<PAGE>
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: September 30, 1996 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 November 1, 1996 there were 7,631,943 shares of the
issuer's common stock outstanding.
<PAGE>
PART 1
FINANCIAL INFORMATION
<TABLE>
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except per share amount)
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Assets:
Cash and due from banks ...................... $ 59,704 $ 74,746
Federal funds sold ........................... 35,000 65,000
----------- -----------
Cash and cash equivalents .................... 94,704 139,746
----------- -----------
Securities (Note 4):
Held-to-maturity ............................. 283,827 231,730
Available-for-sale ........................... 137,903 125,835
Bankers' acceptances ......................... 44,085 139,294
Loans, net of allowance of $15,894 at
September 30, 1996 and $12,349 at
December 31, 1995 (Note 5) ................... 588,201 546,452
Premises and equipment, net (Note 6) ......... 7,094 8,149
Accrued interest receivable .................. 7,840 7,981
Other assets (Note 7) ........................ 14,474 13,174
----------- -----------
Total assets ................................. $ 1,178,128 $ 1,212,361
=========== ===========
Liabilities:
Deposits:
Demand deposits .............................. $ 159,652 $ 158,122
NOW deposit accounts ......................... 132,642 148,027
Money Market deposit accounts ................ 393,534 427,198
Savings deposits ............................. 92,688 94,124
Time deposits of $100,000 or more ............ 93,175 76,438
Other time deposits .......................... 160,818 150,111
----------- -----------
Total deposits ............................... 1,032,509 1,054,020
Securities sold under agreements
to repurchase and Federal funds purchased .... 31,124 51,316
Other borrowed funds ......................... 1,000 1,210
Accrued interest payable and other liabilities 7,079 4,818
----------- -----------
Total liabilities ............................ 1,071,712 1,111,364
----------- -----------
Shareholders' equity:
Common stock (no par value;
$.67 per share stated value;
20,000 authorized; 7,641
outstanding at September 30, 1996
and 7,679 at December 31 ................... 5,094 5,119
Surplus ...................................... 37,198 39,191
Unrealized loss on securities
available for sale ........................... (195) (179)
Retained earnings ............................ 64,319 56,866
----------- -----------
Total shareholders' equity ................... 106,416 100,997
----------- -----------
Total liabilities and shareholders ........... $ 1,178,128 $ 1,212,361
=========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements
</FN>
<PAGE>
</TABLE>
<TABLE>
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<CAPTION>
For the Nine-Month For the Three-Month
Periods Ended Periods Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ..... $ 41,989 $ 40,018 $ 13,253 $ 12,566
Interest on securities ......... 19,214 17,375 6,899 5,948
Interest on Federal funds sold . 2,345 1,935 510 1,024
Interest on bankers' acceptances 3,018 2,041 550 553
-------- -------- -------- --------
Total interest income .......... 66,566 61,369 21,212 20,091
-------- -------- -------- --------
Interest expense:
Interest on deposits ........... 24,536 23,421 8,090 8,356
Interest on securities sold
under agreements to repurchase
and Federal funds purchased .. 1,512 961 349 391
Interest on other borrowed funds 41 61 12 13
-------- -------- -------- --------
Total interest expense ......... 26,089 24,443 8,451 8,760
-------- -------- -------- --------
Net interest income ............ 40,477 36,926 12,761 11,331
Provision for loan losses ...... 4,264 8,874 -- 3,910
-------- -------- -------- --------
Net interest income after
provision for loan loss ........ 36,213 28,052 12,761 7,421
-------- -------- -------- --------
Other income:
Service charges on deposits .... 3,395 3,172 1,144 1,056
Trust fees ..................... 6,296 5,042 2,050 1,686
Other service charges,
commissions and fees ......... 4,823 4,740 1,353 1,130
Net loss on securities transactions (759) (22) (104) --
Other income ................... 347 360 121 169
-------- -------- -------- --------
Total other income ............. 14,102 13,292 4,564 4,041
-------- -------- -------- --------
Other expense:
Salaries and benefits .......... 19,210 17,550 6,589 5,927
Net occupancy expense .......... 3,387 3,094 1,131 1,080
Equipment expense .............. 1,909 1,937 623 652
Net loss (gain) from operating
other real estate ............ 189 30 99 46
Other expense .................. 9,151 9,355 3,050 1,547
-------- -------- -------- --------
Total other expense ............ 33,846 31,966 11,492 9,252
-------- -------- -------- --------
Income before income taxes ..... 16,469 9,378 5,833 2,210
Applicable income taxes ........ 5,119 2,392 2,128 493
-------- -------- -------- --------
Net income ..................... $ 11,350 $ 6,986 $ 3,705 $ 1,717
======== ======== ======== ========
Earnings per share ............. $ 1.48 $ 0.91 $ 0.48 $ 0.22
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<CAPTION>
For the Nine Months
Ended September 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income ........................................... $ 11,350 $ 6,986
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization ........................ 1,528 1,408
Provision for loan losses ............................ 4,264 8,874
Provision (benefit) for deferred income taxes ........ (2,184) 1,329
Net amortization of investment securities
discounts and premiums ............................. (1,575) (428)
Net change in deferred loan origination and
extension fees and costs ........................... 475 87
Decrease in accrued interest receivable .............. 141 78
Increase (decrease) in accrued interest payable ...... (145) 196
Decrease (increase) in fee income receivable ......... 101 (2,242)
Decrease (increase) in prepaid expenses .............. (31) 170
Increase (decrease) in accrued expenses .............. 960 (1,739)
Net loss (gain) on sale of OREO ...................... 85 45
Net loss on securities transactions .................. 758 --
Other operating activities ........................... 1,811 1,590
--------- ---------
Net cash provided by operating activities ............ 17,538 16,354
--------- ---------
Cash flows from investing activities:
Proceeds from call or maturity of securities:
Available-for-sale ................................... 50,350 36,743
Held-to-maturity ..................................... 23,663 10,081
Purchase of securities:
Available-for-sale ................................... (185,171) (52,577)
Held-to-maturity ..................................... (72,445) (5,324)
Proceeds from sale of securities:
Available-for-sale ................................... 121,210 --
Proceeds from maturity of bankers' acceptances ....... 222,654 108,470
Purchase of bankers' acceptances ..................... (128,274) (77,440)
Net increase in loans made to customers .............. (48,070) (43,349)
Disposition of property from defaulted loans ......... 1,557 294
Purchase or investment in premises and equipment ..... (476) (2,369)
--------- ---------
Net cash used in investing activities ................ (15,002) (25,471)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits .................. (21,511) 21,410
Net increase (decrease) in borrowings with
maturities of 90 days or less ...................... (20,401) 24,995
Proceeds from issuance of common stock ............... 1,081 204
Payments to retire common stock ...................... (3,099) (866)
Dividends paid ....................................... (3,648) (3,072)
--------- ---------
Net cash provided by (used in) financing activities .. (47,578) 42,671
--------- ---------
Net increase (decrease) in cash and cash equivalents . (45,042) 33,554
Cash and cash equivalents at beginning of period ..... 139,746 84,630
========= =========
Cash and cash equivalents at end of period ........... $ 94,704 $ 118,184
========= =========
<FN>
Supplemental disclosure:
Cash paid for the nine months ended:
Interest ............................................. $ 25,944 $ 24,248
Income taxes ......................................... $ 6,150 $ 3,110
See accompanying notes to consolidated condensed financial statements
</FN>
</TABLE>
Santa Barbara Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(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 Sanbarco Mortgage Company ("Mortgage Company").
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 nine- and three-month periods ended September 30, 1996 and
1995, the weighted average shares outstanding were as follows:
Nine-Month Periods Three-Month Periods
Ended September 30, Ended September 30,
1996 1995 1996 1995
Weighted average
shares outstanding 7,643,664 7,678,858 7,640,472 7,657,950
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 nine months ended September 30, 1996 are not necessarily
indicative of the results to be expected for the full year. Certain amounts
reported for 1995 have been reclassified to be consistent with the reporting for
1996.
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
their amortized historical cost. That is, 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 market 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.
The Company has reclassified a few U.S. agency securities from
"available-for-sale" to "held-to-maturity." These securities have a current book
value of $34.6 million. As required by Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"), the securities were transferred at their then fair
value which was lower than their amortized cost. This unrealized loss, net of
tax, is included in the separate component of shareholders' capital, and is
being amortized against the interest income for the securities over the
respective lives of the securities. This amount, approximately $137,000 at
September 30, 1996 and $315,000 at December 31, 1995, is the reason that the
separate component of capital does not equal the net unrealized losses related
to the securities classified as "available-for-sale" times the combined Federal
and state tax rate of approximately 41%.
During the third quarter of 1995, the Bank became a member of the Federal
Reserve System. As a member, it is required to purchase stock in the Federal
Reserve Bank equal to a percentage of the Bank's capital. By regulation, this
stock is classified as available-for-sale, but it has no market value other than
its purchase price. Therefore, it is shown on a separate line in the next table.
Book and market values of securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
(in thousands) Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1996:
Held-to-maturity:
U.S. Treasury obligations ......... $145,577 $ 103 $ (1,314) $144,366
U.S. agency obligations ........... 52,175 464 (658) 51,981
State and municipal securities .... 86,075 12,952 (4) 99,023
-------- -------- -------- --------
Total held-to-maturity ............ 283,827 13,519 (1,976) 295,370
-------- -------- -------- --------
Available-for-sale:
U.S. Treasury obligations ......... 107,956 220 (195) 107,981
U.S. agency obligations ........... -- -- -- --
Collateralized mortgage
obligations ..................... 29,559 67 (192) 29,434
Equity Securities ................. 488 -- -- 488
-------- -------- -------- --------
Total available-for-sale .......... 138,003 287 (387) 137,903
-------- -------- -------- --------
Total Securities .................. $421,830 $ 13,806 $ (2,363) $433,273
======== ======== ======== ========
December 31, 1995:
Held-to-maturity:
U.S. Treasury obligations ......... $ 97,528 $ 775 $ -- $ 98,303
U.S. agency obligations ........... 51,826 983 (143) 52,666
State and municipal securities .... 82,376 15,913 -- 98,289
-------- -------- -------- --------
Total held-to-maturity ............ 231,730 17,671 (143) 249,258
-------- -------- -------- --------
Available-for-sale:
U.S. Treasury obligations ......... 100,090 316 (122) 100,284
U.S. agency obligations ........... 25,026 37 -- 25,063
Equity Securities ................. 488 -- -- 488
-------- -------- -------- --------
Total available-for-sale .......... 125,604 353 (122) 125,835
-------- -------- -------- --------
Total Securities .................. $357,334 $ 18,024 $ (265) $375,093
======== ======== ======== ========
</TABLE>
In November, 1995, the Financial Accounting Standards Board ("the FASB") issued
a guide to implementing SFAS 115. The guide permitted holders of debt securities
a one-time opportunity to transfer securities from their held-to-maturity
classification to available-for-sale without calling into question the holder's
ability and intent to hold to maturity any securities still classified as
held-to-maturity. Under this "window of opportunity," the Company transferred
securities with an amortized cost of $144 million from the held-to-maturity
classification to available-for-sale. The unrealized gains and losses on these
securities totaled $683,000 and $986,000, respectively. $94 million of these
reclassified securities were sold prior to December 31, 1995.
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, consistent with their classification under the provisions of SFAS 115,
it is the Company's intent to hold them to maturity. At that 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>
September 30, 1996:
Amortized cost:
In one year or less ..................... $ 50,126 $ 35,023 $ 85,149
After one year through five years ....... 192,147 102,492 294,639
After five years through ten years ...... 14,384 -- 14,384
After ten years ......................... 27,170 -- 27,170
Equity Securities ....................... -- 488 488
-------- -------- --------
$283,827 $138,003 $421,830
======== ======== ========
Estimated market value:
In one year or less ..................... $ 50,486 $ 35,165 $ 85,651
After one year through five years ....... 196,563 102,250 298,812
After five years through ten years ...... 18,202 -- 18,202
After ten years ......................... 30,119 -- 30,119
Equity Securities ....................... -- 488 488
-------- -------- --------
$295,370 $137,903 $433,273
======== ======== ========
December 31, 1995:
Amortized cost:
In one year or less ..................... $ 32,414 $ 55,135 $ 87,549
After one year through five years ....... 151,560 69,981 221,541
After five years through ten years ...... 21,823 -- 21,823
After ten years ......................... 25,933 -- 25,933
Equity Securities ....................... -- 488 488
-------- -------- --------
$231,730 $125,604 $357,334
======== ======== ========
Estimated market value:
In one year or less ..................... $ 32,522 $ 55,172 $ 87,694
After one year through five years ....... 158,803 70,175 228,978
After five years through ten years ...... 27,978 -- 27,978
After ten years ......................... 29,955 -- 29,955
Equity Securities ....................... -- 488 488
-------- -------- --------
$249,258 $125,835 $375,093
======== ======== ========
</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. Depending on the contractual terms of the security, the Company may
receive a call or prepayment penalty.
5. Loans
The balances in the various loan categories are as follows:
<TABLE>
<CAPTION>
(in thousands) September 30, December 31,
1996 1995
<S> <C> <C>
Real estate:
Residential ......................... $171,617 $142,143
Non-residential ..................... 192,851 179,272
Construction ........................ 15,572 20,846
Commercial loans .................... 142,187 144,011
Home equity loans ................... 32,535 34,597
Consumer loans ...................... 39,556 28,494
Municipal tax-exempt obligations .... 7,222 7,573
Other loans ......................... 2,555 1,865
-------- --------
Total loans ......................... $604,095 $558,801
======== ========
</TABLE>
The loan balances at September 30, 1996 and December 31, 1995, are net of
approximately $2,614,000 and $1,990,000, respectively, in loan fees and
origination costs deferred under the provisions of Statement of Financial
Accounting Standards No. 91.
Statements of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan, and No. 118, Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures were adopted on January 1, 1995. At
that date, a valuation allowance 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. Because this definition is very similar to that used by bank
regulators to determine on which loans interest should not be accrued, the
Company expects that most impaired loans will be on non-accrual status.
Therefore, in general, the accrual of interest on impaired loans is
discontinued, and any uncollected interest is written off against interest
income 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.
There are some loans about which there is doubt regarding the collectibility of
interest and principal according to the contractual terms, but which are both
fully secured by collateral and are current in their interest and principal
payments. These impaired loans are not classified as non-accrual. Not all types
of loans are covered by the provisions of these statements. Loans not covered by
the statements may be classified as non-accrual because of concern for
collectibility, but not be reported as impaired.
The amount of the valuation allowance for impaired loans is determined by
comparing the recorded investment in each loan with its value measured by one of
three methods: (1) the expected future cash flows are estimated and then
discounted at the effective interest rate; (2) the loan's observable market
price if it is of a kind for which there is a secondary market; or (3) a
valuation of the underlying collateral. A valuation allowance is that amount by
which the recorded investment exceeds the value of the impaired loan. If the
value of the loan as determined by one of the above methods exceeds the recorded
investment in the loan, no valuation allowance for that loan is established. The
following table discloses balance information about the impaired loans and the
allowance related to them ($ in thousands) as of September 30, 1996 and December
31, 1995:
September 30, December 31,
1996 1995
Loans identified as impaired $8,430 $13,295
Impaired loans for which a valuation
allowance has been determined 4,957 13,295
Impaired loans for which no valuation
allowance was determined necessary 3,473 --
Amount of valuation allowance 2,166 4,766
The provisions of SFAS Nos. 114 and 118 permit the valuation allowance reported
above to be determined on a loan-by-loan basis or by aggregating loans with
similar risk characteristics. Because the loans currently identified as impaired
have unique risk characteristics, the valuation allowance was determined on a
loan-by-loan basis.
The following table discloses additional information ($ in thousands) about
impaired loans for the three and nine-month periods ended September 30, 1996 and
1995:
Three-Month Period Nine-Month Period
Ended September 30,Ended September 30,
1996 1995 1996 1995
Average amount of
recorded investment
in impaired loans .............. $8,478 $23,832 $9,035 $25,100
Collections of interest
from impaired loans and
recognized as interest income .. -- $ 412 $ 249 $ 1,145
The Company also provides an allowance for losses for: (1) loans that are not
covered by the provisions of SFAS Nos. 114 and 118; (2) loans which, while
covered by the statements, are not identified as impaired; and (3) losses
inherent in loans of all types which have not been specifically identified as of
the period end. This allowance is based on review of individual loans,
historical trends, current economic conditions, and other factors.
Loans that are deemed to be uncollectible, whether or not covered by the
provisions of the statements, are charged-off. Uncollectibility is determined
based on the individual circumstances of the loan and historical trends.
The valuation allowance for impaired loans of $2.2 million is included with the
general allowance for loan losses of $13.7 million to total the $15.9 million
reported on the balance sheet for September 30, 1996 which these notes accompany
and in the statement of changes in the allowance account for the first nine
months of 1996 shown below. The amounts related to tax refund anticiption loan
and to all other loans are shown separately.
Balance, December 31, 1995 ........................... $12,349
Provision for tax refund anticipation loans .......... 1,100
Tax refund loan losses charged against allowance ..... (1,080)
Tax refund loan recoveries added to allowance ........ 1,359
Provision for other loan losses ...................... 3,164
Other loan losses charged against .................... (2,550)
Other loan recoveries added to all ................... 1,552
-------
Balance, September 30, 1996 ................. $15,894
=======
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
$615 and $525 for the three-month periods ended September 30, 1996 and 1995,
respectively, and $1,617 and $1,408 for the nine-month periods ended September
30, 1996 and 1995, respectively. The table below shows the balances by major
category of fixed assets: (in thousands)
-----------------------------------------
Accumulated Net Book
September 30, 1996 Cost Depreciation Value
-----------------------------------------
Land and buildings $ 5,614 $ 3,081 $ 2,533
Leasehold improvements 6,396 4,447 1,949
Furniture and equipment 13,273 10,661 2,612
----------------------------------------
Total $ 25,283 $ 18,189 $ 7,094
========================================
Accumulated Net Book
December 31, 1995 Cost Depreciation Value
-------------------------------------------
Land and buildings $ 5,607 $ 2,967 $2,640
Leasehold improvements 6,427 3,996 2,431
Furniture and equipment 12,843 9,765 3,078
----------------------------------------
Total $24,877 $16,728 $8,149
========================================
7. Property from Defaulted Loans Included in Other Assets
Property from defaulted loans is included within other assets on the balance
sheets. As of September 30, 1996 and December 31, 1995, the Company had
$1,583,000 and $1,785,000 respectively, in property from defaulted loans.
Property from defaulted loans is carried at the lower of the outstanding balance
of the related loan at the time of foreclosure or the estimate of the market
value of the assets less disposal costs.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company posted its highest earnings for a third quarter for the quarter
ending September 30, 1996. Earnings were $3.7 million, up 118 percent over the
$1.7 million reported for the comparable period in 1995. Per share earnings for
the third quarter of 1996 were $0.48 compared to $0.22 earned in the third
quarter of 1995. Third quarter 1996 earnings exceeded by $700,000 the earnings
for the third quarter of 1994 which previously had the highest quarterly
earnings. Year-to-date earnings for the Company were also higher in the first
nine months of 1996 compared to the same period in 1995, increasing 63% from
$7.0 million, or $.91 per share, for the first nine months of 1995 to $11.4
million, or $1.48 per share, for the first nine months of 1996.
Earnings benefited during the third quarter from a combination of favorable
factors, including a 13% increase in net interest income and fees compared to
the prior year. Additionally, a reduction in delinquent and non-performing
assets during the year has permitted the Company to maintain an adequate
allowance for loan loss without additional provision in the current quarter
compared to $3.9 million in provision for loan loss recorded in the third
quarter of 1995. Although total non-interest expense is up 24% for the third
quarter of 1996 compared to 1995, the comparison overstates the effective
increase as the 1995 expenses were reduced by a one-time rebate and accrual
reversal for FDIC insurance premiums of $1.0 million due to decreased insurance
premium rates which went into effect in that quarter. Non-interest expense
adjusted for this item is up 11.8% for the third quarter of 1996 as compared to
1995 and is primarily the result of increased marketing and salary expenses
relating to the Bank's growth strategies described in the following paragraph.
Several key strategic initiatives undertaken during 1995 also contributed to the
Company's strong performance in the third quarter. First, the Company expanded
into adjacent Ventura County last year with the opening of three offices in the
first and second quarters. Total deposits in these offices are $80.9 million at
September 30, 1996 and loan production has been strong. Second, the Trust &
Investment Services Division reported trust fee income of $2.1 million during
the quarter, up $364,000 or 22% over the third quarter of 1995. The increase was
due principally to the addition of new products and services during the past
year, the aggressive cultivation of new customers, and higher stock market
levels. Third, the Company has continued to focus on lending and credit
administration. Loans have increased 8% during this year, while non-current
loans have decreased by over $1.4 million or 13% in the same period.
These initiatives are expected to continue to produce favorable results during
the balance of 1996 and beyond. While each initiative required significant
planned expenditures in 1995 in advance of the anticipated revenues, these moves
were critically important for the long-term viability and profitability of the
Company, and should assist in the Company's planned expansion into new market
areas.
BUSINESS
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 & Trust (the "Bank"). The Bank is a
state-chartered commercial bank and is a member of the Federal Reserve 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 Sanbarco Mortgage
Company ("Mortgage Company"). In October 1996, Mortgage Company changed its name
from SBBT Service Corporation. In addition to providing correspondent banking
services such as check processing for other financial institutions, Mortage
Company will also begin to broker commercial real estate loans to large
insurance companies. It will provide loan servicing on these loans for a fee.
All references to "the Company" apply to the Company and its subsidiaries.
TOTAL ASSETS AND EARNING ASSETS
The chart below shows the growth in average total assets and deposits since the
first quarter of 1994. 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. 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
balances for the quarters.
[IN THE PRINTED TEXT AT THIS LOCATION THERE IS A GRAPHIC THAT HAS BEEN OMITTED
FROM THIS EDGAR FILING. THE GRAPHIC IS A CHART SHOWING THE QUARTERLY GROWTH IN
TOTAL AVERAGE ASSETS AND DEPOSITS. THE CHART SHOWS BOTH ELEMENTS GRADUALLY
TRENDING UPWARD. THE EXCEPTIONS TO THIS TREND ARE DISCUSSED IN THE TEXT BELOW.]
The usual pattern of deposit and asset growth is for the first quarter averages
to be about the same or slightly less than the last quarter of the prior year.
The averages for the second quarter may be lower than the averages for the first
quarter as deposits tend to decrease during the first quarter. The third and
fourth quarters generally show growth over the earlier quarters. The increase in
average total assets from the fourth quarter of 1995 to the first quarter of
1996 was larger than historical trends and was due to a larger than usual
increase in deposits and Federal funds purchased occurring late in the fourth
quarter of 1995. These increases are explained below in "Deposits" and "Other
Borrowings," respectively. In 1996, the usual seasonal increase in deposits did
not begin until late in the third quarter. While the average for the third
quarter is lower than that for the second quarter, the period-end deposits were
higher than at either of the two prior quarters and continued to increase
subsequent to September 30. Continued consolidation in the financial services
industry and the three Ventura County offices opened in 1995 have contributed to
the continued growth in deposits and therefore in assets.
Earning assets consist of the various assets on which the Company earns interest
income. The Company was earning interest on 94.90% of its assets during the
third quarter of 1996. This compares with an average of 85.12% for all
FDIC-Insured Commercial Banks.[1] 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. 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. In this
manner, the interest received can be invested to earn additional interest. The
Company leases most of its facilities under long-term contracts rather than
owning them. This, together with the aggressive disposal of real estate obtained
as the result of foreclosure avoids tying up funds that could be earning
interest. Lastly, the Company has developed systems for clearing checks faster
than those used by most banks of comparable size. This permits it to put the
cash to use more quickly. At the Company's current size, these steps have
resulted in about $113.4 million more assets earning interest during the first
half of the year than would be the case if the Company's ratio were similar to
its FDIC peers. The additional earnings from these assets are somewhat offset by
higher lease expense, additional equipment costs, and occasional losses taken on
quick sales of foreclosed property, but on balance Management believes that
these steps give the Company an earnings advantage.
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.
The Company earns interest income on the loans and securities and pays interest
expense 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 average 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.
The Company must maintain its net interest margin to remain profitable, and must
be prepared to address the risks of adverse effects on the net interest margin
as interest rates change. Average market interest rates moved higher and then
flattened during the first half of 1995, decreased during the second half of
1995 and early in the first quarter of 1996 as the Federal Reserve Board ("the
Fed") eased short-term rates, moved higher throughout the remainder of 1996's
first half, and then leveled off during the third quarter of 1996.
Because the Company earns interest income on 95% of its assets and pays interest
expense on the majority of its liabilities, it is subject to adverse impact from
changes in market rates. A primary economic risk is "market risk." 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 issued after the rise in rates. This is because it pays less
interest than the newly issued security. If the security is sold, the Company
would have to recognize a loss. The opposite is true when interest rates
decline. 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 because their rate would be less than the new higher rate and a more
costly obligation when interest rates decline because their rate would be more
than the new lower rate. However, because most fixed-rate interest-bearing
liabilities have a shorter maturity than fixed-rate interest-earning assets,
there is less fluctuation in the market value of liabilities 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 for their term
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. While virtually all of the Company's securities are fixed-rate,
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. If it were to make only variable
loans and only purchase securities with very short maturities, its net interest
margin would be significantly less.
The Company is also exposed to "mismatch risk" and "basis risk." Mismatch risk
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 securities or fund longer-term loans. If interest rates
rise significantly, the interest that must be paid on the deposits will exceed
the interest earned on the assets. Basis risk due to the fact that interest
rates for Company's assets and liabilities rarely change in equal amounts as
market rates increase or decrease. The prime lending rate may drop and thereby
reduce interest income. However, because deposit rates are near historic lows,
the Company may not be able to decrease deposit rates an equal amount and thus
net interest income would decrease.
The Company controls mismatch risk by attempting to roughly match the maturities
and repricing opportunities of assets and liabilities. For example, if the
interest rates start to decrease, the Company's variable loans will be repriced
at lower rates and the proceeds from securities that mature in the near future
will be reinvested at lower rates. If the Company is well matched, it 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 rectify
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 for each
period and on a cumulative basis for each period. As a percentage of total
assets, the Company's target is to be no more than 10% plus or minus in either
of the first two periods, and not more than 15% plus or minus cumulative through
the first year.
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 first three months after quarter-end. 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. As of
September 30, 1996, the gap for this first period is a negative 10.37%, slightly
outside the target range. At the end of the second quarter of 1996, the gap was
a negative 9.32% of assets. The change from last quarter is mostly due to a
higher level of interest bearing transaction accounts that would be repriced
within the next three months.
The negative gap in the first period, which causes some exposure to adverse
impact on net interest income should short-term rates rise, 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
to offset the negative impact of rising rates.
The negative gap for the third period, "After six months but within one year" is
caused by the large amount of transaction deposits that the Company at present
assumes are most likely to be repriced between six and twelve months. This large
negative gap for the third period causes the cumulative gap of a negative 19.76%
for the first three periods to be outside the Company's target range of plus or
minus 15%. Management does not consider this to be a significant problem in that
roughly two-thirds of the investments in the "After one year but within five"
column mature in years one and two. The maturation of these securities will
provide proceeds for reinvestment at the new rates within a reasonable time to
offset the impact of a rise in rates. If rates rise enough, the Company's
investment policy requires it to sell certain available-for-sale securities
before their maturity dates to reposition the proceeds at the new rates.
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 arising from
repricing mismatches.
<TABLE>
Table 1--INTEREST RATE SENSITIVITY
<CAPTION>
After three After six After one Non-interest
As of September 30, 1996 Within months months year but bearing or
(in thousands) three but within but within within After five non-repricing
months six one year five years items Total
----------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 298,779 $ 111,953 $ 43,731 $ 88,179 $ 54,809 $ 6,643 $ 604,095
Cash and due from banks -- -- -- -- -- 59,704 59,704
Federal Funds 35,000 -- -- -- -- -- 35,000
Securities:
Held-to-maturity 8,976 26,810 14,340 192,147 41,554 -- 283,827
Available-for-sale -- 5,020 30,003 60,316 42,076 488 137,903
Bankers' acceptances 23,810 20,276 -- -- -- -- 44,085
Other assets -- -- -- -- -- 13,514 13,514
---------------------------------------------------------------------- ---------
Total assets 366,565 164,059 88,074 340,642 138,439 80,349 1,178,128
---------------------------------------------------------------------- ---------
Liabilities and
shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased 31,124 -- -- -- -- -- 31,124
Other borrowings 1,000 -- -- -- -- -- 1,000
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts 365,922 -- 252,864 -- -- -- 618,786
Time deposits 90,706 56,099 53,824 53,077 365 -- 254,070
Demand deposits -- -- -- -- -- 159,652 159,652
Other liabilities -- -- -- -- -- 7,079 7,079
Shareholders' equity -- -- -- -- -- 106,416 106,416
---------------------------------------------------------------------- ----------
Total liabilities
and shareholders' equity 488,752 56,099 306,688 53,077 365 273,147 $1,178,128
---------------------------------------------------------------------- ==========
Interest rate-
sensitivity gap $(122,187) $107,960 $(218,614) $ 287,565 $138,075 $(192,798)
=======================================================================
Gap as a percentage of
total assets (10.37%) 9.16% (18.56%) 24.41% 11.72% (16.36%)
Cumulative interest
rate-sensitivity gap $(122,187) $(14,227) $(232,841) $ 54,724 $192,798
Cumulative gap as a
percentage of total assets (10.37%) (1.21%) (19.76%) 4.64% 16.36%
<FN>
Note: Net deferred loan fees, overdrafts, and the allowance for loan losses are
included in the above table as non-interest bearing or non-repricing items.
</FN>
</TABLE>
Gap reports can show mismatches in the maturities and repricing opportunities of
assets and liabilities, but have limited usefulness in measuring or managing
market risk and basis risk.
The Company uses interest rate modeling to measure these risks. This modeling
applies hypothetical changes in interest rates to determine the impacts on net
interest income and net economic value. Net economic value or market value of
portfolio equity is defined as the difference between the market value of
financial assets and financial liabilities. The hypothetical changes include
scenarios that involve immediate, parallel shocks as well as gradual interest
rate changes. The changes are in both directions. The latest results of this
modeling show that the Company's net interest income and net economic value are
more at risk from an increase in rates than a decrease. The Company will
continue to monitor this risk and to take action, where appropriate to minimize
or reduce impact of an increase in rates.
DEPOSITS AND RELATED INTEREST EXPENSE
While occasionally there are slight decreases in average deposits from one
quarter to the next, the overall trend is one of growth in average deposits.
This growth has been planned by Management and Management anticipates that this
growth can be sustained because of the strong capital position and earnings
record of the Company. The overall deposit base for financial institutions in
the Company's Santa Barbara market area declined by over $1 billion from 1989 to
the end of 1995. During this time the Company increased its market share from
14.1% in 1989 to 30.6% in 1995. The increases have come by maintaining
competitive deposit rates, introducing new deposit products, and successfully
encouraging former customers of failed or merged financial institutions to
become customers of the Company.
Table 2 presents the average balances for the major deposit categories and the
yields of interest-bearing deposit accounts for the last seven quarters (dollars
in millions). As shown both in Table 2, average deposits for the third quarter
of 1996 have increased $59.9 million or 6.3% from average deposits a year ago.
Average deposits declined in the second and third quarters of 1996 as compared
to the first quarter of 1996. This is primarily a result of Management's
decision to outsource certain money market demand accounts ("MMDA") for the
Bank's trust clients to mutual funds as a means of diversifying investment
options for these clients.
<TABLE>
Table 2--AVERAGE DEPOSITS AND RATES
<CAPTION>
1995: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW/MMDA ................ $ 480.1 3.58% $ 470.5 3.67% $ 512.7 3.67% $ 550.6 3.52%
Savings ................. 108.6 2.4 100.7 2.38 95.0 2.36 91.7 2.35
Time deposits 100+ ...... 53.8 4.6 56.7 5.10 59.9 5.26 63.4 5.34
Other time deposits ..... 144.9 5.2 151.6 5.50 157.7 5.65 160.1 5.71
-------- -------- -------- --------
Total interest-bearing
deposits ................ 787.4 3.79% 779.5 3.96% 825.3 4.02% 865.8 3.95%
Non-interest-bearing .... 135.5 126.3 130.6 135.9
------ ------ ------ --------
Total deposits .......... $ 922.9 $ 905.8 $ 955.9 $1,001.7
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996: 1st Quarter 2nd Quarter 3rd Quarter
<S> <C> <C> <C> <C> <C> <C>
---------------- ---------------- -----------------
NOW/MMDA ................ $ 555.8 3.35% $ 540.2 3.20% $ 521.1 3.13%
Savings ................. 94.0 2.37 92.9 2.40 93.9 2.41
Time deposits 100+ ...... 65.8 5.32 71.2 5.31 78.3 5.21
Other time deposits ..... 163.2 5.67 166.3 5.58 170.9 5.58
-------- -------- --------
Total interest-bearing
deposits ................ 878.8 3.82% 870.6 3.74% 864.2 3.72%
Non-interest-bearing .... 154.4 150.8 151.5
-------- -------- --------
Total deposits .......... $1,033.2 $1,021.4 $1,015.8
======== ========= ========
</TABLE>
The average rates that are paid on deposits generally trail behind money market
rates because financial institutions do not try to change deposit rates with
each small increase or decrease in short-term rates. This trailing
characteristic is stronger with time deposits than with deposit types that have
administered rates. Administered rate deposit accounts are those products which
the institution can reprice at its option based on competitive pressure and need
for funds. This contrasts with deposits for which the rates are set by contract
for a term or are tied to an external index. Certificates of deposit are time or
term 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 are
replaced during the quarter will bear the new rate.
This lag effect explains the contrast between the rates paid on the NOW/MMDA
which followed the general trend of falling rates early in 1996 and savings
accounts which lagged behind this trend and began to decline in the 3rd quarter
of this year.
The average balances for non-interest bearing demand deposits during the first
quarters of 1995 and 1996 are impacted by outstanding checks from the Tax Refund
Anticipation Loan ("RAL") program discussed below in "Loans and Related
Interest". Approximately $15.6 million of the average balance for
non-interest-bearing demand deposits in the first quarter of 1995 and $12.3 in
the first quarter of 1996 relates to the RAL program. There is relatively little
effect from these checks in other quarters.
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 two primary reasons for this.
First, as indicated in the next section of this discussion, loan demand has been
low in the California economy. With less need for funds to lend, the Company has
been reluctant to encourage through premium rates large deposits that are not
the result of stable customer relationships. If the deposits are short-term and
will be kept by the depositor with the Company only while premium rates are
paid, the Company must invest the funds in very short-term assets, like Federal
funds. Since Federal funds sold earned less than 6% during almost all of 1995
and 1996, the spread between the cost of premium rate CD's and the earnings on
their potential uses is very small. Second, a significant portion of the under
$100,000 time deposits are IRA accounts. The Company pays a higher rate on these
accounts than on other CD's. 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.
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. They are generally appropriate only for short-term
funding needs, and the Company has available other, less expensive sources of
such funding.
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[2] over the last eight
quarters (dollars in millions).
Table 3--LOAN BALANCES AND YIELDS
EOP Average Interest Average
Quarter Ended Outstanding Outstanding and Fees Yield
- ------------------- -------------- ------------- --------- ---------
December 1994 $499.4 $486.3 $11.3 9.25%
March 1995 534.9 525.5 15.1 11.58
June 1995 541.0 537.8 12.5 9.31
September 1995 532.2 536.0 12.6 9.40
December 1995 558.8 543.8 12.6 9.32
March 1996 556.4 565.8 15.5 11.07
June 1996 581.2 568.4 13.2 9.36
September 1996 604.1 585.8 13.3 9.07
Changes in Loan Balances
- ------------------------
The end-of-period loan balance as of September 30, 1996 has increased by $45.3
million compared to December 31, 1995, and by $71.9 million compared to
September 30, 1995. Residential real estate loans increased $29.5 million,
commercial loans decreased $6.5 million and consumer loans, including home
equity loans, increased by $9.0 million from December 31, 1995. Most of the
increase in residential real estate loans is in adjustable rate mortgages
("ARMS") that have initial "teaser" rates. The yield will increase for these
loans as the teaser rates expire. Applicants for these loans are qualified based
on the fully-indexed rate. 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 risk and liquidity.
The average balance and yield for the first quarters of 1996 and 1995 show the
impact of the RAL loans that the Company makes. The RAL loans 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 and repaid during the first quarter of
the year. The impact of this program on the results of operations is summarized
in the section titled "Refund Anticipation Loan and Transfer Program" below.
Average yields for the first quarters of 1995 and 1996 without the effect of RAL
loans were 9.27% and 9.24%, respectively.
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. This is because the borrower may reset the rate by prepaying
the loan 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. The base lending rate is established by the Company by
reference to the national prime rate adjusted 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.
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 thousands) September 30, December 31,
1996 1995
Standby letters of credit $ 8,026 $12,623
Loan commitments 42,375 46,996
Undisbursed loans 21,476 12,793
Unused consumer credit lines 52,874 53,759
Unused other credit lines 86,853 73,779
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
fully drawn on by customers. Consumers do not tend to borrow the maximum amounts
available under their home equity lines and businesses typically arrange for
credit lines in excess of their immediate needs to handle contingencies.
The Company has established maximum loan amount to collateral value ratios for
construction and development loans ranging from 65% to 90%, depending on the
type of project. There are no specific loan to value ratios for other
commercial, industrial or agricultural loans not secured by real estate. The
adequacy of the collateral is established based on the individual borrower and
purpose of the loan. Consumer loans may have maximum loan to collateral ratios
based on the loan amount, the nature of the collateral, and other factors.
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, respectively, 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, historical 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, Statements of
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
and No. 118, Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures require 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 third quarter of 1996, at the end of the prior two
quarters and at the end of the same quarter a year ago (in thousands). 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. Included in the table in boldface is comparable data3
regarding the Company's peers for the three earlier quarters.
Total non-performing assets have decreased by $900,000 at September 30, 1996
compared to September 30, 1995. Although there was an increase in non-performing
assets in the first quarter of 1996, the level at September 30, 1996 indicates
that there has been a general decrease in the level of non-performing assets
since December 31, 1995. In addition, non-current loans have declined as a
percentage of total loans to 1.60% at September 30, 1996 from 2.09% at December
31, 1995. In 1995 the Company strengthened its credit review, analysis, and
administrative functions by hiring additional professional staff and established
a Special Assets Committee to give increased attention to the larger problem
loans. The new staff and the committee have aggressively pursued collection
plans with customers that have resources to repay at least some portion of their
loans and they have acknowledged uncollectibility and charged-off other loans.
These efforts are still continuing, and the amount of non-current loans has
decreased by $1.4 million at September 30, 1996 to $9.7 million compared to
$11.1 million at September 30, 1995.
With the increase in allowance for loan losses from $11.5 million at September
30, 1995 to $15.9 million at September 30, 1996, the Company's coverage ratio is
more comparable to that of its peers.
<TABLE>
Table 4--ASSET QUALITY
<CAPTION>
September 30, June 30, March 31, September 30,
1996 1996 1996 1995
--------------- ----------------- --------------------- -------------------
Company Company Company Company
<S> <C> <C> <C> <C>
Loans delinquent
90 days or more $ 1,109 $ 1,401 $ 186 $ 535
Non-accrual loans 8,578 8,827 10,507 10,588
-------- -------- -------- --------
Total non-current loans 9,687 10,228 10,693 11,123
Foreclosed real estate 1,583 1,422 1,816 1,021
-------- -------- -------- --------
Total non-performing assets $11,270 $11,650 $12,509 $12,144
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FDIC FDIC FDIC
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 163% 152% 185% 142% 185% 104% 102%
Ratio of non-current loans
to total loans and leases 1.60% 1.76% 1.11% 1.92% 1.14% 2.09% 3.09%
Ratio of non-performing
assets to average total assets 0.97% 0.99% 0.84% 1.04% 0.88% 1.11% 2.74%
</TABLE>
The September 30, 1996 balance of non-current loans does not equate directly
with future charge-offs, because most of these loans are secured by collateral.
Nonetheless, Management believes it is probable that some portion will have to
be charged off and that other loans will become delinquent. Based on its review
of the loan portfolio, Management considers the current amount of the allowance
adequate. With the trend of improving credit quality, Management did not
consider it necessary to provide additional allowance in the third quarter 1996.
As the cycle of periodic reviews continues and additional information becomes
available, Management will provide for additional allowance as necessary to
address any new losses when identified or change in the trend of credit quality
ratios.
Table 5 classifies non-current loans and all potential problem loans other than
non-current loans by loan category for September 30, 1996 (amounts in
thousands). As of June 30, 1996 all RAL loans made in 1996 and still outstanding
were charged off.
Table 5--NON-CURRENT AND POTENTIAL PROBLEM LOANS
Potential Problem
Non-Current Loans Other Than
Loans Non-Current
Loans secured by real estate:
Construction and
land development $ -- $ --
Agricultural -- --
Home equity lines 99 111
1-4 family mortgage 2,930 2,011
Multi-family 358 694
Non-residential, non-farm 4,627 7,485
Commercial and industrial 1,628 1,295
Other consumer loans 45 90
------ -------
Total $9,687 $11,686
====== =======
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of September 30, 1996 (amounts in thousands).
Doubtful $2,373
Substandard $1,639
Special Mention --
The total of the above numbers is less than the total allowance because some of
the allowance is allocated to loans which are not regarded as potential problem
loans, and some of the allowance is not allocated but instead is provided for
potential losses that have not yet been identified.
SECURITIES AND RELATED INTEREST INCOME
Statement of Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, ("SFAS 115") was adopted by the Company in 1994. It
requires that securities be classified in one of three categories when they are
purchased. One 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
reported on the balance sheet at their amortized historical cost. That is, they
are reported 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 reported on the balance sheet at their current market value.
Changes in the market value of these securities are recognized in the income
statement for each period in which they occur as unrealized gain or loss. The
Company has no securities classified as trading assets.
Securities that do not meet the criteria for either of these categories, e.g.
securities which are not purchased with intention of selling them later at a
gain, but 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.
The Company has created three 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 securities that are available for sale and is
made up almost entirely of the shorter term taxable securities. Certain of these
securities will be sold if their market value deteriorates to a predetermined
point. The third portfolio, the "Discretionary Portfolio," consists of shorter
term securities that are available for sale but which will not automatically be
sold if their market value deteriorates. The Company specifies the portfolio
into which each security will be classified at the time of purchase.
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 November, 1995, the Financial Accounting Standards Board ("the FASB") issued
a guide to implementing SFAS 115. The guide permitted holders of debt securities
a one-time opportunity to transfer securities from their held-to-maturity
classification to available-for-sale without calling into question the holder's
ability and intent to hold to maturity any securities still classified as
held-to-maturity. Under this "window of opportunity," the Company transferred
securities with an amortized cost of $144 million from the Earnings Portfolio to
the newly established Discretionary Portfolio. The unrealized gains and losses
on these securities totaled $683,000 and $986,000, respectively. $94 million of
these reclassified securities were sold prior to December 31, 1995 at an
aggregate realized net loss of $77,000.
In the fourth quarter of 1995, the Company's Investment Committee approved the
acquisition of up to $30 million of planned amortization class ("PAC")
securities with average lives of two to three years for the Discretionary
Portfolio. PAC's are particular classes of a larger collateralized mortgage
obligation ("CMO") which are designed to have principal payments occur at
designated times. PAC bondholders have priority over other classes in the CMO
issue in receiving principal payments from the underlying collateral. The
Company's policy requires the underlying collateral to be AAA rated, guaranteed
either by the Federal National Mortgage Association, the Federal Home Loan
Mortgage Company, or the United States Government. The creation of PAC bonds
does not make prepayment risk disappear, it just shifts the vast majority of the
risk to the other bonds in the CMO which are held by other investors. At the end
of the third quarter of 1996, the Company held $29.4 million of PAC's.
Federal banking regulations require that all fixed-rate CMO's held by financial
institutions, even short-term PAC's, be low volatility investments. A PAC must
pass three "stress tests" to be considered a low volatility investment: an
average life test, an average life sensitivity test, and a price sensitivity
test. Each of the PAC's passed the tests at the time of purchase and, as of
September 30, 1996, all passed the tests.
As a percentage of total assets, the balances in the Liquidity and Earnings
Portfolios are intended to remain relatively stable. The size of the
Discretionary Portfolio will vary based on loan demand and deposit growth. In
general, the Company uses available funds to purchase securities for the three
portfolios according to the following priorities. Taxable securities, usually
U.S. Treasury or agency, are purchased for the Liquidity or Earnings Portfolio
to maintain the desired size relative to total assets. To the extent tax-exempt
municipals that meet credit quality and yield standards are available, they will
be purchased for the Earnings Portfolio up to an amount that does not trigger
the Alternative Minimum Tax ("AMT"). Lastly, taxable securities, generally U.S.
Treasury or agency obligations would be purchased for the Discretionary
Portfolio.
The Effects of Interest Rates on the Composition of the Investment Portfolio
- ----------------------------------------------------------------------------
Table 6 presents the combined securities portfolios, showing the average
outstanding balances (dollars in millions) and the yields for the last seven
quarters. The yield on tax-exempt state and municipal securities has been
computed on a taxable equivalent basis. A 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>
6--AVERAGE BALANCES OF SECURITIES AND INTEREST YIELD
<CAPTION>
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $236.7 5.63% $226.8 5.60% $224.5 5.57% $203.1 5.54%
U.S. agency 55.6 4.86 54.8 5.25 77.0 5.51 86.9 5.63
Tax-Exempt 87.6 12.99 84.0 12.69 84.8 12.52 84.1 12.60
------ ------ ------ ------
Total $379.9 7.22% $365.6 7.18% $386.3 7.08% $374.1 7.14%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter
------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $194.6 5.56% $260.6 5.80% $267.1 5.86%
U.S. agency 79.7 5.65 62.9 5.84 56.7 5.92
Collateralized
Mortgage
Obligations 13.2 5.47 24.7 6.03 29.6 6.03
Tax-Exempt 82.8 12.15 83.0 12.08 85.1 11.79
------ ------ ------
Total $370.3 7.04% $431.2 7.03% $438.5 7.04%
====== ====== ======
</TABLE>
Interest rates for securities of more than one year maturity began to rise
during the latter half of the first quarter of 1996. Management decided that
this was a favorable time to sell some of the securities from the Discretionary
and Liquidity Portfolios and reinvest at the new higher rates and at longer
maturities. The selection of securities for purchase was also done with the aim
of evening out the amount of proceeds that would be received from maturing
securities each quarter. Management believes that this more constant repricing
of the securities in the three portfolios will better protect the average
interest yields and more closely follow market rates. Implementation of this
reinvestment plan required realized net security losses of $512,000 for the
first quarter. However, over the life of the repositioned assets increased
interest income will offset these losses due to the higher rates of the extended
maturities, and the Company receives immediate tax benefit from the losses while
the increased interest income will be taxed over the extended period.
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 decreases in market
rates is seen as a very gradual decrease in the average rates of taxable
securities during 1995.
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.
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 AMT. AMT
causes the advantage of the tax exempt income to be deferred until future years.
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. Accretion is the periodic recognition as interest income
of the difference between the lower purchase cost and the par value that will be
received from the issuer upon maturity.
Included with the balances shown for U.S. Agency securities that are being held
to maturity are four structured notes with a combined book value of $34.6
million. They are a type of security know as "step bonds". They were issued at
an initial rate and had one or more call dates. If not called, the interest rate
steps up to a higher level. All four notes have now passed their final call
dates and have reached their final step.
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 rise in interest rates that has
occurred during 1996. At the end of the third quarter in 1996, the market value
of the U.S. Treasury and agency securities held-to-maturity is less than the
amortized cost or "book value" by $1.4 million. However, the market value of the
municipal securities held-to-maturity had a market value exceeding their book
value by $12.9 million at September 30, 1996. In total, the securities
classified held-to-maturity had net unrealized gains of $11.5 million as of
September 30, 1996.
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 available 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 therefore an indication of Management's estimation
during the quarter of immediate cash needs and relative yields of alternative
investment vehicles. Though they are not securities, the Company includes
Federal funds sold and bankers' acceptances in its liquidity planning as if they
were components of the Liquidity Portfolio discussed above in "Securities and
Related Interest Income."
Table 7 shows the average funds sold position of the Company and the average
yields over the last eight quarters (dollars in millions).
Table 7--AVERAGE BALANCE OF FUNDS SOLD AND YIELDS
Average Average
Quarter Ended Outstanding Yield
December 1994 $30.8 5.13%
March 1995 23.8 5.69
June 1995 38.5 6.01
September 1995 69.8 5.82
December 1995 81.8 5.79
March 1996 81.8 5.39
June 1996 56.9 5.23
September 1996 37.9 5.35
The average balance sold into the market was greater in the first and second
quarters of 1996 than the comparable quarters in 1995 primarily due to four
factors. First, the Company operated under stricter RAL guidelines in 1996 which
resulted in fewer loans and more refund transfers being made. This meant that
the Company did not need to reduce its Federal funds sold position to fund the
RAL loans. Second, until the interest rates for securities started to rise in
the latter part of the first quarter of 1996, the Company had to purchase
securities of one and a half to two years to earn more than the Federal funds
rate. Because of its desire to even out the maturities in its securities
portfolios, management was selective in the purchase of new securities with the
$94 million in proceeds generated from the sale of securities initiated under
the "window of opportunity" described in "Securities and Related Interest
Income." This selectivity left more of the proceeds to be held in Federal funds.
Third, loan demand, a potential use of the funds, has not kept pace with the
growth in deposits. Lastly, the Company's Trust Division deposits customers'
funds with the Bank before purchasing other investments. These balances were
higher in the fourth quarter of 1995 and the first quarter of 1996 than is
usual.
BANKERS' ACCEPTANCES
The Company has used bankers' acceptances as an alternative to short-term U.S.
Treasury securities when pledging requirements are otherwise met and sufficient
interest spreads to U.S. Treasury obligations exist. With their relatively short
maturities, bankers' acceptances are an effective instrument for managing the
timing of near-term cash flows. Acceptances of only the highest quality
institutions are utilized. Table 8 discloses the average balances and yields of
bankers' acceptances for the last eight quarters (dollars in millions).
Table 8--AVERAGE BALANCE OF BANKERS' ACCEPTANCES AND YIELDS
Average Average
Quarter Ended Outstanding Yield
December 1994 $ 64.4 5.38%
March 1995 55.7 5.97
June 1995 41.6 6.44
September 1995 35.9 6.11
December 1995 84.1 5.91
March 1996 121.0 5.73
June 1996 55.0 5.43
September 1996 38.4 5.69
OTHER SHORT-TERM BORROWINGS AND RELATED INTEREST EXPENSE
Other short-term 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
borrowings represent a very small portion of the Company's source of funds (less
than 5%) and generally shows little variation in total, all of the short-term
items have been combined for the following table. In the first quarter of 1996,
the total was larger than usual. Federal funds purchased averaged $32.1 million
in that quarter versus $8.5 million in the first quarter of 1995 reflecting the
strong liquidity positions of local banks whose Federal funds the Company
purchases as described above.
Table 9 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 eight quarters.
Table 9--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
December 1994 $18.3 4.63% 1.8%
March 1995 16.3 5.47 1.6
June 1995 28.1 5.69 2.7
September 1995 29.5 5.42 2.7
December 1995 38.8 5.37 3.2
March 1996 59.3 4.86 4.9
June 1996 40.8 4.64 3.5
September 1996 31.9 4.51 2.7
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 10 shows trust income over the last eight quarters (in
thousands).
Table 10--TRUST INCOME
Quarter Ended Trust Income
December 1994 $1,611
March 1995 1,765
June 1995 1,590
September 1995 1,686
December 1995 1,978
March 1996 2,224
June 1996 2,022
September 1996 2,050
Trust customers are charged for the preparation of the fiduciary tax returns.
The preparation generally occurs in the first quarter of the year. This accounts
for approximately $260,000 of the fees earned in the first quarter of 1996 and
$236,000 of the fees earned in the first quarter of 1995. Variation is also
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 increased in the last three quarters because
of substantially enhanced marketing efforts.
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 11 for the last eight quarters
(in thousands).
Table 11--OTHER INCOME Other Service
Service Charges Charges,
on Deposit Commissions Other
Quarter Ended Accounts & Fees Income
December 1994 $ 961 $ 1,013 $ 152
March 1995 1,044 2,468 78
June 1995 1,072 1,143 113
September 1995 1,056 1,130 169
December 1995 1,083 1,219 194
March 1996 1,118 2,130 102
June 1996 1,113 1,340 121
September 1996 1,144 1,353 121
The Company revised its schedule for most fees in the fourth quarter of 1994.
The full effect of the revision is seen in the increase in the amount of service
charges on deposit accounts in the succeeding quarters.
The large increases in other service charges, commissions and fees for the first
quarters of 1996 and 1995 is due to $1.05 million and $1.54 million of fees
received for the electronic transfer of tax refunds. As explained in the section
below titled "Refund Anticipation Loan and Transfer Program," the Company did
not advance funds under the RAL loan program in 1995 and 1996 to as many
borrowers as it had in 1994 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, and a fee is
charged for this service.
Included in other income are gains or losses on sales of loans. When the Company
collects fees on loans that it originates, it may only recognize them as
interest income over the term of the loan, rather than in the period in which
they are collected. If the loan is sold before maturity, any unamortized fees
are recognized as gains on sale rather than as interest income. In a declining
rate environment such as portions of 1995, homeowners are more apt to refinance
their homes. They usually choose fixed rate loans to "lock-in" the lower rates.
Because the Company generally does not keep fixed-rate loans for its portfolio,
such refinancing results in the Company selling more of these loans into the
secondary market and thereby recognizing gains on sale. The amount for the first
three quarters of 1996 is lower because in a rising rate environment the number
of loans made is less and there are fewer sales opportunities.
Staff Expense
The largest component of non-interest expense is staff expense. Staff size is
closely monitored and in most years the rate of increase in staff is less than
the rate of growth in the Company's assets (if the growth in off-balance sheet
fiduciary assets is also considered).
Table 12 shows the amounts of staff expense incurred over the last eight
quarters (in thousands).
Table 12--STAFF EXPENSE
Salary and Profit Sharing and
Quarter Ended Other Compensation Other Employee Benefits
December 1994 $3,834 $1,045
March 1995 4,780 1,405
June 1995 4,422 1,015
September 1995 4,776 1,151
December 1995 4,424 682
March 1996 4,939 1,329
June 1996 4,973 1,379
September 1996 5,180 1,409
There is usually some variation in staff expense from quarter to quarter.
Beginning in the first quarter of 1995, staff expense increased due to the three
initiatives undertaken in that quarter that are mentioned in the introduction to
this discussion. First, the Company began hiring staff for the three Ventura
offices. Second, the Company hired a number of new staff in lending and credit
administration and in loan review to more closely monitor credit quality. Third,
staff was added in the Trust Division to sell and manage several new products
offered in this area. In addition to the above, staff expense will usually
increase in the first quarter of each year because all officers have their
annual salary review in the first quarter with merit increases effective on
March 1. In 1996, these averaged 3%. In addition, some temporary staff is added
in the first quarter for the RAL program.
Salary and other compensation decreased in the second and fourth quarters of
1995. Officer bonuses are paid after the end of each year from a bonus pool, the
size of which has been set by the Board of Directors based on net income. The
Company accrues compensation expense for the pool for officer bonuses during the
year for which they are earned rather than in the subsequent year when they are
actually paid. The accrual is based on projected net income for the year.
Management's revised forecasts during the second quarter of 1995 and near the
end of the year projected net income at amounts less than originally projected.
Therefore a portion of the amounts accrued were reversed in those second and
fourth quarters of 1995. Had the adjustments not occurred, staff expense for the
second and fourth quarters would have been comparable to the amount for the
first and third quarters of 1995. Salary and other compensation expense in the
first two quarters of 1996 reflect merit increases as discussed above and bonus
accrual estimates based on initial earnings projections for this year. In the
third quarter of 1996 the bonus accrual was adjusted upward based on the year to
date results which were ahead of the original forecast. This is the reason the
expense level is higher than the preceding quarter.
There is also variability in the amounts reported above for Profit Sharing and
Other Employee Benefits. These amounts 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 Company's contributions for the profit sharing and retiree health benefit
plans are determined by a formula. The formula provides for a contribution equal
to 10% of a base figure made up of income before tax and before the
contribution. As with the bonus accrual mentioned above, the Company begins each
year accruing an amount based on its forecast of the base figure. To the extent
that income before tax differs from the forecast, an adjustment to accrual will
be made. In the second and fourth quarters of 1995 accrual adjustments were made
which reduced the profit sharing contribution for those quarters. In the third
quarter of 1996 an adjustment was made which increased the accrual for this
quarter.
Payroll taxes also introduce a seasonality to this expense category. While bonus
expense is accrued as salary expense during the year to which it relates, 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 related to
bonuses are expensed in the first quarter. 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 income for the loan portfolio. Therefore,
compensation actually paid to employees in each of the above listed periods is
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 13 shows other operating expenses over the last seven quarters (in
thousands).
Table 13--OTHER OPERATING EXPENSE
Occupancy Expense Furniture & Other
Quarter Ended Bank Premises Equipment Expense
December 1994 $ 950 $634 $3,745
March 1995 1,011 645 4,198
June 1995 1,003 640 3,611
September 1995 1,080 652 1,547
December 1995 1,163 673 3,060
March 1996 1,132 650 3,172
June 1996 1,124 636 2,922
September 1996 1,131 623 3,050
Occupancy expenses increased in the first quarter of 1995 as a result of the new
Ventura County offices and will remain higher than in prior years. 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 needs change,
maintenance is performed, and equipment is purchased. Like occupancy expense,
this category has been impacted by the opening of the new offices as new
equipment and furniture had to be purchased.
Table 14 shows a detailed comparison for the major expense items in other
expense for the nine- and three-month periods ended June 30 (amounts in
thousands).
Table 14--OTHER EXPENSE
Nine-Month Periods Three-Month Periods
Ended September 30, Ended September 30,
----------------- -------------------
1996 1995 1996 1995
------ ------ ------ --------
FDIC and State assessments $ 59 $ 6 $ 21 $(1,031)
Professional services 677 743 238 294
RAL processing and incentive fees 369 37 1 (63)
Supplies and sundries 464 511 147 196
Postage and freight 488 508 165 144
Marketing 1,036 1,059 450 255
Bankcard processing 1,306 1,070 495 363
Credit bureau 175 540 22 47
Telephone and wire expense 560 655 176 176
Charities and contributions 167 259 89 44
Software expense 825 628 267 212
Operating losses 20 253 27 38
Other 3,005 3,086 952 872
------- ------ ------ -------
Total $9,151 $9,355 $3,050 $ 1,547
======= ====== ====== =======
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. Prior to the third quarter of 1995, the annual rate for
banks ranged from $0.23 to $0.30 per hundred dollars of deposits. On the basis
of its "well-capitalized" position, the Company's rate was $0.23 per hundred. As
deposits increased, this expense increased proportionally. However, in the third
quarter of 1995, the FDIC announced that it would decrease the rates paid by
well-capitalized banks to $0.04 per hundred dollars because the Bank Insurance
Fund had been capitalized to the level specified by statute. The recapture of
excess premiums paid in the first half of 1995 plus the accrual adjustment for
the lower premium rate resulted in a decrease of $1.0 million which was booked
in the 3rd quarter of 1995. Currently, well-capitalized banks are charged only
the statutory minimum, $500 per quarter.
Marketing expense for the three-month period of 1996 is greater than for the
comparable period of 1995, but is approximately the same for the nine month
periods. This is a result of accelerating marketing expense in the early
quarters of 1995 to promote the opening of the Ventura Offices. The increase, on
a year to date and quarter to date basis, in Bankcard processing fees is a
result of an increase in the number of merchant card processing transactions.
The decrease in credit bureau expense is almost wholly related to the reduced
credit checks for the RAL program in 1996 compared to 1995. Also in the first
quarter of 1995, the Company became aware that it might have had some
responsibility for a loss suffered by one of its customers and therefore
included with other operating losses an accrual for the estimated reimbursement
to the customer. This matter was resolved later in 1995 for an amount
substantially less than the original estimate.
RAL processing and incentive fees are paid to tax preparers and filers based on
the volume and collectibility of the loans made through them. In the second and
third quarters of 1995, when the Company found that collectibility of a large
number of the loans was uncertain, it reversed a portion of the accrual it had
made in the first quarter. With collectibility substantially higher in 1996,
this expense is correspondingly higher.
The amounts in the final line of Table 14 comprise a wide variety of
miscellaneous expenses, none of which total more than 1% of revenues.
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 consolidated
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. 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.
As disclosed in Note 7 to the financial statements, the Company had $1,583,000
in OREO as of September 30, 1996 as compared with $1,785,000 at December 31,
1995. 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
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs, such as might be caused by fluctuations in deposit
levels, customers' credit needs, and to take advantage of attractive investment
opportunities. The Company's objective is to maintain adequate liquidity at all
times. Adequate liquidity is achieved by (1) maintaining liquid assets, (2)
being able to raise deposits and liabilities, and (3) having access to capital
markets.
The Company has defined and manages three types of liquidity: (1) Immediate
liquidity, which is the ability to raise funds today to meet today's cash
obligations, (2) Intermediate liquidity, which is the ability to raise funds
during the next few weeks to meet cash obligations over those next few weeks,
and (3) Long term liquidity, which is the ability to raise funds over the entire
planning horizon to meet anticipated cash needs due to strategic balance sheet
changes.
Immediate liquidity is provided by the prior day's balance of Federal funds
sold, any cash in excess of the Federal Reserve balance requirement, unused
Federal funds lines from other banks, and unused repurchase agreement facilities
with other banks or brokers. The Company's policy is to maintain total sources
of immediate liquidity that are at least twice the Federal Reserve balance
requirement. Management believes that at the end of September 1996, these
sources of immediate liquidity were well in excess of that policy. If all of the
liquidity were held in the form of liquid assets, this would likely have an
adverse impact on net interest income because of the lower interest rates
usually associated with short-term assets. This is the reason that the Company
relies on the ability to borrow as well as on liquid assets to provide this
immediate liquidity.
Sources of intermediate liquidity include maturities or sales of bankers'
acceptances and securities in the Liquidity and Discretionary Portfolios,
securities in the Earnings Portfolio maturing in the next few weeks, term
repurchase agreements, and deposit increases from special programs. The
Company's policy is to plan ahead and raise funds from these intermediate
liquidity sources to meet cash needs projected over the next several weeks. At
the end of September 1996, the Company's intermediate liquidity was adequate to
meet all projected needs.
Long term liquidity would be provided by special programs to increase core
deposits, reducing the size of the investment portfolios, securitizing loans,
and accessing capital markets. The Company's policy is to plan ahead to address
cash needs over the entire planning horizon from actions and events such as
market expansions, acquisitions, increased competition for deposits, anticipated
loan demand, and economic conditions and the regulatory outlook. At the end of
September 1996, the Company's long term liquidity was adequate to meet cash
needs anticipated over its planning horizon.
CAPITAL RESOURCES AND COMPANY STOCK
Table 16 presents a comparison of several important amounts and ratios for the
third quarters of 1996 and 1995 (dollars in thousands).
Table 16--CAPITAL RATIOS
3rd Quarter 3rd Quarter
1996 1995 Change
---------- ---------- --------
Amounts:
Net Income $ 3,705 $ 1,717 $ 1,988
Average Total Assets 1,159,625 1,090,070 69,555
Average Equity 105,674 99,035 6,639
Ratios:
Equity Capital to Total Assets (period end) 9.03% 8.80% 0.23%
Annualized Return on Average Assets 1.28% 0.63% 0.65%
Annualized Return on Average Equity 14.02% 6.93% 7.09%
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 variations from quarter to quarter in operating earnings. Areas of
uncertainty or seasonal variation include asset quality, loan demand, and RAL
operations.
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. RAL earnings, occurring almost entirely
in the first quarter, introduce significant seasonality.
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 September 30, 1996, the Company's risk-based capital
ratio was 18.64%. The Company must also maintain shareholders' equity of at
least 4% to 5% of unadjusted total assets. As of September 30, 1996,
shareholders' equity was 9.03% of total assets.
The Company applied for listing on the NASDAQ National Market System in April,
1996 and began to be listed in the middle of May. The trading symbol is SABB.
The Board of Directors, while not establishing specific goals, has authorized
Management, with certain limits, to purchase shares of the Company's stock at
market to offset the dilution effect on earnings per share from the issuance of
shares upon the exercise of employee stock options. During the first nine months
of 1996, the Company purchased approximately 112,000 shares. These purchases
have reduced shareholders' equity by $2.8 million. Trading volume for the third
quarter of 1996, the first full quarter of trading on NASDAQ, was 199,274
shares.
Aside from these purchases, no significant commitments or reductions of capital
are planned at this time. However, as the Company pursues its stated plans to
expand beyond its current market area, Management will consider opportunities to
form strategic partnerships with other financial institutions that have
compatible management philosophies and corporate cultures and that share the
Company's commitment to superior customer service and community support. Such
transactions, depending on their structure, may be accounted for as a purchase
of the other institution by the Company. To the extent that consideration is
paid in cash rather than Company stock, the assets of the Company would increase
by more than its equity and therefore the ratio of capital to assets would
decrease.
The current annual cash dividend rate of $0.72 results in a payout ratio of 36%
annualized third quarter earnings.
REGULATION
The Company is closely regulated by Federal and State agencies. The Company and
its subsidiaries may only engage 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 conditions 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.
As a bank holding company, the Company is primarily regulated by the Federal
Reserve Bank. As a member bank of the Federal Reserve System that is
state-chartered, the Bank's primary Federal regulator is the FRB and its state
regulator is the California State Department of Banking. As a non-bank
subsidiary of the Company, Mortgage Company is regulated by the FRB. Both of
these regulatory agencies conduct 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 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 and the
Bank have the highest capital classification, "well capitalized," given by the
regulatory agencies and therefore are not subject to any restrictions as
discussed above. Management expects the Company and the Bank to continue to be
classified as well capitalized in the future.
REFUND ANTICIPATION LOAN AND TRANSFER PROGRAM
The Company is one of very few financial institutions in the country to operate
a RAL program. This program had significant impacts on the Company's activities
and results of operations during the first half of 1995 and 1996 which as has
been discussed in various parts of this discussion. This section is intended to
provide a summary of the financial results of the program for the Company for
the 1995 and 1996 filing seasons.
Prior to 1995, before the Company advanced funds for the RAL loan, the IRS
provided confirmation 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. During the filing 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 whose refund consists primarily of 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. These changes required
a shift in emphasis during the remainder of the 1995 tax season from making
loans to simply acting as a transfer agent for the refund. Rather than extend
funds to the taxpayer and wait for repayment by the IRS, the Company remitted
the payment to the taxpayer only after receipt from the IRS. With these
electronic transfers, taxpayers received the funds sooner than would have been
the case had they waited for a check.
The Company earned $4.9 million in interest on loans and fees for transfers in
the first nine months of 1995. However, the EIC change necessitated increased
salary, telephone, and other collection-related expenses to attempt to recover
as many of these loans as possible, and operating expenses of $1.5 million were
incurred during the same period. While the shift from loans to transfers and the
collection efforts were instituted as quickly as possible, the IRS changes
nonetheless substantially increased the amount of delinquencies and resulting
charge-offs. These totaled $4.1 million in the first nine months of 1995. From
the beginning of the 1996 filing season, the Company followed the same
restrictive guidelines for loans it instituted during the 1995 filing season.
Although the Company has reduced its credit risk with these restrictions, the
fees received for acting as a transfer agent are less than the fees received for
the loans. During the first half of 1996, the Company made 52,000 RAL loans for
a total of $55.8 million, as compared to 75,600 loans for $75.5 million in the
first half of 1995. Gross revenue for RAL activity was $4.2 million for the
first half of 1996, with operating expenses of $1.2 million. There was virtually
no loan or transfer activity in the third quarter.
The Company began collection efforts in 1995 to recover as large a portion of
the charge-off amount from that year as could be done cost effectively.
Customers were contacted and repayment agreements arranged with them. Agreements
were also arranged with the other financial institutions that have similar
programs to give priority to the repayment of past loans. Collection efforts
resulted in RAL recoveries in 1996 of $1.4 million. This amount exceeded
charged-off loans for the same period, resulting in a net recovery of $279,000.
All remaining outstanding loans were charged-off as of June 30, 1996, so there
have been no further charge-offs in 1996, only recoveries.
- --------
[1] To obtain information on the performance ratios of its peers, the Company
primarily uses The FDIC Quarterly Banking Profile, published by the FDIC
Division of Research and Statistics. This publication 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. The information in this publication is
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 second quarter of 1996. All peer information in this discussion and
analysis is reported in or has been derived from information reported in this
publication.
[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 $7.3 million as of September 30, 1996. 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 third quarter of 1996 would
be $13.2 million and the average yield would be 9.03%. There would also be
corresponding reductions for the other quarters shown in the Table 3. The
computation of the taxable equivalent yield is explained in the section below
titled "Securities and Related Interest Income."
[3] Peer data are computed from statistics reported in FDIC Quarterly Banking
Profile, Second Quarter, 1996 for banks with total assets from $1-10 billion.
<TABLE>
EXHIBIT 11
SANTA BARBARA BANCORP & SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------------
1996 1995
----------------------------- ----------------------------
Primary Fully Diluted Primary Fully Diluted
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted Average
Shares Outstanding 7,640,472 7,640,472 7,657,950 7,657,950
------------- ------------- ------------- -------------
Weighted Average
Options Outstanding 773,228 773,228 692,868 692,868
Anti-dilution adjustment (1) (34,022) (34,022) (8,562) --
------------- ------------- ------------- -------------
Adjusted Options
Outstanding 739,206 739,206 684,306 692,868
Equivalent Buyback Shares (2) (442,389) (442,091) (457,742) (431,346)
------------- ------------- ------------- -------------
Total Equivalent Shares 296,817 297,115 226,564 261,522
Adjustment for Non-Qualified
Tax Benefit (3) (121,695) (121,817) (92,891) (107,224)
------------- ------------- ------------- -------------
Weighted Average Equivalent
Shares Outstanding 175,122 175,298 133,673 154,298
------------- ------------- ----------------------------
Weighted Average Shares
for Computation 7,815,594 7,815,770 7,791,623 7,812,248
============= ============= ============= =============
Fair Market Value (4) $ 26.65 $ 26.65 $ 18.95 $ 20.50
Net Income $3,705,402 $3,705,402 $1,717,011 $1,717,011
Earnings Per Share $ 0.47 $ 0.47 $ 0.22 $ 0.22
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
Primary Fully Diluted Primary Fully Diluted
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted Average
Shares Outstanding 7,643,664 7,643,664 7,678,858 7,678,858
-------------- -------------- ------------- -------------
Weighted Average
Options Outstanding 730,851 730,851 678,982 678,982
Anti-dilution adjustment(1) (44,176) (12,362) (11,529) --
-------------- -------------- ------------- -------------
Adjusted Options Outstanding 686,675 718,489 667,453 678,982
Equivalent Buyback Shares(2) (389,813) (401,463) (460,913) (414,941)
-------------- -------------- ------------- -------------
Total Equivalent Shares 296,862 317,026 206,540 264,041
Adjustment for Non-Qualified
Tax Benefit(3) (121,714) (129,981) (84,681) (108,257)
-------------- -------------- ------------- -------------
Weighted Average Equivalent
Shares Outstanding 175,148 187,045 121,859 155,784
-------------- -------------- ----------------------------
Weighted Average Shares
for Computation 7,818,812 7,830,709 7,800,717 7,834,642
============== ============== ============= =============
Fair Market Value(4) $ 25.00 $ 26.25 $ 17.91 $ 20.50
Net Income $11,350,223 $11,350,223 $6,986,479 $6,986,479
Earnings Per Share $ 1.45 $ 1.45 $ 0.90 $ 0.89
<FN>
(1) Options with exercise prices above fair market value are excluded because of
their anti-dilutive effect.
(2) The number of shares that could be purchased at fair market value from the
proceeds were the adjusted options outstanding to be exercised.
(3) The Company receives a tax benefit when non-qualified options are exercised
equal to its tax rate times the difference between the market value at the time
of exercise and the exercise price. This benefit is assumed available for
purchase of additional outstanding shares.
(4) Fair market value for the computation is defined as the average market price
during the period for primary dilution, and the greater of that average or the
end of period market price for full dilution.
</FN>
</TABLE>
<PAGE>
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
Not applicable.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Exhibit Number Item Description
11 Computation of Per
Share Earnings
27 Financial Data Schedule
(b) No reports were filed on Form 8-K.
<PAGE>
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: November 14, 1996
David W. Spainhour
President
Chief Executive Officer
DATE: November 14, 1996
Donald Lafler
Senior Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 59,704
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 35,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 137,903
<INVESTMENTS-CARRYING> 283,827
<INVESTMENTS-MARKET> 0
<LOANS> 604,095
<ALLOWANCE> 15,894
<TOTAL-ASSETS> 1,178,128
<DEPOSITS> 1,032,509
<SHORT-TERM> 31,124
<LIABILITIES-OTHER> 7,079
<LONG-TERM> 0
0
0
<COMMON> 5,094
<OTHER-SE> 101,322
<TOTAL-LIABILITIES-AND-EQUITY> 1,178,128
<INTEREST-LOAN> 41,989
<INTEREST-INVEST> 19,214
<INTEREST-OTHER> 5,363
<INTEREST-TOTAL> 66,566
<INTEREST-DEPOSIT> 24,536
<INTEREST-EXPENSE> 26,089
<INTEREST-INCOME-NET> 40,477
<LOAN-LOSSES> 4,264
<SECURITIES-GAINS> (759)
<EXPENSE-OTHER> 33,846
<INCOME-PRETAX> 16,469
<INCOME-PRE-EXTRAORDINARY> 16,469
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,350
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 4.83
<LOANS-NON> 8,578
<LOANS-PAST> 1,109
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,686
<ALLOWANCE-OPEN> 12,349
<CHARGE-OFFS> 3,630
<RECOVERIES> 2,911
<ALLOWANCE-CLOSE> 15,894
<ALLOWANCE-DOMESTIC> 15,894
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
