<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number 0-11113
SANTA BARBARA BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 Anacapa Street, Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of Each Exchange on Which
Registered
Common Stock, no par value Not Listed
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]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 8, 1995, based on the sales prices reported to
the Company on that date of $25.75 per share: Common Stock - $106,532,385*
*Based on reported beneficial ownership by all directors and executive
officers and the Company's Employee Stock Ownership Plan; however, this
determination does not constitute an admission of affiliate status for any
of these stockholders.
As of March 8, 1995, there were 5,126,406 shares of the issuer's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of registrant's Proxy
Statement for the Annual Meeting of Shareholders on April 25, 1995 and the
Annual Report to Shareholders for the fiscal year ended December 31, 1994
are incorporated by reference into Parts I, II, and III.
Exhibit Index on Page 7
Page 1 of 130
Pursuant to Rules 12b-23 and 12b-32 and Instruction G to Form 10-K, the
following indicated items of information from the registrant's Proxy
Statement for the Annual Meeting of Shareholders on April 25, 1995
("Proxy") and the Annual Report to Shareholders for the fiscal year ended
December 31, 1994 ("Annual Report") are incorporated into this form by
reference to the page number in the relevant printed document.
Annual
Report Proxy
(Page Numbers in
Printed
Documents as
Distributed
to Shareholders)
PART I
Item 1. Business 13
a) General Description of Business
Operations commenced as Santa Barbara National
Bank with one office and 18 employees in 1960.
The Company was formed in 1982. The Bank (name
changed to Santa Barbara Bank & Trust) became
the principal subsidiary of the Company, and has
grown to 12 banking offices and trust, escrow,
and real estate offices. Two of the banking
offices were added in the merger with Community
Bank of Santa Ynez Valley on March 31, 1989. A
second subsidiary, SBBT Service Corporation,
was formed in 1988.
The Bank continued its pattern of growth in 1994
with significant increases in assets and deposits.
b) Financial Information about Industry Segments
There are no identifiable industry segments.
c) Narrative Description of Business 13-36
As of December 31, 1994, the Company had the
equivalent of approximately 474 employees engaged
to provide banking and trust services to the local
community, including correspondent services to
other local banks.
For most of its banking products, the Company
faces competition in its market area from branches
of most of the major California money banks, some
of the state-wide savings and loan associations,
and other community banks and savings and loans.
For some of its products, the Company faces
competition from other non-bank financial service,
especially securities firms.
d) Financial Information about Foreign and Domestic
Operations and Export Sales
The Company is engaged in local domestic business
operations only.
Item 2. Properties 42,46,
The Company maintains executive and administrative 53
offices at leased premises at 1021 Anacapa Street, Santa
Barbara, California. Of the 12 branch banking offices,
all or a portion of 9 are leased. The office space used
by the Real Estate and Escrow departments is owned, and
space is leased for the Trust, and Management Information
Services, and Loan Servicing departments.
Item 3. Legal Proceedings
There are no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the
fiscal year covered by this report.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
a) Market Information 35,56
b) Holders
There are approximately 1,674 holders of stock as
of March 8, 1995.
c) Dividends 35,40
Dividends are currently declared four times a year, 56
and the Company expects to follow the same policy
in the future.
Item 6. Selected Financial Data 56
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 13-36
Item 8. Financial Statements and Supplementary Data 37-55
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors 4-
5
Executive Officers
6
Item 11. Executive Compensation 8-
13
Item 12. Security Ownership of Certain Beneficial Owners and
Management
7
Item 13. Certain Relationships and Related Transactions
15
PART IV
Item 14. Exhibits, Financial Statements, and Reports on
Form 8-K
a) The following documents are filed as a part of
this Report:
1) Financial Statements:
Consolidated Balance Sheets as of December 31,
1994 and 1993 38
Consolidated Statements of Income for the years
ended December 31, 1994, 1993, and 1992 39
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994, 1993,
and 1992 40
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1993, and 1992 41
2) Financial Statement Schedules:
The following schedules and information are included
in the Footnotes to the above Financial Statements or
in Management's Discussion and Analysis of Financial
Condition and Results of Operations, both of which
are included in the Annual Report:
Interest Rate Sensitivity 16
Distribution of Average Assets, Liabilities, and
Shareholders' Equity and Related Interest Income,
Expense, and Rates 18
Volume and Rate Variance Analysis of Net Interest
Income 19
Maturity Distribution and Yield Analysis of the
Securities Portfolios 20
Loan Portfolio Analysis by Category 24
Maturity and Sensitivities of Selected Loan Types
to Changes in Interest Rates 24
Risk Elements:
Non-Accrual, Past Due and Restructured Loans 27
Potential Problem Loans 28
Foreign Loans 28
Summary of Loan Loss Experience 26
Foregone Interest on Non-Accrual Loans 28
Detailed Deposit Summary 29
Maturity Distribution of Time Certificates of
Deposit of $100,000 or More 30
Return on Equity and Assets, Operating and
Capital Ratios 56
Short-term Borrowings 49
3) Exhibits - See exhibits listed on page 7, "Exhibit Index"
b) No reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended December 31, 1994.
c) Exhibits - See exhibits listed on page 7, "Exhibit Index"
d) Financial statement schedules required by Regulation S-X
which are excluded from the annual report to shareholders-
Not Applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
by the undersigned, thereunto duly authorized.
Santa Barbara Bancorp
By /s/David W. Spainhour 3/30/95
David W. Spainhour date
President
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
/s/ Donald M. Anderson 3/30/95 /s/ David W. Spainhour 3/30/95
Donald M. Anderson date David W. Spainhour date
Chairman of the Board President
Director Director
/s/ Kent M. Vining 3/30/95 /s/ Donald Lafler 3/30/95
Kent M. Vining date Donald Lafler date
Senior Vice President Vice President
Chief Financial Officer Principal Accounting Officer
/s/ Frank H. Barranco, M.D. 3/30/95 /s/ Edward E. Birch 3/30/95
Frank H. Barranco, M.D. date Edward E. Birch date
Director Director
/s/ Richard M. Davis 3/30/95 /s/ Anthony Guntermann 3/30/95
Richard M. Davis date Anthony Guntermann date
Director Director
/s/ Dale E. Hanst 3/30/95 /s/ Harry B. Powell 3/30/95
Dale E. Hanst date Harry B. Powell date
Director Director
EXHIBIT INDEX TO
SANTA BARBARA BANCORP FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
Sequential
Exhibit Page
Number Description Number
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession**
3 Articles of incorporation and bylaws
3.1 Restated Articles of Incorporation of Santa Barbara
Bancorp (filed as Exhibit 3(i) to the Company's
Form S-4, File No. 33-19181, and is incorporated
herein by reference thereto).
3.2 Amended and Restated Bylaws of the Company dated
September 25, 1991 (filed as "Other Information" to
the Company's form 10-Q for the quarter ended
September 30, 1991, File No. 0-11113, and is
incorporated herein by reference thereto).
4 Instruments defining rights of security holders - The
rights of security holders are defined by applicable
law and in the Bylaws of the Company-see Exhibit 3.2 above.
9 Voting trust agreement**
10 Material contracts
10.1 Compensation Plans and Agreements:
10.1.1 Santa Barbara Bancorp Restricted Stock Option Plan
(previously filed as Exhibit 4.1 of the Company's
Registration Statement on Form S-8, filed with the
Commission on June 23, 1992, File No. 33-48704,
incorporated herein by this reference).
10.1.2 Santa Barbara Bancorp Director Stock Option Plan
(previously filed as Exhibit 4.2 of the Company's
Registration Statement on Form S-8, filed with the
Commission on June 23, 1992, File No. 33-48704,
incorporated herein by this reference).
10.1.3 Santa Barbara Bancorp Stock Option Plan (previously
filed as Exhibit 4.2 of the Company's Registration
Statement on Form S-8, filed with the Commission on
October 28, 1991, File No. 33-43560, incorporated
herein by this reference).
10.1.4 Santa Barbara Bank & Trust Incentive and Investment
and Salary Savings Plan, as amended through
December 31, 1991 (previously filed with the
Commission as Exhibit 10.1.4 to the Company's annual
report on Form 10-K on March 29, 1993, File
No. 0-11113, incorporated herein by this reference).
10.1.5 Santa Barbara Bank & Trust Employee Stock Ownership
Plan and Trust, as amended and restated through
December 31, 1993 (previously filed with the Commission as
Exhibit 10.1.5 to the Company's annual report on Form
10-K on March 16, 1994, File No. 0-11113, incorporated
herein by this reference).
10.1.6 Amendment to the Santa Barbara Bank & Trust Employee
Stock Ownership Plan and Trust as ratified by the
Employee Benefit Advisory Committee on January 14,
1993 (previously filed with the Commission as
Exhibit 10.1.6 to the Company's annual report on
Form 10-K on March 29, 1993, File No. 0-11113,
incorporated herein by this reference).
10.1.7 Description of Group Term Life and Accidental
Death and Dismemberment Benefits and of Payment
of Membership Dues (previously filed with the
Commission as Exhibit 10.1.7 to the Company's
annual report on Form 10-K on March 29, 1993,
File No. 0-11113, incorporated herein by this
reference).
10.1.8 Santa Barbara Bank & Trust Key Employee Retiree
Health Plan dated December 29, 1992 (previously filed
with the Commission as Exhibit 10.1.8 to the Company's
annual report on Form 10-K on March 16, 1994, File
No. 0-11113, incorporated herein by this reference).
10.1.9 Santa Barbara Bank & Trust Retiree Health Plan
(Non-Key Employees) dated December 29, 1992 (previously
filed with the Commission as Exhibit 10.1.9 to the
Company's annual report on Form 10-K on March 16, 1994,
File No. 0-11113, incorporated herein by this reference).
10.2.0 Securities and Insurance Service Agreement 9
10.2.1 IRA Custodial Agreement.
33
11 Statement re computation of per share earnings
41
12 Statement re computation of ratios**
13 Annual report to security-holders
42
16 Letter re change in certifying accountant**
18 Letter re change in accounting principles**
21 Subsidiaries of the registrant
128
22 Published report regarding matters submitted to vote
of security-holders**
23 Consents of experts and counsel:
23.1 Consent of Independent Public Accountants
128
23.2 Consent of Independent Public Accountants
128
24 Power of attorney**
27 Financial Data Schedules
129
99 Additional exhibits-Notice of Annual Meeting of
Shareholders and Proxy Statement for Annual Meeting occurring
April 25, 1995 filed with the Commission on March 15, 1995,
File No. 0-11113, incorporated herein by this reference.
* Shareholders may obtain a copy of any exhibit by writing to:
Clare McGivney, Corporate Services Administrator
Santa Barbara Bancorp
P.O. Box 1119
Santa Barbara, CA 93102
** Not applicable
Exhibit 10.2.0
SECURITIES AND INSURANCE
SERVICES AGREEMENT
SANTA BARBARA BANK AND TRUST
Page Numbers
in Printed
Documents
Recitals 1
Agreement 1
1. The "CoreLink Program" 1
a. Marketing Planning 1
b. Product Selection 1
c. Product Due Diligence 1
d. Hiring Assistance 1
e. Licensing 2
f. Training 2
g. Technological Support 2
h. Tracking Software System 2
i. Commission Accounting 2
j. Customer Support 2
k. Account Management Support 2
l. Compliance Consultation 2
m. Customer Disclosure Material 3
2. Product Selection 3
3. Modification of Services 3
4. Employment of Investment Specialists 4
a. Employment 4
b. Number, Acceptability and Assignment 4
c. Background Checks 4
d. Licensing 4
e. Compensation 4
f. Employee Records 5
g. Control 5
h. Discipline 5
i. Conduct of Either Party's Separate Business 6
j. Training 6
5. Institution's Other Employees 6
a. Limit Employees Activities 6
b. Limitations on Employees 6
c. Training 7
d. Confidential Customer Information 7
e. Monitoring by Institution 7
f. Incentive Compensation 7
6. Records, Access to Records 7
a. CoreLink Records 7
b. Access for CoreLink 7
c. Access for Institution 8
7. Insurance Coverage 8
8. Marketing 8
a. Referral Program 8
b. Literature Development 8
c. Costs 8
d. Contents 8
e. Compliance 8
f. Institution's Approval 9
9. Payments for Services 9
a. By CoreLink 9
b. By Institution 9
c. Commission Chargebacks 9
10. Sole Provider 9
a. Agreement not to Sell or Market Products 9
b. Exception for Operations of Trust Department and
Institution's Own Account 10
c. Exception for Asset Allocation Program 10
d. Exception for Business Sweep Account 10
11. Confidentiality 10
12. Representations and Warranties of CoreLink 11
13. Representations and Warranties of the Institution 11
14. Indemnification of Institution 11
15. Indemnification of CoreLink 11
16. Space for CoreLink Program 12
a. Space 12
b. Separation of Businesses 12
17. Term and Termination 12
a. Initial Term 12
b. Renewal Term 12
c. Termination for Cause by CoreLink 12
d. Termination for Cause by the Institution 12
e. Ownership of Customer Accounts 13
f. Return of Materials 13
18. Service Marks; License: Right to Use 13
19. Notices 13
20. Miscellaneous 14
a. Notification of Certain Events 14
b. Compliance with Applicable Regulations 14
c. Entire Agreement 14
d. Remedies 14
e. Severability 14
f. Waiver 14
g. Agency 15
h. Headings 15
i. Governing Law 15
j. Counterparts 15
k. Consent to Jurisdiction and Venue 15
Schedule A 16
Schedule B 17
Schedule C 18
Schedule D 19
Recitals
1. This Securities and Insurance Services Agreement (the "Agreement")
is dated March 28, 1995}. It is between CoreLink Financial, Inc., a
California corporation, and Santa Barbara Bank and Trust.
2. Santa Barbara Bank and Trust (the "Institution") is a state banking
corporation organized under the laws of the State of California.
3. CoreLink Financial, Inc. ("CoreLink") is a registered broker dealer
and licensed life insurance agent.
4. CoreLink desires to distribute and sell mutual funds and life
insurance products including annuities and to provide certain securities
brokerage and investment advisory services to the general public through
the offices of Santa Barbara Bank and Trust ("Branches").
Agreement
The parties agree as follows:
1. The "CoreLink Program"
CoreLink will provide securities' brokerage and investment advisory
services, and life insurance and annuity sales and service to the general
public, including customers of Institution (collectively, "Customers"), at
desks or offices located in the Branches ("Investment Desks"). The
individuals providing these services at the Investment Desks are referred
to in this Agreement as "Investment Specialists". CoreLink will arrange
for the purchase and sale only of securities, life insurance and annuities
approved for marketing pursuant to Paragraph 2 (collectively the
"Products"). In connection with these securities and insurance services,
CoreLink agrees to provide the following management, administrative and
customer support services:
a. Marketing Planning
Assist the Institution to develop and periodically update a
written securities and insurance marketing plan;
b. Product Selection
Assist the Institution to develop and periodically update a
written product selection policy;
c. Product Due Diligence
Conduct regular reviews of and monitor insurance carriers it
recommends to the Institution for financial soundness, conduct regular
updates of all Products, and report on the reviews, the updates and
adverse information related to such carriers or products that would
alter CoreLink's recommendation of the company or product promptly
after
receipt of such information.
d. Hiring Assistance
Advise and assist in the hiring and retention of qualified
Investment Specialists;
e. Licensing
Secure and maintain all necessary licensing and qualifications
of
each Investment Specialist with the SEC, NASD, federal and state
securities and insurance regulators, and any other applicable
authorities with respect to the offer and sale of Products;
f. Training
Implement and maintain a training program for Investment
Specialists which will include training on selling, product
familiarization, customer service, account administration and
compliance with securities and insurance regulations. Training for
Investment Specialists and other personnel of the Institution will be
provided on compliance with the Interagency Statement on Retail Sales
of
Non-Deposit Investment Products (the "Interagency Statement") Note 1,
and
as outlined in Schedule C which is attached hereto and incorporated
herein by this reference. CoreLink shall bear the costs for senior
management training and bank officer and employee training;
g. Technological Support
Install and maintain a data base for the Institution that will
maintain the confidentiality of the customer records and will provide
administrative, service, and compliance support. The Institution will
have access to it 24 hours a day 7 days a week via password protected
modem (except for periods of maintenance). Customers will receive
transaction confirmations and monthly consolidated statements from
CoreLink that identify the CoreLink offices in branches of the
Institution. Investment Specialists will be able to access
consolidated
investment holding statements for customers at any time (except for
periods of maintenance). All CoreLink technology will be made
available
to Institution as described in Schedule D attached hereto.
h. Tracking Software System
Provide and maintain a computer system sufficient to track and
report on all referrals and sales at the Branches;
i. Commission Accounting
Providing analysis, reconciliation, and information with
respect
to accounting for commissions and bank compensation payable in
connection with the CoreLink Program;
j. Customer Support
Provide a customer service department of sufficient size to
promptly and accurately provide answers to questions of Investment
Specialists and Customers regarding the purchase or sale of Products.
At a minimum, the service department will be open during the
Institution's business hours;
k. Account Management Support
Provide on-going Customer account management support to the
Institution.
l. Compliance Consultation
Monitor all applicable federal and state securities and
insurance
laws and regulations as well as applicable NASD rules and industry
trends which may affect the Institution or the subject matter of this
agreement and report as necessary and appropriate to the Institution.
m. Customer Disclosure Material
Provide all applications, notices, signs, and other documents
for
the opening of accounts by customers and provide appropriate
disclosures
in conformity with applicable rules and regulations, including the
Interagency Statement and OCC Section 413.
2. Product Selection
Products to be offered by the Investment Specialists shall be limited
to Products listed on a list of approved products that will be maintained
by CoreLink (the "Approved Product List"). The Approved Product List will
contain products approved by both CoreLink and the Institution, from time
to time, in accordance with considerations of prudence, suitability to the
customer base, the agreed upon selection policy and other appropriate
factors.
The approval of insurance products will involve two steps - approval
of the insurance company and approval of the product. CoreLink will
recommend insurance companies that offer products which CoreLink believes
are suitable for sale through the Institution. The Institution shall
promptly approve or disapprove the recommended insurance companies in
writing. CoreLink will recommend products to be added to the Approved
Product List which are offered by approved or recommended insurance
companies. If the Institution does not object in writing to the addition
of a recommended product it will be added to the Approved Product List ten
days after the recommendation is given to the Institution or upon approval
of the insurance company by the Institution, whichever is later. Any
product substantially similar in nature to one on the Approved Product List
which is offered by the same insurance company may be added to the Approved
Product List upon CoreLink providing the Institution with a written
recommendation that the product be added to the Approved Product List. If
an insurance company modifies a product on the Approved Product List,
CoreLink will notify Institution of the changes and the product will remain
in the Approved Product List.
CoreLink will recommend other products to be added to the Approved
Product List. If the Institution does not object in writing to the
addition of a recommended product it will be added to the Approved Product
List ten days after the recommendation is given to the Institution. Mutual
fund recommendations will be of specific funds and not of fund groups.
When a mutual fund is on the Approved Product List, all types of shares
(i.e. A, B or C) may be sold by the Investments Specialists unless
specifically disapproved by either party.
The Institution or CoreLink may request that a product on the Approved
Product List be removed at any time and the product will be promptly
removed from the Approved Product List. If sales are pending for products
which a party wants to remove from the Approved Product List, those sales
may be completed provided they are otherwise suitable. Promptly after each
change in the Approved Product List, CoreLink will provide the Institution
with an updated list.
3. Modification of Services
CoreLink may alter its services from time to time, to satisfy
applicable regulatory requirements, to provide effective, economical and
competitive services, to adapt to new technology or conditions, or to
enhance the reputation or public acceptance of CoreLink 's services at the
Branches. No such modification shall be implemented by CoreLink without
prior notification to the Institution. Notification of modifications
required by applicable regulations shall specify that the change is
required by such regulation and shall become effective immediately. All
other proposed modifications shall become effective only if the Institution
does not object in writing within ten business days of its receipt of
notice to the proposed modification. If the Institution objects, it will
not be implemented until CoreLink and Institution reach a mutual agreement
on the proposed modification.
4. Employment of Investment Specialists
a. Employment
Investment Specialists will be dual employees of the Institution and
CoreLink. Both CoreLink and the Institution will enter into a written
employment contract with each Investment Specialist.
b. Number, Acceptability and Assignment
The Institution and CoreLink shall determine jointly which
individuals shall receive offers of employment as Investment Specialists.
The parties shall designate from which Branches the securities and
insurance services described in paragraph one will be offered. A
sufficient number of Investment Specialists, but not less than one, shall
be hired to cover all designated Branches. The Institution and CoreLink
shall determine jointly which Investment Specialists shall be placed at a
Branch.
c. Background Checks
CoreLink shall perform background checks on Investment Specialists
necessary to satisfy applicable securities and insurance regulatory
standards. The background checks shall include making inquiries of past
employers, securities regulators or other applicable governmental agencies
regarding such applicant's employment history.
d. Licensing
CoreLink shall ensure that each Investment Specialist who handles
transactions that require registration, licensing or qualification with the
National Association of Securities Dealers, Inc. ("NASD"), or state or
federal securities regulators, shall be registered and qualified with the
NASD and with applicable securities regulatory authorities. Similarly,
CoreLink shall ensure that each Investment Specialist who handles
transactions that require licensing with state insurance regulators shall
be licensed with the applicable insurance regulatory authorities.
e. Compensation
The Institution shall pay the compensation of Investment Specialists
in amounts to be determined by Institution from time to time. Investment
Specialists shall be eligible for the Institution's employee benefit
programs. Institution shall be responsible for paying all employment
related taxes, workers compensation coverage, costs of licensing (including
the costs of training to obtain such licenses), and other costs required by
or related to the employment of Investment Specialists. Institution may
provide incentive compensation to any Investment Specialist, directly or
indirectly based upon the volume of sales or commissions, provided, such
incentive compensation does not result in unsuitable recommendations or
sales being made to Customers or does not violate applicable law. At least
ten days before implementing any such incentive compensation program,
Institution shall advise CoreLink of the details of such program. If
CoreLink, at any time, advises Institution that an incentive compensation
program for the Investment Specialists may result in unsuitable
recommendations being made to Customers or may violate applicable law,
Institution shall modify, to the satisfaction of CoreLink, or withdraw such
incentive compensation program.
f. Employee Records
Institution shall maintain all required employment records for
Investment Specialists, including materials concerning Investment
Specialists submitted by CoreLink. CoreLink shall provide the Institution
all such information it possesses with respect to Investment Specialists.
Institution shall make available to CoreLink, promptly upon request, all
records of Investment Specialists. Institution shall transmit to CoreLink
at least once each year, and promptly following CoreLink's request, a copy
of each Investment Specialist's Form W-2 and such other information with
respect to the compensation in such form as CoreLink may prescribe.
CoreLink shall maintain all employee records related to the licensing of
Investment Specialists and shall provide copies of such material to
Institution upon request.
g. Control
CoreLink shall have exclusive control over and sole responsibility
for the Investment Specialists' operation of the Investment Desks and their
activities related to providing securities and insurance services except
such activities as are permitted under Paragraph 4i below. CoreLink shall
provide procedures manuals, compliance manuals, rules and instructions to
govern the Investment Specialists' securities and insurance activities
which will comply with applicable laws, rules and regulations in effect
from time to time. CoreLink will supervise the activities of each
Investment Specialist with respect to the offer and sale of the Products.
The Institution shall have no authority over the operation of the
Investment Desks or the securities and insurance services performed by the
Investment Specialists and shall not be responsible for compliance by the
Investment Specialists with manuals, rules or instructions of CoreLink.
Institution retains and shall exercise its own supervisory responsibilities
with respect to the status of Investment Specialists as employees of the
Institution.
h. Discipline
The Investment Specialists shall be subject to discipline by
CoreLink, various federal and state regulatory authorities, securities
exchanges, clearing corporations or associations of brokers and dealers and
certain other entities having jurisdiction over the operation of the
Investment Desks and the conduct of the Investment Specialists. With
respect to any other matters, the Investment Specialist shall be subject
to discipline by the Institution. Each party to this Agreement shall
report promptly to the other, any violation by an Investment Specialist of
any law, rule or regulation, or of CoreLink's or Institution's standards of
conduct or procedures of which such party has knowledge or substantial
suspicion. The Institution shall have only the obligation to monitor such
conduct or procedures as is required of it by applicable law or regulation.
Each party shall transmit any such notice to the other party in a manner
calculated to give such party immediate notice of any such violation and
shall promptly confirm any such report in writing to that party's
compliance officer. Each party shall cooperate with the other in all
respects in connection with the enforcement of any sanctions against any
Investment Specialist imposed by CoreLink or by any federal or state
regulatory authorities, securities exchanges, clearing corporations or
associations, associations of brokers and dealers or any other entity
having jurisdiction over the operation of the Investment Desks and the
conduct of the Investment Specialists. Such disciplinary measures may
include suspension or dismissal of any Investment Specialist as a
representative or agent of CoreLink. If either party suspends or dismisses
a Investment Specialist, the other party, after receipt of notice of such
suspension or dismissal, shall not assign any duties in connection with the
securities or insurance services under this Agreement to such Investment
Specialist, during such suspension or after such dismissal.
i. Conduct of Either Party's Separate Business
Investment Specialists may not conduct any separate business on
behalf of or act as a separate agent for either party or the affiliates of
either party. Investment Specialists may discuss and refer Customers to an
appropriate employee of Institution if the Customer wishes to discuss
products or services provided by the Institution. Notwithstanding the
above, CoreLink acknowledges and agrees that the Investment Specialists
will sell an asset allocation program on behalf of the Institution and may
conduct the purchases and sales of products included with such programs
with other broker dealers.
j. Training
CoreLink shall determine and supervise the training that will be
required of Investment Specialists except for training in connection with
obtaining or maintaining any licenses to carry out the securities or
insurance services contemplated by this Agreement. Institution shall make
the Investment Specialists available for training. If Institution requests
extraordinary training of Investment Specialists it may be provided at the
Institution's expense.
5. Institution's Other Employees
a. Limit Employees Activities
The parties shall take such steps as are reasonably available to
them to insure that all employees of the Institution, except the Investment
Specialists with appropriate licenses, who come into contact with Customers
or potential Customers, at all times, limit their activities and functions
with respect to the offer and sale of Products as described in sub-
paragraph 5b.
b. Limitations on Employees
Employees of the Institution other than Investment Specialists who
have appropriate licenses to sell a particular Product:
i) Shall not discuss the merits of, give advise regarding, or
recommend a Product to Customers or potential Customers,
ii) Shall refer any Customer or potential Customer with
questions
regarding that Products to an appropriately licensed Investment
Specialist within the Branches, and in the absence or
unavailability
of any such Investment Specialist shall [1] make an appointment
for
the Customer or potential Customer to meet such an Investment
Specialist at any Branch at some future time, [2] take a message
from the Customer or potential Customer and deliver it to such an
Investment Specialist, or [3] provide Customer or potential
Customer
with a telephone and number to call such an Investment Specialist,
iii) Shall refer any communication, whether written or
telephonic,
regarding or concerning any of that Product to such a Investment
Specialist,
iv) Will not be compensated in any manner which is dependent
upon
the sale of that Product,
v) May distribute literature regarding services provided by
Investment Specialists, and
May provide certain other limited types of information and
administrative, or ministerial assistance to Investment
Specialists.
c. Training
CoreLink shall determine and supervise the training that will be
required for employees of the Institution other than the Investment
Specialists with appropriate licenses. During the implementation of the
sales program contemplated herein, CoreLink will conduct orientation and
training meetings with appropriate employees and will assist the
Institution in developing such a training program as described more fully
in Schedule C. All such training shall be at CoreLink's expense.
d. Confidential Customer Information
Institution's employees shall not disclose to CoreLink information
regarding customers of the Institution, to the extent such disclosure would
violate laws or regulations applicable to the Institution.
e. Monitoring by Institution
The Institution shall distribute a written manual provided by
CoreLink which specifies the limitations on the activities of the
Institution's employees with regard to activities that require licenses
from securities and insurance authorities. Institution shall monitor the
activities of their employees for compliance with the limitations set forth
in this paragraph 5 and take any required action to ensure such employees
comply with these limitations. Any violations of these limitations known
to the Institution or of which the Institution has reasonable grounds for
suspicion shall be promptly reported to CoreLink. Institution shall
cooperate and assist CoreLink should CoreLink elect to review the
activities of Institution employees other than the Investment Specialists
for compliance with these limitations.
f. Incentive Compensation
The Institution may compensate its employees, other than the
Investment Specialists who are properly licensed and registered, for
referring potential Customers to properly licensed Investment Specialists
with the prior written consent of CoreLink. Any compensation for referrals
paid to such employees shall not be determined by the sale of any Product
to the person referred and shall be in the form of a "flat dollar amount"
referral fee as described in Section 413 of the requirements of the Office
of the Comptroller of the Currency Handbook for National Bank Examination
("OCC Section 413") as amended from time to time..
6. Records, Access to Records
a. CoreLink Records
CoreLink will maintain proper records, books and accounts at the
Branches, its headquarters, and such other locations as required by law,
regarding the offer and sale of Products under this Agreement.
b. Access for CoreLink
CoreLink's supervisory personnel and representatives of regulatory
authorities or other entities having jurisdiction over CoreLink shall have
reasonable access at all times during normal business hours to the
Investment Desk area, and to all records maintained in connection with the
operation of the securities and insurance services provided by the
Investment Specialists. Institution shall cooperate with reviews of the
records and the activities of the Investment Specialists by CoreLink's
management, its auditors and regulators.
c. Access for Institution
Institution's management shall have unimpeded access at all times
and the Institution's agents, auditors, and regulators shall have
reasonable access the Investment Specialists and to records maintained in
connection with the securities and insurance services provided by the
Investment Specialists at the Branches to verify compliance with all
applicable regulations, guidelines, restrictions and contract terms.
CoreLink will periodically provide Institution with lists of Customers
receiving service through the Investment Specialists. CoreLink shall
cooperate with reviews of the records and the activities of the Investment
Specialists by the Institution's management, its auditors and regulators.
7. Insurance Coverage
CoreLink shall maintain such insurance as is typically carried by
companies providing similar services, including errors and omission
coverage of not less than two million dollars per event, a fidelity policy
of at least five hundred thousand dollars per event, and SIPC coverage.
8. Marketing
a. Referral Program
Institution will work with CoreLink to develop a prospective buyer
referral program.
b. Literature Development
CoreLink will assist Institution in the design and development of
sales literature and advertising as and to the extent the Institution
determines to issue such sales literature and advertising. Any marketing
materials must be approved, in advance, by CoreLink.
c. Costs
All costs incurred in marketing efforts for the securities and
insurance that are the subject of this Agreement, including, but not
limited to direct mail, lobby posters and counter solicitation cards,
advertising, seminars and public relations, shall be committed to and paid
for solely by the Institution, unless CoreLink agrees in writing to pay for
a particular expense. The Institution shall have the sole discretion as to
whether to incur such costs.
d. Contents
All marketing materials must clearly indicate that:
i) the Products are available to Customers through CoreLink, a
registered broker-dealer, and the Products are not available
through
the Institution;
ii) CoreLink and the Institution are separate and distinct
corporate entities not affiliated with each other;
iii) the Products are not deposit products or other obligations
of, or guaranteed by, the Institution;
iv) the Products are not insured by the FDIC; and
v) the Products are subject to investment risks, including
possible loss of the principal amount invested.
e. Compliance
CoreLink undertakes to assure that any such marketing materials will
comply with applicable federal and state securities and insurance laws and
regulations as well as the applicable rules of the NASD regarding such
advertising. Institution undertakes to assure that any such materials
shall comply with applicable banking laws and regulations, and applicable
state law and regulation on advertising, including without limitation OCC
Section 413 and the Interagency Statement.
f. Institution's Approval
CoreLink will not engage in any marketing efforts or use any
materials relating to selling Products through Institution without prior
approval by the Institution.
9. Payments for Services
a. By CoreLink
As compensation for the services of the Investment Specialists,
rental of the space, allocated cost and usage of telephone system,
equipment, and maintenance of such systems, furnishings, supplies and
equipment used in the operation of the Investment Desk Area and other such
space in back office areas as may be provided for use by CoreLink in the
offices of the Institution, and other services provided by the Institution
from time to time, CoreLink shall pay Institution the percent of gross
revenues received by CoreLink as set forth in Schedule A. By the fifteenth
day of each month during the term of this Agreement, CoreLink shall deliver
a statement of all revenues it received during the prior month from the
activities of the Investment Specialists. Payments to the Institution will
accompany the monthly report for each month of the term of this Agreement.
Subsequent to the termination of this Agreement, for as long as Institution
is liable for charge backs pursuant to paragraph 9a, CoreLink will continue
to pay Institution the share of insurance and annuity commissions specified
on Schedule A for new premiums and additions to annuity contracts purchased
by Customers prior to the date of termination of this Agreement.
b. By Institution
Institution will pay to CoreLink the Implementation / Set up Fee set
forth on Schedule B within 30 days after receipt of an invoice from
CoreLink. Institution will be responsible for paying for all other expenses
listed in Schedule B. Any amounts advanced by CoreLink for expenses listed
on Schedule B with the consent of Institution, will be reimbursed by
Institution within 30 days of billing from CoreLink.
c. Commission Chargebacks
The Institution shall be liable for commission chargebacks on early
termination of insurance and annuity products due to cancellation,
surrender or death. The Institution shall be liable to CoreLink for the
same portion of any such chargeback made against CoreLink, as it received
in commissions as set forth in Schedule A. The Institution shall be liable
for such chargebacks for the full period during which an insurance company
may chargeback commissions previously paid to CoreLink for such early
termination of policies and contracts without regard to the termination of
this Agreement. Such chargebacks will be offset by CoreLink against
payments due to Institution under paragraph 9c. To the extent such
chargebacks exceed amounts due under paragraph 9c, Institution shall pay
CoreLink within 30 days of receipt of a statement.
10. Sole Provider
a. Agreement not to Sell or Market Products
It would be harmful to CoreLink's ability to perform under this
Agreement if it had to compete with the Institution or other persons
offering similar products to Customers through or with the support of the
Institution, or any affiliate of the Institution. During the term of this
Agreement, the Institution will not, and it will act to prevent any
affiliate from, entering into any agreement, or undertaking on its own
behalf, to sell or assist in the selling or marketing, of any security,
annuity or life insurance product except as provided in this Agreement.
b. Exception for Operations of Trust Department and
Institution's
Own Account
CoreLink acknowledges that the Institution currently does or may
purchase and sell securities, annuities, and insurance products for its own
investment account or on behalf of customers of its trust department. This
Agreement will not affect the ability of the Institution or its trust
department to continue to make such purchases or sales.
c. Exception for Asset Allocation Program
The parties agree that the Investment Specialists may perform
services from time to time in connection with an asset allocation program
to be sold by Institution. The purchase and sale of products included
within that program may be handled by a broker-dealer other than CoreLink.
CoreLink agrees that it will review all such proposed asset allocation
programs which will be sold by Investment Specialists and it will work with
the Institution to promptly confirm that such programs comply with all
applicable regulatory requirements. In consideration for the benefits
received by CoreLink under this Agreement, CoreLink agrees that all costs
incurred by CoreLink in reviewing proposed asset allocation programs,
monitoring such programs, and any other necessary regulatory
responsibilities imposed upon CoreLink as a result of present and future
asset allocation programs shall be borne by CoreLink.
d. Exception for Business Sweep Account
If the Institution elects to offer business customers an account
sweeping service to automatically transfers funds over a specified level
into a money market or similar type of mutual fund investment, the
Institution will request CoreLink to make a proposal to offer that service.
This Agreement will not limit the Institution's ability to offer such an
account sweeping service if CoreLink declines to make a proposal, or if the
Institution prefers to offer such a sweep service on its own or with
another broker dealer.
11. Confidentiality
Information concerning the customers of the Institution, their
identity, financial status, addresses and phone numbers, and all
information concerning the Institution or CoreLink and their respective
operations that is not generally available to the public is confidential
information. Each party agrees to use and to ensure that its employees,
officers, agents, and affiliates agree to use such confidential information
and any notes about or copies of such material only in a manner consistent
with its duties and responsibilities under this Agreement and not for the
separate benefit of itself or its affiliates. All confidential materials,
including any copies, which are not necessary records required by law to be
retained by each party, shall be returned to the providing party promptly
after request. This paragraph does not restrict the use and disclosure of
information which was known by a party prior to its receipt from the other;
which is or becomes publicly known through no fault or omission
attributable to the receiving party or any of its employees, officers,
agents, and affiliates; which is lawfully obtained by a party from a third
person in lawful possession thereof; or which is required to be disclosed
by law to the extent so required by law or regulation. The obligations of
each party with respect to said confidential information shall continue
after termination of this Agreement.
12. Representations and Warranties of CoreLink
CoreLink represents and warrants to the Institution that; (a)
CoreLink has full legal right, power and authority to enter into this
Agreement and to undertake all responsibilities of CoreLink in this
Agreement; (b) this Agreement has been duly authorized, executed and
delivered by CoreLink and constitutes its legal, valid and binding
agreement; and (c) no consent, approval, authorization or order of any
governmental agency or third party, is required to be obtained by CoreLink
prior to execution of this Agreement.
13. Representations and Warranties of the Institution
The Institution represents and warrants to CoreLink that (a) the
Institution has full legal right, power and authority to enter into and
perform this Agreement; (b) this Agreement has been duly authorized,
executed and delivered by the Institution and constitutes the legal, valid
and binding agreement of the Institution; and (c) no consent, approval,
authorization or order of any governmental agency or authority or third
party, is required to be obtained by the Institution prior to execution of
this Agreement.
14. Indemnification of Institution
CoreLink shall indemnify and hold the Institution harmless against
all claims, liabilities and losses to which the Institution may become
subject (including legal or other expenses reasonably incurred by it in
connection with investigating or defending any claim, action, suit, or
proceeding) arising out of (a) the negligent or willful misconduct of any
employee of CoreLink, except for Investment Specialists, (b) any act or
omission to act by any Investment Specialist acting as a registered
representative or licensed agent on behalf of CoreLink; (c) the failure of
CoreLink to remain a member of NASD or remain a duly licensed broker, or a
licensed life insurance agent under applicable federal and state laws; (d)
any violation of federal and state laws by CoreLink in connection with the
sale of securities or insurance under this Agreement; or (e) the breach by
CoreLink or any of its employees, officers, directors or agents of any
representations, warranties or covenants set forth in this Agreement.
15. Indemnification of CoreLink
The Institution shall indemnify and hold CoreLink harmless against
all claims, liabilities and losses to which CoreLink may become subject
(including legal or other expenses reasonably incurred by it in connection
with investigating or defending any claim, action, suit, or proceeding)
arising out of (a) the negligent or willful misconduct of any employee of
Institution, other than any action of an Investment Specialist described in
14(b) above (b) any act or omission to act by any Investment Specialist or
employee of the Institution in connection with an asset allocation program
without regard to any responsibility imposed by any regulatory authority on
CoreLink for or actual oversight by CoreLink of such programs or
transactions; (c) the failure of any employee of the Institution to become
or remain licensed, as required for the offering of an asset allocation
program under applicable federal and state laws; or (d) liability or
expense incurred in litigation arising from the Institution's enforcement
of disciplinary sanctions of an Investment Specialist imposed by CoreLink
or required by CoreLink to be enforced by the Institution; or (e) the
breach by Institution or any of its employees, officers, directors or
agents of any representations, warranties or covenants set forth in this
Agreement.
16. Space for CoreLink Program
a. Space
Institution will provide space for Investment Specialists to work,
to make and receive telephone calls in at least one branch and space to
meet with Customers in all branches.
b. Separation of Businesses
The parties shall separate their businesses as required by
applicable regulatory standards and as necessary to avoid confusion between
the business conducted by Institution and the business conducted by
CoreLink. That separation will include separation of records and physical
facilities used by each. The space used by Investment Specialists for
dealing with Customers shall be visually distinct and plainly
distinguishable to Customers as the space occupied by CoreLink. Signs will
be located on or near the desk or office used by any Investment Specialist
which shall clearly identify CoreLink as a separate and distinct entity not
affiliated with the Institution. Telephone inquiries related to securities
and insurance services will be directed to the Investment Specialists.
Confirmations, account statements and other customer communications will
clearly state they are being provided by CoreLink.
17. Term and Termination
The term of this Agreement commences on the date indicated on page
one and terminates at the end of the initial term, the renewal term, or
upon notice as provided in the following sub paragraphs:
a. Initial Term
The initial term of this Agreement will commence on the date
indicated on page one and terminate two years later.
b. Renewal Term
This Agreement will automatically renew for a renewal term unless
either party gives notice to the other at least ninety ( 90) days prior to
the end of the initial term. The renewal term shall commence on the day
after the initial term and terminate two years later.
c. Termination for Cause by CoreLink
CoreLink may terminate this Agreement immediately without notice
upon the occurrence of any event which (i) in the opinion of counsel for
CoreLink, would entitle the SEC, the NASD or any other federal or state
securities or other regulatory body to impose administrative or regulatory
sanctions or penalties upon CoreLink; or (ii) results in the failure, in
any material respect, of the Institution to abide by the terms set forth in
this Agreement.
d. Termination for Cause by the Institution
The Institution may terminate this Agreement immediately without
notice upon the occurrence of any event which, (i) in the opinion of
counsel for the Institution, would entitle the SEC, the NASD or any federal
or state securities or other regulatory body to impose administrative or
regulatory sanctions or penalties upon the Institution; or (ii) results in
the failure in any material respect of CoreLink to abide by the terms set
forth in the Agreement, or (iii) results in the Institutions reasonable
belief that CoreLink is experiencing financial difficulties that are likely
to prevent it from performing as provided in this Agreement.
e. Ownership of Customer Accounts
The customer lists and relationships developed at the Branches are
the property of the Institution. When this Agreement terminates, either
through expiration of the term or upon notice, CoreLink may continue to
service those accounts, sending periodic statements, responding to
inquiries from such customers, and required information regarding
investments held by such customer. After termination statements will
indicate the same relationship with the Institution as before, unless the
Institution directs CoreLink to delete such identification. Upon request by
the Institution, CoreLink will help to transfer such accounts to a
replacement broker-dealer designated by the Institution. CoreLink will
provide the current customer lists and account holdings in such formats
requested by Institution as are readily available or which are necessary to
return the data to the Institution and shall not retain any copies or
duplicates of such information. CoreLink agrees to execute consents as may
be reasonably required to effect such transfer. All trailing income (12-b
fees), if any, will accrue to CoreLink until such transfer. Accounts not
transferred within six months of the date of termination will be considered
abandoned and will become the property of CoreLink.
f. Return of Materials
Upon termination, each party shall promptly return to the other all
documents, market materials, and other records which have been made
available to that party.
18. Service Marks; License: Right to Use
Each party recognizes and acknowledges that the other may own the
rights to use a logo or trademark (herein, a "Service Mark"). This
Agreement does not constitute a grant or a license or sublicense to exploit
any such Service Mark. Each party agrees that it will not use the other's
Service Mark without the owner's prior written consent.
19. Notices
All notices, requests and other communications to any party shall be
in writing and shall be given to such party at its address or number as
such party may specify for such purpose. Each such notice, request or other
communication shall be effective (i) if given by facsimile or telex, when
such facsimile is transmitted to the telex or facsimile number specified in
this paragraph and the appropriate answer back is received, (ii) if given
by mail, 72 hours after such communication is deposited in the mail with
first class postage prepaid, addressed to the party, or (iii) if given by
any other means, when delivered at the address specified in this paragraph.
If to the Institution
Ms. Rosemary Dunn, Vice President
Santa Barbara Bank and Trust
1021 Anacapa Street
Santa Barbara, California 93101
Telephone: (805) 564-6300
Facsimile: (805) 564-6293
If to CoreLink
Mr. A. Ray Freeman, President
CoreLink Financial, Inc.
Gateway Boulevard, Suite 750
Concord, California 94520
Telephone: (510) 602-9300
Facsimile: (510) 602-9310
20. Miscellaneous
a. Notification of Certain Events
CoreLink agrees to provide Institution with notice of any event that
is likely to have a material adverse impact on the ability of CoreLink to
carry out its obligations under this agreement.
b. Compliance with Applicable Regulations
All parties to this Agreement shall comply with OCC Section 413, and
all applicable banking regulations regarding retail non-deposit investment
sales by or at the Institution including but not limited to the Interagency
Statement and applicable guidelines published by the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), the Federal Reserve Board (FRB), and the California
State Department of Banking, and including the provisions of OCC Section
413 relating to customer disclosures.
c. Entire Agreement
This Agreement constitutes the entire understanding of the parties
with respect to this subject matter. This Agreement may be amended only in
writing signed by both parties. Neither party may assign its rights under
this Agreement without the prior written consent of the other party. This
Agreement shall be binding upon, inure to the benefit of, and be
enforceable by and against, the successors and permitted assigns of the
parties.
d. Remedies
Neither party shall be liable to the other for special, indirect, or
consequential damages arising out of any breach of its obligations under
this Agreement other than the obligation to indemnify set forth in
paragraphs 14 and 15 of this Agreement. Each of the parties to this
Agreement acknowledges that breach of this Agreement may cause the other
party irreparable harm which may not be adequately compensated by money
damages. Therefore, in the event of a breach or threatened breach by either
party, injunctive or other equitable relief will be available to the other
party. Remedies provided herein are not exclusive.
e. Severability
If any court of competent jurisdiction, regulatory agency or self-
regulatory organization shall declare invalid any provision of this
Agreement, such invalidity shall have no effect on the other provisions
hereof, which shall remain valid and binding and in full force and effect,
and to that end the provisions of this Agreement shall be considered
severable.
f. Waiver
The failure of either party to exercise any right, power, remedy or
privilege in this Agreement or existing, now or hereafter, under
controlling law, shall not be construed to be a waiver of such right,
power, remedy or privilege, or to preclude its further exercise.
g. Agency
Neither this Agreement nor any operation under this Agreement is
intended to be, shall be deemed to be, or shall be treated as creating an
agency relationship, general or limited partnership, association or joint
venture between CoreLink and the Institution.
h. Headings
The headings of the paragraphs of this Agreements are for the
convenience or reference and shall nor affect its construction or
interpretation.
i. Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, without reference to otherwise
applicable principles of conflicts of laws.
j. Counterparts
This agreement may be executed in counter parts, each of which shall
be deemed an original, but all of which taken together shall constitute one
and the same instrument.
k. Consent to Jurisdiction and Venue
Each party herein consents (i) to the jurisdiction of the courts in
the State of California and the United States for any judicial district
located within California invoked in any action or proceeding relating to
this Agreement, the breach hereof or the transactions contemplated hereby,
and (ii) to the venue of such action in the County of Santa Barbara (or any
judicial district of a court of the United States as shall include the
same.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date set forth on page one.
SANTA BARBARA BANK & TRUST CORELINK FINANCIAL,INC.
____________________________ ___________________________
By: Rosemary Dunn By: A. Ray Freeman
Vice President - Product Manager President
Schedule A
Revenue Sharing Payments
CoreLink will reimburse Institution for the Investment Specialists,
space usage, telephones, furnishings, supplies, equipment, computer
software, and general administration as provided in paragraph 9 of the
Agreement as follows:
Source of Income Percentage Paid to
Institution
Commissions received by CoreLink on sales
of mutual funds (as a percentage of dealer
concessions) sales of mutual funds (as a
percentage of the dealer concession) 75%
Commissions received on sales of variable or
fixed annuities 75%
Commissions received on stocks and bonds 75%
(after clearing
costs)
Sales of life insurance products To be determined if
and
when offered
12b-1 fees 75%
Schedule B
Expenses to be reimbursed to CoreLink or paid directly by the Institution
Travel cost of CoreLink personnel if at the request of the
Institution (excludes normal sales management)
Travel expenses of Investment Specialists
Fed Wire charges for money going into investments
Telecommunications lines for access to records on CoreLink's
computers
Cost of printing customized marketing and sales materials
Referral fees paid to bank employees
Laptop computers, CRT's and printers.
One-time implementation/set up fee of $5,000
Cost to subscribe to CDA Weisenberger Service (estimated at $300 per
year per specialist)
Schedule C
Initial Training Elements
Senior Management Overview - This is provided to senior managers
directly or indirectly involved with the program. It typically is a two
hour session during which the following is covered:
Management perspective on the program
Sale philosophy/sale process
Elements of a successful program
Compliance; front line; manager level; director level
The real impact of disintermediation
Expectations for revenues, costs and profit
Goal setting, tracking, and performance evaluation
Customer service measurement
Bank Officer and Employee Training - This is provided for all
customer contact employees and others as appropriate. Covered here are:
Basic principles of mutual funds and annuities
The regulatory environment and compliance issues, especially do's
and
don'ts
Overview of the program
Detailed description of products
Establishing accounts and related administrative details
Operations and CoreTrac systems
Customer service
Overview of the marketing/sales process
Investment Specialist Training - This consists of a 4 day classroom
training for newly hired specialists.
Ongoing Training - CoreLink will provide ongoing training for the
Institution's branch employees and Investment Specialists in the form of
one-on-one coaching sessions, brief employee training sessions, and
training for Investment Specialists at regional sales meetings. This
training will be provided by CoreLink's Regional Vice President, Training
Director, or other personnel employed by CoreLink.
Schedule D
Technological Support
CoreLink will provide the Institution with access to the following
programs on CoreLink's computers:
CoreContract contact management and communications system
CoreAdvisor customer profiling and compliance system
CorePresentation library of approved computer based sales
presentations
CoreTrac database of retail program customers
CDA Weisenberger mutual fund analysis database of 3,800 funds
Note 1 The Interagency Statement on Retail Sales of Non Deposit
Investment Products issued February 15, 1994, issued jointly by the Office
for the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and the
Office of Thrift Supervision as that statement may be amended from time to
time.
Exhibit 10.2.1
IRA CUSTODIAL AGREEMENT
This Custodial Agreement ("Agreement") is entered as on 24th day of
October, 1994 between CoreLink Financial, Inc. ("CoreLink") and Santa
Barbara Bank and Trust, a banking corporation organized under the laws of
the state of California ("Institution").
WITNESSETH
WHEREAS, CoreLink has entered into a Securities and Insurance Services
Agreement with the Institution, dated as of September 19, 1994 (the
"Securities and Insurance Services Agreement"), pursuant to which CoreLink
is to distribute and sell mutual funds and certain insurance products and
provide certain securities brokerage and investment advisory services to
the general public at the branch offices ("Branches") of the Institution
and
WHEREAS, CoreLink wishes to provide for the offering of self-directed
individual retirement accounts ("IRAs") including simplified employee
pension ("SEP") IRAs to customers of Institution; and
WHEREAS, the Institution and CoreLink wish for the Institution to serve as
custodian of such IRAs and SEP IRAs and for CoreLink to perform certain
custodial functions and responsibilities on behalf of the Institution as
its agent, all in accordance with the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the parties hereto agree as
follows:
1. IRA AND CUSTODIAL SERVICES PROVIDED BY CORELINK. CoreLink shall
provide forms and functions relating to self-directed IRAs, including SEP
IRAs (such IRAs and SEP IRAs also referred to herein as "Accounts") as
described in detail on Exhibit A attached hereto and hereby incorporated
herein by this reference. For this purpose, "self-directed IRAs" means
IRAs the investments of which are directed by the customer or the
customer's duly appointed investment manager (and not by the custodian) and
which may include assets other than deposit accounts at the Institution.
CoreLink shall provide such forms and functions to the Institution and
customers at the Branches. The Institution shall have the right, but not
the obligation, to review all disclosures, contract documents, and
advertisements in connection with the Accounts prior to their use by
CoreLink, to ensure compliance with all applicable laws, rules, regulations
and regulatory guidelines.
2. CUSTODIAL SERVICES PROVIDED BY INSTITUTION. (a) Appointment of
Agent and Attorney-In-Fact. The Institution consents to being named as
custodian for Accounts established by customers at the Branches in
accordance with documentation provided by CoreLink as described in Exhibit
A. The Institution hereby delegates to CoreLink the responsibilities set
forth in Exhibit A and appoints CoreLink to act as the Institution's agent
and attorney-in-fact for the limited purpose of maintaining the custodial
accounts in accordance with Exhibit A, all applicable laws and the
governing Account documents.
(b) Monitoring of CoreLink's Performance. The Institution shall be
responsible for monitoring CoreLink's actions as its agent and attorney-in-
fact, provided, however, that the failure of the Institution to monitor
CoreLink's actions shall not relieve CoreLink of its obligations under this
Agreement, including its indemnification obligations as set forth in
Paragraph 9. CoreLink shall provide a quality assurance program as set
forth in Exhibit A as a guideline for the Institution to assure compliance
with all requirements of this Agreement and applicable laws, rules and
regulations.
(c) Tax Withholding Obligations. The Institution acknowledges and
agrees that the Institution, and not CoreLink, is obligated to remit to any
governmental taxing agency and amounts required by such governmental agency
or requested by a customer to be withheld from and of the IRAs or SEP IRAs
("Withholding Obligations"). Accordingly, CoreLink will remit to the
Institution on a timely basis all sums withheld by it representing
Withholding Obligations, together with a report showing the customer's
name, address, tax identification number and other required information,
and the Institution will remit such sums to the governmental agency along
with the appropriate documentation.
(d) Obligation of Sound Trust Administration. The Institution
acknowledges that, as custodian for the Accounts, it is obligated to and it
will exercise principles of sound trust administration, that is ultimately
responsible for fulfilling its fiduciary obligations as custodian for the
Accounts, and that the act of assigning CoreLink as its agent and attorney-
in-fact will not exempt the Institution from its fiduciary obligations. In
no event, however, will the Institutions exercise any investment discretion
with respect to the Accounts.
3. MAINTENANCE FEES. Neither CoreLink not the Institution will
charge an annual maintenance fee to administer the Accounts under this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF CORELINK. CoreLink hereby
represents and warrants to the Institution that (a) it is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California, with full power and authority to carry on its business
as now being conducted, (b) it is and will remain duly licensed with all
applicable state securities regulatory bodies and the National Association
of Securities Dealers (NASD), and (c) the execution, delivery and
performance by CoreLink of this Agreement (i) are within CoreLink's
corporate power, (ii) have been duly authorized and approved any necessary
corporate action, (iii) do not contravene, conflict with or constitute a
default under any provision of applicable law or regulations of CoreLink's
articles of incorporation or by-laws or any judgment, injunction, order,
decree, material agreement or material instrument binding upon CoreLink and
(iv) do not require the consent or approval of any governmental authority
or non-governmental third party not already obtained.
5. REPRESENTATIONS AND WARRANTIES OF INSTITUTION. The Institution
hereby represents and warrants to CoreLink that (a) it is a bank duly
organized and validly existing under the laws of California, with full
power and authority to carry on its business as now being conducted, (b)
the execution, delivery and performance by the Institution of this
Agreement (i) are within the Institution's corporate power, (ii) have been
duly authorized and approved by all necessary corporate action, (iii) do
not contravene, conflict with or constitute a default under any provision
of applicable law or regulations of the Institution's charter or by-laws or
any judgment, injunction, order, decree, material agreement or material
instrument binding upon the Institution, and (iv) do not require the
consent or approval of any governmental authority or non-governmental third
party not already obtained.
6. CONFIDENTIALITY. CoreLink agrees that all information with
respect to customers of the Institution shall be the sole property of the
Institution and such information shall be kept confidential. CoreLink
acknowledges and agrees to use customer information only in a manner
consistent with and necessary to perform its duties and responsibilities
hereunder, and not for CoreLink's or its affiliate's advantage. CoreLink
agrees to comply with all laws, rules and regulations applicable to the
Institution regarding disclosure of customer account information to third
parties. Promptly following the termination of this Agreement as provided
for herein, all information regarding customers previously furnished to or
made available to CoreLink by the Institution shall be returned to the
Institution by CoreLink; provided that CoreLink may continue to use such
information in servicing Account customers until a replacement provider is
found and to retain such customer information as required to comply with
all regulations of the NASD, the Securities and Exchange Commission (SEC)
or other regulatory bodies. CoreLink shall disclose to the Institution any
instance in which CoreLink has used customer information, and the
opportunity or profit received by CoreLink or any of its subsidiaries,
principals or affiliates from such use.
7. ACCESS TO INFORMATION. The Institution and its agents, auditors
and regulators shall have reasonable access at all times to all records
maintained by CoreLink in connection with this agreement and to all
CoreLink personnel for the purpose of on-going monitoring and verifying
compliance with all applicable laws, rules, regulations and guidelines
relating to the provision of services under this Agreement, and CoreLink
shall provide all reasonable cooperation in connection therewith. CoreLink
shall provide the Institution with such information with respect to its
financial ability to perform this Agreement and such other information with
respect to its lawful status with its regulators and its provision of
services hereunder which the Institution or its regulators require.
8. FURTHER ASSURANCES. CoreLink shall take all steps reasonably
required by the Institution or the Institution's regulators to ensure that
the provision of IRA account services and the Institution's role as
custodian of the Accounts comply with all rules, laws, regulations and
guidelines, including (i) placing on any Account contract documents,
disclosures or advertisements of any legends or disclosures as may be
required and (ii) disclosing accurately to all third parties, when asked or
when otherwise necessary, the relationship between the Institution as
custodian of the Accounts and CoreLink as its agent.
9. INDEMNIFICATION. (a) Indemnification by CoreLink. CoreLink
will indemnify and hold harmless the Institution against any and all
losses, claims, damages, liabilities, actions, costs or expenses, joint or
several, to which the Institution may become subject (including any legal
or other expenses reasonably incurred by it in connection with
investigating any claim against it and defending any action and any amounts
paid in settlement or compromise, provided CoreLink shall have given its
prior written approval of such settlement or compromise), insofar as such
losses, claims, damages, liabilities, actions, costs or expenses arise out
of or are based upon:
(i) any act or omission to act, whether negligent, reckless,
intentional or otherwise, by CoreLink, its employees, officers,
directors or agents, in the performance of its obligations
pursuant to this Agreement;
(ii) the failure of the documentation provided by CoreLink in
connection with the Accounts to conform to applicable laws,
rules and regulations, including state or federal taxation
laws; and
(iii) the failure of CoreLink, its employees, officers, directors
or agents to comply with applicable federal and state taxation
and securities and other laws, rules and regulations in
connection with this Agreement.
(b) Indemnification by the Institution. The Institution will
indemnify and hold harmless CoreLink against any and all losses, claims,
damages, liabilities, actions, costs or expenses, joint or several, to
which it may become subject (including any legal or other expenses
reasonably incurred by it in connection with investigating any claim
against it and defending any action and any amounts paid in settlement or
compromise, provided the Institution shall have given its prior written
approval of such settlement or compromise), insofar as such losses, claims,
damages, liabilities, actions, costs or expenses arise out of or are based
upon:
(i) any act or omission to act, whether negligent, reckless or
intentional, by the Institution, its employees, officers,
directors and agents (other than CoreLink) in the performance
of its obligations under this Agreement, other than any claims
covered under Paragraph 9(a) of this Agreement; and
(ii) the failure of the Institution, its employees, officers,
directors or agents (other than CoreLink) to comply with all
applicable federal and state taxation and other laws, rules
and regulations in connection with this Agreement, other than
claims covered under Paragraph 9(a) of this Agreement.
(c) Notice of Claims and Assumption of Defense. If any event
occurs for which the indemnified party is entitled to indemnification under
this Agreement, the indemnified party shall provide the indemnifying party
with written notice of such event as soon as practicable, after such time
as the indemnified party has actual knowledge of the occurrence of such
event but not later than fifteen (15) days after such time as the
indemnified party receives notice that an action has been filed in a court,
or action has been taken by any administrative agency alleging the
occurrence of an event that entitles the indemnified party to
indemnification. The indemnifying party shall be entitled, in its sole
discretion and at its sole cost and expense, to contest or defend the
indemnified party's liability under such event; provided that counsel for
the indemnifying party shall be satisfactory to the indemnified party. The
indemnified party may participate in such defense but only at its expense.
Neither the indemnified party not its successors or assigns shall admit any
liability with respect thereto or settle, compromise, pay or discharge the
same without prior written consent or the indemnifying party, so long as
the indemnifying party is contesting or defending such liability in good
faith. The indemnified party shall cooperate with the indemnifying party
in the contest or defense thereof. Any settlement is subject to the mutual
consent of the indemnified and the indemnifying party, which consent shall
not be unreasonably withheld.
10. TERM AND TERMINATION. The term of this Agreement shall be
concurrent with the term of the Securities and Insurance Services
Agreement, including any renewals or extensions thereof, and shall
automatically terminate upon termination of the Securities and Insurance
Services Agreement, unless earlier terminated as provided below.
(a) Termination Upon Notice. This Agreement may be terminated
by either party by giving at least ninety (90) days' written notice to the
other party.
(b) Termination for Cause. This Agreement may be terminated
upon a default by the other party of its obligations hereunder by giving
thirty (30) days written notice to the other party and such default
continues uncorrected at the end of the 30 day notice period.
11. AMENDMENT AND BINDING NATURE OF AGREEMENT. This Agreement may
be amended, modified or supplemented only by a writing signed by both
parties. This Agreement shall be binding upon all successors, assigns or
transferees of the parties. Any assignment of this Agreement shall be
subject to the written approval of the non-assigning party and the
requisite review and/or approval of any regulatory agency or self-
regulatory body whose review and/or approval must be obtained prior to the
effectiveness of such assignment.
12. NOTICES. All notices delivered hereunder shall be delivered by
certifies mail, return receipt requested, at the following addresses, or to
such other address as either party may specify, in writing, to the other
party:
If to CoreLink:
Mr. A. Ray Freeman, President
CoreLink Financial, Inc.
1855 Gateway Boulevard, Suite 750
Concord, CA 94520
Telephone: (510) 602-9300
Telecopier: (510) 602-9310
If to the Institution:
Ms. Rosemary Dunn
Vice President
Santa Barbara Bank and Trust
1021 Anacapa Street
Santa Barbara, CA 93101
Telephone: (818) 865-3273
Telecopier: (818) 706-0925
13. CONTROLLING LAW. Except regarding matters controlled by
federal securities, taxation or banking law, this Agreement shall be
governed by and construed in accordance with the laws of the State of
California
14. HEADINGS. The headings preceding the text hereof have been
inserted for convenience and reference only and shall not be construed to
affect the meaning, construction or effect of the Agreement.
15. SEVERABILITY. Should any term, provision or condition of this
Agreement be held to be invalid, unenforceable, or illegal by any court,
regulatory agency or self-regulatory body, such invalidity,
unenforceability or illegality shall attach only to such term, provision,
or condition, and the validity and enforceability of the remaining portions
of this Agreement shall not be affected.
16. WAIVER. The failure of either party to exercise any right,
power, remedy or privilege contained in this Agreement or now, or
hereafter, existing under controlling law, shall not be construed to be a
waiver of such right, power, remedy or privilege or to preclude its further
exercise thereof.
17. REMEDIES. Neither party shall be liable to the other for
special, indirect or consequential damages arising out of any breach of its
obligations under this Agreement other that the obligation to indemnify set
forth in Paragraph 9 of this Agreement. Each of the parties to this
Agreement acknowledges that breach of this Agreement may cause the other
party irreparable harm which may not be adequately compensated by money
damages. Therefore, in the event of a breach or threatened breach by
either party, injunctive or other equitable relief will be available to the
other party. Remedies provided in this Agreement are not exclusive.
CORELINK FINANCIAL, INC. SANTA BARBARA BANK AND
TRUST
By: By:
A. Ray Freeman Rosemary Dunn
President Vice President
EXHIBIT A
CORELINK RESPONSIBILITIES
1. Provision of Documents and Forms. CoreLink will provide a Form
5305A, self-directed IRA/SEP IRA Custodial Agreement, with expanded
Articles VIII and IX, and a Disclosure Agreement to each customer opening
an Account. CoreLink shall be responsible for providing the Institution's
customers with an Adoption Agreement and all other forms and documentation,
including proper disclosures necessary to accurately maintain the Account
in accordance with all applicable rules and regulations, including those of
the Internal Revenue Service (IRS). All documentation will specify that
the Institution is the custodian of the account; however, an authorized
person from CoreLink will have authority to sign in the custodian's
capacity as its agent and attorney-in-fact pursuant to Paragraph 2(a) of
the Agreement. CoreLink shall be responsible for providing forms and
updating such forms as necessary in order to assure compliance with
applicable tax laws.
2. Provision of Account Information to Institution. CoreLink shall
provide the Institution, on a monthly basis, a list, in alphabetical order
by customer name, of all Accounts opened of which the Institution is the
named custodian.
3. Tax Reporting. CoreLink shall be responsible for all tax
reporting and shareholder mailings with respect to the Accounts, including,
without limitation:
Fair Market Value Reporting
1099R Reporting/Amended reporting if needed
5498 Reporting/Amended reporting if needed
70 1/2 mailing
Required Distributions
Annual Withholding Notice
The Institution's tax identification number will be used where proper in
such reporting.
4. Account Maintenance. CoreLink will be solely responsible for
receiving and timely responding to all Account inquiries and requests
(including Account inquiries and requests for information made by third
parties pursuant to valid legal process) and shall be solely responsible
for executing purchases, redemptions, data changes, exchanges, information
research and any other transactions pertaining to an Account. Any loss
caused by a CoreLink customer reporting or accounting error will be
resolved by CoreLink. CoreLink shall maintain a customer service telephone
number to which the Institution may direct customer inquiries that it
receives as custodian. Any statements or additional mailings generated
with respect to an Account shall be sent by CoreLink at its sole cost and
expense. CoreLink shall follow IRS guidelines and requirements in
maintaining the Accounts, including causing funds to be withheld from
distributions on an Account to the extent necessary to comply with customer
requests and applicable state and federal tax laws; such withheld amounts
shall be handled as set forth in Paragraph 2(c) of the Agreement.
5. Quality Assurance. (a) At the beginning of each calendar year,
CoreLink will provide the Institution a copy of its IRA Compliance Calendar
in substantially the form set forth as Exhibit B, listing all required
compliance filings and customer mailings required during the applicable
year.
(b) In January of each year, CoreLink shall provide the Institution a
list of all IRA and SEP IRA Accounts which identifies alphabetically the
name of the customer, type of account, year-end fair market value and the
amount of contribution during the preceding year.
(c) By April 1st of each year, CoreLink will provide the Institution
with a list of IRA customers who are or will be receiving distributions
from their Account. This list will include any mandatory distributions for
customers who have attained the age of 70 1/2.
(d) In May, CoreLink will prepare Form 5498 with respect to each
Account and mail it to the customer. CoreLink will notify the Institution
when such 5498s have been completed and mailed.
(e) CoreLink will promptly notify the Institution about any inquiries
or complaints received from customers or regulatory agencies pertaining to
the Accounts.
(f) The Institution may audit CoreLink's compliance with its calendar
and the Accounts at any time.
Exhibit 11.0
SANTA BARBARA BANCORP AND SUBSIDIARIES
<TABLE>
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
For the Years Ended December 31,
1994 1993
Primary Fully Diluted Primary Fully Diluted
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding 5,097,893 5,097,893 5,189,082 5,189,082
Weighted Average Options
Outstanding 500,378 500,378 532,172 532,172
Anti-dilution adjustment (1) (22,294) (22,294) (6,493) 0
Adjusted Options Outstanding 478,084 478,084 525,679 532,172
Equivalent Buyback Shares (2) (331,950) (330,729) (450,930) (431,319)
Total Equivalent Shares 146,134 147,355 74,749 100,853
Adjustment for Non-Qualified
Tax Benefit (3) (59,915) (60,416) (30,647) (41,350)
Weighted Average Equivalent
Shares Outstanding 86,219 86,939 44,102 59,503
Weighted Average Shares
for Computation 5,184,112 5,184,832 5,233,184 5,248,585
Fair Market Value (4) $ 25.49 $ 25.49 $ 20.47 $ 21.75
Net Income $12,950,918 $12,950,918 $12,929,853 $12,929,853
Per Share Earnings $ 2.50 $ 2.50 $ 2.47 $ 2.46
<FN>
(1) Options with exercise prices above fair market value are excluded because of their anti-dilutive
effect.
(2) The number of shares that could be purchased at fair market value from the proceeds were the adjusted
options outstanding to be exercised.
(3) The Company receives a tax benefit when non-qualified options are exercised equal to its tax rate times
the difference between the market value at the time of exercise and the exercise price. This benefit is
assumed available for purchase of additional outstanding shares.
(4) Fair market value for the computation is defined as the average market price during the period for
primary dilution, and the greater of that average or the end of period market price for full dilution.
</TABLE>
To Our Shareholders & Friends
For the twenty-ninth consecutive year, your company, Santa Barbara Bancorp
and its principal subsidiary, Santa Barbara Bank & Trust, are pleased to
announce record earnings. We firmly believe our continued success is a
direct reflection of the quality of our employees and their tireless
dedication to fulfill our competitive strategy outlined on the opposite
page. All efforts to fulfill these strategies eventually must result in
satisfied customers. To that end, 1994 was an exceptionally good year. Last
year SBB&T not only ranked as Santa Barbara County's number one financial
institution for individuals, but also served as many businesses as the next
four leading banks combined. This report outlines more of the initiatives
that SBB&T has undertaken to achieve its competitive strategy, along with
the results of these initiatives. We think once you have taken the time to
understand our direction and progress, you will agree that the bank is
poised for outstanding performance, profitability and growth in 1995 and
years beyond.
In order to accomplish results planned for this year and beyond, we have
added a number of people to our staff during the latter part of 1994 and
first quarter of 1995. We are proud of the quality of our people and are
anticipating another excellent year in 1995 as we execute our plans for
gaining new customers, offering existing customers more products, and
expanding into Ventura County.
As always, our success is your success. Thank you again for your loyal
support of our Company.
(Photograph of two individuals)
Donald M. Anderson David W. Spainhour
Chairman of the Board President
Financially Strong
Santa Barbara Bank & Trust continues to provide the strength and security
of the area's highest rated financial institution as determined by
independent industry rating services. We believe this consistent
recognition of ongoing superior performance is surpassed only by the
opportunities ahead for a financially strong, customer focused, community
oriented bank like Santa Barbara Bank & Trust.
(Photograph of three individuals)
Members of the Board of Directors serve on many different committees. Ed
Birch, Harry Powell and Dale Hanst are members of the Trust Committee.
In 1994, for the first time in thirty-five years of operation, the
Company's assets exceeded one billion dollars. Return on average assets in
1994 was 1.27%. As of year-end 1994, the Company had $1.07 billion in
assets and nearly $94 million in equity capital, for a capital to assets
ratio of 8.80%. Return on average equity for 1994 was 14.33%. In 1994,
the cash dividends declared were nearly $4 million, slightly more than 30%
of net income.
As the Company has grown, so has the strength of its balance sheet. In
1975, the company then operating as Santa Barbara National Bank, had year-
end assets of just over $99 million and earnings of just under $785,000.
Total capital was under $5 million, for a capital to assets ratio of 4.87%.
Cash dividends declared in 1975 were $150,000, slightly less than 20% of
net income.
As you will read later in this report, the company has the vision, the
financial strength and the quality of assets necessary to develop new
services and pursue new markets.
The stability of consistent direction and leadership from board members and
management with the bank since the 1960's combined with the strategic
addition of new board members and management over the years has allowed the
institution to grow and prosper.
Tony Guntermann, a member of the original board of directors, is still
active on the board and on the Executive Committee. Chairman of the Board
Donald Anderson and David Spainhour, President and CEO, began with the
Company before 1970. And in 1994, William S. (Tom) Thomas, Jr. was the
latest to join the management team as Senior Vice President and Division
Manager of Trust and Investment Services. Formerly President and COO of
Security Pacific-Arizona, Tom brings to the bank a depth of experience, as
well as the respect and friendship of colleagues at both Security Pacific
and Bank of America.
A detailed discussion of the Company's operations may be reviewed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" later in this report. In summary, the importance of financial
strength to the depositor, the borrower, the personal investor and the
shareholder is manifest.
Although most of our depositors carry balances far less than the Federal
Deposit Insurance Corporation (FDIC) coverage limits, our financial
strength is important to them. They know that the role of a community bank
is to act as a financial intermediary, using their deposits to fund the
credit needs of their neighbors. Without the ability to perform in the
marketplace with consistent profitability and superior asset quality, a
bank forfeits that role. Ask borrowers who have had to establish new
credit relationships because their bank has been put under regulatory fiat
or has been sold to a distant large corporation, and you will discover that
strong financial performance by their local financial institution is
important to them. Santa Barbara Bank & Trust's strong financial
performance and superior asset quality has enabled us to consistently
strengthen the local communities we serve.
As our communities, customers and shareholders continue to benefit from the
Company's past success, the groundwork for the future is being built. For
the innovative, customer-focused community bank with the financial strength
to compete, the opportunities are greater than ever.
(Photograph of three individuals)
Members of the Audit Committee who are also on the Board of Directors
include Frank Barranco, Dick Davis and Tony Guntermann.
A Value-Added Provider of A Broad Array of Financial Products
During research interviews conducted a few years ago, a group of customers
described SBB&T as "having the expertise of a big bank with the heart of a
local bank."
Those customer opinions are a direct reflection of our goal to continually
develop a broader line of personal and business financial services and to
have those services delivered by friendly, knowledgeable employees. This
service-oriented, people-focused approach has resulted in the creation of
what we consider to be an outstanding staff: employees who are willing and
able to respond to almost any financial need, ranging from opening the
simplest checking account to coordinating complex asset management
services.
Improving Services for Individuals
SBB&T continues to be the leading financial institution, serving
individuals, capturing nearly 30% of all market area deposits. While we are
justly proud of our top standing, we continue our commitment to strengthen
our leadership position in all service areas.
In 1994, one area of attention and expansion was residential real estate
lending. Enacting a series of process and product improvements, SBB&T
launched a highly competitive line of real estate loan options. In May, we
capitalized on the convenience of our retail office system and shortened
our loan pre-approvals to one day and loan funding to 10 working days.
Greater emphasis was also placed on establishing more personal
relationships with the realtor community. These steps resulted in a three-
fold increase in the market share of home loans in 1994. This dramatic rise
moved SBB&T from the seventh market position to the number two position.
Plans are under way to profitably become the number one provider of
residential real estate loan services in the markets we serve.
Another key area targeted for growth is the Trust and Investment Services
market. Here SBB&T is uniquely positioned as the only tri-county based
provider of these services.
(Photograph of three individuals)
In 1994, the Bank went from seventh to second place in market share of
residential real estate loans. In January of 1995, the Bank moved to first
place. Members of the Residential Lending Team include: Pam Martin, Escrow
Supervisor; Charles Browning, Real Estate Loan Officer and Product Manager;
and Pam Geremia, Loan Services Manager.
To ensure maximum service to our customers in this area, we provide skilled
trust and investment management professionals who are prepared to handle
the most challenging financial needs in a personalized, caring manner. This
approach has encouraged customers to entrust SBB&T with the management of
six hundred million dollars of money market instruments, stocks, bonds and
real estate. In addition, SBB&T continues to be the area's leading trust
company with one billion, two hundred million dollars of assets under
administration. Our wide range of asset management services include: trust
administration, investment management, real estate management, tax planning
and preparation, IRA rollovers and employee benefit planning.
In January 1995, SBB&T retail offices began providing a line of investment
products including high-quality annuities and mutual funds offered through
CoreLink, a broker-dealer. SBB&T also launched The Prepared Investor
Program (SM). This disciplined investment management process provides
access to the nation's leading money managers along with the professional
service of knowledgeable, locally-based investment counselors.
During 1995, the Trust and Investment Services Division will continue to
expand its line of services, enhancing its attractiveness to investors who
are seeking investment management expertise outside of a traditional trust
relationship.
Improving Services for Businesses
SBB&T holds a substantial lead in the business and professional market,
serving as many businesses as the next four leading banks combined. While
our success in this market segment is a source of great pride, we are
continually seeking ways to improve our ability to serve area businesses.
(Photograph of four individuals)
The Trust and Investment Services Division will enhance its business
development resources with assistance from officers including: Judy
Frazier, Trust Administrator--Ventura Office; Jim Williams, Alternative
Investments Manager; Wendy Penke, Trust Sales Officer; and Tom Thomas,
Trust and Investment Services Division Manager.
(Photograph of three individuals)
Commercial Market Sales and Service efforts will be better coordinated in
1995 to enhance team efforts in business banking. Shown here are: Sharon
Green, Business Services Manager; Bill Enholm, Commercial Loan Officer; and
Paulette Posh, Employee Benefits Trust Manager.
In 1994, we undertook an extensive review of how we develop and deliver
services to our commercial customers. Market research and analysis of the
local business and professional markets confirmed SBB&T's leadership in
nearly all areas of business financial services. Research also pointed to
opportunities to better serve special markets. In 1995, the Company will
expand its expertise to include the areas of international trade finance,
asset-based lending and certain Small Business Administration (SBA) loan
products as well as introduce other new cash management business services.
These services will be managed within a newly organized Business Banking
Division. This division will also oversee a variety of organizational
improvements and technological advancements that should enhance both
customer service and profitability levels.
Through closer supervision, the delivery of all business services will be
better coordinated. For instance, cash management services such as bankcard
business services, lock box, account reconciliation, and PC-based cash
management systems will be more effectively packaged with employee benefit
planning services and commercial real estate lending.
Measurably Superior Quality Service
Successful execution of our competitive strategy is achieved only when we
continue to exceed customer expectations. SBB&T seeks to achieve this goal
in two important ways: The first is through the hiring of employees who
make a personal commitment to anticipate and exceed the expectations of our
customers. The second, to support employee efforts we regularly interview
customers to determine how they judge our performance. These measurements
are used by office managers and department heads to make modifications that
will lead to increased market share and improved customer service levels.
For example, a combination of monthly customer mailings and mystery
shopping programs provides SBB&T Office Managers with a wealth of feedback
on the concerns most important to customer satisfaction. Reports are
generated indicating how each office performs in comparison to bank
averages. These customer service reports are shared at staff meetings so
that employees have the opportunity to volunteer suggestions for sustaining
or improving their service levels. This procedure is repeated on a monthly
basis so that all employees can chart the impact of their contributions.
SBB&T also periodically compares its service measurements to quality levels
at competitive institutions. While we consistently earn the highest ratings
for customer service in both the personal and business banking markets, we
believe the quest for total customer satisfaction requires our ongoing
commitment.
(Reproductions of three newspaper clippings)
In reader polls conducted by the Santa Barbara News-Press, the Business
Digest, and The Santa Barbara Independent, Santa Barbara Bank & Trust is
consistently rated "The Best Bank."
Broadening Opportunities Within Our Current Geographic Market and
Selectively Expanding Into Adjacent Communities
SBB&T is vigilant in exploring new opportunities within the communities we
presently serve. Efforts like our 1994 residential real estate expansion,
trust and investment product development and the business market review,
prove that these efforts pay strong dividends.
While we have always devoted great energy to our existing markets, SBB&T
also has a tradition of expanding into adjacent communities where there is
a need for a strong service-oriented bank. The Bank's start in downtown
Santa Barbara in 1960 was followed by commitments in Montecito, Carpinteria
and Goleta. When it appeared the Santa Ynez Valley was in need of a more
full-service community focused bank, we acquired offices in Solvang and
Buellton. Now, a unique new opportunity has arisen in Ventura County. The
First Interstate Bank's acquisition of Ventura County's leading independent
bank, the Bank of A. Levy, has created a new, considerably promising
market.
SBB&T will open offices in the cities of Camarillo, Oxnard and Ventura. To
ensure a management and staff with strong community ties, the leadership of
these new offices has been recruited from within the Ventura County market.
SBB&T plans to build a reputation for being highly committed to these
communities. This commitment will be demonstrated both through the
allocation of top managers and staff to all bank, lending, trust and
investment areas, and through local staff participation in area arts, civic
activities, charitable groups and causes.
SBB&T is confident it can earn a leadership position in the Ventura area if
it listens carefully to the unique needs and perspectives of local
businesses and individuals. This may require the Bank to adjust its efforts
in ways perhaps different than in other communities. However, preliminary
research conducted among Camarillo, Oxnard and Ventura businesses and
individuals indicates a favorable response to our established competitive
strategy: to be financially strong, to serve as a value-added provider of a
broad array of financial products, to offer measurably superior service.
We look forward to 1995 as a year of successful expansion and increased
profitability.
(Photograph of 15 individuals)
SBB&T's commitment to Ventura, Oxnard and Camarillo communities began with
the recruiting of the finest bankers in the area. In fact, every member of
the local management team comes to us from the former Bank of A. Levy and
other Ventura County banks. Shown here are (top row) Camarillo Office:
Sharie Quarry, Customer Service Manager; Jan Gibson, Office Manager;
Elizabeth Graham, Business Services Representative. (middle row) Oxnard
Office: Kim Gibas, Office Manager; Dani Navas, Customer Service Manager;
Debbie Harrison, Business Services Representative. (bottom row) Ventura
Office: Sue Chadwick, Area Business Development Manager; Liz Seitz, Office
Manager; Paul Mistele, Senior Credit Analyst; Ken Helms, Customer Service
Manager; Christi Hamilton, Business Services Representative; Ron Rose;
Donna De Los Santos, Banking Services Officer; Lee Draughon, Commercial
Loan Officer; Kim Fertig, Commercial Loan Officer.
Directors and Officers
BOARD OF DIRECTORS
DONALD M. ANDERSON
Chairman of the Board
DAVID W. SPAINHOUR
President, Chief Exec. Officer
FRANK BARRANCO, M.D.
Retired
EDWARD E. BIRCH, Ph. D.
Exec. Vice President
College Advance. Westmont College
RICHARD M. DAVIS
Retired Div. Mgr., Gen. Tel.
ANTHONY GUNTERMANN
Certified Public Acct.
DALE E. HANST
Attorney at Law
HARRY B. POWELL
Retired Business Exec.
GEORGE H. CLYDE
Director Emeritus
DANIEL B. TURNER
Director Emeritus
ADMINISTRATION
DONALD M. ANDERSON
Chairman of the Board
DAVID W. SPAINHOUR
President, Chief Exec. Officer
DAVID A. ABTS
Sr. Vice Pres., Dir. of MIS & Ops.
JOHN J. McGRATH
Sr. Vice Pres., Chief Credit Officer
JAY D. SMITH
Sr. Vice Pres., Gen. Coun. & Corp. Sec.
KENT M. VINING
Sr. Vice Pres., Chief Financial Officer
Vice Presidents
CARL BATTLES
MICHAEL CONLEY
ROSEMARY DUNN
ROY GASKIN
SHARON E. GREEN
JERRY HELTON
DEL HOOVER
MARK A. HUBERT
H. GEORGE KALLUSKY
JEFFREY KARFONTA
DON LAFLER
HAZEL MARCUS
SUSAN MARSHALL
MICHAEL MURPHY
CYNTHIA PLAHN
SHERRELL REEFER
DAVE RISTIG
ALFRED J. ROTELLA
JOYCE SPEZMAN-MARGOLIN
CATHERINE STEINKE
KIM TAUFER
AL TODD
GARY TURNER
RICH TURNER
Asst. Vice Presidents
TERRY BALL
DEBRA CARTER
NICOLE DINKELACKER
RITA DUBOIS
MIKE FITZGIBBON
MICHAEL IVEZIC
ROGER JANES
KERRY KELLEY
JANICE NICCUM KROEKEL
CHRIS LEM
ROY MARTINEZ
SCOTT MATTHEW
CLARE MCGIVNEY
FRED PRZEKOP
KEVIN QUIGLEY
RALPH STROHBACH
ILENE TERRY
MARY TREBBIN
DAWN WILLIAMSON
Officers
SHERRY BAKER
PHILIP BERRY
PATRICIA BOUCHER
DAVID BRIAN
BRADLEY BROWN
MARGARET BUSHEY
DANI CARAM
TERRY CAVAZOS
MICHELLE DREXLER-HALL
NANCY DUNCAN
KIMBERLY EVANS
MARYLOU FAVELA
JULIA FOX
WENDY LACEY
OLGA MEDINA
CHRISTINA NAUGLE
JULIE PUGH
BRIAN ROSS
SHIRLEY SCALES
TERRI SLATON
CAROLYN SNYDER
QUYEN URICK
CONSUMER LOANS
ROBERT CURRY
Vice President
DON ENDERBY
Asst. Vice President
MIKE GARCIA
Officer
ESCROW
PAMELA MARTIN
Asst. Vice President
DIANE NORIAN
Officer
JANET WOODARD
Officer
OUR GANG SERVICES
PAMELA HOLST
Vice President
FRANCES JIMENEZ
Asst. Vice President
MARJORIE KOCHER
Officer
LOAN SERVICES
PAMELA J. GEREMIA
Vice President
Asst. Vice Presidents
ANN MARKONIS
CHARLENE RAY
BARBARA ALMEIDA
REAL ESTATE
Vice Presidents
CHARLES BROWNING
TERRY SWANN
Asst. Vice Presidents
JANICE BAXTER
TERI GAUTHIER
ELIZABETH HEITMANN
ALICE MADRID
Officers
KAREN CLEMOW
TRUST & INVESTMENTS
WILLIAM S. THOMAS, JR.
Sr. Vice President
JOHN ZIEGLER
Sr. Vice President
Vice Presidents
JOHN BRINKER
JEAN BUBRISKI
CHRIS COLBERT
ANTHONY FIELDHOUSE
MARK GOLDEN
BARRY HUNTER
JANICE JOHNSON
WENDY PENKE
PAULETTE POSCH
ALICE SYKES
FRANK TABAR
JIM WILLIAMS
Asst. Vice Presidents
DAVID COVELL
NICKIE FURNIER CRANDALL
KAREN JAHNS
JUDITH MILAM
MICHAEL MORGAN
BARBARA PETRONIS
SALLY SYLVIA
Officers
WARREN BITTERS
MILTON BURTON
TEREASE CANN
JEANINE KARCZEWSKI
ROBERT RAMIREZ
BUSINESS BANKING
JOHN F. MURPHY
Sr. Vice President
GERALD O. COWAN
Sr. Vice President
RICHARD B. WELCH
Sr. Vice President
BRUCE I. WENNERSTROM
Sr. Vice President
Vice Presidents
LINDA CABLE
DONALD R. DUNCAN
WILLIAM ENHOLM
MICHAEL FLOYD
MIKE GRIFFIN
GARY HARRIS
MICHAEL R. KIRKWOOD
PHIL MORREALE
THOMAS PRENDIVILLE
ROBERT WESTWICK
BERNARD M. WITTKINS
JOHN H. WURZEL
SANTA BARBARA AREA
MAIN OFFICE
Vice President
EMMA TORRES
Asst. Vice Presidents
SANDRA COCKLIN
LORETTA GARDNER
Officers:
PATRICIA FANNING
PATRICIA OLVERA
KELLY SILVA
SUSAN WHITFORD
MESA OFFICE
THOMAS TURNER
Asst. Vice President, Mgr.
VICTORIA WILLIAMS
Officer
GOLETA AREA
LYNNETTE DAVIS
Vice President
Area Business Devel. Mgr.
GOLETA/FAIRVIEW OFFICE
CAROL THOMAS
Vice President
MARY LOUISE LISCOMBE
Officer
MAGNOLIA OFFICE
SCOTT HANSEN
Asst. Vice President, Mgr.
Officers
MICHAEL DOMINGUEZ
MARTHA MERA
MONTECITO/CARPINTERIA AREA
MONTECITO OFFICE
SAMANTHA PARRETT
Asst. Vice President, Mgr.
DEBBIE JIMENEZ
Officer
CARPINTERIA OFFICE
CHRISTINE DEVRIES
Asst. Vice President, Mgr.
JOHN LACEY
Vice President
CHRISTOPHER O'CONNOR
Officer
MONTECITO VILLAGE OFFICE
LINDA COWAN
Vice President, Mgr.
Officers
ROSEMARY BERTKA
DEBORAH WILSON
SAN ROQUE AREA
JOANNE FUNARI
Vice President
Area Business Devel. Mgr.
SAN ROQUE OFFICE
MARY YOST
Asst. Vice President, Mgr.
Officers
LISA VARGAS
JENNIFER WELCH
COTTAGE OFFICE:
DORIS WENGLER
Asst. Vice President, Mgr.
MARGIE FAIRGRAY
Officer
LA CUMBRE OFFICE:
KARAN DUQUETTE
Customer Service Mgr.
SANTA YNEZ AREA
CHUCK PIRA
Vice President
Area Business Devel. Mgr.
SOLVANG OFFICE
Officers
SHIRLEY BROWN
CHERYL REYNOLDS
PEGGY CHAMBLIN
BUELLTON OFFICE
CHUCK PIRA
Vice President
Area Business Devel. Mgr.
VENTURA AREA
SUZANNE CHADWICK
Vice President
Area Business Devel. Mgr.
VENTURA OFFICE
ELIZABETH SEITZ
Asst. Vice President, Mgr.
LEE DRAUGHON
Vice President, Loan Officer
KIM FERTIG
Vice President, Loan Officer
JUDY FRAZIER
Asst. Vice President, Trust Admin.
KENNETH HELMS
Asst. Vice President
DONNA DE LOS SANTOS
Officer
OXNARD OFFICE
KIMBERLEY GIBAS
Asst. Vice President, Mgr.
DANIELLE NAVAS
Officer
CAMARILLO OFFICE
JANICE GIBSON
Asst. Vice President, Mgr.
SHARIE QUARRY
Officer
<TABLE>
<CAPTION>
HISTORICAL SUMMARY (unaudited) Santa
Barbara Bancorp
and
Subsidiaries
Balance Sheets (as of December 31): 1994 1993 1992 1991
1990
<S> <C> <C> <C> <C>
<C>
Assets:
Cash and due from banks $ 69,630 $ 50,946 $ 44,059 $ 44,987 $
29,233
Federal funds sold 15,000 -- -- 20,000
25,000
Securities 386,959 383,518 387,670 323,585
235,119
Bankers' acceptances
and commercial paper 80,594 63,614 35,300 --
--
Net loans 486,520 454,163 467,862 491,529
531,962
Premises and equipment, net 7,391 6,657 5,111 7,598
6,036
Other assets 21,522 20,245 21,237 19,483
16,495
Total assets $ 1,067,616 $ 979,143 $ 961,239 $ 907,182 $
843,845
Liabilities and shareholders' equity:
Demand deposits $ 147,085 $ 114,557 $ 116,342 $ 107,068 $
99,806
Time and savings deposits 809,632 751,696 733,033 693,554
646,613
Total deposits 956,717 866,253 849,375 800,622
746,419
Securities sold under
agreements to repurchase
and Federal funds purchased 9,487 20,155 25,983 30,046
27,092
Other liabilities 7,452 6,744 8,736 9,299
12,077
Shareholders' equity 93,960 85,991 77,145 67,215
58,257
Total liabilities and shareholders' equity $ 1,067,616 $ 979,143 $ 961,239 $ 907,182 $
843,845
Statements of Income
(for the years ended December 31):
Operating revenue $ 87,984 $ 82,535 $ 85,978 $ 91,335 $
90,268
Operating expense (1) 70,515 65,848 69,968 76,803
76,224
Income before taxes 17,469 16,687 16,010 14,532
14,044
Applicable income taxes (1) 4,518 3,757 4,310 3,824
3,740
Net income $ 12,951 $ 12,930 $ 11,700 $ 10,708 $
10,304
Per share data (adjusted
for stock dividends and splits):
Average shares outstanding 5,098 5,189 5,182 5,197
5,187
Net income $ 2.54 $ 2.49 $ 2.26 $ 2.06 $
1.99
Cash dividends declared $ 0.78 $ 0.70 $ 0.57 $ 0.46 $
0.27
Other statistics:
Stock dividends declared -- -- -- 5%
2x5%
Stock splits declared -- -- -- --
-- Trust assets under administration
(market value) $ 1,188,748 $ 1,165,522 $ 926,233 $ 853,428 $
722,862
<FN>
(1) For the year 1992, operating expense includes the cumulative effect of the accounting change and
provision
for income tax includes the tax effect of the change. For the year 1993, provision for income
tax includes
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL SUMMARY-CONTINUED
Balance Sheets (as of December 31): 1989 1988 1987 1986 1985 1980 1975 1970 1965
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 46,941 $ 48,273 $ 23,684 $ 42,987 $ 24,485 $ 12,357 $21,755 $ 5,253 $ 1,766
Federal funds sold 40,000 30,000 15,000 15,000 23,600 3,425 1,100 700 --
Securities 149,031 171,419 143,714 203,160 137,369 64,299 33,327 11,935 6,701
Bankers' acceptances
and commercial paper 19,883 29,200 24,729 19,795 19,619 4,934 -- -- --
Net loans 445,475 344,051 277,054 228,577 206,563 103,580 39,544 21,134 12,854
Premises and equipment, net 6,874 5,248 6,210 4,509 5,326 4,590 1,936 718 194
Other assets 13,774 7,376 7,348 10,282 6,308 3,307 1,339 373 164
Total assets $721,978 $635,567 $497,739 $524,310 $423,270 $196,492 $99,001 $40,113 $21,679
Liabilities and shareholders' equity:
Demand deposits $107,677 $ 96,866 $ 84,658 $110,863 $ 82,060 $ 64,405 $39,134 $16,867 $ 8,370
Time and savings deposits 527,661 470,074 357,281 361,218 292,404 109,798 50,085 20,188 11,000
Total deposits 635,338 566,940 441,939 472,081 374,464 174,203 89,219 37,055 19,370
Securities sold under
agreements to repurchase
and Federal funds purchased 26,228 15,924 11,115 12,400 15,875 4,723 3,750 -- --
Other liabilities 7,039 7,213 8,391 11,246 6,994 3,202 1,211 394 394
Shareholders' equity 53,373 45,490 36,294 28,583 25,937 14,364 4,821 2,664 1,915
Total liabilities and shareholders' equity$721,978 $635,567 $497,739 $524,310 $423,270 $196,492 $99,001 $40,113 $21,679
Statements of Income
(for the years ended December 31):
Operating revenue $ 78,698 $ 60,444 $ 51,706 $ 45,014 $ 45,524 $ 21,870 $ 7,054 $ 3,067 $ 1,203
Operating expense (1) 65,656 49,953 44,038 40,193 41,703 18,375 5,983 2,424 1,075
Income before taxes 13,042 10,491 7,668 4,821 3,821 3,495 1,071 643 128
Applicable income taxes (1) 3,392 2,410 1,173 (829) (43) 1,183 286 331 30
Net income $ 9,650 $ 8,081 $ 6,495 $ 5,650 $ 3,864 $ 2,312 $ 785 $ 312 $ 98
Per share data (adjusted
for stock dividends and splits):
Average shares outstanding 5,263 5,266 5,114 4,978 4,993 4,742 4,001 4,008 4,008
Net income $ 1.83 $ 1.53 $ 1.27 $ 1.13 $ 0.77 $ 0.49 $ 0.20 $ 0.08 $ 0.02
Cash dividends declared $ 0.26 $ 0.19 $ 0.16 $ 0.13 $ 0.12 $ 0.07 $ 0.04 $ 0.02 0.00
Other statistics:
Stock dividends declared -- 12% -- -- 5% 15% 8% 5% 5%
Stock splits declared 4 FOR 3 -- -- 3 FOR 1 5 FOR 4 -- -- -- --
Trust assets under administration
(market value) $700,948 $616,948 $600,817 $537,608 $315,961 $112,696 $46,265 $25,477 $ 5,548
</TABLE>
Santa Barbara Bancorp and Subsidiaries
1994 FINANCIAL STATEMENTS & INFORMATION
TABLE OF CONTENTS Page
Management's Responsibility for Financial Reporting 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Report of Independent Public Accountants 37
Consolidated Balance Sheets 38
Consolidated Statements of Income 39
Consolidated Statements of Changes in
Shareholders' Equity 40
Consolidated Statements of Cash Flows 41
Notes to Consolidated Financial Statements 42
Selected Annual and Quarterly Financial Data 56
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Management of Santa Barbara Bancorp is responsible for the preparation,
integrity, and fair presentation of the Company's annual financial
statements and related financial data contained in this report. With the
exception that some of the information in Management's Discussion and
Analysis of Financial Condition and Results of Operations is presented on a
tax-equivalent basis to improve comparability, all information has been
prepared in accordance with generally accepted accounting principles and,
as such, includes certain amounts that are based on Management's best
estimates and judgments.
The consolidated financial statements presented on pages 38 through 41 have
been audited by Arthur Andersen LLP, who have been given unrestricted
access to all financial records and related data, including minutes of all
meetings of shareholders, the Board of Directors, and committees of the
Board. Management believes that all representations made to Arthur Andersen
LLP during the audit were valid and appropriate.
Management is responsible for establishing and maintaining an internal
control structure over financial reporting. Two of the objectives of this
internal control structure are to provide reasonable assurance to
Management and the Board of Directors that transactions are properly
authorized and recorded in our financial records, and that the preparation
of the Company's financial statements and other financial reporting is done
in accordance with generally accepted accounting principles.
Management has made its own assessment of the effectiveness of the
Company's internal control structure over financial reporting as of
December 31, 1994, in relation to the criteria described in the report,
Internal Control--Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to reliability
of financial statements. Furthermore, the effectiveness of any internal
control structure can change with changes in circumstances. Nonetheless,
based on its assessment, Management believes that as of December 31, 1994,
Santa Barbara Bancorp's internal control structure was effective in
achieving the objectives stated above.
The Board of Directors is responsible for reviewing and monitoring the
policies and practices employed by Management in preparing the Company's
financial reporting. This is accomplished through its Audit Committee,
which is comprised of directors who are not officers or employees of the
Company. The Committee reviews accounting policies, control procedures,
internal and independent audit reports, and regulatory examination reports
with Management, the Company's internal auditors, and representatives of
Arthur Andersen LLP. Both the Company's internal auditors and the
representatives of Arthur Andersen LLP have full and free access to the
Committee to discuss any issues which arise out of their examinations
without Management present.
David W. Spainhour Kent M. Vining
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
OVERVIEW OF THE EARNINGS, FINANCIAL CONDITION, AND BUSINESS OF THE COMPANY
Introduction
It was another year of growth for Santa Barbara Bancorp in 1994. Net income
increased over the prior year amount for the 29th consecutive year. Net
income for 1994 was up $21,000, while earnings per share increased from
$2.49 to $2.54, an increase of 2%. Assets, deposits and equity all grew in
1994, both in terms of their average balances for the year and from period
end to period end. Net interest income also increased over 9.4% after
provision for loan losses.
Southern California has yet to experience the economic recovery other areas
of the country have seen. This continues to impact the ability of some
borrowers to repay loans according to their contractual terms. Non-
performing assets increased, but at the end of the year represented less
than one percent of total assets. This compares favorably with the peer
banks (Note A). Management has continued to augment the allowance for loan
loss. At year end 1994, the allowance was 2.59% of total loans and 170% of
non-current loans.
Santa Barbara Bancorp (the "Bancorp") is a California bank holding company
incorporated in 1982 that is headquartered in the city of Santa Barbara.
Unless otherwise stated, "Company" refers to the consolidated entity, and
"Bancorp" refers to the parent company only. The Bancorp on its own has a
few operations, but these are very insignificant in comparison to those of
its major subsidiary, Santa Barbara Bank & Trust (the "Bank").
The Bank first opened for business in March, 1960, as Santa Barbara
National Bank, and became a state-chartered bank in May, 1979, changing its
name to Santa Barbara Bank & Trust. The Bank operates ten banking offices
along the southern Santa Barbara County coastline and two offices in the
county's central Santa Ynez Valley. The Bank is currently in the process of
opening three offices in adjacent Ventura County, one in Camarillo, one in
Oxnard, and one in the City of Ventura. A full range of banking services
are offered to households, professionals, and small to medium size
businesses.
The Bancorp's other operating subsidiary, SBBT Service Corporation (the
"ServiceCorp"), provides correspondent bank services, such as check
processing, and professional services, such as internal audit review, to
other financial institutions throughout the Central Coast of California.
The remainder of this discussion is to assist readers of the accompanying
financial statements by providing information on the environment in which
the Company operates, the risks for a financial institution in this
environment, the strategies adopted by the Company to address these risks,
and the results of these strategies. Each of these elements will be
addressed as they relate to the major asset and liability components of the
Company's balance sheets, and the major income and expense categories of
the Company's statements of income and to significant changes therein.
Lastly, it is intended to provide insight into Management's assessment of
the operating trends over the last several years and its expectations for
1995.
EXTERNAL FACTORS IMPACTING THE COMPANY
The major external factors impacting the Company include economic
conditions, regulatory considerations, and trends in the banking and
financial services industries.
Economic Conditions
From a national perspective, the most significant economic factor in 1994
has been the actions of the Federal Reserve Board to push up short-term
interest rates. These actions were taken to slow the rate of the country's
economic growth and thereby forestall inflationary pressures. This has had
both a negative impact on the value of the Company's fixed income
securities portfolios and a positive impact on its net interest income as
margins have increased.
The local economy is still being impacted by reductions in defense
spending. Like in 1993, a number of local companies whose business is tied
to the defense industry implemented or announced significant layoffs.
Tourism has long been important to the communities in the Company's market
area. The recession meant less disposable cash to spend on travel, but
there appears to have been some improvement in this segment of the local
economy in 1994. The local governments have generally been perceived to be
inclined towards environmentalism and slow-growth. However, at both the
state and local levels more attention is now being paid to the need to
create a supportive business climate in order to maintain a healthy,
sustainable economy.
Regulatory Considerations
The Company is impacted by changes in the regulatory environment. As a bank
holding company, the Bancorp is primarily regulated by the Federal Reserve
Bank (the "FRB"). The Bank is primarily regulated by the FDIC and, as a
state-chartered commercial bank, by the California State Department of
Banking. As a non-bank subsidiary of the Company, ServiceCorp is regulated
by the FRB. The Bank is currently considering membership in the Federal
Reserve System as a strategy to simplify regulatory issues.
Changes in regulation impact the Company in different ways. The FRB
requires that the Company maintain cash reserves with it equal to a
percentage of the Company's transaction deposits. Increasing or decreasing
the percentage of deposits that must be held at the FRB impacts the amount
of funds available to the Company to lend to customers. In 1991, the FRB
reduced the amount of cash reserves that must be held at the FRB in an
effort to stimulate additional lending by banks across the country.
The Company is also impacted by the imposition of minimum capital
requirements. At the end of 1992, new capital adequacy rules went into
effect which limited deposit growth for some institutions and have
influenced the choice of investments for all institutions. These rules are
discussed below in the section entitled "Capital Adequacy."
A third recent regulatory change impacting the Company is the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") which
became effective in 1992. Among the changes this legislation has brought to
the banking industry are new requirements relating to the audit committees
of Boards of Directors, to internal controls over financial reporting, and
to the measurement and management of interest rate risk. The actions which
the various banking agencies can take with respect to financial
institutions which fail to maintain adequate capital and comply with other
requirements of the act are discussed below in the section titled
"Regulation."
Trends in the Banking and Financial Services Industries
Among the major trends within the banking and financial services industry
over the last several years has been the continuing consolidation through
mergers and seizures. Also, increased competition has come from companies
not typically associated with the banking and financial services industry
such as AT&T and General Motors.
Over the last several years there has been the mega-merger of Bank of
America and Security Pacific, a number of savings and loan associations
with offices in the Company's market area which have been seized by the
Resolution Trust Corporation, and a number of institutions whose deposits
and/or offices have been sold to other institutions. Most recently, the
largest community bank in Ventura County, Bank of A. Levy, was acquired by
First Interstate Bancorp. This process of consolidation is expected to
continue, and Management expects that, as in the past, it will provide the
opportunity for the Company to gain both "in-market" market share from
customers not satisfied with the new institution chosen for them and the
opportunity for expansion into new geographic markets.
Banks once had an almost exclusive franchise for deposit products and
provided the majority of business financing. With deregulation in the
1980's, other kinds of financial institutions began to offer competing
products. Community banks, including the Company, are working to offset
this trend by developing new products that capitalize on the service
quality that a local institution can offer. Among these are new residential
loan products, and programs for the sale of mutual funds and annuities to
retail customers through the Company's trust division.
RISK MANAGEMENT
The Company sees the process of addressing the potential impacts of these
external factors as part of its management of risk. In addition to common
business risks such as disasters, theft, and loss of market share, the
Company is subject to special types of risk due to the nature of its
business. New and sophisticated financial products are continually
appearing with different types of risk which need to be defined. Also, the
risks associated with old products must periodically be reassessed. The
Company cannot operate risk-free and make a profit. Instead, the process of
risk definition and reassessment allows the Company to select the level of
risk and the corresponding level of reward that is appropriate to the
current economic conditions.
These special risks related to financial products are credit risk, market
risk, mismatch risk, and basis risk. The nature of each of these risks will
be explained in appropriate sections below. The effective management of
these risks is the backbone of the Company's business strategy.
NET INTEREST MARGIN AND CHANGES IN THE RELATIVE PROPORTIONS OF ASSETS AND
LIABILITIES
The Company earns income from two sources. The primary source is through
the management of its financial assets and liabilities and the second is by
charging fees for services provided. The first involves functioning as a
financial intermediary. The Company takes in funds from depositors or other
creditors and then either loans the funds to borrowers or invests those
funds in the securities or other financial instruments. Fee income is
discussed in other sections of this analysis.
Net interest income as reported on the statements of income is the
difference between the interest income and fees earned on loans and
investments and the interest expense paid on deposits and other
liabilities. The amount by which interest income will exceed interest
expense depends on two factors. The first factor is that the portion of the
Company's assets that earn interest is larger than the portion of its
liabilities on which interest must be paid. The second is that in most
situations, the Company is able to earn more on each dollar of assets that
it lends or invests than it must pay. Net interest margin is net interest
income expressed as a percentage of earning assets. This ratio is used so
that the Company can monitor the spread between interest income and
interest expense from month to month and year to year irrespective of any
volume changes related to the growth of the Company, and to enable it to
compare its spread with other financial institutions regardless of their
size.
To maintain its net interest margin at a level sufficient to generate
steady earnings, the Company must manage the relationship between interest
earned and paid. Stated another way, with so many of its assets earning
interest and so many of its liabilities requiring interest to be paid, the
Company is subject to risks that are related to changes in interest rates.
Market Risk
The market values of assets or liabilities on which the interest rate is
fixed will increase or decrease with changes in market interest rates. If
the Company invests funds in a fixed-rate long-term security and then
interest rates rise, the security is worth less than a comparable security
just issued because the older security pays less interest than the newly
issued security. If the older security had to be sold, the Company would
have to recognize a loss. Correspondingly, if interest rates decline after
a fixed rate security is purchased, its value increases. Therefore, while
the value changes regardless of which direction interest rates move, the
adverse exposure to "market risk" is due to rising interest rates. This
exposure is lessened by managing the amount of fixed rate assets and by
keeping maturities relatively short. However, these steps must be balanced
against the need for adequate interest income because variable rate and
shorter term fixed securities generally earn less interest than longer term
fixed securities.
Note 13 to the financial statements discloses the carrying amounts and
market values of the Company's financial instruments as of the end of 1993
and 1994. The net appreciation at the end of 1993 is $19.1 million compared
with net depreciation of $8.6 million at the end of 1994. This decrease is
due to several factors. As shown in Note 2 to the financial statements, the
Company has a large portfolio of municipal securities. These longer term
notes had net unrealized appreciation of $18.6 million at the end of 1993.
They have declined in value with the steady increase of interest rates
during 1994, but still have unrealized appreciation of $8.3 million.
Secondly, some of the securities that were held in the held-to-maturity
portfolio at appreciated amounts at the end of 1993 have since matured.
With increased interest rates, the securities in the held-to-maturity
portfolio which were purchased to replace these maturing investments have
experienced some decline in value. Thirdly, in 1993, many of the Company's
customers refinanced their loans in order to take advantage of the lower
rates available that year. While the Company sells most fixed rate
residential loans into the secondary mortgage markets, some of them could
not be sold until seasoned or because of nonconforming terms. These fixed
rate loans have now declined in value in the same manner that securities do
when interest rates rise.
Mismatch Risk
The second interest-related risk arises from the fact that when interest
rates change, the changes may not occur equally in the rates of interest
earned and paid because of differences in the contractual terms of the
assets and liabilities held. The Company has a large portion of its loan
portfolio tied to its base lending rate. If the base lending rate is
lowered because of general market conditions, e.g., other banks are
lowering their lending rates, these loans will be repriced. If the Company
were at the same time to have a large proportion of its deposits in long-
term fixed rate certificates, net interest income would decrease
immediately. Interest earned on loans would decline while interest expense
would remain at higher levels for a period of time because of the higher
rate still being paid on the deposits.
A decrease in net interest income could also occur with rising interest
rates if the Company had a large portfolio of fixed rate loans and
securities funded by deposit accounts on which the rate is steadily rising.
This exposure to "mismatch risk" is managed by matching the maturities and
repricing opportunities of assets and liabilities. This is done by varying
the terms and conditions of the products that are offered to depositors and
borrowers. For example, if many depositors want longer-term certificates
while most borrowers are requesting loans with floating interest rates, the
Company will adjust the interest rates on the certificates and loans to try
to match up demand. The Company can then partially fill in mismatches by
purchasing securities with the appropriate maturity or repricing
characteristics.
One of the means of monitoring this matching process is by use of a table
like Table 1, titled "Interest Rate Sensitivity." The table shows the
extent to which the maturities or repricing opportunities of the major
categories of assets and liabilities are matched. This table is sometimes
called a "gap" report, because it shows the gap between assets and
liabilities repricing or maturing in each of a number of periods. The gap
is stated in both dollars and as a percent of total assets. The Company's
target is to have a gap as a percentage of total assets of no more than 10%
plus or minus in any of the three periods within one year, with the
emphasis on the first two periods.
<TABLE>
Table 1- Interest Rate Sensitivity
<CAPTION>
As of December 31, 1994 After three After six After one
Noninterest
(in thousands) Within months months year but bearing
or
three but within but within within After five
nonrepricing
months six months one year five years years items
Total
<S> <C> <C> <C> <C> <C> <C>
<C>
Assets:
Loans (Note F) 281,625 78,929 42,576 61,220 23,199 11,882
499,431
Cash and due from banks -- -- -- -- -- 69,630
69,630
Federal funds sold 15,000 -- -- -- -- --
15,000
Securities:
Held-to-maturity 2,680 4,447 10,093 225,648 56,652 --
299,520
Available-for-sale 15,000 4,990 13,826 53,623 -- --
87,439
Bankers' acceptances 56,783 23,811 -- -- -- --
80,594
Other assets (Note F) -- -- -- -- -- 16,002
16,002
Total Assets 371,088 112,177 66,495 340,491 79,851 97,514
1,067,616
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased 9,487 -- -- -- -- --
9,487
Other borrowings 1,000 -- -- -- -- --
1,000
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts 363,549 -- 247,745 -- -- --
611,294
Time deposits 63,805 30,875 39,907 63,275 476 --
198,338
Demand deposits -- -- -- -- -- 147,085
147,085
Other liabilities -- -- -- -- -- 6,452
6,452
Net shareholders' equity -- -- -- -- -- 93,960
93,960
Total liabilities and
shareholders' equity 437,841 30,875 287,652 63,275 476 247,497
1,067,616
Interest rate-
sensitivity gap (66,753) 81,302 (221,157) 277,216 79,375 (149,983)
Gap as a percentage of
total assets (6.25%) 7.62% (20.72%) 25.97% 7.43% (14.05%)
Cumulative interest
rate-sensitivity gap (66,753) 14,549 (206,608) 70,608 149,983
</TABLE>
The first measuring period shown in the table covers assets and liabilities
that mature or reprice within the next three months. This is the most
critical period because there is little time to correct a mismatch that is
having an adverse impact on income. For example, if the Company had a
significant positive gap--assets significantly exceeded liabilities--and
interest rates dropped suddenly, the Company would have to wait for more
than three months before enough deposits could be repriced to offset the
lower earnings on the assets.
At year-end 1994, the Company has a slightly negative gap in this first
period. Liabilities exceed assets by 6.25% of total assets, well within the
target range of 10%. This negative gap is primarily caused by repricing
assumptions on some of the deposit accounts. There is some arbitrariness in
the assignment to specific time periods of deposit accounts that reprice at
the option of the Company. For the purposes of this table, the Company has
made the assumption that some of the money market accounts will reprice
within three months, but this will be governed by market conditions rather
than contractual terms.
In the next period, after three months but within six months, there is an
excess of assets over liabilities, but again the mismatch is within the
target range of the Company.
For the third period, after six months but within one year, liabilities
substantially exceed assets. However, this excess is also due to some
assumptions the Company makes with respect to its deposits. NOW accounts,
money market accounts, and passbook savings accounts may be repriced at any
time, and thus by their contractual terms would ordinarily be placed in the
first period--within three months. However, depositors do not expect the
rate on these accounts to change with each slight movement of market
interest rates, so Management does not expect to reprice these accounts
more often than every six months to a year. These accounts are therefore
placed in the third period--after six months but within one year. In
practice, however, if interest rates were to rise or fall precipitously,
these accounts would be repriced as often as necessary to protect the net
interest margin while remaining competitive in the market place. Management
is therefore also not taking any specific steps to lessen the gap for this
period, other than reviewing the assumptions about repricing frequency on a
continuing basis in light of current market conditions.
The periods of over one year are the least critical because more steps can
be taken to mitigate the adverse effects of any interest rate changes. The
Company does attempt to loosely match its long-term municipal bond holdings
with long-term IRA certificates of deposit, However, much of the rest of
the assets in this category are highly liquid U.S. Treasury notes which, as
part of the liquidity portfolio as explained in "Securities" below, would
be sold if interest rates rise, in order to achieve a repricing.
Basis Risk
The third interest-related risk arises from the fact that interest rates
rarely change in a parallel or equal manner. The interest rates associated
with the various assets and liabilities differ in how often they change,
the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific
asset and a specific liability may fall in the same period of the gap
report, the interest rate on the liability may rise one percent in response
to rising market rates while the asset increases only one-half percent.
While evenly matched in the gap report, the Company would suffer a decrease
in net interest income. This exposure to "basis risk" is the type of
interest risk least able to be managed, but is also the least dramatic.
Avoiding concentration in only a few types of assets or liabilities is the
best insurance that the average interest received and paid will move in
tandem, because the wider diversification means that many different rates,
each with their own volatility characteristics, will come into play.
Income Simulation
While a gap report can show mismatches in the maturities and repricing
opportunities of assets and liabilities, it has limited usefulness in
measuring or managing market risk and basis risk. To assess the extent of
these risks in both its current position and the potential results of
positions it might take in the future, the Company uses a computer model to
simulate the effect on interest income of different interest rate
scenarios. These scenarios include both sudden and gradual interest rate
changes, and changes in both directions.
Asset/Liability Management
In general, the Company monitors the trends in interest rates and responds
to them so as to minimize risk while maximizing net interest income. This
process, known as asset/liability management, is carried out by changing
the maturities and relative proportions of the various types of loans,
investments, deposits and other borrowings in the ways described above.
Table 2, "Distribution of Average Assets, Liabilities and Shareholders"
Equity and Related Interest Income, Expense and Rates," sets forth the
average balances for the major asset and liability categories, the related
income or expense where applicable, and the resultant yield or cost
attributable to the average earning assets and interest-bearing
liabilities. Average balances for the year are used in the table rather
than the end of the year amounts shown in the balance sheets of the
accompanying financial statements. When comparing year to year, the use of
average balances more accurately reflects growth patterns since these
balances are not significantly impacted by period-end transactions. The
amount of interest earned or paid for the year is also directly related to
the average balances and not to what the balances happened to be on the
last day of the year.
<TABLE>
TABLE 2 -- Distribution of Average Assets, Liabilities, and Shareholders' Equity and Related Interest
Income,
Expense, and Rates (Taxable equivalent
basis-- Notes B and E)
<CAPTION>
(amounts in thousands) 1994 1993 1992
Balance Interest Rate Balance Interest Rate Balance
Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
Assets:
Loans:
Commercial $ 169,001 $ 16,472 9.75 % $181,813 $ 15,725 8.65 % $187,397 $
16,577 8.85 %
Real estate 230,607 19,138 8.30 206,504 18,803 9.11 205,475
20,640 10.05
Consumer 78,997 11,603 14.69 83,153 8,905 10.71 93,347
9,743 10.44
Total loans 478,605 47,213 9.86 471,470 43,433 9.21 486,219
46,960 9.66
Securities:
Taxable 350,849 18,580 5.30 300,645 17,074 5.68 308,490
19,556 6.34
Non-taxable 83,711 11,114 13.28 76,723 10,490 13.67 73,311
9,805 13.37
Total securities 434,560 29,694 6.83 377,368 27,564 7.30 381,801
29,361 7.69
Money market instruments:
Bankers' acceptances 31,282 1,500 4.80 22,662 760 3.35 3,583
127 3.54
Federal funds sold 16,709 772 4.62 26,881 795 2.96 5,033
190 3.78
Total money market
instruments 47,991 2,272 4.73 49,543 1,555 3.14 8,616
317 3.68
Total earning assets 961,156 79,179 8.24 % 898,381 72,552 8.08 % 876,636
76,638 8.74 %
Non-earning assets 58,313 64,109 55,500
Total assets $1,019,469 $962,490 $932,136
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased $ 23,632 878 3.72 % $ 24,952 728 2.92 % $ 30,128
1,058 3.51 %
Other borrowings 2,314 81 3.50 2,586 68 2.63 4,113
136 3.31
Total borrowed funds 25,946 959 3.70 27,538 796 2.89 34,241
1,194 3.49
Interest bearing deposits:
Savings and interest bearing
transaction accounts 562,049 14,714 2.62 505,085 11,493 2.28 463,378
14,246 3.07
Time deposits 214,860 9,294 4.33 240,080 10,073 4.20 264,378
13,337 5.04
Total interest bearing
deposits 776,909 24,008 3.09 745,165 21,566 2.89 727,756
27,583 3.79
Total interest bearing
liabilities 802,855 24,967 3.11 % 772,703 22,362 2.89 % 761,997
28,777 3.78 %
Demand deposits 119,578 100,384 90,271
Other liabilities 6,662 5,572 6,779
Net shareholders' equity 90,374 83,831 73,089
Total liabilities and
shareholders' equity $1,019,469 $962,490 $932,136
Interest income/earning assets 8.24 % 8.08 %
8.74 %
Interest expense/earning assets 2.60 2.49
3.28
Net interest margin 54,212 5.64 50,190 5.59
47,861 5.46
Provision for loan losses
charged to operations/earning assets 6,257 0.65 6,150 0.68
4,650 0.53
Net interest margin after provision
for loan losses on tax equivalent basis 47,955 4.99 % 44,040 4.91 %
43,211 4.93 %
Less: taxable equivalent income
included in interest income from
non-taxable securities and loans 4,279 4,119
3,722
Net interest income $ 43,676 $ 39,921 $
39,489
</TABLE>
<TABLE>
TABLE 3 -- Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis' Notes D and E)
<CAPTION>
(in thousands) 1994 over 1993 1993 over 1992
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Loans
Commercial loans $ (1,160) $ 1,907 $ 747 $ (484) $ (368) $ (852)
Real estate loans 2,089 (1,754) 335 103 (1,940) (1,837)
Consumer loans (465) 3,163 2,698 (1,085) 247 (838)
Total loans 464 3,316 3,780 (1,466) (2,061) (3,527)
Securities:
Taxable 2,706 (1,200) 1,506 (487) (1,995) (2,482)
Non-taxable 931 (307) 624 462 223 685
Total securities 3,637 (1,507) 2,130 (25) (1,772) (1,797)
Money market instruments:
Bankers' acceptances 346 394 740 640 (7) 633
Federal funds sold (369) 346 (23) 655 (50) 605
Total money market
instruments (23) 740 717 1,295 (57) 1,238
Total earning assets 4,078 2,549 6,627 (196) (3,890) (4,086)
Liabilities:
Repurchase agreements and
Federal funds purchased (41) 191 150 (167) (163) (330)
Other borrowings (7) 20 13 (44) (24) (68)
Total borrowed funds (48) 211 163 (211) (187) (398)
Interest bearing deposits:
Savings and interest bearing
transaction accounts 1,387 1,834 3,221 1,184 (3,937) (2,753)
Time certificates of deposit (1,084) 305 (779) (1,160) (2,104) (3,264)
Total interest bearing
deposits 303 2,139 2,442 24 (6,041) (6,017)
Total interest bearing
liabilities 255 2,350 2,605 (187) (6,228) (6,415)
Net interest margin $ 3,823 $ 199 $ 4,022 $ (9) $ 2,338 $ 2,329
</TABLE>
Changes in the dollar amount of interest earned or paid will vary from one
year to the next because of changes in the average balances ("volume") of
the various earning assets and interest-bearing liability accounts and
changes in the interest rates applicable to each category. Table 3, "Volume
and Rate Variance Analysis of Net Interest Income," analyzes the difference
in interest earned and paid on the major categories of assets and
liabilities in terms of the effects of volume and rate changes for the
periods indicated.
Each of the major categories of assets and liabilities will be discussed
below, with a description of the reason for significant changes in the
balances, how they impacted the net interest income and margin, and how
they fit in with the overall asset/liability strategy for managing risk.
As mentioned above, the Company carefully monitors its net interest income
and its net interest margin. As might be expected, as the Company has grown
and has had more earning assets, net interest income has increased.
However, whether the net interest margin, the spread between interest
income and expense, increases or decreases, depends on how well the Company
has managed its interest rate and basis risk and its product pricing
policy.
The success of these steps is seen in the upward trend in the net interest
margin over the last several years. In 1993, the net interest margin
increased from 5.46% in 1992 to 5.59%, and in 1994 it increased to 5.64%.
The net interest margin for the Company's peers in 1992 and 1993 was 4.78%
and 4.73%, respectively, and for the first nine months of 1994 it was
4.73%.
With interest rates declining in 1992, relatively stable in 1993, and
rising in 1994, this upward trend in the net interest margin was
accomplished by lowering rates paid more than rates earned when rates were
declining and by raising rates on loans more than rates paid on deposits
when rates were rising. While the average rate earned on assets fell from
8.74% in 1992 to 8.08% in 1993, a decline of 66 basis points, the weighted
average cost of funds (interest expense expressed as a percentage of
earning assets) decreased 79 basis points from 3.28% in 1992 to 2.49% in
1993. For 1994 compared with 1993, the average rate earned increased 16
basis points while the average cost of funds increased 11 basis points.
There are always steps that the Company can take to increase its net
interest margin. Among these steps would be to increase the average
maturity of its securities portfolios because longer term instruments earn
a higher rate; to emphasize fixed rate loans because they earn more than
variable rate loans; to purchase lower rated securities; and to lend to
less creditworthy borrowers. However, as noted above, banking is a process
of balancing risks, and each of these alternative tactics involve more
risk. The first two involve more market risk, the second two more credit
risk. For 1994, the Company strove to increase the proportion of loans
relative to securities, which is a shift from lower earning assets to
higher earning assets, while maintaining the same average maturity and
credit risk characteristics. This balanced approach is also what is planned
for 1995.
Non-earning Assets
For a bank, non-earning assets are those assets like cash reserves,
equipment, and premises which do not earn interest. This ratio is watched
carefully by Management because it represents the efficiency with which
funds are used. Tying up funds in non-earning assets lessens the amount of
interest that may be earned. Average non-earning assets as a percentage of
total average assets increased from 5.95% in 1992 to 6.66% in 1993. The
major reason for this increase was Other Real Estate Owned ("OREO").
Foreclosure action was taken on one large loan resulting in the addition of
over $9 million in OREO. Though only $2.0 million of the properties
obtained in this foreclosure remained unsold at December 31, 1993, carrying
it as OREO during most of the year significantly impacted the average
balance of non-earning assets. Similarly, the expected foreclosure on
another loan resulted in $5 million being carried as OREO for a portion of
1993, before the loan was eventually paid.
With these properties disposed of in 1993, the average balance of OREO was
only $1.9 million in 1994 compared with $11.0 million in 1993. This
aggressive approach to disposing of foreclosed property allowed average
non-earning assets to drop to 5.72% of assets in 1994. The Company's ratio
compares very favorably to its peers. At September 30, 1994, the average
ratio of non-earning assets to total assets for all FDIC banks, regardless
of size, was 15.14%. Using the Company's average asset size and average
rate of 4.73% earned in 1994 on money market investments, having an extra
9.42% of assets earning interest meant the Company had $96.0 million more
in earning assets compared with its peers and earned $4.5 million in pre-
tax income on those assets. This efficient use of assets allows the Company
to produce a given amount of revenue at substantially less risk risk than
its competition. There is less risk because additional deposits or
borrowings do not have to be obtained to fund the assets generating the
revenue.
SECURITIES
The major components of the earning asset base for 1994 were the securities
portfolios, the loan portfolio and the money market instrument portfolio.
The structure and detail within these portfolios are of vital significance
in analyzing the financial condition of the Company. The loan and money
market portfolios will be covered in later sections of this discussion.
SFAS 115 and the Establishment of Two Portfolios
Upon implementation of SFAS 115 at December 31, 1993 as described in Note 1
to the accompanying consolidated financial statements, Management was
required to formally classify each security purchased as one that would be
held to maturity or would be available for sale. To accomplish this
classification, the Company divided its securities portfolio in two
components, the "Earnings" or held-to-maturity portfolio and the
"Liquidity" or available-for-sale portfolio.
The first of these portfolios consists of tax-exempt obligations and U.S.
Treasury and agency securities with longer original maturities. These
securities are purchased with the intention and ability to hold to maturity
and would be sold only in the event of concerns with the creditworthiness
of the issuer, a change in the tax law that eliminates or reduces the tax-
exempt status of interest earned from the security, or a few other
infrequent situations permitted by SFAS 115. They would not be sold because
of changes in market rates, liquidity needs, or asset/liability management
concerns.
The second portfolio, the liquidity portfolio, consists of U.S. Treasury
and agency securities with a shorter original maturity term. These
securities might be sold for liquidity needs and asset/liability concerns,
and as explained below, will be sold if their market value deteriorates to
a predetermined point because of higher interest rates.
<TABLE>
TABLE 4 -- Maturity Distribution and Yield Analysis of the Securities Portfolios
<CAPTION>
After one After five
As of December 31, 1994 One year year to years to Over
(amounts in thousands) or less five years ten years ten years
Total
<S> <C> <C> <C> <C>
<C>
Maturity distribution:
Available-for-sale:
U.S. Treasury obligations $ 23,885 $ 24,254 -- --
$ 48,139
U.S. agency obligations 9,931 29,369 -- --
39,300
Subtotal 33,816 53,623 -- --
87,439
Held-to-maturity:
U.S. Treasury obligations -- 195,354 -- --
195,354
U.S. agency obligations -- 14,654 -- --
14,654
State and municipal
securities 17,220 15,640 $ 35,798 $ 20,854
89,512
Subtotal 17,220 225,648 35,798 20,854
299,520
Total $ 51,036 $ 279,271 $ 35,798 $ 20,854
$ 386,959
Weighted average yield (Tax equivalent-Note B):
Available-for-sale:
U.S. Treasury obligations 5.72% 5.30% -- --
5.51%
U.S. agency obligations 5.30% 4.49% -- --
4.68%
Weighted average 5.60% 4.85% -- --
5.13%
Held-to-maturity:
U.S. Treasury obligations -- 5.66% -- --
5.66%
U.S. agency obligations -- 5.72% -- --
5.72%
State and municipal
securities 14.81% 12.52% 12.89% 10.70%
12.68%
Weighted average 14.81% 6.14% 12.89% 10.70%
7.76%
Overall weighted average 8.70% 5.88% 12.89% 10.70%
7.16%
</TABLE>
Purposes Served by the Securities Portfolios
The securities portfolios of the Company serve several purposes: 1) they
provide liquidity to even out cash flows from the loan and deposit
activities of customers (primarily the liquidity portfolio); 2) the
deposits of public agencies and trust customers must be secured by certain
assets of the Company, as required by law, and portions of either of the
securities portfolios may be used for this function; 3) they are a large
base of assets, the maturity and interest rate characteristics of which can
be changed more readily than the loan portfolio to better match changes in
the deposit base and other funding sources of the Company; and 4) they are
an alternative interest-earning use of funds when loan demand is light
(primarily the earnings portfolio). Prior to 1986, much of the income from
the securities now included in the earnings portfolio had the additional
advantage of being tax-exempt through investment in state and municipal
bonds. Since 1986, this availability is more limited, but the Company is
still able to earn about $7 million in tax-exempt income each year from
this portfolio.
Liquidity, the first purpose listed above, is provided through proceeds
arising from either the sale or maturity of securities. To serve this
purpose, the combined portfolios must be of an adequate size so that a
large number of individual issues may be purchased with staggered
maturities. This ensures that there are adequate amounts maturing or close
to maturity to provide liquidity when needed. Securities in the earnings or
held-to-maturity portfolio may not be sold without calling into question
Management's intent to hold to maturity the remaining securities in that
portfolio. However, maturing securities provide liquidity irrespective of
whether they had been part of the earnings or liquidity portfolio, there
being no requirement that proceeds from securities maturing from the
earnings portfolio be reinvested in a like manner. In assessing the
adequacy of the size of the portfolio and managing the maturity schedule,
Management tends to look at the combination of U.S. Treasury securities,
bankers' acceptances and Federal funds sold. Funds are switched between
these instruments based on their relative interest rates and other factors
discussed below.
The relative amounts of securities maintained in the earnings and liquidity
portfolios should change based on expected liquidity needs. The Company's
investment and liquidity policies direct that if the ratio of loans to
assets increases, then most new purchases would be made for the liquidity
portfolio, because the liquidity of the Company is decreasing with the rise
in loans. When loans are decreasing as a percentage of total assets, most
new purchases would be made for the earnings portfolio to obtain higher
yields.
The legal requirements for securing specific deposits, the second purpose
of the portfolio, may only be satisfied by certain types of securities. A
large proportion of the deposits may be secured by state and municipal
securities, but some can only be secured by U.S. Treasury securities, so
holding a minimum amount of these securities will always be necessary.
As discussed above, a major concern in managing interest rate risk is
matching the maturities and/or repricing characteristics of assets and
liabilities so that changes in interest rates will affect both sides of the
balance sheet equally. The Company tries to better meet the needs of loan
customers by being flexible in offering a variety of maturity and repricing
terms for the funds they borrow from the Company. Their decisions, however,
will not always match the maturity and repricing decisions made by the
deposit customers. Because the Company can select from a wide variety of
securities which have different maturities and repricing terms, the
securities portfolios may be used to obtain the desired overall matching.
This use of the portfolios for matching is also available only if there are
frequent maturities that provide cash to reinvest. With a little over 24%
of the combined portfolios made up of long-term tax-exempt securities, the
tax advantages of which cannot be replaced if they are sold, it is
necessary for most of the remaining portion of the portfolio to be invested
in securities with shorter maturities. The maturity of most purchases in
the last two years has been in the 1 to 3 year range.
The emphasis on purchasing shorter maturities is evident in Table 4, which
sets forth the book value and maturity ranges of the two security
portfolios at December 31, 1994. The weighted average yields (using taxable
equivalent adjustments in calculating the yields of state and municipal
securities--Note B) of the securities are also shown. By comparing the
average yields on the taxable securities (U.S. Treasury and agency
securities) with the average rates earned from loans as shown in Table 2,
it is obvious why securities are purchased for earnings only when loan
demand is weak.
Tax-Exempt Securities
The average yields for tax-exempt securities reported in Table 4 are
significantly higher than for taxable securities, but this advantage is not
readily available since the passage of the Tax Reform Act of 1986 ("TRA").
Certain provisions of this act disallow a deduction in the Company's tax
return for the portion of the interest expense paid on deposits and other
liabilities that fund most tax-exempt securities now purchased.
However, certain issues of municipal securities may still be purchased with
the tax advantages available before TRA. Such securities, because they can
only be issued in very limited amounts, are generally issued only by small
municipalities, and the Company must do a careful credit evaluation to
ascertain that the municipality has a diverse and healthy tax base from
which to repay the debt. In reviewing securities for possible purchase,
management must also ascertain that they have desirable maturity
characteristics, and that the amount of tax-exempt income they generate
will not be enough to trigger the Alternative Minimum Tax or the tax
advantage could be lost. In the last several years the Company has been
able to identify some securities that met all of these criteria and
purchased $9.7 million in 1994, $2.6 million in 1993, and $2.5 million in
1992. Management expects any purchases in coming years to be of about the
same magnitude.
Portfolio Turnover, Unrealized Gains and Losses, and Securities Losses
As shown in the accompanying consolidated statements of cash flows there
appears to be a relatively large turnover in the securities portfolios. The
purchase of relatively short-term securities both to provide liquidity and
to minimize market risk, as explained above, is part of the reason for the
high turnover in the Company's securities portfolios. However, proceeds
from sales of $139 million is still almost 32% of the average balance of
$435 million for the securities portfolios for the year.
The turnover from sales is the result of the Company following a "stop
loss" policy of liquidating taxable fixed rate securities with a remaining
maturity of over one year if they have declined in fair value by a
specified amount, while holding securities that have appreciated in fair
value because of declining rates. With the adoption of SFAS 115, only the
securities in the liquidity portfolio are subject to sale for this reason.
There are two advantages to following this policy.
First, as discussed above, fixed rate securities are subject to market risk
when interest rates change. Therefore, if interest rates change, the holder
is faced with the choice of whether to hold the security and continue to
earn its fixed rate until maturity, or sell it and use the proceeds to
purchase a current security. If rates have declined, the seller will
recognize a gain but earn less income on the new security in the future. If
rates have increased, the seller will recognize a loss but earn more income
on the new security. The amount of the gain or loss from the sale is simply
the net present value of the greater or lesser interest that would be
earned by holding the security compared to what would be earned on a new
security over the same term.
Thus far, the investor holding an appreciated security would be indifferent
between the two possible courses of action: 1) selling the security and
recognizing an immediate gain from a sale but earning less on the
reinvestment at lower rates, or 2) foregoing the immediate gain by holding
the security but earning more in the future. Similarly, the owner of a
depreciated security would be indifferent between 1) recognizing an
immediate loss and realizing future increased interest income by
reinvesting the proceeds, or 2) avoiding the loss but earning less interest
in the future. However, the tax treatment of these transactions favors
holding appreciated securities and selling depreciated ones. Selling a
depreciated security generates an immediate tax loss that will offset other
income, and defers the tax expense on the increased interest from the new
security over its life. Selling an appreciated security generates an
immediate tax liability which is only recovered over time through lower
taxes on the new lower-yielding security. Therefore, while the taxes paid
will be the same, they must be paid sooner if appreciated securities are
sold and depreciated securities are held.
The second factor leading Management to follow this policy is the
recognition that depreciated securities are simply not as liquid as
appreciated ones. In other words, the smaller losses associated with
selling securities when they first start to decline are easier to accept
than the large losses that must be taken if the security should need to be
sold after continued interest rate increases have occurred.
As the result of declining or relatively stable interest rates in 1992 and
1993, most of the securities held by the Company had fair values close to
or above their amortized cost. As of December 31, 1993, U.S. Treasury and
agency securities in the liquidity or available-for-sale portfolio had a
fair value of $1.18 million more than their amortized cost. This excess of
the fair value over the amortized cost indicated that the securities were
yielding higher rates than comparable securities available for purchase at
that time, and the Company held them in accordance with above described
policy.
In 1994, as short-term interest rates increased substantially, many of
these securities were sold because their established stop-loss points were
reached. In fact, a number of the securities purchased during 1994 with the
proceeds of maturing or sold securities were themselves sold as their stop-
loss points were in turn passed. These sales caused $1.19 million in
realized pre-tax losses, but their sale generated immediate tax benefits
and permitted the Company to increase its average earning rate by
purchasing new securities at the higher rates.
There are a few exceptions to this stop-loss policy. The tax advantage of
holding gains and selling losses is minimal on securities with a remaining
maturity of less than one year, so these securities and securities expected
to be called within a year are not sold even if they are below their stop-
loss point. Secondly, securities purchased with a maturity selected to
match a specific liquidity need may be exempted because they are going to
be held to maturity to meet that need.
As of December 31, 1994, the U.S. Treasury and agency securities in the
available-for-sale portfolio had a net fair value of $2.40 million less
than their amortized cost. Of this amount, $1.83 million related to
securities with maturities or expected calls within one year, $0.54 million
related to one $20 million security purchased with a specific maturity to
fund tax refund anticipation loans in 1996, and the small remainder related
to securities which had depreciated below their amortized cost but not to
their stop-loss point.
Other Effects of Interest Rate Changes on the Securities Portfolios
The Company does not have a trading portfolio. That is, it does not
purchase securities on the expectation that interest rates will decrease
and thereby allow subsequent sale at a gain. Instead, if the purposes
mentioned above are to be met, purchases must be made throughout interest
rate cycles. Rather than anticipate the direction of changes in interest
rates, the Company's investment policy directs purchases on changes in
either direction. The practice of the Company is to shorten the average
maturity of its investments while interest rates are rising, and lengthen
the average maturity as rates are declining. When interest rates are
rising, shorter maturity investments are preferred because principal is
better protected and average interest yields follow market rates up quite
closely as the Company buys new securities more frequently to replace those
maturing. When rates are declining, longer maturities are preferable
because their purchase tends to "lock-in" higher rates.
When rates are relatively stable, some maturing funds are reinvested if
maturity gaps need to be filled in, but generally the Company will refrain
from making any commitment and instead will sell the funds into the Federal
funds market.
Hedges, Derivatives, and Other Disclosures
The Company has not made use of interest rate swaps or other forms of
hedging because it has had good success managing the market and interest
rate risks in its securities portfolios by the two principles discussed
above--1) the lengthening of maturities as interest rates are declining and
shortening maturities as they are rising, and 2) the selling of securities
that have reached a predetermined stop-loss point.
The Company has not purchased any derivative securities. The Company has
purchased several structured notes issued by U.S. agencies, but, as
described in Note 2 of the accompanying financial statements, they are
step-up bonds that pay an increased interest rate if not called. They are
not indexed nor have contingent terms other than whether the issuer will
decide to call them.
The Company has not purchased any securities arising out of a highly
leveraged transaction, and its investment policy prohibits the purchase of
any securities of less than investment grade, so-called "junk bonds."
The Company has no securities in its portfolios issued by Orange County or
any political subdivision thereof. The Company has not noticed any decline
in the value of its municipal securities attributable to the filing for
bankruptcy by Orange County or the Orange County Investment Fund.
MONEY MARKET INSTRUMENTS--FEDERAL FUNDS SOLD AND BANKERS' ACCEPTANCES
Cash in excess of amounts immediately needed for operations is generally
lent to other financial institutions as Federal funds sold. Excess cash
expected to be available for longer periods is generally used to purchase
short-term U.S. Treasury securities or bankers' acceptances.
Average Federal funds sold and bankers' acceptances as a percentage of
average earning assets tends to vary based on changes in short-term market
rates. As explained above in "Securities," with interest rates declining in
1992, the Company invested all excess funds not identified for anticipated
liquidity needs in U.S. Treasury securities. It thereby obtained the higher
rates that were not available with the overnight sales of Federal funds,
but resulted in a lower average balance of Federal funds sold. With rates
remaining relatively stable in 1993, proceeds from maturing securities were
often sold into the Federal funds market for a period of time before
purchasing securities, and the average balance is consequently greater than
in 1992.
In 1993, with the growth in the tax refund anticipation loan ("RAL")
program as described below and a continued slow rate of growth in loan
demand, the Company began to manage its liquidity differently. With the
need to provide for the specific liquidity need of the RAL program, funds
that might otherwise have been used to purchase U.S. Treasury securities
were instead used to purchase bankers' acceptances.
While the acceptances of only the highest rated financial institutions are
utilized, acceptances have some amount of risk above that of U.S. Treasury
securities, and the Company therefore requires that there be a reasonable
spread in the yields between the bankers' acceptances and U.S. Treasury
securities to justify the assumption of that additional risk.
LOAN PORTFOLIO
Table 5 sets forth the distribution of the Company's loans at the end of
each of the last five years.
<TABLE>
TABLE 5 -- Loan Portfolio Analysis by Category(in thousands)
<CAPTION>
December 31
1994 1993 1992 1991
1990
<S> <C> <C> <C> <C> <C>
Real estate:
Residential 108,923 54,395 40,496 30,133
27,042
Non-residential 145,928 123,534 108,117 96,548
114,519
Construction and development 26,695 41,030 67,524 85,454
92,079
Commercial, industrial, and agricultural 148,396 168,227 168,575 188,252
207,067
Home equity lines 32,573 36,219 43,877 44,318
36,188
Consumer 27,319 27,331 36,888 44,328
50,849
Municipal tax-exempt obligations 7,831 11,888 9,445 7,955
8,853
Other 1,766 1,606 2,293 2,152
1,573
499,431 464,230 477,215 499,140
538,170
Net deferred fees 2,038 1,301 1,162 1,219
1,307
</TABLE>
The amounts shown in the table for each category are net of the deferred or
unamortized loan origination, extension, and commitment fees and
origination costs for loans in that category. The total amounts for these
net fees are shown at the bottom of the table. These deferred amounts are
amortized over the lives of the loans to which they relate.
The majority of the loans in the portfolio either amortize monthly or have
relatively short maturities. This helps maintain the liquidity of the
portfolio. Most have floating rates of interest, generally tied to the
Company's base lending rate or to another market rate indicator, which
serve to lessen the risk to the Company from increases in interest rates.
Table 6 shows the maturity of selected loan types outstanding as of
December 31, 1994. Net deferred loan origination, extension, and commitment
fees are not shown in the table. There is no maturity or interest
sensitivity associated with the fees because they have been collected in
advance.
The Company makes adjustable rate mortgage loans with low initial "teaser"
rates. While these loans have interest rate "caps," nearly all can be
repriced to a market rate of interest within a reasonable time. A few loans
have payment caps which would result in negative amortization if interest
rates rise appreciably.
<TABLE>
TABLE 6 -- Maturities and Sensitivities of Selected
Loan Types to Changes in Interest Rates
CAPTION>
Due after
(in thousands) Due in one one year to Due After
year or less five years five years
<S> <C> <C> <C>
Commercial, industrial, and
agricultural loans:
Floating rate $ 124,168 -- --
Fixed rate 13,282 $ 9,920 $ 1,026
Real estate--construction
and development:
Floating rate 26,695 -- --
Fixed rate -- -- --
Municipal tax-exempt
obligations 815 7,016 --
$ 164,960 $ 16,936 $ 1,026
</TABLE>
Tax Refund Anticipation Loans ("RAL's")
In 1992, the Company began providing RAL's. The taxpayer requests a loan
through a tax preparer. The Company does not earn interest based on the
amount of the loan or the length of time it is outstanding. Instead, the
Company collects a fee for each loan. After withholding the loan fee due to
the Company (the withheld fee is recognized as income only after the loan
is collected), the Company advances to the taxpayer the amount of the
refund due on the taxpayer's return up to specified amounts based on
certain criteria. Each taxpayer signs an agreement permitting the Internal
Revenue Service (the "IRS") to pay their refund to the Company to pay off
the loan. Any amount due the taxpayer above the amount of the RAL is sent
by the Company to the taxpayer when received from the IRS.
The tax preparers are located across the country and few of the taxpayers
have any customer relationships with the Company other than these RAL's.
Therefore, if there is a problem with the return such that the IRS rejects,
partially disallows, or disregards the request of the taxpayer to remit the
refund to the Company, collection efforts may be less effective than with
local customers.
The Company has taken several steps to minimize losses from these loans.
Preparers are screened before they are allowed to submit their electronic
filings, procedures have been defined for the preparers to follow to ensure
that the agreement signed by the taxpayer is a valid loan, and the
preparers' IRS reject rates are monitored very carefully. If rejects are
above normal, they are dropped from the program. If rejects are below
expectations, they are paid an incentive fee. Through the 1994 filing
season, the Company only extended the loans to the taxpayer after receiving
an acknowledgement from the IRS that it has run several preliminary
computer checks on the taxpayer for such items as a valid Social Security
number and that there are no outstanding liens from the IRS against the
taxpayer. Nonetheless, losses are higher than for most other loans.
The Company made about 19,000 RAL's in 1992. The maximum amount advanced to
taxpayers was $1,500 and the RAL's averaged $1,000 each. The maximum
outstanding at any one time was about $8 million.
The Company expanded the program for the 1993 tax season. Almost $45
million was lent to over 42,000 taxpayers. The collected fees amounted to
just over $1 million. The pre-tax earnings after losses from these loans
was about $460,000. The average loan was outstanding for 20 days.
The program was expanded further in 1994. About 150,000 loans were made,
totaling $230 million. The fees earned were $4.7 million and net charge-
offs were $2.4 million (1.03% of total loans), resulting in net fee income
after losses of $2.3 million.
The balances outstanding during each tax filing season are included in the
average balance for consumer loans shown in Table 2, but there are no such
loans included in the balance sheets as of December 31, 1994 or 1993
because all loans not collected from the IRS by June 30 of each year are
charged-off. The fees earned are included in the accompanying income
statements for 1994, 1993, and 1992 within interest and fees on loans.
For the 1995 filing season, the IRS will not be providing the
acknowledgement mentioned above. The Company will therefore be subject to
more credit risk in this program. Steps have been taken to reduce this
risk, but their effectiveness is uncertain at this time, and some will
involve additional expense. The Company will run credit checks on all
taxpayers who are new to the program in the 1995 filing year. Fees have
been raised to cover the additional losses expected, and to cover the
additional expenses. With the additional loan criteria, Management expects
that fewer taxpayers will qualify for loans in 1995. The taxpayers may
still have their returns filed electronically and will receive their
refunds more quickly by having it sent to the Company to prepare the check
rather than the IRS, and the Company will still earn a fee for this
service.
Changes in Loan Balances
The decrease in consumer loans from the end of 1992 to the end of 1993 was
primarily due to the sale of the Company's credit card portfolio to another
commercial bank at the end of the third quarter of 1993.
The Company earned interest on the card balances and fees on transactions,
but the transaction charges and personnel costs associated with managing
the product were more than the income. The Company still issues credit
cards on behalf of the purchaser and earns a fee based on cardholder
activity.
For the first time in several years, the year-end balance for all loans was
higher than the average balance for the year, as loans increased about $35
million from the end of 1993 to the end of 1994. Residential real estate
doubled from one year to the next as the Company significantly expanded its
share of the local market. Most of these loans are 1-4 family adjustable
rate mortgage loans. As noted above, the Company sells any of the fixed
rate real estate loans that are salable in the secondary market to avoid
assuming the interest rate risk.
This increase in residential real estate loans helped to offset the
continued decline in commercial loans.
ALLOWANCE FOR LOAN LOSSES
Credit risk is inherent in the business of extending loans to individuals,
partnerships, and corporations. An important step in managing this risk is
to periodically grade all of the larger loans, all of the delinquent loans,
and other loans where there is a question of repayment. A significant
portion of all other loans are also graded. The Company sets aside an
allowance or reserve for loan losses through charges to earnings. The
charges are shown in the income statements as provision for loan losses.
All specifically identifiable and quantifiable losses are immediately
written off against the allowance. The Company formally assesses the
adequacy of the allowance on a monthly basis. This assessment involves a
review of the current status of all of the delinquent loans and problem
loans as well as a summary of each grading category.
The process of allocation first involves a portion of the allowance being
allocated to the delinquent or otherwise questionable loans in an amount
sufficient to cover Management's estimate of the loss that might exist in
them. A portion of the allowance is then allocated to the remainder of the
loans based on the latest grading of their quality. Relatively more is
allocated to those loans which, while currently performing according to
their terms, are in categories that have characteristics which lead
Management to conclude that there is inherently more risk of problems in
the future.
There are limitations to any grading process. The first is that it is
impracticable to grade every loan every quarter. Therefore, it is possible
that some of the smaller currently performing loans not recently graded
will not be as strong as their last grading and an insufficient portion of
the allowance will have been allocated to them. The second is that grading
loans and estimating possible losses involve judgments, even for
experienced reviewers, and losses may differ from the most recent estimate.
Because of these limitations and also to provide a comfortable margin of
safety for any growth in the loan portfolio, the Company maintains the
allowance at an amount larger than the total that is allocated as described
above.
Table 7, "Summary of Loan Loss Experience," shows the activity in the
Company's allowance for loan losses and the ratio of charge-offs to average
loans for each of the last five years. The allowance allocation shown in
the table 8, "Allocation of the Allowance for Loan Losses," should not be
interpreted as an indication of the specific amounts or specific loan
categories in which charge-offs did or may ultimately occur. There is no
allocation of allowance to RAL's because all loans unpaid as of June 30 of
each year were charged-off. At the bottom of the table is the ratio of the
allowance for loan losses to average total loans for each year.
<TABLE>
Table 7 -- Summary of Loan Loss Experience
<CAPTION>
(in thousands) Year ended December 31
1994 1993 1992 1991
1990
<S> <C> <C> <C> <C> <C>
Balance of the allowance for
loan loss at beginning of year 10,067 9,353 7,611 6,207
4,823
Charge-offs:
Real estate:
Residential -- -- -- -- -
-
Non-residential 48 -- 70 -- -
-
Contruction and development -- 3,380 331 878 -
-
Commercial, industrial, and agricultural 921 1,268 1,553 1,169
1,172
Home equity lines 200 -- 77 -- -
-
Tax refund anticipation 3,030 650 404 -- -
-
Other consumer 345 570 762 711
580
Municipal tax-exempt obligations -- -- -- -- -
-
Total charge-offs 4,544 5,868 3,197 2,758
1,752
Recoveries:
Real Estate:
Residential -- -- -- -- -
-
Non-residential -- -- -- -- -
-
Construction and development -- 2 -- -- -
-
Commercial, industrial, and agricultural 236 130 116 137
287
Home equity lines 50 -- -- -- -
-
Tax refund anticipation 672 62 77 -- -
-
Other consumer 173 238 96 125
49
Municipal tax-exempt obligations -- -- -- -- -
-
Total recoveries 1,131 432 289 262
336
Net charge-offs 3,413 5,436 2,908 2,496
1,416
Provision for loan losses chareged to operations 6,257 6,150 4,650 3,900
2,800
Balance at end of year 12,911 10,067 9,353 7,611
6,207
Ratio of net charge-offs to
average loans outsatnding 0.71% 1.15% 0.60% 0.48%
0.28%
</TABLE>
The ratio of net charge-offs to average loans outstanding shown in Table 7
had increased over the last several years with the recessionary economy and
in the first few years of the RAL program. Therefore, Management concluded
it would be prudent to add to the allowance even though the loan balances
were declining and there was already an excess of allowance over the amount
allocated.
<TABLE>
Table 8 -- Allocation of the Allowance for Loan Losses
<CAPTION>
(amounts in thousands) December 31, 1994 December 31, 1993 December 31, 1992
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial, industrial,
and agricultural 5,343 29.2 3,508 35.4 1,898 34.4
Real estate:
Residential 1,183 21.4 1,074 11.5 178 8.3
Non-residential 2,856 28.7 1,652 26.0 999 22.1
Construction
and development 1,141 5.3 881 8.7 3,045 13.8
Home equity lines 496 6.4 491 7.6 469 9.0
Consumer 438 5.4 462 5.8 673 7.5
Municipal tax-exempt
obligations -- 1.5 -- 2.5 -- 1.9
Other (Note G) 91 2.1 104 2.5 122 3.0
Not specifically allocated 1,363 0.0 1,895 0.0 1,969 0.0
Total allowance 12,911 100.0 10,067 100.0 9,353 100.0
Allowance for loan loss
as percentage of
year-end loans 2.59% 2.17% 1.96%
</TABLE>
There are very few banks in the country that have RAL programs, so some
comparability with the net charge-off ratio of other institutions is lost.
Approximately $2.4 million, $588,000, and $327,000 of the net charge-offs
for 1994, 1993, and 1992, respectively, are related to the RAL's. If the
Company had not had the RAL program, the ratio of net charge-offs to
average loans would have been 0.22% in 1994, 1.03% in 1993, and 0.53% in
1992. These ratios compare with the net charge-off ratios for the Company's
FDIC peers of 0.61% for the first nine months of 1994, 0.92% for 1993, and
0.74% for 1992. The larger ratio for the Company in 1993 was due to $3.3
million in charge-offs associated with one large loan in order to recognize
the decline in the value of the real estate that secured it. The Company
subsequently had to foreclose on the property, adding OREO of about $9
million. During 1993, the Company was able to sell most of the property it
had taken in foreclosure with no further net loss, and recognized a gain
when the remaining property was sold in 1994.
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
Table 9 summarizes the Company's nonaccrual and past due loans for the last
five years:
<TABLE>
Table 9 -- Nonaccrual and Past Due Loans
<CAPTION>
(in thousands) Year ended December 31
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 6,326 $ 3,126 $ 888 $ 3,058 $ 277
90 days or more
past due 1,290 862 322 100 565
Total noncurrent
loans $ 7,616 $ 3,988 $ 1,210 $ 3,158 $ 842
Total noncurrent
loans as a percentage of
the total loan portfolio 1.52% 0.86% 0.25% 0.63% 0.16%
Allowance for loan
loss as a percentage
of noncurrentloans 170% 252% 773% 241% 737%
</TABLE>
Past Due Loans: Included in the amounts listed above as 90 days or more
past due are commercial and industrial, real estate, and all types of
consumer loans. These loans are well secured and in the process of
collection. These figures do not include loans in nonaccrual status.
Nonaccrual Loans: If there is reasonable doubt as to the collectibility of
principal or interest on a loan, the loan is placed in nonaccrual status,
i.e., the Company stops recognizing income from the interest on the loan
and reverses any uncollected interest that had been accrued but not
received. These loans may or may not be collateralized, but are actively
being collected.
Of those loans listed as nonaccrual at year-end 1993, $414,000 were
charged-off; loans representing $686,000 of the 1993 amount are still in
the portfolio now accruing interest, some payments having been made; and
loans in the amount of $1.1 million are in the loan portfolio with some
payments having been received but are still not accruing interest.
The Company has experienced a significant increase in noncurrent loans
during 1994, and the ratio of 1.52% is higher than its FDIC peers' ratio of
1.27%.
Two specific steps have been taken to reverse this increase. First,
Management has strengthened the credit review and analysis function by
hiring a second credit reviewer, a credit analyst, an appraisal reviewer,
and will be hiring a credit administrator. Secondly, Management has
established a Special Assets Committee to give increased attention to the
larger problem loans and will be drawing up restructuring or other
collection plans. Meanwhile the Company has set aside a larger amount of
allowance for loan loss in relation to these loans (170%) compared to the
average peer group bank's ratio (138%).
Management expects that charge-offs will be higher during 1995 than in 1994
because the RAL program will be both larger and subject to more uncertainty
in the absence of the IRS acknowledgement and because some portion of the
larger balance of nonaccrual loans will have to be charged off.
Interest income from nonaccrual loans in the portfolio at year-end that was
not recognized is shown below:
Table 10 -- Foregone Interest
(in thousands) Year ended December 31
1994 1993 1992
Interest that would have been
recorded under original terms $ 301 $ 83 $ 405
Gross interest recorded 188 54 197
Foregone interest $ 113 $ 29 $ 208
Restructured Loans: The Company did not have any restructured loans at the
end of any of the years from 1990 through 1992. The only restructured loans
at the end of 1993 and 1994 are reported above in the total of nonaccrual
loans.
Potential Problem Loans: From time to time, Management has reason to
believe that certain borrowers may not be able to repay their loans within
the parameters of the present repayment terms, even though, in some cases,
the loans are current at the time. These loans are regarded as potential
problem loans, and a portion of the allowance is allocated as discussed
above to cover the Company's exposure to loss should the borrowers indeed
fail to perform according to the terms of the notes. This class of loans
does not include loans in a nonaccrual status or 90 days or more delinquent
but still accruing, which are shown in Table 9.
At year-end 1994, these loans amounted to $32,561,000 or 6.52% of the
portfolio. The corresponding amounts for 1993 and 1992 were $18,729,000 or
4.03% of the portfolio and $16,396,000 or 3.44% of the portfolio,
respectively. The 1994 amount consists of loans of all types. Most of these
loans are graded "substandard" or "doubtful" and, as such, a portion of the
allowance for loan losses of from 15% to 50% of the outstanding loan amount
has been allocated to these loans to cover potential losses.
OTHER LOAN PORTFOLIO INFORMATION
Other information about the loan portfolio is presented that may be helpful
to readers of the financial statements follows.
Foreign Loans: The Company does not have nor has it ever had any foreign
loans in its loan portfolio.
Loan Sales: During the last several years, the Company has sold most of the
fixed-rate single family mortgage loans it originates as well as selected
other portfolio loans. These loans are made to accommodate the borrower,
but are sold to mitigate the market risk inherent in fixed rate assets.
Servicing is not generally retained. When it is, the Company earns a fee.
The sales are made without recourse, that is, the purchaser cannot look to
the Company in the event the borrower does not perform according to the
terms of the note.
Participations: Occasionally, the Company will sell or purchase a portion
of a loan from another bank. Banks usually sell a portion of a loan as a
means of staying within the bank's maximum limit for loans to any one
borrower. A portion of another bank's loan may be purchased by the Company
as an accommodation to a smaller bank unable to lend the whole amount under
its regulatory lending limit to its borrower, but this would be done only
if the loan also represents a good investment for the Company. In these
cases, the Company conducts its own independent credit review prior to
committing to purchase.
Loan to Value Ratio: The Company follows a policy of not loaning more than
75% of the value of commercial property nor more than 80% of residential
property for its real estate loans. The Company generally does not make use
of credit enhancements like loan insurance to exceed these amounts. The
above ratios are sometimes exceeded when the loan is being originated for
sale to another institution that does lend at higher ratios and the sale is
immediate, when the exception is temporary, or when other special
circumstances apply.
Loan Concentrations: The concentration profile of the Company's loans is
discussed in Note 15 to the accompanying consolidated financial statements.
The Company's one material concentration of loans to borrowers engaged in
similar activities at year-end 1994 is for real estate construction and
development.
A majority of the $27 million in construction and development loans have
been made to developers. However, these projects include a wide variety of
properties--single family, small and large apartment complexes,
condominiums, commercial offices, and industrial and retail space.
These loans are generally payable upon sale or refinancing of the property,
but also have a maturity date irrespective of sale or refinance. With
slower sales in the real estate market, some of the properties have not
sold or refinanced before the maturity date. The Company may extend the
maturity date for a fee after a new review of the loan and the borrower's
efforts to sell.
DEPOSITS
An important component in analyzing net interest margin is the composition
and cost of the deposit base. Net interest margin is improved to the extent
that growth in deposits can be focused in the lower cost core deposit
accounts--demand deposits, NOW accounts, and savings. The average daily
amount of deposits by category and the average rates paid on such deposits
is summarized for the periods indicated in the Table 11.
<TABLE>
TABLE 11 -- Detailed Deposit Summary
<CAPTION>
(dollars in thousands) Year ended December 31
1994 1993 1992
Average Average Average
Balance Rate Balance Rate Balance Rate
S> <C> <C> <C> <C> <C> <C>
NOW accounts 128,212 1.01% 119,778 1.20% 107,940 1.87%
Money market deposit accounts 298,561 3.48 231,575 2.70 221,593 3.45
Savings accounts 135,276 2.25 153,732 2.48 134,276 3.41
Time certificates of deposit for
less than $100,000 and IRA's 157,763 4.54 158,613 4.52 155,425 5.35
Time certificates of deposit for
$100,000 or more 57,097 3.72 81,467 3.57 108,522 4.63
Interest-bearing deposits 776,909 3.09% 745,165 2.89% 727,756 3.79%
Demand deposits 119,578 100,384 90,271
896,487 845,549 818,027
</TABLE>
The average rate paid on deposits declined significantly from 3.79% in 1992
to 2.89% in 1993, but began to increase again in 1994 to 3.05%. The
decrease from 1992 to 1993 was due not only to the lower interest rates
paid on all types of accounts, but also because most of the deposit growth
between 1992 and 1993 was in the transaction and savings categories which
pay lower rates, and in the demand deposits which are noninterest bearing.
This change in product mix reflected both a customer choice to shorten the
maturities of their accounts so as to be able to reinvest should interest
rates turn up, and a choice by the Company to encourage shortening so that
interest paid would decrease as were falling. There was a general practice
among banks, which the Company also followed, of lowering the rates on the
time deposit categories more than on the transaction and savings account
categories.
The Company's transaction and savings account categories continued to
increase as a percentage of total deposits in 1994, but the expected effect
of a less expensive mix of deposits was offset by increasing interest
rates. Most dramatically affected was the Money Master accounts. These
accounts, with an interest rate indexed to the 3-month Treasury bill, grew
substantially during the year from an average balance of $69.1 million in
1993 to $131.7 million in 1994 as the rate paid increased from 3.06% at the
beginning of 1994 to 5.07% by November. After proper notice was given to
depositors, the Company changed the rate paid to an administered rate (the
same way all other non-term deposits are priced) instead of a rate indexed
to the Treasury bill.
Potentially, the most volatile deposits in a financial institution are the
large certificates of deposit over $100,000. Because the deposits exceed
the FDIC insurance limit, depositors often select only the shortest
maturities. Nonetheless, many institutions have tried to fund their growth
by means of large certificates of deposit. This usually requires a "money
desk," a separate department devoted to procuring these deposits by
offering premium rates. The aim is to invest the funds in longer-term
assets which earn the higher rates. The hazard in this practice arises from
the mismatch of maturity terms. If interest rates rise, the bank will have
to immediately offer the higher interest rates, or the deposits will
migrate to another institution. Meanwhile, as discussed above, if interest
rates go up, fixed-rate loans and securities lose a portion of their value.
If the deposits cannot be retained, the bank would eventually be forced to
liquidate the assets at a loss.
The Company, however, has not found its over $100,000 certificates to be
very volatile because it does not solicit any deposits from brokers, nor
has it encouraged these certificates by paying premium interest rates. It
has been the Company's experience that large depositors have placed their
funds with the Company because they are confident in its financial strength
and stability. This is also suggested by the lack of any significant
shortening of maturities of these larger certificates beyond the general
customer trend to shorten their deposit maturities.
TABLE 12 -- Maturity Distribution of Time
Certificates of Deposit of $100,000 or More
(in thousands) At December 31
1994 1993 1992
Three months or less $ 26,232 $ 51,022 $ 56,242
After three months
to six months 10,258 12,868 12,801
After six months
to one year 14,086 7,953 23,228
Over one year 12,980 11,537 9,394
$ 63,556 $ 83,380 $ 101,665
Several courses of action would be available should the Company experience
an outflow of funds in this category. Among the most likely scenarios would
be a sale of some of the securities in the liquidity portfolio followed by
an effort to replace these lost deposits with growth in the other retail
deposit products. This course of action is unlikely to result in a negative
impact on earnings for the Company because, while the cost of acquiring and
servicing the transaction deposits is higher than for certificates, the
interest rate paid will be lower.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
Securities sold under agreements to repurchase ("repos") are a form of
borrowing from customers that is secured by some of the securities in the
Company's portfolios. Like the rate paid on Federal funds purchased, the
interest rate paid on repos is tied to the Federal funds sold rate, which
had steadily declined from 1990 through 1992 and remained at a very low
rate during 1993. The average rate paid in 1994 increased to 3.26% from an
average rate of 2.90% during 1993. A lower average balance for these
arrangements is to be expected when the economy is sluggish because these
customers frequently have less cash to invest and/or choose other deposit
products or brokerage money market accounts that may earn more interest.
The average balance borrowed during 1994 declined slightly to $9.4 million
from $12.2 million in 1993, and $10.7 million in 1992.
Federal funds purchased are a form of overnight borrowing from other banks.
The Company purchases funds each day to accommodate other local community
banks on the Central Coast that have excess cash to invest overnight. The
related interest expense is tied to the rate that the Company receives for
its Federal funds sold to larger financial institutions. During the last
three years, the Company has occasionally purchased additional funds from
money center banks to meet liquidity needs, especially during the RAL
season. The average balance was $14.3 million in 1994, compared to $12.7
million for 1993, and $19.4 million in 1992. Management anticipates that
the Company may need to borrow funds during the early part of the 1995
while large amounts of RAL's are outstanding to provide for liquidity
between maturing bankers' acceptances and securities. However, it is also
expected that the average balance for all of 1995 will approximate the
average balance for 1994.
OTHER REAL ESTATE OWNED
Real property owned by the Company which is not used for operational
purposes is termed Other Real Estate Owned or OREO. This would include
property acquired in foreclosure proceedings and any real estate
investments.
Occasionally, in order to protect its interests, the Company must foreclose
on the collateral for loans. The Company does not make loans with
receivables as collateral, and seldom accepts personal property as
collateral with the exception of consumer loans made for the purchase of
automobiles, boats, or motor homes. Therefore, foreclosed property
generally consists of real estate.
In addition, generally accepted accounting principles have required that
the collateral for a loan is to be considered as "in-substance foreclosed"
and reported along with OREO resulting from actual foreclosures if certain
criteria are met. Basically these criteria are meant to identify instances
in which it is unlikely that the Company will be repaid by the borrower and
will have to eventually foreclose on the collateral. In the last several
years, the Company reclassified a number of its loans as in-substance
foreclosures. In most of these instances, the Company has been unable to
initiate or complete foreclosure proceedings because the borrower has filed
for bankruptcy.
Table 13 summarizes the OREO activity during 1994:
TABLE 13 -- OREO Activity
(in thousands)
Balance, December 31, 1993 3,479
Additions 363
Sales (2,934)
Write-downs (52)
Balance, December 31, 1994 856
As can be seen from the large amount of OREO disposed of during the year,
the Company follows an aggressive policy of selling collateral it has
acquired in foreclosure. While disposal of OREO represents a challenge for
the Company when the real estate market is slow, the total left to be
disposed of is only 0.08% of total assets. This is about 37% of the amount
held by its FDIC peers as a percentage of their total assets.
As part of the loan application process, the Company reviews all real
estate collateral for possible problems from contamination by hazardous
waste. This is reviewed again before any foreclosure proceedings are
initiated, and Management therefore believes the Company has no significant
exposure to liability for environmental cleanup costs.
As mentioned in Note 1 a new accounting standard will eliminate in-
substance foreclosures and such loans will continue to be accounted for as
loans until the Company has actually taken title. While reported as loans,
they will be carried at the fair value of the collateral or at the net
present value of the anticipated cash flows rather than at the principal
balance outstanding.
OTHER OPERATING INCOME
Trust fees remain the largest component of other operating income. The
market value of assets under administration--on which the majority of fees
are based--increased from $853 million at the start of 1992 to $1.2 billion
at the end of 1994.
Trust fees are expected to increase in 1995 as the Company will be placing
trust employees in the new Ventura offices and will be implementing new
marketing activities in Santa Barbara.
Included within other service charges, commissions and fees are service
fees arising from credit card processing, escrow fees, and a number of
other fees charged for special services provided to customers. This
category of income is less than in prior years because of the sale in 1993
of the credit card portfolio, but the personnel costs and other expenses
related to this activity have also been reduced.
The Company continues to work on increasing other income and fees because
it is an important potential contributor to profitability. In late 1994,
after a thorough evaluation of the cost and value of the services and a
comparison of the Company's fees with other financial institutions,
Management raised most fees and began charging new fees for a number of
services.
OTHER OPERATING EXPENSE
Total other operating expenses have increased over the last three years as
the Company has grown, but as a percentage of average earning assets, these
expenses have remained relatively steady at 4.09%, 4.16%, and 4.00%, for
1994, 1993, and 1992, respectively. These ratios are quite favorable
compared to the average ratio of 4.52% for its FDIC peer group for the
first nine months of 1994, especially when two important factors are
considered.
The first is that it is exceptional for a financial institution the size of
the Company to have such a large trust division. The expenses of this
division are included in the general category of other operating expenses
(the numerator of the ratio), but there are no earning assets associated
with the division (the denominator of the ratio).
The second factor is the high proportion of premises leased rather than
owned by the Company. There is increased lease expense, but, as noted
above, by avoiding committing funds to the purchase of premises, the
Company is able to substantially increase its net interest income.
Within the whole category of other operating expense, from 1992 to 1994
salary and benefit expenses have increased 14.2% compared to a 9.6%
increase in average earning assets. Net occupancy and equipment expense
have increased slightly from 1992 to 1994 because of some renovation of
branch offices, cost of living increases on leases, and the opening of a
new branch in Santa Barbara in 1993. Both of these categories will increase
in 1995 as the Company opens three new branches in Ventura County.
Several of the major components of other operating expense are shown in
Note 11 to the consolidated financial statements which this discussion
accompanies, and one of these, FDIC insurance assessments, has increased
from 1992 to 1994 due to the growth in deposits during this period. In
1993, the FDIC instituted a sliding scale for deposit premiums, charging
more to those banks which were not well capitalized. The Company's rate in
1993 and 1994, 23.0 cents per hundred dollars of deposits per year, is the
lowest rate in the scale. Regulations have been proposed which would
significantly lower this rate for commercial banks in the fourth quarter of
1995.
CAPITAL RESOURCES
By the current regulatory definitions, the Company is "well-capitalized,"
the highest rating of the five categories defined under FDICIA.
Capital Adequacy Standards
Much of the regulatory, political, and media attention being given to
financial institutions of late has been focused on their capital adequacy.
The primary measure of capital adequacy is based on the ratio of capital to
risk weighted assets. This method of measuring capital adequacy is meant to
accomplish several ends: 1) to establish capital requirements that are more
sensitive to the differences in risk associated with various assets; 2) to
explicitly take into account off-balance sheet exposures in assessing
capital adequacy; and, 3) to minimize disincentives to holding liquid, low-
risk assets. The Company, as a bank holding-company, is required by the FRB
to maintain a risk-based capital ratio of at least 8.00%. At the end of
1994, the Company's ratio was 19.14%. Through its primary regulator, the
FDIC, the Bank is also subject to the requirement to maintain a risk-based
capital ratio of 8.00%. The Bank's ratios have always been slightly higher
than the Company's, and at the end of 1994, its ratio was 19.28%. The
ServiceCorp has no minimum capital requirements.
The risk-based capital ratio is strongly impacted by the management of the
investment portfolio because the U.S. Treasury securities in which the
Company is now heavily invested are assigned a zero risk weighting and two
other instruments in which the Company has often placed a significant
amount of funds--Federal funds sold and bankers' acceptances--have only a
20% risk weighting. Loans, which the Company is trying to increase as a
percentage of total assets are generally risk-weighted at 100%. If
Management's projections for loan growth are reached in 1995, the Company's
ratio may decrease slightly, but Management does not anticipate any reason
whatsoever why minimum standards will not continue to be significantly
exceeded.
Future Sources and Uses of Capital
The Company expects sustained growth in capital resources. Net income has
provided $37.6 million in capital in the last three years. In addition to
the capital generated from the operations of the Bank, over the years a
significant source of capital growth has been the exercise of employee
stock options. The extent of the growth from this source in any one year
depends on a number of factors, among them the current stock price in
relation to the price at the time options were granted and the number of
options that would expire if not exercised sometime during the year. In
1994, the net increase to capital from the exercise of options was $1.2
million or 14.9% percent of the net growth in shareholders' equity in this
year.
At December 31, 1994, there were approximately 237,000 options outstanding
and exercisable at less than the current market price, with an average
exercise price of $17.33. This represents a potential addition to capital
of $4.1 million, if all options were exercised with cash. However,
employees are permitted to exercise options by trading shares of stock
already owned. This "swapping" of shares reduces the amount of new equity
created when options are exercised. Therefore, some amount less than the
$4.1 million in new capital is likely to result from the exercise of
options, and they are likely to be exercised over a number of years.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements as of the end of 1994, except as reported in
Note 15 to the consolidated financial statements. State law limits the
amount of dividends that may be paid by a bank to the lesser of the bank's
retained earnings or the total of its undistributed net income for the last
three years. For the Bank, this would mean approximately $26.1 million more
could have been transferred as dividends to the Bancorp in 1994, subject to
regulatory capital requirements. The primary need for funds to be
transferred to the Bancorp is for the payment of dividends to its
shareholders. Management expects that the amount of dividends to be
transferred to the Bancorp from the Bank will be in the range of $2 to $4
million per year.
Tender Offer
As disclosed in Note 8 to the accompanying consolidated financial
statements, in 1993 the Company purchased approximately 155,000 shares of
its stock under the terms of a formal tender offer. The Company paid $3.3
million for the stock tendered, accounted for as a retirement of shares and
reduction of capital. As explained in the tender offer, this action was
taken: 1) to provide an opportunity to sell shares to shareholders who
wished to dispose of shares and had not been able to because of the lack of
an active, established market, 2) because the significant earnings growth
over the last several years had resulted in an accumulation of capital in
excess of current needs, and 3) to reduce the outstanding shares in
anticipation of the issuance of new shares upon the exercise of employee
stock options.
REGULATION
The Company is strongly impacted by regulation. The Company and its
subsidiaries may engage only in lines of business that have been approved
by their respective regulators, and cannot open, close, or relocate offices
without their approval. Disclosure of the terms and conditions of loans
made to customers and deposits accepted from customers are both heavily
regulated as to content. The Company and the Bank must file periodic
reports with the various regulators to keep them informed of their
financial condition and operations as well as their compliance with all the
various regulations. The FRB, the FDIC, and the California State Department
of Banking conduct periodic examinations of the Company and the Bank to
verify that the reporting is accurate and to ascertain that the Company and
the Bank are in compliance with regulations.
FDICIA became effective in 1992. FDICIA requires banks to meet new
capitalization standards, follow stringent outside audit rules, and
establish stricter internal controls. There are also new requirements to
ensure that the Audit Committee of the Board of Directors is independent.
By the provisions of the federal Community Reinvestment Act ("CRA"), the
Bank is required to make significant efforts to ensure that access to
banking services is available to every segment of the community. The
Company was examined in late 1992 by the FDIC for compliance with this act
and was given the highest possible rating of "Outstanding."
The FRB may take action against bank holding companies and the FDIC against
banks should either agency make a finding that a financial institution has
failed to maintain adequate capital. This action has usually taken the form
of restrictions on the payment of dividends to shareholders, requirements
to obtain more capital from investors, and restrictions on operations.
Management has received no indication from either regulatory agency that
would in any way suggest that they are contemplating any such finding, and
given the strong capital position of the Company and the Bank, it expects
no such finding to be made in the foreseeable future.
IMPACT OF INFLATION
Inflation has been moderate for the last several years and has had little
or no impact on the financial condition and results of operations of the
Company during the periods discussed here.
LIQUIDITY
Sufficient liquidity is necessary to handle fluctuations in deposit levels,
to provide for customers' credit needs, and to take advantage of investment
opportunities as they are presented in the market place. As indicated in
the Consolidated Statements of Cash Flows included with the accompanying
consolidated financial statements, the principal sources of liquidity for
the Company have been interest payments received on loans and investments,
proceeds from the maturity or sale of securities and bankers' acceptances,
and the growth in deposits.
To manage the Company's liquidity properly, however, it is not enough
merely to have large cash inflows; they must be timed to coincide with
anticipated outflows. Also, the available cash on hand or cash equivalents
must be sufficient to meet the exceptional demands that can be expected
from time to time relating to natural catastrophes such as flood,
earthquakes, and fire.
The timing of inflows and outflows is accomplished by making adjustments to
the mix of the assets and the liabilities so that maturities are well
matched. The timing of liquidity sources and demands is well-matched when
there are approximately the same amount of short-term liquid assets as
volatile, large liabilities, and the maturities of the remaining longer-
term assets are not concentrated in any single time period.
A means of computing liquidity using this concept of matching maturities,
and one that is similar to that used by bank regulators, is to compute the
difference between the short-term, liquid assets and the volatile, large
liabilities. Liquidity is positive if short-term, liquid assets exceed
volatile, large liabilities and negative if they are less. The difference
is then divided by the sum of net loans and long-term securities to
determine the relative size of any mismatch. The formula reads as follows:
Short-term, Volatile,
liquid assets -- large liabilities
_______________________________________ = Liquidity Ratio
Net Loans and Long--Term Securities
Of those assets currently held, the Company considers its short-term liquid
assets to consist of U.S. Treasury securities with a remaining term to
maturity of two years or less, Federal funds sold, and bankers'
acceptances. In the Company's asset/liability management framework,
bankers' acceptances are used only as an alternative to 6-month U.S.
Treasury securities, rather than as loans, and since only the highest rated
bankers' acceptances are purchased, they are highly liquid over their 6-
month terms. Cash on hand and at the FRB is not included among liquid
assets because the Company maintains only the minimum amounts required by
Federal regulations of these non-earning assets.
The volatile, large liabilities are time deposits over $100,000, Federal
funds purchased, repurchase agreements, and other borrowed funds. While
balances held in demand and passbook accounts are immediately available to
depositors, they are generally the result of stable business or customer
relationships with inflows and outflows usually in balance over relatively
short periods of time. Therefore, for the purposes of this kind of
analysis, they are not considered volatile.
As of December 31, 1994, this ratio was a positive 15.8%. This means that
there is a substantial excess of short-term, liquid assets to handle any
sudden withdrawals of large, volatile liabilities. This positive 15.8%
compares with ratios for year-end 1993 and 1992 of 21.0% and 29.0%,
respectively. Liquidity has decreased from year-end 1992 to year-end 1994
as the large, volatile liabilities and the net loans and long-term
securities have increased while short-term, liquid assets--primarily
shorter-term U.S. Treasury securities--have decreased.
Too little liquidity results in lost opportunities and difficulties in
meeting commitments. Excessive liquidity results in less income because the
shorter, liquid assets do not usually pay as high an interest rate as the
longer-maturing assets. Despite a decrease in the last two years, as of
December 31, 1994, the liquidity ratio is still higher than the Company's
target level. However, the Company manages its liquidity along with
considerations of the three types of interest risk, and Management has been
reluctant to invest more than a small portion of the taxable portfolio in
instruments with longer than a two year maturity when rates are rising
because of the depreciation that would result if interest rates continue to
rise.
The mechanism used by the Company to respond to liquidity needs has
differed during the last three years depending on what instruments were
held in its securities and money-market portfolios.
As explained in the section above titled "Securities," as interest rates
fall, the Company's investment policy requires it to purchase securities
with available cash rather than sell it as Federal funds. This process
began in 1990, and continued into 1992. Such a shift into securities does
not occur all at once; the Company staggers its purchases to ensure a range
of maturities and to avoid a concentration of securities at similar
interest rates. The first consideration helps to maintain liquidity through
frequent maturities and the latter avoids having to sell a large amount of
securities at one time under the "stop-loss" practice described above
should interest rates start to rise again.
In 1992 and 1993, with a high proportion of its liquidity placed in U.S.
Treasury securities, short-term liquidity needs were occasionally met by
purchasing additional Federal funds from the money center banks or
borrowing at the FRB discount window. The amount and frequency with which
the Company may borrow from the FRB and from the money center banks is
restricted by regulation and by agreement. Therefore, Management limited
the use of these sources of liquidity as much as possible.
INCOME TAX EXPENSE
As indicated in Note 1 to the accompanying consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("SFAS 109") at the beginning of 1993.
As was the case under the former standard, income tax expense continues to
be the sum of two components, the current tax expense or provision and the
deferred expense or provision. Current tax expense is the result of
applying the current tax rate to taxable income, just as it was under the
former method, but the new standard changes the method by which the
deferred income tax provision is computed.
The deferred provision is supposed to account for the fact that taxable
income differs from pre-tax income in the accompanying consolidated income
statements because some items of income and expense are recognized in
different years for income tax purposes than in the financial statements.
For example, the Company is only permitted to deduct from taxable income on
its Federal tax return actual net loan charge-offs, irrespective of the
amount of provision for loan loss (bad debt expense) it recognized in its
financial statements. This causes what is termed a "temporary difference"
because eventually, as loans are charged-off, the Company will be able to
deduct for taxes what has already been recognized as an expense in the
financial statements. Another example is the accretion of discount on
certain securities. For its financial statements, the Company recognizes
income as the discount is accreted, but for its tax return, the Company can
defer the recognition of income until the cash is received at the maturity
of the security. The first example causes a deferred tax asset to be
created because the Company has recognized as an expense for its current
financial statements an item that it will be able to deduct from its
taxable income in a future year. The second example causes a deferred tax
liability, because the Company has been able to delay until a subsequent
year the paying of tax on an item of current year financial statement
income.
SFAS 109 requires that the Company measure all its deferred tax assets and
liabilities at the end of each year and the difference between the net
asset or liability at the beginning of the year and the end of the year is
the deferred tax provision for the year. Prior to 1993, the Company had
been computing its deferred provision by a different method which was then
in accordance with generally accepted accounting principles. Therefore, an
initial adjustment had to be recognized to bring its net deferred asset up
to the amount that was computed under the new standard. This adjustment of
$620,000 is shown on the statement of income for 1993 as the cumulative
effect of a change in accounting principle.
The standard limits the amount of any deferred tax asset that may be
recorded to an amount that is likely to be realized as a tax benefit in
future years.
Most of the Company's temporary differences involve recognizing
substantially more expenses in its financial statements than it has been
allowed to deduct for taxes, and therefore the Company has a net deferred
tax asset. Deferred tax assets are dependent for realization on past taxes
paid, against which they may be carried back, or future taxable income,
against which they may be offset. The Company has had and expects to have
in the future sufficient taxable income each year to make it very likely
that it will be able to realize the benefit of this deferred tax asset. If
there were a question about the Company's ability to realize the benefit
from the asset, it would have to record a valuation allowance against the
asset to reflect the uncertainty. Given the amount and nature of the
Company's deferred assets, the past taxes paid, and the likelihood of
future taxable income, realizability is assured and no valuation allowance
needs to be provided.
The amounts of the two components, the amounts of the various deferred tax
assets and liabilities, and the tax effect of the principal temporary
differences between taxable income and pre-tax financial statement income
are shown in Note 7 to the accompanying financial statements.
To ensure that all corporations with substantial income for financial
reporting purposes ("book income") pay some Federal income tax, Congress
established the Alternative Minimum Tax ("AMT") as a second parallel tax
system. Under AMT provisions, there is a limitation on how great the
difference may be between book income and taxable income. If the difference
is too great, a portion of the book income not normally taxable is
nonetheless added to taxable income and the total is multiplied by the AMT
tax rate for comparison with the regular tax computation. The Company is
required to pay the greater of the Federal tax liability computed under the
regular tax system or that computed using the special rules of the AMT.
The Company has substantial differences between book income and taxable
income due to the temporary differences noted above and due to permanent
differences like the tax-exempt income from state and municipal securities.
These differences have not been sufficient to trigger the AMT rate in the
last three years, but the lowest effective tax rate for the Company occurs
at the point that the regular tax computation and the AMT computation
result in the same tax amount. The Company therefore tries to stay very
close to this crossover point. In these circumstances, the Company
carefully considers the impact of new purchases of tax-exempt securities
and other transactions which might cause the AMT to come into effect.
COMMON STOCK PRICES AND DIVIDENDS
Stock prices and cash dividends declared for the last eight quarters are
shown on page 56 in "Selected Annual and Quarterly Financial Data." The
stock prices shown represent only trades known to the Company or its
transfer agent. The stock is not listed on an exchange, but offers to buy
and sell, and some trades are reported on the NASDAQ bulletin board under
the symbol SABB.
The Board of Directors periodically increases the dividend rate in
acknowledgement that earnings have been increasing by a sufficient amount
to ensure adequate capital and also provide a higher return to
shareholders. For the years 1994, 1993, and 1992, the Company has declared
dividends which were 30.8%, 28.0%, and 25.4%, respectively, of its net
income.
Notes to Management's Discussion and Analysis of Financial Condition and
Results of Operations
NOTE A
As of September 30, 1994, for all FDIC banks with an asset size of $1
billion to $10 billion, non-performing assets represented 12.80% of their
equity capital and 1.06% of their total assets. For banks of all sizes in
the FDIC's Western region, they represented 17.20% of equity capital and
1.48% of total assets.
In various places throughout this discussion, comparisons will be made
between ratios for the Company and for its FDIC peers. For 1994, the peer
group generally is all FDIC banks with an asset size of $1 billion to $10
billion, and the information set forth above is reported in or calculated
from information reported in the FDIC Quarterly Banking Profile, Third
Quarter 1994, which is the latest issue available. This publication also
reports some statistics by all banks within a geographical region. When
relevant, the statistic for the Western region is cited. The publication
does not report some of the statistics cited in this analysis by the
separate size-based peer groups or by geographical region. In these
instances, the figure cited is for all FDIC banks regardless of size.
NOTE B
For Tables 2 and 4, the yield on tax-exempt state and municipal securities
has been computed on a taxable equivalent basis. The interest on these
securities is subject to California state tax no matter what the state of
origin of the issuer. The California state tax rate used for the taxable
equivalent computation in 1994 is 11.470%. While the income from these
state and municipal securities is not subject to Federal tax, the Company
does receive Federal income tax benefit for 34% of the State tax paid, that
is, state taxes are deductible for Federal taxes, and to the extent that
state tax is paid on the income from these securities, the deduction for
state taxes on the Federal return is larger. The difference between
purchase yield and taxable equivalent yield is further impacted by the
disallowance as a deduction for Federal income tax purposes of 20% of the
underlying cost of funds used to support tax-exempt securities. The amount
of interest expense disallowed for Federal tax purposes for 1994 was
approximately $452,000.
To compute the taxable equivalent yield for these securities one must first
add to the actual interest earned an amount such that if the resulting
total were fully taxed, the after-tax income would be equivalent to the
actual tax-exempt income. This taxable equivalent income is then divided by
the average balance to obtain the taxable equivalent yield. The dollar
amount of the adjustment is shown at the bottom of Table 2 as "Taxable
equivalent income included in interest income from nontaxable securities
and loans."
NOTE C
For purposes of Table 2, loans in a nonaccrual status are included in the
computation of average balances in their respective loan categories.
NOTE D
For purposes of the amounts in Table 3 relating to the volume and rate
analysis of net interest margin, the portion of the change in interest
earned or paid that is attributable to changes in rate is computed by
multiplying the change in interest rate by the prior year's average
balance. The portion of the change in interest earned or paid that is
attributable to changes in volume is computed by multiplying the change in
average balances by the prior year's interest rate. The portion of the
change that is not attributable either solely to changes in volume or
changes in rate is prorated on a weighted basis between volume and rate.
NOTE E
For purposes of Tables 2 and 3, non-origination loan fees and net
origination fees amortized in accordance with Statement of Financial
Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases, are included in interest income.
NOTE F
In Table 1, the net deferred loan origination, commitment, and extension
fees and the allowance for loan losses are included in the column titled
"Noninterest bearing or non-repricing items."
NOTE G
Since there is credit risk associated with letters of credit as well as
with outstanding loans, a portion of the allowance for loan loss needs to
be allocated to them. This allocation for letters of credit is included in
the category of "Other." The amount of outstanding letters of credit was
added to total loans and to the category of "Other" loans for the purpose
of computing the ratio each category of loans bears to total loans. These
amounts were $9,093,000 for 1994, $10,447,000 for 1993, and $12,230,000 for
1992.
Santa Barbara Bancorp and Subsidiaries
Report of Independent Public Accountants
To the Shareholders and the
Board of Directors
We have audited the accompanying consolidated balance sheets of SANTA
BARBARA BANCORP (a California corporation) and Subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1994. These financial statements are the
responsibility of Santa Barbara Bancorp's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Santa Barbara Bancorp
and Subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
As explained in Notes 1, 2, 7 and 14 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards
No. 106 effective January 1, 1992, Statement of Financial Accounting
Standards No. 109 effective January 1, 1993, and Statement of Financial
Accounting Standards No. 115 effective December 31, 1993.
(Signature: Arthur Andersen & Co)
Los Angeles, California
January 31, 1995
<TABLE>
CONSOLIDATED BALANCE SHEETS Santa Barbara Bancorp
and Subsidiaries
<CAPTION>
December 31
(in thousands) 1994 1993
<S> <C> <C>
Assets:
Cash and due from banks (Note 5) $ 69,630 $ 50,946
Federal funds sold 15,000 0
Total cash and cash equivalents 84,630 50,946
Securities (approximate fair value of $382,090
in 1994 and $404,233 in 1993) (Notes 1 and 2):
U.S. Treasury obligations 243,493 289,520
U.S. agency obligations 53,954 15,800
State and municipal securities 89,512 78,198
Total securities 386,959 383,518
Bankers' acceptances 80,594 63,614
Loans (Note 3) 499,431 464,230
Less: allowance for loan losses (Note 4) 12,911 10,067
Net loans 486,520 454,163
Premises and equipment, net (Note 6) 7,391 6,657
Accrued interest receivable 8,130 7,228
Other assets (Notes 1 and 7) 13,392 13,017
Total assets $ 1,067,616 $ 979,143
Liabilities:
Deposits:
Noninterest bearing demand deposits $ 147,085 $ 114,557
Interest bearing deposits:
NOW accounts 142,639 127,296
Money market deposit accounts 355,581 247,772
Other savings deposits 113,074 148,719
Time certificates of $100,000 or more 63,556 83,380
Other time deposits 134,782 144,529
Total deposits 956,717 866,253
Securities sold under agreements to repurchase
and Federal funds purchased (Note 9) 9,487 20,155
Other borrowings (Note 10) 1,000 1,172
Accrued interest payable and
other liabilities (Notes 7, 12 and 14) 6,452 5,572
Total liabilities 973,656 893,152
Commitments and contingencies (Note 15)
Shareholders' equity (Notes 8 and 12):
Common stock-- no par value, $1.00 stated value; shares
authorized: 20,000; shares issued and outstanding:
5,126 in 1994 and 5,065 in 1993. 5,126 5,065
Surplus 39,683 38,557
Unrealized gain (loss) on securities
available-for-sale net of tax (Notes 1 and 2) (1,496) 683
Retained earnings 50,647 41,686
Total shareholders' equity 93,960 85,991
Total liabilities and shareholders' equity $ 1,067,616 $ 979,143
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS Santa Barbara Bancorp
OF INCOME and Subsidiaries
<CAPTION>
(in thousands, except for per share data) Year Ended December 31
1994 1993 1992
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 46,816 $ 43,032 $ 46,667
Interest on securities:
U.S. Treasury obligations 16,495 16,848 19,556
U.S. Agency obligations 2,085 226 --
State and municipal securities 7,232 6,772 6,376
Interest on Federal funds sold 772 795 190
Interest on bankers' acceptances 1,500 760 127
Total interest income 74,900 68,433 72,916
Interest expense:
Interest on deposits:
NOW accounts 1,294 1,436 2,016
Money market deposit accounts 10,387 6,245 7,646
Other savings deposits 3,033 3,812 4,584
Time certificates of $100,000 or more 2,366 2,910 5,022
Other time deposits 6,928 7,163 8,315
Total interest on deposits 24,008 21,566 27,583
Interest on securities sold under agreements to
repurchase and Federal funds purchased (Note 9) 878 728 1,058
Interest on other borrowings (Note 10) 81 68 136
Total interest expense 24,967 22,362 28,777
Net interest income 49,933 46,071 44,139
Provision for loan losses (Notes 1 and 4) 6,257 6,150 4,650
Net interest income after provision for loan losses 43,676 39,921 39,489
Other operating income (Note 11):
Service charges on deposit accounts 3,183 2,825 2,722
Trust fees (Note 1) 6,449 6,588 6,124
Other service charges, commissions and fees 4,077 3,793 3,650
Net loss on sale of securities (Notes 1, 2 and 7) (1,191) (47) (408)
Other income 566 943 974
Total other operating income 13,084 14,102 13,062
Other operating expense:
Salaries and other compensation 16,300 15,332 14,060
Employee benefits (Note 12) 4,849 4,309 4,461
Net occupancy expense (Notes 6 and 15) 3,528 2,990 2,809
Equipment rental, depreciation and maintenance (Note 6) 2,247 1,816 1,442
Net cost of operating other real estate (Note 1) (485) 1,151 1,278
Other operating expense (Note 11) 12,852 11,738 11,031
Total other operating expense 39,291 37,336 35,081
Income before provision for income taxes 17,469 16,687 17,470
Provision for income taxes (Note 7) 4,518 4,377 4,912
Net income before cumulative effect
of accounting changes 12,951 12,310 12,558
Cumulative effect of accounting changes (Notes 1 and 14) -- 620 (858)
Net income $ 12,951 $ 12,930 $ 11,700
Earnings per share before cumulative effect
of accounting changes $2.54 $2.37 $2.42
Cumulative effect of accounting changes -- 0.12 (0.16)
Earnings per share $2.54 $2.49 $2.26
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES Santa Barbara Bancorp
IN SHAREHOLDERS' EQUITY and Subsidiaries
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Surplus Available-
(in thousands) Common Stock Net of for-Sale Retained
Shares Amount ESOP Loan (Notes 1 & 2) Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1991 5,174 $ 5,174 $ 38,396 -- $ 23,645 $ 67,215
Exercise of employee
stock options 33 33 375 -- -- 408
Retirement of
common stock (28) (28) (382) -- -- (410)
Cash dividends declared
at $0.565 per share -- -- -- -- (2,968) (2,968)
Reduction in
ESOP Liability -- -- 1,200 -- -- 1,200
Net income -- -- -- -- 11,700 11,700
Balance,
December 31, 1992 5,179 5,179 39,589 -- 32,377 77,145
Exercise of employee
stock options 51 51 861 -- -- 912
Retirement of
common stock (165) (165) (3,293) -- -- (3,458)
Cash dividends declared
at $0.70 per share -- -- -- -- (3,621) (3,621)
Unrealized gain on securities
available-for-sale -- -- -- $ 683 -- 683
Reduction in
ESOP liability -- -- 1,400 -- -- 1,400
Net income -- -- -- -- 12,930 12,930
Balance,
December 31, 1993 5,065 5,065 38,557 683 41,686 85,991
Exercise of employee
stock options 100 100 2,116 -- -- 2,216
Retirement of
common stock (39) (39) (990) -- -- (1,029)
Cash dividends declared
at $0.78 per share -- -- -- -- (3,990) (3,990)
Changes in unrealized gain
(loss) on securities
available-for-sale -- -- -- (2,179) -- (2,179)
Net income -- -- -- -- 12,951 12,951
Balance,
December 31, 1994 5,126 $ 5,126 $ 39,683 $ (1,496) $ 50,647 $ 93,960
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF Santa Barbara
Bancorp
CASH FLOWS and
Subsidiaries
<CAPTION>
(in thousands)
Increase (decrease) in cash and cash Year Ended December
31
equivalents (Note 1): 1994 1993
1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,951 $ 12,930 $
11,700
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,614 1,143
989
Provision for loan losses 6,257 6,150
4,650
Benefit for deferred income taxes (1,724) (122)
(1,241)
Net (recovery) writedown on other real estate owned (821) 139
1,021
Net amortization of discounts and premiums for
securities and bankers' acceptances (6,523) (4,165)
(4,067)
Net change in deferred loan origination fees and costs 736 139
(34)
(Increase) decrease in accrued interest receivable (902) 664
(439)
Increase (decrease) in accrued interest payable 296 (101)
(662)
Net loss on sale of securities 1,191 47
408
Increase in service fees and other income receivable (23) (697)
(20)
Increase (decrease) in income taxes payable (214) (74)
301
Other operating activities 816 (524)
410
Net cash provided by operating activities 13,654 15,529
13,016
Cash flows from investing activities:
Proceeds from sale of securities: (Note 2) 9,975
56,002
Available-for-sale 138,799
Proceeds from call or maturity of securities: (Note 2) 118,843
83,659
Available-for-sale 163,847
Held-to-maturity 4,610
Purchase of securities: (Note 2) (119,904)
(200,213)
Available-for-sale (211,108)
Held-to-maturity (98,514)
Proceeds from sale or maturity of bankers' acceptances 62,970 35,175
--
Purchase of bankers' acceptances (79,380) (62,969)
(35,174)
Net (increase) decrease in loans made to customers (39,374) (7,541)
15,230
Disposition of property from defaulted loans 3,436 15,511
3,564
Purchase or investment in premises and equipment (2,384) (2,714)
(867)
Proceeds from sale of premises and equipment 22 15
2,307
Net cash used in investing activities (57,076) (13,609)
(75,492)
Cash flows from financing activities:
Net increase in deposits 90,464 16,878
48,753
Net decrease in borrowings with maturities of 90 days or less (10,668) (5,827)
(4,447)
Proceeds from issuance of common stock (Note 8) 1,187 728
180
Payments to retire common stock (Note 8) -- (3,274)
(182)
Dividends paid (3,877) (3,538)
(2,756)
Net cash provided by financing activities 77,106 4,967
41,548
Net increase (decrease) in cash and cash equivalents 33,684 6,887
(20,928)
Cash and cash equivalents at beginning of period 50,946 44,059
64,987
Cash and cash equivalents at end of period $ 84,630 $ 50,946 $
44,059
Supplemental disclosure:
Cash paid during the year for:
Interest $ 24,671 $ 22,463 $
29,439
Income taxes $ 6,102 $ 4,355 $
5,096
Non-cash transactions:
Additions to other real estate owned
and in-substance foreclosures (Note 1) $ 265 $ 18,496 $
4,370
Net release from senior debt on OREO upon sale $ 327 $ 353
0
<FN>
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL Santa Barbara Bancorp
STATEMENTS and Subsidiaries
1. SUMMARY OF SIGNIFICANT POLICIES
General
SANTA BARBARA BANCORP (the "Company") is a bank holding company organized
under the laws of California. The Company and its principal subsidiary,
Santa Barbara Bank & Trust (the "Bank") are engaged in the general
commercial bank and trust business. The other subsidiary, SBBT Service
Corporation, provides correspondent services to other local area community
banks.
Basis of Presentation
The accounting and reporting policies of the Company and its subsidiaries
are in accordance with generally accepted accounting principles and conform
to practices within the banking industry. The consolidated financial
statements include the accounts of the Company and its subsidiaries, after
eliminating significant intercompany balances and transactions.
Securities
Debt obligations of the U.S. Treasury, U.S. agencies, and of states and
municipalities are purchased with the intent to hold to maturity. However,
the Company occasionally sells securities prior to maturity in order to
limit losses if interest rates rise, or to restructure the portfolio to
better match the maturity and interest rate characteristics of liabilities.
The Company implemented Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115"), as of December 31, 1993. This statement requires the Company
to classify its securities into one of three categories. Securities for
which the Company has the positive intent and ability to hold until
maturity are classified as held-to-maturity securities. Securities which
might be sold prior to maturity because of interest rate changes, to meet
liquidity needs, or to better match the repricing characteristics of
funding sources are classified as available-for-sale. If the Company were
to purchase securities principally for the purpose of selling them in the
near term for a gain, they would be classified as trading securities. The
Company holds no securities that should be classified as trading
securities.
In accordance with the provisions of SFAS 115, the Company's securities
classified as held-to-maturity are carried at amortized historical cost.
This is the purchase price increased by the accretion of discounts or
decreased by the amortization of premiums using the effective interest
method. Discount is accreted and premium is amortized over the period to
maturity of the related securities, or to an earlier call date, if
appropriate.
The interest income from securities that are classified as available-for-
sale is recognized in the same manner as for securities that are held-to-
maturity, including the accretion of discounts and the amortization of
premiums. However, unlike the securities that are held-to-maturity, these
securities are reported on the consolidated balance sheets for the years
ended December 31, 1994 and 1993 at their fair value. The net unrecognized
gain or loss for these securities is reported on the consolidated balance
sheets as a separate component of equity, net of the tax effect.
Loans, Fees, and Allowance for Loan Losses
Loans are carried at amounts advanced to the borrowers less principal
payments collected. Interest on loans is accrued on a simple interest
basis, except where serious doubt exists as to the collectibility of the
loan, in which case the accrual of income is discontinued and uncollected
income is subtracted from interest earned.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of
the loan as an adjustment to the interest earned. The net unrecognized fees
represent unearned revenue, and they are reported as reductions of the loan
principal outstanding, or additions to the loan principal if the deferred
costs are greater than deferred fees.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can reasonably be anticipated. The allowance is
based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and, as adjustments
become necessary, they are reported in earnings in the periods in which
they become known.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to income over the estimated useful
lives of the assets, usually by the use of accelerated methods in the early
years, switching to the straight-line method in later years. Leasehold
improvements are amortized over the terms of the leases or the estimated
useful lives of the improvements, whichever is shorter. Generally, the
estimated useful lives of other items of premises and equipment are as
follows:
Buildings and improvements 10-25 years
Furniture and equipment 5-7 years
Income Taxes
The Company is required to use the accrual method for tax return purposes
as well as for financial reporting purposes. However, there are several
items of income and expense which are recognized in different periods for
tax return purposes than for financial reporting purposes. Appropriate
provisions have been made in the financial statements for deferred taxes in
recognition of these temporary differences.
In February, 1992, the FASB promulgated Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"), which requires
an asset and liability approach for financial accounting and reporting for
income taxes. The Company adopted the pronouncement as of the beginning of
1993. The effect on income for the years prior to adoption must be
recognized. This had to be done by either of two means. The first is by
recognizing the effect on all prior years as a cumulative effect from a
change in accounting principle in the year of adoption. The second is by
restating the financial statements for one or more prior years to conform
to the provisions of the statement, with the effect on earlier years that
were not restated being recognized as a cumulative effect in the earliest
year restated. The Company elected to implement the statement by the first
means, and consequently recognized a gain of $620,000 as the cumulative
effect of a change in accounting principle.
Trust Fees
Trust fees for customary services are generally based on the market value
of customer assets, and an estimate of the fees is accrued monthly. Fees
for unusual or infrequent services are recognized when the fee can be
determined.
Earnings Per Share
Earnings per common share are based on the weighted average number of
shares outstanding during each year retroactively restated for stock
dividends and stock splits. The weighted average number of shares
outstanding was 5,097,893 in 1994, 5,189,082 in 1993, and 5,182,168 in
1992. The only potential common stock equivalents for the Company are
shares issuable on the exercise of outstanding options. Even if all of the
outstanding stock options had been exercised, there would be no material
dilutive effect for any of the years presented and therefore they have been
excluded from the computation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and Federal funds sold. Federal funds are sold for
only one day at a time.
Postretirement Health Benefits
The Company provides eligible retirees with postretirement health care and
dental benefit coverage. These benefits are also provided to the spouses
and dependents of retirees on a shared cost basis. Benefits for retirees
and spouses are subject to deductibles, copayment provisions, and other
limitations.
In December 1990, the FASB issued Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions ("SFAS 106"). Though permitted to wait until 1993 to
implement the statement, the Company elected to implement it in 1992. The
statement requires that the expected cost of any such benefits must be
charged to expense during the years that the employees render service. This
was a significant change from the Company's past practice of recognizing
these costs on the cash basis. In addition, the Company had to address the
cost of the benefits that were earned by retirees and employees prior to
1992. The Company adopted the statement effective January 1, 1992.
Under the provisions of the statement, at the effective date of adoption,
the employer has a liability which represents the net present value of that
portion of the estimated future cost of the eventual benefits that the
employees have earned by their service up to that date. An employer may
recognize this liability by one of two means. In the year of adoption it
may record the whole amount of this liability through a charge to income as
a change in accounting method. The statement refers to this option as
"adoption by means of a cumulative catch-up adjustment." Alternatively, the
employer may instead record a pro-rata portion of the liability over a
period of up to twenty years. The statement refers to this method as
"adopting prospectively". The Company elected to adopt the statement by
means of a cumulative catch-up adjustment whereby it recognized the whole
liability in 1992. It is shown net of the tax effect as a cumulative effect
of an accounting change of $858,000 in the consolidated statement of income
for the year ended December 31, 1992.
Other Real Estate Owned and Collateral Foreclosed In Substance
Other real estate owned ("OREO") represents real estate acquired through
foreclosure or deed in lieu of foreclosure and real estate investments. In
addition, loans which meet certain criteria are not included in the amounts
reported for loans, but are instead reported along with other real estate
owned in other assets. The criteria are designed to identify loans which
are unlikely to be repaid except through eventual foreclosure and
subsequent sale of the collateral by the Company. The collateral for these
loans is said to be foreclosed "in substance." As provided in the Statement
of Position 92-3, Accounting for Foreclosed Assets, published by the
American Institute of Certified Public Accountants, OREO acquired through
foreclosure and collateral that is regarded as foreclosed in substance are
carried at the lower of cost or fair value less estimated costs to sell the
collateral. Cost is determined at the date of acquisition or classification
of the collateral as foreclosed in substance and is defined as the fair
value at that time. If the outstanding balance of the loan is greater than
the fair value less estimated disposal costs at the time of the acquisition
or reclassification, the difference is charged-off against the allowance
for loan loss. Any senior debt to which other real estate owned is subject
is reported along with other borrowings and is not deducted from the
carrying amount of the collateral.
During the time the property is held or while the collateral is classified
as foreclosed in substance, all related carrying costs are expensed as
incurred and additional decreases in the fair value are charged to other
operating expense in the period in which they become known. Expenditures
related to improvements are capitalized to the extent that they are
realizable through increases in the fair value of the properties. Increases
in the fair value may be recognized as reductions of OREO operating expense
to the extent that they represent recoveries of amounts previously written-
down. Gains in excess of the fair value at the time of foreclosure are
recognized only when the property is sold.
In May 1993, the FASB issued Statement of Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114"). This
pronouncement must be implemented by the Company in 1995. The statement
requires that when a borrower is expected to be unable to meet the
contractual payment terms of the note, the carrying amount of the loan must
be written down to the present value of the anticipated cash flows for
principal and interest. Federal banking regulators have indicated that they
would permit banks to classify as loans those notes for which the
collateral has not yet actually been foreclosed. The Company has elected to
report those notes that had been already classified as foreclosed in
substance with other real estate owned, while reporting new situations that
arise in 1995 as loans carried at their discounted cash flows or at the
fair value of their collateral.
Management does not believe that there will be any material adverse impact
on the financial condition of the Company or on the results of operations
in the year of implementation.
OREO that has been acquired through foreclosure or deed in lieu was
$175,000 and $2,524,000 as of December 31, 1994 and 1993, respectively.
Collateral foreclosed in substance was $681,000 and $955,000 as of December
31, 1994 and 1993, respectively.
Reclassifications
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to be comparable with classifications used in the 1994
financial statements.
2. SECURITIES
A summary of debt securities at December 31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
(in thousands) Gross Gross
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses
Value
<S> <C> <C> <C> <C>
1994:
Held-to-maturity:
U.S. Treasury
obligations $ 195,354 $ 69 $ (12,189) $
183,234
U.S. agency
obligations 14,654 -- (999)
13,655
State and
municipal
securities 89,512 9,727 (1,477)
97,762
299,520 9,796 (14,665)
294,651
Available-for-sale:
U.S. Treasury
obligations 48,812 12 (685)
48,139
U.S. agency
obligations 41,024 -- (1,724)
39,300
89,836 12 (2,409)
87,439
$ 389,356 $ 9,808 $ (17,074) $
382,090
1993:
Held-to-maturity:
U.S. Treasury
obligations $ 106,491 $ 2,594 $ (512) $
108,573
U.S. agency
obligations 9,786 -- (11)
9,775
State and
municipal
securities 78,197 18,644 --
96,841
194,474 21,238 (523)
215,189
Available-for-sale:
U.S. Treasury
obligations 181,865 1,182 (17)
183,030
U.S. agency
obligations 6,015 -- (1)
6,014
187,880 1,182 (18)
189,044
$ 382,354 $ 22,420 $ (541) $
404,233
</TABLE>
During 1994, the Company transferred one of its U.S. agency securities from
its liquidity portfolio to its earnings portfolio. This entailed a change
in classification from "available-for-sale" to "held-to-maturity." The
security, purchased in 1993, was callable on the first anniversary of its
issuance. The terms of the security provided that if it was not called, the
interest rate on the security would increase, or "step up." At the time of
purchase, interest rates were such that Management expected that it would
be called. When interest rates increased during 1994, it became more
expensive for the issuer to refinance the debt at current interest rates
and the security was not called. With circumstances changed, Management
decided to transfer the security to the earnings portfolio and has
classified it as held-to-maturity. The note was transferred at its fair
value of $4,802,000. The unrealized loss on the security at the time of
transfer was $109,000 and this amount remained in the special component of
equity for unrealized gains and losses on securities available-for-sale to
be amortized over the remaining term of the security.
The amortized cost and estimated fair value of debt securities at December
31, 1994 and 1993, by contractual maturity, are shown in the next table.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
(in thousands) Held-to- Available-
Maturity for-Sale Total
<S> <C> <C> <C>
1994:
Amortized cost:
In one year or less $ 17,220 $ 33,992 $ 51,212
After one year
through five years 225,648 55,844 281,492
After five years
through ten years 35,798 -- 35,798
After ten years 20,854 -- 20,854
$ 299,520 $ 89,836 $ 389,356
Estimated market value:
In one year or less $ 17,694 $ 33,816 $ 51,510
After one year
through five years 214,105 53,623 267,728
After five years
through ten years 43,063 -- 43,063
After ten years 19,789 -- 19,789
$ 294,651 $ 87,439 $ 382,090
1993:
Amortized cost:
In one year or less $ 4,504 $ 144,965 $ 149,469
After one year
through five years 137,139 41,886 179,025
After five years
through ten years 36,463 1,029 37,492
After ten years 16,368 -- 16,368
$ 194,474 $ 187,880 $ 382,354
Estimated market value:
In one year or less $ 4,694 $ 145,650 $ 150,344
After one year
through five years 141,799 42,364 184,163
After five years
through ten years 48,229 1,030 49,259
After ten years 20,467 -- 20,467
$ 215,189 $ 189,044 $ 404,233
</TABLE>
The proceeds received from sales or calls of debt securities and the gross
gains and losses that were recognized for the years ended December 31, 1994
and 1993 are shown in the next table. Because the identification of the
securities as held-to-maturity or available-for-sale under the provisions
of SFAS 115 did not take place until December 31, 1993, it is not possible
to distinguish to which portfolio the proceeds, gains, and losses from
sales or calls that occurred during the year of 1993 relate. Consequently,
the amounts for 1993 relate to the whole portfolio. Similarly, in the
Consolidated Statements of Cash Flow, the proceeds from sales, maturities,
and calls, and the purchases of securities, are reported only for the whole
securities portfolio.
(in thousands)
Gross Gross
Proceeds Gains Losses
1994:
Held-to-maturity:
Calls $ 3,295 -- --
Available-for-sale:
Sales $ 138,799 $ 5 $ 1,196
1993 Total portfolio:
Sales $ 9,975 $ 1 $ 48
Calls $ 8,283 $ -- $ --
Securities with a book value of approximately $161,050,000 at December 31,
1994 and $140,010,000 at December 31, 1993 were pledged to secure public
funds, trust deposits and other borrowings as required or permitted by law.
3. LOANS
The loan portfolio consists of the following:
(in thousands) December 31
1994 1993
Real estate loans:
Residential $ 108,923 $ 54,395
Non-residential 145,928 123,534
Construction 26,695 41,030
Commercial, industrial,
and agricultural 148,396 168,227
Home equity line 32,573 36,219
Consumer 27,319 27,331
Municipal tax-exempt obligations 7,831 11,888
Other 1,766 1,606
$ 499,431 $ 464,230
The amounts above are shown net of deferred loan origination, commitment,
and extension fees of $2,038,000 for 1994 and of $1,301,000 for 1993.
The Company has made tax refund anticipation loans during the last three
years. Taxpayers desiring to receive their income tax refunds early borrow
from the Company and the Internal Revenue Service later sends the refund to
the Company. The funds advanced are generally paid within several weeks.
Therefore, the costs to process the loans are greater in comparison to the
cost of funds than they are for other types of loans. Consequently, the
Company has a set fee for this service which does not vary by the amount of
funds advanced or the length of time that the loan is outstanding.
Nonetheless, the fees are reported in the statements of income as interest
income, and totaled $4,791,000 for 1994, $1,048,000 for 1993, and $473,000
for 1992. The loans are all made during the tax filing season of January
through April of each year. Any loans for which repayment has not been
received by June 30 are charged-off. Consequently, there were no refund
anticipation loans included in the above table of outstanding loans at
December 31, 1994 or 1993.
4. ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses:
(in thousands) Year ended December 31
1994 1993 1992
Balance, beginning $ 10,067 9,353 7,611
Tax refund anticipation loans:
Provision for losses 2,890 118 300
Recoveries on
loans previously charged-off 672 62 77
Loans charged-off (3,030) (650) (404)
All other loans:
Provision for losses 3,367 6,032 4,350
Recoveries on loans
previously charged-off 458 370 212
Loans charged-off (1,513) (5,218) (2,793)
Balance, end of year $ 12,911 10,067 9,353
The ratio of losses to total loans made from the tax refund anticipation
loans are higher than arise from other loans. For these loans, the
provision for loan loss, the loans charged-off, and the loans recovered,
are reported separately from the corresponding amounts for all other loans.
5. CASH AND DUE FROM BANKS
Included within cash and due from banks are the reserves that all
depository institutions are required by law to maintain on transaction
deposits. The average cash reserve balances required by the Federal Reserve
Bank to be maintained by the Bank were approximately $18.5 million in 1994
and $16.4 million in 1993.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
(in thousands) December 31
1994 1993
Land $ 1,282 $ 1,282
Buildings and improvements 4,294 4,331
Leasehold improvements 5,369 4,383
Furniture and equipment 11,167 10,004
Total cost 22,112 20,000
Accumulated depreciation
and amortization (14,721) (13,343)
Net book value $ 7,391 $ 6,657
Depreciation and amortization on fixed assets included in other operating
expenses totaled $1,614,000 in 1994, $1,143,000 in 1993, and $989,000 in
1992.
7. INCOME TAXES
The provisions (benefits) for income taxes related to operations, the tax
benefit related to stock options that is credited directly to shareholders'
equity, and the tax effect of the accounting changes described in Notes 1,
2, and 14 are as follows:
Year ended December 31
(in thousands) 1994 1993 1992
Federal:
Current $ 3,962 $ 2,547 $ 3,730
Deferred (1,312) 46 (694)
2,650 2,593 3,036
State:
Current 2,280 1,684 1,957
Deferred (412) 100 (81)
1,868 1,784 1,876
Total tax provision $ 4,518 $ 4,377 $ 4,912
Reduction in taxes payable
associated with exercises
of stock options $ (326) $ (82) $ (58)
Tax associated with
changes in accounting
principles -- $ (620) $ 602
Tax effect of unrealized gain
or loss on securities
available-for-sale $ 1,064 $ (481) $ --
The current provision for income taxes includes credits of $495,000,
$19,000, and $167,000, related to net securities losses for 1994, 1993, and
1992, respectively.
Although not affecting the total provision, actual income tax payments may
differ from the amounts shown as current as a result of the final
determination as to the timing of certain deductions and credits.
The total tax provision differs from the Federal statutory rate of 34
percent for the reasons shown in the following table:
(in thousands) Year ended December 31
1994 1993 1992
Tax provision at Federal
statutory rate $ 5,939 $ 5,674 $ 6,045
Interest on securities exempt
from Federal taxation (2,507) (2,422) (2,195)
State income taxes, net of
Federal income tax benefit 1,233 1,112 1,141
ESOP dividends deductible as
an expense for tax purposes (148) (140) (113)
Other, net 1 153 34
Actual tax provision $ 4,518 $ 4,377 $ 4,912
Because certain items of income and expense are not recognized in the same
year in the financial statements of the Company as in its Federal and
California tax returns, deferred assets and liabilities are created. As of
December 31, 1994 and 1993, included within other assets on the balance
sheet are net deferred tax assets of $8,066,000 and $4,797,000,
respectively. The net deferred tax assets as of December 31, 1994 and 1993
and the tax effect of the principal temporary differences for the year
ending that date are as follows:
Tax Tax
(in thousands) Components Effect Components Effect
1994 1994 1993 1993
Deferred tax assets:
Allowance for
loan loss $ 5,366 $ 1,375 $ 3,991 $ 126
State taxes 767 114 653 5
Loan fees 1,022 403 619 117
Depreciation 691 386 305 (115)
Post retirement
benefits 501 (84) 585 1
Other real
estate owned -- (143) 143 (49)
Unrealized loss
on securities 1,064 -- -- --
Other 70 52 18 15
9,481 2,103 6,314 100
Valuation
allowance -- -- -- --
Total deferred
tax assets 9,481 2,103 6,314 100
Deferred tax liabilities:
Unrealized gain
on securities -- -- 481 --
Loan costs 400 88 312 33
Accretion on
securities 563 140 423 267
Federal effect
of state asset 452 152 300 (52)
Other -- (1) 1 (2)
Total deferred
tax liabilities 1,415 379 1,517 246
Net deferred
tax asset $ 8,066 $ 1,724 $ 4,797 $ (146)
Management believes a valuation allowance is not needed to reduce any
deferred tax asset because there is no material amount that will not be
realized through sufficient taxable income within the carryback periods or
within one year from the taxable income generated by operations.
The principal timing differences with their tax effects for the year ended
December 31, 1992 were as follows:
(in thousands) 1992
Accrual and cash basis income $ 244
Lower provision for loan losses
for tax return (756)
Use of accelerated depreciation (71)
Valuation adjustments to OREO
not deductible for tax until sale
of property (192)
$ (775)
8. SHAREHOLDERS' EQUITY
The Company currently has three stock option plans. These plans offer key
employees and directors an opportunity to purchase shares of the Company's
common stock. The first is the Directors Stock Option Plan, established in
1986 for directors of the Company. Only non-qualified options may be
granted under this plan. The second is the Restricted Stock Option Plan for
employees established in January, 1992. Either incentive or non-qualified
options may be granted under this plan. Stock acquired by the exercise of
options granted under this plan may not be sold for five years after the
date of the grant or two years after the date options are exercised,
whichever is later. The third plan is the Stock Option Plan for employees
established in 1983. All options approved under this plan have been granted
and the plan is active now only for the exercise of options held by
employees.
All options outstanding were granted with an option price set at 100% of
the market value of the Company's common stock on the date of the grant.
The grants for most of the options specify that they are exercisable in
cumulative 20% annual installments and will expire 5 years from the date of
grant. The Board has granted some options which are exercisable in
cumulative 10% annual installments and expire 10 years from the date of
grant.
The following information is presented concerning the stock option plans as
of December 31, 1994, 1993, and 1992 (adjusted for stock splits and stock
dividends):
Per Share
Options PriceRanges
1994
Granted 56,468 $21.00 to $28.50
Exercised 99,893 $21.75 to $28.50
Cancelled and expired 44,730 $7.33 to $ 25.63
Outstanding
at end of year 452,843 $13.81 to $28.50
Range of
expiration dates 5/01/95 to 5/01/2002
Exercisable
at end of year 239,118 $13.81 to $28.50
Shares available
for future grant 214,002
1993
Granted 162,602 $19.00 to $21.50
Exercised 50,874 $13.81 to $19.44
Cancelled and expired 6,539 $15.24 to $19.95
Outstanding
at end of year 540,998 $13.81 to $21.06
Exercisable
at end of year 268,689 $13.81 to $21.06
1992
Granted 215,859 $13.81 to $17.14
Exercised 33,684 $9.26 to $17.14
Cancelled and expired 22,734 $9.26 to $21.98
Outstanding
at end of year 435,809 $14.29 to $21.06
Exercisable
at end of year 217,468 $14.29 to $21.06
The option plans permit employees and directors to pay the exercise price
of options they are exercising with shares of stock they already own. The
owned shares are surrendered to the Company at current market value. Shares
with a current market value of $1,029,000, $184,000, and $229,000 were
surrendered in the years ended December 31, 1994, 1993, and 1992,
respectively.
In October 1993, the Company offered to purchase about 4.8% of the then
outstanding shares of common stock from its shareholders. Provision was
made in the offer to purchase additional tendered shares at the Company's
option. At the close of the offer on November 15, about 3.0% of the
outstanding shares were purchased by the Company. The purchase of $3.3
million was financed from operating funds paid by the Bank to the Company
as a dividend. The weighted average shares outstanding for the computation
of 1993 earnings per share reflects the reduction in shares from this
purchase.
In March 1990, the Company's Employee Stock Ownership Plan ("ESOP")
purchased 289,406 shares (adjusted for stock dividends) from the Company.
The purchase of the shares by the ESOP was financed partially by a loan
from another commercial bank. This loan was guaranteed by the Company.
Generally accepted accounting principles require that the outstanding
amount of such a loan be shown on the Company's balance sheet both among
liabilities and as an offset to shareholders' equity. Interest and
principal payments were made by the ESOP from dividends received on Company
stock held for employees and from funds received from the Company as part
of its regular contribution to employee retirement plans. The balance of
the note at December 31, 1992 was $1,400,000. The remaining balance of the
note was paid in January 1993, and this transaction is reported in the
Statement of Changes in Shareholders' Equity for the year ended December
31, 1993.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS
PURCHASED
The Company sells certain of its securities under agreements to repurchase
at a later date at a set price. The following information is presented
concerning these transactions:
(dollars in thousands) Year ended December 31
1994 1993 1992
Weighted average interest
rate at year-end 4.57 % 2.68 % 2.97 %
Weighted average interest
rate for the year 3.26 % 2.90 % 3.53 %
Average outstanding
for the year $ 9,355 $12,220 $10,722
Maximum outstanding at any
month-end during the year $12,525 $16,274 $20,910
Amount outstanding at
end of year $ 3,461 $ 7,641 $11,261
The Bank purchased Federal funds from correspondent banks as detailed
below:
(dollars in thousands) Year ended December 31
1994 1993 1992
Weighted average interest
rate at year-end 5.75 % 2.91 % 3.04 %
Weighted average interest
rate for the year 4.01 % 2.93 % 3.50 %
Average outstanding
for the year $ 14,277 $ 12,732 $ 19,407
Maximum outstanding at any
month-end during the year $ 21,206 $ 27,151 $ 34,475
Amount outstanding at
end of year $ 6,026 $ 12,514 $ 14,722
10. OTHER BORROWINGS
Included in other borrowings are Treasury Tax and Loan demand notes issued
to the U.S. Treasury and miscellaneous other borrowings including the
senior debt on other real estate owned as explained in Note 1. There was no
such senior debt at December 31, 1994, and at December 31, 1993, it totaled
$172,000. During the course of 1993 and 1994, the Company borrowed funds
for liquidity purposes from the discount window at the Federal Reserve
Bank, but there were no such borrowings at December 31 of either year.
11. OTHER OPERATING INCOME AND EXPENSE
Of the amounts included in other service charges, commissions, and fees,
the largest items are fees earned from the processing of credit card drafts
for merchant customers of the Company, gains from loan sales, and escrow
fees. The gains on loan sales arise primarily from the recognition of
origination fees that have not been amortized by the time of sale. Of the
amounts included in other operating expense, the largest items are FDIC
deposit insurance premiums, credit card clearing fees, and consultant
expense. Consultants include the Company's independent accountants,
attorneys, and other management consultants used for special projects. The
amounts for these income and expense categories included in the statements
of income are as follows:
(in thousands) Year ended December 31
1994 1993 1992
Income items:
Draft processing $ 2,011 $ 2,104 $ 2,078
Gains on loan sales 126 548 623
Escrow fees 331 311 339
Expense items:
FDIC assessments $ 1,982 $ 1,891 $ 1,885
Credit card clearing fees 1,575 1,757 1,694
Consultant expense 702 730 590
12. EMPLOYEE BENEFIT PLANS
The Company has two defined-contribution profit sharing plans. The first is
the Incentive and Investment and Salary Savings Plan. This plan has two
components. The first is authorized under Section 401(k) of the Internal
Revenue Code. An employee may defer up to 10% of pre-tax salary in the plan
up to a maximum dollar amount set each year by the Internal Revenue
Service. Effective January 1, 1994, the Company matches 100% of the first
3% of the employee's deferral and 50% of the next 3%, but not more than
41/2% of the employee's total compensation. Through 1993, the Company had
matched 50% of the employee's deferral up to 6% of the employee's
compensation. This led to a maximum match of 3%. In 1994, 1993, and 1992
the employer's matching contributions were $554,000, $287,000, and
$277,000, respectively.
The other component, the Incentive and Investment Plan, was established in
1966, and provides for contributions computed by a formula of approximately
10% of pre-tax profits prior to employer contribution, reduced by the
matching contributions paid to the Salary Savings component of the Plan and
the contributions made to the ESOP. In 1992 the Company directed $631,000
of the total 1992 profit sharing contribution to the Incentive and
Investment Plan. In 1993, as mentioned in Note 8, the Company contributed
an extra amount to the ESOP for the purpose of paying off the loan it
incurred for the purchase of stock. Consequently, no contribution was made
to the Incentive and Investment portion of the plan. In 1994, all profit-
sharing contributions in excess of the 401(k) employer match were directed
to the Incentive and Investment Plan.
The second plan is the ESOP, which was initiated in January 1985. As of
December 31, 1994, the ESOP held 552,872 shares at an average cost of
$13.63 per share.
In 1993 and 1992, the Company made contributions to the ESOP of $1,404,000
and $942,000, respectively. In 1992, $467,000 of the annual contribution
was used for regularly scheduled payments of principal, and $142,000 was
used for payments of interest. In addition, $333,000 in dividends received
from the Company were used for principal payments and $400,000 in cash held
from prior year contributions was used for an extra principal payment. The
total principal reduction in 1992 was $1,200,000. In 1993, $1,400,000 of
the contribution was used to pay off the remaining balance of the note and
$4,000 was used for the payment of interest.
Total contributions to the profit sharing plans were $1,884,000 in 1994,
$1,691,000 in 1993, and $1,850,000 in 1992.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107") requires companies with $150
million or more in total assets to provide certain disclosures about most
financial instruments. For the types of financial instruments covered by
the statement, whether or not recognized in the balance sheet, the Company
is required to disclose the fair value of financial instruments for which
it is practicable to estimate that value and the methods and significant
assumptions used to estimate those fair values. This must be done
irrespective of whether or not the instruments are recognized on the
balance sheets of the Company. In the case of financial instruments for
which it is not practicable to estimate the fair value, the Company is
required to disclose information pertinent to estimating the fair value
such as interest rates and maturity, and also state the reasons why it is
not practicable to estimate fair value.
In the statement, the FASB states that the "[f]air values of financial
instruments depict the market's assessment of the present value of net
future cash flows directly or indirectly embodied in them, discounted to
reflect both current interest rates and the market's assessment of the risk
that the cash flows will not occur." The information about fair value is
said to better enable "investors, creditors, and other users to assess the
consequences of an entity's investment and financing strategies, that is,
to assess its performance."
Nonetheless, there are several factors which users of these financial
statements should keep in mind regarding the fair values disclosed in this
note. First, the statement acknowledges that there are uncertainties
inherent in the process of estimating the fair value of financial
instruments. Secondly, the statement covers only financial instruments, not
other assets like premises, the fair value of which might differ
signficantly from the amounts at which they are carried in an entity's
financial statements. Thirdly, the Company must exclude from its estimate
of the fair value of deposit liabilities any consideration of its on-going
customer relationships which provide stable sources of investable funds.
Lastly, the statement does not address means of evaluating an entity's
performance in areas other than the management of financial instruments,
for example the ability to generate noninterest income and the control of
noninterest expense. For these reasons, users are advised not to regard the
disclosure of the fair market value of financial instruments as in any way
equivalent to a valuation of the Company as a whole.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash
The face value of cash is its fair value.
Securities and bankers' acceptances
For securities and bankers' acceptances, fair value equals quoted market
price, if available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities. Because of
the implementation of SFAS 115 at December 31, 1993 as explained in Note 1,
a portion of the portfolio is carried at fair value.
Loans
The fair value of loans is estimated by discounting the future contractual
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. These contractual cash flows are adjusted to reflect estimates
of uncollectible amounts.
Deposit liabilities
The fair value of demand deposits, money market accounts, and savings
accounts is the amount payable on demand as of December 31 of each year.
The fair value of fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.
Repurchase agreements, Federal funds purchased, and other borrowings
For these short-term instruments, the carrying amount is a reasonable
estimate of their fair value.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
The fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements. The Company seldom charges fees
for loan commitments. Since no fees are being collected, the use of the
commitment is at the option of the potential borrower, and the commitments
are being written at rates comparable to current market rates, the Company
does not believe that these commitments have a fair value within the
context of SFAS 107.
The Company has no financial instruments covered by the statement for which
it is not practicable to estimate a fair value.
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1994 and 1993 are as follows:
(in thousands) Carrying Fair
Amount Value
As of December 31, 1994:
Financial assets:
Cash $ 69,630 $ 69,630
Federal funds sold 15,000 15,000
Securities available-for-sale 87,439 87,439
Securities held-to-maturity 299,520 294,651
Bankers' acceptances 80,594 80,510
Loans 486,520 483,632
Financial liabilities:
Deposits 956,717 957,478
Repurchase agreements,
Federal funds purchased,
and other borrowings 10,487 10,487
Unrecognized financial instruments:
Commitments to extend credit -- --
Standby letters of credit -- 166
As of December 31, 1993:
Financial assets:
Cash $ 50,946 $ 50,946
Securities available-for-sale 189,044 189,044
Securities held-to-maturity 194,474 215,189
Bankers' acceptances 63,614 63,614
Loans 454,163 456,677
Financial liabilities:
Deposits 866,253 870,346
Repurchase agreements,
Federal funds purchased,
and other borrowings 21,327 21,327
Unrecognized financial instruments:
Commitments to extend credit -- --
Standby letters of credit -- 134
14. OTHER POSTRETIREMENT BENEFITS
As explained in Note 1, the Company adopted SFAS 106 effective as of the
beginning of 1992. The statement requires the Company to recognize the net
present value of the estimated future cost of providing health insurance
benefits to retirees as those benefits are earned rather than when paid. To
provide for these benefits, the Company established the Retiree Health Plan
on December 29, 1992.
Under the provisions of the Retiree Health Plan, all eligible retirees may
purchase health insurance coverage through the Company. The cost of this
coverage is that amount which the Company pays under the basic coverage
plan provided for current employees. Based on a formula involving date of
retirement, age at retirement, and years of service prior to retirement,
the Plan provides that the Company will contribute a portion of the cost
for the retiree, varying from 60% to 100% at the time the employee retires,
with the stipulation that the cost of the portion paid by the Company shall
not increase by more than 5% per year.
As of the effective date of adoption, January 1, 1992, the Company's
accumulated postretirement benefit obligation ("APBO") totaled $1,735,000.
This obligation is the actuarial net present value of the obligation for
fully eligible plan participants' expected postretirement benefits plus the
portion of the expected postretirement benefit obligation for other active
plan participants attributed to service through December 31, 1991. In prior
years, the Company had recognized $275,000 of this cost. Therefore, the
APBO recognized effective January 1, 1992 was $1,460,000.
This obligation must be remeasured each year because it changes with each
of the following factors: 1) the number of employees working for the
Company; 2) the average age of the employees working for the Company; 3)
increases in expected health care costs; 4) the amount of earnings
anticipated on plan assets; and 5) prevailing interest rates. In addition,
because the obligation is measured on a net present value basis, the
passage of each year brings the eventual payment of benefits closer, and
therefore causes the obligation to increase. The following table shows the
amount of the APBO, the fair value of the plan assets, and the accrued
postretirement benefit cost as of December 31, 1994 and 1993.
(in thousands) December 31
1994 1993
Retirees eligible for benefits (512) (686)
Dependents eligible for benefits (274) (313)
Active employees fully eligible (368) (630)
Active employees not fully eligible (1,009) (1,666)
Accumulated postretirement benefit obligation (2,163) (3,295)
Fair value of plan assets 2,162 2,015
Accumulated postretirement
benefit obligation in excess
of plan assets (1) (1,280)
Unrecognized prior service cost 8 10
Unrecognized net (gain) loss (230) 1,047
Accrued postretirement benefit cost (223) (223)
The accrued postretirement benefit cost of $223,000 is included within
accrued interest payable and other liabilities in the consolidated balance
sheet for December 31, 1994.
Each year the Company is required to recognize a portion of the change in
the APBO. This portion is called the net periodic postretirement benefit
cost (the "NPPBC"). The NPPBC, included with the cost of other benefits in
the Consolidated Statements of Income is made up of several components as
shown in the next table.
(in thousands) Year ended December 31
1994 1993 1992
Service cost $ 252 $ 165 $ 142
Interest cost 231 185 156
Return on assets (149) (127) --
Amortization cost 56 -- --
Net cost $ 390 $ 223 $ 298
The first component is service cost, which is the net present value of the
portion of the expected postretirement benefit obligation for active plan
participants attributed to service for that year. The second is interest
cost, which is the increase in the accumulated postretirement benefit
obligation that results from the passage of another year. That is, because
the benefit obligation for each employee is one more year closer to being
paid, the net present value increases. The third component, return on
assets, is the income earned on any investments that have been set aside to
fund the benefits. This return is an offset to the other components.
The fourth component, amortization cost, arises because significant
estimates and assumptions about interest rates, trends in health care
costs, employee turnover, and earnings on assets are used in measuring the
APBO each year. Actual experience may differ from the estimates and
assumptions may change, both of which cause increases or decreases in the
APBO or the value of plan assets. For example, in measuring the APBO at
December 31, 1992, and determining the NPPBC for 1993, a discount rate of
8.9% was used in determining the net present value and a rate of 7.0% was
assumed to be the long-term rate of return on plan assets. In measuring the
APBO at December 31, 1993 and determining the NPPBC for 1994, the discount
rate was lowered to 7.12% because of the continuing decline in interest
rates during 1993. This reduction in discount rate caused the APBO to
increase by $750,000.
Rather than the whole amount of such a loss being recognized in the year it
arises, the statement provides for gains or losses arising from these
changes in experience and/or assumptions to be recognized through
amortization over the average remaining service lives of the employees.
Amortization over time is used because many of these changes may partially
or fully reversed in subsequent years. Amortization of this loss began in
1994 as a component of the Company's NPPBC. However, because of increasing
interest rates in 1994, a discount rate of 8.73% is used to measure the
APBO at December 31, 1994 and the NPPBC for 1995. With the partial
amortization in 1994, this higher discount rate has virtually eliminated
the remaining unrecognized experience/assumptions loss, and there will be
no amortization component included in the NPPBC of $213,000 for 1995.
At the time of implementing the statement, the Company fully recognized the
net present value of the benefits earned by employees for prior service.
Had the Company not recognized this amount, a portion of it would be
included in the NPPBC as a fifth component.
Among the significant estimates or assumptions used in determining the APBO
are the rate of earnings on assets which will be available to offset the
other components and the annual increase in medical insurance premiums.
While the discount rate used in the present value computation of the APBO
has fluctuated with market rates, the Company has continued to use 7.0% as
its estimate of the long-term rate of return on plan assets. As noted
above, the Retiree Health Plan provides for the Company's contribution for
insurance premiums to be limited to an annual increase of 5%. Should
insurance premiums increase at a higher rate, the retirees will need to
contribute a larger portion of the total premium cost. Therefore, 5% has
been set as the assumed cost trend rate for health care.
Under the provisions of SFAS 106, employers are allowed wide discretion as
to whether and how they set aside funds to meet the obligation they are
recognizing. Under the provisions of the current Internal Revenue Code,
only a portion of this funding may be deducted by the employer. The funded
status of the plan is shown in the previous table as the excess of the
APBO over plan assets.
On December 29, 1992, the Company established a Voluntary Employees'
Beneficiary Association ("VEBA") to hold the assets that will be used to
pay the benefits for participants of the plan other than key executive
officers. Most of the plan assets have been invested in insurance policies
on the lives of various employees of the Company.
The current funding policy of the Company is to contribute assets to the
VEBA sufficient to pay the costs of current medical premiums of retirees
and the costs of the life insurance premiums. Proceeds from the life
policies payoffs will fund benefits and premiums in the future.
As of December 31, 1994, because of the reduction in the APBO caused by the
higher discount rate and changes in other assumptions, the VEBA was
underfunded by $1,000 compared to an underfunded status of $1,037,000 as of
December 31, 1993. The APBO related to the key employees of $173,000 is
totally unfunded.
15. COMMITMENTS AND CONTINGENCIES
The Company leases several office locations and substantially all of the
office leases contain multiple five-year renewal options and provisions for
increased rentals, principally for property taxes and maintenance. As of
December 31, 1994, the minimum rentals under non-cancelable leases for the
next five years and thereafter are as follows:
(in thousands) Year ended Non-cancelable
December 31 lease expense
1995 $ 1,844
1996 1,825
1997 1,788
1998 1,773
1999 3,688
Thereafter 5,973
$ 16,891
Total net rentals for premises included in other operating expenses are
$1,801,000 in 1994, $1,552,000 in 1993, and $1,409,000 in 1992.
The Company is currently leasing space from a partnership in which a
director has an interest. The original terms of the lease were negotiated
with the assistance of two independent, outside appraisers, and the lease
was approved by the Board of Directors of the Company. The Company
exercised its option to renew the lease in 1989. In 1994, the Company
renogiated the lease to receive other rights such as additional lease
option periods and a right of first refusal to purchase the building if it
is offered for sale. The nominal monthly rent increased to obtain these
benefits, but the actual outlay was reduced in order for the Company to be
reimbursed for advancing the partnership's share of seismic improvements
made to the leased property in 1994. The above schedule of lease
commitments includes the terms of the current agreement. Management
believes the terms of the revised lease are comparable with terms which
would be available with unaffiliated third parties and the terms were also
approved by the Company's Board of Directors.
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with "off-
balance sheet" risk. These financial instruments consist of commitments to
extend credit and standby letters of credit.
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. The
Company almost never charges fees in connection with loan commitments.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company
charges a fee for these letters of credit.
The Company does not enter into any interest rate swaps or caps, or forward
or futures contracts.
The standby letters of credit involve, to varying degrees, exposure to
credit risk in excess of the amounts recognized in the statement of
financial position. This risk arises from the possibility of the failure of
another party to perform according to the terms of a contract that would
cause a draw on a standby letter of credit. To minimize the first risk, the
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The decision as to
whether collateral should be required is based on the circumstances of each
specific commitment or conditional obligation.
Changes in market rates of interest for those few commitments and
undisbursed loans which have fixed rates of interest represent a possible
cause of loss by the contractual requirement to lend money at a rate that
is no longer as great as the market rate at the time the loan is funded. To
minimize this risk, if rates are quoted in a commitment, they are generally
stated in relation to the Company's base lending rate which varies with
prevailing market interest rates. Fixed-rate loan commitments are not
usually made for more than 3 months.
The maximum exposure to credit risk is represented by the contractual
notional amount of those instruments. As of December 31, 1994 and 1993, the
contractual notional amount of these instruments are as follows:
(in thousands) December 31
1994 1993
Standby letters of credit $ 9,093 $ 10,447
Loan commitments 25,941 13,237
Undisbursed loans 13,795 10,850
Unused consumer credit lines 45,866 34,242
Unused credit lines 69,384 82,069
$ 164,079 $ 150,845
Since many of the commitments are expected to expire without being drawn
upon, the amounts above do not necessarily represent future cash
requirements.
The Company has concentrated its lending activity almost exclusively with
customers within Santa Barbara County. The business customers are in widely
diversified industries, and there is a large consumer component to the
portfolio. The largest concentration of loans is to real estate developers,
but the nature of the properties is quite varied: 1-4 family residential,
multi-family residential, and commercial buildings of various kinds.
Continued increases in interest rates may cause delay in the sale or lease
of some of these properties, and the Company has considered this in
evaluating the adequacy of the allowance for loan loss.
The Company has a trust department that has fiduciary responsibility for
the assets that it holds on behalf of its trust customers. These assets are
not owned by the Company and accordingly are not reflected in the
accompanying consolidated balance sheets.
The Company is involved in various litigation of a routine nature which is
being handled and defended in the ordinary course of the Company's
business. In the opinion of management, the resolution of this litigation
will not have a material impact on the Company's financial position.
16. SANTA BARBARA BANCORP
Santa Barbara Bancorp is the parent company and sole owner of the Bank.
However, there are legal limitations on the amount of dividends which may
be paid by the Bank to the Company. At December 31, 1994, the Bank could
have declared dividends of approximately $26.1 million to the Company.
Federal law also restricts the Bank from extending credit to the Company by
making any such extensions of credit subject to strict collateral
requirements. The condensed financial statements of the parent company only
are presented on this and the following page.
<TABLE>
SANTA BARBARA BANCORP
(Parent Company Only)
Balance Sheets
(in thousands)
<CAPTION>
December 31
1994 1993
<S> <C> <C>
Cash $ 204 $ 298
Investment in and advances to subsidiaries 94,726 86,549
Notes receivable 55 56
Other assets 1 --
Total assets $ 94,986 $ 86,903
Dividends payable $ 1,025 $ 912
Other liabilities 1 --
Total liabilities 1,026 912
Common stock 5,126 5,065
Surplus 39,683 38,557
Unrealized gain (loss) on securities available-for-sale (1,496) 683
Retained earnings 50,647 41,686
Total shareholders' equity 93,960 85,991
Total liabilities and shareholders' equity $ 94,986 $ 86,903
</TABLE>
<PAGE>
SANTA BARBARA BANCORP
(Parent Company Only)
Income Statements
(in thousands)
Year ended December 31
1994 1993 1992
Equity in earnings of subsidiaries:
Undistributed $ 10,356 $ 7,102 $ 8,609
Dividends 2,500 5,780 3,025
Interest income 7 7 7
Miscellaneous expenses (153) (215) (128)
Income tax benefit 241 256 187
Net income $ 12,951 $ 12,930 $ 11,700
<TABLE>
SANTA BARBARA BANCORP
(Parent Company Only)
Statements of Cash Flows
(in thousands)
<CAPTION>
Year ended December 31
1994 1993 1992
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Interest received $ 7 $ 8 $ 7
Cash paid to suppliers and others (153) (215) (128)
Income tax benefit 241 256 187
Net cash provided by operating activities 95 49 66
Cash flows from investing activities:
Net decrease in loans made to customers 1 3 6
Purchase of OREO from Bank -- -- (400)
Proceeds from sale of OREO -- 400 --
Distributed earnings of subsidiaries 2,500 5,780 3,025
Net cash provided by investing activities 2,501 6,183 2,631
Cash flows from financing activities:
Proceeds from issuance of common stock 1,187 728 180
Payments to retire common stock -- (3,274) (182)
Dividends paid (3,877) (3,538) (2,756)
Net cash used in financing activities (2,690) (6,084) (2,758)
Net increase (decrease) in cash and cash equivalents (94) 148 (61)
Cash and cash equivalents at beginning of period 298 150 211
Cash and cash equivalents at end of period $ 204 $ 298 $ 150
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 12,951 $ 12,930 $ 11,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Earnings from subsidiaries (12,856) (12,882) (11,634)
Accretion of discount related to notes receivable (1) -- --
Decrease in interest receivable 1 1 --
Net cash provided by operating activities $ 95 $ 49 $ 66
</TABLE>
<PAGE>
<TABLE>
Selected Annual and Quarterly Santa Barbara Bancorp
Financial Data (unaudited) and Subsidiaries
(amounts in thousands except
per share amounts)
<CAPTION>
Increase
1994 (Decrease) 1993 1992 1991
1990
<S> <C> <C> <C> <C> <C>
<C>
RESULTS OF OPERATIONS:
Interest income $ 74,900 $ 6,467 $ 68,433 $ 72,916 $ 78,382
$ 77,808
Interest expense 24,967 2,605 22,362 28,777 39,906
42,098
Net interest income before
provision for loan losses 49,933 3,862 46,071 44,139 38,476
35,710
Provision for loan losses 6,257 107 6,150 4,650 3,900
2,800
Other operating income 13,084 (1,018) 14,102 13,062 12,953
12,460
Non-interest expense:
Staff expense 21,149 1,508 19,641 18,521 17,434
16,790
Other operating expense 18,142 447 17,695 16,560 15,563
14,536
Income before income taxes and
effect of accounting change 17,469 782 16,687 17,470 14,532
14,044
Provision for income taxes 4,518 141 4,377 4,912 3,824
3,740
Income before effect of
accounting change 12,951 641 12,310 12,558 10,708
10,304
Effect of accounting change -- 620 (620) 858 --
--
Net income $ 12,951 $ 21 $ 12,930 $ 11,700 $ 10,708
$ 10,304
PER SHARE DATA: (1)
Average shares outstanding 5,097 (92) 5,189 5,182 5,197
5,187
Net income $2.54 $0.05 $2.49 $2.26 $2.06
$1.99
Cash dividends declared $0.78 $0.08 $0.70 $0.57 $0.46
$0.27
FINANCIAL CONDITION:
Total assets $1,067,616 $88,473 $979,143 $961,239 $907,182
$843,845
Total deposits $956,717 $90,464 $866,253 $849,375 $800,622
$746,419
Long-term debt (3) -- -- -- $1,400 $2,600
$3,404
Net shareholders' equity (2) $93,960 $7,969 $85,991 $77,145 $67,215
$58,257
OPERATING AND CAPITAL RATIOS:
Average total shareholders'
equity to average total assets 8.86% 0.15% 8.71% 8.06% 7.73%
7.40%
Rate of return on average:
Total assets 1.27% 0.07% 1.34% 1.26% 1.24%
1.33%
Total shareholders' equity (2) 14.33% 1.08% 15.41% 15.58% 16.07%
17.91%
Net shareholders' equity (2) 14.33% 1.09% 15.42% 16.01% 16.86%
18.86%
<FN>
(1) Adjusted for stock splits and stock dividends
(2) Total shareholders' equity does not include the reduction to equity for
the ESOP loan; net shareholders' equity is reduced by the loan amount.
N/M = Not Meaningful
(3) Includes $0, $0, $1,400, $2,600, and $3,400 for 1994, 1993, 1992, 1991, and 1990. respectively,
for debt owed by the ESOP which was guaranteed by the Company
</TABLE>
<TABLE>
<CAPTION>
1994 Quarters 1993 Quarters
4th 3rd 2nd 1st 4th 3rd 2nd
1st
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets $1,067,616 $1,042,589 $1,018,751 $1,001,475 $979,143 $959,878 $947,623
$942,434
Net interest income
(tax equivalent
basis 'Note A) $12,674 $12,528 $12,873 $16,137 $12,674 $12,212 $12,430
$12,874
Net income $3,261 $2,996 $3,177 $3,517 $3,251 $3,219 $3,161
$3,299
Net income
per share $0.64 $0.59 $0.62 $0.69 $0.63 $0.62 $0.61
$0.63
Range of stock prices:
High $29.25 $30.00 $27.13 $26.13 $22.50 $22.00 $21.50
$20.00
Low $24.75 $23.63 $23.88 $21.00 $21.00 $20.00 $19.00
$18.25
Cash dividends
declared $0.20 $0.20 $0.20 $0.18 $0.18 $0.18 $0.18
$0.16
</TABLE>
<PAGE>
The members of the Board of Directors extend a cordial invitation to attend
the Annual Meeting of Shareholders to be held Tuesday, April 25 1995 at 2PM
at the Lobero Theatre in Santa Barbara.
TO OUR SHAREHOLDERS:
It is our objective to maintain close communications with you. "Ouarterly
Shareholder Bulletins", publications summarizing pertinent information
about the Bank's financial performance, and "The Investors Analysis and
Report" are mailed to our shareholders.
Those shareholders who have their shares held by a brokerage firm are
considered "street name" shareholders and are generally not known to us.
If you are one of these shareholders and would like the Bank to
communicated with you directly, please send me your name and address.
Stockholders with inquiries about stock ownership, changes of address,
dividend payments, etc., or securities analysists, portfolio managers and
representatives of financial institutions seeking financial and operating
information are also invited to contact me.
Sincerely,
(Handwritten signature)
Clare M. McGivney
Corporate Services Administrator
Santa Barbara Bancorp
1021 Anacapa Street or P.O. Box 1119
Santa Barbara, CA 93102
(805) 564-6302
Concept and Design: H. George Kallusky, SBB&T, Vice President, Public
Relations Manager; Typography: Karen Young Designs; Lithography: Haagen
Printing and Offset; Photography: Wm. B. Dewey Photography. The line
drawings of flowers used in the report are native to Santa Barbara and
Ventura Counties.
FRONT COVER: "East Beach," woodblock, 14"x20" by Patti Jacquemain, Mission
Creek Studios, P.O. Box 23309, Santa Barbara, CA 93121
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Santa Barbara Bank & Trust, a California corporation,
doing business under name of Santa Barbara Bank & Trust
SBBT Service Corporation, a California corporation,
doing business under name of SBBT Service Corporation
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 31, 1995, incorporated by reference in this
Form 10-K. It should be noted that we have not audited any financial
statements of Santa Barbara Bancorp and Subsidiaries subsequent to December
31, 1994 or performed any audit procedures subsequent to the date of our
report.
(Handwritten signature)
ARTHUR ANDERSEN LLP
Los Angeles, California
January 31, 1995
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 31, 1995, incorporated by reference in this
Form 10-K, into Santa Barbara Bancorp's previously filed Form S-8
Registration Statements File Nos. 33-5493, 2-83293 and 33-43560. It should
be noted that we have not audited any financial statements of Santa Barbara
Bancorp and Subsidiaries subsequent to December 31, 1994 or performed any
audit procedures subsequent to the date of our report.
(Handwritten signature)
ARTHUR ANDERSEN LLP
Los Angeles, California
January 31, 1995
Exhibit 27
Financial Data Schedules
[ARTICLE] 9
[CIK] 0000357264
[NAME] SANTA BARBARA BANCORP
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1994
[PERIOD-END] DEC-31-1994
[CASH] 69,630
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 15,000
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 87,439
[INVESTMENTS-CARRYING] 299,520
[INVESTMENTS-MARKET] 0
[LOANS] 499,431
[ALLOWANCE] 12,911
[TOTAL-ASSETS] 1,067,616
[DEPOSITS] 956,717
[SHORT-TERM] 10,487
[LIABILITIES-OTHER] 6,452
[LONG-TERM] 0
[COMMON] 5,126
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 88,834
[TOTAL-LIABILITIES-AND-EQUITY] 1,067,616
[INTEREST-LOAN] 46,816
[INTEREST-INVEST] 25,812
[INTEREST-OTHER] 2,272
[INTEREST-TOTAL] 74,900
[INTEREST-DEPOSIT] 24,008
[INTEREST-EXPENSE] 24,967
[INTEREST-INCOME-NET] 49,933
[LOAN-LOSSES] 6,257
[SECURITIES-GAINS] (1,191)
[EXPENSE-OTHER] 39,291
[INCOME-PRETAX] 17,469
[INCOME-PRE-EXTRAORDINARY] 17,469
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 12,951
[EPS-PRIMARY] 2.54
[EPS-DILUTED] 2.54
[YIELD-ACTUAL] 5.20
[LOANS-NON] 6,326
[LOANS-PAST] 1,290
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 32,561
[ALLOWANCE-OPEN] 10,067
[CHARGE-OFFS] 4,543
[RECOVERIES] 1,130
[ALLOWANCE-CLOSE] 12,911
[ALLOWANCE-DOMESTIC] 12,911
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
