<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1993 COMMISSION FILE NUMBER: 1-9757
------------------------
GUARDIAN BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3686137
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 SOUTH FIGUEROA, LOS ANGELES, 90017
CALIFORNIA
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (213) 239-0800
------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Common Stock, no par value American Stock Exchange
</TABLE>
------------------------
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 15, 1994, there were 12,514,075 shares of the registrant's
common stock, no par value, issued and outstanding and the aggregate market
value of the common stock, based on the closing price of the stock on the
American Stock Exchange, held by non-affiliates of the registrant was
approximately $24,945,000. Solely for purposes of this calculation, the share
ownership of all directors and executive officers has been excluded.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal year
are incorporated herein by reference in Part III.
2. Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1993 are incorporated herein by reference in Parts I and II.
- --------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
GUARDIAN BANCORP
Guardian Bancorp (the "Company") is a bank holding company which was
incorporated in California on December 31, 1981 and registered under the Bank
Holding Company Act of 1956, as amended. Guardian Bancorp conducts operations
through its sole subsidiary, Guardian Bank. The Company's executive offices are
located at 800 South Figueroa Street, Los Angeles, California 90017, and its
telephone number is (213) 239-0800.
GUARDIAN BANK
Guardian Bank (the "Bank") was incorporated under the laws of the State of
California on October 22, 1982, was licensed by the California Superintendent of
Banks ("Superintendent") and commenced operations as a California
state-chartered bank in October 1983. The Bank's deposit accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits, and
the Bank is a member of the Federal Reserve System.
The Bank has three regional banking offices at the following locations: 800
South Figueroa Street, Los Angeles, California, which also serves as the Bank's
head office; 17330 Brookhurst Street, Fountain Valley, California; and 3401
Centrelake Drive, Ontario, California. Historically, the Bank concentrated on
marketing to, and servicing the needs of, the title insurance and escrow
industries, labor unions, real estate professionals, small and medium sized
businesses and high net worth individuals in the counties of Los Angeles,
Orange, Riverside, San Bernardino and Ventura, California. Furthermore, the
Bank's historical primary lending focus was on real estate-mortgage and
construction lending and, to a lesser extent, on lending to commercial and
industrial enterprises. Although the Bank also makes installment loans, it does
so primarily as an accommodation to existing customers.
Real estate-mortgage loans include individual and multi-family residential
mortgages, commercial and industrial mortgage loans and land acquisition loans.
Construction loans include individual and multi-family residential construction
loans and commercial and industrial construction loans. Commercial loans include
loans made primarily to small and medium sized businesses and professionals for
working capital and equipment acquisitions as well as trade finance. A
substantial portion of these loans are made to borrowers involved in the real
estate industry. Installment loans consist primarily of automobile loans and
loans made to finance small equipment acquisitions.
The Bank has generated a substantial portion of its deposits from large
balance depositors by offering various customer services. A significant amount
of such deposits are from Southern California-based title insurance companies
and escrow companies. Customer services consist primarily of accounting, data
processing and courier services. The Bank also offers a variety of other deposit
instruments. These include personal and business checking accounts, savings
accounts, including interest-bearing negotiable order of withdrawal accounts,
money market accounts and time certificates of deposits. The Bank also offers a
range of specialized services designed to attract and service the needs of its
customers, including wire transfer capability, telephone transfers, same day
posting and account research.
In response to a changed economic environment, the Company has recently
embarked upon a loan portfolio and deposit base diversification effort. The
Company's loan portfolio diversification efforts are focused on targeting small
and medium sized businesses in its market area and such targets include
manufacturers, wholesalers, distributors, retailers, service companies and
professionals. Efforts at changing the Company's deposit mix include introducing
a wider array of deposit products, including retirement and cash management
accounts.
<PAGE>
GUARDIAN TRUST COMPANY
Guardian Trust Company was incorporated under the laws of the State of
California on April 16, 1991, was licensed by the Superintendent and commenced
operations as a California state-chartered trust company in July 1991. Guardian
Trust Company, a wholly-owned subsidiary of the Bank, maintains its offices at
800 South Figueroa Street, Los Angeles, California.
Guardian Trust Company offers custodial, securities servicing and cash
management services to trusts established by labor unions. Each trust has
professional investment managers that direct the investment of the trust funds
held by Guardian Trust Company, and Guardian Trust Company does not offer any
investment advice to such trusts. Guardian Trust Company, which was capitalized
at $5 million by the Bank, subleases approximately 1,500 square feet of office
space from the Company and employs eight people. Currently, the financial
condition and results of operations of Guardian Trust Company are not material
to those of the Company on a consolidated basis. At December 31, 1993, Guardian
Trust Company provided services to trust fund clients based primarily in
Southern California who control approximately $2.3 billion in assets.
PRINCIPAL MARKET AREA
The general economy in the Company's market area, and particularly the real
estate market, are suffering from the effects of a persistent recession that has
negatively impacted the ability of certain borrowers of the Company to perform
under the original terms of their obligations to the Company. According to THE
UCLA BUSINESS FORECAST FOR THE NATION AND CALIFORNIA, DECEMBER 1993 REPORT (the
"UCLA Report"), the current recession in California is expected to continue
until at least the second half of 1994, despite the presence of a moderate
national economic recovery. The UCLA Report attributes the length and depth of
the California recession, which began in 1990, to a number of negative economic
factors, including permanent cutbacks in the California defense industries and
military base closings, a cyclical downturn in California residential real
estate construction, lower rates of international trade growth as a result of
the worldwide recession and the effects on employment of an increased global
emphasis on cost controls and downsizing. The statewide unemployment rate in
November 1993 was 8.6%, compared with a national rate of 6.4%. The UCLA Report
notes that while statewide unemployment figures have improved recently, this was
due to a decline in the size of the labor force and that total California
employment has declined. Nevertheless, the UCLA Report expects a weak job
recovery to begin in California during the second half of 1994, approaching a
normal growth rate over the next four years. Based on its assessment of recent
economic reports and the current economic environment in the Company's market
areas, management believes that the California recession may continue beyond the
third quarter of 1994. It remains uncertain if the impact of the recent Southern
California earthquake and the related aftershocks will have additional negative
effect on the Southern California economy and the Company's customers.
The financial condition of the Company has been, and is expected to continue
to be, dependent upon overall general economic conditions and the real estate
market in Southern California. The future success of the Company is dependent,
in large part, upon the quality of its assets. Although management of the
Company has devoted substantial time and resources to the identification,
collection and workout of nonperforming and other potential problem assets, the
real estate market and the overall economy in Southern California are likely to
continue to significantly effect the quality of the Company's assets in future
periods and, accordingly, its financial condition and results of operations.
LOAN PORTFOLIO
The Company has historically engaged in real estate lending through
construction and term mortgage loans, all of which are secured by deeds of trust
on underlying real estate. The Company also engages in commercial lending to
businesses, and although the Company looks principally to the borrowers' cash
flow as the source of payment, many commercial loans are secured by real estate
as a secondary source of repayment. The Company's real estate and construction
loans are diversified by type of collateral and are concentrated geographically
throughout the five counties it serves in Southern California. The Company is
currently in the process of diversifying its loan portfolio to
2
<PAGE>
include more commercial loans to businesses. In addition to the collateralized
position on its lending activities, all lending transactions are subject to the
Bank's credit evaluation, underwriting criteria and monitoring standards.
The lending activities of the Company are guided by the basic lending policy
established by the Company's Board of Directors. Each loan is evaluated based
on, among other things, character and leverage capacity of the borrower; capital
and investment in a particular property, if applicable; cash flow; collateral;
market conditions for the borrower's business or project; and prevailing
economic trends and conditions. The Company's lending policy also requires an
independent appraisal or an evaluation on each parcel of real estate which will
be taken as collateral for a loan. Loan approval is centralized, and no officer
has loan approval authority in excess of $100,000 on unsecured loans or $250,000
on secured loans.
The following table sets forth the type and amount of loans outstanding as
of the dates indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate-mortgage............................ $ 147,039 $ 138,430 $ 151,620 $ 125,389 $ 106,173
Construction.................................... 87,829 164,194 188,978 148,605 87,898
Commercial...................................... 86,260 85,618 86,946 66,006 52,386
Installment..................................... 2,046 2,938 2,940 2,687 2,598
----------- ----------- ----------- ----------- -----------
Total loans................................... 323,174 391,180 430,484 342,687 249,055
Allowance for loan losses....................... (18,200) (13,466) (9,135) (3,473) (2,505)
Deferred loan fees.............................. (426) (345) (1,238) (1,608) (1,393)
----------- ----------- ----------- ----------- -----------
Total net loans............................... $ 304,548 $ 377,369 $ 420,111 $ 337,606 $ 245,157
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Except as otherwise disclosed herein, as of December 31, 1993, the Company
did not have any concentration of loans in any particular industry exceeding 10%
of total outstanding loans.
In light of the current economic environment and the impact it has had and
may have on the real estate sector, as well as a regulatory recommendation
regarding the size and growth of the Company's real estate related loans prior
to 1992, management remains committed to reducing the Company's real estate
concentration, particularly construction lending. At the same time, management
intends to continue diversifying the loan portfolio by increasing the level of
non-real estate credits to the extent such loans satisfy the Bank's underwriting
criteria and are available and by limiting the growth of new real estate related
loans.
REAL ESTATE-MORTGAGE LOANS. Approximately 45.5% of the Company's loan
portfolio at December 31, 1993 was comprised of medium term mortgage loans,
virtually all of which were secured by first deeds of trust. The following table
sets forth the composition of such mortgage loans by broad type of collateral as
of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1993 1992 1991
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential:
1-4 family units............................................... $ 24,298 16.5% $ 21,807 15.8% $ 24,335 16.1%
Multifamily.................................................... 16,309 11.1 12,632 9.1 16,885 11.1
Commercial and industrial........................................ 79,398 54.0 70,776 51.1 67,953 44.8
Land acquisition loans........................................... 27,034 18.4 33,215 24.0 42,447 28.0
-------- ------- -------- ------- -------- -------
Total.......................................................... $147,039 100.0% $138,430 100.0% $151,620 100.0%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
3
<PAGE>
The Company's 1-4 family residential mortgage loans, which averaged
approximately $270,000 at December 31, 1993 (with four loans over $1 million),
are typically secured by moderate or high-priced single family residences
located in the Company's principal market area. These loans generally have a
term of five years, are amortized over 20 to 30 years, provide for a balloon
payment at the end of the term and generally bear a floating rate of interest
either tied to the 11th District cost of funds or the Company's prime rate.
These loans generally were underwritten with loan-to-value ratios ranging from
approximately 70% to 80%, which decreases progressively for loans in excess of
$250,000.
The Company's multifamily residential mortgage loans, which averaged
approximately $652,000 at December 31, 1993 (with four loans over $1 million),
are typically secured by small (8 to 30 unit) apartment projects for which the
Company has provided the construction financing (see "Item 1. Business -- Loan
Portfolio -- Construction Loans" below). These loans generally have a term of
five years, are amortized over 20 to 30 years and bear a floating rate of
interest tied to the Company's prime rate. The Company's underwriting standards
generally apply a maximum loan-to-value ratio of 75% to these loans.
The Company's commercial and industrial mortgage loans, which averaged
approximately $696,000 at December 31, 1993 (with 29 loans over $1 million), are
primarily secured by small office buildings and multi-use industrial buildings
that are either owner-occupied or built for rental purposes and, to a much
lesser extent, by small (20 to 50 unit) motels located in the Company's
principal market area. These loans generally have a term of three to five years,
are amortized over 20 years and bear a floating rate of interest tied to the
Company's prime rate. The Company's underwriting standards generally apply a
maximum loan-to-value ratio of 70% to these loans.
Land acquisition loans, which averaged approximately $403,000 at December
31, 1993 (with four loans over $1 million), are typically secured by raw land
acquired for residential, commercial or industrial development within a
relatively short period of time after acquisition. Of the amount outstanding at
December 31, 1993, 56.2% was for residential development, 42.1% was for
commercial projects and 1.7% was for industrial development. These loans
generally mature in three years or less, bear a floating rate of interest tied
to the Company's prime rate and are all due and payable at maturity. In
addition, these loans were generally underwritten between 45% to 60% of the
appraised value of the property on an undeveloped basis under the Company's
underwriting policy.
Although real estate-mortgage loans increased by approximately $8.6 million
at the close of 1993 from the amount outstanding at December 31, 1992, this
increase is primarily attributable to an increase in mini-permanent loans made
by the Company to existing customers. The Company's mini-permanent loans
represent loans that have a term of three to five years, are amortized over 20
to 25 years and provide for a balloon payment at the end of the term. Most of
these loans provide intermediate term financing for construction loans that were
originated by the Company. The Company expects to continue to provide
intermediate term financing of this type in the future.
CONSTRUCTION LOANS. Approximately 27.2% of the Company's loan portfolio at
December 31, 1993 was comprised of construction loans. The following table sets
forth the composition of such construction loans by broad type of project as of
the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1993 1992 1991
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential:
1-4 family units............................................... $ 59,349 67.6% $ 94,204 57.4% $ 78,308 41.4%
Multifamily.................................................... 8,437 9.6 16,000 9.7 59,169 31.3
Commercial and industrial........................................ 20,043 22.8 53,990 32.9 51,501 27.3
-------- ------- -------- ------- -------- -------
Total.......................................................... $ 87,829 100.0% $164,194 100.0% $188,978 100.0%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
4
<PAGE>
During the last two and a half years, the Company's residential construction
loans have increased as a percentage of the Company's total construction loan
portfolio. This increase is indicative of the Company's preference for entry
level housing projects, including detached homes and condominiums, and
multifamily rental units, and the demand for such loans by its regular
construction customers. These single-family housing and condominium units built
for resale typically average approximately 1,600 square feet and sell for
$130,000 to $250,000.
The multifamily residential units financed by the Company consist of
low-rise apartment projects of between eight and 30 units, each ranging in size
from 800 square feet to 1,000 square feet, and rent for between $750 and $1,000
per month. As of December 31, 1993, four of the Company's residential
construction loans, totalling approximately $2.3 million, or 0.7% of the total
loan portfolio, were for projects located outside the State of California. The
borrowers on these out-of-state loans are customers with whom the Company has
had a long-standing relationship and who previously have demonstrated an ability
to complete similar projects successfully.
The Company's residential construction loans generally bear a floating rate
of interest and mature in one year or less. The Company's residential
construction loan underwriting standards generally limit the loan amount to
approximately 70% of the completed value of the project. Larger single-family
residential projects, including detached homes and/or condominiums, which
consist of 15 to 150 units, are usually built by the Company's customers on a
phased basis. Construction loans for these projects are generally underwritten
on a phase-by-phase basis, such that each phase must qualify for financing
separately and only after all or substantially all of the units in the prior
phase or phases have been sold.
The Company's commercial and industrial construction loans are typically
made for the construction of small office, multi-use industrial buildings and,
to a lesser extent, retail centers and had an average outstanding balance of
$2.0 million at December 31, 1993. The Company's commercial and industrial
construction loans generally bear a floating rate of interest and mature in one
year or less. The Company's commercial and industrial loan underwriting
standards generally limit the loan amount to approximately 70% of the completed
value of the project. Since inception, all of the Company's commercial
construction projects have been located in Southern California and have been
made to customers who have had long-standing relationships with the Company and
who generally have had previous success in the commercial construction industry.
The Company disburses funds under each construction loan in accordance with
a disbursement schedule that is part of the construction loan agreement and
details the budgeted project cost. Borrowers are required to submit payment
requests with cost breakdowns and invoices that are accompanied by, as
appropriate, labor releases, original material releases and payee signatures
acknowledging pending payment. Payment requests must also be supported by
project inspection reports that include, among other things, line item actual
cost amount comparisons to budgeted costs, photographs of the project and a
discussion of the project's status. Funds are disbursed only after the request
has been reviewed by the Company and a determination has been made that the
project is proceeding on budget.
Real estate mortgage and construction lending contain potential risks which
are not inherent in other types of commercial loans. These potential risks
include declines in market values of underlying real property collateral and,
with respect to construction lending, delays or cost overruns, which could
expose the Company to loss. In addition, risks in commercial real estate lending
include declines in commercial real estate values, general economic conditions
surrounding the commercial real estate properties, and vacancy rates. A decline
in the general economic conditions or real estate values within the Company's
market area have had and could have a further negative impact on the performance
of the loan portfolio or value of the collateral. During the last three years,
the Company has been adversely affected by the actualization of these risks. See
"Nonaccrual, Past Due and Modified Loans" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
5
<PAGE>
COMMERCIAL LOANS. As of December 31, 1993, approximately 26.7% of the
Company's loan portfolio was comprised of commercial loans. Loans in this
category, which averaged approximately $131,000 at December 31, 1993, include
loans made primarily to small and medium sized businesses and professionals for
working capital and equipment acquisitions, as well as trade finance. In
addition, at December 31, 1993, the Company had made available $24.0 million in
secured warehouse lines of credit to Southern California mortgage banking
companies, of which $14.1 million was outstanding. At December 31, 1993,
approximately 70% of the Company's commercial loans were to borrowers involved
in the real estate industry, such as real estate brokers, title insurance
companies, escrow companies, mortgage banking companies and other real estate
professionals. Although the Company typically looks to the borrower's cash flow
as the principal source of repayment for such loans, approximately 34.4% of the
loans within this category at December 31, 1993 were secured by real estate as a
secondary source of repayment. Certain of the Company's commercial loans are
secured by buildings for which the Company has provided the construction
financing.
As indicated above, a significant portion of the Company's loan portfolio,
including commercial loans, is secured by real estate. The general economy in
the Company's market area, and particularly the real estate market, are
suffering from the effects of persistent recessionary conditions. Real estate
values have been negatively impacted resulting in increases in the Company's
average loan to value ratios in almost all segments of its loan portfolio. The
current recession also has negatively impacted the volume of real estate
transactions which adversely affected certain commercial borrowers involved in
the real estate industry.
INSTALLMENT LOANS. Installment loans consist primarily of automobile loans
and loans made to finance small equipment acquisitions. These loans are made
primarily as an accommodation to existing customers and are not a substantial
part of the Company's lending strategy.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table sets forth the maturity distribution of the Company's
loan portfolio (excluding installment loans) at December 31, 1993, which are
based on remaining scheduled principal repayments (dollars in thousands).
<TABLE>
<CAPTION>
MATURING
--------------------------------------
OVER ONE
ONE YEAR OR THROUGH FIVE OVER FIVE
LESS YEARS YEARS TOTAL
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Real estate-mortgage......................................... $ 57,551 $ 72,315 $ 17,173 $ 147,039
Construction................................................. 83,853 3,976 - 87,829
Commercial................................................... 62,501 22,494 1,265 86,260
----------- ------------ ----------- -----------
Total...................................................... $ 203,905 $ 98,785 $ 18,438 $ 321,128
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
The following table sets forth the sensitivity of the amounts due after one
year to changes in interest rates for the Company's loan portfolio (excluding
installment loans) at December 31, 1993 (dollars in thousands).
<TABLE>
<CAPTION>
MATURING
------------------------
OVER ONE
THROUGH OVER
FIVE YEARS FIVE YEARS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Loans:
With fixed interest rates...................................... $ 25,290 $ 5,186 $ 30,476
With variable interest rates................................... 73,495 13,252 86,747
----------- ----------- -----------
Total...................................................... $ 98,785 $ 18,438 $ 117,223
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NONACCRUAL, PAST DUE AND MODIFIED LOANS
The performance of the Company's loan portfolio is evaluated regularly by
senior management. Interest on loans is accrued monthly as earned. When, in the
opinion of management, a reasonable
6
<PAGE>
doubt exists as to the collection of principal or interest, such loans are
evaluated individually to determine both the collectibility and the adequacy of
collateral. Loans are generally placed on nonaccrual status when principal or
interest is past due 90 days or more, or management has reasonable doubt as to
the full collection of principal and interest, at which time the accrual of
income is discontinued and previously accrued but unpaid interest is reversed
against income. Subsequent interest payments are generally credited to income
when received, except when the ultimate collectibility of principal is
uncertain, in which case all collections are applied as principal reductions.
The following table sets forth the amount of the Company's nonperforming
loans (nonaccrual loans and loans delinquent 90 days or more) and loans with
modified terms as of the dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.................................. $29,056 $33,316 $17,050 $ 268 $ 287
Loans delinquent 90 days or more (1).............. 5,769 1,547 11,734 2,403 2,452
-------- -------- -------- ------- -------
Total nonperforming loans (2)................... $34,825 $34,863 $28,784 $2,671 $2,739
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Loans with modified terms (1)..................... $ 9,539 $ 2,149 $ 8,124 $ - $ 103
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Nonperforming loans and loans with modified
terms........................................... $44,364 $37,012 $36,908 $2,671 $2,842
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Nonaccrual and past due loans as a percentage of
total loans..................................... 10.8% 8.9% 6.7% 0.8% 1.1%
<FN>
- ------------------------
(1) These loans were on accrual status throughout the year or, if held for
part of the year, since their origination. Included in loans delinquent 90
days or more at December 31, 1993 were $1.7 million of loans which were
pending receipt of documentation for purposes of renewal or extension
which was received shortly after the close of 1993 and, in turn, caused
such loans to return to performing status.
(2) Nonperforming loans at December 31, 1993 and 1992 are shown net of
participations sold to others of approximately $576,000 and $4.8 million,
respectively.
</TABLE>
The following tables set forth the Company's nonperforming loans by type as
of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Nonaccrual loans:
Real estate-mortgage......................................................... $ 13,804 $ 15,578 $ 9,013
Construction................................................................. 9,214 16,416 7,361
Commercial................................................................... 6,005 1,320 659
Installment.................................................................. 33 2 17
--------- --------- ---------
Total...................................................................... $ 29,056 $ 33,316 $ 17,050
--------- --------- ---------
--------- --------- ---------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Loans past due 90 days or more and still accruing interest:
Real estate-mortgage............................................................ $ 4,486 $ 70 $ 8,954
Construction.................................................................... - 1,363 2,305
Commercial...................................................................... 1,247 100 228
Installment..................................................................... 36 14 247
--------- --------- ---------
Total......................................................................... $ 5,769 $ 1,547 $ 11,734
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following tables set forth the composition of nonperforming loans by
broad collateral type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Nonaccrual loans:
Real estate:
Residential:
1-4 Family units......................................................... $ 13,502 $ 11,358 $ 8,017
Multifamily units........................................................ 2,815 1,316 -
Land(1).................................................................. 5,703 8,723 5,858
Commercial and industrial:
Units.................................................................... 4,415 6,965 -
Land(2).................................................................. 356 4,255 2,586
Business and consumer........................................................ 2,265 699 589
--------- --------- ---------
$ 29,056 $ 33,316 $ 17,050
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Loans past due 90 days or more and still accruing interest:
Real estate:
Residential:
1-4 Family units............................................................ $ 1,001 $ 725 $ 2,134
Multifamily units........................................................... 439 554 -
Land........................................................................ - - 150
Commercial and industrial:
Units....................................................................... 661 154 3,005
Land(3)..................................................................... 3,050 - 5,323
Business and consumer........................................................... 618 114 1,122
--------- --------- ---------
$ 5,769 $ 1,547 $ 11,734
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
(1) At December 31, 1993, nonaccrual loans secured by residential land were
comprised of approximately $3.4 million of land which was zoned and
tentatively or fully mapped for immediate use and approximately $2.3
million of land that requires additional permits, zone changes or other
efforts to be suitable for immediate use.
(2) At December 31, 1993, all such loans were secured by commercial or
industrial land that requires additional permits, zone changes and other
efforts to be suitable for immediate use.
(3) At December 31, 1993, loans past due 90 days or more and still accruing
interest secured by commercial and industrial land was zoned and
tentatively or fully mapped for immediate use.
</TABLE>
8
<PAGE>
The following table sets forth the Company's loans with modified terms by
type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Real estate-mortgage............................................................... $ 6,368 $ 2,149 $ 3,089
Construction....................................................................... 2,072 - 4,835
Commercial......................................................................... 1,099 - 200
--------- --------- ---------
Total............................................................................ $ 9,539 $ 2,149 $ 8,124
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1993, the Company's portfolio of loans with modified terms
reflects the original principal amount as amortized by their terms, less a
$600,000 charge-off of principal taken against one credit at the time of
modification. The weighted average stated yield on these loans for the year
ended December 31, 1993 was approximately 5.5%. The Company's average cost of
interest-bearing liabilities was 3.3% for the year ended December 31, 1993.
The following table sets forth the composition of loans with modified terms
by broad collateral type as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Real estate:
Residential:
1-4 Family units............................................................... $ - $ - $ 2,360
Multifamily units.............................................................. 1,280 - -
Commercial and industrial........................................................ 7,493 2,126 5,764
Business and consumer.............................................................. 766 23 -
--------- --------- ---------
$ 9,539 $ 2,149 $ 8,124
--------- --------- ---------
--------- --------- ---------
</TABLE>
Since 1991, the Company has been impacted by the significant slowdown in
California's economic activity. One result of the current recessionary
environment has been the decrease of real estate values in certain sectors of
the Company's target markets which, in turn, has affected certain borrowing
customers' financial capabilities and liquidity. The significant increase in
amounts reported as nonperforming loans since 1990 is attributable to the
existing economic climate, and a substantial portion of the nonperforming loans
are real estate mortgage and construction credits. At December 31, 1993, 1992,
and 1991, the ratio of the allowance for loan losses to period end nonperforming
loans was 52.3%, 38.6% and 31.7%, respectively.
The amount of loans with modified terms has increased significantly since
1992. It is the Company's policy to consider a restructured loan a loan with
modified terms when a determination has been made that greater economic value
may be realized under new terms rather than through foreclosure, liquidation or
other disposition. In such circumstances, the Company may grant a concession to
the borrower that it would not otherwise grant, including the reduction of
interest charged, the forgiveness of certain penalties and, in certain cases,
the reduction of the principal balance on a loan.
Except for the loans included in the nonperforming and modified loan tables
above and approximately $35.3 million in additional credits, which represent
loans that have been identified by management as potential problem credits but
are not included in the tables above, the Company is not aware of any other
loans at December 31, 1993 where known information about possible credit
problems of the borrower causes management to have serious doubts as to the
ability of such borrowers to comply with their present loan repayment terms and
which may result in such loans being included in such tables at some future
date.
9
<PAGE>
The following table sets forth the composition of potential problem credits
by broad collateral type at December 31, 1993 (dollars in thousands):
<TABLE>
<S> <C>
Real estate:
Residential:
1-4 Family units...................................................... $ 10,360
Multifamily units..................................................... 9,856
Land.................................................................. 1,875
Commercial and industrial:
Units................................................................. 11,101
Business and Consumer..................................................... 2,122
---------
$ 35,314
---------
---------
</TABLE>
Management cannot predict the extent to which the current recessionary
economic environment may persist or worsen or the full impact such environment
may have on the Company's loan portfolio. However, if current economic
conditions continue for a sustained period of time or worsen, management
anticipates that the Bank's borrowers will be adversely effected and underlying
collateral values will continue to decline. Furthermore, the Bank's primary
regulators review the loan portfolio as an integral part of their periodic
examinations of the Bank, and their assessment of specific credits, based upon
information available to them at the time of their examinations, may affect the
level of the Company's nonperforming loans. Accordingly, there can be no
assurance that other loans will not be placed on nonaccrual, become 90 days or
more past due or have terms modified in the future.
ALLOWANCE FOR LOAN LOSSES
A certain degree of risk is inherent in the extension of credit. Management
has credit policies in place to monitor and attempt to control the level of loan
losses and nonperforming loans. One product of the Company's credit risk
management is the maintenance of the allowance for loan losses at a level
considered by management to be adequate to absorb estimated known and inherent
losses in the existing portfolio, including commitments and standby letters of
credit. The allowance for loan losses is established through charges to
operations in the form of provisions for loan losses.
The allowance is based upon a regular review of current economic conditions,
which might affect a borrower's ability to pay, underlying collateral values,
risks in and the composition of the loan portfolio, prior loss experience and
industry averages. In addition, the Bank's primary regulators, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses and may recommend additions to the allowance based on their
assessment of information available to them at the time of their examination.
Loans that are deemed to be uncollectible are charged-off and deducted from the
allowance. The provision for loan losses and recoveries on loans previously
charged-off are added to the allowance.
10
<PAGE>
The following table sets forth the Company's loan loss experience and
certain information relating to its allowance for loan losses as of the dates
and for the years indicated (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average net loans outstanding.............................. $353,032 $420,192 $392,997 $291,741 $203,090
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for loan losses:
Balance at beginning of period........................... $ 13,466 $ 9,135 $ 3,473 $ 2,505 $ 1,713
--------- --------- --------- --------- ---------
Charge-offs:
Commercial loans....................................... (4,068) (1,863) (250) (153) (419)
Real estate-mortgage loans............................. (5,286) (705) - - -
Construction loans..................................... (4,142) (2,486) - - -
Installment loans...................................... (73) (61) (38) (42) (34)
Recoveries:
Commercial loans....................................... 44 39 2 - -
Real estate-mortgage loans............................. - - - - -
Construction loans..................................... - - - - -
Installment loans...................................... 9 12 2 3 9
--------- --------- --------- --------- ---------
Net charge-offs.......................................... (13,516) (5,064) (284) (192) (444)
--------- --------- --------- --------- ---------
Provision charged to operations.......................... 18,250 9,395 5,946 1,160 1,236
--------- --------- --------- --------- ---------
Balance at end of period................................. $ 18,200 $ 13,466 $ 9,135 $ 3,473 $ 2,505
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of allowance for loan losses to loans outstanding
at end of period........................................ 5.64% 3.45% 2.13% 1.01% 1.01%
Ratio of allowance for loan losses to nonperforming loans
at the end of the period................................ 52.26% 38.63% 31.74% 130.03% 91.46%
Ratio of net charge-offs to average loans outstanding
during the period....................................... 3.83% 1.21% 0.07% 0.07% 0.22%
</TABLE>
The increase in net charge-offs during 1993 and in 1992 from those reported
in prior periods primarily resulted from losses recognized upon transfer of
assets to other real estate owned ("OREO"), losses taken on certain real estate
related loans due to economic conditions and other charge-offs related to loans
deemed uncollectible by the Company.
Management believes that the allowance for loan losses at December 31, 1993
was adequate to absorb the known and inherent losses in the loan portfolio at
that time. However, no assurance can be given that continuation of current
recessionary factors, future changes in economic conditions that might adversely
affect the Company's principal market area, borrowers or collateral values, and
other circumstances will not result in increased losses in the Company's loan
portfolio in the future.
11
<PAGE>
Although the Company does not normally allocate the allowance for loan
losses to specific loan categories, an allocation has been made for purpose of
this discussion as set forth below. The allocations used in the table are based
upon the criteria considered by management in determining the amount of
additional provisions for loan losses and the aggregate level of the allowance
for loan losses (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
--------------------------------- --------------------------------- -----------------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
ALLOWANCE FOR CATEGORY TO ALLOWANCE FOR CATEGORY TO ALLOWANCE FOR LOAN CATEGORY TO
LOAN LOSSES TOTAL LOANS LOAN LOSSES TOTAL LOANS LOSSES TOTAL LOANS
---------------- -------------- ---------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Real
estate-mortgage...... $ 6,246 45.5% $ 2,823 35.0% $ 1,618 35.2%
Construction.......... 4,632 27.2 6,134 41.8 2,657 43.9
Commercial............ 4,644 26.7 1,719 22.5 966 20.2
Installment........... 75 .6 29 .7 28 .7
Unallocated........... 2,603 - 2,761 - 3,866 -
-------- ----- -------- ----- ------- -----
$18,200 100.0% $13,466 100.0% $ 9,135 100.0%
-------- ----- -------- ----- ------- -----
-------- ----- -------- ----- ------- -----
</TABLE>
The allocation of the allowance for loan losses should not be interpreted as
an indication of future credit trends or that losses will occur in these amounts
or proportions. Furthermore, the portion allocated to each loan category is not
the total amount available for future losses that might occur within such
categories, since even on the above basis there is a substantial unallocated
portion of the allowance, and the total allowance is a general allowance
applicable to the entire portfolio.
OTHER REAL ESTATE OWNED
Real estate and other assets acquired in satisfaction of loans are recorded
at estimated fair value, less estimated costs of disposition, and any difference
between fair value and the loan amount is charged to the allowance for loan
losses. Gains and losses from the sale of such assets, any subsequent additions
to the OREO valuation allowance and net operating expenses are included in
noninterest expense.
Activity in OREO for the periods indicated is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
---------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of period......................................... $ 4,359 $ 2,945 $ -
Additions............................................................ 24,209 6,071 6,245
Sales................................................................ (13,905) (4,617) (3,300)
Valuation adjustments................................................ (714) (40) -
---------- --------- ---------
Balance, end of period............................................... $ 13,949 $ 4,359 $ 2,945
---------- --------- ---------
---------- --------- ---------
</TABLE>
The following sets forth the composition of OREO, net of valuation
adjustments, by broad type of collateral at the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Residential:
1-4 Family units...................................................... $ 7,023 $ 1,410 $ 2,495
Land.................................................................. 3,736 50 -
Commercial and industrial:
Units................................................................. 1,540 1,782 450
Land.................................................................. 1,650 1,117 -
--------- --------- ---------
Total............................................................... $ 13,949 $ 4,359 $ 2,945
--------- --------- ---------
--------- --------- ---------
</TABLE>
12
<PAGE>
DEPOSITS
The Company has generated a substantial portion of its deposits from large
balance depositors by offering various customer services. A significant amount
of such deposits are from Southern California based title insurance companies
and escrow companies. Customer services consist primarily of accounting and
courier services. The Company seeks to control its customer service expense by
continuously monitoring the earnings performance of its account relationships
and, on that basis, limiting the amount of services provided. As of December 31,
1993, title insurance companies and escrow companies accounted for approximately
$287.3 million, or 89.0%, of the Company's noninterest-bearing demand deposits
which compares to $374.1 million, or 90.3% of the Company's noninterest-bearing
demand deposits at the close of 1992. The decline between the close of 1993 and
1992 principally reflects a slow down in real estate transaction activity
handled by such depositors, and to a lesser extent, the Company's reduced
reliance on such accounts as a funding source. At December 31, 1993, the
Company's five largest title insurance company customers accounted for $129.5
million, or 24.6% of total deposits; the two largest of such customers accounted
for 8.5% and 6.3% of total deposits.
Title insurance company deposits and, to a lesser extent, escrow company
deposits are subject to greater fluctuation and can be sensitive to prevailing
interest rates and other general economic factors that affect the demand for
housing and other real estate than other types of demand deposits. For example,
as real estate development and sales activity decline during periods of rising
interest rates, the Company might experience a corresponding decline in its
demand deposits from such sources. Should the Company experience a decline in
the level of such deposits, it would have to obtain funds from other sources,
and probably at higher rates, to maintain, or expand, its lending activities. An
increase in the cost of funds without a corresponding increase in the yield on
interest earning assets would likely decrease the Company's net interest income,
which is the primary component of the Company's earnings. During the first
quarter of 1994, the Board of Governors of the Federal Reserve System issued a
new interpretive release which is applicable to all member banks, such as the
Bank, and other entities, which limits the payment of customer service expense
to prescribed instances. As a result of this release, it is expected that
certain balances of accounts associated with these expenses and customer service
expense will decline in 1994.
Labor union deposits, which were $91.5 million at December 31, 1993, or
17.4% of total deposits and were $90.9 million at December 31, 1992, or 15.2% of
total deposits, generally are not transaction oriented and, thus, are less
likely to fluctuate with the general level of interest rates. At December 31,
1993, approximately 64.2% of such deposits were demand deposits. Management
believes that labor union deposits are subject to less fluctuation than title
insurance company and escrow company deposits and therefore afford a more stable
funding source for the Company's lending activities. No individual account
represented 10% or more of total deposits.
Time certificates of deposit of $100,000 or more, which were $22.2 million
at December 31, 1993, or 4.2% of total deposits and were $28.4 million, or 4.7%,
of total deposits at December 31, 1992, are generally more sensitive to changes
in interest rates than other types or amounts of deposits.
The Company's period end deposit balances traditionally reflect increases in
noninterest-bearing demand deposits from title insurance company and escrow
company customers. These deposits increase at or near each month end as the
underlying real estate transactions being handled by such deposit customers are
nearing consummation. Accordingly, management considers average deposit balances
to be more indicative of the Company's deposit base.
13
<PAGE>
The following table sets forth the distribution of average deposits and the
rates paid thereon for the years indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------ ------------------------------ ------------------------------
AMOUNT RATE % OF TOTAL AMOUNT RATE % OF TOTAL AMOUNT RATE % OF TOTAL
-------- ----- ----------- -------- ----- ----------- -------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits..................... $323,661 - % 59.3% $383,580 - % 63.6% $292,079 - % 54.9%
Interest-bearing demand and
savings deposits............. 53,626 2.3 9.8 65,242 2.7 10.8 57,187 3.4 10.8
Money market deposits......... 52,327 2.5 9.6 51,813 3.2 8.6 47,701 5.2 9.0
Time certificates of deposit.. 116,603 3.9 21.3 102,210 5.0 17.0 134,621 7.0 25.3
-------- ----- ----- -------- ----- ----- -------- ----- -----
Total....................... $546,217 3.2% 100.0% $602,845 3.9% 100.0% $531,588 5.9% 100.0%
-------- ----- ----- -------- ----- ----- -------- ----- -----
-------- ----- ----- -------- ----- ----- -------- ----- -----
</TABLE>
During the year ended December 31, 1993, the mix in the composition of
average deposits changed from the prior year as average noninterest-bearing
demand deposits decreased, and average time certificates of deposit increased,
when expressed as a percentage of average total deposits. Average
noninterest-bearing demand deposits comprised 59.3%, 63.6% and 54.9% of average
total deposits for the years ended December 31, 1993, 1992 and 1991,
respectively. Average time certificates of deposit comprised 21.3%, 17.0% and
25.3% of total average deposits for the years ended December 31, 1993, 1992 and
1991, respectively. Total average interest-bearing demand, savings and money
market deposits, when expressed as a percentage of total average deposits,
remained comparable over the three years ended December 31, 1993, and were
19.4%, 19.4% and 19.7%, respectively, during 1993, 1992 and 1991. The increase
in the Company's average time certificates of deposit during the year ended
December 31, 1993 from the prior year's average is, in management's opinion,
attributable to efforts devoted toward diversifying the Company's funding
sources. The Company's noninterest-bearing deposits declined in 1993 from levels
reached in the prior two years reflecting the decreased volume of title
insurance company and escrow company deposit activity occurring as a result of
recent declines in refinancing activity from levels in the prior two years.
During the first quarter of 1994, the Board of Governors of the Federal Reserve
System issued a new interpretive release which is applicable to all member
banks, such as the Bank, and other entities, which limits the payment of
customer service expense to certain prescribed instances. As a result of the
issuance of this interpretive release it is expected that certain
noninterest-bearing account balances of title insurance company and escrow
company depositors will decline in 1994.
The following table sets forth the maturities of the Company's time
certificates of deposit outstanding at December 31, 1993 (dollars in thousands).
<TABLE>
<CAPTION>
$100,000
UNDER $100,000 AND OVER
-------------- ---------
<S> <C> <C>
Three months or less........................................................ $ 4,604 $ 5,459
Over three months through six months........................................ 20,787 6,626
Over six months through twelve months....................................... 39,613 8,789
Over twelve months.......................................................... 14,640 1,368
-------------- ---------
Total..................................................................... $ 79,644 $ 22,242
-------------- ---------
-------------- ---------
</TABLE>
COMPETITION
The Company faces substantial competition for deposits and loans throughout
its market area. The primary factors in competing for deposits are interest
rates, personalized services, the quality and range of financial services,
convenience of office locations and office hours. Competition for deposits comes
primarily from other commercial banks, savings institutions, credit unions,
thrift and loans, money market funds and other investment alternatives. The
primary factors in competing for loans are interest rates, loan origination
fees, the quality and range of lending services and personalized services.
Competition for loans comes primarily from other commercial banks, savings
institutions,
14
<PAGE>
thrift and loans, mortgage banking firms, credit unions and other financial
intermediaries. The Company faces competition for deposits and loans throughout
its market areas not only from local institutions but also from out-of-state
financial intermediaries which have opened loan production offices or which
solicit deposits in its market areas. Many of the financial intermediaries
operating in the Company's market areas offer certain services, such as trust,
investment and international banking services, which the Company does not offer
directly (other than custodial, cash management and securities servicing
provided by Guardian Trust Company). Additionally, banks with larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the needs
of larger customers. The Company has three offices located in Los Angeles,
Fountain Valley and Ontario, California. Neither the deposits nor loans of any
office of the Company exceed 1% of the aggregate loans or deposits of all
financial intermediaries located in the counties in which such offices are
located.
EMPLOYEES
At December 31, 1993, the Company employed 159 people. Management believes
that its relations with its employees are satisfactory.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise the major
portion of the Company'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 Company 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
Company are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the "FDIC Improvement Act") was enacted into law. Set forth below
is a brief discussion of certain portions of this law and implementing
regulations that have been adopted or proposed by the Federal Reserve Board, the
Comptroller of the Currency, the Office of Thrift Supervision and the FDIC
(collectively, the "Federal banking agencies").
15
<PAGE>
BIF RECAPITALIZATION. The FDIC Improvement Act provides the FDIC with three
additional sources of funds to protect deposits insured by the Bank Insurance
Fund (the "BIF") administered by the FDIC. The FDIC is authorized to borrow up
to $30 billion from the U.S. Treasury; borrow from the Federal Financing Bank up
to 90% of the fair market value of assets of institutions acquired by the FDIC
as receiver; and borrow from financial intermediaries 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.
IMPROVED EXAMINATIONS. All insured depository institutions must undergo a
full-scope, on-site examination by their appropriate Federal banking agency at
least once every 12 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate Federal
banking agency against each institution or affiliate as it deems necessary or
appropriate.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDIC Improvement Act,
the Federal banking agencies have issued proposed safety and soundness standards
on matters such as loan underwriting and documentation, asset quality, earnings,
internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. The proposals, among other things,
establish the maximum ratio of classified assets to total capital at 1% and the
minimum level of earnings sufficient to absorb losses without impairing capital.
The proposals provide that a bank's earnings are sufficient to absorb losses
without impairing capital if the bank is in compliance with minimum capital
requirements and the bank would, if its net income or loss over the last four
quarters continued over the next four quarters, remain in compliance with
minimum capital requirements. Any institution which fails to comply with these
standards must submit a compliance plan. Failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. No assurance can be given as to the final form of the proposed
regulations or, if adopted, the impact of such regulations on the Company and
the Bank.
In December 1992, the Federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective 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.
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires each
Federal banking agency to take prompt corrective action to resolve the problems
of insured depository institutions that fall below one or more prescribed
minimum capital ratios. The purpose of this law is to resolve the problems of
insured depository institutions at the least possible long-term cost to the
appropriate deposit insurance fund.
The law requires each Federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet one or more of the capital requirements),
significantly undercapitalized (significantly below one or more capital
requirement) and critically undercapitalized (failing to meet all capital
requirements).
In September 1992, the Federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution will
be deemed to be:
-"well capitalized" if it (i) has a total risk-based capital ratio
of 10% or greater, a Tier 1 risk-based ratio capital of 6% or
greater and a leverage ratio of 5% or greater and (ii) is not
subject to an order, written agreement, capital directive or
prompt corrective action directive to meet and maintain a
specific capital level for any capital measure;
16
<PAGE>
-"adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4%
or greater and a leverage ratio of 4% or greater (or a leverage
ratio of 3% or greater if the institution is rated composite 1
under the applicable regulatory rating system in its most recent
report of examination);
-"undercapitalized" if it has a total risk-based capital ratio
that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4% or a leverage ratio that is less than 4% (or a
leverage ratio that is less than 3% if the institution is rated
composite 1 under the applicable regulatory rating system in its
most recent report of examination);
-"significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3% or a leverage ratio that is less than
3%; and
-"critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified to
the next lower capital category if the appropriate Federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is in an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and Federal banking agencies are given less flexibility in
deciding how to deal with it.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions, including dividends, 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, subjected 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 on any undercapitalized depository institution 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 merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
17
<PAGE>
specified activities; (vi) replacement of directors or senior executive
officers, subject to certain grandfather provisions for those elected prior to
enactment of the FDIC Improvement Act; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate Federal banking agency. Although the appropriate
Federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
Federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
As of December 31, 1993, the Bank had a total risk-based capital ratio of
8.33%, a Tier 1 risk-based capital ratio of 7.02% and a leverage ratio of 4.19%.
The Bank is subject to a written regulatory agreement that requires it to
develop a plan to maintain an adequate capital position. See "Item 1. Business
- -- Supervision and Regulation -- Potential and Existing Enforcement Actions."
Pursuant to its plan, in January 1994, the Company raised gross proceeds of
approximately $19.7 million in new equity capital in a rights offering
(offering) which, after deducting capital raising costs, provided $18.0 million
in net equity capital. The Company contributed $16.5 million of the net proceeds
to the Bank in the form of Tier 1 capital. On a proforma basis, the Bank's total
risk-based capital ratio, and Tier 1 risk-based capital ratio and leverage ratio
are 11.77%, 13.07% and 6.89%, respectively, at December 31, 1993, assuming that
the Bank had received the capital contribution and, in turn, placed the funds in
20% risk-weighted assets at year end. Under the same assumptions, the Company's
total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage
ratio were 13.08%, 10.95% and 6.68%, respectively.
OTHER ITEMS. The FDIC Improvement Act also, among other things, (i) limits
the percentage of interest paid on brokered deposits and limits the unrestricted
use of such deposits to only those institutions that are well capitalized; (ii)
requires the FDIC to charge insurance premiums based on the risk profile of each
institution; (iii) eliminates "pass through" deposit insurance for certain
employee benefit accounts unless the depository institution is well capitalized
or, under certain circumstances, adequately capitalized; (iv) prohibits insured
state chartered banks from engaging as principal in any type of activity that is
not permissible for a national bank unless the FDIC permits such activity and
the bank meets all of its regulatory capital requirements; (v) directs the
appropriate Federal banking agency to determine the amount of readily marketable
purchased mortgage servicing rights that may be included in calculating such
institution's tangible, core and risk-based capital; and (vi) provides that,
subject to certain limitations, any Federal savings association may acquire or
be acquired by any insured depository institution.
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<PAGE>
The FDIC has adopted final regulations implementing the risk-based premium
system mandated by the FDIC Improvement Act. Under the final 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. To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as well capitalized,
adequately capitalized or undercapitalized based on its capital ratios. A well
capitalized institution is one that has at least a 10% total risk-based capital
ratio, a 6% Tier 1 risk-based capital ratio and a 5% leverage capital ratio. An
adequately capitalized institution will have at least an 8% total risk-based
capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% leverage capital
ratio. The FDIC will also assign each institution to one of three subgroups
based upon reviews by the institution's primary Federal or state regulator,
statistical analyses of financial statements and other information relevant to
evaluating the risk posed by the institution. As a result, the assessment rates
within each of three capital categories will be as follows (expressed as cents
per $100 of deposits):
<TABLE>
<CAPTION>
SUPERVISORY SUBGROUP
----------------------
A B C
---- ---- ----
<S> <C> <C> <C>
Well capitalized.............. 23 26 29
Adequately capitalized........ 26 29 30
Undercapitalized.............. 29 30 31
</TABLE>
In addition, the FDIC has issued final regulations implementing provisions
of the FDIC Improvement Act relating to powers of insured state-chartered banks.
The regulations prohibit insured state-chartered banks from making equity
investments of a type, or in an amount, that are not permissible for national
banks. In general, equity investments include equity securities, partnership
interests and equity interests in real estate. Under the final regulations,
non-permissible investments must be divested by no later than December 19, 1996.
The FDIC has also issued final regulations which prohibit, subject to
certain specified exceptions, insured state-chartered banks from engaging as
principal in any activity not permissible for a national bank, without FDIC
approval. The regulations also provide that, subject to certain specified
exceptions, subsidiaries of insured state-chartered banks may not engage as
principal in any activity that is not permissible for a subsidiary of a national
bank, without FDIC approval.
The impact of the FDIC Improvement Act on the Company and the Bank is
uncertain, especially since many of the regulations promulgated thereunder have
only been recently adopted and certain of the law's provisions still need to be
defined through future regulatory action. Certain provisions, such as the
recently adopted real estate lending standards and the limitations on
investments and powers of state-chartered banks and the rules to be adopted
governing compensation, fees and other operating policies, may affect the way in
which the Bank conducts its business, and other provisions, such as those
relating to the establishment of the risk-based premium system and the
limitations on pass-through insurance, may affect the Bank's results of
operations.
CAPITAL ADEQUACY GUIDELINES
The Federal Reserve Board and the FDIC have issued guidelines to implement
risk-based capital requirements. The guidelines are intended to establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and certain
U.S. government securities, to 100% for relatively high-risk assets, such as
loans and investments in fixed assets, premises and other real estate owned. The
aggregate dollar amount of each
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<PAGE>
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital.
Higher risk-based ratios are required for an insured depository institution to
be considered well capitalized under the prompt corrective action provisions of
the FDIC Improvement Act. See "Item 1. Business -- Effect of Governmental
Policies and Recent Legislation -- Federal Deposit Insurance Improvement Act of
1991 -- Prompt Corrective Regulatory Action."
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock (plus, for
bank holding companies, qualifying cumulative perpetual preferred stock in an
amount up to 25% of Tier 1 capital) and minority interests in the equity
accounts of consolidated subsidiaries. Intangibles, such as goodwill, are
generally deducted from Tier 1 capital; however, purchased mortgage servicing
rights and purchase credit card relationships may be included, subject to
certain limitations. At least 50% of the banking organization's total regulatory
capital must consist of Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock (which for bank holding
companies must have an original maturity of 20 years or more) and related
surplus; (iii) hybrid capital instruments (instruments with characteristics of
both debt and equity), perpetual debt and mandatory convertible debt securities;
and (iv) eligible term subordinated debt and intermediate-term preferred stock
with an original maturity of five years or more, including related surplus, in
an amount up to 50% of Tier 1 capital. The inclusion of the foregoing elements
of Tier 2 capital are subject to certain requirements and limitations of the
Federal banking agencies.
The Federal Reserve Board and the FDIC have also adopted a minimum leverage
ratio of Tier 1 capital to average total assets of 3% for institutions which
have been determined to be in the highest of five categories used by regulators
to rate financial institutions. This leverage ratio is only a minimum.
Institutions experiencing or anticipating significant growth or those with other
than minimum risk profiles are expected to maintain capital well above the
minimum level. All other institutions are required to maintain leverage ratios
of at least 100 to 200 basis points above the 3% minimum. Furthermore, higher
leverage ratios are required for an insured depository institution to be
considered well capitalized or adequately capitalized under the prompt
corrective action provisions of the FDIC Improvement Act. See "Item 1. Business
- -- Effect of Governmental Policies and Recent Legislation -- Federal Deposit
Insurance Corporation Improvement Act of 1991 -- Prompt Corrective Regulatory
Action."
As of December 31, 1993, the Company and the Bank had total risk-based
capital ratios of 8.15% and 8.33%, Tier 1 risk-based capital ratios of 6.00% and
7.02% and leverage ratios of 3.74% and 4.19%, respectively. See "Effect of
Governmental Policies and Recent Legislation -- Standards for Safety and
Soundness."
The Federal banking agencies have issued proposed rules, in accordance with
the FDIC Improvement Act, seeking public comment on methods for measuring
interest rate risk, and two alternative methods for determining what amount of
additional capital, if any, a bank may be required to have for interest rate
risk. The Company cannot yet determine whether such proposals will be adopted or
the impact of such regulations, if adopted, on the Company and the Bank.
The Federal banking agencies recently issued a statement advising that, for
regulatory purposes, federally supervised banks and savings associations should
report deferred tax assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," beginning in 1993.
SFAS No. 109 employs an asset and liability approach in accounting for
20
<PAGE>
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 law. See "Item 1. Business --
Effect of Governmental Policies and Recent Legislation." However, the Federal
banking agencies have advised limiting the amount of deferred tax assets that is
allowable in computing an institution's regulatory capital. Deferred tax assets
that can be realized from taxes paid in prior carry back years and from the
future reversal of taxable temporary differences would generally not be limited.
Deferred tax assets that can only be realized through future taxable earnings,
including the implementation of a tax planning strategy, would be 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 deferred taxes in excess of this limit, if any, would be deducted
from Tier 1 capital and total assets in regulatory capital calculations.
CHANGES IN ACCOUNTING PRINCIPLES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan is impaired when
it is "probable" that a creditor will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. The measurement of impairment may be based on (1) the present
value of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (2) the observable market price of the
impaired loan or (3) the fair value of the collateral of a collateral-dependent
loan. The amount by which the recorded investment of the loan exceeds the
measure of the impaired loan is recognized by recording a valuation allowance
with a corresponding charge to provision for loan losses. Additionally, SFAS 114
eliminates the requirement that a creditor account for certain loans as
foreclosed assets until the creditor has taken possession of the collateral.
SFAS 114 is effective for financial statements issued for fiscal years beginning
after December 15, 1994. Earlier adoption is permitted. To comply with
regulatory requirements regarding SFAS No. 114 effective in 1993, in-substance
foreclosed assets are classified as loans in cases where the Company does not
have physical possession of the underlying collateral. Although the Company has
not yet adopted SFAS 114, management does not expect implementation to have a
material impact on the Company's financial position or results of operations.
In May 1993, the FASB issued Statement of Financial Standards 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.
Those investments would be classified in three categories and accounted for as
follows: (i) debt and equity securities that the entity has the positive intent
and ability to hold to maturity would be classified as "held to maturity" and
reported at amortized cost; (ii) debt and equity securities that are held for
current resale would be classified as trading securities and reported at fair
value, with unrealized gains and losses included in operations; 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
operations and reported as a separate component of shareholders' equity. The
statement 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. The Bank has both investment securities classified as
"available to maturity" and investment securities classified as "available for
sale". Securities classified as available for sale will be reported at their
fair value at the end of each fiscal quarter. Accordingly, the value of such
securities fluctuates based on changes in interest rates. Generally, an increase
in interest rates would result in a decline in the value of investment
securities held for sale, while a decline in interest rates would result in an
increase in the value of such securities. Therefore, the value of investment
securities available for sale and the Bank's shareholders' equity could be
subject to fluctuation based on changes in interest rates. As a consequence, the
Bank's capital levels for regulatory purposes could change based solely on
fluctuations in interest rates and fluctuations in the value of investment
securities available for sale. Such change could result in additional regulatory
21
<PAGE>
restrictions under the prompt corrective actions provisions of the FDIC
Improvement Act of 1991 and various other laws and regulations that are based,
in part, on an institution's capital levels, including those dealing with the
risk related insurance premium system and brokered deposit restrictions. See
"Business -- Effect of Governmental Policies and Recent Legislation -- Federal
Deposit Insurance Corporation Improvement Act of 1991."
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
On August 10, 1993, President Clinton signed the Omnibus Budget
Reconciliation Act of 1993 (the "Reconciliation Act"). Some of the provisions in
the Reconciliation Act that may have an effect on the Company include the
following: (i) the corporate income tax rate was increased from 34.0% to 35.0%
for taxable income in excess of $10.0 million; (ii) mark-to-market rules for tax
purposes with regard to securities held for sale by the Company; (iii) beginning
in 1994 the amount of business meals and entertainment expenses that will be
disallowed will be increased from the current 20.0% disallowance to 50.0%
disallowance; (iv) club dues and lobbying expenses will no longer be deductible;
and (v) certain intangible assets, including goodwill, will be amortized over a
period of 15 years. Considering the Company's current tax situation, the Company
does not expect the provisions of the Reconciliation Act to have a material
effect on the Company.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "Act"). The Company
is required to file with the Federal Reserve Board quarterly and annual reports
and such additional information as the Federal Reserve Board may require
pursuant to the Act. The Federal Reserve Board may conduct examinations of the
Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the Act and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company is required by
the Federal Reserve Board to maintain certain levels of capital. See "Item 1.
Business -- Effect of Governmental Policies and Recent Legislation -- Capital
Adequacy Guidelines."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company may, subject to the prior
approval of the Federal Reserve Board, engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper
22
<PAGE>
incident thereto. In making any such determination, the Federal Reserve Board is
required to consider whether the performance of such activities by the Company
or an affiliate can reasonably be expected to produce benefits to the public,
such as greater convenience, increased competition or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. The Federal Reserve Board is also empowered to differentiate between
activities commenced DE NOVO and activities commenced by acquisition, in whole
or in part, of a going concern and is generally prohibited from approving an
application by a bank holding company to acquire voting shares of any commercial
bank in another state unless such acquisition is specifically authorized by the
laws of such other state.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both. This doctrine has become known as the "source of strength"
doctrine. Although the United States Court of Appeals for the Fifth Circuit
found the Federal Reserve Board's source of strength doctrine invalid in 1990,
stating that the Federal Reserve Board had no authority to assert the doctrine
under the Act, the decision, which was not binding on federal courts outside the
Fifth Circuit, was recently reversed by the United States Supreme Court on
procedural grounds. The validity of the source of strength doctrine is likely to
continue to be the subject of litigation until definitively resolved by the
courts or by Congress.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
THE BANK
The Bank, as a California state-chartered bank which is a member of the
Federal Reserve System, is subject to primary supervision, periodic examination
and regulation by the Federal Reserve Board and the Superintendent.
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. See "Item 1.
Business -- Effect of Governmental Policies and Recent Legislation."
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. See "Item 1. Business -- Effect of Governmental
Policies and Recent Legislation -- Capital Adequacy Guidelines."
RESTRICTIONS ON TRANSFERS OF FUNDS TO GUARDIAN BANCORP BY THE BANK
Guardian Bancorp is a legal entity separate and distinct from the Bank and
its subsidiary.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to Guardian Bancorp by the Bank. California law restricts the
amount available for cash dividends by
23
<PAGE>
state-chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to shareholders
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 Federal Reserve Board also has authority to prohibit the Bank from
engaging in what, in the Federal Reserve Board'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
Federal Reserve Board could assert that the payment of dividends or other
payments might, under some circumstances, be such an unsafe or unsound practice.
Further, the Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set forth in
such guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of the FDIC Improvement Act could limit the amount
of dividends which the Bank or the Company may pay. See "Item 1. Business --
Federal Deposit Insurance Corporation Improvement Act of 1991 -- Prompt
Corrective Regulatory Action and -- Capital Adequacy Guidelines" for a
discussion of these additional restrictions on capital distributions.
At December 31, 1993, Guardian Bancorp, on an unconsolidated parent company
only basis, had cash and cash equivalents available of approximately $402,000.
Guardian Bancorp retained approximately $1.2 million of the net proceeds
received in its rights offering completed in the first quarter of 1994 for
purposes of meeting its general corporate operating needs. Substantially all of
Guardian Bancorp's future revenues, on an unconsolidated basis, including funds
available for the payment of dividends and other operating expenses, are, and
will continue to be, primarily dividends paid by the Bank. However, the Bank has
entered into a written agreement with the Federal Reserve Bank of San Francisco
(the "Federal Reserve Bank") pursuant to which it has agreed not to pay any cash
dividends to Guardian Bancorp without the prior written approval of the Federal
Reserve Bank. See "Item 1. Business -- Supervision and Regulation -- Potential
and Existing Enforcement Actions."
The Bank is 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, the Company or other 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 the Company or other affiliates. Such
restrictions prevent the Company and such other 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 to or in the
Company or to or 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 Guardian Bancorp and 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. See "Item 1. Business -- Effect of
Governmental Policies and Recent Legislation -- Federal Deposit Insurance
Corporation Improvement Act of 1991 -- Prompt Corrective Regulatory Action."
POTENTIAL AND EXISTING ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, and their
institution-affiliated parties, which include the Company, may be subject to
potential enforcement actions by the Federal Reserve Board, the Superintendent
and the FDIC 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 the Bank), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the
24
<PAGE>
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. Additionally, a
holding company's inability to serve as a source of strength to its subsidiary
banking organizations could serve as an additional basis for a regulatory action
against the holding company.
On February 16, 1993, the Bank consented to the payment of $20,000 as
settlement of an assessed civil money penalty relating to alleged Call Report
filing deficiencies asserted by the Federal Reserve Board. The payment was made
solely for the purpose of settlement of the alleged deficiencies and to avoid
protracted or extended hearings, testimony or other proceedings, and it did not
constitute an admission by the Bank of any allegation made or implied by the
Federal Reserve Board. Management believes that the Federal Reserve Board does
not contemplate taking any further action in connection with this matter.
On October 14, 1992, the Federal Reserve Bank, acting under delegated
authority from the Federal Reserve Board, entered into a separate written
agreement with each of the Company and the Bank. These agreements require the
Company and the Bank to, among other things: (a) develop a plan and take steps
to monitor and decrease the level of the Bank's nonperforming or otherwise
classified assets; (b) establish policies designed to monitor the type, growth
and amounts of credit concentration; (c) develop or update, as necessary,
various operating and intercompany plans and procedures; (d) develop formalized
strategic operating and capital maintenance plans, including a plan to maintain
an adequate capital position; (e) maintain a loan loss reserve that is equal to
or greater than 1.7% of the Bank's total loans; (f) assess the duties and
remuneration of certain personnel; (g) take steps to correct or eliminate any
violations of law and to avoid them in the future; (h) refrain from declaring or
paying any cash dividends without the prior approval of the Federal Reserve
Bank; (i) refrain from incurring any debt, other than in the ordinary course of
business, at the holding company level without the prior approval of the Federal
Reserve Bank; (j) refrain from accepting or placing any brokered deposits except
in compliance with Sections 29 and 29A of the Federal Deposit Insurance Act; (k)
notify the Federal Reserve Bank at least 30 days before adding or replacing a
director or senior executive officer; (l) take steps to ensure that all reports
required to be filed accurately reflect the financial condition of the Company
or the Bank as of the date of such report; and (m) furnish quarterly written
progress reports to the Federal Reserve Bank detailing the actions taken to
comply with the terms of the agreements.
Both before and after entering into these agreements, management of the
Company and the Bank have taken various steps, including the recently completed
capital raising efforts, that are designed to facilitate compliance with the
terms thereof. However, compliance with the terms of the agreements will be
determined by the Federal Reserve Bank during subsequent examinations of the
Company and the Bank. In the event that the Federal Reserve Bank determines that
the Company or the Bank is not in compliance with any of the terms of the
agreements, it would have available to it various remedies, including taking one
or more of the enforcement actions discussed above.
ITEM 2. PROPERTIES.
All of the Company's offices are occupied under leases that expire on
various dates through March 2003, and, in the case of the Company's principal
executive and the Bank's head office, include options to renew. For the years
ended December 31, 1993, 1992 and 1991, rental expense under these leases
aggregated approximately $921,000, $1.6 million and $1.4 million, respectively.
Guardian Trust subleases its space from the Company. Management believes that
its existing facilities are adequate for its present purposes. See Note 13 to
the Company's Consolidated Financial Statements of the Registrant's Annual
Report to shareholders for the year ended December 31, 1993 (the "1993 Annual
Report") and incorporated herein for additional information relating to lease
rental expense and commitments. During the first quarter of 1993, the Company
renegotiated the lease for the Company's principal executive office and the
Bank's head office. The renegotiated lease will reduce the base rent expense for
that space over the next nine years by an aggregate amount of approximately $2.3
million.
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to routine litigation involving various aspects of
its business, none of which, in the opinion of management, will have a material
adverse impact on the consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is set forth under the caption "Common
Stock Price Range and Dividend Policy" at page 52 of the Registrant's 1993
Annual Report and incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is set forth under the caption
"Selected Financial Data" at page 8 of the Registrant's 1993 Annual Report and
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" at pages 9 through 27 of the Registrant's 1993 Annual Report and
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is set forth in the Registrant's
Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year ("Proxy Statement") under the
captions entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is set forth in the Registrant's Proxy
Statement under the caption entitled "Executive Compensation" and incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is set forth in the Registrant's Proxy
Statement under the caption entitled "Beneficial Ownership of Common Stock" and
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
The information required by this item is set forth in the Registrant's Proxy
Statement under the caption entitled "Executive Compensation -- Transactions
with Management" and incorporated herein by reference.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Schedules
<TABLE>
<CAPTION>
PAGE
REFERENCES TO
ANNUAL REPORT
TO
SHAREHOLDERS*
---------------
<S> <C>
Consolidated Balance Sheet as of December 31, 1993 and 1992.................. 28
Consolidated Statement of Operations for the years ended December 31, 1993,
1992 and 1991.............................................................. 29
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991........................................... 30
Consolidated Statement of Cash Flows for the years ended December 31, 1993,
1992 and 1991.............................................................. 31
Notes to Consolidated Financial Statements................................... 32 to 50
Independent Auditors' Report................................................. 51
<FN>
--------------------------------
*The pages of the Registrant's 1993 Annual Report listed above are
incorporated herein by reference in response to Item 8 of this report.
Except for these pages and the pages referred to in Items 1, 2, 5, 6
and 7 of this report, the Registrant's 1993 Annual Report shall not be
deemed filed as a part of this report and is not filed herewith.
</TABLE>
2. No financial statement schedules are included in this report on the
basis that they are either inapplicable or the information required to be
set forth therein is contained in the financial statements filed herewith.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------
<C> <S>
3.1 --Articles of Incorporation, as amended(3)
3.2 --Bylaws, as amended(3)
4.1 --Specimen Common Stock Certificate
4.2 --Guardian Bancorp 1984 Stock Incentive Plan, As Amended and Restated
(May 1988)(10)
4.2(a) --Amendment No. 1 to 1984 Stock Incentive Plan, As Amended and
Restated (May 1988)(7)
4.2(b) --Amendment No. 2 to 1984 Stock Incentive Plan, As Amended and
Restated (May 1988)(10)
4.3 --Form of Incentive Stock Option Agreement (1990) for 1984 Stock
Incentive Plan(10)
4.4 --Form of Non-Qualified Stock Option Agreement (1990) for 1984 Stock
Incentive Plan(10)
4.5 --Reserved
4.6 --Reserved
4.7 --Guardian Bancorp Employee Stock Ownership Plan(6)
4.8 --Guardian Bancorp Employee Stock Ownership Trust, dated May 25,
1988(6)
4.9 --Guardian Bancorp Deferred Compensation Plan(6)
4.10 --Guardian Bancorp Deferred Compensation Trust Agreement(6)
4.11 --Subordinated Debenture Purchase Agreement, dated December 22,
1988(6)
4.12 --Guardian Bank 11% Mandatory Convertible Subordinated Debenture due
1995(6)
4 .13 --Warrant to Purchase Common Stock, dated December 30, 1988(6)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------
<C> <S>
4.14 --Guardian Bancorp 1990 Stock Incentive Plan, As Amended and Restated
(February 1990)(9)
4.14(a) --Amendment No. 1 to 1990 Stock Incentive Plan, As Amended and
Restated (February 1990)(10)
4.15 --Form of Incentive Stock Option Agreement for 1990 Stock Incentive
Plan(8)
4.16 --Form of Non-Qualified Stock Option Agreement for 1990 Stock
Incentive Plan(8)
4.17 --Guardian Bancorp 1990 Deferred Compensation Plan (As Amended through
December 1990)(10)
4.18 --Guardian Bancorp 1990 Deferred Compensation Plan Trust Agreement(10)
4.19 --Form of Subscription Right Certificate(12)
4.20 --Warrant Agreement and Form of Warrant(12)
10.1 --Lease between Guardian Bancorp and Shuwa Investments Corporation,
dated February 23, 1993, for ground floor and office space in Los
Angeles, California(11)
10.2 --Reserved
10.3 --Reserved
10.4 --Employment Agreement between the Registrant and Paul M. Harris,
dated October 20, 1992(11)
10.5 --Settlement Agreement and Mutual General Release among the
Registrant, Guardian Bank, Guardian Trust Co. and Arthur W. Tate
dated November 12, 1993.
10.6 --Employment Agreement between the Registrant and Vincent A. Bell,
dated October 20, 1988(11)
10.7 --Settlement Agreement and Mutual General Release among the
Registrant, Guardian Bank and Ronald W. Holloway dated November 26,
1993
10.8 --Form of Indemnification Agreement entered into with each Executive
Officer and Director of the Registrant Company(6)
10.9 --Form of Indemnification Agreement entered into with each director
and executive officer of Guardian Bank(6)
10.10 --Lease between Centrelake Plaza Associates and Guardian Bancorp,
dated as of October 11, 1989, for office space in Ontario,
California(8)
10.11 --Form of Dealer Manager Agreement(12)
10.12 --Form of Soliciting Dealer Agreement(12)
10.13 --Form of Standby Stock Purchase Agreement(12)
10.14 --Form of Information Agent Agreement(12)
10.15 --Form of Subscription Agent Agreement(12)
10.16 --Form of Commitment(12)
10.17 --Form of Agreement Not to Sell(12)
13.1 --Annual Report to Shareholders for the year ended December 31, 1993
(parts not specifically incorporated by reference are filed for
informational purposes and are not filed herewith)
21.1 --Subsidiaries of the Registrant
23.1 --Accountants' Consent
<FN>
----------------------------
1. Reserved.
2. Reserved
3. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991, filed with the Commission
on March 27, 1992 (Commission File No. 1-9757), and incorporated
herein by reference.
4. Reserved.
5. Reserved.
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
6. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1988, filed with the Commission
on March 29, 1989 (Commission File No. 1-9757), and incorporated
herein by reference.
7. Reserved.
8. This exhibit is contained in the Registrant's Registration Statement
on Form S-2 filed with the Commission on December 18, 1989 and amended
January 26, 1990 (Commission File No. 33-32611), and incorporated
herein by reference.
9. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989, filed with the Commission
on March 16, 1990 (Commission File No. 1-9757), and incorporated
herein by reference.
10. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990, filed with the Commission
on March 29, 1991 (Commission File No. 1-9757), and incorporated
herein by this reference.
11. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992, filed with the Commission
on March 27, 1993 (Commission File No. 1-9757) and incorporated herein
by reference.
12. This exhibit is contained in the Registrant's Registration Statement
on Form S-2 filed with the Commission on October 6, 1993 and amended
on November 22, 1993, December 10, 1993 and December 16, 1993 (File
No. 33-70032) and incorporated herein by reference.
</TABLE>
Executive Compensation Plans and Arrangements
The following compensation plans and arrangements are filed as
exhibits to this Annual Report on Form 10-K: Guardian Bancorp 1984 Stock
Option Plan, as amended and restated and further amended, and the Form of
Stock Option Agreements thereunder, Exhibits 4.2, 4.2(a), 4.2(b), 4.3 and
4.4; Guardian Bancorp Employee Stock Ownership Plan, Exhibit 4.7;
Guardian Bancorp Employee Stock Ownership Trust, dated May 25, 1988,
Exhibit 4.8; Guardian Bancorp Deferred Compensation Plan, Exhibit 4.9;
Guardian Bancorp Deferred Compensation Trust Agreement, Exhibit 4.10;
Guardian Bancorp 1990 Stock Incentive Plan, as amended and restated and
further amended, and the Form of Stock Option Agreements thereunder,
Exhibits 4.14, 4.14(a), 4.15 and 4.16; Guardian Bancorp 1990 Deferred
Compensation Plan, Exhibit 4.17; Guardian Bancorp 1990 Deferred
Compensation Plan Trust Agreement, Exhibit 4.18; Employment Agreement
between the Registrant and Paul M. Harris, dated October 20, 1992,
Exhibit 10.4; Settlement Agreement and Mutual General Release among the
Registrant, Guardian Bank, Guardian Trust Co. and Arthur W. Tate dated
November 12, 1993, Exhibit 10.5; Employment Agreement between the
Registrant and Vincent A. Bell, dated October 20, 1988, Exhibit 10.6;
Settlement Agreement and Mutual General Release among the Registrant,
Guardian Bank and Ronald W. Holloway dated November 26, 1993, Exhibit
10.7.
(b) Reports on Form 8-K
Inapplicable
(c) Exhibits Required by Item 601 of Regulation S-K
See Item 14(a)(3) above.
(d) Additional Financial Statements
Inapplicable
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as
29
<PAGE>
follows, which undertaking shall be incorporated by reference into registrant's
Registration Statements on Form S-8, Commission File Nos. 2-96894 (filed April
5, 1985 and amended by post-effective amendment dated May 24, 1988), 33-22371
(filed June 8, 1988) and 33-35012 (filed May 30, 1990):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
30
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GUARDIAN BANCORP
Date: March 29, 1994 By: /s/ PAUL M. HARRIS
--------------------------------------
Paul M. Harris
CHIEF EXECUTIVE OFFICER
By: /s/ JON D. VAN DEUREN
--------------------------------------
Jon D. Van Deuren
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------- ------------------
<S> <C> <C>
------------------------------------------- Director March , 1994
Donald J. Bohana
/s/ MARILYN M. COHEN
------------------------------------------- Director March 29, 1994
Marilyn M. Cohen
/s/ HOWARD C. FLETCHER III Director
------------------------------------------- and President March 29, 1994
Howard C. Fletcher III
/s/ ROBERT D. FRANDZEL
------------------------------------------- Director March 29, 1994
Robert D. Frandzel
/s/ PAUL M. HARRIS Director and
------------------------------------------- Chief Executive Officer March 29, 1994
Paul M. Harris
/s/ JAMES F. LEWIN
------------------------------------------- Director March 29, 1994
James F. Lewin
/s/ SAUL SOCOLOSKE
------------------------------------------- Director March 29, 1994
Saul Socoloske
</TABLE>
31
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -------------------------------------------------------
<C> <S>
3.1 --Articles of Incorporation, as amended(3)
3.2 --Bylaws, as amended(3)
4.1 --Specimen Common Stock Certificate
4.2 --Guardian Bancorp 1984 Stock Incentive Plan, As
Amended and Restated (May 1988)(10)
4.2(a) --Amendment No. 1 to 1984 Stock Incentive Plan, As
Amended and Restated (May 1988)(7)
4.2(b) --Amendment No. 2 to 1984 Stock Incentive Plan, As
Amended and Restated (May 1988)(10)
4.3 --Form of Incentive Stock Option Agreement (1990) for
1984 Stock Incentive Plan(10)
4.4 --Form of Non-Qualified Stock Option Agreement (1990)
for 1984 Stock Incentive Plan(10)
4.5 --Reserved
4.6 --Reserved
4.7 --Guardian Bancorp Employee Stock Ownership Plan(6)
4.8 --Guardian Bancorp Employee Stock Ownership Trust,
dated May 25, 1988(6)
4.9 --Guardian Bancorp Deferred Compensation Plan(6)
4.10 --Guardian Bancorp Deferred Compensation Trust
Agreement(6)
4.11 --Subordinated Debenture Purchase Agreement, dated
December 22, 1988(6)
4.12 --Guardian Bank 11% Mandatory Convertible Subordinated
Debenture due 1995(6)
4.13 --Warrant to Purchase Common Stock, dated December 30,
1988(6)
4.14 --Guardian Bancorp 1990 Stock Incentive Plan, As
Amended and Restated (February 1990)(9)
4.14(a) --Amendment No. 1 to 1990 Stock Incentive Plan, As
Amended and Restated (February 1990)(10)
4.15 --Form of Incentive Stock Option Agreement for 1990
Stock Incentive Plan(8)
4.16 --Form of Non-Qualified Stock Option Agreement for 1990
Stock Incentive Plan(8)
4.17 --Guardian Bancorp 1990 Deferred Compensation Plan (As
Amended through December 1990)(10)
4.18 --Guardian Bancorp 1990 Deferred Compensation Plan
Trust Agreement(10)
4.19 --Form of Subscription Right Certificate(12)
4.20 --Warrant Agreement and Form of Warrant(12)
10.1 --Lease between Guardian Bancorp and Shuwa Investments
Corporation, dated February 23, 1993, for ground floor
and office space in Los Angeles, California(11)
10.2 --Reserved
10.3 --Reserved
10.4 --Employment Agreement between the Registrant and Paul
M. Harris, dated October 20, 1992(11)
10.5 --Settlement Agreement and Mutual General Release among
the Registrant, Guardian Bank, Guardian Trust Co. and
Arthur W. Tate, dated November 12, 1993
10.6 --Employment Agreement between the Registrant and
Vincent A. Bell, dated October 20, 1988(11)
10.7 --Settlement Agreement and Mutual General Release among
the Registrant, Guardian Bank and Ronald W. Holloway,
dated November 26, 1993
10.8 --Form of Indemnification Agreement entered into with
each Executive Officer and Director of the Registrant
Company(6)
10.9 --Form of Indemnification Agreement entered into with
each director and executive officer of Guardian Bank(6)
10 .10 --Lease between Centrelake Plaza Associates and
Guardian Bancorp, dated as of October 11, 1989, for
office space in Ontario, California(8)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -------------------------------------------------------
<C> <S>
10.11 --Form of Dealer Manager Agreement(12)
10.12 --Form of Soliciting Dealer Agreement(12)
10.13 --Form of Standby Stock Purchase Agreement(12)
10.14 --Form of Information Agent Agreement(12)
10.15 --Form of Subscription Agent Agreement(12)
10.16 --Form of Commitment(12)
10.17 --Form of Agreement Not to Sell(12)
13.1 --Annual Report to Shareholders for the year ended
December 31, 1993 (parts not specifically incorporated
by reference are filed for informational purposes and
are not filed herewith)
21.1 --Subsidiaries of the Registrant
23.1 --Accountants' Consent
<FN>
----------------------------
1. Reserved.
2. Reserved.
3. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991, filed with the Commission
on March 27, 1992 (Commission File No. 1-9757), and incorporated
herein by reference.
4. Reserved.
5. Reserved.
6. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1988, filed with the Commission
on March 29, 1989 (Commission File No. 1-9757), and incorporated
herein by reference.
7. Reserved.
8. This exhibit is contained in the Registrant's Registration Statement
on Form S-2 filed with the Commission on December 18, 1989 and amended
January 26, 1990 (Commission File No. 33-32611), and incorporated
herein by reference.
9. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989, filed with the Commission
on March 16, 1990 (Commission File No. 1-9757), and incorporated
herein by reference.
10. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990, filed with the Commission
on March 29, 1991 (Commission File No. 1-9757), and incorporated
herein by this reference.
11. This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992, filed with the Commission
on March 27, 1993 (Commission File No. 1-9757) and incorporated herein
by reference.
12. This exhibit is contained in the Registrant's Registration Statement
on Form S-2 filed with the Commission on October 6, 1993 and amended
on November 22, 1993, December 10, 1993 and December 16, 1993 (File
No. 33-70032) and incorporated herein by reference.
</TABLE>
<PAGE>
EXHIBIT 4.1
NUMBER: SD SHARES
GUARDIAN BANCORP
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF LOS ANGELES OR NEW YORK
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT CUSIP 401321 10 4
IS THE RECORD HOLDER OF
FULLY PAID AND NON ASSESSABLE COMMON SHARES OF NO PAR VALUE OF
- ------------------------ GUARDIAN BANCORP ------------------------
- ------------------------ ------------------------
- ------------------------ ------------------------
TRANSFERABLE ON THE BOOKS OF THE CORPORATION IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE
IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTERED BY THE
REGISTRAR.
WITNESS THIS FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES
OF ITS DULY AUTHORIZED OFFICERS.
DATED:
CHAIRMAN PRESIDENT SECRETARY
<PAGE>
COUNTERSIGNED AND REGISTERED:
FIRST INTERSTATE BANK OF CALIFORNIA
TRANSFER AGENT AND REGISTRAR
BY AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- .............. Custodian .............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ...................................
in common (State)
UNIF TRF MIN ACT-- ....... Custodian (until age ....... )
(Cust)
............... under Uniform Transfers
(Minor)
to Minors Act .........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___ HEREBY SELL, ASSIGN AND TRANSFER UNTO
<TABLE>
<S> <C>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
</TABLE>
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ SHARES
OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE,
AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
_______________________________________________________________________ ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ______________________________________________
X _______________________________________________________
X _______________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
By _____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
APPENDIX TO SPECIMEN COMMON STOCK CERTIFICATE
1. The bottom of the front of the stock certificate has facsimile signatures of
the Registrant's chairman, president and secretary.
2. The Corporate seal is immediately above the facsimile signature of the
Registrant's president. The seal is composed of three concentric circles.
The middle circle contains the Registrant's name, "GUARDIAN BANCORP" and
"CALIFORNIA", the Registrant's state of incorporation; "INCORPORATED DEC.
31, 1981" is shown in the seal's innermost circle.
<PAGE>
EXHIBIT 10.5
SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE
This Settlement Agreement and Mutual General Release ("Agreement")
is made between Arthur W. Tate ("Claimant"), on the one hand, and Guardian Bank
("Bank"), Guardian Bancorp ("Bancorp") and Guardian Trust Co. ("Trust Co.")
(collectively "Releasees"), on the other hand, and is made with respect to the
following facts:
A. A dispute has arisen between Claimant and Releasees regarding
Claimant's employment with Bank and Bancorp and his serving as a director and
officer of Bancorp and Trust Co. With respect to this dispute, Claimant has
threatened to file a lawsuit. A copy of the draft complaint (the "Draft
Complaint") Claimant proposed to file is attached hereto as Exhibit A. Because
the Draft Complaint was not filed, Releasees were not required to file an
Answer; however, they would deny all the material allegations contained within
it.
B. The parties hereto are now desirous of settling their
differences.
C. Based on the foregoing facts, and in exchange for the
covenants contained herein, the parties hereto, and each of them, agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meaning indicated:
(a) "Claims" refers to and includes all claims, demands,
rights, causes of action, rights of action, rights of subrogation, rights of
indemnity, rights to reimbursement, rights to payment, liens and remedies of
every kind or nature whatsoever, whether the same are or any of the same is at
law, in equity, or otherwise, and whether the same are or any of the same is
known or unknown to the parties at the time of their execution of this
Agreement.
(b) "Obligations" refers to and includes all obligations,
duties, liabilities, damages, costs, fees (including, but without limitation
thereto, attorneys' fees), expenses and debts of every kind and nature
whatsoever, whether the same are or any of the same is known or unknown to the
parties at the time of their execution of this Agreement.
Subject to and with reference to the definitions set forth
above, the parties hereto, and each of them, execute this Agreement in favor of
and for the benefit of the other as follows.
1
<PAGE>
2. GENERAL.
(a) It is understood that this Agreement does not constitute
an admission by any of the parties of any wrongdoing whatsoever. Moreover, each
of the parties specifically denies having engaged in any wrongdoing.
(b) The parties have agreed to enter into this Agreement for
the purpose of fully and completely settling all differences between them and in
the interest of saving themselves the costs and vexation of further legal
proceedings.
3. CLAIMANT'S RESIGNATION.
(a) Releasees' personnel records shall reflect that effective
August 23, 1993, Claimant voluntarily resigned as Vice Chairman of Bank, as
President of Bancorp and as Chairman of Trust Co. Claimant's letter of
resignation from these positions is attached hereto as Exhibit B. This letter
shall become a permanent part of Claimant's personnel file. Any document in
Claimant's personnel file indicating that Claimant's departure from any of these
positions was for any reason other than voluntary resignation shall be removed
from the file.
(b) Claimant shall voluntarily resign as a Director of the
Board of Directors of Bancorp and of Trust Co. and from each and every committee
or subcommittee thereof on which he serves. Claimant's letter of resignation
from these positions is attached hereto as Exhibit C. Claimant's resignation
shall be deemed to be accepted on the date this Agreement becomes effective.
4. PAYMENT BY RELEASEES.
(a) Releasees shall pay Claimant the gross sum of ONE
HUNDRED THIRTEEN THOUSAND, NINE HUNDRED SIX DOLLARS AND TWENTY-FIVE CENTS
($113,906.25). This sum shall be allocated completely to Claimant's alleged
claims for personal injury, pain, suffering, anguish, physical and emotional
stress and strain (which claims Releasees deny). None of this portion of the
settlement proceeds is paid as earnings, back wages, vacation or separation pay.
Releasees shall not file a W2 form or a 1099 with respect to this payment.
(b) Releasees shall pay Claimant the gross sum of FIFTY SIX
THOUSAND, NINE HUNDRED FIFTY-THREE DOLLARS AND THIRTEEN CENTS ($56,953.13). This
sum shall be allocated to Claimant's claims to additional compensation (which
claims Releasees deny). This payment shall be treated as a taxable payment, and
all
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deductions required by law, calculated using the most current W4 form Claimant
has filed with Releasees, shall be made from these proceeds. Releasees shall
include this payment in the W2 form issued to Claimant at the end of the
calendar year.
(c) The payments called for in this paragraph 4 shall be made
upon Claimant's delivery to Releasees' attorney of five (5) executed copies of
this Agreement and the expiration of the revocation period set forth in
paragraph 26 below.
(d) Claimant acknowledges and agrees that he shall pay any
local, state or federal income taxes, penalties, fines, interest or assessments
incurred as the result of any payment of monies under this Agreement. In the
event Releasees are required to pay, or it is contended that Releasees are
required to pay any such taxes, fines, interest or assessments, Claimant agrees
to hold harmless and indemnify Releasees from any and all such taxes, fines,
interest or assessments. Claimant further agrees not to seek or make any claim
against Releasees for any loss, cost, damage or expense if a claim or adverse
determination is made in connection with the nonwithholding or other tax
treatment of any of the proceeds of this settlement or any portion thereof. In
addition, Claimant acknowledges and agrees that Releasees have no duty to defend
against any claim or assertion made in connection with the nonwithholding or
other tax treatment of the proceeds of this settlement or any portion thereof,
and Claimant agrees to assume full responsibility for defending against any such
claim or assertion. At their option, Releasees may select counsel of their
choosing to represent them in connection with any claim or assertion made in
connection with the nonwithholding or other tax treatment of the proceeds of
this settlement. Claimant shall indemnify Releasees for the attorneys' fees and
costs incurred in connection with such claim or assertion.
5. TRANSFER OF TITLE TO AUTOMOBILE.
(a) Releasees shall assign to Claimant title to the 1988
Mercedes Benz 300 SEL which Releasees purchased but which they permitted
Claimant to use while he was in their employ. Subject to Claimant's providing
Releasees with a copy of the written statement he has obtained from a recognized
Mercedes Benz dealership regarding the current fair market value of the vehicle,
Releasees, in transferring title, shall advise the DMV that the value of the
vehicle is $12,500. Releasees shall assign title at the same time and under the
same conditions as set forth in Paragraph 4(c).
(b) Claimant acknowledges that the transfer of title
referred to in this Paragraph 5 represents the receipt of
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value in addition to any payment of value to which Claimant already is entitled
and is made for the purpose of avoiding the costs and vagaries of litigation.
6. BALBOA BAY CLUB MEMBERSHIP. To the extent permitted by the
applicable membership documents, Bank shall promptly transfer all rights it has
in its membership in the Balboa Bay Club which it permitted Claimant to use
while in its employ. Claimant will be liable for any and all financial
obligations that accompany that membership or the transfer thereof from a
corporate to an individual membership.
7. TELEPHONES. Releasees shall transfer the car phone and
portable phone they permitted Claimant to use at an imputed income of $100 each.
8. INSURANCE.
(a) Bank shall continue to provide Claimant his current
health, life and long-term disability insurance benefits for a six (6) month
period commencing August 23, 1993. Thereafter, with respect to the health
insurance, Claimant shall be entitled to exercise his rights under the
Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Bank shall timely
provide Claimant notice of his rights under and forms needed to make the
elections provided by COBRA.
(b) The life insurance policy in the amount of $750,000 of
coverage, naming Claimant as the insured, shall remain in place through its
renewal date of July 23, 1994. Thereafter, to the extent permitted by the terms
of the policy, Claimant may continue coverage by making such payments and
fulfilling such other requirements as called for in the policy.
9. RELEASE.
(a) Claimant does hereby agree to fully, finally and forever
release, quitclaim and discharge Releasees, and each of them, and each of their
officers, directors, shareholders, agents, employees, attorneys, trustees,
administrators, accountants, successors, assigns, insurance carriers and/or
administrators, affiliates and related organizations and any or all of them from
any and all claims, liabilities, demands, debts, accounts, obligations, actions
and causes of action, known or unknown, at law or in equity, which he may have
or claimed to have had, arising at any time in the unlimited past to and
including the date of this Agreement, including, but without
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limiting the generality of the foregoing, any and all matters arising out of or
in any manner whatsoever connected with his employment with and his serving as a
Director on the Board of Directors of Releasees and his
resignations/terminations therefrom. Without limiting the generality of the
foregoing, Claimant specifically acknowledges that the persons he is releasing
include (but are not limited to) Howard Fletcher III, Vincent Bell, Donald
Bohana, Marilyn M. Cohen, Robert D. Frandzel, Paul M. Harris, Saul Socoloske and
John P. Sullivan.
(b) Without limiting the generality of the foregoing,
Claimant acknowledges and agrees that among the claims released are any and all
claims pursuant to Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Equal Pay Act, the Americans with
Disabilities Act, the California Fair Employment and Housing Act, the California
Equal Pay Act, the Fair Labor Standards Act, the California Labor Code, any Wage
Order promulgated by the Industrial Welfare Commission, the California
Unemployment Insurance Code, any breach of an express, written, oral or implied
contract, breach of an implied covenant of good faith and fair dealing, tortious
wrongful discharge based on a breach of any state or federal public policy,
fraud, negligent misrepresentation, defamation, libel, slander, negligence,
intentional or negligent infliction of emotional distress and any and all
additional claims purported to be pled in the Draft Complaint.
(c) Claimant further acknowledges and agrees that this
Agreement shall operate as a complete bar of any and all litigation, charges,
complaints, grievances, arbitrations, or demands of any kind whatsoever which
arose at any time in the unlimited past to and including the date of this
Agreement, regardless of whether they are pending or contemplated, or might at
any time be filed including, but without limiting the generality of the
foregoing, any and all matters arising out of or in any manner whatsoever
connected with his employment with and his serving as a Director on the Board of
Directors of Releasees and his resignations/terminations therefrom. Each and
all of the aforesaid claims or potential claims, are hereby fully and finally
settled, compromised and released.
(d) Claimant acknowledges that he has been advised by legal
counsel and is familiar with the provision of Section 1542 of the California
Civil Code, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTORS.
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(e) Being aware of said Code section, Claimant hereby
expressly waives and relinquishes any rights or benefits he may have thereunder,
as well as under any other state or federal statutes or common law principles of
similar effect.
(f) Releasees do hereby agree to fully, finally and forever
release, quitclaim and discharge Claimant and each of his attorneys, agents,
successors and assigns and any or all of them from any and all claims,
liabilities, demands, debts, accounts, obligations, actions and causes of
action, known or unknown, at law or in equity, which they may have or claimed to
have had, arising at any time in the unlimited past to and including the date of
this Agreement, including, but without limiting the generality of the foregoing,
any and all matters arising out of or in any manner whatsoever connected with
Claimant's employment with and his serving as a Director on the Board of
Directors of Releasees and his resignations therefrom.
(g) Releasees further acknowledge and agree that this
Agreement shall operate as a complete bar of any and all litigation, charges,
complaints, grievances, arbitrations, or demands of any kind whatsoever which
arose at any time in the unlimited past to and including the date of this
Agreement, regardless of whether they are pending or contemplated, or might at
any time be filed including, but without limiting the generality of the
foregoing, any and all matters arising out of or in any manner whatsoever
connected with Claimant's employment with Releasees and his serving as Director
on the Boards of Directors of Releasees and his resignations therefrom. Each
and all of the aforesaid claims are hereby fully and finally settled,
compromised and released.
(h) Releasees acknowledge that they have been advised by
legal counsel and are familiar with the provision of Section 1542 of the
California Civil Code, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTORS.
(i) Being aware of said Code section, Releasees hereby
expressly waive and relinquish any rights or benefits they may have thereunder,
as well as under any other state or federal statutes or common law principles of
similar effect.
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10. LETTER OF RECOMMENDATION/REFERENCES. Upon request from
Claimant, Releasees will issue a copy of the letter of recommendation attached
hereto as Exhibit C to such persons as Claimant may direct. A copy of the
letter of recommendation shall also become a permanent part of Claimant's
personnel file. Apart from the obligations set forth in this paragraph 9,
Releasees shall have no obligation to provide references on Claimant's behalf.
11. SUCCESSORS AND ASSIGNS. All agreements, acknowledgments,
declarations, representations, understandings, promises, warranties,
authorizations and instructions made, and all understandings expressed by the
parties hereto, and each of them, in this Agreement and all benefits accruing
under this Agreement apply to and bind the respective makers of said agreements,
acknowledgments, declarations, representations, understandings, promises,
warranties, authorizations, instructions and expressions of understanding, and
also all of their respective heirs, officers, directors, agents, servants,
employees, attorneys, shareholders, affiliates, subsidiaries, parent entities,
firms, predecessors, successors and assigns, and also all other persons, firms,
corporations, associations, partnerships and entities in privity with or related
to or affiliated with any such person, firm, corporation, association,
partnership or entity.
12. MODIFICATION. This Agreement may not be modified except by a
writing signed by each of the parties hereto, or their duly authorized
representatives.
13. APPLICABLE LAW. This Agreement shall, in all respects, be
interpreted, construed and governed by and under the domestic laws of the State
of California.
14. ARBITRATION.
(a) Any dispute regarding any aspect of this Agreement
(including but not limited to its formation, performance or breach) or any act
which allegedly has or would violate any provision of this Agreement
("Arbitrable Dispute"), except for a dispute arising out of an alleged violation
of paragraph 14, will be submitted to arbitration in Los Angeles County,
California, before an experienced employment arbitrator licensed to practice law
in California and selected in accordance with the Model Employment Arbitration
Procedures of the American Arbitration Association. Each party shall pay the
fees of their respective attorneys, the expenses of their witnesses and any
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other expenses connected with presenting their claim. Other costs of the
arbitration, including the fees of the arbitrator, cost of any record or
transcript of the arbitration, administrative fees and other fees and costs
shall be borne equally by the parties, one-half by Claimant, on the one hand,
and one-half by Releasees, on the other hand.
(b) Should either party to this Agreement hereafter
institute any legal action or administrative proceeding against the other with
respect to any Claim waived by this Agreement or pursue any Arbitrable Dispute
by any method other than through arbitration, the responding party shall be
entitled to recover from the initiating party all damages, costs, expenses and
attorneys' fees incurred as a result of such action.
15. PROPRIETARY INFORMATION.
(a) Claimant agrees that he will not in any fashion, form or
manner, either directly or indirectly, solicit or use for his own purposes or
for the purposes of any third party, or divulge, disclose or communicate to any
third party, any information he obtained during the course and scope of his
employment with Releasees regarding the identity of Releasees' customers, the
business transacted with them, the nature of the services provided by Releasees
and the prices charged for such services, and any other information that
constitutes a "trade secret" under California law.
(b) Claimant further agrees that as of the date he delivers
five (5) executed copies of this Agreement to Releasees' attorney, he has
returned to Releasees all originals and all copies of all the Releasees'
documents or other business records within his possession, custody or control,
including without limitation, manuals, documents, files, reports, studies,
instruments or other material used and/or developed by Claimant during his
employment with Releasees, and letters, memoranda, notes, reports, tables,
charts, photographs, video and audio tapes and transcriptions of such tapes,
computer records (including without limitation any and all computer disks,
computer tapes, and electronic or "E" mail).
16. RELEASEES' PROPERTY. Claimant represents and agrees that,
except as set forth above, on or before the date he delivers five (5) executed
copies of this Agreement to Releasees' attorney, in addition to the items
identified in Paragraph 14, above, he turned over to Releasees all files,
memoranda, records, other documents, badges, keys, credit cards and any other
physical or personal property which are or were the property of
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Releasees which Claimant had in his possession, custody or control.
17. SEVERABILITY. The provisions of this Agreement are severable,
and if any part of it is found to be unenforceable, the other paragraphs shall
remain fully valid and enforceable. This Agreement shall survive the
termination of any terms or conditions contained herein.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
19. CONFIDENTIALITY.
(a) Claimant agrees that he will not disclose, directly or
indirectly, whether individually or by or through an agent, representative,
attorney or other person, the existence of this Agreement or its terms or
conditions except (a) as required under compulsion of law, or (b) to his spouse,
financial, accounting or legal advisors and further agrees that he will take
reasonable steps to ensure against disclosure of the existence or terms of this
Agreement by such persons.
(b) Releasees agree that they will not disclose, directly or
indirectly, whether individually or by or through an agent, representative,
attorney or other person, the existence of this Agreement or its terms or
conditions except (a) as required under compulsion of law, including (without
limitation) responding to any request for such information from any state or
federal governmental agency to which they are subject to regulation, or setting
forth such information in public disclosure statements, to the extent required
by law, (b) to such of its officers, employees or agents who need such
information in order to effectuate the terms of the Agreement. Releasees will
take reasonable steps to ensure against disclosure of the existence or terms of
this Agreement by such persons. Nothing contained herein shall prevent the
parties from discussing the terms and conditions of the Agreement with each
other.
20. INDEMNIFICATION. As a further material inducement to Releasees
to enter into this Agreement, Claimant hereby agrees to indemnify and hold
Releasees, and each of them, harmless from and against any and all loss, costs,
damages, or expenses, including, without limitation, attorneys' fees incurred by
Releasees, or any of them, arising out of any breach of this
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Agreement by Claimant or the fact that any representation expressly made herein
by Claimant was false when made.
21. NO DISPARAGEMENT. Claimant shall take no action of any type
and make no statement of any type which harms, tends to harm, inconveniences,
embarrasses, is against the best interest of, or brings into disrepute Releasees
or any of their employees, officers, executives, directors, staff members,
agents and related organizations.
22. ENTIRETY OF AGREEMENT. The parties hereto acknowledge and
agree that this instrument and any other instruments specifically referred to
herein constitute and contain the entire agreement and understanding concerning
the subject matter between the parties and supersede and replace all prior
negotiations and proposed agreements, whether written or oral. The parties, and
each of them, warrant that no other party or any agent or attorney of any other
party has made any promise, representation or warranty whatsoever not contained
herein to induce them to execute this instrument and the other documents
referred to herein. The parties, and each of them, represent that they have not
executed this instrument or the other documents in reliance on any promise,
representations or warranty not contained herein.
23. CONSTRUCTION. The parties hereto acknowledge and agree that
the language of this instrument shall be construed as a whole according to its
fair meaning and not strictly for or against any of the parties.
24. HEADINGS. The various headings in this Agreement are inserted
for convenience only and shall not be deemed a part of or in any manner affect
this Agreement or any provisions hereof.
25. CONSULTATION WITH ATTORNEY AND COMPLETE UNDERSTANDING OF
AGREEMENT. Claimant acknowledges that he was represented by independent legal
counsel in connection with the negotiation and execution of this Agreement.
Claimant further acknowledges that he was advised that he had a period of
twenty-one (21) calendar days in which to consider and execute this Agreement.
Claimant acknowledges that he consulted with his attorney before signing this
Agreement, that Claimant has carefully read and fully understands all the
provisions of this Agreement and that he is voluntarily entering into it.
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26. EFFECTIVE DATE OF AGREEMENT. Claimant further acknowledges
and understands that he has seven (7) calendar days from the date on which he
executes this Agreement to revoke it. Any such revocation must be made in a
signed writing delivered to Debby Manning, Guardian Bank, 800 South Figueroa
Street, Los Angeles, California 90017, no later than 5:00 p.m. on the seventh
day after Claimant signs this Agreement. If Claimant revokes this Agreement, it
shall not be effective or enforceable and Claimant will not receive any of the
benefits described in this Agreement. The Agreement shall not be effective
until the expiration of this revocation period.
Dated: 11-12-93 GUARDIAN BANCORP
By: H. Fletcher
--------------------------------
Title: President
Dated: 11-12-93 GUARDIAN BANK
By: H. Fletcher
--------------------------------
Title: President & CEO
Dated: 11-12-93 GUARDIAN TRUST COMPANY
By: H. Fletcher
--------------------------------
Title: Chairman
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Dated: Arthur W. Tate
---------------------------
ARTHUR W. TATE
APPROVED AS TO FORM AND SUBSTANCE
RICKS & ANDERSON
Cecil Ricks, Jr.
- ---------------------------------
Cecil Ricks, Jr.
Attorneys for Claimant
PROSKAUER ROSE GOETZ & MENDELSOHN
Harold M. Brody
- ---------------------------------
Harold M. Brody
Attorneys for Releasees
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Exhibit 10.7
SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE
This Settlement Agreement and Mutual General Release ("Agreement") is
made between Ronald W. Holloway ("Claimant"), on the one hand, and Guardian Bank
("Bank") and Guardian Bancorp ("Bancorp") (collectively "Releasees"), on the
other hand, and is made with respect to the following facts:
A. A dispute has arisen between Claimant and Releasees regarding
Claimant's employment with Bank and his departure therefrom.
B. The parties hereto are now desirous of settling their differences
and wish to recognize the goodwill Claimant has engendered among Releasees'
customers and his efforts to assist in an orderly transition of
responsibilities.
C. Based on the foregoing facts, and in exchange for the covenants
contained herein, the parties hereto, and each of them, agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meaning indicated:
(a) "Claims" refers to and includes all claims, demands, rights,
causes of action, rights of action, rights of subrogation, rights of indemnity,
rights to reimbursement, rights to payment, liens and remedies of every kind or
nature whatsoever, whether the same are or any of the same is at law, in equity,
or otherwise, and whether the same are or any of the same is known or unknown to
the parties at the time of their execution of this Agreement.
(b) "Obligations" refers to and includes all obligations,
duties, liabilities, damages, costs, fees (including, but without limitation
thereto, attorneys' fees), expenses and debts of every kind and nature
whatsoever, whether the same are or any of the same is known or unknown to the
parties at the time of their execution of this Agreement.
Subject to and with reference to the definitions set forth above,
the parties hereto, and each of them, execute this Agreement in favor of and for
the benefit of the other as follows.
2. GENERAL.
(a) It is understood that this Agreement does not constitute an
admission by any of the parties of any wrongdoing whatsoever. Moreover, each of
the parties specifically denies having engaged in any wrongdoing.
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(b) The parties have agreed to enter into this Agreement for the
purpose of fully and completely settling all differences between them and in the
interest of saving themselves the costs and vexation of further legal
proceedings.
3. PAYMENTS BY RELEASEES.
(a) Releasees shall pay Claimant the gross sum of ONE HUNDRED
TEN THOUSAND, SEVEN HUNDRED FORTY-TWO DOLLARS AND NO CENTS ($110,742.00). This
sum shall be allocated completely to Claimant's alleged claims for personal
injury, pain, suffering, anguish, physical and emotional stress and strain
(which claims Releasees deny). None of this portion of the settlement proceeds
is paid as earnings, back wages, vacation or separation pay. Releasees shall
not file a W2 form or a 1099 with respect to this payment. The payment called
for in this subparagraph shall be made upon Claimant's delivery to Releasees of
five (5) executed copies of this Agreement and the expiration of the revocation
period set forth in paragraph 25 below.
(b) On January 3, 1994, Releasees shall pay Claimant the gross
sum of FIFTY-FIVE THOUSAND THREE HUNDRED SEVENTY-ONE DOLLARS AND NO CENTS
($55,371.00). This sum shall be allocated completely to Claimant's alleged
claims for personal injury, pain, suffering, anguish, physical and emotional
stress and strain (which claims Releasees deny). None of this portion of the
settlement proceeds is paid as earnings, back wages, vacation or separation pay.
Releasees shall not file a W2 form or a 1099 with respect to this payment.
(c) On January 3, 1994, Releasees shall pay Claimant the gross
sum of TWENTY-FIVE THOUSAND, FIVE HUNDRED FIFTY-FIVE DOLLARS AND EIGHTY-FIVE
CENTS ($25,555.85). This payment shall be treated as a taxable payment, and all
deductions required by law, calculated using the most current W4 form Claimant
has filed with Releasees, shall be made from these proceeds. Releasees shall
include this payment in the W2 form issued to Claimant at the end of the
calendar year.
(d) Claimant acknowledges and agrees that he shall pay any
local, state or federal income taxes, penalties, fines, interest or assessments
incurred as the result of any payment of monies under this Agreement. Claimant
further agrees not to seek or make any claim against Releasees for any loss,
cost, damage or expense if a claim or adverse determination is made in
connection with the nonwithholding or other tax treatment of any of the proceeds
of this settlement or any portion thereof. In addition, Claimant acknowledges
and agrees that Releasees have no duty to defend against any claim or assertion
made in connection with the nonwithholding or other tax treatment of the
proceeds of this settlement or any portion thereof, and Claimant
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agrees to assume full responsibility for defending against any such claim or
assertion. At their option, Releasees may select counsel of their choosing to
represent them in connection with any claim or assertion made in connection with
the nonwithholding or other tax treatment of the proceeds of this settlement.
Claimant shall indemnify Releasees for the attorneys' fees and costs incurred
in connection with such claim or assertion.
4. SALE OF AUTOMOBILE.
(a) On January 3, 1993, Releasees shall sell to Claimant the
1988 Mercedes Benz 560 SEL which Releasees purchased but which they permitted
Claimant to use while he was in Bank's employ. Subject to Claimant's providing
Releasees with a copy of a written statement from a recognized Mercedes Benz
dealership or other reputable source regarding the current fair market value of
the vehicle, Releasees shall sell the vehicle to Claimant for $16,000.00.
(b) Claimant shall be permitted to keep possession of the
vehicle from the effective date of this Agreement until he purchases it from
Releasees. During that time, Releasees shall maintain any insurance coverage
currently in place on the vehicle, but Claimant shall be responsible for any
maintenance or repairs needed on the vehicle. Upon the sale of the vehicle,
Releasees shall have no further obligations for it (including, but not limited
to, maintaining insurance), and Claimant shall then have sole and full
responsibility for the vehicle (including, but not limited to, securing and
maintaining insurance).
5. TELEPHONES. Releasees shall transfer the car phone and portable
phone they permitted Claimant to use while in Bank's employ at an imputed income
of $100 each.
6. OUTPLACEMENT. At Releasees' expense, the outplacement firm of
Lee Hecht Harrison shall prepare a formal resume for Claimant's use to
Claimant's reasonable satisfaction.
7. INSURANCE. Bank shall continue to provide Claimant his current
health, life and long-term disability insurance benefits for a six (6) month
period commencing on the effective date of this Agreement. Thereafter, with
respect to the health insurance, Claimant shall be entitled to exercise his
rights under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Bank
shall timely provide Claimant notice of his rights under and forms needed to
make the elections provided by COBRA.
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8. RELEASE.
(a) Claimant does hereby agree to fully, finally and forever
release, quitclaim and discharge Releasees, and each of them, and each of their
officers, directors, shareholders, agents, employees, attorneys, trustees,
administrators, accountants, successors, assigns, insurance carriers and/or
administrators, affiliates and related organizations and any or all of them from
any and all claims, liabilities, demands, debts, accounts, obligations, actions
and causes of action, known or unknown, at law or in equity, which he may have
or claimed to have had, arising at any time in the unlimited past to and
including the date of this Agreement, including, but without limiting the
generality of the foregoing, any and all matters arising out of or in any manner
whatsoever connected with his employment with Bank and his departure therefrom.
(b) Without limiting the generality of the foregoing, Claimant
acknowledges and agrees that among the claims released are any and all claims
pursuant to Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act, the Equal Pay Act, the Americans with Disabilities Act, the
California Fair Employment and Housing Act, the California Equal Pay Act, the
Fair Labor Standards Act, the California Labor Code, any Wage Order promulgated
by the Industrial Welfare Commission, the California Unemployment Insurance
Code, any breach of an express, written, oral or implied contract, breach of an
implied covenant of good faith and fair dealing, tortious wrongful discharge
based on a breach of any state or federal public policy, fraud, negligent
misrepresentation, defamation, libel, slander, negligence and intentional or
negligent infliction of emotional distress.
(c) Claimant further acknowledges and agrees that this Agreement
shall operate as a complete bar of any and all litigation, charges, complaints,
grievances, arbitrations, or demands of any kind whatsoever which arose at any
time in the unlimited past to and including the date of this Agreement,
regardless of whether they are pending or contemplated, or might at any time be
filed including, but without limiting the generality of the foregoing, any and
all matters arising out of or in any manner whatsoever connected with his
employment with Bank and his departure therefrom. Each and all of the aforesaid
claims or potential claims, are hereby fully and finally settled, compromised
and released.
(d) The parties expressly agree that the above release of claims
does not include any claim Claimant may have under the California Workers'
Compensation Law or the terms of Bank's disability insurance policy for any
injuries Claimant may contend he suffered while in Bank's employ.
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Claimant acknowledges and agrees that he is releasing any other claim
(including, without limitation, any third party action) he may have against
Releasees, or any of them, or any of their directors, shareholders, officers,
employees or agents, arising out of any such injuries.
(e) Claimant acknowledges that he has been advised by legal
counsel and is familiar with the provision of Section 1542 of the California
Civil Code, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTORS.
(f) Being aware of said Code section, Claimant hereby expressly
waives and relinquishes any rights or benefits he may have thereunder, as well
as under any other state or federal statutes or common law principles of similar
effect.
(g) Releasees do hereby agree to fully, finally and forever
release, quitclaim and discharge Claimant and each of his attorneys, agents,
successors and assigns and any or all of them from any and all claims,
liabilities, demands, debts, accounts, obligations, actions and causes of
action, known or unknown, at law or in equity, which they may have or claimed to
have had, arising at any time in the unlimited past to and including the date of
this Agreement, including, but without limiting the generality of the foregoing,
any and all matters arising out of or in any manner whatsoever connected with
Claimant's employment with Bank and his departure therefrom.
(h) Releasees further acknowledge and agree that this Agreement
shall operate as a complete bar of any and all litigation, charges, complaints,
grievances, arbitrations, or demands of any kind whatsoever which arose at any
time in the unlimited past to and including the date of this Agreement,
regardless of whether they are pending or contemplated, or might at any time be
filed including, but without limiting the generality of the foregoing, any and
all matters arising out of or in any manner whatsoever connected with Claimant's
employment with Bank and his departure therefrom. Each and all of the aforesaid
claims are hereby fully and finally settled, compromised and released.
(i) Releasees acknowledge that they have been advised by legal
counsel and are familiar with the provision of Section 1542 of the California
Civil Code, which provides as follows:
5
<PAGE>
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTORS.
(j) Being aware of said Code section, Releasees hereby expressly
waive and relinquish any rights or benefits they may have thereunder, as well as
under any other state or federal statutes or common law principles of similar
effect.
9. LETTER OF RECOMMENDATION/REFERENCES. Upon request from Claimant,
Releasees will issue a copy of the letter of recommendation attached hereto as
Exhibit A to such persons as Claimant may direct. A copy of the letter of
recommendation shall also become a permanent part of Claimant's personnel file.
Apart from the obligations set forth in this paragraph, Releasees shall have no
obligation to provide references on Claimant's behalf.
10. SUCCESSORS AND ASSIGNS. All agreements, acknowledgments,
declarations, representations, understandings, promises, warranties,
authorizations and instructions made, and all understandings expressed by the
parties hereto, and each of them, in this Agreement and all benefits accruing
under this Agreement apply to and bind the respective makers of said agreements,
acknowledgments, declarations, representations, understandings, promises,
warranties, authorizations, instructions and expressions of understanding, and
also all of their respective heirs, officers, directors, agents, servants,
employees, attorneys, shareholders, affiliates, subsidiaries, parent entities,
firms, predecessors, successors and assigns, and also all other persons, firms,
corporations, associations, partnerships and entities in privity with or related
to or affiliated with any such person, firm, corporation, association,
partnership or entity.
11. MODIFICATION. This Agreement may not be modified except by a
writing signed by each of the parties hereto, or their duly authorized
representatives.
12. APPLICABLE LAW. This Agreement shall, in all respects, be
interpreted, construed and governed by and under the domestic laws of the State
of California.
13. ARBITRATION.
(a) Any dispute regarding any aspect of this Agreement
(including but not limited to its formation, performance or breach) or any act
which allegedly has or would violate any provision of this Agreement
("Arbitrable Dispute"),
6
<PAGE>
except for a dispute arising out of an alleged violation of paragraph 14, will
be submitted to arbitration in Los Angeles County, California, before an
experienced employment arbitrator licensed to practice law in California and
selected in accordance with the Model Employment Arbitration Procedures of the
American Arbitration Association. Each party shall pay the fees of their
respective attorneys, the expenses of their witnesses and any other expenses
connected with presenting their claim. Other costs of the arbitration,
including the fees of the arbitrator, cost of any record or transcript of the
arbitration, administrative fees and other fees and costs shall be borne equally
by the parties, one-half by Claimant, on the one hand, and one-half by
Releasees, on the other hand.
(b) Should either party to this Agreement hereafter institute
any legal action or administrative proceeding against the other with respect to
any Claim waived by this Agreement or pursue any Arbitrable Dispute by any
method other than through arbitration, the responding party shall be entitled to
recover from the initiating party all damages, costs, expenses and attorneys'
fees incurred as a result of such action.
14. PROPRIETARY INFORMATION.
(a) Claimant agrees that he will not in any fashion, form or
manner, either directly or indirectly, divulge, disclose or communicate to any
third party, any information he obtained during the course and scope of his
employment with Releasees regarding the identity of Releasees' customers, the
business transacted with them, the nature of the services provided by Releasees
and the prices charged for such services, and any other information that
constitutes a "trade secret" under California law.
(b) Claimant further agrees that as of the date he delivers five
(5) executed copies of this Agreement to Releasees' attorney, he has returned to
Releasees all originals and all copies of all the Releasees' documents or other
business records within his possession, custody or control, including without
limitation, manuals, documents, files, reports, studies, instruments or other
material used and/or developed by Claimant during his employment with Releasees,
and letters, memoranda, notes, reports, tables, charts, photographs, video and
audio tapes and transcriptions of such tapes, computer records (including
without limitation any and all computer disks, computer tapes, and electronic or
"E" mail).
7
<PAGE>
15. RELEASEES' PROPERTY. Claimant represents and agrees that, except
as set forth above, on or before the date he delivers five (5) executed copies
of this Agreement to Releasees, in addition to the items identified in Paragraph
14, above, he turned over to Releasees all files, memoranda, records, other
documents, badges, keys, credit cards and any other physical or personal
property which are or were the property of Releasees which Claimant had in his
possession, custody or control.
16. SEVERABILITY. The provisions of this Agreement are severable,
and if any part of it is found to be unenforceable, the other paragraphs shall
remain fully valid and enforceable. This Agreement shall survive the
termination of any terms or conditions contained herein.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
18. CONFIDENTIALITY.
(a) Claimant agrees that he will not disclose, directly or
indirectly, whether individually or by or through an agent, representative,
attorney or other person, the existence of this Agreement or its terms or
conditions except (a) as required by law, or (b) to his spouse, financial,
accounting or legal advisors and further agrees that he will take reasonable
steps to ensure against disclosure of the existence or terms of this Agreement
by such persons.
(b) Releasees agree that they will not disclose, directly or
indirectly, whether individually or by or through an agent, representative,
attorney or other person, the existence of this Agreement or its terms or
conditions except (a) as required by law, including (without limitation)
responding to any request for such information from any state or federal
governmental agency to which they are subject to regulation, or setting forth
such information in public disclosure statements or reports, to the extent
required by law, (b) to such of its directors, officers, employees or agents who
need such information in order to effectuate the terms of the Agreement.
Releasees will take reasonable steps to ensure against disclosure of the
existence or terms of this Agreement by such persons. Nothing contained herein
shall prevent the parties from discussing the terms and conditions of the
Agreement with each other.
19. INDEMNIFICATION. As a further material inducement to Releasees
to enter into this Agreement, Claimant hereby agrees to indemnify and hold
Releasees, and each of them, harmless from and against any and all loss, costs,
damages, or expenses,
8
<PAGE>
including, without limitation, attorneys' fees incurred by Releasees, or any of
them, arising out of any breach of this Agreement by Claimant or the fact that
any representation expressly made herein by Claimant was false when made.
20. NO DISPARAGEMENT. The parties shall take no action of any type
and make no statement of any type which harms, tends to harm, inconveniences,
embarrasses, is against the best interest of, or brings into disrepute the other
or any of their respective employees, officers, executives, directors,
shareholders, staff members, agents, related organizations, successors or
assigns.
21. ENTIRETY OF AGREEMENT. The parties hereto acknowledge and agree
that this instrument and any other instruments specifically referred to herein
constitute and contain the entire agreement and understanding concerning the
subject matter between the parties and supersede and replace all prior
negotiations and proposed agreements, whether written or oral. The parties, and
each of them, warrant that no other party or any agent or attorney of any other
party has made any promise, representation or warranty whatsoever not contained
herein to induce them to execute this instrument and the other documents
referred to herein. The parties, and each of them, represent that they have not
executed this instrument or the other documents in reliance on any promise,
representations or warranty not contained herein.
22. CONSTRUCTION. The parties hereto acknowledge and agree that the
language of this instrument shall be construed as a whole according to its fair
meaning and not strictly for or against any of the parties.
23. HEADINGS. The various headings in this Agreement are inserted
for convenience only and shall not be deemed a part of or in any manner affect
this Agreement or any provisions hereof.
24. CONSULTATION WITH ATTORNEY, COMPLETE UNDERSTANDING OF AGREEMENT
AND ACKNOWLEDGMENT OF RECEIPT OF CONSIDERATION. Claimant acknowledges that he
was represented by independent legal counsel in connection with the negotiation
and execution of this Agreement. Claimant further acknowledges that he was
advised that he had a period of twenty-one (21) calendar days in which to
consider and execute this Agreement. Claimant acknowledges that he consulted
with his attorney before signing this Agreement, that Claimant has carefully
read and fully understands all the provisions of this Agreement and that he is
voluntarily entering into it. Claimant further acknowledges that the payments
and other consideration which he is receiving
9
<PAGE>
pursuant to this Agreement represent consideration in addition to any payment of
value to which he is already entitled.
25. EFFECTIVE DATE OF AGREEMENT. Claimant further acknowledges and
understands that he has seven (7) calendar days from the date on which he
executes this Agreement to revoke it. Any such revocation must be made in a
signed writing delivered to Debby Manning, Guardian Bank, 800 South Figueroa
Street, Los Angeles, California 90017, no later than 5:00 p.m. on the seventh
day after Claimant signs this Agreement. If Claimant revokes this Agreement, it
shall not be effective or enforceable and Claimant will not receive any of the
benefits described in this Agreement. The Agreement shall not be effective
until the expiration of this revocation period.
Dated: 11/26/93 GUARDIAN BANCORP
By: H. Fletcher
--------------------------------
Title: President
-----------------------------
Dated: 11/26/93 GUARDIAN BANK
By: H. Fletcher
--------------------------------
Title: President
-----------------------------
Dated: 11/26/93 Ronald W. Holloway
-------------------------------------
RONALD W. HOLLOWAY
10
<PAGE>
8 GUARDIAN BANCORP
................................................................................
EXHIBIT 13.1
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statement of operations for the years ended
December 31, 1993, 1992 and 1991 are derived from the consolidated
financial statements, which have been audited by KPMG Peat Marwick,
independent auditors, included in this report. The selected consolidated
statement of operations data for the years ended December 31, 1990 and
1989 are derived from audited consolidated financial statements which
are not included in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS DATA:
Interest income $ 32,769 41,295 50,223 42,553 34,090
Interest expense (7,505) (9,010) (14,334) (10,857) (7,739)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 25,264 32,285 35,889 31,696 26,351
Provision for loan losses (18,250) (9,395) (5,946) (1,160) (1,236)
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,014 22,890 29,943 30,536 25,115
Noninterest income 1,419 1,039 923 611 554
Noninterest expense (27,436) (26,356) (24,749) (19,288) (16,631)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (19,003) (2,427) 6,117 11,859 9,038
Provision (benefit) for income tax (4,546) (109) 2,900 4,744 3,615
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (14,457) (2,318) 3,217 7,115 5,423
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net earnings (loss) $ (3.90) (.64) .77 1.61 1.31
Fully diluted net earnings (loss) (3.90) (.64) .77 1.61 1.31
Book value(1) 5.70 9.70 10.47 9.66 7.06
Weighted average shares outstanding (in thousands)(2) 3,710 3,624 4,194 4,413 4,130
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET DATA:
Federal funds sold $ 89,318 61,950 63,372 20,575 25,698
Investment securities 31,429 44,048 41,102 31,845 45,165
Short-term investments 33,003 27,823 -- -- --
Loans, net of deferred loan fees 353,032 420,192 392,997 291,741 203,090
Allowance for loan losses (15,419) (9,924) (4,681) (2,916) (2,107)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 337,613 410,268 388,316 288,825 200,983
- ---------------------------------------------------------------------------------------------------------------------
Total assets 585,716 652,580 575,987 414,934 353,343
Total deposits 546,217 602,845 531,588 374,965 326,016
Shareholders' equity 30,888 39,590 37,147 31,819 20,823
- ---------------------------------------------------------------------------------------------------------------------
ASSET QUALITY(5):
Nonperforming loans $ 34,825 34,863 28,784 2,671 2,739
Other real estate owned 13,949 4,359 2,945 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans and other real estate owned 48,774 39,222 31,729 2,671 2,739
- ---------------------------------------------------------------------------------------------------------------------
Loans with modified terms 9,539 2,149 8,124 -- 103
Net charge-offs to average loans 3.83% 1.21 .07 .07 .22
Nonperforming loans to total period-end loans 10.79 8.92 6.71 .78 1.11
Allowance for loan losses to period-end loans 5.64 3.45 2.13 1.01 1.01
Allowance for loan losses to period-end nonperforming loans 52.26 38.63 31.74 130.03 91.46
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average assets (2.47)% (.36) .56 1.71 1.53
Return on average shareholders' equity (46.80) (5.86) 8.66 22.36 26.04
Average shareholders' equity to average assets 5.27 6.07 6.45 7.67 5.89
Net interest margin(4) 4.99 5.83 7.21 9.23 9.49
Capital Ratios:(3)
Company:
Tier 1 6.00 8.26 7.99 10.73 NA
Total 8.15 10.23 10.14 11.80 NA
Leverage 3.74 5.34 5.74 6.86 NA
Bank:
Tier 1 7.02 8.36 7.89 9.10 NA
Total 8.33 10.36 10.04 11.03 NA
Leverage 4.19 5.21 5.69 6.75 NA
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1)All book value per share numbers are based on the number of shares
outstanding at period end.
(2)The weighted average number of shares of common stock outstanding during 1993
and 1992 was used to compute loss per share as the use of average shares
outstanding including common stock equivalents would be antidilutive.
(3)Based upon the capital adequacy guidelines that are in effect at December 31,
1993.
(4)Computed on a tax equivalent basis. If customer service expenses were
deducted in computing net interest income, net interest margin would have
been 3.90%, 4.39%, 5.38%, 7.21% and 6.80%, respectively.
(5)Prior years have been restated to be consistent with 1993 reclassification of
in-substance foreclosed assets from other real estate owned to loans.
</TABLE>
<PAGE>
GUARDIAN BANCORP 9
................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to
facilitate the understanding and assessment of significant changes in
trends related to the financial condition of the Company and its results
of operations. It should be read in conjunction with the audited
consolidated financial statements and footnotes appearing elsewhere in
this report.
OVERVIEW
The Company recorded a net loss of $14.5 million in 1993 compared to a
net loss of $2.3 million in 1992 and net earnings of $3.2 million in
1991. The net loss recorded in 1993 was attributable to increases in the
Company's provision for loan losses and the related allowance for loan
losses, a decline in net interest income and an increase in noninterest
expense. The increased provision for loan losses during 1993 reflects
management's assessment of the economic conditions that were prevailing
and the actual and potential impact those conditions have had and may
have on the Company's loan portfolio, including a continuing high level
of nonperforming loans and loan charge-offs. Net interest income during
1993 decreased from the amount reported for 1992 due principally to a
decline in average interest-earning assets and the yields earned
thereon. Net interest income for 1993 was also negatively affected by an
increase in nonperforming assets and a change in the composition of the
funding sources used by the Company, as average noninterest-bearing
deposits declined as a percentage of average total deposits. The decline
in net interest income for 1992 compared to 1991 was largely
attributable to a decline in the yield on interest-earning assets.
Noninterest expense during 1993 increased approximately $1.1 million
over the amount reported in 1992. This increase was largely attributable
to expenses associated with other real estate owned (OREO), which
increased approximately $2.3 million, a decrease of $969,000 in the
deferral of loan origination costs due to declines in the volume of new
loan originations and, to a lesser extent, a $750,000 increase in
professional expenses. These increases were partially offset by a $2.5
million decrease in customer service expense and a $540,000 decrease in
occupancy expense. Noninterest expense increased in 1992 over amounts
reported in 1991 primarily due to increased staffing needs, legal and
professional costs and other direct costs associated with carrying OREO.
The increase attributable to these factors was partially offset by
reductions in customer service expense and promotional costs.
At December 31, 1993, total assets, deposits and net loans of $567.5
million, $525.7 million and $322.7 million, respectively, had declined
12.8%, 12.4% and 17.4%, respectively, from amounts reported at the close
of 1992. At December 31, 1992, total assets, deposits and net loans of
$650.8 million, $599.9 million and $390.8 million, respectively, had
declined 10.5%, 12.1%, and 8.9%, respectively, from amounts reported at
the close of 1991. The decline in the loan portfolio during 1993 and
1992 from prior years' levels reflects the result of general economic
conditions in the Company's marketplace, a slow down in real estate
activity in Southern California and a shift in the Company's growth
patterns which started in 1991 and continued in 1993. In light of the
recessionary economic environment and the impact which it has had and
continues to have on the real estate sector, as well as a regulatory
recommendation regarding growth in the Company's real estate related
loans prior to 1992, management has moved to limit growth in the
Company's real estate related loans, particularly construction loans,
and has commenced the diversification of the loan portfolio mix to
include more non-real estate related credits. These actions are
consistent with the provisions of the Bank's regulatory agreement that
requires it to monitor and control the concentration of construction,
land development and land acquisition loans. Offsetting the decline in
the loan portfolio has been an increase at December 31, 1993 and 1992 in
the Company's lower yielding investment securities and short-term
investments, as management positioned the balance sheet mix to attain
acceptable yields, and an increase in its cash balances to meet
liquidity needs.
The Company's period end deposit balances traditionally reflect
increases in noninterest-bearing demand deposits from its title
insurance company and escrow company customers. These deposits generally
increase at or near each month end as the underlying real estate
transactions being handled by such deposit customers are nearing
consummation. In turn, the Company invests a substantial amount of these
funds in securities of the U.S.
<PAGE>
10 GUARDIAN BANCORP
................................................................................
Treasury and other short-term money market instruments which increases
its period end asset levels. Subsequent to each period end, such
short-term investments are converted into cash and used to meet such
customers' withdrawal needs as the underlying transactions are
consummated.
Total average assets, deposits and loans, net of deferred loan fees, of
$585.7 million, $546.2 million and $353.0 million, respectively, during
the year ended 1993 declined 10.3%, 9.4% and 16.0%, respectively, from
the averages for calendar year 1992. During the year ended December 31,
1992, average assets were $652.6 million, average deposits were $602.8
million and average loans, net of deferred loan fees, were $420.2
million, representing increases of 13.3%, 13.4% and 6.9%, respectively,
over the 1991 average amounts of $576.0 million, $531.6 million and
$393.0 million, respectively.
The composition of the Company's average deposit base changed during
1993 as average noninterest-bearing demand accounts decreased as a
percentage of total average deposits to 59.3% compared to 63.6% during
1992 and increased from the reported 54.9% in 1991. Those funds were
replaced with more costly interest-bearing deposits and partially
contributed to the decline in the Company's net interest margin during
1993. During 1993, average interest-bearing deposits comprised 40.7% of
total average deposits compared with 36.4% in 1992.
Nonperforming loans were essentially flat between December 31, 1993 and
1992 and were approximately $34.8 million at December 31, 1993, compared
with $34.9 million at the close of 1992. The current economic
environment has had and is expected to continue to have an adverse
impact on the Company's level of nonperforming loans, and management's
assessment of this existing and potential impact contributed to its
decision to increase the provision for loan losses and the related
allowance for loan losses during 1993. The majority of nonperforming
loans are supported by real estate collateral which reduces, but does
not eliminate, exposure to loss of principal. The ratio of the allowance
for loan losses to nonperforming loans increased to 52.26% at December
31, 1993 from the 38.63% reported at December 31, 1992.
OREO was $13.9 million at December 31, 1993, compared to $4.4 million at
the close of 1992. During 1993, the Company foreclosed on $24.2 million,
recorded valuation adjustments of $714,000, and sold $13.9 million of
such assets, realizing a net loss on sale of $266,000. Commencing in
1993, the Company reclassified in-substance foreclosed assets from other
real estate owned to loans if it does not have physical possession of
the underlying collateral. This practice is consistent with regulatory
reporting requirements and with changing trends evolving in the
financial reporting practices. Accordingly, related prior years'
financial information has been reclassified to be consistent with 1993's
presentation.
At December 31, 1993 and 1992, the allowance for loan losses was 5.64%
and 3.45% of loans, net of deferred fees, respectively. The Company's
level of net charge-offs, expressed as a percentage of average loans
outstanding, was 3.83%, as compared to 1.21% for the year ended December
31, 1992.
On October 14, 1992, the Federal Reserve Bank of San Francisco (the
"FRB") entered into a separate written agreement with each of the
Company and the Bank. These agreements require, among other things, the
Company and the Bank to: (a) develop a plan to maintain adequate
capital; (b) maintain an allowance for loan losses that is equal to or
greater than 1.7% of the Bank's total loans; (c) refrain from paying any
cash dividends to the Company or the Company's shareholders without the
prior approval of the FRB; (d) refrain from incurring any debt, other
than in the ordinary course of business, at the holding company level
without the prior approval of the Federal Reserve Bank; and (e) develop,
update and otherwise adopt various policies, procedures and plans to
improve the financial condition of the Bank. Both before and after
entering these agreements, management of the Company and the Bank have
taken various steps, including the Company's successful capital raising
effort which closed in early 1994, that are designed to facilitate
compliance with the terms thereof. However, compliance with the terms of
the agreements will be determined by the FRB during subsequent
examinations of the Company and the Bank.
On January 28, 1994, Guardian Bancorp consummated its rights offering of
common stock ("the Offering"), and raised gross proceeds of
approximately $19,700,000 through the issuance of 8,774,000 shares of
common stock. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. In early February 1994,
Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank
for the Bank's general corporate purposes and subsequently reimbursed
the Bank approximately $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds of
approximately $1.2 million for its own general corporate purposes.
<PAGE>
GUARDIAN BANCORP 11
................................................................................
The following table sets forth certain information regarding the
Company's results of operations for the three years indicated. Average
balances are computed using average daily balances.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1993 1992 1991
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
Return on average assets (2.47)% (.36)% .56%
Return on average shareholders' equity (46.80) (5.86) 8.66
Net earnings (loss) $ (14,457) $ (2,318) $ 3,217
Net earnings (loss) per share (3.90) (.64) .77
Total average assets $ 585,716 $ 652,580 $ 575,987
- ---------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The principal component of the Company's net earnings is net interest
income, which is the difference between interest and fees earned on
interest-earning assets and interest paid on deposits and borrowed
funds. Net interest income, when expressed as a percentage of total
average interest-earning assets, is referred to as the net interest
margin. A comparison of net interest income and net interest margin for
the last three years is shown in the table below. Net interest margin is
shown on a tax equivalent basis at the incremental tax rate of 34% for
the three year period ended December 31, 1993.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 (DECREASE) 1992 (DECREASE) 1991
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Interest income $ 32,769 (20.6)% $41,295 (17.8)% $50,223
Interest expense 7,505 (16.7) 9,010 (37.1) 14,334
- --------------------------------------------------------------------------------------------------
Net interest income 25,264 (21.7) 32,285 (10.0) 35,889
Net interest margin 4.99% 5.83% 7.21%
- --------------------------------------------------------------------------------------------------
</TABLE>
The Company's net interest income is affected by the change in the
amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as "volume change." It is also affected by
changes in yields earned on assets and rates paid on deposits and other
borrowed funds, referred to as "rate change." The following table sets
forth changes in interest income and interest expense for each major
category of interest-earning assets and interest-bearing liabilities and
the amount of change attributable to volume change and rate change for
the years indicated. The change in interest income due to both volume
change and rate change has been allocated to volume change and rate
change pro rata.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1993 AND 1992 1992 AND 1991
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest-bearing deposits with financial institutions $ (18) (28) (46) (40) (47) (87)
Federal funds sold 819 (273) 546 (75) (1,276) (1,351)
Investment securities (762) (354) (1,116) 200 (149) 51
Short-term investments 151 (101) 50 873 -- 873
Loans, net (5,386) (2,574) (7,960) 2,830 (11,244) (8,414)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (5,196) (3,330) (8,526) 3,788 (12,716) (8,928)
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Borrowed funds $ (104) 45 (59) 233 (216) 17
Interest-bearing demand and savings deposits (288) (197) (485) 252 (465) (213)
Money market deposits 16 (400) (384) 200 (1,023) (823)
Time certificates of deposit 662 (1,239) (577) (1,978) (2,327) (4,305)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 286 (1,791) (1,505) (1,293) (4,031) (5,324)
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ (5,482) (1,539) (7,021) 5,081 (8,685) (3,604)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
12 GUARDIAN BANCORP
................................................................................
Net interest income for the year ended December 31, 1993 decreased
approximately $7.0 million from the comparable period in 1992. Net
interest margin for the year ended December 31, 1993 decreased 84 basis
points from the comparable period in 1992 and was 4.99% in 1993 compared
to 5.83% in 1992. These declines are primarily attributable to a
reduction in average interest-earning assets in general and average
loans in particular and an overall decline in the yield on average
interest-earning assets. Net interest income was also negatively
affected by a change in the composition of the Company's deposits.
Average interest-earning assets and average loans, the Company's highest
yielding assets, were $508.5 million and $353.4 million, respectively,
during 1993 compared to $556.6 million and $421.0 million for 1992. This
decline and any further decline in interest-earning assets in general
and loans in particular has and could continue to adversely affect net
interest income in the future. In light of the high level of the
Company's average noninterest-bearing deposits, declining interest rates
have adversely affected the Company's net interest income as interest
income has been reduced without a corresponding reduction in interest
expense. Average interest rates have continued to decline during 1993 as
the Company's prime rate dropped to 7.0% at December 31, 1993 from 7.5%
at June 30, 1992. Until such time as interest rates increase, the
Company's net interest income will continue to be adversely affected by
the current level of, or any future decline in, interest rates.
Additionally, loans on nonaccrual have increased during the three years
ended December 31, 1993 and had the negative impact on net interest
margin by reducing it by 113, 69 and 48 basis points, during 1993, 1992
and 1991, respectively. Net interest margin will continue to be
adversely effected by the level of, or any future increases in loans on
nonaccrual. During the year ended December 31, 1993, the composition of
average deposits changed as average noninterest-bearing deposits
decreased as a percentage of total average deposits to 59.3% from 63.6%
during 1992 and average interest-bearing deposits increased as
percentage of total average deposits to 40.7% from 36.4% during 1992. It
is likely that increased reliance will be placed on interest-bearing
deposit sources in light of management's decision to diversify its
funding sources and a newly issued interpretive release by the Federal
Reserve Board which limits the payment of customer service expense to
certain instances. See "Financial Condition -- Liquidity." This
increased reliance on interest-bearing sources of funds has and will
continue to adversely affect net interest income, offset; in part, by
decreases in noninterest customer service expense attributable to
certain noninterest-bearing account relationships.
The $3.6 million decrease in net interest income for the year ended
December 31, 1992 from the comparable period in 1991 was principally due
to a 260 basis point decline in the yield on average interest-earning
assets. This decline is largely attributable to an increase in average
loans on nonaccrual during 1992 as compared to 1991, an overall decline
in the yield on average interest-earning assets and, to a lesser extent,
a reduction in loans outstanding, the Company's highest yielding asset,
as a percentage of total average earning assets. The decrease was
partially offset by an increase in the volume of average loans and a
decrease in the volume of average time certificates of deposit and the
rates paid on all interest-bearing deposits. Net interest margin was
5.83% in 1992 compared to 7.21% in 1991 and reflects the increase in
average earning assets and a decline in yields on virtually all such
assets that exceeded the decline in rates paid on the Company's
interest-bearing liabilities during 1992.
<PAGE>
GUARDIAN BANCORP 13
................................................................................
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields
and rates thereon. Average balances are computed using daily average
balances.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
INTEREST INTEREST INTEREST
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Interest-bearing deposits with
financial institutions $ 1,317 42 3.2% 1,742 88 5.1% 2,383 175 7.3%
Federal funds sold 89,318 2,594 2.9 61,950 2,048 3.3 63,372 3,399 5.4
Investment securities(1) 31,429 1,811 6.1 44,048 2,927 7.0 41,102 2,876 7.6
Short-term investments 33,003 923 2.8 27,823 874 3.3 -- -- --
Gross loans(2) 353,388 27,399 7.8 421,031 35,358 8.4 394,127 43,773 11.1
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 508,455 32,769 6.5 556,594 41,295 7.4 500,984 50,223 10.0
- ---------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 77,261 95,986 75,003
Total assets $585,716 652,580 575,987
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Borrowed funds $ 4,805 397 8.3% 6,104 456 7.5% 3,567 439 12.3%
Interest-bearing demand and
savings deposits 53,626 1,257 2.3 65,242 1,742 2.7 57,187 1,955 3.4
Money market deposits 52,327 1,289 2.5 51,813 1,673 3.2 47,701 2,496 5.2
Time certificates of deposit 116,603 4,562 3.9 102,210 5,139 5.0 134,621 9,444 7.0
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 227,361 7,505 3.3 225,369 9,010 4.0 243,076 14,334 5.9
- ---------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 323,661 383,580 292,079
Other liabilities 3,806 4,041 3,685
Shareholders' equity 30,888 39,590 37,147
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $585,716 652,580 575,987
- ---------------------------------------------------------------------------------------------------------------
Net interest income(3) $25,264 32,285 35,889
- ---------------------------------------------------------------------------------------------------------------
Net interest margin(3) 4.99% 5.83% 7.21%
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1)Yields are presented on a tax equivalent basis at the incremental tax rate of
34% for the three year period ended December 31, 1993.
(2)Includes loans on nonaccrual. Interest income on loans includes net loan fees
amortized to income of $648,000, $529,000 and $2.0 million during 1993, 1992 and
1991, respectively.
(3)If customer service expense were classified as interest expense, then the
Company's reported net interest income and noninterest expense for each of the
years in the three year period ended December 31, 1993 would be reduced by $5.5
million, $8.0 million and $9.2 million, respectively. Net interest margin for
each year would have been 3.90%, 4.39% and 5.38%, respectively.
</TABLE>
The level of nonperforming loans in the Company's portfolio affects the
amount of interest income. If a loan is placed on nonaccrual status,
interest income that had been accrued to the date a loan is placed on
nonaccrual is reversed and income is not recognized until the payment
has actually been received. At December 31, 1993, there was no interest
accrued which had not been reversed on nonaccrual loans. The amount of
net interest income foregone for the years ended December 31, 1993, 1992
and 1991, assuming nonaccrual loans at December 31, 1993, 1992 and 1991
complied with their original terms, was $4.0 million, $2.9 million and
$1.9 million, respectively. The amount of interest income foregone for
the years ended December 31, 1993, 1992 and 1991, assuming loans with
modified terms at December 31, 1993, 1992 and 1991 complied with their
original terms, was $318,000, $124,000 and $106,000, respectively.
Interest income will continue to be adversely affected until such time
as the Company is able to reduce the level of its nonaccrual loans. See
Note 4 to the Company's Consolidated Financial Statements.
<PAGE>
14 GUARDIAN BANCORP
................................................................................
PROVISION FOR LOAN LOSSES
The amounts provided for loan losses are determined by management after
quarterly evaluations of the loan portfolio. This evaluation processs
requires that management apply various judgments, assumptions and
estimates concerning the impact certain factors may have on amounts
provided. Factors considered by management in its evaluation process
include known and inherent losses in the loan portfolio, the current
economic environment, the composition of and risk in the loan portfolio,
prior loss experience and underlying collateral values. While management
considers the amounts provided for loan losses for the year ended
December 31, 1993 to be adequate, subsequent changes in these factors
and related assumptions may warrant significant adjustments in amounts
provided, based on conditions prevailing at the time. In addition,
various regulatory agencies, as an integral part of the examination
process, review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additions to the allowance based on their
judgments of information available to them at the time of their
examination.
The provision for loan losses in 1993, 1992 and 1991 was approximately
$18.3 million, $9.4 million and $5.9 million, respectively. The
significant increase in the 1993 provision for loan losses over that in
1992 is in response to management's assessment of current economic
conditions in California, particularly those in the southern portion of
the state, which point to continuation of persistent recessionary
conditions that continue to affect the financial capabilities and
liquidity of the Company's borrowers and the values of the underlying
collateral supporting the Company's loans. Due to the general economic
decline, the level of the Company's nonperforming loans (See "Financial
Condition -- Loans") and net loan charge-offs continue to remain high by
the Company's historical levels. Furthermore, the information analyzed
by the Company throughout 1993, including appraisal data, in connection
with management's quarterly reviews of loans and the adequacy of the
allowance for loan loss disclosed further deterioration in the value of
collateral for real estate related loans. Moreover, the valuation of
certain loans in the process of foreclosure was further adjusted
downward to reflect subsequent market value data which exacerbated the
impact of charge-offs during 1993. Finally, management's perspective on
the general economic conditions in the Company's marketplace at December
31, 1993 was based in part upon a then recent economic report indicating
that the current recessionary environment would continue through at
least the third quarter of 1994. There can be no assurance that the
recession will not persist beyond the third quarter of 1994.
The increase in the provision for loan losses has resulted in an
increase in the allowance for loan losses from $13.5 million at the
close of 1992 to $18.2 million at December 31, 1993.
NONINTEREST INCOME
The following table sets forth information by category of noninterest
income of the Company for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Gain on sale of securities $ 3 42 2
Service charges on deposits 315 270 209
Escrow fees and other service charges 283 292 397
Trust fees 627 186 14
Other 191 249 301
- -----------------------------------------------------------------------------------------
Total $ 1,419 1,039 923
- -----------------------------------------------------------------------------------------
</TABLE>
The increase in noninterest income in 1993 over 1992 is due to increases
in trust fee income and modest increases in service charges on deposit
customers offset by a decrease in escrow fees due to a decline in the
number of escrows handled by the Company in 1993 as compared to 1992 and
decreases in other miscellaneous fee income. The increase in noninterest
income in 1992 from 1991 is due to modest increases in service charges
on deposit customers and trust fee income offset by a decrease in escrow
fees resulting from a decline in the number of escrows handled by the
Company in 1992.
<PAGE>
GUARDIAN BANCORP 15
................................................................................
NONINTEREST EXPENSE
The following table sets forth information by category of noninterest
expense of the Company for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Salaries and employee benefits $ 8,621 7,271 6,118
Occupancy 1,238 1,778 1,783
Furniture and equipment 851 1,004 884
Customer service 5,539 7,989 9,189
Data processing 351 831 568
Promotional 758 1,120 1,436
Professional 2,416 1,666 1,033
Office supplies 416 416 444
FDIC assessments 1,791 1,365 1,025
Other real estate owned 2,957 667 41
Other 2,498 2,249 2,228
- -------------------------------------------------------------------------------------
Total $ 27,436 26,356 24,749
- -------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the components of salaries and employee
benefits for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries, wages and payroll taxes $ 8,337 7,780 7,240
Deferred direct incremental underwriting costs (770) (1,739) (2,223)
Medical and other insurance benefits 672 847 743
Other 382 383 358
- --------------------------------------------------------------------------------------------------------------
$ 8,621 7,271 6,118
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Direct compensation increased approximately $557,000 for the year ended
December 31, 1993, or 7.2% over the amount for 1992. The increase in
direct compensation is attributable to the net increase in the number of
employees, particularly in the credit administration and special assets
departments, within the Company during 1993 over that of 1992 and
severance arrangements partially offset by decreases in the compensation
levels of certain executive officers. During the third quarter of 1993,
two executive officers of the Company ceased to serve as employees.
These executives were serving pursuant to three year contracts that were
entered into during 1992 and initially provided for aggregate annual
base salaries of $451,000. Each agreement stipulates grounds for its
termination and provides for alternative severance payments that depend
upon the circumstances of the termination. The Company accrued an
aggregate of $350,000 associated with the negotiation and settlement of
severance arrangements with these former executives and such expense is
included in direct compensation for the year ended December 31, 1993.
Substantially all of the severance arrangements were paid in 1993. The
increase in direct compensation of $540,000, or 7.5%, in 1992 over 1991
is principally attributable to new employee additions at Guardian Trust
Company, increased staff levels at the Company to accommodate 1991
growth and, to a lesser extent, salary increases during that year.
Deferred direct incremental underwriting compensatory costs decreased
$969,000, or 55.7%, during 1993 from the amounts reported for 1992. The
level of such deferred costs is directly related to the volume of new
loan originations which, since the second half of 1991, has been
declining as part of management's goal of reducing real estate loan
growth, particularly construction lending, in light of softness in the
real estate sector. The decrease in medical and other insurance benefits
of $175,000 during the year ended December 31, 1993 from the level
reported for 1992 is attributable to plan changes implemented by the
Company in the type of benefit package offered to employees which
reduced the costs associated with such benefits. Increases in medical
and other insurance benefits of $104,000 during 1992 over 1991 are
attributable to an increase in cost pass-throughs to the Company from
its health care providers and the higher number of
<PAGE>
16 GUARDIAN BANCORP
................................................................................
employees with the Company. Other expenses in 1993, comprised
principally of temporary help, recruiting, employee education and
Company provided transit costs, are consistent with 1992 levels which,
in turn, were up modestly over those in 1991 due to the higher number of
employees in the Company.
The decrease in occupancy costs for the year ended December 31, 1993
from the amount reported in the comparable period of 1992 was directly
attributable to the Company renegotiating the terms of the lease of the
space it occupies in Los Angeles. Terms of the new lease will reduce the
base rent expense for that space over the next nine years by an
aggregate amount of approximately $2.3 million as compared to previously
existing terms. Occupancy expense was $5,000 lower in 1992 over the
level reported in 1991 and reflects the decision to close the Bank's San
Fernando Valley loan production office during the first quarter of 1992,
offset by escalations in rent for other leased space occupied by the
Company.
The decrease in furniture and equipment expense for the year ended
December 31, 1993 from the amount reported in 1992 is the result of
lower depreciation expense as Company owned furniture and equipment
becomes fully depreciated. The increase during 1992 in furniture and
equipment expense from expense amounts reported in 1991 were
attributable to scheduled depreciation and the maintenance on the
Company's premises and equipment.
Customer service expense, primarily attributable to accounting, data
processing and courier services provided to title insurance company and
escrow company depositors, is incurred by the Company to the extent that
certain average balances of noninterest-bearing deposits are maintained
by such depositors and such deposit relationships are determined to be
profitable. The Company seeks to control its customer service expense by
continuously monitoring the earnings performance of its account
relationships and, on that basis, limiting the amount of services
provided. The average balance of title insurance company and escrow
company deposits for the years ended December 31, 1993 and 1992 were
$277.6 million and $334.3 million, respectively. At December 31, 1993
and 1992, the actual balance of such deposits was $287.3 million and
$374.1 million, respectively. The decline in average balances during
1993 from 1992 contributed to the decrease in customer service expense
for the year ended December 31, 1993 of $2.5 million from the comparable
1992 period. Despite higher average balances in title insurance company
and escrow company deposits during 1992, the growth in the level of such
deposits slowed during the latter half of 1992, contributing to a
decrease in customer service expense of $1.2 million in 1992 from
amounts reported in 1991. The decreases also reflects management's
efforts at monitoring the earnings performance of such accounts, thereby
decreasing the level and cost of outside services provided. If customer
service expense was classified as interest expense, then the Company's
net interest income and noninterest expense for the years ended December
31, 1993 and 1992 would have been reduced by $5.5 million and $7.9
million, respectively. During the first quarter of 1994, the Board of
Governors of the Federal Reserve System issued a new interpretive
release which is applicable to all member banks, such as the Bank, and
other entities, which limits the payment of customer service expense to
certain prescribed instances. As a result of the issuance of this
interpretive release, it is expected that certain balances of accounts
of certain customers to whom these services are provided will decline
and, in turn, customer service expense will decline in 1994.
Data processing expense decreased approximately $480,000 during the year
ended December 31, 1993 from the comparable period in 1992 as a result
of the Company's renegotiation, in the first quarter of 1993, of its
contract with its primary data services provider. This renegotiated
contract is expected to reduce data processing costs by approximately
$320,000 annually for each of the years from 1994 through 1997.
Promotional expense decreased to $362,000 during 1993 from levels
reported in 1992, consistent with the Company's emphasis on reduced
marketing efforts during 1993. Such expenses declined $316,000 during
1992 from 1991, also reflecting less emphasis on promotional activities.
Professional fees increased by $750,000 during 1993 from amounts
reported for the year ended December 31, 1992 which, in turn, was a
$633,000 increase over professional fees reported for 1991. These
increases principally reflect the Company's increased use of legal
counsel and others for assistance in the resolution of problem real
estate credits, which have increased in the recessionary economy and
typically involve complex legal and other issues. Included in
professional expense are appraisal related costs of $436,000, $314,000
and $93,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Such expenses have increased since 1991 due to the
Company's increased use of appraisal related services in light of the
recessionary economic environment and its impact on real estate
collateral values. To a lesser extent, professional expenses have also
increased as a result of increases in
<PAGE>
GUARDIAN BANCORP 17
................................................................................
outside professional assistance rendered to the Company for other
corporate related matters. Management expects that professional fees
incurred in connection with problem asset resolution will continue to
negatively affect noninterest expense in 1994, until the level of such
assets decline, and are likely to increase if problem assets increase.
Premiums paid for FDIC insurance increased for year ended December 31,
1993 by $426,000 over the similar period in 1992. Under existing
regulations, FDIC insurance premiums have increased in 1993 over levels
applicable to 1992, and these increased premiums have resulted in a
corresponding increase in the Company's noninterest expense. Absent a
significant decline in average deposits, FDIC insurance premiums will
continue to contribute to increased noninterest expense. Premiums paid
for FDIC deposit insurance increased in 1992 over 1991 due primarily to
increased average deposits and a higher level of assessments which
became applicable to all banks during 1991. Deposit insurance premiums
increased in the second half of 1991 from prior periods, and the higher
assessment was applicable throughout all of 1992.
OREO expense increased during the year ended December 31, 1993 by $2.3
million from the amount reported for 1992 which was $667,000, and in
turn, OREO expense increased $626,000 during 1992 over the amount
reported in 1991. During the year ended December 31, 1993, the level of
OREO was significantly higher than during 1992, which has resulted in an
increase in direct holding costs and valuation adjustments of $1.5
million and $674,000, respectively, in 1993 from 1992. Direct holding
costs are comprised principally of property taxes, insurance, security,
foreclosure costs, marketing and other miscellaneous costs. Valuation
adjustments result from write-downs of existing OREO to reflect
reductions in fair market value. Due to weaknesses in the Southern
California real estate market and the high level of the Company's
nonperforming assets, OREO expense is expected to continue to adversely
affect the Company's results of operations. (See "Financial Condition --
Nonperforming Assets".
The principal component contributing to the increase in other
noninterest expense of $249,000 during 1993 over the amount reported in
1992 is the expenses associated with the outsourcing of item processing
which are classified in other noninterest expense in 1993 whereas prior
to 1993, internal item processing costs were principally in the form of
salaries and benefits. Other noninterest expense decrease was comparable
between 1992 and 1991.
INCOME TAXES
The Company files consolidated federal income and combined California
state franchise tax returns. Amounts provided for income taxes are based
on the income reported in the consolidated financial statements at
current tax rates. Such amounts include taxes deferred to future periods
resulting from timing differences in the recognition of items for tax
and financial purposes. Income tax expense (benefit) reflects effective
rates on earnings (loss) before income taxes of (23.9)%, (4.5)% and
47.4% for each of the years in the three year period ended December 31,
1993. The Company's effective tax rate reflected an increase in the
valuation allowance established due to certain net deductible temporary
differences that cannot be realized through carryback to prior periods.
The Company has not considered income from future periods in evaluating
the realizability of its deferred tax assets. During the first quarter
of 1993, the Company implemented Statement of Financial Accounting
Standards (SFAS) 109 "Accounting For Income Taxes" by applying such
statement on a retroactive basis to year-end 1991 in its consolidated
financial statements. The cumulative impact at January 1, 1991 of the
implementation of FASB 109 was not material. The impact of the
restatement was to reduce the tax benefit and to increase the net loss
by $492,000 for the year ended December 31, 1992 and to increase the
provision for income taxes and reduce net earnings by $493,000 for the
year ended December 31, 1991.
<PAGE>
18 GUARDIAN BANCORP
................................................................................
FINANCIAL CONDITION
The following table sets forth the Company's consolidated average
assets, liabilities and shareholders' equity and the percentage
distribution of these items for the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 67,900 11.6% 90,825 13.9% 70,799 12.3%
Interest-bearing deposits with financial
institutions 1,317 0.2 1,742 0.3 2,383 0.4
Federal funds sold 89,318 15.2 61,950 9.5 63,372 11.0
Investment securities 31,429 5.4 44,048 6.7 41,102 7.1
Short-term investments 33,003 5.6 27,823 4.3 -- --
Loans, net 337,613 57.6 410,268 62.9 388,316 67.4
Premises and equipment, net 2,088 0.4 2,700 0.4 3,280 0.6
Other real estate owned 11,559 2.0 3,652 0.6 1,473 0.3
Other assets 11,489 2.0 9,572 1.4 5,262 0.9
- -------------------------------------------------------------------------------------------------------------
Total assets $ 585,716 100.0% 652,580 100.0% 575,987 100.0%
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand deposits $ 323,661 55.2% 383,580 58.8% 292,079 50.7%
Interest-bearing demand and savings
deposit 105,953 18.1 117,055 17.9 104,888 18.2
Time certificates of deposit 116,603 19.9 102,210 15.7 134,621 23.4
- -------------------------------------------------------------------------------------------------------------
Total average deposits 546,217 93.2 602,845 92.4 531,588 92.3
Subordinated debt 3,000 0.5 3,000 0.5 3,000 0.5
Other liabilities 5,611 1.0 7,145 1.0 4,252 0.7
Shareholders' equity 30,888 5.3 39,590 6.1 37,147 6.5
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 585,716 100.0% 652,580 100.0% 575,987 100.0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
TOTAL ASSETS
In the opinion of management, average balances are meaningful to a
discussion and analysis of the Company's consolidated financial
condition and results of operations. Accordingly, such information,
which is based on daily average balances, is included in the following
discussion.
At December 31, 1993, total assets were approximately $567.5 million as
compared to $650.8 million at December 31, 1992 and $727.9 million at
December 31, 1991. Total average assets for the year ended December 31,
1993 were $585.7 million, down $66.9 million, or 10.3%, from the $652.6
million average for the year ended December 31, 1992. The $83.3 million
decrease in assets at December 31, 1993 was primarily the result of year
end decreases in noninterest-bearing deposits from title insurance
company and escrow company customers. The reduction in average assets
during 1993 and year end assets from 1992 to 1993 reflected the results
of the recessionary economic conditions in the Company's marketplace, a
slow down of real estate activity in Southern California and
management's decision to limit the growth of new real estate related
loans, which was based in part upon a regulatory recommendation and is
consistent with the provision of the Bank's regulatory agreement that
requires it to monitor and control the concentration of construction,
land development and land acquisition loans.
The $652.6 million in total average assets for the year ended December
31, 1992 represents a 13.3% increase from $576.0 million for 1991, and
this increase was due primarily to increases in the Company's average
mortgage and construction loan portfolios that were achieved primarily
during the second half of 1991. The shift in the mix of
<PAGE>
GUARDIAN BANCORP 19
................................................................................
average assets during 1992 from loans and federal funds sold to
investment securities and short-term investments reflects management's
decision, as discussed above, to limit growth of new real estate related
credits, slower growth rates experienced in new loan origination and
management's direction of available funds toward higher yielding liquid
investments.
CASH AND DUE FROM BANKS
A high percentage of the Company's assets are maintained in cash and due
from banks directly reflecting the large volume and size of clearings
associated with the Company's title company and escrow company deposits.
Average cash and due from banks for the year ended December 31, 1993 was
$67.9 million, a 25.2% decrease from the $90.8 million of such assets
for the year ended December 31, 1992. The 1992 average balance of cash
and due from banks represents a 28.2% increase from the $70.8 million
average during 1991.
At December 31, 1993, cash and due from banks was $23.2 million down
approximately $25.6 million from $48.8 million at December 31, 1992,
primarily as a result of the Company's lower level of demand deposits
and the placement of excess funds into short-term investments. Due to
the lower level of demand deposits placed with the Company at the end of
1992, cash and due from banks at December 31, 1992 was $48.8 million,
down $35.1 million from the $83.9 million reported at December 31, 1991.
FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
Federal Funds Sold
Average federal funds sold were approximately $89.3 million during the
year ended December 31, 1993, up $27.3 million, or 44.0%, from the $62.0
million average for all of 1992. The increase was primarily due to
having, on an average basis, excess funds available to invest in the
form of federal funds sold. At December 31, 1993, the Company did not
take a position in federal funds sold as compared to the $60.0 million
reported at December 31, 1992, as the Company placed available funds
into other forms of liquid investments.
The $62.0 million of average federal funds sold during 1992 represents a
decline of $1.4 million from the $63.4 million average for 1991. The
decrease was primarily due to the Company's placement of available
excess funds into other forms of liquid investments during 1992. At
December 31, 1992, federal funds sold decreased $55.0 million to $60.0
million from the $115.0 million reported at December 31, 1991.
Short-Term Investments
During 1992, and in response to trends developing in the banking
industry, the Company commenced the practice of classifying securities
and investments in money market funds held for purposes of managing its
overall liquidity as short-term investments. Such short-term investments
are carried at the lower of cost or market. At December 31, 1993, the
Company's short-term investments aggregated $179.9 million, up
approximately $59.4 million, or 49.3%, from the $120.5 million reported
at December 31, 1992. During the year ended December 31, 1993, the
Company purchased short-term investments of $815.2 million, retired
approximately $386.4 million of matured investments and sold
approximately $369.9 million of such securities for a gain of $3,000.
During the year ended December 31, 1993, average short-term investments
were $33.0 million as compared to $27.8 million during 1992. There were
no lower of cost or market adjustments charged to income during 1993 or
1992. During 1992, the Company purchased short-term investments of
$254.5 million, retired approximately $90.5 million of matured
short-term investments and sold $14.9 million of such securities to meet
liquidity needs for a gain of $31,000.
The Company's period end deposit balances traditionally reflect
increases in noninterest-bearing demand deposits from its title
insurance company and escrow company customers. These deposits generally
increase at or near each month end as the underlying real estate
transactions being handled by such deposit customers are nearing
consummation. In turn, the Company invests a substantial amount of these
funds in securities of the U.S. Treasury and other short-term money
market instruments which increases its period end asset levels.
Subsequent to each period end, such short-term investments are converted
into cash and used to such customers' withdrawal needs as the underlying
transactions are consummated.
<PAGE>
20 GUARDIAN BANCORP
................................................................................
See Note 3 to the Company's December 31, 1993 consolidated financial
statements for the maturity distribution, carrying value, estimated
market value and weighted average yields of the Company's short-term
investments as of December 31, 1993, 1992 and 1991, respectively.
INVESTMENT SECURITIES
At December 31, 1993, the Company's investment securities portfolio
aggregated $29.1 million, up $2.2 million from the $26.9 million
reported by the Company at December 31, 1992. The Company purchased
$20.7 million of investment securities for its portfolio and retired
$18.2 million of matured securities during the year ended December 31,
1993.
Total average investment securities for the year ended December 31, 1993
were $31.4 million, down $12.6 million from the average during 1992 of
$44.0 million. During 1993, the Company placed greater emphasis on the
placement of available funds in short-term investments. During the year
ended December 31, 1992, the Company purchased $97,000 of securities for
its investment portfolio and retired $72.3 million of matured
securities. During the first quarter of 1992 and prior to the practice
of segregating certain investments as short-term during the second
quarter of 1992, the Company sold $20.1 million of investment
securities, realizing a gain of $11,000.
See Note 3 to the Company's December 31, 1993 consolidated financial
statements for the maturity distribution, carrying value, estimated
market value and weighted average yields of the Company's investment
securities as of December 31, 1993, 1992 and 1991, respectively.
LOANS
The Company engages in real estate lending through construction and term
mortgage loans, all of which are secured by deeds of trust on underlying
real estate. The Company also engages in commercial lending to
businesses, and although the Company looks principally to the borrowers'
cash flow as source of repayment, many commercial loans are secured by
real estate as a secondary source of repayment. The Company's real
estate and construction loans are diversified by type of collateral and
concentrated geographically throughout the five counties it serves in
Southern California. In addition to the collateralized position on
certain of its lending activities, all lending transactions are subject
to the Bank's credit evaluation, underwriting criteria and monitoring
standards.
At December 31, 1993, loans, net of deferred loan fees, were $322.7
million, down $68.1 million, or 17.4% from the $390.8 million reported
at December 31, 1992. This decline is attributable to management's
decision to limit real estate related loans generally to existing
customers and to the funding of previously existing commitments, which
was based in part upon a regulatory recommendation and is consistent
with the provision of the Bank's regulatory agreement that requires it
to monitor and control the concentration of construction, land
development and land acquisition loans. The declines also reflect the
slowdown in California's economic activity which impacted all segments
of the loan portfolio.
At December 31, 1993, real estate, construction and commercial loans
comprised approximately 45.5%, 27.2% and 26.7%, respectively, of total
outstanding loans in the portfolio. This compares to 35.4%, 42.0% and
21.9% categorized as real estate, construction and commercial loans,
respectively, at December 31, 1992. Although real estate loans increased
by $8.6 million in 1993, this increase is primarily attributable to an
increase in mini-permanent loans made to the Company's existing
customers. The Company's mini-permanent loans represent loans that have
a term of three to five years, are amortized over 20 to 25 years and
provide for a balloon payment at the end of the term. Most of these
loans provide intermediate term financing for construction loans that
were originated by the Company. Construction loans declined $76.4
million and commercial loans increased $642,000 at December 31, 1993
when compared to the respective balances outstanding at the close of
1992.
Average gross loans were $353.4 million for the year ended December 31,
1993, a decrease of $67.6 million, or 16.1%, from the $421.0 million
average for the year ended December 31, 1992. This decline reflects the
downward trend in the level of gross loans outstanding due to
California's economic activity in 1993 and earlier which has impacted
all segments of the loan portfolio. The Company's average
loan-to-deposit ratio was 64.7% during 1993 as compared to 69.8% and
74.1% during 1992 and 1991, respectively.
<PAGE>
GUARDIAN BANCORP 21
................................................................................
In light of the current economy, management's decision to limit real
estate lending, principally construction financing, is expected to
continue during 1994. This may have the effect of reducing the size of
the Company's loan portfolio unless the Company is able to successfully
market other loan products.
ALLOWANCE FOR LOAN LOSSES
A certain degree of risk is inherent in the extension of credit.
Management has credit policies in place to monitor and attempt to
control the level of loan losses and nonperforming loans. One product of
the Company's credit risk management is the maintenance of the allowance
for loan losses at a level considered by management to be adequate to
absorb estimated known and inherent losses in the existing portfolio,
including commitments and standby letters of credit. The allowance for
loan losses is established through charges to operations in the form of
provisions for loan losses.
The allowance is based upon a regular review of current economic
conditions, which might affect a borrower's ability to pay, underlying
collateral values, risk in and the composition of the loan portfolio,
prior loss experience and industry averages. In addition, the Bank's
primary regulators, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and may
recommend additions to the allowance based on their assessment of
information available to them at the time of their examination. Loans
that are deemed to be uncollectible are charged-off and deducted from
the allowance. The provision for loan losses and recoveries on loans
previously charged-off are added to the allowance.
The allowance for loan losses was approximately $18.2 million, $13.5
million and $9.1 million at December 31, 1993, 1992 and 1991,
respectively. Net charge-offs were approximately $13.5 million, $5.1
million and $284,000 during the years ended December 31, 1993, 1992 and
1991, respectively. The increase in net charge-offs during 1993 from
those reported in prior periods primarily resulted from losses
recognized upon transfer of loans to OREO, losses taken on certain real
estate loans due to economic conditions and other charge-offs related to
loans deemed uncollectible by the Company, including charge-offs taken
on the restructuring of loans with modified terms. As a percentage of
average loans outstanding, net charge-offs were 3.83%, 1.21% and .07% in
1993, 1992 and 1991, respectively. The ratio of the allowance for loan
losses to loans, net of deferred loan fees, was 5.64%, 3.45% and 2.13%
at December 31, 1993, 1992 and 1991, respectively.
Management believes that the allowance for loan losses at December 31,
1993 was adequate to absorb the known and inherent risks in the loan
portfolio at that time. However, no assurance can be given that
continuation of current recessionary factors, future changes in economic
conditions that might adversely affect the Company's principal market
area, borrowers or collateral values, and other circumstances, including
regulatory agencies' assessment of information available to them at the
time of their future examinations, will not result in increased losses
in the Company's loan portfolio in the future.
NONPERFORMING ASSETS
Nonaccrual, Past Due and Modified Loans
The following is a summary of the Company's nonperforming loans
(nonaccrual loans and loans past due 90 days or more and still accruing
interest) and loans with modified terms at years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Loans on nonaccrual $ 29,056 33,316
Loans past due 90 days or more and still accruing interest 5,769 1,547
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 34,825 34,863
Loans with modified terms 9,539 2,149
- ------------------------------------------------------------------------------------------------------------------
Nonperforming loans and loans with modified terms $ 44,364 37,012
- ------------------------------------------------------------------------------------------------------------------
Nonaccrual and past due loans as a percentage of total loans 10.79% 8.92
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, approximately 92.2% of the Company's outstanding
nonperforming loans were secured by deeds of trust on a portfolio of
real estate which reduces, but does not eliminate, the risk of loss. At
December 31,
<PAGE>
22 GUARDIAN BANCORP
................................................................................
1993 and 1992, loans on nonaccrual are shown net of participations sold
of approximately $576,000 and $4.8 million, respectively. The ratio of
the Company's allowance for loan losses to nonperforming loans was 52.3%
and 38.6% at December 31, 1993 and 1992, respectively.
The following table sets forth the composition of potential problem
credits by broad collateral type at December 31, 1993 (dollars in
thousands):
<TABLE>
<S> <C>
Real estate:
Residential:
1-4 Family units...................................................................... $ 10,360
Multifamily units..................................................................... 9,856
Land.................................................................................. 1,875
Commercial and industrial:
Units................................................................................. 11,101
Business and Consumer................................................................... 2,122
---------
$ 35,314
---------
---------
</TABLE>
Since 1991, the Company has been impacted by the slowdown in
California's economic activity. One result of the current recessionary
environment has been the weakening of real estate values in certain
sectors of the Company's target markets which, in turn, has affected
certain borrowers' financial capabilities and liquidity. The significant
increase in amounts reported as nonperforming loans since 1991 is
attributable to the existing economic climate, and a substantial portion
of the loans are real estate mortgage and construction credits. While it
is management's current intention to resolve nonperforming loans and
sell other real estate owned on an asset by asset basis, management is
also exploring additional alternatives, including the possible sale of
part or all of such assets to a select number of outside investors. If
consummated, such a sale likely would entail further provisions to the
allowance for loan losses and writedowns of the carrying value of
certain assets sold in recognition of the administrative expenses and
the cost of money assumed by the buyer, together with the requirement
imposed by typical buyers in such transactions that they be able to
achieve a substantial return on their investment. The amount of such
additional provisions and writedowns should the Company decide to pursue
this strategy cannot be determined at this time. In determining whether
or not to pursue this strategy management will consider, among other
factors, the relative magnitude of the possible additional provisions to
the allowance for loan losses and writedowns which could result from
such a sale and the anticipated level of both interest income and
noninterest expense attributable to continuing to hold such assets for
sale on an asset by asset basis; and the level of income reasonably
anticipated from the investment of any proceeds received from such a
sale. While management is considering proposals from financial advisors,
and is in active discussions with a potential financial advisor, to
assist in the design and implementation of such a sale, it has not yet
entered into a contract with an advisor. Moreover, management has not
yet determined the specific assets that may be included in such a sale
and, accordingly, cannot reasonably estimate anticipated sales proceeds
or additional provisions for loan losses. No assurance can be given that
the Bank will implement a sale of problem assets or the likely impact of
such a sale on the consolidated financial condition or results of
operations of the Company.
Loans with modified terms approximated $9.5 million and $2.1 million at
December 31, 1993 and 1992, respectively. The average yield on loans
with modified terms during 1993 was approximated 5.5% compared to the
Company's average cost of funds for 1993 of 3.3%.
Other Real Estate Owned
At December 31, 1993, OREO amounted to $13.9 million, an increase of
$9.5 million from the $4.4 million reported at December 31, 1992. During
1993, the Company acquired $24.2 million of real estate through
foreclosure, recorded valuation charges of $714,000 and sold $13.9
million of such real estate incurring a net loss upon sale of $266,000.
The increase in OREO reflects the impact on foreclosure levels brought
about by the general economic decline and depressed real estate market
in Southern California. During 1992, the Company acquired and sold $6.1
million and $4.7 million, respectively, of OREO incurring a net loss
upon sale of $173,000, after valuation charges of $40,000. (See "Results
of Operations -- Noninterest Expense").
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 114 (SFAS 114), "Accounting for Loan
Impairment". The Company plans to adopt SFAS 114 on January 1, 1995
<PAGE>
GUARDIAN BANCORP 23
................................................................................
by reporting the effect of initial application as an adjustment to the
provision for loan losses in the period of adoption. To comply with
regulatory requirements regarding SFAS 114 effective in 1993,
in-substance foreclosed assets are classified as loans if the Company
does not have physical possession of the underlying collateral. December
31, 1992 in-substance foreclosed assets in the amount of $11.8 million
have been reclassified to loans to effect this change in classification.
DEPOSITS
At December 31, 1993, total deposits of $525.7 million were comprised of
$322.9 million and $202.8 million of noninterest-bearing and
interest-bearing deposits, respectively. At December 31, 1992, total
deposits of $599.9 million were comprised of $414.2 million and $185.7
million of noninterest-bearing and interest-bearing deposits,
respectively. The $74.2 million decrease in total deposits since
December 31, 1992 is comprised of a decrease of $91.3 million and an
increase of $17.1 million in noninterest-bearing and interest-bearing
deposits, respectively.
The decrease in noninterest-bearing deposits at December 31, 1993 as
compared to December 31, 1992 was primarily in title insurance company
and escrow company deposits and reflects the current declining trends in
the volume of residential mortgage refinancing occurring in the
Company's marketplace and the Company's decreased reliance upon such
funding sources. The increase in interest-bearing deposits since
December 31, 1992 reflects a $17.7 million increase and a $656,000
decrease in the Company's time certificates of deposits and the
Company's savings and interest-bearing demand deposit balances,
respectively, and reflects management's efforts at diversifying the
Company's deposit mix. It is likely that noninterest-bearing deposits
will continue to represent a decreasing percentage of total deposits
reflecting management's efforts to diversify the Company's funding
sources and the effect of a recent Federal Reserve Board interpretation
which limits the payment of customer service expense in connection with
noninterest-bearing deposits.
Total average deposits for the year ended December 31, 1993 were $546.2
million, down $56.6 million, or 9.4%, from the $602.8 million average
for all of 1992. Average noninterest-bearing deposits and average
interest-bearing deposits during 1993 were $323.7 million and $222.5
million, respectively, which compares to averages of $383.6 million and
$219.2 million, respectively, for the year ended December 31, 1992. The
$59.9 million decrease in average noninterest-bearing deposits during
1993 from the average for all of 1992 primarily reflects the general
decline from historical levels in real estate transaction activity
handled by the Company's title insurance company and escrow company
depositors as a result of current economic conditions and a decreased
reliance on such funding sources. The increase in average
interest-bearing deposits of $3.3 million during 1993 from the 1992
average is comprised of a $14.4 million increase in average time
certificates of deposit offset by a $11.1 million decline in savings and
other interest-bearing demand accounts.
The total average deposits of $602.8 million for the year ended December
31, 1992 were up $71.2 million, or 13.4%, from the $531.6 million
reported for the year ended December 31, 1991. Average
noninterest-bearing deposits were up $91.5 million to $383.6 million
during 1992 over the $292.1 million average for 1991. This increase was
primarily in title insurance company and escrow company deposits and
reflects the higher volume of residential refinancing that occurred in
the Company's marketplace during 1992.
The Company experienced a decline in total average interest-bearing
deposits during 1992 as compared to 1991. Average time certificates of
deposit decreased approximately $32.4 million during 1992 from 1991 but
that decrease was partially offset by an increase in average
interest-bearing demand and savings deposits of approximately $12.2
million during the same period.
The decreases in average time certificates of deposit during 1992 from
the averages during 1991 and the decrease in such deposits and
noninterest-bearing demand and savings deposits at December 31, 1992
from the close of 1991 is, in management's opinion, attributable to
those depositors seeking higher yields on their funds than were being
offered by the Company as a result of the lower interest rate
environment prevailing in the marketplace. The increase in average
interest-bearing demand and savings deposits reflects the Company's
efforts to diversify its deposit sources, especially among labor unions
and related clientele.
ASSET/LIABILITY MANAGEMENT
The Company's policy is to match its level of rate sensitive assets and
rate sensitive liabilities thereby reducing its exposure to interest
rate fluctuations. Generally, where rate sensitive assets exceed rate
sensitive liabilities, the net
<PAGE>
24 GUARDIAN BANCORP
................................................................................
interest margin is expected to be positively impacted during periods of
increasing interest rates and negatively impacted during periods of
decreasing interest rates. When rate sensitive liabilities exceed rate
sensitive assets, generally, the net interest margin will be negatively
affected during periods of increasing interest rates and positively
affected during such periods of decreasing interest rates.
The following table sets forth information concerning interest rate
sensitivity of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 1993. Such assets and
liabilities are classified by the earliest possible repricing date or
maturity.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
OVER OVER ONE
THREE YEAR
THREE THROUGH THROUGH
MONTHS OR TWELVE FIVE OVER FIVE
(DOLLARS IN THOUSANDS) LESS MONTHS YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits with financial
institutions $ 1,396 594 -- -- 1,990
Investment securities 5,464 9,241 14,374 -- 29,079
Short-term investments 179,948 -- -- -- 179,948
Loans, net 283,507 5,236 28,180 5,825 322,748
- ----------------------------------------------------------------------------------------------------------
Total interest-earnings assets $ 470,315 15,071 42,554 5,825 533,765
- ----------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand and savings deposits $ 100,888 -- -- -- 100,888
Time certificates of deposit 10,063 75,815 16,008 -- 101,886
Other borrowings 15,000 -- 3,000 -- 18,000
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 125,951 75,815 19,008 -- 220,774
- ----------------------------------------------------------------------------------------------------------
Interest rate-sensitivity gap $ 344,364 (60,744) 23,546 5,825
Cumulative interest rate-sensitivity gap 344,364 283,620 307,166 312,991
Cumulative interest rate-sensitivity gap as a
percentage of total interest-bearing assets 64.52% 53.14% 57.55% 58.64%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Approximately 86.9% of the Company's loan portfolio at December 31, 1993
bears a floating rate of interest.
The Company's funding source is primarily its deposit base which is
comprised of interest-bearing and noninterest-bearing accounts. On
occasion, the Company augments its funding needs through federal funds
purchased, securities sold under repurchase agreements and other
short-term borrowings, which are all interest-bearing. The Company's
noninterest-bearing demand deposits are, by their very nature, subject
to withdrawal upon demand. Noninterest-bearing demand deposits include
title insurance company and escrow company deposits which are subject to
fluctuation caused by general economic factors affecting the demand for,
sales of, and settlement activity relating to residential and other
forms of real estate which, in turn, are sensitive to prevailing
interest rates. Declines in one form of funding source requires the
Company to obtain funds from another source. If the Company were to
experience a decline in noninterest-bearing demand deposits and was to
have a significant increase in loan volume without a commensurate
increase in such deposits, it would utilize alternative sources of
funds, probably at higher cost, to maintain its liquidity and to meet
its loan funding needs. This would place downward pressure on the
Company's net interest margin and have a negative impact on the
Company's liquidity position.
LIQUIDITY
The Company manages its liquidity position to seek to ensure that
sufficient funds are available to meet customers' needs for borrowing
and deposit withdrawals. Liquidity is derived from both the asset and
liability sides of the balance sheet. Asset liquidity arises from the
ability to convert assets to cash and self-liquidation or maturity of
assets. Liquid asset balances include cash, interest-bearing deposits
with financial institutions, short-term investments and federal funds
sold. Liability liquidity arises from a diversity of funding sources as
well as from the ability of the Company to attract deposits of varying
maturities.
<PAGE>
GUARDIAN BANCORP 25
................................................................................
At December 31, 1993, the Company's ratio of liquid assets, defined as
cash and due from banks, interest-bearing deposits with financial
institutions, federal funds sold and short-term investments, to total
deposits was 39.0%. This compares to ratios of 38.4% and 29.6% at year
end 1992 and 1991, respectively. The ratio of average total liquid
assets to average total deposits was 35.1% during 1993 compared to 30.2%
and 25.7% during 1992 and 1991, respectively.
At December 31, 1993, $287.3 million of the Company's
noninterest-bearing demand deposits, or 54.7% of total deposits, were
from title insurance companies and escrow companies and $129.5 million
of such deposits, or 24.6% of total deposits, were maintained by five
title insurance and escrow company customers; one such customer
accounted for 8.5%, and another accounted for 6.3%, of total deposits.
Title insurance company and escrow company deposits generally fluctuate
with the volume of real estate activity, which, in turn, are affected by
fluctuations in the general level of interest rates and other economic
factors affecting the real estate market. During the first quarter of
1994, the Board of Governors of the Federal Reserve System issued a new
interpretive release which is applicable to all member banks, such as
the Bank, and other entities, which limits the payment of customer
service expense to certain prescribed instances. As a result of the
issuance of this interpretive release, it is expected that certain
balances of accounts of customers to whom these services are provided
will decline and, in turn, customer service expense will decline in
1994, the exact amount of which cannot be predicted. In addition as of
December 31, 1993, labor union deposits were $91.5 million, or 17.4% of
total deposits, and 64.2% of these deposits were demand deposits.
Further, all demand deposit accounts, including title insurance company,
escrow company and labor union deposits, are subject to turnover. At
December 31, 1993, $322.9 million or 61.4% of the Company's total
deposits were noninterest-bearing demand deposits, and time certificates
of deposit of $100,000 or more were $22.2 million, which represented
4.2% of total deposits. Time certificates of deposit of $100,000 or more
may be subject to fluctuation as they are generally more sensitive to
changes in interest rates than other types or amounts of deposits.
In an effort to address the potential fluctuations in the Company's
deposit base, management seeks to limit loans to no more than 75% of
deposits to attempt to ensure that sufficient funds are available to
meet customers' needs for borrowing and deposit withdrawals. A
substantial amount of these funds are invested in securities of the U.S.
Treasury and other short-term money market instruments, including
federal funds sold, money market mutual funds and interest-bearing
deposits with other financial institutions. To further cushion any
unanticipated fluctuation in its liquidity position, the Bank, as with
all commercial banks who are members of the Federal Reserve System, may
borrow from the regional Federal Reserve Bank subject to compliance with
regulatory requirements. In addition, the Bank has federal funds
facilities available with its major correspondent banks aggregating
$15.0 million. These facilities are subject to customary terms for such
arrangements and are terminable at any time in the discretion of the
correspondent bank. Notwithstanding these precautionary steps, there can
be no assurance that the Company will not experience substantial
fluctuations in its deposit base or otherwise adversely affect its net
interest income by requiring the Bank to replace such deposits with
higher costing funds.
At December 31, 1993, Guardian Bancorp, on an unconsolidated parent
company only basis, had cash and cash equivalents available of
approximately $402,000. On January 28, 1994, Guardian Bancorp
consummated the Offering of common stock raising gross proceeds of
approximately $19,700,000. After deducting expenses incurred in the
Offering, net proceeds were approximately $17,958,000. Guardian Bancorp
contributed $16,500,000 of the net proceeds to the Bank, subsequently
reimbursed the Bank approximately $229,000 for costs it incurred and
retained approximately $1.2 million for its own general corporate
purposes. In addition, on September 30, 1993, Guardian Bancorp exercised
its right to convert the entire $3.0 million principal amount of Bank
Convertible Debentures into common stock of the Bank, thereby converting
this security into Tier 1 capital and eliminating the Bank as a
liquidity source through interest payments.
On December 22, 1988, Guardian Bancorp issued to an unaffiliated
purchaser $3.0 million in aggregate principal amount of 11 3/4%
Subordinated Debentures that mature on December 30, 1995. Interest on
the Bancorp Debentures accrues and is payable quarterly, and the
principal is due on maturity. Guardian Bancorp is not currently in
default with respect to any of the interest payments due on the Bancorp
Debentures, and management believes that Guardian Bancorp currently has
sufficient liquid assets to make such payments through to maturity.
However, absent a restructuring of the Bancorp Debentures or the receipt
of additional funds from Bank dividends, the issuance of debt or equity
or otherwise, Guardian Bancorp will not have sufficient liquid assets to
<PAGE>
26 GUARDIAN BANCORP
................................................................................
pay the $3.0 million principal amount of such securities that will
become due on the stated maturity date. Guardian Bancorp's ability to
receive additional funds through Bank dividends or the issuance of debt
at the holding company level is limited by regulatory and statutory
restrictions.
CAPITAL RESOURCES
Management seeks to maintain 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 1992
risk-based capital guidelines adopted by the Federal Reserve Board
require the Company and the Bank to achieve certain minimum ratios of
capital to risk-weighted assets. In addition, the Federal Reserve Board
has adopted a leverage ratio that requires a minimum ratio of Tier 1
capital to average assets. The following table sets forth the Company's
and the Bank's risk-based capital and leverage ratios at December 31,
1993 (dollars in thousands):
<TABLE>
<CAPTION>
COMPANY BANK
-------------------- --------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) BALANCE % BALANCE %
- -----------------------------------------------------------------------------------------------------------------
Tier 1 Capital(1) $ 21,301 6.00% 23,839 7.02%
Tier 1 Capital minimum requirement(2) 14,195 4.00 13,575 4.00
- -----------------------------------------------------------------------------------------------------------------
Excess $ 7,106 2.00 10,264 3.02
- -----------------------------------------------------------------------------------------------------------------
Total Capital(3) $ 28,907 8.15 28,254 8.33
Total Capital minimum requirement(2) 28,389 8.00 27,150 8.00
- -----------------------------------------------------------------------------------------------------------------
Excess $ 518 0.15 1,104 0.33
- -----------------------------------------------------------------------------------------------------------------
Leverage ratio (3% + minimum)(4) 3.74 4.19
- -----------------------------------------------------------------------------------------------------------------
Risk-weighted assets $ 354,866 339,377
- -----------------------------------------------------------------------------------------------------------------
<FN>
(1)Includes common shareholders' equity.
(2)Commencing December 19, 1992, insured institutions such as the Bank must,
among other things, maintain a Tier 1 capital ratio of at least 4% or 6% and
a Total capital ratio of at least 8% or 10% to be considered "adequately
capitalized" or "well capitalized", respectively, under the prompt corrective
action provisions of the FDIC Improvement Act.
(3)Includes common shareholders' equity, subordinated debt, plus allowance for
loan losses, subject to certain limitations.
(4)Tier 1 capital divided by average assets for the period. Under the current
rules, a minimum leverage ratio of 3% is required for institutions which have
been determined to be in the highest of five categories used by regulators to
rate financial institutions. All other institutions, including the Company
and the Bank, are required to maintain leverage ratios of at least 100 to 200
basis points above the 3% minimum. Commencing December 9, 1992, insured
institutions such as the Bank must, among other things, maintain a leverage
ratio of at least 4% or 5% to be considered "adequately capitalized" or "well
capitalized", respectively, under the prompt corrective action provisions of
the FDIC Improvement Act.
</TABLE>
On January 28, 1994, Guardian Bancorp consummated its rights offering of
common stock ("the Offering"), and raised gross proceeds of
approximately $19,700,000 through the issuance of 8,774,000 shares of
common stock. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. In early February 1994,
Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank
for the Bank's general corporate purposes and subsequently reimbursed
the Bank approximately $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for
its own general corporate purposes.
<PAGE>
GUARDIAN BANCORP 27
................................................................................
The following tables set forth the consolidated capitalization of the
Company and the capitalization of the Bank at December 31, 1993, and the
proforma consolidated capitalization of the Company and the
capitalization of the Bank, as adjusted to give effect to the offering
as consummated:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------
<S> <C> <C>
PROFORMA ACTUAL
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPANY
Shareholders' equity:
Preferred stock $ -- --
Common stock 33,794(1) 15,836
Retained earnings 5,465 5,465
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 39,259 21,301
- -------------------------------------------------------------------------------------------------------------------
Book value $ 3.14 (2) 5.70
- -------------------------------------------------------------------------------------------------------------------
BANK
Equity capital:
Common Stock $ 35,565 (3) 19,065
Undivided profits 4,774 4,774
- -------------------------------------------------------------------------------------------------------------------
Equity capital $ 40,339 23,839
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1)Assumes net proceeds of approximately $17,958,000 raised in the Offering were
received at December 31, 1993.
(2)Adjusted to give effect to the additional 8,774,000 shares issued in the
Offering.
(3)Assumes $16.5 million in new equity capital contributed to the Bank was
contributed at December 31, 1993.
</TABLE>
The following tables set forth the Company's and the Bank's risk-based
and leverage ratios at December 31, 1993 and their respective proforma
risk-based and leverage ratios, as adjusted to give effect to the
Offering.
<TABLE>
<CAPTION>
COMPANY BANK
------------------------ ------------------------
<S> <C> <C> <C> <C>
PROFORMA(1) ACTUAL PROFORMA(2) ACTUAL
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital ratio 10.95% 6.00% 11.77% 7.02%
Total capital ratio 13.08 8.15 13.07 8.33
Leverage ratio 6.68 3.74 6.89 4.19
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(1)Assumes net proceeds raised in the Offering had been invested in 20%
risk-weighted assets at December 31, 1993.
(2)Assumes $16.5 million in new equity capital was contributed to the Bank at
December 31, 993 which, in turn, invested the proceeds in 20% risk-weighted
assets at December 31, 1993.
</TABLE>
With the exception of the capital raising efforts discussed above, and,
on a much smaller scale, the periodic exercise of employee stock
options, retained earnings from operations have been the Company's
primary source of new capital. Management is committed to maintaining
capital at a sufficient level to assure shareholders, customers and
regulators that the Company is financially sound.
EFFECTS OF NORTHRIDGE EARTHQUAKE
On January 17, 1994, an earthquake of approximately 6.7 magnitude on the
Richter scale struck the Southern California area. The earthquake and
related aftershocks caused significant damage to certain areas of Los
Angeles and Ventura Counties. While the full extent of damage in this
area is not yet known, management's preliminary assessment of damage to
collateral securing loans indicates that there should not be a material
impact on the Company's consolidated financial position or results of
operations. However, it remains uncertain if whether or not the
earthquake will have additional negative impact on the Southern
California economy and the Company's customers.
<PAGE>
28 GUARDIAN BANCORP
................................................................................
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
GUARDIAN BANCORP AND SUBSIDIARY
DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
<S> <C> <C>
- ------------------------------------------------------------------------------
<CAPTION>
ASSETS 1993 1992
<S> <C> <C>
- ------------------------------------------------------------------------------
Cash and due from banks $ 23,155 48,763
Interest-bearing deposits with financial institutions 1,990 1,090
Federal funds sold -- 60,000
Investment securities (market value of $29,221 and
$27,604 in 1993 and 1992, respectively) 29,079 26,939
Short-term investments (market value of $179,948 and
$120,535 in 1993 and 1992, respectively) 179,948 120,487
Loans 322,748 390,835
Less allowance for loan losses (18,200) (13,466)
- ------------------------------------------------------------------------------
Net loans 304,548 377,369
- ------------------------------------------------------------------------------
Premises and equipment, net 1,808 2,372
Deferred income taxes 3,574 3,642
Other real estate owned, net 13,949 4,359
Accrued interest receivable and other assets 9,495 5,780
- ------------------------------------------------------------------------------
$ 567,546 650,801
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Deposits $ 525,674 599,903
Subordinated debentures 3,000 3,000
Other borrowed money 15,000 10,000
Accrued interest payable and other liabilities 2,571 2,420
- ------------------------------------------------------------------------------
546,245 615,323
- ------------------------------------------------------------------------------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, without par value;
Authorized 10,000,000 shares; none issued -- --
Common stock, without par value;
Authorized 29,296,875 shares; issued and outstanding
3,740,000 and 3,659,000 shares in 1993 and 1992,
respectively 15,836 15,556
Retained earnings 5,465 19,922
- ------------------------------------------------------------------------------
Total shareholders' equity 21,301 35,478
- ------------------------------------------------------------------------------
$ 567,546 650,801
- ------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
GUARDIAN BANCORP 29
................................................................................
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
GUARDIAN BANCORP AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------
Interest income:
Loans $ 27,399 35,358 43,773
Deposits with financial institutions 42 88 175
Investment securities:
Taxable 1,614 2,605 2,434
Nontaxable 197 322 442
Short-term investments 923 874 --
Federal funds sold 2,594 2,048 3,399
- ------------------------------------------------------------------------------
32,769 41,295 50,223
- ------------------------------------------------------------------------------
Interest expense:
Deposits 7,108 8,554 13,895
Borrowed funds 397 456 439
- ------------------------------------------------------------------------------
7,505 9,010 14,334
- ------------------------------------------------------------------------------
Net interest income 25,264 32,285 35,889
Provision for loan losses 18,250 9,395 5,946
- ------------------------------------------------------------------------------
Net interest income after provision for
loan losses 7,014 22,890 29,943
- ------------------------------------------------------------------------------
Noninterest income:
Gain on sale of securities 3 42 2
Trust 627 186 14
Other 789 811 907
- ------------------------------------------------------------------------------
1,419 1,039 923
- ------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 8,621 7,271 6,118
Occupancy 1,238 1,778 1,783
Furniture and equipment 851 1,004 884
Customer service 5,539 7,989 9,189
Data processing 351 831 568
Promotional 758 1,120 1,436
Professional 2,416 1,666 1,033
Office supplies 416 416 444
FDIC assessments 1,791 1,365 1,025
Other real estate owned 2,957 667 41
Other 2,498 2,249 2,228
- ------------------------------------------------------------------------------
27,436 26,356 24,749
- ------------------------------------------------------------------------------
Earnings (loss) before income taxes (19,003) (2,427) 6,117
Provision (benefit) for income taxes (4,546) (109) 2,900
- ------------------------------------------------------------------------------
Net earnings (loss) $ (14,457) (2,318) 3,217
- ------------------------------------------------------------------------------
Net earnings (loss) per common share $ (3.90) (.64) .77
- ------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
30 GUARDIAN BANCORP
................................................................................
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
GUARDIAN BANCORP AND SUBSIDIARY COMMON STOCK
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 ---------------------- RETAINED
(IN THOUSANDS) SHARES AMOUNT EARNINGS TOTAL
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1990 3,607 $ 15,825 19,023 34,848
Retirement of common stock (93) (940) -- (940)
Stock options exercised 49 167 -- 167
Net earnings -- -- 3,217 3,217
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 3,563 15,052 22,240 37,292
Stock options exercised 96 345 -- 345
Tax benefit of stock options exercised -- 159 -- 159
Net loss -- -- (2,318) (2,318)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 3,659 15,556 19,922 35,478
Stock options exercised 81 280 -- 280
Net loss -- -- (14,457) (14,457)
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 3,740 $ 15,836 5,465 21,301
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
GUARDIAN BANCORP 31
................................................................................
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
GUARDIAN BANCORP AND SUBSIDIARY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS) 1993 1992 1991
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (14,457) (2,318) 3,217
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Provision for loan losses 18,250 9,395 5,946
Depreciation and amortization 854 935 813
Provision for deferred income taxes 68 (563) (1,935)
Amortization of deferred loan fees (648) (529) (2,005)
Amortization of net premium (discount) on investment
securities 347 (139) 207
Amortization of discount on short-term investments (525) (874) --
Gain on sales of securities (3) (42) (2)
Gain on sale of premises and equipment (22) -- --
Net loss on sales of other real estate owned 266 173 --
Valuation of other real estate owned 714 40 --
Net (increase) decrease in accrued interest receivable
and other assets (3,715) 1,267 930
Net increase (decrease) in accrued interest payable and
other liabilities 151 (2,356) 1,147
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,280 4,989 8,318
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from investment securities transactions:
Sales -- 20,112 1,000
Maturities 18,189 72,335 11,400
Purchases of investment securities (20,676) (97) (75,042)
Proceeds from short-term investment transactions:
Sales 369,865 14,881 --
Maturities 386,385 90,492 --
Purchases of short-term investments (815,183) (254,463) --
Net change in loans 31,010 28,165 (92,691)
Proceeds from sale of other real estate owned 13,639 4,084 --
Proceeds from sale of premises and equipment 32 -- --
Purchases of premises and equipment (300) (194) (859)
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,039) (24,685) (156,192)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (74,229) (82,724) 243,676
Increase in other borrowed money 5,000 10,000 --
Net proceeds from issuance of common stock 280 504 167
Retirement of common stock -- -- (940)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (68,949) (72,220) 242,903
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (84,708) (91,916) 95,029
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 109,853 201,769 106,740
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 25,145 109,853 201,769
- ------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
32 GUARDIAN BANCORP
................................................................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GUARDIAN BANCORP AND SUBSIDIARY
DECEMBER 31, 1993, 1992 AND 1991
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accounting and reporting policies of Guardian Bancorp and subsidiary
(collectively, the Company) are in accordance with generally accepted
accounting principles and conform to general practices within the
banking industry. The consolidated financial statements are prepared on
the accrual basis of accounting.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Guardian
Bancorp, its wholly owned subsidiary Guardian Bank and Guardian Bank's
wholly owned subsidiary, Guardian Trust Company (the Bank). All material
intercompany accounts and transactions have been eliminated in the
consolidated financial statements. Certain reclassifications of prior
years' data have been made to conform to the current year's
presentation.
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS
Investment securities are carried at cost, net of the amortization of
premiums and accretion of discounts. Amortized premiums and accreted
discounts are included in interest on investment securities. The
carrying value of investment securities is not adjusted for temporary
declines in market values as the Bank has the positive intent and
ability to hold the securities to maturity. However, the Company may
sell such securities if it determines that collectibility is in doubt.
In such cases, gains and losses realized are determined using the
specific-identification method.
Securities which the Company does not intend to hold to maturity are
classified as short-term investments. These securities are carried at
the lower of cost or market, net of accreted discounts which are
included in interest on short-term investments. Adjustments to carrying
value, if any, and realized gains or losses upon sale of the securities
are included in gain on sale of securities.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are recorded in the consolidated balance sheet at principal
amounts outstanding, net of deferred loan fees. Interest on loans is
accrued monthly as earned. When, in the opinion of management, a
reasonable doubt exists as to the collection of principal or interest,
such loans are evaluated individually to determine both the
collectibility and the adequacy of collateral. Loans are generally
placed on nonaccrual status when principal or interest is past due 90
days or more or management has reasonable doubt as to the full
collection of principal and interest, the accrual of income is
discontinued and previously accrued but unpaid interest is reversed
against income. Subsequent interest payments are generally credited to
income when received, except when the ultimate collectibility of
principal is uncertain, in which case all collections are applied as
principal reductions. Loans with modified terms are those with
restructured contractual terms due to borrowers' financial difficulty in
meeting original terms.
The allowance for loan losses is maintained at a level deemed adequate
by management to provide for known and inherent losses in the loan
portfolio. The allowance is based upon a quarterly review of past loan
loss experience, loan portfolio composition and risk, current economic
conditions that may affect the borrower's ability to pay and the
underlying collateral value. While management uses available information
to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic and other conditions. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to make additions to the
allowance based on their judgments of information available to them at
the time of their examination.
Loans that are deemed to be uncollectible are charged off and deducted
from the allowance. The provision for loan losses and recoveries on
loans previously charged off are added to the allowance.
<PAGE>
GUARDIAN BANCORP 33
................................................................................
LOAN ORIGINATION AND CREDIT-RELATED FEES
Loan origination fees and certain direct costs associated with the
origination or purchase of loans are deferred and recognized over the
lives of the related loans as an adjustment of the loan's yield on a
basis which approximates the interest method. Nonrefundable fees
associated with the issuance of loan commitments are deferred and
recognized over the life of the loan as an adjustment of yield. Fees for
commitments that expire unexercised are recognized in noninterest income
upon expiration of the commitment.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation on furniture, fixtures and equipment is
computed on the straight-line method over the estimated useful lives of
the related assets, which range from three to ten years. Leasehold
improvements are capitalized and amortized over the term of the lease or
the estimated useful lives of the improvements, whichever is shorter,
calculated on the straight-line method.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the lower of estimated fair
value, less estimated costs of disposition, or the outstanding loan
amount, and any difference between fair value and the loan amount is
charged to the allowance for loan losses. In 1993, the Company
reclassified in-substance foreclosed assets from other real estate owned
to loans in cases where it did not have physical possession of the
underlying collateral. This is consistent with regulatory reporting
requirements and with changing trends evolving in financial reporting
practices. Related prior years' data have been reclassified to conform
with the current year's presentation. Gains and losses from the sale of
such assets, any subsequent valuation adjustments and net operating
expenses are included in noninterest expense.
INCOME TAXES
The Company files consolidated Federal and combined state income tax
returns. Amounts provided for income taxes are based on the income
reported in the consolidated financial statements at current tax rates.
Such amounts include taxes deferred to future periods resulting from
temporary differences in the recognition of items for tax and financial
reporting purposes. Current and deferred components of the total tax
provision are redetermined each year when tax returns are filed which
results in an adjustment to the previously reported components.
In the first quarter of 1993, the Company implemented Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 changed the Company's method of accounting for
income taxes from the deferred method to the asset and liability method.
Under the deferred method, annual income tax expense was matched with
pretax accounting income by providing deferred taxes at current tax
rates for temporary differences between the determination of net income
for financial reporting and tax purposes. Under the asset and liability
method deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. In
implementing SFAS 109, the Company elected to restate prior years and,
therefore, the consolidated financial statements and related notes for
prior years have been restated to apply the new method of accounting
retroactively to 1991. The cumulative impact at January 1, 1991 of the
implementation was not material. The effect of the accounting change was
an increase in the net loss in 1992 of $492,000, or $0.14 per share, and
a decrease in 1991 net earnings of $493,000, or $0.11 per share.
PER SHARE DATA
Primary and fully diluted earnings (loss) per common share are computed
using the weighted average number of shares of common stock and common
stock equivalents outstanding. Stock options and warrants are considered
to be common stock equivalents, except when their effect is antidilutive
or immaterial. The weighted average number of shares of common stock
outstanding used to compute loss per share for the years ended December
31, 1993 and 1992 was 3,710,000 and 3,624,000, respectively. The
weighted average number of shares of common stock outstanding, including
common stock equivalents, used to compute earnings per share for the
year ended December 31, 1991 was 4,194,000.
<PAGE>
34 GUARDIAN BANCORP
................................................................................
In 1993, 1992 and 1991, the weighted average number of shares including
common stock equivalents for fully diluted earnings (loss) per share was
not materially different than the number of shares used to compute
primary earnings (loss) per share.
STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, the Company considers
cash and due from banks, interest-bearing deposits with financial
institutions having maturities of less than three months and Federal
funds sold as cash and cash equivalents. Supplemental information
regarding the accompanying consolidated statement of cash flows for the
years ended December 31, 1993, 1992 and 1991 is as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Interest paid $ 7,507 9,418 14,429
- --------------------------------------------------------------------------------------------------------------------
Income taxes (received) paid $ (920) 2,203 4,422
- --------------------------------------------------------------------------------------------------------------------
Other real estate owned acquired in satisfaction of loans $ 24,209 5,922 6,245
- --------------------------------------------------------------------------------------------------------------------
Senior liens assumed upon acquisition of other real estate owned $ -- 149 --
- --------------------------------------------------------------------------------------------------------------------
Loans made to facilitate sale of other real estate owned $ 5,855 400 2,774
- --------------------------------------------------------------------------------------------------------------------
Transfer of investment securities to short-term investments $ -- 29,508 --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" ("SFAS 107"). SFAS 107 is effective
for fiscal years ending after December 15, 1992, and requires the
disclosure of the fair value of financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate
the value. Financial instruments are defined under SFAS 107 as cash,
evidence of an ownership in an entity, or a contract that conveys or
imposes on an entity the contractual right or obligation to either
receive or deliver cash or another financial instrument. A significant
portion of the Company's assets and liabilities are financial
instruments as defined under SFAS 107. Additionally, the Company is also
a party to financial instruments that are not reported on the balance
sheet ("off-balance sheet financial instruments"). Such off-balance
sheet financial instruments include commitments to originate loans and
standby letters of credit.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, premises and
equipment and other real estate owned are not considered financial
instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in these
estimates. Since the fair value is estimated as of December 31, 1993 and
1992, the amounts that will actually be realized or paid at settlement
or maturity of the instruments could be significantly different.
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments which are contained in the notes to the consolidated
financial statements that describe each financial instrument.
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH FINANCIAL
INSTITUTIONS AND FEDERAL FUNDS SOLD
The book value of cash and due from banks, interest-bearing deposits
with financial institutions and federal funds sold approximates the
estimated fair value of such assets.
<PAGE>
GUARDIAN BANCORP 35
................................................................................
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS
The Company has utilized market quotes for similar or identical
securities in an actively traded market, where such a market exists, or
has obtained quotes from independent security brokers or dealers to
determine the estimated fair value of its investment securities and
short-term investments.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, and consumer. Each loan
category is further segmented into fixed and adjustable rate interest
terms, by performing and nonperforming categories and by maturity.
Loans which are either maturing or subject to repricing in the short
term are valued for fair market value purposes by using the carrying
amount for such loans. For other loans, fair value is estimated by
discounting scheduled cash flows through estimated maturity using
estimated market discount rates adjusted for the cost to administer and
the credit and interest rate risk inherent in the loan.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, and NOW accounts, and
money market and checking accounts, is estimated to equal the amount
payable on demand as of December 31, 1993 and 1992. The fair value of
certificates of deposit is based on the estimated discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
BORROWINGS
The fair value of the Company's subordinated debentures was based upon
alternative borrowing costs. Book value of the Company's other
borrowings approximates the fair value of such liabilities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of the Company's commitments to extend credit and the
fair value of letters of credit are estimated based upon terms currently
offered for similar agreements and approximates their carrying value.
CHANGES IN ACCOUNTING PRINCIPLES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan
is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to
the contractual terms of the loan agreement. The measurement of
impairment may be based on (1) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (2) the observable market price of the impaired
loan or (3) the fair value of the collateral of a collateral-dependent
loan. The amount by which the recorded investment of the loan exceeds
the measure of the impaired loan is recognized by recording a valuation
allowance with a corresponding charge to provision for loan losses.
Additionally, SFAS 114 eliminates the requirement that a creditor
account for certain loans as foreclosed assets until the creditor has
taken possession of the collateral. SFAS 114 is effective for financial
statements issued for fiscal years beginning after December 15, 1994.
Earlier adoption is permitted. To comply with regulatory requirements
regarding SFAS No. 114 effective in 1993, in-substance foreclosed assets
are classified as loans in cases where the Company does not have
physical possession of the underlying collateral. Although the Company
has not yet adopted SFAS 114, management does not expect implementation
to have a material impact on the Company's financial position or results
of operations.
In May 1993, the FASB issued Statement of Financial Standards 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. Those investments would be classified in
three categories and accounted for as follows: (i) debt and equity
securities that the entity has the positive intent and ability to hold
to maturity would be classified as "held to maturity" and reported at
amortized cost; (ii) debt and equity securities that are held for
current resale would be classified as trading securities and reported at
fair value, with unrealized gains and losses included in operations; 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 operations and reported as a
<PAGE>
36 GUARDIAN BANCORP
................................................................................
separate component of shareholders' equity. The statement 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. The Bank has both investment securities classified as
"available to maturity" and investment securities classified as
"available for sale". Securities classified as available for sale will
be reported at their fair value at the end of each fiscal quarter.
Accordingly, the value of such securities fluctuates based on changes in
interest rates. Generally, an increase in interest rates would result in
a decline in the value of investment securities held for sale, while a
decline in interest rates would result in an increase in the value of
such securities. Therefore, the value of investment securities available
for sale and the Bank's shareholders' equity could be subject to
fluctuation based on changes in interest rates.
(2) CONSUMMATION OF RIGHTS OFFERING
On January 28, 1994, Guardian Bancorp consummated its rights offering of
common stock ("the Offering"), and raised gross proceeds of
approximately $19,700,000 through the issuance of 8,774,000 shares of
common stock. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. In early February 1994,
Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank
for the Bank's general corporate purposes and subsequently reimbursed
the Bank approximately $229,000 for costs it incurred in the capital
raising effort. Guardian Bancorp retained the remaining net proceeds for
its own general corporate purposes.
<PAGE>
GUARDIAN BANCORP 37
................................................................................
(3) INVESTMENT AND SHORT-TERM SECURITIES
The carrying value, gross unrealized gains and losses and estimated
market values of investment securities at December 31, 1993, 1992 and
1991 are as follows (in thousands):
<TABLE>
<CAPTION>
1993
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $24,279 123 36 24,366
State and municipal securities 4,336 55 -- 4,391
Federal Reserve Bank stock 464 -- -- 464
- ---------------------------------------------------------------------------------------------------------------
$29,079 178 36 29,221
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1992
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $20,327 579 -- 20,906
U.S. Government agency securities 164 6 -- 170
State and municipal securities 4,984 75 -- 5,059
Corporate bonds 1,000 5 -- 1,005
Federal Reserve Bank stock 464 -- -- 464
- ---------------------------------------------------------------------------------------------------------------
$26,939 665 -- 27,604
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1991
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $79,020 937 34 79,923
U.S. Government agency securities 360 22 -- 382
State and municipal securities 7,129 100 8 7,221
Corporate bonds 2,755 32 -- 2,787
Federal Reserve Bank stock 367 -- -- 367
- ------------------------------------------------------------------------------------------------------------
$89,631 1,091 42 90,680
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of investment securities in 1992 were $20,112,000
and the gain recognized upon sale was $11,000. There were no sales of
investment securities in 1993.
<PAGE>
38 GUARDIAN BANCORP
................................................................................
The following table shows the carrying value and estimated market value
of investment securities by contractual maturity at December 31, 1993.
Also shown are the weighted average yields by investment category, and
such yields for state and municipal securities are stated on a tax
equivalent basis at the incremental rate of 34% (dollars in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
WEIGHTED ESTIMATED
CARRYING AVERAGE MARKET
AMOUNT YIELD VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities:
Within one year $ 10,528 4.9% 10,595
After one year but within five years 13,751 4.5 13,771
- --------------------------------------------------------------------------------------------------------
24,279 4.7 24,366
- --------------------------------------------------------------------------------------------------------
State and municipal securities:
Within one year 3,737 4.3 3,764
After one year but within five years 599 11.4 627
- --------------------------------------------------------------------------------------------------------
4,336 5.3 4,391
- --------------------------------------------------------------------------------------------------------
Corporate bonds:
Federal Reserve Bank stock 464 6.0 464
- --------------------------------------------------------------------------------------------------------
$ 29,079 4.8% 29,221
- --------------------------------------------------------------------------------------------------------
</TABLE>
U.S. Treasury and Government agency securities carried at approximately
$4,222,000 at December 31, 1993 were pledged to secure public deposits
or for other purposes as required or permitted by law.
Since the second quarter of 1992, the Company has categorized as
short-term investments, securities and other investments that may be
sold in response to changes in interest rates, increases in loan demand,
liquidity needs or other similar instances. Such short-term investments
are carried at the lower of cost or market and during 1993 had a
weighted average yield of approximately 2.8% and mature within one year.
The following table shows carrying value, gross unrealized gains and
losses and estimated market values of short-term investments at December
31, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1993
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 179,948 -- -- 179,948
- -------------------------------------------------------------------------------------------------------------
$ 179,948 -- -- 179,948
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 119,887 48 -- 119,935
Cash management funds 600 -- -- 600
- -------------------------------------------------------------------------------------------------------------
$ 120,487 48 -- 120,535
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of short-term investments were $369,865,000 and
$14,881,000 during 1993 and 1992, respectively, and the gains realized
upon sale were $3,000 and $31,000, respectively. During 1993 and 1992,
there were no lower of cost or market adjustments charged to income.
<PAGE>
GUARDIAN BANCORP 39
................................................................................
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of the composition of the Company's loan
portfolio by type of loan at December 31, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Real estate $ 147,039 138,430
Construction 87,829 164,194
Commercial 86,260 85,618
Installment 2,046 2,938
- -------------------------------------------------------------------------------------------------------------
$ 323,174 391,180
Deferred loan fees (426) (345)
- -------------------------------------------------------------------------------------------------------------
$ 322,748 390,835
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company emphasizes real estate and construction lending for
contractors and real estate developers in its Southern California market
area. A significant portion of the Company's loan portfolio is secured
with deeds of trust on real estate. Commercial loans are loans made to
professionals and small businesses for trade and general financing
purposes and also include loans made to companies involved in the real
estate industry, such as real estate brokers, title insurance and escrow
companies and real estate developers for working capital and equipment
acquisitions. Although the Company looks primarily to the borrower's
cash flow as the principal source of repayment for such loans, 34.4% of
the loans within this category at December 31, 1993 were secured by real
estate. The Company's lending policy, established by the Board of
Directors, requires that each loan meet certain underwriting criteria,
including loans to customers who have significant cash investment in
their projects and have the ability to provide additional cash flows, if
necessary, as well as collateral underlying the loan, and capital and
leverage capacity of the borrower.
The following table sets forth the composition of real estate and
construction loans by broad type of collateral as of December 31, 1993
(in thousands):
<TABLE>
<CAPTION>
REAL ESTATE CONSTRUCTION
-------------------- --------------------
<S> <C> <C> <C> <C>
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------------------------------------
Residential:
1-4 family units $ 24,298 16.5% $ 50,530 57.5%
Multifamily units 16,309 11.1 8,437 9.6
Commercial and industrial units 79,398 54.0 19,324 22.0
Land:
Residential 15,204 10.3 8,820 10.1
Commercial and industrial 11,830 8.1 718 .8
- ------------------------------------------------------------------------------------------------------------
Total $ 147,039 100.0% $ 87,829 100.0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, the Company had total unfunded loan commitments of
approximately $46,181,000 of which $1,579,000, $20,312,000 and
$24,290,000 were related to real estate, construction and commercial
loans, respectively.
A summary of nonperforming loans at December 31, 1993 and 1992 follows
(in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Loans on nonaccrual $ 29,056 33,316
Loans past due greater than 90 days and still accruing 5,769 1,547
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 34,825 34,863
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
40 GUARDIAN BANCORP
................................................................................
The following tables set forth the Company's nonperforming loans by type
at December 31, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Real estate-mortgage $ 13,804 15,578
Construction 9,214 16,416
Commercial 6,005 1,320
Installment 33 2
- ---------------------------------------------------------------------------------------------------------------
$ 29,056 33,316
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and still accruing interest:
Real estate-mortgage $ 4,486 70
Construction -- 1,363
Commercial 1,247 100
Installment 36 14
- ---------------------------------------------------------------------------------------------------------------
$ 5,769 1,547
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Loans with modified terms approximated $9,539,000 and $2,149,000 at
December 31, 1993 and 1992, respectively.
The effect of loans on nonaccrual and loans with modified terms on
interest income for the years ended December 31, 1993, 1992 and 1991 is
presented below (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Gross interest income that would have been recorded at original terms:
Loans on nonaccrual $ 5,716 4,832 2,487
Loans with modified terms 1,105 288 231
- ----------------------------------------------------------------------------------------------------------
6,821 5,120 2,718
Interest reflected in income:
Loans on nonaccrual 1,703 1,933 608
Loans with modified terms 787 164 125
- ----------------------------------------------------------------------------------------------------------
2,490 2,097 733
Interest foregone:
Loans on nonaccrual 4,013 2,899 1,879
Loans with modified terms 318 124 106
- ----------------------------------------------------------------------------------------------------------
$ 4,331 3,023 1,985
- ----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, commitments to lend additional funds to borrowers
whose loans were on nonaccrual or had modified terms were approximately
$182,000.
At December 31, 1993 and 1992, the estimated fair value of the Company's
loan portfolio was $319,411,000 and $379,937,000, respectively, which
compares to the carrying value of net loans of $304,548,000 and
$377,369,000, respectively. At December 31, 1993 and 1992, the fair
value of the Company's commitments to extend credit and letters of
credit approximates their carrying value. The assumptions inherent in
these fair value estimates are in Note 1 to the consolidated financial
statements.
<PAGE>
GUARDIAN BANCORP 41
................................................................................
The following is a summary of the activity within the allowance for loan
losses for the years ended December 31, 1993, 1992 and 1991 (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Balance at beginning of year $ 13,466 9,135 3,473
Provision charged to operations 18,250 9,395 5,946
Loans charged off (13,569) (5,115) (288)
Recoveries 53 51 4
- --------------------------------------------------------------------------------
Net charge-offs (13,516) (5,064) (284)
- --------------------------------------------------------------------------------
Balance at end of year $ 18,200 13,466 9,135
- --------------------------------------------------------------------------------
</TABLE>
(5) PREMISES AND EQUIPMENT, NET
The following is a summary of the major components of premises and
equipment at December 31, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- ------------------------------------------------------------------------------------
Furniture and equipment $ 4,386 4,285
Leasehold improvements 1,666 1,624
- ------------------------------------------------------------------------------------
Total premises and equipment 6,052 5,909
Less accumulated depreciation and amortization (4,244) (3,537)
- ------------------------------------------------------------------------------------
Premises and equipment, net $ 1,808 2,372
- ------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense on premises and equipment
approximated $854,000, $909,000, and $813,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
(6) OTHER REAL ESTATE OWNED, NET
Activity in other real estate owned during the year ended December 31,
1993 and 1992 follows (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- ------------------------------------------------------------------------------------
Balance at beginning of year $ 4,359 2,945
Additions 24,209 6,071
Sales (13,905) (4,617)
Valuation adjustments (714) (40)
- ------------------------------------------------------------------------------------
Balance at end of year $ 13,949 4,359
- ------------------------------------------------------------------------------------
</TABLE>
Consistent with regulatory reporting requirements and with changing
trends evolving in financial reporting practices, in the fourth quarter
of 1993 the Company reclassified $1,269,000 of in-substance foreclosed
property to loans as it did not have physical possession of the
underlying collateral. To be consistent with the 1993 presentation,
in-substance foreclosed property of $11,817,000 has been reclassified to
loans in 1992, where the Company did not have physical possession of the
underlying collateral.
Components of other real estate owned expense included in the
accompanying consolidated statement of operations for the years ended
December 31, 1993, 1992 and 1991 were as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Gain upon sale $ (123) -- --
Loss upon sale 389 173 --
Direct holding costs 1,977 454 41
Valuation adjustments 714 40 --
- --------------------------------------------------------------------------------------------------------
$ 2,957 667 41
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
42 GUARDIAN BANCORP
................................................................................
(7) DEPOSITS
The following summarizes deposits outstanding at December 31, 1993 and
1992 (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 322,900 414,163
Savings and interest-bearing demand 53,285 48,374
Money market 47,603 53,170
Certificates of deposit under $100,000 79,644 55,768
Certificates of deposit of $100,000 and over 22,242 28,428
- --------------------------------------------------------------------------------------------------------
Total deposits $ 525,674 599,903
- --------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense related to deposits for the years ended December 31,
1993, 1992 and 1991 amounted to the following (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Money market, savings and interest-bearing demand deposits $ 2,547 3,415 4,451
Time certificates of deposit under $100,000 3,451 2,028 2,667
Time certificates of deposit of $100,000 and over 1,110 3,111 6,777
- -------------------------------------------------------------------------------------------------------
Total interest expense on deposits $ 7,108 8,554 13,895
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Company has attracted a substantial portion of its deposit base from
large balance depositors by offering a high level of customer services.
A significant amount of such deposits are from Southern California based
title insurance companies and escrow companies. While these deposits are
noninterest-bearing, they are not cost free funds. As shown in the
accompanying consolidated statement of operations, the Company incurs
customer service expenses in the form of payments to third parties to
provide accounting, data processing, courier and other permissible
banking related services for certain of these customers. At December 31,
1993 and 1992, such arrangements were applicable to approximately
$287,300,000 and $374,100,000 of noninterest-bearing demand deposits,
respectively. During 1993 and 1992, the average balance of such accounts
were $277,600,000 and $334,300,000, respectively.
At December 31, 1993 and 1992, the estimated fair value of the Company's
deposits was determined to be $525,740,000 and $600,341,000,
respectively. The estimate of fair value does not include any amount
that relates to core deposit intangible, since such intangibles are not
defined as financial instruments under SFAS 107. The assumptions
inherent in these fair value estimates are in Note 1 to the consolidated
financial statements.
(8) SUBORDINATED DEBENTURES
On December 22, 1988, the Company issued $3,000,000 of 11 3/4%
subordinated debentures that mature in December, 1995. In connection
with the issuance of the debentures, the Company issued a nondetachable
warrant that expires in 1995 to purchase 56,250 shares of the Company's
common stock at $9.60 per share. Interest on the debentures is payable
quarterly. The debentures have certain covenants, such as restrictions
on the incurrence of certain debt and mergers, requirement of the
maintenance of not less than $14 million in tangible net worth and
restrictions on the payment of cash dividends. In the opinion of
management, none of these restrictions effectively limit the operations
of the Company and the Company was in compliance with the covenants at
December 31, 1993.
At December 31, 1993 and 1992, the estimated fair value of the Company's
subordinated debentures was determined to be $3,090,000 and $3,129,000,
respectively and the assumptions inherent to this estimate are in Note 1
to the consolidated financial statements.
<PAGE>
GUARDIAN BANCORP 43
................................................................................
(9) OTHER BORROWED MONEY
The Company's principal source of funds has been and continues to be
deposits. However, on occasion, the Company will borrow funds to augment
its funding needs in forms which may include federal funds purchased,
securities sold under repurchase agreements and other short-term
borrowings. At December 31, 1993, other borrowed money of $15,000,000
consisted of unsecured overnight borrowings under the Company's federal
funds line which was settled shortly after year end. At December 31,
1993, loans outstanding in the amount of approximately $52 million were
pledged to secure future advances with the Federal Reserve Bank as
collateral. At December 31, 1992, other borrowed money of $10,000,000
consisted of overnight borrowings from the Federal Reserve Bank, were
secured by U.S. Treasury securities with a carrying value of $10,000,000
and were settled shortly after year end.
(10) INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1993, 1992 and 1991 includes the following (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Current tax expense (benefit):
Federal $ (4,614) 454 3,490
State -- -- 1,345
Tax benefit of stock options exercised -- (159) --
- ---------------------------------------------------------------------------------------------------------
Total (4,614) 295 4,835
- ---------------------------------------------------------------------------------------------------------
Deferred tax benefit:
Federal (2,188) (1,405) (1,763)
State (518) (524) (665)
- ---------------------------------------------------------------------------------------------------------
Total (2,706) (1,929) (2,428)
- ---------------------------------------------------------------------------------------------------------
Change in valuation allowance 2,774 1,366 493
Tax benefit of stock options -- 159 --
- ---------------------------------------------------------------------------------------------------------
Total income tax expense (benefit) $ (4,546) (109) 2,900
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The income tax provision (benefit) reflected an effective rate of
(23.9)%, (4.5)% and 47.4% for the years ended December 31, 1993, 1992
and 1991 on the earnings (loss) before income taxes, respectively. The
income tax provision (benefit) differed from the amounts computed by
applying the statutory Federal income tax rate of 34% for 1993, 1992 and
1991 to the earnings (loss) before income taxes for the following
reasons (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Tax expense (benefit) at statutory Federal income tax rate $ (6,461) (825) 2,080
California franchise tax, net of Federal benefit (518) (524) 449
State and municipal securities interest (63) (104) (137)
Valuation allowance for deferred tax assets 2,774 1,366 493
Other, net (278) (22) 15
- ---------------------------------------------------------------------------------------------------------
$ (4,546) (109) 2,900
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
44 GUARDIAN BANCORP
................................................................................
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1992 and 1991 are presented below (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Provision for loan losses $ 8,041 5,876
Cash basis tax reporting method 269 73
Depreciation 136 95
Other, net 78 1
- -------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 8,524 6,045
Valuation allowance (4,854) (2,080)
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 3,670 3,965
- -------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan fees (96) (200)
Capitalized sign rights -- (13)
California franchise tax -- (110)
- -------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (96) (323)
- -------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 3,574 3,642
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had sufficient tax carryback availability at December 31,
1993 and 1992 to realize the entire net deferred tax asset. At December
31, 1993, the Company had a net operating loss carryforward for state
income tax purposes of $1,490,000, of which one-half, or $745,000, is
available to offset any future state taxable income through 1998.
Included in accrued interest receivable and other assets in the
accompanying consolidated balance sheet at December 31, 1993 and 1992
was approximately $4,841,000 and $1,147,000, respectively, of income
taxes currently receivable.
During 1992, 93,309 unqualified stock options granted under the 1984
Stock Incentive Plan were exercised. If such shares acquired through the
exercise of such options are subsequently sold within prescribed time
periods, applicable tax regulation permits the Company to reduce its
current tax liability to the extent of the tax effect on the difference
between the exercise price of the shares acquired and the selling price
of the shares sold. During 1992, the effect of these transactions was a
decrease to income taxes payable and an increase to shareholders' equity
of $159,000.
(11) STOCK OPTIONS AND COMMON STOCK
The Company has adopted two stock option plans, the 1984 Stock Incentive
Plan and the 1990 Stock Incentive Plan, under which nonemployee
directors, officers and other key employees of the Company have and may
be granted nonqualified or incentive stock options. The Company
authorized the issuance of up to 1,189,000 shares of common stock under
both plans. Option prices under both plans may not be less than the fair
market value at the date of the grant and all options granted expire not
more than ten years after the grant date, except that options
exercisable in installments become fully exercisable upon a change of
control of the Company, as defined. The following summarizes stock
option activity for the years ended December 31, 1993 and 1992 (in
thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 881 989
Options granted 136 5
Options cancelled and exercised (305) (113)
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 712 881
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, there were approximately 547,000 options
exercisable at option prices ranging from $3.42 to $19.20 per share;
those options not exercisable had option prices ranging from $2.875 to
$19.20. Approximately 81,000 options were exercised during 1993 at
prices ranging from $3.42 to $3.93.
<PAGE>
GUARDIAN BANCORP 45
................................................................................
The 1987 Stock Appreciation Rights Plan (SAR Plan) and awards thereunder
expired in 1992. Reversals of previous expense accruals for benefits
payable under the SAR Plan reduced compensation expense in 1991 by
approximately $171,000. Cash payments made under exercise of outstanding
rights in 1991 were approximately $22,000.
(12) EMPLOYEE STOCK OWNERSHIP PLAN
In July 1988, the Board of Directors adopted the Guardian Bancorp
Employee Stock Ownership Plan (the Plan), which constitutes a qualified
plan under Section 401(a) of the Internal Revenue Code (IRC). The Plan
also contains a cash-or-deferred arrangement under Section 401(k) of the
IRC. The Plan is a defined contribution plan that is available to
substantially all employees. Employee contributions are voluntary, as
the employee elects to defer from 1% to 6% of compensation, exclusive of
overtime, bonuses or other special payment (qualifying compensation).
The Company makes a matching contribution to the Plan equal to 50% of
the amount that eligible participants have contributed to the Plan,
other than executive officers for whom no matching contributions are
made. In addition, the Company may contribute an additional amount to
the Plan each year based on the performance of the Company. The decision
to make the additional contribution and the amount of such contribution
is at the discretion of the Board of Directors. For the years ended
December 31, 1993, 1992 and 1991, the Plan's administrative expenses,
which were paid by the Bank, approximated $12,000, $17,000 and $13,000,
respectively; and the Company contributed approximately $24,000, $66,000
and $96,000, respectively, to the Plan.
Activity in the number of shares of the Company's common stock held by
the Plan for the years ended December 31, 1993 and 1992 follows (in
thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Shares held at beginning of year 109 85
Shares acquired 18 24
Shares distributed to Plan participants (3) --
- -------------------------------------------------------------------------------------------------------------------
Shares held at end of year 124 109
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(13) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding
commitments and contingencies, such as financial instruments with
off-balance sheet risk, which are not reflected in the accompanying
consolidated financial statements. These financial instruments primarily
consist of commitments to extend credit and standby letters of credit
issued to meet the financing needs of the Company's customers.
Management does not anticipate any material losses as a result of these
transactions.
Commitments to extend credit, standby letters of credit and other
letters of credit only represent exposure to off-balance sheet risk in
the event the contract is drawn upon and the other party to the contract
defaults. The actual credit risk of these transactions depends upon the
creditworthiness of the customer and on the value of any related
collateral. The Company uses the same credit policies in making
commitments and conditional obligations as its does for on-balance sheet
instruments.
The Company has total unfunded loan commitments of approximately
$46,181,000 at December 31, 1993. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of
a fee. Since certain of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company minimizes its exposure
to loss under these commitments by requiring that customers meet certain
conditions prior to disbursing funds. The amount of collateral obtained,
if any, is based on a credit evaluation of the borrower and may include
accounts receivable, inventory, property, plant and equipment, and real
property.
Standby letters of credit amounting to $2,989,000 were outstanding at
December 31, 1993. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. Where appropriate, cash or other security
support is held as collateral.
<PAGE>
46 GUARDIAN BANCORP
................................................................................
In the ordinary course of business, the Company becomes involved in
litigation. In the opinion of management, based upon opinions of legal
counsel, the disposition of suits pending against the Company would not
have any material adverse effect on its results of operations or
financial position.
The Company leases its premises and certain equipment under several
noncancelable operating leases that expire on various dates through
March 31, 2003. The building lease commitments are subject to
cost-of-living adjustments to reflect future changes in the consumer
price index. Rent expense of its premises of approximately $921,000,
$1,551,000 and $1,430,000 is included in occupancy expense in the
accompanying 1993, 1992 and 1991 consolidated statement of operations,
respectively.
At December 31, 1993, minimum rental commitments for the noncancelable
lease terms are as follows (in thousands):
<TABLE>
<CAPTION>
COMMITMENTS
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
1994 $ 725
1995 777
1996 810
1997 765
1998 719
Thereafter 2,746
- ---------------------------------------------------------------------------------------------------------------
Total $6,542
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(14) TRANSACTIONS INVOLVING OFF ICERS AND DIRECTORS
As part of its normal banking activities, the Company has provided
credit facilities to certain officers, directors, and the entities with
which they are associated. In the opinion of management, such credit
extensions are on terms similar to transactions with nonaffiliated
parties and involve only normal credit risk. The following table
summarizes such lending activity in 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Aggregate loan balance at beginning of year $ 6,635 10,662
Additions 242 689
Repayments (702) (2,149)
Other (2,795) (2,567)
- ---------------------------------------------------------------------------------------------------------------
Aggregate loan balance at end of year $ 3,380 6,635
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, there were no commitments to lend additional
amounts to the aforementioned parties, however, the Company had issued
$326,000 of stand-by letters of credit on behalf of one director.
Interest and fee income earned on the foregoing transactions was
$556,000, $765,000, and $1,247,000 for the years ended December 31,
1993, 1992 and 1991, respectively. Included in other are loans with
officers, directors and the entities with which they are associated
which, due to resignation, are no longer deemed affiliated parties. At
December 31, 1993, $278,000 of the aforementioned loans were on
nonaccrual and $2,570,000 of such loans were current as to interest but
were past due 90 days or more as to principal.
The Company has engaged a law firm with which a director is affiliated
to address certain of its corporate, credit documentation and
collection, on-going litigation and other matters. Management believes
that such services are rendered at market terms consistent within the
industry. During the years ended December 31, 1993, 1992 and 1991
related legal fees were $379,000, $357,000 and $115,000, respectively.
(15) AVAILABILITY OF FUNDS FROM BANK, RESTRICTIONS ON CASH BALANCES AND
OTHER REGULATORY MATTERS
The Bank is required to maintain certain minimum reserve balances on
deposit with the Federal Reserve Bank. Cash balances maintained to meet
reserve requirements are not available for use by the Bank. During 1993,
the Bank was required to maintain average reserves of approximately
$27,745,000.
<PAGE>
GUARDIAN BANCORP 47
................................................................................
The source of substantially all the revenues of Guardian Bancorp, on an
unconsolidated basis, including funds available for the payment of
dividends, is, and is expected to continue to be, dividends paid by the
Bank. Under state banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the California
Superintendent of Banks, exceed its net income, as defined, for that
year combined with its retained earnings for the preceding two years.
Guardian Bancorp has agreed not to incur additional debt or pay any
dividends, and the Bank cannot pay or declare dividends to Guardian
Bancorp without prior regulatory approval. State banking law also
restricts the Bank from extending credit to Guardian Bancorp in excess
of 10% of the capital stock and surplus, as defined, of the Bank or
approximately $1.9 million at December 31, 1993.
At December 31, 1993, Guardian Bancorp, on an unconsolidated parent
company only basis, had cash and cash equivalents available of
approximately $402,000. On January 28, 1994, Guardian Bancorp
consummated the Offering by raising gross proceeds of approximately
$19,700,000. After deducting expenses incurred in the Offering, net
proceeds were approximately $17,958,000. Guardian Bancorp contributed
$16,500,000 of the net proceeds to the Bank, subsequently reimbursed the
Bank approximately $229,000 for costs it incurred and retained
approximately $1.2 million for its own general corporate purposes. In
addition, on September 30, 1993, Guardian Bancorp exercised its right to
convert the entire $3.0 million principal amount of Bank Convertible
Debentures into common stock of the Bank, thereby converting this
security into Tier 1 capital and eliminating the Bank as a liquidity
source through interest payments.
On December 22, 1988, Guardian Bancorp issued to an unaffiliated
purchaser $3.0 million in aggregate principal amount of 11 3/4%
Subordinated Debentures that mature on December 30, 1995. Interest on
the Bancorp Debentures accrues and is payable quarterly, and the
principal is due on maturity. Guardian Bancorp is not currently in
default with respect to any of the interest payments due on the Bancorp
Debentures, and management believes that Guardian Bancorp currently has
sufficient liquid assets to make such payments through to maturity.
However, absent a restructuring of the Bancorp Debentures or the receipt
of additional funds from Bank dividends, the issuance of debt or equity
or otherwise, Guardian Bancorp will not have sufficient liquid assets to
pay the $3.0 million principal amount of such securities that will
become due on the stated maturity date. Guardian Bancorp's ability to
receive additional funds through Bank dividends or the issuance of debt
at the holding company level is limited by regulatory and statutory
restrictions.
In October 1992, each of the Company and the Bank entered into a written
agreement with the Federal Reserve Bank of San Francisco ("FRB"). Among
other things, the agreements require the Company and the Bank to a)
maintain an allowance for loan losses that is equal to or greater than
1.7% of the Bank's outstanding loans, b) develop formalized strategic,
operating and capital plans, including a plan to maintain adequate
capital, c) develop a plan and take steps to monitor and decrease its
level of nonperforming or otherwise classified assets, d) establish
policies designed to monitor the type, growth and amounts of credit
concentration, e) refrain from incurring any debt at the Company level
without prior FRB approval, other than in the ordinary course of
business, f) develop or update, as necessary, various operating policies
and procedures, and g) refrain from declaring or paying any cash
dividends without prior FRB approval. Both before and after entering
these agreements, management of the Company and the Bank have taken
various steps, including the Company's successful capital raising effort
which closed in early 1994, that are designed to facilitate compliance
with the terms thereof. However, compliance with the terms of the
agreements will be determined by the FRB during subsequent examinations
of the Company and the Bank.
<PAGE>
48 GUARDIAN BANCORP
................................................................................
(16) PARENT COMPANY INFORMATION (CONDENSED)
The balance sheet of Guardian Bancorp (parent company only) as of
December 31, 1993 and 1992 and the related statements of operations and
cash flows for the years ended December 31, 1993, 1992 and 1991 follow
(in thousands):
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS 1993 1992
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Interest-bearing deposit with Guardian Bank $ 402 68
Short-term investments (market value of $600,000) -- 600
Investment in Guardian Bank 23,839 34,612
Receivable from Guardian Bank -- 3,000
Accrued interest receivable and other assets 298 198
- ------------------------------------------------------------------------------------------------------------
$ 24,539 38,478
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Accrued interest payable and other liabilities $ 238 --
Subordinated debentures 3,000 3,000
- ------------------------------------------------------------------------------------------------------------
3,238 3,000
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock; without par value; Authorized 10,000,000 shares; none issued -- --
Common stock; without par value; Authorized 29,296,875 shares, issued and
outstanding 3,740,000 and 3,659,000 in 1993 and 1992, respectively. 15,836 15,556
Retained earnings 5,465 19,922
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 21,301 35,478
- ------------------------------------------------------------------------------------------------------------
$ 24,539 38,478
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
<S> <C> <C> <C>
1993 1992 1991
- ------------------------------------------------------------------------------------------------------
Interest income $ 287 369 467
Other income 12 95 106
- ------------------------------------------------------------------------------------------------------
Total income 299 464 573
- ------------------------------------------------------------------------------------------------------
Interest expense 352 352 352
Other expense 31 27 304
- ------------------------------------------------------------------------------------------------------
Total expense 383 379 656
- ------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (benefit) and equity in
undistributed net earnings (loss) of Guardian Bank (84) 85 (83)
Provision (benefit) for income taxes -- 35 (28)
- ------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in undistributed net earnings (loss)
of Guardian Bank (84) 50 (55)
Equity in undistributed net earnings (loss) of Guardian Bank (14,373) (2,368) 3,272
- ------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (14,457) (2,318) 3,217
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
GUARDIAN BANCORP 49
................................................................................
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
<S> <C> <C> <C>
1993 1992 1991
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (14,457) (2,318) 3,217
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Equity in undistributed net (earnings) loss of Guardian Bank 14,373 2,368 (3,272)
Net decrease (increase) in accrued interest receivable and
other assets (100) (143) 1,403
Net increase (decrease) in accrued interest payable and other
liabilities 238 (731) 731
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 54 (824) 2,079
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiary (600) -- (2,431)
Principal collected on loan participations purchased -- 306 66
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (600) 306 (2,365)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 280 504 167
Retirement of common stock -- -- (940)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 280 504 (773)
- ------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (266) (14) (1,059)
Cash and cash equivalents at beginning of year 668 682 1,741
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 402 668 682
- ------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Conversion to equity capital of receivable from Guardian Bank $ 3,000 -- --
Interest paid 352 352 352
Income taxes (received) paid (97) 846 350
</TABLE>
<PAGE>
50 GUARDIAN BANCORP
................................................................................
(17) QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited quarterly operating results for the years ended
December 31, 1993 and 1992 follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
1993:
INTEREST INCOME $ 8,144 8,792 8,124 7,709
NET INTEREST INCOME 6,127 6,786 6,305 6,046
PROVISION FOR LOAN LOSSES 5,000 3,750 4,500 5,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,127 3,036 1,805 1,046
LOSS BEFORE INCOME TAXES (5,485) (2,838) (4,905) (5,775)
NET LOSS (4,079) (2,247) (3,903) (4,228)
NET LOSS PER COMMON SHARE (1.11) (.61 ) (1.04 ) (1.13 )
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
1992:
Interest income $ 11,035 10,801 10,262 9,197
Net interest income 8,343 8,556 8,072 7,314
Provision for loan losses 995 150 1,750 6,500
Net interest income after provision for loan losses 7,348 8,406 6,322 814
Earnings (loss) before income taxes 1,047 1,799 372 (5,645)
Net earnings (loss) 609 1,042 215 (4,184)
Net earnings (loss) per common share .15 .26 .05 (1.14 )
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company recorded larger provisions for loan losses in the latter
half of 1992 than were recorded in the first half of the year. There
were several reasons for this occurrence. In general, the information
analyzed by the Company in the second half in connection with its
quarterly review of loans and the allowance for loan loss adequacy
disclosed declines in the value of collateral for real estate related
loans, particularly in the non-residential sectors. This was further
supported by the most recent appraisal data received during the latter
part of the year. In addition, the valuation of loans in the process of
foreclosure and in-substance foreclosed was adjusted to reflect recent
market data and changes in the Company's strategies for ultimate
disposition of the collateral which impacted charge-offs in the second
half of the year. These trends continued in the fourth quarter along
with other events occurring which included unexpected deeds-in-lieu of
foreclosure received by the Company, declared bankruptcies by borrowers
and the continuing deterioration in most real estate sectors in Southern
California. Finally, management's perspective on the general economic
conditions in the Company's marketplace were based upon the then most
recent economic reports which indicate that the current environment
would persist throughout and perhaps beyond 1993.
(18) NORTHRIDGE EARTHQUAKE
On January 17, 1994, a large earthquake struck the Southern California
area. The earthquake and related aftershocks caused significant damage
to certain areas of Los Angeles and Ventura Counties. While the full
extent of damage in this area is not yet known, management's preliminary
assessment of damage to collateral securing loans indicates that there
should be no material impact on the Company's consolidated financial
position or results of operations.
<PAGE>
GUARDIAN BANCORP 51
................................................................................
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
GUARDIAN BANCORP:
We have audited the accompanying consolidated balance sheet of Guardian
Bancorp and subsidiary (the Company) as of December 31, 1993 and 1992
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 financial position of
Guardian Bancorp and subsidiary as of December 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1993 in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 10 to the consolidated financial statements,
the Company changed its method of accounting for income taxes in 1993 to
adopt the provisions of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes".
______/s/_KPMG Peat Marwick______
KPMG Peat Marwick
Los Angeles, California
February 15, 1994
<PAGE>
52 GUARDIAN BANCORP
................................................................................
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Company's common stock is listed on the American Stock Exchange
under the symbol "GB". The following table sets forth, on a per share
basis for the periods indicated, the high and low closing sales prices
for the common stock as reported by the American Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
- ---------------------------------------------------------------------
1992:
First Quarter $ 9 7/8 6 3/4
Second Quarter 8 1/4 6 5/8
Third Quarter 7 7/8 5 1/2
Fourth Quarter 7 1/8 5
1993:
First Quarter $ 7 1/8 5 1/2
Second Quarter 5 3/4 3 7/8
Third Quarter 5 3/8 2 3/4
Fourth Quarter 3 3/16 2 1/8
1994:
FIRST QUARTER (THROUGH MARCH 15, 1994) $ 2 1/16 $ 1 11/16
- ---------------------------------------------------------------------
</TABLE>
On December 31, 1993, the Company had approximately 463 shareholders of
record of its common stock which does not include beneficial owners
whose shares are held by brokers, banks and other nominees.
The Company has never paid a cash or stock dividend on its common stock
and does not intend to pay any cash dividends until such time as
internally generated profits are not needed to support growth or enhance
shareholders' equity of the Company. At present, the source of
substantially all of Guardian Bancorp's revenues, including funds
available for the payment of dividends, is, and is expected to continue
to be, dividends paid by the Bank. The Bank's ability to pay dividends
to Guardian Bancorp is subject to statutory and regulatory restrictions.
In addition, the Company's ability to pay cash dividends is limited by
the terms of the Subordinated Debenture Purchase Agreement pursuant to
which the Company's 11 3/4% Subordinated Debentures were issued and the
terms of its written agreement with the Federal Reserve Bank of San
Francisco. See "Capital Resources" and Notes 8 and 15 to the Company's
Consolidated Financial Statements filed within.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Guardian Bank, a California state-chartered bank.
2. Guardian Trust Company, a California state-chartered trust company.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Guardian Bancorp:
We consent to incorporation by reference in the Registration Statement Nos.
2-96894, 33-22371 and 33-35012 on Form S-8 of Guardian Bancorp of our report
dated February 15, 1994, relating to the consolidated balance sheet of Guardian
Bancorp and subsidiary as of December 31, 1993 and 1992 and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1993,
which report appears in the December 31, 1993 annual report on Form 10-K of
Guardian Bancorp.
Our report refers to the adoption of the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109, "Accounting For Income Taxes".
KPMG Peat Marwick
Los Angeles, California
March 29, 1994
