----------
------------ -----------
</TABLE>
Gross gains of $54,043 were realized on those investment securities
available for sale in 1995, (taxes related to investment securities available
for sale gains in 1995 were $24,320). Gross losses of $734 were realized on
those investment securities available for sale in 1994, (taxes related to
investment securities available for sale gains in 1994 were $303). There
were no losses on investment securities available for sale for the year 1993.
Proceeds from the sale of investment securities available for sale were
$7,050,140 in 1995 and $4,978,734 in 1994. There were no sales of investment
securities available for sale for the year ended December 31, 1993.
Maturities of mortgage-backed securities are classified in accordance with
the contractual repayment schedules. Expected maturities differ from the
contractual maturities reported above because investment security issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
The Company has pledged certain investment securities with a fair value of
$3,233,149 to secure treasury, tax and loan, bankruptcy and public deposits
at December 31, 1995.
-75-
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
3. LOANS
The composition of the Company's loan portfolio at December 31, 1995 and 1994
is as follows:
1995 1994
---- ----
Commercial $ 51,528,000 $ 46,502,000
Commercial -- real estate secured 53,434,000 45,311,000
Real estate -- mortgage 16,127,000 15,101,000
Real estate -- construction 3,412,000 4,329,000
Installment 5,911,000 3,607,000
------------ ------------
$130,412,000 $114,850,000
------------ ------------
------------ ------------
The majority of loans, excluding installment loans, have variable interest
rates related to the prime interest rate. Installment loans have fixed
interest rates.
All of the Company's business is conducted in Southern California, with
individuals and small and medium-sized businesses. These relationships are
targeted to the geographic area in which management is familiar with real
estate and economic trends.
In the normal course of business, the Company has made loans to directors and
employees. Loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Loans outstanding to directors and employees at
December 31, 1994 totaled approximately $671,960. During 1995, new loans of
approximately $2,311,055 were made and principal payments approximating
$463,398 were received resulting in a balance outstanding at December 31,
1995 of approximately $2,519,617.
Loan commitments are made to accommodate the financial needs of the Company's
customers. Letters of credit commit the Company to make payments on behalf
of customers when certain specified events occur. Both arrangements have
credit risk essentially the same as
- 76 -
<PAGE>
that involved in extending loans to customers and are subject to the
Company's normal credit policies and review. Collateral is obtained based on
management's credit assessment of the borrower. The amount of credit risk is
represented by the face amount of the commitments and letters of credit.
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
3. LOANS (CONT'D.)
At December 31, 1995, the Company had outstanding commitments to its
customers on letters of credit of approximately $485,927 and unfunded
nonrevolving loan commitments of $1,359,033 .
The recorded investment in loans considered impaired at December 31, 1995,
under SFAS No. 114, was $6,745,972 with a valuation reserve of $858,962. For
the year ended December 31, 1995, the average recorded investment in impaired
loans was approximately $4,888,800 and cash basis interest income recognized
on those loans during the year was immaterial.
At December 31, 1995, 1994 and 1993, the Company had $6,745,972,
$5,739,511, and $4,870,272, respectively, of loans which were considered to
be nonperforming loans and on which the company ceased its accrual of
interest. Interest income which would have been recognized in 1995, 1994 and
1993 on nonperforming loans was $260,264, $166,308, and $24,272,
respectively. At December 31, 1995 approximately 24% of nonaccrual loans
were part of a single lending relationship.
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses during each of the three years in
the period ended December 31, 1995 are summarized as follows:
- 77 -
<PAGE>
1995 1994 1993
---- ---- ----
Balance at beginning of year $3,224,468 $3,666,823 $1,355,458
Provision charged to expense 312,596 1,088,000 2,958,359
Allowance acquired -- -- 606,356
Recoveries on loans previously
charged off 18,620 44,031 43,081
Loans charged off (552,453) (1,574,386) (1,296,431)
----------- --------- ---------
Balance at end of year $3,003,231 $3,224,468 $3,666,823
----------- --------- ---------
----------- --------- ---------
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
FEDERAL STATE TOTAL
------- ----- -----
1995:
Current $ 536,000 $ 1,000 $ 537,000
Deferred 119,000 23,000 142,000
---------- --------- ---------
$ 655,000 $ 24,000 $ 679,000
1994:
Current $ 105,000 $ (75,000) $ 30,000
Deferred (20,000) 10,000 (10,000)
---------- --------- ---------
$ 85,000 $ (65,000) $ 20,000
1993:
- 78 -
<PAGE>
Current $ 283,000 $ 23,000 $ 306,000
Deferred (628,000) (175,000) (803,000)
--------- --------- ---------
$(345,000) $(152,000) $(497,000)
The deferred tax expense (benefit) represent the changes in the amounts of
temporary differences from January 1 to December 31 of 1995, 1994 and 1993,
respectively. The types of temporary differences that give rise to
significant portions of the deferred tax at December 31, 1995, 1994 and 1993,
include reserves for credit losses, other real estate and fixed assets.
- 79 -
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
5. INCOME TAXES (CONT'D.)
The effective federal income tax rate varies from the statutory rate due to a
number of factors principally including certain interest exclusions for state
income tax purposes. A reconciliation of the differences between statutory
and effective tax rates follows:
1995 1994 1993
---- ---- ----
Federal income tax based
on statutory rate $ 652,000 $ 60,000 $(394,000)
State income tax
net of federal income tax 16,000 (34,000) (92,000)
Other income 11,000 (6,000) (11,000)
--------- ---------- --------
$ 679,000 $ 20,000 $(497,000)
--------- ---------- --------
--------- ---------- --------
The tax effects of temporary differences which give rise to significant
elements of deferred tax assets and liabilities as of December 31, 1995 are
detailed below:
Gross deferred assets
Loan loss reserve $ 778,000
Other real estate 34,000
Unrealized securities losses 43,000
Other 32,000
----------
Total gross deferred assets $ 887,000
Gross deferred liabilities
Fixed assets $ (25,000)
----------
Net deferred tax asset $ 862,000
----------
----------
- 80 -
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
6. STOCK OPTIONS
The Company has a stock option plan which provides for the issuance of up to
90,295 shares of its common stock. Either qualified or nonqualified options
may be granted to directors and officers and other key full-time salaried
employees. Option prices may not be less than 100% of the fair market value
of the stock at the date of grant.
As of December 31, 1995, there were 55,100 shares under option at prices
ranging from $7.34 to $10.00. During 1995, no options were exercised and
11,576 with an exercise price averaging $7.34 were canceled or expired. At
December 31, 1995 there were 12,032 exercisable stock options with an
exercise price of $7.34.
Generally, the options become exercisable one year following the date of
grant in cumulative equal amounts over five years at which time any options
not exercised expire.
7. EMPLOYEE STOCK BONUS PLAN
The Company has an employee stock bonus plan which covers substantially all
employees. The Company may make annual contributions, subject to the
approval of the Board of Directors. Contributions were $90,000 in 1995, 1994
and 1993.
- 81 -
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
8. COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations in leased facilities under
noncancellable operating leases expiring at various dates through 2004, at
which time the leases are renewable at the then fair rental value for periods
of five to ten years. Total future minimum sublease rentals amount to
approximately $877,383 at December 31, 1995.
The minimum rental commitments for operating leases, excluding sublease
income, are approximately as follows:
Year ending December 31:
1996 1,767,000
1997 1,764,000
1998 1,764,000
1999 1,710,000
2000 1,580,000
Thereafter 3,649,000
-----------
$12,234,000
-----------
-----------
Rental expense for the three years ended December 31, 1995 consists of the
following:
1995 1994 1993
---- ---- ----
Minimum rentals $1,791,000 $1,878,000 $1,697,000
Sublease rentals (259,000) (333,000) (294,000)
---------- ---------- ----------
$1,532,000 $1,545,000 $1,403,000
---------- ---------- ----------
---------- ---------- ----------
- 82 -
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
As a result of a Federal Deposit Insurance Corporation ("FDIC") examination
at December 31, 1993, the Bank and FDIC executed a Memorandum of
Understanding ("FDIC Memorandum") dated August 3, 1994. In accordance with
the terms of the FDIC Memorandum, the Bank agreed to take certain actions for
improving credit management practices; reducing classified assets
substantially in accordance with stated guidelines; revising policies and
procedures; maintaining acceptable management; maintaining adequate allowance
for loan losses; maintaining adequate capital (not in excess of current
levels); and restricting cash dividends from the Bank. The Bank believes it
is currently in compliance with the FDIC Memorandum .
Due to the nature of their business, the Company, the Bank and their
subsidiaries are subject to legal actions threatened or filed which arise
from the normal course of their business. Management believes that such
litigation is incidental to the business of the Company and the Bank and the
eventual outcome of all currently pending legal proceedings will not be
material to the Company's financial position or results of operations.
- 83 -
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
9. CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Harbor Bancorp (parent
only):
- ---------------------------------------------------------------------------
BALANCE SHEETS
December 31,
1995 1994
---- ----
Assets:
Cash $ 20,437 $ 30,727
Investment in Harbor Bank 14,379,680 12,917,001
Investment in Harbor Bank
Properties 25,052 24,803
Other assets 131,258 162,399
----------- -----------
Total assets $14,556,427 $13,134,930
----------- -----------
----------- -----------
Stockholders' equity:
Common stock, no par value $13,257,875 $13,257,875
Retained earnings 1,298,552 (122,945)
----------- -----------
Total stockholders' equity $14,556,427 $13,134,930
----------- -----------
----------- -----------
INCOME STATEMENTS
Years ended December 31,
1995 1994 1993
Equity in undistributed
earnings of subsidiaries $1,279,964 $ 162,505 $(659,601)
Miscellaneous income -0- 14,725 32,583
---------- ---------- ---------
Total income (loss) $1,279,964 $ 177,230 $(627,018)
- 84 -
<PAGE>
Operating expense 41,430 19,290 33,692
---------- ---------- ---------
Net income (loss) $1,238,534 $ 157,940 $(660,710)
---------- ---------- ---------
---------- ---------- ---------
- 85
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
9. CONDENSED FINANCIAL STATEMENTS (CONT'D.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $1,238,534 $ 157,940 $(660,710)
Adjustments to reconcile
net income to net cash
used in operating
activities:
Equity in undistributed
(income) loss of
subsidiaries (1,279,964) (162,505) 659,601
Decrease (increase) in
interest receivable 31,140 306 (8)
Other assets -0- (109,182) (379)
---------- ---------- ---------
Net cash used in
operating activities (10,290) (113,441) (1,496)
</TABLE>
86
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
9. CONDENSED FINANCIAL STATEMENTS (CONT'D.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Financing activities:
Fractional shares - (1,321) (3,456)
--------- ---------- --------
Net cash used in
financing activities - (1,321) (3,456)
Decrease in cash (10,290) (114,762) (4,952)
Cash at beginning of year 30,727 145,489 150,441
--------- ---------- --------
Cash at end of year $ 20,437 $ 30,727 $145,489
--------- ---------- --------
--------- ---------- --------
</TABLE>
DIVIDEND RESTRICTION
The Company is dependent to a significant degree on dividends from its
subsidiaries. There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. Retained earnings of
subsidiaries available for dividends to the Company approximated $ 782,868 at
December 31, 1995. However, as discussed in Note 8, cash dividend payments by
the Bank are restricted by the FDIC Memorandum.
-87-
<PAGE>
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a comparison of the carrying amounts and fair values of
financial instruments as of December 31, 1995:
<TABLE>
<CAPTION>
Carrying Fair Value of
Amount Asset\(Liability)
------------ -----------------
<S> <C> <C>
Cash and due from banks $ 20,964,212 $ 20,964,212
Federal funds sold and securities
purchased under resale agreement 5,200,000 5,200,000
Time certificates of deposit 495,000 495,000
Investment securities 34,982,653 34,986,179
Loans, net 127,408,913 129,059,320
Noninterest bearing deposits (92,003,263) (92,003,263)
Interest bearing deposits (87,201,532) (85,290,143)
</TABLE>
-88-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
- 89 -
<PAGE>
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table provides certain information as of December 31, 1995,
concerning the directors of the Company:
Present Principal Served as
Occupation During Director
Name Age the Past Five Years Since (1)
- ---------------------------------------------------------------------
James H. Gray 58 Chairman of the Board and 1982
Chief Executive Officer of
Harbor Bank, President and
Director of Harbor Bancorp
John W. Hancock 58 Senior Vice President, Bancap
Investment Group 1992
Dallas E. Haun 42 President and Chief Operating 1993
Officer of Harbor Bank and
Director of Harbor Bancorp
Kermit Q. Jones 76 Owner, Treasure Valley Land 1982
& Cattle/Dairy Farmer
Robert E. Leslie 70 Retired Fire Chief 1988
Dorothy K. Matteson 69 Uniform Sales, Retired 1982
H. E. Nance 63 Retired President
Nance Travel Services 1988
Malcolm C. Todd, M.D. 82 Physician/Surgeon, Retired 1982
James Willingham 67 President, Boulevard Buick 1982
and Chairman of the Board
of Harbor Bancorp
Margaret E. Wilson 67 Co-Trustee, Wilson Family 1993
Trust
-90-
<PAGE>
(1) All the current directors were appointed to the Board of Directors by the
Company's incorporator on June 24, 1982, with the exception of Robert E. Leslie
and H. E. Nance who were appointed March 22, 1988, John W. Hancock who was
appointed on June 23, 1992, Margaret E. Wilson who was appointed on March 23,
1993, and Dallas E. Haun who was appointed on December 21, 1993.
-91-
<PAGE>
EXECUTIVE OFFICERS
As of December 31, 1995, the principal Executive Officers of the Company
were:
Name and Office Age Date Elected
- ---------------------------------------------------------------------
James H. Gray
President & Chief Executive Officer 58 March 22, 1983
Dallas E. Haun
President &
Chief Operating Officer 42 October 24, 1995
H. Melissa Lanfre'
Vice President &
Chief Financial Officer 44 June 23, 1987
All executive officers of the Company are elected by, and serve at the
pleasure of, the Board of Directors. Set forth above are the names and offices
held by the executive officers of the Company, their respective ages, and the
date when each was elected to his/her present position with the Company. A
brief account of the business experience of each is set forth below:
Mr. Gray has been President of Harbor Bank, the major subsidiary of the
Company, from July of 1976 to January 1983 and Chairman of Harbor Bank from
July 1976 to present. He currently holds the position of Chairman of the
Board and Chief Executive Officer of Harbor Bank and President of Harbor
Bancorp.
Mr. Haun has been with the Company since June 1, 1977 where he served in a
variety of capacities with his most recent assignment being Executive Vice
President/Branch Administrator. He currently holds the position of President
and Chief Operating Officer of Harbor Bank and continues to serve as a voting
member of Harbor Bank's Board of Directors.
Ms. Lanfre' joined the Company on July 13, 1987 and currently holds the
position of Vice President and Chief Financial Officer. Prior to joining the
Company, she served as Controller and Chief Financial
-92-
<PAGE>
Officer of Sterling Bank from January 1984 until July 1987. Prior to
January 1984, Ms. Lanfre' served as Accounting Manager for Foothill Capital
Corporation, a commercial finance company.
-93-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the two other officers of the Company
(determined as of the end of the last fiscal year) whose annual salary and
bonus exceeded $100,000 in 1995 (the "Named Executives") for each of the
fiscal years ended December 31, 1995, 1994, and 1993.
SUMMARY OF CASH AND CERTAIN COMPENSATION
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compensation
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($)(1) ($)(2) ($) ($) SARs(#) ($) ($)(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James H. Gray 1995 $193,563 $60,000 -0- -0- -0- -0- $1,488
Chairman of the Board 1994 125,704 39,550 -0- -0- -0- -0- 1,488
and Chief Executive 1993 128,186 56,500 -0- -0- -0- -0- 1,488
Officer of Harbor Bank
Dallas E. Haun 1995 $146,557 $50,000 -0- -0- -0- -0- $1,320
President and Chief 1994 98,157 30,100 -0- -0- -0- -0- 1,080
Operating Officer 1993 93,907 41,500 -0- -0- -0- -0- 1,080
of Harbor Bank
</TABLE>
(1) Included in this column are salaries and director's fees, where
applicable, paid for services rendered to the Company's subsidiary, Harbor
Bank, during 1995 before any salary reduction for contributions to the
Company's plan under section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"), and salary reductions for contributions for welfare
plan coverages under section 125 of the Code.
(2) The bonus amounts are payable pursuant to the Company's senior
management compensation plan as approved annually by the Board of Directors.
This column may include bonuses paid in a certain year for services rendered
in the prior year.
-94-
<PAGE>
(3) "All Other Compensation" is only required to be reported for 1995. The
amount represents the Company's matching contribution for the 401(k) plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d)
- ----------------------------------------------------------------------------------------------------
Value
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-End(#) Year-End ($)
Shares Acquired on Value Realized(1) Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James H. Gray -0- -0- -0-/15,788 -0-
Dallas E. Haun -0- -0- -0-/27,365 -0-
</TABLE>
(1) There are no in-the-money options.
Directors of the Company which are considered to be inside directors, or
employees of the Company, receive a director's fee of $600 per meeting and
all other directors, which are considered to be outside directors, receive a
director's fee of $1,000 per meeting. Non-officer directors serving on the
Company's weekly Loan Committee receive $150 per meeting.
-95-
<PAGE>
HARBOR BANCORP 1990 STOCK OPTION PLAN
On 2/22/90, the Company adopted an Employee Stock Option Plan for the
purpose of providing an additional means of attracting and retaining competent
managerial personnel. The plan provides 90,000 unissued shares of the Company,
or approximately 10% of the issued and outstanding shares of the Company to be
reserved for issuance to directors, officers and employees of the Company and
its subsidiaries. Options granted pursuant to the plan may be non-qualified
options or incentive options within the meaning of Section 422A of the Internal
Revenue Code.
The plan will be administered by the Board of Directors of the Company or
by a committee appointed from time to time by the Board. The committee or the
Board of Directors will determine with respect to the persons who shall
participate in the plan and the extent of their participation.
The purchase price of stock subject to each option shall be not less than
one hundred percent of the fair market value of such stock at the time such
option is granted. An employee owning more than ten percent of the total
combined voting power of all classes of stock of the Bank may not be granted an
option under the plan. The purchase price of any shares exercised shall be paid
in full in cash. Options may be granted pursuant to the plan for a term of up
to ten years. Each option shall be exercisable according to the determination
of the Board or committee.
Options granted under the plan shall not be transferable by the optionee
during the optionee's lifetime. In the event of termination of employment as a
result of the optionee's disability or in the event of an employee's death
during the exercise period, to the extent the option is exercisable on the date
employment terminates or the date the employee dies, the option shall remain
exercisable for up to one year (but not beyond the end of the original option
term) by the disabled optionee, or in the event of death of the optionee, a
non-qualified option shall be exercisable by the person or persons to whom
rights under the option shall have passed by will or the laws of descent and
distribution.
-96-
<PAGE>
If an optionee's employment is terminated, unless termination was by reason
of disability or death the optionee shall have the right, for a three-month
period after termination, to exercise that portion of the option which was
exercisable immediately prior to such termination. In no event may the option
be exercised after the end of the original option term.
In the event of certain changes in the outstanding Common Stock of the
Company without receipt of consideration by the Company, such as stock
dividends, stock splits, recapitalization, reclassification, reorganization,
merger, stock consolidation, or otherwise, appropriate and proportionate
adjustments shall be made in the number, kind and exercise price of shares
covered by any unexercised or partially unexercised options which were already
granted. Optionees will receive prior notice of any pending dissolution or
liquidation of the Company, or reorganization, merger or dissolution or
liquidation of the Company where the Company is not the surviving corporation or
sale of substantially all the assets of the Company, or other form of corporate
reorganization in which the Company is not a surviving entity, or the
acquisition of stock representing more that 50% of the voting power of the stock
of the Company then outstanding ("Terminating Event"). Optionees shall be
notified of the Terminating Event, any option not exercised shall terminate, and
upon the happening of the Terminating Event, the plan shall terminate, unless
some other provision is made in connection with the Terminating Event.
The Board reserves the right to suspend, amend, or terminate the plan, and,
with the consent of the optionee, make such modifications, of the terms and
conditions of his or her option as it deems advisable, except that the Board may
not, without further approval of a majority of the shares, increase the maximum
number of shares covered by the plan, change the minimum option price, increase
the maximum term of options under the plan or permit options to be granted to
any one other than an officer, employee or director of the Company or its
subsidiaries.
HARBOR BANK EMPLOYEE STOCK OWNERSHIP PLAN
On January 1, 1980, Harbor Bancorp established the Harbor Bancorp Employee Stock
Ownership Plan for the purpose of enabling employees of Harbor Bancorp to invest
in employer stock. The plan covers substantially all employees.
-97-
<PAGE>
The Bank contributes amounts as determined annually by the Company's Board of
Directors, but not in excess of the amount allowable as a deduction for federal
income tax purposes. The contribution may be in cash, common stock or other
property which is acceptable to the Trustee, and shall be invested primarily in
common stock, but may be invested in assets other than common stock.
Contributions were $90,000 in 1995, 1994 and 1993. In absence of an active
Employee Stock Ownership Plan Committee, the trustee of the Plan has full
authority as to the investment of the Plan's assets.
Each employee of the Bank over 21 years of age becomes a participant of the Plan
when he completes one year of service. A new vesting schedule was adopted which
was effective January 1, 1989. Participants vest at the rate of ten percent per
year of service until the fifth year of service when vesting is at 60% in the
fifth year, 80% in the sixth year and fully (100%) vested after 7 years of
service. A year of service is a time period of no more than twelve months in
which an employee has a least 1,000 hours of service commencing on the
anniversary date of employment.
A separate account is maintained for each participant which is adjusted annually
for Bank contributions, income, gains and losses of the Plan and reallocation of
forfeitures.
Upon the earliest of retirement at age 65, death or disability, the balance of
the separate account is paid to the participant or his beneficiary in company
common stock or in cash or a combination of common stock and cash (by his
election). If termination of employment occurs before retirement, death or
disability, the vested balance in the separate account is distributed to the
participant in the same manner if the vested balance exceeds $3,500.00. If the
vested balance does not exceed $3,500.00, the participant's election as to the
form of distribution is not required.
For the purpose of allocating Bank contributions and forfeitures, each
participant is credited on a pro rata basis determined by the proportion that
each eligible participant's compensation for the year bears to the total
compensation of all participants. Annual additions to a participant account are
limited to twenty-five percent (25%) of the participant's compensation, or
$30,000, whichever is less. Participants are included in the allocation of
forfeitures after one year.
-98-
<PAGE>
The annual allocation of the income, gains and losses of the Plan is on a pro
rata basis determined by the proportion that each participant's dollar value of
interest in the Plan bears to the total dollar value interest of all
participants at the beginning of the year.
While the Company has not expressed any intent to terminate the Plan, it has the
right to do so at any time. In the event of termination, each participant's
interest automatically becomes fully vested to the extent of the balance in his
separate account.
-99-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information about those stockholders
who are known to the Company to be beneficial owners of more than 5% of the
Common Stock as of December 31, 1995:
Name & address of Amount and nature of Percent
beneficial owner beneficial ownership of class
- ----------------------------------------------------------------
James H. Gray 101,301 7.51%
11 Golden Shore, Suite 600
Long Beach, CA 90802
Harbor Bank Employee Stock
Ownership Plan 110,344 8.19%
11 Golden Shore, Suite 600
Long Beach, CA 90802
James A. Willingham 77,642 5.76%
1881 Long Beach Boulevard
Long Beach, CA 90806
The following table sets forth, as of December 31, 1995, the number and
percentage of shares of the Company's Common Stock, the only class outstanding
equity securities of the Company, beneficially owned by each of the Company's
directors, and the directors and current executive officers of the Company, as a
group:
Amount and nature of Percent
Name beneficial ownership of class
- ---------------------------------------------------------------
James H. Gray 101,301 7.51%
-100-
<PAGE>
John W. Hancock 4,169 .31%
Dallas E. Haun 5,137 .38%
Kermit Q. Jones 52,943 3.93%
Robert E. Leslie 798 .06%
Dorothy K. Matteson 36,897 2.74%
H. E. Nance 10,313 .77%
Malcolm C. Todd 45,853 3.40%
James A. Willingham 77,642 5.76%
Margaret E. Wilson 54,304 4.03%
All executive officers as
a group 389,357 28.88%
-101-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors, officers and principal shareholders of the Company
and their associates were customers of, and had banking transactions with, the
Company's subsidiary, Harbor Bank, in the ordinary course of the Bank's business
during 1993 and the Bank expects to have such transactions in the future. All
loans and commitments to loan included in such transactions were made in
compliance with the applicable laws on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons of similar creditworthiness, and in the opinion
of the Bank, did not involve more than a normal risk of collectibility or
present other unfavorable features.
-102-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules and exhibits:
(1) and (2) Financial statements and financial statement schedules: See
"Item 8. Financial Statements and Supplementary Data."
(3) Exhibits:
None
(b) Reports on Form 8-k:
None
-103-
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 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.
HARBOR BANCORP
DATED: March 26, 1996 By:/s/ James H. Gray
-------------------------
James H. Gray, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER
AND DIRECTOR
DATED: March 26, 1996 By:/s/ James H. Gray
------------------------------
James H. Gray, President and
Chief Executive Officer
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER
DATED: March 26, 1996 By:/s/H. Melissa Lanfre'
------------------------------
H. Melissa Lanfre'
Vice President and Chief
Financial Officer
-104-
<PAGE>
DIRECTORS:
DATED: March 26, 1996 By:/s/ James H. Gray
---------------------------
James H. Gray, Director
DATED: March 26, 1996 By:/s/ Dallas E. Haun
---------------------------
Dallas E. Haun, Director
DATED: March 26, 1996 By:/s/ Kermit Q. Jones
----------------------------
Kermit Q. Jones, Director
DATED: March 26, 1996 By:/s/ Dorothy K. Matteson
-------------------------------
Dorothy K. Matteson, Director
DATED: March 26, 1996 By:/s/ H. E. Nance
-------------------------------
H. E. Nance, Director
DATED: March 26, 1996 By:/s/ James A. Willingham
-------------------------------
James A. Willingham, Director
-105-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 120964
<INT-BEARING-DEPOSITS> 495
<FED-FUNDS-SOLD> 5200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24796
<INVESTMENTS-CARRYING> 10187
<INVESTMENTS-MARKET> 10191
<LOANS> 130412
<ALLOWANCE> 3003
<TOTAL-ASSETS> 195092
<DEPOSITS> 179205
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1331
<LONG-TERM> 0
0
0
<COMMON> 13258
<OTHER-SE> 1382
<TOTAL-LIABILITIES-AND-EQUITY> 195092
<INTEREST-LOAN> 11502
<INTEREST-INVEST> 1760
<INTEREST-OTHER> 835
<INTEREST-TOTAL> 14098
<INTEREST-DEPOSIT> 2598
<INTEREST-EXPENSE> 2642
<INTEREST-INCOME-NET> 11456
<LOAN-LOSSES> 313
<SECURITIES-GAINS> 54
<EXPENSE-OTHER> 10372
<INCOME-PRETAX> 1918
<INCOME-PRE-EXTRAORDINARY> 1918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1239
<EPS-PRIMARY> .92
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 6746
<LOANS-PAST> 121
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3224
<CHARGE-OFFS> 552
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 3003
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
