<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995 Commission
File No.: 0-11113
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
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)
Not Applicable
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to 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
Common Stock - As of May 10, 1995, there were 5,126,467 shares of the
issuer's common stock outstanding.
Page One of Thirty-three
<PAGE> 2
PART 1
FINANCIAL INFORMATION
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except per share amount)
<TABLE>
<CAPTION>
March 31, December 31,
Assets: 1995 1994
<S> <C> <C>
Cash and due from banks $ 64,642 $ 69,630
Federal funds sold 0 15,000
Cash and cash equivalents 64,642 84,630
Securities:
Held-to-maturity 327,228 99,520
Available-for-sale 44,583 87,439
Bankers' acceptances 43,736 80,594
Loans, net of allowance of $16,433 at
March 31, 1995 and $12,911 at
December 31, 1994 (Note 5) 518,462 486,520
Premises and equipment, net (Note 6) 7,720 7,391
Accrued interest receivable 6,993 8,130
Other assets (Note 7) 14,247 13,392
Total assets $1,027,611 $1,067,616
Liabilities:
Deposits:
Demand deposits $ 129,828 $ 147,085
NOW deposit accounts 124,729 142,639
Money Market deposit accounts 337,182 355,581
Savings deposits 104,548 113,074
Time deposits of $100,000 or more 64,902 63,556
Other time deposits 136,403 134,782
Total deposits 897,592 956,717
Securities sold under agreements
to repurchase and Federal
funds purchased 23,795 9,487
Other borrowed funds 1,000 1,000
Accrued interest payable
and other liabilities 8,486 6,452
Total liabilities 930,873 973,656
Shareholders' equity (Notes 3)
Common stock (no par value; $1.00 per
per share stated value; 20,000
authorized; 5,126 outstanding
at March 31, 1995 and 5,126
at December 31, 1994) 5,126 5,126
Surplus 39,675 39,683
Unrealized gain (loss) on securities
available for sale (660) (1,496)
Undivided profits 52,597 50,647
Total shareholders' equity 96,738 93,960
Total liabilities and
shareholders' equity $1,027,611 $1,067,616
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE> 3
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended March
31,
1995 1994
<S> <C> <C>
Interest income:
Interest and fees on loans $15,023 $14,106
Interest on securities 5,811 5,906
Interest on Federal funds sold 335 38
Interest on bankers' acceptances 820 275
Total interest income 21,989 20,325
Interest expense:
Interest on deposits:
NOW accounts 366 312
Money Market accounts 3,877 1,605
Savings deposits 640 828
Time deposits of $100,000 or more 608 598
Other time deposits 1,873 1,663
Interest on securities sold under
agreements to repurchase and
Federal funds purchased 200 192
Interest on other borrowed funds 19 19
Total interest expense 7,583 5,217
Net interest income 14,406 15,108
Provision for loan losses 3,663 4,282
Net interest income after
provision for loan losses 10,743 10,826
Other income:
Service charges on deposits 1,044 724
Trust fees 1,765 1,781
Other service charges,
commissions and fees, net 2,468 791
Securities losses (Note 4) 0 0
Other income 78 145
Total other income 5,355 3,441
Other expense:
Salaries and benefits 6,185 5,449
Net occupancy expense 1,011 787
Equipment expense 645 488
Net gain from operating other real estate (18) (650)
Other expense 4,198 3,096
Total other expense 12,021 9,170
Income before income taxes 4,077 5,097
Applicable income taxes 1,101 1,580
Net income $ 2,976 $ 3,517
Earnings per share (Note 2) $0.58 $0.69
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE> 4
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
<S> 1995 1994
Cash flows from operating activities: <C> <C>
Net Income $ 2,976 $ 3,517
Adjustments to reconcile net
income to net cash provided
by operations:
Depreciation and amortization 416 328
Provision for loan losses 3,663 4,282
Benefit for deferred income taxes (1,589) (2,112)
Net amortization of investment
securities discounts and premiums 713 (487)
Net change in deferred loan
origination and extension
fees and costs 51 111
Decrease (increase) in accrued
interest receivable 1,137 (58)
Increase (decrease) in accrued
interest payable 114 (8)
Decrease (increase) in
income receivable (347) 49
Increase in income taxes payable 2,635 3,390
Decrease (increase) in prepaid expenses 118 (143)
Decrease in accrued expenses (1,668) (903)
Other operating activities 1,122 (402)
Net cash provided by
operating activities 9,341 7,564
Cash flows from investing activities:
Proceeds from call or
maturity of securities:
Available-for-sale 14,744 69,539
Held-to-maturity 1,661 1,495
Purchase of securities:
Available-for-sale 0 (69,188)
Held-to-maturity 0 (79,118)
Proceeds from sale or maturity
of bankers' acceptances 55,693 58,043
Purchase of bankers' acceptances (19,373) 0
Net increase in loans made to customers (35,656) (5,479)
Disposition of property
from defaulted loans 198 2,970
Purchase or investment in
premises and equipment (745) (593)
Net cash provided by (used in)
investing activities 16,522 (22,331)
Cash flows from financing activities:
Net increase (decrease) in deposits (59,125) 7,147
Net increase in borrowings with
maturities of 90 days or less 14,308 10,731
Proceeds from issuance of common stock 49 22
Payments to retire common stock (57) 0
Dividends paid (1,026) (912)
Net cash provided by (used in)
financing activities (45,851) 16,988
Net increase (decrease) in cash
and cash equivalents (19,988) 2,221
Cash and cash equivalents at
beginning of period 84,630 50,946
Cash and cash equivalents
at end of period $ 64,642 $ 53,167
Supplemental disclosure:
Cash paid during the three months ended:
Interest $7,469 $5,225
Income taxes $35 $302
<FN>
See accompanying notes to consolidated condensed financial
statements
</TABLE>
<PAGE> 5
Santa Barbara Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1995
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements include the parent holding company,
Santa Barbara Bancorp ("Company"), and its wholly owned subsidiaries,
Santa Barbara Bank & Trust ("Bank") and SBBT Service Corporation ("Service
Corp."). Material intercompany balances and transactions have been
eliminated.
2. Earnings Per Share
Net earnings per common and common equivalent share are computed based on
the weighted average number of shares outstanding during the period.
There are no common stock equivalents that cause dilution in earnings per
share in excess of 3 percent. For the three-month periods ended March 31,
1995 and 1994, the weighted average shares outstanding were as follows:
Three-Month Periods
Ended March 31,
1995 1994
Weighted average
shares outstanding 5,127,054 5,065,462
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format, and therefore do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
Management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been reflected in the
financial statements. However, the results of operations for the three
months ended March 31, 1995, are not necessarily indicative of the results
to be expected for the full year. Certain amounts reported for 1994 have
been reclassified to be consistent with the reporting for 1995.
For the purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and Federal funds sold.
4. Securities
The Company's securities are classified as either "held-to-maturity" or
"available-for-sale." Only those securities for which the Company has the
ability and positive intent to hold to maturity may be classified as held-
to-maturity. Securities which meet these criteria are accounted for at
amortized historical cost. These securities are carried at their purchase
price adjusted for the amortization of any premium or discount
irrespective of later changes in their market value prior to maturity.
Securities which might be sold for liquidity purposes, sold in response to
interest rate changes, or sold to restructure the maturities of the
portfolio to better match deposit maturities or complement the maturity
characteristics of the loan portfolio are considered available-for-sale.
These securities are reported in the financial statements at fair value
rather than at amortized cost. The after-tax effect of unrealized gains
or losses is reported as a separate component of shareholders' equity.
Changes in the unrealized gains or losses are shown as increases or
decreases in this component of equity, but are not reported as gains or
losses in the statements of income of the Company.
Book and market values of securities are as follows:
<TABLE>
<CAPTION>
(in thousands) Amor- Gross Un- Gross Un- Estimated
tized realized realized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
March 31, 1995:
Held-to-maturity:
U.S. Treasury
obligations $195,461 $ 279 $(7,392) $188,348
U.S. Agency
obligations 43,997 0 (825) 43,172
State and municipal
securities 87,770 12,114 (111) 99,773
327,228 12,393 (8,328) 331,293
Available-for-sale:
U.S. Treasury
obligations 33,856 0 (249) 33,607
U.S. Agency
obligations 11,023 0 (47) 10,976
44,879 0 (296) 44,583
$372,107 $12,393 $ (8,624) $375,876
December 31, 1994:
Held-to-maturity:
U.S. Treasury
obligations $195,354 $ 69 $(12,189) $183,234
U.S. Agency
obligations 14,654 0 (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 0 (1,724) 39,300
89,836 12 (2,409) 87,439
$389,356 $9,808 $(17,074) $382,090
</TABLE>
The Company does not expect to realize any significant amount of the
unrealized gains shown above for the held-to-maturity securities unless
the securities are called prior to maturity. The Company does not expect
to realize any of the unrealized losses related to the securities in the
held-to-maturity portfolio, because it is the Company's intent to hold
them to maturity at which time the par value will be received. Losses may
be realized on securities in the available-for-sale portfolio.
<TABLE>
<CAPTION>
(in thousands)
Held-to- Available-
Maturity for-Sale Total
<S> <C> <C> <C>
March 31, 1995
Amortized cost:
In one year or less $ 25,711 $38,883 $ 64,594
After one year through five years 253,290 5,996 259,286
After five years through ten years 28,273 0 28,273
After ten years 19,954 0 19,954
$327,228 $44,879 $372,107
Estimated market value:
In one year or less $ 25,903 $38,527 $ 64,430
After one year through five years 248,689 6,056 254,745
After five years through ten years 35,631 0 35,631
After ten years 21,070 0 21,070
$331,293 $44,583 $375,876
December 31, 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 0 35,798
After ten years 20,854 0 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 0 43,063
After ten years 19,789 0 19,789
$294,651 $87,439 $382,090
</TABLE>
The book value and estimated market value of debt securities by
contractual maturity are shown above. Expected maturities may differ from
contractual maturities because certain issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
5. Loans
The balances in the various loan categories are as follows:
<TABLE>
<CAPTION>
(in thousands) March 31, December 31,
1995 1994
<S> <C> <C>
Real estate:
Residential $ 122,445 $ 108,923
Non-residential 167,433 145,928
Construction 22,669 26,695
Commercial loans 146,287 148,396
Home equity loans 32,293 32,573
Consumer loans 33,537 27,319
Municipal tax-exempt obligations 7,738 7,831
Other loans 2,493 1,766
Total loans $ 534,895 $ 499,431
</TABLE>
The loan balances at March 31, 1995 and December 31, 1994, are net of
approximately $2,088,000 and $2,038,000 respectively, in loan fees and
origination costs deferred under the provisions of Statement of Financial
Accounting Standards No. 91.
Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan, was adopted on January 1, 1995. At
that date, a valuation for credit losses related to impaired loans was
established. A loan is identified as impaired when it is probable that
interest and principal will not be collected according to the contractual
terms of the loan agreement. The accrual of interest is discontinued on
such loans any uncollected interest is written off against interest from
other loans in the current period. No further income is recognized until
all recorded amounts of principal are recovered in full or until
circumstances have changed such that the loan is no longer regarded as
impaired.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the effective interest rate or by valuing the
underlying collateral. As of March 31, 1995, the Company had identified
$27.8 million in impaired loans against which it had established a
valuation allowance of $5.3 million.
The Company also provides an allowance for possible loan losses for loans
that are not regarded as impaired. This allowance is based on historical
trends, current economic conditions, and other factors. The valuation
allowance for impaired loans is included with the general allowance for
loan losses of $11.1 million to total the $16.4 million reported on the
balance sheet for March 31, 1995 which these notes accompany and in the
statement of changes in the allowance account below.
<TABLE>
<CAPTION>
Allowance for Loan Losses
(in thousands)
<S> <C>
Balance, December 31, 1994 $ 12,911
Provision for tax refund anticipation loans 2,613
Tax refund loan losses charged to allowance 0
Tax refund loan recoveries credited to allowance 62
Provision for loan losses 1,050
Loan losses charged to allowance (268)
Loan recoveries credited to allowance 65
Balance, March 31, 1995 $ 16,433
</TABLE>
6. 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, generally by the use of an accelerated method
in the early years, switching to the straight line method in later years.
Leasehold improvements are amortized over the terms of the related lease
or the estimated useful lives of the improvements, whichever is shorter.
Depreciation expense (in thousands) was $416 and $328 for the three-month
periods ended March 31, 1995 and 1994, respectively. The table below
shows the balances by major category of fixed assets:
<TABLE>
<CAPTION>
(in thousands)
March 31, 1995:
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Land and buildings $ 5,571 $ 2,838 $2,733
Leasehold improvements 5,488 3,578 1,910
Furniture and equipment 11,778 8,701 3,077
Total $22,837 $15,117 $7,720
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994:
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Land and buildings $ 5,576 $ 2,793 $2,783
Leasehold improvements 5,369 3,481 1,888
Furniture and equipment 11,167 8,447 2,720
Total $22,112 $14,721 $7,391
</TABLE>
7. Property from Defaulted Loans Included in Other Assets
Property from defaulted loans is included within other assets on the
balance sheets. As of March 31, 1995, and December 31, 1994, the Company
had $681,000 and $856,000, respectively, in property from defaulted loans.
Property from defaulted loans is carried at the lower of the outstanding
balance of the related loan or the estimate of the market value of the
assets less disposal costs.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Net income for the first quarter of 1995 is lower than net income for the
same quarter of last year. While the Company has grown 5.3% in average
total assets and 6.6% in average total deposits compared to the first
quarter of 1994, net income decreased by $541,000. The reasons for this
decrease will be discussed in detail in various sections of this
discussion, but in brief, they include a narrower spread between interest
income and interest expense for core products, and an increase in non-
interest expense as the Company began to enter the Ventura County market.
The Company is a bank holding company. While the Company has a few
operations of its own, these are not significant in comparison to those of
its major subsidiary, Santa Barbara Bank and Trust (the "Bank"). The Bank
is a state-chartered commercial bank. It offers a full range of retail
and commercial banking services. These include commercial, real estate,
and consumer loans, a wide variety of deposit products, and full trust
services. The Company's second subsidiary is SBBT Service Corporation
("ServiceCorp"). ServiceCorp provides correspondent banking services such
as check processing, internal auditing, and courier service to other
financial institutions on the Central Coast of California. All references
to "the Company" below apply to the Company and its subsidiaries.
Interest Rate Sensitivity
Most of the Company's earnings arise from its functioning as a financial
intermediary. As such, it takes in funds from depositors and then either
loans the funds to borrowers or invests the funds in securities and other
instruments. It earns interest on the loans and securities and it pays
interest on the deposits. Net interest income is the difference in
dollars between the interest income earned and the interest expense paid.
The net interest margin is the ratio of net interest income to earning
assets. This ratio is useful in allowing the Company to monitor the
spread between interest income and interest expense from month to month
and year to year irrespective of the growth of the Company's assets. If
the Company is able to maintain the same percentage spread between
interest income and interest expense as the Company grows, the amount of
net interest income will increase.
Because the Company must maintain its net interest margin to remain
profitable, the Company must be prepared to address the risks of adverse
effects as interest rates change. Average market interest rates for the
first quarter of 1995 were substantially higher than during the first
quarter of 1994. This reversal of the trend of declining interest rates
that had prevailed for several years occurred because the Federal Reserve
Board ("the Fed") raised short term interest rates in an effort to temper
economic recovery. In comparing results for the first quarters of 1995
and 1994, the major impacts of the increase in market rates for the
Company are increases in the average rates earned on assets and paid on
liabilities and a decrease in unrealized gains in the securities
portfolio. These impacts illustrate the risks associated with changes in
interest rates.
The primary risk is "market risk;" that is, the market value of financial
instruments such as loans, securities, and deposits that have rates of
interest fixed for some term will increase or decrease with changes in
market interest rates. If the Company invests funds in a fixed-rate long-
term security and interest rates subsequently rise, the security is worth
less than a comparable security just issued because it pays less interest
than the newly issued security. If the security had to be sold, the
Company would have to recognize a loss. The opposite is true when
interest rates decline; that is, the market value of the older security
would be higher than that of a newly issued comparable security because
the holder of the older security would be earning interest at a higher
rate than the current market. The same principle applies to fixed rate
certificates of deposit and other liabilities. They represent a less
costly obligation relative to the current market when interest rates rise
and a more costly obligation when interest rates decline. However, most
interest-bearing liabilities have a shorter maturity than interest-earning
assets and so there is less fluctuation in market value from changes in
interest rates. Therefore, the exposure to loss from market risk is
primarily from rising interest rates.
This exposure to "market risk" is managed by limiting the amount of fixed
rate assets (loans or securities that earn interest at a rate fixed when
the funds are lent or the security purchased) and by keeping maturities
short. The Company underwrites the largest proportion of its loans with
variable interest rates. It has generally maintained the taxable portion
of its securities portfolios heavily weighted towards securities with
maturities of less than three years. However, these methods of avoiding
market risk must be balanced against the consideration that shorter term
securities generally earn less interest income than longer term
instruments. Therefore, the Company makes some fixed rate loans and
purchases some longer-term securities, because if it were to make only
variable loans and only purchase securities with very short maturities,
its net interest margin would decline significantly.
The Company is also exposed to "mismatch risk." This is the risk that
interest rate changes may not be equally reflected in the rates of
interest earned and paid because of differences in the contractual terms
of the assets and liabilities held. An obvious example of this kind of
difference is if a financial institution uses the proceeds from shorter-
term deposits to purchase longer-term assets or fund longer-term loans.
Many savings and loan institutions were hurt in the early 1980's by this
kind of mismatch.
The Company controls mismatch risk by attempting to roughly match the
maturities and repricing opportunities of assets and liabilities. When
this matching is achieved, if the interest rates for a significantly large
proportion of the Company's loans or securities decrease, the Company
should be able to reprice an approximately equal amount of deposits or
other liabilities to lower interest rates within a short time. Similarly,
if interest rates paid on deposits increase, the Company should be able to
protect its interest rate margin through adjustments in the interest rates
earned on loans and securities. This matching is accomplished by managing
the terms and conditions of the products that are offered to depositors
and borrowers and by purchasing securities with the right maturity or
repricing characteristics to fill in mismatches.
One of the means by which the Company monitors the extent to which the
maturities or repricing opportunities of the major categories of assets
and liabilities are matched is an analysis such as that shown in Table 1.
This analysis 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 percentage of
total assets. As a percentage of assets, the Company's target is to be no
more than 10% plus or minus in either of the first two periods.
Many of the categories of assets and liabilities on the balance sheet do
not have specific maturities. For the purposes of this table, the Company
assigns these pools of funds to a likely repricing period. However, the
assumptions underlying the assignment of the various classes of non-term
assets and liabilities are somewhat arbitrary in that the timing of the
repricing is often a function of competitive influences. For example, if
other financial institutions are increasing the rates offered depositors,
the Company may have no choice but to reprice sooner than it expected or
assumed in order to maintain market share.
The first period shown in the gap report covers assets and liabilities
that mature or reprice within the next three months. This is the most
critical period because there would be little time to correct a mismatch
that is having an adverse impact on income. For example, if the Company
had a significant negative gap for the period--with liabilities maturing
or repricing within the next three months significantly exceeding assets
maturing or repricing in that period -- and interest rates rose suddenly,
the Company would have to wait for more than three months before an equal
amount of assets could be repriced to offset the higher interest expense
on the liabilities. From quarter to quarter, the gap for the first period
varies between positive and negative. As of March 31, 1995, the gap for
this first period is negative and, at 10.19%, is just outside the target
range. At the end of 1994 and at the end the first quarter of 1994, the
gaps were also negative at 6.25% and 2.82% of assets, respectively. It
has changed from the last quarter primarily because of the maturity of
many of the short-term bankers' acceptances with reinvestment into the
three to six month period. The change from a year ago is due to a lower
balance of outstanding tax refund anticipation loans and to a large
increase (about $44 million) in money market deposits.
The impact of negative gap in the first period is mitigated by the
similarly sized positive gap in the second period, "After three months but
within six." If there were a negative gap in the second period as well as
the first, then it would be even longer before sufficient assets could be
repriced.
The larger negative gap for the third period, "After six months but within
one year" is caused by the large amounts of transaction deposit accounts
that the Company at present assumes will not be repriced sooner than six
months. If interest rates continue to rise, the rates paid on these
accounts may have to be repriced sooner than that. There would be a
negative impact on earnings from the repricing of these deposits. This
impact would be partially offset by the fact that, in an environment of
rising interest rates, short-term assets tend to reprice more often and to
a greater degree than the short-term liabilities.
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.
<TABLE>
Table 1- Interest Rate Sensitivity
<CAPTION>
As of March 31, 1995 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 290,934 99,003 37,156 60,845 27,484 19,473 534,895
Cash and due from banks -- -- -- -- -- 64,642 64,642
Securities:
Held-to-maturity 4,567 4,961 16,183 253,290 48,227 -- 327,228
Available-for-sale 5,000 9,975 23,552 6,056 -- -- 44,583
Bankers' acceptances 24,183 19,553 -- -- -- -- 43,736
Other assets -- -- -- -- -- 12,527 12,527
Total assets 324,684 133,492 76,891 320,191 75,711 96,642 1,027,611
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased 23,795 -- -- -- -- -- 23,795
Other borrowings 1,000 -- -- -- -- -- 1,000
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts 339,932 -- 226,527 -- -- -- 566,459
Time deposits 64,644 33,467 43,687 58,932 575 -- 201,305
Demand deposits -- -- -- -- -- 129,828 129,828
Other liabilities -- -- -- -- -- 8,486 8,486
Net shareholders' equity -- -- -- -- -- 96,738 96,738
Total liabilities and
shareholders' equity 429,371 33,467 270,214 58,932 575 235,052 1,027,611
Interest rate-
sensitivity gap (104,687) 100,025 (193,323) 261,259 75,136 (138,410)
Gap as a percentage of
total assets (10.19%) 9.73% (18.81%) 25.42% 7.31% (13.47%)
Cumulative interest
rate-sensitivity gap (104,687) (4,662) (197,985) 63,274 138,410
<FN>
Note: Net deferred loan fees, overdrafts, and the reserve for loan loss are
included in the above table as non-interest bearing or non-repricing items.
</TABLE>
As noted above, interest rates rose during 1994 after a prolonged decline.
There was a slight downward drift in rates during the first quarter of
1995 as the Fed refrained from raising rates further. Its effect on the
unrealized gains and losses in the securities portfolios is discussed in
the section below titled "Securities and Related Interest Income."
Total Assets and Earning Assets
Because significant deposits are sometimes received at the end of a
quarter and are quickly withdrawn, especially at year-end, the overall
trend in the Company's growth is better shown by the use of average bal-
ances for the quarters. The chart below shows the growth in average total
assets and deposits since the fourth quarter of 1992. For the Company,
changes in assets are primarily related to changes in deposit levels, so
these have been included in the chart. Dollar amounts are in millions.
The chart exemplifies the normal pattern of asset and deposit growth for
the Company -- relatively steady increases with first quarter totals
sometimes less than in the fourth quarter of the prior year.
[Placed here in the printed copy of the Form 10Q is a graph that shows a
relatively steady increase in average assets and deposits for the
indicated quarters.]
Earning assets consist of the various assets on which the Company earns
interest income. The Company was earning interest on 94.3% of its assets
during the first quarter of 1995. This compares with an average of 83.8%
for all FDIC-Insured Commercial Banks and 88.3% for the Company's Southern
California peers for 1994. Having more of its assets earning interest
helps the Company to maintain its high level of profitability. The
Company has achieved this higher percentage by several means: (1) loans
are structured to have interest payable in most cases each month so that
large amounts of accrued interest receivable (which are non-earning
assets) are not built up; (2) the Company avoids tying up funds that could
be earning interest by leasing most of its facilities under long-term
contracts rather than owning them; (3) the Company has aggressively
disposed of real estate obtained as the result of foreclosure; and (4) the
Company has developed systems for clearing checks faster than those used
by most banks of comparable size that allow it to put the cash to use more
quickly. At the Company's current size, these steps have resulted in
about $109.0 million more assets earning interest than would be the case
if the Company's ratio were similar to its FDIC peers. If these extra
assets are assumed to earn interest at the average rate earned on U. S.
Treasury and Agency securities held by the Company during the first
quarter of 1995, they have added about $1.5 million in additional pre-tax
income for this period.
Deposits and Related Interest Expense
Table 2 presents the average balances for the major deposit categories and
the yields of interest-bearing deposit accounts for the last five quarters
(dollars in millions). As shown both in the preceding chart and in Table
2, average deposits have continued to grow. Average total deposits for
the first quarter of 1995 increased 6.6% from average deposits a year ago.
While occasionally there are slight decreases in average deposits from one
quarter to the next, the overall trend is one of growth. This orderly
growth has been planned by Management and can be sustained because of the
strong capital position and earnings record of the Company. These factors
have allowed the Company to increase its market share of local deposits by
maintaining competitive deposit rates. The increases have come through
the introduction of new deposit products and successfully encouraging
former customers of failed or merged financial institutions to become
customers of the Company.
The growth trends of the individual types of deposits are primarily
impacted by the relative rates of interest offered by the Company and the
customers' perceptions of the direction of future interest rate changes.
Compared with the first quarter of 1994, the primary growth in deposits
during the last four quarters came in the interest-bearing transaction
accounts. During 1994, as market interest rates were rising, most banks,
including the Company, raised interest rates paid on their "administered
rate" transaction accounts only minimally. Administered rate deposit
accounts are those products which the institution can reprice at its
choice based on competitive pressure and need for funds. This contrasts
with deposits the rate for which are set by contract for a term or are
tied to an external index. Since 1990, the Company has offered a money
market account, "Personal Money Master," the rate for which was tied to
the 3-month Treasury bill. With the increases in short-term rates and a
bonus rate offered during the second quarter of 1994 for customers
bringing in new deposits from other financial institutions, this product
became very popular. The monthly average balance of these accounts had
increased $110.4 million or 152% from December 1993 to October 1994. In
November 1994 the Company changed the account to an administered rate
account and lowered the rate. The account still remains attractive and
average balance has remained at the October 1994 level of approximately
$185 million.
<TABLE>
<CAPTION>
Table 2 AVERAGE DEPOSITS AND RATES
1994 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW/MMDA $ 371.2 2.09% $ 407.0 2.50% $ 446.5 2.93% $ 481.0 3.25%
Savings 149.4 2.25 142.9 2.25 130.4 2.24 118.7 2.23
Time deposits 100+ 72.3 3.35 63.2 3.57 61.0 3.88 58.4 4.13
Other time deposits 155.1 4.35 153.7 4.47 151.0 4.63 145.1 4.90
Total interest-bearing
deposits 748.0 2.72% 766.8 2.95% 788.9 3.21% 803.2 3.46%
Non-interest-bearing 117.5 118.6 119.1 123.0
Total deposits $ 865.5 $ 885.4 $ 908.0 $ 926.2
</TABLE>
<TABLE>
<CAPTION>
1995 1st Quarter
<S> <C> <C>
NOW/MMDA $ 480.1 3.58%
Savings 108.6 2.39
Time deposits 100+ 53.8 4.58
Other time deposits 144.9 5.24
Total interest-bearing
deposits 787.4 3.79%
Non-interest-bearing 135.5
Total deposits $ 922.9
</TABLE>
As shown in Table 2, there has been some growth in non-interest bearing
demand accounts as well during the last year. Approximately $11.1 million
of the average balance for demand deposits in the first quarter of 1994
and $15.6 in the first quarter of 1995 relates to outstanding checks from
the tax refund anticipation loan program. Adjusting for these amounts
indicates that there has been a real growth of about $13.5 million or
12.7%.
The Company does not solicit and does not intend in the future to solicit
any brokered deposits or out-of-territory deposits. Because these types
of accounts are highly volatile, they present major problems in liquidity
management unless the depository institution is prepared to continue to
offer very high interest rates to keep the deposits. Therefore, the
Company has taken specific steps to discourage even unsolicited out-of-
territory deposits in the $100,000 range and above.
Interest Rates Paid
The average rates that are paid on deposits generally trail behind money
market rates because financial institutions do not try to raise deposit
rates with each small increase or decrease in short-term rates. This
trailing characteristic is stronger with time deposits. With these
accounts, even when new offering rates are established, the average rates
paid during the quarter are a blend of the rates paid on individual
accounts. Only new accounts and those which mature and therefore reprice
during the quarter will bear the new rate. It is therefore consistent
with expectations that average rate on the time deposit categories would
increase to a lesser degree between the first quarter of 1994 and the
first quarter of 1995 than the NOW/MMDA transaction accounts.
Generally, the Company offers higher rates on certificates of deposit in
amounts over $100,000 than for lesser amounts. It would be expected,
therefore, that the average rate paid on these large time deposits would
be higher than the average rate paid on time deposits with smaller
balances. As may be noted in Table 2, however, this is not the case.
There are three primary reasons for this.
First, as indicated in the next section of this discussion, loan demand
has been low during the recession in the California economy. With less
need for funds to lend, the Company has been reluctant to encourage large
deposits that are not the result of stable customer relationships, because
the spread between the cost of these funds and the earnings on their uses
are small. Therefore the premium offered on these large deposits has been
small. Second, the time deposits of $100,000 and over generally have
shorter maturities than the smaller certificates. Therefore, they reprice
more frequently. In a declining interest rate environment, that means
that their average rate paid will decline faster, and in a rising rate
environment they will rise faster. While the average rate paid on the
smaller time deposits has remained greater than on the larger deposits
over the last four quarters, the difference has contracted from 100 basis
points to 66 basis points reflecting the general trend of increasing
rates. Third, there has been an increase in the proportion of IRA
accounts among the under $100,000 time deposits. The Company pays a
higher rate on these accounts. These factors have served to maintain a
higher average rate paid on the smaller time deposits relative to the
average rate paid on larger deposits.
Loans and Related Interest Income
Table 3 shows the changes in the end-of-period (EOP) and average loan
portfolio balances and taxable equivalent income and yields over the last
six quarters (dollars in millions).
<TABLE>
<CAPTION>
Table 3 LOAN BALANCES AND YIELDS
EOP Average Interest Average
Quarter Ended Outstanding Outstanding and Fees Yield
<S> <C> <C> <C> <C>
December 1993 464.2 457.7 10.36 9.00
March 1994 469.5 488.6 14.23 11.73
June 1994 464.9 465.6 10.76 9.24
September 1994 480.2 474.1 10.90 9.15
December 1994 499.4 486.3 11.29 9.25
March 1995 534.9 525.5 15.09 11.58
</TABLE>
Change in Average Loan Balances
The Company has increased its residential real estate loans by $68 million
or 125% in the last year. These are adjustable rate mortgages ("ARMS")
that have initial "teaser" rates. As the teaser rate periods expire and
with current rates higher than when most of these loans were made, the
yield should increase. The Company sells almost all of its long-term,
fixed rate, 1-4 family residential loans when they are originated. This
is done in order to manage market and interest rate risks and liquidity.
The first quarters of both 1994 and 1995 show the impact of the tax refund
anticipation loans ("RAL's") that the Company makes. The RAL's are
extended to taxpayers who have filed their returns with the IRS
electronically and do not want to wait for the IRS to send them their
refund check. The Company earns a fixed fee per loan for advancing the
funds. Because of the April 15 tax filing date, almost all of the loans
are made in the first quarter of the year.
As of the end of the first quarter of 1994, the Company had lent $230
million to 150,000 taxpayers. The outstanding loans averaged $29.5
million for the first quarter of 1994 and there were $13.9 million
outstanding at March 31, 1994. Eliminating these loans from the above
table would show average loans for the first quarter of 1994 of $459.1
million, just slightly higher than for the fourth quarter of 1993. Only
$5.4 million of the average balance for the second quarter of 1994 in the
table above relates to RAL's.
The Company had intended to significantly expand the program for the 1995
tax season, but several changes in IRS procedures prevented this. In
prior years the IRS provided confirmation before the Company advanced
funds that the taxpayer identification was valid, that there were no liens
by the IRS against the refund, and that the refund would be sent to the
Company instead of the taxpayer. This confirmation was discontinued for
the 1995 tax season. The IRS also placed a moratorium on payment of that
portion of refunds which was related to the Earned Income Credit ("EIC").
Many of the taxpayers filing electronically are low income families who do
so to receive the EIC. Without confirmation, and with significant
uncertainty regarding whether the IRS would reimburse the Company for
loans related to EIC, the Company restricted loans only to those taxpayers
who met certain credit standards, and restricted the amount that it would
lend only to the non-EIC related portion of any refund claim.
As of the end of the first quarter of 1995, the Company had lent just over
$68 million to about 75,000 taxpayers. Eliminating these loans from the
above table would show average loans for the first quarter of 1995 of
$513.9, continuing a steady increase in the average balance since the
second quarter of 1994. Fees earned on the loans were increased to cover
the greater credit risk and the additional expenses associated with credit
checks on taxpayers which had not been necessary in previous years.
However, the lower level of activity resulted in $3.2 million in fees from
RAL's in the first quarter of 1995 compared to $4.7 million in fees in
1994. As described in the section below titled "Other Operating Income,"
$1.5 million in other fees related to the RAL program were earned during
the first quarter.
Interest and Fees Earned and the Effect of Changing Interest Rates
Interest rates on most consumer loans are fixed at the time funds are
advanced. The average yields on these loans significantly lag market
rates as rates rise because the Company only has the opportunity to
increase yields as new loans are made. In a declining interest rate
environment, these loans tend to track market rates more closely because
they may be prepaid if the current market rate for any specific type of
loan declines sufficiently below the contractual rate on the original loan
to warrant the customer refinancing.
The rates on most commercial and construction loans vary with an external
index like the national prime rate or the Cost of Funds Index ("COFI") for
the 11th District of the Federal Home Loan Bank, or are set by reference
to the Company's base lending rate. This rate is established by the
Company by reference to the national prime adjusting for local lending and
deposit price conditions. The loans that are tied to prime or to the
Company's base lending rate adjust immediately to a change in those rates
while the loans tied to COFI usually adjust every six months or less.
Therefore, variable rate loans tend to follow market rates more closely.
The yields shown in Table 3 for the first quarters of 1994 and 1995 are
significantly affected by the income from the RAL program. Average yields
for the two quarters without the effect of RAL's were 8.67% and 9.27%,
respectively.
Other Loan Information
In addition to the outstanding loans reported in the accompanying
financial statements, the Company has made certain commitments with
respect to the extension of credit to customers.
(in millions) March 31, March 31
1995 1994
Credit lines with unused balances $119.9 $116.9
Undisbused loans $11.7 $15.8
Other loan or letter of credit commitments $64.7 $37.2
The increase in commitments is attributed to some improvement in local
economic activity and to the Company's entry into the Ventura County
market area. The majority of the commitments are for one year or less.
The majority of the credit lines and commitments may be withdrawn by the
Company subject to applicable legal requirements. With the exception of
the undisbursed loans, the Company does not anticipate that a majority of
the above commitments will be used by customers.
The Company defers and amortizes loan fees collected and origination costs
incurred over the lives of the related loans. For each category of loans,
the net amount of the unamortized fees and costs are reported as a
reduction or addition to the balance reported. Because the fees are
generally less than the costs for commercial and consumer loans, the total
net deferred or unamortized amounts for these categories are additions to
the loan balances.
Allowance for Loan Losses and Credit Quality
The allowance for loan losses (sometimes called a "reserve") is provided
in recognition that not all loans will be fully paid according to their
contractual terms. The Company is required by regulation, generally
accepted accounting principles, and safe and sound banking practices to
maintain an allowance that is adequate to absorb losses that are inherent
in the loan portfolio, including those not yet identified. The adequacy
of this general allowance is based on the size of the loan portfolio, his-
torical trends of charge-offs, and Management's estimates of future
charge-offs. These estimates are in turn based on the grading of
individual loans and Management's outlook for the local and national
economies and how they might affect borrowers. In addition, Statement of
Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan requires the establishment of a valuation allowance for impaired
loans as described in Note 5 to the financial statements.
Table 4 shows the amounts of non-current loans and non-performing assets
for the Company at the end of the first quarter of 1995, at the end of the
prior two quarters and at the end of the same quarter a year ago. Also
shown is the coverage ratio of the allowance to non-current loans, the
ratio of non-current loans to total loans, and the percentage of non-
performing assets to average total assets. Also included in the table in
boldface is comparable data regarding the Company's Southern California
peers for the three earlier quarters.
One large relationship consisting of a number of individual loans was
recognized as impaired and placed on non-accrual status during the first
quarter of 1995. This relationship accounts for $6.8 million of the $10.6
million in non-accrual loans as of March 31, 1995. The deterioration of
the quality of these assets has significantly impacted the credit ratios
shown in Table 4 below, but the Company's ratios are still better than
those of its Southern California peers as of December 31, 1994.
<TABLE>
<CAPTION>
Table 4 ASSET QUALITY
March 31, December 31, September 30, June 30,
1995 1994 1994 1994
Company Company Company Company
<S> <C> <C> <C> <C>
Loans delinquent
90 days or more $ 1,671 $ 1,290 $ 1,379 $ 348
Non-accrual loans 10,650 6,326 3,328 5,308
Total non-current loans 12,321 7,616 4,707 5,656
Foreclosed real estate 681 856 1,397 1,423
Total non-performing assets $ 13,002 $ 8,472 $ 6,104 $ 7,079
</TABLE>
<TABLE>
<CAPTION>
So. Cal So. Cal So. Cal
Peer Peer Peer
Company Company Group Company Group Company Group
<S> <C> <C> <C> <C> <C> <C> <C>
Coverage ratio of allowance
for loan losses to non-current
loans and leases 133% 170% 99% 267% 99% 252% 83%
Ratio of non-current loans
to total loans and leases 2.30% 1.52% 3.54% 0.98% 3.59% 1.20% 4.89%
Ratio of non-performing
assets to average total assets 1.25% 0.81% 3.16% 0.59% 2.97% 0.72% 3.81%
</TABLE>
While non-current loans are always a cause of concern, the amount of these
loans shown for the Company as of March 31, 1995, does not equate directly
with future charge-offs. Most of these loans are secured by collateral.
Nonetheless, Management has considered it prudent to add to the allowance
by providing $350,000 each month so far in 1995 for loans other than
RAL's. Additions to the allowance during the first quarter of 1995 for
the estimated amount of RAL's that will not be repaid by the IRS or the
taxpayers was $2.6 million. This has resulted in a ratio of total
allowance to total loans of 3.07%. The ratio of the allowance not related
to RAL's to total loans other than RAL's is 2.61% compared to 2.09% for
the average FDIC insured bank of comparable size, and is 2.83% for the
Company's Southern California peers. Although the Company's ratio of
allowance to total loans is less than that of the average ratio for its
Southern California peers, Management believes that the lower ratio is
justified because the Company's coverage ratio of allowance to non-current
loans is higher than that of its peers.
Two specific steps have been taken to reverse the trend of increase in
non-current loans. First, Management has strengthened the credit review,
analysis, and administrative functions by hiring additional professional
staff. Second, Management has established a Special Assets Committee to
give increased attention to the larger problem loans.
Securities and Related Interest Income
Generally accepted accounting principles require that securities be
classified in one of three categories when they are purchased. The first
category is that of "held-to-maturity." The Company must have both the
intent and the ability to hold a security until its maturity date for it
to be classified as such. Securities classified as held-to-maturity are
carried on the balance sheet at their amortized historical cost. That is,
they are carried at their purchase price adjusted for the amortization of
premium or accretion of discount. If debt securities are purchased for
later sale, the securities are classified as "trading assets." Assets held
in a trading account are required to be carried on the balance sheet at
their current market value. Changes in the market value of the securities
are recognized in the income statement for each period in which they occur
as unrealized gain or loss. Securities that do not meet the criteria for
either of these categories, e.g. securities which might be sold to meet
liquidity requirements or to effect a better asset/liability maturity
matching, are classified as "available-for-sale." They are carried on the
balance sheet at market value like trading securities. However, unlike
trading securities, changes in their market value are not recognized in
the income statement for the period. Instead, the unrealized gain or loss
(net of tax effect) is reported as a separate component of equity.
Changes in the market value are reported as changes to this component.
The Company has created two separate portfolios of securities. The first
portfolio, for securities that will be held to maturity, is the "Earnings
Portfolio." This portfolio includes all of the tax-exempt municipal
securities and most of the longer term taxable securities. The second
portfolio,the "Liquidity Portfolio," consists of the securities that are
available for sale and is made up almost entirely of the shorter term
taxable securities. The Company specifies the portfolio into which each
security will be classified at the time of purchase. The Company has no
securities which would be classified as trading securities.
Securities purchased for the earnings portfolio will not be sold for
liquidity purposes or because their fair value has increased or decreased
because of interest rate changes. They could be sold if concerns arise
about the ability of the issuer to repay them or if tax laws change in
such a way that any tax-exempt characteristics are reduced or eliminated.
In general, the Company uses available funds to purchase for the two
portfolios according to the following priorities. Taxable securities,
usually U. S. Government obligations with maturities of two years to
three years, are purchased for the liquidity portfolio. The size of the
liquidity portfolio will vary based on loan demand, deposit growth, and
the scheduled maturities of other securities. To the extent that
estimated liquidity needs are met, tax-exempt municipals that meet credit
quality standards will be purchased for the earnings portfolio up to an
amount that does not trigger the Alternative Minimum Tax described below
in "Income Taxes." Lastly, taxable securities, generally U. S.
Government obligations with maturities of two to five years, may be
purchased for the earnings portfolio.
The Effects of Interest Rates on the Composition of the Investment
Portfolio
Table 5 presents the combined securities portfolios, showing the average
outstanding balances (dollars in millions) and the yields for the last
five quarters. The yield on tax-exempt state and municipal securities has
been computed on a taxable equivalent basis. Computation using this basis
increases income for these securities in the table over the amount accrued
and reported in the accompanying financial statements. The tax-exempt
income is increased to that amount which, were it fully taxable, would
yield the same income after tax as the amount that is reported in the
financial statements. The computation assumes a combined Federal and
State tax rate of approximately 41%.
<TABLE>
<CAPTION>
Table 5 AVERAGE BALANCES OF SECURITIES AND INTEREST YIELD
1994 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 305.4 5.28% $ 355.6 5.30% $ 309.4 5.38% $ 259.5 5.55%
U.S. Agency 20.8 4.61 45.9 4.55 55.8 4.71 55.7 4.78
Tax-Exempt 78.0 13.49 79.9 13.44 86.8 13.14 90.0 13.49
Total $ 404.2 6.83% $ 481.4 6.58% $ 452.0 6.79% $ 405.2 7.21%
</TABLE>
<TABLE>
<CAPTION>
1995 1st Quarter
<S> <C> <C>
U.S. Treasury $ 236.7 5.63%
U.S. Agency 55.6 4.86
Tax-Exempt 87.6 12.99
Total $ 379.9 7.22%
</TABLE>
The Company's practice has been to shorten the average maturity of its
investments while interest rates are rising, and to lengthen the average
maturity as rates are declining. When interest rates are rising, short
maturity investments are preferred. This is because principal is better
protected and average interest yields more closely follow market rates
since the Company is buying new securities more frequently to replace
maturing securities. When rates are declining, longer maturities are
preferable because their purchase tends to "lock-in" higher rates. When
there is no sustained movement up or down, the funds from maturing
securities are usually sold as Federal funds until a clear direction is
established. Generally, "longer maturities" has meant purchases of
securities with maturities of three or five years.
Because securities generally have a fixed rate of interest to maturity,
the average interest rate earned in the portfolio lags market rates in the
same way as rates paid on term deposits. The impact of last year's
increases in market rates is seen as a very gradual increase in the
average rates of taxable securities.
Investments in most tax-exempt securities became less advantageous after
1986 because of the effect of certain provisions of the Tax Reform Act of
1986 ("TRA"). Those provisions did not affect securities purchased before
the passage of the act which make up the majority of the Company's tax-
exempt securities. There is still more than a sufficient differential
between the taxable equivalent yields on these securities and yields on
taxable securities to justify holding them to maturity. The average
maturity is approximately eight years. The yield on these securities is
gradually declining as older, higher-earning securities mature or are
called by the issuers.
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 require a careful credit evaluation of the issuer. In
reviewing securities for possible purchase, Management must also ascertain
that the securities have desirable maturity characteristics, and that the
amount of tax-exempt income they generate will not be enough to trigger
the Alternative Minimum Tax; otherwise the tax advantage will be lost.
Apart from a few small issues that have met the Company's criteria for
purchase, the increase in the average balance of tax exempt securities is
due to the accretion of discount (the periodic recognition as interest
income of the difference between the purchase cost and the par value that
will be received from the issuer upon maturity).
Unrealized Gains and Losses
As explained in "Interest Rate Sensitivity" above, fixed rate securities
are subject to market risk from changes in interest rates. Footnote 4 to
the financial statements shows the impact of the decline in interest rates
that occurred during the first quarter of 1995. The market value of the
U.S. Treasury securities in the earnings or held-to-maturity portfolio
increased by $5.1 million. The municipal securities also increased in
market value by about $3.7 million.
Federal Funds Sold
Cash in excess of the amount needed to fund loans, invest in securities,
or cover deposit withdrawals, is sold to other institutions as Federal
funds. The sales are only overnight. Excess cash expected to be avail-
able for longer periods is generally invested in U. S. Treasury
securities or bankers' acceptances if the available returns are
acceptable. The amount of Federal funds sold during the quarter is there-
fore an indication of Management's estimation during the quarter of
immediate cash needs and relative yields of alternative investment
vehicles.
Table 6 illustrates the average funds sold position of the Company and the
average yields over the last six quarters (dollars in millions).
Table 6--AVERAGE BALANCE OF FUNDS SOLD AND YIELDS
Average Average
Quarter Ended Outstanding Yield
December 1993 $21.8 2.97%
March 1994 4.9 3.20
June 1994 8.7 3.95
September 1994 22.1 4.47
December 1994 30.8 5.13
March 1995 23.8 5.69
When interest rates are rising, the Company can benefit by keeping larger
amounts in Federal funds because these excess funds then earn interest
that is repriced daily. When rates are declining, the Company generally
decreases the amount of funds sold and instead purchases Treasury
securities and/or bankers' acceptances. When rates are stable, the
balance of Federal funds is determined more by available liquidity than by
policy concerns. In recent years, excess funds that might otherwise have
been sold as Federal funds were instead invested in short-term U. S.
Treasury securities and bankers' acceptances that would mature in the
first quarter of the year to provide funding for the RAL program. In the
first quarter of 1994, virtually all available funds were used to support
the program, leaving few funds for sale, even though rates were rising.
In the first quarter of 1995, with the RAL program requiring less funds,
the balance in Federal funds sold was higher than the same quarter a year
ago.
Bankers' Acceptances
The Company has used bankers' acceptances as an alternative to 6-month U.
S. Treasury securities when pledging requirements are otherwise met and
sufficient spreads to U. S. Treasury obligations exist. The acceptances
of only the highest quality institutions are utilized. Table 7 discloses
the average balances and yields of bankers' acceptances for the last six
quarters (dollars in millions).
Table 7--AVERAGE BALANCE OF BANKERS' ACCEPTANCES AND YIELDS
Average Average
Quarter Ended Outstanding Yield
December 1993 $60.8 3.32%
March 1994 33.7 3.31
June 1994 1.4 3.35
September 1994 25.3 5.32
December 1994 4.4 5.38
March 1995 55.7 5.97
After the RAL program expanded in 1993, Management recognized that it
would have to begin during the third quarter to purchase securities or
bankers' acceptances that would mature during the first quarter of the
following year. With rates on acceptances comparing favorably to shorter-
term U. S. Treasury securities, significant purchases were made
beginning late in the third quarter of 1993. When they matured, the
proceeds were used as planned to fund the RAL program. Expecting a
further expansion of the program in 1995, Management again purchased
bankers' acceptances in the third and fourth quarters of 1994 to mature in
early 1995. With the reduction in loans in the RAL program in 1995, some
of the maturities were not needed for the intended purpose and were
reinvested in bankers' acceptances in anticipation of funding the loans
that would be arising out of the opening of the Ventura offices.
Other Borrowings and Related Interest Expense
Other borrowings consist of securities sold under agreements to
repurchase, Federal funds purchased (usually only from other local banks
as an accommodation to them), Treasury Tax and Loan demand notes, and
borrowings from the Federal Reserve Bank ("FRB"). Because the average
total short-term component represents a very small portion of the
Company's source of funds (less than 5%) and shows little variation in
total, all of the short-term items have been combined for the following
table. Interest rates on these short-term borrowings change over time,
generally in the same direction as interest rates on deposits.
Table 8 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by the
short-term component over the last six quarters.
Table 8--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
December 1993 $29.1 2.88% 2.9%
March 1994 28.8 2.97 2.9
June 1994 30.5 3.50 3.0
September 1994 26.3 4.05 2.5
December 1994 18.3 4.63 1.8
March 1995 15.9 5.47 1.5
Other Operating Income
Trust fees are the largest component of other operating income.
Management fees on trust accounts are generally based on the market value
of assets under administration. Table 9 shows trust income over the last
six quarters (in thousands).
Table 9--TRUST INCOME
Quarter Ended Trust Income
December 1993 $1,706
March 1994 1,781
June 1994 1,510
September 1994 1,548
December 1994 1,611
March 1995 1,765
Trust customers are charged for the preparation of the fiduciary tax
returns. The preparation generally occurs in the first and/or second
quarter of the year. This accounts for approximately $236,000 of the fees
earned in the first quarter of 1995 and $179,000 and $81,000 of the fees
earned in the first and second quarters of 1994, respectively. Other
variation is caused by the recognition of probate fees when the work is
completed rather than accrued as the work is done, because it is only upon
the completion of probate that the fee is established by the court. After
adjustment for these seasonal and non-recurring items and short-term
fluctuations of price levels in the stock and bond markets, trust income
has remained relatively stable during the quarters shown.
Other categories of non-interest income include various service charges,
fees, and miscellaneous income. Included within "Other Service Charges,
Commissions & Fees" in the following table are service fees arising from
credit card processing for merchants, escrow fees, and a number of other
fees charged for special services provided to customers. Categories of
non-interest operating income other than trust fees are shown in Table 10
for the last six quarters (in thousands).
Table 10--OTHER INCOME Other Service
Service Charges Charges,
on Deposit Commissions Other
Quarter Ended Accounts & Fees Income
December 1993 $ 713 $1,012 $334
March 1994 724 791 145
June 1994 746 1,249 149
September 1994 752 1,023 121
December 1994 961 1,013 152
March 1995 1,044 2,468 78
The Company revised its schedule for most fees in the fourth quarter of
1994. The effect of the increase is seen in the increase in the amount of
service charges on deposit accounts in that quarter and the first quarter
of 1995.
The large increase in other service charges, commissions and fees for the
first quarter of 1995 is due to $1.5 million of fees received for the
electronic transfer of tax refunds. As explained in the section above
titled "Loans and Related Interest Income," the Company did not advance
funds under the RAL program to as large a number of potential borrowers as
it had expected because of the changes in the IRS procedures.
Nonetheless, the Company was able to assist these taxpayers by
transferring funds to them faster than the standard IRS check writing
process. The Company received the refund from the IRS and then
transferred it directly to the taxpayer's checking account or authorized
the tax preparer to write a check that the taxpayer could pick up
immediately.
Included in other income are gains or losses on sales of loans. When the
Company collects fees on loans that it originates, it must defer them and
recognize them as interest income over the term of the loan. If the loan
is sold before maturity, any unamortized fees are recognized as gains on
sale rather than interest income. In 1993 when interest rates were low,
the Company originated a significant number of refinancings that it
immediately sold to other financial institutions or insurance companies.
This was especially true in the fourth quarter of 1993 as approximately
$196,000 in gains were recognized. The larger amount appeared to be
related to consumers' fears that rates were starting to rise and that this
would be their last chance to "lock in" lower rates. As interest rates
rose in 1994, the Company did fewer refinancings, accounting for the
smaller amount of other income.
Staff Expense
The Company closely monitors staff size and over the last several years
has managed to limit the increase in the average number of employees to
less than the rate of increase in the average assets of the Company and
rate of increase in the market value of trust assets under administration.
Table 11 shows the amounts of staff expense incurred over the last six
quarters (in thousands).
Table 11--STAFF EXPENSE
Salary and Profit Sharing and
Quarter Ended Other Compensation Other Employee Benefits
December 1993 $4,010 $ 787
March 1994 4,096 1,353
June 1994 4,281 1,246
September 1994 4,090 1,205
December 1994 3,834 1,045
March 1995 4,780 1,405
Staff expense increased in the first quarter of 1995 for several reasons.
First, the Company began hiring staff for the three Ventura offices that
have been opened. They were hired with enough lead time before the
openings to provide training and familiarization with the Company.
Second, as mentioned above, the Company has hired a number of new staff in
the areas of lending and credit administration and in loan review to more
closely monitor credit quality. Thirdly, staff has been added in the
Trust Division to sell and manage several new products offered in this
area. Lastly, all officers have their annual salary review in the first
quarter with merit increases effective on March 1. These increases
averaged 4% this year.
The amounts shown for Profit Sharing and Other Employee Benefits include
(1) the Company's contribution to profit sharing plans and retiree health
benefits, (2) the Company's portion of health insurance premiums and
payroll taxes, and (3) payroll taxes and workers' compensation insurance.
The amount for the fourth quarter of 1993 was unusually low. The
Company's contributions for the profit sharing and retiree health benefit
plans are determined by a formula that results in a contribution equal to
10% of a base figure made up of income before tax and before the
contribution, adjusted to add back the provision for loan loss and to
subtract actual charge-offs. The Company begins each year accruing an
amount based on its forecast of the base figure. Because actual net
charge-offs were a higher percentage of the provision in 1993 (72%) than
they had been in prior years, the base was lower relative to net income
than it previously had been. The Company had been accruing for these
contributions during the first three quarters of 1993 with the assumption
of a more normal ratio of actual net charge-offs to provision and
therefore needed to adjust the accrual in the fourth quarter. In 1994,
the Company again adjusted its accrual as base figure proved lower than
originally forecast. During the course of 1995, Management will change
the rate of accrual if its estimate of the base amount is too different
from the actual.
The second factor explaining the increase in profit sharing and other
employee benefits relates to payroll taxes. An estimated amount for
officer bonuses is accrued as salary expense during the year because the
bonuses are based on the financial performance for that year. However,
the Company is not liable for the payroll taxes until the bonuses are paid
in the first quarter of the following year. Therefore the payroll taxes
relating to the bonuses for the prior year are all charged as expense in
the first quarter of the current year, accounting for a portion
(approximately $57,000) of the increase from the fourth quarter of 1994 to
the first quarter of 1995. Moreover, payroll tax expense is normally
lower in the fourth quarter of each year because the salaries of the
higher paid employees have passed the payroll tax ceilings by the fourth
quarter.
As discussed above in "Loans and Related Interest Income," the accounting
standard relating to loan fees and origination costs requires that salary
expenditures related to originating loans not be immediately recognized as
expenses, but instead be deferred and then amortized over the life of the
loan as a reduction of interest and fee income for the loan portfolio.
Compensation actually paid to employees in each of the above listed
periods is thus higher than shown by an amount ranging from $125,000 to
$275,000, depending on the number of loans originated during that quarter.
Other Operating Expenses
Table 12 shows other operating expenses over the last six quarters (in
thousands).
Table 12--OTHER OPERATING EXPENSE
Occupancy Expense Furniture & Other
Quarter Ended Bank Premises Equipment Expense
December 1993 $ 817 $539 $3,459
March 1994 787 488 3,096
June 1994 855 511 3,144
September 1994 935 614 2,867
December 1994 950 634 3,745
March 1995 1,011 645 4,198
Other operating expenses have increased in the first quarter of 1995.
Occupancy expenses have increased as a result of the new Ventura County
offices. The Company leases rather than owns most of its premises. Many
of the leases provide for annual rent adjustments. Equipment expense
fluctuates over time as rental needs change, maintenance is performed, and
equipment is purchased, and this category has also been impacted by the
opening of the new offices.
Table 13 shows a detailed comparison for the major expense items in other
expense for the first quarters of 1994 and 1995.
<TABLE>
<CAPTION>
Table 13 OTHER EXPENSE
Three-Month Periods
Ended March 31,
1995 1994
<S> <C> <C>
FDIC and State assessments $ 528 $ 520
Professional services 185 196
RAL processing and incentive fees 250 323
Supplies and sundries 168 148
Postage and freight 220 176
Marketing 167 136
Bankcard processing 348 418
Credit bureau 443 11
Telephone and wire expense 309 88
Charities and contributions 142 63
Software expense 203 175
Operating losses 201 (3)
Other 1,034 845
Total $4,198 $3,096
</TABLE>
Included in other expense is the premium cost paid for FDIC insurance.
The FDIC has converted to a graduated rate for the premium based on the
soundness of the particular institution. The annual rate ranges from $0.23
to $0.30 per hundred dollars of deposits. On the basis of its "well-
capitalized" position, the Company's rate is $0.23 per hundred. As deposits
increase, this expense increases as well.
A number of these expense categories have increased due to the Ventura
County expansion. These include marketing, telephone and wire, and
charities and contributions. The increase in credit bureau expense is
almost wholly related to the extra credit checks for the RAL program
necessitated by the IRS changes noted above. Substantial telephone
expense was incurred in the RAL program to answer questions from
applicants for loans regarding the changes made by the IRS and why the
Company would act as a transferor only. Telephone expense also increased
because of a new business rate schedule implemented by the Company's local
telephone vendor. The RAL related expenses will be less for subsequent
quarters of the year, but expenses related to the new offices will
continue.
The Company became aware in the first quarter of 1995 that it may have
some responsibility for a large loss suffered by one of its customers and
has therefore included with other operating losses an estimate of the
amount it is likely to have to reimburse the customer.
The net cost of other real estate owned ("OREO") is not included in the
preceding table because it appears on a separate line in the statements of
income. When the Company forecloses on the real estate collateral
securing delinquent loans, it must record these assets at the lower of
their fair value (market value less estimated costs of disposal) or the
outstanding amount of the loan. If the fair value is less than the
outstanding amount of the loan, the difference is charged to the allowance
for loan loss at the time of foreclosure. Costs incurred to maintain or
operate the properties are charged to expense as they are incurred. If
the fair value of the property declines below the original estimate, the
carrying amount of the property is written-down to the new estimate of
fair value and the decrease is also charged to this expense category. If
the property is sold at an amount higher than the estimated fair value,
the gain that is realized is credited to this category.
The negative amount in the income statement for this expense category for
the first quarter of 1994 reflects approximately $907,000 in net gains
arising out of sales less approximately $327,000 in operating expenses and
writedowns. The gains arose from the sale of the final four units of a
condominium project on which the Company foreclosed in 1993. The Company
had made a very conservative estimate of the market value of these units
at the time of foreclosure because of the slow pace of sales of the units
before foreclosure. With the local residential real estate market showing
increased strength, and with some initial sales to demonstrate that the
prices were not going to be reduced further, the Company was able to sell
the units at prices higher than the conservative estimate. Some gains
from sale were also recognized in the final quarter of 1993.
As disclosed in Note 7 to the financial statements, the Company had
$681,000 in OREO as of March 31, 1995. This compares with $1.4 million as
of a year earlier. With the small balance of OREO being held, Management
anticipates that OREO operating expense will continue to be relatively
low. However, the Company has liens on properties which are collateral
for (1) loans which are in non-accrual status, or (2) loans that are
currently performing but about which there is some question that the
borrower will be able to continue to service the debt according to the
terms of the note. These conditions may necessitate additional
foreclosures during the next several quarters, with a corresponding
increase in this expense.
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. Sufficient liquidity is a
function of (1) having cash or cash equivalents on hand or on deposit at a
Federal Reserve Bank ("FRB") adequate to meet unexpected immediate
demands, and (2) balancing near-term and long-term cash inflows and
outflows to meet such demands over future periods.
Federal regulations require banks to maintain a certain amount of funds on
deposit ("deposit reserves") at the FRB for liquidity. Except in periods
of extended declines in interest rates when the investment policy calls
for additional purchases of investment securities, or at times during the
first quarter when all available funds are used to fund the RAL's, the
Company also maintains a balance of Federal funds sold which are available
for liquidity needs with one day's notice. Because the Company stays
fairly fully invested, occasionally during the year, and more frequently
during the first quarter of the year, with the large liquidity needs
associated with the RAL program, the Company purchases Federal funds from
other banks or borrows from the FRB. There are no significant problems
with this approach, and the Company always has an abundance of Treasury
notes in its liquidity portfolio that could be sold to provide immediate
liquidity if necessary.
The timing of inflows and outflows to provide for liquidity over longer
periods is achieved by making adjustments to the mix of assets and
liabilities so that maturities are matched. These adjustments are
accomplished through changes in terms and relative pricing of different
products. The timing of liquidity sources and demands is well matched
when there is at least the same amount of short-term liquid assets as
volatile, large liabilities. It is also important that the maturities of
the remaining long-term assets are relatively spread out. Of those assets
generally held by the Company, the short-term liquid assets consist of
Federal funds sold and debt securities with a remaining maturity of less
than one year. Because of its investment policy of selling taxable
securities from the liquidity portfolio before any loss becomes too great
to materially affect liquidity, and because there is an active market for
Treasury securities, the Company considers its Treasury securities with a
remaining maturity of under 2 years to be short-term liquid assets for
this purpose. The volatile, large liabilities are time deposits over
$100,000, public time deposits, 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 analysis, they are not
considered volatile.
A method used by bank regulators to compute liquidity using this concept
of matching maturities is to divide the difference between the short-term,
liquid assets and the volatile, large liabilities by the sum of the loans
and long-term investments, that is:
Short-term, Liquid Assets - Volatile, Large Liabilities
- ------------------------------------------------------- = Liquidity
Ratio
Net Loans and Long-term Investments
<TABLE>
<CAPTION>
Table 14--LIQUIDITY COMPUTATION COMPONENTS
(in thousands of $)
Short-term, Volatile, Net Loans and Long-
Liquid Assets: Large Liabilities: term Investments:
<S> <C> <S> <C> <S> <C>
Fixed rate debt Time deposits 100+ $64,902 Net loans $518,462
with maturity Repurchase agreements Long-term
less than 1 year $ 64,238 and Federal funds securities 261,639
Treasury securities purchased 23,795
with 1-2 year Other borrowed funds 1,000
maturities 45,934
Bankers'
acceptances 43,736
Total $153,908 Total $89,697 Total $780,101
</TABLE>
As of March 31, 1995, the difference between short-term, liquid assets and
volatile, large liabilities, the "liquidity amount," was a positive $64
million and the liquidity ratio was 8.23%, using the balances (in
thousands) in Table 14.
The Company's liquidity ratio indicates that all of the Company's
volatile, large liabilities are matched against short-term liquid assets,
with an excess of liquid assets. The current liquidity amount is within
the range that the Company is trying to maintain -- from positive $75
million to negative $25 million. Too high a liquidity amount or ratio
results in reduced earnings because the short-term, liquid assets
generally have lower interest rates. If liquidity is too low, earnings
are reduced by the cost to borrow funds or because of lost opportunities.
Securities from both the liquidity and earnings portfolios are included in
the balances for short-term liquid assets in Table 14. The inclusion of
securities from the earnings portfolio is not predicated on their possible
sale, but rather on the recognition that Management will be including the
proceeds that will be received at maturity in liquidity planning. The
amounts in Table 14 are also adjusted for $5 million in taxable securities
which had depreciated below the level at which they would normally be
sold, but which Management elected to hold until the market showed more
stability.
Capital Resources
Table 15 presents a comparison of several important amounts and ratios for
the first quarters of 1995 and 1994 (dollars in thousands).
<TABLE>
<CAPTION>
Table 15 CAPITAL RATIOS First Quarter First Quarter
1995 1994 Change
<S> <C> <C> <C>
Amounts:
Net Income $ 2,976 $ 3,517 $ (541)
Average Total Assets 1,042,357 989,683 52,674
Average Equity 96,043 88,263 7,780
Ratios:
Equity Capital to
Total Assets (Period-end) 9.41% 8.77% 0.64%
Annualized Return
on Average Assets 1.14% 1.42% -0.28%
Annualized Return
on Average Equity 12.39% 15.94% -3.55%
</TABLE>
Earnings are the largest source of capital for the Company. For reasons
mentioned in various sections of this discussion, Management expects that
there will be more variation quarter by quarter in operating earnings.
Areas of uncertainty include asset quality, loan demand, RAL operations
and collections, and the Ventura County expansion.
A substantial increase in charge-offs would require the Company to record
a larger provision for loan loss to restore the allowance to an adequate
level, and this would negatively impact earnings. If loan demand
increases, the Company will be able to reinvest proceeds from maturing
investments at higher rates, which would positively impact earnings.
Because of the changes instituted by the IRS regarding RAL payments to the
Company, the amount of these loans not repaid to the Company may be higher
than originally estimated. These changes have already increased operating
costs over the Company's original projections and additional costs may be
incurred in the second quarter. There will be some additional initial
expenses related to Ventura that will be incurred in the second quarter as
well as a full quarter of operating expenses, but these should begin to be
offset by additional income as loans are made and deposits received.
The FRB sets minimum capital guidelines for U. S. banks and bank holding
companies based on the relative risk of the various types of assets. The
guidelines require banks to have capital equivalent to at least 8% of risk
adjusted assets. As of March 31, 1995, the Company's risk-based capital
ratio was 19.09%. The Company must also maintain shareholders' equity of
at least 4% to 5% of unadjusted total assets. As of March 31, 1995,
shareholders' equity was 9.41% of total assets. The Company's ratios
reflect that it currently has ample capital to support the additional
growth in Ventura County.
No significant commitments or reductions of capital are anticipated.
Regulation
The Company is closely regulated by Federal and State agencies. The
Company and its subsidiaries may engage only in lines of business that
have been approved by their respective regulators, and cannot open or
close offices without their approval. Disclosure of the terms and condi-
tions of loans made to customers and deposits accepted from customers are
both heavily regulated as to content. The Company is required by the
provisions of the Community Reinvestment Act ("CRA") to make significant
efforts to ensure that access to banking services is available to the
whole community. The Bank's CRA compliance was last examined by the FDIC
in the fourth quarter of 1992, and the Bank was given the highest rating
of "Outstanding." As a bank holding company, the Company is primarily
regulated by the FRB. The Bank is primarily regulated by the FDIC and the
California State Department of Banking. As a non-bank subsidiary of the
Company, ServiceCorp is regulated by the FRB. Each of the regulatory
agencies conducts periodic examinations of the Company and/or its
subsidiaries to ascertain their compliance with regulations.
The FRB may take action against bank holding companies and the FDIC
against banks should they fail 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. The Company has received no indication that
either banking agency is in any way contemplating any such action with
respect to the Company or the Bank, and given the strong capital position
of both the Bank and the Company, Management expects no such action.
Footnotes to Management's Discussion and Analysis
[1] The Company primarily uses two published sources of information to obtain
performance ratios of its peers. The FDIC Quarterly Banking Profile, Fourth
Quarter, 1994, published by the FDIC Division of Research and Statistics,
provides information about all FDIC insured banks and certain subsets based
on size and geographical location. Geographically, the Company is included in
a subset that includes 12 Western states plus the Pacific Islands. To obtain
information more specific to California, the Company uses The Western Bank
Monitor, published by Montgomery Securities. This publication provides
performance statistics for "leading independent banks" in 13 Western states,
and further distinguishes a Southern California subset within which the
Company is included. Both of these publications are based on year-to-date
information provided by banks each quarter. It takes about 2-3 months to
process the information, so the published data is always one quarter behind
the Company's information. For this quarter, the peer information is for the
four quarters of 1994. All peer information in this discussion and analysis
is reported in or has been derived from information reported in one of these
two publications.
[2] As required by applicable regulations, tax-exempt non-security
obligations of municipal governments are reported as part of the loan
portfolio. These totaled approximately $7.7 million as of March 31, 1995. The
average yields presented in Table 3 give effect to the tax-exempt status of
the interest received on these obligations by the use of a taxable equivalent
yield assuming a combined Federal and State tax rate of approximately 41%
(while not tax exempt for the State of California, the State taxes paid on
this Federal-exempt income is deductible for Federal tax purposes). If their
tax-exempt status were not taken into account, interest earned on loans for
the first quarter of 1995 would be $15.0 million as shown in the accompanying
financial statements and the average yield would be 11.53%. There would also
be corresponding reductions for the other quarters shown in the Table 4. The
computation of the taxable equivalent yield is explained in the section below
titled "Investment Securities and Related Interest Income."
[3] Reported in Western Bank Monitor, Fourth Quarter, 1994.
[4] Reported in or derived from information reported in The FDIC Quarterly
Banking Profile and the Western Bank Monitor, Fourth Quarter 1994.
<PAGE> 29
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of shareholders was held on
April 25, 1995. Proxies were solicited by the Company's management
pursuant to Regulation 14 under the Securities Exchange Act of 1934.
(b) There was no solicitation in opposition to Management's
nominees for directorships as listed in the proxy statement, and all of
such nominees were elected pursuant to the vote of shareholders. The
directors elected to one year terms were:
Donald Anderson Anthony Guntermann
Frank H. Barranco Dale Hanst
Edward E. Birch Harry B. Powell
Richard M. Davis David W. Spainhour
There are no other directors whose term of office as a director
continued after the shareholders' meeting.
(c) Arthur Andersen LLP was selected as the Company's independent
public accountants for 1995.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Sequential
Exhibit Number Item Description Page Number
11 Computation of Per 30
Share Earnings
99 Financial Data Schedule 32
(b) No reports were filed on Form 8-K
<PAGE> 30
EXHIBIT 11
SANTA BARBARA BANCORP & SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the Three-Month Periods Ended March 31,
1995 1994
Primary Fully Diluted Primary Fully Diluted
<S> <C> <C> <C> <C>
Weighted Average
Shares Outstanding 5,127,054 5,127,054 5,065,462 5,065,462
Weighted Average
Options Outstanding 452,209 452,209 537,456 537,456
Anti-dilution
adjustment (1) (21,991) (21,991) 0 0
Adjusted Options
Outstanding 430,218 430,218 537,456 537,456
Equivalent Buyback
Shares (2) (304,533) (304,544) (426,339) (381,895)
Total Equivalent
Shares 125,685 125,674 111,117 155,561
Adjustment for
Non-Qualified
Tax Benefit (3) (51,531) (51,526) (45,558) (63,780)
Weighted Average
Equivalent Shares
Outstanding 74,154 74,148 65,559 91,781
Weighted Average
Shares for
Computation 5,201,208 5,201,202 5,131,021 5,157,243
Fair Market Value (4) $25.52 $25.52 $22.39 $25.00
Net Income $2,976,476 $2,976,476 $3,517,155 $3,517,155
Per Share Earnings $0.57 $0.57 $0.69 $0.68
<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. The
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>
<PAGE> 31
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized:
SANTA BARBARA BANCORP
DATE: May 12, 1995 /s/ Kent M. Vining
Kent M. Vining
Senior Vice President
Chief Financial Officer
DATE: May 12, 1995 /s/ Donald Lafler
Donald Lafler
Vice President
Principal Accounting Officer
<PAGE> 32
[ARTICLE] 9
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] MAR-31-1995
[CASH] 64,642
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 44,583
[INVESTMENTS-CARRYING] 327,228
[INVESTMENTS-MARKET] 0
[LOANS] 534,895
[ALLOWANCE] 16,433
[TOTAL-ASSETS] 1,027,611
[DEPOSITS] 897,592
[SHORT-TERM] 24,795
[LIABILITIES-OTHER] 8,486
[LONG-TERM] 0
[COMMON] 5,126
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 91,612
[TOTAL-LIABILITIES-AND-EQUITY] 1,027,611
[INTEREST-LOAN] 15,023
[INTEREST-INVEST] 5,811
[INTEREST-OTHER] 1,155
[INTEREST-TOTAL] 21,989
[INTEREST-DEPOSIT] 7,364
[INTEREST-EXPENSE] 7,583
[INTEREST-INCOME-NET] 14,406
[LOAN-LOSSES] 3,663
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 12,021
[INCOME-PRETAX] 4,077
[INCOME-PRE-EXTRAORDINARY] 4,077
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2,976
[EPS-PRIMARY] 0.58
[EPS-DILUTED] 0.58
[YIELD-ACTUAL] 5.86
[LOANS-NON] 10,650
[LOANS-PAST] 1,671
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 27,487
[ALLOWANCE-OPEN] 12,911
[CHARGE-OFFS] 268
[RECOVERIES] 127
[ALLOWANCE-CLOSE] 16,433
[ALLOWANCE-DOMESTIC] 16,433
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
