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, 1997
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 13, 1997 there were 7,610,091 shares of the
issuer's common stock outstanding.
<PAGE>
PART 1
FINANCIAL INFORMATION
<TABLE>
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(in thousands except share amounts)
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets:
Cash and due from banks $ 52,960 $ 51,181
Federal funds sold and securities purchased under
agreement to resell 69,000 70,000
Cash and cash equivalents 121,960 121,181
Securities (Note 5):
Held-to-maturity 229,195 276,359
Available-for-sale 212,837 141,679
Bankers acceptances 68,914 64,732
Loans, net of allowance of $19,940 at
September 30, 1997 and $16,572 at
December 31, 1996 (Note 6) 783,950 667,595
Premises and equipment, net (Note 7) 12,957 6,835
Accrued interest receivable 9,055 8,503
Other assets (Notes 4 & 8) 24,504 14,436
Total assets $ 1,463,372 $ 1,301,320
Liabilities:
Deposits:
Demand deposits $ 203,340 $ 178,511
NOW deposit accounts 161,654 143,191
Money Market deposit accounts 411,298 438,559
Savings deposits 106,213 88,103
Time deposits of $100,000 or more 148,495 95,172
Other time deposits 225,756 169,547
Total deposits 1,256,756 1,113,083
Securities sold under agreements
to repurchase and Federal funds purchased 43,433 33,490
Long-term debt and other borrowings 41,500 39,000
Accrued interest payable and other liabilities 5,658 8,154
Total liabilities 1,347,347 1,193,727
Shareholders equity
Common stock (no par value; $0.67 per share stated value;
20,000,000 authorized; 7,611,118 outstanding at
September 30, 1997 and 7,587,800 at December 31, 1996 5,081 5,059
Surplus 33,566 35,415
Unrealized gain on securities available for sale 320 2
Retained earnings 77,058 67,117
Total shareholders equity 116,025 107,593
Total liabilities and shareholders equity $ 1,463,372 $ 1,301,320
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>
<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,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 59,358 $ 41,989 $ 18,341 $ 13,253
Interest on securities 19,561 19,214 6,583 6,899
Interest on Federal funds sold and securities
purchased under agreement to resell 3,479 2,345 947 510
Interest on bankers acceptances 3,237 3,018 1,204 550
Total interest income 85,635 66,566 27,075 21,212
Interest expense:
Interest on deposits 28,399 24,536 9,927 8,090
Interest on securities sold under agreements
to repurchase and Federal funds purchased 1,178 1,512 287 349
Interest on other borrowed funds 1,833 41 673 12
Total interest expense 31,410 26,089 10,887 8,451
Net interest income 54,225 40,477 16,188 12,761
Provision for loan losses 6,980 4,264 733
Net interest income after provision for loan losses 47,245 36,213 15,455 12,761
Other operating income:
Service charges on deposits 3,928 3,395 1,361 1,144
Trust fees 7,463 6,296 2,599 2,050
Other service charges, commissions and fees, net 7,194 4,823 1,601 1,353
Net gain (loss) on securities transactions (416) (759) 36 (104)
Other operating income 579 347 240 121
Total other income 18,748 14,102 5,837 4,564
Other operating expense:
Salaries and benefits 23,598 19,210 8,033 6,589
Net occupancy expense 3,811 3,387 1,409 1,131
Equipment expense 2,455 1,909 938 623
Net loss (gain) from operating other real estate (136) 189 (47) 99
Other expense 13,269 9,151 4,671 3,050
Total other operating expense 42,997 33,846 15,004 11,492
Income before income taxes 22,996 16,469 6,288 5,833
Applicable income taxes 7,581 5,119 2,009 2,128
Net income $ 15,415 $ 11,350 $ 4,279 $ 3,705
Earnings per common and common
equivalent share (Note 2) $ 2.03 $ 1.48 $ 0.56 $ 0.48
Fully diluted earnings per share (Note 2) $ 1.97 $ 1.45 $ 0.55 $ 0.47
<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,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 15,415 $ 11,350
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,987 1,528
Provision for loan and lease losses 6,980 4,264
Provision for deferred income taxes (169) (2,184)
Net writedown on other real estate owned 50 --
Net amortization of discounts and premiums for
securities and bankers' acceptances (3,375) (1,575)
Net change in deferred loan origination
fees and costs 15 475
Increase (decrease) in accrued interest receivable (552) 141
Increase (decrease) in accrued interest payable 97 (145)
Net loss on sales and calls of securities 416 758
Increase in prepaid expenses (267) (31)
Increase (decrease) in accrued expenses (1,515) 960
Net loss (gain) on sales of OREO (103) 85
Decrease in service fee and other
income receivable 207 101
Decrease in income taxes payable (3,557) (180)
Other operating activities 1,256 1,991
Net cash provided by operating activities 16,885 17,538
Cash flows from investing activities:
Proceeds from call or maturity of securities 68,696 74,013
Purchase of securities (188,514) (257,616)
Proceeds from sale of securities 99,225 121,210
Proceeds from maturity of bankers acceptances 128,601 222,654
Purchase of bankers acceptances (132,494) (128,274)
Net increase in loans made to customers (123,458) (48,070)
Disposition of property from defaulted loans 1,654 1,557
Purchase or investment in premises and equipment (8,458) (476)
Purchase of investment real estate (598) --
Excess of purchase price over net assets
for purchase of First Valley Bank (10,037) --
Net cash used in investing activities (165,383) (15,002)
Cash flows from financing activities:
Net increase (decrease) in deposits 143,673 (21,511)
Net increase (decrease) in borrowings with
maturities of 90 days or less 9,943 (20,401)
Net increase in long-term debt and other borrowings 2,500 --
Proceeds from issuance of common stock 3,712 1,081
Payments to retire common stock (5,539) (3,099)
Dividends paid (5,012) (3,648)
Net cash provided by (used in) financing activities 149,277 (47,578)
Net increase (decrease) in cash and cash equivalents 779 (45,042)
Cash and cash equivalents at beginning of period 121,181 139,746
Cash and cash equivalents at end of period $ 121,960 $ 94,704
Supplemental disclosure:
Cash paid for the nine months ended:
Interest $ 31,313 $ 25,944
Income taxes $ 9,981 $ 6,150
<FN>
See accompanying notes to consolidated condensed financial statements
</FN>
</TABLE>
<PAGE>
Santa Barbara Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
(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 Corporation. Material intercompany
balances and transactions have been eliminated.
2. Earnings Per Share
Earnings per common and common equivalent shares are based on the weighted
average number of shares and common stock equivalents outstanding during each
period. Common stock equivalents include the number of shares issuable on the
exercise of outstanding options less the number of shares that could have been
purchased with the proceeds from the exercise of the options plus any tax
benefits based on the average price of common stock during the year. Fully
diluted earnings per share are determined in the same manner, except that the
assumed purchase of common stock from the proceeds of the options and tax
benefits is computed using the period-end price if it is higher than the average
for the period.
For the nine and three-month periods ended September 30, 1997 and 1996, the
weighted average shares outstanding were as follows:
Nine-Month Periods Three-Month Periods
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ------ ---- ----
Weighted average
fully diluted
shares outstanding 7,842,371 7,830,709 7,843,543 7,815,770
Weighted average
primary shares
outstanding 7,788,035 7,818,811 7,810,991 7,815,594
In February 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128") which replaces the presentation of primary earnings per share ("EPS") with
the presentation of basic EPS and also requires dual presentation of basic and
diluted EPS on the face of the income statement. SFAS 128 will be effective for
periods ending after December 15, 1997. Management believes that implementation
of SFAS 128 will not materially effect the presentation of EPS.
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in a condensed format, and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been reflected in the financial statements. However, the results of
operations for the three and nine-month periods ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts reported for 1996 have been reclassified to be consistent with the
reporting for 1997.
For the purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, Federal funds sold, and securities purchased under agreement
to resell.
4. Acquisition
As of the close of business on March 31, 1997, the Company acquired First Valley
Bank of Lompoc ("FVB") for $26.1 million. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated on the basis of the estimated fair value of the assets acquired and
liabilities assumed as follows (in thousands):
Net fair value of tangible assets acquired $ 16,063
Goodwill 10,037
----------
Purchase consideration $ 26,100
==========
The purchased goodwill, included in other assets on the balance sheet as of
September 30, 1997, is being amortized over 15 years. Intangible assets,
including goodwill, are reviewed each year to determine if circumstances related
to their valuation have been materially affected. In the event that the current
market value is determined to be less than the current book value of the
intangible asset, a charge against current earnings would be recorded.
For purposes of reporting cash flows, the securities, loans, and deposits
acquired in this transaction are included within purchases of securities, net
increase in loans made to customers, and net increase in deposits, respectively.
5. 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.
In 1994 and 1995, the Company reclassified certain U.S. agency securities from
"available-for-sale" to "held-to-maturity." 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 remains as part of the separate component of capital mentioned
above, and is amortized against the interest income for the securities over
their respective lives. This amount, approximately $37,000 at September 30, 1997
and $90,000 at December 31, 1996, 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 42%.
The Bank became a member of the Federal Reserve System in 1995. As a condition
of membership, the Bank was required to purchase Federal Reserve Bank stock. The
shares purchased are reported as equity securities.
In 1996, the Bank became a member of the Federal Home Loan Bank (FHLB). As of
September 30, 1997, the Bank held $6,193,000 in FHLB stock which are reported as
equity securities.
<PAGE>
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, 1997
Held-to-maturity:
U.S. Treasury obligations $ 88,301 $ 335 $ (162) $ 88,474
U.S. agency obligations 32,390 165 (171) 32,384
State and municipal securities 108,504 14,962 (66) 123,400
-----------------------------------------------------
Total held-to-maturity 229,195 15,462 (399) 244,258
-----------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 135,082 365 -- 135,447
U.S. agency obligations 1,000 2 -- 1,002
State and municipal securities 796 12 -- 808
Collateralized mortgage obligations 63,877 247 (17) 64,107
Asset backed securities 4,000 9 -- 4,009
Equity Securities 7,464 -- -- 7,464
-----------------------------------------------------
Total available-for-sale 212,219 635 (17) 212,837
-----------------------------------------------------
Total Securities $ 441,414 $ 16,097 $ (416) $ 457,095
=====================================================
December 31, 1996:
Held-to-maturity:
U.S. Treasury obligations $ 137,988 $ 178 $ (680) 137,486
U.S. agency obligations 52,268 351 (391) 52,228
State and municipal securities 86,103 13,613 -- 99,716
-----------------------------------------------------
Total held-to-maturity 276,359 14,142 (1,071) 289,430
-----------------------------------------------------
Available-for-sale:
U.S. Treasury obligations 105,482 221 (60) 105,643
U.S. agency obligations -- -- -- --
Collateralized mortgage obligations 30,551 132 (135) 30,548
Equity Securities 5,488 -- -- 5,488
-----------------------------------------------------
Total available-for-sale 141,521 353 (195) 141,679
-----------------------------------------------------
Total Securities $ 417,880 $ 14,495 $ 1,266) $ 431,109
=====================================================
</TABLE>
The Company does not expect to realize any of the unrealized gains or 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. An
exception to this expectation occurs when securities are called prior to their
maturity, at which time gains may be realized. Gains or 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, 1997:
Amortized cost:
In one year or less $ 35,858 $ 56,473 $ 92,331
After one year through five years 143,039 141,824 284,863
After five years through ten years 11,464 5,867 17,331
After ten years 38,834 591 39,425
Equity Securities -- 7,464 7,464
-----------------------------------
$ 229,195 $ 212,219 $ 441,414
===================================
Estimated market value:
In one year or less $ 44,635 $ 72,908 $ 117,543
After one year through five years 143,041 90,348 233,389
After five years through ten years 16,312 14,737 31,049
After ten years 40,270 27,380 67,650
Equity Securities -- 7,464 7,464
----------------------------------
$ 244,258 $ 212,837 $ 457,095
==================================
December 31, 1996:
Amortized cost:
In one year or less $ 49,070 $ 51,495 $ 100,565
After one year through five years 185,092 84,538 269,630
After five years through ten years 14,672 -- 14,672
After ten years 27,525 -- 27,525
Equity Securities -- 5,488 5,488
----------------------------------
$ 276,359 $ 141,521 417,880
==================================
Estimated market value:
In one year or less $ 48,825 $ 51,579 $ 100,404
After one year through five years 184,495 84,612 269,107
After five years through ten years 19,479 -- 19,479
After ten years 36,631 -- 36,631
Equity Securities -- 5,488 5,488
----------------------------------
$ 289,430 $ 141,679 $ 431,109
==================================
</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.
6. Loans
The balances in the various loan categories are as follows:
<TABLE>
<CAPTION>
(in thousands) September 30, 1997 December 31, 1996
<S> <C> <C>
Real estate:
Residential $ 225,200 $ 172,846
Non-residential 226,591 199,203
Construction 12,806 10,245
Commercial loans 170,003 154,162
Home equity loans 35,659 34,323
Consumer loans 66,457 43,944
Leases 57,113 58,526
Municipal tax-exempt
obligations 7,822 8,658
Other loans 2,239 2,260
---------- ---------
Total loans $ 803,890 $ 684,167
========== =========
</TABLE>
The loan balances at September 30, 1997 and December 31, 1996, are net of
approximately $2,378,000 and $2,362,000, respectively, in net loan fees and
origination costs deferred.
A loan is identified as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the loan agreement.
Because this definition is very similar to that used by Management to determine
on which loans interest should not be accrued, the Company expects that most
impaired loans will be on non-accrual status. Therefore, in general, the accrual
of interest on impaired loans is discontinued, and any uncollected interest is
written off against interest income from other loans in the current period. No
further income is recognized until all recorded amounts of principal are
recovered in full or until circumstances have changed such that the loan is no
longer regarded as impaired.
There are some loans about which there is doubt regarding the collectibility of
interest and principal according to the contractual terms, but which are both
fully secured by collateral and are current in their interest and principal
payments. These impaired loans are not classified as non-accrual.
The amount of the valuation allowance for impaired loans is determined by
comparing the recorded investment in each loan with its value measured by one of
three methods: (1) the expected future cash flows are estimated and then
discounted at the effective interest rate; (2) the loan's observable market
price if it is of a kind for which there is a secondary market; or (3) a
valuation of the underlying collateral. A valuation allowance is established for
any amount by which the recorded investment exceeds the value of the impaired
loan. If the value of the loan as determined by one of the above methods exceeds
the recorded investment in the loan, no valuation allowance for that loan is
established. The following table discloses balance information about the
impaired loans and the allowance related to them ($ in thousands) as of
September 30, 1997 and December 31, 1996:
September 30, 1997 December 31, 1996
------------------ -----------------
Loans identified as impaired $5,688 $5,945
Impaired loans for which a valuation
allowance has been determined $730 $4,003
Impaired loans for which no valuation
allowance was determined necessary $4,958 $1,942
Amount of valuation allowance $88 $1,196
Because the loans currently identified as impaired have unique risk
characteristics, the valuation allowance was determined on a loan-by-loan basis.
In contrast to the situation at December 31, 1996, few impaired loans required a
valuation allowance at September 30, 1997, because most impaired loans at the
latter date had collateral in excess of recorded investment.
The following table discloses additional information ($ in thousands) about
impaired loans for the nine and three-month periods ended September 30, 1997 and
1996:
Nine-Month Periods Three-Month Periods
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Average amount of recorded investment
in impaired loans $3,939 $9,035 $3,001 $8,478
Collections of interest from impaired
loans and recognized as interest income $201 $249 $173 --
The Company also provides an allowance for losses for: (1) loans that are not
impaired and (2) losses inherent in the various loan portfolios, but 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 are charged-off. Uncollectibility is
determined based on the individual circumstances of the loan and historical
trends.
The valuation allowance for impaired loans of $88,000 is included with the
general allowance for loan losses to total the $19.9 million reported on the
balance sheet for September 30, 1997, which these notes accompany, and in the
statement of changes in the allowance account for the first nine months of 1997
shown below. The amounts related to tax refund anticipation loans and to all
other loans are shown separately.
<TABLE>
<CAPTION>
(in thousands) Refund All
Anticipation Other Total
------------ ----- -----
<S> <C> <C> <C>
Balance, December 31, 1996 $ 98 $ 16,474 $ 16,572
Provision for loan losses 4,649 2,331 6,980
Loan losses charged against allowance (5,946) (2,050) (7,996)
Loan recoveries added to allowance 1,215 3,169 4,384
---------------------------------
Balance, September 30, 1997 $ 16 $ 19,924 $ 19,940
=================================
</TABLE>
7. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Most of the substantial increase from December 31, 1996 relates to
the acquisition of FVB. 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 $1,987 and $1,617 for the nine-month periods ended September 30,
1997 and 1996, respectively, and $824 and $615 for the three-month periods ended
September 30, 1997 and 1996, respectively. The table below shows the balances by
major category of fixed assets:
<TABLE>
<CAPTION>
(in thousands) September 30, 1997 December 31, 1996
----------------------------- -------------------------------
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
----------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Land and buildings $10,173 $ 4,012 $ 6,161 $ 5,616 $ 3,119 $ 2,497
Leasehold improvements 6,823 5,046 1,777 6,396 4,600 1,796
Furniture and equipment 19,167 14,148 5,019 13,495 10,953 2,542
----------------------------- -------------------------------
Total $36,163 $ 23,206 $12,957 $25,507 $ 18,672 $ 6,835
============================= ===============================
</TABLE>
8. Other Assets
Property from defaulted loans is included within other assets on the balance
sheets. As of September 30, 1997 and December 31, 1996, the Company had $108,000
and $1,629,000, 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.
Also included in other assets on the balance sheet for September 30, 1997, are
goodwill (see Note 4) and deferred tax assets.
9. Acquisition of Citizens State Bank
In June 1997, the Company entered into a definitive agreement whereby it would
acquire all of the outstanding shares of Citizens State Bank of Santa Paula
("CSB") and merge it into the Bank. The acquisition was approved by the
shareholders of CSB and Federal and State regulators and was consummated after
the close of business on September 30, 1997. The transaction will be accounted
for as a purchase and accordingly the assets and liabilities of CSB will be
included at their fair market value with those of the Bank as of the beginning
of the fourth quarter of 1997. There will be no restatement of prior periods to
include the assets, liabilities, or results of operation of CSB.
The agreement provided for Citizens State Bank shareholders to receive $1,925.00
in cash for each of the 8,400 Citizens State Bank shares outstanding for a total
price of $16.17 million. The purchase price was paid from the liquid assets of
the Company, specifically the Federal funds shown on the balance sheet for
September 30, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Santa Barbara Bancorp (the "Company") posted earnings of $4.28 million for the
quarter ended September 30, 1997, up 15% over the same quarter last year. Third
quarter earnings continue the trend of the previous eight quarters in which net
income has been higher than the same quarter of the prior year. Year-to-date
results of $15.4 million exceeded earnings for the comparable period of 1996 by
36%. Per share earnings for the third quarter of 1997 were $0.55 compared to
$0.47 earned in the third quarter of 1996.
The increase in net income for the quarter compared to the same quarter of 1996
was due to increases in net interest income and fee income. Compared to the
third quarter of 1996, net interest income (the difference between interest
income and interest expense) increased by $3.4 million or 27%.
The Company's acquisition of First Valley Bank of Lompoc ("FVB") was completed
April 1, 1997 and a portion of the increase in net income for the quarter and
year to date compared to the same periods of 1996 was due to this transaction.
However, the Company's loans and deposits grew exclusive of the FVB acquisition
in the last 12 months, generating additional net interest income. The leasing
portfolio purchased from another local financial institution added $57.1 million
in loans compared to September 30, 1996. In addition, other loan categories
increased $82.8 million in the last 12 months. Deposits increased $107.6
million.
Noninterest income increased by $1.3 million over the same quarter of 1996 due
primarily to an increase in trust fees. The Trust & Investment Services Division
posted quarterly fee income of $2.6 million, a 27% gain over the $2.1 million
recorded in the prior year's third quarter. Other services charges, commissions
and fees increased by $248,000 compared to the third quarter of 1996. In
addition, the service charges on deposits grew by $217,000 due to the growth in
deposits.
Delinquent and nonperforming loans were less at the end of the third quarter of
1997 than a year ago. However, because of the growth in the loan portfolios and
some uncertainty regarding the anticipated performance of the new loan
portfolios acquired, the Company has provided $733,000 for possible loan losses
compared to no provision expense in the third quarter of 1996.
As would be expected with the growth in the Company's average assets in the past
year, there has also been an increase in noninterest expenses. These include
salary costs, occupancy and marketing, some of which are related to the
Company's expansion into new market areas. During the past twelve months the
rate of growth of noninterest expenses of 31% was greater than the 23% rate of
growth of average assets. However, the operating efficiency ratio, which
measures how many cents of expense it takes to earn a dollar of operating
income, decreased from $0.66 for the third quarter of 1996 to $0.65 for the
third quarter of 1997. The decrease reflects a faster rate of growth of revenues
as compared to expenses in these two periods. Included in the third quarter of
1997 were some non-recurring expenses relating to the conversion and integration
of FVB branches into Santa Barbara Bank & Trust and the acquisition of CSB. The
Company recognized approximately $10.0 million in goodwill in the FVB
acquisition. This will be amortized over a period of 15 years. Amortization
expense in the third quarter was approximately $187,000.
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 System.
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
Corporation ("Sanbarco"). The primary business activity of Sanbarco is brokering
commercial real estate loans and servicing those loans for a fee. All references
to "the Company" apply to Santa Barbara Bancorp and its subsidiaries. "Bancorp"
will be used to refer to the parent company only.
Forward-looking Information
The matters discussed in this analysis include historical information and
forward-looking statements. In accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions that important
factors, including factors beyond the Company's control, could cause actual
results to differ materially from those in the forward-looking statements. Such
factors include risks associated with changes in interest rates, underestimation
of credit losses in the refund anticipation loan ("RAL") and other loan
programs, increased competition from other major financial institutions as well
as other risks identified in this discussion.
Total Assets and Earning Assets
The chart below shows the growth in average total assets and deposits since the
fourth quarter of 1994. For the Company, changes in assets are primarily related
to changes in deposit levels, so these also 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.
<PAGE>
Chart 1--GROWTH IN AVERAGE ASSETS AND DEPOSITS
$1,450
AAAAAAA
$1,400 AA
AA
$1,350 AA
AA
$1,300 AA
AA
$1,250 AA
AA DDDDDDD
$1,200 AAA AA DDD
AAA AAAAA AA DD
$1,150 AA AAAA DD
AA DD
$1,100 AAA DD
AA DD
$1,050 AAAAAAA AA DDDDD
AAAAA DDDDDDDDDDDD
$1,000 DDDDD
DDD
$950 DD
DDDDDDDDDD DDD
$900 DD
$850
$800
4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd
'94 '95 '95 '95 '95 '96 '96 '96 '96 '97 `97 '97
A = Assets D = Deposits
Growth in the first quarters of 1996 and 1997 was impacted by the volume
activity related to the RAL and refund transfer ("RT") programs which cause
average loans and deposits to reflect higher average balances than in subsequent
quarters. RAL and RT activity is discussed in more detail in the section titled
"Refund Anticipation Loan and Loan Transfer Program." Due to the relatively
smaller RAL and RT volumes in the 1st quarter of 1995, growth was not impacted
to the extent realized in 1996 and 1997. In addition, the growth in average
assets for the first quarter of 1997 also reflects the full quarter impact of
the $59 million leasing portfolio acquired in the December of 1996.
The averages for the second quarter tend to be lower than the averages for the
first quarter because of seasonal factors such as the RAL program--which
primarily affects the first quarters of each year--and cash outflow for tax
payments which impacts the second quarters. The increase in average assets and
deposits between the first and second quarters of 1997 do not follow the usual
pattern because of the addition of approximately $125 million in assets and $108
million in deposits through the acquisition of FVB. Without the acquired assets
and liabilities, the averages for the second and third quarters of 1997 would
have been slightly less than those for the first quarter.
The third and fourth quarters generally show growth over the earlier quarters.
In the third quarter of 1997, growth occurred later in the quarter for both
assets and deposits. Although the average balances from the second to third
quarter remained flat, assets at September 30 grew by $35 million and deposits
by $24 million over their respective balances at June 30. In 1996, the usual
seasonal increase in deposits also 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, acquisition of the leasing
portfolio, FVB and the three Ventura County offices opened in 1995 have
contributed to the longer trend growth in both deposits and assets.
Earning assets consist of the various assets on which the Company earns interest
income. The Company was earning interest on 96% of its assets during the first
nine months of 1997. This compares with an average of 86% 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
$135 million more assets earning interest during the first nine months 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 and other borrowings. 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 net interest margin 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 margin as interest
rates change. Because the Company earns interest income on 95% of its assets and
pays interest expense on the majority of its liabilities, these adverse effects
could be material if not managed properly. 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 most 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." This is the risk that interest
rate changes may not be equally reflected in the rates of interest earned and
paid because of differences in the contractual terms of the assets and
liabilities held. An obvious example of this kind of difference is if a
financial institution uses the proceeds from shorter-term deposits to purchase
longer-term securities or fund longer-term loans. If interest rates rise
significantly, the interest that must be paid on the deposits could exceed the
interest earned on the assets.
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 15% plus or minus in either
of the first two periods, and not more than 25% 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 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
large 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, 1997,
the gap for this first period is a negative 2.11%, well within the target range
and effectively a matched position. At the end of the fourth quarter of 1996,
the gap was a negative 4.52% of assets.
There is a large block of savings and transaction deposit accounts which the
Company has assigned to the third time period because it assumes that is the
earliest that they might be repriced. Because they are offset by few assets
repricing in the same period, there is a relatively large negative gap for this
third period, "After six months but within one year." This gap for the third
period causes the cumulative gap to be a negative 16.76% for the first three
periods. However, this is still well within the Company's policy limit of plus
or minus 25%. The periods of over one year are less critical because more steps
can be taken to mitigate the adverse effects of any interest rate changes
arising from repricing mismatches
<PAGE>
<TABLE>
Table 1--INTEREST RATE SENSITIVITY
<CAPTION>
After three After six After one Non-interest
As of September 30, 1997 Within months months year but After bearing or
(in thousands) three but within but within within Five non-repricing
months six one year five years items Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $ 337,060 $ 112,878 $ 76,498 $ 241,458 $ 27,558 $ (9,107) $ 786,345
Cash and due from banks -- -- -- -- -- 52,960 52,960
Money market investments 111,088 26,238 -- -- -- -- 137,326
Securities 56,670 25,022 42,397 229,245 80,616 8,082 442,032
Other assets -- -- -- -- -- 39,245 39,245
---------------------------------------------------------------- ------------
Total assets 504,818 164,138 118,895 470,703 108,174 91,180 $ 1,457,908
---------------------------------------------------------------- ============
Liabilities and shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased 43,433 -- -- -- -- -- 43,433
Other borrowings 3,500 2,500 5,000 30,500 -- -- 41,500
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts 372,008 -- 307,143 -- -- -- 679,151
Time deposits 115,699 86,953 95,066 75,940 608 -- 374,266
Demand deposits -- -- -- -- -- 202,752 202,752
Other liabilities 900 -- -- -- -- 3,734 4,634
Shareholders' equity -- -- -- -- -- 112,172 112,172
-------------------------------------------------------------------------------
Total liabilities and
shareholders' equity 535,540 89,453 407,209 106,440 608 318,658 $ 1,457,908
---------------------------------------------------------------- ==============
Interest rate-
sensitivity gap $ (30,722) $ 74,685 $ (288,314) $ 364,263 $ 107,566 $ (227,478)
================================================================
Gap as a percentage of
total assets (2.11%) 5.12% (19.78%) 24.99% 7.38% (15.60%)
Cumulative interest
rate-sensitivity gap $ (30,722) $ 43,963 $ (244,351) $ 119,912 $ 227,478
Cumulative gap as a
percentage of total assets (2.11%) 3.02% (16.76%) 8.22% 15.60%
<FN>
Note: Net deferred loan fees, overdrafts, and the allowance for loan losses
are included in the above table as noninterest bearing or
non-repricing items. Money market investments include Federal funds
sold, securities purchased under agreements to resell, and bankers'
acceptances
</FN>
</TABLE>
The third interest-related risk arises from the fact that interest rates rarely
change in a parallel or equal manner. The interest rates associated with the
various assets and liabilities differ in how often they change, the extent to
which they change, and whether they change sooner or later than other interest
rates. For example, while the repricing of a specific asset and a specific
liability may fall in the same period of the gap report, the interest rate
payable on the liability may rise one percent in response to rising market rates
while the interest rate received on the asset increases only one-half percent.
While evenly matched in the gap report, the Company would suffer a decrease in
net interest income. This exposure to "basis risk" is the type of interest risk
least able to be managed, but is also the least dramatic. Avoiding concentration
in only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
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
"at risk" from an increase or decrease in rates is within the Company's policy
and less vulnerable than at the end of December 1996 because of certain interest
rate risk management actions taken during the first half of 1997. These actions,
which also resulted in the evenly matched gap for the first period, included
holding larger balances in short-term money market investments like Federal
funds sold and bankers' acceptances, the purchase of an interest rate hedge as
described in the section titled "Hedges, Derivatives, and Other Disclosures,"
setting targets for administered rate deposits that are less sensitive to
changes in market rates, the sale of certain fixed-rate investment securities,
the purchase of some floating rate investment securities, and the borrowing of
additional amounts from the Federal Home Loan Bank at fixed rates.
The primary risk the Company has from falling rates is that the relatively low
rates currently paid on administered rate accounts would limit reductions to
match money market declines for assets.
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 as shown in Chart 1.
This orderly growth has been planned by Management and Management anticipates
that it can be sustained because of the strong capital position and earnings
record of the Company. The increases have come by maintaining competitive
deposit rates, introducing new deposit products, the opening of new retail
branch offices, the assumption of deposits in the FVB acquisition, and
successfully encouraging former customers of 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 Chart 1 and in Table 2, average deposits for the
third quarter of 1997 have increased $219.1 million or 21.6% from average
deposits a year ago.
<TABLE>
Table 2--AVERAGE DEPOSITS AND RATES
<CAPTION>
1996: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW/MMDA $ 555.8 3.35% $ 540.2 3.20% $ 521.1 3.13% $ 554.8 3.12%
Savings 94.0 2.37 92.9 2.40 93.9 2.41 93.2 2.41
Time deposits 100+ 65.8 5.32 71.2 5.31 78.3 5.21 82.9 5.18
Other time deposits 163.2 5.67 166.3 5.58 170.9 5.58 176.2 5.57
---------- --------- ---------- -----------
Total interest-bearing
deposits 878.8 3.82 870.6 3.74 864.2 3.72 907.1 3.71
Noninterest-bearing 154.4 150.8 151.5 158.7
---------- --------- ---------- ----------
Total deposits $ 1,033.2 $ 1,021.4 $ 1,015.7 $ 1,065.8
========== ========= ========== ==========
1997:
NOW/MMDA $ 577.3 3.19% $ 585.8 3.05% $ 566.4 2.98%
Savings 90.3 2.33 111.4 2.19 105.6 2.32
Time deposits 100+ 84.7 5.16 112.1 5.33 124.0 5.35
Other time deposits 186.2 5.55 225.9 5.75 239.9 5.75
---------- --------- ----------
Total interest-bearing
deposits 938.5 3.75 1,035.2 3.79 1,035.9 3.80
Noninterest-bearing 199.9 191.5 198.9
---------- --------- ----------
Total deposits $ 1,138.4 $ 1,226.7 $ 1,234.8
========== ========= ==========
</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 reprices 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.
The average balances for noninterest bearing demand deposits during the first
quarters of 1996 and 1997 were impacted by outstanding checks from the RAL and
RT programs discussed below in "Refund Loan and Transfer Programs."
Approximately $12.3 million of the average balance for noninterest-bearing
demand deposits in the first quarter of 1996 and $41.6 million in the first
quarter of 1997 relate to these programs. There was 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, while the California economy has been improving, loan demand has not been
so great that the Company would 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 1996 and
the first nine months of 1997, the spread between the cost of premium rate CD's
and the earnings on their potential uses would be 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 because their
terms tend to be relatively longer than 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 has not utilized any brokered deposits.
Loans and Related Interest Income
Table 3 shows the changes in the end-of-period (EOP) and average loan portfolio
balances and taxable equivalent income and yields2 over the last eight quarters
(dollars in millions),
<TABLE>
Table 3--LOAN BALANCES AND YIELDS
<CAPTION>
EOP Average Interest Average
Quarter Ended Outstanding Outstanding and Fees Yield
- -------------------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C>
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
December 1996 684.2 634.4 14.9 9.35
March 1997 719.9 723.0 22.9 12.75
June 1997 788.8 789.0 18.3 9.21
September 1997 803.9 790.7 18.3 9.26
</TABLE>
The end-of-period loan balance as of September 30, 1997 has increased by $119.7
million compared to December 31, 1996, and by $199.8 million compared to
September 30, 1996. Residential real estate loans increased $52.4 million,
nonresidential real estate loans increased $27.4 million, commercial loans
increased $15.8 million and consumer loans, including home equity loans,
increased by $23.8 million from December 31, 1996. 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 increase in the balance between the third and fourth quarters of 1996 is due
to the purchase of $56 million in lease contracts from another financial
institution. These are accounted for as loans. A portion of the increase in the
June 1997 balance compared to the March balance relates to the acquisition of
FVB.
The average balance and yield for the first quarters of 1997 and 1996 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 for the first
halves of 1996 and 1997 is summarized in the section titled "Refund Anticipation
Loan and Transfer Program" below. Average yields for the first quarters of 1996
and 1997 without the effect of RAL loans were 9.27% and 9.04%, respectively.
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 one year constant maturity treasury ("CMT"),
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
adjusting for local lending and deposit price conditions. The loans that are
tied to prime or to the Company's base lending rate adjust immediately to a
change in those rates while the loans tied to CMT usually adjust every year.
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,
1997 1996
---- ----
Standby letters of credit $ 17,707 $ 9,202
Loan commitments 79,881 26,083
Undisbursed loans 29,360 15,588
Unused consumer credit lines 58,938 54,904
Unused other credit lines 123,731 82,837
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, generally accepted
accounting standards 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 noncurrent loans and nonperforming assets for the
Company at the end of the third quarter of 1997, and at the end of the last four
quarters (in thousands). Also shown for both the Company and its peers3 are the
coverage ratio of the allowance to total loans and the ratio of noncurrent loans
to total loans.
Nonperforming assets include noncurrent loans and foreclosed collateral
(generally real estate). Total nonperforming assets have decreased by $2.5
million at September 30, 1997 compared to September 30, 1996. Although there is
some variation quarter to quarter, there has been an overall trend of lower
balances as problem loans have been brought current, collected, or charged-off
and as foreclosed collateral has been disposed of aggressively. Noncurrent loans
have declined as a percentage of total loans to 1.07% at September 30, 1997 from
1.60% at September 30, 1996.
<TABLE>
Table 4--ASSET QUALITY
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1997 1997 1997 1996 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
COMPANY:
Loans
delinquent
90 days
or more $ 480 $ 2,565 $ 683 $ 1,420 $ 1,109
Nonaccrual
loans 8,143 6,270 5,967 7,027 8,578
------------- ------------- ------------- ------------- ------------
Total non-
current loans 8,623 8,835 6,650 8,447 9,687
Foreclosed
real estate 108 0 325 1,629 1,583
------------- ------------- ------------- ------------- -------------
Total nonper-
forming assets $ 8,731 $ 8,835 $ 6,975 $ 10,076 $ 11,270
============= ============= ============= ============= =============
Allowance for
loan loss $ 19,940 $ 19,174 $ 23,057 $ 16,572 $ 15,894
============= ============= ============= ============= =============
COMPANY:
Coverage ratio
of allowance for
loan losses to
total loans 2.48% 2.43% 3.20% 2.42% 2.63%
Coverage ratio
of allowance for
loan losses to
noncurrent
loans 231% 217% 347% 196% 163%
Ratio of non-
current loans to
total loans 1.07% 1.12% 0.92% 1.23% 1.60%
Ratio of non-
performing assets
to average
total assets 0.60% 0.62% 0.52% 0.77% 0.96%
FDIC PEER GROUP:
Coverage ratio
of allowance for
loan losses to
total loans n/a 2.12% 2.00% 1.99% 2.09%
Coverage ratio
of allowance for
loan losses to
noncurrent
loans n/a 190% 179% 167% 176%
Ratio of non-
current loans to
total loans n/a 1.12% 1.12% 1.19% 1.19%
Ratio of non-
performing assets
to average
total assets n/a 0.82% 0.83% 0.88% 0.89%
</TABLE>
The September 30, 1997 balance of noncurrent 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.
The primary reason for the larger allowance for loan loss at March 31 as shown
in Table 4 was the need to provide for loan losses in the RAL program. The
reported allowance for the Company as of March 31, 1997 included $4.5 million in
allowance that had been provided for RAL's. While most of the loans are made in
the first quarter, the Company does not know how many loans will have to be
charged-off until the second quarter. Based on payment patterns available at the
end of the first quarter, the Company estimated that it would need to charge-off
approximately $4.5 million. During the second quarter, the Company found that it
would need to charge-off additional loans, and $941,000 was charged against
income in the second quarter, specifically for RAL's. The RAL charge-offs at the
end of the second quarter against the portion of the allowance specifically
allocated for RAL losses reduced the allowance from the March 31 balance.
However, the allowance at the end of the second and third quarters of 1997 was
still higher than the balance at December 31, 1996. There are several reasons
for this increase. Among these are the Company's significant expansion of its
portfolio of indirect automobile loans, the acquisition of leasing assets and
the growth in the loan portfolio from the acquisition of the FVB. These are new
areas of activity or new market areas for the Company, and until repayment
patterns become more determinable over the next several years, there is a higher
degree of uncertainty regarding the amount of losses inherent in the portfolios
though not yet identified. In addition, nonperforming asset ratios move in
cycles relative to the economy and while the current trend has been very
favorable, Management takes into consideration the cyclical nature of these
assets when analyzing the adequacy of loan loss reserves. These risk elements
led the Company to take provision expense in the three-month and nine-month
periods of 1997. Based on these factors and its review of the loan portfolio,
Management considers the current amount of the allowance adequate.
Management identifies and monitors other loans which are potential problem loans
although they are not now delinquent more than 90 days. Table 5 classifies
noncurrent loans and all potential problem loans other than noncurrent loans by
loan category for September 30, 1997 (amounts in thousands). At September 30,
1997 there were no outstanding RAL balances because as of June 30, 1997 all RAL
loans made in 1997 and still outstanding were charged off.
Table 5--NONCURRENT AND POTENTIAL PROBLEM LOANS
Potential Problem
Noncurrent Loans Other Than
Loans Noncurrent
----- ----------
Loans secured by real estate:
Construction and
land development $ 220 $ --
Agricultural 751 486
Home equity lines 335 132
1-4 family mortgage 1,446 1,898
Multi-family -- --
Non-residential, non-farm 4,020 4,335
Commercial and industrial 1,371 927
Leases 297 --
Other consumer loans 183 230
------ ------
Total $8,623 $8,008
====== ======
The following table sets forth the allocation of the allowance for all potential
problem loans by classification as of September 30, 1997 (amounts in thousands).
Doubtful $407
Substandard $1,536
Special Mention --
The total of the above numbers is less than the total allowance because most of
the allowance is allocated based on historical trends to loans which are not
currently 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
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 practically all of the tax-exempt municipal
securities and some of the longer term taxable securities. The second and third
portfolios consist of securities that are all classified as available-for-sale.
The second portfolio, the "Liquidity Portfolio," is made up almost entirely of
the shorter term Treasury securities. The third portfolio, the "Discretionary
Portfolio," consists of shorter term Treasury securities, collateralized
mortgage obligations and asset-backed securities. The Company specifies the
portfolio into which each security will be classified at the time of purchase,
but can transfer securities between the Liquidity and Discretionary Portfolios
at its option.
Securities purchased for the Earnings Portfolio will not be sold for liquidity
purposes or 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, or if
sale is necessary to maintain the Company's interest rate risk position in the
event of a major business combination or disposition. As permitted for this last
purpose, in conjunction with the acquisition of FVB, the Company sold $30
million of long-term Treasury Notes from its Earnings Portfolio. This action was
undertaken as one component of a plan of action to manage the interest rate risk
being assumed by the purchase of First Valley Bank. The Company also sold some
long-term securities it had classified as available for sale and sold some of
the longer term securities acquired from FVB.
Federal banking regulations require that all fixed-rate collateralized mortgage
obligations ("CMO's") held by financial institutions be low volatility
investments. A CMO 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 CMO's held by the Company passed the
tests at the time of purchase and, as of September 30, 1997, all passed the
tests. All of the CMO's are held in the Discretionary Portfolio.
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 are purchased
for the Discretionary Portfolio. If sufficient interest rates above U.S.
Treasury obligations can be obtained, the Company currently prefers to purchase
floating rate CMO's or asset backed securities to help mitigate its liability
sensitivity.
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 42%.
<TABLE>
Table 6--AVERAGE BALANCES OF SECURITIES AND INTEREST YIELD
<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 194.6 5.56% $ 260.6 5.80% $ 267.1 5.86% $ 244.4 5.94%
U.S. agency 79.7 5.65 62.9 5.84 56.7 5.92 52.2 6.34
Collateralized
Mortgage Obligations 13.2 5.47 24.7 6.03 29.6 6.06 30.0 6.07
Tax-Exempt 82.8 12.15 83.0 12.08 85.1 12.53 86.4 12.35
------- ------- ------- -------
Total $ 370.3 7.04% $ 431.2 7.03% $ 438.5 7.17% $ 413.0 7.33%
======= ======= ======= =======
1997
U.S. Treasury $ 240.0 5.95 $ 201.5 5.95% $ 196.7 5.93%
U.S. agency 48.2 6.36 40.0 5.56 37.4 5.84
Collateralized
Mortgage Obligations 33.0 6.03 56.4 6.18 64.4 6.37
Tax-Exempt 86.3 12.60 101.0 11.77 108.2 11.67
Equity Securities 6.2 5.96 7.2 5.70 7.4 5.76
------- ------- -------
Total $ 413.7 7.39% $ 406.1 7.34% $ 414.1 7.47%
======= ======= =======
</TABLE>
Included with the balances shown for U.S. agency securities that are being held
to maturity is one structured note with a book value of $9.9 million. It is a
type of security known as "step bond". It was issued at an initial rate and had
one or more call dates. If not called, the interest rate steps up to a higher
level. The note has now passed its final call date and has reached its final
step.
The average balances of securities declined from the third quarter to the fourth
quarter of 1996 as the Company built liquidity for the purchase of a leasing
portfolio and FVB; purchases of securities slowed and funds were directed at
attractive rates to bankers' acceptances and Federal funds sold.
Unrealized Gains and Losses
As explained in "Interest Rate Sensitivity" above, fixed rate securities are
subject to market risk from changes in interest rates while rates fluctuated
some in 1997. The first table in Note 5 to the financial statements shows the
impact of a slight decline in interest rates that has occurred during 1997. At
the end of the third quarter in 1997, the market value of the U.S. Treasury and
agency securities classified as held-to-maturity exceeds the amortized cost or
"book value" by $167,000 compared to an unrealized loss of $542,000 at December
31, 1996. The market value of the municipal securities held-to-maturity
increased in market value to $14,896,000 greater than "book value" at September
30, 1997 from $13,613,000 at December 31, 1996.
Hedges, Derivatives, and Other Disclosures
The Company established policies and procedures in 1996 to permit limited types
and amounts of off-balance sheet hedges to help manage interest rate risk. The
Company entered into an interest rate "Cap Corridor" contract in January 1997 at
a cost of approximately $90,000 to protect net interest income should rates rise
rapidly. The notional amount of the contract is $50 million and the covered
period is for fifteen months beginning July 1, 1997. The contract pays the
Company the rate by which the 3-month Libor index rate exceeds 7.0% up to a
maximum of 1.5%. The transaction was entered into to reduce the risk of rising
interest rates, specifically to off-set or hedge the increased interest expense
on some of the Company's money market deposit accounts that would occur if
interest rates rise. Because there was less expectation at September 30 than in
January that interest rates would rise, the market value of the contract
declined to approximately $2,000.
Federal Funds Sold and Securities Purchased under Agreements to Resell
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 or
invested with other institutions on a collateralized basis as securities
purchased under agreement to resell ("repurchase agreements"). These repurchase
agreements are investments which are collateralized by high quality securities
of the borrower and mature on a daily basis. The sales of Federal funds are on
an overnight basis as well. Excess cash expected to be available for longer
periods up to six months is generally invested in U.S. Treasury securities or
bankers' acceptances if the available returns are acceptable. The amount of
Federal funds sold and repurchase agreements purchased 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,
repurchase agreements 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 illustrates the average balance of funds sold and repurchase agreement
position of the Company and the average yields over the last eight quarters
(dollars in millions).
Table 7--AVERAGE BALANCES OF FUNDS SOLD AND SECURITIES PURCHASED UNDER
AGREEMENTS TO RESELL AND THEIR RELATED YIELDS
Average Average
Quarter Ended Outstanding Yield
------------- --------------- -----
December 1995 $81.8 5.79%
March 1996 81.8 5.39
June 1996 56.9 5.23
September 1996 37.9 5.35
December 1996 58.3 5.34
March 1997 94.6 5.30
June 1997 92.2 5.64
September 1997 67.0 5.61
The average balance sold into the market in the first quarters of 1997 and 1996
reflects the large volume of funds received from the IRS related to the refund
anticipation loans and refund transfers processed by the Company during that
time. In addition, liquidity was increased in anticipation of the financing
requirements relating to the purchase of FVB. The average balance in the fourth
quarter of 1996 reflects the build-up of liquidity utilized to purchase the $59
million leasing portfolio.
There are two other factors which impacted the average balances. First, when the
Company is in a liability sensitive position as discussed in the section above
titled "Interest Rate Risk," Management is reluctant to purchase large amounts
of longer-term securities beyond the amounts necessary to establish and maintain
the Company's maturity ladders because that action would increase the mismatch
risk. The result is higher average balances of Federal funds sold than would
otherwise be the case. Second, 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, the fourth quarter of 1996, and the first
quarter of 1997 than is usual.
Bankers' Acceptances
Bankers' acceptances are notes owed by a purchaser of merchandise to a vendor.
The notes have been "accepted" or guaranteed by the purchaser's bank and sold
into the financial markets. The Company has used bankers' acceptances as an
alternative to short-term U.S. Treasury securities when sufficient Treasury
securities are already held to meet the pledging requirements of certain trust
and public deposits and when the rates available are sufficiently higher than
the rates available on comparable U.S. Treasury obligations. 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 1995 $ 84.1 5.91%
March 1996 121.0 5.73
June 1996 55.0 5.43
September 1996 38.4 5.69
December 1996 55.3 5.63
March 1997 69.3 5.57
June 1997 76.3 5.69
September 1997 82.0 5.83
The higher than usual average balance for the first quarter of 1996 was related
to a one-time restructuring of the securities portfolios that occurred in 1995
as described in the 1996 annual report.
Other Borrowings, Long-term Debt and Related Interest Expense
Other borrowings consist of securities sold under agreements to repurchase,
Federal funds purchased (usually only from other local financial institutions as
an accommodation to them), Treasury Tax and Loan demand notes, and borrowings
from the Federal Reserve Bank ("FRB"). Because the average total of other
borrowings represents a very small portion of the Company's source of funds
(less than 5%), all of these short-term items have been combined for the
following table.
Table 9 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by other
borrowings over the last eight quarters.
Table 9--OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ------------- ---------- --------------------
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
December 1996 34.3 4.68 2.8
March 1997 43.3 4.50 3.2
June 1997 36.2 4.73 2.5
September 1997 24.1 4.97 1.7
Long-term debt consists of advances from the Federal Home Loan Bank ("FHLB").
The Bank became a member of the FHLB in fourth quarter of 1996. The Bank
borrowed $38 million in December 1996 for the acquisition of leasing assets and
$10 million in September 1997 for interest rate management. The advances were
structured to amortize at $2.5 million declining to $1.0 million per quarter
through the fourth quarter of 2001.
Table 10 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by long-term
debt over the last four quarters.
Table 10--LONG-TERM DEBT
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
------------- ----------- ---- --------------------
December 1996 $ 6.6 6.13% 0.5%
March 1997 37.6 6.13 2.8
June 1997 37.2 6.12 2.6
September 1997 42.6 6.20 3.0
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 11 shows trust income over the last eight quarters (in
thousands).
Table 11--TRUST INCOME
Quarter Ended Trust Income
------------- ------------
December 1995 $1,978
March 1996 2,224
June 1996 2,022
September 1996 2,050
December 1996 2,144
March 1997 2,479
June 1997 2,377
September 1997 2,599
There is some variation in fees from quarter to quarter. 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 $284,000 of the fees earned in the first quarter of 1997 and
$260,000 of the fees earned in the first quarter of 1996. 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 amount of the fee is established by the court. After adjustment for
these seasonal and non-recurring items and increasing price levels in the stock
market, trust income has been increasing because of growth in the total number
of accounts and dollar balances under management resulting from substantially
enhanced marketing efforts.
Other categories of noninterest operating 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 all noninterest
operating income other than trust fees are shown in Table 12 for the last eight
quarters (in thousands).
Table 12--OTHER INCOME Other Service
Service Charges Charges,
on Deposit Commissions Other
Quarter Ended Accounts & Fees Income
-------------- --------------- ------------ -------
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
December 1996 1,200 1,284 211
March 1997 1,195 3,453 176
June 1997 1,373 2,185 161
September 1997 1,361 1,601 240
The large increases in other service charges, commissions and fees for the first
quarters of 1997 and 1996 are due to $2.16 million and $1.03 million,
respectively, of fees received for the electronic transfer of tax refunds. 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.
Staff Expense
The largest component of noninterest expense is staff expense. Staff size is
closely monitored in relation to the growth in the Company's revenues and
assets.
Table 13 shows the amounts of staff expense incurred over the last eight
quarters (in thousands).
Table 13--STAFF EXPENSE
Salary and Profit Sharing and
Quarter Ended Other Compensation Other Employee Benefits
------------- ------------------ -----------------------
December 1995 $4,424 $ 682
March 1996 4,939 1,329
June 1996 4,973 1,379
September 1996 5,180 1,409
December 1996 5,614 1,329
March 1997 5,797 2,096
June 1997 5,987 1,683
September 1997 6,431 1,602
In the fourth quarter of 1996 additional staff was hired to manage the portfolio
of leasing assets which were purchased in December. When the purchase of FVB was
completed in the second quarter of 1997, additional staff was hired to operate
the five new branches. Staff expense increased in the third quarter of 1997 in
preparation of branch openings and in support areas to handle growth in the
volume of transactions. Beyond the addition of staff, there is usually some
variation in staff expense from quarter to quarter. Staff expense will usually
increase in the first quarter of each year because all Company exempt employees
have their annual salary review in the first quarter with merit increases
effective on March 1. In 1996 and 1997, these averaged 3% and 5% respectively.
In addition, some temporary staff is added in the first quarter for the RAL
program.
Employee bonuses are paid after the end of each year from a bonus pool, the size
of which is set by the Board of Directors based on meeting or exceeding the
Company's goals for net income. The Company accrues compensation expense for the
pool for employee 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
third and fourth quarters of 1996 projected net income at an amount more than
originally projected. Therefore, additional amounts were accrued in the first
quarter of 1997.
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 the accrual
will be made. In the third quarter of 1996 and the first quarter of 1997,
adjustments were made which increased the accrual for these quarters.
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. 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, upon which
payroll tax and workers' compensation insurance amounts are based, is higher in
each of the periods shown above by an amount ranging from $125,000 to $275,000,
depending on the number of loans originated during that 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. These factors cause some lack of correlation between the
payroll taxes and salary figures recognized in each quarter.
OTHER OPERATING EXPENSES
Table 14 shows other operating expenses over the last eight quarters (in
thousands).
Table 14--OTHER OPERATING EXPENSE
Occupancy Expense Furniture & Other
Quarter Ended Bank Premises Equipment Expense
------------- ------------- --------- -------
December 1995 $1,163 $673 $3,060
March 1996 1,132 650 3,177
June 1996 1,124 636 2,922
September 1996 1,131 623 3,050
December 1996 1,162 654 3,904
March 1997 1,137 645 4,418
June 1997 1,265 872 4,188
September 1997 1,409 938 4,671
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 in Ventura County and in the second quarter of 1997 with the acquisition
of new branches with the FVB purchase.
Table 15 shows a detailed comparison for the major expense items in other
expense for the nine and three-month periods ended September 30 (amounts in
thousands).
<TABLE>
Table 15--OTHER EXPENSE
<CAPTION>
Nine-Month Periods Three-Month Periods
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FDIC and State assessments $ 178 $ 59 $ 62 $ 21
Professional services 1,498 677 723 238
RAL processing and incentive fees 528 369 (78) 1
Supplies and sundries 641 464 236 147
Postage and freight 586 488 172 165
Marketing 1,307 1,036 509 450
Bankcard processing 1,532 1,306 565 495
Credit bureau 335 175 42 22
Telephone and wire expense 861 560 318 176
Charities and contributions 288 167 95 89
Software expense 1,035 825 344 267
Operating losses 195 20 107 27
Other 4,285 3,005 1,576 952
------------ ------------ ------------ ------------
Total $ 13,269 $ 9,151 $ 4,671 $ 3,050
============ ============ ============ ============
</TABLE>
Several of the categories above show increases for the third quarter and first
nine months of 1997 compared to the same period of 1996 because of expenses
related to the acquisition of FVB and the planned acquisition of Citizens State
Bank. These categories include marketing expense, professional fees, and
training expenses included in "Other."
The increase in Bankcard processing fees is a result of an increase in the
number of merchant card processing transactions. The increase in credit bureau
expense is almost wholly related to the expanded number of credit checks for the
RAL program in 1997 compared to 1996.
RAL processing and incentive fees are paid to tax preparers and filers based on
the volume and collectibility of the loans made through them. Since the volume
of transactions is substantially higher in 1997, the Company had accrued a
correspondingly higher amount in the first quarter of 1997. The incentive fees
were paid in the second quarter as collectibility was determined, and
accordingly, there were adjustments to the accrual in the second quarter of both
years. There was a final adjustment to the accrual in the third quarter of 1997.
The amounts in the final line of Table 15 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 8 to the financial statements, the Company had $108,000
OREO resulting from foreclosure as of September 30, 1997 as compared with
$1,629,000 at December 31, 1996. With a low 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 acceptable cost in
order to meet cash needs, such as might be caused by fluctuations in deposit
levels, customers' credit needs, and 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 or borrow funds, 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 months to meet cash obligations over that time period, 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
and repurchase agreements, 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 maintains total
sources of immediate liquidity at not less than 5% of total assets. At the end
of September 1997, these sources of immediate liquidity were well in excess of
that minimum.
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
projects intermediate liquidity needs and sources over the next several weeks
based on historical trends, seasonal factors, and special transactions.
Appropriate action is then taken to cover any anticipated unmet needs. At the
end of September 1997, 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, selling or
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 1997, 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 1997 and 1996 (dollars in thousands).
<TABLE>
Table 16--CAPITAL RATIOS
<CAPTION>
3rd Quarter 3rd Quarter
1997 1996 Change
----------- ----------- ----------
Amounts:
<S> <C> <C> <C>
Net Income $ 4,279 $ 3,705 $ 574
Average Total Assets 1,422,446 1,159,625 262,821
Average Equity 116,012 105,674 10,338
Ratios:
Equity Capital to Total Assets (period end) 7.93% 9.03% (1.10%)
Annualized Return on Average Assets 1.20% 1.28% (0.08%)
Annualized Return on Average Equity 14.75% 14.02% 0.73%
</TABLE>
Earnings are the largest source of capital for the Company. For reasons
mentioned in various sections of this discussion, Management expects that there
will be variations from quarter to quarter in operating earnings. Areas of
uncertainty or seasonal variations include asset quality, loan demand, and RAL
and RT 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. To be classified as "well capitalized", the Company is required
to have capital equivalent to at least 10% of risk adjusted assets. As of
September 30, 1997, the Company's risk-based capital ratio was 12.94%. The
Company must also maintain a Tier I capital (total shareholder equity less
goodwill and other intangibles) to average asset ratio of at least 4% to 5%. As
of September 30, 1997, Tier I capital was 11.67% of average assets.
In January 1997, the Company made a public tender offer to its shareholders to
purchase up to 500,000 shares of common stock duly tendered by February 21,
1997. The number of shares tendered on that date were 65,247 or 0.9% of the
outstanding shares at December 31, 1996. The Company paid $30.00 per share or
approximately $2.0 million for the stock tendered, which was accounted for as a
retirement of shares and reduction of capital. As explained in the tender offer,
this action was taken: 1) to provide shareholders with larger holdings an
opportunity to sell shares if they had not been able to because the market was
not able to absorb larger blocks; and 2) because the significant earnings growth
over the last several years had resulted in an accumulation of capital in excess
of current and anticipated needs.
The Company has repurchased shares of its common stock to offset the increased
number of shares issued as a result of the exercise of employee stock options
and also to utilize the accumulation of excess capital generated by the
Company's earnings. During the first nine months of 1997, approximately 107,000
shares were repurchased through the tender offer and other transactions compared
with the issuance of approximately 130,000 shares in connection with the
exercise of stock options.
Total capital did not change as a result of the purchase of FVB since the
transaction was a purchase for cash, not an exchange of shares of the Company
for the shares of FVB. However, Tier 1 capital and total risked-based capital
were reduced by the $10.0 million of goodwill recognized. In addition, the
capital to asset ratios decreased because of the addition of the FVB assets with
no addition to capital since only cash was paid as consideration. However, all
capital ratios remain in excess of the "well-capitalized" minimums.
State law limits the amount of dividends that may be paid by a bank to the
lesser of the bank's retained earnings or the total of its undistributed net
income for the last three years. Until 1997, the primary need for funds to be
transferred from the Bank to the Bancorp was for the payment of dividends to its
shareholders. In the first quarter of 1997, sizable dividends were paid to
Bancorp to provide the funds needed for the acquisition of FVB and, as a result,
the state limit on dividends was reached. In order to pay dividends beyond the
limit, approval was sought and obtained by the Bank from the California
Department of Financial Institutions ("CDFI"). Management expects that approval
will continue to be granted due to strong earnings and the well-capitalized
position of the Bank.
There are no material commitments for capital expenditures or "off-balance
sheet" financing arrangements planned at this time. However, as the Company
pursues its stated plan 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 $1.04 results in a payout ratio of 41%
of earnings for the last twelve months.
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, Bancorp is primarily regulated by the Federal Reserve
Bank ("FRB"). 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 CDFI. As a non-bank subsidiary of the Company, Sanbarco 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 laws, regulations, and safe and sound banking practices.
The regulatory agencies 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, except for the
need for approval of dividends paid from the Bank to the Bancorp, 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 ("RAL") and Refund Transfer ("RT") Programs
Since 1992, the Company has provided loans and refund transfers to taxpayers who
file their income tax returns electronically. These loans and transfers are made
through tax preparers across the country. The Company collects a fee for each
transaction.
If a taxpayer meets the Company's credit criteria for the RAL product, the
taxpayer receives an advance on his or her income tax refund less the
transaction fees, which are considered finance charges. The Company is repaid
directly by the IRS and remits any refund amount over the amount due the Company
to the taxpayer.
If the taxpayer does not meet the credit criteria or does not want a loan, the
Company can still facilitate the receipt of the refund by the taxpayer through
the RT program. This is accomplished by the Company authorizing the tax preparer
to issue a check to the taxpayer once the refund has been received by the
Company from the IRS. The fees received for acting as a transfer agent are less
than the fees received for the loans.
While the Company is one of very few financial institutions in the country to
operate these electronic loan and transfer programs, the electronic processing
of payments involved in these programs is similar to other payment processing
regularly done by the Company and other commercial banks such as direct deposits
and electronic bill paying. The RAL and RT programs had significant impacts on
the Company's activities and results of operations during the first quarters of
1996 and 1997 and to a lesser extent on the second quarters of 1996 and 1997. A
more extended description of these programs may be found in the Company's Form
10-K for 1996 and the activities and results of operations for the first and
second quarters of 1997 are covered at length in the Forms 10-Q filed for the
quarters ending March 31, 1997 and June 30, 1997. In the third quarter of 1997,
the RAL program is dormant except for receiving recoveries of loans previously
charged-off.
- --------
1. To obtain information on the performance ratios for peer banks, 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 1997. 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 $7.9 million as of September 30, 1997. 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 42% (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 1997
would be $18.2 million and the average yield would be 9.23%. 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 titled
"Securities and Related Interest Income."
3. Peer data are computed from statistics reported in FDIC Quarterly Banking
Profile, Second Quarter, 1997 for banks with total assets from $1-10 billion.
<PAGE>
<TABLE>
EXHIBIT 11
SANTA BARBARA BANCORP & SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
For the Three Months Ended September 30,
1997 1996
---- ----
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 7,605,676 7,605,676 7,640,472 7,640,472
Weighted Average Options Outstanding 819,605 819,605 739,206 739,206
Anti-dilution adjustment (1) -- -- -- --
Adjusted Options Outstanding 819,605 819,605 739,206 739,206
Equivalent Buyback Shares (2) (471,614) (416,440) (442,389) (442,091)
Total Equivalent Shares 347,991 403,165 296,817 297,115
Adjustment for Non-Qualified Tax Benefit (3) (142,676) (165,298) (121,695) (121,817)
Weighted Average Equivalent Shares Outstanding 205,315 237,867 175,122 175,298
Weighted Average Shares for Computation 7,810,991 7,843,543 7,815,594 7,815,770
Fair Market Value (4) $ 42.38 $ 48.25 $ 26.65 $ 26.65
Net Income $ 4,278,911 $ 4,278,911 $ 3,705,402 $ 3,705,402
Earnings Per Share $ 0.55 $ 0.55 $ 0.48 $ 0.47
<CAPTION>
For the Nine Months Ended September 30,
1997 1996
---- ----
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 7,592,688 7,592,688 7,643,664 7,643,664
Weighted Average Options Outstanding 691,848 755,351 686,675 718,489
Anti-dilution adjustment (1) -- -- -- --
Adjusted Options Outstanding 691,848 755,351 686,675 718,489
Equivalent Buyback Shares (2) (360,750) (332,159) (389,815) (401,463)
Total Equivalent Shares 331,098 423,192 296,860 317,026
Adjustment for Non-Qualified Tax Benefit (3) (135,751) (173,509) (121,713) (129,981)
Weighted Average Equivalent Shares Outstanding 195,347 249,683 175,147 187,045
Weighted Average Shares for Computation 7,788,035 7,842,371 7,818,811 7,830,709
Fair Market Value (4) $ 36.17 $ 48.25 $ 25.00 $ 26.25
Net Income $ 15,414,788 $ 15,414,788 $ 11,350,223 $ 11,350,223
Earnings Per Share $ 1.98 $ 1.97 $ 1.45 $ 1.45
<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) The acquisition of 100% of the outstanding capital stock of
Citizens State Bank of Santa Paula, a California state banking
corporation headquartered in Santa Paula, California was
reported on Form 8-K filed with the Commission on October 8,
1997.
<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 13, 1997
David W. Spainhour
President
Chief Executive Officer
DATE: November 13, 1997
Donald Lafler
Senior Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 52,960
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 69,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 212,837
<INVESTMENTS-CARRYING> 229,195
<INVESTMENTS-MARKET> 0
<LOANS> 803,890
<ALLOWANCE> 19,940
<TOTAL-ASSETS> 1,463,372
<DEPOSITS> 1,256,756
<SHORT-TERM> 44,433
<LIABILITIES-OTHER> 5,658
<LONG-TERM> 40,500
<COMMON> 5,081
0
0
<OTHER-SE> 110,944
<TOTAL-LIABILITIES-AND-EQUITY> 1,463,372
<INTEREST-LOAN> 59,358
<INTEREST-INVEST> 19,561
<INTEREST-OTHER> 6,716
<INTEREST-TOTAL> 85,635
<INTEREST-DEPOSIT> 28,399
<INTEREST-EXPENSE> 31,410
<INTEREST-INCOME-NET> 54,225
<LOAN-LOSSES> 6,980
<SECURITIES-GAINS> (416)
<EXPENSE-OTHER> 42,997
<INCOME-PRETAX> 22,996
<INCOME-PRE-EXTRAORDINARY> 22,996
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,415
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.97
<YIELD-ACTUAL> 5.40
<LOANS-NON> 8,143
<LOANS-PAST> 480
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,008
<ALLOWANCE-OPEN> 16,572
<CHARGE-OFFS> 7,996
<RECOVERIES> 4,384
<ALLOWANCE-CLOSE> 19,940
<ALLOWANCE-DOMESTIC> 19,940
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
