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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 13, 1998
Commission file number 2-76555
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ELDORADO BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0720548
(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
24012 CALLE DE LA PLATA, SUITE 150, LAGUNA 92653
HILLS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
</TABLE>
(949) 699-4344
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
Included as Exhibit 99.1 hereto is Antelope Valley Bank's Annual Report on
Form 10-KSB for the year ended December 31, 1997 as filed with the Federal
Deposit Insurance Corporation. Included as Exhibit 99.2 hereto is Antelope
Valley Bank's Interim Report on Form 10-QSB for the quarter ended June 30, 1998
as filed with the Federal Deposit Insurance Corporation.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
99.1 Antelope Valley Bank's Annual Report on Form 10-KSB for the year ended December 31,
1997 as filed with the Federal Deposit Insurance Corporation
99.2 Antelope Valley Bank's Interim Report on Form 10-QSB for the quarter ended June 30,
1998 as filed with the Federal Deposit Insurance Corporation
</TABLE>
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EXHIBIT INDEX
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<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
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<S> <C> <C>
99.1 Antelope Valley Bank's Annual Report on Form 10-KSB for the year ended
December 31, 1997 as filed with the Federal Deposit Insurance Corporation.... 5
99.2 Antelope Valley Bank's Interim Report on Form 10-QSB for the quarter ended
June 30, 1998 as filed with the Federal Deposit Insurance Corporation........ 58
</TABLE>
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELDORADO BANCSHARES, INC.
October 13, 1998 By: /s/ CURT A. CHRISTIANSSEN
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Curt A. Christianssen
Senior Vice President
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EXHIBIT 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20006
FORM 10-KSB/A
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<S> <C>
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the transition period from ------- to -------
Commission File Number: n/a
</TABLE>
ANTELOPE VALLEY BANK
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3463755
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
831 WEST LANCASTER BLVD., LANCASTER, 93534
CALIFORNIA
(Address of principal executive offices) Zip Code
</TABLE>
Registrant's telephone number, including area code: (805) 945-4511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 bank
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-B 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-KSB ir any amendment to this Form
10-KSB. /X/
The registrant's revenues for its most recent fiscal year were $17,589,000.
As of February 28, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $18,534,905 (As quoted by
Sutro Co., Inc. at $35.50 Per share).
Shares of Common Stock held by each officer and director and each person
owning more than five percent of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of the
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of Common Stock of the registrant outstanding as of
February 28, 1998 was 767,342.
Documents Incorporated by Reference: Portions of the definitive proxy
staement for the 1998 Annual Meeting of Shareholders to be filed with the
Federal Deposit Insurance Corporation pursuant to SEC Regulation 14A are
incorporated by reference in Part III, Items 9-12.
Transitional Small Business Disclosure Format: Yes / / No /X/
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ANTELOPE VALLEY BANK
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1 Business.................................................................. 3
Item 2. Properties................................................................ 10
Item 3. Legal Proceedings......................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders....................... 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.................. 12
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................. 14
Item 7. Financial Statements and Supplementary Data............................... 30
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(1) of the Exchange Act.................................... 31
Item 10. Executive Compensation.................................................... 31
Item 11. Stock Ownership by Certain Beneficial Owners and Management............... 31
Item 12. Certain Relationships and Related Transactions............................ 31
Item 13. Exhibits and Reports on Form 8-K.......................................... 31
INDEX TO EXHIBITS..................................................................... 32
</TABLE>
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PART I
ITEM 1. BUSINESS
The Bank was incorporated as a state chartered bank on February 8, 1980, and
opened as a full service commercial bank on February 2, 1981. The Bank is not a
member of the Federal Reserve System; it is a member of the Federal Deposit
Insurance Corporation and its deposits are insured up to the legal maximum by
that entity. The Bank's business plan targeted the commercial and retail
accounts of small to medium sized businesses, professionals, and executives.
RETAIL BANKING SERVICES
The Bank offers a full line of retail deposit accounts that include
noninterest earning Demand Deposit Accounts (DDA) and interest earning NOW
Accounts, Savings Accounts, Insured Money Market Accounts (IMMAs), Custodial
Individual Retirement Accounts (IRAs) and Certificate of Deposit Accounts (CDS).
Retail loan products include auto loans, personal lines of credit, VISA
credit card, overdraft protection, equity lines of credit and personal loans.
Residential construction and real estate loans are also available.
The Bank also offers numerous other retail products and services. For more
than ten years the Bank has had in place an automated system that allows
customers to access account information 24 hours a day, seven days a week, by
telephone. Automated Teller Machines (ATMs) are in place at all branch locations
in addition to five off premise sites throughout the community. Other services
offered are, safe deposit box rental, wire transfer, night depository contract
collection and telephone transfer services.
BUSINESS BANKING SERVICES
The Bank offers a full line of business deposit accounts that include
noninterest earning Demand Deposit Accounts (DDA) and interest earning NOW
Accounts, Savings Accounts, Insured Money Market Accounts (IMMAs), Custodial
Individual Retirement Accounts (IRAs) and Certificate of Deposit Accounts (CDS).
Business loan products include commercial and industrial loans which are
generally made for the purpose of providing working capital, financing the
purchase of equipment or inventory and for other business purposes. Standby
Letters of credit, revolving and nonrevolving lines of credit and accounts
receivable financing are also available. The Bank became active in SBA loans in
1992 and in 1996, the Bank obtained Certified Lender status from the Small
Business Administration (SBA).
Other business banking products and services include VISA/MasterCard
Merchant processing, acceptance of federal tax deposits, check verification
through the automated account information system and all of the services listed
under Retail Banking Services that would apply to business. In addition, the
Bank offers a PC software product called Powerline that obtains account
information from the Bank's mainframe computer. The software then provides for
account reconciliation along with other accounting services that apply to the
business checking account.
In March 1996, the Bank sold its Data Processing Center to a newly formed
corporation, BancData Solutions, Inc. The Bank is an investor along with five
other Southern California financial institutions. The Bank, along with eight
other financial institutions, is being serviced by BancData Solutions, Inc.
In June 1996, a 50% Stock Dividend was issued with a resulting 767,342
shares outstanding.
On February 14, 1997, the Bank has acquired the deposits, all real property
and fixed assets of three branches of Wells Fargo Bank. These branches are
located in Frazier Park, Rosamond and Wrightwood, California.
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COMPETITION
The banking business in California generally, and specifically in the Bank's
market area, is highly competitive with respect to virtually all products and
services and has become increasingly so in recent years. The industry continues
to consolidate and strong, unregulated competitors have entered banking markets
with focused products targeted at highly profitable customer segments. Many
largely unregulated competitors are able to compete across geographic boundaries
and provide customers increasing access to meaningful alternatives to banking
services in nearly all significant products. These competitive trends are likely
to continue.
With respect to commercial bank competitors, the business is largely
dominated by a relatively small number of major banks with many offices
operating over a wide geographical area, which banks have, among other
advantages, the ability to finance wide-ranging and effective advertising
campaigns and to allocate their investment resources to regions of highest yield
and demand. Many of the major banks operating in the area offer certain services
which the Bank does not offer directly (but some of which the Bank offers
through correspondent institutions). By virtue of their greater total
capitalization, such banks also have substantially higher lending limits than
does the Bank.(1)
In addition to other banks, competitors include savings institutions, credit
unions, and numerous non-banking institutions, such as finance companies,
leasing companies, insurance companies, brokerage firms, and investment banking
firms. In recent years, increased competition has also developed from
specialized finance and non-finance companies that offer wholesale finance,
credit card, and other consumer finance services, including on-line banking
services and personal finance software. Strong competition for deposit and loan
products affects the rates of those products as well as the terms on which they
are offered to customers. Mergers between financial institutions have placed
additional pressure on banks within the industry to streamline their operations,
reduce expenses, and increase revenues to remain competitive. Competition has
also intensified due to recently enacted federal and state interstate banking
laws, which permit banking organizations to expand geographically, and the
California market has been particularly attractive to out-of-state institutions.
Technological innovation has also resulted in increased competition in
financial services markets. Such innovation has, for example, made it possible
for non-depository institutions to offer customers automated transfer payment
services that previously have been considered traditional banking products. In
addition, many customers now expect a choice of several delivery systems and
channels, including telephone, mail, home computer, ATMs, self-service branches,
and/or in-store branches. In addition to other banks, the sources of competition
for such products include savings associations, credit unions, brokerage firms,
money market and other mutual funds, asset management groups, finance and
insurance companies, and mortgage banking firms.
In order to compete effectively, the Bank relies principally upon the
stability and knowledge of the officers and directors, founders, employees and
shareholders, and innovative services. The fact that the Bank is locally
headquartered and essentially locally owned is important to its customer base.
For customers whose loan demands exceed the Bank's lending limits, the Bank
assists to arrange such loans on a participation basis with its correspondent
banks. The Bank also assists customers requiring services not offered by the
Bank to obtain those services from its correspondent banks or other service
organizations.
EMPLOYEES
As of December 31, 1997, the Bank had 154 full-time equivalent employees.
The Bank's management believes that its employee relations are satisfactory.
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(1) Legal lending limits to each customer are restricted to a percentage of
the Bank's total stockholders' equity, the exact percentage depending upon
the nature of the loan transaction.
4
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SUPERVISION AND REGULATION
GENERAL
The following discussion of statutes and regulations affecting banks is only
a summary and does not purport to be complete. This discussion is qualified in
its entirety by reference to such statutes and regulations. No assurance can be
given that such statutes or regulations will not change in the future.
As a California state-chartered bank whose accounts are insured by the FDIC
up to a maximum of $100,000 per depositor, the Bank is subject to regulation,
supervision and regular examination by the California Department of Financial
Institutions (the "Department") and the Federal Deposit Insurance Corporation
(the "FDIC"). In addition, while the Bank is not a member of the Federal Reserve
System, it is subject to certain regulations of the Board of Governors of the
Federal Reserve System (the "FRB"). The regulations of these agencies govern
most aspects of the Bank's business, including the making of periodic reports by
the Bank, and the Bank's activities relating to dividends, investments, loans,
borrowings, capital requirements, certain check-clearing activities, branching,
mergers and acquisitions, reserves against deposits and numerous other areas.
Supervision, legal action and examination of the Bank by the regulatory agencies
are generally intended to protect depositors and are not intended for the
protection of stockholders.
The earnings and growth of the Bank are largely dependent on its ability to
maintain a favorable differential or "spread" between the yield on its
interest-earning assets and the rate paid on its deposits and other
interest-bearing liabilities. As a result, the Bank's performance is influenced
by general economic conditions, both domestic and foreign, the monetary and
fiscal policies of the federal government, and the policies of the regulatory
agencies, particularly the FRB. The FRB implements national monetary policies
(such as seeking to curb inflation and combat recession) by its open-market
operations in United States Government securities, by adjusting the required
level of reserves for financial institutions subject to its reserve requirements
and by varying the discount rate applicable to borrowings by banks which are
members of the Federal Reserve System. The actions of the FRB in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and deposits. The nature and impact of any
future changes in monetary policies cannot be predicted.
CAPITAL ADEQUACY REQUIREMENTS. The Bank is subject to the regulations of
the FDIC governing capital adequacy. Those regulations incorporate both
risk-based and leverage capital requirements. Each of the federal regulators has
established risk-based and leverage capital guidelines for the banks or bank
holding companies it regulates, which set total capital requirements and define
capital in terms of "core capital elements," or Tier 1 capital; and
"supplemental capital elements," or Tier 2 capital. Tier 1 capital is generally
defined as the sum of the core capital elements less goodwill and certain other
deductions, notably the unrealized net gains or losses (after tax adjustments)
on available for sale investment securities carried at fair market value. The
following items are defined as core capital elements: (i) common stockholders'
equity; (ii) qualifying noncumulative perpetual preferred stock and related
surplus; and (iii) minority interests in the equity accounts of consolidated
subsidiaries. Supplementary capital elements include: (i) allowance for loan and
lease losses (but not more than 1.25% of an institution's risk-weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus. The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
100% of Tier 1 capital, net of goodwill.
The Bank is required to maintain a minimum ratio of qualifying total capital
to total risk-weighted assets of 8.0% ("Total Risk-Based Capital Ratio"), at
least one-half of which must be in the form of Tier 1 capital ("Tier 1
Risk-Based Capital Ratio"). Risk-based capital ratios are calculated to provide
a measure of capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets, and transactions, such as letters of credit and recourse arrangements,
which are recorded as off-balance sheet items. Under the risk-based capital
guidelines, the
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nominal dollar amounts of assets and credit-equivalent amounts of off-balance
sheet items are multiplied by one of several risk adjustment percentages, which
range from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans. As of December 31, 1997, the Bank's Total Risk-Based Capital
Ratio was 12.55% and its Tier 1 Risk-Based Capital Ratio was 11.42%.
The federal banking agencies have revised the risk-based capital standards
to take adequate account of concentrations of credit (i.e., relatively large
proportions of loans involving one borrower, industry, location, collateral or
loan type) and the risks of "non-traditional" activities (those that have not
customarily been part of the banking business). The regulations require
institutions with high or inordinate levels of risk to operate with higher
minimum capital standards, and authorize the regulators to review an
institution's management of such risks in assessing an institution's capital
adequacy.
The federal banking agencies have also revised the risk-based capital
regulations to include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a bank's capital adequacy. Interest rate
risk is the exposure of a bank's current and future earnings and equity capital
arising from adverse movements in interest rates. While interest risk is
inherent in a bank's role as financial intermediary, it introduces volatility to
bank earnings and to the economic value of the bank.
Banks are also required to maintain a leverage capital ratio designed to
supplement the risk-based capital guidelines. Banks that have received the
highest rating of the five categories used by regulators to rate banks and are
not anticipating or experiencing any significant growth must maintain a ratio of
Tier 1 capital (net of all intangibles) to adjusted total assets ("Leverage
Capital Ratio") of at least 3.0%. All other institutions are required to
maintain a leverage ratio of at least 100 to 200 basis points above the 3.0%
minimum, for a minimum of 4.0% to 5.0%. Pursuant to federal regulations, banks
must maintain capital levels commensurate with the level of risk to which they
are exposed, including the volume and severity of problem loans, and federal
regulators may, however, set higher capital requirements when a bank's
particular circumstances warrant. As of December 31, 1997, the Bank's Leverage
Capital Ratio was 8.35%.
PROMPT CORRECTIVE ACTION PROVISIONS. Federal law requires each federal
banking agency to take prompt corrective action to resolve the problems of
insured financial institutions, including but not limited to those that fall
below one or more prescribed minimum capital ratios. The federal banking
agencies have by regulation defined the following five capital categories: "well
capitalized" (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital
Ratio of 6%; and Leverage Ratio of 5%); "adequately capitalized" (Total
Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and
Leverage Ratio of 4%); "undercapitalized" (Total Risk-Based Capital Ratio of
less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio
of less than 4%) (or 3% if the institution receives the highest rating from its
primary regulator); "significantly undercapitalized" (Total Risk-Based Capital
Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or
Leverage Ratio less than 3%); and "critically undercapitalized" (tangible equity
to total assets less than 2%). A bank may be treated as though it were in the
next lower capital category if after notice and the opportunity for a hearing,
the appropriate federal agency finds an unsafe or unsound condition or practice
so warrants, but no bank may be treated as "critically undercapitalized" unless
its actual capital ratio warrants such treatment.
At each successively lower capital category, an insured bank is subject to
increased restrictions on its operations. For example, a bank is generally
prohibited from paying management fees to any controlling persons or from making
capital distributions if to do so would make the bank "undercapitalized". Asset
growth and branching restrictions apply to undercapitalized banks, which are
required to submit written capital restoration plans meeting specified
requirements (including a guarantee by the parent holding company, if any).
"Significantly undercapitalized" banks are subject to broad regulatory
authority, including among other things, capital directives, forced mergers,
restrictions on the rates of interest they may pay on deposits, restrictions on
asset growth and activities, and prohibitions on paying certain bonuses without
FDIC approval. Even more severe restrictions apply to critically
undercapitalized banks. Most importantly,
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except under limited circumstances, not later than 90 days after an insured bank
becomes critically undercapitalized, the appropriate federal banking agency is
required to appoint a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action provisions,
insured banks may be subject to potential actions by the federal regulators for
unsafe or unsound practices in conducting their businesses or for violations of
any law, rule, regulation or any condition imposed in writing by the agency or
any written agreement with the agency. Enforcement actions may include the
issuance of cease and desist orders, termination of insurance of deposits (in
the case of a bank), the imposition of civil money penalties, the issuance of
directives to increase capital, formal and informal agreements, or removal and
prohibition orders against "institution-affiliated" parties.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
final guidelines establishing safety and soundness standards for all insured
depository institutions. Those guidelines relate to internal controls,
information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the
standards are designed to assist the federal banking agencies in identifying and
addressing problems at insured depository institutions before capital becomes
impaired. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to submit a compliance plan
and institute enforcement proceedings if an acceptable compliance plan is not
submitted.
PREMIUMS FOR DEPOSIT INSURANCE. The FDIC has adopted final regulations
implementing a risk-based premium system, whereby insured depository
institutions are required to pay insurance premiums depending on their risk
classification. Under this system, institutions such as the Bank which are
insured by the Bank Insurance Fund ("BIF"), are categorized into one of three
capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three supervisory categories based on federal
regulatory evaluations. The three supervisory categories are: financially sound
with only a few minor weaknesses (Group A), demonstrates weaknesses that could
result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C). The capital ratios used by the FDIC to define
well capitalized, adequately capitalized and undercapitalized are the same in
the FDIC's prompt corrective action regulations. The current BIF assessment
rates are summarized below.
Assessment Rates Effective January 1, 1998(1)
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP C
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<S> <C> <C> <C>
Well Capitalized................................................................... $ 0.00(1) $ 0.03 $ 0.17
Adequately Capitalized............................................................. 0.03 0.10 0.24
Undercapitalized................................................................... $ 0.10 $ 0.24 $ 0.27
</TABLE>
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(1) Subject to statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications).
Assessment figures are expressed in terms of costs per $100 in deposits.
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COMMUNITY REINVESTMENT ACT. The Bank is subject to certain requirements and
reporting obligations involving Community Reinvestment Act ("CRA") activities.
The CRA generally requires the federal banking agencies to evaluate the record
of a financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods. The CRA further requires the
agencies to take a financial institution's record of meeting its community
credit needs into account when evaluating applications for, among other things,
domestic branches, consummating mergers or acquisitions, or holding company
formations. In measuring a bank's compliance with its CRA obligations, the
regulators now utilize a performance-based evaluation system which bases CRA
ratings on the bank's actual lending service and investment performance, rather
than on the extent to which the institution conducts needs assessments,
documents community outreach activities or complies with other procedural
requirements. In connection with its assessment of CRA performance, the FDIC
assigns a rating of "outstanding," "satisfactory," "needs to improve" or
"substantial noncompliance." The Bank was last examined for CRA compliance in
1996 and received a "satisfactory" CRA Assessment Rating.
OTHER CONSUMER PROTECTION LAWS AND REGULATIONS. The bank regulatory
agencies are increasingly focusing attention on compliance with consumer
protection laws and regulations. Examination and enforcement has become intense,
and banks have been advised to carefully monitor compliance with various
consumer protection laws and their implementing regulations. The federal
Interagency Task Force on Fair Lending issued a policy statement on
discrimination in home mortgage lending describing three methods that federal
agencies will use to prove discrimination: overt evidence of discrimination,
evidence of disparate treatment, and evidence of disparate impact. In addition
to CRA and fair lending requirements, the Bank is subject to numerous other
federal consumer protection statutes and regulations. Due to heightened
regulatory concern related to compliance with consumer protection laws and
regulations generally, the Bank may incur additional compliance costs or be
required to expend additional funds for investments in the local communities it
serves.
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act") regulates the
interstate activities of banks and bank holding companies and establishes a
framework for nationwide interstate banking and branching. Since June 1, 1997, a
bank in one state has generally been permitted to merge with a bank in another
state without the need for explicit state law authorization. However, states
were given the ability to prohibit interstate mergers with banks in their own
state by "opting-out" (enacting state legislation applying equality to all
out-of-state banks prohibiting such mergers ) prior to June 1, 1997. Limited
interstate bank mergers were permitted prior to June 1, 1997 provided the
applicable states' laws met certain requirements.
Since 1995, adequately capitalized and managed bank holding companies have
been permitted to acquire banks located in any state, subject to two exceptions:
first, any state may still prohibit bank holding companies from acquiring a bank
which is less than five years old; and second, no interstate acquisition can be
consummated by a bank holding company if the acquiror would control more then
10% of the deposits held by insured depository institutions nationwide or 30%
percent or more of the deposits held by insured depository institutions in any
state in which the target bank has branches.
A bank may establish and operate DE NOVO branches in any state in which the
bank does not maintain a branch if that state has enacted legislation to
expressly permit all out-of-state banks to establish branches in that state.
Among other things, the Interstate Banking Act amended the Community
Reinvestment Act to require that in the event a bank has interstate branches,
the appropriate federal banking regulatory agency must prepare for such
institution a written evaluation of (i) the bank's record of performance; and
(ii) the bank's performance in each applicable state. Interstate branches are
now prohibited from being used as deposit production offices, and foreign banks
will be permitted to establish branches in any state other than its home state
to the same extent that a bank chartered by the foreign bank's home state may
establish such branches.
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The Caldera, Weggeland, and Killea California Interstate Banking and
Branching Act of 1995 (the "Caldera Weggeland Act") was designed among other
things to implement important provisions of the Interstate Banking Act discussed
above and to repeal California's previous interstate banking laws, which were
largely preempted by the Interstate Banking Act. (Prior California law
prohibited, among other things, an out-of-state bank holding company from
establishing a DE NOVO California bank except for the purpose of taking over the
deposits of a closed bank. This restriction has been eliminated.)
As indicated above, the Interstate Banking Act generally permits a bank in
one state to merge with a bank in another state without the need for explicit
state law authorization. However, the Caldera Weggeland Act expressly prohibits
a foreign (other state) bank which does not already have a California branch
office from (i) purchasing a branch office of a California bank (as opposed to
the entire bank) and thereby establishing a California branch office or (ii)
establishing a California branch office on a DE NOVO basis.
The Interstate Banking Act also requires, among other things, approval of
the state bank supervisor of the target bank's home state for interstate
acquisitions of banks by bank holding companies. The Caldera Weggeland Act
authorizes the California Commissioner of Financial Institutions (the
"Commissioner") to approve such an interstate acquisition if the Commissioner
finds that the transaction is consistent with certain criteria specified by law.
The changes effected by Interstate Banking Act and Caldera Weggeland Act are
expected to increase competition in the environment in which the Bank operates
to the extent that out-of-state financial institutions directly or indirectly
enter the Bank's market areas. It appears that the Interstate Banking Act has
contributed to the accelerated consolidation of the banking industry in that a
number of the largest bank holding companies are expanding into different parts
of the country that were previously restricted. While many large, out-of-state
banks have already entered the California market as a result of this
legislation, it is not possible to predict the precise impact of this
legislation on the Bank and the competitive environment in which it operates.
OTHER PENDING AND PROPOSED LEGISLATION. Other legislative and regulatory
initiatives which could affect the Bank and the banking industry in general are
pending, and additional initiatives may be proposed or introduced, before the
United States Congress, the California legislature and other governmental bodies
in the future. For example, consumer legislation has been proposed in Congress
which would require banks to offer basic, low-cost financial services to meet
minimum customer needs. Other legislation has been proposed which would reform
the Glass-Steagall Act and the Bank Holding Company Act, which restrict banks'
and bank holding companies' ability to engage in certain activities, including
the underwriting of and dealing in various securities. The latter proposal would
significantly change the makeup of the financial services industry, expand the
ability of banks and bank holding companies to offer a broader range of
financial products, and provide the opportunity for additional competitors to be
able to enter the financial services market in ways that are not currently
permissible. Such proposals, if enacted, may further alter the structure,
regulation and competitive relationship among financial institutions, and may
subject the Bank to increased regulation, disclosure and reporting requirements.
In addition, the various banking regulatory agencies often adopt new rules and
regulations to implement and enforce existing legislation. It cannot be
predicted whether, or in what form, any such legislation or regulations may be
enacted or the extent to which the business of the Bank would be affected
thereby.
9
<PAGE>
ITEM 2. PROPERTIES
The Bank's Corporate Office is located at 831 West Lancaster Blvd,
Lancaster, California. This location was purchased from the RTC in June 1994 and
the Corporate Office relocated to this site in September 1994. The Bank was able
to negotiate a buy-out of the previous lease that made the move cost effective.
In April 1995, the Bank sold the facility at 44288 10th Street West and
relocated the Lancaster Main Office (the Head Office) to the Corporate Office
location. That property was located on a land lease (ending date December 31,
2006) which was assigned to the purchaser of the building. The newly acquired
premises consists of approximately 21,750 square feet in a two story, single
purpose building. Included in the purchase price were two separate pieces of
property which consist of finished parking lots. This property is located less
than 1 mile from the previous leased space. This property is unencumbered.
The Palmdale Office is located at 1667 East Palmdale Boulevard, Palmdale,
California. The approximately 5,600 square foot building is owned by the Bank
and is on Bank owned land. The facility has one drive up ATM and two additional
drive up teller lanes. It is located in a small shopping center along the
primary business street. The center is named for the Bank, the Bank being the
primary tenant. This property is unencumbered.
The Acton Office is located at 31924 Crown Valley Road, Acton, California.
The Bank is approximately 1,500 square feet in a stand alone one story building
in the main business area of the town. There is one ATM but no drive up teller
windows. The premise lease expires March 31, 1998 and has one remaining five
year option to renew. Total lease payments for the year 1996 approximated
$30,300.
The Rosamond Office was relocated from 2718 Sierra Highway, to 2535 Rosamond
Blvd.,Rosamond, California in October 1993. It went from the 400 square feet
inside a family owned market to an 1,800 square foot store front location in a
strip mall. The Bank exercised its renewal option in October 1996 and extended
the lease for a 3 year period. There are no additional options. The new location
is a full service branch with an ATM. The amount paid on the lease for 1996 was
approximately $31,300. With the acquisition of a Wells Fargo Bank, N.A. branch
located within 3 miles of this location, the Bank will be looking to consolidate
both locations at a new site in Rosamond that is yet to be determined.
The Lake Los Angeles branch is located at 40124 170th Street East in Lake
Los Angeles, California. The branch has approximately 4,000 square feet with a
single drive-up lane. The facility is a modular building owned by the Bank on
leased land. This building is unencumbered. In January 1996, the Bank exercised
its option to renew for a five year period. The amount paid on the lease for
1996 was approximately $6,700.
On February 14, 1997, the Bank closed a transaction for the purchase of
three branches of Wells Fargo Bank, N.A. These branches are as follows:
1. The Rosamond branch is located at 2660 Diamond Street, Rosamond,
California. The Bank has purchased the land, building and fixed asset
contents for the net book value price of approximately $133,000. This 1,700
square foot facility has the capability for a single lane drive-up, ATM and
is a full service branch. Since the Bank already has a location in the
relatively small town of Rosamond, a combination of the two branches is
being considered for later in 1997 or early 1998. This property is
unencumbered.
2. The Frazier Park branch is located at 3150 San Carlos Trail, Frazier
Park, California. The Bank has purchased the land, building and fixed asset
contents for the net book value of approximately $256,000. This 4,000 square
foot facility has a single lane drive-up, ATM and is a full service branch.
This property is unencumbered.
3. The Wrightwood branch is located at 6074 Park Drive, Wrightwood,
California. The Bank has purchased the building and fixed asset contents for
the net book value of approximately $109,000. This building is unencumbered.
The building has an ATM and is on leased land, said lease to expire in
10
<PAGE>
April 1999. The amortization of the building is scheduled to the lease
expiration. The Landlord initiated discussions regarding the Bank's purchase
of this land. The Bank did purchase the land in September 1997 for $145,000.
This property is unencumbered.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by counsel to the Bank as to the current status of these
claims or proceedings to which the Bank is a party, management is of the opinion
that the ultimate aggregate liability represented thereby, if any, will not have
a material adverse effect on the financial condition of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Bank's Common Stock is traded in the over-the-counter market, but is not
included for quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), nor is it listed on any exchange. Trading
in the Common Stock of the Bank has been limited since the Bank commenced
operations in 1981 and such trading cannot be characterized as amounting to an
active trading market. Management is aware of the following securities dealers
which make a market in the Bank's stock:
<TABLE>
<S> <C>
Sutro and Company, Inc.
P. O. Box 1688
Big Bear Lake, Ca.,
92315 Ph: (800)
288-2811
Albertson and Associates
Sentra Securities
828 West Lancaster Blvd.
Lancaster, Ca. 93534 Ph: (805)
948-8545
Hoefer & Arnett
100 Pine Street, 4th
Floor
San Francisco, Ca. 94111 Ph. (415)
362-7111
</TABLE>
TWO YEAR SUMMARY OF COMMON STOCK PRICES
(OBTAINED FROM SUTRO AND COMPANY, INC)
<TABLE>
<CAPTION>
SALES PRICE
--------------------
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1997
First Quarter.................................................................................. $ 35.50 $ 34.00
Second Quarter................................................................................. 37.25 35.00
Third Quarter.................................................................................. 36.00 34.12
Fourth Quarter................................................................................. 36.00 34.38
<CAPTION>
SALES PRICE
--------------------
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1996
First Quarter.................................................................................. $ 32.75 $ 32.75
Second Quarter................................................................................. 36.25 24.50
Third Quarter.................................................................................. 27.50 26.13
Fourth Quarter................................................................................. 31.50 30.00
</TABLE>
12
<PAGE>
(B) HOLDERS
On February 28, 1998, there were approximately 433 Stockholders of record of
the Common Stock.
(C) DIVIDENDS
The Bank's dividend practices depend upon the Bank's earnings, financial
condition, current and anticipated cash requirements and other factors deemed
relevant by the Board of Directors at the time.
Dividends of $.25 per share were declared and paid in the years 1988 and
1989. Two dividends of $.25 each were declared and paid in 1990. There were no
dividends paid in 1991, 1992 or 1993. A 2% Stock Dividend and a 2% Cash dividend
was declared and paid in 1994. A 50% Stock Dividend was declared and paid in
June 1996.
Under California law, the Bank may declare a cash dividend out of the Bank's
net profits up to the lesser of the Bank's retained earnings or the Bank's net
income for the last three (3) fiscal years (less any distributions made to
stockholders during such period), or, with the prior written approval of the
Commissioner, in an amount not exceeding the greatest of (i) the retained
earnings of the Bank, (ii) the net income of the Bank for its last fiscal year,
or (iii) the net income of the Bank for its current fiscal year. The payment of
any cash dividends by the Bank will depend not only upon the Bank's earnings
during a specified period, but also on the Bank meeting certain capital
requirements. (See "Item 1--Business-- Regulation and Supervision--Capital
Adequacy Requirements" herein.)
13
<PAGE>
ANTELOPE VALLEY BANK
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is designed to provide a better understanding of the significant
changes and trends related to the Bank's financial condition, including
liquidity and capital resources, and the results of operations. The discussion
should be read in conjunction with the Financial Statements of the Bank and
Notes contained thereto and "SELECTED FINANCIAL DATA" included elsewhere herein.
SUMMARY OF PERFORMANCE
The Bank's net income for the year ended December 31, 1997 was $1,920,000 or
$2.50 per share, compared to net income of $2,094,000, or $2.73 per share, and
$1,650,000 or $2.15 per share, for the same periods in 1996 and 1995,
respectively. The increase in 1996 and subsequent decrease in net income for
1997 was primarily a result the net gain booked in 1996 from the sale of the
Bank's Data Processing Center. The provision for possible credit losses for the
year ended December 31, 1997 was $1,054,000 compared to $700,000 and $1,040,000
for the same periods in 1996 and 1995, respectively. Noninterest income for 1997
was $4,225,000 compared to $4,517,000 and $4,109,000 for 1996 and 1995,
respectively. Noninterest income for 1996 reflects an approximate gross gain of
$600,000 on the sale of the Bank's Data Processing Center. Noninterest expense
for 1997 was $10,712,000 compared to $8,659,000 and $8,851,000 for 1996 and
1995, respectively. The increase in 1997 reflects out-of-pocket and ongoing
expense associated with the acquisition of three Wells Fargo Bank branch offices
and a full year of servicing fees for data processing.
Net interest income increased in 1997 to $9,883,000 compared to $8,066,000
in 1996 and $8,152,000 in 1995. The increase in 1997 is primarily due to the
Wells Fargo branch acquisitions of approximately $33,000,000 in deposits. Of the
amount acquired, approximately 75% was non-interest bearing deposits. With these
deposits, the Bank was able to increase both the loan and investment portfolios
to generate additional interest income. The greatest increase in the loan
portfolio was seen in the Indirect Auto portfolio which generally has lower
yields than other categories of loans. The demand for this type of loan was
greater than other loan types throughout the year. The yield on average earning
assets decreased 48 basis points for 1997, while the cost of average interest
bearing liabilities decreased by only 10 basis points.
Noninterest income for the year ended December 31, 1997 was $4,225,000, as
compared to $4,517,000 for the year ended December 31, 1996, a decrease of
$292,000 or 6.46%. That decrease was caused primarily by the fact that "Other"
income for 1996 included $600,000 gain on the sale of the data processing center
and $239,000 in servicing revenue, resulting in a decrease in that category from
1996 to 1997 of $916,000, but was offset by $663,000 in increased service charge
revenue for 1997 as a result of the branch acquisition and growth in general.
Noninterest income for the year ended December 31, 1996 was $4,517,000 as
compared to $4,109,000 for the year ended December 31, 1995, an increase of
$408,000 or 9.93%. As stated above, 1996 reflects the gain on sale of the data
processing center, however, it only reflects four months of servicing income
compared to twelve months in 1995.
Noninterest expense for the year ended December 31, 1997 was $10,712,000,
which represented an increase of $2,053,000 or 23.71% from the year ended
December 31, 1996. This increase was a result of (1) overall growth within the
bank, including the acquisition of the three branch offices, as it relates to
salary and related expense ($658,000) and (2) a full year of data processing and
other ongoing expense ($1,392,000) that included bank wide growth of almost 29%.
Noninterest expense decreased to $8,659,000 in 1996 from $8,851,000 in 1995, a
decrease of $192,000 or 2.17%. That decrease was the result of reduced overhead
as a result of the sale of the data processing center in 1996. (See
"MANAGEMENT'S
14
<PAGE>
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
RESULTS OF OPERATIONS--NONINTEREST INCOME", herein.)
Total assets of the Bank were $189,659,000 at December 31, 1997 as compared
to $147,210,000 at December 31, 1996, an increase of $42,449,000 or 28.8%. Total
assets increased $16,040,000 or 12.2% for December 31, 1996 from $131,160,000
for December 31, 1995. The reason for the significant increase in total assets
for 1997 was the result of continued consolidation of major banks and the Bank's
acquisition of three Wells Fargo branch offices with approximately $33,000,000
in deposits. Major bank customers continued to seek alternative financial
institutions with whom to establish relationships. Many of these customers had
been with a previous community bank that First Interstate Bank acquired several
years ago and seemed to be unwilling to go through yet another conversion. It
has been our experience that they decided instead to change their banking
relationships.
Total net loans were $116,127,000 at December 31, 1997 as compared to
$93,734,000 at December 31, 1996, an increase of $22,393,000 or 23.9%. Total net
loans increased to $93,734,000 at December 31, 1996 from $85,386,000 at December
31, 1995. While the increase in net loans in 1997 as compared to 1996 was
largely a result of increased marketing efforts for Indirect Auto loans (the
demand for this type of loan was greater than that of any other loan type), all
loan categories exhibited growth for the year.
Total deposits were $167,867,000 at December 31, 1997 as compared to
$127,630,000 at December 31, 1996, an increase of $40,237,000 or 31.5%. Total
deposits increased to $127,630,000 at December 31, 1996 from $113,707,000 at
December 31, 1995. The increase in deposits in 1997 was primarily due to the
acquisition of the three Wells Fargo branches with $33,000,000 in deposits. The
remainder of the growth is a continued result of major bank consolidation and a
better economic environment for the primary market area of the Bank.
Stockholders' equity increased to $19,680,000 at December 31, 1997 as
compared to $17,723,000 at December 31, 1996, an increase of $1,957,000 or
11.0%. That increase was due to the Bank's net income in 1997 of $1,920,000,
plus $37,000 net increase in unrealized gain on securities available for sale.
Stockholders' equity increased to $17,723,000 at December 31, 1996 from
$15,899,000 at December 31, 1995, an increase of $1,824,000 or 11.5%. That
increase was the result of net income of $2,094,000 and decrease of $267,000 in
net unrealized gain on securities available for sale and $3,000 paid in
fractional shares of a 50% stock dividend distributed in June 1996.(See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--FINANCIAL CONDITION-- SECURITIES AND CERTIFICATES OF DEPOSITS",
herein.) At December 31, 1997, the Bank's Leverage Capital Ratio, Tier 1
Risk-Based Capital Ratio and Total Risk-Based Capital Ratio were 8.35%, 11.42%
and 12.55%, respectively.
FINANCIAL CONDITION
LOAN PORTFOLIO
The Bank's commercial loans are made for the purpose of providing working
capital, financing the purchase of equipment or for other business purposes.
Such loans include loans with maturities ranging from 30 days to one year and
"term loans," which are loans with maturities normally ranging from one to five
years. Short-term business loans are generally intended to finance current
transactions and typically provide for periodic principal payments, with
interest payable monthly. Term loans normally provide for floating interest
rates, with monthly payments of both principal and interest. Included in
commercial loans are business loans secured by commercial real property and
single family residences.
The Bank's real estate loans include interim construction loans made to
finance the building of single-family residential property, which, typically,
have short maturities. These residential construction loans are customarily
"pre-sold" but there is minimal speculative activity. The Bank has generally not
required construction loan borrowers to obtain commitments for permanent
"take-out" financing as a condition to
15
<PAGE>
making the construction loan. The Bank does not make a strong market in mortgage
lending. In 1997, interim construction and mortgage loans originated amounted to
approximately $1,037,000. At December 31, 1997, mortgage loans amounting to
approximately $194,000 were being serviced for investors.
The Bank became active in originating SBA loans in 1992 and has continued
throughout the years. For 1997, the Bank originated approximately $1,355,000 of
such loans of which more than $1,049,000 is government guaranteed. The
guaranteed portion is sold in the secondary market place and is being serviced
by the Bank. Most SBA loans generated by the Bank are not real estate secured
and they have maturity terms of ten years. The SBA guarantees up to 80% of the
whole loan amount.
Consumer loans are made for the purpose of financing automobiles, various
types of consumer goods, and other personal purposes. Consumer loans generally
provide for the monthly payment of principal and interest. Most of the Bank's
consumer loans are Dealer Originated Contracts (Indirect Auto loans) secured by
the personal property being purchased. The Bank since its inception has been a
major player in its service area in this type of loan, seeking to diversify risk
over a wide number of smaller dollar volume loans. At year end 1997, 1996 and
1995, the total percentage of consumer loans as a part of the total net loan
portfolio was 64%, 60% and 55%, respectively.
Indirect Auto Loans are contracts assigned without recourse covering the
sale of new or used vehicles that the Bank purchases from Bank authorized
dealers. The purchase of all dealer originated contracts is predicated on the
following interrelated factors:
a. The buyer's ability and willingness to pay.
b. The dealer's responsibility and reputation.
c. The value of the goods purchased and the buyer's equity therein.
The retail contracts generated by the dealer are purchased on their own
merits and each transaction is treated individually according to the buyer's
credit standing, as evidenced by his ability and willingness to pay.
The Bank has retained the required expertise that allows for the portfolio
to remain a viable bank product. This type of loan generally has a term of five
years with a fixed rate. However, the average life of such auto loans is
approximately thirty months.
With certain exceptions, the Bank is permitted to make unsecured extensions
of credit to any one borrowing entity in an amount up to 15% of the Bank's
capital and reserves. Secured extensions of credit to any one borrowing entity
are permitted in an amount up to 25% of capital and reserves. At December 31,
1997, those lending limits for the Bank were $3,181,000 and $5,302,000,
respectively. The Bank sells participations in its loans when necessary to stay
within lending limits.
The Bank does not have any concentrations in its loan portfolio by industry
or group of industries, except for the Indirect Auto Loans discussed above,
which, at December 31, 1997, constituted approximately 47% of the Bank's total
loan portfolio.
At December 31, 1997, total net loans were $116,127,000 as compared to
$93,734,000 at December 31, 1995, an increase of $22,393,000 or 23.9%. The
increase for 1997 was primarily the result of continued marketing efforts toward
Indirect Auto loans and a more favorable economic environment for Commercial and
Real Estate loans. Consumer loans accounted for approximately $18,000,000 of the
increase, Real Estate loans had an increase of $2,500,000 and Commercial loans
increased by $4,200,000.
At December 31, 1996, total net loans were $93,734,000 as compared to
$85,386,000 at December 31, 1995, an increase of $8,348,000, or 9.8%. The
increase for 1996 was primarily the result of increased marketing efforts toward
Indirect Auto loans due to increased deposit activity. Consumer loans accounted
for approximately $9,200,000 of the increase, Real Estate loans had a modest
increase of approximately $700,000 and Commercial loans decreased by
approximately $400,000.
16
<PAGE>
The following table sets forth the amount of total loans outstanding in each
category as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AS OF DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Real estate:
Construction............................................. $ 715 $ 826 $ 1,836
Mortgage................................................. 14,863 12,267 10,538
Commercial and industrial.................................. 35,920 31,733 32,173
Consumer................................................... 74,264 56,362 47,141
---------- ---------- ---------
TOTAL.................................................. 125,762 101,188 91,688
LESS:
Unearned Discount.......................................... 8,206 6,152 4,943
Deferred loan fees......................................... (99) (68) (51)
Allowance for possible credit losses....................... 1,528 1,370 1,410
---------- ---------- ---------
TOTAL NET LOANS........................................ $ 116,127 $ 93,734 $ 85,386
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
At December 31, 1997, the Bank had outstanding loan commitments of $814,000
which are related to commercial and standby letters of credit and had
outstanding commitments of $7,585,000, which represents undisbursed loans. Based
upon the Bank's historical experience, the outstanding loan commitments will
remain relatively stable throughout the year.
The following table shows the amounts of total loans outstanding, at
December 31, 1997, which, based on remaining scheduled repayments of principal,
are due within one year, after five years, and in more than five years (dollars
in thousands):
<TABLE>
<CAPTION>
AFTER ONE
YEAR BUT AFTER
WITHIN WITHIN FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Real Estate:
Construction........................................................ $ 715 $ 0 $ 0 $ 715
Mortgage............................................................ 1,339 11,571 1,953 14,863
Commercial and Industrial........................................... 11,193 19,804 4,923 35,920
Consumer............................................................ 1,488 68,483 4,293 74,264
--------- ----------- --------- ----------
TOTAL............................................................... $ 14,735 $ 99,858 $ 11,169 $ 125,762
--------- ----------- --------- ----------
--------- ----------- --------- ----------
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans on nonaccrual status, loans 90
days or more past due and still accruing interest, loans restructured where the
terms of repayment have been renegotiated resulting in a deferral of interest or
principal, and other real estate owned ("OREO"). Loans are generally placed on
nonaccrual status when they become 90 days past due unless management believes
the loan is adequately collateralized and in the process of collection. Loans
may be restructured by management when a borrower has experienced some change in
financial status causing an inability to meet the original repayment terms and
where the Bank believes the borrower will eventually overcome those
circumstances and repay the loan in full. OREO consists of foreclosed properties
that Management intends to offer for sale.
At December 31, 1997, nonperforming assets totaled $1,390,000 as compared to
$3,579,000 at December 31, 1996, a decrease of $2,189,000 or 61.2%. That
decrease was in spite of an increase in
17
<PAGE>
nonaccrual loans of $377,000, from $83,000 at December 31, 1996 to $461,000 at
December 31, 1997 (this increase was due to one particular commercial loan); and
resulted primarily from a decrease in OREO of $1,681,000, from $1,701,000 at
December 31, 1996 to $20,000 at December 31, 1997 (primarily due to the sale of
one commercial office building); in addition, loans 90 days or more past due and
still accruing decreased by $47,000, or 9.8%, from $480,000 at December 31, 1996
to $433,000 at of December 31, 1997; and restructured loans decreased by
$828,000, or 63.5%, from $1,304,000 at December 31, 1996 to $476,000 at December
31, 1997 (due to newly obtained collateral combined with a significant pay down
on one account relationship).
At December 31, 1996, nonperforming assets totaled $3,579,000 as compared to
$2,939,000 at December 31, 1995, an increase of $640,000 or 21.8%.That increase
was attributable primarily to the increase in restructured loans of $845,000, or
184.1%, from $459,000 at December 31, 1995 to $1,304,000 at December 31, 1996,
was largely the result of one account relationship which subsequently improved
in 1997 as discussed in the preceding paragraph; an increase in loans 90 days or
more past due and still accruing of $179,000 or 57.5% (the net result of one
real estate secured relationship that has since been placed on nonaccrual), from
$311,000 at December 31, 1995 to $490,000 at December 31, 1996; and a decrease
in Other Real Estate Owned of $369,000 or 17.8% from $2,070,000 at December 31,
1995 to $1,701,000 at December 31, 1996.
At December 31, 1997, the OREO held by the Bank consisted of two pieces of
raw land which appear on the Bank's balance sheet for $20,000. Each property was
written down to its fair market value at the time it was foreclosed. The Bank is
currently marketing all of such properties for sale. Management believes that
the foreclosed properties will ultimately be sold at prices sufficient to
recover all or most of the values at which they are currently being carried on
the Bank's books. However, until each of those properties is actually sold, it
is impossible to conclusively predict whether such prices will actually be
obtainable due to changing market conditions.
18
<PAGE>
The table on the following page provides information with respect to the
components of the Bank's nonperforming assets as of the dates indicated (dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Nonaccrual loans(1):
Real Estate..................................................... $ 48 $ 0 $ 0
Commercial and industrial....................................... 297 6 80
Consumer........................................................ 116 78 19
--------- --------- ---------
Total......................................................... $ 461 $ 84 $ 99
Loans 90 days or more past due and still accruing
(as to principal or interest):
Real Estate Loans............................................... $ 77 $ 253 $ 48
Commercial and industrial....................................... 332 237 263
Consumer........................................................ 24 0 0
--------- --------- ---------
Total........................................................... $ 433 $ 490 $ 311
Restructured loans(2)(3):
Real Estate..................................................... 187 397 48
Commercial and industrial....................................... 289 907 411
--------- --------- ---------
Total........................................................... $ 476 $ 1,304 $ 459
Other real estate owned......................................... 20 1,701 2,070
--------- --------- ---------
Total nonperforming assets...................................... $ 1,390(4) $ 3,579 $ 2,939
--------- --------- ---------
--------- --------- ---------
Nonperforming loans as a percentage of total gross loans........ 1.11% 3.54% 3.21%
Nonperforming assets as a percentage of total gross loans and
other real estate owned....................................... 1.11% 3.48% 3.13%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) During the periods ended December 31, 1997 and 1996, no interest income
related to these loans was included in net income.
(2) A "restructured loan" is one where the terms of which were renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
(3) During the periods ended December 31, 1997 and 1996, approximately $86,000
and $110,000, respectively, of interest income related to these loans was
included in net income. Additional interest income of approximately $175,000
and $197,000, respectively, would have been recorded during the periods
ended December 31, 1997 and 1996 if these loans had been paid in accordance
with their original terms and had been outstanding throughout the applicable
period then ended or, if not outstanding throughout the applicable period
then ended, since origination.
(4) In addition, at December 31, 1997, the Bank had approximately $3,383,000 in
real estate and commercial loans on its "Watch" list. (All loans placed on
the Bank's Watch list are performing but are earmarked by management because
they have a reasonable likelihood of becoming nonperforming assets in the
foreseeable future.)
19
<PAGE>
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Bank maintains an allowance for possible credit losses to provide for
potential losses in its loan portfolio. Additions to the allowance are made by
charges to operating expenses in the form of a provision for credit losses. All
loans which are judged to be uncollectible are charged against the allowance
while any recoveries are credited to the allowance. Management conducts a
critical evaluation of the loan portfolio quarterly. That evaluation includes an
assessment of the following factors: past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
The allowance for credit losses is maintained at a level determined by
Management to be adequate, based on the past performance of loans in the Bank's
portfolio, evaluation of collateral for such loans, the prospects or worth of
the prospective borrowers or guarantors, and such other factors which, in the
Bank's judgement, deserve consideration in the estimation of potential loan
losses, including regulatory classification, classification assigned by the
Bank's independent loan review consultant, and loans determined by Management as
warranting special attention. Because these estimates and evaluations are
primarily judgmental factors, no assurance can be given that the Bank may not
sustain loan losses in excess of the size of the allowance for credit losses, or
that subsequent evaluation of the loan portfolio may not require substantial
changes in such allowance.
At December 31, 1997, Management had determined that the level of allowance
for credit losses was adequate. At December 31, 1997, the allowance for credit
losses was $1,528,000 or 1.21% of gross loans of $125,762,000. At December 31,
1996, the allowance for credit losses was $1,370,000 or 1.35% of gross loans of
$101,188,000. At December 31, 1995, the allowance for credit losses was
$1,410,000 or 1.54% of gross loans of $91,688,000.
During the past several years, the Bank's loan portfolio has increased and
charged off loans have increased by a similar, but slightly lesser, percentage.
The Bank's gross loan portfolio grew $24,574,000 or 24.3%, while loans charged
off, net of recoveries, grew by 21%. For the years ended December 31, 1997, 1996
and 1995, charge-offs exceeded recoveries by $896,000, $740,000, and $668,000,
respectively.
Although on the increase, charge-offs of commercial and real estate loans
for those periods represent losses associated with long term problem loans,
exacerbated by the relatively weak economic conditions of several years ago,
primarily related to the slowdown in business in general. Charge-offs exceeded
recoveries by $233,000 in 1996 and $470,000 in 1997. This increase of $237,000
represents loans to one particular loan customer that were charged off by the
Bank, but for which the customer continues to make regular payments. Consumer
loan charge-offs, net of recoveries, actually declined from $507,000 in 1996 to
$426,000 in 1997.
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN--INCOME RECOGNITION AND DISCLOSURES. 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 (i) the present
value of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had
no material effect on the Bank's financial condition or results of operations as
the Bank's existing policy of measuring loan impairment is consistent with the
methods prescribed in those standards.
At December 31, 1997, the carrying value of loans that are considered to be
impaired under SFAS 114 totaled $1,132,000. At December 31, 1997, the allowance
for credit losses determined in accordance with the provisions of SFAS 114
(related to loans considered to be impaired under SFAS 114) totaled $151,000.
For year end December 31, 1996, the Bank recognized $86,000 in interest income
on those impaired loans.
20
<PAGE>
The table on the following page summarizes, for the periods indicated, loan
balances at the end of each period and the daily averages during the period;
changes in the allowance for credit losses arising from loans charged off,
recoveries on loans previously charged off, and additions to the allowance which
have been charged to operating expense; and certain ratios related to the
allowance for credit losses (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES:
Average gross loans outstanding during period....... $ 107,601 $ 89,533 $ 87,814 $ 77,873 $ 75,160
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Gross loans outstanding at end of period............ $ 125,762 $ 101,188 $ 91,688 $ 91,224 $ 77,044
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
ALLOWANCE FOR CREDIT LOSSES:
Balance at beginning of period...................... $ 1,370 $ 1,410 $ 1,038 $ 924 $ 996
---------- ---------- --------- --------- ---------
Actual charge-offs:
Real Estate....................................... 129 1 89 27 55
Commercial and industrial......................... 377 258 361 494 471
Consumer.......................................... 1,159 1,011 760 751 1,080
---------- ---------- --------- --------- ---------
Total........................................... 1,665 1,270 1,210 1,272 1,606
Recoveries on loans previously charged off:
Real Estate....................................... 0 0 3 0 0
Commercial and industrial......................... 36 26 31 78 68
Consumer.......................................... 733 504 508 448 586
---------- ---------- --------- --------- ---------
Total........................................... 769 530 542 526 654
---------- ---------- --------- --------- ---------
Net loan charge-offs (recoveries)................... 896 740 668 746 952
---------- ---------- --------- --------- ---------
Provision charged to operating expense.............. 1,054 700 1,040 860 880
---------- ---------- --------- --------- ---------
Balance at end of period............................ $ 1,528 $ 1,370 $ 1,410 $ 1,038 $ 924
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
RATIOS:
Net loan charge-offs to average loans............... 0.83% 0.83% 0.76% 0.96% 1.27%
Net loan charge-offs to loans at end of period...... 0.71% 0.73% 0.73% 0.82% 1.24%
Allowance for credit losses at end of period to
average loans..................................... 1.42% 1.53% 1.61% 1.33% 1.23%
Allowance for credit losses to loans at end of
period............................................ 1.21% 1.35% 1.54% 1.14% 1.20%
Net loan charge-offs to allowance for credit losses
at end of period.................................. 58.64% 54.01% 47.38% 71.87% 103.03%
Net loan charge-offs to provision charged to
operating expense................................. 85.01% 105.71% 64.23% 86.74% 108.18%
</TABLE>
The principal risks inherent in the Bank's commercial and industrial loans
involve competition, economic conditions and the interest rate environment as
discussed above for other types of loans. More than for other types of loans,
however, the payment experience of commercial loans is directly tied to the cash
flow adequacy of the business and may be more directly affected by changing
economic conditions or specific adverse industry conditions or trends.
Consumer loan repayment is dependent upon the borrower's continuing
financial stability, and thus is more likely to be negatively affected by job
loss, divorce, personal bankruptcy or adverse economic conditions. However,
since the Bank engages primarily in consumer lending that includes
collateralization (autos) and as the amounts of each such loan are not deemed to
be "large", the risk is diversified. What
21
<PAGE>
defrays risk in this type of lending is the expertise and experience of the
staff. Controls are in place to properly obtain these loan types with strict
adherence to established underwriting guidelines.
The primary risk element with respect to commercial real estate and real
estate construction loans is fluctuation in the value of the collateral.
Realizing this risk, the Bank is well aware of market value trends within its
lending area and takes a very conservative approach to such lending. The Bank
has engaged in minimal speculative real estate lending over the years. In the
late 1980's and early 1990's, the Bank determined that it would not jump on the
"Equity Loan" bandwagon and only made minimal loans of this type. The Bank all
but discontinued "spec" construction lending in 1990. The minimal losses in the
real estate portfolio demonstrate that these decisions have proven to be of
great value in the many years of declining real estate values.
SECURITIES AND CERTIFICATES OF DEPOSITS PURCHASED
In order to maintain a reserve of readily saleable assets to meet the Bank's
liquidity and lending requirements, from time to time the Bank purchases United
States Treasury securities, obligations of federal and state agencies,
bank-qualified securities of counties and municipalities rated "A-1" or better,
and corporate bonds and commercial paper rated "A-1" or better. Purchases of
such securities, as well as sales of "federal funds" (short-term loans to other
banks) and placement of funds in certificates of deposit with other FDIC insured
financial institutions are also made as alternative investments pending
utilization of funds for loans or deposit withdrawals.
In order to achieve diversity in maturities, investments are targeted to
longer term tax-exempt municipals and short average life US Agency CMOs that
provide cash flow for loan demand. The Bank's investment portfolio is designated
as Available For Sale (AFS) which allows for flexibility in Asset/Liability
Management.
At December 31, 1997, total securities available for sale and certificates
of deposit were $38,603,000 as compared to $26,999,000 at December 31, 1996, an
increase of $11,604,000 or 43%. This increase was driven by the growth in
deposits (including the acquisition of the three Wells Fargo Branch
offices),which was not matched by corresponding growth in new loans, thus
creating additional liquidity to invest. Additional securities available for
sale and certificates of deposit were made in the tax-exempt area since the
Bank, as of January 1, 1996, was no longer in an Alternative Minimum Tax (AMT)
bracket. The other growth category was US Agency, almost exclusively in CMOs.
At December 31, 1996, total securities available for sale and certificates
of deposit were $26,999,000 as compared to $24,829,000 at December 31, 1995, an
increase of $2,170,000 or 8.7%.
On November 15, 1995, The Financial Accounting Standards Board (FASB)
released a Special Report entitled " A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities". This most
notably confirmed the one time opportunity, prior to December 31, 1995, to
reclassify securities between Held To Maturity (HTM) and Available For Sale
(AFS). AFS securities must be marked to market, reflecting the Gain or Loss in
the securities portfolio within the Capital section of the Balance Sheet.
However, regulatory changes earlier in 1995 had ruled that the Gain or Loss
would not be included in calculations for capital adequacy. Because of these
changes, the Bank reclassified all of its securities to Available For Sale in
December 1995. The adoption of FASB 115 did not have a material affect on the
operations of the Bank.
22
<PAGE>
The following tables summarize the distribution of average securities, CDS
purchased and Fed Funds Sold and the average rates earned for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
-------------------- -------------------- --------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CDS Purchased............................................ $ 2,672 5.76% $ 1,791 5.64% $ 1,139 5.88%
US Treasury.............................................. 2,793 5.97 2,605 5.92 2,028 5.75
US Agency................................................ 20,127 6.73 9,533 5.97 10,818 5.88
Municipal................................................ 13,972 5.65 8,763 6.73 7,424 7.48
Corporate Bonds.......................................... 562 7.15 2,842 7.12 1,519 8.41
Mtg Backed Sec........................................... 0 0.00 0 0.00 0 0.00
FF Sold.................................................. 8,785 5.13 8,222 5.16 6,070 5.67
--------- --------- ---------
Total investments........................................ $ 48,911 6.04% $ 33,756 6.05% $ 28,998 6.37%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table shows the amounts of total securities and certificates
of deposit outstanding (at market value), at December 31, 1997, which, based on
remaining scheduled maturities, are due within one year, after one year but
within five years, after five years but within ten years and in more than ten
years (dollars in thousands):
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN ONE WITHIN FIVE WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS TOTAL
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
CDS Purchased......................................... $ 1,962 $ 0 $ 0 $ 0 $ 1,962
US Agency............................................. 4,368 8,210 2,003 6,925 21,506
US Treasury........................................... 1,014 0 0 0 1,014
Municipal............................................. 1,406 1,875 1,455 9,385 14,121
Corporate Bonds....................................... 0 0 0 0 0
Mtg Backed Sec........................................ 0 0 0 0 0
----------- ----------- ----------- --------- ---------
Total................................................. $ 8,750 $ 10,085 $ 3,458 $ 16,310 $ 38,603
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
DEPOSITS
Deposits are the Bank's primary source of funds. At December 31, 1997, the
Bank had a deposit mix of 39.0% in time and savings deposits, 31.9% in money
market and NOW deposits, and 29.1% in noninterest-bearing demand deposits. The
Bank's net interest income is enhanced by its percentage of noninterest-bearing
deposits.
The Bank's deposits are obtained from a cross-section of the communities it
serves. No material portion of the Bank's deposits has been obtained from or is
dependent upon any one person or industry. The Bank's business is not seasonal
in nature. The Bank accepts deposits in excess of $100,000 from customers. Those
deposits are priced to remain competitive. The Bank has no brokered funds on
deposit. The Bank is not dependent upon funds from sources outside the United
States and has not made loans to any foreign entities.
At December 31, 1997, total deposits were $167,867,000 as compared to
$127,630,000 at December 31, 1996, an increase of $40,237,000 or 31.5%. That
increase resulted from an increase from December 31, 1996 to December 31, 1997
in: (i) other time deposits of $9,435,000, or 35.8%, from $26,327,000 to
$35,762,000; (ii) NOW deposits of $9,826,000, or 43.7%, from $22,475,000 to
$32,301,000; (iii) time certificates of deposit in denominations of $100,000 or
more of $132,000, or 1.4%, from $9,753,000 to
23
<PAGE>
$9,885,000; (iv) demand deposits of $12,171,000, or 33.2%, from $36,685,000 to
$48,856,000; (v) savings deposits of $4,650,000, or 30.6%, from $15,192,000 to
$19,842,000; and (vii) insured money market deposits of $4,023,000 or 23.4%,
from $17,198,000 to $21,221,000. The significant increase in deposits overall,
was due to the acquisition of three Wells Fargo Branch offices with
approximately $33,000,000 in deposits. However, there was still general growth
of approximately $7,000,000 in addition to the acquisition.
The following tables summarize the distribution of average deposits and the
average rates paid for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
--------------------- --------------------- ---------------------
BALANCE RATE BALANCE RATE BALANCE RATE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Demand:
Noninterest-bearing...................................... $ 46,162 n/a $ 34,106 n/a $ 32,750 n/a
Money market............................................. 21,657 2.32% 18,343 2.34% 18,871 2.32%
NOW...................................................... 29,364 0.98 20,199 0.94 18,993 0.94
Savings.................................................. 19,400 1.95 14,191 1.97 13,918 1.96
Time certificates of deposit of $100,000 or more......... 9,394 5.35 7,213 5.35 5,686 5.15
Other time deposits...................................... 33,870 5.34 26,360 5.53 24,750 5.06
---------- ---------- ----------
Total deposits........................................... $ 159,847 3.06% $ 120,412 3.18% $ 114,968 2.96%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The scheduled maturities of the Bank's time deposits in denominations of
$100,000 or greater as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Deposits Maturing In
Three months or less................................................. $ 5,726
Over three months through twelve months.............................. 3,136
Over twelve months................................................... 1,023
------
Total:............................................................. $ 9,885
------
------
</TABLE>
CAPITAL RESOURCES
Management seeks to maintain capital adequate to support credit risks and
anticipated asset growth and to ensure that the Bank is within established
regulatory guidelines and industry standards.
Stockholders' equity of the Bank increased to $19,680,000 at December 31,
1997 from $17,723,000 at December 31, 1996, an increase of $1,957,000 or 11.0%.
That increase is attributable to a net income of $1,920,000 and $37,000 net
increase in unrealized gain on securities Available For Sale. At December 31,
1997, the Bank's Leverage Capital Ratio was 8.4%, its Tier 1 Risk-Based Capital
Ratio was 11.4% and its Total Risk-Based Capital Ratio was 12.6%. (See "Item 1.
Business. Supervision and Regulation. Capital Adequacy" herein for exact
definitions) At December 31, 1996, such ratios were 12.2%, 16.2% and 17.4%,
respectively. The reason that these ratios materially decreased from 1996 to
1997 is the accounting for Goodwill as a result of the acquisition of the three
Wells Fargo branch offices.
24
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Bank's earnings depend largely upon the difference between the income
received from its loan portfolio and other interest-earning assets and the
interest paid on deposits. The difference is "net interest income." The net
interest income, when expressed as a percentage of average total
interest-earning assets, is referred to as the net yield on interest-earning
assets. The Bank's net interest income is affected by the change in the level
and the mix of interest-earning assets and interest-bearing liabilities,
referred to as volume changes. The Bank's net yield on interest-earning assets
is also affected by changes in the yields earned on assets and rates paid on
liabilities, referred to as rate changes. Interest rates charged on the Bank's
loans are affected principally by the demand for such loans, the supply of money
available for lending purposes and competitive factors. Those factors are, in
turn, affected by general economic conditions and other factors beyond the
Bank's control, such as federal economic policies, the general supply of money
in the economy, legislative tax policies, the governmental budgetary matters,
and the actions of the Board of Governors of the Federal Reserve System (the
"FRB").
For the year ended December 31, 1997, net interest income was $9,883,000, an
increase of $1,817,000, or 22.5%, from $8,066,000 for the year ended December
31, 1996. This increase was attributable to an increase in the yields earned on
a larger interest earning asset base that out-paced the the yield and volume of
interest-bearing liabilities. Average interest-bearing liabilities increased
31.7% from $86,306,000 for 1996 to $113,685,000 for 1997. The net yield on
interest-earning assets was 8.7% and 8.9% for 1997 and 1996, respectively.
For the year ended December 31, 1997, the net interest spread was 5.6% as
compared to 5.7% for the year ended December 31, 1996, an decrease of 10 basis
points.
For the year ended December 31, 1996, the Bank's net interest income was
$8,066,000, a decrease of $86,000, or 1.1%, from $8,152,000 for the year ended
December 31, 1995. This decrease was attributable to the net yield on
interest-earning assets which decreased from 9.2% in 1995 to 8.9% in 1996, while
at the same time the average rate paid on interest-bearing liabilities increased
from 3.0% in 1995 to 3.2% in 1996.
For the year ended December 31, 1996, the net interest spread was 5.69% as
compared to 6.21% for the year ended December 31, 1995, a decrease of 52 basis
points. That decrease was the result of lower yields on average interest-earning
assets and higher rates paid on interest-bearing liabilities. Those changes were
the result of the loan portfolio mix moving more to the lower yielding consumer
indirect loans, while time deposits increased resulting in a slight overall
increase in the rates paid.
The table on the following page shows the Bank's average balances of assets,
liabilities and stockholders' equity; the amount of interest income or interest
expense; the average yield or rate for each category
25
<PAGE>
of interest-earning assets and interest-bearing liabilities; and the net
interest spread and the net interest margin for the periods indicated (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ----------------------------------- ---------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE/ AVERAGE INCOME/ RATE/ AVERAGE
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD BALANCE
--------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Earning assets:
Loans receivable, net(1).............. $ 106,275 $ 10,408 9.79% $ 88,163 $ 8,766 9.91% $ 86,404
Federal funds sold.................... 8,703 451 5.18 8,222 424 5.16 6,070
Securities & CD Purchased(2).......... 40,193 2,505 6.23 25,534 1,617 6.33 22,928
--------- ----------- --------- ----------- ---------
Total interest-earning assets........... 155,171 13,364 8.61% 121,919 10,807 8.86% 115,402
Non-interest-earning assets:
Cash and due from banks............... 12,758 9,354 8,314
Premises and equipment, net........... 2,492 2,106 2,636
Other real estate owned............... 539 1,701 2,070
Other assets.......................... 9.318 4,096 2,483
--------- --------- ---------
Total non-interest-earning assets....... 25,107 17,257 15,503
--------- --------- ---------
Total assets........................ $ 180,278 $ 139,176 $ 130,905
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market........................ $ 21,657 503 2.32 $ 18,343 429 2.34 $ 18,871
NOW................................. 29,364 287 0.98 20,199 190 0.94 18,993
Savings............................. 19,400 379 1.95 14,191 279 1.97 13,918
Time certificates of deposit of
$100,000 or more.................. 9,394 503 5.35 7,213 386 5.35 5,686
Other time deposits................. 33,870 1,809 5.34 26,360 1,457 5.53 24,750
--------- ----------- --------- ----------- ---------
Total int-bearing liabilities....... 113,685 3,481 3.06% 86,306 2,741 3.18% 82,218
Non-interest-bearing liabilities:
Demand deposits....................... 46,162 34,106 32,750
Other liabilities..................... 2,080 1,880 1,241
--------- --------- ---------
Total non-int-bearing liab.......... 48,242 35,986 33,991
Stockholders' equity.................... 18,351 16,884 14,696
--------- --------- ---------
Total liabilities and stockholders'
equity............................ $ 180,278 $ 139,176 $ 130,905
--------- --------- ---------
--------- --------- ---------
Net interest income..................... $ 9,883 $ 8,066
----------- -----------
----------- -----------
Net interest spread(3).................. 5.55% 5.69%
--- ---
--- ---
Net interest margin(4).................. 5.69% 6.04%
--- ---
--- ---
<CAPTION>
INTEREST AVERAGE
INCOME/ RATE/
EXPENSE YIELD
----------- -----------
<S> <C> <C>
ASSETS:
Earning assets:
Loans receivable, net(1).............. $ 8,740 10.12%
Federal funds sold.................... 344 5.67
Securities & CD Purchased(2).......... 1,503 6.11
-----------
Total interest-earning assets........... 10,587 9.17%
Non-interest-earning assets:
Cash and due from banks...............
Premises and equipment, net...........
Other real estate owned...............
Other assets..........................
Total non-interest-earning assets.......
Total assets........................
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market........................ 438 2.32
NOW................................. 179 0.94
Savings............................. 273 1.96
Time certificates of deposit of
$100,000 or more.................. 293 5.15
Other time deposits................. 1,252 5.06
-----------
Total int-bearing liabilities....... 2,435 2.96%
Non-interest-bearing liabilities:
Demand deposits.......................
Other liabilities.....................
Total non-int-bearing liab..........
Stockholders' equity....................
Total liabilities and stockholders'
equity............................
Net interest income..................... $ 8,152
-----------
-----------
Net interest spread(3).................. 6.21%
-----
-----
Net interest margin(4).................. 6.16%
-----
-----
</TABLE>
- ------------------------
(1) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $247,000, $260,000 and $299,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
(2) Yields computed for securities are based on income received, not accounting
for tax equivalent rates for tax exempt securities.
(3) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(4) Represents net interest income (after provision for credit losses) as a
percentage of average interest-earning assets.
The following table sets forth, for the periods indicated, the dollar amount
of changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average balances (volume) or changes in average interest rates (rate). The
26
<PAGE>
variances attributable to both the volume and rate changes have been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amount of the changes in each:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 VS. 1996 1996 VS. 1995
------------------------------- ----------------------
INCREASE (DECREASE) INCREASES (DECREASES)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Earning assets--Interest income(1):
Loans, net(2).................................................... $ 1,776 $ (134) $ 1,642 $ 176 $ (150)
Federal funds sold............................................... 25 2 27 113 (33)
Securities and CDS Purchased..................................... 914 (26) 888 163 (49)
--------- --------- --------- ----- ---------
Total.......................................................... 2,715 (158) 2,557 452 (232)
Deposits and borrowed funds:
Interest expense:
Other Deposits................................................... 268 3 271 23 (377)
Time certificates of deposit in denominations of $100,000 or
more........................................................... 116 20 136 81 12
Other time deposits.............................................. 404 (71) 333 61 506
--------- --------- --------- ----- ---------
Total.......................................................... 788 (48) 740 165 141
--------- --------- --------- ----- ---------
Change in net interest income...................................... $ 1,927 $ (110) $ 1,817 $ 287 $ (373)
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Earning assets--Interest income(1):
Loans, net(2).................................................... $ 26
Federal funds sold............................................... 80
Securities and CDS Purchased..................................... 114
---------
Total.......................................................... 220
Deposits and borrowed funds:
Interest expense:
Other Deposits................................................... (354)
Time certificates of deposit in denominations of $100,000 or
more........................................................... 93
Other time deposits.............................................. 567
---------
Total.......................................................... 306
---------
Change in net interest income...................................... $ (86)
---------
---------
</TABLE>
- ------------------------
(1) Tax exempt income was not computed on a tax equivalent basis.
(2) Loan fees have been included in the calculation of interest income. Loan
fees were approximately $247,000, $260,000 and $299,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Loans are net of the
allowance for loan losses, deferred fees and related direct costs.
PROVISION FOR CREDIT LOSSES
Provisions for credit losses are charged to earnings to bring the total
allowance for credit losses to a level deemed appropriate by management based on
such factors as historical experience, the volume and type of lending conducted
by the Bank, the amount of nonperforming loans, regulatory policies, generally
accepted accounting principles, general economic conditions and other factors
related to the collectability of loans in the Bank's portfolio. Each quarter,
the Bank reviews the allowance for credit losses and makes additional transfers
to the allowance, as needed.
During 1997, the provision for credit losses was $1,054,000, compared to
$700,000 in 1996, an increase of $354,000 or 50.6%. The amount of the provision
in 1997 was deemed sufficient by Management as a result of the quarterly
calculations for loan loss adequacy. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION-FINANCIAL CONDITION-ALLOWANCE
FOR POSSIBLE CREDIT LOSSES", herein.)
During 1996, the provision for credit losses was $700,000, compared to
$1,040,000 in 1995, a decrease of $340,000 or 32.7%. The 1996 provision was
deemed sufficient by Management as a result of the quarterly calculations for
Loan loss adequacy.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1997 was $4,225,000 as
compared to $4,517,000 for the year ended December 31, 1996, a decrease of
$292,000 or 6.5%. There were several revenues
27
<PAGE>
generated in 1996 that were not recurring in 1997. They were, (1) the gain on
sale of the Bank's data processing center in March 1996 ($602,000 gain); revenue
generated for four months of 1996 for data processing servicing for other banks
($240,000); and gross rent receipts on an OREO property which sold in March 1997
($180,000). Operational income actually increased by approximately $663,000 in
service charge and related deposit account income. Overall deposit growth
combined with the acquisition of three Wells Fargo branch offices accounts for
most of this.
Noninterest income for the year ended December 31, 1996 was $4,517,000, as
compared to $4,109,000 for the year ended December 31, 1995, an increase of
$408,000 or 9.93%. That increase was due in part to the non-recurring revenues
in 1996 discussed in the preceding paragraph.
Noninterest income was impacted negatively by approximately $400,000, due to
the fact that as of May 1996, there was no more Data Processing servicing income
of approximately $240,000 in 1997. However, this was partially offset by savings
in noninterest expense of $192,000.
The Bank upgraded its in-house computer system in 1990 with the plan to
offer data processing services to other financial institutions. The first client
bank was signed in late 1991, however, it was difficult to break into the
servicing market and achieve credibility. The Bank decided to approach potential
client banks with the idea to offer "ownership" in a separate corporation at a
later date. This new corporation would bring economies of scale in data
processing and other back office functions. With this approach, the Bank was
then able to sign four additional client banks. In early 1996, the Bank sold the
data processing center to the newly formed corporation, which is owned by five
financial institutions. The Bank is an investor in and is serviced by the
BancData Solutions, Inc., the new corporation.
As a result of the sale, many categories on the Bank's Income Statement vary
from previous years. There is no longer any noninterest income from data
processing servicing of clients, however, the Bank's noninterest expense
categories of salary, occupancy and other related expense decreased due to the
elimination of the previous overhead created by the data center. Taking these
items into consideration, the Bank is saving approximately $5,000 per month by
being serviced by BancData Solutions, Inc.. In addition, the Bank has eliminated
its liability in regard to data processing for client banks.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1997 was $10,712,000,
which represented an increase of $2,053,000 from the year ended December 31,
1996. Salaries were up $658,000 over 1996 due to the three newly acquired Wells
Fargo branch offices and some overall growth in the Bank. The primary increase
in noninterest expense revolves around two main factors, (1) $623,000 in
increased data processing expense (There was a full year of data processing
expense in 1997 as compared to eight months in 1996. In addition to that,
overall volumes increased significantly which bear directly on data processing
costs.); and (2) $367,000 in goodwill amortization expense as a result of the
branch acquisition. Net occupancy and premises expense was only $3,000 more in
1997 than in 1996.
Noninterest expense for the year ended December 31, 1996 was $8,659,000,
which represented a decrease of $192,000 from the year ended December 31, 1995.
This decrease was a direct result of the sold Data Processing department and
savings in related salary, occupancy and selected other expense categories.
INCOME TAXES
Income tax expense was $422,000, $1,130,000 and $720,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The effective tax rate for the
same periods was 18.0%, 35.1% and 30.4%, respectively. The federal statutory tax
rate for 1997, 1996 and 1995 is 34%. Tax expense for 1997 reflects a $154,000
benefit as a result of timing differences in current and deferred tax liability.
The Bank's effective
28
<PAGE>
tax rate is different than the statutory rate due to tax exempt, bank-qualified
municipal securities and officers life insurance expense.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity management for banks requires that funds always be available to
pay anticipated deposit withdrawals and maturing financial obligations promptly
and fully in accordance with their terms. The balance of the funds required is
generally provided by payments on loans, sale of loans, liquidation of assets
and the acquisitions of additional deposit liabilities. One method banks utilize
for acquiring additional liabilities is through the acceptance of "brokered
deposits" (defined to include not only deposits received through deposit
brokers, but also deposits bearing interest in excess of 75 basis points over
market rates), typically attracting large certificates of deposit at high
interest rates. These types of deposits are considered volatile in nature in
that they generally will not remain with the Bank unless premium rates are
constantly paid. It is a costly way of funding liquidity needs. The Bank has not
accepted "brokered deposits" in the recent past, and the Bank does not
anticipate modifying that policy in the foreseeable future.
To meet liquidity needs, the Bank maintains a portion of its funds in cash
deposits in other banks, federal funds sold, and certificates of deposit
purchased in other financial institutions. The Bank has an arranged line of
credit with two correspondent banks to provide an alternative source of
short-term funds. It is Management's policy to limit usage of the credit lines
to cover short-term gaps between maturing investments and immediate cash needs.
The Bank did not use the credit lines in 1997.
In order to meet its liquidity needs, the Bank endeavors to maintain a
liquidity ratio in excess of 20%. This ratio is equivalent to the sum of (a)
cash and due from banks, (b) interest-earning deposits and securities(less
pledged securities) and (c) federal funds sold, divided by total assets. At
December 31, 1997, 1996 and 1995, the Bank's liquidity ratio was 28.5%, 25.9%
and 27.6%, respectively.
The careful planning of asset and liability maturities and the matching of
interest rates to correspond with this maturity matching is an integral part of
the active management of an institution's net yield. To the extent maturities of
assets and liabilities do not match in a changing interest rate environment,net
yields may be affected. Even with perfectly matched repricing of assets and
liabilities, risks remain in the form of prepayment of assets, timing lags in
adjusting certain assets, and liabilities that have varying sensitivities to
market interest rates and basis risk. In its overall attempt to match assets and
liabilities, management takes into account rates and maturities to be offered in
connection with its certificates of deposit and offers variable rate loans. The
Bank has generally been able to control its exposure to changing interest rates
by maintaining primarily floating interest rate loans and a majority of its time
certificates in relatively short maturities.
The following table sets forth the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 1997,
the interest rate sensitivity gap (interest rate-sensitive assets less interest
rate-sensitive liabilities), cumulative interest rate sensitivity gap, the
interest rate sensitivity gap ratio (interest rate-sensitive assets divided by
interest rate-sensitive liabilities) and the cumulative interest rate
sensitivity gap ratio. For purposes of the following table, an asset or
liability is
29
<PAGE>
considered rate-sensitive within a specified period when it can be repriced or
matures within such period in accordance with its contractual terms.
<TABLE>
<CAPTION>
AFTER AFTER ONE
WITHIN THREE MONTHS YEAR BUT
THREE BUT WITHIN WITHIN AFTER
MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Gross loans...................................... $ 39,513 $ 17,541 $ 51,022 $ 8,051 $ 116,127
Federal funds sold............................... 4,380 -0- -0- -0- 4,380
Securities & CD Purch............................ 1,676 9,282 13,214 14,433 38,605
---------- ------------- ----------- ----------- ----------
Total.......................................... $ 45,569 $ 26,823 $ 64,236 $ 22,484 $ 159,112
---------- ------------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------
Interest-bearing liabilities:
Savings deposits................................. $ 19,842 $ -0- $ -0- $ -0- $ 19,842
Money market and NOW............................. 53,522 -0- -0- -0- 53,522
Time deposits................................ 18,834 21,879 4,934 -0- 45,647
---------- ------------- ----------- ----------- ----------
Total............................................ $ 92,198 $ 21,879 $ 4,934 $ -0- $ 119,011
---------- ------------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------
Int rate sensitivity gap........................... $ (46,629) $ 4,944 $ 59,302 $ 22,484 $ 40,101
Cumulative interest rate sensitivity gap........... $ (46,629) $ (41,685) $ 17,617 $ 40,101 $ 40,101
Cumulative interest rate sensitivity gap ratio
based on total assets............................ (24.59%) (21.98%) 9.29% 21.14% 21.14%
</TABLE>
Within the one year time horizon, the Bank is liability rate sensitive given
that the repricing opportunity for liabilities is greater than that for assets.
However, after the one year horizon, the Bank shifts to a position of asset rate
sensitivity. Earnings to the Bank are impacted by rate shifts based on the
asset/liability sensitive position. In a rising interest rate environment, a
liability sensitive position will create a negative impact to earnings by
lowering the net interest margin, however, in an asset sensitive position,
earnings are enhanced. There is a converse affect in a declining interest rate
environment.
NEW ACCOUNTING PRONOUNCEMENT
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which prescribes standard for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 is effective for financial statements issued for
periods beginning after December 15, 1997. The Bank has determined that the
adoption of SFAS 130 will not have a material effect on its financial
statements.
ITEM 7. FINANCIAL STATEMENTS
The Bank's financial statements are listed on the Index To Exhibits.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
30
<PAGE>
PART III
<TABLE>
<S> <C>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(1) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. STOCK OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>
The information required by these items is contained in the Bank's
definitive Proxy Statement for the Bank's 1998 Annual Meeting of Shareholders,
which the Bank intends to file with the FDIC within 120 days after the close of
the Bank's 1997 fiscal year in accordance with SEC Regulation 14A under the
Securities Exchange Act of 1934. Such information is incorporated herein by this
reference.
ITEM 13. EXHIBITS AND REPORTS IN FORM 8-K
(a) Exhibits
Exhibits required to be filed hereunder are indexed hereunder.
(b) Reports on Form 8-K
No reports on From 8-K were filed during the last quarter of the Bank's
fiscal year ending December 31, 1997.
31
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT TABLE
REFERENCE NUMBER
- -------------------
<C> <S>
3.1 Articles of Incorporation, as Amended
3.2 Bylaws, as Amended
4.1 Specimen of Common Stock Certificate
11. Statement Regarding Computation of Net Earnings per Share
The above information required by this exhibit is incorporated by reference from Note A of the
Bank's Financial Statements included herein.
13. Financial Statements
</TABLE>
32
<PAGE>
ANTELOPE VALLEY BANK
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
ANTELOPE VALLEY BANK
---------------------------------------------
Date: March 16, 1998 Jack D. Seefus,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
---------------------------------------------
Date: March 16, 1998 Margaret A. Torres,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
---------------------------------------------
Date: March 16, 1998 Clyde G. Golding,
CHAIRMAN OF THE BOARD
---------------------------------------------
Date: March 16, 1998 E. Gordon Harrison,
DIRECTOR
---------------------------------------------
Date: March 16, 1998 Roy J. Simi,
DIRECTOR
---------------------------------------------
Date: March 16, 1998 Michael G. Schafer,
DIRECTOR
---------------------------------------------
Date: March 16, 1998 John F. Murphy,
DIRECTOR
---------------------------------------------
Date: March 16, 1998 William Walsh, IV,
DIRECTOR
---------------------------------------------
Date: March 16, 1998 A. C. Warnack,
DIRECTOR
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
---------------------------------------------
Date: March 16, 1998 Jack D. Seefus,
PRESIDENT AND CHIEF EXECUTIVE OFFICER AND
DIRECTOR
---------------------------------------------
Date: March 16, 1998 Margaret A. Torres,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
---------------------------------------------
Date: March 16, 1998 George E. Nagy,
EXECUTIVE VICE PRESIDENT AND CHIEF LENDING
OFFICER
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Antelope Valley Bank
We have audited the accompanying balance sheets of Antelope Valley Bank (a
California corporation) as of December 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Antelope Valley Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Los Angeles, California
January 23, 1998
F-1
<PAGE>
ANTELOPE VALLEY BANK
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and noninterest-earning deposits (minimum Federal Reserve
balance at December 31, 1997 and 1996 was $3,306,000 and
$1,402,000, respectively)...................................... $18,447,000 $12,032,000
Federal funds sold............................................... 4,380,000 5,520,000
----------- -----------
Cash and cash equivalents........................................ 22,827,000 17,552,000
Time deposits due from financial institutions.................... 1,962,000 2,751,000
Securities available for sale--at fair value..................... 36,641,000 24,248,000
Loans............................................................ 116,127,000 93,734,000
Premises and equipment--at cost, net of accumulated depreciation
and amortization............................................... 2,527,000 1,980,000
Other real estate owned.......................................... 20,000 1,701,000
Other assets and accrued interest................................ 9,555,000 5,244,000
----------- -----------
$189,659,000 $147,210,000
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Deposits
Noninterest-bearing demand deposits............................ $48,856,000 $36,685,000
Interest-bearing deposits
NOW accounts................................................. 32,301,000 22,475,000
Money market accounts........................................ 21,221,000 17,198,000
Savings...................................................... 19,842,000 15,192,000
Time deposits of $100,000 or more............................ 9,885,000 9,753,000
Other time deposits.......................................... 35,762,000 26,327,000
----------- -----------
167,867,000 127,630,000
Other liabilities and accrued interest........................... 2,112,000 1,857,000
----------- -----------
169,979,000 129,487,000
Commitments and contingencies.................................... -- --
Stockholders' equity
Common stock--authorized, 10,000,000 shares without par value;
issued and outstanding, 767,342 shares in 1997 and 1996........ 3,625,000 3,625,000
Retained earnings................................................ 15,935,000 14,015,000
Net unrealized gain on securities available for sale, net of tax
of $92,000 in 1997 and $65,000 in 1996......................... 120,000 83,000
----------- -----------
19,680,000 17,723,000
----------- -----------
$189,659,000 $147,210,000
----------- -----------
----------- -----------
</TABLE>
F-2
<PAGE>
ANTELOPE VALLEY BANK
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income
Loans............................................................. $ 10,408,000 $ 8,766,000 $ 8,740,000
Securities available for sale
Taxable......................................................... 1,562,000 926,000 881,000
Nontaxable...................................................... 789,000 590,000 555,000
Time deposits..................................................... 154,000 101,000 67,000
Federal funds sold................................................ 451,000 424,000 344,000
------------- ------------- -------------
13,364,000 10,807,000 10,587,000
------------- ------------- -------------
Interest expense
Time deposits of $100,000 or more................................. 503,000 386,000 293,000
Other deposits.................................................... 2,978,000 2,355,000 2,142,000
------------- ------------- -------------
3,481,000 2,741,000 2,435,000
------------- ------------- -------------
Net interest income......................................... 9,883,000 8,066,000 8,152,000
Provision for credit losses......................................... 1,054,000 700,000 1,040,000
------------- ------------- -------------
Net interest income after provision
for credit losses......................................... 8,829,000 7,366,000 7,112,000
Noninterest income
Service charges on deposit accounts............................... 2,887,000 2,224,000 2,221,000
Gain (loss) on sale of securities--net............................ (16,000) 23,000 (3,000)
Other............................................................. 1,354,000 2,270,000 1,891,000
------------- ------------- -------------
4,225,000 4,517,000 4,109,000
------------- ------------- -------------
Noninterest expense
Salaries, wages and employee benefits............................. $ 4,818,000 $ 4,160,000 $ 4,514,000
Occupancy......................................................... 571,000 562,000 811,000
Premises and equipment............................................ 482,000 488,000 680,000
Other............................................................. 4,841,000 3,449,000 2,846,000
------------- ------------- -------------
10,712,000 8,659,000 8,851,000
------------- ------------- -------------
Earnings before income taxes................................ 2,342,000 3,224,000 2,370,000
Income tax expense.................................................. 422,000 1,130,000 720,000
------------- ------------- -------------
NET EARNINGS................................................ $ 1,920,000 $ 2,094,000 $ 1,650,000
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted earnings per share................................ $ 2.50 $ 2.73 $ 2.15
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ANTELOPE VALLEY BANK
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
NUMBER SECURITIES
OF SHARES COMMON RETAINED AVAILABLE FOR
OUTSTANDING STOCK EARNINGS SALE
----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Balance--January 1, 1995............................. 511,636 $ 3,625,000 $ 10,274,000 $ (134,000)
Net changes in unrealized gain on securities
available for sale, net of tax of $292,000......... -- -- -- 484,000
Net earnings for the year............................ -- -- 1,650,000 --
----------- ------------ ------------- ---------------
Balance--December 31, 1995........................... 511,636 3,625,000 11,924,000 350,000
50% stock dividend................................... 255,706 -- -- --
Cash dividend on fractional shares................... -- -- (3,000) --
Net changes in unrealized gain on securities
available for sale, net of tax benefit of
$199,000........................................... -- -- -- (267,000)
Net earnings for the year............................ -- -- 2,094,000 --
----------- ------------ ------------- ---------------
Balance--December 31, 1996........................... 767,342 3,625,000 14,015,000 83,000
Net changes in unrealized gain on securities
available for sale, net of tax of $27,000.......... -- -- -- 37,000
Net earnings for the year............................ -- -- 1,920,000 --
----------- ------------ ------------- ---------------
Balance--December 31, 1997........................... 767,342 $ 3,625,000 $ 15,935,000 $ 120,000
----------- ------------ ------------- ---------------
----------- ------------ ------------- ---------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
ANTELOPE VALLEY BANK
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net earnings............................................................. $1,920,000 $2,094,000 $1,650,000
Adjustments to reconcile net earnings to net cash provided by operating
activities
Provision for credit losses.............................................. 1,054,000 700,000 1,040,000
Provision for losses on other real estate owned.......................... -- 330,000 --
Depreciation and amortization............................................ 825,000 596,000 655,000
Loss (gain) on sale of premises and equipment............................ -- (602,000) 81,000
(Gain) loss on sale of other real estate owned........................... (3,000) 22,000 (17,000)
Net change in deferred loan fees......................................... 31,000 17,000 --
Accretion of discounts on investment securities.......................... (17,000) (32,000) (10,000)
Increase in unearned discount............................................ 2,054,000 1,209,000 497,000
Loss (gain) on sale of investment securities, net........................ 16,000 (23,000) 3,000
Deferred income taxes expense............................................ (89,000) (150,000) (256,000)
Increase in other assets................................................. (225,000) (2,218,000) (129,000)
Increase in other liabilities............................................ 229,000 337,000 969,000
Amortization of goodwill................................................. 367,000 -- --
---------- ---------- ----------
Net cash provided by operating activities................................ 6,162,000 2,280,000 4,483,000
Cash flows from investing activities:
Proceeds from sale of securities available for sale...................... 12,673,000 7,983,000 501,000
Purchases of securities available for sale............................... (32,807,000) (12,615,000) (3,164,000)
Proceeds from maturing securities available for sale..................... 4,012,000 2,699,000 --
Proceeds from maturing securities held to maturity....................... -- -- 2,106,000
Principal paydowns on investment securities.............................. 3,362,000 520,000 75,000
Decrease (increase) in time deposits due from financial institutions..... 789,000 (1,378,000) 281,000
Net increase in loans.................................................... (25,726,000) (10,661,000) (1,933,000)
Purchases of premises and equipment...................................... (444,000) (192,000) (664,000)
Improvements on real estate owned........................................ -- -- (49,000)
Proceeds from sale of equipment.......................................... -- 868,000 411,000
Proceeds from sale of real estate owned.................................. 1,878,000 404,000 587,000
Net cash received in purchase of Wells Fargo Bank branches............... 28,388,000 -- --
Net cash used by investing activities.................................... (7,875,000) (12,372,000) (1,849,000)
Cash flows from financing activities:
Cash dividends........................................................... $ -- $ (3,000) $ --
Increase (decrease) in deposits.......................................... 6,988,000 13,923,000 (1,491,000)
---------- ---------- ----------
---------- ---------- ----------
Net cash provided by (used in) financing activities...................... 6,988,000 13,920,000 (1,491,000)
---------- ---------- ----------
---------- ---------- ----------
Increase in cash and cash equivalents.................................... 5,275,000 3,828,000 1,143,000
Cash and cash equivalents at beginning of year........................... 17,552,000 13,724,000 12,581,000
---------- ---------- ----------
Cash and cash equivalents at end of year................................. $22,827,000 $17,552,000 $13,724,000
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Interest paid............................................................ $3,435,000 $2,421,000 $2,170,000
---------- ---------- ----------
---------- ---------- ----------
Income taxes paid........................................................ $ 705,000 $1,389,000 $ 837,000
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of noncash investing activities:
Acquisition of real estate in settlement of loans........................ $ 194,000 $ 251,000 $ 768,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Antelope Valley Bank are in
accordance with generally accepted accounting principles and conform to
practices within the banking industry. A summary of the significant accounting
policies consistently applied in the preparation of the accompanying financial
statements follows:
1. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and noninterest-earning deposits and federal funds sold. Generally, federal
funds are sold for one day periods.
2. SECURITIES AVAILABLE FOR SALE
Investments in marketable equity securities and all debt securities are
classified as securities available for sale. Securities available for sale are
carried at fair value and unrealized holding gains and losses, net of tax, on
securities available for sale are reported in a separate component of
stockholders' equity until realized.
3. LOANS
Loans are stated at their outstanding principal balances, less unearned
discount, allowance for credit losses and unamortized deferred loan fees or
costs.
Interest is accrued daily as earned on all simple interest loans. Interest
income on discounted loans is recognized under a method that approximates
interest calculated using the interest method. Interest income is not recognized
on loans if collection of the interest is deemed by management to be unlikely.
The Bank recognizes loan origination fees as an adjustment of the loan's yield
over the life of the loans by the interest method, which results in a constant
rate of return. Certain direct costs, primarily salaries, of originating the
loan are recognized over the life of the loan as a reduction of the yield rather
than as an expense item when incurred.
3. LOANS
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Measurement of the impairment is based on either
the discounted future cash flows of the impaired loan or the fair market value
of the collateral for a collateral-dependent loan. The Bank may select the
measurement method on a loan-by-loan basis, except that collateral-dependent
loans for which foreclosure is probable must be measured at the fair value of
the collateral. Restructured loans are measured for impairment by discounting
the total expected future cash flows using the loan's effective rate of interest
in the original loan agreement.
4. ALLOWANCE AND PROVISION FOR CREDIT LOSSES
The determination of the balance in the allowance for credit losses is based
on an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for potential losses after giving
consideration to known and inherent risks in the loan portfolio, current
economic conditions, past loss experience, estimated value of any underlying
collateral and such other factors as deserve current recognition in estimating
credit losses. The provision for credit losses is charged to expense.
F-6
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. DEPRECIATION AND AMORTIZATION
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. Leasehold
improvements are amortized over the life of the lease or the service lives of
the improvements, whichever is shorter. The straight-line method of depreciation
is used for financial reporting purposes, while both straight-line and
accelerated methods of depreciation are used for income tax purposes.
6. OTHER REAL ESTATE OWNED
Other real estate owned, which represents properties acquired by foreclosure
or by a deed in lieu of foreclosure, is recorded at the lower of the unpaid
balance of the loan or the fair value of the property at the date of
acquisition. Any valuation reductions required at the date of acquisition are
charged to the allowance for credit losses. Subsequent to acquisition, other
real estate owned is carried at the lower of recorded cost or fair value less
cost to sell. Subsequent operating expenses or income, reduction in estimated
values, and gains or losses on disposition of such properties are recognized in
current operations.
7. INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
8. EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average
number of shares outstanding during each year retroactively adjusted for stock
dividends. The weighted average number of shares used in the computation of
earnings per share for each of the three years ended December 31, 1997, 1996 and
1995 was 767,342.
9. FAIR VALUE OF FINANCIAL INVESTMENTS
The bulk of the Bank's assets and liabilities are considered financial
instruments. However, many of such instruments lack an available trading market,
as characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Bank uses significant estimations and present value
calculations to estimate their fair values.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
10. PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-7
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
11. GOODWILL
Goodwill, from the acquisition of three branch offices of Wells Fargo Bank
in 1997, representing the excess of cost over fair value of net assets acquired
and is being amortized over ten years using the straight-line method.
NOTE B--SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities available for
sale as of December 31, are as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS UNREALIZED
AMORTIZED ------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ------------- -------------
U.S. Treasury....................... $ 1,010,000 $ 4,000 $ -- $ 1,014,000
U.S. Agencies....................... 21,638,000 97,000 (229,000) 21,506,000
Municipal........................... 13,789,000 336,000 (4,000) 14,121,000
------------- ---------- ------------- -------------
$ 36,437,000 $ 437,000 $ (233,000) $ 36,641,000
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS UNREALIZED
AMORTIZED ------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ------------- -------------
U.S. Treasury....................... $ 3,044,000 $ 11,000 $ (2,000) $ 3,053,000
U.S. Agencies....................... 9,592,000 12,000 (84,000) 9,520,000
Municipal........................... 9,016,000 270,000 (87,000) 9,199,000
Corporate........................... 2,454,000 22,000 -- 2,476,000
------------- ---------- ------------- -------------
$ 24,106,000 $ 315,000 $ (173,000) $ 24,248,000
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>
Gross realized gains (losses) on sales of securities available for sale for
the year ended December 31, 1997, 1996, 1995 were $(16,000), $23,000, and
$(3,000), respectively.
F-8
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE B--SECURITIES AVAILABLE FOR SALE (CONTINUED)
The amortized cost and estimated fair value of securities available for sale
at December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 6,748,000 $ 6,788,000
Due after one year through five years.......................... 9,955,000 10,085,000
Due after five years through ten years......................... 3,466,000 3,458,000
Due after ten years............................................ 16,268,000 16,310,000
------------- -------------
$ 36,437,000 $ 36,641,000
------------- -------------
------------- -------------
</TABLE>
Securities available for sale pledged to secure public funds and for other
purposes as required or permitted by law amounts to approximately $5,046,000 and
$6,240,000 at December 31, 1997 and 1996, respectively.
NOTE C--LOANS AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Bank's loan portfolio at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Real estate loans
Construction............................................... $ 715,000 $ 826,000
Mortgage................................................... 14,863,000 12,267,000
Commercial and industrial loans.............................. 35,920,000 31,733,000
Loans to individuals for automobiles, household, family and
other personal expenditures................................ 74,264,000 56,362,000
-------------- --------------
125,762,000 101,188,000
Less:
Unearned discount.......................................... 8,206,000 6,152,000
Deferred loan fees, net.................................... (99,000) (68,000)
Allowance for credit losses................................ 1,528,000 1,370,000
-------------- --------------
$ 116,127,000 $ 93,734,000
-------------- --------------
-------------- --------------
</TABLE>
As of December 31, 1997 and 1996, the Bank has nonaccruing loans of $461,000
and $83,000, respectively.
F-9
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE C--LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
Transactions in the allowance for credit losses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year........................ $ 1,370,000 $ 1,410,000 $ 1,038,000
Provision for credit losses charged to operations... 1,054,000 700,000 1,040,000
Credit losses charged to allowance.................. (1,665,000) (1,270,000) (1,210,000)
Recoveries credited to allowance.................... 769,000 530,000 542,000
------------ ------------ ------------
Balance at end of year.............................. $ 1,528,000 $ 1,370,000 $ 1,410,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The recorded investment of impaired loans and the allowance for credit
losses related to these loans are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Principal amount of impaired loans................................ $ 1,255,000 $ 1,295,000
Accrued interest.................................................. 28,000 3,000
------------ ------------
1,283,000 1,298,000
Less allowance for credit losses.................................. 151,000 155,000
------------ ------------
$ 1,132,000 $ 1,143,000
------------ ------------
------------ ------------
</TABLE>
The activity in the allowance account is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Allowance at beginning of period.................... $ 155,000 $ 127,000 $ 166,000
Net charges to operations for impairment............ 479,000 73000 167,000
Direct write-downs.................................. (483,000) (45,000) (206,000)
------------ ------------ ------------
Allowance at end of period.......................... $ 151,000 $ 155,000 $ 127,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Total cash collected on impaired loans during 1997 and 1996 was $274,000 and
$506,000, of which $188,000 and $396,000 was credited to the principal balance
outstanding on such loans and $86,000 and $110,000 was recognized as interest
income, respectively. Interest that would have been accrued on impaired loans
during 1997 and 1996 was $175,000 and $197,000, respectively.
F-10
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE D--RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
directors and the companies with which they are associated. All such loans and
commitments to lend were made under terms that are consistent with the Bank's
normal lending policies.
A summary of directors' loan activity is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Beginning balance................................................. $ 2,486,000 $ 2,333,000
New loans made, including renewals................................ 356,000 437,000
Repayments........................................................ (969,000) (284,000)
------------ ------------
Ending balance.................................................... $ 1,873,000 $ 2,486,000
------------ ------------
------------ ------------
</TABLE>
As of December 31, 1997 and 1996, there are undisbursed lines of credit of
$545,000 and $885,000, respectively, to directors.
The Bank purchases insurance coverage through an agency controlled by a
director. Premiums paid in 1997, 1996 and 1995 were approximately $220,000,
$176,000 and $179,000, respectively. The Bank also obtains legal counsel from a
law firm wherein one of the directors of the Bank is a partner. Legal expenses
paid to the firm in 1997, 1996 and 1995 were $27,000, $20,000 and $112,000,
respectively.
The Bank has an ownership interest in a company which provides data
processing services to the Bank. The Bank paid approximately $1,300,000 and
$677,000 in 1997 and 1996, respectively, to this company for these services.
NOTE E--PREMISES AND EQUIPMENT--AT COST
Premises and equipment at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Building.......................................................... $ 1,963,000 $ 1,622,000
Furniture, fixtures and equipment................................. 2,852,000 2,424,000
Leasehold improvements............................................ 88,000 91,000
Bank automobiles.................................................. 117,000 115,000
------------ ------------
5,020,000 4,252,000
Less accumulated depreciation and amortization.................... 2,868,000 2,516,000
------------ ------------
2,152,000 1,736,000
Land.............................................................. 375,000 244,000
------------ ------------
$ 2,527,000 $ 1,980,000
------------ ------------
------------ ------------
</TABLE>
During 1997, the Bank acquired three branch offices from Wells Fargo Bank in
Rosamond, Wrightwood, and Frazier Park, California.
F-11
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE F--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Bank's deferred tax liabilities and assets as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses......................................... $ 252,000 $ 208,000
Deferred compensation............................................... 419,000 310,000
Current state taxes................................................. 90,000 106,000
Goodwill............................................................ 55,000 --
Allowance for other real estate owned............................... -- 150,000
---------- ----------
Total deferred tax assets....................................... 816,000 774,000
---------- ----------
Deferred liabilities:
Depreciation........................................................ $ 30,000 $ 105,000
Deferred state taxes................................................ 39,000 41,000
Deferred loan costs................................................. 137,000 107,000
Unrealized gains on securities...................................... 92,000 65,000
---------- ----------
Total deferred tax liabilities.................................. 298,000 318,000
---------- ----------
Net deferred tax asset.......................................... $ 518,000 $ 456,000
---------- ----------
---------- ----------
</TABLE>
The current and deferred amounts of income tax provisions are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ ----------
<S> <C> <C> <C>
Current tax expense
Federal.............................................. $ 306,000 $ 889,000 $ 662,000
State................................................ 205,000 391,000 314,000
---------- ------------ ----------
511,000 1,280,000 976,000
Deferred tax expense (benefit)
Federal.............................................. (89,000) (110,000) (198,000)
State................................................ -- (40,000) (58,000)
---------- ------------ ----------
(89,000) (150,000) (256,000)
---------- ------------ ----------
$ 422,000 $ 1,130,000 $ 720,000
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
F-12
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE F--INCOME TAXES (CONTINUED)
As a result of the following items, the total income tax expense differs
from the amount computed by applying the statutory federal income tax rate to
earnings before income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense at statutory rate..... $ 796,000 34.0% $ 1,096,000 34.0% $ 806,000 34.0%
State franchise taxes, net of federal benefit.... 177,000 7.6 244,000 7.6 177,000 7.5
Nontaxable income................................ (331,000) (14.1) (245,000) (7.6) (168,000) (7.1)
Change in estimate related to prior year sale of
fixed assets................................... (154,000) (6.6) -- -- -- --
Other............................................ (66,000) (2.9) 35,000 1.1 (95,000) (4.0)
----------- ----- ------------ --- ----------- ---
$ 472,000 18.0% $ 1,130,000 35.1% $ 720,000 30.4%
----------- ----- ------------ --- ----------- ---
----------- ----- ------------ --- ----------- ---
</TABLE>
NOTE G--MATURITIES OF CERTIFICATES OF DEPOSIT
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1998........................................................... $40,660,000
1999........................................................... 3,863,000
2000........................................................... 712,000
2001........................................................... 281,000
2002 and thereafter............................................ 131,000
----------
$45,647,000
----------
----------
</TABLE>
NOTE H--COMMITMENTS AND CONTINGENCIES
The Bank leases the property upon which its Lancaster branch office is
located from a nonaffiliate under an operating lease expiring in the year 2000
with options to extend the lease for two additional five-year periods. The lease
payments are subject to annual cost of living adjustments. In addition, various
other offices and land are leased from nonaffiliates under operating leases
expiring through 1998 with options to extend the leases for periods ranging from
two to twenty years.
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ----------------------------------------------------------------------------------- ---------
<S> <C>
1998............................................................................... $ 43,000
1999............................................................................... 38,000
2000............................................................................... 8,000
---------
Total minimum payments required.................................................... $ 89,000
---------
---------
</TABLE>
F-13
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rental expense for 1997, 1996 and 1995 was approximately $87,000, $89,000
and $357,000, respectively.
In the normal course of business, the Bank is involved in various
litigation. In the opinion of management, based on the advice of the Bank's
legal counsel, the disposition of all pending litigation will not have a
material effect on the Bank's financial position.
NOTE I--OTHER INCOME AND EXPENSE
Other income and expense for the years ended December 31 consist of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income
Customer EFT transaction and acquirer fees........ $ 160,000 $ 165,000 $ 167,000
Gross rental income............................... 63,000 240,000 265,000
Data processing income............................ -- 240,000 503,000
Credit card/merchant fees......................... 131,000 132,000 140,000
Gain on sale of assets............................ -- 602,000 --
Fee income--customer service...................... 496,000 447,000 445,000
Other............................................. 504,000 444,000 371,000
------------ ------------ ------------
$ 1,354,000 $ 2,270,000 $ 1,891,000
------------ ------------ ------------
------------ ------------ ------------
Expenses
Office supplies................................... $ 452,000 $ 286,000 $ 358,000
Advertising....................................... 240,000 230,000 131,000
Professional services............................. 453,000 341,000 410,000
Data processing fees.............................. 1,300,000 677,000 22,000
Public relations.................................. 79,000 75,000 64,000
Telephone......................................... 191,000 131,000 179,000
Federal Deposit Insurance Corporation
assessment...................................... 15,000 2,000 129,000
Amortization of goodwill.......................... 367,000 -- --
Loan and collection expenses...................... 254,000 454,000 93,000
Other............................................. 1,490,000 1,253,000 1,460,000
------------ ------------ ------------
$ 4,841,000 $ 3,449,000 $ 2,846,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE J--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
F-14
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE J--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
--------------------------
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit........................................................ $ 7,585,000 $ 7,921,000
------------ ------------
------------ ------------
Standby letters of credit........................................................... $ 814,000 $ 808,000
------------ ------------
------------ ------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions.
F-15
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE K--BENEFIT PLANS
In October 1990, the Bank adopted a profit sharing and deferred compensation
401(k) plan for all eligible employees. The Bank matches 50% of employee
contributions up to 6% of such contributions. The Bank's contribution vests over
a period of five years. Contributions were approximately $81,000, $75,000 and
$74,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Bank has entered into retirement benefit agreements with certain
officers providing for future benefits aggregating approximately $6,158,000,
payable in equal annual installments for fifteen years from the death or
retirement dates of each participating officer. The obligations for these
agreements are funded by single premium life insurance policies, with cash
surrender values aggregating approximately $3,363,000, $3,082,000 and $1,615,000
at December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996
and 1995, approximately $941,000, $681,000 and $549,000, respectively, has been
accrued in conjunction with these agreements.
NOTE L--SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the
Antelope Valley. The economy of the Antelope Valley is somewhat dependent upon
the defense and aerospace industries.
NOTE M--REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional,
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. The regulations require the
Bank to meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting principles. The Bank's capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and minimum ratios of Tier 1 and total capital (as defined)
to risk-weighted assets (as defined). Management believes, as of December 31,
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
regulatory framework for prompt corrective action. To be considered adequately
capitalized (as defined) under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and
total risk-based ratios as set forth in the table below. There are no
conditions, or events since that notification that management
F-16
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE M--REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
believes have changed the Bank's category. The Bank's actual capital amounts and
ratios are also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
(to Risk Weighted Assets)..................................... $16,990,000 12.6% $10,829,000 8.0% $13,536,000 10.0%
Tier I Capital
(to Risk Weighted Assets)..................................... $15,463,000 11.4% $ 5,414,000 4.0% $ 8,122,000 6.0%
Leverage Capital
(to Total Average Assets)..................................... $15,463,000 8.4% $ 7,410,000 4.0% $ 9,263,000 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets)..................................... $19,004,000 17.4% $ 8,733,310 8.0% $ 5,459,000 5.0%
Tier I Capital
(to Risk Weighted Assets)..................................... $17,639,000 16.2% $ 4,367,000 4.0% $ 6,550,000 6.0%
Leverage Capital
(to Total Average Assets)..................................... $17,639,000 12.2% $ 5,772,000 4.0% $14,430,000 10.0%
</TABLE>
NOTE N--STOCK SPLIT EFFECTED IN THE FORM OF A DIVIDEND
On April 17, 1996, the Bank's Board of Directors declared a 50% stock
dividend that was distributed on June 7, 1996, to stockholders of record on
April 24, 1996. As a result, 255,706 additional shares were issued. There were
no stock splits or dividends in 1997 or 1995.
NOTE O--NEW ACCOUNTING PROUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net income or loss for the current
period and other comprehensive income (income, expenses, gains and losses that
currently bypass the income statement and are reported directly in a separate
component of equity). SFAS 130 is effective for financial statements issued for
periods beginning after December 15, 1997. The Bank has determined that the
adoption of SFAS 130 will not have a material effect on its financial
statements.
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values have been estimated using data which management considered the
best available using methodologies deemed suitable for the pertinent category of
financial instruments. The estimation methodologies are as follows:
CASH AND CASH EQUIVALENTS. The carrying amount approximates the fair value.
F-17
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
TIME DEPOSITS DUE FROM FINANCIAL INSTITUTIONS. The carrying amount
approximates the fair value.
SECURITIES AVAILABLE FOR SALE. Fair values are based upon quoted market
prices.
LOANS RECEIVABLE. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four family
residential), credit-card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair value of
commercial real estate and commercial loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
DEPOSITS. The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand (that is, their carrying amount). The
carrying amounts of variable-rate, fixed-term money-market accounts and
certificates of deposit (CDs) approximate their fair values at the reporting
date. Fair values for fixed-rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on time deposits. while
fair value of financial instrument liabilities with no stated maturities.
Off-balance-sheet instruments: Fair value estimates were not made for these
financial instruments as there is not a quoted market price for these types of
financial instruments and the Bank has not developed a valuation model necessary
to make such an estimate. However, management believes that the current fees
assessed on these off-balance-sheet items represent market rates which would be
charged for similar agreements. The Bank enters into certain financial
commitments in the normal course of business. Management does not anticipate
that those financial instruments will have a material adverse effect on the
Bank's financial position or results of operations.
F-18
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
CARRYING
AMOUNT FAIR VALUE
---------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................................... $ 22,827 $ 22,827
Time deposits due from financial institutions....................... 1,962 1,962
Securities available for sale....................................... 36,641 36,641
Loans............................................................... 117,655 118,060
Less allowance for loan losses...................................... 1,528 --
---------- -----------
Net loans....................................................... 116,127 118,060
Accrued interest receivable......................................... 908 908
Financial liabilities:
Deposits............................................................ 167,867 167,944
Accrued interest payable............................................ 1,073 1,073
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
CARRYING
AMOUNT FAIR VALUE
---------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................................... $ 17,552 $ 17,552
Time deposits due from financial institutions....................... 2,751 2,751
Securities available for sale....................................... 24,248 24,248
Loans............................................................... 95,104 95,419
Less allowance for credit losses.................................... 1,370 --
---------- -----------
Net loans....................................................... 93,734 95,419
Accrued interest receivable......................................... 796 796
Financial liabilities:
Deposits............................................................ 127,630 127,736
Accrued interest payable............................................ 1,027 1,027
</TABLE>
F-19
<PAGE>
EXHIBIT 99.2
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20006
FORM 10-QSB/A
(Mark One)
<TABLE>
<C> <S>
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the transition period from to
Commission File Number: n/a
</TABLE>
ANTELOPE VALLEY BANK
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-346-3755
- --------------------------------------------- ---------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
831 WEST LANCASTER BLVD, LANCASTER , 93534
CALIFORNIA
- --------------------------------------------- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (805) 945-4511
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods 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 / /
The number of shares of Common Stock of the registrant outstanding as of
April 28, 1998 was 767,342.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET
JUNE 30, 1998 AND DECEMBER 31, 1997................................................. 3
STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997............................................. 4
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997............................................. 5
STATEMENT OF CHANGES IN STOCKHOLDER EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997............................................. 6
NOTES TO FINANCIAL STATEMENTS....................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................... 8-13
PART II OTHER INFORMATION
ITEM 1-5 (INAPPLICABLE)............................................................. 13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................................. 13
</TABLE>
2
<PAGE>
ITEM 1--FINANCIAL STATEMENTS
THE ANTELOPE VALLEY BANK
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Cash and noninterest-earning deposits (minimum Federal Reserve balance at
December 31, 1997 and 1996 was $3.3 and $1.4 million, respectively)........... $ 18,447 $ 16,863
Federalfunds sold............................................................... 4,380 15,060
-------- -------------
Cash and cash equivalents..................................................... 22,728 31,923
Time deposits from financial istitutions........................................ 1,962 1,566
Securities available-for-sale fair value........................................ 36,641 35,823
Loans........................................................................... 116,127 118,822
Premise and equipment-at cost, net of accumulated deprecaition and
amortization.................................................................. 2,527 2,786
Other real estate owned......................................................... 20 20
Other assets and accrued interest............................................... 9,555 9,976
-------- -------------
TOTAL ASSETS.................................................................... $ 189,659 $ 200,916
-------- -------------
-------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing demand deposits........................................... $ 48,856 $ 54,542
Interest-bearing deposits
NOW accounts................................................................ 32,301 34,116
Money market accounts....................................................... 21,221 21,977
Savings..................................................................... 19,842 22,092
Time deposits of $100,00 or more............................................ 9,885 9,249
Other time deposits......................................................... 35,762 36,149
-------- -------------
167,867 178,125
Other liabilities and accrued interest.......................................... 2,112 2,177
-------- -------------
169,979 180,302
Commitments and contingencies................................................... 0 0
STOCKHOLDERS' EQUITY
Common stock-authorized, 10,000,000 shares without par value; issued and
outstanding, 767,342 shares................................................. 3,625 3,625
Retained earnings............................................................. 15,935 16,796
Accumulated other comprehensive income........................................ 120 193
-------- -------------
19,680 20,614
-------- -------------
$ 189,659 $ 200,916
-------- -------------
-------- -------------
</TABLE>
3
<PAGE>
THE ANTELOPE VALLEY BANK
ENDING FISCAL QUARTER JUNE 30,1998 AND CORRESPONDING PERIOD OF PRECEDING FISCAL
QUARTER 1997
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE 6 MONTHS FOR THE 3 MONTHS
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 1998 30, 1997 30, 1998 30, 1997
------------- ------------- ------------- -------------
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest Income
Loans............................................... $ 5,792 $ 4,814 $ 2,944 $ 2,533
Securities available for sale
Taxable........................................... 616 821 271 526
Nontaxable........................................ 389 385 189 215
Time deposits....................................... 48 88 22 47
Federal funds sold.................................. 291 232 188 60
------ ------ ------ ------
7,136 6,340 3,614 3,381
Interest expense
Time deposits of $100,000 or more................... 249 220 126 111
Other deposits...................................... 1,544 1,410 781 756
------ ------ ------ ------
1,793 1,630 907 867
------ ------ ------ ------
Net interest income............................. 5,343 4,710 2,707 2,514
Provision for credit losses........................... 540 450 270 270
------ ------ ------ ------
Net interest income after provision for credit
losses........................................ 4,803 4,260 2,437 2,244
Noninterest income
Service charges on deposit accounts................. 1,541 1,373 771 730
Gain (loss) on sale of securities-net............... 0 (16) 0 0
Other............................................... 541 712 298 350
------ ------ ------ ------
2,082 2,069 1,069 1,080
------ ------ ------ ------
Noninterest expense
Salaries, wages and employee benefits............... 2,724 2,281 1,371 1,176
Occupancy........................................... 262 278 133 136
Premise and equipment............................... 247 238 129 124
Other............................................... 2,510 2,342 1,344 1,243
------ ------ ------ ------
5,743 5,139 2,977 2,679
------ ------ ------ ------
Earnings before income taxes.................... 1,142 1,190 529 645
Income tax expense.................................... 281 366 112 198
------ ------ ------ ------
NET EARNINGS.................................... $ 861 $ 824 $ 417 $ 447
------ ------ ------ ------
------ ------ ------ ------
Basic and diluted earning per share................... $ 1.12 $ 1.07 $ 0.54 $ 0.58
------ ------ ------ ------
------ ------ ------ ------
(dollar amounts as stated)
</TABLE>
4
<PAGE>
THE ANTELOPE VALLEY BANK
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
<S> <C> <C>
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
CASH FLOWS,OPERATING ACTIVITIES
Net Earnings (Loss)................................................................. $ 861 $ 824
Reconcilement of net earnings to net cash from operations:
Provision for credit losses....................................................... 540 450
Provision for losses on other real estate owned................................... 0 0
Depreciation and Amortization..................................................... 497 389
Loss (Gain)on sale of premises and equipment...................................... (11) 0
Loss(gain) on sales of other real estate owned.................................... 11 (7)
Net Change in Deferred Loan Fees.................................................. 161 193
Accretion of discounts on investment securities................................... (4) (9)
Increase(decrease) unearned discount.............................................. 117 1,721
Loss(gain) on sales of securities transactions,net................................ 0 0
Deferred income taxes (benefit) expense........................................... 29 (242)
Decrease (increase) in other assets............................................... (673) (424)
Increase (decrease) in other liabilities.......................................... 13 134
Amortization of Goodwill.......................................................... 223 145
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITES...................................... 1,764 3,174
CASH FLOWS, INVESTING ACTIVITIES
Purchase of available for sale securities........................................... ($ 8,128) ($ 29,813)
Proceeds from sales of available for sale securities................................ 0 10,742
Proceeds from maturities of available for sale securities........................... 2,980 2,065
Proceeds from maturities of held to matuity securities.............................. 0 0
Principal paydowns on investment securities......................................... 5,805 1,102
Decrease (increase) in time deposits due from financial institutions................ 396 (197)
Decrease (increase) in loans, net................................................... (3,592) (17,414)
Purchase of premises, equipment, and real estate.................................... (455) (258)
Improvements on real estate owned................................................. 0 0
Proceeds from sale of equipment..................................................... 0 0
Proceeds from sale of real estate owned............................................. 68 1,412
Net cash received in purchase of Wells Fargo Bank branches.......................... 0 28,388
------------- -------------
NET CASH USED BY INVESTING ACTIVITES.......................................... (2,926) (3,973)
CASH FLOWS, FINANCING ACTIVITIES
Increase(decrease) in deposits.................................................... 10,258 1,723
Cash dividends.................................................................... 0 0
NET CASH PROVIDED BY FINANCING ACTITIVES...................................... 10,258 1,723
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 9,096 924
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................... 22,827 17,552
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................ $ 31,923 $ 18,476
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
INTEREST PAID..................................................................... $ 1,893 $ 1,829
------------- -------------
------------- -------------
INCOME TAXES PAID................................................................. $ 310 $ 269
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
ACQUISITION OF REAL ESTATE IN SETTLEMENT OF LOANS................................. $ 79 $ 100
------------- -------------
------------- -------------
</TABLE>
5
<PAGE>
THE ANTELOPE VALLEY BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON COMPREHENSIVE RETAINED
1998 STOCK INCOME EARNINGS TOTAL
------------ ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance as of January 1,1998..................... $ 3,625,000 $ 120,000 $ 15,935,000 $ 19,680,000
Comprehensive Income
Net Income..................................... 861,000 861,000
Other Comprehensive Income, net of tax
Unrealized gains on securities............... 73,000 73,000
-------------
Comprehensive income....................... 934,000
Common stock issued.............................. 0 0
Dividends declared on common stock............... 0 0
BALANCE AS OF JUNE 30, 1998...................... $ 3,625,000 $ 193,000 $ 16,796,000 $ 20,614,000
------------ ---------- ------------- -------------
------------ ---------- ------------- -------------
1997
Balance as of January 1,1997..................... $ 3,625,000 $ 83,000 $ 14,015,000 $ 17,723,000
Comprehensive Income
Net Income..................................... 824,000 824,000
Other Comprehensive Income, net of tax
Unrealized gains on securities............... (342,000) (342,000)
-------------
Comprehensive income....................... 482,000
Common stock issued.............................. 0 0
Dividends declared on common stock............... 0 0
BALANCE AS OF JUNE 30, 1997...................... $ 3,625,000 ($ 259,000) $ 14,839,000 $ 18,205,000
------------ ---------- ------------- -------------
------------ ---------- ------------- -------------
</TABLE>
6
<PAGE>
ANTELOPE VALLEY BANK
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
1. The accompanying unaudited financial statements, which are for interim
periods, do not include all disclosures provided in the annual financial
statements. These unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto contained in
the Annual Report on Form 10-KSB for the year ended December 31, 1997 of
Antelope Valley Bank (Bank). The December 31, 1997 balance sheet was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
2. In the opinion of the Bank, the accompanying unaudited financial statements
contain all adjustments (which are of a normal recurring nature) necessary
for a fair presentation of the financial statements. The results of
operations for the six months and three months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
7
<PAGE>
THE ANTELOPE VALLEY BANK
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations are designed to provide a better understanding of the significant
changes and trends related to the Bank's financial condition, including
liquidity and capital resources, and the results of operations. The discussion
should be read in conjunction with the financial reports herein.
ANALYSIS OF FINANCIAL CONDITION
CHANGES IN THE ASSET AND LIABILITY MIX
The Bank experienced moderate asset growth of 6% in the first six months of
1998 due in large part to continued deposit growth as a result of major bank
consolidation. With this additional liquidity base, the bank's loan portfolio
grew approximately 2.3% in the first six months.
Gross loans increased by $2.7 million or 2.3%. The greatest growth occurred
in the consumer loan portfolio as a result of the bank's continued presence in
indirect auto loans. In addition, real estate loans increased by 9.0% in the
first six months of 1998.
Security investments decreased by $.8 million or 2.2% from the year end
which is a result of actual increased portfolio and cash flow pay downs from CMO
instruments. Fed Funds Sold increased significantly to a level of $15 million,
or $10.7 million higher than at year end. With a flat yield curve, management
has been hesitant to invest in longer term securities which would not bring
material value beyond rates associated with Fed Funds.
Earning assets increased by $12.2 million or 7.6% from December 31, 1997 to
June 30, 1998. At June 30, 1998, the loan to deposit ratio was 67.6% as compared
to 70.1% at year end 1997. Earning assets as a percent of total assets were
85.2% and 83.9% at June 30, 1998 and December 31, 1997, respectively.
Cash and non-interest earning deposits, including Federal Reserve Bank, were
$16.8 million and $18.4 million at June 30, 1998 and December 31, 1997,
respectively. These assets accounted for 8.4% and 9.7% of total assets at June
30, 1998 and December 31, 1997, respectively.
Fixed assets at $2.8 million for June 30, 1998 shows an increase of $0.3
million or 10% from December 31, 1997. This difference is due to depreciation
and minimal purchases net of the acquired fixed assets in the opening of the
Quartz Hill Branch Office in June 1998.
Net Other Real Estate Owned of $20,000 remained the same at June 30, 1998
and year end 1997. The amount includes two parcels of land. All properties are
carried on the bank's balance sheet at the lower of market or book value.
Non-interest bearing demand deposits as a percent of total deposits were
30.6% and 29.1% at June 30, 1998 and December 31, 1997, respectively.
Interest bearing demand deposits (Now Accounts) increased $1.8 million or
5.6% from the period ending December 31, 1997. Deposits were $32.1 and $34.1
million at June 30, 1998 and December 31, 1997, respectively. These deposits
accounted for 19.2% of total deposits at June 30, 1998 and December 31, 1997.
Time deposits of $100,000 or more were $9.9 million and $9.2 million at
December 31, 1997 and June 30, 1998 respectively. As a percent of total
deposits, these were 5.9% and 5.2% respectively.
8
<PAGE>
Other time deposits were $36.1 million and $35.7 million at June 30, 1998
and December 31, 1997, respectively. As a percent of total deposits, these were
20.3% and 21.3% respectively.
Insured Money Market Accounts had ending balances of $21.2 million and $22.0
million for December 31, 1997 and June 30, 1998 respectively. As a percent of
total deposits, these were 12.6% and 12.3% respectively.
CAPITAL RESOURCES
Asset growth must be regulated in relation to available capital. This
relationship, most commonly measured by capital adequacy ratio (primary capital,
adjusted for allowance for credit losses) is a determinant of a bank's leverage,
and thus, growth potential.
At June 30, 1998, the Bank's capital adequacy ratio was 8.53% as compared to
8.24% at December 31, 1997. The variance is a reflection of retained earnings
net of asset growth.
Risk-adjusted capital guidelines were issued by bank regulatory authorities
early in 1989 which incorporate off-balance sheet exposures in the measurement
of capital adequacy and place increased emphasis on common equity. The new rules
require by year end 1992, Tier I capital of 4 percent of risk-based assets and
combined Tier I and Tier II capital of 8 percent. Tier I capital generally
consists of common stockholder's equity and perpetual preferred stock. less
goodwill. Tier II capital is comprised of other elements, the only one which
concerns this bank being credit loss reserves, subject to certain limitations.
At June 30, 1998 and December 31, 1997, the bank's Tier I capital ratios under
risk-adjusted capital guidelines is 11.8% and 11.4% respectively.
At June 30, 1998, the bank reports total shareholder's equity of $20.6
million. This represents an increase of $.9 million which is the result of
year-to-date earnings of $.8 million, and net FASB 115 adjustment of $.1
million.
LIQUIDITY
The bank has an arranged line of credit with two of its correspondent banks
to provide an alternative source of short term funds. It is management's policy
to limit usage of the credit lines to cover any short term gaps between maturing
investments and immediate cash needs. The bank did not use a line of credit
during the first half of 1998.
ANALYSIS OF OPERATING PERFORMANCE
Net income for the SIX months ending June 30, 1998 was $861,000, an increase
of $37,000 or 4.5% over the same period in 1997. This is a factor of increased
net interest income and increased net operating expense as a result of deposit
growth.
Net income for the THREE months ending June 30, 1998 is $417,000, a decrease
of $30,000 or 7% over the same period in 1997.
NET INTEREST INCOME
Net interest income for the SIX months ending June 30, 1998 is $5,343,000 as
compared to $4,710,000 for the same period in 1997. This represents an increase
of 13.4%. Total interest income increased by $796,000 and interest expense
increased by $163,000 at June 30, 1998 as compared to the same period in 1997. A
moderate increase in loans accounted for the majority of the interest income
increase.
Net interest income for the THREE months ending June 30, 1998 is $2,707,000
as compared to $2,514,000 for the same period in 1997. This represents an
increase of 7.7%. Interest income increased by 6.5% while interest expense
increased by only 4.4%.
9
<PAGE>
Interest income for the SIX months ending June 30, 1998 was $7,136,000
compared to $6,340,000 for the same period in 1997. This represents an increase
of $796,000. All categories of interest income producing items show an increase,
with the exception of US Government securities which had lower outstanding
balances at June 1998. Indirect Consumer Auto loans account for the greatest
increase in consumer loan interest income as a result of stepped-up measures to
enhance that portfolio. Likewise, for the THREE months ending June 30, 1998,
interest income is up $233,000 as compared to the same period in 1997.
Interest expense was $1,793,000 for the SIX months ending June 30, 1998 as
compared to $1,630,000 for the same period in 1997. This represents an increase
of $163,000 or 10.0%. For the THREE months ending June 30, 1998, interest
expense was $907,000 as compared to $867,000 for the same period in 1997, an
increase of $40,000 or 4.4%.
PROVISION FOR CREDIT LOSSES
The allowance for credit losses is reduced by net loan charge-offs and
increased by the provision for loan losses charges to operating expenses. The
allowance is reviewed quarterly. Additions to the reserve are based upon the
bank's credit loss experience, anticipated loan growth and economic conditions.
The provision for credit losses for the SIX months ending June 30, 1998 was
$540,000 which compares to $450,000 for the same period in 1997. Loan losses net
of recoveries charged to the allowance year-to-date 1998 was $489,000 as
compared to $594,000 for the same period in 1997.
The allowance for credit losses of $1,579,000 at June 30, 1998 is an
increase of $352,000 over the same period in 1997. With the increase in the loan
portfolio, management feels that this is an adequate reserve based on the
quarterly loan loss reserve calculations.
Management has addressed loan loss problems by having an independent loan
review performed twice a year by an outside credit analysis company.
Loans past due 90 days and still accruing are $195,000 and $860,000 at June
30, 1998 and June 30, 1997 respectively. The significant decrease is a factor of
two real estate loans, both of which became current and remain so today. At this
time, management feels that both loans are adequately secured and will result in
no loss to the bank.
Loans past due 30 to 89 days compared by the two periods of June 30, 1998
and 1997 are $506,000 and $909,000 respectively.
NON-INTEREST INCOME
For the SIX months ending June 30, 1998, the non-interest income is
$2,082,000 as compared to $2,069,000 for the same period in 1997. For the THREE
months ending June 30, 1998 as compared to the same period in 1997, there was a
slight decrease of $11,000. During the first three months of 1997, the bank
owned a commercial property that had approximately $63,000 in gross rental
income. This property was sold March 31, 1997.
NON-INTEREST EXPENSES
Non-interest expense of $5,743,000 for the SIX months ending June 30, 1998
is a $594,000 increase over $5,139,000 for the same period in 1997. This
category is representative of the following:
SALARY/RELATED UP $443,000 OR 19% FROM 1997
This is due mostly to the acquisition of the three branches and their
related staff in February 1997 and increased salary continuation
commitments for senior officers.
OCCUPANCY DOWN $16,000 OR 6% FROM 1997
10
<PAGE>
This is a combination of reduced expense from the sale of an OREO
property in March 1997, the addition of the three acquired branches in
February 1997 and the opening of the new Quartz Hill branch in June 1998.
OTHER NON-INTEREST
EXPENSE UP $168,000 OR 7% FROM 1997
This variance is a factor of increased operating expenses and
amortization of Goodwill as a result of the three branch acquisition.
For the THREE months ending June 30, 1998, non-interest expense increased by
$298,000 from the same period in 1997. This variance is a factor of increased
operating expenses and amortization of Goodwill as a result of the three branch
acquisition.
GENERAL INFORMATION
The period covered in this report has seen a surge in deposit activity along
with moderate loan demand throughout our primary market area. Along with our
acquisition of three Wells Fargo branches in 1997 and the opening of the new
Quartz Hill branch office in June 1998, consolidation of major financial
institutions continues to create new business opportunities for Antelope Valley
Bank.
During the first half of 1998, the Antelope Valley has experienced moderate
growth in industrial and commercial based business. There is an effort in place
to supply more industrial property to meet the need of interested parties
looking to relocate. The Antelope Valley provides affordable housing and a ready
work force for any new business. Real estate values are actually appreciating,
albeit slight, for the first time since the early 1990's.
PART II OTHER INFORMATION
All items of Part II other than item 6 below are either inapplicable or
would be responded to in the negative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) No reports on Form 8-K have been filed during the period, and no
events have occurred which would require one to be filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE ANTELOPE VALLEY BANK
Date: July 21, 1998
-------------------------------------------
Jack D. Seefus,
President and
Chief Executive Officer
Date: July 21, 1998 /s/ MARGARET A. TORRES
-------------------------------------------
Margaret A. Torres,
Executive Vice President and
Chief Financial Officer
</TABLE>
12
