-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, q2zrfTjqr19XK36upEmcP6oUHAW5CkZs9qEM3S0pPTWbflPBQqfC2aZo3ysF4qlM ungm61BtA3/4yGaMTFuz1A== 0000912057-94-001119.txt : 19940330 0000912057-94-001119.hdr.sgml : 19940330 ACCESSION NUMBER: 0000912057-94-001119 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUARDIAN BANCORP CENTRAL INDEX KEY: 0000749751 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 953686137 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-09757 FILM NUMBER: 94518729 BUSINESS ADDRESS: STREET 1: 800 S FIQUEROA ST CITY: LOS ANGELES STATE: CA ZIP: 90017 BUSINESS PHONE: 2132390800 MAIL ADDRESS: STREET 1: 800 S FIGUEROA STREET CITY: LOS ANGELES STATE: CA ZIP: 90017 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1993 COMMISSION FILE NUMBER: 1-9757 ------------------------ GUARDIAN BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 95-3686137 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 SOUTH FIGUEROA, LOS ANGELES, 90017 CALIFORNIA (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (213) 239-0800 ------------------------ Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, no par value American Stock Exchange
------------------------ Securities registered pursuant to Section 12(g) of the Act: None ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of March 15, 1994, there were 12,514,075 shares of the registrant's common stock, no par value, issued and outstanding and the aggregate market value of the common stock, based on the closing price of the stock on the American Stock Exchange, held by non-affiliates of the registrant was approximately $24,945,000. Solely for purposes of this calculation, the share ownership of all directors and executive officers has been excluded. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year are incorporated herein by reference in Part III. 2. Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1993 are incorporated herein by reference in Parts I and II. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. GENERAL GUARDIAN BANCORP Guardian Bancorp (the "Company") is a bank holding company which was incorporated in California on December 31, 1981 and registered under the Bank Holding Company Act of 1956, as amended. Guardian Bancorp conducts operations through its sole subsidiary, Guardian Bank. The Company's executive offices are located at 800 South Figueroa Street, Los Angeles, California 90017, and its telephone number is (213) 239-0800. GUARDIAN BANK Guardian Bank (the "Bank") was incorporated under the laws of the State of California on October 22, 1982, was licensed by the California Superintendent of Banks ("Superintendent") and commenced operations as a California state-chartered bank in October 1983. The Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits, and the Bank is a member of the Federal Reserve System. The Bank has three regional banking offices at the following locations: 800 South Figueroa Street, Los Angeles, California, which also serves as the Bank's head office; 17330 Brookhurst Street, Fountain Valley, California; and 3401 Centrelake Drive, Ontario, California. Historically, the Bank concentrated on marketing to, and servicing the needs of, the title insurance and escrow industries, labor unions, real estate professionals, small and medium sized businesses and high net worth individuals in the counties of Los Angeles, Orange, Riverside, San Bernardino and Ventura, California. Furthermore, the Bank's historical primary lending focus was on real estate-mortgage and construction lending and, to a lesser extent, on lending to commercial and industrial enterprises. Although the Bank also makes installment loans, it does so primarily as an accommodation to existing customers. Real estate-mortgage loans include individual and multi-family residential mortgages, commercial and industrial mortgage loans and land acquisition loans. Construction loans include individual and multi-family residential construction loans and commercial and industrial construction loans. Commercial loans include loans made primarily to small and medium sized businesses and professionals for working capital and equipment acquisitions as well as trade finance. A substantial portion of these loans are made to borrowers involved in the real estate industry. Installment loans consist primarily of automobile loans and loans made to finance small equipment acquisitions. The Bank has generated a substantial portion of its deposits from large balance depositors by offering various customer services. A significant amount of such deposits are from Southern California-based title insurance companies and escrow companies. Customer services consist primarily of accounting, data processing and courier services. The Bank also offers a variety of other deposit instruments. These include personal and business checking accounts, savings accounts, including interest-bearing negotiable order of withdrawal accounts, money market accounts and time certificates of deposits. The Bank also offers a range of specialized services designed to attract and service the needs of its customers, including wire transfer capability, telephone transfers, same day posting and account research. In response to a changed economic environment, the Company has recently embarked upon a loan portfolio and deposit base diversification effort. The Company's loan portfolio diversification efforts are focused on targeting small and medium sized businesses in its market area and such targets include manufacturers, wholesalers, distributors, retailers, service companies and professionals. Efforts at changing the Company's deposit mix include introducing a wider array of deposit products, including retirement and cash management accounts. GUARDIAN TRUST COMPANY Guardian Trust Company was incorporated under the laws of the State of California on April 16, 1991, was licensed by the Superintendent and commenced operations as a California state-chartered trust company in July 1991. Guardian Trust Company, a wholly-owned subsidiary of the Bank, maintains its offices at 800 South Figueroa Street, Los Angeles, California. Guardian Trust Company offers custodial, securities servicing and cash management services to trusts established by labor unions. Each trust has professional investment managers that direct the investment of the trust funds held by Guardian Trust Company, and Guardian Trust Company does not offer any investment advice to such trusts. Guardian Trust Company, which was capitalized at $5 million by the Bank, subleases approximately 1,500 square feet of office space from the Company and employs eight people. Currently, the financial condition and results of operations of Guardian Trust Company are not material to those of the Company on a consolidated basis. At December 31, 1993, Guardian Trust Company provided services to trust fund clients based primarily in Southern California who control approximately $2.3 billion in assets. PRINCIPAL MARKET AREA The general economy in the Company's market area, and particularly the real estate market, are suffering from the effects of a persistent recession that has negatively impacted the ability of certain borrowers of the Company to perform under the original terms of their obligations to the Company. According to THE UCLA BUSINESS FORECAST FOR THE NATION AND CALIFORNIA, DECEMBER 1993 REPORT (the "UCLA Report"), the current recession in California is expected to continue until at least the second half of 1994, despite the presence of a moderate national economic recovery. The UCLA Report attributes the length and depth of the California recession, which began in 1990, to a number of negative economic factors, including permanent cutbacks in the California defense industries and military base closings, a cyclical downturn in California residential real estate construction, lower rates of international trade growth as a result of the worldwide recession and the effects on employment of an increased global emphasis on cost controls and downsizing. The statewide unemployment rate in November 1993 was 8.6%, compared with a national rate of 6.4%. The UCLA Report notes that while statewide unemployment figures have improved recently, this was due to a decline in the size of the labor force and that total California employment has declined. Nevertheless, the UCLA Report expects a weak job recovery to begin in California during the second half of 1994, approaching a normal growth rate over the next four years. Based on its assessment of recent economic reports and the current economic environment in the Company's market areas, management believes that the California recession may continue beyond the third quarter of 1994. It remains uncertain if the impact of the recent Southern California earthquake and the related aftershocks will have additional negative effect on the Southern California economy and the Company's customers. The financial condition of the Company has been, and is expected to continue to be, dependent upon overall general economic conditions and the real estate market in Southern California. The future success of the Company is dependent, in large part, upon the quality of its assets. Although management of the Company has devoted substantial time and resources to the identification, collection and workout of nonperforming and other potential problem assets, the real estate market and the overall economy in Southern California are likely to continue to significantly effect the quality of the Company's assets in future periods and, accordingly, its financial condition and results of operations. LOAN PORTFOLIO The Company has historically engaged in real estate lending through construction and term mortgage loans, all of which are secured by deeds of trust on underlying real estate. The Company also engages in commercial lending to businesses, and although the Company looks principally to the borrowers' cash flow as the source of payment, many commercial loans are secured by real estate as a secondary source of repayment. The Company's real estate and construction loans are diversified by type of collateral and are concentrated geographically throughout the five counties it serves in Southern California. The Company is currently in the process of diversifying its loan portfolio to 2 include more commercial loans to businesses. In addition to the collateralized position on its lending activities, all lending transactions are subject to the Bank's credit evaluation, underwriting criteria and monitoring standards. The lending activities of the Company are guided by the basic lending policy established by the Company's Board of Directors. Each loan is evaluated based on, among other things, character and leverage capacity of the borrower; capital and investment in a particular property, if applicable; cash flow; collateral; market conditions for the borrower's business or project; and prevailing economic trends and conditions. The Company's lending policy also requires an independent appraisal or an evaluation on each parcel of real estate which will be taken as collateral for a loan. Loan approval is centralized, and no officer has loan approval authority in excess of $100,000 on unsecured loans or $250,000 on secured loans. The following table sets forth the type and amount of loans outstanding as of the dates indicated:
December 31, --------------------------------------------------------------- 1993 1992 1991 1990 1989 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) Real estate-mortgage............................ $ 147,039 $ 138,430 $ 151,620 $ 125,389 $ 106,173 Construction.................................... 87,829 164,194 188,978 148,605 87,898 Commercial...................................... 86,260 85,618 86,946 66,006 52,386 Installment..................................... 2,046 2,938 2,940 2,687 2,598 ----------- ----------- ----------- ----------- ----------- Total loans................................... 323,174 391,180 430,484 342,687 249,055 Allowance for loan losses....................... (18,200) (13,466) (9,135) (3,473) (2,505) Deferred loan fees.............................. (426) (345) (1,238) (1,608) (1,393) ----------- ----------- ----------- ----------- ----------- Total net loans............................... $ 304,548 $ 377,369 $ 420,111 $ 337,606 $ 245,157 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Except as otherwise disclosed herein, as of December 31, 1993, the Company did not have any concentration of loans in any particular industry exceeding 10% of total outstanding loans. In light of the current economic environment and the impact it has had and may have on the real estate sector, as well as a regulatory recommendation regarding the size and growth of the Company's real estate related loans prior to 1992, management remains committed to reducing the Company's real estate concentration, particularly construction lending. At the same time, management intends to continue diversifying the loan portfolio by increasing the level of non-real estate credits to the extent such loans satisfy the Bank's underwriting criteria and are available and by limiting the growth of new real estate related loans. REAL ESTATE-MORTGAGE LOANS. Approximately 45.5% of the Company's loan portfolio at December 31, 1993 was comprised of medium term mortgage loans, virtually all of which were secured by first deeds of trust. The following table sets forth the composition of such mortgage loans by broad type of collateral as of the dates indicated.
December 31, -------------------------------------------------------------- 1993 1992 1991 ------------------ ------------------ ------------------ Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- (Dollars in thousands) Residential: 1-4 family units............................................... $ 24,298 16.5% $ 21,807 15.8% $ 24,335 16.1% Multifamily.................................................... 16,309 11.1 12,632 9.1 16,885 11.1 Commercial and industrial........................................ 79,398 54.0 70,776 51.1 67,953 44.8 Land acquisition loans........................................... 27,034 18.4 33,215 24.0 42,447 28.0 -------- ------- -------- ------- -------- ------- Total.......................................................... $147,039 100.0% $138,430 100.0% $151,620 100.0% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
3 The Company's 1-4 family residential mortgage loans, which averaged approximately $270,000 at December 31, 1993 (with four loans over $1 million), are typically secured by moderate or high-priced single family residences located in the Company's principal market area. These loans generally have a term of five years, are amortized over 20 to 30 years, provide for a balloon payment at the end of the term and generally bear a floating rate of interest either tied to the 11th District cost of funds or the Company's prime rate. These loans generally were underwritten with loan-to-value ratios ranging from approximately 70% to 80%, which decreases progressively for loans in excess of $250,000. The Company's multifamily residential mortgage loans, which averaged approximately $652,000 at December 31, 1993 (with four loans over $1 million), are typically secured by small (8 to 30 unit) apartment projects for which the Company has provided the construction financing (see "Item 1. Business -- Loan Portfolio -- Construction Loans" below). These loans generally have a term of five years, are amortized over 20 to 30 years and bear a floating rate of interest tied to the Company's prime rate. The Company's underwriting standards generally apply a maximum loan-to-value ratio of 75% to these loans. The Company's commercial and industrial mortgage loans, which averaged approximately $696,000 at December 31, 1993 (with 29 loans over $1 million), are primarily secured by small office buildings and multi-use industrial buildings that are either owner-occupied or built for rental purposes and, to a much lesser extent, by small (20 to 50 unit) motels located in the Company's principal market area. These loans generally have a term of three to five years, are amortized over 20 years and bear a floating rate of interest tied to the Company's prime rate. The Company's underwriting standards generally apply a maximum loan-to-value ratio of 70% to these loans. Land acquisition loans, which averaged approximately $403,000 at December 31, 1993 (with four loans over $1 million), are typically secured by raw land acquired for residential, commercial or industrial development within a relatively short period of time after acquisition. Of the amount outstanding at December 31, 1993, 56.2% was for residential development, 42.1% was for commercial projects and 1.7% was for industrial development. These loans generally mature in three years or less, bear a floating rate of interest tied to the Company's prime rate and are all due and payable at maturity. In addition, these loans were generally underwritten between 45% to 60% of the appraised value of the property on an undeveloped basis under the Company's underwriting policy. Although real estate-mortgage loans increased by approximately $8.6 million at the close of 1993 from the amount outstanding at December 31, 1992, this increase is primarily attributable to an increase in mini-permanent loans made by the Company to existing customers. The Company's mini-permanent loans represent loans that have a term of three to five years, are amortized over 20 to 25 years and provide for a balloon payment at the end of the term. Most of these loans provide intermediate term financing for construction loans that were originated by the Company. The Company expects to continue to provide intermediate term financing of this type in the future. CONSTRUCTION LOANS. Approximately 27.2% of the Company's loan portfolio at December 31, 1993 was comprised of construction loans. The following table sets forth the composition of such construction loans by broad type of project as of the dates indicated.
December 31, -------------------------------------------------------------- 1993 1992 1991 ------------------ ------------------ ------------------ Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- (Dollars in thousands) Residential: 1-4 family units............................................... $ 59,349 67.6% $ 94,204 57.4% $ 78,308 41.4% Multifamily.................................................... 8,437 9.6 16,000 9.7 59,169 31.3 Commercial and industrial........................................ 20,043 22.8 53,990 32.9 51,501 27.3 -------- ------- -------- ------- -------- ------- Total.......................................................... $ 87,829 100.0% $164,194 100.0% $188,978 100.0% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
4 During the last two and a half years, the Company's residential construction loans have increased as a percentage of the Company's total construction loan portfolio. This increase is indicative of the Company's preference for entry level housing projects, including detached homes and condominiums, and multifamily rental units, and the demand for such loans by its regular construction customers. These single-family housing and condominium units built for resale typically average approximately 1,600 square feet and sell for $130,000 to $250,000. The multifamily residential units financed by the Company consist of low-rise apartment projects of between eight and 30 units, each ranging in size from 800 square feet to 1,000 square feet, and rent for between $750 and $1,000 per month. As of December 31, 1993, four of the Company's residential construction loans, totalling approximately $2.3 million, or 0.7% of the total loan portfolio, were for projects located outside the State of California. The borrowers on these out-of-state loans are customers with whom the Company has had a long-standing relationship and who previously have demonstrated an ability to complete similar projects successfully. The Company's residential construction loans generally bear a floating rate of interest and mature in one year or less. The Company's residential construction loan underwriting standards generally limit the loan amount to approximately 70% of the completed value of the project. Larger single-family residential projects, including detached homes and/or condominiums, which consist of 15 to 150 units, are usually built by the Company's customers on a phased basis. Construction loans for these projects are generally underwritten on a phase-by-phase basis, such that each phase must qualify for financing separately and only after all or substantially all of the units in the prior phase or phases have been sold. The Company's commercial and industrial construction loans are typically made for the construction of small office, multi-use industrial buildings and, to a lesser extent, retail centers and had an average outstanding balance of $2.0 million at December 31, 1993. The Company's commercial and industrial construction loans generally bear a floating rate of interest and mature in one year or less. The Company's commercial and industrial loan underwriting standards generally limit the loan amount to approximately 70% of the completed value of the project. Since inception, all of the Company's commercial construction projects have been located in Southern California and have been made to customers who have had long-standing relationships with the Company and who generally have had previous success in the commercial construction industry. The Company disburses funds under each construction loan in accordance with a disbursement schedule that is part of the construction loan agreement and details the budgeted project cost. Borrowers are required to submit payment requests with cost breakdowns and invoices that are accompanied by, as appropriate, labor releases, original material releases and payee signatures acknowledging pending payment. Payment requests must also be supported by project inspection reports that include, among other things, line item actual cost amount comparisons to budgeted costs, photographs of the project and a discussion of the project's status. Funds are disbursed only after the request has been reviewed by the Company and a determination has been made that the project is proceeding on budget. Real estate mortgage and construction lending contain potential risks which are not inherent in other types of commercial loans. These potential risks include declines in market values of underlying real property collateral and, with respect to construction lending, delays or cost overruns, which could expose the Company to loss. In addition, risks in commercial real estate lending include declines in commercial real estate values, general economic conditions surrounding the commercial real estate properties, and vacancy rates. A decline in the general economic conditions or real estate values within the Company's market area have had and could have a further negative impact on the performance of the loan portfolio or value of the collateral. During the last three years, the Company has been adversely affected by the actualization of these risks. See "Nonaccrual, Past Due and Modified Loans" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". 5 COMMERCIAL LOANS. As of December 31, 1993, approximately 26.7% of the Company's loan portfolio was comprised of commercial loans. Loans in this category, which averaged approximately $131,000 at December 31, 1993, include loans made primarily to small and medium sized businesses and professionals for working capital and equipment acquisitions, as well as trade finance. In addition, at December 31, 1993, the Company had made available $24.0 million in secured warehouse lines of credit to Southern California mortgage banking companies, of which $14.1 million was outstanding. At December 31, 1993, approximately 70% of the Company's commercial loans were to borrowers involved in the real estate industry, such as real estate brokers, title insurance companies, escrow companies, mortgage banking companies and other real estate professionals. Although the Company typically looks to the borrower's cash flow as the principal source of repayment for such loans, approximately 34.4% of the loans within this category at December 31, 1993 were secured by real estate as a secondary source of repayment. Certain of the Company's commercial loans are secured by buildings for which the Company has provided the construction financing. As indicated above, a significant portion of the Company's loan portfolio, including commercial loans, is secured by real estate. The general economy in the Company's market area, and particularly the real estate market, are suffering from the effects of persistent recessionary conditions. Real estate values have been negatively impacted resulting in increases in the Company's average loan to value ratios in almost all segments of its loan portfolio. The current recession also has negatively impacted the volume of real estate transactions which adversely affected certain commercial borrowers involved in the real estate industry. INSTALLMENT LOANS. Installment loans consist primarily of automobile loans and loans made to finance small equipment acquisitions. These loans are made primarily as an accommodation to existing customers and are not a substantial part of the Company's lending strategy. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table sets forth the maturity distribution of the Company's loan portfolio (excluding installment loans) at December 31, 1993, which are based on remaining scheduled principal repayments (dollars in thousands).
MATURING -------------------------------------- OVER ONE ONE YEAR OR THROUGH FIVE OVER FIVE LESS YEARS YEARS TOTAL ----------- ------------ ----------- ----------- Real estate-mortgage......................................... $ 57,551 $ 72,315 $ 17,173 $ 147,039 Construction................................................. 83,853 3,976 - 87,829 Commercial................................................... 62,501 22,494 1,265 86,260 ----------- ------------ ----------- ----------- Total...................................................... $ 203,905 $ 98,785 $ 18,438 $ 321,128 ----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
The following table sets forth the sensitivity of the amounts due after one year to changes in interest rates for the Company's loan portfolio (excluding installment loans) at December 31, 1993 (dollars in thousands).
MATURING ------------------------ OVER ONE THROUGH OVER FIVE YEARS FIVE YEARS TOTAL ----------- ----------- ----------- Loans: With fixed interest rates...................................... $ 25,290 $ 5,186 $ 30,476 With variable interest rates................................... 73,495 13,252 86,747 ----------- ----------- ----------- Total...................................................... $ 98,785 $ 18,438 $ 117,223 ----------- ----------- ----------- ----------- ----------- -----------
NONACCRUAL, PAST DUE AND MODIFIED LOANS The performance of the Company's loan portfolio is evaluated regularly by senior management. Interest on loans is accrued monthly as earned. When, in the opinion of management, a reasonable 6 doubt exists as to the collection of principal or interest, such loans are evaluated individually to determine both the collectibility and the adequacy of collateral. Loans are generally placed on nonaccrual status when principal or interest is past due 90 days or more, or management has reasonable doubt as to the full collection of principal and interest, at which time the accrual of income is discontinued and previously accrued but unpaid interest is reversed against income. Subsequent interest payments are generally credited to income when received, except when the ultimate collectibility of principal is uncertain, in which case all collections are applied as principal reductions. The following table sets forth the amount of the Company's nonperforming loans (nonaccrual loans and loans delinquent 90 days or more) and loans with modified terms as of the dates indicated (dollars in thousands).
DECEMBER 31, ---------------------------------------------------------- 1993 1992 1991 1990 1989 -------- -------- -------- ------- ------- Nonaccrual loans.................................. $29,056 $33,316 $17,050 $ 268 $ 287 Loans delinquent 90 days or more (1).............. 5,769 1,547 11,734 2,403 2,452 -------- -------- -------- ------- ------- Total nonperforming loans (2)................... $34,825 $34,863 $28,784 $2,671 $2,739 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Loans with modified terms (1)..................... $ 9,539 $ 2,149 $ 8,124 $ - $ 103 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Nonperforming loans and loans with modified terms........................................... $44,364 $37,012 $36,908 $2,671 $2,842 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Nonaccrual and past due loans as a percentage of total loans..................................... 10.8% 8.9% 6.7% 0.8% 1.1% - ------------------------ (1) These loans were on accrual status throughout the year or, if held for part of the year, since their origination. Included in loans delinquent 90 days or more at December 31, 1993 were $1.7 million of loans which were pending receipt of documentation for purposes of renewal or extension which was received shortly after the close of 1993 and, in turn, caused such loans to return to performing status. (2) Nonperforming loans at December 31, 1993 and 1992 are shown net of participations sold to others of approximately $576,000 and $4.8 million, respectively.
The following tables set forth the Company's nonperforming loans by type as of the dates indicated (dollars in thousands):
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Nonaccrual loans: Real estate-mortgage......................................................... $ 13,804 $ 15,578 $ 9,013 Construction................................................................. 9,214 16,416 7,361 Commercial................................................................... 6,005 1,320 659 Installment.................................................................. 33 2 17 --------- --------- --------- Total...................................................................... $ 29,056 $ 33,316 $ 17,050 --------- --------- --------- --------- --------- ---------
7
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Loans past due 90 days or more and still accruing interest: Real estate-mortgage............................................................ $ 4,486 $ 70 $ 8,954 Construction.................................................................... - 1,363 2,305 Commercial...................................................................... 1,247 100 228 Installment..................................................................... 36 14 247 --------- --------- --------- Total......................................................................... $ 5,769 $ 1,547 $ 11,734 --------- --------- --------- --------- --------- ---------
The following tables set forth the composition of nonperforming loans by broad collateral type as of the dates indicated (dollars in thousands):
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Nonaccrual loans: Real estate: Residential: 1-4 Family units......................................................... $ 13,502 $ 11,358 $ 8,017 Multifamily units........................................................ 2,815 1,316 - Land(1).................................................................. 5,703 8,723 5,858 Commercial and industrial: Units.................................................................... 4,415 6,965 - Land(2).................................................................. 356 4,255 2,586 Business and consumer........................................................ 2,265 699 589 --------- --------- --------- $ 29,056 $ 33,316 $ 17,050 --------- --------- --------- --------- --------- ---------
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Loans past due 90 days or more and still accruing interest: Real estate: Residential: 1-4 Family units............................................................ $ 1,001 $ 725 $ 2,134 Multifamily units........................................................... 439 554 - Land........................................................................ - - 150 Commercial and industrial: Units....................................................................... 661 154 3,005 Land(3)..................................................................... 3,050 - 5,323 Business and consumer........................................................... 618 114 1,122 --------- --------- --------- $ 5,769 $ 1,547 $ 11,734 --------- --------- --------- --------- --------- --------- - ------------------------ (1) At December 31, 1993, nonaccrual loans secured by residential land were comprised of approximately $3.4 million of land which was zoned and tentatively or fully mapped for immediate use and approximately $2.3 million of land that requires additional permits, zone changes or other efforts to be suitable for immediate use. (2) At December 31, 1993, all such loans were secured by commercial or industrial land that requires additional permits, zone changes and other efforts to be suitable for immediate use. (3) At December 31, 1993, loans past due 90 days or more and still accruing interest secured by commercial and industrial land was zoned and tentatively or fully mapped for immediate use.
8 The following table sets forth the Company's loans with modified terms by type as of the dates indicated (dollars in thousands):
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Real estate-mortgage............................................................... $ 6,368 $ 2,149 $ 3,089 Construction....................................................................... 2,072 - 4,835 Commercial......................................................................... 1,099 - 200 --------- --------- --------- Total............................................................................ $ 9,539 $ 2,149 $ 8,124 --------- --------- --------- --------- --------- ---------
At December 31, 1993, the Company's portfolio of loans with modified terms reflects the original principal amount as amortized by their terms, less a $600,000 charge-off of principal taken against one credit at the time of modification. The weighted average stated yield on these loans for the year ended December 31, 1993 was approximately 5.5%. The Company's average cost of interest-bearing liabilities was 3.3% for the year ended December 31, 1993. The following table sets forth the composition of loans with modified terms by broad collateral type as of the dates indicated (dollars in thousands):
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Real estate: Residential: 1-4 Family units............................................................... $ - $ - $ 2,360 Multifamily units.............................................................. 1,280 - - Commercial and industrial........................................................ 7,493 2,126 5,764 Business and consumer.............................................................. 766 23 - --------- --------- --------- $ 9,539 $ 2,149 $ 8,124 --------- --------- --------- --------- --------- ---------
Since 1991, the Company has been impacted by the significant slowdown in California's economic activity. One result of the current recessionary environment has been the decrease of real estate values in certain sectors of the Company's target markets which, in turn, has affected certain borrowing customers' financial capabilities and liquidity. The significant increase in amounts reported as nonperforming loans since 1990 is attributable to the existing economic climate, and a substantial portion of the nonperforming loans are real estate mortgage and construction credits. At December 31, 1993, 1992, and 1991, the ratio of the allowance for loan losses to period end nonperforming loans was 52.3%, 38.6% and 31.7%, respectively. The amount of loans with modified terms has increased significantly since 1992. It is the Company's policy to consider a restructured loan a loan with modified terms when a determination has been made that greater economic value may be realized under new terms rather than through foreclosure, liquidation or other disposition. In such circumstances, the Company may grant a concession to the borrower that it would not otherwise grant, including the reduction of interest charged, the forgiveness of certain penalties and, in certain cases, the reduction of the principal balance on a loan. Except for the loans included in the nonperforming and modified loan tables above and approximately $35.3 million in additional credits, which represent loans that have been identified by management as potential problem credits but are not included in the tables above, the Company is not aware of any other loans at December 31, 1993 where known information about possible credit problems of the borrower causes management to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which may result in such loans being included in such tables at some future date. 9 The following table sets forth the composition of potential problem credits by broad collateral type at December 31, 1993 (dollars in thousands): Real estate: Residential: 1-4 Family units...................................................... $ 10,360 Multifamily units..................................................... 9,856 Land.................................................................. 1,875 Commercial and industrial: Units................................................................. 11,101 Business and Consumer..................................................... 2,122 --------- $ 35,314 --------- ---------
Management cannot predict the extent to which the current recessionary economic environment may persist or worsen or the full impact such environment may have on the Company's loan portfolio. However, if current economic conditions continue for a sustained period of time or worsen, management anticipates that the Bank's borrowers will be adversely effected and underlying collateral values will continue to decline. Furthermore, the Bank's primary regulators review the loan portfolio as an integral part of their periodic examinations of the Bank, and their assessment of specific credits, based upon information available to them at the time of their examinations, may affect the level of the Company's nonperforming loans. Accordingly, there can be no assurance that other loans will not be placed on nonaccrual, become 90 days or more past due or have terms modified in the future. ALLOWANCE FOR LOAN LOSSES A certain degree of risk is inherent in the extension of credit. Management has credit policies in place to monitor and attempt to control the level of loan losses and nonperforming loans. One product of the Company's credit risk management is the maintenance of the allowance for loan losses at a level considered by management to be adequate to absorb estimated known and inherent losses in the existing portfolio, including commitments and standby letters of credit. The allowance for loan losses is established through charges to operations in the form of provisions for loan losses. The allowance is based upon a regular review of current economic conditions, which might affect a borrower's ability to pay, underlying collateral values, risks in and the composition of the loan portfolio, prior loss experience and industry averages. In addition, the Bank's primary regulators, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may recommend additions to the allowance based on their assessment of information available to them at the time of their examination. Loans that are deemed to be uncollectible are charged-off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged-off are added to the allowance. 10 The following table sets forth the Company's loan loss experience and certain information relating to its allowance for loan losses as of the dates and for the years indicated (dollars in thousands).
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- Average net loans outstanding.............................. $353,032 $420,192 $392,997 $291,741 $203,090 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Allowance for loan losses: Balance at beginning of period........................... $ 13,466 $ 9,135 $ 3,473 $ 2,505 $ 1,713 --------- --------- --------- --------- --------- Charge-offs: Commercial loans....................................... (4,068) (1,863) (250) (153) (419) Real estate-mortgage loans............................. (5,286) (705) - - - Construction loans..................................... (4,142) (2,486) - - - Installment loans...................................... (73) (61) (38) (42) (34) Recoveries: Commercial loans....................................... 44 39 2 - - Real estate-mortgage loans............................. - - - - - Construction loans..................................... - - - - - Installment loans...................................... 9 12 2 3 9 --------- --------- --------- --------- --------- Net charge-offs.......................................... (13,516) (5,064) (284) (192) (444) --------- --------- --------- --------- --------- Provision charged to operations.......................... 18,250 9,395 5,946 1,160 1,236 --------- --------- --------- --------- --------- Balance at end of period................................. $ 18,200 $ 13,466 $ 9,135 $ 3,473 $ 2,505 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of allowance for loan losses to loans outstanding at end of period........................................ 5.64% 3.45% 2.13% 1.01% 1.01% Ratio of allowance for loan losses to nonperforming loans at the end of the period................................ 52.26% 38.63% 31.74% 130.03% 91.46% Ratio of net charge-offs to average loans outstanding during the period....................................... 3.83% 1.21% 0.07% 0.07% 0.22%
The increase in net charge-offs during 1993 and in 1992 from those reported in prior periods primarily resulted from losses recognized upon transfer of assets to other real estate owned ("OREO"), losses taken on certain real estate related loans due to economic conditions and other charge-offs related to loans deemed uncollectible by the Company. Management believes that the allowance for loan losses at December 31, 1993 was adequate to absorb the known and inherent losses in the loan portfolio at that time. However, no assurance can be given that continuation of current recessionary factors, future changes in economic conditions that might adversely affect the Company's principal market area, borrowers or collateral values, and other circumstances will not result in increased losses in the Company's loan portfolio in the future. 11 Although the Company does not normally allocate the allowance for loan losses to specific loan categories, an allocation has been made for purpose of this discussion as set forth below. The allocations used in the table are based upon the criteria considered by management in determining the amount of additional provisions for loan losses and the aggregate level of the allowance for loan losses (dollars in thousands).
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991 --------------------------------- --------------------------------- ----------------------------------- PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF LOANS IN EACH LOANS IN EACH LOANS IN EACH ALLOWANCE FOR CATEGORY TO ALLOWANCE FOR CATEGORY TO ALLOWANCE FOR LOAN CATEGORY TO LOAN LOSSES TOTAL LOANS LOAN LOSSES TOTAL LOANS LOSSES TOTAL LOANS ---------------- -------------- ---------------- -------------- ------------------ -------------- Real estate-mortgage...... $ 6,246 45.5% $ 2,823 35.0% $ 1,618 35.2% Construction.......... 4,632 27.2 6,134 41.8 2,657 43.9 Commercial............ 4,644 26.7 1,719 22.5 966 20.2 Installment........... 75 .6 29 .7 28 .7 Unallocated........... 2,603 - 2,761 - 3,866 - -------- ----- -------- ----- ------- ----- $18,200 100.0% $13,466 100.0% $ 9,135 100.0% -------- ----- -------- ----- ------- ----- -------- ----- -------- ----- ------- -----
The allocation of the allowance for loan losses should not be interpreted as an indication of future credit trends or that losses will occur in these amounts or proportions. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories, since even on the above basis there is a substantial unallocated portion of the allowance, and the total allowance is a general allowance applicable to the entire portfolio. OTHER REAL ESTATE OWNED Real estate and other assets acquired in satisfaction of loans are recorded at estimated fair value, less estimated costs of disposition, and any difference between fair value and the loan amount is charged to the allowance for loan losses. Gains and losses from the sale of such assets, any subsequent additions to the OREO valuation allowance and net operating expenses are included in noninterest expense. Activity in OREO for the periods indicated is as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1992 1991 ---------- --------- --------- Balance, beginning of period......................................... $ 4,359 $ 2,945 $ - Additions............................................................ 24,209 6,071 6,245 Sales................................................................ (13,905) (4,617) (3,300) Valuation adjustments................................................ (714) (40) - ---------- --------- --------- Balance, end of period............................................... $ 13,949 $ 4,359 $ 2,945 ---------- --------- --------- ---------- --------- ---------
The following sets forth the composition of OREO, net of valuation adjustments, by broad type of collateral at the dates indicated (dollars in thousands):
DECEMBER 31, ------------------------------- 1993 1992 1991 --------- --------- --------- Residential: 1-4 Family units...................................................... $ 7,023 $ 1,410 $ 2,495 Land.................................................................. 3,736 50 - Commercial and industrial: Units................................................................. 1,540 1,782 450 Land.................................................................. 1,650 1,117 - --------- --------- --------- Total............................................................... $ 13,949 $ 4,359 $ 2,945 --------- --------- --------- --------- --------- ---------
12 DEPOSITS The Company has generated a substantial portion of its deposits from large balance depositors by offering various customer services. A significant amount of such deposits are from Southern California based title insurance companies and escrow companies. Customer services consist primarily of accounting and courier services. The Company seeks to control its customer service expense by continuously monitoring the earnings performance of its account relationships and, on that basis, limiting the amount of services provided. As of December 31, 1993, title insurance companies and escrow companies accounted for approximately $287.3 million, or 89.0%, of the Company's noninterest-bearing demand deposits which compares to $374.1 million, or 90.3% of the Company's noninterest-bearing demand deposits at the close of 1992. The decline between the close of 1993 and 1992 principally reflects a slow down in real estate transaction activity handled by such depositors, and to a lesser extent, the Company's reduced reliance on such accounts as a funding source. At December 31, 1993, the Company's five largest title insurance company customers accounted for $129.5 million, or 24.6% of total deposits; the two largest of such customers accounted for 8.5% and 6.3% of total deposits. Title insurance company deposits and, to a lesser extent, escrow company deposits are subject to greater fluctuation and can be sensitive to prevailing interest rates and other general economic factors that affect the demand for housing and other real estate than other types of demand deposits. For example, as real estate development and sales activity decline during periods of rising interest rates, the Company might experience a corresponding decline in its demand deposits from such sources. Should the Company experience a decline in the level of such deposits, it would have to obtain funds from other sources, and probably at higher rates, to maintain, or expand, its lending activities. An increase in the cost of funds without a corresponding increase in the yield on interest earning assets would likely decrease the Company's net interest income, which is the primary component of the Company's earnings. During the first quarter of 1994, the Board of Governors of the Federal Reserve System issued a new interpretive release which is applicable to all member banks, such as the Bank, and other entities, which limits the payment of customer service expense to prescribed instances. As a result of this release, it is expected that certain balances of accounts associated with these expenses and customer service expense will decline in 1994. Labor union deposits, which were $91.5 million at December 31, 1993, or 17.4% of total deposits and were $90.9 million at December 31, 1992, or 15.2% of total deposits, generally are not transaction oriented and, thus, are less likely to fluctuate with the general level of interest rates. At December 31, 1993, approximately 64.2% of such deposits were demand deposits. Management believes that labor union deposits are subject to less fluctuation than title insurance company and escrow company deposits and therefore afford a more stable funding source for the Company's lending activities. No individual account represented 10% or more of total deposits. Time certificates of deposit of $100,000 or more, which were $22.2 million at December 31, 1993, or 4.2% of total deposits and were $28.4 million, or 4.7%, of total deposits at December 31, 1992, are generally more sensitive to changes in interest rates than other types or amounts of deposits. The Company's period end deposit balances traditionally reflect increases in noninterest-bearing demand deposits from title insurance company and escrow company customers. These deposits increase at or near each month end as the underlying real estate transactions being handled by such deposit customers are nearing consummation. Accordingly, management considers average deposit balances to be more indicative of the Company's deposit base. 13 The following table sets forth the distribution of average deposits and the rates paid thereon for the years indicated (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------- 1993 1992 1991 ------------------------------ ------------------------------ ------------------------------ AMOUNT RATE % OF TOTAL AMOUNT RATE % OF TOTAL AMOUNT RATE % OF TOTAL -------- ----- ----------- -------- ----- ----------- -------- ----- ----------- Noninterest-bearing demand deposits..................... $323,661 - % 59.3% $383,580 - % 63.6% $292,079 - % 54.9% Interest-bearing demand and savings deposits............. 53,626 2.3 9.8 65,242 2.7 10.8 57,187 3.4 10.8 Money market deposits......... 52,327 2.5 9.6 51,813 3.2 8.6 47,701 5.2 9.0 Time certificates of deposit.. 116,603 3.9 21.3 102,210 5.0 17.0 134,621 7.0 25.3 -------- ----- ----- -------- ----- ----- -------- ----- ----- Total....................... $546,217 3.2% 100.0% $602,845 3.9% 100.0% $531,588 5.9% 100.0% -------- ----- ----- -------- ----- ----- -------- ----- ----- -------- ----- ----- -------- ----- ----- -------- ----- -----
During the year ended December 31, 1993, the mix in the composition of average deposits changed from the prior year as average noninterest-bearing demand deposits decreased, and average time certificates of deposit increased, when expressed as a percentage of average total deposits. Average noninterest-bearing demand deposits comprised 59.3%, 63.6% and 54.9% of average total deposits for the years ended December 31, 1993, 1992 and 1991, respectively. Average time certificates of deposit comprised 21.3%, 17.0% and 25.3% of total average deposits for the years ended December 31, 1993, 1992 and 1991, respectively. Total average interest-bearing demand, savings and money market deposits, when expressed as a percentage of total average deposits, remained comparable over the three years ended December 31, 1993, and were 19.4%, 19.4% and 19.7%, respectively, during 1993, 1992 and 1991. The increase in the Company's average time certificates of deposit during the year ended December 31, 1993 from the prior year's average is, in management's opinion, attributable to efforts devoted toward diversifying the Company's funding sources. The Company's noninterest-bearing deposits declined in 1993 from levels reached in the prior two years reflecting the decreased volume of title insurance company and escrow company deposit activity occurring as a result of recent declines in refinancing activity from levels in the prior two years. During the first quarter of 1994, the Board of Governors of the Federal Reserve System issued a new interpretive release which is applicable to all member banks, such as the Bank, and other entities, which limits the payment of customer service expense to certain prescribed instances. As a result of the issuance of this interpretive release it is expected that certain noninterest-bearing account balances of title insurance company and escrow company depositors will decline in 1994. The following table sets forth the maturities of the Company's time certificates of deposit outstanding at December 31, 1993 (dollars in thousands).
$100,000 UNDER $100,000 AND OVER -------------- --------- Three months or less........................................................ $ 4,604 $ 5,459 Over three months through six months........................................ 20,787 6,626 Over six months through twelve months....................................... 39,613 8,789 Over twelve months.......................................................... 14,640 1,368 -------------- --------- Total..................................................................... $ 79,644 $ 22,242 -------------- --------- -------------- ---------
COMPETITION The Company faces substantial competition for deposits and loans throughout its market area. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. Competition for deposits comes primarily from other commercial banks, savings institutions, credit unions, thrift and loans, money market funds and other investment alternatives. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services. Competition for loans comes primarily from other commercial banks, savings institutions, 14 thrift and loans, mortgage banking firms, credit unions and other financial intermediaries. The Company faces competition for deposits and loans throughout its market areas not only from local institutions but also from out-of-state financial intermediaries which have opened loan production offices or which solicit deposits in its market areas. Many of the financial intermediaries operating in the Company's market areas offer certain services, such as trust, investment and international banking services, which the Company does not offer directly (other than custodial, cash management and securities servicing provided by Guardian Trust Company). Additionally, banks with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers. The Company has three offices located in Los Angeles, Fountain Valley and Ontario, California. Neither the deposits nor loans of any office of the Company exceed 1% of the aggregate loans or deposits of all financial intermediaries located in the counties in which such offices are located. EMPLOYEES At December 31, 1993, the Company employed 159 people. Management believes that its relations with its employees are satisfactory. EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Company are subject to the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation. The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the Federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The likelihood of any major changes and the impact such changes might have on the Company are impossible to predict. Certain of the potentially significant changes which have been enacted and proposals which have been made recently are discussed below. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improvement Act") was enacted into law. Set forth below is a brief discussion of certain portions of this law and implementing regulations that have been adopted or proposed by the Federal Reserve Board, the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC (collectively, the "Federal banking agencies"). 15 BIF RECAPITALIZATION. The FDIC Improvement Act provides the FDIC with three additional sources of funds to protect deposits insured by the Bank Insurance Fund (the "BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the U.S. Treasury; borrow from the Federal Financing Bank up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver; and borrow from financial intermediaries that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. IMPROVED EXAMINATIONS. All insured depository institutions must undergo a full-scope, on-site examination by their appropriate Federal banking agency at least once every 12 months. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate Federal banking agency against each institution or affiliate as it deems necessary or appropriate. STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDIC Improvement Act, the Federal banking agencies have issued proposed safety and soundness standards on matters such as loan underwriting and documentation, asset quality, earnings, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. The proposals, among other things, establish the maximum ratio of classified assets to total capital at 1% and the minimum level of earnings sufficient to absorb losses without impairing capital. The proposals provide that a bank's earnings are sufficient to absorb losses without impairing capital if the bank is in compliance with minimum capital requirements and the bank would, if its net income or loss over the last four quarters continued over the next four quarters, remain in compliance with minimum capital requirements. Any institution which fails to comply with these standards must submit a compliance plan. Failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action. No assurance can be given as to the final form of the proposed regulations or, if adopted, the impact of such regulations on the Company and the Bank. In December 1992, the Federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires each Federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions that fall below one or more prescribed minimum capital ratios. The purpose of this law is to resolve the problems of insured depository institutions at the least possible long-term cost to the appropriate deposit insurance fund. The law requires each Federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized (significantly exceeding the required minimum capital requirements), adequately capitalized (meeting the required capital requirements), undercapitalized (failing to meet one or more of the capital requirements), significantly undercapitalized (significantly below one or more capital requirement) and critically undercapitalized (failing to meet all capital requirements). In September 1992, the Federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of the FDIC Improvement Act. Under the regulations, an insured depository institution will be deemed to be: -"well capitalized" if it (i) has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based ratio capital of 6% or greater and a leverage ratio of 5% or greater and (ii) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; 16 -"adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater (or a leverage ratio of 3% or greater if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); -"undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage ratio that is less than 4% (or a leverage ratio that is less than 3% if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); -"significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and -"critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized may be reclassified to the next lower capital category if the appropriate Federal banking agency, after notice and opportunity for hearing, (i) determines that the institution is in an unsafe or unsound condition or (ii) deems the institution to be engaging in an unsafe or unsound practice and not to have corrected the deficiency. At each successive lower capital category, an insured depository institution is subject to more restrictions and Federal banking agencies are given less flexibility in deciding how to deal with it. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate Federal banking agency, subjected to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate Federal banking agency 45 days after becoming undercapitalized. The appropriate Federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate Federal banking agency may impose on any undercapitalized depository institution any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt corrective action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of 17 specified activities; (vi) replacement of directors or senior executive officers, subject to certain grandfather provisions for those elected prior to enactment of the FDIC Improvement Act; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate Federal banking agency. Although the appropriate Federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate Federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. As of December 31, 1993, the Bank had a total risk-based capital ratio of 8.33%, a Tier 1 risk-based capital ratio of 7.02% and a leverage ratio of 4.19%. The Bank is subject to a written regulatory agreement that requires it to develop a plan to maintain an adequate capital position. See "Item 1. Business - -- Supervision and Regulation -- Potential and Existing Enforcement Actions." Pursuant to its plan, in January 1994, the Company raised gross proceeds of approximately $19.7 million in new equity capital in a rights offering (offering) which, after deducting capital raising costs, provided $18.0 million in net equity capital. The Company contributed $16.5 million of the net proceeds to the Bank in the form of Tier 1 capital. On a proforma basis, the Bank's total risk-based capital ratio, and Tier 1 risk-based capital ratio and leverage ratio are 11.77%, 13.07% and 6.89%, respectively, at December 31, 1993, assuming that the Bank had received the capital contribution and, in turn, placed the funds in 20% risk-weighted assets at year end. Under the same assumptions, the Company's total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage ratio were 13.08%, 10.95% and 6.68%, respectively. OTHER ITEMS. The FDIC Improvement Act also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates "pass through" deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate Federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any Federal savings association may acquire or be acquired by any insured depository institution. 18 The FDIC has adopted final regulations implementing the risk-based premium system mandated by the FDIC Improvement Act. Under the final regulations, which cover the assessment periods commencing on and after January 1, 1994, insured depository institutions are required to pay insurance premiums within a range of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending on their risk classification. To determine the risk-based assessment for each institution, the FDIC will categorize an institution as well capitalized, adequately capitalized or undercapitalized based on its capital ratios. A well capitalized institution is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% leverage capital ratio. An adequately capitalized institution will have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% leverage capital ratio. The FDIC will also assign each institution to one of three subgroups based upon reviews by the institution's primary Federal or state regulator, statistical analyses of financial statements and other information relevant to evaluating the risk posed by the institution. As a result, the assessment rates within each of three capital categories will be as follows (expressed as cents per $100 of deposits):
SUPERVISORY SUBGROUP ---------------------- A B C ---- ---- ---- Well capitalized.............. 23 26 29 Adequately capitalized........ 26 29 30 Undercapitalized.............. 29 30 31
In addition, the FDIC has issued final regulations implementing provisions of the FDIC Improvement Act relating to powers of insured state-chartered banks. The regulations prohibit insured state-chartered banks from making equity investments of a type, or in an amount, that are not permissible for national banks. In general, equity investments include equity securities, partnership interests and equity interests in real estate. Under the final regulations, non-permissible investments must be divested by no later than December 19, 1996. The FDIC has also issued final regulations which prohibit, subject to certain specified exceptions, insured state-chartered banks from engaging as principal in any activity not permissible for a national bank, without FDIC approval. The regulations also provide that, subject to certain specified exceptions, subsidiaries of insured state-chartered banks may not engage as principal in any activity that is not permissible for a subsidiary of a national bank, without FDIC approval. The impact of the FDIC Improvement Act on the Company and the Bank is uncertain, especially since many of the regulations promulgated thereunder have only been recently adopted and certain of the law's provisions still need to be defined through future regulatory action. Certain provisions, such as the recently adopted real estate lending standards and the limitations on investments and powers of state-chartered banks and the rules to be adopted governing compensation, fees and other operating policies, may affect the way in which the Bank conducts its business, and other provisions, such as those relating to the establishment of the risk-based premium system and the limitations on pass-through insurance, may affect the Bank's results of operations. CAPITAL ADEQUACY GUIDELINES The Federal Reserve Board and the FDIC have issued guidelines to implement risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0% for risk-free assets, such as cash and certain U.S. government securities, to 100% for relatively high-risk assets, such as loans and investments in fixed assets, premises and other real estate owned. The aggregate dollar amount of each 19 category is then multiplied by the risk-weight associated with that category. The resulting weighted values from each of the risk categories are then added together to determine the total risk-weighted assets. The guidelines require a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital. Higher risk-based ratios are required for an insured depository institution to be considered well capitalized under the prompt corrective action provisions of the FDIC Improvement Act. See "Item 1. Business -- Effect of Governmental Policies and Recent Legislation -- Federal Deposit Insurance Improvement Act of 1991 -- Prompt Corrective Regulatory Action." A banking organization's qualifying total capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus and retained earnings, qualifying noncumulative perpetual preferred stock (plus, for bank holding companies, qualifying cumulative perpetual preferred stock in an amount up to 25% of Tier 1 capital) and minority interests in the equity accounts of consolidated subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1 capital; however, purchased mortgage servicing rights and purchase credit card relationships may be included, subject to certain limitations. At least 50% of the banking organization's total regulatory capital must consist of Tier 1 capital. Tier 2 capital may consist of (i) the allowance for possible loan and lease losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative perpetual preferred stock and long-term preferred stock (which for bank holding companies must have an original maturity of 20 years or more) and related surplus; (iii) hybrid capital instruments (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus, in an amount up to 50% of Tier 1 capital. The inclusion of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the Federal banking agencies. The Federal Reserve Board and the FDIC have also adopted a minimum leverage ratio of Tier 1 capital to average total assets of 3% for institutions which have been determined to be in the highest of five categories used by regulators to rate financial institutions. This leverage ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain capital well above the minimum level. All other institutions are required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. Furthermore, higher leverage ratios are required for an insured depository institution to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of the FDIC Improvement Act. See "Item 1. Business - -- Effect of Governmental Policies and Recent Legislation -- Federal Deposit Insurance Corporation Improvement Act of 1991 -- Prompt Corrective Regulatory Action." As of December 31, 1993, the Company and the Bank had total risk-based capital ratios of 8.15% and 8.33%, Tier 1 risk-based capital ratios of 6.00% and 7.02% and leverage ratios of 3.74% and 4.19%, respectively. See "Effect of Governmental Policies and Recent Legislation -- Standards for Safety and Soundness." The Federal banking agencies have issued proposed rules, in accordance with the FDIC Improvement Act, seeking public comment on methods for measuring interest rate risk, and two alternative methods for determining what amount of additional capital, if any, a bank may be required to have for interest rate risk. The Company cannot yet determine whether such proposals will be adopted or the impact of such regulations, if adopted, on the Company and the Bank. The Federal banking agencies recently issued a statement advising that, for regulatory purposes, federally supervised banks and savings associations should report deferred tax assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," beginning in 1993. SFAS No. 109 employs an asset and liability approach in accounting for 20 income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and as measured by the provisions of enacted tax law. See "Item 1. Business -- Effect of Governmental Policies and Recent Legislation." However, the Federal banking agencies have advised limiting the amount of deferred tax assets that is allowable in computing an institution's regulatory capital. Deferred tax assets that can be realized from taxes paid in prior carry back years and from the future reversal of taxable temporary differences would generally not be limited. Deferred tax assets that can only be realized through future taxable earnings, including the implementation of a tax planning strategy, would be limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date or (ii) 10% of Tier 1 capital. The amount of deferred taxes in excess of this limit, if any, would be deducted from Tier 1 capital and total assets in regulatory capital calculations. CHANGES IN ACCOUNTING PRINCIPLES In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to provision for loan losses. Additionally, SFAS 114 eliminates the requirement that a creditor account for certain loans as foreclosed assets until the creditor has taken possession of the collateral. SFAS 114 is effective for financial statements issued for fiscal years beginning after December 15, 1994. Earlier adoption is permitted. To comply with regulatory requirements regarding SFAS No. 114 effective in 1993, in-substance foreclosed assets are classified as loans in cases where the Company does not have physical possession of the underlying collateral. Although the Company has not yet adopted SFAS 114, management does not expect implementation to have a material impact on the Company's financial position or results of operations. In May 1993, the FASB issued Statement of Financial Standards No. 115 "Accounting For Certain Investments in Debt and Equity Securities" addressing the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments would be classified in three categories and accounted for as follows: (i) debt and equity securities that the entity has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost; (ii) debt and equity securities that are held for current resale would be classified as trading securities and reported at fair value, with unrealized gains and losses included in operations; and (iii) debt and equity securities not classified as either securities held to maturity or trading securities would be classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from operations and reported as a separate component of shareholders' equity. The statement is effective for financial statements for calendar year 1994, but may be applied to an earlier fiscal year for which annual financial statements have not been issued. The Bank has both investment securities classified as "available to maturity" and investment securities classified as "available for sale". Securities classified as available for sale will be reported at their fair value at the end of each fiscal quarter. Accordingly, the value of such securities fluctuates based on changes in interest rates. Generally, an increase in interest rates would result in a decline in the value of investment securities held for sale, while a decline in interest rates would result in an increase in the value of such securities. Therefore, the value of investment securities available for sale and the Bank's shareholders' equity could be subject to fluctuation based on changes in interest rates. As a consequence, the Bank's capital levels for regulatory purposes could change based solely on fluctuations in interest rates and fluctuations in the value of investment securities available for sale. Such change could result in additional regulatory 21 restrictions under the prompt corrective actions provisions of the FDIC Improvement Act of 1991 and various other laws and regulations that are based, in part, on an institution's capital levels, including those dealing with the risk related insurance premium system and brokered deposit restrictions. See "Business -- Effect of Governmental Policies and Recent Legislation -- Federal Deposit Insurance Corporation Improvement Act of 1991." OMNIBUS BUDGET RECONCILIATION ACT OF 1993 On August 10, 1993, President Clinton signed the Omnibus Budget Reconciliation Act of 1993 (the "Reconciliation Act"). Some of the provisions in the Reconciliation Act that may have an effect on the Company include the following: (i) the corporate income tax rate was increased from 34.0% to 35.0% for taxable income in excess of $10.0 million; (ii) mark-to-market rules for tax purposes with regard to securities held for sale by the Company; (iii) beginning in 1994 the amount of business meals and entertainment expenses that will be disallowed will be increased from the current 20.0% disallowance to 50.0% disallowance; (iv) club dues and lobbying expenses will no longer be deductible; and (v) certain intangible assets, including goodwill, will be amortized over a period of 15 years. Considering the Company's current tax situation, the Company does not expect the provisions of the Reconciliation Act to have a material effect on the Company. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. THE COMPANY The Company, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"). The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board may conduct examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the Act and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Item 1. Business -- Effect of Governmental Policies and Recent Legislation -- Capital Adequacy Guidelines." The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company. The Company is prohibited by the Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper 22 incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by the Company or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced DE NOVO and activities commenced by acquisition, in whole or in part, of a going concern and is generally prohibited from approving an application by a bank holding company to acquire voting shares of any commercial bank in another state unless such acquisition is specifically authorized by the laws of such other state. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. This doctrine has become known as the "source of strength" doctrine. Although the United States Court of Appeals for the Fifth Circuit found the Federal Reserve Board's source of strength doctrine invalid in 1990, stating that the Federal Reserve Board had no authority to assert the doctrine under the Act, the decision, which was not binding on federal courts outside the Fifth Circuit, was recently reversed by the United States Supreme Court on procedural grounds. The validity of the source of strength doctrine is likely to continue to be the subject of litigation until definitively resolved by the courts or by Congress. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California State Banking Department. Finally, the Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. THE BANK The Bank, as a California state-chartered bank which is a member of the Federal Reserve System, is subject to primary supervision, periodic examination and regulation by the Federal Reserve Board and the Superintendent. The Bank is insured by the FDIC, which currently insures deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the Bank, as is the case with all insured banks, pays a semi-annual statutory assessment and is subject to the rules and regulations of the FDIC. See "Item 1. Business -- Effect of Governmental Policies and Recent Legislation." Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and Federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. Further, the Bank is required to maintain certain levels of capital. See "Item 1. Business -- Effect of Governmental Policies and Recent Legislation -- Capital Adequacy Guidelines." RESTRICTIONS ON TRANSFERS OF FUNDS TO GUARDIAN BANCORP BY THE BANK Guardian Bancorp is a legal entity separate and distinct from the Bank and its subsidiary. There are statutory and regulatory limitations on the amount of dividends which may be paid to Guardian Bancorp by the Bank. California law restricts the amount available for cash dividends by 23 state-chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the Superintendent. The Federal Reserve Board also has authority to prohibit the Bank from engaging in what, in the Federal Reserve Board's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the Federal Reserve Board could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the Federal Reserve Board has established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of the FDIC Improvement Act could limit the amount of dividends which the Bank or the Company may pay. See "Item 1. Business -- Federal Deposit Insurance Corporation Improvement Act of 1991 -- Prompt Corrective Regulatory Action and -- Capital Adequacy Guidelines" for a discussion of these additional restrictions on capital distributions. At December 31, 1993, Guardian Bancorp, on an unconsolidated parent company only basis, had cash and cash equivalents available of approximately $402,000. Guardian Bancorp retained approximately $1.2 million of the net proceeds received in its rights offering completed in the first quarter of 1994 for purposes of meeting its general corporate operating needs. Substantially all of Guardian Bancorp's future revenues, on an unconsolidated basis, including funds available for the payment of dividends and other operating expenses, are, and will continue to be, primarily dividends paid by the Bank. However, the Bank has entered into a written agreement with the Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") pursuant to which it has agreed not to pay any cash dividends to Guardian Bancorp without the prior written approval of the Federal Reserve Bank. See "Item 1. Business -- Supervision and Regulation -- Potential and Existing Enforcement Actions." The Bank is subject to certain restrictions imposed by Federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliate is limited to 10% of the Bank's capital and surplus (as defined by Federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined by Federal regulations). California law also imposes certain restrictions with respect to transactions involving Guardian Bancorp and other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of the FDIC Improvement Act. See "Item 1. Business -- Effect of Governmental Policies and Recent Legislation -- Federal Deposit Insurance Corporation Improvement Act of 1991 -- Prompt Corrective Regulatory Action." POTENTIAL AND EXISTING ENFORCEMENT ACTIONS Commercial banking organizations, such as the Bank, and their institution-affiliated parties, which include the Company, may be subject to potential enforcement actions by the Federal Reserve Board, the Superintendent and the FDIC for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of the Bank), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the 24 issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of the FDIC Improvement Act. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. On February 16, 1993, the Bank consented to the payment of $20,000 as settlement of an assessed civil money penalty relating to alleged Call Report filing deficiencies asserted by the Federal Reserve Board. The payment was made solely for the purpose of settlement of the alleged deficiencies and to avoid protracted or extended hearings, testimony or other proceedings, and it did not constitute an admission by the Bank of any allegation made or implied by the Federal Reserve Board. Management believes that the Federal Reserve Board does not contemplate taking any further action in connection with this matter. On October 14, 1992, the Federal Reserve Bank, acting under delegated authority from the Federal Reserve Board, entered into a separate written agreement with each of the Company and the Bank. These agreements require the Company and the Bank to, among other things: (a) develop a plan and take steps to monitor and decrease the level of the Bank's nonperforming or otherwise classified assets; (b) establish policies designed to monitor the type, growth and amounts of credit concentration; (c) develop or update, as necessary, various operating and intercompany plans and procedures; (d) develop formalized strategic operating and capital maintenance plans, including a plan to maintain an adequate capital position; (e) maintain a loan loss reserve that is equal to or greater than 1.7% of the Bank's total loans; (f) assess the duties and remuneration of certain personnel; (g) take steps to correct or eliminate any violations of law and to avoid them in the future; (h) refrain from declaring or paying any cash dividends without the prior approval of the Federal Reserve Bank; (i) refrain from incurring any debt, other than in the ordinary course of business, at the holding company level without the prior approval of the Federal Reserve Bank; (j) refrain from accepting or placing any brokered deposits except in compliance with Sections 29 and 29A of the Federal Deposit Insurance Act; (k) notify the Federal Reserve Bank at least 30 days before adding or replacing a director or senior executive officer; (l) take steps to ensure that all reports required to be filed accurately reflect the financial condition of the Company or the Bank as of the date of such report; and (m) furnish quarterly written progress reports to the Federal Reserve Bank detailing the actions taken to comply with the terms of the agreements. Both before and after entering into these agreements, management of the Company and the Bank have taken various steps, including the recently completed capital raising efforts, that are designed to facilitate compliance with the terms thereof. However, compliance with the terms of the agreements will be determined by the Federal Reserve Bank during subsequent examinations of the Company and the Bank. In the event that the Federal Reserve Bank determines that the Company or the Bank is not in compliance with any of the terms of the agreements, it would have available to it various remedies, including taking one or more of the enforcement actions discussed above. ITEM 2. PROPERTIES. All of the Company's offices are occupied under leases that expire on various dates through March 2003, and, in the case of the Company's principal executive and the Bank's head office, include options to renew. For the years ended December 31, 1993, 1992 and 1991, rental expense under these leases aggregated approximately $921,000, $1.6 million and $1.4 million, respectively. Guardian Trust subleases its space from the Company. Management believes that its existing facilities are adequate for its present purposes. See Note 13 to the Company's Consolidated Financial Statements of the Registrant's Annual Report to shareholders for the year ended December 31, 1993 (the "1993 Annual Report") and incorporated herein for additional information relating to lease rental expense and commitments. During the first quarter of 1993, the Company renegotiated the lease for the Company's principal executive office and the Bank's head office. The renegotiated lease will reduce the base rent expense for that space over the next nine years by an aggregate amount of approximately $2.3 million. 25 ITEM 3. LEGAL PROCEEDINGS. The Company is a party to routine litigation involving various aspects of its business, none of which, in the opinion of management, will have a material adverse impact on the consolidated financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is set forth under the caption "Common Stock Price Range and Dividend Policy" at page 52 of the Registrant's 1993 Annual Report and incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is set forth under the caption "Selected Financial Data" at page 8 of the Registrant's 1993 Annual Report and incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" at pages 9 through 27 of the Registrant's 1993 Annual Report and incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is set forth in the Registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year ("Proxy Statement") under the captions entitled "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is set forth in the Registrant's Proxy Statement under the caption entitled "Executive Compensation" and incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is set forth in the Registrant's Proxy Statement under the caption entitled "Beneficial Ownership of Common Stock" and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS. The information required by this item is set forth in the Registrant's Proxy Statement under the caption entitled "Executive Compensation -- Transactions with Management" and incorporated herein by reference. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements and Schedules
PAGE REFERENCES TO ANNUAL REPORT TO SHAREHOLDERS* --------------- Consolidated Balance Sheet as of December 31, 1993 and 1992.................. 28 Consolidated Statement of Operations for the years ended December 31, 1993, 1992 and 1991.............................................................. 29 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991........................................... 30 Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991.............................................................. 31 Notes to Consolidated Financial Statements................................... 32 to 50 Independent Auditors' Report................................................. 51 -------------------------------- *The pages of the Registrant's 1993 Annual Report listed above are incorporated herein by reference in response to Item 8 of this report. Except for these pages and the pages referred to in Items 1, 2, 5, 6 and 7 of this report, the Registrant's 1993 Annual Report shall not be deemed filed as a part of this report and is not filed herewith.
2. No financial statement schedules are included in this report on the basis that they are either inapplicable or the information required to be set forth therein is contained in the financial statements filed herewith. 3. Exhibits
EXHIBIT NO. DESCRIPTION - ---------- ---------------------------------------------------------------------- 3.1 --Articles of Incorporation, as amended(3) 3.2 --Bylaws, as amended(3) 4.1 --Specimen Common Stock Certificate 4.2 --Guardian Bancorp 1984 Stock Incentive Plan, As Amended and Restated (May 1988)(10) 4.2(a) --Amendment No. 1 to 1984 Stock Incentive Plan, As Amended and Restated (May 1988)(7) 4.2(b) --Amendment No. 2 to 1984 Stock Incentive Plan, As Amended and Restated (May 1988)(10) 4.3 --Form of Incentive Stock Option Agreement (1990) for 1984 Stock Incentive Plan(10) 4.4 --Form of Non-Qualified Stock Option Agreement (1990) for 1984 Stock Incentive Plan(10) 4.5 --Reserved 4.6 --Reserved 4.7 --Guardian Bancorp Employee Stock Ownership Plan(6) 4.8 --Guardian Bancorp Employee Stock Ownership Trust, dated May 25, 1988(6) 4.9 --Guardian Bancorp Deferred Compensation Plan(6) 4.10 --Guardian Bancorp Deferred Compensation Trust Agreement(6) 4.11 --Subordinated Debenture Purchase Agreement, dated December 22, 1988(6) 4.12 --Guardian Bank 11% Mandatory Convertible Subordinated Debenture due 1995(6) 4 .13 --Warrant to Purchase Common Stock, dated December 30, 1988(6)
27
EXHIBIT NO. DESCRIPTION - ---------- ---------------------------------------------------------------------- 4.14 --Guardian Bancorp 1990 Stock Incentive Plan, As Amended and Restated (February 1990)(9) 4.14(a) --Amendment No. 1 to 1990 Stock Incentive Plan, As Amended and Restated (February 1990)(10) 4.15 --Form of Incentive Stock Option Agreement for 1990 Stock Incentive Plan(8) 4.16 --Form of Non-Qualified Stock Option Agreement for 1990 Stock Incentive Plan(8) 4.17 --Guardian Bancorp 1990 Deferred Compensation Plan (As Amended through December 1990)(10) 4.18 --Guardian Bancorp 1990 Deferred Compensation Plan Trust Agreement(10) 4.19 --Form of Subscription Right Certificate(12) 4.20 --Warrant Agreement and Form of Warrant(12) 10.1 --Lease between Guardian Bancorp and Shuwa Investments Corporation, dated February 23, 1993, for ground floor and office space in Los Angeles, California(11) 10.2 --Reserved 10.3 --Reserved 10.4 --Employment Agreement between the Registrant and Paul M. Harris, dated October 20, 1992(11) 10.5 --Settlement Agreement and Mutual General Release among the Registrant, Guardian Bank, Guardian Trust Co. and Arthur W. Tate dated November 12, 1993. 10.6 --Employment Agreement between the Registrant and Vincent A. Bell, dated October 20, 1988(11) 10.7 --Settlement Agreement and Mutual General Release among the Registrant, Guardian Bank and Ronald W. Holloway dated November 26, 1993 10.8 --Form of Indemnification Agreement entered into with each Executive Officer and Director of the Registrant Company(6) 10.9 --Form of Indemnification Agreement entered into with each director and executive officer of Guardian Bank(6) 10.10 --Lease between Centrelake Plaza Associates and Guardian Bancorp, dated as of October 11, 1989, for office space in Ontario, California(8) 10.11 --Form of Dealer Manager Agreement(12) 10.12 --Form of Soliciting Dealer Agreement(12) 10.13 --Form of Standby Stock Purchase Agreement(12) 10.14 --Form of Information Agent Agreement(12) 10.15 --Form of Subscription Agent Agreement(12) 10.16 --Form of Commitment(12) 10.17 --Form of Agreement Not to Sell(12) 13.1 --Annual Report to Shareholders for the year ended December 31, 1993 (parts not specifically incorporated by reference are filed for informational purposes and are not filed herewith) 21.1 --Subsidiaries of the Registrant 23.1 --Accountants' Consent ---------------------------- 1. Reserved. 2. Reserved 3. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, filed with the Commission on March 27, 1992 (Commission File No. 1-9757), and incorporated herein by reference. 4. Reserved. 5. Reserved.
28 6. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, filed with the Commission on March 29, 1989 (Commission File No. 1-9757), and incorporated herein by reference. 7. Reserved. 8. This exhibit is contained in the Registrant's Registration Statement on Form S-2 filed with the Commission on December 18, 1989 and amended January 26, 1990 (Commission File No. 33-32611), and incorporated herein by reference. 9. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, filed with the Commission on March 16, 1990 (Commission File No. 1-9757), and incorporated herein by reference. 10. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, filed with the Commission on March 29, 1991 (Commission File No. 1-9757), and incorporated herein by this reference. 11. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, filed with the Commission on March 27, 1993 (Commission File No. 1-9757) and incorporated herein by reference. 12. This exhibit is contained in the Registrant's Registration Statement on Form S-2 filed with the Commission on October 6, 1993 and amended on November 22, 1993, December 10, 1993 and December 16, 1993 (File No. 33-70032) and incorporated herein by reference.
Executive Compensation Plans and Arrangements The following compensation plans and arrangements are filed as exhibits to this Annual Report on Form 10-K: Guardian Bancorp 1984 Stock Option Plan, as amended and restated and further amended, and the Form of Stock Option Agreements thereunder, Exhibits 4.2, 4.2(a), 4.2(b), 4.3 and 4.4; Guardian Bancorp Employee Stock Ownership Plan, Exhibit 4.7; Guardian Bancorp Employee Stock Ownership Trust, dated May 25, 1988, Exhibit 4.8; Guardian Bancorp Deferred Compensation Plan, Exhibit 4.9; Guardian Bancorp Deferred Compensation Trust Agreement, Exhibit 4.10; Guardian Bancorp 1990 Stock Incentive Plan, as amended and restated and further amended, and the Form of Stock Option Agreements thereunder, Exhibits 4.14, 4.14(a), 4.15 and 4.16; Guardian Bancorp 1990 Deferred Compensation Plan, Exhibit 4.17; Guardian Bancorp 1990 Deferred Compensation Plan Trust Agreement, Exhibit 4.18; Employment Agreement between the Registrant and Paul M. Harris, dated October 20, 1992, Exhibit 10.4; Settlement Agreement and Mutual General Release among the Registrant, Guardian Bank, Guardian Trust Co. and Arthur W. Tate dated November 12, 1993, Exhibit 10.5; Employment Agreement between the Registrant and Vincent A. Bell, dated October 20, 1988, Exhibit 10.6; Settlement Agreement and Mutual General Release among the Registrant, Guardian Bank and Ronald W. Holloway dated November 26, 1993, Exhibit 10.7. (b) Reports on Form 8-K Inapplicable (c) Exhibits Required by Item 601 of Regulation S-K See Item 14(a)(3) above. (d) Additional Financial Statements Inapplicable For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as 29 follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8, Commission File Nos. 2-96894 (filed April 5, 1985 and amended by post-effective amendment dated May 24, 1988), 33-22371 (filed June 8, 1988) and 33-35012 (filed May 30, 1990): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 30 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GUARDIAN BANCORP Date: March 29, 1994 By: /s/ PAUL M. HARRIS -------------------------------------- Paul M. Harris CHIEF EXECUTIVE OFFICER By: /s/ JON D. VAN DEUREN -------------------------------------- Jon D. Van Deuren EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------------------ ------------------------------------- ------------------ ------------------------------------------- Director March , 1994 Donald J. Bohana /s/ MARILYN M. COHEN ------------------------------------------- Director March 29, 1994 Marilyn M. Cohen /s/ HOWARD C. FLETCHER III Director ------------------------------------------- and President March 29, 1994 Howard C. Fletcher III /s/ ROBERT D. FRANDZEL ------------------------------------------- Director March 29, 1994 Robert D. Frandzel /s/ PAUL M. HARRIS Director and ------------------------------------------- Chief Executive Officer March 29, 1994 Paul M. Harris /s/ JAMES F. LEWIN ------------------------------------------- Director March 29, 1994 James F. Lewin /s/ SAUL SOCOLOSKE ------------------------------------------- Director March 29, 1994 Saul Socoloske
31 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION --------- ------------------------------------------------------- 3.1 --Articles of Incorporation, as amended(3) 3.2 --Bylaws, as amended(3) 4.1 --Specimen Common Stock Certificate 4.2 --Guardian Bancorp 1984 Stock Incentive Plan, As Amended and Restated (May 1988)(10) 4.2(a) --Amendment No. 1 to 1984 Stock Incentive Plan, As Amended and Restated (May 1988)(7) 4.2(b) --Amendment No. 2 to 1984 Stock Incentive Plan, As Amended and Restated (May 1988)(10) 4.3 --Form of Incentive Stock Option Agreement (1990) for 1984 Stock Incentive Plan(10) 4.4 --Form of Non-Qualified Stock Option Agreement (1990) for 1984 Stock Incentive Plan(10) 4.5 --Reserved 4.6 --Reserved 4.7 --Guardian Bancorp Employee Stock Ownership Plan(6) 4.8 --Guardian Bancorp Employee Stock Ownership Trust, dated May 25, 1988(6) 4.9 --Guardian Bancorp Deferred Compensation Plan(6) 4.10 --Guardian Bancorp Deferred Compensation Trust Agreement(6) 4.11 --Subordinated Debenture Purchase Agreement, dated December 22, 1988(6) 4.12 --Guardian Bank 11% Mandatory Convertible Subordinated Debenture due 1995(6) 4.13 --Warrant to Purchase Common Stock, dated December 30, 1988(6) 4.14 --Guardian Bancorp 1990 Stock Incentive Plan, As Amended and Restated (February 1990)(9) 4.14(a) --Amendment No. 1 to 1990 Stock Incentive Plan, As Amended and Restated (February 1990)(10) 4.15 --Form of Incentive Stock Option Agreement for 1990 Stock Incentive Plan(8) 4.16 --Form of Non-Qualified Stock Option Agreement for 1990 Stock Incentive Plan(8) 4.17 --Guardian Bancorp 1990 Deferred Compensation Plan (As Amended through December 1990)(10) 4.18 --Guardian Bancorp 1990 Deferred Compensation Plan Trust Agreement(10) 4.19 --Form of Subscription Right Certificate(12) 4.20 --Warrant Agreement and Form of Warrant(12) 10.1 --Lease between Guardian Bancorp and Shuwa Investments Corporation, dated February 23, 1993, for ground floor and office space in Los Angeles, California(11) 10.2 --Reserved 10.3 --Reserved 10.4 --Employment Agreement between the Registrant and Paul M. Harris, dated October 20, 1992(11) 10.5 --Settlement Agreement and Mutual General Release among the Registrant, Guardian Bank, Guardian Trust Co. and Arthur W. Tate, dated November 12, 1993 10.6 --Employment Agreement between the Registrant and Vincent A. Bell, dated October 20, 1988(11) 10.7 --Settlement Agreement and Mutual General Release among the Registrant, Guardian Bank and Ronald W. Holloway, dated November 26, 1993 10.8 --Form of Indemnification Agreement entered into with each Executive Officer and Director of the Registrant Company(6) 10.9 --Form of Indemnification Agreement entered into with each director and executive officer of Guardian Bank(6) 10 .10 --Lease between Centrelake Plaza Associates and Guardian Bancorp, dated as of October 11, 1989, for office space in Ontario, California(8)
EXHIBIT NO. DESCRIPTION --------- ------------------------------------------------------- 10.11 --Form of Dealer Manager Agreement(12) 10.12 --Form of Soliciting Dealer Agreement(12) 10.13 --Form of Standby Stock Purchase Agreement(12) 10.14 --Form of Information Agent Agreement(12) 10.15 --Form of Subscription Agent Agreement(12) 10.16 --Form of Commitment(12) 10.17 --Form of Agreement Not to Sell(12) 13.1 --Annual Report to Shareholders for the year ended December 31, 1993 (parts not specifically incorporated by reference are filed for informational purposes and are not filed herewith) 21.1 --Subsidiaries of the Registrant 23.1 --Accountants' Consent ---------------------------- 1. Reserved. 2. Reserved. 3. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, filed with the Commission on March 27, 1992 (Commission File No. 1-9757), and incorporated herein by reference. 4. Reserved. 5. Reserved. 6. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, filed with the Commission on March 29, 1989 (Commission File No. 1-9757), and incorporated herein by reference. 7. Reserved. 8. This exhibit is contained in the Registrant's Registration Statement on Form S-2 filed with the Commission on December 18, 1989 and amended January 26, 1990 (Commission File No. 33-32611), and incorporated herein by reference. 9. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, filed with the Commission on March 16, 1990 (Commission File No. 1-9757), and incorporated herein by reference. 10. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, filed with the Commission on March 29, 1991 (Commission File No. 1-9757), and incorporated herein by this reference. 11. This exhibit is contained in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, filed with the Commission on March 27, 1993 (Commission File No. 1-9757) and incorporated herein by reference. 12. This exhibit is contained in the Registrant's Registration Statement on Form S-2 filed with the Commission on October 6, 1993 and amended on November 22, 1993, December 10, 1993 and December 16, 1993 (File No. 33-70032) and incorporated herein by reference.
EX-4.1 2 EXHIBIT 4.1 EXHIBIT 4.1 NUMBER: SD SHARES GUARDIAN BANCORP INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF LOS ANGELES OR NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT CUSIP 401321 10 4 IS THE RECORD HOLDER OF FULLY PAID AND NON ASSESSABLE COMMON SHARES OF NO PAR VALUE OF - ------------------------ GUARDIAN BANCORP ------------------------ - ------------------------ ------------------------ - ------------------------ ------------------------ TRANSFERABLE ON THE BOOKS OF THE CORPORATION IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTERED BY THE REGISTRAR. WITNESS THIS FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. DATED: CHAIRMAN PRESIDENT SECRETARY COUNTERSIGNED AND REGISTERED: FIRST INTERSTATE BANK OF CALIFORNIA TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT-- .............. Custodian ............. TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act ................................... in common (State) UNIF TRF MIN ACT-- ....... Custodian (until age ....... ) (Cust) ............... under Uniform Transfers (Minor) to Minors Act ......................... (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ___ HEREBY SELL, ASSIGN AND TRANSFER UNTO PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE --------------------------------------
________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ SHARES OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT _______________________________________________________________________ ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED ______________________________________________ X _______________________________________________________ X _______________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED By _____________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. APPENDIX TO SPECIMEN COMMON STOCK CERTIFICATE 1. The bottom of the front of the stock certificate has facsimile signatures of the Registrant's chairman, president and secretary. 2. The Corporate seal is immediately above the facsimile signature of the Registrant's president. The seal is composed of three concentric circles. The middle circle contains the Registrant's name, "GUARDIAN BANCORP" and "CALIFORNIA", the Registrant's state of incorporation; "INCORPORATED DEC. 31, 1981" is shown in the seal's innermost circle. EX-10.5 3 EXHIBIT 10.5 EXHIBIT 10.5 SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE This Settlement Agreement and Mutual General Release ("Agreement") is made between Arthur W. Tate ("Claimant"), on the one hand, and Guardian Bank ("Bank"), Guardian Bancorp ("Bancorp") and Guardian Trust Co. ("Trust Co.") (collectively "Releasees"), on the other hand, and is made with respect to the following facts: A. A dispute has arisen between Claimant and Releasees regarding Claimant's employment with Bank and Bancorp and his serving as a director and officer of Bancorp and Trust Co. With respect to this dispute, Claimant has threatened to file a lawsuit. A copy of the draft complaint (the "Draft Complaint") Claimant proposed to file is attached hereto as Exhibit A. Because the Draft Complaint was not filed, Releasees were not required to file an Answer; however, they would deny all the material allegations contained within it. B. The parties hereto are now desirous of settling their differences. C. Based on the foregoing facts, and in exchange for the covenants contained herein, the parties hereto, and each of them, agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meaning indicated: (a) "Claims" refers to and includes all claims, demands, rights, causes of action, rights of action, rights of subrogation, rights of indemnity, rights to reimbursement, rights to payment, liens and remedies of every kind or nature whatsoever, whether the same are or any of the same is at law, in equity, or otherwise, and whether the same are or any of the same is known or unknown to the parties at the time of their execution of this Agreement. (b) "Obligations" refers to and includes all obligations, duties, liabilities, damages, costs, fees (including, but without limitation thereto, attorneys' fees), expenses and debts of every kind and nature whatsoever, whether the same are or any of the same is known or unknown to the parties at the time of their execution of this Agreement. Subject to and with reference to the definitions set forth above, the parties hereto, and each of them, execute this Agreement in favor of and for the benefit of the other as follows. 1 2. GENERAL. (a) It is understood that this Agreement does not constitute an admission by any of the parties of any wrongdoing whatsoever. Moreover, each of the parties specifically denies having engaged in any wrongdoing. (b) The parties have agreed to enter into this Agreement for the purpose of fully and completely settling all differences between them and in the interest of saving themselves the costs and vexation of further legal proceedings. 3. CLAIMANT'S RESIGNATION. (a) Releasees' personnel records shall reflect that effective August 23, 1993, Claimant voluntarily resigned as Vice Chairman of Bank, as President of Bancorp and as Chairman of Trust Co. Claimant's letter of resignation from these positions is attached hereto as Exhibit B. This letter shall become a permanent part of Claimant's personnel file. Any document in Claimant's personnel file indicating that Claimant's departure from any of these positions was for any reason other than voluntary resignation shall be removed from the file. (b) Claimant shall voluntarily resign as a Director of the Board of Directors of Bancorp and of Trust Co. and from each and every committee or subcommittee thereof on which he serves. Claimant's letter of resignation from these positions is attached hereto as Exhibit C. Claimant's resignation shall be deemed to be accepted on the date this Agreement becomes effective. 4. PAYMENT BY RELEASEES. (a) Releasees shall pay Claimant the gross sum of ONE HUNDRED THIRTEEN THOUSAND, NINE HUNDRED SIX DOLLARS AND TWENTY-FIVE CENTS ($113,906.25). This sum shall be allocated completely to Claimant's alleged claims for personal injury, pain, suffering, anguish, physical and emotional stress and strain (which claims Releasees deny). None of this portion of the settlement proceeds is paid as earnings, back wages, vacation or separation pay. Releasees shall not file a W2 form or a 1099 with respect to this payment. (b) Releasees shall pay Claimant the gross sum of FIFTY SIX THOUSAND, NINE HUNDRED FIFTY-THREE DOLLARS AND THIRTEEN CENTS ($56,953.13). This sum shall be allocated to Claimant's claims to additional compensation (which claims Releasees deny). This payment shall be treated as a taxable payment, and all 2 deductions required by law, calculated using the most current W4 form Claimant has filed with Releasees, shall be made from these proceeds. Releasees shall include this payment in the W2 form issued to Claimant at the end of the calendar year. (c) The payments called for in this paragraph 4 shall be made upon Claimant's delivery to Releasees' attorney of five (5) executed copies of this Agreement and the expiration of the revocation period set forth in paragraph 26 below. (d) Claimant acknowledges and agrees that he shall pay any local, state or federal income taxes, penalties, fines, interest or assessments incurred as the result of any payment of monies under this Agreement. In the event Releasees are required to pay, or it is contended that Releasees are required to pay any such taxes, fines, interest or assessments, Claimant agrees to hold harmless and indemnify Releasees from any and all such taxes, fines, interest or assessments. Claimant further agrees not to seek or make any claim against Releasees for any loss, cost, damage or expense if a claim or adverse determination is made in connection with the nonwithholding or other tax treatment of any of the proceeds of this settlement or any portion thereof. In addition, Claimant acknowledges and agrees that Releasees have no duty to defend against any claim or assertion made in connection with the nonwithholding or other tax treatment of the proceeds of this settlement or any portion thereof, and Claimant agrees to assume full responsibility for defending against any such claim or assertion. At their option, Releasees may select counsel of their choosing to represent them in connection with any claim or assertion made in connection with the nonwithholding or other tax treatment of the proceeds of this settlement. Claimant shall indemnify Releasees for the attorneys' fees and costs incurred in connection with such claim or assertion. 5. TRANSFER OF TITLE TO AUTOMOBILE. (a) Releasees shall assign to Claimant title to the 1988 Mercedes Benz 300 SEL which Releasees purchased but which they permitted Claimant to use while he was in their employ. Subject to Claimant's providing Releasees with a copy of the written statement he has obtained from a recognized Mercedes Benz dealership regarding the current fair market value of the vehicle, Releasees, in transferring title, shall advise the DMV that the value of the vehicle is $12,500. Releasees shall assign title at the same time and under the same conditions as set forth in Paragraph 4(c). (b) Claimant acknowledges that the transfer of title referred to in this Paragraph 5 represents the receipt of 3 value in addition to any payment of value to which Claimant already is entitled and is made for the purpose of avoiding the costs and vagaries of litigation. 6. BALBOA BAY CLUB MEMBERSHIP. To the extent permitted by the applicable membership documents, Bank shall promptly transfer all rights it has in its membership in the Balboa Bay Club which it permitted Claimant to use while in its employ. Claimant will be liable for any and all financial obligations that accompany that membership or the transfer thereof from a corporate to an individual membership. 7. TELEPHONES. Releasees shall transfer the car phone and portable phone they permitted Claimant to use at an imputed income of $100 each. 8. INSURANCE. (a) Bank shall continue to provide Claimant his current health, life and long-term disability insurance benefits for a six (6) month period commencing August 23, 1993. Thereafter, with respect to the health insurance, Claimant shall be entitled to exercise his rights under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Bank shall timely provide Claimant notice of his rights under and forms needed to make the elections provided by COBRA. (b) The life insurance policy in the amount of $750,000 of coverage, naming Claimant as the insured, shall remain in place through its renewal date of July 23, 1994. Thereafter, to the extent permitted by the terms of the policy, Claimant may continue coverage by making such payments and fulfilling such other requirements as called for in the policy. 9. RELEASE. (a) Claimant does hereby agree to fully, finally and forever release, quitclaim and discharge Releasees, and each of them, and each of their officers, directors, shareholders, agents, employees, attorneys, trustees, administrators, accountants, successors, assigns, insurance carriers and/or administrators, affiliates and related organizations and any or all of them from any and all claims, liabilities, demands, debts, accounts, obligations, actions and causes of action, known or unknown, at law or in equity, which he may have or claimed to have had, arising at any time in the unlimited past to and including the date of this Agreement, including, but without 4 limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with his employment with and his serving as a Director on the Board of Directors of Releasees and his resignations/terminations therefrom. Without limiting the generality of the foregoing, Claimant specifically acknowledges that the persons he is releasing include (but are not limited to) Howard Fletcher III, Vincent Bell, Donald Bohana, Marilyn M. Cohen, Robert D. Frandzel, Paul M. Harris, Saul Socoloske and John P. Sullivan. (b) Without limiting the generality of the foregoing, Claimant acknowledges and agrees that among the claims released are any and all claims pursuant to Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Equal Pay Act, the Americans with Disabilities Act, the California Fair Employment and Housing Act, the California Equal Pay Act, the Fair Labor Standards Act, the California Labor Code, any Wage Order promulgated by the Industrial Welfare Commission, the California Unemployment Insurance Code, any breach of an express, written, oral or implied contract, breach of an implied covenant of good faith and fair dealing, tortious wrongful discharge based on a breach of any state or federal public policy, fraud, negligent misrepresentation, defamation, libel, slander, negligence, intentional or negligent infliction of emotional distress and any and all additional claims purported to be pled in the Draft Complaint. (c) Claimant further acknowledges and agrees that this Agreement shall operate as a complete bar of any and all litigation, charges, complaints, grievances, arbitrations, or demands of any kind whatsoever which arose at any time in the unlimited past to and including the date of this Agreement, regardless of whether they are pending or contemplated, or might at any time be filed including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with his employment with and his serving as a Director on the Board of Directors of Releasees and his resignations/terminations therefrom. Each and all of the aforesaid claims or potential claims, are hereby fully and finally settled, compromised and released. (d) Claimant acknowledges that he has been advised by legal counsel and is familiar with the provision of Section 1542 of the California Civil Code, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTORS. 5 (e) Being aware of said Code section, Claimant hereby expressly waives and relinquishes any rights or benefits he may have thereunder, as well as under any other state or federal statutes or common law principles of similar effect. (f) Releasees do hereby agree to fully, finally and forever release, quitclaim and discharge Claimant and each of his attorneys, agents, successors and assigns and any or all of them from any and all claims, liabilities, demands, debts, accounts, obligations, actions and causes of action, known or unknown, at law or in equity, which they may have or claimed to have had, arising at any time in the unlimited past to and including the date of this Agreement, including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with Claimant's employment with and his serving as a Director on the Board of Directors of Releasees and his resignations therefrom. (g) Releasees further acknowledge and agree that this Agreement shall operate as a complete bar of any and all litigation, charges, complaints, grievances, arbitrations, or demands of any kind whatsoever which arose at any time in the unlimited past to and including the date of this Agreement, regardless of whether they are pending or contemplated, or might at any time be filed including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with Claimant's employment with Releasees and his serving as Director on the Boards of Directors of Releasees and his resignations therefrom. Each and all of the aforesaid claims are hereby fully and finally settled, compromised and released. (h) Releasees acknowledge that they have been advised by legal counsel and are familiar with the provision of Section 1542 of the California Civil Code, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTORS. (i) Being aware of said Code section, Releasees hereby expressly waive and relinquish any rights or benefits they may have thereunder, as well as under any other state or federal statutes or common law principles of similar effect. 6 10. LETTER OF RECOMMENDATION/REFERENCES. Upon request from Claimant, Releasees will issue a copy of the letter of recommendation attached hereto as Exhibit C to such persons as Claimant may direct. A copy of the letter of recommendation shall also become a permanent part of Claimant's personnel file. Apart from the obligations set forth in this paragraph 9, Releasees shall have no obligation to provide references on Claimant's behalf. 11. SUCCESSORS AND ASSIGNS. All agreements, acknowledgments, declarations, representations, understandings, promises, warranties, authorizations and instructions made, and all understandings expressed by the parties hereto, and each of them, in this Agreement and all benefits accruing under this Agreement apply to and bind the respective makers of said agreements, acknowledgments, declarations, representations, understandings, promises, warranties, authorizations, instructions and expressions of understanding, and also all of their respective heirs, officers, directors, agents, servants, employees, attorneys, shareholders, affiliates, subsidiaries, parent entities, firms, predecessors, successors and assigns, and also all other persons, firms, corporations, associations, partnerships and entities in privity with or related to or affiliated with any such person, firm, corporation, association, partnership or entity. 12. MODIFICATION. This Agreement may not be modified except by a writing signed by each of the parties hereto, or their duly authorized representatives. 13. APPLICABLE LAW. This Agreement shall, in all respects, be interpreted, construed and governed by and under the domestic laws of the State of California. 14. ARBITRATION. (a) Any dispute regarding any aspect of this Agreement (including but not limited to its formation, performance or breach) or any act which allegedly has or would violate any provision of this Agreement ("Arbitrable Dispute"), except for a dispute arising out of an alleged violation of paragraph 14, will be submitted to arbitration in Los Angeles County, California, before an experienced employment arbitrator licensed to practice law in California and selected in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association. Each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any 7 other expenses connected with presenting their claim. Other costs of the arbitration, including the fees of the arbitrator, cost of any record or transcript of the arbitration, administrative fees and other fees and costs shall be borne equally by the parties, one-half by Claimant, on the one hand, and one-half by Releasees, on the other hand. (b) Should either party to this Agreement hereafter institute any legal action or administrative proceeding against the other with respect to any Claim waived by this Agreement or pursue any Arbitrable Dispute by any method other than through arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses and attorneys' fees incurred as a result of such action. 15. PROPRIETARY INFORMATION. (a) Claimant agrees that he will not in any fashion, form or manner, either directly or indirectly, solicit or use for his own purposes or for the purposes of any third party, or divulge, disclose or communicate to any third party, any information he obtained during the course and scope of his employment with Releasees regarding the identity of Releasees' customers, the business transacted with them, the nature of the services provided by Releasees and the prices charged for such services, and any other information that constitutes a "trade secret" under California law. (b) Claimant further agrees that as of the date he delivers five (5) executed copies of this Agreement to Releasees' attorney, he has returned to Releasees all originals and all copies of all the Releasees' documents or other business records within his possession, custody or control, including without limitation, manuals, documents, files, reports, studies, instruments or other material used and/or developed by Claimant during his employment with Releasees, and letters, memoranda, notes, reports, tables, charts, photographs, video and audio tapes and transcriptions of such tapes, computer records (including without limitation any and all computer disks, computer tapes, and electronic or "E" mail). 16. RELEASEES' PROPERTY. Claimant represents and agrees that, except as set forth above, on or before the date he delivers five (5) executed copies of this Agreement to Releasees' attorney, in addition to the items identified in Paragraph 14, above, he turned over to Releasees all files, memoranda, records, other documents, badges, keys, credit cards and any other physical or personal property which are or were the property of 8 Releasees which Claimant had in his possession, custody or control. 17. SEVERABILITY. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other paragraphs shall remain fully valid and enforceable. This Agreement shall survive the termination of any terms or conditions contained herein. 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. 19. CONFIDENTIALITY. (a) Claimant agrees that he will not disclose, directly or indirectly, whether individually or by or through an agent, representative, attorney or other person, the existence of this Agreement or its terms or conditions except (a) as required under compulsion of law, or (b) to his spouse, financial, accounting or legal advisors and further agrees that he will take reasonable steps to ensure against disclosure of the existence or terms of this Agreement by such persons. (b) Releasees agree that they will not disclose, directly or indirectly, whether individually or by or through an agent, representative, attorney or other person, the existence of this Agreement or its terms or conditions except (a) as required under compulsion of law, including (without limitation) responding to any request for such information from any state or federal governmental agency to which they are subject to regulation, or setting forth such information in public disclosure statements, to the extent required by law, (b) to such of its officers, employees or agents who need such information in order to effectuate the terms of the Agreement. Releasees will take reasonable steps to ensure against disclosure of the existence or terms of this Agreement by such persons. Nothing contained herein shall prevent the parties from discussing the terms and conditions of the Agreement with each other. 20. INDEMNIFICATION. As a further material inducement to Releasees to enter into this Agreement, Claimant hereby agrees to indemnify and hold Releasees, and each of them, harmless from and against any and all loss, costs, damages, or expenses, including, without limitation, attorneys' fees incurred by Releasees, or any of them, arising out of any breach of this 9 Agreement by Claimant or the fact that any representation expressly made herein by Claimant was false when made. 21. NO DISPARAGEMENT. Claimant shall take no action of any type and make no statement of any type which harms, tends to harm, inconveniences, embarrasses, is against the best interest of, or brings into disrepute Releasees or any of their employees, officers, executives, directors, staff members, agents and related organizations. 22. ENTIRETY OF AGREEMENT. The parties hereto acknowledge and agree that this instrument and any other instruments specifically referred to herein constitute and contain the entire agreement and understanding concerning the subject matter between the parties and supersede and replace all prior negotiations and proposed agreements, whether written or oral. The parties, and each of them, warrant that no other party or any agent or attorney of any other party has made any promise, representation or warranty whatsoever not contained herein to induce them to execute this instrument and the other documents referred to herein. The parties, and each of them, represent that they have not executed this instrument or the other documents in reliance on any promise, representations or warranty not contained herein. 23. CONSTRUCTION. The parties hereto acknowledge and agree that the language of this instrument shall be construed as a whole according to its fair meaning and not strictly for or against any of the parties. 24. HEADINGS. The various headings in this Agreement are inserted for convenience only and shall not be deemed a part of or in any manner affect this Agreement or any provisions hereof. 25. CONSULTATION WITH ATTORNEY AND COMPLETE UNDERSTANDING OF AGREEMENT. Claimant acknowledges that he was represented by independent legal counsel in connection with the negotiation and execution of this Agreement. Claimant further acknowledges that he was advised that he had a period of twenty-one (21) calendar days in which to consider and execute this Agreement. Claimant acknowledges that he consulted with his attorney before signing this Agreement, that Claimant has carefully read and fully understands all the provisions of this Agreement and that he is voluntarily entering into it. 10 26. EFFECTIVE DATE OF AGREEMENT. Claimant further acknowledges and understands that he has seven (7) calendar days from the date on which he executes this Agreement to revoke it. Any such revocation must be made in a signed writing delivered to Debby Manning, Guardian Bank, 800 South Figueroa Street, Los Angeles, California 90017, no later than 5:00 p.m. on the seventh day after Claimant signs this Agreement. If Claimant revokes this Agreement, it shall not be effective or enforceable and Claimant will not receive any of the benefits described in this Agreement. The Agreement shall not be effective until the expiration of this revocation period. Dated: 11-12-93 GUARDIAN BANCORP By: H. Fletcher -------------------------------- Title: President Dated: 11-12-93 GUARDIAN BANK By: H. Fletcher -------------------------------- Title: President & CEO Dated: 11-12-93 GUARDIAN TRUST COMPANY By: H. Fletcher -------------------------------- Title: Chairman 11 Dated: Arthur W. Tate --------------------------- ARTHUR W. TATE APPROVED AS TO FORM AND SUBSTANCE RICKS & ANDERSON Cecil Ricks, Jr. - --------------------------------- Cecil Ricks, Jr. Attorneys for Claimant PROSKAUER ROSE GOETZ & MENDELSOHN Harold M. Brody - --------------------------------- Harold M. Brody Attorneys for Releasees 12 EX-10.7 4 EXHIBIT 10.7 Exhibit 10.7 SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE This Settlement Agreement and Mutual General Release ("Agreement") is made between Ronald W. Holloway ("Claimant"), on the one hand, and Guardian Bank ("Bank") and Guardian Bancorp ("Bancorp") (collectively "Releasees"), on the other hand, and is made with respect to the following facts: A. A dispute has arisen between Claimant and Releasees regarding Claimant's employment with Bank and his departure therefrom. B. The parties hereto are now desirous of settling their differences and wish to recognize the goodwill Claimant has engendered among Releasees' customers and his efforts to assist in an orderly transition of responsibilities. C. Based on the foregoing facts, and in exchange for the covenants contained herein, the parties hereto, and each of them, agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meaning indicated: (a) "Claims" refers to and includes all claims, demands, rights, causes of action, rights of action, rights of subrogation, rights of indemnity, rights to reimbursement, rights to payment, liens and remedies of every kind or nature whatsoever, whether the same are or any of the same is at law, in equity, or otherwise, and whether the same are or any of the same is known or unknown to the parties at the time of their execution of this Agreement. (b) "Obligations" refers to and includes all obligations, duties, liabilities, damages, costs, fees (including, but without limitation thereto, attorneys' fees), expenses and debts of every kind and nature whatsoever, whether the same are or any of the same is known or unknown to the parties at the time of their execution of this Agreement. Subject to and with reference to the definitions set forth above, the parties hereto, and each of them, execute this Agreement in favor of and for the benefit of the other as follows. 2. GENERAL. (a) It is understood that this Agreement does not constitute an admission by any of the parties of any wrongdoing whatsoever. Moreover, each of the parties specifically denies having engaged in any wrongdoing. 1 (b) The parties have agreed to enter into this Agreement for the purpose of fully and completely settling all differences between them and in the interest of saving themselves the costs and vexation of further legal proceedings. 3. PAYMENTS BY RELEASEES. (a) Releasees shall pay Claimant the gross sum of ONE HUNDRED TEN THOUSAND, SEVEN HUNDRED FORTY-TWO DOLLARS AND NO CENTS ($110,742.00). This sum shall be allocated completely to Claimant's alleged claims for personal injury, pain, suffering, anguish, physical and emotional stress and strain (which claims Releasees deny). None of this portion of the settlement proceeds is paid as earnings, back wages, vacation or separation pay. Releasees shall not file a W2 form or a 1099 with respect to this payment. The payment called for in this subparagraph shall be made upon Claimant's delivery to Releasees of five (5) executed copies of this Agreement and the expiration of the revocation period set forth in paragraph 25 below. (b) On January 3, 1994, Releasees shall pay Claimant the gross sum of FIFTY-FIVE THOUSAND THREE HUNDRED SEVENTY-ONE DOLLARS AND NO CENTS ($55,371.00). This sum shall be allocated completely to Claimant's alleged claims for personal injury, pain, suffering, anguish, physical and emotional stress and strain (which claims Releasees deny). None of this portion of the settlement proceeds is paid as earnings, back wages, vacation or separation pay. Releasees shall not file a W2 form or a 1099 with respect to this payment. (c) On January 3, 1994, Releasees shall pay Claimant the gross sum of TWENTY-FIVE THOUSAND, FIVE HUNDRED FIFTY-FIVE DOLLARS AND EIGHTY-FIVE CENTS ($25,555.85). This payment shall be treated as a taxable payment, and all deductions required by law, calculated using the most current W4 form Claimant has filed with Releasees, shall be made from these proceeds. Releasees shall include this payment in the W2 form issued to Claimant at the end of the calendar year. (d) Claimant acknowledges and agrees that he shall pay any local, state or federal income taxes, penalties, fines, interest or assessments incurred as the result of any payment of monies under this Agreement. Claimant further agrees not to seek or make any claim against Releasees for any loss, cost, damage or expense if a claim or adverse determination is made in connection with the nonwithholding or other tax treatment of any of the proceeds of this settlement or any portion thereof. In addition, Claimant acknowledges and agrees that Releasees have no duty to defend against any claim or assertion made in connection with the nonwithholding or other tax treatment of the proceeds of this settlement or any portion thereof, and Claimant 2 agrees to assume full responsibility for defending against any such claim or assertion. At their option, Releasees may select counsel of their choosing to represent them in connection with any claim or assertion made in connection with the nonwithholding or other tax treatment of the proceeds of this settlement. Claimant shall indemnify Releasees for the attorneys' fees and costs incurred in connection with such claim or assertion. 4. SALE OF AUTOMOBILE. (a) On January 3, 1993, Releasees shall sell to Claimant the 1988 Mercedes Benz 560 SEL which Releasees purchased but which they permitted Claimant to use while he was in Bank's employ. Subject to Claimant's providing Releasees with a copy of a written statement from a recognized Mercedes Benz dealership or other reputable source regarding the current fair market value of the vehicle, Releasees shall sell the vehicle to Claimant for $16,000.00. (b) Claimant shall be permitted to keep possession of the vehicle from the effective date of this Agreement until he purchases it from Releasees. During that time, Releasees shall maintain any insurance coverage currently in place on the vehicle, but Claimant shall be responsible for any maintenance or repairs needed on the vehicle. Upon the sale of the vehicle, Releasees shall have no further obligations for it (including, but not limited to, maintaining insurance), and Claimant shall then have sole and full responsibility for the vehicle (including, but not limited to, securing and maintaining insurance). 5. TELEPHONES. Releasees shall transfer the car phone and portable phone they permitted Claimant to use while in Bank's employ at an imputed income of $100 each. 6. OUTPLACEMENT. At Releasees' expense, the outplacement firm of Lee Hecht Harrison shall prepare a formal resume for Claimant's use to Claimant's reasonable satisfaction. 7. INSURANCE. Bank shall continue to provide Claimant his current health, life and long-term disability insurance benefits for a six (6) month period commencing on the effective date of this Agreement. Thereafter, with respect to the health insurance, Claimant shall be entitled to exercise his rights under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Bank shall timely provide Claimant notice of his rights under and forms needed to make the elections provided by COBRA. 3 8. RELEASE. (a) Claimant does hereby agree to fully, finally and forever release, quitclaim and discharge Releasees, and each of them, and each of their officers, directors, shareholders, agents, employees, attorneys, trustees, administrators, accountants, successors, assigns, insurance carriers and/or administrators, affiliates and related organizations and any or all of them from any and all claims, liabilities, demands, debts, accounts, obligations, actions and causes of action, known or unknown, at law or in equity, which he may have or claimed to have had, arising at any time in the unlimited past to and including the date of this Agreement, including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with his employment with Bank and his departure therefrom. (b) Without limiting the generality of the foregoing, Claimant acknowledges and agrees that among the claims released are any and all claims pursuant to Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Equal Pay Act, the Americans with Disabilities Act, the California Fair Employment and Housing Act, the California Equal Pay Act, the Fair Labor Standards Act, the California Labor Code, any Wage Order promulgated by the Industrial Welfare Commission, the California Unemployment Insurance Code, any breach of an express, written, oral or implied contract, breach of an implied covenant of good faith and fair dealing, tortious wrongful discharge based on a breach of any state or federal public policy, fraud, negligent misrepresentation, defamation, libel, slander, negligence and intentional or negligent infliction of emotional distress. (c) Claimant further acknowledges and agrees that this Agreement shall operate as a complete bar of any and all litigation, charges, complaints, grievances, arbitrations, or demands of any kind whatsoever which arose at any time in the unlimited past to and including the date of this Agreement, regardless of whether they are pending or contemplated, or might at any time be filed including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with his employment with Bank and his departure therefrom. Each and all of the aforesaid claims or potential claims, are hereby fully and finally settled, compromised and released. (d) The parties expressly agree that the above release of claims does not include any claim Claimant may have under the California Workers' Compensation Law or the terms of Bank's disability insurance policy for any injuries Claimant may contend he suffered while in Bank's employ. 4 Claimant acknowledges and agrees that he is releasing any other claim (including, without limitation, any third party action) he may have against Releasees, or any of them, or any of their directors, shareholders, officers, employees or agents, arising out of any such injuries. (e) Claimant acknowledges that he has been advised by legal counsel and is familiar with the provision of Section 1542 of the California Civil Code, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTORS. (f) Being aware of said Code section, Claimant hereby expressly waives and relinquishes any rights or benefits he may have thereunder, as well as under any other state or federal statutes or common law principles of similar effect. (g) Releasees do hereby agree to fully, finally and forever release, quitclaim and discharge Claimant and each of his attorneys, agents, successors and assigns and any or all of them from any and all claims, liabilities, demands, debts, accounts, obligations, actions and causes of action, known or unknown, at law or in equity, which they may have or claimed to have had, arising at any time in the unlimited past to and including the date of this Agreement, including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with Claimant's employment with Bank and his departure therefrom. (h) Releasees further acknowledge and agree that this Agreement shall operate as a complete bar of any and all litigation, charges, complaints, grievances, arbitrations, or demands of any kind whatsoever which arose at any time in the unlimited past to and including the date of this Agreement, regardless of whether they are pending or contemplated, or might at any time be filed including, but without limiting the generality of the foregoing, any and all matters arising out of or in any manner whatsoever connected with Claimant's employment with Bank and his departure therefrom. Each and all of the aforesaid claims are hereby fully and finally settled, compromised and released. (i) Releasees acknowledge that they have been advised by legal counsel and are familiar with the provision of Section 1542 of the California Civil Code, which provides as follows: 5 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTORS. (j) Being aware of said Code section, Releasees hereby expressly waive and relinquish any rights or benefits they may have thereunder, as well as under any other state or federal statutes or common law principles of similar effect. 9. LETTER OF RECOMMENDATION/REFERENCES. Upon request from Claimant, Releasees will issue a copy of the letter of recommendation attached hereto as Exhibit A to such persons as Claimant may direct. A copy of the letter of recommendation shall also become a permanent part of Claimant's personnel file. Apart from the obligations set forth in this paragraph, Releasees shall have no obligation to provide references on Claimant's behalf. 10. SUCCESSORS AND ASSIGNS. All agreements, acknowledgments, declarations, representations, understandings, promises, warranties, authorizations and instructions made, and all understandings expressed by the parties hereto, and each of them, in this Agreement and all benefits accruing under this Agreement apply to and bind the respective makers of said agreements, acknowledgments, declarations, representations, understandings, promises, warranties, authorizations, instructions and expressions of understanding, and also all of their respective heirs, officers, directors, agents, servants, employees, attorneys, shareholders, affiliates, subsidiaries, parent entities, firms, predecessors, successors and assigns, and also all other persons, firms, corporations, associations, partnerships and entities in privity with or related to or affiliated with any such person, firm, corporation, association, partnership or entity. 11. MODIFICATION. This Agreement may not be modified except by a writing signed by each of the parties hereto, or their duly authorized representatives. 12. APPLICABLE LAW. This Agreement shall, in all respects, be interpreted, construed and governed by and under the domestic laws of the State of California. 13. ARBITRATION. (a) Any dispute regarding any aspect of this Agreement (including but not limited to its formation, performance or breach) or any act which allegedly has or would violate any provision of this Agreement ("Arbitrable Dispute"), 6 except for a dispute arising out of an alleged violation of paragraph 14, will be submitted to arbitration in Los Angeles County, California, before an experienced employment arbitrator licensed to practice law in California and selected in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association. Each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any other expenses connected with presenting their claim. Other costs of the arbitration, including the fees of the arbitrator, cost of any record or transcript of the arbitration, administrative fees and other fees and costs shall be borne equally by the parties, one-half by Claimant, on the one hand, and one-half by Releasees, on the other hand. (b) Should either party to this Agreement hereafter institute any legal action or administrative proceeding against the other with respect to any Claim waived by this Agreement or pursue any Arbitrable Dispute by any method other than through arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses and attorneys' fees incurred as a result of such action. 14. PROPRIETARY INFORMATION. (a) Claimant agrees that he will not in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any third party, any information he obtained during the course and scope of his employment with Releasees regarding the identity of Releasees' customers, the business transacted with them, the nature of the services provided by Releasees and the prices charged for such services, and any other information that constitutes a "trade secret" under California law. (b) Claimant further agrees that as of the date he delivers five (5) executed copies of this Agreement to Releasees' attorney, he has returned to Releasees all originals and all copies of all the Releasees' documents or other business records within his possession, custody or control, including without limitation, manuals, documents, files, reports, studies, instruments or other material used and/or developed by Claimant during his employment with Releasees, and letters, memoranda, notes, reports, tables, charts, photographs, video and audio tapes and transcriptions of such tapes, computer records (including without limitation any and all computer disks, computer tapes, and electronic or "E" mail). 7 15. RELEASEES' PROPERTY. Claimant represents and agrees that, except as set forth above, on or before the date he delivers five (5) executed copies of this Agreement to Releasees, in addition to the items identified in Paragraph 14, above, he turned over to Releasees all files, memoranda, records, other documents, badges, keys, credit cards and any other physical or personal property which are or were the property of Releasees which Claimant had in his possession, custody or control. 16. SEVERABILITY. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other paragraphs shall remain fully valid and enforceable. This Agreement shall survive the termination of any terms or conditions contained herein. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument. 18. CONFIDENTIALITY. (a) Claimant agrees that he will not disclose, directly or indirectly, whether individually or by or through an agent, representative, attorney or other person, the existence of this Agreement or its terms or conditions except (a) as required by law, or (b) to his spouse, financial, accounting or legal advisors and further agrees that he will take reasonable steps to ensure against disclosure of the existence or terms of this Agreement by such persons. (b) Releasees agree that they will not disclose, directly or indirectly, whether individually or by or through an agent, representative, attorney or other person, the existence of this Agreement or its terms or conditions except (a) as required by law, including (without limitation) responding to any request for such information from any state or federal governmental agency to which they are subject to regulation, or setting forth such information in public disclosure statements or reports, to the extent required by law, (b) to such of its directors, officers, employees or agents who need such information in order to effectuate the terms of the Agreement. Releasees will take reasonable steps to ensure against disclosure of the existence or terms of this Agreement by such persons. Nothing contained herein shall prevent the parties from discussing the terms and conditions of the Agreement with each other. 19. INDEMNIFICATION. As a further material inducement to Releasees to enter into this Agreement, Claimant hereby agrees to indemnify and hold Releasees, and each of them, harmless from and against any and all loss, costs, damages, or expenses, 8 including, without limitation, attorneys' fees incurred by Releasees, or any of them, arising out of any breach of this Agreement by Claimant or the fact that any representation expressly made herein by Claimant was false when made. 20. NO DISPARAGEMENT. The parties shall take no action of any type and make no statement of any type which harms, tends to harm, inconveniences, embarrasses, is against the best interest of, or brings into disrepute the other or any of their respective employees, officers, executives, directors, shareholders, staff members, agents, related organizations, successors or assigns. 21. ENTIRETY OF AGREEMENT. The parties hereto acknowledge and agree that this instrument and any other instruments specifically referred to herein constitute and contain the entire agreement and understanding concerning the subject matter between the parties and supersede and replace all prior negotiations and proposed agreements, whether written or oral. The parties, and each of them, warrant that no other party or any agent or attorney of any other party has made any promise, representation or warranty whatsoever not contained herein to induce them to execute this instrument and the other documents referred to herein. The parties, and each of them, represent that they have not executed this instrument or the other documents in reliance on any promise, representations or warranty not contained herein. 22. CONSTRUCTION. The parties hereto acknowledge and agree that the language of this instrument shall be construed as a whole according to its fair meaning and not strictly for or against any of the parties. 23. HEADINGS. The various headings in this Agreement are inserted for convenience only and shall not be deemed a part of or in any manner affect this Agreement or any provisions hereof. 24. CONSULTATION WITH ATTORNEY, COMPLETE UNDERSTANDING OF AGREEMENT AND ACKNOWLEDGMENT OF RECEIPT OF CONSIDERATION. Claimant acknowledges that he was represented by independent legal counsel in connection with the negotiation and execution of this Agreement. Claimant further acknowledges that he was advised that he had a period of twenty-one (21) calendar days in which to consider and execute this Agreement. Claimant acknowledges that he consulted with his attorney before signing this Agreement, that Claimant has carefully read and fully understands all the provisions of this Agreement and that he is voluntarily entering into it. Claimant further acknowledges that the payments and other consideration which he is receiving 9 pursuant to this Agreement represent consideration in addition to any payment of value to which he is already entitled. 25. EFFECTIVE DATE OF AGREEMENT. Claimant further acknowledges and understands that he has seven (7) calendar days from the date on which he executes this Agreement to revoke it. Any such revocation must be made in a signed writing delivered to Debby Manning, Guardian Bank, 800 South Figueroa Street, Los Angeles, California 90017, no later than 5:00 p.m. on the seventh day after Claimant signs this Agreement. If Claimant revokes this Agreement, it shall not be effective or enforceable and Claimant will not receive any of the benefits described in this Agreement. The Agreement shall not be effective until the expiration of this revocation period. Dated: 11/26/93 GUARDIAN BANCORP By: H. Fletcher -------------------------------- Title: President ----------------------------- Dated: 11/26/93 GUARDIAN BANK By: H. Fletcher -------------------------------- Title: President ----------------------------- Dated: 11/26/93 Ronald W. Holloway ------------------------------------- RONALD W. HOLLOWAY 10 EX-13.1 5 EXHIBIT 13.1 8 GUARDIAN BANCORP ................................................................................ EXHIBIT 13.1 SELECTED FINANCIAL DATA The selected consolidated financial data set forth below with respect to the Company's consolidated statement of operations for the years ended December 31, 1993, 1992 and 1991 are derived from the consolidated financial statements, which have been audited by KPMG Peat Marwick, independent auditors, included in this report. The selected consolidated statement of operations data for the years ended December 31, 1990 and 1989 are derived from audited consolidated financial statements which are not included in this report.
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------------------------------- EARNINGS DATA: Interest income $ 32,769 41,295 50,223 42,553 34,090 Interest expense (7,505) (9,010) (14,334) (10,857) (7,739) - --------------------------------------------------------------------------------------------------------------------- Net interest income 25,264 32,285 35,889 31,696 26,351 Provision for loan losses (18,250) (9,395) (5,946) (1,160) (1,236) - --------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 7,014 22,890 29,943 30,536 25,115 Noninterest income 1,419 1,039 923 611 554 Noninterest expense (27,436) (26,356) (24,749) (19,288) (16,631) - --------------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes (19,003) (2,427) 6,117 11,859 9,038 Provision (benefit) for income tax (4,546) (109) 2,900 4,744 3,615 - --------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ (14,457) (2,318) 3,217 7,115 5,423 - --------------------------------------------------------------------------------------------------------------------- PER SHARE DATA: Net earnings (loss) $ (3.90) (.64) .77 1.61 1.31 Fully diluted net earnings (loss) (3.90) (.64) .77 1.61 1.31 Book value(1) 5.70 9.70 10.47 9.66 7.06 Weighted average shares outstanding (in thousands)(2) 3,710 3,624 4,194 4,413 4,130 - --------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCE SHEET DATA: Federal funds sold $ 89,318 61,950 63,372 20,575 25,698 Investment securities 31,429 44,048 41,102 31,845 45,165 Short-term investments 33,003 27,823 -- -- -- Loans, net of deferred loan fees 353,032 420,192 392,997 291,741 203,090 Allowance for loan losses (15,419) (9,924) (4,681) (2,916) (2,107) - --------------------------------------------------------------------------------------------------------------------- Loans, net 337,613 410,268 388,316 288,825 200,983 - --------------------------------------------------------------------------------------------------------------------- Total assets 585,716 652,580 575,987 414,934 353,343 Total deposits 546,217 602,845 531,588 374,965 326,016 Shareholders' equity 30,888 39,590 37,147 31,819 20,823 - --------------------------------------------------------------------------------------------------------------------- ASSET QUALITY(5): Nonperforming loans $ 34,825 34,863 28,784 2,671 2,739 Other real estate owned 13,949 4,359 2,945 -- -- - --------------------------------------------------------------------------------------------------------------------- Total nonperforming loans and other real estate owned 48,774 39,222 31,729 2,671 2,739 - --------------------------------------------------------------------------------------------------------------------- Loans with modified terms 9,539 2,149 8,124 -- 103 Net charge-offs to average loans 3.83% 1.21 .07 .07 .22 Nonperforming loans to total period-end loans 10.79 8.92 6.71 .78 1.11 Allowance for loan losses to period-end loans 5.64 3.45 2.13 1.01 1.01 Allowance for loan losses to period-end nonperforming loans 52.26 38.63 31.74 130.03 91.46 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS: Return on average assets (2.47)% (.36) .56 1.71 1.53 Return on average shareholders' equity (46.80) (5.86) 8.66 22.36 26.04 Average shareholders' equity to average assets 5.27 6.07 6.45 7.67 5.89 Net interest margin(4) 4.99 5.83 7.21 9.23 9.49 Capital Ratios:(3) Company: Tier 1 6.00 8.26 7.99 10.73 NA Total 8.15 10.23 10.14 11.80 NA Leverage 3.74 5.34 5.74 6.86 NA Bank: Tier 1 7.02 8.36 7.89 9.10 NA Total 8.33 10.36 10.04 11.03 NA Leverage 4.19 5.21 5.69 6.75 NA - --------------------------------------------------------------------------------------------------------------------- (1)All book value per share numbers are based on the number of shares outstanding at period end. (2)The weighted average number of shares of common stock outstanding during 1993 and 1992 was used to compute loss per share as the use of average shares outstanding including common stock equivalents would be antidilutive. (3)Based upon the capital adequacy guidelines that are in effect at December 31, 1993. (4)Computed on a tax equivalent basis. If customer service expenses were deducted in computing net interest income, net interest margin would have been 3.90%, 4.39%, 5.38%, 7.21% and 6.80%, respectively. (5)Prior years have been restated to be consistent with 1993 reclassification of in-substance foreclosed assets from other real estate owned to loans.
GUARDIAN BANCORP 9 ................................................................................ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes in trends related to the financial condition of the Company and its results of operations. It should be read in conjunction with the audited consolidated financial statements and footnotes appearing elsewhere in this report. OVERVIEW The Company recorded a net loss of $14.5 million in 1993 compared to a net loss of $2.3 million in 1992 and net earnings of $3.2 million in 1991. The net loss recorded in 1993 was attributable to increases in the Company's provision for loan losses and the related allowance for loan losses, a decline in net interest income and an increase in noninterest expense. The increased provision for loan losses during 1993 reflects management's assessment of the economic conditions that were prevailing and the actual and potential impact those conditions have had and may have on the Company's loan portfolio, including a continuing high level of nonperforming loans and loan charge-offs. Net interest income during 1993 decreased from the amount reported for 1992 due principally to a decline in average interest-earning assets and the yields earned thereon. Net interest income for 1993 was also negatively affected by an increase in nonperforming assets and a change in the composition of the funding sources used by the Company, as average noninterest-bearing deposits declined as a percentage of average total deposits. The decline in net interest income for 1992 compared to 1991 was largely attributable to a decline in the yield on interest-earning assets. Noninterest expense during 1993 increased approximately $1.1 million over the amount reported in 1992. This increase was largely attributable to expenses associated with other real estate owned (OREO), which increased approximately $2.3 million, a decrease of $969,000 in the deferral of loan origination costs due to declines in the volume of new loan originations and, to a lesser extent, a $750,000 increase in professional expenses. These increases were partially offset by a $2.5 million decrease in customer service expense and a $540,000 decrease in occupancy expense. Noninterest expense increased in 1992 over amounts reported in 1991 primarily due to increased staffing needs, legal and professional costs and other direct costs associated with carrying OREO. The increase attributable to these factors was partially offset by reductions in customer service expense and promotional costs. At December 31, 1993, total assets, deposits and net loans of $567.5 million, $525.7 million and $322.7 million, respectively, had declined 12.8%, 12.4% and 17.4%, respectively, from amounts reported at the close of 1992. At December 31, 1992, total assets, deposits and net loans of $650.8 million, $599.9 million and $390.8 million, respectively, had declined 10.5%, 12.1%, and 8.9%, respectively, from amounts reported at the close of 1991. The decline in the loan portfolio during 1993 and 1992 from prior years' levels reflects the result of general economic conditions in the Company's marketplace, a slow down in real estate activity in Southern California and a shift in the Company's growth patterns which started in 1991 and continued in 1993. In light of the recessionary economic environment and the impact which it has had and continues to have on the real estate sector, as well as a regulatory recommendation regarding growth in the Company's real estate related loans prior to 1992, management has moved to limit growth in the Company's real estate related loans, particularly construction loans, and has commenced the diversification of the loan portfolio mix to include more non-real estate related credits. These actions are consistent with the provisions of the Bank's regulatory agreement that requires it to monitor and control the concentration of construction, land development and land acquisition loans. Offsetting the decline in the loan portfolio has been an increase at December 31, 1993 and 1992 in the Company's lower yielding investment securities and short-term investments, as management positioned the balance sheet mix to attain acceptable yields, and an increase in its cash balances to meet liquidity needs. The Company's period end deposit balances traditionally reflect increases in noninterest-bearing demand deposits from its title insurance company and escrow company customers. These deposits generally increase at or near each month end as the underlying real estate transactions being handled by such deposit customers are nearing consummation. In turn, the Company invests a substantial amount of these funds in securities of the U.S. 10 GUARDIAN BANCORP ................................................................................ Treasury and other short-term money market instruments which increases its period end asset levels. Subsequent to each period end, such short-term investments are converted into cash and used to meet such customers' withdrawal needs as the underlying transactions are consummated. Total average assets, deposits and loans, net of deferred loan fees, of $585.7 million, $546.2 million and $353.0 million, respectively, during the year ended 1993 declined 10.3%, 9.4% and 16.0%, respectively, from the averages for calendar year 1992. During the year ended December 31, 1992, average assets were $652.6 million, average deposits were $602.8 million and average loans, net of deferred loan fees, were $420.2 million, representing increases of 13.3%, 13.4% and 6.9%, respectively, over the 1991 average amounts of $576.0 million, $531.6 million and $393.0 million, respectively. The composition of the Company's average deposit base changed during 1993 as average noninterest-bearing demand accounts decreased as a percentage of total average deposits to 59.3% compared to 63.6% during 1992 and increased from the reported 54.9% in 1991. Those funds were replaced with more costly interest-bearing deposits and partially contributed to the decline in the Company's net interest margin during 1993. During 1993, average interest-bearing deposits comprised 40.7% of total average deposits compared with 36.4% in 1992. Nonperforming loans were essentially flat between December 31, 1993 and 1992 and were approximately $34.8 million at December 31, 1993, compared with $34.9 million at the close of 1992. The current economic environment has had and is expected to continue to have an adverse impact on the Company's level of nonperforming loans, and management's assessment of this existing and potential impact contributed to its decision to increase the provision for loan losses and the related allowance for loan losses during 1993. The majority of nonperforming loans are supported by real estate collateral which reduces, but does not eliminate, exposure to loss of principal. The ratio of the allowance for loan losses to nonperforming loans increased to 52.26% at December 31, 1993 from the 38.63% reported at December 31, 1992. OREO was $13.9 million at December 31, 1993, compared to $4.4 million at the close of 1992. During 1993, the Company foreclosed on $24.2 million, recorded valuation adjustments of $714,000, and sold $13.9 million of such assets, realizing a net loss on sale of $266,000. Commencing in 1993, the Company reclassified in-substance foreclosed assets from other real estate owned to loans if it does not have physical possession of the underlying collateral. This practice is consistent with regulatory reporting requirements and with changing trends evolving in the financial reporting practices. Accordingly, related prior years' financial information has been reclassified to be consistent with 1993's presentation. At December 31, 1993 and 1992, the allowance for loan losses was 5.64% and 3.45% of loans, net of deferred fees, respectively. The Company's level of net charge-offs, expressed as a percentage of average loans outstanding, was 3.83%, as compared to 1.21% for the year ended December 31, 1992. On October 14, 1992, the Federal Reserve Bank of San Francisco (the "FRB") entered into a separate written agreement with each of the Company and the Bank. These agreements require, among other things, the Company and the Bank to: (a) develop a plan to maintain adequate capital; (b) maintain an allowance for loan losses that is equal to or greater than 1.7% of the Bank's total loans; (c) refrain from paying any cash dividends to the Company or the Company's shareholders without the prior approval of the FRB; (d) refrain from incurring any debt, other than in the ordinary course of business, at the holding company level without the prior approval of the Federal Reserve Bank; and (e) develop, update and otherwise adopt various policies, procedures and plans to improve the financial condition of the Bank. Both before and after entering these agreements, management of the Company and the Bank have taken various steps, including the Company's successful capital raising effort which closed in early 1994, that are designed to facilitate compliance with the terms thereof. However, compliance with the terms of the agreements will be determined by the FRB during subsequent examinations of the Company and the Bank. On January 28, 1994, Guardian Bancorp consummated its rights offering of common stock ("the Offering"), and raised gross proceeds of approximately $19,700,000 through the issuance of 8,774,000 shares of common stock. After deducting expenses incurred in the Offering, net proceeds were approximately $17,958,000. In early February 1994, Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank for the Bank's general corporate purposes and subsequently reimbursed the Bank approximately $229,000 for costs it incurred in the capital raising effort. Guardian Bancorp retained the remaining net proceeds of approximately $1.2 million for its own general corporate purposes. GUARDIAN BANCORP 11 ................................................................................ The following table sets forth certain information regarding the Company's results of operations for the three years indicated. Average balances are computed using average daily balances.
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1993 1992 1991 - --------------------------------------------------------------------------------- Return on average assets (2.47)% (.36)% .56% Return on average shareholders' equity (46.80) (5.86) 8.66 Net earnings (loss) $ (14,457) $ (2,318) $ 3,217 Net earnings (loss) per share (3.90) (.64) .77 Total average assets $ 585,716 $ 652,580 $ 575,987 - ---------------------------------------------------------------------------------
RESULTS OF OPERATIONS NET INTEREST INCOME The principal component of the Company's net earnings is net interest income, which is the difference between interest and fees earned on interest-earning assets and interest paid on deposits and borrowed funds. Net interest income, when expressed as a percentage of total average interest-earning assets, is referred to as the net interest margin. A comparison of net interest income and net interest margin for the last three years is shown in the table below. Net interest margin is shown on a tax equivalent basis at the incremental tax rate of 34% for the three year period ended December 31, 1993.
YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1993 (DECREASE) 1992 (DECREASE) 1991 - -------------------------------------------------------------------------------------------------- Interest income $ 32,769 (20.6)% $41,295 (17.8)% $50,223 Interest expense 7,505 (16.7) 9,010 (37.1) 14,334 - -------------------------------------------------------------------------------------------------- Net interest income 25,264 (21.7) 32,285 (10.0) 35,889 Net interest margin 4.99% 5.83% 7.21% - --------------------------------------------------------------------------------------------------
The Company's net interest income is affected by the change in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." It is also affected by changes in yields earned on assets and rates paid on deposits and other borrowed funds, referred to as "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to volume change and rate change for the years indicated. The change in interest income due to both volume change and rate change has been allocated to volume change and rate change pro rata.
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1993 AND 1992 1992 AND 1991 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGE IN DUE TO CHANGE IN - ------------------------------------------------------------------------------------------------------------------------------- NET NET (DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE - ------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Interest-bearing deposits with financial institutions $ (18) (28) (46) (40) (47) (87) Federal funds sold 819 (273) 546 (75) (1,276) (1,351) Investment securities (762) (354) (1,116) 200 (149) 51 Short-term investments 151 (101) 50 873 -- 873 Loans, net (5,386) (2,574) (7,960) 2,830 (11,244) (8,414) - ------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (5,196) (3,330) (8,526) 3,788 (12,716) (8,928) - ------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Borrowed funds $ (104) 45 (59) 233 (216) 17 Interest-bearing demand and savings deposits (288) (197) (485) 252 (465) (213) Money market deposits 16 (400) (384) 200 (1,023) (823) Time certificates of deposit 662 (1,239) (577) (1,978) (2,327) (4,305) - ------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 286 (1,791) (1,505) (1,293) (4,031) (5,324) - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ (5,482) (1,539) (7,021) 5,081 (8,685) (3,604) - -------------------------------------------------------------------------------------------------------------------------------
12 GUARDIAN BANCORP ................................................................................ Net interest income for the year ended December 31, 1993 decreased approximately $7.0 million from the comparable period in 1992. Net interest margin for the year ended December 31, 1993 decreased 84 basis points from the comparable period in 1992 and was 4.99% in 1993 compared to 5.83% in 1992. These declines are primarily attributable to a reduction in average interest-earning assets in general and average loans in particular and an overall decline in the yield on average interest-earning assets. Net interest income was also negatively affected by a change in the composition of the Company's deposits. Average interest-earning assets and average loans, the Company's highest yielding assets, were $508.5 million and $353.4 million, respectively, during 1993 compared to $556.6 million and $421.0 million for 1992. This decline and any further decline in interest-earning assets in general and loans in particular has and could continue to adversely affect net interest income in the future. In light of the high level of the Company's average noninterest-bearing deposits, declining interest rates have adversely affected the Company's net interest income as interest income has been reduced without a corresponding reduction in interest expense. Average interest rates have continued to decline during 1993 as the Company's prime rate dropped to 7.0% at December 31, 1993 from 7.5% at June 30, 1992. Until such time as interest rates increase, the Company's net interest income will continue to be adversely affected by the current level of, or any future decline in, interest rates. Additionally, loans on nonaccrual have increased during the three years ended December 31, 1993 and had the negative impact on net interest margin by reducing it by 113, 69 and 48 basis points, during 1993, 1992 and 1991, respectively. Net interest margin will continue to be adversely effected by the level of, or any future increases in loans on nonaccrual. During the year ended December 31, 1993, the composition of average deposits changed as average noninterest-bearing deposits decreased as a percentage of total average deposits to 59.3% from 63.6% during 1992 and average interest-bearing deposits increased as percentage of total average deposits to 40.7% from 36.4% during 1992. It is likely that increased reliance will be placed on interest-bearing deposit sources in light of management's decision to diversify its funding sources and a newly issued interpretive release by the Federal Reserve Board which limits the payment of customer service expense to certain instances. See "Financial Condition -- Liquidity." This increased reliance on interest-bearing sources of funds has and will continue to adversely affect net interest income, offset; in part, by decreases in noninterest customer service expense attributable to certain noninterest-bearing account relationships. The $3.6 million decrease in net interest income for the year ended December 31, 1992 from the comparable period in 1991 was principally due to a 260 basis point decline in the yield on average interest-earning assets. This decline is largely attributable to an increase in average loans on nonaccrual during 1992 as compared to 1991, an overall decline in the yield on average interest-earning assets and, to a lesser extent, a reduction in loans outstanding, the Company's highest yielding asset, as a percentage of total average earning assets. The decrease was partially offset by an increase in the volume of average loans and a decrease in the volume of average time certificates of deposit and the rates paid on all interest-bearing deposits. Net interest margin was 5.83% in 1992 compared to 7.21% in 1991 and reflects the increase in average earning assets and a decline in yields on virtually all such assets that exceeded the decline in rates paid on the Company's interest-bearing liabilities during 1992. GUARDIAN BANCORP 13 ................................................................................ The following table sets forth certain information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Average balances are computed using daily average balances.
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991 - --------------------------------------------------------------------------------------------------------------- INTEREST INTEREST INTEREST - --------------------------------------------------------------------------------------------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - --------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Interest-bearing deposits with financial institutions $ 1,317 42 3.2% 1,742 88 5.1% 2,383 175 7.3% Federal funds sold 89,318 2,594 2.9 61,950 2,048 3.3 63,372 3,399 5.4 Investment securities(1) 31,429 1,811 6.1 44,048 2,927 7.0 41,102 2,876 7.6 Short-term investments 33,003 923 2.8 27,823 874 3.3 -- -- -- Gross loans(2) 353,388 27,399 7.8 421,031 35,358 8.4 394,127 43,773 11.1 - --------------------------------------------------------------------------------------------------------------- Total interest-earning assets 508,455 32,769 6.5 556,594 41,295 7.4 500,984 50,223 10.0 - --------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 77,261 95,986 75,003 Total assets $585,716 652,580 575,987 - --------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Borrowed funds $ 4,805 397 8.3% 6,104 456 7.5% 3,567 439 12.3% Interest-bearing demand and savings deposits 53,626 1,257 2.3 65,242 1,742 2.7 57,187 1,955 3.4 Money market deposits 52,327 1,289 2.5 51,813 1,673 3.2 47,701 2,496 5.2 Time certificates of deposit 116,603 4,562 3.9 102,210 5,139 5.0 134,621 9,444 7.0 - --------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 227,361 7,505 3.3 225,369 9,010 4.0 243,076 14,334 5.9 - --------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 323,661 383,580 292,079 Other liabilities 3,806 4,041 3,685 Shareholders' equity 30,888 39,590 37,147 - --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $585,716 652,580 575,987 - --------------------------------------------------------------------------------------------------------------- Net interest income(3) $25,264 32,285 35,889 - --------------------------------------------------------------------------------------------------------------- Net interest margin(3) 4.99% 5.83% 7.21% - --------------------------------------------------------------------------------------------------------------- (1)Yields are presented on a tax equivalent basis at the incremental tax rate of 34% for the three year period ended December 31, 1993. (2)Includes loans on nonaccrual. Interest income on loans includes net loan fees amortized to income of $648,000, $529,000 and $2.0 million during 1993, 1992 and 1991, respectively. (3)If customer service expense were classified as interest expense, then the Company's reported net interest income and noninterest expense for each of the years in the three year period ended December 31, 1993 would be reduced by $5.5 million, $8.0 million and $9.2 million, respectively. Net interest margin for each year would have been 3.90%, 4.39% and 5.38%, respectively.
The level of nonperforming loans in the Company's portfolio affects the amount of interest income. If a loan is placed on nonaccrual status, interest income that had been accrued to the date a loan is placed on nonaccrual is reversed and income is not recognized until the payment has actually been received. At December 31, 1993, there was no interest accrued which had not been reversed on nonaccrual loans. The amount of net interest income foregone for the years ended December 31, 1993, 1992 and 1991, assuming nonaccrual loans at December 31, 1993, 1992 and 1991 complied with their original terms, was $4.0 million, $2.9 million and $1.9 million, respectively. The amount of interest income foregone for the years ended December 31, 1993, 1992 and 1991, assuming loans with modified terms at December 31, 1993, 1992 and 1991 complied with their original terms, was $318,000, $124,000 and $106,000, respectively. Interest income will continue to be adversely affected until such time as the Company is able to reduce the level of its nonaccrual loans. See Note 4 to the Company's Consolidated Financial Statements. 14 GUARDIAN BANCORP ................................................................................ PROVISION FOR LOAN LOSSES The amounts provided for loan losses are determined by management after quarterly evaluations of the loan portfolio. This evaluation processs requires that management apply various judgments, assumptions and estimates concerning the impact certain factors may have on amounts provided. Factors considered by management in its evaluation process include known and inherent losses in the loan portfolio, the current economic environment, the composition of and risk in the loan portfolio, prior loss experience and underlying collateral values. While management considers the amounts provided for loan losses for the year ended December 31, 1993 to be adequate, subsequent changes in these factors and related assumptions may warrant significant adjustments in amounts provided, based on conditions prevailing at the time. In addition, various regulatory agencies, as an integral part of the examination process, review the Bank's allowance for loan losses. Such agencies may require the Bank to make additions to the allowance based on their judgments of information available to them at the time of their examination. The provision for loan losses in 1993, 1992 and 1991 was approximately $18.3 million, $9.4 million and $5.9 million, respectively. The significant increase in the 1993 provision for loan losses over that in 1992 is in response to management's assessment of current economic conditions in California, particularly those in the southern portion of the state, which point to continuation of persistent recessionary conditions that continue to affect the financial capabilities and liquidity of the Company's borrowers and the values of the underlying collateral supporting the Company's loans. Due to the general economic decline, the level of the Company's nonperforming loans (See "Financial Condition -- Loans") and net loan charge-offs continue to remain high by the Company's historical levels. Furthermore, the information analyzed by the Company throughout 1993, including appraisal data, in connection with management's quarterly reviews of loans and the adequacy of the allowance for loan loss disclosed further deterioration in the value of collateral for real estate related loans. Moreover, the valuation of certain loans in the process of foreclosure was further adjusted downward to reflect subsequent market value data which exacerbated the impact of charge-offs during 1993. Finally, management's perspective on the general economic conditions in the Company's marketplace at December 31, 1993 was based in part upon a then recent economic report indicating that the current recessionary environment would continue through at least the third quarter of 1994. There can be no assurance that the recession will not persist beyond the third quarter of 1994. The increase in the provision for loan losses has resulted in an increase in the allowance for loan losses from $13.5 million at the close of 1992 to $18.2 million at December 31, 1993. NONINTEREST INCOME The following table sets forth information by category of noninterest income of the Company for the years indicated:
YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 1991 - ----------------------------------------------------------------------------------------- Gain on sale of securities $ 3 42 2 Service charges on deposits 315 270 209 Escrow fees and other service charges 283 292 397 Trust fees 627 186 14 Other 191 249 301 - ----------------------------------------------------------------------------------------- Total $ 1,419 1,039 923 - -----------------------------------------------------------------------------------------
The increase in noninterest income in 1993 over 1992 is due to increases in trust fee income and modest increases in service charges on deposit customers offset by a decrease in escrow fees due to a decline in the number of escrows handled by the Company in 1993 as compared to 1992 and decreases in other miscellaneous fee income. The increase in noninterest income in 1992 from 1991 is due to modest increases in service charges on deposit customers and trust fee income offset by a decrease in escrow fees resulting from a decline in the number of escrows handled by the Company in 1992. GUARDIAN BANCORP 15 ................................................................................ NONINTEREST EXPENSE The following table sets forth information by category of noninterest expense of the Company for the years indicated:
YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 1991 - ------------------------------------------------------------------------------------- Salaries and employee benefits $ 8,621 7,271 6,118 Occupancy 1,238 1,778 1,783 Furniture and equipment 851 1,004 884 Customer service 5,539 7,989 9,189 Data processing 351 831 568 Promotional 758 1,120 1,436 Professional 2,416 1,666 1,033 Office supplies 416 416 444 FDIC assessments 1,791 1,365 1,025 Other real estate owned 2,957 667 41 Other 2,498 2,249 2,228 - ------------------------------------------------------------------------------------- Total $ 27,436 26,356 24,749 - -------------------------------------------------------------------------------------
The following table summarizes the components of salaries and employee benefits for the years indicated:
YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------- Salaries, wages and payroll taxes $ 8,337 7,780 7,240 Deferred direct incremental underwriting costs (770) (1,739) (2,223) Medical and other insurance benefits 672 847 743 Other 382 383 358 - -------------------------------------------------------------------------------------------------------------- $ 8,621 7,271 6,118 - --------------------------------------------------------------------------------------------------------------
Direct compensation increased approximately $557,000 for the year ended December 31, 1993, or 7.2% over the amount for 1992. The increase in direct compensation is attributable to the net increase in the number of employees, particularly in the credit administration and special assets departments, within the Company during 1993 over that of 1992 and severance arrangements partially offset by decreases in the compensation levels of certain executive officers. During the third quarter of 1993, two executive officers of the Company ceased to serve as employees. These executives were serving pursuant to three year contracts that were entered into during 1992 and initially provided for aggregate annual base salaries of $451,000. Each agreement stipulates grounds for its termination and provides for alternative severance payments that depend upon the circumstances of the termination. The Company accrued an aggregate of $350,000 associated with the negotiation and settlement of severance arrangements with these former executives and such expense is included in direct compensation for the year ended December 31, 1993. Substantially all of the severance arrangements were paid in 1993. The increase in direct compensation of $540,000, or 7.5%, in 1992 over 1991 is principally attributable to new employee additions at Guardian Trust Company, increased staff levels at the Company to accommodate 1991 growth and, to a lesser extent, salary increases during that year. Deferred direct incremental underwriting compensatory costs decreased $969,000, or 55.7%, during 1993 from the amounts reported for 1992. The level of such deferred costs is directly related to the volume of new loan originations which, since the second half of 1991, has been declining as part of management's goal of reducing real estate loan growth, particularly construction lending, in light of softness in the real estate sector. The decrease in medical and other insurance benefits of $175,000 during the year ended December 31, 1993 from the level reported for 1992 is attributable to plan changes implemented by the Company in the type of benefit package offered to employees which reduced the costs associated with such benefits. Increases in medical and other insurance benefits of $104,000 during 1992 over 1991 are attributable to an increase in cost pass-throughs to the Company from its health care providers and the higher number of 16 GUARDIAN BANCORP ................................................................................ employees with the Company. Other expenses in 1993, comprised principally of temporary help, recruiting, employee education and Company provided transit costs, are consistent with 1992 levels which, in turn, were up modestly over those in 1991 due to the higher number of employees in the Company. The decrease in occupancy costs for the year ended December 31, 1993 from the amount reported in the comparable period of 1992 was directly attributable to the Company renegotiating the terms of the lease of the space it occupies in Los Angeles. Terms of the new lease will reduce the base rent expense for that space over the next nine years by an aggregate amount of approximately $2.3 million as compared to previously existing terms. Occupancy expense was $5,000 lower in 1992 over the level reported in 1991 and reflects the decision to close the Bank's San Fernando Valley loan production office during the first quarter of 1992, offset by escalations in rent for other leased space occupied by the Company. The decrease in furniture and equipment expense for the year ended December 31, 1993 from the amount reported in 1992 is the result of lower depreciation expense as Company owned furniture and equipment becomes fully depreciated. The increase during 1992 in furniture and equipment expense from expense amounts reported in 1991 were attributable to scheduled depreciation and the maintenance on the Company's premises and equipment. Customer service expense, primarily attributable to accounting, data processing and courier services provided to title insurance company and escrow company depositors, is incurred by the Company to the extent that certain average balances of noninterest-bearing deposits are maintained by such depositors and such deposit relationships are determined to be profitable. The Company seeks to control its customer service expense by continuously monitoring the earnings performance of its account relationships and, on that basis, limiting the amount of services provided. The average balance of title insurance company and escrow company deposits for the years ended December 31, 1993 and 1992 were $277.6 million and $334.3 million, respectively. At December 31, 1993 and 1992, the actual balance of such deposits was $287.3 million and $374.1 million, respectively. The decline in average balances during 1993 from 1992 contributed to the decrease in customer service expense for the year ended December 31, 1993 of $2.5 million from the comparable 1992 period. Despite higher average balances in title insurance company and escrow company deposits during 1992, the growth in the level of such deposits slowed during the latter half of 1992, contributing to a decrease in customer service expense of $1.2 million in 1992 from amounts reported in 1991. The decreases also reflects management's efforts at monitoring the earnings performance of such accounts, thereby decreasing the level and cost of outside services provided. If customer service expense was classified as interest expense, then the Company's net interest income and noninterest expense for the years ended December 31, 1993 and 1992 would have been reduced by $5.5 million and $7.9 million, respectively. During the first quarter of 1994, the Board of Governors of the Federal Reserve System issued a new interpretive release which is applicable to all member banks, such as the Bank, and other entities, which limits the payment of customer service expense to certain prescribed instances. As a result of the issuance of this interpretive release, it is expected that certain balances of accounts of certain customers to whom these services are provided will decline and, in turn, customer service expense will decline in 1994. Data processing expense decreased approximately $480,000 during the year ended December 31, 1993 from the comparable period in 1992 as a result of the Company's renegotiation, in the first quarter of 1993, of its contract with its primary data services provider. This renegotiated contract is expected to reduce data processing costs by approximately $320,000 annually for each of the years from 1994 through 1997. Promotional expense decreased to $362,000 during 1993 from levels reported in 1992, consistent with the Company's emphasis on reduced marketing efforts during 1993. Such expenses declined $316,000 during 1992 from 1991, also reflecting less emphasis on promotional activities. Professional fees increased by $750,000 during 1993 from amounts reported for the year ended December 31, 1992 which, in turn, was a $633,000 increase over professional fees reported for 1991. These increases principally reflect the Company's increased use of legal counsel and others for assistance in the resolution of problem real estate credits, which have increased in the recessionary economy and typically involve complex legal and other issues. Included in professional expense are appraisal related costs of $436,000, $314,000 and $93,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Such expenses have increased since 1991 due to the Company's increased use of appraisal related services in light of the recessionary economic environment and its impact on real estate collateral values. To a lesser extent, professional expenses have also increased as a result of increases in GUARDIAN BANCORP 17 ................................................................................ outside professional assistance rendered to the Company for other corporate related matters. Management expects that professional fees incurred in connection with problem asset resolution will continue to negatively affect noninterest expense in 1994, until the level of such assets decline, and are likely to increase if problem assets increase. Premiums paid for FDIC insurance increased for year ended December 31, 1993 by $426,000 over the similar period in 1992. Under existing regulations, FDIC insurance premiums have increased in 1993 over levels applicable to 1992, and these increased premiums have resulted in a corresponding increase in the Company's noninterest expense. Absent a significant decline in average deposits, FDIC insurance premiums will continue to contribute to increased noninterest expense. Premiums paid for FDIC deposit insurance increased in 1992 over 1991 due primarily to increased average deposits and a higher level of assessments which became applicable to all banks during 1991. Deposit insurance premiums increased in the second half of 1991 from prior periods, and the higher assessment was applicable throughout all of 1992. OREO expense increased during the year ended December 31, 1993 by $2.3 million from the amount reported for 1992 which was $667,000, and in turn, OREO expense increased $626,000 during 1992 over the amount reported in 1991. During the year ended December 31, 1993, the level of OREO was significantly higher than during 1992, which has resulted in an increase in direct holding costs and valuation adjustments of $1.5 million and $674,000, respectively, in 1993 from 1992. Direct holding costs are comprised principally of property taxes, insurance, security, foreclosure costs, marketing and other miscellaneous costs. Valuation adjustments result from write-downs of existing OREO to reflect reductions in fair market value. Due to weaknesses in the Southern California real estate market and the high level of the Company's nonperforming assets, OREO expense is expected to continue to adversely affect the Company's results of operations. (See "Financial Condition -- Nonperforming Assets". The principal component contributing to the increase in other noninterest expense of $249,000 during 1993 over the amount reported in 1992 is the expenses associated with the outsourcing of item processing which are classified in other noninterest expense in 1993 whereas prior to 1993, internal item processing costs were principally in the form of salaries and benefits. Other noninterest expense decrease was comparable between 1992 and 1991. INCOME TAXES The Company files consolidated federal income and combined California state franchise tax returns. Amounts provided for income taxes are based on the income reported in the consolidated financial statements at current tax rates. Such amounts include taxes deferred to future periods resulting from timing differences in the recognition of items for tax and financial purposes. Income tax expense (benefit) reflects effective rates on earnings (loss) before income taxes of (23.9)%, (4.5)% and 47.4% for each of the years in the three year period ended December 31, 1993. The Company's effective tax rate reflected an increase in the valuation allowance established due to certain net deductible temporary differences that cannot be realized through carryback to prior periods. The Company has not considered income from future periods in evaluating the realizability of its deferred tax assets. During the first quarter of 1993, the Company implemented Statement of Financial Accounting Standards (SFAS) 109 "Accounting For Income Taxes" by applying such statement on a retroactive basis to year-end 1991 in its consolidated financial statements. The cumulative impact at January 1, 1991 of the implementation of FASB 109 was not material. The impact of the restatement was to reduce the tax benefit and to increase the net loss by $492,000 for the year ended December 31, 1992 and to increase the provision for income taxes and reduce net earnings by $493,000 for the year ended December 31, 1991. 18 GUARDIAN BANCORP ................................................................................ FINANCIAL CONDITION The following table sets forth the Company's consolidated average assets, liabilities and shareholders' equity and the percentage distribution of these items for the years indicated.
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT - ------------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks $ 67,900 11.6% 90,825 13.9% 70,799 12.3% Interest-bearing deposits with financial institutions 1,317 0.2 1,742 0.3 2,383 0.4 Federal funds sold 89,318 15.2 61,950 9.5 63,372 11.0 Investment securities 31,429 5.4 44,048 6.7 41,102 7.1 Short-term investments 33,003 5.6 27,823 4.3 -- -- Loans, net 337,613 57.6 410,268 62.9 388,316 67.4 Premises and equipment, net 2,088 0.4 2,700 0.4 3,280 0.6 Other real estate owned 11,559 2.0 3,652 0.6 1,473 0.3 Other assets 11,489 2.0 9,572 1.4 5,262 0.9 - ------------------------------------------------------------------------------------------------------------- Total assets $ 585,716 100.0% 652,580 100.0% 575,987 100.0% - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Noninterest-bearing demand deposits $ 323,661 55.2% 383,580 58.8% 292,079 50.7% Interest-bearing demand and savings deposit 105,953 18.1 117,055 17.9 104,888 18.2 Time certificates of deposit 116,603 19.9 102,210 15.7 134,621 23.4 - ------------------------------------------------------------------------------------------------------------- Total average deposits 546,217 93.2 602,845 92.4 531,588 92.3 Subordinated debt 3,000 0.5 3,000 0.5 3,000 0.5 Other liabilities 5,611 1.0 7,145 1.0 4,252 0.7 Shareholders' equity 30,888 5.3 39,590 6.1 37,147 6.5 - ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 585,716 100.0% 652,580 100.0% 575,987 100.0% - -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS In the opinion of management, average balances are meaningful to a discussion and analysis of the Company's consolidated financial condition and results of operations. Accordingly, such information, which is based on daily average balances, is included in the following discussion. At December 31, 1993, total assets were approximately $567.5 million as compared to $650.8 million at December 31, 1992 and $727.9 million at December 31, 1991. Total average assets for the year ended December 31, 1993 were $585.7 million, down $66.9 million, or 10.3%, from the $652.6 million average for the year ended December 31, 1992. The $83.3 million decrease in assets at December 31, 1993 was primarily the result of year end decreases in noninterest-bearing deposits from title insurance company and escrow company customers. The reduction in average assets during 1993 and year end assets from 1992 to 1993 reflected the results of the recessionary economic conditions in the Company's marketplace, a slow down of real estate activity in Southern California and management's decision to limit the growth of new real estate related loans, which was based in part upon a regulatory recommendation and is consistent with the provision of the Bank's regulatory agreement that requires it to monitor and control the concentration of construction, land development and land acquisition loans. The $652.6 million in total average assets for the year ended December 31, 1992 represents a 13.3% increase from $576.0 million for 1991, and this increase was due primarily to increases in the Company's average mortgage and construction loan portfolios that were achieved primarily during the second half of 1991. The shift in the mix of GUARDIAN BANCORP 19 ................................................................................ average assets during 1992 from loans and federal funds sold to investment securities and short-term investments reflects management's decision, as discussed above, to limit growth of new real estate related credits, slower growth rates experienced in new loan origination and management's direction of available funds toward higher yielding liquid investments. CASH AND DUE FROM BANKS A high percentage of the Company's assets are maintained in cash and due from banks directly reflecting the large volume and size of clearings associated with the Company's title company and escrow company deposits. Average cash and due from banks for the year ended December 31, 1993 was $67.9 million, a 25.2% decrease from the $90.8 million of such assets for the year ended December 31, 1992. The 1992 average balance of cash and due from banks represents a 28.2% increase from the $70.8 million average during 1991. At December 31, 1993, cash and due from banks was $23.2 million down approximately $25.6 million from $48.8 million at December 31, 1992, primarily as a result of the Company's lower level of demand deposits and the placement of excess funds into short-term investments. Due to the lower level of demand deposits placed with the Company at the end of 1992, cash and due from banks at December 31, 1992 was $48.8 million, down $35.1 million from the $83.9 million reported at December 31, 1991. FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS Federal Funds Sold Average federal funds sold were approximately $89.3 million during the year ended December 31, 1993, up $27.3 million, or 44.0%, from the $62.0 million average for all of 1992. The increase was primarily due to having, on an average basis, excess funds available to invest in the form of federal funds sold. At December 31, 1993, the Company did not take a position in federal funds sold as compared to the $60.0 million reported at December 31, 1992, as the Company placed available funds into other forms of liquid investments. The $62.0 million of average federal funds sold during 1992 represents a decline of $1.4 million from the $63.4 million average for 1991. The decrease was primarily due to the Company's placement of available excess funds into other forms of liquid investments during 1992. At December 31, 1992, federal funds sold decreased $55.0 million to $60.0 million from the $115.0 million reported at December 31, 1991. Short-Term Investments During 1992, and in response to trends developing in the banking industry, the Company commenced the practice of classifying securities and investments in money market funds held for purposes of managing its overall liquidity as short-term investments. Such short-term investments are carried at the lower of cost or market. At December 31, 1993, the Company's short-term investments aggregated $179.9 million, up approximately $59.4 million, or 49.3%, from the $120.5 million reported at December 31, 1992. During the year ended December 31, 1993, the Company purchased short-term investments of $815.2 million, retired approximately $386.4 million of matured investments and sold approximately $369.9 million of such securities for a gain of $3,000. During the year ended December 31, 1993, average short-term investments were $33.0 million as compared to $27.8 million during 1992. There were no lower of cost or market adjustments charged to income during 1993 or 1992. During 1992, the Company purchased short-term investments of $254.5 million, retired approximately $90.5 million of matured short-term investments and sold $14.9 million of such securities to meet liquidity needs for a gain of $31,000. The Company's period end deposit balances traditionally reflect increases in noninterest-bearing demand deposits from its title insurance company and escrow company customers. These deposits generally increase at or near each month end as the underlying real estate transactions being handled by such deposit customers are nearing consummation. In turn, the Company invests a substantial amount of these funds in securities of the U.S. Treasury and other short-term money market instruments which increases its period end asset levels. Subsequent to each period end, such short-term investments are converted into cash and used to such customers' withdrawal needs as the underlying transactions are consummated. 20 GUARDIAN BANCORP ................................................................................ See Note 3 to the Company's December 31, 1993 consolidated financial statements for the maturity distribution, carrying value, estimated market value and weighted average yields of the Company's short-term investments as of December 31, 1993, 1992 and 1991, respectively. INVESTMENT SECURITIES At December 31, 1993, the Company's investment securities portfolio aggregated $29.1 million, up $2.2 million from the $26.9 million reported by the Company at December 31, 1992. The Company purchased $20.7 million of investment securities for its portfolio and retired $18.2 million of matured securities during the year ended December 31, 1993. Total average investment securities for the year ended December 31, 1993 were $31.4 million, down $12.6 million from the average during 1992 of $44.0 million. During 1993, the Company placed greater emphasis on the placement of available funds in short-term investments. During the year ended December 31, 1992, the Company purchased $97,000 of securities for its investment portfolio and retired $72.3 million of matured securities. During the first quarter of 1992 and prior to the practice of segregating certain investments as short-term during the second quarter of 1992, the Company sold $20.1 million of investment securities, realizing a gain of $11,000. See Note 3 to the Company's December 31, 1993 consolidated financial statements for the maturity distribution, carrying value, estimated market value and weighted average yields of the Company's investment securities as of December 31, 1993, 1992 and 1991, respectively. LOANS The Company engages in real estate lending through construction and term mortgage loans, all of which are secured by deeds of trust on underlying real estate. The Company also engages in commercial lending to businesses, and although the Company looks principally to the borrowers' cash flow as source of repayment, many commercial loans are secured by real estate as a secondary source of repayment. The Company's real estate and construction loans are diversified by type of collateral and concentrated geographically throughout the five counties it serves in Southern California. In addition to the collateralized position on certain of its lending activities, all lending transactions are subject to the Bank's credit evaluation, underwriting criteria and monitoring standards. At December 31, 1993, loans, net of deferred loan fees, were $322.7 million, down $68.1 million, or 17.4% from the $390.8 million reported at December 31, 1992. This decline is attributable to management's decision to limit real estate related loans generally to existing customers and to the funding of previously existing commitments, which was based in part upon a regulatory recommendation and is consistent with the provision of the Bank's regulatory agreement that requires it to monitor and control the concentration of construction, land development and land acquisition loans. The declines also reflect the slowdown in California's economic activity which impacted all segments of the loan portfolio. At December 31, 1993, real estate, construction and commercial loans comprised approximately 45.5%, 27.2% and 26.7%, respectively, of total outstanding loans in the portfolio. This compares to 35.4%, 42.0% and 21.9% categorized as real estate, construction and commercial loans, respectively, at December 31, 1992. Although real estate loans increased by $8.6 million in 1993, this increase is primarily attributable to an increase in mini-permanent loans made to the Company's existing customers. The Company's mini-permanent loans represent loans that have a term of three to five years, are amortized over 20 to 25 years and provide for a balloon payment at the end of the term. Most of these loans provide intermediate term financing for construction loans that were originated by the Company. Construction loans declined $76.4 million and commercial loans increased $642,000 at December 31, 1993 when compared to the respective balances outstanding at the close of 1992. Average gross loans were $353.4 million for the year ended December 31, 1993, a decrease of $67.6 million, or 16.1%, from the $421.0 million average for the year ended December 31, 1992. This decline reflects the downward trend in the level of gross loans outstanding due to California's economic activity in 1993 and earlier which has impacted all segments of the loan portfolio. The Company's average loan-to-deposit ratio was 64.7% during 1993 as compared to 69.8% and 74.1% during 1992 and 1991, respectively. GUARDIAN BANCORP 21 ................................................................................ In light of the current economy, management's decision to limit real estate lending, principally construction financing, is expected to continue during 1994. This may have the effect of reducing the size of the Company's loan portfolio unless the Company is able to successfully market other loan products. ALLOWANCE FOR LOAN LOSSES A certain degree of risk is inherent in the extension of credit. Management has credit policies in place to monitor and attempt to control the level of loan losses and nonperforming loans. One product of the Company's credit risk management is the maintenance of the allowance for loan losses at a level considered by management to be adequate to absorb estimated known and inherent losses in the existing portfolio, including commitments and standby letters of credit. The allowance for loan losses is established through charges to operations in the form of provisions for loan losses. The allowance is based upon a regular review of current economic conditions, which might affect a borrower's ability to pay, underlying collateral values, risk in and the composition of the loan portfolio, prior loss experience and industry averages. In addition, the Bank's primary regulators, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may recommend additions to the allowance based on their assessment of information available to them at the time of their examination. Loans that are deemed to be uncollectible are charged-off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged-off are added to the allowance. The allowance for loan losses was approximately $18.2 million, $13.5 million and $9.1 million at December 31, 1993, 1992 and 1991, respectively. Net charge-offs were approximately $13.5 million, $5.1 million and $284,000 during the years ended December 31, 1993, 1992 and 1991, respectively. The increase in net charge-offs during 1993 from those reported in prior periods primarily resulted from losses recognized upon transfer of loans to OREO, losses taken on certain real estate loans due to economic conditions and other charge-offs related to loans deemed uncollectible by the Company, including charge-offs taken on the restructuring of loans with modified terms. As a percentage of average loans outstanding, net charge-offs were 3.83%, 1.21% and .07% in 1993, 1992 and 1991, respectively. The ratio of the allowance for loan losses to loans, net of deferred loan fees, was 5.64%, 3.45% and 2.13% at December 31, 1993, 1992 and 1991, respectively. Management believes that the allowance for loan losses at December 31, 1993 was adequate to absorb the known and inherent risks in the loan portfolio at that time. However, no assurance can be given that continuation of current recessionary factors, future changes in economic conditions that might adversely affect the Company's principal market area, borrowers or collateral values, and other circumstances, including regulatory agencies' assessment of information available to them at the time of their future examinations, will not result in increased losses in the Company's loan portfolio in the future. NONPERFORMING ASSETS Nonaccrual, Past Due and Modified Loans The following is a summary of the Company's nonperforming loans (nonaccrual loans and loans past due 90 days or more and still accruing interest) and loans with modified terms at years indicated:
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1993 1992 - ------------------------------------------------------------------------------------------------------------------ Loans on nonaccrual $ 29,056 33,316 Loans past due 90 days or more and still accruing interest 5,769 1,547 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans 34,825 34,863 Loans with modified terms 9,539 2,149 - ------------------------------------------------------------------------------------------------------------------ Nonperforming loans and loans with modified terms $ 44,364 37,012 - ------------------------------------------------------------------------------------------------------------------ Nonaccrual and past due loans as a percentage of total loans 10.79% 8.92 - ------------------------------------------------------------------------------------------------------------------
At December 31, 1993, approximately 92.2% of the Company's outstanding nonperforming loans were secured by deeds of trust on a portfolio of real estate which reduces, but does not eliminate, the risk of loss. At December 31, 22 GUARDIAN BANCORP ................................................................................ 1993 and 1992, loans on nonaccrual are shown net of participations sold of approximately $576,000 and $4.8 million, respectively. The ratio of the Company's allowance for loan losses to nonperforming loans was 52.3% and 38.6% at December 31, 1993 and 1992, respectively. The following table sets forth the composition of potential problem credits by broad collateral type at December 31, 1993 (dollars in thousands): Real estate: Residential: 1-4 Family units...................................................................... $ 10,360 Multifamily units..................................................................... 9,856 Land.................................................................................. 1,875 Commercial and industrial: Units................................................................................. 11,101 Business and Consumer................................................................... 2,122 --------- $ 35,314 --------- ---------
Since 1991, the Company has been impacted by the slowdown in California's economic activity. One result of the current recessionary environment has been the weakening of real estate values in certain sectors of the Company's target markets which, in turn, has affected certain borrowers' financial capabilities and liquidity. The significant increase in amounts reported as nonperforming loans since 1991 is attributable to the existing economic climate, and a substantial portion of the loans are real estate mortgage and construction credits. While it is management's current intention to resolve nonperforming loans and sell other real estate owned on an asset by asset basis, management is also exploring additional alternatives, including the possible sale of part or all of such assets to a select number of outside investors. If consummated, such a sale likely would entail further provisions to the allowance for loan losses and writedowns of the carrying value of certain assets sold in recognition of the administrative expenses and the cost of money assumed by the buyer, together with the requirement imposed by typical buyers in such transactions that they be able to achieve a substantial return on their investment. The amount of such additional provisions and writedowns should the Company decide to pursue this strategy cannot be determined at this time. In determining whether or not to pursue this strategy management will consider, among other factors, the relative magnitude of the possible additional provisions to the allowance for loan losses and writedowns which could result from such a sale and the anticipated level of both interest income and noninterest expense attributable to continuing to hold such assets for sale on an asset by asset basis; and the level of income reasonably anticipated from the investment of any proceeds received from such a sale. While management is considering proposals from financial advisors, and is in active discussions with a potential financial advisor, to assist in the design and implementation of such a sale, it has not yet entered into a contract with an advisor. Moreover, management has not yet determined the specific assets that may be included in such a sale and, accordingly, cannot reasonably estimate anticipated sales proceeds or additional provisions for loan losses. No assurance can be given that the Bank will implement a sale of problem assets or the likely impact of such a sale on the consolidated financial condition or results of operations of the Company. Loans with modified terms approximated $9.5 million and $2.1 million at December 31, 1993 and 1992, respectively. The average yield on loans with modified terms during 1993 was approximated 5.5% compared to the Company's average cost of funds for 1993 of 3.3%. Other Real Estate Owned At December 31, 1993, OREO amounted to $13.9 million, an increase of $9.5 million from the $4.4 million reported at December 31, 1992. During 1993, the Company acquired $24.2 million of real estate through foreclosure, recorded valuation charges of $714,000 and sold $13.9 million of such real estate incurring a net loss upon sale of $266,000. The increase in OREO reflects the impact on foreclosure levels brought about by the general economic decline and depressed real estate market in Southern California. During 1992, the Company acquired and sold $6.1 million and $4.7 million, respectively, of OREO incurring a net loss upon sale of $173,000, after valuation charges of $40,000. (See "Results of Operations -- Noninterest Expense"). The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting for Loan Impairment". The Company plans to adopt SFAS 114 on January 1, 1995 GUARDIAN BANCORP 23 ................................................................................ by reporting the effect of initial application as an adjustment to the provision for loan losses in the period of adoption. To comply with regulatory requirements regarding SFAS 114 effective in 1993, in-substance foreclosed assets are classified as loans if the Company does not have physical possession of the underlying collateral. December 31, 1992 in-substance foreclosed assets in the amount of $11.8 million have been reclassified to loans to effect this change in classification. DEPOSITS At December 31, 1993, total deposits of $525.7 million were comprised of $322.9 million and $202.8 million of noninterest-bearing and interest-bearing deposits, respectively. At December 31, 1992, total deposits of $599.9 million were comprised of $414.2 million and $185.7 million of noninterest-bearing and interest-bearing deposits, respectively. The $74.2 million decrease in total deposits since December 31, 1992 is comprised of a decrease of $91.3 million and an increase of $17.1 million in noninterest-bearing and interest-bearing deposits, respectively. The decrease in noninterest-bearing deposits at December 31, 1993 as compared to December 31, 1992 was primarily in title insurance company and escrow company deposits and reflects the current declining trends in the volume of residential mortgage refinancing occurring in the Company's marketplace and the Company's decreased reliance upon such funding sources. The increase in interest-bearing deposits since December 31, 1992 reflects a $17.7 million increase and a $656,000 decrease in the Company's time certificates of deposits and the Company's savings and interest-bearing demand deposit balances, respectively, and reflects management's efforts at diversifying the Company's deposit mix. It is likely that noninterest-bearing deposits will continue to represent a decreasing percentage of total deposits reflecting management's efforts to diversify the Company's funding sources and the effect of a recent Federal Reserve Board interpretation which limits the payment of customer service expense in connection with noninterest-bearing deposits. Total average deposits for the year ended December 31, 1993 were $546.2 million, down $56.6 million, or 9.4%, from the $602.8 million average for all of 1992. Average noninterest-bearing deposits and average interest-bearing deposits during 1993 were $323.7 million and $222.5 million, respectively, which compares to averages of $383.6 million and $219.2 million, respectively, for the year ended December 31, 1992. The $59.9 million decrease in average noninterest-bearing deposits during 1993 from the average for all of 1992 primarily reflects the general decline from historical levels in real estate transaction activity handled by the Company's title insurance company and escrow company depositors as a result of current economic conditions and a decreased reliance on such funding sources. The increase in average interest-bearing deposits of $3.3 million during 1993 from the 1992 average is comprised of a $14.4 million increase in average time certificates of deposit offset by a $11.1 million decline in savings and other interest-bearing demand accounts. The total average deposits of $602.8 million for the year ended December 31, 1992 were up $71.2 million, or 13.4%, from the $531.6 million reported for the year ended December 31, 1991. Average noninterest-bearing deposits were up $91.5 million to $383.6 million during 1992 over the $292.1 million average for 1991. This increase was primarily in title insurance company and escrow company deposits and reflects the higher volume of residential refinancing that occurred in the Company's marketplace during 1992. The Company experienced a decline in total average interest-bearing deposits during 1992 as compared to 1991. Average time certificates of deposit decreased approximately $32.4 million during 1992 from 1991 but that decrease was partially offset by an increase in average interest-bearing demand and savings deposits of approximately $12.2 million during the same period. The decreases in average time certificates of deposit during 1992 from the averages during 1991 and the decrease in such deposits and noninterest-bearing demand and savings deposits at December 31, 1992 from the close of 1991 is, in management's opinion, attributable to those depositors seeking higher yields on their funds than were being offered by the Company as a result of the lower interest rate environment prevailing in the marketplace. The increase in average interest-bearing demand and savings deposits reflects the Company's efforts to diversify its deposit sources, especially among labor unions and related clientele. ASSET/LIABILITY MANAGEMENT The Company's policy is to match its level of rate sensitive assets and rate sensitive liabilities thereby reducing its exposure to interest rate fluctuations. Generally, where rate sensitive assets exceed rate sensitive liabilities, the net 24 GUARDIAN BANCORP ................................................................................ interest margin is expected to be positively impacted during periods of increasing interest rates and negatively impacted during periods of decreasing interest rates. When rate sensitive liabilities exceed rate sensitive assets, generally, the net interest margin will be negatively affected during periods of increasing interest rates and positively affected during such periods of decreasing interest rates. The following table sets forth information concerning interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1993. Such assets and liabilities are classified by the earliest possible repricing date or maturity.
- ---------------------------------------------------------------------------------------------------------- OVER OVER ONE THREE YEAR THREE THROUGH THROUGH MONTHS OR TWELVE FIVE OVER FIVE (DOLLARS IN THOUSANDS) LESS MONTHS YEARS YEARS TOTAL - ---------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Interest-bearing deposits with financial institutions $ 1,396 594 -- -- 1,990 Investment securities 5,464 9,241 14,374 -- 29,079 Short-term investments 179,948 -- -- -- 179,948 Loans, net 283,507 5,236 28,180 5,825 322,748 - ---------------------------------------------------------------------------------------------------------- Total interest-earnings assets $ 470,315 15,071 42,554 5,825 533,765 - ---------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Interest-bearing demand and savings deposits $ 100,888 -- -- -- 100,888 Time certificates of deposit 10,063 75,815 16,008 -- 101,886 Other borrowings 15,000 -- 3,000 -- 18,000 - ---------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 125,951 75,815 19,008 -- 220,774 - ---------------------------------------------------------------------------------------------------------- Interest rate-sensitivity gap $ 344,364 (60,744) 23,546 5,825 Cumulative interest rate-sensitivity gap 344,364 283,620 307,166 312,991 Cumulative interest rate-sensitivity gap as a percentage of total interest-bearing assets 64.52% 53.14% 57.55% 58.64% - ----------------------------------------------------------------------------------------------------------
Approximately 86.9% of the Company's loan portfolio at December 31, 1993 bears a floating rate of interest. The Company's funding source is primarily its deposit base which is comprised of interest-bearing and noninterest-bearing accounts. On occasion, the Company augments its funding needs through federal funds purchased, securities sold under repurchase agreements and other short-term borrowings, which are all interest-bearing. The Company's noninterest-bearing demand deposits are, by their very nature, subject to withdrawal upon demand. Noninterest-bearing demand deposits include title insurance company and escrow company deposits which are subject to fluctuation caused by general economic factors affecting the demand for, sales of, and settlement activity relating to residential and other forms of real estate which, in turn, are sensitive to prevailing interest rates. Declines in one form of funding source requires the Company to obtain funds from another source. If the Company were to experience a decline in noninterest-bearing demand deposits and was to have a significant increase in loan volume without a commensurate increase in such deposits, it would utilize alternative sources of funds, probably at higher cost, to maintain its liquidity and to meet its loan funding needs. This would place downward pressure on the Company's net interest margin and have a negative impact on the Company's liquidity position. LIQUIDITY The Company manages its liquidity position to seek to ensure that sufficient funds are available to meet customers' needs for borrowing and deposit withdrawals. Liquidity is derived from both the asset and liability sides of the balance sheet. Asset liquidity arises from the ability to convert assets to cash and self-liquidation or maturity of assets. Liquid asset balances include cash, interest-bearing deposits with financial institutions, short-term investments and federal funds sold. Liability liquidity arises from a diversity of funding sources as well as from the ability of the Company to attract deposits of varying maturities. GUARDIAN BANCORP 25 ................................................................................ At December 31, 1993, the Company's ratio of liquid assets, defined as cash and due from banks, interest-bearing deposits with financial institutions, federal funds sold and short-term investments, to total deposits was 39.0%. This compares to ratios of 38.4% and 29.6% at year end 1992 and 1991, respectively. The ratio of average total liquid assets to average total deposits was 35.1% during 1993 compared to 30.2% and 25.7% during 1992 and 1991, respectively. At December 31, 1993, $287.3 million of the Company's noninterest-bearing demand deposits, or 54.7% of total deposits, were from title insurance companies and escrow companies and $129.5 million of such deposits, or 24.6% of total deposits, were maintained by five title insurance and escrow company customers; one such customer accounted for 8.5%, and another accounted for 6.3%, of total deposits. Title insurance company and escrow company deposits generally fluctuate with the volume of real estate activity, which, in turn, are affected by fluctuations in the general level of interest rates and other economic factors affecting the real estate market. During the first quarter of 1994, the Board of Governors of the Federal Reserve System issued a new interpretive release which is applicable to all member banks, such as the Bank, and other entities, which limits the payment of customer service expense to certain prescribed instances. As a result of the issuance of this interpretive release, it is expected that certain balances of accounts of customers to whom these services are provided will decline and, in turn, customer service expense will decline in 1994, the exact amount of which cannot be predicted. In addition as of December 31, 1993, labor union deposits were $91.5 million, or 17.4% of total deposits, and 64.2% of these deposits were demand deposits. Further, all demand deposit accounts, including title insurance company, escrow company and labor union deposits, are subject to turnover. At December 31, 1993, $322.9 million or 61.4% of the Company's total deposits were noninterest-bearing demand deposits, and time certificates of deposit of $100,000 or more were $22.2 million, which represented 4.2% of total deposits. Time certificates of deposit of $100,000 or more may be subject to fluctuation as they are generally more sensitive to changes in interest rates than other types or amounts of deposits. In an effort to address the potential fluctuations in the Company's deposit base, management seeks to limit loans to no more than 75% of deposits to attempt to ensure that sufficient funds are available to meet customers' needs for borrowing and deposit withdrawals. A substantial amount of these funds are invested in securities of the U.S. Treasury and other short-term money market instruments, including federal funds sold, money market mutual funds and interest-bearing deposits with other financial institutions. To further cushion any unanticipated fluctuation in its liquidity position, the Bank, as with all commercial banks who are members of the Federal Reserve System, may borrow from the regional Federal Reserve Bank subject to compliance with regulatory requirements. In addition, the Bank has federal funds facilities available with its major correspondent banks aggregating $15.0 million. These facilities are subject to customary terms for such arrangements and are terminable at any time in the discretion of the correspondent bank. Notwithstanding these precautionary steps, there can be no assurance that the Company will not experience substantial fluctuations in its deposit base or otherwise adversely affect its net interest income by requiring the Bank to replace such deposits with higher costing funds. At December 31, 1993, Guardian Bancorp, on an unconsolidated parent company only basis, had cash and cash equivalents available of approximately $402,000. On January 28, 1994, Guardian Bancorp consummated the Offering of common stock raising gross proceeds of approximately $19,700,000. After deducting expenses incurred in the Offering, net proceeds were approximately $17,958,000. Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank, subsequently reimbursed the Bank approximately $229,000 for costs it incurred and retained approximately $1.2 million for its own general corporate purposes. In addition, on September 30, 1993, Guardian Bancorp exercised its right to convert the entire $3.0 million principal amount of Bank Convertible Debentures into common stock of the Bank, thereby converting this security into Tier 1 capital and eliminating the Bank as a liquidity source through interest payments. On December 22, 1988, Guardian Bancorp issued to an unaffiliated purchaser $3.0 million in aggregate principal amount of 11 3/4% Subordinated Debentures that mature on December 30, 1995. Interest on the Bancorp Debentures accrues and is payable quarterly, and the principal is due on maturity. Guardian Bancorp is not currently in default with respect to any of the interest payments due on the Bancorp Debentures, and management believes that Guardian Bancorp currently has sufficient liquid assets to make such payments through to maturity. However, absent a restructuring of the Bancorp Debentures or the receipt of additional funds from Bank dividends, the issuance of debt or equity or otherwise, Guardian Bancorp will not have sufficient liquid assets to 26 GUARDIAN BANCORP ................................................................................ pay the $3.0 million principal amount of such securities that will become due on the stated maturity date. Guardian Bancorp's ability to receive additional funds through Bank dividends or the issuance of debt at the holding company level is limited by regulatory and statutory restrictions. CAPITAL RESOURCES Management seeks to maintain capital adequate to support anticipated asset growth and credit risks and to ensure that the Company is within established regulatory guidelines and industry standards. The 1992 risk-based capital guidelines adopted by the Federal Reserve Board require the Company and the Bank to achieve certain minimum ratios of capital to risk-weighted assets. In addition, the Federal Reserve Board has adopted a leverage ratio that requires a minimum ratio of Tier 1 capital to average assets. The following table sets forth the Company's and the Bank's risk-based capital and leverage ratios at December 31, 1993 (dollars in thousands):
COMPANY BANK -------------------- -------------------- (DOLLARS IN THOUSANDS) BALANCE % BALANCE % - ----------------------------------------------------------------------------------------------------------------- Tier 1 Capital(1) $ 21,301 6.00% 23,839 7.02% Tier 1 Capital minimum requirement(2) 14,195 4.00 13,575 4.00 - ----------------------------------------------------------------------------------------------------------------- Excess $ 7,106 2.00 10,264 3.02 - ----------------------------------------------------------------------------------------------------------------- Total Capital(3) $ 28,907 8.15 28,254 8.33 Total Capital minimum requirement(2) 28,389 8.00 27,150 8.00 - ----------------------------------------------------------------------------------------------------------------- Excess $ 518 0.15 1,104 0.33 - ----------------------------------------------------------------------------------------------------------------- Leverage ratio (3% + minimum)(4) 3.74 4.19 - ----------------------------------------------------------------------------------------------------------------- Risk-weighted assets $ 354,866 339,377 - ----------------------------------------------------------------------------------------------------------------- (1)Includes common shareholders' equity. (2)Commencing December 19, 1992, insured institutions such as the Bank must, among other things, maintain a Tier 1 capital ratio of at least 4% or 6% and a Total capital ratio of at least 8% or 10% to be considered "adequately capitalized" or "well capitalized", respectively, under the prompt corrective action provisions of the FDIC Improvement Act. (3)Includes common shareholders' equity, subordinated debt, plus allowance for loan losses, subject to certain limitations. (4)Tier 1 capital divided by average assets for the period. Under the current rules, a minimum leverage ratio of 3% is required for institutions which have been determined to be in the highest of five categories used by regulators to rate financial institutions. All other institutions, including the Company and the Bank, are required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. Commencing December 9, 1992, insured institutions such as the Bank must, among other things, maintain a leverage ratio of at least 4% or 5% to be considered "adequately capitalized" or "well capitalized", respectively, under the prompt corrective action provisions of the FDIC Improvement Act.
On January 28, 1994, Guardian Bancorp consummated its rights offering of common stock ("the Offering"), and raised gross proceeds of approximately $19,700,000 through the issuance of 8,774,000 shares of common stock. After deducting expenses incurred in the Offering, net proceeds were approximately $17,958,000. In early February 1994, Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank for the Bank's general corporate purposes and subsequently reimbursed the Bank approximately $229,000 for costs it incurred in the capital raising effort. Guardian Bancorp retained the remaining net proceeds for its own general corporate purposes. GUARDIAN BANCORP 27 ................................................................................ The following tables set forth the consolidated capitalization of the Company and the capitalization of the Bank at December 31, 1993, and the proforma consolidated capitalization of the Company and the capitalization of the Bank, as adjusted to give effect to the offering as consummated:
DECEMBER 31, 1993 ---------------------- PROFORMA ACTUAL - ------------------------------------------------------------------------------------------------------------------- COMPANY Shareholders' equity: Preferred stock $ -- -- Common stock 33,794(1) 15,836 Retained earnings 5,465 5,465 - ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $ 39,259 21,301 - ------------------------------------------------------------------------------------------------------------------- Book value $ 3.14 (2) 5.70 - ------------------------------------------------------------------------------------------------------------------- BANK Equity capital: Common Stock $ 35,565 (3) 19,065 Undivided profits 4,774 4,774 - ------------------------------------------------------------------------------------------------------------------- Equity capital $ 40,339 23,839 - ------------------------------------------------------------------------------------------------------------------- (1)Assumes net proceeds of approximately $17,958,000 raised in the Offering were received at December 31, 1993. (2)Adjusted to give effect to the additional 8,774,000 shares issued in the Offering. (3)Assumes $16.5 million in new equity capital contributed to the Bank was contributed at December 31, 1993.
The following tables set forth the Company's and the Bank's risk-based and leverage ratios at December 31, 1993 and their respective proforma risk-based and leverage ratios, as adjusted to give effect to the Offering.
COMPANY BANK ------------------------ ------------------------ PROFORMA(1) ACTUAL PROFORMA(2) ACTUAL - ---------------------------------------------------------------------------------------------------------------------------- Tier 1 capital ratio 10.95% 6.00% 11.77% 7.02% Total capital ratio 13.08 8.15 13.07 8.33 Leverage ratio 6.68 3.74 6.89 4.19 - ---------------------------------------------------------------------------------------------------------------------------- (1)Assumes net proceeds raised in the Offering had been invested in 20% risk-weighted assets at December 31, 1993. (2)Assumes $16.5 million in new equity capital was contributed to the Bank at December 31, 993 which, in turn, invested the proceeds in 20% risk-weighted assets at December 31, 1993.
With the exception of the capital raising efforts discussed above, and, on a much smaller scale, the periodic exercise of employee stock options, retained earnings from operations have been the Company's primary source of new capital. Management is committed to maintaining capital at a sufficient level to assure shareholders, customers and regulators that the Company is financially sound. EFFECTS OF NORTHRIDGE EARTHQUAKE On January 17, 1994, an earthquake of approximately 6.7 magnitude on the Richter scale struck the Southern California area. The earthquake and related aftershocks caused significant damage to certain areas of Los Angeles and Ventura Counties. While the full extent of damage in this area is not yet known, management's preliminary assessment of damage to collateral securing loans indicates that there should not be a material impact on the Company's consolidated financial position or results of operations. However, it remains uncertain if whether or not the earthquake will have additional negative impact on the Southern California economy and the Company's customers. 28 GUARDIAN BANCORP ................................................................................ CONSOLIDATED BALANCE SHEET
GUARDIAN BANCORP AND SUBSIDIARY DECEMBER 31, 1993 AND 1992 (IN THOUSANDS) - ------------------------------------------------------------------------------ ASSETS 1993 1992 - ------------------------------------------------------------------------------ Cash and due from banks $ 23,155 48,763 Interest-bearing deposits with financial institutions 1,990 1,090 Federal funds sold -- 60,000 Investment securities (market value of $29,221 and $27,604 in 1993 and 1992, respectively) 29,079 26,939 Short-term investments (market value of $179,948 and $120,535 in 1993 and 1992, respectively) 179,948 120,487 Loans 322,748 390,835 Less allowance for loan losses (18,200) (13,466) - ------------------------------------------------------------------------------ Net loans 304,548 377,369 - ------------------------------------------------------------------------------ Premises and equipment, net 1,808 2,372 Deferred income taxes 3,574 3,642 Other real estate owned, net 13,949 4,359 Accrued interest receivable and other assets 9,495 5,780 - ------------------------------------------------------------------------------ $ 567,546 650,801 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------ Deposits $ 525,674 599,903 Subordinated debentures 3,000 3,000 Other borrowed money 15,000 10,000 Accrued interest payable and other liabilities 2,571 2,420 - ------------------------------------------------------------------------------ 546,245 615,323 - ------------------------------------------------------------------------------ Commitments and contingent liabilities Shareholders' equity: Preferred stock, without par value; Authorized 10,000,000 shares; none issued -- -- Common stock, without par value; Authorized 29,296,875 shares; issued and outstanding 3,740,000 and 3,659,000 shares in 1993 and 1992, respectively 15,836 15,556 Retained earnings 5,465 19,922 - ------------------------------------------------------------------------------ Total shareholders' equity 21,301 35,478 - ------------------------------------------------------------------------------ $ 567,546 650,801 - ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. GUARDIAN BANCORP 29 ................................................................................ CONSOLIDATED STATEMENT OF OPERATIONS
GUARDIAN BANCORP AND SUBSIDIARY YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------ 1993 1992 1991 - ------------------------------------------------------------------------------ Interest income: Loans $ 27,399 35,358 43,773 Deposits with financial institutions 42 88 175 Investment securities: Taxable 1,614 2,605 2,434 Nontaxable 197 322 442 Short-term investments 923 874 -- Federal funds sold 2,594 2,048 3,399 - ------------------------------------------------------------------------------ 32,769 41,295 50,223 - ------------------------------------------------------------------------------ Interest expense: Deposits 7,108 8,554 13,895 Borrowed funds 397 456 439 - ------------------------------------------------------------------------------ 7,505 9,010 14,334 - ------------------------------------------------------------------------------ Net interest income 25,264 32,285 35,889 Provision for loan losses 18,250 9,395 5,946 - ------------------------------------------------------------------------------ Net interest income after provision for loan losses 7,014 22,890 29,943 - ------------------------------------------------------------------------------ Noninterest income: Gain on sale of securities 3 42 2 Trust 627 186 14 Other 789 811 907 - ------------------------------------------------------------------------------ 1,419 1,039 923 - ------------------------------------------------------------------------------ Noninterest expense: Salaries and employee benefits 8,621 7,271 6,118 Occupancy 1,238 1,778 1,783 Furniture and equipment 851 1,004 884 Customer service 5,539 7,989 9,189 Data processing 351 831 568 Promotional 758 1,120 1,436 Professional 2,416 1,666 1,033 Office supplies 416 416 444 FDIC assessments 1,791 1,365 1,025 Other real estate owned 2,957 667 41 Other 2,498 2,249 2,228 - ------------------------------------------------------------------------------ 27,436 26,356 24,749 - ------------------------------------------------------------------------------ Earnings (loss) before income taxes (19,003) (2,427) 6,117 Provision (benefit) for income taxes (4,546) (109) 2,900 - ------------------------------------------------------------------------------ Net earnings (loss) $ (14,457) (2,318) 3,217 - ------------------------------------------------------------------------------ Net earnings (loss) per common share $ (3.90) (.64) .77 - ------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 30 GUARDIAN BANCORP ................................................................................ CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
GUARDIAN BANCORP AND SUBSIDIARY COMMON STOCK YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 ---------------------- RETAINED (IN THOUSANDS) SHARES AMOUNT EARNINGS TOTAL - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1990 3,607 $ 15,825 19,023 34,848 Retirement of common stock (93) (940) -- (940) Stock options exercised 49 167 -- 167 Net earnings -- -- 3,217 3,217 - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1991 3,563 15,052 22,240 37,292 Stock options exercised 96 345 -- 345 Tax benefit of stock options exercised -- 159 -- 159 Net loss -- -- (2,318) (2,318) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 3,659 15,556 19,922 35,478 Stock options exercised 81 280 -- 280 Net loss -- -- (14,457) (14,457) - ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 3,740 $ 15,836 5,465 21,301 - -------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. GUARDIAN BANCORP 31 ................................................................................ CONSOLIDATED STATEMENT OF CASH FLOWS
GUARDIAN BANCORP AND SUBSIDIARY YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (IN THOUSANDS) 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings (loss) $ (14,457) (2,318) 3,217 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Provision for loan losses 18,250 9,395 5,946 Depreciation and amortization 854 935 813 Provision for deferred income taxes 68 (563) (1,935) Amortization of deferred loan fees (648) (529) (2,005) Amortization of net premium (discount) on investment securities 347 (139) 207 Amortization of discount on short-term investments (525) (874) -- Gain on sales of securities (3) (42) (2) Gain on sale of premises and equipment (22) -- -- Net loss on sales of other real estate owned 266 173 -- Valuation of other real estate owned 714 40 -- Net (increase) decrease in accrued interest receivable and other assets (3,715) 1,267 930 Net increase (decrease) in accrued interest payable and other liabilities 151 (2,356) 1,147 - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 1,280 4,989 8,318 - ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from investment securities transactions: Sales -- 20,112 1,000 Maturities 18,189 72,335 11,400 Purchases of investment securities (20,676) (97) (75,042) Proceeds from short-term investment transactions: Sales 369,865 14,881 -- Maturities 386,385 90,492 -- Purchases of short-term investments (815,183) (254,463) -- Net change in loans 31,010 28,165 (92,691) Proceeds from sale of other real estate owned 13,639 4,084 -- Proceeds from sale of premises and equipment 32 -- -- Purchases of premises and equipment (300) (194) (859) - ------------------------------------------------------------------------------------------------ Net cash used in investing activities (17,039) (24,685) (156,192) - ------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net change in deposits (74,229) (82,724) 243,676 Increase in other borrowed money 5,000 10,000 -- Net proceeds from issuance of common stock 280 504 167 Retirement of common stock -- -- (940) - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (68,949) (72,220) 242,903 - ------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (84,708) (91,916) 95,029 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 109,853 201,769 106,740 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 25,145 109,853 201,769 - ------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32 GUARDIAN BANCORP ................................................................................ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GUARDIAN BANCORP AND SUBSIDIARY DECEMBER 31, 1993, 1992 AND 1991 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The accounting and reporting policies of Guardian Bancorp and subsidiary (collectively, the Company) are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. The consolidated financial statements are prepared on the accrual basis of accounting. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Guardian Bancorp, its wholly owned subsidiary Guardian Bank and Guardian Bank's wholly owned subsidiary, Guardian Trust Company (the Bank). All material intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain reclassifications of prior years' data have been made to conform to the current year's presentation. INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS Investment securities are carried at cost, net of the amortization of premiums and accretion of discounts. Amortized premiums and accreted discounts are included in interest on investment securities. The carrying value of investment securities is not adjusted for temporary declines in market values as the Bank has the positive intent and ability to hold the securities to maturity. However, the Company may sell such securities if it determines that collectibility is in doubt. In such cases, gains and losses realized are determined using the specific-identification method. Securities which the Company does not intend to hold to maturity are classified as short-term investments. These securities are carried at the lower of cost or market, net of accreted discounts which are included in interest on short-term investments. Adjustments to carrying value, if any, and realized gains or losses upon sale of the securities are included in gain on sale of securities. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are recorded in the consolidated balance sheet at principal amounts outstanding, net of deferred loan fees. Interest on loans is accrued monthly as earned. When, in the opinion of management, a reasonable doubt exists as to the collection of principal or interest, such loans are evaluated individually to determine both the collectibility and the adequacy of collateral. Loans are generally placed on nonaccrual status when principal or interest is past due 90 days or more or management has reasonable doubt as to the full collection of principal and interest, the accrual of income is discontinued and previously accrued but unpaid interest is reversed against income. Subsequent interest payments are generally credited to income when received, except when the ultimate collectibility of principal is uncertain, in which case all collections are applied as principal reductions. Loans with modified terms are those with restructured contractual terms due to borrowers' financial difficulty in meeting original terms. The allowance for loan losses is maintained at a level deemed adequate by management to provide for known and inherent losses in the loan portfolio. The allowance is based upon a quarterly review of past loan loss experience, loan portfolio composition and risk, current economic conditions that may affect the borrower's ability to pay and the underlying collateral value. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic and other conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to make additions to the allowance based on their judgments of information available to them at the time of their examination. Loans that are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance. GUARDIAN BANCORP 33 ................................................................................ LOAN ORIGINATION AND CREDIT-RELATED FEES Loan origination fees and certain direct costs associated with the origination or purchase of loans are deferred and recognized over the lives of the related loans as an adjustment of the loan's yield on a basis which approximates the interest method. Nonrefundable fees associated with the issuance of loan commitments are deferred and recognized over the life of the loan as an adjustment of yield. Fees for commitments that expire unexercised are recognized in noninterest income upon expiration of the commitment. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation on furniture, fixtures and equipment is computed on the straight-line method over the estimated useful lives of the related assets, which range from three to ten years. Leasehold improvements are capitalized and amortized over the term of the lease or the estimated useful lives of the improvements, whichever is shorter, calculated on the straight-line method. OTHER REAL ESTATE OWNED Other real estate owned is recorded at the lower of estimated fair value, less estimated costs of disposition, or the outstanding loan amount, and any difference between fair value and the loan amount is charged to the allowance for loan losses. In 1993, the Company reclassified in-substance foreclosed assets from other real estate owned to loans in cases where it did not have physical possession of the underlying collateral. This is consistent with regulatory reporting requirements and with changing trends evolving in financial reporting practices. Related prior years' data have been reclassified to conform with the current year's presentation. Gains and losses from the sale of such assets, any subsequent valuation adjustments and net operating expenses are included in noninterest expense. INCOME TAXES The Company files consolidated Federal and combined state income tax returns. Amounts provided for income taxes are based on the income reported in the consolidated financial statements at current tax rates. Such amounts include taxes deferred to future periods resulting from temporary differences in the recognition of items for tax and financial reporting purposes. Current and deferred components of the total tax provision are redetermined each year when tax returns are filed which results in an adjustment to the previously reported components. In the first quarter of 1993, the Company implemented Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to the asset and liability method. Under the deferred method, annual income tax expense was matched with pretax accounting income by providing deferred taxes at current tax rates for temporary differences between the determination of net income for financial reporting and tax purposes. Under the asset and liability method deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. In implementing SFAS 109, the Company elected to restate prior years and, therefore, the consolidated financial statements and related notes for prior years have been restated to apply the new method of accounting retroactively to 1991. The cumulative impact at January 1, 1991 of the implementation was not material. The effect of the accounting change was an increase in the net loss in 1992 of $492,000, or $0.14 per share, and a decrease in 1991 net earnings of $493,000, or $0.11 per share. PER SHARE DATA Primary and fully diluted earnings (loss) per common share are computed using the weighted average number of shares of common stock and common stock equivalents outstanding. Stock options and warrants are considered to be common stock equivalents, except when their effect is antidilutive or immaterial. The weighted average number of shares of common stock outstanding used to compute loss per share for the years ended December 31, 1993 and 1992 was 3,710,000 and 3,624,000, respectively. The weighted average number of shares of common stock outstanding, including common stock equivalents, used to compute earnings per share for the year ended December 31, 1991 was 4,194,000. 34 GUARDIAN BANCORP ................................................................................ In 1993, 1992 and 1991, the weighted average number of shares including common stock equivalents for fully diluted earnings (loss) per share was not materially different than the number of shares used to compute primary earnings (loss) per share. STATEMENT OF CASH FLOWS For the purpose of the statement of cash flows, the Company considers cash and due from banks, interest-bearing deposits with financial institutions having maturities of less than three months and Federal funds sold as cash and cash equivalents. Supplemental information regarding the accompanying consolidated statement of cash flows for the years ended December 31, 1993, 1992 and 1991 is as follows (in thousands):
1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- Interest paid $ 7,507 9,418 14,429 - -------------------------------------------------------------------------------------------------------------------- Income taxes (received) paid $ (920) 2,203 4,422 - -------------------------------------------------------------------------------------------------------------------- Other real estate owned acquired in satisfaction of loans $ 24,209 5,922 6,245 - -------------------------------------------------------------------------------------------------------------------- Senior liens assumed upon acquisition of other real estate owned $ -- 149 -- - -------------------------------------------------------------------------------------------------------------------- Loans made to facilitate sale of other real estate owned $ 5,855 400 2,774 - -------------------------------------------------------------------------------------------------------------------- Transfer of investment securities to short-term investments $ -- 29,508 -- - --------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"). SFAS 107 is effective for fiscal years ending after December 15, 1992, and requires the disclosure of the fair value of financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate the value. Financial instruments are defined under SFAS 107 as cash, evidence of an ownership in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. A significant portion of the Company's assets and liabilities are financial instruments as defined under SFAS 107. Additionally, the Company is also a party to financial instruments that are not reported on the balance sheet ("off-balance sheet financial instruments"). Such off-balance sheet financial instruments include commitments to originate loans and standby letters of credit. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, premises and equipment and other real estate owned are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in these estimates. Since the fair value is estimated as of December 31, 1993 and 1992, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different. The following summary presents a description of the methodologies and assumptions used to estimate the fair value of the Company's financial instruments which are contained in the notes to the consolidated financial statements that describe each financial instrument. CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS AND FEDERAL FUNDS SOLD The book value of cash and due from banks, interest-bearing deposits with financial institutions and federal funds sold approximates the estimated fair value of such assets. GUARDIAN BANCORP 35 ................................................................................ INVESTMENT SECURITIES AND SHORT-TERM INVESTMENTS The Company has utilized market quotes for similar or identical securities in an actively traded market, where such a market exists, or has obtained quotes from independent security brokers or dealers to determine the estimated fair value of its investment securities and short-term investments. LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms, by performing and nonperforming categories and by maturity. Loans which are either maturing or subject to repricing in the short term are valued for fair market value purposes by using the carrying amount for such loans. For other loans, fair value is estimated by discounting scheduled cash flows through estimated maturity using estimated market discount rates adjusted for the cost to administer and the credit and interest rate risk inherent in the loan. DEPOSIT LIABILITIES The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, and NOW accounts, and money market and checking accounts, is estimated to equal the amount payable on demand as of December 31, 1993 and 1992. The fair value of certificates of deposit is based on the estimated discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. BORROWINGS The fair value of the Company's subordinated debentures was based upon alternative borrowing costs. Book value of the Company's other borrowings approximates the fair value of such liabilities. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of the Company's commitments to extend credit and the fair value of letters of credit are estimated based upon terms currently offered for similar agreements and approximates their carrying value. CHANGES IN ACCOUNTING PRINCIPLES In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to provision for loan losses. Additionally, SFAS 114 eliminates the requirement that a creditor account for certain loans as foreclosed assets until the creditor has taken possession of the collateral. SFAS 114 is effective for financial statements issued for fiscal years beginning after December 15, 1994. Earlier adoption is permitted. To comply with regulatory requirements regarding SFAS No. 114 effective in 1993, in-substance foreclosed assets are classified as loans in cases where the Company does not have physical possession of the underlying collateral. Although the Company has not yet adopted SFAS 114, management does not expect implementation to have a material impact on the Company's financial position or results of operations. In May 1993, the FASB issued Statement of Financial Standards No. 115 "Accounting For Certain Investments in Debt and Equity Securities" addressing the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments would be classified in three categories and accounted for as follows: (i) debt and equity securities that the entity has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost; (ii) debt and equity securities that are held for current resale would be classified as trading securities and reported at fair value, with unrealized gains and losses included in operations; and (iii) debt and equity securities not classified as either securities held to maturity or trading securities would be classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from operations and reported as a 36 GUARDIAN BANCORP ................................................................................ separate component of shareholders' equity. The statement is effective for financial statements for calendar year 1994, but may be applied to an earlier fiscal year for which annual financial statements have not been issued. The Bank has both investment securities classified as "available to maturity" and investment securities classified as "available for sale". Securities classified as available for sale will be reported at their fair value at the end of each fiscal quarter. Accordingly, the value of such securities fluctuates based on changes in interest rates. Generally, an increase in interest rates would result in a decline in the value of investment securities held for sale, while a decline in interest rates would result in an increase in the value of such securities. Therefore, the value of investment securities available for sale and the Bank's shareholders' equity could be subject to fluctuation based on changes in interest rates. (2) CONSUMMATION OF RIGHTS OFFERING On January 28, 1994, Guardian Bancorp consummated its rights offering of common stock ("the Offering"), and raised gross proceeds of approximately $19,700,000 through the issuance of 8,774,000 shares of common stock. After deducting expenses incurred in the Offering, net proceeds were approximately $17,958,000. In early February 1994, Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank for the Bank's general corporate purposes and subsequently reimbursed the Bank approximately $229,000 for costs it incurred in the capital raising effort. Guardian Bancorp retained the remaining net proceeds for its own general corporate purposes. GUARDIAN BANCORP 37 ................................................................................ (3) INVESTMENT AND SHORT-TERM SECURITIES The carrying value, gross unrealized gains and losses and estimated market values of investment securities at December 31, 1993, 1992 and 1991 are as follows (in thousands):
1993 - --------------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $24,279 123 36 24,366 State and municipal securities 4,336 55 -- 4,391 Federal Reserve Bank stock 464 -- -- 464 - --------------------------------------------------------------------------------------------------------------- $29,079 178 36 29,221 - --------------------------------------------------------------------------------------------------------------- 1992 - --------------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $20,327 579 -- 20,906 U.S. Government agency securities 164 6 -- 170 State and municipal securities 4,984 75 -- 5,059 Corporate bonds 1,000 5 -- 1,005 Federal Reserve Bank stock 464 -- -- 464 - --------------------------------------------------------------------------------------------------------------- $26,939 665 -- 27,604 - ---------------------------------------------------------------------------------------------------------------
1991 - ------------------------------------------------------------------------------------------------------------ GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------ U.S. Treasury securities $79,020 937 34 79,923 U.S. Government agency securities 360 22 -- 382 State and municipal securities 7,129 100 8 7,221 Corporate bonds 2,755 32 -- 2,787 Federal Reserve Bank stock 367 -- -- 367 - ------------------------------------------------------------------------------------------------------------ $89,631 1,091 42 90,680 - ------------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities in 1992 were $20,112,000 and the gain recognized upon sale was $11,000. There were no sales of investment securities in 1993. 38 GUARDIAN BANCORP ................................................................................ The following table shows the carrying value and estimated market value of investment securities by contractual maturity at December 31, 1993. Also shown are the weighted average yields by investment category, and such yields for state and municipal securities are stated on a tax equivalent basis at the incremental rate of 34% (dollars in thousands):
- -------------------------------------------------------------------------------------------------------- WEIGHTED ESTIMATED CARRYING AVERAGE MARKET AMOUNT YIELD VALUE - -------------------------------------------------------------------------------------------------------- U.S. Treasury securities: Within one year $ 10,528 4.9% 10,595 After one year but within five years 13,751 4.5 13,771 - -------------------------------------------------------------------------------------------------------- 24,279 4.7 24,366 - -------------------------------------------------------------------------------------------------------- State and municipal securities: Within one year 3,737 4.3 3,764 After one year but within five years 599 11.4 627 - -------------------------------------------------------------------------------------------------------- 4,336 5.3 4,391 - -------------------------------------------------------------------------------------------------------- Corporate bonds: Federal Reserve Bank stock 464 6.0 464 - -------------------------------------------------------------------------------------------------------- $ 29,079 4.8% 29,221 - --------------------------------------------------------------------------------------------------------
U.S. Treasury and Government agency securities carried at approximately $4,222,000 at December 31, 1993 were pledged to secure public deposits or for other purposes as required or permitted by law. Since the second quarter of 1992, the Company has categorized as short-term investments, securities and other investments that may be sold in response to changes in interest rates, increases in loan demand, liquidity needs or other similar instances. Such short-term investments are carried at the lower of cost or market and during 1993 had a weighted average yield of approximately 2.8% and mature within one year. The following table shows carrying value, gross unrealized gains and losses and estimated market values of short-term investments at December 31, 1993 and 1992 (in thousands):
1993 - ------------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 179,948 -- -- 179,948 - ------------------------------------------------------------------------------------------------------------- $ 179,948 -- -- 179,948 - ------------------------------------------------------------------------------------------------------------- 1992 - ------------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED CARRYING UNREALIZED UNREALIZED MARKET VALUE GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------- U.S. Treasury securities $ 119,887 48 -- 119,935 Cash management funds 600 -- -- 600 - ------------------------------------------------------------------------------------------------------------- $ 120,487 48 -- 120,535 - -------------------------------------------------------------------------------------------------------------
Proceeds from the sale of short-term investments were $369,865,000 and $14,881,000 during 1993 and 1992, respectively, and the gains realized upon sale were $3,000 and $31,000, respectively. During 1993 and 1992, there were no lower of cost or market adjustments charged to income. GUARDIAN BANCORP 39 ................................................................................ (4) LOANS AND ALLOWANCE FOR LOAN LOSSES The following is a summary of the composition of the Company's loan portfolio by type of loan at December 31, 1993 and 1992 (in thousands):
1993 1992 - ------------------------------------------------------------------------------------------------------------- Real estate $ 147,039 138,430 Construction 87,829 164,194 Commercial 86,260 85,618 Installment 2,046 2,938 - ------------------------------------------------------------------------------------------------------------- $ 323,174 391,180 Deferred loan fees (426) (345) - ------------------------------------------------------------------------------------------------------------- $ 322,748 390,835 - -------------------------------------------------------------------------------------------------------------
The Company emphasizes real estate and construction lending for contractors and real estate developers in its Southern California market area. A significant portion of the Company's loan portfolio is secured with deeds of trust on real estate. Commercial loans are loans made to professionals and small businesses for trade and general financing purposes and also include loans made to companies involved in the real estate industry, such as real estate brokers, title insurance and escrow companies and real estate developers for working capital and equipment acquisitions. Although the Company looks primarily to the borrower's cash flow as the principal source of repayment for such loans, 34.4% of the loans within this category at December 31, 1993 were secured by real estate. The Company's lending policy, established by the Board of Directors, requires that each loan meet certain underwriting criteria, including loans to customers who have significant cash investment in their projects and have the ability to provide additional cash flows, if necessary, as well as collateral underlying the loan, and capital and leverage capacity of the borrower. The following table sets forth the composition of real estate and construction loans by broad type of collateral as of December 31, 1993 (in thousands):
REAL ESTATE CONSTRUCTION -------------------- -------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE - ------------------------------------------------------------------------------------------------------------ Residential: 1-4 family units $ 24,298 16.5% $ 50,530 57.5% Multifamily units 16,309 11.1 8,437 9.6 Commercial and industrial units 79,398 54.0 19,324 22.0 Land: Residential 15,204 10.3 8,820 10.1 Commercial and industrial 11,830 8.1 718 .8 - ------------------------------------------------------------------------------------------------------------ Total $ 147,039 100.0% $ 87,829 100.0% - ------------------------------------------------------------------------------------------------------------
At December 31, 1993, the Company had total unfunded loan commitments of approximately $46,181,000 of which $1,579,000, $20,312,000 and $24,290,000 were related to real estate, construction and commercial loans, respectively. A summary of nonperforming loans at December 31, 1993 and 1992 follows (in thousands):
1993 1992 - --------------------------------------------------------------------------------------------------------------- Loans on nonaccrual $ 29,056 33,316 Loans past due greater than 90 days and still accruing 5,769 1,547 - --------------------------------------------------------------------------------------------------------------- Total nonperforming loans $ 34,825 34,863 - ---------------------------------------------------------------------------------------------------------------
40 GUARDIAN BANCORP ................................................................................ The following tables set forth the Company's nonperforming loans by type at December 31, 1993 and 1992 (in thousands):
1993 1992 - --------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Real estate-mortgage $ 13,804 15,578 Construction 9,214 16,416 Commercial 6,005 1,320 Installment 33 2 - --------------------------------------------------------------------------------------------------------------- $ 29,056 33,316 - --------------------------------------------------------------------------------------------------------------- 1993 1992 - --------------------------------------------------------------------------------------------------------------- Loans past due 90 days or more and still accruing interest: Real estate-mortgage $ 4,486 70 Construction -- 1,363 Commercial 1,247 100 Installment 36 14 - --------------------------------------------------------------------------------------------------------------- $ 5,769 1,547 - ---------------------------------------------------------------------------------------------------------------
Loans with modified terms approximated $9,539,000 and $2,149,000 at December 31, 1993 and 1992, respectively. The effect of loans on nonaccrual and loans with modified terms on interest income for the years ended December 31, 1993, 1992 and 1991 is presented below (in thousands):
1993 1992 1991 - ---------------------------------------------------------------------------------------------------------- Gross interest income that would have been recorded at original terms: Loans on nonaccrual $ 5,716 4,832 2,487 Loans with modified terms 1,105 288 231 - ---------------------------------------------------------------------------------------------------------- 6,821 5,120 2,718 Interest reflected in income: Loans on nonaccrual 1,703 1,933 608 Loans with modified terms 787 164 125 - ---------------------------------------------------------------------------------------------------------- 2,490 2,097 733 Interest foregone: Loans on nonaccrual 4,013 2,899 1,879 Loans with modified terms 318 124 106 - ---------------------------------------------------------------------------------------------------------- $ 4,331 3,023 1,985 - ----------------------------------------------------------------------------------------------------------
At December 31, 1993, commitments to lend additional funds to borrowers whose loans were on nonaccrual or had modified terms were approximately $182,000. At December 31, 1993 and 1992, the estimated fair value of the Company's loan portfolio was $319,411,000 and $379,937,000, respectively, which compares to the carrying value of net loans of $304,548,000 and $377,369,000, respectively. At December 31, 1993 and 1992, the fair value of the Company's commitments to extend credit and letters of credit approximates their carrying value. The assumptions inherent in these fair value estimates are in Note 1 to the consolidated financial statements. GUARDIAN BANCORP 41 ................................................................................ The following is a summary of the activity within the allowance for loan losses for the years ended December 31, 1993, 1992 and 1991 (in thousands):
1993 1992 1991 - -------------------------------------------------------------------------------- Balance at beginning of year $ 13,466 9,135 3,473 Provision charged to operations 18,250 9,395 5,946 Loans charged off (13,569) (5,115) (288) Recoveries 53 51 4 - -------------------------------------------------------------------------------- Net charge-offs (13,516) (5,064) (284) - -------------------------------------------------------------------------------- Balance at end of year $ 18,200 13,466 9,135 - --------------------------------------------------------------------------------
(5) PREMISES AND EQUIPMENT, NET The following is a summary of the major components of premises and equipment at December 31, 1993 and 1992 (in thousands):
1993 1992 - ------------------------------------------------------------------------------------ Furniture and equipment $ 4,386 4,285 Leasehold improvements 1,666 1,624 - ------------------------------------------------------------------------------------ Total premises and equipment 6,052 5,909 Less accumulated depreciation and amortization (4,244) (3,537) - ------------------------------------------------------------------------------------ Premises and equipment, net $ 1,808 2,372 - ------------------------------------------------------------------------------------
Depreciation and amortization expense on premises and equipment approximated $854,000, $909,000, and $813,000 for the years ended December 31, 1993, 1992 and 1991, respectively. (6) OTHER REAL ESTATE OWNED, NET Activity in other real estate owned during the year ended December 31, 1993 and 1992 follows (in thousands):
1993 1992 - ------------------------------------------------------------------------------------ Balance at beginning of year $ 4,359 2,945 Additions 24,209 6,071 Sales (13,905) (4,617) Valuation adjustments (714) (40) - ------------------------------------------------------------------------------------ Balance at end of year $ 13,949 4,359 - ------------------------------------------------------------------------------------
Consistent with regulatory reporting requirements and with changing trends evolving in financial reporting practices, in the fourth quarter of 1993 the Company reclassified $1,269,000 of in-substance foreclosed property to loans as it did not have physical possession of the underlying collateral. To be consistent with the 1993 presentation, in-substance foreclosed property of $11,817,000 has been reclassified to loans in 1992, where the Company did not have physical possession of the underlying collateral. Components of other real estate owned expense included in the accompanying consolidated statement of operations for the years ended December 31, 1993, 1992 and 1991 were as follows (in thousands):
1993 1992 1991 - -------------------------------------------------------------------------------------------------------- Gain upon sale $ (123) -- -- Loss upon sale 389 173 -- Direct holding costs 1,977 454 41 Valuation adjustments 714 40 -- - -------------------------------------------------------------------------------------------------------- $ 2,957 667 41 - --------------------------------------------------------------------------------------------------------
42 GUARDIAN BANCORP ................................................................................ (7) DEPOSITS The following summarizes deposits outstanding at December 31, 1993 and 1992 (in thousands):
1993 1992 - -------------------------------------------------------------------------------------------------------- Noninterest-bearing demand $ 322,900 414,163 Savings and interest-bearing demand 53,285 48,374 Money market 47,603 53,170 Certificates of deposit under $100,000 79,644 55,768 Certificates of deposit of $100,000 and over 22,242 28,428 - -------------------------------------------------------------------------------------------------------- Total deposits $ 525,674 599,903 - --------------------------------------------------------------------------------------------------------
Interest expense related to deposits for the years ended December 31, 1993, 1992 and 1991 amounted to the following (in thousands):
1993 1992 1991 - ------------------------------------------------------------------------------------------------------- Money market, savings and interest-bearing demand deposits $ 2,547 3,415 4,451 Time certificates of deposit under $100,000 3,451 2,028 2,667 Time certificates of deposit of $100,000 and over 1,110 3,111 6,777 - ------------------------------------------------------------------------------------------------------- Total interest expense on deposits $ 7,108 8,554 13,895 - -------------------------------------------------------------------------------------------------------
The Company has attracted a substantial portion of its deposit base from large balance depositors by offering a high level of customer services. A significant amount of such deposits are from Southern California based title insurance companies and escrow companies. While these deposits are noninterest-bearing, they are not cost free funds. As shown in the accompanying consolidated statement of operations, the Company incurs customer service expenses in the form of payments to third parties to provide accounting, data processing, courier and other permissible banking related services for certain of these customers. At December 31, 1993 and 1992, such arrangements were applicable to approximately $287,300,000 and $374,100,000 of noninterest-bearing demand deposits, respectively. During 1993 and 1992, the average balance of such accounts were $277,600,000 and $334,300,000, respectively. At December 31, 1993 and 1992, the estimated fair value of the Company's deposits was determined to be $525,740,000 and $600,341,000, respectively. The estimate of fair value does not include any amount that relates to core deposit intangible, since such intangibles are not defined as financial instruments under SFAS 107. The assumptions inherent in these fair value estimates are in Note 1 to the consolidated financial statements. (8) SUBORDINATED DEBENTURES On December 22, 1988, the Company issued $3,000,000 of 11 3/4% subordinated debentures that mature in December, 1995. In connection with the issuance of the debentures, the Company issued a nondetachable warrant that expires in 1995 to purchase 56,250 shares of the Company's common stock at $9.60 per share. Interest on the debentures is payable quarterly. The debentures have certain covenants, such as restrictions on the incurrence of certain debt and mergers, requirement of the maintenance of not less than $14 million in tangible net worth and restrictions on the payment of cash dividends. In the opinion of management, none of these restrictions effectively limit the operations of the Company and the Company was in compliance with the covenants at December 31, 1993. At December 31, 1993 and 1992, the estimated fair value of the Company's subordinated debentures was determined to be $3,090,000 and $3,129,000, respectively and the assumptions inherent to this estimate are in Note 1 to the consolidated financial statements. GUARDIAN BANCORP 43 ................................................................................ (9) OTHER BORROWED MONEY The Company's principal source of funds has been and continues to be deposits. However, on occasion, the Company will borrow funds to augment its funding needs in forms which may include federal funds purchased, securities sold under repurchase agreements and other short-term borrowings. At December 31, 1993, other borrowed money of $15,000,000 consisted of unsecured overnight borrowings under the Company's federal funds line which was settled shortly after year end. At December 31, 1993, loans outstanding in the amount of approximately $52 million were pledged to secure future advances with the Federal Reserve Bank as collateral. At December 31, 1992, other borrowed money of $10,000,000 consisted of overnight borrowings from the Federal Reserve Bank, were secured by U.S. Treasury securities with a carrying value of $10,000,000 and were settled shortly after year end. (10) INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 1993, 1992 and 1991 includes the following (in thousands):
1993 1992 1991 - --------------------------------------------------------------------------------------------------------- Current tax expense (benefit): Federal $ (4,614) 454 3,490 State -- -- 1,345 Tax benefit of stock options exercised -- (159) -- - --------------------------------------------------------------------------------------------------------- Total (4,614) 295 4,835 - --------------------------------------------------------------------------------------------------------- Deferred tax benefit: Federal (2,188) (1,405) (1,763) State (518) (524) (665) - --------------------------------------------------------------------------------------------------------- Total (2,706) (1,929) (2,428) - --------------------------------------------------------------------------------------------------------- Change in valuation allowance 2,774 1,366 493 Tax benefit of stock options -- 159 -- - --------------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ (4,546) (109) 2,900 - ---------------------------------------------------------------------------------------------------------
The income tax provision (benefit) reflected an effective rate of (23.9)%, (4.5)% and 47.4% for the years ended December 31, 1993, 1992 and 1991 on the earnings (loss) before income taxes, respectively. The income tax provision (benefit) differed from the amounts computed by applying the statutory Federal income tax rate of 34% for 1993, 1992 and 1991 to the earnings (loss) before income taxes for the following reasons (in thousands):
1993 1992 1991 - --------------------------------------------------------------------------------------------------------- Tax expense (benefit) at statutory Federal income tax rate $ (6,461) (825) 2,080 California franchise tax, net of Federal benefit (518) (524) 449 State and municipal securities interest (63) (104) (137) Valuation allowance for deferred tax assets 2,774 1,366 493 Other, net (278) (22) 15 - --------------------------------------------------------------------------------------------------------- $ (4,546) (109) 2,900 - ---------------------------------------------------------------------------------------------------------
44 GUARDIAN BANCORP ................................................................................ The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1992 and 1991 are presented below (in thousands):
1993 1992 - ------------------------------------------------------------------------------------------------------------- Deferred tax assets: Provision for loan losses $ 8,041 5,876 Cash basis tax reporting method 269 73 Depreciation 136 95 Other, net 78 1 - ------------------------------------------------------------------------------------------------------------- Total gross deferred tax assets 8,524 6,045 Valuation allowance (4,854) (2,080) - ------------------------------------------------------------------------------------------------------------- Deferred tax assets, net of valuation allowance 3,670 3,965 - ------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred loan fees (96) (200) Capitalized sign rights -- (13) California franchise tax -- (110) - ------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities (96) (323) - ------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 3,574 3,642 - -------------------------------------------------------------------------------------------------------------
The Company had sufficient tax carryback availability at December 31, 1993 and 1992 to realize the entire net deferred tax asset. At December 31, 1993, the Company had a net operating loss carryforward for state income tax purposes of $1,490,000, of which one-half, or $745,000, is available to offset any future state taxable income through 1998. Included in accrued interest receivable and other assets in the accompanying consolidated balance sheet at December 31, 1993 and 1992 was approximately $4,841,000 and $1,147,000, respectively, of income taxes currently receivable. During 1992, 93,309 unqualified stock options granted under the 1984 Stock Incentive Plan were exercised. If such shares acquired through the exercise of such options are subsequently sold within prescribed time periods, applicable tax regulation permits the Company to reduce its current tax liability to the extent of the tax effect on the difference between the exercise price of the shares acquired and the selling price of the shares sold. During 1992, the effect of these transactions was a decrease to income taxes payable and an increase to shareholders' equity of $159,000. (11) STOCK OPTIONS AND COMMON STOCK The Company has adopted two stock option plans, the 1984 Stock Incentive Plan and the 1990 Stock Incentive Plan, under which nonemployee directors, officers and other key employees of the Company have and may be granted nonqualified or incentive stock options. The Company authorized the issuance of up to 1,189,000 shares of common stock under both plans. Option prices under both plans may not be less than the fair market value at the date of the grant and all options granted expire not more than ten years after the grant date, except that options exercisable in installments become fully exercisable upon a change of control of the Company, as defined. The following summarizes stock option activity for the years ended December 31, 1993 and 1992 (in thousands):
1993 1992 - ------------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 881 989 Options granted 136 5 Options cancelled and exercised (305) (113) - ------------------------------------------------------------------------------------------------------------------- Options outstanding at end of year 712 881 - -------------------------------------------------------------------------------------------------------------------
At December 31, 1993, there were approximately 547,000 options exercisable at option prices ranging from $3.42 to $19.20 per share; those options not exercisable had option prices ranging from $2.875 to $19.20. Approximately 81,000 options were exercised during 1993 at prices ranging from $3.42 to $3.93. GUARDIAN BANCORP 45 ................................................................................ The 1987 Stock Appreciation Rights Plan (SAR Plan) and awards thereunder expired in 1992. Reversals of previous expense accruals for benefits payable under the SAR Plan reduced compensation expense in 1991 by approximately $171,000. Cash payments made under exercise of outstanding rights in 1991 were approximately $22,000. (12) EMPLOYEE STOCK OWNERSHIP PLAN In July 1988, the Board of Directors adopted the Guardian Bancorp Employee Stock Ownership Plan (the Plan), which constitutes a qualified plan under Section 401(a) of the Internal Revenue Code (IRC). The Plan also contains a cash-or-deferred arrangement under Section 401(k) of the IRC. The Plan is a defined contribution plan that is available to substantially all employees. Employee contributions are voluntary, as the employee elects to defer from 1% to 6% of compensation, exclusive of overtime, bonuses or other special payment (qualifying compensation). The Company makes a matching contribution to the Plan equal to 50% of the amount that eligible participants have contributed to the Plan, other than executive officers for whom no matching contributions are made. In addition, the Company may contribute an additional amount to the Plan each year based on the performance of the Company. The decision to make the additional contribution and the amount of such contribution is at the discretion of the Board of Directors. For the years ended December 31, 1993, 1992 and 1991, the Plan's administrative expenses, which were paid by the Bank, approximated $12,000, $17,000 and $13,000, respectively; and the Company contributed approximately $24,000, $66,000 and $96,000, respectively, to the Plan. Activity in the number of shares of the Company's common stock held by the Plan for the years ended December 31, 1993 and 1992 follows (in thousands):
1993 1992 - ------------------------------------------------------------------------------------------------------------------- Shares held at beginning of year 109 85 Shares acquired 18 24 Shares distributed to Plan participants (3) -- - ------------------------------------------------------------------------------------------------------------------- Shares held at end of year 124 109 - -------------------------------------------------------------------------------------------------------------------
(13) COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various outstanding commitments and contingencies, such as financial instruments with off-balance sheet risk, which are not reflected in the accompanying consolidated financial statements. These financial instruments primarily consist of commitments to extend credit and standby letters of credit issued to meet the financing needs of the Company's customers. Management does not anticipate any material losses as a result of these transactions. Commitments to extend credit, standby letters of credit and other letters of credit only represent exposure to off-balance sheet risk in the event the contract is drawn upon and the other party to the contract defaults. The actual credit risk of these transactions depends upon the creditworthiness of the customer and on the value of any related collateral. The Company uses the same credit policies in making commitments and conditional obligations as its does for on-balance sheet instruments. The Company has total unfunded loan commitments of approximately $46,181,000 at December 31, 1993. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company minimizes its exposure to loss under these commitments by requiring that customers meet certain conditions prior to disbursing funds. The amount of collateral obtained, if any, is based on a credit evaluation of the borrower and may include accounts receivable, inventory, property, plant and equipment, and real property. Standby letters of credit amounting to $2,989,000 were outstanding at December 31, 1993. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Where appropriate, cash or other security support is held as collateral. 46 GUARDIAN BANCORP ................................................................................ In the ordinary course of business, the Company becomes involved in litigation. In the opinion of management, based upon opinions of legal counsel, the disposition of suits pending against the Company would not have any material adverse effect on its results of operations or financial position. The Company leases its premises and certain equipment under several noncancelable operating leases that expire on various dates through March 31, 2003. The building lease commitments are subject to cost-of-living adjustments to reflect future changes in the consumer price index. Rent expense of its premises of approximately $921,000, $1,551,000 and $1,430,000 is included in occupancy expense in the accompanying 1993, 1992 and 1991 consolidated statement of operations, respectively. At December 31, 1993, minimum rental commitments for the noncancelable lease terms are as follows (in thousands):
COMMITMENTS - --------------------------------------------------------------------------------------------------------------- 1994 $ 725 1995 777 1996 810 1997 765 1998 719 Thereafter 2,746 - --------------------------------------------------------------------------------------------------------------- Total $6,542 - ---------------------------------------------------------------------------------------------------------------
(14) TRANSACTIONS INVOLVING OFF ICERS AND DIRECTORS As part of its normal banking activities, the Company has provided credit facilities to certain officers, directors, and the entities with which they are associated. In the opinion of management, such credit extensions are on terms similar to transactions with nonaffiliated parties and involve only normal credit risk. The following table summarizes such lending activity in 1993 and 1992 (in thousands):
1993 1992 - --------------------------------------------------------------------------------------------------------------- Aggregate loan balance at beginning of year $ 6,635 10,662 Additions 242 689 Repayments (702) (2,149) Other (2,795) (2,567) - --------------------------------------------------------------------------------------------------------------- Aggregate loan balance at end of year $ 3,380 6,635 - ---------------------------------------------------------------------------------------------------------------
At December 31, 1993, there were no commitments to lend additional amounts to the aforementioned parties, however, the Company had issued $326,000 of stand-by letters of credit on behalf of one director. Interest and fee income earned on the foregoing transactions was $556,000, $765,000, and $1,247,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Included in other are loans with officers, directors and the entities with which they are associated which, due to resignation, are no longer deemed affiliated parties. At December 31, 1993, $278,000 of the aforementioned loans were on nonaccrual and $2,570,000 of such loans were current as to interest but were past due 90 days or more as to principal. The Company has engaged a law firm with which a director is affiliated to address certain of its corporate, credit documentation and collection, on-going litigation and other matters. Management believes that such services are rendered at market terms consistent within the industry. During the years ended December 31, 1993, 1992 and 1991 related legal fees were $379,000, $357,000 and $115,000, respectively. (15) AVAILABILITY OF FUNDS FROM BANK, RESTRICTIONS ON CASH BALANCES AND OTHER REGULATORY MATTERS The Bank is required to maintain certain minimum reserve balances on deposit with the Federal Reserve Bank. Cash balances maintained to meet reserve requirements are not available for use by the Bank. During 1993, the Bank was required to maintain average reserves of approximately $27,745,000. GUARDIAN BANCORP 47 ................................................................................ The source of substantially all the revenues of Guardian Bancorp, on an unconsolidated basis, including funds available for the payment of dividends, is, and is expected to continue to be, dividends paid by the Bank. Under state banking law, dividends declared by the Bank in any calendar year may not, without the approval of the California Superintendent of Banks, exceed its net income, as defined, for that year combined with its retained earnings for the preceding two years. Guardian Bancorp has agreed not to incur additional debt or pay any dividends, and the Bank cannot pay or declare dividends to Guardian Bancorp without prior regulatory approval. State banking law also restricts the Bank from extending credit to Guardian Bancorp in excess of 10% of the capital stock and surplus, as defined, of the Bank or approximately $1.9 million at December 31, 1993. At December 31, 1993, Guardian Bancorp, on an unconsolidated parent company only basis, had cash and cash equivalents available of approximately $402,000. On January 28, 1994, Guardian Bancorp consummated the Offering by raising gross proceeds of approximately $19,700,000. After deducting expenses incurred in the Offering, net proceeds were approximately $17,958,000. Guardian Bancorp contributed $16,500,000 of the net proceeds to the Bank, subsequently reimbursed the Bank approximately $229,000 for costs it incurred and retained approximately $1.2 million for its own general corporate purposes. In addition, on September 30, 1993, Guardian Bancorp exercised its right to convert the entire $3.0 million principal amount of Bank Convertible Debentures into common stock of the Bank, thereby converting this security into Tier 1 capital and eliminating the Bank as a liquidity source through interest payments. On December 22, 1988, Guardian Bancorp issued to an unaffiliated purchaser $3.0 million in aggregate principal amount of 11 3/4% Subordinated Debentures that mature on December 30, 1995. Interest on the Bancorp Debentures accrues and is payable quarterly, and the principal is due on maturity. Guardian Bancorp is not currently in default with respect to any of the interest payments due on the Bancorp Debentures, and management believes that Guardian Bancorp currently has sufficient liquid assets to make such payments through to maturity. However, absent a restructuring of the Bancorp Debentures or the receipt of additional funds from Bank dividends, the issuance of debt or equity or otherwise, Guardian Bancorp will not have sufficient liquid assets to pay the $3.0 million principal amount of such securities that will become due on the stated maturity date. Guardian Bancorp's ability to receive additional funds through Bank dividends or the issuance of debt at the holding company level is limited by regulatory and statutory restrictions. In October 1992, each of the Company and the Bank entered into a written agreement with the Federal Reserve Bank of San Francisco ("FRB"). Among other things, the agreements require the Company and the Bank to a) maintain an allowance for loan losses that is equal to or greater than 1.7% of the Bank's outstanding loans, b) develop formalized strategic, operating and capital plans, including a plan to maintain adequate capital, c) develop a plan and take steps to monitor and decrease its level of nonperforming or otherwise classified assets, d) establish policies designed to monitor the type, growth and amounts of credit concentration, e) refrain from incurring any debt at the Company level without prior FRB approval, other than in the ordinary course of business, f) develop or update, as necessary, various operating policies and procedures, and g) refrain from declaring or paying any cash dividends without prior FRB approval. Both before and after entering these agreements, management of the Company and the Bank have taken various steps, including the Company's successful capital raising effort which closed in early 1994, that are designed to facilitate compliance with the terms thereof. However, compliance with the terms of the agreements will be determined by the FRB during subsequent examinations of the Company and the Bank. 48 GUARDIAN BANCORP ................................................................................ (16) PARENT COMPANY INFORMATION (CONDENSED) The balance sheet of Guardian Bancorp (parent company only) as of December 31, 1993 and 1992 and the related statements of operations and cash flows for the years ended December 31, 1993, 1992 and 1991 follow (in thousands): BALANCE SHEET
ASSETS 1993 1992 - ------------------------------------------------------------------------------------------------------------ Interest-bearing deposit with Guardian Bank $ 402 68 Short-term investments (market value of $600,000) -- 600 Investment in Guardian Bank 23,839 34,612 Receivable from Guardian Bank -- 3,000 Accrued interest receivable and other assets 298 198 - ------------------------------------------------------------------------------------------------------------ $ 24,539 38,478 - ------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------ Accrued interest payable and other liabilities $ 238 -- Subordinated debentures 3,000 3,000 - ------------------------------------------------------------------------------------------------------------ 3,238 3,000 - ------------------------------------------------------------------------------------------------------------ Shareholders' equity: Preferred stock; without par value; Authorized 10,000,000 shares; none issued -- -- Common stock; without par value; Authorized 29,296,875 shares, issued and outstanding 3,740,000 and 3,659,000 in 1993 and 1992, respectively. 15,836 15,556 Retained earnings 5,465 19,922 - ------------------------------------------------------------------------------------------------------------ Total shareholders' equity 21,301 35,478 - ------------------------------------------------------------------------------------------------------------ $ 24,539 38,478 - ------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS 1993 1992 1991 - ------------------------------------------------------------------------------------------------------ Interest income $ 287 369 467 Other income 12 95 106 - ------------------------------------------------------------------------------------------------------ Total income 299 464 573 - ------------------------------------------------------------------------------------------------------ Interest expense 352 352 352 Other expense 31 27 304 - ------------------------------------------------------------------------------------------------------ Total expense 383 379 656 - ------------------------------------------------------------------------------------------------------ Earnings (loss) before income taxes (benefit) and equity in undistributed net earnings (loss) of Guardian Bank (84) 85 (83) Provision (benefit) for income taxes -- 35 (28) - ------------------------------------------------------------------------------------------------------ Earnings (loss) before equity in undistributed net earnings (loss) of Guardian Bank (84) 50 (55) Equity in undistributed net earnings (loss) of Guardian Bank (14,373) (2,368) 3,272 - ------------------------------------------------------------------------------------------------------ Net earnings (loss) $ (14,457) (2,318) 3,217 - ------------------------------------------------------------------------------------------------------
GUARDIAN BANCORP 49 ................................................................................
STATEMENT OF CASH FLOWS 1993 1992 1991 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings (loss) $ (14,457) (2,318) 3,217 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Equity in undistributed net (earnings) loss of Guardian Bank 14,373 2,368 (3,272) Net decrease (increase) in accrued interest receivable and other assets (100) (143) 1,403 Net increase (decrease) in accrued interest payable and other liabilities 238 (731) 731 - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 54 (824) 2,079 - ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Investment in subsidiary (600) -- (2,431) Principal collected on loan participations purchased -- 306 66 - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (600) 306 (2,365) - ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net proceeds from issuance of common stock 280 504 167 Retirement of common stock -- -- (940) - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 280 504 (773) - ------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (266) (14) (1,059) Cash and cash equivalents at beginning of year 668 682 1,741 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 402 668 682 - ------------------------------------------------------------------------------------------------------ Supplemental cash flow information: Conversion to equity capital of receivable from Guardian Bank $ 3,000 -- -- Interest paid 352 352 352 Income taxes (received) paid (97) 846 350
50 GUARDIAN BANCORP ................................................................................ (17) QUARTERLY INFORMATION (UNAUDITED) A summary of unaudited quarterly operating results for the years ended December 31, 1993 and 1992 follows (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------------------------------------------------------------- 1993: INTEREST INCOME $ 8,144 8,792 8,124 7,709 NET INTEREST INCOME 6,127 6,786 6,305 6,046 PROVISION FOR LOAN LOSSES 5,000 3,750 4,500 5,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,127 3,036 1,805 1,046 LOSS BEFORE INCOME TAXES (5,485) (2,838) (4,905) (5,775) NET LOSS (4,079) (2,247) (3,903) (4,228) NET LOSS PER COMMON SHARE (1.11) (.61 ) (1.04 ) (1.13 ) - --------------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------------------------------------------------------------- 1992: Interest income $ 11,035 10,801 10,262 9,197 Net interest income 8,343 8,556 8,072 7,314 Provision for loan losses 995 150 1,750 6,500 Net interest income after provision for loan losses 7,348 8,406 6,322 814 Earnings (loss) before income taxes 1,047 1,799 372 (5,645) Net earnings (loss) 609 1,042 215 (4,184) Net earnings (loss) per common share .15 .26 .05 (1.14 ) - ---------------------------------------------------------------------------------------------------------------
The Company recorded larger provisions for loan losses in the latter half of 1992 than were recorded in the first half of the year. There were several reasons for this occurrence. In general, the information analyzed by the Company in the second half in connection with its quarterly review of loans and the allowance for loan loss adequacy disclosed declines in the value of collateral for real estate related loans, particularly in the non-residential sectors. This was further supported by the most recent appraisal data received during the latter part of the year. In addition, the valuation of loans in the process of foreclosure and in-substance foreclosed was adjusted to reflect recent market data and changes in the Company's strategies for ultimate disposition of the collateral which impacted charge-offs in the second half of the year. These trends continued in the fourth quarter along with other events occurring which included unexpected deeds-in-lieu of foreclosure received by the Company, declared bankruptcies by borrowers and the continuing deterioration in most real estate sectors in Southern California. Finally, management's perspective on the general economic conditions in the Company's marketplace were based upon the then most recent economic reports which indicate that the current environment would persist throughout and perhaps beyond 1993. (18) NORTHRIDGE EARTHQUAKE On January 17, 1994, a large earthquake struck the Southern California area. The earthquake and related aftershocks caused significant damage to certain areas of Los Angeles and Ventura Counties. While the full extent of damage in this area is not yet known, management's preliminary assessment of damage to collateral securing loans indicates that there should be no material impact on the Company's consolidated financial position or results of operations. GUARDIAN BANCORP 51 ................................................................................ INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS GUARDIAN BANCORP: We have audited the accompanying consolidated balance sheet of Guardian Bancorp and subsidiary (the Company) as of December 31, 1993 and 1992 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guardian Bancorp and subsidiary as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 10 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". ______/s/_KPMG Peat Marwick______ KPMG Peat Marwick Los Angeles, California February 15, 1994 52 GUARDIAN BANCORP ................................................................................ COMMON STOCK PRICE RANGE AND DIVIDEND POLICY The Company's common stock is listed on the American Stock Exchange under the symbol "GB". The following table sets forth, on a per share basis for the periods indicated, the high and low closing sales prices for the common stock as reported by the American Stock Exchange.
HIGH LOW - --------------------------------------------------------------------- 1992: First Quarter $ 9 7/8 6 3/4 Second Quarter 8 1/4 6 5/8 Third Quarter 7 7/8 5 1/2 Fourth Quarter 7 1/8 5 1993: First Quarter $ 7 1/8 5 1/2 Second Quarter 5 3/4 3 7/8 Third Quarter 5 3/8 2 3/4 Fourth Quarter 3 3/16 2 1/8 1994: FIRST QUARTER (THROUGH MARCH 15, 1994) $ 2 1/16 $ 1 11/16 - ---------------------------------------------------------------------
On December 31, 1993, the Company had approximately 463 shareholders of record of its common stock which does not include beneficial owners whose shares are held by brokers, banks and other nominees. The Company has never paid a cash or stock dividend on its common stock and does not intend to pay any cash dividends until such time as internally generated profits are not needed to support growth or enhance shareholders' equity of the Company. At present, the source of substantially all of Guardian Bancorp's revenues, including funds available for the payment of dividends, is, and is expected to continue to be, dividends paid by the Bank. The Bank's ability to pay dividends to Guardian Bancorp is subject to statutory and regulatory restrictions. In addition, the Company's ability to pay cash dividends is limited by the terms of the Subordinated Debenture Purchase Agreement pursuant to which the Company's 11 3/4% Subordinated Debentures were issued and the terms of its written agreement with the Federal Reserve Bank of San Francisco. See "Capital Resources" and Notes 8 and 15 to the Company's Consolidated Financial Statements filed within. EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Guardian Bank, a California state-chartered bank. 2. Guardian Trust Company, a California state-chartered trust company. EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Guardian Bancorp: We consent to incorporation by reference in the Registration Statement Nos. 2-96894, 33-22371 and 33-35012 on Form S-8 of Guardian Bancorp of our report dated February 15, 1994, relating to the consolidated balance sheet of Guardian Bancorp and subsidiary as of December 31, 1993 and 1992 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, which report appears in the December 31, 1993 annual report on Form 10-K of Guardian Bancorp. Our report refers to the adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes". KPMG Peat Marwick Los Angeles, California March 29, 1994 -----END PRIVACY-ENHANCED MESSAGE-----