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AMENDMENT #1
Washington, D.C. 20549
FORM 10-KSB/A
(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 re sponse 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 incorpo rated 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
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PART I
ITEM 1. BUSINESS.
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General
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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, 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
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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 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 had not been previously collected or charged-off, and
reduce the assets classified "Substandard" that had 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 had a loan or other extension of credit from the Bank that had been
charged-off or classified "Loss" and is uncollected, or "Substandard" without
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
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reports detailing the compliance with the FDIC Memorandum and the
results thereof.
Based upon the January 8, 1996, FDIC examination of the Bank as of
November 30, 1995, the Bank was notified on May 22, 1996, that the FDIC
Memorandum dated August 3, 1994, has been removed. The Board of Directors of the
Bank subsequently approved a resolution which will require the Bank management
to maintain certain performance standards. In accordance with the resolution
signed April 23, 1996, the Bank agreed to take certain actions including the
following: (i) the Bank shall not advance additional credit to any borrower that
has had a loan charged off or classified, in whole or in part, "Loss" or
"Doubtful" by the FDIC, and is uncollected, (ii) the Bank shall not advance
additional credit to any borrower whose loan has been classified, in whole or in
part, "Substandard" by the FDIC, without the prior consent and confirmation of
the Board of Directors, (iii) deficiencies in credit administration noted in the
most recent exam will be corrected by June 25, 1996, (iv) the allowance for loan
and lease losses will be maintained at an adequate level, (v) the Bank will
adopt a Funds Management Policy which is acceptable to the FDIC, including
policies and practices to measure the volatile aspects of the Bank's funding
structure, (vi) the Bank will develop action plans to resolve each classified
asset, and (vii) the Bank will correct any violations cited in the January 8,
1996, FDIC Report of Examination. The Bank believes that all of the actions
noted in the resolution have been taken, or are being monitored on an ongoing
basis.
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 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 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
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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 shareholders
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. On June 12, 1996, the Bank was notified by the
Department that the Department's Memorandum has been removed.
Supervision and Regulation
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Harbor Bancorp
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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
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%
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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 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
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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 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
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authority to regulate debt obligations (other than commercial paper) issued by
bank holding companies by imposing interest ceilings and reserve requirements on
such debt obligations.
The ability of the Company to pay dividends to its shareholders is
subject to the restrictions set forth in the California General Corporation Law
(the "Corporation Law"). The Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The Corporation Law
further provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally are
as follows: (i) the corporation's assets equal at least 1-1/4 times its
liabilities; and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the 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
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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
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(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 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 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
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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
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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.
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.
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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. 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
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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 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
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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:
<TABLE>
<CAPTION>
"Well Capitalized" "Adequately Capitalized"
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<S> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
"Undercapitalized" "Significantly Undercapitalized"
------------------ --------------------------------
<S> <C>
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%
</TABLE>
"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
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certain limited exceptions, making capital distributions if after such
transaction the institution would be undercapitalized. If an insured depository
institution is undercapitalized, it will be closely monitored by the appropriate
federal banking agency, subject to asset growth restrictions and required to
obtain prior regulatory approval for acquisitions, branching and engaging in new
lines of business. Any undercapitalized depository institution must submit an
acceptable capital restoration plan to the appropriate federal banking agency 45
days after becoming undercapitalized. The appropriate federal banking agency
cannot accept a capital plan unless, among other things, it determines that the
plan (i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is limited
to the lesser of (a) an amount equal to 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 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
- 13 -
<PAGE> 15
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 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
- 14 -
<PAGE> 16
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
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.
- 15 -
<PAGE> 17
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.
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
- 16 -
<PAGE> 18
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 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).
- 17 -
<PAGE> 19
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
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
- 18 -
<PAGE> 20
exchanged in a current transaction between willing parties, other 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.
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
- 19 -
<PAGE> 21
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 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
- 20 -
<PAGE> 22
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 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
- 21 -
<PAGE> 23
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 1995 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.
<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 28,357 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.
- 22 -
<PAGE> 24
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
---------------------------------- -----------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
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).
-23-
<PAGE> 25
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):
<TABLE>
<CAPTION>
----------------------------------------------------
Less than One Year Five Thru After
One Year Thru Ten Years Ten Years
Five Years
----------------------------------------------------
Book
Value
------
<S> <C> <C> <C> <C> <C>
U.S. gov't
& agency
obligations(1) $33,812 $28,977 $ 1,260 $ 1,650 $ 1,924
Obligations of
state/political
subdivisions (2) 338 -- 137 201 --
Mutual funds, net 832 -- -- -- 832
------- ------- ------- ------- -------
$34,982 $28,977 $ 1,397 $ 1,852 $ 2,756
======= ======= ======= ======= =======
</TABLE>
- 24 -
<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C>
Yield-Weighted Average 5.85% 7.68% 6.42% 8.69%
</TABLE>
(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.
-25-
<PAGE> 27
Loan Portfolio
(in thousands)
<TABLE>
<CAPTION>
Domestic
Commercial Real Estate
Loans
(Construction)
<S> <C> <C>
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
======= =======
</TABLE>
Loans Contractually Past Due
all domestic)
<TABLE>
<CAPTION>
Total Loans Past Due 90 Days(2) Loans On
Outstanding Amount % of Total Non Accrual(1)
-----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
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
======== ==== === ======
</TABLE>
(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.
-26-
<PAGE> 28
Summary of Loan Loss Experience
-------------------------------
(in thousands)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
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
========= =========
Ratio of net loans charged off to
average loans outstanding 0.45% 1.31%
==== ====
Ratio of allowance for loan
losses to loans at year end 2.30% 2.81%
==== ====
</TABLE>
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.
-27-
<PAGE> 29
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.
-28-
<PAGE> 30
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 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 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.
-29-
<PAGE> 31
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 pre scribed regulatory minimums for
well capitalized banks and those specified in the FDIC Memorandum dated August
3, 1994.
-30-
<PAGE> 32
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>
-31-
<PAGE> 33
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 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.
-32-
<PAGE> 34
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 $108,000 and an expiration date of November 1999. There
is ample parking which is shared with other tenants. The prem ises 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.
-33-
<PAGE> 35
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.
-34-
<PAGE> 36
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.
-35-
<PAGE> 37
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 Everen Securities,
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 Everen Securities 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
-36-
<PAGE> 38
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>
-37-
<PAGE> 39
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 under standing 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, 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.
-38-
<PAGE> 40
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 rates 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 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.
-39-
<PAGE> 41
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 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. Of the $6,745,972 in non-performing loans at December 31,
1995, $2,686,978 were on cash basis nonaccrual. All payments have been received
as agreed on the cash basis nonaccrual loans which have a weighted average
interest rate of approximately 6.10%. The primary reason for the increase in
non-performing loans was the addition in the fourth quarter of two loans
totaling approximately $1.5 million.
ANNUAL REPORT
NONACCRUAL COMMENT
Of the $6,745,972 in non-performing loans on December 31, 1995, $2,686,978 were
on cash basis nonaccrual. All payments have been received as agreed on the cash
basis nonaccrual loans which have a weighted average interest rate of
approximately 6.10%. The primary reason for the increase in non-performing
loans was the addition in the fourth quarter of two loans totalling
approximately $1.5 million.
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.
Based upon the January 8, 1996, FDIC examination of the Bank as of November 30,
1995, the Bank has been notified that the FDIC Memorandum dated August 3, 1994,
will be removed. Subsequent to the removal of the FDIC Memorandum, the Board of
Directors of the Bank will approve a resolution which will require Bank
management to maintain certain performance standards.
Other Operating Income
Other operating income, which includes income derived from service charges
on deposit accounts, loan servicing fees and
-40-
<PAGE> 42
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.
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
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, and
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.
-41-
<PAGE> 43
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 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 In vestment 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.
-42-
<PAGE> 44
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%.
-43-
<PAGE> 45
(THIS PAGE INTENTIONALLY LEFT BLANK)
-44-
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
Covered by Report of Independent Public Accountants.
Page
<TABLE>
<S> <C>
Reference
Report of Ernst & Young, LLP, Auditors 46
Consolidated Balance Sheets at
December 31, 1995 and 1994 47-48
Consolidated Statements of Income for the
years ended December 31, 1995, 1994 and 1993 49-50
Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1995,
1994 and 1993 51
Consolidated Statements of Cash Flows
for the years ended December 31, 1995
1994 and 1993 52-53
Notes to Consolidated Financial Statements 54-72
</TABLE>
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.
-45-
<PAGE> 47
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 Company changed
its method of accounting for investment securities.
Los Angeles, California Ernst & Young LLP
March 1, 1996
-46-
<PAGE> 48
HARBOR BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
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
------------ ------------
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
============ ============
</TABLE>
-47-
<PAGE> 49
HARBOR BANCORP
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
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-
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
============= =============
</TABLE>
See notes to consolidated financial statements.
-48-
<PAGE> 50
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>
-49-
<PAGE> 51
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.
- 50 -
<PAGE> 52
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>
See notes to consolidated financial statements.
- 51 -
<PAGE> 53
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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) loss on sale of
investment securities (54,044) 734 (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 1,454,380 1,003,904 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 6,995,550 4,978,000 --
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)
</TABLE>
- 52 -
<PAGE> 54
HARBOR BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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 (13,759,596) 12,391,937 (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
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
- 53 -
<PAGE> 55
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.
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.
- 54 -
<PAGE> 56
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 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 allowance for loan 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.
- 55 -
<PAGE> 57
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 cash income taxes of
$700,000, $244,211 and $598,772 in 1995, 1994 and 1993, respectively.
- 56 -
<PAGE> 58
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
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.
- 57 -
<PAGE> 59
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>
- 58 -
<PAGE> 60
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 held to maturity in 1995 and 1994.
Gross gains of $146,096 were realized on sales in 1993 (taxes related to
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.
- 59 -
<PAGE> 61
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
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>
- 60 -
<PAGE> 62
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
----------- -----------
$24,921,790 $24,795,506
=========== ===========
</TABLE>
Gross gains of $54,044 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 $6,995,550 in 1995 and
$4,978,000 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.
- 61 -
<PAGE> 63
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:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
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 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.
- 62 -
<PAGE> 64
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
- 63 -
<PAGE> 65
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
5. Income taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
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:
Current $ 283,000 $ 23,000 $ 306,000
Deferred (628,000) (175,000) (803,000)
--------- --------- ---------
$(345,000) $(152,000) $(497,000)
</TABLE>
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.
- 64 -
<PAGE> 66
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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)
======== ========= =========
</TABLE>
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:
<TABLE>
<S> <C>
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
=========
</TABLE>
- 65 -
<PAGE> 67
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.
- 66 -
<PAGE> 68
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:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
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
===========
</TABLE>
Rental expense for the three years ended December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
- 67 -
<PAGE> 69
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
8. Commitments and contingencies (Cont'd)
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.
- 68 -
<PAGE> 70
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
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
INCOME STATEMENTS
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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)
Operating expense 41,430 19,290 33,692
---------- ---------- ---------
Net income (loss) $1,238,534 $ 157,940 $(660,710)
========== ========== ==========
</TABLE>
-69-
<PAGE> 71
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 -- 306 (8)
Other assets 31,140 (109,182) (379)
----------- ----------- -----------
Net cash used in
operating activities (10,290) (113,441) (1,496)
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>
-70-
<PAGE> 72
HARBOR BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
9. Condensed Financial Statements (Cont'd.)
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 $ 783,000 at
December 31, 1995. However, as discussed in Note 8, cash dividend payments by
the Bank are restricted by the FDIC Memorandum.
-71-
<PAGE> 73
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>
-72-
<PAGE> 74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
-73-
<PAGE> 75
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
(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.
-74-
<PAGE> 76
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
of 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 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.
-75-
<PAGE> 77
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 other officer 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 $148,258 $60,000 -0- -0- -0- -0- $1,488
Chairman of the Board 1994 125,400 45,000 -0- -0- -0- -0-
1,488
and Chief Executive 1993 120,398 39,550 -0- -0- -0- -0- 1,488
Officer of Harbor Bank
Dallas E. Haun 1995 $106,250 $ 50,000 -0- -0- -0- -0- $1,320
President and Chief 1994 97,850 40,000 -0- -0- -0- -0- 1,200
Operating Officer 1993 93,600 30,100 -0- -0- -0- -0- 1,080
of Harbor Bank(4)
</TABLE>
(1) Included in this column are salaries 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
includes bonuses accrued in the current year to be paid in subsequent year.
(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.
(4) Dallas E. Haun was promoted to the position of Vice President of Harbor
Bancorp on May 23, 1995, and was elected as the President and Chief Operating
Officer of Harbor Bank on October 24, 1995. On August 22, 1995, the Board of
Directors of Harbor Bank approved an Employment Agreement effective September 1,
1995, between Harbor
-76-
<PAGE> 78
Bank and Dallas Haun that would run to February 22, 1999. The agreement calls
for base salary levels and bonus plan participation declared annually by the
Board of Directors and is extended for an additional year each succeeding
February 28 by mutual agreement.
(5) Phillip J. Bond joined Harbor Bank on September 11, 1995 as Executive Vice
President and Chief Credit Officer and by a Letter Agreement with the Board of
Directors will be entitled to extra compensation in the amount of $50,000.00 if
there is a change in majority ownership of the Bank within 24 months of his
employment.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d)
- ------------------------------------------------------------------------------------------------------
Value
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-End (#) Year-End ($)
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.
-77-
<PAGE> 79
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.
If an optionee's employment is terminated, unless termina tion 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
-78-
<PAGE> 80
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.
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
-79-
<PAGE> 81
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.
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.
-80-
<PAGE> 82
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%
John W. Hancock 4,169 .31%
Dallas E. Haun 5,137 .38%
Kermit Q. Jones 52,943 3.93%
Robert E. Leslie 798 .06%
-81-
<PAGE> 83
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%
-82-
<PAGE> 84
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.
-83-
<PAGE> 85
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:
20.1 - Proxy, 1996
27 - Financial Data Schedule
(b) Reports on Form 8-k:
None
-84-
<PAGE> 86
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
DIRECTORS:
DATED: March 26, 1996 By: /s/ James H. Gray
------------------------------
James H. Gray, Director
-85-
<PAGE> 87
DATED: March 26, 1996 By: /s/ John W. Hancock
-------------------------------
John W. Hancock, 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/ Robert E. Leslie
-------------------------------
Robert E. Leslie, 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/ Malcolm C. Todd
-------------------------------
Malcolm C. Todd, Director
DATED: March 26, 1996 By: /s/ James A. Willingham
-------------------------------
James A. Willingham, Director
DATED: March 26, 1996 By: /s/ Margaret E. Wilson
-------------------------------
Margaret E. Wilson, Director
-86-
<PAGE> 1
[LOGO]
HARBOR BANCORP
11 Golden Shore
Long Beach, California 90802
(310) 491-1111
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 28, 1996
TO THE SHAREHOLDERS OF HARBOR BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of
its Board of Directors, the 1996 Annual Meeting of Shareholders (the "Meeting")
of Harbor Bancorp (the "Company") will be held at Harbor Bank, 11 Golden Shore,
Long Beach, California 90802 on Tuesday, May 28, 1996 at 2:00 p.m., for the
purpose of considering and voting upon the following matters:
1. Election of Directors. Electing ten (10) persons to the Board of
Directors to serve until the 1997 Annual Meeting of Shareholders and until their
successors are elected and have qualified. The following persons are the Board
of Directors' nominees:
James H. Gray Dorothy K. Matteson
John W. Hancock H.E. Nance
Dallas E. Haun Malcolm C. Todd, M.D.
Kermit Q. Jones James A. Willingham
Robert E. Leslie Margaret E. Wilson
2. Other Business. Transacting such other business as may properly
come before the Annual Meeting and any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on April 15,
1996, as the record date for determination of shareholders entitled to notice
of, and the right to vote at, the Meeting.
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. THE ENCLOSED PROXY IS
SOLICITED BY THE COMPANY'S BOARD OF DIRECTORS. ANY SHAREHOLDER GIVING A PROXY
MAY REVOKE IT PRIOR TO THE TIME IT IS VOTED BY NOTIFYING THE SECRETARY OF THE
COMPANY IN WRITING OF REVOCATION OF SUCH PROXY, BY FILING A DULY EXECUTED PROXY
BEARING A LATER DATE, OR BY ATTENDING THE MEETING AND VOTING IN PERSON.
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING SO THAT WE CAN ARRANGE FOR ADEQUATE ACCOMMODATIONS.
Dated: April 30, 1996
BY ORDER OF THE BOARD OF DIRECTORS
Dorothy K. Matteson, Secretary
<PAGE> 2
HARBOR BANCORP
11 Golden Shore
Long Beach, California 90802
(310) 491-1111
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 28, 1996
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of Proxies for use at the 1996 Annual Meeting of Shareholders (the
"Meeting") of Harbor Bancorp (the "Company") to be held at Harbor Bank, 11
Golden Shore, Long Beach, California 90802 at 2:00 p.m., on Tuesday, May 28,
1996, and at any and all adjournments thereof.
It is anticipated that this Proxy Statement and the accompanying
notice will be mailed on or about April 30, 1996 to shareholders eligible to
receive notice of and vote at the Meeting.
The matters to be considered and voted upon at the Meeting will be:
1. Election of Directors. Electing ten (10) persons to the Board of
Directors to serve until the 1997 Annual Meeting of Shareholders and until their
successors are elected and have qualified. The following persons are the Board
of Directors' nominees:
James H. Gray Dorothy K. Matteson
John W. Hancock H.E. Nance
Dallas E. Haun Malcolm C. Todd, M.D.
Kermit Q. Jones James A. Willingham
Robert E. Leslie Margaret E. Wilson
2. Other Business. Transacting such other business as may properly
come before the Annual Meeting and any adjournment or adjournments thereof.
REVOCABILITY OF PROXIES
A form of proxy for voting your shares at the Meeting is enclosed.
Any shareholder who executes and delivers such a Proxy has the right to revoke
it at any time before it is exercised by filing with the Secretary of the
Company an instrument revoking it or a duly-executed Proxy bearing a later date.
In addition, the powers of the proxy holders will be revoked if the person
executing the Proxy is present at the meeting and elects to vote in person by
advising the Chairman of such election. Subject to such revocation, all shares
represented by a properly executed Proxy received in time for the Meeting will
be voted by the proxy holders in accordance with the instructions specified on
the Proxy. IF NO INSTRUCTION IS SPECIFIED WITH RESPECT TO A PROPOSAL TO BE ACTED
UPON, THE SHARES REPRESENTED BY YOUR EXECUTED PROXY WILL BE VOTED FOR THE
ELECTION OF THE BOARD OF DIRECTORS' NOMINEES AS DIRECTORS. IF ANY OTHER BUSINESS
IS PROPERLY PRESENTED AT THE MEETING, THE PROXY WILL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS.
If you hold your shares of common stock in "street name" and you
fail to instruct your broker or nominee as to how to vote your common stock,
your broker or nominee may, at its discretion, vote your common stock "FOR" the
election of the Board of Directors' nominees.
-1-
<PAGE> 3
PERSONS MAKING THE SOLICITATION
This solicitation of proxies is being made by the Board of Directors
of the Company. The expense of preparing, assembling, printing and mailing this
Proxy Statement and the material used in the solicitation of proxies for the
Meeting will be borne by the Company. It is contemplated that proxies will be
solicited principally through the use of the mail, but officers, directors, and
employees of the Company and its subsidiary, Harbor Bank (the "Bank"), may
solicit proxies personally or by telephone, without receiving special
compensation therefor. Although there is no formal agreement to do so, the
Company may reimburse banks, brokerage houses, and other custodians, nominees
and fiduciaries for their reasonable expense in forwarding these Proxy Materials
to shareholders whose stock in the Company is held of record by such entities.
In addition, the Company may utilize the services of individuals or companies
not regularly employed by the Company in connection with the solicitation of
proxies if Management of the Company determines it advisable.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
There were issued and outstanding 1,415,225 shares of the Company's
common stock on April 15, 1996, which has been fixed as the record date for the
purpose of determining the shareholders entitled to notice of and to vote at the
meeting (the "Record Date"). On any matter submitted to the vote of the
shareholders, each holder of common stock will be entitled to one vote, in
person or by the proxy, for each share of common stock held of record on the
books of the Company as of the Record Date for the Meeting. In connection with
the election of directors, the shares may be voted cumulatively if a shareholder
present at the meeting has given notice at the meeting prior to the voting of
his or her intention to so vote and such candidate or candidates' names have
been placed in nomination prior to the meeting. If any shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. Cumulative voting allows a shareholder to cast a number of shares
held in his or her name as of the Record Date, multiplied by the number of
directors to be elected. This total number of votes may be cast for one nominee,
or distributed among as many nominees or in such proportions as the shareholders
sees fit. If cumulative voting is declared at the Meeting, votes represented by
proxies delivered pursuant to this Proxy Statement may be cumulated at the
discretion of the proxy holders, in accordance with the recommendations of the
Board of Directors. In the election of directors, the ten (10) nominees
receiving the highest number of votes will be elected.
SHAREHOLDERS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management of the Company knows of no person who owns, beneficially
or of record, either individually or together with associates, 5 percent or more
of the outstanding common stock, except as set forth in the table below. The
following table sets forth certain information as of April 15, 1996 concerning
the beneficial ownership of the Company's outstanding common stock by each of
the directors of the Company, the named executives (as defined below) and by all
directors and executive officers of the Company as a group AND INCLUDES A 5%
STOCK DIVIDEND AS DECLARED ON APRIL 8, 1996. Management is not aware of any
change in control of the Company or of any arrangement which may, at a
subsequent date, result in a change of control of the Company.
<TABLE>
<CAPTION>
Common Stock
------------
Name and Title Beneficially Percent
-------------- ------------ -------
Other than Director Owned(1) of Class(2)
------------------- -------- -----------
<S> <C> <C>
James H. Gray 122,941(3) 8.69%
President of Company, Chairman of the Board,
and Chief Executive Officer of Bank
c/o Harbor Bank
11 Golden Shore
</TABLE>
-2-
<PAGE> 4
<TABLE>
<S> <C> <C>
Long Beach, California 90802
John W. Hancock 4,377 .31%
Dallas E. Haun 44,626(4) 3.15%
VICE PRESIDENT OF COMPANY AND
PRESIDENT & CHIEF OPERATING OFFICER OF BANK
Kermit Q. Jones 55,590 3.93%
Robert E. Leslie 837 .06%
Dorothy K. Matteson 38,741 2.74%
H.E. Nance 10,828 .77%
Malcolm C. Todd 48,145 3.40%
James A. Willingham 81,524 5.76%
Margaret E. Wilson 57,019(5) 4.03%
ALL DIRECTORS AND OFFICERS (12 IN NUMBER)(6) 595,216(7) 42.06%
</TABLE>
(1) Beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (a) voting power, which
includes the power to vote, or to direct the voting of such security;
and/or (b) investment power which includes the power to dispose, or to
direct the disposition of such security. Beneficial owner also includes
any person who has the right to acquire beneficial ownership of such
security as defined above within 60 days of the Record Date.
(2) Shares subject to options held by directors and executive officers (or
group) are treated as issued and outstanding for the purpose of
computing the percent of the class owned by such person (or group), but
not for computing the percent of the class owned by any other person (or
group).
(3) Includes 16,577 shares of stock options granted to Mr. Gray but not
exercised.
(4) Includes 39,233 shares of stock options granted to Mr. Haun but not
exercised.
(5) Shares are held by the Wilson Family Trust of which Mrs. Wilson is a
Co-Trustee.
(6) As used throughout this Proxy Statement, the terms "officer" and
"executive officer" mean the President of Harbor Bancorp and Chairman of
the Board of Directors and Chief Executive Officer of the Bank, the
President and Chief Operating Officer of the Bank and Vice President of
the Company, the Executive Vice President and Chief Credit Officer of
the Bank, the Senior Vice President and Chief Financial Officer of the
Bank and Vice President and Chief Financial Officer of the Company, and
the Senior Vice President and Director of Operations of the Bank. The
Secretary of the Company is not an executive officer.
(7) Includes 67,137 shares of stock options granted to all directors and
executive officers as a group but not exercised. Includes 119,261 shares
owned by the Harbor Bank Employee Stock Ownership Plan of which Melissa
Lanfre, Vice President and Chief Financial Officer of the Company serves
as Trustee and over which Ms. Lanfre has sole voting and investment
power.
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES
The Company's Articles provide for a range of eight (8) to fifteen (15)
directors, and permit the exact number of directors of the Company to be fixed
by Board or shareholder action. The Board of Directors has fixed the number of
directors at ten (10).
The persons named below, all of whom are currently members of the Company's
Board of Directors, will be nominated for election as directors to serve until
the 1997 Annual Meeting of Shareholders and until their successors are elected
and have qualified. Votes will be cast in such a way as to effect the election
of all ten (10) nominees, or as many thereof as possible under the rules of
cumulative voting. In the event that any of the nominees should be unable to
serve as a director, it is intended that
-3-
<PAGE> 5
the Proxy will be voted for the election of such substitute nominees, if any, as
shall be designated by the Board of Directors. All nominees have indicated their
willingness to serve if elected and the Board of Directors has no reason to
believe that any of the nominees will be unavailable to serve if elected.
None of the directors, nominees or executive officers of the Company were
selected pursuant to any arrangement or understanding, other than with the
directors and executive officers of the Company and the Bank, acting within
their capacities as such. There are no family relationships between the
directors and executive officers of the Company and none of the directors or
executive officers of the Company serve as directors of any company which has a
class of securities registered under, or which is subject to the periodic
reporting requirements of, the Securities Exchange Act of 1934, as amended, or
any investment company registered under the Investment Company Act of 1940, as
amended.
The following table sets forth the names and certain information as of
April 15, 1996, concerning the persons to be nominated by the Board of Directors
for election as directors of the Company:
<TABLE>
<CAPTION>
Present Principal Occupation
----------------------------
and Principal Occupation Served as Director
------------------------ ------------------
Name Age During Past Five Years Since(1)
- ---- --- ---------------------- --------
<S> <C> <C> <C>
James H. Gray 58 President of Harbor Bancorp, Chairman and
Chief Executive Officer of Harbor Bank 1982
John W. Hancock 59 President, Bancap Investment Group 1992
Dallas E. Haun 42 VICE PRESIDENT OF HARBOR BANCORP,
PRESIDENT AND CHIEF OPERATING OFFICER OF HARBOR BANK 1993
Kermit Q. Jones 77 Owner, Treasure Valley Land and 1982
Cattle/Dairy Farmer
Robert E. Leslie 71 Retired Fire Chief, City of Long Beach 1988
Dorothy K. Matteson 69 Uniform Sales, Retired 1982
H.E. Nance 63 Retired President, Nance Tours & Travel 1988
Malcolm C. Todd, M.D. 83 Retired Physician/Surgeon 1982
James A. Willingham 67 President, Boulevard Buick and Chairman of the 1982
Board of Harbor Bancorp
Margaret E. Wilson 67 Co-trustee of the Wilson Family Trust 1993
</TABLE>
- ---------------
(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.
EXECUTIVE OFFICERS
The following table sets forth as to each of the persons who
currently serve as an executive officer of the Company, such person's age, such
person's principal occupation during the past five (5) years, such person's
current position with the Company, and the periods during which such person
served in such capacity.
<TABLE>
<CAPTION>
Name and Position Age Date Elected, Company Date Elected, Bank
----------------- --- --------------------- ------------------
<S> <C> <C> <C>
James H. Gray
President & Chief Executive Officer 58 March 22, 1983
Chairman & Chief Executive Officer November 1, 1987
Dallas E. Haun
Vice President 42 May 23, 1995
</TABLE>
-4-
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
President & Chief Operating Officer October 24, 1996
Phillip J. Bond 32 N/A
Executive V. President & Chief Credit Officer September 11, 1995
H. Melissa Lanfre
Vice President & Chief Financial Officer 44 June 23, 1987
Senior V. President & Chief Financial Officer June 23, 1987
Lou Burgess
Senior V. President & Director of Operations 55 N/A November 1, 1995
</TABLE>
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 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 with the major subsidiary of the Company, Harbor
Bank, since 1976. 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 major subsidiary of the Company, Harbor
Bank, since 1977. He currently holds the position of President and Chief
Operating Officer of Harbor Bank and Vice President of Harbor Bancorp.
Mr. Bond joined the major subsidiary of the Company, Harbor Bank, on
September 11, 1995, and currently holds the position of Executive Vice President
and Chief Credit Officer.
Ms. Lanfre joined the Company on July 13, 1987, and currently holds
the position of Senior Vice President and Chief Financial Officer of Harbor Bank
and Vice President and Chief Financial Officer of the Company.
Ms. Burgess has been with the major subsidiary of the Company,
Harbor Bank, since 1986. She currently holds the position of Senior Vice
President and Director of Operations.
The Board of Directors and Committees
The Board of Directors of the Company held seven (7) regular
meetings and one (1) special meeting in 1995. In 1995, all of the Company's
directors attended at least 75% of all Board meetings. The Company's Board has
no standing committees, and any matters which might ordinarily be considered by
an audit, compensation or nominating committee, were considered by the Board as
a whole. The Company's directors also serve as members of the Bank's Board of
Directors and on committees of the Bank's Board. In particular, all Company
Directors are members of the Bank's Board of Directors, and they met twelve (12)
times during 1995. Any matters of the Bank which might ordinarily be considered
by a compensation or nominating committee were considered by the Board of the
Bank as a whole.
The Bank's Loan Committee met fifty-two (52) times in 1995. This
committee reviews certain types of loan requests. The Bank's Audit Committee met
eleven (11) times in 1995. This committee is responsible for audit functions in
the Bank, the appointment of an outside accounting firm and the review of
reports of the accounting firm. The Bank's Loan and Investment Committee met
twelve (12) times in 1995. This committee also reviews certain types of loan
requests and Bank investments.
-5-
<PAGE> 7
DIRECTOR COMPENSATION
Directors of the Company and Bank who are considered to be inside
directors or employees of the Company, receive a director's fee of $600 per
meeting attended and all other directors, who are considered to be outside
directors, receive a director's fee of $1,000 per meeting attended. Non-officer
directors serving on the Bank's Loan Committee receive $150 per meeting
attended.
EXECUTIVE OFFICERS' COMPENSATION AND OTHER INFORMATION
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 executive officers
of the Company (determined as of the end of the last fiscal year) whose annual
salary and bonus exceeded $100,000 in 1995 (the "Named Executives") for each of
the fiscal years ended December 31, 1995, 1994, and 1993.
SUMMARY OF CASH AND CERTAIN COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ------------------ -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -------------------------- ----- --------- ------- ------------ --------- ------- ------ --------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($) SARS(#) ($) ($)(3)
- --------------------------- ---- -------- -------- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James H. Gray 1995 $148,258 $60,000 -0- -0- -0- -0- $1,488
Chairman of the Board and Chief 1994 125,400 45,000 -0- -0- -0- -0- 1,488
Executive Officer of Harbor Bank 1993 120,398 39,550 -0- -0- -0- -0- 1,488
Dallas E. Haun 1995 106,250 50,000 -0- -0- -0- -0- 1,320
President and Chief Operating Officer 1994 97,850 40,000 -0- -0- -0- -0- 1,200
of Harbor Bank(4) 1993 93,600 30,100 -0- -0- -0- -0- 1,080
</TABLE>
- ----------
(1) Included in this column are salaries and director's fees, where
applicable, paid for services rendered to the 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.
(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.
(4) Dallas E. Haun was promoted to the position of Vice President of
Harbor Bancorp on May 23, 1995, and was elected as the President and
Chief Operating Officer of Harbor Bank on October 24, 1995. On
August 22, 1995, the Board of Directors of Harbor Bank approved an
Employment Agreement effective September 1, 1995 between Harbor Bank
and Dallas Haun that would run to February 28, 1999. The agreement
calls for base salary levels and bonus plan participation declared
annually by the Board of Directors and is extended for an additional
year each succeeding February 28 by mutual agreement.
(5) Mr. Phillip J. Bond joined Harbor Bank on September 11, 1995 as
Executive Vice President and Chief Credit Officer and by Letter
Agreement with the Board of Directors will be entitled to extra
compensation in the amount of $50,000.00 if there is a change in
majority ownership of the Bank within 24 months of his employment.
-6-
<PAGE> 8
The following table provides information with respect to the Named
Executives concerning the exercise of options and/or stock appreciation rights
("SARs") during the fiscal year ended December 31, 1995 and unexercised options
and/or SARs held by the Named Executives as of December 31, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d)
- ------------------------------------------------------------------------------------------------------
Value
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year-End (#) Year-End ($)
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.
CERTAIN TRANSACTIONS
There are no existing or proposed material transactions between the
Company or the Bank and any of the Company's executive officers, directors, or
beneficial owners of 5% or more of the common stock, or the immediate family or
associates of any of the foregoing persons, except as indicated below.
Some of the Company's directors, nominees for director, and
executive officers and their immediate families, as well as the companies with
which such directors and executive officers are associated, are customers of,
and have had banking transactions with the Bank in the ordinary course of the
Bank's business and the Bank expects to have such ordinary banking transactions
with such persons in the future. In the opinion of Management of the Bank, all
loans and commitments to lend included in such transactions were made in
compliance with applicable laws on substantially the same terms, including
interest rates and collateral, as those prevailing for comparable transactions
with other persons of similar creditworthiness and did not involve more than a
normal risk of collectibility or present other unfavorable features.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE BOARD OF DIRECTORS'
NOMINEES.
OTHER MATTERS
The firm of Ernst & Young served as independent public auditors for
the Company and the Bank for 1995. It is anticipated that a representative of
Ernst & Young will be present at the Meeting to respond to appropriate questions
from shareholders.
On December 31, 1993, the Bank underwent examinations conducted
concurrently by the Federal Deposit Insurance Corporation (the "FDIC") and the
California State Banking Department (the "Department"). As a result of the FDIC
examination, the Bank entered into a Memorandum of Understanding dated August 3,
1994. On January 8, 1996, the Bank underwent an examination as of November 30,
1995, conducted by the Federal Deposit Insurance Corporation (the"FDIC") and
upon review of that examination removed the Memorandum of Understanding.
-7-
<PAGE> 9
Any shareholder desiring to submit a proposal for action at the 1997
Annual Meeting of Shareholders which is desired to be presented in the Company's
Proxy Statement with respect to such meeting should submit such proposal to the
Company at its principal place of business no later than January 12, 1997.
The Board of Directors does not know of any matters to be presented
at the Meeting other than those set forth above. However, if any other matters
come before the Meeting, it is the intention of the persons named in the
accompanying Proxy to vote said Proxy in accordance with the recommendations of
the Board of Directors on such matters, and discretionary authority to do so is
included in the Proxy.
The Company's Annual Report for the year ended December 31, 1995 was
mailed to the shareholders on approximately April 30, 1996. The Annual Report
contains consolidated financial statements of the Company and its subsidiaries
and the report thereon of Ernst & Young, independent public auditors.
Dated: April 30, 1996
HARBOR BANCORP
Dorothy K. Matteson, Secretary
-8-
<PAGE> 10
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
HARBOR BANCORP
ANNUAL MEETING OF SHAREHOLDERS
MAY 28, 1996
The undersigned shareholder of Harbor Bancorp (the "Company") hereby
nominates, constitutes and appoints James H. Gray, Kermit Jones and James
Willingham, and each of them, attorney(s), agent(s) and proxy(s) of the
undersigned, with full powers of substitution, to vote all stock of the Company
which the undersigned is entitled to vote at the Annual Meeting of Shareholders
of the Company to be held on Tuesday, May 28, 1996, at 2:00 p.m. at Harbor Bank,
11 Golden Shore, Long Beach, California 90802 and at any and all adjournment or
adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally present thereat, as follows:
1. Elections of Directors
Authority to elect the ten (10) persons named below and in the Proxy
Statement dated April 30, 1996 accompanying the Notice of said Meeting, to serve
until the 1997 Annual Meeting of Shareholders and until their successors are
elected and have qualified:
<TABLE>
<S> <C>
/ / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote
(except as indicated to the contrary below). for all nominees listed below.
</TABLE>
James H. Gray, John W. Hancock, Dallas E. Haun, Kermit Q. Jones, Robert E.
Leslie, Dorothy K. Matteson, H.E. Nance, Malcolm C. Todd, James A. Willingham
and Margaret E. Wilson.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THE NOMINEE'S NAME IN THE SPACE BELOW.)
- --------------------------------------------------------------------------------
2. Other Business
In their discretion, the proxyholders are authorized to vote upon
such other business as may properly come before the Meeting, and at any and all
adjournment or adjournments thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 11
The undersigned hereby ratifies and confirms all that the
proxyholders, or any of them, or their substitutes, shall lawfully do or cause
to be done by virtue hereof, and hereby revokes any and all proxies heretofore
given by the undersigned to vote at the Meeting. The undersigned acknowledges
receipt of the Notice of Annual Meeting of Shareholders and the Proxy Statement
accompanying said Notice.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
DIRECTORS NOMINATED BY THE BOARD OF DIRECTORS. THE PROXY CONFERS AUTHORITY AND
SHALL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATION OF THE BOARD OF DIRECTORS
UNLESS A CONTRARY INSTRUCTION IS INDICATED, IN WHICH CASE THE PROXY SHALL BE
VOTED IN ACCORDANCE WITH SUCH INSTRUCTIONS. IN ALL OTHER MATTERS, IF ANY,
PRESENTED AT THE MEETING, THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
PLEASE SIGN AND DATE BELOW
DATED: ______________________________
NUMBER OF SHARES ____________________
_____________________________________
(SIGNATURE OF SHAREHOLDER)
_____________________________________
(SIGNATURE OF SHAREHOLDER)
(Please date this Proxy and sign your name as it
appears on the stock certificates. When signing as
attorney, executor, administrator, trustee or
guardian, please give full title. If more than one
trustee, all should sign. All joint owners should
sign.)
I DO / / DO NOT / / EXPECT TO ATTEND THE MEETING.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000708193
<NAME> HARBOR BANCORP
<MULTIPLIER> 1,000
<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> 20,964
<INT-BEARING-DEPOSITS> 495
<FED-FUNDS-SOLD> 5,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,796
<INVESTMENTS-CARRYING> 10,187
<INVESTMENTS-MARKET> 10,191
<LOANS> 130,412
<ALLOWANCE> 3,003
<TOTAL-ASSETS> 195,092
<DEPOSITS> 179,205
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,331
<LONG-TERM> 0
0
0
<COMMON> 13,258
<OTHER-SE> 1,382
<TOTAL-LIABILITIES-AND-EQUITY> 195,092
<INTEREST-LOAN> 11,502
<INTEREST-INVEST> 1,760
<INTEREST-OTHER> 835
<INTEREST-TOTAL> 14,098
<INTEREST-DEPOSIT> 2,598
<INTEREST-EXPENSE> 2,642
<INTEREST-INCOME-NET> 11,456
<LOAN-LOSSES> 313
<SECURITIES-GAINS> 54
<EXPENSE-OTHER> 10,372
<INCOME-PRETAX> 1,918
<INCOME-PRE-EXTRAORDINARY> 1,918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,239
<EPS-PRIMARY> .92
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 6,746
<LOANS-PAST> 121
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,224
<CHARGE-OFFS> 552
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 3,003
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
